CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
SECOND EXAM COVERAGE
December 6, 2017
(April Liz Parreno)
TITLE III - BOARD OF
DIRECTORS/TRUSTEES/OFFICERS
Sec. 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.
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. Corporation is given second priority or no priority at all.
What is the term of Board of Directors?
It is not right to say 1 year. It is 1 year until their
successors are elected and qualified.
What is the meaning of elected?
It means that the stockholders or members of the
corporation cast a vote to elect you.
What is the meaning of qualified?
It means you accept it and sit down as BOD. You are
elected and qualified.
You called for a director/stockholder’s meeting; and then
there is no quorum because less than 50% of the share
holders+1 is represented in the meeting. What happens?
Can you go on to elect the BOD? (Because every annual
meeting you elect the BOD.)
Usually if it is a stock and profit corporation, you do not
have a stock holder’s meeting that failed to have a
quorum.
But if you have a non-stock non-profit corporation, like
the corporation that is made up of the homeowners of
Bell-Air Subdivision I, which is more than 1k houses.
And they do not bother to send a proxy; proxy is allowed
by the specific provisions of Bell-Air Homeowners
Corporation.
What happens if they do not have a quorum? They
have given notice so let’s go ahead with the election.
Is that valid?
No it is not valid. What happens is the entire Board
becomes a hold-over board. That is when the second part
of the last sentence of 1st paragraph of section 23 takes
effect. They continue to hold office because there is no
successor that has been elected and qualified.
The problem is, if a hold over director dies, does he
have an unexpired term?
No, he does not have unexpired term because he is just
a hold-over. The Board of Directors cannot elect another
to replace him to serve the unexpired term. It has to be
the stockholders to elect him or the homeowners who will
elect the replacement.
But they can’t get a quorum, what happens?
I-abort. Next meeting, wala gyapon quorum so hold-over
gyapon. Hantod maghinay hinay na silang kamatay, wala
na gyuy quorum na mabilin. But I am telling you it is a
problem of 90% of Home Owners’ Association that are
high end. The problem of condominiums. They are so
busy with some other businesses that their Homeowners
The only corporation meeting of homeowners which is
non-stock non-profit but has always with quorum is
Forbes Park. Why? Because the owners are not
individuals but corporations. The owners of lots and
homes in Forbes Park are all corporations. Ingon ka,
why? Why in heaven’s name is it a corporation? Because
nobody sells land in Forbes Park. If you want to sell your
land, you sell the corporation who owns the land. Why?
So that your capital gains tax will not be punitive in size.
Ever since Pacquiao bought property in Forbes Park, the
price of property in Forbes Park is 400,000/sq.m. The size
of the property is 2,500 sq.m minimum; how much is that
at 400,000/sq.? 1 billion. Why is it that expensive?
Because BGC is already 450,000/sq.m. Ayala, the other
side, is also 450,000/sq.m. That’s Forbes Park in
between.
In Forbes Park, there is an annotation: you cannot build
more than two stories. It is limited, but the first 25 years is
over. And it’s already 10 years into the next 25 years when
they reviewed the annotations in the titles by the
subdivision owners. They elected to renew it.
Pagkahuman 15 years to go na lng, there is a potential it
becomes an extension of BGC or extension of Ayala.
That’s why corporations are the ones positioned in them
1
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
Do you know that UP has three lots there? You may ask,
why? If you have studied your Property laws then you
would have come across the case of Quasha vs
Republic of the Philippines.
They have land in Forbes Park. Two years before the end
of parity, they filed a case straight to the SC. What was
the case? Petition for Declaratory relief.
I am an American under Parity; I own a residential land in
Forbes Park. What is the scope and extent of my right
post-parity? Can I continue to own? Am I still the owner?
That is the question he brought up. And it was JBL Reyes
who wrote the decision.
JBL Reyes said you had parity while the amendment
lasted. After the amendment expired, that is the end. You
have to disinvest. What the SC pronounces becomes law
of the land. So all the Americans in Forbes Park that had
property had to think what are we going to do. What did
they do? They conveniently donated the property to the
Universty of the Philippines; but not before the UP signed
a deed of assignment so that executives will continue to
live there for a sum of money, 25 years renewable for
another 25 years. That is why the UP is an owner of
property next to the property of Senator Boxer Manny
Pacquiao. The rule in Forbes Park is that you can only
build of 60% of the lot; the rest is easement and that
includes for another development like swimming pool. (Fr
talks about prop of Napoles)
If the sale of 2,500 is according to market value, it will be
1 billion. How much is capital gains plus doc stamps?
What is 7.5% of that? 75 million. Maghilak ka. Whereas if
it is owned by a corporation and you sell the corporation,
you sell the shares of stocks of all the stockholders there
who are under your control at par value, that is the extent
of your capital gains.
Let us say you are 95% owner of an outstanding capital
stock of a corporation. The moment you are 95% owner,
the business parlance term is that corporation is wholly-
owned by you. That is business parlance ha, that is not
legal. The moment you own 50% + 1 of the outstanding
capital stock of a corporation, that corporation is called a
subsidiary of the owning corporation.
If the corporation’s outstanding capital stock is owned less
than 50% by another corporation, this corporation is said
to be an affiliate of the owning corporation.
Why is it wholly-owned when it is only 95%? It’s not
100%?
Because you cannot own 100%. Why? Because you need
a Board of directors. And a Board of Directors constitutes
the smallest number of 5. You cannot be elected as a
member of Board of Directors unless you own 1 share in
the books of the corporation. You own 95%, you have to
allow co-ownership by at least other 4 people, so that you
will be at least be followed.
The business language is accommodating. 95% is
wholly-owned already.
Let us say you are 95% owner of outstanding capital
stock, and then, all of a sudden, you die. And in your will
you already bequeath the shares of stocks of the
corporation to your only daughter. You have other
business and you disposed according to your will. Let us
say you die in February, just a week after the annual
meeting of the corporation and all 5 directors are already
elected and you chose not to be one of the directors. You
have a nominate, all, in fact, are your nominates. You die;
your daughter becomes the stockholder that owns 95%.
Can she say, I demand to attend the BOD meeting?
Can she demand attendance to a meeting of the BOD
legally?
Unless she is elected to the Board, she cannot demand.
The powers are directly given by Section 23. It is not a
derivative power. It is a power granted by law, directly by
law.
“xx 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 xx”.
Make no mistake about that.
Can the majority stockholder, 95% owner of the
outstanding capital stock, can he remove all the
directors?
SECTION 28 provides:
Sec. 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 two-thirds (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:
From that first sentence, there is possibility that you can
remove because you have 95% of the shares and not only
2/3.
2
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
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 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.
So the 95% owner can demand a special meeting.
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. PLDT has more than 2 million stockholders. Ngano
What is qualified notice?
It contains not only the time and the place of the meeting
but also of that item in the agenda for which the meeting
is called. If it is for removal, then you must state in the
notice that this is a meeting for the removal of the
directors, so and so. Notice must be qualified.
“Must be given by publication and by written notice
as prescribed in this code.”
The vacancy resulting pursuant to this section may be
filled by election at the same meeting without further
notice or at any regular or special meeting called for that
purpose.
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.
95% ka stockholder, ang tulo ana matangtang nimo
without cause because they are deemed to be your
representative, if you call a meeting. But the two, you
cannot remove without cause, because they deem to be
the minority representation. It has to be for cause that they
must be removed.
How do you guard against it? In most corporations, if you
are the controlling investor, when you invite somebody to
become a director, make him sign a letter of resignation
that is undated. Ready na ka, aron dili ka mamoroblema
aning section 28.
This is not asked in the Bar exam but please memorize
the formula for the number of votes that is required to elect
directors.
What is the formula?
(AB/C + 1) +1 = number of votes that can be shares
or proxies that is required to elect directors.
A = total outstanding shares that are voting shares
B = desired number of directors
C = total number of directors you want elected or
voted
You have to memorize this formula if you are the
secretary.
kadaghan? Kay Marcos passed a law favoring the
Cojuangcos. If you wanted a telephone connection, part
of the fee you paid PLDT for that telephone connection is
for the purchase of preferred non-voting shares. ½ of the
2M stockholders of the PLDT has no votes; only 1 million
has voting powers. So you count; but how can you count
when everyday it is being bought and sold in the stock
market? How can you identify the value of A?
PLDT has this thing called a “cut-off date”. 1 month
before the annual meeting, the stock transfer book is
closed. If you buy or sell, it is not recorded. Because that
day freezes the number of voters for the annual meeting.
Is that valid?
The SC already said it is valid.
What is the reason for holding the validity of the cut-
off date 1 month before the annual meeting?
Because it will be chaotic if you do not have that cut-off
date. Suppose all 1 million decide to transfer their sales
the day before election, how can you process that? And
you must grant because theoretically they have the right.
3
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
It is a way of solving the orderly transfer ownership and
the keeping of the stock and transfer book.
Corporation law, especially, stock and profit corporation is
all about control. Who controls the corporation?
Muingon ka, magbuhat kog corpo na walay ga control.
33% diri, 33% sad diri, 33% diri. Walay ga control. Do you
know what you’re doing? You are inviting chaos. Your
proposal is that the purpose of the corporation is not
fulfilled kay magsigeg away. Equal force man sila.
In the formation of the corporation, drawing up of the
articles, you make sure that there is no control and control
is not necessarily padaghanay shares. You can have
control even if you have the smallest number of shares.
If you are swing interest, 40% and 40% magka- away
gyud na sila gikan sauna. Musulod ka naa kay 20%, ikaw
naay control. Kay kung kinsa imo dapigan, mao man ng
madaog.
If you are the swing vote and you do it very well in the
articles of the corporation, even if you are the minority,
you will control. Classification of shares is very important
because in the end what determines is control.
Sec. 24. Election of directors or trustees. - At all
elections of directors or trustees, there must be
present, either in person or by representative
authorized to act by written proxy, the owners of a
majority of the outstanding capital stock, or if there
be no capital stock, a majority of the members
entitled to vote.
Can you provide for a higher requirement for quorum
than simple majority?
The Securities and Exchange Commission’s opinion is:
Yes, you can provide for a higher requirement for quorum
but you cannot reduce the quorum to less than majority.
The election must be by ballot if requested by any
voting stockholder or member. So the BOD is the captain of the Corporation.
Is the election has to be by ballot?
No. Only if requested.
W corporation, they require cut-off of the stock and
transfer vote one month before the annual meeting of the
stockholders. The by-laws also require that those who
want to put themselves up as candidates to be directors
must be nominated by at least 10% of the outstanding
capital stock and the names must be submitted before the
cut-off.
Ang mga minority, they have to organize themselves so
they can submit somebody in voting. The Corporation
Code requires that you must allow for cumulative voting.
You cannot deny cumulative voting in a stock and profit
corporation.
What is “cumulative voting”?
If you’re a stock holder, your maximum number of votes
is your number of shares multiplied by number of director
to be elected. That is your total number of votes
Pila man imong shares? 10
Pila ka directors ang pillion? 11
11 x 10 = 110
that is your maximum number.
How do you cast it?
You can cast it all on one candidate; you can divide it
equally; or divide it according to the proportion that you
want.
Why is it allowed to cumulate all its votes and put it
in one candidate?
To allow or give chance to minority to have
representation. That is why cumulative voting cannot be
denied in the by-laws in a profit and stock corporation.
In a non-stock, non-profit corporation, if the by-laws is
silent, there’s only one vote per person, you cannot have
cumulative voting.
December 7, 2017
(Janice Molina)
If the corporation were a ship, the BOD is the captain of
the ship. Remember that analogy. The captain of the ship,
mao nay tinood nga manager, gusto ka makakitag tinood
nga manager, kapitan sa dakong bapor nga overseas. Wa
kay tabang ana ikaw ra, naay magbuang buang ana nimo
nga tripulante unsa man imong buhaton ana makiglayog
nimo? Disiplinahon nimo kay kon d na nimo disiplinahon
manunod nang uban.
Who elects the Board?
As a general rule, it is the stockholders or the
members of the corporation. But there are times when
it is the BOD that elect the members of the Board.
In case a member dies, is incapacitated, resigned, or
is disqualified, the one who elect is the board itself. I
will summarize it to you. There are five (5) instances
when the stockholders elect the board:
1. Annual Meeting - usually Fiscal year. The
annual meeting is dictated by the by-laws, you
4
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
cannot just change the date of the annual
meeting. It is provided in the by-laws and
normally it coincides with the cycle of the fiscal
year. Fiscal Year meaning the twelve month
period not necessarily coinciding with the
calendar but it is the accounting period to recon
the financial story of the corporation. Usually 2 to
3 months at the end of the fiscal year, that is the
annual meeting in the by laws
Why 2 to 3 months?
Because you have to give time to the independent
external accountants to review the Financial Statements
of the Corporation Because one of the items in the
agenda of the annual meeting after you elect the directors
is to present the financial statements. The President
together with the treasurer, they make a report. Why did
we register laws? They explain. Why did we make less
money? They also explain. Why did we make a lot of
money? That’s when they also explain. And then the
stockholders vote to accept the financial statement. After
they have voted, then that is the Financial Statement of
the Corporation. But that is already audited.
What is the significance of audited Financial
Statements?
The significance of the audited FS is that a third party that
is respected in his field certifies that the number in the FS,
Balance Sheet, and Profit and Loss Statement reflects
accurately the financial story of the Corporation in
accordance with Generally Accepted Accounting
Principles (GAAP). Then you are not afraid to present it to
anybody. If there are investors, dia ra ang FS namo! Naay
magsukit sukit diha nga Government Agency? Dia ra
sagpaon nimo ana :) kay audited naman. Mao nay
purpose ana nga di ka mag tago-tago.
You have an election then, annual meeting. One year
man ang term or until the successor is elected and
qualified, one year ang term. Unya mapatay sya in the
middle of the term. Patawag kag stockholder's meeting
para mupili sa mupuli nya? Dili! Only the directors choose
the replacement. If incapacitated? If napiang sya?
Incapacitated ba na? Dili! He can still attend meeting by
teleconferencing, by video conferencing, mahimo man.
So he is not incapacitated. Kani adto, incapacitated ka
ana, marayuma ka, ma gout ka, d naka kalakaw,
incapacitated ka na. Karon dili na! Dili ka incapacitated
hangtud buhi pa imong utok.
2. When the numbers of BOD is increased - by
an amendment to the Articles. Even if it's in the
middle of the term, it is the stockholders who elect
the additional BODs.
When can they do that?
When the amendment is approved
How is it approved?
When the SEC issues a Certificate of Filing
3. When the Director is removed - First of all, to
remove a director you need a meeting duly called
for a purpose. Di na mahimo ang written assent
ha. And 2/3 must vote to remove you. If you are
the representative of the majority, you can be
removed by 2/3 vote of the stockholders with or
without cause.
Cause: Nangawat ka, tangtang ka.
Without cause: Wa ka, gisumhan ra sila sa imong
hitsura!
When do you elect the replacement?
You can elect the replacement at the same meeting of his
removal.
4. When a director resigns, dies or is
incapacitated, and the remaining directors no
longer constitute a quorum. The example is
Texas Instruments Philippines Inc., five directors
in their corporation, nag inaugurate sila ug ika-
duhang factory sa Baguio. Ngano sa Baguio
man? Bacause higher altitude and ostensibly the
air in Baguio contain fewer pollutants, they
manufacture, not ordinary chips but they
manufacture intelligent controlling chips. In fact
the likelihood of the Texas Instruments controlling
chips in your smartphone is 70% because Texas
Instrument manufactures 90% of all controlling
chips. Mao nay technology nga gitaguan sa
Amercano. Japan and China? Puro na memory
pero pag abot na sa controlling chips, wa pa na
nila buhi-i.
How about the 5 Directors of the Texas Instruments?
The law requires that the majority in the BOD must be a
resident of the Philippines. There is no citizenship
requirement, majority is residents. That is what is required
by the law. Now they were inaugurating a factory, the 3
Americans choose to fly, the 2 Filipinos decided to go by
tag. But ang gisakyan sa Americano na-crash man, patay
ang 3. When a director dies, it’s only the BOD who elects
the replacement but the replacement is to be elected by
at least the majority of the Board. Absolute majority or at
least 3. Duha naman lang nahibilin? So they have to call
a stockholder's meeting. So that is the work.
5. The case of Bel-Air vs. SEC (Recently decided
case, 2 years ago). Bel-Air is one of the
subdivisions created by the Ayalas. Pila mana ka
subdivision diha sa Makati? Forbes, Dasmarinas,
Bel-Air 1, Bel-Air 2, San Lorenzo. Residential
Subdivisions created out of the Ayala estate. In
the middle is the Ayala Central Business District.
This is one of the most expensive Real Estate.
Aron makabawi ka naa kay dapat at least 30
stories nga building, naay 600 to 650T per square
meter.
5
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
Ang Bel-Air mao na ila problema, walay quorum kada
magmeeting sila homeowners. Bel-Air Homeowners
Associations, Inc. Unsa may meetingan ana? Gasto sa
garbage, repair, security, discipline (husay) sa
subdivision. What happens? 3 na ka-tuig walay quorum,
so all the directors were so called "hold-over directors"
because a director is supposed to have a term of 1 year
or until the successor is elected and qualified. Tua na sya
sa "until elected and qualified". Ni-resign man sya, ang
director ni resign, pag resign niingon ang nahibilin nga
sige magpili ta ug replacement. Unya naa may bag-o
abogado, gi-challenge nya, niingon nga dili namo makapili
kay hold-over man mo. Wa man xay term nga nahibilin,
naghulat nalang sa puli. Wa man paminawa abogado,
nagkaso sila hangtod naabot sa SC. SC said correct, the
Board cannot elect the replacement if there is no
unserved portion of the term that is left behind because
he is a holdover director. So, that is what happens. When
the director resigns, dies, disqualified, incapacitated or in
any way cannot continue to serve a remaining portion of
his term and the remaining director also are hold-over
directors, they cannot elect the replacement. It must be
the stockholders.
Those are the 5 instances that a director must be elected
by the stockholders or the members of the Corporation.
Remember, if the director dies, you have 30 days to
report. If he disqualified himself? Here is a question.
There is a disqualification provision, Section 27.
Section 27. 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 by-laws preventing a stockholder to become
This is a disqualification. So if na-priso na gani ka ug 6
years, di naka ma director or if you violated any provision
of the Corporation Code or directive of the SEC within 5
years from your election, you cannot serve as a director
or trustee.
Can the Articles or the By-Laws add qualification or
disqualification to a Directorship in that Corporation?
The leading case is Gokongwei vs. SEC 89 SCRA 336.
I remember this case because that was 1977, I was still in
Ateneo de Manila Law school and the lawyer of
Gokongwei was teaching us and the lawyer of San Miguel
was also teaching us. This is their issue, Gokongwei
slowly accumulated shares of San Miguel. All you need to
be elected to San Miguel, you need only 1/15 of
Outstanding Capital Stock. The story here is Gokongwei,
after he has accumulated about 1/12 of the Outstanding
Capital Stock, he started getting proxies and one month
before the annual elections, they already submitted his
name and nominations to be a director. So he is
registered 1 month before, so San Miguel started floating
articles in the newspaper that Gokongwei has
antagonistic business against San Miguel, that
Gokongwei is in San Miguel precisely to spy on the
product developments of San Miguel so that he could
have advance knowledge of where San Miguel is now.
Now, even before that, San Miguel already passed an
amendment to their Article. The amendment was this, if
you have an interest, personally or in another
Corporation, financially or indirectly of a business that is
in competition with San Miguel or of any of its product
lines, then you are disqualified from becoming a member
of a BOD. So they said, you Gokongwei, you have
antagonistic business.
What is SMC's antagonistic business?
Nakahinumdom mo atong Presto Ice cream? Gokongwei
had Presto IceCream, SMC had Magnolia. Gokongwei
had Robina Feeds, SMC had BMeg Feeds. So in
competition. So they said, Gokongwei, you cannot run for
Board of Director of SMC. But di man nila mapugngan naa
naman siyay one-fifteenth, you just cumulate that, dba
cumulative voting? You cumulate that lingkod jud ka di ka
ma prevent. So Gokongwei did not accept the warning of
the secretary. He filed a case with the SEC, the SEC ruled
in favor of SMC. The decision of the SEC is appealable to
the CA but the lawyer decided to go to the SC for the
question of law.
Can a stockholder be disqualified from becoming a
member of the BOD when he has enough shares to
be voted as director?
The SC divided the issue:
1. Can there be a disqualification added in the
a director? SC says Yes. A corporation is free to
add disqualification or additional qualification.
2. Is there a valid disqualification here when his
disqualification was voted upon by the
stockholder when the Outstanding Capital
stock was only one-third of the present
number of shares that is in__? Gamay pa tong
corporation niadto when this disqualification was
set. The SC says yes, the disqualification still
operates later
Is Gokongwei disqualified from running?
SC answered, the presumption is Gokongwei can run.
If as the controlling share says that he is disqualified then
he must be given his day in court. He must be
investigated, he must be heard, and there must be an
investigation as to whether he really fits the
disqualification. So it is not automatic. If there is a
disqualification in the by-laws, that still has to go to an
investigation. The order is to remand to the SEC but it was
6
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
settled amicably. Gokongwei was first made a director of Sec. 32. Dealings of directors, trustees or
San Miguel International in Hong Kong and afterwards
officers with the corporation. - A contract of the
they offered him a price he could not refuse and so he
made a lot of money. The money he got, he bought PCI corporation with one or more of its directors or
bank together with the Lopez’s. Later on, they sold PCI trustees or officers is voidable, at the option of such
bank to Equitable Bank. corporation, unless all the following conditions are
present:
Say, there were people in the board who are also
disqualified but they did not raise the objection later. One 1. That the presence of such director or trustee
of them is Jaime Zobel de Ayala, used to sit on the board in the board meeting in which the contract
of SMC and yet the Ayala's at that time owned Pure foods was approved was not necessary to
because SMC bought them up and SMC had Monterey. constitute a quorum for such meeting;
Ngano gi-allow man nila si Ayala na mulingkod diha? Naa 2. That the vote of such director or trustee was
sila BMeg, Ayala also had a Joint Venture with Harvel, nor necessary for the approval of the
high breed corn. They allow Ayala because Ayala and contract;
Soriano are first cousins. 3. That the contract is fair and reasonable
under the circumstances; and
COMPENSATION OF DIRECTORS 4. That in case of an officer, the contract has
Director’s Compensation has a limit in the Corporation. been previously authorized by the board of
What is the limit? It cannot be collectively more than directors.
10% of the Net Income of the Corporation before tax.
When you are given a problem about this, make sure that Where any of the first two conditions set forth in the
is a pure director because there are directors who are also preceding paragraph is absent, in the case of a
officers of the Corporation. Let's see you are President contract with a director or trustee, such contract may
and CEO of the Corporation and you are also a director, be ratified by the vote of the stockholders
your compensation as an officer does not have a limit, but representing at least two-thirds (2/3) of the
your compensation as a director has a limit. The limit is outstanding capital stock or of at least two-thirds
not more than 10% of the net profit before tax. That ceiling (2/3) of the members in a meeting called for the
does not include per diem. Per Diem is the expenses that purpose: Provided, That full disclosure of the
you must incur in order for you to perform the Director's adverse interest of the directors or trustees involved
duties. is made at such meeting: Provided, however, That
the contract is fair and reasonable under the
Probably you remember that PNB was still a GOCC, it circumstances.
was the President who appointed the directors and during
the time of Ramos, he was very grateful with this
Dabawenyo, because he helps during the elections, he
SELF-DEALING DIRECTOR are those who enter
appointed him as the director of PNB. PNB has a meeting
contract with the corporation of which they are
once a month. Director’s fee? 100k per meeting excluding
directors. Technically speaking, it is an anomalous
per Diem. The per diem is not included in the ceiling of
dealing. A director is an agent of the corporation who acts
1/10th of the net income before tax.
for the corporation. Yet, a self-dealing director also acts
for himself.
What is the Director's fee in PLDT? 250K, one board
meeting. If you are called in a committee meeting, it is
REQUISITES:
150K. So once a month you have a meeting 250k, tawgon
1. His presence in the meeting, which approved the
sad ka ug committee meeting 150K.
transaction, must not be counted for purposes of
st quorum.
December 8, 2017 (1 Half)
2. He cannot vote on said issue.
(Lizette Kaye Estillore)
3. The contract is fair and reasonable under the
circumstances
SELF-DEALING DIRECTOR
4. In case of an officer, the contract has been
previously authorized by the board of directors
(SELF-DEALING OFFICER e.g. president of the
corporation, general manager who is not a
director)
st nd
If the 1 and 2 requisites are not met, for as long as the
contract is fair and reasonable (In NIRC, it is termed as

7
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
arms length transaction), there is no fair advantage that is
given to the director.
Illustration:
You are a director of Bachelor Bus. You are also one of
the biggest dealers in second hand tires and brand-new
tires in Davao. As a director, you offer it to Bachelor Bus.
This transaction must go through Section 32 of the Code.
There’s a meeting.
The presence of the director is not counted. Tangtang
na siya sa minutes for this particular discussion on the
transaction because in the end the BOD will pass a
resolution approving the transaction. That’s how a
corporation acts!
Put it in record that he did not vote. The others who
voted shall still constitute as the majority of the BOD.
Have a comparative pricing of others. “These are the
pricing of others. This is the price that he gives.
Therefore, it is fair and reasonable.”
It’s another story when this self-dealing director owns
2/3 of the outstanding capital stocks because even
st nd
with the absence of the 1 and 2 requisites, these
transactions can be ratified by the stockholders.
What is the assumption behind this rule?
If the self-dealing director is a stockholder with 2/3 of the
outstanding capital stock, he is less likely to take
advantage of the corporation. Mura ka ug nag-dunggab
sa imong kaugalingon – imo na gud na ang 2/3 unya imo
pang lawgawon ang corporation! Maluoy ka man sa
imong kaugalingon. Charity begins at home! I’d like to
point this out to you because there is another applicable
assumption applicable to directors.
INDEPENDENT DIRECTORS
Now, the Securities Regulation Code requires of
certain corporations to have independent directors at
least 20% or at least 2, whichever is lower, in the
Board. These are:
1. Listed Corporations
2. Corporations with at least P50M assets and at
least 200 stock holders, 100 of the stockholders
owning at least 100 shares
3. Banks, financial institutions, and quasi-banks
Who is an INDEPENDENT DIRECTOR?
1. He cannot own more than 10% of the outstanding
capital stock of the corporation. The PSE raised
the requirement. The law says not 10%. The
PSE says not more than 5%.
2. He cannot be related to any of the controlling
owners.
3. He cannot be an employee of the corporation or
the external auditor, or consultant of the
corporation, its mother or subsidiary.
The whole thinking is you can think better for the good of
the corporation if you are not related to the corporation –
you are thinking of the general welfare of the investing
public. In Section 32, if you have 2/3, you are thinking
about the good of the corporation that is why you can ratify
the transaction. Asa ma’y tinuod ana? If you ask me,
none of those two. It’s the actual running of the
corporation. It’s the oversight! In the end, good
governance is good governance in any language provided
that it exists.
Are the directors prohibited from entering into
contracts with the corporation?
No, they are not. But there is a formality that has to be
done.
INTERLOCKING DIRECTORS
Sec. 33. Contracts between corporations with
interlocking directors. - Except in cases of fraud,
and provided the contract is fair and reasonable
under the circumstances, a contract between two or
more corporations having interlocking directors shall
not be invalidated on that ground alone: Provided,
That if the interest of the interlocking director in one
corporation is substantial and his interest in the other
corporation or corporations is merely nominal, he
shall be subject to the provisions of the preceding
section insofar as the latter corporation or
corporations are concerned.
Stockholdings exceeding twenty (20%) percent of
the outstanding capital stock shall be considered
substantial for purposes of interlocking directors.
Normally, it is the corporation who enters into a contract
of which the director is also a director because he is also
a stockholder, and he is entering into contract with the
corporation of which he is also a director. This is what we
call INTERLOCKING DIRECTOR.
There is an INTERLOCKING DIRECTOR in a croprations
where one or some, or all of the directors of one
corporation is/are a director in another corporation. If the
interest of the interlocking director of a corporation are
both substantial where stockholdings exceed 20% of the
outstanding capital stock, you become a substantial
interest in the corporation, as far as interlocking directors
is concerned, then a contract between two or more
corporations having interlocking directors shall not be
invalidated on that ground alone, except if the contract is
fraudulent or not fair or reasonable.
8
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
The contract, as a general rule, is voidable if the interest
of the interlocking director in one of the corporations is
nominal, while substantial in the other stockholdings in
another corporation. It will only be valid if the following
conditions are present:
1. The presence of such director/trustee in the
board meeting in which the contract is approved
was not necessary
2. The vote of such director/trustee is not necessary
or not counted in the approval of the contracts
3. The contract must be fair and reasonable
The corporation where that interlocking director has only
nominal interest needs to be ratified by 2/3 of the
outstanding capital stock or 2/3 of the members of the
corporation. There has to be full disclosure of the adverse
interest of the directors and the contract must be fair and
reasonable.
Kanusa man naa’y ratification kinahanglan 2/3?
If your interest is less than substantial or if it is nominal,
the assumption is that you may favour the corporation
where your interest is substantial.
A director might act as an agent for another corporation
and that other corporation has nothing to do with that, but
he brings in to the director. That is not covered. (Huh?)
Illustration:
For example a corporation is putting up a building. They
are opening it for bidders. One of the directors is related
to a well-known construction company because his
brothers are architects and engineers. So dad-on niya
ang corporation sa iyang brothers. Is he a stockholder
there? No, he is not! How do you handle that? Then you
enter into *** because *** requires full disclosure if a
director brings a business opportunity to the corporation
through the board, then he must make full disclosure.
Muiingon siya – “Kini akong giduso, I am related to them.
My brothers are officers of the corporation and a major
stockholder.” For delicadeza, muingon siya – “I better
refuse myself so you can freely discuss the merits and
demerits of this transaction.” Sibat siya! Ang iyang
proposal debatehon sa BOD and wala siya diha kay
related man siya. Mao na ang full-disclosure, honest, and
transparent. Kinsa man muingon ana? Ang corporate
secretary.
(Father talks about SMC and derivative suit)
DERIVATIVE SUIT is filed by a stockholder in the name
of the corporation.
Who files the suit for the corporation?
It’s not the corporation because it has no hands to sign
the complaint. It has to be the BOD who files the suit. It
files the suit by passing a resolution where a natural
person, normally the President, is named who will act for
and in behalf of the corporation. This is approved by the
majority of the BOD.
If the corporation acts against the very agents who are
supposed to act for him, the suit shall be filed through a
derivative suit. A stockholder can file the suit in the name
of the corporation. The stockholder is the representative
party to the corporation because the mortal
representatives of the corporation are themselves the
respondents.
Only one share is needed for a stockholder to validly file
a derivative suit. At the time the controversy arose, you
must be a stockholder. At the time you file the suit, you
must still be a stockholder.
(Fathers talks about the whereabouts of Danding
Conjuanco and SMC)
nd
December 8, 2017 (2 Half)
(Zarah Donna Domingo)
WHEN IS A DIRECTOR LIABLE
Sec. 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 therefrom 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.
Section 31 lists down the 3 ways in which a Director is
liable.
1) When he votes for or consents to a patently illegal
act;
2) Willfully and knowingly vote for or assent to
patently unlawful acts of the corporation;
It was reported a week ago that the Mayor of the IGACOS
(Samal) said he has money for microfinance and he
appointed the multi-purpose cooperative of Samal that it
will process the applicants, after which they will release
9
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
the microloans. The cooperative passed a resolution
which provided that in gratefulness to the Mayor, it is
giving the mayor a gift of P100,000. The following year,
they passed another resolution giving P100,000. This is
in violation of the Anti-Graft and Corrupt Practices Act-
“gifts by reason of office.” The Mayor received the check
and subsequently encashed it and deposited it in his
account. The check was recorded in the cooperative.
There is no way he can deny that he has not received the
money.
Give a law that makes the director and the office liable,
criminally. An example is the violation of the Trust
Receipts Law. If the corporation is the trustee, the officers
are the ones who serve the prison term, not the
corporation because it cannot be put in jail.
Section 13. Penalty clause. The failure of an
entrustee to turn over the proceeds of the sale of the
goods, documents or instruments covered by a trust
receipt to the extent of the amount owing to the
entruster or as appears in the trust receipt or to return
the said goods, documents or instruments if they were
not sold or disposed of in accordance with the terms
of the trust receipt shall constitute the crime of estafa,
punishable under the provisions of Article Thirteen
hundred and fifteen, paragraph one (b) of Act
Numbered Three thousand eight hundred and fifteen,
as amended, otherwise known as the Revised Penal
Code. If the violation or offense is committed by a
corporation, partnership, association or other
juridical entities, the penalty provided for in this
Decree shall be imposed upon the directors,
officers, employees or other officials or persons
therein responsible for the offense, without
prejudice to the civil liabilities arising from the
criminal offense. get the skin of the cow that will be slaughtered. Is that a
Illustration:
For instance, you import a machine (8-color printing
machine from Italy). You obtain a loan from a corporation.
You open a letter of credit in the name of the corporation
(bank), assigned to you. You will be made to sign a trust
receipt which provides that the proceeds of that, if you are
a printing press, go directly to the corporation to service
the debt. If you cannot pay, that will amount to estafa. The
proceeds belong to the bank because it is the owner of
that machine.
That is the same case with Avon. You will be asked to
open an account and issue postdated checks so that you
will work hard to sell them, and at the same time, you will
be made to sign trust receipts because Avon is the owner
of the beauty products (pa-pula) and you are merely an
agent. If you cannot pay and you cannot return the beauty
products, you are deemed to have appropriated these
products for your benefit. You have committed estafa.
The provision of law states that if it is the corporation who
is the trustee in a trust receipts contract, the officers, the
members of the board, they are criminally responsible.
They will answer for the fine or imprisonment that is meted
out to the corporation, jointly and severally liable.
Doctrine of Corporate Opportunity
Section 34. Disloyalty of a director. – Where a
director, by virtue of his office, acquires for himself a
business opportunity which should belong to the
corporation, thereby obtaining profits to the prejudice
of such corporation, he must account to the latter for
all such profits by refunding the same, unless his act
has been ratified by a vote of the stockholders
owning or representing at least two-thirds (2/3) of the
outstanding capital stock. This provision shall be
applicable, notwithstanding the fact that the director
risked his own funds in the venture.
“Nangilog ko ug business sa corporation.”
Illustration:
You are all directors, you went to Australia. Cattle-
fattening is your business. As long as the cattle is still
increasing its weight, you do not yet kill it. When it stops
growing, that is the time you slaughter it. While you were
choosing a cow, somebody came near you and told you
they were looking for leather. It made an offer that the
former will make leather from their cattle and they will buy
it. You as director, you say this is my chance, I will not
give this to the corporation. When you went back to the
Philippines, you put up a leather-tanning business. You
violation of the Doctrine of Corporate Opportunity? No.
The requisites of the Doctrine of Corporate
Opportunity; The Doctrine says that if there is presented
to a corporate director a business opportunity which:
1) The corporation is financially able to undertake;
2) From its nature is in line with the corporation’s
business and is of practical advantage to it;
3) One in which the corporation has an interest or a
reasonable expectancy. And then, wala nimu
gihatag, imuhang gi-solo. Then you must account
for the profits, even if you spent you money in that
business.
The Supreme Court said that it is not a case of violation
of the Doctrine of Corporate Opportunity. Cattle-fattening
and Leather-Hide/Cattle-Hide Tanning, Curing and
Selling, are 2 different businesses.
10
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
What is an example of a violation of the Doctrine of
Corporate Opportunity? Bitong vs CA (1998)
Bitong was the President of Jaka Corporation (the holding
company of Juan Ponce Enrile).The corporation was
nd
named after Enrile’s two children. It was the 2 biggest
owner of real property along Ayala Avenue, the main
avenue of the Central Business District in Makati. Jaka
was in the development of high-rise condominium and a
law was passed than when you are a high-rise developer,
10% of your project must also be in low-cost housing.
They looked for lot where they will be putting up the low-
cost housing project. They found 3 prospects: the first one
was flat, already with electricity and NAWASA connection;
the second one was also flat but without water and
electricity; and the third one will require high cost of
development because it is not in a flat area, which
although having access to electricity, had no access to
water. Bitong said that Jaka will get the third option. He
got the first one for his own corporation which was also
involved in real property development. The SC said that it
was a violation of the Doctrine of Corporate Opportunity
because it was no longer speculative, the corporation
needs that, it was in-line with the business. There are no
ifs and buts.
If you compare this case with the previous example, layo
pa, daghan pa itranslate, agian. There is a way of
slaughtering to produce leather—there is curing and
stretching. In other words, the process of producing
leather is not part of the business of cattle-fattening.
Hence, there was no violation of the Doctrine of Corporate
Opportunity.
DISLOYALTY
There is a corporation that has a debt with another
corporation. The latter calls the directors for a meeting. It
was found out that although all the former’s properties in
the Philippines were already attached, a special
information was received that the debtor corporation
owned a plane in Burbank, California. The directors
agreed that they will hire a lawyer to attach the property.
Now, one of the directors stands up and goes outside and
makes a phone call. He called his lawyer in LA and told
him that since the debtor corporation also had debts to
him, he instructed the said lawyer to go to Burbank and
attach the same property which the creditor corporation
has agreed to attach. He is a director of a corporation. He
used his knowledge for his own benefit/ that is disloyalty.
If you are a director of a corporation, it is like partnership,
if the debtor has a debt to a partnership and a debt to you
personally, not as a partner, but in your other business,
and both obligations have ripened. Naa siya gihatag na
payment pero dili paigo sa duha, sa usa ra. Asa man na
i-apply kung ikaw ang mukulekta? To his debt to you or to
the corporation? (But, charity begins at home.) You have,
first and foremost, a fiduciary duty, which is higher
than your personal duty. It is higher.
In the same way, when a friend requests that he parks his
car in your parking space while he is away for a
conference and your house got burned and you chose to
save your own car before your friend’s car, are you liable?
Yes, you are liable for it. That is a contract of deposit. You
have an obligation as the depositary to attend to what is
deposited ahead of your own. That is the obligation that
you accepted when he deposited it to you. When you
deposit in the bank, it is fungible so it is not a true deposit.
It is a mutuum. Contract of Deposit, Contract of
Partnership, Fiduciary nature of a corporation, mau ra na.
It’s a common thread.
If you are not careful, you will end up betraying the
corporation because you obtain an interest to your
benefit, at the expense of the corporation.
EXECUTIVE COMMITTEE
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 filling 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 dividend to the shareholders.
Those are the exceptions which the Executive
Committee cannot act.
There are so many corporations who do not want to call it
Execom. They call it Mancom (Management
Committee). The problem with that is that it is the
terminology that is found in FRIA (Financial Rehabilitation
and Insolvency Act of 2010). It is a technical group which
may be appointed by the SEC in a distressed corporation.
So, the correct term is Executive Committee, not
Mancom.
It says here that the by-laws of the corporation may
create. Suppose there is no provision in the by-laws,
can the board create an Execom?
The Supreme Court said YES. Why? Because the powers
of the Board is plenary. It is supposed to exercise such
powers and create such committees to enable it to govern
and administer the affairs of the corporation. So even if
11
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
there is no provision in the by-laws, the board can create
an Execom.
I will tell you the story of the Execom of the old PCI Bank.
PCI Bank was bought by the Lopez Group and the
Gokongwei Group. They teamed up together, equal
shares sila and they bought it right after EDSA Revolution.
The way it was bought is, the Romualdez shares, most of
it, were sequestered by government and the government
said, since the Romualdez’s did not contest, we are
selling it. The way they sell it is by obtaining dollar credits.
At that time, the Philippines had so much foreign debt. If
you pay the foreign debt, you obtain credits equivalent to
the debt that you paid. And that is how they gained control
over these different corporations that were for sale. So
since Lopez did not have enough money to pay for
everything, he teamed up with Gokongwei who had
money, but did not have enough to buy everything. So
pareho sila, they teamed up. 35%-35%, so 70% sila.
Karun, gipalit nila, pagkahuman palit nila, ingun dayun si
Gokongwei kay Eugenio Lopez “since you are more used
to the public, you be the Chairman and President, tapos
ako, Execom ra ko.” Lipay kayo si Eugenio kay siya man
ang starring, siya man ang chairman. Si Gokongwei,
Execom ra siya. Sa ngadtu-ngadtu na, nakamatikud na si
Lopez na ang mga corporation ni Gokongwei ang sige
kahuwam sa kwarta because it is the Execom that
processes the loans, they meet every week. Ka-isa ra
man magmeeting every month ang board.
Nothing reaches the board unless it is approved by the
execom. So nawala na sa passing si Eugenio Lopez Jr.
Mauna niingun siya na ibaligya na natu. Who wants to buy
35% when you do not control. So, niduol siya kang
Gokongwei ingun siya “let’s sell together” so it’s 60%, they
have to pay a premium for control, not only the buying of
the shares, but you add a price to being in control of the
corporation, that is the premium, because you get 70%.
Ingun si Gokongwei: No I am not interested in selling.
So what did Eugenio Lopez Jr do? He did the unthinkable,
he went to Romualdez (mau nit u siyang gipriso ni Marcos
unya gipa-eskapo sila) who was a minority stockholder
with 20%. Giingnan niya si Romualdez “I am approaching
you, I am asking for your help (hinay na tu sila, wala na
man tu sila sa Board), let us organize and let us sell
togather because the Equitable Bank is interested in
buying.”
This is the time of Estrada. Gipahuwam ni Estrada sa SSS
and GSIS ang Equitable Bank, so naa siya kwarta ikapalit.
So Romualdez said “Go atu ni ibaligya arun maka-kwarta
ko kay I will have a premium. If I sell by myself, there will
be no premium because there will be no control, but if I
sell together with Lopez, there will be control, it will be
55%.” Lopez told Romualdez wait for my signal.
Lopez went to Gokongwei and he told him “you don’t have
to attend the meeting because if you do, you will just be
embarrassed. You will no longer be in the Executive
Committee, and I am and Romualdez will sell to Equitable
Bank-Mr. Go, and that will be the end of you, you are just
nd
35%, no premium, you will only be 2 beadle to Mr. Go of
Equitable Bank.” What did Gokongwei say “Okay I am
selling with you.”
Lopez said “Okay, we were in this together when we came
in, we will exit together.” And that was the ultimate
stabwound to Romualdez because Romualdez grabbed
Meralco from the Lopez’s so Lopez did not have any
qualms at all to betray Romualdez.
That is the story of how it became Equitable Bank, then
afterwards, it got into trouble because of bankrun
(remember that vice-president who testified that it was
Velarde himself who signed it but that was Estrada, edi,
bankrun).mWho got Equitable Bank? BDO. Equitable
Bank is lost in BDO who bought it.
Sometimes, it is the Executive Committee who runs the
corporation. Naa man na resolution ang Board of
Directors, let us say for loans, P5 Million and below,
approval of the Executive Committee is enough and it is
just ratified in passing, paspas ra na kaayo. The Board
begins to look at the loans once it is above P5 Million. So
for a big bank like Unibank or PCI Bank, higher tingali ang
threshold, P10 Million or P20 Million. So that was how
Gokongwei made PCI Bank the financing company of his
corporations kay siya man ang sa Execom, siya man
gakupot. Is it not covered by the Interlocking Directors? It
is covered supposed to be if it was the Board that
approved it, but it is not the Board that approved it, it was
the Executive Committee.
Alright, we are finished with the Board of Directors. We
are now with Powers of a Corporation (Father hands in a
handout to the class).
DECEMBER 13, 2017
(Shahata Tagtagan)
Before we leave DIRECTORS, I just like to bring to your
attention what is not in the Corporation Code: the
requirement of INDEPENDENT DIRECTOR.
CORPORATIONS THAT REQUIRE INDEPENDENT
DIRECTOR:
1) Publicly listed corporations – those which shares
are listed in the stock exchange.
2) Corporations that, although not listed, have sold
securities to the public, which securities required
to be registered with the SEC under R.A. 8799. –
If you sell bonds, then you have to have
independent director. It means you are dealing
with the public. Public has a stake, so you must
have an independent director sitting on the
Board.
12
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
REMEMBER: An independent director must NOT own
more than 10% of the outstanding capital stock.
3) A private corporation not listed, but has at least
P50Million assets, has 200 or more stockholders,
200 of whom at least own 100 shares of any class
of its equity securities which has been sold and
registered.
4) Banks – Required by the General Banking Law.
5) Other financial institutions – e.g. investment banks,
quasi-banks, deposit taking institutions.
WHO IS AN INDEPENDENT DIRECTOR?
An independent director shall mean a person other than
an officer or employee of the corporation, its parent or
subsidiaries, or any individual having a relationship with
the corporation, which would interfere with the exercise of
independent judgment in carrying out the responsibilities
of a director. (R.A. 8799, SECTION 38)
If you are a parent, consultant or director of a holding
corporation of your corporation, or subsidiary, or sister
corporation [up, down, sideways – covered], you cannot
be an independent director.
HOW MANY INDEPENDENT DIRECTORS ARE
NEEDED?
At least two independent directors or such independent
directors shall constitute at least 20% of the members of
such Board, whichever is lesser.
Many corporations even add to the requirement. They
make take three, like MERALCO, PLDT, SAN MIGUEL.
Why? Because that is the number required by the
Sarbanes-Oxley Law, and they are bound to comply with
the Sarbanes-Oxley Law, because they sell securities in
the New York Stock Exchange. If you are that corporation,
you cannot be approved to sell securities if you do not
comply with the rules and requirements of Sarbanes-
Oxley Law.
PUBLIC UTILITIES are also required to have
independent directors, because normally, they are listed
under the Public Utilities Act after they have been in
existence for ten years, at least 10% of the outstanding
capital stocks must be sold to the public.
There is a pending legislation. They are narrowing down
the corporations that will be deemed to be public utilities.
The rest may not be public utilities anymore, but it does
not mean that they are not covered anymore by the
independent director requirement. They might be,
because they might be P50Million in assets, at least 200
or more stockholders, 200 of whom at least own 100
shares. Under that classification, they may still be
required to have independent directors.
I was once an independent director for 15 years with a
bank (ONB). Many times, the BSP requires that the
independent director makes a comment on a particular
subject. It got to a point where I have to ask, “Does the
BSP have open access to whatever is discussed in the
Board? Isn’t the Board, in the end; at least has privacy to
be able to discuss things freely?” There were DOSRI at
the time.
BSP: Why does the independent director not make any
comment about the DOSRI?
Father: Why should I?!
At the time, the Consunes (?) were putting in more
deposits than borrowing. Of course they borrowed money
but their deposits were bigger than the money they
borrowed.
Sometimes, the oversight office of the government, they
become paranoid, especially at a time when there were
so many banks that were failing. Look what happened to
Metrobank. There’s a lady there, Leonor Lopez. She got
away with P1.14Billion. As a consequence, Metrobank
was fined P4.4Billion, because this officer was able to
steal from the bank. How did that happen? You will be
surprised.
The assumption behind independent director is
completely different from the assumption of a good
director in the Corporation Code. Many self-dealing
transactions of the director are ratified by 2/3 votes of the
stockholders. You own at least 2/3 of the capital stock;
you are less likely to hurt the corporation. The reasoning
why they want independent director is, the less
connection you have with the corporation, the clearer and
more objective your judgment is. That is from the point of
view of Sarbanes-Oxley Law. That is from the point of
view of ENRON Corporation.
ENRON was an unknown corporation. Ang napaon atong
ENRON, wa kahuman college. The U.S. deregulated the
power market, which means that a state can no longer say
“We will determine our production and use of electricity”.
Any company distributing electricity, like Davao Light or
MERALCO, they can buy electricity from anywhere. The
national grid (?) is obliged to transmit that electricity.
Suppose the electricity is cheaper in Naga, because it is
geothermal, and they have excess electricity there. Davao
Light says “Kana among paliton”, the national grid, now
owned by the Chinese and SM group, they must be forced
to transmit that electricity from Naga down to Davao. Who
did the buying and selling of electricity? ENRON in the
US. Out of nowhere, kalit lang sila nigawas, ENRON
number ten of all the corporations of the Fortune 500,
after just two years of operation. Why? Their actual sales
is their commission from getting the electricity and selling
it to the distributor. But then, they recorded as sales the
price of the electricity which they bought, which is gross.
Dili man net commission ang ilang gi___. The way they
13
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
arranged it was, every purchase is done by a joint
venture. They put up a partnership. Kadtong power
company somewhere in Naga, before it sends the
electricity, it passes it on to a partnership which is already
ENRON and local managers of the power company. Then
they pass it on to ENRON. Why did they use that
structure? Muganansya gani, ganansya will be reflected
on ENRON. Malugi gani, adto na sa partnership, because
the partnership is offshore. Dugay wa mahibawi, ang
losses, hain man dapita? Wa ka kahibaw. Wa man sa
libro si ENRON. Kinsa may nag-engineer ana? Si Mr. Lei
(or Lee?).
Mr.Lei was from Anderson-Cooper, what used to be the
big five. He was the biggest of the five. Tungod atong
iyang gibuhat, Anderson was dismantled. Big four na lang
naa ron. Katong si Mr. Lei gikan sya sa Anderson, sya
ang nagsuggest kay gikuha man nya tong buang buang
na high school graduate na Texan na maayo sigeg
yawyaw. The government was wary from coming in,
because it says DEREGULATED MARKET. Electricity is
known in the monopoly of big power producers, daghan
kaayo complaints. Atras ang gobyerno, unya sigeg
maniobra diri katong Texan na maayo musulti. Mr. Lei
was former internal auditor of ENRON from Anderson.
Then he resigned from Anderson. From internal auditor,
gihimo syang Vice President sa ENRON, then nahimong
President, then Chairman. Mao nang no connection at all.
Independent director. The best you should read about
what happened to ENRON is “The Congressional
Investigation Report of the ENRON Scandal”. It’s in the
web, you can download it.
[Story about Napoles who engineered the PDAF, na wala
daw sya natapos ng college like the Texan guy.]
[Father talks about bitcoin. Two days ago it was
$17,000.00 per bitcoin. That it was so bad in South Korea.
That it was a medium of transaction in some industries.
Whole point is that the public determines the value. There
is no Central Bank. The trouble with bitcoin is, if it is a
store of value, it is still reckoned in dollars. Murag
depende sya sa value in dollars. You do not say “Let me
buy this for two bitcoins”. It is still a commodity. 2/3 of the
21Million bitcoins is still held by the founder. Kung
mudailos na na, katong tag-iya buhia nya na tanan,
kuhaon nya ang dollars. Warren Buffet and others say
that it is a bubble.]
The rule is, if your transaction, merger or consolidation of
the corporation is P1 Billion or more, you have to ask
permission from the Philippine Competition Commission.
Karon, gi-hold nila ang merger sa SM group and
Goldilocks. Unsa may competition ana na mahimong
monopoly? Kay more than P1Billion man, gi-scrutinize
nila. Sobra ra, over-regulation.
[Father talks about PHILSAT.]
We are talking about the extraordinary power of the
corporation that requires a more elaborate system of
formalities. The formalities are summarized in this two-
paged matrix [Consult Father’s notes]. The powers are
vertical, the requirements are horizontal. Each exercise
has a requirement. Some, not all, do not need all the
requirements.
The corporation extends its term, is it written assent
or vote? Non-voting stock, can they vote? When the
corporation decides to give out cash dividend, do the
stockholders vote?
There are some powers when they are exercised, that the
corporation says, the stockholders have a right to
exercise APPRAISAL RIGHT, which means they want
out of the corporation. You exercise this power and they
are in disagreement, they vote against it, pildi sila, the
corporation will go ahead with this particular decision,
then the stockholder has the appraisal right. The question
is how much? The stockholder says, “I think my shares
are this value”. Corporation says, “No, this is the value”.
What happens when they disagree? It’s all outlined in the
Corporation Code.
What exercise of powers gives you appraisal right?
There’s also a list. When you extend the corporate term
of the corporation, remember what is the maximum? 50
years.
When can you extend normally?
You cannot extend earlier than 5 years before the end of
the term, but only for good reason (e.g. When you are
loaning for the bank. The bank may not feel secure
because your life term that is remaining is less than the
term of your loan, then the bank will say “You better
extend your term now!”, even if it is before 5 years,
because you ‘re borrowing money for 15 years. The SEC
will probably grant you.)
The law says in Section 37, if you extend the term, you
have appraisal right as a stockholder. You disagree, you
have appraisal right. But if you SHORTEN the term, it
does not say that you have appraisal right. Why is that?
Because if you can amend the Articles to extend the term,
you can also amend the Articles to reduce your term.
WHY IS THERE NO APPRAISAL RIGHT IF YOU
REDUCE THE TERM?
Because reduction of term is another form of
dissolution. When you dissolve a corporation, normally
what happens is, it is followed by liquidation. The
shareholders will be valuated as to how much is owing to
them according to their proportionate share of outstanding
capital stocks. So necessarily, when you shorten the term,
there is liquidation; there is payment to the stockholders
of the value of their shares.
WHAT IS QUALIFIED NOTICE?
Many exercises of extraordinary power under Title Four
require qualified notice. Qualified notice is notice of the
meeting, not only as to date, time and place, but also the
notice includes the particular item in the agenda, namely
14
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
the exercise of this extraordinary power. Why? Because Sec. 36. Corporate powers and capacity. - Every
that item of information is crucial for the stockholder to
corporation incorporated under this Code has the power
determine whether or not he/she should attend the
stockholders meeting. and capacity:

DECEMBER 14, 2017 1. To sue and be sued in its corporate name;

(Jennifer Mortejo)
TITLE IV - POWERS OF THE CORPORATION
The Corporation Code now lists the powers of a
corporation and some of those listed are incidental or
inherent powers.
What is the significance of the listing of inherent
powers?
First of all, it is superfluous because even if it’s not listed,
the power exists. Why? Because that power is definitive
of a corporation. It is not that you’re a corporation first,
then you have that power. It is the very fact of that power
that makes you a corporation.
(Fr talks about political law: the 3 inherent powers of the
State are not granted by the Constitution, the Constitution
merely recognizes those powers. So even with the
disappearance of the Constitution, whether there’s a
revolutionary government, that government would still
exercise those 3 powers because that is inherent in
government.)
Same goes with the inherent powers of the corporation;
there is no need to put these down in Section 36.
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 in accordance with
the provisions of this Code;
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
non-stock 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
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.

So even if all these presentations of inherent powers in

section 36 are legislated out of existence, let us say the
code is amended and the amended code no longer
reflects these powers, the corporation still has these
powers because they are inherent.

(Fr: Just like it is inherent for rain to wet, if it does not wet,
it is not rain. The essence of rain is it wets. Makabasa. But
is anytime you are wet, is it rain? What if nagbaktas ka sa
kilid sa dalan tapos kalit lang gisabligan ka unya nabasa
ka, is that rain? No! Mao na, it belongs to the essence but
it is not exclusive)

For a corporation to sue and be sued is (…) of essence of

being a person, because to be a person is to be a subject
of rights and obligations. Only a person can sue kay naa
15
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
man siyay katungod. (Fr talks about dogs, that no matter of an agreement, it must have the consent of the parties.
how intelligent and talented they are, still they cannot sue A subscriber is a party. So if you do not agree, you
since they are not persons.) The only one subject of rights exercise your appraisal right. “Buy me out”.
is a person and a corporation is a person by fiat of law.
We are persons by birth. All we have to do is to be born The next power is provided in Section 38:
to be a natural person, then you have rights.

The inclusion of inherent powers in Section 36 is

superfluous. Then you will later on find out, it maybe
superfluous but for purposes of legal fees, it enhances
your capacity to demand legal fees. There are lawyers
now that if you make them draw up articles of
incorporation, when it comes to the purpose clause, they
will put down the purpose and then to make the purpose
clause longer, they recite all the inherent powers. Why do
they put it down? Aron mabaga-baga ang articles of
incorporation ug ma-dako ang attorney’s fees. (Fr talks
about an SPA signed abroad.)

We said that this first presentation, “the power to extend

or shorten corporate term”, the last sentence of Section
34 (I think Fr meant Section 37) says that:

Sec. 37. Power to extend or shorten corporate term. –

xxxx

Provided, That in case of extension of corporate term, any

dissenting stockholder may exercise his appraisal right
under the conditions provided in this code.

But it does not say that in case of shortening the corporate

term, any dissenting stockholder may exercise his
appraisal right. So, there is no appraisal right for
shortening the corporate term. Why? Because it is a form
of dissolution. And when you go through dissolution, what
follows is liquidation. You will ultimately liquidate the value
of your shares.

Why is there an appraisal right when you extend the

corporate term?
Because assuming you are a pre-incorporation
subscriber or even if you are a subscriber after the
corporation has already been (..), the terms of your
agreement as to the investment is the articles of
incorporation. You are presumed to have read the
articles. And you know the end of your investment is
marked by the term. So you are expecting that by this
date, you will already get the principal value of your
investment. Not just the dividend, you will also get back
your principal. So if you extend the term, you are novating
that contract. It still follows the Civil Code, any change as
to the term is novation. A change of a term of the contract,
the length of time within which the contract is to be
existing or the obligation to ripen, the extension of the
term is a novation. So when you change the basic terms

16
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
Sec. 38. Power to increase or decrease capital stock; the Securities and Exchange Commission and attached to
incur, create or increase bonded indebtedness. - No the original articles of incorporation. From and after
corporation shall increase or decrease its capital stock or approval by the Securities and Exchange Commission and
the issuance by the Commission of its certificate of filing,
incur, create or increase any bonded indebtedness unless
the capital stock shall stand increased or decreased and
approved by a majority vote of the board of directors and, the incurring, creating or increasing of any bonded
at a stockholder's meeting duly called for the purpose, two- indebtedness authorized, as the certificate of filing may
thirds (2/3) of the outstanding capital stock shall favor the declare: Provided, That the Securities and Exchange
increase or diminution of the capital stock, or the incurring, Commission shall not accept for filing any certificate of
creating or increasing of any bonded indebtedness. increase of capital stock unless accompanied by the sworn
Written notice of the proposed increase or diminution of statement of the treasurer of the corporation lawfully
holding office at the time of the filing of the certificate,
the capital stock or of the incurring, creating, or increasing
showing that at least twenty-five (25%) percent of such
of any bonded indebtedness and of the time and place of increased capital stock has been subscribed and that at
the stockholder's meeting at which the proposed increase least twenty-five (25%) percent of the amount subscribed
or diminution of the capital stock or the incurring or has been paid either in actual cash to the corporation or
increasing of any bonded indebtedness is to be that there has been transferred to the corporation property
considered, must be addressed to each stockholder at his the valuation of which is equal to twenty-five (25%) percent
place of residence as shown on the books of the of the subscription: Provided, further, That no decrease of
the capital stock shall be approved by the Commission if
corporation and deposited to the addressee in the post its effect shall prejudice the rights of corporate creditors.
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 certificate in duplicate must be signed by a majority of a majority vote of the board of trustees and of at least two-
the directors of the corporation and countersigned by the thirds (2/3) of the members in a meeting duly called for the
chairman and the secretary of the stockholders' meeting, purpose.
setting forth:
(1) That the requirements of this section have been Bonds issued by a corporation shall be registered with the
complied with; Securities and Exchange Commission, which shall have
(2) The amount of the increase or diminution of the capital the authority to determine the sufficiency of the terms
stock; thereof.
(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 stock-holder if such
increase is for the purpose of making effective stock
dividend therefor authorized;
(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.

One of the duplicate certificates shall be kept on file in the

office of the corporation and the other shall be filed with

17
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
INCREASE OF CAPITAL STOCK
Is it necessary that all the shares be first issued before
you can increase capital stock? Remember, capital stock
has three distinct classifications in the articles of
incorporation: authorized capital, subscribed capital
and paid-in/paid-up capital.
When can you increase capital stock? When all the
authorized capital stock has already been issued, is
that the only time that you can increase?
The answer is NO. Even if there is still sub-authorized
capital, you can already increase sale. The only
requirement is when you increase authorized capital, at
least 25% of the increase must be subscribed and at least
25% of the subscribed is paid-up.
ILLUSTRATION:
Authorized capital stock = 1 million pesos divided into 1
million shares at 1 peso value
Subscribed capital = 750,000 (that is ¾ already of the
authorized capital); out of the subscribed capital, 500,000
is already paid.
You have been in business for 3 years and the Board
passes a resolution to increase the capital stock to 2
million instead of 1 million. Why? Because you are going
to borrow. How much are you borrowing? 10 million. And
your capital base, at most, is only 1 million. The bank is
saying “contribute sad mog equity, dobleha inyong equity
kay 10 million gud na inyong huwamon”. So, pasaka ka
from 1 million to 2 million authorized capital stock. Can
you tell the SEC, 2 million na ang authorized capital stock,
unya ang subscribed kay 750,000 man, that is more than
25% of 2 million. Unya pag-abot nimo sa paid-up,
500,000, that is 25% already of 2 million. Kinahanglan pa
ba ko mudugang ug subscribers? The SEC will tell you
that the basis is the increase.
Your increase is 1 million, the 25% that must be
subscribed must be based on the increase. Thus, the
subscribed capital of your increase must be at least
250,000. And out of that 250,000, the minimum
requirement is that the paid-up must be 25% (meaning
25% of 250,000).
So, it must be based on the increase and not on the
increased amount of authorized capital stock.
DECREASE OF CAPITAL STOCK
When do you decrease capital stock? You decrease
capital stock when your capital stock has in fact
decreased. Over the years you have sustained these
losses, so much so that your capital is already impaired.
Your external auditors will tell you that your original
capitalization no longer holds because you have lost a lot
of money. So you better tell the truth. Decrease your
capital stock and put down the real capital (status?).
ILLUSTRATION:
A corporation has 1 million capital stock, 500,000 is in
redeemable shares. Par value is 1 peso.
Suppose your entire 500,000 redeemable shares is fully
subscribed and fully paid-up. After 3 years, it is mandatory
that you should redeem it. The redemption is at the option
of the holder, and the holder says “I want my money
back”. But what happens is after 3 years, you did not
make any money. There are no unrestricted retained
earnings. You are not yet so depleted that redemption will
impair your operations. So, redemption will be around you
but you are now using capital stock to redeem because
you have no unrestricted retained earnings. It is as if the
capital you got from the issuance of the shares, imong i-
uli ngadto sa redeemable shareholders (500,000 worth).
Tinuod pa ba na imong articles of incorporation which
says, “paid-up capital: 500,000 redeemable shares”? Gi-
uli naman nimo tong 500,000 na imong nadawat kay wa
man kay unrestricted retained earnings. What happened
to the redeemable shares? It became treasury shares.
So, the capital you stated in the articles of incorporation
is not true anymore, it is lessened by 500,000 shares.
That is why now, you have to reflect your true capital
stock. What do you do? Retire your treasury shares and
when you retire it, you decrease capital stock.
Tangtangon na nimo ang redeemable shares sa imong
articles of incorporation. Ang authorized capital stock,
subscribed and paid-up, tangtangan sad nimo ug 500,000
to reflect the true state of your capital stock.
But that requires approval by 2/3 vote of the stockholders
in a meeting duly called for the purpose. Stockholders
include voting and non-voting shares.
INCURRING, CREATING OR INCREASING BONDED
INDEBTEDNESS
Every time you borrow money by bonds, you have to get
2/3 vote of the stockholders.
In decreasing bonded indebtedness, do you need
2/3? It does not say. Why? Because decreasing means
paying your bonds and that is included in incurring
bonded indebtedness. Muingon gani kag mangutang ka,
impliedly muingon man ka mu-gamay sad na imong utang
kay mu-bayad ka man. Mao man nay magpa-gamay sa
utang. (Fr talks about “buwangan” being an institution in
the Philippines and the meaning of “pago”. In Spanish, it
means “you have paid” while in Filipino, it means “escape
of payment”.)
If increasing bonded indebtedness requires 2/3 votes
of the stockholders, how can a corporation evade this
very burdensome formality? Is there a way that you
can circumvent this requirement?
YES, there is a way. De Leon, Villanueva, all those people
will not tell you this. How do you escape?
ILLUSTRATION:
18
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
San Miguel Corp (SMC) is the issuing corporation. To
avoid the 2/3 requirement, SMC creates another
corporation called the SMC bonding corporation. Who are
the stockholders of SMC bonding? The stockholders are
selected from the officers of SMC. The Board is the
controlling interest in SMC bonding corporation, 5
members. SMC has 15 members of the Board. SMC
bonding will issue the bond. Kinsa may mutuo sa SMC
bonding in the financial market? Why will you believe it?
Because SMC will unconditionally guarantee the bond of
SMC bonding. At any time it could increase. Ngano man?
15 na gud na ka members ang mu-boto ratifying the
issuance of the bond. Unanimous. All 5 members of the
Board of SMC bonding corporation will always vote.
(Transcriber’s note: Sorry wala ko kasabot diri na part
guys kay absent ko. Naa atay gi-drawing si Father sa
board).
Why do you need 2/3 ratification when you borrowby
bonds but when you borrow through the bank, you do
not need?
You cannot borrow 2 billion from a single bank because
most likely that is already beyond the single borrower’s
limit. Sulti na gani kag 2-3 billion, you are talking about a
syndicated loan (Fr further explains the structure of a
syndicated loan.)
In a bond, you have at least 3 parties, the BOND ISSUER,
TRUSTEE and BOND HOLDER.
ILLUSTRATION:
Bond issuer – MERALCO
MERALCO wants to issue a 10 billion bond and it is a
long-term bond for 10 years. MERALCO will engage the
services of a financial adviser, normally an investment
bank and the investment bank will structure the bond.
First of all they will choose if it is an interest-bearing bond
or no interest-bearing bond.
Now, you have the bond and its smallest denomination is
500,000. It is sold at a discount, 10 years. For a 500,000
face value bond, this will end up with you paying only
150,000. Ang gihatag nimo sa MERALCO kay 150,000,
ang imong gi-dawat kay 500,000 face value. Huwat ka ug
10 years, pag-adto nimo sa MERALCO kay magpa-bayad
ka na, pila may ibayad? 500,000. Ang difference ana is
the interest. So this is a no-interest bearing bond.
Maka-agwanta ba kag 10 years? Kung maka-agwanta ka,
naa kay 500,000, imo nang i-gapos dira. Ug gawas pa
ana, ang 500,000 nimo karon, 10 years from now ambot
pilay mapalit ana. Naa man nay depletion.
Do you know about the “rule of thumb”? It is the rule of
72. You divide 72 by the average interest rate of your
money. The interest rate is measured annually, you divide
it and the answer that you get is the number of years it
would take to double your money. (Ex. If the average
interest rate of your money is 12%, you divide 72 by 12.
The answer is 6 years. So every 6 years, your money
doubles)
Back to the example, in 10 years, what happened to your
money? After 6 years, it should become 300,000. After 12
years, it should become 600,000. In our example, it is only
10 years. So the interest rate here is about 11-12%.
Now MERALCO, by issuing 10 billion 10-year bonds, has
to choose a TRUSTEE. What is the purpose of the
trustee?
1. The trustee holds the collateral for the loan
because the bond holders, they hold small
amounts (daghan man sila, so mag-away sila
kung kinsay mu-gunit sa collateral). The trustee
will hold it.
2. If the bond should fail, it is the trustee who
executes on the collateral and liquidates the
collateral and divides it among the bond holders.
So sa sugod if it is with interest, the bond holder will go to
MERALCO. If it is an interest-bearing bond and it happens
to be a COUPON BOND, there are coupons attached to
the bond. And the bond normally gives interest twice a
year and its coupon corresponds to a payment period.
Pag muabot na ang payment period, laksi-on na nimo ang
coupon. Then you go to the ISSUER and they will pay you
the interest.
BAR QUESTION: What is a coupon bond?
It is an interest-bearing bond to which is attached coupons
corresponding to the payment periods of the interest of
the bond. The moment the payment period matures, you
detach the coupon and go to the issuer and the issuer
pays you the interest.
So a 10 years’ bond have 20 coupons since interest is
paid every 6 months. There are also some bonds with
WARRANTS instead of coupons.
What is a Warrant?
It is the right to purchase shares of the issuer at a given
strike price. In other words, it is an added feature to the
bond to make it attractive to investors. It is a promise that
you are not only a creditor; you can also become a
proprietor shareholder.
ILLUSTRATION:
MERALCO now is traded at P270. They will say this bond
has a warrant, that for every 100,000 of the bond, you can
buy 100 shares at a strike price of P270. MERALCO gains
price because it has now greater sales. Why do its sales
increase? Because it borrowed money to put up a power
plant. It does not only distribute electricity, it now
produces the electricity that it distributes. So mu-saka ang
ilang revenues and its net profits. Let us say, by the time
th
that the 5 year comes around, the price of stock is
already P370. Imagine that your warrant says you can buy
at P270, mu-ingon ka mangita na sad kog P270. Ayaw
19
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
kung di ka gusto mangita, ibaligya ang warrant because
that itself is a right. You don’t have to exercise it. That’s
precisely why it is a DETACHABLE WARRANT.
(Transcriber’s note: Please read other materials about
this topic. Medyo confusing gyud ang akong pagka-
transcribe since absent ko ani na date ☹.)
January 4, 2018
(Eliza Den Devilleres)
Sec. 43. Power to declare dividends.
xxxxx
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)
xxxx

Sec. 43. Power to declare dividends. - The board With emphasis on: “reserve for probable
of directors of a stock corporation may declare contingencies”
dividends out of the unrestricted retained
earnings xxx WHAT IS THE DIFFERENCE BETWEEN POSSIBLE
AND PROBABLE? You must know that because when
you examine a witness, you must clearly know when it is
possible or probable.
WHAT IS UNRESTRICTED RETAINED EARNINGS?
• PROBABLE – Statistical
WHAT ARE INCLUDED IN UNRESTRICTED
• POSSIBLE – A matter of proving from potential
RETAINED EARNINGS?
to actual
Under Sec. Memo. No 11, Series of 2008:
Illustration:
UNRESTRICTED RETAINED EARNINGS is the
1. Is it possible for a dog to be a doctor? There is
accumulated profits realized out of normal arid continuous
NO possibility.
operations of the business after deducting therefrom
distributions to stockholders and transfers to capital stock
2) Is it possible for you to become a doctor?
or other accounts and which is:
POSSIBLE, but improbable kay naglaw ka
1) Not appropriated by its BOD for corporate
naman. The chances of you being a doctor is as
expansion projects – cross refer to Sec. 43 :
improbable for a medical student to become a
lawyer. It’s possible but layo kaayo. Pero for a
Sec. 43. Power to declare dividends. dog to be a doctor, that’s NOT POSSIBLE.

xxxxx
Sec. 43. Power to declare dividends.
Stock corporations are prohibited from retaining
surplus profits in excess of one hundred (100%)
xxxxx
percent of their paid-in capital stock, except: (1)
or (3) when it can be clearly shown that such
when justified by definite corporate expansion
retention is necessary under special circumstances
projects or programs approved by the board of
obtaining in the corporation, such as when there is
directors; or (2) when the corporation is prohibited
need for special reserve for probable contingencies.
under any loan agreement with any financial
(n)
institution or creditor, whether local or foreign, from
declaring dividends without its/his consent, and such
consent has not yet been secured;
xxxxx • PROBABLE CONTINGENCIES – statistical na.

Naay mining corp. sa Palau Island. They are setting aside

money for their highly profitable Guano operations – a
So a creditor can limit a corporation’s power to declare
huge chunk. Because of the probable contingency of
dividends by including in the loan agreement that
being overtaken by the sea. Unsaon mana pagka
prohibition against the declaration of dividends, unless or
probable? The sea is now rising 1 meter a year. They are
till the loan is paid.
just 1 meter from the shoreline. Naa dira ang langob nila
kung asa sila gakuhag guano. Is that possible or
probable? Unless you are like Trump who denies that
there is global warming, you put it in the level of possibility.
But if you are together with 90% of respectable scientists,
you say that there is global warming and sea levels are
20
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
rising; the fact that it has been rising for the past xxx and
your cave where you get your guano will be underwater.
WHEN THE CORPORATION IS JUSTIFIED BY
DEFINITE CORPORATE EXPANSION PROJECTS,
WHAT’S THE DIFFERENCE BETWEEN THAT AND
PLANS FOR THE CORP??
This one is manmade – the corporation has already
decided on it. it has passed a resolution to expand its
mining site. It has decided to purchase the adjoining site
mining plain. Because by the advice of the geologist, that
next door mining claim is probably homogenous to the
mining claim that is now currently already assessed as
healthy percentage of the mine xxx. Nagbuslot-buslot ka
dira, an aka na possible na mao ning nia. Didto 1 ka
kilometro nasad, possible nana na gold na. pero
magbuslot ra gani ka ug tag 10 metros ra, dli gani na
possible ore. Dli gani na probable but actual nana na ore.
Mahimo nanag ikargada nimo sa libro nimo na asset na.
That’s an asset. So make sure you know the difference
because those are all includible in the limitation of the
corp’s power to declare dividends.
Once again we will go to the definition that
UNRESTRICTED RETAINED EARNINGS – The bulk of
it is the result of profits and gains. From what?
Normal, continuous, strenuous (NCS_ operations of the
company – Ex: Sa operation sa company nakakita sila sa
backhoe us aka cartoon na pagabri gold – Yamashita
gold/treasure. Can that be included in unrestricted
retained earnings? It cannot! Because it is not continuous
and ordinary operations of the corporation. Muingon ka
grabe man pud, there can still be a lot of controversy over
that gold! The sovereign gov’t still has claims over that
unya imo nang ibutang saimong libro? Kuyawa. Muingon
ang gobyerno, naa miy katungod niana. Kinawat na gikan
sa Central Bank!
For example, kakita kag gold diadto sa may Manila Bay,
can you put that in your unrestricted retained earnings? If
you are a salvage company, you can, kay mao mana
imung negosyo. Pero kung scientific corp. ka na
nagmopping diadtos ubos unya kakita ka niana, unya
imung ibutang na saimong libro, it has to be Normal,
continuous, strenuous (NCS) operations of the
corporation (TAKE NOTE!)
What cannot be included in unrestricted retained
earnings?
There are still no definite decided cases locally but the
SEC have issued circulars based on foreign cases. For
instance:
1) Revaluation surplus – for the increase of the
value of assets cannot be considered earnings of
a corporation. They are not income from
operation. They are by nature subject to
fluctuations. What is an example of revaluation
surplus? ADDU – it has a building. This building
was completed in 1980, 39 yrs na. This building
is supposedly fully depreciated, but it has been
revalued. Why? Every 10 yrs this building is
revalued for purposes of insurance and
revaluation as directed by mgt of the university to
the appraisers is replacement cost. Kay kung
masunog ni, kinahanglan magput up dri ug
building na mupadayon ang eskwela for purposes
of contingency. Karon pagrevalue niini muingon
tung appraisers “300M na ni. To put up this
bulding we need 300M. Therefore you have to
insure it for 300M.” Pero pagtukod niini, 60M ra
ni! Naa kay ginansaya niana. Pila? 240M! Ana ka,
declare tag dividend niana. Mahimo ba na? No!
You cannot declare dividends on revaluation
surplus. Revaluation surplus is not the result of
the Normal, continuous, strenuous (NCS)
operations of the corporation (TAKE NOTE!)
2. Paid-in surplus cannot be declared as
dividend. Paid in surplus is the difference
between the par value and the issued value or
selling price of the shares and are not there as
considered profits earned for the conduct of the
business of the corp. they are considered as part
of the CAPITAL.
IN THE CAPITAL ACCOUNTS YOU HAVE: Common
stock, Premiums and Accumulated unrestricted retained
earnings/profits.
EXCESS OF THE PAR VALUE OF THE ISSUED PRICE
Let’s say the par value say P10.00. What is the rule? You
cannot issue shares that are lower than par value. It must
be at least par value. Now if you issue it higher than par
value it is PREMIUM OF STOCK – ganansya na ba na?
Dli na ganansya pag paingon naimo idistribute as profits.
That belongs to capital. There is however another circular
of the SEC which says that, “in such cases, at the
discretion of the SEC, the SEC can allow distribution of
paid in surplus as stock dividends and NOT as cash
dividends kay wa may mubiya ana sa corp. just as stock.
3. UNREALIZED FOREIGN EXCHANGE GAINS
(emphasis) except to attributable cash and cash
equivalents for the time being that they are not yet
actual income prior to realization of such foreign
exchange gain.
Illustration: You’re a bank. You applied to the BSP to be
a trustee. So you become a trust company – you manage
the assets of others. For your trust license to be approved,
you are required to put up a surety deposit in the BSP
assets that are valued at a fair market value. Let us say
one of your assets are shares of stock of Apple because
you have foreign partners that are willing to supply shares
of stock which their foreign corp. owns. So that is
assigned to the corp. here and that is put in the BSP as
surety. BSP says, if you’re trust business is worth 100M
worth of shares that you are managing, then 20% of that
must be secured financially. So you need to put up 200M
21
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
of assets as surety. So it can be in the form of: a.) Actual
cash; b.) Shares of stock bought in the Phils; or c.) Shares
of stock that are listed in respectable foreign exchange
markets – Apple shares, accepted mana. Mao na ang
gibutang sa BSP.
So it’s valuation is at the time of the listing. Let us say
$100/share, mao na ang value na gibutang diha. Naa
saimong libro pero naa sa BSP as surety. As time goes
on the value of the shares of stock goes up and it’s in
dollars! Nahimo naman ug $200, na double naman ang
value. Mahimo naman gani nimong kuhaan tung shares
na gibutang nimo sa surety kay mitaas naman ang value
saimong surety. Muingon ka na ipabilin na dinha unya ang
value niana ibalhin nato sa libro nato kay ginansya na
nato aron madistribute nato as dividends. Can be?
CANNOT! Because it’s still unrealized value! What goes
up can also go down. What happens if for some reason
Apple Corp. mubagsak, edi imung shares of stock imbes
musaka, mikanaog nasad, kay naa mana dinha di man
nimo mabaligya. Naa mana diha as surety with the BSP.
So UNREALIZED FOREIGN EXCHANGE GAINS
cannot be part of unrestricted retained earnings that
can be the source of declaration of dividends.
4. The amount of unrecognized deferred tax
assets that reduce the amount of income tax
expense, can increase the net income and
retained earnings of the corp. You cannot include
it as part of unrestricted retained earnings. Oncce
it is realized, you can!
Illustration:
You are assessed of the payment of tax. Gi-fight nimo ang
gobyerno – you fought Henares and the case went on for
5 yrs and you won all the way to the SC. You’re victory is
equivalent to P100M – just like Lucio Tan. Lucio Tan won
something like 3B – daog cyag 3B kadtong tax na gicollect
ni Henares worth 3B! Unlawful collection diay to! The
trouble is, the gov’t, the BIR will not refund it.
How will you get back the taxes? It will be charged to your
account and the BIR will pay whatever is charged to that
amount. Daog kana sa SC and in the dispositive portion
of the decision says 3B ang daog nimo. Mauna ka
bulahan! Mudeclare ta niini ug extraordinary dividend. Di
mahimo dong! Why? It has not been realized! Every year
naa kay bayrunon na tax, mareduce ang imong payment
of tax kay naa naman kay ngadtoy charged account! Mao
ranay imong maapil sa unrestricted retained earnings
– as if xx but not the entire decision. So unrestricted
retained earnings, pagampo lang na simple lng nang
question na musud unyas BAR EXAMINATION. Kay ug
kuti-kutihon jud ni, unsa may gamiton nimo na rule? YOU
STICK TO THE DEFINITION! Bisag sayop paka, stick lng
sa definition – that it is not a product of STRENUOUS,
CONTINUOUS and ORDINARY operation of the
company, naa kay points! Pero wa jud gani kay gibasihan
jud kay matintal ka jud, kay naa naman ni. UNREALIZED
– kasabot sa sila naa kay nasabtan saimong taxation na
not all income is taxable. If you have an income which is
not realized, it is not taxable! Ngano gi-income man?
INCOME IN NAME! Naka-income ka but it has not been
realized yet.
*TIP: So you show the examiner that you have an
understanding of realized, and unrealized
How about GAINS ON SALE OF CORPORATION’S
REAL PROPERTY, is that ordinary business?
It’s NOT ordinary business. Corporation sells a property,
but since it bought it 50 yrs ago – just like the corner lot
where the EuroTowers is rising. Tanawa nang opisina sa
EuroTowers unsay may nahitabo diha? Sirhan na nila kay
nakabaligya na sila ug igo na unita, unya irelease nas
bangko aron pambayad aron pagconstruct ana. Nanira na
sila! We have fooled enough people that’s why we closed
this office. Tan-awa gud na. paspas na nang construction
rd
nila. Wa jud ta kahibaw na 3 flr na sila. Wa mo makaagi
ana? But another foreign standard di jud na makalusot!
Ibaligya na, that’s xx of land originally of PLDT! That was
the orig. office of PLDT. Until it bought DCCT.
(Chika about Duterte St. The Chinese believe that it’s the
luckiest street in Davao. Abot na nag P100K per sqm.
dira! Very expensive! There’s a place there that’s selling
dried fish! Gatupad pa na sila)
Unsa ma nay ila gikuan? Capital gains! Patubo na nila
ang value sa real property. Gatubo mana unya gasaka
ang imong real property tax. Unya ireflect na nimo
saimong financial statements na nisaka na ang value ana.
FROM THE INCREASE OF THE VALUE, CAN YOU
DECLARE DIVIDENDS OUT OF THAT?
You cannot! Because it is still unrealized – the GAIN
there! But the moment that you sell it, the gain that is
realized becomes part of UNRESTRCITED RETAINED
EARNINGS.
If the corporation has shares of stock in other corporations
– I’m not saying that it is engaged in Sec. 42 because it is
an extraordinary power to engage/invest in another
corporation. TO INVEST IN ANOTHER CORP.
REQUIRES 2/3 VOTE OF THE STOCKHOLDERS. But
treasury, may indirectly do that without the need of
complying Sec. 42.
22
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
Sec. 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) stockholders but it is with the stock and transfer book
If you put the extra cash of the corp. with an ITF, mura ra
nag UTF (Unexchanged Traded Fund). Alangan ibutang
na nimos bangko. Pulpol ka na treasurer kung dra nimo
ibutang – millions gud na. So, why don’t you put it in an
UNEXCHANGED TRADED FUND? The value of the fund
that is invested is in other corporations. And it is divided
into units and it is traded in the stock market. And at
anytime the money that you put there can be retrieved by
just selling the units. And you are informed by your
financial adviser na ang fund nimo, niadtong pagbutang
nimo nganha par value ra xxx P100/unit. Karon it’s
already 140/unit – naa nay deperensya, and the financial
statement must carry market-to-market value – ibutang
naimo dinha 140/unit.
THAT DIFFERENCE, CAN IT DECLARE DIVIDENDS
OUT OF THAT?
You cannot because that is just a nominal value. It has
not been realized, unless when you sell it, you REALIZED
the amount, DEDUCT the expenses, then you can put it
in your UNRESTRCITED RETAINED EARNINGS. Mao
na ilang giingon, “What goes up, goes down.” Masakpan
ka misaka tuod unya miubos. Mao na. So until realized,
CAPITAL GAINS, either from revaluation, risk
assessment or whatever measure, you cannot source it
as for purposes of cash.
STOCKHOLDERS ARE ENTITLED TO DIVIDENDS
PRO-RATA BASED ON THE TOTAL NUMBER OF
SHARES AND NOT ON THE AMOUNT PAID FOR THE
SHARES. Ang imo ganing basehanan amount gani, naa
paka sa last two. Dili na ingon ana. Naa nay per share.
STOCKHOLDER AT THE TIME OF THE
DECLARATION ARE ENTITLED TO DIVIDENDS. What
happens if there is a transaction and then there is a
declaration? Who has the right to the dividends?
PLEASE TAKE NOTE:
• Dividends declared before the transfer of shares
belongs to the transferor.
• Dividends declared after the transfer of shares
belongs to the transferee.
WHEN IS THERE A TRANSFER OF SHARES?
As far as the corp. is concerned, the moment the stock
cert. covering the shares of transferred is surrendered to
the corporate secretary and the transfer is registered in
the books – that is when the transfer happens. Before
that, even if gibayran na ang transferor, the transfer has
not yet occurred for the purposes of the corporation.
RECKONING POINT: Not the transaction with the
– the moment it is recorded there, there is a transfer.
Muingon ka na wa man ni naka-record! Ngano man?
Nabayran na namo cya pero closed naman ang books.
There are some corporations that close their book 1
month before the annual meeting. That is provided in their
by-laws. So all transfers are frozen. You cannot register it
with them. Why? To make an orderly determination of the
number of shares that should participate.
Illustration: Kanang PLDT, they have 2M shareholders,
you have to determine how many stockholders on which
we base the majority xx to constitute a quorum. Mag cge
pakag dawat hangtod sa day before the meeting, you
cannot compute because there’s so many transactions
everyday! So they close the books 1 month before. The
transactions happen after the close of the books. Where
do the stock dividends go? Because it has not been
recorded, it still goes to the TRANSFEROR even if he
has the stock cert., he has already given the stock cert. to
the transferee, the transaction as far as he is concerned
is complete because he has received the consideration,
he still receives the dividends.
So, that is the baseline: the recording in the books of the
corporation for purposes of who is entitled to the
dividends – cash dividends or stock dividends.
January 5, 2018 (First Half)
(Miles Buhay)
23
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
You have that matrix with you on the exercise of the
fundamental powers of the corporation and the requisites
for the exercise? Most of those instances, the vote that is
required of the board of directors or the board of trustees
is absolute majority.
What is the difference between absolute majority and
ordinary majority? Ordinary majority is the majority of
the quorum.
Suppose the board of directors hold a meeting. What is
the quorum that is need ordinarily? Six (6). Now the by-
laws require simple majority. If you want to pass an
ordinary resolution, you just need the majority of the
quorum even if it is not the majority of the incorporators.
So if four (4) of the six (6) vote, then the resolution is
carried. But, if it is one of those instances mentioned in
Section 8 of the corporation code, then it must be the
absolute majority of the board of directors or trustees.
What is the absolute majority? It is not less than six (6).
[If the number of those present is] eleven? The absolute
majority is six (6). So if there are only six (6) present, then
all of them must vote to pass the resolution.
A word of advice to you, if you are a secretary of a
corporation: you do not hold a meeting unless you know
you have the absolute majority. If you do not have that
certainty, then you contact each board member or board
of trustee and convince him. And to know whether or not
he accepts you, you let him sign the minutes first. Di gani
na siya mupirma, wa gyud kay majority. So make him sign
the resolution because it is a requisite. You take a look at
the exercise of the powers right at the very start.
Sec. 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 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) the capital stock, or the incurring, creating or
Sec. 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.
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 stock-holder if such increase is for the
purpose of making effective stock dividend therefor
authorized;
(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
increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the
incurring, creating or increasing of any bonded
24
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
indebtedness shall require prior approval of the
Securities and Exchange Commission.
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 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.
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)
So it is majority of the board NOT majority of the
quorum. That’s how you do it.
When you go to the stockholders’ meeting, and there are
other resolutions to be approved by the stockholders, then
you cannot do a wholesale (?) vote.
Illustration:
“We shall now vote on all the resolutions.” You cannot do
that because there are some resolutions where the non-
voting shares can vote and there are other resolutions
where the non-voting shares cannot vote.
For instance, in the issue of dividends, when you declare
cash dividends, you just need the vote of the board of
directors. But when you pass a resolution for issuing,
instead of cash dividend, you issue stock dividend, then it
requires 2/3 vote of the stockholders. It does not include
the non-voting shares. So if you have a resolution to
approve the issuance of stock dividends and then also a
resolution to increase capital stock (remember that the
issue to increase capital stock is one of the instances
mentioned in Section 6), non-voting shares have the right
to vote. So you cannot conduct the wholesale voting. You
need to have separate voting. Not just one ballot, but
separate ballots because that is the formality required by
law.
Alright, this is very important because this is formality; it
is the only thing that will tell the world that the corporation
has acted. If there are no formalities, the corporation has
not acted. Take note that the corporation is a person. It
is an artificial person. I’m telling you, the more
sophisticated the management, the more there is a need
for a strong corporate secretary. There will come a time
when there will be a controversy. When in doubt,
papirmaha na dayon. The minutes of the meeting are
already there and they have signed.
The last act of the corporation is the power to enter into
management contracts. Management contracts are
standard in many corporations. Why? Because it is a way
of decreasing taxable income. It is also a way of isolating
gross. So for both profitability and gross, it is
advantageous.
You may begin with one business. And then you have
another business. Instead of making a division of that
corporation you already have, you make another
corporation. What is the purpose? In terms of loss, if this
becomes unviable for this (first) business, then it is the
only one that is perished. But if it is a division of the
corporation that you already have, it is very difficult to slice
it out because it affects that corporation. So most likely, if
you branch out to another business, you create a
separate corporation.
25
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
And then you have several corporations. What happens
is you create a management corporation; a corporation
that manages the other corporations.
Ex. AnFloPo – managing corporation of Cadeco, JEA
(Jesus E. Ayala) management corporation
They could have just made divisions of, let’s say, the
bigger banana corporation. But they made it into separate
corporations. Why? If there if loss, it will be limited.
Costing? It is easier to observe if it is a separate
corporation.
Now what is required to put up a management
corporation? That is provided Section 44.
Sec. 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: times, the one who obtains the franchise develops the
The stockholders’ confirmatory vote is just majority. It is
not 2/3. Or in the case of non-stock corporations, the
confirmatory vote of the members is just majority.
Sec. 44. Power to enter into management
contract.
xxxxxx
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.
xxxxxx
So remember, if (1/3) of the total outstanding capital stock
entitled to vote of the managing corporation, and is listed
in the managed corporation, the law will require 2/3. Why?
Because the managing corporation has less equity
interest in the managed corporation and it might abuse
the managed corporation. That is why it requires 2/3 vote
of the managed corporation.
Sec. 44. Power to enter into management
contract.
xxxxx
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: xxxxx
Do you see the implication here? You know very well that
the exploitation of natural resources have to be 60%
Filipino and 40% foreigner-owned, maximum. Many
natural resources, or do mining, or do public utility. They
enter into operating agreements whereby it’s the foreigner
that operates. The corporation that manages can be
100% owned by foreigners. They supply money, they do
the marketing, and do the technical services. They
practically run the corporation. That is how you run around
the nationality requirements.
For instance, the Malampaya; that’s natural resources.
The Malampaya is offshore drill and they take out natural
gas. They ___ it all the way from Palawan to Batangas.
And the electric plants are there that are fired by natural
gas. Very few people realize, but that saves more than
one half of the ___ requirement because they do not pay
for the natural gas. It is these power plants that pay and
consume.
(Story on oriental petroleum)
Sec. 44. Power to enter into management
contract.
xxxxxx
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)
You will see that this is an admission that you cannot do
it just by yourself. We do not have the capital. These are
very expensive projects.
26
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
Constitutional provision which says that only the State can
Know the requirement: majority vote of the board of develop natural resources.
directors, majority vote (confirmatory) of the stockholders
or members unless there is more than 1/3 ownership of Sec. 45. Ultra vires acts of corporations. - No
the total outstanding stock of the managing corporation
corporation under this Code shall possess or exercise
and the managed corporation has less than the 1/3
significant portion of the controlling ownership of the any corporate powers except those conferred by this
managing corporation. Code or by its articles of incorporation and except
So you manage the corporation in order to safeguard its such as are necessary or incidental to the exercise of
welfare extensively when they are obliged to have a the powers so conferred. (n)
confirmatory vote of 2/3.

Now there is still a way from getting around this. What is

that? Usually, the managing corporation will __ the exact
Ultra vires acts is the act above; infra is below [latin].
negative contracts from the managed corporation.
Ultra vires is “beyond the powers of the corporation”.
(Editor’s Note: Audio distorted in this part). Necessary to
develop the franchise of exploiting natural resources, you
There is a distinction. You have to distinguish ultra vires
will have to borrow by yourselves, these small mining
powers of the corporation and illegal acts of the
companies, from the big companies. So it will be a
corporation. Then you have to distinguish ultra vires acts
sponsorship of the managing corporation. The managing
of officers of the corporation as to ultra vires acts of the
corporation will say, “For every peso that we will be able
corporation.
to borrow at our behest then we will be asked a
management fee, 10%.” Kay kung sa imo lang
An officer of the corporation has not been authorized by
kaugalingon, dili man gyud nimo makuha. Then, there are
the corporation to enter into an agreement with another
these other requirements: You will not issue stock
corporation and he enters and signs even if there is no
dividends or cash dividends unless you have serviced the
resolution from the board allowing the corporation to enter
loans. And then you are committed to extend upon the
into such an agreement. Is that valid? What is that called
renewal of the management. Why? Because the
in civil law? That is an unauthorized act, is it not? Acts
management agreement that you signed according to the
[were] done by an agent lacking authority from the
Corporation Code must not be longer than five (5) years.
principal.
It says:
“No management contract shall be entered
Who is the agent? The president of the corporation. Who
into for a period longer than five (5) years for
is the principal? The corporation.
any one (1) term.”
That’s what the last sentence of the first paragraph of
How does the principal give the agent authority? By
Section 44 says.
resolution.
“Be it resolved as it is hereby resolved that the corporation
So, mandatory renewal with foreign corporation who is
enters into a loan agreement not exceeding Php120
managing with SEC. there will be mandatory renewal.
million with MetroBank and Trusting Company, and
And so these are the so called NEGATIVE COVENANTS.
further assigning the president of this corporation to sign
And sometimes, they even ask for a VOTING TRUST
all the necessary papers for and in behalf of the
AGREEMENT as to how the managed corporation will be
corporation.”
run. The stockholders there will have to sign a voting trust
agreement as part of the consideration of obtaining the
In one resolution you have the corporation entering into
__. [EN: Sorry, guys. Nawala jud ang voice ni Fr.then
an agreement with MetroBank. And then, in that same
sabay ring sa bell ☹]
resolution, the corporation appoints the agent; the
[Fr. mentions a case which according to him was long and president.
was reversed by the Supreme Court.]
The SC has said it is not enough that the by-laws says
The old decision was no foreign corporation can exploit that the president has power to sign for and in behalf of
natural resources. That was the old decision. Then it was the corporation to a contract. That is not enough. [ano po
revisited. They reversed. Now, there can be service ba ang enough Fr.?]
contracts and in the exploitation of natural resources, it’s
supposed to be 100% but with that radical ruling, which is There must be a separate and distinct resolution by the
about scrap, which tells you right then and there that it is board as to a specific transaction and as to the authority
bad law. So much needed contortions to change their of the president as to that specific transaction.
mind about an earlier decision affording that

27
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
Suppose the president signs without authority from the
board of directors. What is that? That is an ultra vires act
of the officer of the corporation. That is not an ultra vires
act of the corporation.
Now, just like all unauthorized acts under the Civil Code,
unauthorized acts may be subsequently ratified. It is
voidable but can be subsequently ratified.
How can it be ratified?
It can be ratified expressly or impliedly:
Expressly – the corporation passes a resolution
recognizing the act entered into by the president
and further approving it.
Impliedly – There is no resolution, etc. But when
the president signs the agreement in the board
room itself of the corporation with all the directors
present. Picture-taking. Lamano lamano. That is
an implied ratification of the authority of the
president. That is what is called apparent
authority.
Make sure you have the correct terminologies. It is as if
the corporation issued a resolution because all the
directors were there. If they were opposed, they should
not have been there or they should have said no. Their
presence there is a sign that they approve of the act of
the corporation and therefore the corporation is bound by
that agreement with all its containing obligations.
If it is an illegal act, there is no ratification possible.
Illustration:
Magtanum ta ug Marijuana. So the president orders the
planting of Marijuana; the acquisition of land for the
purpose of planting Marijuana. What motivated [the
president]? Ingon sila, “He (president) just came from
California. There is already a law in California allowing for
the, not only medicinal use, but for the recreational use of
Marijuana.” (Story: Marijuana in California. Dako ang kita
besh. Dako pud ang tax)
Now if a president of a corporation here in the Philippines
orders the planting in anticipation of the legalization of
Marijuana in the Philippines, unsa man na? That cannot
be ratified because that is illegal.
Know the distinctions in the ultra vires acts of the
corporation. Suppose you’re a corporation that has in its
articles the purpose of retail business; to engage in retail
business; the selling of commodities, merchandise, all
manner of goods, food, clothing, and other articles of
commerce to end-users. And then all of a sudden, the
corporation goes into real estate.
What is that act? Illegal or ultra vires? Nothing in the
purpose clause of the articles (of incorporation) says that
the corporation can engage in real property development.
Kalit lang nisulod ug real property. Not allowed because
the majority stockholder is also has his own business of
pawnshop. Unya sa pawnshop nia man gicollateral niya
na yuta sa nangutang niya. Unya kay na-foreclose man
niya. So naan a siyay yuta. Ingon siya himuon nalang
nako ni nga subdivision. Apply na siya ug subdivision
permit. So naa na plano, nagkuha na ug architect, impact
study… No impact na. tan-awa nang Jade Valley
Subdivision. Wala gyud kay makita nga nahuman nga
atop dira. You call a stockholders’ meeting. Amend the
articles and add real property business. Ratified.
(When) you do not have it yet in your purpose clause in
your Articles and then you start the business, and then
you amend the articles. Then it is ratified.
An unauthorized ultra vires act is ratified. Ang problema
lang kung wala naapprove kadtong imong amendment.
Imong negosyo hospital unya nisulod kag kalit ug
punerarya. Nagpasa ka ug amendment. Muingon ang
SEC, “Dili ni compatible.” Unsa man na, kanang dili
mabuhi kay dal-on sa pikas? Mao nay ginatawag na
conflict of interest. Dili gani na maratify ug approve, it
remains an illegal act. It will ripen from an ultra vires
act into an illegal act because it cannot be ratified.
nd
January 5, 2018 (2 half)
(Marry Suan)
TITLE V – BY-LAWS
There are two possibilities for the adoption of the by-
laws:
1. The incorporators draw up the by-laws and they
submit it, together with the Articles, to the SEC.
So that once the certificate of incorporation is
released by the SEC, the by-laws, together with
the Articles, are already in effect. So it’s only the
incorporators who draw up the by-laws.
2. [Submission of the Articles to the SEC without
including the by-laws]
But if you just submit the Articles without any by-
laws, the certificate of incorporation will still be
issued. But within one month, according to
Section 46, of the issuance of the certificate of
incorporation, you must have an organizational
meeting to elect the members of the Board of
Directors or Trustees. And then, you elect the
officers and then you adopt the by-laws.
28
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
Section 46. Adoption of by-laws. – Every
corporation formed under this Code must, within one
(1) month after receipt of official notice of the issuance
of its certificate of incorporation by the Securities and
Exchange Commission, adopt a code of by-laws for
its government not inconsistent with this Code. For
the adoption of by-laws by the corporation the
affirmative vote of the stockholders representing at
least a majority of the outstanding capital stock, or of
at least a majority of the members in case of non-
stock corporations, shall be necessary. The by-laws
shall be signed by the stockholders or members
voting for them and shall be kept in the principal office
of the corporation, subject to the inspection of the
stockholders or members during office hours. A copy
thereof, duly certified to by a majority of the directors
or trustees countersigned by the secretary of the
corporation, shall be filed with the Securities and
Exchange Commission which shall be attached to the
original articles of incorporation.
xxx directors or trustees;
In that adoption of the by-laws as well as the amendment
of any of the provisions of the by-laws, there are two ways
of doing it:
a. Either doing the long way—Board of
Directors by majority vote (absolute majority)
approve the by-laws, and then majority of the
stockholders or members ratify the by-laws.
Remember, this includes voting and non-
voting shares.
b. Or 2/3 of the stockholders or members of the
corporation delegate the adoption of the by-
laws to the Board of Directors
For the approval of the by-laws, only absolute majority is
needed. But if you entrust it to the BOD or BOT, you
require 2/3 vote of the stockholders.
Now, Section 48 says that the delegation to the BOD
to adopt amendment or new by-laws may be revoked
by the vote of majority of the stockholders or
members of the corporation. So to delegate the
adoption of the by-laws to the board, you just need 2/3.
To revoke, you just need majority.
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 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 two-thirds (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 by-laws 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.
xxx
Now, what should be in the by-laws? The by-laws are
considered the internal rules of the corporation. You will
have the officers there, their functions, powers, duties.
You will have the manner of meetings, etc. The
qualifications, duties and compensation of directors.
Section 47. Contents of by-laws. – Subject to the
provisions of the Constitution, this Code, other special
laws, and the articles of incorporation, a private
corporation may provide in its by-laws for:
1. The time, place and manner of calling and
conducting regular or special meetings of the
2. The time and manner of calling and conducting
regular or special meetings of the stockholders
or members;
3. The required quorum in meetings of
stockholders or members and the manner of
voting therein;
4. The form for proxies of stockholders and
members and the manner of voting them;
5. The qualifications, duties and compensation of
directors or trustees, officers and employees;
6. The time for holding the annual election of
directors of trustees and the mode or manner
of giving notice thereof;
7. The manner of election or appointment and the
term of office of all officers other than directors
or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner
of issuing stock certificates; and
10. Such other matters as may be necessary for
the proper or convenient transaction of its
corporate business and affairs. (21a)
The public is not expected to know the by-laws. It is
supposed to be an internal agreement. So when xxx this
person is authorized by the by-laws to act for the
corporation, there is no such provision in the by-laws. And
then the third party enters into transaction with that person
as an officer of the corporation, even if he has no authority
delegated to him in the by-laws, the fact that he has no
such authority in the by-laws does not put the third party
xxx because he does not know.
29
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
Apparent authority, again, is very important. If the
surrounding circumstances of that transaction was with
the presence of other officers in the premises of the
corporation and xxx acted as if the officer, who had no
authority under the by-laws, acted as if he had authority,
then the corporation is estopped. Because they have
misled an innocent public who has no obligation to verify
in the by-laws whether or not this particular officer has
authority. Because the by-laws is just an internal
document or internal rules of the corporation.
Now, in Loyola Grand Villas vs. Court of Appeals
(1997), the SC declared that the corporation that has
been operating for at least 10 years without any by-laws
is a de-facto corporation. That means that there is a
general enabling act. The corporation made attempts to
comply with the general enabling act but there is a fatal
defect. There is an absence of the by-laws. So even if the
corporation is issued a certificate of incorporation but it
has been operating without by-laws, that is a de-facto
corporation.
The failure to file by-laws is not automatically a ground for
cancellation of registration of the corporation. It is a
ground for cancellation but it is not an automatic ground.
So that is the by-laws. What is required for the by-laws to
be valid?
1. It cannot contradict the Corporation Code.
So if you are drawing up by-laws of a stock and
profit corporation and you provide there that you
cannot cumulate votes in the election of directors,
you contradict the Code. So that proviso in the by-
laws is void. Remember, the Corporation Code,
in the election of directors, allows for cumulative
voting and that cannot be deleted in the by-laws.
2. Once again, the by-laws cannot contradict the
Articles of Incorporation.
If there is a conflict between the Articles and the
by-laws, when it is specifically the province of the
by-laws like classification of shares, preference of
shares, voting power of shares, if that is defeated
in the by-laws and it is in conflict with the Articles,
it is the Articles that will prevail and not the by-
laws. The by-laws prevail with respect to time,
date and place of meeting, manner of service of
notice to stockholders or members as to the
meetings. That is not provided in the Articles. So
the by-laws cannot contradict the Articles.
So that is the by-laws, up to Article 48.
What happens if the by-laws are silent as to the
compensation of directors? Does that mean that the
directors cannot be compensated?
The directors can pass a resolution as to their own
compensation, unless the by-laws say that there is
absolutely no compensation for directors or trustees. But
normally, for the by-laws of a stock and profit corporation,
they cannot provide that there is no compensation for
directors. If you’re non-stock and non-profit, you can
provide that there is no compensation for the trustees.
The by-laws are silent as to the compensation then the
BOD or BOT can pass a resolution as to the
compensation of the directors or trustees.
Remember, what is the limit of the compensation? It
cannot be more than 10% of the net profit before tax.
Section 30. Compensation of directors. – xxx. In no
case shall the total yearly compensation of directors, as
such directors, exceed 10% of the net income before
income tax of the corporation during the preceding year.
TITLE VI - MEETINGS
What do you have to remember with respect to meetings?
You have to read the case of Expert Travel and Tours
vs. Court of Appeals, 459 SCRA 147 (2005) because
this is judicial legislation. The SC says this court takes
judicial notice of the practice common in corporate affairs
of teleconferencing or videoconferencing in the meetings
of directors.
Here, the Corporation Code assumes that the meetings
are, there is a social intercourse. Nagtagbo gyud mo ana.
Nagkitaay mo. Nagbinayloay mo. But now, I think De
Leon has it. There is the SEC’s circular on
teleconferencing.
You can have teleconferencing for meetings of directors
but there can be no teleconferencing for meetings of
stockholders. The meetings of stockholders or members
of the corporation must be actual, social.
I’ll leave it to you. You better read that. What is the
obligation of the secretary of the corporation before he
will… you know, the way meetings are… kasagaran
meeting sa mga corporation naay mga items gyud na naa
ra gyud nato, wala na sa uban. Una ang opening prayer.
Naa gyud na. Why is it there? Because there’s always
somebody who’s religious among the members or
stockholders. Hadlok man sila mu-against nimo kay tingali
musukol ka batok sa Ginoo. Naa gyud ng opening prayer.
But actually, legally, when does the meeting of the
corporation begin?
The meeting begins once the secretary responds
positively to the exhortation of the presiding officer,
whether he be president or chairman of the board. The
president of chairman will say, “Mr. or Ms. secretary, do
we have a quorum?” then the secretary will say, “Present
in this meeting, Chairman, in person 58% of outstanding
capital stock. Present here by proxy is an additional 15%.
This meeting has a quorum.” Then the chairman will xxx.
30
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
And that’s the meeting. The pronouncement of the
quorum. Way quorum, way meeting. Caucus rana.
Storya-storya ra mog mingaw ana.
So that is the beginning of the meeting. Kanang pag ingon
sa secretary that there is a quorum. And then normally the
meeting is begun by either reading the minutes of the
previous meeting. Then the board or stockholders will
uphold it or the president will make a report as to the
events, decisions, the workings of the corporation that has
taken place in between the previous meeting and this
meeting. He makes a report. Normally that is how it is
done. You look first at the past and then you will say, “we
have the following resolutions to consider.”
Now, many people believe that naa diha ang dispute. I am
against this… wala nana sa meeting sa corporation. Wala
nana dispute. You express that in the caucus. Magsige ka
pag diskurso dinha. Gubot kaayo. PLDT, 2 million
stockholders. Aha mang discussion mahimo nimo ana?
Sobra pa gani na sa masa sa Luneta. 1 million gud tong
ningtambong ato unya 2 million ang stockholders. Ug
mupresent na sila tanan, naa ba kay discussion mahimo
ana? Wa. Muabot na gani nag 50 katao, wa nay
discussion na.
Naa nay mutindog representing the controlling shares.
Tindog man na sya. “Point of order, Mr. Chairman. I am
Mr. so and so. Fernando Zobel Ayala. I have with me the
votes of the Ayala listed in the top 100 stockholders of
Ayala Corporation as consisting 42% of the outstanding
capital stock. I have also with me the proxies representing
an additional 20% of the outstanding capital stock.
Therefore, we have 66.66% [I don’t know how Father
arrived to this sum] of the outstanding capital stock, which
means 2/3. The entire votes, which I have, have already
been prequalified to vote for the resolutions that have
been tabulated in the agenda for deliberation in this
meeting.” Nibuto na daan dinha. Di na ni musimang. Para
ra gyud ni sa resolution as it is worded in the agenda.
What is that declaration? That declaration is telling
everybody that tapos na ang labanan. Wa na. Nia ra ang
boto sa tanan na muapprove ana. Kung supak ka,
pasensya ka. 66.66% gud. The possible vote is mutugpa
ka ana, must be more than that. Di ka na ka ka-more than
that. xxx
Padaghanay man nig kwarta. Gamay gani imong kwarta,
gamay ra imong tingog. Dako imong tingog, dako imong
kwarta. Simple. Now, the Corporation Code says that if
anyone raises his hand and says that he would like to
have secret balloting. Pag gusto kag secret balloting, mas
sayon. Isa ra man ng ballot diha ng 66%. Isa ra man sya.
Dali ra. Human na. You can ask for secret balloting.
REGULAR MEETING
What are regular meetings? Those that are provided in
the by-laws – annual meeting, monthly meeting. There
are ways of determining the types of which the meeting is
to be held.
There is a discussion that is important as to when the
annual meetings xxx. In the annual meeting, you have an
election of the directors or trustees. You have the election
of the officers. That is determined by the controlling
shares. Kanang 66.66%. Tingali mapasok ng minority
representatives, duha kabuok. Sa kinse kabuok, naay
chance na duha masulod. Lower than 15 gani, 11. Usa ra
tingali imong masulod. Pero ug 5 or 7 ra gani, lower than
10%, wa na gyud kay minority na masulod ana.
That is why in the very famous case of Ayala Corporation,
when Ayala Corporation decided to lower the number of
directors from 15 to 5, niay ning-alsa. Ingon sila, we are
minority stockholders. You are equally rendering it
impossible for minority representation in the board. Ngano
man? When you talk about 5, you need at least 20% of
the outstanding capital stock to cumulate it to have 1.
Kinsa may naay 20 sa minority, wa man. Adtua ra gud
ninyo sa Philippine Stock Exchange, letter (a) Ayala
Corporation. Tua na. Nakalista na. Top 100 stockholders.
Way makasulod na minority. Ang gipasulod sa Ayala na
minority token, ang mga Hapon – Mitsubishi. Pero all the
rest are Ayala. Pito ra gud ang member sa ilang board kay
nag-compromise man sila. Pag reduce sa 15 to 5,
nagcomplain man. Nagtagbo sila sa 7. Ayala Corporation
now has been reduced from 15 members of the board to
7.
So, cumulative voting ha? Now, you do the election in the
annual meeting. Another important act is the stockholders
approve the annual audited financial statements. So the
president, together with the treasurer or the chief financial
officer, reports on the financial story(?). And then
stockholders vote. Until the stockholders give their
approval, it is not the financial statement of the
corporation. It may be the financial statement of the
officers but it is not the financial statement of the
corporation.
Now, when you have a corporation as complex, as big as
Ayala, which is the holding company of BPI, Globe, Ayala
Land, Manila Water, kinahanglan mahuman ng financial
statement sa subsidiaries. Unya iconsolidate na nimo sa
holding company. Kinanhanglan ka ug igo na panahon.
So when is the annual meeting? The annual meeting of
Ayala, just like Meralco, PLDT, is 6 months after the end
of its fiscal year. Kay di man sila makapresent ug annual
financial statements that are audited. Di lang man na
kamo lang mubuhat ana, i-audit pa man mo ug reputable,
independent auditors.
So when you decide the fiscal year, what is the fiscal
year?
It is 12 months accounting period which may or may not
coincide with the calendar year. Kining sa Ateneo, unsa
man ang fiscal year dinhi? Fiscal year diri follows the
31
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
academic year, June 1 and ends in May 31. Naa nay
grade school, high school, senior high school, college,
graduate school. Kana tanan, consolidate na nimo. So it
takes about 4 months. That’s why the annual meeting is
about September. So that is important when you consider
putting the annual meeting in the by-laws because you
have to specify in your meeting. Kinahanglan ready ang
financial statements. You can imagine international
companies. Coca-Cola International.
(chika about Coca-Cola)
Normally, di pa magsugod ang meeting, ihatag na ng mga
resolution, ang copies sa annual financial statements.
There is no problem if it is a listed corporation because
this is supposed to be public and can be given to the
public. But if you are a private corporation not listed, you
might not want your audited financial statement to be
shared with non-stockholders. So you will put a notice
there, that the financial statements given to you are for
your personal disposable(?) and copies thereof must be
returned to the secretary of the corporation.
Tanawa ninyo ang Cargill. That is the biggest private
corporation in the world, not listed in any stock market.
(chika about Cargill)
xxx and you are required to submit your financial
statements to the BIR. If you do not, what happens? SEC
gives you a fine which is daily. Every day that you are
delayed and it is the portion of your total sales of your
corporation. You are obliged. Mao man na niadto, a very
famous guy who’s always late in submitting his financial
statements to the SEC is Mr. Lucio Tan. That is the Lucio
Tan circular. Karon, ma-late gani ka, every day ang fine.
After 30 days, there is a surcharge over and above the
fine unya naa na sad penalty after 60 days. Ah, surrender
si Lucio Tan. Karon on time na sya.
Who can attend a stockholder’s meeting? Before we
break up, is there an instance where you are not named
as a stockholder, you are not a transferee of shares, and
yet you can attend the stockholder’s meeting. Mahitabo
ba na? Your name is not in the stock and transfer book.
You do not have a certificate but you can attend and they
cannot deny your presence. Is that possible? You find that
in your commentaries. Who is that person?
January 10, 2018
(Ria Lumapas)
Proxies and Voting Trust Agreement
If you are not a stockholder, a proxy, a trustee in a voting
trust agreement, you cannot enter or join a stockholder’s
meeting. Is that correct? You are a stockholder named in
the books as the owner, you are the titular owner, you can
attend. You are in the books. You are given a proxy, a
proxy can be the instrument and it can also be a person.
It can either be of the two: the instrument by which you
are appointed to take the place of the rightful stockholder
who should be there in the meeting. Now if you are a
trustee in a voting trust agreement, voting trust agreement
is different from a proxy.
First of all, what is their common denominator?
Both are the instruments by which a titular stockholder
gives way to someone else to exercise the vote for him or
her. It is the instrument by which the main stockholder
gives way to another to attend and vote.
What isn’t common?
Both must be in writing but the difference is, the voting
trust agreement but must be in a public document. It must
be in writing but with the intervention of a notary public,
so when you draw up a voting trust agreement, what do
you put below? A jurat or acknowledgement? Jurat is for
affidavits. Acknowledgement is for a contract. Voting
trust agreement is a contract. The stockholder is the
trustor. He surrenders his certificate of stock to the
secretary together with a voting trust agreement.
Now, the secretary of the corporation issues a trust
certificate after which the trustee issues another
certificate to the trustor. From now on the one who is listed
in the certificate in place of the titular owner is the trustee.
In fact, the trustee in a voting trust agreement can run for
office. He can be elected as director. So the big difference
is that in a voting trust agreement, the trustee votes by his
own right. The titular stockholder makes a public act of
divesting himself of that voting right. In a proxy, the proxy
exercises the vote of this titular stockholder. That
stockholder can tell the proxy to vote a certain way
because it is his vote. What happens if he does not follow
the instructions of the principal, is his vote nullified? No.
That is between the two of them. But it is the vote of the
principal.
General Rule: Both proxy and the voting trust agreement
cannot be for a period longer than 5 years.
Exception: Voting trust agreement can last longer than 5
years if it is incorporated in the conditions of a loan
agreement. Because a voting trust agreement can be part
of those negative covenants that cover a loan agreement.
Illustration: Here is a bank which lends money to X
Corporation but together with that loan requires that the
controlling stockholder issues a voting trust agreement to
the bank for the duration of the loan. Nganu man?
Because he owns more than 66.66 percent of the shares
of stock of the corporation. Dako kayo iyang utang. Dugay
kayo iyang duration. Gihakot na nya tanang assets.
Manigurado ang banko. Co-signatory ka. Unya you
execute a voting trust agreement and it is the bank now
who exercises your vote. What happens in that instance?
Tag iya ka sa corporation pero gihubuan na diay ka
because it is the bank who votes for the duration of the
loan. And the bank will vote in accordance with its peculiar
interest in the corporation.
32
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
nd
That person is the one found in section 55, 2
So in a proxy, you do not surrender your shares. Voting paragraph.
trust agreement: you surrender your stock certificate and Section 55 –
the treasurer will issue you a voting trust agreement
certificate. And you also issue a certificate to the trustee. xxxx
It contains the term, the date of expiry of the voting trust Executors, administrators, receivers and other
agreement. Once the voting trust agreement expires, he legal representatives duly appointed by the court
gives it to the secretary and the secretary will issue the may attend and vote in behalf of the stockholders
stock certificate and that ends the voting trust agreement. or members without need of any written proxy.
Kanang voting trust agreement, usually the debtor there
is in bad straits. The financial markets no longer believe
him but the business is otherwise very good. Muingon ka
The law is very deceptive. The law says without need of
unsa man intawon ng negosyoha nga gwapo kaayo pero
written proxy. Actually, it is not a question of need, it is a
wa na mutuo nimo? I’ll give you an example. Masbate. It’s
question of possibility. Receiver, administratrix ka
an island. Because it’s an island it’s off the grid. So it must
appointed by the court, who can write a proxy for you? Not
produce its own electricity. Its production cost of electricity
the court because the court is not a stockholder. The one
is high because it has to generate by itself. It cannot resort
who can write a proxy for you is already 6 feet
to coal because consumption is less than what it takes to
underground. How can a proxy be produced? No proxy
put up a large coal plant. So it does it with bunker fuel.
can be produced? So who is the rightful substitute? The
Mas hugaw pa kesa coal pero cheap. It’s brought in by
administrator of the estate. So you go that meeting and
barges. Now to get tax incentives the power plant is
you submit your appointment by the court that you are the
organized as a cooperative. Wa kay income tax. Wa kay
administratrix of the estate of Juan dela Cruz. If there is
customs tariff. Exempt from minimum wage. You make all
no cut-off date you can do it at any time. Tunga ka didto,
the workers of the power plant members of the
dal-a imong appointment.
cooperative and you are exempt from minimum wage.
Btw, proxies have a peculiar set of rules. The stockholder
So kay coop man, the articles say that it is the provincial
may write multiple proxies. Is he allowed? Yes. Is he likely
board that appoints the officers of the coop. Tanang users
to do that? The moment he reaches senior age at which
man myembro. Unsaon pag election? It’s the provincial
imbecility begins, chances are he or she will appoint
board. It is the provincial board that guarantees the loan
multiple proxies. Makalimot naman sya na nag appoint
so it appoints. The provincial board is the first one who
diay sya.
does not pay the electric bills. Kanang mga suga sa dalan.
Magkagidlay. Kada utang tubuson nasad ug laing utang.
How do you decide between multiple proxies? Who is
Unya di nasad kabayad. Finally gusto na sila mangutang
the rightful proxy?
wa nay mupautang nila.
Your commentaries, they have the circular of the SEC
with respect to proxies. Unlike double sale of real
Ingon sila ibagligay nato, wala sad mupalit unless you
property, kinsay palabihon? The earliest to register with
amend the articles. So finally here is a bank who will say
the ROD. Ang nakauna. Ang proxy, baliktad. Kinsa tung
this business is a good business. Di man ka muingon na
latest mao tuy favored. He has the better right. The
‘di nalang ko mupalit ug electricity’. Ang imong anak
assumption behind that is that the principal changed his
maghimo ug homework pag gabii, maoy mutulisok nimo
mind. The latest one is the rightful proxy.
ug una. Palit gyud ka ug electricity aron naa kay suga,
naa kay tubig. Sure market. That’s why you don’t hear of
Now proxies, according to the Code, maybe revoked
a marketing department in a power corporation.
expressly or impliedly:
The one in control is not the one who is fully responsible.
Expressly - musuwat na sad sya sa secretary. “I
The province is the one abusing so the bank says voting
changed my mind. So and so is no longer my
trust agreement for as long as this loan. General
proxy.” He signs it. That is express.
resolution by the members of the coop. Board resolution
by the provincial board. They exercise the vote. Kuyaw
Implied - if the principal stockholder shows up in
na. Bad credit, good business so you have voting trust
the meeting, that means the proxy is already
agreement.
removed.
Now, it is possible for somebody who is not a trustee in a
But that cannot happen if there is a check off date. If the
voting trust agreement, who is not a proxy and who is not
by-laws of the corporation especially corporations listed in
a stockholder and yet he can attend a stockholders’
the stock market, they will say all proxies must be in
meeting. Who is that person?
before such and such a date. After which the books of the
corporation are already closed for all possible registration.

33
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
So before that, you take back the proxy. If you don’t it
stays and implied revocation no longer works beyond that
period for listed corporations. Normally those provisos are
present in cases of listed corporations that have a very
wide stockholder base.
Can the by-laws provide that proxies for that
corporation to be in a public instrument? YES!
But if there is no such proviso, what is needed?
Just an ordinary writing signed by the stockholder. That is
enough.
Now is there such a thing as proxy with
consideration? There is a war, normally they call it a
proxy war. Muingon gani sila proxy war, there is no one
who has majority of the outstanding capital stock of a
corporation. And they are fighting for control of the board.
So iyahay mo ug kuha ug proxies. Your stockholdings
plus proxies should be above the 50 percent mark of
outstanding capital stock if you want to control the board.
Now as you can see the proxy can be changed.
Now, you are an owner of shares of stock. The shares of
stock that you own are considerable and since they are
traded in the stock market there is always a daily price as
to which the shares of stock are traded. So more or less
there is an agreement as to the market value of the shares
of stock that you own. Now, suppose you borrow from the
bank and you use the shares of stock as collateral and so
you pledge the shares of stock. Now who has the right to
vote now? The mortgagor or mortgagee? Look at the law.
Section 55 says:
Sec. 55. Right to vote of pledgors, mortgagors,
and administrators. - In case of pledged or
mortgaged shares in stock corporations, the pledgor
or mortgagor shall have the right to attend and vote at
meetings of stockholders, unless the pledgee or
mortgagee is expressly given by the pledgor or
mortgagor such right in writing which is recorded on
the appropriate corporate books. (n)
Executors, administrators, receivers, and other legal
representatives duly appointed by the court may
attend and vote in behalf of the stockholders or
members without need of any written proxy. (27a) of the shares is the corporation itself. When he transfers
But if the mortgage contract says that it is the mortgagee
that will exercise the right to vote then it is the mortgagee.
That proviso in the contract becomes a statutory proxy.
That must be registered with the secretary of the
corporation because unless it is registered, it does not
bind the corporation. The corporation will continue to
recognize the mortgagor because he is the one named in
the books. So it must be registered.
What is the most famous voting trust agreement in
Philippine history?
The voting trust agreement written by Danding
Cojuangco. That is the most famous. When Andres
Soriano decided to unload his shares to Danding,
Danding said okay I am going to buy but I don’t have
enough money. So I will pay you one half and you transfer
the shares of stock to me and now I have the certificate
and I write the voting trust agreement for your son to
exercise the votes until I can pay. And those were the
shares declared by government to be the coco levy funds.
Wa pa nya natiwas ug bayad, Marcos fled to the US and
he brought along Danding Cojuangco. So in the meantime
Andres Soriano III tried to recover the shares. He thought
of borrowing money to pay Danding so he could get back
the shares but since he did not have money he borrowed
money from Hongkong Shanghai Bank and he passed a
resolution that San Miguel Corporation would guarantee
that loan. Who is the borrower? Not San Miguel, Andres
Soriano et al. will guarantee that loan. That is why
Eduardo Delos Angeles opposed that resolution. Why
would the corporation guarantee a loan from which it
would not benefit anything? And that’s why he filed that
derivative suit. That is the most famous voting trust
agreement. Wa pa to gi-file di unta mugawas tung coco
levy shares.
TITLE VII – STOCKS AND STOCKHOLDERS
Sec. 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.
What is a subscription contract?
Disabuse your mind of what you used to know of
subscription. In corporation law, subscription is a contract
and what makes it a subscription is that the subject matter
of the contract is unissued shares, new shares. If it is old
shares it is no longer a subscription, it is a contract of sale.
But if it is unissued shares that means that the transferor
it for the first time to a stockholder that is a subscription
no matter what the name is according to section 60.
Why is that important? Third year namo. You must have
a differentiated understanding because there are two
forums fighting for jurisdiction over subscription. When
you say it’s a subscription, the terms of a subscription is
a sale and therefore it is under the regular courts. But
because it is a subscription the formalities of the contract
the one who has jurisdiction is the intra corporate court.
34
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
Because it is an intra corporate dispute. When do you
know? Look at the facts and when you see clearly that the
law that is used to resolve the dispute is the corporation
code then you go to intra corporate court. If the law that is
going to be used is the civil code then you go to the
regular courts. So duha na gaaway sa jurisdiction. All
these caveats here of the law, that is the cause of twilight
zone issue of jurisdiction. So formalities, is the
subscription valid? Tan-aw ka dinhi. The trouble with
subscription is that there is no specific form that is
required. Does not require anything.
Which is more a solid evidence of stock ownership?
A certificate of stock or somebody’s receipt from the
corporation for the same set of shares of stock?
Di gani sya kaproduce sa iyang receipt sa ato pa kinawat
to niya iyang certificate of stock from the stock stub.
Kanang certificate of stock, numbered na, naa man nay
stub.nya ibutang na didto ang receipt. Kanus-aa na gisi-
on? Kung nakabayad na ka sa tanan. Certificate ra gani
imo, sa ato pa gikawat na nimo. Sya na wala pa kabayad
totally, naa pa syay balance, syay tag-iya ato. Because a
stock certificate is issued based on primary documents,
original documents.
Remember, the stock certificate is not synonymous to
the stocks themselves. There are different laws
covering the right to own a stock certificate, different from
the laws owning the stock itself. So you have to read the
provisions here carefully.
January 11, 2018
(Florienne Melendrez)
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) corporation. So therefore the law allows pre-incorporation
Now we are in this contract called subscription. It is the
acquisition of shares of stock by which an individual who
acquires it—the transferee, becomes a stockholder. He
might already be a stockholder because he has other
shares in that corporation.
That’s not the only way you can become a stockholder.
You can also buy shares from another stockholder. That
is not subscription. But if you purchase it from the
corporation and the corporation is selling you newly
issued shares-- not treasury shares then it is subscription.
This is the dilemma because a subscription is actually a
sale. Yet, it is under the jurisdiction of the intra-corporate
court and not the regular court because it involves a
specific subject matter that takes it away from ordinary
sale. It involves newly issued shares or shares that have
not been transferred before originating from the issuer.
The one who sells it is not called a seller. The corporation
who sells it is called an issuer. The one who buys it is
called a subscriber. It is not called a buyer. Why? So that
it will be removed from the general contract of sale that is
covered by the civil code and covered by the jurisdiction
of the ordinary court.
Let’s talk about a peculiar kind of subscription: the pre-
incorporation subscription.
Section 61. Pre-incorporation subscription. – A
subscription for shares of stock of a corporation still to
be formed shall be irrevocable for a period of at least
six (6) months from the date of subscription, unless all
of the other subscribers consent to the revocation, or
unless the incorporation of said corporation fails to
materialize within said period or within a longer period
as may be stipulated in the contract of subscription:
Provided, That no pre-incorporation subscription may
be revoked after the submission of the articles of
incorporation to the Securities and Exchange
Commission. (n)
The issuer is not yet an existing person. It is still a
corporation to be formed. So it is a peculiar kind of
subscription. It defies the rules of contract. Can a non-
existing person sell something? Under the civil code? No.
But how is it that it can sell? Because the law says so. It
is allowed by the law to do that because how else can it
become a person if it cannot sell shares. Because a
corporation is composed of constituent shareholders.
Kung di sya makakuha’g shareholders di sya mahimong
subscription defined under section 61 as a subscription
for shares of stock of a corporation still to be formed.
It is a peculiarity when a corporation that does not yet exist
enters into a pre-incorporation subscription, it is
irrevocable for a period of at least 6 months from the date
of subscription unless all others subscribers consent to
the revocation or unless the incorporation of said
corporation fails to materialize within the said period or
within the longer period as may be stipulated (?) in the
contract of subscription.
It is irrevocable for the subscriber. How about for the
corporation? It is not irrevocable for the corporation.
Suppose the corporation is not allowed by SEC, there is
no subscription. Walay mahitabo na shares na ma-issue
35
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
sa corporation. It is not allowed to be formed. So what
happens to the subscription? It is unenforceable.
Now in the meantime, if you have a pre-incorporation
subscription you already handed over your money. To
whom do you give out your money since the corporation
still does not exist? The interim treasurer! He deposits it
in the bank in trust for the corporation still to be formed.
So the stockholder subscriber has already performed
partially if it is subscription by installment. When can you
have subscription by installment? If it is par-value shares.
But if it is no par-value shares, you have completely
performed your obligation. It is fully paid.
Now that you have partially performed your
obligation, what stage of a contract does it fall under?
Negotiation-perfection-execution. Naa na ka sa
execution phase. For its part, the corporation must
obtain the certificate of incorporation. Pag kuhaon na
niya, corporation na siya, it has done its part. The other
party now is a complete person.
If what he issued are no par-value shares, the subscriber
can now go to that corporation, look for a secretary and
say “give me a certificate of incorporation because the
subscription is fully paid and now has a right to a
certificate of stock.”
When do you have a right to the certificate of stock?
If you have fully paid the subscription. Sa subscription,
you have right to certificate of stock after you have fully
paid.
But if it is a sale—stockholder to stockholder, do you
have a right to this certificate of stock after you have
fully paid the stockholder?
Ihatag niya ang certificate of stock niya. Pero muadto ka
sa secretary, isurrender to nim, ipakita nimo nga
giendorse niya sa likod na transfer na niya. Karon
makapangayo ka sa secretary ug certificate of stock.
Lahi ra ha! In a sale, there are three persons involved:
1. Buyer of shares of stock
2. Stockholder who sells
3. Secretary of corporation who recognizes the transfer
and cancels the certificate of stock that was transferred
and issues a new certificate of stock to the transferee.
Lahi ra. In an ordinary sale, buyer and seller man na. kung
mubaligya ka ug yuta nga titulado, what is involved is the
register of deeds.
[Father talks about hangers and cabinets inside our brains
while studying law. Lol]
Pre-incorporation subscription: Why is it irrevocable
for a 6-month period?
Actually the subscription transaction is recorded in the
articles of incorporation (AOI) because the AOI submitted
in the SEC contains
a) Authorized capital;
b) subscribed capital. Because you have to account
for the subscription total that you say it is.
subscribed capital: that is that part of authorized
capital that is already answered for.
c) paid-up capital – ilista sa na nila pila ang sa
subscribed ang gibayran na. assuming you are
talking about par-value shares.
Now, if it were not irrevocable, suppose the subscriber
cancels the subscription, you cannot take back your
subscription because after you submit it (AOI) to the SEC,
it becomes public document. That is the particulars of a
corporation. Once the corporation does business, if the
public wants to know about the corporation, they can go
to the SEC and request a copy of the AOI.
Paunsa ka musalig ani nga corporation? Ang capital naa
didto! Number of subscribers naa didto! If you take back
your subscription, there will be a deduction in the number
of subscribers then the AOI will no longer be true. That is
why it is irrevocable for 6 months. If the corporation
articles are not approved and no certificate of
incorporation issues from the SEC after 6 months, then
you can remove because it is assumed that the
corporation is not incorporated. And the reason why
subscribed does not exist, there is no corporation. That is
the time when you can revoke your subscription.
No pre-incorporation subscription may be revoked after
the submission of the articles of incorporation to the
Securities and Exchange Commission unless the SEC
issues a disapproval of the AOI. Normally it will not issue
a disapproval. It will just give it back to the corporation for
them to amend. They will give you time to correct.
Unlike cases in court, there is no dismissal from the SEC
with prejudice. It’s not a complaint not a petition, it is
asking for the certificate of incorporation to enable it to
function as a corporation. The SC has said the SEC’s
function is not discretionary but merely ministerial. That’s
why if you think the SEC is not allowing to be corporation
for no reason at all whether legal or rational, you can go
to higher authorities—such as the CA—for mandamus for
them to get the SEC to issue you a certificate of
incorporation. Because there is not such thing as the SEC
dismissing your petition for certificate of incorporation with
prejudice. There is no res judicata in there. It is a purely
ministerial act.
The SEC might question your capital either paid-up or
authorized. How? If the consideration that is used is
other than cash. Because the normal consideration for the
issuance of shares is cash but the law allows for other
forms of consideration.
36
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
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:
1. Actual cash paid to the corporation;
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;
xxx
Remember the rule: if it is property that you will give to
the corporation in consideration for the issuance of the
shares of stock, you can undervalue the property but you
cannot overvalue the property.
UNDERVALUE VS. OVERVALUE
For example, land. The corporation needs land to put up
its buildings and office since it is a corporation supposed
to create digital games to be sold in the web. So you can
say you will subscribe to shares of stock in exchange for
a real property (land). At how much will you value the
land? Market price. Market price is not just one. It is a
range.
The trouble with market value is it has to be certified. So
you ask an appraiser because the SEC will tentatively
accept your valuation. But if it has doubts, it will reject your
articles of incorporation then you will have to an
appraiser’s certification of the correctness of the value
that you have pegged to the property you surrendered to
the corporation in exchange for your shares of stock.
But if you say you are valuing your property according to
the assessor’s value--- provincial assessor, that is lower
than the market value! You are actually undervaluing your
property. way problema ang SEC ana, dawaton dayun na
kay government man ang ga peg sa value.
Another value you can peg from the government is zonal
value. BIR ra na. That is for purposes of capital gains tax.
This is normally higher than assessor’s value. It is
permissible. SEC will not question it.
But if you give higher than assessor’s or zonal valuation,
you will have problem with the SEC unless you
accompany it with an appraiser’s certification. Appraisers
do not give their appraisal for free. Bayran na ninyo sila.
Mugasto nasad ka.
Who will pay the assessor? The corporation who will be
receiving the property or the subscriber?
Normally it is the issuer. Muingon ang corporation
“nagsugod pa, wala pa gani miy kwarta pagastuhon pa
mi”. ikaw nay una gasto ana! That is normally the
situation. There are people who purposely undervalue
their property in exchange for shares of stock.
[father writes on the board]
INDOFOODS
49% 50+1%
50%+1 (Salim)
48%
1%
(public)
(management)
Before it became Indofoods, it was a private corporation
by the Salims in Indonesia. This is what they did: they sold
the entire corporation and they still became in control of
it.
First, Salim forms a small corporation. Minimum capital is
1million dollars. And then, since he is the owner of
Indofood, out of 10 million dollars, he uses 50% of the
shares of stock of Indofood. He is the owner of 99.9%
outstanding capital stock of Indofood. He gets 50% + 1,
then transfers it to this (small) corporation for 1 million
dollars. The total assets of this is probably 5 million but he
transfers it for only 1million. So, you have this corporation
holding assets that are grossly undervalued then he starts
selling new shares of this corporation at 10 times par
value because it is undervalued. People start buying it
because even at 10 times par, lamang man gihapon sila.
Dako man kaayog asset na gibutang dinhi. So you have
the public 48% owning this corporation and Salim now
owning 50% + 1. The other percentage is management.
Then what happens? He goes over to the bank and he
borrows money so that this corporation can pay Salim for
this 50% + 1. Kanang 1 million na gitransfer diri, initial
payment ra diay. How will he pay the bank? He will pay
the bank through the earnings of the 50% here (smaller
corporation). So ultimately he is paid a value. Initially he
is not but ultimately he is paid. What happens to the other
49% here? Then he sells it to the public. You see he is
paid completely! He sells it to the public, borrows money
from the bank but remains in control 50% + 1 of this
because it is corporation. But he has sold all the shares.
We have the term “unlocking the value” of this (smaller)
corporation. He controls it through a Holding Corporation
37
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
by which he first undervalues it because that is the
(inaudible.
So is it possible to sell all the shares of stock of a
corporation and you still control it? YES. But you have to
have the confidence of the market.
Section 62. Consideration for stocks. -
xxx
3. Labor performed for or services actually rendered
to the corporation;
xxx Because the whole idea of giving options is not
The operative word is performed labor--- past tense! It is
not labor still to be performed. Why can you not issue
shares to a subscriber for promised labor? Because
promised labor, under the terms of the civil code, is a
personal obligation. And if you do not pay by performing
the promised labor, you cannot be compelled by an order
by the court because that would be involuntary servitude.
So, it is very difficult to enforce it. So the shared of stock
cannot be issued without any consideration.
[father talks about Nielsen case wherein a geogolist was
engaged by Baguio gold mine promising him 10% of the
profits of the corporation. Upon payback, Nielsen was
issued 10% cash dividends prompting the protest of the
other stockholders arguing that Nielsen wasn’t a
stockholder thus shouldn’t be issued the stock dividends.
SC said the agreement between Nielsen and the
corporation was valid. This remuneration should be paid
in cash out of the expense of the corporation and the
measurement is 10% of the net profits.]
Now most corporations, kanang nagkagidlay na
corporation, mangita silag talents na muressurrect ana
nga corporation.
[father talks about the famous Google employee pirated
by Yahoo who was offered the CEO post and given stock
options proportionate to the success he is able to
generate. Success then is measured by the stock price of
Yahoo.]
If you are given an option, you are given a right to
purchase shares of stock, of the corporation at par value,
not at the price it is traded at the stock market. Even if it
is traded at $50 per share in the stock market, you are
only obliged to pay the par value, let us say, $5. Now
what is the consideration there? Cash. These are new
shares that are given to you as compensation for work,
for labor performed. Kung makapasaka ka sa price of
stock, rewardan ka ug shares of stock at strike (?) of price
that is way way lower than the traded price. Wa nakay
capital ana.
Sometimes when they you give options, they give you
minimum holding period. Why? Outsiders will interpret it
na dili to tinuod imong pagpasaka sa profitability kay
namaligya ka naman. Sa atoa pa nagparachute naka kay
magcrash na ang eroplano. You are not allowed to sell
your options immediately.
Because of the abuse that has been committed with
respect to options given to executives, now the SEC has
a new rule based on the obsolete Usury Law that was
passed by congress: that if you give options you must cost
it. It must be reflected in your profit and loss statement.
reflected—the cost and all. Many times, the revenue office
will not accept your costing so corporations in the United
States now say that it is better to just give you outright.
They buy shares in the market, put it in escrow, and then
distribute it to the CEO annually based on certain targeted
achievement by the CEO. Why? Because when you buy
it from the market, it is actual cost. Mulakra guyd imong
gasto. If you put it in escrow, say put it in a bank, the bank
is the trustee. And the condition is this: hold it, and if the
price of the shares of stock goes up by 20%, he also gets
20% of this number of stock. If it gets higher, 50%, then
he also gets that. So the bank is the trustee which holds
the shares. These are no longer newly-issued shares ha.
These are shares which the corporation buys in the open
market therefore can be costed. Shares that are give, no
longer brand new, no longer unissued shares, to
compensate labor performed that benefited the
corporation.
Section 62. Consideration for stocks.-
Xxx
4. Previously incurred indebtedness of the
corporation;
xxx
This is Dacion en Pago - Previously incurred
indebtedness.
Illustration:
The corporation borrows money from the bank and is no
longer able to pay for the loan, it eould convince the bank
that it would pay through shares of stock instead. If the
bank agrees, the bank is transformed from a creditor to a
shareholder. So the past indebtedness is considered
payment for the shares of stock they issued to the bank
and the bank now becomes a stockholder.
Section 62. Consideration for stocks.- xxx
5. Amounts transferred from unrestricted retained
earnings to stated capital; and xxx
38
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
That is Stock Dividend. Accumulated profits are the
consideration for the issuance of the shares of stock.
Proportionate according to your proportionate shares of
the outstanding capital stocks.
Example, 10% ka sa outstanding capital stock, makakuha
sad ka ug 10% sa profits nga gidistribute sa corporation.
That’s why it is always percentage.
Section 62. Consideration for stocks.- xxx
6. Outstanding shares exchanged for stocks in the
event of reclassification or conversion. xxx than par value. It can be higher but not lower. When you
You have convertible shares. Or you have preferred
shares convertible to common shares. The new common
shares that are issued are issued for consideration of the
preferred shares that are surrendered because preferred
shares are now converted to common shares where
before they have no votes, now they have voting power.
So are the considerations allowed in exchange for shares
of stock. You cannot issue without consideration. If you
do, that is called watered stock and the directors who
assented to the issuance are liable. Namakak ka na. guba
na sad imong AOI. Wa may consideration.
Section 62. Consideration for stocks.- xxx
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.
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) than the original issued value. If the corporation is not
st
January 12, 2018 (1 half)
(Therese Candolita)
So now we are in the important section of stocks and
stockholders. Our last discussion was centered on the
consideration for the issuance of the shares of stock. You
have to think of 2 kinds of stocks:
1. No par value shares - you talk about one value
for purposes of consideration and that is the
issued value.
2. Par value shares - you talk about 2 kinds of
values, the par value and the issued value.
For par value shares, the issued value cannot be lower
talk about no par value, you only talk about issued value
and yet there is a statutory meaning of issued value. What
is it? That is 5 pesos. You cannot issue shares of stock
that are no par value for lower than 5 pesos because that
is the lowest issued value.
Now, shares of stock that are issued the moment they are
issued the value is not frozen because we are talking
about an ongoing concern. The corporation, it operates. If
it loses money, the book value goes down. The
beginning book value is the issued value. Always.
Whether it be no par value or par value shares. Why?
Because the issued value is what is received by the
corporation.
Now if you say par value shares, you receive higher than
par value. It’s still the capital counts. You have capital
stock and the excess of par value is in another entry. That
is premium of stock. Now if the corporation is losing
money, the book value goes down. If the corporation
makes money, the book value goes up.
So let’s zero our attention on no par value shares.
Particularly the no par value shares pre-incorporation
subscription. The issued value is fixed in the Articles Of
Incorporation, because that is what is presented to the
pre-incorporation subscribers. You have that issued
value, if the corporation decides to issue more shares,
certainly the issued value will not be the same with what
is provided in the AOI and by-laws because the
corporation is out of my concern. If it makes money the
book value goes up. If you say the succeeding stocks that
will be issued will be the same as the issued value, the
existing stockholders will complain. There are more
shares to divide the capital stock dapat. More shares to
divide para lipay ang stockholders.
So in the very least the succeeding issuance of the par
value shares will be pegged at book value. It will be higher
making money, the book value will go down. In the very
least, it will be the lower book value that will be the next
issued value. Why? Because nobody will buy your shares
if you sell at higher than book value considering the
corporation is not making money. Unsa man, mura ra ka
galabay ug kwarta ana.
39
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
So, that is why what is provided in the AOI and by-laws of
pre-incorporation is most likely one-time only unless the
corporation is neither losing or gaining or for example if it
gains then loses again, so that the book value is still the
same with the issued value. Very important to realize that
if you look at financial statements, balance sheets, profit
and loss statements, it is always denominated on top.
Illustration:
Balance Sheet of XYZ Corporation as of and then they put
the date which is the last day of the fiscal year usually
December 31. Now the probity of this financial statement
is that it is good only for that date. Beyond that date, that
statement is no longer accurate. It is a snapshot of that
date. There is money going out, there is money going in
and the overall snapshot financially which is the balance
sheet will be changed and the external auditor will not
certify that beyond that date.
Now you go to par value shares. Par value shares you
have: par value and you have an issued value. The
only prohibition is that you do not issue shares at lower
than par value. Issue shares at higher than par value but
not lower. This is possible for pre-incorporation
subscription. The corporation at that time is not yet
formed. If you are already issuing shares at higher than
par value, yes, it is possible. Because sometimes people
have a way of reading the future that may be based on
what they believe is the prospect of this particular
corporation.
What happens if the corporation issues at higher than
par value?
It will get more money and certainly it will more than
qualify for purposes of basic requirements of the AOI.
Illustration: AOI says authorized capital stock is 1 million
divided into 1 peso par value shares of 1 mil shares. If you
issue shares of stock pre-incorporation, 25% must be
subscribed. So, what is 25% of 1 million, it is 250,000.
That is if it is bought at 1 peso. But let us say it is bought
at 2 pesos. So how much did the corporation bring in? The
corporation brings in 500,000. It does not mean that the
corporation sold 500,000 shares. No, it did not. It just
issued 250,000 shares.
That is why it is important to remember that the authorized
capital stock is not the ceiling of the peso value that the
corporation can raise. The authorized capital stock is the
ceiling for the number of shares that the corporation can
issue, not the peso value that the corporation can issue,
because it is possible that the corporation can bring in
more than the authorized capital if the investing public
wants to pay more than the par value of the shares of
stock.
Now, suppose the corporation issues just the minimum
25% of the authorized capital stock. 250,000 shares of the
1 million. But let us say it is bought at 3 pesos. How much
do you bring in? Let us say gross lang. 750,000! And let
us say the corporation decided “our business is growing.
We need to expand and put up more branches so let’s
double our authorized capital stock.” So you double the
authorized capital stock. You apply for the amendment
and get the majority vote of the Board of Directors and the
2/3 ratification of the stockholders, voting and non-voting,
and so you increase the authorized capital stock. So
before, 1 million divided to 1 million shares at 1 peso, now
it’s 2 million shares. Now you already have 750,000 pesos
capital stock and premium. If you consider that as paid
up capital what percentage is that of 2 million? That is
already over 25% of 2 million. Do you still have to have
new subscribers to be able to say that the increased
capital is 25% subscribed and 25% of the subscribed is
paid up? The answer is yes because the basis is not the
authorized capital stock increased. The basis is the
increase, the 1 million that is added, the increase itself
must be 25% subscribed, and 25% of that subscribed
must be paid up. It’s as to the increase.
Here’s another very important concept of subscription.
Time and again the Supreme Court says that a
subscription is an indivisible contract. You say, “So
what? What is the consequence?”
General Rule: No corporation is allowed to issue a cert
of stock unless the subscription is fully paid.
Suppose the subscriber gives up after paying 25% of his
subscription, and he says he can no longer pay the
remaining and he asks if it is possible that he is issued a
certificate of stock equivalent to what is covered by his
initial payment? You can never do that because a
subscription contract is indivisible.
Exception: If it is a delinquency sale.
Remember it is possible for a corporation to collect the
balance of payment and the completion of the balance
through a delinquency sale.
How does a delinquency sale occur?
We discussed this already. When we talk about
delinquency sale, you only talk about par value shares.
Why, because no par value shares cannot be put on
installment. The moment it is issued, it is considered fully
paid. So we talk of par value shares and the par value
shares is not fully paid, there is a balance. What if 50%
was paid and there’s a balance of 50% of the
subscription? So 500,000 was paid initially and the half is
the balance. When is that going to be paid? The rule is:
#1: at the date prescribed in the subscription contract,
and;
#2: If there is no date stipulated, it is to be paid on call by
the directors of the corporation.
The BOD issues a call na magbayad sila on or before this
date. If you do not pay on or before that date, the
corporation gives you another 30 days. If you have not
paid within that 30 days then the corporation CAN declare
40
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
you as delinquent. Remember “CAN” because the
corporation can choose to bring an action against you.
Which is collection for sum of money before the regular
courts, not the intracorporate court because it’s just a
forbearance of money. The law used to resolve the
controversy is not the corporation code but the civil code.
Now 30 days and you have not paid the balance, the
board can declare the subscription as delinquent. What
are the days to remember? 60 days and 30 days. After
the declaration that the subscription is delinquent, count
off 30 days. The delinquency sale is between 30 days and
60 days. Not earlier, not later. It requires publication kasi.
That is why there is that period. To publish that this
subscription is delinquent and those interested can bid for
these shares of stock covered by this delinquent
subscription.
Now here comes the delinquency sale. This is a peculiar
way of bidding because the bid price is the same. The bid
price consists of:
1. the balance of the subscription,
2. plus interest, if any
3. plus surcharges, if any
4. plus cost of the auction delinquency sale,
because the corporation has to rent a place and
hire an auctioner and has to do legal notarization
of the sale once it is done. Pag-igo anang gavel
sa lamesa, it is perfection. Pagpirma sa notary,
that is execution.
That is the price but the winner of the auction is the one
who sets the same price for the least number of shares.
So the winner gets a stock certificate. The shares go to
the original subscriber. He is issued a certificate of stock.
What happened to the indivisible subscription? Natunga
diba, kay ang half naa sa original subscriber, ang katunga
gi-auction. That is the only exception.
Now let me just point out if it is a corporation that is traded
in the stock market, then there is a running tabulation of
the market value of the shares. Normally there is no
instalment in the shares. Mubayad ka dayon ana, no
instalment payment. Sometimes it is sold at a discount,
sometimes sold at a premium, it all depends but most
likely because it is traded at stock market, the public has
a gauge as to the market value.
There is a subscription that is delinquent, very easy. Ikaw
na ang mangita ana ug mupalit sa imong subscription.
That is the beauty when listed in the stock exchange.
There is a ready measure of the value because the stock
market keeps the opening value and closing value.
Sec. 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 endorsed 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.
Tan-awa ang first sentence sa section 63, it is a
recognition that there is a vice president (see
underlined words in section above). People think that
there are only 3 kinds of officers: President, treasurer and
secretary pero naa’y vice president.
Naa pa diay assistant secretary gani, basaha (see
underlined words in section above). So why is that
important to know? Because even if the by-laws does not
provide for a VP or assistant secretary, you can create
that office because it is provided for in the corporation
code.
So let me point out that it says “MAY” (see underlined
words in section above). The first paragraph says shares
of stock issued may be transferred by delivery… So how
are shares of stock transferred? One way is you endorse
the back of the certificate and then you deliver.
What is the meaning of delivery?
Transfer of possession of the thing delivered and it is
personal property. Transfer WITH intent to transfer. That
is the technical meaning. You do not take delivery. To
take delivery is business. You demand delivery.
Is there a sale of shares of which cannot be done by
endorsement and delivery of certificate that names
the shares covered by the transaction? Murag wala na
gisulti diri diba? Pero pwede na. Kung ang shares of
stock nimo, 1 million shares, mao ang nakabutang sa
stock certificate. Ang gusto nimo ibaligya 100,000 ra. How
41
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
can you endorse at the back? Di nimo mahatag ang 1
million! So in that case what will you do? You need to draw
up a deed of sale.
Illustration:
“This Contract of Sale of shares of stock entered into by
and between JD Cruz, seller, the owner of 1 million shares
covered by stock certificate number 123 and buyer J
Santos, who is interested and is willing to pay 1 peso per
1 share in the amount of 100,000 shares.” Ibutang na dira.
You put down in the stock certificate the coverage and the
amount of shares taken. So when you go to the secretary
of the corporation you bring the deed of sale and the old
stock certificate and you surrender that and the secretary
of the corporation will issue 2 certificates: 1 certificate
covering 900,000 shares of the seller, and the other stock
certificate covering 100,000 shares to the buyer. So it’s
still 1 certificate that became 2. So there is now the
transfer of shares in what is called certificated shares
because the movement now for corporations listed in the
stock market is towards uncertificated shares. Wala na’y
stock certificates. Digital na imong proof of ownership.
You have digital evidence of ownership. Why is that
resorted to? Because it brings down the cost of
transactions.
nd
January 12, 2018 (2 half)
(Ria Danielle Lumapas)
Wa nay stock certificate, digital na ang imong proof of
ownership, digital evidence of stock ownership. Why is
that resorted to? It brings down the cost of transactions.
Palit ka anang shares of stock, pabayron naman sad ka
anang certificate so mudako imong gasto. Nya kung sulod
gawas ka sa market sige kag bayad ana. Mudako imo
gasto. Now of course you can tell your stockbroker, di
nako mubayad. You are the trustee. You hold the shares
of stock for and in my behalf. Daghan ng ig-ana, mu-save
sila. But uncertificated, naa kay pin na ikaw lang
nakabalo.
Hongkong hapit na na sila ma uncertificated. Kuala
Lumpur, last year I think completely uncertificated.
Singapore, Japan, Wall Street. Muingon ka “I want my
shares traded in the stock market. Any requirements?”
One of the requirements, are you willing to spend for
uncertification of shares? So that is an additional one-time
expense.
Diri sa atoa, what percentage is uncertificated? Wa pa.
Papel pa ta. That’s why gamay kayo ang galihok. So
kining terminologies na street certificate, that was asked
in the bar exams a couple of years back.
What is a street certificate?
A street certificate is a certificate of stock endorsed at the
back and delivered to the transferee which then the
transferee subsequently delivers to another transferee to
whom he sells the shares of stock without need of
endorsement kay di pa man sya ang main stockholder. So
a street certificate can be sold in the street just by mere
delivery without endorsement.
So the next question is, is a certificate of stock a
negotiable instrument?
Of course you know Sec. 1 of the Negotiable Instruments
Law. Although it has some characteristics in that it can
be negotiated in a similar manner as a negotiable
instrument, it is not.
When do I get my stock certificate?
If it is a subscription, you get it from the corporation after
you have fully paid. If it is a transaction between
stockholders you don’t get it from the stockholder, you get
it when you register the sale with the secretary of the
corporation. Now, if it is listed in the stock market, your
broker is your agent and he goes thru the clearing house
until he reaches the stock and transfer agent. So the stock
and transfer book is no longer held by the secretary. It is
held by the stock and transfer agent who is considered
the agent of the secretary. Technically speaking the one
who has the rightful possession of the book is the
secretary of the corporation. That will be one of your
problems if you are the secretary of the corporation. You
will not have time to do the recordings but it is considered
your responsibility. So i-entrust na nimo ug accountant.
Now, buang2x gani imong assistant naay mawala na
certificate ana. (chika about gikawat na isa ka libro sa
stocks sa isa ka mining corporation)
.
Now, section 63, the last paragraph says:
Sec. 63. Certificate of stock and transfer of
shares. –
Xxxxx
No shares of stock against which the corporation
holds any unpaid claim shall be transferable in the
books of the corporation.
That is the case of Chinabank vs Court of Appeals, 270
s 503, 1997. There’s this story. It’s actually not shares of
stock; it is transferable membership in a non-stock, non-
profit corporation. It was Capitol Golf and Country Club.
Now, the owner of the transferrable membership that has
been in his possession, nangutang sya for purposes of
getting a loan. What was his collateral? Membership
certificate in Capitol Golf. Wa sya kabayad. Default. Wa
gihapon. So gi-auction. Walay nipalit. Default buyer was
the bank of the certificate of membership. So the bank
goes to Capitol Golf and demands a new membership
certificate issued under their name. Capitol says we
cannot issue because of Section 63, last paragraph.
42
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
Unsa man wa mabay-ri? Wa sya kabayad ug country club
dues, sa iyang gipangkaon. So he has unpaid claims.
Now, the trouble is the lower court believed Capitol Golf
and ruled against Chinabank. The appellate court also
ruled against Chinabank. Finally the SC says the issue
here is what is the meaning of unpaid claims? The
Supreme Court said unpaid claims are calims arising from
the subscription, not just any claim. Kanang gipangaon dili
na mao. It must be claims connected with the subscription
and then Capitol Golf was ordered to issue a new
certificate. So what happened to the unpaid claims? That
remains to be under the account of that gentleman who is
no longer a member. So unpaid claim is connected with
subscription.
January 17, 2018
(Althea Astrid Gopo)
*TSN of FR. GUS about the Rappler Issue*
(This is from Ana Lapu, so let’s thank her guys)
(Father talking about the possibility of this coming out
during our Bar exam)
If it’s already decided, then it will be dependent on the
ruling. If the ruling is outrageous, it will be a decision which
the SC would like to be forgotten, just like the decision on
the futures contracts that are traded in the futures
commodity.
That’s in the dust bin of history, the “boo boo” on the part
of the SC because this one is, it’s either Calida is
uninformed, nobody giving him the correct information,
because he is a criminal lawyer and this is corporation,
because he is now looking for the criminal aspect of the
case. And the same is true with Herbosa and the guys in
SEC. It’s either they are severely misinformed or they
have culpable ulterior motive.
There’s a decision by the SEC that the registration should
be cancelled. PD 902-A contains the list of cases that the
SEC has its jurisdiction, one of them is cancellation of
registration. There should be no cancelation of
registration unless there is notice and hearing. That is
questionable if they were given sufficient notice and
hearing under the rules of SEC, because the SEC just
went on the ruling en banc, normally it is first in division
then it is raised en banc. That is one of the side issues.
The 2 most important issues, (did give it to you?) is #1
IS RAPPLER MASS MEDIA. Because the constitution
says, it is mass media that must be 100%Filipino owned.
Now, Rappler as you know, you have to subscribe to
Rappler in order to avail of their news. And their news,
they not only report on the news but they use all other
resources that are already available as the news
uncovers, so much so that the traditional owners of news
agencies just like Murdox, FOX news, AP or Reuters, they
call this set-up of “news aggregators”, they are called
“news aggregators, that they are abusing the resources
that they needed because they report the news, and they
already use whatever is news, whatever is said, whatever
is reported of that particular event they are writing to do
so. They aggregate, so tha is an issue.
Now as to that, if you want to get the “dole out” of that,
you can get it from Ronie, you can get the authoritative
discussion of that in the Harvard Law review, “The rise of
the news aggregators the legal implications and
Responsibilities”. That is the prevailing article now about
this whole thing about WON it is Mass Media. Because if
it is MM, then FB is MM, or this other entities. There is
now technical word that qualifies them, they are called
SOCIAL MEDIA, they are not MM. Kay kanang MM,
kanang way tumong ba. ”Shot gun” mag broadcast kag
radio, oh, wala man ka kahibawo ug na bay naminaw o
wa. It’s possible na walay naminaw nimo. Pero naa ka
diha, that’swhy it’s called MASS. Now kaning imong
computer. Naa man jud kay makit-ang hits. Kay muadto
ka ug website, it’s a hit! So there is difference. Now is that
covered by MM. Now if you will say that is the issue. If you
are saying that it is covered, then you have to cover other
things.By common sense. So that is one issue. That's a
technical issue that is info tech issue that is also a legal
issue.
The issue for us who are taking up Corp Law is, is there
foreign ownership because of PDRs?
Phil Depository Receipts. I discussed that with you, but i
used ADRs because that is what San Miguel and Meralco
uses.
This is what happened. It sells about 5% of its outstanding
capital stocks to a depository. Phil Stock Depository that
is a corporation. What is its job? One of its jobs is to
precisely float PDRs. So these shares of stocks (over
there) are in here. No change has occurred in the stock
and transfer book, ha! Why, because you are delivering it
to them not for the purpose of ownership. You are
delivering it to them for purpose of assignment in order to
create another security. The PDR. A PDR is actually a
derivative, why because the underlying asset is another
security. Now what is our definition of derivative? A
security, the underlying asset of which is another security.
Normally it’s a security, the underlying assets of which are
physical assets, like shares of stocks. What are the
underlying assets? The capital of the corp less its
liabilities, then you have something solid.
Now these PDR's are issued by the depository and are
traded in NY or in the local stock exchange. Now,
foreigners bought 5% of the total PDRs of the OCS. For
every one PDR there is one share of stock of Rappler.
That is their issue, that is why the price of one PDR tracks
the price of one share of Rappler. The price of 1 ADR of
PLDT tracks the price of one share of PLDT that is traded
in NY stocks exchange.
The trouble is there is another feature, foreign currency.
It is traded there in dollars. The shares of stock, The
underlying security is traded here in Pesos. Sometimes
there can be a difference between the two. Wa ka mu
react, ang price, according to the strengthening or the
43
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
weakening of the peso. So you can make money out of
the discrepancy that is called Arbitrage. Kung mupalit ka
dollar didto, kay ang kinahanglan nimo pagpalit pag
exchange ug dollar, gamay ra ang pesos, muginansya ka
ug mupalit u shares of stock ADRs didto sa NY, in a space
of a few hours. Kay sunod pag adjust ana, ibaligya man
nimo dire sa Pilipinas, mas daghan pesos imong makuha.
That is the "make-money" of the Foreign Exchange. But
here, the PDRs are traded here in the Philippines.
What does one PDR entitle the holder thereof?
1. You are entitled to all the interest, all the
dividends that equivalent share attach to that
PDR. So imo tana dividendo, imo tanan interest,
appreciation.
2. You are entitled to demand delivery of the
security. So one PDR equals one security, one
share of Rappler. You can say, deliver me that
security. Why? In the by-laws of the PDR it says,
if you do not qualify to hold Rappler's shares,
what the depository will do, is it will sell the
security and their dividends thereat, get the
proceeds, and that is what is delivered. So that is
how you replicate the PDR. Ingon ana ka ug
mubaligya ka sa PDR.
Muingon ka " I demand the security" ibaligya na niya
ang security, to whom? To a Filipino who is qualified to
hold it.
Question: Do you own shares of stock because of the
PDR?
Wa pa! It is between you, you are the owner, and the
depository! Can you attend the meetings? You cannot!
Can you move? You cannot. Those are the critical
aspects of ownership which is not monolithic but a bundle
of rights. That is the ( ).
Now this is not a phenomenon that just started with
Rappler. PDRs, depository receipts, 1920 pa. That's the
reason why there are depository receipts and they are
traded as a security, because there are CDRs, Chinese
Depository Receipts. There are JDR, Japanese
Depository Receipts. Certain markets in EU are on the
rise, they are willing to trade GDR Global Depository
Receipts. What's the purpose of that? The purpose is,
many foreigners do not want to be bothered with having
to adjust to local markets and buy securities. So they
would like a medium. And then ma (agihan na nila)
makasabot na sila unsa ilang buhaton. So that is
translated into depository receipts. It is a medium
between locals and them.
Now why would they want to invest there? They want to
invest there because they want to be known as an
international investor. If you have a pool of money that
you are investing and you campaign for more to invest
with you, you will say " We are very stable, we are
diversified!" Mubagsak ang dollars, Naa mi Yen,
Malaysian Ringgit, naa mi Peso, mubalanse gid dayon.
That is the strength of an international investor.
Now ngano man sad ng mga corporation, why would they
engage. Even if they can get money already as
permanent investors locally, why would they go to that
trouble? Because they also want to be known as an entity
that is already worthy of an international attention. Why?
Because the next time that you want to expand, you might
want to borrow from a foreign bank, and you go to the
foreign bank, and you tell the foreign bank "we are already
in the radar of many international investors, so you can
lend us, no problem with us, we are already established."
So it is not just a question of circumventing local
ownership laws. It has been long there. Pero kung karon
ra ka nahigmata,unya muingon ka, violating na na sa
ownership rules, mahimokang kataw-anan ana sa Europe
mahimo kag kataw-anan sa America.
So, if the decision here will be correct, it might be asked
in your examination. If it is wrong, then try to forget it.
*CLASS DISCUSSION PROPER*
So we have finished the stocks and stockholders except
for this last provision – SECTION 73: LOST OR
DESTROYED CERTIFICATES.
Cerrtificates of stock, if they are lost, you have to
reconstitute them – just like a title to real property or an
old decision of the Supreme Court. So you go through a
legal process. And that process is IN REM because it
is binding against the whole world.
So that Certificate of Stock is issued to you, recognizing
your ownership, shares of a property. That is binding
against the whole world. So if you lose it, that is replaced
by another procedure that establishes your ownership.
And so it requires publication.
Just like titles to real property, you better keep it in a safe
place, under lock and key, because you do not want to go
to Section 73.
Now, there is a peculiar case: Philex Mining versus
Reyes, where the Supreme Court says, it does not matter
who lost it. If it has already been issued and it was lost by
the stockholder who was named there, then it goes
through Section 73. If it is the corporation who lost it,
according to the claim of Reyes – because Reyes says, “I
am entitled to stock dividend because I am already a
stockholder of Philex.” He writes the office of the
President of Philex. And they say, “as far as we know, we
have already mailed your stock certificate covering your
stock dividend.” And it did not reach Reyes. So he says,
you issue me a new one. They said, “No, we cannot issue
another one because we have already issued a Stock
Certificate covering your dividend.”
44
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
Finally, after many months, he demands from Philex.
Because he says, “I did not lose it. It’s you who lost it. You
mailed it and it did not reach me.” But then Philex says,
“No. You have to go through 73.” That is why Reyes went
to Court. The lower court sided with Reyes. Di man sya
mao’y nakasala. Di man sya’y nakawala sa Stock
Certificate. That is why Philex went to the Supreme Court
to see who is correct.
The Supreme Court says: Section 73 of the
Corporation Code applies no matter who lost it, who
is at fault. You have to go through it. It’s basically
bureaucratic.
Affidavit in triplicate describing how you lost the Stock
Certificate; the stock certificate’s particulars: the number
of shares, serial number, etc.
And then you have to publish a Notice in the newspaper
– 3 consecutive weeks, at the expense of the registered
owner of the certificate. And then you wait for one (1) year.
Now, if you cannot wait for 1 year, then you can file a
surety bond with the treasurer of the corporation, the
secretary of the corporation, to answer just in case
somebody is damaged by the release of the new stock
certificate in place of the old one.
TITLE VIII - CORPORATE BOOKS AND
RECORDS
3 Kinds of Books and Records
1. A record of all business transactions (1
st
paragraph of Sec 74);
2. minutes of the meetings of stockholders or
members, or of the Board of Directors (2
nd
paragraph of Sec 74);
3. Stock and transfer book (third paragraph of
Sec 74).
Now, there are some corporations that are broadly owned
– so many stockholders and so many transactions. And
the transactions are _____. So the natural person who is
the secretary of the corporation – even if he has
assistants – they could not possibly cope with the work,
and it requires a compliment of personnel to handle it.
That is why the law allows the engagement of the services
of a STOCK TRANSFER AGENT.
STOCK TRANSFER AGENT. That is the case when the
secretary of the corporation can then endorse the Stock
and Transfer Book to the Stock Transfer Agent, who is
engaged to maintain the stock transfer.
STOCK TRANSFER BOOK contains all the transactions
of the shares of stock, beginning with subscription,
payment, chattel mortgage, pledge, disposition, sale, etc.
It’s all recorded there. And the transfer of ownership.
Also recorded there are the stock certificates that are
issued. Although the stock certificate is a different book
consecutively numbered with a stub so that you will know
where the stock certificate went.
Take note, the title of real property is different from a stock
certificate in that the stock and transfer book does not
contain an original of the certificate. The certificate of
stock does not have an original unlike the Torrens title,
you have an original with the Register of Deeds. What do
you have as a land owner? You have an Owner’s
Duplicate. Those are the correct terms: and Owner’s
Duplicate.
Except for the Register of Deeds or his/her staff, most
landowners do not see the original of their land title. Gusto
ka mupalit ug yuta, gusto ka masiguro bisag gihatagan ka
na sa owner’s duplicate, ug wa ba na’y encumbrances.
Kung muadto ka sa Register of Deeds, mangayo ka ug
Certified True Copy. So they will go to his book, get the
original, iyang i-xerox. Human niyag Xerox, stampahan
niya: “Certified True Copy”. Kanang gipa-xerox, wala gani
nay annotation, or ang annotation didto cancelled na,
clean na. Nganong naka-hibalo man kang clean? Kay naa
man kay copy sa original didto. Nakakita ka sa original?
Wa gyud. Tagaan ka lang sa Certified True Copy.
Certificate of Stock, ikaw ra ang nay stock certificate.
There’s a record that it was issued to you. But there is not
an owner’s duplicate; that is the original, kanang naa
nimo. That is why you surrender that, and a new one is
issued in favor of the transferee.
Now, the Stock Transfer Agents is aware of so-called cut-
off dates. If it is a big corporation – thousands of
stockholders – they normally have a cut-off date before
the annual meeting to be able to rationally determine how
many shares are outstanding. Sirhan na gani nang libro –
wa nay dugang, wa nay subtraction – and then they will
count outstanding shares.
How do you compute outstanding shares?
Outstanding shares is issued shares net of Treasury
shares. Kadtong mga gipamalit na shares sa corporation
that are in the treasury, that is deducted from the issued
shares because they are issued but they are no longer
outstanding.
Now, on the basis of that outstanding shares you
determine what is the quorum. Cut off date, then you
determine what is the minimum number of votes that is
needed to elect one. And so these are the figures that the
secretary must have upon the annual meeting of the
stockholders.
Beyond the cut-off point, the Stock Transfer Agent will no
longer accept proxies. All proxies are already not allowed
after the cut-off date.
45
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
Sec. 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.
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)
You can ask to inspect the books of the corporation.
You must request it IN WRITING. Written request, and
then the corporation shall allow you to inspect the books
during business hours.
EXCEPT that, if you have abused that privilege in the
past, then the corporation may deny you from
exercising that right. For instance, you steal in the
shared secrets of the corporation by exercising the right
of inspection.
Now, you can have a copy of the financial statement
also upon request and the corporation is obliged to grant
you the copy of the last year’s Financial Statements,
Balance Sheet, and Profit and Loss Statement that is
already audited as of last year.
And the last paragraph says,
“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.”
Need not be an external independent public company (?)
if it is paid-up capital of less than P50,000.00.
WHERE SHOULD THE STOCK AND TRANSFER
BOOK BE?
It should be kept, according to the provisions here, in the
principal office of the Corporation. BUT if there is a Stock
Transfer Agent, it should be with the Stock Transfer Agent
because he is now the one in-charge of the stock transfer
book.
WHERE SHOULD THE MINUTES OF THE MEETINGS
OF THE STOCKHOLDERS AND THE BOARD OF
DIRECTORS?
It should be with the Secretary of the corporation and the
it should be in the Principal Office.
Some years back, when stock options were the main
incentive for the compensation of executives of a
corporation, there used to be doctoring of the minutes.
Now, very difficult to do that. Because the moment you
declare, you must enter the cost of that particular option.
But before there was doctoring.
Why was doctoring necessary? Ilang isingit ba. When was
the resolution passed to grant the CEO the options.
Because the options are granted at a discount of the
traded price. You are given, let’s say, 600,000 options;
that means you can buy 600,000 shares of the company.
Suppose, it’s trading at 200 dollars. You are given a 50%
discount; so you can purchase it at 100 dollars. What is
the par value? It would be 5 dollars. But since it has been
operating for so many years, the value has gone up.
Now, suppose, they want a lower strike price. They will
look at the days when the stock price was down. They will
trace it. “Ah nia diri oh, niabot ug 150.” So ma-lower pa
ang imong strike price. Let us say by 25. Because they
will give you a 50% discount. So you search the number
of days, where the price by which it is traded in the market
is low. That is when you say “there was a meeting of the
Board of Directors and the options were granted at 50%
discount, so therefore, it will be at this price.” Wa guy
meeting! Pero gisingit na nimo didto, to lower the strike
price. Papirmahon na tanan BOD.
Nganong mu-pirma man sila? Gusto man sila nga ang
CEO mudawat aning posisyona… kay nagkagidlay
naman ang corporation; kay kinahanglan mana siya. So
they will sign. Now, there is no need anymore to doctor
because the moment you grant options, you must cost it.
You must reflect the cost.
That is why the practice has shifted slowly from options to
shares of stock – actual shares of stock – held in escrow
to be granted upon the happening of the condition stated
that merits the award.
WHAT IS THE EQUIVALENT IN THE NON-STOCK,
NON-PROFIT CORPORATION OF THE STOCK AND
TRANSFER BOOK?
The equivalent is the MEMBERSHIP BOOK.
Stock and transfer corporation has these three books; the
non-stock corporation has also three books:
1. Book of business transactions;
2. Book of minutes of the trustees and
members; and
46
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
3. Book of members – that is where the members
are listed, not stockholders.
DO YOU HAVE A MEMBERSHIP TRANSFER AGENT?
No, there is none. Wala mana’y magbalhin-balhin. It’s not
like a stock transfer book, where there are so many
transactions.
Alright, next time we will take up Merger and
Consolidation. Try to look up in the internet: What is a
reverse verdict?
January 18, 2018
(April Liz Parreno)
TITLE IX – MERGER AND CONSOLIDATION
Sec. 76. Plan or merger of consolidation. - Two or
more corporations may merge into a single
corporation which shall be one of the constituent
corporations or may consolidate into a new single
corporation which shall be the consolidated
corporation.
The board of directors or trustees of each
corporation, party to the merger or consolidation,
shall approve a plan of merger or consolidation
setting forth the following:
1. The names of the corporations proposing to merge
or consolidate, hereinafter referred to as the
constituent corporations;
2. The terms of the merger or consolidation and the
mode of carrying the same into effect;
3. A statement of the changes, if any, in the articles
of incorporation of the surviving corporation in case
of merger; and, with respect to the consolidated
corporation in case of consolidation, all the
statements required to be set forth in the articles of
incorporation for corporations organized under this
Code; and
4. Such other provisions with respect to the proposed
merger or consolidation as are deemed necessary or
desirable. (n) The original owners of Goldilocks, nagbahin na. ang uban
Merger means there are at least two corporations. These
two are all constituents to the merger. When they merge,
the one that survives is the surviving corporation and
those that no longer have their corporate personality that
is the constituent. If there is a survivor and a constituent
corporation, it is called a MERGER. If all the constituent
corporations die, and a new corporation emerges, it is
called CONSOLIDATION. That is what the statute
provides.
However, Bank of Commerce vs RPN INC., April 21,
2014, points out that there may be a de facto merger.
What is a DE FACTO MERGER?
This is not a merger contemplated under the Corporation
Code. A de facto merger can be pursued by one
corporation acquiring all or substantially all of the
properties of another corporation in exchange of shares
of stock of the acquiring corporation. The acquiring
corporation would end up to be the business enterprise of
the target corporation. Whereas the target corporation
would end up, would basically, its only remaining assets
being the shares of stock of the acquiring corporation. Or
if it is not paid a shares of stock, the money that was paid
in order to acquire the assets of the corporation.
Is there an example to that?
Yes. Very clear example is Magnolia Ice cream of San
Miguel Corporation. Sometime, 15 years ago, San Miguel
under the new leadership, they decided to sell all the
assets of Magnolia Ice cream. Who was the very eager
and willing buyer? Nestle! Together with the purchase,
Nestle had the temporary use of Magnolia brand for one
year. They had an agreement of non-competition for 5
years. Nestle had a privilege of taking over all the facilities
of Magnolia Ice cream and San Miguel: all the preserves,
their ice cream machinery, but not their brand. The brand
is temporarily only for one year. After that, they changed
into Nestle. That’s why their logo, murag pareha. Five
years later, San Miguel revived its Ice cream business
and put up Magnolia again.
There was an ice cream company in Manila that had the
rare product of selling ice cream made up of carabao milk.
Patay naman ang founding parents, ang mga igsuon
decided to sell. Some children who were deeply involved
in the running of the business did not want to sell. Unsay
nahitabo? What they did was just to sell their assets and
the one who bought the assets is this Go-negosyo guy,
Concepcion. And he made the Selecta ice cream.
Goldilocks was also acquired but the constituents did not
lose their corporate personality. Who was the buyer? SM!
But since Goldilocks is a well established brand in the
Philippines, they get it as separate corporation. Holding
corporation is SM Investments, then you have Goldilocks.
gusto maka kwarta, ang uban not interested. Many of
these who are not involved, magduda pa ba. Mangutana
kung sakto ba ning bahin nako? Ngano ang mga igsoon
nako na nagpadagan ana kay sigeg ilis ug sakyanan kada
tuig. Ikaw naa na ka sa States, kuntahay nag practice ug
Medicine. They charge it to the company, and the
company amortizes their vehicles because they use it
ostensibly for the company. And yet there is ostensible
asset of a brand. Ilado man kaayo imong brand. Naa sad
imong trabahante; you are also concerned that the buyer
47
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
will have the same spirit as you have to continue
promoting the business.
You are bought or acquired by the acquiring company and
many times if the acquiring company is already a leading
company in the Philippine stock market, you don’t mind
being paid in terms a shares of stock. For the acquiring
company, that is not expensive because there is no out of
the pocket stock, you just put out more shares. The issue
is the valuation of the shares. If the acquiring company
ratio in shares, both the acquired and acquiree have to be
audited and audited very costly because there is a
valuation that is not fixed. The shares used to buy is not
fixed, it’s a moving, on-going enterprise. And the one that
is purchased is also a moving, on-gong enterprise.
The auditing that happens before the merger,
consolidation or acquisition is already the most __ audit.
The most common audit is audit for fraud. How is it
committed? That is the most expensive kind of audit. the
next to that is for merger and acquisition. Kanang mag
annual audit, something ra na. (chika about accounting)
Mergers and acquisition: How does it begin? Does it
begin here in Section 76?
No. The most crucial legal is before the plan or merger.
Naa man gyud isa ka tao ana either ang mupapalit or
mupalit ang mu-merge. Diha man magsugod. Now and
then, in sophisticated market, the one who begins the
process of merging are investment bankers. Pati ng mga
pharmaceuticals, mgbantay man na sila kanang mga
investment bankers. Kinsay daghan kwarta, kinsay
prospect.
When it is still negotiating, this is where you have to be
conscious of two legal concepts:
1) Non disclosure agreement or Secrecy
agreement
2) Due diligence period
What is NON-DISCLOSURE AGREEMENT?
If the 2 corporations are involved in merger talks, actual
parties who are involved must sign an agreement that
there will be no disclosure. Whether or not the transaction
is successful, there shall be no disclosure.
Illustration: I examine na nimo siya, imo diay nang isulti
na pungkol diay ni siya kay nahibal-an na nimo iyang
weakness. Magsabot mo, waay sulti-anay kng unsa man
imong nakit-an diha. Pag interviewhon na dayon sila sa
press, unsay tubag ana? Sorry we cannot talk. Dili na sila
muingon na naay non-disclosure, kay unsay pasabot
ana? Nag merger na diay mo? So muingon ka, sorry we
cannot speak.
The problem is, if you are a member of stocks exchange.
There is a rule in the stock exchange, the INSIDER
TRADE RULE.
If you know of a significant material fact that has a bearing
on whether or not a stockholder should sell, buy or hold a
shares of stock, then you are under obligation to disclose
it to the stockholder.
Now, normally those who are involved in Mergers &
Consolidation would say there is nothing definite yet that
is why we cannot disclose. When the time comes that we
will disclose to you, that is when it is material. And by the
time we will ask for a trading __. Suspend the trading of
our shares because we will now disclose what is
happening.
(Father talks about Smart PLDT & Gokongwei)
Gokongwei says we don’t need cash, we are willing to
accept shares of stocks. How many seats are you willing
to give? Si Pangilinan muingon, naa man kayay mga
hapon diha? Naa may gobyerno diha, SSS, GSIS, mga
investors. Muingon si Pangilinan we can only afford one
seat. Okay, one seat is good enough. So what happens?
Since theoretically the price of Sun is more than 1 seat,
you will have to sell the extra shares because you cannot
have more than 1 seat. Agree na ang board sa price, sa
currency, what is the medium? What happens next? Mao
na na ang due diligence and no disclosure.
What is a DUE DILIGENCE AGREEMENT?
A due diligence agreement is to agree that we will run the
corporation that is part of this transaction as close as
possible to the last audited financial statement that was
presented to you; that we will not make a drastic change
and we promise that with due diligence.
Dili mi magsugod ug bag-o na investment ug maghatag
ug bag-o na benefits or unsa ba diha na appreciably will
result to failures. The basis is the latest financial
statement from which your company will be evaluated.
What is the difference between CERTIFIED BUSINESS
VALUATOR and AN APPRAISER?
Appraiser ka, tangible property ka kutob: yuta, building,
factory. Mao na imong i-appraise.
Valuator gani ka, tanan covered nimo. Patents, shares of
stock, intangible properties, goodwill. Makahatag kag
presyo ana, certified man ka.
Once that is done, they have to have an agreement in
principle. That is the plan of merger and consolidation,
that is the first thing voted upon by the directors and by
the stock holders, 2/3 votes and that includes voting and
non voting stockholders. Apil na sila. So you have to send
a letter of explanation. Ngano man ka mag-merge? Lisod
kaayo magbaligya ka kung di gani kasabot ang mga
stockholders within 2 mins, wa na.
Once you win the 2/3 votes, included in that vote normally
are what we called omnibus proxy. In the voting, if you
48
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
approve, you also approve an omnibus proxy for the sudden, Duterte will say this is now a monopoly, this must
successful completion of the merger or consolidation. be examined and reviewed by a committee.

So you already appoint a president to vote for articles of
merger; to vote for amendments to the articles of merger.
Because even a single amendment in the articles of
merger based on the plan of merger, that must be
approved by the stockholders. Tawgon pa nimo ang mga
stockholders mag meeting to amend one provision and
then ugma na sad ug lain, wa na. di na mahimo; that’s
why you need a proxy and get more than 2/3 aron diretso
na.
In the merger, I personally went through ONB and BDO.
Wa may problema because they have ownership of 70%
of outstanding capital stock so more than 2/3. 2/3 is
66.666.
Kung minority ka, ang problema, wala kay apil sa merger.
So ang mga dagko lang, ikaw bale wala ka. What
happens to you? Di man ka kamaligya kay walay mupalit
because there is no premium in your shares; no power
results from your shares. So you are a minority, pagsugod
gyud sa Obispo muapil siya sa ONB, I made sure that
there is this agreement between the majority stockholder
and the Roman Catholic of dieces of Kidapawan that we
have the right of first refusal to sell our shares.
If the majority of controlling shareowners are going to sell
their shares, they cannot do so unless they bring along
the minority shareholders. And whatever shares that
results as dividends from the original composition, you
register that with the secretary of corporation and it is
annotated in books and certificates of shares of the
majority owner and the certificate of stock of the minority
owners. For your benefit, I am telling you that.
All mergers and consolidation would have to be approved
by the Competition Board. Technically that is one of the
condition for the merger. If the Competition Board does
not approve, you file a notice with the Competition Board
and you tell them that they are merging in one month. If
they have no objection, at the end of one month then go
ahead. If there is objection, there will be hearings. That is
how a competition board works.
Sometimes muingon na sila sa press na they opposed,
wa pa gani sila kapadala ug letter sa ilang gi oppose.
If you already agreed and there is a legal barrier, what will
happen? Dili na matuloy ang merger. The Competition
Board should decide that this unduly restricts competition
and freedom in the particular industry, you cannot
proceed with the merger. No vote of the stockholders or
the board can override the legal impediment. Wala pa
may implementing rules. Sa states, dili gani approve duha
ka oil companies, unsay need? The commission will say
sell all your gas stations, para 20% na lang ka sa industry
once you do that then you can go ahead and merge. Wala
pa man na dinhi. Unsaon man nato ni? How much do we
have to shed off or can you remedy it by shedding off
businesses in the Philippines? That is another topic.
st
January 19, 2018 (1 half)
(Zarah Domingo)
Effects of Merger or Consolidation

If you want control of the company, why would you spend

money more than what is necessary? All you need is 50
+ 1 of the shares of stock of that company and you already
control that company. Ngano paliton pa man nimo ang
minority? Pagpalit nimo, apil naman na sila. Minority man
na sila, dili man na sila maka pirde nimo.

The first that is treated in the Corporation Code is the plan

of merger. Agreement na na in principle. It is voted upon
by the board. It requires majority vote of ALL the
members of the Board. Not majority of quorum, but
majority of ALL. And then 2/3 vote of a stockholders in
a meeting duly called for that purpose.

The third voting is on the articles of merger and

consolidation. The new name, or the surviving name, and
then the shares of stock. What is now the new par value
of these merged shares?

And then subsequently, if there is an amendment, why

would there be an amendment? For example, all of a

49
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
Section 80. Effects of merger or consolidation. – The 4. (here begins the complexity) The surviving or the
consolidated corporation shall thereupon and
merger or consolidation shall have the following effects:
thereafter, possess:
a) All the rights, privileges, immunities and
1. The constituent corporations shall become a single
franchises of each of the constituent
corporation which, in case of merger, shall be the surviving
corporations;
corporation designated in the plan of merger; and, in case
b) All property, real or personal, and
of consolidation, shall be the consolidated corporation
c) All receivables due on whatever account,
designated in the plan of consolidation;
including subscription to shares and other choses
2. The separate existence of the constituent corporations
in action;
shall cease, except that of the surviving or the
d) All and every other interest of, or belonging to, or
consolidated corporation;
due to each constituent corporation shall be
3. The surviving or the consolidated corporation shall
deemed transferred to and vested in such
possess all the rights, privileges, immunities and powers
surviving or consolidated corporation without
and shall be subject to all the duties and liabilities of a
further act or deed.
corporation organized under this Code;
4. The surviving or the consolidated corporation shall
Now, suppose there are subscribers of shares of stock of
thereupon and thereafter possess all the rights, privileges,
the constituent corporation that are not yet fully paid, what
immunities and franchises of each of the constituent
happens to it? If not resolved by the corporation itself
corporations; and all property, real or personal, and all
before the actual date of the incorporation, it is supposed
receivables due on whatever account, including
to be transferred to the surviving or consolidated
subscriptions to shares and other choses in action, and all
corporation without any need for any deed, or act. It
and every other interest of, or belonging to, or due to each
becomes automatically transferred. But you can be sure
constituent corporation, shall be deemed transferred to
that it will be considered in the articles of merger or
and vested in such surviving or consolidated corporation
consolidation itself.
without further act or deed; and
5. The surviving or consolidated corporation shall be
Naa ka gilista dira na subscribed capital, pero out of the
responsible and liable for all the liabilities and obligations
subscribed capital diay, 20% ra dira ang gibayran. So
of each of the constituent corporations in the same
daku kaayo na nabilin sa wala ba nabayran. Unya,
manner as if such surviving or consolidated corporation
muingon tung mupalit na corporation na we have to lower
had itself incurred such liabilities or obligations; and any
the price because what we are actually getting is not what
pending claim, action or proceeding brought by or against
is written in the articles of incorporation. Pagamyan natu
any of such constituent corporations may be prosecuted
gamay. Muingon sila tagai mi ug 1 month, gukdon namu
by or against the surviving or consolidated corporation.
ni amuang subscriber ug stockholders, di pa diay ni
The rights of creditors or liens upon the property of any of
nabayran.
such constituent corporations shall not be impaired by
such merger or consolidation. (n)
That is what I say that sometimes it is settled before the
actual effectivity of the actual merger or consolidation
because otherwise, it is transferred withut any need for
any act or deed.
1. The constituent corporations shall become a
Ingun man sila pagtransfer na natu sa pikas, if they were
single corporation.
paid in shares, then you will get your shares of the new
Merger: surviving corporation designated in the plan of
corporation if you will come across the balance of your
merger;
subscription. Otherwise, how can you get the
Consolidation: consolidated corporation designated in
consideration for your shares when you have not yet fully
the plan of consolidation.
paid for your shares.
2. The separate existence of the constituent
That’s how it will be put to subscribers who are not fully
corporation shall cease except that of the
paid, by the new surviving or consolidated corporation. So
surviving or consolidated corporation. The many
bayad muna, so you cannot fix the price, so it can be
shall become one, and the rest disappear.
settled before effectivity, so you can pay your new shares.
Or, pay the balance so you can pay its consideration.
3. The surviving or consolidated corporation shall
Otherwise, you still have something owing to the
possess all the rights, privileges, immunities,
corporation that is a party to the ___.
powers, and shall be subject to the duties and
liabilities of a corporation organized under this
Code. If a constituent corporation has ongoing contracts. Let us
say, one of the constituent corporation has a lease
contract, it is leasing its property to a third party, what
50
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
happens to that lease agreement? The lessor is a
constituent corporation, the lessee is a third party. The
lessor, without any amendment to the contract of lease,
substitutes the constituent corporation. It takes over. Now,
the third party will say “I entered into a transaction with
this corporation, how come you’re here now?”
What will the surviving or consolidated corporation
show the third party when the third party is not privy
to the merger or consolidation?
Muingon ang third party, did this corporation execute a
deed of assignment to you? (And the surviving or
consolidated corporation will say) wala ra ba. The
corporation code says “without need of any act or deed.”
So when you go to the third party, unsa man imung dad-
un? Ang articles of merger or consolidation kay naa man
dinha sulat sa Section 80 Effect of Merger Paragraph 4.
So that is what you say to a third party who is not privy to
the merger or the consolidation.
Real or personal property becomes vested in the
surviving. All the vehicles of the constituent corporation
when they disappear out of their existence, what will
happen to them, registration in the LTO? Ang imuhang
dad-un sa LTO, ipa-annotate sa registration didtu kay ang
articles of merger and consolidation. Show them that.
How about real property? It is entitled under the name of
Corporation A. Corporation A has disappeared because it
has been gobbled up by Corporation B. Corporation A
gives you all the titles but it is all in the name of
Corporation A. Can you go to the Register of Deeds and
tell ROD to issue us a new title because we are now the
owners by virtue of this merger. The ROD cannot issue a
new title. Why? Because he is not called ROD for nothing.
He needs a deed. Way deed, way do!!! Asa man ang deed
ninyo, deed of sale, deed of donation, deed of exchange
kay ako tung tagaan dayun ug lain title! Pero ang
nakabutang (sa corporation code) kay “without need of
any act or deed” man. Away mo sa ROD?
Magdala na pud ka sa articles of incorporation, imo na
pud ingnun ROD na magbayad mi for annotating (petition
to annotate the title). So all those titles of land owned by
Corporation A, will now have annotated therein the
articles of incorporation of merger. And it will there be
stated in the articles that the constituent corporation that
used to be the titular owner of this property has
disappeared because there is a new continuation of the
merged or consolidated corporation.
Pabilin ang titulo. Annotatan. From then on, it’s already as
good as owned by the merged corporation or the
consolidated corporation. Ang daku gasto, kanang mga
karatula. Pagmerge sa ONB ug BDO, defacto merger gali
tu. Ang tag-iya BDO naman. ONB man gihapon kay
nagsurvey sila, wala man nailhan ang BDO sa
kalasangan. ONB man ang nailhan. So we will return and
retain the name of ONB. Unya ang tag-iya kay BDO
naman. And the Bangko Sentral requires that the BDO
new owner must be in the signage “ONB: A Rural Bank of
BDO. Kana lang pagbutang ug BDO, usbon nimu tanan
sign, tang-tangun nimu, lastik man na, naay siga-siga sa
sulod. Mau na ang dako ug gasto…
Pero pag-deed, annotation lang man na. If you are the
retaining counsel, maligpitan man jud ka sa tanan titulo.
Hain man ning mga titulo sa mga yuta nga naa sa mga
financial statements? You get the schedule of real
properties then immediately you take physical possession
of the titles. I-sort out na sa imuhang mga assistants jung
asa na dapit kay each of city, each province has its own
Register of Deeds…where the properties are located. It is
not only the property where the branches are located but
the properties that are already foreclosed, consolidated
na ang ownership ana sa bangko. Kana tanan, annotatan
na nimu because the ownership is vested in the merged
or consolidated corporation.
Section 80. Effects of merger or consolidation. –
The merger or consolidation shall have the following
effects: xxxxx
5. The surviving or consolidated corporation shall be
responsible and liable for all the liabilities and
obligations of each of the constituent corporations in
the same manner as if such surviving or consolidated
corporation had itself incurred such liabilities or
obligations; and any pending claim, action or
proceeding brought by or against any of such
constituent corporations may be prosecuted by or
against the surviving or consolidated corporation. The
rights of creditors or liens upon the property of any of
such constituent corporations shall not be impaired by
such merger or consolidation.
Now, we go to the famous case of BPI Davao vs BPI
Employees Association.
51
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
BPI vs BPI Employees Union, G.R. 164301,
October 19, 2011 (resolution of the case in the
Motion for Reconsideration)
Pertinent Facts:
BPI bought Far East Bank and Trust Company.
The problem is Far East Bank (the target
corporation) is an unorganized establishment.
BPI (the acquiring corporation) is organized. Pag-
merge, niana ang organized na “kamu na
unorganized, kailangan mu muapil sa organized.
We are invoking our union security clause.”
Dili gani mu, we will invoke the union security
clause and we will ask the employer, BPI, to
dismiss you because membership in the union is
a condition for continued employment.
Issue: Are these people (referring to employees
of Far East Bank) obliged to become members of
the union of the surviving corporation?
Ruling: The basic argument is: at stake here is
their Union Security Clause because if they refuse
to join the union, they will be terminated.
(An argument here is) the Union Security Clause
here cannot be superior to the Security of Tenure
so they cannot be forced to become members of
the Union. This was quoted by the majority.
This was subject to a Motion for Reconsideration
and it took more than a year.
Senior Justice Carpio was the one who wrote this
decision. He said: What happened is there are 2
bargaining units—1 unorganized, the other
organized. The survivor is organized. Nawala
naman tung bargaining unit kay nawala na tung
corporation. So their employees should be
members of the union because now they are in the
bargaining unit that is organized. companies…
So, balihun nimu. Let’s say what was organized is Far
East Bank, unorganized is BPI. Kung ang BPI pa nipalit
nila, nibalhin didtua ang workers, wala na unta silay union
kay ang bargaining union man kaha ang deperensya.
Balihun nimu, there is no obligation to become members
of the Union.
Now, let’s quote another datum. Suppose mas daghan
ang tao sa targeted corporation, they have more workers
than the acquiring corporation. The organized
disappeared in existence because the surviving
corporation is the buyer. Pasagdan sila nisulod diri, it’s
unorganized, should this (the unorganized) be unionized?
Supreme Court says, they should file a petition for
certification election and you will have a certification
election and whatever wins is what prevails. But the
bargaining unit here is unorganized and it will stay that
way until there is the process of making it organized.
So, take note ha, it is not a question of number of
employees, it is a question of bargaining units. If the
surviving corporation is organized, then all the
constituents will be organized. But if it is not
organized, even if the constituent corporations that
disappeared are organized, they cannot be
considered as unionized when they move to the new
surviving or consolidated corporation. It is a question
of bargaining units.
How about franchises? What happens to the
franchises of constituent corporations?
There are franchises that are readily transferrable and are
controllable but there are those franchises which might
not be that easily transferrable. It might be revoked. For
instance: transportation. If you have a franchise of a
public utility in one route, and the acquiring corporation
has also a franchise over the same route and this
corporation buys in one public utility operating in that
route. The franchise most likely of the acquired
corporation will be cancelled and LTFRB will bid it out to
third parties so there will be competition. Makaingun ka
binuang, tan-awa ng Bachelor Express, ilaha man na
tanan pero nganu wala nila patya ang corporation—they
went only to what is called a de facto mergers. They
never merged in such a way that the acquired corporation,
the constituent corporation will die. They keep it going.
They buy the shares. (i.e. Rural Transit, Ceres, Land
Car—all these are now owned by Bachelor Express—so
they still have a semblance of competition—it is just
competition by name).
That is one kind of public utility. But, as to other public
utilities (i.e. telecom), they did not fully merge, they only
went to a de facto merger. Some remain a separate
corporation (i.e. PLDT, SMART) but it all has the same
controlling interest. What is crucial there is the allocation
of frequencies. (Fr talks about frequencies of telecom
Duterte might reapportion all these different frequencies.
Can do Duterte say “I will get back all these, re-bid it, and
all of you will be bidding. The third one that has come in
is Smart, Sun and Globe, we re-bid the entire spectrum.
Dugay kayo na mahimu, they will file cases–cause of
action is impairment of contracts. Can the next
administration reappropriate those frequencies? (No) You
are impairing the obligations of contracts. What is superior
to the non-impairment clause? Police Power. Is this an
exercise of police power or is this pushing business
interests? (Father talks about the 3G becoming outdated
and the rise of 4G).
These different properties that are consolidated in
ownership with the surviving or consolidated
corporations, are problems in themselves and can keep
52
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
busy any resident counsel of the new surviving
corporation or consolidated corporation. Ang uban, mau
na ang solution, de facto merger. That is Bank of
Commerce vs RPN (April 21, 2014).
The one who gave that name ‘de facto merger,’ the
Supreme Court merely took that from Dean Villanueva of
Ateneo de Manila Law School. He has written a book on
Corporation Law.
nd
January 19 (2 half)
(Lizette Kaye Estillore)
RA10067
A National Competition Policy Prohibiting Anti-Competitive
Agreements, Abuse Of Dominant Position And Anti-Competitive
Mergers And Acquisitions, Establishing The Philippine
Competition Commission And Appropriating Funds Therefor
Section 17. Compulsory Notification. – Parties to the merger or
acquisition agreement referred to in the preceding section wherein the
value of the transaction exceeds one billion pesos (P1,000,000,000.00)
are prohibited from consummating their agreement until thirty (30) days
after providing notification to the Commission in the form and containing
the information specified in the regulations issued by the
Commission: Provided, That the Commission shall promulgate other
criteria, such as increased market share in the relevant market in excess
of minimum thresholds, that may be applied specifically to a sector, or
across some or all sectors, in determining whether parties to a merger or
acquisition shall notify the Commission under this Chapter.
An agreement consummated in violation of this requirement to notify the
Commission shall be considered void and subject the parties to an
administrative fine of one percent (1%) to five percent (5%) of the value
of the transaction.
Should the Commission deem it necessary, it may request further
information that are reasonably necessary and directly relevant to the
prohibition under Section 20 hereof from the parties to the agreement
before the expiration of the thirty (30)-day period referred. The issuance
of such a request has the effect of extending the period within which the
agreement may not be consummated for an additional sixty (60) days,
beginning on the day after the request for information is received by the
parties: Provided, That, in no case shall the total period for review by the
Commission of the subject agreement exceed ninety (90) days from initial
notification by the parties.
When the above periods have expired and no decision has been
promulgated for whatever reason, the merger or acquisition shall be
deemed approved and the parties may proceed to implement or
consummate it. All notices, documents and information provided to or
emanating from the Commission under this section shall be subject to
confidentiality rule under Section 34 of this Act except when the release
of information contained therein is with the consent of the notifying entity
or is mandatorily required to be disclosed by law or by a valid order of a
court of competent jurisdiction, or of a government or regulatory agency,
including an exchange.
In the case of the merger or acquisition of banks, banking institutions,
building and loan associations, trust companies, insurance companies,
public utilities, educational institutions and other special corporations
governed by special laws, a favorable or no-objection ruling by the
Commission shall not be construed as dispensing of the requirement for
a favorable recommendation by the appropriate government agency
under Section 79 of the Corporation Code of the Philippines.
A favorable recommendation by a governmental agency with a
competition mandate shall give rise to a disputable presumption that the
proposed merger or acquisition is not violative of this Act.
There is now a requirement of compulsory notification for
mergers and acquisition. Kung di ka gusto maapil sa
competition law, you will downgrade your valuation aron
di ka masulod anang P1 billion. If you want to be good to
the public, you want your valuation to be as high as
possible.
One way of raising the value – suppose the target
corporation has an existing debt, and you assume that
53
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
debt when you merge with that corporation. I-dugang
man na nimo sa value. Imbis na pag exchange ninyo sa
shares of stock it’s only P22B, but because there is a P9B
debt, ibutang na na nimo ug P31 or P32 B worth sa
merger. Kay kuyaw man paminawon. The public is
always in awe with large numbers and size.
But for the Anti-Competition Commission, kung mahimo
pa, ayaw paabta P1 M para di ka maapil sa restrictions of
the law.
What are the grounds by which the Anti-Competition
Commission can go against a merger or
consolidation?
It says in RA 10667, if a merger or acquisition
agreement is to be anti-competitive, in which case he is
either:
1. Prohibit the implementation of the agreement;
2. Prohibit the implementation of the agreement
unless and until it is modified by changes
specified by the Commission.
3. Prohibit the implementation of the agreement
unless and until the pertinent party or parties
enter into legally enforceable agreements
specified by the Commission.
The Commission is empowered to suggest binding
restructuring agreement in order to safeguard healthy
competition and unrestraint trade in that particular
industry.
Section 21, RA10067. Exemptions from Prohibited. Mergers and
Acquisitions. – Merger or acquisition agreement prohibited under Section
20 of this Chapter may, nonetheless, be exempt from prohibition by the
Commission when the parties establish either of the following:
a. The concentration has brought about or is likely to bring about
gains in efficiencies that are greater than the effects of any
limitation on competition that result or likely to result from the
merger or acquisition agreement; or
b. A party to the merger or acquisition agreement is faced with
actual or imminent financial failure, and the agreement
represents the least anti-competitive arrangement among the
known alternative uses for the failing entity’s assets:
Provided, That an entity shall not be prohibited from continuing to own
and hold the stock or other share capital or assets of another corporation
which it acquired prior to the approval of this Act or acquiring or
maintaining its market share in a relevant market through such means
without violating the provisions of this Act:
Provided, further, That the acquisition of the stock or other share capital
of one or more corporations solely for investment and not used for voting
or exercising control and not to otherwise bring about, or attempt to bring
about the prevention, restriction, or lessening of competition in the
relevant market shall not be prohibited.
“(b) A party to the merger or acquisition agreement is
faced with actual or imminent financial failure, and
the agreement represents the least anti-competitive
arrangement among the known alternative uses for
the failing entity’s assets”
Sa ato pa, in order to save the corporation, ipa-merge na
nimo kay mahapay man na sila even if the result is a
monopoly or ***
Monopoly is really a bad word. But there are certain
industries, even internationally, that is by force of
circumstances really monopolized. Take a look at the
makers of airplanes for passengers. There are only two
in the world. It’s Boeing and Airbus. Airbus is a
consortium, British and European, and all of Europe
participates in making the parts of Airbus. Boeing is just
U.S., and yet it is Airbus which is about to put out a white
flag. It was about to declare bankruptcy. Until the Middle-
Eastern countries that have so much invested in shares
of stocks in Airbus, decided to save Airbus. It is the Arabs
who saved Airbus. How? They ordered planes. Now, it
is off the endangered list.
What is the mistake of Airbus? Airbus is really bound to
die. It just postponed its death. Pag-order sa Qatar, trying
to save its own self because they have shares of stock in
Airbus, the moment they are out of that, wala na sila’y
suporta. Ang ilang consenses sa Airbus – “You make us
as big as possible a plane so that you can divide fuel costs
to as many as the passenger seats.” What Boeing did, it
says – “The size of the plane has reached its limit,” which
is the terminal in the airport. Kaning other countries
magbuhat na sad diay sila ug new terminal? Wa na’y
mupalit nimo. Mas dako ug gasto. So they concentrated
on smaller planes that can fly longer distances with fewer
passengers.
Karon, niubos man ang presyo sa aviation fuel, eh di
dagma ang Boeing. Unya, daghan pud ka madala na
passengers pero naa ma’y limit ana. Ang daghan
madala, kanang lowhold. Unya mas daghan man sad
mulupad dinha, eh di kompitensiya na sad. So that is
what brought Airbus down. Unya in the whole world, isa
nalang gabuhat eroplano, Boeing nalang!
China is already building their own. That is why China
has at least 50 patent cases in aviation. Pangawaton
nalang gyud na nila! Naa’y spareparts buhaton didto sa
China, pagsugod buhat sa factory dinhi, simultaneous.
Dili kaayo layo, naa na’y laing factory gabuhat. Theft by
instalment! Hinay-hinay na nila ug buhat. Unya, di na
nimo mahunong! Muingon ka there is a violation of
intellectual property. Unsaon man pagpahunong nga ang
head nganha member man sa Police Bureau. (Father
talks about manufacturing in China of motorboats)
If you become a lawyer, you may find yourself on the side
of the regulator, on the side of merger and acquisition, or
on the side of those acquired.
54
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
Sometimes, an industry cannot stand competition. It is a
luxury because it is so expensive. “(2) In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of all or
Now, there is a very big issue in U.S. on the internet. That substantially all of the corporate property and assets
is the internet neutrality. It seems that Trump is throwing as provided in the Code”
overboard the so-called internet neutrality. Now, he is
throwing the regulation so that.. Kung mubayad ka ug “(3) In case of merger or consolidation.”
mahal, mahimo ka nga tagaan ug paspas na internet
connection. Before, pareho lang tanan. You can make “(4) Section 42 – Investment in another corporation or
searches without any forced advertisement. Now, it is another business. ”
possible with Trump. For more money, you can have a
better internet. For less money, you will be at the bottom Sec. 42. Power to invest corporate funds in another
of the internet. Trump is really for the big corporations
corporation or business or for any other
because they want to further *** because they say service
now is for the poor. purpose. –

Subject to the provisions of this Code, a private

TITLE X – APPRAISAL RIGHT
Sec. 81. Instances of appraisal right.- the primary purpose for which it was organized when
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: or by at least two thirds (2/3) of the members in the
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;
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.
APPRAISAL RIGHT. The right of any stockholder of the
corporation to dissent to a fundamental action of the
corporation and demand payment of the fair value of the
shares.
corporation may invest its funds in any other
corporation or business or for any purpose other than
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,
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.
How do you exercise the right? Follow Section 82.

But there are only specific grounds that give you the right
to be bought up, UNLESS it is a closed corporation where
you can ask to be bought up for any reason. But for a ***
corporation, you must proved that it is one of the reasons
that are cited in Article 81.

In shortening the term, there is NO appraisal right.

Extending it, then THERE IS APPRAISAL because
shortening the corporation term, we will later find out, is
dissolving a corporation. When you dissolved, you are
paid your shares. So, there is no appraisal right in
shortening the corporate term.

55
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
Sec. 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 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. decided by a panel which consists of three disinterest
(1) VOTE AGAINST IT. Dapat pildi ka. Kung
makadaog gani ka, wala kay appraisal right.
(2) YOU LOSE.
(3) INVOKE APPRAISAL RIGHT within 30 days
after the date on which the vote was taken for
payment of the fair value of his shares. You
surrender your stock certificate.
Sec. 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)
The moment you surrender, all your rights cease as a
stockholder. You cannot vote, attend meetings – the only
right to be left with you is to be paid the fair value of your
shares
Sec. 85. Who bears costs of appraisal. –
The costs and expenses of appraisal shall be borne
by the corporation, unless the fair value ascertained
by the appraisers is approximately the same as the
price which the corporation may have offered to pay
the stockholder, in which case they shall be borne by
the latter. In the case of an action to recover such fair
value, all costs and expenses shall be assessed
against the corporation, unless the refusal of the
stockholder to receive payment was unjustified. (n)
In case of conflict as to the value of the shares, it will be
person one of whom shall be named by the stockholder,
another by the corporation, and the third by the two thus
chosen. In the end, usa ra gihapon mupili.
This three people will not be serving out of the goodness
of their hearts. Kinsa man mubayad ana? The law says
that in the end if the price agreed upon the by the panel is
closer to the proposed price of the management, then it
will be the stockholder who will pay. If the considered
price by the panel is closer to the price invoked by the
stockholder, then it will be the corporation that shall pay.
Once the corporation has decided by a vote of approval
by the stockholder of this fundamental action, can the
corporation change its mind and say – “We will not go
ahead with creating new shares of stock that has superior
right over those that are presently owners of share, or we
will not extend anymore the corporate term, or we will not
anymore invest with another corporation.” YES. The
moment the corporation changes its mind, then all the
56
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
bets are off. They return your surrendered stock
certificates and your rights are resumed. Your appraisal
right are in no longer in effect. That is one instance where
the appraisal right is nullified because the corporation
refrains from taking the fundamental action which it
decided before.
Sec. 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. (6) Fraternal
Is there appraisal right if you stocks are traded in the
stock market?
As a matter of practicality, there is none. The value that
is sold in the stock market reflects the proper valuation of
the shares because it is the market which decides the
value. At anytime gusto ka mu-disown, dagan ka sa
market kay wala ka makaangay sa corporation, then your
shares are readily ***.
TITLE XI - NON-STOCK NON-PROFIT
CORPORATION
Sec. 87. Definition. - For the purposes of this Code, 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: Provided, That any profit which a non-stock
corporation may obtain as an incident to its operations
shall, whenever necessary or proper, be used for the
furtherance of the purpose or purposes for which the
corporation was organized, subject to the provisions of this
Title.
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. as an incident to its operations shall, whenever
Sec. 88. Purposes. - Non-stock corporations may be
formed or organized for charitable, religious, educational,
professional, cultural, fraternal, literary, scientific, social,
civic service, or similar purposes, like trade, industry,
agricultural and like chambers, or any combination thereof,
subject to the special provisions of this Title governing
particular classes of non-stock corporations.
Those listed in Section 88 can be listed as non-stock. If
your purpose/purposes in the articles of incorporation is
other than any of these or any combination of these, then
you cannot be non-stock non-profit corporation.
Non-stock corporations can be formed or organized for:
(1) Charitable
(2) Religious
(3) Educational
(4) Professional
(5) Cultural
(7) Literary
(8) Scientific
(9) Social
(10)Civic service
(11)Other similar purposes
What is the ESSENCE OF NON-STOCK? That the
corporation cannot distribute to its members or officers
surplus profits or accumulated surplus of the corporation.
The said shall be thrown back to the corporation to be
distributed.
The essence of non-stock, non-profit, is cannot make
profits. It can. PROFIT is the excess of revenues over
expenses. Whenever you have excess, you have profits.
It is a mark of a good enterprise because you can survive.
Otherwise, you will die.
“For the purposes of this Code, 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”
Why subject on dissolution? Because a non-stock non-
profit corporation can provide for the way it will distribute
its excess profits. If you do not have a plan, it will be the
government which will decide what to do with your excess
profit and it will normally award it to a non-stock non-profit
similar to the corporation.
“any profit which a non-stock corporation may obtain
necessary or proper, be used for the furtherance of
the purpose or purposes for which the corporation
57
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
was organized, subject to the provisions of this Title.” Sec. 95. Plan of distribution of assets. - A plan
So plow back!
providing for the distribution of assets, not inconsistent
“The provisions governing stock corporation, when with the provisions of this Title, may be adopted by a
pertinent, shall be applicable to non-stock non-stock corporation in the process of dissolution in
corporations, except as may be covered by specific the following manner:
provisions of this Title.”
So, suppletory application of all other provisions of the
Corporation Code when it comes to Non-stock Non-profit The board of trustees shall, by majority vote, adopt a
corporations. resolution recommending a plan of distribution and
directing the submission thereof to a vote at a regular
January 25, 2018 or special meeting of members having voting rights.
(Paul Jordan Berguia) Written notice setting forth the proposed plan of
distribution or a summary thereof and the date, time
*According to Chairperson Herbosa what makes the and place of such meeting shall be given to each
PDRs of Rappler fatal is the provision that says rappler member entitled to vote, within the time and in the
cannot change its structure, activities, and management manner provided in this Code for the giving of notice of
without first discussing in good faith with the holders of the meetings to members. Such plan of distribution shall
PDR.* be adopted upon approval of at least two-thirds (2/3) of
the members having voting rights present or
So we are finished with Appraisal Right. We are also done represented by proxy at such meeting. (n)
with some provisions of Non-stock corporations.
Unlike a stock corporation, in case of distribution, non-
stock corporations can provide in its articles of
A plan providing for the distribution of assets, not
incorporation a so-called PLAN OF DISTRIBUTION.
inconsistent with the provisions of this Title – so as long
as the plan does not say that the distribution is made for
Remember what is prohibited in the dissolution in a
the members, officers and trustees that can be allowed.
non-stock non-profit corporation?
That none of the members, nor the directors or trustees nd
*father reads 2 paragraph – so it can be incorporated in
can receive any of the assets because if they do receive
the articles or it can be made through a resolution.
that would be an indirect circumvention of the distribution
Because if there is no such plan, it can be the state or the
of profits. This is so because these corporations, in
government that will decide. It can say that the assets
essence, are not allowed to distribute surplus
shall be given to the same corporation having the same
accumulated profits unlike a stock corporation wherein
or similar purpose. Like for example, educational. Mangita
you can distribute from unrestricted retained earnings,
sila ug non-stock non-profit corporation unya tagaan nila.
dividends. So if these non-stock non-profit corporations
(chika about Jefferson Library (?), then why naabot sa
makes a profit, what would they do with the profits? They
Ateneo ang mga libro and wala sa laing school kay kato
are plowed back to the operations of the non-stock non-
lage daw dili daw sila corporation with the same purpose
profit corporation. So at the time of dissolution, if you allow
ug ang Holy Cross dili daw University, shubi. Then naabot
distribution to members that would be tantamount to
na siyag Israel, Jews, USA. Naabot na pud siyang Trump
circumvention.
lol. Then karon kay DMSF donated buildings, scholarship
funds. Ug ang mga LAGOM sa DMSF kay doble daw ang
Now, however, a plan of distribution of asset is
tuition, huhu ouch. Caste System, Brahmins. Hala uy
allowed in section 95.
taas taas pud ang cheka diri nga side)

Non-stock non-profit corporation, remember you can

have a plan of distribution. Have it approved and then my
suggestion is make an amendment of your articles of
incorporation not just a resolution, gather majority votes
of the members – that is good as an amendment. Submit
it so that it can be incorporated in the articles of
incorporation.

Remember, articles of incorporation- stock and non-

stock, kung gusto ka madugay ug approve inig apply
nimo- pag buhat ug imong kaugalingon, abtan kag 9 ka
buwan di gihapon na ma approve. Ipadala man na sa
Manila. Then it has to be reviewed in Manila. Pero palit sa

58
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
ilang ready made form, 500 pesos kada copy, usa r aka Sec. 98. Validity of restrictions on transfer of
copy palita unya pagpa Xerox nimo, dili na dawaton didto,
shares. - Restrictions on the right to transfer shares
A4 man nang papel nila. Fill in the blanks, approve dayon
na nila and then dira dayon nimo na i-amend. must appear in the articles of incorporation and in the
by-laws as well as in the certificate of stock; otherwise,
TITLE XII – CLOSE CORPORATIONS the same shall not be binding on any purchaser thereof
in good faith. Said restrictions shall not be more onerous
This title is entirely new – up to Section 105. What is the than granting the existing stockholders or the
purpose of this? They are trying to make a hybrid corporation the option to purchase the shares of the
corporation that has a feature of a partnership and that of
transferring stockholder with such reasonable terms,
a corporation. The best of both worlds and so they come
up with this. conditions or period stated therein. If upon the
expiration of said period, the existing stockholders or
What makes a Close corporation? What are the the corporation fails to exercise the option to purchase,
essentials? That is answered by Section 96 the transferring stockholder may sell his shares to any
Sec. 96. Definition and applicability of Title. - A close third person.
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 What is another feature of a close corporation?
The corporation shall have restrictions as to the right of
a specified number of persons, not exceeding twenty
transfer. It can not be sold openly, it can not be sold to
(20); (2) all the issued stock of all classes shall be subject anybody. It has a restriction. Later on we will find out that
to one or more specified restrictions on transfer these restrictions shall mean that these transfers can not
permitted by this Title; and (3) The corporation shall not be more onerous than giving the corporation and or any
list in any stock exchange or make any public offering of of the existing stockholders the right of first refusal.
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.

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.

There is therefore a limit as to the no. of shareholders.

The articles can limit it but it can not make it beyond 20. It
can only provide of maximum 20 stockholders. Nothing
more. Can it be corporations also that holds shares? Yes,
provided that the corporation holding such shares is also
a close corporation.

59
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
Sec. 100. Agreements by stockholders. -
1. Agreements by and among stockholders executed
before the formation and organization of a close
corporation, signed by all stockholders, shall survive the
incorporation of such corporation and shall continue to be
valid and binding between and among such stockholders,
if such be their intent, to the extent that such agreements
are not inconsistent with the articles of incorporation,
irrespective of where the provisions of such agreements
are contained, except those required by this Title to be
embodied in said articles of incorporation.
2. An agreement between two or more stockholders, if in
writing and signed by the parties thereto, may provide that
in exercising any voting rights, the shares held by them
shall be voted as therein provided, or as they may agree,
or as determined in accordance with a procedure agreed
upon by them.
3. No provision in any written agreement signed by the
stockholders, relating to any phase of the corporate
affairs, shall be invalidated as between the parties on the
ground that its effect is to make them partners among
themselves.
4. A written agreement among some or all of the
stockholders in a close corporation shall not be
invalidated on the ground that it so relates to the conduct
of the business and affairs of the corporation as to restrict
or interfere with the discretion or powers of the board of
directors: Provided, That such agreement shall impose
on the stockholders who are parties thereto the liabilities
for managerial acts imposed by this Code on directors.
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. must appear in the articles of incorporation and in
There could be restrictions between specific shares of
stock as to other shareholders because the corporation
code says that the agreement between stockholders shall
be valid even after the incorporation of a close
corporation. Magsabot mo nga iincorporate na, your side
agreements remain effective even after incorporation. So
if there are agreements limiting transferability among
parties, then that continues.
So, the 3 features of a close corporation are not more than
20 owners, limitation as to transfer and third, that the
corporation shall not list in any stock market.
Ibutang nato nga 20 mo kabuok stockholders, one of them
dies without a will, 7 iyang anak apil asawa, leaving these
shares of stock. What will happen? It passes to his legal
heirs by operation of law. What is the limit of
shareholders? 8 (anak ug asawa replacing him) + 19, 27
na? That cannot be. What will happen? It is my
submission, wala pa ni nigawas sa BAR ning
pangutanaha, that the corporation should give ample
opportunity to the heirs to either:
1. Constitute themselves into a close
corporation - in which case they will be qualified
to incorporate. Then they apply all the features of
a close corp.
2. Reduce their ownership into one – how will
they do that? Ang isa nga kwartahan siya na lang
mupalit in behalf sa tanan.
That is my suggestion in a way that gives effect to
corporation code- close corporation, and provisions of
succession under civil code.
There are certain industries that cannot admit of close
corporations; they are the same industries that cannot
admit of no par value shares corporation - mining or oil
companies, stock exchanges, banks, insurance
companies, public utilities, educational institutions and
corporations declared to be vested with public interest.
They cannot organize a close corporations.
So, you can structure your close corporation such that it
does not have any board of directors. The law allows that.
In which case all the stockholders shall have all the
liabilities of a BOD. If there is no BOD, then there are also
no board meetings, there are only stockholder’s meeting.
These stockholders are all considered as managing
partners - they are liable as such and liable as a member
of the board.
Sec. 98. Validity of restrictions on transfer of
shares. - Restrictions on the right to transfer shares
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.
60
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
Restriction as to transfer must be in the articles, by laws
and stock certificate- so as to bind innocent transferee. If
it is both in the articles and stock certificate then it can be
conclusively presumed that the transferee has prior
knowledge as to the restrictions of the transferability of
shares. The restriction is already there, sala na nimo na
ngano wa nimo na gibasa. The law will leave you where
you are. Ignorance of the law excuses no one.
January 26, 2018
(Jennifer Marie Lim)
What is the objectionable part of the closed
corporation? There are two objectionable parts.
1st: SECTION 104 ON DEADLOCKS.
When there is a deadlock in a closed corporation, the
Securities and Exchange Commision has the power to
arbitrate against you. Towards the middle paragraph, it
Sec. 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) canceling or altering any provision contained in the
articles of incorporation, by-laws, or any stockholder's
agreement; (2) canceling, 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.
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 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.
61
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
says “In the exercise of such power, the Commission shall
have authority to make such order as it deems
appropriate, including an order:”
1. Canceling or altering any provision contained
in the articles of incorporation, by-laws, or
any stockholder's agreement;
Imagine that if the corporation amends the articles, what
does it have to do? Majority of the board of directors –
absolute majority. 2/3 of the stockholders’ votes. Voting
lang pirmi. Kini(sa closed corporation)? Commission can
amend or alter any provision in the agreement.
2. Canceling, altering or enjoining any
resolution or act of the corporation or its
board of directors, stockholders, or officers;
It can countermand any decision of the stockholders or
the board.
3. Directing or prohibiting any act of the
corporation or its board of directors,
stockholders, officers, or other persons party
to the action; Cease and desist order
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;
Can you imagine that? The commission appoints a
provisional director.
6. Dissolving the corporation; or the
commission can dissolve the corporation; or
7. Granting such other relief as the
circumstances may warrant
So, the Commission is a complete outsider and all of a
sudden it has all these almighty powers. It can
countermand the board, it can countermand the
stockholders, it can amend the articles, it can order the
*dissolution*, it can appoint a provisional director.
That is a big problem, because big brother is behind your
shoulder and if there is any deadlock, big brother comes
in and you have no power anymore.
2nd: SECTION 105 ON WITHDRAWAL OF
STOCKHOLDERS OR DISSOLUTION OF
CORPORATION.
The second objectionable part of a corporation is section
105. This is the problem in ordinary corporations; the
withdrawal of stockholders is through the exercise of the
right of appraisal and on grounds found in the articles –
creating a term, creating shares of stock, rights over
existing stock holders, investment in another corporation,
entering into another business, etc. There are grounds.
Sec. 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.
Sec 105 says, “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…” In marriage law, this is called
divorce.
Of all countries which instituted divorce law, they became
very strict. In the end, they came up with no-fault
divorce. Muingon gani ang usa nga dili na ko gusto,
divorce na. Unsa may hinungdan? Bad breath, snoring or
what. Las Vegas is a famous place because for purposes
of divorce, in Las Vegas if you stay for 24 hours, you are
considered a resident of Las Vegas. That is why you can
have drive-in divorce.
That is why there are those who say hold or fight divorce
law in the Philippines. Once it comes, the next step is the
no-fault divorce. Way problema na unta kung kaya nimo
because you have a job, pero if you have no means, I’m
talking about the economic aspect, on the feminine
gender. If you go beyond the city, the traditional act is that
the wife is the one who stays at home and take care of
the children. She does have the means of income. If you
are a judge, the husband will support unsaon man pag
gukod ana. Mag lisod man gani madakpan ang wanted.
Tell me if I’m wrong if you are going to practice family law.
It says “..any stockholder of a close corporation may, by
written petition to the Securities and Exchange
Commission, compel the dissolution of such
62
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
corporation….” So, the stockholder on his own can even
compel the dissolution of the corporation, whenever any
of the acts of the directors for these grounds:
1. 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,
2. Whenever corporate assets are being
misapplied or wasted
So these are the grounds for demanding the
dissolution. But to demand you be paid the value of your
shares of stock, right of appraisal. What is the ground?
Any reason that’s what 105 says, “for any reason, compel
the said corporation to purchase his shares at their fair
value”.
Those are the two difficulties of a closed- corporation. In
a closed corporation, there is somebody there who is
discontented; he can exploit 104 deadlocks to 105
dissolution. That makes a closed corporation unstable. If
it is unstable, it is not a reliable platform for building up a
business enterprise. Mag lisod ka ana.
TITLE XII - SPECIAL CORPORATIONS
There are two special corporations – Educational
corporation and Religious corporation- sole or
aggregate religious society.
1st: EDUCATIONAL CORPORATION
Sec. 106. Incorporation. - Educational corporations
shall be governed by special laws and by the general
provisions of this Code. (n) The Commander of the 66 Infantry Battalion that covers
This provision forgets that there is a specific provision in
the Constitution on educational institutions that are non-
stock non-profit which have constitutional tax exemptions.
Can you remember? They do not pay RPT. They do not
pay income tax. They are also free from tariff and special
assessments.
Educational institutions that are non-stock non-profit, the
first law you have to look at when dealing with educational
institutions is with the Constitution. What article? These
are the institutions that must be 100% Filipino.
Educational, unya 100% Filipino. Do you mean that a
foreigner cannot educate you? What does the
Constitution say?
ARTICLE 14 SECTION 4. xxxx
(2) 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 subsection shall not apply to schools
established for foreign diplomatic personnel and their dependents and,
unless otherwise provided by law, for other foreign temporary residents.
(3) All revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties. Upon the
dissolution or cessation of the corporate existence of such
institutions, their assets shall be disposed of in the manner
provided by law.
Proprietary educational institutions, including those cooperatively owned,
may likewise be entitled to such exemptions subject to the limitations
provided by law including restrictions on dividends and provisions for
reinvestment.
(4) Subject to conditions prescribed by law, all grants, endowments,
donations, or contributions used actually, directly, and exclusively for
educational purposes shall be exempt from tax.
GENERAL RULE : EDUCATIONAL INSTITUTION
MUST BE 100% FILIPINO. Both the ownership and
administration.
EXCEPTION: IF IT IS A MISSIONARY SCHOOL. Out in
the boondocks or the valleys.
th
th
Davao Oriental and the 67 that covers Compostela
Valley, they made a report that the NPA’s average
educational attainment of recruit militants is GRADE 3.
Mao na dali kaayo sila matunto sa mga seminar. “Kamo
pubri mo, ngano pubri man mo tungod kay naa mga dato
nagpahimulos ka ninyo, magpabilin mo diha sa ka way
hinungdan.” Tatlo ka bulan ra ka swelduhan dayun
dalhons layo. Ngano grade 3 raman? Layo man kayos
skwelahan. Unsa man recommendation of the military?
Put up schools.
That is one exception, if you are a missionary school, you
can be Non-Filipino. Didto kas layo put up kag skwelahan.
The other exception is if you put up a school for
diplomatic deterrents or members of the Foreign
Service. They can put up their own schools. Like the
English foreign school in Makati or the American school
in Fort Bonifacio. That is foreign and its purpose is to
qualify you for schools abroad. They also have foreign
and Filipino teachers.
63
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
Wa ko kasabot ana. Open it up. Education. Tan awa na si
Father Mcnamara. Puti man na siya, na-Dean man na
siya diha. Why? naturalized Filipino citizen. PhD in
Astrophysics from the University of Colorado, not a soft
PhD like education. Suwayi mu-PhD astrophysics maka-
libang kang tingga. (Long chika about Mathematics)
January 26, 2018 (2nd half)
(Janice Molina)
Educational Corporation
Section 107. Pre-requisites to incorporation. - Except
upon favorable recommendation of the Ministry of
Education and Culture, the Securities and Exchange
Commission shall not accept or approve the articles of
incorporation and by-laws of any educational institution.
(168a)
Section 108. Board of trustees. - Trustees of
educational institutions organized as non-stock
corporations shall not be less than five (5) nor more than
fifteen (15): Provided, however, That the number of
trustees shall be in multiples of five (5).
Unless otherwise provided in the articles of incorporation
on the by-laws, the board of trustees of incorporated
schools, colleges, or other institutions of learning shall, as
soon as organized, so classify themselves that the term
of office of one-fifth (1/5) of their number shall expire
every year. Trustees thereafter elected to fill vacancies,
occurring before the expiration of a particular term, shall
hold office only for the unexpired period. Trustees elected
thereafter to fill vacancies caused by expiration of term
shall hold office for five (5) years. A majority of the
trustees shall constitute a quorum for the transaction of
business. The powers and authority of trustees shall be
defined in the by-laws.
For institutions organized as stock corporations, the
number and term of directors shall be governed by the
provisions on stock corporations. (169a)
What do you have to remember with respect to education
Institution, you can be non-stock or you can be stock and
profit. Of course the Articles must be endorsed by the
appropriate educational oversight agency government.
You are opening up an educational institution that is
elementary and high school then it is the Department of
Education. If you are opening a college institution then
you will need the endorsement of the CHED but if you
open a pre-school, you'll require no endorsement either in
the (?) or the CHED. If you open a trade school, you will
require the endorsement of TESDA.
The peculiar requisite for Educational Corporation is that
their Board must be multiples of 5, so you can only have
3 in number; you can have 5, 10, and 15. And then every
year 1/5 of the term of the director expires. That is the
requisite. You are a director of an educational institution
non-stock non-profit, for 3 years. It’s not like the director
under section 23, where you have a 1 year term. There is
always a holdover of 5 or 1/5 of the directors.
For institutions organized as Stock Corporation the
number and term of directors shall be governed by the
provisions of Stock Corporation. Educational institutions
must be lucrative business propositions. Why? Because
many business interest groups are xxx to education. What
is this education? National University. If you are going
into educational, if you are stock and profit then you will
be governed just like any ordinary corporation, you do not
have tax exemption privileges.
In Philippines, mostly higher education is in private hands.
The minority in higher education is government and the
problem is we are very weak in STEM (Science,
technology, Engineering and Mathematics). There is not
one single university that can run PhD’s instead. It has to
be a consortium in Manila. We do not have enough. The
people we send abroad have a tendency not to come
back or if they comeback they get employed in industry,
they did not stay in education. I guess they are not
compensated enough.
So mao nay problema. There are many problems and
most of them are taxation problems because of this
particular provision. The income and properties of this
educational institution, non-stock and profit provided it is
used directly, exclusively for educational purposes shall
be exempt from tax.
What is directly and exclusively used? That is the
problem of taxation. Many times, you study that and there
are so many cases. Naa pay dormitoryo nagbayad ang
mga studyante diha, Is that income that is free of tax or
not? This university has properties that have tenants, is
that free of tax or deducted from the xxx. The Supreme
Court wasn't given a chance to rule on issues like that
because the technicality of applying for tax exemption
every year which was imposed by Henares. xxx Regional
Trial court was dismissed on appeal for being moot and
academic. Why? Henares just recalled their circular xxx
do not have to apply for tax exemption certification from
the BIR every year. It is in the constitution that you are tax
exempt if you are Non-stock Corporation. Wa sya
kahibawo sa constitution, that is why she was xxx for
issuing a circular that is ultra vires, beyond her powers.
So on appeal, it was not raised to the SC anymore
because it was moot and academic. That is a question of
transcendental importance, the SC should rule upon it.
Bisan pag moot and academic na, the issue is of
transcendental importance.
That is education. You should put a special body to
oversee these educational institutions that are for profit.
In the US, the only institutions that are for profit are review
centers. Universities can only be organized in the US if
you are non-profit. They have the biggest endowment
funds.
64
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
It has a special significance. Why of all kinds of
corporation, why is educational institution has special
treatment? xxx in the constitution and in corporation code.
Religious Corporation
1. Corporation Sole under 109; and
2. Religious society. Religious society is covered by
the same provisions as other non-stock non-profit
corporation.
Section 109. Classes of religious corporations. -
Religious corporations may be incorporated by one or
more persons. Such corporations may be classified into
corporations sole and religious societies.
Religious corporations shall be governed by this Chapter
and by the general provisions on non-stock corporations
insofar as they may be applicable. (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)
Corporation Sole
The origin of corporation sole is the Napoleonic Code
which became the origin of codigo civil of Spain and then
it was picked up and copied common law practice in the
UK and transferred to the US. So corporation sole is a
contradiction in terms, when you say corporation it
necessarily involves more than one natural person and
yet when you look at corporation sole you are
incorporating the holder of office. The office of bishop,
rabbi and elder only it has to be religious.
Now, what does the Articles of Incorporation of a
corporation sole consist of when the ordinary articles
says, “we the undersigned incorporators have this day
constituted ourselves to be a corporation under the name
of XYZ Corporation, witnessed and then you put down the
terms.
What is the AOI in corporation sole? Wa may "we","i" lang
man na. It's an affidavit actually executed by the bishop,
rabbi, minister, priest because that is what section 111
says.
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:
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, 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
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)
So you executed an affidavit and then you attached the
manner, the reason why you are the bishop. You are the
bishop because you are appointed by the Holy See. The
problem is the appointment a paper of the bishop is in
Latin. So you have it translated because the SEC even as
learned as they are cannot read Latin. You also attached
the affidavit of the translator, to the effect that he has done
the translation faithfully and accurately to the best of his
knowledge.
Here is one thing you should remember about religious
corporation specially corporation sole. Take a look at 111.
It does not mention the term of the corporation. There is
no term. There is a circular in the old SEC which says that
religious corporation are considered perpetual person. So
even if it is a religious society and it has a term and the
religious society corporation forgets to extend the term,
the corporation is deemed not thereby dissolve because
Religious Corporation are considered perpetual. They
found out about that because some of the corporation
sole were listed as already defunct because they did not
renew their term, they allow it to expire and then the SEC
in Manila that religious corporations are presumed to be
perpetual and do not have to renew the term. As proof of
that they point out section 111 of the corporation code
does not mention any term of the corporation sole.
Unsa man mahitabo ani? The corporation sole still
continues if the bishop dies, the successor will just submit
his appointment to the SEC and he takes the place of the
former incorporated sole. The SEC supplied the particular
appointment together with the translations and the
translator’s affidavit and then he takes over.
65
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
Now, section 113 deals especially with the acquisition of
property:
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)
The corporation sole is supposed to be the administrator
of the temporalities of the religious corporation, it's the
administrator because the property is said to be owned by
the corporation collectively. That is why the citizenship
majority of the members of congregations determine the
citizenship of the corporation sole and not the bishop.
That is the ruling of Roman Catholic Administrator of
Davao vs. ROD of Davao City. So therefore the law
says, section 113 that if he should dispose real property
and personal property for its church, it must go to court
and obtain the clearance and permission to dispose
because he is just an administrator.
What does he do with the court?
He must prove that the disposition or acquisition is for the
benefit of the corporation. Then it says, provided that in
cases where the rules, regulations and discipline of the
religious denominations sector, church, religious society
or other concerned represented by such corporation sole
regulate the method of acquiring, holding, selling,
mortgaging real property and personal property such rule,
regulation and discipline shall control and the intervention
of the court shall not be necessary.
So under canon law, the bishop has full authority to
dispose of the property. He needs to inform the bishop of
Rome, the pope, but he has the authority to dispose. So
therefore, he does not have to go to regular court. To tell
you there are many internal legal counsel of
xxx,manghuwam ug kwarta ang obispo ky ngano man
mutukod syag building, so mortgage sya property sa
simbahan. Is mortgaging act of administration or act of
disposition? Disposition. Mao bitaw nang
manginahanglan kag special power of attorney. Muingon
mana na ang internal legal counsel, we need a court order
because that is what the corporation code says. Sa ato pa
wa pa gyud diay kay experience, daghan mana, wa pa
gyud diay ka ka experience ug mortgage sa simbahan.
Kay wa manay kinahanglan muadto sa court because
according to the rules of the religious society or religious
denomination the elder has the authority. So that is what
is followed not 113 of the corporation code.
Now if the corporation sole dissolves, that is covered by
section 115. It does so by submitting to the SEC a verified
declaration of dissolution and that declaration should
contain the following:
1. The name of the corporation
2. The reason for dissolution and winding up
3. The authorization of the dissolution of the corporation
by the particular religious denomination or church
4. The names and addresses of the persons who are to
supervise the winding up of the affair of the corporation;
Upon approval of such declaration of dissolution by the
SEC the corporation shall cease to carry on its operations
except for the purpose of winding up its affairs.
But you can do this by not following section 115. I can tell
you that from experience. I dissolve the Mary xxx Fathers
and Brothers of the Philippines, Inc. by not following
section 115. What did I do? I followed section 22.
Section 22. Effects on non-use of corporate charter
and continuous inoperation of a corporation. - If a
corporation does not formally organize and commence
the transaction of its business or the construction of its
works within two (2) years from the date of its
incorporation, its corporate powers cease and the
corporation shall be deemed dissolved. However, if a
corporation has commenced the transaction of its
business but subsequently becomes continuously
inoperative for a period of at least five (5) years, the same
shall be a ground for the suspension or revocation of its
corporate franchise or certificate of incorporation. (19a)
Non-user of Corporate charter for 2 years or continuous
inoperation for 5 years shall be a ground for revocation of
corporate franchise. File a notice that you cannot continue
operation because we are reduced in number, the
minimum number of which is required under the
corporation code. What is the minimum? At least 5
members of the BOD. Religious society, 5 members.
They elect themselves as members of the BOD because
there are already 5 and their average age is 79. Wa na,
delikado naman na sila bisag they want to replace wa na.
wa nay mapili because to be a member you must be a
member of the religious community.
66
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
So continuous inoperation after 5 years you will be put in
the list of the defunct corporation. After 3 more years you
will have pro forma notice and hearing. wa man mutunga.
dissolve! wa kay gasto. Musud gani ka aning 115, imo
nang e-file, musiga mata sa BIR, sugoon dayon na nila
task force, utingkayon mga libro ngano man mo tingali
you are escaping tax? So mangita kag labad sa ulo sud
ka aning 115.
Religious Society
If you are religious society you cannot dissolve except the
board vote’s majority and the two thirds of the members
vote to approve the dissolution. Then you have
publication then you submit the schedule of your creditors
and then you submit the plan for liquidating your assets.
TITLE XIV - DISSOLUTION
So now we are in Dissolution, title XIV. SC has said
dissolution has only one proceeding but it has 2 phases.
What is the first phase?
The dissolution proper. Who handles that? SEC. Is there
substantial compliance with the procedure for arriving at
the dissolution? They can examine the book of the BOD
or trustees. Absolute majority. Is there a two thirds vote of
the stockholders, voting and non-voting, or of the member
of the corporation in case of non-stock non-profit. Where
was the meeting held? Was there proper notification?
Qualified notice is needed. After that is verified, the SEC
is convinced that all the legal requirement under the
corporation code is xxx then the SEC will petition the
court. The court can ask jurisdiction over the principal
office of the corporation, will petition the court to assist the
SEC on the liquidation phase. That is where the
corporation will submit its list of creditors. That is where
the corporation will published the fact of its dissolution and
give the time frame 60 days for all those that are not listed
as creditors to appear before the court and prove your
credits otherwise you will be forever barred.
Now question, why can't the SEC handle it? Because the
sec is not the forum of general jurisdiction, the sec is just
the specialized forum. The court can handle all the
contracts that are nominate or innominate under the civil
code. So go to the court to prove your claim.
Now dissolution can be voluntary or involuntary. Voluntary
pertains it is the corporation itself that brings the petition
or one of the stockholders. Close corporation diay,
pabuang buang stockholder mao nay mungadto mag file
ug dissolution.
Dissolution by creditor, by stockholder, by anyone
other than the corporation, voluntary without
creditors or with creditors. Naa may voluntary
dissolution petition without creditor. Sa ato pa pa they
have paid all the creditors. Is publication still required?
Yes, even if without creditors. Sel-serving mana kung
ikaw mu petition nga wakoy creditor, that is not proof, that
is mere allegation and dissolution is binding against the
whole world. The only way you can summon the world is
by publication. Pahibaw on nimo kadaghanan. So there is
still publication even if you have no creditors. The judge
will examine the evidence of the creditors. Once the judge
is satisfied, he will account a receiver in liquidation. Sya
na ang bahala, bayran xa sa corporation and he
distributes the proceeds according to the credit. That is
the last three years of the corporation to liquidate, wind
up. Naa pa bay BOD ana? Wana because you are no
longer operating as an ongoing concern, you are already
on your way to legal death. So you just need a receiver.
Now, can you still retrieve assets during the 3 years? Can
you still file cases against your debtors to recover assets
that belong to the corporation? Yes. Who will file the
asset? The receiver, he will file it because he is now the
assignee. The court will approve the assignment of the
asset to the receiver, so that the receiver can dispose of
it. Assignment in bankruptcy, it has to be in the name of
the receiver.
January 31, 2018
So we are in DISSOLUTION.
Remember the SC says that dissolution is one procedure.
Although one, it has phases. There is the phase up to
dissolution. Then dissolution is always followed by
liquidation.
Now, all the way up to dissolution, it is the SEC. Is it not
the intracorporate court? No, it is the SEC. After the SEC,
then it is the courts, intracorporate courts.
Now, can it happen that dissolution begins in xxx? It can
happen if the dissolution is based on a fatal defect of the
corporation. In which case, it is through the so-called quo
warranto proceeding that is initiated by the Solicitor
General. When that happens, the Sol-Gen brings the suit
to the court. That is a specific special proceeding: quo
warranto. Special proceedings always begin with a
verified petition. That is because it is based on a defect, a
defect that is fatal. It’s not just an ordinary defect.
67
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
Likewise, the SEC can also bring this dissolution
proceeding because that is divided in P.D. 902-A. If there
is a culpable violation of the Corporation Code and it is a
serious violation, then the SEC can bring the proceeding
of dissolution.
There is a general principle. There can be no dissolution
unless there is notice and hearing. And the SC has ruled
that not any hearing can xxx into dissolution. There must
be a notice that this is a serious violation that could result
in dissolution. Not just an ordinary notice or ordinary
hearing.
That is one of the issues in the Rappler case because they
were just called on a possible breach of the rule on
ownership. And they were heard not en banc. They were
heard in division and all of a sudden, here comes the
ruling. So the issue is: did they have due process? The
SEC said that to be a corporation is a privilege; it is not a
right. There is substantial compliance because you were
given your day in court for purposes of this defect – to
verify as to whether or not this defect had caused us to
lose our right to exist as a corporation. That is the issue.
You could lose your franchise to be media but you can still
exist as a corporation because a dissolution proceeding
means you lose your right to exist as a corporation. You
are juridically dead. Is there a proceeding: whether or not
a natural person should die? Yes, there is. If it is heinous
crimes. That is why, in proceedings of a natural person,
once the lower court makes a penalty of death, what
happens? There is mandatory appeal. Di man ka muingon
ana, patya na lang ko. The court will not allow that. you
have to go up and it will be the court en banc who will
review. Di na pwede na mag-division lang. That enjoys
the highest protection: no person shall be deprived of life,
liberty, property. That is mandatory. So it seems that the
Constitution sees to it that nobody is meted with finality of
execution by accident. (chika about death penalty and the
life of a person)
When you come to dissolution and it is legal death for a
juridical person, then it demands publication. Di man na
automatic ka lang.
One of the effects in Section 22 – failure to commence the
transaction of its business or the construction of its works
within two (2) years from the date of incorporation, or so-
called continuous inoperation for a period of five (5) years.
You have already begun your business. You have already
constructed your works and all of a sudden, you stop. No
more business. So the board no longer meets and no
more reports to the SEC. If you do that for five years, look
at the language of the law.
Section 22. Effects on non-use of corporate charter
and continuous inoperation of a corporation. – If a
corporation does not formally organize and
commence the transaction of its business or the
construction of its works within two (2) years from the
date of its incorporation, its corporate powers cease
and the corporation shall be deemed dissolved.
However, if a corporation has commenced the
transaction of its business but subsequently
becomes continuously inoperative for a period of at
least five (5) years, the same shall be a ground for the
suspension or revocation of its corporate franchise
or certificate of incorporation. (19a)
This provision shall not apply if the failure to
organize, commence the transaction of its
businesses or the construction of its works, or to
continuously operate is due to causes beyond the
control of the corporation as may be determined by
the Securities and Exchange Commission.
The same shall be a ground for the suspension or
revocation of its corporate franchise or certificate of
incorporation. Is that automatic? That cannot be
automatic. In Chung Ka Bio vs. IAC, 163 SCRA 534, it
is not automatic but only a ground. This is prosecuted
under Section 6(i) of P.D. 902-A. This case is a SEC
proceeding and yet it leads to dissolution.
Now, the moment there is an order of dissolution that is
issued, after of the lapse of the period to file a motion for
reconsideration under the rules of the SEC, then the SEC
will petition the court to now handle the liquidation. Then
it endorses everything to the intracorporate court. Then
the court will appoint a receiver in liquidation. [Father said
68
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
‘receiver in dissolution’ but in previous TSNs and
commentaries, it is ‘receiver in liquidation.’]
What does the receiver in liquidation do? He will sell the
assets because after the order, the properties that do not
belong to the corporation but are entrusted to the
corporation for its use according to its specific purpose,
they must be returned to their owners. That normally
happens if it is a non-stock non-profit corporation. Many
times they receive donations on the condition that it may
be used only for the purpose of the corporation. So you
have to return.
Is it possible that a non-stock non-profit corporation is
donated property and then the property is to be used
exclusively for that purpose? And it is returned because it
is no longer used for that purpose? That is possible. That
is what happened to the property where the People’s Park
is now. That property used to belong to Monteverde. And
according to the donation, it’s to be for educational
purpose. What happened? Before it was the athletic
facilities of the school. (chika about the property)
So dissolution can start from SEC, from the Solicitor
General and from a private citizen. The private citizen can
bring a suit through the Sol-Gen on a permissive quo
warranto. The Sol-Gen can bring a case directly if public
interest is affected, like this Rappler. The Sol-Gen says it
affects public interest. Now if you are a private citizen and
you allege a fatal defect in the constitution, you can ask
the Sol-Gen to bring the suit by way of permissive quo
warranto. Remember there are two kinds of quo warranto
– mandatory and permissive. But then when you do that,
you have to put up a security [bond] for the Sol-Gen to
answer for any damages that the respondent might allege
and prove, that your suit was not meritorious. So the Sol-
Gen has to have that security so he can bring the suit
without fear that he cannot answer for counterclaims that
the respondent might prove.
Can you bring a dissolution through the so-called
Financial Rehabilitation and Insolvency Act of 2010
(FRIA)? This is when dissolution and insolvency are two
different animals. Dissolution is not insolvency.
Insolvency is entirely different. That brings us to the
question, because there is a provision in FRIA which says
that once the liquidation of the debtor(?) has been
completed, then the court may be asked to also cancel his
registration of incorporation in the SEC.
One of these days, there will be a case brought up. That
that is not the proper court to handle dissolution because
there is a provision in FRIA which says that the dissolution
may be asked after the liquidation by the debtor has been
completed. Unsa pa may buhaton na wa na man syay
property tanan? Gihatag na sa iyang mga creditors. Wala
nay nahibilin. And then you can ask the court for
dissolution. Mura bag incidental. It’s just one more speck.
Tantangan na ka sa imong corporate personality. One of
these days, the validity of that provision will be questioned
because there are many corporations that undergo
dissolution and either way, to go get back to business
even after they have declared insolvent.
So the law declares that there is three (3) years from and
after the time that you are declared dissolved that you
wind up the operations of the corporation.
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
69
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
stockholders, members, creditors or other persons in
interest.
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.
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.
So the winding up, which is three years after there is a
declaration of dissolution, that is already in the hands of
the courts, not with the SEC. Because it is no longer for
the purpose of continuing the business for which is was
established, there is no more board of trustees if non-
stock non-profit, no more board of directors if it is stock
and profit.
So who is there? It is the receiver in liquidation. That is
appointed by the court. And he runs the liquidation.
He/she engages the services of legal counsel to retrieve
properties of the corporation because once it is retrieved,
it is sold. The proceeds are first applied to the creditors
according to the concurrence and preference of credits.
So sya nay mangita ug mga xxx, file sa kaso aron mabawi
tong mga properties. Syay mu-organize sa public
auctions. Naay property ang corporation, he/she engages
the services of an auctioneer and the auction of the
property. Then the proceeds will be divided according to
the plan approved by the court because by then, the court
already declares who are the creditors to be paid, who are
stockholders who are junior claimants to the creditor. So
the court merely oversees that it’s really the xxx is the
receiver in liquidation. Sya na ang mangusog ana.
Because the judge has no time.
Now, what happens if the three years are over and a case
began by a receiver in liquidation continues? It has
already been adjudged in the lower court; the petitioner
wins, namely the corporation; then it is appealed to the
CA; the case is continued hantud nahurot na ang three
years unya niretire na ang receiver. Finally, after five
years, daog. What are they going to do with the
judgment? If the lawyer is still there and the lawyer move
for execution and gets back the property. Finally when the
property is gotten back, it is in the name of, supposed to
be the receiver, because there is no more corporation.
The lawyer of the corporation presents the final order of
the court, that the corporation has been dissolved. Kinsa
mang ngalan tong property? That is where the SC says
that the de facto trustee is the lawyer and he has the
obligation to hold the property for the benefit of its rightful
beneficiaries. Kung naa kay dinha creditors na wala pa
mabayri, kana sila ang tagaan sa proceeds. Kung na-
satisfy na ang tanan creditors, it should go to the next in
line. Who are the succeeding beneficiaries? The
shareholders, is it not? And then the lawyer should xxx
because he is the trustee.
The court who handled it is still there. So paghuman nimo
ug kuan ana, ihatag na sa shareholder. And then you
make a return to the court. Unsa man ng return? Report
na. Imo nang ihatag sa court. This is in accordance with
your court order. Kasagaran ana, patay na ng judge na
originally nagpreside ana. Hain man ang records? Ang
uban ana, gisunog na. Di na makit-an ang records. Kita
ba mo anang court? (chika about court) You have to
refresh the mind of the court.
There is no more receiver in liquidation. There are no
more stockholders presented. Maybe the original
stockholders are already dead and their estates have
already been settled. Dili na dakog problema kung dako
na nga proceeds. Kay naa man kay ikagastos. Ang
problema ana, kung igo-igo ra ng proceeds. But if the
proceeds are considerable, then it is worth the trouble.
Now the last part, the second to the last title is FOREIGN
CORPORATIONS.
Are there foreign corporations composed of 100%
Filipinos stockholders? Yes, there can be because what
makes a corporation foreign? It is the laws under which it
is incorporated. That is the Corporation Code of a foreign
corporation. Foreign corporation in the Corporation Code
is contrasted with a domestic corporation, not a Filipino
corporation.
70
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno

Section 123. Definition and rights of foreign What is the effect if you do not have a license and you
corporations. – For the purposes of this Code, a conduct business? You can be sued but you cannot sue.
foreign corporation is one formed, organized or
existing under any laws other than those of the
Philippines and whose laws allow Filipino citizens
When can a corporation, who does business without a
and corporations to do business in its own country or
license, sue in the courts? If someone conducts business
state. It shall have the right to transact business in
with you, he cannot later on claim that you, a foreign
the Philippines after it shall have obtained a license
corporation, cannot demand from him by way of court
to transact business in this country in accordance
action on the basis that you do not have a license because
with this Code and a certificate of authority from the
he is estopped. But as to third parties, he cannot sue.
appropriate government agency.

Now the big problem here is “doing business”. You have

Domestic corporation is a corporation incorporated under
to go through some cases where you get a good
the laws of the Philippines. Foreign corporation, under the
understanding about “doing business”. One transaction,
Corporation Code, is a corporation incorporated under
is that doing business? Some cases, the SC says it’s not
laws other than the Corporation Code.
doing business. Other instances, the SC says it is doing
business. So you have to make a differentiation.
Importation, exporting, is that a business? Muingon ang
So it can happen na puros mo mga Pilipino, nag- SC, he was just importing, so there was no business. He
incorporate mo sa California. Ngano nag-incorporate man was just exporting, therefore there was no business.
mo? Kay gusto mo magnegosyo dinhi sa Pilipinas. What
brought you together? Classmate man mo unya nag-retire
namo. Dugay mo nagtrabaho sa America. Dual inyong
You are in California and you exported goods here in the
citizenship pero nag-incorporate man mo sa California.
Philippines. And then, there is another corporation which
Unsa ba gyud ning inyong negosyo, nganong naa man
receives it and distributes it. Are you doing business? No,
mo sa California? Kay tua man ang source sa inyong
you are just exporting. Wa ka may agent ba. You are
negosyo. Mag export mo niini sa Pilipinas ug mga itlog
importing. You have a consignee here. But then that’s it.
para sa fighting cock. Unya pag abot dinhi, anhi ninyo
Somebody else takes over. Is that doing business? SC
ipapusa ang itlog unya ipamaligya nana sa mga training
says no, it’s not doing business.
farms. (chika about training farms, and eggs of fighting
cocks being a regulated item and not a prohibited item)

Xxx. A lease contract is doing business. It is preparatory

to succeeding transactions.
Does that require 100% Filipino? Must it be a Filipino
corporation? are you dealing there with natural
resources?
Nag-invest ka. Palit ka ug shares sa Rappler. Are you
engaged in doing business? We will continue.

Now what is the rule if you are incorporated outside the February 1, 2018 TSN
Philippines? To do business here, you must have a
license. What is the purpose for having a license? That Take a look at the provisions on how we register foreign
purpose is so that you are within the court processes. So corporations; you will see that it is much more
cumbersome that is practical and less expensive to
you can be reached by the court. Remember, you are an
organize than the domestic corporation.
artificial person. Therefore, you must have a place where
you can be served(?).

71
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
Section 125 is a kilometric provision. It is longer than
section 6. It speaks of the application of a license to be a
foreign corporation.

72
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
Sec. 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:

1. The date and term of incorporation;

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;

4. The place in the Philippines where the corporation intends to

operate;

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 and the aggregate

number of shares which the corporation has issued, itemized by
classes, par value of shares, shares without par value, and
series, if any;

9. A statement of the amount actually paid in; and

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 transact business in the Philippines, and to
determine and assess the fees payable.

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

73
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
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)

74
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
It provides for the date and term, the application to be filed
under oath. The application shall be under oath and,
unless already stated in its articles of incorporation,
shall specifically set forth the following:
1. The date and term of incorporation;
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;
4. The place in the Philippines where the corporation
intends to operate;
5. The specific purpose or purposes which the corporation
intends to pursue in the transaction of its business in the
Philippines
6. The names and addresses of the present directors and
officers of the corporation.. etc.
You have to file your certificate of incorporation and by-
law then, you have to put up a bond. How much is the
bond? Initially 100 thousand pesos under Section 26
nd
2 Paragraph.
Sec. 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.
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)
75
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
After you have set up a bond which can be in cash or in
acceptable securities like government bonds, Then you have to appoint a resident agent and finance
treasury bills or shares of stock traded in the stock na sad na nimo and you have to execute an undertaking
market. After filing the initial bond worth 100 thousand, that says that if the resident agent is somehow
within six (6) months after each fiscal year of the licensee, incapacitated, it has to prove its capacity as a resident
the Securities and Exchange Commission shall require agent. Then your default resident agent is the Securities
the licensee to deposit additional securities equivalent in and Exchange Commission.
actual market value to two (2%) percent of the amount by
which the licensee's gross income for that fiscal year Sec. 127. Who may be a resident agent. - A resident agent
exceeds five million (P5,000,000.00) pesos.
may be either an individual residing in the Philippines or a
domestic corporation lawfully transacting business in the
Gross income is your sales and revenues. The moment
Philippines: Provided, That in the case of an individual, he must
you exceed it exceeds 5 million, your initial 100thousand
be of good moral character and of sound financial standing. (n)
bond is not enough. You have to put an additional bond
of at least 2 % of the excess.

Now, it says that if the value of your bond decreases in

market value, you have to put an additional bond.

Let us say your bond is the original bond is a stock
certificate of PLDT and you put it up as 3 thousand pesos.
Now, the share of stock of PLDT is not even 1500 or 1600.
So the opposal value is by 50%. You have to add
additional security. So, very cumbersome.
That is why legally, it is a benefit business to have a
warehouse corporation. That is the bread and butter of the
big law firms like Sycip Salazar, Corpuz Masanta. They
have this wareouse corporation.
EXAMPLE: Coca-cola na planta. It supplies Coca-cola
bottling here in the Philippines, the syrup for Coke. And
you pay for that plus royalties. You can choose to operate
here as a foreign corporation or make your own
corporation.
If you are operating here as a foreign corporation, it will
be Coca-cola Atlanta Incorporated in Delaware. Your
business here is the sale of Coca-cola syrup. Unsa man
nang syrup? Kita ka anang sa Tibungco nang mga van
nga blue mao na. la-i-non man na pag padala diri aron
mix na lang. kanang Coca-cola Bottling lain man na na
kumpanya, mao nay mudistribute man.
Is CC Atlanta registered here as a foreign
corporation? NO. nag buhat na silag sariling
corporation kanang Coca-cola Philippines Export
Import Corporation. Pangita-a na sa SEC 500. SEC
annually issues the top 500 corporation. Now they added
the next 500 so it is the top 1000.
Who may be a resident agent? Resident agent service
of process.
What is the concept of a resident agent? Since you are
not domiciled here as a resident corporation, it is the
resident agent which will receive the processes of the law.
If you are given a notice, it is given to the resident agent
corporation. If you are sent summons by the court, it is the
resident agent that is the entity which you will serve
summons. Service to the resident agent is service to the
foreign corporation.
If you make amendments in a contract, you have to inform
the SEC of the equivalent amendment. If there is a
merger or consolidation that happens abroad, you
have to again inform the SEC about the particular
process and the result of the merger or consolidation.
So it is very cumbersome. That is why it is easier to put
up a Philippine corporation or a domestic corporation if
you are a foreign corporation. You get lawyers and pay
them; they will do the work for you. The capital can be
owned 100% foreign corp. why? They do not need that.
It’s just a shoebox in the office of the employer. Of course,
you have to pay the lawyer and that is the steady income
of the law firm.
There is also a process of recognition and revocation of a
license. Its grounds are found in Sec. 134.

Naa dinha ang Coca-cola Import Export Corporation.

Dako man kaayo na but it is just a shoebox in Sycip
Salazar Gaitmaitan Law Office. All those people in the
bottling company traded and they remit it to Coca-cola.
It’s called import export. They import it and sell it to Coca-
cola bottling. It is an import export company set up here
as a Philippine corporation because it is so cumbersome
to have a foreign licensed corporation.
76
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
Sec. 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;
2. Failure to appoint and maintain a resident agent in
the Philippines as required by this Title;
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;
Imagine that if you fail to report something your license
can be revoked as a foreign corporation under
Philippine Laws.
4. Failure to submit to the Securities and Exchange
Commission an authenticated copy of any amendment
to its articles of incorporation or by-laws or of any
articles of merger or consolidation within the time
prescribed by this Title;
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 the
Philippine Government or any of its agencies or political
subdivisions;
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
9. Any other ground as would render it unfit to transact
business in the Philippines. (n) BUSINESS? What is the definition of doing business?
th
There are nine grounds and the 9 ground is the most
comprehensive which says “Any other ground as
would render it unfit to transact business in the
Philippines”
Any other ground. This is all-embracing. If you are unfit,
kinsa man muingon na unfit ka?
Now if you withdraw, there is also a process. You have to
secure a certificate of withdrawal from the SEC.
Sec. 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;
1. All claims which have accrued in the Philippines have
been paid, compromised or settled;
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. 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.
You must show proof of the following:
1. All claims which have accrued in the Philippines have
been paid, compromised or settled;
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. The petition for withdrawal of license has been
published once a week for three (3) consecutive weeks in
a newspaper of general circulation
This is not used to much because it is much simpler to
form. Nevertheless, there are several decided cases.
They normally focus on a foreign corporation’s ability or
capacity to sue and be sued.
There are also foreign corporations which are not
registered and they sue in the Philippines. It is claimed
that they are doing business but they deny the decision of
the Supreme Court.
The whole issue hinges on WHAT IS DOING
The decided case for this is Agilant Technologies
Singapore Ltd vs. Integrated Technologies
Philippines. 427 SCRA 593.
As to the question, what is doing business? The SC in MR
Holding vs. Bajar 180 SCRA 617 said “The Corporation
Code of the Philippines, is silent as to what constitutes
doing or transacting business in the
Philippines. Fortunately, jurisprudence has supplied the
deficiency and has held that the term implies a continuity
of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or
77
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
works or the exercise of some of the functions normally
incident to, and in progressive prosecution of, the purpose
and object for which the corporation was organized.”
This has led the SC in later cases say that the dual test.
There are two tests to determine what doing business
is.
1. Substance test
2. Continuity test
What is the substance test? SC says “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.”
Naga export ka diris Philipines pero nay mudawat na
distributor. Nag appoint kag distributor. Is that doing
business in the Philippines? Unless it is proven that the
distributor is fully under the control of the exporter abroad,
it is not doing business in the Philippines. The distributor
might be distributing other products and it might be a
separate and distinct corporation of its own. It might be
already conducting its own business and not that of the
exporter. The mere fact of exporting is not doing business.
What is the continuity test? The 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 for which the corporation was organized.
Continuity test means that there are several acts which
are continuous to the purpose and goal of the foreign
corporation. Continuity and if not for that one act then it is
not doing business.
That was the basis of the SC when it said that when the
foreign corporation has entered into a lease contract for
an office, not the office for which the distributor has used,
but its own office. The foreign corporation itself signed the
contract that it is going to be their office. That is intent to
start a business. Continuity of works. It might be a single
transaction that is doing business. Again, the SC said
Corporation Code of the Philippines, is silent as to
what constitutes doing or transacting business in the
Philippines. Fortunately, jurisprudence has supplied
the deficiency.
That was an old ruling of the SC. There is already a law
passed. RA 7042 otherwise known as the Foreign
Investment Act of 1991. There is a definition there for
doing business. What is it? (copied from the MR Holding
case earlier cited)
d) The phrase doing business shall include soliciting
orders, service contracts, opening offices, whether called
liaison offices or branches; appointing representatives or
distributors domiciled in the Philippines or who in any
calendar year stay in the country for a period or periods
totalling one hundred eight(y) (180) days or more;
participating in the management, supervision or control of
any domestic business, firm, entity, or corporation in the
Philippines; and any other act or acts that imply a
continuity of commercial dealings or arrangements, and
contemplate 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, commercial
gain or of the purpose and object of the business
organization;
This answers the question you are a foreign company and
you communicate with a broker in Makati and you say buy
me Meralco and you buy Mercalco upto 4% of the
outstanding shares of Meralco with voting shares.
Foreigner ang muanhi kay muexercise sa vote. 4% of the
total shares of Meralco is already 1 billion pesos. Are you
doing business? Do not confuse the term stain(?)
economics to the term foreign investment. You buy from
the stock market that is foreign investment that is not
direct foreign investment. Direct foreign investment is you
put up a factory. If you put up assets that does not define
doing business.
Whether or not you are a direct investor or you are just a
stock market investor if you do not have a say in the
operations management who have made an investment
you are not doing business. That is the definition in RA
7042 “e term doing business in the same tenor as those
above-quoted, and as may be observed, one
common denominator among them all is the concept of
continuity.”
There is a new decision in this shoal in Palawan called
the Malampaya. Oil exploration when it happens, it is
always a consortium of oil companies. No oil company
can conduct an oil exploration by itself. Its very expensive
ug matumba na sakit kaayo. It always daghan sila.
Although there are many, it is always one who will take
the lead and it is always the one who normally the biggest
one na magdala. The question is, are those in investment
are they doing business? If you are not involved in the
operations, if you are not a service contract or technical
agreement, if you have no certificate as a board of
director, you are not doing business because you are not
involved in the business.
But what about a clause in the investment contract which
says you stand ready to provide whatever technical
assistance as maybe called upon for you to exercise all
management assistance or help should be needed by the
consortium. The interpretation of the SEC now is that is
doing business so therefore, you must apply foreign
investment. That is a new decision. Sa basketball pa, wa
pa ka mushoot andam na ka pero bench pa ka andam na
ka muduwa.
78
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
Is that fair? Ang malipay ni-ini ang Sycip Salazar etc kay
shoebox ra may ilaha nya income na sad. Intellectual
property ba, Coca-cola registered man na dinhis ato.
Coca-cola Import Export ang registered owner ana
tanawa pa nang lubot sa Coca-cola nay PATREO- Patent
Registry Office. Walay ana ang can. That is why top 20
ang CCIE Corporation sa SEC of the SEC 1000, 500.
Check SEC.com.ph. apil ang NCCC Top 100 baya na
mas dako pas burger king pero ambot lang karon kay
tungod anang sunog they are not doing business.
Some case given of consignee of cargo where the cargo
is for transit and took cargo into another destination.
Mayan Ship, transport to the US, passed through in the
Philippines for Vietnam. Nagubot ang cargo diris
Philippines, ang tag-iya sa cargo gi assign ni ya iyang
insurance sa cargo to another corporation somewhere in
the US. Kiha siyan diris Philippines ingon siya invalid
cause of action, dinhi nahitabo sa Philippines. Kanang
crane niya naputol kanang mga refrigerator didto wala na.
it is insured so one the original indorsee or assignee by
the discounting kanang mga kumpanya na mudawat ug
insurance liabilities. Let’s say rediscount ka, 30% makuha
nimo and satisfied ka. Dinhi nahitabo sa Philippines
nakapark dinha.
complied with certain requirements, then such
compliance or exemption there from, becomes a
necessary averment in the complaint. The case was
properly dismissed. You have to allege in your complaint
that you are a foreign corporation that you have a license
and if you are suing as a foreign corporation, license to do
business.
If you are a foreign corporation availing the isolated
transaction rule you also have to aver that you are a
foreign corporation not licensed and you have to note that
you are a foreign corporation. Sayop nis mga abogado.
They should not be able to collect their attorneys fees.
Kay when it comes to the issue on jurisdiction ignorance
na. Ignorance of the law. Pasaka lang ug complaint nya
kuwang diay jurisdictional averments.
Those are the thing you have to watch out for. The case
which contains a summary discussion of isolated
transaction is Agilant Technologies Singapore Ltd vs.
Integrated Silicon Philippines Corporation 427 SCRA
593 2004.

Can you sue? You took the place of the owner as the
owner of the goods. Is that doing business? That is a
single isolated transaction which is not doing business.
But if you pay to establish a corporate character of foreign
corporations. The SC says that is fathom. Dili ka kalusot.
The old doctrine says the isolated transaction everybody
knows that diba. If you pay to allege and establish the
corporate character as foreign corporations then you lose
the case on technicality. SC says a foreign corporation not
engaged in the business in the Philippines may not be
denied of their right to file an action in the Philippine courts
for a time-isolated transaction. But the isolation
transaction rule refers only to foreign corporations, the
consignee failure to prove the legal existence or juridical
personality as foreign corporation absent such proof they
are far from invoking the right to sue in the Philippine
jurisdiction under the isolated transaction rule since they
do not qualify for the availment of such. Commissioner
of Customs vs. KMK Gani Corporation 52 S 594
February 1990 (not sure with citation ☹ inaudible)
Jurisdictional- alleging that you are a foreign corporation
and proving that you are a foreign corporation.

In a case where a corporation is foreign and has a license

to do business, but the complaint which the corporation’s
license to do business in the corporation is filed; the
complaint failed to allege that the plaintiffs were foreign
corporations duly licensed to transact business in the
Philippines. The action was dismissed on the ground of
lack of capacity to sue. Was the dismissal correct? Once
again the SC says where the law denies a foreign
corporation to maintain a suit unless it has previously

79
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
AGILENT TECHNOLOGIES SINGAPORE (PTE) LTD., vs.
INTEGRATED SILICON TECHNOLOGY PHILIPPINES CORP
et al
G.R. No. 154618
April 14, 2004

**The challenge to Agilent’s legal capacity to file suit hinges on

whether or not it is doing business in the Philippines. However,
there is no definitive rule on what constitutes “doing”, “engaging
in”, or “transacting” business in the Philippines. The Corporation
Code itself is silent as to what acts constitute doing or transacting
business in the Philippines.

[Jurisprudence has it, however, that 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 or in progressive
prosecution of the purpose and subject of its organization.”

In the Mentholatum case this Court discoursed on the two

general tests to determine whether or not a foreign corporation
can be considered as “doing business” in the Philippines. The
first of these is the substance test, thus:

The true test [for doing business], however, seems to be whether

the foreign corporation is continuing the body 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 second test is the continuity test, expressed thus:

The term [doing business] 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 the progressive prosecution
of, the purpose and object of its organization.]

**
The Foreign Investments Act of 1991 (the “FIA”; Republic Act No.
7042, as amended), defines “doing business” as follows:

Sec. 3, par. (d). The phrase “doing business” shall include

soliciting orders, service contracts, opening offices, whether
called “liaison” offices or branches; appointing representatives or
distributors domiciled in the Philippines or who in any calendar
year stay in the country for a period or periods totaling one
hundred eighty (180) days or more; participating in the
management, supervision or control of any domestic business,
firm, entity, or corporation in the Philippines; and any other act or
acts that imply a continuity of commercial dealings or
arrangements, and contemplate to that extent the performance
of acts or works, or the exercise of some of the functions normally
incident to, and in the progressive prosecution of, commercial
gain or of the purpose and object of the business organization.

80
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno
An analysis of the relevant case law, in conjunction with Sec 1 of
the IRR of the FIA (as amended by RA 8179), would demonstrate
that the acts enumerated in the VAASA do not constitute “doing
business” in the Philippines. The said provision provides that the
following shall not be deemed “doing business”:

(1) Mere investment as a shareholder by a foreign entity in

domestic corporations duly registered to do business, and/or the
exercise of rights as such investor;

(2) Having a nominee director or officer to represent its interest

in such corporation;

(3) Appointing a representative or distributor domiciled in the

Philippines which transacts business in the representative’s or
distributor’s own name and account;

(4) The publication of a general advertisement through any print

or broadcast media;

(5) Maintaining a stock of goods in the Philippines solely for the

purpose of having the same processed by another entity in the
Philippines;

(6) Consignment by a foreign entity of equipment with a local

company to be used in the processing of products for export;

(7) Collecting information in the Philippines; and

(8) Performing services auxiliary to an existing isolated contract

of sale which are not on a continuing basis, such as installing in
the Philippines machinery it has manufactured or exported to the
Philippines, servicing the same, training domestic workers to
operate it, and similar incidental services.

By and large, to constitute “doing business”, the activity to be

undertaken in the Philippines is one that is for profit-making.

By the clear terms of the VAASA, Agilent’s activities in the

Philippines were confined to (1) maintaining a stock of goods in
the Philippines solely for the purpose of having the same
processed by Integrated Silicon; and (2) consignment of
equipment with Integrated Silicon to be used in the processing of
products for export. As such, we hold that, based on the evidence
presented thus far, Agilent cannot be deemed to be “doing
business” in the Philippines. Respondents’ contention that
Agilent lacks the legal capacity to file suit is therefore devoid of
merit. As a foreign corporation not doing business in the
Philippines, it needed no license before it can sue before our
courts

81
 CORPORATION LAW TSN 2017
Based on the Lectures of Fr. Agustin Nazareno

82