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Corpo Midterms Notes 501
Corpo Midterms Notes 501
GAVIOLA-CLIMACO
3. CORPORATION AS TO SUCCESSION
Section 2, Corporation Code of the Philippines: An Corporation: right of succession exists
artificial being created by operation of law, having the right of o heirs of stockholder will succeed in the rights
succession and the the powers, attributes and properties Partnership: no right of succession
expressly authorized by law or incident to its existence.
AS TO CAPITALIZATION
Corporation: The corporation can acquire more investments
since there are unlimited opportunities for the increase in
capitalization. Consequently, this makes it feasible for the
corporation to engage in bigger business.
Partnership: Because of the principle of trust and
confidence, only those chosen may invest and be a partner.
Capitalization is limited to the contribution of the partners
and loans from creditors.
AS TO MANNER OF CREATION
Corporation: created through a legal process and requires SEC
approval via Certificate of Incorporation
Partnership: contractual, created by mere agreement
AS TO LIABILITIES
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Atty. GC: So how does this relate to the Doctrine of Piercing the S: No. In the transfer or assignment of shares or rights in a
Veil? corporation, a stockholder does not need the consent of the other
stockholders because they own it in their own right and as oppose
(Based on Aquino book) Doctrine of Piercing the Veil of to a partner in a partnership, it is needed because of their highly
Corporate Fiction: fiduciary relationship.
Basic in corporate law is the principle that a
corporation has a separate personality distinct from its Atty. GC: So as a general rule, a stockholder can transfer his share
stockholders and from other corporation to which it may be in the corporation even without the consent of the other
connected. It is a fiction created by law with the intent that it stockholders.
should be treated as true. However, under this doctrine, the Exception: If they expressly provide for a restriction on transfers
corporation’s separate juridical personality may be disregarded as reflected in their Articles of Incorporation.
when there is an abuse of the corporate form. Whenever the
doctrine applies, the principal and the conduit will be treated as 4 | Has the powers, attributes and properties expressly
one; the controlled corporation will be deemed to have, “ so to authorized by law or incident to its existence
speak, no separate mind, will or existence of its own, and is but S: It means that once a corporation is registered or has been
a conduit for its principal.” If applicable, “ the corporation is approved by the SEC, it can immediately perform the different
merely an aggregation of persons whose liabilities must be obligations or exercise rights related to the purpose for which it is
treated as one with the corporation.” The conduit corporation formed.
will then be solidarily liable with the principal.
The corporation also has powers and attributes given by law and
S: It means that the veil or the artificial or separate personality of incidental to its existence. It means that a corporation can:
the corporation is disregarded and that the members or the 1. Sue in its own name
stockholders thereof are made personally liable because they are 2. Acquire properties
using the corporation as an alter ego or an avatar(term used by 3. Enter into contract
Atty.) as a means to defeat public convenience, justify a wrong,
protect a fraud, defend a crime, to commit injustice or as a vehicle This fourth attribute is a direct result of a corporation being an
for the evasion of an existing obligation. artificial being.
2 | Created by operation of law This means that because a corporation is created by operation of
law as a separate and distinct entity, the powers is limited to only
S: As we have discussed, a corporation is different from a that prescribed by law and any power incidental to the express
partnership for the latter can be formed by mere consent. A powers provided by law. Anything beyond that, the corporation is
corporation, however, is formed once it gains the approval of the not authorized anymore.
Securities and Exchange Commission. Technically, a corporation
needs to comply with the necessary requirements set forth by law KINDS OF POWERS
and from that, the issuance of the Certificate of Incorporation Express powers: those authorized by law
follows which in turn starts its corporate existence. Implied powers: those incidental to its existence
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Atty: But the implied powers must be only those that are related if it is used as a means to perpetrate fraud or an illegal act, or as
to the expressed powers of the corporation. It cannot be just a vehicle for the evasion of an existing obligation, the
anything implied, it has to be powers that are directly related or circumvention of statutes, or to confuse legitimate issues.
incidental to the powers expressly provided for by law. As a
creature of law, its powers are limited only to that, and anything Goldkey is a mere alter ego of Hammer
done beyond that will be considered “ultra vires” or an authorized.
Goldkey’s argument, that iBank is barred from pursuing Goldkey
HEIRS OF FE TAN UY V. INTERNATIONAL EXCHANGE BANK, G.R. for the satisfaction of the unpaid obligation of Hammer because
NO. 166282-166283, FEBRUARY 13, 2013 it had already limited its liability to the real estate mortgage, is
FACTS: Respondent International Exchange Bank (iBank), completely absurd. Goldkey needs to be reminded that it is
granted loans to Hammer Garments Corporation (Hammer), being sued not as a consequence of the real estate mortgage,
covered by promissory notes and deeds of assignment. but rather, because it acted as an alter ego of Hammer.
Accordingly, they must be treated as one and the same entity,
These were made pursuant to the Letter-Agreement between making Goldkey accountable for the debts of Hammer.
iBank and Hammer, represented by its Pres and Gen Manager,
Manuel Chua (Chua) a.k.a. Manuel Chua Uy Po Tiong, granting Under a variation of the doctrine of piercing the veil of corporate
Hammer a P 25 Million-Peso Omnibus Line. The loans were fiction, when two business enterprises are owned, conducted
secured by a Real Estate Mortgage executed by Goldkey and controlled by the same parties, both law and equity will,
Development Corporation (Goldkey) over several of its when necessary to protect the rights of third parties, disregard
properties and a Peso Surety Agreement signed by Chua and his the legal fiction that two corporations are distinct entities and
wife, Fe Tan Uy (Uy). treat them as identical or one and the same.
While the conditions for the disregard of the juridical entity may
Hammer defaulted in the payment of its loans, prompting iBank vary, the following are some probative factors of identity that
to foreclose on Goldkey’s third-party Real Estate Mortgage. will justify the application of the doctrine of piercing the
corporate veil:
The mortgaged properties were sold for P 12 million during the
foreclosure sale, leaving an unpaid balance of P 13,420,177.62. a. Both corporations are family corporations of defendants
For failure of Hammer to pay the deficiency, iBank filed a Manuel Chua and his wife Fe Tan Uy.
Complaint for sum of money against Hammer, Chua, Uy, and
Goldkey. b. Hammer Garments and Goldkey share the same office and
practically transact their business from the same place.
Despite service of summons, Chua and Hammer did not file their
respective answers and were declared in default. In her separate c. Defendant Manuel Chua is the President and Chief Operating
answer, Uy claimed that she was not liable to iBank because she Officer of both corporations. All business transactions of
never executed a surety agreement in favor of iBank. Goldkey, Goldkey and Hammer are done at the instance of defendant
on the other hand, also denies liability, averring that it acted Manuel Chua who is authorized to do so by the corporations.
only as a third-party mortgagor and that it was a corporation
separate and distinct from Hammer. d. The assets of Goldkey and Hammer are co-mingled. The real
properties of Goldkey are mortgaged to secure Hammer's
ISSUES: obligation with creditor hanks.
1. Whether Uy can be held liable to iBank for the loan obligation e. When defendant Manuel Chua "disappeared", the defendant
of Hammer as an officer and stockholder of the said Goldkey ceased to operate.
corporation? Uy is not liable.
The bank filed a collection case against Chua and Goldkey. There
2. Whether Goldkey can be held liable for the obligation of are two issues in this case :
Hammer for being a mere alter ego of the latter? Goldkey is a first issue. Whether or not UY the wife of Chua can be personally
mere alter ego of Hammer. liable being the officer of hammer garment.
second issue. Whether or not Goldkey can be peirce by the veil
being the surety where its property has been used as the
HELD: mortgage on the loan by the hammer garment ?
Uy is not liable. With repspect to the first issue on the w/n Uy the wife of Chua
can be personally liable , the Supreme Court said no because
Basic is the rule in corporation law that a corporation is a the corporation has its distinct and separate personality distinct
juridical entity which is vested with a legal personality separate from its officer.
and distinct from those acting for and in its behalf and, in
general, from the people comprising it. Following this principle, So the ground was not that because she signed the surety
obligations incurred by the corporation, acting through its agreement the ground was due to the fact that she was an
directors, officers and employees, are its sole liabilities. A officer because it was found that its not here real signature so
director, officer or employee of a corporation is generally not the only basis that the court has in making here liable on the
held personally liable for obligations incurred by the obligation of hammer is the mere fact that she is an officer and
corporation. Nevertheless, this legal fiction may be disregarded a director of Hammer . So what happened there? What did the
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Atty: So is she liable by the mere fact that she is an officer? However the Supreme Court said that they actually signed in
one set of signature, as a mere representative of the
So the Supreme Court said , go back to general rule because of corporation. It could have been different if they affixed their
the separate personality of a corporation and its officer and signature twice.
stockholders the officer and the stockholders does not become
liable of the obligation of the corporation by the mere fact of Question: Why does it matter if they are signing as
their being an officer. representative of the corporation or signing under their own
name?
DOCTRINE OF PIERCING THE CORPORATE VEIL
It is different because a corporation has a separate and distinct
It is a recognition that while a corporation is granted by law a personality as opposed to its officers. So because of that the
personality distinct and separate from its stockholder - meaning officers should not be held liable with the liabilities of the
its a separate person, its an artificial being which is recognized as corporation if they did not act in bad faith or there has no fraud
a person under the law separate from its stockholder and its or illegality of the transaction, and that they are authorized to
members. That artificial being is only created by law, a mere legal do such transaction. In this case, it was shown that they were
fiction, because in reality there is no real person there. That authorized proven by the Board Resolution.
recognition as a person is a mere legal fiction created by law so
that when that artificial being is used as a means to commit fraud
or injustice then the law allows that this legal fiction will be taken There is a principle in the Negotiable Instruments Law that was
down. The law allows that it will pierce the veil of this separate discussed in the case, if you are only signing as a representative
entity and consider it as one with the persons opposing it. That is of a particular corporation and that you are actually authorized
the reason behind the Doctrine of Piercing the Veil. to represent the corporation you should not be held liable.
SOLIDBANK CORPORATION VS This is because your personality is distinct from the corporation
MINDANAO FERROALLOY CORPORATION and you are merely acting on behalf of the corporation.
Facts:
Philippine corporation Maria Cristina Chemical Industries Question: So, when they sign the loan documents as
(MCCI) and three Korean corporations: Ssangyong Corporation, representatives of the corporation. Whose obligation was
Pohang Iron and Steel Company and Dongil Industries Company, created?
Ltd., entered into a joint venture under the name of Mindanao
Ferroalloy Corporation. The officers of these corporation The obligation created is that of the corporation and of the
comprised the Board members of Mindanao Ferroalloy Bank, not of their personal capacity. They only acted as a
Corporation: Guevara as the President and Chairman, Hong the representative of the corporation.
Vice President, Teresita Cu as a member. Subsequently, the
Board of Directors authorized Guevara to secure a loan of ATTY. GAVI: That is correct, because they signed as officers of
30Million pesos from Solidbank. the corporation and representing the corporation then that loan
obligation that was created is not their personal obligation. It is
The Mindanao Ferroalloy started their operation in April 1991. the obligation of the corporation. They were only acting as
However, the indebtedness acquired from Solidbank ballooned representatives of the corporation. The act and obligation was
to 200.4Million pesos while its asset is only 65.4Million pesos. entered into by the corporation and not the officers even if they
The Corporation executed Promissory Note signed by Teresita are the ones representing the corporation. Why is that?
Cu and Jong-Won Hong. They also executed a Deed of
Assignment in favor of the Bank covering its rights, title and Student: This is because of the artificial being created by law to
interests: entire proceeds of drafts drawn under Irrevocable a corporation. Since there is an artificial created to a corporation
Letter of Credit a Quedan. Hong and Cu also affixed their by law then the officers, members, and representatives of such
signatures for the Corporation. The Corporation, also, through should not be held liable since their personality is different.
Hong and Teresita Cu, executed a Trust Receipt Agreement, by
way of additional security for said loan, the Corporation ATTY. GAVI: If the corporation has an obligation just because it
undertaking to hold in trust, for the Bank, some of its property. was contracted through a particular officer, does it now mean
that it becomes the liability of the officer? Why?
Shortly after the execution of the said deeds, the Corporation
stopped its operations. The Corporation failed to pay its loan. Section 2. A corporation is an artificial being. Being an artificial
Hence, a collection of sum of money was filed against the being its obligations are separate and distinct of its officers,
Corporation imploding Guevarra, Hong, and Cu as joint and directors, and stockholders.
solidary debtors.
Question: Why would it have been different if the officers signed
Question: What was the basis of Solidbank for impleading the the second time around?
officers of Ferro Alloy as solidary debtors of the loan?
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If they sign the second time around the Supreme Court was corporation are its own properties and obligations and not that of
saying that they are already signing in their own capacity and its stockholders, directors or officers.
not mere representative of the corporation. By signing, it means
that they are really liable to the loan. Meaning, by fiction of law the person of the corporation is
separate from the person of stockholders that the latter may
Question: If they sign the second time, what happens now to compose the corporation but they are not the corporation.
that obligation of solid bank? However, in certain instances the fiction or the veil of the
corporation and its stockholders may be lifted in which case the
They are now solidary liable because they already bind corporation is considered as one with its board of directors and
themselves not as officers of corporation but in their personal stockholders. There are only very specific instances where this is
capacity. The first time they signed, they are representing the allowed because the law considers that corporation as separate
corporation, if they sign the second time (done na ang entity for the convenience of the parties involved and to facilitate
corporation na part), SC said they are now signing on their own economic transactions. If this artificial being is being used to
behalf, they are now obliged in their personal capacity but in the commit injustice or to defraud the public, the law will lift the veil
case at hand, THEY DID NOT, they only signed once. Hence, they because this is only a legal fiction, it’s not reality. The law will
signed on behalf of the corporation. pierce the veil of legal fiction and consider the corporation as one
with its stockholders.
The officers were not made joint and solidary liable with the
corporation. It is only the corporation that is liable to the loan
contracted by its officers. ZAMBRANO CASE
Being an artificial entity, a corporation can only act through its Facts:
board of directors ( no physical hands to sign contract). It acts Zambrano et al were employees of PhilCarp and then they
through its officers or board of directors. When they act on were dismissed because PhilCarp ceased operation on the
behalf of the corporation, it doesn’t mean that the obligations grounds of serious business reversals. So upon termination,
created are the obligations of the board or its officers because a they filled a case against PhilCarp and Pacific contending that
corporation is an artificial being having a separate and distinct they were illegally dismissed since Phil carp did not incur
personality from its stockholders and officers. serious business losses because as a matter of fact they are
But if the representatives would voluntarily take on themselves earning. They also want to implead Pacific because they are
the obligation, that’s allowed. In which case they are now mere Alter Ego given the fact that the assets of Phil Carp was
solidarily liable with the corporation because they bound transferred to Pacific and some of the employees of Phil CArp
themselves as such. were absorbed by Pacific
Under the Concept of Artificial entity , Corporation B is Atty. G: so one, if the corporate vehicle is used to evade
separate and distinct from ABCDE (stockholders-BOD-officers) obligations, the corporate then will be pierced and the
IN the same way Corporation C is separate and distinct from stockholders will still be made liable for the obligation of the
ABCDE. But at the same time Corporation C is separate and corporation.
distinct form Corporation C.
Student: second is the protection of commission of a wrong, since
PIERCING OF VEIL ISSUE the corporation is a separate entity, it can only act through its
agents, so a corporation cannot be held, for example, criminally
The court said that , the mere fact that Pacific as a Subsidiary liable. So if there are perpetrators, they might say for example
of Phil Carp it will not permit the piercing of veil . commit estafa through the corporation then the corporate fiction
will be used for them.
Under the concept of artificial entity, corporation B is separate Atty. G: so when the corporate fiction is used to defraud or
and distinct from A, C, D and E, the stockholders, board of commit a crime then a corporate fiction will be pierced and the
directors and officers. In this way, corporation C is separate and stockholders will be held liable. The third instance is alter ego
distinct from corporation A, B, D and E, the stockholders, board of cases.
directors and officers and at the same time corporation C is
separate and distinct from corporation D. The separate entity Student: The alter ego principle is that, a corporation is created
applies not only to your stockholders, board of directors and by another person or juridical person through which the
officers but also to any other legal entity in which the corporation transactions of that person is directly done through the
is created. In this case, we have the Philippine carpet being the corporation, the essence of alter ego principle is that the person
stockholder of the pacific carpet so now the employee’s who is using the corporation in shielding himself from any possible
contention are that Philippine carpet merely transferred its
liabilities that may arise from its transactions. The difference
operations to pacific carpet and now they are trying to say that
between that and the first one is that the first one, there might be
Philippine Carpet committed unfair labor practice by transferring
its operations and now pacific carpet should also be liable to them a pre-existing intent to defraud whereas the third one there might
so they’re not claiming against stockholders, board of directors be none, that he is just shielding himself from any possible liability.
and officers of Philippine carpet, they’re claiming against the
Atty. G:The essence of the alter ego principle is CONTROL. If
subsidiary of Philippine carpet. Thus the rule on artificial being
somebody is controlling the corporation such that the corporation
apply in this case. The Supreme Court said that a corporation has
basically does not have its own mind because a person is
a personality separate and distinct from the persons composing it
as well as from any other legal entity which it may be related. The controlling not just majority but complete dominion not only of its
artificial entity is applicable not just to the persons composing the finances but also its policies and business practice so whatever the
corporation but also to any other legal entity which it may be decision of this controlling person is considered the decision of the
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corporation, so control, not just financial but also with respect to RJL owned some of the shares of Mar Tierra which was 42%
business decisions and operations and you use this control in owned by petitioner Ruben Maritnez. Ruben had nothing to
order to commit a fraud or wrong, and that the control causes with CLL he was neither a beneficial owner nor a stockholder of
harm or injury to other persons. In this case, the corporation is CLL. He was a stockholder of RJL.
merely your alter ego such that whatever obligations incurred by
the corporation because of your control can be attributed to you CLL purchases molasses from Mar Tierra through letters of
and that person controlling the corporation becomes liable. credit.
So when do you apply the alter ego principle? There are three test This is how CLL and Mar Tierra did their business and their bank
was BPI. The bank transferred funds to Mar Tierra upon
Student: the instrumentality, the fraud and the harm. The instructions of CLL, so what happened next was that there was
instrumentality test means the person has control including the a non-payment of $340k.
financial activities and policies. Second is fraud test, the entity is
used to commit fraud. Lastly, the harm test, there is a causal CLL had Money market placements with BPI so the arrangement
connection between the injury to the person and the use of the was that the bank will deduct the deposit from the amount that
corporate fiction. The ruling of the SC in this case is that, there was was paid to Mar Tierra. The bank did not do this because at the
no alter ego or control because while there is control in the time the money market placements were not matured and so
instead of deducting it from the deposit, it recorded as a
subsidiary it does not amount to alter ego. There is absence of
receivable from CLL meaning CLL owes the bank.
harm and fraud.
A: Why not? When the placements matured, the bank did not collect but
S: because the move of Philippine carpet to cease its operation is they allowed withdrawal from amount. So at the end of the day
lawful and there is no unfair labor practice committed. there was no more money in the account of CLL but CLL still had
A: so in order for there to be piercing of the veil based on alter ego an obligation to the bank.
the three elements must occur together. It is not because you own The bank filed a case against CLL, Wilfredo and Ruben, He was
all the stocks in a certain corporation and another corporation included because he was one of the signatories of the account.
owns the stocks in another corporation, it does not mean Ruben questions why he was impleaded because he had nothing
automatically that you will apply the alter ego rule. All three to do with CLL.
elements must occur. There was complete control, there was an
intention to defraud, using that control and you cause harm to The bank filed a case for the payment of the 340k against CLL,
another person because of that control. In this case it is true there Wilfredo et.al and Ruben.
was control by Phil Carpet of pacific carpet. It owned 100% of the
shares. However it was also found that there was no fraud and Atty G: Why was Wilfredo and Lacson liable in the RTC and CA?
there was no harm because Phil carpet’s reason for foreclosure
was legitimate. It was shown by the audited financial statements Because they signed and agreed that they bound themselves
of the corporation that it was really losing money and based on solidarily with CLL while Ruben Martinez was made liable by the
the labor code that is a sufficient ground to terminate the RTC because he owned shares in RJL.
employment of your employees. There was no fraud and
technically there was no harm. So the SC said that the alter ego RJL owns share with Mar Tierra and Mar Tierra and CLL had
principle is not applicable in this case to justify piercing the veil. common stockholders and that he was a co-signor in the bank
account, so they ruled that Ruben was liable because of such
A: So you have here CLL which is a foreign corporation engaged in connection they pierced the veil.
buy and sell of molasses. One of its suppliers was MarTiera, which
is based in the Philippines and was owned partially by RJL Martinez Atty G: Is this valid?
fishing corporation. RJL on the other hand was owned by Ruben
Martinez. Okay? so that was the relationship of the parties. No. The SC said that the mere fact the majority stockholder of
Mar Tierra is RJL and that Ruben along with Jose and Luis
MARTINEZ VS. CA Martinez owned 42% of the corporate stock does not mean that
they had complete domination over Mar Tierra.
Facts:
In this case, CLL which is a foreign corporation engaged in the
There was no showing that Ruben even benefitted of the
importation of molasses from the Phil which are obtained from
transaction. Just because he was a signatory, does not mean
a company called Mar Tierra which is a domestic company and
that he can be made liable. Control alone does not warrant
the president of Mar Tierra was Wilfred Martinez.
piercing the veil.
Who was Wilfredo to CLL?
The SC said that the mere fact, therefore, that the businesses of
two or more corporations are interrelated is not a justification
CLL has nominee shareholders and one of them was a firm also
for disregarding their separate personalities, absent sufficient
owned by Wilfredo which was Baker Mckenzie (their firm here
showing that the corporate entity was purposely used as a shield
in the Phil is Quisumbing Torres). Baker was a nominee
to defraud creditors and third persons of their rights
stockholder but the beneficial ownership was vested in Wilfredo
Martinez, Lacson et.al
So Ruben was held not liable, Wilfredo and Lacson were liable.
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In this case, the corporation was used to evade the liability from
the other corporation. It would cause harm, thus the corporate ....the bank tried to collect from CLL, Ruben and Gozales but
veil may be pierced. they refused. Eventually, they discovered that they really have a
payable to BPI after auditing their account. BPI filed a collection
An important fact in this case was that Hammer and Goldkey case. Since they refused to pay BPI asked the court to pierce the
commingled their assets. Meaning one corporation benefited corporate veil, claiming that since the majority of the
from the other’s loan. Even without an express finding of fraud stockholders are the same.
on the part of Goldkey, by the mere fact that it benefited, then
it should be held liable. The respondents to the complaint filed by the bank are CLL,
Ruben, Lacson, Gonzales, and Wilfredo Martinez. Wilfredo is a
Ordinarily, control alone is not sufficient, unless there is a stockholder of CLL. Ruben is not a stockholder of CLL. He is the
finding of fraud and harm. But an exception is this case of Uy, stockholder of RJL corp which is a stockholder of Martiera.
where the commingling of assets is considered sufficient ground Martiera is the supplier of CLL and they also have common
to consider them as one entity. stockholders. The SC ruled that the mere identity of the officers
is not sufficient to pierce the corporate veil.
Side Discussion about letter of credit: The persons, as ruled by the court, who were not held liable are
What’s the letter of credit for? How does it work? Ruben and Gonzales. Wilfredo Martinez and Lacson were held
liable because they signed a surety agreement and not because
Atty. Gavi: It is a financial instrument it’s used basically as a of piercing the veil. This is because they voluntarily bound
bridge between buyer and seller especially if they are located in themselves. Ruben was one of the signatories of the account but
different countries. he did not sign the surety agreement.
Illustration: if I were a buyer, I am not going to pay you until I The RTC found the claim of the bank to be valid. That yes, CLL,
get the goods because if I pay you what if I don’t get the goods? the two Martinez and Lacson are liable under the piercing of the
On the other hand if I was the seller, I’m not also going to pay veil. That they were being used to defraud the bank. The CA
you if I don’t get paid, because what happens if I ship the goods, agreed that they are liable except for Gonzales, considering that
its already with you and you don’t pay me? Okay ra if we’re in he was merely an employee and not a stockholder. Ruben went
the same City, what if you’re in HK and I’m in Cebu. So how do to the SC on the ground that there was no basis on the judgment
you reconcile? You do a letter of credit transaction. So as the against him. Why? Because the rest of the stockholders signed
buyer, you’re going to go to a bank, open a letter of credit and a surety agreement. Having signed such will make one liable
then the bank will contact its correspondent bank where the jointly and solidary liable with CLL. You do not even need to
seller is, and then you will say “hey, seller, I have here a letter of pierce the veil because they bound themselves voluntarily by
credit in your favor, you ship the goods to the buyer then give contract.
me the shipping documents, the moment you give the complete
shipping docs, me and the bank will pay you” so the seller What about Ruben? The ground for including him as one of the
knowing that he will get paid by the bank will ship the goods, the solidary debtor merely on the basis of piercing the veil/ the alter
bank now will turn around and tells the buyer “hey mr. buyer ego doctrine. According to the SC, it pierced the veil to CLL to
the good are on their way, these are the docs you will need to Martiera to RJL and to Ruben who was the majority stockholder
claim the goods, now pay me what I paid the seller”) of RJL, saying that all of these persons are one and the same.
That CLL was merely a paper corporation and sham used to
So that is what was used in this case, we have here CLL buying defraud the bank. The only proof that they had is the common
molasses from Mar Tierra, so as part of that transaction, CLL stockholding between Martiera and CLL. THAT IS NOT A
opened a letter of credit in favor of Mar Tierra. So Mar Tierra, SUFFICIENT GROUND TO APPLY THE ALTER EGO PRINCIPLE. As
shipped goods to CLL knowing that its going to get paid under we go back to the case of Zambrano, we apply the alter ego
the letter of credit. But ultimately, the letter of credit is a liability when there is a concurrence of 3 elements: (control, fraud,
of the buyer because iya man I reimburse ang bank, so the letter injury)
of credit is the liability of CLL. THREE TESTS:
CONTROL TEST – not just financial, but COMPLETE business and
operating control control.
INSTRUMENTALITY TEST – that control must be used to defraud.
Atty. Gavi: (reiterations) So when everything was said and done, HARM TEST – that fraud cause harm to the other party.
that $340k transferred to Mar Tierra was supposed to be In this case, the bank was able to establish only the common
deducted from their deposit with the bank, but the bank did not shareholdings between CLL and Martiera. But they have no
deduct, so it just recorded a receivable, and then worse is it proof to show that Martiera was using CLL to conduct fraud. In
allowed CLL and its representatives to deduct the full amount of fact, the SC found that there was a valid business transaction
the deposit without taking into consideration that they still had between CLL and Martiera. Martiera also has other clients other
an obligation in the amount of $340k. So now, the bank was left than CLL. The SC found that there was no fraud. And since there
with no money in its hand but with a receivable with CLL. So was no fraud, there was not harm. And since these two
what happened? elements are missing then you cannot apply the alter ego
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doctrine. So, there can be no piercing the veil as far as Ruben is them. The bigger amount goes to Jackbilt and the lesser amount
concerned. serves as profit or the compensation in selling the concrete
blocks to Norton and Harrison.
HEIRS OF FE TAN UY VS. INTERNATIONAL EXCHANGE BANK
Atty G: Okay, take note class that this case happened 1964 pa or
The bank granted a loan to Hammer which is secured by the 1940’s ang facts occured. So lahi pa, the corporate income tax
property of Goldkey under a surety agreement signed by Chua then was different. So you have here two companies, one is the
and his wife. Hammer defaulted with the payment. The property manufacturing, the other is the distributor. Okay? What did they
of Goldkey was foreclosed. But there is still an outstanding have in common?
balance of the loan. Bank filed a collection case against Hammer,
Goldkey and Chua. The issues are: whether or not UY can be held S: Three years after their agreement or their arrangement
personally liable, being an officer of Hammer; and whether or rather, here comes Norton and Harrison eventually buying the
not the alter ego doctrine is applicable in this case. shares of Jackbilt.
There was a finding by the trial court that Uy did not sign the
loan agreement. But she was made liable solely because she is Atty G: They purchased the shares. What’s the difference
an officer and director of the corporation. That is the only basis between purchasing assets and purchasing shares? For example
that the court had. The SC said that it is not a sufficient ground you have A company and B company. What is the difference if
to hold her liable because a corporation has a personality “A company will buy all the assets of B company” or “A company
distinct from its officers and stockholders. The officer does not buying the outstanding shares of B company”? Is it the same or
become liable with the obligations of the corporation by that are they different transactions? They are different. So don’t
mere fact. interchange them. What’s the difference?
As to the issue whether Goldkey can be held liable for the When you buy assets, you acquire the business. You acquire the
obligation of Hammer for being a mere alter ego of the latter? business because now you have all the assets of that other
entity but you don’t acquire another entity. Do you get it? You
It was ruled that the corporate veil must be pierced on the acquire the assets of B so you acquire its business but you don’t
ground that Goldkey is a mere alter ego of Hammer because of acquire B. Get it?
certain circumstances such as they have common stockholders,
both are family corporations by Chua who is the president of But if you buy shares, you are not only buying the business, you
both corporations, they share the same office, when Chua are buying the entity. Do you get it? So rather than buying the
disappeared, Goldkey and Hammer ceased operations. But the business, you buy the entity, you buy shares. So you acquire a
reason which cannot found in any other case is the commingling subsidiary. So be careful with that. That’s not the same. So in
of assets of the corporations. This means that when Hammer practice, you can do an asset purchase or a share purchase. Two
contracted the loan, Goldkey was also benefited by it. Whatever very different transactions.
benefits that Hammer received from the loan was also enjoyed
by Goldkey. SC said that you are under the same control, you Okay? So what was the transaction here?
have the same person running the corps, and that you
commingled you assets, even without mentioning fraud, or S: The sale of the concrete blocks, or the purchase of the assets
harm which is a requirement under the alter ego doctrine, of the, or the outstanding shares of stocks
Goldkey is still liable.
Atty G: The shares of Jackbilt were purchased by Norton. In
Atty G: Whatever benefits that Hammer receives from the effect, Norton now acquired control.
proceeds of the loan, it is assumed that Goldkey also enjoyed it
because they co-mingled their assets. So now that Hammer Atty G: So Norton and Harrison became the sole stockholder of
cannot pay, Goldkey should be held liable. Jackbilt. They now have control over Jackbilt. What happened
next?
CIR VS NORTON & HARRISON.
It is about a case where Norton and Harrison company came S: The CIR (inaudible) collecting sales tax said that the sale, it
into an agreement with Jackbilt where it manufacture concrete should disregard the entity of Jackbilt since its shares were
blocks. They came into an agreement where Jackbilt will acquired by Norton. The sales tax should be imposed upon the
manufacture these concrete blocks and Norton will sell it to the sales made by Norton to the public, and not the sale by Jackbilt
public, and it was found out that, when Norton and Harrison to Norton. Because after the, after Norton purchased the
sells it to the public, sells it, it will receive a lesser amount and outstanding shares of Jackbilt, the CIR said that (inaudible)
the rest of the (inaudible) of the amount goes to Jackbilt and. Jackbilt is now the corporation of Norton since it exercises
control over Jackbilt.
Atty G: So how many transactions were there in the sale of the
goods? How did they structure their transactions? Atty G: What was the effect of the two transactions, the scheme
done by Norton and Jackbilt? What was the effect of that of their
S: It was like a buy and sell structure, buy and sell … tax liability? Why is the CIR saying that there should only be one
Norton and Harrison buys the concrete blocks from Jackbilt, and sale? How many sales were there? Two diba? Jackbilt to Norton
then upon buying them, Norton and Harrison will sell it to the then Norton to the public. But now the CIR is saying that no,
public. And the proceeds of the sale will go to, will go to both of there should only be one sale because is the same as Norton.
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Why would the CIR do that? Of course, they want to get more claimed was the personal obligation of the stockholders, so the
taxes. How is that scheme, nga iduha ka transaction, depriving Supreme Court refused to apply the piercing the veil principle
the CIR of taxes? Why? Because lain-lain man nga sales price. here.
Lain ang price from Jackbilt to Norton, and they declared that as
different revenue. Okay? At that time, the lower the revenue, It’s not black and white, but generally, piercing the veil will only
the lower your tax rate. Mura xag individual the taxation style apply if you want to make the stockholders liable for the
bah. Have you have your tax already? Then from Jackbilt to liabilities of the Corporation, not the other was around. Why?
Norton, another sale. So daku man ang cost, so again lower na You go back to the essence of piercing the veil—if you are using
sad ang tax. Diba? Because they broke the transactions into two, the legal entity to defraud, so if naa na siya then you pierce the
ni-qualify sila for a lower bracket sa tax rates. You understand? veil. In this case, there was no such allegation that the Corp was
Whereas if ila lang tu giusa nga sale, daku ang revenue, that being used to defraud the lawyer. So, the Supreme Court, it will
means that they go to the higher bracket. So the CIR is saying not apply.
that no, there should be only one sale, direct from Norton to the
public. We disregard from Jackbilt to Norton because that first KUKAN INTERNATIONAL CORPORATION VS. HON. AMOR REYES
sale was only used to create a buffer to lower their tax. So you GR NO. 182729, SEPTEMBER 29 2010
understand? So what happened?
Here, you have a supplier not being paid. Supplier sued Kukan
Inc., and then Kukan Inc. stopped appearing in court, so that
FOLLOW UP DISCUSSION judgment was made and then Kukan Inc. was held liable.
However, when they served the writ of execution, they found
xx---direct from Norton to the public. We disregard the sale from that there was another Corporation occupying the premises,
Jackbilt to Norton because that first sale was only used to create Kukan International Corporation—same stockholder but
a buffer to lower their tax. different corporation. So now you have the supplier trying to
enforce the judgment of Kukan Inc. against Kukan International
General Rule, just because one corporation owns another, it Corporation and the justification is piercing the veil. Can he do
doesn’t mean that they are one and the same corporation; they that? No. The Supreme Court said that while piercing the veil
are still separate and distinct. However, there are circumstances can be used as a basis to impute liability, it cannot be used as a
to show that the separate personality is used to evade an basis to acquire jurisdiction. That’s a different matter—
obligation then that separate personality will be disregarded acquisition of jurisdiction is something that’s technical. You
and both corporations will be considered as one. cannot just enforce a judgment against Corporation A when the
judgment was against Corporation B under the guise of piercing
So in this case, the Supreme Court found that Norton and the veil. The Supreme Court said that it is not how piercing the
Harrison and Jackbilt were structed in such a way as to evade veil works. It is used to establish a liability but it is not used to
paying the larger amount of tax; and it was shown that basically acquire jurisdiction.
the two corporations were under the same control. It was
Norton and Harrison who financed the operations of Jackbilt. CLASSIFICATION OF CORPORATION
Since there was a finding that the structure was made that the Section 3. Classes of Corporations. – Corporations formed or
two-pronged sale was made just to avail of a lower tax, then the organized under this Code may be stock or nonstock
Supreme Court said that Yes, we disregard the separate entity corporations. Stock corporations are those which have capital
and consider that there should only be one sale—the sale from stock divided into shares and are authorized to distribute to
Norton and Harrison to the public. So that sale is assessed with the holders of such shares, dividends, or allotments of the
a higher tax rate, and Norton and Harrison were held liable for surplus profits on the basis of the shares held. All other
deficiency tax. corporations are nonstock corporations.
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Ans: Technically, the corporation will not be dissolved if you have FOREIGN INVESTMENTS ACT OF 1991 (RA 7042), SECTION 3.
3 corporators but the law requires that you must have atleast 5 DEFINITION:
members in the board, and each member of the board must have The term "Philippine national" shall mean a citizen of the
atleast 1 share. So, that non-compliant corporation will be Philippines or a domestic partnership or association wholly owned
penalized by the SEC. by citizens of the Philippines; or a corporation organized under the
laws of the Philippines of which at least sixty percent (60%) of the
AS TO LAWS OF INCORPORATION: capital stock outstanding and entitled to vote is owned and held
Domestic corporation - A corporation formed, by citizens of the Philippines; or a trustee of funds for pension or
organized or existing under Philippine laws. other employee retirement or separation benefits, where the
Foreign corporation - A corporation formed, organized, trustee is a Philippine national and at least sixty (60%) of the fund
or existing under any laws other than those of the will accrue to the benefit of the Philippine nationals: Provided,
Philippines and whose laws allow Filipino citizens and That where a corporation and its non-Filipino stockholders own
corporations to do business in its own country or state. stocks in a Securities and Exchange Commission (SEC) registered
enterprise, at least sixty percent (60%) of the capital stocks
Atty. GC: So when we talk about domestic or foreign corporations, outstanding and entitled to vote of both corporations must be
what are we talking about specifically? owned and held by citizens of the Philippines and at least sixty
percent (60%) of the members of the Board of Directors of both
Ans: We are talking about the classification based on the Law of corporations must be citizens of the Philippines, in order that the
Incorporation or the Place of Incorporation. It answers the corporations shall be considered a Philippine national;
question as to where the corporation is incorporated in order to
call it as a “Domestic or a Foreign corporation.” It does not speak Foreign-owned corporation - those that don’t qualify in
about the citizenship of its corporators. the abovementioned definition
Thus, it can be possible that you have a domestic corporation but NATIONALIZED ACTIVITY
all of its stockholders are foreign. There is no prohibition as to Determined by looking at the Foreign Investment Negative List
organizing a corporation that is 100% foreign-owned except in (FINL) which enumerates the activities which are limited or
cases of nationalized activities/corporations. reserved to Filipinos. It is a list of areas of economic activity whose
foreign ownership is limited to a maximum of forty ownership is
AS TO NATIONALITY: limited to a maximum of forty percent (40%) of the equity capital
Place of incorporation test: where the corporation was of the enterprise engaged therein. (pls. check Section 8 of RA 7042
created [Corporation Code] or the Foreign Investments Act of 1991)
o Domestic corporation: created in the
Philippines If the activity is not listed, that activity can be performed by a
o Foreign corporation: created abroad corporation which is 100% foreign owned even if incorporated in
Citizenship of stockholders [Foreign Investment Act] the Philippines.
o Philippine National: 100% owned by Filipino
citizens even if incorporated abroad Nationalized Corporations are those that by Constitution or by
o Foreign-owned corporation: majority of special laws are limited to Filipino citizens.
stockholdings owned by foreigners, even if Eg. Natural resource exploration, development and use, public
incorporated in the Philippines utility corporations, land ownership, educational institutions and
advertising companies.
Student:These are like permits which allow or authorizes or 1. Shares of MMC in McArthur x MBMI shares in MMC = Indirect
allows a foreign corporation to exploit, explore or extract shares of MBMI in McArthur
minerals or do mining. This is a nationalized activity. 2. Direct shares of MBMI with McArthur + Indirect shares of
MBMI in McArthur = Total shares to determine compliance
Atty: A nationalized activity so under our constitution it can only with foreign equity limitation
be done by corporations which are owned at least 60% by Filipino
citizens so it is a nationalized activity. Applying in the case:
Atty: Redmont here try to apply for the same permits in certain 1. 60% x 33% = 19.8% or 20% is MBMI’s indirect shares in
parts in Palawan but it new that these permits are already McArthur
distributed to the three corporations namely , Narra , McArthur 2. 40% + 20% = 60% which is a clear violation of the foreign
and Tesoro and after that Redmont claimed that these 3 equity limitation.
corporations are disqualified from having such mpsas because
they are basically foreigned owned thus contradicts the
prohibitions provided for under the constitution basically for the CORPORATE LAYERING
exploitation, development and utilization of the natural resources A type of arrangement whereby a corporation has for its
because it claims that these 3 corporations are controlled by a stockholder another corporation
100% Canadian Corporation MBMI so with this regard those mpsa This is not a circumvention of the law. It is a valid
should be revoked or cancelled. In this case the major issues was structure UNLESS it can be establish that it is used to
the determination really of the nationality of these three circumvent the law or the constitution
corporation. Basis: Foreign Investment Act where it only requires that
the investee corporation and investor corporation
Atty: So let us take one corporation of those three, the Mcarthur should be Filipino citizens at least 60% of its outstanding
Mining Corporation, what was the structure of mcArthur Mining stock entitled to vote and its board of directors should
Corp.? compose at least 60% filipino citizens
Student: Actually McArthur Mining had was qble to get its mpsa Section 3. Definitions. - As used in this Act:
from its predecessor SMMI.
Atty: What was the capital Structure of MMI?
Student: It has a capital structure of 10M and it is divided into one a) The term "Philippine national" shall mean a citizen
, 10 thousand common shares at 1 thousand pesos per share of the Philippines or a domestic partnership or
association wholly owned by citizens of the
Philippines; or a corporation organized under the
The Supreme Court held that McArthur is a foreign corporation laws of the Philippines of which at least sixty percent
because applying the grandfather rule it has to account MBMI's (60%) of the capital stock outstanding and entitled to
shareholdings in MMC which in turn is a shareholder of MMI. vote is owned and held by citizens of the Philippines;
Applying the 60/40 foreign equity requirement based on the or a trustee of funds for pension or other employee
Constitution, it is evident that MBMI adding up his percentage of retirement or separation benefits, where the trustee
shares in MMC and MMI it will exceed the 40 percent limitation. is a Philippine national and at least sixty (60%) of the
fund will accrue to the benefit of the Philippine
nationals: Provided, That where a corporation and
its non-Filipino stockholders own stocks in a
Securities and Exchange Commission (SEC)
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registered enterprise, at least sixty percent (60%) of on FIA or Corporation Law. There is different classification under
the capital stocks outstanding and entitled to vote NIRC. The classification would depend on the purpose.
of both corporations must be owned and held by Examples: a. ) Whether or not this entity is qualified to engage in
citizens of the Philippines and at least sixty percent a certain activity, then you are going to look at the FIA
(60%) of the members of the Board of Directors of classification. Another, b.) whether or not this entity requires a
both corporations must be citizens of the permit with the SEC in order to engage business in the Philippines,
Philippines, in order that the corporations shall be then you are going to look at the Corporation Code classifications.
considered a Philippine national; Bottomline, depends on the purpose.
Summary of Narra Nickel Mining et. al v Redmont: The nationality classification based on place on incorporation will
be discussed later because around section 60s pa sa Corpo code.
1. Apply Control Test It matters whether you are domestic or foreign corporation as to
whether or not you are doing business in the Philippines because
“at least sixty percent (60%) of the capital stock if you are doing business in the Philippines and you re domestic
outstanding and entitled to vote of each of both corporation, you don’t need to get a permit anymore from the
corporations must be owned and held by citizens of the SEC, your certificate of incorporation is already sufficient but if you
Philippines AND at least sixty percent (60%) of the are a foreign corporation (you are not registered in the SEC) if you
members of the Board of Directors of each of both want to do do business in the Philippines, you need to get permit
corporations must be citizens of the Philippines, in order from SEC to operate either as a branch or a representative office.
that the corporation shall be considered a Philippine This classification is also important with regard to doing business
national; (as amended by R.A. 8179).” in the Philippines. (will be further discussed later on)
Place of incorporation whether domestic or foreign, citizenship of
If it FAILED: then it means it does not comply with 60-40 the stockholding s as to what activities your corporation can
requirement and NO NEED TO APPLY THE GRANDFATHER RULE engage in, you look at the FIA. Philippine national or foreign
because you already fell below the 60% requirement. owned. In order to determine whether or not it’s a Philippine
Automatically, it is disqualified and it is not a Philippine National. national or foreign owned, apply the control test. If there are no
doubts, control test is sufficient. If there are doubts on the
If it PASSED and there is NO DOUBT as to the BENEFICIAL ownership of the corporation based on facts and circumstances
OWNERSHIP and CONTROL of the Corporation = stop here then you need to apply the grandfather rule.
Question: In the corporate structure of MMC it is not MBMI but
If it PASSED however there is DOUBT as to the BENEFICIAL another foreign corporation, would you still consider the
OWNERSHIP and CONTROL of the Corporation = apply stockholdings of another foreign corporation to determine
GRANDFATHER RULE whether MMI is a Filipino corporation?
Atty Gavi: Yes, the law does not distinguish as to who the
What do you mean by “doubt”? stockholder is. What the law looks into is the citizenship of the
stockholders. So as long as the stockholders of the investor
“Doubt” is any circumstance, which renders the beneficial corporation (MMC) is still foreigner and if you are going to apply
ownership and control of the corporation outside of Filipino the grandfather rule, then it is still considered foreign ownership.
ownership. It is not when you fall below 60%. Clarification: The SEC rulings were quoted by the SC but unless the
SC really adopts those rulings, they are merely guidelines, they are
In the Narra Nickel Case the following circumstances were not black and white rules. I would like to maintain that you have
considered to establish doubt: to go the ultimate stockholders. Unless the SC will rule on a
specific case really saying to apply only second layer or third layer
1. MBMI fully funded the joint ventures or ventures that MMI
but for me grandfather rule means that you have to go to the
will enter into. The fund of MMC actually came from MBMI
ultimate stockholders.
2. Foreign corporation practically provides all the technical
support and supplies for that particular venture
Where do we apply the 60% in order to determine the nationality
3. Foreign corporation although has minor ownership in said
because there are different kinds of shares? What shares are
corporation but it is the own who prepares its economic
relevant in determining nationality of a corporation?
viability studies
4. During the pendency of the case the three petitioners
converted its MPSA application to an FTAA application. It
confirmed that the petitioners did not have the capacity to
be given the MPSA
Clarification:
For tax laws, there is different classification based on where you
earn the income, or based on your situs. I don’t think we based it
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GAMBOA VS. TEVES, G.R. NO. 176579, JUNE 28, 2011 PTIC holds only 13.847% of the total outstanding common shares
of PLDT.
FACTS
Petitioner filed the instant petition for prohibition, injunction,
declaratory relief, and declaration of nullity of sale of 111,415
shares and averred that the sale would result in an increase in First
Pacific’s common shareholdings in PLDT from 30.7% to 37%, and
this, combined with Japanese NTT DoCoMo’s common
shareholdings in PLDT would result to 51.56% foreign
shareholdings which is over the 40% constitutional limit.
The facts according to public respondents Finance Secretary However, Filipinos only owned 35% of the PLDT’s common shares.
Teves, Undersecretary Sevilla, and PCGG Commissioner Abcede: As between the holdings of the Filipino citizens and foreign
The HR Committee on Good Government conducted a public nationals in terms of common shares, the latter have the
hearing of the impending sale and concluded that First Pacific’s superiority. In preferred shares, the Supreme Court described
intended acquisition of the government’s 111,415 PTIC shares them as mere investors who do not have the right to vote in the
(see 9 in the illustration above) resulting in First Pacific’s 100% election of directors and officers.
ownership of PTIC will not violate the constitutional limit since
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The preferred shares of PLDT is owned by 99% Filipinos. Thus, they preferred non-voting, preferred voting or any other class of
do not have the voting rights—they cannot control, manage or shares.
participate. However, the rest are already owned by the
foreigners. Moreover, such uniform application to each class of shares insures
that the "controlling interest" in public utilities always lies in the
Compliance with the required Filipino ownership of a corporation hands of Filipino citizens.
shall be determined on the basis of outstanding capital stock
whether fully paid or not, but only such stocks which are generally
entitled to vote are considered. Philippine Nationality of Corporations
For stocks to be deemed owned and held by Philippine citizens or Sec 3(a) of the Foreign Investments Act provides, “The term
Philippine nationals, mere legal title is not enough to meet the "Philippine national" shall mean a citizen of the Philippines;or a
required Filipino equity. Full beneficial ownership of the stocks, domestic partnership or association wholly owned by citizens of
coupled with appropriate voting rights is essential. Thus, stocks, thePhilippines; or a corporation organized under the laws of the
the voting rights of which have been assigned or transferred to Philippines of which at least sixty percent (60%) of the capital
aliens cannot be considered held by Philippine citizens or stock outstanding and entitled to vote is owned and held by
Philippine nationals. Individuals or juridical entities not meeting citizens of the Philippines;...”
the aforementioned qualifications are considered as non-
Philippine nationals.
The second ruling expanded the first ruling. They said that it must
apply to all types of shares—voting or non-voting. Common shares
GAMBOA VS. TEVES, G.R. NO. 176579, OCTOBER 9, 2012 must have 60-40 shares, preferred shares 60-40 limitation applies
as well. You apply it separately. You don’t apply it on total
FACTS: outstanding shares, like what PLDT wanted in their MR. The SC
The lawyers of PLDT felt that they were disadvantaged by this wanted it more strict. SC said that it must apply not just those
decision, because now it is not based on total outstanding stock, entitled to shares but to each type of shares—whether voting or
but on the common shares. They filed a Motion for non-voting, class A, class B…
Reconsideration brought by the foreigners and their lawyers who
were insisting on the total outstanding capital stock. (sa IBL ni) Atty Gaviola: That interpretation for me is the correct
interpretation because when the law says outstanding capital
stock entitled to vote, this is very general. You cannot say that
ISSUE preferred stocks are not entitled to vote. General rule is that if the
Whether or not the MR should be granted articles are silent, preferred stocks are entitled to vote in the
election of directors. Only when they are deemed to be non-voting
RULING expressly can they be deprived of their right to vote but only in the
No. SC denied the MR. election of directors. For all the 8 other items enumerated in the
corporation code, they are required to vote.
(...but according to Atty G: The SC now realized that their ruling in
the First Gamboa v. Teves case actually narrowed down the So where do you apply the 60%?
definition of capital. Because of the MR, the SC revised their ruling 60% voting shares or 60%total outstanding shares?
although they did not admit that they revised it. They just The lawyers of PLDT were insisting that you should apply based on
maintained that this it was their ruling all along. But it’s not true total outstanding shares because these are the lawyers
because they said “entitled to vote in the election of directors.” representing the foreign stockholders of PLDT. If you apply it
According to them, what they focused on is on the based on total outstanding shares, PLDT’s total outstanding
pronouncement “that mere legal title is not sufficient, but full shares, more than 70% of its outstanding shares were preferred
beneficial ownership.” ) non-voting shares and majority of that almost 99% were owned
by Filipino citizens. On the other hand, the common stockholdings,
Since a specific class of shares may have rights and privileges or the voting shares were only around 20+% but majority of that
restrictions different from the rest of the shares in a corporation, were owned by foreigners.
the 60-40 ownership requirement in favor of Filipino citizens in Do we apply it to common or do we apply it to the total?
Section 11, Article XII of the Constitution must apply not only to If in common, it would mean PLDT should not own a utility
shares with voting rights but also to shares without voting rights. franchise because more than 60% of its voting shares are owned
Preferred shares, denied the right to vote in the election of by foreigners. But if we apply it on total outstanding, then that’s
directors, are anyway still entitled to vote on the eight specic okay because more than 60% of its total outstanding are owned
corporate matters mentioned above. Thus, if a corporation, by Filipinos.
engaged in a partially nationalized industry, issues a mixture of
common and preferred non-voting shares, at least 60 percent of
the common shares and at least 60 percent of the preferred non-
voting shares must be owned by Filipinos. Of course, if a
corporation issues only a single class of shares, at least 60 percent
of such shares must necessarily be owned by Filipinos. In short,
the 60-40 ownership requirement in favor of Filipino citizens must
apply separately to each class of shares, whether common,
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Ans: Base on the Gamboa case, when you say total capital stock
outstanding & entitled to vote, it means the Total capital stock As to nationality , you can have the place of the corporation ,
outstanding and vote (Election of directors). citizenship of stockholders. Which classification you apply, it
depends on what’s the purpose. If it’s a matter on “can the
IOW: apply the 60 & on the capital stock entitled to vote in the corporation do business?” and to secure a permit, then you take
election of directors: a look at the place of incorporation . If it a question on what
activity can that corporation engage in?” Look at the Citizenship
Ans: So basically, what you classify as voting shares are those of the stock holders and you apply the foreign investment act.
shares entitled to vote in the election of directors.
How do you determine nationality base on the FIA?
Example. 200 shares outstanding, Apply the Control test: 60 % of the Capital stock outstanding and
100- voting shares entitled to vote must be owned by Filipino Citizen.
100- non-voting
If there is corporate layering
Gamboa Decision: 60 % of both the investor and investee if outstanding capital
60 % of the shares entitled to vote in the election of directors stock and entitled to vote must be owned by Filipino Citizens &
must be owned by Filipino Citizens ( refers to 100 voting shares 60 % of the directors both corporation must be Filipino citizen.
lang) non-voting and shares outstanding (NOT IMPORTANT) In which case, your corporation is Philippine national .
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CLASSIFICATION OF SHARES A corporation may further classify its shares for the purpose of
Section 6. Classification of shares. –The classification of shares, ensuring compliance with constitutional or legal requirements.
their corresponding rights, privileges, or restrictions, and their
stated par value, if any, must be indicated in the articles of Stock - It is a unit of division of the capital stock of the corporation.
incorporation. Each share shall be equal in all respects to every
other share, except as otherwise provided in the articles of The stock represents:
incorporation and in the certificate of stock. 1. It represents the interest or right of the stockholder in
the management of the corporation through the
The shares in stock corporations may be divided into classes or exercise of the voting right;
series of shares, or both. No share may be deprived of voting
rights except those classified and issued as “preferred” or 2. It represents the interest of right of the stockholder in
“redeemable” shares, unless otherwise provided in this Code:
the earnings of the corporation in the form of the
Provided, That there shall always be a class or series of shares
with complete voting rights. dividends to be distributed; and
Holders of nonvoting shares shall nevertheless be entitled to 3. It represents the interest or right of the stockholder in
vote on the following matters: the residual assets of the corporation upon dissolution.
Amendment of the articles of incorporation; So the share of stock represents your share in the corporation in
Adoption and amendment of bylaws; the form of dividends. Shares of stocks are therefore an asset on
Sale, lease, exchange, mortgage, pledge, or other disposition the part of the shareholder. It is an intangible asset representing
of all or substantially all of the corporate property; its right and interest in the corporation.
Incurring, creating, or increasing bonded indebtedness;
Increase or decrease of authorized capital stock; Example: you have 1M capital divided into 1M shares, that means
Merger or consolidation of the corporation with another that your capital is divided into 1M parts and each share
corporation or other corporations; represents 1 part.
Investment of corporate funds in another corporation or
business in accordance with this Code; and Types of capital Stock
Dissolution of the corporation. AUTHORIZED CAPITAL STOCK - It refers to the amount of
Except as provided in the immediately preceding paragraph, capital stock as specified in the articles of incorporation.
the vote required under this Code to approve a particular Additional shares may not be issued unless the articles of
corporate act shall be deemed to refer only to stocks with incorporation are amended by vote of the stockholders. But
voting rights. unissued authorized shares may be issued at a later date
without amendment of the articles of incorporation or
The shares or series of shares may or may not have a par value: approval of the stockholders.
Provided, That banks, trust, insurance, and preneed
companies, public utilities, building and loan associations, and SUBSCRIBED CAPITAL STOCK - It is the amount of the capital
other corporations authorized to obtain or access funds from stock subscribed, whether fully paid or not. It connotes an
the public, whether publicly listed or not, shall not be original subscription contract for the acquisition by a
permitted to issue no-par value shares of stock. subscriber of unissued shares in a corporation and would,
therefore, preclude the acquisition of shares by reason of
Preferred shares of stock issued by a corporation may be given subsequent transfer from a stockholder or resale of treasury
preference in the distribution of dividends and in the shares.
distribution of corporate assets in case of liquidation, or such
other preferences: Provided, That preferred shares of stock OUTSTANDING CAPITAL STOCK - The Code defines the
may be issued only with a stated par value. The board of terms as “the total shares of stock issued to subscribers or
directors, where authorized in the articles of incorporation, stockholders, whether or not fully or partially paid (as long
may fix the terms and conditions of preferred shares of stock
as there is a binding subscription agreement), except
or any series thereof: Provided, further, That such terms and
conditions shall be effective upon filing of a certificate thereof treasury shares.” the portion of the capital stock which is
with the Securities and Exchange Commission, hereinafter issued and held by persons other than the corporation itself.
referred to as the “Commission”.
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Out of the 5 million subscribed, 4 million is paid, this is the paid up Requirement as to its issuance:
capital stock. A par value share cannot be issued below par but can be issued
more than par and the excess thereof shall form part of the paid-
Supposing the corporation repurchased/reacquired 1 million in capital but it is accounted for as a premium or as an additional
shares from the shareholders, the 1 million are the treasury paid-in capital.
shares. These treasury shares remain subscribed and issued
because somebody already paid for it. Even the corporation that
reacquired it, paid for it. But they are no longer outstanding capital2. NO PAR VALUE SHARE
stock. Therefore, the outstanding capital stock is 4 million. ACS It is one without any stated value appearing on the face of the
remains at 10M. Unissued shares remain at 5M. certificate of stock. IOW, it is a stock which does not state show
much money it represents.
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Requirement as to its issuance: 2. Under the Code, no share may be deprived of voting rights
except those classified and issued as "preferred" or "redeemable"
1) Shares of stock issued without par value shall be deemed fully shares, unless otherwise provided in the Code.
paid and non-assessable and the holder of such shares shall not
be liable to the corporation or to its creditors in respect thereto. 3.Where non-voting shares are provided for , the Code requires
- The consideration given shall be considered as the full amount of that there shall always be a class or series of shares which have
the issue price, there can be no subscription receivable. complete voting rights.
2) The shares without par value may not be issued for a 4. Under Section 6 (par. 1), only preferred or redeemable shares
consideration less than the value of Five pesos (P5.00) per share. may be denied the right to vote. The issuance of common stock
- This is the minimum consideration for a non par value share with a feature that voting rights thereof shall be exercised by a
trustee violates the rule that common shares cannot be deprived
3) The entire consideration received by the corporation for its of voting rights. The automatic assignment of voting rights in an
non-par value shares shall be treated as capital and shall not be indirect violation of Section 6.
available for distribution as dividends.
(2nd to the last paragraph, RCC) 5. In case any amendment of the articles of incorporation has the
effect of changing or restricting the rights of any stockholder, the
latter shall have the right to dissent and demand payment of the
THE FF INSTITUTIONS ARE NOT ALLOWED TO ISSUE SHARES fair value of his shares
WITH NO-PAR VALUE:
That banks, trust, insurance, and preneed companies, public Atty: The rule is that a corporation must always have voting shares
utilities, building and loan associations, and other corporations there can be no valid agreement where a corporation has all non-
authorized to obtain or access funds from the public. voting share. Any agreement that will take away the right to vote
of all the shares of a corporation is not valid.
3. VOTING SHARE
Voting share is share with right to vote. 5. COMMON STOCK
It is one which entitles the holder thereof to a pro rata division of
the profits, if there are any, and in its assets upon dissolution,
4. NON-VOTING STOCK without any preference or advantage in that respect over other
Non-voting share is share without right to vote. stockholders but equally with all other stockholders except
preferred stockholders. Basic shares issued by the corporation.
Requirement as to its issuance: You cannot have a corporation that has no common shares.
1) Only preferred or redeemable shares may be made non-voting
shares.
6. PREFERRED STOCK
2) There must remain other shares with full voting rights. It is one with a stated par value which entitles the holder thereof
- There can be no valid agreement where a corporation has all to certain preferences over the holder of common stock. Shares
non-voting shares. Any agreeement that will take away the right which are specified in the AOI that the preferred shares have
to vote of all the shares in a corporation is not valid. preference over the distribution of assets in case of liquidation
and preference in the distribution of dividends.
3) Holders of non-voting shares shall nevertheless be entitled to
vote on the ff matters: NOTE: Common and preferred shares are the 2 main classes or
a. Amendment of the articles of incorporation forms of stock.
b. Adoption and amendment of by-laws
c. Sale, lease, exchange, mortgage, pledge or other disposition
of all or substantially all of the corporate property Kinds of preferred shares
d. Incurring, creating or increasing bonded indebtedness a. Preferred share as to assets
e. Increase or decrease of capital stock Share which the holder thereof preference in the distribution of
f. Merger or consolidation of the corporation with another the assets of the corporation in case of liquidation. It has been
corporation or other corporations held that preferred stock, standing alone, creates a preference
g. Investment of corporate funds in another corporation or only to dividends and not to assets in case of liquidation.
business in accordance with this Code, and
h. Dissolution of the corporation. b. Preferred share as to dividends
Share the holder of which is entitled to receive dividends on said
Conditions for the issuance of non-voting shares share to the extent agreed upon before any dividends at all are
paid to the holders of common stock. The preference simply
1. If the stock is originally issued as voting stock, it may not means that holders of common stock may receive dividends only
thereafter be deprived of the right to vote without the consent of after the satisfaction of the prior claims on dividends of preferred
the holder. stockholders. There is no guaranty that it will receive any
dividends. The corporation is not bound to pay dividends unless
the BOD declare them.
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i. Cumulative preferred share - Share which entitles the “exclusive right to vote and be voted for in the election of
holders thereof not only to the payment of current dividends but directors is granted”
also to dividends in arrears. Dividends in arrears means that for
every year that the company did not declare dividends, each GR: Common shares cannot be deprived the right to vote.
cumulative preferred shareholder will have an interest in those
undeclared dividends. XPN: In the case of Founder’s Shares – for a limited period of 5
years, owners of founders’ shares shall have an exclusive right to
ii. Non-cumulative - Share which entitles the holder vote and be voted. (Sec. 7)
thereof to the payment of current dividends only in preference to
commons stockholders. Founders’ Shares – shares issued to the organizers and
promoters of a corporation in consideration of some
Example: 1000 shares; Stated in the AOI that these are preferred supposed right or property having special rights and
shares entitled to cumulative dividends at Php5/share per year. privileges not enjoyed by the owners of other classes of
2017 and 2018, no dividends declared. 2019 – corporation shares.
declares dividends.
Effect: After the lapse of 5 years the founder’s shares
Entitled to how much dividends? will be treated and given the same rights as other
Cumulative: 2017, 2018 and 2019, entitled to 5000/yr common shareholders.
Non-cumulative: 5000 only for the current year
Amendment: Changes in founder’s share expressly provided that
iii. Participating preferred share - Share which gives the exclusive right to vote and be voted on founders share in the
holder thereof not only the right to receive the stipulated election of directors should not violate the Anti-Dummy Law and
dividends at the preferred rate but also to participate with the FIA.
holders of common shares in the remaining profits pro rata (or in
the proportion stated in the articles of incorporation) after the Anti dummy law – persons not allowed to have interest in
common shares have been paid the amount of the stipulated nationalized corporation, they just nominate Filipino citizen to be
dividend at the same preferred rate. Those which after they get legal stockholders but in reality they are the one controlling, a
their share of the dividends, they still participate in the sharing violation of Anti-Dummy Law, a criminal offense.
of dividends of the common stockholders.
iv. Non-participating - Share which entitles the holder Common Shares vs. Preferred shares
thereof to receive the stipulated preferred dividends and no COMMON SHARES
more. The balance, if any, is given entirely to the common stocks. refers to the residual ownership of the corporation
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Therefore, if the articles of incorporation provide only of How about if the stockholders compel the corporation to redeem
common and preferred shares but does not provide for the shares?
anything else the two shares are treated equally.
You can have redeemable shares at the option of the stockholders.
-IF THE ARTICLES OF INCORPORATION ARE SILENT, PREFERRED SHARES ARE
PRESUMED TO BE NON-CUMULATIVE AND NON-PARTICIPATING. There is also an instance where the stockholders can compel the
corporation to purchase as an exercise of their appraisal right.
- AOI CAN SPECIFY THAT SHARES ARE BOTH CUMULATIVE AND PARTICIPATING
. REDEEMABLE SHARES
CUMULATIVE - MEANS YOU HAVE THE RIGHT TO DIVIDENDS IN ARREARS. Sec. 8. Redeemable shares. — Redeemable shares may be
PARTICIPATING- MEANS YOU HAVE THE RIGHT TO PARTICIPATE WITH THE COMMON issued by the corporation when expressly so provided in the
SHARES. articles of incorporation. They may be purchased or taken up
by the corporation upon the expiration of a fixed period,
TN: PREFERRED SHARES CAN BE BOTH CUMULATIVE AND PARTICIPATING regardless of the existence of unrestricted retained earnings in
the books of the corporation, and upon such other terms and
Rule in case of acquisition by the corporation in its own shares conditions stated in the articles of incorporation, which terms
and conditions must also be stated in the certificate of stock
representing said shares, (n)
SEC. 41. POWER TO ACQUIRE OWN SHARES. – A STOCK CORPORATION SHALL
HAVE THE POWER TO PURCHASE OR ACQUIRE ITS OWN SHARES FOR A LEGITIMATE
CORPORATE PURPOSE OR PURPOSES, INCLUDING BUT NOT LIMITED TO THE
Rules to Redeem:
FOLLOWING CASES: PROVIDED, THAT THE CORPORATION HAS UNRESTRICTED
RETAINED EARNINGS IN ITS BOOKS TO COVER THE SHARES TO BE PURCHASED OR 1. Redeemable shares are redeemable even without
ACQUIRED: UNRESTRICTED RETAINED EARNINGS.
1. TO ELIMINATE FRACTIONAL SHARES ARISING OUT OF STOCK 2. BUT SEC RULES REQUIRES:
DIVIDENDS; - after redemption , there should still be sufficient assets to pay
2. TO COLLECT OR COMPROMISE AN INDEBTEDNESS TO THE of all liability plus the capital stock.
CORPORATION, ARISING OUT OF UNPAID SUBSCRIPTION, IN A
DELINQUENCY SALE, AND TO PURCHASE DELINQUENT SHARES SOLD IOW: You cannot redeem without Retained Earnings.
DURING SAID SALE; AND
3. TO PAY DISSENTING OR WITHDRAWING STOCKHOLDERS ENTITLED TO The retained earnings may not be Unrestricted but if you have a
PAYMENT FOR THEIR SHARES UNDER THE PROVISIONS OF THIS CODE. deficit (negative Retained earnings)= CANT REDEEM.
CORPORATION has the power to acquire its own shares whether WHO CAN REDEEM: Corporation/ shareholder
or not these shares are deemed as redeemable. If you have shares that are redeemable , it means that the
parties have already agreed beforehand whether it is
Even if there are no redeemable shares in the articles of redeemable at the option of the corporation or whether
incorporation, corporation is still allowed to reacquire its own redeemable at the option of the stockholder.
shares under section 41. But this section allows such purchase only
if the corporation has unrestricted retained earnings. WHEN TO REDEEM: it depends (Redemption Rights &
Agreement)
GR: Corporation has the power to acquire its own shares whether
the shares are redeemable or not provided that: 1. As a matter of right - when the redemption date
comes, the stockholder can compel redemption as a
1. if not redeemable the corporation has unrestricted matter of right
retained earnings.
2. But if the shares are termed or classified as redeemable 2. As a matter of agreement - redemption date comes
on AOI, even without unrestricted retained earnings, it is and the corporation does not redeem and the
authorized to purchase or reacquire the shares.
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stockholders do not compel redemption, it is now a conversion. So what you will do is to apply for the convertibility
matter of agreement between the two. feature and at the same time you need to apply for the ACTUAL
CONVERSION.
If the stockholder dili ganahan magpa redeem sa
iyahang shares , then the corporation and the NOTE: Generally it needs 2 amendments unless the Convertibility
stockholder can just agree that we’ll just amend our feature is already there. You only need to amend for the actual
AOI to put in there that it’s no longer redeemable. conversion.
AMEND ROI (reduce ACS) IF REDEEMED SHARES ARE The treasury shares will become a property of the corporation
RETIRED meaning that the corporation can resell it in an amount which is
There’s a need to amend the Articles of Incorporation fixed by the board of directors and it cannot be considered as a
to decrease the AUTHORIZED CAPITAL STOCK (ACS) . retired share because it does revert into unissued shares.
The retirement or cancellation of the redeemed shares
will not automatically reduce the ACS , there has to be Retirement is different from an unissued share.
approval by the SEC.
We said that when we have treasury shares, it becomes the
CONVERTIBLE SHARE property of the corporation, it can reissue the shares, or it can
retire the shares but regardless the shares do not revert to the
CONCEPT unissued it will always be issued but no longer outstanding.
Are shares which are convertible or changeable by the
stockholder from one class to another class (such as from Retirement – a decrease in the authorized capital stock. It has
preferred to common) at a certain price and within a certain nothing to do with the unissued shares.
period.
EXAMPLE
If you allow Preferred shares to be converted to Common.
1. Amend your articles to provide for the Convertibility Feature.
( Preferred to Common)
2. Do a 2nd Amendment to wipe out the Convertible preferred
and they are now all Common Shares
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TITLE II- INCORPORATION AND ORGANIZATION OF PRIVATE d. The term for which the corporation is to exist, if the
CORPORATIONs corporation has not elected perpetual existence;
e. The names, nationalities and residences of the
Steps in the creation of a corporation: incorporators;
Promotion f. The number of directors or trustees, which shall not be more
(1) Promotion than fifteen (15) or the number of trustees which may be more
(2) Incorporation than fifteen (15);
(3) Formal organization and commencement of business g. The names, nationalities and residences of persons who
operations shall act as directors or trustees until the first regular directors
or trustees are duly elected and qualified in accordance with
INCORPORATION this Code;
SEC. 18, Revised Corporation Code (RCC). Registration, h. If it be a stock corporation, the amount of its authorized
Incorporation and Commencement of Corporate Existence. – A capital stock, number of shares into which it is divided, the par
person or group of persons desiring to incorporate shall submit value of each, names, nationalities and residence addresses of
the intended corporate name to the Commission for the original subscribers, amount subscribed and paid by each
verification. If the Commission finds that the name is on the subscription, and a statement that some or all of the
distinguishable from a name already reserved or registered for shares are without par value, if applicable;
the use of another corporation, not protected by law and is not i. If it be a non-stock corporation, the amount of its capital, the
contrary to law, rules and regulations, the name shall be names, nationalities and residence addresses of the
reserved in favor of the incorporators. The incorporators shall contributors and the amount contributed by each; and
then submit their articles of incorporation and bylaws to the j. Such other matters consistent with law and which the
Commission. incorporators may deem necessary and convenient.
If the Commission finds that the submitted documents and An arbitration agreement may be provided in the articles of
information are fully compliant with the requirements of this incorporation pursuant to Section 181 of this Code.
Code, other relevant laws, rules and regulations, the
Commission shall issue the certificate of incorporation. The articles of incorporation and applications for amendments
thereto may be filed with the Commission in the form of an
How to incorporate electronic document, in accordance with the Commission’s
rules and regulations on electronic filing.
1. Make a name reservation online on the SEC website +
pay the reservation fee
2. Submission to the SEC of: FORM OF ARTICLES OF INCORPORATION
a. Name verification slip SEC. 14, RCC. Form of Articles of Incorporation. – Unless
b. Articles of Incorporation otherwise prescribed by special law, the articles of
c. By-laws incorporation of all domestic corporations shall comply
d. For banks, quasi-banking institutions, substantially with the following form:
preneed, insurance and trust corporations,
non-stock savings and loan associations Articles of Incorporation
(NSSLAs), pawnshops, and other financial of
intermediaries, a favorable recommendation __________________________
of the appropriate government agency to the (Name of Corporation)
effect that such articles, or even in case of an
amendment, is in accordance with law. The undersigned incorporators, all of legal age, have
voluntarily agreed to form a (stock) (nonstock) corporation
under the laws of the Republic of the Philippines and certify
CONTENTS OF THE ARTICLES OF INCORPORATION the following:
SEC. 13, RCC. Contents of the articles of incorporation. - All
corporations shall file with the Commission articles of First: That the name of said corporation shall be
incorporation in any of the official languages duly signed and “_______________, Inc., Corporation or OPC (ONE PERSON
acknowledged or authenticated by all of the incorporators, CORPORATION)”;
containing substantially the following matters, except as
otherwise prescribed by this Code or by special law: Second: That the purpose or purposes for which such
corporation is incorporated are: (If there is more than one
a. The name of the corporation; purpose, indicate primary and secondary purposes);
b. The specific purpose or purposes for which the corporation
is being incorporated. Where a corporation has more than one Third: That the principal office of the corporation is located in
stated purpose, the articles of incorporation shall indicate the the City/Municipality of ___________________, Province of
primary purpose and the secondary purpose or purposes: _________________________, Philippines;
Provided, That a non-stock corporation may not include a
purpose which would change or contradict its nature as such; Fourth: That the corporation shall have perpetual existence or
c. The place where the principal office of the corporation is to a term of ______________ years from the date of issuance of
be located, which must be within the Philippines; the certificate of incorporation;
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Fifth: That the names, nationalities, and residence addresses Eleventh: (Corporations which will engage in any business or
of the incorporators of the corporation are as follows: activity reserved for Filipino citizens shall provide the
following):
NAME NATIONALITY RESIDENCE “No transfer of stock or interest which shall reduce the
ownership of Filipino citizens to less than the required
Sixth: That the number of directors or trustees of the percentage of capital stock as provided by existing laws shall
corporation shall be _________________; and the names, be allowed or permitted to be recorded in the proper books of
nationalities, and residence addresses of the first directors or the corporation, and this restriction shall be indicated in all
trustees of the corporation are as follows: stock certificates issued by the corporation.”
NAME NATIONALITY RESIDENCE IN WITNESS WHEREOF, we have hereunto signed these Articles
of Incorporation, this ________ day of _________________,
Seventh: That the authorized capital stock of the corporation 20______ in the City/Municipality of _________________,
is ______________ PESOS (P________), divided into ______ Province of _________________, Republic of the Philippines.
shares with the par value of ____________ PESOS ____________________ ____________________
(P_______________) per share. (In case all the shares are ____________________ ____________________
without par value): That the capital stock of the corporation is ____________________ ____________________
_____________________ shares without par value. (Names and signatures of the incorporators)
______________________________
(In case some shares have par value and some are without par (Name and signature of Treasurer)
value): That the capital stock of said corporation consists of
___________________ shares, of which Contents and Form of Articles of Incorporation
_______________________ shares have a par value of It must be written in any of the official languages ( i.e., English or
_________________ PESOS (P____________) each, and of Filipino) duly signed and acknowledged by all of the incorporators.
which _______________________ shares are without par
value. NAME OF THE CORPORATION
(In practice, as a lawyer, you will have to ask 3 corporate names
Eighth: That the number of shares of the authorized capital from your client just in case the first name won’t pass)
stock above-stated has been subscribed as follows: - Once you have the name, apply for reservation and once
reserved, put that in the Articles of Incorporation.
Name of Subscriber - Nationality - No. of Shares Subscribed
- Amount Subscribed - Amount Paid Importance:
- The corporation acquires juridical personality under the name
(Modify No. 8 if shares are with no-par value. In case the stated in the certificate of incorporation.
corporation is nonstock, Nos. 7 and 8 of the above articles may - It has the power of succession by its corporate name
be modified accordingly, and it is sufficient if the articles state - It is the name that identifies and distinguishes it from the other
the amount of capital or money contributed or donated by corporations, firms or entities. By that name it is authorized to
specified persons, stating the names, nationalities, and transact business.
residence addresses of the contributors or donors and the - Therefore, a name is peculiarly essential to its existence.
respective amount given by each.) Nature:
- A corporate name is regarded as of the nature of a trademark
Ninth: That _____________________ has been elected by the even though composed of individual names, and its simulation
subscribers as Treasurer of the Corporation to act as such until may be restrained.
after the successor is duly elected and qualified in accordance - A corporation’s right to use its corporate and tradename is a
with the bylaws, that as Treasurer, authority has been given to property right, a right in rem, it may be asser or protect such right
receive in the name and for the benefit of the corporation, all against anybody, in the same way as it may protect its tangible
subscriptions, contributions or donations paid or given by the property against trespass or conversion. It cannot be impaired or
subscribers or members, who certifies the information set defeated by subsequent appropriation by another corporation in
forth in the seventh and eighth clauses above, and that the the same field.
paid-up portion of the subscription in cash and/or property for
the benefit and credit of the corporation has been duly PURPOSE OF THE CORPORATION
received.
A corporation may be organized only for “any lawful purpose or
purposes” (SEC.10). The purpose or purposes must be stated
Tenth: That the incorporators undertake to change the name
with sufficient clarity.
of the corporation immediately upon receipt of notice from the
Commission that another corporation, partnership or person
Primary Purpose
has acquired a prior right to the use of such name, that the
name has been declared not distinguishable from a name refers to the primary activity of the corporation
already registered or reserved for the use of another
corporation, or that it is contrary to law, public morals, good Secondary Purpose
customs or public policy. the additional activities that the corporation can do
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If you do a transaction not covered by your purpose, the OLD Corporation Code: Not to exceed 50 years
transaction is ultra vires. The purpose determines the power and Renewable for another 50 years.
authorities of the corporation. REVISED Corporation Code: Perpetual existence unless articles of
incorporation provides otherwise
PRINCIPAL OFFICE
It is important because any notice or communication or any letters NAME, NATIONALITIES AND RESIDENCE OF INCORPORATORS
that the government will issue or send to you will be addressed or SEC. 10, RCC. Number and qualifications of incorporators. –
directed to that address that you have indicated. It must be Any person, partnership, association or corporation, singly or
specific and must contain the street number, street name, jointly with others but not more than fifteen (15) in number,
barangay, building name, unit number, municipality or the city may organize a corporation for any lawful purpose or
where it is located. purposes: Provided, That natural persons who are licensed to
practice a profession, and partnerships or associations
GENERAL RULE organized for the purpose of practicing a profession, shall not
if there is a change of address, you amend the articles of be allowed to organize as a corporation unless otherwise
incorporation provided under special laws. Incorporators who are natural
persons must be of legal age.
EXCEPTION
if there is a change of address but within the same city, you can Each of the incorporators of a stock corporation must own or
file a general information sheet with the new address. be a subscriber to at least one (1) share of the capital stock of
the corporation.
TERM
SEC. 11, RCC. Corporate term. – A corporation shall have A corporation with a single stockholder is considered a One
perpetual existence unless its articles of incorporation Person Corporation as described in Title XIII, Chapter III of this
provides otherwise. Code.
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CAPITAL STOCK and desist from using such name and require the corporation
SEC. 12, RCC. Minimum capital stock required of stock to register a new one.
corporations. – Stock corporations incorporated under this
Code shall not be required to have any minimum capital stock The Commission shall also cause the removal of all visible
except as otherwise specifically provided for by special law. signages, marks, advertisements, labels, prints and other
effects bearing such corporate name. Upon the approval of the
OLD Code: new corporate name, the Commission shall issue a certificate
-No minimum amount for authorized capital stock (ACS) of incorporation under the amended name.
- Subscribed capital - must be at least 25% of the ACS
- Paid-up capital- at least 25% of the subscribed capital stock If the corporation fails to comply with the Commission’s order,
should be paid up the Commission may hold the corporation and its responsible
directors or officers in contempt and/or hold them
(EXAMPLE UNDER OLD CODE, JUST IN CASE): administratively, civilly and/or criminally liable under this
Code and other applicable laws and/or revoke the registration
IF A CORPORATION HAS AUTHORIZED CAPITAL STOCK OF P100,000, of the corporation.
P25,000 (25% OF THE ACS) MUST BE SUBSCRIBED AND AT LEAST
25% OF THE SUBSCRIBED CAPITAL STOCK MUST BE PAID UP. REQUIREMENTS FOR A VALID CORPORATE NAME:
1. Distinguishable from a name already reserved or
IF THE 100,000 ACS IS SUBSCRIBED BY A,B,C, D AND E, WHAT IS registered for the use of another corporation;
REQUIRED IS THAT THE TOTAL SUBSCRIPTION MUST AT LEAST BE TN: A name is not distinguishable even if it contains
25,000. IT IS NOT A REQUIREMENT THAT THE 25,000 MUST BE DIVIDED one or more of the following:
EQUALLY AMONG THE A,B,C, D AND E. IT IS NOT REQUIRED THAT A,B,C, D (a) The word “corporation”,“company”, “incorporated”,
AND E MUST SUBSCRIBE 5,000 EACH FOR AS LONG AS THE TOTAL “limited”, “limited liability”, or an abbreviation of one
SUBSCRIPTION IS AT LEAST 25% OF THE ACS. of such words; and
(b) Punctuations, articles, conjunctions, contractions,
THE LAW DOES NOT SAY WHO MUST SUBSCRIBE. WHAT THE LAW ONLY prepositions, abbreviations, different tenses, spacing,
REQUIRES IS THAT 25% OF THE SUBSCRIBED CAPITAL MUST BE PAID or number of the same word or phrase.
UP, SO YOU MAY HAVE INCORPORATORS SUBSCRIBING TO SHARES WITHOUT 2. One that is not yet protected by law;
PAYING UP. IN FACT THAT IS WHAT HAPPENED IN THE NARRA NICKEL 3. Not contrary to law, rules and regulations
CASE. OLYMPIC MINES DID NOT PAY THEIR SUBSCRIPTION. ALL THE PAID UP
CAPITAL CAME FROM MBMI, A FOREIGN INVESTOR. SO THAT IS THE Upon determination by the Commission that the
REQUIREMENT ON THE SUBSCRIPTION TO INCORPORATE. corporate name violates either of the three requirements, it may
summarily order the corporation to IMMEDIATELY CEASE AND
REVISED Code DESIST FROM USING SUCH NAME AND TO REGISTER A NEW ONE.
- no more minimum capital stock requirement unless IT SHALL ALSO CAUSE THE REMOVAL OF VISIBLE SIGNAGES,
specifically provided by special laws MARKS, ADS, etc. bearing such corporate name.
- The 25%/25% requirement under RCC is applicable
only in case of increase in authorized capital stock under Title IV, Upon approval of the new corporate name, the
SEC. 37, RCC. Commission shall issue a certificate of incorporation under the
amended name.
Effect if the trade name is not included in the Articles of “Sec 18. Corporate name. — no corporate name may be allowed
Incorporation: by the SEC if the proposed name is identical or deceptively or
SEC Rules provide that such trade name can be used by some confusingly similar to that of any existing corporation…or is
other corporations subject to the consent of the owner of the patently deceptive, confusing or contrary to existing laws..”
trade name.
It is the SEC's duty to prevent confusion in the use of corporate
Trade name and Corporate name need not be the same. names not only for the protection of the corporations involved
but more so for the protection of the public, and it has authority
EXAMPLE to de-register at all times and under all circumstances corporate
Trade name: Penshoppe names which in its estimation are likely to generate confusion.
Corporate name: Golden ABC
There is confusing or deceptive similarity.
Grounds to question a corporate name To fall within the prohibition of the law, two requisites must be
1. Complainant corporation has acquired prior right over proven:
the use of such corporate name; and 1. That complainant corporation acquired a prior right over the
2. Proposed name is either: use of the corporate name
a. Identical; or 2. That proposed name is either:
b. Deceptively or confusingly similar to that of any i. Identical; or
existing corporation or to any other name already ii. Deceptively or confusingly similar to that of any existing
protected by law; or corporation or to any other name already protected
c. Patently deceptive, confusing or contrary to by law; or
existing laws. iii. Patently deceptive, confusing or contrary to existing laws.
INDUSTRIAL REFRACTORIES CORPORATION OF THE PHILIPPINES, In this case, anent the second requisite in determining the
PETITIONER, VS. COURT OF APPEALS, SECURITIES AND existence of confusing similarity, the test is whether the
EXCHANGE COMMISSION AND REFRACTORIES CORPORATION similarity is such as to mislead a person using ordinary care and
OF THE PHILIPPINES, RESPONDENT discrimination. The only word that distinguishes them is the
G.R. NO. 122174. OCTOBER 3, 2002 word “industrial” which merely identifies a corporation’s
FACTS: general field of activities or operations. Both corporations also
cater to the same clientele and as established by SEC, both have
October 13, 1976 - RCP was organized for the purpose of similar packaging.
engaging in the business of manufacturing refractory bricks.
June 22, 1977-RCP registered its name with DTI Refractories is a generic term but its usage is not widespread
August 23, 1979- “Synclaire Mftg Corp” was organized and its continuous use by RCP for a considerable period has
August 23, 1985- Synclaire changed its name to IRCP. made the term so closely identified with it.
Both are the only local suppliers of monolithic gunning mix. IRCP’s appropriation of RCP’s corporate name cannot find
April 14, 1988- RCP filed a petition with SEC to compel IRCP to justification under the generic word rule. A contrary ruling
change its corporate name on the ground that it was confusingly would encourage corporations to adopt verbatim and register
similar with RCP an existing and protected corporate name, to the detriment of
the public.
SEC: Rendered judgment in favor of RCP
SEC en banc: Ordered IRCP to delete or drop the name Test in determining Identity/similarity
“Refractories” “If it has the tendency to mislead a person using ordinary care and
Court of Appeals: Name is confusingly similar and RCP has discrimination. “
established prior right to use the word “refractories”
In the case of a corporation desiring to incorporate a subsidiary:
IRCP argues: Usually you will have the same name. The SEC allows it provided
1. Jurisdiction is vested with regular courts as it is not under PD that the corporation which had a priority right will send a letter of
902-a consent. In this case, you cannot reserve your name online. You
2. “refractories” is a generic name will have to write a letter to the SEC main office in Manila to
3. Not confusing similarity basically grant permission for the subsidiary to use the name of
the parent. So, just because it’s similart, it’s automatically not
RULING: allowed. So if the corporation with the prior right consents, then,
it will be allowed. But it has to be proven that there is a parent-
SEC has jurisdiction— under regulatory powers subsidiary/affiliate.
Jurisdiction of SEC is not merely confined to adjudicative
functions under PD 902-A. By express mandate, it has absolute
jurisdiction, supervision and control over all corporation. It
exercises regulatory and administrative powers to implement
and enforce the Corporation Code, one of which is Section 18
which provides:
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ANG MGA KAANIB SA IGLESIA NG DIOS KAY KRISTO HESUS, Eg: Your product name is “bag”. You cannot prevent other
H.S.K. SA BANSANG PILIPINAS, INC. PETITIONER, VS. IGLESIA NG corporations from using that word because that is a generic
DIOS KAY CRISTO JESUS, HALIGI AT SUHAY NG KATOTOHANAN, word.
RESPONDENT
G.R. NO. 137592. DECEMBER 12, 2001 The Supreme Court in this case said that such rule is not
When Soriano, et al. registered the corporate name of petitioner applicable to the provision of the Corporation Code on
corporation, respondent corporation filed a petition before the corporate names. So, even if the corporate name is generic, it is
SEC for the change of petitioner's corporate name on the ground still protected under the Corporation Code because the SC, to
that the same causes confusion among their members and the rule otherwise, would encourage other corporations to adopt
public. verbatim and register an existing corporate name to the
detriment of the public. So, for example you have a corporation
Issue: named “bag Inc.”, you can prevent another corporation from
Is the corporation name “Ang Mga Kaanib sa Iglesia ng Dios Kay using “bag Corp.”. Generic names, although not protected in the
Kristo Hesus, H.S.K, sa Bansang Pilipinas “(The acronym "H.S.K." IP code, they are protected as corporate names. This is the
stands for Haligi at Saligan ng Katotohanan) confusingly similar essence of the Iglesia ni Kristo case.
to “IGLESIA NG DIOS KAY CRISTO JESUS, HALIGI AT SUHAY NG
KATOTOHANAN”?
ZUELLIG FREIGHT AND CARGO SYSTEMS, PETITIONER, VS.
Held: YES. NATIONAL LABOR RELATIONS COMMISSION AND RONALDO V.
SAN MIGUEL , RESPONDENTS
The additional words "Ang Mga Kaanib" and "Sa Bansang G.R. NO. 157900, JULY 22, 2013
Pilipinas, Inc.” in the petitioner’s name are, as correctly Petitioner Zuellig (formerly, “zeta”) ceased operations and
observed by the SEC, merely descriptive of and also referring to dismissed some of its workers. One of those workers was
the members, or kaanib, of respondent who are likewise Ronaldo San Miguel. He filed a complaint, alleging that it was an
residing in the Philippines. These words can hardly serve as an illegal dismissal.
effective differentiating medium necessary to avoid confusion
or difficulty in distinguishing petitioner from respondent. This is Zeta amended its articles and changed its name to “Zuellig”. It
especially so, since both petitioner and respondent corporations was found out that there was no business cessation but merely
are using the same acronym — H.S.K.; not to mention the fact a change of business name and the upgrading of stocks of the
that both are espousing religious beliefs and operating in the corporation. SC held that that there was no closure to speak of.
same place. Parenthetically, it is well to mention that the The termination of services allegedly due to cessation of
acronym H.S.K. used by petitioner stands for "Haligi at Saligan business operations of Zeta was illegal. It was merely a change
ng Katotohanan." of name, and not a change of being.
In holding out their corporate name to the public, petitioner
highlights the dominant words IGLESIA NG DIOS KAY KRISTO Atty’s Discussion:
HESUS, HALIGI AT SALIGAN NG KATOTOHANAN, which is
strikingly similar to respondent's corporate name, thus making The right of succession in corporate law basically is that: any
it even more evident that the additional words Ang Mga Kaanib change in the stockholdings or in the board of directors of the
and Sa Bansang Pilipinas, Inc., are merely descriptive of and corporation will not change the continuity of the corporation. A
pertaining to the members of respondent corporation. change in name is basically just ancillary to the right of
Significantly, the only difference between the corporate names succession, in the sense that the corporate entity continues to
of petitioner and respondent are the words SALIGAN and exist, even if it changes its name or amend its articles. Although
SUHAY. These words are synonymous --- both mean ground, there is no change in the shareholdings of the corporation, but
foundation or support. Hence, this case is on all fours with there is a change of name. it’s similar to a person changing his
Universal Mills Corporation v. Universal Textile Mills, Inc., where name. it doesn’t mean that he is a new person.
the Court ruled that the corporate names Universal Mills
Corporation and Universal Textile Mills, Inc., are undisputably so The SC said that: no, this is still one and the same corporation.
similar that even under the test of reasonable care and therefore, you cannot say that you’ve stopped business
observation confusion may arise. operations. The corporation continued to exist. It merely
Furthermore, the wholesale appropriation by petitioner of changed its name, purpose, and its authorized capital stock.
respondent's corporate name cannot find justification under the
generic word rule. We agree with the Court of Appeals So, a corporation, unlike a partnership, where if you amend
conclusion that a contrary ruling would encourage other anything in the articles of partnership, it automatically dissolves
corporations to adopt verbatim and register an existing and that one partnership and creates another one. In a corporation,
protected corporate name, to the detriment of the public such is not the case. A corporation continues to exist even if you
amend its articles.
Atty’s Discussion:
Under the Intellectual Property law (IP), trade name is not
protected if it is generic. If you use a generic name for a product,
you cannot register it, and other companies can use that name.
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De Facto Corporation The filing of articles of incorporation and the issuance of the
One which actually exists for all practical purposes as a certificate of incorporation are essential for the existence of a
corporation, but which has no legal right to corporate existence as de facto corporation.
against the State. Petitioners themselves admitted that at the time of the
donation, they were not registered with the SEC, nor did they
CASE: SEVENTH DAY ADVENTIST CONFERENCE CHURCH OF even attempt to organize to comply with legal requirements.
SOUTHERN PHILIPPINES VS. NORTHEASTERN MINDANAO Corporate existence begins only from the moment a certificate
MISSION OF SEVENTH DAY ADVENTIST, INC. of incorporation is issued. No such certificate was ever issued to
G.R. NO. 150416, JULY 21, 2006 petitioners or their supposed predecessor-in-interest at the
FACTS: time of the donation. Petitioners obviously could not have
Spouses Cosio donated a parcel of land to South Philippine claimed succession to an entity that never came to exist.
Union Mission of Seventh Day Adventist Church of Bayugan, Neither could the principle of separate juridical personality
Esperanza, Agusan (SPUM-SDA Bayugan), petitoner’s apply since there was never any corporation to speak of. And, as
predecessor, situated in the Barrio of Bayugan, Municipality of already stated, some of the representatives of petitioner
Esperanza, Province of Agusan, Philippines. Seventh Day Adventist Conference Church of Southern
The donation was allegedly accepted by one Liberato Rayos, an Philippines, Inc. were not even members of the local church
elder of the Seventh Day Adventist Church, on behalf of the then, thus, they could not even claim that the donation was
donee. particularly for them.
21 years later, however, the same parcel of land was sold by the Principle:
spouses Cosio to the Seventh Day Adventist Church of "The de facto doctrine thus effects a compromise between two
Northeastern Mindanao Mission (SDA-NEMM), respondents in conflicting public interests - the one opposed to an unauthorized
this case. assumption of corporate privileges; the other, in favor of doing
Petitioners asserted ownership over the property. It filed a case justice to the parties and of establishing a general assurance of
for the cancellation of title, quieting of ownership and security in business dealing with corporations.
possession, declaratory relief and reconveyance with prayer for Generally, the doctrine exists to protect the public dealing with
preliminary injunction and damages), in the RTC of Bayugan, supposed corporate entities, not to favor the defective or non-
Agusan del Sur. existent corporation.’
This was opposed by respondents who argued that at the time Requirements before one can qualify as a de facto corporation:
of the donation, SPUM-SDA Bayugan could not legally be a a. The existence of a valid law under which it may be
donee because, not having been incorporated yet it, had no incorporated;
juridical personality. Neither were petitioners members of the b. An attempt in good faith to incorporate; and
local church then, hence, the donation could not have been c. Assumption of corporate powers
made particularly to them.
After trial, the trial court rendered a decision upholding the sale COLLATERAL ATTACK NOT ALLOWED:
in favor of respondents. De facto corporation’s existence can only be attacked directly,
On appeal, the CA affirmed the RTC decision but deleted the through a quo warranto proceeding. A quo warranto proceeding
award of moral damages and attorney's fees. is a direct attack which questions the very existence of the
Issue: corporation because the issue of the case is WON the
Should respondent SDA-NEMM's ownership of the lot covered corporation exist.
by TCT No. 4468 be upheld?
Ruling: Attempt in good faith (minimum requirements):
Yes. In order to have an attempt in good faith to incorporate, you
Donation is an act of liberality whereby a person disposes must actually have INCORPORATED.
gratuitously of a thing or right in favor of another person who The corporation must have filed the articles of incorporation,
accepts it. The donation could not have been made in favor of treasurer’s affidavi (old Code)t, and by-laws with the SEC.
an entity yet inexistent at the time it was made. Nor could it The SEC must have actually issued the certificate of
have been accepted as there was yet no one to accept it. incorporation.
The deed of donation was not in favor of any informal group of
SDA members but a supposed SPUM-SDA Bayugan (the local Atty’s Discussion:
church) which, at the time, had neither juridical personality nor If you did not comply with the preceding minimum
capacity to accept such gift. requirements, that is not a de facto corporation. Hence, the
Declaring themselves a de facto corporation, petitioners allege existence of such may be attacked collaterally.
that they should benefit from the donation. If the SEC issued the certificate of incorporation, even if there
But there are stringent requirements before one can qualify as was a defect in the issuance by the SEC, that corporation is a de
a de facto corporation: facto corporation, and its existence cannot be attacked
(a) the existence of a valid law under which it may be collaterally. It must be done thru a direct attack, thru a quo
incorporated; warranto proceeding.
(b) an attempt in good faith to incorporate; and In relation to the Seventh Day Adventist case, the donee was
(c) assumption of corporate powers. saying that you cannot just question my existence thru the
There is no proof that there was an attempt to incorporate at revocation of the donation, you cannot say that I do not exist
that time. because only the state can question my existence thru a quo
warranto. Only the state can question the existence of a de facto
corporation and I am a de facto corporation. We cannot just say
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that the donation is revoked because I don’t exist. You have to Commission shall cause the revocation of the corporation’s
file a quo warranto case first. Is this contention valid? NO. certificate of incorporation.
Ruling: In this case, the SC said that Northeastern Seventh Day The Commission shall give reasonable notice to, and
Adventist did not even attempt to file their articles of coordinate with the appropriate regulatory agency prior to the
incorporation, hence, it is not a de facto corporation. Therefore, suspension or revocation of the certificate of incorporation of
it is not protected and its existence can be attacked collaterally. companies under their special regulatory jurisdiction.
It may be negated even without bringing a quo warranto case.
REVISED Code
EFFECTS OF NON-USE OF CORPORATE CHARTER AND
Inoperative for at least 5 consecutive years - Commission may,
CONTINUOUS INOPERATION
after due notice and hearing, place corporation under
SEC. 21. Effects of Non-Use of Corporate Charter and
DELINQUENT STATUS.
Continuous Inoperation. – If a corporation does not formally
organize and commence its business within five (5) years from
TN: A delinquent corporation shall have a period of 2 years in
the date of its incorporation, its certificate of incorporation
which to resume operations and comply with all the requirements
shall be deemed revoked as of the day following the end of the
that the Commission shall prescribe.
five (5)-year period.
COMPLIANCE - Commission issues an order lifting the delinquent
However, if a corporation has commenced its business but
status
subsequently becomes inoperative for a period of at least five
NON-COMPLIANCE - REVOCATION of the corporation’s certificate
(5) consecutive years, the Commission may, after due notice
of incorporation.
and hearing, place the corporation under delinquent status.
Reasonable notice shall be given to the appropriate regulatory
A delinquent corporation shall have a period of two (2) years
agency in case of suspension or revocation of the certificate of
to resume operations and comply with all requirements that
incorporation of companies under their special regulatory
the Commission shall prescribe. Upon compliance by the
jurisdiction.
corporation, the Commission shall issue an order lifting the
delinquent status. Failure to comply with the requirements
and resume operations within the period given by the
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TITLE III- BOARD OF DIRECTORS/TRUSTEES AND OFFICERS 2.Found guilty in an administrative proceedings
QUALIFICATION AND TERM 3.Found guilty by foreign courts or equivalent foreign regulatory
SEC. 22. The Board of Directors or Trustees of a Corporation; authority for analogous cases
Qualification and Term.- Unless otherwise provided in this
Code, the board of directors or trustees shall exercise the Note: These are not perpetual disqualifications as it is qualified by
corporate powers, conduct all business, and control all the phrase “within five (5) years prior to the election or
properties of the corporation. appointment as such.” After the lapse thereof, one may qualify as
a nominee in the Board.
Directors shall be elected for a term of one (1) year from
among the holders of stocks registered in the corporation’s ELECTION OF BOD
books, while trustees shall be elected for a term not exceeding Sec. 23 Election of Directors or Trustees. – Except when the
three (3) years from among the members of the corporation. exclusive right is reserved for holders of founders’ shares
Each director and trustee shall hold office until the successor is under Section 7 of this Code, each stockholder or member shall
elected and qualified. A director who ceases to own at least have the right to nominate any director or trustee who
one (1) share of stock or a trustee who ceases to be a member possesses all of the qualifications and none of the
of the corporation shall cease to be such. XXXXXXXXXXXXXXX disqualifications set forth in this Code.
Qualifications for a Director: At all elections of directors or trustees, there must be present,
1. Must own at least 1 share of stock either in person or through a representative authorized to act
- by ownership, what is required is legal ownership by written proxy, the owners of majority of the outstanding
which is determined through the stocks and transfer book capital stock, or if there be no capital stock, a majority of the
reflecting one’s name as the owner /holder thereof. Beneficial members entitled to vote. When so authorized in the bylaws
ownership not necessary. or by a majority of the board of directors, the stockholders or
2. Must not possess of any of the disqualifications members may also vote through remote communication or in
absentia: Provided, That the right to vote through such modes
Take Note : may be exercised in corporations vested with public interest,
Majority of the directors should be resident of the Philippines notwithstanding the absence of a provision in the bylaws of
such corporations.
Majority, not all. There is NO citizenship requirement except
Nationalized industries even foreigners can be voted as A stockholder or member who participates through remote
directors communication or in absentia, shall be deemed present for
purposes of quorum.
DISQUALIFICATION The election must be by ballot if requested by any voting
SEC. 26. Disqualification of Directors, Trustees or Officers. – A stockholder or member.
person shall be disqualified from being a director, trustee or In stock corporations, stockholders entitled to vote shall have
officer of any corporation if, within five (5) years prior to the the right to vote the number of shares of stock standing in their
election or appointment as such, the person was: own names in the stock books of the corporation at the time
fixed in by-laws or where the by-laws are silent, at the time of
Convicted by final judgment: the election. The said stockholder may: (a) vote such number
(1) Of an offense punishable by imprisonment for a period of shares for as many persons as there are directors to be
exceeding six (6) years; elected; (b) cumulate said shares and give one (1) candidate as
(2) For violating this Code; and many votes as the number of directors to be elected multiplied
(3) For violating Republic Act No. 8799, otherwise known by the number of the shares owned; or (c) distribute them on
as “The Securities Regulation Code”; the same principle among as many candidates as may be seen
(b) Found administratively liable for any offense involving fit: Provided, That the total number of votes cast shall not
fraudulent acts; and exceed the number of shares owned by the stockholders as
(c) By a foreign court or equivalent foreign regulatory authority shown in the books of the corporation multiplied by the
for acts, violations or misconduct similar to those enumerated whole number of directors to be elected: Provided, however,
in paragraphs (a) and (b) above. That no delinquent stock shall be voted. Unless otherwise
provided in the articles of incorporation or in the by-laws,
The foregoing is without prejudice to qualifications or other members of non-stock corporations may cast as many votes as
disqualifications, which the Commission, the primary there are trustees to be elected but may not cast more than
regulatory agency, or the Philippine Competition Commission one (1) vote for one (1) candidate. Nominees for directors or
may impose in its promotion of good corporate governance or trustees receiving the highest number of votes shall be
as a sanction in its administrative proceedings. declared elected.
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The directors or trustees elected shall perform their duties as provided in the articles of incorporation or in the by-laws. They
prescribed by law, rules of good corporate governance, and cannot cumulate.
bylaws of the corporation.
4.No delinquent stock shall be voted.
Election of Directors:
5. Nominees for directors or trustees receiving the highest
1. Done at any meeting called for the election of BOD and voted number of votes shall be declared elected.
for by the stockholders. At all elections, owners of the majority of
the outstanding capital stocks must be present either: 6.If no election is held, or the owners of majority of the
outstanding capital stock or majority of the members entitled to
● In person;
vote are not present in person, by proxy, or through remote
● Through a representative authorized to act by communication or not voting in absentia at the meeting, such
written proxy (in absentia) eg. proxy or trust; or meeting may be adjourned and the corporation shall follow
● If allowed by the by-laws or majority of the BOD, Section 25.
through remote communication eg. Telephone
conference or video conference. INDEPENDENT DIRECTORS
Note: Such modes of attending the meeting and voting may be Sec. 22, last 6 paragraphs. Xxx The board of the following
utilized by corporations vested with public interest although not corporations vested with public interest shall have
provided in their by-laws. independent directors constituting at least twenty percent
(20%) of such board:
2.The election must be by ballot if requested by any voting
stockholder. Hence, voting by viva voces or roll call (raising Corporations covered by Section 17.2 of Republic Act No. 8799,
hands) is valid except when there is a request that it be by ballot. otherwise known as “The Securities Regulation Code”, namely
those whose securities are registered with the Commission,
3.Stockholders shall have the right to vote the number of shares corporations listed with an exchange or with assets of at least
of stock standing in their own names (1share=1vote) as long as Fifty million pesos (P50,000,000.00) and having two hundred
the total number of votes cast shall not exceed the number of (200) or more holders of shares, each holding at least one
shares owned by the stockholders as shown in the books of the hundred (100) shares of a class of its equity shares;
corporation multiplied by the whole number of directors to be
elected. (b) Banks and quasi-banks, nonstock savings and loan
associations, pawnshops, corporations engaged in money
Formula: service business, preneed, trust and insurance companies, and
No. of votes = No. of shares x No. of vacancy other financial intermediaries; and
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Note: Independent directors are required in corporations vested Now, it is expressly provided under the corporation Code that if
with public interest which include: the elections of the BOD are not held at all the SEC may order the
● regulated corporations such as bank, quasi-banks, etc., conduct of the election so this is a new power granted by
Corporation Code to SEC but this power is already reflected in the
● corporations covered by Sec. 17.2 of the SRC:
Securities Regulation Code.
- corporations whose securities are registered in the
SEC
CREATION OF COMMITTEES
- listed corporations
Section 34. Executive, Management, and Other Special
- corporations with assets of at least 50M and have
Committees– If the bylaws so provide, the board may create
200 or more shareholders each holding at least 100 shares
an executive committee composed of at least three (3)
of a class of its equity shares. These are known as
directors. Said committee may act, by majority vote of all
“public corporations” under the SRC.
its members, on such specific matters within the
competence of the board, as may be delegated to it in the
bylaws or by majority vote of the board, except with
ELECTION REPORT
respect to the: (a) approval of any action for which
Section 25. Report of Election of Directors, Trustees and
shareholders' approval is also required; (b) filling of
Officers, Non Holding of Election and Cessation from Office–
vacancies in the board; (c) amendment or repeal of bylaws
Within thirty (30) days after the election of the directors,
or the adoption of new bylaws; (d) amendment or repeal
trustees and officers of the corporation, the secretary, or
of any resolution of the board which by its express terms
any other officer of the corporation, shall submit to the
is not amendable or repealable; and (e) distribution of cash
Commission, the names, nationalities, shareholdings, and
dividends to the shareholders.
residence addresses of the directors, trustees and officers
elected.
The board of directors may create special committees of
temporary or permanent nature and determine the
The non-holding of elections and the reasons therefor shall
members' term, composition, compensation, powers, and
be reported to the Commission within thirty (30) days from
responsibilities.
the date of the scheduled election. The report shall specify
a new date for the election, which shall not be later than
Executive Committee
sixty (60) days from the scheduled date.
- committee which exercise power within the competence of the
If no new date has been designated, or if the rescheduled board that requires the authority under the by-laws. The board
election is likewise not held, the Commission may, upon cannot just create their own executive committee if that
the application of a stockholder, member, director or executive committee will be exercising powers of the board
trustee, and after verification of the unjustified non-holding
of the election, summarily order that an election be held. Special Committee
The Commission shall have the power to issue such orders - can be created by the board even without the authority under
as may be appropriate, including orders directing the the by-laws
issuance of a notice stating the time and place of the
election, designated presiding officer, and the record date FILIPINAS PORT SERVICES, INC VS. GO
or dates for the determination of stockholders or members G.R. NO. 161886, MARCH 16, 2007
entitled to vote. FACTS:
FilPort is a domestic corporation engaged in stevedoring
Notwithstanding any provision of the articles of services with principal office in Davao City. On 4 September
incorporation or bylaws to the contrary, the shares of stock 1992, petitioner Eliodoro Cruz, Filport’s president from 1968
or membership represented at such meeting and entitled until he lost his bid for re-election as Filport’s president during
to vote shall constitute a quorum for purposes of the general stockholders’ meeting in 1991, wrote a letter to the
conducting an election under this section. corporation’s Board of Directors questioning the board’s
Should a director, trustee or officer die, resign or in any creation of the positions of Assistant Vice-Presidents for
manner cease to hold officer, the secretary, or the director, Corporate Planning, Operations, Finance and Administration,
trustee or officer of the corporation, shall, within seven (7) and the creation of the additional positions of Special Assistants
days from knowledge thereof, report in writing such fact to the President and the Board Chairman with a monthly
to the Commission. remuneration of P13,050.00 each, and the election thereto of
certain members of the board. In his aforesaid letter, Cruz
No election held requested the board to take necessary action/s to recover from
the reasons therefor shall be reported to the those elected the salaries they have received. However, it was
Commission 30 days from the date of the scheduled not shown on the records that action was taken. On 14 June
election. The report shall specify a new date for the 1993, Cruz, purportedly in representation of Filport and its
election which shall not be later than 60 days from the stockholders, among which is herein co-petitioner Mindanao
scheduled date Terminal and Brokerage Services, Inc., filed with the SEC a
the commission has authority to motu proprio issue an petition which he describes as a derivative suit against the
order for the conduct of another election of the BOD herein respondents who were then the incumbent members of
Filport’s Board of Directors, for alleged acts of mismanagement
detrimental to the interest of the corporation and its
shareholders at large. With the enactment of R.A. No. 8799, the
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case was first turned over to the RTC of Manila, Branch 14, with the regular business operations of Filport as it is authorized
sitting as a corporate court. Thereafter, on respondents’ to do so by the corporation’s by-laws, pursuant to the
motion, it was eventually transferred to the RTC of Davao City. Corporation Code.
On 10 December 2001, RTC-Davao City rendered its decision in Amended Bylaws of Filport provides the following:
the case. Even as it found that (1) Filport’s Board of Directors has Officers of the corporation, as provided for by the by-laws, shall
the power to create positions not provided for in the by-laws of be elected by the board of directors at their first meeting after
the corporation since the board is the governing body; and (2) the election of Directors. xxx
the increases in the salaries of the board chairman, vice- The officers of the corporation shall be a Chairman of the Board,
president, treasurer and President, a Vice-President, a Secretary, a Treasurer, a General
assistant general manager are reasonable, the trial court Manager and such other officers as the Board of Directors may
nonetheless rendered judgment against the respondents by from time to time provide, and these officers shall be elected to
ordering the directors holding the positions of Assistant Vice hold office until their successors are elected and qualified.
President for Corporate Planning, Special Assistant to the
President and Special Assistant to the Board Chairman to refund Atty: Here the Supreme Court upheld the validity of the
to the corporation the salaries they have received as such executive committee even if the same was not authorized under
officers "considering that Filipinas Port Services is not a big the by-laws, the by-laws was silent which should not be because
corporation requiring multiple executive positions" and that under the law executive committee can only be authorized
said positions "were just created for accommodation." On under the by-laws.
appeal, the CA taking exceptions to the findings of the trial court The reason is as long as the power of a committee is within the
that the creation of the positions of Assistant Vice President for power of the board that requires authority under the by-laws
Corporate Planning, Special Assistant to the President and but if it is any other committee with only recommendatory
Special Assistant to the Board Chairman was merely for authority meaning it cannot act on its own (ex. it cannot
accommodation purposes, granted the respondents’ appeal, approves resolutions on its own) in that case a committee
reversed and set aside the appealed decision of the trial court maybe created without any express authority under the by-laws
and accordingly dismissed the so-called derivative suit filed by
Cruz, et al. Hence this petition for review on certiorari. In other words, the committees created are only required to be
in the by laws if they act as the board if they don’t act as the
ISSUE: board then the board may create these committees even
Whether or not Filport’s Board of Directors has the power to without authority under the by laws.
create positions not provided for in the by-laws of the
corporation. Executive committee vis-a-vis Special Committee
Executive Committee: Requires an authority in the by-
RULING: laws. One exercising powers that is within the power of
The governing body of a corporation is its board of directors. the board of director. They are as powerful as the board
Section 23 of the Corporation Code explicitly provides that of directors and in effect acting for the board itself.
unless otherwise provided therein, the corporate powers of all Special Committee: No authority required in the by-
corporations formed under the Code shall be exercised, all laws and is within the competency of the board to
business conducted and all property of the corporation shall be create. Any other committee exercising a mere
controlled and held by a board of directors. Thus, with the recommendatory power whose actions require
exception only of some powers expressly granted by law to ratification and confirmation by the board. It cannot
stockholders (or members, in case of non-stock corporations), approve resolutions on its own. Reason here is that the
the board of directors (or trustees, in case of non-stock board is the corporation's governing body, clearly
corporations) has the sole authority to determine policies, enter upholding the power of its board to exercise its
into contracts, and conduct the ordinary business of the prerogatives in managing the business affairs of the
corporation within the scope of its charter, i.e., its articles of corporation.
incorporation, by-laws and relevant provisions of law. Verily, the
authority of the board of directors is restricted to the LIABILITY
management of the regular business affairs of the corporation, Section 30. Liability of Directors, Trustees or Officers. —
unless more extensive power is expressly conferred. Directors or trustees who willfully and knowingly vote for or
The raison d’etre behind the conferment of corporate powers assent to patently unlawful acts of the corporation or who are
on the board of directors is not lost on the Court. Indeed, the guilty of gross negligence or bad faith in directing the affairs of
concentration in the board of the powers of control of corporate the corporation or acquire any personal or pecuniary interest
business and of appointment of corporate officers and in conflict with their duty as such directors or trustees shall be
managers is necessary for efficiency in any large organization. liable jointly and severally for all damages resulting therefrom
Stockholders are too numerous, scattered and unfamiliar with suffered by the corporation, its stockholders or members and
the business of a corporation to conduct its business directly. other persons.
And so the plan of corporate organization is for the stockholders
to choose the directors who shall control and supervise the A director, trustee or officer shall not attempt to acquire, or
conduct of corporate business. acquire any interest adverse to the corporation in respect of
In the present case, the board’s creation of the positions of any matter which has been reposed in them in confidence, and
Assistant Vice Presidents for Corporate Planning, Operations, upon which, equity imposes a disability upon themselves to
Finance and Administration, and those of the Special Assistants deal in their own behalf; otherwise, the said director, trustee
to the President and the Board Chairman, was in accordance or officer shall be liable as a trustee for the corporation and
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must account for the profits which otherwise would have RULING:
accrued to the corporation. The Supreme Court affirmed the ruling of the Court of Appeals.
The general rule is that obligations incurred by the corporation,
Best Judgement Rule acting through its directors, officers and employees, are its sole
liabilities, and vice versa. However, there are exceptional
General Rule: The will of the majority of the Board circumstances warranting the disregard of a separate
Members controls in corporate affairs, and contracts personality and held such officer’s and director’s solidarily liable
intra vires entered into by the board of directors are with the corporation:
binding on the corporation and courts will not interfere. 1) When directors /trustees and officers of a corporation:
There is no liability for any damages caused by their b.Vote or assent to patently unlawful acts of the
decisions. corporation;
c.Act in bad faith or with gross negligence in directing
Exceptions: corporate affairs;
1.Assent to patently unlawful acts of the corporation d.Are guilty of conflict of interest to the prejudice of the
2.Gross negligence or bad faith in directing the affairs of corporation, stock holders or members, and other
the corporation persons;
3.Acquiring personal or pecuniary interest in conflict with 4) When a director or officer consented to the insurance of
their duty watered down stocks or who, having knowledge, did not
forthwith file with the corporate secretary his written
o Liability if it falls within the exceptions: The director objection thereto; or
shall be solidarity liable to the corporation, creditors, 5) When a director, trustee or officer is made by specific
stockholders, and to any other persons. provision of law, personally liable for his corporate action.
MAGALING V ONG In the instant case, Reynaldo Magaling’s very own testimony
FACTS: convincingly displayed his gross negligence in the conduct of the
Spouses Reynaldo Magaling and Lucia Magaling is the affairs of Thermo Loans without due regard to the plight of its
controlling stock holders/owner of Thermo Loans and Credit investor. He resigned as President of Thermo Loans in 1998
Corporation. On December 1994, defendant Reynaldo Magaling when the company already became insolvent. He also admitted
induce the Peter Ong at the latter’s store in Lipa City to lend him that no one or nobody took over as president of the corporation,
and/or his company Thermo Loans and Credit Corporation when he resigned. Neither was the investor in-formed about the
money amounting to P350,000.00 at the interest rate of 2 1⁄2% bankruptcy thereof, nor was any bankruptcy or involvers
per month. The plaintiff, herein defendant extended the loan to proceeding instituted to protect the assets of the corporation
the defendant, herein petitioner based on the assurance of and the interest of its investor. Reynaldo Magaling miserably
Reynaldo Magaling. Sometime in September 1997, or three failed to exercise at most diligence expected from the highest
years thereafter the defendants issued and tendered to plaintiff officer of a corporation in the conduct of its affairs. Hence, he
series of postdated checks for the payment of interest and should be held jointly and severally liable for the corporate
principal of the loan. obligation of Thermo Loans to appellant Peter Ong.
Upon failure of Thermo Loans and Credit Corporation to pay its JAMES IENT AND MAHARLIKA SCHULZE, VS. TULLETT PREBON
outstanding loan despite demand from Mr. Ong, the latter filed
a complaint with the RTC for the collection of the loan with Facts:
interest, attorney’s fees and cost of suit, with prayer for Ient is a British national and the Chief Financial Officer of
issuance of a writ of preliminary attachment against the spouses Tradition Asia Pacific Pte. Ltd. (Tradition Asia) in Singapore.
Reynaldo Magaling and Lucia Magaling and Thermo Loans and Petitioner Schulze is a Filipino/German who does Application
Credit Corporation. Support for Tradition Financial Services Ltd. in London (Tradition
London). Tradition Asia and Tradition London are subsidiaries of
The RTC dismissed the complaint of Peter Ong on the ground Compagnie Financiere Tradition and are part of the "Tradition
that the subject obligation is the obligation of the defendant Group."
corporation in which the stockholders and officers are not
personally liable. Said corporation has a personality separate Tradition Group and Tullett are competitors in the inter-dealer
and distinct from that of Reynaldo Magaling who happens to be broking business. Tullett was the first to establish a business
only a stockholder and president thereof at that time. presence in the Philippines and had been engaged in the inter-
dealer broking business or voice brokerage here since 1995.
On appeal the appellate court reversed and set aside the Meanwhile, on the part of the Tradition Group, the needs of its
decision of the RTC. The Court of Appeals pierced the veil of Philippine clients were previously being serviced by Tradition
corporate fiction and held the spouse’s solidarity liable with Asia in Singapore. The other IDBs in the Philippines are Amstel
Thermo Loans for the corporate obligations of the latter. Hence, and Icap.
this petition for certioraris.
In August 2008, in line with Tradition Group's motive of
ISSUE: Whether or not the defendants being officers and expansion and diversification in Asia, petitioners Ient and
stockholders of Thermo Loans and Credit Corporation are Schulze were tasked with the establishment of a Philippine
solidarity liable to the financial liability of said corporation. subsidiary of Tradition Asia to be known as Tradition Financial
Services Philippines, Inc. (Tradition Philippines).[9] Tradition
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In their respective Counter-Affivadits, Villalon alleged that Tullett filed a petition for review with the Secretary of Justice to
frustration with management changes in Tullett Prebon assail the foregoing resolution of the Acting City Prosecutor of
motivated his personal decision to move from Tullett and accept Makati City.
the invitation to enlist with the Tradition Group. Villalon further
argued that his resignation from Tullett was done in the exercise Ient and Schulze moved for reconsideration of the foregoing
of his fundamental rights to the pursuit of life and the exercise Resolution by the Secretary of Justice. Secretary of Justice
of his profession; he can freely choose to avail of a better life by denied the motion for reconsideration filed by petitioners.
seeking greener pastures; and his actions did not fall under any
of the prohibited acts under Sections 31 and 34 of the
Corporation Code. He claimed that the DOJ had previously ISSUE:WON Section 144 of the Corporation Code aplicable to
proclaimed that Section 31 is not a penal provision of law but Sections 31 and 34 of the same statute such that criminal
only the basis of a cause of action for civil liability. Thus, he liability attaches to violations of Sections 31 and 34.
concluded that there was no probable cause that he violated the
Corporation Code nor was the charge of conspiracy properly Ruling: the consolidated petitions are GRANTED
substantiated.
The main bone of disagreement among the parties in this case
Chuidian claimed that she left Tullett simply to seek greener is the applicability of Section 144 of the Corporation Code to
pastures. Like Villalon, She merely exercised her right to exercise Sections 31 and 34 of the same statute such that criminal
her chosen liability attaches to violations of Sections 31 and 34.
profession and pursue a better life. She argued that Section 144
as a penal provision should be strictly construed against the
State and liberally in favor of the accused and Tullett has failed Petitioners posit that Section 144 only applies to the provisions
to substantiate its charge of bad faith on her part. of the Corporation Code or its amendments "not otherwise
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specifically penalized" by said statute and should not cover corporate officers and directors but without unduly impeding
Sections 31 and 34 which both prescribe the "penalties" for their them in the discharge of their work with concerns of litigation.
violation; namely, damages, accounting and restitution of Considering the object and policy of the Corporation Code to
profits. On the other hand, respondent and the appellate court encourage the use of the corporate entity as a vehicle for
have taken the position that the term "penalized" under Section economic growth, we cannot espouse a strict construction of
144 should be interpreted as referring to criminal penalty, such Sections 31 and 34 as penal offenses in relation to Section 144
as fine or imprisonment, and that it could not possibly in the absence of unambiguous statutory language and
contemplate "civil" penalties such as damages, accounting or legislative intent to that effect. We stress that had the
restitution. Legislature intended to attach penal sanctions to Sections 31
and 34 of the Corporation Code it could have expressly stated
After a meticulous consideration of the arguments presented by such intent in the same manner that it did for Section 74 of the
both sides, the Court comes to the conclusion that there is same Code.
textual ambiguity in Section 144; moreover, such ambiguity WHEREFORE, the consolidated petitions are GRANTED.
remains even after an examination of its legislative history and
the use of other aids to statutory construction, necessitating the
application of the rule of lenity in the case at bar. Discussion:
A perusal of Section 144 shows that it is not a purely penal Section 144 is not applicable since sections 31 and 34 already
provision. When it is a corporation that commits a violation of provide penalty for violations of those provisions. Section 144
the Corporation Code, it may be dissolved in appropriate will only apply if the act is not penalized in the sections that are
proceedings before the Securities and Exchange Commission. violated.
The involuntary dissolution of an erring corporation is not
imposed as a criminal sanction, 53 but rather it is an Note:
administrative penalty. Section 144 (now section 170 under the revised corporation
code) is no longer a criminal offense. It is now civil. However, it
There is no provision in the Corporation Code using similarly still applies to violations of the corporation code that do not
emphatic language that evinces a categorical legislative intent have specific penalties.
to treat as a criminal offense each and every violation of that
law. Consequently, there is no compelling reason for the Court SEC. 170. Other Violations of the Code; Separate Liability. –
to construe Section 144 as similarly employing the term Violations of any of the other provisions of this Code or its
"penalized" or "penalty" solely in terms of criminal liability. amendments not otherwise specifically penalized therein shall
be punished by a fine of not less than Ten thousand pesos
Sections 31 to 34 were introduced into the Corporation Code to (P10,000.00) but not more than One million pesos
define what acts are covered, as well as the consequences of (P1,000,000.00). If the violation is committed by a corporation,
such acts or omissions amounting to a failure to fulfil a director's the same may, after notice and hearing, be dissolved in
or corporate officer's fiduciary duties to the corporation. A appropriate proceedings before the Commission: Provided, That
closer look at the subsequent deliberations on C.B. No. 3, such dissolution shall not preclude the institution of appropriate
particularly in relation to Sections 31 and 34, would show that action against the director, trustee, or officer of the corporation
the discussions focused on the civil liabilities or consequences responsible for said violation: Provided, further, That nothing in
prescribed in said provisions themselves.There is no legislative this section shall be construed to repeal the other causes for
intent to criminalize Sections 31 and 34 was manifested in the dissolution of a corporation provided in this Code.
deliberations on the Corporation Code. Liability for any of the foregoing offenses shall be separate from
any other administrative, civil, or criminal liability under this
It is noteworthy from the same deliberations that legislators Code and other laws.
intended to codify the common law concepts of corporate
opportunity and fiduciary obligations of corporate officers as
found in American jurisprudence into said provisions. In SELF-DEALING DIRECTORS
common law, the remedies available in the event of a breach of SEC. 31. Dealings of Directors, Trustees or Officers with the
director's fiduciary duties to the corporation are civil remedies. Corporation. – A contract of the corporation with one or more of
If a director or officer is found to have breached his duty of its directors, trustees, officers or their spouses and relatives
loyalty, an injunction may be issued or damages may be within the fourth civil degree of consanguinity or affinity is
awarded. A corporate officer guilty of fraud or mismanagement voidable, at the option of such corporation, unless all the
may be held liable for lost profits. A disloyal agent may also following conditions are present:
suffer forfeiture of his compensation. There is nothing in the
deliberations to indicate that drafters of the Corporation Code a.The presence of such director or trustee in the board meeting
intended to deviate from common law practice and enforce the in which the contract was approved was not necessary to
fiduciary obligations of directors and corporate officers constitute a quorum for such meeting;
through penal sanction aside from civil liability.
b.The vote of such director or trustee was not necessary for the
approval of the contract;
The Corporation Code was intended as a regulatory measure,
not primarily as a penal statute. Sections 31 to 34 in particular c.The contract is fair and reasonable under the circumstances;
were intended to impose exacting standards of fidelity on
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1 | Quorum
CORPORATION VESTED WITH PUBLIC INTEREST
There has to be a quorum but the presence of such director in ● Material Contracts - they are approved by at least two- third
the board meeting in which the contract was approved WAS NOT ( 2/3) of the ENTIRE MEMBERSHIP of the board, with at least
necessary to constitute a quorum. a majority of the independent directors voting to approve
the material contract
ILLUSTRATION: 5 directors
a. to constitute quorum , needs 3 directors Atty: not just of the directors present but of the Entire
b. the presence of the inter dealing director should not be Membership
counted in constituting the quorum , ( not part of the 3 directors)
INTERLOCKING DIRECTORS
2 | Vote of such director or trustee was not necessary for the Sec. 32 . Contracts Between Corporations with Interlocking
approval Directors . - Except in cases of fraud , and provided the
contract is fair and reasonable under the circumstances , a
His vote is still counted but his vote should not be necessary for contract between two (2) or more corporations having
the approval for such contract. interlocking directors shall not be invalidated on that ground
alone: Provided , that if the interest of the interlocking
ILLUSTRATION: director in one (1) corporation is substantial and the interest
3 Directors present and 1 of them is the Self-dealing director in the other corporation or corporations is merely nominal ,
(Majority -2) the contract shall be subject to the provisions of the
preceding section insofar as the latter corporation or
a. If one of the 2 is a self dealing director corporations are concerned.
Legal Effect : Contract is Voidable
Stockholdings exceeding twenty percent (20 %) of the
outstanding capital stock shall be considered substantial for
3 |Contract should be fair and reasonable the purposes of interlocking.
(Self -explanatory )
INTERLOCKING DIRECTOR
If any of the three is missing :
Effect: Contract is voidable There is an interlocking director when you have two corporations
contracting with each other and there is a common director/
REMEDY : Ratification by Stockholders directors.
a. representing at least (2/3) of the members in a meeting called
for the purpose GENERAL RULE:
b. Provided, that full disclosure of the adverse interest of the Contracts between corporations with interlocking directors is
directors or trustees involve dis made at such meeting valid SO LONG AS IT IS FAIR AND REASONABLE.
c. Contract is fair and reasonable under the circumstance
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INTERLOCKING DIRECTORS IS NOT A GROUND TO INVALIDATE A without prejudice to other sanctions that the commission may
CONTRACT. There is no prohibition at all to be an interlocking impose on the board of directors or trustees who, with
director. knowledge of the disqualification, failed to remove such
director or trustee
EXCEPTION:
1. IN CASES OF FRAUD. Who may remove
2. IF THE INTEREST OF THE INTERLOCKING DIRECTOR IS Stock corporation: vote of the stockholders holding or
SUBSTANTIAL IN ONE, AND NOMINAL IN THE OTHER representing at least two-thirds (2/3) of the outstanding
CONTRACTING CORPORATION, IN WHICH CASE, THE capital stock
CORPORATION WHERE THE DIRECTOR HAS A NOMINAL Non-stock corporation: vote of at least two-thirds (2/3)
INTEREST HAS TO COMPLY WITH THE REQUIREMENTS of the members entitled to vote
ON SELF- DEALING (SEC. 31).
How removal is done
Important: A director is considered to have substantial interest in
a corporation when he has stockholdings exceeding 20% percent
By the stockholders through a regular or special
of the outstanding capital stock.
meeting
o If in a special meeting, the special meeting shall be
EFFECT OF EXCEPTION
for the purpose of removing the director.
When this happens, the contract is voidable, unless:
o Must be called by the secretary on order of the
1. The presence of such interlocking director is not necessary to
president, or upon written demand of the
constitute a quorum.
stockholders representing or holding at least a
2. The vote of such interlocking director is not necessary to majority of the outstanding capital stock, a majority
approve a contract. of the members entitled to vote.
3. When contract is fair and reasonable under the circumstances o If there is no secretary, or if the secretary, despite
given. demand, fails or refuses to call the special meeting
or to give notice thereof, the stockholder or member
REMOVAL OF DIRECTORS OR TRUSTEES of the corporation signing the demand may call for
Section 27. Removal of directors or trustees. – any director or the meeting by directly addressing the stockholders
trustee of a corporation may be removed from office by a vote or members.
of the stockholders holding or representing at least two-thirds o Notice of the time and place of such meeting, as well
(2/3) of the outstanding capital stock, or if the corporation in a as of the intention to propose such removal, must
non-stock corporation, by a vote of at least two-thirds (2/3) of be given by publication or by written notice
the members entitled to vote: provided, that such removal prescribed in this code
shall take place either at a regular meeting of the corporation By SEC
or at a special meeting called for the purpose, and in either o upon verified complaint, and after due notice and
case, after previous notice to stockholders or members of the hearing, order the removal of a director or trustee
corporation of the intention to propose such removal at the elected despite the disqualification, or whose
meeting. A special meeting of the stockholders or members for disqualification arose or is discovered subsequent to
the purpose of removing any director or trustee must be called an election
by the secretary on order of the president, or upon written
demand of the stockholders representing or holding at least a BERNAS V. CINCO, GR NO. 163356-57 JULY 1, 2015
majority of the outstanding capital stock, a majority of the Facts:
members entitled to vote.
The case is about Makati Sports Club where in this case, there is
If there is no secretary, or if the secretary, despite demand, a certain group that had been managing the sports club. And
fails or refuses to call the special meeting or to give notice then there were rumor that the group was mismanaging and
thereof, the stockholder or member of the corporation signing certain funds were missing. The oversight committee which is
the demand may call for the meeting by directly addressing the made up of previous/past presidents of the organization, called
stockholders or members. Notice of the time and place of such for a special meeting to remove the directors. And they were
meeting, as well as of the intention to propose such removal, able to call that meeting and they had that meeting and they
must be given by publication or by written notice prescribed in were able to remove and replace the ruling group. So now a case
this code. Removal may be with or without cause: provided, was brought by the removed directors saying that the oversight
that removal without cause may not be used to deprive committee had no right to remove them as director.
minority stockholders or members of the right of
representation to which they may be entitled under section 23 Ruling:
of this code. The SC said that the relationship of the directors and the
stockholder is a Fiduciary Relationship. Such that the
The commission shall, motu propio or upon verified complaint, stockholder being the proprietor of the corporate interest and
and after due notice and hearing, order the removal of a the beneficiary of the corporate interest should have the power
director or trustee elected despite the disqualification, or to console the directors, such that if the directors fail to perform
whose disqualification arose or is discovered subsequent to an their duty, then
election. The removal of a disqualified directed shall be
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the director has the right under the law, under the by-laws of VALLE VERDE CASE
the corporation to remove and replace the erring director. So SC Legal question on corporate governance: Can the members of
said, of course, the stockholders of a corporation has the right a corporation’s board of directors elect another director to fill
to remove the directors because of the fiduciary relationship in a vacancy caused by the resignation of a hold-over director?
between the corporation, the stockholders and the directors. In
the case, there is a problem because the special stockholders FACT:
meeting was not called by the corporate secretary upon order In 1996, during the Annual Stockholders Meeting of petitioner
of the president. The corporate secretary and the president Valle Verde Country Club, Inc. (VVCC), an election was
would not call because they were part of the ruling group, so it conducted (9 directors were elected). In the years 1997, 1998,
was not called by the secretary, it was not even called by the 1999, 2000, and 2001, however, the requisite quorum for the
members but rather it was called by the oversight committee. holding of the stockholders meeting could not be obtained.
The by-laws of the Makati Sports Club says that it is the Consequently, the directors elected in 1996 continued to serve
president or the board of directors who can call for a special in the VVCC Board in a hold-over capacity.
meeting. So it did not comply with the
procedure. In 1998, Dinglasan resigned from his position as member of the
VVCC Board. In a meeting after, the remaining directors, still
So according to the SC that even if you have the right to remove constituting a quorum of VVCCs nine-member board, elected
the directors you have to follow the procedure. Sec 28 says, it is Roxas to fill in the vacancy.
the corporate secretary or upon written demand of a
stockholder. A year later, Makalintal also resigned as member of the VVCC
And even the by-laws says it is the president and board of Board and was replaced by Ramirez, who was elected by the
directors. SC said that nowhere in the corporation code or in the remaining members of the VVCC Board in 2001.
bylaws of the Makati Sports Club that the oversight committee
is authorized to set in whenever there is a breach of fiduciary Respondent Africa, a member of VVCC, questioned the election
duty and call for special election for the purpose of removing the of Roxas and Ramirez with SEC and RTC, respectively. [SEC –
existing set of officers and electing their replacement. The Roxas; RTC – Ramirez]
oversight committee did not have the power to call. Thus, the
special stockholders meeting is void. Even if that special meeting In his nullification complaint before the RTC, Africa alleged that
was later on ratified during the annual stockholders meeting. the election of Roxas was contrary to Section 29, in relation to
“SC said, if the act is invalid it cannot be ratified.” You have to Section 23, of the Corporation Code of the Philippines
distinguish an act which is illegal because it is against the law (Corporation Code). These provisions read:
and an act which is beyond the authority of the officers. SC said
that the act is against the law, it cannot be ratified. The law is
very specific, in order to remove a director you have to comply
with the requirements of the corporation code or the bylaws. Africa claimed that a year after Makalintal’s election, his term
There was also an issue that it’s impossible for the president to as well as those of the others should be considered to have
call for the meeting because he’s the person that’s supposed to already expired. Thus, the resulting vacancy should have been
be removed. SC said, it doesn’t matter because you are left filled by the stockholders in a regular or special meeting called
recourse with the court. If the officers mentioned in the bylaws for that purpose.
fails to call such meeting you can
go to SEC. Africa additionally contends that for the members to exercise
the authority to fill in vacancies in the board of directors, Section
Take note: An improper Board Meeting is a void meeting and if 29 requires, among others, that there should be an unexpired
the person calling the meeting is not the person authorized to do term during which the successor-member shall serve. Here,
so, that is a ground for voiding the meeting and any resolutions there is no more unexpired term during which Ramirez could
passed during that meeting. serve.
Upon failure of a quorum at any annual meeting the directorate by electing their representatives to the board of directors. The
naturally holds over and continues to function until another board of directors, in drawing to themselves the powers of the
directorate is chosen and qualified. Unless the law or the charter corporation, occupies a position of trusteeship in relation to the
of a corporation expressly provides that an office shall become stockholders, in the sense that the board should exercise not
vacant at the expiration of the term of office for which the only care and diligence, but utmost good faith in the
officer was elected, the general rule is to allow the officer to management of corporate affairs.
hold over until his successor is duly qualified. Mere failure of a
corporation to elect officers does not terminate the terms of The underlying policy of the Corporation Code is that the
existing officers. business and affairs of a corporation must be governed by a
board of directors whose members have stood for election, and
RULING: who have actually been elected by the stockholders, on an
Unmeritorious. annual basis. The shareholder vote is critical to the theory that
legitimizes the exercise of power by the directors or officers
The resolution of this legal issue is significantly hinged on the over properties that they do not own.
determination of what constitutes a directors term of office.
The law has authorized the remaining members of the board to
The holdover period is not part of the term of office of a member fill in a vacancy only in specified instances, so as not to retard or
of the board of directors. impair the corporations operations; yet, in recognition of the
stockholders right to elect the members of the board, it limited
Definite meaning of TERM (based on jurisprudence) the period during which the successor shall serve only to the
- time during which the officer may claim to hold the office as of unexpired term of his predecessor in office.
right, and fixes the interval after which the several incumbents
shall succeed one another While the Court in El Hogar (case cited by VVCC) approved of the
- not affected by the holdover practice of the directors to fill vacancies in the directorate, we
- fixed by statute and not change simply because the office may point out that this ruling was made before the present
have become vacant, nor because the incumbent holds over in Corporation Code was enacted and before its Section 29 limited
office beyond the end of the term due to the fact that a the instances when the remaining directors can fill in vacancies
successor has not been elected and has failed to qualify in the board.
Term vs Tenure As correctly pointed out by the RTC, when remaining members
Officer’s tenure represents the term during which the of the VVCC Board elected Ramirez to replace Makalintal, there
incumbent actually holds office. The tenure may be shorter (or, was no more unexpired term to speak of, as the term had
in case of holdover, longer) than the term for reasons within or already expired. Pursuant to law, the authority to fill in the
beyond the power of the incumbent. vacancy lies with the VVCCs stockholders, not the remaining
members of its board of directors.
Based on the above discussion, when Section 23 of the
Corporation Code declares that the board of directors shall hold SEC. 28. VACANCIES IN THE OFFICE OF THE DIRECTOR OR
office for one (1) year until their successors are elected and TRUSTEE; EMERGENCY BOARD.
qualified, we construe the provision to mean that the term of XXXX
the members of the board of directors shall be only for one year; XXXX
their term expires one year after election to the office. The
holdover period that time from the lapse of one year from a HOWEVER, WHEN THE VACANCY PREVENTS THE REMAINING
member’s election to the Board and until his successor’s DIRECTORS FROM CONSTITUTING A QUORUM AND
election and qualification is not part of the director’s original EMERGENCY ACTION IS REQUIRED TO PREVENT GRAVE,
term of office, nor is it a new term; the holdover period, SUBSTANTIAL, AND IRREPARABLE LOSS OR DAMAGE TO THE
however, constitutes part of his tenure. Corollary, when an CORPORATION, THE VACANCY MAY BE TEMPORARILY FILLED
incumbent member of the board of directors continues to serve FROM AMONG THE OFFICERS OF THE CORPORATION BY
in a holdover capacity, it implies that the office has a fixed term, UNANIMOUS VOTE OF THE REMAINING DIRECTORS OR
which has expired, and the incumbent is holding the succeeding TRUSTEES. THE ACTION BY THE DESIGNATED DIRECTOR OR
term. TRUSTEE SHALL BE LIMITED TO THE EMERGENCY ACTION
NECESSARY, AND THE TERM SHALL CEASE WITHIN A
After the lapse of one year from his election as member of the REASONABLE TIME FROM THE TERMINATION OF THE
VVCC Board in 1996, Makalintal’s term of office is deemed to EMERGENCY OR UPON ELECTION OF THE REPLACEMENT
have already expired. That he continued to serve in the VVCC DIRECTOR OR TRUSTEE, WHICHEVER COMES EARLIER. THE
Board in a holdover capacity cannot be considered as extending CORPORATION MUST NOTIFY THE COMMISSION WITHIN
his term. His resignation as a holdover director did not change THREE (3) DAYS FROM THE CREATION OF THE EMERGENCY
the nature of the vacancy; the vacancy due to the expiration of BOARD, STATING THEREIN THE REASON FOR ITS CREATION.
Makalintal’s term had been created long before his resignation. (New provision; POWER TO CONSTITUTE AN EMERGENCY
BOARD)
The powers of the corporation’s board of directors emanate
from its stockholders. VVCCs construction of Section 29 in Atty: If there is an emergency situation, in order to prevent, grave,
relation to Section 23 thereof, effectively weakens the substantial, and irreparable loss or damage to the corporation, the
stockholders power to participate in the corporate governance vacancy may be temporarily filled from among the officers of the
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capital asset unless it is used for business. The problem operate the proposed electric plant; that there is no need for
with the BIR is that, if they see it in your secondary securing the approval of the Municipal Council before operating
purpose, “to purchase, receive, take or grant real and its electric plant as this is not a necessary requisite for the
personal property” they consider that you are a real issuance of a certificate of public convenience inasmuch as it
estate company. So there is disconnect between SEC already possesses the 3 basic requirements of law, namely:
and BIR. Corporations who copied the incidental powers Filipino citizenship, financial capacity and the need for the
in their secondary purpose, if they sell land even if it is service in the interest and convenience of the consuming public.
not used as capital asset they were assessed VAT plus
the 30% tax as against the 6% capital gains tax. Upon consideration of the evidence, oral and documentary,
adduced by Filipinas to the effect that the proposed electric
EXAMPLES: service will be limited to the exclusive needs of its cement
a. Power of succession factory and to give light facilities to its employees living in the
b. To sue and be sued compound only, without adversely affecting the interests and
c. To have a corporate name services of petitioner; that like the latter, Filipinas will not
d. To purchase and hold real property generate its own electric current but buy it from the MERALCO;
e. To adopt and use a corporate seal and that no municipal streets will be traversed by its electric
f. To contract, to make by-laws, etc. wires and posts except small portions of private properties, the
Commission, pursuant to section 15 of Commonwealth Act. 146,
Implied Power vs Incidental Power as amended, issued a certificate of public convenience to it on
March 15, 1963, subject to the conditions set forth therein.
IMPLIED POWER ISSUES:
Those which exist by virtue of the Express powers of the
Corporation. They need not be expressly provided in the articles 1. whether or not Filipinas should have secured either a
but because of the express provisions provided in the articles they municipal or legislative franchise before it could be entitled
can exist. They are necessary for the exercise for the Express to a certificate of public convenience and necessity to
powers. operate and maintain an electric plant
2. whether under its articles of incorporation Filipinas is
INCIDENTAL POWER authorized to operate and maintain an electric plant
Powers given to a Corporation as a result or consequence of 3. whether Filipinas could be granted a certificate of public
being a Juridical Entity. convenience and necessity to operate and maintain an
electric plant notwithstanding the existence of an electric
TERESITA ELECTRIC AND POWER VS. PUBLIC SERVICE plant operator (the petitioner) in the same municipality.
COMMISSION AND FILIPINAS CEMENT CORP RULING:
FACTS:
1. No. The purpose is not for business but for exclusive use for
The Teresa Electric Light and Power Co., Inc., — hereinafter its own factory and employees. Petitioner contends that under
referred to as PETITIONER — is a domestic corporation the provisions of Act. No. 667 of the Philippine Commission, a
operating an electric plant in Teresa, Rizal, under a subsisting municipal or legislative franchise is a condition precedent to the
certificate of public convenience and necessity issued on June 2, granting to Filipinas of a certificate of public convenience and
1960 (PSC Case No. 129940), while the RESPONDENT Filipinas is necessity to operate and maintain an electric plant.
likewise a domestic corporation engaged in the manufacture
and sale of cement (who applied for a certificate of public Section 1 of the Act mentioned above requires the filing of a
convenience to install, maintain and operate an electric plan for formal application with the Council of the municipality in which
its factory and employees living within its compound). or through which the petitioner desires to construct or maintain
its line, stating, among other things, the rate per month to be
On May 24, 1962 Filipinas filed an application with the Public charged for electric light by lamp of specified standard candle-
Service Commission for a certificate of public convenience to power, and by amount of electricity consumed where a meter is
install, maintain and operate an electric plant in sitio Kaysapon used, and the rate per centum of the gross receipts which
of barrio Pamanaan, municipality of Teresa, Rizal, for the petitioner is willing to pay into the provincial treasury for the
purpose of supplying electric power and light to its cement franchise. Paragraphs 2 and 3, section 2 of the same act also
factory and its employees living within its compound. provide that not less than one-half of one per centum of the
gross earnings shall be paid into the provincial treasury, and that
Petitioner filed its written opposition alleging: that it is the duly the rates to be charged shall always be subject to regulations by
authorized operator of an electric light, heat and power service act of the Philippine Commission or the legislative body of the
in Teresa, Rizal; that Filipinas is not authorized by its articles of Islands.
incorporation to operate an electric plant; that the Municipal
Council of Teresa had not authorized it either to operate the The above requirements show that the act was intended to
proposed service; that it is willing to supply Filipinas' need for apply exclusively to any person or corporation who desires a
electricity; and that Filipinas' principal business does not come franchise to construct and maintain an electric line or power
within the jurisdiction of the respondent Commission. plant and line for business purposes, that is, to render service to
the general public at such rate of compensation as may be
Answering the opposition, Filipinas averred that, under approved and regulated by the government. Clearly, therefore,
paragraph 7 of its articles of incorporation, it is authorized to it should not be made to apply to Filipinas who applied for a
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certificate of public convenience and service to operate and obviously necessary or at least related to the operation of the
maintain an electric plant exclusively for its own use in cement factory.
connection with the operation of its cement factory and for the
use of its employees living within the compound of the factory REPUBLIC VS ACOJE MINING COMPANY
— the latter to receive service free of charge. FACTS:
It is, consequently, our view that all that Filipinas needs for the Acoje Mining Company has a lot of employees. In order to
purpose above mentioned is a certificate of public convenience provide more convenience to its employees, the company wrote
and necessity such as the one granted to it by the respondent the Director of Posts requesting the opening of a post, telegraph
Public Service Commission. and money order offices at its mining camp at Zamables for the
2. Yes. It is necessarily connected with the business of use of its employees and their families in said camp. The
manufacturing cement. It appears that the Articles of Director of Posts said yes but with a condition. The Director
Incorporation of Filipinas (paragraph 7) provide for authority to conditioned that the company should assume direct
secure from any governmental, state, municipality, or responsibility for whatever pecuniary loss may be suffered by
provincial, city or other authority, and to utilize and dispose of the Bureau of Posts by reason of any act of dishonesty,
in any lawful manner, rights, powers, and privileges, franchises carelessness or negligence on the part of the employee of Acoje
and concessions — obviously necessary or at least related to the who is assigned to take charge of the post. The BOD of Acoje
operation of its cement factory. Moreover, said Articles of passed a resolution stating that: “That the requirement of the
Incorporation also provide that the corporation may generally Bureau of Posts that the company should accept full
perform any and all acts connected with the business of responsibility for all cash received by the Postmaster be
manufacturing portland cement or arising therefrom or complied with, and that a copy of this resolution be forwarded
incidental thereto. to the Bureau of Posts.”
It cannot be denied that the operation of an electric light, heat Post Office branch was opened in October 13, 1949. However,
and power plant is necessarily connected with the business of after 5 years, the postmaster, an employee of Acoje, went on a
manufacturing cement. If in the modern world where we live 3-day leave and never returned. Acoje informed the Manila Post
today electricity is virtually a necessity for our daily needs, it is Office and upon auditing, it was found that P13,867.24 was
more so in the case of industries like the manufacture of missing.
cement.
The post office demanded payment and filed a suit with the CFI
3. No. Nobody has any exclusive right to secure a franchise or a of Manila for the amount but Acoje denied liability alleging that
certificate of public convenience. Just because there is an the BOD’s act in assigning a postmaster was ultra vires; also, the
existing grantee does not preclude the grant to another, but company alleged that their liability was merely that of a
such grant must be guided by public service and interest. guarantor.
While it is true that operators of public convenience and service
deserve some protection from unnecessary or unlawful CFI: Ruled in favor of the Post Office but only to the amount of
competition, yet the rule is that nobody has any exclusive right P9,515.23 (since they could only present evidence for such
to secure a franchise or a certificate of public convenience. amount)
Above any or all considerations, the grant of franchises and
certificates of public convenience and service should be guided Acoje appealed to SC.
by public service and interest; the latter are the primordial ISSUES:
considerations to be taken into account.
1. Whether or not the acts of the BOD was ultra vires
Moreover, it has been established in this case that petitioner 2. Whether or not its liability is merely that of a guarantor
was in no condition to supply the power needs of Filipinas,
RULING:
because its load capacity was only 200 kilowatts while Filipinas
was in need of 6,000 kilowatts power to operate its cement
1. No. The act covers a subject which concerns the benefit,
factory.
convenience, and welfare of the company’s employees and their
families. An ultra vires act is one committed outside the object
DISCUSSION for which a corporation is created as defined by the law of its
It must be emphasized that Filipinas needed 6,000 kilowatts organization and therefore beyond the powers conferred upon
power in order to operate, while the load capacity of petitioner it by law. However, there are certain corporate acts that may be
was only 2000 kilowatts. It can be said therefore that petitioner performed outside of the scope of the powers expressly
was in no condition to supply the power needs of Filipinas. conferred if they are necessary to promote the interests or
welfare of the corporation. Establishment of the local post office
If Filipinas will not put up its own electric power it cannot continue is a reasonable and proper adjunct to the conduct of the
its operation. Thus, although the putting up of a power plant is not business.
expressly provided in their purpose in the Articles of
Incorporation, it nevertheless provided for the authority to secure Moreover, an ultra vires act is merely voidable, in contrast to
from any governmental, state municipality, or provincial, city, or illegal acts which are void. It may be enforced by performance,
other authority, and to utilize and dispose of in any lawful manner ratification or estoppel. Here it is fair that the resolution be
rights, powers, and privileges, franchises, and concessions upheld at least on the ground of estoppel since the company at
least benefited from the transaction.
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There are powers, although not expressly provided in the Articles Amendment Only General Articles of
of Incorporation or even under the law, as long as it is necessary Information Sheet Incorporation and
for your operations to promote the welfare of corporation or (GIS) General Information
employees it is still considered as part of the scope of the Sheet (GIS)
Corporate Powers. Minimum No minimum At least twenty-five
subscription subscription percent (25%) of the
TO SUE AND BE SUED IN ITS CORPORATE NAME required increase in capital
stock has been
As a Juridical entity the corporation can directly pursue all actions subscribed and that at
to enforce its rights. It does not have to go through its least twenty-five
stockholders. At the same time the corporation can directly be percent (25%) of the
held liable for its obligations. The creditor does not have to go amount subscribed has
through the stockholders. been paid. This must
be supported by a
POWER TO ISSUE OR SELL STOCKS Treasurer’s Affidavit.
Reporting Required under
SECTION 35 (F) requirement Securities and
f) In case of stock corporations , to issue or sell stocks to Regulation Code
subscribers and to sell treasury stocks in accordance with (SRC) and not in
the provisions of this Code; and to admit members to the Corporation Code.
corporation if it be a non-stock corporation;
SEC Form 10-1
basically a form to
show that the
increase or that
the new issuance
is not covered by
the registration
requirement
under the SRC.
Effectivity No prior approval Deemed effective upon
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from the SEC is approval of the SEC of DISTINGUISHED FROM SECTION 39:
needed the application and
upon the issuance of SECTION 35 (g)– SECTION 39 –
SEC of the certificate of To purchase, Sale and other
filing. receive, take or disposition of assets
grant , hold,
ILLUSTRATION: SECTION 35 (F) convey, sell, lease,
Authorized capital stock: 1,000,000 pledge, mortgage,
Subscribed Issued shares: 500,000 and otherwise
Unissued but authorized shares: 500,000 deal with such
real and personal
If the corporation decides to sell the 500,000 unissued but property
authorized shares, what is required is only the approval of the Object Sale of any asset of Sale or disposition of
majority of the board of directors in a meeting constituting a the corporation, as all or substantially all
quorum. In this case, apply Sec. 35 (f) long as it is not all, of the assets
or substantially all
After the sale of the unissued 500,000 shares, the authorized of the assets
capital stock will remain at 1,000,000. Your subscribed and issued, Approval Majority of the Majority of the board
on the other hand, will now be 1,000,000 instead of 500,000. requirement board of directors of the directors in a
in a meeting quorum and at least
ILLUSTRATION: SECTION 37 constituting a two-thirds (2/3) of the
Authorized capital stock: 1,000,000 quorum outstanding capital
Subscribed Issued shares: 1,000,000 stock (both voting and
non-voting)
If the corporation decides to increase the authorized capital stock
from 1 million to 2 million, then such increase would need the NOTE:
approval of a majority vote of the board of directors where there - If the primary purpose of the corporation is to sell
is a quorum and by two-thirds (2/3) of the outstanding capital assets, there is no need for approval by the board. Any
stock. authorized officer or employee can transact as long as it
is in the ordinary course of business.
In this case, apply sec. 37. In the end, after it has been approved - If it is not in the ordinary course of business of the
by the SEC, the Authorized capital stock will now be at 2 million. corporation and it is a sale of not all or substantially all
The subscribed issued shares should be at least 1,250,000 because of the assets, then you only need a board approval -
of the requirement under sec. 37 that at least twenty-five percent majority vote of the directors in a meeting where there
(25%) of the increase in capital stock has been subscribed and is a quorum.
that at least twenty-five percent (25%) of the amount subscribed
has been paid. POWER TO EXTEND OR SHORTEN CORPORATE TERM
Section 36. Power to extend or shorten corporate term. – A
In the amended code, there is no need of the 25% requirement in private corporation may extend or shorten its term as stated in
order to incorporate. But to increase the authorized capital stock the articles of incorporation when approved by a majority vote
there is the requirement that at least twenty-five percent (25%) of of the board of directors or trustees, and ratified at a meeting by
the increase in capital stock has been subscribed and that at least the stockholders or members representing at least two-thirds
twenty-five percent (25%) of the amount subscribed has been (2/3) of the outstanding capital stock or of its members. Written
paid. notice of the proposed action and the time and place of the
meeting shall be sent to stockholders or members at their
Note: the two-thirds (2/3) stockholder approval requirement respective place of residence as shown in the books of the
includes both stocks – voting or non-voting corporation, and must be deposited to the addressee in the post
office with postage prepaid, served personally, or when allowed
in the bylaws or done with the consent of the stockholder, sent
POWER TO PURCHASE, RECEIVE, TAKE OR GRANT, HOLD. electronically in accordance with the rules and regulations of the
CONVEY, SELL, LEASE, PLEDGE, MORTGAGE REAL AND PERSONAL Commission on the use of electronic data messages. In case of
PROPERTIES extension of corporate term, a dissenting stockholder may
exercise the right of appraisal under the conditions provided in
SECTION 35 (G) this Code.
a) To purchase , receive, take or grant , hold, convey , sell,
lease, pledge, mortgage, and otherwise deal with such Requirements to extend or shorten corporate term:
real and personal property, including securities and bonds 1. Voting
of other corporations, as the transaction of the lawful majority vote of the board of directors or trustees
business of the corporation may reasonably and constituting a quorum
necessarily require , subject to the limitations prescribed ratified at a meeting by the stockholders or
by law and the Constitution; members representing at least two-thirds (2/3) of
the outstanding capital stock or by at least two-
thirds (2/3) of its members.
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NOTE: they vote for the amendment of the Articles of Any increase or decrease in the capital stock or the incurring,
Incorporation to extend or shorten the corporate term. Filing creating or increasing of any bonded indebtedness shall
is not enough. It also requires the approval of the SEC. require prior approval of the Commission, and where
appropriate, of the Philippine Competition Commission. The
2. Written Notice application with the Commission shall be made within six (6)
Notice of the proposed action and the time and months from the date of approval of the board of directors and
place of the meeting shall be sent to stockholders stockholders, which period may be extended for justifiable
or members at their respective place of residence reasons.
as shown in the books of the corporation, and must
be deposited to the addressee in the post office Copies of the certificate shall be kept on file in the office of the
with postage prepaid, served personally ,or when corporation and filed with the Commission and attached to the
allowed in the bylaws or done with the consent of original articles of incorporation. After approval by the
the stockholder, sent electronically in accordance Commission and the issuance by the Commission of its
with the rules and regulations of the Commission certificate of filing, the capital stock shall be deemed increased
on the use of electronic data messages. or decreased and the incurring, creating or increasing of any
bonded indebtedness authorized, as the certificate of filing
3. Filing and Approval of the Securities and Exchange may declare: Provided, That the Commission shall not accept
Commission is required for filing any certificate of increase of capital stock unless
Mere filing of the amended Articles of accompanied by a sworn statement of the treasurer of the
Incorporation is not enough it must be coupled corporation lawfully holding office at the time of the filing of
with an approval by SEC. the certificate, showing that at least twenty-five percent (25%)
The amendment shall take effect once the increase of the increase in capital stock has been subscribed and that at
or decrease in the corporate term is approved by least twenty-five percent (25%) of the amount subscribed has
the SEC. been paid in actual cash to the corporation or that property,
the valuation of which is equal to twenty-five percent (25%) of
4. Dissenting Stockholder may exercise the right of appraisal the subscription, has been transferred to the corporation:
Provided, further, That no decrease in capital stock shall be
POWER TO INCREASE OR DECREASE CAPITAL STOCK; INCUR, approved by the Commission if its effect shall prejudice the
CREATE OR INCREASE BONDED INDEBTEDNESS rights of corporate creditors.
Section 37. Power to Increase or Decrease Capital Stock; Incur,
Create or Increase Bonded Indebtedness. - No corporation Nonstock corporations may incur ,create or increase bonded
shall increase or decrease its capital stock or incur, create or indebtedness when approved by a majority of the board of
increase any bonded indebtedness unless approved by a trustees and of at least two-thirds (2/3) of the members in a
majority vote of the board of directors and by two-thirds (2/3) meeting duly called for the purpose.
of the outstanding capital stock at a stockholders’ meeting
duly called for the purpose. Written notice of the time and Bonds issued by a corporation shall be registered with the
place of the stockholders’ meeting and the purpose for said Commission, which shall have the authority to determine the
meeting must be sent to the stockholders at their places of sufficiency of the terms thereof.
residence as shown in the books of the corporation and served
on the stockholders personally, or through electronic means Requirements to increase or decrease capital stock:
recognized in the corporation’s bylaws and/or the 1. Voting
Commission’s rules as a valid mode for service of notices. Majority vote of the Board of Directors in a meeting
where there is a quorum; and
A certificate must be signed by a majority of the directors of Affirmative vote of the Stockholders owning 2/3 of the
the corporation and countersigned by the chairperson and outstanding capital stock at a meeting duly called for
secretary of the stockholders’ meeting, setting forth: the purpose
(a) That the requirements of this section have been complied 2. Written Notice
with; Notice for the Stockholder’s meeting served
(b) The amount of the increase or decrease of the capital personally or through electronic means recognized
stock; by the by-laws and/or rules of Securities and
(c) and the amount paid by each on the subscription in cash Exchange Commission
or property, or the amount of capital stock or number of
shares of no-par stock allotted to each stockholder if such 3. Amendment of the Articles of Incorporation and General
increase is for the purpose of making effective stock Information Sheet
dividend therefor authorized;
(d) Any bonded indebtedness to be incurred, created or 4. Filing to the Securities and Exchange Commission is required
increased; Certificate signed by majority of the BOD and
(e) The amount of stock represented at the meeting; and countersigned by the chairperson and secretary
(f) The vote authorizing the increase or decrease of the (contents refer to the section 37) which shall be
capital stock, or the incurring, creating or increasing of filed before the SEC.
any bonded indebtedness.
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General rule: If the articles are silent, pre-emptive rights can be 3. From the previous answer, can A buy more?
exercised. Yes. If the other shareholders do not exercise their pre-
Exception: Pre-emptive right can be denied in the following emptive right, then the other existing shareholders can
instances: exercise their pre-emptive right also in proportion to their
1. When the right is expressly denied in the Articles of current shareholdings. For example, if C declines, the shares
Incorporation pertaining to C can now be shared among A, B and D if they
2. When shares are issued in compliance with laws requiring want.
stock offerings or minimum stock ownership by the public; and
3. When shares are issued in good faith with the approval of the 4. What if the corporation want to issue to E? Meaning if
stockholders representing two-thirds (2/3) of the outstanding A, B, C and D do not buy, what do they do? What do they
capital stock, in exchange for property needed for corporate do if they want a fresh capital coming in?
purposes; or in payment of a previously contracted debt. The corporation have to execute waiver of pre-
emptive rights. If the current stockholders do not
Exception to the Exception: exercise their pre-emptive rights, the SEC will
If the directors acted in breach of trust and their primary purpose require you to submit proof thru a waiver of pre-
is to perpetuate or shift control of the corporation, or to “freeze emptive rights. It is one of the reportorial
out” the minority interest, the preemptive right may be exercised requirements to the SEC if you are increasing your
(Majority Stockholders of Ruby International v Lim) subscribed capital.
Banking Corporation (China Bank), Pilipinas Shell Petroleum of Ruby’s corporate term for another 25 years and election of
Corporation (Pilipinas Shell), and RUBY represented by Mr. Yu directors. At the scheduled stockholder’s meeting, Lim together
Kim Giang. with other minority stockholders appeared in order to put on
record their objections on the validity of the holding thereof and
The MANCOM was tasked to perform the following functions: the matters taken therein. Specifically, they questioned the
(1) undertake the management of RUBY; (2) take custody and percentage of stockholders present in the meeting which the
control over all existing assets and liabilities of RUBY; (3) majority claimed stood at 74.75% of Ruby. Lim also argued that
evaluate RUBYs existing assets and liabilities, earnings and a majority of the stockholders claiming to be 74.75% of Ruby
operations; (4) determine the best way to salvage and protect increased their shares to 75.75% by subscribing from the
the interest of its investors and creditors; and (5) study, review unissued shares of the authorized capital stock as “capital
and evaluate the proposed rehabilitation plan for RUBY. infusion”.
Subsequently, two (2) rehabilitation plans were submitted to Accordingly, Lim said that the extension of corporate term and
the SEC: the BENHAR/RUBY Rehabilitation Plan of the majority increase in capital stock were done in violation CA and without
stockholders led by Yu Kim Giang, and the Alternative Plan of compliance to legal requirements of Corporation Code.
the minority stockholders represented by Miguel Lim (Lim).
RULING:
Plan 1 (BENHAR/RUBY): Benhar International, Inc. (BENHAR) — Supreme Court ruled that the preemptive right of the
a domestic corporation engaged in the importation and sale of shareholders were violated.
vehicle spare parts which is wholly owned by the Yu family and
headed by Henry Yu, who is also a director and majority Pre-emptive right under Sec. 39 of the Corporation Code refers
stockholder of RUBY — shall lend its P60 million credit line in to the right of a stockholder of a stock corporation to subscribe
China Bank to RUBY, payable within ten (10) years. Moreover, to all issues or disposition of shares of any class, in proportion
BENHAR shall purchase the credits of RUBY's creditors and to their respective shareholdings. The right may be restricted or
mortgage RUBY's properties to obtain credit facilities for RUBY. denied under the articles of incorporation, and subject to
Upon approval of the rehabilitation plan, BENHAR shall control certain exceptions and limitations. The stockholder must be
and manage RUBY's operations. For its service, BENHAR shall given a reasonable time within which to exercise their
receive a management fee equivalent to 7.5% of RUBY's net preemptive rights. Upon the expiration of said period, any
sales. stockholder who has not exercised such right will be deemed to
have waived it.
Plan 2 (Alternative/Minority): On the other hand, the
Alternative Plan of RUBY's minority stockholders proposed to: The validity of issuance of additional shares may be questioned
(1) pay all RUBY's creditors without securing any bank loan; (2) if done in breach of trust by the controlling stockholders. Thus,
run and operate RUBY without charging management fees; (3) even if the pre-emptive right does not exist, either because the
buy-out the majority shares or sell their shares to the majority issue comes within the exceptions in Section 39 or because it is
stockholders; (4) rehabilitate RUBY's two plants; and (5) secure denied or limited in the articles of incorporation, an issue of
a loan at 25% interest, as against the 28% interest charged in the shares may still be objectionable if the directors acted in breach
loan under the BENHAR/RUBY Plan. of trust and their primary purpose is to perpetuate or shift
control of the corporation, or to “freeze out” the minority
Both plans were endorsed by the SEC to the MANCOM for interest.
evaluation. In 1988, SEC approved BENHAR/RUBY Plan.
Meanwhile, BENHAR started to pay off secured creditors of SALE OR OTHER DISPOSITION OF ASSETS
RUBY and executed deeds of assignments of credit and Section 39. Sale or Other Disposition of Assets. — Subject to
mortgage rights in favor of BENHAR. These were done despite the provisions of Republic Act No. 10667, otherwise known as
the TRO and injunction and even before the SEC Hearing Panel. the "Philippine Competition Act," and other related laws, a
corporation may, by a majority vote of its board of directors or
AFLC and Lim moved to nullify the deeds of assignment in favor trustees, sell, lease, exchange, mortgage, pledge, or otherwise
of BENHAR and cite the parties in contempt for willfull violation dispose of its property and assets, upon such terms and
of SEC order on suspension of payments. They also charged that conditions and for such consideration, which may be money,
in paying of FEBTC debts, it was given undue preference over stocks, bonds, or other instruments for the payment of money
the other creditors of Ruby. SEC nullified the deeds of or other property or consideration, as its board of directors or
assignments, upon appeal SEC En Banc denied appeal for trustees may deem expedient.
BENHAR et al, CA affirmed SEC ruling nullifying the deeds.
A sale of all or substantially all of the corporation's properties
On the other hand, it appears that even during the pendency of and assets, including its goodwill, must be authorized by the
appeals, BENHAR and Ruby have performed other acts in vote of the stockholders representing at least two-thirds (2/3)
pursuance of BENHAR/RUBY Plan approved by SEC (even if there of the outstanding capital stock, or at least two-thirds (2/3) of
was an injunction). the members, in a stockholders' or members' meeting duly
called for the purpose.
Lim received a notice of stockholder’s meeting signed by Mr
Magtalas the “designated secretary” of Ruby and stating the In non-stock corporations where there are no members with
matters to be taken up in said meeting which includes extention voting rights, the vote of at least a majority of the trustees in
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office will be sufficient authorization for the corporation to - A sale or other disposition shall be deemed to
enter into any transaction authorized by this section. cover substantially all the corporate property and
assets if thereby the corporation would be
The determination of whether or not the sale involves all or rendered incapable of continuing the business or
substantially all of the corporation's properties and assets accomplishing the purpose for which it was
must be computed based on its net asset value, as shown in its incorporated.
latest financial statements. A sale or other disposition shall
be deemed to cover substantially all the corporate property Y-I LEISURE VS. YU
and assets if thereby the corporation would be rendered FACTS:
incapable of continuing the business or accomplishing the
purpose for which it was incorporated. This case involves a complaint for collection of sum of money
and damages with prayer for preliminary attachment against
Written notice of the proposed action and of the time and MADCI and its president Rogelio Sangil (Sangil) to recover his
place for the meeting shall be addressed to stockholders or payment for the purchase of golf and country club shares.
members at their places of residence as shown in the books of Mt. Arayat Development Co., Inc.(MADCI) was a real estate
the corporation and deposited to the addressee in the post development corporation. Respondent James Yu (Yu) was a
office with postage prepaid, served personally, or when businessman, interested in purchasing golf and country club
allowed by the bylaws or done with the consent of the shares.
stockholder, sent electronically: Provided, That any dissenting
stockholder may exercise the right of appraisal under the Sometime in 1997, MADCI offered for sale shares of a golf and
conditions provided in this Code. country club located in the vicinity of Mt. Arayat for the price of
P550.00 per share. Relying on the representation of MADCI's
After such authorization or approval by the stockholders or brokers and sales agents, Yu bought 500 golf and 150 country
members, the board of directors or trustees may, club shares for a total price of P650,000.00 which he paid by
nevertheless, in its discretion, abandon such sale, lease, installment with fourteen (14) Far East Bank and Trust Company
exchange, mortgage, pledge, or other disposition of property (FEBTC) checks.
and assets, subject to the rights of third parties under any
contract relating thereto, without further action or approval Upon full payment of the shares to MADCI, Yu visited the
by the stockholders or members. supposed site of the golf and country club and discovered that
it was non-existent. In a letter, Yu demanded from MADCI that
Nothing in this section is intended to restrict the power of any his payment be returned to him. MADCI recognized that Yu had
corporation, without the authorization by the stockholders or an investment of P650,000.00, but the latter had not yet
members, to sell, lease, exchange, mortgage, pledge, or received any refund. Yu filed with the RTC above-said complaint.
otherwise dispose of any of its property and assets if the same In his transactions with MADCI, Yu alleged that he dealt with
is necessary in the usual and regular course of business of the Sangil, who used MADCI's corporate personality to defraud him.
corporation or if the proceeds of the sale or other disposition
of such property and assets shall be appropriated for the Sangil alleged that Yu dealt with MADCI as a juridical person;
conduct of its remaining business. that he did not benefit from the sale of shares; that the return
of Yu's money was no longer possible because its approval had
Board of Directors approval only been blocked by the new set of officers of MADCI, which
• Voting requirement: Board resolution by a majority vote of controlled the majority of its board of directors; that MADCI
the Board of Directors in a meeting where there is a failed to develop the golf course because its properties were
quorum. taken over by YIL after he allegedly violated the MOA. The lands
of MADCI were eventually sold to YICRI for a consideration of
• Instances: P9.3 million, which was definitely lower than their market price.
a) A sale of all or substantial all of the assets of the
corporation, provided, that it is in the regular course MADCI claimed that it was Sangil who defrauded Yu invoked the
of business of the corporation. Memorandum of Agreement (MOA) entered into by MADCI,
b) It is not in a regular course of business but it is a sale Sangil and petitioner Yats International Ltd. (YIL) wherein Sangil
of NOT all of substantial all of the assets of the undertook to redeem MADCI proprietary shares sold to third
corporation. persons or settle in full all their claims for refund of payments
claimed that Sangil should be ultimately liable to refund the
Board of Directors and Stockholder approval payment for shares purchased
• Voting requirement:
1. Board resolution by a majority vote of the Board of Directors Yu filed an Amended Complaint, impleaded YIL, Y-I Leisure Phils.,
in a meeting where there is a quorum. Inc. (YILPI) and Y-I Club & Resorts, Inc. (YICRI). According to Yu,
2. Stockholders vote representing at least two-thirds (2/3) of he discovered in the Registry of Deeds of Pampanga that,
the outstanding capital stock, or at least two-thirds (2/3) of substantially, all the assets of MADCI, consisting of 120 hectares
the members, in a stockholders' or members' meeting duly of land located in Magalang, Pampanga, were sold to YIL, YILPI
called for the purpose. and YICRI. The transfer was done in fraud of MADCI's creditors,
• Instance/s: and without the required approval of its stockholders and board
a) A sale of all or substantially all of the assets of the of directors under Section 40 of the Corporation Code. Yu also
corporation
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alleged that Sangil even filed a case in Pampanga which assailed d) Where the transaction is entered into fraudulently in order
the said irregular transfers of lands. to escape liability for such debts; Article 1388, NCC:
whoever acquires in bad faith the things alienated in fraud
YIL, YILPI and YICRI alleged that they only had an interest in of creditors, shall indemnify the latter for damages
MADCI in 1999 when YIL bought some of its corporate shares suffered.
pursuant to the MOA. This occurred two (2) years after Yu
bought his golf and country club shares from MADCI that as a Thus, if there is fraud in the transfer of all the assets of the
mere stockholder of MADCI, YIL could not be held responsible transferor corporation, its creditors can hold the transferee
for the liabilities of the corporation as to the transfer of liable. This exception contemplates the “business-enterprise
properties from MADCI to YILPI and subsequently to YICRI, they transfer” where the transferee coproration’s interest goes
averred that it was not undertaken to defraud MADCI's creditors beyond the assets of the transferor’s assets and its desires to
and it was done in accordance with the MOA. In fact, it was acquire the latter’s business enterprise including its goodwill.
stipulated in the MOA that Sangil undertook to settle all claims The transferee here actually purchases not only the assets but
for refund of third parties. the business itself that the transferor is merely left with its
juridical existence. The proper provision of law that is
The President and CEO of YILPI and YICRI, and managing director contemplate by this exception (business-enterprise transfer) is
of YIL, Denny On Yat Wang (Wang) testified that YIL was an Section 40 refers to the sale, lease, exchange or disposition of
investment company engaged in the development of real all or substantially all of the corporation's assets, including its
estates, projects, leisure, tourism, and related businesses that goodwill. The sale under this provision does not contemplate an
YIL subscribed to the shares of MADCI because it was interested ordinary sale of all corporate assets; the transfer must be of such
in its golf course development project in Pampanga. Thus, he degree that the transferor corporation is rendered incapable of
signed the MOA on behalf of YIL and he paid P31.5 million to continuing its business or its corporate purpose. A sale or other
subscribe to MADCI's shares, subject to the fulfillment of Sangil's disposition shall be deemed to cover substantially all the
obligations; that the MOA stipulated that MADCI would execute corporate property and assets if thereby the corporation would
a special power of attorney in his favor, empowering him to sell be rendered incapable of continuing the business or
the property of MADCI in case of default in the performance of accomplishing the purpose for which it was incorporated.
obligations; that due to Sangil's subsequent default, a deed of
absolute sale over the lands of MADCI was eventually executed However not every transfer of the entire corporate assets would
in favor of YICRI, its designated company; that, aside from its qualify under Section 40, it does not apply: if the sale of the
lands, MADCI had other assets in the form of loan advances of entire property and assets is necessary in the usual and regular
its directors course of business of corporation, or if the proceeds of the sale
or other disposition of such property and assets will be
ISSUES: appropriated for the conduct of its remaining business. Thus,
the litmus test to determine the applicability of the Section
1. Whether fraud must exist in the transfer of all the corporate would be the capacity of the corporation to continue its
assets in order for the transferee to assume the liabilities of the business after the sale of all or substantially all of its assets.
transferor. No.
2. Whether or not the petitioners indeed became a continuation The purpose of the business-enterprise transfer is to protect the
of MADCI’s business. Yes creditors by allowing them a remedy.
RULING:
2. Yes. Based on the factual findings, the Court is convinced that
1. No. Fraud is not an essential consideration. Under the Nell MADCI indeed had assets consisting of 120 hectares of
doctrine (Nell v Pacific Farms Inc.) the general rule is that the landholdings in Magalang, Pampanga, to be developed into a
transfer of all the assets of a corporation to another shall not golf course, pursuant to its primary purpose. Because of its
render the latter liable to the liabilities of the transferor, except alleged violation of the MOA, however, MADCI was made to
when: transfer all its assets to the petitioners. No evidence existed that
a) Where the purchaser expressly or impliedly agrees to MADCI subsequently acquired other lands for its development
assume such debts; Article 2047, NCC: When a person projects. Thus, MADCI, as a real estate development
binds himself solidarily with the principal debtor, then a corporation, was left without any property to develop
contract of suretyship is produced. Necessarily, the eventually rendering it incapable of continuing the business or
corporation which expressly or impliedly agrees to assume accomplishing the purpose for which it was incorporated.
the transferor's debts shall be liable to the same. Section 40 must apply.
b) Where the transaction amounts to a consolidation or
merger of the corporations; Sections 76 to 80, Corporation The MOA cannot prejudice respondent Yu. CA correctly ruled
Code: If the transfer of assets of one corporation to another that there was novation of its provision. Since it was done
amounts to a merger or consolidation, then the transferee without securing the consent of respondent, the agreement
corporation must take over the liabilities of the transferor. cannot prejudice him and MADCI is still its debtor and given that
c) Where the purchasing corporation is merely a there was transfer to the petitioners, then the petitioners shall
continuation of the selling corporation, and transferee be liable.
purchases not only the assets of the transferor, but also
its business thus the transferor is merely left with its Petition is denied.
juridical existence, devoid of its industry and earning
capacity.
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TO BE LIABLE UNDER THE BUSINESS ENTERPRISE RULE, Agreement that the transferor will assume the liability
REQUIREMENTS: An agreement where the transferor retains the liability is a valid
1. The transferor Corporation sells all or substantially all its agreement but it is only enforceable between the transferor and
assets to another entity; and transferee. The creditors not being a party to their agreement, are
2. The transferee corporation will continue the business of not bound by such.
the transferor corporation.
If the transferee assumes the liability, such is binding to the
Under Sec. 39, when a corporation sells all or substantially all its creditors.
assets and the Corporation can no longer continue its operations,
the presumption that the transferee corporation will now be the If the transferor expressly assumes liability, such is not binding to
one to continue the business of the corporation. the creditors. The creditors can still go after the transferee, but of
course the transferee has the recourse to go after the transferor
REASON FOR THE RULE: To avoid a situation where the creditors based on their agreement.
can no longer go after the assets of the corporation because it has
already transferred the assets to another entity. FOR THE
PROTECTION OF CREDITORS. POWER TO ACQUIRE OWN SHARES
Section 40. Power to Acquire Own Shares. — Provided that the
Ways to transfer a Corporate Business corporation has unrestricted retained earnings in its books to
cover the shares to be purchased or acquired, a stock
1. Share Purchase Agreement (SPA) corporation shall have the power to purchase or acquire its
own shares for a legitimate corporate purpose or purposes,
EXAMPLE: A owning all the shares of B Corporation, if A wants to including the following cases:
transfer the business of B Corp, A can enter into a SPA with C, with (a) To eliminate fractional shares arising out of stock
that, C now becomes the owner of B corp. dividends;
(b) To collect or compromise an indebtedness to the
Is there a change in entity in B Corporation? No. the corporation corporation, arising out of unpaid subscription, in a
has the power of succession and its identity is separate and delinquency sale, and to purchase delinquent shares sold
distinct from the stockholders. Here, there is no change in the during said sale; and
Entity, only the stockholders. There is no change or transfer of
(c) To pay dissenting or withdrawing stockholders entitled to
liability because B Corporation continues to exist only that it is C
payment for their shares under the provisions of this
and no longer A that owns all the shares in the corporation.
Code.
LABOR CODE: in case of transfer of shares, the employee of the
Applicability: Section 40 applies to all shares other than
Corporations continues to be its employees. No termination of
redeemable shares because there is a specific provision on
employment because the corporation continues to exist.
redeemable shares. One of the rule on redeemable shares is that
it does not require the existence of Unrestricted Retained
2. Asset Purchase (AP)
Earnings (URE).
There is no change in its stockholders but you are taking away the
Requirements for a Corporation to acquire its own shares
assets of B corporation and giving it to C. (Related to the above
example) B corporation continues to be owned by A. 1. There must be unrestricted retained earnings.
Rule on Asset Purchase in terms of transfer of Liability (Nell 2. Voting required is only a majority of the directors present in
Doctrine) a meeting where there is a quorum
Determine first if there is a quorum to constitute a
General Rule: The purchaser only acquires the assets, liabilities valid meeting. If there is no quorum in the first
remain with the Corporation. place, there is no need for voting because the
meeting is invalid.
Exception: If there is already a quorum to have a valid
1. when there is an agreement that the purchaser will assume the meeting, the voting will now depend on the actual
liability; number of directors present. The vote needed is a
2. when the transaction amounts to a merger or consolidation; majority vote of the directors present in a meeting
3. Transferee Corporation is merely a continuation of the business where there is a quorum to be a valid corporate
of the corporation; act.
4. Transaction is fraudulently entered into to escape liability.
Atty: The quorum requirement is segregated from the voting
Where does Section 39 fall? 3rd exception. Rule is called BUSINESS requirement.
ENTERPRISE RULE.
3. It must be for a legitimate purpose
To eliminate fractional shares arising out of stock
dividends;
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Fractional Share – it refers to a share less than one full share of outstanding capital stock at a stockholder’s meeting
equity. duly called for that purpose.
Amendment of the Primary Purpose in the Articles of
ILLUSTRATION Incorporation
When the stockholder has 250 shares and the corporation issues
stock dividends, so 250 X 25% ownership, that is 62.5, so the share Note: Failure to amend the AOI’s primary purpose, that activity
will now be 112.5. The .5 shares is the fractional share, the will be considered as ULTRA VIRES, it being not part of the primary
corporation will now acquire the .5 shares. purpose of the corporation.
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RETAINED EARNINGS
Here, the trust fund doctrine no longer applies because the
Accumulated profits of a corporation in its previous operations. It corporation is already being liquidated. Which means that
includes all income accumulated all throughout the years during before you can even distribute your liquidating dividends,
which the corporation was in operation. you have to pay your creditors first. Whatever is left, can be
distributed as dividends.
So, if the corporation has been experiencing losses, there will be
no retained earnings. Rather, there will be deficits. Retained 2. When the corporation is a WASTING ASSET CORPORATION –
earnings can only exist if the corporation has been operating at a a type of corporation where the corporation has a limited life
profit. because its assets are consumed during the operation of the
corporation and it’s not replenished.
TYPES OF RETAINED EARNINGS
RESTRICTED RETAINED EARNINGS – in general, it is EXAMPLES
restricted if it is not available for dividend declaration
UNRESTRICTED RETAINED EARNINGS – if available for Mining – if a corporation is created to mine a certain
dividend declaration area, that area once the minerals are gone, the
corporation’s purpose no longer exists. So slowly, as the
RESTRICTING RETAINED EARNINGS minerals are consumed, the assets of the corporation
1. Appropriated by its Board of Directors for corporate expansion are being depleted. In that sense, the corporation is
projects or programs. allowed to return capital to its stockholder. Because, the
idea is that the corporation is only for a limited period,
EXAMPLE: as long as the assets are existing. Once the assets are
If the Board of directors says that out of the 50 million retained depleted, then the corporation can return capital to the
earnings, we are going to allocate 15 million for a future stockholders.
expansion, that will make your 15 million a restricted retained
earnings. Therefore, out of the 50 million, 15 million cannot be Relevant dates when it comes to dividend declaration
declared as dividends. 1. Declaration date
Before the declaration date, the dividends are not a liability of the
2. Covered by a restriction for dividend declaration under a loan corporation. In fact, the corporation is not obliged to declare
agreement. dividends, even if it has unrestricted retained earnings. The BOD
cannot be compelled to declare dividends. Dividends do not
Contractual Covenants - If, for example, there is a loan become a liability of the corporation unless and until it is actually
agreement, and the creditor expressly provides that the declared. The moment of declaration is the time that the
corporation cannot declare dividends out of a certain amount corporation now recognizes the liability.
of its retained earnings. That portion that is restricted under
the contract, becomes restricted retained earnings. 2. Record date
This refers to the date to determine who are the stockholders
3. Required to be retained under special circumstances obtaining entitled to receive dividends. The stockholders of record as of the
in the corporation such as when there is a need for special record date are the stockholders who will be receiving the
reserve for probable contingencies. dividends.
EXAMPLE Before the record date, the stocks are considered sold at
When a corporation acquires treasury shares, it is required to DIVIDENDS ON. Meaning, before the record date, you are also
restrict a portion of its retained earnings, in the same amount selling with it the right to receive the dividends, which means that
as the treasury shares that they acquired. That portion there is actually a premium on the price of those shares because
becomes restricted retained earnings. It cannot be available for they carry with it the right to receive dividends.
dividend declaration.
When we sell the stocks after the record date, normally we call it
If the corporation has been experiencing losses, such that it has as DIVIDENDS OFF, because even if you sell shares or transfer
zero or negative retained earnings, then it cannot declare ownership, the person who was the owner as of the record date
dividends at all. So, there has to be unrestricted retained will be the one entitled to receive the dividends. The record date
earnings for a corporation to declare dividends. is important to determine who is receives the dividends.
General Rule: Dividends CANNOT be distributed out of the capital. Declaration date March 10
It violates the trust fund doctrine. Under the trust fund doctrine, Record date March 30
you cannot return capital to the stockholders unless all the
creditors have been paid first. A is holder of the share on declaration date. On March
15, A sells the shares to B, that is still considered as
Exceptions: (exclusive exceptions) dividends on.
1. If the dividend is A LIQUIDATING DIVIDEND – it is distributed B sells the shares to C on March 25, still considered as
during a liquidation of a corporation. dividends on.
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On March 30, the record date, if C is still the owner of control more than one-third (1/3) of the total outstanding
the shares by that time, C is the stockholder entitled to capital stock entitled to vote of the managing corporation; or
the dividends. (b) where a majority of the members of the board of directors
If on April 5, C sells the shares to D. It still C who is of the managing corporation also constitute a majority of the
entitled to receive dividends. members of the board of directors of the managed
The sale from A to B to C is still dividends on. It carries corporation, then the management contract must be approved
with it the right to receive dividends. They are sales by the stockholders of the managed corporation owning at
before the record date. Sales after the record date is least two-thirds (2/3) of the total outstanding capital stock
already dividends off, because the right to receive the entitled to vote, or by at least two-thirds (2/3) of the members
dividends remains with the stockholder as of the record in the case of a nonstock corporation.
date.
These shall apply to any contract whereby a corporation
3. Payment Date undertakes to manage or operate all or substantially all of the
Date when the dividends are actually paid by the corporation. business of another corporation, whether such contracts are
When a corporation declares dividends, it will normally say what called service contracts, operating agreements or otherwise:
is the record date and what is the payment date. Provided, however, That such service contracts or operating
agreements which relate to the exploration, development,
If the corporation’s resolution for the declaration of dividends is exploitation or utilization of natural resources may be entered
silent as to the record date, the record date is considered the same into for such periods as may be provided by pertinent laws or
as the declaration date. regulations.
Ultra Vires Act would foreclose its properties if MSLAI's total outstanding
One not within the express, implied, and incidental powers of the obligation of P12,534,907.73 remained unpaid.
corporation conferred by the Corporation Code or articles of
incorporation. An ultra vires act means simply an act which is In its reply, University of Mindanao denied that University of
beyond the conferred powers of a corporation or the purposes or Mindanao's properties were mortgaged. It also denied having
objects for which it is created as defined by the law of its received any loan proceeds from Bangko Sentral ng Pilipinas,
organization. which prompted them to file for nullification and cancellation of
mortgage.
CONSEQUENCE OF AN ULTRA VIRES ACT
Merely voidable which may be enforced by performance, University of Mindanao also alleged that Aurora de Leon's
ratification or estoppel. (De Leon) certification was anomalous. It never authorized Saturnino
Petalcorin to execute real estate mortgage contracts involving
AS DISTINGUISHED FROM ILLEGAL ACT its properties to secure FISLAI's debts. There was no board
Void and cannot be validated. An illegal corporate act, on other resolution to that effect. Thus, the mortgages executed by
hand, is an act which is contrary to law, morals, good customs, Saturnino Petalcorin were unenforceable. It never ratified the
public order, or public policy (Art. 1306, Civil Code.) and, execution of the mortgage contracts. Moreover, as an
therefore, per se illicit. educational institution, it cannot mortgage its properties to
secure another person's debts. The execution of the mortgage
UNIVERSITY OF MINDANAO, INC. VS. BANGKO SENTRAL NG contract was ultra vires. As an educational institution, it may not
PILIPINAS, ET AL. secure the loans of third persons. Securing loans of third persons
FACTS: is not among the purposes for which petitioner was established.
University of Mindanao (UM) is an educational institution. For Bangko Sentral argued that petitioner's act of mortgaging its
the year 1982, its Board of Trustees was chaired by Guillermo B. properties to guarantee FISLAI's loans was consistent with
Torres. His wife, Dolores P. Torres, sat as University of petitioner's business interests, since petitioner UM was
Mindanao's Assistant Treasurer. presumably a FISLAI shareholder whose officers and
shareholders interlock with FISLAI. It also argued that it merely
Guillermo B. Torres and Dolores P. Torres incorporated and relied on the regularity of the Secretary Certificate authorizing
operated two (2) thrift banks: (1) First Iligan Savings & Loan Petalcorin.
Association, Inc. (FISLAI); and (2) Davao Savings and Loan ISSUE:
Association, Inc. (DSLAI). Guillermo B. Torres chaired both thrift
banks. He acted as FISLAI's President, while his wife, Dolores P. Whether petitioner University of Mindanao is bound by the real
Torres, acted as DSLAI's President and FISLAI's Treasurer. estate mortgage contracts executed by Saturnino Petalcorin.
RULING:
Upon Guillermo B. Torres' request, Bangko Sentral ng Pilipinas
issued a P1.9 million standby emergency credit to FISLAI. There Corporations are artificial entities granted legal personalities
were three promissory notes. All these promissory notes were upon their creation by their incorporators in accordance with
signed by Guillermo B. Torres, and were co-signed by either his law. Unlike natural persons, they have no inherent powers.
wife, Dolores P. Torres, or FISLAI's Special Assistant to the Third persons dealing with corporations cannot assume that
President Ramos, Jr. corporations have powers. It is up to those persons dealing with
corporations to determine their competence as expressly
On May 25, 1982, University of Mindanao's Vice President for defined by the law and their articles of incorporation. A
Finance, Saturnino Petalcorin, executed a deed of real estate corporation may exercise its powers only within those
mortgage over University of Mindanao's property in Cagayan de definitions. Corporate acts that are outside those express
Oro City in favor of Bangko Sentral ng Pilipinas. There was definitions under the law or articles of incorporation or those
allegedly executed on University of Mindanao’s behalf. Proof of "committed outside the object for which a corporation is
the authority to execute the REM was a Secretary’s Certificate created are ultra vires. The only exception to this, rule is when
showed by Saturnino Petalcorin authorizing him to represent acts are necessary and incidental to carry out a corporation's
the University of Mindanao to transact, transfer, convey, lease, purposes, and to the exercise of powers conferred by the
mortgage, or otherwise hypothecate any or all of the following Corporation Code and under a corporation's articles of
properties situated at Cagayan de Oro and Iligan City and incorporation. This exception is specifically included in the
authorizing further Mr. Petalcorin to sign any or all documents general powers of a corporation under Section 36 of the
relative thereto. Corporation Code: “To exercise such other powers as may be
essential or necessary to carry out its purpose or purposes as
FISLAI, DSLAI, and Land Bank of the Philippines entered into a stated in its articles of incorporation. (Emphasis supplied)”
Memorandum of Agreement intended to rehabilitate the thrift
banks, which had been suffering from their depositors' heavy Montelibano, et al. v. Bacolod-Murcia Milling Co., Inc.[78] stated
withdrawals. Among the terms of the agreement was the the test to determine if a corporate act is in accordance with its
merger of FISLAI and DSLAI, with DSLAI as the surviving purposes:
corporation. DSLAI later became known as Mindanao Savings It is a question, therefore, in each case, of the logical relation of
and Loan Association, Inc. (MSLAI). MSLAI failed to recover from the act to the corporate purpose expressed in the charter. If that
its losses and was liquidated. Bangko Sentral ng Pilipinas sent a act is one which is lawful in itself, and not otherwise prohibited,
letter to University of Mindanao, informing it that the bank is done for the purpose of serving corporate ends, and is
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The commission shall not accept for filing the by-laws or any
amendment thereto of any bank, banking institution, building
and loan association, trust company, insurance company, public
utility, educational institution, or other special corporations
governed by special laws, unless accompanied by a certificate of
the appropriate government agency to
the effect that such bylaws or amendments are in
accordance with law.
1) PRE-INCORPORATION
REQUIREMENTS:
1. Approved and signed by ALL INCORPORATORS
2. Submitted to the SEC together with the AOI
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government agency to the effect that such bylaws or amendments paragraph of the law which allows the filing of the by-laws
are in accordance with law even prior to incorporation. This provision in the same section
of the Code rules out mandatory compliance with the
2) POST-INCORPORATION requirement of filing the by-laws within one (1) month after
receipt of official notice of the issuance of its certificate of
Basically, everything that you need to do post incorporation in incorporation by the Securities and Exchange Commission. It
order to commence transaction of business. necessarily follows that failure to file the by-laws within that
period does not imply the demise of the corporation. By-laws
Requirements: may be necessary for the government of the corporation but
1. Affirmative vote and must be signed by the stockholders these are subordinate to the articles of incorporation as well
representing at least a majority of the outstanding as to the Corporation Code and related statutes. There are in
capital stock/members in case of non-stock. fact cases where by-laws are unnecessary to corporate
2. Duly certified by the majority of the directors/trustees existence or to the valid exercise of corporate powers, thus:
3. Filed to the SEC, to be attached to the original AOI
Although the Corporation Code requires the filing of by-laws,
it does not expressly provide for the consequences of the non-
NOTE: LOYOLA GRAND CASE MAY NOT BE APPLICABLE filing of the same within the period provided for in Section 46.
ANYMORE SINCE UNDER THE REVISED CORPORATION CODE, THE
1 MONTH REQUIREMENT WAS REMOVED However, under by Presidential Decree No. 902-A, the
pertinent provisions on the jurisdiction of the SEC of which
LOYOLA GRAND VILLAS HOMEOWNER ASSOCIATION, state: SEC. 6. In order to effectively exercise such jurisdiction,
INC.,PETITIONER,VS. HON. COURT OF APPEALS, HOME the Commission shall possess the following powers:
INSURANCE AND GUARANTY CORPORATION, EMDEN
ENCARNACION AND HORATIO AYCARDO, RESPONDENTS. (l) To suspend, or revoke, after proper notice and hearing, the
Facts: franchise or certificate of registration of
LGVHAI was organized on February 8, 1983 as the association corporations, partnerships or associations, upon any of the
of homeowners and residents of the Loyola Grand Villas. For grounds provided by law, including the following:
unknown reasons, however, LGVHAI did not file its corporate
by-laws. 5. Failure to file by-laws within the required period;
There was an inquiry about the status of LGVHAI. Atty. Joaquin Even under the foregoing express grant of power and
A. Bautista, the head of the legal department of the HIGC, authority, THERE CAN BE NO AUTOMATIC CORPORATE
informed that LGVHAI had been automatically dissolved for DISSOLUTION SIMPLY BECAUSE THE INCORPORATORS FAILED
two reasons. First, it did not submit its by-laws within the TO ABIDE BY THE REQUIRED FILING OF BY-LAWS EMBODIED IN
period required by the Corporation Code and, second, there SECTION 46 OF THE CORPORATION CODE. THERE IS NO
was non-user of corporate charter because HIGC had not OUTRIGHT DEMISE OF CORPORATE EXISTENCE. PROPER
received any report on the associations activities. NOTICE AND HEARING ARE CARDINAL COMPONENTS OF DUE
PROCESS IN ANY DEMOCRATIC INSTITUTION, AGENCY OR
Petitioner contends that, since Section 46 uses the word must SOCIETY. In other words, the incorporators must be given the
with respect to the filing of by-laws, noncompliance therewith chance to explain their neglect or omission and remedy the
would result in self-extinction either due to non-occurrence of same.
a suspensive condition or the occurrence of a resolutory
condition under the hypothesis that (by) the issuance of the CONSEQUENCES OF FAILURE TO ADOPT BY LAWS
certificate of registration alone the corporate personality is (THIS MAY NOT BE APPLICABLE PURSUANT TO THE REVISED
deemed already formed. It asserts that the Corporation Code CORPO CODE. But this was not discussed by Atty after the
provides for a gradation of violations of requirements. Hence,
revision)
Section 22 mandates that the corporation must be formally
organized and should commence transactions within two years Non-filing of the by- laws on time will not result in the automatic
from date of incorporation. Otherwise, the corporation would dissolution of the corporation. Such consequence is not provided
be deemed dissolved. On the other hand, if the corporation
in the Corporation Code.
commences operations but becomes continuously inoperative
for five years, then it may be suspended or its corporate 1. Pursuant to Section 6(i, 5) of Pres. Decree No. 902-A(see Sec.19),
franchise revoked. the failure to file a code of by-laws within one (1) month from the
date of incorporation with the SEC shall render the corporation
liable to the revocation of its registration.
Issue: WON, the failure to file LGVHAI’s by-laws within the
period prescribed by Sec. 46 of the Corporation Code had the 2. There must, first of all, be a hearing to determine the existence
effect of automatically dissolving the said corporation. of the ground, and assuming such finding, the penalty is not
necessarily revocation but may only be revocation.
Ruling: NO.
Section 46 reveals the legislative intent to attach a directory, 3.Under the rules and regulations of the Commission, the failure
and not mandatory, meaning for the word must in the first may be merely with the imposition of an administrative fine.
sentence thereof. Note should be taken of the second
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EFFECT OF FAILURE TO ADOPT BY-LAWS: The by-laws may provide for quorum but it must not be
less than what is required in the corporation code.
Only gives a ground to penalize the Corporation and not Therefore, it cannot be less than 50% + 1. If the by-laws
an automatic dissolution or termination of its franchise. does not provide for the quorum, the default is what is
The penalty is not found in the Corporation Code. Stated in Section 25 of the Corporation Code which
Basis of the penalty: Section 6 of P.D. 902-A with respect refers to the “majority holding the outstanding capital
to the power of the Securities and Exchange stock”. It is counted by shares and not by the number of
Commission to suspend or revoke a corporation’s persons.
registration.
Under this law, it is still a requirement that the Majority is counted as 50% + 1
corporation is accorded with due process which is
satisfied by due notice and hearing. Therefore, still not NOTE:
automatic suspension or revocation. If it is more than the majority it is called as Super Majority quorum
CONTENTS OF BY-LAWS WHY BY-LAWS CANNOT PROVIDE THE MANNER OF VOTING OF THE ELECTION OF
BOARD OF DIRECTORS?
Section. 46. Contents of By-laws. –A private corporation may
provide the following in its by-laws: VOTING FOR ELECTION OF DIRECTORS IS NOT THE SAME AS THE VOTING FOR OTHER
a. The time, place and manner of calling and conducting regular MATTERS BY THE STOCKHOLDERS. VOTING FOR OTHER MATTER OR APPROVAL BY
or special meetings of the directors or trustees; THE STOCKHOLDER REQUIREMENT IS BASED FROM THE NUMBER OF SHARES. IF THE
b. The time and manner of calling and conducting regular or LAW OR THE BY-LAWS ALLOW FOR THE MAJORITY THEN BASE IT FROM THE
special meetings and mode of notifying of the stockholders or OUTSTANDING CAPITAL STOCK. IF IT REQUIRES 2/3 VOTES, THEN YOU JUST NEED
members thereof; TO GET THE APPROVAL OF THE HOLDERS OF THE 2/3 OF OUTSTANDING CAPITAL
c. The required quorum in meetings of stockholders or STOCK. TAKE POPULATION AS A WHOLE. THAT’S ORDINARY RATIFICATION OR
members and the manner of voting therein; APPROVAL BY STOCKHOLDERS.
d. The modes by which a stockholder, member, director, or
trustee may attend meetings and cast their votes; HOWEVER, VOTING FOR ELECTION OF DIRECTORS IS NOT THE SAME. THIS
e. The form for proxies of stockholders and members and the REQUIRES CUMULATIVE VOTING OF STOCKHOLDERS. MEANING, YOUR VOTE IS
manner of voting them; COUNTED BY THE NUMBER OF VACANCIES IN THE BOARD MULTIPLIED BY THE
f. The directors’ or trustees’ qualifications, duties, and NUMBER OF SHARES IN THE CORPORATION.
responsibilities, the guidelines for settling the compensation of
directors’ or trustees’ and officers, and the maximum number EXAMPLE
of other board representations hat an independent director or THERE ARE 5 VACANCIES AND YOU HAVE 100 SHARES, THE CORPORATION GIVES
trustee may have which shall, in no case, be more than the THE STOCKHOLDER 500 VOTES ALLOWED. FOR ORDINARY MATTER, YOU CAN ONLY
number prescribed by the commission; VOTE 100 OR THE NUMBER OF VOTES THAT YOU HAVE. FOR ELECTION OF
g. The time for holding the annual election of directors or DIRECTORS, ITS CUMULATIVE OR THE NUMBER OF VACANCIES MULTIPLIED THE
trustees and the mode or manner of giving notice thereof; NUMBER OF SHARES YOU HAVE.
h. The manner of election or appointment and the term of
office of all officers other than directors or trustees; THE BY-LAWS CANNOT PROVIDE FOR ANY OTHER MANNER OF VOTING IN THE
i. The penalties for violation of the by-laws; In the case of stock ELECTION OF DIRECTORS, OTHER THAN WHAT IS PROVIDED IN THE LAW WHICH IS
corporations, the manner of issuing stock certificates; and CUMULATIVE VOTING. IT HAS TO COMPLY WITH THE CORPORATION CODE.
j. Such other matters as may be necessary for the proper or
convenient transaction of its corporate affairs for the THEREFORE, BY-LAWS SHOULD NOT BE CONTRARY TO THE PROVISIONS OF THE
promotion of good governance and anti-graft and corruption CONSTITUTION, THE CORPORATION CODE, OTHER SPECIAL LAWS, AND THE
measures. ARTICLES OF INCORPORATION.
An arbitration agreement may be provided in the by-laws
pursuant to section 181 of this code. IF THERE IS A CONFLICT BETWEEN THE BY-LAWS AND CONSTITUTION, THE
CORPORATION CODE, OTHER SPECIAL LAWS, AND THE ARTICLES OF
INCORPORATION, SUBSTANTIVE LAWS WILL PREVAIL.
The time and manner of calling and conducting regular or special
meetings of the stockholders or members GRACE CHRISTIAN HIGH SCHOOL VS. CA
Facts:
The by-laws does not provide for the place of the In 1968, when the by-laws of the Grace Village Association Inc.
meeting for Stockholders or Members because the was adopted, it states that the director shall be elected every
Articles of Incorporation has provided for it which is the year and shall serve for one year. An amendment was made in
principal place of business. 1975 in the by-laws making the representative of Grace
It is different with the Board of Directors that they can Christian High School as permanent Director of the
hold there meeting anywhere. Association. This draft was never presented to the general
membership for approval. In 1990, Mr. James Tan, the
The required quorum in meetings of stockholders or members principal of the said school was informed by the association
and the manner of voting therein that “it was the sentiment that all directors should be elected
by members of the association”.
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A suit for mandamus in the HIGC was brought by the school to CHINABANK V CA
compel the board of directors of the association to recognize FACTS:
its right to a permanent seat in the board. Calapatia pledged his VGCCI stocks to Chinabank (CBC). CBC
informed VGCCI and asked the latter to record it in its books to
SEC: practice of allowing unelected members in the board was which the latter acceded. Calapatia obtained a loan from CBC
contrary to the existing by-laws of the association and to the secured by the pledge agreement. He failed to pay thus CBC
Corporation Code. extrajudcially foreclosed the mortgage which resulted in CBC
as the highest bidder. VGCCI refused to transfer the stock in
Moreover, the said by-laws which made the School the name of CBC due to Calapatia’s unsettled accounts (unpaid
representative as permanent director of the board was merely monthly dues). Instead, VGCCI sent a demand letter to
a proposal and never been ratified by its members. Calapatia and later on informed the latter of the termination
of his membership to the sale of his stocks which was also
SC: There was no valid amendment of the association’s by-laws conducted by VGCCI. CBC protested such sale.
because there was a failure to comply with the requirement of
its existing by-laws and the Corporation Code pertaining to the VGGCCI STATED THAT UNDER ITS BY-LAWS, A member cannot
manner of voting of board of directors. It is worthy to note that sell his shares if there are unpaid obligations to the country
the proposed amendment to the by-laws was never approved club.
by the holders of the association representing majority of the
outstanding capital stock as required by the provisions of the ISSUE: WHETHER CBC IS BOUND BY VGCCI’S BYLAWS
law and its own by-laws. Further, the law provides that the
position must be elected. Petitioner has not acquired HELD:
a vested right despite its long and continued “practice” since Since China bank is not among those enumerated by law as
practice, no matter how long continued, cannot give rise to any being bound by the by-laws of a corporation, CBC is not bound
vested right if its contrary to law. by that specific requirement of the by-laws.
DISCUSSION OF THE CASE: If Chinabank was notified by the bank when he applied for the
registration of the pledge Effect: it would make a difference ,
In order to be elected as a director, you need to be a since he would have prior knowledge.
stockholder or in order for you to be a trustee, you need to be
a member. You cannot be elected as a director or a trustee In this case, the notice given by the country club came in too
when you are not a stockholder or a member of a corporation. late, since they only notified CB only after the pledge has
The representative of Grace Christian High School in this case aldready been foreclose, they did not notify upon the
is not a member of the village association. He just sits in the registration of the pledge.
board as a representative of Grace Christian School. This is not
allowed under the law. Even if it was provided in the by-laws Therefore, Chinabank is not bound by the by-law for being a
and the latter is approved by the SEC, that by-laws cannot be third person without prior knowledge.
contrary to the Corporation Code. Clearly, the latter should
prevail.
CEBU MACTAN MEMBERS INC V TSUKAHARA
This case was worse because the by-laws giving the principal a Facts:
permanent seat in the board was never approved by the SEC. on February 1994, the CMMCI President, purportedly on behalf
Even if it was approved, the Corporation Code requirement will of CMMCI, obtained a loan amounting to P6,500,000 from
still prevail. By laws, cannot put a requirement that is contrary Tsukahara. As payment for the loan, CMMCI issued seven
to the provisions of the Corporation Code. postdated checks of CMMCI payable to Tsukahara. On 13 April
1994, Sugimoto, again purportedly on behalf of CMCI,
Moreover, even the fact that it has been practiced from 1975 obtained another loan amounting to P10,000,000 from
to 1990s , that’s not mean that you have a vested right to the Tsukahara. Sugimoto executed and signed a promissory note
position because the law gives a specific qualification on who in his capacity as CMMCI President and Chairman, as well as in
can be considered as directors or trustees. If you do not fall his personal capacity. Upon maturity, the checks were
within the requirement of the law then you cannot be elected presented for payment but the same were dishonored by PNB,
as director or trustee even if it is provided in the by-laws. the drawee bank. After several failed attempts to collect the
loan Tsukahara filed a case for collection of sum of money
against CMMCI and Sugimoto with the Regional Trial Court.
Persons bound by the By-Laws
1. Corporation ISSUE: WHETHER CMMMI’S PRESIDENT CAN BIND THE
2. Directors CORPORATION EVEN THOUGH IT ACTED WITHOUT AUTHORITY
3. Board of Trustees FROM THE BOARD, BUT UNDER THE AUTHORITY FROM THE
4. Stockholders CORPORATION’S BYLAWS
HELD:
Persons not bound by the By-Laws The Supreme Court ruled that the CMMCI President is given
1. Any person who has no actual knowledge of the the power under CMMCI’s by-laws to borrow money, execute
corporation contracts, and sign and indorse checks and promissory notes,
2. Employees of the corporation in the name and on behalf of CMMCI.
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(i) A director or trustee compensation report prepared in purposes of this section, be considered a city or municipality.
accordance with this Code and the rules the Commission may Notice of meetings shall be sent through the means of
prescribe; communication provided in the bylaws, which notice shall
(j) Director disclosures on self-dealings and related party state the time, place and purpose of the meetings.
transactions; and/or Each notice of meeting shall further be accompanied by the
(k) The profiles of directors nominated or seeking election or following:
reelection. (a) The agenda for the meeting;
A director, trustee, stockholder, or member may propose any (b) A proxy form which shall be submitted to the corporate
other matter for inclusion in the agenda at any regular meeting secretary within a reasonable time prior to the meeting;
of stockholders or members. (c) When attendance, participation, and voting are allowed by
Special meetings of stockholders or members shall be held at remote communication or in absentia, the requirements and
any time deemed necessary or as provided in the bylaws: procedures to be followed when a stockholder or member
Provided, however, That, at least one (1) week written notice elects either option; and
shall be sent to all stockholders or members, unless a different (d) When the meeting is for the election of directors
period is provided in the bylaws, law, or regulation. or trustees, the requirements and procedure for nomination
A stockholder or member may propose the holding of a special and election.
meeting and items to be included in the agenda. All proceedings and any business transacted at a
Notice of any meeting may be waived, expressly or impliedly, meeting of the stockholders or members, if within the
by any stockholder or member: Provided, That, general powers or authority of the corporation, shall be valid
waivers of notice in the articles of incorporation or the bylaws even if the meeting is improperly held or called:
shall not be allowed: Provided, further, that attendance at a Provided, That all the stockholders or members of the
meeting shall constitute a meeting for the express purpose of corporation are present or duly represented at the meeting
objecting to the transaction of any business because the and not one of them expressly states at the beginning of the
meeting is not lawfully called or convened. meeting that the purpose of their attendance is to object to
Whenever for any cause, there is no person authorized or the the transaction of any business because the meeting is not
person authorized unjustly refuses to call a meeting, the lawfully called or convened.
Commission, upon petition of a stockholder or member on a
showing of good cause therefor, may issue an order, directing NOTE: Please check the rest of Section 49 of the Revised
the petitioning stockholder or member to call a meeting of the Corporation Code. There is a long list of what is to be presented in
corporation by giving proper notice required by this Code or meetings. It was not discussed in class.
the bylaws. The petitioning stockholder or member shall
preside thereat until at least a majority of the stockholders or KINDS OF MEETINGS
members present have chosen from among themselves, a REGULAR
presiding officer. DIRECTORS OR TRUSTEES’ REGULAR MEETING
Unless the bylaws provide for a longer period, the stock and STOCKHOLDER OR MEMBERS’ REGULAR MEETING
transfer book or membership book shall be closed at least
twenty (20) days for regular meetings and seven (7) days for SPECIAL
special meetings before the scheduled date of the meeting. DIRECTORS OR TRUSTEES’ REGULAR MEETING
In case of postponement of stockholders’ or members’ regular
meetings, written notice thereof and the reason therefor shall STOCKHOLDER OR MEMBERS’ REGULAR MEETING
be sent to all stockholders or members of record at least two
MEETINGS OF STOCKHOLDERS/MEMBERS
(2) weeks prior to the date of the meeting, unless a different
period is required under the bylaws, law or regulation.
REGULAR MEETINGS OF STOCKHOLDERS
The right to vote of stockholders or members may be exercised
in person, through a proxy, or when so authorized in the WHEN
bylaws, through remote communication or in absentia. The Annually
Commission shall issue the rules and regulations governing On a date fixed in the by-laws,
participation and voting through remote communication or in a. or if not so fixed, on any date after April 15 of
absentia, taking into account the company’s scale, number of every year, as determined by the board of
shareholders or members, structure, and other factors directors or trustees
consistent with the protection and promotion of shareholders’ WHERE
or members’ meetings. (a) principal office of the corporation as set forth in the
articles of incorporation
PLACE AND TIME
(b) if not practicable, in the city or municipality where the
Section 50. Place and Time of Meetings of Stockholders or
principal office of the corporation is located: Provided,
Members. – Stockholders’ or members’ meetings, whether
That any city or municipality in Metro Manila, Metro
regular or special, shall be held in the principal office of the
Cebu, Metro Davao, and other Metropolitan areas shall,
corporation as set forth in the articles of incorporation, or, if
for purposes of this section, be considered a city or
not practicable, in the city or municipality where the principal
municipality.
office of the corporation is located:
Provided, That any city or municipality in Metro Manila, Metro
Cebu, Metro Davao, and other Metropolitan areas shall, for
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written notice of regular meetings - Whether or not the notice of the stockholders' meeting was
shall be sent to all stockholders or members of record properly sent in compliance with law and the by-laws of the
at least twenty-one (21) days prior to the meeting corporation?
unless the by-laws provide for a longer period HELD:
YES. Special meetings of stockholders or members shall be held
SPECIAL MEETINGS OF STOCKHOLDERS at any time deemed necessary or as provided in the by-laws:
WHEN Provided, however, that at least one (1) week written notice
Any time as deemed necessary shall be sent to all stockholders or members, unless otherwise
provided in the by-laws. Notice of any meeting may be waived,
WHERE expressly or impliedly, by any stockholder or member.
(a) principal office of the corporation as set forth in the The Court finds that the provisions under Sec. 50 of the
articles of incorporation Corporation Code and the by-laws of GCI are clear and
unambiguous. They do not admit of two or more meanings, nor
(b) if not practicable, in the city or municipality where the do they make reference to two or more things at the same time.
principal office of the corporation is located: Provided, The provisions only require the sending/mailing of the notice of
that any city or municipality in Metro Manila, Metro a stockholders' meeting to the stockholders of the corporation.
Cebu, Metro Davao, and other Metropolitan areas shall, Sending/mailing is different from filing or service under the
for purposes of this section, be considered a city or Rules of Court. Had the lawmakers intended to include the
municipality. stockholder's receipt of the notice, they would have clearly
reflected such requirement in the law. Absent that requirement,
Written notice of special meetings the word "send" should be understood in its plain meaning:
at least one (1) week before the meeting unless a ‘Depositing in the mail of the notice is sufficient as part of
different period is provided in the bylaws, law, or sending. Receipt is not required.” Thus, the corporation need
regulation. not show that the notice was received unless the by-laws of that
corporation specifically requires.
SIMNY G. GUY, VS. GILBERT G. GUY,
G.R. No. 184068. April 19, 2016. WHO CAN CALL THE MEETING?
(Attorney’s lecture): 1. Any person designated in the by-laws; or
The issue in this case was that the Stockholders did not receive
the notice but it was sent. There was a question W/N the 2. In the absence of that provision or in case of refusal of the said
meeting was valid. The Supreme Court ruled that the law and person to call the meeting, then the stockholder may
the by-laws of the corporation are unambiguous, it only require petition the SEC to order the calling of the meeting. So, the
the sending of notices and nothing therein state that it should SEC will issue an order directing the petitioning stockholder
be received by the SHs. to call the meeting to call the meeting of the corporation.
To send in Corporation Code is different from Remedial Law in
terms of filing or sending of petitions/ documents which BERNAS VS. CINCO
requires receipt, here it does not. G.R. No. 163356-57, July 10, 2015 - cited provisions based on Old
In this case, the president was able to prove that notices were Corporation Code
sent to all SHs, so the SC upheld the validity of the meeting even (Atty’s lecture:)
if some SHs were not able to receive the notice. Here is a case of an Oversight Committee calling for a meeting
‘Depositing in the mail of the notice is sufficient as part of to overthrow the current directors or officers of the corporation.
sending. Receipt is not required.” Thus, the corporation need In this case, the SC held that the meeting was improperly called,
not show that the notice was received unless the by-laws of that IOW void. The Oversight Committee did not have the authority
corporation specifically requires. to call the meeting. It ruled that it could have been allowed if
FACTS: the stockholders did not have any options but its by-laws and
GCI is a family-owned corporation of the Guy family . the law provided the option. One contention in this case was
On 10 September 2004, Paulino Delfin Pe and Benjamin Lim that the sitting officers, of course, would not call a meeting to
(stockholders of record of GCI) informed Simny that they had oust themselves. The SC said that it may be true but they were
received a notice dated 31 August 2004 calling for the holding not left without any recourse because they can always go to the
of a special stockholders' meeting on 7 September 2004. SEC and petition the SEC for the calling of the meeting. Hence,
On 30 September 2004, Simny, for himself and on behalf of GCI the meeting in this case was invalid for it was called for by
and Grace Guy Cheu, filed a Complaint against respondents for people who were not authorized to do it and consequently, the
the "Nullification of Stockholders' Meeting. He argued on the election held was also invalid.)
following grounds: FACTS:
(1) there was no previous notice to Simny and Cheu; (2) the Makati Sports Club (MSC) is a domestic corporation duly
meeting was not called by the proper person; and (3) the notices organized and existing under Philippine laws for the primary
were not issued by the person who had the legal authority to do purpose of establishing, maintaining, and providing social,
so. cultural, recreational and athletic activities among its members.
Gilbert argued that the meeting on was legally called and held;
that the notice of meeting was signed by the authorized officer Petitioners in G.R. Nos. 163356-57, Jose A. Bernas (Bernas),
of GCI and sent in accordance with the by-laws of the Cecile H. Cheng, Victor Africa, Jesus Maramara, Jose T.
corporation Frondoso, Ignacio T. Macrohon and Paulino T. Lim (Bernas
ISSUE: Group) were among the Members of the Board of Directors and
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Officers of the corporation whose terms were to expire either in and the selling of his shares. at the public auction, are likewise
1998 or 1999. invalid.
The Corporation Code laid down the rules on the removal of the
Petitioners in G.R. Nos. 163368-69 Jovencio Cinco, Ricardo Directors of the corporation by providing, inter alia, the persons
Librea and Alex Y. Pardo (Cinco Group) are the members and authorized to call the meeting and the number of votes required
stockholders of the corporation who were elected Members of for the purpose of removal, thus:
the Board of Directors and Officers of the club during the 17 Textually, only the President and the Board of Directors are
December 1997 Special Stockholders Meeting. authorized by the by-laws to call a special meeting. In cases
Alarmed with the rumored anomalies in handling the corporate where the person authorized to call a meeting refuses, fails or
funds, the MSC Oversight Committee (MSCOC), composed of neglects to call a meeting, then the stockholders representing at
the past presidents of the club, demanded from the Bernas least 100 shares, upon written request, may file a petition to call
Group, who were then incumbent officers of the corporation, to a special stockholder's meeting.
resign from their respective positions to pave the way for the In the instant case, there is no dispute that the 17 December
election of new set of officers. Resonating this clamor were the 1997 Special Stockholders' Meeting was called neither by the
stockholders of the corporation representing at least 100 shares President nor by the Board of Directors but by the MSCOC.
who sought the assistance of the MSCOC to call for a special While the MSCOC, as its name suggests, is created for the
stockholders meeting for the purpose of removing the sitting purpose of overseeing the affairs of the corporation, nowhere
officers and electing new ones. Pursuant to such request, the in the by-laws does it state that it is authorized to exercise
MSCOC called a Special Stockholders’ Meeting and sent out corporate powers, such as the power to call a special meeting,
notices to all stockholders and members stating therein the solely vested by law and the MSC by-laws on the President or
time, place and purpose of the meeting. For failure of the the Board of Directors.
Bernas Group to secure an injunction before the Securities The board of directors is the directing and controlling body of
Commission (SEC), the meeting proceeded wherein Jose A. the corporation. It is a creation of the stockholders and derives
Bernas, Cecile H. Cheng, Victor Africa, Jesus Maramara, Jose T. its power to control and direct the affairs of the corporation
Frondoso, Ignacio T. Macrohon, Jr. and Paulino T. Lim were from them. The board of directors, in drawing to itself the power
removed from office and, in their place and stead, Jovencio F. of the corporation, occupies a position of trusteeship in relation
Cinco, Ricardo G. Librea, Alex Y. Pardo, Roger T. Aguiling, Rogelio to the stockholders, in the sense that the board should exercise
G. Villarosa, Armando David, Norberto Maronilla, Regina de not only care and diligence, but utmost good faith in the
Leon-Herlihy and Claudio B. Altura, were elected. management of the corporate affairs.
Aggrieved by the turn of events, the Bernas Group initiated an The underlying policy of the Corporation Code is that the
action before the Securities Investigation and Clearing business and affairs of a corporation must be governed by a
Department (SICD) of the SEC docketed as SEC Case No. 5840 board of directors whose members have stood for election, and
seeking for the nullification of the 17 December 1997 Special who have actually been elected by the stockholders, on an
Stockholders Meeting on the ground that it was improperly annual basis. Only in that way can the continued accountability
called. Citing Section 28 of the Corporation Code, the Bernas to shareholders, and the legitimacy of their decisions that bind
Group argued that the authority to call a meeting lies with the the corporation's stockholders, be assured. The shareholder
Corporate Secretary and not with the MSCOC which functions vote is critical to the theory that legitimizes the exercise of
merely as an oversight body and is not vested with the power to power by the directors or officers over the properties that they
call corporate meetings. For being called by the persons not do not own.
authorized to do so, the Bernas Group urged the SEC to declare Even the Corporation Code is categorical in stating that a
the 17 December 1997 Special Stockholders’ Meeting, including corporation exercises its powers through its board of directors
the removal of the sitting officers and the election of new ones, and/or its duly authorized officers and agents, except in
be nullified. instances where the Corporation Code requires stockholders'
approval for certain specific acts (Section 23, Old Code).
For their part, the Cinco Group insisted that the 17 December A corporation's board of directors is understood to be that body
1997 Special Stockholders’ Meeting is sanctioned by the which (1) exercises all powers provided for under the
Corporation Code and the MSC by-laws. In justifying the call Corporation Code; (2) conducts all business of the corporation;
effected by the MSCOC, they reasoned that Section 25 of the and (3) controls and holds all the property of the corporation.
MSC by-laws merely authorized the Corporate Secretary to issue Its members have been characterized as trustees or directors
notices of meetings and nowhere does it state that such clothed with fiduciary character.25
authority solely belongs to him. It was further asseverated by It is ineluctably clear that the fiduciary relation is between the
the Cinco Group that it would be useless to course the request stockholders and the board of directors and who are vested with
to call a meeting thru the Corporate Secretary because he the power to manage the affairs of the corporation. The
repeatedly refused to call a special stockholders’ meeting ordinary trust relationship of directors of a corporation and
despite demands and even filed a suit to restrain the holding of stockholders is not a matter of statutory or technical law. It
a special meeting. springs from the fact that directors have the control and
ISSUE: W/N the meeting was validly called? guidance of corporate affairs and property and hence of the
No. The Special Stockholders' Meeting called by the Oversight property interests of the stockholders. Equity recognizes that
Committee cannot have any legal effect. The removal of the stockholders are the proprietors of the corporate interests and
Bernas Group, as well as the election of the Cinco Group, are ultimately the only beneficiaries thereof. Should the board
effected by the assembly in that improperly called meeting is fail to perform its fiduciary duty to safeguard the interest of the
void, and since the Cinco Group has no legal right to sit in the stockholders or commit acts prejudicial to their interest, the law
board, their subsequent acts of expelling Bernas from the club
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and the by-laws provide mechanisms to remove and replace the Previously under the old Corporation Code they can attend in
erring director. person or by proxy but now the new law has added a third form
Relative to the powers of the Board of Directors, nowhere in the of attendance which is through remote communication or in
Corporation Code or in the MSC by-laws can it be gathered that absentia, provided that in these two the vote shall be received
the Oversight Committee is authorized to step in wherever before the corporation finishes the tallying of the votes
there is breach of fiduciary duty and call a special meeting for
the purpose of removing the existing officers and electing their QUORUM IN MEETINGS
replacements even if such call was made upon the request of SECTION 51. Quorum in Meetings. — Unless otherwise provided
shareholders. Needless to say, the MSCOC is neither in this Code or in the bylaws, a quorum shall consist of the
empowered by law nor the MSC by-laws to call a meeting and stockholders representing a majority of the outstanding
the subsequent ratification made by the stockholders did not capital stock or a majority of the members in the case of
cure the substantive infirmity, the defect having set in at the nonstock corporations.
time the void act was done. The defect goes into the very
authority of the persons who made the call for the meeting. It is STOCK CORPORATIONS
apt to recall that illegal acts of a corporation which contemplate Based on the number of outstanding capital stocks (so long as it is
the doing of an act which is contrary to law, morals or public subscribed and outstanding)
order, or contravenes some rules of public policy or public duty, NONSTOCK CORPORATIONS
are, like similar transactions between individuals, void.They Based on actual living members with the right to vote
cannot serve as basis for a court action, nor acquire validity by DISCUSSION:
performance, ratification or estoppel. The same principle can Ordinarily, the quorum of the stockholders is majority of the
apply in the present case. The void election of 17 December outstanding capital stock or majority of members in case of non-
1997 cannot be ratified by the subsequent Annual Stockholders' stock corporations. In ordinary approval by the stockholders you
Meeting. just need to look at the outstanding 50% plus one (1) of the
A distinction should be made between corporate acts or outstanding capital stock meaning you don’t include treasury
contracts which are illegal and those which are merely ultra shares.
vires. The former contemplates the doing of an act which are But there are certain instances where two-thirds (2/3) vote is
contrary to law, morals or public policy or public duty, and are, required so those are exceptions to the rule that quorum is
like similar transactions between individuals, void: They cannot majority because in those instances where 2/3 vote is required
serve as basis of a court action nor acquire validity by you don’t use 50% plus one (1) the required vote is 2/3.
performance, ratification or estoppel. Mere ultra vires acts, on
the other hand, or those which are not illegal or void ab initio, LEE TAN VS SYCIP, G.R. NO. 153468, AUGUST 17, 2006
but are not merely within the scope of the articles of Facts: Petitioner Grace Christian high school is a non-stock, non-
incorporation, are merely voidable and may become binding profit educational institution composed of 15 regular members
and enforceable when ratified by the stockholders. The 1 7 who are ALL members of the board of trustees.
December 1997 Meeting belongs to the category of the latter, An annual stockholder’s meeting was held and during that time,
that is, it is void ab initio and cannot be validated. 4 members were already deceased effectively making both the
Board of Trustees (BOT) and Members(shareholders)
IMPROPERLY CALLED MEETINGS membership only 11.
Improperly called meetings can be considered valid provided: During the meeting, only 7 members attended with their
1. ALL the stockholders attend or duly represented during respective proxies. When the meeting was sought to be
that meeting. convened, Atty. Pacis objected arguing that there was no
2. not one of those stockholders attended just for the quorum (50% plus 1).
purpose of objecting to the calling or holding of the Quorum if based on total member composition (15) - 8
meeting. Quorum if based on remaining alive members(11) - 6
In the meeting, Petitioners Ernesto Tanchi, Edwin Ngo, Virginia
Even if the meeting is improperly held or improperly called, all Khoo, and Judith Tan were voted to replace the four deceased
transactions all resolutions approved during the stockholders’ member-trustees.
meeting can still be considered as valid provided that ALL the Issue: WON there was quorum in the meeting held.
stockholders attend or duly represented during that meeting. Held: YES, THERE WAS QUORUM, hence the meeting was valid.
The new amendment added a new caveat, provided that not In the absence of an express charter or statutory provision to
anyone of those stockholders attended just for the purpose of the contrary, the general rule is that every member of a
objecting to the calling or holding of the meeting. nonstock corporation, and every legal owner of shares in a stock
so even if the stockholders are duly represented or are present, corporation, has a right to be present and to vote in all corporate
but one of them was there just to object the calling or the holding meetings. Conversely, those who are not stockholders or
of the meeting then you cannot apply the exception that the members have no right to vote. Voting may be expressed
meeting is still valid even if it’s improperly held or called provided personally, or through proxies who vote in their representative
all the stockholders are present or duly represented. capacities. Generally, the right to be present and to vote in a
meeting is determined by the time in which the meeting is held.
METHODS OF ATTENDING MEETING: Section 52 of the Corporation Code states: "Section 52. Quorum
1. IN PERSON in Meetings. —Unless otherwise provided for in this Code or in
2. BY PROXY the by-laws, a quorum shall consist of the stockholders
3. IN ABSENTIA – remote communication representing a majority of the outstanding capital stock or a
majority of the members in the case of non-stock corporations."
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TITLE VII- STOCKS AND STOCKHOLDERS (g) Shares of stock in another corporation; and/or
(h) Other generally accepted form of consideration.
2 ways to become a stockholder
1. SUBSCRIPTION – purchasing unissued stocks Where the consideration is other than actual cash, or
2. ASSIGNMENT – purchasing issued stocks consists of intangible property such as patents or
copyrights, the valuation thereof shall initially be
SUBSCRIPTION determined by the stockholders or the board of
SEC. 59. Subscription Contract. – Any contract for the directors, subject to the approval of the Commission.
acquisition of unissued stock in an existing corporation or a Shares of stock shall not be issued in exchange for
corporation still to be formed shall be deemed a subscription promissory notes or future service. The same
within the meaning of this Title, notwithstanding the fact that considerations provided in this section, insofar as
the parties refer to it as a purchase or some other contract. applicable, may be used for the issuance of bonds by
the corporation.
Subscription is an offer to acquire a specified number of unissued
shares of an existing corporation or one still to be formed. The issued price of no-par value shares may be fixed
in the articles of incorporation or by the board of
Types of subscriptions directors pursuant to authority conferred by the
articles of incorporation or the bylaws, or if not so
2. Pre-incorporation subscription – subscription before
fixed, by the stockholders representing at least a
the corporation is incorporated
majority of the outstanding capital stock at a meeting
3. Post-incorporation subscription – subscription after the
duly called for the purpose.
corporations incorporated
PRE-INCORPORATION SUBSCRIPTION The amount of the consideration should not be less than the par
value or the issued price of the shares. If it is less, it becomes a
SEC. 60. Pre-incorporation Subscription. –
WATERED STOCK.
A subscription of shares in a corporation still to be
formed shall be irrevocable for a period of at least six
LIABILITY FOR WATERED STOCKS
(6) months from the date of subscription, unless all of
the other subscribers consent to the revocation, or the SEC. 64. Liability of Directors for Watered Stocks. –
corporation fails to incorporate within the same A director or officer of a corporation who:
period or within a longer period stipulated in the contract of
subscription. (a) consents to the issuance of stocks for a consideration less than
No pre-incorporation subscription may be revoked its par or issued value;
after the articles of incorporation is submitted to the (b) consents to the issuance of stocks for a consideration other
Commission. than cash, valued in excess of its fair value; or
(c) having knowledge of the insufficient consideration, does not
file a written objection with the corporate secretary, shall be liable
Rule for Pre-incorporation Subscription
to the corporation or its creditors, solidarily with the stockholder
Irrevocable for a period of six months, unless all of concerned for the difference between the value received at the
the other subscribers consent to the revocation, or the time of issuance of the stock and
corporation fails to incorporate within the same period the par or issued value of the same
or within a longer period stipulated in the contract of
subscription.
When director or officer liable
No pre-incorporation subscription may be revoked after
a. If the consideration is cash, and the officer/director
the articles of incorporation is submitted to the
consents to the issuance of stocks for a consideration
Commission
less than its par or issued value;
b. If the consideration is other than cash, and the
CONSIDERATION FOR STOCKS
officer/director consents to the issuance of stocks for a
SEC. 61. Consideration for Stocks. – Stocks shall not
consideration valued in excess of its fair value; or
be issued for a consideration less than the par or
c. If having knowledge of the insufficient consideration,
issued price thereof. Consideration for the issuance of does not file a written objection with the corporate
stock may be:
secretary
(a) Actual cash paid to the corporation;
(b) Property, tangible or intangible, actually received
Liability
by the corporation and necessary or convenient for its
The officer/director who falls under the enumeration above
use and lawful purposes at a fair valuation equal to
shall be solidarily liable with the stockholder concerned, to
the par or issued value of the stock issued;
the corporation and or its creditors, for the difference
(c) Labor performed for or services actually rendered
between the value received at the time of issuance of the
to the corporation;
stock and the par or issued value of the same.
(d) Previously incurred indebtedness of the corporation;
(e) Amounts transferred from unrestricted retained
earnings to stated capital;
(f) Outstanding shares exchanged for stocks in the
event of reclassification or conversion;
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Issue: vacant seat should be filled. Such BODs should only act in a hold-
1. WON Madrid’s meeting is legal and valid. over capacity until their successors are elected and qualified.
2. WON a Management Committee should be created.
2. NO. Such extraordinary remedy requires the concurrence of
Ruling: two elements: (a) Dissipation, loss, wastage or destruction of
assets or other properties; and (b) Paralyzation of its business
1. NO. It is true that the RTC already recognized Madrid as the operations which may be prejudicial to the interest of the
sole heir of Angela to the exclusion of others (sister of Angela minority stockholders, parties- litigants or the general public.
for failure to appeal in a separate case), thus death of Angela This is because appointed management committees will
immediately transferred the 70.82% ownership of shares to immediately take over the management of the corporation and
him, and he can compel issuance of certificates of stock in his exercise the management powers specified in the law. This may
favor. However, this does no ipso facto afford him the rights have a negative effect on the operations and affairs of the
accorded to such majority ownership of FSVCI’s shares. Sec. 63 corporation with third parties, as persons who are more familiar
of the Corporation Code provides that: with its operations are necessarily dislodged from their
positions in favor of appointees who are strangers to the
Xxx No transfer, however, shall be valid, except as between the corporation's operations and affairs. The CA merely based its
parties, until the transfer is recorded in the books of the directive on the finding that there is a conflicting interest
corporation showing the names of the parties to the transaction, between the two groups. However, absent any actual evidence
the date of the transfer, the number of the certificate or from the records showing such imminent danger, the CA's
certificates and the number of shares transferred. findings have no legal or factual basis to support the
Thus, all transfers of shares of stock must be registered in the appointment/constitution of a Management Committee for
corporate books in order to be binding on the corporation. FSVCI. Accordingly, the CA erred in ordering the creation of a
Specifically, this refers to the Stock and Transfer Book as Management Committee in this case.
provided for under Sec. 74.
SCRIPLESS TRADING
An owner of shares of stock cannot be accorded the rights “The Commission may require corporations whose securities are
pertaining to a stockholder — such as the right to call for a traded in trading markets and which can reasonably demonstrate
meeting and the right to vote, or be voted for — if his ownership their capability to do so to issue their securities or shares of stocks
of such shares is not recorded in the Stock and Transfer Book. in uncertificated or scripless form in accordance with the rules of
until registration is accomplished, the transfer, though valid the Commission” – excerpt from Section 62 of the Revised
between the parties, cannot be effective as against the Corporation Code of the Philippines.
corporation. The purpose of registration, therefore, is two-fold:
to enable the transferee to exercise all the rights of a “Scrip”
stockholder, including the right to vote and to be voted for, and A duly signed stock certificate
to inform the corporation of any change in share ownership so
that it can ascertain the persons entitled to the rights and Scripless Trading
subject to the liabilities of a stockholder. Records are bereft of Transfer of ownership of shares without actually delivering stock
any showing that the transfer of Angela's shares of stock to certificates is done through BOOK ENTRIES
Madrid had been registered in FSVCI's Stock and Transfer Book.
This kind of trading is usually done when the stocks are listed in
Further, be it noted also that submission of a GIS of a the Stock Exchange.
corporation before the SEC is pursuant to the objective sought
by Section 26 40 of the Corporation Code which is to give the Rationale
public information, under sanction of oath of responsible
For convenience of buying and selling securities. To strictly follow
officers, of the nature of business, financial condition, and
to the traditional way of transferring shares (delivery of actual
operational status of the company, as well as its key officers or
certificates), the stock market will not survive because the
managers, so that those dealing and who intend to do business
transactions will take from days to months.
with it may know or have the means of knowing facts concerning
the corporation's financial resources and business
How Done
responsibility. The contents of the GIS, however, should not be
deemed conclusive as to the identities of the registered The Corporation that intends to trade shares in the Stock
Exchange must—
stockholders of the corporation, as well as their respective
ownership of shares of stock, as the controlling document
should be the corporate books, specifically the Stock and 1. Deliver all their securities on their shares to the
Transfer Book. As between the General Information Sheet and Philippine Depository and Trust Corporation (PDTC).
the corporate books, it is the latter that is controlling. 2. The shares in the book of PDTC will now be assigned or
given to the brokers who purchased the shares
Since as reflected in the Stock and Transfer book Madrid only 3. Stock and Transfer Agent records the stocks in the Stock
has 4.16% in view of the non- registration of the transfer, and Transfer Book and issues the Stock Certificates of
Madrid’s Meeting is null and void. And considering that RTC’s the Corporation.
decision of Velasco’s Meeting’s nullity, the FSVCI’s BOD at the
time of Angela’s death should be reconstituted, and Angela’s Take Note: The entity recorded in the Stock and Transfer Book will
be PDTC, the holder of the share under the Stock and Transfer
Book.
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If later on you decide to sell it, the stock certificate should be NOTE: Atty. made mention of the rule in Oblicon that generally a
returned to the Stock and Transfer Agent, which will again take contract is revocable when it is not consummated. We apply the
time. same logic here in a sense that when a subscriber pays for his
subscription pre-incorporation, it is given with the condition that it
Take Note: This is the delay and complication that Scripless shall be used for the formation of the corporation. The failure of
Trading avoids. such event to happen would allow the subscriber to revoke his
subscription but this is subject to the period provided in Sec.60 that
Key Points on Scripless Trading the corporation is given 6 months to comply with its obligation.
1. There is only one owner—PDTC, the listed stockholder And once the corporation files its articles of incorporation then it
in the books of the Corporation. is as if it had complied with its obligation thus, making the
2. PDTC will have its own list of brokers who hold the subscription irrevocable (contract is consummated).
shares for their clients For post-incorporation subscription, it is akin to a valid and binding
3. Brokers will have their own list of their own clients as contract already perfected hence, it is irrevocable. The
well subscription now becomes a part of the capital stock of the
corporation hence, the corporation cannot allow such
Ownership of stocks traded through Scripless Trading subscriptions to be revoked without prejudicing its interests and
Legal Owner – PDTC; Beneficial Owner – Client of the Brokers that of its stockholders. The corporation now must comply with its
obligations to its stockholders (eg. distribution of dividends,
allowing them to exercise their rights as stockholders).
Voting during Elections
The beneficial owner should ask for a certification from the broker Difference between a Stock and Stock Certificate
that he is the owner of this certain number of shares; that
certification (NOT a stock certificate) should be brought by the STOCK CERTIFICATE OF STOCK
beneficial owner during the election; akin to proxy allowing to
vote shares. ownership interest in the mere evidence of your
corporation ownership interest
REVOCATION OF SUBSCRIPTIONS
Intangible Tangible
Rule for Pre-incorporation Subscription
GR: Irrevocable for a period of six months merely represent the number of
o The 6 months irrevocability is counted from shares or ownership in a
the date of subscription. corporation
EXC: unless
o all of the other subscribers consent to the
revocation, or
o the corporation fails to incorporate within the you acquire stocks whether you can only be acquired upon full
same period or within a longer period pay it or not payment
stipulated in the contract of subscription.
EXC to EXC: Irrevocable after the articles of Certificate of Stock as defined in Anna Teng vs SEC
incorporation is submitted to the Commission.
A certificate of stock is a written instrument signed by the
Rule on Post-incorporation Subscription proper officer of a corporation stating or acknowledging that
the person named in the document is the owner of a
Under Post Incorporation the law is silent as to the revocability or designated number of shares of its stock. It is prima facie
irrevocability of the subscription but actually it is irrevocable. The evidence that the holder is a shareholder of a corporation.
moment a subscriber subscribes in a post incorporation even if he
did not pay yet the subscription he becomes a stockholder and he
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credited as fully paid in the books of the corporation. Title to 9. The remaining shares, if any, shall be credited in favor of the
all the shares of stock covered by the subscription shall be delinquent stockholder who shall likewise be entitled to the
vested in the corporation as treasury shares and may be issuance of a certificate of stock covering such shares.
disposed of by said corporation in accordance with the
provisions of this Code.
ILLUSTRATION: Based on the illustration above 1,000 shares out
of the 10,000 delinquent shares shall be given to Bidder C. The
Procedure remaining 9,000 shares shall be given to the delinquent subscriber.
1. Board resolution declaring the subscription delinquent
2. The sale must be made not less than 30 days but not more
than 60 days from the date the stock became delinquent.
10. If there is no bidder, the corporation is authorized to
3. Notice together with the resolution must be made to all
purchase the shares and shall form part of the treasury
delinquent stockholders personally, registered mail, or
through other means authorized. shares.
4. Publication once a week for two consecutive weeks in a
newspaper of general circulation. EFFECT: If the bidder is the corporation there will be no shares
5. Before the sale, the stockholder may stop the delinquency given to the stockholder. Applying the illustration above all the
sale by paying the unpaid subscription, interest, cost of 10,000 delinquent shares shall pertain to the corporation. This
advertisement, and expenses. shall form part of the treasury shares.
6. Failure of the stockholder to pay, the delinquent stock shall
be sold at a public auction. COURT ACTION TO RECOVER UNPAID SUBSCRIPTION
Section 69. Court Action to Recover Unpaid Subscription. —
Nothing in this Code shall prevent the corporation from
ILLUSTRATION: “DELINQUENT STOCK”
collecting through court action, the amount due on any unpaid
subscription, with accrued interest, costs and expenses.
Total subscription - 20,000 shares valued at 1,000,000
Total paid - 10,000 shares valued at 500,000 ASSIGNMENT: 2ND MODE OF ACQUIRING SHARES
Total unpaid - 10,000 shares valued at 500,000 THIS IS A SECONDARY TRANSFER SINCE SHARES ARE ALREADY ISSUED. YOU
ACQUIRED THE SHARES FROM THE OWNERS OF THE SHARES NOT FROM THE ISSUER
ANYMORE.
In this case, the entire subscription of 20,000 shares are
considered delinquent stock. This is because of the Principle of PROCEDURE FOR ASSIGNMENT
Indivisibility of Subscription. Thus, a delinquent stock shall refer 1. DELIVERY OF THE STOCK CERTIFICATE TO THE TRANSFEREE
not only to the the unpaid subscription but includes the paid 2. THE STOCK CERTIFICATE MUST BE INDORSED BY THE
subscription. ASSIGNOR/TRANSFEROR.
3. THE TRANSFER OR ASSIGNMENT IN THE TRANSFEREE’S NAME MUST BE
REGISTERED IN THE STOCK AND TRANSFER BOOK
Bidder A - 2,000 shares valued at 10,000; 5 pesos/share THIS IS EVEN WITHOUT A STOCK CERTIFICATE AS LONG AS THE TRANSFER IS
Bidder B - 1,500 shares value at 10,000; 6.67 pesos/share RECORDED IN THE STOCK AND TRANSFER BOOK.
Bidder C - 1,000 shares value at 10,000; 10 pesos/share
TENG VS. SEC
In this case Bidder C should be declared the highest bidder NO NEED TO SURRENDER THE ORIGINAL STOCK CERTIFICATE FOR THE
because he is the bidder who is willing to pay the smallest number TRANSFEREE TO BECOME A STOCKHOLDER. THE TRANSFEREE BECOMES A
of shares or fraction of a share. This means that the highest bidder STOCKHOLDER THE MOMENT HIS NAME IS REGISTERED IN THE STOCK AND
must be the bidder who is willing to pay the highest amount per TRANSFER BOOK. THE TRANSFEREE IS ONLY REQUIRED TO SURRENDER THE
share. ORIGINAL STOCK CERTIFICATE TO THE CORPORATION FOR THE ISSUANCE OF A
NEW ONE.
8. Upon payment of the highest bidder, the stock so purchased LOST OR DESTROYED CERTIFICATES
shall be transferred to such purchaser in the books of the SEC. 72. Lost or Destroyed Certificates. – The following
corporation and a certificate for such stock shall be issued in procedure shall be followed by a corporation in issuing new
the purchaser's favor. certificates of stock in lieu of those which have been lost,
stolen or destroyed:
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If they do not object , the certificate will be issued after one year.
EXC: the owner will give a bond or security which will be valid for
1 year. That will now allow the issuance of the new certificate of
stocks before the lapse of 1 year.
TITLE VIII- CORPORATE BOOKS AND RECORDS Any officer or agent of the corporation who shall refuse to
BOOKS TO BE KEPT; STOCK TRANSFER AGENT allow the inspection and/or reproduction of records in
Section 73. Books to be Kept; Stock Transfer Agent . — Every accordance with the provisions of this Code shall be liable to
corporation shall keep and carefully preserve at its principal such director, trustee, stockholder or member for damages,
office all information relating to the corporation including, but and in addition, shall be guilty of an offense which shall be
not limited to: punishable under Section 161 of this Code: Provided, That if
such refusal is made pursuant to a resolution or order of the
(a) The articles of incorporation and bylaws of the board of directors or trustees, the liability under this section
corporation and all their amendments; for such action shall be imposed upon the directors or trustees
(b) The current ownership structure and voting rights of the who voted for such refusal: Provided, further, That it shall be a
corporation, including lists of stockholders or members, defense to any action under this section that the person
group structures, intra-group relations, ownership data, demanding to examine and copy excerpts from the
and beneficial ownership; corporation's records and minutes has improperly used any
(c) The names and addresses of all the members of the board information secured through any prior examination of the
of directors or trustees and the executive officers; records or minutes of such corporation or of any other
(d) A record of all business transactions; corporation, or was not acting in good faith or for a legitimate
(e) A record of the resolutions of the board of directors or purpose in making the demand to examine or reproduce
trustees and of the stockholders or members; corporate records, or is a competitor, director, officer,
(f) Copies of the latest reportorial requirements submitted controlling stockholder or otherwise represents the interests
to the Commission; and of a competitor.
(g) The minutes of all meetings of stockholders or members,
or of the board of directors or trustees. Such minutes shall If the corporation denies or does not act on a demand for
set forth in detail, among others; the time and place of the inspection and/or reproduction, the aggrieved party may
meeting held, how it was authorized, the notice given, the report such denial or inaction to the Commission. Within five
agenda therefor, whether the meeting was regular or (5) days from receipt of such report, the Commission shall
special, its object if special, those present and absent, and conduct a summary investigation and issue an order directing
every act done or ordered done at the meeting. Upon the the inspection or reproduction of the requested records.
demand of a director, trustee, stockholder or member,
the time when any director, trustee, stockholder or Stock corporations must also keep a stock and transfer book,
member entered or left the meeting must be noted in the which shall contain a record of all stocks in the names of the
minutes; and on a similar demand, the yeas and nays must stockholders alphabetically arranged; the installments paid
be taken on any motion or proposition, and a record and unpaid on all stocks for which subscription has been made,
thereof carefully made. The protest of a director, trustee, and the date of payment of any installment; a statement of
stockholder or member on any action or proposed action every alienation, sale or transfer of stock made, the date
must be recorded in full upon their demand. thereof, by and to whom made; and such other entries as the
bylaws may prescribe. The stock and transfer book shall be
Corporate records, regardless of the form in which they are kept in the principal office of the corporation or in the oce of
stored, shall be open to inspection by any director, trustee, its stock transfer agent and shall be open for inspection by any
stockholder or member of the corporation in person or by a director or stockholder of the corporation at reasonable hours
representative at reasonable hours on business days, and a on business days.
demand in writing may be made by such director, trustee or
stockholder at their expense, for copies of such records or A stock transfer agent or one engaged principally in the
excerpts from said records. The inspecting or reproducing business of registering transfers of stocks in behalf of a stock
party shall remain bound by confidentiality rules under corporation shall be allowed to operate in the Philippines upon
prevailing laws, such as the rules on trade secrets or processes securing a license from the Commission and the payment of a
under Republic Act No. 8293, otherwise known as the fee to be fixed by the Commission, which shall be renewable
"Intellectual Property Code of the Philippines," as amended, annually: Provided , That a stock corporation is not precluded
Republic Act No. 10173, otherwise known as the "Data Privacy from performing or making transfers of its own stocks, in
Act of 2012," Republic Act No. 8799, otherwise known as "The which case all the rules and regulations imposed on stock
Securities Regulation Code," and the Rules of Court. transfer agents, except the payment of a license fee herein
provided, shall be applicable: Provided, further, That the
A requesting party who is not a stockholder or member of Commission may require stock corporations which transfer
record, or is a competitor, director, officer, controlling and/or trade stocks in secondary markets to have an
stockholder or otherwise represents the interests of a independent transfer agent.
competitor shall have no right to inspect or demand
reproduction of corporate records. Corporate Books
1. Records of all business transactions i.e. accounting books,
Any stockholder who shall abuse the rights granted under this ledgers, and journals
section shall be penalized under Section 158 of this Code, 2. Minutes book for Stockholders - minutes of the meetings of the
without prejudice to the provisions of Republic Act No. 8293, stockholders
otherwise known as the “Intellectual Property Code of the 3. Minutes book for Directors and Trustees - minutes meetings of
Philippines," as amended, and Republic Act No. 10173, the Board of Directors and Trustees
otherwise known as the "Data Privacy Act of 2012.” 4. Stock and Transfer Book
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Corporate Records
1. Charter documents - Articles of Incorporation, Bylaws,
and it’s amendments. Inspection of Corporate Records
2. Reports filed with the SEC - general information sheets Open to inspection by any director, trustee, stockholder or
(GIS), and all other reports required under the Securities member of the corporation in person or by a representative at
Regulation Code (SRC) reasonable hours on business days, and a demand in writing may
be made by such director, trustee, or stockholder at their expense,
Book of Minutes; Contents for copies of such records or excerpts from said records.
(1) date and time of meeting
(2) place of holding the meeting The inspecting or reproducing party shall remain bound by
(3) how the meeting was authorized confidentiality rules under prevailing laws, such as the rules on
(4) the fact that notice was given trade secrets or processes under Intellectual Property Code of the
(5) whether the meeting was regular or special Philippines, Data Privacy Act of 2012, and The Securities
Regulation Code.
(6) if the meeting is special, object must be
stated
(7) those present and absent The right to inspect covers all the books of the corporation,
(8) every act done or ordered done at the including the journal, ledger, financial statements, income tax
returns, vouchers, receipts, contracts and all papers pertaining to
meeting
the operation of the corporation which are of interest to its
(9) upon demand of a director, trustee,
stockholders.
stockholder or member, the time when any
director, trustee, stockholder or member
entered or left the meeting must be noted in There are matters that are not covered by the right to inspect. For
the minutes instance, a corporation engaged in manufacturing goods can keep
secret the formula or process which is not generally well known.
(10) upon demand of a director, trustee,
stockholder or member, a carefully made
record of the yeas and nays must be taken on Requisites for Exercise of Right
any motion or proposition 1. must be exercised at reasonable hours on business days
(11) upon demand of a director, trustee, 2. has not improperly used any information he secured through
stockholder, or member, the protest on any any previous examination
action or proposed action 3. demand is made in good faith or for a legitimate purpose
o The mere certification of the Corporate Secretary gives the Who Cannot Inspect
Minutes probative value, the signatures of the directors is A requesting party that is not a stockholder or member of record,
not necessary. or is a competitor, director, officer, controlling stockholder or
o Minutes of the meeting of the BOD may be proof of the otherwise represents the interest of a competitor.
existence of a contract (considered as a written contract for
the purposes of extinctive prescription under Article 1144(1)
of the New Civil Code) Liability for refusal to allow inspection or production of records
failure or refusal by the corporation, or by those responsible complaint is that the respondents are merely outgoing officers
for keeping and maintaining corporate records, to comply with of STRADEC who, for some reason, withheld and refused to turn-
Sections 45, 73, 92, 128, 177 and other pertinent rules and over the company records of STRADEC. It clearly suggest that
provisions of this Code on inspection and reproduction of respondents are neither in relation to STRADEC.
records shall be punished with a fine ranging from Ten
thousand pesos (P10,000.00) to Two hundred thousand pesos In other words, petitioners are not actually invoking their right
(P200,000.00), at the discretion of the court, taking into to inspect the records and the stock and transfer book of
consideration the seriousness of the violation and its STRADEC under the second and fourth paragraphs of Section 74.
implications. When the violation of this provision is injurious What they seek to enforce is the proprietary right of STRADEC
or detrimental to the public, the penalty is a fine ranging from to be in possession of such records and book. Such right, though
Twenty thousand pesos (P20,000.00) to Four hundred certainly legally enforceable by other means, cannot be
thousand pesos (P400,000.00). enforced by a criminal prosecution based on a violation of the
second and fourth paragraphs of Section 74. That is simply not
The penalties imposed under this section shall be without the situation contemplated by the second and fourth
prejudice to the Commission's exercise of its contempt powers paragraphs of Section 74 of the Corporation Code.
under Section 157 hereof.
YUJUICO V QUIAMBAO Note: The SC agreed that refusal to allow inspection is subject to
Facts: Strategic Alliance Development Corporation (STRADEC) is a criminal liability. However, the case was still dismissed because
a domestic corporation operating as a business development the person who refused to show the corporate books was not an
and investment company. During the annual stockholder's officer of a corporation, because the liability is criminal in nature
meeting of STRADEC, petitioner Aderito Z. Yujuico was elected it is construed strictly. Therefore, only an officer or a director of a
as president and chairman of the company. Yujuico replaced corporation that can be held liable.
respondent Cezar T. Quiambao, who had been the president
and chairman of STRADEC since 1994. With Yujuico at the helm, That is no longer applicable because under the amended
STRADEC appointed petitioner Bonifacio C. Sumbilla as corporation code, the refusal to allow inspection or reproduction
treasurer and one Joselito John G. Blando as corporate is now only subject to civil liability under Section 161, and no
secretary. Blando replaced respondent Eric C. Pilapil the longer criminal in nature.
previous corporate secretary of STRADEC.
Subsequently, a criminal case was filed by petitioners against IF THE CORPORATION OR ITS OFFICERS REFUSE TO ALLOW A
respondents and one Giovanni T. Casanova alleging that STOCKHOLDER TO INSPECT, IS A CASE THE ONLY OPTION OF THE
Quiambao refused for the turnover of the corporate records of STOCKHOLDER?
the company, particularly the accounting files, ledgers, journals
and other records of the corporation's business as well as its NEW PROVISION UNDER SEC. 73 OF THE REVISED CORPORATION CODE:
stock and transfer books. Initially, it was agreed to be deposited
in a safety box in BPI but the same resulted to the refusal of “If the corporation denies or does not act on a demand for
respondents. inspection and/or reproduction, the aggrieved party may report
such denial or inaction to the Commission. Within five (5) days
Upon determination of probable cause, the RTC concluded that from receipt of such report, the Commission shall conduct a
respondents were at most withholding the stock and transfer summary investigation and issue an order directing the
books and that refusing inspection to such is not punishable inspection or reproduction of the requested records.”
under the Corporation code as opposed to refusal to inspect
other corporate records thus the case was dismissed against
Remedy of Party Refused Inspection; Summary Investigation
respondent.
Aggrieved party may report such denial or inaction to the
Issue: WON refusal to inspect the stock and transfer books is Commission.
punishable under the Corporation Code?
Within five (5) days from the receipt of such report, the
Ruling: Yes. Such refusal is a violation of Section 74 of the Commission shall conduct a Summary Investigation and issue and
Corporation Code to which Section 144 provides for the penalty. order directing the inspection or reproduction of the requested
However, a criminal action based on the violation of a records.
stockholder’s right to examine or inspect the corporate records
and the stock and transfer book of a corporation under the Defenses for Refusal
second and fourth paragraphs of Section 74 of the corporation (1) person demanding to examine and copy
code - such as Criminal Case No. 89724 — can only be excerpts from the corporation's records and
maintained against corporate officers or any other persons minutes has improperly used any information
acting on behalf of such corporation. secured through any prior examination of the
records or minutes of such corporation or of
The problem with the petitioners' complaint and the evidence any other corporation
that they submitted during preliminary investigation is that they (2) person demanding to examine was not
do not establish that respondents were acting behalf of acting in good faith or for a legitimate purpose
STRADEC. Quite the contrary, the scenario painted by the
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Corporation Law (2019) MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO
The board of directors or trustees of each corporation 5. Submission of the Articles to SEC for approval
, party to the merger or consolidation, shall approve a plan of Four copies of the Articles of Merger or Consolidation (together
merger or consolidation setting forth the following: with favorable recommendation of a pertinent government
agency in certain cases) shall be submitted to the SEC for
(a) The names of the corporations proposing to merge approval.
or consolidate, hereinafter referred to as the constituent
corporations; 6. Issuance by SEC of Certificate of merger
(b) The terms of the merger or consolidation and the The SEC shall issue certificate of merger if it is satisfied that the
mode of carrying the same into effect; merger or consolidation of the corporations concerned is not
( c) A statement of the changes , if any in the articles inconsistent with the provisions of this code and existing laws.
of incorporation of the surviving corporation in case of merger;
and, in case of consolidation , all the statements required to be EFFECTIVITY OF MERGER OR CONSOLIDATION
set forth in the articles of incorporation for corporations SEC. 78. Effectivity of Merger or Consolidation . - The articles of
organized under this Code; and merger or of consolidation , signed and certified as required by
(d) Such other provisions with respect to the this Code, shall be submitted to the Commission for its approval
proposed merger or consolidation as are deemed necessary or ; Provided, That in case of merger or Consolidation of banks or
desirable banking institutions, loan associations, trust companies,
insurance companies , public utilities , educational institutions ,
Merger and other special corporations governed by special laws , the
1. A + B = A or B favorable recommendation of the appropriate government
2. Meaning 2 corporations combined, one is dissolved then the agency shall first be obtained. If the Commission is satisfied that
other becomes the surviving corporation the merger or consolidation of the corporations concerned is
consistent with the provisions of this code and existing laws, it
Consolidation shall issue a certificate approving the articles and plan of merger
1. A + B = C or of consolidation , at which time the merger or consolidation
2. When two corporations combined they form an entirely new shall be effective.
corporation. When A & B consolidate, non of the combining
corporation survive, what is created in its place is a new If, upon investigation , the Commission has reason to
corporation. believe that the proposed merger or consolidation is contrary to
or inconsistent with the provisions of this Code or existing laws,
Requirements it shall set a hearing to give the corporations concerned the
opportunity to be heard. Written notice of the date, time , and
place of hearing shall be given to each constituent corporation
1. Creation of “Plan of Merger and Consolidation “ by the Board
at least two (2) weeks before said hearing. The Commission shall
of each corporation
thereafter proceed as provided in this Code.
- this is the first document that the corporation needs to create
- the plan should specify what will happen to the surviving
corporation or the newly created corporation Effectivity of Merger & Consolidation
GENERAL RULE
2. Approval of Majority vote of each of the BOD or trustees of Takes effect only upon the approval of the SEC.
such plan TN: no approval of the SEC no valid merger or consolidation
- the plan of merger or consolidation shall be approved by
majority vote of each of the board of the concerned corporations EXCEPTION
at separate meetings Any merger or acquisition in excess of 1 Billion pesos
3. Approval of such plan by 2/3 Stockholders and Members - additional Requirement of Notice to Philippine Competition
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Corporation Law (2019) MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO
Effects of merger or consolidation ATTY: Horizontal or vertical agreements are not prohibited, they
The Constituent corporations shall become a single become prohibited only when they become agreements between
corporation; competitors that restrict competition as to the price component
The separate existence of the constituents shall cease thereof or as to the other terms or trade, so let’s say for , an
EXCEPT that of the surviving corporation ( in merger) or agreement between Globe and Smart that they will now charge
the consolidated corporation (in consolidation) P5 per text message so they fix the price and no one can go against
The surviving or the consolidated corporation shall them because they are the major players in the market. So if they
possess all the rights, privileges , immunities and agree, people will normally have no choice because you are either
powers and shall be subject to all duties and liabilities of a Globe or a Smart subscriber. So wala kay choice but to pay up, if
a corporation; ang Globe lang ang mag-increase sa price and Smart does not,
All liabilities of the constituents shall pertain to the people will go to Smart but if they both agree then the market has
surviving or the consolidated corporation. no choice. So any agreement that will restrict competition as to
the price component so meaning wala na kay choice because that
Merger: the constituent corporations becomes a single is the essence of competition, giving the public a choice kung kinsa
entity. imong source of your goods or services. So any agreement which
Consolidation: there is a now a consolidated restricts a choice for the public in terms of price or any other terms
corporation. or trade, that can be considered as an anti-competitive
o The separate existence of constituent agreement.
corporations cease except the surviving or
consolidated corporation. So automatically What else is considered as an anti-competitive agreement? If you
the non-surviving or the non-consolidated fix the price in an auction or you try to do bid manipulation that is
corporation will be dissolved. also prohibited.
o The surviving or consolidated corporation will
now possess all the rights, privileges, BID MANIPULATION
immunities and powers, and shall be subject It can be cover bidding, bid suppression, bid rotation, market
to the duties and liabilities of a corporation allocation and other forms of bid manipulation.
organized under this code.
- Cover bidding – it is when the participants to an auction
ATTY: will agree to basically pad their bid price in order to
So meaning, the new corporation need not be registered again allow one competitor to win.
with the SEC. Automatically upon approval of the merger or - Bid suppression – is when they agree that the
consolidation that new corporation whether it’s the surviving competitor will not submit their bid to allow whoever is
corporation or a consolidated corporation possesses all the participating to win.
powers of a corporation under this code. The surviving - Bid Rotation – similar to cover bidding and bid
corporation or the consolidated corporation shall also possess all suppression except that the parties agree that for this
the rights, privileges, immunities and franchises of the constituent bidding, ikaw makadaog, for the second bidding, ako na
corporation and all the properties and receivables including sad. So you agree or fix who will win per
subscriptions and other interest of the constituent corporation bidding/auction.
shall be deemed transferred to the surviving or consolidated
corporation. The surviving corporation or the consolidated Those are considered as manipulative practices, which are
corporation shall also be responsible for all the liabilities and considered as anti-competitive agreement and prohibited under
obligations of the constituent corporation. Under the NELL the Competition Act.
DOCTRINE, merger and consolidation is one of the ways in which
liabilities are passed to the new corporation. - Any other agreement which would have the effect of
restricting or preventing competition such as:
Prohibitions under Philippine Competition Act
1. Anti- competitive Agreements; 1. Setting, limiting or controlling production
2. Abuse of Dominant Positions; markets, technical development, investment
3. Anti-competitive mergers and acquisitions. dividing, or sharing the market.
Anti- competitive Agreements So if the competitors agree nga sige akong area ang
Luzon so don’t come in here but I don’t go to Visayas
Horizontal Agreements - these are agreements and Mindanao. So Luzon is your monopoly, that’s not
between parties who are similarly situated meaning a allowed.
supplier of a certain commodity entering into an
agreement of a supplier of the same commodity. Setting, limiting or controlling production - This can be
Vertical Agreements - this is when a supplier or in the form of a vertical agreement where you have an
producer of a certain goods will enter into an agreement with the supplier that any raw material that
agreement with the supplier of the raw materials for they produce will only be supplied to you or to lessen
the production of that goods. It is vertical because it the production of that raw material so that your
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Corporation Law (2019) MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO
EXAMPLE FOR PREDATORY PRICING: The PCC can add or modify some portions in the contract. If
the parties do not agree to the proposed changes, then, the
If you are the go to supplier for that particular market, you can get PCC can deny the merger/acquisition
control in the sense that because you have more customers,
pwede nimo paubsan imo price because you exchange volume for 3. PROHIBIT THE IMPLEMENTATION OF THE AGREEMENT
the price. UNLESS AND UNTIL THE PERTINENT PARTY/PARTIES
ENTER INTO LEGALLY ENFORCEABLE AGREEMENT
But if you do it in such a way that you will now edge out your SPECIFICIED BY THE COMMISSION
competitors because you are doing predatory pricing nga dili na
maapas saimo competitors so they have to close down because if If the commission finds out that there are anti-competitive
they follow your pricing malugi na sila. That’s not allowed. terms in the transaction, then the commission can take out
those terms.
EXAMPLE FOR TYING AND BUNDLING: NOTE: In the second one, PCC adds or modifies; but, in the third
one, the PCC removes some portions to make the agreement
Suppliers that have a product which is dominant in the market, legally enforceable.
and then they have ancillary products that they tie to their main
product i.e. printer, if the producer of the printer will create a NOT ALL MERGERS OR ACQUISITIONS WHICH RESTRICT
printer na dili ka makagamit ug any other ink except ang ink na COMPETITION SHOULD BE INVALIDATED
ilang gi produce, that is an abuse of dominant position. The law provides that there are certain mergers/acquisition that
even though are anti-competitive can still be allowed.
Tying and bundling: bundling of your ancillary product with your
main product.
GENERAL RULE: ANTI-COMPETITIVE MERGERS/ACQUISITIONS ARE
Another example: Apple products, there are certain applications PROHIBITED
that will only apply to their phones. But not illegal because people
have the options. But what if you have no other options or all the EXCEPTIONS:
other phones will be inferior to their phones. In that case, that
would be considered as an abuse of dominant power. 1. IF THERE COULD BE GAINS IN EFFICIENCY BROUGHT
ABOUT BY THE COMBINATION, AND THAT GAIN IN
You have a product that is dominant or preferred in the market EFFICIENCY IS MORE THAN ANY ADVERSE EFFECT OF
meaning more than 50% of the market share and then you tie up THE LIMITATION ON COMPETITION
other products to it. Such that you can’t use any other products
created by the suppliers except kadtong imo lang. If, for example, 2 competitors will combine. With the
combination, the new company will be producing double the
Merger or acquisition that exceeds 1b volume of what they ordinarily produce before the merger.
The production has doubled because the assets of the two
Any merger or acquisition which exceeds 1 billion pesos (the competitors have been combined. And also, with that double
transaction value). Are prohibited from consummating their production, the production cost became less. (greater
agreement for 30 days after providing notice to the Philippine production, lesser cost. Meaning, economy of scale)
Competition Commission (PCC).
If it can be shown that that economy of scale resulting from
Effect of failure to comply with the notice requirement to the greater efficiency in production will redound to the benefit
PCC: of the public, shown by reduced prices of the goods, then
that combination can be allowed.
1. Transaction will be considered as void; and
2. Penalty of 1%-5% of the value of the transaction.
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- Technically, if you invest funds in another corporation, thereafter notified, but you failed to surrender the stock
as discussed before, you amend your articles. certificate, appraisal right is terminated.
EXERCISE OF APPRAISAL RIGHT; HOW Under Sec. 81, Paragraph 2: “If the proposed corporate action
SEC. 81. How Right is exercised. – The dissenting stockholder is implemented, the corporation shall pay the stockholder,
who votes against a proposed corporate upon
action may exercise the right of appraisal by making surrender of the certificate or certificates of stock
a written demand on the corporation for the payment representing the stockholder’s shares, the fair
of the fair value of shares held within thirty (30) days value thereof as of the day before the
from the date on which the vote was taken: Provided, vote was taken, excluding any appreciation or
That failure to make the demand within such period depreciation in anticipation of such corporate action.”
shall be deemed a waiver of the appraisal right. - It means that if the corporation does not push through
If the proposed corporate action is implemented, the with the action where the stockholder dissented,
corporation shall pay the stockholder, upon appraisal right is also terminated. So, the appraisal right
surrender of the certificate or certificates of stock can only be pursued if the corporation actually pushes
representing the stockholder’s shares, THE FAIR through with the corporate action and the fair value
VALUE THEREOF AS OF THE DAY BEFORE THE should be the value of the shares THE DAY BEFORE THE
VOTE WAS TAKEN, excluding any appreciation or ACTUAL VOTING ON THE CORPORATE ACTION.
depreciation in anticipation of such corporate action.
If, within sixty (60) days from the approval of the APPLICATION OF THE RULE
corporate action by the stockholders, the This is most applicable in publicly listed corporations because the
withdrawing stockholder and the corporation cannot corporate action will normally be published by the issuer
agree on the fair value of the shares, it shall be corporation. So, it can affect the price of the shares.
determined and appraised by three (3) disinterested
persons, one of whom shall be named by the Example:
stockholder, another by the corporation, and the third You acquire another subsidiary. If the market deems that
by the two (2) thus chosen. The findings of the acquisition to be advantageous to the corporation, it can result to
majority of the appraisers shall be final, and their an increase in the shares. If the market deems that acquisition to
award shall be paid by the corporation within thirty (30) days be disadvantageous to the corporation, it can result to a decrease
after such award is made: in the price of shares.
Provided, That no payment shall be made to any Being a dissenting stockholder, the stockholder who wants to
dissenting stockholder unless the corporation has exercise his appraisal rights, should be immune from any of those
unrestricted retained earnings in its books to cover fluctuations. He cannot benefit nor can he be disadvantaged of
such payment: Provided, further, That upon any change in the price brought about by the action which he
payment by the corporation of the agreed or dissented from.
awarded price, the stockholder shall forthwith
transfer the shares to the corporation. TWO THINGS TO REMEMBER IN THE SECOND PARAGRAPH OF
SECTION 81:
Manner of exercising appraisal right 1. If the proposed action does not push through, then the
1. VOTE AGAINST THE CORPORATE ACTION appraisal right is terminated
- It can only be exercised by a stockholder who actually 2. The fair market value of the share should be on the day before
dissented or voted against that particular corporate the vote was taken.
action, where the right is allowed. Meaning, if you, a
stockholder, voted to approve the amendment in the - Within the period of 60 days from the approval of the
articles, you cannot exercise appraisal right. corporate action, if the parties cannot agree how much
is the value of the shares, then there needs to be an
2. MAKE A WRITTEN DEMAND ON THE CORPORATION appraisal by 3 disinterested persons.
WITHIN 30 DAYS AFTER THE DATE ON WHICH THE VOTE
ÂWAS TAKEN FOR THE FAIR VALUE OF YOUR SHARES Who determines
- Failure to make that demand shall be deemed a waiver One will be named by the stockholder.
of the appraisal right. Appraisal right is strictly construed The other will be named by the corporation.
against the stockholder, being violative of the trust fund The third one will be named by the two representatives.
doctrine.
- Basically, this will be an independent appraisal
3. SUBMIT THE STOCK CERTIFICATE TO THE committee to determine the value of the shares. The
CORPORATION WITHIN 10 DAYS AFTER DEMANDING findings of this appraisers will be final and the award
PAYMENT shall be paid by the corporation within 30 days after the
award is made. The stockholder and the corporation
- So that there can be an annotation on the stock cannot anymore question on the value given by the
certificate that he is a dissenting stockholder, and the appraisers.
shares/stocks are dissenting shares. Failure to do so
shall terminate his appraisal right at the option of the Last but not the least, appraisal right can only be granted if there
corporation. So, even if you have dissented and is unrestricted retained earnings in the books of the corporation.
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- It is not sufficient that there is only retained earnings. It should 2. proposed corporate action is abandoned or rescinded by the
be unrestricted retained earnings. Meaning, you don’t take into corporation
account the retained earnings that has been restricted for 3. proposed corporate action is disapproved by the Commission
corporate expansion, retained earnings that has been restricted where sun approval is necessary
for certain contractual provisions, and retained earnings that has 4. Commission determines that such stockholder is not entitled
been restricted for contingencies or any other valid restriction of to the appraisal right
retained earnings. They are not included in the determination. 5. failure to make a written demand within the 30-day period
provided
The exercise of appraisal right is very strict that the failure to 6. the shares are transferred by the dissenting shareholder
comply with one requirement automatically terminates the 7. the dissenting shareholder failed to submit the stock certificate
appraisal right because this is an exception to the trust fund within 10 days from demand
doctrine.
Effect
GR: When the right of said stockholder to be paid the fair value of his
The corporation is not allowed to give back the capital shares ceased in the cases enumerated above, his status as a
contribution of a stockholder because that capital contribution is stockholder shall be restored, and all dividend distributions which
considered as a trust fund in favor of the creditors. would have accrued on the shares shall be paid to the stockholder.
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