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Aquila Legis Fraternity Corporation Law
Aquila Legis Fraternity Corporation Law
8. Quasi corporations.
a. Quasi corporations – public bodies or municipal societies such as townships,
counties, school districts, road or highway districts which, though not vested with
the general powers of corporations, are organized by statutes or immemorial
usage, as persons or aggregate corporations with precise duties which may be
enforced, and privileges which may be maintained, by suits of law.
9. De jure corporations.
a. De jure corporations – juridical entities created or organized in strict or
substantial compliance with the statutory requirements of incorporation and
whose right to exist as such cannot be successfully attacked even by the State in
a quo warranto proceeding.
10. De facto corporations.
a. De facto corporations – those which exist by virtue of an irregularity or defect in
the organization or constitution or from some other omission to comply with the
conditions precedent by which corporations de jure are created, but there was
colorable compliance with the requirements of the law under which they might be
lawfully incorporated for the purposes and powers assumed, and user of the
rights claimed to be conferred by law.
11. Corporations by estoppel.
a. Corporations by estoppel – those which are so defectively formed as not to be
either de jure or de facto corporations but which are considered as corporations
in relation only to those who cannot deny their corporate existence due to their
agreement, admission or conduct.
The mere fact that the government happens to be a majority stockholder does not make it a public
corporation. (National Coal vs. CIR)
CHAPTER 4: FORMATION AND ORGANIZATION
Stages in the life of a corporation:
1. Creation
2. Reorganization or quasi-reorganization
3. Dissolution and winding up
Steps in creation:
1. Promotional stage
2. Process of incorporation
3. Organization and commencement of business
PROMOTIONAL STAGE
A promoter acting for a proposed corporation has 3 options:
1. He may make a continuing offer on behalf of the corporation, which, if accepted after
incorporation, will become a contract. In this case, the promoter does not assume any
personal liability, whether or not the corporation will accept the offer.
2. The promoter may make a contract at the time binding himself, with the understanding
that if the corporation, once formed, accepts or adopts the contract, he will be relieved of
responsibility.
3. The promoter may bind himself personally and assume the responsibility of looking to the
proposed corporation, when formed, for reimbursement.
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PROCESS OF INCORPORATION
Process of incorporation:
1. Drafting the articles of incorporation
2. Preparation and submission of additional and supporting documents
3. Filing with the SEC
4. Subsequent issuance of certificate of incorporation
Contents of the articles of incorporation
1. Name
2. Purpose
3. Principal office
4. Term
5. Incorporators
6. Number of directors/trustees
7. Names, nationalities and residences of directors/trustees
8. If a stock corporation, amount of authorized capital stock, number of shares, par value,
original subscribers
9. If a non-stock corporation, amount of capital, contributors
10. Such other matters not inconsistent with law and which the incorporator may deem
necessary and convenient
11. Treasurer‟s certificate
CORPORATE NAME
A corporation cannot use a name which is:
1. identical or deceptively or confusingly similar to that of any existing corporation or to any
other name protected by law; or
2. patently deceptive, confusing or contrary to law.
The law gives a corporation no express or implied authority to assume another name that is
unappropriated; still less that of another corporation, which is expressly set apart from it and
protected by law. (Red Line Transportation Co. vs. Rural Transit Co.)
A word or phrase originally incapable of exclusive appropriation with reference to an article on the
market, because geographically or otherwise descriptive, might nevertheless have been used so
long and so exclusively by one producer with reference to his article that, in that trade and to that
branch of the purchasing public, the word or phrase has come to mean that the article was his
product. (Doctrine of secondary meaning, Lyceum of the Philippines, Inc. vs.CA)
A corporation's right to use its corporate and trade name is a property right, a right in rem, which it
may assert and protect against the world in the same manner as it may protect its tangible
property, real or personal, against trespass or conversion. It is regarded, to a certain extent, as a
property right and one which cannot be impaired or defeated by subsequent appropriation by
another corporation in the same field. (Philips Export B.V. vs. CA)
To come within the scope of the prohibition of Sec. 18, two requisites must be proven, namely:
1. That the complainant corporation acquired a prior right over the use of such corporate
name; and
2. The proposed name is either: (a) identical or (b) deceptively or confusingly similar to that
of any existing corporation or to any other name already protected by law; or (c) patently
deceptive, confusing or contrary to existing law. (Philips Export B.V. vs. CA)
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In determining the existence of confusing similarity in corporate names, the test is whether the
similarity is such as to mislead a person using ordinary care and discrimination. Proof of actual
confusion need not be shown. It suffices that confusion is probably or likely to occur. (Philips Export
B.V. vs. CA)
A corporation has an exclusive right to the use of its name, which may be protected by injunction
upon a principle similar to that upon which persons are protected in the use of trademarks and
tradenames. (Philips Export B.V. vs. CA)
A mere change in the name of a corporation, either by the legislature or by the corporators or
stockholders under legislative authority, does not, generally speaking, affect the identity of the
corporation, nor in any way affect the rights, privileges or obligations previously acquired or
incurred by it.
PURPOSE CLAUSE
A corporation has only such powers as are expressly granted to it by law and by its articles of
incorporation including those which are incidental to such conferred powers, those reasonably
necessary to accomplish its purpose and those which may be incidental to its existence.
Reasons for requiring a statement of purposes or objects:
1. In order that the stockholder who contemplates on an investment in a business enterprise
shall know within what lines of business his money is to be put at risk.
2. So that the board of directors and management may know within what lines of business
they are authorized to act.
3. So that anyone who deals with the company may ascertain whether a contract or
transaction into which he contemplates entering is one within the general authority of the
management.
If the corporate purpose or objective includes any purpose under the supervision of another
government agency, prior clearance and/or approval of the concerned government agencies or
instrumentalities will be required.
General limitations on the purpose clause:
1. The purpose must be lawful.
2. The purpose must be specific or stated concisely although in broad or general terms.
3. If there is more than one purpose, the primary as well as the secondary ones must be
specified.
4. The purpose must be capable of being lawfully combined.
THE PRINCIPAL OFFICE
The residence of the corporation is the place of its principal office as may be indicated in its articles
of incorporation and may, therefore, be sued only at that place. (CRS vs. Antillon)
TERM OF EXISTENCE
Sec. 11. Corporate term. - A corporation shall exist for a period not exceeding fifty (50) years from
the date of incorporation unless sooner dissolved or unless said period is extended. The corporate
term as originally stated in the articles of incorporation may be extended for periods not exceeding
fifty (50) years in any single instance by an amendment of the articles of incorporation, in
accordance with this Code; Provided, That no extension can be made earlier than five (5) years
prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier
extension as may be determined by the Securities and Exchange Commission.
INCORPORATORS
Sec. 10. Number and qualifications of incorporators. - Any number of natural persons not less than
five (5) but not more than fifteen (15), all of legal age and a majority of whom are residents of the
Philippines, may form a private corporation for any lawful purpose or purposes. Each of the
incorporators of a stock corporation must own or be a subscriber to at least one (1) share of the
capital stock of the corporation.
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Consideration for the issuance of stock may be any or a combination of any two or more of the ff:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and necessary or
convenient for its use and lawful purposes at a fair valuation equal to the par or issued
value of the stock issued;
3. Labor performed or services actually rendered to the corporation;
4. Previously incurred indebtedness by the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares in exchange for stocks in the event of reclassification or conversion.
Stocks shall not be issued in exchange of promissory notes or future services.
Shares of stock and their classification
Shares of stock designate the interest or right which the stockholder has in the management of the
corporation, and in the surplus profits and, in case of distribution, in all assets remaining after the
payment of its debts.
Stock certificate is a document or instrument evidencing the interest of a stockholder in the
corporation.
The shares of stock of stock corporations may be divided into classes or series of shares, or both,
any of which classes or series of shares may have such rights, privileges or restrictions as may be
stated in the articles of incorporation.
Purpose of classification:
1. To specify and define the rights and privileges of the stockholders.
2. For regulation and control of the issuance of sale of corporate securities for the protection
of purchasers and stockholders.
3. As a management control device.
4. To comply with statutory requirements.
5. To better insure return on investment.
6. For flexibility in price.
Except as otherwise provided in the articles of incorporation and stated in the certificate of stock,
each share shall be equal in all respects to every other share.
Common and preferred shares
Common stock – a stock which entitles its owner to an equal pro-rata division of profits, if there be
any, but without any preference or advantage in that respect over any other stockholder or class of
stockholders.
Preferred stock – a stock that gives the holder a preference over the holder of common stocks with
respect to the payment of dividends and/or with respect to distribution of capital upon liquidation.
Limitations on preferred stock:
1. Must be issued with a stated par value; and
2. The preferences must be stated in the articles of incorporation and in the certificate of
stock, otherwise, each share shall be, in all respect, equal to every other share.
The guarantee to preference as to dividends does not create a relation of debtor and creditor
between the corporation and the holders of such stock. The board has the discretion to determine
whether or not to declare dividends.
Preferred shares are presumed to be non-participating.
Participating preferred shares – the holders thereof are still given the right to participate with the
common stockholders in dividends beyond their stated preference.
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Cumulative preferred share – those that entitle the owner thereof to payment not only of current
dividends but also back dividends not previously paid whether or not, during the past years,
dividends were declared or paid.
In absence of express stipulation, preferred shares are presumed to be non-cumulative.
Non-cumulative preferred shares – those which grant the holders of such shares only to the
payment of current dividends but not back dividends, when and if dividends are paid, to the extent
agreed upon before any other stockholders are paid the same.
Types of non-cumulative preferred shares:
1. Discretionary dividend type – gives the holder of such shares the right to have dividends
paid thereon in a particular year depending on the judgment or discretion of the board of
directors.
2. Mandatory if earned type – impose a positive duty on directors to declare dividends every
year when profits are earned.
3. Earned cumulative or dividend credit – gives the holder thereof the right to arrears in
dividends if there were profits earned during the previous years but dividends were not
declared.
Unless the right to vote is clearly withheld, a preferred stockholder has the right to vote.
Preference upon liquidation must be clearly indicated otherwise they shall be placed on equal
footing with other shares.
Par and no par value shares
Par value shares – those whose value are fixed in the articles of incorporation.
Par value shares cannot be issued nor sold by the corporation at less than par.
No par value shares – those whose issued price are not stated in the certificate of stock but which
may be fixed in the articles of incorporation, or by the board of directors when so authorized by the
said articles or by the by-laws, or in the absence thereof, by the stockholders themselves.
Limitations of no par value shares:
1. Such shares, once issued, are deemed fully paid and thus, non assessable;
2. The consideration for its issuance should not be less than P5.00;
3. The entire consideration for its issuance constitutes capital, hence, not available for
dividend declaration;
4. They cannot be issued as preferred stock; and
5. They cannot be issued by banks, trust companies, insurance companies, public utilities
and building and loan associations.
Advantages to the issuance of no par value shares:
1. Flexibility in price;
2. Evasion of the danger of liability upon watered stock; and
3. Disappearance of personal liability on the part of the holder thereof for unpaid
subscription.
Voting and non-voting shares
Voting shares – gives the holder thereof the right to vote and participate in the management of the
corporation through the exercise of such right, either at the election of the board of directors, or in
any manner requiring the stockholder‟s approval.
Non-voting shares – do not grant the holder thereof the right to vote except under the penultimate
paragraph of Sec. 6.
Only preferred and redeemable shares may be denied the right to vote.
There must always be a class or series of shares which have complete voting rights.
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If a corporation by estoppel exists and enters into a contract or transacts business with a third
party, the latter has three remedies:
1. He may file a suit against the ostensible corporation to recover from the corporate
properties;
2. He may file the case directly against the associates personally who held out the
association a corporation; and
3. Against both the ostensible corporation and persons forming it, jointly and severally.
As regards the liability of the associates of the alleged corporation, only those who actively
participated in holding out the association as a corporation should be held personally liable.
ORGANIZATION AND COMMENCEMENT OF BUSINESS
Sec. 22. Effects on non-use of corporate charter and continuous inoperation of a corporation. - If a
corporation does not formally organize and commence the transaction of its business or the
construction of its works within two (2) years from the date of its incorporation, its corporate powers
cease and the corporation shall be deemed dissolved. However, if a corporation has commenced
the transaction of its business but subsequently becomes continuously inoperative for a period of at
least five (5) years, the same shall be a ground for the suspension or revocation of its corporate
franchise or certificate of incorporation.
This provision shall not apply if the failure to organize, commence the transaction of its
businesses or the construction of its works, or to continuously operate is due to causes beyond the
control of the corporation as may be determined by the Securities and Exchange Commission.
Organization – the election of officers, providing for the subscription and payment of capital stock,
the adoption of by-laws, and such other steps as are necessary to endow the legal entity with the
capacity to transact the legitimate business for which it was created.
Failure of the corporation to organize within the prescribed period would result in its automatic
dissolution, unless its failure to do so is due to causes beyond its control.
Substantial compliance is sufficient.
Subsequent inoperation is merely a ground for suspension or revocation of corporate franchise.
Dissolution is not automatic.
CHAPTER 5: THE CORPORATE CHARTER AND ITS AMENDMENTS
CORPORATE CHARTER
Corporate charter – an instrument or authority from the sovereign power, bestowing rights and
power.
The corporate charter is a three-fold contract:
1. Between the corporation and the state insofar as it concerns its primary franchise to be
and act as a corporation;
2. Between the corporation and the stockholders or members insofar as it governs their
respective rights and obligations; and
3. Between and among the stockholders or members themselves as far as their relationship
with one another is concerned.
The charter of corporations created under the Corporation Code consists of the articles of
incorporation and the Corporation Code inclusive of the by-laws adopted thereunder and all
pertinent provisions of any statute governing them.
The charter of corporations created by special laws consists of the special law creating the same
and any and all laws, rules and regulations affecting or applicable to them.
Franchise – the right or privilege itself to be and act as a corporation or to do a certain act.
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Kinds of franchises:
1. Primary franchise – the right or privilege of being a corporation which the state confers
upon the applicant for this faculty.
2. Secondary franchise – the powers and privileges vested in, and to be exercised by the
corporate body as such.
CORPORATE ENTITY THEORY
The corporation is possessed with a personality separate and distinct from the individual
stockholders or members.
A corporation is a distinct legal entity to be considered as separate and apart from the individual
stockholders or members who compose it, and is not affected by the personal rights, obligations
and transactions of its stockholders or members. Conversely, a corporation has no interest in the
individual property of its stockholders unless transferred to the corporation, even in case of a one-
man corporation. (Sulo ng Bayan, Inc. vs. Gregoria Araneta, Inc.)
A bona fide corporation should alone be liable for its corporate acts as duly authorized by its
directors and officers. (Caram vs. CA)
The president and manager of a corporation who entered into and signed a contract in his official
capacity, cannot be made liable thereunder in his individual capacity in the absence of stipulation to
that effect due to the personality of the corporation being separate and distinct from the person
composing it. (Rustan Pulp and Paper Mills, Inc. vs. IAC)
A corporation has a personality distinct and separate from its individual stockholders or members.
The mere fact that one is president of a corporation does not render the property he owns and
possesses the property of the corporation, since the president, as an individual, and the corporation
are separate entities. (Cruz vs. Dalisay)
Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital
stock of a corporation is not, of itself, sufficient ground for disregarding the separate corporate
personality. (Palay Inc. vs. Clave)
In a right of action against the corporation, the officers may not be held personally liable as long as
they act within the scope of their authority. (Soriano vs. CA)
PIERCING THE VEIL OF CORPORATE FICTION
Piercing the veil of the corporate fiction is resorted to only in cases where the corporation is used or
being used to defeat public convenience, justify wrong, protect fraud, defend crime, confuse
legitimate issues, or to circumvent the law or perpetuate deception, or an alter-ego, adjunct or
business conduit for the sole benefit of a stockholder or a group of stockholders or another
corporation.
Test in determining the applicability of the doctrine of piercing the veil of corporation fiction:
1. Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that
the corporate entity as to this transaction had at the time no separate mind, will or
existence of its own;
2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust
act in contravention of plaintiff's legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of. (Instrumentality Rule, Concept Builders, Inc. vs. NLRC)
WHEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED
Corporate fiction cannot be disregarded in the absence of intent to defraud in corporate
transactions. (Remo, JR vs. IAC)
For the separate juridical personality of a corporation to be disregarder, the wrongdoing must be
clearly and convincingly established. (Del Rosario vs. NLRC)
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Mere corporate ownership of all the stocks of another corporation will not justify their being treated
as single entity. (PNB vs. Ritratto)
There being not the least indication that the second corporation is a dummy or serves as a client of
the first corporation, the fiction of separate and distinct corporate entities cannot be disregarder and
brushed aside. (Yu vs. NLRC)
AMENDMENT OF THE CORPORATE CHARTER
Steps to be followed for an effective amendment of the articles of incorporation:
1. Resolution by at least a majority of the board of directors or trustees.
2. Vote or written assent of the stockholders representing at least 2/3 of the outstanding
capital stock or 2/3 of the members in case of non-stock corporation.
3. Submission and filing of the amendments with the SEC as follows:
a. The original and amender articles together shall contain all the provisions
required by law to be set out in the articles of incorporation. Such articles, as
amended, shall be indicated by underscoring the change or changes made.
b. A copy thereof, duly certified under oath by the corporate secretary and a
majority of the directors or trustees stating the fact that such amendments have
been duly approved by the required vote of the stockholders or members.
c. Favorable recommendation of the appropriate government agency concerned in
the case where the corporation is under its supervision.
Time when the amendments shall take effect:
1. Upon approval of the SEC; or
2. From the date of filing with the SEC if not acted upon with 6 months from the date of filing
for a cause not attributable to the corporation. (Note: not applicable to special
amendments)
Special amendments:
1. Extension or shortening of corporate term (Sec. 37)
2. Increase or decrease of capital stock (Sec. 38)
3. Incurring, creating or increasing bonded indebtedness (Sec. 38)
PROVISIONS SUBJECT TO AMENDMENT
Matters which are fait accompli are not subject to change.
A change in the name of the corporation does not affect the identity of the corporation, nor in any
way affect the rights, privileges, or obligations previously acquired or incurred by it. (Philippine First
Insurance Co. vs. Hartigan)
AMENDMENT OF THE CORPORATE TERM
Procedure to amend the corporate term:
1. Approval by a majority vote of the board or directors or trustees.
2. Written notice of the proposed action and the time and place of meeting shall be served to
each stockholder or member either by mail or by personal service.
3. Ratification by the stockholders representing at least 2/3 of the outstanding capital stock
or 2/3 of the members in case of non-stock corporations.
4. In case of extension of corporate term, the extension should be for periods not exceeding
50 years in any single instance, and provided that no extension can be made earlier than
5 years prior to the original or subsequent expiry date(s) unless there are justifiable
reasons for an earlier extension as may be determined by the SEC.
5. In cases of extension of corporate term, a dissenting stockholder may exercise his
appraisal rights.
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Extension may be made only before the term provided in the corporate charter expires. (Alhambra
Cigar & Cigarette Mfg. Co., Inc. vs. SEC)
CHAPTER 6: BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
POWERS OF THE BOARD
Sec. 23. The board of directors and trustees. - Unless otherwise provided in the Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors or
trustees.
The authority of the board of directors does not extend to the fundamental changes in the corporate
charter.
The board may delegate the exercise of corporate powers.
A corporation is bound by the acts of its corporate officers if they act within the scope of the 5
classifications of powers of corporate agents:
1. Those expressly conferred or those granted by the articles of incorporation, the corporate
by-laws or by the official act of the board of directors.
2. Those that are incidental or those acts as are naturally and ordinarily done which are
reasonable and necessary to carry out the corporate purpose or purposes.
3. Those that are inherent or acts that go with the office.
4. Those that are apparent or those acts which although not actually granted, the principal
knowingly allows or permits it to be done.
5. Powers arising out of customs, usage or emergency.
Where a corporation seeks to evade liability on a contract on the ground of lack of authority on the
part of the person who assumed to act for it, such defense should be specially pleaded. Failure to
make an issue as to such authority eliminates any questions regarding it. (Ramirez vs. Orientalist
Co.)
The fact that the power to make corporate contracts is thus vested in the board of directors does
not signify that a formal vote of the board must always be taken before contractual liability can be
fixed upon a corporation; for the board can create liability, like an individual, by other means than
by a formal expression of its will. (Ramirez vs. Orientalist Co.)
The power to make corporate contracts resides primarily in the company's board of directors; but
the board may ratify an unauthorized contract made by an officer of the corporation. Ratification in
this case is held to have occurred when the board, with knowledge that the contract had been
made, adopted a resolution recognizing the existence of the contract and directing that steps be
taken to enable the corporation to utilize its benefits. (Ramirez vs. Orientalist Co.)
Where a corporate contract has been effected with the approval of the board of directors, a
resolution adopted at a meeting of stockholders refusing to recognize the contract or repudiating it
is without effect. (Ramirez vs. Orientalist Co.)
Contracts between a corporation and third persons must be made by or under the authority of its
board of directors and not of its stockholders. (Barreto vs. La Previsora)
QUALIFICATIONS AND DISQUALIFICATIONS
Qualifications:
1. Directors must own at least one (1) share of the capital stock of the corporation. Trustees
must be members.
2. A majority of the directors or trustees must be residents of the Philippines.
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Disqualifications:
1. Conviction by final judgment of an offense punishable by imprisonment for a period
exceeding six (6) years, or a violation of this Code committed within five (5) years prior to
the date of election or appointment.
2. Other disqualifications under applicable special laws.
In order to be eligible as a director, what is material is the legal title to, not beneficial ownership, of
the stock as appearing on the books of the corporation. (Lee vs. CA)
If no election is conducted or no qualified candidate is elected, the incumbent director shall
continue to act as such in a hold-over capacity until the election is held and a qualified candidate is
so elected. (Detective and Protective Bureau vs. Cloribel)
ELECTION AND VOTING
In stock corporations, the majority of the outstanding capital stock, in person or by representative
authorized to act by written proxy, must be present at the election of directors.
In non-stock corporations, a majority of the members entitled to vote, in person or by proxy, if
allowed in its articles of incorporation or by-laws, must be present in the election.
The election may be adjourned if, for any reason, no election is held, or if the required quorum is
not obtained. However, it may not be adjourned indefinitely.
The election must be by ballot if requested by any voting stockholder or member.
Candidates receiving the highest number of votes shall be declared elected.
In stock corporations, cumulative voting is a matter of right.
In non-stock corporations, cumulative voting is not available unless provided for in the articles of
incorporation or by-laws. I.e., a member may cast as many votes as there are trustees to be
elected but may not cast more than one vote for one candidate.
In stock corporations, the stockholder may:
1. Vote such number of shares for as many persons as there are directors to be elected;
2. Cumulate said shares and give one candidate as many votes as the number of directors
to be elected multiplied by the number of his shares shall equal;
3. Distribute them on the same principle among as many candidates as he shall see fit.
No delinquent stock shall be voted.
Officers to be elected
1. President, who shall be a director
2. Treasurer, who may or may not be a director
3. Secretary, who shall be a resident and citizen of the Philippines
4. Such other officers as may be provided for in the by-laws.
Any two (2) or more positions may be held concurrently by the same person, except that no one
shall act as president and secretary or as president and treasurer at the same time.
The directors or officers shall hold office for one (1) year until their successors are elected and
qualified.
VALIDITY AND BINDING EFFECT OF ACTIONS OF CORPORATE OFFICERS
General rule: the quorum requirement for a valid board meeting is the majority of the number of the
directors or trustees as fixed in the articles of incorporation.
Exception: The articles of incorporation or the by-laws may provide for a greater majority.
General rule: To have a valid corporate act, the decision of at least a majority of the directors or
trustees present at a meeting at which there is a quorum is required.
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Exception: The election of corporate officers requires the vote of a majority of all the members.
General rule: Individual directors cannot bind the corporation by their individual acts.
Exceptions:
1. By delegation of authority;
2. Where expressly conferred; or
3. Where the officer or agent is clothed with actual or apparent authority.
Although an officer or agent acts without, or in excess of, his actual authority if he acts within the
scope of an apparent authority with which the corporation has clothed him by holding him out or
permitting him to appear as having such authority, the corporation is bound thereby in favor of a
person who deals with him in good faith in reliance on such apparent authority, as where an officer
is allowed to exercise a particular authority with respect to the business, or a particular branch of it,
continuously and publicly, for a considerable time. Also, if a private corporation intentionally or
negligently clothes its officers or agents with apparent power to perform acts for it, the corporation
will be estopped to deny that such apparent authority is real, as to innocent third persons dealing in
good faith with such officers or agents. This apparent authority may result from (1) the general
manner by which the corporation holds out an officer or agent as having power to act or, in other
words, the apparent authority with which it clothes him to act in general, or (2) the acquiescence in
his acts of a particular nature, with actual or constructive knowledge thereof, whether within or
without the scope of his ordinary powers. (Yao Ka Sin Trading vs. CA)
Any action of the board without a meeting and without the required voting and quorum requirement
will not bind the corporation unless subsequently ratified, expressly or impliedly. (Lopez vs.
Fontecha)
Where a general business manager of a corporation is clothed with apparent authority to borrow
money and the amount borrowed does not exceed the ordinary requirements of the business, the
authority is implied and that the corporation is bound. (Pua Casim & Co. vs. Neumark and Co.)
An invalid contract may be validated by the ratification only of the board of directors; the president
has no authority to ratify such contract. (Yu Chuck vs. Kong Li Po)
Silence coupled with acceptance of benefits constitutes a binding ratification. (Francisco vs. GSIS)
A corporate officer entrusted with the general management and control of its business, has implied
authority to make any contract or do any other act which is necessary or appropriate to the conduct
of the ordinary business of the corporation. As such officer, he may, without any special authority
from the Board of Directors, perform all acts of an ordinary nature, which by usage or necessity are
incident to his office, and may bind the corporation by contracts in matters arising in the usual
course of business. Where similar acts have been approved by the directors as a matter of general
practice, custom, and policy, the general manager may bind the company without formal
authorization of the board of directors. (Board of liquidators vs. Kalaw)
Lack of repudiation, acquiescence and acceptance of benefits are equivalent to an implied
ratification by the Board of Directors and binds the corporation even without formal resolution
passed and recorded. (Buenaseda vs. Bowen & Co., Inc.)
Express ratification: through formal board action.
Implied ratification:
1. Silence or acquiescence;
2. Acceptance and/or retention of benefits; or
3. By recognition or adoption.
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If there is wastage of corporate assets, the courts may be justified to look into the reasonableness
and fairness of the compensation despite the fact that the grant thereof is authorized pursuant to
the by-laws and by the vote of the majority of the holders of the outstanding capital stock of the
corporation.
The board may not grant compensation upon itself without authorization of the by-laws or in
contravention of the by-laws. (Central Cooperative Exchange vs. Tibe, Jr.)
Members of the board of directors may receive compensation, in addition to reasonable per diems,
when they render services to the corporation in a capacity other than as directors or trustees.
(Western Institute of Technology, Inc. vs. Salas)
The fact that the amount paid as compensation to directors under a by-law provision has increased
beyond what would probably be necessary to secure adequate service from them is a matter that
cannot be corrected by the court. The remedy is in the hands of the stockholders who have the
power at any lawful meeting to change the rule. (Govt. vs. El Hogar Filipino)
LIABILITY OF CORPORATE OFFICERS
The general rule is that unless the law specifically provides, a corporate officer or agent is not civilly
or criminally liable for acts done by him as such officer or agent.
Personal liability of a corporate director, trustee or officer along with the corporation may validly
attach, as a rule, only when:
1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, gross
negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the
corporation, its stockholders or other persons;
2. He consents to the issuance of watered stocks or who, having knowledge thereof, does
not forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by specific provision of law, to personally answer for his corporate action.
(Tramat Mercantile, Inc. vs. CA)
Where a check is drawn by a corporation, company or entity, the person or persons who actually
signed the check in behalf of such drawer shall be liable under this Act. (Sec. 1, BP 22)
In labor cases, corporate directors and officers are solidarily liable with the corporation for the
termination of employment of corporate employees done with malice or in bad faith. (Uichico vs.
NLRC)
THREE-FOLD DUTY OF DIRECTORS
Three-fold duty of directors:
1. Obedience
2. Diligence
3. Loyalty
Solidarily liability for all damages suffered by the corporation, its stockholders or members or other
persons shall be imposed upon directors or trustees:
1. Who willfully and knowingly vote for or assent to patently unlawful acts of the corporation;
2. Who are guilty of gross negligence or bad faith in directing the affairs of the corporation; or
3. Who acquire any personal property or pecuniary interest in conflict with their duty as such
directors or trustees.
Business judgment rule – directors are not liable for losses due to imprudence or honest error of
judgment. Questions of policy and management are left solely to the honest decision of the board
of directors and the courts are without authority to substitute its judgment as against the former.
Resolutions passed in good faith by the board of directors are valid and binding, and whether or not
it will cause losses or decrease in profits are not subject to the review of the court. (Montelibano vs.
Bacolod Murcia Milling, Co., Inc.)
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General rule: A director is not liable for misconduct of co-directors or other officers.
Exceptions:
1. He connives or participates in it; or
2. He is negligent in not discovering or acting to prevent it.
The duty of loyalty is violated in the following instances:
1. When a director or trustee acquires any personal or pecuniary interest in conflict with his
duty as such director or trustee;
2. When he attempts to acquire or acquires, in violation of his duty, any interest adverse to
the corporation in respect to any matter which has been reposed in him in confidence, as
to which equity imposes a disability upon him to deal in his own behalf; and
3. When he, by virtue of his office, acquires for himself a business opportunity which should
belong to the corporation, thereby obtaining profit to the prejudice of such corporation.
Corporate opportunity doctrine – It places a director of a corporation in the position of a fiduciary
and prohibits him from seizing a business opportunity and/or developing it at the expense and with
the facilities of the corporation. He cannot appropriate to himself a business opportunity which in
fairness should belong to the corporation.
Distinction between Secs. 31 & 34:
1. Sec. 31, where a director is liable to account for profits if he attempts to acquire or
acquires any interest adverse to the corporation in respect to any matter reposed in him in
confidence as to which equity imposes a disability upon him to deal in his own behalf is
not subject to ratification by the stockholders.
2. Sec. 34, where the director acquires for himself a business opportunity which should
belong to the corporation, he is bound to account for such profits unless his act is ratified
by the stockholders owning or representing at least 2/3 of the outstanding capital stock.
Directors are liable for fraud committed by concealment of information as to the state and probable
result of the negotiations for the sale of corporate assets which may affect the price of the
corporation‟s stock. (Strong vs. Repide)
SELF-DEALING DIRECTORS
A contract of the corporation with one or more of its directors or trustees or officers is voidable, at
the option of such corporation, unless all of the following conditions are present:
1. That the presence of such director or trustee in the board meeting in which the contract
was approved was not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the approval of the
contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the board of
directors.
Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a
contract with a director or trustee, such contract may be ratified, provided:
1. The contract is ratified by the vote of the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock or of at least two-thirds (2/3) of the members
2. Such ratification is made at a meeting called for that purpose;
3. Full disclosure of the adverse interest of the directors or trustees involved is made; and
4. The contract is fair and reasonable under the circumstances.
In the absence of express delegation, a contract entered into by the president, on behalf of the
corporation, may bind the corporation if the board should ratify the same expressly or impliedly.
Furthermore, the president as such may bind the corporation by a contract in the ordinary course of
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business, provided the same is reasonable under the circumstances. These rules only apply where
the president or other officer, purportedly acting for the corporation, is dealing with a third person,
i.e., person outside the corporation. It does not apply to self-dealing directors or officers. (Prime
White Cement Corp. vs. IAC)
A director or officer may in good faith and for an adequate consideration purchase from a majority
of the directors or stockholders the property even of an insolvent corporation. (Mead vs. Mc
Cullough)
INTERLOCKING DIRECTORS
Sec. 33. Contracts between corporations with interlocking directors. - Except in cases of fraud, and
provided the contract is fair and reasonable under the circumstances, a contract between two or
more corporations having interlocking directors shall not be invalidated on that ground alone:
Provided, That if the interest of the interlocking director in one corporation is substantial and his
interest in the other corporation or corporations is merely nominal, he shall be subject to the
provisions of the preceding section insofar as the latter corporation or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be
considered substantial for purposes of interlocking directors.
A director who owns a substantial interest in one corporation dealing with another where he has a
nominal interest is a regarded as a self-dealing director in so far as the latter corporation is
concerned.
DERIVATIVE SUIT
Suits that stockholders may bring against erring directors or officers:
1. Individual or personal suit – one brought by the shareholders for direct injury to his rights,
such as denial of his right to inspect corporate books and records or pre-emptive right;
2. Representative of class suit - ; and
3. Derivative suit – an action based on injury to the corporation – to enforce a corporate right
– wherein the corporation is joined as a necessary party, and recovery is in favor of the
corporation.
A stockholder in a corporation who was not such at the time of the transactions complained of, or
whose shares had not devolved upon him since by operation of law, can not maintain a derivative
suit unless such transactions continue and are injurious to the stockholder, or affect him specifically
in some other way. (Pascual vs. Orozco, et al.)
When the board is under the complete control of the principal defendants in the case, demand
upon such board to institute action and prosecute the same is not required. The law does not
require litigants to do useless acts. (Everett vs. Asia Banking Corporation)
The corporation should be made a party, in order to make the court‟s judgment binding upon it, and
thus bar future relitigation of the issue. On what side the corporation appears is not important.
(Republic Bank vs. Cuaderno)
The minority shareholder who is suing for and in behalf of the corporation must allege in his
complaint before the proper forum that he is suing on a derivative cause of action on behalf of the
corporation and all other shareholders similarly situated who wish to join. This is necessary to vest
jurisdiction upon the tribunal in line with the rule that it is the allegations in the complaint that vest
jurisdiction upon the court or quasi-judicial body concerned over the subject matter and nature of
the action. (Western Institute of Technology, Inc. vs. Salas)
The bona fide ownership by a stockholder of stock in his own right suffices to invest him with
standing to bring a derivative action for the benefit of the corporation. The number of his shares is
immaterial since he is not suing in his own behalf, or for the protection or vindication of his own
particular right, or the redress of a wrong committed against him, individually, but in behalf and for
the benefit of the corporation. (SMC vs. Khan)
Where corporate directors are guilty of breach of trust – not mere error of judgment or abuse of
discretion – and intra-corporate remedy is futile or useless, a stockholder may institute a suit in
behalf of himself and other stockholders and for the benefit of the corporation, to bring about a
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redress of the wrong inflicted directly upon the corporation and indirectly upon the stockholders.
(Reyes vs. Tan, et al.)
The stockholders in a derivate suit cannot allege or vindicate their own individual interests or
prejudice. (Gamboa vs. Victoriano, et al.)
In a derivative suit, the injury complained of is primarily to the corporation, so that the suit for the
damages claimed should be by the corporation rather than by the stockholders. The stockholders
may not directly claim those damages for themselves for that would result in the appropriation by,
and the distribution among them of part of the corporate assets before the dissolution of the
corporation and the liquidation of its debts and liabilities. (Evangelista vs. Santos)
Rules, requirements and procedure so that a derivative suit may proceed or prosper:
1. The party bringing the action should be a stockholder as of the time the act or transaction
complained of took place, or whose shares have evolved upon him since by operation of
law. This rule, however, does not apply if such act or transaction continues and is injurious
to the stockholder or affects him specifically in some other way. The number of shares is
immaterial.
2. He has tried to exhaust intra-corporate remedies, i.e. he has made a demand on the
board of directors for the appropriate relief but the latter had failed or refused to heed his
plea. Demand, however, is not required if the company is under the complete control of
the directors who are the very ones to be sued (or where it becomes obvious that a
demand upon them would have been futile and useless) since the law does not require a
litigant to perform useless acts.
3. The stockholder bringing the suit must allege in his complaint that he is suing on a
derivative cause of action on behalf of the corporation and all other stockholders similarly
situated, otherwise, the case is dismissible.
4. The corporation should be made a party, either as party-plaintiff or defendant, in order to
make the court‟s judgment binding upon it.
5. Any benefit or damages recovered shall pertain to the corporation.
EXECUTIVE COMMITTEE
An executive committee may be created when authorized by the by-laws.
General rule: The executive committee may act, by majority vote of all its members, on such
specific matters within the competence of the board, as may be delegated to it in the by-laws or on
a majority vote of the board.
Exceptions:
1. Approval of any action for which shareholders' approval is also required;
2. The filling of vacancies in the board;
3. The amendment or repeal of by-laws or the adoption of new by-laws;
4. The amendment or repeal of any resolution of the board which by its express terms is not
so amendable or repealable; and
5. A distribution of cash dividends to the shareholders.
CHAPTER 7: CORPORATE POWERS AND AUTHORITY
Classification of corporate authority:
1. Those expressly granted or authorized by law inclusive of the corporate charter or articles
of incorporation
2. Those impliedly granted as are essential or reasonably necessary to the carrying out of
the express powers
3. Those that are incidental to its existence.
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6. In case of increase in capital stock, 25% of such increased capital must be subscribed and
that at least 25% of the amount subscribed must be paid either in cash or property;
7. In case of decrease in capital stock, the same must not prejudice the right of the creditors;
8. Filing of the certificate of increase and amended articles with the SEC; and
9. Approval thereof by the SEC.
3 ways of increasing the capital stock:
1. Increasing the par value of the existing number of shared without increasing the number of
shares;
2. Increasing the number of existing shares without increasing the par value thereof; and
3. Increasing the number of existing shares and at the same time increasing the par value of
the shares.
Existence of unissued or unsubscribed share out of the original capital stock will not prohibit the
increase of capital stock.
Reasons for decreasing capital stock:
1. To reduce or wipe out existing deficit where no creditors would thereby be affected;
2. When capital is more than what is necessary to procreate the business or reduction of
capital surplus; or
3. To write down the value of its fixed assets to reflect the present actual value in case where
there is a decline in the value of the fixed assets of the corporation.
A corporation has no power to release an original subscriber to its capital stock from the obligation
of paying for his shares, without a valuable consideration for such release; and as against creditors
a reduction of the capital stock can take place only in the manner and under the conditions
prescribed by law. Moreover, strict compliance with the statutory regulations is necessary.
(Philippine Trust Company vs. Rivera)
A reduction of capital stock may not be used as a subterfuge, a deception as it were, to camouflage
the fact that a corporation has been making profits to obviate a just sharing to labor. (Madrigal &
Co. vs. Zamora)
A corporation which has the power to borrow or raise money, to contract for labor or services, or
otherwise contract a debt has the implied power to issue bonds in payment or as a security
provided it violates no prohibition or restriction in its charter or any other statutes.
Corporate bonds must be registered and approved by the SEC before they are issued.
POWER TO DENY PRE-EMPTIVE RIGHTS
Pre-emptive right – is a right granted by law to all existing stockholders of a stock corporation to
subscribe to all issues or disposition of shares of any class, in proportion to their respective
stockholdings, subject only to the limitations imposed under Sec. 39.
The basis for the grant of this right is the preservation, unimpaired and undiluted, of the old
stockholders‟ relative and proportionate voting strength and control, that is, the existing ratio of their
proprietary interest and voting power in the corporation.
All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or
disposition of shares of any class, in proportion to their respective shareholdings, unless such right
is denied by the articles of incorporation or an amendment thereto.
Exceptions:
1. Shares to be issued in compliance with laws requiring stock offerings or minimum stock
ownership by the public; or
2. Shares to be issued in good faith with the approval of the stockholders representing two-
thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate
purposes or in payment of a previously contracted debt.
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Types of dividends:
1. Cash dividend – those that are payable in lawful money.
2. Property dividend – those that take form of bonds, notes, evidences of indebtedness or
stock in other corporations.
3. Stock dividends – refer to the corporation‟s shares of stock.
Rules on dividends due on delinquent stock:
1. Cash dividend – first applied to the unpaid balance on subscription costs and expenses.
2. Stock dividend – withheld until subscription is fully paid.
General rule: Stock corporations are prohibited from retaining surplus profits in excess of 100% of
their paid-in capital stock.
Exceptions:
1. When justified by definite corporate expansion projects or programs approved by the
board of directors; or
2. When the corporation is prohibited under any loan agreement with any financial institution
or creditor, whether local or foreign, from declaring dividends without its/his consent, and
such consent has not yet been secured; or
3. When it can be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there is need for special reserve
for probable contingencies.
General rule: The board of directors exercise exclusive authority in declaring dividends.
Exception: In declaring stock dividends, the approval of the stockholders representing at least 2/3
of the outstanding capital stock is required.
The judgment of the board of directors in the matter of declaring dividends is conclusive except
when they act in bad faith, or for a dishonest purpose or act fraudulently, oppressively,
unreasonably or unjustly or abuse of discretion can be shown so as to impair the rights of the
complaining stockholders to their just proportion of corporate profits.
The essential test of bad faith is to determine if the policy of the directors is dictated by their
personal interest rather than the corporate welfare.
The right of the stockholders to be paid dividends vest as soon as they have been lawfully and
finally declared by the Board of Directors.
No revocation of dividend may be had unless it has not been officially communicated to the
stockholders or is in the form of stock dividends which is revocable at any time prior to distribution.
Stock dividends cannot be issued to a person who is not a stockholder. (Neilson & Co., Inc. vs.
Lepanto Consolidated Mining Co.)
Directors are not liable for declaration of dividend contrary to law, unless attended with bad faith,
gross negligence or willful and knowing assent. (Ladia)
POWER TO ENTER INTO MANAGEMENT CONTRACTS
Requirements and procedure:
1. Resolution by the board of directors or trustees;
2. Approval by the stockholders representing a majority of the outstanding capital stock or
majority of the members in case of non-stock corporations;
3. The approval must be at a meeting duly called for that purpose;
4. The contract shall not be for a period longer than 5 years for any one term, except those
which relate to exploration, development or utilization of natural resources which may be
entered into for such periods as may be provided by pertinent laws and regulations.
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When approval of the stockholders of the managed corporation owning at least 2/3 of the
outstanding capital stock or 2/3 of the members in case of non-stock corporations are required:
1. Where a stockholder or stockholders representing the same interest of both the managing
and the managed corporations own or control more than 1/3 of the total outstanding
capital stock entitled to vote of the managing corporation;
2. Where a majority of the members of the board of directors of the managing corporation
also constitute a majority of the members of the board of directors of the managed
corporation; or
3. Where the contract would constitute the management or operation of all or substantially all
of the business of another corporation, whether such contracts are called service
contracts, operating agreements or otherwise.
ULTRA-VIRES ACTS
Ultra-vires acts – are those that can not be executed or performed by a corporation because they
are not within its express, inherent or implied powers as defined by its charter or articles of
incorporation.
Consequences of ultra-vires acts:
1. On the corporation itself – the proper forum may suspend or revoke, after proper notice
and hearing, the franchise or certificate of registration of the corporation for serious
misrepresentation as to what the corporation can do or is doing to the great damage or
prejudice of the general public.
2. On the rights of the stockholders – a stockholder may either an individual or derivative suit
to enjoin a threatened ultra-vires act or contract.
3. On the immediate parties – (a) if the contract is fully executed on both sides, the contract
is effective; (b) if the contract is executory on both sides, neither party can maintain an
action for its non-performance; and (c) if the contract is executory on one side only, and
has been fully performed on the other, the party who has received the benefits is estopped
to set up that the contract is ultra-vires.
Acts which are clearly beneficial to the company or necessary to promote the interest or welfare of
the corporation, its employees and their families, or in the legitimate furtherance of its business are
within corporate powers. (Republic vs. Acoje Mining)
Mere ultra-vires acts which are not illegal per se may become binding and enforceable either by
ratification, estoppel or on equitable grounds unless the public or third parties are thereby
prejudiced. (Privano vs. De la Rama Steamship)
Corporations authorized to acquire the bonds have the implied power to guarantee them in order to
place them upon the market under better, more advantageous conditions, and thereby secure the
profit derived from their sale. When a contract is not on its face necessarily beyond the scope of the
power of the corporation by which it was made, it will, in the absence of proof to the contrary, be
presumed to be valid. Corporations are presumed to contract within their powers. The doctrine of
ultra vires, when invoked for or against a corporation, should not be allowed to prevail where it
would defeat the ends of justice or work a legal wrong. (Carlos vs. Midoro Sugar Co.)
Actions which are beyond the powers of the corporation as embodied in its articles of incorporation
and have absolutely no relation to the avowed purpose of the corporation are ultra-vires. (Japanese
War Notes Claimants Assoc., Inc. vs. SEC)
Corporate officers have no power to execute for mere accommodation a negotiable instrument of
the corporation for their individual debts or transactions arising from or in relation to matters in
which the corporation has no legitimate concern. Since such accommodation paper cannot thus be
enforced against the corporation, especially since it is not involved in any aspect of the corporate
business or operations, the signatories thereof shall be personally liable therefor, as well as for the
consequences arising from their acts in connection therewith. (Crisologo-Jose vs. CA)
CHAPTER 8: BY-LAWS
By-laws – are rules and ordinances made by a corporation for its own government; to regulate the
conduct and define the duties of the stockholders or members towards the corporation and among
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themselves. They are rules and regulations or private laws enacted by the corporation to regulate,
govern and control its own actions, affairs and concerns and its stockholders or member and
directors and officers with relation thereto and among themselves in their relation to it.
Requirements and procedure for adoption of by-laws:
1. The by laws must not be inconsistent with the Code;
2. If adopted prior to incorporation:
a. Approved and signed by all the incorporators;
b. Submitted together with the articles of incorporation to the SEC;
3. If adopted subsequent to incorporation:
a. Adopted within one (1) month after receipt of official notice of the issuance of its
certificate of incorporation by the SEC;
b. Affirmative vote of the stockholders representing at least a majority of the
outstanding capital stock, or of at least a majority of the members in case of non-
stock corporations,
c. Signed by the stockholders or members voting for them
d. Kept in the principal office of the corporation, subject to the inspection of the
stockholders or members during office hours.
e. A copy thereof, duly certified to by a majority of the directors or trustees
countersigned by the secretary of the corporation, must be filed with the SEC
which shall be attached to the original articles of incorporation.
4. Certification of the appropriate government agency concerned to the effect that such by-
laws or amendments are in accordance with law.
5. Issuance by the Securities and Exchange Commission of a certification that the by-laws
are not inconsistent with this Code.
Contents of by-laws:
1. The time, place and manner of calling and conducting regular or special meetings of the
directors or trustees;
2. The time and manner of calling and conducting regular or special meetings of the
stockholders or members;
3. The required quorum in meetings of stockholders or members and the manner of voting
therein;
4. The form for proxies of stockholders and members and the manner of voting them;
5. The qualifications, duties and compensation of directors or trustees, officers and
employees;
6. The time for holding the annual election of directors of trustees and the mode or manner
of giving notice thereof;
7. The manner of election or appointment and the term of office of all officers other than
directors or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing stock certificates; and
10. Such other matters as may be necessary for the proper or convenient transaction of its
corporate business and affairs.
By-laws are subordinate to the articles of incorporation, the Corporation Code and other statutes
which form part of the corporate charter.
By-laws become effective only upon the approval of the SEC
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Time of filing:
1. Prior to incorporation – must be signed by all the incorporators, must be filed together with
the articles of incorporation
2. After incorporation – approval of at least a majority of the outstanding capital stock
Failure to file by-laws may result to suspension or revocation of corporate franchise after proper
notice and hearing
Failure to file by-laws does not result in automatic dissolution. (LGVHA vs. CA)
By-laws are internal rules an cannot bind, effect or prejudice third persons without knowledge.
(Fleisher vs. Botica Nolasco)
Two modes of amending or repealing by laws or adopting a new one:
1. By a majority vote of the directors or trustees and the majority vote of the outstanding
capital stock or members, at a regular or special meeting called for that purpose; or
2. By the board of directors alone when delegated by 2/3 of the outstanding capital stock or
members
Delegated power to amend, repeal or adopt by-laws may be revoked
Incorporation of an invalid by-law provision is not a misdemeanor. It does not justify the dissolution
of the corporation. (Govt. vs. El Hogar)
The by-laws may disqualify a stockholder from being elected into office if he has a substantial
interest in a competitor corporation to avoid any possible adverse effects of conflicting interest of a
director. (Gokongwei, Jr. vs. SEC)
Elements of a valid by laws:
1. It must not be contrary to law, public policy or morals.
2. It must not be inconsistent with the articles of incorporate.
3. It must be general and uniform in its effect or applicable to all alike or those similarly
situated.
4. It must not impair obligations and contracts or vested rights.
5. It must be reasonable.
CHAPTER 9: MEETINGS
Meetings – applies to every duly convened assembly either stockholders, members, directors or
trustees, manages, etc. for any legal purpose, or the transaction of business of a common interest.
Classes of meetings:
1. General
2. Special
STOCKHOLDER’S MEETINGS
Requirements to have a valid stockholder‟s meeting:
1. It must be held on the date fixed in the by-laws or in accordance with law.
2. Prior notice must be given.
3. It must be held at the proper place.
4. It must be called by the proper party.
5. Quorum and voting requirements must be met
It must be held on the date fixed in the by-laws or in accordance with law.
Regular meetings shall be held annually on a date fixed in the by-laws, or if not so fixed, on any
date in April of every year as determined by the board of directors or trustees.
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Special meetings of stockholders or members shall be held at any time deemed necessary or as
provided in the by-laws.
Prior notice must be given.
Regular – 2 weeks prior notice
Special – 1 week prior notice
The by-laws may provide for a different period (shorter or longer)
Failure to give notice of a meeting would render the resolution made thereunder voidable at the
option of the stockholder or member who was not notified. (Board of Directors vs. Tan)
Notice may be waived, expressly or impliedly.
Notice must state the agenda otherwise it may become voidable.
Notice of meetings shall be in writing, and the time and place thereof stated therein.
It must be held at the proper place.
General Rule: Stockholders' or members' meetings, whether regular or special, shall be held in the
city or municipality where the principal office of the corporation is located, and if practicable in the
principal office of the corporation.
Exceptions to the rule:
1. A non-stock corporation, in its by laws, may provide for any place within the Philippines.
2. Metro Manila is considered a city or municipality.
It must be called by the proper party.
Persons who may call the meeting:
1. The person or persons authorized under the by-laws;
2. Absent of any provision in the by-laws, the president;
3. Under Sec. 28 (removal of director), by the secretary on order of the president or on
written demand of the stockholder representing or holding at least a majority of the
outstanding capital stock or majority of the members entitled to vote in a non-stock
corporation, or the stockholder or member making the demand if there is no secretary or
he refuses to do so; and
4. On order of the proper forum under Sec. 50.
A stockholder may only petition the SEC to issue an order directing the petitioner to call a meeting
when there is no person authorized to call a meeting. Otherwise, the remedy is to file a petition for
mandamus.
Quorum and voting requirements must be met
A quorum shall consist of the stockholders representing a majority of the outstanding capital stock.
The by-laws or the Code itself may provide for a greater quorum.
The basis of determining the presence of a quorum:
1. Stock corporation – total subscription irrespective of the amount paid by them.
2. Non-stock corporation – total number of registered voting members.
A quorum once present is not broken by the subsequent withdrawal of a part or fraction of the
stockholders.
If the voting requirement is met, any resolution passed in the meeting, even if improperly held or
called will be valid if all the stockholders or members are present or duly represented.
DIRECTORS’/TRUSTEES’ MEETING
Regular meetings – held monthly, unless the by-laws provide otherwise
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Special meetings – held at any time upon the call of the president or as provided in the by-laws
Meetings may be held anywhere in or outside of the Philippines, unless the by-laws provide
otherwise.
Notice must be sent at least one (1) day prior to the scheduled meeting, unless otherwise provided
by the by-laws.
Notice may be waived, expressly or impliedly.
If the notice requirement is not complied with the meeting is illegal and will not bind the corporation
except when subsequently ratified. (Lopez vs. Fontecha)
In a close corporation, the act of any one director may bind the corporation without a meeting.
Presence at a meeting waives want of notice.
Physical presence at the meeting is not required; teleconferencing and videoconferencing is
allowed. (RA 8792)
The president shall preside at the meeting, unless the by-laws provide otherwise.
A director or trustee cannot attend or vote by proxy at any board meeting.
STOCKHOLDERS’ RIGHT TO VOTE AND MANNER OF VOTING
General rule: The right to vote is an inherent right and the stockholder may vote any way he
pleases.
Exceptions:
1. Non-voting shares are not entitled to vote except in those instances provided for in the
penultimate paragraph of Sec. 6
2. Treasury shares
3. Delinquent shares
4. Unregistered transferee of stock
General rule: Stockholders or members may vote personally or through a representative by way of
proxy, voting trust agreement or by the executor, administrator, receiver of other legal
representative.
Exception: In non-stock corporations, the right to vote may be limited, broadened or denied in the
articles of incorporation or in the by-laws.
The right to vote is vested with the legal owner of the shares.
In case of pledged or mortgaged shares, the pledgor or mortgagor is entitled to vote in absence of
a written agreement (recorded in the corporate books) to the contrary. (Sec. 55)
Executors, administrators, receivers, and other legal representatives duly appointed by the court
may attend and vote in behalf of the stockholders or members without need of any written proxy.
(Sec. 50)
An executor or administrator of a stockholder may not be elected unless he owns at least 1 share.
General Rule: In case of shares jointly owned, the consent of all the co-owners shall be necessary.
Exceptions:
1. Written proxy signed by all the co-owners
2. The shares are owned in an "and/or" capacity
PROXY
Proxy – the authority given by the stockholder or member to another to vote for him at a
stockholders‟ or members‟ meeting. It also refers to the instrument or paper which is evidence of
the authority of the agent or the holder thereof to vote for and in behalf of the stockholder or
member.
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6. The trustee or trustees shall execute and deliver to the transferors voting trust certificates,
which shall be transferable in the same manner and with the same effect as certificates of
stock.
7. It should not be entered into for the purpose of circumventing the law against monopolies
and illegal combinations in restraint of trade or used for purposes of fraud.
Voting trust distinguished from proxy
VOTING TRUST PROXY
The beneficial owner of the shares ceases Legal title remains with the beneficial owner
to be a stockholder of record of the
corporation
The trustee votes as owner of the shares The proxy holder votes merely as an agent
The beneficial owner of the shares is The owner of the shares may be elected as
disqualified to be a director a director since legal title remains with him
The purpose is to acquire voting control of Generally used to secure voting and quorum
the corporation requirements or merely for the purpose of
representing an absent stockholder
Irrevocable Revocable unless coupled with an interest
The trustee can act and vote at any meeting A proxy holder can generally act as such
during the duration of the voting trust only at a particular meeting
agreement
The trustee may vote in person or by proxy A proxy holder must vote in person
The duration may exceed 5 years The duration may not exceed 5 years
Must be notarized and filed with the SEC Need not be notarized nor filed with the SEC
A corporation is not a party to a voting trust agreement therefore it is not a real party interest in a
suit to enforce the same. (NIDC vs. Aquino)
A voting trust transfers only voting and other rights pertaining to the shares subject of the
agreement or control over the stock. It does not include the assets, operation and management of
the corporation. (NIDC vs. Aquino)
CHAPTER 10: STOCKS AND STOCKHOLDERS
3 ways in which a person may become a stockholder:
1. By a contract of subscription with the corporation;
2. By the purchase of treasury shares from the corporation; and
3. By purchase or acquisition of shares from existing stockholders (includes purchase from
the stock exchange).
SUBSCRIPTION CONTRACT
Subscription – the mutual agreement of the subscribers to take and pay for the stocks of a
corporation.
Subscription contract – any contract for the acquisition of unissued stock in an existing corporation
or a corporation still to be formed, not withstanding the fact that the parties refer to it as a purchase
or some other contract.
A subscription contract is not required to be written; an oral contract for subscription is valid and
enforceable. The statutes of fraud do not apply to a subscription contract because such
subscription does not fall under the statutory definition of a sale.
Conditional subscription – one made upon a condition precedent, does not make the subscriber a
stockholder, or render him to pay the amount of his subscription, until the performance or fulfillment
of the condition.
Subscription upon special terms – an absolute subscription, making the subscriber a stockholder,
and rendering him liable as such, as soon as the subscription is accepted, the special term being
an independent stipulation.
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In case of doubt, a subscription shall be considered one upon special terms in order to protect the
creditors and other subscribers.
General rule: Conditional subscriptions are valid.
Exceptions:
1. The charter or enabling act prohibits the same; or
2. The conditions are such as to render their performance beyond the powers of the
corporation or in violation of law or contrary to public policy.
An application for subscription which is at variance with the terms evidenced in a general form of
subscription must be accepted by the corporation to create a binding contract. (Trillana vs. Quezon
College, Inc.)
A condition facultative as to the debtor renders the whole obligation void. (Trillana vs. Quezon
College, Inc.)
PRE-INCORPORATION SUBSCRIPTIONS
Types of subscriptions as to time of execution:
1. Pre-incorporation subscriptions – subscriptions for shares of stock of a corporation still to
be formed; and
2. Post-incorporation subscriptions – those made or executed after the formation or
organization of the corporation.
General rule: A subscription for shares of stock of a corporation still to be formed is irrevocable.
Exceptions:
1. Lapse of a period of 6 months from the date of subscription;
2. All the subscribers consent to the revocation; or
3. The incorporation of said corporation fails to materialize within 6 months or within a longer
period as may be stipulated in the contract of subscription.
Exception to the exceptions: No pre-incorporation subscription may be revoked after the
submission of the articles on incorporation to the SEC.
Pre-incorporation subscriptions are mandatory in view of Secs. 13 and 14 which mandates that a
corporation may be registered as such only if at least 25% of its authorized capital stock has been
subscribed and that at least 25% of the total subscription has been paid.
Stocks shall not be issued for a consideration less than the par or issued price thereof.
Consideration for the issuance of stock may be any or a combination of any two or more of the ff:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and necessary or
convenient for its use and lawful purposes at a fair valuation equal to the par or issued
value of the stock issued;
3. Labor performed or services actually rendered to the corporation;
4. Previously incurred indebtedness by the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares in exchange for stocks in the event of reclassification or conversion.
Stocks shall not be issued in exchange of promissory notes or future services. Their realization is
uncertain.
Issue – the making of a share contract or contract of subscription; transaction by which a person
becomes the owner of shares and by which new share contracts are created.
The issuance of shares is not dependent on the delivery of a certificate of stock.
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Par or issue price – indicates the amount which the original subscribers are supposed to contribute
to the corporate capital as the basis of the privilege of profit sharing with limited liability.
Valuation of properties given as a consideration for issuance of stock:
1. Tangible properties (particularly real properties):
a. Appraisal report of an independent appraiser;
b. Zonal valuation as certified by the BIR; or
c. Market value indicated in the Real Estate Tax Declaration.
2. Intangible properties (such as patents or copyrights):
a. Initial determination by the incorporators or the board of directors subject to the
approval of the SEC; or
b. Appraisal report of an independent appraiser.
Labor performed or services actually rendered to the corporation must be capable of valuation and
in fact fairly valued.
Two theories in the valuation of property or services:
1. True value rule – the motives or intent of those making the valuation are disregarded and
the sole and decisive factor or question is whether or not the property or services are in
fact worth the value placed on them.
2. Good faith rule – the value of the property or services is a matter about which there can be
an honest difference of opinion. Therefore, if the parties have acted in good faith without
fraud or intentional over-valuation, the transaction cannot be overturned even if the later
becomes evident that the property or services were in fact worth much less than the value
fixed on them initially.
The set-off or satisfaction of a debt due from the corporation is a lawful and valid consideration for
the issuance of stock.
Amounts transferred from unrestricted retained earnings to stated capital – refers to the declaration
and distribution of stock dividends where corporate earnings are capitalized.
Outstanding shares exchanged for stocks in the event of reclassification or conversion – refers to
stocks surrendered to the corporation in exchange for a new or different type of shares. (Ex.
conversion of founder‟s shares to common shares.)
The prohibition against the issuance of shares by corporations except for actual cash or property at
its fair valuation secures absolute equality among stockholders with respect to their liability upon
stock subscriptions. A stipulation is a stock subscription which obligates the subscriber to pay
nothing for the shares except as dividends may accrue upon the stock is a discrimination in favor of
the particular subscriber, and hence, illegal. (National Exchange Co., Inc. vs. Dexter)
A corporation has no power to receive a subscription upon such terms as will operate as a fraud
upon the other subscribers as stockholders by subjecting the particular subscribers to lighter
burden, or by giving his greater rights and privileges, or as fraud upon creditors of the corporation
by withdrawing or decreasing capital. Therefore, an agreement between a corporation and a
particular subscriber, by which the subscription is not to be payable, or is to be payable in part only,
is illegal and void. (National Exchange Co., Inc. vs. Dexter)
CERTIFICATES OF STOCK AND THEIR TRANSFER
Certificate of stock – the piece of paper or document which evidences the ownership of shares and
a convenient instrument for the transfer of the title.
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registration. (Rural Bank of Salinas vs. CA) However, the transferee has no such right when his title
to said shares has no prima facie validity of is uncertain. (Tay vs. CA)
The right to transfer shares of stock may not be unreasonably restricted or prohibited. Every owner
of corporate shares has the same uncontrollable right to alienate them and is under no obligation
from selling them at his sacrifice and for the welfare and benefit of the corporation and other
stockholders. (Padgett vs. Bobcock & Templeton; Fleischer vs. Botica Nolasco)
However, the right to transfer may be “regulated” to give the corporation protection against
colorable or fraudulent transfer or to enable it to know who its stockholders are. Also, as a matter of
policy, the SEC allows the grant of “preferential rights” to existing stockholders and/or the
corporation, giving them the first option to purchase the shares of a selling stockholder within a
reasonable period not exceeding 30 days provided that the same is contained in the articles of
incorporation and in all of the stock certificates to be issued by the corporation. This is considered
“reasonable” since it merely suspends the right to transfer within the period specified.
A corporation may classify its shares and grant such “rights, privileges or restrictions” provided that
such are made in the articles of incorporation and subject to reasonable terms, conditions or
period. (Go Soc & Sons vs. IAC)
Other restrictions on the right to transfer shares:
1. It is not valid, except as between the parties, until recorded in the books of the
corporation;
2. Share of stock against which the corporation holds any unpaid claim shall not be
transferable in the books of the corporation; unpaid claims, refer to claims arising from
unpaid subscription and not to any indebtedness which a stockholder may owe the
corporation such as monthly dues;
3. Restrictions required to be indicated in the articles of incorporation, by-laws and stock
certificates of a close corporation;
4. Restrictions imposed by special law, such as the Public Service Act requiring the approval
of the government agency concerned if it will vest unto the transferee 40% of the capital of
the public service company;
5. Sale to aliens in violation of maximum ownership of shares under the Nationalization
Laws; and
6. Those covered by reasonable agreement of the parties.
Transfer – refers to absolute and unconditional conveyance of the title and ownership of a share of
stock to warrant registration in the books of the corporation in order to bind the latter and other third
persons. (Monserrat vs. Ceron)
Only the transfer or absolute conveyance of the ownership of the title to a share need be entered
and noted upon the books of the corporation in order that such transfer may be valid, therefore,
inasmuch as a chattel mortgage of the aforesaid title is not a complete and absolute alienation of
the dominion and ownership thereof, its entry and notation upon the books of the corporation is not
a necessary requisite to its validity. (Monserrat vs. Ceron)
Chattel mortgages over shares of stock should be registered both at the owner‟s domicile and in
the province where the corporation has its principal office or place of business in order to bind third
persons. The ownership of shares in a corporation is property distinct from the certificates which
are merely the evidence of such ownership. The property in the shares are deemed to be situated
in the province in which the corporation has its principal office or place of business. (Chua Guan vs.
Samahang Magsasaka, Inc.)
All transfers of shares should be entered in the books of the corporation. Transfers not so entered
are invalid as to attaching or execution creditors of the assignors as well as to the corporation and
to subsequent purchasers in good faith, and indeed, as to all persons interested, except the parties
to such transfer. (Uson vs. Diosomito)
A clause contained in the by-laws of a corporation which provides that the owner of a share of
stock cannot sell it to another person except to the defendant corporation is ultra-vires, violative of
the property rights of shareholders, and in restraint of trade. (Fleischer vs. Botica Nolasco Co.)
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Shares of stock being regarded as property, the owner of such shares may, as a general rule,
dispose of them as they see fit, unless the corporation has been dissolved, or unless the right to do
so is properly restricted, or the owner‟s privilege of disposing of his shares has been hampered by
his own action. (Padgett vs. Babcock & Templeton)
Any restriction on a stockholder‟s right to dispose of his shares must be construed strictly; and any
attempt to restrain a transfer of shares is regarded as being in restraint of trade, in the absence of a
valid lien upon its shares, and except to the extent that valid restrictive regulations and agreements
exist and are applicable. Subject only to such restrictions, a stockholder cannot be controlled in or
restrained from exercising his right to transfer by the corporation or its officers or by other
stockholders, even though the sale is to a competitor or the company, or to an insolvent person, or
even though a controlling interest is sold to one purchaser. Therefore, restrictions consisting in the
word “non-transferable” is illegal. (Padgett vs. Babcock & Templeton)
The suspension of the power to sell shares of stock which has a beneficial purpose, results in the
protection of the corporation as well as of the individual parties to the contract, and is reasonable
as to the length of time of suspension is valid. (Lambert vs. Fox)
An indorsee of an undelivered certificate of stock has no power to effectively transfer the shares to
other persons or his nominees. For an effective transfer of shares of stock the mode and manner of
transfer prescribed by law must be followed. (Embassy Farms, Inc. vs. CA)
Indorsement of the certificate of stock is a mandatory requirement of law for an effective transfer of
a certificate of stock. (Razon vs. IAC)
The right of a transferee/assignee to have stocks transferred to his name is an inherent right
flowing from his ownership of the stocks. The corporation‟s obligation to register is ministerial.
(Rural Bank of Salinas vs. CA)
The pledge of shares of stock does not vest ownership of such shares to the pledgee. The pledgor
remains the owner during the pendency of the pledge and prior to foreclosure and sale. Therefore,
the pledgee has no right to demand the registration of the pledged shares in his name. In order that
a writ of mandamus may issue, it is essential that the person petitioning for the same has a clear
legal right to the thing demanded and that is it the imperative duty of the respondent to perform the
act required. (Tay vs. CA)
Without a stock certificate, which is the evidence of ownership of corporate stock, the assignment
of corporate shares is effective only between the parties to the transaction. (Nava vs. Peers
Marketing)
For a valid transfer of stocks, there must be strict compliance with the mode of transfer prescribed
by law.
1. There must be delivery of the stock certificate;
2. The certificate must be endorsed by the owner or his attorney-in-fact or other persons
legally authorized to make the transfer; and
3. To be valid against third parties, the transfer must be recorded in the books of the
corporation.
An assignment, without endorsement and delivery, while valid as among the parties, does not
necessarily make the transfer effective. The assignees cannot enjoy the status of a stockholder,
cannot vote nor be voted for, and will not be entitled to dividends, insofar as the assigned shares
are concerned. (Rural Bank of Lipa City, Inc. vs. CA)
Delivery is not essential where it appears that the person sought to be held as stockholders are
officers of the corporation, and have custody of the stock books. (Tan vs. SEC)
After a valid transfer of share, the right to have such registered commences to exist. However, it
would not follow that said right should be exercised immediately or within a definite period. (Won
vs. Wack Wack Golf & Country Club, Inc.)
Certificates of stock are not negotiable instruments. Consequently, a transferee under a forged
assignment acquires no title which can be asserted against the true owner, unless his own
negligence has been such as to create an estoppel against him. If the owner of the certificate has
endorsed it in blank, and it is stolen from him, no title is acquired by an innocent purchaser for
value. (De Los Santos vs. Republic)
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Failure or refusal of the corporation, through its board of directors to enforce or collect payment of
unpaid subscription will not prevent the creditors or the receiver of the corporation to institute a
court action to collect the unpaid portion thereof (trust fund doctrine).
Procedure for the enforcement of payment through board action:
1. The board of directors, by a formal resolution, declares the whole or any percentage of
unpaid subscriptions to be due and payable on a specific date. However, if the contract of
subscription provides the date or dates when payment is due, no “call” declaration of the
board is necessary;
2. The stockholders concerned are given notice of the board resolution by the corporation
either personally or by registered mail. Publication of the notice of call is not required
unless the by-laws provide otherwise. Notice is not likewise necessary if the contract of
the subscription stipulates a specific date when any unpaid portion is due and payable;
3. Payment shall be made in the date specified in the call or on the date provided for in the
contract of subscription;
4. Failure to pay on the date required in the call or as specified in the contract of subscription
will render the entire balance due and payable and making the stockholder liable for the
interest;
5. If within 30 days from the date stated in the call or as may be provided in the contract of
subscription no payment is made, all the stock covered by the subscription shall become
delinquent and shall be subject to a delinquency sale;
6. The board, by resolution, orders the sale of the delinquent stock stating the amount due
and the date, time and place of the sale;
7. The sale shall be made not less than 30 days nor more than 60 days from the date the
stocks became delinquent;
8. Notice of the sale, with the copy of the board resolution should be sent to every delinquent
stockholder either personally or by registered mail;
9. Publication of the notice of sale must be made once a week for two consecutive weeks in
the newspaper of general circulation in the province or city where the principal officer is
located;
10. Sale at public auction if no payment is made by the delinquent stockholder in favor of the
bidder who offered to pay the full amount of the balance in the subscription, inclusive of
interest, cost of advertisement and expenses for the smallest number of shares;
11. Registration or transfer of the shares of stock in the name of the bidder and corresponding
issuance of the stock certificate covering the shares successfully bidded;
12. If there be any remaining shares, the same shall be credited in favor of the delinquent
stockholder who shall be entitled to the issuance of a certificate of stock covering such
shares;
13. If there is no bidder at the public auction who offers to pay the total amount due plus
interest, cost and expenses, the corporation may, subject to the provisions of the Code,
bid for the same and the total amount due shall be credited or paid in full in the corporate
books; and
14. The shares so purchased by the corporation shall be vested in the latter as treasury
shares.
Highest bidder – is such bidder who shall offer to pay the full amount of the balance on the
subscription together with accrued interest, cost of advertisement and expenses of sale, for the
smallest number of shares or fraction of a share.
Grounds to question the delinquency sale:
1. Irregularity or defect in the notice of sale; or
2. Irregularity or defect in the sale itself.
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Two conditions before an action to recover delinquent stocks irregularly sold may be allowed:
1. The party seeking to maintain such action first pays or tenders to the party holding the
stock the sum for which the same was sold, with interest from the date of the sale at the
legal rate; and
2. The action shall be commenced by the filing of a complaint within six months from the
date of the sale.
A “call” is a condition precedent before the right of action to institute a recovery suit accrues. A
demand is required before a debtor may incur a delay in the performance of his obligation.
Instances when a “call” is not necessary:
1. The contract of subscription provides for a date or dates when payment is due; or
2. The corporation has become insolvent.
A subscription for shares of stock does not require an express promise to pay the amount
subscribed, as the law implies a promise to pay on the part of the subscriber. The subscriber is as
much bound to pay the amount of the share subscribed by him as he would be to pay any other
debt, and the right of the company to demand payment is no less incontestable. (Velasco vs.
Poizat)
Notwithstanding the fact that the by-laws of the corporation provides for a method for the collection
of the unpaid portion of stock subscriptions, the corporation may still make use of the methods
provided by the Code. (De Silva vs. Aboitiz & Co.)
General rule: A valid and binding subscription for stock of a corporation cannot be cancelled so as
to release the subscriber from liability thereon.
Exception: Consent of all the stockholders is given.
Exceptions to the exception:
1. Bona fide compromise;
2. Set-off of a debt due from the corporation; or
3. Release supported by consideration. (Lingayen Gulf vs. Baltazar)
The NLRC has no jurisdiction to determine intra-corporate disputes between the stockholder and
the corporation as in the matter of unpaid subscriptions. (Apocada vs. NLRC)
Unpaid subscriptions are not due and payable until a call is made by the corporation for payment.
(Apocada vs. NLRC)
Subscription to the capital of a corporation constitutes a fund to which the creditors have a right to
look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon
any unpaid stock subscription in order to realize assets for the payment of its debt. (Lumanlan vs.
Cura)
The President of the Philippines is devoid of the prerogative of suspending the operation of any
stature or any of its items. Thus the President cannot condone the payment of stock subscriptions
in the event that the counterpart fund to be invested by the government would not be available.
(PNB vs. Bitulok Sawmill, Inc.)
A stockholder is personally liable for the financial obligations of a corporation to the extent of his
unpaid subscription. (Edward Keller & Co., Ltd. vs. Cob Group Marketing, Inc.)
The subscription to capital stock of the corporation, unless otherwise stipulated, is not payable at
the moment of the subscriptions but on a subsequent date which may be fixed by the corporation.
(Garcia vs. Suarez)
Shares of stock become delinquent when no payment is made on the balance of all or any portion
of the subscription on the date or dates fixed in the contract of subscription without need of call, or
on the date specified by the board of directors pursuant to a call made by it.
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5. The surviving or consolidated corporation shall be responsible and liable for all the
liabilities and obligations of each of the constituent corporations; and any pending claim,
action or proceeding brought by or against any of such constituent corporations may be
prosecuted by or against the surviving or consolidated corporation. The rights of creditors
or liens upon the property of any of such constituent corporations shall not be impaired by
such merger or consolidation.
Merger or consolidation does not become effective upon the mere agreement of the constituent
corporations. It shall be effective only upon the issuance of a certificate of merger. (Associated
Bank vs. CA)
CHAPTER 13: APPRAISAL RIGHT
Appraisal right – the method of paying a shareholder for the taking of his property; the statutory
means whereby a stockholder can avoid the conversion of his property into another property not of
his own choosing. The purpose of the right is to protect the property rights of dissenting
stockholders from actions by the majority shareholders which alters the nature and character of
their investment. It is a right granted to dissenting stockholders on certain corporate or business
decisions to demand payment of the fair market value of their shares.
Instances when a stockholder may have the right to dissent and demand payment of the fair value
of his shares:
1. In case any amendment to the articles of incorporation has the effect of:
a. Changing or restricting the rights of any stockholder or class of shares;
b. Authorizing preferences in any respect superior to those of outstanding shares of
any class; or
c. Extending or shortening the term of corporate existence.
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in the Code; and
3. In case of merger or consolidation.
Other instances provided for in the Code:
1. Investment of corporate funds in another corporation or business or for any other purpose;
2. In a close corporation, a stockholder has the right to compel the corporation for any
reason to purchase his shares at their fair value which shall not be less than the par or
issued value when the corporation has sufficient assets to cover it debts and liabilities,
exclusive of capital stock.
Requirements and procedure for the exercise of the appraisal right:
1. The stockholder must have voted against the proposed corporate action in any of the
instances allowed by law for the exercise of the appraisal right;
2. A written demand for payment must be made by the dissenting stockholder within 30 days
after the date on which the vote was taken. Failure to make the demand within the said
period shall be deemed a waiver of the appraisal right;
3. Surrender of the certificate of stock by the dissenting stockholder for notation in the
corporate books and payment by the corporation of the fair market value of said shares as
of the day prior to the date on which the vote was taken, excluding any appreciation or
depreciation in anticipation of such corporate action. If the stockholder and the corporation
cannot agree on the fair market value thereof, the same shall be determined by
appraisers;
4. The corporation must have unrestricted retained earnings in it books to cover the
payment of the fair value of the shares of the dissenting stockholder;
5. Upon payment of the shares by the corporation, the dissenting stockholder shall transfer
his shares to the corporation.
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set forth in the articles of incorporation and is not distributable to its incorporators, members or
officers, since mere intangible or pecuniary benefits of the members does not change the nature of
the corporation.
The determination of whether or not a non-stock corporation can engage in profit-making business
or activity depends largely on the purpose or purposes indicated in the articles of incorporation. If
the business activity is authorized in the said articles, necessary, incidental or essential thereto, the
same may be undertaken by the corporation, otherwise, not, as it would be an ultra-vires act.
Purposes: Charitable, religious, educational, professional, cultural, fraternal, literary, scientific,
social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any
combination thereof (non-exclusive).
The provisions governing stock corporation, when pertinent, shall be applicable to non-stock
corporations.
MEMBERSHIP AND VOTING RIGHTS
General rule: Each member, regardless of class, shall be entitled to one vote (no cumulative
voting).
Exception: The right to vote is limited, broadened or denied in the articles of incorporation or the by-
laws.
General rule: A member may vote by proxy.
Exception: Proxy voting is denied in the articles of incorporation or the by-laws.
Voting by mail or other similar means by members of non-stock corporations may be authorized by
the by-laws of non-stock corporations with the approval of, and under such conditions which may
be prescribed by the SEC.
General rule: Membership in a non-stock corporation and all rights arising therefrom are personal
and non-transferable.
Exception: The articles of incorporation or the by-laws provide otherwise.
Membership in non-stock corporations may be acquired by complying with the provisions of its
rules prescribed in the by-laws. In absence of restrictions, a non-stock corporation may act
arbitrarily and exclude any persons it may see fit, and the courts have no power to interfere. It is
free to fix qualifications for membership and to provide for termination of membership.
General rule: The board of directors of a non-stock corporation shall have the authority to admit
members.
Exception: The by-laws provide otherwise.
Membership shall be terminated in the manner and for the causes provided in the articles of
incorporation or the by-laws.
General rule: Termination of membership shall have the effect of extinguishing all rights of a
member in the corporation or in its property.
Exception: The articles of incorporation or the by-laws provide otherwise.
In terminating membership, strict compliance with the manner and procedure laid down in the by-
laws must be observed, otherwise it may render the expulsion ineffective and invalid. (Carmoan vs,
PED)
In absence of any provision in the articles of incorporation or by-laws relative to the manner and
causes of termination, the power is nonetheless inherent in the following situations:
1. When an offense is committed which, although it has no immediate relation to a member‟s
duty as such, it is so infamous as to render him unfit for society of honest men, and which
is indictable at common law;
2. When the offense is a violation of his duty as a member of the corporation; and
3. When the offense is of a mixed nature, being both against his duty as a member of the
corporation, and also indictable at common law.
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As to whether or not a member should be expelled or maintained is the established right of the
corporation to determine and the courts are without authority to strip a member of his membership
without cause.
Courts cannot strip a member of a non-stock corporation of his membership therein without cause.
Otherwise, that would be an unwarranted and undue interference with the well established right of
a corporation to determine its membership. (Chinese YMCA vs. Ching)
TRUSTEES AND OFFICERS
Non-stock or special corporations may designate their governing boards by any name through their
articles of incorporation or their by-laws.
General rule: The number of trustees in a non-stock corporation may exceed 15.
Exception: The articles of incorporation or the by-laws provide otherwise.
General rule: The term of office of the board of trustees may be staggered. They shall classify
themselves in order that 1/3 of their number shall expire every year and subsequent elections of
trustees comprising 1/3 shall be held annually.
Exception: The articles of incorporation or the by-laws provide otherwise.
Qualifications of trustees:
1. He is a member of the corporation;
2. Majority thereof must be residents of the Philippines; and
3. Other qualifications as may be provided for in the by-laws.
General rule: officers of a non-stock corporation may be directly elected by the members.
Exception: The articles of incorporation or the by-laws provide otherwise.
Trustees elected to fill vacancies occurring before the expiration of a particular term hold office only
for the unexpired period.
General rule: The courts will not interfere on matters involving the internal affairs of an
unincorporated association such as elections, the manner by which it was conducted and the
results thereof. (Lions Club International vs. CA)
Exceptions:
1. There is fraud, oppression or bad faith;
2. The action complained of is capricious, arbitrary or unjustly discriminatory;
3. Property and civil rights are invaded;
4. The proceedings are violative of the laws of society, or the law of the land, as by depriving
a person of due process of law;
5. There is lack of jurisdiction on the part of the tribunal conducting the proceedings;
6. The organization exceeds its powers;
7. The proceedings are illegal; or
8. An incorporated association or its members avail of the remedy of instituting an intra-
corporate dispute case.
General rule: Regular or special meetings of members of a non-stock corporation shall be held in
the city or municipality where the principal office is located, and if practicable in the principal office
of the corporation.
Exceptions:
1. The by-laws of the corporation provide otherwise; and
2. Metro Manila is considered a city or municipality.
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Requirements for meetings held outside the location of the principal office as provided for by the
by-laws:
1. Proper notice is sent to all members indicating the date, time and place of the meeting;
and
2. The place of meeting must be within the Philippines.
General rule: All proceedings and business transactions at a meeting improperly held or called are
invalid.
Exception: All of the members are present or duly represented at the meeting.
DISTRIBUTION OF ASSETS UPON DISSOLUTION
Rules of distribution:
1. All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or
adequate provision shall be made therefore;
2. Assets held by the corporation upon a condition requiring return, transfer or conveyance,
and which condition occurs by reason of the dissolution, shall be returned, transferred or
conveyed in accordance with such requirements;
3. Assets received and held by the corporation subject to limitations permitting their use only
for charitable, religious, benevolent, educational or similar purposes, but not held upon a
condition requiring return, transfer or conveyance by reason of the dissolution, shall be
transferred or conveyed to one or more corporations, societies or organizations engaged
in activities in the Philippines substantially similar to those of the dissolving corporation
according to a plan of distribution;
4. Assets other than those mentioned in the preceding paragraphs, if any, shall be
distributed in accordance with the provisions of the articles of incorporation or the by-laws,
to the extent that the articles of incorporation or the by-laws, determine the distributive
rights of members, or any class or classes of members, or provide for distribution; and
5. In any other case, assets may be distributed to such persons, societies, organizations or
corporations, whether or not organized for profit, as may be specified in a plan of
distribution.
Procedure and requirements for a plan of distribution of assets:
1. Majority vote of the board of trustees adopting a plan of distribution;
2. Approval of such plan by at least 2/3 of the members having voting rights present or
represented by proxy at a regular or special meeting for that purpose; and
3. Prior written notice setting forth the proposed plan of distribution or a summary thereof
and the date, time and place of such meeting shall be given to each member entitled to
vote, within the time and in the manner provided in the Code for the giving of notice of
meetings to members.
CHAPTER 15: CLOSE CORPORATIONS
Close corporation - one whose articles of incorporation provide that:
1. All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held
of record by not more than a specified number of persons, not exceeding 20;
2. All the issued stock of all classes shall be subject to one or more specified restrictions on
transfer permitted by Title XV of the Code; and
3. The corporation shall not list in any stock exchange or make any public offering of any of
its stock of any class.
Absent any of the three requisites, a corporation cannot be considered a close corporation and
would thus be governed by the general provisions on ordinary corporations.
A corporation does not become a close corporation just because a husband and wife owns 99.86%
of the capital stock. (San Juan Structural Steel vs. CA)
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A corporation shall not be deemed a close corporation when at least 2/3 of its voting stock or voting
rights is owned or controlled by another corporation which is not a close corporation.
General rule: Any corporation may be incorporated as a close corporation.
Exceptions:
1. Mining or oil companies;
2. Stock exchanges;
3. Banks;
4. Insurance companies;
5. Public utilities;
6. Educational institutions; and
7. Corporations declared to be vested with public interest.
Sec. 140 authorizes the NEDA to recommend to the legislature the setting of maximum limits to
family or group ownership of stock in corporation vested with public interest, and the determination
of whether or not it should be vested with public interest is within its domain.
The provisions of Title XV of the Code shall primarily govern close corporations. However, the
provisions of other Titles of the Code apply suppletorily.
A close corporation may partake the nature of a partnership in that the stockholders thereof take an
active role in the management of the corporate affairs either as directors, officers or even perhaps
as partners in management which is akin to the partnership form of business.
The articles of incorporation of a close corporation may provide:
1. For a classification of shares or rights and the qualifications for owning or holding the
same and restrictions on their transfers as may be stated therein;
2. For a classification of directors into one or more classes, each of whom may be voted for
and elected solely by a particular class of stock;
3. For a greater quorum or voting requirements in meetings of stockholders or directors;
4. That the business of the corporation shall be managed by the stockholders of the
corporation rather than by a board of directors. So long as this provision continues in
effect:
a. No meeting of stockholders need be called to elect directors;
b. Unless the context clearly requires otherwise, the stockholders of the corporation
shall be deemed to be directors; and
c. The stockholders of the corporation shall be subject to all liabilities of directors.
5. That all officers or employees or that specified officers or employees shall be elected or
appointed by the stockholders, instead of by the board of directors.
In order to bind purchasers in good faith, restrictions on the right to transfer shares must appear in:
1. The articles of incorporation;
2. The by-laws; and
3. The certificate of stock.
Restrictions on the right to transfer shares shall not be more onerous than granting the existing
stockholders or the corporation the option to purchase the shares of the transferring stockholder
within reasonable terms, conditions or period. If upon the expiration of said period, the existing
stockholders or the corporation fails to exercise the option to purchase, the transferring stockholder
may sell his shares to any third person.
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General rule: A close corporation may refuse to register the transfer of stock in the name of the
transferee who has or is conclusively presumed to have notice that:
1. He is not eligible to be a holder of stock of the corporation;
2. Transfer of stock to him causes the stock of the corporation to be held by more than the
number of persons permitted by its articles of incorporation to hold stock of the
corporation; or
3. The transfer of stock is in violation of a restriction on transfer of stock.
Exceptions:
1. The transfer of stock has been consented to by all the stockholders; or
2. The close corporation has amended its articles of incorporation.
Options granted to the transferee:
1. Rescind the transfer; or
2. Recover under any applicable warranty, express or implied.
The term "transfer" is not limited to a transfer for value.
Agreements by and among stockholders executed before the formation and organization of a close
corporation, signed by all stockholders, shall survive the incorporation of such corporation and shall
continue to be valid and binding between and among such stockholders, if such be their intent, to
the extent that such agreements are not inconsistent with the articles of incorporation, irrespective
of where the provisions of such agreements are contained, except those required by this Title to be
embodied in said articles of incorporation.
An agreement between two or more stockholders, if in writing and signed by the parties thereto,
may provide that in exercising any voting rights, the shares held by them shall be voted as therein
provided, or as they may agree, or as determined in accordance with a procedure agreed upon by
them.
No provision in any written agreement signed by the stockholders, relating to any phase of the
corporate affairs, shall be invalidated as between the parties on the ground that its effect is to make
them partners among themselves.
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A written agreement among some or all of the stockholders in a close corporation shall not be
invalidated on the ground that it so relates to the conduct of the business and affairs of the
corporation as to restrict or interfere with the discretion or powers of the board of directors:
Provided, That such agreement shall impose on the stockholders who are parties thereto the
liabilities for managerial acts imposed by this Code on directors.
To the extent that the stockholders are actively engaged in the management or operation of the
business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties
to each other and among themselves. Said stockholders shall be personally liable for corporate
torts unless the corporation has obtained reasonably adequate liability insurance.
Sec. 101. When board meeting is unnecessary or improperly held. - Unless the by-laws provide
otherwise, any action by the directors of a close corporation without a meeting shall nevertheless
be deemed valid if:
General rule: Any action by the directors of a close corporation without a meeting is invalid.
Exceptions:
1. Written consent is signed by all the directors;
2. All the stockholders have actual or implied knowledge of the action and make no prompt
objection thereto in writing;
3. The directors are accustomed to take informal action with the express or implied
acquiescence of all the stockholders; or
4. All the directors have express or implied knowledge of the action in question and none of
them makes prompt objection thereto in writing.
(If a director's meeting is held without proper call or notice, an action taken therein within
the corporate powers is deemed ratified by a director who failed to attend, unless he
promptly files his written objection with the secretary of the corporation after having
knowledge thereof.)
Exception to the exceptions: The by-laws provide otherwise.
General rule: The pre-emptive right of stockholders in close corporations shall extend to all stock to
be issued, including reissuance of treasury shares, whether for money, property or personal
services, or in payment of corporate debts.
Exception: The articles of incorporation provide otherwise.
Any amendment to the articles of incorporation which seeks to:
1. Delete or remove any provision required by Title XV of the Code to be contained in the
articles of incorporation, or
2. Reduce a quorum or voting requirement stated in said articles of incorporation,
must be approved by the affirmative vote of at least 2/3 of the outstanding capital stock, whether
with or without voting rights, or of such greater proportion of shares as may be specifically provided
in the articles of incorporation for amending, deleting or removing any of the aforesaid provisions,
at a meeting duly called for the purpose.
Deadlock - the directors or stockholders are so divided respecting the management of the
corporation's business and affairs that the votes required for any corporate action cannot be
obtained, with the consequence that the business and affairs of the corporation can no longer be
conducted to the advantage of the stockholders generally.
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In case of a deadlock and upon written petition by any stockholder, the SEC has the power to
arbitrate the dispute and the authority to:
1. Cancel or alter any provision contained in the articles of incorporation, by-laws, or any
stockholder's agreement;
2. Cancel, alter or enjoin any resolution or act of the corporation or its board of directors,
stockholders, or officers;
3. Direct or prohibit any act of the corporation or its board of directors, stockholders, officers,
or other persons party to the action;
4. Require the purchase at their fair value of shares of any stockholder, either by the
corporation regardless of the availability of unrestricted retained earnings in its books, or
by the other stockholders;
5. Appoint a provisional director;
6. Dissolve the corporation; or
7. Grant such other relief as the circumstances may warrant.
Provisional director:
1. A provisional director shall be an impartial person who is neither a stockholder nor a
creditor of the corporation or of any subsidiary or affiliate of the corporation, and whose
further qualifications, if any, may be determined by the SEC.
2. A provisional director is not a receiver of the corporation and does not have the title and
powers of a custodian or receiver.
3. A provisional director shall have all the rights and powers of a duly elected director of the
corporation, including the right to notice of and to vote at meetings of directors, until such
time as he shall be removed by order of the SEC or by all the stockholders.
4. His compensation shall be determined by agreement between him and the corporation
subject to approval of the SEC, which may fix his compensation in the absence of
agreement or in the event of disagreement between the provisional director and the
corporation.
Any stockholder of a close corporation may, for any reason, compel the said corporation to
purchase his shares at their fair value, which shall not be less than their par or issued value, when
the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital
stock.
Any stockholder of a close corporation may, by written petition to the SEC, compel the dissolution
of such corporation whenever:
1. Any of acts of the directors, officers or those in control of the corporation is illegal, or
fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any
stockholder; or
2. Corporate assets are being misapplied or wasted.
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In a close corporation, a corporate action taken at a board meeting without proper call or notice is
deemed ratified by the absent director unless the latter promptly files his written objection with the
secretary of the corporation after having knowledge of the meeting. (Manuel Dulay Enterprises vs.
CA)
Stockholders who actively engage in the management or operation of the business and affairs of a
close corporation shall be personally liable for corporate torts unless the corporation has obtained
reasonably adequate liability insurance. Essentially a tort consists in the violation of a right given or
the omission of a duty imposed by law. Article 283 of the Labor Code mandates the employer to
grant separation pay to employees in case of closure or cessation of operations of establishment or
undertaking not due to serious business losses or financial reverses. CFTI failed to comply with this
law-imposed duty or obligation. Consequently, its stockholder who was actively engaged in the
management or operation of the business should be held personally liable. (Naguiat vs. NLRC)
CHAPTER 16: SPECIAL CORPORATIONS
EDUCATIONAL CORPORATIONS
Educational corporations – those which provide facilities for teaching or instruction.
Educational corporations are governed primarily by special laws and secondarily by the Code.
Educational institutions are required to incorporate within 90 days after their recognition as such.
However, failure to comply will not immune the educational institution from suit as a corporation.
A favorable recommendation of the Secretary of Education, Culture and Sports is required before
the SEC accepts or approves the articles of incorporation or by-laws of any educational institution.
Trustees of non-stock educational corporations shall not be less than 5 nor more than fifteen 15, in
multiples of 5.
Unless otherwise provided in the articles of incorporation on the by-laws, the board of trustees of
incorporated schools, colleges, or other institutions of learning shall, as soon as organized, so
classify themselves that the term of office of 1/5 of their number shall expire every year. Trustees
thereafter elected to fill vacancies, occurring before the expiration of a particular term, shall hold
office only for the unexpired period. Trustees elected thereafter to fill vacancies caused by
expiration of term shall hold office for 5 years. A majority of the trustees shall constitute a quorum
for the transaction of business. The powers and authority of trustees shall be defined in the by-
laws.
For institutions organized as stock corporations, the number and term of directors shall be
governed by the provisions on stock corporations.
General rule: Educational institutions shall be owned solely by citizens of the Philippines or
corporations or associations at least 60% of the capital of which is owned by such citizens. The
control and administration of educational institutions shall be vested in citizens of the Philippines.
Exception: Educational institutions established by religious groups and mission boards.
General rule: No educational institution shall be established exclusively for aliens and no group of
aliens shall comprise more than 1/3 of the enrollment in any school.
Exception: The rule shall not apply to schools established for foreign diplomatic personnel and their
dependents and, unless otherwise provided by law, for other foreign temporary residents.
RELIGIOUS CORPORATIONS
Religious corporation – one composed entirely of spiritual persons which is created for the
furtherance of religion or perpetuating the rights of the church or for the administration of church or
religious work or property.
Classes of religious corporations:
1. Corporations sole; and
2. Religious societies.
Religious corporations are governed by the appropriate chapter of the Code and the general
provisions on non-stock corporations.
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Corporation Sole
Corporation sole – consists of one person only and his successor in some particular station, who
are incorporated by law in order to give them some legal capacities and advantages, particularly
that of perpetuity, which in their natural persons they could not have had.
Purpose – Administration and management, as trustee, of the affairs, properties and temporalities
of any religious denomination, sect or church.
Who – Chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious
denomination, sect or church.
Requirements and procedure of incorporation:
1. The chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such
religious denomination, sect or church must file the articles of incorporation with the SEC
which must contain the following:
a. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding elder
of his religious denomination, sect or church and that he desires to become a
corporation sole;
b. That the rules, regulations and discipline of his religious denomination, sect or
church are not inconsistent with his becoming a corporation sole and do not
forbid it;
c. That as such chief archbishop, bishop, priest, minister, rabbi or presiding elder,
he is charged with the administration of the temporalities and the management of
the affairs, estate and properties of his religious denomination, sect or church
within his territorial jurisdiction, describing such territorial jurisdiction;
d. The manner in which any vacancy occurring in the office of chief archbishop,
bishop, priest, minister, rabbi of presiding elder is required to be filled, according
to the rules, regulations or discipline of the religious denomination, sect or church
to which he belongs; and
e. The place where the principal office of the corporation sole is to be established
and located, which place must be within the Philippines.
2. The articles of incorporation may include any other provision not contrary to law for the
regulation of the affairs of the corporation.
3. The articles of incorporation must be:
Verified by affidavit or affirmation of the chief archbishop, bishop, priest, minister,
rabbi or presiding elder, as the case may be;
Accompanied by a copy of the commission, certificate of election or letter of
appointment of such chief archbishop, bishop, priest, minister, rabbi or presiding
elder; and
Duly certified to be correct by any notary public.
4. From and after the filing of the aforementioned documents with the SEC, such chief
archbishop, bishop, priest, minister, rabbi or presiding elder shall become a corporation
sole.
All temporalities, estate and properties of the religious denomination, sect or church administered
or managed by the corporation sole shall be held in trust for the use, purpose, behalf and sole
benefit of the religious denomination, sect or church, including hospitals, schools, colleges, orphan
asylums, parsonages and cemeteries thereof.
A provision relative to its term of existence is not required since a corporation sole is supposed to
exist in perpetuity.
General rule: A corporation acquires juridical personality only upon the issuance of a certificate of
incorporation by the SEC.
Exception: A corporation sole becomes endowed with corporate personality after filing of the
verified articles of incorporation together with other required documents.
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A corporation sole may purchase and hold real estate and personal property for its church,
charitable, benevolent or educational purposes, and may receive bequests or gifts for such
purposes.
General rule: A court order is required before a corporation sole may sell or mortgage real property
held by it. Before such an order is granted, a verified petition must be made by the chief
archbishop, bishop, priest, minister, rabbi or presiding elder acting as corporation sole and it must
be shown that notice of the application has been given as directed by the court and that it is to the
interest of the corporation that the petition be granted. However, such application may be opposed
by any member of the religious denomination, sect or church represented by the corporation sole.
Exception: Court intervention is not necessary when the rules, regulations and discipline of the
religious denomination, sect or church, religious society or order concerned represented by such
corporation sole regulate the method of acquiring, holding, selling and mortgaging real estate and
personal property.
Registration of real property in the name of the corporation sole does not vest ownership unto the
head thereof.
The constitutional requirement that 60% of the capital of a corporation must be owned by Filipino
citizens before it may register land in its own name does not apply to a corporation sole. A
corporation sole has no nationality and the framers of the constitution did not have in mind the
corporation sole when it provided for such requirement. (Roman Catholic Apostolic Adm. of Davao,
Inc. vs. LRC)
Whether or not a corporation sole, or any private corporation for that matter, can acquire alienable
land of the public domain depends upon the character of the land at the time of the institution of the
registration proceeding. If it still forms part of the public domain, no. If it is private, yes. (Republic
vs. INC)
Under the Public Land Act, alienable public land may be subject to registration by a possessor if
he, personally or through his predecessor-in-interest, had openly, continuously, exclusively and
notoriously possessed the same for 30 years. The law creates the legal fiction whereby the land,
upon completion of the requisite period ipso jure and without the need of judicial or other sanction,
ceases to be public land and becomes private property. (Director of Lands vs. CA)
In case of vacancy in the office of the “head” of the corporation, the person authorized by the rules,
regulations or discipline of the denomination shall exercise all the powers and authority of the
corporation sole during such vacancy and until such vacancy has been filled-up.
The successors in office shall become the corporation sole and shall be permitted to transact
business as such only upon the filing with the SEC of a copy of their commission, certificate of
election, or letters of appointment, duly certified by a notary public.
Requirements for the voluntary dissolution of corporations sole:
1. Filing with the SEC of a verified declaration of dissolution which must set forth the
following:
a. The name of the corporation;
b. The reason for dissolution and winding up;
c. The authorization for the dissolution of the corporation by the particular religious
denomination, sect or church; and
d. The names and addresses of the persons who are to supervise the winding up of
the affairs of the corporation.
2. Approval of the SEC.
Religious Societies
Religious society – a body of person associated together for the purpose of maintaining religious
worship.
Purpose – the administration of its temporalities or for the management of its affairs, properties and
estate
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Who – any religious society or religious order, or any diocese, synod, or district organization of any
religious denomination, sect or church.
Requirements and procedure for incorporation:
1. Filing of the articles of incorporation with the SEC;
2. The articles of incorporation must set forth the following:
a. That the religious society or religious order, or diocese, synod, or district
organization is a religious organization of a religious denomination, sect or
church;
b. That at least 2/3 of its membership have given their written consent or have
voted to incorporate, at a duly convened meeting of the body;
c. That the incorporation of the religious society or religious order, or diocese,
synod, or district organization desiring to incorporate is not forbidden by
competent authority or by the constitution, rules, regulations or discipline of the
religious denomination, sect, or church of which it forms a part;
d. That the religious society or religious order, or diocese, synod, or district
organization desires to incorporate for the administration of its affairs, properties
and estate;
e. The place where the principal office of the corporation is to be established and
located, which place must be within the Philippines; and
f. The names, nationalities, and residences of the trustees elected by the religious
society or religious order, or the diocese, synod, or district organization to serve
for the first year or such other period as may be prescribed by the laws of the
religious society or religious order, or of the diocese, synod, or district
organization, the board of trustees to be not less than 5 nor more than 15.
3. The articles of incorporation must be verified by the affidavit of the presiding elder,
secretary, or clerk or other member of such religious society or religious order, or diocese,
synod, or district organization of the religious denomination, sect or church.
4. Issuance of the SEC of the certificate of incorporation.
The articles of incorporation of a religious society need not indicate a term since it is supposed to
exist in perpetuity.
CHAPTER 17: DISSOLUTION
Dissolution – the extinguishment of the corporate franchise and the termination of corporate
existence.
General rule: When a corporation is dissolved, it ceases to be a juridical entity and can no longer
pursue the business for which it is incorporated.
Exception: The corporation will continue as a body corporate for another period of 3 years from the
time it is dissolved for the purpose of winding up its affairs and the liquidation of its assets.
Three modes of dissolution:
1. By expiration of the corporate term;
2. By voluntary surrender of its primary franchise (voluntary dissolution); or
3. By the revocation of its corporate franchise (involuntary dissolution).
EXPIRATION OF CORPORATE TERM
General rule: A corporation registered under the Corporation Code is required to indicate its term of
existence in the articles of incorporation.
Exceptions:
1. Corporations sole; and
2. Religious societies.
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A corporation ceases to exist and is automatically dissolved upon the expiration of the term
indicated in its articles of incorporation without the need of formal proceeding. There is no need to
for the institution of a proceeding for quo warranto to determine the time and date of the dissolution
of a corporation because the period of corporate existence is provided in the articles of
incorporation. (PNB vs. CFI)
SURRENDER OF FRANCHISE (VOLUNTARY DISSOLUTION)
Three modes of voluntary dissolution:
1. Voluntary dissolution where no creditors are affected;
2. Voluntary dissolution where creditors are affected; and
3. Shortening of corporate term.
Voluntary dissolution where no creditors are affected
Formal and procedural requirements for voluntary dissolution where no creditors are affected:
1. Majority vote of the board of directors or trustees;
2. Sending of notice to each stockholder or member either by registered mail or personal
delivery at least 30 days prior to the meeting (scheduled by the board for the purpose of
submitting the board action to dissolve the corporation for approval of the stockholders or
members);
3. Publication of the notice of time, place and subject of the meeting for 3 consecutive weeks
in a newspaper published in the place where the principal office of said corporation is
located or in a newspaper of general circulation in the Philippines;
4. Resolution adopted by the affirmative vote of the stockholders owning at least 2/3 of the
outstanding capital stock or 2/3 of the members at the meeting duly called for the purpose;
5. A copy of the resolution authorizing the dissolution must be certified by a majority of the
board of directors or trustees and countersigned by the corporate secretary; and
6. Issuance of a certificate of dissolution by the SEC.
The requirements and formalities provided by law for the dissolution of corporations are mandatory
such that failure to comply therewith will have no effect on the legal existence of the corporation. A
corporation being a creation of law may only terminate its existence in the manner prescribed by
law.
A mere resolution by the stockholders or the board of directors of a corporation to dissolve the
same does not affect the dissolution of a corporation. (Daguhoy Enterprises vs. Ponce)
Voluntary dissolution where creditors are affected
Formal and procedural requirements for voluntary dissolution where creditors are affected:
1. Affirmative vote of the stockholder representing at least 2/3 of the outstanding capital
stock or at least 2/3 of the members at a meeting duly called for that purpose;
2. Petition for the dissolution shall be filled with the SEC signed by the majority of its board of
directors or trustees or other officers having the management of its affairs, verified by the
president or secretary or one of its directors or trustees, setting forth all claims and
demands against it;
3. Issuance of an order by the SEC reciting the purpose of the petition and fixing the date on
or before which objections thereto may be filed by any person, which date shall not be
less than 30 days nor more than 60 days after entry of the order;
4. Before such date, a copy of the order must be published once a week for 3 consecutive
weeks in a newspaper of general circulation published in the city or municipality where the
principal office is situated or in a newspaper of general circulation in the Philippines;
5. Posting of the same order for 3 consecutive weeks in 3 public places in such city or
municipality;
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6. Upon 5 days notice, given after the date on which the right to file objects has expired, the
SEC shall hear the petition and try any issue made by the objections filed; and
7. Judgment dissolving the corporation and directing disposition of its assets as justice
requires and the appointment of a receiver (if necessary in the court‟s discretion) to collect
such assets and pay the debts of the corporation.
The appointment of a receiver is only permissive and not mandatory. The law is intended to let the
stockholders have control of the assets of the corporation upon dissolution and winding up of its
affairs.
Dissolution by shortening the corporate term
Procedure to shorten the corporate term:
1. Approval by a majority vote of the board or directors or trustees.
2. Written notice of the proposed action and the time and place of meeting shall be served to
each stockholder or member either by mail or by personal service.
3. Ratification by the stockholders representing at least 2/3 of the outstanding capital stock
or 2/3 of the members in case of non-stock corporations.
4. Submission of the amended articles of incorporation to the SEC.
5. Approval of the SEC.
In case of a corporation sole, an authorization for the dissolution by the particular religious
denomination, sect or church is necessary.
A vote must cast at a duly constituted meeting. Written assent is insufficient.
It is only upon the approval of the SEC that the corporation is deemed dissolved.
INVOLUNTARY DISSOLUTION
Requirements for involuntary dissolution by the SEC:
1. Filing of a verified complaint; and
2. Proper notice and hearing on the grounds provided by laws, rules and regulations.
Notwithstanding the fact that RA 8799 transferred the jurisdiction of the SEC under Sec. 5 of PD
902-A to the Special Commercial Courts, the same law granted the SEC concurrent jurisdiction
over revocation proceedings. Sec. 5 (m) of RA 8799 provides that the SEC shall have the power to
suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of
corporations, partnerships or associations, upon any ground provided by law.
Grounds for involuntary dissolution under Sec. 6, PD 902-A:
1. Fraud in procuring the certificate of registration;
2. Serious misrepresentation as to what the corporation can do or is doing to the great
prejudice of or damage to the general public;
3. Refusal to comply or defiance of any lawful order of the Commission restraining
commission of acts which would amount to a grave violation of its franchise;
4. Continuous inoperation for a period of at least 5 years;
5. Failure to file by-laws within the required period; and
6. Failure to file required reports in appropriate forms as determined by the Commission
within the prescribed period.
Other grounds provided for the in Corporation Code:
1. Violation of any provision of the Code (Sec. 144);
2. In case of deadlock in a close corporation (Sec. 105);
3. In a close corporation, any acts of directors, officers or those in control of the corporation
which is illegal or fraudulent or dishonest or oppressive or unfairly prejudicial to the
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A dissolved corporation has no juridical personality; it ceases to exist as a corporation and cannot
apply for a new certificate or a secondary franchise. (Buenaflor vs. Camarines Sur Industry Corp.)
The 3-year period allowed by the law is only for the purpose of liquidation or winding up of
corporate affairs. No act can be done for the purpose of continuing the business for which it was
established. Neither can it enforce a contract executed prior to its dissolution. (Cebu Port Labor
Union vs. State Marine Co.)
The termination of the life of a juridical entity does not, by itself, imply the diminution or extinction of
rights demandable against such juridical entity. Debts due to or against the corporation will not be
extinguished. Otherwise, it will amount to an impairment of contracts or a denial of due process.
(Gonzales vs. Sugar Regulatory Administration)
LIQUIDATION AND WINDING UP
Liquidation and winding up – the collection of all corporate assets, the payments of all its debts and
settlement of its obligations and the ultimate distribution of the corporate assets, if any of it remains,
to all stockholders in accordance with their proportionate stockholdings in the corporation or in
accordance with their respective contracts of subscription (e.g. preferred stocks).
A dissolved corporation continues as a body corporate for a period of 3 years from the time of
dissolution for the purpose of prosecuting and defending suits by or against it and enabling it to
settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not
for the purpose of continuing the business for which it was established.
At any time during said three (3) years, the corporation is authorized and empowered to convey all
of its property to trustees for the benefit of stockholders, members, creditors, and other persons in
interest. From and after any such conveyance by the corporation of its property in trust for the
benefit of its stockholders, members, creditors and others in interest, all interest which the
corporation had in the property terminates, the legal interest vests in the trustees, and the
beneficial interest in the stockholders, members, creditors or other persons in interest.
Upon the winding up of the corporate affairs, any asset distributable to any creditor or stockholder
or member who is unknown or cannot be found shall be escheated to the city or municipality where
such assets are located.
General rule: No corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities.
Exceptions:
1. By decrease of capital stock; or
2. As otherwise allowed the Code.
Three methods of liquidation:
1. By the corporation itself though the Board of Directors.
2. By a Trustee appointed by the corporation.
3. By appointment of a receiver.
Mere appointment of a receiver without anything more does not imply the dissolution of a
corporation.
Pending actions by or against a corporation are abated upon expiration of the period allowed by
law for the liquidation of its affairs; but trustees to whom the corporate assets have been conveyed
may sue or be sued as such in all matters connected with the liquidation. The effect of conveyance
is to make the trustees the legal owners of the property conveyed, subject to the beneficial interest
therein of creditors and stockholders. (National Abaca Other Fibers Co. vs. Pore)
If the corporation carries out the liquidation of its assets through its own officers and continues and
defends the actions brought by or against it, its existence shall terminate at the end of three years
from the time of dissolution; but if a receiver or assignee is appointed, as has been done in the
present case, with or without a transfer of its properties within three years, the legal interest passes
to the assignee, the beneficial interest remaining in the members, stockholders, creditors and other
interested persons; and said assignee may bring an action, prosecute that which has already been
commenced for the benefit of the corporation, or defend the latter against any other action already
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instituted or which may be instituted even outside of the period of three years fixed for the offices of
the corporation. (Sumera vs. Valencia)
(Board of Liquidators vs. Kalaw)
The counsel who prosecuted and defended the interest of the corporation and who appeared in
behalf of the corporation may be considered a trustee of the corporation at least with respect to the
matter in litigation only. The word “trustee” must be understood in its general concept. (Gelano vs.
CA)
A claim established against the corporation may be prosecuted against the liquidator of such
corporation even after the three years from its dissolution. (Republic vs. Marsman Development
Company)
Upon dissolution of the corporation its assets are held for the benefit of its stockholder after
payment of its debts and will be so distributed to the said stockholder in accordance with their
proportionate interest in the corporation or their contracts of subscription.
Holders of preferred shares may be granted certain rights or privileges upon dissolution.
General rule: The board of directors of a dissolved corporation is not permitted to undertake any
activity outside of the usual liquidation of the corporation.
Exception: The stockholders of a dissolved corporation may convey their respective shareholdings
toward the creation of a new corporation to continue the business of the old. Winding up is the sole
activity of a dissolved corporation that does not intend to incorporate a new. (Chung Ka Bio vs.
IAC)
If the three year period of liquidation has elapsed and no effort to finally settle or close the
corporate affairs was undertaken, those having pecuniary interest in the corporate assets, including
not only the stockholders but likewise the creditors, acting for and its behalf, may make proper
representations with the SEC for working out a final settlement of the corporate concern. (Clemente
vs. CA)
Note: The above decision is an aberrant ruling. Once the three year period for liquidation and
winding up has elapsed without any trustee or receiver being appointed, the assets of the
corporation will be escheated in favor of the Government thus barring the claims of stockholders
and creditors.
CHAPTER 18: FOREIGN CORPORATIONS
Foreign corporation – one formed, organized or existing under any laws other than those of the
Philippines (and whose laws allow Filipino citizens and corporations to do business in its own
country or state).
The phrase “whose laws allow Filipino citizens and corporations to do business in its own country
or state” is a mere condition precedent to the grand of a license of a foreign corporation to do
business in the Philippines.
General rule: The “incorporation test” is applied in determining whether a corporation is domestic or
foreign. If it is incorporated in another state, it is a foreign corporation, while if it is registered under
Philippine laws, it is deemed a Filipino or domestic corporation irrespective of the nationality of its
stockholders.
Exception: In times of war, the “control test” would apply in determining the corporate nationality,
i.e., the citizenship of the controlling stockholders determines the nationality of the corporation.
General rule: A corporation can have no legal existence outside the boundaries of the sovereign by
which it is created.
Exception: By virtue of state comity, a corporation created by laws of one state is usually allowed to
transact business in other states and to sue in the courts of the forum, subject to restrictions and
certain requirements imposed therein.
Requisites for a foreign corporation to transact business in the Philippines:
1. A license or permit to do so; and
2. A certificate of authority from the appropriate government agency.
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banks, or any combination thereof, with an actual market value of P100,000.00. Additional
securities may be required by the SEC if the actual market value of the securities on deposit has
decreased by at least 10%.
The objective of the law requiring the license is not to prevent the foreign corporation from
performing isolated or single acts, but to prevent it from acquiring a domicile for the purpose of
pursuing its business without taking steps to render it amendable to suit in the local courts.
(Marshall-Wells Co. vs. H. W. Elser & Co.)
MODES OF ENTRY OF FOREIGN CORPORATIONS
Modes of entry of foreign corporations:
1. Branch office;
2. Representative or liaison office;
3. Local subsidiary;
4. Regional or area headquarters;
5. Regional operating headquarters;
6. Regional warehouse; or
7. Joint venture.
RESIDENT AGENT
The appointment of a resident agent is a condition precedent to the issuance of a license to
transact business in the Philippines by a foreign corporation.
The following may be appointed as a resident agent:
1. An individual residing in the Philippines, of good moral character and of sound financial
standing; or
2. A domestic corporation lawfully transacting business in the Philippines (includes
partnerships such as law firms and accounting firms).
The necessity of the appointment of a resident agent is only for the purpose of receiving summons
and other legal processes in any legal action or proceeding against the foreign corporation.
Modes of service of summons upon a foreign corporation:
1. Service upon the resident agent – service upon the resident agent is mandatory if the
foreign corporation is license to do business in the Philippines;
2. Service upon the SEC – if the licensed foreign corporation has ceased to transact
business in the Philippines or has no resident agent in the Philippines; or
3. Service upon any of its officers or agents within the Philippines.
DOING BUSINESS WITHOUT A LICENSE
General rule: No foreign corporation transacting business in the Philippines without a license, or its
successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding
in any court or administrative agency of the Philippines
Exception: Such corporation may be sued or proceeded against before Philippine courts or
administrative tribunals on any valid cause of action recognized under Philippine laws.
A foreign corporation cannot transact business in the Philippines without the requisite license. If it
does so, the responsible officers may be subjected to the penal provisions of Sec. 144.
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General rules regarding whether or not a foreign corporation may sue or be sued in the Philippines:
1. As to whether or not it can sue.
a. A foreign corporation transacting or doing business in the Philippines with a
license can sue before Philippine Courts.
b. Subject to certain exceptions, a foreign corporation doing business in the country
without a license can not sue in Philippine Courts.
c. If it is not transacting business in the Philippines, even without a license, it can
sue before the Philippine Courts.
2. As to whether it can be sued or not.
a. A foreign corporation transacting business in the Philippines with the requisite
license can be sued in the Philippines.
b. A foreign corporation transacting business in the Philippines without a license
can be sued in Philippine courts.
c. If it is doing business in the Philippines, it cannot be sued in Philippine courts for
lack of jurisdiction.
It is not the lack of required license but doing business without a license which bars a foreign
corporation from access to our courts. (Universal Shipping vs. IAC)
General rule: A foreign corporation must have the requisite license to sue before the Philippine
courts.
Exceptions:
1. The act or transaction involved is an “isolated transaction;”
2. The foreign corporation is not seeking to enforce any legal or contractual rights arising
from, or growing out of any business which it has transacted in the Philippines;
3. The purpose of the suit is to protect its trademark, tradename, corporate name, reputation
or goodwill;
4. The suit is based on a violation of the Revised Penal Code;
5. The foreign corporation is merely defending a suit filed against it;
6. The party is estopped to challenge the personality of the corporation by entering into a
contract with it.
Exception to an exception: Where a single act or transaction however, is not merely incidental or
casual but indicates the foreign corporation‟s intention to do other business in the Philippines, said
single act or transaction constitutes „doing‟ or „engaging in‟ or „transacting‟ business in the
Philippines.
The true test regarding “doing” or “engaging in” or “transacting” business is whether the foreign
corporation is continuing the body or substance of the business or enterprise for which it was
organized or whether it has substantially retired from it and turned it over to another. The term
implies a continuity of commercial dealings and arrangements, and contemplates, to that extent,
the performance of acts or works or the exercise of some of the functions normally incident to, and
in progressive prosecution of, the purpose and object of its organization. (Mentholatum Co., Inc. vs.
Mangaliman)
The object of the statute was to subject the foreign corporation doing business in the Philippines to
the jurisdiction of its courts. The object of the statute was not to prevent the foreign corporation
from performing single acts, but to prevent is from acquiring domicile for the purpose of business
without taking the steps necessary to render it amenable to suit in the local courts. The law simply
means that no foreign corporation shall be permitted “to transact business in the Philippine Islands”
unless it shall have the license required by law, and until it complies with the law, shall not be
permitted to maintain any suit in the local courts. (Marshall-Wells Co. vs. Henry W. Elser & Co.)
A foreign corporation not engaged in business in the Philippines may not be denied the right to file
an action in Philippine courts for isolated transactions. (Bulakhidas vs. Navarro)
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If A foreign corporation not engaged in business in the Philippines has the right to sue on an
isolated transaction, more so may it sue based on a mistake. (Swedish East Asia Co., Ltd. vs.
Manila Port Service)
There was only one agreement between petitioners and the respondent. The three seemingly
different transactions were entered into by the parties only in an effort to fulfill the basic agreement
and in no way indicate an intent on the part of the respondent to engage in a continuity of
transactions with petitioners which will categorize it as a foreign corporation doing business in the
Philippines. The respondent, being a foreign corporation not doing business in the Philippines,
does not need to obtain a license to do business in order to have the capacity to sue. (Atnam
Consolidated, Inc. vs. CA)
Under the rules of the BOI, the phrase „doing business‟ has been exemplified with illustrations,
among them being as follows:
1. Soliciting orders, purchase (sales) or service contracts. Concrete and specific solicitations
by a foreign firm, not acting independently of the foreign firm amounting to negotiation or
fixing of the terms and conditions of sales or service contract, regardless of whether the
contracts are actually reduced to writing, shall constitute doing business even in the
enterprise has no office or fixed place of business in the Philippines.
2. Appointing a representative or distributor who is domiciled in the Philippines unless said
representative or distributor has an independent status, i.e., it transacts business in its
name and for its own account, and not in the name or for the account of the pricipal.
3. Opening offices, whether called „liaison‟ offices, agencies or branches, unless provided
otherwise.
4. Any other act or acts that imply a continuity of commercial dealings or arrangements, and
contemplate to that extent the performance of acts or works, or the exercise of some of
the functions normally incident to, or in the progressive prosecution of, commercial gain or
of the purpose and objective of the business organization. (Facilities Management Corp.
vs. De La Rosa)
A single act may bring the corporation within the purview of the statute where it is an act of the
ordinary business of the corporation. In such a case, the single act of transaction is not merely
incidental or casual, but is of such character as distinctly to indicate a purpose on the part of the
operations for the conduct of a part of the corporation‟s ordinary business. (Far East Int‟l Import vs.
Nankai)
ITEC‟s arrangement with its various business contacts in the country indicate its purpose to bring
about the situation among its customers and the general public that they are dealing directly with
ITEC and that ITEC is actively engage in business in the country. In determining whether a
corporation does business in the Philippines or not, aside from their activities within the forum,
reference may be made to the contractual agreements entered into by it with other entities in the
country. (Communication Materials and Design, Inc. vs. CA)
A foreign corporation doing business in the Philippines may sue in Philippine courts although no
authorized to do business here against a Philippine citizen or entity who had contracted with and
benefited by said corporation. To put it another way, a party is estopped to challenge the
personality of a corporation after having acknowledged the same by entering into a contract with it.
An the doctrine of estoppel to deny corporate existence applies to a foreign as well as to domestic
corporations. One who has dealt with a corporation of foreign origin as a corporate entity is
estopped to deny its corporate existence and capacity. The principle will be applied to prevent a
person contracting with a foreign corporation from later taking advantage of its noncompliance with
the statutes chiefly in cases where such person has received the benefits of the contract.
(Communication Materials and Design, Inc. vs. CA)
The right of a corporation to use its corporate and trade name is a property right, a right in rem,
which it may assert and protect against all the world, in any of the courts of the world – even in
jurisdictions where it does not transact business – just the same as it may protect its tangible
property, real or personal, against trespass, or conversion. Since it is the trade and not the make
that is to be protected, a trademark acknowledges no territorial boundaries or municipalities or
states or nations, but extends to every market where the trader‟s goods have become known and
identified by the use of the mark. (Western Equipment and Supply Co. vs. Reyes)
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A foreign corporation which has never done business in the Philippine Islands and which is
unlicensed and unregistered to do business here, but is widely and favorably known in the Islands
through the use therein of its products bearing its corporate and trade name has a legal right to
maintain an action in the Islands. Parenthetically the Trademark Law allows a foreign corporation or
juristic person to bring an action in Philippine courts for infringement of a mark or trade-name, for
unfair competition, or false designation of origin and false description, whether or not it has been
licensed to do business in the Philippines. (General Garments Corporation vs. Director of Patents)
Article 8 of the Paris Convention to which the Philippines became a party provides that a trade
name shall be protected in all the countries of the Union without the obligation of filing or
registration, whether or not it forms part of the trademark. (Puma vs. IAC)
A foreign corporation not doing business not doing business in the Philippines needs no license to
sue before Philippine courts for infringement of trademark and unfair competition. (Le Chemise
Lacoste vs. Fernandez)
In a suit involving the violation of the Revised Penal Code the complainant foreign corporation‟s
capacity to sue is not significant. (Le Chemise Lacoste vs. Fernandez)
CAPACITY TO SUE
General rule: A foreign corporation must affirmatively plead its capacity to sue in order that it may
proceed and effectively institute a case in Philippine courts.
Exceptions:
1. The action involves a complaint for violation of the Revised Penal Code.
2. The foreign corporation is not suing or maintaining a suit but is merely defending itself
from one filed against it.
The qualifying circumstance of whether or not a foreign corporation has engaged in business in the
Philippines is an essential part of the element of a foreign corporation‟s capacity to sue and must
be affirmatively pleaded. (Atlantic Mutual Insurance Co. vs. Cebu Stevedoring Co., Inc.)
If the dismissal of the case, based on failure of the foreign corporation to aver its capacity to sue,
would not, however, bar the institution of the same action, dismissal should not be allowed,
especially so if it would be an idle, circuitous ceremony considering the absence of any meritorious
substantial defense of the defense of the defendant. Technical rules should not be accorded undue
importance to frustrate and defeat a plainly valid claim. (Olympia Business Machines Co. vs.
Razon, Inc.)
Since petitioner is not maintaining any suit but is merely defending one against itself (it did not file
any complaint but only a corollary defensive petition to prohibit the lower court from further
proceeding with a suit that it had no jurisdiction to entertain), its failure to aver its legal capacity to
institute the present petition is not fatal. (Time, Inc. vs. Reyes)
LAWS GOVERNING FOREIGN CORPORATIONS
General rule: Any foreign corporation lawfully doing business in the Philippines shall be bound by
all laws, rules and regulations applicable to domestic corporations of the same class.
Exceptions:
1. Laws which provide for the creation, formation, organization or dissolution of corporations;
or
2. Laws which fix the relations, liabilities, responsibilities, or duties of stockholders, members
or officers of a corporation to each other or to the corporation.
Intra-corporate or internal matters not affecting creditors or the public in general are governed not
by Philippine laws but the law under which the foreign corporation was formed or organized.
Special laws may provide or grant certain restrictions, limitations, privileges or incentives to a
foreign corporation not otherwise applicable or granted to domestic corporations (e.g. import duties
and tax incentives under the Omnibus Investments Code).
A foreign corporation authorized to transact business in the Philippines which amends its articles of
incorporation or by-laws must file a copy of such amended articles of incorporation or by-laws with
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the SEC or the appropriate government agency within 60 days from the effectivity of such
amendment.
Instances when a foreign corporation authorized to transact business in the Philippines must obtain
an amended license:
1. The foreign corporation changes its corporate name; or
2. The foreign corporation desires to pursue other or additional purposes in the Philippines.
Requirements in a merger or consolidation of a foreign corporation licensed in the Philippines:
With a domestic corporation:
Such must be permitted under Philippines laws and by the law of its incorporation;
and
The requirements on merger or consolidation provided by the Code must be followed.
With a foreign corporation:
Such must be permitted by the law of its incorporation;
A duly authenticated articles of merger or consolidation must be filed with the SEC or
the appropriate government agency within 60 days from the effectivity of the
merger or consolidation; and
If the absorbed corporation is the foreign corporation doing business in the
Philippines, a petition for withdrawal of its license must also be filed.
Requirements and procedure for the withdrawal of foreign corporations:
1. Filing of a petition for withdrawal of license;
2. All claims which have accrued in the Philippines have been paid, compromised or settled;
3. All taxes, imposts, assessments and penalties, if any, lawfully due to the Philippine
Government or any of its agencies or political subdivisions have been paid;
4. Publication of the petition for withdrawal once a week for 3 consecutive weeks in a
newspaper of general circulation in the Philippines; and
5. Issuance of the certificate of withdrawal by the SEC.
Grounds for the revocation or suspension of license:
1. Failure to file its annual report or pay any fees as required by the Code;
2. Failure to appoint and maintain a resident agent in the Philippines;
3. Failure, after change of its resident agent or of his address, to submit to the SEC a
statement of such change;
4. Failure to submit to the SEC an authenticated copy of any amendment to its articles of
incorporation or by-laws or of any articles of merger or consolidation within the time
prescribed by the Code;
5. Misrepresentation of any material matter in any application, report, affidavit or other
document submitted;
6. Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to
the Philippine Government or any of its agencies or political subdivisions;
7. Transacting business in the Philippines outside of the purpose or purposes for which such
corporation is authorized under its license;
8. Transacting business in the Philippines as agent of or acting for and in behalf of any
foreign corporation or entity not duly licensed to do business in the Philippines; or
9. Any other ground as would render it unfit to transact business in the Philippines.
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days but not more than five (5) years, or both, in the discretion of the court. If the violation is
committed by a corporation, the same may, after notice and hearing, be dissolved in appropriate
proceedings before the Securities and Exchange Commission: Provided, That such dissolution
shall not preclude the institution of appropriate action against the director, trustee or officer of the
corporation responsible for said violation: Provided, further, That nothing in this section shall be
construed to repeal the other causes for dissolution of a corporation provided in this Code.
No right or remedy in favor of or against any corporation, its stockholders, members, directors,
trustees, or officers, nor any liability incurred by any such corporation, stockholders, members,
directors, trustees, or officers, shall be removed or impaired either by the subsequent dissolution of
said corporation or by any subsequent amendment or repeal of this Code or of any part thereof.
All corporations lawfully existing and doing business in the Philippines on the date of the effectivity
of this Code and heretofore authorized, licensed or registered by the Securities and Exchange
Commission, shall be deemed to have been authorized, licensed or registered under the provisions
of this Code, subject to the terms and conditions of its license, and shall be governed by the
provisions hereof: Provided, That if any such corporation is affected by the new requirements of
this Code, said corporation shall, unless otherwise herein provided, be given a period of not more
than two (2) years from the effectivity of this Code within which to comply with the same.
PD 902-A, AS AMENDED
The SEC‟s quasi-judicial functions under Sec. 5 of PD 902-A, as amended were transferred to the
Special Commercial Courts by RA 8799.
General rule: The Special Commercial Courts shall have exclusively and originally jurisdiction over
cases falling under Sec. 5 of PD 902-A.
Exception: The SEC shall retain jurisdiction over cases involving suspension of payments and
corporate rehabilitation filed on or before June 30, 2000.
Distribution of Special Commercial Courts:
1. Two in Makati City;
2. Two in Quezon City;
3. One in each in other cities in Metro Manila; and
4. One per region.
DEVICES OR SCHEMES AMOUNTING TO FRAUD AND MISREPRESENTATION (Sec. 5 [a])
General rule: The Special Commercial Courts shall have original and exclusive jurisdiction to hear
and decide cases involving devices or schemes employed by or any acts of the board of directors,
business associates, its officers or partners, amounting to fraud and misrepresentation which may
be detrimental to the interest of the public and/or of the stockholder, partners, members of
associations or organizations registered with the SEC.
Exception: The complaint is based on the violation of the Revised Penal Code (Ex. Syndicated
Estafa)
Even if the action is for recovery of sums of money paid or given to the corporation through devices
and schemes amounting to fraud or misrepresentation detrimental to the investing public, the same
must be filed, heard and tried by the Special Commercial Courts.
Examples of acts amount to fraud or misrepresentation within the original and exclusive jurisdiction
of the Special Commercial Courts:
1. Fraud committed by a corporation in failing to pay individual money market placements.
(Orosa, Jr. vs. CA)
2. Corporations act of duping persons into investing money when such corporations authority
to issue commercial papers has already expired. (Mangalad vs. Premier Corporation)
3. Corporate officer‟s act of diverting corporate funds and assets for his personal use. (Alleje
vs. CA)
4. Pyramiding schemes.
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The allegation of fraud must be stated with particularity to place the case with the jurisdiction of the
Special Commercial Courts.
INTRA-CORPORATE CONTROVERSIES (Sec. 5 [b])
Intra-corporate controversies include those of corporations, partnerships and associations.
Elements of intra-corporate controversies:
1. An intra-corporate relationship:
a. Between and among the stockholders, members, associates of a corporation,
partnership or association;
b. Between them and the corporation, partnership or association; or
c. Between the corporation, partnership or association and the State.
2. The controversy must arise out of said relationship.
The dispute among the parties must be intrinsically connected with the regulation of the
corporation. If the nature of the controversy involves matters that are purely civil in character
necessarily the case does not involve an intra-corporate controversy. (Speed Distributing Corp. vs.
CA)
The fact that shares of stock were issued to be used as part payment for lease rentals does not
convert it into a intra-corporate controversy. (DMRC Enterprises vs. Este del Sol Mountain
Reserve, Inc.)
Recovery of the control and management of a corporation in the guise of a complaint for rescission
of a memorandum of agreement which vested such control and management is an intra-corporate
controversy. (DPB vs. Ilustre, Jr.)
If all of the requirements for a valid transfer have been complied the dispute is intra-corporate and
is within the jurisdiction of the Special Commercial Court. (Abejo vs. de la Cruz; Rural Bank of
Salinas, Inc. vs. CA)
If the petitioner does not have a “prima facie” title to the share sought to be recorded in his name
the dispute is not intra-corporate and the ordinary or regular court can assume jurisdiction over the
case. (Rivera vs. Florendo; Tay vs. CA)
A dispute regarding the automatic rescission clause of a Memorandum of Agreement regarding the
sale of shares of a group of stockholders to another group of stockholders is intra-corporate.
(Saavedra vs. SEC)
Where the conflict involves the enforcement of rights and obligations under the Corporation Code
or the inter and intra-corporate affairs of the corporation, jurisdiction would fall with the Special
Commercial Courts. But if it requires a mere determination of the contractual rights of the parties
under an ordinary agreement, the ordinary/regular courts can acquire jurisdiction thereto.
The factor which decides whether the action is within the jurisdiction of the Special Commercial
Courts is that the controversy arose out of an intra-corporate relation between and among the
parties. (SEC vs. CA)
The filing of the civil/intra-corporate case before the SEC does not preclude the simultaneous and
concomitant filing of a criminal action before the regular courts; such that, a fraudulent act may give
rise to liability for violation of the rules and regulations of the SEC cognizable by the SEC itself, as
well as criminal liability for violation of the Revised Penal Code cognizable by the regular courts,
both charges to be filed and proceeded independently, and may be simultaneously, with the other.
(Fabia vs. CA)
CONTROVERSIES IN THE APPOINTMENT, ELECTION AND REMOVAL OF DIRECTORS AND
OFFICERS (Sec. 5 [c])
The Special Commercial Courts have original and exclusive jurisdiction to hear and decide cases
involving controversies in the election or appointment of directors, trustees, officers or managers of
corporations, partnerships or associations.
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General rule: A corporate officer‟s election, appointment or termination by the board of directors is
always a corporate act, and the fact that the officer asks for backwages does not alter the picture.
The original and exclusive jurisdiction rests with the Special Commercial Courts.
Exception: The main cause of action is for the recovery of unpaid wages and separation pay.
(Midland Construction Co., Inc. vs. Movilla)
The main aspect to be considered is whether the corporate officer asserts his rights as such officer
or questions his removal or ouster. If so, the case would fall within the ambit of the jurisdiction of
the Special Commercial Courts and not the NLRC.
RECEIVERSHIP AND SUSPENSION (Sec. 5 [d] and 6[c, d])
Petitions for suspension of payments of corporations, partnerships or associations, and
appointment of receivership, management committee, board or body are lodged within the
jurisdiction of the Special Commercial Courts.
A corporation, partnership or association, whether or not insolvent, can file a petition for suspension
of payments provided it is placed under a rehabilitation receiver or management committee or
rehabilitation receiver.
Three types of suspension of payments:
1. Simple suspension of payments – mere deferment of payment of debts and it refers to a
petition which is filed by a corporation which possesses sufficient assets to cover its
liabilities but foresees the possibility of meeting them when they respectively fall due
owing to temporary liquidity problems.
2. Suspension of payments with the appointment of a receiver with or without a rehabilitation
plan. The rehabilitation plan is a plan under which the corporation will reschedule the
payment of its debts and liabilities. Either the petitioner corporation will propose the plan
or ask for the appointment of a receiver who will study and make the plan.
3. Suspension of payments where the corporation has no sufficient assets to cover its debts
and liabilities with or without the appointment of a management committee with or without
a rehabilitation plan.
EFFECTS OF SUSPENSION OF PAYMENTS
The proper court may issue an order suspending payments of claims due from a distress
corporation.
Upon the appointment of a management committee, rehabilitation receiver, board or body all
actions for claims against the corporation, partnership or association under management or
receivership pending before any court, tribunal, board or body shall be suspended accordingly.
The reason for suspension of payments for claims against a distressed corporation is to enable the
management committee to effectively exercise its powers free from judicial or extrajudicial
interference that might unduly hinder or prevent the „rescue‟ of the debtor company. (PAL vs. Sps.
Sadic and Kurangking)
The suspension of all actions for claims against a corporation embraces all phases of the suit, be it
before the trial court or any tribunal or before this Court. No other action may be taken, including
the rendition of judgment during the state of suspension. It must be stressed that what are
automatically stayed or suspended are the proceedings of a suit and not just the payment of claims
during the execution stage after the case had become final and executory. Once the process of
rehabilitation, however, is completed, this Court will proceed to complete the proceedings on the
suspended actions. Furthermore, the actions that are suspended cover all claims against the
corporation whether for damages founded on a breach of contract of carriage, labor cases,
collection suits or any other claims of a pecuniary nature. No exception in favor of labor claims is
mentioned in the law. (PAL vs. Zamora)
Claims – refers to debts or demands of pecuniary nature; the assertion of right to have money paid.
Suspended proceedings include extra judicial foreclosures. You cannot even consolidate. All
proceedings at whatever stage are suspended.
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Even if the suspension order is issued after a creditor‟s action in court has already become final but
pending execution, the execution of the decision is likewise suspended. (Filinvest vs. Ejercito)
Note the words “against the corporation.”
If a corporation secures a loan, and one of its key officers uses his private properties to guarantee
the loan, corporation files for suspension, the bank want to foreclose on the prop, may the bank
foreclose? Yes. It is not an action for ac claim against the corporation. Union bank case.
Properties of an individual stockholder, director or officer, as surety of corporate liabilities, are not,
and will not be covered by the suspension of payments order issued by the court pursuant to PD
902-A.
Same with regard to criminal proceedings, personal to corporate officer concerned.
Despite the appointment of a receiver for a corporation under PD 902-A, an action against a
corporation seeking the nullification of corporate documents cannot be suspended by reason
thereof, since the civil action does not present a monetary claim against the corporation. (Finasia
Investment and Finance Corporation vs. CA)
The SEC does not have jurisdiction to entertain petitions for suspension of payments filed by
parties other than corporations, partnerships or associations. (Union Bank vs. CA)
Equality is Equity – during suspension the assets are held in trust for the equal benefit of all
creditors to preclude one from obtaining an advantage or preference over another by the
expediency of an attachment, execution or otherwise. The creditors should stand on equal footing.
Not anyone of them should be given any preference by paying one of them ahead of the others.
(Alemars Sibal and Son, Inc. vs. Elibenas)
The issue of whether or not preferred creditors of distressed corporations stand on equal footing
with all other creditors gains relevance and materiality only upon the appointment of a management
committee, rehabilitation receiver, board or body. Suspension of claims against the corporation
under rehabilitation is counted or figured up only upon the appointment of a management
committee or a rehabilitation receiver. (RCBC vs. IAC)
VERY IMPORTANT!!!
1. All claims against corporations, partnerships or associations that are pending before any
court, tribunal or board, without distinction as to whether or not a creditor is secured or
unsecured, shall be suspended effective upon the appointment of a management
committee, rehabilitation receiver, board or body in accordance with the provisions of PD
902-A.
2. Secured creditors retain their preference over unsecured creditors, but enforcement of
such preferences is equally suspended upon the appointment of a management
committee, rehabilitation receiver, board or body. In the event that the assets of the
corporation, partnership or association are finally liquidated, however, secured or
preferred credits under the applicable provisions of the Civil Code will definitely have
preference over unsecured ones.
If the rehabilitation of the corporation is not feasible, the court muto propio or the management
committee may petition the lifting and the preferences will be there again.
APPOINTMENT OF MANAGEMENT COMMITTEE, BOARD OR BODY (Sec. 6 [d])
Special Commercial Courts may create or appoint a management committee, board or body upon
petition or muto propio to undertake the management of corporations, partnerships or association
not supervised or regulated by other government agencies in appropriate cases where there is
imminent danger of dissipation, loss or wastage or destruction of assets or other properties or
paralyzation of business operations of such corporation or entities which may be prejudicial to the
interest of minority stockholders, parties-litigant or the general public.
It may also create or appoint a management committee, board or body to undertake the
management of corporations, partnerships or other associations supervised or regulated by other
government agencies such as banks and insurance companies, upon the request of the
government agency concerned.
Requisites before a management committee, board or body may be appointed or created:
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Securities
Securities – are shares, participation or interests in a corporation or in a commercial enterprise or
profit-making venture and evidenced by a certificate, contract, instrument, whether written or
electronic in character. It includes:
1. Shares of stock, bonds, debentures, notes, evidences of indebtedness, asset-backed
securities;
2. Investment contracts, certificates of interest or participation in a profit sharing agreement,
certificates of deposit for a future subscription;
3. Fractional undivided interests in oil, gas or other mineral rights;
4. Derivatives like option and warrants;
5. Certificates of assignments, certificates of participation, trust certificates, voting trust
certificates or similar instruments;
6. Proprietary or non proprietary membership certificates incorporations; and
7. Other instruments as may in the future be determined by the Commission.
The definition of securities is extra-ordinarily broad. It is a catch all phrase meant to include all
novel devices which are of the same nature. Investment contracts and golf club shares are included
in the definition of securities.
General rule: Securities cannot be sold or offered for sale or distribution to more than 19 persons
without a Registration Statement duly filed and approved by the SEC. Once the securities are sold
or offered to more than 19 persons, it becomes a public offering requiring prior registration with the
SEC. Violation thereof renders the person administratively, civilly and criminally liable.
Exception: The securities involved are covered by Sec. 9 (exempt securities) and Sec. 10 (exempt
transactions).
Persons engaging in the business of buying or selling securities in the Philippines as a broker or
dealer, or acting as a salesman for such entities must be registered and authorized as such by the
SEC.
Investment contract – a contract or scheme whereby a person invests his money in a common
venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or
managerial efforts of others.
Issuance of certificates of participation in a multi-level marketing scheme, solely on the
management of others without goods or services is an investment contract and thus a security.
(Justee vs. SEC)
Pyramiding schemes partakes of a nature of an investing contract which cannot be sold to more
than 19 persons without prior approval of the SEC.
When an investor is relatively uninformed and turns over his money to others, essentially
depending upon their representations and their honesty and skill in managing it, the transaction
generally is considered as an investment contract. The touchstone is the presence of an
investment in a common venture premised on a reasonable expectation of profits to be derived
from the entrepreneurial or managerial efforts of others. (People vs. Petralba)
Exempt Securities
Exempt Securities (Sec. 9):
1. Any security issued or guaranteed by the Government of the Philippines, or by any
political subdivision or agency thereof, or by any person controlled or supervised by, and
acting as an instrumentality of said Government.
2. Any security issued or guaranteed by the government of any country with which the
Philippines maintains diplomatic relations, or by any state, province or political subdivision
thereof on the basis of reciprocity: Provided, That the Commission may require
compliance with the form and content of disclosures the Commission may prescribe.
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12. The sale of securities to any number of the following qualified buyers:
a. Bank;
b. Registered investment house;
c. Insurance company;
d. Pension fund or retirement plan maintained by the Government of the Philippines
or any political subdivision thereof or managed by a bank or other persons
authorized by the Bangko Sentral to engage in trust functions;
e. Investment company; or
f. Such other person as the Commission may by rule determine as qualified
buyers, on the basis of such factors as financial sophistication, net worth,
knowledge, and experience in financial and business matters, or amount of
assets under management.
Tender Offer
Tender Offers – a publicly announced intention by the purchaser to acquire a certain block of
equities of a company through open market purchases or private negotiations.
A tender offer is required of any person or group of persons acting in concert who intend to acquire:
1. At least 15% of any class of any equity security of a listed corporation or of any class of
any equity security of a corporation with assets of at least P50M and having 200 or more
stockholders with at least 100 shares each; or
2. At least 30% of such equity over a period of 12 months.
Proxies
Proxies must be issued and proxy solicitation must be made in accordance with rules and
regulations to be issued by the Commission.
Requisites for proxies:
1. In writing;
2. Signed by the stockholder or his duly authorized representative; and
3. Filed before the scheduled meeting with the corporate secretary.
General rule: A proxy shall be valid only for the meeting for which it is intended.
Exception: It is otherwise provided in the proxy.
No proxy shall be valid and effective for a period longer than 5 years at one time.
No broker or dealer shall give any proxy, consent or authorization, in respect of any security carried
for the account of a customer, to a person other than the customer, without the express written
authorization of such customer.
A broker or dealer who holds or acquires the proxy for at least 10% or such percentage as the
Commission may prescribe of the outstanding share of the issuer, shall submit a report identifying
the beneficial owner within 10 days after such acquisition, for its own account or customer, to the
issuer of the security, to the Exchange where the security is traded and to the Commission.
Independent Director
Any corporation with a class of equity securities listed for trading on an Exchange or with assets in
excess of P50M and having 200 or more holders, at least of 200 of which are holding at least 100
shares of a class of its equity securities or which has sold a class of equity securities to the public
pursuant to an effective registration statement shall have at least 2 independent directors or such
independent directors shall constitute at least 20% of the members of such board, whichever is the
lesser.
Independent director – a person other than an officer or employee of the corporation, its parent or
subsidiaries, or any other individual having a relationship with the corporation, which would
interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
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The SEC may exempt corporations from the required independent directors as it did in the
rehabilitation of Victorias Milling Co. Inc..
Insider Trading
Insider:
1. The issuer;
2. A director or officer (or person performing similar functions) of, or a person controlling the
issuer;
3. A person whose relationship or former relationship to the issuer gives or gave him access
to material information about the issuer or the security that is not generally available to the
public;
4. A government employee, or director, or officer of an exchange, clearing agency and/or
self-regulatory organization who has access to material information about an issuer or a
security that is not generally available to the public; or
5. A person who learns such information by a communication from any of the foregoing
insiders.
General rule: An insider may not sell or buy a security of the issuer while in possession of material
information with respect to the issuer or the security that is not generally available to the public.
Exceptions:
1. The insider proves that the information was not gained from such relationship; or
2. The insider disclosed the information to a party reasonably believed by the insider to
possess the information.
Material non-public information – has not been generally disclosed to the public and:
1. would likely affect the market price of the security after being disseminated to the public
and the lapse of a reasonable time for the market to absorb the information; or
2. would be considered by a reasonable person important under the circumstances in
determining his course of action whether to buy, sell or hold a security.
An insider may not communicate material non-public information to any person who will likely buy
or sell a security of the issuer while in possession of such information.
Trading by persons who have material non-public information about a tender offer is prohibited.
Registration of Brokers, Dealers, Salesmen and Associated Persons
Persons engaging in the business of buying or selling securities in the Philippines as a broker or
dealer, or acting as a salesman for such entities must be registered and authorized as such by the
SEC.
Broker – a person engaged in the business of buying and selling securities for the account of
others.
Dealer – any person who buys and sells securities for his/her own account in the ordinary course of
business.
Salesman - a natural person, employed as such or as an agent, by a dealer, issuer or broker to
buy and sell securities.
A stockbrokerage firm can have no other business than that.
Purchase of shares should be coursed through a broker. However a private transaction can be
made.
Fraudulent Transactions and Other Market Manipulations
Fraudulent and manipulative devices:
1. Wash sale – any transaction in a security which involves no change in the beneficial
ownership thereof.
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2. Matched order – an order or orders for the purchase or sale of security with the knowledge
that a simultaneous order or orders of substantially the same size, time and price for the
sale or purchase of such security has, or will be entered by or for the same or different
parties.
3. Marking the close – place of purchase or sale order, at or near the close of the trading
period.
4. Painting the tape – the activity is made during normal trading hours. It involves buying
activity among nominee accounts at increasingly higher or lower prices or causing
fictitious reports to appear on the “ticker tape.”
5. Squeezing the float – the part or portion of the issue/security which is outstanding but
intentionally held by dealers or other persons with a view of reselling them later for profit.
6. Hype and dump – the act employed by a person or group of persons of purchasing the
outstanding capital stock of a dormant public shell company for a nominal amount and
merge it with their privately held company. They would then gain control of the majority of
the stocks of the merged entity. The shares of the Shell Company are often reverse-split
four to one or more to reduce the number of shares. Stock certificates are often re-issued
in the name of the merged entity to relatives and associates who act as nominees of the
person or group of persons employing the device. They would then look for a broker-
dealer who would be willing to make a market relative to the stocks of the newly merged
company; then hire a promoter who would “hype” the virtues of the company, its products
and stocks. The broker-dealer then generates volume and advance bid price. When the
market reaches a high price, they would “dump” their shareholdings and bail out.
7. Boiler room operations – involves an intensive selling campaign through numerous
salesmen by telephone or through direct mail offerings for securities of either a certain
type or from a specific issuer. Investors are induced to purchase through hard-sell
techniques based on unfounded predictions and mailing of misleading market letters.
8. Circulating or dissemination information that the price of any security listed in the
Exchange will or is like to rise or fall (illegal)
9. Making false or misleading statements with respect to any material fact, which he knew or
had reasonable ground to believe was so false or misleading for the purpose of inducing
the purchase or sale of any security (illegal).
10. Pegging or fixing or stabilizing the price of security effected either alone or with others
through any series of transactions for the purchase or sale thereof (illegal)
11. Short sale – sale of securities which the vendor does not own (illegal unless done in
accordance with the rules and regulations of the SEC) (T3 rule).
12. Insider trading – the act of an insider of buying or selling securities of the issuer while in
possession of material information with respect thereto that is not generally available to
the public (illegal unless exempted).
Wash sale and matched order is illegal when used as a means to create a false or misleading
appearance of active trading in the security concerned.
Marking the close, painting the tape, squeezing the float, hype and dump, and boiler room
operations are illegal when they are effected to:
1. Raise the price or induce the purchase of a security or of a controlling, controlled or
commonly controlled company by others;
2. Depress their price to induce the sale of a security, whether of the same or of a different
class, of the same issuer or of a controlling, controlled company, or common controlled
company of others; and
3. Creates active trading to induce such purchase or sale through said devices or schemes.
Other fraudulent transactions:
1. Employing any device, scheme, or artifice to defraud;
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2. Obtaining money or property by means of any untrue statement of a material fact of any
omission to state a material fact necessary in order to make the statements made, in the
light of the circumstances under which they were made, not misleading; or
3. Engaging in any act, transaction, practice or course of business which operates or would
operate as a fraud or deceit upon any person.
Fraud – akin to bad faith which implies a conscious and intentional design to do a wrongful act for a
dishonest purpose or moral obliquity.
Settlement Offer
At any time, during an investigation or proceeding under this Code, parties being investigated
and/or charged may propose in writing an offer of settlement with the Commission.
Upon receipt of such offer of settlement, the Commission may consider the offer based on timing,
the nature of the investigation or proceeding, and the public interest.
The Commission may only agree to a settlement offer based on its findings that such settlement is
in the public interest. Any agreement to settle shall have no legal effect until publicly disclosed.
Such decision may be made without a determination of guilt on the part of the person making the
offer.
Limitation of Actions
SEC. 62. Limitation of Actions. - 62.1. No action shall be maintained to enforce any liability created
under Section 56 or 57 of this Code unless brought within two (2) years after the discovery of the
untrue statement or the omission, or, if the action is to enforce a liability created under Subsection
57.1(a), unless brought within two (2) years after the violation upon which it is based. In no event
shall any such action be brought to enforce a liability created under Section 56 or Subsection 57.1
(a) more than five (5) years after the security was bona fide offered to the public, or under
Subsection 57.1 (b) more than five (5) years after the sale.
62.2. No action shall be maintained to enforce any liability created under any other provision of this
Code unless brought within two (2) years after the discovery of the facts constituting the cause of
action and within five (5) years after such cause of action accrued.
Fasle registration statement - liable civily - sec. 56
Ceiling as to amount of damages - triple of the amount involved
limitation of actions - not later than 5 years after the cause of action accrues