BUSINESS ORGANIZATION II

therefore, it cannot experience physical suffering and

mental anguish. Mental suffering can be experienced only
by one having a nervous system and it flows from real ills,
sorrows, and grieves of life all of which cannot be suffered
by an artificial person.

Kinds Of Business Organization :

1)

2)

Sole Proprietorship - a one-man form of

business entity and is one conducted for profit by a
lone or single individual who owns all the assets,
personally owes and answers all the liabilities or
suffers all the losses and enjoys all profits to the
exclusion of others

However, it was ruled by the SC in Filipinas

Broadcasting
Network
vs.
Ago
Medical
and
Educational Center, that a corporation may be awarded
moral damages in cases of slander, libel or any form of
defamation. Art. 2219 (7) does not qualify whether the
plaintiff is a natural or juridical person.
Therefore, a
juridical person such as a corporation can validly complain
for libel or any other form of defamation and claim for
moral damages.

Partnership two or more persons bind

themselves
to contribute money, property or
industry to a common fund with the intention of
dividing the profits among themselves. It may be
brought about by express or implied contract and
is established for the common benefit or interest of
all parties.

3)

Joint venture partakes the nature of a

partnership contract and it is created for the
purpose of prosecuting a particular business
transaction. It is one-time grouping of two or
more persons in a particular undertaking.

4)

Corporation an artificial being, created by

operation by law, having the right of succession
and the powers, attributes and properties
expressly authorized by law or incident to its
existence (Sec. 2)

Advantages of Corporate Form of Business:

1)
2)
3)
4)
5)
6)
7)

2)
3)

1)
2)
3)

The articles of incorporation expressly authorized

the corporation to enter into contracts of
partnership;
The agreement or articles of partnership must
provide that all the partners will manage the
partnership;
The article of partnership must stipulate that all
the partners are and shall be jointly and severally
liable for all obligations of the partnership

4)
5)
6)
7)
8)

Attributes of Corporation:
1)

2)

It is an artificial being.
it has a juridical
personality, separate and distinct from the persons
composing it.

It has the right of succession. - It persists to

exist independently of the individuals or persons
composing it,

4)

It has the powers, attributes and properties

expressly authorized by law or incident to its
existence. - It can exercise only such powers and
can hold only such properties as are granted to it
by the enabling statutes unlike natural persons
who can do anything as they please.

Formal proceedings are required to have a valid

corporate act
Business transactions of a corporation is limited to
the State of its incorporation
Shareholders limited liability tends to llimit the
credit available to the corporation
Transfers of share may result to uniting
incompatible and conflicting interests
Minority shareholders have practically no say in the
conduct of corporate affairs
Stockholders voting rights may become merely
fictitious and theoretical
Double taxation may be imposed on corporate
income
Corporations
are
subject
to
governmental
regulations, supervision, and control (e.g. basic
annual report and detailed financial statement)

Classification of Corporations under the Corporation

Code:
1) Stock
2) Non-stock

It is created by operation of law. - the formal

requirement of the States consent through
compliance with the requirements imposed by law
is necessary for its creation.

3)

organization,

Disadvantages of the Corporate Form of Business:

Requisites before a corporation can enter into a

partnership: (should concur)
1)

Capacity to act as a single unit

Limited shareholders liability
Continuity of existence
Feasibility of greater undertaking
Transferability of shares
Centralized Management
Standardized
method
of
management and finance

Requisites to be classified as non-stock corporation:

a) they have a capital stock divided into shares; and
b) they are authorized to distribute dividends or
allotments as surplus profits to its stockholders on
the basis of the shares held by each of them.
Non-stock corporations those where no part of their
income is distributable as dividends to its members,
trustees, or officers subject to the provisions on dissolution
While non-stock corporations primarily exist for
purposes other than for profit, it does not follow that they
cannot make profits as an incident to their operations.
However, these profits obtained cannot be distributed as
dividends but are used merely for the furtherance of their
purpose(s).

Whether or not an artificial being can be awarded

moral damages.
Moral damages are granted in recompense for
physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock,
social humiliation and similar injury. A corporation being an
artificial person and having existence only in legal
contemplation, has no feelings, no emotions, no senses,

Business this term is restricted to activities or affairs

where profit is the purpose or livelihood id the motive

What is determinative of whether a corporation is

engaged in business is its object or purpose as
stated in the articles of incorporation and by-laws

a)
b)

Lay Corporations those established for purposes other

than religion. They exist for secular or business purpose

Civil Service Law governs officers and employees of

government owned or controlled corporations created by
special laws

a)

Labor Code governs employees and officials of

corporations organized under the provisions of Corporation
Code.

b)

The test in determining whether they are governed

by the Civil Service Law or the Labor Code is the
manner of their creation.

Aggregate Corporations composed of a

number of individuals vested with corporate powers
consists of not less than 5 but not more than 15
incorporators
Corporations Sole - those that consist of one
person or individual only and who are made as bodies
corporate and politic in order to give them some legal
capacity and advantage which, as natural persons, they
cannot have.

Other Classes of Corporations:

Public and Private Corporations no distinction
under the Corporation Code

4) Close and Open Corporations

Public Corporations - defined as those formed or

organized for the government or a portion of the State
or any of its political subdivisions and which have for
their purpose the general good and welfare.
those created by the State as its own device
and agency for the accomplishment of its own public
purpose.

Close corporations those whose shares of stock are

held by limited number of persons like the family or other
closely-knit group. There are no public investors and the
shareholders are active in the conduct of the corporate
affairs
Open corporations those formed to openly accept
outsiders as stockholders or investors

The true test to determine the nature of a

corporation as public or private is found in the
relation of the body to the State.
A public corporation is one that is created,
formed
or
organized
for
political
or
governmental purposes with political powers
to be exercised for purposes connected with
the public good in the administration of civil
government

5) Domestic and foreign corporations

Domestic corporations those organized or created
under or by virtue of the Philippine laws
Foreign corporations those formed, organized or
existing under any laws other than those of the Philippines
and whose laws allow Filipino citizens and corporations to
do business in its own country or State.

Classification of government-owned or controlled

corporation:
a) with original charter or created by special
charter; or
b) incorporated under general law i.e. the
Corporation Code

6) Parent or Holding Companies and Subsidiaries and

Affiliates
Parent or Holding Company - when one corporation
controls another corporation, or when one corporation
controls several other corporations known as subsidiaries.
Holding companies are corporations that confine their
activities to owning stock in, and supervising management
of other companies. A holding company usually owns a
controlling interest in the companies in whose stocks it
holds, controls the latter by the power and authority to
elect management.
Subsidiary corporations those which another
corporation owns at least a majority of the shares, and thus
have control. It is a corporation under the control of
another corporation which is the holding company.

mere fact that the government happens to be a

majority stockholder does not make it a public
corporation

Private Corporation those formed for some private

purpose, benefit, aim or end. They are created for the
immediate benefit and advantage of the individuals or
members composing it and their franchise may be
considered as privileges conferred by the State to be
exercised and enjoyed by them in the form of the
corporation.

eleemosynary created for charitable and

benevolent purposes
civil organized not for the purpose of public
charity but for the benefit, pecuniary or
otherwise, of its members.

3) Aggregate and Sole Corporations

Government corporations created by special

charter are subject to its provisions while those
incorporated under the General Corporation Law
are not within its coverage

1)

religious societies
corporation sole

True distinction between a public and private

corporation is that the former are organized for
governmental purpose, while the latter are not.

it has an independent and separate juridical personality,

distinct and separate from its parent company, hence, any
claim or suit against the parent company does not bind the
subsidiary and vice versa

3) Ecclesiastical and Lay Corporations

Ecclesiastical or religious corporations - are composed
exclusively of ecclesiastics organized for spiritual purposes
or for administering properties held for religious ones.
They are organized to secure public worship or perpetuating
the right of a particular religion.

Affiliates those corporations which are subject to

common control and operated as part of a system. They
are sometimes called as sister companies since the
stockholdings of a corporation is not substantial enough to
control the former.

become bound by contracts entered into it

before its incorporation by adopting or
ratifying such contracts or by accepting
its benefits with knowledge of the terms
thereof.

7) Quasi-public corporations private corporations

which have accepted from the State the grant of a franchise
or contract involving the performance of public duties.
8) Quasi Corporation applies to public bodies or
municipal societies, though not vested with the general
powers of corporations, are organized by statutes or
immemorial usage, as persons or aggregate corporations.

As a general rule, a promoter, although he may assume to

act for and in behalf of a projected corporation and not for
himself, will be held personally liable on contracts made by
him for the benefit of a corporation he intends to organize.
This personal liability will continue even after the
contemplated corporation is formed and has received the
benefits of the contract unless there is a novation or other
agreement to release him from liability.

they possess some corporate functions and attributes but

they are primarily political subdivisions agencies in the
administration of civil government
9) De jure corporations juridical entities created or
organized in strict or substantial compliance with the
statutory requirements of incorporation and whose rights to
exist cannot be successfully attacked even by the State in a
quo warranto proceeding.

Options for a promoter in acting for the proposed

corporation:
1) Make a continuing offer on behalf of the corporation,
which if accepted after incorporation, will become a
contract. (promoter, herein, does not assume personal
liability);

Quo warranto proceedings by which the Government

attacks an association alleging to be a corporation which is
not lawfully so authorized to act.

2) Promoter make a contract at the time binding himself,

with the understanding
that if the corporation, once
formed, adopts or accepts the contract, he will be relieved
of responsibility; or

10) De facto corporations - exists by the virtue of an

irregularity or defect in the organization or constitution or
from some omission to comply with the conditions
precedent by which corporations de jure are created, but
there was colorable compliance with the requirements of
the law.
can only be attacked by a direct quo warranto
proceedings.

3) Promoter may bind himself personally and assume the

responsibility of looking to the proposed corporation, when
formed for reimbursement.
The process of incorporation:

11) Corporation by Estoppel those whih are so

defectively formed as not to be either de jure or de facto
corporations but which are considered as corporations in
relation only to those who cannot deny their corporate
existence due to their agreement, admission or conduct.

All persons who assume to act as a corporation knowing it

to be without authority to do so shall be liable as general
partners for all debts, liabilities and damages incurred or
arising as a result therof.

NOTE:
different types of business, different types of
supporting documents required.

FORMATION AND ORGANIZATION OF ORGANIZATION

Contents of the Articles of Incorporation: Sec. 14

3 stages in the life of a corporation

1)
2)
3)

Includes the drafting of the Articles of

Incorporation;
preparation and submission of additional and
supporting documents;
Filing with the SEC;
And the subsequent issuance of the Certificate
of Incorporation

Prefatory paragraph of the Articles of Incorporation

must specify the nature of the corporation, whether it is a
non-stock or stock corporation, a close corporation, etc.

creation
re-organization or quasi-reorganization;
dissolution and winding-up

Corporate Name through this it can act and perform all

legal acts
3 steps of creation:

promotion act of getting a corporation organized including

the procurement of subscription to its capital stock.

Promoter is an organizer or projector who brings persons to

unite in forming a corporation.
1)

2)

a name to sue and be sued

the pricncipal means of distinguishing it not only from
its stockholders or members, but also from other firms
or entities.
a corporation once formed may not use any other
name, unless it is amended in accordance with law
a corporation has the power of succession by its
corporation name
by that name alone it is authorized to transact business
the law gives no express or implied authority to
assume another name that is unappropriated

Incorporation the formal and procedural requisite

of drafting the Articles of Incorporation and
preparing other necessary supporting documents
and their subsequent filing with the SEC, and the
approval by the SEC by issuance of the Certificate
of Incorporation.

names deceptively or confusingly similar to that of an

existing corporation cannot be used by a corporation

Organization and Commencement of Business

refers to the overt acts after incorporation

Doctine of secondary meaning a word or phrase

originally incapable of exclusive appropriation, might
have been used so long and so exclusively by one
producer with reference to his article that, in that trade
and to that branch of the purchasing public, the word

A corporation may make contracts on its

own after its due incorporation, and may

or phrase has become to mean that the article was his

product.

A corporations right to use its corporate name and

trade name is a property right, a right in rem, which it
may assert and protect against the world. It is one
which cannot be impaired or defeated by subsequent
appropriation by another corporation in the same field.

Requisites to prohibit use of a corporate name:

The Principal Office:

must be located within the Philippines

principal office establishes the residence
corporation
Functions:

Determines the place where the

mortgage should be registered

Determines the venue of actions for or

the corporation

Determines the location of meetings

stockholders or members

Complainant corporation acquired a prior right over the use

of such corporate name; and
Proposed name is

Identical; or

Deceptively or confusingly similar to that of

any existing corporation, or to any other name
already protected by law; or

Patently deceptive, confusing or contrary to

existing law.

In determining the existence of confusing similarity in

corporate names, test is whether the similarity is such
as to mislead a person using ordinary care and
discrimination.

A corporation has an exclusive right to the use of its

name, which may be protected by injunction upon a
principle similar to that upon which persons are
protected in the use of trademark and tradenames.

Amendment or change of Corporate Name:

Any change upon the corporate name or identity does
not affect the rights of the corporation or lessen or add
to its obligations
Mere change in the name of a corporation, generally,
does not affect the identity of the corporation, nor in
any way affect the rights, privileges or obligations
previously incurred by it.
A corporation, upon its change of name is the same
corporation with a different name, and its character is
in no respect changed.

of

the

chattel
against
of the

Term of Existence:

A corporation can sue or be sued and transact business

only while it possesses a juridical personality.
Once it ceases to exist, its legal personality also
expires, therefore it cannot act in its own name
for the purpose of prosecuting its business.
A corporation, however, continues to be a body
corporate for three (3) years after the termination
of its existence for purposes of dissolution and
winding up.
Term of existence is for 50 years which could be
extended for an unlimited number of times but in
no case shall each extension exceed 50 years.
The term of existence is extended through the
amendment of articles of incorporation

The Incorporators
Corporators those who compose a corporation
whether as stockholders or members
Incorporators those stockholders or members
mentioned in the Articles of Incorporation as
originally forming and composing the corporation
and who are signatories thereof

Purpose Clause:
Function: defines the scope of the authority of the
corporate enterprise or undertaking.
A corporation has only such powers as are expressly
granted to it by law and by its articles of incorporation,
including incidental powers and those reasonably
necessary to its existence.
The Corporation Code does not restrict nor limit the
number of purposes which a corporation may have, but
it is required that if it has more than one purpose, the
primary and secondary ones must be indicated therein.
NOTE:

if there is more than one purpose, the primary as well

as the secondary purpose must be specified
the purpose(s) must be capable of being lawfully
combined

Qualifications of Incorporators:
1)
2)
3)
4)
5)

should be a natural person;

not less than 5 but not more than 15
should be of legal age;
majority should be residents of the Philippines
must be a subscriber or owner of at least one (1)
share of the capital stock of the corporation

Note: The law only requires the incorporators to be

residents, therefore aliens could be incorporators.
A
corporation could be composed of 100% aliens, unless
contrary to our nationalization laws.

Educational, religious and other non-stock

corporations cannot include any other purpose
which would change or contradict its nature or
to engage in any enterprise to make profits for
its members;
Insurance companies cannot engage in
commercial banking at the same time, and
vice versa;
Stock brokers can have no other line of
business not peculiar to them.

Note: Since only natural persons can be incorporators,

corporations, partnerships and other juridical persons
cannot be incorporators.
Exceptions:
1) cooperatives; and
2)
corporations primarily organized to hold
equities in rural banks

Limitations on the purpose clause:

purpose(s) must be lawful;
purpose must be specific or stated concisely although
in broad or general terms;

Note: A corporation can be a corporator but not an

incorporator.
The Directors/Trustees:

Who shall fix the issue price of no-par value shares?

Directors refer to the governing board in stock

corporations
Trustees refer to the governing board in non-stock
corporations

1) it shall be fixed in the articles of incorporation;

or

2) by the board of directors pursuant to authority

conferred upon it by the articles of incorporation or
the by-laws; or
3) by the stockholders: (In the absence of any
provision)
a) representing at least majority of the
outstanding capital stock (not majority of
warm bodies);
b) at a meeting duly called for the
purpose

Gen. Rule: Directors or Trustees in a corporation

must be at least (5) but not more than 15.
Exception:
1) educational
corporations
registered
as
non-stock
corporations (still 5-15, but
should always be divisible by 5)
2) close corporations (allows 20
members in the board)
3) corporation sole

SHARES OF STOCKS

Any director who ceases to own at least one share

of the capital stock also ceases to be a
director/trustee.
o
What is important is the legal title not the
mere beneficial title
o
In a voting trust agreement, the legal title
is lost by the owner of the share, only the
shares beneficial title is left to him.

Functions :
Shares of stock designate the units into which the
proprietary interest in a corporation is divided.
Shares of stock are interests or right which the
stockholder has in the management of the
corporation

Trustees of a non-stock corporation must be a

member thereof.

They represent the proportionate integers or units,

the sum of which constitutes the capital stock of
the corporation.

Disqualification of directors, trustees or officers:

(minimum disqualifications that cannot be done away
with)
1)
2)

Shares of stocks are different from

certificates of stocks, which is a document or instrument
evidencing the interest of a stockholder in the corporation.

conviction of final judgment of an offense

punishable by imprisonment for a period exceeding
6 years; or
violation of the Corporation Code committed within
5 years prior to the date of his election or
appointment

Instances when non-voting shares may vote: (very

important, penultimate paragraph of Sec. 6)
1)
2)
3)

the corporations by-laws may provide for

additional
qualifications
and
disqualifications
thus,
by-laws
may
validly
require
ownership of a specified number of shares
for directorate qualification (Govt. vs. El
Hogar, 50 PHIL 399)
By-laws
may
likewise
disqualify
a
stockholder from being elected into office
if he has substantial interest in a
competitor corporation to avoid any
possible adverse effects of conflicting
interest of a director (Gokongwei vs. SEC,
89 SCRA 336)

4)
5)
6)
7)
8)

Purpose of Classification of the Shares of Stock:

Capitalization:

1)

Consideration for stock:

1)
2)
3)
4)
5)
6)

Amendment of the articles of incorporation;

Adoption and amendment of by-laws;
Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the
corporate property;
Incurring,
creating,
or
increasing
bonded
indebtedness;
Increase or decrease of capital stock;
Merger or consolidation of the corporation with
another corporation or other corporations;
Investment of corporate funds in another
corporation or business in accordance with this
Code; and
Dissolution of the corporation

2)

actual cash paid;

property actually received by the corporation,
necessary or convenient for its use;
labor performed or services
actually
rendered to the corporation;
indebtedness incurred by the corporation;
amounts transferred from unrestricted
retained earnings to stated capital;
outstanding shares in exchange for stocks in
the event of reclassification or conversion

3)
4)
5)
6)

to specify and define the rights and privileges of

the stockholders;
for regulation and control of the issuance of sale of
corporate securities for the protection of
purchasers and stockholders;
as a management control device;
to comply with statutory requirements;
to better insure return on investment;
for flexibility in price

Kinds of Shares of Stocks:

1)

Shares of stock shall not be issued in exchange for

promissory notes or future services.
The consideration for stock may be a combination
of 2 or more forms provided

Common Stock - described as one which entitles

its owners to an equal pro-rata division of profits
The most commonly issued shares of
stock of a corporation
Usually carries with it the right to vote

NOTE: irrespective of the classification of the shares of

stock issued by a corporation, all shares are equal in all
respects, unless provided otherwise by the Articles of
Incorporation, or by the Certificate of Stock
2)

3)

Preferred Stocks - a stock that gives the holder

a preference over the holder of common stocks
with respect to the payment of dividends and/or
with respect to the distribution of capital upon
liquidation.

NOTE: dividend credit type = if profits were earned vs.

cumulative preferred = whether profits were earned or not

Limitations on Issuance of Preferred Stocks:

i. They can be issued only with a
stated par value;
ii. The preferences must be stated
in the articles of incorporation
and in the certificate of stock,
otherwise, each share shall be
deemed equal

Preference as to Dividends

This guaranty is not absolute because the board of

directors has the discretion to determine whether or
not dividends are to be declared out of the unrestricted
retained earnings of the corporation

Preference Upon Liquidation. If such is the intention, the

contract of subscription must so indicate lest they are
placed on equal footing with common shares
3) Par value shares - those whose value are fixed in the
articles of incorporation. Its primary function is to fix a
minimum subscription or original issue price of the shares
and indicates the amount which the original subscribers are
supposed to contribute to the capital

Preferred shareholders are entitled to its fixed priority or

preference only.

Classification of Preferred Stocks

Participating shares - holders hereof are still given the

right to participate with the common stockholders in
dividends beyond their stated preference.

Non-participating shares

Cumulative preferred shares those that entitle the

owner thereof to payment not only of current dividends
but also back dividends, whether declared or not. The
stockholders of such shares do not lose the right to
claim dividends for the years they were not declared.

Entitlement to current and back dividends, whether or

not declared

Preferred shares to be cumulative must be provided in

the Articles of Incorporation and specified in the
Certificate of Stock

Principal types of non-cumulative preferred shares:

1)

Discretionary dividend type gives the holder of such

shares the right to have dividends paid thereon in a
particular year depending on the judgment or
discretion of the board of directors
Mandatory of earned type impose a positive duty on
directors to declare dividends every year when profits
are earned.
In effect, it gives the preferred
stockholders a right to the annual profit and leave the
directors no discretion to withhold dividends.

2)

These shares cannot be issued or sold by the

corporation at less than par

4) No par value shares those whose issued price are

not stated in the certificate of stock but which may be fixed
in the articles of incorporation, or by the board of directors
when authorized by the articles of incorporation or the bylaws, or in the absence thereof, by the stockholders
themselves.

1)
2)
3)
4)
5)
6)

Limitations on the issuance of no par value shares:

such shares, once issued are deemed fully paid
and thus, non-assessable;
consideration for its issuance should not be less
than 5 pesos;
entire consideration for its issuance constitutes
capital;
cannot be issued as preferred stock;
cannot be issued by banks, trust companies,
insurance companies, public utilities and building
and loan associations.
No par value shares can be used as a means of
management control device

5) Voting shares gives the holder thereof the right to

vote and participate in the management of the corporation
6) Non-voting shares - do not grant the holder thereof, a
voice in the election of directors and some other matters
requiring stockholders vote

Non- cumulative preferred shares - those which grant

the holders of such shares only to the payment of
current dividends but not back dividends

Preferred as to Voting Rights. Preferred stocks are

usually denied voting rights, in fact, only this type of
share along with redeemable shares may be deprived
voting rights. Thus, what shares may be denied voting
rights?

ANSWER:
Preferred stocks; and Redeemable shares.

The amount of preference is usually on a fixed percentage

or specified amount, thus, other shareholders can possibly
receive higher or bigger dividends than the preferred
holders of stock.

Dividend credit type gives the holder thereof the right

to arrears in dividends if there were profits earned
during the previous years but dividends were not
declared. In effect, their right to receive dividends is
merely postponed to a later date.

QUERY: Can common shares be deprived of the right to

vote? General rule, NO, reason Sec. 6
Can common shares never be deprived of the right to vote?
NO, they may be deprived. Reason, Sec. 7
7) Founders shares presumed to be the shares of stock
which are issued to the founders of the corporation
Exclusive right to vote may be granted but only up
to 5 years

8) Redeemable shares those issued by a corporation

subject to redemption as may be provided by the terms of
the subscription contract.

Should the corporation desire to grant such

options, restrictions and/or preferences, it must be
indicated in the articles of incorporation and in all
of the stock certificates to be issued in the
corporation.

Redemption may be optional or mandatory.

A corporation may acquire its own shares if it has

unrestricted retained earnings, BUT in the case of
redeemable shares, a corporation may redeem
redeemable shares regardless of whether or not it has
unrestricted retained earnings.
Redemption of redeemable shares is thus,
an
exception.

Failure to provide the same in the articles of

incorporation would not bind the purchasers in
good faith despite the fact that said restriction
and/or preference is indicated in the by-laws of the
corporation (PMI College vs. NLRC, 227 SCRA 462)
In a close corporation, such restrictions and
preferences must not only appear in the articles of
incorporation and in the stock certificates but
should also be embodied in the by-laws of that
close corporation, otherwise it may not bind
purchasers of such shares in good faith (Sec. 98,
Corporation Code)

11) Treasury shares - those which have been issued and

fully paid for, but subsequently reacquired by the issuing
corporation by purchase, redemption, donation or through
some other lawful means.

While in the possession of the corporation, treasury

shares have no dividend or voting rights.

Voting and dividend rights

outstanding shares of stock

Treasury shares may be declared as dividends since

they are properties of the corporation.

Treasury shares are issued shares but being in the

treasury, they do not have the status of outstanding
shares

are

granted

only

The No Transfer Clause

to

Required in corporations which will engage in a

business activity reserved to citizens of the
Philippines (Sec. 15, Corporation Code)
Requires by the SEC to all stock corporations, as a
matter of policy.
The Execution Clause
That part of the articles of incorporation where the
incorporators sign the document with an indication
as to where it was signed and when the same was
executed.

Only outstanding shares have voting and dividend

rights

Treasury shares have no voting rights because the

Board of Directors might perpetuate themselves of
power. It has no right to dividends because it is like
putting money in your right pocket from your left
pocket.

Contains the signature of the incorporators as

witnessed by 2 disinterested persons because the
articles of incorporation serves as a contract
between the signatories thereof, i..e., the
corporation and the State

NOTE: A stock dividend, being one payable in capital

stock, cannot be declared out of outstanding corporate
stock but only from retained earnings

Acknowledgment
That part of the articles of incorporation where the
incorporators acknowledge before a notary public
that they have executed and signed the same in
their own free, voluntary act and deed.
Grounds for disapproval

CAPITAL REQUIREMENT
There is no minimum capital required of stock
corporations (Sec. 12)

After the filing of the articles of incorporation, the

Sec will determine whether or not there was
substantial compliance with the requirements of
the law.
Note that strict compliance is not
required, substantial compliance is sufficient.

But there is minimum paid-up capital required

(Sec. 13)
Minimum paid-up capital should in no case be less
than 5,000 pesos (Sec. 13)

Grounds for disapproval: (Sec. 17)

At least 25% of the authorized capital stock as

stated in the AoI must be subscribed at the time of
incorporation (Sec. 13)
At least 25% of the subscribed capital must be
paid upon subscription, but in no case less than
5,000 pesos. (Sec. 13)
Thus, if the authorized capital is 1,000,000 pesos,
25% should have been subscribed (250,000
pesos), 25% of 250,000 must have been paid-up
= 62,500 pesos Hence, if A, B, C, D and E have
subscribed P50,000 each, A&B alone can possibly
pay in the minimum paid-up requirement of
62,500.

1)

The articles of incorporation or any

amendment thereto is not substantially in
accordance with the form prescribed (in
Sec. 15).

2)

Purpose or purposes of the corporation

are unconstitutional, illegal, immoral or
contrary to government rules and
regulations.

3) Treasurers
affidavit
concerning
the
amount of capital stock subscribed is false;
4) Percentage of capital ownership of the
capital stock to be owned by citizens has not
been complied with

Restrictions and Preferences on Transfer of Shares

Only the State could attack a de facto corporation

through a quo warranto proceeding. The attack
should be direct.
Collateral attack would not
prosper.

These grounds are not exclusive

The articles of incorporation or amendment thereto of

banks, banking and quasi-banking institutions, building
and loan associations, trust companies and other
financial intermediaries, insurance companies, public
utilities, educational institutions, and other corporations
governed by special laws shall be accompanied by a
favourable
recommendation
of
the
appropriate
government agency to the effect that such AoI is in
accordance with law.
Failure to comply with this
requirement will preclude the SEC from approving such
articles of incorporation or amendment thereto (Sec.
17)

QUERY: Can a de facto corporation exist by virtue of a law

which was later declared as null and void?
ANSWER: NO. An unconstitutional act is not a law; it
confers no rights; it imposes no duties; it affords no
protection; it creates no office; it is in legal contemplation,
as inoperative as though it has never been passed
(Municipality of Malabang vs. Benito, et al, 27 SCRA 533)
It is the issuance of a certificate of incorporation
by the SEC which calls a corporation into being.

Commencement of Corporate Existence

A corporation commences to exist from the time of
the issuance of its certificate of incorporation or
registration.

The personality of a corporation begins to exist

only from the moment such articles is issued not
before

Only from the time of issuance of the certificate of

incorporation would the corporation acquire
juridical personality and legal existence.

Except corporation sole whose existence commences

from the filing of the Articles of Incorporation.

Other exceptions are cooperatives and home owners

insurance guaranty corporation

Corporation by Estoppel:
Exists on the ground of estoppel by virtue of the
agreement, admission or conduct of the parties
such that they will not be permitted to deny the
fact of the existence of the coporation.
Before the members or agents of the corporation
by estoppel be estopped to deny that it is a
corporation, the acts relied upon must be
equivalent to a representation or admission of
corporate existence.

A corporation should have a full and complete

existence as an entity before it can enter into a
contract or transact any business.

To give rise to an estoppel on the ground of

recognition
by
dealing
with
a
pretended
corporation, it must have been dealt with or
treated as a corporation

Thus a sale to a corporation before its

incorporation is of no legal effect, and the
corporation cannot subsequently dispose of the
property even after its incorporation.
This is
because a corporation, until organized has no
being, franchises or faculties (Cagayan Fishing
Devt. vs. Sandiko, 65 PHIL 233).

When does corporation by estoppel apply? When

persons assume to form a corporation and
exercise corporate functions and enter into
business relations with third persons.

DEFECTIVELY FORMED CORPORATIONS:

When there is no third person involved and the conflict

arises among those assuming to form a corporation, who
knows that it has not been registered, there is no
corporation by estoppel.

De Facto Corporation:
One that is so defectively created as not to be a de
jure corporation but nevertheless exists as a
corporate body, by virtue of its bona fide attempt
to incorporate under existing statutory authority,
coupled with the exercise of corporate powers.

A person acting or purporting to act on behalf of a

corporation which has no valid existence assumes
such privileges and obligations and becomes
personally liable for contracts entered into or for
other acts performed as such agent.

Conditions for a de facto corporation to exist:

1)
2)
3)
4)

a valid statute under which the corporation could

have been created as a de jure corporation;
an attempt in good faith, to forma corporation
according to the requirements of the law, which
amounts to a colourable compliance with the law;
a user of corporate power, as if it were a
corporation;
good faith in claiming to be and doing business as
a corporation

GENERAL RULE: a person who has contracted or

dealt with an association in such a way as to
recognize its existence as a corporate body is
estopped from denying its corporate existence
(Doctrine of Corporation by Estoppel)
o

A de facto corporation is similarly situated with a

de jure corporation except that a de facto
corporation can be attacked by the State in a quo
warranto proceeding.
A de jure corporation cannot be attacked by the
State even in a direct proceeding.

EXCEPTIONS:

When there is fraud in the

transaction

When the third party is the

claimant and is not trying to
escape liability on the contract
from which he has benefited

The rule that a stockholder or member cannot be

held personally liable for any financial obligation by
the corporation in excess of his unpaid subscription

is only applicable to registered corporations. It

does not apply to an unincorporated association.

Commencement of Business/Transaction:
means that the corporation has actually functioned
and engaged in the business for which it was
organized.

Remedies of a third party against a corporation by

estoppel:
3)
4)

5)

File a suit against the ostensible

corporation to recover from the corporate
properties;
File the case directly against the
associates personally who held out the
association
as
association
as
a
corporation;
File a case both against the ostensible
corporation and persons forming it jointly
and severally.
o

THE COPORATE CHARTER:

signifies an instrument or authority from the
sovereign power, bestowing rights and power to
the corporation.
Charter of the corporation is regarded as a 3-fold
contract:
i.

The last 2 remedies may not be

availed of if the 3rd party by his
conduct is estopped from denying the
existence of the association as a
corporation as such, recovery should
be limited only against the corporate
assets

ii.

iii.

All persons who assume to act as a corporation

knowing it to be w/o authoriry to do so shall be
liable as general partners for all debts, liabilities
and damages incurred or arising therefrom.

The common notion is that the corporate charter is

synonymous with the articles of incorporation. But
it should be noted that the charter consists of the
articles of incorporation and the relevant laws
under which it was created or the Corporation
Code plus the by-laws adopted.

The passive stockholders/associates should be

limited in their liability only to their agreed
contribution. ]
Corporate Organization:
After the issuance of the certificate of incorporation
or registration, the corporation must formally
organize and commence its business lest it will be
deemed dissolved.

Charter vs. Franchise. Franchise applies to the

right or privilege itself to be and act as a
corporation or to do a certain act while a charter
applies to the instrument by which the State vests
such right or privilege.

Corporation is deemed dissolved if it fails to

organize and commence the transaction of its
business within 2 years from the date of its
incorporation. (Dissolution)

Classification of Franchise:

If a corporation commenced its business

transaction, but fails to continue or becomes
continuously inoperative for 5 years, the same
shall be a ground for revocation of its corporate
franchise or certificate of registration (Revocation
or Suspension)
Dissolution and Revocation/Suspension shall not
apply if failure to organize or continuously operate
is due to causes beyond the control of the
corporation

2)
3)

PRIMARY FRANCHISE the right or

privilege of being a corporation which the
State confers upon the applicant for this
faculty (right itself)

SECONDARY FRANCHISE the powers

and privileges, vested in, and to be
exercised by the corporate body as such
(powers to be exercised)

THE CORPORATE ENTITY THEORY

(Sec. 19) A corporation comes into existence upon
the issuance of the certificate of incorporation.
Then and only then will it acquire a juridical
personality to sue and be sued, enter into
contracts, hold or convey property or perform any
legal act, in its own name

Steps in the formal organization of a corporation:

1)

Between the corporation and

the State, insofar as it
concerns its primary franchise
Between the corporation and
the stockholders or members,
insofar as it governs their
respective
rights
and
obligations
Between the and among the
stockholders
or
members
themselves, insofar as their
relationship with one another
is concerned.

organizational
meeting
of
the
stockholders to elect its board of
directors;
adoption of by-laws, filed w/in one month
from the issuance of the certificate of
incorporation;
organizational meeting of the board of
directors elected to elect the corporate
officers, adoptiono of corporate seal.
Accepting pre-incorporation subscriptions,
establishing the principal office and such
other necessary steps to transact the
legitimate business of the corporation

As a legal entity, the corporation is possessed with

a personality separate and distinct from the
individual stockholders or members, and is not
affected by the personal rights, obligations or
transactions of the latter, and vice versa.
A corporation has ordinarily no interest in the
individual property of its stockholders unless
transferred to the corporation, therefore, a
corporation has no personality to bring an action
for and in behalf of its stockholders or members

for the purpose of recovering property which

belongs to said stockholders or members in their
personal capacities (Sulo ng Bayan, Inc. vs.
Gregorio Araneta, Inc., 72 SCRA 347)

Test in determining the applicability of the

doctrine of piercing the veil of corporation
fiction:
1) Control, of complete domination, of finances,
policy and business practice in the transaction
attacked, such that the corporate entity as to
this transaction had at the time no separate
mind, will or existence of its own;

A president and manager of a corporation who

entered into and signed a contract in his official
capacity, cannot be made liable thereunder in his
individual capacity in the absence of stipulation to
that effect due to the personality of the corporation
being separate and distinct from the person
composing it.

2) Such control must have been used to

commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal
duty or dishonest and unjust act in
contravention of the plaintiffs legal rights; and

PIERCING THE VEIL OF CORPORATE FICTION:

GENERAL RULE: A corporation may not be made to
answer for acts or liabilities of its stockholders or
those of the legal entities to which it may be
connected and vice versa. A corporation is an
entity separate and distinct from its stockholders
or members and from other corporations to which
it may be connected.

3) Control and breach of duty must proximately

cause the injury or loss complained of
o

Mere ownership of all or nearly all of the capital

stock of a corporation does not necessarily mean
that it is a mere business conduit of the
stockholder(s). To hold such stockholders liable for
the corporations obligations, it should be clearly
shown that the operations of the corporation was
so merged with the stockholders as to be
practically indistinguishable from them.

EXCEPTIONS TO THE CORPORATE ENTITY THEORY:

1)
2)
3)
4)
5)
6)
7)
8)

When the notion of legal entity is used a shield to

further an end subversive of justice; or
When it is used for purposes that could not have
been intended by the law that created it;
When it is used to defeat public convenience;
When it is used to justify wrong protect fraud or
defend crime;
When it is used to perpetuate fraud or confuse
legitimate issues;
When it is used to circumvent the law or
perpetuate deception;
When it is used as an alter ego, adjunct or
business conduit for the sole benefit of the
stockholders;
In the case of a closed family corporation, where
the incorporators and directors belong to one
single family
o

These
requisites
should
concur,
absence of one prevents the piercing
the corporate veil

When Piercing the Corporate Fiction is not Justified:

Absent any showing that the corporate fiction is
used to:
o
defeat public convenience,
o
justify wrong,
o
protect fraud,
o
defend crime,
o
confuse legitimate issues,
o
or circumvent the law or perpetuate
deception,
o
or an alter ego, adjunct or business
conduit for the sole benefit of a
stockholder or a group of stockholders or
another corporation

In these cases, the notion of corporate

fiction shall be disregarded, and the law
will regard the corporation as a mere
association of persons, or in the case of 2
corporations, merge them into one, the
one being merely regarded as part or
instrumentality of the other.

piercing the veil of corporate fiction is not

justified.
Mere ownership of all or substantially all of the
shares of stock of a corporation is not in itself,
sufficient ground for disregarding the separate
corporate personality. For the separate personality
of the corporation to be disregarded, the wrong
doing must be clearly and convincingly established.
Fraud must be clearly established, it may never be
presumed.

Some probative factors of identity that will justify

the application of the doctrine of piercing the
corporate veil:
1) stock ownership by one or common
ownership of both corporations;
2) identity of directors and officers;
3) manner of keeping corporate books
and records;
4) methods of conducting the business

The corporate entity is disregarded only if it is

sought to hold the stockholders or officers directly
liable for the corporate debt or obligation. If the
claimant does not seek to impose a claim against
the said persons, piercing the veil of corporate
fiction is not justified.

Instrumentality Rule where one corporation is so

organized and controlled and its affairs are so conducted so
that is, in fact, a mere instrumentality or adjunct of the
other, the fiction of the corporate entity of the
instrumentality may be disregarded. (Concept Builders,
Inc. vs. NLRC, 257 SCRA 149)

For the separate juridical personality of a

corporation to be disregarded, the wrongdoing
must be clearly and convincingly established. It
cannot be presumed.
In PNB vs. Ritratto Group, Inc. Et. Al (362
SCRA 216) it was held that: General rule is that a

10

corporation has a personality separate and distinct

from its individual stockholders or members, and is
not affected by the personal rights, obligations and
transactions of the latter. The mere fact that a
corporation owns all of the stocks of another
corporation is not sufficient to justify their being
treated as one entity.
If used to perform
legitimate functions, a subsidiarys separate
existence may be respected, and the liability of the
parent corporation as well as the subsidiary will be
confined to those arising in their respective
business.

4) Written notice of the proposed amendment of

the capital stock or the proposed incurring,
creating
or
increasing
any
bonded
indebtedness, and the time and place of the
meeting should be sent to each stockholder;
5) A certificate in duplicate signed by the
majority of directors, and countersigned by
the chairman and the secretary of the
stockholders meeting.
o

Any increase or decrease in the

capital stock or the incurring,
creating, or increasing of any bonded
indebtedness shall require prior
approval of the SEC.

The SEC shall not accept for filing any

certificate of increase of capital stock
unless accompanied by the sworn
statement of the treasurer of the
corporation lawfully holding office at
the time of the filing of the
certificate, showing that at least 25%
of the increased capital stock has
been subscribed and that at least
25% of the amount subscribed has
been paid-up.

AMENDMENT OF THE CORPORATE CHARTER

Steps in the Amendment of the Articles of
Incorporation: (Sec. 16)
1)
2)

3)

Resolution by at least a majority of the board of

directors or trustees;
Vote or written assent of the stockholders
representing at least 2/3 of the outstanding
capital stocks or 2/3 of the members in case of
non-stock corporations;
Submission and filing of the amendments with the
SEC
Amendments shall take effect upon their approval
by the SEC or from the date of filing with the SEC
if not acted upon within 6 months from the date
of filing for a cause not attributable to the
corporation.

QUERY: May any matter or provision in the articles of

incorporation be amended? NO. This is because there
are certain provisions which can not be changed, as
for
example,
incorporators/signatories.
The
incorporators or signatories cannot be amended or
changed.

Special Amendments: (Secs. 37; 38)

Sec. 37 refers to the power to extend or shorten
the corporate term

Some provisions not subject to amendment:

1) name of the treasurer originally or
first elected;
2) number of shares and amount
originally subscribed and paid-out of
the original authorized capital stock
of the corporation;
3) date and place of execution of the
articles of incorporation; signatories
and acknowledgment thereof

Sec. 38 refers to the power to power to increase

or decrease capital stock
Requisites to amend the corporate term (Sec.
37):
1) Resolution of the board of directors/trustees,
as approved by a majority vote of such board;

Change in Corporate Name:

2) Ratification by the stockholders representing

at least 2/3 of the outstanding capital stock or
at least 2/3 of the members in case of nonstock corporations;
3) Ratification
meeting;

should

be

at

Any change in the corporate identity or name does

not affect the rights and obligations of the
corporation.

stockholders

Mere change of name if the corporation does not

affect the identity of the corporation nor in any
manner affect the rights, privileges and obligations
previously acquired or incurred by it.

4) Written notification to the proposed action and

the time and place of meeting, addressed to
each stockholder or member

In Philippine First Insurance, Co vs. Hartigan

(74 SCRA 252), it was ruled that: An authorized
change of name of a corporation has no more
effect upon its identity as a corporation than a
change of name of a natural person has upon its
identity.
It does not affect the rights of the
corporation or lessen or add to its obligations.
After a corporation has effected a change in its
name it should sue and be sued in its new name.

5) In case of a dissenting stockholder, he may

exercise his appraisal right
Requisites to amend the capital stock: (Sec.
38)
1) Resolution of the board of directors, as
approved by a majority vote of such board;

A mere change in the name of the

corporation does not generally speaking affect
the identity of the corporation, nor in any way
affect the rights, privileges, or obligations
previously acquired or incurred by it. A change of
name by a corporation has no more effect upon
the identity of the corporation than a change of

2) Approval should be at a stockholders meeting

duly called for the purpose;
3) Approval should be by at least 2/3 of the
outstanding capital stock;

11

name by a natural person has upon the identity of

such person.
It is the same corporation with
different name, and its character is in no respect
changed.

all powers and authority of the corporation

emanate from the Board of Directors/Trustees
Qualifications and Disqualifications of Directors:

In Republic Planters Bank vs. CA, (216 SCRA

738) it was reiterated that a change in the
corporate name does not make a new corporation,
and whether effected by a special act or under a
general law, has no effect on the identity of the
corporation, or on its property rights or liabilities.
The corporation continues, as before responsible in
its new name for all debts or other liabilities which
it had previously contracted or incurred.

Sec. 23 (2) Qualifications of directors/trustees:

Extension of the corporate term should be done

during the life of the corporation and before the
expiration of the term of its existence.

1)

owner of at least one

share of the capital
stock of the corporation;

2)

share should stand in

his name on the books
of the corporation;

3)

trustees
must
members thereof

4)

majority of the directors

or
trustees
of
all
corporations organized
under the Corporation
Code
must
be
residents
of
the
Philippines

The corporation is ipso facto dissolved as soon as

the time stated in the articles of incorporation
expires.
When any corporation expires by the terms of its
articles of incorporation, it may thereafter continue
to act for the purpose of closing up its business,
but for no other purpose.
BOARD OF DIRECTORS/TRUSTEES AND OFFICERS

Sec. 27 Disqualifications of directors/trustees:

Powers of the Board:

1)
2)
3)

1) conviction of final judgment of

an
offense
punishable
by
imprisonment
for
a
period
exceeding 6 years, or

authority to exercise power;

conduct all business of the corporation;
control and hold all properties of the corporation

2) a violation of the Corporation

Code committed within 5 years
prior to the date of his election
or appointment

equitable principle - the stockholders may have

all the profits but shall turn over the management of
the enterprise to the Board of Directors

Directors are the chief administrators to whom the

power and duty of managing the regular and ordinary
business of the company is delegated.
o

This power may be further delegated to

individual directors or other officers or
agents.

These
disqualifications
are
only
minimum
disqualifications, as the
by-laws of a corporation
may add or provide for
additional
disqualifications as well
as qualifications

In order to be eligible as a director, what is

material is the legal title to, not beneficial
ownership, of the stock as appearing on the books
of the corporation (Lee vs. CA, 205 SCRA 752)

5 Classification of Powers of Corporate Agents:

1) those expressly conferred or granted by the
articles of incorporation, corporate by-laws or by
the official act of the board of directors;

A voting trust agreement (VTA) strips the owner of

the share of its legal title. What is left of the
owner is the beneficial title, the legal title being
transferred to the assignee.

2) those incidental or those acts naturally and

ordinarily done as they are reasonable and
necessary to carry out the corporate purpose(s);
3) those inherent or acts that go with the office;

Directors serve for a term of one (1) year and until

their successors are elected and qualified (Sec. 24)
this proviso cannot be amended. Thus a by-law
providing that the director shall serve for 3 years
is not valid, because the law is clear that term is
only 1 year.

4) those apparent or those acts though not actually

granted, the principal allows or permits it to be
done;
5) those powers arising out of customs, usage or
emergency
o

be

But if no election is conducted or no qualified

candidate is elected, the incumbent director shall
continue to act as such in a hold-over capacity
until an election is held and a qualified candidate is
so elected.

acts done by the agent which fall under

any of these classification binds the
corporation

12

Validity and Binding Effect of Actions of Corporate

Officers: (Sec. 25)

QUERY: Can a director server as a director for

more than 1 year? YES. Although the Corporation
Code limits the term of a director to only one year,
it allows an incumbent director to continue as a
director in a hold-over capacity until an election is
held and a qualified candidate is so elected.

A majority of the number of directors or trustees

as fixed in the articles of incorporation shall
constitute a quorum
for the transaction of
corporate business, unless the articles of
incorporation or the by-laws provide otherwise.

Election and Voting:

Thus, if there are 10 members of the board,

presence of six members constitute a quorum

Manner of election and voting:

1)

stockholders
representing
majority
of
the
outstanding capital stock, or members entitled to
vote, present either in person or in written proxy;

2)

election must be by ballot if requested by any

voting stockholder or member

3)

stockholders/members are entitled to vote through

cumulative voting

4)

candidates receiving the highest number of

votes shall be declared elected]

A decision of at least a majority of the directors or

trustees present at a meeting at which there was a
quorum shall be valid as a corporate act, except
for the election of officers which shall require the
vote of a majority of all the members of the board.
Thus, if there are 10 members of the board,
presence of 6 members constitute a quorum, and a
vote of 4 of the members present constitutes a
decision for a valid corporate act. BUT, if the act is
election of officers of officers, majority of all the
members of the board is necessary, thus 6 out of
10..

Cumulative voting gives the stockholder entitled

to vote the right to give a candidate as many votes
as the number of directors to be elected multiplied
by the number of his shares shall equal
o
It is a matter of right granted by law to
each stockholder with voting rights
o
In non-stock corporations cumulative
voting is not available, unless granted by
the articles of incorporation or by-laws,
since each member is only entitled to one
vote.
o

Any action of the board w/o a meeting and w/o the

required voting and quorum requirement will not
bind the corporation, unless subsequently ratified.
Individual directors cannot bind the corporation by
their individual acts, EXCEPT:
1)
2)
3)

Example of cumulative voting:

Shares of Stockholder = 1,000
Directors to be elected = 10
Thus 1,000 x 10 = 10,000 this
can be cast in favor of only one
candidate or may apportion his
vote to any number of candidate
that he may wish

In Yao Ka Sin Trading vs. CA, (209 SCRA 763),

it was held that: A corporate officer or agent may
represent and bind the corporation in transactions
with third persons to the extent that authority to
do so has:
a) been conferred upon him; or
a) Such powers are incidental in
the usual course of business;
or
b)
Such powers are implied
from
powers
intentionally
conferred; or
c) Such powers are added by
custom and usage ; or
d) Such powers are apparent as
the corporation has caused
persons dealing with the officer
or agent to believe that it has
conferred

Reason why cumulative voting is a right

granted by law to stockholders of a stock
corporation is to allow the minority to
have a rightful representation in the
board of directors.

If share is a preferred non-voting share, they are

excluded in determining quorum in election of the
board of directors/trustees, because such instance
is not included in the penultimate paragraph of
Sec. 6
Corporate Officers: (Sec. 25)
1)
2)
3)
4)

President who must be a director;

Treasurer who may or may not be a director;
Secretary who should be a resident and citizen of
the Philippines;
Such other officers as may be provided for in the
by-laws
o

by delegation of authority;
where expressly conferred; or
where the officer or agent is
clothed w/ actual or apparent
authority.

If the president is given general control and

supervision over the affairs of the corporation, it
will be presumed that he has authority to make
contracts and do acts within the course of its
ordinary business. But this is not so if the by-laws
provides for a different officer to assume the
management of the business of the corporation.
(Yao Ka Sin Trading vs. CA ). Thus even the
president has no power to deal with the business
management of the corporation, if the by-laws
specify the officer to deal with such business
management.

any two or more positions may be held

concurrently by the same person, except
that no one may be president and
secretary or as president and treasurer at
the same time

13

A corporation, through its board of directors should

act within the formalities prescribed, if any, by its
charter or by the general laws.

If removal is with cause, minority may be

deprived of rightful limitation, for the limitation of
the law only applies to removal w/o cause.

Directors must act as a body in a meeting called

pursuant to the law or the corporations by-laws,
otherwise, any action taken therein is may be
questioned by any objecting director
or
stockholder.

If a vacancy in the board of directors occurs by

virtue of removal, Sec. 28 authorizes the filling of
vacancy by the election of a replacement at the
same meeting w/o further notice.
But if the filling of vacancy occurs after the
meeting for removal, or at any subsequent general
or special meeting the filling of vacancy should
only be after further notice.

Defective actions by the board, however, may be

ratified expressly by the directors in a subsequent
legal meeting, or impliedly by the corporations
subsequent conduct.

Filling of Vacancies in the Office of Director or

Trustee: (Sec. 29) other than by removal or
expiration of term:

Express ratification may be by an express

resolution or vote to that effect.
It is made
through a formal action of the board of directors to
that effect.

1) Vote of at least a majority of the remaining

directors or trustees, if still constituting
a quorum;

Implied ratification may be by :

2) Otherwise, said vacancies must be filled by

the stockholders, in a regular or special
meeting called for that purpose

Recognition or adoption of the

act; or
acceptance and/or retention of
benefits; or
silence or acquiescence

If the vacancy to be filled up is by virtue of an

increase in the number of directors or trustees, it
shall be filled only by an election at a regular
or
at
a
special
meeting
of
stockholders/members duly called for the
purpose, or in the same meeting authorizing the
increase of directors/trustees if so stated in the
notice of the meeting.

Forward Sales sales agreement are entered

into even though the goods are not yet in the
hands of the seller. Common in copra sales for
future delivery.

Any change in the constitution of the board of directors

or trustees must be reported to the SEC within 30 days
after the election of the directors, trustees and officers of
the corporation. (Sec. 26) this proviso is mandatory

REMOVAL AND FILLING UP OF VACANCIES:

Removal of a director by the stockholders or
trustees may be with or without cause, subject
only to the limitation that removal w/o cause
may
not
used
to
deprive
minority
stockholders or members of the right of
representation which they may be entitled
under the law and further subject to the
requirements imposed by Sec. 28.

Why is there a need to report such change? To give

the public information, of the nature of the business,
financial condition and operational status of the company
together with the information on its key officers or
managers so that those dealing with it and those who
intend to do business with it may know or have the means
of knowing facts concerning the corporations financial
resources and business responsibility

Requisites for the Removal of directors or

trustees:

Compensation of Directors:

1) vote of stockholders representing at least 2/3

of the outstanding capital stock, or 2/3 of
members entitled to vote in case of non-stock
corporation;

Directors are not generally entitled to receive any

compensation except for reasonable per diems,
unless the by-laws so provide.

2) removal should take place either at a regular

meeting or at a special meeting called for the
purpose;
3) previous notice to stockholders or members of
the corporation of the intention to propose such
removal

QUERY:
When
compensation?

may

directors

receive

ANSWER: 1) Directors may receive compensation

by the vote of stockholders representing at least a
majority of the outstanding capital stock; or

Who may call a special meeting for the

removal of a director?
a) by the secretary on order of the
president; or
b)
on written demand of the
stockholders
representing
or
holding at least a majority of
the outstanding capital stock,; or
c)
by the majority of members
entitled to vote, in case of nonstock corporations

2) When there is a provision in the by-laws to that

effect; or
3) When the director renders extra-ordinary or
unusual service
Yearly compensation of directors shall not exceed
10% of the net income before income tax of the
corporation
Directors
are
generally
not
entitled
to
compensation because their office are usually filled

14

up by those chiefly interested in the welfare of the

institution, and such interests are presumed to be
the motive for executing duties of the office w/o
compensation

corporate action (ex. In B.P. 22 and

P.D. 115)
Three-Fold Duty of Directors:
1.
2.
3.

The general rule relative to non-compensation of

directors does not apply if the director concerned
performs special or extra-ordinary service

Willfully and knowingly voting or assenting to

patently unlawful acts violates the duty of
obedience

Special and extra-ordinary service rendered by the

director outside the regular duties of the director,
may form the basis for a claim of special
compensation

Gross negligence or bad faith in directing the

affairs of the corporation violates the duty of
diligence

In Sec. 30 the phrase as such directors delimits

the scope of the prohibition to compensation given
to them for services performed purely in their
capacity as directors or trustees

Acquiring any personal or pecuniary interest in

conflict with their duty as such director violates the
duty of loyalty

The unambiguous application of Sec. 30 is that

members of the board may receive compensation,
in addition to reasonable per diems, when they
render services to the corporation in a capacity
other than as directors/trustees.

Directors are required to manage the corporate

affairs with reasonable care and prudence. Their
liability is that of an agent who violated his
authority or neglects his duty to the damage of his
principal

The 10% ceiling only applies if compensation is as

such directors

The degree of diligence required of a director is

that degree of care and diligence which an
ordinary prudent director could reasonably be
expected to exercise in a like position under
similar circumstances.

The power to fix the compensation to be received

by the directors is left to the corporation, to be
determined in its by-laws
Liability of Corporate Officers

Business judgment rule states that questions

of policy and management are left to the honest
decision of the board of directors and the courts
are without authority to substitute its judgment as
against the former

Corporate directors, officers and agents are not

generally liable for obligations incurred by the
corporation through their acts if they did so within
the scope of their authority and in good faith

As long as the directors acted in good faith, their

actuations are not subject to judicial review

In MAM Realty Devt. Corp vs. NLRC (244 SCRA

797), it was held that a corporate officer cannot be
held jointly and severally liable with the
corporation in the termination of an employee in
the absence of malice or bad faith.

General rule: A directors is not liable for the

misconduct of co-directors or other officers unless:
1)
2)

QUERY: Can a corporation be a party to a criminal

case?
ANSWER:
YES, if the penalty imposed would
include a fine

2)

He assents to (a) patently unlawful

act of the corporation, or (b) for bad
faith, or gross negligence in directing
its affairs, or (c) for conflict of
interest, resulting in damages to the
corporation, its stockholders or other
persons;

Instances when duty of loyalty is violated by a

director:

He consents to the issuance of

watered stocks, or though with
knowledge of its issuance, does not
file with the corporate secretary his
written objection thereto;

3)

He agrees to hold himself personally

liable and solidarily liable with the
corporation; or

4)

He is made by a specific provision of

law to personally answer for his

He connives or participates in it; or

He is negligent in not discovering or
acting to prevent it

One test in determining whether a director can be

held liable for the misconduct of his co-director:
absent of actual knowledge of the wrongful
activities on the part of co-directors, the same
cannot be imputed to the other director unless in
the exercise of reasonable care attending his
responsibilities, he should have been aware of
suspicious circumstances demanding corrective
action

Instances when personal liability of a corporate

director, trustee or officer attach with the
corporation:
1)

Obedient;
Diligent; and
Loyal

15

1)

When a director or trustee acquires any personal

or pecuniary interest in conflict with his duty as
such director or trustee;

2)

When he attempts to acquire or acquires any

interest, in violation of his duty, adverse to the
corporations with respect to matters reposed to
him in confidence;

3)

When by virtue of his office, he acquires for

himself a business opportunity which should

belong to the corporation, thereby obtaining profits

to the prejudice of such corporation

4)

Forbidden profits - directors and officers are

fiduciary representatives of the corporation and as
such they are not allowed to obtain any personal
profit, commission, bonus or gain for their official
actions.
o
May also refer to those arising from
transactions of directors with third
persons
which
may
involve
misappropriation
of
corporate
opportunities and disloyal diverting of
business

o
o

Requirements for ratification of

the contract w/ a self-dealing director:
1)
2)
3)

A director is liable to account for profits if he

attempts to acquire or acquires interest adverse
to the corporation in respect to any matter
reposed in him in confidence. This case is not
subject to ratification by the stockholders (Sec. 31)

INTERLOCKING DIRECTORS: (Sec. 33)

A director in one corporation who deals or
transacts business with another corporation of
which he is also a director is known as an
interlocking director.

In sum, if the violation of loyalty consists of a

matter which has been reposed in him in
confidence the same is not subject to ratification

Contracts with interlocking directors are valid and

shall not be invalidated except in cases of fraud
and provided the contract is fair and reasonable

Sec. 34 speaks of an acquisition of a business

opportunity which has not been reposed to him in
confidence, the same may be subject to ratification
by the stockholders

If the interest of the interlocking director in one

corporation is substantial (more than 20%), and
merely nominal in the other, the contract becomes
voidable and would be subject to the provisions of
Sec. 32 on self-dealing directors

Sec. 31 are matters reposed to the directors in

confidence while Sec. 34 are matters not reposed
to a director in confidence

Stockholdings exceeding 20% of the outstanding

capital stock shall be considered substantial for
purposes of interlocking directors.

SELF-DEALING DIRECTORS (Sec. 32)

In effect, the law considers an interlocking director

who owns a substantial interest in one corporation
dealing with another corporation where he has
nominal interest, as a self-dealing director.

One who deals or transacts business with his own

corporation
These dealings are voidable.

Nominal interest when stockholdings is less than

20% of the outstanding capital stock

A contract of a corporation with one or more of its

directors or trustees or officers is voidable unless
all of the following conditions are present:

If the stockholding is either substantial or nominal

in both, he is considered as an inter-locking
director.

Presence of such director or trustee in the

board meeting in which the contract was
approved was not necessary to constitute a
quorum for such meeting;
The vote of such director or trustee was not
necessary for the approval of the contract

3)

The contract is fair and reasonable under the

circumstances; and

It must be at a meeting duly called for that

purpose;
Full disclosure of the adverse interest of the
director concerned must be made;
Contract is fair and reasonable under the
circumstances

The general doctrine, with regard to contracts of

this class is, not that they are absolutely void, but
they are voidable at the election of the party
whose interest has been so represented by the
party claiming under it.

If a director acquires for himself a business

opportunity
which
should
belong
to
the
corporation, he is bound to account for such profits
unless his act is ratified by the stockholders
owning or representing at least 2/3 of the
outstanding capital stock (Sec. 34)

2)

If not all of these requisites are present,

contract is voidable
If (1) or (2) is absent, contract is
ratifiable

Contracts with self-dealing directors

or trustees may be ratified by the vote of the
stockholders representing at least 2/3 of the
outstanding capital stock, or of at least 2/3 of the
members in a meeting duly called for the purpose

Corporate opportunity doctrine places a

director of a corporation in the position of a
fiduciary and prohibits him from seizing a business
opportunity and/or developing it at the expense
and with the facilities of the corporation

1)

In case of an officer, the contract has been

previously authorized by the board of directors

Derivative Suit
3 suits that stockholders/members may bring
against erring directors or officers:
1)

16

INDIVIDUAL OR PERSONAL SUIT one

brought by the shareholder for direct
injury to his rights;

2)

REPRESENTATIVE OR CLASS SUIT one

which one or more members of a class
sue for themselves as a class or for all to
whom the right was denied

3)

DERIVATIVE SUIT an action based on

injury to the corporation to enforce a
corporate right wherein the corporation
itself is joined as a necessary party, and
recovery is in favour of and for the
corporation

3)

Well-settled is the rule that courts cannot

undertake to control the discretion of the board of
directors about administrative matters as to which
they have legitimate power of action, and
contracts intra-vires entered into by the board of
directors are binding upon the corporation and the
courts will not interfere unless such contracts are
so unconscionable and oppressive as to amount to
a wanton destruction of the rights of the minority

Power to sue and be sued is lodged with the board

of directors, thus the board has the authority to
institute a suit in behalf of a corporation
To allow any stockholder to institute the case
would violate the doctrine of corporate entity and
may result to multiplicity of suits including the well
established rule that all corporate powers should
be exercised by the board of directors.

Well-settled
rules,
requirements
and
procedure for a derivative suit to prosper:

Instances for the institution of a derivative

suit:
1)

When the corporate directors committed

breach of trust by their frauds, ultra-vires,
and negligence ; or

2)

When the corporation is unable or unwilling

to institute a suit to remedy the wrong; or

3)

When demand upon the Board of Directors to

institute suit is useless, as the principal
defendants are the Board of Directors
themselves.

General Rights of a Stockholder:

1)
2)
3)

To have a certificate of stock;

To vote at meetings of a corporation;
To
participate
proportionately
in
the
distribution of corporate assets upon the
dissolution and winding-up of the corporation.

Party bringing suit should be a shareholder as

of the time of the act or transaction
complained of took place;

2)

He has tried to exhaust intra-corporate

remedies, i.e. made a demand upon the board
of directors for relief but the latter failed or
refused his plea;

3)

Stockholder bringing the suit must allege in

his complaint that he is suing on a derivative
cause of action on behalf of the corporation
and other stockholders similarly situated;
cause of action devolves upon the corporation

4)

Corporation should be made a party to make

the courts judgment binding upon it;

5)

Benefit or damages recovered shall pertain to

the corporation

The board of directors of a corporation may

delegate the powers and functions that may be
lawfully delegated to other corporate officers or
agents for convenience and appropriate action on
matters that may require immediate attention.
The corporation is authorized to create, in
accordance with its by-laws, executive committees
to perform specific functions w/in the competence
of the board.

One of the requirements for a derivative suit to

prosper is that the minority shareholders who are
suing for and on behalf of the corporation must
allege in his complaint before the proper forum
that he is suing on a derivative cause of action on
behalf of the corporation and all other shareholder
similarly situated who wish to join.

Executive Committee:

The SEC exercises original and exclusive

jurisdiction over derivative suits, they being intracorporate in nature (Sec. 5b, P.D. 902-A)
Requisites for a derivative suit (SMC vs.
Khan, 176 SCRA 447)

2)

1)

Executive Committee: (Sec. 35)

In derivative suits, the stockholder is regarded as

the nominal party, while the corporation is the real
party in interest.

1)

Cause of action actually devolves on the

corporation, the wrongdoing or harm having
been, or being caused to the corporation and
not to the particular stockholder bringing the
suit.

Party bringing suit should be a shareholder as

of the time of the act or transaction
complained of took place;

1)

Must be composed of
members of the board;

2)

Members are appointed by the board;

3)

It may act
members;

4)

Actions must be within the competence of the

board

by

not

majority

less

vote

of

than

all

its

The powers, functions and authority of the

executive committee are those that may be
delegated to it by the board of directors or those
that may be specifically granted to it in the by-laws
of the corporation

He has tried to exhaust intra-corporate

remedies, i.e. made a demand upon the BoD
for relief but the latter failed or refused his
plea;

All actions of the committee must be by a majority

vote of all its members except:

17

a)

Approval of any action for which stockholders

approval is also required;

Court is necessary to confer jurisdiction of the

court over a corporation

b)

Filing of vacancies of the board;

c)

Amendment or repeal of by-laws

adoption of new-by-laws;

To whom summons may be served: (Sec. 11, Rule

14 of the 1997 Rules of Court)

or the

d)

Amendment or repeal of any resolution of the

board which by its express terms is not so
amendable or repealable; and

e)

Distribution of
shareholders

cash

dividends

to

o
o
o
o
o
o

the

In the case of E.B. Villarosa & Partner Co, Ltd vs,

Benito, (G.R. No. 136426, 08/06/1999), the SC enunciated
its ruling in Delta Motor Sales Corporation vs. Mangosing
that: A strict compliance with the mode of service is
necessary to confer jurisdiction of the court over a
corporation. The officer upon whom service is made must
be the one named in the statute; otherwise the service is
insufficient.

CORPORATE POWERS AND AUTHORITY

Classification of Corporate Authority:
1)

Those expressly granted or authorized by law

inclusive of the corporate charter or articles of
incorporation;

2)

Those impliedly granted as are essential or

reasonably necessary to the carrying out of
the express powers; and

3)

Power of succession
The right of succession basically means that it
persists to exist despite the death, incapacity, civil
interdiction or withdrawal of the stockholders or
members thereof.

Those that are incidental to its existence

Corporate Powers and Authority (Sec. 36):

1)

To sue and be sued in its corporate name;

2)

Succession by its corporate name;

3)

Adopt and use a corporate seal;

4)

Amend its articles of incorporation;

5)

Adopt by-laws and to amend or repeal the same;

6)

Issue or sell stocks to subscribers and sell treasury

stocks, in cases of stock corporations; and admit
members, in cases of non-stock corporation;

7)

Being a juridical corporation, its existence as such

continues for such period of time as may be stated
in its articles of incorporation unless sooner
dissolved in accordance with law or its corporate
term shortened pursuant to Sec. 37 of the
Corporation Code
Power to adopt and use a corporate seal
A corporation may exist w/o a seal, and thus, as a
rule, the use of corporate seal is merely permissive
and not mandatory.
Function of the corporate seal: imparts a prima
facie evidence of the due execution by the
corporation of a written document or obligation

Purchase, receive, take or grant, hold, convey, sell,

lease, pledge, mortgage and otherwise deal w/
such real or personal property, as the transaction
of the lawful business of the corporation may
reasonably and necessarily require;

8)

Merge or consolidate with other corporations;

9)

Make reasonable donations, except in favor of any

political party or candidate;

President;
Managing partner;
General manager;
Corporate secretary;
Treasurer; or
In-house counsel

Corporations can enter into contracts w/o the use

of its corporate seal
Power to amend its articles of incorporation
Amendments of article of incorporation by
corporations formed under the Corporation Code is
a matter of right

10) Establish pension, retirement, and other plans for

the benefit of its directors, trustees, officers and
employees; and

Insofar as corporations formed by special laws,

amendment of AoI is not a matter of right, as the
special law creating them may not authorize or
empower the corporation to make amendments

11) Exercise such other powers as may be essential

and necessary to carry put its purposes

Power to adopt by-laws

Power to Sue and be sued:

Corporations formed under the Corporation Code

requires the adoption of by-laws, within one month
from receipt of official notice of the issuance of
certificate of incorporation or registration

Suits against and by corporations must be

instituted at the place of the principal office of the
corporation

Power to issue or sell stocks and to admit members

The residence of the corporation is the place of its

principal office, and may be sued only at that place

Issuance or sale of stocks is an inherent right of

any stock corporation subject to regulations by law

Strict compliance with the mode of service of

summons in Sec. 11, Rule 14 of the 1997 Rules of

Admission and termination of members is a

prerogative
granted by law to non-stock

18

corporations and the manner and procedure for

such must be contained in its articles of
incorporation or by-laws

Power to exercise such other powers essential or

necessary to carry out its purposes
Test applied is whether the act in question is in
direct and immediate furtherance of the
corporations business fairly incident to the
express powers and reasonably necessary to their
exercise. If so, the corporation has the power to
do it, otherwise, not.

Power to acquire or alienate real or personal property

Exercise of this right is limited to transactions as
the lawful business of the corporation may
reasonably and necessarily require.
Art. XII ,Sec. 3 of the 1987 Constitution provides
that private corporations may not hold alienable
lands of the public domain except agricultural
lands but only by lease for a period not exceeding
25 years, and not to exceed 1,000 hectares. A

Classification
of implied
corporation may exercise:

Acquisition of property by a corporation, for

example, through chattel mortgage, is not allowed
if the property acquired would not have a
necessary connection to the legitimate business of
the corporation which may be inferred from its
articles of incorporation
In acquisition of property, prospects with the
future may betaken into consideration.
Every corporation has the power to purchase, hold
and lease property as the transaction of the lawful
business of the corporation may reasonably
require.

powers

which

1)

Acts in the usual course of business;

2)

Acts to protect debts owing to the corporation;

3)

Embarking in a different business (depending

on whether it is a regular and permanent part
of its business or is merely casual, temporary
or incidental)

4)

Acts in part or wholly to protect or aid

employees; and

5)

Acts to increase business

If the act is one which is lawful in itself and not

otherwise prohibited, and is done for the purpose
of serving corporate ends in a substantial and not
in a remote and fanciful sense, it amy be fairly
considered within the corporations charter powers

Power to enter into merger or consolidation

Power to extend or shorten corporate term

Power to make reasonable donations

Ordinarily, a pure gift of funds or property by a
corporation not created for charitable purpose is
not authorized and would constitute a violation of
the rights of its stockholders unless it is
empowered by a statute.

Requirements and procedure for extending or

shortening the corporate term:
1)

Approval by the majority vote of the board of

directors or trustees;

Reason for this is that a business corporation is

regarded as being carried on primarily for the
profit of its stockholders.
It is not for the
corporation to be generous with other peoples
money

2)

Ratification by the stockholders representing

at least 2/3 of the outstanding capital stock or
2/3 of the members in case of non-stock
corporations;

3)

Ratification must be at a meeting duly called

for the purpose;

4)

Prior written notice of the proposal to extend

or shorten the corporate term must be made
stating the time and place of meeting, either
by mail or personal service;

5)

Extensions cannot be made earlier than 5

years prior to the original or subsequent
expiry date unless there are justifiable reasons
for an earlier extension;

6)

Extensions must be made during the lifetime

of the corporation;

7)

Any dissenting stockholder may exercise his

appraisal right;

8)

Submission of the amended articles with the

SEC;

9)

Approval thereof by the SEC

Limitations on donations by a corporation:

1)

Donation must be reasonable;

2)

Must be for public welfare, or for hospital,

charitable, scientific, cultural or similar
purpose; and

3)

Shall not be in aid of any political party or

candidate, or for purposes of partisan political
activity

Power to establish pension, retirement and other

plans
A corporation may furnish medical care and other
aid to its officials and employees as is necessary to
enable the corporation to fittingly carry out its
purposes and business
The directors, officials, and employees are the very
persons responsible for the success of any
business undertaking and granting them certain
benefits and privileges would necessarily be to the
advantage of the corporation

Power to increase or decrease capital stock; incur,

create or increase bonded indebtedness
Requirements and procedure
decrease the corporate capital:

19

to

increase

or

1)

Approval by the majority of the board of

directors;

2)

Ratification by the stockholders representing

at least 2/3 of the outstanding capital stock;

3)

Prior written notice of the proposed increase

or decrease of the capital stock indicating the
time and place of meeting;

4)

paying for his shares, w/o valuable consideration

for such release.
Bond one where an obligor obliges himself to pay a
certain sum of money to another at a day named
Power to deny pre-emptive rights
A right granted by law to all existing stockholders
of a stock corporation to subscribe to all issues or
disposition of shares of any class, in proportion to
their respective stockholdings, subject only to the
limitation imposed under Sec. 39 of the Code.

Certificate in duplicate signed by a majority of

the directors, countersigned by the chairman
and the secretary of the stockholders
meeting;

5)

In case of increase of capital stock, 25% of

such increased capital must have been already
subscribed, and that at least 25% of the
subscribed capital must have been paid-up;

6)

Decrease in the capital stock must

prejudice the right of the creditors;

not

7)

Filing of the certificate of increase

amended articles with the SEC; and

and

8)

Approval therof by the SEC

The underlying basis for the grant of this right is

the preservation, unimpaired and undiluted , of
the old stockholders relative and proportionate
voting strength and control, that is the existing
ration of their proprietary interest and voting
power in the corporation
Absent this right, a controlling stockholder may
easily strengthen his hold of the corporate affairs
by simply arrogating unto himself all subsequent
issuance or disposition of corporate shares
Gen. Rule: Pre-emptive right may be denied. Exceptions:
1)

Special amendments must be governed by the

special provisions of the law and not by Sec. 16 of
the Code

2)

3 methods of increasing the capital stock of a

corporation:
1)

Increasing the par value of the existing

number of shares w/o increasing the number
of shares;

2)

Increasing the number of existing shares w/o

increasing the par value thereof; and

3)

Increasing the number of existing shares and

at the same time increasing the par value of
the shares

2)

3)

these exceptions will not apply to

close corporations (see Sec. 102)

right of pre-emption may be lost by waiver of the

stockholder, expressly or impliedly, by his inability
or failure to exercise it after having been notified
of the proposed issuance or disposition of shares

Reasons for decreasing the capital stock of a

corporation:
1)

when the shares to be issued is in

compliance with laws requiring stock
offerings or minimum stock ownership by
the public; or
shares to be issued in good faith with the
approval of the stockholders representing
2/3 of the outstanding capital stock either
in (a) in exchange for property needed for
corporate purpose or (b) in payment of a
previously contracted debt

The coverage of pre-emptive right includes new

shares, unissued shares forming part of the
original capital stock, and treasury shares

To reduce or wipe out existing deficit

where no creditors would by thereby
affected;

Power to sell or dispose of assets (Sec. 40)

When the capital is more than what is

necessary to procreate the business or
reduction of capital surplus; or

Conditions:

To write down the value of its fixed assets

to reflect the present actual value in case
where there is a decline in the value of
the fixed assets of the corporation

the reduction of the capital stock shall not be

approved by the SEC if its effect shall prejudice the
rights of corporate creditors
Trust fund doctrine subscriptions to capital
stock of corporations constitute a fund which the
creditors have a right to look up to for the
satisfaction of their claims
A corporation has no power to release an original
subscriber to its capital stock from the obligation of

20

1)

Resolution by the .majority vote of the board of

directors/trustees;

2)

Authorization from the stockholders representing

atleast 2/3 of the outstanding capital stock or 2/3
of the members;

3)

Ratification of the stockholders or members in a

meeting duly called for the purpose;

4)

Prior written notice of the proposed action and of

the time and place of meeting sent to each
shareholder of record, either personally or through
mail;

5)

Sale of the assets shall be subject to the provisions

of existing laws

6)

Any dissenting stockholder shall have the option to

exercise his appraisal right
o

4)

These procedures shall not apply

if the sale or disposition does not
involve all or substantially all of
the assets of the corporation as
to render it incapable of
continuing
the
corporate
business or accomplishing the
purpose
for
which
it
was
incorporated

Redeem redeemable shares

The limitation that the corporation must at all

times have unrestricted retained earnings is a
condition for the exercise of this corporate power.
Thus, a corporation cannot use its capital stock to
purchase its own shares except
Redemption of redeemable shares, where the
corporation may acquire its own shares regardless
of the existence of unrestricted retained earnings;
and

Thus, if the same is necessary in

the usual and regular course of
the business, Sec. 40 will not
apply.

In the exercise of stockholders of their right to

compel a close corporation to purchase his shares
for any reason (Sec. 105), when the corporation
has sufficient assets in its book to cover its debts
and liabilities exclusive of capital stock

For Sec. 40 to apply, the sale or

disposition of assets must be
such as to render the corporation
incapable to carry out the
purpose of its organization, or
that the proceeds thereof will not
be used for the conduct of the
remaining business

Power to Invest Funds: (Sec. 42)

The phrase may invest its funds in Sec. 42
means an investment in the form of money, stock,
bonds and other liquid assets and does not include
real properties or other fixed assets

Sale of property made by the board of

directors/trustees of a corporation w/o authority,
as when consent is wanting is null and void and
produces no effect whatsoever (Islamic Directorate
of the Phils. vs. CA, 272 SCRA 454).

Requirements and steps to be followed for a valid

investment of corporate funds:
1)

Resolution by the majority of the board of

directors or trustees;

Generally, where one corporation sells or otherwise

transfers all of its assets to another corporation,
the purchasing corporation is not liable for the
debts and liabilities of the transferor except:

2)

Ratification by the stockholders representing

at least 2/3 of the outstanding capital stock or
2/3 of the members ;

3)

Ratification must be made at a meeting duly

called for the purpose;

4)

Prior
written
notice
of
the
proposed
investment and the time and place of meeting
addressed to each stockholder by mail or
personal service;

5)

Any dissenting stockholder shall have the

option to exercise his appraisal right

1)

Where the purchaser expressly or

impliedly agrees to assume such
debts;

2)

Where the transaction amounts to a

consolidation or merger of the
corporations;

3)

Where the purchasing corporation is

merely a continuation of the selling
corporation; and

4)

The requirement relative to the ratification and

approval of the stockholders only applies to
investments that are beyond the corporations
primary purpose, or outside the express or
implied powers of the investing corporation

Where the transaction is entered into

fraudulently in order to escape
liability (Edward J. Nell Co. vs. Pacific
Farms, Inc. 15 SCRA 415)

Thus, where the investment is reasonably

necessary to accomplish its primary purpose, the
approval of the stockholders or members is not
required.

Power to acquire own shares (Sec. 41)

A corporation can acquire its own shares provided
it is for a limited corporate purpose(s)

In the case of Gokongwei, Jr. vs. SEC, (89 SCRA

369), it was held that investment for facilities
apparently relevant to the corporate purpose does
not require the approval of the stockholders.

Provided further that a corporation should have

unrestricted retained earnings before it could
acquire its own share
Instances when a corporation may acquire its
shares:
1)

To eliminate fractional shares; (fractional

shares are no longer allowed in the Phils.)

2)

To collect or compromise an indebtedness to

the corporation;

3)

To pay dissenting or withdrawing stockholders;

In the same case, it was further held that if the

investment is made in pursuance of the corporate
purpose, it does not need the approval of the
stockholders. It is only when the purchase of
shares is done solely for investment and not to
accomplish the purpose of its incorporation that
the vote of approval of the stockholders holding
shares entitling them to exercise at least 2/3 of
the voting power is necessary

21

Power to declare dividends (Sec. 43)

Judgment to declare dividends is conclusive to the

board of directors except when they act in bad faith, or
for a dishonest purpose or act fraudulently,
oppressively, unreasonably or unjustly, or abuse of
discretion can be shown so as to impair the rights of
the complaining stockholders to their just proportion of
corporate profits

Dividends are corporate profits set aside, ordered

by the Board of Directors to be paid to the
stockholders
Power to declare dividends is inherent in every
stock corporation

GEN. RULE: If profits earned by the corporation

exceeds 100% of the corporations paid-up capital
stock, the board is be compelled to distribute dividends

Unrestricted
retained
earnings
are
the
undistributed earnings of the corporation which
have not been allocated for any managerial,
contractual or legal purposes and which are free
for distribution to the stockholders as dividends

Instances when a corporation may not be

compelled to declare dividends even profits exceed
100% of the paid-up capital:

A corporation has no power to declare dividends if

its paid-up capital is not maintained or impaired.
This is because this capital represents a trust
fund which at all times must be kept intact for the
protection of the creditors who have a right to rely
on such subscription and the paid-up capital for
the satisfaction of their claims

1)

When justified by definite corporate

expansion projects or programs
approved by the board of directors;
or

2)

When the corporation is prohibited

under any loan agreement with any
financial institution or creditor, from
declaring dividends w/o his consent,
and such consent has not yet been
secured; or

3)

When it can be clearly shown that

such retention is necessary under
special circumstances obtaining in
the corporation

Directors cannot declare dividends if there are no

surplus profits or when the corporation is insolvent
3 types of dividends that may be distributed to the
stockholders:
1) Cash dividends those that are payable in
lawful money or currency;
2) Property dividends those that are paid in
the form of property instead of cash

When dividend rights vest

In case of cash or property dividends, their
declaration may be revoked if it has not been
made public or communicated to the stockholders,
and until such announcement, the action of the
directors is not final

3) Stock dividends the corporations shares of

stock itself or the certificates evidencing it
Board of Directors exercise exclusive authority as
to whether or not the corporation declare cash or
property dividends

Thus once, cash or property dividends has been

declared, it is irrevocable

As to the declaration of stock dividends, the

approval
of
the
stockholders,
holding
or
representing at least 2/3 of the outstanding capital
stock is required

This irrevocability
dividends

does

not

apply

to

stock

Property dividends are declared if there is surplus

in that form, e.g., bonds, notes and shares of
other corporation

A stock dividend is actually 2 things: (1) a dividend

and (2) the enforced use of the dividend money to
purchase additional shares of stock at par

Effect of declaration of cash and property

dividends: reduces the corporate assets to the
extent of dividends declared

It should be noted that stock dividends are

different from shares of stock forming part of the
capital stock of the corporation.

Effect of stock dividends: merely divides the

stockholders existing shares into smaller units. It
does not increase the proportionate interest of the
stockholders of the corporation

In
Neilson
&
Co.,
Inc.
vs.
Lepanto
Consolidated Mining Co., 26 SCRA 540, it was
ruled that A corporation may legally issue shares
of stock in consideration of services rendered to it
by a person not a stockholder, or in payment of
indebtedness. But such issued share should be that
which forms part of the capital. A share of stock
thus issued should be part of the original capital
stock of the corporation upon its organization, or
part of the stocks that are originally issued by the
corporation and forming part of the capital that can
be exchanged for cash or services rendered.

Corporation cannot issue more than what is

authorized to issue, if it wants to issue more than
the authorized capital stock, it should then
increase its capital
Authority to declare dividends lodged with the board
(Sec. 43)

But a share of stock coming from stock

dividends cannot be issued to one who is not a
stockholder of a corporation. Stock dividends are
distribution of the shares of stick of a corporation
among its stockholders as dividends. Thus it is
apparent that stock dividends are issued only to

A corporation may have a surplus or accumulated

profits legally available for dividends, but the right of
the shareholders to the making of any distribution is
dependent upon the exercise of an honest discretion of
the directors as to its financial advisability at the time

22

stockholders because
entitled to dividends.

only

stockholders

are

If a corporation acts beyond the power or authority

granted to it by law, its articles of incorporation or
those necessary or incidental to its existence, such
actions are ultra-vires.

Stock dividends cannot be issued to a

person who is not a stockholder in payment of
services rendered.

Ultra-vires acts are subject to collateral attack

Whoever is the registered owner on a specified

record date is, as far as the corporation is
concerned is entitled to the dividends

Powers that can be exercised by a corporation:

o
o
o

Power to enter into management contracts (Sec. 44)

Requirement for a valid management contract:
(ONLY MAJORITY VOTE IS NEEDED)
1)

Resolution of the board of directors;

2)

Approval by the stockholders holding or

representing a majority of the outstanding
capital stock or majority of members;

3)

Approval of the stockholders or members

made at a meeting duly made for that
purpose;

4)

Contract shall no be for a period longer than

five (5) years for any one term except those
which relate to the:

Thus, any transaction which is fairly incidental or

auxiliary to the main business of the corporation
may be undertaken
2 types of ultra-vires acts:
1)
2)

Ultra-vires acts not illegal per se may become

binding and enforceable by ratification, estoppel
or on equitable grounds. These are acts merely
beyond the scope of the articles of incorporation
and are merely voidable

Exploration;
Development
or utilization of
natural
resources
Which may be entered into for such periods as
may be provided by pertinent laws and
regulations

However, ultra-vires acts not illegal per se cannot

be binding regardless of ratification, estoppel or
equitable grounds if the public or third parties
are prejudiced

When the 2/3 vote requirement is required:

Where the stockholders representing the same
interest of both the managing and managed
contract own or control more than 1/3 of the
total outstanding capital stock of the
managing corporation; and

2)

Where a majority of the members of the board

of directors of the managing corporation also
constitute a majority of the directors of the
managed corporation;

3)

Where the contract would constitute the

management
or
operation
of
all
or
substantially all of the business of another
corporation.

Illegal; and
Merely beyond the power to perform

Illegal acts are void ab initio. These are acts

contrary to law, morals, public order or public
policy

I.
II.

1)

Those expressly conferred;

Those necessary to its existence;
Those incidental to the exercise of its
power;
Those beneficial to the corporation

Consequences of Ultra-Vires acts:

If it will not constitute the

management
of
all
or
substantially all of the business
of another corporation, only the
vote of the majority of the
stockholders
holding
or
representing at least a majority
of the outstanding capital stock
or majority of the members is
necessary

Ultra Vires Acts

Those that cannot be executed or performed by a
corporation because they are not within its
express, inherent or implied powers as defined by
its charter or articles of incorporation

23

ON THE CORPORATION ITSELF: franchise

or certificate of registration of the
corporation may be revoked by the proper
forum

ON THE RIGHTS OF THE STOCKHOLDERS:

stockholder may bring an individual or
derivative suit to enjoin an ultra-vires act

ON THE IMMEDIATE PARTIES:

If the contract is fully executed

on both sides, contract is
effective to both parties;

If the contract is executory on

both sides, neither party can
maintain an action for its nonperformance;

Where the contract is executory

on one side only, and had been
fully performed on the other, the
party who has received the
benefits from the performance is
estopped to set up that the
contract is ultra-vires to defeat
the action on the contract

In the case of Carlos vs. Mindoro Sugar Co. (57

PHIL 353) it was held that it is not ultra-vires for a
corporation to enter into contracts of guaranty
where it is done so in furtherance of its purpose
and business.

In cases of banks, banking institution, building and

loan association, trust company, insurance
company, public utility, educational institution or
other special corporations governed by
special laws, filing of by-laws or amendments
thereto should be accompanied by a certificate of
the appropriate government agency to the effect
that such by-laws and amendments are in
accordance with law, otherwise, the SEC shall not
accept the filing thereof.

When a corporation acquires commercial

papers or bonds in the legitimate
transaction of its business it may sell
them,
indorse
or
guarantee
their
payment, to give them a marketable
quality

In sum, by-laws become effective only upon the

approval of the SEC

In Crisologo-Jose vs. CA (117 SCRA 594), it was

held that the NIL which holds an accommodation
party liable on the instrument to a holder for
value, although such holder at the time of taking
the instrument knew him to be only an
accommodation party, does not include nor apply
to corporations which are accommodation parties.
This is because the issue or indorsement of
negotiable
paper
by
a
corporation
w/o
consideration and for the accommodation of
another is ultra-vires.

When to adopt by-laws:

1)
2)

If it is adopted prior to incorporation, by-laws

must be signed by all incorporators w/o the need
of the affirmative vote of the majority of the
outstanding capital stock or the majority of the
members.

By way of exception, an officer or agent of

a corporation shall have the power to
execute or indorse a negotiable paper in
the name of the corporation for the
accommodation of third parties only if
specifically authorized to do so.

If it is adopted and filed after incorporation, the

stockholders or members consent or approval
would be required and must be signed by the
stockholder/members
voting
for
them.
Furthermore, the by-laws are to be adopted within
one month after receipt of notice of its due
incorporation. Failure to do so may result to
suspension or revocation of its corporate franchise

BY-LAWS
By-laws are rules and ordinances made by a
corporation:
a)
b)
c)

By-laws are merely internal rules of a corporation

and therefore may not bind or affect 3rd persons
unless they have knowledge of its existence and
contents (Fleisher vs. Botica Nolasco, 47 PHIL 584
and CBC vs, CA, 270 SCRA 503)

For its own government;

To regulate the conduct of stockholders; and
Define the duties of the stockholders or
members

Sec. 46 specifically requires a corporation to adopt

by-laws within one month after receipt of official
notice of the issuance of the certificate of
incorporation by the SEC

Effect of non-filing of by-laws: Failure to file bylaws on time may be penalized with the imposition
of an administrative fine w/o affecting the
corporate of the erring firm. It shall not result in
the automatic dissolution of the corporation. SEC
is however, empowered to suspend, or revoke
after proper notice and hearing, the franchise or
certificate of the corporation on the ground, inter
alia, of failure to file the by-laws on time (Loyola
Grand Villas Homeowners Asso., Inc vs. CA,
276 SCRA 681)

Requirements for the adoption of by-laws:

1)

Must be adopted within one month after

receipt of official notice of the issuance of the
certificate of incorporation by the SEC;

2)

With the affirmative vote of the stockholders

representing at least a majority of the
outstanding capital stock or members;

3)

By-laws
must
be
signed
by
stockholders/members voting for them;

4)

Must be duly certified by a majority of the

directors or trustees

5)

Countersigned
corporation

6)

Filed with the SEC which shall be attached to

the original articles of incorporation

by

the

secretary

of

Prior to incorporation; or
Within one month after receipt of the
official notice of the issuance of the
certificate of incorporation

The corporation in the absence of such power,

cannot ordinarily inquire into or pass upon the
legality of the transaction by which its stock passes
from one person to another, nor can it question the
consideration upon which sale is based.

the

A corporation can do no more than prescribe a

general mode of transfer on the corporate books
and cannot justify an unreasonable restriction
upon the right of sale

the

Jus disponendi, being an incident of ownership of

property, the general rule is that every owner of a
corporate share has the same uncontrollable right
to alienate them which attaches to the ownership
of any other species of property

In all cases, by-laws shall be effective upon

issuance by the SEC of a certification that the bylaws are not inconsistent with the Corporation
Code.

In Gokongwei, Jr, vs. SEC (89 SCRA 336), it was

held that an amendment which renders ineligible,

24

or if elected, subjects to removal, a director if he

be also a director in a corporation whose business
is in competition with or is antagonistic to the
other corporation is valid. This is based on the
principle that where the director is so employed in
the service of a rival company, he cannot serve
both, but must betray one or the other.

4) Notice should be sent at least two weeks prior

to the meeting, unless a different period is
required by the by-laws
Special meetings:

Sec. 21 of the Corporarion Code allows a

corporation to prescribe in its by-laws
qualifications, duties and compensation of
directors, officers and employees in
addition to the qualification specified in
Sec. 30 of the Code

3)

Must be general and uniform in its effect or

applicable to all alike ot those similarly
situated;

4)
5)

the rule that annual meetings

must be held on the date fixed
by the by-laws, or on any date of
April every year is subject to
exception, i.e., when the annual
meeting cannot be held on the
appointed time for some valid
and meritorious reasons

2) Prior notice must be given

Must not impair the obligations of contracts or

vested rights; and

failure to give notice renders the

resolution
made
thereunder
voidable at the option of the
stockholder or member not
notified

Certain matters that should be

taken up in a meeting duly called
for the purpose:
1) removal of directors or trustees;
2) filling up of vacancies in the
office of directors or trustees;
3) ratification of contract of the
corporation with any of its
directors or trustees;
4) extension or shortening of
corporate term;

Must be reasonable

QUERY: May the by-laws provide for other location for

stockholders meeting?
ANSWER: NO, in case of stock corporations.
YES, in case of non-stock corporations.
MEETINGS:

increase or decrease of
capital stock or incurring,
creating,or
increasing
bonded indebtedness;
5) sale or other disposition
of all or substantially all
of the assets of the
corporation;
6) investment of corporate
funds
in
another
corporation or business
or
for
any
other
purpose;
7) declaration
of
stock
dividends;
8) entering
into
a
management
contract
with
another
corproration;
9) amendment or repeal of
the by-laws or adoption
of a new one;
10) fixing the issue price of
no-par value shares by
the stockholders;
11) merger or consolidation;

Every
duly
convened
assembly
either
of
stockholders, members, directors or trustees,
managers, etc., for any legal purpose, or the
transaction of business of a common interest
Classification of meetings:
1)
2)

At least one week written notice shall be

sent to all stockholders or members,
unless otherwise provided in the by-laws

Must not be contrary to law, public policy or

morals;
Must not be inconsistent with the articles of
incorporation;

2)

1) Must be held on a date fixed in the

by-laws or in accordance with law

Elements of a valid by-laws:

2)

Held anytime deemed necessary, or as

provided in the by-laws;

Requirements to have a valid stockholders meeting:

Doctrine of corporate opportunity a

recognition by the courts that the fiduciary
standards could not be held where the fiduciary
was acting for two entities with competing
interests.
This doctrine is premised on the
unfairness, in particular circumstances, of an
officer or director taking advantage of an
opportunity for his own personal profit when the
interest of the corporation justly calls for
protection

1)

1)

Regular meetings;
Special meetings

Regular meetings:
1) Should be held annually;
2) Held on a date fixed in the by-laws, or if not
so fixed on any date of April of every year as
determined by the board of directors or
trustees;
3) Written notice of regular meetings should be
sent to all stockholders or members

25

12) dissolution
corporation

the

A quorum shall consist of the stockholders

representing a majority of the outstanding
capital stock or a majority of the
members

3) It must be held at the proper place (Sec.

51)

Basis of determining quorum in stock

corporations: total subscription of the
stockholders

of

meetings, whether regular or

special shall be held in the city or
municipality where the principal
office of the corporation is
located, and if practicable in the
principal office of the corporation

Metro Manila for purposes of this

meetings, shall be considered as
one city or municipality

Notice of meetings shall be in

writing, and the time and place
therof stated therein

However, non-stock corporations

may fix the place of meeting,
even
outside
the
city
or
municipality of its principal office,
provided proper notice is sent to
all its members indicating the
time, place and date of the
meeting which shall be within the
Philippines (Sec. 93)

Basis of determining quorum in non-stock

corporations:
total
number
of
registered voting members of the
non-stock corporation
Any provision in the by-laws relative to
the quorum requirement, will be invalid if
it is in conflict with the provision of the
statute on the subject
A by-law provision requiring less than the
proportion required by the Code will have
no force and effect since a by-law
provision is subordinate to the statute and
cannot
be
used
to
defeat
the
requirements of the law
Should the Code require a specific number
of vote necessary for a valid resolution,
the by-laws cannot validly provide for a
lesser number
Directors/Trustees Meetings
Regular Meetings of Directors/Trustees shall
be held monthly, unless by-laws provide otherwise

4) It must be called by the proper party

Special Meetings of Directors/Trustees shall

be held at any time upon the call of the president
or as provided in the by-laws

Generally the power to call meetings is

vested in the board of directors, and
unless the by-laws so provide, the
president of the corporation has no power
to call a meeting of the stockholders or
members

Venue for directors/trustees meetings:

anywhere in or outside the Philippines, unless bylaws provide otherwise

In cases where there is no person

authorized to call a meeting, a petitioning
stockholder upon showing good cause
therefor may call for a meeting by giving
proper notice in accordance with the
Code.

Notice of meetings should be sent to every

director or trustee at least one day prior to the
scheduled meeting, unless otherwise provided by
the by-laws
Meetings outside the Philippines must be
reasonable and related to the business of the
corporation

In sum, the persons authorized to call

a meeting are:
1)
2)
3)

4)
5)

The SEC opines that a special meeting conducted

in the absence of some of the directors and w/o
any notice to them is illegal and the action at such
meeting, although by a majority of the directors is
invalid, unless subsequently ratified.

person(s) authorized under a bylaw provision;

by the president, absent any
provision in the by-laws;
secretary, upon order of the
president or on written demand
of the stockholders representing
or holding at least majority of
the outstanding capital stock or
majority of the members entitled
to vote;
stockholder making a demand if
the secretary refuses to do so;
on order of the proper forum
(Sec. 50)

The president shall preside at all meetings of the

directors/trustees
as
well
as
of
the
stockholders/members EXCEPT
o

A petitioning stockholder upon showing

good cause as inferred from Sec. 50 of
the Code

A majority of the members of the board of

directors or trustees as fixed in the articles of
incorporation will constitute a quorum for the
transaction of corporate business and the decision
of the majority of those present shall be valid as a
corporate act EXCEPT

5) Quorum and voting requirements must be

met

26

In the case of election of

corporate officers which requires
the vote of all members of the
board

Query:
May proxies never be denied?
NO.
proxies may be denied in case of non-stock
corporation
Requisites of proxies:

A director or trustee cannot attend or vote by

proxy at any board meeting
Directors may not vote by proxy as such
directors, thus if it is only as a stockholder, a
director may vote by proxy
Stockholders right to vote and manner of voting

1)

Must be in writing;

2)

Signed by the stockholder or member;

3)

Filed before the scheduled meeting;

4)

Filed with the corporate secretary

This right is a property right and is an inherent

right granted to a stockholder

A proxy is valid only for the meeting for which it is

intended

Instances when this right may be denied to a

stockholder:

Proxies may only be valid and effective for a period

of no longer than 5 years at any one time

1)

Non-voting shares are not entitled to vote

except in the instances provided by the
penultimate paragraph of Sec. 6;

2)

Treasury shares have no voting rights

while they remain in the treasury;

3)

Shares of stock declared delinquent are

not entitled to vote at any meeting; and

Where the proxy has no fixed period, it ceases to

exist after the meeting for which it was given
A proxy is revocable unless coupled with an
interest.
2 types of proxies:
o

General gives a general discretionary

power of attorney to vote for directors
and all ordinary matters that may
properly come before the meeting;

Right to vote is generally vested with the legal

owner of the shares

Pledgor or Mortgagor shall have the right to vote

and attend at meetings of stockholders, unless
pledgee or mortgagee is expressly given by the
pledgor/mortgagor such right in writing. (Sec. 55)

Limited restricts the authority to vote on

specified matters only and may direct the
manner in which the vote will be cast

Voting Trust:

4)

Unregistered
stock

transferees

of

shares

of

One created by an agreement between a group of

stockholders of a corporation and a trustee, or a
group of identical agreements between individual
stockholders and common trustee, whereby it is
provided that for a term of years, or for a period
contingent upon a certain event, or until the
agreement is terminated, control over the stock
owned by such stockholders, shall be lodged in the
trustee

In the absence of an appointment, no person can

represent or vote the shares of an incapacitated or
deceased stockholder on the ground that nobody is
legally capable to represent the deceaseds estate
An executor or administrator may be a director
only if he holds legal title to the shares of stock
belonging to the decedent

Requisites of a voting trust: (Sec. 59)

If the shares are owned by two or more persons

jointly, the right to vote is in them jointly. In order
that the shares may be voted, they must agree
upon the vote.
Consent of the other co-owners is not required if
there is a written proxy signed by all co-owners or
when the shares are owned in an and/or
capacity, where any of the joint owner may vote
the shares or appoint a proxy therefore

1)

Must be in writing;

2)

Notarized;

3)

Specifying the terms and conditions thereof;

4)

Certified copy must

corporation and SEC

There is a presumption of equality in co-ownership

be

filed

with

the

Failure to comply with this requisites

shall render the VTA ineffective and
unenforceable

Proxy and other representative voting

No VTA shall be entered into for the purpose of
circumventing the law

Proxy is the authority given by the stockholder or

member to another t vote for him at a
stockholders meeting.
o
It is also the instrument or paper which is
evidence of the authority of the agent or
the holder thereof to vote for and in
behalf of the stockholder or member

Voting trustee(s) may vote by proxy, unless agreed

upon otherwise
Criteria/Test for Voting Trust Agreement:
1)

27

Voting rights of the stock are separated from

the other attributes of ownership;

2)

Voting rights granted are intended to be

irrevocable for a definite period of time; and

3)

Principal purpose of the voting rights is to

acquire voting control of the corporation

Query: When can subscription contracts be incorporated?

Answer:
(1) prior to incorporation OR (2) after
incorporation

VTA results in the dichotomy of ownership of the

title to the shares:

Pre-incorporation subscriptions refer to subscriptions

for shares of stock of a corporation still to be formed

Legal title rests with the trustee

Beneficial or equitable title rests with the

owner

PRE-INCORPORATION SUBSCRIPTIONS

Post-incorporation subscriptions are those made or

executed after the formation or organization of the
corporation
Are pre-incorporation subscriptions mandatory?
YES as inferred from Secs. 13 and 14 of the Corp.
Code that a corporation may be registered only if
at least 25% of its authorized capital stock has
been subscribed and that at least 25% of the
subscribed capital has been paid up.

By a voting trust, the beneficial owner ceases to be

recognized as a shareholder of record and may be
deprived of some rights pertaining to a stockholder
QUERY: Are proxies always revocable?
ANSWER: No, if they are coupled with interest

Pre-incorporation subscriptions are irrevocable for

6 months, unless:

A proxy may not vote by proxy, as an agent cannot

have an agent

STOCKS AND STOCKHOLDERS:

Ways to become a stockholder:

1) By contract of subscription with the corporation;
2) By purchase of treasury shares from the corporation;
3) By purchase or acquisition of shares from existing
stockholders

Pre- incorporation subscriptions are irrevocable

after the submission of the articles of incorporation
to the SEC

Subscription contract any contract for the acquisition of

unissued stock in an existing corporation or a corporation
still to be formed, notwithstanding the fact that the parties
refer to it as a purchase or some other contract.

Consideration for the issuance of shares of stocks

should not be less than its par or issued price
Consideration for stocks:

Once unissued shares of stock are acquired,

stockholders become entitled to all the rights and
liabilities attached therafter.

1) cash;
2) property actually received and necessary or
convenient for the corporations lawful purposes;
3) labor;
4) previously incurred indebtedness;
5) amounts transferred from unrestricted retained
earnings to stated capital;
6) outstanding shares exchanged for stocks in the
event of reclassification or conversion

A subscription contract need not be in writing, such

that an oral contract of subscription is valid and
enforceable under the Statute of Fraud because a
subscription contract is not deemed to be a
contract of sale.
Kinds of subscription contract:

Shares of stock shall not be issued in exchange of

promissory notes or future services

1) Conditional subscription one made upon a

condition precedent.
It does not make a the
subscriber a stockholder until the performance or
fulfilment of the condition

How are prices of no-par value shares fixed? It

may fixed in the Articles of Incorporation or by the
Board of directors pursuant to the authority
conferred upon it by the articles of incorporation or
the by-laws; or in the absence thereof, by the
stockholders representing at least a majority of the
outstanding capital stock at a meeting duly called
for the purpose

A conditional subscription is valid, unless

corporation charter provides otherwise, or
is contrary to public policy
A purely potestative condition is void,
therefore, if a subscription is dependent
upon a purely potestative condition, then
it is void

The issuance of the shares of stock is not

dependent on the delivery of a certificate of stock

2) Subscription upon special terms an absolute

subscription, making the subscriber a stockholder,
and rendering him liable as such, as soon as the
subscription is accepted, the special term being an
independent stipulation

All the subscribers consent to the

revocation; or
the incorporation of said corporation fails
to materialize within the said period as
may be stipulated in the contract of
subscription

The par or issue price merely indicates the

amount which the original subscribers are
supposed to contribute to the capital as the basis
of the privilege or profit sharing with limited
liablilty

In case of doubt, a subscription contract

should be considered as an absolute
subscription upon special terms

If shares were issued in exchange of property, it

should be at least equal to the par or issued value
of the stocks

28

How is the
determined?
o
o
o

value

of

tangible

properties

Requisites for the issuance of certificate of

stock:

By appraisal report of an independent

appraiser;
By zonal valuation certified by the BIR;
By the market value indicated in the Real
Estate Tax Declaration

1.

It must be signed by the president or vicepresident and countersigned by the secretary

or assistant secretary;

2. It must be sealed with the corporate seal; and

the entire value thereof should have been paid.

As far as the value of intangible

property is concerned, the Code states that the
valuation thereof shall initially be determined by the
incoporators or the board of directors subject to the
approval of the SEC

Requisites for a valid transfer of shares:

1) by delivery of the certificates or certificates;

2 theories in approaching the

problem of valuation of property or services:

2) indorsement by the owner or his attorney in fact

or other person legally authorized to make the
transfer;

TRUE VALUE RULE: test is whether or not

the property or services are worth the
value placed on them

3) To be valid as to the corporation: Transfer must

be recorded in the books of the corporation
showing:

GOOD FAITH RULE:

the value of a
property or service is a matter about
which there can be an honest difference
in opinion. Thus, if the parties acted in
good faith, the transaction cannot be
overturned even if later it becomes
evident that the property or services were
in fact worth much less than the value
fixed on them initially

a) names of the parties

transaction;
b) date of the transfer;
c) number of the certificate(s)
d) number of shares transferred

to

the

NOTE:
If the third requisite is not
complied with, that is, only delivery and
indorsement are present, transfer is only
valid between the parties

Could shares of stock be issued more than the

par or issue price? YES, but it could not be less
than its par value as provided by Sec. 62

No shares of stock against which the corporation

holds any unpaid claim shall be transferable in the
books of the corporation

Amounts transferred to stated capital means

income becoming capital. A conversion of income
into capital

A certificate of stock can only be issued to a

subscriber after the full amount of the subscription
has been paid, together with the interests and
expenses, if any

Outstanding shares exchanged for stocks in the

event of re-classification or conversion are
shares of stock surrendered to the corporation in
exchange for new or different type of shares

However, a subscriber to shares of stock, even if

not yet fully paid, is entitled to exercise all the
rights of a stockholder and the corresponding
liability that attach thereunder

Promissory notes and future services are not

allowed
to be used as consideration for the
issuance of shares as their realization are not
certain

Holders of subscribed shares not fully paid which

are not delinquent shall have all the rights of a
stockholder

Shares of stock cannot be issued otherwise than

what is provided for in the Code, thus, if the
issuance of shares of stock was not in accordance
with the Code, e.g. manner o payment or
consideration for its issuance, then such issuance
is void

An assignment although valid and binding on the

parties, does not necessarily make the transfer
effective. Mere assignees, cannot enjoy the status
of a stockholder, insofar as the assigned shares are
concerned.
Hence assignors cannot yet be
deprived rights as stockholders, until and unless
the issue of ownership and transfer of the shares
in question is resolved with finality.

CERTIFICATE OF STOCK AND THEIR TANSFER

Share of stock described as a profit sharing
contract, a series of units of interest and
participation in a corporation in consideration of a
proportionate right to participate in dividend and
other distributions.

So pending question of validity of transfer, or issue

of share ownership, the incumbent owners are still
entitled to all the rights of a stockholder. They
cannot yet be depruved of their rights
The issuance of a stock certificate is not a
condition sine qua non to consider a subscriber a
stockholder

Certificate of stock a piece of paper which

evidences the ownership of shares and a
convenient instrument for the transfer of the title.

The moment a subscription becomes effective, the

subscriber becomes a stockholder for all intents
and purposes except only that he cannot be

Shares of stock are personal properties and the

owners thereof have the unbridled right to transfer
the same to anyone they please subject only to
reasonable charter provisions.

29

entitled to be issued a certificate of stock until the

full amount of his subscription is paid

2 modes of transferring shares of stock:

A certificate of stock is not a negotiable instrument

although it may be transferred by indorsement. It
is non-negotiable in the sense that the transferee
takes it w/o prejudice to all the rights and
defenses which the true and lawful owner may
have except insofar as the principles governing
estoppel may apply

1) endorsement of the stock certificate coupled

with delivery thereof; OR
2) by a duly notarized deed
However, when a corporation has already issued
stock certificates, any transfer of the shares can
only be effectively made by endorsement and
delivery of the stock certificate

Are certificates of stock negotiable instruments?

NO, because the transferee takes it subject to all
rights and defenses which the true owner may
have insofar as the principles of estoppel apply

To reiterate, the 2nd mode of transfer, i.e. transfer

by a duly notarized deed will not suffice if the
corporation has already issued stock certificates.
After issuance of the corporation by stock
certificates, shares can only be transferred by
endorsement coupled with delivery thereof. This is
to avoid fraudulent or fictitious transfers sought to
be avoided by the SEC

EXAMPLE: A certificate of stock (not signed)owned

by B was stolen by C. Can C acquire title? In NIL
yes. In Corporation Code, NO bec. A certificate
of stock is non-negotiable, but if the instrument
was signed. The true owner is estopped
A transfer not recorded in the books of the
corporation will not entitle the transferee the
recognition as a stockholder and therefore, he
cannot exercise his rights until the transfer has
been duly recognized in the stock and transfer
book

So, transfer by a duly notarized deed is only

available and valid IF no new stock certificates has
been issued by a corporation
The rule is that the delivery of the stock certificate
duly endorsed by the owner is the operative act of
transfer of shares from the lawful owner to the
transferee.
Thus, title may be vested in the
transferee only be delivery of the duly indorsed
certificate of stock

In De Erquaiga vs. CA, 178 SCRA 1, 1989, the SC

held that:
Until registration is accomplished, the
transfer, though valid between the parties,
cannot be effective as against the corporation.
Thus, the unrecorded transfer cannot enjoy
the status of a stockholder; he cannot vote
nor be voted for, and he will not be entitled to
dividends. X X X The purpose of registration
is 2-fold:

The right to transfer may not be unreasonably

restricted or prohibited, as every owner has the
uncontrollable right to alienate their shares (as it is
a personal property).
This right to transfer, however, can be regulated
to give the corporation protection against
colourable or fraudulent transfer or to enable it to
know who its stockholder are

(1) to enable the transferee to

exercise all the rights of a
stockholder; and

What are preferential rights? The first option

given to existing stockholders to purchase the
shares of a selling stockholder within a reasonable
period not exceeding thirty days provided that the
same is contained in the articles of incorporation
and in all the stock certificates to be issued by the
corporation

(2) to inform the corporation of

any change in shares ownership
so that it can ascertain the
persons entitled to the rights and
subject to the liabilities of a
stockholder

The term transfer as used by the Corporation

Code means absolute and unconditional transfer.
Thus chattel mortgage is not within its
contemplation.

Reasons for Registration:

1)
2)
3)
4)
5)

To enable the corporation to know who its

stockholders are;
To enable the transferee to exercise his rights
as stockholder;
To afford the corporation an opportunity to
object or refuse registration of the transfer in
case allowed by law
To avoid fictitious and fraudulent transfers;
and
To protect creditors who have the right to look
upon stockholders, in case of non-payment or
watered shares, for the satisfaction of their
claims

If transfer is a chattel mortgage, it need not be

noted in the books of a corporation as it is not the
transfer spoken of in the Corp. Code parlance. A
chattel mortgage is a conditional sale of personal
property as security for the payment of a debt, or
the performance of some other obligation
All transfer of shares should be entered in the
books of the corporation. All transfer of shares not
so entered in the books of the corporation are
absolutely void (Uson vs, Diomito, 61 PHIL 535
1935)

If the corporation or corporate secretary refuses to

record the transfer, mandamus will lie to compel
registration. Because the duty to record is ministerial.
However, record of transfer cannot be compelled if the
transferees title to said shares has no prima-facie
validity or is uncertain

May transfer of shares be restricted? YES, but it

cannot be restricted unreasonably.
Restrictions
must be reasonable.

30

An unreasonable limitation on the transfer of

shares is null and void

So GENERAL RULE: shares may be disposed by

the owner to whomever he pleases
LIMITATION:
when the corporation holds any
unpaid claim against the shares intended to be
transferred

Shares of corporate stock regarded as property,

the owner of such shares may, generally, dispose
of them as he sees fit

After all requirements for a valid transfer of shares

have been complied with, the corporations
obligation to register is ministerial. In transferring
stock, the secretary of a corporation acts in a
purely ministerial capacity, and does not try to
decide the question of ownership

Any restriction on a stockholders right to dispose

of his shares must be construed strictly
Any attempt to restrain a transfer of shares is
regarded as being a restraint of trade, in the
absence of a valid lien upon its shares

If the corporation refuses toe record transfer of

shares without good cause, mandamus will lie

Subject only to reasonable restrictions, a

stockholder cannot be controlled in or restrained
from exercising his right to transfer by the
corporation
or
its
officers,
or
by
other
stockholders, even though the sale is to a
competitor of the company, or to an insolvent
person, or even though a controlling interest is
sold to one purchaser

If corporations refusal has good cause, mandamus

will lie
In order that a writ of mandamus may issue, it is
essential that the person petitioning for the same
has a clear legal right to the thing demanded and
that is the imperative duty of the respondent to
perform the act required. It neither confers power
nor imposes duties and is never issued in doubtful
cases. It is simply a command to exercise a power
already possessed and to perform a duty already
imposed

The only restraint imposed by the Corp. Code is

found in Sec. 63 thereof.
Such restriction is
necessary in order that the officers of the
corporation may know who are the stockholders,
which is essential in conducting its meetings,
conducting elections of officers and for other
purposes
A restriction to the effect that a share is non-

In a contract of pledge, to have a valid transfer of

ownership, there must be foreclosure and sale at
public auction or private sale

transferable is illegal

Steps in transfer of shares:

A restriction which suspends the power to sell the

shares of stock is valid if it is for a beneficial
purpose and results in the protection of the
corporation as well as of the individual parties to
the contract, and is reasonable as to the length of
time of the suspension

1) stockholder signs the form on the back of the

stock certificate
2) certificate may thereafter be transferred from
one person to another;
3) if the holder of the certificate desires to assume
the legal rights of a stockholder, he fills up the
blanks in the form by inserting his own name as
transferee;
4) Then he delivers the certificate to the secretary
of the corporation;
5) record of the transfer should thereafter be
entered by the secretary in the books of the
corporation;
6) certificate is surrendered and a new one is
issued

For an effective transfer of shares of stock the

mode and manner of transfer as prescribed by law
must be complied with. Thus, if there is only
indorsement of the shares, delivery being absent,
there is no effective transfer of shares
Shares of stock may be transferred by delivery to
the transferee of the certificate properly indorsed.

Summary of rules in transfer of shares:

For an effective transfer, there should indorsement

coupled with delivery. Neither would suffice alone.
In the absence of the corporations by-laws or
rules governing effective transfer of shares of
stock, the provisions of the Code are applied
The right of a transferee/assignee to have stocks
transferred to his name is an inherent right flowing
from stock ownership
Sec. 63 of the Code contemplates no restriction as
to whom the shares are to be transferred. It does
not suggest that any discrimination may be
created by the corporation in favour of, or against
a certain purchaser. The owner of the shares is at
liberty to dispose them in favour of whomever he
pleases. The only limitation imposed by law is
when the corporation holds any unpaid claim
against the shares intended to be transferred

ENDORSED
TRANSFER

NOT

DELIVERED

NO

DELIVERED
TRANSFER

NOT

ENDORSED

NO

NOTARIZED DEED = VALID TRANSFER

NOTARIZED DEED AFTER A CERTIFICATE

OF STOCK HAS ALREADY BEEN ISSUED
BY THE CORPORATION = NO TRANSFER

CERTIFICATE OF STOCK ALREADY ISSUED

W/O ENDORSEMENT OR DELIVERY =
VALID TRANSFER (Tan vs. SEC, 206 SCRA
740, 1993), because of estoppel, except

31

Uncertificated securities
43-43.3, R.A. 8799)

(Sec.

A (owner) B (forger) C (purchaser for value

and good faith) D (PVGF)

A stock subscription is a subsisting liability from

the time the subscription is made. The subscriber
is as much bound to pay his subscription as he
would be to pay another debt.

C has title if he relied on the new certificate of

stock issued by the corporation

A corporation cannot release an original subscriber

from paying for his shares w/o a valuable
consideration, or w/o the unanimous consent of
the stockholders

D has title because on reliance on genuineness

Is A deprived of title? NO, because it certificate
was taken subject to all the rights and defenses of
the true owner, as it is NON-NEGOTIABLE (doctrine
of non-negotiability)

In Tan vs. SEC, supra, although there was no

endorsement delivery, transfer was valid because
of estoppel

Between A and C, who has better title? A

But delivery is not essential where it appears that

the person sought to be held as stockholders are
officers of the corporation, and have the custody
of the stock book

Can A, C or D compel the corporation to recognize

them as stockholders?
NO, only the original
stockholder may be recognized. D has only a
cause of action against the corporation as he relied
on the representation of the corporation.

A certificate of stock is not necessary to render

one a stockholder in a corporation

The corporation in turn may go after C, and C may

go after B

A certificate of stock is not the stock in the

corporation but is merely evidence of the holders
interest and status in the corporation, his
ownership of the share represented thereby, but is
not the equivalent of such ownership. It is the
contract between the corporation and the
stockholder, but is not essential in the existence of
a share in stock or the notion of the relation of
shareholder to the corporation

ISSUANCE OF STOCK CERTIFICATES

Subscriptions to shares of stock are indivisible
such that a subscriber to such shares will not be
entitled to the issuance of a stock certificate until
he has paid the full amount of his subscription
On the other hand, shares of stocks are divisible

It is only after registration that the transfer would

become binding

Once a subscriber has paid his subscription in full,

he becomes entitled to be issued a stock certificate
and in the event that the corporation refuses to do
so, the stockholder may institute a case for
mandamus with damages.
It is the duty of
corporate officers to issue stock certificates to
those entitled thereto, as it is their ministerial duty
enforceable by mandamus

FORGED AND UNAUTHORIZED TRANSFERS

In forged and unauthorized transfers, what is
forged or unauthorized is the transfer of the
certificate from the true and lawful owner to
another person

WATERED STOCKS

In an unauthorized issuance of certificate of stock,

the corporation either issued the certificate
fraudulently or by mistake

Defined as one issued by the corporation as fully

paid-up shares when in fat the whole amount or
value thereof has not bee paid

In
forged
or
unauthorized
transfer,
the
purchaser(s) of the shares no matter how innocent
they may have been, will acquire no title as
against the lawful owner thereof by virtue of the
doctrine of non-negotiability of certificates of
stock. The purchaser will have no remedy against
the corporation and the corporation incurs no
liability to the person to whom the certificate was
indorsed or issued

The shares are watered or are fictitiously paid-up

to the extent that they have not been or are not to
be paid for
Sec. 62 proscribes the issuance of shares for a
consideration less than its par or issued price
A director or officer of the corporation consenting
to the issuance of watered stocks, or who having
knowledge of its issuance, does not express his
objection in writing and file the same w/ the
corporate secretary, shall be solidarily liable w/ the
stockholder concerned to the corporation and its
creditors for the difference between the fair value
received at the time of issuance of the stock and
the par or issued value of the same

However, if the new certificate issued by the

corporation passes into the hands of a subsequent
bona fide purchaser, the latter may rightfully
acquire title thereto since the corporation will be
estopped to deny the validity thereof. Herein, the
subsequent purchadser in good faith took the
shares not by virtue of the unauthorized or forged
transfer but on reliance on the genuineness of the
certificate issued by the corporation.
He may
therefore compel the corporation to recognize him
as a stockholder or claim reimbursement and
damages

The right of the corporation and its creditors to

enforce payment of the water in the stocks issued
applies to all creditors prior or subsequent to the
issuance of the watered stock

ILLUSTRATION:

How watered stocks are issued:

32

1)

For a monetary consideration less than its par

or issued value;

2)

For a consideration in property, valued in

excess of its fair market value;

3)

Gratuitously or under and agreement that

nothing shall be paid at all; or

4)

In the guise of stock dividends when there are

no surplus profits of the corporation

5) As against the transferees of the watered stock:

His right is the same as that of the transferor. If, a
certificate of stock has been issued and duly
indorsed to a bona fide purchaser, w/o knowledge,
such transferee cannot be held liable as against
the corporation, since he took the shares on
reliance of the misrepresentation made by the
corporation that the stock certificate is valid and
subsisting. A corporation is prohibited from issuing
certificates of stock until the full value of the
subscriptions have been paid and could not,
therefore, deny the validity of the stock certificate
it issued as against a purchaser in good faith

Evil effects of watered stocks:

Thus whether there is liability on the part

of the transferee is made to depend upon whether
he acquired the same w/o notice.
If he had
knowledge thereof, he is subject to the same
liability as his transferor

1) The corporation is deprived of its capital thereby

hurting its business prospects, financial capability
and responsibility;
2) Stockholders who paid their subscriptions in
full, or promised to pay the same, are injured and
prejudiced by the reduction of their proportionate
interest in the corporation; and

QUESTION: Can passive directors be held liable

in the issuance of watered stocks?
ANSWER: YES, if they have knowledge of its
issuance, but did not do anything to oppose it

3) Present and future creditors are deprived of the

corporate assets for the protection of their interest

SITUATION:
The original par value of shares is 1.00 php, due to
gains, the fair market value became 12 php. If
stock was issued at 2.00, was there stock
watering? NO, the orig. issue prioce was 1.00

2 theories as bases for the liability of the

officers and directors consenting to the
issuance of watered stocks:
o

stocks:

TRUST FUND DOCTRINE: treats that the

capital of a corporation, including the
unpaid subscriptions, is a trust fund to
which the creditors have a right to look to
for the satisfaction of their claims. By this
doctrine, stockholders are required and
mandated to pay the full value of their
shares

If the Fair Market Value depreciated to 0.80

because of losses, and it was issued at 0.80, was
there stock watering? YES, the original par value
or issue price is 1.00
If because of gains, the FMV of the stock became
12.00, and the members of the board bought it at
2.00, then subsequently they sold it at
10.00/share, was there any violation? YES, Sec.
21 which speaks of the 3-fold duty of the directors

FRAUD or MISREPRENTATION THEORY:

the liability is based on the false
representation made by the corporation
and the stockholder concerned to the
creditors that the true par value or issued
price of the shares has been paid or
promised to be paid in full

Subscribers are obliged to:

a)

Pay the full amount of their subscription;

b)

Pay the interests on all unpaid subscriptions IF

so imposed in the contract or in the corporate
by-laws as such rate indicated, or in the
absence thereof, at the legal rate

Effect of issuance off watered

1) As to the corporation: State may institute a

quo-warranto
proceeding
to
forfeit
the
corporations charter for the misuse or abuse of its
franchise, if the corporation is guilty of ultra-vires
or illegal acts which may injure or have injured the
public

Unless so required to pay interest on

the shares of stock not fully paid,
there is no liability to pay interest on
the unpaid subscriptions

Are subscribers required to pay

interests? NO, absent any provisions
in the by-laws. If they are required to
pay interest, the obligation starts
form the date of the subscription
(Sec. 66).

Rate of interest would that be what

was stipulated in the by-laws, or the
legal rate, if there was no rate fixed

2) As between the corporation and the subscriber:

subscription is void, thus the subscriber is liable to
pay the full par or issued value thereof, to render it
valid and effective
3)
As to dissenting stockholders:
they may
compel the payment of the water in the stock
solidarily against the responsible and consenting
directors and officers inclusive of the holder of the
watered stock

ENFORCEMENT OF PAYMENT OF SUBSCRIPTIONS

4) As to creditors: they may enforce payment of

the difference in the price, or the water in the
stock,
solidarily
against
the
responsible
directors/officers and the stockholders concerned
and,

When to pay for unpaid subscriptions:

a)
b)

33

On the date fixed in the contract of

subscription; or
On the date(s) that may be specified by the
board of directors pursuant to a call

declaring any unpaid portion thereof to be so

payable

from the date of sale at the legal rate, and no

action shall be maintained unless commenced w/in
6 months from date of sale

Remedies of a corporation to enforce unpaid

subscription:

A call is a condition precedent before the right of

action to institute a recovery suit accrues.

a) by board action; (Secs. 67-69)

b) by a collection case (Sec. 70)

A stock subscription is a contract between the

corporation and the subscribers. A subscription for
shares of stock does not require an express
promise to pay the amount subscribed, as the law
implies a promise to pay on the part of the
subscriber

Failure or refusal of the corporation, thru the Board

of Directors to enforce or collect payment for
unpaid subscription will not prevent the creditors
or the receiver of the corporation to institute a
court action to collect payments due, based on the
TRUST FUND DOCTRINE

The subscriber is as much bound

amount of the share subscribed by
would be to pay any other debt, and
the company to demand payment
incontestable

Procedure to collect and enforce payment of

subscriptions:
a)

b)

Resolution passed by the BoD declaring a date

when payment is due, if no date is fixed; If a
date is fixed, no call is necessary

Payment on date due;

d)

Failure to pay on the date fixed renders the

entire balance due and demandable

e)

Order of delinquency sale by the BoD;

g)

Sale shall be not less that 30 days, nor more

than 60 days from date of delinquency;

Publication of the notice of sale once for 2

consecutive weeks;

j)

Sale at public auction, if no payment is made

by the delinquent stockholder in favour of the
highest bidder who offered to pay the full
amount of the balance in the subscription,
plus costs and interests for the smallest
number of shares;

l)

b)

But when the corporation is solvent, a creditor

cannot yet recover if there was no proceeded call
or assessment against the subscriber, and that
until this is done, no right of action accrues
To effect release, there must be unanimous
consent of the stockholders of the corporation.
A subscription cannot be cancelled even under a
secret or collateral agreement for cancellation
made with the subscriber at the time of the
subscription, as against persons who subsequently
subscribed or purchased w/o notice of such
agreement
How to effect release:

Registration or transfer of the shares of stock

in the name of the bidder and issuance of new
certificates of stocks covering the shares
successfully bidded;
If there be remaining shares, it shall be
credited to the delinquent stockholder who
shall be entitled to the issuance of certificates
of stocks covering the said shares;

1)

There must be unanimous consent of the

stockholders of the corporation; or

2)

Release is given pursuant to a bona fide

compromise; or

3)

Release was to set-off a debt due from the

corporation

Gen. Rule:
Notice of call for
payment of unpaid subscription must be published
EXCEPTION: when the corporation
is insolvent, in which case, payment is immediately
demandable

m) If there be no bidder at public auction, the

corporation ,may bid for the same and the
total amount due shall be credited or paid in
full in the corporation books
n)

A corporation may put the unpaid stock and

dispose of it for the account of the delinquent
subscriber; or
By an action in court

When the corporation becomes insolvent, no call or

assessment is necessary before the institution of
suits to collect unpaid balance on subscription

Notice of the sale should be sent to the

delinquent stockholder;

i)

k)

a)

Failure to pay w/in 30 days from date of call

or date fixed in the contract renders the stock
delinquent and subject to a delinquency sale

f)

h)

2 remedies for the enforcement of stock

subscription:

Notice of the resolution;

c)

to pay the
him as he
the right of
is no less

The NLRC is w/o jurisdiction to

determine intra-corporate disputes between the
stockholder and the corporation even as in the
matter of unpaid subscriptions. This controversy is
within the jurisdiction of the SEC

Shares so purchased shall become treasury

shares

An action to recover delinquent stock sold can only

be sustained on the ground of irregularity or defect
of sale and if the party seeking such action first
pays or tenders to the party holding the stock the
sum for which the same was sold, with interest

Unpaid subscriptions are not due and

payable until a call is made by the corporation for
payment.

34

of stock, the right to make such contest shall

be barred and the corporation shall cancel in
its books the certificates of stock which has
been lost, destroyed or stolen and issue in lieu
thereof new certificates of stock;

It is established that subscriptions

to the capital of a corporation constitute a fund to
which creditors have a right to look for the
satisfaction of their claims and that the assignee in
an insolvency can maintain an action upon any
unpaid stock subscription in order to realize assets
for the payment of its debt
A corporation has no power to
release an original subscriber to its capital stock from
the obligation of paying his shares, w/o a valuable
consideration for such release

4)

If the registered owner files a bond or other

security in lieu of the lost certificates, effective
for a period of one year, a new certificate may
be issued even before the expiration of one
year;

5)

If before the expiration of the one year period,

a contest has been presented to said
corporation or if an action is pending in court
regarding ownership of said certificates of
stock which have been lost, the issuance of
the new certificates in lieu thereof shall be
suspended until final decision by the court has
been issued by the court

A stockholder is personally liable for

the financial obligations of a corporation to the
extent of his unpaid subscriptions
The obligation to pay arises from the
date of the subscription, but the coming into being of
an obligation should not be confused with the time
when it becomes demandable

QUESTION: In lost/destroyed Certificates of Stock, can

there be transfer through notarized deed?
ANSWER: General rule, no. as it may open the door to fraud

Subscriptions to the capital stock of

the corporation, unless otherwise stipulated, is not
payable at the moment of the subscriptions but on a
subsequent date which may be fixed by the
corporation

CORPORATE BOOKS AND RECORDS

All corporations, stock and non-stock, are required
by law to keep and maintain corporate books and
records
All corporate books and records are to be kept in
the principal office of the corporation except the
stock and transfer book which may be kept in the
office of the stock transfer agent

The prescriptive period to enforce

unpaid portion of subscription sets in after a demand
has been made
Shares of stock become delinquent
when no payment is made on the balance of all or
any portion of the subscription on the date or dates
fixed in the contract of subscription w/o need of call,
or on the date specified by the board of directors
pursuant to a call made by it in accordance with the
Code

The following are to be kept and maintained

by the corporation:

When the shares are declared

delinquent, the holder thereof immediately loses the
right to vote and be voted upon or represented in
any stockholders meeting as well as all the rights
pertaining to a stockholder except the right to
receive dividends in accordance with Sec. 71, until
and unless he pays the amount due on his
subscription w/ accrued interest and the costs and
expenses of advertisement, if any.

3)

2)

Minutes of all meetings of stockholders or

members and of the directors or trustees;

3)

Stock and transfer book

These corporate books and records are
subject to inspection by any of the
directors,
trustees,
stockholders
or
members of the corporation at reasonable
hours on business days and a copy of
excerpts of said records may be
demanded

No stock transfer
agent or one engaged principally in the business of
registering transfers of stocks in behalf of a stock
corporation shall be allowed to operate in the
Philippines unless he secures a license from the SEC
and pays a fee as may be fixed be the SEC

Procedure for the issuance of a

new certificate of stock when the original was
lost or destroyed

2)

Records of all business transaction;

Holders of subscribed shares not

fully paid which are not delinquent shall have all the
rights of a stockholder except the right to be issued a
certificate of stock

1)

1)

Owner must file an affidavit in triplicate

setting forth the circumstances as to how the
certificate was lost, destroyed or stolen, the #
of shares represented by the such certificate,
serial #s of the certificate and the name of the
corporation which issued the same

Such license can

be renewed annually
However, a stock
corporation may perform or make transfers of its
own stocks complying with the requirements
imposed on stock transfer agents, except the
payment of a license fee

After verifying the affidavit, said corporation

shall publish a notice in a newspaper of
general circulation at the expense of the
registered owner of the certificate

The basis of the

right of a stockholder to inspect the books and
records of the corporation for a proper purpose is to
protect his interest as a stockholder]

After expiration of one year from date of last

publication, if no contest has been presented
to said corporation regarding the certificates

35

The right of the

shareholders to ascertain how the affairs of his
company are being conducted by its directors and
officers is founded on by his beneficial interest
through ownership of shares and the necessity of
self-protection

3)
Prove that the right is
limited or restricted by special law or the law
of its creation
The
provisions of law conceding the right of inspection
to stockholders of corporations are to be liberally
construed and that said right may be exercised
through any other properly authorized person

The right of the

stockholders to examine corporate books extends to
a wholly-owned subsidiary which is completely under
the control and management of the parent company
where he is a such a stockholder

A
by-law
unduly restricting the right of the stockholders to
inspect corporate books and records is invalid

But if the two

entities are legally being operated as separate and
distinct entities, there is no such right of inspection
on the part of the stockholder of the parent company

The record of
all business transactions of the corporation and the
minutes of any meeting shall be open to the
inspection of any director, member, or stockholder
of the corporation at reasonable hours

Although the right

to inspect is personal, it may be exercised by the
stockholders agent or representative

Directors, on
the other hand, have the unqualified right to
inspect the books and records of the corporation at
all reasonable hours

The right of the

director or trustee to inspect and examine corporate
books and records is unqualified and absolute as
compared to the right of the stockholder or member,
because a director supervises, directs and manages
corporate business and it is necessary that he be
equipped with w/ all the information and data w/
regard to the affairs of the company in order that he
may manage and direct its operations intelligently.

stockholder to inspect books

corporation only applies to a
subsidiary

The right to
examine the books of a corporation must be
exercised in good faith, for specific and honest
purpose, and do not gratify curiosity of for
speculative or vexatious purposes

Thus, although a
stockholder or member is entitled to inspect and
examine the books and records of a corporation, they
may not gain access to highly sensitive and
confidential information, which could not be denied
to a director or trustee

If
the
stockholder is unduly refused the inspect the
corporate books and records of a wholly-owned
subsidiary, mandamus will lie

Inspection
of
corporate books and records may not be unduly
restricted and may not be arbitrarily set a few days
of a year within which the stockholders may make
the inspection

Remedies of a
stockholder unduly and arbitrarily refused to
inspect the corporate books and records:
1)

DAMAGES either against the corporation

OR the responsible officer who refused
the inspection;

3)

CRIMINAL COMPLAINT for violation of his

right to inspect and copy excerpts of the
business transactions and minutes of the
meeting (Sec. 74)

Defenses
responsible corporate officers:

available

However, if the subsidiary has a

personality distinct and separate
from the parent corporation,
mandamus will not lie

Limitations on the right of inspection

by the stockholder:

MANDAMUS.
Herein, the corporate
secretary will be included as a party
respondent;

2)

The right of a
of subsidiary
wholly owned

1)

Records must be kept at the principal

office of the corporation;

2)

The inspection
business day;

3)

The stockholder may demand a copy of

the excerpts of the records or minutes;

4)

The refusal to allow such inspection shall

subject the erring officer or agent of the
corporation to civil and criminal liabilities

must

be

made

on

to

1)
Prove that the person
demanding
has
improperly
used
any
information secured through any prior
examination of the records or minutes of such
corporation or of any other corporation;

It is required as a condition for

such examination that the one requesting it must
not have been guilty of using improperly any
information secured through a prior examination
and that the person asking for such examination
must be acting in good faith and for a legitimate
purpose in making the demand

2)
Prove that he was not
acting in good faith or for a legitimate purpose
in making his demand;

Purpose of the stockholders

inspection must be germane to his interest as a
stockholder

36

favourable
approved;

Right of the stockholder to

inspect corporate books may be limited or
restricted by the special law governing the
corporation as in the case of Gonzales vs. PNB,
(122 PHIL 489, 1983).
In said case, PNB is
governed by a special law which limits corporate
book inspection to specified persons, thus, it can
rightfully deny its stockholder the right to inspect
the corporate books and records

9) Issuance
consolidation

recommendation
of

should

certificate

of

first
merger

be
or

Steps to amendment of the plan of merger or

consolidation:
1) Resolution by
directors/trustees;

majority

of

the

board

of

2) Ratification by stockholders representing 2/3 of

the outstanding capital stock or 2/3 of the
members

MERGER AND CONSOLIDATION

Corporations may either:

Contents
of
Consolidation:

a) Merge into a single corporation which shall be

one of the constituent corporations; or

Articles

of

Merger

or

1) Plan of the merger or plan of consolidation;

b) Consolidate into a new single corporation which

shall be the consolidated corporation

2) In stock corporations, the # of outstanding

shares, in non-stock corporations, the # of
members;

Contents of a merger plan:

3) The # of shares or members voting for or

against such plan of each ocorporation

1) Names of the corporations proposing to merge

or consolidate, referred to as the constituent
corporation;

Effectivity of merger or consolidation: Upon

issuance of the SEC of a certificate of merger or
consolidation

2) Terms of merger or consolidation;

3) Mode of merger or consolidation;

In case of banks, building and loans associations,

trust companies, insurance companies, public
utilities, educational institutions and other special
corporations governed by special laws, the
favourable recommendation of the appropriate
government agency shall first be obtained

4) Statement of the changes, in the articles of

incorporation of the surviving corporation, in the
case of merger, and all statements required to be
set forth by a corporation in its AoI, in case of
consolidation

If SEC has reason to believe that plan of merger or

consolidation should not be approved, it shall set a
hearing to give the corporations the opportunity to
be heard

5) Other provisions necessary or desirable

Steps for merger or consolidation:
1) Resolution by the board of directors of the plan
to merge or consolidate;

Effects of merger or consolidation:

1) There will only be a single corporation. The
surviving corporation (merger), the consolidated
corporation (consolidation);

2) Approval by the stockholders or members of

each corporation at separate corporation meetings
duly called for the purpose;
3) Notice of meetings to each stockholder at least
2 weeks prior to the date of the meeting;

2)
Termination of corporate existence of the
constituent corporation except the surviving
corporation or consolidated corporation;

4) Notice shall state the purpose of the meeting

and shall include a copy of the plan of merger or
consolidation;

3)
Surviving or consolidated corporation
possesses all the rights, privileges, immunities and powers,
duties and liabilities of a corporation;

5) Affirmative vote of stockholders representing

2/3 of the outstanding capital stock of the
corporation or 2/3 of the members;

4)
Surviving or consolidated corporation
possesses all the rights, privileges, immunities and
franchises of the constituent corporations, and all property
and receivables due, and every interest belonging to the
constituent corporations shall be deemed transferred to the
surviving or consolidated corporation w/o need for any
further act;

6) Any dissenting stockholder may exercise his

appraisal right;
7) Execution of the articles of merger or
consolidation by each constituent corporations
signed by the president or vice president and
certified by the corporate secretary or assistant
secretary

5) Rights of creditors or any lien on the property of

the constituent corporations shall not be impaired by the
merger or consolidation
In the merger of 2 or more corporations, one of
the combining corporations survives and continues
the combined business, while the rest are
dissolved and all their rights, properties and
liabilities are acquired by the surviving corporation

8) Submission of the articles of merger or

consolidation to the SEC in quadruplicate,
provided, if it involves a corporation under the
direct supervision of a government agency, a

37

Although there is a dissolution of the absorbed

corporations, there is no winding up of their affairs
or liquidation of their assets because the surviving
corporation automatically requires all their rights,
privileges and powers, as well as liabilities

3)

Failure to make the demand w/in such

period shall be deemed a waiver to
exercise his appraisal right;

4)

Surrender of the certificate of stock by

the dissenting stockholder for the notation
in the corporate books and payment of
the corporation of the FMV of the shares
as of the day prior to the date on w/c the
vote was taken;

5)

Fair value of the shares of the dissenting

stockholder must be paid by the
corporation only of it has unrestricted
retained earnings;

6)

Absent ant unrestricted retained earnings,

the dissenting stockholder may not
exercise his appraisal right;

7)

Upon payment of shares by the

corporation, the dissenting stockholder
shall transfer his shares to the corporation

The merger does not become effective upon mere

agreement of the constituent corporations
Is there liquidation and winding-up in case of
merger or consolidation?
NO, because all the
rights, liabilities, properties are acquired by the
absorbing corporation
APPRAISAL RIGHT
It is the method of paying a shareholder for the
taking of his property.
It is a right granted to dissenting stockholders on
certain corporate or business decisions to demand
payment of the fair market value of their shares
Instances when
exercised:

appraisal

right

may

1)

In case any amendment to the articles of

incorporation has the effect of changing or
restricting the rights of any stockholder or
class of shares,

2)

Or of authorizing preferences in any

respect superior to those of outstanding
shares of any class;

3)

Or of extending
corporate term;

4)

In case of sale, lease, exchange, transfer,

mortgage, pledge or other disposition of
all or substantially all of the corporate
property and assets;

5)

In case of merger or consolidation;

6)

In case of investment of corporate funds

in another corporation or business or for
any other purpose other than its primary
purpose

or

shortening

From time of demand for payment of the fair

value of the shares of a stockholder until either the
abandonment of the corporate action involved, or
the purchase of the said shares, all rights accruing
to such shares, including voting and dividend
rights, shall be suspended, except the right of the
stockholder to receive payment of the fair value of
his shares

be

If the dissenting stockholder is not paid the

value of his shares w/in 30 days after award, his
voting and dividend rights shall be restored

the

When right to payment of a dissenting

stockholder ceases:

In a close corporation, a stockholder has an

unbridled right to compel the corporation for any
reason to purchase his shares at their FMV which
shall not be less than the par or issued value, when the
corporation has sufficient assets to cover its debts and
liabilities, exclusive of capital stock
Appraisal right is not available in all instances of
amendment of articles of incorporation.
It is not
available in ordinary amendments
Procedure and requirements
exercise of appraisal right:

for

Stockholder must have voted against the

proposed corporate action in the instance
allowed to exercise appraisal right;

2)

Written demand for payment must be

made by the dissenting stockholder w/in
30 days after the date on which the vote
was taken;

When he withdraws his demand for

payment and the corporation consents
thereto;

2)

When the proposed action is abandoned

or rescinded by the corporation;

3)

When the proposed action is disapproved

by the SEC where such approval is
necessary;

4)

When the SEC determines that he is not

entitled to exercise his appraisal right;

5)

When he fails to submit the stock

certificate w/in 10 days from demand to
the corporation for notation that such
shares are dissenting shares; and

6)

If the shares are transferred and the

certificate subsequently cancelled

The appraisal, if not agreed upon by the

corporation and the dissenting stockholder, shall be
determined by three disinterested persons and the
cost thereof shall be borne either by the
corporation or the dissenting stockholder as
provided for in Sec. 85
Corporation bears the cost for appraisal if:

valid

1)

1)

38

The price offered by the corporation is

lower than the fair value of the shares of
the dissenting stockholders as determined
by the appraisers; or

Where an action is filed by the dissenting

stockholders to recover such fair value
and the refusal of the stockholder to
receive payment is found to be justified

and is not distributable to any of its members or

officers
Whether or not a non-stock corporation may
engage in profit-making business or activity
depends largely on the purpose or purposes
indicated in the articles of incorporation.

Dissenting stockholder bears the cost for

appraisal if:

When the price offered by the corporation

is approximately the same as the value
ascertained by the appraisers; or

If the said business activity is 1 authorized in

its AoI, 2 necessary, 3 incidental or 4 essential
thereto, it may be undertaken, otherwise, it would
be an ultra-vires act

Where the action filed by the dissenting

stockholder and his refusal to accept payment
is found to be unjustified

Membership in a non-stock corporation and all

rights arising therefrom are personal and nontransferable, unless AoI or by-laws provide
otherwise

QUESTION:
Can a stockholder who is also a director
exercising his appraisal right, still act as a director? YES, he
can still be a director, he only loses the right as a
stockholder

Membership is terminated for the causes

provided in the AoI or by-laws

If he is a delinquent stockholder, who is also a director?

YES, he can still be a director, he only loses the right as a
stockholder

Unless limited, broadened or denied by the

articles of incorporation or by-laws, eaxh member,
regardless of any class shall be entitled to one
vote. Cumulative voting is generally not allowed in
non-stock corporations, while cumulative voting
is a matter of right in stock corporations

NON-STOCK CORPORATIONS
Also known as non-stock corporations

Proxy voting may be denied in non-stock

corporations not in stock corporations

It is one where no part of its income is

distributable as dividends to its members, trustees,
or officers

Voting by mail or other similar means may

also be authorized in non-stock corporations. In
stock corporations, generally, votes are cast at a
duly constituted meeting, except
in general
amendments of the AoI, where written assent of
stockholders is sufficient

Any profit that a non-stock corporation may

obtain as an incident to its operations shall be used
in furtherance of the purpose(s) for which the
corporation was organized

Non-stock corporations have the right to adopt

rules prescribing the mode and manner in which
membership can be obtained or maintained. It
may act arbitrarily and exclude any person it may
see fit, and the courts have no power to interfere.
It is free to fox qualifications for membership and
provide for termination of membership]

Provisions governing stock corporations when

pertinent shall be applicable to non-stock
corporations
Purposes
of
non-stock
corporations:
charitable, educational, professional, cultural,
fraternal, literary, scientific, social. Civic, or similar
purposes like trade, industry, agricultural and like
chambers, or any combination thereof

The by-laws determine who shall be admitted

as members in a non-stock corporation. Absent
any provision, determination is lodged w/ the
board of trustees

A non-stock corporation may have a capital

stock divided into shares, proprietary or otherwise,
a corporation is considered as non-stock so long as
it does not distribute dividends to its members and
officers

Manner of membership
in non-stock corporations
mode of termination in the
be complied w/ otherwise it

A non-stock corporation cannot, generally,

engage in any business undertaking or activity for
profit as it would run counter to its very nature as
a non-profit entity

termination is inherent
but the manner and
by-laws should strictly
is void.

In the absence of provisions in the by-laws for

termination, the ff. are the grounds for
termination:

However, as may be allowed and specified in

its articles of incorporation or as incidental to the
objects and purposes indicated therein, it may
engage in certain money-making ventures or
economic activities provided that any profits
derived therefrom shall be used for the furtherance
of the purpose for which the corporation was
organized or to defray the operating expenses of
the entity
Thus, the fact that the corporation earns profit
does not make it a profit-making corporation
where such profit or income is used for the
purpose set forth in the articles of incorporation

39

1)

When an offense is committed which is so

infamous as to render him unfit for
society of honest men, and which is
indictable in common law;

2)

When the offense is a violation of his duty

as a member of corporation;

3)

When the offense is of a mixed nature,

being both of his duty as a member of the
corporation, and also indictable at
common law

Courts cannot strip a member of non-stock

corporations of his membership therein w/o cause,
otherwise that would be an unwarranted and
undue interference w/ the well established right of
a corporation to determine its membership

AoI or by-laws of a non-stock corporation may

validly provide that its officers be directly elected
by the members. In stock corporations, officers
are elected by the board of directors
Meetings in non-stock corporations may be held
anywhere in the Philippines. In stock corporations,
meetings should be w/in the city or municipality
where the principal office is located, and as far as
practicable, in the principal office of the
corporation

Trustees refer to the governing board or body in

a non-stock corporation. It is like the board of
directors in a stock corporation
Non-stock
corporations
or
other
special
corporations may designate their governing board
by any name other than as board of directors or
trustees

But, even if the meeting was improperly called, it

would be valid of all the stockholders or members
were present or duly represented thereat (Sec. 51)

Qualification of trustees:
1)

Must be a member of the association;

2)

Majority of the board of trustees must be

residents of the Philippines;

3)

In the absence of any by-laws provision for the

venue of meetings, it should be w/in the city or
municipality where the principal office is located
Rules of distribution upon dissolution of a
non-stock corporation:

Other qualifications as may be provided

by the by-laws

Number of trustees in a non-stock corporation may

exceed 15, unless otherwise provided in the AoI or
by-laws
In stock corporations, the # of members of the
board of directors should not exceed 15

1)

All liabilities and obligations of the

corporation shall be paid, satisfied and
discharged;

2)

Assets held by the corporation requiring

return, transfer or conveyance shall be
returned, transferred or conveyed;

3)

Assets received and held by the

corporation for charitable, religious,
benevolent,
educational
or
similar
purposes, not held upon any condition
shall be transferred or conveyed to one or
more
corporations,
societies
or
organizations
engaged
in
activities
substantially similar to those of the
dissolving corporation;

4)

Other assets shall be distributed in

accordance w/ the provisions of the AoI or
the by-laws;

5)

Assets may be distributed to such

persons,
societies,
organizations
or
corporations, w/not for profit, pursuant to
a specified plan of distribution

Members of the board of trustees may serve a

term of more than 1 year as may be validly
provided by its AoI or by-laws, but it could never
be in excess of 5 years, by analogy with Sec. 7 of
the Code
Term of office of the BoT may be staggered, unless
otherwise provided by the AoI or by-laws
Instances when the courts may interfere with
the internal affairs of the corporation:
1)

Where the law and justice so require and

the proceedings of the association are
subject to judicial review; or

2)

Where there is fraud, oppression, or bad

faith, or

3)

Where the act complained of is capricious,

arbitrary or unjustly discriminatory; or

4)

In case property or civil rights are

invaded, when there is arbitrariness, fraud
or collusion;

5)

Where the proceedings in question are

violative of the laws of the society, or the
law of the land; or

6)

Where there is lack of jurisdiction on the

part of the tribunal conducting the
proceedings, where the organization
exceeds its powers, or where the
proceedings are otherwise illegal

Plan of distribution of assets:

1)

Resolution by the Board of Trustees;

2)

Adoption by members through a vote at a

regular or special meeting;

3)

Written notice for such meeting;

4)

Approval by 2/3 of the members either

present or by proxy

CLOSE CORPORATIONS
One whose articles of incorporation provide that:
(all 3 must be contained)

The decision of an unincorporated association on

the question of an election to office is a matter
peculiarly and exclusively to be determined by the
association and, in the absence of fraud, is final
and binding on the courts

1) All the corporations issued stock of all classes,

exclusive of treasury shares, shall be held of
record by not more than 20;

40

2) All the issued stock of all classes shall be

subject to one or more specified restrictions on
transfer permitted by Title XV;

capital stock.
complied with

Thus, even 100% of the shares of a corporation is

owned by a single family, it is not a close
corporation if the qualifying conditions are not
complied

3) Corporation shall not list in any stock exchange

or make any public offering of its stock of any
class
Absent any of these 3, the corporation will not be
considered as a close corporation

A close corporation may classify its shares into

different classes to be held of record only by
specified persons

A corporation shall not be deemed a close

corporation when at least 2/3 of its voting stock or
voting rights is owned or controlled by another
corporation which is not a close corporation

EXAMPLE: Classes A, B and C. A shares to be held

only by incorporators; B shares by their relatives
w/in the 3rd degree of consanguinity or affinity;
and C shares by their close business associates

But a corporation whose 2/3 of its voting stocks or

voting rights is owned or controlled by another
close corporation, the former may be a close
corporation

The Articles of Incorporation may also provide for

a classification of directors into one or more
classes, each of whom may be voted for and
elected solely by a particular class of stock

Any corporation may be incorporated as a close

corporation except:

So if the AoI has 1,000 A shares; 500 B shares;

and 200 C shares, the AoI may provide that each
class have a representation in the Board of
Directors regardless of the # of shares w/in each
class. Cumulative voting w/in each class may be
exercised, but to the extent that each class can
elect its own director regardless of the # of shares
in such class, in effect restricting the right of
cumulative voting

1) mining or oil companies;

2) stock exchanges;
3) banks;
4) insurance companies;
5) public utilities;

A close corporation may also provide for a greater

voting requirement in meetings of stockholders or
directors.
In ordinary stock corporations, the
voting requirement of stockholders may not be
altered or increased

6) educational institutions; and

7) corporations declared to be vested with public
interest
Ultimate effect of close corporation:
corporation with a corporate shell

The qualifying conditions must be

a de-facto

If the AoI of a close corporation provides that

stockholders would manage the corporation, doing
away w/ a board of directors, the stockholders are
subject to all the rights and liabilities of a director.
Their liability is more extensive, in that they are
personally liable for corporate torts unless, the
corporation has obtained a reasonably adequate
liability insurance

A close corporation is sometimes referred as a

hybrid of both corporate and partnership forms, an
incorporated partnership or a corporation de jure
but a de facto partnership
A close corporation may partake the nature of a
partnership in that the stockholders thereof take
an active role in the management of the corporate
affairs either as directors, officers or even partners
in the management akin to the partnership form of
business

In ordinary stock corporations, directors thereof

are liable for corporate torts only if they have been
negligent or acted fraudulently in the performance
of their functions
The articles of incorporation of a close corporation
to provide that all officers or employees shall be
elected or appointed by the stockholders instead of
the board of directors.

Distinction to an ordinary stock corporation, is that

the stockholders do not have an active part in the
management of the corporation. Stockholders only
elect the directors who will manage the affairs of
the corporation.

In ordinary, the officers are appointed or elected

by the board

In a close corporation, all stockholders have an

active part in the management of the corporate
affairs

Restrictions on transfer of shares must be appear

in the articles of incorporation, in all of the stock
certificates issued by the corporation and in the
corporate by-laws

A close corporation may do away with the Board of

Directors, vesting management of the corporate
affairs to the stockholders themselves. Despite
this, stockholders who are active in the
management, still enjoy limited liability to the
extent of their subscriptions insofar as corporate
obligations are concerned

In ordinary stock corporations, restrictions on

transfer of shares would be valid if it is provided
for in the articles of incorporation and stock
certificates issued by it. In close corporations, the
restrictions must also be provided for in the bylaws

A corporation does not become a close corporation

just because man and his wife own 99.86% of the

The restrictions, however, shall not be more

onerous than granting existing stockholders or the

41

corporation the option to purchase the shares of

the selling or transferring stockholder w/in
reasonable terms, conditions and period

Pre-incorporation agreements ordinarily do not

survive the corporation in ordinary stock
corporations, unless it has been ratified or adopted
by the corporation after incorporation

Effects of Issuance or Transfer of Stock in

Breach of Qualifying Conditions:
1)

2)

3)

4)

In
close
corporations,
pre-incorporation
agreements survive and continue to be valid and
binding if such be the intent of the stockholders, as
long as the agreement is not inconsistent w/ the
AoI

If the stock of a close corporation is issued or

transferred to any person not entitled to be a
holder of record, and if the certificate for such
stock conspicuously shows the qualifications of
the persons entitled to be holders, such
person is conclusively presumed to have
notice of the fact of his ineligibility to be a
stockholder;

Stockholders in a close corporation may agree to

vote for a specific person or a group or to maintain
a certain stockholder as their president or
chairman

If the AoI of a close corporation states the #

of persons, not exceeding 20, who are entitled
to be holders of its stock, and if the certificate
for such stock conspicuously states such #,
and if the issuance or transfer of stock to any
person would cause the stock to be held by
more than such stated # of persons, the
transferee is conclusively presumed to have
notice of this fact;

As a rule, directors in ordinary stock corporations

must act as a body at a duly constituted meeting
to have a valid corporate transaction. In a close
corporation directors may validly act even w/o a
meeting subject to the restrictions in Sec. 101 of
the Code
The instances on when pre-emptive rights in
ordinary stock corporations may be denied do not
apply to close corporations.
The pre-emptive
rights in a close corporation is broadened to
include all issues w/o exceptions, unless denied or
limited by the articles of incorporation.

If a stock certificate of any close corporation

conspicuously shows restriction on transfer of
stock of the corporation, the transferee of the
stock is conclusively presumed to have notice
of the fact that he has acquired the stock in
violation of the restrictions;

Thus, in close corporations, pre-emptive rights

may be denied only if denied or limited by the
Articles of Incorporation

Whenever any person to whom a stock

certificate of a close corporation has been
issued or transferred has or is conclusively
presumed to have notice that (a) he is
ineligible to be a holder of stock, or (b)
transfer of stock to him would cause the stock
to be held by more than the allowed # of
holders by the AoI, or (c) that the transfer of
stock is in violation of a restriction on transfer
of stock, the corporation may at its option,
refuse to register the transfer of stock in the
name of the transferee

Deadlocks when the directors or stockholders are

so divided that the votes required for any
corporate action cannot be obtained w/ the
consequence that the business and affairs of the
corporation can no longer be conducted
In case of deadlocks, the SEC shall arbitrate the
dispute, upon written petition by any stockholder.
The SEC may even appoint a provisional director
The provisional director may act like a god in a
way that he may even order the dissolution of the
corporation

If all of the stockholders of the close corporation

consented to the registration despite the violation,
or if the close corporation has amended its AoI,
the transferee shall be registered in the books of
the corporation. In case of unanimous approval.
The AoI must be amended

The Business Judgment Rule does not apply to

close corporations, even of the directors acted in
good faith

The stockholder who wants his stock transferred or

disposed of, however, can compel the close
corporation to purchase his shares at their fair
value for any reason as long as there are sufficient
assets in its books to cover its debts and liabilities

Powers of the SEC in case of deadlocks in

close corporations:

The transferee, on the other hand may rescind the

transaction or to recover from the transferor under
any applicable warranty
In ordinary stock corporations, stockholder may
only transfer his shares if he sells his shares or in
the exercise of his appraisal right, in instances
allowed by the Code
Question: May the close corporation be compelled
to purchase a stockholders shares if it has no
unrestricted retained earnings?
Answer:
Yes (Sec. 105), as long as it has
sufficient assets in its books to cover its debts and
liabilities, exclusive of its capital assets

42

1)

Cancel or alter any provision in the AoI, bylaws, or any stockholders agreement;

2)

Cancel, alter or enjoin any resolution or other

act of the corporation or its board of directors,
stockholders or officers;

3)

Prohibit any act of the corporation or its board

of directors, stockholders or officers or other
persons party to the action;

4)

Require the purchase of the par value of the

shares of any stockholders, either by the
corporation regardless of availability of

unrestricted retained earnings, or by the other

stockholders;
5)

Appointment of a provisional director;

6)

Dissolving the corporation; or

7)

Other relief as the circumstances may warrant

is non-stock, the # should be by multiples of

5. If it is a stock corporation, their # is any #
w/in 5-15

B.P. 232 prohibits educational

institutions to organize as stock corporations.
Prior to its effectivity, educ. stock corps. are
encouraged
to
convert
into
non-stock
corporations

The provisional director, if one be appointed may

cast the deciding vote to break the deadlock

In
an
Educational
Stock
Institution BoD/T may hold office for either 1
or 5 years

If a stockholder of a close corporation wishes to

withdraw therefrom, he may do so for any
reason and compel the corporation to purchase
his shares at their fair value provided the
corporation has sufficient assets in its books to
cover its debts and liabilities exclusive of the
capital stock.

In
Educational
Non-Stock
Institution BoD/T may hold office for either 1,
3 or 5 years

While foreigners may own a

maximum of 40 % of the capital stock of an
educational corporation, not one of them may
sit as a member of the governing board.
Foreigners can neither act as an officer w/ the
power of control and administration of the
institution.
Their ownership of any capital
stock would be limited to non-controlling
interest

Recall: a corporation may acquire its own shares

even in the absence of unrestricted retained
earnings if: (1) it is a redeemable share or (2) in
case of close corporation, sufficient assets will
suffice
Grounds
for
corporation:
1)

dissolution

of

close

T/F:
BoD of educational
institutions must be divisible by 5 only.
FALSE, Only in cases of non-stock educational
institutions

Any acts of the directors/officers in control of

the corporation are:
a)
b)
c)
d)
e)

Illegal;
Fraudulent;
Dishonest;
Oppressive;
Unfairly prejudicial to the corporation
or any stockholder; or

Religious Corporations

One composed entirely of spiritual

persons for the furtherance of religion or
perpetuating the rights of the church or
for the administration of church or
religious work or property

2 classes of religious corporations:

2) Corporate assets are misapplied

[ NOTE: Read distinctions between Close and Ordinary
Stock Corporations, page 457-458 ]
SPECIAL CORPORATIONS
Educational Corporations

1)

Religious societies

2)

Corporation Sole

CORPORATION SOLE consists of one

person only and his successor in some
particular station, who are incorporated by law
in order to give them some legal capacities
and
advantages,
particularly
that
of
perpetuity, which in their natural persons they
could not have had

Governed by special laws and by

the general provisions of the Code

Those which provide facilities for

teaching or instruction

Private schools or colleges,

which include any private institutions for
learning, once recognized by the government
as such are mandated by law to be
incorporated
w/in 90 days under the
provisions of the Corp. Code. Their failure to
do so will not immune the educational
institution from suit as a corporation (Chang
Kai Shek School vs. CA, 1989)

PURPOSE of Corp. Sole:

to
administer and manage, as
trustee, the affairs, properties
and temporalities of any religious
denomination, sect or church

Contents of the AoI of a Corporation

Sole:

The SEC shall not accept or

approve the articles of incorporation and bylaws of any educational institution w/o a
favorable recommendation by the DECS

1) That he is the chief archbishop, bishop,

priest, minister, rabbi, or presiding elder
of his religious denomination, sect or
church and that he desires to become a
corporation sole;

The Board of Directors/Trustees

of an educational institution has the same #
as any other corporation, except that in case it

2) That the rules, regulations and

discipline of his religious denomination,
sect or church are not inconsistent w/ his

43

becoming a corporation sole, and do not

forbid it;

In case of vacancy in the office of the

head of the corporation, the person
authorized by the rules, regulations or
discipline of the denomination shall exercise
all the powers and authority of the corporation
sole during such vacancy and until such
vacancy has been filled-up

3) That as such chief archbishop, bishop,

priest, minister, rabbi, or presiding elder,
he is charged with the administration of
the temporalities and the mngmt. of the
affairs, estate and properties of his
religious denomination, sect or church
w/in his territorial jurisdiction;

Sec. 114 provides for the manner in which

the vacancy should be filled-up

4) The manner in which any vacancy

occurring is to be filled according to the
rules, regulations or discipline of the
religious denomination, sect or church to
which he belongs;

It is required that the successor filling-up

the vacancy, in order to be permitted to
transact business as a corporation sole, must
file w/ the SEC a copy of his commission,
certificate of election, or letter of appointment,
duly certified by a notary public

5) Place where the principal office of the

corporation sole is to be established and
located, which must be w/in the
Philippines

A corporation sole may be dissolved by

submitting to the SEC a verified declaration
of dissolution setting forth:

6) Other provisions not contrary to law for

the regulation of the affairs of the
corporation

o
o
o

Term of existence of corporation sole: In

perpetuity
A corporation sole becomes endowed with
a corporate personality upon mere filing of its
articles of incorporation

Gen
Rule:
A
corporation
acquires
personality after issuance by the SEC of
certificate of incorporation

Name of the corporation;

Reason for the dissolution
and winding-up;
Authorization
for
the
dissolution of the corporation
by the particular religious
denomination,
sect
or
church;
Names and addresses of the
persons
who
are
to
supervise the winding up of
the affairs of the corporation

A corporation sole
will be dissolved upon declaration of dissolution
by the SEC

The corporation sole may sell or mortgage

real properties but it must first secure a court
order for that purpose

Can dissolution of a
corporation sole be by a judicial decree? Many
believes that: NO, only upon a verified
declaration of belief (because of the separation
of the Church and State)

Court intervention may be dispensed with

only if the religious denomination, sect or
church does not provide for rules which
regulate the holding or alienating of properties
A corporation sole has no nationality thus,
the Constitutional requirement that 60% of
the capital of the corp. must be owned by
Filipino citizens does not apply to corporation
sole

Religious Societies

T/F: Corporation sole has the same rights

and privileges to hold or acquire property just
like ordinary corporations: FALSE. It does not
have the same rights bec. if it is to alienate
property, court order is necessary except
when there are rules, regulations and
discipline which provides for rules in alienation
Power of the corporation sole to purchase
real property is not restricted, but the power
to sell or mortgage sometimes is, depending
upon the rules and regulations and discipline
of the church concerned represented by the
corporation sole
Alienable public lands held by a possessor,
personally or through his predecessor-ininterest, openly, continuously and exclusively
for the prescribed statutory period is
converted ipso jure to private property by
mere lapse or completion of the said period

44

A body of persons associated together for

the purpose of maintaining religious
worship

Religious societies may incorporate upon

written consent and/or by affirmative
vote at a meeting duly called for the
purpose of at least 2/3 of its
membership by filing w/ the SEC AoI
verified by the affidavit of the presiding
elder, secretary or clerk or other member
of such religious society

Contents of the AoI of a religious

society:
1)

That such religious society is a

religious
denomination,
sect
or
church;

2)

That at least 2/3 of its membership

have given their written consent or
have voted to incorporate in a
meeting duly called for the purpose;

3)

That the incorporation of the religious

society is not forbidden by competent
authority or by the constitution,
rules, regulations or discipline of the
religious
denomination,
sect
or
church of which it forms part;

The extension of the corporate term

should be made before the expiration of
the
original
term
otherwise
the
corporation is dissolved ipso facto, insofar
as the continuance of the business is
concerned

4)

That the religious society desires to

incorporate for the administration of
its affairs, properties and estate;

5)

That the place of principal office is

w/in the Philippines;

Note that the extension should not be

made earlier than 5 years before the
original or subsequent expiry date unless
there are justifiable reasons for an earlier
extension determined by the SEC

6)

The
names,
nationalities
and
residences of the trustees elected by
the religious society to serve for the
1st year or such other period as may
be prescribed by the laws of the
religious society be not be less than 5
nor be more than 15

A corporation shall exist for a period not

exceeding 50 years from the date of
incorporation unless sooner dissolved or
unless said period is extended. Upon the
expiration of the period fixed in the AoI in
the absence of compliance with the legal
requisites for the extension of the period,
the corporation ceases to exist and is
dissolved ipso facto

When period of corporate existence

expires, the corporation ceases to be a
body corporate for the purposes of
continuing its business for w/c it was
organized. But it shall nevertheless be
continued as a body corporate for 3 years
after the time when it would have been
dissolved, for the purpose of prosecuting
and defending suits by or against it and
for enabling it to gradually settle and
close its affairs to dispose of and convey
its property and to divide its assets

When period of corporate life expires and

w/o any extension having made pursuant
to law, the corporation is dissolved
automatically insofar as the continuation
of its corporate business is concerned

Quo
warranto
proceeding
may
be
instituted by the Sol. Gen. only for the
involuntary dissolution of a corp, on any
of the ff. grounds:

QUESTION: How many persons should organize a

religious society? Not less than 5 nor more than
15
QUESTION: When/How does a religious society
acquire juridical personality? Upon issuance of
certificate of incorporation be SEC, the general rule
applies, since the Code does not provide otherwise
QUESTION:
May it be dissolved by a judicial
decree? YES.
DISSOLUTION
The 1 extinguishment of the corporate franchise
and the 2 termination of the corporate existence
When a corporation is dissolved it ceases to be a
corporate entity and can no longer pursue the
business for which it was incorporated. But it will
nevertheless continue as a body corporate for
another period of 3 years from the time it is
dissolved but only for the purpose of winding up
its affairs and the liquidation of its assets
3 ways to dissolve a corporation:
1)

By expiration of its term;

2)

By voluntary surrender of its primary

franchise (voluntary dissolution);

3)

By revocation of its corporate

franchise (involuntary dissolution)

When
the
corporation
has
offended against a provision of
an Act for its creation or
renewal;

When
it
has
forfeited
its
privileges or franchise conferred
upon it by law;

When it has exercised a right,

privilege
or
franchise
in
contravention of law

Under the code there are only 2 methods of

dissolution: voluntary and involuntary
Surrender
Dissolution)

Expiration of Corporate Term:

o

A corporation is required to indicate its

term of its existence in its AoI except
corporation sole

of

Franchise

(Voluntary

3 Modes of Voluntary Dissolution:

1) Voluntary dissolution
creditors are affected; (Sec. 118)

A corporation ceases
to exist and is
deemed automatically dissolved upon the
expiration of the term indicated in its
AoIwithout the need of any formal
proceedings

where

no

2) Voluntary dissolution where creditors

are affected; (Sec. 119)
3) Shortening of corporate term

45

Voluntary
dissolution
where
no
creditors are affected, Procedures:
1) Majority vote
directors/trustees;

of

the

board

of

2) Notice to each stockholder at least 30

days before the meeting;
o

3) Publication of the notice;

4) Resolution adopted by 2/3 of the
stockholders or members;
5) Certification of the resolution by a
majority of the board of directors or
trustees and countersigned by the
corporate secretary;
6) Issuance
dissolution

of

the

certificate

Dissolution by Shortening Corporate Term

A corporation may be given the

capacity of perpetual succession, in
the sense that it has the capacity of
continuous
existence
during
a
particular period or until dissolved in
accordance w/ law

A copy of the amended AoI shall be

submitted to the SEC, and upon
approval of the amended AoI of the
expiration of shortened term, the
corporation
shall
be
deemed
dissolved w/ any further proceedings.

Approval of the SEC of the shortening

of corporate term is required to make
it effective

The shortening of the corporate term

partakes
the
nature
of
an
amendment of the AoI where the
vote must be cast at a duly
constituted meeting

of

Compliance
w/
these
requirements
is
mandatory.
Failure to comply will have no
effect on the legal existence of
the corporation. A corporation
being a creation of law, may only
be dissolved in the manner
prescribed by the law of its
creation

o
Voluntary dissolution where creditors
are affected, Procedures:

ry Dissolution
Effected by filing of a verified
complaint and after proper notice and
hearing on the grounds provided by
existing laws, rules and regulations

b) Petition for dissolution filed w/ the SEC

signed by majority of the managing
directors/trustees,
verified
by
the
president or secretary;

Other grounds for dissolution: (In

the Corporation Code)

c) Issuance of the order by the SEC

reciting the purpose of the petition and
fixing the date w/c objections may be filed
by any person which date shall not be less
than 30 days nor more than 60 days after
entry of the order;

1) Violation of any provisions of

the Code;
2) In case of deadlocks (Sec.
105)
3) In cases provided by Sec. 105
in close corporation

d) Publication of the order;

e) Posting of the order for 3 weeks in 3
public places in the city or municipality;

Involuntary dissolution is a harsh remedy akin to

capital punishment, thus Courts proceed w/ extreme
caution w/c have for their object the forfeiture of
corporate franchise, and a forfeiture will not be
allowed, except under 1express limitation, or 2 for plain
abuse of power by which the corp. fails to fulfill the
design and purpose of its organization

It is a general rule that corporations possess only such

powers as are actually conferred and such implied
powers as are reasonably necessary to the exercise of
the express powers

The board of directors does not have the power to force

the surrender and withdrawal of unmatured stock
except 1 in case of liquidation of the corporation or 2 of
forfeiture of the stock for delinquency

Relief by dissolution will be awarded only where no

other adequate remedy is available, and is not available

f) SEC shall hear the petition after 5 days

notice given after the right to file
objections have expired (61st-65th day);
g) Judgment dissolving the corporation
and directing disposition of its assets as
justice requires and the appointment of
the receiver to collect assets and pay
debts of the corporation
The appointment of a receiver is only
permissive, not mandatory

In cases of voluntary dissolution,

there is no occasion for the
appointment of a receiver except
under special circumstances and
upon proper showing

Involunta

a) Affirmative vote of 2/3 of the

stockholders or members at a meeting
duly called for the purpose;

The appointment of a receiver is not

mandatory since the law intended to
let the shareholders have the control
of the assets of the corporation upon
dissolution in winding-up its affairs

46

where the rights of the stockholders can be, or are,

protected in some other way

Under the present state of law, any stockholder or

member of a corporation can institute a dissolution
proceeding against his own corporation before the
proper forum

In a close corporation, a petition for the dissolution of

the corporation may be instituted
by any one
individual shareholder on the ground, even by mere
dishonesty

Liquidation and winding-up

The collection of all corporate assets, payment of all its

debts and settlement of its obligations and the ultimate
distribution of the corporate assets, if any remains, to
all the stockholders in accordance with their
proportionate stockholdings in the corporation or in
accordance w/ their respective contracts of subscription

The 3-year period for winding-up is not absolute

3 ways to liquidate a corporation:

Effects of dissolution:

1.

By the corporation itself through the board of directors:

If this period is resorted to, the board will only have a
period of 3 years to finish its task of liquidation. Claims
for or against the corporation not filed w/in 3 years will
become unenforceable as there exists no corporate
entity against w/c they can be enforced.
Actions
pending for or against the corporation when the 3 year
expires, are abated since after that period, the
corporation ceases for all intents and purposes and is
no longer capable of suing or being sued

2.

By a trustee appointed by the corporation: The 3 year

period herein will not apply, provided the designation of
the trustee is made within that period. The corporation
as represented by its trustee, can sue and be sued
even beyond the 3 year period fixed by law

3.

By appointment of receiver:
A
receiver may be
appointed by the proper forum on petition or motu
proprio upon the dissolution of the corporation.
Appointment of a receiver is merely permissive and in
cases of voluntary dissolution, there is no occasion for
the appointment of a receiver except under special
circumstances and upon proper showing. If a receiver
is appointed, the 3 year period fixed by law within
which to complete the task of liquidation will not
likewise apply because the dissolved corporation is
substituted by the receiver who may sue or be sued
even after that period. Thus, when a corporation is
dissolved and a receiver is appointed, the period of 3
years is not applicable and the receiver may institute
all actions leading to the liquidation of the corporation
even after the expiration of 3 years

1) Terminates its primary franchise;

2) Generally prevents it from exercising other or secondary
franchises which have been conferred to it;
3) Terminates its power to enter into contracts or to
continue the business as a going concern

A corporation, whose corporate life expired, cannot

lawfully pursue the business for which it was organized.
It cannot apply for a new certificate or a secondary
franchise for it is incapable of receiving a grant.
Neither can it enforce a contract executed prior its
dissolution for the purpose of continuing the business
of its organization

Debts due to or by a corporation are not extinguished.

The termination of the life of a juridical entity does not,
by itself, imply diminution or extinction of rights
demandable against such juridical entity

In general, the rights and liabilities of the corporation

are not extinguished by its dissolution

Thus, a lease to a corporation may, by its terms,

terminate where the corporation ceases to exist. But
unless the lease so provides, the rights and obligations
thereunder are not extinguished by the corporations
dissolution since leases affect property rights and
survives the death of the parties. The stockholders
succeed to the rights and liabilities of the dissolved
corporation in an unexpired leasehold state which may
be enforced by or against the receiver or liquidating
trustee

This rule, however, may not hold true in cases of

contracts for personal services which are deemed
terminated by the dissolution of the corporation. In
such cases, there is an implied condition that the
contract shall terminate in the event of dissolution

Upon the expiration of the 3-year period for windingup, the juridical personality of the corporation of the
corporate ceases for all intents and purposes, and as a
general rule, it can no longer be sued

The 3-year period for winding-up is only for the

purposes of liquidation and winding-up of its affairs and
no other. A corporation cannot renew its existence
within such period

After abolition of a corporation, it shall nevertheless

continue to exist as a juridical entity for 3 years for the
purpose of prosecuting and defending suits by or
against it and enabling it to settle and close its affairs,
to convey and dispose of its properties and to distribute
its assets, but not for the purpose of continuing the
function for which it was established

NOTE: Mere appointment of a receiver does not imply

dissolution of the corporation
Actions commenced w/in the 3 year period of
liquidation may be continued by the trustee
despite the expiration of the said period
The legal interest vests in the trustee, and the
beneficial interest in the members, stockholders,
creditors, or other persons in interest
If the corporation carries out the liquidation of its
assets through its own officers and continues and
defends the actions brought by or against it, its
existence shall terminate at the end of three years
from the time of dissolution
But if a receiver is appointed, the legal interest
passes to the assignee, the beneficial interest
remains
with
the
members,
stockholders,
creditors, or other interested persons; and said
assignee may bring an action or defend an action
even outside the 3-year period
When a corporation is dissolved and the liquidation
of its assets is placed in the hands of a receiver or
assignee, the period of 3 years is not applicable

47

and the assignee may institute all actions leading

to the liquidation of the assets of the corporation
even after the expiration of 3 years

Foreign corporation one formed, organized or

existing under any laws other than those of the
Philippines

The word trustee as used in the corporation

statute must be understood in its general concept
which could include the counsel to whom was
entrusted the prosecution or defense of suit filed
by or against the corporation

A foreign corporation will be granted a license to

do business in the Philippines if the laws of the
country of its incorporation allow Filipino citizens
and corporations to do business in its own country
or state

Thus, counsel who appears in behalf of the

corporation may be a trustee of a corporation,
even if the corporation did not appoint any trustee
to that effect, at least in the matter of litigation
only

The
incorporation
test
is
applied
in
determining whether a corporation is domestic or
foreign. If it is incorporated in another state, it is
a foreign corporation, while if it is registered under
Philippine laws, it is deemed a Filipino or domestic
corporation irrespective of the nationality of its
stockholders

During the 3-year period. The BoD/T cannot do

any business activity other than that of winding-up
of the affairs of the corporation.

However, in times of war and for purposes of

security of the state, the control test would
apply in determining the corporate nationality, i.e.,
the citizenship of the controlling stockholders
determines the nationality of the corporation

There is nothing however that prevents the

stockholders from conveying their respective
shareholdings toward the creation of a new
corporation to continue the business of the old

A corporation can have no legal existence outside

the boundaries of the sovereign by which it is
created

It is not unlawful for the old board of directors to

transfer the assets of a dissolved corporation to
the new corporation intended to be created as long
as the stockholders give their consent

Generally, a foreign corporation has no legal

existence within the state in which it is foreign.
This is based on the principle that juridical
existence of a corporation is confined within the
territory of the state under whose laws it was
incorporated or organized, and it has no legal
status beyond such territory

If the 3-year period has elapsed and no effort to

finally settle or close the corporate affairs was
undertaken, those having pecuniary interest in the
corporate assets, stockholders and creditors, may
make proper representations with the SEC for
working out a final settlement of the corporate
concern

Before a foreign corporation can transact business

in the Philippines, it must first obtain a license and
a certificate from the appropriate government
agency

Any assets distributable to any creditor or

stockholder or member who is unknown or cannot
be found shall be escheated to the city or
municipality where such assets are located

If it transacts business in the Philippines w/o a

license, it shall not be permitted to maintain or
intervene in any action, suit or proceeding in any
court or administrative agency of the Philippines
but it may be sued on any valid cause of action
recognized under the Philippine laws

Winding-up is the sole activity of a dissolved

corporation that does not intend to incorporate
anew. If it intends to incorporate anew, it is not
unlawful for the old board of directors to negotiate
and transfer the assets of the dissolved corporation
to the new corporation intended to be created as
long as the stockholders have given their consent

Requirements for a foreign corporation to

obtain a license:

Thus, General Rule is: upon termination of

corporate existence, the only activity
of a
corporation is liquidation and winding-up except:
1.

2.

1) Copy of its AoI;

2) AoI
must
be
certified
accordance with their laws;

When it intends to incorporate anew, it is not unlawful

for the old board of directors to negotiate and transfer
the assets of the dissolved corporation to the new
corporation intended to be created as long as the
stockholders have given their consent; or

in

3) Translation to an official language

of the Philippines;
4) Duly executed certificate under
oath by the authorized official of
the jurisdiction of incorporation;

In cases of merger and consolidation, where the corp.

does not undergo liquidation and winding-up

5)

FOREIGN CORPORATIONS
A corporation created by the laws of the state or
country is a domestic corporation

Statement under oath by the

president or other authorized
person that the corporation is
solvent;

6) Posting of a bond

Any corporation which owes its existence to the

laws of another state, government or country is
thus a foreign corporation

Sec. 125 Contents of the application for a

license

48

Within 60 days after the issuance of the license, a

foreign corporation except those engaged in
foreign banking or insurance, shall deposit with the
SEC, for the benefit of creditors, bonds or other
securities with an actual market value of P
100,000.00

Who may be a resident agent?

Philippines; or

When gross income has decreased; or

Actual market value of the total securities

on deposit has increased by MORE than
10% of the actual market value of the
securities at the time they were deposited

The necessity of the appointment of a resident

agent is only for the purpose of receiveing
summons an other legal processes in any legal
action
or
proceeding
against
the
foreign
corporation
While the law allows service upon the SEC or on
any of its officers or agents w/in the Philippines,
these 2 modes may become effective only if the
foreign corporation failed or neglected to designate
such person or an agent

What is doing or transacting business as to bar

a foreign corporation from our courts if it has no
license?
There is no general rule, but there is a test. The
true test is whether or not foreign corporation is
continuing the body or substance of the business
or enterprise for which it was organized or whether
it has substantially retired from it and turned it
over to another

If such foreign corporation has a license to do

business, then summons to it will be served on the
agent designated by it for the purpose, or
otherwise in accordance w/ the Corp, Code
Foreign corporations cannot transact business in
the Philippines w/o the requisite license. If they do
so, the responsible officers may be subjected to
the penal sanctions in Sec. 144 of the Code

Term doing or transacting business include

soliciting orders, service contracts opening offices,
whether called liason offices or branches
Term doing or transacting business implies a
continuity
of
commercial
dealings
and
arrangements and contemplates the performance
of acts or works or the exercise of some of the
functions normally incident to, and in progressive
prosecution of, the purpose and object of its
organization

If a corporation does business in the Philippines

w/o a license, it may be sued in the Philippine
courts, but it cannot sue
Rules on whether a foreign corporation can
sue:
1) A foreign corporation transacting or
doing business in the Phils. w/ a license
can sue before the Phil. Courts;

Term doing or transacting business shall not

include mere investment as a shareholder by a
foreign entity in a domestic corporation duly
registered to do business; nor the exercise of
rights as such investor; nor having a nominee
director or officer to represent its interest in such
corporation; nor appointing a representative or
distributor domiciled in the Philippines which
transacts business in its own name and for its own
account

2) A foreign corporation doing business in

the Philippines w/o a license cannot sue in
Philippine courts;
3) If a foreign corporation is not
transacting business in the Philippines,
even w/o a license, it can sue before the
Philippine courts

An isolated transaction even if pursuant to the

usual business does not constitute doing business
the doing of which would not bar a foreign
corporation from access to Philippine courts

Rules on whether a foreign corporation can

be sued or not:
1) A foreign corporation transacting business
in the Philippines with the requisite
license can be sued in the Philippine
courts;

Modes of Entry of Foreign Corporations:

1)
2)
3)
4)
5)
6)
7)

Branch Office;
Representative or Liason Office;
Local Subsidiary;
Regional or Area Headquarters;
Regional Operating Headquarters;
Regional Warehouse;
Joint Venture

2) A foreign corporation transacting business

in the Philippines w/o a license can be
sued in Philippine Courts;
3) If it is not doing business in the
Philippines, it cannot be sued in the
Philippine Courts for lack of jurisdiction
(w/o license, not transacting in the Phils.)

Resident Agent is a condition precedent to the

issuance of the license to transact business in the
Philippines

It is not the lack of required license that bars a

foreign corporation from access to our courts, but
the doing of business w/o a license

Functions of resident agent:

o
o

Either an individual residing in the

2) A domestic corporation lawfully transacting

business in the Philippines

When may the SEC release the securities?

o

1)

Receive summons;
Receive other legal processes served in
all actions or legal proceedings against
such corporation

When can a foreign corporation w/o license sue

before the Phil. Courts?

49

corp. cannot claim exemption from being sued in

Phil. Courts for acts done against a person or
persons in the Philippines

1)

if the act or transaction involved is an

isolated transaction; or

2)

the corporation is not seeking to enforce

any legal or contractual rights arising
from any business w/c it has transacted in
the Philippines; or

3)

if the purpose of the suit is to protect its

trademark, tradename, corporate name,
reputation or goodwill; or

4)

where the suit is from a violation of the

Revised Penal Code or

5)

it is merely defending a suit held against

it; or

Thus, where a single transaction or act, is not

merely incidental or casual but indicates the
foreign corporations intention to do other business
in the Philippines , said single act or transaction
constitutes
doing
or
engaging
in
or
transacting business in the Philippines

6)

where the party is estopped to challenge

the personality of the corporation by
entering into a contract w/ it

A party is estopped to challenge the personality of

a corporation after having acknowledged the same
by entering into a contract with it

The object of the law in requiring a license was to

prevent a corporation from acquiring a domicile for
the purpose of business w/o taking the steps
necessary to render it amenable to suit in the local
courts

One who has dealt with a corporation of foreign

origin as a corporate entity is estopped to deny its
corporate existence and capacity

A single transaction constitute doing business in

the Philippines if it is an act of the ordinary
business of the corporation, when it is not merely
incidental or casual, but is of such character as
distinctly to indicate a purpose on the part of the
operations for the conduct of a part of the
corporations ordinary business

A
trademark
acknowledges
no
territorial
boundaries, but extends to every market where
the traders goods have become known and
identified by the use of mark

It is settled that if a foreign corporation is not

engaged in business in the Philippines, it may not
be denied the right to file an action in Philippine
courts for isolated transactions

The right to use a trademark is a right in rem

which could be asserted against all the world, even
in jurisdictions where it does not transact business

2 isolated transactions does not necessarily

constitute engaging in business in the Phils.
(Bulakhidas vs. Navarro, 142 SCRA 1, 1986)

A foreign corporation which has never done

business in the Philippines and which is unlicensed
and unregistered to do business here but is widely
and favorably known in the Islands through the
use therein of its products bearing its corporate
and trade name has a legal right to maintain an
action in the Philippines

There may only be an isolated transaction despite

several
subsequent
transactions
(Antam
Consolidated, Inc. vs. CA, 143 SCRA 288, 1986).
In this case, the transaction entered into by the respondent
w/ the petitioners are not a series of commercial dealings
which signify an intent on the part of the respondent to do
business in the Philippines but constitute an isolated one
which does not fall under the category of doing business.
The records show that the only reason why the respondent
entered into the second and third transactions with the
petitioner was because it wanted to recover the loss it
sustained from the failure of the petitioners to perform its
obligation under the first transaction and in order to give
the petitioner a chance to make good their obligation .

A foreign corporation not doing business in the

Philippines needs no license to sue before the
Philippine courts for infringement of trademark and
unfair competition
A foreign corporation which has never done any
business in the Philippines and which is unlicensed
and unregistered to do business here, but is widely
and favorably known in the Philippines through the
use therein of its products bearing its corporate
and tradename, has a legal right to maintain an
action in the Philippines to restrain the residents
thereof from organizing a corporation therein
bearing the same name as the foreign corporation,
when it appears that they have personal
knowledge of the existence of such foreign
corporation, and it is apparent that the purpose of
the proposed domestic corporation is to deal and
trade in the same goods as those of the foreign
corporation

The 3 seemingly different transactions were entered by the

parties only in an effort t fulfill the basic agreement and in
no way indicate an intent on the part of the respondent to
engage in a continuity of transactions w/ the petitioners w/c
will categorize it as a foreign corporation doing business in
the Philippines.
May a single act constitute doing business in the
Philippines?
It may. Where a single transaction/contract/act is
not merely incidental or casual but indicates the
foreign corporations intention to do other business
in the Philippines said single act or transaction
constitutes doing business or engaging in or
transacting business in the Philippines (Comm.
Materials and Design, Inc. vs. CA)

A signatory of the Convention of the Union of Paris

for the protection of Industrial Property shall be
protected (the trade name or corporate name) in
all countries of the Union w/o the obligation of
filing or registration, whether or not it forms part
of the trademark

If a foreign corporation, not engaged in business in

the Philippines, is not banned from seeking redress
from courts in the Philippines, a fortiori, that same

Capacity to Sue

50

A foreign corporations capacity to sue must

be affirmatively pleaded in order that it may
proceed and effectively institute a case in
Philippine courts

3)

Failure, after change of its

resident agent or of his address,
to submit to the SEC a statement
of such change;

Averment of the
necessary:

4)

Failure to submit to the SEC an

authenticated copy of its AoI, or
by-laws, or any of its articles of
merger or consolidation w/in the
time prescribed (60 days after
merger of consolidation);

5)

Misrepresentation of any material

matter;

6)

Failure to pay any and all taxes,

imposts,
assessments
or
penalties, if any, lawfully sue to
the Government;

7)

Transacting business in
the
Philippines as agent of or acting
for and in behalf of any foreign
corporation or entity not duly
licensed to do business in the
Philippines; or

8)

Any other ground as would

render it unfit to transact
business in the Philippines

capacity to

sue is

not

1)

If the action involves a complaint

for violation of the RPC, or

2)

When the foreign corporation is

not suing or maintaining a suit
but is merely defending itself
from one filed against it

The law denies to a foreign

corporation the right to maintain suit unless it
has previously complied with a certain
requirement, then such compliance, or the fact
that the suing corporation is exempt therefrom,
becomes a necessary averment in the complaint
Failure to aver its legal capacity to
institute a suit or action is fatal
Laws Governing Foreign Corporations
Same laws governing domestic corporations
except matters concerning its:

The SEC does not have the sole authority to

suspend or revoke the license of a foreign
corporation doing business in the Philippines,
since other government agencies like the CB and
the Insurance Commission may also issue an
order effectively suspending or revoking the
license of a foreign corporation within their
respective domain

a) Creation;
b) Formation;
c) Organization;
d) Dissolution;
e) Those which fix the relations,
liabilities, responsibilities, or duties of
stockholders, members, or officers of the
corporation to each other, or to the
corporation

Miscellaneous provisions

A foreign corporation may merge or

consolidate with any corporation, domestic, or
foreign, whether or not its constituent is
licensed to do business in the Philippines

Non-stock or special corporations may, through

their articles of incorporation or their by-laws,
designate their governing boards by any name
other than as board of trustees

In case of merger or consolidation with a

domestic corporation, the Corporation Code
will apply

Results of examination by the SEC of any

corporate
books
or transaction
sshall
be
confidential, except insofar as the law may require
the same to be made public or where such
interrogatories, answers or results are necessary
to be presented as evidence before any court

If it merges or consolidates in the place of its

incorporation, the laws of that state shall
apply

Sec. 144 Penalty

Corporation Code

If the absorbed corporation is the foreign

corporation doing business in the Philippines,
it is required to file a petition for withdrawal of
its license in accordance with Sec. 136 of the
Code

2)

Failure to appoint and maintain a

resident agent in the Philippines;

of

the

THE SECURITIES AND REGULATIONS CODE

(R.A. NO, 8799)

Grounds for revocation of license of a

foreign corporation (Sec. 134):
Failure to file its annual report or
pay any fees required;

violations

May 1, 1980 date of effectivity of the Corporation

Code

Sec. 136 Manner and procedure for the

withdrawal of foreign corporation

1)

for

Effective August 8, 2000

Adopts the view that the State should not interfere
in the business judgment of investors and as a
means of protection to them, the SEC is tasked
merely to ensure that full and fair disclosure about
the securities traded in the stock exchange are
made on time and sufficiently

51

The
requirement
of
registration
under
Subsection 8.1 shall not as a general rule
apply to any of the following classes of
securities:

Securities shares, participation or interest in a

corporation or in a commercial enterprise or profitmaking venture and evidenced by a certificate,
contract, instrument, whether written or electronic
in character

a)

Any security issued or guaranteed by the

Government of the Philippines, or by any
political subdivision or agency thereof, or by
any person controlled or supervised by, and
acting as an instrumentality of said
Government.

b)

Any security issued or guaranteed by the

government of any country with which the
Philippines maintains diplomatic relations, or
by any state, province or political subdivision
thereof on the basis of reciprocity: Provided,
That the Commission may require compliance
with the form and content of disclosures the
Commission may prescribe.

c)

Certificates issued by a receiver or by a

trustee in bankruptcy duly approved by the
proper adjudicatory body.

d)

Any security or its derivatives the sale or

transfer of which, by law, is under the
supervision and regulation of the Office of the
Insurance Commission, Housing and Land Use
Regulatory Board, or the Bureau of Internal
Revenue.

e)

Any security issued by a bank except its own

shares of stock.

Issuer the originator, maker, obligor, or creator

of the security (corp. from which the shares
originated)
Broker person engaged in the business of
buying and selling securities for the account of
others
Dealer a person who buys and sells securities
for his own account in the ordinary course of
business
Salesman a natural person employed as such or
as an agent, by a dealer, issuer or broker to buy
and sell securities
Insider means: (a) the issuer; (b) director or
officer, or any person controlling the issuer; (c) a
person whose relationship or former relationship to
the issuer gives or gave him access to material
information about the issuer or the security that is
not generally available to the public; or (e) a
person who learns such information by a
communication from any of the foregoing insiders;
Prospectus -- is the document made by or on
behalf of an issuer, underwriter or dealer to sell or
offer securities for sale to the public through a
registration statement filed with the Commission

Exempt Transactions:
The requirement of registration under Subsection 8.1 shall
not apply to the sale of any security in any of the following
transactions:

The Commission may, for purposes of efficiency,

delegate any of its functions to any department or
office
of
the
Commission,
an
individual
Commissioner or staff member of the Commission
except its review or appellate authority and its
power to adopt, alter and supplement any rule or
regulation
The Commissions jurisdiction over all cases
enumerated under Section 5 of Presidential Decree
No. 902-A is hereby transferred to the Courts of
general jurisdiction or the appropriate Regional
Trial Court: Provided, that the Supreme Court in
the exercise of its authority may designate the
Regional Trial Court branches that shall exercise
jurisdiction over these cases. The Commission shall
retain jurisdiction over pending cases involving
intra-corporate disputes submitted for final
resolution which should be resolved within one (1)
year from the enactment of this Code. The
Commission shall retain jurisdiction over pending
suspension of payments/rehabilitation cases filed
as of 30 June 2000 until finally disposed.
Securities shall not be sold or offered for sale or
distribution within the Philippines, without a
registration statement duly filed with and approved
by the Commission. Prior to such sale, information
on the securities, in such form and with such
substance as the Commission may prescribe, shall
be made available to each prospective purchaser.
EXCEPT:
Exempt Securities:

52

a)

At any judicial sale, or

administrator, guardian or
insolvency or bankruptcy.

sale by an executor,
receiver or trustee in

b)

By or for the account of a pledge holder, or mortgagee

or any other similar lien holder selling or offering for
sale or delivery in the ordinary course of business and
not for the purpose of avoiding the provisions of this
Code, to liquidate a bona fide debt, a security pledged
in good faith as security for such debt.

c)

An isolated transaction in which any security is sold,

offered for sale, subscription or delivery by the owner
thereof, or by his representative for the owners
account, such sale or offer for sale, subscription or
delivery not being made in the course of repeated and
successive transactions of a like character by such
owner, or on his account by such representative and
such owner or representative not being the underwriter
of such security.

d)

The distribution by a corporation, actively engaged in

the business authorized by its articles of incorporation,
of securities to its stockholders or other security
holders as a stock dividend or other distribution out of
surplus.

e)

The sale of capital stock of a corporation to its own

stockholders exclusively, where no commission or other
remuneration is paid or given directly or indirectly in
connection with the sale of such capital stock.

f)

The issuance of bonds or notes secured by mortgage

upon real estate or tangible personal property, where
the entire mortgage together with all the bonds or

notes secured thereby are sold to a single purchaser at

a single sale.
g)

The issue and delivery of any security in exchange for

any other security of the same issuer pursuant to a
right of conversion entitling the holder of the security
surrendered in exchange to make such conversion:
Provided, That the security so surrendered has been
registered under this Code or was, when sold, exempt
from the provisions of this Code, and that the security
issued and delivered in exchange, if sold at the
conversion price, would at the time of such conversion
fall within the class of securities entitled to registration
under this Code. Upon such conversion the par value
of the security surrendered in such exchange shall be
deemed the price at which the securities issued and
delivered in such exchange are sold.

h)

Brokers transactions, executed upon customers

orders, on any registered Exchange or other trading
market.

i)

Subscriptions for shares of the capital stock of a

corporation prior to the incorporation thereof or in
pursuance of an increase in its authorized capital stock
under the Corporation Code, when no expense is
incurred, or no commission, compensation or
remuneration is paid or given in connection with the
sale or disposition of such securities, and only when the
purpose for soliciting, giving or taking of such
subscriptions is to comply with the requirements of
such law as to the percentage of the capital stock of a
corporation which should be subscribed before it can be
registered and duly incorporated, or its authorized
capital increased.

j)

The exchange of securities by the issuer with its

existing security holders exclusively, where no
commission or other remuneration is paid or given
directly or indirectly for soliciting such exchange.

k)

The sale of securities by an issuer to fewer than twenty

(20) persons in the Philippines during any twelvemonth period.

l)

The sale of securities to any number of the following

qualified buyers:
i.
ii.

iv.

Pension fund or retirement plan maintained by the

Government of the Philippines or any political
subdivision thereof or managed by a bank or other
persons authorized by the Bangko Sentral to engage
in trust functions;

If there is a product involved, it

is beyond the jurisdiction of the
SEC

Investment contract means a contract,

transaction or scheme whereby a person invests
his money in a common enterprise and is led to
expect profits solely from the efforts of the
promoter or a third party
Elements of an investment contract:
1) there is a contract, transaction or
scheme;

2) there is an investment of money;

3) the investment is made in a common
enterprise;
4) there is expectation of profits;
5) profits arise from the entrepreneurial
and managerial efforts of others
Definitions:

Registered investment house;

Insurance company;

vi.

In pyramiding or multi-level marketing, if no

product is involved, certificate of participation
which is in the form of investment contract,
covered by the SEC

Bank;

iii.

v.

stockholders with at least one hundred (100)

shares each or who intends to acquire at least
thirty per cent (30%) of such equity over a
period of twelve (12) months shall make a
tender offer to stockholders by filing with the
Commission a declaration to that effect; and
furnish the issuer, a statement containing such
of the information required in Section 17 of
this Code as the Commission may prescribe.
Such person or group of persons shall publish
all requests or invitations for tender, or
materials making a tender offer or requesting
or inviting letters of such a security. Copies of
any additional material soliciting or requesting
such tender offers subsequent to the initial
solicitation or request shall contain such
information as the Commission may prescribe,
and shall be filed with the Commission and
sent to the issuer not later than the time
copies of such materials are first published or
sent or given to security holders.

Wash Sale Any transaction in a security which

involves no change in the beneficial ownership
thereof. Example: To create a false or misleading
appearance of active trading in any listed security
traded in an Exchange or any other trading market
(hereafter referred to purposes of this Chapter as
Exchange:

Investment company; or
Such other person as the Commission may by rule
determine as qualified buyers, on the basis of such
factors as financial sophistication, net worth,
knowledge, and experience in financial and business
matters, or amount of assets under management.

By effecting any transaction in such

security which involves no change in the
beneficial ownership thereof;
Matched Order an order(s) for the purchase or
sale of security with the knowledge that a
simultaneous order or orders of substantially the
same size, time and price for the sale or purchase
of such security has, or will be entered by or for
the same or different parties.
Example: By
entering an order or orders for the purchase or
sale of such security with the knowledge that a
simultaneous order or orders of substantially the
same size, time and price, for the sale or purchase

Tender Offers.-- Any person or group of

persons acting in concert who intends to
acquire at least fifteen per cent (15%) of any
class of any equity security of a listed
corporation or of any class of any equity
security of a corporation with assets of at least
Fifty Million Pesos (P50,000,000.00) and
having
two
hundred
(200)
or
more

53

of any such security, has or will be entered by or

for the same or different parties

inducing the purchase or sale of any security listed or

traded in an Exchange is also illegal

Wash sale and matched order are not by

themselves illegal, to be illegal the must
be used to create a false or misleading
appearance of active trading

Pegging or Fixing or stabilizing is also illegal under Sec.

24.1 (e) To effect, either alone or others, any series of
transactions for the purchase and/or sale of any security
traded in an Exchange for the purpose of pegging, fixing or
stabilizing the price of such security, unless otherwise
allowed by this Code or by rules of the Commission

*Marking the Close palcing of purchase or sale

order, at or near the close of the trading period.
Person making the order posts a higher or lower
price for the security just barely the close of the
market thereby increasing or lowering the closing
price. Price of security the next day will be the
same price as marked or taped on the close on the
day before

Short sale or selling security which the vendor does not

own is now per se illegal under Sec. 24.2, unless it is done
in accordance w/ the rules and regulations of the SEC
Insider Trading or the act if an insider to buy or
sell security of the issuer while in possession of
material information w/ respect thereto that is not
generally available to the public is illegal unless the
conditions in Sec. 27 are present

*Painting the Tape involves buying activity

among nominee acoounts at increasingly higher or
lower process causing fictitious reports to appear
on the ticker tape

Sec. 27 Insiders Duty to Disclose When Trading. 27.1.

It shall be unlawful for an insider to sell or

buy a security of the issuer, while in
possession of material information with
respect to the issuer or the security that
is not generally available to the public,
unless: (a) The insider proves that the
information was not gained from such
relationship; or (b) If the other party
selling to or buying from the insider (or
his agent) is identified, the insider proves:
(i) that he disclosed the information to
the other party, or (ii) that he had reason
to believe that the other party otherwise
is also in possession of the information. A
purchase or sale of a security of the
issuer made by an insider defined in
Subsection 3.8, or such insiders spouse
or relatives by affinity or consanguinity
within the second degree, legitimate or
common-law, shall be presumed to have
been effected while in possession of
material
non-public
information
if
transacted after such information came
into existence but prior to dissemination
of such information to the public and the
lapse of a reasonable time for the market
to absorb such information: Provided,
however, That this presumption shall be
rebutted upon a showing by the purchaser
or seller that he was not aware of the
material non-public information at the
time of the purchase or sale.

27.2.

For purposes of this Section, information is

material non-public if: (a) It has not
been generally disclosed to the public and
would likely affect the market price of the
security after being disseminated to the
public and the lapse of a reasonable time
for the market to absorb the information;
or (b) would be considered by a
reasonable person important under the
circumstances in determining his course
of action whether to buy, sell or hold a
security.

27.3.

It shall be unlawful for any insider to

communicate
material
non-public
information about the issuer or the
security to any person who, by virtue of
the communication, becomes an insider
as defined in Subsection 3.8, where the
insider communicating the information
knows or has reason to believe that such

*Squeezing the float - part or portion of the

issue/security
which
is
outstanding
but
intentionally held by dealers or other persons with
a view of reselling them later for profit
*Hype and dump act employed by a person or
group of persons of purchasing the outstanding
capital stock of a dormant public shell company for
a nominal amount and merge it w/ their privately
held company
*Boiler Room Operations involves an
intensive
selling
campaign
thru
numerous
salesmen by telephone operations or thru direct
mail offerings for securities of either a certain type
or from a specific issuer
* governed by Sec. 24.a (b) To effect, alone or with
others, a series of transactions in securities that:
i.

Raises their price to induce the purchase of a

security, whether of the same or a different class of
the same issuer or of a controlling, controlled, or
commonly controlled company by others;

ii.

Depresses their price to induce the sale of a security,

whether of the same or a different class, of the same
issuer or of a controlling, controlled, or commonly
controlled company by others; or

iii.

Creates active trading to induce such a purchase or

sale through manipulative devices such as marking
the close, painting the tape, squeezing the float, hype
and dump, boiler room operations and such other
similar devices

Circulating or Disseminating Information that the

price of any security listed in the Excahnge will or is likely
to rise or fall because of manipulative market operations of
any one or more persons conducted for the purpose of
raising or depressing the price of the security thus inducing
the purchase or sale of such security is outlawed under
Sec. 24.c To circulate or disseminate information that the
price of any security listed in an Exchange will or is likely to
rise or fall because of manipulative market operations of
any one or more persons conducted for the purpose of
raising or depressing the price of the security for the
purpose of inducing the purchase or sale of such security.
Making False or Misleading Statements in Sec. 24.1
(d): To make false or misleading statement with respect to
any material fact, which he knew or had reasonable ground
to believe was so false or misleading, for the purpose of

54

person will likely buy or sell a security of

the issuer while in possession of such
information.
27.4.

(i)

a)

Any tender offeror, those acting on its

behalf, the issuer of the securities sought
or to be sought by such tender offer, and
any insider of such issuer to communicate
material non-public information relating to
the tender offer to any other person
where such communication is likely to
result in a violation of Subsection 27.4 (a)
(i).
(b)

The Special Commercial Courts have

jurisdiction over an action alleging the
commission of fraud by one of the officers
of the corporation.

Allegation of fraud under Sec. 5(a) must

be stated w/ particularity to place the
case w/in the ambit of SEC

In all averments of fraud or mistake, the

circumstances constituting fraud must be
stated w/ particularity

Requisites for intra-corporate controversy:

1) there must be an intra-corporate relationship;
2) controversy must arise out of said relationship
Note: If the controversy did not arise from an
intra-corporate relationship, Special Commercial
Courts are w/o jurisdiction
When
is
there
an
relationship? When it is:

For purposes of this subsection

the term securities of the issuer
sought or to be sought by such
tender offer shall include any
securities
convertible
or
exchangeable into such securities
or any options or rights in any of
the foregoing securities.

1) Between the corporation,

association vs. the public;

26.1.

Employ any device, scheme, or artifice to

defraud;

26.2.

Obtain money or property by means of any

untrue statement of a material fact of any
omission to state a material fact
necessary
in
order to
make
the
statements made, in the light of the
circumstances under which they were
made, not misleading; or

intra-corporate
partnership

or

2) Between the corporation, partnership or

association vs. stockholders, partners, members or
officers;
3) Between the corporation,
association vs. State;

SEC. 26. Fraudulent Transactions. - It shall be

unlawful for any person, directly or indirectly, in
connection with the purchase or sale of any
securities to:

26.3.

Even if the action is for recovery of sums

of money paid or given to the corp. thru
devices or schemes amounting to fraud or
misrepresentation detrimental to the
investing public, it must be filed with the
Special Commercial Courts.

It shall be unlawful where a tender

offer has commenced or is about
to commence for:

Any person (other than the tender

offeror) who is in possession of material
non-public information relating to such
tender offer, to buy or sell the securities
of the issuer that are sought or to be
sought by such tender offer if such person
knows or has reason to believe that the
information is non-public and has been
acquired directly or indirectly from the
tender offeror, those acting on its behalf,
the issuer of the securities sought or to be
sought by such tender offer, or any insider
of such issuer; and

(ii)

partnership

or

4) Among the stockholders, partners, members or

officers themselves
Whether or not transferee of shares of stocks who
compels corporation to register his is an intracorporate controversy?
Depends. If stockholder did everything
necessary to be considered as a stockholder, and
the corp. fails to register him, there is an intracorporate controversy
Criminal

case

may

proceed

independently/simultaneously with civil or

Engage in any act, transaction, practice or

course of business which operates or
would operate as a fraud or deceit upon
any person.

intra-corporate case
Violation of estafa under RPC can proceed
independently w/o intervention of the SCC
The SEC has primary jurisdiction to

T + 3 Rule: obligation to buy or sell shares must

be
complied
w/in 3 days

try/investigate

intra-corporate

controversies

P.D. NO. 902-A, as amended

If ownership of the shares is not clearly

established and it is still unresolved at the
time the action for mandamus is filed,
then jurisdiction is w/ the regular courts

Corporate devices or schemes amounting

to fraud or misrepresentation detrimental
to the public and/or stockholders are now
exclusively lodged with the Special
Commercial Courts.
No other regular
court may hear or decide cases of this
nature
NOTE: Secs. 5-6

55

Intra-corporate controversy is one which arises

between a stockholder and the corporation

Where the conflict involves rights and obligations

under the Corporation Code or the internal and

intra-corporate
affairs
of
jurisdiction is with the SCC

the

corporation,

But if it requires a mere determination of the

contractual rights of the parties under an ordinary
agreement, the ordinary or regular courts has
jurisdiction

Not all matters between a corporation and

stockholder is an intra-corporate controversy that
only the SEC can resolve

Also consider the time at which the intra-corporate

relationship must exist. Should the complainant
be a stockholder at the time the institution of the
complaint or petition or at the act or transaction
complained of took place?

The main factor to consider is: The controversy

arose out of intra-corporate relation between and
among the stockholders

The Special Commercial Courts (SCC) have original

and exclusive jurisdiction to hear and decide cases
involving controversies in the election or
appointment of directors, trustees, officers or
managers
of
corporations,
partnerships
or
associations.

but foresees the impossibility of paying them upon maturity

because of liquidity problems
2) Suspension of payments accompanied by a proposal for
rehabilitation refers to a petition for said suspension w/ a
plan for the rehabilitation of the distressed company and
corresponding repayment scheme for all its debts and
liabilities (w/o sufficient assets, w/ mgmt. com. )
3) Suspension of payments where the corporation is under
a mgmt. com. or rehabilitation receiver may be availed of
by a corp. which has no sufficient assets to cover its
liabilities, or by any corp. having mere liquidity problems
provided it prays for the appt. or is under a mngmt. com. or
rehabilitation receiver
Once a receiver or mngmt. com. is
appointed, all actions for claims against the
corp. pending before any court are suspended
accordingly and automatically
Claims as used herein refer to debts or demands of
pecuniary nature. It means the assertion of right to have
money paid
Q: If claims are presented and there is suspension of
payments, are criminal cases also suspended?
A: No, criminal cases are personal in nature
The properties of an individual stockholder, director
or officer, as surety of corporate liabilities are not
and will not be covered by the suspension of
payments order pursuant to P.D. 902-A. Creditors
may thus proceed against the properties of the
concerned individual used as such security for the
corporate obligation

A corporate officers dismissal is always a

corporate
act
and/or
an
intra-corporate
controversy and that nature is not altered by the
reason which the Board of Directors/Trustees may
have in taking such action
This fact is not altered by the fact that
payment for back wages, other benefits,
as well as moral and exemplary damages
is sought (even so, SEC has jurisdiction)

When a corporation is placed under receivership,

its properties are under the control/mngmt. of the
receiver. Any disposition of property should be w/
approval of the receiver. The receiver on the other
hand, may dispose of the property, only if w/ court
approval

However, if the main cause of action is the

recovery of unpaid wages and separation pay, it is
a labor dispute and w/in the jurisdiction of the
NLRC

Q: What is the reason for suspension of payments?

A: To enable the mngmt. com. or rehabilitation receiver to
effectively exercise its/his powers free from any judicial or
extra-judicial interference that might unduly hinder or
prevent the rescue of the debtor-company

Thus what is considered is whether the corporate

officer asserts his rights as such officer or
questions his removal or ouster. If so, the case
would fall w/in the ambit of the jurisdiction of the
SCC, and not w/ the NLRC

Even if the suspension order is issued after a

creditors action in court has already become final
but pending execution, the execution of the
decision is likewise suspended

Suspension of Payments

Q: What is the effect of suspension of payments?

Under the P.D. 902-A, a corporation

w/c is virtually bankrupt or insolvent may file for
suspension of payments. So even the corporation
has no sufficient assets to answer all its liabilities,
it may file for suspension of payments provided it
is placed under a rehabilitation receiver or
management committee

A: All claims are suspended, even judgment is already final

and pending execution (Filinvest vs. Ejercito)
Q: What are the legal consequences of receivership?
A: All actions for claims against the corporation pending
before any court are suspended.
During rehabilitation
receivership, the assets are held in trust for the equal
benefit of all credtors to preclude one from obtaining an
advantage or preference over the other bythe expediency of
an attachment, execution or otherwise. As between the
creditors, there is equality in equity. All the creditors
therefore stand on equal footing. Not any one of them is
given preference by paying one ahead of the others

Under the Insolvency Act a corporation

may only file for suspension of payments if it has
sufficient assets to answer all its liabilities but
foresees the impossibility of paying them upon
maturity because of liquidity problems

But if corporation can no longer operate profitably, and

will be liquidated, secured creditors will regain preference

3 Remedies available to a corporation seeking to

suspend payments:

NOTE: Foreclosure of Mortgage can be proceeded if it was

prior to the appointment of a management committee

1) Simple suspension of payments mere deferment of

payment of debts and refers to a petition which is filed by a
corp. w/c possesses sufficient assets to cover its liabilities

56

It is upon appointment of a mngmt. com. or

rehabilitation receiver that all actions pending shall
be suspended
Rules:
1) All claims against cororations, partnerships, or
associations that are pending before any court, tribunal or
board, w/o distinction as to whether or not the creditor is
secured or unsecured, shall be suspended effective upon
appointment of a management committee, rehabilitation
receiver, board, or body;
2) Secured creditors retain their preference over unsecured
creditors, but enforcement of such preference is equally
suspended upon the appointment of a management
committee or rehabilitation receiver board, or body;
Once a mngmt. committee or rehabilitation receiver
has been appointed, all actions for clains against a
distressed corporation pending before any court, tribunal,
board, or body shall be suspended accordingly.
The suspension shall not prejudice or render ineffective
the status of a secured creditor a compared to a totally
unsecured creditor. In the event that the rehabilitation is
no longer feasible and claims against the distressed corp.
would eventually have to be settled, the secured creditors
shall enjoy preference over the unsecured creditors, subject
only to the Civil Code on Preferences of Credit
Q: What is the effect of appointment of a receiver? The
Management may not dispose/alienate the assets of the
corp. All assets and properties are vested to the receiver.
The SCC is empowered to appoint a management
committee to undertake the ngmt. Of the corp.,
partnership, or asso. when there is imminent danger of
dissipation, loss, wastage or destruction of assets or
paralyzation of business of a corp. which is prejudicial to
the interest of the stockholders, parties-litigants or general
public.
SCC may also appoint a management com. upon
request of the concerned govt. agency
2 requisites for the appointment of a management
committee: (must concur)
1) the corporate property is in danger of being wasted or
destroyed; that the business of the corporation is being
diverted from the purpose from which it was organized; and
2) there is serious paralyzation of its operations to the
detriment of the stockholder, parties-litigants, or general
public
Such appointed man. Com. or receiver will immediately
take over the mngmt. of the corp.
Appointment of a management committee or receiver
is an extraordinary and drastic remedy to be exercised with
great care and caution, and only when the reqmts. are
shown
It is allowed only under pressing circumstances and,
when there is inadequacy, ineffectual or exhaustion of legal
or other remedies
In the absence of a strong showing of an imminent
danger of dissipation, loss, wastage or destruction of assets
or other properties of a corporation and paralysis of its
business operations, mere apprehension of future
misconduct based on prior mismanagement will not
authorize
the
appointment
of
a
management
committee/receiver
Management committee may be imperative when the
stockholders are in dissension and could not agree among
themselves.
Dissension should be such where the
corporation cannot successfully carry on its corporate
functions.

57

does not entail continuity because after the

undertaking is completed it is already the end
particular partnership and joint venture would be
similar, but there is already a decision of the
Supreme Court declaring them as different
when they do not register, it does not exist
Foreign corporations enters into an agreement with
a domestic corporation, it must be registered.
Generally they do not need to be registered.
Corporations

They may enter into joint venture, but generally

they cannot enter into a partnership, but there are
exceptions allowed by the SEC: the 3 exceptions
must go hand in hand
1. The articles of incorporation expressly
authorized the corporation to enter into
contracts of partnership;
2. The agreement or articles of partnership must
provide that all the partners will manage the
partnership; and
3. The articles of partnership must stipulate that
all the partners are and shall be jointly and
severally liable for all obligations of the
partnership.
DEFINITION AND ATTRIBUTES
-

CORPORATION LAW
Corporation is one of the types of business
organizations. It is also the most important in
economic development.
INTRODUCTION
Sole proprietorship

4 attributes of a corporation

1.
2.
3.
4.

Artificial being
Created by operation of law
Right of succession
Powers, attributes and properties expressly
authorized by law or incident to its existence.

Doctrine of limited capacity

Only such powers as are expressly granted to it by

law and by its articles of incorporation including
others which are incidental to such conferred
powers, those reasonably necessary to accomplish
its purpose and those which may be incidental to
its existence

Can do things as the law asks or allows it to do

If it does anything beyond, it shall be considered
as ULTRA VIRES

General rule: Moral damages cannot be granted to

corporations

Exception: Filipinas Broadcasting Network Inc. vs.

Ago Med

In cases of slander, libel and other forms of

defamation (should not qualify because the code
does not qualify whether natural or juridical) Art.
2219 of the civil code:

One man form of business entity, personally

answers all liabilities, but enjoys all the profits with
the exclusion of others
Limited shareholders responsibility
Paid subscription in full, you are no longer liable

Partnership

Based on mutual trust and confidence

Joint venture

(2) Quasi-delicts causing physical injuries;

one time grouping of persons whether they be

natural or juridical

(3) Seduction, abduction, rape, or other lascivious

acts;

Art. 2219. Moral damages may be

recovered in the following and analogous cases:
(1) A criminal offense resulting in physical injuries;

58

(4) Adultery or concubinage;

Section 4

(5) Illegal or arbitrary detention or arrest;

(6) Illegal search;

Created by a special law, they have their own

character
They are not immune from suit unless provided by
the law of their creation
Primarily governed by the law creating them
Their subsidiaries are entirely different or
independent from that of the other

(7) Libel, slander or any other form of defamation;

(8) Malicious prosecution;

(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles 21, 26,
27, 28, 29, 30, 32, 34, and 35.
The parents of the female seduced, abducted,
raped, or abused, referred to in No. 3 of this
article, may also recover moral damages.
The spouse, descendants, ascendants, and
brothers and sisters may bring the action
mentioned in No. 9 of this article, in the order
named.

Advantages (SEE LADIA BOOK)

No. 2 may also be a disadvantage

No. 5 may also be a disadvantage

A corporation is a person, therefore protected by

the due process clause and equal protection clause
of the Constitution

Importance
of
knowing,
determining
what
provisions of the code or the law may be applicable
Section 3. Classes of corporations. Corporations formed or organized under this Code
may be stock or non-stock corporations.
Corporations which have capital stock divided into
shares and are authorized to distribute to the
holders of such shares dividends or allotments of
the surplus profits on the basis of the shares held
are stock corporations. All other corporations are
non-stock corporations. (3a)

Non-stock- title 10

Stock- section 51

Stockholders must generally cast their votes in the

meeting; section 4 governed primarily by the law
creating them
Section 4. Corporations created by
special laws or charters. - Corporations created by
special laws or charters shall be governed primarily
by the provisions of the special law or charter
creating them or applicable to them, supplemented
by the provisions of this Code, insofar as they are
applicable. (n)

Section 3

1.

The two requisites must always concur

That they have a capital stock divided into shares;
and,
That they are authorized to distribute dividends or
allotments as surplus profits to its stockholders on
the basis of the shares held by each of them.

2.

Close corporation

There is no exemption it is absolute

Public corporation

Political or governmental purposes

Those formed or organized for the government or
a portion of the State or any of its political
subdivision and which have for their purpose the
general good and welfare

Private Corporation

Immediate benefit, aim or advantage of private

individuals
Those formed for some private purpose, benefit,
aim or end
Distinction: public for governmental purpose

Corporation Sole

Exemption to the rule because it is composed only

of one person
An incorporator may also be a juridical person

Close corporation

There is exclusivity of shares of stock

Section 96-105
Restrictions to transfer shares
Only those indicated can own shares
Article must provide that there will be no public
offering

Open corporation

openly admit investors

example: stock exchange

Domestic/ Foreign

Test

Incorporation test
If incorporated under the laws of the Philippines it
is a domestic corporation

CLASSIFICATION OF CORPORATIONS
Section 3 Stock and non-stock
-

ME Gray vs. CA
-

Parent or Holding/ subsidiaries and affiliates

Affiliates- no majority vote
SMC 12%

HERSHEY
12%

CBPl 12%

CBP

Affiliate is subject to common control by the 12 % owners

59

De jure

cannot be attached by the state even in a quo

warranto proceeding

De facto

exists by virtue of colorable compliance

Attached directly only by the state in a quo
warranto proceeding

deemed incorporated from the date the Securities

and Exchange Commission issues a certificate of
incorporation under its official seal; and thereupon
the incorporators, stockholders/members and their
successors shall constitute a body politic and
corporate under the name stated in the articles of
incorporation for the period of time mentioned
therein, unless said period is extended or the
corporation is sooner dissolved in accordance with
law. (n)
-

Corporation by estoppel

Words corporation or inc. either

abbreviated form must be included

in

full

or

Section 18. Corporate name. - No

corporate name may be allowed by the Securities
and Exchange Commission if the proposed name is
identical or deceptively or confusingly similar to
that of any existing corporation or to any other
name already protected by law or is patently
deceptive, confusing or contrary to existing laws.
When a change in the corporate name is approved,
the Commission shall issue an amended certificate
of incorporation under the amended name. (n)

So defectively formed, but still considered

corporation, but only in relation to those who
cannot deny their existence section 20 and 21
FORMATION AND ORGANIZATION
3 stages
1. Creation
2. Re-organization or quasi-reorganization
3. Dissolution/winding-up
Purpose clause
Defining the scope of authority of the corporate
enterprise pr undertaking. Both confirmed and
limited
4 limitations of purpose clause
1. Lawful
2. Specific or stated concisely
3. More than one, the primary and secondary
must be specified
4. Lawfully combined
Provision that states, cannot be issued less than
par, exception is treasury shares because it can be
issued less than par
-

Doctrine of secondary meaning

A word or phrase originally incapable of exclusive

appropriation [usually generic] with reference to
an article in the market, because of geographically
or otherwise descriptive, might nevertheless have
been used so long and so exclusively by one
producer with reference to his article that, in that
trade and to that branch of the purchasing public,
the word or phrase has become to mean that the
article was his product.

A corporation commences only upon issuance of

the certificate, prior thereto it has no being and
cannot transact business. Promoters cannot act for
a projected corporation

Section 18

Metro Manila- paid up capital requirement is 10 M

Lyceum of the Philippines case, the additional

geographical name does not make it confusingly
similar
actual confusion is not necessary- Philips case it is
enough that there is probable confusion

Non- stock- mere mention of the operating capital

Mention the authorized capital

Restrictions

Mandatory in close
Not mandatory in ordinary

Non-stock

If value is not more than 100,000

A corporation cannot use any other name unless it

has been amended

Section 19

If confusingly similar it will not be allowed to be

registered
Verification slip from the records officer

2 requisites must be proven

that the complainant corporation acquired a prior

right over the use of such corporate name
identical, deceptively or confusingly, patently
deceptive

principal office

statement of principal office is required

city and municipality not only province must be
specified
principal office NOT operations office
necessary because it will establish the residence of
corporations
venue of actions for or against the corporations
venue of meetings
section 51 meetings may only be within the
boundaries of the city where the principal office
non-stock may be held anywhere in the
Philippines, if provided in its by-laws
where summons may be served
registration of chattel mortgage must be registered
in the register of deeds where the principal office is
located

Section 19. Commencement of corporate

existence. - A private corporation formed or
organized under this Code commences to have
corporate existence and juridical personality and is

60

Clavecilla Radio System vs. Antillon

Define corporators <sec.5>

action not upon a written contract

city where the defendant resides

term of existence

corporate term required

determining what point in time the juridical
personality will cease to exist
enter into contract only when it has juridical
personality
once it ceases to exist, it no longer has personality
exist for another 3 years only for purposes of
liquidation
Dissolution- it is automatic

All persons who compose the corporation at any

given time and need not be among those who
execute the articles of incorporation at the start of
its formation and organization.
Originally or subsequently
Section 5 provides:
Corporators in a stock corporation are
called stockholders or shareholders. Corporators in
a non-stock corporation are called members. (4a)

When should extension be made?

General rule: Not earlier than 5 years

Exception: unless there are justifiable reasons

May it be extended after expiration?

Alhambra cigar vs. SEC once it ceases to exist it

has no vested politic, exist only for a period of 3
years only for liquidation and for that purpose only

Article 5 How many incorporators should there be?

5-15

May a corporation be an incorporator?

General rule: only natural persons

Exception: cooperatives and corporation primarily
organized to hold equities in rural banks

How about minors?

NO, because they must be of legal age

May a corporation organized by incorporators

consisting solely of foreigners

Yes, there is no nationality requirement only

residence, as long as majority are residents of the
Phil

Define incorporators <sec.5>

Those person mentioned in the articles as

originally forming the corporation and who are
signatories of the articles of incorporation.
Must be signatories to be incorporators

May a corporation be a corporator?

YES. There is nothing to prevent a corporation

from being a stockholder

Incorporator must subscribe to 1 share

There are those that are exclusively reserved to

Filipinos

An incorporator maybe a corporator as long as he

is a stockholder

section 6
Section 6. Classification of shares. - The
shares of stock of stock corporations may be
divided into classes or series of shares, or both,
any of which classes or series of shares may have
such rights, privileges or restrictions as may be
stated in the articles of incorporation: Provided,
That no share may be deprived of voting rights
except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in
this Code: Provided, further, That there shall
always be a class or series of shares which have
complete voting rights. Any or all of the shares or
series of shares may have a par value or have no
par value as may be provided for in the articles of
incorporation: Provided, however, That banks, trust
companies, insurance companies, public utilities,
and building and loan associations shall not be
permitted to issue no-par value shares of stock.
Preferred shares of stock issued by any
corporation may be given preference in the
distribution of the assets of the corporation in case
of liquidation and in the distribution of dividends,
or such other preferences as may be stated in the
articles of incorporation which are not violative of
the provisions of this Code: Provided, That
preferred shares of stock may be issued only with
a stated par value. The board of directors, where
authorized in the articles of incorporation, may fix
the terms and conditions of preferred shares of
stock or any series thereof: Provided, That such
terms and conditions shall be effective upon the
filing of a certificate thereof with the Securities and
Exchange Commission.

Section
5.
Corporators
and
incorporators, stockholders and members. Corporators are those who compose a corporation,
whether as stockholders or as members.
Incorporators are those stockholders or members
mentioned in the articles of incorporation as
originally forming and composing the corporation
and who are signatories thereof.

Shares of capital stock issued without par

value shall be deemed fully paid and nonassessable and the holder of such shares shall not
be liable to the corporation or to its creditors in
respect thereto: Provided; That shares without par
value may not be issued for a consideration less
than the value of five (P5.00) pesos per share:
Provided, further, That the entire consideration
received by the corporation for its no-par value

Corporators in a stock corporation are

called stockholders or shareholders. Corporators in
a non-stock corporation are called members. (4a)

61

shares shall be treated as capital and shall not be

available for distribution as dividends.

trustees to be elected from among the holders of

stocks, or where there is no stock, from among the
members of the corporation, who shall hold office
for one (1) year until their successors are elected
and qualified. (28a)

A corporation may, furthermore, classify

its shares for the purpose of insuring compliance
with constitutional or legal requirements.

Every director must own at least one (1)

share of the capital stock of the corporation of
which he is a director, which share shall stand in
his name on the books of the corporation. Any
director who ceases to be the owner of at least one
(1) share of the capital stock of the corporation of
which he is a director shall thereby cease to be a
director. Trustees of non-stock corporations must
be members thereof. A majority of the directors or
trustees of all corporations organized under this
Code must be residents of the Philippines.

Except as otherwise provided in the

articles of incorporation and stated in the
certificate of stock, each share shall be equal in all
respects to every other share.
Where the articles of incorporation
provide for non-voting shares in the cases allowed
by this Code, the holders of such shares shall
nevertheless be entitled to vote on the following
matters:
1. Amendment of the articles of incorporation;

May a domestic corporation have a governing

board consisting solely of foreigners?

YES, section
residents of
requirement

Anti-dummy act <sec.2-A>

If the business undertaking or activity is only

partially nationalized, aliens can be elected as such
directors, [unless the law provides otherwise] but
their number shall only be in proportion to their
equity or participation in the capital stock of the
corporation.

Disqualifications <sec.27>

The disqualifications provided for is absolute and

may not be done away with. Corporate by-laws
may, however, provide for additional qualifications
and disqualifications.

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or
other disposition of all or substantially all of the
corporate property;
4. Incurring,
indebtedness;

creating

or

increasing

bonded

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with
another corporation or other corporations;
7. Investment of corporate funds in another
corporation or business in accordance with this
Code; and
8. Dissolution of the corporation.
Except as provided in the immediately
preceding paragraph, the vote necessary to
approve a particular corporate act as provided in
this Code shall be deemed to refer only to stocks
with voting rights. (5a)

How many directors should there be?

1.

General rule: Not less than 5 not more than 15

Exceptions:
Educational corporations registered as non stock
corporation whose number of trustees, though not
less than five and not more than [15] should be
divisible by five [5], meaning they must have
either five, ten, or fifteen trustees and no other;
In close corporations where all the stockholders
are considered as members of the board of
directors thereby effectively allowing twenty
members in the board.
The by-laws of a corporation may provide for
additional qualifications and disqualifications of its
members of the board of directors or trustees.
However it may not do away with the minimum
disqualifications lay down by the Code.

2.

3.

Qualifications of the governing board

Requires mere residency <sec. 23>

23 majority of them must be

the Philippines, no nationality

Section 27. Disqualification of directors,

trustees or officers. - No person convicted by final
judgment
of
an
offense
punishable
by
imprisonment for a period exceeding six (6) years,
or a violation of this Code committed within five
(5) years prior to the date of his election or
appointment, shall qualify as a director, trustee or
officer of any corporation. (n)

Section 27 and 23 minimum disqualifications and

qualifications
Lee vs. CA

By laws may provide for additional

Govt vs. El hogar Filipino, Gokongwei vs. SMC

Capital structure
Foundation- minimum paid-up capital 3M
Authorized capital 1 M
No. of shares 1M shares
par value 1.00
Amount of shares subscribed
50 K
A
50 K
B
C
250K
D
E
PAID UP =62,500
Corporation cannot exceed more than 1 M it is the
maximum amount it cannot issue more unless amended

Section 23. The board of directors or

trustees. - Unless otherwise provided in this Code,
the corporate powers of all corporations formed
under this Code shall be exercised, all business
conducted and all property of such corporations
controlled and held by the board of directors or

62

Maximum shares it can issue is 1M shares unless amended

How much shares should be subscribed?

For flexibility in price, particularly, no par shares

may be issued or sold from time to time at
different price depending on the net worth of the
company since they do not purport to represent an
actual of fixed value.

Must be at least 25% of the authorized capital

stock

Paid- up must be at least 25%-minimum

Section 6

Section 30

Total subscription compliance with minimum 25%

total
Any combination would comply with the minimum
required by section 30

Each shall be equal in all respects to every other

share

Preferred shares

Specific preference
Dividends or during liquidation

No par

Can sell it with the network of the corporation

Distinction
between
outstanding stocks?

Section 137

Section 30. Compensation of directors. In the absence of any provision in the by-laws
fixing their compensation, the directors shall not
receive any compensation, as such directors,
except for reasonable per diems: Provided,
however, That any such compensation other than
per diems may be granted to directors by the vote
of the stockholders representing at least a majority
of the outstanding capital stock at a regular or
special stockholders' meeting. In no case shall the
total yearly compensation of directors, as such
directors, exceed ten (10%) percent of the net
income before income tax of the corporation during
the preceding year. (n)

Minimum for a domestic corporation?

In no case shall the paid- up capital be less than

5k

the

subscribed

and

Section 137. Outstanding capital stock

defined. - The term "outstanding capital stock", as
used in this Code, means the total shares of stock
issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or
partially paid, except treasury shares. (n)

Is there a minimum authorized capital imposed by

the code?

Voting and dividend rights, it refers to the

outstanding capital stocks
Only outstanding stocks are allowed to vote and
receive dividends
Actually the same

If there is minimum paid-up logically there should

also be a minimum capital =5000

Treasury shares

Minimum paid-up capital for a financing company

metro manila 10 M if located in MM

Shares of stock

Purpose of classification

are also subscribed shares

while they remain in the treasury, no voting and
dividend rights
may be reissued by the corporation
once reissued they become outstanding stocks
again

To specify and define the rights and privileges of

the stockholders;

For regulation and control of the issuance of sale of

corporate securities for the protection of
purchasers and stockholders.

As a management control device.

To comply with statutory requirements particularly

those which provide for certain limitations on
foreign ownership and shares like overseas
employment agencies requiring to own at least
75% of the shares of stock thereof.

common shares

carry the right to vote

preferred shares

grants the holder preference

preference as to dividends
preference as to distribution of the remaining
assets upon dissolution or
both
YOU MUST STATE THE PREFERENCE BECAUSE IF
NOT THEY ARE PRESUMED TO BE EQUAL
It may include such other preferences not
inconsistent with the Code. This is so because
Section 6 of the said law allows a stock corporation
to issue preferred shares subject only to the
limitations imposed therein which are:
They can be issued only with sated par value; and,
The preferences must be stated in the articles of
incorporation and in the certificate of stock,

To better insure return on investment which can be

affected through the issuance of redeemable
shares or preferred shares, i.e., granting the
holders thereof, preference as to dividends and/or
distribution of assets in case of liquidation; and,

a.
b.

63

otherwise, each share shall be, in all respect, equal

to every other share.

Par

stated par value; shall not be issued less than par

Participating

No par

Must be stated because the presumption is that it

is participating

without stated par value

Cumulative

once fully paid no longer liable

Irrespective of whether or not they where earned

Corporations cannot use its capitals in declaring

dividends; not all can issue no par value section 6

Preferred

Voting

May be denied
Unless denied they are still entitled

What if hindi i-declare kahit na may dividends

rights for the previous years? May they be denied
dividend rights because they are non holders of
non-cumulative? NOTE: YOU CANNOT COMPEL THE
CORPORATION TO DECLARE DIVIDENDS UNLESS
IT EXCEEDS 100 % PAID UP CAPITAL SEC. 43

entitled to vote at any motion brought up in

writing

Non-voting

not entitled to vote

What types of shares may be denied of the right to

vote?

Preferred and redeemable shares

Is it correct to state that common shares can

never be denied the right to vote?

Only preferred and redeemable shares are denied

unless provided in this code

PWEDENG MA-DENY YUNG COMMON SHARES,

KASI YUNG FOUNDERS SHARES MERON SILANG
EXCLUSIVE RIGHTS NA SILA LANG ANG MERON,
SO PWEDE SILANG BUMOTO WITH REGARDS TO
SOMETHING NA HINDI NA SAKOP NG COMMON
SHARE RIGHTS

Example: founders shares- may be given certain

rights and privileges

Even common shares may be denied the right to

vote of founders shares issued <sec.7>

Section 43. Power to declare dividends. The board of directors of a stock corporation may
declare dividends out of the unrestricted retained
earnings which shall be payable in cash, in
property, or in stock to all stockholders on the
basis of outstanding stock held by them: Provided,
That any cash dividends due on delinquent stock
shall first be applied to the unpaid balance on the
subscription plus costs and expenses, while stock
dividends shall be withheld from the delinquent
stockholder until his unpaid subscription is fully
paid: Provided, further, That no stock dividend
shall be issued without the approval of
stockholders representing not less than two-thirds
(2/3) of the outstanding capital stock at a regular
or special meeting duly called for the purpose.
(16a)
Stock corporations are prohibited from
retaining surplus profits in excess of one hundred
(100%) percent of their paid-in capital stock,
except: (1) when justified by definite corporate
expansion projects or programs approved by the
board of directors; or (2) when the corporation is
prohibited under any loan agreement with any
financial institution or creditor, whether local or
foreign, from declaring dividends without its/his
consent, and such consent has not yet been
secured; or (3) when it can be clearly shown that
such retention is necessary under special
circumstances obtaining in the corporation, such as
when there is need for special reserve for probable
contingencies. (n)

Section 7. Founders' shares. - Founders'

shares classified as such in the articles of
incorporation may be given certain rights and
privileges not enjoyed by the owners of other
stocks, provided that where the exclusive right to
vote and be voted for in the election of directors is
granted, it must be for a limited period not to
exceed five (5) years subject to the approval of the
Securities and Exchange Commission. The fiveyear period shall commence from the date of the
aforesaid approval by the Securities and Exchange
Commission. (n)

It depends because there are three types of noncumulative preferred shares

Discretionary dividend type
Mandatory if earned
Earned cumulative or dividend credit type

Do you include non-voting shares in passing a valid

corporate act?

Compare cumulative share from non-cumulative,

earned cumulative or dividend credit type

Even non-voting shares are entitled to vote under

section 6

Cumulative share whether or not earned

Non-cumulative earned cumulative or dividend
credit type- only if earned

Redeemable shares

Discretionary/optional

64

Obligatory or mandatory

Once re-issued they become outstanding stocks

again

Generally a corporation can reacquire its own

shares if it has unrestricted retained earnings

The corporation may cancel them; in effect there

will be a reduction in the outstanding capital stocks

Exception: redeemable shares may be reacquired

irrespective of retained earnings

The code does not require ordinary corporations to

provide for restrictions, but it does not likewise
prohibit restrictions

Example: right of first refusal

The restriction must be contained in the articles of

incorporation

Treasury shares

They are treasury while in the treasury account of

the corporation

May they be reissued by the corporation?

YES

If provided in by-laws but not in the articles of

incorporation then it will not be binding

If they are reissued will they be denied the right to

vote?

Restrictions and preferences

required in close corporations

are

mandatorily

Once reissued they shall become outstanding

stocks again and purchasers shall be entitled to all
the rights and privileges as the other holders have

If it does not provide restrictions it is not a close

corporation

Section 57 treasury shares have no voting and

Specified persons- close corporations

Section 57. Voting right for treasury

shares. - Treasury shares shall have no voting
right as long as such shares remain in the
Treasury. (n)

If not one of those specified you are not included

because there is exclusivity in close corporations

Should also be in the by-laws not only in the

articles of incorporation

Answer: commissioner vs. manning page 62 first

par.

No transfer clause

Execution clause

Acknowledgment

Treasurer affidavit
incorporation

Section 23-27 minimum qualifications, but there

may be additional

Grounds for disapproval

Only substantial and not strict is required

May the SEC refuse or reject registration?

<Section 17>

dividend rights. Why not?

Although authorities may differ on the

exact legal and accounting status of so-called
treasury shares, they are more or less in
agreement that treasury shares are stocks issued
and fully paid for and reacquired by the
corporation either by purchase, donation, forfeiture
or other means. Treasury shares are therefore
issued shares but being in the treasury they do not
have
the
status
of
outstanding
shares.
Consequently, although a treasury share, not
having been retired by the corporation re-acquiring
it, may be re-issued or sold again, such shares, as
long as it is held by the corporation as a treasury
share, participates neither in dividends, because
dividends cannot be declared by the corporation to
itself, nor in meetings of the corporation as voting
stock, for otherwise equal distribution of voting
powers among stockholders will be effectively lost
and the directors will be able to perpetrate their
control of the corporation, though it still represents
a paid for interest in the property of the
corporation. The foregoing essential features of a
treasury stocks are lacking in the questioned
shares.
In this case, and under the terms of the
trust agreement, the shares of stock of Reese
participated in dividends which the trustee
received and the said shares were voted upon by
the trustee in all corporation meetings. They were
not, therefore, treasury shares.
When the law speaks of outstanding rights it does
not include treasury shares

Treasury shares may be reissued

They are actually assets of the corporation

part

of

the

articles

of

Section 17. Grounds when articles of

incorporation or amendment may be rejected or
disapproved. - The Securities and Exchange
Commission
may
reject
the
articles
of
incorporation or disapprove any amendment
thereto if the same is not in compliance with the
requirements of this Code: Provided, That the
Commission shall give the incorporators a
reasonable time within which to correct or modify
the objectionable portions of the articles or
amendment. The following are grounds for such
rejection or disapproval:
1. That the articles of incorporation or any
amendment thereto is not substantially in
accordance with the form prescribed herein;

65

2. That the purpose or purposes of the corporation

are patently unconstitutional, illegal, immoral, or
contrary to government rules and regulations;

administered or managed by him as such chief

archbishop, bishop, priest, minister, rabbi or
presiding elder shall be held in trust by him as a
corporation sole, for the use, purpose, behalf and
sole benefit of his religious denomination, sect or
church, including hospitals, schools, colleges,
orphan asylums, parsonages and cemeteries
thereof. (n)

3. That the Treasurer's Affidavit concerning the

amount of capital stock subscribed and/or paid is
false;
4. That the percentage of ownership of the capital
stock to be owned by citizens of the Philippines has
not been complied with as required by existing
laws or the Constitution.
No articles of incorporation or amendment
to articles of incorporation of banks, banking and
quasi-banking institutions, building and loan
associations, trust companies and other financial
intermediaries,
insurance
companies,
public
utilities, educational institutions, and other
corporations governed by special laws shall be
accepted or approved by the Commission unless
accompanied by a favorable recommendation of
the appropriate government agency to the effect
that such articles or amendment is in accordance
with law. (n)
-

But the grounds in section 17 are not exclusive

When will the corporation commence to exist?

Section 19

A corporation de jure can come into existence only

upon the issuance of the certificate of registration
by the SEC? TRUE OR FALSE?

TRUE

EXCEPTION: CORPORATION SOLE <sec. 112>

CORPORATION SOLE- upon filing of the verified

articles of incorporation, once filed it is vested with
a judicial capacity

General rule section 19

Vested with judicial capacity upon issuance of the

certificate by the SEC
o

However it is not accurate according to

atty. Ladia because there are those that
can issue for example cooperativesBUREAU OF COOPERATIVES which
register,
home
insurance
guaranty
corporation- HOME OWNERS

Cagayan Fishing vs. Sandika

Section 19. Commencement of corporate

existence. - A private corporation formed or
organized under this Code commences to have
corporate existence and juridical personality and is
deemed incorporated from the date the Securities
and Exchange Commission issues a certificate of
incorporation under its official seal; and thereupon
the incorporators, stockholders/members and their
successors shall constitute a body politic and
corporate under the name stated in the articles of
incorporation for the period of time mentioned
therein, unless said period is extended or the
corporation is sooner dissolved in accordance with
law. (n)

Section 112. Submission of the articles

of incorporation. - The articles of incorporation
must be verified, before filing, by affidavit or
affirmation of the chief archbishop, bishop, priest,
minister, rabbi or presiding elder, as the case may
be, and accompanied by a copy of the commission,
certificate of election or letter of appointment of
such chief archbishop, bishop, priest, minister,
rabbi or presiding elder, duly certified to be correct
by any notary public.
From and after the filing with the
Securities and Exchange Commission of the said
articles of incorporation, verified by affidavit or
affirmation, and accompanied by the documents
mentioned in the preceding paragraph, such chief
archbishop, bishop, priest, minister, rabbi or
presiding elder shall become a corporation sole and
all temporalities, estate and properties of the
religious denomination, sect or church theretofore

66

Corporations are created by law

Commence to exist upon issuance by the

CONCERNED government corporation or agency

Prior there to it has no being

The transfer of the property was not valid, it

likewise did not have the right to transfer

De jure

Strict or substantial compliance

De facto

4 requisites must go hand in hand take out anyone

of them there can be no de facto corporation

1.

There is a valid statute under which the

corporation could have been created as a de jure
corporation.

2.

An attempt, in good faith, to form a corporation

according to the requirements of law, which goes
far enough to amount to a colorable compliance
with the law;

3.

A user of corporate powers, the transaction of

business in some way as if it were a corporation;
and,

4.

Good faith in claiming to be and doing business as

a corporation.

Are the rights and obligations between officers and

directors of a de jure and de facto the same?

YES. Governed
regulations

by the

same

law, rules

and

Only important in determining, is for the purpose

of applying the rules with regards to the direct and
collateral attack
The existence of a de jure cannot be questioned
even by the State, either directly or indirectly

What is the missing link so as to consider it a de

facto? A law, because the executive order is
unconditional

An unconditional act affords no rights, creates no

office

Legal contemplation it was never passed at all

It can therefore be questioned by any person

If the certificate of registration has not been

issued, may a corporation de facto exist?

NO!

Number 4 requirement, good faith in claiming to

be and doing business as a corporation

Applied where the rules governing agency

A person purporting in behalf of a non existing

corporation

Section 21, you arrive at the same decision

Chiang Kai Siek vs. CA

Existence of a de facto can be questioned only by

the State directly in a quo warranto proceeding
only
Municipality of Malabang vs. Benito

SC based its decision from the provision of the

education act

It cannot immune itself by virtue of its non

compliance with the law

Assuming there was no law?

YES, it may still be sued as a school for the past

32 years the school represented itself as possessed
of juridical personality

General rule: a 3rd party transacting with a non

existent corporation shall be estopped to deny
Asia banking vs. standard products

General rule: absence of fraud a person who has

dealt with a non incorporated corporation shall be
stopped to deny from actions in which it had
benefited

Hall vs. Piccio

Exemptions: when there is fraud the general rule

shall not apply

Missing link is good faith

Salvatierra vs. Garlitos

The certificate was not yet issued by the SEC, the

members knew and therefore they were not acting
in good faith, therefore anybody can question its
existence

Corporation by estoppel

So defectively formed so that they are not to be

considered a de jure or de facto

As a general rule a person who has contracted it a

corporation lacking personality

Doctrine is not applicable where fraud takes part in

the transaction

Another exemption
International express travel and tours vs. CA

General partners- liable even beyond his promise

even his personal properties are prone to
attachment

No fraud in this case

How come Kahn was made liable?

Lozano vs. Delos Santos

Doctrine of incorporation

Founded on principle of equity

Applies only if that person is trying to escape from

a contract where he is benefited

Exercise corporate powers

Enters with business with 3rd parties

In this case petitioner is not trying to escape

liability, but rather the one claiming from the
contract

When there is no 3rd persons involved and the

problem arises between there members, therefore
they themselves know that there is no corporation
by estoppel

Would this apply to foreign corporation?

YES, it may apply

Albert vs. University

Georg Grotjahn vs. Isnami

1965 case, no section 21 yet

A foreign corporation cannot gain access to our

courts unless they attain a license to engage in

67

business in the Philippines but applying corporation

by estoppels, the court allowed

Municipality of Malabang case

No law, hence may be questioned by any person

An unconstitutional act is not a law, t confers no

rights, it imposes no duties, it affords no
protections, it crates o office, it is in legal
contemplation, as inoperative as though it had
never been passes

You cannot issue investment contracts without a

secondary franchise, kailangan primary muna hindi
pwede mauna secondary kasi sa section 19 it does
not exist until issued with a certificate of
registration or incorporation

Corporate entity

Corporation exist separately and independently

from the stockholders

Stockholders cannot bring an action, to bring back

the properties of a corporation

Hall vs. Piccio

No good faith

Corporation has no interest in the individual

properties of its members

Corporation by estoppel

Sulo ng Bayan vs. Araneta

Admission, conduct or agreement

Will not apply among members themselves there

must be a 3rd party

Cannot escape when benefited

General rule: you deal with a corporation, as to

estop it

Exceptions: 1.
fraudulently misrepresents the
third person may file an action directly to those
members, 2. 3rd party will not be estopped if he is
not trying to escape liability

2 possible remedies

Chiang kai siek case

Albert case

What would be the effect if the corporation failed

to commence transaction?

Corporation cannot bring an action for the recovery

of the properties of its members
Caram vs. CA

Stockholders cannot be held liable for the

legitimate obligations of the corporation, they exist
separately and independently from one another
Cruz vs. Dalisay

Final judgment against a corporation cannot be

enforced against stockholders
Rustan Pulp vs. CA

Corporation exist separately and independently

Corporation are juridical entities, they exist only in

legal contemplation, can act only through its
authorized representatives
Soriano vs. CA

Automatic

They are not personally liable

Operated but becomes subsequently inoperative

for 5 years only a ground for suspension, proper
notice and hearing

They where signed for and in behalf of the

corporation

Commencement

Example realty company

Palay inc. vs. Clave

-

Liabilities incurred by the corporation cannot be

enforced against stockholders, etc., even if
stockholders, etc. happens to own a substantial
interest in the corporation, mere ownership does
not disregard the corporate entity theory

Corporate entity for legal or legitimate purposes

only

Two or more corporations, one of them will be

treated as a mere alter-ego

You cannot pierce the veil of corporate fiction when

there are no facts attendant in the case

Corporate Entity Theory

CORPORATE CHARTER AND ITS AMENDMENTS

What do you understand by the word charter? Is it
the same as articles of incorporation?
-

Corporate charter is broader

Franchise

Primary power granted by the state to be and act

as a corporation

Secondary franchise is the right or privilege that

the corporation may exercise

68

The corporation is possessed with a personality

separate and distinct from the individual
stockholders or members and is not affected by
the personal rights, obligations or transactions of
the latter

Sued in there official capacity

Reverse of Soriano vs. CA (signed in their official

capacity)
Tesco vs. WCC

Instrumentality rule

Where one corporation is so organized and

controlled and its affairs are conducted so that it
is, in fact, a mere instrumentality or adjunct of the
other, the fiction of the corporate entity of the
instrumentality may be disregarded

Claparols vs. CIR

-

Courts are concerned with reality and not form

Mere ownership of all or substantially all of the

shares of stock of a corporation is not, in itself,
insufficient ground for disregarding the separate
corporate personality. And for the separate
personality of the corporation to be disregarded,
the wrong doing must be clearly and convincingly
established

Fraud must be proven by clear and convincingly

evidence amounting to more than preponderance.
It cannot be justified by speculation and can never
be presumed. And only if it sought to hold the
stockholders liable directly for corporate debt

Instrumentality rule. What is the instrumentality

rule? where one corporation is so organized and
controlled and its affairs are conducted so that it
is, in fact, a mere instrumentality or adjunct of the
other, the fiction of the corporate entity of the
instrumentality may be disregarded.

Has no separate mind of its own. What is the

degree of control?

1.

Control, not mere majority or complete stock

control, but complete domination, not only of
finances but of policy and business practice in
respect to the transaction attacked so that the
corporate entity as to this transaction had at the
time no separate mind, will or existence of its own.

2.

Such control must have been used by the

defendant to commit fraud or wrong, to perpetuate
the violation of a statutory or other positive legal
duty or dishonest and unjust act in contravention
of plaintiffs legal rights; and,

3.

The aforesaid control and breach of duty must

proximately cause the injury or unjust loss
complained of.

The absence of one of the elements prevents

piercing the corporate veil. In applying the
instrumentality or alter ego doctrine, the courts
are concerned with reality and not form, with how
the corporation operated and the individual
defendants relationship to that operation.

Palacio vs. Fely

-

Piercing the veil of corporate fiction

Fely trans and the other corporation is one and the

same
Marvel bldg. vs. David

There must be facts before the court will be

justified in piercing the veil of corporate fiction

Corporation was a mere

personality of the person

of

Same as NAFLU and A.C. Ransom

Concept builders vs. NLRC

extension

The two corporations where located in the same

office

the

Yutivo and sons vs. Court of Tax Appeals

-

What where the facts or circumstances arrived by

the court here?

Subscribed capital where all advanced by Yutivo,

the board where the same as Yutivo

There must facts and circumstances before warrant

piercing the veil of corporate fiction

Commissioner of Internal Revenue vs. Norton and

Harrison

The control
ownership

Court applied the general rule

Mere substantial ownership does not mean

that it has a same corporate entity

does

not

mean

stock

MCConnel vs. CA

La Campana Coffee Factory, Inc. vs. KKM

-

necessary

Two corporations managed by the same family,

workers were made interchangeably
Emilio Cano vs. CIR

69

were located in the same floor

while the mere ownership of all or nearly all of the

capital stock of a corporation does not necessary
mean that it is a mere business conduit of the
stockholder, that conclusion is amply justified
where it is shown, as in the case before us, that
the operations of the corporation were so merged
with the stockholders as to be practically

indistinguishable from them. To hold the latter

liable for the corporations obligations is not to
ignore the corporations separate entity, but merely
to apple the established principle that such entity
cannot be invoked or used for purposes that could
not have been intended by the law that created
that separate personality.

Express power granted to a corporation

Section 16

Appraisal right

Section 81
transactions

to

object

on

certain

acts

and

Tan boon bee vs. Jarencio

-

Why would a drug company need a printing

machine

The property must be in pursuance of a company

business

Section 81. Instances of appraisal right.

- Any stockholder of a corporation shall have the
right to dissent and demand payment of the fair
value of his shares in the following instances:
1. In case any amendment to the articles of
incorporation has the effect of changing or
restricting the rights of any stockholder or class of
shares, or of authorizing preferences in any
respect superior to those of outstanding shares of
any class, or of extending or shortening the term
of corporate existence;

Cease vs. CA
-

Alter-ego or the extension of the person of forest

ware does the court pierced the veil of corporate
fiction

As to not deprive the holders of their successional

rights

Mere ownership of all or substantially all is not a

justification of piercing the veil of corporate fiction

Fraud must be proven by clear and convincing

evidence cannot presume or speculate, there must
be facts and circumstances

Fraud must be clear and convincing evidence more

than preponderance

2. In case of sale, lease, exchange, transfer,

mortgage, pledge or other disposition of all or
substantially all of the corporate property and
assets as provided in the Code; and
3. In case of merger or consolidation. (n)
-

Are non-voting shares included in amending the articles of

incorporation
1
100/s
XYZ-----ABC
2

The resolution was not entered to defraud anyone

Del Rosario vs. National Labor Commission

The wrongdoing must be clearly established

There must be facts to support

Payment of claims cannot thus be presumed

Indophil Textile Mill vs. CALICA

How do you distinguish this ruling to La Campana,

having the same issues:

La campana, one payroll, employees were made

interchangeable. Acrylic had its own standards

Control test

Not mere majority but rather complete

Twin ace was only a subsequent interested party

Assets and machineries

Amendment of the articles of incorporation

what would be
except

the foregoing
1
2
3

5
6

5
6

1 & 2=absent
1&2=absent but gave their written assent
3 & 4= objected
3&4=objected
5 & 6= approved the amendment
5&6=approved
Would there be a valid amendment
Special amendments 37 & 38 shortening that
would result to dissolution require prior approval
by the SEC

PNB vs. Ritratto Group

-

100/s

To
10 100/s
=1M/S
the 2/3?
Section 6 last paragraph
Voting shares are excluded
instances
1
2
3

Remo Jr. vs. IAC

-

Right granted only in specified instances

Section 37. Power to extend or shorten

corporate term. - A private corporation may extend
or shorten its term as stated in the articles of
incorporation when approved by a majority vote of
the board of directors or trustees and ratified at a
meeting by the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock or
by at least two-thirds (2/3) of the members in
case of non-stock corporations. Written notice of

70

the proposed action and of the time and place of

the meeting shall be addressed to each
stockholder or member at his place of residence as
shown on the books of the corporation and
deposited to the addressee in the post office with
postage prepaid, or served personally: Provided,
That in case of extension of corporate term, any
dissenting stockholder may exercise his appraisal
right under the conditions provided in this code.
(n)

One of the duplicate certificates shall be

kept on file in the office of the corporation and the
other shall be filed with the Securities and
Exchange Commission and attached to the original
articles of incorporation. From and after approval
by the Securities and Exchange Commission and
the issuance by the Commission of its certificate of
filing, the capital stock shall stand increased or
decreased and the incurring, creating or increasing
of any bonded indebtedness authorized, as the
certificate of filing may declare: Provided, That the
Securities and Exchange Commission shall not
accept for filing any certificate of increase of
capital stock unless accompanied by the sworn
statement of the treasurer of the corporation
lawfully holding office at the time of the filing of
the certificate, showing that at least twenty-five
(25%) percent of such increased capital stock has
been subscribed and that at least twenty-five
(25%) percent of the amount subscribed has been
paid either in actual cash to the corporation or that
there has been transferred to the corporation
property the valuation of which is equal to twentyfive (25%) percent of the subscription: Provided,
further, That no decrease of the capital stock shall
be approved by the Commission if its effect shall
prejudice the rights of corporate creditors.

Section 38. Power to increase or

decrease capital stock; incur, create or increase
bonded indebtedness. - No corporation shall
increase or decrease its capital stock or incur,
create or increase any bonded indebtedness unless
approved by a majority vote of the board of
directors and, at a stockholder's meeting duly
called for the purpose, two-thirds (2/3) of the
outstanding capital stock shall favor the increase
or diminution of the capital stock, or the incurring,
creating or increasing of any bonded indebtedness.
Written notice of the proposed increase or
diminution of the capital stock or of the incurring,
creating, or increasing of any bonded indebtedness
and of the time and place of the stockholder's
meeting at which the proposed increase or
diminution of the capital stock or the incurring or
increasing of any bonded indebtedness is to be
considered, must be addressed to each stockholder
at his place of residence as shown on the books of
the corporation and deposited to the addressee in
the post office with postage prepaid, or served
personally.

Non-stock corporations may incur or

create bonded indebtedness, or increase the same,
with the approval by a majority vote of the board
of trustees and of at least two-thirds (2/3) of the
members in a meeting duly called for the purpose.
Bonds issued by a corporation shall be
registered with the Securities and Exchange
Commission, which shall have the authority to
determine the sufficiency of the terms thereof.
(17a)

A certificate in duplicate must be signed

by a majority of the directors of the corporation
and countersigned by the chairman and the
secretary of the stockholders' meeting, setting
forth:

The vote must be cast at the meeting called for

that purpose

Written assent would not suffice

When do amendments become valid and effective?

Only upon the approval of the SEC TRUE OR

FALSE?

FALSE because it can be valid upon the date of

filing if not acted upon within 6 months without
fault attributable to the corporation

Why is it retroactive?

What provision may be amended, altered or

repealed

(5) The actual indebtedness of the corporation on

the day of the meeting;

Can you change name, address for example she

married or changed address?

(6) The amount of stock represented at the

meeting; and

NO. you cannot change that

(7) The vote authorizing the increase or diminution

of the capital stock, or the incurring, creating or
increasing of any bonded indebtedness.

Fait accompli, are beyond the powers or authority

of the corporation to change, alter or modify.
These would include the following:

Any increase or decrease in the capital

stock or the incurring, creating or increasing of any
bonded indebtedness shall require prior approval
of the Securities and Exchange Commission.

Names of the incorporators and

The incorporating directors or trustees,

(1) That the requirements of this section have

been complied with;
(2) The amount of the increase or diminution of
the capital stock;
(3) If an increase of the capital stock, the amount
of capital stock or number of shares of no-par
stock thereof actually subscribed, the names,
nationalities and residences of the persons
subscribing, the amount of capital stock or number
of no-par stock subscribed by each, and the
amount paid by each on his subscription in cash or
property, or the amount of capital stock or number
of shares of no-par stock allotted to each stockholder if such increase is for the purpose of making
effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred,
created or increased;

71

The name of the treasurer originally or first elected

by the subscribers or members to act as such until
his successor has been duly elected and qualified,

Mere change in the name of a corporation or by

merely complying with the law is general
amendment

The number of shares and amount originally

subscribed and paid out of the original authorized
capital stock of the corporation,

It does not change its personality. It is the same

person in a different name. the charter is the same

Amendment of a corporate term

The date and place of execution of the articles of

incorporation,

Extending the same can never be made 7 years

prior? TRUE or FALSE

FALSE. It can be if there are justifiable reasons for

earlier extension as may be determined by the SEC

Can you extend the corporate term if it has already

expired?

Once the term expires without an amendment

having happen it ceases to exist as a body politic.
It is dissolved automatically on the day it expires.

The signatories and acknowledgment thereof.

All other provisions or matters stated or contained

in the articles are subject to amendment.

Founders or signatories hindi pwede palitan

Names, nationalities- you cannot

Capital- right granted by law to all corporation

Paid up capital- NO

Alhambra cigar and PNB case

Restriction and transfer of shares in ordinary stock

corporations

Instances when the SEC allowed extension whose

term has already expired

You can, but close corporation cannot

Section 96, otherwise it will not be a close

corporation

All of them involved are institutions of learning, it

was the case in order to avoid confusion that
would arise later on.

BOARD OF DIRECTORS/TRUSTEES
Section 23

Section 96. Definition and applicability of

Title. - A close corporation, within the meaning of
this Code, is one whose articles of incorporation
provide that: (1) All the corporation's issued stock
of all classes, exclusive of treasury shares, shall be
held of record by not more than a specified
number of persons, not exceeding twenty (20); (2)
all the issued stock of all classes shall be subject to
one or more specified restrictions on transfer
permitted by this Title; and (3) The corporation
shall not list in any stock exchange or make any
public offering of any of its stock of any class.
Notwithstanding the foregoing, a corporation shall
not be deemed a close corporation when at least
two-thirds (2/3) of its voting stock or voting rights
is owned or controlled by another corporation
which is not a close corporation within the meaning
of this Code.

Section 23. The board of directors or

trustees. - Unless otherwise provided in this Code,
the corporate powers of all corporations formed
under this Code shall be exercised, all business
conducted and all property of such corporations
controlled and held by the board of directors or
trustees to be elected from among the holders of
stocks, or where there is no stock, from among the
members of the corporation, who shall hold office
for one (1) year until their successors are elected
and qualified. (28a)
Every director must own at least one (1)
share of the capital stock of the corporation of
which he is a director, which share shall stand in
his name on the books of the corporation. Any
director who ceases to be the owner of at least one
(1) share of the capital stock of the corporation of
which he is a director shall thereby cease to be a
director. Trustees of non-stock corporations must
be members thereof. A majority of the directors or
trustees of all corporations organized under this
Code must be residents of the Philippines.

Any corporation may be incorporated as a

close corporation, except mining or oil companies,
stock exchanges, banks, insurance companies,
public utilities, educational institutions and
corporations declared to be vested with public
interest in accordance with the provisions of this
Code.
The provisions of this Title shall primarily
govern close corporations: Provided, That the
provisions of other Titles of this Code shall apply
suppletorily except insofar as this Title otherwise
provides.

Transfer clause, executor clause, acknowledgment,

treasury affidavit-NO

Controlled by the board of directors

Authority are however restricted to the day to day

Stockholders may have all the profit but will turn

over the management to the governing board

But unless the law provides the power may be

delegated

General rule

Philippine First Insurance case

72

Corporations must sit and act as a body

Will be bound by corporate officers if they acted

within the 5 classification page 150

Should the stockholder be the equitable or

beneficial owner in order to qualify as a director?

NO, it is not necessary, as long as you are listed in

the books as owner of one share

Ramirez vs. Orientalist co.

-

Lee vs. CA

What was the position of Fernandez in this case?

TREASURER
Why did the court rule that actions of Fernandez
bound the corporation when he is not even a board
of director?
if a man is found acting for a corporation
with the external indicia of authority, any person
not having notice of want of authority, may usually
rely upon those appearances; and if it be found
that the directors had permitted the agent to
exercise that authority and thereby held him out
as a person competent to bind the corporation, or
had acquiesced in a contract and retained the
benefit supposed to have been conferred by it, the
corporation will be bound, notwithstanding the
actual authority may never have been granted.
Contracts must be made by the director and not
the stockholders

As long as you are listed in the books as owner of

one share

Under the old law he must be the beneficial owner

and legal owner thereof but in the new law it is not
required as long as it stands in his name he is
qualifies

1 A-100t/S
B (own in the trust of X) is B qualified to
be a director?
2
3-10
2 transferring there voting rights in favor of VT
Other rights will accrue in favor of them, but not the voting
rights
voting rights must be recorder in the books of the
corporation that it is transferred
PNB-IFL- wholly owned subsidiary of PNB
PNB will assign to PNB-IFL nominal shares and PNB-IFL now
will be able to be nominated
Gen. Rule:

Actions of the stockholders in such matters is only

advisory and not in any way binding in the
corporation

Term of one year who will serve as such until there

successors are elected and qualified

Exception:

Non-stock corporation can serve for a term of 3

years

Educational non-stock- term of the governing

board can be 5 years

May this term exceed one year?

Yes, they may serve in a hold over capacity until

their successors have been duly elected and
qualified

Barreto vs. La previsora Filipina

-

Everything emanates from the board of directors

Stockholders action is merely advisory except

their approval or vote is necessary to prove a valid
corporate act

Qualifications:

No citizenship requirement, at least majority must

be residents

Can have a governing board consisting solely of

foreigners

But we have to take into consideration partly

nationalized industries and other laws which
prohibits or limits foreign ownership

In the by-laws, managing director must be elected

from among themselves

Anti-dummy act

Must be duly elected and qualified

Utilization development of natural resources 60%

must be owned by Filipino citizens, therefore they
only own 40%---10 members they can only have 4
seats, but not entirely correct because the law may
provide
otherwise;
educational
institutions
restricted to Filipinos, but there are exceptions
when created by religious and charitable
institutions.

By-laws may provide additional qualifications and

disqualifications

To qualify as a director he must own at least 1

share

Detective and protective bureau vs. Cloribel

How are the directors elected?

1-100T/S
2-100T/S
3-100T/S
to 10=1M/S
Do you include the vote of 1 & 2 to have a quorum
to have a valid meeting?
-

NO, quorum requirements is 401,000

Quorum requirement is 501k

Holders of non-voting shares are only entitled to vote in last
par. Of section 6
1-200k
2-200k

73

3-200k
4-100k
5-100k
6-100k
7-50k
8-40k
9-5k
10-5k
=1MS
1&2 is absent, 3&4 ayaw tumakbo and hindi nagvote 6-10,
tumakbo and ninominate nila yung sarili nila and cast all
their shares on themselves
Who wins? Or who gets elected?
-

No vote requirement, the one who gets the most

number of votes gets elected, section24.

What is cumulative voting?

Process of multiplying the number of shares to the

number of director to be elected

Matter of right granted to stockholders in a stock

corporation

no one shall act as president and secretary or as

president and treasurer at the same time.
The directors or trustees and officers to
be elected shall perform the duties enjoined on
them by law and the by-laws of the corporation.
Unless the articles of incorporation or the by-laws
provide for a greater majority, a majority of the
number of directors or trustees as fixed in the
articles of incorporation shall constitute a quorum
for the transaction of corporate business, and
every decision of at least a majority of the
directors or trustees present at a meeting at which
there is a quorum shall be valid as a corporate act,
except for the election of officers which shall
require the vote of a majority of all the members
of the board.
Directors or trustees cannot attend or
vote by proxy at board meetings. (33a)

1 to 5 has 200k/s and members of the same familymajority 800k they have 4M votes they are guaranteed 4
seats
6 to 10 are not related- 1 seat 1M votes
Cumulative to allow the minority to have a rightful
representation in the board

Is it allowed in a non-stock corporation?

Not generally available

Section 89 unless the articles or by-laws allow

cumulative voting
Section 89. Right to vote. - The right of
the members of any class or classes to vote may
be limited, broadened or denied to the extent
specified in the articles of incorporation or the bylaws. Unless so limited, broadened or denied, each
member, regardless of class, shall be entitled to
one vote.

Is the president required to be a stockholder. YES

The chairman may be another person

The president may also be another person

Prohibited is president to be secretary or treasurer

at the same time

Board of director must sit and act as a body to

arrive at a corporate act

What would constitute a quorum if 5 then 3 must

be present

May the vote of 2 members past a 5 man

governing board pass a valid corporate act?

YES. Voting requirement is majority of directors

present at which there where a quorum

1
requirement
2
3
4
5
Is it absolute?

Unless otherwise provided in the articles

of incorporation or the by-laws, a member may
vote by proxy in accordance with the provisions of
this Code. (n)
Voting by mail or other similar means by
members of non-stock corporations may be
authorized
by
the
by-laws
of
non-stock
corporations with the approval of, and under such
conditions which may be prescribed by, the
Securities and Exchange Commission.

Other corporate officers other than the governing

board section 25
Section 25. Corporate officers, quorum. Immediately after their election, the directors of a
corporation must formally organize by the election
of a president, who shall be a director, a treasurer
who may or may not be a director, a secretary who
shall be a resident and citizen of the Philippines,
and such other officers as may be provided for in
the by-laws. Any two (2) or more positions may be
held concurrently by the same person, except that

74

1 and 2 present=valid voting

1 and 2 voted yes
3 voted no

NO, except in the election because it requires the

majority of all the members of the board

If by-laws or articles provide a higher voting

requirement

Artificial beings must act through its members and

act as a body to have a valid corporate act

Exception:

Delegation

Expressly conferred

Where the officer or agent is clothed with actual or

apparent authority

Otherwise it will not bind the corporation

Yao ka sin trading case already asked in the bar

Only bind the corporation to the extent of authority

confined to him or virtue of customs, usage and
policy

Must pass first the controller and counsel

What if the notice requirement is not complied

with?
Lopez realty vs. Fotencha

Notice requirement must be complied with hence it

should have been with force and effect, but
according to the SC, it may be ratified expressly if
there is a subsequent meeting called for that
purpose

Impliedly through acts

Asuncion was aware of the corporations obligation

There was implied ratification or she was estopped

Buenaseda vs. Bowen

Pua casim vs. Neumark and Co.

-

Considered 3 circumstanced

Check which was the proceed of the loan which

was endorsed and deposit in the corporate account

Neumark as president and also stockholder

Express ratification is made through a formal

board action

Implied ratification is through:

acquiescence, acceptance benefits
recognition or adoption

An unauthorized act may nevertheless be binding

either by express or implied by estoppels

By virtue of silence the board had impliedly

accepted the act

By recognition or adoption

By virtue of payment
therefore- Lopez realty

May directors or trustees be disqualified to act as

such?

YES, crime, etc. disqualifications in book

Possess or dispossess any of the qualifications or

disqualifications , cease to hold at least one share

May directors be ousted from office?

At least 2/3 of members representing outstanding

capital stock. Again notice requirement must be
complied with

Yu chuck vs. Kong Li Po

-

General manager usually has the power to hire but

the SC said the contract must be reasonable
The contract here is so onerous that it would throw
the corporation into insolvency
Francisco vs. GSIS

usual course of business of a corporation, an

officer has been allowed in his official capacity to
manage its affairs, his authority to represent the
corporation may be implied from the manner in
which he has been permitted by the directors to
manage its business.
In the case at bar, the practice of the
corporation has been to allow its general manager
to negotiate and execute contracts in its copra
trading activities for and in NACOCOs behalf
without prior board approval. If the by-laws were
to be literally followed, the board should give its
stamp of prior approval on all corporate contracts.
But that Board itself, by its acts and through
acquiescence, practically laid aside the by-law
requirement of prior approval.
Kalaw signed alone and said contracts were
submitted to the board of directors after its
consummation and not before

GSIS cannot evade the binding effect of the

telegram
Only 15 months later that the corporation said
there was a mistake
The silence coupled with the unconditional
acceptance of the other subsequent remittances is
binding to the corporation
Board of liquidators vs. Kalaw

of

silence or
and lastly

obligations

arising

1-200
1-5
same
family
2-200
3-200
4-100
5-100
electing
6-100
6 to 10 not
related
7-50
8-40
9-5
10-5
outstanding
director
Meetings called by the president or the secretary
ordered by the president

Settled jurisprudence has it that where

similar acts have been approved by the directors
as a matter of general practice, custom and policy,
the general manager may bind the company
without formal authorization of the board of
directors. In varying language, existence of such
authority is established, by proof of the course of
business, the usages and practices of the company
and by the knowledge which the board of directors
has, or must be presumed to have, of acts and
doings of its subordinates in and about the affairs
of the corporation. So also, xx authority to act for
and bind a corporation may be presumed from acts
of recognition in other instances where the power
was in fact exercised. xx Thus, when, in the

75

It depends if the removal is without cause they

cannot do so because removal without cause shall
not deprive the minority stockholders or members
of the right of representative

Generally not entitled to receive compensation

because they render it gratuitously

Unless the by-laws allows

If with cause they can even if it will prejudice the

rights of the minority, provided of course additional
requirements by-laws and articles of incorporation

Stockholders may
majority vote

Who will fill up the vacancy created due to the

ouster of a member of the board of directors
<section 29>

Must not exceed net income of 10% tax of the

preceding year

Acting in special capacity

In, sum directors may receive compensation when

Section 29. Vacancies in the office of

director or trustee. - Any vacancy occurring in the
board of directors or trustees other than by
removal by the stockholders or members or by
expiration of term, may be filled by the vote of at
least a majority of the remaining directors or
trustees, if still constituting a quorum; otherwise,
said vacancies must be filled by the stockholders in
a regular or special meeting called for that
purpose. A director or trustee so elected to fill a
vacancy shall be elected only or the unexpired
term of his predecessor in office.

1.

also

grant

pursuant

to

there is a provision in the by-laws to that effect

2.

When the stockholders, by a majority vote of the

outstanding capital stock grant the same; and,

3.

If the director renders extra-ordinary or unsual

service
Central cooperative exchange vs. Tibe

Any directorship or trusteeship to be filled

by reason of an increase in the number of directors
or trustees shall be filled only by an election at a
regular or at a special meeting of stockholders or
members duly called for the purpose, or in the
same meeting authorizing the increase of directors
or trustees if so stated in the notice of the
meeting. (n)

By-laws may allow, stockholders may also allow

such

What do you understand by the phrase as such

directors

Other than by removal or expiration of term they

do not have the power

Compensation
authority

When will the vacancies be filled up?

Prohibition is not a sweeping rule

Is notice required, to fill up vacancies due to

removal?

Members of the board may receive when they

receive in a special capacity

What if the vacancy is due to an increase, can it be

filled up in the same meeting where in the number
is increased?

Mere act of the board will suffice

Is the 10% ceiling applicable to other officers?

Election due to removal-in the same meeting

notice is not required

NO. the phrase as such director was used twice

<Section 30>

Election due to increase in number- it must be so

stated in the meeting

The SC ruled that the 10% ceiling will not likewise

apply if they acted in a capacity other than as
such directors

Section 30

Western institute vs. Salas

was

granted

without

by-laws

Government vs. El Hogar

Section 30. Compensation of directors. In the absence of any provision in the by-laws
fixing their compensation, the directors shall not
receive any compensation, as such directors,
except for reasonable per diems: Provided,
however, That any such compensation other than
per diems may be granted to directors by the vote
of the stockholders representing at least a majority
of the outstanding capital stock at a regular or
special stockholders' meeting. In no case shall the
total yearly compensation of directors, as such
directors, exceed ten (10%) percent of the net
income before income tax of the corporation during
the preceding year. (n)

Judicial intervention is not proper

The appropriates remedy is to those who can make

or unmake the by-laws

Liability of corporate officers

Obligations incurred by those acting for and in

behalf of the corporations are not theres BUT
there are exceptions even if they are acting for and
in behalf of the corporation
Tramat vs. CA

76

General rule was applied in the case

Ong acted as officers and acted within the scope of

his authority

Court laid down 4 instances when even if acting

within the scope of his authority he is held
solidarily liable

1.

He assents (a) to a patently unlawful act of the

corporation, or (b) for bad faith, or gross
negligence in directing its affairs, or (c) for conflict
of interest, resulting in damages to the
corporation, its stockholders or other persons;

BOD, business manager of the corporation and as

long as they act in good faith, its actuations are
not subject to judicial review

They are not insurer of the property of the

company, they were guarantors that the enterprise
undertaken by the corporation shall be successful
Montelibano vs. Bacolod Murcia Milling Co.

Directors are not liable due to imprudence or

honest error of judgment

Duty of loyalty of corporate directors

He consents to the issuance of watered stocks or

who, having knowledge thereof, does not forthwith
file with the corporate secretary his written
objection thereto;

31,32,33,34

31,32,33- specific instances

officers may violate loyalty

3.

He agrees to hold himself personally and solidarily

liable with the corporation;

32,33 self-dealing and interlocking director

Corporate opportunity doctrine

4.

He is made, by a specific provision of law, to

personally answer for his corporate action.

It places a director of a corporation in the position

of a fiduciary and prohibits him form seizing a
business opportunity and/or developing it at the
expense and with the facilities of the corporation.
He cannot appropriate to himself a business
opportunity which in fairness should belong to the
corporation.

Last paragraph of section 31 and the provision of

section 34 make reference to recovery of
forbidden profits

Distinction between section 31 and 34 relative to

the ratification by the stockholders

The second paragraph of section 31 which makes a

director liable to account for profits if he attempts
to acquire or acquires any interest adverse to the
corporation in respect to any matter reposed in
him in confidence as to which equity imposes a
disability upon him to deal in his own behalf is not
subject to ratification by the stockholders.
Whereas, in section 34 if a director acquires for
himself a business opportunity which should
belong to the corporation, he is bound to account
for such profits unless his act is ratified by the
stockholders owning ore representing at least 2/3
of the outstanding capital stock.

If reposed in him in confidence, not subject to

ratification

If the acquisition is merely that of a business

opportunity which has not been reposed in him in
confidence, the same may be subject to ratification
by the stockholders.

2.

Watered stocks- issued, fully paid up when in fact

they have not been fully paid or promised as such
Llamado vs. CA

The corporate entity theory cannot be used as a

defense to escape liability in violation of B.P. 22
Where the check is drawn by a corporation the
persons who signed the check shall be liable.
Uichico vs. NLRC

Labor case corporate directors and officers are

solidarily liable with the corporation for the
termination of employment of corporate employee
done with malice and bad faith

3 fold duty of directors

obedient

diligent

loyal

Business judgment rule

Questions of policy and management are left solely

to the honest decision of the board of directors and
the courts are without authority to substitute its
judgment as against the former. The directors are
the business managers of the corporation and as
long as they act in good faith, its actuations are
not subject to judicial review. Montelibano vs.
Bacolod Murcia Milling

Director x co.
A-REALTY
B
C

questions of policy and management are left solely

to the board of directors

77

when

corporate

Z owns property and is going

abroad never to Return, he

wants to sell for 25M the fair

market value is 30M
D
E
E goes to Z and offers to pay the property for 26 M and
later he sells it for 30M making 4M profit, one of the
stockholders learned and complains that he should submit
the profits. E said that he will move for ratification of his
actuation. Can it be ratified?
It can be ratified he merely acquired a business
owning to the corporation
-

Requisites for ratification (subject to ratification by

the stockholders holding or representing at least
2/3 of the outstanding capital stock or 2/3 of the
members.)

it must be at a meeting called for the purpose

full disclosure of the adverse interest of the

director concerned must be made

the contract is fair and reasonable under the

circumstances

Problem if self-dealing director involved owns all or

substantially all of the shares of stock of the
corporation thereby making it easily possible to
have the contract ratified

last sentence of section 32 should be made to

apply by determining the reasonableness and
fairness of the contract

It would be different if it was entrusted in his

confidence

Another scenario:
Had A not attended the meeting he would not have
known of the sale it is then a matter reposed in him in
confidence
A corporation cannot reaquire its share if it has no
restricted unretained earnings
Strong vs. Rapide
-

What duty did he violate?

He violated his duty of loyalty

The law would be impotent if the sale were not

invalidated

Self-dealing director and interlocking director

What is a self-dealing director?

Director of a corporation dealing or transacting

business with his corporation

Are the contracts and dealing of a self0dealing

director valid?

General rule: voidable

May the contracts of a self-dealing director be valid

per se.

YES. If all the 4 conditions are present they will be

valid per se

1.

That the presence of such director or trustee in the

board meeting in which the contract was approved
was not necessary to constitute a quorum for such
meeting;

2.

That the vote of such director or trustee was not

necessary for the approval of the contract;

3.

That the contract is fair and reasonable under the

circumstances; and

4.

That in case of an officer, the contract has been

previously authorized by the board of directors.

When do they become voidable?

When any of the two requisites are absent it is

voidable, but subject to ratification by 2/3 of the
outstanding capital stock or 2/3 of the member

Section 32. Dealings of directors,

trustees or officers with the corporation. - A
contract of the corporation with one or more of its
directors or trustees or officers is voidable, at the
option of such corporation, unless all the following
conditions are present:
1. That the presence of such director or trustee in
the board meeting in which the contract was
approved was not necessary to constitute a
quorum for such meeting;
2. That the vote of such director or trustee was not
necessary for the approval of the contract;
3. That the contract is fair and reasonable under
the circumstances; and
4. That in case of an officer, the contract has been
previously authorized by the board of directors.
Where any of the first two conditions set
forth in the preceding paragraph is absent, in the
case of a contract with a director or trustee, such
contract may be ratified by the vote of the
stockholders representing at least two-thirds (2/3)
of the outstanding capital stock or of at least twothirds (2/3) of the members in a meeting called for
the purpose: Provided, That full disclosure of the
adverse interest of the directors or trustees
involved is made at such meeting: Provided,
however, That the contract is fair and reasonable
under the circumstances. (n)
Prime white cement vs. IAC

78

a director of a corporation owes a position in trust

in case of conflict between himself and that of the

corporation, he cannot sacrifice the interest of the
corporation to his own advantage

as a director he should have acted in a manner as

not to unduly prejudice the corporation

he cannot be allowed to enrich himself

May corporate directors purchase the corporate

property?

Mead vs. Mccullogh

Class suit

interlocking director- a director of one corporation

who deals and transacts business with another
corporation who is himself a director

Filed by a stockholder in representation of other

stockholders

A-

director of X company also a director of Y

corporation

A wrong or redress done, a derivative suit in

nature

Intra-corporate remedies

Demand to the BOD to institute such action

Negated by the BOD

The one who instituted must be a stockholder at

the date when the act was done, must have been a
stockholder by that time

Demand will not be required if the majority of the

BOD are the ones guilty of the wrong charged

The corporation must be made a party in the case

whatever side will not matter because under
Philippine law misjoinder is not a ground for
dismissal

Non-joinder is a ground for dismissal

Any benefit should inure to the corporation

Stockholder bringing the action is entitled to

reimbursement such as attorneys fee ONLY IF the
case is SUCCESSFUL to avoid harassment suit to
their management

BCDE

Both companies enter into a contract and A sits, is

the contract valid?

Yes on the ground of fraud or if it is unfair

May be subject to the provision of section 32

Section 32 contract may become voidable, hence it

may also be ratified

X Co.
Y Co.
A owe 20%
A owe 20%
Is it generally valid or voidable? VALID
25%
25% VALID
15%
25% VOIDABLE SUBJECT TO section 32
More than 20 substantial
BOD mismanages corporate officers. Who may file
a suit?
-

General rule: BOD which can institute a case

because it has all the powers. To allow
stockholders to file would violate the doctrine of
corporate entity and may result to multiplicity of
suits
Stockholders cannot therefore generally file a case
EXCEPT of course in a DERIVATIVE SUIT

Derivative suit

An action based on injury to the corporation-to

enforce a corporate right- wherein the corporation
itself is joined as a necessary party, and recovery
is in favor of and for the corporation.

Pascual vs. Orozco

Remedy granted by law to stockholders to

institute a case to remedy a wrong done directly to
the corporation and indirectly to the stockholders,
if the board refuses to do so. Otherwise if not they
would be left without any recourse

Available suits

individual or personal

Wrong done against his person as a stockholder

By virtue of the fact that he is a stockholder, may

maintain a derivative suit

Depend on how, when and what reason

Seeking for the years 1898 all the way 1907

Only became a stockholder in 1903

He can sue only in 1903 forward because he must

be a stockholder

The right of action is personal in nature. He

became a stockholder only in 1902

Derivative suit

By a stockholder to address a wrong done against

the corporation and the stockholder indirectly

Essential requisite must have been a stockholder

from the time the act complained of took place

Cannot institute an action from the years he was

still not a stockholder
Everett vs. Asia Banking

79

Stockholders cannot ordinarily commence suit in

equity and such is in the hands of its BOD however

there are exceptions when the BOD will not sue

since they are themselves principals to the fraud.

Evangelista vs. Santos

-

Derivative suit is not proper

Claim is not for the benefit of the corporation, but

rather his individual benefit

From the cases above cited, these are the

requirements and the procedures that must be
followed in order that a derivative suit may prosper

1.

That the party bringing the suit should be a

stockholder as of the time the act or transaction
complained of took place, or whose shares have
evolved upon him since by operation of law. This
rule, however, does not apply if such act or
transaction continues and is injurious to the
stockholder or affect him specifically in some other
way.

Republic vs. Cuaderno

-

The facts constitute sufficient cause of action

It is not the corporate interest to shield one from

criminal prosecution which is personal interest

Perez is not suing in his behalf, but in behalf of the

corporation
Western institute vs. Salas

Assuming it was filed in the proper forum would

there argument that it is a derivative suit prosper?
NO. it is people of the Philippines vs. individual
director, it must be stated in the complaint that it
is being instituted as a derivative suit and for and
in behalf of the corporation
Granting arguendo, that this is a derivative suit,
the same is still outrightly dismissible for having
been wrongfully filed in the regular court devoid of
any jurisdiction to entertain the complaint. The
case should have been filed with the SEC which
exercises original and exclusive jurisdiction over
derivative suits, they being intra-corporate
disputes, per Section 5 (b) of P.D. 902-A

2.

San Miguel vs. Khan

-

Was a demand made? NO

It is not necessary because he objected in the

board meeting, but still it was adopted therefore it
was useless

3.

The stockholder bringing the suit must allege in his

complaint that he is suing on a derivative cause of
action on behalf of the corporation and all other
stockholders similarly situated, otherwise, the case
is dismissible. This is because the cause of action
actually devolves on the corporation and not to a
particular stockholder.

4.

The corporation should be made a party, either as

party-plaintiff or defendant, in order to make the
courts judgment binding upon it, and thus, bar
future litigation of the same issues. On what side
the corporation appears loses importance when it
is considered that it lay within the power of the
court to direct the making of amendment of the
pleading, by adding or dropping parties, as may be
required in the interest of justice. Misjoinder of
parties is not a ground to dismiss action; and,

5.

Any benefit or damages recovered shall pertain to

the corporation. This is so because in all instances,
derivative suit is instituted for and in behalf of the
corporation and not for the protection or
vindication of a right or rights of a particular
stockholder, otherwise, the aggrieved stockholder
should institute, instead, an individual or personal
suit to vindicate his personal or individual right. Or,
for that matter, representative or class suit for all
other stockholders whose rights are similarly
situated, injured or violated, personally or
individually.

Chase vs. Buencamino

-

Argument that he should be in estoppels since he

filed in the U.S.

Assuming the case prospered in the U.S. would not

estoppels apply as against him? NO for estoppels
to step in it must be a case by the corporation
Reyes vs. tan

Corporate director are guilty of breach of trust

A stockholder may institute an action to remedy a

wrong done

Fraud in the conduct of corporate affairs

Gamboa vs. Victoriano

Is derivative suit appropriate in this case

They are not vindicatory damage done to the

corporation, but rather they where vindicating
damage against him

Violation of their rights as individuals, hence

derivative suit is not the remedy

80

The number of his hares is immaterial since he is

not suing in his own behalf or for the protection or
vindication of his own right, or the redress of a
wrong done against him, individually, but in behalf
and for the benefit of the corporation.
He has tried to exhaust intra-corporate remedies,
he has made a demand on the board of directors
for the appropriate relief but the latter had failed
or refused to heed his plea. Demand, however, is
not required if the company is under the complete
control of the directors who are the very ones to
be sued (or where it becomes obvious that a
demand upon them would have been futile and
useless) since the law does not require a litigant to
perform useless acts;

Executive committee

Not allowed under the OLD law

How may executive

constituted?

Section 35

committee

created

and

Section 35. Executive committee. - The

by-laws of a corporation may create an executive
committee, composed of not less than three
members of the board, to be appointed by the
board. Said committee may act, by majority vote
of all its members, on such specific matters within
the competence of the board, as may be delegated
to it in the by-laws or on a majority vote of the
board, except with respect to: (1) approval of any
action for which shareholders' approval is also
required; (2) the filing of vacancies in the board;
(3) the amendment or repeal of by-laws or the
adoption of new by-laws; (4) the amendment or
repeal of any resolution of the board which by its
express terms is not so amendable or repealable;
and (5) a distribution of cash dividends to the
shareholders.
-

Approval of any action for which shareholders

approval is also required

2.

The filing of vacancies in the board;

3.

Amendment or repeal of by-laws or the adoption of

new by-laws;

4.

Amendment or repeal of any resolution of the

board which by its express terms is not so
amenable or repealable; and,

5.

Distribution of cash dividends to the shareholders.

May the board alone create an executive

committee without any authority provided for the
by-laws?

NO board of directors must sit and act as a body to

have a valid transaction

May a non-member of the board of directors be a

member of the executive committee?

BOD cannot act by proxy it would be abdication of

powers

Purpose clauses necessary because it confers and

also limits the actual authority of the corporation

2.

Those impliedly granted as are essential or

reasonably necessary to the carrying out of the
express powers;

3.

Those that are incidental to its existence.

Section 36 to 45- POWER GRANTED BY LAW

1. To sue and be sued in its corporate name;

2. Of succession by its corporate name for the
period of time stated in the articles of
incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation
accordance with the provisions of this Code;

in

5. To adopt by-laws, not contrary to law, morals,

or public policy, and to amend or repeal the same
in accordance with this Code;
6. In case of stock corporations, to issue or sell
stocks to subscribers and to sell stocks to
subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and to
admit members to the corporation if it be a nonstock corporation;
7. To purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal
property, including securities and bonds of other
corporations, as the transaction of the lawful
business of the corporation may reasonably and
necessarily require, subject to the limitations
prescribed by law and the Constitution;
8. To enter into merger or consolidation with other
corporations as provided in this Code;
9. To make reasonable donations, including those
for the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes:
Provided, That no corporation, domestic or foreign,
shall give donations in aid of any political party or
candidate or for purposes of partisan political
activity;
10. To establish pension, retirement, and other
plans for the benefit of its directors, trustees,
officers and employees; and

NO, all of them must be members of the board of

directors

Those expressly granted or authorized by law

inclusive of the corporate charter or articles of
incorporation;

Section 36. Corporate powers and capacity. - Every

corporation incorporated under this Code has the power and
capacity:

Said committee may act and bind the corporation

by the majority vote of all its members except with
respect to those matters provided for in sec. 35
these are:

1.

1.

11. To exercise such other powers as may be

essential or necessary to carry out its purpose or
purposes as stated in the articles of incorporation.
(13a)
Section 37. Power to extend or shorten corporate
term. - A private corporation may extend or shorten its
term as stated in the articles of incorporation when
approved by a majority vote of the board of directors or
trustees and ratified at a meeting by the stockholders
representing at least two-thirds (2/3) of the outstanding
capital stock or by at least two-thirds (2/3) of the members
in case of non-stock corporations. Written notice of the

CORPORATE POWERS AND AUTHORITY

Corporate authority may be classified into three
classes namely:

81

proposed action and of the time and place of the meeting

shall be addressed to each stockholder or member at his
place of residence as shown on the books of the corporation
and deposited to the addressee in the post office with
postage prepaid, or served personally: Provided, That in
case of extension of corporate term, any dissenting
stockholder may exercise his appraisal right under the
conditions provided in this code. (n)

creating or increasing of any bonded indebtedness

authorized, as the certificate of filing may declare:
Provided, That the Securities and Exchange Commission
shall not accept for filing any certificate of increase of
capital stock unless accompanied by the sworn statement of
the treasurer of the corporation lawfully holding office at
the time of the filing of the certificate, showing that at least
twenty-five (25%) percent of such increased capital stock
has been subscribed and that at least twenty-five (25%)
percent of the amount subscribed has been paid either in
actual cash to the corporation or that there has been
transferred to the corporation property the valuation of
which is equal to twenty-five (25%) percent of the
subscription: Provided, further, That no decrease of the
capital stock shall be approved by the Commission if its
effect shall prejudice the rights of corporate creditors.

Section 38. Power to increase or decrease capital

stock; incur, create or increase bonded indebtedness. - No
corporation shall increase or decrease its capital stock or
incur, create or increase any bonded indebtedness unless
approved by a majority vote of the board of directors and,
at a stockholder's meeting duly called for the purpose, twothirds (2/3) of the outstanding capital stock shall favor the
increase or diminution of the capital stock, or the incurring,
creating or increasing of any bonded indebtedness. Written
notice of the proposed increase or diminution of the capital
stock or of the incurring, creating, or increasing of any
bonded indebtedness and of the time and place of the
stockholder's meeting at which the proposed increase or
diminution of the capital stock or the incurring or increasing
of any bonded indebtedness is to be considered, must be
addressed to each stockholder at his place of residence as
shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served
personally.

Non-stock corporations may incur or create bonded

indebtedness, or increase the same, with the approval by a
majority vote of the board of trustees and of at least twothirds (2/3) of the members in a meeting duly called for the
purpose.
Bonds issued by a corporation shall be registered with the
Securities and Exchange Commission, which shall have the
authority to determine the sufficiency of the terms thereof.
(17a)
Section 39. Power to deny pre-emptive right. - All
stockholders of a stock corporation shall enjoy pre-emptive
right to subscribe to all issues or disposition of shares of
any class, in proportion to their respective shareholdings,
unless such right is denied by the articles of incorporation
or an amendment thereto: Provided, That such pre-emptive
right shall not extend to shares to be issued in compliance
with laws requiring stock offerings or minimum stock
ownership by the public; or to shares to be issued in good
faith with the approval of the stockholders representing
two-thirds (2/3) of the outstanding capital stock, in
exchange for property needed for corporate purposes or in
payment of a previously contracted debt.

A certificate in duplicate must be signed by a majority of

the directors of the corporation and countersigned by the
chairman and the secretary of the stockholders' meeting,
setting forth:
(1) That the requirements of this section have
been complied with;
(2) The amount of the increase or diminution of
the capital stock;
(3) If an increase of the capital stock, the amount
of capital stock or number of shares of no-par
stock thereof actually subscribed, the names,
nationalities and residences of the persons
subscribing, the amount of capital stock or number
of no-par stock subscribed by each, and the
amount paid by each on his subscription in cash or
property, or the amount of capital stock or number
of shares of no-par stock allotted to each stockholder if such increase is for the purpose of making
effective stock dividend therefor authorized;

Section 40. Sale or other disposition of assets. Subject to the provisions of existing laws on illegal
combinations and monopolies, a corporation may, by a
majority vote of its board of directors or trustees, sell,
lease, exchange, mortgage, pledge or otherwise dispose of
all or substantially all of its property and assets, including
its goodwill, upon such terms and conditions and for such
consideration, which may be money, stocks, bonds or other
instruments for the payment of money or other property or
consideration, as its board of directors or trustees may
deem expedient, when authorized by the vote of the
stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, or in case of non-stock
corporation, by the vote of at least to two-thirds (2/3) of
the members, in a stockholder's or member's meeting duly
called for the purpose. Written notice of the proposed action
and of the time and place of the meeting shall be addressed
to each stockholder or member at his place of residence as
shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served
personally: Provided, That any dissenting stockholder may
exercise his appraisal right under the conditions provided in
this Code.

(4) Any bonded indebtedness to be incurred,

created or increased;
(5) The actual indebtedness of the corporation on
the day of the meeting;
(6) The amount of stock represented at the
meeting; and
(7) The vote authorizing the increase or diminution
of the capital stock, or the incurring, creating or
increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the
incurring, creating
or increasing
of any bonded
indebtedness shall require prior approval of the Securities
and Exchange Commission.

A sale or other disposition shall be deemed to cover

substantially all the corporate property and assets if
thereby the corporation would be rendered incapable of
continuing the business or accomplishing the purpose for
which it was incorporated.

One of the duplicate certificates shall be kept on file in the

office of the corporation and the other shall be filed with the
Securities and Exchange Commission and attached to the
original articles of incorporation. From and after approval by
the Securities and Exchange Commission and the issuance
by the Commission of its certificate of filing, the capital
stock shall stand increased or decreased and the incurring,

After such authorization or approval by the stockholders or

members, the board of directors or trustees may,
nevertheless, in its discretion, abandon such sale, lease,
exchange, mortgage, pledge or other disposition of property

82

and assets, subject to the rights of third parties under any

contract relating thereto, without further action or approval
by the stockholders or members.

Stock corporations are prohibited from retaining surplus

profits in excess of one hundred (100%) percent of their
paid-in capital stock, except: (1) when justified by definite
corporate expansion projects or programs approved by the
board of directors; or (2) when the corporation is prohibited
under any loan agreement with any financial institution or
creditor, whether local or foreign, from declaring dividends
without its/his consent, and such consent has not yet been
secured; or (3) when it can be clearly shown that such
retention is necessary under special circumstances
obtaining in the corporation, such as when there is need for
special reserve for probable contingencies. (n)

Nothing in this section is intended to restrict the power of

any corporation, without the authorization by the
stockholders or members, to sell, lease, exchange,
mortgage, pledge or otherwise dispose of any of its
property and assets if the same is necessary in the usual
and regular course of business of said corporation or if the
proceeds of the sale or other disposition of such property
and assets be appropriated for the conduct of its remaining
business.

Section 44. Power to enter into management

contract. - No corporation shall conclude a management
contract with another corporation unless such contract shall
have been approved by the board of directors and by
stockholders owning at least the majority of the outstanding
capital stock, or by at least a majority of the members in
the case of a non-stock corporation, of both the managing
and the managed corporation, at a meeting duly called for
the purpose: Provided, That (1) where a stockholder or
stockholders representing the same interest of both the
managing and the managed corporations own or control
more than one-third (1/3) of the total outstanding capital
stock entitled to vote of the managing corporation; or (2)
where a majority of the members of the board of directors
of the managing corporation also constitute a majority of
the members of the board of directors of the managed
corporation, then the management contract must be
approved by the stockholders of the managed corporation
owning at least two-thirds (2/3) of the total outstanding
capital stock entitled to vote, or by at least two-thirds (2/3)
of the members in the case of a non-stock corporation. No
management contract shall be entered into for a period
longer than five years for any one term.

In non-stock corporations where there are no members

with voting rights, the vote of at least a majority of the
trustees in office will be sufficient authorization for the
corporation to enter into any transaction authorized by this
section.
Section 41. Power to acquire own shares. - A
stock corporation shall have the power to purchase or
acquire its own shares for a legitimate corporate purpose or
purposes, including but not limited to the following cases:
Provided, That the corporation has unrestricted retained
earnings in its books to cover the shares to be purchased or
acquired:
1. To eliminate fractional shares arising out of stock
dividends;
2. To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares sold
during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to
payment for their shares under the provisions of this Code.
(a)

The provisions of the next preceding paragraph shall apply

to any contract whereby a corporation undertakes to
manage or operate all or substantially all of the business of
another corporation, whether such contracts are called
service contracts, operating agreements or otherwise:
Provided, however, That such service contracts or operating
agreements which relate to the exploration, development,
exploitation or utilization of natural resources may be
entered into for such periods as may be provided by the
pertinent laws or regulations. (n)

Section 42. Power to invest corporate funds in

another corporation or business or for any other purpose. Subject to the provisions of this Code, a private corporation
may invest its funds in any other corporation or business or
for any purpose other than the primary purpose for which it
was organized when approved by a majority of the board of
directors or trustees and ratified by the stockholders
representing at least two-thirds (2/3) of the outstanding
capital stock, or by at least two thirds (2/3) of the members
in the case of non-stock corporations, at a stockholder's or
member's meeting duly called for the purpose. Written
notice of the proposed investment and the time and place
of the meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books of
the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally: Provided,
That any dissenting stockholder shall have appraisal right
as provided in this Code: Provided, however, That where
the investment by the corporation is reasonably necessary
to accomplish its primary purpose as stated in the articles
of incorporation, the approval of the stockholders or
members shall not be necessary. (17 1/2a)

Section 45. Ultra vires acts of corporations. - No

corporation under this Code shall possess or exercise any
corporate powers except those conferred by this Code or by
its articles of incorporation and except such as are
necessary or incidental to the exercise of the powers so
conferred. (n)
Section 36
Where should the corporation be sued?

Section 43. Power to declare dividends. - The

board of directors of a stock corporation may declare
dividends out of the unrestricted retained earnings which
shall be payable in cash, in property, or in stock to all
stockholders on the basis of outstanding stock held by
them: Provided, That any cash dividends due on delinquent
stock shall first be applied to the unpaid balance on the
subscription plus costs and expenses, while stock dividends
shall be withheld from the delinquent stockholder until his
unpaid subscription is fully paid: Provided, further, That no
stock dividend shall be issued without the approval of
stockholders representing not less than two-thirds (2/3) of
the outstanding capital stock at a regular or special meeting
duly called for the purpose. (16a)

83

principal office is important because it establishes

the residence of the corporation and determining
service of summons, venue of action

it can be sued in the city or municipality where its

principal office is found

Principal office is also important for venue of

meetings

Non-stock corporation may provide in its by-laws

that the venue of meeting be anywhere in the
Philippines

Upon whom service of summons be made?

Section 11. Service upon domestic private juridical

entity- when the defendant is a corporation,
partnership or association organized under the
laws of the Philippines with a juridical personality,
service may be made upon the president,
managing partner, general manager, corporate
secretary, treasurer, or in house counsel.

Power to amend

section 16

special 37,38,120

Power to adopt by-laws

Delta motor vs. Mangosing

section 46-48

strict compliance is necessary

Power to issue or sell stocks and to admit

members

should be served to those named in the statute

-

secretary of a dept are not those included in the

statute

stock of stockholders and provision governing nonstock

Power to acquire or alienate real or personal

property

E.B. Villarosa vs. Benito

-

decision En Banc repeals all other pronouncement

is there any limitation? YES

section 13 Rule 14 was repealed

Two specific limitation

the old rules was ambiguous and broad and at all

time illogical

1.

Section 36, as lawful transactions of business of

the corporation may reasonably and necessarily
require

the particular revision under Section 11 of Rule 14

was explained by retired Supreme Court Justice
Florenz Regalado, thus:

2.

Constitution and law

Luneta vs. A.D. Santos

xxx the then section 13 of this Rule

allowed
service
upon a defendant
corporation to be made on the president,
manager, secretary, cashier, agent or any
of its directors. The aforesaid terms were
obviously ambiguous and susceptible of
broad
and
sometimes
illogical
interpretations,
especially
the
word
agent of the corporation. The Filoil case,
involving the litigation lawyer of the
corporation who precisely appeared to
challenge the validity of service of
summons but whose very appearance for
that purpose was seized upon to validate
the defective service, is an illustration of
the need for this revised section with
limited scope and specific terminology.
Thus the absurd result in the Filoil case
necessitated the amendment permitting
service only on the in-house counsel of
the corporation who is in effect an
employee
of
the
corporation,
as
distinguished
from
an
independent
practitioner.
notes: additional knowledge

special appearance enter for that particular

appearance you are not the counsel in the case

would apply only if it does not involve an intracorporate controversy (controversy between and
among the stockholders)

upon any of the statutory officers or officers fixed

in the by-laws any secretary, any of the directors;
any managers in the by-laws

Seal

merely ministerial or permissive

Importance of the purpose clause

Cannot have the power to acquire

Cannot engage in land transportation

Doctrine of limited capacity

Govt vs. El Hogar

As the lawful transaction of its business may

reasonably represent
Director of Lands vs. CA

84

Exception to the rule in the constitution

Alienable public land

Converts the property to a

automatically once converted it
registered

Power to make donation

Limitation section 36 par.9

These are circumstances, however, under which a

donation by a corporation may be to its benefit as
a means of increasing its business or promoting
patronage. Thus, paragraph 9 of section 36
expressly authorizes a corporation to make
donations. The only limitations imposed are the
following:

1.

The donation must be reasonable;

private land
can now be

2.

It must be for public welfare, or for hospital,

charitable, scientific, cultural or similar purpose;
and,

Venue

Place of meetings

3.

It shall not be in aid of political party or candidate,

or for purposes of partisan political activity.

Place or registration of chattel mortgage

Power to extend its terms

Power to establish pension

-

Include any act to promote and improve the

convenience, welfare and benefit of the employees
or offices

Once
its
term
expires,
already
dissolved
automatically, thus can no longer ask for extension

After dissolution, it has 3 years to windup

Republic vs. Acoje

What are the modes of increasing capital stock?

While as a rule an ultra-vires act is one committed

outside the object for which a corporation is
created as defined by law, there are however
certain corporate acts that may be performed
outside of the scope of the powers expressly
conferred if they are necessary to promote the
interest or welfare of the corporation. Thus, it has
been held that although not expressly authorized
to do so a corporation may become a surety where
the particular transaction is reasonably necessary
or proper to the conduct of its business, and here
it is undisputed that the establishment local post
office is a reasonable and proper adjunct to the
conduct of the business of appellant company.
Indeed, such post office is a vital improvement in
the living condition of its employees and laborers
who came to settle in its mining camp which is far
removed from the postal facilities or means of
communication accorded to people living in a city
or municipality.

1.

Increasing the par value of the existing number of

shares without increasing the number of shares;

2.

Increasing the number of existing shares without

increasing the par value thereof; and,

3.

Increasing the number of existing shares and at

the same time increasing the par value of the
shares.

Why a corporation increases it capital stock?

Generate funds, business expansion, or payment

of liabilities, purposes of acquiring other business.
(example: to buy cars for the officers, purpose of
acquiring other business, expansion, other valid
reasons)

How do you decrease capital stock and why a

corporation decreases?

Reduce or wipeout existing deficit

creditors would thereby be effected

When capital is more than necessary to procreate

the business or reduction of capital surplus

To write down the value of its fixed assets to

reflect those present and actual

NOTE: any increase or decrease of capital stock

requires approval of government agency like SEC it
can never take place unless SEC approves the
same

Teresa Electric and Power Co. vs. P.S.C.

Relevance of decrease of capital?

Examined the articles of incorporation to arrive at

its decision

1.

To reduce or wipe out existing deficit where no

creditors would thereby be affected;

National Power vs. Vera

2.

When the capital is more than what is necessary to

procreate the business or reduction of capital
surplus; or,

Power to exercise such other powers essential or

necessary to carry out its purpose (implied power)

1.

Acts in the usual course of business;

2.

Acts to protect debts owing to the corporation;

3.

Embarking in a different business;

4.

Acts in part or wholly to protect or aid employees;

and,

5.

Acts to increase business

where

no

For purpose of prohibiting the NAPOCOR

The court must decide whether or not a logical and

necessary relation exists between the act
questioned and the corporate purpose expressed
in the NPC charter

3.

To write down the value of its fixed assets to

reflect there present actual value in case where
there is a decline in the value of the fixed assets of
the corporation.

Importance of PLACE of registration

Residence

Examples: Php 10M capital for grocery business,

mayor didnt want to issue license/permit because
mayor has 3 other grocery stores, only allowed

85

sari-sari store permit, reduce capital for sari-sari

so that the money will not sleep in bank
-

Example: car rental agencies-Php 10M capital for

20 taxis, after some time each taxi is only 250K,
nagmura ang taxi, to reduce capital is to show
actual assets

Pre-emptive rights, why it is granted?

In order that the existing stockholders may

maintain their proportionate right as not to dilute
their right

Power to deny pre-emptive rights

Limitation imposed by law

Decrease shall not in any way affect the rights of

the creditors

Philippine Trust Company vs. Rivera

Without the appraisal of SEC, a decrease in capital

stocks has no effect

TRUST FUND DOCTRINE:

Subscription to capital stock of a corporation

constitute a fund to which the creditors have a
right to look upon for satisfaction of their claims
and that the assignee in insolvency can maintain
an action upon any unpaid stock subscription in
order to realize assets for the payment of its
debts.

May it be denied? How?

Yes, if provided by articles of incorporation or by

an amendment

Madrigal vs. Zamora

However, pre-emptive rights is unavailable to

shares in trading in stock exchange otherwise
stockholders must waive first their right before
they may sell such.

Exceptions

Decrease in capital has a subterfuge to evade

payment

Thus not valid and effective

Must not prejudice creditors which includes the

employees

Bond

Commonly understood as an obligation of a state,

its
subdivision
or
a
private
corporation,
represented by a certificate or an instrument for
the principal and by detachable coupons for the
payment of interests. In its simplest term, it is one
where an obligor obliges himself to pay a certain
sum of money to another at a day named.

There are different kinds of bond but before they

may be issued or floated by the corporation, the
same must be registered and approved by the SEC
subject to the rules and regulations that may be
adopted by that agency. The procedure and
requirements set forth in section 38 is the same as
in increasing or decreasing the capital stock except
that the certificate does not have to state the
matters required in sub-section 2 & 3 thereof.

Pre-emptive rights

A right granted by law to all existing stockholders

of a stock corporation to subscribe to all issues or
disposition of shares of any class, in proportion to
their respective stockholdings, subject only to the
limitations imposed under section 39 of the Code.

Internationally granted

Section 39. Power to deny pre-emptive

right. - All stockholders of a stock corporation shall
enjoy pre-emptive right to subscribe to all issues
or disposition of shares of any class, in proportion
to their respective shareholdings, unless such right
is denied by the articles of incorporation or an
amendment thereto: Provided, That such preemptive right shall not extend to shares to be
issued in compliance with laws requiring stock
offerings or minimum stock ownership by the
public; or to shares to be issued in good faith with
the approval of the stockholders representing twothirds (2/3) of the outstanding capital stock, in
exchange for property needed for corporate
purposes or in payment of a previously contracted
debt.

86

1.

When the shares to be issued is in compliance

with laws requiring stock offerings or
minimum stock ownership by the public

2.

Shares to be issued in good faith with the

approval of the stockholders representing 2/3
of the outstanding capital stock either
a.

In exchange for property needed for

corporate purpose or,

b.

In payment of a previously contracted

debt

The exceptions, however will not apply to

stockholders of a close corporation by virtue of a
subsequent and specific provision of the Code
which provides that the pre-emptive right of a
stockholder in a close corporation shall extend to
all stock to be issued, including reissuance of
treasury shares, whether for money, property or
personal services or in payment of a corporate
debt, unless the articles of incorporation provide
otherwise, if not entirely absolute, in that it
extends to all issuance and disposition of shares

Such right of pre-emption may be lost by waiver of

the stockholder, expressly or impliedly by his
inability or failure to exercise it after having been
notified of the proposed issuance or disposition of
shares

When is it unavailable?

Does it include those originally unsubscribed?

In shares traded openly in stock exchange/market

NO. Benito vs. SEC

Is it applicable to close corporations?

See section 96, close corporations must provide it

first on its articles of incorporation, that its articles
does not really deny such pre-emptive rights.

Will the stockholders be able to exercise their preemptive right with respect to the old unissued
shares?

Pre-emptive rights is applicable only to new issued

shares and not to the old unissued shares because
it is presumed that the original subscribers is
deemed to have taken his shares knowing that
they form a definite proportionate part of the
whole number of authorized shares

When the shares, left unsubscribed are re-offered,

he cannot therefore claim. DILUTION OF INTEREST

Will the acquiring purchaser be liable for debts of

the former corporation?

Generally no, corporate entity theory because

there may be instances when purchasing
corporation may be held liable

May a corporation acquire its own shares?

Yes

Is there any restriction provided for by law in

reacquiring its own shares?

Yes, it must have been unrestricted retained

earnings appearing in the books of corporation

A corporation can never acquire its own shares if it

has no unrestricted retained earnings

False, exception close corporation and redeemable

shares

Section 102, will not apply to close corporations

The right of pre-emptive rights is absolute in close

corporations

All issues or depositing shares of any class form part of

ACS
Certain instances when a stockholder may
nevertheless be unable to exercise this right:
-

Issued for public ownership

Issued in good faith, with approval of 2/3 of

outstanding capital stock either a) in exchange for
property needed or b) for payment of a previously
contracted debt

Pre- emptive rights of stockholders in ordinary

stock corporations may be denied

if the shares are to be issued in compliance with

laws requiring stock offering or minimum stock
ownership by the pubic

In exchange for property needed for corporate

purposes

In payment of previously contracted debts

This rule, however, does not apply in a close

corporation as the pre-emptive rights of the
stockholders thereof is broadened to include all
issues without exceptions unless, of course, denied
or limited by the articles of incorporations. Section
102 provides:

EXAMPLE:
ACS
SUBSCRIBED
PAID UP 1M
1

Section 102. Pre-emptive right in close

corporations.
The
pre-emptive
right
of
stockholders in close corporations shall extend to
all stock to be issued, including reissuance of
treasury shares, whether for money, property or
personal services, or in payment of corporate
debts, unless the articles of incorporation provide
otherwise.

section 96

May a stock holder in a close corporation insist in

the exercise of his pre-emptive rights?

Yes, section 102

What type or shares are covered by pre-emptive

rights?

100K
100K

TO
10 100K
If 1-5 became 200K each, may 6-10 demand the
exercise their pre-emptive right?

Denial will not apply to a close corporation,

ABSOLUTE

2M
1M

87

YES

May 1-5 subscribe to the unsubscribed capital

stock to the exclusion of 6-10?

If a corporation makes 2M unrestricted retained

earnings, it is the shares and not the number of
persons that matters

May 6-10 complain for a dilution of their interest?

YES, its an internationally recognized right

because it includes all issues and disposition of

shares of any class and all kinds of shares new or

old
-

If the remaining unsubscribed shares are issued,

its an issuance of any class

May a corporation sell/dispose all or substantially

all of its corporate assets and liabilities?

YES

1)
RESOLUTION
2)
AUTHORIZATION
3)
RATIFICATION 4) PRIOR WRITTEN NOTICE 5) SALE
SUBJECT TO PROVISIONS OF EXITING LAWS 6)
DISSENTING STOCKHOLDERS HAVE THE RIGHT TO
EXERCISE THEIR APPRAISAL RIGHT

NO, if the same is necessary in the usual and

regular course of business of said corporation or if
the proceeds of the sale or other disposition of
such property and assets be appropriated for the
conduct of its remaining business

If X is a manufacturing company, then it can sell

its only property upon approval of the stockholders
because it will render itself capable of continuing
its business, BUT if the proceeds will be used to
purchase a better one for the continuance of its
business, then it does not need the approval of the
stockholders

Conditions for the valid exercise of this power are

the following

If a corporation sells substantially all of it assets

and properties, will the buyer assume liability?

1.

Resolution by the majority vote of the board of

directors/trustees

NO, EXCEPT

2.

1)

Express or implied agreement to the purchase

Authorization from the stockholders representing

at least 2/3 of the outstanding capital stock or 2/3
of the members;

2)

Where the transaction amounts to consolidation or

merger of the corporations

3.

3)

When purchasing corporation is

continuation of the selling corporation

The ratification of the stockholders or members

must be made at a meeting duly called for that
purpose

4.

Prior written notice of the proposed action and of

the time and place of meeting must be made
addressed to all stockholders of record, either by
mail or personal service;

5.

The sale of the assets shall be subject to the

provisions of existing laws on illegal combinations
and monopolies

6.

Any dissenting stockholder shall have the option to

exercise his appraisal right

merely

4)

Where the transaction is entered into fraudulently

in order to escape liability for such debt

Legitimate purpose: for a corporation to reacquire

its own shares

Limitation: it must
retained earnings

have

surplus/unrestricted

Exception: may redeem irrespective of unrestricted

retained earnings

1)

Exercise of stockholders right to compel close

corporation to purchase his shares

2)

Where corporation has sufficient assets in its books

to cover its debts and liabilities exclusive of capital
stock

ACS
SUBSRIBED
PAID-UP 1M
ASSETS
-

IDP vs. CA
-

Edward Nell Co. vs. Pacific Farms

-

1M
1M

500K
1M PROFITS
500K LIABILITIES

____________________
500K RESERVES
IN
A
CLOSE
CORPORATION IT CAN USE THIS TO REACQUIRE ISSUED
STOCKS
X REALTY CORPORATION

THE ONLY PROPERTY OF

THE CORPORATION

Consent of the members was not secured

BOARD OF DIRECTORS
DECIDED TO SELL IT

Will it need the approval of the stockholders?

88

Generally where one corporation sells or otherwise

transfers all of its assets to another corporation,
the latter is not liable for the debts and liabilities of
the transferor, except:
1.

Where the purchaser expressly or impliedly

agrees to assume such debts;

2.

Where the transaction amounts to a

consolidation or merger of the corporations;

3.

Where the purchasing corporation is merely a

continuation of the selling corporation;

4.

Where the transaction is entered into

fraudulently in order to escape liability for
such debts.

Power to acquire own shares

Section 41. Power to acquire own

shares. - A stock corporation shall have the power
to purchase or acquire its own shares for a
legitimate
corporate
purpose
or
purposes,
including but not limited to the following cases:
Provided, That the corporation has unrestricted
retained earnings in its books to cover the shares
to be purchased or acquired:

If its in connection with the primary purpose, only

board resolution is necessary

Requirements and steps to be followed for a valid

investment of corporate funds are:

1.

1. To eliminate fractional shares arising out of

stock dividends;

Resolution by the majority of the board of directors

or trustees;

2.

2. To collect or compromise an indebtedness to the

corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent
shares sold during said sale; and

Ratification by the stockholders representing at

least 2/3 of the outstanding capital stock or 2/3 of
the members in case of non-stock corporations;

3.

The ratification must be made at a meeting duly

called for that purpose;

4.

Prior written notice of the proposed investment

and the time and place of the meeting shall be
made, addressed to each stockholder or member
by mail or by personal service, and;

5.

Any dissenting stockholder shall have the option to

exercise his appraisal right

3. To pay dissenting or withdrawing stockholders

entitled to payment for their shares under the
provisions of this Code. (a)

The corporation must at all times have

unrestricted retained earnings to exercise this
corporate power
Steinberg vs. Velasco

For as long as there are debts and liabilities, a

corporation may not reacquire its shares (subject
to exceptions)

Dela rama vs. Ma-ao Sugar

Creditors of a corporation have the right to assume

that so long as there are outstanding debts and
liabilities, the board of directors will not use the
assets of the corporation to purchase its own
stock, and that it will not declare dividends to
stockholders when the corporation is insolvent.

There is a substantial and not remote connection

between the sugar bags and the sugar
manufacture, thus stockholders approval is not
necessary for validity

A private corporation, in order to accomplish its

purpose as stated in its articles of incorporation,
and imposed by the Corporation Law, has the
power to acquire, hold, mortgage, pledge, or
dispose of shares bonds, securities and other
evidences of indebtedness of any domestic or
foreign corporation. Such an act, if done in
pursuance of the corporate purpose, does not need
the approval of the stockholders; but when the
purchase of shares of another corporation is done
solely for investment and not to accomplish the
purpose of its incorporation, the vote of approval
of the stockholders is necessary.

Power to invest funds <sec.42>

Section 42. Power to invest corporate
funds in another corporation or business or for any
other purpose. - Subject to the provisions of this
Code, a private corporation may invest its funds in
any other corporation or business or for any
purpose other than the primary purpose for which
it was organized when approved by a majority of
the board of directors or trustees and ratified by
the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, or by at
least two thirds (2/3) of the members in the case
of non-stock corporations, at a stockholder's or
member's meeting duly called for the purpose.
Written notice of the proposed investment and the
time and place of the meeting shall be addressed
to each stockholder or member at his place of
residence as shown on the books of the
corporation and deposited to the addressee in the
post office with postage prepaid, or served
personally:
Provided,
That
any
dissenting
stockholder shall have appraisal right as provided
in this Code: Provided, however, That where the
investment by the corporation is reasonably
necessary to accomplish its primary purpose as
stated in the articles of incorporation, the approval
of the stockholders or members shall not be
necessary. (17 1/2a)

Gokongwei vs. SEC

For any other purpose other than the primary

purpose, stockholders consent or approval is
necessary

Investments made by SMC is necessarily

connected with its primary purpose and this was
ratified in a meeting

Submission of previous action is a sound corporate

practice

Redeemable shares

Closed corporation (see section 105)

For any reason, compel the value of shares

withdrawal shares provided corporation has
sufficient funds to cover its debts and liabilities
Section 105. Withdrawal of stockholder
or dissolution of corporation. - In addition and
without prejudice to other rights and remedies
available to a stockholder under this Title, any
stockholder of a close corporation may, for any

Thus, if its for the secondary purpose, it is

necessary

89

reason, compel the said corporation to purchase

his shares at their fair value, which shall not be
less than their par or issued value, when the
corporation has sufficient assets in its books to
cover its debts and liabilities exclusive of capital
stock: Provided, That any stockholder of a close
corporation may, by written petition to the
Securities and Exchange Commission, compel the
dissolution of such corporation whenever any of
acts of the directors, officers or those in control of
the corporation is illegal, or fraudulent, or
dishonest, or oppressive or unfairly prejudicial to
the corporation or any stockholder, or whenever
corporate assets are being misapplied or wasted.

Like tables and chairs? Can tables and chairs make

surplus profits?

No, they do not make surplus, bonds, etc.

Where should dividends come from?

Stock dividends are declared as stocks coming

from corporation

Who declares dividends to

stockholders have any say?

If shares are reacquired, what happens?

It becomes treasury shares

Board of Directors, if stock approval of 2/3

outstanding capital stock

Stockholders consent/ approval is not necessary

and mere board action is sufficient if in accordance
with primary purpose

The logical relation of act done and primary

purpose of corporation and between the board of
directors to undertake submission of acts is a
sound corporate practice

Dividends

Stock corporations are prohibited from

retaining surplus profits in excess of one hundred
(100%) percent of their paid-in capital stock,
except: (1) when justified by definite corporate
expansion projects or programs approved by the
board of directors; or (2) when the corporation is
prohibited under any loan agreement with any
financial institution or creditor, whether local or
foreign, from declaring dividends without its/his
consent, and such consent has not yet been
secured; or (3) when it can be clearly shown that
such retention is necessary under special
circumstances obtaining in the corporation, such as
when there is need for special reserve for probable
contingencies. (n)
What are dividends?

Corporate profits set aside, declared and ordered

by the Board of Directors to be paid to the
stockholders.

What are property dividends?

Those paid in property surplus

declared?

Do

ACS-1M
SUB-1M P.U.-1M 1M-U.R.E.
(surplus
profits of the corporation)
1-100k
2-100k
To
10-100k
1M
Board decides to declare 1M, how much will each
receive? May the board declare stock dividend

Section 43. Power to declare dividends. The board of directors of a stock corporation may
declare dividends out of the unrestricted retained
earnings which shall be payable in cash, in
property, or in stock to all stockholders on the
basis of outstanding stock held by them: Provided,
That any cash dividends due on delinquent stock
shall first be applied to the unpaid balance on the
subscription plus costs and expenses, while stock
dividends shall be withheld from the delinquent
stockholder until his unpaid subscription is fully
paid: Provided, further, That no stock dividend
shall be issued without the approval of
stockholders representing not less than two-thirds
(2/3) of the outstanding capital stock at a regular
or special meeting duly called for the purpose.
(16a)

be

90

NO. that would be over issuance of shares,

violation of securities regulation code

It must have a free portion

The corporation may increase its capital

Z co. 1M to X Co. is 2/3 of Xco. Stockholders

reacquired?

No, because in property 2/3 is not required

What is the effect of declaration of dividends with

regards to the assets of a company?

As compared to stock dividends, the declaration of

cash or property dividends have the effect of
reducing corporate assets to the extent of
dividends declared.

Neither would stock dividends increase the

proportionate interest of the stockholders of the
corporation although it will have the effect of
increasing the subscribed and paid-up capital of
the corporation. It gives the stockholders nothing
in the way of distribution of assets but merely
divides his existing shares into smaller units.

Earnings belong to the corporation until declared

or given

Revocation

No revocation of dividend may be has unless it has

not
been
officially
communicated
to
the
stockholders or is in the form of stock dividends
which is revocable at any time prior to distribution.

Stock dividends- no reduction, you capitalize your

restricted retained earnings, what is issued is a

piece of paper. The restricted earnings remain in

the corporation

Cash and property- reduces corporate assets

Stock dividends increase corporate assets? No, it

will only have the effect of increasing the
subscribed and paid-up capital of the corporation

Will there be a corresponding increase in their

proportionate interest?

REMAINS THE SAME

Exception: when stock dividends will result in a

fractional share

1-100K 200 (10%)

*VOTING AND DIVIDEND RIGHTS STILL THE SAME
SUB-1M TO
10%
PU-1M
10-100K
ACS
2M
SUB
1M
PU
1M
1M
RE
1
100K
2
100K
TO
10
100K
1M
May they be compelled?
NO. You cannot declare if it does not come from
unrestricted retained earnings.

1.

1M-U.R.E. (is it true there is no way to compel?)

2.

2M-U.R.E.

May they be compelled to declare dividends

Mandatory if earned, the board may be compelled

to declare dividends

if exceeds 100% of the paid-up capital the boards

may be compelled

Delinquency occurs, you are called to pay, but you

failed to pay. In case of stock dividend, the
delinquent stock holder will not be entitled thereto
until he has paid his subscription in full.

Are non-stockholders entitled to receive dividends?

How did the court decide dividends in the case of

Neilsen

Stock dividends cannot be issued to a person who

is not a stockholder in payment of services
rendered.

Whether cash, property or stock, only stockholders

may receive dividends. Dividends are fruits of
investments. They come from the U.R.E. or surplus
profits of the corporation.
2M
1M

1M
U.R.E.
JULY 24 DECLARATION

JULY

1M
100K
100T JULY 26-Y(NEW
ONE WAS DECLARED TO Y) JULY 30- 100K

2
TO
TO
HAVE
THE
TRANSFER
RECORDED
10 100K
1M
Insofar as 1 and Y who has a better right? Already
declared, but not yet paid?

YES. They are entitled however if they are declared

delinquent, the amount due them shall first be
applied to his delinquency plus expenses.

ACS
2M
1M
U.R.E.
SUB
1M
PU
800K
1-100K 50K PU
2-100K 50K
TO
10-100K
1M
Will 1 and 2 receive full amount of dividends?
-

No, tock dividends are civil fruits of the original

investment, and to the owners of the shares
belong the civil fruits.

ACS
SUB
31
PU

ACS-2M

91

Right to receive vest upon declaration. Who ever

owns at the time of declaration owns the dividends

Unless there is a stipulation to the contrary

TRUST FUND DOCTRINE

The power to declare it if paid-up capital is not

maintained or is impaired

Trust fund must be kept intact for the protection of

creditors who have the right to rely on such
subscription and the paid-up capital for the
satisfaction of their claims

Cannot accumulate surplus unreasonably

Basis is the paid-up capital

Entitled to dividends

Irrespective of whether the subscription is full

Illegally declared

Declare dividend with the belief that it formed part

of the U.R.E., but yun pala sa capital

Directors are not liable, unless sec31 acted in bad

faith or gross negligence in the conduct of
corporate affairs

Directors even if acting in behalf of

corporation, may still be held solidarily liable

Power to enter into management contract

the

1.

Where the stockholders representing the same

interest of both the managing and managed
corporation own or control more than 1/3 of the
total outstanding capital stock of the managing
corporation; and

2.

Where a majority of the members of the board of

directors of the managing corporation also
constitute a majority of the directors of the
managed corporation

3.

Where the contract would

constitute the
management or operation of all or substantially all
of the business of another corporation, whether
such contracts are called service contracts. If it will
not constitute the management of all or
substantially all of the business of another
corporation the first paragraph of section 44 will
apply and not that of the second, that is, only the
vote of the stockholders holding or representing at
least a majority of the outstanding capital stock or
majority of the members in the case of non-stock
corporation will be required.

How long?

Not longer than 5 years for any one term

The provisions of the next preceding

paragraph shall apply to any contract whereby a
corporation undertakes to manage or operate all or
substantially all of the business of another
corporation, whether such contracts are called
service contracts, operating agreements or
otherwise: Provided, however, That such service
contracts or operating agreements which relate to
the exploration, development, exploitation or
utilization of natural resources may be entered into
for such periods as may be provided by the
pertinent laws or regulations. (n)

Exception: exploration, development or utilization

of natural resources

What is an ultra-vires act or contract?

Doctrine of limited capacity. Corporation can do

such acts and things as it is allowed to do

Acts beyond it will be ultra vires, allowing a

collateral attack

The requirement for a valid management contract

are as follows:

If not illegal per se merely voidable. Can be ratified

expressly or impliedly or even stopped as equitable
grounds

1.

Resolution of the board of directors

-

2.

Approval
by
the
stockholders
holding
or
representing a majority of the outstanding capital
stock or majority of the members in case of nonstock corporation of both the managing and the
managed corporation

Ultra-vires acts which are not illegal per se may

become binding and enforceable either by
satisfaction, estoppels or equitable grounds

Consequences of ultra-vires acts?

1.

On the corporation itself

The proper forum, in accordance with the

provisions of PD 902-A, as amended and R.A. No.
8799 may suspend or revoke, after proper notice
and hearing, the franchise or certificate of
registration of the corporation for serious
misrepresentation as to what the corporation can
do or is doing to the great damage or prejudice of
the general public

2.

On the rights of the stockholders

A stockholder may bring either an individual or

derivative suit to enjoin a threatened ultra-vires
act or contract. If the act or contract has already
been performed, a derivative suit for damages
against the directors may be filed, but their liability

New provision
Section 44. Power to enter into
management contract. - No corporation shall
conclude a management contract with another
corporation unless such contract shall have been
approved by the board of directors and by
stockholders owning at least the majority of the
outstanding capital stock, or by at least a majority
of the members in the case of a non-stock
corporation, of both the managing and the
managed corporation, at a meeting duly called for
the purpose: Provided, That (1) where a
stockholder or stockholders representing the same
interest of both the managing and the managed
corporations own or control more than one-third
(1/3) of the total outstanding capital stock entitled
to vote of the managing corporation; or (2) where
a majority of the members of the board of
directors of the managing corporation also
constitute a majority of the members of the board
of directors of the managed corporation, then the
management contract must be approved by the
stockholders of the managed corporation owning at
least two-thirds (2/3) of the total outstanding
capital stock entitled to vote, or by at least twothirds (2/3) of the members in the case of a nonstock corporation. No management contract shall
be entered into for a period longer than five years
for any one term.

3.

The approval of the stockholders or members must

be made at the meeting called for that purpose

4.

The contract shall not be for a period longer than 5

years for any one term, except those which relate
to exploration, development or utilization of
natural resources which may be entered into for
such periods as may be provided by pertinent laws
and regulations

Every corporate act emanates from the BOARD

Is the voting requirements

stockholder ABSOLUTE?

Not only a majority but 2/3 of the outstanding

capital stock or 2/3 of the members in a non-stock
corporation would be required for the approval of a
management contract in the following instances:

of

majority

92

will depend on whether they acted in good faith

and with reasonable diligence in entering into the
contract.
3.

On the immediate parties

The courts have not agreed as to the legal effect of

a corporate contract outside of its authorized
business but Ballatine gives the following summary
of the doctrines evolved:
a.

b.

c.

Crisologo-Jose vs. CA (ALWAYS ASKED BY DEAN

SUNDIANG)

If the contract is fully executed on both sides,

the contract is effective and the courts will no
interfere to deprive either party of what has
been acquired under it
If the contract is executory on both sides, as a
rule, neither party can maintain an action for
its non-performance

The negotiable instruments law which holds an

accommodation party liable on the instrument to a
holder for value, although such holder at the time
of taking the instrument knew him to be only an
accommodation party, does not include nor apply
to corporations which are accommodation parties.
This is because the issue or indorsement of
negotiable paper by a corporation without
consideration and for the accommodation of
another is ultra-vires

Corporate officers may guarantee or endorse an

accommodation only if specifically authorized

Section 36 paragraph 11
Section 10
Section 14 and 15
Corporate powers depend on the agreement of the
stockholders rather than any director

Where the contract is executor on one side

only, and has been fully performed on the
other, the courts differ as to whether an action
will lie on the contract against the party who
has received benefits of performance under it.
Majority of the courts, however, hold that the
party who has received benefits from the
performance is estopped to set up that the
contract is ultra-vires to defeat an action on
the contract. This is more in conformity with
the doctrine that no person shall be allowed to
enrich himself at the expense of another

It may sell and it may guarantee, contract not

necessarily illegal, it will in the absence of proof to
the
contrary
presumed
within
its
power.
Corporations are presumed to contract with in its
powers- CARLOS CASE

Purpose clause may be stretched to cover PLDT

internet. It may be within its business.

May it sell computers? NO! other line of business.

Its trading!

Privano vs. Dela Rama

-

Court looked into the purpose clause

The purpose clause empowers and limits

Articles likewise provide that it may deal with any

of its money

deal broad enough to cover the donation it is not

then ultra-vires

Not illegal per se hence (law of agency) excess

powers are subject to ratification

Ratified by passing the resolution in question

BY-LAWS
By-Laws
-

Rule adopted by the corporation for its internal

governance

Is the adoption of by-laws mandatory?

When should the by-laws be adopted or filed? Can

it not be adopted earlier?

After incorporation- within 1 month (emanates

from the BOARD)

Prior-more
convenient
incorporators)

Who will sign the adoption clause?

Majority of the stockholders or members attested

to by the corporate secretary

What happens if the corporation fails to adopt the

by-laws from the tie provided by the law? Would
there be an automatic revocation or suspension?

Proper notice and hearing, must first be complied

with

Carlos vs. Mindoro sugar Co.

-

PTC- trust company as such, it also has implied

powers as to make them more attractable
Not ultra-vires in pursuance of its legitimate
business
Japanese war notes vs. SEC

Non-stock corporations cannot make profits and

distribute profits to its shareholders
Ultra-vires because Japanese war notes is a nonstock corporation

Loyola grand villas vs. CA

-

93

Not the SEC, but the HIGC

(signed

by

the

Must not always imperative

May provide reasonable restriction

Filing of by-laws mandatory

By-laws merely internal laws

Empowered by SEC

Articles is the contract between and among the

parties and corporation

Merely a ground, there must be proper notice and

hearing

Govt vs. El Hogar

Not affect the status of the corporation as a

juridical person

Did the court categorically ruled here that the

provision in the 5th cause of action is valid?

Subject the corporation to a fine, as may be issued

by the SEC

Rules governing equity, considering the fact that

there was always lack of quorum

When do by-laws become effective?

Section 29 BOD if still constituting a quorum may

fill up a vacancy other than by removal, etc.

Until and unless the SEC gives it stamped of

approval

Suspension of any government agency.

permission must first be secured- section 46

1.

Gokongwei vs. SEC

The

Section 48 allows a corporation to amend it bylaws

Elements of a valid by-law

Section 47 of the code, the by-laws may provide

for the qualification and disqualification

It must not be contrary to law, public policy or

morals;

It cannot be said Gokongwei has a vested rights

Prevent directors from taking advantage of position

to promote his individual interest to the damage of
others

2.

It must not be inconsistent with the articles of

incorporation;

3.

It must be general and uniform in its effect or

applicable to all alike or those similarly situated;

It must not impair obligations and contracts or

vested rights; and

The validity or reasonableness of a by-laws is a

question of law

Subject to the limitations that reasonableness of a

by-law is a mere matter of judgment

Rule of the majority and not the tyranny of the

minority

May the by-laws be amended altered or appealed?

YES. HOW? Two modes

1.

By a majority vote of the directors or trustees and

the majority vote of the outstanding capital stock
or members in a non-stock corporation, at a
regular or special meeting called for that purpose;

2.

By the board of directors alone when delegated by

2/3 of the outstanding capital stock or 2/3 of the
members in a non-stock corporation.

This delegated power, however, is considered

revoked whenever a majority of the outstanding
capital stock or members shall so vote at a regular
or special meeting.

If it is to be amended what is the proceeding?

Section 48 2nd paragraph provides:

4.

5.

It must be reasonable.

Must not be inconsistent with existing laws. Not be

inconsistent with articles of incorporation

By-laws

None filing would not affect the status of the

corporation, Loyola grand villas case

The word must is not always imperative

Stockholders are conlusively presumed to know

the provisions of the by-laws

How about 3rd persons?

NO. unless there is actual knowledge of the same

they are not presumed to know of the provisions of
the by-laws
Fleischer vs. Botika Nolasco

Shares of stock are personal properties

Shares of stock may transfer to whom ever he

wishes

The by-laws is contrary to law

Articles of incorporation

Section 48. Amendments to by-laws. The board of directors or trustees, by a majority

vote thereof, and the owners of at least a majority
of the outstanding capital stock, or at least a

94

majority of the members of a non-stock

corporation, at a regular or special meeting duly
called for the purpose, may amend or repeal any
by-laws or adopt new by-laws. The owners of twothirds (2/3) of the outstanding capital stock or
two-thirds (2/3) of the members in a non-stock
corporation may delegate to the board of directors
or trustees the power to amend or repeal any bylaws or adopt new by-laws: Provided, That any
power delegated to the board of directors or
trustees to amend or repeal any by-laws or adopt
new by-laws shall be considered as revoked
whenever stockholders owning or representing a
majority of the outstanding capital stock or a
majority
of
the
members
in
non-stock
corporations, shall so vote at a regular or special
meeting.

Meetings are regular and special

Meetings of stockholders

What is regular and what is special?

When are regular meetings of the stockholders

held?

Fixed date provided by the by-laws

What if there is no date?

April

Why april?

Point in time the audited financial statement have

been prepared

What if in the date specified in the by-laws or by

the law itself the meeting was not convened, for
instance lack of quorum or force majeure?

It may be postponed on a reasonable date

Notice requirement?

Regular- 2 weeks prior notice

Baretto vs. La Previsora

Special- 1 week

Any corporate act emanates from the board

May the notice requirement be lessened?

Directors themselves cannot amend the by-laws if

they were not granted the same

By-laws may provide a longer or a shorter duration

Section 48

What if the notice requirement is not complied

with?

The power granted is not subject to revocation T or

F?

What happened to any act passed in a meeting

when notice requirement was not required with?

FALSE

Voidable, subject to ratification

If the by-laws are amended when will they become

valid?

Upon issuance of the SEC that they are not

inconsistent

Whenever any amendment or new bylaws are adopted, such amendment or new bylaws shall be attached to the original by-laws in
the office of the corporation, and a copy thereof,
duly certified under oath by the corporate
secretary and a majority of the directors or
trustees, shall be filed with the Securities and
Exchange Commission the same to be attached to
the original articles of incorporation and original
by-laws.
The amended or new by-laws shall only
be effective upon the issuance by the Securities
and Exchange Commission of a certification that
the same are not inconsistent with this Code. (22a
and 23a)

Board of directors vs. Tan

What if the SEC failed to act within 10 months

without fault attributable to the corporation?
T or F any amendment of the by-laws will never
become valid until it gives its stamp of approval
even after 1 year

Notice requirement is the by-laws is a mandatory

requirement

Improperly served, any action will be invalidated at

the objection of any stockholder or member

Must be held in the proper place

Where should it be held?

Apparent from the foregoing provision is that

meetings of stockholders must, at all times, be
held in the city or municipality where the principal
office of the corporation is located and, as far as
practicable, in the principal office of the
corporation.

May the by-laws of a corporation provide that

meetings be held anywhere in the Philippines?

TRUE. Articles of incorporation and by-laws are

different

MEETINGS
Meetings
-

Meetings of stockholders
the by-laws or by-law

Meetings of director or trustees

1. Date fixed in

95

While there is no provision authorizing a stock

corporation to hold stockholders meetings outside
of the City of Municipality where the principal office
is located, the law allows a non-stock corporation
to provide in its by-laws any place of members
meeting provided that proper notice is sent to all
members indicating the date, time and place of the
meeting which shall be within the Philippines.

T or F the by-laws of a stock corporation may

validly provide that meetings shall be held
anywhere in the Philippines?

FALSE.
Non-stock corporations lang pwede
provided nakalagay sa by-laws and provided
proper notice is given

Corporation can do only such things as the law

allows it to do, DOCTRINE OF LIMITED CAPACITY

San Miguel office located in Ortigas Center. May

stockholders meeting be held in PICC center?

YES. Metro Manila, one single city

Must be called by the proper party

Who calls?

President until and unless there is a provision ,

secretary on order of the president

What if there is nobody who can call?

stockholders representing or holding at least a

majority of the outstanding capital stock, or, if it be
a non-stock corporation, on the written demand of
a majority of the members entitled to vote. Should
the secretary fail or refuse to call the special
meeting upon such demand or fail or refuse to give
the notice, or if there is no secretary, the call for
the meeting may be addressed directly to the
stockholders or members by any stockholder or
member of the corporation signing the demand.
Notice of the time and place of such meeting, as
well as of the intention to propose such removal,
must be given by publication or by written notice
prescribed in this Code. Removal may be with or
without cause: Provided, That removal without
cause may not be used to deprive minority
stockholders or members of the right of
representation to which they may be entitled under
Section 24 of this Code. (n)

Cases of removal or ouster of a director

Mandamus would be appropriate remedy if there is

a person authorized but refuses

Quorum and voting requirement

Majority stockholders or members constitute a

quorum

Is the presence of the majority owners of the

outstanding capital stock ABSOLUTE to have a
quorum?

NO. when the code requires a higher quorum it

must also be equivalent to the vote required

The petitioner, stockholder may petition the court

What if there is a person who can call, but he fails

or neglects to call the meeting? May a stockholder
petition to authorize a meeting?

Do you include non-voting shares in arriving at the

voting requirement to have a valid corporate act?

It depends.

Ponce case only applies when there is NO person

authorized to call the meeting. If there is a person,
but neglects his duty. Ponce will not apply.

Section 6 last par. If it falls within the penultimate

par. Of section 6

Five requisites of a valid meeting

Writ of injunction may never be issued ex parte

1.

It must be held on the date fixed in the by-laws or

in accordance with law

Is there any exception?

2.

Prior notice must be given

Section 28 only instance

3.

It must be held at he proper place

4.

It must be called by the proper party

5.

Quorum and voting requirements must be met

Date not complied with, notice, place, not complied

with and the person who called not authorized,
what happens to any resolution called?

Section 51, any meeting shall be valid provided all

the stockholders are present or duly represented
and provided it is within the power of the
corporation. 3RD paragraph of 324

If the voting requirement is met, any resolution

passed in the meeting, even if improperly held or
called will be valid if all the stockholders or

Section 28. Removal of directors or

trustees. - Any director or trustee of a corporation
may be removed from office by a vote of the
stockholders holding or representing at least twothirds (2/3) of the outstanding capital stock, or if
the corporation be a non-stock corporation, by a
vote of at least two-thirds (2/3) of the members
entitled to vote: Provided, That such removal shall
take place either at a regular meeting of the
corporation or at a special meeting called for the
purpose, and in either case, after previous notice
to stockholders or members of the corporation of
the intention to propose such removal at the
meeting. A special meeting of the stockholders or
members of a corporation for the purpose of
removal of directors or trustees, or any of them,
must be called by the secretary on order of the
president or on the written demand of the

96

members are present or duly represented thereat.

The last paragraph of section 51 is clear on the
matter when it provides:

proceedings which were taken at it void,

for every member of the board were
present, and their joint action had
completely bound the corporation as if the
meeting has been called with due
formality, and everyone of the directors
had received proper notice.
What is the quorum and voting requirement in the
directors meeting?

all proceedings had and any business

transacted at any meeting of the
stockholders or members, if within the
powers or authority of the corporation,
shall be valid even if the meeting be
improperly held or called, provided all the
stockholders
or
members
of
the
corporation
are
present
or
duly
represented at the meeting.
Directors/trustees meeting

Regular (monthly) and special (anytime)

May that be restricted (within or outside the Phil)

YES. unless the by-laws provide otherwise.

Is there any notice requirement?

YES. 1 day unless otherwise provided by the bylaws

Should the director or trustees be physically

present?

What happens if notice is not complied with?

If the notice requirement is not complied with the

meeting is illegal and will not bind the corporation
except when subsequently ratified or in the case of
a close corporation where the act of any one
director may bind the corporation even without a
meeting under the special provision of Section 101
of the Code.

General rule, must sit and act as a body to have a

valid corporate act

Five man member board, a meeting was called

today, should the physical presence or warm
bodies requires to constitute a quorum?

NO. it is not required. Teleconference or video

conference is allowed, E- commerce law

Can notice be waived? <sec.53>

Membership subject to laws

Section
53.
Regular
and
special
meetings of directors or trustees. - Regular
meetings of the board of directors or trustees of
every corporation shall be held monthly, unless the
by-laws provide otherwise.

Stockholder not yet

May director vote by proxy?

NO

If A is a director and a meeting is called for the

purpose of electing a new set of BOD can A vote
by proxy?

YES. Because it is a stockholders meeting

If directors meeting, cannot vote by proxy

Stockholders right to vote

Inherent in stock ownership

However this right is not always inherent, because

it may be denied:

Special meetings of the board of directors

or trustees may be held at any time upon the call
of the president or as provided in the by-laws.
Meetings of directors or trustees of
corporations may be held anywhere in or outside
of the Philippines, unless the by-laws provide
otherwise. Notice of regular or special meetings
stating the date, time and place of the meeting
must be sent to every director or trustee at least
one (1) day prior to the scheduled meeting, unless
otherwise provided by the by-laws. A director or
trustee may waive this requirement, either
expressly or impliedly. (n)
-

YES. Expressly and impliedly

SEC ruling
A special meeting is valid without notice
where the directors are all present or
where they consent to the meeting.
Presence at the meeting waives the want
of notice. Moreover, it has been ruled that
the meeting of the directors without a
formal call first being had, and notice
thereof given to the members, did not
operate to invalidate it or to render the

Majority of the members of the board of directors

(entire membership)

Vote required to pass a valid corporate act?

Majority of those present at which there is a

quorum (3 present, vote of 2 sufficient)

Exception, majority of all the members of the

board in case of election of corporate officers,
unless the articles provide for a greater quorum or
voting requirement

97

1.

Redeemable and preferred shares, however if

founders shares are issued others may be
denied the right to vote.

2.

May be denied by the articles of incorporation

or contracts

When not denied they may do so in person or by

proxy

May the right to vote by proxy be denied?

May the articles of incorporation deny?

May the by-laws validly provide that proxy voting

is not allowed?

NO

Only non-stock may be denied proxy voting (may

be broaden, limited or denied)

Proxy voting is a matter of right granted by law

Requirements of a valid proxy?

Section 58

Section 58. Proxies. - Stockholders and

members may vote in person or by proxy in all
meetings of stockholders or members. Proxies
shall in writing, signed by the stockholder or
member and filed before the scheduled meeting
with the corporate secretary. Unless otherwise
provided in the proxy, it shall be valid only for the
meeting for which it is intended. No proxy shall be
valid and effective for a period longer than five (5)
years at any one time. (n)
How long may a proxy exist?

Maximum of 5 years

Valid for the meeting in which it is intended

Is proxy revocable?

Generally revocable, unless coupled with interest

Revocation

A proxy, like agency in general is revocable unless

coupled with an interest and revocation need not
be made by formal notice in writing. Revocation
may be expressed to the proxy holder, to the
election committee, by a subsequent proxy to
another or by sale of the shares. Thus it may be
revoke orally by conduct such that appearing and
asserting the right to vote at a meeting by the
registered owner of the shares revokes a proxy
previously given.

Must be submitted to a validation committee

By-laws of non-stock corporations may deny proxy

voting

What is voting trust agreement?

One created by an agreement between a group of

stockholders of a corporation and a trustee, or a
group of identical agreements between individual
stockholders and a common trustee, whereby it is
provided that for a term o years or for a period
contingent upon a certain event, or until the
agreement is terminated, control over the stock
owned by such stockholders, shall be lodged in the
trustee, either with or without reservation to the

owners or persons designated by them the power

to direct how such control shall be issued.
-

It is a devise of binding stockholders to vote as a

unit and thus assuring a desirable stability and
continuity in management in situations where it is
needed.

What is the effect of a voting trust agreement

relative to the rights?

Lee vs. CA must pass these criteria

1.

That the voting rights of the stock are separated

from the other attributes of ownership;

2.

That the voting rights granted are intended to be

irrevocable for a definite period of time; and,

3.

That the principal purpose of the grant of voting

rights is to acquire voting control of the
corporation.

During the duration of the trust they are

irrevocable unless there is a violation either by
fraud

Requisites

Section 59
Section 59. Voting trusts. - One or more
stockholders of a stock corporation may create a
voting trust for the purpose of conferring upon a
trustee or trustees the right to vote and other
rights pertaining to the shares for a period not
exceeding five (5) years at any time: Provided,
That in the case of a voting trust specifically
required as a condition in a loan agreement, said
voting trust may be for a period exceeding five (5)
years but shall automatically expire upon full
payment of the loan. A voting trust agreement
must be in writing and notarized, and shall specify
the terms and conditions thereof. A certified copy
of such agreement shall be filed with the
corporation and with the Securities and Exchange
Commission; otherwise, said agreement is
ineffective and unenforceable. The certificate or
certificates of stock covered by the voting trust
agreement shall be cancelled and new ones shall
be issued in the name of the trustee or trustees
stating that they are issued pursuant to said
agreement. In the books of the corporation, it shall
be noted that the transfer in the name of the
trustee or trustees is made pursuant to said voting
trust agreement.
The trustee or trustees shall execute and
deliver to the transferors voting trust certificates,
which shall be transferable in the same manner
and with the same effect as certificates of stock.
The voting trust agreement filed with the
corporation shall be subject to examination by any
stockholder of the corporation in the same manner
as any other corporate book or record: Provided,
That both the transferor and the trustee or
trustees may exercise the right of inspection of all
corporate books and records in accordance with
the provisions of this Code.

98

Any other stockholder may transfer his

shares to the same trustee or trustees upon the
terms and conditions stated in the voting trust
agreement, and thereupon shall be bound by all
the provisions of said agreement.

YES he remains to be the owner

Is the stockholder executing in a voting trust

agreement, is he qualified to act as a director?

No voting trust agreement shall be

entered into for the purpose of circumventing the
law against monopolies and illegal combinations in
restraint of trade or used for purposes of fraud.

NO. ceases to be stockholder of record, no longer

the legal owner of shares

May the corporation enforce the voting trust

agreements executed by its stockholders?

NO. NIDC vs. AQUINO

Not a privy to the contract

Rights liabilities of a stockholder are there in their

individual capacity- corporate entity theory

Voting trust agreements

Normally executed in favor of banking and financial

institutions

So that they can vote a certain set of directors

They will be more secured

Voting pull agreement

Enters into an agreement

Pull all their shares to cast one vote

Covered by rules governing contracts

By pulling their votes they

resolution passed by the board

Unless expressly renewed, all rights

granted in a voting trust agreement shall
automatically expire at the end of the agreed
period, and the voting trust certificates as well as
the certificates of stock in the name of the trustee
or trustees shall thereby be deemed cancelled and
new certificates of stock shall be reissued in the
name of the transferors.
The voting trustee or trustees may vote
by proxy unless the agreement provides otherwise.
(36a)

Does it need to be notarized?

Yes, otherwise it is ineffective and unenforceable

Only legal ownership is transferred

Being still the beneficial owner they may transfer

these rights

Is the right granted to a voting trust agreement

absolute? (to inspect)

NO.

The voting trust agreement filed with the

corporation shall be subject to examination by any
stockholder of the corporation in the same manner
as any other corporate book or record. Provided,
that both the transfer and the trustee or trustees
may exercise the right of inspection of all
corporate books and records in accordance with
the provisions of this Code.

Legal title is transferred to the voting trustee

May the voting trustee vote by proxy?

Yes, legal owner may vote by proxy

May the proxy holder vote by proxy?

NO, (AGENT) an agent can have no other agent

unless specifically allowed by the principal

Stockholder executing as a proxy, is he qualified to

be voted as a director?

Why is he qualified to act as a director if the

stockholder executes as a director?

The beneficial owner of the shares in a voting trust

is disqualified to be a director in a voting trust
whereas in a proxy, the owner of the shares may
be elected as such since legal title thereof remains
with him

can

decline

the

END OF MIDTERMS
STOCKS AND STOCKHOLDERS
3 modes
1.

By a contract of subscription with the corporation;

2.

By purchase of
corporation; and,

3.

By purchase or acquisition of shares from existing

stockholders.

Section 60 subscription

Any contract

Whether existing or still to be formed

treasury

shares

from

the

Section 60. Subscription contract. - Any contract

for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed shall be
deemed a subscription within the meaning of this Title,
notwithstanding the fact that the parties refer to it as a
purchase or some other contract. (n)

99

Under the old law the 4th mode is PURCHASE

Purchase

Reciprocal in nature

Purchaser can neither require the issuance

Facultative because it is in his own free will, it is

void

What may be used as a consideration and how

much should be the consideration?

Section 62 provides:

Xco. Inc.

Authorized capital
1M
500
SUBSCRIBED
500
UNISSUED STOCKS (AS LONG AS GALING DITO)
Z wants to acquire 100K
Entered in June 50% shall be down payment remainder
December 08
o
he will not be considered a stockholder unless he
has paid in full

Section 62. Consideration for stocks. Stocks shall not be issued for a consideration less
than the par or issued price thereof. Consideration
for the issuance of stock may be any or a
combination of any two or more of the following:

August 08 property is ravaged by fire all are turned into

shares
Is Z liable to pay the balance of his acquisitions?

1. Actual cash paid to the corporation;

YES, no matter how the party refer to it, it is

considered subscription

2. Property, tangible or intangible, actually

received by the corporation and necessary or
convenient for its use and lawful purposes at a fair
valuation equal to the par or issued value of the
stock issued;

Once you subscribe, you become a stockholder

which is entitled to all the liabilities of a
stockholder

3. Labor performed for or

rendered to the corporation;
4. Previously
corporation;

Z- subscribed to 100T/S of XCo.

Amount he paid 50k
Z did not pay on the date called and was declared a
delinquent share
Corporation paid 100T/S therefore the corporation
reacquired the shares again, what are they called?
-

First example galing sa unissued stock

2nd example galling sa treasury shares hindi sa

unissued share

NO such thing as purchase of unissued stocks

A subscription contract can be conditional provided

there is nothing in the charter or statute
prohibiting it and not against public order, law, etc.

of

the

6. Outstanding shares exchanged for stocks in the

event of reclassification or conversion.
Where the consideration is other than
actual cash, or consists of intangible property such
as patents of copyrights, the valuation thereof
shall initially be determined by the incorporators or
the board of directors, subject to approval by the
Securities and Exchange Commission.

Y- 80T/S DECEMBER 08
40 % (AUGUST) WAS DESTROYED BY FIRE, IS HE STILL
LIABLE TO PAY THE UNPAID PORTION?
IT WAS AGREED THAT IT WAS A PURCHASE AND
WILL BE A STOCKHOLDER ONLY IF PAID IN FULL
IS HE LIABLE?
NO, because that was a purchase

indebtedness

actually

5. Amounts transferred from unrestricted retained

earnings to stated capital; and

Treasury shares

incurred

services

Shares of stock shall not be issued in

exchange for promissory notes or future service.
The same considerations provided for in
this section, insofar as they may be applicable,
may be used for the issuance of bonds by the
corporation.
The issued price of no-par value shares
may be fixed in the articles of incorporation or by
the board of directors pursuant to authority
conferred upon it by the articles of incorporation or
the by-laws, or in the absence thereof, by the
stockholders representing at least a majority of the
outstanding capital stock at a meeting duly called
for the purpose. (5 and 16)

Amounts transferred from unrestricted retained

earnings to stated capital what does it mean?

Must it be in writing?

NO, it may be oral

Stock dividends will in effect

unrestricted retained earnings

5M should it be in writing to be valid and binding

as a subscription?

After 5 years the founders shares may be

converted into common shares or other kinds of
shares

Trillana vs. Quezon College

May shares of stocks

consideration? Why?

Counter proposal, therefore there was a need for

an acceptance

NO, two reasons by the SC, discriminatory against

other stockholders and second unlawful, it

NO, statutes of frauds only applies to SALES

100

be

capitalize

issued

the

without

prejudices the right of the creditors Trust Fund

Doctrine

If issued without a consideration

Section 65, they will be considered as watered

stocks

Subscribers may be compelled to pay the value

Issuance of a certificate of stock is another thing

What are the requisites for the issuance of a valid

certificate of stock?

1.

It must be signed by the president or vicepresident and countersigned by the secretary or

assistant secretary;

2.

It must be sealed with the corporate seal; and the

entire value thereof (together with interest or
expenses, if any) should have been paid.

Quasi-negotiable

Why are they considered quasi-negotiable when it

may be transferred through endorsement and
delivery?

100t/s
001
10/s
B stole and forged the signature
Abcfaith
co.and for value will C acquire title
C is purchaser in good

Section 65. Liability of directors for

watered stocks. - Any director or officer of a
corporation consenting to the issuance of stocks
for a consideration less than its par or issued value
or for a consideration in any form other than cash,
valued in excess of its fair value, or who, having
knowledge thereof, does not forthwith express his
objection in writing and file the same with the
corporate secretary, shall be solidarily, liable with
the stockholder concerned to the corporation and
its creditors for the difference between the fair
value received at the time of issuance of the stock
and the par or issued value of the same. (n)
-

Endorsement from
When issued by owner
Endorsed by owner- strict compliance
ANSWER: a certificate of stock is not regarded as
negotiable in the same sense that a bill or note is
negotiable, even if it is endorsed in blank. Thus, while it
may be transferred by endorsement coupled with delivery
thereof, and therefore merely quasi-negotiable, it is
nonetheless non-negotiable in that the transferees takes it
without prejudice to all the rights and defenses which the
true and lawful owner may have except in so far as the
principles governing estoppels may apply.
He acquired it by virtue of a forged instrument; no matter
how innocent the purchaser is because it is subject to all
the rights and defenses
What if A endorsed it?
-

He is estopped, unless there are other available

defenses

Transfer is required to be recorded in the books of

the corporation, however even if not recorded, it
will be valid between the parties. Non-registration
will not however, affect the validity thereof at least
in so far as the contracting parties are concerned.

While it appears, that a subscriber to shares of

stock cannot be entitled to the issuance of a
certificate of stock until the full amount of his
subscription together with interest and expenses
(in case of delinquent shares) if any is due, has
been paid, a subscriber to shares of stock, even if
not yet fully paid, is entitled to exercise all the
rights of a stockholder and the corresponding
liability that attach thereunder. Thus, the Code
provides:
Section 72. Rights of unpaid shares. Holders of subscribed shares not fully paid which
are not delinquent shall have all the rights of a
stockholder. (n)
Is the issuance of a certificate of stock necessary
to consider the subscriber a stockholder?

NO, shall be considered a stockholder even without

a certificate of stock

Instances when he may not be able to exercise his

rights as such stockholder

Declared delinquent

When he exercises his appraisal right

Are certificate of stocks transferrable?

YES

Are certificate of stocks considered negotiable?

Section 63. Certificate of stock and

transfer of shares. - The capital stock of stock
corporations shall be divided into shares for which
certificates signed by the president or vice
president, countersigned by the secretary or
assistant secretary, and sealed with the seal of the
corporation shall be issued in accordance with the
by-laws. Shares of stock so issued are personal
property and may be transferred by delivery of the
certificate or certificates indorsed by the owner or
his attorney-in-fact or other person legally
authorized to make the transfer. No transfer,
however, shall be valid, except as between the
parties, until the transfer is recorded in the books
of the corporation showing the names of the
parties to the transaction, the date of the transfer,
the number of the certificate or certificates and the
number of shares transferred.
No shares of stock against which the
corporation holds any unpaid claim shall be
transferable in the books of the corporation. (35)

101

Until registration is accomplished, the transfer,

though valid between the parties, cannot be
effective as against the corporation. Thus the,
unrecorded transfer cannot enjoy the status of a
stockholder; he cannot vote nor be voted for, and
he will not be entitled to dividends. The

corporation will be protected when it pays dividend

to the registered owner despite a previous transfer
of which it had no knowledge. The purpose of
registration therefore is twofold: to enable the
transferee to exercise all the rights of a
stockholder and to inform the corporation of any
change in shares ownership so that it can ascertain
the persons entitled to the rights and subject to
the liabilities of a stockholder.

NO, it is not an absolute transfer

Will not affect the transfer through mortgage

Absolute and unconditional transfer

Only the transfer or absolute conveyance of the

ownership of the title to a share need be entered
and noted upon the books of the corporation in
order that such transfer may be valid, therefore,
inasmuch as a chattel mortgage of the aforesaid
title is not a complete and absolute alienation of
the dominion and ownership thereof, its entry and
notation upon the books of the corporation is not
necessary requisite to its validity

Chua guan vs. Magsasaka

Was the mortgage valid and effective as against

subsequent third parties

Duty of the secretary is ministerial, hence

mandamus will lie if the secretary refuses to record
the transfer, but he cannot be compelled when the
transferees title to the said shares has no prima
facie validity or uncertain

Register of deeds where the corporation resides

and if different in the register of deeds of owners
domicile

Unson vs. Dinamito

All transferred not register will not have a valid

force and effect

Transfer- absolute and unconditional transfer to

warrant registration in the books of the corporation
in order to bind the latter and other third persons.

Right to transfer may be regulated

May not be unreasonably restricted

Other restrictions on the right to transfer shares

would include:

Violation of nationalization law- Central Bank

3.

To afford the corporation an opportunity to object

or refuse registration of the transfer in case
allowed by law;

4.

To avoid fictitious and fraudulent transfers; and,

5.

To protect creditors who have the right to look

upon stockholders, in case of no-payment or
watered shares, for the satisfaction of their claims.

to

know

who

its

1.

It is not valid, except as between the parties, until

recorded in the books of the corporation;

2.

Shares of stock against which the corporation

holds any unpaid claim shall not be transferable in
the books of the corporation; unpaid claims, refer
to claims arising from unpaid subscription and not
to any indebtedness which a stockholder may owe
the corporation such as monthly dues;

4.

Those covered by reasonable agreement of the

parties.

To enable the transferee to exercise his rights a s

stockholders;

3.

6.

Does it include mortgage?

2.

Sale to aliens in violation of maximum ownership

of shares under the Nationalization Laws;

To enable the corporation

stockholders are;

5.

Monserat vs. Ceron

Thus, it was also ruled by the High Court

in Nautica Canning Corp. vs. Yumul that
A transfer of shares not recorded in the
stock and transfer book of the corporation
is non-existent in so far as the corporation
is concerned. This is so because the
corporation looks only through its books
for the purpose of determining who its
stockholders are.
Registration is necessary for the following:

1.

the transferee 40% of the capital of the public

service company;

Lambert vs. Fox

-

Valid , may be reasonably regulated, restricted by

agreement of parties

Reasonable agreement by the parties

Reasonable as to length of time

Padgett vs. Babcock

Restrictions required to be indicated in the articles

of incorporation, by-laws and stock certificates of a
close corporation;
Restrictions imposed by special law, such as the
Public Service Act requiring the approval of the
government agency concerned if it will vest unto

102

Any attempt to restrain transfer

SC, in the absence of a valid lien upon its shares

Valid restrictions shares are applicable

Any restriction on a stockholders right to dispose

of his shares must be construed strictly; and any
attempt to restrain a transfer of shares is regarded
as being in restraint of trade, in the absence of a
valid lien upon its shares, and except to the extent
that valid restrictive regulations and agreements
exist and are applicable. Subject only to such
restrictions, a stockholder cannot be controlled in
or restrained from exercising his right to transfer
by the corporation or its officers or by other
stockholders, even though the sale is to a
competitor of the company, or to an insolvent
person, or even though a controlling interest is
sold to one purchaser.

Certificate of stocks are transferrable

By endorsement and delivery

certificate to the transferee

In order to be valid, must be registered in the

books. If not, will only be binding among parties

How may shares of stock be transferred?

Endorsement of stock certificate by owner or

attorney-in-fact with delivery

of

the

Petitioner failed to establish a clear legal right and

alleged ownership is without merit

Did not acquire ownership by virtue of the contract

of pledge

In a contract of pledge there must be foreclosure

In the case there was no attempt to foreclose

Petitioner must have a prima facie right

Nava vs. Peers Marketing

stock

A stock subscription is a subsisting liability from

the time the subscription is made

The subscriber is as much bound to pay his

subscription as he would be to pay any other debt

No stock certificate was issued. Without stock

certificate, which is the evidence of ownership of
corporate stock, the assignment of corporate
shares is effective only between the parties to the
transaction

Exception to the general rule

Rural Bank of Lipa vs. CA

Embassy farms vs. CA

-

Must be endorsed by owner or attorney-in-fact

coupled with delivery

Endorsed not delivered

Proper mode and manner must be complied with

Razon vs. IAC

By notarized deed

Certificate of stocks already issued must

coupled with delivery, exception (TAN vs. SEC)

Stock certificate has already been issued it must

be coupled with the delivery

After certificate of stock is issued, may it be

effectively transferred even without endorsement
or delivery of the stock certificate?

Person sought to be a stockholder is an officer and

has custody

be

Delivered not endorsed

Reverse of Embassy Farms

Endorsement alone is not sufficient nor delivery

without endorsement is not allowed

Endorsement plus delivery is mandatory

Endorsement and delivery is not necessary (TAN

vs. SEC)

Is there any other mode of transferring stock?

Tan vs. SEC (FULL KNOWLEDGE, HE IS ESTOPPED)

Notarized deed

Deed of assignment

Persons sought to be stockholder is officer and has

custody of the book (estopped)

General Rule for valid transfer

Certificate of stock must be endorsed by owner or

attorney-in-fact coupled with delivery

Exceptions

Section 63 uses the word may

Showing that there may be other modes of

transferring shares

Is there a time frame or fixed period as when

transfer can be made?

Rural bank of Salinas vs. CA

-

If denied or refused
mandamus will lie

without

good

cause,

Tay vs. CA
-

Mandamus may issue if petition has a clear legal

right
Never issued in doubtful cases

103

NO, (WON vs. WACK WACK)

A found out what happened and goes to the

corporation who has a better title C or A?

Won vs. Wack Wack

-

Valid between contracting parties even if not

recorded in corporation books

Right accrues only if refused

Statute of limitations does not apply in registration

of shares of stock

Must determined from the time of refusal

Why are they non-negotiable when they may be

transferred?

Transferees pays it without prejudice to all the

rights and defenses as the true and lawful owner
may have under the law except insofar as such
rights and defenses are subject to the limitations
imposed by the principles governing estoppels

- A, A cannot be deprived of his right by virtue of an

unauthorized transfer

- D will acquire title took the shares not by virtue of a

forged or unauthorized transfer, but on the reliance
that the stock certificate is valid and owned by C

Stock certificate now in possession of D. A knew of

what happened and went to the corporation and
complains. Who will have a better title?

the corporation may be compelled to recognize

both,
A as stockholder (non-negotiable) D,
reliance that the stock certificate is valid and
existing and owned by C

De los Santos vs. Republic

Why is he, not considered as the owner of shares?
When it has been said that when endorsed by the
owner it is considered as strict certificate? Because
certificate of stocks are non-negotiable

Although a stock-certificate is sometimes regarded

as quasi-negotiable, in the sense that it may be
transferred by endorsement, coupled with delivery,
it is well settled that the instrument is nonnegotiable, because the holder thereof takes it
without prejudice to such rights or defenses as the
registered owner or creditor may have under the
law, except insofar as such rights or defenses are
subject to the limitations imposes by the principles
governing estoppels.

Unauthorized issuance of stock certificates

100/s

100
XYZCo

100 pesos per share

Stolen by B and forged the signature of A
B sells to C will C acquire title? NO

ENDORSEMENT FORM
C armed with the endorsement form certificate, sold
to D (innocent purchaser for value), will D acquire
title?
-

Corporation can compel C to deliver the new stock

certificate because he made a representation that
the certificate where good.
Armed with the new certificate issued to C, C
delivers to D a purchaser in good faith and for
value will D acquire title?

NO, subject to such rights and defenses as the true

and lawful owner may have

What if C now goes to the corporation and presents

the form?
- Then the corporation shall cancel the old certificate
and issues a new one, now in the name of C, now
registered in the name of C, will C acquire title?

Forged transfers

If the corporation should issue a new certificate in

pursuance of a forged transfer, the corporation
incurs no liability to the person in whose favor it is
issued and it may demand its return for
cancellation. The corporation in such case has
been guilty of no misrepresentation. On the other
hand, it is the duty of the purchaser to determine
that the indorsement of the owner is genuine.
However, if the new certificate issued to the
purchaser comes into the hands of a bona fide
purchaser for value, the corporation will be
stopped from denying validity thereof, since by
issuing such new certificate it represents that the
person named therein is a stockholder of the
corporation. The corporation is thus forced to
recognize both the original certificate and new
certificate-the original, because the true owner
could not be deprived of his title by a forged
transfer,
and
the
new,
because
of
its
representation that the person named therein is
the owner of shares in the corporation. But if the
recognition of both stockholders would result in an
over issue of shares, then only the original and
true owner can be recognized as a stockholder. The
bona fide purchaser of the new certificate will
however have a right of damages against the
corporation. The corporation, in turn, would have a
right of action against the person who made false
representations and in whose favor it issued a new
certificate. The true owner of the shares which
were wrongfully transferred would of course have a
right to compel the corporation to issue him a
certificate in lieu of the original one which was
wrongfully cancelled.

Authorized capital stock 1M shares

104

 All are subscribed who will the corporation recognize

as rightful owner A or D? if both will be recognized
there will be over issuance

effectivity of this Code within which to comply with

the same. (n)

- only A citing citizens national bank vs. state (but if

recognition of both stockholders would result in an
over issue of shares, then only the original and
true owner can be recognized as a stockholder)
-

by virtue of the doctrine of non-negotiability of

certificate of stocks

The true and lawful owner will never be deprived of

his rights
What happens to D?

- D will have a cause of action against the corporation

for the value of his acquisition cost inclusive of
damages, attorneys fees and cost of suit

D sues the corporation for the value of his

acquisition cost, inclusive of damages, attorneys
fees and cost of suit. What may the corporation
do?

- NO defense, no valid defense, because it was

represented to other parties that the certificate of
stocks is valid, subsisting, etc.

2nd situation, what cause of action may the

corporation have? Remedy?

- Third party complaint against C, but what if he is a

purchaser for value? 4th party claim against B

When may certificate of stocks be issued?

Section 64 provides:

1.
2.

3.

Section
64.
Issuance
of
stock
certificates. - No certificate of stock shall be issued
to a subscriber until the full amount of his
subscription together with interest and expenses
(in case of delinquent shares), if any is due, has
been paid. (37)

4.

1.

A certificate of stock cannot be issued unless he

fully paid the amount subscribed
Subscription to the capital stocks of the
corporation are indivisible
Clear mandate of section 148 of the code is that
the ruling of the court in Baltazar vs. Lingayen
Gulf, no longer holds true

2.

3.

Section 148. Applicability to existing

corporations. - All corporations lawfully existing
and doing business in the Philippines on the date
of the effectivity of this Code and heretofore
authorized, licensed or registered by the Securities
and Exchange Commission, shall be deemed to
have been authorized, licensed or registered under
the provisions of this Code, subject to the terms
and conditions of its license, and shall be governed
by the provisions hereof: Provided, That if any
such corporation is affected by the new
requirements of this Code, said corporation shall,
unless otherwise herein provided, be given a
period of not more than two (2) years from the

1.

2.

105

Subscription to shares of stocks are indivisible

Also apparent is that once a subscriber has paid
his subscription in full, he becomes entitled to be
issued a stock certificate and in the event that the
corporation refuses to do so, the stockholder my
institute a case for mandamus with damages.
Thus, it has been said that the duty of the
corporate officers to issue stock certificates to
those entitled thereto is a ministerial duty
enforceable by mandamus.
Fua Cun vs. Summers and China Banking Corp.
The court erred in holding the plaintiff as the
owner of 250 shares of stock; the plaintiffs rights
consist in equity in 500 shares and upon payment
of the unpaid portion of the subscription price he
becomes entitled to the issuance of certificate for
said 500 shares in his favor.
No certificate of stock until the full amount has
been paid.
Watered stock
One which is issued by the corporation as fully
paid-up shares, when in fact the whole amount of
the value thereof has not been paid.
Basis is par value and not the fair market value
Section 62 states that stocks shall not be issued
for a consideration less than par or issued price
thereof, while section 13 states that in no case
shall be paid-up capital be less than five thousand
[P5000] pesos.
If issued below par, issued value considered as
water
How may watered stocks be issued?
For a monetary consideration less than its par or
issued value;
For a consideration in property, tangible or
intangible, valued in excess of its fair market
value;
Gratuitously or under an agreement that nothing
shall be paid at all; or
In the guise of stock dividends when there are no
surplus profits of the corporation.
Why is stock watering illegal?
The corporation is deprived of its capital thereby
hurting its business prospects, financial capability
and responsibility;
Stockholders who paid their subscriptions in full, or
promised to pay the same, are injured and
prejudiced by the reduction of their proportionate
interest in the corporation; and,
Present and future creditors are deprived of the
corporate assets for the protection of their
interest.
Corporation is prejudiced
Stockholders, dilution of interest
Creditors are prejudiced, virtue of right to look
upon corporations properties for the satisfaction of
their claims
What is the effect of issuance of watered stocks
As to the corporation - when a corporation is guilty
of ultra-vires or illegal acts which constitute an
injury to or fraud upon the public, or which will
tend to injure or defraud the public, the State may
institute a quo-warranto proceeding to forfeit its
charter for the misuse or abuse of its franchise.
As between the corporation and the subscriberThe subscription is void. Such being the case, the

3.
4.

5.

6.

subscriber is liable to pay the full par or issued

value thereof, to render it valid and effective.
As to the consenting stockholders - They are
stopped from raising any objection thereto;
As to dissenting stockholders - In view of the
dilution of their proportionate interest in the
corporation, they may compel the payment of the
water in the stock solidarily against the
responsible and consenting directors and officers
inclusive of the holder of the watered stocks;
As to creditors - They may enforce payment of the
difference in the price, or the water in the stock,
solidarily against the responsible directors/officers
and the stockholders concerned; and
As against transferees of the watered stock His
right is the same as that of his transferor. If,
however, a certificate of stock has been issued and
duly indorsed to a bona fide purchaser, without
knowledge, actual or constructive, the latter
cannot be held liable, at least as against the
corporation, since he took the shares on reliance of
the misrepresentation made by the corporation
that the stock certificate is valid and subsisting.
This is because a corporation is prohibited from
issuing certificates of stock until the full value of
the subscriptions have been paid and could not,
therefore, deny the validity of the stock certificate
it issued as against a purchaser in good faith.
Thus, Ballentine states that whether there is any
liability on the part of the transferee of watered
stock is made to depend upon whether he acquired
the same without notice, either as purchaser or
donee. If he had knowledge thereof, he is subject
to the same liability as his transferor.
What is the nature of the liability of the corporate
directors consenting to the issuance of watered
stocks and the extent of their liabilities?
Solidarily liable with the holder of the watered
stocks to the extent of the water from said shares
of stocks
Will all the directors be liable? What if you objected
will you also be liable?
If you do not issue a written objection, you are still
liable
Even passive directors may be liable
Those having knowledge thereof, but did not
interpose their objection shall be liable

A
B
C
D
E
There is a denial of pre-emptive rights and directors
A,B,C,D,E decided to issue the remaining 50M and
subscribed for 10M each at 2 per share.
Is there stock watering if the fair market value is
12.00?
No stock watering
The basis is the par value
The shares where in fact paid more than the par
value indicated in the articles of incorporation
3 days later they sold their 10M share for P11.00 each,
therefore making a profit.
Can you question there actuations? What would be
the cause of action?
It may be questioned.
Duty of loyalty or fiduciary duty as such directors
They cannot advance their own motives to the
damage prejudice of the corporation which they
represents and stockholders as a whole instead of
it being sold outside
500M would have gone to the coffers of the
corporation, 500M should be there for the
protection of creditors
They are placed in a fiduciary relationship
Sila lang ba ang kikita, pano naman yung
corporation, opportunity na yun para kumita
When are unpaid subscriptions due and payable?
Section 67. Payment of balance of subscription. Subject to the provisions of the contract of
subscription, the board of directors of any stock
corporation may at any time declare due and
payable to the corporation unpaid subscriptions to
the capital stock and may collect the same or such
percentage thereof, in either case with accrued
interest, if any, as it may deem necessary.
Payment of any unpaid subscription or any
percentage thereof, together with the interest
accrued, if any, shall be made on the date specified
in the contract of subscription or on the date
stated in the call made by the board. Failure to pay
on such date shall render the entire balance due
and payable and shall make the stockholder liable
for interest at the legal rate on such balance,
unless a different rate of interest is provided in the
by-laws, computed from such date until full
payment. If within thirty (30) days from the said
date no payment is made, all stocks covered by
said
subscription
shall
thereupon
become
delinquent and shall be subject to sale as
hereinafter provided, unless the board of directors
orders otherwise. (38)

Section 65 provides:
Section 65. Liability of directors for
watered stocks. - Any director or officer of a
corporation consenting to the issuance of stocks
for a consideration less than its par or issued value
or for a consideration in any form other than cash,
valued in excess of its fair value, or who, having
knowledge thereof, does not forthwith express his
objection in writing and file the same with the
corporate secretary, shall be solidarily, liable with
the stockholder concerned to the corporation and
its creditors for the difference between the fair
value received at the time of issuance of the stock
and the par or issued value of the same. (n)

ACS-100M
100M/S
1.00
SUBSCRIBED-50M
VALUE-12.00/S
UNSUBSCRIBED-50M

PAR

VALUE-

FAIR

MARKET

106

Remedies of the corporation to enforce payment of

unpaid subscription

1.

By board action in accordance with the procedure

laid down in sections 67 to 69 of the code

2.

By a collection case in court as provided for in

section 70

Are subscribers of shares of stocks not fully paid,

liable to pay interest?

General rule is they are not liable to pay interest

because the code says unless requires in the bylaws

Aside from the mandate of the law that subscribers

to shares of stock must pay the full value of their
subscription, they may likewise be required to pay
interest on all unpaid subscriptions if so imposed in
the contract or in the corporate by-laws at such
rate as may be indicated thereat or the legal rate if
not so fixed. Unless so required or provided,
however, subscribers to shares of stock, not fully
paid, are not liable to pay interest on their unpaid
subscriptions. The code thus provides:

of stock covered by the subscription shall be

vested in the corporation as treasury shares and
may be disposed of by said corporation in
accordance with the provisions of this Code. (39a46a)

Who is the winning bidder in a delinquency sale?

Bidder who shall offer to pay the full amount of

the balance on the subscription together with
accrued interest, cost of advertisement and
expenses of sale, for the smallest number of
shares or fraction of a share.
X Co. has 1M authorized capital stock

Section
66.
Interest
on
unpaid
subscriptions. - Subscribers for stock shall pay to
the corporation interest on all unpaid subscriptions
from the date of subscription, if so required by,
and at the rate of interest fixed in the by-laws. If
no rate of interest is fixed in the by-laws, such rate
shall be deemed to be the legal rate. (37)

Until a call is made, they are not due and payable,

but still subject to the provisions of the contracts

Procedures in case of sale of delinquent stocks

Section 68. Delinquency sale. - The board of

directors may, by resolution, order the sale of
delinquent stock and shall specifically state the
amount due on each subscription plus all accrued
interest, and the date, time and place of the sale
which shall not be less than thirty (30) days nor
more than sixty (60) days from the date the stocks
become delinquent.

500 thousand is already subscribed

A subscribed to 100 thousand shares, 50 thousand
is already paid leaving 50 thousand unpaid
The corporation is at a loss of 250 thousand, the
board decides to make a call for the payment of
the unpaid subscriptions, however A could not
paid, hence declared delinquent and decides to sell
his share at a public auction
55 thousand is to be paid, remaining balance plus
cost and expenses
BIDDERS:
X-55K FOR 99,900 shares
Y-55K FOR 99,500 shares
Z-55K FOR 99,000 shares (winning bidder)

Notice of said sale, with a copy of the

resolution, shall be sent to every delinquent
stockholder either personally or by registered mail.
The same shall furthermore be published once a
week for two (2) consecutive weeks in a
newspaper of general circulation in the province or
city where the principal office of the corporation is
located.

Assume there is no bidder, may the corporation

bid?

NO. It cannot bid because the law says, subject to

the provisions of this CODE. Section 68 and 41
should be reconciled. Section 68 states that:
Should there be no bidder at the public
auction who offers to pay the full amount of the
balance on the subscription together with accrued
interest, costs of advertisement and expenses of
sale, for the smallest number of shares or fraction
of a share, the corporation may, subject to the
provisions of this Code, bid for the same, and
the total amount due shall be credited as paid in
full in the books of the corporation. Title to all the
shares of stock covered by the subscription shall
be vested in the corporation as treasury shares
and may be disposed of by said corporation in
accordance with the provisions of this Code. (39a46a)

Unless the delinquent stockholder pays to

the corporation, on or before the date specified for
the sale of the delinquent stock, the balance due
on his subscription, plus accrued interest, costs of
advertisement and expenses of sale, or unless the
board of directors otherwise orders, said
delinquent stock shall be sold at public auction to
such bidder who shall offer to pay the full amount
of the balance on the subscription together with
accrued interest, costs of advertisement and
expenses of sale, for the smallest number of
shares or fraction of a share. The stock so
purchased shall be transferred to such purchaser in
the books of the corporation and a certificate for
such stock shall be issued in his favor. The
remaining shares, if any, shall be credited in favor
of the delinquent stockholder who shall likewise be
entitled to the issuance of a certificate of stock
covering such shares.

There was no unrestricted retained earnings in the

example given therefore the corporation cannot bid
, section 41, it states that:
Section 41. Power to acquire own
shares. - A stock corporation shall have the power
to purchase or acquire its own shares for a
legitimate
corporate
purpose
or
purposes,
including but not limited to the following cases:
Provided, That the corporation has unrestricted
retained earnings in its books to cover the
shares to be purchased or acquired:

Should there be no bidder at the public

auction who offers to pay the full amount of the
balance on the subscription together with accrued
interest, costs of advertisement and expenses of
sale, for the smallest number of shares or fraction
of a share, the corporation may, subject to the
provisions of this Code, bid for the same, and the
total amount due shall be credited as paid in full in
the books of the corporation. Title to all the shares

1. To eliminate fractional shares arising out of

stock dividends;

107

2. To collect or compromise an indebtedness to the

corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent
shares sold during said sale; and

Apocada vs. NLRC

3. To pay dissenting or withdrawing stockholders

entitled to payment for their shares under the
provisions of this Code. (a)

What if the shares of A were sold without

compliance of the requirements? May A question
the sale?

The law prescribes two conditions before an action

to recover delinquent stocks irregularly sold may
be allowed. These are:

1.

The party seeking to maintain such action first

pays or tenders to the party holding the stock the
sum for which the same was sold, with interest
from the date of the sale at the legal rate; and,

2.

The action shall be commenced by the filing of a

complaint within six months from the date of the
sale.

The reason for such is the stability of transactions

of the shares of stock

Suppose in the example, since there are no

unrestricted
retained
earnings,
hence
the
corporation cannot bid, is the corporation left
without any recourse?

Section 70. Court action to recover unpaid

subscription. - Nothing in this Code shall prevent
the corporation from collecting by action in a court
of proper jurisdiction the amount due on any
unpaid subscription, with accrued interest, costs
and expenses. (49a)

Set-off is without any legal basis

It was premature

Unpaid subscriptions will become due and payable

only upon certain instance

Call or if there is a stipulation in contract

If no call and no stipulation in contract then it will

not be demandable or payable at all
Lumanlan vs. Cura

PNB vs. Bitulak

-

Where it not for the promise, the defendants would

have not subscribed

Trust Fund Doctrine, it is established doctrine that

subscriptions to the capital of a corporation
constitute a fund to which creditors have a right to
look for satisfaction of their claims and that the
assignee in insolvency can maintain an action upon
any unpaid stock subscription in order to realize
assets for the payment of its debts.

A corporation has no power to release an original

subscriber to its capital stock from the obligation of
paying for his shares, without a valuable
consideration for such release; and as against
creditors a reduction of the capital stock can take
place only in the manner and under the conditions
prescribed by the statute or the charter or the
articles of incorporation.

Velasco vs. Poizat

-

The subscriber is as much bound

amount of the share subscribed by
would be to pay any other debt, and
the company to demand payment
incontestable.

to pay the
him as he
the right of
is no less

Edward Keller and Co. vs. COB

Two available remedies: the first and most special

remedy given by the statute consist in permitting
the corporation to put up the unpaid stock and
dispose of it for the account of the delinquent
subscriber. The other remedy is by action in court.

May the stockholder be held liable for the debts of

the corporation? YES. To the extent of their unpaid
subscription

As to the liability of the stockholders, it is settled

that a stockholder is personally liable for the
financial obligations of a corporation to the extent
of his unpaid subscriptions

Is there a prescriptive period wherein a demand

for unpaid subscription should be made?

NO. Garcia vs. Suarez case

De Silva vs. Aboitiz and Co.

-

Discretionary on the part of the board of directors

to do whatever is provided in the said article
relative to the application of the part of the 70
percent of the profit distributable in equal parts on
the payment of the shares subscribed to and fully
paid

Garcia vs. Suarez

Lingayen Gulf vs. Baltazar

-

Trust Fund Doctrine- subscription to the capital of

a corporation constitute a fund to which the
creditors have a right to look for satisfaction of
their claims and that the assignee in insolvency
can maintain an action upon any unpaid stock
subscription in order to realize assets for the
payment of its debts.

Exception: pursuant to a bona fide compromise or

to set off a debt due from the corporation, a
release supported by consideration, will be
effectual as against dissenting stockholders and
subsequent and existing creditors. A release which
might originally have been held invalid may be
sustained after a considerable lapse of time

108

Never became due and payable until there is a call

made

Prescription will not run until and unless there is

demand

Prescription should be determined from the time

demand has been made and not from the time of
subscription

If declared delinquent, what would be the effect as

to the owner of said shares?

Section 71. Effect of delinquency. - No delinquent

stock shall be voted for or be entitled to vote or to
representation at any stockholder's meeting, nor
shall the holder thereof be entitled to any of the
rights of a stockholder except the right to
dividends in accordance with the provisions of this
Code, until and unless he pays the amount due on
his subscription with accrued interest, and the
costs and expenses of advertisement, if any. (50a)

However if the shares are not delinquent,

subscribers to the capital of a corporation, though
not fully paid, are entitled to all the rights of a
stockholder, according to section 72

Stock corporations are prohibited from

retaining surplus profits in excess of one hundred
(100%) percent of their paid-in capital stock,
except: (1) when justified by definite corporate
expansion projects or programs approved by the
board of directors; or (2) when the corporation is
prohibited under any loan agreement with any
financial institution or creditor, whether local or
foreign, from declaring dividends without its/his
consent, and such consent has not yet been
secured; or (3) when it can be clearly shown that
such retention is necessary under special
circumstances obtaining in the corporation, such as
when there is need for special reserve for probable
contingencies. (n)

Section 72. Rights of unpaid shares. Holders of subscribed shares not fully paid which
are not delinquent shall have all the rights of a
stockholder. (n)

May the rules governing delinquency sale apply to

a non-stock corporation? Are there unpaid shares
in a non-stock corporation?

Rules
governing
stock
corporations,
when
applicable, also applies to a non-stock corporation

There are delinquent shareholders also in a nonstock corporation. Example is membership dues

A corporation paid 50% of subscription and was

later on declared delinquent when he could not pay
upon call; A is also a director of the corporation.
Will A, upon declaration of delinquency , still be
able to exercise his right as a director?

Yes, he loses all his right as a stockholder except

his right to receive dividends

He remains to be a director, only qualification to be

a director is he must own at least 1 share and
since it still stands in his name pending the sale,
he remains to be and act as a director

Even if there is sale, he may still be director

because the winning bidder may not bid or pay for
all the shares or there might be remaining shares,
which would be credited in favor of the delinquent
stockholder

Section 43 provides:

When a certificate of stock is loss or destroyed,

what must be done by the owner thereof?

Section 73. Lost or destroyed certificates. - The

following procedure shall be followed for the
issuance by a corporation of new certificates of
stock in lieu of those which have been lost, stolen
or destroyed:
1. The registered owner of a certificate of
stock in a corporation or his legal representative
shall file with the corporation an affidavit in
triplicate
setting
forth,
if
possible,
the
circumstances as to how the certificate was lost,
stolen or destroyed, the number of shares
represented by such certificate, the serial number
of the certificate and the name of the corporation
which issued the same. He shall also submit such
other information and evidence which he may
deem necessary;
2. After verifying the affidavit and other
information and evidence with the books of the
corporation, said corporation shall publish a notice
in a newspaper of general circulation published in
the place where the corporation has its principal
office, once a week for three (3) consecutive
weeks at the expense of the registered owner of
the certificate of stock which has been lost, stolen
or destroyed. The notice shall state the name of
said corporation, the name of the registered owner
and the serial number of said certificate, and the
number of shares represented by such certificate,
and that after the expiration of one (1) year from
the date of the last publication, if no contest has
been presented to said corporation regarding said
certificate of stock, the right to make such contest
shall be barred and said corporation shall cancel in
its books the certificate of stock which has been
lost, stolen or destroyed and issue in lieu thereof
new certificate of stock, unless the registered
owner files a bond or other security in lieu thereof
as may be required, effective for a period of one
(1) year, for such amount and in such form and
with such sureties as may be satisfactory to the
board of directors, in which case a new certificate
may be issued even before the expiration of the
one (1) year period provided herein: Provided,
That if a contest has been presented to said
corporation or if an action is pending in court
regarding the ownership of said certificate of stock
which has been lost, stolen or destroyed, the
issuance of the new certificate of stock in lieu
thereof shall be suspended until the final decision
by the court regarding the ownership of said
certificate of stock which has been lost, stolen or
destroyed.

Section 43. Power to declare dividends. The board of directors of a stock corporation may
declare dividends out of the unrestricted retained
earnings which shall be payable in cash, in
property, or in stock to all stockholders on the
basis of outstanding stock held by them: Provided,
That any cash dividends due on delinquent stock
shall first be applied to the unpaid balance on the
subscription plus costs and expenses, while stock
dividends shall be withheld from the delinquent
stockholder until his unpaid subscription is fully
paid: Provided, further, That no stock dividend
shall be issued without the approval of
stockholders representing not less than two-thirds
(2/3) of the outstanding capital stock at a regular
or special meeting duly called for the purpose.
(16a)

109

Except in case of fraud, bad faith, or

negligence on the part of the corporation and its
officers, no action may be brought against any
corporation which shall have issued certificate of
stock in lieu of those lost, stolen or destroyed
pursuant to the procedure above-described. (R.A.
201a)
-

The rationale of the above-quoted law is to avoid

duplication of certificates of stock and the
avoidance of fictitious and fraudulent transfers.

When will the replacement certificate be issued?

The code provides that:

suffered by the corporation, its stockholders or

members and other persons.
When a director, trustee or officer
attempts to acquire or acquires, in violation of his
duty, any interest adverse to the corporation in
respect of any matter which has been reposed in
him in confidence, as to which equity imposes a
disability upon him to deal in his own behalf, he
shall be liable as a trustee for the corporation and
must account for the profits which otherwise would
have accrued to the corporation. (n)

after the expiration of one (1) year

from the date of the last publication, if no
contest has been presented to said corporation
regarding said certificate of stock, the right to
make such contest shall be barred and said
corporation shall cancel in its books the certificate
of stock which has been lost, stolen or destroyed
and issue in lieu thereof new certificate of stock,

Could it be issued earlier than 1 year?

Yes it can be, the code states that:

unless the registered owner files a bond
or other security in lieu thereof as may be
required, effective for a period of one (1) year, for
such amount and in such form and with such
sureties as may be satisfactory to the board of
directors, in which case a new certificate may
be issued even before the expiration of the
one (1) year period provided herein: Provided,
That if a contest has been presented to said
corporation or if an action is pending in court
regarding the ownership of said certificate of stock
which has been lost, stolen or destroyed, the
issuance of the new certificate of stock in lieu
thereof shall be suspended until the final decision
by the court regarding the ownership of said
certificate of stock which has been lost, stolen or
destroyed.

Certificate of stock was lost, the owner transfers

his shares by way of a notarized deed will it be
valid?

He cannot do so, if a certificate of stock is issued

by a corporation, a mere notarized deed will not
suffice

Deed of assignment was not sufficient since there

was no endorsement (Rural Bank of Lipa vs. CA)

Rights and liabilities of stockholders

RIGHTS

1.

Participation in the management of the corporate

affairs by exercising their right to vote and be
voted upon either personally or by proxy as
provided for under sections 50 and 58 of the code;

2.

To enter into a voting trust agreement subject to

the procedure, requirements and limitations
imposed under section 50;

3.

To receive dividends and to compel

declaration if warranted under section 43;

4.

To transfer shares of stock subject only to

reasonable restrictions such as options and
preferences as may be allowed by law inclusive of
the right of the transferee to compel the
registration of the transfer in the books of the
corporation as provided for in section 63;

their

May corporate officers be held liable for the

unauthorized issuance?

5.

To be issued a certificate of stock for fully paid-up

shares in accordance with 64;

YES, the code provides that:

6.

To exercise pre-emptive rights as provided for in

section 39;

7.

To exercise their appraisal right in accordance with

the provision of section 81 and in those instance
allowed by law such as section 42 and 105;

8.

To institute and file a derivative suit;

9.

To recover shares of stock unlawfully sold for

delinquency as may be allowed under section 69;

Except in case of fraud, bad faith, or

negligence on the part of the corporation and its
officers, no action may be brought against any
corporation which shall have issued certificate of
stock in lieu of those lost, stolen or destroyed
pursuant to the procedure above-described. (R.A.
201a)

Assuming the last paragraph is not there; would it

be not the same, that they should be held liable
due to fraud, bad faith or negligence?

10. To inspect the books of the corporation subject

only to the limitations imposed by section 73;

YES. Section 31 provides that:

11. To be furnished by the most recent financial

statement of the corporation as by section 75;

Section 31. Liability of directors, trustees

or officers. - Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful
acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of
the corporation or acquire any personal or
pecuniary interest in conflict with their duty as
such directors or trustees shall be liable jointly and
severally for all damages resulting there from

12. To be issued a new stock certificate in lieu of the

lost or destroyed one subject to the procedure laid
down in section 73;
13. To have the corporation dissolved under section
118 to 121, and section 105 in a close corporation;

110

14. To participate in the distribution of the assets of

the corporation upon dissolution under section
122;
15. In the case of a close corporation, to petition the
SEC to arbitrate in the event of a deadlock as
allowed under section 104; and,
16. Also in the case of a close corporation, to withdraw
therefrom, for my reason, and compel the
corporation to purchase his shares as provided for
under section 105.

111

LIABILITIES

1.

To pay to the corporation the balance of his unpaid

subscriptions subject to the provision of section 67
to 70;

2.

To pay interest on his unpaid subscription if

required by the by-laws or by the contract of
subscription in accordance with section 66;

3.

To answer to the creditors for the unpaid portion of

his
subscription
under
the
TRUST
FUND
DOCTRINE;

4.

To answer the water in his stocks as provided for

in section 65;

5.

To be liable, as general partners, for all debts,

liabilities and damages of a determinable
corporation as envisioned under section 21
(corporation by estoppel); and,

6.

To be personally liable for torts, in the event that a

stockholder in a close corporation actively
participates in the management of the corporate
affairs.

trustees, the liability under this section for such

action shall be imposed upon the directors or
trustees who voted for such refusal: and Provided,
further, That it shall be a defense to any action
under this section that the person demanding to
examine and copy excerpts from the corporation's
records and minutes has improperly used any
information secured through any prior examination
of the records or minutes of such corporation or of
any other corporation, or was not acting in good
faith or for a legitimate purpose in making his
demand.
Stock corporations must also keep a book
to be known as the "stock and transfer book", in
which must be kept a record of all stocks in the
names of the stockholders alphabetically arranged;
the installments paid and unpaid on all stock for
which subscription has been made, and the date of
payment of any installment; a statement of every
alienation, sale or transfer of stock made, the date
thereof, and by and to whom made; and such
other entries as the by-laws may prescribe. The
stock and transfer book shall be kept in the
principal office of the corporation or in the office of
its stock transfer agent and shall be open for
inspection by any director or stockholder of the
corporation at reasonable hours on business days.

CORPORATE BOOKS AND RECORDS

What are these books and records that are

required to be kept?

Section 74. Books to be kept; stock transfer

agent. - Every corporation shall keep and
carefully preserve at its principal office a
record of all business transactions and
minutes of all meetings of stockholders or
members, or of the board of directors or
trustees, in which shall be set forth in detail
the time and place of holding the meeting,
how authorized, the notice given, whether
the meeting was regular or special, if special
its object, those present and absent, and
every act done or ordered done at the
meeting. Upon the demand of any director,
trustee, stockholder or member, the time
when any director, trustee, stockholder or
member entered or left the meeting must be
noted in the minutes; and on a similar
demand, the yeas and nays must be taken on
any motion or proposition, and a record
thereof carefully made. The protest of any
director, trustee, stockholder or member on
any action or proposed action must be
recorded in full on his demand.

No stock transfer agent or one engaged

principally in the business of registering transfers
of stocks in behalf of a stock corporation shall be
allowed to operate in the Philippines unless he
secures a license from the Securities and Exchange
Commission and pays a fee as may be fixed by the
Commission, which shall be renewable annually:
Provided, That a stock corporation is not precluded
from performing or making transfer of its own
stocks, in which case all the rules and regulations
imposed on stock transfer agents, except the
payment of a license fee herein provided, shall be
applicable. (51a and 32a; P.B. No. 268.)

The records of all business transactions of

the corporation and the minutes of any meetings
shall be open to inspection by any director, trustee,
stockholder or member of the corporation at
reasonable hours on business days and he may
demand, in writing, for a copy of excerpts from
said records or minutes, at his expense.
Any officer or agent of the corporation
who shall refuse to allow any director, trustees,
stockholder or member of the corporation to
examine and copy excerpts from its records or
minutes, in accordance with the provisions of this
Code, shall be liable to such director, trustee,
stockholder or member for damages, and in
addition, shall be guilty of an offense which shall
be punishable under Section 144 of this Code:
Provided, That if such refusal is made pursuant to
a resolution or order of the board of directors or

To summarize:

1.

Records of all business transactions which include,

among
others,
journals,
ledger, contracts,
vouchers and receipts, financial statements and
other books of accounts, income tax returns, and
voting trust agreements which must be kept and
carefully preserved at its principal office;

2.

Minutes of all meetings of stockholders or

members and of the directors or trustees setting
forth in detail the date, time, and place of meeting,
how authorized, the notice given whether the
same be regular or special, and if special, the
purpose thereof shall be specified, those present
and absent, and every act done or ordered done
there at which ,must likewise be kept at the
principal office of the corporation; and,

3.

Stock and transfer book showing the names of the

stockholders, the amount paid or unpaid on all
stocks for which subscription has been made, a
statement of every alienation, sale or transfer of
stock made, if any the date thereof, and by whom
and to whom made which must also be kept at the
principal office of the corporation or in the office of
its stock transfer agent.
These corporate books and records, inclusive of all
business transactions and minutes of meetings,
are subject to inspection by any of the directors,
trustees, stockholders or members of the

112

corporation at reasonable hours on business days

and a copy of excerpts of said records may be
demanded. In fact, in so far as financial statement
is concerned, the Code clearly provides:

prescribe. The stock and transfer book shall be

kept in the principal office of the corporation
or in the office of its stock transfer agent and
shall be open for inspection by any director or
stockholder of the corporation at reasonable
hours on business days.

Section
75.
Right
to
financial
statements. - Within ten (10) days from receipt of
a written request of any stockholder or member,
the corporation shall furnish to him its most recent
financial statement, which shall include a balance
sheet as of the end of the last taxable year and a
profit or loss statement for said taxable year,
showing in reasonable detail its assets and
liabilities and the result of its operations.
At the regular meeting of stockholders or
members, the board of directors or trustees shall
present to such stockholders or members a
financial report of the operations of the corporation
for the preceding year, which shall include financial
statements, duly signed and certified by an
independent certified public accountant.

Stock and transfer agent

Records every movement

Person who monitors movement by the minutes or

by the hours

Non-stock corporation- stock and transfer books

Club share- membership

Are stockholders entitled to financial statements?

Yes, they are entitled to a copy, the code provides

that:

However, if the paid-up capital of the corporation is

less than P50,000.00, the financial statements
may be certified under oath by the treasurer or
any responsible officer of the corporation. (n)

May books and records be examined? Who may

examine? Can they copy them? In whose expense?

Yes, according to the code:

Section
75.
Right
to
financial
statements. - Within ten (10) days from receipt of
a written request of any stockholder or member,
the corporation shall furnish to him its most recent
financial statement, which shall include a balance
sheet as of the end of the last taxable year and a
profit or loss statement for said taxable year,
showing in reasonable detail its assets and
liabilities and the result of its operations.

The
records
of
all
business
transactions of the corporation and the
minutes of any meetings shall be open to
inspection
by
any
director,
trustee,
stockholder or member of the corporation at
reasonable hours on business days and he
may demand, in writing, for a copy of
excerpts from said records or minutes, at his
expense.

Is there any defense available that could be

raised? By the corporate officers to justify the
refusal?

Yes, the code provides that:

At the regular meeting of stockholders or

members, the board of directors or trustees shall
present to such stockholders or members a
financial report of the operations of the corporation
for the preceding year, which shall include financial
statements, duly signed and certified by an
independent certified public accountant.
However, if the paid-up capital of the
corporation is less than P50,000.00, the financial
statements may be certified under oath by the
treasurer or any responsible officer of the
corporation. (n)

and Provided, further, That it shall be a

defense to any action under this section that the
person demanding to examine and copy
excerpts from the corporation's records and
minutes has improperly used any information
secured through any prior examination of the
records or minutes of such corporation or of
any other corporation, or was not acting in
good faith or for a legitimate purpose in
making his demand.

What is the stock and transfer? Where should

stock and transfer be kept? Can it be kept
elsewhere?
Stock corporations must also keep a
book to be known as the "stock and transfer
book", in which must be kept a record of all
stocks in the names of the stockholders
alphabetically arranged; the installments paid
and unpaid on all stock for which subscription
has been made, and the date of payment of
any installment; a statement of every
alienation, sale or transfer of stock made, the
date thereof, and by and to whom made; and
such other entries as the by-laws may

Audited financial statement filed in the SEC, 120

days from the end of the final year, or must be
filed on or before April of each year

Must be stamp received by the BIR

Those in the stock exchange

Disclosure of any matter that have to do with

increasing and decreasing

If not kulong
regulation act

Why is this right of inspection granted to a

stockholder?

The basis of the right of the stockholder to inspect

the books and records of the corporation for a
proper purpose is to protect his interest as a
stockholder. Thus, it has been said that:

violation

of

securities

and

The right of the shareholders to ascertain

how the affairs of his company are being
conducted by its directors and officers is
founded by his beneficial interest through
ownership of shares and the necessity of
self-protection. Managers of some

113

corporations
deliberately
keep
the
shareholders in ignorance or under
misapprehension as to the true condition
of its affairs. Business prudence demands
that the investor keep a watchful eye on
the management and the condition of the
business. Those in charge of the company
may be guilty of gross incompetence or
dishonesty for years and escape liability if
the shareholders cannot inspect the
records and obtain information.

Is there any distinction of the right of inspection of

a stockholder and that of a director?

Yes, as compared to a stockholder or member, the

right of a director or trustee to inspect and
examine corporate books and records is considered
absolute and unqualified and without regard to
motive. This is because a director supervises,
directs and manages corporate business and it is
necessary that he be equipped with all the
information and data with regard to the affairs of
the company in order that he may manage and
direct its operations intelligently and according to
his best judgment in the interest of all the
stockholders
he
represents.
Thus,
while
stockholders and members are entitled to inspect
and examine the books and records as provided in
sections 74 and 75 they may not gain access to
highly sensitive and confidential information. In
the case of directors. it is not denied that they
have such access. This would include, among
others,

imprisonment for not less than 30 days but not

more than 5 years, or both, at the discretion of the
court. If the refusal is pursuant to a resolution or
order of the board, the liability shall be imposed
upon the directors or trustees who voted for such
refusal.

Defense of the responsible corporate officer

1.

That the person demanding has improperly used

any information secured through any prior
examination of the records or minutes of such
corporation or of any other corporation;

2.

That he was not acting in good faith or for a

legitimate purpose in making his demand;

3.

The right is limited or restricted by special law or

the law of it creation.
W.G. Philpotts vs. Philippine Manufacturing Co.

The right of inspection given to a stockholder can

be exercised either by himself or by any proper
representative or attorney-in-fact, and either with
or without the attendance of the stockholder

The right may be regarded as personal, in the

sense that only a stockholder may enjoy it; but the
inspection and examination may be made by
another. Otherwise it would be unavailing in many
instances.
o

Note: Usually hires an auditor or accountant to

safeguard his interest

a.

Marketing strategies and pricing structure;

b.

Budget for expansion and diversification;

c.

Research and development;

d.

Sources of funding, availability of personnel,

proposals of mergers or tie-ups with other
firms

The law is clear, it may be exercised during

reasonable hours on any business days, the bylaws cannot deny this right all together

The general right given by the statute may not be

lawfully abridged to the extent attempted in this
resolution. It may be admitted that the officials in
charge of a corporation may deny inspection when
sought at unusual hours or under other improper
conditions; but neither the executive officers nor
the board of directors have the power to deprive a
stockholder of the right altogether.

The corporation, or its responsible directors and

officers cannot unduly restrict this right of
inspection and may not arbitrarily set a few days of
the year within which the stockholder may make
the inspection.

A by-law unduly restricting the right of inspection

is undoubtedly invalid

Pardo vs. Hercules Lumber Co.

May this right be exercised, other than by the

stockholders themselves?

Yes, while the right is founded on stock ownership

thus personal in nature it may be made by the
stockholders agent or representative since it may
be unavailing in many instances

What if the right of the stockholder to inspect is

denied? What is his remedy?

1.

Mandamus

2.

Damages either against the corporation

responsible officer who refused the inspection

3.

Criminal complaint for violation of his right to

inspect and copy excerpts of all business
transactions and minutes of meeting. Section 74
provides that Any officer or agent of the
corporation who shall refuse to allow any director,
trustees, stockholder or member of the corporation
to examine and copy excerpts from its records or
minutes, in accordance with the provisions of this
Code, shall be liable to such director, trustee,
stockholder or member for damages, and in
addition, shall be guilty of an offense which shall
be punishable under Section 144 of this Code. The
latter provision imposes a penalty of a fine of not
less than P1,000 but not more than P10,000 or an

or

Vegaruth vs. Isabela Sugar Co.

114

Directors of a corporation have the unqualified

right to inspect the books and records of the
corporation at all reasonable hours.

We do not conceive, however, that a director or

stockholder has any absolute right to secure
certified copies of the minutes of the corporation
until these minutes have been written up and
approved by the directors.

May a stockholder of a holding company inspect

the books and records of a subsidiary?

It depends

The right of the stockholders to examine corporate

books extends to wholly-owned subsidiary which is
completely under the control and management of
the parent company where he is such a
stockholder. But if the two entities (subsidiary and
parent) are legally being operated as separate and
distinct entities, there is no such right of inspection
on the part of the stockholder of the parent
company.

bank is confidential and shall not be revealed to

any person other than the President of the
Philippines, the Secretary of Finance and the Board
of Directors, nor shall any information relative to
the funds in its custody, its current accounts or
deposits
belonging
to
private
individuals,
corporations or other entities except by order of a
Court of Competent Jurisdiction, hence inspection
sought to by the petitioner is violative of the
provisions of its charter and is even subject to
penal sanctions

AYALA- HOLDING COMPANY/PARENT COMPANY

SUBSIDIARIES: BPI/GLOBE/AYALA
wholly-owned subsidiary)
o

LAND

Assuming you are a stockholder of PNB, and then

it was privatized, may you already have the right
to inspect?

No, unless its charter has been altered or repealed

it is still subject to the same law

3 stages in the life of a corporation

Formation or birth

We now discuss the union of the corporation

The last would be its death or dissolution

(not

HOLD ATLEAST 50 +1 shares in order to be a

PARENT COMPANY

A, is a stockholder of Ayala, does he have a right

to inspect the records of its subsidiaries?
If wholly owned pwede, but its subsidiaries are not
wholly owned kaya hindi pwede
Gokongwei vs. SEC

MERGER AND CONSOLIDATION

San Miguel corporation owns all of the shares of

stock of San Miguel International

Merger and consolidation

It is wholly-owned

In corporate parlance it is called spin-off

It would be in accord with equity, good faith and

fair dealing to construe the statutory right of
petitioner as stockholder to inspect the books and
records of such wholly-owned subsidiary which are
in respondent corporations possession and control

Almost a year ago San Miguel separated its

brewery business

San Miguel Corporation is now a full time holding

company; it can later on absorb the company

If being operated as separate

corporations, there is no such right

Corporations are granted by the code to merge or

consolidate

Telecommunications- special franchise, it

legislative grant

most common type of corporate recognition

not the same in every case

but most common in the weal financial or insolvent

condition, aim is to bring it back to its financial
capability

also a method of recapitalization

and

distinct

is

Gonzales vs. PNB

-

Provisions of the old law was unqualified, when it

granted stockholders the right to inspect

However, whole seemingly enlarging the right of

inspection, the new code has prescribed limitations
to the same. It is now expressly required as a
condition for such examination that the one
requesting it must not have been guilty of using
improperly any information secured through a prior
examination and that the person asking for such
examination must be acting in good faith and for a
legitimate purpose in making his demand

Admittedly, he sought to be a stockholder in order

to pry into transactions entered into by the
respondent bank even before he became a
stockholder. His obvious purpose was to arm
himself with materials he can use against the
respondent bank for acts done by the latter when
the petitioner was a total stranger to the same.

Bank was created by a special law, it has its own

charter and primarily governed by the law creating
them

The bank is only subject to the inspection of the

Central Bank and any information pertaining to the

115

purchase and sale of corporate assets is

another form of corporate reorganization

How do you value the assets of the merging

corporation, do you consider goodwill?

First
secure
favorably
government agency

Section 79. Effectivity of merger or

consolidation. - The articles of merger or of
consolidation, signed and certified as herein above
required, shall be submitted to the Securities and
Exchange Commission in quadruplicate for its
approval: Provided, That in the case of merger
or consolidation of banks or banking
institutions, building and loan associations,
trust companies, insurance companies, public
utilities, educational institutions and other
special corporations governed by special
laws, the favorable recommendation of the
appropriate government agency shall first be

recommendation

of

obtained. If the Commission is satisfied that the

merger or consolidation of the corporations
concerned is not inconsistent with the provisions of
this Code and existing laws, it shall issue a
certificate of merger or of consolidation, at which
time the merger or consolidation shall be effective.

members at least two (2) weeks prior to the

scheduled
meeting,
either
personally
or
registered mail stating the purpose thereof;

If, upon investigation, the Securities and

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

Merger

A union effected by absorbing one or more existing

corporations by another which survives and
continues the combined business

It is the uniting of two or more corporations by the

transfer of property to one of them which continue
in existence, the other or the others being
dissolved and merged therein.
A

A
transfers
all assets,
obligations, liabilities to B

properties,

4.

Execution of the articles of merger or consolidation

by each constituent corporations to be signed by
the president or vice-president and certified
by the corporate secretary or assistant
secretary setting forth the matters required
in section 78;

5.

Submission of the articles of merger or

consolidation in quadruplicate to the SEC
subject to the requirement of section 79 that if it
involve corporations under the direct supervision of
any other government agency or governed by
special laws the favorable recommendation of the
government agency concerned shall first be
secured and;

6.

Issuance of the certificate of merger or

consolidation by the SEC at which time the
merger or consolidation shall be effective. If the
plan, however, is believed to be contrary to law,
the SEC shall set a hearing to give the corporations
concerned an opportunity to be heard upon proper
notice and thereafter, the Commission shall
proceed as provided in the Code.

Although merger and consolidation is an express

power granted to corporation, it is subject to
limitations, as maybe proscribed by law

What would be the effect

consolidation? <sec. 80>

1.

There will only be a single corporation. In case of

merger, the
surviving
corporation
or the
consolidated corporation in case of consolidation;

2.

The termination of the corporate existence of the

constituent corporations, except that of the
surviving
corporation
or
the
consolidated
corporation;

3.

The surviving corporation or the consolidated

corporation will possess all the rights, privileges,
immunities and powers and shall be subject to all
the duties and liabilities of a corporation organized
under the Code;

4.

The surviving or consolidated corporation shall

possess all the rights, privileges, immunities and
franchises of the constituent corporations, and all
property and all receivables due, including
subscriptions to shares and other choses in action,
and every other interest of, or belonging to or due
to the constituent corporations shall be deemed
transferred to and vested in such surviving or
consolidated corporation without further act and
deed; and,

5.

The rights of creditors or any lien on the property

of the constituent corporations shall not be
impaired by the merger or consolidation.

Is there a liquidation process in case of merger or

consolidation?

None, there is nothing to distribute

rights,

B issues shares of stocks in exchange of the

transfer
A is then dissolved and B SURVIVES
Parties to a merger are called constituent
corporation

Consolidation

The uniting or amalgamation of two or more

existing corporations to form a new corporation

In merger there is a surviving corporation, the

others are dissolved, while in consolidation, all
constituent are dissolved and a new one organized

Like all other corporate acts, it emanates from the

board

1.

The board of directors or trustees of each

constituent corporations shall approve a plan of
merger or consolidation setting forth the matters
required in section 76;

2.

3.

Approval of the plan by the stockholders

representing 2/3 of the outstanding capital
stock or 2/3 of the member in non-stock
corporations of each of such corporations at
separate corporate meetings called for the
purpose;

Associated Bank vs. CA

Prior notice of such meeting, with a copy or

summary of
the plan
of
merger or
consolidation shall be given to all stockholders or

116

of

merger

or

By virtue of a specific provision in the merger

agreement

Although the subject promissory note names CBTC

as the payee, the reference to CBTC in the note
shall be construed, under the very provision of the
merger agreement, as a reference to petitioner
bank, as if such reference (was a) direct reference
to the latter for all intents and purposes

What property? When may this right be exercises?

Section 81 provides:
Section 81. Instances of appraisal right.
- Any stockholder of a corporation shall have the
right to dissent and demand payment of the fair
value of his shares in the following instances:
1. In case any amendment to the articles of
incorporation has the effect of changing or
restricting the rights of any stockholder or class of
shares, or of authorizing preferences in any
respect superior to those of outstanding shares of
any class, or of extending or shortening the term
of corporate existence;

Section 80 par. 4 states:

The
surviving
or
the
consolidated
corporation shall thereupon and thereafter possess
all the rights, privileges, immunities and franchises
of each of the constituent corporations; and all
property, real or personal, and all receivables due
on whatever account, including subscriptions to
shares and other choses in action, and all and
every other interest of, or belonging to, or due to
each constituent corporation, shall be deemed
transferred to and vested in such surviving or
consolidated corporation without further act or
deed; and

Without further acts, meaning it is automatic

When do merger and consolidation become

effective? What if the SEC fails to act on it without
fault attributable to the corporation involved?

2. In case of sale, lease, exchange, transfer,

mortgage, pledge or other disposition of all or
substantially all of the corporate property and
assets as provided in the Code; and
3. In case of merger or consolidation. (n)

May it be exercised by a stockholder who dissents

to the act of a business other than a primary
purpose?
X Co. inc
Principal office is in Quezon city, it was changed to
Paranaque

It will never become valid until and unless the SEC

gives its stamp of approval

A objects and makes a written demand. May he

exercise his right of appraisal?

It will be up to the constituent corporation to follow

it up

It is not available in all amendments of the

corporation

It will never take effect until the SEC gives its

approval and issues the articles of merger

It must be changing or restricting the rights of any

stockholder

What if the principal office is changed from QC to

TAWI-TAWI, will it change or affect the rights of A?

Granted 3 years to wing up unless there is a

trustee to wing up its affairs

Could there be liquidators and winding up with

respect to the corporation in consolidation and
merger?

To some it may change or restrict the rights to

others it may not

No, there is none

How is the right exercised?

No assets properties or rights to collect, they are

transferred

According to section 82 of the code:

No debts and liabilities to pay because they

become the liabilities of the surviving corporations

No properties transferred because they will be the

properties of the surviving corporations
o

Hardest part is the financial act, regarding

how many shares would be issued, probability
of collection and the like

In merger and consolidation, there is due

diligence and an economist is usually hired

Section 82. How right is exercised. - The

appraisal right may be exercised by any
stockholder who shall have voted against the
proposed corporate action, by making a written
demand on the corporation within thirty (30) days
after the date on which the vote was taken for
payment of the fair value of his shares: Provided,
That failure to make the demand within such
period shall be deemed a waiver of the appraisal
right. If the proposed corporate action is
implemented or affected, the corporation shall pay
to such stockholder, upon surrender of the
certificate or certificates of stock representing his
shares, the fair value thereof as of the day prior to
the date on which the vote was taken, excluding
any appreciation or depreciation in anticipation of
such corporate action.

APPRAISAL RIGHT

Define appraisal

Right to withdraw from the corporation and

demand payment of the fair value of his shares
after dissenting from certain corporate acts
involving fundamental changes in corporate
structure <sec. 81>

If within a period of sixty (60) days from

the date the corporate action was approved by the
stockholders, the withdrawing stockholder and the
corporation cannot agree on the fair value of the
shares, it shall be determined and appraised by
three (3) disinterested persons, one of whom shall

117

be named by the stockholder, another by the

corporation, and the third by the two thus chosen.
The findings of the majority of the appraisers shall
be final, and their award shall be paid by the
corporation within thirty (30) days after such
award is made: Provided, That no payment shall
be made to any dissenting stockholder unless the
corporation has unrestricted retained earnings in
its books to cover such payment: and Provided,
further, That upon payment by the corporation of
the agreed or awarded price, the stockholder shall
forthwith transfer his shares to the corporation. (n)

corporation has unrestricted retained earnings in

its books to cover such payment: and Provided,
further, That upon payment by the corporation of
the agreed or awarded price, the stockholder shall
forthwith transfer his shares to the corporation. (n)
Section 86. Notation on certificates;
rights of transferee. - Within ten (10) days after
demanding payment for his shares, a dissenting
stockholder shall submit the certificates of stock
representing his shares to the corporation for
notation thereon that such shares are dissenting
shares. His failure to do so shall, at the option of
the corporation, terminate his rights under this
Title. If shares represented by the certificates
bearing such notation are transferred, and the
certificates consequently cancelled, the rights of
the transferor as a dissenting stockholder under
this Title shall cease and the transferee shall have
all the rights of a regular stockholder; and all
dividend distributions which would have accrued on
such shares shall be paid to the transferee. (n)

X Co.
Principal Office- QC, it was changed to Manila
A objects and makes a written demand for
payment of fair value of shares. Can he make a
demand of payment of shares?

True or False, no stockholder in a stock corporation

can ever demand if the principal office is amended,
changing it from QC to Manila

Notation is not mandatory, it is even discretionary

because the code provides at the option of the
corporation because it never issued one for that
matter since the subscriptions are not yet fully
paid

May the corporation be compelled to pay the

interest of A

False, a stockholder in a close corporation may for

any reason compel the close corporation that he be
paid the fair value of his shares
Can he exercise his appraisal rights in the first
place? He hasnt even paid his subscription in full.

May a stockholder who hasnt paid his subscription

in full exercise his appraisal rights?

Yes, he can exercise his appraisal rights, by

reconciling the provisions of section 72, section 82
and section 86

300 T, 150T, 150T and 0 unrestricted retained

earnings

Section 72. Rights of unpaid shares. Holders of subscribed shares not fully paid which
are not delinquent shall have all the rights of a
stockholder. (n)
Section 82. How right is exercised. - The
appraisal right may be exercised by any
stockholder who shall have voted against the
proposed corporate action, by making a written
demand on the corporation within thirty (30) days
after the date on which the vote was taken for
payment of the fair value of his shares: Provided,
That failure to make the demand within such
period shall be deemed a waiver of the appraisal
right. If the proposed corporate action is
implemented or affected, the corporation shall
pay to such stockholder, upon surrender of
the certificate or certificates of stock
representing his shares, the fair value thereof
as of the day prior to the date on which the vote
was taken, excluding any appreciation or
depreciation in anticipation of such corporate
action.
If within a period of sixty (60) days from
the date the corporate action was approved by the
stockholders, the withdrawing stockholder and the
corporation cannot agree on the fair value of the
shares, it shall be determined and appraised by
three (3) disinterested persons, one of whom shall
be named by the stockholder, another by the
corporation, and the third by the two thus chosen.
The findings of the majority of the appraisers shall
be final, and their award shall be paid by the
corporation within thirty (30) days after such
award is made: Provided, That no payment shall
be made to any dissenting stockholder unless the

118

No stockholder may be able to compel the

corporation to pay the value of his shares if the
corporation has no unrestricted retained earnings

False, a stockholder of a close corporation may for

any reason, provided only that the corporation has
sufficient assets to cover its debts and liabilities
o

General rule: there should be unrestricted

retained earnings

Exception: section 105 close corporation

The procedure and requirements for the valid

exercise of this rights are:

1.

The stockholder must have voted against the

proposed corporate action in any of the instances
allowed by law for the exercise of the right of
appraisal;

2.

The written demand for payment must be made by

the dissenting stockholder within thirty (30) days
after the date on which the vote was taken
thereon. Failure to make the demand within the
said period shall be deemed a waiver on the part
of the stockholder concerned to exercise his
appraisal right;

3.

Surrender of the certificate of stock by the

dissenting stockholder for notation in the corporate
books and the payment by the corporation of the
fair market value of the said shares as of the day
prior to the date on which the vote was taken. If
the stockholder and the corporation cannot agree
on the fair market value thereof, the same shall be
determined in accordance with the provision of
paragraph 2 of section 82;

4.

5.

The fair value of the shares of the dissenting

stockholder must be paid by the corporation only if
it has unrestricted retained earnings in its books
to cover such payment. If the corporation has no
unrestricted retained earnings, the dissenting
stockholder may not, therefore, be able to
effectively exercise his appraisal rights;
Upon payment of the shares by the corporation,
the dissenting stockholder shall transfer his shares
to the corporation.

1.

When he withdraws his demand for payment and

the corporation consents thereto;

2.

When the proposed action

rescinded by the corporation;

3.

When the proposed action is disapproved by the

SEC where such approval is necessary;

4.

When the SEC determines that he is not entitled to

exercise his appraisal right;

is

abandoned

or

What would be the effect if the stockholder

exercises his appraisal rights? What happens to his
voting and dividend rights if he exercises his
appraisal rights?

5.

When he fails to submit the stock certificate within

ten (10) days from demand to the corporation for
notation that such shares are dissenting shares;
and,

It will be suspended, with a limitation of 30 days,

as provided for by section 83 of the code:

6.

If the shares are transferred and the certificate

subsequently cancelled.

Section 83. Effect of demand and

termination of right. - From the time of demand for
payment of the fair value of a stockholder's shares
until either the abandonment of the corporate
action involved or the purchase of the said shares
by the corporation, all rights accruing to such
shares, including voting and dividend rights,
shall be suspended in accordance with the
provisions of this Code, except the right of
such stockholder to receive payment of the
fair value thereof: Provided, That if the
dissenting stockholder is not paid the value
of his shares within 30 days after the award,
his
voting
and
dividend
rights
shall
immediately be restored. (n)

Who bears the cost of appraisal?

It depends

The corporation bears the cost if

How do you compare the rights of a stockholder,

declared delinquent compared to a dissenting
stockholder exercising his appraisal rights

What if a stockholder exercising his appraisal

rights is also a director, will he also lose his rights
as a stockholder?

The shares remain to stand in his name until he is

paid, unless there is a stipulation in the by-laws

When may the right to be paid the value of his

shares cease? Can he withdraw his right of
appraisal?

Yes, he may withdraw, but there must be consent

by the corporation as provided for by section 83 of
the code:

The price offered by the corporation is lower

than the fair value of the shares of the
dissenting stockholder as determined by the
appraisers;

b.

Where an action is filed by the dissenting

stockholder to recover such fair value and the
refusal of the stockholder to receive payment
is found by the court to be justified.

Dissenting stockholder will be liable for the cost

and expenses of appraisal when
a.

When the price offered by the corporation is

approximately the same as the fair value
ascertained by the appraisers;

b.

Where the action filed by the dissenting

stockholder and his refusal to accept payment
is found by the court to be unjustified.

The dissenting stockholder may also sell, transfer

or assign his shares
Section 86. Notation on certificates;
rights of transferee. - Within ten (10) days after
demanding payment for his shares, a dissenting
stockholder shall submit the certificates of stock
representing his shares to the corporation for
notation thereon that such shares are dissenting
shares. His failure to do so shall, at the option of
the corporation, terminate his rights under this
Title. If shares represented by the certificates
bearing such notation are transferred, and
the certificates consequently cancelled, the
rights of the transferor as a dissenting
stockholder under this Title shall cease and
the transferee shall have all the rights of a
regular
stockholder;
and
all
dividend
distributions which would have accrued on
such shares shall be paid to the transferee.
(n)

Section 84. When right to payment

ceases. - No demand for payment under this Title
may be withdrawn unless the corporation consents
thereto. If, however, such demand for payment is
withdrawn with the consent of the corporation, or
if the proposed corporate action is abandoned or
rescinded by the corporation or disapproved by the
Securities and Exchange Commission where such
approval is necessary, or if the Securities and
Exchange Commission determines that such
stockholder is not entitled to the appraisal right,
then the right of said stockholder to be paid the
fair value of his shares shall cease, his status as a
stockholder shall thereupon be restored, and all
dividend distributions which would have accrued on
his shares shall be paid to him. (n)

a.

NON-STOCK CORPORATIONS

Instances when the right of a dissenting

stockholder to be paid the fair value of his shares
ceases.

119

What is a non-stock corporation?

A non-stock corporation is one where no part of its

income is distributable as dividends to its

members, trustees, or officers, subject to the

provisions of this code on dissolution

What provision of the code will govern non-stock

corporations? Would the provision governing stock
corporations also apply to non-stock corporations?

It may exceed 15 in a non-stock corporation unless

the AOI or by-laws provide otherwise, as provided
for by section 92 of the code:
Section 92. Election and term of
trustees. - Unless otherwise provided in the
articles of incorporation or the by-laws, the board
of trustees of non-stock corporations, which may
be more than fifteen (15) in number as may be
fixed in their articles of incorporation or by-laws,
shall, as soon as organized, so classify themselves
that the term of office of one-third (1/3) of their
number shall expire every year; and subsequent
elections of trustees comprising one-third (1/3) of
the board of trustees shall be held annually and
trustees so elected shall have a term of three (3)
years. Trustees thereafter elected to fill vacancies
occurring before the expiration of a particular term
shall hold office only for the unexpired period.

Yes, 2nd par. Of section 87 provides:

The
provisions
governing
stock
corporation, when pertinent, shall be applicable to
non-stock corporations, except as may be covered
by specific provisions of this Title. (n)

How is the right to vote exercised in a non-stock

corporation compared to a stock corporation

May a member in a non-stock corporation vote

cumulatively?

General rule is NO

May it be granted or allowed by the by-laws?

Yes

May the right to cumulative voting be denied in a

stock corporation?

Qualifications?

No, Doctrine of Limited Capacity

1.

He is a member of the association;

May members in a non-stock corporation vote by

proxy?

2.

Majority thereof
Philippines; and,

Yes, section 89 provides that:

3.

Other qualifications as may be provided for in the

by-laws.

Governing board in a non-stock

Board of Trustees, however section 138 provides

that:

No person shall be elected as trustee

unless he is a member of the corporation.
Unless otherwise provided in the articles
of incorporation or the by-laws, officers of a nonstock corporation may be directly elected by the
members. (n)

Unless otherwise provided in the articles

of incorporation or the by-laws, a member may
vote by proxy in accordance with the provisions of
this Code. (n)

May the right to vote by proxy be validly denied in

a stock corporation?

No, it is a matter of right in a stock corporation

May member of a non-stock corporation cast their

vote by text?

Yes, subject to the approval and terms and

conditions of the SEC <sec. 89>

How about in stock?

Voting by mail or other similar means may also be

authorized and allowed by the by-laws of nonstock
corporations.
Generally,
in
stock
corporations, the vote must be cast at a duly
constituted meeting. The only exception, in case of
the latter, is in the matter of general amendment
of the articles of incorporation where the written
assent of the stockholder may be sufficient.

be

residents

of

the

Section 138. Designation of governing

boards. - The provisions of specific provisions of
this Code to the contrary notwithstanding, nonstock or special corporations may, through
their articles of incorporation or their bylaws, designate their governing boards by
any name other than as board of trustees. (n)

Voting by mail or other similar means by

members of non-stock corporations may be
authorized
by
the
by-laws
of
non-stock
corporations with the approval of, and under such
conditions which may be prescribed by, the
Securities and Exchange Commission.

must

Disqualifications

Section 27 also applies to a non-stock corporation,

same holds true to the manner of removal <sec.
29 ad 30>
Section 27. Disqualification of directors,
trustees or officers. - No person convicted by final
judgment
of
an
offense
punishable
by
imprisonment for a period exceeding six (6) years,
or a violation of this Code committed within five
(5) years prior to the date of his election or
appointment, shall qualify as a director, trustee or
officer of any corporation. (n)
Section 29. Vacancies in the office of
director or trustee. - Any vacancy occurring in the
board of directors or trustees other than by
removal by the stockholders or members or by
expiration of term, may be filled by the vote of at
least a majority of the remaining directors or
trustees, if still constituting a quorum; otherwise,
said vacancies must be filled by the stockholders in
a regular or special meeting called for that

How is the governing board constituted in a nonstock corporation? How many members?

120

purpose. A director or trustee so elected to fill a

vacancy shall be elected only or the unexpired
term of his predecessor in office.

Section
90.
Non-transferability
of
membership. - Membership in a non-stock
corporation and all rights arising there from are
personal and non-transferable, unless the articles
of incorporation or the by-laws otherwise provide.
(n)

Any directorship or trusteeship to be filled

by reason of an increase in the number of directors
or trustees shall be filled only by an election at a
regular or at a special meeting of stockholders or
members duly called for the purpose, or in the
same meeting authorizing the increase of directors
or trustees if so stated in the notice of the
meeting. (n)

A holds a membership certificate

B goes to the corporation and compels
corporation to record the transfer in his name

Section 30. Compensation of directors. In the absence of any provision in the by-laws
fixing their compensation, the directors shall not
receive any compensation, as such directors,
except for reasonable per diems: Provided,
however, That any such compensation other than
per diems may be granted to directors by the vote
of the stockholders representing at least a majority
of the outstanding capital stock at a regular or
special stockholders' meeting. In no case shall the
total yearly compensation of directors, as such
directors, exceed ten (10%) percent of the net
income before income tax of the corporation during
the preceding year. (n)

Who elects the other officers?

Directly by the general members unless the bylaws or articles provide otherwise. <sec.92>

In stock corporations who elect officers?

Directors

The provision that stock corporations cannot

validly provide that members cannot be voted by
stockholders is only a general rule because there is
an exception section 97 of the code states that:

Membership in non-stock corporations may be

acquired by complying with the provisions of its
rules prescribed in the by-laws. This is in
consonance with the express power granted by law
under section 36, paragraph 6 of the code,
authorizing them to admit members thereof and
that authority carries with it the power to prescribe
rules on membership. It has thus been stated that
in the absence of charter or statutory restrictions,
non-stock corporations may determine who shall
be admitted to membership and how they shall be
admitted.

6. In case of stock corporations, to issue or sell

stocks to subscribers and to sell stocks to
subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and to
admit members to the corporation if it be a nonstock corporation;
-

They can provide the manner in which to admit

depending on their own rules

The power or authority to terminate members in

non-stock corporations is said to be inherent but
strict compliance with the manner and procedure
laid down in the by-laws must be observed,
otherwise it may render the expulsion ineffective
and invalid.

The articles of incorporation of a

close corporation may provide that the business
of the corporation shall be managed by the
stockholders of the corporation rather than
by a board of directors. So long as this provision
continues in effect:

Section 91. Termination of membership.

- Membership shall be terminated in the manner
and for the causes provided in the articles of
incorporation or the by-laws. Termination of
membership shall have the effect of extinguishing
all rights of a member in the corporation or in its
property, unless otherwise provided in the articles
of incorporation or the by-laws. (n)

1. No meeting of stockholders need be called to

elect directors;
2. Unless the context clearly requires otherwise,
the stockholders of the corporation shall be
deemed to be directors for the purpose of applying
the provisions of this Code; and

3. The stockholders of the corporation shall be

subject to all liabilities of directors.
The articles of incorporation may
likewise provide that all officers or employees or
that specified officers or employees shall be
elected or appointed by the stockholders,
instead of by the board of directors.

the

Section 36. Corporate powers and

capacity. - Every corporation incorporated under
this Code has the power and capacity:

Unless otherwise provided in the articles

of incorporation or the by-laws, officers of a nonstock corporation may be directly elected by the
members. (n)

How is a membership requirement in a non-stock

corporation

Nature of membership is non-transferrable and

personal in nature unless the articles of
incorporation or by-laws provide otherwise

121

Power is inherent and may be exercised in certain

situations:
1.

When an offense is committed which, although

it has no immediate relation to a members
duty as such, it is so infamous as to render
him unfit for society of honest men, which is
indictable at common law;

2.

When the offense is a violation of his duty as

member of the corporation; and,

3.

When the offense is of a mixed nature, being

both against his duty as a member of the
corporation, and also indictable at common
law.

If the conduct of the member comes within any of

this cases, it is a ground for valid expulsion
although it may not be expressly made so by the
by-laws

1. All liabilities and obligations of the

corporation shall be paid, satisfied and
discharged, or adequate provision shall be
made therefore;

Chinese YMCA vs. Ching

2. Assets held by the corporation upon a

condition
requiring
return,
transfer
or
conveyance, and which condition occurs by
reason of the dissolution, shall be returned,
transferred or conveyed in accordance with
such requirements;

Right of the corporation to choose who the

members are, cannot be inquired or intervened by
the court

The appealed decision thus contravened the

establish principle that the courts cannot strip a
member of a non-stock corporation of his
membership therein without cause.

3. Assets received and held by the corporation

subject to limitations permitting their use only
for
charitable,
religious,
benevolent,
educational or similar purposes, but not held
upon a condition requiring return, transfer or
conveyance by reason of the dissolution, shall
be transferred or conveyed to one or more
corporations,
societies
or
organizations
engaged in activities in the Philippines
substantially similar to those of the dissolving
corporation according to a plan of distribution
adopted pursuant to this Chapter;

Lions Club International vs. CA

-

Courts will not generally interfere on matters

involving the internal affairs of an unincorporated
association such as election contest unless the acts
complained of are arbitrary, oppressive, fraudulent,
violative of civil rights and the like

General rule is that the courts will not interfere

with the internal affairs of an unincorporated
association so as to settle disputes between the
members, or questions of policy, discipline, or
internal government, so long as the government of
the society is fairly and honestly administered in
conformity with its by-laws and the law of the land,
and no property or civil rights are involved.

4. Assets other than those mentioned in the

preceding paragraphs, if any, shall be
distributed in accordance with the provisions
of the articles of incorporation or the by-laws,
to the extent that the articles of incorporation
or the by-laws, determine the distributive
rights of members, or any class or classes of
members, or provide for distribution; and

Exceptions are the following:

5. In any other case, assets may be

distributed
to
such
persons,
societies,
organizations or corporations, whether or not
organized for profit, as may be specified in a
plan of distribution adopted pursuant to this
Chapter. (n)

a.

b.

Where law and justice so require, and the

proceedings of the association are subject to
judicial review where there is fraud,
oppression, or bad faith, or where the action
complained of is capricious, arbitrary, or
unjustly discriminatory

To grant relief in case property or civil rights

are invaded, although it has also been held
that the involvement of property rights does
not necessarily authorize judicial intervention,
in the absence of arbitrariness, fraud or
collusion.

c.

Are violative of the laws of the society, or the

law of the land, as by depriving the person of
due process of law

d.

There is lack of jurisdiction on the part of the

tribunal conducting the proceedings, where
the organization exceeds its powers, or where
the proceedings are otherwise illegal

Non-stock corporations with 4Billion funds, may it

be distributed for and among its members?

- Section 94 number 3 provides:

3. Assets received and held by the
corporation subject to limitations permitting their
use only for charitable, religious, benevolent,
educational or similar purposes, but not held upon
a
condition
requiring
return,
transfer
or
conveyance by reason of the dissolution, shall be
transferred or conveyed to one or more
corporations, societies or organizations engaged in
activities in the Philippines substantially similar to
those of the dissolving corporation according to a
plan of distribution adopted pursuant to this
Chapter;
-

Corporations, stock and non-stock, may be

dissolved in accordance and pursuant to the
provisions of Sections 118 to 121 of the
Corporation Code and the pertinent provisions of
P.D. 902-A, as amended. If such be the case, the
assets of the corporation are to be distributed in
accordance with law and established jurisprudence.

If there is no distributive agreement then they may

do so through a plan of distribution under section
95
Section 95. Plan of distribution of assets.
- A plan providing for the distribution of assets, not
inconsistent with the provisions of this Title, may
be adopted by a non-stock corporation in the
process of dissolution in the following manner:

If a non-stock corporation is dissolved how will its

properties be distributed?

The board of trustees shall, by majority

vote, adopt a resolution recommending a plan of
distribution and directing the submission thereof to
a vote at a regular or special meeting of members
having voting rights. Written notice setting forth
the proposed plan of distribution or a summary
thereof and the date, time and place of such

Section 94. Rules of distribution. - In

case dissolution of a non-stock corporation in
accordance with the provisions of this Code,
its assets shall be applied and distributed as
follows:

122

meeting shall be given to each member entitled to

vote, within the time and in the manner provided
in this Code for the giving of notice of meetings to
members. Such plan of distribution shall be
adopted upon approval of at least two-thirds (2/3)
of the members having voting rights present or
represented by proxy at such meeting. (n)

No, it will only be a closed corporation if 2/3 of the

voting stocks of a close corporation is also owned
by a close corporation. It must be voting stocks

Even if another corporation owns or controls 2/3 of

the voting stocks of a close corporation, the latter
may still be considered as such close corporation if
the corporation owning or controlling the shares is
also a close corporation.

CLOSE CORPORATIONS

Notwithstanding
the
foregoing,
a
corporation shall not be deemed a close
corporation when at least two-thirds (2/3) of its
voting stock or voting rights is owned or controlled
by another corporation which is not a close
corporation within the meaning of this Code.

Section 96. Definition and applicability of Title. A close corporation, within the meaning of this
Code, is one whose articles of incorporation
provide that: (1) All the corporation's issued
stock of all classes, exclusive of treasury
shares, shall be held of record by not more
than a specified number of persons, not
exceeding twenty (20); (2) all the issued
stock of all classes shall be subject to one or
more specified restrictions on transfer
permitted by this Title; and (3) The
corporation shall not list in any stock
exchange or make any public offering of any
of its stock of any class. Notwithstanding the
foregoing, a corporation shall not be deemed a
close corporation when at least two-thirds (2/3) of
its voting stock or voting rights is owned or
controlled by another corporation which is not a
close corporation within the meaning of this Code.

What kind of corporations cannot be a close

corporation?

1.

Mining or oil companies,

2.

Stock exchange

3.

Banks and insurance companies,

4.

Public utilities

5.

Educational institutions

6.

Corporations vested with public interest

Between and among themselves, they feel and act

alike

Classification of directors

Not more than 20 stockholders

Ordinary stock- no such right

Specified persons, if you are not specified, you

cannot be a stockholder

Close corporation-yes there is such a right

Section 97 is a permissive provision

All the issued stocks of all classes is subject to

restrictions

Shall not be listed in the stock exchange not

publicly offered

Section 97. Articles of incorporation. The articles of incorporation of a close corporation

may provide:
1. For a classification of shares or rights and the
qualifications for owning or holding the same and
restrictions on their transfers as may be stated
therein, subject to the provisions of the following
section;

3 qualifying conditions must be contained in the

articles of incorporation, to be considered as a
close corporation, if not, it will not be considered
as such and will be governed by the general
provisions of the code

2. For a classification of directors into one or more

classes, each of whom may be voted for and
elected solely by a particular class of stock; and

Even if 100 % is owned by one person it will not

be considered a close corporation without the 3
qualifying provisions

Identity of stockholders, specified persons

Active management either as directors or partners

in management

Combination of the corporation and partnership

type of business

May any type of corporation, be organized as such

close corporation?

No, the 3 qualifying conditions must be present

What if 2/3 of the outstanding capital stock is

owned by another corporation which is also a close
corporation, will it be a close corporation?

3. For a greater quorum or voting requirements in

meetings of stockholders or directors than those
provided in this Code.

123

After classification what then?

After
classification,
qualification
and
then
restriction as provided for under the 3 qualifying
conditions in section 96

Cumulative voting is
restricted in close
corporations if will be elected solely by a particular
class

In a close corporation, the articles of incorporation

may provide for a greater quorum and voting
requirement in meetings of both stockholders or
directors to increase the veto power of minority
stockholders, unlike in a stock corporation wherein
only directors meetings may provide for greater
quorum requirement and in stockholders meeting

which may not be altered or increased, as provide

for in section 25, following the doctrine of limited
capacity

The articles of a close corporation may likewise

provide that the business of the corporation shall
be managed by the stockholders rather than by
the board of directors. However the same must
contain the continuing provisions required in
paragraph 2 of section 97, that is:
1.
2.

3.

No meeting of stockholders need be called to

elect directors;

In close corporations, may not be compelled to

admit because it breaches the qualifying conditions

Since they cannot be compelled, may they admit?

Yes, provided all the stockholders consented or

instead of consenting they decide to amend their
articles of incorporation

Will have to amend the articles of incorporation to

accommodate other purchasers of share

Will cease to be a close corporation if it amends

and becomes in excess of 20

Unless the context clearly requires otherwise,

the stockholders of the corporation shall be
deemed to be directors; and;

The stockholders of the corporation shall be

subject to all liabilities of directors.

Liability of stockholders acting as directors in a

close corporation are more extensive since they
are personally liable for corporate torts unless the
corporation has obtained a reasonable adequate
liability insurance, unlike a ordinary stock
corporation, wherein directors thereof are only
liable for corporate torts only if they have been
negligent or acted fraudulently in the performance
of their functions.

Restrictions

In ordinary stock corporations, the restrictions

must appear in the articles of incorporation as well
as the certificate of stocks

In a close corporation, the restrictions must appear

in the articles of incorporation, the by-laws and the
certificate of stocks. Otherwise, the same shall not
be binding on any purchaser thereof in good faith

What if the stockholders do not want to exercise

their right or option to purchase may it be sold to
any person?

Yes, any third person, section 98 provides:

ordinary stock corporations are liable only

if acted in Bad faith, fraud or negligence
in performance of duty

What if there are already 20 stockholders and they

want to add 2 more, may it compel?

In ordinary stock corporations, they may compel

by mandamus

What if the other stockholders object to register?

What will be the remedy of the transferee?

His remedy is rescission. The effect of rescission is

mutual restitution

How about the stockholder, what is his recourse?

He may compel the close corporation to purchase

his shares at their fair value for any reason,
provided the corporation has sufficient assets in its
books to cover the debts and liabilities exclusive of
capital

In a close corporation, there is a withdrawing

stockholder, unlike in an ordinary stockholder
where there is none, they may only do so in the
exercise of appraisal rights
Section 105. Withdrawal of stockholder
or dissolution of corporation. - In addition and
without prejudice to other rights and remedies
available to a stockholder under this Title, any
stockholder of a close corporation may, for
any reason, compel the said corporation to
purchase his shares at their fair value, which
shall not be less than their par or issued
value, when the corporation has sufficient
assets in its books to cover its debts and
liabilities exclusive of capital stock: Provided,
That any stockholder of a close corporation may,
by written petition to the Securities and Exchange
Commission, compel the dissolution of such
corporation whenever any of acts of the directors,
officers or those in control of the corporation is
illegal, or fraudulent, or dishonest, or oppressive or
unfairly prejudicial to the corporation or any
stockholder, or whenever corporate assets are
being misapplied or wasted.

Section 98. Validity of restrictions on

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

Unless all the stockholders consent they

may

124

Agreements may also be entered in a close

corporation <sec.100>

They can even

management

Pre-incorporation

Manner in which the business of the corporation

shall be managed

Board resolution

Ordinary stock corporations- sit and act as a body

at a duly constituted meeting, they may do so by

agree

to

be

partners

in

virtue
of
the
E-Commerce
teleconference or video conference

Act

through

purposes or in payment of a previously contracted

debt.

Exception to the rule: other officers may be

directly appointed and hired by the stockholders

Are treasury shares covered in the exercise of preemptive rights in ordinary stock corporations?

Close corporations may validly act even without a

meeting provided the conditions are obtained

As regards amendments
Section 103. Amendment of articles of
incorporation. - Any amendment to the articles of
incorporation which seeks to delete or remove any
provision required by this Title to be contained in
the articles of incorporation or to reduce a quorum
or voting requirement stated in said articles of
incorporation shall not be valid or effective unless
approved by the affirmative vote of at least twothirds (2/3) of the outstanding capital stock,
whether with or without voting rights, or of such
greater proportion of shares as may be specifically
provided in the articles of incorporation for
amending, deleting or removing any of the
aforesaid provisions, at a meeting duly called for
the purpose.

Section 101. When board meeting is

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

Pre-emptive
absolute

rights

in

close

corporation

Section 102. Pre-emptive right in close

corporations.
The
pre-emptive
right
of
stockholders in close corporations shall extend to
all stock to be issued, including reissuance of
treasury shares, whether for money, property or
personal services, or in payment of corporate
debts, unless the articles of incorporation provide
otherwise.
Why is it said to be absolute?

Because there is no public offering in a close

corporation, otherwise it will not be considered as
close

In a close corporation the pre-emptive rights is

broadened to include all issues without exception
unless denied or limited by the articles of
incorporation

Section 39 is the governing provision concerning

rights of the stockholder in an ordinary stock
corporation and it may be denied. If it is not
denied a stockholder can exercise his pre-emptive
rights for all issues of shares whether money,
property or previously incurred indebtedness.

What happens if there is a deadlock?

Section 104 provides for a remedy

Section
104.
Deadlocks.
Notwithstanding any contrary provision in the
articles of incorporation or by-laws or agreement
of stockholders of a close corporation, if the
directors or stockholders are so divided respecting
the management of the corporation's business and
affairs that the votes required for any corporate
action cannot be obtained, with the consequence
that the business and affairs of the corporation can
no longer be conducted to the advantage of the
stockholders
generally,
the
Securities
and
Exchange Commission, upon written petition by
any stockholder, shall have the power to arbitrate
the dispute. In the exercise of such power, the
Commission shall have authority to make such
order as it deems appropriate, including an order:
(1) cancelling or altering any provision contained
in the articles of incorporation, by-laws, or any
stockholder's agreement; (2) cancelling, altering or
enjoining any resolution or act of the corporation
or its board of directors, stockholders, or officers;
(3) directing or prohibiting any act of the
corporation or its board of directors, stockholders,
officers, or other persons party to the action; (4)
requiring the purchase at their fair value of shares
of any stockholder, either by the corporation
regardless of the availability of unrestricted
retained earnings in its books, or by the other
stockholders; (5) appointing a provisional director;
(6) dissolving the corporation; or (7) granting such
other relief as the circumstances may warrant.

is

Section 39. Power to deny pre-emptive

right. - All stockholders of a stock corporation shall
enjoy pre-emptive right to subscribe to all issues
or disposition of shares of any class, in proportion
to their respective shareholdings, unless such right
is denied by the articles of incorporation or an
amendment thereto: Provided, That such preemptive right shall not extend to shares to be
issued in compliance with laws requiring stock
offerings or minimum stock ownership by the
public; or to shares to be issued in good faith with
the approval of the stockholders representing twothirds (2/3) of the outstanding capital stock, in
exchange for property needed for corporate

A provisional director shall be an impartial

person who is neither a stockholder nor a creditor
of the corporation or of any subsidiary or affiliate
of
the
corporation,
and
whose
further
qualifications, if any, may be determined by the
Commission. A provisional director is not a receiver
of the corporation and does not have the title and
powers of a custodian or receiver. A provisional
director shall have all the rights and powers of a
duly elected director of the corporation, including
the right to notice of and to vote at meetings of
directors, until such time as he shall be removed
by order of the Commission or by all the
stockholders.
His
compensation
shall
be
determined by agreement between him and the

125

corporation subject to approval of the Commission,

which may fix his compensation in the absence of
agreement or in the event of disagreement
between the provisional director and the
corporation.

4. Shares
of
stock
are
prohibited
from
being
listed
in
the
stock
exchange or offered for
sale to the public

No prohibition

5. Stockholders may take an

active part in corporate
management by vesting
management
to
them
rather than a Board of
Director

Management is lodged in the

Board of Directors

6. Those
active
in
management
are
personally
liable
for
corporate torts unless the
corporation has obtained
an
adequate
liability
insurance

Directors are liable for torts

only if they have acted
negligently or fraudulently

7. Directors can validly act

even without a meeting

Directors must, as a rule,

act as a body at a duly
constituted meeting

8. Agreements
between
stockholders
regarding
the operations of the
business can validly be
made

Not valid and binding since

stockholders
agreement
cannot limit the discretion of
the
Board
to
manage
corporate affairs

9. To
the
extent
that
directors may be classified
into one or more classes
and to be voted solely by
a particular class of stock,
cumulative voting may, in
effect, be restricted

Ordinarily,
no
such
classification
and
no
restrictions on cumulative
voting

Officers are elected by the

Board of Directors

may

10.The
articles
of
incorporation may provide
that all officers shall be
elected or appointed by
the stockholders

Section 105

Dishonesty is a ground for dissolution of a close

corporation

11.It
may
provide
for
greater
quorum
and
voting requirements in
meetings of stockholders
and directors

Even one stockholder may petition for dissolution

Although the articles of

incorporation
or
by-laws
may provide for greater
quorum
and
voting
requirements in directors
meeting under section 25,
those
for
stockholders
meeting cannot generally be
altered

12.Restriction on transfer of
shares should be indicated
in
the
articles
of
incorporation, by-laws and
stock certificates

Valid and binding if indicated

in
the
articles
of
incorporation
and
stock
certificates

13.Pre-emptive rights of
stockholders is broader as
it
include
all
issues
without exception

Pre-emptive rights may be

denied as provided for in
section 39

14.A
stockholder
may
withdraw and compel the
corporation to purchase
his shares for any reason
with the limitation only
that the corporation has
sufficient assets to cover
its liabilities exclusive of

Unless he sells his shares, a

stockholder cannot get back
his investment nor compel
the corporation to buy his
shares
except
in
the
exercise of his appraisal
right

Powers of the SEC in intra-corporate concerns has

been transferred to the proper commercial courts

Prohibit, even if acting in good faith

Provisional director appointed by the court

Requiring the purchase, irrespective of unrestricted

retained earnings

The provision of the law above-quoted gives the

SEC a very wide discretion in respect to
management of a close corporation in the event of
a deadlock. It may:
1.

Cancel or alter any provision in the articles of

incorporation, by-laws or any stockholders
agreement

2.

Cancel, alter or enjoin any resolution or other

act of the corporation or its board of directors,
stockholders or officers

3.

Prohibit any act of the corporation or its board

of directors, stockholders or officers or other
persons party to the action;

4.

Requiring the purchase of the par value of the

shares of any stockholders, either by the
corporation regardless of availability of
unrestricted earnings, or by the other
shareholders,

5.

Appointment of a provisional director

6.

Dissolving the corporation; or

7.

Other relief
warrant.

as

the

circumstances

when there is a relief available,

dissolution would not be available in an
ordinary corporation

CLOSE CORPORATION

ORDINARY STOCK
CORPORATION

1. The
number
of
stockholders
cannot
exceed 20

No limitation as to number
of shareholder

2. To the extent that all

stockholders
can
be
deemed
directors,
the
number of directors can
effectively be more than
15

Maximum
number
directors is 15

3. Shares
of
stock
are
subject
to
specified
restrictions

Generally no restriction on
transfer of shares

of

126

capital stock
15.The proper forum may
interfere
in
the
management of a close
corporation in case of
deadlocks under Section
104,
even
of
the
directors/stockholders are
acting in good faith

Courts cannot interfere I the

business judgment of the
directors/stockholders
BUSINESS
JUDGMENT
RULE

16.Any stockholder
may
petition
the
SEC
for
corporate dissolution on
grounds among others,
provides for in section 105

Dissolution may be had only

on the grounds provided by
the provisions of the Code
on dissolution and P.D. 902A, as amended

Special laws
Philippines

These institutions of learning, once recognized by

the government as such are mandated by law to
be incorporated within ninety (90) days under the
provisions of the Corporation Code and must,
perforce, comply with the requirements and
procedure laid down there under. Their failure to so
will not immune the educational institution from
suit as a corporation. (Chiang Kai Siek Case)

Manuel Dulay Enterprises vs. CA

What was the position of Manuel Dulay here?

President, General Manager and Treasurer

Favorable recommendation of government agency

involved

Two types of educational corporations

Certificate of completion in the academic field

Vocational and technical ones

Cannot act both as president and treasurer at the

same time

Since it is a close corporation owned by the family

of Manuel Dulay, save and except the secretary, it
should be governed by Title XII

Section 106. Incorporation. - Educational

corporations shall be governed by special laws and
by the general provisions of this Code. (n)
-

Petitioner is classified as a close corporation and

consequently a board resolution authorizing the
sale or mortgage of the subject property is not
necessary to bind the corporation for the action of
its president. At any rate, a corporate action taken
at a board meeting without proper call or notice in
a close corporation is deemed ratified by the
absent director unless the latter promptly files his
written objection with the secretary of the
corporation after having knowledge of the meeting
which, in this case, petitioner Virgilio Dulay failed
to do.
Virgilio Dulay is a signatory witness, he knows very
well about the deed of absolute sale, he is
estopped

Section 100 par. 5. To the extent that the

stockholders are actively engaged in the
management or operation of the business and
affairs of a close corporation, the stockholders
shall be held to strict fiduciary duties to each other
and among themselves. Said stockholders shall be
personally liable for corporate torts unless the
corporation has obtained reasonably adequate
liability insurance.
Family corporations is not automatically a close
corporation the 3 qualifying conditions must be
present.

SPECIAL CORPORATIONS

2 types of special corporations

1.

Educational corporations

2.

Religious corporations

like

they

Education

Act

of

the

Recommendation of DECS if certificate of

completion in the academic field

How is the governing board of an educational

institution instituted?

Non-stock- multiples of 5 only (example: 5,10,15)

Stock- can be anywhere between 5 to 15

Can they consist of 7 or 9 members?

Yes, if stock

Can they be incorporated also as non-stock?

Yes

B.P. 232 allows the organization of an educational

institution that is stock corporation, only if they do
not issue a certificate of completion in the
academic field

Qualifications
and
membership in the
corporation

Educational corporations are governed by special

laws and general provisions, hence if there is no
provision in the special law, you go back to section
25 and 27 of the general provisions

Stock- must be a stockholder

Non-stock- must be a member

By-laws may provide for additional qualifications

and disqualifications

Naguiat vs. NLRC

-

What provision governs educational corporations?

disqualifications
of
the
board of an educational

Section 25. Corporate officers, quorum. Immediately after their election, the directors of a
corporation must formally organize by the election
of a president, who shall be a director, a treasurer
who may or may not be a director, a secretary who
shall be a resident and citizen of the Philippines,
and such other officers as may be provided for in
the by-laws. Any two (2) or more positions may be

2.1 Corporation Sole

2.2 Religious Societies

127

held concurrently by the same person, except that

no one shall act as president and secretary or as
president and treasurer at the same time.

Corporation sole and religious societies

What is a corporation sole?

The directors or trustees and officers to

be elected shall perform the duties enjoined on
them by law and the by-laws of the corporation.
Unless the articles of incorporation or the by-laws
provide for a greater majority, a majority of the
number of directors or trustees as fixed in the
articles of incorporation shall constitute a quorum
for the transaction of corporate business, and
every decision of at least a majority of the
directors or trustees present at a meeting at which
there is a quorum shall be valid as a corporate act,
except for the election of officers which shall
require the vote of a majority of all the members
of the board.

Consists of one person only and his successor in

some particular station, who are incorporated by
law in order to give them some legal capacities and
advantages, particularly that of perpetuity, which
in their natural persons they could not have had

May a corporation be organized by less than 5

natural persons?

General rule, 5 to 15 natural persons(except

cooperatives and corporations primarily organized
to hold equities in rural banks and may rightfully
become incorporators thereof)

Directors or trustees cannot attend or vote by

proxy at board meetings. (33a)

Exception, corporation sole, consist of only one

person

May any person form or organize a corporation

sole?

No, not any person can form a corporation sole,

section 110 provides:

Section 27. Disqualification of directors, trustees

or officers. - No person convicted by final judgment of an
offense punishable by imprisonment for a period exceeding
six (6) years, or a violation of this Code committed within
five (5) years prior to the date of his election or
appointment, shall qualify as a director, trustee or officer of
any corporation. (n)

Section 110. Corporation sole. - For the

purpose of administering and managing, as
trustee, the affairs, property and temporalities of
any religious denomination, sect or church, a
corporation sole may be formed by the chief
archbishop, bishop, priest, minister, rabbi or other
presiding elder of such religious denomination, sect
or church. (154a)

Article 14 section 4 par. 2 of the Constitutions

Educational institutions, other than those
established by religious groups and mission
boards, shall be owned solely by citizens of the
Philippines or corporations or associations at least
sixty per centum of the capital of which is owned
by such citizens. The Congress may, however,
require increased Filipino equity participation in all
educational
institutions.
The
control
and
administration of educational institutions shall be
vested
in
citizens
of
the
Philippines.
No educational institution shall be established
exclusively for aliens and no group of aliens shall
comprise more than one-third of the enrollment in
any school. The provisions of this sub section shall
not apply to schools established for foreign
diplomatic personnel and their dependents and,
unless otherwise provided by law, for other foreign
temporary residents.

Management is
Philippines

Board of Directors manages the corporate affairs,

foreigners cannot therefore be elected in the board
Exceptions are, mission boards and religious
orders, which may have a governing board
consisting of foreigners

Term of office of governing board in an educational

institutions

Can serve a term of 5 years. If that be the case,

1/5 of their number shall expire every year

Non-stock or stock, can they serve for a 1 year

term only?

Yes, the articles of incorporation may provide that

it be 1 year only

What are these religious corporations spoken off?

Is it required to file the articles of incorporation in

the SEC?

Yes

What should be contained in the articles of

incorporation?

Section 111 and section 112 provides for the

contents and procedures
Section 111. Articles of incorporation. In order to become a corporation sole, the chief
archbishop, bishop, priest, minister, rabbi or
presiding elder of any religious denomination, sect
or church must file with the Securities and
Exchange Commission articles of incorporation
setting forth the following:

left solely to citizens of the

1. That he is the chief archbishop, bishop, priest,

minister, rabbi or presiding elder of his religious
denomination, sect or church and that he desires
to become a corporation sole;
2. That the rules, regulations and discipline of his
religious denomination, sect or church are not
inconsistent with his becoming a corporation sole
and do not forbid it;
3. That as such chief archbishop, bishop, priest,
minister, rabbi or presiding elder, he is charged
with the administration of the temporalities and
the management of the affairs, estate and
properties of his religious denomination, sect or
church within his territorial jurisdiction, describing
such territorial jurisdiction;
4. The manner in which any vacancy occurring in
the office of chief archbishop, bishop, priest,

128

minister, rabbi of presiding elder is required to be

filled, according to the rules, regulations or
discipline of the religious denomination, sect or
church to which he belongs; and

when there is a regulated method, a court order

may be dispensed with <sec. 113>
Section 113. Acquisition and alienation
of property. - Any corporation sole may purchase
and hold real estate and personal property for its
church, charitable, benevolent or educational
purposes, and may receive bequests or gifts for
such purposes. Such corporation may sell or
mortgage real property held by it by obtaining an
order for that purpose from the Court of First
Instance of the province where the property is
situated upon proof made to the satisfaction of the
court that notice of the application for leave to sell
or mortgage has been given by publication or
otherwise in such manner and for such time as
said court may have directed, and that it is to the
interest of the corporation that leave to sell or
mortgage should be granted. The application for
leave to sell or mortgage must be made by
petition, duly verified, by the chief archbishop,
bishop, priest, minister, rabbi or presiding elder
acting as corporation sole, and may be opposed by
any member of the religious denomination, sect or
church represented by the corporation sole:
Provided, That in cases where the rules,
regulations and discipline of the religious
denomination, sect or church, religious society or
order concerned represented by such corporation
sole regulate the method of acquiring, holding,
selling and mortgaging real estate and personal
property, such rules, regulations and discipline
shall control, and the intervention of the courts
shall not be necessary. (159a)

5. The place where the principal office of the

corporation sole is to be established and located,
which place must be within the Philippines.
The articles of incorporation may include
any other provision not contrary to law for the
regulation of the affairs of the corporation. (n)
Section 112. Submission of the articles
of incorporation. - The articles of incorporation
must be verified, before filing, by affidavit or
affirmation of the chief archbishop, bishop, priest,
minister, rabbi or presiding elder, as the case may
be, and accompanied by a copy of the commission,
certificate of election or letter of appointment of
such chief archbishop, bishop, priest, minister,
rabbi or presiding elder, duly certified to be correct
by any notary public.
From and after the filing with the
Securities and Exchange Commission of the said
articles of incorporation, verified by affidavit or
affirmation, and accompanied by the documents
mentioned in the preceding paragraph, such chief
archbishop, bishop, priest, minister, rabbi or
presiding elder shall become a corporation sole and
all temporalities, estate and properties of the
religious denomination, sect or church theretofore
administered or managed by him as such chief
archbishop, bishop, priest, minister, rabbi or
presiding elder shall be held in trust by him as a
corporation sole, for the use, purpose, behalf and
sole benefit of his religious denomination, sect or
church, including hospitals, schools, colleges,
orphan asylums, parsonages and cemeteries
thereof. (n)

Is it required to indicate its terms of execution?

Why not?

Not required because they are supposed to exist in

perpetuity

However, it does not mean that it shall continue to

exist forever, it merely means that it has the
capacity of continuous existence during a particular
period until dissolved in accordance with law

When will it acquire judicial personality? How do

you compare this to other types of corporation?

After the filing the verified articles of incorporation

along with the documents required in Section 112
with the SEC, immediately becomes endowed with
corporate personality, this serves as an exception
to the rule that a corporation acquires juridical
personality only upon the issuance of a certificate
of incorporation by the said government agency.

Upon filing of verified articles of incorporation with

the SEC, will not require the approval of SEC

A corporation sole is possessed with the same

power, rights and privileges, to own, acquire and
hold or convey properties like any other
corporation? True or False

False, they have the same power rights and

privileges, but when it comes to alienation and
acquisition, it must possess a court order, however

Since a corporation sole is consists only of one

person, will the registration of the property in the
name of the corporation sole vest unto the head
thereof the ownership of the property?

No, it will not vest unto the head, the head is

acting merely as a guardian
Roman Catholic Apostolic Adm. Of Davao, inc. vs.
Land Reg. Comm, et al.

Act only as a guardian

Ownership devolves upon the congregation or

religious denomination

A corporation consists of one person only and his

successors (who will always be one at a time, in
some particular station), who are incorporated by
law in order to give them some legal capacities and
advantages, particularly that of perpetuity, which
in their natural persons they could not have had

Roman Catholic Church has no nationality and that

the framers of the Constitution, as will be
hereunder explained, did not have in mind the
religious corporations sole when they provided that
60 percent of the capital thereof be owned by
Filipino citizens.
Director of Lands vs. CA

Alienable public land is converted into private land

when the same has been openly, continuously and
exclusively in possession of the property as
concept of an owner for 30 years, automatically
that is
Republic of the Philippines vs. IAC

129

Determination of the character of the land should

be in mind

If they still form part of public domain they cannot

be owned, but if they are converted into private
land, the constitutional prohibition will not apply

If there is vacancy who will fill up the same? What

if there is none, what must the successor do?

According to section 114:

amending the articles of incorporation to affect

dissolution.
o

Section 114. Filling of vacancies. - The

successors in office of any chief archbishop,
bishop, priest, minister, rabbi or presiding elder in
a corporation sole shall become the corporation
sole on their accession to office and shall be
permitted to transact business as such on the filing
with the Securities and Exchange Commission of a
copy of their commission, certificate of election, or
letters of appointment, duly certified by any notary
public.
During any vacancy in the office of chief
archbishop, bishop, priest, minister, rabbi or
presiding elder of any religious denomination, sect
or church incorporated as a corporation sole, the
person or persons authorized and empowered by
the rules, regulations or discipline of the religious
denomination, sect or church represented by the
corporation sole to administer the temporalities
and manage the affairs, estate and properties of
the corporation sole during the vacancy shall
exercise all the powers and authority of the
corporation sole during such vacancy. (158a)

May a corporation sole be dissolved by judicial

decree?

General rule: No, because a corporation sole, is by

its very nature ecclesiastical and religious (doctrine
of separation of church and state)

Exception: police power of the state, if its purpose

is being carried out and is instead being used for
illegal purpose, it may be so dissolved

What are religious societies?

Under common law, a religious society is a body of

persons associated together for the purpose of
maintaining religious worship.

Is it also required to file its articles of incorporation

to the SEC?

No <sec. 116> may

What should be contained in the articles of

incorporation?

Section 116 provides:

Section 116. Religious societies. - Any
religious society or religious order, or any diocese,
synod, or district organization of any religious
denomination, sect or church, unless forbidden by
the constitution, rules, regulations, or discipline of
the religious denomination, sect or church of which
it is a part, or by competent authority, may, upon
written consent and/or by an affirmative vote at a
meeting called for the purpose of at least twothirds (2/3) of its membership, incorporate for the
administration of its temporalities or for the
management of its affairs, properties and estate
by filing with the Securities and 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 district
organization of the religious denomination, sect or
church, setting forth the following:

If a corporation exists in equity may it not be

dissolved?
Section 115. Dissolution.
sole may be dissolved and its
voluntarily by submitting to the
Exchange Commission a verified
dissolution.

Expiration of a corporate term will not

apply to a religious corporation

- A corporation
affairs settled
Securities and
declaration of

The declaration of dissolution shall set forth:

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

1. That the religious society or religious order, or

diocese, synod, or district organization is a
religious organization of a religious denomination,
sect or church;

Upon approval of such declaration of

dissolution by the Securities and Exchange
Commission, the corporation shall cease to carry
on its operations except for the purpose of winding
up its affairs. (n)

2. That at least two-thirds (2/3) of its membership

have given their written consent or have voted to
incorporate, at a duly convened meeting of the
body;

While section 115 of the code provides for the

process and procedure for the dissolution of a
corporate sole, there is nothing in the law itself
which would prohibit it from amending its articles
of incorporation

It is believed that authorization for the dissolution

by the particular religious denomination, sect or
church, as required in sub-paragraph 3 of section
115 would still be necessary in the case of

3. That the incorporation of the religious society or

religious order, or diocese, synod, or district
organization desiring to incorporate is not
forbidden by competent authority or by the
constitution, rules, regulations or discipline of the
religious denomination, sect, or church of which it
forms a part;
4. That the religious society or religious order, or
diocese, synod, or district organization desires to

130

incorporate for the administration of its affairs,

properties and estate;

corporation because the period of corporate

existence
is
provided
in
the articles
of
incorporation. When such period expires and
without any extension having been made pursuant
to law, the corporation is dissolved automatically
insofar as the continuation of its business is
concerned.

5. The place where the principal office of the

corporation is to be established and located, which
place must be within the Philippines; and
6. The names, nationalities, and residences of the
trustees elected by the religious society or
religious order, or the diocese, synod, or district
organization to serve for the first year or such
other period as may be prescribed by the laws of
the religious society or religious order, or of the
diocese, synod, or district organization, the board
of trustees to be not less than five (5) nor more
than fifteen (15). (160a)

Is it required to indicate its term of existence?

Likewise to exist in perpetuity, the law does not

require to indicate its term of existence

When will it acquire juridical personality?

Only a corporation sole may come into existence

without SEC approval, section 19 will thus govern,
Vested with judicial capacity upon issuance of the
certificate by the SEC
o

However it is not accurate according to

atty. Ladia because there are those that
can issue for example cooperativesBUREAU OF COOPERATIVES which
register,
home
insurance
guaranty
corporation- HOME OWNERS

How may religious societies be dissolved?

Go to the general rules governing dissolution,

because the rules under special corporations do
not provide for such rule

DISSOLUTION

What is dissolution?

Extinguishment of the corporate franchise and the

termination of corporate existence

3 modes of dissolution

1.

By expiration of its term;

2.

By voluntary surrender of its primary franchise

(voluntary dissolution);

3.

By
revocation
of
its
(involuntary dissolution)

corporate

What are the 3 modes of voluntary dissolution?

1.

Voluntary dissolution
affected; <sec.118>

2.

Voluntary dissolution where creditors are affected;

<sec. 119>

3.

Shortening of corporate term. <sec. 120>

Voluntary dissolution
affected <sec.118>

The formal and procedural requirements necessary

are the following:

1.

Majority vote of the board of directors or trustees;

2.

Sending of notice of each stockholders or member

either by registered mail or personal delivery at
least thirty (30) days prior to the meeting
(scheduled by the board for the purpose of
submitting the board action to dissolve the
corporation for approval of the stockholder or
members.);

3.

Publication of the notice of time, place and subject

of the meeting for three (3) consecutive weeks in a
newspaper published in the place where the
principal office of said corporation is located or in a
newspaper of general circulation in the Philippines;

4.

Resolution adopted by the affirmative vote of the

stockholders owning at least 2/3 of the
outstanding capital stock or 2/3 of the members at
the meeting duly called for the purpose;

5.

A copy of the resolution authorizing the dissolution

must be certified by a majority of the board of
directors or trustees and countersigned by the
corporate secretary;

franchise

When the period of corporate life expires, the

corporation ceases to be a body corporate for
purposes of continuing the business for which it is
organized. But it shall nevertheless be continued
as a body corporate for three years after the time
when it would have be dissolved, for the purpose
of prosecuting and defending suits by or against it
and for enabling it gradually to settle and close its
affairs to dispose of and convey its property and to
divide its assets. There is no need for the
institution of a proceeding for quo warranto to
determine the time and date of the dissolution of a

131

3 modes of
dissolution, 3 modes of
voluntary dissolution and 3 modes of
liquidation and winding up- FREQUENTLY
ASKED IN THE FINALS

Philippine National Bank vs. CFI

-

The rights of the lessor and the lessee over the

improvements which the latter constructed on the
leased premises are governed by Article 1678 of
the Civil Code. The provision gives the lessee the
right to remove the improvements if the lessor
chooses not to pay one half of the value thereof.
However, in the case at bar the law will not apply
because the parties herein have stipulated in the
contract their own terms and conditions concerning
the improvements before the termination of the
lease. Petitioner PNB as assignee of PBM
succeeded to the obligation of the latter under the
contract of lease. It could not possess rights more
than what PBM had as lessee under the contract.
Hence, petitioner was duly bound to remove the
improvements before the expiration of the period
of lease. Its failure to do so when the lease was
terminated was tantamount to a waiver of its
rights and interest over the improvements on the
leased premise.

where

where

no

no

creditors

creditors

are

are

6.

Issuance of a certificate of dissolution by the SEC.

Is the appointment of a receiver mandatory?

Should this be strictly complied with?

Yes, compliance with the requirements and

formalities prescribed above is mandatory such
that failure to comply therewith will have no effect
on the legal existence of the corporation.

No, it is merely permissive or discretionary on the

part of the court. The code uses the word may;
the law intended to let the shareholders have the
control of the assets of the corporation upon
dissolution and winding up.

Will dissolution be effective and valid by a mere

resolution of the BOD and stockholders?

The directors may also undertake liquidation and

winding up of its corporate affairs, and sound
business judgment, on how they will wind up

No, a mere resolution by the stockholders or the

BOD of a corporation to dissolve the same does
not affect the dissolution but that some other
steps, administrative or judicial is necessary.
(Daguhoy Enterprises vs. Ponce)

Dissolution
<sec.120>

Will be valid upon approval of the SEC, unlike

general amendments, which will be deemed
approved if not acted upon by the SEC within 6
months from the date of filing for a cause not
attributable to the corporation.

Shortening of the corporate term partakes the

nature of an amendment of the articles of
incorporation.
Section
16
under
general
amendments allows written assent section 37
mandates that the vote must be cast at a duly
constituted meeting.

Since it is the State which grants its right to exist,

it is only through the State which can allow the
termination of its existence; without consent of the
State, it will not be dissolved.

Voluntary dissolution where creditors are affected

<sec.119>

By virtue of a petition, when there are creditors

affected

The following formalities would thus be required:

1.

Affirmative vote of the stockholders representing

at least 2/3 of the outstanding capital stock or at
least 2/3 of the members at a meeting duly called
for that purpose;

2.

Petition for dissolution shall be filed with the SEC

signed by a majority of its board of directors or
trustees or other officers having the management
of its affairs, verified by the president or secretary
or one of its directors or trustees, setting forth all
claims and demands against it.

3.

4.

6.

Upon five (5) days notice, given after the date on

which the right to file objections has expired, the
SEC shall hear the petition and try any issue made
by the objections filed.

7.

Judgment dissolving the corporation and directing

of its assets as justice requires and the
appointment of a receiver (if necessary in its
discretion) to collect such assets and pay the debts
of the corporation.
o

The foregoing
requirements

are

also

of

corporate

term

Intra-corporatecourts

special

commercial

Another way of dissolving a corporation is through

involuntary dissolution
Section 121. Involuntary dissolution. - A
corporation may be dissolved by the Securities and
Exchange Commission upon filing of a verified
complaint and after proper notice and hearing on
the grounds provided by existing laws, rules and
regulations. (n)

Before such date, a copy of the order must be

published once a week for three (3) consecutive
weeks in a newspaper of general circulation
published in the city or municipality where the
principal office is situated or in a newspaper of
general circulation in the Philippines.
Posting of the same order for three (3) consecutive
weeks in three (3) public places in such city or
municipality.

shortening

Section 120. Dissolution by shortening

corporate term. - A voluntary dissolution may be
effected by amending the articles of incorporation
to shorten the corporate term pursuant to the
provisions of this Code. A copy of the amended
articles of incorporation shall be submitted to the
Securities
and
Exchange
Commission
in
accordance with this Code. Upon approval of the
amended articles of incorporation of the expiration
of the shortened term, as the case may be, the
corporation shall be deemed dissolved without any
further proceedings, subject to the provisions of
this Code on liquidation. (n)

Issuance of an order by the SEC reciting the

purpose of the petition and fixing the date on or
before which objections thereto may be filed by
any person, which date shall not be less than thirty
days nor more than sixty days after entry of the
order.

5.

by

mandatory

132

Dissolution is tantamount to the imposition of

death penalty

Instead of dissolving the corporation, courts

normally enjoin the further commission of the
questioned act

The relief of dissolution will be awarded only where

no other remedy is available and it will not be
allowed where the rights of the stockholders can
be, or are, protected in some other way (Republic
vs. Bisaya Land Trans. Co. Inc.)

What are the grounds for involuntary dissolution?

It is commenced through a verified complaint or

motu proprio by the proper courts

Section 6 of PD 902-A provides for the grounds for

involuntary dissolution as follows:

1.

Fraud in procuring its certificate of registration;

2.

Serious misrepresentation as to what the

corporation can do or is doing to the great
prejudice of or damage to the general public;

3.

Refusal to comply or defiance of any lawful order

of the Commission restraining commission of acts
which would amount to a grave violation of its
franchise;

4.

Continuous inoperation for a period of at least five

(5) years;

5.

Failure to file by-laws within the required period;

6.

Failure to file required reports in appropriate forms

as determined by the Commission within the
prescribed period.

Other grounds are provided for in the corporation

code itself: among them are:

1.

Violation of any provision of the Code under

section 144;

2.

In case of deadlock in a close corporation as

provided for in section 105;

3.

Government vs. El Hogar

Mere dishonesty is also a ground in a close

corporation

Other grounds can be found in other special laws

like the Securities Regulation Code and the General
Banking Act as well as the Insurance Code.

3 causes of action, the first is that the corporation

violated the law by holding on the property beyond
that provide for by law, the second is that the
corporation
undertook
the
management
f
petitioners belonging to delinquent shareholders of
the association, and lastly that the by-law
provision, which empowers the BD to cancel shares
and to return to the owners thereof the balance
returning from the liquidation

Compare to Philippine Sugar Estate, wherein the

court ruled conditional dissolution. Why decree
conditional dissolution in one and not in the other
case?

Because in El Hogar the government was at fault,

the government wasnt able to issue the certificate
of title on time

When the case was instituted, El Hogar was

already able to dispose the properties in question,
in Philippine Sugar Estate it was still the holding
the properties in order to enrich itself at the
expense of the taxpayers
Republic vs. Security Credit and Acceptance Corp.
et al.

In a close corporation, any acts of directors,

officers or those in control of the corporation which
is illegal or fraudulent or dishonest or oppressive
or unfairly prejudicial to the corporation or any
stockholder or whenever corporate assets are
being misapplied or wasted under section 105.

The corporation here is a lending institution and

not a banking institution

Defendant corporation violated the law because

before a corporation may engage into a banking
activity it must first obtain a secondary franchise
from the Central Bank

Defendant corporation threatens substantial injury

to the general public, dissolution is warrant

If there is a bank run kawawa naman yung

depositors

Government vs. Philippine Sugar Estate

-

Republic vs. Bisaya Land Transportation Co. Inc

It is necessary in order to secure judicial

foreclosure of respondents charter to show a misuser of its franchise justifying such a forfeiture
Object is to protect the public, and not to redress
private grievances, the mis-user must be such as
to work or threaten a substantial injury to the
public, or such as to amount to a violation of the
fundamental condition of the contract by which the
franchise was granted and thus defeat the purpose
of the grant
Courts proceed with extreme caution which has for
their object the forfeiture of corporate franchise,
and forfeiture will not be allowed, except under
express limitation, or for plain abuse of power by
which the corporation fails to fulfill the design and
purpose of its organization. But when the abuse or
violation constitutes or threatens a substantial
injury to the public or such as to amount to a
violation of the fundamental conditions of its
charter, or its conduct is characterized by obduracy
or pertinacity in contempt of law, dissolution will
be granted

The relief of dissolution will be awarded only where

no other remedy is available and it will not be
allowed where the rights of the stockholders can
be, or are, protected in some other way

Misuse and misapplication of the funds and assets

of the respondent were committed particularly by
the corporate officers, where they can instead be
held personally liable

Since there is another remedy available dissolution

is not warranted

Assuming the above stated corporation is a close

corporation, would the court decree otherwise?

Yes, because in a close corporation,

dishonesty is a ground for the dissolution

Can even be dissolved by petition of only one

stockholder on the grounds stated in the code <
sec. 105>
Financing
Teodoro

Did the court dissolve the corporation? No, it did

not, it granted the corporation 6 months to cease
and desist the performance of the questioned act
otherwise it will be dissolved

133

Corporation

of

the

Philippines

mere

vs.

Minority stockholders may not ask for the

dissolution of a corporation in private suits and

that such actions should be brought by the

Government through its legal officers, except in
cases where the intervention of the State, for
one reason or another, cannot be obtained, as
when the State is not interested because the
complaint is strictly a matter between the
stockholders and does not involve, in the
opinion
of
the
legal
officer
of
the
Government, any of the acts or omissions
warranting quo warranto proceeding , in
which minority stockholders are entitled to
have such dissolution. It should be exercised if
necessary in order not to entirely ignore and
disregard the rights of said minority stockholders,
especially when said minority stockholders are
unable to obtain redress and protection of their
rights within the corporation itself. Stockholders
should not be left without recourse

A corporation where the corporate life has expired

it cannot lawfully pursue the business for which it
was organized.

the Supreme Court held that a corporation, whose

corporate life expired, cannot lawfully pursue the
business for which it was organized. It cannot
apply for a new certificate or a secondary franchise
for it is incapable of receiving a grant.

Awarding it to Camarines Sur is tantamount to a

medal for its illegal acts

It cannot apply for a new certificate or a secondary

franchise for it is incapable of receiving a grant. It
was not even a corporation de facto. And then,
there is no application subscribed by the new
corporation

Present set up

Any stockholder or member of a corporation can

institute a dissolution proceeding against his own
corporation before the proper forum

And yet as stated, the new corporation has not

filed any application for certificate of public
convenience in Sabang, and has not published
such application.

Special Commercial Courts, shall hear and decide

intra-corporate disputes

May a corporation ask for dissolution of the

corporation when there is no prejudice to the
general public?

Yes, in a close corporation, a petition for the

dissolution of the corporation may be instituted by
any one individual shareholder on the ground,
even by mere dishonesty

Effects of dissolution

The dissolution of a corporation not only

terminates its primary franchise to be a
corporation, but generally prevents it from further
exercising other or secondary franchises which
have been conferred to its. It terminates its power
to enter into contracts or t o continue the business
as a going concern.

Cebu Port Labor Union vs. State Marine Co

-

Gonzales vs. Sugar Regulatory Administration

Based on this general rule, the Supreme Court

held that a corporation, whose corporate life
expired, cannot lawfully pursue the business for
which it was organized. It cannot apply for a new
certificate or a secondary franchise for it is
incapable of receiving a grant. Neither can it
enforce a contract executed prior its dissolution for
the purpose of continuing the business of its
organization.

Instead of applying the corporation code, the court

applied the constitutional provision

Cannot be read as permitting to destroy the

substantive rights

Such would collide with the non-impairment of

contracts clause of the constitution

Complainants will have the right to follow the

assets of the corporation in the hands of SRA or
any other agency for that matter

After dissolution what next?

Liquidation and winding up should follow

What is the definition of liquidation and winding

up?

Collection of all corporate assets, the payments of

all its debts and settlement of its obligations and
the ultimate distribution of the corporate assets, if
any of it remains, to all stockholders in accordance
with their proportionate stockholdings in the
corporation or in accordance with their respective
contracts of subscription.

Preference upon liquidation

If there are preferred shares, the preference

granted to such should be complied with

Preferred shares may give the holder thereof,

preference only in the dividends but also in the
distribution of corporate assets upon liquidation or
termination of the corporate existence. If such is
the intent, the contract of subscription must so

In general the rights and liabilities of the

corporation are not extinguished by its dissolution.
Section 145. Amendment or repeal. - No
right or remedy in favor of or against any
corporation, its stockholders, members, directors,
trustees, or officers, nor any liability incurred by
any such corporation, stockholders, members,
directors, trustees, or officers, shall be removed or
impaired either by the subsequent dissolution of
said corporation or by any subsequent amendment
or repeal of this Code or of any part thereof. (n)
Buenaflor vs. Camarines Sur Industry Corp.

Even a cursory reading of the provision would

convey the idea clearly manifested in the limitation
but not for the purpose of continuing the business
for which it was established, that the 3-year
period allowed by the law is only for the purpose of
winding up its affairs.

From that time on Camarines Sur was plying in an

activity that was illegal

134

indicate lest they are placed on equal footing with

common shareholders
-

Preference
may
participating

be

participating

or

non-

Dissolved corporations are granted a period of 3

years to liquidate
Section 122. Corporate liquidation. Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise,
or whose corporate existence for other purposes is
terminated in any other manner, shall nevertheless
be continued as a body corporate for three (3)
years after the time when it would have been so
dissolved, for the purpose of prosecuting and
defending suits by or against it and enabling it to
settle and close its affairs, to dispose of and
convey its property and to distribute its assets, but
not for the purpose of continuing the business for
which it was established.
At any time during said three (3) years,
the corporation is authorized and empowered to
convey all of its property to trustees for the benefit
of stockholders, members, creditors, and other
persons in interest. From and after any such
conveyance by the corporation of its property in
trust for the benefit of its stockholders, members,
creditors and others in interest, all interest which
the corporation had in the property terminates, the
legal interest vests in the trustees, and the
beneficial interest in the stockholders, members,
creditors or other persons in interest.

Liquidation may be undertaken in either of the 3

ways

1.

By the corporation itself through the BOD

Usual method or procedure of liquidating a

corporation and although there is no law
authorizing it, neither is there anything that
prohibits the BOD from undertaking the same

If this method is resorted to, the board will only

have a period of 3 years to finish its task of
liquidation

Claims for or against the corporate entity not filed

within the period will become unenforceable as
there exist no corporate entity against which they
can be enforced

Actions pending for or against the corporation

when the 3 year period expires, are abated since
after the period, the corporation ceases for all
intents and purposes and is no longer capable of
suing or being sued

The corporation may opt to convey all corporate

assets to a trustees who will take charge of
liquidation

If this method is used, the three year period

limitation imposed by section 122 will not apply
provided the designation of the trustee is made
within that period

3.

By appointment of a receiver

A receiver may be appointed by the proper forum

on petition or motu proprio upon the dissolution of
the corporation

The appointment of a receiver is, however,

permissive rather than mandatory and the law
tends to recognize that in cases of voluntary
dissolution there is no occasion for the
appointment of a receiver except under special
circumstances and upon proper showing

If a receiver is appointed, the 3 year period fixed

by law within which to complete the task of
liquidation will not likewise apply because the
dissolved corporation is substituted by the receiver
who may sue or be sued even after that period
Mere appointment of a receiver without
anything more does imply in the
dissolution of a corporation

National Abaca other Fibers Co. vs. Pore

Except by decrease of capital stock and as

otherwise allowed by this Code, no corporation
shall distribute any of its assets or property except
upon lawful dissolution and after payment of all its
debts and liabilities. (77a, 89a, 16a)
However the 3 year period is not absolute

By a trustee appointed by the corporation

Upon the winding up of the corporate

affairs, any asset distributable to any creditor or
stockholder or member who is unknown or cannot
be found shall be escheated to the city or
municipality where such assets are located.

2.

Actions pending for or against the corporation

when the 3 year period expires, are abated since
after that period, the corporation ceases for all
intents and purposes and is no longer capable of
suing or being sued

May be continued by the trustee provided done

within the 3 year period

Should the corporation, therefore, finds it difficult

to finish its liquidation, it may, at any time during
the three year period, convey all its assets and
receivables to a trustee to prosecute and defend
suits by or against the corporation begun before
the expiration of said period

The effect of the conveyance is to make the

trustees the legal owners of the property
conveyed, subject to the beneficial interest therein
of creditors and stockholders
Sumera vs. Valencia

135

Thus it was held that when a corporation is

dissolved and the liquidation of the assets is placed
in the hands of receiver or assignee, the period of
3 years prescribed by law is not applicable and the
assignee may institute all actions leading to the
liquidation of the corporation even after the
expiration of 3 years.

If the corporation carries out the liquidation of its

assets through its own officers and continues and
defends the actions brought by or against it, its
existence shall terminate at the end of three years
from the time of dissolution; but if a receiver or
assignee is appointed, with or without a transfer of
its properties within 3 years, the legal interest

passes to the assignee, the beneficial interest

remaining in the members, stockholders, creditors
and other interested persons and said assignee
may bring an action, prosecute that which has
already been commenced for the benefit of the
corporation, or defend the latter against any other
action already instituted or which may be
instituted even outside of the period of three years
fixed for the offices of the corporation.

assets of the dissolved corporation to the new

corporation intended to be created as long as the
stockholders have given their consent (Chung Ka
Bio vs. IAC)

What happens to the remaining assets and

properties of the dissolved corporation if liquidation
and winding up as provided in section 122 is not
complied with, as a result of which the 3 year
period has elapsed

If the three year extended life has expired without

a trustee or receiver having been expressly
designated by the corporation within that period,
the board of directors o trustees itself, following
the rationale of the Supreme Courts decision in
Gelano vs. CA may be permitted to do so continue
as trustees by legal implication to complete the
liquidation. Still in the absence of a BOD or BOT,
those having any pecuniary interest in the assets,
including not only the shareholders but likewise
the creditors of the corporation, acting for and in
its behalf, might make proper representations with
the SEC, which has primary and sufficiently broad
jurisdiction in matters of this nature, for working
out a final settlement of the corporate concerns
(Clemente vs. CA)

Board of Liquidators vs. Kalaw

-

If there is a trustee, assignee or liquidator, it can

continue prosecuting suit even beyond the 3 year
period fixed by law because he becomes the legal
owner of the rights, assets and properties
conveyed to him
Gelano vs. CA

Trustee as used in the corporation statute must

be understood in its general concept which could
include the counsel to whom was entrusted in the
instant case, the prosecution of the suit filed by
the corporation. The purpose in the transfer of the
assets of the corporation to a trustee upon its
dissolution is more for the protection of its
creditors and stockholders. Debtors like the
petitioners herein may not take advantage of the
failure of the corporation to transfer its assets to a
trustee, assuming it has any to transfer which
petitioner has failed to show, in the first place. To
sustain petitioners contention would be to allow
them to enrich themselves at the expense of
another, which all enlightened legal systems
condemn.

The counsel who prosecuted and defended the

interest of the corporation may be considered as a
trustee at least with respect to the matter in
litigation only

May a corporation that is already dissolved,

transfer and assign its assets and properties to a
new corporation which will continue the business of
the dissolved one?

Yes, provided all the stockholders gave their

consent (Chung Ka Bio vs. IAC)

Clemente vs. CA
-

Who owns the properties? SOCIEDAD ANONIMA

The termination of the life of a juridical entity does

not by itself cause the extinction or diminution of
the rights and liabilities of such entity or those of
its owners and creditors. If the three year
extended life has expired without a trustee or
receiver having been expressly designated by the
corporation within that period, the board of
directors o trustees itself, following the rationale of
the Supreme Courts decision in Gelano vs. CA may
be permitted to do so continue as trustees by
legal implication to complete the liquidation. Still in
the absence of a BOD or BOT, those having any
pecuniary interest in the assets, including not only
the shareholders but likewise the creditors of the
corporation, acting for and in its behalf, might
make proper representations with the SEC, which
has primary and sufficiently broad jurisdiction in
matters of this nature, for working out a final
settlement of the corporate concerns

Republic vs. Marsman Development Company &

Chung Ka Bio vs. IAC
-

According to atty. Ladia the ruling of the

Supreme Court in the case of Clemente
vs. CA is wrong, opinion is further
discussed after the Clemente Case

During the three year period granted to a

corporation to liquidate or wind up its affairs, the
BOD is not normally permitted to undertake any
activity outside the usual liquidation of the
corporation. There is, however, nothing to prevent
the stockholders from conveying their respective
shareholdings toward the creation of a new
corporation to continue the business of the old.
This is because winding up is the sole activity of
the dissolved corporation that does not intend to
incorporate a new. If it does, however, it is not
unlawful for the old board of directors to negotiate
and transfer the assets of the dissolved corporation
to the new corporation intended to be created as
long as the stockholders have given their consent
(Republic vs. Marsman Development Company)

Winding up is the sole activity of a dissolved

corporation that does not intend to incorporate
anew. If it does, however, it is not unlawful for the
old board of directors to negotiate and transfer the

136

the ruling is wrong according to atty.

Ladia

According to atty Ladia: What happens to a

corporation that is already dissolved, that has not
been able to appoint a trustee with in the 3 year
period?

a corporation dissolved which failed to exercise its

rights granted in section 122 after the 3 year
period has elapsed, ceases to exist for all intents
and purposes, it can no longer sue or be sued

according to 122 of the code, the property should

be escheated, accordingly:

Section 122. Corporate liquidation. Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise,
or whose corporate existence for other purposes is
terminated in any other manner, shall nevertheless
be continued as a body corporate for three (3)
years after the time when it would have been so
dissolved, for the purpose of prosecuting and
defending suits by or against it and enabling it to
settle and close its affairs, to dispose of and
convey its property and to distribute its assets, but
not for the purpose of continuing the business for
which it was established.

Composed of 100% Americans; organized under

the laws other than the Philippines

The test is the incorporation test

General rule: the place of

irrespective of the nationality

Exception: control test would apply in determining

the corporate nationality, i.e., the citizenship of the
controlling stockholders determines the nationality
of the corporation

At any time during said three (3) years,

the corporation is authorized and empowered to
convey all of its property to trustees for the benefit
of stockholders, members, creditors, and other
persons in interest. From and after any such
conveyance by the corporation of its property in
trust for the benefit of its stockholders, members,
creditors and others in interest, all interest which
the corporation had in the property terminates, the
legal interest vests in the trustees, and the
beneficial interest in the stockholders, members,
creditors or other persons in interest.

If a foreign corporation wants to transact business

in the Philippines, what must it do?

Obtain a license

How may it do so?

According to sec. 125:

1. The date and term of incorporation;

Except by decrease of capital stock and as

otherwise allowed by this Code, no corporation
shall distribute any of its assets or property except
upon lawful dissolution and after payment of all its
debts and liabilities. (77a, 89a, 16a)

2. The address, including the street number, of the

principal office of the corporation in the country or
state of incorporation;
3. The name and address of its resident agent
authorized to accept summons and process in all
legal proceedings and, pending the establishment
of a local office, all notices affecting the
corporation;

FOREIGN CORPORATIONS
Definition

Section 123. Definition and rights of foreign

corporations. - For the purposes of this Code, a
foreign corporation is one formed, organized or
existing under any laws other than those of the
Philippines and whose laws allow Filipino citizens
and corporations to do business in its own country
or state. It shall have the right to transact
business in the Philippines after it shall have
obtained a license to transact business in this
country in accordance with this Code and a
certificate of authority from the appropriate
government agency. (n)

What if the law of the state of the foreign

corporation does not allow Filipino citizens to do
business in their country?

The phrase and whose laws allow Filipino citizens

and corporations to do business in its own country
or state is not, however, an accurate inclusion in
the definition as ay corporation registered or
organized under the laws of another state is
necessarily a foreign corporation whether or not
the state of its incorporation allow Filipino citizens
or corporations to do business in that forum.

incorporation

Section 125. Application for a license. A foreign corporation applying for a license to
transact business in the Philippines shall submit to
the Securities and Exchange Commission a copy of
its articles of incorporation and by-laws, certified in
accordance with law, and their translation to an
official language of the Philippines, if necessary.
The application shall be under oath and, unless
already stated in its articles of incorporation, shall
specifically set forth the following:

Upon the winding up of the corporate

affairs, any asset distributable to any creditor
or stockholder or member who is unknown or
cannot be found shall be escheated to the city
or municipality where such assets are
located.

its

4. The place in the Philippines

corporation intends to operate;

where

the

5. The specific purpose or purposes which the

corporation intends to pursue in the transaction of
its business in the Philippines: Provided, That said
purpose or purposes are those specifically stated in
the certificate of authority issued by the
appropriate government agency;
6. The names and addresses of the present
directors and officers of the corporation;
7. A statement of its authorized capital stock and
the aggregate number of shares which the
corporation has authority to issue, itemized by
classes, par value of shares, shares without par
value, and series, if any;
8. A statement of its outstanding capital stock
the aggregate number of shares which
corporation has issued, itemized by classes,
value of shares, shares without par value,
series, if any;

and
the
par
and

9. A statement of the amount actually paid in; and

The said phrase was inserted by the framers of the

law only as a condition precedent to the grant of a
license of a foreign corporation to do business in
the Philippines.

10. Such additional information as may be

necessary or appropriate in order to enable the
Securities and Exchange Commission to determine
whether such corporation is entitled to a license to

137

transact business in the Philippines,

determine and assess the fees payable.

and

to

Within sixty (60) days after the issuance

of the license to transact business in the
Philippines, the license, except foreign banking or
insurance corporation, shall deposit with the
Securities and Exchange Commission for the
benefit of present and future creditors of the
licensee in the Philippines, securities satisfactory to
the
Securities
and
Exchange
Commission,
consisting of bonds or other evidence of
indebtedness of the Government of the Philippines,
its political subdivisions and instrumentalities, or of
government-owned or controlled corporations and
entities, shares of stock in "registered enterprises"
as this term is defined in Republic Act No. 5186,
shares of stock in domestic corporations registered
in the stock exchange, or shares of stock in
domestic insurance companies and banks, or any
combination of these kinds of securities, with an
actual market value of at least one hundred
thousand (P100,000.) pesos; Provided, however,
That within six (6) months after each fiscal year of
the licensee, the Securities and Exchange
Commission shall require the licensee to deposit
additional securities equivalent in actual market
value to two (2%) percent of the amount by which
the licensee's gross income for that fiscal year
exceeds five million (P5,000,000.00) pesos. The
Securities and Exchange Commission shall also
require deposit of additional securities if the actual
market value of the securities on deposit has
decreased by at least ten (10%) percent of their
actual market value at the time they were
deposited.
The
Securities
and
Exchange
Commission may at its discretion release part of
the additional securities deposited with it if the
gross income of the licensee has decreased, or if
the actual market value of the total securities on
deposit has increased, by more than ten (10%)
percent of the actual market value of the securities
at the time they were deposited. The Securities
and Exchange Commission may, from time to time,
allow the licensee to substitute other securities for
those already on deposit as long as the licensee is
solvent. Such licensee shall be entitled to collect
the interest or dividends on the securities
deposited. In the event the licensee ceases to do
business in the Philippines, the securities deposited
as aforesaid shall be returned, upon the licensee's
application therefor and upon proof to the
satisfaction of the Securities and Exchange
Commission that the licensee has no liability to
Philippine residents, including the Government of
the Republic of the Philippines. (n)

Attached to the application for license

shall be a duly executed certificate under oath by
the authorized official or officials of the jurisdiction
of its incorporation, attesting to the fact that the
laws of the country or state of the applicant allow
Filipino citizens and corporations to do business
therein, and that the applicant is an existing
corporation in good standing. If such certificate is
in a foreign language, a translation thereof in
English under oath of the translator shall be
attached thereto.
The application for a license to transact
business in the Philippines shall likewise be
accompanied by a statement under oath of the
president or any other person authorized by the
corporation, showing to the satisfaction of the
Securities and Exchange Commission and other
governmental agency in the proper cases that the
applicant is solvent and in sound financial
condition, and setting forth the assets and
liabilities of the corporation as of the date not
exceeding one (1) year immediately prior to the
filing of the application.
Foreign banking, financial and insurance
corporations shall, in addition to the above
requirements, comply with the provisions of
existing laws applicable to them. In the case of all
other foreign corporations, no application for
license to transact business in the Philippines shall
be accepted by the Securities and Exchange
Commission without previous authority from the
appropriate
government
agency,
whenever
required by law. (68a)

Is there any deposit or security requirement?

Yes, within 60 days after the issuance of the

license, a foreign corporation, except those
engaged in foreign banking or insurance, shall
deposit with the SEC, for the benefit of creditors,
securities consisting of bonds or other evidence of
indebtedness of the Philippine government or its
political subdivision, or of government owned or
controlled corporation, shares of stock in
registered enterprises as this term is defined in
R.A. 5186, shares of stock in domestic insurance
companies and banks or any combination thereof
with an actual market value of 100,000

Additional securities may be required by the SEC if

the actual market value of the securities on deposit
has decreased by at least 10%. Section 126 of the
code provides:
Section 126. Issuance of a license. - If
the Securities and Exchange Commission is
satisfied that the applicant has complied with all
the requirements of this Code and other special
laws, rules and regulations, the Commission shall
issue a license to the applicant to transact business
in the Philippines for the purpose or purposes
specified in such license. Upon issuance of the
license, such foreign corporation may commence
to transact business in the Philippines and continue
to do so for as long as it retains its authority to act
as a corporation under the laws of the country or
state of its incorporation, unless such license is
sooner surrendered, revoked, suspended or
annulled in accordance with this Code or other
special laws.

Other than section 125 and 126. What other

requirements are set under Philippine Law before a
foreign corporation may transact business in the
Philippines

Yes. A Resident agent is required. As a condition

precedent to the grant of a license to do or
transact business in the Philippines, the foreign
corporation is required to designate its resident
agent on whom summons and other legal
processes may be served in all actions or legal
proceedings against such corporation

Section 128 provides:

Section 128. Resident agent; service of
process.
The
Securities
and
Exchange
Commission shall require as a condition precedent
to the issuance of the license to transact business
in the Philippines by any foreign corporation that
such corporation file with the Securities and

138

Exchange Commission a written power of attorney

designating some person who must be a resident
of the Philippines, on whom any summons and
other legal processes may be served in all actions
or
other
legal
proceedings
against
such
corporation, and consenting that service upon such
resident agent shall be admitted and held as valid
as if served upon the duly authorized officers of
the foreign corporation at its home office. Any such
foreign corporation shall likewise execute and file
with the Securities and Exchange Commission an
agreement or stipulation, executed by the proper
authorities of said corporation, in form and
substance as follows:
"The (name of foreign corporation) does
hereby stipulate and agree, in consideration of its
being granted by the Securities and Exchange
Commission a license to transact business in the
Philippines, that if at any time said corporation
shall cease to transact business in the Philippines,
or shall be without any resident agent in the
Philippines on whom any summons or other legal
processes may be served, then in any action or
proceeding arising out of any business or
transaction which occurred in the Philippines,
service of any summons or other legal process
may be made upon the Securities and Exchange
Commission and that such service shall have the
same force and effect as if made upon the dulyauthorized officers of the corporation at its home
office."
Whenever such service of summons or
other process shall be made upon the Securities
and Exchange Commission, the Commission shall,
within ten (10) days thereafter, transmit by mail a
copy of such summons or other legal process to
the corporation at its home or principal office. The
sending of such copy by the Commission shall be
necessary part of and shall complete such service.
All expenses incurred by the Commission for such
service shall be paid in advance by the party at
whose instance the service is made.

If there is a resident agent appointed. May

summons be served to any officers of the
corporation?

No, if there is a resident agent, the designation is

exclusive and service must be made only to the
resident agent or else the service is without force
and effect unless made to him

Thus, while the law allows service upon the SEC or

any of its officers or agents within the Philippines

The two modes may become effective only if the

foreign corporation failed or neglected to designate
such a person or an agent

Summons must be made only to resident agent

except when there is no resident agent appointed

Where such foreign corporation actually doing

business here has not applied for a license to do
and has not designated an agent to receive
summons, then service of summons on it will be
made pursuant to the provisions of the rules of
court. If such foreign corporation has a license to
do business, then summons to it will be served on
the agent designated by it for the purpose, or
otherwise in accordance with the Corporation Law
(General Corporation of the Philippines vs. Union
Insurance Soc. Of Canton Ltd.)

If the foreign corporation conducts business in the

Philippines without the license requirement. What
is the effect?

Section 133 provides:

Section 133. Doing business without a
license. - No foreign corporation transacting
business in the Philippines without a license, or its
successors or assigns, shall be permitted to
maintain or intervene in any action, suit or
proceeding in any court or administrative agency
of the Philippines; but such corporation may be
sued or proceeded against before Philippine courts
or administrative tribunals on any valid cause of
action recognized under Philippine laws. (69a)

In case of a change of address of the

resident agent, it shall be his or its duty to
immediately notify in writing the Securities and
Exchange Commission of the new address. (72a;
and n)

The necessity of the appointment of a resident

agent is only for the purpose of receiving summons
and other legal processes in any legal action or
proceeding against the foreign corporation

if they do so, the responsible officers may be

subjected to the penal sanctions provided for in
section 144 of the code, which may either be fine
or imprisonment

What if it is not doing business without a license?

Who may be appointed as a resident agent?

Section 127 provides that:

If it is not transacting business in the Philippines,

even without a license, it can sue before the
Philippine Courts

The general rule is that it is not the lack of

required license but doing business without a
license which bars a foreign corporation form
access to our courts.

Exception:

Section 127. Who may be a resident

agent. - A resident agent may be either an
individual residing in the Philippines or a domestic
corporation lawfully transacting business in the
Philippines: Provided, That in the case of an
individual, he must be of good moral character and
of sound financial standing. (n)

May a partnership be appointed as a resident

agent?

Yes, domestic corporation taken in its general

sense not legal sense

1.

139

Foreign corporations can sue before the

Philippine Courts if the act or transaction
involved is an isolated transaction or the
corporation is not seeking to enforce any legal
or contractual rights arising from, or growing
out of, any business which it has transacted in
the Philippines

2.

Neither is a license required before a foreign

corporation may sue before the forum if the
purpose of the suit is to protect its trademark,
trade name, corporate name, reputation or
goodwill;

3.

Or where it is based on a violation of the

Revised Penal Code;

4.

Or merely defending a suit filed against it

5.

Or where a party is stopped to challenge the

personality of the corporation by entering into
a contract with it.

The true test, however, seems to be whether the

foreign corporation is continuing the body or
substance of the business or enterprise for which it
was organized or whether it has substantially
retired from it and turned it over to another. The
term implies a continuity of commercial dealings
and arrangements, and contemplates, to that
extent, the performance of acts or works or the
exercise of some of the functions normally incident
to, and in progressive prosecution of, the purpose
and object of its organization

Whatever transaction the Philippine-American Drug

Co. had executed in view of the law, the
Mentholatum Co. did it itself. And the Mentholatum
Co. being a foreign corporation doing business in
the Philippines without the license required by
section 68 of the Corporation Law, it may not
prosecute this action for violation of trade mark
and unfair competition

Rules laid down by the SC

A.

As to whether or
not it can sue

B.

As to whether or
not it can be
sued

A
foreign
corporation
transacting
or
doing
business in the Philippines
with a license can sue
before Philippine Courts

A
foreign
corporation
transacting business in
the Philippines with the
requisite license can be
sued in the Philippine
Courts

Why is foreign corporations barred access from our

courts if they do business without a license?

Marshall-Wells Co. vs. Henry W. Elser and Co.

Subject
to
certain
exceptions,
a
foreign
corporation
doing
business in the country
without a license cannot
sue in Philippine Courts

A
foreign
corporation
transacting business in
the Philippines without a
license can be sued in
Philippine Courts

If it is not transacting
business
in
the
Philippines, even without
a license, it can sue
before
the
Philippine
Courts

if it is not doing business

in
the
Philippines,
it
cannot
be
sued
in
Philippine Courts for lack
of jurisdiction

A foreign corporation not doing business in the

Philippines, may it be sued?

If it is not transacting business in the country it

cannot be sued for lack of jurisdiction

Is there any sanction that can be enforced to

foreign corporations which are doing business
without the required license?

Penal sanctions under section 144

Any violation of the code is subject to such penal

sanctions

What would constitute doing business?

The true test, however, seems to be whether the

foreign corporation is continuing the body or
substance of the business or enterprise for which it
was organized or whether it has substantially
retired from it and turned it over to another. The
term implies a continuity of commercial dealings
and arrangements, and contemplates, to that
extent, the performance of acts or works or the
exercise of some of the functions normally incident
to, and in progressive prosecution of, the purpose
and object of its organization (Mentholatum Co.
Inc. vs. Mangaliman)

Marshall-Wells Co. vs. Henry W. Elser and Co.

The object of the statute was to subject the foreign
corporation doing business in the Philippines to the
jurisdiction of its courts. The object of the statute
was not to prevent the foreign corporation from
performing single acts, but to prevent it from
acquiring a domicile for the purpose of business
without taking the steps necessary to render it
amenable to suit in local courts.
Bulakhidas vs. Navarro
-

It is settled that if a foreign corporation is not

engaged in business in the Philippines, it may not
be denied the right to file an action in Philippine
courts for isolated transactions

The object of section 68 and 69 of the Corporation

law was not to prevent the foreign corporation
from performing single acts, but to prevent it from
acquiring a domicile for the purpose of business
without taking the steps necessary to render it
amenable to suit in the local courts. It was never
the purpose of the Legislature to exclude a foreign
corporation which happens to obtain an isolated
order for business from the Philippines, from
securing redress in the Philippine courts
The Swedish East Asia Co., Ltd. Vs. Manila Port
Service

Mentholatum vs. Mangaliman

140

It must stated that the section is not applicable to

a foreign corporation performing single acts or
isolated transactions. There is nothing to show
that the petitioner has been in the Philippines
engaged in continuing business or enterprise for
which it was organized, when the sixteen bundles
were erroneously discharged in manila, for it to be
considered as transacting business in the
Philippines. The fact is that the bundles, the value
of which is sought to be recovered, were landed
not as a result of a business transaction, isolated
or otherwise, but due to a mistaken belief that
they were part of the shipment of forty similar
bundles consigned to persons or entities in the
Philippines, there is no justification therefore, for
invoking the section

There were 3 contracts entered into, how come

they were still not considered as doing business?
(Antam Consolidted, Inc. vs. CA)

If a corporation appoints a distributor or a

representative, will it necessarily imply doing
business in the country?

Every case shall be judged in the light of its

peculiar circumstances, where a single act or
transaction however, is not merely incidental or
casual but indicates the foreign corporations
intention to do other business in the Philippines,
said single act or transaction constitutes doing or
engaging in or transacting business in the
Philippines

If the
foreign
corporation
maintained an
independent status during the existence of the
disputed contract.

Appointment of a distributor or representative in

the Philippines, unless it has an independent status
(transacts and does business in its own name and
for its account and not of the foreign corporation)

In the case at bar, the transaction entered into by

the respondent with the petitioners are not a
series of commercial dealings which signify an
intent on the part of the respondent to do business
in the Philippines but constitute an isolated one
which does not fall under the category of doing
business.

if that be the case the mere appointment of a

distributor will not constitute doing business

How do you know if it has an independent status?

Communications Materials and Design vs. CA

Communications Materials and Design vs. CA

The records show that the only reason why the

respondent entered into the second and third
transactions with the petitioner was because it
wanted to recover the loss it sustained from the
failure of the petitioners to deliver the crude
coconut oil under the first transaction and in order
to give the latter a chance to make good on their
obligation. From these facts alone, it can be
deducted that in reality there was only one
agreement between the petitioners and the
respondent.
The three seemingly different transactions were
entered into by the parties only in an effort to
fulfill the basic agreement and in no way indicate
an intent on the part of the respondent to engage
in a continuity of transactions with petitioners
which will categorize it as a foreign corporation
doing business in the Philippines

A perusal of the agreements between petitioner

ASPAC and the respondents show that there are
provisions which are highly restrictive in nature,
such as to reduce petitioner ASPAC to a mere
extension or instrument of the private respondents

ITEC was doing business

however ASPAC is estopped

by entering into the Representative Agreement

with ITEC, petitioner is charge with knowledge that
ITEC
was not licensed to engage in business
activities in the country, and is thus stopped from
raising in defense such incapacity of ITEC, having
chosen to ignore or even presumptively take
advantage of the same

In top-weld we ruled that a foreign corporation

may be exempted from the license requirements in
order to institute an action in our courts if its
representative in the country maintained an
independent status during the existence of the
disputed contract. Petitioner is deemed to have
acceded to such independent character when it
entered into the Representative Agreement with
ITEC

3 contracts, but according to the court was not

doing business in the Philippines
Far East Intl import vs. Nankai Kogyo Co. Ltd.

Only one contract , but according to the Supreme

Court was doing business in the Philippines

Every case shall be judged in the light of its

peculiar circumstances, where a single act or
transaction however, is not merely incidental or
casual but indicates the foreign corporations
intention to do other business in the Philippines,
said single act or transaction constitutes doing or
engaging in or transacting business in the
Philippines

without

license,

Western Equipment and Supply Co. vs. Reyes

In the instant case, the testimony of Atty. Pablo

Ocampo, that appellant was doing business in the
Philippines corroborated by no less than Nabuo
Toshida, one of appellants officers, that he was
sent to the Philippines to look into the operation of
mines, thereby revealing the defendants desire to
continue engaging in business here, after receiving
the shipment of the scrap iron under consideration,
making the Philippines a base thereof.
In such a case, the single act of transaction is not
merely incidental or casual, but is of such
character as distinctly to indicate a purpose on the
part of the operations for the conduct of a part of
corporations ordinary business

141

The company is not here seeking to enforce any

legal or contract rights arising from, or growing out
of any business which it has transacted in the
Philippine Islands. The sole purpose of the action is
to protect its reputation, its corporate name, its
goodwill, whenever that reputation, corporate
name or goodwill have through the natural
development of its trade, established themselves

And it contends that its rights to the use of its

corporate and trade name, is a property right, a
right in rem, which may assert and protect against
all the world, in any of the courts of the world even
in jurisdictions where it does not transact business
just the same as it may protect its tangible
property, real or personal, against trespass, or
conversion

Since it is the trade and not the mark that is to be

protected a trademark acknowledges no territorial
boundaries or municipalities or states or nations,
but extends to every market where the traders

goods have become known and identified by the

use of the mark
General Garments Corporation vs. Director of
Patents
-

A foreign corporation which has never done

business in the Philippine Islands and which is
unlicensed and unregistered to do business here,
but is widely and favorably known in the Islands
through the use therein of its products bearing its
corporate and trade name has a legal right to
maintain an action in the Islands

Mentholatum case was subsequently derogated

when Congress, purposely to counteract the
effects of said case, enacted R.A. 638, inserting
Section 21-A in the Trademark Law, which allows a
foreign corporation or juristic person to bring an
action in Philippine Courts for infringement of a
mark or trade-name, for unfair competition, or
false designation of origin and false description,
whether or not it has been licensed to do business
in the Philippines under Act Numbered Fourteen
hundred and fifty-nine, as amended, otherwise
known as Corporation Law, at the time it brings
complaint.

Even if Lacoste did business in the Philippines it

can bring action because the case involves a
violation of our penal code

Such was a violation of article 189 of the RPC, if

prosecution follows after the completion of the
preliminary investigation being conducted by the
Special Prosecutor the information shall be in the
name of the People of the Philippines and no
longer the petitioner which is only an aggrieved
party since a criminal offense is essentially an act
against the State. It is the latter which is
principally the injured party although there is a
private right violated

The records show that the goodwill and reputation

of the petitioners products bearing the trademark
Lacoste date back even before 1964 when Lacoste
clothing apparels were forst marketed in the
Philippines. To allow Hemandas to continue using
the trademark Lacoste for the simple reason that
he was the first registrant in the Supplemental
Register of a trademark used in international
commerce and not belonging to him is to render
nugatory the very essence of the law on
trademarks and trade names
Atlantic Mutual Insurance Co. vs. Cebu Stevedoring
Co.

Puma Sporschufabriken Rudolf Dassler, K.G. vs.

IAC and MIL-ORO MFG. Corp.
-

Treaties for part of the law of the land

Quoting the Paris Convention and the case of

Vanity Fair Mills Inc. vs. T. Eaton Co. this court
further said:
By the same token, the petitioner should
be given the same treatment in the
Philippines as we make available to our
own citizens. We are obliged to assure to
nationals of countries of the Union an
effective
protection
against
unfair
competition on the same way that they
are obligated to similarly protect Filipino
Citizen and firms

The ruling in the aforecited case is in consonance

with the Convention of the Union of Paris for the
protection of Industrial Property to which the
Philippines became a party. Article 8 thereof
provides that a trade name shall be protected in all
the countries of the Union without the obligation of
filing or registration, whether or not it forms part
of the trademark

The law denies to a foreign corporation the right to

maintain suit unless it has previously complied
with a certain requirement, then such compliance,
or the fact that the suing corporation is exempt
there from, becomes a necessary averment in the
complaint

These are matters peculiarly within the knowledge

of appellants alone, and it would be unfair to
impose upon appellee the burden of asserting and
proving the contrary. It is enough that foreign
corporations are allowed by law to seek redress in
our
courts
under
certain
conditions:
the
interpretation of the law should not go so far as to
include, in effect, an inference than those
conditions have been met from the mere fact that
the party suing is a foreign corporation
Olympia Business Machines Co. vs. E. Razon

How do you distinguish this case with Atlantic?

In Atlantic it dismissed the case, while in Olympia

it did not
Time Inc. vs. Reyes

Le Chemiste Lacoste vs. Fernandez

-

The French company may gain access to our

courts, in the first place it was not doing business
in the Philippines

The marketing of its products in the Philippines is

done through an exclusive distributor, Rustan
Commercial Corporation. The latter is an
independent entity which buys and then markets
not only products of the petitioner but also many
other products bearing equally well-known and
established trademarks and trade-names

Assuming Rustans had no independent status

would the SC grant Lacoste access to our courts?

142

We fail to see how these doctrines can be a propos

in the case at bar, since the petitioner is not
maintaining any suit but is merely defending one
against itself; it did not file any complaint but only
a corollary defensive petition to prohibit the lower
court from further proceeding with a suit that it
had no jurisdiction to entertain

What law govern foreign corporation doing and

transacting business in the Philippines with a
license

Laws of the Republic of the Philippines save and

except that would normally be those matters which
concern its formation, organization or dissolution,
or those fixing the relationship, liabilities,
responsibilities, or duties of the stockholders,

members or officers of the foreign corporation or

their relations to each other.

the Philippine Government or any of its agencies or

political subdivisions;

In effect, intra-corporate or internal matters not

affecting creditors or the public in general are
governed not by Philippine laws but the law under
which the foreign corporation was formed or
organized

7. Transacting business in the Philippines outside

of the purpose or purposes for which such
corporation is authorized under its license;
8. Transacting business in the Philippines as agent
of or acting for and in behalf of any foreign
corporation or entity not duly licensed to do
business in the Philippines; or

Section 129. Law applicable. - Any

foreign corporation lawfully doing business in the
Philippines shall be bound by all laws, rules and
regulations applicable to domestic corporations of
the same class, except such only as provide for the
creation, formation, organization or dissolution of
corporations or those which fix the relations,
liabilities,
responsibilities,
or
duties
of
stockholders, members, or officers of corporations
to each other or to the corporation. (73a)

9. Any other ground as would render it unfit to

transact business in the Philippines. (n)

Will the pre-emptive rights of a foreign corporation

be governed by the same section of the code? Is
the pre-emptive rights of a stockholder in a
domestic corporation same as the pre-emptive of a
stockholder of a foreign corporation.

SEC does not have the sole authority to suspend or

revoke the license of a foreign corporation doing
business in the Philippines, other government
agencies like the Central Bank , the Insurance
Commission may also do so within their respective
dominion, despite the provision of section 134

If the SEC believes that revocation is warranted,

section 135 provides that:
Section 135. Issuance of certificate of
revocation. - Upon the revocation of any such
license to transact business in the Philippines, the
Securities and Exchange Commission shall issue a
corresponding certificate of revocation, furnishing
a copy thereof to the appropriate government
agency in the proper cases.

No
M.E. Grey vs. Insular Lumber Company

PNB vs. Gonzales, will this apply to a foreign

corporation? How do you distinguish this case from
a Philippine law?

Since it concerns the rights of stockholders it is the

law of New York that should govern

Is the license to do business of a foreign

corporation subject to suspension or revocation?
What are the grounds?

The Securities and Exchange Commission

shall also mail to the corporation at its registered
office in the Philippines a notice of such revocation
accompanied by a copy of the certificate of
revocation. (n)

Section 134 provides:

Voluntary withdrawal of license

All 3 conditions must be complied with

Section 136. Withdrawal of foreign
corporations. - Subject to existing laws and
regulations, a foreign corporation licensed to
transact business in the Philippines may be allowed
to withdraw from the Philippines by filing a petition
for withdrawal of license. No certificate of
withdrawal shall be issued by the Securities and
Exchange Commission unless all the following
requirements are met;

Section 134. Revocation of license. Without prejudice to other grounds provided by

special laws, the license of a foreign corporation to
transact business in the Philippines may be
revoked or suspended by the Securities and
Exchange Commission upon any of the following
grounds:
1. Failure to file its annual report or pay any fees
as required by this Code;

1. All claims which have accrued in the Philippines

have been paid, compromised or settled;

2. Failure to appoint and maintain a resident agent

in the Philippines as required by this Title;

2. All taxes, imposts, assessments, and penalties,

if any, lawfully due to the Philippine Government or
any of its agencies or political subdivisions have
been paid; and

3. Failure, after change of its resident agent or of

his address, to submit to the Securities and
Exchange Commission a statement of such change
as required by this Title;

3. The petition for withdrawal of license has been

published once a week for three (3) consecutive
weeks in a newspaper of general circulation in the
Philippines.

4. Failure to submit to the Securities and Exchange

Commission an authenticated copy of any
amendment to its articles of incorporation or bylaws or of any articles of merger or consolidation
within the time prescribed by this Title;

P.D. 902-A
P.D. 902-A was amended by R.A. 8799 or the
SECURITIES REGULATION CODE in the year 2000
The jurisdiction of SEC for cases falling under
section 5 thereof was transferred to the courts of
general jurisdiction designated by the SC, they
were called special commercial courts, the only

5. A misrepresentation of any material matter in

any application, report, affidavit or other document
submitted by such corporation pursuant to this
Title;
6. Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully due to

143

1.
2.

exceptions were revocation of corporate franchise

and calling of elections
However the SEC retained receivership or
suspension payments within June 20,2000
Jurisdiction of special commercial courts are
exclusive and original, jurisdiction is conferred by
law; 1 Special Commercial Court per region except
MAKATI and QUEZON CITY which has two
Devices or Schemes
Pyramid
scheme
(misrepresentation)-Special
Commercial Courts
Syndicated estafa- not bailable
Alleje case
Falls squarely under sec. 5 (a) Special Commercial
Courts
Allegation corporate officers employing schemes in
diverting
Not only detrimental to corporation, but general
membership
Fraud must be stated with particularity
Abad vs. CFI of Pangasinan
Fraud must be stated with particularity otherwise it
may be filed to any court
Intra-corporate
Exclusive and original jurisdiction of special
commercial courts
Sole criteria is there must be an intra-corporate
relationship
Pertaining to a controversy (speaks also of intrapartnership controversy, that partnership must be
registered with the SEC)
Rule now
Necessarily be an intra-corporate relationship;
and,
The controversy must arise out of said relationship
Intra-corporate relationship alone will not suffice to
put it in the ambit of special commercial courts
and courts of general jurisdiction may take
cognizance
Case of a transferee of shares of stock to compel
the corporation to recognize him as a stockholder
How can it be intra-corporate when he is not yet
fully paid
When the transferee has done all he can be
required to do to render the transfer effectual and
the corporation refuses to register the transfer, the
requirement of the registration is waived and the
transferee is considered technically a stockholder
who may sue to enforce the right to have the
transfer registered
Florendo vs. rivera, Embassy Farms
The transferor withheld the delivery, they are not
yet prima facie; it will not be considered intracorporate
Controversies in the appointment (asked in the
bar)
Cases involving election, appointment and removal
In Andaya the court said that a corporate officer
elected or appointed by the BOD is always a
corporate act
The fact that petitioner sought payment of his back
wages, other benefits as well as moral and
exemplary damages and attorneys fees in his
complaint will not operate to prevent the SEC from
exercising its jurisdiction under P.D. 902-A. The
jurisdiction will not wrest on the NLRC just because
of that
Tabang vs. NLRC

1.
-

2.

3.

144

Jurisdiction lies originally and exclusively to special

commercial courts and not in the NLRC
SEC has jurisdiction over cases of removal from
employment of corporate officers
The relationship of a person to a corporation,
whether as officer or as agent or employee or not
determined by the nature of the servides
performed, but by the incidents of the relationship
on they actually exist
Corporate officers dismissal is always a corporate
act or intra-corporate controversy
Midland construction vs. Movilla
NLRC will be possessed of jurisdiction exception
will not apply to mere recovery
Main consideration
Asserts his right to the office or questions the
propriety or validity of his ouster or removal, it will
be the special commercial courts and not the NLRC
Securities Regulation Code
Transferred jurisdiction of the SEC to Special
Commercial Courts
Suspension
of
payment,
appointment
of
management receivership
What is the reason for suspension of all claims?
The reason for suspending actions for claims
against the corporation is not really to enable the
management committee or the rehabilitation
receiver to substitute the defendant in any pending
action against it before any court, tribunal or body.
The real justification is to enable the management
committee or rehabilitation receiver to effectively
exercise his powers free from any Judicial or extrajudicial interference that might unduly hinder or
prevent the rescue of the debtor company. To
allow such other actions to continue would only
add to the burden of the management committee
pr rehabilitation receiver, whose time, effort and
resources would be wasted in defending claims
against the corporation instead of being directed
towards restructuring and rehabilitation.(PAL vs.
Spouses Sadic and Kurangking)
To enable the receiver to effectively exercise his or
her power free form any judicial or extra-judicial
that may disturb
3 types of suspension of payments
Simple suspension of payments
where deferment of payment of claims against a
distress company; ask the court to be given time
to the payment of liability by postponing the
payment
When it has sufficient assets and liabilities but
forces the impossibility of meeting them when they
respectively fall due
Suspension of receiver with a management
committee with a rehabilitation play or suspension
of payments accompanied by a proposal for
rehabilitation (with or without rehabilitation)
corporation has sufficient assets to cover its
liabilities, but sees the possibility; is or without
rehabilitation plans; normally would attach the
rehabilitation plan
For purpose of economic development
Suspension of payments when the corporation has
no sufficient assets to its liabilities
May it still be revived?
Yes, it may still be revived
How can a corporation with more liabilities than
assets continue its operations profitably?

1.

Even if the distressed company has no sufficient

assets and liabilities it can go for suspension
It asked for a management committee without a
receiver plan (Victorius Milling case)
Convert their claims into equity
Their liability was almost wiped out they became
stockholders instead of creditors
After 5 years those who converted sold it back to
the corporation, thereby making profits
Amendment is for the economic development of
the country
What if walang amendment, e mas maraming
liabilities kesa assets
Suspension order- all actions for claims against the
corporation are accordingly suspended at whatever
stage the proceedings maybe
Effect of suspension- you cannot foreclose
What are claims?
Debts or demands of pecuniary nature. Assertion
of a right to have money paid
Claims against the corporation shall be suspended,
assertion of a right to have money paid; it must
present
a
monetary
claim,
liquidated
or
unliquidated
Nullification of corporations does not present a
monetary claim of pecuniary nature
Union vs. CA
It does not allow a mere individual to file the
petition
which
is
limited
to
corporations
partnership or associations.
Where no authority is granted to hear petitions of
individuals for suspension of payments, such
petition are beyond the competence of the SEC
What happens if there is a suspension order?
Explain the key phrase quality is equity
All creditors stand on equal footing, secure or
unsecure, holding or lien or without a lien, no
creditor may enforce his lien while rehabilitation is
going (Alemar case)
No preference shall be given
RCBC vs. IAC
Decided on motion for reconsideration
It court 7 years to decide authentication
Rule of the thumb
Automatic suspension even if not decreed in the
decision itself
Once lifted the preferred creditors will regain their
preference
Appointment of a management committee
Take over the management committee of the
distressed corporation
Extraordinary and drastic remedy
Without any remedy
What is an intra-corporate controversy?
Section 5(B)
Sole criteria is whether there exists an intracorporate dispute is that if there is an intracorporate relationship
Why is there suspension of all actions against
claims when a receiver is appointed?
To enable the management committee to exercise
its powers
Sy Chim vs. Sy Siy Ho (before a management
committee may be opt by a court)
2 requisites for a valid appointment of
management committee
Imminent danger of dissipation, loss, wastage or
destruction of assets or other corporate properties

2.

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Paralysis of business operations, the mere

apprehension of future misconduct based upon
prior management
Save and except in the case of a close corporation
in case of deadlock management committee is
allowed to take over right away
Jacinto case
2nd par of page 676
2 requisites where present
Wala ng mapautang, there was a paralyzation
Sy Chim
Did not appoint a management committee
In the absence of a strong showing of an imminent
danger of dissipation, loss wastage or destruction
of assets or other properties of a corporation and
paralysis of its business operations, the mere
apprehension of future misconduct based upon
prior mismanagement will not authorize the
appointment of a management committee
Section 5 and 6(D) governed by separate rules;
interim rules and intra-corporate controversy
Venue of actions
Rules of court- where the parties are residing
Intra-corporate- no matter where the parties are
residing it will be in the city or municipality where
the principal office is located
Rehabilitation proceedings venue
In rem
Acquired upon publication without furnishing the
creditors a copy of the petition and attachments
thereof
A creditor may now file the suspension
proceedings; provides that creditors owns at least
25%
Intra-corporate- rule 1 section 6
Service of summons- rule 2 section 5
Summons may be made to anyone
In case of intra-corporate dispute, elections, fraud,
etc; if they are governed by interim rules of
procedure on intra-corporate controversies
Venue
Special commercial courts where principal office is
located/established (section 5 rule 1)
Matters of payment/suspension must be filed in
the city/ municipality where corporation is located
Under old rule, creditors have no right to institute
an action for receivership; now creditors, if they
sold 20% they can institute an action for
receivership
Section 5
Service of summons may be made by fax/e-mail
E.B. Villarosa vs. Benito
Will apply only if it is not an intra-corporate
controversy
If the controversy arose out of an intra-corporate
dispute rules on interim rules of procedure of intracorporate controversies shall govern
Rule 4 section 17- immunity from suit
Rehabilitation receiver shall not subject to any
action, claim or demand in connection with any act
done omitted by him in good faith in the exercise
of his functions and powers herein conferred
Claim
Right to payment, whether or not it is reduced to
judgment, liquidated or unliquidated, fixed or
contingent, matured or unmatured, disputed or
undisputed, legal or equitable and secured or
unsecured

1.
2.
3.
4.
5.
6.
7.

Investment contracts
A contract, transaction or scheme whereby a
person invests his money in a common enterprise
and is led to expect profits primarily from the
effects of others
The management committee and rehabilitation
receiver are empowered to:
Take custody and control of all assets of the
corporation
Evaluate assets and liabilities, earnings operations
of the corporation
Determine the best way to protect the investors
and creditors
Study, review evaluate the feasibility of continuing
operation and structures
Submit recommendations to the RTC regarding
rehabilitation plan
Rehabilitate the corporation if determined to be
feasible by the RTC
Report to the RTC until the corporation is dissolved

g)

Shares of
evidences
securities;

stock, bonds, debentures, notes,

of
indebtedness,
asset-backed

GR: Securities shall not be sold or offered for sale or

distribution within the PH, without a registration statement
filed with and approved by SEC. Prior to such sale,
information on the securities, in such form and with such
substance as the Commission may prescribe, shall be made
available to each prospective purchaser. (Sec 8)
EXCEPT: Exempt Securities under Sec 9
a) Any security issued or guaranteed by the
Government of the PH, or by any political
subdivision or agency thereof, or by any person
controlled or supervised by, and acting as an
instrumentality of said Government.
b) Any security issued or guaranteed by the
government of any country with diplomatic
relations with the PH, or by any state, province or
political subdivision thereof on the basis of
reciprocity: Provided, that the SEC may require
compliance with the form and content of
disclosures the Commission may prescribe.
c) Certificates issued by a receiver or by a trustee in
bankruptcy duly
approved
by the
proper
adjudicatory body.
d) Any security or its derivatives the sale or transfer
of which, by law, is under the supervision and
regulation of the Office of the Insurance
Commission, Housing and Land Use Regulatory
Board, or the Bureau of Internal Revenue.
e) Any security issued by a bank except its own
shares of stock.

THE SECURITIES REGULATION CODE (RA8799)

- Also known as the Blue Sky Law since it was enacted to
protect the public from unscrupulous promoters who stake
business which have no basis and sell shares and interest
therein to investors, who are then left holding certificates
representing nothing more than a claim to a square of the
blue sky.
-SEC. 2. Declaration of State Policy. The State shall
establish a socially conscious, free market that regulates
itself, encourage the widest participation of ownership in
enterprises, enhance the democratization of wealth,
promote the development of the capital market, protect
investors, ensure full and fair disclosure about securities,
minimize if not totally eliminate insider trading and other
fraudulent or manipulative devices and practices which
create distortions in the free market.

AND Exempt Transactions under Sec 10

a) A judicial sale, or sale by an executor,
administrator, guardian or receiver or trustee in
insolvency or bankruptcy.
b) By or for the account of a pledge holder, or
mortgagee or any other similar lien holder selling
or offering for sale or delivery in the ordinary
course of business and not for the purpose of
avoiding the provisions of this Code, to liquidate a
bona fide debt, a security pledged in good faith as
security for such debt.
c) An isolated transaction in which any security is
sold, offered for sale, subscription or delivery by
the owner thereof, or by his representative for the
owners account, such sale or offer for sale,
subscription or delivery not being made in the
course of repeated and successive transactions of a
like character by such owner, or on his account by
such
representative
and
such
owner
or
representative not being the underwriter of such
security.
d) Distribution by a corporation, actively engaged in
the business authorized by its AOI, of securities to
its stockholders or other security holders as a stock
dividend or other distribution out of surplus.
e) Sale of capital stock of a corporation to its own
stockholders exclusively, where no commission or
other remuneration is paid or given directly or
indirectly in connection with the sale of such capital
stock.
f) Issuance of bonds or notes secured by mortgage
upon real estate or tangible personal property,
where the entire mortgage together with all the
bonds or notes secured thereby are sold to a single
purchaser at a single sale.
g) Issue and delivery of any security in exchange for
any other security of the same issuer pursuant to a
right of conversion entitling the holder of the
security surrendered in exchange to make such
conversion: Provided, That the security so

BROKER - person who buys and sells securities for the

account of others.
DEALER - person who buys and sells securities for his/her
own account in the ordinary course of business.
NOTE: No person shall engage in the
business of buying or selling securities in the
Philippines as a broker or dealer, or act as a
salesman, or an associated person of any
broker or dealer unless registered as such with
the Commission. (Sec 28)
SECURITES - shares, participation or interests in a
corporation or in a commercial enterprise or profit-making
venture and evidenced by a certificate, contract,
instrument, whether written or electronic in character. It
includes:
CODE: COFDIPS
a) Certificates
of
assignments,
certificates
of
participation, trust certificates, voting trust
certificates or similar instruments;
b) Other instruments as may in the future be
determined by the Commission;
c) Fractional undivided interests in oil, gas or other
mineral rights;
d) Derivatives like option and warrants;
e) Investment contracts, certificates of interest or
participation in a profit sharing agreement,
certificates of deposit for a future subscription;
f) Proprietary or non proprietary membership
certificates incorporations; and

146

h)
i)

j)

k)
l)

surrendered has been registered under this Code

or was, when sold, exempt from the provisions of
this Code, and that the security issued and
delivered in exchange, if sold at the conversion
price, would at the time of such conversion fall
within the class of securities entitled to registration
under this Code. Upon such conversion the par
value of the security surrendered in such exchange
shall be deemed the price at which the securities
issued and delivered in such exchange are sold.
Brokers transactions, executed upon customers
orders, on any registered Exchange or other
trading market.
Subscriptions for shares of the capital stock of a
corporation prior to the incorporation thereof or in
pursuance of an increase in its authorized capital
stock under the Corporation Code, when no
expense
is
incurred,
or
no
commission,
compensation or remuneration is paid or given in
connection with the sale or disposition of such
securities, and only when the purpose for soliciting,
giving or taking of such subscriptions is to comply
with the requirements of such law as to the
percentage of the capital stock of a corporation
which should be subscribed before it can be
registered and duly incorporated, or its authorized
capital increased.
The exchange of securities by the issuer with its
existing security holders exclusively, where no
commission or other remuneration is paid or given
directly or indirectly for soliciting such exchange.
The sale of securities by an issuer to fewer than
twenty (20) persons in the Philippines during any
twelve-month period.
The sale of securities to any number of the
following qualified buyers: (i) Bank; (ii) Registered
investment house; (iii)insurance company; (iv)
Pension fund or retirement plan maintained by the
Government of the Philippines or any political
subdivision thereof or managed by a bank or other
persons authorized by the Bangko Sentral to
engage in trust functions; (v) investment company
or; (vi) Such other person as the Commission may
by rule determine as qualified buyers, on the basis
of such factors as financial sophistication, net
worth, knowledge, and experience in financial and
business matters, or amount of assets under
management.

the Commission may prescribe of the outstanding share of

the issuer, shall submit a report identifying the beneficial
owner within ten (10) days after such acquisition, for its
own account or customer, to the issuer of the security, to
the Exchange where the security is traded and to the
Commission. (Sec 20.5)
FRAUDULENT TRANSACTIONS AND OTHER MARKET
MANIPULATIONS
1.
2.

Note: Wash sale and matched orders become

illegal when they are used as a means to create
false appearance of active trading in the security
concerned.
3.

4.
5.

6.

PROTECTION OF SHAREHOLDERS INTEREST

1.
2.
3.

Wash Sale (Sec 24.1(a)(i)) any transaction in a

security which involves no change in the beneficial
ownership thereof.
Matched Order (Sec 24.1(a)(ii)) order or orders
for the purchase or sale of security with the
knowledge that a simultaneous order or orders of
substantially the same size, time and price for the
sale or purchase of such security has, or will be
entered by or for the same or different parties.

Tender Offers (Sec 19)

Proxy solicitation (Sec 20)
Internal record keeping and accounting (Sec 22)

7.

TENDER OFFER A publicly announced intention acting

alone or in concert with others to acquire equity securities
of a company. (2002 Bar Exams)
Instances when Tender Offer is Required
1. When the person intends to acquire 15% or more
of the equity share of a public company pursuant
to an agreement made between or among the
person and one or more sellers;
2. When the person intends to acquire 30% or more
of the equity share of a public company within a
period of 12 months;
3. When the person intends to acquire shares that
would result in an ownership of more than 50% of
the equity shares of a public company.

Marking the close placing the purchase order,

at or near the close of the trading period. The price
that was closed will then be the price that will be
posted on the following trading day.
Painting the tape involves a series of
transactions that are reported publicly to give the
impression of an activity in a security.
Squeezing the float the part of an outstanding
security intentionally held by dealers or other
persons with a view of reselling them later for
profit.
Hype and dump Act employed by a person or
group of persons of purchasing the outstanding
capital stock of a dormant public shell company for
a nominal amount and merge it with their privately
held company. They would then gain control of the
majority stocks of the merged entity.
Stock
certificates are often re-issued in the name of the
merged entity to relatives and associates who act
as nominees of the person or persons employing
the device. They would then look for a brokerdealer who would be willing to make a hype of
the securities. The broker-dealer then generates
volume and advance bid price. When the market
reaches a high price, they would dump their
shareholdings and bail out.
Boiler Room Operations involves an intensive
selling campaign through numerous salesmen by
telephone or through direct mail offerings for
securities of either a certain type or from a specific
issuer. Investors are induced to purchase through
hard-sell based on unfounded predictions and
mailing of misleading market letters.
Note: Marking the close, Painting the tape,
Squeezing the float, Hype and dump, Boiler Room
Operations become unlawful if it is effected to
either raise the price or induce the purchase of a
security or of a controlling, controlled, or
commonly controlled company by others or to
depress the price to induce the sale of a security,
whether of the same or of a different class, of the
same issuer or of a controlling, controlled company
or common controlled company by others or to
create active trading to induce the purchase
through said devices or schemes.

PROXY SOLICITATION
8.

NOTE: A broker or dealer who holds or acquires the proxy

for at least ten per centum (10%) or such percentage as

147

Circulating or Disseminating Information

circulating an information that any of the security
listed in the exchange will or is likely to rise or fall

because of manipulative market operations of any

one or more persons conducted for the purpose of
raising or depressing the price of the security and
thus inducing the purchase of such security.
9. Making False or Misleading Statements with
respect to any material fact which he knew or had
reasonable ground to believe was so false or
misleading for the purpose of inducing the
purchase or sale of such security.
10. Pegging or Fixing Or Stabilizing the price of
security effected either alone or with others
through any series of transactions for the purchase
or sale thereof, if done for such purpose.
11. Short sale selling of security which the vendor
does not own unless done in accordance with the
rules and regulations of the SEC.
12. Insider Trading the act of an insider to buy or
sell security of the issuer while in possession of
material information with respect to such security
that is not generally made known to the public
unless (a) The insider proves that the information
was not gained from such relationship; or (b) If the
other party selling to or buying from the insider (or
his agent) is identified, the insider proves: (i) that
he disclosed the information to the other party, or
(ii) that he had reason to believe that the other
party otherwise is also in possession of the
information.

of the members of such board, whichever is the

lesser.
OPTION TRADING

Put a transferrable option or offer to deliver a

given number of shares of stock at a stated price
on any given time during the stated period.

Call a transferrable option to buy a specified

number of share at a stated price

Straddle a combination of put and call.

SETTLEMENT OFFERS
At any time, during an investigation or proceeding
under this Code, parties being investigated and/or charged
may propose in writing an offer of settlement with the
Commission.
The Commission may only agree to a
settlement offer based on its findings that such settlement
is in the public interest. Any agreement to settle shall have
no legal effect until publicly disclosed. Such decision may be
made without a determination of guilt on the part of the
person making the offer.
DAMAGES
All suits to recover damages shall be brought
before the Regional Trial Court, which shall have exclusive
jurisdiction to hear and decide such suits. The Court is
authorized to award damages in an amount not exceeding
triple the amount of the transaction plus actual damages.

Note: When is information material nonpublic? - if: (a) It has not been generally
disclosed to the public and would likely affect the
market price of the security after being
disseminated to the public and the lapse of a
reasonable time for the market to absorb the
information; or (b) would be considered by a
reasonable
person
important
under
the
circumstances in determining his course of action
whether to buy, sell or hold a security.

NOTES

If there are goods involved in the multimarket, it is

beyond the jurisdiction of SEC (Ex First Quadrant)

Criminal charge for violation of SRC is a specialized

dispute, hence it must be first referred with SEC
(Baviera vs. Paglinawan G.R. No. 168380
Feb 8, 2007)

T3 Rule in trading of Securities Trading day +

3 more days you must comply with your
obligations.

Note: Who is an insider? - 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 information
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 communication from any of the
foregoing insiders.
INDEPENDENT DIRECTOR
Person other than an officer or employee of the
corporation, its parent or subsidiaries, or any other
individual having a relationship with the corporation, which
would interfere with the exercise of independent judgment
in carrying out the responsibilities of a director.
Corporations which require an Independent Director
1. An exchange; or
2. Any corporation with a class of equity securities
listed for trading on an Exchange or with assets in
excess of P50M and having 200 or more holders, at
least 200 of which are holding at least 100 shares
of a class of its equity securities or which has sold
a class of equity securities to the public pursuant to
an effective registration statement shall have at
least two (2) independent directors or such
independent directors shall constitute at least 20%

148