The Corporation Code of The Philippines (Final)

THE CORPORATION CODE OF THE PHILIPPINES
CHAPTER 1: INTRODUCTION law is necessary for its creation such that the mere agreement of the
persons composing it or intending to organize it does not warrant the
KINDS OF BUSINESS ORGANIZATION grant of its independent existence as a juridical entity;
1. SOLE PROPRIETORSHIP – one conducted for profit by a lone or 2. ARTIFICIAL BEING – it has a juridical personality, separate and
single individual who owns all assets, personally owes and answers all distinct from the persons composing it.
the liabilities or suffers all the losses and enjoys all the profits to the
exclusion of others. 3. RIGHT OF SUCCESSION – unlike in a partnership, the death,
incapacity or civil interdiction of one or more of its stockholder does
ADVANTAGES DISADVANTAGES not result in its dissolution;
Eliminates the bureaucratic process Unlimited personal liability of the
common in corporations where the proprietor 4. POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY
board of directors must sit as a AUTDHORIZED BY LAW – it can exercise only such powers and can
body to have a valid transaction. hold only such properties as are granted to it by the enabling statutes
The proprietor makes his own unlike natural persons who can do anything as they please.
decisions and can act without delay.
Proprietor owns all the profits Capital is limited by the proprietor’s LBC EXPRESS, INC. VS. COURT OF APPEALS (236 SCRA 602 [Sept. 21,
without having to share the same personal resources 1994]) – Private respondent Carloto, incumbent President-Manager of
private respondent Rural Bank of Labason, alleged that he was instructed
2. PARTNERSHIP – a contract where two or more persons bind to go to Manila to follow up on the Bank’s plan of payment of rediscounting
themselves to contribute money, property or industry to a common obligations with Central Bank’s main office, where he purchased a round
fund with the intention of dividing the profits among themselves (Art. trip ticket and phone his sister to send him P1,000 for his pocket money
1767, Civil Code). which LBC failed to deliver and eventually Carloto was not able to submit
the rediscounting documents and the Bank was made to pay the Central
3. JOINT VENTURE – a one-time grouping of two or more persons, Bank P32,000 s penalty interest and alleged that he suffered
natural or juridical, in a specified undertaking. embarrassment and humiliation. Respondent Rural Bank was later on
joined as one of the plaintiff and prayed for the reimbursement of P32,000.
PARTNERSHIP JOINT VENTURE Carloto and the Bank were awarded moral and exemplary damages of
Has a personality separate and Does not acquire a separate and P10,000 and P5,000, respectively.
distinct from the partners distinct personality from the
venturers ISSUE: WON Rural Bank of Labason, Inc. being an artificial person should
Has for its object a general business Object is an undertaking of a be awarded moral damages?
of particular kind, although there particular or single transaction
may be partnership for a single HELD: No. Moral damages are granted in recompense for physical
transaction suffering, mental anguish, fright, serious anxiety, besmirched reputation,
wounded feelings, oral shock, social humiliation and social injury. A
Corporations, generally are not Corporations may enter joint
corporation, being an artificial person and having existence only in legal
allowed to enter into partnerships* ventures
contemplation, has no feelings, no emotions, no senses; therefore, it
cannot experience physical suffering and mental anguish. Mental suffering
*A corporation is generally not allowed to enter into partnerships because
can be experienced only by one having a nervous system and it flows from
(1) the identity of the corporation is lost or merged with that of another;
real ills, sorrows and grieves of life – all of which cannot be suffered by
and (2) the discretion of the officials is placed in other hands other than
respondent bank as an artificial person.
those permitted by the law in its creation.
BEDROCK RULE: Under Article 2219 of the Civil Code, for cases of libel,
EXCEPTION to the rule is when the following conditions are met:
slander and other forms of defamation, a corporation is entitled to moral
a. The articles of incorporation expressly authorized the corporation to
damages.
enter into contracts of partnership;
b. The agreement or articles of partnership must provide that all the
C. ADVANTAGES OF THE CORPORATE FORM OF BUSINESS
partners will manage the partnership; and
c. The articles of partnership must stipulate that all the partners are and
1. CAPACITY TO ACT AS A SINGLE UNIT – any number of persons
shall be jointly and severally liable for all obligations of the partnership
may unite in a single enterprise without using their names, without
difficulty or inconvenience, and with the valuable right to contract, to
4. CORPORATION – an artificial being created by operation of law,
sue and be sued, and to hold or convey property, in the corporate
having the right of succession and the powers, attributes and
name;
properties expressly authorized by law or incident to its existence
2. LIMITED SHAREHOLDER’S LIABILITY – the limit of his liability
(Sec. 1, Corporation Code [CC])
since stockholders are not personally liable for the debts of the
corporation;
3. CONTINUITY OF EXISTENCE – rights and obligations of a
CHAPTER 2: DEFINITION AND ATTRIBUTES
corporation are not affected by the death, incapacity or replacement
of the individual members;
A. DEFINITION
4. FEASIBILITY OF GREATER UNDERTAKING – it enables the
individuals to cooperate in order to furnish the large amounts of
Sec. 2. Corporation Defined – A corporation is an artificial being created
capital necessary to finance large scale enterprises;
by operation of law, having the right of succession and the powers, attributes
5. TRANSFERABILITY OF SHARES – unless reasonably restricted,
and properties expressly authorized by law or incident to its existence.
shares of stocks, being personal properties, can be transferred by the
owner without the consent of the other stockholders;
B. ATTRIBUTES (CARP)
6. CENTRALIZED MANAGEMENT – the vesting of powers of
management and appointing officers and agents in board of directors
1. CREATED BY OPERATION OF LAW – the formal requirement of the
gives to a corporation the benefit of a centralized administration which
State’s consent through compliance with the requirements imposed by
Cesar Nickolai F. Soriano Jr.
1 Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
is a practical business necessity in any large organization; and consent of the State is necessary for they deem it fit (Art. 1830, par. 1(b)
7. STANDARDIZED METHOD OF ORGANIZATION, MANAGEMENT it to cease as a body corporate. and par. 2)
AND FINANCE – which are provided under a well-drawn general
corporation law. The corporation statutes enter into the charter F. GOVERNMENT POWERS IN RELATION TO CORPORATIONS
contract and these are constantly being interpreted by courts. An
established system of management and protection of shareholders The Corporation Code places all corporations registered under its provision
and creditors’ rights has thus been and are being evolved. to be under the control and supervision of the Securities and Exchange
Commission (Sec. 19 and 144). Its powers and functions are clearly spelled
D. DISADVANTAGES out in PD 902-A, as amended by RA No. 8799, otherwise known as the
1. To have a valid and binding corporate act, formal proceedings, such Securities Regulation Code.
as board meetings are required;
2. The business transactions of a corporation is limited to the State of its
incorporation and may not act as such corporation in other jurisdiction CHAPTER 3: CLASSIFICATION OF CORPORATION
unless it has obtained a license or authority from the foreign state;
3. The shareholders’ limited liability tends to limit the credit available to A. CLASSES OF CORPORATIONS UNDER THE CORPORATION
the corporation as a separate legal entity; CODE
4. Transferability of shares may result to uniting incompatible and
conflicting interests; Sec. 3. Classes of corporations. - Corporations formed or organized under
5. The minority shareholders have practically no say in the conduct of this Code may be stock or non-stock corporations. Corporations which have
corporate affairs; capital stock divided into shares and are authorized to distribute to the
6. In large scale enterprises, stockholders’ voting rights may become holders of such shares dividends or allotments of the surplus profits on the
merely fictitious and theoretical because of disinterest in basis of the shares held are stock corporations. All other corporations are
management, wide-scale ownership and inaccessible place of non-stock corporations.
meeting;
7. “Double taxation” may be imposed on corporate income; and REQUISITES TO BE CLASSIFIED STOCK CORPORATIONS:
8. Corporations are subject to governmental regulations, supervision and 1. They have a capital stock dividend into shares; and
control including submission of reportorial requirements not otherwise 2. That they are authorized to distribute dividends or allotments as
imposed in other business form. surplus profits to its stockholders on the basis of the shares held by
each of them.
E. CORPORATION VS. PARTNERSHIP
SIGNIFICANT DISTINCTION: Although a non-stock corporation exists
CORPORATION PARTNERSHIP for purposes other than for profit, it does not follow that they cannot make
Created by operation of law (Sec. Created by mere agreement of the profits as an incident to their operations. But a significant distinction is that
2&4, Corp Code) parties (Art. 1767, Civil Code) profits obtained by a non-stock corporation cannot be distributed as
There must be at least 5 Maybe formed by two or more dividends but are used merely for the furtherance of their purpose or
incorporations (Sec. 10), except natural persons (Art. 1767) purposes.
corporation sole which is
incorporated by one single individual COLLECTOR OF INTERNAL REVENUE VS. CLUB FILIPINO, INC. DE
(Sec. 110) CEBU (5 SCRA 312; May 31, 1968) – Herein respondent Club operates a
Can exercise only such powers and Can do anything by agreement of clubhouse, a bowling alley, a golf course and a bar restaurant where it sells
functions expressly granted to it by the parties provided only that it is wines, liquors, soft-drinks, meals and short orders to its members and their
law and those that are necessary or not contrary to law, morals, good guests. The bar and restaurant was a necessary incident to the operation
incidental to its existence (Sec. 2, customs or public order. (Art. 1306) of the Club and its golf course is operated mainly with funds derived from
45) membership fees and dues. Whatever profits it had were used to defray its
Unless validly delegated expressly or In the absence of an agreement to overhead expenses and to improve its golf course. In 1951, as a result of
impliedly, a corporation must the contrary, any one of the parties capital surplus arising from the revaluation of its real properties, the Club
transact its business through the in the partnership form of business declared stock dividends. In 1952, the BIR assessed percentage taxes on
board of directors (Sec. 23) may validly bind the partnership (Art. the gross receipt of the Club’s bar and restaurant pursuant to Sec. 182 of
1308, par. 1) the Tax Code: “unless otherwise provided, every person engaging in a
Right of succession, it continues to Based on mutual rust and the death, business on which the percentage tax is imposed shall pay in full a fixed
exist despite the death, withdrawal, incapacity, insolvency, civil annual tax of P10 for each calendar year or a fraction thereof” and under
incapacity or civil interdiction of the interdiction or mere withdrawal of Sec. 191: “keepers of restaurant, refreshment parlors and other eating
stockholders or members. (Sec. 3) one of the parties would result in its places shall pay a tax of 3% of their gross receipts”
dissolution (Art. 1830, par. 6 & 7)
Transferability of shares – without A partner cannot transfer his rights ISSUE: WON the Club is liable for the assessment?
the consent of the other or interests in the partnership so as
stockholders. (Sec. 63) to make the transferee a partner HELD: No. It has been held that the liability for fixed and percentage taxes
without the consent of the other does not ipso facto attach by mere reason of the operation of a bar and
partners (Art. 1830, par. 6 & 7) restaurant. For the liability to attach, the operator thereof must be engaged
Limited liability – only to the extent All partners, including industrial ones in the business as a bar keeper and restauranteur. Business, in the ordinary
of their subscription or their (except a limited partner) are liable sense, is restricted to activities or affairs where profit is the purpose or
promised contribution. pro rata with all their property and livelihood is the motive, and the term business when used without
after all the partnership property has qualification, should be construed in its plain and ordinary meaning;
been exhausted, for all partnership restricted to activities for profit or livelihood.
liability (Art. 1813)
The term of corporate existence is May exist for an indefinite period The fact that the Club derived profits from the operation of its bar and
limited only to fifty years and unless subject only to the causes of restaurant does not necessarily convert it into a profit making enterprise.
extended by amendment, it shall be dissolution provided for by the law of The bar and restaurant are necessary adjunct of the Club to foster its
considered non-existent except for its creation (Art. 1824) purpose and the profits derived therefrom are necessarily incidental to the
the purpose of liquidation. primary object of developing and cultivating sports for the healthful
Cannot be dissolved by mere Partners may dissolve their recreation and entertainment of the stockholders and members. That a club
agreement of the stockholders. The partnership at will or at any time makes profit does not make it a profit-making club.
whose employees are subject to the provisions of the Labor Code.
ISSUE2: Is the Club a stock corporation?
C. OTHER CLASSES OF CORPORATIONS
HELD: No. The fact that the capital of the Club is divided into shares does
not detract from the finding of the trial court that it is not engaged in the 1. PUBLIC AND PRIVATE CORPORATIONS
business of operator of bar and restaurant. What is determinative of
whether or not the Club is engaged in such business is its object or PUBLIC CORPORATION: those formed or organized for the government
purpose as stated in its articles and by-laws. of a portion of the State or any of its political subdivisions and which have
for their purpose the general good and welfare.
Moreover, for a stock corporation to exists, two requisites must be
complied with: (1) a capital stock divided into shares; and (2) an It is to be observed, however, that the mere fact that the undertaking in
authority to distribute to the holders of such shares, dividends or which a corporation is engaged in is one which the State itself might enter
allotments of surplus profits on the basis of the shares held. In the into as part of its public work does not make it a public one. Nor is the fact
case at bar, nowhere it its AOI or by-laws could be found an authority for that the State has granted property or special privileges to a corporation
the distribution of its dividends or surplus profits. Strictly speaking, it render it public. Likewise, the fact that some or all of the stocks in the
cannot therefore, be considered as stock corporation, within the corporation are held by the government does not make it a public
contemplation of the Corporation Code. corporation.
B. CORPORATIONS CREATED BY SPECIAL LAW OR CHARTER The TRUE TEST to determine the nature of a corporation is found in the
relation of the body to the State. Strictly speaking, a public corporation
Sec. 4. Corporations created by special laws or charters. - is one that is created, formed or organized for political or governmental
Corporations created by special laws or charters shall be governed primarily purposes with political powers to be exercised for purposes connected with
by the provisions of the special law or charter creating them or applicable to the public good in the administration of the civil government.
them, supplemented by the provisions of this Code, insofar as they are
applicable. The GOCCs are regarded as private corporations despite common
misconceptions.
Among these corporations created by special law are the Philippine National NATIONAL COAL COMPANY VS. COLLECTOR OF INTERNAL
Oil Company, the National Development Company, the Philippine Export REVENUE (146 Phil. 583) – Herein plaintiff brought an action for the
and Foreign Loan Guarantee Corporation and the GSIS. All these are purpose of recovering a sum of money allegedly paid by it under protest to
government owned or controlled, operating under a special law or charter the herein defendant, a specific tax on some tons of coal. It claimed
such that registration with the SEC is not required for them to acquire legal exemption from taxes under Sec. 1469 of the Administrative Code which
and juridical personality. They owe their own existence as such not by provides that “on all coal and coke shall be collected per metric ton, fifty
virtue of their compliance with the requirements of registration under the centavos”. Of the 30,000 shares issued by the corporation, the Philippine
Corporation Code but by virtue of the law specially creating them. government is the owner of 29,809 or substantially all of the shares of the
company.
They are primarily governed by the special law creating them. But unless
otherwise provided by such law, they are not immune from suits, it is thus ISSUE: WON the plaintiff corporation is a public corporation?
settled that when the government engages in a particular business through
the instrumentality of a corporation, it divests itself pro hoc vice of its HELD: No. The plaintiff is a private corporation. The mere fact that the
sovereign character so as to subject itself to the rules governing private government happens to be a majority stockholder does not make
corporations (PNB vs. Pabolar 82 SCRA 595) it a public corporation. As a private corporation, it has no greater rights,
powers and privileges than any other corporation which might be organized
Officers and employees of GOCCs created by special laws are governed by for the same purpose under the Corporation Law, and certainly, it was not
the law of their creation, usually the Civil Service Law. Their subsidiaries, the intention of the Legislature to give it a preference or right or privilege
organized under the provisions of the Corporation Code are governed by over other legitimate private corporation in the mining of coal.
the Labor Code. The test in determining whether they are governed by the
Civil Service Law is the manner of their creation. PRIVATE CORPORATIONS: those formed for some private purpose,
benefit, aim or end. They are created for the immediate benefit and
PNOC-EDC VS. NLRC (201 SCRA 487; Sept. 11, 1991) – Danilo Mercado, advantage of the individuals or members composing it and their franchise
an employee of herein petitioner was dismissed on the ground of may be considered as privileges conferred by the State to be exercised and
dishonesty and violation of company rules and regulations. He filed an enjoyed by them in the form of the corporation.
illegal dismissal complaint before herein respondent NLRC who ruled on his
favour, despite the motion to dismiss of petitioner that the Civil Service 2. ECCLESIASTICAL AND LAY CORPORATIONS
Commission has jurisdiction over the case.
ECCLESIASTICAL OR RELIGIOUS CORPORATIONS: are composed
ISSUE: WON NLRC has jurisdiction over the case? exclusively of ecclesiastics organized for spiritual purposes or for
administering properties held for religious ones. They are organized to
HELD: Yes. Employees of GOCCs, whether created by special law or secure public worship or perpetuating the right of a particular religion.
formed as subsidiaries under the Corporation Law are governed by the Civil
Service Law and not the Labor Code, under the 1973 Constitution has been LAY CORPORATIONS: are those organized for purposes other than
supplanted by the present Constitution. religion. They may further be classified as:
a. ELEEMOSYNARY: created for charitable and benevolent purposes such
Thus, under the present state of the law, the test in determining as those organized for the purpose of maintaining hospitals and houses for
whether a GOCC is subject to the Civil Service Law is the manner the sick, aged or poor.
of its creation, such that government corporations created by b. CIVIL: organized not for the purpose of public charity but for the
special charter are subject to its provisions while those benefit, pecuniary or otherwise, of its members.
incorporated under the General Corporation Law are not within its
coverage. 3. AGGREGATE AND SOLE CORPORATIONS
PNOC has its special charter, but its subsidiary, PNOC-EDC, having been AGGREGATE CORPORATIONS: are those composed of a number of
incorporated under the General Corporation Law was held to be a GOCC individuals vested with corporate powers.

such as telegraph and telephone companies, water and electric companies.
CORPORATION SOLE: those consist of one person or individual only and More appropriately, they are known as public service corporations.
who are made as bodies corporate and politic in order to give them some
legal capacity and advantage which, as natural persons, they cannot have. 8. DE JURE, DE FACTO AND CORPORATION BY ESTOPPEL
Under the Code, a corporation sole may be formed by the chief archbishop,
bishop, priest, minister, rabbi, or other presiding elder or religious DE JURE CORPORATIONS: are juridical entities created or organized in
denominations, sects or churches. strict or substantial compliance with statutory requirements of incorporation
and whose rights to exist as such cannot be successfully attacked even by
4. CLOSE AND OPEN CORPORATION the State in a quo warranto proceeding. They are, in effect, incorporated
by strict adherence to the provisions of the law of their creation.
CLOSE CORPORATIONS: are those whose shares of stock are held by a
limited number of persons like the family or other closely-knit group. There DE FACTO CORPORATIONS: are those which exist by the virtue of an
are no public investors and the shareholders are active in the conduct of irregularity or defect in the organization or constitution or from some
the corporate affairs; recognized under Sec. 96 of the Corporation Code. omission to comply with the conditions precedent by which corporations de
jure are created, but there was colorable compliance with the requirements
OPEN CORPORATIONS: are those formed to openly accept outsiders as of the law under which they might be lawfully incorporated for the
stockholders or investors. They are authorized and empowered to list in the purposes and powers assumed, and user of the rights claimed to be
stock exchange and to offer their shares to the public such that stock conferred by law. Its existence can only be attacked by a direct action of
ownership can widely be dispersed. quo warranto proceedings.
5. DOMESTIC AND FOREIGN CORPORATIONS CORPORATION BY ESTOPPEL: those which are so defectively formed as
not to be either de jure or de facto corporations but which are considered
DOMESTIC CORPORATIONS: are those organized or created under or as corporations in relation only to those who cannot deny their corporate
by virtue of the Philippine laws, either by legislative act or under the existence due to their agreement, admission or conduct.
provisions of the General Corporation Law.
FOREIGN CORPORATIONS: are those formed, organized or existing CHAPTER 4: FORMATION AND ORGANIZATIONS OF
under any laws other than those of the Philippines and whose laws allow CORPORATIONS
Filipino citizens and corporations to do business in its own country or state
(Sec. 123, Corporation Code). 1. PROMOTIONAL STAGE
The second part of the definition is, however, somehow misplaced since This is undertaken by the organizers or promoters who bring together
any corporation for that matter, which is not registered under Philippine persons interested in the business venture. They enter into contract either
laws is a foreign corporation. Such second part was inserted only for the in their own names or in the name of the proposed corporation.
purpose of qualifying a foreign corporation to secure a license and to do
business in the Philippines. LIABILITY OF PROMOTERS:
GENERAL RULE: a promoter, although he may assume to act for and on
6. PARENT OR HOLDING COMPANIES AND SUBSIDIARIES AND behalf of a projected corporation and not for himself, will be held
AFFILIATES personally liable on contracts made by him for the benefit of a corporation
he intends to organize. The personal liability continues even after the
PARENT OR HOLDING COMPANY: a corporation who controls another formation of the corporation unless there is novation or other agreement to
corporation, or several other corporations known as its subsidiaries. release him from liability. As such, the promoter may do either of the
Holding companies have been defined as corporations that confine their following options:
activities to owning stock in, and supervising management of other
companies. A holding company usually owns a controlling interest (more a. He may make a continuing offer on behalf of the corporation, which, if
than 50% of the voting stock) in the companies whose stocks it holds. As accepted after incorporation, will become a contract. In this case, the
may be differentiated from investment companies which are active in the promoter does not assume any personal liability, whether or not the
sale or purchase of shares of stock or securities, parent or holding corporation will accept the offer;
companies have a passive portfolio and hold the securities merely for b. He may make a contract at the time binding himself, with the
purposes of control and management. understanding that if the corporation, once formed, accepts or adopts the
contract, he will be relieved of responsibility; or
SUBSIDIARY CORPORATIONS: those which another corporation owns c. He may bind himself personally and assume responsibility of looking to
at least a majority of the shares, and thus have control. the proposed corporation, when formed, for reimbursement.
A subsidiary has an independent and separate juridical personality, distinct 2. PROCESS OF INCORPORATION
from that of its parent company, hence any claim or suit against the latter
does not bind the former or vice versa. Includes the drafting of the Articles of Incorporation, preparation and
submission of additional and supporting documents, filing with the SEC,
AFFILIATES: are those corporations which are subject to common control and the subsequent issuance of the Certificate of Incorporation.
and operated as part of a system. They are sometimes called “sister
companies” since the stockholdings of a corporation is not substantial CONTENTS OF THE ARTICLES OF INCORPORATION
enough to control the former. Example: 15% of ABCD Company is held by
A Corp, 18% by B Corp, and another 15% by C Corp. – A, B and C are Sec. 14. Contents of the articles of incorporation. - All corporations
affiliates. organized under this code shall file with the Securities and Exchange
Commission articles of incorporation in any of the official languages duly
7. QUASI-PUBLIC CORPORATIONS signed and acknowledged by all of the incorporators, containing substantially
the following matters, except as otherwise prescribed by this Code or by
These are private corporations which have accepted from the state the special law:
grant of a franchise or contract involving the performance of public duties.
The term is sometimes applied to corporations which are not strictly public 1. The name of the corporation;
in the sense of being organized for governmental purposes, but whose 2. The specific purpose or purposes for which the corporation is being
operations contribute to the convenience or welfare of the general public, incorporated. Where a corporation has more than one stated purpose, the
articles of incorporation shall state which is the primary purpose and which and supervision.
is/are the secondary purpose or purposes: Provided, That a non-stock
corporation may not include a purpose which would change or contradict its Thus, the organizers must make sure that the name they intend to use as a
nature as such; corporate name is not similar or confusingly similar to any other name
3. The place where the principal office of the corporation is to be located, already registered and protected by law since the SEC would refuse
which must be within the Philippines; registration if such be the case.
4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the incorporators; Sec. 18. Corporate name. - No corporate name may be allowed by the
6. The number of directors or trustees, which shall not be less than five (5) Securities and Exchange Commission if the proposed name is identical or
nor more than fifteen (15); deceptively or confusingly similar to that of any existing corporation or to any
7. The names, nationalities and residences of persons who shall act as other name already protected by law or is patently deceptive, confusing or
directors or trustees until the first regular directors or trustees are duly contrary to existing laws. When a change in the corporate name is approved,
elected and qualified in accordance with this Code; the Commission shall issue an amended certificate of incorporation under the
8. If it be a stock corporation, the amount of its authorized capital stock in amended name.
lawful money of the Philippines, the number of shares into which it is divided,
and in case the share are par value shares, the par value of each, the names, The SEC, in implementing the above provision on corporate name, thus
nationalities and residences of the original subscribers, and the amount requires that a “Verification Slip” from the Records Division of the
subscribed and paid by each on his subscription, and if some or all of the Commission be submitted showing that the proposed name is legally
shares are without par value, such fact must be stated; permissible. If the corporate name is available for use, the SEC will allow
9. If it be a non-stock corporation, the amount of its capital, the names, the incorporators to “reserve” it for a nominal fee for a specific period until
nationalities and residences of the contributors and the amount contributed the AOI is filed with the SEC.
by each; and
10. Such other matters as are not inconsistent with law and which the SEC Memorandum Circular No. 14-2000 dated October 24, 2000, provides:
incorporators may deem necessary and convenient.
In implementing Section 18 of the Corporation Code of the Philippines (BP
The Securities and Exchange Commission shall not accept the articles of 68), the following revised guidelines in the approval of corporate and
incorporation of any stock corporation unless accompanied by a sworn partnership names are hereby adopted for the information and guidelines
statement of the Treasurer elected by the subscribers showing that at least of all concerned:
twenty-five (25%) percent of the authorized capital stock of the corporation
has been subscribed, and at least twenty-five (25%) of the total subscription 1. The corporation name shall contain the word "Corporation" or
has been fully paid to him in actual cash and/or in property the fair valuation its abbreviation "Corp." or "Incorporated", or "Inc.".
of which is equal to at least twenty-five (25%) percent of the said
subscription, such paid-up capital being not less than five thousand The partnership name shall contain the word "Company" or "Co.". For
(P5,000.00) pesos. limited partnership, the word "Limited" or "Ltd." shall be included. In
case of professional partnership, the word "Company" need not be
Sec. 15. Forms of Articles of Incorporation . - Unless otherwise used.
prescribed by special law, articles of incorporation of all domestic 2. Terms descriptive of a business in the name shall be indicative of the
corporations shall comply substantially with the following form: primary purpose. If there are two (2) descriptive terms, the first shall
refer to the primary purpose and the second shall refer to one of the
secondary purposes.
a. PREFATORY PARAGRAPH 3. The name shall not be identical, misleading or confusingly
similar to one already registered by another corporation or
xxx partnership with the Commission or a sole proprietorship registered
“KNOW ALL MEN BY THESE PRESENTS: with the Department of Trade and Industry.
The undersigned incorporators, all of legal age and a majority of
whom are residents of the Philippines, have this day voluntarily If the proposed name is similar to the name of a registered
agreed to form a (stock) (non-stock) corporation under the laws firm, the proposed name must contain at least one distinctive
of the Republic of the Philippines” word different from the name of the company already
xxx registered. (The Book of Sir Ladia, 2007 Edition, provides that there
must be two other words different and distinct from the name of the
It must specify the nature of the corporation being organized in order to company already registered or protected by law).
prevent difficulties of administration and supervision. Thus, the corporation 4. Business or tradename of any firm which is different from its
should indicate whether it is a stock or a non-stock corporation, a close corporate or partnership name shall be indicated in the articles of
corporation, corporation sole or a religious corporation. incorporation or partnership of said firm.
5. Tradename or trademark duly registered with the Intellectual Property
Office cannot be used as part of a corporate or partnership name
b. CORPORATE NAME without the consent of the owner of such tradename of trademark.
6. If the name or surname of a person is used as part of a
xxx corporate or partnership name, the consent of said person or
AND WE HEREBY CERTIFY: his heirs must be submitted except of that person is a
FIRST: That the name of said corporation shall be stockholder, member, partner of a declared national hero. If
".............................................., INC. or CORPORATION"; such person cannot be identified or non-existent, an
xxx explanation for the use of such name shall be required.
7. The meaning of initials in the name shall be disclosed in
The name of the corporation is essential to its existence since it is through writing by the registrant.
it that it can act and perform all legal acts. Each corporation should 8. Name containing a term descriptive of a business different from the
therefore, have a name by which it is to sue and be sued and do all legal business of a registered company whose name also bears similar
acts. term(s) used by the former may be allowed.
9. The name should not be patently deceptive, confusing or
A corporation, once formed, cannot use any other name, unless it has been contrary to existing laws.
amended in accordance with law as this would result in confusion and may 10. The name which contains a word identical to a word in a
open the door to fraud and evasion as well as difficulties of administration registered name shall not be allowed if such word is coined or

already appropriated by a registered firm, regardless of the name except in the manner provided by law. By that name alone it is
number of the different words in the proposed name, unless authorized to transact business.
there is consent from the registered firm of this firm is one of
the stockholders of partners of the entity to be registered. The law gives a corporation on express or implied authority to assume
11. The name of an internationally known foreign corporation or another name that is unappropriated; still less that of another corporation,
one similar to it may not be used by a domestic corporation which is expressly set apart from it and protected by law. If any
without the consent of the former. corporation should assume at pleasure as an unregistered trade name, the
12. The term "Philippines" when used as part of the name of a name of another corporation, this practice would result in confusion of
subsidiary corporation of a foreign corporation shall be in administration and supervision. The policy of the law as expressed in our
parenthesis: i.e. "(Philippines)" or "(Phil.)". corporation statute and the Code of Commerce is clearly against such a
13. The following words shall not be used as part of a corporate practice.
or partnership names:
a. As provided by special laws: UNIVERSAL MILLS CORP. VS. UNIVERSAL TEXTILE MILLS INC. (78
1. "Finance", "Financing" or "Finance and SCRA 62; July 28, 1977) – In 1953, Universal Textile Mills, Inc. (UTMI) was
Investment" by corporations or partnerships not engaged in organized. In 1954, Universal Hosiery Mills Corporation (UHMC) was also
the financing business (R.A. 5980, as amended) organized. Both are actually distinct corporations but they engage in the
2. "Engineer", "Engineering" or "Architects" as part same business (fabrics). In 1963, UHMC petitioned to change its name to
of the corporate name (R. A. 546 and R.A. 1582) Universal Mills Corporation (UMC). The Securities and Exchange
3. "Bank", "Banking", "Banker", Building and Loan Commission (SEC) granted the petition.
Association", Trust Corporation", "Trust Company" or words
of similar import by corporations or associations not Subsequently, a warehouse owned by UMC was gutted by fire. News about
engaged in banking business. (R.A. 337, as amended) the fire spread and investors of UTMI thought that it was UTMI’s
4. "United Nations" in full or abbreviated form warehouse that was destroyed. UTMI had to make clarifications that it was
cannot be part of a corporate or partnership name (R.A. UMC’s warehouse that got burned. Eventually, UTMI petitioned that UMC
226) should be enjoined from using its name because of the confusion it
5. "Bonded" for corporations or partnerships with brought. The SEC granted UTMI’s petition. UMC however assailed the order
unlicensed warehouse (R.A. 245) of the SEC as it averred that their tradename is not deceptive; that UTMI’s
b. As a matter of policy: tradename is qualified by the word “Textile”, hence, there can be no
1. "Investment(s)" by corporations or partnership confusion,
not organized as investment house company or holding
company. ISSUE: WON the SEC is correct?
2. "National" by all stock corporations and
partnership. HELD: Yes. There is definitely confusion as it was evident from the facts
3. "Asean", "Calabarzon" and "Philippines 2000". where the investors of UTMI mistakenly believed that it was UTMI’s
14. The name of a dissolved firm shall not be allowed to be used by other warehouse that was destroyed. Although the corporate names are not
firms within three (3) years after the approval of the dissolution of the really identical, they are indisputably so similar that it can cause, as it
corporation by the Commission, unless allowed by the last already did, confusion. The SEC did not act in abuse of its discretion when
stockholders representing at least majority of the outstanding capital it ordered UMC to drop its name because there was factual evidence
stock of the dissolved firm. presented as to the confusion. Further, when UMC filed its petition for
15. Registrant corporations or partnership shall submit a letter change of corporate name, it made an undertaking that it shall change its
undertaking to change their corporate or partnership name in case name in the event that there is another person, firm or entity who has
another person or firm has acquired a prior right to the use of the said obtained a prior right to the use of such name or one similar to it. That
firm name or the same is deceptively or confusingly similar to one promise is still binding upon the corporation and its responsible officers
already registered unless this undertaking is already included as one
of the provisions of the articles of incorporation or partnership of the
registrant.1 LYCEUM OF THE PHILIPPINES VS. COURT OF APPEALS (219 SCRA
610; March 5, 1993) - Lyceum of the Philippines Inc. previously obtained
RED LINE TRANSPORTATION CO. VS. RURAL TRANSIT CO. (60 Phil. from the SEC a favourable decision on the exclusive use of “Lyceum”
549; Sept. 6, 1934) – A certificate of public convenience was issued in the against Lyceum of Baguio, Inc.. such decision assailed by the latter before
name of Rural Transit Co. by the Public Service Commission despite the SC which was denied for lack of merit.
opposition of herein petitioner-appellant Red Line Transportation Co.. It
appears that “Red Line Transit Co.” is being used as a trade name of Armed with the Resolution of the Supreme Court, the Lyceum of the
Bahrach Motors Co. Philippines then wrote all the educational institutions it could find using the
word "Lyceum" as part of their corporate name, and advised them to
ISSUE: Who is the real party in interest, Rural Transit Co. which appears discontinue such use of "Lyceum." Unheeded, Lyceum of the Philippines
in the face of the application? Or Bahrach Motors, Inc. using the name of instituted before the SEC an action to enforce what Lyceum of the
the former as a trade name? Philippines claims as its proprietary right to the word "Lyceum." The SEC
rendered a decision sustaining petitioner's claim to an exclusive right to use
HELD: Bahrach Motors, Inc.. There is no law that empowers PSC or any the word "Lyceum." The hearing officer relied upon the SEC ruling in the
court in this jurisdiction to authorize one corporation to assume the name Lyceum of Baguio, Inc. case.
of another corporation as a trade name. Both Rural Transit and Bahrach
are Philippine corporations and the very law of their creation and continued On appeal, however, by Lyceum Of Aparri, Lyceum Of Cabagan, Lyceum Of
existence requires each to adopt and certify a distinctive name. Camalaniugan, Inc., Lyceum Of Lallo, Inc., Lyceum Of Tuao, Inc., Buhi
Lyceum, Central Lyceum Of Catanduanes, Lyceum Of Southern Philippines,
The incorporators constitute a body politic and corporate under the name Lyceum Of Eastern Mindanao, Inc. and Western Pangasinan Lyceum, Inc.,,
state in the certificate (Sec. 11, Act. No. 1459). A corporation has the which are also educational institutions, to the SEC En Banc, the decision of
power of succession in its corporate name (Sec. 13). The name of a the hearing officer was reversed and set aside. The SEC En Banc did not
corporation is therefore essential to its existence. It cannot change its consider the word "Lyceum" to have become so identified with Lyceum of
the Philippines as to render use thereof by other institutions as productive
of confusion about the identity of the schools concerned in the mind of the
1 http://www.disini.ph/res_sec__mc142000.html general public. Unlike its hearing officer, the SEC En Banc held that the
attaching of geographical names to the word "Lyceum" served sufficiently

to distinguish the schools from one another, especially in view of the fact the private respondents, i.e., the Western Pangasinan Lyceum, Inc., used
that the campuses of Lyceum of the Philippines and those of the other the term "Lyceum" 17 years before Lyceum of the Philippines registered its
Lyceums were physically quite remote from each other. own corporate name with the SEC and began using the word "Lyceum." It
follows that if any institution had acquired an exclusive right to the word
On appeal, the CA affirmed the decision of the CA en banc, and denied "Lyceum," that institution would have been the Western Pangasinan
reconsideration. Lyceum, Inc. rather than Lyceum of the Philippines. Hence, Lyceum of the
Philippines is not entitled to a legally enforceable exclusive right to use the
ISSUE: WON private respondents can be directed to delete the word word "Lyceum" in its corporate name and that other institutions may use
“lyceum” from their corporate names? "Lyceum" as part of their corporate names.
HELD: No. The policy underlying the prohibition in Section 18 against PHILIPS EXPORT B.V. et. al. VS. COURT OF APPEALS (206 SCRA
the registration of a corporate name which is "identical or deceptively or 457; Feb. 21, 1992) – Petitioner is the registered owner of the trademark
confusingly similar" to that of any existing corporation or which is "patently PHILIPS and PHILIPS SHIELD EMBLEM issued by the Philippine Patent
deceptive" or "patently confusing" or "contrary to existing laws," is the Office. Philips Electric Lamp Inc. and Philips Industrial Development Inc.,
avoidance of fraud upon the public which would have occasion to also petitioners, are the authorized users of such trademark.
deal with the entity concerned, the evasion of legal obligations
and duties, and the reduction of difficulties of administration and Petitioner filed a case with SEC praying for a writ of injunction to prohibit
supervision over corporations. herein respondent Standard Philips Corporation from using the word
“PHILIPS” in its corporate name, which was denied. On appeal, the CA
Herein, the Court does not consider that the corporate names of the affirmed the SEC.
academic institutions are "identical with, or deceptively or confusingly
similar" to that of Lyceum of the Philippines Inc. True enough, the ISSUE: WON Standard Philips should be directed to delete the word
corporate names of the other schools (defendant institutions) entities all PHILIPS from its corporate name?
carry the word "Lyceum" but confusion and deception are effectively
precluded by the appending of geographic names to the word "Lyceum." HELD: Yes. As early as Western Equipment and Supply Co. v. Reyes, 51
Thus, the "Lyceum of Aparri" cannot be mistaken by the general public for Phil. 115 (1927), the Court declared that a corporation's right to use its
the Lyceum of the Philippines, or that the "Lyceum of Camalaniugan" would corporate and trade name is a property right, a right in rem, which
be confused with the Lyceum of the Philippines. Further, etymologically, it may assert and protect against the world in the same manner as
the word "Lyceum" is the Latin word for the Greek lykeion which in turn it may protect its tangible property, real or personal, against
referred to a locality on the river Ilissius in ancient Athens "comprising an trespass or conversion. It is regarded, to a certain extent, as a
enclosure dedicated to Apollo and adorned with fountains and buildings property right and one which cannot be impaired or defeated by
erected by Pisistratus, Pericles and Lycurgus frequented by the youth for subsequent appropriation by another corporation in the same field
exercise and by the philosopher Aristotle and his followers for teaching." (Red Line Transportation Co. vs. Rural Transit Co., September 8, 1934, 20
Phil 549).
In time, the word "Lyceum" became associated with schools and other
institutions providing public lectures and concerts and public discussions. A name is peculiarly important as necessary to the very existence
Thus today, the word "Lyceum" generally refers to a school or an institution of a corporation (American Steel Foundries vs. Robertson, 269 US 372,
of learning. Since "Lyceum" or "Liceo" denotes a school or institution of 70 L ed 317, 46 S Ct 160; Lauman vs. Lebanon Valley R. Co., 30 Pa 42;
learning, it is not unnatural to use this word to designate an entity which is First National Bank vs. Huntington Distilling Co. 40 W Va 530, 23 SE 792).
organized and operating as an educational institution. To determine Its name is one of its attributes, an element of its existence, and essential
whether a given corporate name is "identical" or "confusingly or deceptively to its identity (6 Fletcher [Perm Ed], pp. 3-4). The general rule as to
similar" with another entity's corporate name, it is not enough to ascertain corporations is that each corporation must have a name by which it
the presence of "Lyceum" or "Liceo" in both names. One must evaluate is to sue and be sued and do all legal acts. The name of a
corporate names in their entirety and when the name of Lyceum of the corporation in this respect designates the corporation in the same
Philippines is juxtaposed with the names of private respondents, they are manner as the name of an individual designates the person
not reasonably regarded as "identical" or "confusingly or deceptively (Cincinnati Cooperage Co. vs. Bate. 96 Ky 356, 26 SW 538; Newport
similar" with each other. Mechanics Mfg. Co. vs. Starbird. 10 NH 123); and the right to use its
corporate name is as much a part of the corporate franchise as
ISSUE2: WON the word “Lyceum” has acquired a secondary meaning any other privilege granted (Federal Secur. Co. vs. Federal Secur.
although originally generic? Corp., 129 Or 375, 276 P 1100, 66 ALR 934; Paulino vs. Portuguese
Beneficial Association, 18 RI 165, 26 A 36).
HELD: No. The Court of Appeals recognized this issue and answered it in
the negative: "Under the doctrine of secondary meaning, a word or A corporation acquires its name by choice and need not select a name
phrase originally incapable of exclusive appropriation with identical with or similar to one already appropriated by a senior corporation
reference to an article in the market, because geographical or while an individual's name is thrust upon him ( See Standard Oil Co. of New
otherwise descriptive might nevertheless have been used so long Mexico, Inc. v. Standard Oil Co. of California, 56 F 2d 973, 977). A
and so exclusively by one producer with reference to this article corporation can no more use a corporate name in violation of the
that, in that trade and to that group of the purchasing public, the rights of others than an individual can use his name legally
word or phrase has come to mean that the article was his produce acquired so as to mislead the public and injure another (Armington
(Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This circumstance has been vs. Palmer, 21 RI 109. 42 A 308).
referred to as the distinctiveness into which the name or phrase
has evolved through the substantial and exclusive use of the same The statutory prohibition (under Sec. 18 of the Corporation Code) cannot
for a considerable period of time. . . . No evidence was ever presented be any clearer. To come within its scope, two requisites must be proven,
in the hearing before the Commission which sufficiently proved that the namely:
word 'Lyceum' has indeed acquired secondary meaning in favor of the
appellant. If there was any of this kind, the same tend to prove only that (1) that the complainant corporation acquired a prior right over the use of
the appellant had been using the disputed word for a long period of time. such corporate name; and
(2) the proposed name is either:
The number alone of the private respondents in the present case suggests (a) identical; or
strongly that the Lyceum of the Philippines' use of the word "Lyceum" has (b) deceptively or confusingly similar to that of any existing
not been attended with the exclusivity essential for applicability of the corporation or to any other name already protected by law; or
doctrine of secondary meaning. It may be noted also that at least one of (c) patently deceptive, confusing or contrary to existing law.

acquired a right to that name and perhaps carried on its business
The right to the exclusive use of a corporate name with freedom thereunder, that another should attempt to use the same name, or the
from infringement by similarity is determined by priority of same name with a slight variation in such a way as to induce persons to
adoption. In this regard, there is no doubt with respect to Petitioners' deal with it in the belief that they are dealing with the corporation which
prior adoption of' the name ''PHILIPS" as part of its corporate name. has given a reputation to the name (6 Fletcher [Perm Ed], pp. 39-40, citing
Petitioners Philips Electrical and Philips Industrial were incorporated on 29 Borden Ice Cream Co. v. Borden's Condensed Milk Co., 210 F 510).
August 1956 and 25 May 1956, respectively, while Respondent Standard Notably, too, Private Respondent's name actually contains only a single
Philips was issued a Certificate of Registration on 12 April 1982, twenty-six word, that is, "STANDARD", different from that of Petitioners inasmuch as
(26) years later. Petitioner PEBV has also used the trademark "PHILIPS" on the inclusion of the term "Corporation" or "Corp." merely serves the
electrical lamps of all types and their accessories since 30 September 1922. Purpose of distinguishing the corporation from partnerships and other
business organizations.
The second requisite no less exists in this case. In determining the
existence of confusing similarity in corporate names, the test is The fact that there are other companies engaged in other lines of business
whether the similarity is such as to mislead a person, using using the word "PHILIPS" as part of their corporate names is no defense
ordinary care and discrimination. In so doing, the Court must look to and does not warrant the use by Private Respondent of such word which
the record as well as the names themselves. While the corporate names of constitutes an essential feature of Petitioners' corporate name previously
Petitioners and Private Respondent are not identical, a reading of adopted and registered and-having acquired the status of a well-known
Petitioner's corporate names, to wit: PHILIPS EXPORT B.V., PHILIPS mark in the Philippines and internationally as well (Bureau of Patents
ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC., Decision No. 88-35 [TM], June 17, 1988, SEC Records).
inevitably leads one to conclude that "PHILIPS" is, indeed, the dominant
word in that all the companies affiliated or associated with the principal c. PURPOSE CLAUSE
corporation, PEBV, are known in the Philippines and abroad as the PHILIPS
Group of Companies. xxx
SECOND: That the purpose or purposes for which such corporation
Respondents argue that there were no evidence presented that there was is incorporated are: (If there is more than one purpose, indicate
actual confusion. It is settled, however, that proof of actual confusion primary and secondary purposes);
need not be shown. It suffices that confusion is probably or likely xxx
to occur (6 Fletcher [Perm Ed], pp. 107-108, enumerating a long line of
cases). The statement of the objects or purpose or powers in the charter results
practically in defining the scope of authority of the corporate enterprise or
Moreover, Given Private Respondent's underlined primary purpose in its undertaking. This statement both congers and also limits the actual
AOI, nothing could prevent it from dealing in the same line of business of authority of the corporate representatives.
electrical devices, products or supplies which fall under its primary
purposes. Besides, there is showing that Private Respondent not only The reasons for requiring a statement of the purposes or objects:
manufactured and sold ballasts for fluorescent lamps with their corporate 1. In order that the stockholder who contemplates on an investment in a
name printed thereon but also advertised the same as, among others, business enterprise shall know within what lines of business his money is to
Standard Philips (TSN, before the SEC, pp. 14, 17, 25, 26, 37-42, June 14, be put at risks;
1985; pp. 16-19, July 25, 1985). As aptly pointed out by Petitioners, 2. So that the board of directors and management my now within
[p]rivate respondent's choice of "PHILIPS" as part of its corporate name what lines of business they are authorized to act; and
[STANDARD PHILIPS CORPORATION] . . . tends to show said respondent's 3. So that anyone who deals with the company may ascertain whether
intention to ride on the popularity and established goodwill of said a contract or transaction into which he contemplates entering is one within
petitioner's business throughout the world" ( Rollo, p. 137). The subsequent the general authority of the management.
appropriator of the name or one confusingly similar thereto usually seeks
an unfair advantage, a free ride of another's goodwill (American Gold Star SECONDARY PURPOSE: Although the Corporation Code does not restrict
Mothers, Inc. v. National Gold Star Mothers, Inc., et al, 89 App DC 269, 191 nor limit the number of purpose or purposes which a corporation may have,
F 2d 488). Sec. 14 thereof, requires that if it has more than one purpose, the primary
purpose as well as the secondary ones must be indicated therein.
In allowing Private Respondent the continued use of its corporate name,
the SEC maintains that the corporate names of Petitioners PHILIPS PROHIBITION: The following are prohibited by special laws for having
ELECTRICAL LAMPS. INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC. any other purpose not peculiar to them:
contain at least two words different from that of the corporate name of 1. Educational, religious, and other non-stock corporations cannot include
respondent STANDARD PHILIPS CORPORATION, which words will readily any other purpose which would change or contradict its nature or to
identify Private Respondent from Petitioners and vice-versa. engage in any enterprise to make profits for is members;
2. Insurance companies cannot engage in commercial banking at the same
True, under the Guidelines in the Approval of Corporate and Partnership time, and vice-versa; and
Names formulated by the SEC, the proposed name "should not be similar to 3. Stock brokers can have no other line of business not peculiar to them.
one already used by another corporation or partnership. If the proposed
name contains a word already used as part of the firm name or style of a RESTRICTIONS AND/OR ADDITIONAL REQUIREMENTS:
registered company; the proposed name must contain two other 1. As a general rule, the purpose or purposes must be lawful. Hence, the
words different from the company already registered" (Emphasis SEC is duty bound to determine the legality of the corporate purpose/s
ours). It is then pointed out that Petitioners Philips Electrical and Philips before it issues the certificate of registration;
Industrial have two words different from that of Private Respondent's 2. A corporation may not be formed for the purpose of practicing a
name. profession like law, medicine or accountancy, either directly or indirectly.
These are reserved exclusively for professional partnerships;
What is lost sight of, however, is that PHILIPS is a trademark or trade 3. The retail trade, where the corporate capital is less than $2.5M, or its
name which was registered as far back as 1922. Petitioners, therefore, peso equivalent are reserved exclusively for Filipinos, or for corporations or
have the exclusive right to its use which must be free from any partnerships wholly owned by such citizen.
infringement by similarity. A corporation has an exclusive right to the 4. As a general rule, corporations with foreign equity are not allowed to
use of its name, which may be protected by injunction upon a engage in restaurant business but corporations with such foreign equity
principle similar to that upon which persons are protected in the can purse such undertaking if it is incidental or in connection with hotel or
use of trademarks and tradenames (18 C.J.S. 574). Such principle inn-keeping business.
proceeds upon the theory that it is a fraud on the corporation which has

5. Management consultants, advisers and/or specialists, must submit the
personal information sheet of the incorporators and directors in order that The fact that CRS maintains branch office in some parts of the country
the SEC may be able to find out or determine whether or not the applicant does not mean that it can be sued in any of these places. To allow such
corporation is qualified to act as such. would create confusion and work untold inconveniences to the corporation.
6. As a matter of policy, financing companies are required by the SEC to
submit certain additional documents together with their applications for e. TERM OF EXISTENCE
registration to verify compliance with RA 8556. xxx
7. For bonded warehousing companies, an undertaking to comply with the FOURTH: That the term for which said corporation is to exist
General Bonded Warehousing Act must be submitted along with the AOI. is............... years from and after the date of issuance of the
8. In case the applicant proposes to engage in the business of hospital certificate of incorporation;
and/or clinic, the purpose clause must contain the following proviso: xxx
“Provided that purely medical or surgical services in connection therewith
shall be performed by duly qualified physician and surgeon who may or Sec. 11. Corporate term. - A corporation shall exist for a period not
may not be freely and individually contracted by the parties.” exceeding fifty (50) years from the date of incorporation unless sooner
9. In the case of Customs Brokerage business, the applicant must submit dissolved or unless said period is extended. The corporate term as originally
the license of at least two customs broker connected with the applicant stated in the articles of incorporation may be extended for periods not
corporation; exceeding fifty (50) years in any single instance by an amendment of the
10. Transfer Agents, Broker and Clearing Houses must submit the articles of incorporation, in accordance with this Code; Provided, That no
certificate of admission to the profession of the CPA of any officer of the extension can be made earlier than five (5) years prior to the original or
corporation; subsequent expiry date(s) unless there are justifiable reasons for an earlier
11. Carriage of mails cannot be a purpose of a corporation unless a special extension as may be determined by the Securities and Exchange Commission
franchise has been granted to it.
12. If the corporate purpose or objective includes any purpose under The corporate term is necessary in determining at what point in time the
the supervision of another government agency, prior clearance corporation will cease to exist or have lost its juridical personality. Once it
and/or approval of the concerned government agencies or ceases to exist, its legal personality also expires and could not thereafter,
instrumentalities will be required pursuant to the last paragraph of act in its own name for the purpose of prosecuting it business.
Sec. 17 of the Code.
EXTENSION: can be made not earlier than 5 years prior to the expiry date
GENERAL LIMITATIONS: unless there are justifiable reasons.
1. The purpose or purposes must be lawful;
2. The purpose must be specific or stated concisely although in broad or
general terms; f. INCORPORATORS
3. If there is more than one purpose, the primary as well as the secondary xxx
ones must be specified; and FIFTH: That the names, nationalities and residences of the
4. The purposes must be capable of being lawfully combined. incorporators of the corporation are as follows:
d. PRINCIPAL OFFICE NAME NATIONALITY RESIDENCE

xxx ..................... ............................. ............................
THIRD: That the principal office of the corporation is located in ..................... ............................. ............................
the City/Municipality of............................................, Province ..................... ............................. ............................
of................................................., Philippines ..................... ............................. ............................
xxx ..................... ............................. ............................
xxx
It must be located within the Philippines. The AOI must not only specify the
province, but also the City or Municipality where it is located. In this
regard, it is to be observed that the principal office may be in one place but Sec. 5. Corporators and incorporators, stockholders and members. -
the business operations are actually conducted in other areas. The law Corporators are those who compose a corporation, whether as stockholders
does not, of course, require a statement of the place of corporate or as members. Incorporators are those stockholders or members mentioned
operations and, therefore, may be dispensed with. in the articles of incorporation as originally forming and composing the
corporation and who are signatories thereof.
The principal office serves as the residence of the corporation, and is thus
important in: (1) venue of actions; (2) registration of chattel mortgage of Corporators in a stock corporation are called stockholders or shareholders.
shares; (3) validity of meetings of stockholders or members in so far as Corporators in a non-stock corporation are called members.
venue thereof is concerned.
CLAVECILLA RADIO SYSTEM VS. ANTILLON (19 SCRA 379; Feb. 18, CORPORATORS apply to all who compose the corporation at any given
1967) – The New Cagayan Grocery filed a complaint against CRS for some time and need not be among those who executed the AOI at the start of its
irregularities in the transmission of a message which changed the context formation or organization.
and purport causing damages. The complaint was filed in the City Court of
Cagayan de Oro. INCORPORATORS are those mentioned in the AOI as originally forming
the corporation and who are signatories in the AOI.
ISSUE: WON the action will prosper?
An incorporator may be considered as a corporator as long as he continues
HELD: No. The action was based on tort and not upon a written contract to be a stockholder or a member, but not all corporators are incorporators.
and as such, under the Rules of Court, it should be filed in the municipality
where the defendant or any of the defendants resides or may be served
Sec. 10. Number and qualifications of incorporators. - Any number of
with summons.
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
Settled is the principle in corporation law that the residence of a
a private corporation for any lawful purpose or purposes. Each of the
corporation is the place where the principal office is established.
incorporators of a stock corporation must own or be a subscriber to at least
Since it is not disputed that CRS has its principal office in Manila, it follows
one (1) share of the capital stock of the corporation.
that the suit against it may properly be filed in the City of Manila.

QUALIFICATIONS OF INCORPORATORS: Sec. 27. Disqualification of directors, trustees or officers. - No person
1. Must be natural persons. It implies that a corporation or a partnership convicted by final judgment of an offense punishable by imprisonment for a
cannot become incorporators. EXCEPTION: (1) cooperatives; (2) period exceeding six (6) years, or a violation of this Code committed within
corporations primarily organized to hold equities in rural banks and may five (5) years prior to the date of his election or appointment, shall qualify as
rightfully become incorporators thereof. It must be noted likewise that the a director, trustee or officer of any corporation.
law does not preclude firms and other entities from becoming stockholders
or subscribers to the shares of a stock corporation. Thus, while they cannot DISQUALIFICATIONS:
qualify as incorporators, they can become corporators or stockholders. 1. Imprisonment for a period exceeding 6 years;
2. Of Legal Age. Minors cannot be incorporators. They may, however, 2. Violation of the Corporation Code within 5 years prior to the date of
become stockholders provided they are legally represented by parents, election or appointment;
guardians or administrators. 3. Such other disqualifications that may be provided in the by-laws.
3. Must own at least 1 share.
4. Majority must be residents of the Philippines. The law does not provide JOHN GOKONGWEI, JR., Petitioner,
for citizenship requirements. EXCEPT: in certain areas of activity or vs.
industry wherein ownership of shares of stock are reserved wholly or SECURITIES AND EXCHANGE COMMISSION, SAN MIGUEL
partially to Filipino citizens. Hence, all incorporators may be foreigners CORPORATION, ANDRES M. SORIANO, JOSE M. SORIANO, ENRIQUE
provided majority of them are residents. Note that the requirement is ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE,
residence and not citizenship. MIGUEL ORTIGAS, EMIGDIO TANJUATCO and EDUARDO VISAYA,
Respondents
g. DIRECTORS/TRUSTEES (GR No. L-52129; April 21, 1980)
xxx
SIXTH: That the number of directors or trustees of the corporation FACTS: Petitioner, stockholder of San Miguel Corp. filed a petition with the
shall be............; and the names, nationalities and residences of SEC for the declaration of nullity of the by-laws etc. against the majority
the first directors or trustees of the corporation are as follows: members of the BOD and San Miguel. The amended by-laws provided for
the disqualification of competitors from nomination and election in the
NAME NATIONALITY RESIDENCE Board of Directors of SMC. This was denied by the SEC.
..................... ............................. ............................
..................... ............................. ............................ ISSUE: Is the disqualification valid?
..................... ............................. ............................
..................... ............................. ............................ HELD: Yes. The Court held that a corporation has authority prescribed, by
..................... ............................. ............................ law, the qualifications of directors. It has the inherent power to adopt by-
xxx laws for its internal government, and to regulate the conduct and prescribe
the rights and duties of its members towards itself and among themselves
DIRECTORS compose the governing board in stock corporations. in reference to the management of its affairs. A corporation, under the
TRUSTEES refer to non-stock corporations. Corporation law, may prescribe in its by-laws the qualifications,
duties and compensation of directors, officers, and employees. Any
There must be at least 5 but not more than 15 directors in a private person who buys stock in a corporation does so with the knowledge that its
corporation. EXCEPTIONS: affairs are dominated by a majority of the stockholders and he impliedly
1. Educational corporations registered as non-stock corporations whose contracts that the will of the majority shall govern in all matters within the
number of trustees, though not less than 5 and not more than 15 should limits of the acts of incorporation and lawfully enacted by-laws and not
be divisible by 5. forbidden by law. Any corporation may amend its by-laws by the owners of
2. In close corporations where all stockholders are considered as members the majority of the subscribed stock. It cannot thus be said that petitioners
of the board of directors (Sec. 97) thereby effectively allowing 20 members has the vested right, as a stock holder, to be elected director, in the face of
in the board. the fact that the law at the time such stockholder's right was acquired
contained the prescription that the corporate charter and the by-laws shall
The by-laws of a corporation may provide for additional qualifications and be subject to amendment, alteration and modification. A Director stands
disqualifications of its members of the board of directors or trustees. in a fiduciary relation to the corporation and its shareholders,
However, it may not do away with the minimum disqualifications laid down which is characterized as a trust relationship. An amendment to
by the Code. The minimum qualifications of directors and trustees in a the corporate by-laws which renders a stockholder ineligible to be
domestic corporation are provided under the 2nd par. Of Sec. 23: director, if he be also director in a corporation whose business is
in competition with that of the other corporation, has been
Sec. 23. The board of directors or trustees sustained as valid. This is based upon the principle that where the
xxx director is employed in the service of a rival company, he cannot serve
Every director must own at least one (1) share of the capital stock of the both, but must betray one or the other. The amendment in this case serves
corporation of which he is a director, which share shall stand in his name on to advance the benefit of the corporation and is good. Corporate officers
the books of the corporation. Any director who ceases to be the owner of at are also not permitted to use their position of trust and confidence to
least one (1) share of the capital stock of the corporation of which he is a further their private needs, and the act done in furtherance of private
director shall thereby cease to be a director. Trustees of non-stock needs is deemed to be for the benefit of the corporation. This is called the
corporations must be members thereof. a majority of the directors or trustees doctrine of corporate opportunity.
of all corporations organized under this Code must be residents of the
Philippines. h. CAPITALIZATION
xxx
QUALIFICATIONS OF DIRECTORS/TRUSTEES: SEVENTH: That the authorized capital stock of the corporation
1. Must own at least 1 share in their own names or a member (in the case is................................................ (P......................) PESOS in lawful
of trustees); money of the Philippines, divided into.............. shares with the par
2. Majority must be resident of the Philippines. Even aliens may be elected value of.................................. (P.......................) Pesos per share.
as directors, provided that the majority of such directors are residents of (In case all the share are without par value):
the Philippines. EXCEPT: in activities exclusively reserved to Filipino citizens
like the management of educational institutions and those governed by the That the capital stock of the corporation is.......................... shares
Retail Trade Law. without par value. (In case some shares have par value and some

are without par value): That the capital stock of said corporation 5. Amounts transferred from unrestricted retained earnings to stated capital;
consists of....................... shares of which...................... shares are and
of the par value of............................. (P.....................) PESOS each, 6. Outstanding shares exchanged for stocks in the event of reclassification or
and of which............................... shares are without par value. conversion.
EIGHTH: That at least twenty five (25%) per cent of the Where the consideration is other than actual cash, or consists of intangible
authorized capital stock above stated has been subscribed as property such as patents of copyrights, the valuation thereof shall initially be
follows: determined by the incorporators or the board of directors, subject to approval
by the Securities and Exchange Commission.
Name of Subscriber Nationality No of Shares Amount
Subscribed Shares of stock shall not be issued in exchange for promissory notes or future
........................ .............. ................ ........................... service.
........................ .............. ................ ...........................
........................ .............. ................ ........................... The same considerations provided for in this section, insofar as they may be
........................ .............. ................ ........................... applicable, may be used for the issuance of bonds by the corporation.
........................ .............. ................ ...........................
The issued price of no-par value shares may be fixed in the articles of
NINTH: That the above-named subscribers have paid at least incorporation or by the board of directors pursuant to authority conferred
twenty-five (25%) percent of the total subscription as follows: upon it by the articles of incorporation or the by-laws, or in the absence
thereof, by the stockholders representing at least a majority of the
Name of Subscriber Amount Subscribed Total Paid-Up outstanding capital stock at a meeting duly called for the purpose.
.............................. .............................. ....................
.............................. .............................. .................... SHARES OF STOCKS AND THEIR CLASSIFICATIONS
.............................. .............................. ....................
.............................. .............................. .................... SHARES OF STOCK designate the units into which the proprietary interest
.............................. .............................. .................... in a corporation is divided. They represent the proportionate integers or
units, the sum of which constitutes the capital stock of the corporation. It is
(Modify Nos. 8 and 9 if shares are with no par value. In case the likewise the interest or right which the owner, called the stockholders or
corporation is non-stock, Nos. 7, 8 and 9 of the above articles may shareholder, has in the management of the corporation, and in the surplus
be modified accordingly, and it is sufficient if the articles state the profits and in case of distribution, in all of its assets remaining after the
amount of capital or money contributed or donated by specified payment of its debts.
persons, stating the names, nationalities and residences of the
contributors or donors and the respective amount given by each.) CERTIFICATE OF STOCK is a document or instrument evidencing the
xxx interest of a stockholder in the corporation.
The Corporation Code requires the AOI to state the authorized capital
Sec. 6. Classification of shares. - The shares of stock of stock
stock, the number of shares and/or kind of shares into which the
corporations may be divided into classes or series of shares, or both, any of
authorized capital is divided, the par value of each share, if there by any,
which classes or series of shares may have such rights, privileges or
the names, nationalities and residences of the original subscribers, and the
restrictions as may be stated in the articles of incorporation: Provided, That
amount subscribed and paid by each. At least 25% of the subscribed
no share may be deprived of voting rights except those classified and issued
capital must be paid and in no case may the paid-up capital be less than
as "preferred" or "redeemable" shares, unless otherwise provided in this
P5,000.
Code: Provided, further, That there shall always be a class or series of shares
which have complete voting rights. Any or all of the shares or series of shares
AUTHORIZED CAPITAL signifies the MAXIMUM amount fixed in the
may have a par value or have no par value as may be provided for in the
articles to be subscribed and paid-in or secured to be paid by the
articles of incorporation: Provided, however, That banks, trust companies,
subscribers. It may also refer to the maximum number of shares that a
insurance companies, public utilities, and building and loan associations shall
corporation can issue.
not be permitted to issue no-par value shares of stock.
SUBSCRIBED CAPITAL STOCK is the total number of shares and its
Preferred shares of stock issued by any corporation may be given preference
total value for which there are contracts for their acquisition or
in the distribution of the assets of the corporation in case of liquidation and in
subscription. It is in effect, the stockholder’s equity account showing that
the distribution of dividends, or such other preferences as may be stated in
part of the authorized capital stock which has been paid or promised to be
the articles of incorporation which are not violative of the provisions of this
paid, or that portion of the authorized capital stock which has been
Code: Provided, That preferred shares of stock may be issued only with a
subscribed by the subscribers or stockholders.
stated par value. The board of directors, where authorized in the articles of
incorporation, may fix the terms and conditions of preferred shares of stock
PAID UP CAPITAL STOCK or paid-in capital is the actual amount or value
or any series thereof: Provided, That such terms and conditions shall be
which has been actually contributed or paid to the corporation in
effective upon the filing of a certificate thereof with the Securities and
consideration of the subscriptions made thereon. It may be in the form of
Exchange Commission.
cash, property or in the form of services actually rendered to the
corporation as provided under Sec. 62 of the Corporation Code:
Shares of capital stock issued without par value shall be deemed fully paid
and non-assessable and the holder of such shares shall not be liable to the
Sec. 62. Consideration for stocks. - Stocks shall not be issued for a corporation or to its creditors in respect thereto: Provided; That shares
consideration less than the par or issued price thereof. Consideration for the without par value may not be issued for a consideration less than the value of
issuance of stock may be any or a combination of any two or more of the five (P5.00) pesos per share: Provided, further, That the entire consideration
following: received by the corporation for its no-par value shares shall be treated as
capital and shall not be available for distribution as dividends.
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and A corporation may, furthermore, classify its shares for the purpose of insuring
necessary or convenient for its use and lawful purposes at a fair valuation compliance with constitutional or legal requirements.
equal to the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation; Except as otherwise provided in the articles of incorporation and stated in the
4. Previously incurred indebtedness of the corporation; certificate of stock, each share shall be equal in all respects to every other
share. payment not only of current dividends but also back dividends not
previously paid whether or not, during the past years, dividends were
Where the articles of incorporation provide for non-voting shares in the cases declared or paid. In light of the provision of the Code stating that all shares
allowed by this Code, the holders of such shares shall nevertheless be are equal in all respects unless otherwise stated in the AOI, a preferred
entitled to vote on the following matters: share to be considered cumulative, the same must be provided for and
specified in the certificate.
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws; Non-cumulative preferred shares are those which grant the holders of such
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or shares only to the payment of current dividends but not back dividends,
substantially all of the corporate property; when and if dividends are paid, to the extent agreed upon before any other
4. Incurring, creating or increasing bonded indebtedness; stockholders are paid the same. This type may be divided into three
5. Increase or decrease of capital stock; groups:
6. Merger or consolidation of the corporation with another corporation or 1. Discretionary dividend type – depends on the judgment or discretion of
other corporations; the board of directors. Unless there is grave abuse of discretion as to result
7. Investment of corporate funds in another corporation or business in in oppression, fraud or unfair discrimination, the dividend right of
accordance with this Code; and stockholders of a particular year cannot be made up in subsequent years;
8. Dissolution of the corporation. 2. Mandatory if earned – impose a positive duty on directors to declare
dividends every year when profits are earned. In effect, directors cannot
Except as provided in the immediately preceding paragraph, the vote withhold dividends if there are profits.
necessary to approve a particular corporate act as provided in this Code shall 3. Earned cumulative or dividend credit type – gives the holder the right to
be deemed to refer only to stocks with voting rights. arrears in dividends if there were profits earned during the previous years.
In effect, their right to receive dividends is merely postponed on a later
PURPOSE OF CLASSIFICATION: date. The moment dividends are declared, back dividends earned in
1. To specify and define the rights and privileges of the stockholders; previous years but not declared as such must first be paid to this type of
2. For regulation and control of the issuance of sale of corporate securities preferred shareholders before the common shareholders receive theirs.
for the protection of purchasers and stockholders.
3. As a management control device. DIFFERENCE WITH CUMULATIVE PREFERRED: Cumulative preferred are
4. To comply with statutory requirements particularly those which provide entitled to dividends whether or not there are profits. Earned cumulative or
for certain limitations on foreign ownership. dividend credit type is entitled only to arrears if there are profits in those
5. To better insure return on investment which can be affected through the years.
issuance of redeemable shares or preferred shares, i.e., granting the
holders thereof, preference as to dividends and/or distribution of assets in
case of liquidation; and b. Voting Right of Preferred Shares
6. For flexibility in price, particularly, no par shares may be issued or sold Preferred shares, along with redeemable shares, are usually denied voting
from time to time at different prices depending on the net worth of the rights as they are allowed to be denied of such as provided in Sec. 6, but
company since they do not purport to represent an actual or fixed value. this right must clearly be withheld. However, even if deprived, preferred
shareholders have the right to vote in matters enumerated in the
COMMON STOCKS are the most commonly issued shares of stock of a penultimate paragraph of Sec. 6.
corporation. Although no clear cut definition can be found, it has been
described as one which entitles it owner to an equal or pro-rata division of c. Preference Upon Liquidation
profits, if there are any, but without any preference or advantage in that Such preference must also be stated in the contract, accordingly giving
respect over any other stockholder or class of stockholders. them the preference to the distribution of corporate assets upon liquidation
or termination of corporate existence. If the preferred shares are
A common share usually carries with it the right to vote, and frequently, cumulative, they have the right to any arrears in arrears in priority to any
the exclusively right to do so. However, where the AOI is silent, all issued distribution of assets to the common stockholders.
and outstanding shares shall be considered to have the right to vote and be
voted for. PAR AND NON-PAR VALUE SHARES
PREFERRED STOCK is a stock that gives the holder preference over the Par Value Shares are those whose values are fixed in the AOI. Its par value
holder of common stocks with respect to the payment of dividends and/or is the minimum subscription or original issue price of the shares and
with respect to distribution of capital upon liquidation. LIMITATIONS indicates the amount which the original subscribers are supposed to
imposed by the Code in the issuance of preferred stocks: (1) They can be contribute to the capital, which, however, may not reflect the true value of
issued only with a stated par value; and (2) The preference must be stated the shares because the same may fluctuate depending on the liability and
in the AOI and in the certificate of stock otherwise each share shall be, in networth of the enterprise.
all respect, equal to every other share.
Watered Stocks are those issued at less than par value where the
a. PREFERENCE AS TO DIVIDENDS stockholders will remain liable for the difference between what he paid and
They have the privilege of being paid dividends first before any other the actual par value thereof (Sec. 65).
stockholders are paid theirs. The guaranty is not absolute so as to create a
relation of debtor and creditor between the corporation and the holders of No Par Value Shares are those whose issued price are not stated in the
such stock. The amount of preference is stated in the contract of certificate of stock but may be fixed in the AOI, or by the BOD when so
subscription and is usually a fixed percentage or by specified amount authorized the articles or the by-laws, or in the absence thereof, the
indicated therein. stockholders themselves. They do not purport to represent ay stated
proportionate interest in the capital measured by value, but only an aliquot
Participating and Non-Participating Preferred Shares part of the whole number of shares of the corporation issuing it.
If the preferred shares are participating, they are entitled to participate in
dividends with the common shareholders beyond their stated preference. The Code allows the issuance of no par value shares, subject to the
Non-participating preferred shares on the other hand are entitled to its following limitations provided in Sec. 6:
fixed priority or preference only. 1. Such shares once issued, are deemed fully paid and thus, non-
assessable;
Cumulative and Non-cumulative Preference Shares 2. The consideration for its issuance should not be less than P5;
Cumulative preferred shares are those that entitle the owner thereof to
3. The entire consideration constitutes capital, hence, not available for
dividend declaration; These types of shares grants the corporation the right to repurchase the
4. They cannot be issued as preferred stock; and shares at its option or at the option of the holder based on the face or
5. They cannot be issued by banks, trust companies, insurance companies, issued value plus specified premium, such redemption may be optional or
public utilities and building and loans associations. mandatory at a fixed or future date.
Advantages of no-par value shares: Such repurchase may also be made regardless if there are unrestricted
1. Flexibility in price – no par shares may be issued from time to time at retained earnings. (see Power to Acquire Own Shares)
different prices with the exception only that it shall not be issued at less
than P5; TREASURY SHARES
2. The issuance thereof practically results to the evasion of the danger of
liability upon watered stock in case of overvaluation of the consideration Sec. 9. Treasury shares. - Treasury shares are shares of stock which have
paid for it; been issued and fully paid for, but subsequently reacquired by the issuing
3. There is a disappearance of personal liability on the part of the holder corporation by purchase, redemption, donation or through some other lawful
for unpaid subscription since they are already deemed fully paid and non- means. Such shares may again be disposed of for a reasonable price fixed by
assessable. the board of directors.
VOTING AND NON-VOTING SHARES Treasury shares, as provided in Sec. 9, are reacquired but not retired. They
Voting shares as the name suggests, gives the holder thereof the right to may be issued for a price, even less than par, and the purchaser will not be
vote and participate in the management of the corporation, through the liable to the creditors of the corporation for the difference of the purchase
election of the BOD, or in any matter requiring stockholders’ approval. price and its par value. They may also be declared as dividends since they
are properties of the corporation.
However, voting shares may practically be denied the right to vote where
there exist founders’ shares. Such shares do not have the right to share in dividends nor the right to
vote.
Non-voting shares do not grant the holder thereof, a voice in the election
of directors and some other matter requiring stockholders’ vote. COMMISSIONER OF INTERNAL REVENUE VS. MANNING (66 SCRA
14; Aug. 6, 1975) – Julius Reese owned 24,700 of the 25,000 authorized
Only preferred and redeemable shares may be denied the right to vote. capital stock of Manta Trading and Supply Co., the rest are owned by
But, even if denied such right, they may still vote on the following matters: herein respondents. Upon Reese’ death, his shares was held in trust by the
law firm Ross, Carrascoso and Janda for the private respondent, who were
1. Amendment of the articles of incorporation; to continue management of the corporation. These shares considered by
2. Adoption and amendment of by-laws; the respondents as treasury shares, prior to full payment, were declared as
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or stock dividends. Such declaration was assessed by the BIR as distribution
substantially all of the corporate property; of assets subject to income tax.
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock; ISSUE: WON the subject shares are treasury shares?
6. Merger or consolidation of the corporation with another corporation or
other corporations; HELD: No. Treasury shares are stocks issued and fully paid for and
7. Investment of corporate funds in another corporation or business in reacquired by the corporation either by purchase, donation,
accordance with this Code; and forfeiture or other means and do not have the status of
8. Dissolution of the corporation outstanding shares. They may be re-issued or sold again and while
held by the company participates neither in dividends, because
dividends cannot be declared by the corporation to itself, nor in
FOUNDERS’ SHARES are shares issued to the founders of the corporation
meeting of the corporation as voting stock for otherwise equal
which are granted certain right and privileges such as the exclusive right to
distribution of voting powers among stockholders will be
vote and be voted for in the election of directors.
effectively lost and the directors will be able to perpetuate their
control of the corporation, though it still represent a paid for
Sec. 7. Founders' shares. - Founders' shares classified as such in the
interest in the property of the corporation. These features of a
articles of incorporation may be given certain rights and privileges not
treasury stock are lacking in the questioned shares.
enjoyed by the owners of other stocks, provided that where the exclusive
right to vote and be voted for in the election of directors is granted, it must
In this case, and under the terms of the trust agreement, the shares of
be for a limited period not to exceed five (5) years subject to the approval of
stock of Reese participated in dividends which the trustee received and the
the Securities and Exchange Commission. The five-year period shall
said shares were voted upon by the trustee in all corporate meetings. They
commence from the date of the aforesaid approval by the Securities and
were not, therefore, treasury shares. The 24,700 shares were outstanding
Exchange Commission.
shares of Reese’s estate until they were fully paid. Such being the case,
their declaration as treasury stock dividend was a complete nullity.
The period of 5 years is non-extendable because it may result in the almost
perpetual disqualification of other stockholders to elect or be elected as CAPITAL REQUIREMENTS
members of the BOD resulting to the lack of proper representation thereat.
Sec. 12. Minimum capital stock required of stock corporations. -
REDEEMABLE SHARES are those subject to redemption as may be
Stock corporations incorporated under this Code shall not be required to have
provided in the subscription contract, which are usually attached to
any minimum authorized capital stock except as otherwise specifically
preferred shares and other debt securities like bonds.
provided for by special law, and subject to the provisions of the following
section
Sec. 8. Redeemable shares. - Redeemable shares may be issued by the
corporation when expressly so provided in the articles of incorporation. They
Sec. 13. Amount of capital stock to be subscribed and paid for the
may be purchased or taken up by the corporation upon the expiration of a
purposes of incorporation. - At least twenty-five percent (25%) of the
fixed period, regardless of the existence of unrestricted retained earnings in
authorized capital stock as stated in the articles of incorporation must be
the books of the corporation, and upon such other terms and conditions as
subscribed at the time of incorporation, and at least twenty-five (25%) per
may be stated in the articles of incorporation, which terms and conditions
cent of the total subscription must be paid upon subscription, the balance to
must also be stated in the certificate of stock representing said shares
be payable on a date or dates fixed in the contract of subscription without
need of call, or in the absence of a fixed date or dates, upon call for payment City/Municipality of......................................., Province
by the board of directors: Provided, however, That in no case shall the paid- of................................................, Republic of the Philippines.
up capital be less than five Thousand (P5,000.00) pesos
(Names and signatures of the incorporators)
From the above provisions, it can be said that there is no minimum capital xxx
requirement in order that a corporation may be duly incorporated except in
special cases and provided that at least P5,000 should be paid-in, which
effectively would make the P5,000 the minimum capital requirement. The signatures are important as the AOI serves as a contract between the
signatories thereof, by and among themselves, with the corporation, and
The 25% minimum paid-in capital can be paid by any shareholder, meaning the latter with the State.
that it is not particularly required that each subscriber pay 25% of their
subscription. m. TREASURER’S AFFIDAVIT
xxx
There are instances where the SEC, by virtue of an existing law, rules and TREASURER'S AFFIDAVIT
regulations or policies, requires the payment of more than the amount
provided in the Code, such as Financing Companies where the required REPUBLIC OF THE PHILIPPINES )
minimum paid-up capital be P10,000,000 (within Metro Manila), P5,000,000 CITY/MUNICIPALITY OF ) S.S.
(other cities), and P2,000,000 (municipalities). PROVINCE OF )
i. RESTRICTIONS AND PREFERENCES I,..................................., being duly sworn, depose and say:
That I have been elected by the subscribers of the corporation as
Corporations are not required to provide for certain restrictions and Treasurer thereof, to act as such until my successor has been duly
preferences regarding the transfer, sale or assignment of shares in the AOI elected and qualified in accordance with the by-laws of the
except in close corporations which would subject their shares to specific corporation, and that as such Treasurer, I hereby certify under
restrictions as required in Sec. 96 of the Code. They are not, however, oath that at least 25% of the authorized capital stock of the
restrained or prohibited from doing so corporation has been subscribed and at least 25% of the total
subscription has been paid, and received by me, in cash or
If the corporation desires to grant such options, restrictions and/or property, in the amount of not less than P5,000.00, in accordance
preferences, the same must be indicated in the AOI AND in all of the stock with the Corporation Code.
certificates. Failure to provide the same in the AOI would not bind the .......................................
purchasers in good faith despite the fact that the said restriction and/or
preference is indicated in the by-laws of the corporation. (Signature of Treasurer)
xxx
In a close corporation, however, such restrictions and preferences must not
only appear in the articles of incorporation and in the stock certificates BUT n. NOTARIAL ACKNOWLEDGMENT
ALSO be embodied in the by-laws of that close corporation otherwise it xxx
may not bind purchasers in good faith. SUBSCRIBED AND SWORN to before me, a Notary Public, for and
in the City/Municipality of................................. Province
j. THE TREASURER of........................................., this............ day of........................,
xxx 19.......; by........................................... with Res. Cert.
TENTH: That...................................... has been elected by the No..................... issued at................ on....................., 19.........
subscribers as Treasurer of the Corporation to act as such until his
successor is duly elected and qualified in accordance with the by- NOTARY PUBLIC
laws, and that as such Treasurer, he has been authorized to
receive for and in the name and for the benefit of the corporation, My commission expires on.........................., 19.......
all subscription (or fees) or contributions or donations paid or
given by the subscribers or members.
xxx Doc. No...............;
Page No...............;
k. NO TRANSFER CLAUSE Book No..............;
xxx Series of 19.....
ELEVENTH: (Corporations which will engage in any business or xxx
activity reserved for Filipino citizens shall provide the following):
GROUNDS FOR DISAPPROVAL
"No transfer of stock or interest which shall reduce the ownership
of Filipino citizens to less than the required percentage of the Sec. 17. Grounds when articles of incorporation or amendment may
capital stock as provided by existing laws shall be allowed or be rejected or disapproved. - The Securities and Exchange Commission
permitted to recorded in the proper books of the corporation and may reject the articles of incorporation or disapprove any amendment thereto
this restriction shall be indicated in all stock certificates issued by if the same is not in compliance with the requirements of this Code: Provided,
the corporation." That the Commission shall give the incorporators a reasonable time within
xxx which to correct or modify the objectionable portions of the articles or
amendment. The following are grounds for such rejection or disapproval:
This indicates the treasurer who has been elected as such until his
successor has been elected and qualified and who is authorized to receive 1. That the articles of incorporation or any amendment thereto is not
for and in the name of the corporation all subscriptions, contributions or substantially in accordance with the form prescribed herein;
donations paid or given by the subscribers or members. 2. That the purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral, or contrary to government rules and
l. THE EXECUTION CLAUSE regulations;
xxx 3. That the Treasurer's Affidavit concerning the amount of capital stock
IN WITNESS WHEREOF, we have hereunto signed these Articles of subscribed and/or paid if false;
Incorporation, this..............day of....................., 19.......... in the 4. That the percentage of ownership of the capital stock to be owned by
citizens of the Philippines has not been complied with as required by existing
laws or the Constitution. contract, unless so authorized by the charter, there is no corporation, nor
does it possess franchise or faculties for it to exercise, until it acquires
No articles of incorporation or amendment to articles of incorporation of complete existence.
banks, banking and quasi-banking institutions, building and loan associations,
trust companies and other financial intermediaries, insurance companies, If the company could not and did not acquire the four parcels of and here
public utilities, educational institutions, and other corporations governed by involved, it follows that it did not have the resultant right to dispose the
special laws shall be accepted or approved by the Commission unless same to the defendant.
accompanied by a favorable recommendation of the appropriate government
agency to the effect that such articles or amendment is in accordance with D. DEFECTIVELY FORMED CORPORATIONS
law.
A corporation de jure is one created in strict or substantial compliance to
After filing of the AOI, the SEC will examine and process them to determine the governing corporation statutes and whose right to exist and act as such
compliance with the requirements enumerated in Sec. 14 and if the form could not be attacked in a either collaterally or through a direct proceeding
prescribed under Sec. 15 is complied with. Only substantial and not for that purpose even by the State.
strict compliance is required.
1. DE FACTO CORPORATIONS
The above grounds are not exclusive. There may be other reasons for
rejection or disapproval such as the corporate name is not legally A de facto corporation is one that is so defectively created as not to be a
permissible or that the minimum capital requirement is not sufficient. de jure corporation but nevertheless exists, for all practical purposes, as a
corporate body, by virtue of its bona fide attempt to incorporate under
3. COMMENCEMENT OF CORPORATE EXISTENCE existing statutory authority, coupled with the exercise of corporate powers.
Corporate existence is reckoned from the time of the issuance of its REQUISITES:
CERTIFICATE OF INCORPORATION or registration. It is only from this a. There is a valid statute under which the corporation could have been
time that it acquires juridical personality and legal existence, EXCEPT: created as a de jure corporation (or according to some, an apparently
a. Corporations by Estoppel; valid statute);
b. Those created by special laws; b. An attempt, in good faith, to form a corporation according to the
c. Those organized as Cooperatives covered by Bureau of Cooperatives requirements of law which goes far enough to amount to a
and Home Owners’ Associations covered by Home Insurance Guaranty “colourable compliance” with the law;
Corporation. c. A user of corporate powers, the transaction of business in some way
d. Corporation Sole – which is reckoned from the filing of verified articles. as if it were a corporation;
(Sec. 112) d. Good faith in claiming to be and doing business as a corporation.
Sec. 19. Commencement of corporate existence. - A private Sec. 20. De facto corporations. - The due incorporation of any
corporation formed or organized under this Code commences to have corporation claiming in good faith to be a corporation under this Code, and its
corporate existence and juridical personality and is deemed incorporated from right to exercise corporate powers, shall not be inquired into collaterally in
the date the Securities and Exchange Commission issues a certificate of any private suit to which such corporation may be a party. Such inquiry may
incorporation under its official seal; and thereupon the incorporators, be made by the Solicitor General in a quo warranto proceeding
stockholders/members and their successors shall constitute a body politic and
corporate under the name stated in the articles of incorporation for the ATTACK: From the above provision, the only purpose of determining
period of time mentioned therein, unless said period is extended or the whether it is a de facto or de jure corporation is the applicability of the
corporation is sooner dissolved in accordance with law. rules on collateral and direct attack. Such that a de jure is impregnable to
either, while a de facto corporation’s existence can only be questioned in a
CAGAYAN FISHING DEVELOPMENT CO. VS. SANDIKO (65 Phil. 233; direct proceeding by the State through a quo warranto. A de facto
Dec. 23, 1937) – On May 31, 1930, Manuel Tabora executed a Deed of corporation’s corporate existence however cannot be attacked collaterally.
Sale where he sold four parcels of land in favor of herein petitioner
Cagayan Fishing Development Co., said to be under the process of THE MUNICIPALITY OF MALABANG, LANAO DEL SUR, and AMER
incorporation. Plaintiff company filed its AOI with the Bureau of Commerce MACAORAO BALINDONG, petitioners,
and Industry on Oct. 22, 1930. A year later, before the issuance of the vs.
certificate of incorporation, the BD of the company adopted a resolution to PANGANDAPUN BENITO, HADJI NOPODIN MACAPUNUNG, HADJI
sell the four parcels of land to Teodoro Sandiko for P42,000. HASAN MACARAMPAD, FREDERICK V. DUJERTE MONDACO ONTAL,
MARONSONG ANDOY, MACALABA INDAR LAO. Respondents
ISSUE: WON the subsequent sale to Sandiko is valid? GR No. L-28113; March 28, 1969)
HELD: No. A duly organized corporation has the power to purchase and FACTS: The Municipality of Balabagan was created from the barrios and
hold real property as the purpose for which such corporation was formed sitios of the Municipality of Malabang by virtue of EO No 386 issued by
may permit and for this purpose may enter into such contract as may be President Garcia by virtue of Sec. 68 of the Revised Administrative Code.
necessary. But before a corporation may be said to be lawfully Following the decision of the Court in Pelaez vs. Auditor General, which
organized many thing have to be done. Among which, the law declared Sec. 68 unconstitutional and that the President had no power to
requires the filing of the AOI. create a municipality, herein petitioners sought to nullify EO 386 and to
restrain the respondents, who are officers of Balabagan, to vacate said
It cannot be denied that the plaintiff was not incorporated when it entered their office and desist from performing their functions.
into the contract of sale. It was not even a de facto corporation at that
time. Not being in legal existence then, it did not possess juridical Respondents argue that it is at least a de facto corporation and the ruling
personality to enter into the contract. in Pelaez is not applicable to it, having been organized under color of a
statute before it was declared unconstitutional, its officers having been
Corporations are creatures of the law, and can only come into existence in either elected or appointed, and the municipality itself having discharged
the manner prescribed by the law. That a corporation should have a full corporate functions for the past five years. That as a de facto corporation,
and complete organization and existence as an entity before it can enter its existence cannot be collaterally attacked.
into a contract or transact any business, would seem to be self-evident. A
corporation, until organized, has no being, franchises or faculties. Nor do ISSUE: WON the Municipality of Balabagan is a de facto corporation?
those engaged in bringing it into being have any power to bind it by
HELD: No. In cases where a de facto municipal corporation was recognized with the supposed corporation. They cannot avoid liability on the ground of
as such despite the fact that the statute creating it was later invalidated, lack of personality to be sued.
the decision could be fairly made to rest on the consideration that there
was some other valid law giving validity to the organization. As to third persons – they are estopped from denying the existence of the
Hence, in the case at bar, the mere fact that Balabagan was organized at alleged corporation in a suit to enforce a contract. However, the association
the time when the statute had not been invalidated cannot conceivably of persons must have purported or acted, and were treated by the third
make it a de facto corporation, as independently of the Administrative Code persons, as corporations. The doctrine also applies when the third person
provision in question, there is no other valid statute to give color of tries to escape liability on a contract from which he has benefited on the
authority for its creation. irrelevant ground of defective incorporation.
An unconstitutional act is not a law; it confers no rights; it imposes no LOZANO VS. DE LOS SANTOS (274 SCRA 452; June 19, 1977) –
duties; it affords no protection; it creates no office; it is, in legal Petitioner Reynaldo Lozano and respondent Antonio Anda agreed to
contemplation, as inoperative as though it had never been passed. consolidate their respective Jeepney Associations, to which they are
presidents. They conducted an election for one set of officers of the
HALL VS. PICCIO (86 Phil 603 June 29, 1950) – Petitioner, together with consolidated association, where petitioner was the winner. Respondent,
private respondents signed and acknowledged the AOI of Far East Lumber however, refused to abide by the agreement which prompted petitioner to
and Commercial Co., Inc., after the execution of which the corporation institute an action for damages in the trial court which was denied for being
proceeded to do business by adopting its by-laws and election of its intra-corporate, and was held to be within the jurisdiction of the SEC.
officers. Subsequently, pending action on the AOI, the respondents filed
with the CFI alleging the corporation to be an unregistered partnership and ISSUE: WON there is corporation by estoppel placing the case within SEC
praying for its dissolution, which was granted. jurisdiction?
Herein petitioner claims that the corporation is a de facto corporation, that HELD: None. The unified association was still a proposal and had not been
its dissolution may be ordered only in a quo warranto proceedings approved by the SEC, neither had its officers and members submitted their
instituted by the State. AOI. Their respective associations are distinct and separate entities,
petitioner and private respondent does not have an intra-corporate relation
ISSUE: WON it is a de facto corporation? much less do they have an intra-corporate dispute. The SEC has no
jurisdiction over the complaint.
HELD: No. First, not having obtained a certificate of incorporation, the
company, even its stockholders, may not probably claim “in good faith” to The doctrine of corporation by estoppel advance by private respondent
be a corporation. cannot override jurisdictional requirements. Jurisdiction is fixed by law and
is not subject to the agreement of the parties.
Such claim is compatible with the existence of errors and irregularities, but
not with a total or substantial disregard of the law. Unless there has been Corporation by estoppel is founded on principle of equity and is designated
an evident attempt to comply with the law the claim to be a corporation to prevent injustice and unfairness. It applies when persons assume to
“under this Act” (Sec. 19) could not be made in good faith. form a corporation and exercise corporate functions and enter into business
relations with third persons. Where there is no third person involved
Second, this is not a suit where the corporation is a party. This is a and the conflict arises only among those assuming to form a
litigation between a stockholder of the alleged corporation, for the purpose corporation, who therefore know that it has not been registered,
of obtaining its dissolution. Even the existence of a de jure corporation may there is no corporation by estoppel.
be terminated in a private suit for its dissolution between stockholders,
without the intervention of the State. ALBERT VS. UNIVERSITY PUBLISHING CO., INC. (13 SCRA 84; Jan.
30, 1965) – Jose Aruego, president of defendant University Publishing Co,
2. CORPORATION BY ESTOPPEL Inc. entered into a contract with plaintiff for the publishing of the latter’s
revised commentaries on the Revised Penal Code, which the defendant
A corporation may exist on the ground of estoppel by virtue of the failed to pay the second instalment due. The CFI of Manila rendered
agreement, admission or conduct of the parties such that they will not be judgment in favor of plaintiff, such judgment reduced by the Supreme
permitted to deny the fact of the existence of the corporation. It is neither Court to P15,000.
a de jure nor de facto because of serious defects in its incorporation or
organization, unlike the de facto doctrine, it does not involve a theory that The CFI issued a writ of execution against Aruego, as the real defendant,
the irregular corporation has acquired a corporate status generally. It stating the discovery that there is no such entity as University Publishing
applies to the consequences of some particular transactions or acts done in Co., Inc.
the corporate name by associates assuming to be a corporation.
ISSUE: WON the writ of execution may be effected upon Aruego?
Sec. 21. Corporation by estoppel. - All persons who assume to act as a
corporation knowing it to be without authority to do so shall be liable as HELD: Yes. On account of non-registration, University cannot be
general partners for all debts, liabilities and damages incurred or arising as a considered a corporation, not even a corporation de facto. It has therefore,
result thereof: Provided, however, That when any such ostensible corporation no personality separate from Aruego it cannot be sued independently.
is sued on any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use as a defense its lack of The doctrine of corporation by estoppel is inapplicable. Aruego represented
corporate personality. a non-existent entity and induced not only the plaintiff but even the court
of belief of such representation. He signed the contract as “President” of
On who assumes an obligation to an ostensible corporation as such, cannot University and obviously misled plaintiff in to believing that University is a
resist performance thereof on the ground that there was in fact no “corporation duly organized and existing under the laws of the Philippines”.
corporation. One who has induced another to act upon his wilful
misrepresentation that a corporation was duly organized and
From the above provision, it is clear that the doctrine of estoppel may apply existing under the law, cannot, thereafter, set up against his
to the alleged corporation or to a third party transacting with the former. victim the principle of corporation by estoppel.
As to the Corporation – the members who purported to be a corporate SALVATIERRA VS. GARLITOS, ET AL. (103 Phil. 757; May 23, 1958) –
body cannot deny their purported existence as a corporation in an action Petitioner Manuel T. Vda de Salvatierra, owner of a parcel of land, entered
against them on the contract, where the third persons were induced to deal into a contract of lease with Philippine Fibers Processing Co., Inc., allegedly

a corporation. For failure to comply with the obligations under the lease, At the trial of the case the plaintiff failed to prove affirmatively the
petitioner filed a complaint in the CFI where the company was declared in corporate existence of the parties and the appellant insists that under these
default and decision was rendered in favor of petitioner. Defendant circumstances the court erred in finding that the parties were corporations
Refuerzo filed a motion claiming that he should not be made personally with juridical personality and assigns same as reversible error.
liable in the decision which was granted by the Court. Hence, this petition.
ISSUE: WON parties herein are corporations with juridical personality?
ISSUE: WON Refuerzon can be made personally liable?
HELD: Yes. There is no merit whatever in the appellant's contention. The
HELD: Yes. While as a general rule, a person who has contracted or general rule is that in the absence of fraud a person who has
dealt with an association in such a way as to recognize its existence as a contracted or otherwise dealt with an association in such a way as
corporate body is estopped from denying the same in an action arising out to recognize and in effect admit its legal existence as a corporate
of such transaction or dealing, yet this doctrine may not be held body is thereby estopped to deny its corporate existence in any
applicable where fraud takes part in the said transaction. In the action leading out of or involving such contract or dealing, unless
instant case, on plaintiff’s charge that she was unaware of the fact that the its existence is attacked for cause which have arisen since making
company had no juridical personality, defendant Refuerzo gave no the contract or other dealing relied on as an estoppel and this
confirmation or denial and the circumstances surrounding the execution of applies to foreign as well as to domestic corporations. (14 C. J.,
the contract led to the inescapable conclusion that plaintiff Salvatierra was 227; Chinese Chamber of Commerce vs. Pua Te Ching, 14 Phil., 222.)
really made to believe that such corporation was duly organized in
accordance with law. The defendant having recognized the corporate existence of the plaintiff by
making a promissory note in its favor and making partial payments on the
The rule on the separate personality of a corporation is understood to refer same is therefore estopped to deny said plaintiff's corporate existence. It
merely to registered corporations and cannot be made applicable to the is, of course, also estopped from denying its own corporate existence.
liability of members of an unincorporated association. The reason behind Under these circumstances it was unnecessary for the plaintiff to present
this doctrine is obvious – since an organization which before the law other evidence of the corporate existence of either of the parties. It may be
is non-existent has no personality and would be incompetent to noted that there is no evidence showing circumstances taking the case out
act on its behalf; thus, those who act or purport to act as its of the rules stated.
representatives or agent do so without authority and at their own
risk. And, as is it elementary principle of law that a person who acts as INTERNATIONAL EXPRESS TRAVEL & TOURS SERVICES, INC. VS.
an agent without authority or without principal is himself CA (343 SCRA 674; Oct. 19, 2000) – Petitioner International Express Travel
regarded as the principal, a person acting or purporting to act on & Tours Services, Inc. entered into an agreement with the Philippine
behalf of a corporation which has no valid existence assumes such Football Federation through its president Henry Kahn, herein private
privileges and obligations and becomes personally liable for respondent, where the former supplied tickets for the trips of the athletes
contracts entered into or for other acts performed as such agents. to the Southeast Asian Games and other various trips. The Federation
failed to pay a balance of P265,894.33 which led petitioner to file a civil
In acting on behalf of a corporation which he knew to be unregistered, the case in the RTC of Manila which decided in its favor and holding Henry
president of the unregistered corporation Refuerzo, assumed the risk of Kahn personally liable. On appeal, the CA reversed the decision of the RTC
reaping the con the consequential damages of resultant right, if any, absolving Kahn from personal liability holding that the Federation had a
arising out of such transaction. separate and distinct personality.
CHANG KAI SHEK SCHOOL VS. CA (172 SCRA 389; April 18, 1989) – ISSUE: WON Henry Kahn can be made personally liable?
Private respondent Faustina Oh has been teaching in the herein petitioner
School since 1932 for a continuous period of 33 years until that day that HELD: Yes. While we agree with the appellate court that associations may
she was told that she had no assignment for the next semester. She filed a be accorded corporate status, such does not automatically take place by
suit before the CFI against the school and later on amended her complaint the mere passage of RA 3135 otherwise known as the Revised Charter of
to include certain officials. The CFI of Sorsogon dismissed the complaint. the Philippine Amateur Athletic Federation and PD 604. It is a basic
On appeal, the CA reversed the decision and held herein petitioner school postulate that before a corporation may acquire juridical personality, the
liable but absolved the other defendants. State must give its consent either in the form of a special law or a general
enabling act. Nowhere can it be found in RA 3135 and PD 604 any
ISSUE: WON the School can be held liable? provision creating the Philippine Football Federation. These laws merely
recognized the existence of national sports associations and provided for
HELD: Yes. Even though the school failed to incorporate as mandated by the manner by which these entities may acquire juridical personality.
law, it cannot now invoke such non-compliance with the law to immunize it
from the private respondent’s complaint. There should also be no question The recognition of Philippine Amateur Athletic Federation required under
that having contracted with the private respondent every year for 32 years RA 3135 and the Department of Youth and Sports Development under 604,
and thus represented itself possessed of juridical personality to defeat her extended to the PFF was not substantiated by Kahn. Accordingly, the PFF is
claim against it. According to Art. 1431 of the Civil Code: “through estoppel not a national sports association within the purview of the aforementioned
an admission or representation is rendered conclusive upon the person laws and does not have corporate existence of its own.
making it and it cannot be denied as against the person relying on it”.
This being said, it follows that private respondent Kahn should be held
As the school itself may be sued in its own name, there is no need to apply liable for the unpaid obligations of the unincorporated PFF. It is a settled
Rule 3, Sec. 15 ,under which the persons joined in an association without principle in corporation law that any person acting or purporting to act on
any juridical personality may be sued with such an association. Besides, it behalf of a corporation which has no valid existence assumes such
has been shown that the individual members of the board of trustees are privileges and obligations and becomes personally liable for contracts
not liable, having been appointed only after the private respondent’s entered into or for other acts performed as such agents.
dismissal.
We cannot subscribe to the position taken by the appellate court that even
ASIA BANKING CORP., plaintiff-appelle VS. STANDARD PRODUCTS assuming that the PFF was defectively incorporated, the petitioner cannot
CO., INC., defendant-appellant (46 Phil. 144; Sept. 11, 1924) – This action deny the corporate existence of the PFF because it had contracted and
was brought to recover the balance due of a promissory note executed by dealt with the PFF in such a manner as to recognize and in effect admits its
herein appellant. The court rendered judgment in favor of the plaintiff. existence. The doctrine of corporation by estoppel is mistakenly applied by
the respondent court to the petitioner. The application of the doctrine
applies to a third party only when he tries to escape liability on a

contract from which he has benefited on the irrelevant ground of becomes continuously inoperative for a period of at least five (5) years, the
defective incorporation. In the case at bar, the petitioner is not trying to same shall be a ground for the suspension or revocation of its corporate
escape liability from the contract but rather is the one claiming from the franchise or certificate of incorporation.
contract.
This provision shall not apply if the failure to organize, commence the
GEORG GROTJAHN GMBH & CO. VS. ISNANI (235 SCRA 216; Aug. 10, transaction of its businesses or the construction of its works, or to
1994) – Petitioner is a German company who was granted a license to continuously operate is due to causes beyond the control of the corporation
establish a regional or area headquarters in the Philippines. Private as may be determined by the Securities and Exchange Commission.
respondent Romana Lanchinebre was a sales representative of petitioner
who made advances totalling P35,000 which were left unpaid. Petitioner Once the certificate of incorporation has been issued, the corporation MUST
filed a complaint for the collection of a sum of money which was dismissed formally organize and commence its business.
by the judge holding, among others, that the license of petitioner does not
include the license to do business in the Philippines. NON-USE OF CORPORATE CHARTER: Apparent from the above
provision is that the failure of the corporation to organize within 2
ISSUE: WON petitioner has capacity to sue? years would result in it automatic dissolution, unless, of course, its
failure to do so is due to causes beyond its control.
HELD: Yes. Private respondent is estopped from assailing the personality
of petitioner. “The rule is that the party is estopped to challenge the FORMAL ORGANIZATION: refers to the process of structuring the
personality of a corporation after having acknowledged the same by corporation to enable it to effectively pursue the purpose for which it was
entering into a contract with it. And the doctrine of estoppel to deny organized. It includes:
corporate existence applies to foreign as well as domestic corporation; one a. Organizational meeting of the stockholders to elect the BOD;
who has dealt with a corporation of foreign origin as a corporate entity is b. Adoption of by-laws, if not simultaneously filed with the AOI, and its
estopped to deny its corporate existence and capacity. The principle will be subsequent filing with the SEC which must be within 1 month from the
applied to prevent a person contracting with a foreign corporation from issuance of the certificate of incorporation;
later taking advantage of its non-compliance with the statutes chiefly in c. Organizational meeting of the BOD to elect the corporate officers,
case where such person has received the benefits of the contract” (Merill adoption of corporate seal, accepting pre-incorporation subscriptions,
Lynch Futures, Inc. vs. CA). establishing the principal office and such other steps necessary to
transact the legitimate business for which the corporation was formed.
In the case of Merill Lynch Futures, the SC held that a foreign corporation
doing business in the Philippines may sue in Philippine courts although not Strict compliance is not required. Substantial compliance therewith is
authorized to do business here against the Philippine citizen who had sufficient. Thus, it has been held in the case of Perez vs. Balmaceda that a
contracted with and been benefited by said corporation. Citing and applying corporation is deemed to have formally organized if it had a governing
the doctrine laid down in Asia Banking Corp. vs. Standard Products Co., board which direct its affairs, as well as a treasurer and a clerk, and that
Inc. through these instrumentalities, it actually functioned and engaged in the
business for which it was organized. It cannot be held to have forfeited its
IN SUMMARY: it appears that if a corporation by estoppel exist and charter simply because it has not been shown that is also had a president
enters into a contract and transact business with a third party, the latter and a secretary.
has three possible remedies:
1. He may file a suit against the ostensible corporation to recover from b. COMMENCEMENT OF BUSINESS/TRANSACTION
the corporate properties;
2. He may file the case directly against the associates personally liable This means that the corporation has actually functioned and engaged in
who held out the association as a corporation; and business for which it was organized which must be done within two
3. Against both the ostensible corporation and persons forming it, jointly years from the issuance of the certificate of incorporation lest it is
and severally. The last two remedies may not, however, be availed of deemed dissolved. This may take the form of entering into contracts
if the third party by his conduct is estopped from denying the which tend to pursue its business undertaking or other acts related thereto.
existence of the association as a corporation and as such, recovery
should be limited only against the corporate assets. If a corporation has commenced its business but subsequently becomes
inoperative continuously for a period of at least 5 years, the same
INDIVIDUAL LIABILITY of associates should not be overlooked. If the shall be merely a ground for suspension or revocation of its
doctrine of corporation by estoppel cannot be applied in their favor because corporate franchise or certificate of registration.
the third party dealing with it has not, in any manner, deemed to have
chosen to deal with it as a corporation or in short not, estopped to deny
corporate existence, the associates can be held liable either as partners or CHAPTER 5: THE CORPORATE CHARTER AND ITS AMENDMENTS
principals.
A. CORPORATE CHARTER
WHO SHOULD BEAR THE LOSS: The better view is that those who
actively participated in holding out the association as a corporation should CORPORATE CHARTER signifies an instrument or authority from the
be held personally liable by virtue of the express provision of Sec. 21 which sovereign power, bestowing rights or power, and is often used convertibly
provides that “all persons who assume to act as a corporation knowing it with the term “act of incorporation”, where the corporation was formed
to be without authority to do so shall be liable as general partners for under a special act of the legislature, and with the “articles of
all debts, liabilities and damages incurred or arising” therefrom. incorporation”, when the corporation was formed under a general law.
4. ORGANIZATION AND COMMENCEMENT OF BUSINESS THREE-FOLD CONTRACT:

1. Between the corporation and the state insofar as it concerns its
a. CORPORATE ORGANIZATION primary franchise to be and act as a corporation’
2. Between the corporation and the stockholders or members insofar as
Sec. 22. Effects on non-use of corporate charter and continuous it governs their respective rights and obligations;
inoperation of a corporation. - If a corporation does not formally organize 3. Between and among the stockholders or members themselves as far
and commence the transaction of its business or the construction of its works as their relationship with one another is concerned.
within two (2) years from the date of its incorporation, its corporate powers
cease and the corporation shall be deemed dissolved. However, if a FRANCHISE: appropriately applies to the right or privilege itself to be and
corporation has commenced the transaction of its business but subsequently act as a corporation or to do a certain act while charter applies to the
instrument by which the state vests such right or privilege. Franchise may respondent, as the main promoter. It was he who was putting all the
either be: (1) Primary – nothing more than the right or privilege of being a pieces together, so to speak. The petitioners were merely among the
corporation; or (2) Secondary – the powers and privileges vested in, and to financiers whose interest was to be invited and who were in fact
be exercised by the corporate body as such. Example: Employment persuaded, on the strength of the project study, to invest in the proposed
Agencies, primary franchise is the certificate of incorporation from the SEC, airline.
the secondary franchise is the license issued by the POEA.
Significantly, there was no showing that the Filipinas Orient Airways was a
B. CORPORATE ENTITY THEORY fictitious corporation and did not have a separate juridical personality, to
justify making the petitioner, as principal stockholder thereof, responsible
As a legal entity, the corporation is possessed with a juridical personality for its obligations. As a bona fide corporation, the Filipinas Orient Airways
separate and distinct from the individual stockholders or members and is should alone be liable for its corporate acts as duly authorized by its
not affected by the personal rights, obligations or transactions of the latter. directors and officers.
The properties it possesses belongs to it exclusively as a separate juridical
entity such that the personal creditors of its stockholders or members The most that can be said is that they benefited from the services, but that
cannot attach corporate properties to satisfy their claims. surely is no justification to hold them personally liable therefor. Otherwise,
all other stockholders of the corporation, including those who came in later,
On the other hand, the corporation is not likewise liable for the debts, and regardless of the amount of their stockholdings would be equally and
obligations or liabilities of its stockholders. Neither may it properties be personally liable also with the petitioners for the claims of the private
made answerable to satisfy the claim of creditors against its stockholders or respondents.
member even if the stockholder concerned is its president.
Petitioners are not liable under the challenged decision.
SULO NG BAYAN, INC., plaintiff-appellant VS. GREGORIO ARANETA,
INC. ET AL., defendant-appelle (72 SCRA 347; Aug. 17, 1976) – Plaintiff- RUSTAN PULP AND PAPER MILLS, INC. VS. IAC (214 SCRA 665; Oct.
appellant Sulo ng Bayan, Inc. instituted a reinvindicatory action for the 19, 1992) – Petitioner Rustan entered into a contract of sale with
recovery of 28,000 square meters of land for and in behalf of its members, respondent Lluch which was later on stopped by Rustan through a letter.
who were themselves and their predecessors-in-interest pioneered in the Lluch sent a letter to clarify whether the letter sent by Rustan was for the
clearing of the land and cultivated the same since the Spanish Regime and stoppage of delivery or termination of the contract of sale. Unanswered,
have been in continuous possession of the same. The action was dismissed respondent Lluch resumed deliveries and later on filed a complaint for
on the ground that there is no cause of action. On appeal, the CA certified contractual breach which was dismissed. On appeal, the CA modified the
the case to the SC for the legal issues involved. decision of the trial court directing petitioner including Tantoco, president
and general manager, and Vergara, resident manager, to pay private
ISSUED: WON Sulo ng Bayan, Inc. may institute the action for recovery of respondents.
property of it individual members?
ISSUE: WON individual petitioners may be held liable?
HELD: No. It is a doctrine well-established and obtains both at law and in
equity that a corporation is a distinct legal entity to be considered as HELD: No. The president and manager of a corporation, who
separate and apart from the individual stockholders or members who entered into and signed a contract in his official capacity, cannot
compose it, and is not affected by the personal rights, obligations and be made liable thereunder in his individual capacity in the absence
transactions of its stockholders or members. The property of a corporation of stipulation to that effect due to the personality of a corporation
is its property and not that of the stockholders, as owners, although they being separate and distinct from the person composing it. And
have equities in it. Properties registered in the name of the corporation are because of this precept, Vergara’s supposed non-participation in the
owned by it as an entity separate and distinct from its members. contract of sale although he signed the letter terminating it is completely
Conversely, a corporation ordinarily has no interest in the individual immaterial.
property of its stockholders unless transferred to the corporation, “even in
the case of a one-man corporation”. CRUZ VS. DALISAY (152 SCRA 482; July 31, 1987) – Adelio Cruz charged
Quiterio Dalisay, Senior Deputy Sheriff of Manila, with malfeasance in
Absent any showing of interest, therefore, a corporation, like plaintiff- office, corrupt practices and serious irregularities when the respondent
appellant herein, has no personality to bring an action for and in behalf of sheriff attached and/or levied the money belonging to complainant Cruz
its stockholders or members for the purpose of recovering property which when he was not himself the judgment debtor in the final judgment of
belongs to said stockholders or members in their personal capacities. NLRC sought to be enforced but rather the company known as Qualitrans
Limousine Service, Inc., a duly registered corporation.
It is fundamental that there cannot be a cause of action without an
antecedent primary legal right conferred by law upon a person. Evidently, ISSUE: WON the charge against the respondent should be upheld for
there can be no wrong without a corresponding right, and no breach of attaching personal property of the corporate president?
duty by one person without a corresponding right belonging to some other
person. HELD: Yes. The respondent’s action in enforcing judgment against
complaint who is not the judgment debtor in the case calls for disciplinary
FERMIN CARAM, JR. AND ROSA DE CARAM VS. CA AND ALBERTO action. Considering the ministerial duty in enforcing writs of execution,
V. ARELLANO (151 SCRA 372; June 30, 1987) – Herein petitioners were what is incumbent upon him is to ensure that only that portion of a
ordered jointly and severally to pay the plaintiff P50,000 for the preparation decision ordered or decreed in the dispositive part should be the subject of
of the project study and his technical services that led to the organization execution. No more, no less. That the title of the case specifically names
of the defendant corporation. The petitioners questioned the order stating complaint as one of the respondent is of no moment as execution must
that they are mere subsequent investors in the corporation that was later conform to that directed in the dispositive portion and not in the title of the
created, that they should not be held solidarily liable with the Filipinas case. The tenor of the NLRC judgment and the implementing writ are clear
Orient Airways, a separate juridical entity, and with co-defendants who enough. It directed Qualitrans to reinstate the discharged employee and
were the ones who requested the said services from the private pay the full backwages. Respondent, however, chose to “pierce the veil of
respondent. corporate entity” usurping a power belonging to the court and assumed
improvidently that since the complainant is the owner/president, they are
ISSUE: WON petitioners can be held personally liable for such expenses? one and the same. It is well-settled doctrine, both in law and in equity that
as a legal entity, a corporation has a personality distinct and
HELD: No. Petitioners were not involved in the initial stages of the separate from its individual stockholders or members. The mere
organization of the airline, which were being directed by Baretto, fact that one is president of a corporation does not render the

property he owns or possesses the property of the corporation,
since the president, as individual, and the corporation are Done this 10th day of August 1964 at Bacarra, Ilocos Norte.
separate entities.
(Sgd.) Paulino Soriano
PALAY INC. VS. CLAVE (124 SCRA 638; Sept. 21, 1983) – Petitioner PAULINO SORIANO
Palay, Inc. through its president Albert Onstott, executed in favor of President
respondent Naario Dumpit a Contract to Sell a parcel of land which
provided for automatic rescission upon default in payment of any monthly (Sgd.) Nenita C. Esperanza
amortization without need of notice and forfeiture of all instalments paid. NENITA C. ESPERANZA
Respondent failed to pay some instalments and later offered to update all Sec. Treasurer
his overdue account but was informed that the contract has already been
rescinded. by:
(Sgd.) Erlinda V. Acosta BIENVENIDO
Respondent filed with the NHA a complaint questioning the validity of the E. ACOSTA Director, Official
rescission which decided in its favor holding Palay, Inc. and Alberto Representative
Onstott, in his capacity as president, jointly and severally liable.
(Sgd.) A. Macadangdang
ISSUE: WON the corporate president is liable to refund the amount state A.G. MACADANGDANG
in the NHA ruling? Manager
HELD: No. As a general rule, a corporation may not be made to answer for ISSUE: WON petitioners are liable?
acts or liabilities of its stockholders or those of the legal entities to which it
may be connected and vice versa. However, the veil of corporate fiction HELD: No. We cannot accept the conclusion that the official designations
may be pierced when it is used as a shield to further an end subversive of of petitioners were written on the document merely as meaningless and
justice; or for purposes that could not have been intended by the law that hollow decorations or as mere descripto personae without any relevance to
created it; or to defeat public convenience, justify wrong, protect fraud, or the liability of the corporation these officers obviously represented. Indeed,
defend crime; or to perpetuate fraud or confuse legitimate issues; or to taking in conjunction with the other obtaining circumstances, the receipt
circumvent the law or perpetuate deception; or as an alter ego, adjunct or discloses the capacity by which the petitioners entered into the “deal” with
business conduit for the sole benefit of the stockholders. private respondent.
We find no badges of fraud on petitioners’ part. They had literally relied, The subject receipt itself states that the conditions contained therein were
albeit mistakenly, on its contract with private respondent when it rescinded between the private respondent and the “Association”. The lower court
the contract to sell extrajudicially and had sold it to another person. held that the “Association” referred only to the signatories. We disagree. It
is quite plain and we are convinced that the “Association is none other than
No sufficient proof exists on record that said petitioner used the corporation the Bacarra (I.N.) Facoma, Inc. which is a farmer’s cooperative marketing
to defraud private respondent. He cannot, therefore, be made personally association. Not only that , we cannot find any cogent reason why the
liable just because he “appears to be the controlling stockholder”. Mere petitioners used the word “Association” when they could have more easily
ownership by a single stockholder or by another corporation of all and conveniently placed “the undersigned” or words to the same effect in
or nearly all of the capital stock of a corporation is not, of itself, its stead.
sufficient ground for disregarding the separate corporate
personality. In light of the foregoing, it is clear that the liability of the petitioners under
the document subject of the instant case is not personal but corporate, and
PAULINO SORIANO, NENITA C. ESPERANZA and JANDRO G. therefore attached to the Bacarra (I.N.) Facoma, Inc. which being a
MACADANGDANG, petitioners, corporation, has a personality distinct and separate from that of the
vs. petitioners who are only its officers. It is the general rule that the
HON. COURT OF APPEALS (Former Sixth Division) and GERVACIO protective mantle of a corporation’s separate and distinct
CU, respondents personality could only be pierced and liability attached directly to
(GR No. L-49834; June 22, 1989) its officers and/or member-stockholders, when the same is used
for fraudulent, unfair or illegal purpose.
FACTS: Petitioners were held solidarily liable by the appellate court in their
personally capacity to the private respondent for non-payment of tobacco C. PIERCING THE VEIL OF CORPORATE FICTION
under an agreement between them embodied in a receipt which states as
follows: The notion of corporate legal entity is not, at all ties respected. This is
because the applicability of the corporate entity theory is confined to
GREETINGS: legitimate transactions and is subject to equitable limitations to prevent its
WE, the President, Manager, Treasurer and Director Representative of being used as a cloak or cover for fraud or illegality, or to work injustice.
Bacarra (I.N.) Facoma, Inc., do hereby execute this document:
While no hard and fast rule exists as to when the corporate fiction may
That we received from Mr. Gervacio Cu, a truck load of Virginia tobacco pierced or disregarded, it is a fundamental principle in Corporation law that
consisting of ONE HUNDRED SIXTY (160) bales of fifty (50) kilos each a corporation is an entity separate and distinct from its stockholders or
bale (sic) the said Virginia tobacco consists of different grades or class member and from other corporations to which it may be connected. But
from E to A (sic) the said tobaccos are to be shipped to the redrying when the notion of legal entity is used to defeat public convenience, Justify
plants through the Bacarra Facoma under Guia number 236. wrong, Protect fraud, Defend crime, the law will regard the corporation as
a mere association of persons, or in the case of two corporations, merge
Conditions of the deal between Mr. Cu and the Association. Upon them into one, the one being merely regarded as part or instrumentality of
payment of the said tobacco by the Philippine Virginia Tobacco the other. The same is true where a corporation is a mere dummy and
Administration then Mr. Cu, will collect the corresponding payments as serves no business purpose and is intended only as a blind, or an alter-ego
graded by the redrying plant as further stipulated that the check or business conduit for the sole benefit of the stockholders.
representing the payment shall only be cashed in the presence of Mr.
Cu, or his authorized representative. (Sic) In cases where the doctrine of piercing the veil of corporate fiction, liability
This instrument is executed for the protection, guidance and information will attach directly to the officers and stockholders, at least, in so far as
of the parties concerned. that particular act is concerned.

PALACIO VS. FELY TRANSPORTATION COMPANY (5 SCRA 1011; The Collector of Internal Revenue assessed Yutivo for deficiency sales taxes
Aug. 31, 1962) – Alfredo Carillo, a driver of herein respondent corporation, which the CTA affirmed.
ran over the child of herein petitioner Mario Palacio, and was found guilty
of the criminal case filed against him. Isabelo Calingasan, the employer, ISSUE: WON Yutivo is liable for the deficiency taxes?
was held subsidiarily liable and not the defendant corporation. Plaintiffs
now contend that the defendant corporation should be made subsidiarily HELD: No. It is elementary rule and fundamental principle of corporation
liable for damages in the criminal case because the sale to it of the jeep in law that a corporation is an entity separate and distinct from its
question, after the conviction of Carillo was merely an attempt on the part stockholders and from other corporations to which it may be connected.
of Calingasan, its president and general manager, to evade his subsidiary However, when the notion of legal entity is used to defeat public
civil liability. convenience, justify wrong, protect fraud or defend crime, the law will
regard the corporation as an association of persons, or in case of two
ISSUE: WON the corporation can be held liable for the subsidiary civil corporations merge them into one. Another rule is that, when the
liability of Isabelo Calingasan? corporation is a mere alter-ego or business conduit of a person, it may
disregarded.
HELD: Yes. It is evident that Calingasan’s main purpose in forming the
corporation was to evade his subsidiary civil liability resulting from the The sales tax liability of Yutivo did not arise until it became the importer
conviction of his driver. This conclusion is borne out by the fact that the and simply continued its practice of selling to SM. The decision, therefore,
incorporators of the Fely Transportation are Isabelo Calingasan, his wife, of the Tax Court that SM was organized purposely as a tax evasion device
his son, Dr. Calingasan, and his two daughters. We believe that this one runs counter to the fact that there was no tax to evade.
case where the defendant corporation should not be heard to say
that it has a personality separate and distinct from its members We are, however, inclined to agree with the court below that SM was
when to allow it to do so would be to sanction the use of the actually owned and controlled by petitioner as to make it a mere subsidiary
fiction of corporate entity as a shield to further an end of or branch of the latter created for the purpose of selling the vehicles at
subversive of justice. Furthermore, the failure of the defendant retail and maintaining stores for spare parts as well as service repair shops.
corporation to prove that it has other property other than the jeep It is not disputed that the petitioner, which is engaged principally in
strengthens the conviction that its formation was for the purpose above hardware supplies and equipment, is completely controlled by the Yutivo,
indicated. Young and Yu family. The founders of the corporation are closely related to
each other either by blood or affinity and most of its stockholders are
MARVEL BUILDING CORPORATION, et al. VS. DAVID (94 Phil. 376; members of the Yu (Yutivo or Young) family.
Feb. 24, 1954) – Plaintiffs, as stockholders of Marvel Building Corporation
sought to enjoin the defendant Collector of Internal Revenue from selling at According to the AOI, the amount of P62,500 was actually advanced by
a public auction properties which were said to be registered in the name of Yutivo. The additional subscriptions to SM were paid by Yutivo. The
said corporation. Said properties were seized and distrained by defendant shareholders in SM are mere nominal stockholders holding the share for
to collect war profits taxes against Maria Castro who the former claims to and in behalf of Yutivo, so even conceding that the original subscribers
be the sole owner of the said corporation. Maria Castro owns P250,000 of were bona fide stockholders, Yutivo was at all tie in control of the stock of
the P1,025,000 capital of the corporation, of the rest of the incorporators SM and that the latter was a mere subsidiary of the former.
were her half-brothers, half-sister and a brother-in-law.
SM is under the management control of Yutivo by virtue of the
ISSUE: WON Maria Castro is the sole owner of the Corporation? management contract entered into between the two parties. In fact, the
controlling majority of the BOD of Yutivo is also the controlling majority of
HELD: Yes. Circumstantial pieces of evidence presented were: (1) the Board of SM. At the same time, the principal officers of both
Endorsement in blank of the certificates of stock issued in the name of the corporations are identical. In addition, both corporations have a common
incorporators and the possession thereof by Maria Castro; (2) The other comptroller. There is therefore no doubt that by virtue of such control, the
incorporators did not have incomes in such amount, during the time of the business, financial and management policies of both corporations would be
organization of the corporation or immediately thereto, as to enable them directed towards common ends. Likewise, cash or funds of SM, including
to pay in full their supposed subscriptions; and (3) It should have been the those of its branches which are directly remitted to Yutivo, and subject to
supposed subscribers who should have come to court to assert that they withdrawal only by Yutivo, SM’s being under Yutivo’s control, the former’s
actually paid for their subscriptions and are not mere dummies. operations and existence became dependent upon the latter.
The circumstantial evidence is not only convincing, it is conclusive. In SM, being but a mere instrumentality or adjunct of Yutivo, the CTA
addition to the above, the fact that the stockholders or directors never correctly disregarded the technical defense of separate corporate entity to
appeared to have ever met to discuss the business of the corporation and arrive at the true tax liability of Yutivo.
the fact that Maria Castro advanced big sums of money to the corporation
without any previous arrangements or account, and the fact that the books COMMISSIONER OF INTERNAL REVENUE, petitioner,
of accounts were kept as if they belonged to Maria Castro alone – these vs.
facts are of patent and potent significance. NORTON and HARRISON COMPANY, respondent.
(GR No. L-17618; 11 SCRA 714; Aug 31, 1964)
In our opinion, the facts and circumstances duly set forth, all of which have
been proved to our satisfaction, prove conclusively and beyond reasonable FACTS: Herein respondent entered into an agreement with Jackbilt where
doubt that Maria Castro is the sole and exclusive owner of all the shares of the former was made the sole and exclusive distributor of concrete blocks
stock of the corporation and that the other partners are her dummies. manufactured by Jackbilt and accordingly every order of a customer of
Norton was transmitted to Jackbilt which delivered the merchandise directly
YUTIVO & SONS CO. VS. CTA (1 SCRA 160; Jan. 28, 1961) – Herein to the customer. Payment of the goods, however, is made to Norton, which
petitioner Yutivo purchased its cars and trucks from General Motors in turn pays Jackbilt the amount charged the customer less a certain
Overseas Corporation (GM), the latter paying the sales tax once on original amount, as its compensation or profit.
sales, Yutivo no longer paid sales tax on its sales to the public. Later no,
GM withdrew from the Philippines and appointed Yutivo as importer. Yutivo During the existence of the agreement, Norton acquired by purchase all the
in turn exclusively sold to Southern Motors, Inc. (SM), a corporation where outstanding stocks of Jackbilt. Due to this, the Commissioner of Internal
the incorporators are sons of the founders of Yutivo. Under this Revenue, assess respondent Norton for deficiency taxes making the basis
arrangement, Yutivo paid the sales tax on original sale, while SM did not of sales tax the sales of Norton to the public, which is the higher price
subject to sales tax its sales to the public. compare to the sale of Jackbilt to Norton. The CTA decided in favor of

Norton. unfair labor practice, the Court of Industrial Relations rendered a decision
in favor of Honorata Cruz, ordering Emilio and Rodolfo Cano, officials of
ISSE: WON the two corporations may be merged into a single corporation? herein petitioner corporation, to reinstate Cruz. An order of execution was
issued directed against the properties of herein petitioner. Hence, this
HELD: Yes. It has been settled that the ownership of all the stocks of petition.
a corporation by another corporation does not necessarily breed
an identity of corporate interest between the two companies and ISSUE: WON execution may be had on the properties of the corporation?
be considered as a sufficient ground for disregarding distinct
personalities. However, in the case at bar, we find sufficient grounds to HELD: Yes. We should not lose sight of the fact that Emilio Cano
support the theory that the separate identities of the two companies should Enterprises, Inc. is a closed family corporation where the incorporators and
be disregarded. directors belong to one single family. Here is an instance where the
corporation and its members are considered as one. And to hold such
(a) Norton owned all the outstanding stocks of Jackbilt; entity liable for the acts of its members is not to ignore the legal
(b) Norton constituted Jackbilt’s directors; fiction but merely to give meaning to the principle that such
(c) Norton financed the operations of Jackbilt; fiction cannot be invoked if its purpose is to use it as a shield to
(d) Norton treats Jackbilt’s employees as its own; further an end subversive of justice. And so it has been held that
(e) Compensation given to board members of Jackbilt indicate that Jackbilt while a corporation is a legal entity existing separate and apart
is merely a department of Norton; from the person composing it, that concept cannot be extended to
(f) The offices of Norton and Jackbilt are located in the same compound; a point beyond it reason and policy, and when invoked in support
(g) Payments were effected by Norton of accounts for Jackbilt and vice of an end subversive of this policy it should be disregarded by the
versa; courts.
(h) Payments were also made to Norton of accounts due or payable to
Jackbilt and vice versa. Emilio and Rodlfo Cano were indicted in the case, not in their personal
capacity, but as president and manager of the corporation. Having been
The circumstances presented by the facts of the case, yields to the sued officially, their connection with the case must be deemed to be
conclusion that Jackbilt is merely an adjunct, business conduit or alter-ego impressed with the representation of the corporation. In fact, the court’s
of Norton and that the fiction of corporate entities, separate and distinct order is for them to reinstate Honorata Cruz to her former position in the
from each other should be disregarded. corporation and incidentally pay her the wages she had been deprived of
during her separation. Verily, the order against them is in effect against the
LA CAMPANA COFFEE FACTORY, INC. VS. KAISAHAN NG MGA corporation. No benefit can be attained if this case were to be remanded to
MANGGAGAWA SA LA CAMPANA (KKM) (93 Phil. 160; May 25, 1953) – the court a quo merely in response to a technical substitution of parties.
Tan Tong, one of herein petitioners, is engaged in the buying and selling of
guagua under the trade name La Campana Guagua Packing. Later on, Tong TELEPHONE ENGINEERING SERVICE CO. VS. WCC (104 SCRA 354;
and his family organized a family corporation known as La Campana Coffee May 13, 1981) – The late Pacifico Gatus was an employee of Utilities
Factory Co, Inc. with its principal office located at the same place as that of Management Corporation (UMACOR), a sister company of herein Petitioner
La Campana Guagua Packing. TESCO. He was later on detailed with Petitioner Company and returned
back to UMACOR. But he contracted illness and later on died of “liver
Tan Tong’s employees later on formed a union (herein respondent) through cirrhosis with malignant degeneration”.
which they demanded (from both companies) higher salaries and more
privileges. As the demand was not granted and an attempt at a settlement His wife, respondent Leonila Gatus filed a Notice and Claim for
through mediation had given no result, the Department of Labor certified Compensation with the Workmen’s Compensation Commission (WCC)
the dispute to the Court of Industrial Relations (CIR). Petitioners filled a alleging Pacifico to be an employee of TESCO. An employer’s report was
motion to dismiss which was denied. Hence, this present petition for submitted to WCC where UMACOR was indicated as the employer of the
certiorari. deceased and stated that it would not contravert the claim and admitted
that Pacifico contracted illness “in regular occupation”.
ISSUE: WON the corporate entity of La Campana Coffee Factory, Inc. may
be disregarded? The sheriff levied on and attached the property of TESCO and scheduled
the sale of the same at public auction. Thus, the present petition for
HELD: Yes. La Campana Guagua Packing and La Campana Coffee Factory, certiorari with preliminary injunction.
Inc. are operating under on single management, that is, as one business
though with two trade names. True, the coffee factory is a corporation and, ISSUE: WON the award may be rendered against TESCO?
by legal fiction, an entity existing separate and apart from the person
composing it, that Tan Tong and his family. But it is settled that this HELD: Yes. We note that it is only in this Petition that petitioner denied,
fiction of law, which has been introduced as a matter of for the first time, the employer-employee relationship. In fact, in the letters
convenience and to subserve the ends of justice cannot be it submitted to the Acting Referee and to the Commission, petitioner
invoked as to further and end subversive of that purpose. represented and defended itself as the employer of the deceased.
Petitioner even admitted that TESCO and UMACOR are sister companies
In the present case, Tan Tong appears to be the owner of the guagua operating under one single management and housed in the same building.
factory. And the factory, though an incorporated business, is in reality Although respect for the corporate personality as such, is the
owned exclusively by Tan Tong and his family. As found by the CIR, one general rule, there are exceptions. In appropriate cases, the veil
payroll, except after July 17, the day the case was certified to the CIR, of corporate fiction may be pierced as when the same is made as a
when the person who was discharging the office of cashier for both shield to confuse the legitimate issues.
branches of the business began preparing separate payrolls for the two.
And above all, it should not be overlooked that, as also found by the While indeed, jurisdiction cannot be conferred by acts or omission of the
industrial court, the laborers of the guagua factory and the coffee factory parties. TESCO’s denial at this stage that it is the employer of the deceased
were interchangeable. In view of all these, the attempt to make the two is obviously an afterthought, a devise to defeat the law and evade its
factories appear as two separate businesses, when in reality they are but obligations. This denial also constitutes a change of theory on appeal which
one, is but a device to defeat the ends of the law and should not be is not allowed in this jurisdiction.
permitted to prevail.
CLARAPOLS VS. COMMISSIONER OF INTERNAL REVENUE (July 31,
EMILIO CANO ENTERPRISES, INC. VS. COURT OF INDUSTRIAL 1975; 65 SCRA 613) – A decision rendered against herein petitioner was
RELATIONS (CIR) (13 SCRA 290; Feb. 26, 1965) – In a complaint for rendered on a complaint filed by herein private respondents Allied Workers’

Association, Demetrio Garlitos and 10 respondent workers who petitioner This finding does not ignore the legal fiction that a corporation has a
dismissed from Clarapols Steel and Nail Plant. personality separate and distinct from its stockholders and members for, as
this Court had held “where the incorporators belong to a single family, the
ISSUE: WON the veil of corporate fiction should be pierced? corporation and its members can be considered as one in order to avoid it
being used as an instrument to commit injustice,” or to further an end
HELD: Yes. It very clear that the latter corporation was a continuation and subversive of justice. In the case of Clarapols vs. CIR involving almost
successor of the first entity, and its emergence was skilfully timed to avoid similar facts as in this case, it was also held that the shield of corporate
financial liability that already attached to its predecessor, Clarapols Steel fiction should be pierced when it is deliberately and maliciously designed to
and Nail Plant. (1) Both predecessor and successor were owned and evade financial obligations to employees.
controlled by the petitioner Eduardo Clarapols; and (2) there was no break
in the succession and continuity in the same business. This avoiding-the- Aggravating AC Ransom’s clear evasion of payment of its financial
liability scheme is very patent, considering that (3) 90% of the subscribed obligations is the organization of a “run-away” corporation, ROSARIO
shares of stock of the second corporation was owned by Clarapols himself, Industrial Corporation, in 1969 at the time the unfair labor practice case
and (4) all assets of the dissolved Clarapols Steel and Nail Plant were was proceeding before the CIR by the same person who were the officers
turned over to the emerging Clarapols Steel Corporation. and stockholders of AC Ransom, engaged in the same line of business,
producing the same line of product, occupying the same compound, using
It is very obvious that the second corporation seeks the protective shield of the same machineries, buildings, factories, bodega and sales and accounts
a corporate fiction whose veil in the present case could, and should be departments used by AC Ransom, and which is still in existence. Both
pierced as it was deliberately and maliciously designed to evade its financial corporations were closed corporations owned and managed by members of
obligations to its employees. the same family. Its organization proved to be a convenient instrument to
avoid payment of backwages and the reinstatement of 22 workers. This is
NATIONAL FEDERATION OF LABOR UNION (NAFLU) VS. OPLE (143 another instance where the fiction of separate and distinct corporate
SCRA 124; July 22, 1986) – NAFLU requested for conciliation before the entities should be disregarded.
Bureau of Labor Relations for certain money claims and refusal of the
company to conclude collective agreement and run-away shop undertaken CONCEPT BUILDERS, INC. VS. NLRC (257 SCRA 149; May 29, 1996) –
by management. In the course of the negotiation, management unilaterally Private respondents were employees of petitioner Concept Builders, Inc.,
declared a temporary shutdown. But it was discovered that the actual who were served termination letters stating that the project for which they
partial shutdown begun a month before and that the machines of Lawman were hired was already completed and that their contracts have already
were transferred to a different location and the name of the company was expired. Finding that the project was not actually completed yet, and that
changed to Libra Garments, upon discovery of this, the name was further petitioner employed a subcontractor whose employees performed the
changed to DOLPHIN garments. For failure of the company to resume duties of private respondents, the latter filed a complaint for illegal
operations in January 1983 (as promised) a complaint for unfair labor dismissal with the Labor Arbiter who held that the dismissal was illegal.
practice was filed.
A writ of execution was issued but was partially satisfied only. The sheriff
ISSUE: WON the corporate fiction of LIBRA (now DOLPHIN) garments sought levy upon the properties in the head office of Concept Builders, Inc.
should be pierced? but was not allowed to do so on the ground that it was occupied by Hydro
Pipes Philippines, Inc. and not concept builders. Unable to remove the
HELD: Yes. It is very obvious from the above findings that the second personal properties he found thereat, the Sheriff asked for a “break-open”
corporation seeks the protective shield of a corporate fiction to achieve order which was denied by the Labor Arbiter after a third party claim was
illegal purpose. As enunciated in Clarapols vs. CIR, its view in the present filed by Hydro, which was reversed by the NLRC on appeal.
case should, therefore be pierced as it was deliberately and maliciously
designed to evade its financial obligations to it employees. It is an ISSUE: WON the break-open order should be issued?
established principle that when the veil of corporate fictions is made as a
shield to perpetrate a fraud or to confuse legitimate issues (here, the HELD: Yes. The conditions under which the juridical entity may be
relation of employer-employee), the same should be pierced. disregarded vary according to the particular facts and circumstances of
each case. No hard and fast rule can be accurately laid down, but certainly
After finding that Lawman Industrial Corporation had transferred business there are some probative factors of identity that will justify the
operations to Libra Garments, which later changed to Dolphin Garments, application of the doctrine of piercing the veil of corporate veil, to wit:
the public respondent cannot deny reinstatement to the petitioners simply 1. Stock ownership by one or common ownership of both corporations;
because Lawman has ceased its operation. 2. Identity of directors and officers;
3. The manner of keeping corporate books and records;
As Libra Garments is but an alter-ego of the old employer, Lawman 4. Methods of conducting the business.
Industrial, the former must bear the consequences of the latter’s unfair act
by reinstating petitioners to their former positions without loss of seniority The SEC en banc explained the “instrumentality rule” which the courts have
rights. applied in disregarding separate juridical personality of corporations as
follows:
AC RANSOM LABOR UNION-CCLU VS. NLRC (150 SCRA 498 May 29,
1987) – A decision was rendered by the CIR and affirmed by this Court “Where on corporation is so organized and controlled and its affairs are
against AC Ransom for unfair labor practice. Writ of execution were issued conducted so that it is, in fact, a mere instrumentality or adjunct of the
successively against Ransom to no avail. The Union filed an ex-parte other, the fiction of the corporate entity of the “instrumentality” may be
motion for a Writ of Execution and Garnishment against the officers/agents disregarded. The control necessary to invoke the rule is not majority or
of AC Ransom personally and on their estates, as the case may be, which even complete stock control but such domination of finances, policies,
the Labor Arbiter granted. On appeal, the NLRC reversed the Labor Arbiter and practices that the controlled corporation has, so to speak, no
relieving the officers of personal liability. separate mind, will or existence of its own and is a business conduit of its
principal. It must be kept in mind that the control must be shown to have
ISSUE: WON the officers may be liable? been exercised at the time the acts complained of took place. Moreover,
the control and breach of duty must proximately cause the injury or unjust
HELD: Yes. The NLRC, on appeal, could not have modified the CIR loss for which the complaint is made”
decision as affirmed by this Court, by relieving AC Ransom’s officers and
agent of liability which were held to be jointly and severally liable to the 22 The test in determining the applicability of piercing the veil of
employees for unfair labor practice. corporate fictions is as follows:
1. Control, not mere majority or complete stock control, but complete

domination, not only in finances but of policy and business practice in law that created the separate personality.
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 TAN BOON BEE & CO., INC., petitioner,
its own; vs.
2. Such control must have been used by the defendant to commit fraud THE HONORABLE HILARION U. JARENCIO, PRESIDING JUDGE OF
or wrong, to perpetuate the violation of a statutory or other positive BRANCH XVIII of the Court of First Instance of Manila, GRAPHIC
legal duty or dishonest and unjust act in contravention of plaintiff’s PUBLISHING, INC., and PHILIPPINE AMERICAN CAN DRUG COMPANY,
legal rights; and respondents
3. The aforesaid control and breach of duty must proximately cause the (GR No. L-41337; 163 SCRA 205; June 30, 1988)
injury or unjust los complained of.
FACTS: For failure of private respondent Graphic Publishing Inc. to pay
The absence of one of the elements prevents piercing the corporate veil. In paper products purchased from petitioner (doing business under the name
applying the “instrumentality” or “alter-ego” doctrine, the courts are and style Anchor Supply, Inc.), petitioner filed a complaint in the CFI of
concerned with reality and not form, with how the corporation operated Manila. A writ of Execution was issued levying a printing machine which
and the individual defendant’s relationship to that operation. Thus, the private respondent Philippine American Drug Company claimed as its own.
question of whether a corporation is mere alter-ego, a mere sheet PADCO filed a third party claim and asked the court to nullify the auction
of paper corporation, a sham or a subterfuge is purely one of fact. sale already conducted, which herein respondent judge granted.
In this case, while petitioner claimed that it ceased on operations on April ISSUE: WON the respondent judge should be upheld?
29, 1986, it filed an information sheet with the SEC on May 15, 1987
stating that its office address is at 355 Maysan Road, Valenzuela Metro HELD: No. It is true that a corporation, upon coming into being, is invested
Manila. On the other hand, third-party claimant Hydro, on the same day, by law with a personality separate and distinct from that of the persons
filed an information sheet with the same address, both information sheets composing it as well as from any other legal entity to which it may be
filed by the same Virgilio O. Casino. Both companies have the same related. As a matter of fact, the doctrine that a corporation is a legal entity
president, the same BOD, the same corporate officers and substantially the distinct and separate from the members and stockholders who compose it
same subscribers. is recognized and respected in all cases which are within reason and the
law. However, this separate and distinct personality is merely a
Clearly, petitioner ceased its business operations in order to evade the fiction created by law for convenience and to promote justice.
payment to private respondents of back wages and to bar their Accordingly, this separate personality of the corporation may be
reinstatement to their former position. Hydro is obviously a business disregarded, or the veil of corporate fiction pierced, in cases
conduit of petitioner corporation and its emergence was skilfully where it is used as a cloak or cover for fraud or illegality, or to
orchestrated to avoid the financial liability attached to petitioner work an injustice, or where necessary to achieve equity or when
corporation. necessary for the protection of creditors. Corporations are
composed of natural persons and the legal fiction of a separate
MC CONNEL VS. CA (1 SCRA 722; March 1, 1961) – Petitioners, original corporate personality is not a shield for the commission of
incorporators of Park Rite Co., Inc. was ordered to pay the unsatisfied injustice and inequity. Likewise, this is true when the corporation
balance of a judgment rendered in favor of lot owners whose property they is merely an adjunct, business conduit or alter-ego of another
used in the operations of their parking business without the owners’ corporation. In such case, the fiction of separate and distinct
consent. corporate entities should be disregarded.
ISSUE: WON the incorporators may be held liable for obligations of the In the instant case, petitioner’s evidence established that PADCO never
corporation? engaged in the printing business; that the BOD and the officers of PADCO
and Graphic are the same; and that PADCO holds 50% share of stock of
HELD: Yes. The Court has already answered the question in the affirmative Graphic. The printing machine in question was in the premises of Graphic,
wherever the circumstances have shown that the corporate entity is being long before PADCO even acquired its alleged title from Capitol Publishing.
used as an alter-ego or business conduit for the sole benefit of the
stockholders, or else to defeat public convenience, justify wrong, protect Considering the above, respondent judge should have pierced PADCO’s veil
fraud, or defend crime. of corporate identity.
The evidence shows that Cirilio Paredes and Ursula Tolentino (present CEASE VS. CA (93 SCRA 483; Oct. 18, 1979) – Forrest L. Cease is the
stockholders) and M. McConnel, WP Cochrane and Ricardo Rodriguez common predecessor-in-interest of the parties. He and other American
(previous stockholders) completely dominated and controlled the citizens organized the Tiaong Milling and Plantation Company and in the
corporation and that the functions of the corporation were solely for their course of its corporate existence all other incorporators were bought out by
benefit, as shown that the other shareholders were merely qualifying Cease and his children. The corporation’s charter expired but there were no
shares. This is strengthened by the fact that the office of Cirilio Paredes records as to its liquidation. Upon Cease’s death, Ernesto, Teresita, Cecilia
and that of Park Rite Co., Inc. were located in the same building, in the (3 of the 5 children) and Bonifacia Terante re-incorporated under FL Cease
same floor, and in the same room. This is further shown by the fact that Plantation Company, to the objection of Benjamin and Florence who
the funds of the corporation were kept by Cirilio Paredes in his own name. wanted actual division of Forrest Cease’s shares. The latter two filed a civil
The corporation itself had no visible assets, as correctly found by the trial case asking to declare the corporation identical to FL Cease and that its
court, except perhaps the toll house, the wire fence around the lot and the properties be divided among Fl Cease’s children as his intestate heirs which
signs thereon It was for this reason that the judgment against it could not was granted by the trial court.
be fully satisfied.
ISSUE: WON the assets of the corporation are also the properties of
While the mere ownership of all or nearly all of the capital stock of Forrest L. Cease?
a corporation does not necessarily mean that it is a mere business
conduit of the stockholder, that conclusion is amply unjustified HELD: Yes. In sustaining respondent’s theory of “merger of Forrest Cease
where it is shown, as in this case before us, that the operations of and the Tiaong Milling as one personality”, or that “the company is only the
the corporation were so merged with the stockholders as to be business conduit and alter-ego of the deceased FL Cease and the
practically indistinguishable from them. To hold the latter liable for registered properties of Tiaong Milling are actually properties of FL Cease
the corporation’s obligations is not to ignore the corporation’s separate and should be divided equally among his children”, the trial court did aptly
entity, but merely to apply the established principle that such entity cannot apply the familiar exception to the general rule by disregarding the legal
be invoked or used for purposes that could not have been intended by the fiction of distinct and separate corporate personality and regarding the

corporation and the individual members one and the same. In shredding that until the balance is paid, the down payment shall accrue as rentals for
the fictitious corporate veil, the trial judge narrated the undisputed factual the 13 trucks; and in case of failure to pay the balance shall constitute a
premise: chattel mortgage lien; and the parties may allow 30 day extension; and
private respondent may ask for the revocation of the contract and re-
“While the records show that originally, the incorporators were aliens, conveyance of the said trucks. The obligation is further secured by a
friends or third-parties in relation of one to another, in the course of its promissory note executed by Coprada, where it is stated that the balance
existence, it developed into a close family corporation. The BOD and shall be paid from the proceeds of a loan from DBP which was never
stockholders belong to one family the head of which FL Cease always applied for. A complaint was later on filed by private respondent for the
retained the majority and hence, the control and management of its affairs. recovery of the P525, 000 or the return of the 13 trucks against Akron and
In fact, during the reconstruction of its records before the SEC, only 9 its officers and directors including herein petitioner which was granted by
nominal shares out of 300 appear in the name of his 3 eldest children then the CFI of Rizal. Petitioner denied any participation the transaction and
and another person close to them (Ternate). It is likewise noteworthy to alleging that Akron has distinct corporate personality. He was, however,
observe that as his children increase or perhaps become of age, he declared in default for failure to attend pre-trial.
continued distributing his shares among them adding Florence, Teresa and
Marion until at the time of his death, only 190 were left to his name. ISSUE: WON Petitioner Remo, Jr. is jointly and severally liable?
Definitely, only the members of his family benefited from the corporation.
HELD: No. The facts of the case show that there is no cogent basis to
The accounts of the corporation and therefore its operation, as well as that pierce the corporate veil of Akron and hold petitioner personally liable for
of the family appears to be indistinguishable and apparently joined its obligation to private respondent. While it is true that he is a member of
together. As admitted by the defendants, the corporation “never” had any the board at the time the resolution to purchase the trucks were adopted, it
account with any banking institution or if any account was carried in a bank does not appear that said resolution was intended to defraud anyone. It
on its behalf, it was in the name of FL Cease. In brief, the operation of the was Coprada who negotiated with respondent and the one who signed the
Corporation is merged with those of the majority stockholders, the latter promissory note. The word “We” in the said promissory note must refer to
using the former as his instrumentality and for the exclusive benefit of all the corporation and Coprada and not of its stockholders and directors.
his family. From the foregoing indication, therefore, there is truth in Petitioner did not sign such note so he cannot be personally bound thereby.
plaintiffs’ allegation that the corporation is only a business conduit of his Thus, if there was any fraud or misrepresentation that was foisted on
father and an extension of his personality, they are once and the same private respondent in that there was forthcoming loan from the DBP when
thing. Thus, the assets of the corporation are also the estate of FL Cease, in fact there as none, it is Coprada who should account for the same and
the father of the parties herein who are al legitimate children of full blood” not the petitioner.
Were we to sustain petitioners, the legal fiction of separate corporate

personality shall have been used to delay and ultimately deprive and DEL ROSARIO VS. NLRC (182 SCRA 777; July 24, 1990) - Pursuant to a
defraud the respondents of their successional right to the estate of their complaint for money claims which was ultimately decided by the NLRC
deceased father. against PHILSA Construction and Trading Co. (recruiter) and Arieb
Enterprises (employer), a writ of execution was issued by the POEA which
D. WHEN PIERCING THE CORPORATE FICTION IS NOT was returned unsatisfied as PHILSA was no longer operating and was
JUSTIFIED financially incapable of satisfying the judgment.
WHEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED At the motion of private respondent, an alias writ was issued against the
properties of Mr. Francisco del Rosario and if insufficient, against the cash
1. Absent any of the following circumstances, the courts will not be and/or surety bond of the Bonding Company concerned.
justified in disregarding the corporate entity;
a. The corporation is used or being used to defeat public Petitioner appealed to the NLRC which was denied together with his MR.
convenience;
b. Justify wrong; ISSUE: WON the writ of execution must be upheld?
c. Protect fraud;
d. Defend crime; HELD: No. Under the law, a corporation is bestowed juridical personality,
e. Confuse legitimate issues; separate and distinct from its stockholders. But when the juridical
f. Circumvent the law; personality of the corporation is used to defeat public convenience, Justify
g. Perpetuate deception; or wrong, protect fraud or defend crime, the corporation shall be
h. An alter-ego, adjunct or business conduit for the sole benefit of a considered as a mere association of persons, and its responsible
stockholder or a group of stockholders or another corporation. officers and/or stockholders shall be held individually liable. For
2. The wrong doing must be clearly and convincingly established. It the same reasons, a corporation shall be liable for the obligation of a
cannot be justified by speculation and can never be presumed. stockholder or a corporation and its successor-in-interest shall be
3. The petitioner must seek to impose a claim against the stockholders or considered as one and the liability of the former shall attach to the latter.
officers directly liable, otherwise piercing the veil of corporate fiction
would not be available nor justified. But for the separate juridical personality of a corporation to be disregarded,
the wrongdoing must be clearly and convincingly established. It cannot be
CRUZ VS. DALISAY (supra) – It is well-settled doctrine, both in law and presumed. In this regard, we find the NLRC decision wanting.
in equity that as a legal entity, a corporation has a personality
distinct and separate from its individual stockholders or members. 1. PHILSA allowed its license to expire so as to evade payment of private
The mere fact that one is president of a corporation does not respondent’s claim – not supported by facts. The license expired in
render the property he owns or possesses the property of the 1985, it was delisted in 1986, there was no judgment yet in favour of PR.
corporation, since the president, as individual, and the corporation An intent to evade payment of his claims cannot therefore be
are separate entities implied from the expiration of PHILSA’s license and its delisting.
REMO, JR. VS. INTERMEDIATE APPELLATE COURT (175 SCRA 405; 2. Organization of PHILSA International Placemen and Services Corp. and
April 18, 1989) – Petitioner Feliciano Coprada, as president of Akron, its registration with POEA implies fraud – it was organized and registered in
purchased 13 trucks from private respondent (EB Marcha Transport Co., 1981, several years before private respondent filed his complaint with the
Inc.) for and in consideration of P525,000 as evidenced by a deed of POEA in 1985. The creation of the second corporation could not
absolute sale. In a side agreement, the parties agreed on a down payment therefore have been in anticipation of PR’s money claims and the
of P50,000 and the balance to be paid within 60 days. They further agreed consequent adverse judgment against PHILSA.

PNB, organized and doing business in HK, extended a letter of credit in
3. Substantial identity of the incorporators of the two corporations – does favor of respondent RITRATTO in the amount of US$300K , later increased
not necessarily imply fraud. to 1.14M, to 1.29M, to 1.425M and decreased to 1,421,316.18, secured by
a real estate mortgage constituted in 4 parcels of land in Makati City.
*Distinguished from other cases*
LA CAMPANA – the two companies were substantially owned by the same As of April 1998, the outstanding obligation of respondents stood at
person. They had one office, one management, and a single payroll for US$1,497,274.70. Pursuant to the terms of the mortgages, IFL, through its
both businesses. The laborers were also interchangeable. attorney-in-fact PNB, notified respondents of the foreclosure of all the real
estate mortgages and that the properties would be sold at a public auction.
CLARAPOLS – Both corporations were substantially owned and controlled
by the same person and there was no break or cessation in operations. Respondents filed a complaint for injunction for which a TRO was issued
Moreover, all the assets of the old were transferred to the new corporation. and later on a writ of preliminary injunction, which petitioner assailed with
the CA through petition for certiorari.
AC RANSOM – The distinguishing mark of fraud were clearly apparent in
AC Ransom, when such corporation ceased operation after the decision of The CA dismissed the petition.
the CIR and new one replacing it which was owned by the same family,
engaging in the same business and operating in the same compound. In ISSUE: WON the corporate entity of IFL may be disregarded?
the present case, not only has there been failure to establish fraud,
but it has also not been shown that petitioner is the corporation HELD: No. Respondents, therefore, do not have any cause of action
officer responsible for PR’s predicament. It must be emphasized that against it. The trial court erred in disregarding the corporate entity by
the claims were actually directed against the employer, PHILSA became saying that IFL is a wholly owned subsidiary of PNB and that it is a mere
liable only because of its undertaking to be jointly and severally bound with alter-ego or business conduit of the latter.
the foreign employer, as required by POEA rules.
The mere fact that a corporation owns all of the stocks of another
INDOPHIL TEXTILE MILL WORKERS UNION VS. CALICA (205 SCRA corporation, taken alone is not sufficient to justify their being
697; Feb. 3, 1992) - On April 1987, petitioner and Indophil Textile Mills, treated as one entity. If used to perform legitimate functions, a
Inc. executed a CBA effective from April 1, 1987 to March 31, 1990. On subsidiary’s separate existence may be respected, and the liability
November 3, 1987, Indophil ACRYLIC MANUFACTURING CORP was formed of the parent corporation as well as the subsidiary will be confined
and registered with the SEC and in 1988 became operation and hired to those arising in their respective businesses.
workers according to its own criteria and standards.
KOPPEL PHIL VS. YATCO – this Court disregarded the separate
In 1989, the workers of ACRYLIC unionized and a CBA was executed. In existence of the parent and subsidiary on the ground that the latter was
1990, petitioner union claimed that the plant facilities build and set up by formed merely for the purpose of evading the payment of higher taxes. In
ACRYLIC should be considered an extension or expansion of the facilities of the case at bar, respondents failed to show any cogent reason why
TEXTILE MILLS, to make ACRYLIC part of the TEXTILE MILLS bargaining the separate entities of PNB and IFL should be disregarded.
unit. Public respondent voluntary arbitrator Calica declared that the CBA of
petitioner DOES NOT extend to employees of ACRYLIC. While there exists no definite test of general application in determining
when a subsidiary may be treated as a mere instrumentality of the parent
ISSUE: WON the veil of corporate entity should be pierced? corporation some factors have been identified that will justify the
application of the treatment of the doctrine of piercing the corporate veil:
HELD: No. Under the doctrine of piercing the veil of corporate entity, when
valid grounds therefore exist, the legal fiction that a corporation is an entity 1. As a general rule, the stock ownership alone by one corporation of the
with a juridical personality separate and distinct from its members or stock of another does not thereby render the dominant corporation liable
stockholders may be disregarded. In such cases, the corporation will be for the torts of the subsidiary unless the separate corporate existence
considered as a mere association of persons. The members or of the subsidiary is a mere sham, or unless the control of the
stockholders of a corporation will be considered as the subsidiary is such that it is by an instrumentality or adjunct of the
corporation, that is, liability will attach directly to the officers and dominant corporation (Garrett vs. Southern Railway Co.; Tennessee
stockholders. SC);
In the case at bar, petitioner alleges that the creation of the ACRYLIC is a 2. The doctrine of piercing the corporate veil is an equitable doctrine
devise to evade the application of the CBA between petitioner and TEXTILE developed to address situations where the separate corporate personality
MILL. While we do not discount the possibility of the similarities of the of a corporation is abused or used for wrongful purpose. The doctrine
businesses of the two corporations, neither are we inclined to apply the applies when the corporate fiction is used to defeat public
doctrine invoked by petitioner. convenience, justify wrong, protect fraud or defend crime, or when it is
1. The fact that the business of Indophil Textile Mills and Indphil Acrylic used as a shield to confuse legitimate issues or where the corporation is
Manufacturing are related; so organized and controlled and its affairs are so conducted as to
2. That some of the employees of PR are the same persons manning and make it merely an instrumentality, agency, conduit or adjunct of
providing for auxilliary services to the units of ACRILYC, and that; another corporation;
3. The physical plants, offices and facilities are situated in the same
compound. 3. The test in determining the doctrine of piercing the veil of corporation
fiction:
It is our considered opinion that these facts are not sufficient to a. Control, not mere majority of complete control, but complete
justify piercing the corporate veil of ACRILYC. domination, not only of finances, but of policy and business
practices in respect to the transaction attacked so that the corporate
UMALI VS. CA – “the legal corporate entity is disregarded only if it’s entity as to this transaction had at the time no separate mind,
sought to hold the officers and stockholders directly liable for a corporate will or existence of its own;
debt or obligation”. In the instant case, petitioner does not seek to
impose a claim against the members of ACRILYC. b. 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
PNB VS. RITRATTO GROUP, INC. ET. AL. (362 SCRA 216; July 31, contravention to plaintiff’s legal rights; and
2001) - PNB International Finance Ltd. (IFL), a wholly-owned subsidiary of

c. The aforesaid control and breach of duty must proximately cause The genuine nature of the sale to Twin Ace is evidenced by the fact that
the injury or unjust loss complained of. Twin Ace was only a subsequent interested buyer . PRs have not
presented any proof as to communality of ownership and
The absence of any one of these elements prevents “piercing the management to support their contention that the two companies
corporate veil”. In applying the “instrumentality” or “alter-ego” doctrine, are one firm or closely related.
the courts are concerned with reality and not form, with how the
corporation operated and the individual defendant’s The complaint was filed against TDI. Only later when the manufacture
relationship to the operation. (Concept Builders, Inc. vs. NLRC) and sale of Tanduay products was taken over by Twin Ace or
Tanduay Distillers were James Yu and Wilson Young impleaded.
Aside from the fact that IFL is a wholly owned subsidiary, there is no The corporation itself was never made a party to the case.
showing of the indicative factors that the it is a mere instrumentality of
PNB. Neither is there a demonstration that any of the evils sought to be The buyer (Twin Ace) did not buy TDI as a corporation, only most of its
prevented by the doctrine of piercing the corporate veil based on assets, equipment and machinery. Thus, Tanduay Distillers or Twin-
the alter-ego or instrumentality doctrine finds application in the Ace did not take over the corporate personality of TDI although
case at bar. they manufacture the same product at the same plant with the
same equipment and machinery. Obviously, the trade name “Tanduay”
The injunction suit was directed against PNB, as agent of IFL and not as went with the sale because the new firm does business as Tanduay
parent. A suit against an agent, cannot, without compelling reasons be Distillers and its main product of rum is sold as Tanduay Rum. There is no
considered a suit against the principal, for he is not the real party in showing, however, that TDI itself was absorbed by Twin Ace or
interest provided under the Rules of Court. that it ceased to exist as a separate corporation. In point of fact, TDI
is now herein a party respondent represented by its own counsel.
YU VS. NLRC, FERNANDO DURAN, EDUARDO PALIWAN, ROQUE The fiction of separate and distinct corporate entities cannot, in the instant
ESTOCE AND RODRIGO SANTOS (245 SCRA 134) - Private respondents case, be disregarded and brushed aside, there being not the lease
were employees of Tanduay Distillery, Inc. (TDI). On March 29, 1988, 22 indication that the second corporation was a dummy or services
employees of TDI, including PRs, received a memorandum from TDI, as a client of the first corporate entity.
terminating their services for reasons of retrenchment, because First Pacific
Metro Corporation is buying TDI’s assets, which purchase did not push
through. AMENDMENT OF THE CORPORATE CHARTER
On June 1, 1988, after employees had ceased as such, Twin Ace Holdings, Sec. 36. Corporate powers and capacity. - Every corporation
Inc. took over the business and assumed the name Tanduay Distillers incorporated under this Code has the power and capacity:
(Tanduay).
xxx
Labor Arbiter, on a case originally filed in April 26, decided in favor of PRs 4. To amend its articles of incorporation in accordance with the provisions of
holding the retrenchment illegal, which was affirmed by the NLRC. this Code;
Petitioners filed an opposition against the motion for execution (which was
directed towards them and TDI) contending that Tanduay is a separate Sec. 16. Amendment of Articles of Incorporation. - Unless otherwise
entity distinct from TDI, and respondents James Yu and Wilson Young, prescribed by this Code or by special law, and for legitimate purposes, any
which was dismissed by the NLRC. provision or matter stated in the articles of incorporation may be amended by
a majority vote of the board of directors or trustees and the vote or written
ISSUE1: WON the order of execution is void? assent of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, without prejudice to the appraisal right of
HELD: Yes. The decision dated May 24, 1989, was already final and dissenting stockholders in accordance with the provisions of this Code, or the
executory and cannot be amended or corrected except for clerical errors or vote or written assent of at least two-thirds (2/3) of the members if it be a
mistakes. An examination of the said decision does not in any manner non-stock corporation.
obligate Tanduay or even petitioners Yu and Young to reinstate PRs. Only
TDI was held liable up to the time of change of ownership. The order of The original and amended articles together shall contain all provisions
execution in effect amended the decision. It is beyond the power and required by law to be set out in the articles of incorporation. Such articles, as
competence of Labor Arbiter Cueto to amend a final decision. The writ of amended shall be indicated by underscoring the change or changes made,
execution must not go beyond the scope of judgment. and a copy thereof duly certified under oath by the corporate secretary and a
majority of the directors or trustees stating the fact that said amendment or
ISSUE2: WON NLRC committed grave abuse of discretion in holding amendments have been duly approved by the required vote of the
petitioner Yu and Young liable? stockholders or members, shall be submitted to the Securities and Exchange
Commission.
HELD: It cannot be said that TDI and Tanduay are one and the same, as
seems to be the impression of respondents when they impleaded The amendments shall take effect upon their approval by the Securities and
petitioners as party-respondents in their complaint. Exchange Commission or from the date of filing with the said Commission if
not acted upon within six (6) months from the date of filing for a cause not
Such a stance is not supported by the facts. The name of the company attributable to the corporation
for whom the petitioners are working is Twin Ace Holdings
Corporation. As stated by the SolGen, Twin Ace is part of the Allied The steps to be followed for an effective amendment of the articles of
Banking Group although it conducts the rum business under the name of incorporation would thus be:
Tanduay Distillers. The use of a similar sounding or almost identical name 1. Resolution by at least a majority of the board of directors or
is an obvious device to capitalize on the goodwill which Tanduay Rhum has trustees;
built over the years. Twin Ace or Tanduay Distillers and TDI are 2. Vote OR WRITTEN ASSENT of the stockholders representing at
distinct and separate corporations. There is nothing to suggest least 2/3 of the outstanding capital stocks or members in case of a
that the owners of TDI, have any common relationship as to non-stock corporation. (Note: non-voting shares are considered in
identify it with Allied Banking Group which runs Tanduay determining the voting and quorum requirement in case of
Distillery. amendments of the articles of incorporation as provided in Sec. 6);
3. Submission and filing of the amendments with the SEC as follows:

a. The original and amended articles together shall contain all the One of the duplicate certificates shall be kept on file in the office of the
provision required by law to be set out in the articles of corporation and the other shall be filed with the Securities and Exchange
incorporation. Such articles, as amended, shall be indicated by Commission and attached to the original articles of incorporation. From and
underscoring the change or changes made; after approval by the Securities and Exchange Commission and the issuance
b. A copy thereof, duly certified under oath by the corporate by the Commission of its certificate of filing, the capital stock shall stand
secretary and a majority of the directors or trustees stating the increased or decreased and the incurring, creating or increasing of any
fact that such amendments have been approved by the required bonded indebtedness authorized, as the certificate of filing may declare:
vote of the stockholders or members; Provided, That the Securities and Exchange Commission shall not accept for
c. Favorable recommendation of the appropriate government filing any certificate of increase of capital stock unless accompanied by the
agency concerned in the case where the corporation is under its sworn statement of the treasurer of the corporation lawfully holding office at
supervision such as banking and insurance companies, etc. the time of the filing of the certificate, showing that at least twenty-five
(25%) percent of such increased capital stock has been subscribed and that
When to take effect? (1) Upon approval by the SEC; or (2) From the date at least twenty-five (25%) percent of the amount subscribed has been paid
of filing if not acted upon within 6 months for a cause not attributed to the either in actual cash to the corporation or that there has been transferred to
corporation (does not apply to increasing or decreasing the capital stock or the corporation property the valuation of which is equal to twenty-five (25%)
shortening the corporate term, which shall require the approval of the SEC percent of the subscription: Provided, further, That no decrease of the capital
[Sec. 38 and 120]) stock shall be approved by the Commission if its effect shall prejudice the
rights of corporate creditors.
SPECIAL AMENDMENTS
Non-stock corporations may incur or create bonded indebtedness, or increase
Sec. 37.Power to extend or shorten corporate term. - A private the same, with the approval by a majority vote of the board of trustees and
corporation may extend or shorten its term as stated in the articles of of at least two-thirds (2/3) of the members in a meeting duly called for the
incorporation when approved by a majority vote of the board of directors or purpose.
trustees and ratified at a meeting by the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock or by at least two-thirds Bonds issued by a corporation shall be registered with the Securities and
(2/3) of the members in case of non-stock corporations. Written notice of the Exchange Commission, which shall have the authority to determine the
proposed action and of the time and place of the meeting shall be addressed sufficiency of the terms thereof.
to each stockholder or member at his place of residence as shown on the
books of the corporation and deposited to the addressee in the post office SEC. 37&38 vs. SEC. 16:
with postage prepaid, or served personally: Provided, That in case of 1. In the former a meeting of the stockholders would be REQUIRED, unlike
extension of corporate term, any dissenting stockholder may exercise his in Sec. 16, where the “written assent” would suffice.
appraisal right under the conditions provided in this code. 2. Former requires the approval of the SEC.
Sec. 38. Power to increase or decrease capital stock; incur, create or NOTE: When the amendment of the corporate charter involves shortening
increase bonded indebtedness. - No corporation shall increase or the life of the corporation with the effect of dissolution, Sec. 120 would
decrease its capital stock or incur, create or increase any bonded apply, requiring approval by the SEC.
indebtedness unless approved by a majority vote of the board of directors
and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3) GROUNDS FOR DISAPPROVAL OF AMENDMENT
of the outstanding capital stock shall favor the increase or diminution of the
capital stock, or the incurring, creating or increasing of any bonded Sec. 17. Grounds when articles of incorporation or amendment may
indebtedness. Written notice of the proposed increase or diminution of the be rejected or disapproved. - The Securities and Exchange Commission
capital stock or of the incurring, creating, or increasing of any bonded may reject the articles of incorporation or disapprove any amendment thereto
indebtedness and of the time and place of the stockholder's meeting at which if the same is not in compliance with the requirements of this Code: Provided,
the proposed increase or diminution of the capital stock or the incurring or That the Commission shall give the incorporators a reasonable time within
increasing of any bonded indebtedness is to be considered, must be which to correct or modify the objectionable portions of the articles or
addressed to each stockholder at his place of residence as shown on the amendment. The following are grounds for such rejection or disapproval:
books of the corporation and deposited to the addressee in the post office
with postage prepaid, or served personally. 1. That the articles of incorporation or any amendment thereto is not
substantially in accordance with the form prescribed herein;
A certificate in duplicate must be signed by a majority of the directors of the
corporation and countersigned by the chairman and the secretary of the 2. That the purpose or purposes of the corporation are patently
stockholders' meeting, setting forth: unconstitutional, illegal, immoral, or contrary to government rules and
regulations;
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock; 3. That the Treasurer's Affidavit concerning the amount of capital stock
(3) If an increase of the capital stock, the amount of capital stock or number subscribed and/or paid if false;
of shares of no-par stock thereof actually subscribed, the names, nationalities
and residences of the persons subscribing, the amount of capital stock or 4. That the percentage of ownership of the capital stock to be owned by
number of no-par stock subscribed by each, and the amount paid by each on citizens of the Philippines has not been complied with as required by existing
his subscription in cash or property, or the amount of capital stock or number laws or the Constitution.
of shares of no-par stock allotted to each stock-holder if such increase is for
the purpose of making effective stock dividend therefor authorized; No articles of incorporation or amendment to articles of incorporation of
(4) Any bonded indebtedness to be incurred, created or increased; banks, banking and quasi-banking institutions, building and loan associations,
(5) The actual indebtedness of the corporation on the day of the meeting; trust companies and other financial intermediaries, insurance companies,
(6) The amount of stock represented at the meeting; and public utilities, educational institutions, and other corporations governed by
(7) The vote authorizing the increase or diminution of the capital stock, or special laws shall be accepted or approved by the Commission unless
the incurring, creating or increasing of any bonded indebtedness. accompanied by a favorable recommendation of the appropriate government
agency to the effect that such articles or amendment is in accordance with
Any increase or decrease in the capital stock or the incurring, creating or law.
increasing of any bonded indebtedness shall require prior approval of the
Securities and Exchange Commission. PROVISIONS NOT SUBJECT TO AMENDMENT (fait accompli):

1. Names of the incorporations and the incorporating directors or RED LINE TRANSPORT VS. RURAL TRANSIT CO. – what was held as
trustees; contrary to public policy is the USE by one corporation of the name of
2. Name of the treasurer originally or first elected by the subscribers or another corporation as its trade name. We are certain no one will disagree
members to act as such; that such an act can only result in confusion and open the door to frauds
3. Number of shares and the amount originally subscribed and paid out and evasions and difficulties of administration and supervision. Surely, the
of the original authorized capital stock of the corporation; and Red Line case was not one of change of name.
4. Date and place of execution of the articles of incorporation and the
signatories and acknowledgment thereof. The change of name of a corporation DOES NOT result in its dissolution .
There is unanimity in authorities: “An authorized change in the name of a
CHANGE IN CORPORATE NAME corporation has no more effect upon its identity as a corporation
than change of name of natural person has upon his identity. It
Change in corporate name is included in the general power to amend and does not affect the rights of the corporation or lessen or add to its
maybe effected with compliance to Sec. 16. obligations. After a corporation has effected a change in its name
it should sue and be sued in its new name” (13 Am. Jur. 276-277)
Any change in the corporate identity or name does not affect the rights and
obligations of the corporation. A mere change in the name of the A mere change in the name of a corporation, either by the legislature or by
corporation does not affect the identity of a corporation nor in any the corporators or stockholders under legislative authority, does not,
manner affect the rights, privileges and obligations previously generally speaking, affect the identity of the corporation, nor in
acquired or incurred by it. any way affect the rights, privileges, or obligations previously
acquired or incurred by it. Indeed, it has been said that a change of
PHILIPPINE FIRST INSURANCE CO., plaintiff-appellant name by a corporation has no more effect upon the identity of the
vs. corporation than a change of name by a natural person has upon the
MARIA CARMEN HARTIGAN, CGH and O. ENGKEE, defendants- identity of such person. The corporation, upon such change in its
appellees (GR No. L-26370; 74 SCRA 252; July 31, 1970) name, is in no sense a new corporation, nor the successor of the
original one, but remains and continues to be the original
FACTS: Plaintiff changed its name from “The Yek Tong Lin Fire and Marine corporation. It is the same corporation with a different name, and
Insurance Co., Ltd” (Yek Tong). its character is in no respect changed. ... (6 Fletcher, Cyclopedia of
the Law of Private Corporations, 224-225, citing cases).
The complaint alleges that under its old name, PFIC signed as co-maker
together with Hartigan, a promissory note for P5,000 in favor of China
Banking Corporation (Chinabank). Plaintiff agreed to act as such upon REPUBLIC PLANTERS BANK VS. CA (216 SCRA 738; Dec. 31, 1992) – A
application of the defendant, who together with Antonio Chua and Chang change in the corporate name does not make a new corporation, and
Ka Fu, signed an indemnity agreement in favor of the plaintiff. whether effected by special act or under a general law, has no effect on
the identity of the corporation, or on its property rights or liabilities. The
Defendants admitted the execution of the indemnity agreement but argued corporation continues, as before, responsible in its new name for all debts
that it was made in favor of Yek Tong and not PFIC. They claim that there or other liabilities which it had previously contracted or incurred.
was no privity of contract between plaintiff and defendants and
consequently, the plaintiff has no cause of action against them considering
that the plaintiff does not allege that PFIC and Yek Tong are one and the AMENDMENT OF THE CORPORATION TERM
same or that the plaintiff has acquired the rights of the latter. For purposes of amending the corporate term, the following procedure is to
be observed (Sec. 37):
CFI of Manila dismissed the complaint. 1. Approval by a majority vote of the board of directors or trustees;
2. Written notice of the proposed action and the time and place of
ISSUE: WON the trial court correctly dismissed the case? meeting shall be served to each stockholder or member either by mail
or by personal service;
HELD: No. Sec. 18 (Now Sec. 16) of the Corporation Law (Act No. 1459) 3. Ratification by the stockholders or members representing at least
explicitly permits the articles of incorporation to be amended. The law does 2/3;
not only authorize corporations to amend their charter; it also lays down 4. In case of extension of corporate term, it should be for periods not
the procedure for such amendment; and, what is more relevant to the exceeding 50 years in any single instance, and provided that no
present discussion, it contains provisos restricting the power to amend extension can be made earlier than 5 years prior to the original or
when it comes to the term of their existence and the increase or decrease subsequent expiry date(s) unless there are justifiable reasons for an
of the capital stock. There is no prohibition therein against the change of earlier extension as may be determined by the SEC.
name. The inference is clear that such a change is allowed, for if the 5. In cases of extension of corporate term, a dissenting stockholder
legislature had intended to enjoin corporations from changing names, it may exercise appraisal rights under the conditions prescribes by
would have expressly stated so in this section or in any other provision of Sec. 81 and 82 of the Code.
the law.
ALHAMBRA CIGAR & CIGARETTE MANUFACTURING COMPANY,
No doubt, the name of the corporation is peculiarly important as INC., petitioner,
necessary to the very existence of a corporation. The general rule vs.
as to corporation is that each corporation shall have a name by SECURITIES & EXCHANGE COMMISSION, respondent
which it is to sue and be sued and do all legal acts . The name of the (G.R. No. L-23606 July 29, 1968)
corporation in this respect designates the corporation in the same manner
as the name of an individual designates the person. Since an individual FACTS: ACCMC was incorporated on Jan. 15, 1912 for a period of 50 years
has the right to change his name under certain conditions, there is which expired on Jan. 15, 1962.
no compelling reason why a corporation may not enjoy the same
right. The sentimental considerations which individuals attach to their On July 15, 1963, during the period within which it is to liquidate, the board
names are not present in corporations and partnerships. Of course, as in of directors resolved to amend its articles of incorporation extending its
the case of an individual, such change may not be made exclusively by corporate life for another 50 years which was approved by the stockholders
the corporation’s own act. It has to follow the procedure but denied by the SEC.
prescribed by law for the purpose, and this is what is important and
indispensably prescribed – strict adherence to such procedure. ISSUE: WON the extension of corporate term should be allowed?

HELD: No. The privilege of extension is purely statutory. All the The Board of Directors (or trustees or other designation allowed under Sec.
statutory conditions precedent must be complied with in order 138) is the supreme authority in matter of management of the regular and
that the extension may be effectuated. And, generally, these ordinary business affairs of the corporation.
conditions must be complied with, and the steps necessary to effectuate an
extension must be taken, during the life of the corporation, and However, this authority does not extend to the fundamental changes in the
before the expiration of the term of existence as originally fixed by corporate charter such as amendments or substantial changes thereof,
its charter or the general law, since, as a rule, the corporation is ipso which belong to the stockholders as a whole. The equitable principle
facto dissolved as soon as the time expires. So where the extension is therefore is that the stockholders may have all the profits but
by amendment of the articles of incorporation, the amendment must be shall turn over the management of the enterprise to the Board of
adopted before that time. Directors.
The logic of this position is well-expressed in a four square case decided by CLASSIFICATION OF POWERS OF CORPORATE AGENTS/OFFICERS
the CA of Kentucky:
Unless the law so provides, corporate powers may be delegated to
“But section 561 (section 2147) provides that, when any corporation individual directors or other officers or agents. Whether or not the
expires by the terms of its articles of incorporation, it may be thereafter acts of the individual director, officer or agent would bind the corporation
continued to act for the purpose of closing up its business, but for no depend on the nature of the agency created or the powers conferred upon
other purpose. The corporate life of the Home Building Association such person by the statute, the corporate charter, the by-laws, the
expired on May 3, 1905. After that date, by the mandate of the statute, corporate action of the board or stockholders, or whether it is necessary or
it could continue to act for the purpose of closing up its business, but for incidental to one’s office.
no other purpose. The proposed amendment was not made until January
16, 1908, or nearly three years after the corporation expired by the The general rule is that a corporation is bound by the acts of its
terms of the articles of incorporation. When the corporate life of the corporate officers who act within the scope of the 5 classification
corporation was ended, there was nothing to extend. Here it was of powers of corporate agents, which are:
proposed nearly three years after the corporate life of the association 1. Those expressly conferred or those granted by the articles of
had expired to revivify the dead body, and to make that relate back incorporation, corporate by-laws or by the official act of the board of
some two years and eight months. In other words, the association for directors;
two years and eight months had only existed for the purpose of winding 2. Those that are incidental or those acts as are naturally and ordinarily
up its business, and, after this length of time, it was proposed to revivify done which are reasonable and necessary to carry out the corporate
it and make it a live corporation for the two years and eight months purpose or purposes;
daring which it had not been such. 3. Those that are inherent or acts that go with the office;
4. Those that are apparent or those acts which although not actually
The law gives a certain length of time for the filing of records in this granted, the principal knowingly allows or permits it to be done; and
court, and provides that the time may be extended by the court, but 5. Powers arising out of customs, usage or emergency.
under this provision it has uniformly been held that when the time was
expired, there is nothing to extend, and that the appeal must be J. F. RAMIREZ, plaintiff-appellee,
dismissed... So, when the articles of a corporation have expired, it is too vs.
late to adopt an amendment extending the life of a corporation; for, the THE ORIENTALIST CO., and RAMON J. FERNANDEZ, defendants-
corporation having expired, this is in effect to create a new corporation appellants
..." (G.R. No. 11897 September 24, 1918)
OTHER MATTERS SUBJECT TO AMENDMENT: FACTS: The Board of Directors were apprised of the fact the plaintiff JF
1. Purpose clause – by changing, altering or including other purpose or Ramirez, who is based in Paris and represented by his son Jose Ramirez,
purposes; had control of agencies for two different marks of films, “Éclair Films” and
2. Principal Office; “Milano Films”.
3. Number of Directors;
4. Shares of stock and their classification; Negotiations began between Jose Ramirez and the board of directors of
5. Restrictions as well as preference; Orientalist Co. where Ramon Fernandez, one of the members of the board
and TOC’s treasurer was chiefly active.
CHAPTER 6: BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Near the end of July 1913, Jose Ramirez offered to supply from Paris the
aforesaid films to TOC through Fernandez. Accordingly, Fernandez had an
A. POWERS OF THE BOARD informal conference with the BOD except one, and with approval of those
whom he had communicated, accepted the offer through letters signed by
Sec. 23. The board of directors or trustees. - Unless otherwise provided Fernandez in his capacity as treasurer.
in this Code, the corporate powers of all corporations formed under this Code
shall be exercised, all business conducted and all property of such Upon arrival of the said films, it turned out that TOC was without funds, so
corporations controlled and held by the board of directors or trustees to be the first drafts, taken in the name of TOC were received and paid by its
elected from among the holders of stocks, or where there is no stock, from president, Hernandez, through his own funds and such films were treated
among the members of the corporation, who shall hold office for one (1) year by him as his own property; and in fact, they never came into the
until their successors are elected and qualified. possession of TOC and were rented by Hernandez to TOC as they are
exhibited in the Oriental Theater.
Every director must own at least one (1) share of the capital stock of the
corporation of which he is a director, which share shall stand in his name on Other films arrived together with their drafts, taken in the name of TOC
the books of the corporation. Any director who ceases to be the owner of at through its president, which were not paid and gave rise to the present
least one (1) share of the capital stock of the corporation of which he is a action. TOC was declared the principal debtor and Ramon Fernandez, the
director shall thereby cease to be a director. Trustees of non-stock guarantor.
corporations must be members thereof. A majority of the directors or
trustees of all corporations organized under this Code must be residents of ISSUE: WON the corporation could be held liable for the contract?
the Philippines.
HELD: Yes. The public is not supposed nor required to know the
transactions which happen around the table where the corporate board of

directors or the stockholders are from time to time convoked. In dealing HELD: No. Sec. 20 of the Corporation Law limits the authority of a
with corporations, the public at large is bound to rely to a large corporation to adopt by-laws which are not consistent with the provisions
extent upon outward appearances. If a man is acting for a corporation of the law. The appellees contend that the articled in question is merely a
with the external indicia of authority, any person not having notice of want provision of the compensation of directors which is not only consistent with
of authority may usually rely upon those appearances; and if it be found but expressly authorized by Sec. 21 of the Corporation Law.
that the directors had permitted the agent to exercise that authority and
thereby held him out as a person competent to bind the corporation, or We cannot agree with this contention. The authority conferred upon
had acquiesced in a contract and retained the benefit supposed to have corporations in that section refers only to providing compensation for the
been conferred by it, the corporation will be bound, notwithstanding the future services of directors, officers, and employees thereof after the
actual authority may ever have been granted. adoption of the by-law or other provisions in relation thereto, and cannot in
any sense be held to authorize the giving, as in this case, of continuous
The failure of the defendant corporation to make an issue in its answer compensation to particular directors after their employment has terminated
with regard to the authority of Ramon Fernandez to bind it, and particularly for part services rendered gratuitously by them to the corporation. To
to deny specifically under oath the genuineness and due execution of the permit the transaction involved in this case would be to create an obligation
contracts sued upon have the effect of eliminating the question of his unknown to law, and to countenance a misapplication of the funds of the
authority from the case. defendant building and loan association to the prejudice of the substantial
rights of its shareholders.
It is declared under Sec. 28 (now 23) that corporate powers shall be
exercised, and all corporate business conducted by the board of Irrespective of the above, the conclusion is the same. The article which the
directors, and this principle is recognized in the by-laws of the appellees rely upon is merely a by-law provision adopted by the
corporation in question which contain a provision declaring that stockholders of the defendant corporation, without any action having been
the power to make contracts shall be vested in the board of taken in relation thereto by its board of directors. The law is settled that
directors. contracts between a corporation and third person must be made
by or under the authority of its board of directors and not by its
It is true that it is also true in the by-laws, that the president shall have the stockholders. Hence, the action of the stockholders in such matters is
power and it shall be his duty, to sigh contract; but this has reference only advisory and not in any wise binding on the corporation. There could
rather to the formality of reducing to proper form the contract not be a contract without mutual consent, and it appears that the
which are authorized by the board and is not intended to confer an plaintiffs did not consent to the provisions of the by-law in
independent power to make contract binding on the corporation. question, but, on the contrary, they objected to and voted against
it in the stockholders’ meeting in which it was adopted.
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 QUALIFICATIONS AND DISQUALIFICATIONS (see discussion under
always be taken before contractual liability can be fixed upon a DIRECTORS/TRUSTEES in chapter 4)
corporation; for a board can create liability, like an individual, by
other means than by a formal expression of its will. RAMON C. LEE and ANTONIO DM. LACDAO, petitioners,
vs.
Participation of the stockholders. The letter accepting the offer was THE HON. COURT OF APPEALS, SACOBA MANUFACTURING CORP.,
dispatched in a meeting of the board called by Ramon Fernandez, where 4 PABLO GONZALES, JR. and THOMAS GONZALES, respondents.
members, including the president were present. The minutes add that (GR No. 93695; 205 SCRA 752; Feb. 4, 1992)
terms of this offer were approved; but at the suggestion of Fernandez it
was decided to call a special meeting of the stockholders to consider the FACTS: A complaint for a sum of money was filed by International
matter and definite action was postponed. From the meeting of the Corporate Bank, Inc. against the private respondents who, in turn, filed a
stockholders, it can be inferred that this body was then cognizant that the third-party complaint against Alfa Integrated Textile Mills, Inc.
offer had already been accepted. It is not, however, necessary to find the
judgment of the stockholder proceedings, even if the assumption is that The trial court ordered the issuance of alias summons upon Alfa through
they did not approve of the contract. DBP, who is said to be the transferee of Alfa’s management by virtue of a
voting trust agreement.
Both upon the principle and authority it is clear that the action of the
stockholders, whatever its character, must be ignored. The theory DBP declined to receive the summons saying it is not authorized, Alfa
of a corporation is that the stockholders may have all the profits but having a personality separate and distinct. The trial court in turn ordered
shall turn over the complete management of the enterprise to private respondents to take the appropriate steps to serve the summons to
their representatives and agents, called directors. Accordingly, there Alfa which they made through the officers and later on, was later on
is little for the stockholders to do beyond electing directors, making by- declared to be proper service of summons.
laws, and exercising certain other special powers defined by law. In
conformity with this idea, it is settled that contract between a After the second motion for reconsideration, the trial court reversed itself,
corporation and third person must be made by the director and saying that the service of summons upon the petitioners were not proper,
not by the stockholders. The corporation, in such matters, is them not being officers of the corporation anymore. On appeal, the CA
represented by the former and not by the latter. It results that where a reversed the trial court.
meeting of the stockholders is called for the purpose of passing on the
propriety of making a corporate contract, its resolutions are at most ISSUE: WON the petitioners can still be authorized to receive the
advisory and not in any wise binding on the board. summons despite the voting trust agreement with DBP?
BARRETO VS. LA PREVISORY FILIPINA (57 Phil. 649; Dec. 8, 1932) – HELD: No. Sec. 59 of the Code expressly recognizes VTAs and gives a
Petitioners, directors of respondent up to March 1929, sought to recover more definitive meaning. By its very nature, a VTA results in the separation
1% (to each plaintiff) of the profits of the company for the year 1929, of the voting right of a stockholder from his other rights such as the right
under and in accordance with an amendment to the by-laws which was to receive dividends, the right to inspect the books of the corporation, the
made at the general meeting of the stockholders on Feb. 1929, to which right to sell certain interests in the assets of the corporation and other
the lower court rendered in their favor. rights to which a stockholder may be entitled until the liquidation of the
corporation. However, in order to distinguish a VTA from proxies and other
ISSUE: WON the amendment has a binding effect as to grant plaintiffs’ voting pool and agreements, it must pass three criteria or tests, namely:
claim? (1) the voting rights of the stock are separated from other attributes or
ownership; (2) that the voting right granted are intended to be irrevocable

for a definite period of time; and (3) that the principal purpose of the grant for as many persons as there are directors to be elected or he may cumulate
of voting rights is to acquire voting control of the corporation. 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, or he may
The execution of VTA, therefore, may create a dichotomy between distribute them on the same principle among as many candidates as he shall
the equitable and beneficial ownership of the corporate shares of see fit: Provided, That the total number of votes cast by him shall not exceed
stockholder, on the one hand and the legal title thereto, on the the number of shares owned by him as shown in the books of the corporation
other hand. multiplied by the whole number of directors to be elected: Provided,
however, That no delinquent stock shall be voted. Unless otherwise provided
By virtue of the VTA, the petitioners are no longer directors. Under the old in the articles of incorporation or in the by-laws, members of corporations
and new Corporation Code, the most immediate effect of a VTA on the which have no capital stock may cast as many votes as there are trustees to
status of a stockholder who is a party to its execution is that he becomes be elected but may not cast more than one vote for one candidate.
only an equitable or beneficial owner, from being the legal titleholder or Candidates receiving the highest number of votes shall be declared elected.
owner of the shares subject of the VTA. Any meeting of the stockholders or members called for an election may
adjourn from day to day or from time to time but not sine die or indefinitely
Under the old code, the eligibility of a director, strictly speaking, cannot be if, for any reason, no election is held, or if there not present or represented
adversely affected by a VTA inasmuch as he remains the owner (although by proxy, at the meeting, the owners of a majority of the outstanding capital
beneficial or equitable only) of the shares subject of the VTA pursuant to stock, or if there be no capital stock, a majority of the member entitled to
which a transfer of the stockholder’s shares in favor of the trustee is vote.
required. No disqualification arises by virtue of the phrase “in his own right”
provided under the Old Code, which has been omitted. NOTE:
1. Majority of the outstanding capital stock, whether in person or by
Hence, this omission requires that in order to be eligible as director, what is written proxy must be present at the election of the directors; or
material is the legal title to, not beneficial ownership, of the stock as majority of members entitled to vote, in the case of a non-stock
appearing on the books of the corporation. corporation. If the required quorum is not obtaining, the meeting may
be adjourned;
The petitioners ceased to be the owners of at least one share standing in 2. On the request of any voting stockholder or member, the election may
their names on the books of Alfa as required under Sec. 23 of the new be held by ballot otherwise viva-voce would suffice.
Code. They also ceased to have anything to do with the management of 3. The candidates receiving the highest number of votes shall be elected.
the enterprise. The petitioners ceased to be directors.
CUMULATIVE VOTING:
Considering the VTA, DBP as trustee, became the stockholder of record 1. Cumulative voting gives the stockholder entitled to vote the right to
with respect to the said shares of stocks. give a candidate as many votes as the number of directors to be
elected multiplied by the number of his shares shall equal or he may
DETECTIVE AND PROTECTIVE BUREAU VS. CLORIBEL (26 SCRA distribute them among the candidates as he may see fit.
256; Nov. 29, 1968) – A complaint was filed by herein petitioner-plaintiff 2. This is granted by law to each stockholder with voting rights.
Detective and Protective Bureau against defendant-respondent Fausto However, in non-stock corporations, cumulative voting is generally not
Alberto, alleging that defendant illegally seized and took control of all the allowed, UNLESS allowed by the AOI or by-laws.
assets as well as the books, records, vouchers and receipt of the 3. Under this method, if there are 10 directors to be elected, a holder of
corporation from the accountant-cashier, concealed them illegally and 1,000 shares will have 10,000 votes which he may cast in favor of one
refused to allow any member of the corporation to see and examine the candidate or may apportion to any number of candidate he may wish;
same. That on a meeting, the stockholders removed defendant as 4. PURPOSE: to allow the minority to have a rightful representation in
managing director and elected Jose dela Rosa. the board of directors.
Alberto, on the other hand, stated that Jose dela Rosa could not be elected Sec. 25. Corporate officers, quorum. - Immediately after their election,
managing director because he did not own any stock in the corporation. the directors of a corporation must formally organize by the election of a
president, who shall be a director, a treasurer who may or may not be a
ISSUE: WON dela Rosa may be elected managing director? director, a secretary who shall be a resident and citizen of the Philippines,
and such other officers as may be provided for in the by-laws. Any two (2) or
HELD: No. There is no record showing that Jose dela Rosa owned a share more positions may be held concurrently by the same person, except that no
of stock in the corporation. If he did not own any share of stock, certainly one shall act as president and secretary or as president and treasurer at the
he could not be a director pursuant to Sec. 30 of the Corporation Law and same time.
consequently he cannot be a managing director by virtue of the by-laws of
the corporation that the manager shall be elected by the BOD among its NOTE:
members. 1. Except in a close corporation where the corporate officers may be
elected directly by the stockholders, the Code requires the BOD to
Accordingly, Faustino Alberto could not be compelled to vacate his office elect the said officers;
and cede the same to dela Rosa because the by-laws provide that the 2. The officers that may be elected are the:
Directors shall serve until the election and qualification of their duly a. President – who must be a director;
qualified successor. b. Treasurer – who may or may not be a director;
c. Secretary – who should be a resident and citizen of the
ELECTION AND VOTING Philippines;
d. Such other officers as may be provided for in the by-laws.
Sec. 24. Election of directors or trustees. - At all elections of directors or 3. Any two or more positions may be held concurrently by the same
trustees, there must be present, either in person or by representative person, except:
authorized to act by written proxy, the owners of a majority of the a. The president and the secretary;
outstanding capital stock, or if there be no capital stock, a majority of the b. The president and the treasurer.
members entitled to vote. The election must be by ballot if requested by any
voting stockholder or member. In stock corporations, every stockholder B. VALIDITY AND BINDING EFFECT OF ACTIONS OF CORPORATE
entitled to vote shall have the right to vote in person or by proxy the number OFFICERS
of shares of stock standing, at the time fixed in the by-laws, in his own name
on the stock books of the corporation, or where the by-laws are silent, at the Sec. 25. Corporate officers, quorum
time of the election; and said stockholder may vote such number of shares

xxx he has authority to make contract and do acts within the course of its
The directors or trustees and officers to be elected shall perform the duties ordinary business," We find such inapplicable in this case. We note that the
enjoined on them by law and the by-laws of the corporation. Unless the private corporation has a general manager who, under its By-Laws
articles of incorporation or the by-laws provide for a greater majority, a has, inter alia, the following powers: "(a) to have the active and direct
majority of the number of directors or trustees as fixed in the articles of management of the business and operation of the corporation, conducting
incorporation shall constitute a quorum for the transaction of corporate the same accordingly to the order, directives or resolutions of the Board of
business, and every decision of at least a majority of the directors or trustees Directors or of the president." It goes without saying then that Mr. Maglana
present at a meeting at which there is a quorum shall be valid as a corporate did not have a direct and active and in the management of the business
act, except for the election of officers which shall require the vote of a and operations of the corporation.
majority of all the members of the board.
Petitioner's last refuge then is his alternative proposition, namely, that
QUORUM: requirement for a valid board meeting is the majority of the private respondent had clothed Mr. Maglana with the apparent power to act
number of the board fixed in the AOI, and a decision of at least a majority for it and had caused persons dealing with it to believe that he was
of the directors/trustees present in a meeting at which there is a quorum conferred with such power. The rule is of course settled that "[a]lthough
shall be a valid corporate act, except: an officer or agent acts without, or in excess of, his actual
1. Election of officers, which shall require the majority of all the members authority if he acts within the scope of an apparent authority with
of the board; and which the corporation has clothed him by holding him out or
2. Unless the AOI or the by-laws provide for a greater quorum/voting permitting him to appear as having such authority, the
requirement. corporation is bound thereby in favor of a person who deals with
him in good faith in reliance on such apparent authority, as where
Every action of the board without a meeting and without the required an officer is allowed to exercise a particular authority with respect
voting and quorum requirement will not bind the corporation unless to the business, or a particular branch of it, continuously and
subsequently ratified, expressly or impliedly. publicly, for a considerable time." Also, "if a private corporation
intentionally or negligently clothes its officers or agents with
Individual directors, however, can rightfully be considered as agents of the apparent power to perform acts for it, the corporation will be
corporation. And although they cannot bind the corporation by their estopped to deny that such apparent authority in real, as to
individual acts, this is subject to certain EXCEPTIONS: (1) by delegation of innocent third persons dealing in good faith with such officers or
authority; (2) when expressly conferred; or (3) where the officer or agent agents." This "apparent authority may result from (1) the general manner,
is clothed with actual or apparent authority. 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
YAO KA SIN TRADING VS. CA (209 SCRA 763; June 15, 1992) – act in general or (2) acquiescence in his acts of a particular nature, with
Constacio B. Malagna, President and Chairman of the Board of private actual or constructive knowledge thereof, whether within or without the
respondent Prime White Cement Corporation (PWCC), sent a letter-offer scope of his ordinary powers.
(Exhibit A) to Mr. Yao for the delivery of cement, which was accepted by
the latter by delivering a check for P243,000. It was incumbent upon the petitioner to prove that indeed the private
respondent had clothed Mr. Maglana with the apparent power to execute
ISSUE: WON the letter-offer sent by Malagna binds the corporation? Exhibit "A" or any similar contract. This could have been easily done by
evidence of similar acts executed either in its favor or in favor of
HELD: No. A corporation can act only through its officers and agents, all other parties. Petitioner miserably failed to do that. Upon the other hand,
acts within the powers of said corporation may be performed by agents of private respondent's evidence overwhelmingly shows that no contract can
his selection and except in so far as limitations or restrictions may be be signed by the president without first being approved by the Board of
imposed by special charter, by-law or statutory provisions, the same Directors; such approval may only be given after the contract passes
general provision of law which govern the relation of agency for natural through, at least, the comptroller, who is the NIDC representative, and the
person govern the officer or agent of a corporation, of whatever status or legal counsel.
rank, in respect to his power to act for the corporation; and the agents
once appointed, or members acting in their stead, are subject to the same LOPEZ REALTY, INC. VS. FOTENCHA (147 SCRA 183; Aug. 11, 1995) –
rules, liabilities and incapacities as are agents of individuals and private Petitioner corporation approved two resolutions providing for the gratuity
persons. pay of its employees. Except for Asuncion Lopez-Gonzales, who was then
abroad, the remaining member of the board convened a special meeting
Moreover, a corporate officer or agent may represent and bind the and passed a resolution adopting the above-mentioned resolutions. Private
corporation in transactions with third person to the extent that authority respondents requested for the full payment of the gratuity pay which was
has been conferred upon him, and this includes powers which have been granted.
(1) intentionally conferred, and (2) also such powers as, in the usual
course of business, are incidental thereto, or may be implied therefrom, At that time, however, petitioner Asuncion was still abroad, and allegedly
(3) powers added by custom and usage, as usually pertaining to the sent a cablegram objecting to certain matters taken up by the board in her
particular officer or agent, and (4) such apparent powers as the absence.
corporation has caused persons dealing with the officer or agent to believe
that it has conferred. Notwithstanding a corporate squabble between Asuncion and Arturo Lopez,
the first two installments of the gratuity pay of private respondents were
While Mr. Maglana was an officer, the by-laws do not in any way confer paid. Also, petitioner corporation had prepared the cash vouchers and
upon the president the authority to enter into contracts for the corporation checks for the third installment. For some reason, said voucher was
independently of the BOD. That power is expressly lodged in the latter. cancelled by petitioner Asuncion.
Nevertheless, to expedite or facilitate the execution of the contract, only A complaint was filed before the labor arbiter who decided in favor of
the President shall sign the contact for the corporation. No greater power private respondents.
can be implied from such express, but limited delegated authority. Neither
can it be logically claimed that any power greater than that expressly ISSUE: WON the gratuity pay should be paid?
conferred is inherent in Mr. Maglana’s position as president and chairman
of the corporation. HELD: Yes. The general rules is that a corporation, through its board
of directors, should act in the manner and within the formalities, if
Although there is authority "that if the president is given general control any, prescribed by its charter or by the general law. Thus, the
and supervision over the affairs of the corporation, it will be presumed that directors must act as a body in a meeting called pursuant to the law or the

corporation’s by-laws, otherwise, any action taken therein may be the corporation’s business, or a specific part thereof, may bind the
questioned by any objecting director or shareholder. corporation as are usual and necessary in the conduct of such
business. But the contracts of employment must be reasonable.
Be that as it may, jurisprudence tells us that an action of the board of
directors during a meeting, which was illegal for lack of notice, Chen, as general manager of Kong Li Po, had implied authority to bind the
may be ratified either (1) expressly, by the action of the directors defendant corporation by a reasonable and usual contract of employment
in subsequent legal meeting, or (2) impliedly, by the corporations’ with the plaintiffs, but we do not think that contract here in question can
subsequent conduct. be so considered. Not only is the term of employment usually long, but the
conditions are otherwise so onerous to the defendant that the possibility of
Ratification by directors may be by an express resolution or vote to that the corporation being thrown into insolvency thereby is expressly
effect, or it may be implied from adoption of the act, acceptance or contemplated in the same contract. This fact, in itself was, in our opinion,
acquiescence. Moreover, the unauthorized acts of an officer of a sufficient to put the plaintiffs upon inquiry as to the extent of the business
corporation may be ratified by the corporation by conduct implying manager’s authority; they had not the right to presume that he or any
approval and adoption of the act in question. Such ratification may be other single officer or employee of that corporation had implied authority to
expressed or may be inferred from silence and inaction. enter into a contract of employment which might bring about its ruin.
In the case at bench, it was established that petitioner corporation did not TRINIDAD J. FRANCISCO VS. GSIS (7 SCRA 557; March 30, 1963) –
issue any resolution revoking nor nullifying the board resolution granting Trinidad Francisco, in consideration of loan extended by GSIS, mortgaged
gratuity pay to private respondents. Instead, they paid the gratuity pay, her property in QC. For being in arrears in her installments, GSIS
particularly, the first two installments thereof. extrajudicially foreclosed the mortgage.
Despite lack of notice to Asuncion, we can glean from the records that she Plaintiff’s father, Atty. Vicente Francisco sent a letter to Rodolfo Andal,
was aware of the corporation’s obligations under the said resolution. More general manager of GSIS, offering to redeem the property which was
importantly she acquiesced thereto by affixing her signature on two cash replied to by Andal through a telegram saying “GSIS BOARD APPROVED
vouchers. The conduct of petitioners had estopped them from assailing the YOUR REQUEST RE REDEMTPION OF FORECLOSED PROPERTY OF YOUR
validity of the said board resolutions. DAUGHTER”
PUA CASIM & CO. VS. NEUMARK AND CO. (46 Phil. 242; Oct. 2, 1924) Later, inasmuch as, according to the defendant GSIS, the remittances
– W. Neumark, president of defendant corporation borrowed P15000 from made by Atty. Francisco were allegedly not sufficient to pay off her
plaintiff which was delivered by means of a check in favor of defendant and daughter’s arrears, the one year redemption period has expired, said
deposited in BPI and the amount of it credited to the corporation’s current defendant consolidated title to the property in its name.
account.
ISSUE: WON the telegram sent by the Andal binds the corporation?
ISSUE: WON the corporation is responsible for the money borrowed by its
president? HELD: Yes. The terms of the offer were clear and over the signature of
Andnal, plaintiff was informed that the proposal has been accepted. There
HELD: Yes. W. Neumark is the principal stockholder, president and general was nothing in the telegram that hinted at any anomaly, or gave grounds
business manager of the defendant corporation. On behalf of the to suspect its veracity, and the plaintiff, therefore, cannot be blamed for
corporation, he solicited a loan and was given a check, which was endorsed relying upon it. There is no denying that the telegram was within Andal’s
by him in his capacity as president and deposited to the corporation’s apparent authority, but eh defense is that he did not sign it, but that it was
account. It may be true that a large part of the amount so deposited was sent by the board secretary in his name and without his knowledge.
diverted by Neumark to his own use, but that does not alter that the Assuming this to be true, how was appellee to know it? Corporate
money was borrowed for the corporation and was placed in its possession. transactions would speedily come to a standstill were every
person dealing with a corporation were held duty-bound to
It is conceded that Neumark was not expressly authorized by the board of disbelieve every act of its responsible officers, no matter how
directors to borrow the money in question and the general rule is that a regular they should appear on their face.
business manager or other officer of a corporation, has no implied power to
borrow money on its behalf. But much depends upon the circumstances of Indeed, it is well-settled that If a private corporation intentionally or
each particular case and the rule state is subject to important exceptions. negligently clothes its officers or agents with apparent power to
Thus, where a general business manager of a corporation is perform acts for it, the corporation will be estopped to deny that
clothed with apparent authority to borrow money and the amount such apparent authority is real, as to innocent third persons
borrowed does not exceed the ordinary requirements of the dealing in good faith with such officers or agents.
business, it has often been held that the authority is implied and
that the corporation is bound. Hence, even if it were the board secretary who sent the telegram, the
corporation could not evade the binding effect produced by the telegram.
YU CHUCK VS. KONG LI PO (46 Phil. 608; Dec. 3, 1924) – CC Chen or
TC Chen, General Manager of defendant corporation Kong Li Po, entered The error in the wording cannot be taken seriously. All the while GSIS
into an agreement with the plaintiffs by which the latter bound themselves pocketed the various remittances, and kept silent as to the true facts as it
to do the necessary printing for the newspaper. Later on, the new general now alleges. This silence, taken together with the unconditional acceptance
manager, Tan Tian Hong, discharged plaintiffs with no special reasons. of three other subsequent remittances from plaintiff constitutes in itself a
Aggrieved, plaintiffs sought to recover full payment of the remaining term binding ratification of the original agreement.
of the contract, which was originally for 3 years, as stated therein.
THE BOARD OF LIQUIDATORS VS. KALAW (20 SCRA 987; Aug. 10,
ISSUE: WON Chen had the power to bind the corporation under a contract 1965) – National Coconut Corporation (NACOCO) embarked on copra
of that character? trading activities led by its General Manager Maximo Kalaw and the other
defendants as members of the board. Due to natural calamities, the
HELD: No. The general rule is that the power to bind a corporation by business of copra became unprofitable. Kalaw made a full disclosure of the
contract lies with its board of directors or trustees, but this power may situation and apprised the board of the impending losses on the contracts
either be expressly or impliedly be delegated to other officers or agents of already entered into, but no action was taken. But later on, the contracts
the corporation, and it is well settled that except where the authority of were unanimously approved by the Board.
employing servants and agents is expressly vested in the BOD/T,
an officer or agent who has general control and management of The buyers threated damage suits, but some were settled. Louis Dreyfus &

Co. Ltd. Actually sued but was also culminated in an out-of-court the corporation. The Board did not repudiate the agreement but on the
settlement. contrary, acquiesced in and took advantage of the benefits afforded by said
agreement. Such acts are equivalent to an implied ratification of the
NACOCO now seeks to recover the sum paid to Louis from general agreement by the BOD and bound the corporation even without formal
manager and board chairman Kalaw and the other members who approved resolution passed and recorded.
the contracts. It charges Kalaw with negligence and bad faith and/or
breach of trust for having approved the contracts, which was dismissed by It is agreed by the respondents, defendants below, that the profits of the
the trial court. corporation form part of its assets and payment of a certain percentage of
the profits requires a declaration of dividends and/or resolution of the BOD.
ISSUE: WON the contracts executed by Kalaw bind the corporation? The agreement is untenable. Although the plaintiff is a stockholder of the
corporation he does not, however, claim a share of the profits as such
HELD: Yes. A rule that has gained acceptance through the years is that a stockholder, but under the agreement between him and the president of
corporate officer “entrusted” with the general management and the corporation which has been impliedly ratified by the BOD.
control of its business, has implied authority to make any contract
or do any other act which is necessary or appropriate to the IN SUMMARY: An unauthorized act, or the act of a single director, officer
conduct of the ordinary business of the corporation. As such or agent of a corporation may be ratified either expressly or impliedly.
officer, he may, without any special authority from the BOD 1. Express ratification is made through a formal board action;
perform all acts of an ordinary nature, which by usage or 2. Implied ratification can either be (a) silence or acquiescence; (b)
necessity are incident to his office, and may bind the corporation acceptance and/or retention of benefits, or (c) by recognition or
by contracts in matters arising in the usual course of business. adoption.
Long before the disputed contracts came into being, Kalaw contracted by C. REMOVAL AND FILLING UP OF VACANCIES
himself alone as general manager – for forward sales of copra (which is a
necessity in the business) which were profitable. So pleased was NACOCO;s Sec. 28. Removal of directors or trustees. - Any director or trustee of a
BOD that it voted to grant Kalaw special bonus in recognition of the signal corporation may be removed from office by a vote of the stockholders
achievement rendered by him. holding or representing at least two-thirds (2/3) of the outstanding capital
stock, or if the corporation be a non-stock corporation, by a vote of at least
These previous contacts, it should be stressed, were signed by Kalaw two-thirds (2/3) of the members entitled to vote: Provided, That such
without prior authority from the board. Said contracts were known all along removal shall take place either at a regular meeting of the corporation or at a
to the board members. Nothing was said by them. The aforesaid contracts special meeting called for the purpose, and in either case, after previous
stand to prove one thing. Obviously, NACOCO’s board met difficulties notice to stockholders or members of the corporation of the intention to
attendant to forward sales by leaving the adoption of means to end, to the propose such removal at the meeting. A special meeting of the stockholders
sound discretion of NACOCO’s general manager Maximo Kalaw. or members of a corporation for the purpose of removal of directors or
trustees, or any of them, must be called by the secretary on order of the
Where similar acts have been approved by the directors as a president or on the written demand of the stockholders representing or
matter of general practice, custom, and policy, the general holding at least a majority of the outstanding capital stock, or, if it be a non-
manager may bind the company without formal authorization of stock corporation, on the written demand of a majority of the members
the BOD. In varying language, existence of such authority is established, entitled to vote. Should the secretary fail or refuse to call the special meeting
by proof of the course of business, the usages and practices of the upon such demand or fail or refuse to give the notice, or if there is no
company and by the knowledge which the BOD has, or must be presumed secretary, the call for the meeting may be addressed directly to the
to have, of acts and doings of its subordinates in and about the affairs of stockholders or members by any stockholder or member of the corporation
the corporation. signing the demand. Notice of the time and place of such meeting, as well as
of the intention to propose such removal, must be given by publication or by
In the case at bar, the practice of the corporation has been to allow its written notice prescribed in this Code. Removal may be with or without
general manager to negotiate and execute contracts in its copra trading cause: Provided, That removal without cause may not be used to deprive
activities for and in NACOCO’s behalf without prior board approval. If the minority stockholders or members of the right of representation to which they
by-laws were to be literally followed, the board should give its stamp of may be entitled under Section 24 of this Code.
prior approval on all corporate contracts. But the Board itself, by its acts
and through acquiescence, practically laid aside the by-law requirement of NOTE:
prior approval. 1. By-laws may provide for causes or grounds for removal of a director;
2. A director representing the minority may not be removed except for
BUENASEDA VS. BOWEN & CO., INC. (110 Phil. 464; Dec. 29, 1969) – those causes;
As a consequence of P200,000 worth of ECA allocated to the Bowen & Co., 3. A director NOT representing the minority may be removed even
Inc., it required a letter of credit in the amount of P100,000 with the PNB. without a cause.
As the corporation did not have at the time the necessary funds to put up
the required cash marginal deposit of P60,000, its president Geoffrey REQUIREMENTS FOR A VALID REMOVAL:
Bowen, obligating the corporation and himself in his personal capacity, 1. The removal should take place at a general or special meeting duly
offered to pay Francisco Buenaseda 37 ½% of the profits to be realized call for that purpose;
from the sale of the ECA procurement materials, should he be able to 2. The removal must be by the vote of the stockholders holding or
obtain and produce the amount necessary to cover the cash marginal representing 2/3 of the outstanding capital stock or the members
deposit – which Buenaseda was able to do. entitled to vote in cases of non-stock corporations; and
3. There must be a previous notice to the stockholders or members of
The corporation refused to pay, Buenaseda filed an action in the CFI to the intention to propose such removal at the meeting either by
recover the same. publication or on written notice to the stockholders or members.
ISSUE: WON the agreement was binding? JURISDICTION OF THE COURT: The law, as it stands now, grants the
proper court, the power and authority to hear and decide cases “involving
HELD: Yes. It is not here pretended that the BOD of the defendant controversies in the election or appointment of directors, trustees, officers,
corporation had no knowledge of the agreement between Bowen and or managers of such corporation, partnership or association.”
plaintiff. Indeed, at the time the said Agreement was made, the BOD of the
corporation was composed of Bowen himself, his wife, Buenaseda and two DEADLOCK: In the case of deadlock in a close corporation, the SEC is also
others, with Bowen and his wife controlling the majority of the stocks of authorized to issue an Order as it deems appropriate “canceling, altering or
enjoining any resolution or other act of the corporation or its board of because the office may have become vacant, nor because the incumbent
directors or “directing or prohibiting” any act the corporation or the other holds over in office beyond the end of the term due to the fact that a
board of directors thereby effectively taking away the rights of the directors successor has not been elected and has failed to qualify.
to act as manager of the corporation.
Term is distinguished from tenure in that an officer’s “tenure” represents
VACANCY: the term during which the incumbent actually holds office. The
1. If a vacancy occurs by virtue of REMOVAL, Sec. 28 authorizes the tenure may be shorter (or, in case of holdover, longer) than the term for
filling of the vacancy by the election of a replacement at the same reasons within or beyond the power of the incumbent.
meeting;
2. If it occurs NOT by removal, Sec. 29 applies. Based on the above discussion, when Section 23 of the Corporation Code
declares that “the board of directors…shall hold office for one (1) year until
Sec. 29. Vacancies in the office of director or trustee. - Any vacancy their successors are elected and qualified,” we construe the provision to
occurring in the board of directors or trustees other than by removal by the mean that the term of the members of the board of directors shall
stockholders or members or by expiration of term, may be filled by the vote be only for one year; their term expires one year after election to the
of at least a majority of the remaining directors or trustees, if still constituting office. The holdover period – that time from the lapse of one year from a
a quorum; otherwise, said vacancies must be filled by the stockholders in a member’s election to the Board and until his successor’s election and
regular or special meeting called for that purpose. A director or trustee so qualification – is not part of the director’s original term of office, nor is it a
elected to fill a vacancy shall be elected only or the unexpired term of his new term; the holdover period, however, constitutes part of his tenure.
predecessor in office. Corollary, when an incumbent member of the board of directors continues
to serve in a holdover capacity, it implies that the office has a fixed
A directorship or trusteeship to be filled by reason of an increase in the term, which has expired, and the incumbent is holding the succeeding
number of directors or trustees shall be filled only by an election at a regular term.
or at a special meeting of stockholders or members duly called for the
purpose, or in the same meeting authorizing the increase of directors or After the lapse of one year from his election as member of the VVCC Board
trustees if so stated in the notice of the meeting. in 1996, Makalintal’s term of office is deemed to have already expired.
That he continued to serve in the VVCC Board in a holdover capacity
If the VACANCY is resulting from other than (1) by expiration of term; or cannot be considered as extending his term. This holdover period is not to
(2) by removal, the BOARD OF DIRECTORS, if still constituting a quorum, be considered as part of his term, which, as declared, had already expired.
may fill the vacancy.
With the expiration of Makalintal’s term of office, a vacancy resulted which,
VALLE VERDE COUNTRY CLUB, INC., ERNESTO VILLALUNA, RAY by the terms of Section 29 of the Corporation Code, must be filled by the
GAMBOA, AMADO M. SANTIAGO, JR., FORTUNATO DEE, AUGUSTO stockholders of VVCC in a regular or special meeting called for the purpose.
SUNICO, VICTOR SALTA, FRANCISCO ORTIGAS III, ERIC ROXAS, in their To assume – as VVCC does – that the vacancy is caused by Makalintal’s
capacities as members of the Board of Directors of Valle Verde Country resignation in 1998, not by the expiration of his term in 1997, is both
Club, Inc., and JOSE RAMIREZ, Petitioners illogical and unreasonable. His resignation as a holdover director did not
Vs. change the nature of the vacancy; the vacancy due to the expiration of
Victor Africa, Respondent Makalintal’s term had been created long before his resignation.
(GR No. 151969; Sept. 4, 2009)
The powers of the corporation’s board of directors emanate from
 FACTS: February 27, 1996: Ernesto Villaluna, Jaime C. Dinglasan its stockholders
(Dinglasan), Eduardo Makalintal (Makalintal), Francisco Ortigas III, Victor
Salta, Amado M. Santiago, Jr., Fortunato Dee, Augusto Sunico, and Ray This theory of delegated power of the board of directors similarly explains
Gamboa were elected as BOD during the Annual Stockholders’ Meeting why, under Section 29 of the Corporation Code, in cases where the vacancy
of petitioner Valle Verde Country Club, Inc. (VVCC). From 1997-2001, the in the corporation’s board of directors is caused not by the expiration of a
requisite quorum could not be obtained so they continued to act as member’s term, the successor “so elected to fill in a vacancy shall be
directors in a hold-over capacity. elected only for the unexpired term of the his predecessor in office.”
 The law has authorized the remaining members of the board to fill in a
 On September 1, 1998, Dinglasan resigned, BOD still constituting vacancy only in specified instances, so as not to retard or impair the
a quorum elected Eric Roxas (Roxas) followed by Macalintal. corporation’s operations; yet, in recognition of the stockholders’ right to
 elect the members of the board, it limited the period during which the
 On March 6, 2001, Jose Ramirez (Ramirez) was elected successor shall serve only to the “ unexpired term of his predecessor in
by the remaining BOD. Respondent Africa (Africa), a member of VVCC, office.”
questioned the election of Roxas and Ramirez as members of the VVCC
Board with the Securities and Exchange Commission (SEC) and the It also bears noting that the vacancy referred to in Section 29 contemplates
Regional Trial Court (RTC) as contrary to Sec. 23 and 29 of the Corporation a vacancy occurring within the director’s term of office. When a
Code. vacancy is created by the expiration of a term, logically, there is no more
unexpired term to speak of. Hence, Section 29 declares that it shall be the
The RTC decided in favor of Africa. corporation’s stockholders who shall possess the authority to fill in a
vacancy caused by the expiration of a member’s term.
ISSUE: WON the appointment of Roxas and Ramirez made by the
remaining members of the Board, still constituting a quorum, were valid?
CHANGE IN CONSTITUTION OF THE BOARD: must be reported by the
HELD: No. The resolution of this legal issue is significantly hinged on the BOD to the SEC:
determination of what constitutes a director’s term of office.
Sec. 26. Report of election of directors, trustees and officers. - Within
The holdover period is not part of the term of office of a member thirty (30) days after the election of the directors, trustees and officers of the
of the board of directors. The word “term” has acquired a definite corporation, the secretary, or any other officer of the corporation, shall
meaning in jurisprudence. In several cases, we have defined “term” as submit to the Securities and Exchange Commission, the names, nationalities
the time during which the officer may claim to hold the office as of and residences of the directors, trustees, and officers elected. Should a
right, and fixes the interval after which the several incumbents shall director, trustee or officer die, resign or in any manner cease to hold office,
succeed one another. The term of office is not affected by the his heirs in case of his death, the secretary, or any other officer of the
holdover. The term is fixed by statute and it does not change simply corporation, or the director, trustee or officer himself, shall immediately
report such fact to the Securities and Exchange Commission claim can be asserted therefor. Thus it has been held that there
can be no recovery of compensation, unless expressly provided
PURPOSE: to give public information, under sanction of oath responsible for, when director serves as president or vice-president, as
officers, of the nature of the business, financial condition and operational secretary or treasurer or cashier, as member of an executive
status of the company together with information on its key officers or committee, as chairman of a building committee, or similar
managers so that hose dealing with it and those who intend to do business offices.
with it may know or have the means of knowing facts concerning the
corporation’s financial resources and business responsibility” Thus, the directors, in assigning themselves additional duties, such as the
visitation of FACOMAS, acted within their power, but, by voting for
D. COMPENSATION OF DIRECTORS themselves compensation for such additional duties, they acted in excess of
their authority, as express in the by-laws.
Sec. 30. Compensation of directors. - In the absence of any provision in
the by-laws fixing their compensation, the directors shall not receive any WESTERN INSTITUTE OF TECHNOLOGY, INC., HOMERO L.
compensation, as such directors, except for reasonable per diems: Provided, VILLASIS, DIMAS ENRIQUEZ, PRESTON F. VILLASIS & REGINALD
however, That any such compensation other than per diems may be granted F. VILLASIS, petitioner,
to directors by the vote of the stockholders representing at least a majority of vs.
the outstanding capital stock at a regular or special stockholders' meeting. In RICARDO T. SALAS, SALVADOR T. SALAS, SOLEDAD SALAS-
no case shall the total yearly compensation of directors, as such directors, TUBILLEJA, ANTONIO S. SALAS, RICHARD S. SALAS & HON. JUDGE
exceed ten (10%) percent of the net income before income tax of the PORFIRIO PARIAN, respondents
corporation during the preceding year. (GR No. 113032; 278 SCRA 216; Aug. 21, 1997)
GENERALLY: Directors are not entitled to receive any compensation, FACTS: In a special board meeting, a resolution was passed providing for
EXCEPT: compensation of officers. A few years later, petitioners Homero Villasis,
1. Reasonable per diems; Prestod Villasis, Reginald Villasis and Dimas Enriquez filed an affidavit-
2. As provided in the by-laws or upon a majority vote of the complaint for falsification of public documents (for submission of an income
stockholders; and reflecting the resolution as passed on 1985, when in fact it was passed in
3. If they are performing functions other than that of a director. 1986) and estafa (for the disbursement of funds by effecting payment to
the aforesaid salaries) against herein respondents who were members of
(3) above: Sec. 30 is clear on the point when it provides “as such the Board of Trustees who were also officers of the corporation. The trial
directors”. Therefore, special and extraordinary service rendered, outside of court acquitted respondents in both charges without civil liability. The
the regular duties, may form the basis for a claim of special compensation, motion for reconsideration on the civil aspect being denied, petitioners filed
such as when a director acts as a general counsel. this petition.
REASON: the office of a director is usually filled up by those chiefly ISSUE: WON the resolution granting compensation to OFFICERS of the
interested in the welfare of the institution by virtue of their interest in stock corporation is valid?
or other advantages and such interests are presumed to be the motive for
executing duties of the office without compensation. HELD: Yes. The proscription under Sec. 30, is against granting
compensation to directors/trustees of a corporation is not a sweeping rule.
MAY THE COURTS LOOK INTO THE REASONABLENESS OF Worthy of note is the clear phraseology of Sec 30 which states “… [T]he
COMPENSATION? The courts will not generally undertake to review the directors shall not receive any compensation, as such directors, …” The
fairness of official salaries, at the suit of a stockholder unless wrongdoing phrase as such directors is not without significance for it delimits
and oppression or possible abuse of fiduciary position are shown. the scope of the prohibition to compensation given to them for
services performed purely in their capacity as directors or
When the recipient does not stand in the dual relation of the (1) one trustees. The unambiguous implication is that members of the board may
compensated and (2) a participant in fixing his own compensation, it is receive compensation, in addition to reasonable per diems, when they
considered outside the proper judicial function to go into business policy render services to the corporation in a capacity other than as
question of the fairness or reasonableness of compensation as fixed by the directors/trustees. In the case at bench, the Resolution granted monthly
board. Otherwise, it will call for a scrutiny of the reasonableness or fairness compensation to private respondents not in their capacity as members of
of the compensation. Likewise, even if consented to by the majority of the board, but rather as officers of the corporation, more particularly as
stockholders, the courts may still look into such reasonableness if: (1) it Chairman, Vice-Chairman, Treasurer and Secretary of WIT.
would amount to giving away corporate funds in the guise of compensation
as against the interest of the dissenting minority; or (2) in fraud of Clearly Sec. 30 is not violated. Consequently, the last sentence limiting the
creditors, either amounting to wastage of assets. compensation to 10% of the net income before income tax does not
likewise find application in this case since the compensation is being given
CENTRAL COOPERATIVE EXCHANGE (CCE) VS. TIBE, JR. (33 SCRA to private respondents in their capacity as officers of WIT and not as board
593; June 30, 1970) – This is a complaint filed by herein petitioner CCE for members.
the refund of certain amounts received by respondent when he served as
member of the board of directors of CCE, which were said to be per diems GOVERNMENT VS. EL HOGAR FILIPINO (50 Phil. 399; July 14, 1927) –
and transportation expenses, representation expenses and commutable The members of the board of El Hogar Filipino receives 5% of the net profit
discretionary funds. as shown in the balance sheet and is distributed in proportion to their
attendance to meetings of the board. A complaint was filed against the,
ISSUE: WON the BOD had the power to appropriate funds for the and the sixth cause of action alleged that the directors, instead of serving
expenses claimed by respondent? without pay, or receiving nominal pay or a fixed salary - as the
complainant supposes would be proper – have been receiving large
HELD: No. The by-laws expressly reserved unto the stockholders the compensation in varying amounts.
power to determine the compensation of the members of the BOD, and the
stockholders did restrict such compensation to (1) actual transportation ISSUE: WON the courts may declare the by-law provision null and void?
expenses plus (2) per diems of P30 and (3) actual expenses while waiting.
Even without the express prohibition, the directors are not entitled to HELD: No. The Corporation Law does not undertake to prescribe
compensation for “The law is well-settled that directors of the rate of compensation for the directors of corporations. The
corporations presumptively serve without compensation and in power to fix the compensation they shall receive, if any, is left to the
the absence of an express agreement or a resolution thereto, no corporation, to be determined in its by-laws (Act No. 1459, sec. 21).

Pursuant to this authority the compensation for the directors of El Hogar Llamado and Jacinto Pascual the amount of P180,000 which is to be repaid
Filipino has been fixed in section 92 of its by-laws, as already stated. The in 6 months with 12% interest. As security, the accused issued and signed
justice and propriety of this provision was a proper matter for the a postdated check which was later on stopped and dishonored for being
shareholders when the by-laws were framed; and the drawn against insufficient funds. Gaw filed a complaint for violation of BP
circumstance that, with the growth of the corporation, the Blg. 22. Pascual remained at large and the trial on the merits against
amount paid as compensation to the directors has increased Llamado was conducted. The trial court convicted Llamado.
beyond what would probably be necessary to secure adequate
service from them is matter that cannot be corrected in this ISSUE: WON petitioner, treasurer of Pan Asia Finance Corporation could
action; nor can it properly be made a basis for depriving the respondent of be held civilly and criminally liable?
its franchise, or even for enjoining it from compliance with the provisions of
its own by-laws. If a mistake has been made, or the rule adopted in the by- HELD: Yes. Petitioner denies knowledge of the issuance of the check
laws has been found to work harmful results, the remedy is in the hands of without sufficient funds and involvement in the transaction with private
the stockholders who have the power at any lawful meeting to change the complainant. However, knowledge involves a state of mind difficult to
rule. The remedy, if any, seems to lie rather in publicity and competition, establish. Thus, the statute itself creates a prima facie presumption, i.e.,
rather than in a court proceeding. The sixth cause of action is in our that the drawer had knowledge of the insufficiency of his funds in or credit
opinion without merit. with the bank at the time of the issuance and on the check's presentment
for payment. Petitioner failed to rebut the presumption by paying the
E. LIBABILITY OF CORPORATE OFFICERS amount of the check within five (5) banking days from notice of the
dishonor. His claim that he signed the check in blank which allegedly is
The general rule is that unless the law specifically provides a corporate common business practice is hardly a defense. If as he claims, he signed
officer or agent is not civilly or criminally liable for acts done by him as such the check in blank, he made himself prone to being charged with violation
officer or agent, or when absent bad faith or malice. of BP 22. It became incumbent upon him to prove his defenses. As
Treasurer of the corporation who signed the check in his capacity as an
TRAMAT MERCANTILE, INC. VS. CA (238 SCRA 14; Nov. 7, 1994) – officer of the corporation, lack of involvement in the negotiation for the
Melchor dela Cuesta, doing business under the name Farmers Machineries, transaction is not a defense.
sold a tractor to Tramat Mercantile, Inc. In payment, David Ong, Tramat’s
president and manager issued a check for P33,500. Tramat sold the tractor, Petitioner's argument that he should not be held personally liable for the
together with an attached lawn mower fabricated by it, to NAWASA. David amount of the check because it was a check of the Pan Asia Finance
Ong put a stop payment on the check when NAWASA refused to pay on the Corporation and he signed the same in his capacity as Treasurer of the
account that aside from the defects on the lawn mower, the engine (sold corporation, is also untenable. The third paragraph of Section 1 of BP Blg.
by dela Costa) was a reconditioned unit. 22 states:
De la Costa filed an action for recovery of money which was granted by the “Where the check is drawn by a corporation, company or entity,
court. the person or persons who actually signed the check in behalf of
such drawer shall be liable under this Act”
ISSUE: WON Ong should be held jointly and severally liable?
ELENA F. UICHICO, SAMUEL FLORO, VICTORIA F. BASILIO, petitioners,
HELD: No. It was an error to hold David Ong jointly and severally liable vs.
with TRAMAT to de la Cuesta under the questioned transaction. Ong had NATIONAL LABOR RELATIONS COMMISSION, LUZVIMINDA SANTOS,
there so acted, not in his personal capacity, but as an officer of a SHIRLEY PORRAS, CARMEN ELIZARDE, ET. AL., respondents
corporation, TRAMAT, with a distinct and separate personality. As such, it (GR No. 121434; 273 SCRA 35; June 2, 1997)
should only be the corporation, not the person acting for and on its behalf
that properly could be made liable thereon. FACTS: Private respondents were employees of Crispa, Inc. who were
dismissed due to alleged retrenchment. They filed an illegal dismissal
Personal liability of a corporate director, trustee or officer along complaint with the NLRC against Crispa, Inc., Valeriano Floro (major
(although not necessarily) with the corporation may so validly stockholder, incorporation and director of Crispa) and petitioners, who were
attach, as a rule, only when — high ranking officials and directors of Crispa. The Labor Arbiter dismissed
the complaint but ordered petitioners, Floro and Crispa to pay separation
1. He assents (a) to a patently unlawful act of the corporation, or pay.
(b) for bad faith, or gross negligence in directing its affairs, or (c) for
conflict of interest, resulting in damages to the corporation, its stockholders ISSUE: WON petitioners can be held liable?
or other persons;
HELD: Yes. A corporation is a juridical entity with legal personality
2. He consents to the issuance of watered stocks or who, having separate and distinct from those acting for and in its behalf and, in general,
knowledge thereof, does not forthwith file with the corporate secretary his from the people comprising it. The general rule is that obligations incurred
written objection thereto; by the corporation, acting through its directors, officers and employees, are
its sole liabilities. There are times, however, when solidary liabilities may be
3. He agrees to hold himself personally and solidarily liable with the incurred but only when exceptional circumstances warrant such as in the
corporation; following cases:
4. He is made, by a specific provision of law, to personally answer for his “1. When directors and trustees or, in appropriate cases, the
corporate action. officers of a corporation: (a) vote for or assent to patently
unlawful acts of the corporation; (b) act in bad faith or
In the case at bench, there is no indication that petitioner David Ong could with gross negligence in directing the corporate affairs; (c)
be held personally accountable under any of the abovementioned cases. are guilty of conflict of interest to the prejudice of the
corporation, its stockholders or members, and other
RICARDO A. LLAMADO, petitioner, persons;
vs. 2. When a director or officer has consented to the issuance of
COURT OF APPEALS and PEOPLE OF THE PHILIPPINES, respondents watered stocks or who, having knowledge thereof, did not
(GR No. 99032; 270 SCRA 423; March 26, 1997) forthwith file with the corporate secretary his written
objection thereto;
FACTS: Private complainant Leon Gaw delivered to the accused Ricardo 3. When a director, trustee or officer has contractually agreed

or stipulated to hold himself personally and solidarily liable appellees sugar central mill under identical milling contracts with a 55%
with the corporation; or share of the resulting product. There was a proposal to increase the
4. When a director, trustee or officer is made, by specific planter’s share to 60% which was adopted by defendant in an Amended
provision of law, personally liable for his corporate action.” i Milling Contract and consequently a Board Resolution.
In labor cases, particularly, corporate directors and officers are In 1953, the appellants initiated the present action, contending that three
solidarily liable with the corporation for the termination of Negros sugar centrals (La Carlota, Binalbagan-Isabela and San Carlos), with
employment of corporate employees done with malice or in bad a total annual production exceeding one-third of the production of all the
faith. In this case, it is undisputed that petitioners have a direct hand in sugar central mills in the province, had already granted increased
the illegal dismissal of respondent employees. They were the ones, who as participation (of 62.5%) to their planters, and that under paragraph 9 of
high-ranking officers and directors of Crispa, Inc., signed the Board the resolution of August 20, 1936, heretofore quoted, the appellee had
Resolution retrenching the private respondents on the feigned ground of become obligated to grant similar concessions to the plaintiffs (appellants
serious business losses that had no basis apart from an unsigned and herein). The appellee Bacolod-Murcia Milling Co., Inc., resisted the claim,
unaudited Profit and Loss Statement which, to repeat, had no evidentiary and defended by urging that the stipulations contained in the resolution
value whatsoever. This is indicative of bad faith on the part of petitioners were made without consideration; that the resolution in question was,
for which they can be held jointly and severally liable with Crispa, Inc. for therefore, null and void ab initio, being in effect a donation that was ultra
all the money claims of the illegally terminated respondent employees in vires and beyond the powers of the corporate directors to adopt. The trial
this case. court decided in favor of defendant, thus the present appeal.
F. THREE-FOLD DUTY OF DIRECTORS ISSUE: WON the resolutions passed by the bard are valid and binding?
Directors owe a three-fold duty to the corporation: (1) Obedience; (2) HELD: Yes. There can be no doubt that the directors of the appellee
Diligence and (3) Loyalty. company had authority to modify the proposed terms of the Amended
Milling Contract for the purpose of making its terms more acceptable to the
Sec. 31. Liability of directors, trustees or officers. - Directors or other contracting parties.
trustees who willfully and knowingly vote for or assent to patently unlawful
acts of the corporation or who are guilty of gross negligence or bad faith in As the resolution in question was passed in good faith by the
directing the affairs of the corporation or acquire any personal or pecuniary board of directors, it is valid and binding, and whether or not it
interest in conflict with their duty as such directors or trustees shall be liable will cause losses or decrease the profits of the central, the court
jointly and severally for all damages resulting therefrom suffered by the has no authority to review them.
corporation, its stockholders or members and other persons.
“They hold such office charged with the duty to act for the corporation
When a director, trustee or officer attempts to acquire or acquires, in according to their best judgment, and in so doing they cannot be
violation of his duty, any interest adverse to the corporation in respect of any controlled in the reasonable exercise and performance of such duty.
matter which has been reposed in him in confidence, as to which equity Whether the business of a corporation should be operated at a loss
imposes a disability upon him to deal in his own behalf, he shall be liable as a during depression, or close down at a smaller loss, is a purely business
trustee for the corporation and must account for the profits which otherwise and economic problem to be determined by the directors of the
would have accrued to the corporation. corporation and not by the court. It is a well-known rule of law that
questions of policy or of management are left solely to the honest
OBEDIENCE: as stated in the first part of Sec. 31 refers to the act of decision of officers and directors of a corporation, and the court is
voting or assenting, either willfully or knowingly, to patently unlawful acts without authority to substitute its judgment of the board of directors; the
thereby making the responsible director liable for damages resulting board is the business manager of the corporation, and so long as it acts
therefrom; in good faith its orders are not reviewable by the courts. (Fletcher on
Corporations, Vol. 2, p. 390).”
DILIGENCE: Under the second part of Sec. 31, the directors are required
to manage the corporate affairs with reasonable care and prudence. This is And it appearing undisputed in this appeal that sugar centrals of La Carlota,
because the liability of a corporation is not limited to willful breach of trust Hawaiian Philippines, San Carlos and Binalbagan (which produce over one-
or excess of power, but extends also to negligence. Their liability rests third of the entire annual sugar production in Occidental Negros) have
upon the common law rule which renders liable every agent who violates granted progressively increasing participations to their adhered planter at
his authority or neglects his duty to the damage of his principal. an average rate of
62.333% for the 1951-52 crop year;
The degree of diligence is relative. The more fair and satisfactory rule is
that degree of care and diligence which an ordinary prudent director could 64.2% for 1952-53;
reasonably be expected to exercise in a like position under similar
circumstances. 64.3% for 1953-54;
BUSINESS JUDGMENT RULE: Although directors are commonly said to 64.5% for 1954-55; and
be responsible both for reasonable care and also prudence, the formula is 63.5% for 1955-56,
continually repeated that they are not liable for losses due to imprudence
or honest error of judgment. The business judgment rule in effect states the appellee Bacolod-Murcia Milling Company is, under the terms of its
that questions of policy and management are left solely to the honest Resolution of August 20, 1936, duty bound to grant similar increases to
decision of the board of directors and the courts are without authority to plaintiffs-appellants herein.
substitute its judgment as against the former. The directors are business
managers and as long as they act in good faith, its actuations are not
subject to judicial review. LIABILITY OF DIRECTORS FOR ACTS OF THEIR CO-DIRECTORS:
Generally: a director is not liable for the acts of their co-directors, unless:
ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants, (1) He connives or participates; or (2) He is negligent in not discovering or
vs. acting to prevent it. Thus, absent of actual knowledge of the wrongful
BACOLOD-MURCIA MILLING CO., INC., defendant-appellee. activities, on the part of the co-directors, the same cannot be imputed to
(GR No. L-15092; 5 SCRA 36; May 18, 1962) the other director unless in the exercise of reasonable care attending his
responsibilities, he should have been aware of suspicious circumstances
FACTS: Appellants have been sugar planter adhered to defendant- demanding correlative action.

by the Governor, the defendant, although still holding out for a higher price
LOYALTY: refers to the proscription imposed on directors on acquiring any for the lands, took steps to purchase the 800 shares of stock in his own
personal or pecuniary interest in conflict with their duty as director. Their company from Mrs. Strong, which he knew were in the possession of F.
relationship is regarded as “fiduciary relation”. As fiduciaries, they are Stuart Jones, as her agent. The defendant employed Krauffman and the
obliged to act with utmost candor and fair dealing for the interest of the latter employed Mr. Sloan, a broker, to purchase the stock for him. Mr.
corporation and without selfish motives. Sloan, the husband, did not know who wanted to buy the shares nor did
Jones when he was spoken to. Jones would not have sold at the price he
Sec. 34. Disloyalty of a director. - Where a director, by virtue of his did had he known it was the defendant who was purchasing, because, as
office, acquires for himself a business opportunity which should belong to the he said, it would show increased value, as the defendant would not be
corporation, thereby obtaining profits to the prejudice of such corporation, he likely to purchase ore stock unless the price was going up.
must account to the latter for all such profits by refunding the same, unless
his act has been ratified by a vote of the stockholders owning or representing ISSUE: WON it was the duty of the defendant to disclose to the agent of
at least two-thirds (2/3) of the outstanding capital stock. This provision shall the plaintiff the facts bearing upon or which might affect the value of the
be applicable, notwithstanding the fact that the director risked his own funds stock?
in the venture.
HELD: Yes. A director upon whose action the value of the shares depends
Apparent from Sec. 31 and 34, the duty of loyalty is violated in the cannot avail of his knowledge of what his own action will be to acquire
following instances: shares from those whom he intentionally keeps in ignorance of his
1. When a director or trustee “acquires any personal or pecuniary expected action and the resulting value of the shares.
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 Even though a director may not be under the obligation of a fiduciary
interest adverse to the corporation in respect to any matter which has nature to disclose to a shareholder his knowledge affecting the value of the
been reposed in him in confidence, as to which equity imposes a shares, that duty may exist in special cases, and did exist upon the facts in
disability upon him to deal in his own behalf”; and this case.
3. When he, “by virtue of his office, acquires for himself a business
opportunity which should belong to the corporation, thereby obtaining In this case, the facts clearly indicate that a director of a corporation
profit to the prejudice of such corporation”. owning friar lands in the Philippine Islands, and who controlled the action
of the corporation, had so concealed his exclusive knowledge of the
FORBIDDEN PROFITS: Forbidden in the sense that directors and officers impending sale to the government from a shareholder from whom he
are fiduciary representatives of the corporation and as such they are not purchased, through an agent, shares in the corporation, that the
allowed to obtain any personal profit, commission, bonus or gain for their concealment was in violation of his duty as a director to disclose such
official actions. This may also refer to those arising from transactions of knowledge, and amounted to deceit sufficient to avoid the sale; and, under
directors with third persons which may involve misappropriation of such circumstances, it was immaterial whether the shareholder's agent did
corporate opportunities and disloyal diverting of business. Directors and or did not have power to sell the stock.
officers are corporate insiders and cannot, therefore, utilize their strategic
position for their own preferment or use their powers and opportunities for In addition to his ownership of almost three-fourths of the shares of the
their personal advantage to the exclusion of the interest which they stock of the company, the defendant was one of the five directors of the
represent. company, and was elected by the board the agent and administrator
general of such company, "with exclusive intervention in the management"
CORPORATE OPPORTUNITY DOCTRINE: it places a director of a of its general business.
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 Concealing his identity when procuring the purchase of stock, by his agent,
facilities of the corporation. He cannot appropriate to himself opportunity was in itself stock evidence of fraud on the part of the defendant. The
which in fairness should belong to the corporation. concealment was not a mere inadvertent omission but was a studied and
intentional omission, to be characterized as part of the deceitful
RATIFICATION: machination to obtain the purchase without giving information whatever as
1. The second paragraph of Sec. 31 which makes a director liable to to the state and probable result of the negotiations, to the vendor of the
account for profits if he attempts to acquire or acquires any interest stock, and to, in that way, obtain the same at a lower price.
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 G. SELF-DEALING DIRECTORS
his own behalf is not subject to ratification.
2. Whereas, in Sec. 34, if a director acquires a business opportunity The self-dealing director is one who deals or transacts business with his
which should belong to the corporation, he is bound to account for own corporation.
such profits unless his act is ratified by the stockholders owing or
representing at least 2/3 of the outstanding capital stock. Sec. 32. Dealings of directors, trustees or officers with the
corporation. - A contract of the corporation with one or more of its directors
Example: A, B, C, D and E are directors of REALTY CORP., Z wanted to or trustees or officers is voidable, at the option of such corporation, unless all
sell his property with a fair market value of P100M for P90M. the following conditions are present:
a. If it was offered first to A, and A made a profit of P10M, this would fall
under Sec. 34 and may be subject to ratification; A merely acquired a 1. That the presence of such director or trustee in the board meeting in
business opportunity owing to the corporation. which the contract was approved was not necessary to constitute a quorum
b. If it was offered to REALTY CORP., and A, later on offered to buy it for for such meeting;
P95 and sold it making a profit of P5M, it would fall under Sec. 31 and 2. That the vote of such director or trustee was not necessary for the
not subject to ratification, A should return the profits to REALTY approval of the contract;
CORP. It was a matter reposed in him in confidence. 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
STRONG VS. REPIDE (41 Phil. 947; May 3, 1909) – the Governor of the the board of directors.
Philippine Islands, on behalf of the government, made an offer of purchase
for the total sum of $6,,043,219.47 in gold for all the friar lands, though Where any of the first two conditions set forth in the preceding paragraph is
owned by different owners. absent, in the case of a contract with a director or trustee, such contract may
be ratified by the vote of the stockholders representing at least two-thirds
While this state of things existed, and before the final offer had been made (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the

members in a meeting called for the purpose: Provided, That full disclosure period of six years, there would be a considerable rise in the price of white
of the adverse interest of the directors or trustees involved is made at such cement. In fact, respondent Te's own Memorandum shows that in
meeting: Provided, however, That the contract is fair and reasonable under September, 1970, the price per bag was P14.50, and by the middle of
the circumstances. 1975, it was already P37.50 per bag. Despite this, no provision was made
in the "dealership agreement" to allow for an increase in price mutually
acceptable to the parties. Instead, the price was pegged at P9.70 per bag
Generally: A contract entered into by a director with his own corporation is
for the whole five years of the contract. Fairness on his part as a director of
voidable at the latter’s option, except when all the conditions laid down in
the corporation from whom he was to buy the cement, would require such
Sec. 32 are met. On the other hand, where any of the first two conditions
a provision. In fact, this unfairness in the contract is also a basis which
is absent, the contract becomes voidable subject to the ratification of the
renders a contract entered into by the President, without authority from the
stockholders representing 2/3 of the outstanding capital stock – the
Board of Directors, void or voidable, although it may have been in the
requirements of which are: (1) there must be a meeting called for that
ordinary course of business. We believe that the fixed price of P9.70 per
purpose; (2) full disclosure of the adverse interest of the director; and (3)
bag for a period of five years was not fair and reasonable. Respondent Te,
the contract is fair and reasonable under the circumstances.
himself, when he subsequently entered into contracts to resell the cement
to his "new dealers" Henry Wee and Gaudencio Galang stipulated as
If the self-dealing director owns all or substantially all of the shares of
follows:
stock, thereby making ratification easily possible, the last sentence of Sec.
The price of white cement shall be mutually determined by us but in
32 should be made to apply by determining reasonableness of the
no case shall the same be less than P14.00 per bag (94 lbs)
transaction to which there is no yardstick. Every case stands upon its own
bottom, and the ultimate question is whether the contract was honest and
As director, especially since he was the other party in interest, respondent
beneficial which is always a question of fact.
Te's bounden duty was to act in such manner as not to unduly prejudice
the corporation. In the light of the circumstances of this case, it is to Us
PRIME WHITE CEMENT CORPORATION, petitioner,
quite clear that he was guilty of disloyalty to the corporation; he was
vs.
attempting in effect, to enrich himself at the expense of the corporation.
IAC and ALEJANDRO TE, respondents
There is no showing that the stockholders ratified the "dealership
(GR No. L-68555; 220 SCRA 103; March 19, 1993)
agreement" or that they were fully aware of its provisions. The contract
was therefore not valid and this Court cannot allow him to reap the fruits of
FACTS: Respondent Alejandro Te, a director of petitioner corporation, was
his disloyalty.
awarded a dealership agreement whereby Te would be the exclusive dealer
and/or distributor of the corporation in the entire Mindanao. As a
CHARLES W. MEAD, plaintiff-appellant,
consequence, Te entered into different contracts for selling white cement.
vs.
Laer on, defendant corporation decided to impose certain conditions upon
E. C. McCULLOUGH, ET AL., and THE PHILIPPINE ENGINEERING
the dealership agreement.
AND CONSTRUCTION COMPANY, defendant-appellants
(GR No. 6217; 21 Phil. 95; Dec. 26, 1911)
Several demands to comply with the agreement were made by Te to the
corporation but were refused and Te was constrained to cancel the
FACTS: Herein plaintiff-appellant Mead with defendant McCullough formed
contracts he entered into.
the Philippine Engineering and Construction Company, the incorporators
being the only stockholders and directors of the company. When Mead left
Defendant corporation entered into an exclusive dealership agreement with
for China, the other directors entered into an agreement where all the
Napoleon Co for the marketing of white cement in Mindanao. Hence, this
rights in a “wrecking contract” with the naval authorities were sold to
suit.
defendant. The defendant, in turn, sold these rights with R.W. Brown, HDC
jones, John Macleod and TH Twentyman, and retaining one sixth interest,
ISSUE: WON the dealership agreement entered into by Te with his own
formed Manila Salvage Association.
corporation is valid and binding?
ISSUE: WON officers or directors of the corporation may purchase the
HELD: No. In the instant case respondent Te was not an ordinary
corporate property?
stockholder; he was a member of the Board of Directors and Auditor of the
corporation as well. He was what is often referred to as a "self-dealing"
HELD: Yes. While a corporation remains solvent, we can see no reason
director.
why a director or officer, by the authority of a majority of the stockholders
or board of managers, may not deal with the corporation, loan it money or
A director of a corporation holds a position of trust and as such, he owes a
buy property from it, in like manner as a stranger. So long as a purely
duty of loyalty to his corporation. In case his interests conflict with those of
private corporation remains solvent, its directors are agents or trustees for
the corporation, he cannot sacrifice the latter to his own advantage and
the stockholders. They owe no duties or obligations to others. But the
benefit. As corporate managers, directors are committed to seek the
moment such a corporation becomes insolvent, its directors are trustees of
maximum amount of profits for the corporation. This trust relationship "is
all the creditors, whether they are members of the corporation or not, and
not a matter of statutory or technical law. It springs from the fact that
must manage its property and assets with strict regard to their interest;
directors have the control and guidance of corporate affairs and property
and if they are themselves creditors while the insolvent corporation is
and hence of the property interests of the stockholders.
under their management, they will not be permitted to secure to
themselves by purchasing the corporate property or otherwise any personal
Granting arguendo that the "dealership agreement" involved here would be
advantage over the other creditors. Nevertheless, a director or officer may
valid and enforceable if entered into with a person other than a director or
in good faith and for an adequate consideration purchase from a majority
officer of the corporation, the fact that the other party to the contract was
of the directors or stockholders the property even of an insolvent
a Director and Auditor of the petitioner corporation changes the whole
corporation, and a sale thus made to him is valid and binding upon the
situation. First of all, We believe that the contract was neither fair nor
minority. (Beach et al. vs. Miller, supra; Twin-Lick Oil Company vs.
reasonable. The "dealership agreement" entered into in July, 1969, was to
Marbury, supra; Drury vs. Cross, 7 Wall., 299; Curran vs. State of Arkansas,
sell and supply to respondent Te 20,000 bags of white cement per month,
15 How., 304; Richards vs. New Hamphshire Insurance Company, 43 N. H.,
for five years starting September, 1970, at the fixed price of P9.70 per bag.
263; Morawetz on Corporations (first edition), sec. 579; Haywood vs.
Respondent Te is a businessman himself and must have known, or at least
Lincoln Lumber Company et al., 64 Wis., 639; Port vs. Russels, 36 Ind., 60;
must be presumed to know, that at that time, prices of commodities in
Lippincott vs. Shaw Carriage Company, 21 Fed. Rep., 577.)
general, and white cement in particular, were not stable and were expected
to rise. At the time of the contract, petitioner corporation had not even
In the case of the Twin-Lick Oil Company vs. Marbury, he court said:
commenced the manufacture of white cement, the reason why delivery was
not to begin until 14 months later. He must have known that within that
That a director of a joint-stock corporation occupies one of those stock shall be considered substantial for purposes of interlocking directors.
fiduciary relations where his dealings with the subject-matter of his
trust or agency, and with the beneficiary or party whose interest is NOTE:
confided to his care, is viewed with jealousy by the courts, and may 1. The contract between corporations with interlocking director is valid
be set aside on slight grounds, is a doctrine founded on the soundest absent fraud and provided it is reasonable under the circumstances;
morality, and which has received the clearest recognition in this court 2. If the interest of the interlocking director in one corporation exceeds
and others. (Koehler vs. Iron., 2 Black, 715; Drury vs. Cross, 7 Wall., 20% and in the other merely nominal, the contract becomes voidable
299; R.R. Co. vs. Magnay, 25 Beav., 586; Cumberland Co vs. at the latter corporation’s option. In effect, the director would be
Sherman, 30 Barb., 553; Hoffman S. Coal Co. vs. Cumberland Co., 16 treated as a self-dealing director under Sec. 32;
Md., 456.) The general doctrine, however, in regard to contracts of 3. If the interest in both companies is either both substantial or both
this class, is, not that they are absolutely void, but that they are nominal, Sec. 33 will apply.
voidable at the election of the party whose interest has been so
represented by the party claiming under it. We say, this is the general I. DERIVATIVE SUIT
rule; for there may be cases where such contracts would be void ab
initio; as when an agent to sell buys of himself, and by his power of In case of a wrongful or fraudulent act of a director, officer or agent,
attorney conveys to himself that which he was authorized to sell. But stockholders have the following options:
even here, acts which amount to a ratification by the principal may 1. Individual or Personal Action – for direct injury to his rights, such as
validate the sale denial of his right to inspect corporate books and records or pre-
emptive rights;
The sale or transfer of the corporate property in the case at bar was made 2. Representative or Class Suit – in which one or more members of a
by three directors who were at the same time a majority of stockholders. If class sue for themselves as a class or for all to whom the right was
a majority of the stockholders have a clear and a better right to sell the denied, either as an individual action or a derivative suit; and a
corporate property than a majority of the directors, then it can be said that 3. Derivative Suit – an action based on injury to the corporation – to
a majority of the stockholders made this sale or transfer to the defendant enforce a corporate right – wherein the corporation itself is joined as a
McCullough. necessary party, and recovery is in favor of and for the corporation. It
is a suit granted to any stockholder to institute a case to remedy a
What were the circumstances under which said sale was made? The wrong done directly to the corporation and indirectly to stockholders.
corporation had been going from bad to worse. The work of trying to raise
the sunken Spanish fleet had been for several months abandoned. The CANDIDO PASCUAL, plaintiff-appellant,
corporation under the management of the plaintiff had entirely failed in this vs.
undertaking. It had broken its contract with the naval authorities and the EUGENIO DEL SAZ OROZCO, ET AL, defendants-appellees
$10,000 Mexican currency deposited had been confiscated. It had no (GR No. L-5174; 19 Phil. 83; March 17, 1911)
money. It was considerably in debt. It was a losing concern and a financial
failure. To continue its operation meant more losses. Success was FACTS: During 1903-1907, the defendant-appellees, without the
impossible. The corporation was civilly dead and had passed into the limbo knowledge and acquiescence of the stockholders deducted their
of utter insolvency. The majority of the stockholders or directors sold the compensation from gross income instead of from the net profits of the
assets of this corporation, thereby relieving themselves and the plaintiff of bank, the same with their predecessors for the years 1899-1902.
all responsibility. This was only the wise and sensible thing for them to do.
They acted in perfectly good faith and for the best interests of all the Plaintiff-appellant brings this action in his own right as a stockholder of the
stockholders. "It would be a harsh rule that would permit one stockholder, bank, for the benefit of the bank and all the stockholders, in behalf of the
or any minority of stockholders to hold a majority to their investment where corporation, which, even though, nominally a defendant, is to all intents
a continuation of the business would be at a loss and where there was no and purposes the real plaintiff in this case as shown in the prayer of the
prospect or hope that the enterprise would be profitable." complaint.
We therefore conclude that the sale or transfer made by the quorum of the ISSUE: WON plaintiff has capacity to sue?
board of directors — a majority of the stockholders — is valid and binding
upon the majority-the plaintiff. HELD: Yes. In suits of this character the corporation itself and not the
plaintiff stockholder is the real party in interest. The rights of the individual
H. INTERLOCKING DIRECTORS stockholder are merged into that of the corporation. It is a universally
recognized doctrine that a stockholder in a corporation has no title legal or
An interlocking director is a director in one corporation who deals or equitable to the corporate property; that both of these are in the
transacts with another corporation of which he is also a director. In such corporation itself for the benefit of all the stockholders. Text writers
case, there may effectively be a dual agency, a divided allegiance where illustrate this rule by the familiar example of one person or entity owning all
allegiance in one corporation may subordinated to the other. the stock and still having no greater or essentially different title than if he
owned but one single share. Since, therefore, the stockholder has no title;
The prevailing view is that these contracts entered into where there is an it is evident that what he does have, with respect to the corporation and
interlocking director is not voidable merely by reason of conflicting duties or his fellow stockholder, are certain rights sui generis. These rights are
interest as to corporations represented, even when a majority or all of the generally enumerated as being, first, to have a certificate or other evidence
directors are common to both corporations. It is recognized that such will of his status as stockholder issued to him; second, to vote at meetings of
be upheld if there is no bad faith or unfairness or collusion. the corporation; third, to receive his proportionate share of the profits of
the corporation; and lastly, to participate proportionately in the distribution
Sec. 33. Contracts between corporations with interlocking directors. of the corporate assets upon the dissolution or winding up. (Purdy's Beach
– (1) Except in cases of fraud, and provided (2) the contract is fair and on Private Corporations, sec. 554.)
reasonable under the circumstances, a contract between two or more
corporations having interlocking directors shall not be invalidated on that The right of individual stockholders to maintain suits for and on behalf of
ground alone: Provided, That if the interest of the interlocking director in the corporation was denied until within a comparatively short time, but his
one corporation is substantial and his interest in the other corporation or right is now no longer doubted. Accordingly, in 1843, in the leading case of
corporations is merely nominal, he shall be subject to the provisions of the Foss vs. Harbottle, a stockholder brought suit in the name of himself and
preceding section insofar as the latter corporation or corporations are other defrauded stockholders, and for the benefit of the corporation,
concerned. against the directors, for a breach of their duty to the corporation. This
case was decided against the complaining stockholder, on the ground that
Stockholdings exceeding twenty (20%) percent of the outstanding capital the complainant had not proved that the corporation itself was under the
control of the guilty parties, and had not proved that it was unable to of the Company and their replacement. The defendants thereafter gave
institute suit. The court, however, broadly intimated that a case might arise pledges and mortgages from the Company to the Bank and entered into
when a suit instituted by defrauded stockholders would be entertained by contracts as directed by the Bank, and permitted the Bank to foreclose the
the court and redress given. Acting upon this suggestion, and impelled by same and to sell the property of the Company itself and permitted the Bank
the utter inadequacy of suits instituted by the corporation, defrauded to institute suits against the Company, in which the Company was not
stockholders continued to institute these suits and to urge the courts of represented by anyone having its interest at heart and in which reason the
equity to grant relief. These efforts were unsuccessful in clearly establishing Bank occupied both plaintiff and defendant and tricked and deluded the
the right of stockholders herein until the cases of Atwol against courts into giving judgment in which the rights of the real parties were
Merriwether, in England, 1867, and of Dodge vs. Woolsey, in this country, concealed and unknown to the courts.
in 1855. These two great and leading cases have firmly established the law
for England and America, that where corporate directors have Thereafter, defendants incorporated Philippine Motors Corporation where
committed a breach of trust either by their frauds, ultra vires acts, all the assets and goodwill of the Company were transferred by the Bank.
or negligence, and the corporation is unable or unwilling to
institute suit to remedy the wrong, a single stockholder may ISSUE: WON the plaintiffs have the legal capacity to bring an action?
institute that suit, suing on behalf of himself and other
stockholders and for the benefit of the corporation, to bring about HELD: Yes. Invoking the well-known rule that shareholders cannot
a redress of the wrong done directly to the corporation and ordinarily sue in equity to redress wrongs done to the corporation, but that
indirectly to the stockholders. the action must be brought by the Board of Directors, the appellees argue
— and the court below held — that the corporation Teal and Company is a
So it is clear that the plaintiff, by reason of the fact that he is a stockholder necessary party plaintiff and that the plaintiff stockholders, not having
in the bank (corporation) has a right to maintain a suit for and on behalf of made any demand on the Board to bring the action, are not the proper
the bank, but the extent of such a right must depend upon when, how, and parties plaintiff. But, like most rules, the rule in question has its exceptions.
for what purpose he acquired the shares which he now owns. In the It is alleged in the complaint and, consequently, admitted through the
determination of these questions we cannot see how, if it be true that the demurrer that the corporation Teal and Company is under the
bank is a quasi-public institution, it can affect in any way the final result. complete control of the principal defendants in the case, and, in
these circumstances, it is obvious that a demand upon the Board
It is alleged that the plaintiff became a stockholder on the 13th of of Directors to institute an action and prosecute the same
November, 1903; that the defendants, as members of the board of effectively would have been useless, and the law does not require
directors and board of government, respectively, during each and all the litigants to perform useless acts. (Exchange bank of Wewoka vs.
years 1903, 1904, 1905, 1906, and 1907, did fraudulently, and to the great Bailey, 29 Okla., 246; Fleming and Hewins vs. Black Warrior Copper Co., 15
prejudice of the bank and its stockholders, appropriate to their own use Ariz., 1; Wickersham vs. Crittenden, 106 Cal., 329; Glenn vs. Kittaning
from the profits of the bank sums of money amounting approximately to Brewing Co., 259 Pa., 510; Hawes vs. Contra Costa Water Company, 104
P20,000 per annum. U. S., 450.)
It is self-evident that the plaintiff in the case at bar was not, before he The conclusion of the court below that the plaintiffs, not being stockholders
acquired in September, 1903, the shares which he now owns, injured or in the Philippine Motors Corporation, had no legal right to proceed against
affected in any manner by the transactions set forth in the second cause of that corporation in the manner suggested in the complaint evidently rest
action. His vendor could have complained of these transactions, but he did upon a misconception of the character of the action. In this proceeding it
not choose to do so. The discretion whether to sue to set them aside, or to was necessary for the plaintiffs to set forth in full the history of the various
acquiesce in and agree to them, is, in our opinion, incapable of transfer. If transactions which eventually led to the alleged loss of their property and,
the plaintiff himself had been injured by the acts of defendants' in making a full disclosure, references to the Philippine Motors Corporation
predecessors that is another matter. He ought to take things as he found appear to have been inevitable. It is to be noted that the plaintiffs seek no
them when he voluntarily acquired his ten shares. If he was defrauded in judgment against the corporation itself at this stage of the proceedings.
the purchase of these shares he should sue his vendor. (Thus, he may sue
for the second half of 1903 to 1907 but not for the years 1989 to the first In our opinion the plaintiffs state a good cause of action for equitable relief
half of 1903.) and their complaint is not in any respect fatally defective. The judgment of
the court below is therefore reversed, the defendants demurrer is
So it seems to be settled by the Supreme Court of the United States, as a overruled, and it is ordered that the return of the record to the Court within
matter of substantive law, that a stockholder in a corporation who was not ten days from the return of the record to the Court of First Instance. So
such at the time of the transactions complained of, or whose shares had ordered
not devolved upon him since by operation of law, cannot maintain suits of
this character, unless such transactions continue and are injurious to the REPUBLIC BANK, represented in this action by DAMASO P. PEREZ, etc.,
stockholder, or affect him especially and specifically in some other way. plaintiff-appellant,
vs.
HARRIE S. EVERETT, CRAL G. CLIFFORD, ELLIS H. TEAL and GEORGE MIGUEL CUADERNO, BIENVENIDO DIZON, PABLO ROMAN,
W. ROBINSON, plaintiffs-appellants, THE BOARD OF DIRECTORS OF THE REPUBLIC BANK AND THE MONETARY
vs. BOARD OF THE CENTRAL BANK OF THE PHILIPPINES, defendants-
THE ASIA BANKING CORPORATION, NICHOLAS E. MULLEN, ERIC appellees
BARCLAY, ALFRED F. KELLY, JOHN W. MEARS and CHARLES D. (GR No. L-22399; 19 SCRA 671; March 30, 1967)
MACINTOSH, defendants-appellees.
(GR No. L-25241; 49 Phil. 512; Nov. 3, 1926) FACTS: Damaso Perez, a stockholder of Republic Bank, instituted a
derivative suit against defendant Pablo Roman, then President of the Bank,
FACTS: Plaintiffs, stockholders (together with Barclay) of Teal and for granting certain loans to fictitious and non-existing persons and to their
Company (Company), entered into a Memorandum of Agreement and close friends, relatives and/or employees, who were in reality their
Voting Trust Agreement with defendant Asia Banking Corporation (Bank) dummies on the basis of fictitious or inflated appraised value of real estate
with the understanding that it was intended for the protection of all parties properties, in connivance with other officials.
thereto from outside creditors, but that they were not intended to be
enforced according to the letter thereof, and that they did not contain the The complaint alleged that Miguel Cuaderno, then Central Bank Governor,
true agreement between the Bank and the Company which was to finance acting upon the complaint, and the Monetary Board ordered an
the company without interference from the above-named creditors. investigation and found violations of the General Banking Act, but no
information was filed until his retirement; that to neutralize the impending
That shortly after, Mullen caused the removal of the plaintiffs as directors action against him, Pablo Roman engaged Miguel Cuaderno as technical

consultant and selected Bienvenido Dizon as Chairman of the Board of the What is important is that the corporation' should be made a party,
Bank; that such appointment was done in bad faith and without intention in order to make the Court's judgment binding upon it, and thus
to protect the interest of the Bank but were only prompted to protect Pablo bar future relitigation of the issues. On what side the corporation
Roman. appears loses importance when it is considered that it lay within
the power of the trial court to direct the making of such
The complaint, therefore, prayed for a writ of preliminary injunction against amendments of the pleadings, by adding or dropping parties, as
eh Monetary Board in confirming such appointments, but was dismissed by may be required in the interest of justice (Revised Rule 3, sec. 11).
the lower court. Misjoinder of parties is not a ground to dismiss an action. (Ibid.)
ISSUE: WON the court below erred in dismissing the complaint? ISSUE3: WON the action of the plaintiff amounts to a quo warranto
proceeding?
HELD: Yes. The defendants mainly controvert the right of plaintiff to
question the appointment and selection of defendants Cuaderno and Dizon, HELD: No. Plaintiff Perez is not claiming title to Dizon's position as head of
which they contend to be the result of corporate acts with which plaintiff, the Republic Bank's board of directors. The suit is aimed at preventing the
as stockholder, cannot interfere. Normally, this is correct, but Philippine waste or diversion of corporate funds in paying officers appointed solely to
jurisprudence is settled that an individual stockholder is permitted to protect Pablo Roman from criminal prosecution, and not to carry on the
institute a derivative or representative suit on behalf of the corporation's bank business. Whether the complaint's allegations to such
corporation wherein he holds stock in order to protect or vindicate effect are true or not must be determined after due hearing.
corporate rights, whenever (1) the officials of the corporation
refuse to sue, or (2) are the ones to be sued or (3) hold the control WESTERN INSTITUTE OF TECHNOLOGY, INC., vs. SALAS (supra,
of the corporation. In such actions, the suing stockholder is under Compensation of Directors) – Petitioners assert that the motion for
regarded as a nominal party, with the corporation as the real reconsideration of the civil aspect of the RTC decision acquitting
party in interest (Pascual vs. Del Saz Orozco, 19 Phil. 82, 85; Everett vs. respondents is a derivative suit brought by them as minority stockholders
Asia Banking Corp., 45 Phil. 518; Angeles vs. Santos, 64 Phil. 697; of WIT for and on behalf of the corporation
Evangelista vs. Santos, 86 Phil. 388). Plaintiff-appellant's action here is
precisely in conformity, with these principles. He is neither alleging nor ISSUE: WON the appeal may be considered as a derivative action?
vindicating his own individual interest or prejudice, but the
interest of the Republic Bank and the damage caused to it. The HELD: No. A derivative suit is an action brought by minority
action he has brought is a derivative one, expressly manifested to shareholders in the name of the corporation to redress wrongs
be for and in behalf of the Republic Bank, because it was futile to committed against it, for which the directors refuse to sue. It is a
demand action by the corporation, since its Directors were remedy designed by equity and has been the principal defense of
nominees and creatures of defendant Pablo Roman (Complaint, p. the minority shareholders against abuses by the majority. Here,
6). The frauds charged by plaintiff are frauds against the Bank that however, the case is not a derivative suit but is merely an appeal on the
redounded to its prejudice. civil aspect of Criminal Cases Nos. 37097 and 37098 filed with the RTC of
The complaint expressly pleads that the appointment of Cuaderno as Iloilo for estafa and falsification of public document. Among the basic
technical consultant, and of Bienvenido Dizon to head the Board of requirements for a derivative suit to prosper is that the minority
Directors of the Republic Bank, were made only to shield Pablo Roman shareholder who is suing for and on behalf of the corporation
from criminal prosecution and not to further the interests of the Bank, and must allege in his complaint before the proper forum that he is
avers that both men are Roman's alter egos. There is no denying that the suing on a derivative cause of action on behalf of the corporation
facts thus pleaded in the complaint constitute a cause of action for the and all other shareholders similarly situated who wish to join. This
bank: if the questioned appointments were made solely to protect Roman is necessary to vest jurisdiction upon the tribunal in line with the rule that it
from criminal prosecution, by a Board composed by Roman's creatures and is the allegations in the complaint that vests jurisdiction upon the court or
nominees, then the moneys disbursed in favor of Cuaderno and Dizon quasi-judicial body concerned over the subject matter and nature of the
would be an unlawful wastage or diversion of corporate funds, since the action. This was not complied with by the petitioners either in their
Republic Bank would have no interest in shielding Roman, and the directors complaint before the court a quo nor in the instant petition which, in part,
in approving the appointments would be committing a breach of trust; the merely states that "this is a petition for review on certiorari on pure
Bank, therefore, could sue to nullify the appointments, enjoin disbursement questions of law to set aside a portion of the RTC decision in Criminal
of its funds to pay them, and recover those paid out for the purpose, as Cases Nos. 37097 and 37098" since the trial court's judgment of acquittal
prayed for in the complaint in this case (Angeles vs. Santos, supra.). failed to impose any civil liability against the private respondents. By no
amount of equity considerations, if at all deserved, can a mere appeal on
Defendants urge that the action is improper because the plaintiff was not the civil aspect of a criminal case be treated as a derivative suit.
authorized by the corporation to bring suit in its behalf. Any such authority
could not be expected as the suit is aimed to nullify the action taken by the Granting, for purposes of discussion, that this is a derivative suit as insisted
manager and the board of directors of the Republic Bank; and any demand by petitioners, which it is not, the same is outrightly dismissible for having
for intra-corporate remedy would be futile, as expressly pleaded in the been wrongfully filed in the regular court devoid of any jurisdiction to
complaint. These circumstances permit a stockholder to bring a derivative entertain the complaint. The ease should have been filed with the
suit (Evangelista vs. Santos, 86 Phil. 394). That no other stockholder Securities and Exchange Commission (SEC) which exercises original and
has chosen to make common cause with plaintiff Perez is exclusive jurisdiction over derivative suits, they being intra-corporate
irrelevant, since the smallness of plaintiff's holdings is no ground disputes, per Section 5 (b) of P.D. No. 902-A.
for denying him relief (Ashwander vs. TVA, 80 L. Ed. 688). At any rate,
it is yet too early in the proceedings for the absence of other stockholders SAN MIGUEL CORPORATION, represented by EDUARDO DE LOS
to be of any significance, no issues having even been joined. ANGELES, petitioners,
vs.
ISSUE2: WON the Corporation should be a plaintiff or defendant? ERNEST KAHN, ANDRES SORIANO III, BENIGNO TODA, JR., ANTONIO
ROXAS, ANTONIO PRIETO, FRANCISCO EIZMENDI, JR., EDUARDO
HELD2: The English practice is to make the corporation a party plaintiff, SORIANO, RALPH KAHN and RAMON DEL ROSARIO, JR., respondents.
while in the United States, the usage leans in favor of its being joined as (GR No. 85339; 176 SCRA 447; Aug. 11, 1989)
party defendant (see Editorial Note, 51 LRA [NS] 123). Objections can be
raised against either method. (1) Absence of corporate authority FACTS: Eduardo de los Angeles was a director appointed by PCGG who
would seem to militate against making the corporation a party sequestered the shares of Andres Soriano III claiming it to belong to
plaintiff, while (2) joining it as defendant places the entity in the Eduardo Conjuangco, a close associate and dummy of then President
awkward position of resisting an action instituted for its benefit. Marcos. De los Angeles initiated a derivative suit against herein

respondents, in behalf of SMC, for the revocation of a Board Resolution manager of Amparts.
adopted to assume the loans incurred by Neptunia Corporation, a foreign
company, said to be a wholly-owned subsidiary of SMC. The action was For some time the three maintained harmonious relations until Chase
dismissed by the SEC on the grounds that De los Angeles does not have tendered his resignation which was accepted by Buencamino and Cranker.
adequate shares to represent the interest of the stockholders and that his Chase initially filed a case in California against Cranker for the recovery of
assumed role as a PCGG appointed director is inconsistent with his the purchase price of his plant, but this died a natural death. Eventually, he
assumed role as a representative of minority stockholders. filed a case before the CFI alleging various acts of frauds allegedly
committed by the other two.
ISSUE: WON De Los Angeles can institute a derivative suit?
ISSUE: WON Chase has capacity to institute a derivative suit?
HELD: Yes. The theory that de los Angeles has no personality to bring suit
in behalf of the corporation — because his stockholding is minuscule, and HELD: Yes. The evidence of defendants proves very clearly that right from
there is a "conflict of interest" between him and the PCGG — cannot be the start, Chase was by them recognized as a stockholder and initial
sustained. incorporator with 600 paid up shares representing a 1/3 interest in
Amparts, and that would be enough for Chase to have the correct
personality to institute this derivative suit; the second place, it also appears
It is claimed that since de los Angeles 20 shares (owned by him since
apparently undenied that Chase did not win in California so that he did not
1977) represent only. 00001644% of the total number of outstanding
recover the $150,000.00 that he had prayed for there against Overseas,
shares (1 21,645,860), he cannot be deemed to fairly and adequately
which if he had would really in the mind of the Court have put him in
represent the interests of the minority stockholders. The implicit argument
estoppel to intervene in any manner as incorporator or stockholder of
— that a stockholder, to be considered as qualified to bring a derivative
Amparts; and in the third place and most important it should not be
suit, must hold a substantial or significant block of stock — finds no support
forgotten that Chase has filed the present case not for his personal benefit,
whatever in the law. The requisites for a derivative suit are as follows:
but for the benefit of Amparts, so that to the Court the argument of
estoppel as against him would appear to be out of place; the estoppel to be
a) the party bringing suit should be a shareholder as of the time of the
valid as a defense must be an estoppel against Amparts itself; the long and
act or transaction complained of, the number of his shares not being
short of it is that the Court is impelled and constrained to discard all the
material;
other defenses set up by Dr. Buencamino on the principal complaint; the
result of all these would be to sustain so far, the position of Chase that Dr.
b) he has tried to exhaust intra-corporate remedies, i.e., has made a
Buencamino must account for the P570,000.00 used to pay the second
demand on the board of directors for the appropriate relief but the latter
series of payment on the subscription, the P330,000.00 used in paying the
has failed or refused to heed his plea; and
last series on the subscription, plus another sum of P245,000.00 entered as
c) the cause of action actually devolves on the corporation, the
loan on his favor and against Amparts, for the sum of P434,000.00 earned
wrongdoing or harm having been, or being caused to the corporation and
in the blackmarketing of the excess of $140,000.00 dollars on the
not to the particular stockholder bringing the suit.
forwarding costs and promotional expenses, for the sum of P391,200.00
earned in the blackmarketing of the excess of $117,000.00 in the
The bona fide ownership by a stockholder of stock in his own right
transaction with Bertoni and Cotti, and all these would reach a total of
suffices to invest him with standing to bring a derivative action for
P1,970,200.00; and as the appropriation of the profits for himself was a
the benefit of the corporation. The number of his shares is
quasi-delict, the liability therefore assuming that it had been done with the
immaterial since he is not suing in his own behalf, or for the
cooperation of Cranker would have to be solidary, 2194 New Civil Code.
protection or vindication of his own particular right, or the redress
of a wrong committed against him, individually, but in behalf and
CATALINA R. REYES, petitioner,
for the benefit of the corporation.
vs.
HON. BIENVENIDO A. TAN, as Judge of the Court of First Instance of
Neither can the "conflict-of-interest" theory be upheld. From the conceded
Manila, Branch XIII and FRANCISCA R. JUSTINIANI, respondents.
premise that de los Angeles now sits in the SMC Board of Directors by the
(GR No. L-16982; 3 SCRA 198; Sept. 30, 1961)
grace of the PCGG, it does not follow that he is legally obliged to vote as
the PCGG would have him do, that he cannot legitimately take a position
FACTS: Several purchases were made by Roxas-Kalaw Textile Mills in New
inconsistent with that of the PCGG, or that, not having been elected by the
York for raw materials but were found out to consist of already finished
minority stockholders, his vote would necessarily never consider the latter's
product for which reason the Central Bank of the Philippines stopped all
interests. The proposition is not only logically indefensible, non sequitur,
dollar allocations for raw materials for the corporation which necessarily led
but also constitutes an erroneous conception of a director's role and
to the paralysis of the operations. It was alleged that the supplier of the
function, it being plainly a director's duty to vote according to his own
said finished goods was United Commercial Company of New York in which
independent judgment and his own conscience as to what is in the best
Dalamal, appointed by the BOD of the Textile Mills as co-manager, had
interests of the company. Moreover, it is undisputed that apart from the
interests and that the letter of credit for said goods were guaranteed by the
qualifying shares given to him by the PCGG, he owns 20 shares in his own
Indian Commercial Company and Indian Traders in which Dalamal likewise
right, as regards which he cannot from any aspect be deemed to be
has interests. It was further alleged that the sale of the finished products
"beholden" to the PCGG, his ownership of these shares being precisely
was the business of Indian Commercial Company of Manila who cannot
what he invokes as the source of his authority to bring the derivative suit.
obtain dollar allocations for importations of finished goods.
ELTON W. CHASE, as minority Stockholder and on behalf of other
An action for the appointment of a receiver was filed before the trial court
Stockholders similarly situated and for the benefit of AMERICAN
after the BOD refused to proceed against Dalamal, which was granted.
MACHINERY AND PARTS MANUFACTURING, INC., plaintiff-appellant,
vs.
ISSUE: WON Justiniani may be allowed to institute the case for
DR. VICTOR BUENCAMINO, SR., VICTOR BUENCAMINO, JR., JULIO B.
receivership and damages?
FRANCIA and DOLORES A. BUENCAMINO, respondents.
(GR No. L-20395; 136 SCRA 365; May 13, 1985)
HELD: Yes. It is not denied by petitioner that the allocation of dollars to
the corporation for the importation of raw materials was suspended. In the
FACTS: Herein plaintiff-appellant Elton Chase, entered into an agreement
eyes of the court below, as well as in our own, the importation of textiles
with Dr. Buencamino and William Cranker (already business partners) for
instead of raw materials, as well as the failure of the Board of Directors to
the establishment of a factory in Manila called American Machinery
take action against those directly responsible for the misuse of dollar
Engineering Parts, Inc. (Amparts), where chase was to transfer his tractor
allocations constitute fraud, or consent thereto on the part of the directors.
plant, ship his machineries from his former plant in America to Manila,
install said machineries at Amparts plant and he is to be the production
Therefore, a breach of trust was committed which justified the derivative it is yet too early in the proceedings since the issues have not been joined.
suit by a minority stockholder on behalf of the corporation. Besides, misjoinder of parties is not a ground to dismiss an action.
“It is well settled in this jurisdiction that where corporate directors are JUAN D. EVANGELISTA, et. al., plaintiff-appellant VS. RAFAEL
guilty of a breach of trust — not of mere error of judgment or SANTOS, defendant-appelle (86 Phil. 387; May 19, 1950) – Juan D.
abuse of discretion — and intracorporate remedy is futile or Evangelista, et. al. are minority stockholders of the Vitali Lumber Company,
useless, a stockholder may institute a suit in behalf of himself and Inc., while Rafael Santos holds more than 50% of the stocks of said
other stockholders and for the benefit of the corporation, to bring corporation and also is and always has been the president, manager, and
about a redress of the wrong inflicted directly upon the treasurer thereof. Santos, in such triple capacity, through fault, neglect,
corporation and indirectly upon the stockholders. An illustration of a and abandonment allowed its lumber concession to lapse and its properties
suit of this kind is found in the case of Pascual vs. Del Saz Orozco (19 Phil. and assets, among them machineries, buildings, warehouses, trucks, etc.,
82), decided by this Court as early as 1911. In that case, the Banco to disappear, thus causing the complete ruin of the corporation and total
Español-Filipino suffered heavy losses due to fraudulent connivance depreciation of its stocks.
between a depositor and an employee of the bank, which losses, it was
contended, could have been avoided if the president and directors had Evangelista, et. al. therefore prays for judgment requiring Santos: (1) to
been more vigilant in the administration of the affairs of the bank. The render an account of his administration of the corporate affairs and assets:
stockholders constituting the minority brought a suit in behalf of the bank (2) to pay plaintiffs the value of their respective participation in said assets
against the directors to recover damages, and this over the objection of the on the basis of the value of the stocks held by each of them; and (3) to pay
majority of the stockholders and the directors. This court held that the suit the costs of suit. Evangelista, et. al. also ask for such other remedy as may
could properly be maintained.” (64 Phil., Angeles vs. Santos [G.R. No. L- be and equitable. The trial court dismissed the action on the ground of
43413, prom. August 31, 1937] p. 697). improper venue and lack of cause of action.
The claim that respondent Justiniani did not take steps to remedy the ISSUE: WON plaintiffs have a right to bring the action for their benefit?
illegal importation for a period of two years is also without merit. During
that period of time respondent had the right to assume and expect that the HELD: No. The complaint shows that the action is for damages resulting
directors would remedy the anomalous situation of the corporation brought from mismanagement of the affairs and assets of the corporation by its
about by their own wrong doing. Only after such period of time had principal officer, it being alleged that defendant's maladministration has
elapsed could respondent conclude that the directors were remiss in their brought about the ruin of the corporation and the consequent loss of value
duty to protect the corporation property and business. of its stocks. The injury complained of is thus primarily to that of the
corporation, so that the suit for the damages claimed should be by the
We are led to agree with the judge below that the appointment of a corporation rather than by the stockholders (3 Fletcher, Cyclopedia of
receiver was not only expedient but also necessary to restore the faith and Corporation pp. 977-980). The stockholders may not directly claim
confidence of the Central Bank authorities in the administration of the those damages for themselves for that would result in the
affairs of the corporation, thus ultimately leading to a restoration of the appropriation by, and the distribution among them of part of the
dollar allocation so essential to the operation of the textile mills. corporate assets before the dissolution of the corporation and the
liquidation of its debts and liabilities, something which cannot be
RICARDO L. GAMBOA, LYDIA R. GAMBOA, HONORIO DE 1A RAMA, legally done in view of section 16 of the Corporation Law.
EDUARDO DE LA RAMA, and the HEIRS OF MERCEDES DE LA RAMA-
BORROMEO, petitioners, But while it is to the corporation that the action should pertain in cases of
vs. this nature, however, if the officers of the corporation, who are the ones
HON. OSCAR R. VICTORIANO as Presiding Judge of the Court of First called upon to protect their rights, refuse to sue, or where a demand upon
Instance of Negros Occidental, Branch II, BENJAMIN LOPUE, SR., them to file the necessary suit would be futile because they are the very
BENJAMIN LOPUE, JR., LEONITO LOPUE, and LUISA U. DACLES ones to be sued or because they hold the controlling interest in the
respondents. corporation, then in that case any one of the stockholders is allowed to
(GR No. -40620; 90 SCRA 40; May 6, 1979) bring suit (3 Fletcher's Cyclopedia of Corporations, pp. 977-980). But in
that case it is the corporation itself and not the plaintiff stockholder that is
FACTS: A writ of preliminary injunction was filed by herein respondents as the real property in interest, so that such damages as may be recovered
purchasers of 1,328 shares of stock of Inocente De La Rama, inc. after shall pertain to the corporation (Pascual vs. Del Saz Orosco, 19 Phil. 82,
herein petitioners surreptitiously met and authorized the sale of 823 shares 85). In other words, it is a derivative suit brought by a stockholder as the
to forestall the petitioner’s takeover from the previous president and vice- nominal party plaintiff for the benefit of the corporation, which is the real
president (sellers of the 1,328 shares), in violation of their pre-emptive property in interest (13 Fletcher, Cyclopedia of Corporations, p. 295).
right. The trial court ruled in favor of respondents. Later on, private
respondents entered into a compromise agreement with the recipients for In the present case, the plaintiff stockholders have brought the action not
the transfer of the 823 shares, against which the petitioners filed a motion for the benefit of the corporation but for their own benefit, since they ask
to dismiss which was denied. that the defendant make good the losses occasioned by his
mismanagement and pay to them the value of their respective participation
ISSUE: WON a derivative suit is the more proper action that should have in the corporate assets on the basis of their respective holdings. Clearly,
been filed by respondents? this cannot be done until all corporate debts, if there be any, are paid and
the existence of the corporation terminated by the limitation of its charter
HELD: No. The petitioners contend that the proper remedy of the plaintiffs or by lawful dissolution in view of the provisions of section 16 of the
would be to institute a derivative suit against the petitioners in the name of Corporation Law.
the corporation in order to secure a binding relief after exhausting all the
possible remedies available within the corporation. It results that plaintiff's complaint shows no cause of action in their favor so
that the lower court did not err in dismissing the complaint on that ground.
An individual stockholder is permitted to institute a derivative suit on behalf
of the corporation wherein he holds stock in order to protect or vindicate While plaintiffs ask for remedy to which they are not entitled unless the
corporate rights, whenever the officials of the corporation refuse to sue, or requirement of section 16 of the Corporation Law be first complied with, we
are the ones to be sued or hold the control of the corporation. In such note that the action stated in their complaint is susceptible of being
actions, the suing stockholder is regarded as a nominal party, with the converted into a derivative suit for the benefit of the corporation by a mere
corporation as the real party in interest. In the case at bar, however, change in the prayer. Such amendment, however, is not possible now,
the plaintiffs are alleging and vindicating their own individual since the complaint has been filed in the wrong court, so that the same last
interests or prejudice, and not that of the corporation. At any rate, to be dismissed.

articles of incorporation and the certificate of incorporation;
The order appealed from is therefore affirmed, but without prejudice to the
filing of the proper action in which the venue shall be laid in the proper 3. To adopt and use a corporate seal;
province. Appellant's shall pay costs. So ordered
4. To amend its articles of incorporation in accordance with the provisions of
IN SUMMARY: this Code;
1. That the party bringing the suit should be a stockholder as of
the time the act or transaction complained of took place, or whose 5. To adopt by-laws, not contrary to law, morals, or public policy, and to
shares have evolved upon him since by operation of law. This rule, amend or repeal the same in accordance with this Code;
however, does not apply if such act or transaction continues and is
injurious to the stockholder or affect him specifically in some other 6. In case of stock corporations, to issue or sell stocks to subscribers and to
way. sell stocks to subscribers and to sell treasury stocks in accordance with the
provisions of this Code; and to admit members to the corporation if it be a
The number of his shares is immaterial since he is not suing in non-stock corporation;
his own behalf or for the protection or vindication of his own right, or
the redress of a wrong done against him, individually, but in behalf 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
and for the benefit of the corporation. mortgage and otherwise deal with such real and personal property, including
2. He has tried to exhaust intra-corporate remedies, he has made securities and bonds of other corporations, as the transaction of the lawful
a demand on the board of directors for the appropriate relief but the business of the corporation may reasonably and necessarily require, subject
latter had failed or refused to heed his plea. Demand, however, is to the limitations prescribed by law and the Constitution;
not required if the company is under the complete control of
the directors who are the very ones to be sued (or where it 8. To enter into merger or consolidation with other corporations as provided
becomes obvious that a demand upon them would have been futile in this Code;
and useless) since the law does not require a litigant to perform
useless acts; 9. To make reasonable donations, including those for the public welfare or for
3. The stockholder bringing the suit must allege in his complaint that hospital, charitable, cultural, scientific, civic, or similar purposes: Provided,
he is suing on a derivative cause of action on behalf of the That no corporation, domestic or foreign, shall give donations in aid of any
corporation and all other stockholders similarly situated, political party or candidate or for purposes of partisan political activity;
otherwise, the case is dismissible. This is because the cause of action
actually devolves on the corporation and not to a particular 10. To establish pension, retirement, and other plans for the benefit of its
stockholder. directors, trustees, officers and employees; and
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, 11. To exercise such other powers as may be essential or necessary to carry
and thus, bar future litigation of the same issues. On what side the out its purpose or purposes as stated in the articles of incorporation.
corporation appears loses importance when it is considered that it lay
within the power of the court to direct the making of amendment of The statement of the objects, purposes or powers in the AOI results
the pleading, by adding or dropping parties, as may be required in the practically in defining the scope of the authorized corporate enterprise or
interest of justice. Misjoinder of parties is not a ground to dismiss undertaking. This statement both confers and also limits the actual
action; and, authority of the corporation.
5. Any benefit or damages recovered shall pertain to the
corporation. This is so because in all instances, derivative suit is Along with the powers indicated in the AOI, a corporation can also exercise
instituted for and in behalf of the corporation and not for the powers that may be granted by law, particularly those provided under Sec.
protection or vindication of a right or rights of a particular stockholder, 36 and 44 of the Corporation Code and those which may be necessary or
otherwise, the aggrieved stockholder should institute, instead, an incidental to tis existence.
individual or personal suit to vindicate his personal or individual right.
Or, for that matter, representative or class suit for all other In short, corporate authority may be classified as:
stockholders whose rights are similarly situated, injured or violated, 1. Express powers – those expressly granted by law inclusive of the
personally or individually. corporate charter or AOI;
2. Implied Powers – those impliedly granted as are essential or
J. EXECUTIVE COMMITTEE reasonably necessary to the carrying out of the express powers; and
3. Incidental Powers – those incidental to its existence.
Sec. 35. Executive committee. - The by-laws of a corporation may create
an executive committee, composed of not less than three members of the A. POWER TO SUE AND BE SUED
board, to be appointed by the board. Said committee may act, by majority
vote of all its members, on such specific matters within the competence of A corporation may sue and be sued in its corporate name just like any
the board, as may be delegated to it in the by-laws or on a majority vote of other person.
the board, except with respect to: (1) approval of any action for which
shareholders' approval is also required; (2) the filing of vacancies in the VENUE: the action filed against it must be instituted at the place of
board; (3) the amendment or repeal of by-laws or the adoption of new by- principal office of the corporation.
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 SERVICE OF SUMMONS: Sec. 11, Rule 14 of the Rules of Court provide:
cash dividends to the shareholders
Sec. 11. Service upon domestic private juridical entity . When the
defendant is a corporation, partnership or association organized under the
CHAPTER 7: CORPORATE POWERS AND AUTHORITY laws of the Philippines with a juridical personality, service may be made on
the president, managing partner, general manager, corporate secretary,
Sec. 36. Corporate powers and capacity. - Every corporation treasurer, or in-house counsel.
incorporated under this Code has the power and capacity:
1. To sue and be sued in its corporate name; Service of summons upon persons other than those named under than
those named in the above provision is without force and effect.
2. Of succession by its corporate name for the period of time stated in the
DELTA MOTOR SALES CORPORATION, petitioner,
vs. respondent.
HON. JUDGE IGNACIO MANGOSING, Branch XXIV, Court of First (GR No. 136426; Aug. 6, 1999)
Instance of Manila, THE CITY SHERIFF OF MANILA, and JOSE LUIS
PAMINTUAN, respondents FACTS: Petitioner is a limited partnership with principal office address at
(GR No. L-41667; April 30, 1976) Davao City and with branch offices at Parañaque, Metro Manila and
Lapasan, Cagayan de Oro City.
FACTS: Herein respondent Pamintuan initiated an action against petitioner
Delta Motors for the alleged defective Toyota car sold to him and for failure Petitioner and private respondent executed a Deed of Sale with
to fulfill the warranty obligation by not repairing the car. Development Agreement wherein the former agreed to develop certain
parcels of land located at Cagayan de Oro belonging to the latter into a
The summons were served on Dionisia Miranda, employee of the petitioner. housing subdivision for the construction of low cost housing units. They
Delta Motors failed to answer the complaint and was declared in default further agreed that in case of litigation regarding any dispute arising
and evidence was presented and a decision was rendered against herein therefrom, the venue shall be in the proper courts of Makati.
petitioner.
Private respondent, as plaintiff, filed a Complaint for Breach of Contract
Petitioner filed a motion to lift the order of default and to set aside the and Damages against petitioner, as defendant, before the RTC Makati for
judgment and for new trial, which was denied. failure of the latter to comply with its contractual obligation in that, other
than a few unfinished low cost houses, there were no substantial
ISSUE: WON there was proper service of summons? developments therein.
HELD: No. Rule 14 of the Revised Rules of Court provides: Summons, together with the complaint, were served upon the defendant,
through its Branch Manager at the stated address at Cagayan de Oro City
SEC. 13. Service upon private domestic corporation or partnership. — If but the Sheriff's Return of Service stated that the summons was duly
defendant is a corporation organized under the laws of the Philippines or served "upon defendant E.B. Villarosa & Partner Co., Ltd. thru its Branch
a partnership duly registered, service may be made on the president, Manager Engr. at their new office Villa Gonzalo, Nazareth, Cagayan de Oro
manager, secretary, cashier, agent, or any of its directors. City, and evidenced by the signature on the face of the original copy of the
summons.
For the purpose of receiving service of summons and being bound
by it, a corporation is identified with its agent or officer who under Defendant filed a motion to dismiss on the ground of improper service of
the rule is designated to accept service of process. "The corporate summons which was denied.
power to receive and act on such service, so far as to make it
known to the corporation, is thus vested in such officer or agent." ISSUE: WON the court acquired jurisdiction?
(Lafayette Insurance Co. vs. French, 15 L. Ed. 451, 453).
HELD: No. Earlier cases have uphold service of summons upon a
A strict compliance with the mode of service is necessary to confer construction project manager; a corporation's assistant manager; ordinary
jurisdiction of the court over a corporation. The officer upon whom service clerk of a corporation; private secretary of corporate executives; retained
is made be one who is named in the statute; otherwise the service is counsel; officials who had charge or control of the operations of the
insufficient. So, where the statute required that in the case of a domestic corporation, like the assistant general manager; or the corporation's Chief
corporation summons should be served on "the president or head of the Finance and Administrative Officer. In these cases, these persons were
corporation secretary treasurer, cashier or managing agent thereof", considered as "agent" within the contemplation of the old rule. Notably,
service of summons on the secretary's wife did not confer jurisdiction over under the new Rules, service of summons upon an agent of the corporation
the corporation in the foreclosure proceeding against it. Hence, the decree is no longer authorized.
of foreclosure and the deficiency judgment were void and should be
vacated. (Reader vs. District Court, 94 Pacific 2nd 858). The designation of persons or officers who are authorized to accept
summons for a domestic corporation or partnership is now limited and
The purpose is to render it reasonably certain that the corporation more clearly specified in Section 11, Rule 14 of the 1997 Rules of Civil
will receive prompt and proper notice in an action against it or to Procedure. The rule now states "general manager" instead of only
insure that the summons be served on a representative so "manager"; "corporate secretary" instead of "secretary"; and "treasurer"
integrated with the corporation that such person will know what instead of "cashier." The phrase "agent, or any of its directors" is
to do with the legal papers served on him. In other words, "to conspicuously deleted in the new rule.
bring home to the corporation notice of the filing of the action".
(35A C.J.S. 288 citing Jenkins vs. Lykes Bros. S.S. Co., 48 F. Supp. 848; The particular revision under Section 11 of Rule 14 was explained by retired
MacCarthy vs. Langston D.C. Fla., 23 F.R.D. 249). Supreme Court Justice Florenz Regalado, thus:
In the instant case the Manila court did not acquire jurisdiction over Delta . . . the then Sec. 13 of this Rule allowed service upon a
Motor because it was not properly served with summons. The service of defendant corporation to "be made on the president,
summons on Dionisia G. Miranda, who is not among the persons mentioned manager, secretary, cashier, agent or any of its directors."
in section 13 of Rule 14, was insufficient. It did not bind the Delta Motor. The aforesaid terms were obviously ambiguous and
Courts acquire jurisdiction over the person of a party defendant and of the susceptible of broad and sometimes illogical interpretations ,
subject-matter of the action by vertue of the service of summons in the especially the word "agent" of the corporation. The Filoil case,
manner required by law. Where there is no service of summons or a involving the litigation lawyer of the corporation who
voluntary general appearance by the defendant, the court acquires no precisely appeared to challenge the validity of service of
jurisdiction to pronounce a judgment in the cause. (Syllabi Salmon and summons but whose very appearance for that purpose was
Pacific Commercial Co. vs. Tan Cueco, 36 Phil. 556). seized upon to validate the defective service, is an illustration
of the need for this revised section with limited scope and
Consequently, the order of default, the judgment by default and the specific terminology. Thus the absurd result in the Filoil case
execution in Civil Case No. 97373 are void and should be set aside. necessitated the amendment permitting service only on the
in-house counsel of the corporation who is in effect an
E. B. VILLAROSA & PARTNER CO., LTD., petitioner, employee of the corporation, as distinguished from an
vs. independent practitioner. (emphasis supplied).
HON. HERMINIO I. BENITO, in his capacity as Presiding Judge, RTC,
Branch 132, Makati City and IMPERIAL DEVELOPMENT CORPORATION,

Retired Justice Oscar Herrera, who is also a consultant of the Rules of
Court Revision Committee, stated that "(T)he rule must be strictly Admission, as well as termination of members is a prerogative granted by
observed. Service must be made to one named in (the) statute . . . law to non-stock corporations and the manner, requirements or procedures
for such admission or termination may be contained in the AOI or by-laws.
It should be noted that even prior to the effectivity of the 1997 Rules of
Civil Procedure, strict compliance with the rules has been enjoined. In the G. POWER TO ACQUIRE OR ALIENATE REAL OR PERSONAL
case of Delta Motor Sales Corporation vs. Mangosing, the Court held: PROPERTY
A strict compliance with the mode of service is necessary to When a corporation is expressly empowered by law to acquire or alienate
confer jurisdiction of the court over a corporation. The officer real and/or personal properties, the limitations imposed by Sec. 36 are as
upon whom service is made must be one who is named in the follows:
statute; otherwise the service is insufficient. . . .
Sec. 36. Xxx
The purpose is to render it reasonably certain that the corporation will
receive prompt and proper notice in an action against it or to insure 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
that the summons be served on a representative so integrated with mortgage and otherwise deal with such real and personal property, including
the corporation that such person will know what to do with the legal securities and bonds of other corporations, (1) as the transaction of the
papers served on him. In other words, "to bring home to the lawful business of the corporation may reasonably and necessarily
corporation notice of the filing of the action." . . . . require, (2) subject to the limitations prescribed by law and the
Constitution.
The liberal construction rule cannot be invoked and utilized
as a substitute for the plain legal requirements as to the The first limitation practically sets the limit of the corporate authority to
manner in which summons should be served on a domestic acquire, own, hold or alienate property. As it has been said the purpose
corporation. . . . . (emphasis supplied). clause in the AOI grants as well as limits the powers which a corporation
may exercise. Verily, WON the acquisition of such property is within the
Accordingly, we rule that the service of summons upon the branch corporate powers or authority may reasonably be determined from the
manager of petitioner at its branch office at Cagayan de Oro, instead of purpose or purposes indicated in the AOI.
upon the general manager at its principal office at Davao City is improper.
Consequently, the trial court did not acquire jurisdiction over the person of LUNETA MOTOR COMPANY, petitioner, vs. A.D. SANTOS, INC., ET
the petitioner. AL., respondents (Gr No. 17716; July 31, 1962) – Nicolas Concepcion
executed a chattel mortgage covering a certificate of public convenience
B. POWER OF SUCCESSION granted to him to operate taxicab service of 27 units in Manila, in favor of
petitioner, to secure a loan evidenced by a promissory note guaranteed by
This right basically means that the corporation persists to exist despite Concepcion and one Placid Esteban.
death, incapacity, civil interdiction, or withdrawal of the stockholders or
members thereof. Concepcion mortgaged the same certificate to cover a second loan with
Rehabilitation Finance.
C. POWER TO ADOPT AND USE A COMMON SEAL
Petitioner filed an action to foreclose the mortgage. While it was pending,
This right has been expressly granted by law. However, it is not mandatory RF also foreclosed the second chattel mortgage where the certificate was
but merely permissive. This is because the corporate seal performs no sold at a public auction in favor of AD Santos who applied for the approval
further or greater function than to impart prima facie evidence of the due of the sale which was granted by the Public Service Commission.
execution by the corporation of a written document or obligation.
Later on, the CFI rendered a judgment in favor of petitioner, where the
D. POWER TO AMEND ITS ARTICLES OF INCORPORATION certificate was sold at a public auction in favor of the petitioner who
immediately filed for approval with the Commission. AD Santos Inc.,
The procedures for the exercise of this right are provided under Sec. 16, recipient of the certificate from AD Santos, opposed the application for
Sec. 37 and 38 as discussed earlier under CHAPTER 5: CORPORATE approval.
CHARTER AND ITS AMENDMENTS.
ISSUE: WON Petitioner may acquire the certificate of public convenience?
As far as corporations created by special law are concerned, amendment
may NOT be considered as a matter of right. The law creating it may or HELD: No. Petitioner claims in this regard that its corporate purposes are
may not authorize or empower the corporation to make any changes in its to carry on a general mercantile and commercial business, etc., and that it
AOI or charter. However, whether empowered or not, Congress may is authorized in its articles of incorporation to operate and otherwise deal in
amend or repeal a corporate charter by virtue of its inherent authority to and concerning automobiles and automobile accessories' business in all its
amend or repeal laws under the Constitution. multifarious ramification (petitioner's brief p. 7) and to operate, etc., and
otherwise dispose of vessels and boats, etc., and to own and operate
E. POWER TO ADOPT BY-LAWS steamship and sailing ships and other floating craft and deal in the same
and engage in the Philippine Islands and elsewhere in the transportation of
The Corporation Code actually REQUIRES a corporation to adopt by-laws, persons, merchandise and chattels by water; all this incidental to the
not contrary to law, morals, or public policy, within 1 month from receipt of transportation of automobiles (id. pp. 7-8 and Exhibit B).
official notice of the issuance of the certificate of incorporation or
registration (Sec. 46). We find nothing in the legal provision and the provisions of petitioner's
articles of incorporation relied upon that could justify petitioner's contention
Amendment of the by-laws are allowed subject to the procedure and in this case. To the contrary, they are precisely the best evidence that it
requirement provided under Sec. 48. has no authority at all to engage in the business of land transportation and
operate a taxicab service. That it may operate and otherwise deal in
F. POWER TO ISSUE OR SELL STOCKS AND TO ADMIT MEMBERS automobiles and automobile accessories; that it may engage in the
transportation of persons by water does not mean that it may engage in
The power of a corporation to issue or sell its stocks is an inherent right of the business of land transportation — an entirely different line of business.
any stock corporation except only as it may be regulated by law or by the If it could not thus engage in the line of business, it follows that it may not
AOI. acquire a certificate of public convenience to operate a taxicab service,
such as the one in question, because such acquisition would be without
purpose and would have no necessary connection with petitioner's FACTS: Private respondent Iglesia Ni Cristo applied with the CFI of Cavite
legitimate business. for registration of a parcel of land which it claimed to have acquired by
virtue of a Deed of Absolute Sale from Aquelina de la Cruz, alleging that
GOVERNMENT VS. EL HOGAR FILIPINO (supra) – the directors of El the applicant and its predecessors-in-interest have been in actual,
Hogar Filipino erected a modern reinforced concrete office building at the continuous, public, peaceful and adverse possession and occupation of the
site of its old building. The acquisition of the lot and the construction of the said land for more than 30 years, which was opposed by the Government
new office building thereon is not the subject of the second cause of action as represented by the Director of Lands. The CFI and the CA ruled in favor
for being ultra vires on the part of the corporation. of INC.
ISSUE: WON the erection of the building was reasonable? ISSUE: WON the corporation may acquire the land in question?
HELD: Yes. With this contention we are unable to agree. Under the HELD Yes. As observed at the outset, had this case been resolved
Corporation Law, every corporation has the power to purchase, hold and immediately after it was submitted for decision, the result may have been
lease such real property as the transaction of the lawful business of the quite adverse to private respondent. For the rule then prevailing under the
corporation may reasonably and necessarily require. When this property case of Manila Electric Company v. Castro-Bartolome et al., 114 SCRA 799,
was acquired in 1916, the business of El Hogar Filipino had developed to reiterated in Republic v. Villanueva, 114 SCRA 875 as well as the other
such an extent, and its prospects for the future were such as to justify its subsequent cases involving private respondent adverted to above', is that a
directors in acquiring a lot in the financial district of the City of Manila and juridical person, private respondent in particular, is disqualified under the
in constructing thereon a suitable building as the site of its offices; and it 1973 Constitution from applying for registration in its name alienable public
cannot be fairly said that the area of the lot — 1,413 square meters — was land, as such land ceases to be public land "only upon the issuance of title
in excess of its reasonable requirements. The law expressly declares that to any Filipino citizen claiming it under section 48[b]" of Commonwealth Act
corporations may acquire such real estate as is reasonably necessary to No. 141, as amended. These are precisely the cases cited by petitioner in
enable them to carry out the purposes for which they were created; and support of its theory of disqualification.
we are of the opinion that the owning of a business lot upon which to
construct and maintain its offices is reasonably necessary to a building and Since then, however, this Court had occasion to re-examine the rulings in
loan association such as the respondent was at the time this property was these cases vis-a-vis the earlier cases of Carino v. Insular Government, 41
acquired. A different ruling on this point would compel important Phil. 935, Susi v. Razon, 48 Phil. 424 and Herico v. Dar, 95 SCRA 437,
enterprises to conduct their business exclusively in leased offices — a result among others. Thus, in the recent case of Director of Lands v.
which could serve no useful end but would retard industrial growth and be Intermediate Appellate Court, 146 SCRA 509, We categorically stated that
inimical to the best interests of society. the majority ruling in Meralco is "no longer deemed to be binding
precedent", and that "[T]he correct rule, ... is that alienable public land
We are furthermore of the opinion that, inasmuch as the lot referred to was held by a possessor, personally or through his predecessors-in-interest,
lawfully acquired by the respondent, it is entitled to the full beneficial use openly, continuously and exclusively for the prescribed statutory period [30
thereof. No legitimate principle can discovered which would deny to one years under the Public Land Act, as amended] is converted to private
owner the right to enjoy his (or its) property to the same extent that is property by mere lapse or completion of said period, ipso jure." We further
conceded to any other owner; and an intention to discriminate between reiterated therein the timehonored principle of non-impairment of vested
owners in this respect is not lightly to be imputed to the Legislature. The rights.
point here involved has been the subject of consideration in many decisions
of American courts under statutes even more restrictive than that which The crucial factor to be determined therefore is the length of time private
prevails in this jurisdiction; and the conclusion has uniformly been that a respondent and its predecessors-in-interest had been in possession of the
corporations whose business may properly be conducted in a populous land in question prior to the institution of the instant registration
center may acquire an appropriate lot and construct thereon an edifice with proceedings. The land under consideration was acquired by private
facilities in excess of its own immediate requirements respondent from Aquelina de la Cruz in 1947, who, in turn, acquired by
same by purchase from the Ramos brothers and sisters, namely: Eusebia,
It would seem to be unnecessary to extend the opinion by lengthy citations Eulalia, Mercedes, Santos and Agapito, in 1936. Under section 48[b] of
upon the point under consideration, but Brown vs. Schleier (118 Fed., 981), Commonwealth Act No. 141, as amended, "those who by themselves or
may be cited as being in harmony with the foregoing authorities. In dealing through their predecessors-in-interest have been in open, continuous,
with the powers of a national bank the court, in this case, said: exclusive and notorious possession and occupation of agricultural lands of
the public domain, under a bona fide claim of acquisition or ownership, for
When an occasion arises for an investment in real property for either at least thirty years immediately preceding the filing of the application for
of the purposes specified in the statute the national bank act permits confirmation of title except when prevented by war or force majeure" may
banking associations to act as any prudent person would act in apply to the Court of First Instance of the province where the land is
making an investment in real estate, and to exercise the same located for confirmation of their claims, and the issuance of a certificate of
measure of judgment and discretion. The act ought not to be title therefor, under the Land Registration Act. Said paragraph [b] further
construed in such a way as to compel a national bank, when it provides that "these shall be conclusively presumed to have performed all
acquires real property for a legitimate purpose, to deal with it the conditions essential to a Government grant and shall be entitled to a
otherwise than a prudent land owner would ordinarily deal with such certificate of title under the provisions of this chapter." Taking the year
property. 1936 as the reckoning point, there being no showing as to when the
Ramoses first took possession and occupation of the land in question, the
At any rate the weight of judicial opinion is so overwhelmingly in favor of 30-year period of open, continuous, exclusive and notorious possession and
sustaining the validity of the acts alleged in the second cause of action to occupation required by law was completed in 1966.
have been done by the respondent in excess of its powers that we refrain
from commenting at any length upon said cases. The ground stated in the The completion by private respondent of this statutory 30-year period has
second cause of action is in our opinion without merit. dual significance in the light of Section 48[b] of Commonwealth Act No.
141, as amended and prevailing jurisprudence: [1] at this point, the land in
question ceased by operation of law to be part of the public domain; and
THE DIRECTOR OF LANDS, petitioner, [2] private respondent could have its title thereto confirmed through the
vs. appropriate proceedings as under the Constitution then in force, private
THE HONORABLE COURT OF APPEALS and IGLESIA NI CRISTO, corporations or associations were not prohibited from acquiring public
respondents lands, but merely prohibited from acquiring, holding or leasing such type of
(GR No. L56613; March 14, 1988) land in excess of 1,024 hectares.

of its business”, and here it is undisputed that the establishment of the
If in 1966, the land in question was converted ipso jure into private land, it local post office is a vital improvement in the living condition of its
remained so in 1974 when the registration proceedings were commenced. employees and laborers who came to settle in it mining camp which is far
This being the case, the prohibition under the 1973 Constitution would removed from the postal facilities or means of communication accorded to
have no application. Otherwise construed, if in 1966, private respondent people living in a city or municipality.
could have its title to the land confirmed, then it had acquired a vested
right thereto, which the 1973 Constitution can neither impair nor defeat. IMPLIED POWERS
H. POWER TO ENTER INTO MERGER OR CONSOLIDATION Sec. 36. Xxx
This is an express power granted by the law under the Code, particularly 11. To exercise such other powers as may be essential or necessary to carry
Title IX thereof. out its purpose or purposes as stated in the articles of incorporation
I. POWER TO MAKE REASONABLE DONATIONS It is a question, in each case, of the logical relation of the act to the
corporate purpose expressed in the charter. For if the act is one
Ordinarily, a pure gift of funds or property by a corporation not created for which is lawful in itself and not otherwise prohibited, and is done
charitable purpose is not authorized and would constitute a violation of the for the purpose of serving corporate ends, and reasonably
rights of its stockholders unless it is empowered by statute. There are contributes to the promotion of those ends in a substantial and
circumstances, however, under which a donation by a corporation may be not in a remote and fanciful sense, it may be fairly considered
to it benefit as a means of increasing its business or promoting patronage. within the corporation’s charter powers (Montelibano vs. Bacolod-
Murcia Milling Co., Inc. as cited in NPC vs. VERA)
Thus, Sec. 36 (9) expressly authorizes a corporation to make donations,
subject to the following limitations: I. POWER TO EXERCISE SUCH OTHER POWERS ESSENTIAL OR
1. The donation must be reasonable; NECESSARY TO CARRY OUT ITS PURPOSES
2. It must be for public welfare, or for hospital, charitable, scientific,
cultural or similar purpose; and TERESA ELECTRIC AND POWER CO., INC. VS. P.S.C (21 SCRA 198;
3. It shall not be in aid of political party or candidate, or for purposes of Sept. 25, 1967) – Respondent Filipinas Cement Corporation filed an
partisan political activity. application with herein respondent PSC for a certificate of public
convenience to install, maintain and operate an electric plant in Teresa,
J. POWER TO ESTABLISH PENSION, RETIREMENT AND OTHER Rizal for the purpose of supplying electric power and light to its cement
PLANS factory and its employees living within its compound. Herein petitioner,
operating an electric plant in Teresa Rizal filed an opposition claiming that
It is now generally recognized in almost all jurisdiction to empower a Filipinas is not authorized to operate the proposed electric plant under its
corporation to establish pension plans, pension trust, profit sharing plans, articles of incorporation. PSC decided in favor of Filipinas.
stock bonus or stock option plans and other incentive plans to directors,
officers and employees. In fact, the power may include any act to promote ISSUE: WON under its articles of incorporation, Filipinas is authorized to
convenience, welfare and benefit of the employees or officers. operate and maintain an electric plant?
REPUBLIC VS. ACOJE MINING COMPANY INC. (7 SCRA 361; Feb. 28, HELD: Yes. Paragraph 7 of the AOI of Filipinas provides for authority to
1963) - A post office branch was opened in herein respondent’s mining secure from any governmental, state, municipality, or provincial, city or
camp at Sta. Cruz Zambales, at its request, where Hilario M. Sanchez, an other authority, and to utilize and dispose of in any lawful manner, rights,
employee of such company, was the postmaster. Prior to the opening the powers, privileges, franchises and concessions – obviously necessary or at
company, at the request of the Bureau of Posts, adopted a resolution that least related to the operation of its cement factory. Moreover, said AOI also
the former would assume full responsibility for all cash received by the provide that the corporation may generally perform any and all acts
postmaster. On May 11, 1954, the postmaster went on a three day leave connected with the business of manufacturing portland cement or arising
but never returned. As a result, an action was brought by the government therefrom or incidental thereto.
to recover P13,867.24, the amount of shortage in the accounts of the
postmaster, from the company. It cannot be denied that the operation of an electric light, heat and power
\sd plant is necessarily connected with the business of manufacturing cement.
nm If in the modern world where we live today electricity is virtually a
= necessity for our daily needs, it is more so in the case of industries like the
ISSUE: WON the subject resolution is within the powers of the company to manufacture of cement.
adopt?
NPC VS. VERA (170 SCRA 721; Feb. 27, 1989)
HELD: Yes. The opening of the post office branch was undertaken because
of a request submitted by respondent company to promote the FACTS: Private Respondent Sea Lion International Port Terminal Services
convenience and benefit of its employees. The idea did not come from the Inc. filed a complaint for prohibition and mandamus with damages against
government and the Director of Posts was prevailed upon to agree to the petitioner NPC and Philippine Ports Authority after NPC did not renew its
request only after studying the necessity for its establishment and after Contract for Stevedoring Services for coal-handling of NPC’s plant and in
imposing upon the company certain requirements intended to safeguard taking over its stevedoring services.
and protect the interest of the government. Accordingly, the company
cannot now be heard to complain of its liability upon the technical plea that ISSUE: WON NPC may embark in stevedoring and arrastre services?
the resolution is ultra vires. The least that can be said is that it cannot now
go back on its plighted word on the ground of estoppel. HELD: Yes. The NPC was created and empowered not only to construct,
operate and maintain power plants, reservois, transmission lines and other
The resolution covers a subject which concerns the benefit, convenience works, but also:
and welfare of the company’s employees and their families. There are
certain corporate acts that may be performed outside of the scope of the …to exercise such powers and do such things as may be reasonably
powers expressly conferred if they are necessary to promote the interest or necessary to carry out the business and purposes for which it was
welfare of the corporation. Thus, it has been held that “although not organized, or which, from time to time, may be declared by the Board to
expressly authorized to do so a corporation may become a surety where be necessary, useful, incidental or auxiliary to accomplish said purpose…
the particular transaction is reasonably necessary or proper to the conduct (Sec. 3[1] of RA 6395, as amended)
1. Approval by the majority vote of the BOD/T;
To determine whether or not the NPC act falls within the purview of the 2. Ratification by the stockholders representing at least 2/3 of the
above provision, the Court must decide whether or not a logical and outstanding capital stock (including non-voting shares) or 2/3 of the
necessary relation exists between the act questioned and the members in case of non-stock corporations;
corporate purpose expressed in the NPC charter. For if the act is 3. The ratification must be made at a meeting duly called for that
one which is lawful in itself and not otherwise prohibited, and is purpose;
done for the purpose of serving corporate ends, and reasonably 4. Prior written notice of the proposal to extend or shorten the corporate
contributes to the promotion of those ends in a substantial and term must be made stating the time and place of meeting addressed
not in a remote and fanciful sense, it may be fairly considered to each stockholder or member at his place of residence, either by
within the corporation’s charter powers (Montelibano vs. Bacolod- mail or personal service;
Murcia Milling Co., Inc.) 5. In case of extension, the same cannot be made earlier than 5 years
prior to the original or subsequent expiry date unless there are
In the instant case, it is an undisputed fact that the pier owned by NPC, justifiable reasons for an earlier extension;
receives various shipment of coal which is used exclusively to fuel the 6. In case of extension, the same must be made during the lifetime of
Batangas Coal-Fired Thermal Power Plant of the NPC for the generation of the corporation;
electric power. The stevedoring services which involve the unloading of the 7. Any dissenting stockholder may exercise his appraisal right;
coal shipments into the NPC pier for its eventual conveyance to the power 8. Submission of the amended articles with the SEC; and
plant are incidental and indispensable to the operation of the plant. The 9. Approval thereof by the SEC (as required under Sec. 37 for extension,
Court holds that NPC is empowered under its Charter to undertake such and Sec. 120 for shortening the term with the effect of dissolution)
services, it being reasonably necessary to the operation and maintenance
of the power plant. READ: Alhambra Cigar and Cigarette Manufacturing, Inc. vs. SEC
POWERS VS. MARSHALL (161 SCRA 176; May 9, 1988) K. POWER TO INCREASE OR DECREASE CAPITAL STOCK; INCUR,
CREATE OR INCREASE BONDED INDEBTEDNESS
FACTS: 14 plaintiffs, all associate members of the International School,
Inc. brought an action for injunction against 10 members of the Board of Sec. 38. Power to increase or decrease capital stock; incur, create or
Trustees, after a letter of Donal Marshall, president of the board, was sent increase bonded indebtedness. - No corporation shall increase or
stating that the school would be collecting a “development fee” of P2,625 decrease its capital stock or incur, create or increase any bonded
per enrollee for the purpose of constructing new buildings and remodel indebtedness unless approved by a majority vote of the board of directors
existing ones to accommodate the increasing enrollment in the school and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3)
which would need P35M. The CFI of Manila dismissed the complaint. of the outstanding capital stock shall favor the increase or diminution of the
capital stock, or the incurring, creating or increasing of any bonded
ISSUE: WON the imposition of the development fee is within the powers of indebtedness. Written notice of the proposed increase or diminution of the
the school? capital stock or of the incurring, creating, or increasing of any bonded
indebtedness and of the time and place of the stockholder's meeting at which
HELD: Yes. Section 2(b) of PD No. 732 granting certain rights to the the proposed increase or diminution of the capital stock or the incurring or
sch0ol, expressly authorized the Board of Trustees “upon consultation with increasing of any bonded indebtedness is to be considered, must be
the Secretary of Education and Culture” to determine the amount of fees addressed to each stockholder at his place of residence as shown on the
and assessments which may be reasonably imposed upon its students, to books of the corporation and deposited to the addressee in the post office
maintain or conform to the school’s standard of education. Such with postage prepaid, or served personally.
consultation complied with and the Secretary expressed his conformity with
the reasonableness of the assessment. The lower court observed that: A certificate in duplicate must be signed by a majority of the directors of the
corporation and countersigned by the chairman and the secretary of the
Xxx the expansion of the school facilities, which is to be done by improving stockholders' meeting, setting forth:
old buildings and/or constructing new ones, is an ordinary business
transaction well within the competence of the Board of Trustees to act (1) That the requirements of this section have been complied with;
upon. Xxx Being directly related to the purpose of elevating and (2) The amount of the increase or diminution of the capital stock;
maintaining the school’s standard of instruction, which is ordained in fact (3) If an increase of the capital stock, the amount of capital stock or number
by PD 732, the expansion cannot result in any radical or fundamental of shares of no-par stock thereof actually subscribed, the names, nationalities
change in the kind of activity being conducted by the school that might and residences of the persons subscribing, the amount of capital stock or
require the consent of the members composing it. number of no-par stock subscribed by each, and the amount paid by each on
his subscription in cash or property, or the amount of capital stock or number
J. POWER TO EXTEND OR SHORTEN CORPORATE TERM of shares of no-par stock allotted to each stock-holder if such increase is for
the purpose of making effective stock dividend therefor authorized;
This has been discussed in Chapter 5: CORPORATE CHARTER AND ITS (4) Any bonded indebtedness to be incurred, created or increased;
AMENDMENTS. (5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
Sec. 37. Power to extend or shorten corporate term. - A private (7) The vote authorizing the increase or diminution of the capital stock, or
corporation may extend or shorten its term as stated in the articles of the incurring, creating or increasing of any bonded indebtedness.
incorporation when approved by a majority vote of the board of directors or
trustees and ratified at a meeting by the stockholders representing at least Any increase or decrease in the capital stock or the incurring,
two-thirds (2/3) of the outstanding capital stock or by at least two-thirds creating or increasing of any bonded indebtedness shall require
(2/3) of the members in case of non-stock corporations. Written notice of the prior approval of the Securities and Exchange Commission.
proposed action and of the time and place of the meeting shall be addressed
to each stockholder or member at his place of residence as shown on the One of the duplicate certificates shall be kept on file in the office of the
books of the corporation and deposited to the addressee in the post office corporation and the other shall be filed with the Securities and Exchange
with postage prepaid, or served personally: Provided, That in case of Commission and attached to the original articles of incorporation. From and
extension of corporate term, any dissenting stockholder may exercise his after approval by the Securities and Exchange Commission and the issuance
appraisal right under the conditions provided in this code. by the Commission of its certificate of filing, the capital stock shall stand
increased or decreased and the incurring, creating or increasing of any
From the above-provision and jurisprudence, the requirements and bonded indebtedness authorized, as the certificate of filing may declare:
procedure for extending or shortening the corporate term are as follows: Provided, That the Securities and Exchange Commission shall not accept for

filing any certificate of increase of capital stock unless accompanied by the
sworn statement of the treasurer of the corporation lawfully holding office at
the time of the filing of the certificate, showing that at least twenty-five PHILIPPINE TRUST COMPANY VS. RIVERA (44 Phil. 469; Jan. 29,
(25%) percent of such increased capital stock has been subscribed and that 1923) - Shortly after its incorporation, the stockholders of Cooperativa
at least twenty-five (25%) percent of the amount subscribed has been paid Naval Filipina, adopted a resolution to the effect that the capital should be
either in actual cash to the corporation or that there has been transferred to reduced by 50% and the subscribers be released from the obligation to pay
the corporation property the valuation of which is equal to twenty-five (25%) their unpaid balance.
percent of the subscription: Provided, further, That no decrease of the capital
stock shall be approved by the Commission if its effect shall prejudice the In the course of time, the company became insolvent and went into the
rights of corporate creditors. hands of Philippine Trust Company (Philtrust), as assignee in bankruptcy,
and by it this action was instituted to recover ½ of the stock subscription of
Non-stock corporations may incur or create bonded indebtedness, or increase herein defendant who subscribed to 450 of the 1,000 authorized capital
the same, with the approval by a majority vote of the board of trustees and stock.
of at least two-thirds (2/3) of the members in a meeting duly called for the
purpose. It does not appear that the formalities under the Corporation Code for the
reduction of capital stock were observed and in particular it does not
Bonds issued by a corporation shall be registered with the Securities and appear that any certificate was at any time filed in the Bureau of
Exchange Commission, which shall have the authority to determine the Commerce and Industry, showing such reduction.
sufficiency of the terms thereof.
Respondent judge ruled in favor of Philtrust and directed respondent to pay
The following requirements or procedure should be complied with: ½ of the subscription price of his shares.
1. Approval by the majority vote of the BOD/T;
2. Ratification by the stockholders representing at least 2/3 of the ISSUE: WON the reduction is valid and proper?
outstanding capital stock (including non-voting shares) or 2/3 of the
members in case of non-stock corporations at a meeting duly called HELD: No. A corporation has no power to release an original subscriber to
for that purpose; its capital stock from the obligation of paying for his shares, without a
3. Prior written notice of the proposal to extend or shorten the corporate valuable consideration for such release; and as against creditors a
term must be made stating the time and place of meeting addressed reduction of the capital stock can take place only in the manner and under
to each stockholder or member at his place of residence, either by the conditions prescribed by the statute or the charter or the AOI.
mail or personal service; Moreover, strict compliance with the statutory regulations is necessary. In
4. A certificate in duplicate must be signed by a majority of the directors the case before us, the resolution releasing the shareholders from their
of the corporation, countersigned by the chairman and the secretary obligation to pay 50% of their respective subscriptions was an attempted
of the stockholders meeting, setting forth the matters contained in withdrawals of so much capital from the fund upon which the company’s
subsection 1 to 7 of Sec. 38; creditors were entitled ultimately to rely and, having been effected without
5. In case of increase in capital stock, 25% of such increased capital compliance with the statutory requirements, was wholly ineffectual.
must be subscribed and that at least 25% of the amount subscribed
must be paid either in cash or property; MADRIGAL & COMPANY VS. ZAMORA (151 SCRA 355; June 30, 1987)
6. In case of decrease of capital stock, the same must not prejudice the - The Madrigal Central Office Employees Union sought for the renewal of its
right of the creditors; CBA, proposing a P200 wage increase and an allowance of P100 a month.
7. Filing of the certificate of increase and amended AOI with the SEC; Petitioner company requested for the deferment of its negotiation.
and
8. Approval thereof by the SEC. Meanwhile, the company effected two reductions of its capital stock by
issuing marketable securities owned by petitioner in exchange for
METHODS OF INCREASING CAPITAL STOCK: shareholders’ shares.
1. Increase the par value of the existing number of shares without
increasing the number of shares; After the petitioner’s failure to sit down with the respondent union, the
2. Increase the number of existing shares without increasing the par latter commenced a case with the NLRC for unfair labor practice. In due
value thereof; time, petitioner filed its position paper, alleging operating losses.
3. Increasing the number of shares and at the same time increasing the
par value of the shares The Labor Arbiter rendered a decision in favor of respondent Union.
REASONS/PURPOSE FOR THE INCREASE: ISSUE: WON the decrease in capital stock is valid and binding?
1. Expansion;
2. Payment of Debt Obligations; HELD: No. What clearly emerges from the recorded facts is that the
3. To acquire additional assets such as providing cars to employees to petitioner, awash with profits from its business operations but confronted
distribute the goods; with the demand of the union for wage increase, decided to evade its
responsibility towards the employees by a devised capital reduction. While
*Nothing in law prohibits increase of capital stock the reduction in capital stock created an apparent need for retrenchment, it
was, by all indications, just a mask for the purge of union members, who,
REASONS FOR DECREASE: by then, had agitated for wage increases. In the face of the petitioner
1. To reduce or wipe out existing deficit where no creditors would company’s piling profits, the unionists had the right to demand for such
thereby by affected; salary adjustments..
2. When the capital is more than what is necessary to procreate the
business or reduction of capital surplus; That the petitioner made quite handsome profits is clear from the records.
3. To write down the value of its fixed assets to reflect their present
actual value in case where there is a decline in the value of the fixed This court is convinced that the petitioner’s capital reduction efforts were,
assets of the corporation. to begin with, a subterfuge, a deception as it were, to camouflage the fact
that it had been making profits, and consequently, to justify the mass layoff
TRUST FUND DOCTRINE: The subscriptions to capital stock of the in it employee ranks, especially the union members. They were nothing but
corporation constitute a fund which the creditors have a right to look up for a premature and plain distribution of corporate assets to obviate a just
the satisfaction of their claims. Accordingly, if the decrease would affect the sharing to labor of the vast profits obtained by its joint efforts with capital
rights of creditors, the same would not be approved by the SEC. through the years. Surely, we can neither countenance nor condone this. It

is an unfair labor practice. whole number of authorized shares. When the shares left unsubscribed are
reoffered, he cannot therefore claim a dilution of interest.
L. POWER TO DENY PRE-EMPTIVE RIGHT
With respect to the claim that the increase in the authorized capital stock
PRE-EMPTIVE RIGHT is a right granted by law to all existing was without consent, expressed or implied, of the stockholder, it was the
stockholders of a stock corporation to subscribe to all issues or disposition finding of the Commission that a meeting was called for the purpose. The
of shares of any class, in proportion to their respective holdings, subject petitioner had not sufficiently overcome the evidence of respondent that
only to the limitation imposed under Sec. 39, which provides: such meeting was in fact held. What petitioner successfully proved,
however, was the fact that he was not notified of said meeting and that he
Sec. 39. Power to deny pre-emptive right. - All stockholders of a stock never attended the same as he was out of the country at the time,
corporation shall enjoy pre-emptive right to subscribe to all issues or attending the Mecca pilgrimage. Another thing that petitioner was able to
disposition of shares of any class, in proportion to their respective disprove was the allegation that all stockholders who did not subscribe to
shareholdings, unless such right is denied by the articles of incorporation or the increase have waived their pre-emptive right. As far as petitioner is
an amendment thereto: Provided, That such pre-emptive right shall not concerned, he had not waived his pre-emptive right to subscribe as he
extend to shares to be issued in compliance with laws requiring stock could not have done so for the reason that he was not present at the
offerings or minimum stock ownership by the public; or to shares to be meeting and had not executed a waiver, thereof. Not having waived such
issued in good faith with the approval of the stockholders representing two- right and for reasons of equity, he may still be allowed to subscribe to the
thirds (2/3) of the outstanding capital stock, in exchange for property needed increased capital stock proportionate to his present shareholdings.
for corporate purposes or in payment of a previously contracted debt.
M. POWER TO SELL OR DISPOSE OF ASSETS
BASIS OF RIGHT: The grant of this right is for the preservation,
unimpaired and undiluted, of the old stockholders’ relative and Sec. 40. Sale or other disposition of assets. - Subject to the provisions
proportionate voting strength and control, that is, the existing ratio of their of existing laws on illegal combinations and monopolies, a corporation may,
property interest and voting power in the corporation. by a majority vote of its board of directors or trustees, sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or substantially all of its
EXCEPTIONS (Under Sec. 39): property and assets, including its goodwill, upon such terms and conditions
1. When shares to be issued is in compliance with laws requiring stock and for such consideration, which may be money, stocks, bonds or other
offerings or minimum stock ownership by the public; or instruments for the payment of money or other property or consideration, as
2. Shares to be issued in good faith with the approval of the stockholders its board of directors or trustees may deem expedient, when authorized by
representing 2/3 of the outstanding capital stock either: the vote of the stockholders representing at least two-thirds (2/3) of the
a. In exchange for property needed for corporate purpose; or outstanding capital stock, or in case of non-stock corporation, by the vote of
b. In payment of a previously contracted debt. at least to two-thirds (2/3) of the members, in a stockholder's or member's
meeting duly called for the purpose. Written notice of the proposed action
The exceptions will not apply to stockholders of close corporation whose and of the time and place of the meeting shall be addressed to each
pre-emptive right, is broader if not absolute. See Sec. 102. stockholder or member at his place of residence as shown on the books of
the corporation and deposited to the addressee in the post office with
The right may likewise be lost by waiver, express or implied or inability or postage prepaid, or served personally: Provided, That any dissenting
failure to exercise it having been notified of the proposed disposition of stockholder may exercise his appraisal right under the conditions provided in
shares. this Code.
BENITO VS. SEC (123 SCRA 722; July 25, 1983) -Respondent Jamiatul A sale or other disposition shall be deemed to cover substantially all
Philippines – Al Islamia, Inc. was incorporated with P2,000,000 authorized the corporate property and assets if thereby the corporation would
capital stock divided into 20,000 shares, of which 460 belong to herein be rendered incapable of continuing the business or accomplishing
petitioner. In a stockholders meeting, an increase of the authorized capital the purpose for which it was incorporated.
stock to P1,000,000 was approved, where the previously unissued shares
were all issued. After such authorization or approval by the stockholders or members, the
board of directors or trustees may, nevertheless, in its discretion, abandon
Petitioner Datu Tagoranao Benito filed a petition with herein respondent such sale, lease, exchange, mortgage, pledge or other disposition of property
SEC alleging that the additional issue of previously unissued shares was and assets, subject to the rights of third parties under any contract relating
made in violation of his pre-emptive right and that the increase of capital thereto, without further action or approval by the stockholders or members.
stock was illegal considering that the stockholders on record were not
notified, and that such issuance be cancelled. Nothing in this section is intended to restrict the power of any corporation,
without the authorization by the stockholders or members, to sell, lease,
SEC Ruling: Benito is not entitled to pre-emptive right with respect to the exchange, mortgage, pledge or otherwise dispose of any of its property and
original unsubscribed shares, but can exercise such right with regards the assets if the same is (1) necessary in the usual and regular course of
increase capitalization. business of said corporation or (2) if the proceeds of the sale or
other disposition of such property and assets be appropriated for
ISSUE: WON the above ruling is correct? the conduct of its remaining business.
HELD: Yes. The issuance of the unsubscribed portion of the capital stock In non-stock corporations where there are no members with voting rights,
or P110,980 is valid even if assuming that it was made without notice to the vote of at least a majority of the trustees in office will be sufficient
the stockholders as claimed by petitioner. The power to issue shares of authorization for the corporation to enter into any transaction authorized by
stocks in a corporation is lodged in the board of directors and no this section.
stockholders’ meeting is necessary to consider it because such issuance
does not need approval of stockholders. The conditions for the valid exercise of this power are thus as follows:
1. Resolution by a majority of the BOD/T;
The general rule is that pre-emptive right is recognized only with respect to 2. Authorization from the stockholders representing at least 2/3 of the
new issue of shares, and not with respect to additional issues of originally outstanding capital stock or 2/3 of the members;
authorized shares. This is on theory that when a corporation, at its 3. The ratification of the stockholders or member must be made at a
inception offers its first shares, it is presumed to have offered all of those meeting duly called for that purpose;
which it is authorized to issue. An original subscriber is deemed to have 4. Prior written notice of the proposed action and of the time and place
taken his shares knowing that they form a definite proportionate part of the of meeting must be made addressed to all stockholders of record,
either by mail or personal service; leasehold right over a public land in Pangasinan to be sold to herein
5. The sale of the assets shall be subject to the provisions of existing appellee. These facts do not prove that the appellee is an alter ego of
laws on illegal combinations and monopolies; and Insular Farms, or is liable for its debts.
6. Any dissenting stockholder shall have the option to exercise his
appraisal right. Generally where on corporation sells or otherwise transfers all of its assets
to another corporation, the latter is not liable for the debts and liabilities of
The above requirements will not apply: the transferor, except: (1) where the purchaser expressly or impliedly
1. In case the sale is NOT covering all or substantially all of the assets of agrees to assumes such debts; (2) where the transaction amounts to a
a corporation as to render it incapable of continuing the consolidation or merger of the corporations; (3) where the purchasing
business or accomplishing the purpose for which it was corporation is merely a continuation of the selling corporation; and (4)
incorporated; or if the proceeds are to be used to continue the where the transaction is entered into fraudulently in order to escape liability
conduct of the remaining business of the company; for such debts.
2. If the sale is in the usual and regular course of business of the
company. In the case at bar, there is neither proof nor allegation of the foregoing
exceptions. In fact, these sales took place not only over 6 months before
ISLAMIC DIRECTORATE OF THE PHILIPPINES VS. CA (272 SCRA the rendition of the judgment sought to be collected in the present action,
454; May 4, 1997) – The Islamic Directorate of the Philippines received two but also, appellee purchase the shares of stock of Insular Farms as the
parcels of land from the Libyan government for the purpose of putting up a highest bidder at an auction sale held at the instance of a bank to which
Mosque, Madrasah (arabic school) and other religious infrastructures. In said shares had been pledged as security for the obligation of Insular
1972, Martial Law was declared, most of the members of the Board of Farms in favor of said bank.
Trustees, together with petitioner Sen. Mamintal Tamano, fled to the
middle-east to escape political prosecution. N. POWER TO ACQUIRE OWN SHARES
Thereafter, two Muslim groups sprung claiming to be the legitimate IDP. Sec. 41. Power to acquire own shares. - A stock corporation shall have
One headed by Engr. Farouk Caprizo, not having been properly elected as the power to purchase or acquire its own shares for a legitimate corporate
new members of the Board of Trustees caused to be sold, through a purpose or purposes, including but not limited to the following cases:
resolution of IDP, the two lots to respondent Iglesia Ni Cristo. Provided, That the corporation has unrestricted retained earnings in its books
to cover the shares to be purchased or acquired:
The 1971 Board of Trustees now filed a petition to declare the sale null and
void. 1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out
ISSUE: WON the sale is valid? of unpaid subscription, in a delinquency sale, and to purchase delinquent
shares sold during said sale; and
HELD: No. The Caprizo Group is a fake board of trustees. IDP never gave 3. To pay dissenting or withdrawing stockholders entitled to payment for
its consent through a legitimate Board of Trustees. Therefore, this is not a their shares under the provisions of this Code.
case of vitiated consent, but one where consent on the part of one of the
contracting parties is totally wanting. Ineluctably, the subject sale is void The limitation that the corporation must at all times have “unrestricted
and produces no effect whatsoever. retained earnings” is a condition for the exercise of this power, EXCEPT:
1. Redemption of redeemable shares under Sec. 8;
The Caprizo group-INC sale is further deemed null and void ab initio 2. Exercise of stockholders right to compel a close corporation to
because of the Caprizo Group’s failure to comply with Sec. 40 of the purchase his shares for any reason under Sec. 105 when the
Corporation Code pertaining to corporation has sufficient assets in its book to cover its debts and
the disposition of all or substantially all assets of the corporation. liabilities exclusive of capital stock;
3. In case of deadlocks under Sec. 104.
The Tandang Sora property, it appears from the records, constitutes the
only property of the IDP. Hence, its sale to a third-party is a sale or Once purchased, the shares are considered as treasury shares and while
disposition of all the corporate property and assets of IDP falling squarely they remain so, they have no voting rights and dividend rights. The
within the contemplation of Sec. 40. For the sale to be valid, the majority corporation may (1) re-issue them even below par; (2) issue them as stock
vote of the legitimate Board of Trustees, concurred in by vote of at least dividends; (3) retire or cancel them and thereby remove from issue
2/3 of the bona fide members of the corporation should have been effectively reducing the number of shares issued stated in the AOI.
obtained. These twin requirements were not met as the Caprizo Groups
which voted to sell the property was a fake Board and those whose names STEINBERG VS. VELASCO (52 Phil 953; March 12, 1929) - the Board of
and signatures were affixed by the Caprizo Group together with the sham Directors of Trading Company approved and authorized the purchases of
Board Resolution authorizing negotiation for the sale were, from all the capital stock of the company from its various stockholder, herein
indications, not bona fide members of the IDP as they were made to respondents, at par value amounting to P3,300. Petitioner assails the
appear to be. recovery of the amount paid to such stockholders and the P3,000 dividends
declared which were claimed to be made to the injury and in fraud of its
EDWARD J. NELL CO. VS. PACIFIC FARMS, INC. (15 SCRA 415; Nov. creditors. The complaint was dismissed.
29, 1965) - The appellant secured in a civil case against Insular Famrs, Inc.
a judgment for the balance of the price of a pump sold by the former to the ISSUE: WON recovery can be made?
latter. A writ of execution was issued but was returned unsatisfied, saying
that Insular Farms had no leviable property. Soon after appellant filed with HELD: Yes. The Board of Directors acted on the assumption that it had
the same Municipal Court the present action against Pacific Farms claiming accounts receivable of the face value of P19,126.02 but there was no
it to be an alter ego of Insular Farms, which the court denied. On appeal, stipulation as to the value of such accounts and P12,512.47 of which had
the CFI and CA also denied the petition. but little, if any value. The purchase of the stocks and the dividend
declaration further decreased the assets of the corporation. The profits
ISSUE: WON Pacific Farms should answer for the liability of Insular Farms? amounted only to P3,314.72. In other words, that the corporation did not
then have actual bona fide surplus from which the dividends could be paid,
HELD: No. It appears on record that the appellee purchase 1,000 shares of and that the payment of them in full at the time would “affect the financial
stock of Insular Farms, and thereupon sold said shares of stock to certain condition of the corporation”.
individuals, who forthwith reorganized said corporation and that the board
of directors thereof, as reorganized, then caused its assets, including its It is indeed peculiar that the action of the board in the assailed acts was all
done at the same meeting of the board of directors, and it appears that the decided on its legality.
stockholders, whose shares were purchased, were former directors and
resigned before the board approved the purchase and declaration of ISSUE: WON the investment by Ma-ao Sugar constitutes a violation of Sec.
dividends. In other words, the directors were permitted to resign so that 17-1/2 of the Corporation Law?
they could sell their stock to the corporation. In this situation and upon this
state of facts, it is very apparent that the directors did not act in good faith HELD: Yes. In his work entitled “The Philippine Corporation Law”,
or that they were grossly ignorant of their duties. Professor Sulpicio S. Guevarra of the UP College of Law, reconciled par. (9)
and (10) of Sec. 13, as follows:
Creditors of a corporation have the right to assume that so long as there
are outstanding debts and liabilities, the board of directors will not use the “j. Power to acquire or dispose of shares or securities. – A private
assets of the corporation to purchase its own stock, and that it will not corporation, in order to accomplish it purpose as stated in its articles of
declare dividends to stockholders when the corporation is insolvent. incorporation, and imposed by the Corporation Law, has the power to
acquire, hold, mortgage, pledge or dispose of shares, bonds, securities,
The amount involved in this case is not large, but the legal principles are and other evidences of indebtedness of any domestic or foreign
important and we have given them consideration which they deserve. corporation. Such an act, if done in pursuance of the corporate
purpose, does not need the approval of the stockholders; but
O. POWER TO INVEST FUNDS when the purchase of shares of another corporation is done
solely for investment and not to accomplish the purpose of its
Sec. 42. Power to invest corporate funds in another corporation or incorporation, the vote of approval of the stockholders is
business or for any other purpose. - Subject to the provisions of this necessary”
Code, a private corporation may invest its funds in any other corporation or
business or for any purpose other than the primary purpose for which it was “40. Power to invest corporate funds. – A private corporation has the
organized when approved by a majority of the board of directors or trustees power to invest its corporate funds in any other corporation or business,
and ratified by the stockholders representing at least two-thirds (2/3) of the or for any other purpose other than the main purpose for which it was
outstanding capital stock, or by at least two thirds (2/3) of the members in organized, provided that its board of directors has been authorized in a
the case of non-stock corporations, at a stockholder's or member's meeting resolution by the affirmative vote of stockholders holding shares in the
duly called for the purpose. Written notice of the proposed investment and corporation entitling them to exercise at least two-thirds of the voting
the time and place of the meeting shall be addressed to each stockholder or power on such a proposal at a stockholders’ meeting called for that
member at his place of residence as shown on the books of the corporation purpose. When the investment is necessary to accomplish its purpose or
and deposited to the addressee in the post office with postage prepaid, or purposes as stated in its articles of incorporation, the approval of the
served personally: Provided, That any dissenting stockholder shall have stockholders is not necessary”
appraisal right as provided in this Code: Provided, however, That where the
investment by the corporation is reasonably necessary to accomplish its We agree with Professor Guevarra. We therefore agree with the finding of
primary purpose as stated in the articles of incorporation, the approval of the the lower court that the investment in question does not fall under the
stockholders or members shall not be necessary. purview of Sec. 17 ½ of the Corporation Law.
“MAY INVEST FUNDS” has been held by the SEC to mean an investment JOHN GOKONGWEI, JR., petitioner,
in the form of money, stock, bonds and other liquid assets and does not vs.
include real properties or other fixed assets, otherwise the law would have SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO,
phrased Sec. 42 to include “assets” rather than “to invest funds”. JOSE M. SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO
BUNAO, WALTHRODE B. CONDE, MIGUEL ORTIGAS, ANTONIO PRIETO,
SECONDARY PURPOSE: the law uses the phrase “for any purpose other SAN MIGUEL CORPORATION, EMIGDIO TANJUATCO, SR., and EDUARDO
than the primary purpose” signifying that even if the business or R. VISAYA, respondents.
undertaking is allowed or authorized in the secondary purpose or purposes (GR No. L-45911; April 11, 1979)
of the corporation, the provision of Sec. 42 would apply.
FACTS: Petitioner John Gokongwei alleged that the respondent corporation
REQUIREMENTS FOR A VALID INVESTMENT OF CORPORATE has been investing corporate funds in other corporations or business
FUNDS: outside of its primary purpose in violation of Sec. 17 ½ of the Corporation
1. Resolution by a majority of the BOD/T; Law.
2. Ratification by the stockholders representing 2/3 of the outstanding
capital stock (or 2/3 of members); Respondents sent notices of the annual stockholders’ meeting including in
3. The ratification must be made at a meeting duly called for that the agenda thereof the re-affirmation of the authorization of the BOD by
purpose; the stockholders at the meeting to invest corporate funds in other
4. Prior written notice of the proposed investment and the time and companies or businesses or for purposes other than the main purpose. An
place of the meeting shall be made, addressed to each stockholder or injunction was prayed for by petitioner, but the date of hearing originally
member by mail or by personal service; and set was cancelled. No action was taken up to the date of the filing of the
5. Any dissenting stockholder shall have the option to exercise his instant petition.
appraisal right.
ISSUE: WON respondent SEC committed grave abuse of discretion in
RATIFICATION: as a requirement, applies only to investments that are allowing the above agenda to be taken up in the stockholders’ meeting?
beyond the corporation’s prim ary purpose, or outside the express or
implied powers of the investing corporation. Thus, if the investment is HELD: No. Section 17-1/2 of the Corporation Law allows a corporation to
reasonably necessary to accomplish its primary purpose, the approval of "invest its funds in any other corporation or business or for any purpose
the stockholders or members is not required. other than the main purpose for which it was organized" provided that its
Board of Directors has been so authorized by the affirmative vote of
DELA RAMA VS. MA-AO SUGAR CENTRAL CO., INC. (27 SCRA 247; stockholders holding shares entitling them to exercise at least two-thirds of
Feb. 28, 1969) - Defendant Ma-ao Sugar Central Co, Inc., engaged in the the voting power. If the investment is made in pursuance of the
manufacture of sugar, invested P655,000 in shares of stock of Philippine corporate purpose, it does not need the approval of the
Fiber Processing Co., Inc., which is engaged in the manufacture of sugar stockholders. It is only when the purchase of shares is done solely
bags. The sale, though not previously authorized, was ratified by the 2/3 for investment and not to accomplish the purpose of its
vote of the stockholders. Claiming the business of defendant is not related incorporation that the vote of approval of the stockholders
to that of Philippine Fiber, such sale was attacked but the trial court holding shares entitling them to exercise at least two-thirds of the

voting power is necessary. justified by definite corporate expansion projects or programs approved by
the board of directors; or (2) when the corporation is prohibited under any
As stated by respondent corporation, the purchase of beer manufacturing loan agreement with any financial institution or creditor, whether local or
facilities by SMC was an investment in the same business stated as its main foreign, from declaring dividends without its/his consent, and such consent
purpose in its Articles of Incorporation, which is to manufacture and market has not yet been secured; or (3) when it can be clearly shown that such
beer. It appears that the original investment was made in 1947-1948, when retention is necessary under special circumstances obtaining in the
SMC, then San Miguel Brewery, Inc., purchased a beer brewery in corporation, such as when there is need for special reserve for probable
Hongkong (Hongkong Brewery & Distillery, Ltd.) for the manufacture and contingencies.
marketing of San Miguel beer thereat. Restructuring of the investment was
made in 1970-1971 thru the organization of SMI in Bermuda as a tax free UNRESTRICTED RETAINED EARNINGS: the undistributed earnings of
reorganization. the corporation which have not been allocated for any managerial,
contractual or legal purposes and which are free for distribution to the
Under these circumstances, the ruling in De la Rama v. Manao Sugar stockholders as dividends.
Central Co., Inc., supra, appears relevant. In said case, one of the issues
was the legality of an investment made by Manao Sugar Central Co., Inc., TYPES OF DIVIDENDS:
without prior resolution approved by the affirmative vote of 2/3 of the 1. Cash dividends – payable in lawful money or currency;
stockholders' voting power, in the Philippine Fiber Processing Co., Inc., a 2. Property dividends - those paid in the form property (e.g., bonds,
company engaged in the manufacture of sugar bags. The lower court said notes, shares in another corporation);
that "there is more logic in the stand that if the investment is 3. Stock dividends – corporation’s own shares of stock out of the
made in a corporation whose business is important to the remaining unissued shares which would require the approval of the
investing corporation and would aid it in its purpose, to require stockholders representing 2/3 of the outstanding capital stock at a
authority of the stockholders would be to unduly curtail the power regular or special meeting duly called for that purpose. This is to be
of the Board of Directors.” valued at par value or issue price.
Assuming arguendo that the Board of Directors of SMC had no authority to Cash and property dividends have the effect of reducing corporate assets
make the assailed investment, there is no question that a corporation, like to the extent of the dividends declared. In stock dividends, it would
an individual, may ratify and thereby render binding upon it the originally generally not increase the proportionate interest of the stockholders of the
unauthorized acts of its officers or other agents. This is true because the corporation although it will have the effect of increasing the subscribed and
questioned investment is neither contrary to law, morals, public order or paid-up capital (exception is when the stock dividend declaration would
public policy. It is a corporate transaction or contract which is within the result in fractional shares like when 1 share is declared as dividend for
corporate powers, but which is defective from a supported failure to every 9 shares held)
observe in its execution the. requirement of the law that the investment
must be authorized by the affirmative vote of the stockholders holding two- OVERISSUANCE OF SHARES: happens when a corporation issues shares
thirds of the voting power. This requirement is for the benefit of the beyond its authorized capital stock, even in the form of stock dividends.
stockholders. The stockholders for whose benefit the requirement was
enacted may, therefore, ratify the investment and its ratification by said DELINQUENCY: is a requirement for the application of the second part of
stockholders obliterates any defect which it may have had at the outset. the first paragraph of Sec. 43. Such that, cash dividends declared are first
"Mere ultra vires acts", said this Court in Pirovano, "or those applied on the unpaid balance on the subscription plus costs and expenses
which are not illegal and void ab initio, but are not merely within and stock dividends are withheld until the subscription is fully paid.
the scope of the articles of incorporation, are merely voidable and
may become binding and enforceable when ratified by the WHO CAN DECLARE DIVIDENDS? The BOD. They cannot be compelled
stockholders. to declare dividends, except: (1) When the unrestricted retained earnings is
in excess of 100% of the paid-up capital; and (2) In the case of Mandatory
Besides, the investment was for the purchase of beer manufacturing and If Earned Preference Shares.
marketing facilities which is apparently relevant to the corporate purpose.
The mere fact that respondent corporation submitted the assailed The judgment of the BOD is conclusive, EXCEPT: (1) when they act in bad
investment to the stockholders for ratification at the annual meeting of May faith; (2) for a dishonest purpose; (3) they act fraudulently, oppressively,
10, 1977 cannot be construed as an admission that respondent corporation unreasonably or unjustly; or (4) abuse of discretion can be shown as to
had committed an ultra vires act, considering the common practice of impair the rights of the complaining shareholders. The TEST of bad faith is
corporations of periodically submitting for the gratification of their to determine if the policy of the directors is dictated by their personal
stockholders the acts of their directors, officers and managers. interest rather than the corporate welfare.
P. POWER TO DECLARE DIVIDENDS WHEN DIVIDENDS RIGHTS VEST: It has been succinctly said that the
right of the stockholders to be paid dividends vest as soon as they have
DIVIDENDS are corporate profits set aside, declared and ordered by the been lawfully and finally declared by the BOD. It is not revocable unless:
BOD to be paid to the stockholders. It is a fruit of investment, the recurrent (1) it has not been officially communicated to the stockholders; or (2) it is
return, analogous to interest and rent upon other forms of invested capital. in the form of stock dividends which is revocable any time prior to
distribution because this does not result in the distribution of assets but
Sec. 43. Power to declare dividends. - The board of directors of a stock merely the division of existing shares of a stockholder into smaller units or
corporation may declare dividends out of the unrestricted retained earnings integers.
which shall be payable in cash, in property, or in stock to all stockholders on
the basis of outstanding stock held by them: Provided, That any cash TRANSFER OF SHARES: The dividends already declared belong to the
dividends due on delinquent stock shall first be applied to the unpaid balance owner at the time of declaration. Usually, however, the dividends are
on the subscription plus costs and expenses, while stock dividends shall be payable to stockholders of record on a specific future date and as far as the
withheld from the delinquent stockholder until his unpaid subscription is fully corporation is concerned, the registered owner is the one entitled to
paid: Provided, further, That no stock dividend shall be issued without the dividends. As against his transferor, however, the transferee has
approval of stockholders representing not less than two-thirds (2/3) of the presumably the right to such dividends and is oftentimes taken into account
outstanding capital stock at a regular or special meeting duly called for the in entering effecting the transfer of shares.
purpose. (16a)
NIELSON & COMPANY, INC., plaintiff-appellant,
Stock corporations are prohibited from retaining surplus profits in excess of vs.
one hundred (100%) percent of their paid-in capital stock, except: (1) when LEPANTO CONSOLIDATED MINING COMPANY, defendant-appellee
(GR No. L-21601; Dec. 28, 1968) It is Our considered view, therefore, that under Section 16 of the
Corporation Law stock dividends cannot be issued to a person who is not a
FACTS: This is a motion for reconsideration filed by respondent Lepanto stockholder in payment of services rendered. And so, in the case at bar
contending that the order of the SC to pay Nielson 10% of the stock Nielson can not be paid in shares of stock which form part of the stock
dividends, declared by Lepanto during the extension of the contract, as dividends of Lepanto for services it rendered under the management
compensation for services under a management contract is in violation of contract. We sustain the contention of Lepanto that the understanding
the Corporation Law and that it could not be the intention of the parties between Lepanto and Nielson was simply to make the cash value of the
that the services of Nielson should be paid in stock dividends. stock dividends declared as the basis for determining the amount of
compensation that should be paid to Nielson, in the proportion of 10% of
ISSUE: WON Nielson & Co. is entitled to receive stock dividends? the cash value of the stock dividends declared. And this conclusion of Ours
finds support in the record.
HELD: No. The considerations for which shares of stock may be issued
are: (1) cash; (2) property; and (3) undistributed profits. Shares of stock Q. POWER TO ENTER INTO MANAGEMENT CONTRACT
are given the special name "stock dividends" only if they are issued in lieu
of undistributed profits. If shares of stocks are issued in exchange of cash Sec. 44. Power to enter into management contract. - No corporation
or property then those shares do not fall under the category of "stock shall conclude a management contract with another corporation unless such
dividends". A corporation may legally issue shares of stock in consideration contract shall have been approved by the board of directors and by
of services rendered to it by a person not a stockholder, or in payment of stockholders owning at least the majority of the outstanding capital stock, or
its indebtedness. A share of stock issued to pay for services rendered is by at least a majority of the members in the case of a non-stock corporation,
equivalent to a stock issued in exchange of property, because services is of both the managing and the managed corporation, at a meeting duly called
equivalent to property. Likewise a share of stock issued in payment of for the purpose: Provided, That (1) where a stockholder or stockholders
indebtedness is equivalent to issuing a stock in exchange for cash. But a representing the same interest of both the managing and the managed
share of stock thus issued should be part of the original capital stock of the corporations own or control more than one-third (1/3) of the total
corporation upon its organization, or part of the stocks issued when the outstanding capital stock entitled to vote of the managing corporation; or (2)
increase of the capitalization of a corporation is properly authorized. In where a majority of the members of the board of directors of the managing
other words, it is the shares of stock that are originally issued by the corporation also constitute a majority of the members of the board of
corporation and forming part of the capital that can be exchanged for cash directors of the managed corporation, then the management contract must
or services rendered, or property; that is, if the corporation has original be approved by the stockholders of the managed corporation owning at least
shares of stock unsold or unsubscribed, either coming from the original two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by
capitalization or from the increased capitalization. Those shares of stock at least two-thirds (2/3) of the members in the case of a non-stock
may be issued to a person who is not a stockholder, or to a person already corporation. No management contract shall be entered into for a period
a stockholder in exchange for services rendered or for cash or property. But longer than five years for any one term.
a share of stock coming from stock dividends declared cannot be issued to
one who is not a stockholder of a corporation. The provisions of the next preceding paragraph shall apply to any contract
whereby a corporation undertakes to manage or operate all or substantially
A "stock dividend" is any dividend payable in shares of stock of all of the business of another corporation, whether such contracts are called
the corporation declaring or authorizing such dividend. It is, what service contracts, operating agreements or otherwise: Provided, however,
the term itself implies, a distribution of the shares of stock of the That such service contracts or operating agreements which relate to the
corporation among the stockholders as dividends. A stock dividend of a exploration, development, exploitation or utilization of natural resources may
corporation is a dividend paid in shares of stock instead of cash, and is be entered into for such periods as may be provided by the pertinent laws or
properly payable only out of surplus profits. So, a stock dividend is regulations.
actually two things: (1) a dividend, and (2) the enforced use of
the dividend money to purchase additional shares of stock at par. This provision was inserted to assure not only technical competence but
When a corporation issues stock dividends, it shows that the continuity in management policy in running corporate affairs which can be
corporation's accumulated profits have been capitalized instead of achieved through a management contract.
distributed to the stockholders or retained as surplus available for
distribution, in money or kind, should opportunity offer. Far from REQUIREMENTS OF A VALID MANAGEMENT CONTRACT:
being a realization of profits for the stockholder, it tends rather to postpone 1. Resolution of the BOD;
said realization, in that the fund represented by the new stock has been 2. Approval by the stockholders representing a majority of the
transferred from surplus to assets and no longer available for actual outstanding capital stock or majority of the members of both the
distribution. Thus, it is apparent that stock dividends are issued only managing and the managed corporation;
to stockholders. This is so because only stockholders are entitled to 3. The approval of the stockholders or members must be made at the
dividends. They are the only ones who have a right to a proportional share meeting called for that purpose; and
in that part of the surplus which is declared as dividends. A stock dividend 4. The contract shall not be for a period longer than 5 years for any one
really adds nothing to the interest of the stockholder; the proportional term, except those which relate to exploration, development or
interest of each stockholder remains the same. If a stockholder is utilization of natural resources which may be entered into for such
deprived of his stock dividends - and this happens if the shares of periods as may be provided by pertinent laws and regulations;
stock forming part of the stock dividends are issued to a non- 5. 2/3 of the stockholders or members would be required, where:
stockholder — then the proportion of the stockholder's interest a. The stockholders representing the same interest of both the
changes radically. Stock dividends are civil fruits of the original managing and the managed corporation own or control more
investment, and to the owners of the shares belong the civil fruits. than 1/3 of the total outstanding capital stock of the managing
corporation;
The term "dividend" both in the technical sense and its ordinary b. A majority of the members of the BOD of the managing
acceptation, is that part or portion of the profits of the enterprise which the corporation also constitute a majority of the directors of the
corporation, by its governing agents, sets apart for ratable division among managed corporation;
the holders of the capital stock. It means the fund actually set aside, and c. The contract would constitute the management or operation of
declared by the directors of the corporation as dividends and duly ordered all or substantially all of the business of another corporation,
by the director, or by the stockholders at a corporate meeting, to be whether such contracts are called service contracts. If it will not
divided or distributed among the stockholders according to their respective constitute the management of all or substantially all of the
interests. business of another corporation, the first paragraph of Sec. 44
will apply and not that of the second, that is, only the vote of the
majority is required.
they were given away.
R. ULTRA VIRES ACTS
We don’t see much distinction between the acts of generosity of
Sec. 45. Ultra vires acts of corporations. - No corporation under this the benevolence extended to some employees of the corporation,
Code shall possess or exercise any corporate powers except those conferred and even to some in whom the corporation was merely interested
by this Code or by its articles of incorporation and except such as are because of certain moral or political consideration, and the
necessary or incidental to the exercise of the powers so conferred. donations which the corporation has seen fit to give the children
of the late Enrico Privano from the point of view of the power of the
ULTRA VIRES ACTS are those which cannot be executed or performed by corporation as expressed in the AOI. And if the former had been sanctioned
a corporation because they are not within its express, inherent, or implied and had been valid and intra-vires, we see no plausible reasons why the
powers as defined by its charter or AOI. Accordingly, it may be subject to a latter should now be deemed ultra-vires. It may perhaps be argued that
collateral attack questioning the authority of the corporation to engage in the donation given to the children of the late Enrico Privano is so large and
such particular endeavor. disproportionate that it can hardly be considered a pension or gratuity that
can be placed on par with the instances above-mentioned, but this
CONSEQUENCES: argument overlooks one consideration: the gratuity here given was not
1. On the Corporation itself: The proper forum may suspend or revoke, merely motivated by pure liberality or act of generosity, but by a deep
after proper notice and hearing, the franchise or certificate of sense of recognition of the valuable services rendered by the late Enrico
registration of the corporation for serious misrepresentation as to Privano which had immensely contributed to the growth of the corporation
what the corporation can do or is doing to the great damage or to the extent that from its humble capitalization it blossomed into a multi-
prejudice of the general public. million corporation that it is today.
2. On the rights of the Stockholders: A stockholder may bring either an
individual or derivative suit to enjoin a threatened ultra-vires act or Granting that it was ultra-vires, it may be said that the same
contract. If already performed, a derivative suit against the directors cannot be invalidated, or declared legally ineffective for that
may be filed, but their liability will depend on whether they acted in reason alone, it appearing that the donation represents not only
good faith and with reasonable diligence in entering into the contract. the act of the BOD but of the stockholders themselves as shown
3. On the immediate parties: by the fact the same has been expressly ratified in a resolution
a. If the contract is fully executed in both sides, the contract is duly approved by the latter. By this ratification, the infirmity of
effective and the courts will not interfere to deprive either party the corporate act, if any has been obliterated thereby making the
of what has been acquired under it; act perfectly valid and enforceable. This is specially so if the donation
b. If the contract is executory on both sides, as a rule, neither party is not merely executory but executed and consummated and no creditors
can maintain an action for its non-performance; and are prejudiced, or if there are creditors affected, the latter has expressly
c. Where the contract is executory on one side only, and has been given their conformity.
fully performed on the other, the courts differ as to whether an
action will lie on the contract against the party who has received ISSUE2: What is the difference between an illegal act and that which is
benefits of performance under it. Majority of the courts, ultra-vires?
however, hold that the party who has received benefits from the
performance is “estopped” to set up that the contract is ultra HELD: The former contemplates the doing of an act which is contrary to
vires to defeat an action on the contract. law, morals, or public order or contravene some rules of public policy or
public duty, and are, like similar transactions between the individuals, void.
READ AGAIN: Government vs. EL Hogar and Republic vs. Acoje Mining They cannot serve as basis of a court action, nor acquire validity by
(both in this chapter) performance, ratification or estoppel. Mere ultra-vires acts, on the
other hand, or those which are not illegal and void ab initio, but
PRIVANO, ET AL. VS. DE LA RAMA STEAMSHIP CO. (96 Phil. 335; are merely beyond the scope of the AOI, are merely voidable and
Dec. 29, 1954) - The Board of directors of defendant company adopted a may become binding and enforceable when ratified by the
resolution wherein the proceeds of the insurance taken on the life of its stockholders.
previous President and General Manager Enrico Privano be set aside and
used to purchase 4,000 shares to be given to Privano’s heirs, which was Since it is not contended that the donation under consideration is illegal, or
approved by the stockholders in a meeting duly called for the purpose. contrary to any of the express provisions of the AOI, nor prejudicial to the
creditors of the defendant corporation, we cannot but logically conclude
The donation of the shares was later on modified to transfer all the that said donation, even if ultra vires in the supposition we have
proceeds directly to the heirs which would become a loan of the company adverted to, is not void, and if voidable its infirmity has been
with 5% interest per annum and payable after the settlement of its bonded cured by ratification and subsequent acts of the defendant
indebtedness, and still later, modified to be payable “whenever the corporation. The corporation is now prevented or estopped from
company is in a position to meet said obligation”. contesting the validity of the donation.
On an opinion by the SEC, sought by the President of the corporation, IRINEO CARLOS, plaintiff-appellant VS. MINDORO SUGAR CO., ET
Sergio Osmena, Jr., it was opined by the SEC that the donation was void AL., defendant-appellees (57 Phil. 343; Oct. 26, 1932) - Mindoro Sugar
for being ultra vires. The Board planned to adopt a different resolution to Company (MSC) transferred all of its property to Philippine Trust Company
effect the donation but failed to act on it. The heirs, through Mrs. Estefania (PTC) in consideration of the bonds it had issued to the value of
R. Privano, acting as guardian, demanded the settlement of the obligation. P3,000,000, each bond being $1,000, which par value, with interest at 8%
per annum, PTC guaranteed to the holders.
ISSUE: WON the donation was an ultra vires act?
PTC paid Ramon Diaz upon presentation of the coupons, the stipulated
HELD: No. After a careful perusal of the AOI, we find that the corporation interest from the date of maturity until July 1, 1928, when its stopped
was given broad and almost unlimited powers to carry out the purposes for payments, alleging that it did not deem itself bound to pay such interest or
which it was organized among them, (1) “to invest and deal with the to redeem the obligation because the guarantee given for the bonds was
money of the company not immediately required, in such manner as from illegal and void.
time to time may be determined” and (2) “to aid in any manner any person
association, or corporation or in the affairs of the property of which this The CFI of Manila absolved the defendants from the complaint except MSC
corporation has lawful interest”. The donation in question undoubtedly which was sentenced to pay the value of the bond.
comes within the scope of this broad power for it is a fact appearing in the
evidence that the insurance proceeds were not immediately required when ISSUE: WON PTC’s act was ultra-vires?

such services. This was the ruling of the Commission and this we find to be
HELD: No. Firstly, PTC although secondarily engaged in banking, was correct.
primarily organized as a trust corporation with full power to acquire
personal property such as the bonds in question according to both sec. 13 Neither do we find any merit in the third contention that the association
(par. 5) of the Corporation Law and its duly registered by-laws and AOI; has authority to accept and collect fees for reparation claims for civilian
Secondly, that being thus authorized to acquire the bonds, it was given casualties and other injuries. This is beyond any of the powers of the
implied power to guarantee them in order to place them upon the market association as embodied in its articles and has absolutely no relation to the
under better, more advantageous conditions, and thereby secure the profit avowed purpose of the association to work for the redemption of war
derived from their sale. notes.
“It is not, however, ultra vires for a corporation to enter into ERNESTINA CRISOLOGO-JOSE VS. CA (GR No. 80599; Sept. 15, 1989)
contracts of guaranty where it does so in the legitimate - The Vice-president of Mover Enterprises, Inc. issued a check drawn
furtherance of its purposes and business. And it is well settled that against Traders Royal Bank, payable to petitioner Ernestina Crisologo-Jose,
where a corporation acquires commercial papers or bonds in the legitimate for the accommodation of his client. Petitioner-payee was charged with the
transaction of its business it may sell them, and in furtherance of such a knowledge that the check was issued at the instance and for the personal
sale, it may in order to make them more readily marketable, indorse or account of the President who merely prevailed upon respondent vice-
guarantee their payment.” president to act as co-signatory in accordance with the arrangement of the
corporation with its depository bank. While it was the corporation's check
Even if PTC did not acquire the bonds in question, but only guaranteed which was issued to petitioner for the amount involved, petitioner actually
them, it would at any rate, be valid and the said corporation is bound to had no transaction directly with said corporation.
pay the appellant their value with the accrued interest in view of the fact
that they become due on account of the lapse of 60 days, without the ISSUE: WON private respondent, one of the signatories of the check
accrued interest due having been paid; and the reason is that it is estopped issued under the account of Mover Enterprises, Inc., is an accommodation
from denying the validity of its guarantee. party under NIL and a debtor of petitioner to the extent of the amount of
said check?
The doctrine of ultra vires as a defense, is by some courts regarded as an
ungracious and odious one, to be sustained only where the most HELD: Yes. The liability of an accommodation party to a holder for value,
persuasive consideration of public policy are involved, and there are although such holder does not include nor apply to corporations which are
numerous decisions and dicta to the effect that the plea should not as a accommodation parties. This is because the issue or indorsement of
general rule prevail whether interposed for or against the corporation, negotiable paper by a corporation without consideration and for
where it will not advance justice but on the contrary will accomplish a legal the accommodation of another is ultra vires. One who has taken the
wrong. instrument with knowledge of the accommodation nature thereof cannot
recover against a corporation where it is only an accommodation party. By
When a contract is not on its face necessarily beyond the scope of the way of exception, an officer or agent of a corporation shall have the power
power of the corporation by which it was made, it will, in the absence of to execute or indorse a negotiable paper in the name of the corporation for
proof to the contrary, be presumed to be valid. Corporations are presumed the accommodation of a third person only if specifically authorized to do so.
to contract within their powers. The doctrine of ultra vires, when invoked Corollarily, corporate officers, such as the president and vice-president,
for or against a corporation, should not be allowed to prevail where it have no power to execute for mere accommodation a negotiable
would defeat the ends of justice or work a legal wrong. instrument of the corporation for their individual debts or transactions
arising from or in relation to matters in which the corporation has no
JAPANESE WAR NOTES CLAIMANTS ASSOC., INC. VS. SEC (101 Phil legitimate concern. Since such accommodation paper cannot thus be
540; May 23, 1957) - The SEC issued an order requiring petitioner herein enforced against the corporation, especially since it is not involved in any
and its President Alfredo Abcede to show cause why it should not be aspect of the corporate business or operations, the signatories thereof
proceeded against for making misrepresentations to the public about the (president and vice-president) shall be personally liable therefor, as well as
need of registering and depositing war notes, with a view of probable the consequences arising from their acts in connection therewith.
redemption as contemplated in Senate Bill No. 163 and in Senate
Concurrent Resolution No. 14, for otherwise they would be valueless.
CHAPTER 8: BY-LAWS
Petitioner contended that the statement was made in good faith as
President Magsaysay would soon make representations to the US to have BY-LAWS are rules and ordinances made by a corporation for its own
the war notes redeemed. government; to regulate the conduct and define the duties of the
stockholders or members towards the corporation and among themselves.
Respondent SEC found that according to its AOI, the petitioner has the They are the rules and regulations or private laws enacted by the
privilege to work for the redemption of the war notes of its members alone, corporation to regulate, govern and control its own actions, affairs and
but that it cannot offer its services to the public for a valuable concerns and tis stockholder or members and directors and officers with
consideration, because there is nothing definite and tangible about the relation thereto and among themselves in their relation to it.
redemption of the war notes and its success is speculative that any
authority given to offer services can easily degenerate into a racket; that Sec. 46. Adoption of by-laws. - Every corporation formed under this Code
under its AOI the petitioner is a civic and non-stock corporation and upon must, within one (1) month after receipt of official notice of the issuance of
should not engage in business for profit; that it has received war notes for its certificate of incorporation by the Securities and Exchange Commission ,
deposit, upon payment of fees, without authority in its articles to do so; adopt a code of by-laws for its government not inconsistent with
that it had previously been rendered to desist from collecting from those this Code. For the adoption of by-laws by the corporation the affirmative
registering the war notes, but notwithstanding this prohibition it has done vote of the stockholders representing at least a majority of the outstanding
so in the guise of service fees. Hence the Commission ordered to stop capital stock, or of at least a majority of the members in case of non-stock
receiving war notes, receiving same for deposit and charging fees corporations, shall be necessary. The by-laws shall be signed by the
therefore. stockholders or members voting for them and shall be kept in the principal
office of the corporation, subject to the inspection of the stockholders or
ISSUE: WON the SEC erred in issuing the questioned order? members during office hours. A copy thereof, duly certified to by a majority
of the directors or trustees countersigned by the secretary of the corporation,
HELD: No. The articles authorize collection of fees from members; but shall be filed with the Securities and Exchange Commission which shall be
they do not authorize the corporation to engage in the business of attached to the original articles of incorporation.
registering and accepting war notes for deposit and collecting fees from

Notwithstanding the provisions of the preceding paragraph, by-laws may be outstanding capital stock or a majority of the members in non-stock
adopted and filed prior to incorporation; in such case, such by-laws shall be corporations, shall so vote at a regular or special meeting.
approved and signed by all the incorporators and submitted to the Securities
and Exchange Commission, together with the articles of incorporation. Whenever any amendment or new by-laws are adopted, such amendment or
new by-laws shall be attached to the original by-laws in the office of the
In all cases, by-laws shall be effective only upon the issuance by the corporation, and a copy thereof, duly certified under oath by the corporate
Securities and Exchange Commission of a certification that the by-laws are secretary and a majority of the directors or trustees, shall be filed with the
not inconsistent with this Code. Securities and Exchange Commission the same to be attached to the original
articles of incorporation and original by-laws.
The Securities and Exchange Commission shall not accept for filing the by-
laws or any amendment thereto of any bank, banking institution, building and The amended or new by-laws shall only be effective upon the issuance by the
loan association, trust company, insurance company, public utility, Securities and Exchange Commission of a certification that the same are not
educational institution or other special corporations governed by special laws, inconsistent with this Code.
unless accompanied by a certificate of the appropriate government agency to
the effect that such by-laws or amendments are in accordance with law. TWO MODES OF AMENDMENT:
1. By a majority vote of the directors or trustees and the majority vote of
EFFECTIVITY: After approval of the SEC. the outstanding capital stock or members, at a regular or special
meeting called for that purpose; or
BY-LAWS PRIOR TO INCORPORATION: it must be signed by all the 2. By the board of directors alone when delegated by stockholders
incorporators without the need of the affirmative vote of the majority of the owning 2/3 of the outstanding capital stock or 2/3 of the members.
outstanding capital stock or the members provided it is submitted together This power, however, is considered revoked, when so voted by a
with the AOI. majority of the outstanding capital stock or members in a regular or
special meeting.
AFTER INCPORPORATION: Must be submitted one month after the
issuance of the certificate of incorporation and must be approved by a LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION,
majority of the outstanding capital stock or members and signed by such INC., petitioner,
stockholders or members voting for them. Failure to file within 1 month vs.
may result to suspension or revocation of corporate franchise. HON. COURT OF APPEALS, HOME INSURANCE AND GUARANTY
CORPORATION, EMDEN ENCARNACION and HORATIO AYCARDO,
THIRD PERSONS: are generally not bound, affected or prejudiced the by- respondents.
laws, it being merely internal rules of the corporation, EXCEPT: if they have (GR No. 117188; Aug. 7, 1997)
knowledge of its existence and contents.
FACTS: Petitioner Association was organized on Feb. 8, 1983, but for some
CONTENTS: reason failed to file its corporate by-laws. Victorio Soliven, himslef the
owner and developer of the subdivision was the first president of the
Sec. 47. Contents of by-laws. - Subject to the provisions of the Association. Later on, asking on the status of petitioner, Soliven discovered
Constitution, this Code, other special laws, and the articles of incorporation, a that the said association was already dissolved (according to the head of
private corporation may provide in its by-laws for: the legal department of HIGC), and accordingly caused the registration of
HIGC as the association covering Phases West I, East I and East II of the
1. The time, place and manner of calling and conducting regular or special subdivision.
meetings of the directors or trustees;
2. The time and manner of calling and conducting regular or special ISSUE: WON the Association can be considered dissolved for non-adoption
meetings of the stockholders or members; of by-laws?
3. The required quorum in meetings of stockholders or members and the
manner of voting therein; HELD: Yes. As correctly postulated by the petitioner, interpretation of this
4. The form for proxies of stockholders and members and the manner of provision of Sec. 46 begins with the determination of the meaning and
voting them; import of the word "must" in this section. Ordinarily, the word "must"
5. The qualifications, duties and compensation of directors or trustees, connotes an imperative act or operates to impose a duty which may be
officers and employees; enforced. It is synonymous with "ought" which connotes compulsion or
6. The time for holding the annual election of directors of trustees and mandatoriness. However, the word "must" in a statute, like "shall," is not
the mode or manner of giving notice thereof; always imperative. It may be consistent with an exercise of discretion. In
7. The manner of election or appointment and the term of office of all this jurisdiction, the tendency has been to interpret "shall" as the context or
officers other than directors or trustees; a reasonable construction of the statute in which it is used demands or
8. The penalties for violation of the by-laws; requires. This is equally true as regards the word "must." Thus, if the
9. In the case of stock corporations, the manner of issuing stock languages of a statute considered as a whole and with due regard to its
certificates; and nature and object reveals that the legislature intended to use the words
10. Such other matters as may be necessary for the proper or convenient "shall" and "must" to be directory, they should be given that meaning.
transaction of its corporate business and affairs.
In this respect, the following portions of the deliberations of the Batasang
AMENDMENT: Pambansa No. 68 are illuminating:
Sec. 48. Amendments to by-laws. - The board of directors or trustees, by MR. FUENTEBELLA. Thank you, Mr. Speaker.
a majority vote thereof, and the owners of at least a majority of the On page 34, referring to the adoption of by-laws, are we made to
outstanding capital stock, or at least a majority of the members of a non- understand here, Mr. Speaker, that by-laws must immediately be filed
stock corporation, at a regular or special meeting duly called for the purpose, within one month after the issuance? In other words, would this be
may amend or repeal any by-laws or adopt new by-laws. The owners of two- mandatory or directory in character?
thirds (2/3) of the outstanding capital stock or two-thirds (2/3) of the
members in a non-stock corporation may delegate to the board of directors MR. MENDOZA. This is mandatory.
or trustees the power to amend or repeal any by-laws or adopt new by-laws:
Provided, That any power delegated to the board of directors or trustees to MR. FUENTEBELLA. It being mandatory, Mr. Speaker, what would be
amend or repeal any by-laws or adopt new by-laws shall be considered as the effect of the failure of the corporation to file these by-laws within
revoked whenever stockholders owning or representing a majority of the one month?
power in the corporation to adopt by-laws does not ordinarily
MR. MENDOZA. There is a provision in the latter part of the Code and of necessity make the exercise of such power essential to
which identifies and describes the consequences of violations of any its corporate life, or to the validity of any of its acts .
provision of this Code. One such consequences is the dissolution of
the corporation for its inability, or perhaps, incurring certain penalties. Although the Corporation Code requires the filing of by-laws, it does not
expressly provide for the consequences of the non-filing of the same within
MR. FUENTEBELLA. But it will not automatically amount to a the period provided for in Section 46. However, such omission has been
dissolution of the corporation by merely failing to file the by-laws rectified by Presidential Decree No. 902-A, the pertinent provisions on the
within one month. Supposing the corporation was late, say, five days, jurisdiction of the SEC of which state:
what would be the mandatory penalty?
Sec. 6. In order to effectively exercise such jurisdiction, the
MR. MENDOZA. I do not think it will necessarily result in the automatic Commission shall possess the following powers:
or ipso facto dissolution of the corporation. Perhaps, as in the case, as xxx xxx xxx
you suggested, in the case of El Hogar Filipino where a quo warranto (1) To suspend, or revoke, after proper notice and hearing, the
action is brought, one takes into account the gravity of the violation franchise or certificate of registration of corporations, partnerships or
committed. If the by-laws were late — the filing of the by-laws were associations, upon any of the grounds provided by law, including the
late by, perhaps, a day or two, I would suppose that might be a following:
tolerable delay, but if they are delayed over a period of months — as xxx xxx xxx
is happening now — because of the absence of a clear requirement Failure to file by-laws within the required period.
that by-laws must be completed within a specified period of time, the
corporation must suffer certain consequences. Even under the foregoing express grant of power and authority,
there can be no automatic corporate dissolution simply because
This exchange of views demonstrates clearly that automatic corporate the incorporators failed to abide by the required filing of by-laws
dissolution for failure to file the by-laws on time was never the intention of embodied in Section 46 of the Corporation Code. There is no
the legislature. Moreover, even without resorting to the records of outright "demise" of corporate existence. Proper notice and
deliberations of the Batasang Pambansa, the law itself provides the answer hearing are cardinal components of due process in any democratic
to the issue propounded by petitioner. institution, agency or society. In other words, the incorporators
must be given the chance to explain their neglect or omission and
Taken as a whole and under the principle that the best interpreter of a remedy the same.
statute is the statute itself ( optima statuli interpretatix est ipsum statutum ),
Section 46 aforequoted reveals the legislative intent to attach a directory, That the failure to file by-laws is not provided for by the Corporation Code
and not mandatory, meaning for the word "must" in the first sentence but in another law is of no moment. P.D. No. 902-A, which took effect
thereof. Note should be taken of the second paragraph of the law immediately after its promulgation on March 11, 1976, is very much
which allows the filing of the by-laws even prior to incorporation. apposite to the Code.
This provision in the same section of the Code rules out
mandatory compliance with the requirement of filing the by-laws Accordingly, the provisions abovequoted supply the law governing the
"within one (1) month after receipt of official notice of the situation in the case at bar, inasmuch as the Corporation Code and P.D. No.
issuance of its certificate of incorporation by the Securities and 902-A are statutes in pari materia. Interpretare et concordare legibus est
Exchange Commission." It necessarily follows that failure to file optimus interpretandi. Every statute must be so construed and harmonized
the by-laws within that period does not imply the "demise" of the with other statutes as to form a uniform system of jurisprudence.
corporation. By-laws may be necessary for the "government" of the
corporation but these are subordinate to the articles of incorporation as As the "rules and regulations or private laws enacted by the corporation to
well as to the Corporation Code and related statutes. There are in fact regulate, govern and control its own actions, affairs and concerns and its
cases where by-laws are unnecessary to corporate existence or to the valid stockholders or members and directors and officers with relation thereto
exercise of corporate powers, thus: and among themselves in their relation to it," by-laws are indispensable to
corporations in this jurisdiction. These may not be essential to corporate
In the absence of charter or statutory provisions to the contrary, by- birth but certainly, these are required by law for an orderly governance and
laws are not necessary either to the existence of a corporation or to management of corporations. Nonetheless, failure to file them within the
the valid exercise of the powers conferred upon it, certainly in all period required by law by no means tolls the automatic dissolution of a
cases where the charter sufficiently provides for the government of corporation.
the body; and even where the governing statute in express terms
confers upon the corporation the power to adopt by-laws, the failure In this regard, private respondents are correct in relying on the
to exercise the power will be ascribed to mere nonaction which will pronouncements of this Court in Chung Ka Bio v. Intermediate Appellate
not render void any acts of the corporation which would otherwise be Court, as follows:
valid. (Emphasis supplied.)
“Non-filing of the by-laws will not result in automatic
As Fletcher aptly puts it: dissolution of the corporation. Under Section 6(I) of PD 902-A,
the SEC is empowered to "suspend or revoke, after proper notice and
It has been said that the by-laws of a corporation are the rule of its hearing, the franchise or certificate of registration of a corporation" on
life, and that until by-laws have been adopted the corporation may not the ground inter alia of "failure to file by-laws within the required
be able to act for the purposes of its creation, and that the first and period." It is clear from this provision that there must first of all be a
most important duty of the members is to adopt them. This would hearing to determine the existence of the ground, and secondly,
seem to follow as a matter of principle from the office and functions of assuming such finding, the penalty is not necessarily revocation but
by-laws. Viewed in this light, the adoption of by-laws is a may be only suspension of the charter. In fact, under the rules and
matter of practical, if not one of legal, necessity. Moreover, the regulations of the SEC, failure to file the by-laws on time may be
peculiar circumstances attending the formation of a corporation may penalized merely with the imposition of an administrative fine without
impose the obligation to adopt certain by-laws, as in the case of a affecting the corporate existence of the erring firm.”
close corporation organized for specific purposes. And the statute or
general laws from which the corporation derives its corporate HENRY FLEISCHER, plaintiff-appellee,
existence may expressly require it to make and adopt by-laws and vs.
specify to some extent what they shall contain and the manner of BOTICA NOLASCO CO., INC., defendant-appellant.
their adoption. The mere fact, however, of the existence of (GR No. L-23241; March 14 ,1925)

The jus disponendi, being an incident of the ownership of property, the
FACTS: Manuel Gonzales, the original owner of 5 shares of stock in general rule (subject to exceptions hereafter pointed out and discussed)
question of Defendant Company, assigned and transferred to herein is that every owner of corporate shares has the same uncontrollable
plaintiff Fleischer. Two days after, Dr. Miciano, secretary-treasurer of the right to alien them which attaches to the ownership of any other species
company, offered to buy from Fleischer the said shares in behalf of the of property. A shareholder is under no obligation to refrain from selling
corporation, contending that Art. 12 of the by-laws grants the company his shares at the sacrifice of his personal interest, in order to secure the
preferential right to buy Gonzales’ shares. Plaintiff refused and requested welfare of the corporation, or to enable another shareholder to make
Dr. Miciano to register said shares in his name, and the latter refused to do gains and profits. (10 Cyc., p. 577.)
so.
It follows from the foregoing that a corporation has no power to prevent or
ISSUE: WON Fleischer is bound by the provisions of the corporation’s by- to restrain transfers of its shares, unless such power is expressly conferred
laws? in its charter or governing statute. This conclusion follows from the further
consideration that by-laws or other regulations restraining such
HELD: No. Section 13, paragraph 7 (of Act 1459), empowers a corporation transfers, unless derived from authority expressly granted by the
to make by-laws, not inconsistent with any existing law, for the transferring legislature, would be regarded as impositions in restraint of trade .
of its stock. It follows from said provision, that a by-law adopted by a (10 Cyc., p. 578.)
corporation relating to transfer of stock should be in harmony with the law
on the subject of transfer of stock. The law on this subject is found in The foregoing authorities go farther than the stand we are taking on this
section 35 of Act No. 1459. Said section specifically provides that the question. They hold that the power of a corporation to enact by-laws
shares of stock "are personal property and may be transferred by delivery restraining the sale and transfer of shares, should not only be in
of the certificate indorsed by the owner, etc." Said section 35 defines the harmony with the law or charter of the corporation, but such
nature, character and transferability of shares of stock. Under said section power should be expressly granted in said law or charter.
they are personal property and may be transferred as therein provided.
Said section contemplates no restriction as to whom they may be The only restraint imposed by the Corporation Law upon transfer of shares
transferred or sold. It does not suggest that any discrimination may be is found in section 35 of Act No. 1459, quoted above, as follows: "No
created by the corporation in favor or against a certain purchaser. The transfer, however, shall be valid, except as between the parties, until the
holder of shares, as owner of personal property, is at liberty, transfer is entered and noted upon the books of the corporation so as to
under said section, to dispose of them in favor of whomsoever he show the names of the parties to the transaction, the date of the transfer,
pleases, without any other limitation in this respect, than the the number of the certificate, and the number of shares transferred." This
general provisions of law. Therefore, a stock corporation in adopting a restriction is necessary in order that the officers of the corporation may
by-law governing transfer of shares of stock should take into consideration know who are the stockholders, which is essential in conducting elections
the specific provisions of section 35 of Act No. 1459, and said by-law of officers, in calling meeting of stockholders, and for other purposes. but
should be made to harmonize with said provisions. It should not be any restriction of the nature of that imposed in the by-law now in question,
inconsistent therewith. is ultra vires, violative of the property rights of shareholders, and in
restraint of trade
As a general rule, the by-laws of a corporation are valid if they are
reasonable and calculated to carry into effect the objects of the And moreover, the by-laws now in question cannot have any effect on the
corporation, and are not contradictory to the general policy of the laws of appellee. He had no knowledge of such by-law when the shares were
the land. (Supreme Commandery of the Knights of the Golden Rule vs. assigned to him. He obtained them in good faith and for a valuable
Ainsworth, 71 Ala., 436; 46 Am. Rep., 332.) consideration. He was not a privy to the contract created by said by-law
between the shareholder Manuel Gonzalez and the Botica Nolasco, Inc.
On the other hand, it is equally well settled that by-laws of a corporation Said by-law cannot operate to defeat his rights as a purchaser.
must be reasonable and for a corporate purpose, and always within the
charter limits. They must always be strictly subordinate to the constitution GOVERNMENT VS. EL HOGAR (supra) - Fourth cause of action . — It
and the general laws of the land. They must not infringe the policy of the appears that among the by-laws of the association there is an article (No.
state, nor be hostile to public welfare. (46 Am. Rep., 332.) They must not 10) which reads as follows:
disturb vested rights or impair the obligation of a contract, take away or
abridge the substantial rights of stockholder or member, affect rights of “The board of directors of the association, by the vote of an absolute
property or create obligations unknown to the law. (People's Home Savings majority of its members, is empowered to cancel shares and to return to
Bank vs. Superior Court, 104 Cal., 649; 43 Am. St. Rep., 147; Ireland vs. the owner thereof the balance resulting from the liquidation thereof
Globe Milling Co., 79 Am. St. Rep., 769.) whenever, by reason of their conduct, or for any other motive, the
continuation as members of the owners of such shares is not desirable.”
The validity of the by-law of a corporation is purely a question of law.
(South Florida Railroad Co. vs. Rhodes, 25 Fla., 40.) ISSUE: WON the above provision is valid?
“The power to enact by-laws restraining the sale and transfer of stock HELD: No. This by-law is of course a patent nullity, since it is in
must be found in the governing statute or the charter. Restrictions upon direct conflict with the latter part of section 187 of the
the traffic in stock must have their source in legislative enactment, as Corporation Law, which expressly declares that the board of
the corporation itself cannot create such impediments. By-laws are directors shall not have the power to force the surrender and
intended merely for the protection of the corporation, and prescribe withdrawal of unmatured stock except in case of liquidation of the
regulation and not restriction; they are always subject to the charter of corporation or of forfeiture of the stock for delinquency. It is agreed
the corporation. The corporation, in the absence of such a power, that this provision of the by-laws has never been enforced, and in fact no
cannot ordinarily inquire into or pass upon the legality of the attempt has ever been made by the board of directors to make use of the
transaction by which its stock passes from one person to power therein conferred. In November, 1923, the Acting Insular Treasurer
another, nor can it question the consideration upon which a sale addressed a letter to El Hogar Filipino, calling attention to article 10 of its
is based. A by-law cannot take away or abridge the substantial by-laws and expressing the view that said article was invalid. It was
rights of stockholder. Under a statute authorizing by- laws for the therefore suggested that the article in question should be eliminated from
transfer of stock, a corporation can do no more than prescribe a general the by-laws. At the next meeting of the board of directors the matter was
mode of transfer on the corporate books and cannot justify an called to their attention and it was resolved to recommend to the
unreasonable restriction upon the right of sale . (4 Thompson on shareholders that in their next annual meeting the article in question be
Corporations, sec. 4137, p. 674. abrogated. It appears, however, that no annual meeting of the
shareholders called since that date has been attended by a sufficient

number of shareholders to constitute a quorum, with the result that the requires that "all nominations for election of directors ... shall be submitted
provision referred to has not been eliminated from the by-laws, and it still in writing to the Board of Directors at least five (5) working days before the
stands among the by-laws of the association, notwithstanding its patent date of the Annual Meeting" is likewise unreasonable and oppressive.
conflict with the law.
ISSUE: WON the amended by-laws of SMC disqualifying a competitor from
It is supposed, in the fourth cause of action, that the existence of this nomination or election to the BOD are valid and reasonable?
article among the by-laws of the association is a misdemeanor on the part
of the respondent which justifies its dissolution. In this view we are unable HELD: Yes. The validity or reasonableness of a by-law of a corporation in
to concur. The obnoxious by-law, as it stands, is a mere nullity, and could purely a question of law. Whether the by-law is in conflict with the law of
not be enforced even if the directors were to attempt to do so. There is no the land, or with the charter of the corporation, or is in a legal sense
provision of law making it a misdemeanor to incorporate an invalid unreasonable and therefore unlawful is a question of law. This rule is
provision in the by-laws of a corporation; and if there were such, the subject, however, to the limitation that where the reasonableness of a by-
hazards incident to corporate effort would certainly be largely increased. law is a mere matter of judgment, and one upon which reasonable minds
There is no merit in this cause of action. must necessarily differ, a court would not be warranted in substituting its
judgment instead of the judgment of those who are authorized to make by-
ISSUE2: Owing to the failure of a quorum at most of the general meetings laws and who have exercised their authority.
since the respondent has been in existence, it has been the practice of the
directors to fill vacancies in the directorate by choosing suitable persons It is a settled state law in the United States, according to Fletcher, that
from among the stockholders. This custom finds its sanction in article 71 of corporations have the power to make by-laws declaring a person employed
the by-laws, which reads as follows: in the service of a rival company to be ineligible for the corporation's Board
of Directors. ... (A)n amendment which renders ineligible, or if elected,
“ART. 71. The directors shall elect from among the shareholders members subjects to removal, a director if he be also a director in a corporation
to fill the vacancies that may occur in the board of directors until the whose business is in competition with or is antagonistic to the other
election at the general meeting” corporation is valid." This is based upon the principle that where the
director is so employed in the service of a rival company, he
WON Art. 71 is valid? cannot serve both, but must betray one or the other. Such an
amendment "advances the benefit of the corporation and is good."
HELD: Yes. We are unable to see the slightest merit in the charge. No fault An exception exists in New Jersey, where the Supreme Court held that the
can be imputed to the corporation on account of the failure of the Corporation Law in New Jersey prescribed the only qualification, and
shareholders to attend the annual meetings; and their non-attendance at therefore the corporation was not empowered to add additional
such meetings is doubtless to be interpreted in part as expressing their qualifications. This is the exact opposite of the situation in the Philippines
satisfaction of the way in which things have been conducted. Upon failure because as stated heretofore, section 21 of the Corporation Law expressly
of a quorum at any annual meeting the directorate naturally holds over and provides that a corporation may make by-laws for the qualifications of
continues to function until another directorate is chosen and qualified. directors. Thus, it has been held that an officer of a corporation cannot
Unless the law or the charter of a corporation expressly provides engage in a business in direct competition with that of the corporation
that an office shall become vacant at the expiration of the term of where he is a director by utilizing information he has received as such
office for which the officer was elected, the general rule is to officer, under "the established law that a director or officer of a corporation
allow the officer to holdover until his successor is duly qualified. may not enter into a competing enterprise which cripples or injures the
Mere failure of a corporation to elect officers does not terminate business of the corporation of which he is an officer or director.
the terms of existing officers nor dissolve the corporation (Quitman
Oil Company vs. Peacock, 14 Ga. App., 550; Jenkins vs. Baxter, 160 Pa. It is also well established that corporate officers "are not permitted to use
State, 199; New York B. & E. Ry. Co. vs. Motil, 81 Conn., 466; Hatch vs. their position of trust and confidence to further their private interests." In a
Lucky Bill Mining Company, 71 Pac., 865; Youree vs. Home Town Matual case where directors of a corporation cancelled a contract of the
Ins. Company, 180 Missouri, 153; Cassell vs. Lexington, H. and P. Turnpike corporation for exclusive sale of a foreign firm's products, and after
Road Co., 10 Ky. L. R., 486). The doctrine above stated finds expressions in establishing a rival business, the directors entered into a new contract
article 66 of the by-laws of the respondent which declares in so many themselves with the foreign firm for exclusive sale of its products, the court
words that directors shall hold office "for the term of one year on until their held that equity would regard the new contract as an offshoot of the old
successors shall have been elected and taken possession of their offices." contract and, therefore, for the benefit of the corporation, as a "faultless
fiduciary may not reap the fruits of his misconduct to the exclusion of his
It result that the practice of the directorate of filling vacancies by the action principal.
of the directors themselves is valid. Nor can any exception be taken to then
personality of the individuals chosen by the directors to fill vacancies in the The doctrine of "corporate opportunity" is precisely a recognition by the
body. Certainly it is no fair criticism to say that they have chosen courts that the fiduciary standards could not be upheld where the fiduciary
competent businessmen of financial responsibility instead of electing poor was acting for two entities with competing interests. This doctrine rests
persons to so responsible a position. The possession of means does not fundamentally on the unfairness, in particular circumstances, of an officer
disqualify a man for filling positions of responsibility in corporate affairs. or director taking advantage of an opportunity for his own personal profit
when the interest of the corporation justly calls for protection.
READ AGAIN: BARRETO VS. LA PREVISORA FILIPINA (CHAPTER 6)
It is not denied that a member of the Board of Directors of the San Miguel
GOKONGWEI VS. SEC (supra) - As additional causes of action, it was Corporation has access to sensitive and highly confidential information,
alleged that corporations have no inherent power to disqualify a such as: (a) marketing strategies and pricing structure; (b) budget for
stockholder from being elected as a director and, therefore, the questioned expansion and diversification; (c) research and development; and (d)
act is ultra vires and void; that Andres M. Soriano, Jr. and/or Jose M. sources of funding, availability of personnel, proposals of mergers or tie-
Soriano, while representing other corporations, entered into contracts ups with other firms.
(specifically a management contract) with respondent corporation, which
was allowed because the questioned amendment gave the Board itself the It is obviously to prevent the creation of an opportunity for an officer or
prerogative of determining whether they or other persons are engaged in director of San Miguel Corporation, who is also the officer or owner of a
competitive or antagonistic business; that the portion of the amended competing corporation, from taking advantage of the information which he
bylaws which states that in determining whether or not a person is acquires as director to promote his individual or corporate interests to the
engaged in competitive business, the Board may consider such factors as prejudice of San Miguel Corporation and its stockholders, that the
business and family relationship, is unreasonable and oppressive and, questioned amendment of the by-laws was made. Certainly, where two
therefore, void; and that the portion of the amended by-laws which corporations are competitive in a substantial sense, it would seem
improbable, if not impossible, for the director, if he were to discharge
effectively his duty, to satisfy his loyalty to both corporations and place the ISSUE3: WON stockholders have the vested right to be elected a director?
performance of his corporation duties above his personal concerns.
HELD: No. Any person "who buys stock in a corporation does so with the
Sound principles of corporate management counsel against sharing knowledge that its affairs are dominated by a majority of the stockholders
sensitive information with a director whose fiduciary duty of loyalty may and that he impliedly contracts that the will of the majority shall govern in
well require that he disclose this information to a competitive arrival. These all matters within the limits of the act of incorporation and lawfully enacted
dangers are enhanced considerably where the common director such as the by-laws and not forbidden by law." To this extent, therefore, the
petitioner is a controlling stockholder of two of the competing corporations. stockholder may be considered to have "parted with his personal right or
It would seem manifest that in such situations, the director has an privilege to regulate the disposition of his property which he has invested in
economic incentive to appropriate for the benefit of his own corporation the the capital stock of the corporation, and surrendered it to the will of the
corporate plans and policies of the corporation where he sits as director. majority of his fellow incorporators. ... It cannot therefore be justly said
that the contract, express or implied, between the corporation and the
Indeed, access by a competitor to confidential information regarding stockholders is infringed ... by any act of the former which is authorized by
marketing strategies and pricing policies of San Miguel Corporation would a majority ... ."
subject the latter to a competitive disadvantage and unjustly enrich the
competitor, for advance knowledge by the competitor of the strategies for Under section 22 of the same law, the owners of the majority of the
the development of existing or new markets of existing or new products subscribed capital stock may amend or repeal any by-law or adopt new by-
could enable said competitor to utilize such knowledge to his advantage. laws. It cannot be said, therefore, that petitioner has a vested right to be
elected director, in the face of the fact that the law at the time such right
Neither are We persuaded by the claim that the by-law was Intended to as stockholder was acquired contained the prescription that the corporate
prevent the candidacy of petitioner for election to the Board. If the by-law charter and the by-law shall be subject to amendment, alteration and
were to be applied in the case of one stockholder but waived in the case of modification.
another, then it could be reasonably claimed that the by-law was being
applied in a discriminatory manner. However, the by law, by its terms, It being settled that the corporation has the power to provide for the
applies to all stockholders. The equal protection clause of the Constitution qualifications of its directors, it has also been settled that the
requires only that the by-law operate equally upon all persons of a class. disqualification of a competitor from being elected to the Board of Directors
Besides, before petitioner can be declared ineligible to run for director, is a reasonable exercise of corporate authority.
there must be hearing and evidence must be submitted to bring his case
within the ambit of the disqualification. Sound principles of public policy CHAPTER 9: MEETINGS
and management, therefore, support the view that a by-law which
disqualifies a competition from election to the Board of Directors of another Meetings applies to every duly convened assembly either of stockholders,
corporation is valid and reasonable. members, directors or trustees, managers, etc. for any legal purpose or the
transaction of business of common interest.
ISSUE2: WON the Corporation has the power to prescribe qualifications?
Sec. 49. Kinds of meetings. - Meetings of directors, trustees, stockholders,
HELD2: Yes. Private respondents contend that the disputed amended by or members may be regular or special.
laws were adopted by the Board of Directors of San Miguel Corporation a-,
a measure of self-defense to protect the corporation from the clear and A. STOCKHOLDERS’ MEETING
present danger that the election of a business competitor to the Board may
cause upon the corporation and the other stockholders inseparable Sec. 50. Regular and special meetings of stockholders or members. -
prejudice. Submitted for resolution, therefore, is the issue — whether or Regular meetings of stockholders or members shall be held annually on a
not respondent San Miguel Corporation could, as a measure of self- date fixed in the by-laws, or if not so fixed, on any date in April of every year
protection, disqualify a competitor from nomination and election to its as determined by the board of directors or trustees: Provided, That written
Board of Directors. notice of regular meetings shall be sent to all stockholders or members of
record at least two (2) weeks prior to the meeting, unless a different period is
It is recognized by an authorities that 'every corporation has the inherent required by the by-laws.
power to adopt by-laws 'for its internal government, and to regulate the
conduct and prescribe the rights and duties of its members towards itself Special meetings of stockholders or members shall be held at any time
and among themselves in reference to the management of its affairs. At deemed necessary or as provided in the by-laws: Provided, however, That at
common law, the rule was "that the power to make and adopt by-laws was least one (1) week written notice shall be sent to all stockholders or
inherent in every corporation as one of its necessary and inseparable legal members, unless otherwise provided in the by-laws.
incidents. And it is settled throughout the United States that in the absence
of positive legislative provisions limiting it, every private corporation has Notice of any meeting may be waived, expressly or impliedly, by any
this inherent power as one of its necessary and inseparable legal incidents, stockholder or member.
independent of any specific enabling provision in its charter or in general
law, such power of self-government being essential to enable the Whenever, for any cause, there is no person authorized to call a meeting, the
corporation to accomplish the purposes of its creation. Securities and Exchange Commission, upon petition of a stockholder or
member on a showing of good cause therefor, may issue an order to the
In this jurisdiction, under section 21 of the Corporation Law, a corporation petitioning stockholder or member directing him to call a meeting of the
may prescribe in its by-laws "the qualifications, duties and compensation of corporation by giving proper notice required by this Code or by the by-laws.
directors, officers and employees ... " This must necessarily refer to a The petitioning stockholder or member shall preside thereat until at least a
qualification in addition to that specified by section 30 of the Corporation majority of the stockholders or members present have been chosen one of
Law, which provides that "every director must own in his right at least one their number as presiding officer.
share of the capital stock of the stock corporation of which he is a
director ... " In Government v. El Hogar, the Court sustained the validity of The stockholders have no power to act as or for the corporation except at a
a provision in the corporate by-law requiring that persons elected to the corporate meeting called and conducted according to law. This rule arises
Board of Directors must be holders of shares of the paid up value of from the need to protect the stockholder by providing them with notice of
P5,000.00, which shall be held as security for their action, on the ground meeting and giving them opportunity to attend the meeting, discuss the
that section 21 of the Corporation Law expressly gives the power to the issues and vote (an exception would be an ordinary amendment where
corporation to provide in its by-laws for the qualifications of directors and is “written asset” is acceptable).
"highly prudent and in conformity with good practice

DATE OF REGULAR MEETING: The date so fixed in the by-laws, if not 3. It Must Be Held at the Proper Place
fixed, on any date of April of very year as the BOD/T may determine. April,
because this is the time the Audited Financial Statements are already Sec. 51. Place and time of meetings of stockholders or members. -
available. Stockholders' or members' meetings, whether regular or special, shall be held
in the city or municipality where the principal office of the corporation is
DATE OF SPECIAL MEETING: At any time deemed necessary or as located, and if practicable in the principal office of the corporation: Provided,
provided for in the by-laws. That Metro Manila shall, for purposes of this section, be considered a city or
municipality.
REQUIREMENTS FOR A VALID STOCKHOLDERS’ MEETING:
1. It Must Be Held On The Date Fixed In The By-Laws Or In Notice of meetings shall be in writing, and the time and place thereof stated
Accordance With The Law. therein.
The date required, as previously discussed, admits of an exception, as All proceedings had and any business transacted at any meeting of the
when the annual meeting cannot be held on the appointed time for stockholders or members, if within the powers or authority of the
some valid and meritorious reasons. corporation, shall be valid even if the meeting be improperly held or called,
provided all the stockholders or members of the corporation are present or
2. Prior Notice Must Be Given duly represented at the meeting.
Sec 50 and 51 requires that written notice of regular meeting shall be Meeting must, at all times, be held in the city or municipality where the
sent at least 2 weeks prior to the meeting, whereas, 1 week prior principal office is located, or if practicable at the principal office of the
notice is required for special meetings. corporation. For this purpose, Metro Manila is considered as one city or
municipality.
EXCEPTIONS: (a) If the by-laws provide for a different period for
sending out notice for regular or special meetings (failure to comply While there is no law allowing a STOCK corporation to hold a meeting
would render the resolutions adopted at the option of the stockholder outside the city or municipality where the principal office is located, NON-
who was not notified); (b) Waiver, either express or implied. STOCK corporations are allowed to provide a provision in its by-laws any
place of members’ meeting provided there is proper notice (Sec. 93)
The Notice must contain the agenda or business matter/s that may be
taken up before the meeting otherwise it may become voidable at the 4. It Must Be Called by the Proper Party
instance of any objecting stockholder or member.
DOMINGO PONCE AND BUHAY L. PONCE, petitioners,
THE BOARD OF DIRECTORS AND ELECTION COMMITTEE OF THE vs.
SMB WORKERS SAVINGS AND LOAN ASSOCIATION, INC., ET AL., DEMETRIO B. ENCARNACION, Judge of the Court of First Instance of
petitioners, Manila, Branch I, and POTENCIANO GAPOL, respondents
vs. (GR No. L-5883; Nov. 28, 1953)
HON. BIENVENIDO A. TAN, ETC., ET AL., respondents.
(GR No. L-12282; March 31, 1959) FACTS: It was agreed by the stockholders of Daguhoy Enterprises at a
stockholder’s meeting that the said corporation shall be voluntarily
FACTS: A meeting electing the BOD of herein petitioner was declared null dissolved, and was placed under the receivership of Gapol, the largest
and void by the Court in a suit filed by John Castillo, et. al. stockholder. A petition for voluntary dissolution was drafted and signed by
Ponce, which was to be filed with the appropriate authorities. It was found
In compliance with the order, another election was scheduled on March 28 out that instead of filing the petition, Gapol filed a complaint in the CFI for
at 5:30. On March 27, the plaintiff filed an ex-parte motion alleging that the the accounting of the funds and assets of the corporation, and to reimburse
meeting is composed of the same people that had conducted and it the amounts expended for the purchase of a parcel of land, a loan
supervised the previously nullified meeting; that the election to be extended to the wife of Ponce, and an amount spent by Ponce in a trip to
conducted did not comply with the 5 day notice requirement required by the US. Gapol contends that such amount, taken from the corporation, was
the by-laws and the constitution of the association, since the notice was misapplied, misappropriated and misspent by Ponce to his own use and
posted and sent out only on March 26 and the election was to be held on benefit, thus he prayed for the removal of Ponce as a member of the board
March 28. of directors. Such removal was rejected by the court, but Gapol’s petition
for the calling of a stockholders’ meeting, was granted. At said meeting, a
ISSUE: WON the notice requirement is complied with? new set of board of directors was elected. Ponce filed a petition in the
lower court seeking to set aside its order, but the same was denied. Thus,
HELD: No. Section 3, article III, of the constitution and by-laws the they filed for an appeal to the SC.
association provides:
ISSUE: WON the Court may issue such order directing a stockholder to call
“Notice of the time and place of holding of any annual meeting, or any a meeting of the stockholders of a corporation?
special meeting, the members, shall be given either by posting the same
in a postage prepaid envelope, addressed to each member on the record HELD: Yes. The corporation law provides that “whenever, from any cause,
at the address left by such member with the Secretary of the there is no person authorized to call a meeting, or when the officer
Association, or at his known post-office address or by delivering the authorized to do so refuses, fails or neglects to call a meeting, any judge of
same person at least (5) days before the date set for such meeting. . . . a CFI on the showing of a good cause therefore, may issue an order to any
In lieu of addressing or serving personal notices to the members, notice stockholder or member of a corporation, directing him to call a meeting of
of the members, notice of a regular annual meeting or of a special the corporation by giving the proper notice required”. Thus, on the
meeting of the members may be given by posting copies of said notice showing of good cause therefore, the court may authorize a
at the different departments and plants of the San Miguel Brewery Inc., stockholder to call a meeting and to preside thereat until the
not less than five (5) days prior to the date of the meeting. (Annex K.)” majority stockholders representing a majority of the stock present
and permitted to be voted shall have chosen one among them to
Notice of a special meeting of the members should be given at least five preside. This showing of good cause exists when the court is
days before the date of the meeting. Therefore, the five days previous apprised of the fact that the by-laws of the corporation require
notice required would not be complied with. the calling of a general meeting of the stockholders to elect the
board of directors but the call of the meeting has not been done .
There is no need to issue a notice of hearing, nor is there any necessity to
hold a hearing, upon the board of directors. The court here found good trustee may waive this requirement, either expressly or impliedly.
cause in calling the meeting for the election of a new board, because the
chairman of the board of directors who is so authorized to call such REGULAR MEETINGS: those held monthly or as the by-laws may
meeting, failed, neglected or refused to perform his duty. Having the provide;
authority to grant such relief, the lower court did not exceed its jurisdiction SPECIAL MEETINGS: those that are held at any time upon call of the
nor did it abuse its discretion in granting it. President or the person authorized to do so as may be provided in the by-
laws.
NOTE: In a case decided by the SEC, it rules that under the present state
of law, the Ponce case will apply ONLY “where there is no person PLACE: Unlike the meeting of stockholders, the meetings of
authorized to call the meeting:, thus an ex-parte proceeding may be directors/trustees may be held anywhere, within or even outside the
allowed as obviously there is no person to summon and no person whose Philippines, except when the by-laws provide otherwise.
right to due process will be violated. However, where there is an officer
authorized to call the meeting and that officer refuses, fails or neglects to NOTICE REQUIREMENT: is necessary for the purpose of determining the
call a meeting then the Ponce case WILL NOT APPLY. This is so, because legality of and binding effect of the resolution/s passed, EXCEPT:
the phrase “or when the officer authorized to do so refuses, or fails, or 1. When subsequently ratified;
neglects to call a meeting” has been deliberately omitted in Sec. 50 of the 2. In close corporations where a director may bid the corporation even
Corporation Code. without a meeting;
3. When the right to a notice is waived.
Likewise, in the same ruling of the SEC, the Ponce case likened the
questioned order to a writ of preliminary injunction which may be issued ex The SEC has ruled that a special meeting conducted in the absence of
parte, the said PI can no longer be issued without notice and hearing under some of the directors and without any notice to them is illegal and the
Sec. 5 of Rule 58 of the Rules of Court. Mandamus is the proper remedy. action at such meeting although by a majority of the directors is invalid,
unless ratified.
IN SUMMARY: The following are authorized to call a meeting:
a. The person or persons authorized under the by-laws; However, if all the directors are present, their presence at the meeting
b. Absent any provision in the by-laws, it may be called by the President; waives the want of notice.
c. By the secretary on order of the president or on written demand of
the stockholders representing at least a majority of the outstanding PRESIDING OFFICER: Unless the by-laws otherwise provide, the
capital stock or majority of the members entitled to vote, or the president.
stockholder or member making the demand if there is no secretary or
he refuses to do so, under Sec. 28; and Sec. 54. Who shall preside at meetings. - The president shall preside at
d. A stockholder as empowered by the proper forum pursuant to Sec. 50 all meetings of the directors or trustee as well as of the stockholders or
members, unless the by-laws provide otherwise.
5. Quorum and Voting Requirement Must Be Met
QUORUM: Unless the AOI or by-laws provide for a greater majority, a
Sec. 52. Quorum in meetings. - Unless otherwise provided for in this Code majority of the members of the BOD/T as fixed in the AOI will constitute a
or in the by-laws, a quorum shall consist of the stockholders representing a quorum for the transaction of corporate business and the decision of the
majority of the outstanding capital stock or a majority of the members in the majority of those present shall be valid as a corporate act. EXCEPT:
case of non-stock corporations. election of corporate officers as provided under Sec. 25 which required the
vote of a majority of all the members of the board.
A by-law provision may provide for a higher quorum requirement than that
prescribed in the Code, but not less. Otherwise, the by-law provision PROXY VOTING: is not allowed for a director or trustee, since he was
providing for a lesser quorum requirement have no force and effect since a supposedly elected because of his expertise in management or his business
by-law provision is subordinate to the statute and could not defeat the acumen such that he is expected to personally attend and vote on matters
requirements of the law. The same goes for a by-law provision providing brought before the meeting.
for a voting requirement less than that provided in the Code.
C. STOCKHOLDERS’ RIGHT TO VOTE AND MANNER OF VOTING
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 Being a property right, a stockholder can vote his share the way he pleases
members are present or duly represented thereat, as provided under the except in the following:
last paragraph of Sec. 51: 1. Non-voting shares are not entitled to vote except in those instances
provided in the penultimate paragraph of Sec. 6 of the Code;
All proceedings had and any business transacted at any meeting of the 2. Treasury shares have no voting rights while they remain in the
stockholders or members, if within the powers or authority of the treasury (Sec. 57);
corporation, shall be valid even if the meeting be improperly held or called, 3. Shares of stock declared delinquent are not entitled to vote at any
provided all the stockholders or members of the corporation are present or meeting; and
duly represented at the meeting. 4. Unregistered transferee of shares of stock.
B. DIRECTORS’/TRUSTEES’ MEETING PROXY VOTING: is allowed or through a voting trust agreement, or by

the executor, administrator, receiver or other legal representative
Sec. 53. Regular and special meetings of directors or trustees. - appointed by the court.
Regular meetings of the board of directors or trustees of every corporation
shall be held monthly, unless the by-laws provide otherwise. PLEDGED OR MORTGAGED SHARES: the pledgor or mortgagor is
entitled to vote in the absence of an agreement to the contrary:
Special meetings of the board of directors or trustees may be held at any
time upon the call of the president or as provided in the by-laws. Sec. 55. Right to vote of pledgors, mortgagors, and administrators. -
In case of pledged or mortgaged shares in stock corporations, the pledgor or
Meetings of directors or trustees of corporations may be held anywhere in or mortgagor shall have the right to attend and vote at meetings of
outside of the Philippines, unless the by-laws provide otherwise. Notice of stockholders, unless the pledgee or mortgagee is expressly given by the
regular or special meetings stating the date, time and place of the meeting pledgor or mortgagor such right in writing which is recorded on the
must be sent to every director or trustee at least one (1) day prior to the appropriate corporate books.
scheduled meeting, unless otherwise provided by the by-laws. A director or
Executors, administrators, receivers, and other legal representatives duly period not exceeding five (5) years at any time: Provided, That in the case of
appointed by the court may attend and vote in behalf of the stockholders or a voting trust specifically required as a condition in a loan agreement, said
members without need of any written proxy. voting trust may be for a period exceeding five (5) years but shall
automatically expire upon full payment of the loan. A voting trust agreement
SHARES OWNED BY TWO OR MORE PERSONS JOINTLY: must be in writing and notarized, and shall specify the terms and conditions
thereof. A certified copy of such agreement shall be filed with the corporation
Sec. 56. Voting in case of joint ownership of stock. - In case of shares and with the Securities and Exchange Commission; otherwise, said
of stock owned jointly by two or more persons, in order to vote the same, the agreement is ineffective and unenforceable. The certificate or certificates of
consent of all the co-owners shall be necessary, unless there is a written stock covered by the voting trust agreement shall be cancelled and new ones
proxy, signed by all the co-owners, authorizing one or some of them or any shall be issued in the name of the trustee or trustees stating that they are
other person to vote such share or shares: Provided, That when the shares issued pursuant to said agreement. In the books of the corporation, it shall
are owned in an "and/or" capacity by the holders thereof, any one of the be noted that the transfer in the name of the trustee or trustees is made
joint owners can vote said shares or appoint a proxy therefor. pursuant to said voting trust agreement.
D. PROXY AND OTHER REPRESENTATIVE VOTING The trustee or trustees shall execute and deliver to the transferors voting
trust certificates, which shall be transferable in the same manner and with
PROXY: is a species of absentee voting by mail by a one way ballot for the the same effect as certificates of stock.
slate or proposals suggested by the management or even perhaps, the
solicitor thereof. It is the authority given by the stockholder or member to The voting trust agreement filed with the corporation shall be subject to
another to vote for him at a stockholders’ or members’ meeting. The term examination by any stockholder of the corporation in the same manner as
is also used to refer to the instrument or paper which is evidence of the any other corporate book or record: Provided, That both the transferor and
authority of an agent or the holder thereof to vote for and in behalf of the the trustee or trustees may exercise the right of inspection of all corporate
stockholder or member. books and records in accordance with the provisions of this Code.
Sec. 58. Proxies. - Stockholders and members may vote in person or by Any other stockholder may transfer his shares to the same trustee or trustees
proxy in all meetings of stockholders or members. Proxies shall be in writing, upon the terms and conditions stated in the voting trust agreement, and
signed by the stockholder or member and filed before the scheduled meeting thereupon shall be bound by all the provisions of said agreement.
with the corporate secretary. Unless otherwise provided in the proxy, it shall
be valid only for the meeting for which it is intended. No proxy shall be valid No voting trust agreement shall be entered into for the purpose of
and effective for a period longer than five (5) years at any one time. circumventing the law against monopolies and illegal combinations in
restraint of trade or used for purposes of fraud.
PROXY VOTING: is a right granted by law to all stockholders entitled to
vote in stock corporations and cannot, therefore, be denied. EXCEPT: In a Unless expressly renewed, all rights granted in a voting trust agreement shall
non-stock corporation with by-laws providing for a prohibition on the use of automatically expire at the end of the agreed period, and the voting trust
proxies (Sec. 89). certificates as well as the certificates of stock in the name of the trustee or
trustees shall thereby be deemed cancelled and new certificates of stock shall
REQUIREMENTS: In the absence of a by-law provision regulating the be reissued in the name of the transferors.
form and execution of proxy, Sec. 58 requires:
1. The proxy must be in writing; The voting trustee or trustees may vote by proxy unless the agreement
2. It is signed by the stockholder or member or his duly authorized provides otherwise.
representative; and
3. It is filed on or before the schedule meeting with the corporate VOTING TRUSTS DISTINGUISHED FROM PROXY
secretary.
VOTING TRUST PROXY
It is to be noted, however, that publicly listed companies are required to The beneficial owner of the shares Legal title to the shares remain with
observe and comply with SEC Memorandum Circular No. 5 -1996. ceased to be stockholder of record of the beneficial owner
the corporation since the shares are
TYPES OF PROXIES: transferred to the trustee
1. General – gives a general discretionary power of attorney to vote for Trustee votes as owner of the shares Proxy votes merely as an agent
directors and all ordinary matters that my properly come before a The beneficial owner is disqualified The owner of the shares may be
meeting. It is not an authority, however, to vote for fundamental to be a director elected as such since legal title
changes in the corporate charter or for other unusual transactions, thereof remains with him
unless so specified; Purpose is to acquire voting control Generally used to secure voting an
2. Special – restricts the authority to vote on specified matters only and of the corporation quorum requirements or merely for
may direct the manner in which the vote will be cast. the purpose of representing an
absent stockholder
DURATION: May be fixed by the proxy’s own terms but it cannot exceed 5 Irrevocable Revocable anytime unless coupled
years and for not more than 5 years for each renewal. Otherwise, it expires with an interest
after the meeting for which it was given. The trustee can act and vote at any Proxy can generally act as such only
meeting during the duration of the at a particular meeting
VOTING TRUST: is one created by an agreement between a group of VTA
stockholders of a corporation and a trustee, or a group of identical Trustee may vote in person or by Proxy holder must vote in person
agreements between individual stockholders and a common trustee, proxy
whereby it is provided that for a term of years, or for a period contingent Duration may exceed five years Proxy is of a shorter duration and
upon a certain event, or until the agreement is terminated, control over the may not exceed 5 years
stock owned by such stockholders, shall be lodged in the trustee, either VTA to be valid and effective, must Unless required by the by-laws,
with or without reservation to the owners or persons designated by them be notarized and filed with the SEC proxies need not be notarized nor is
the power to direct how such control shall be issued. it required to be filed with the SEC.
Sec. 59. Voting trusts. - One or more stockholders of a stock corporation READ AGAIN: LEE VS. CA
may create a voting trust for the purpose of conferring upon a trustee or
trustees the right to vote and other rights pertaining to the shares for a
NATIONAL INVESTMENT AND DEVELOPMENT CORPORATION, Batjak premises its right to the possession of the three (3) off mills on the
EUSEBIO VILLATUYA MARIO Y. CONSING and ROBERTO S. BENEDICTO, Voting Trust Agreement, claiming that under said agreement, NIDC was
petitioners, constituted as trustee of the assets, management and operations of Batjak,
vs. that due to the expiration of the Voting Trust Agreement, on 26 October
HON. BENJAMIN AQUINO, in his official capacity as Presiding Judge of 1970, NIDC should tum over the assets of the three (3) oil mills to Batjak
Branch VIII of the Court of First Instance of Rizal, BATJAK INC., GRACIANO From the foregoing provisions, it is clear that what was assigned to NIDC
A. GARCIA and MARCELINO CALINAWAN JR., respondents. was the power to vote the shares of stock of the stockholders of Batjak,
(G.R. No. L-34192 June 30, 1988) representing 60% of Batjak's outstanding shares, and who are the
signatories to the agreement. The power entrusted to NIDC also included
PHILIPPINE NATIONAL BANK, petitioner, the authority to execute any agreement or document that may be
vs. necessary to express the consent or assent to any matter, by the
HON. BENJAMIN H. AQUINO, in his capacity as Presiding Judge of the stockholders. Nowhere in the said provisions or in any other part of the
Court of First Instance of Rizal, Branch VIII and BATJAK INCORPORATED, Voting Trust Agreement is mention made of any transfer or assignment to
respondents NIDC of Batjak's assets, operations, and management. NIDC was
(G.R. No. L-34213 June 30, 1988) constituted as trustee only of the voting rights of 60% of the paid-up and
outstanding shares of stock in Batjak. This is confirmed by paragraph No. 9
FACTS: On Oct. 26, 1965, private respondent Batjak, Inc. entered into a of the Voting Trust Agreement, thus:
Voting Trust Agreement with petitioner NIDC, in order to assist the former
with its financial obligations. The VTA was for a period of 5 years 9. TERMINATION — Upon termination of this Agreement as heretofore
constituting 60% of the outstanding paid-up and subscribed shares of provided, the certificates delivered to the TRUSTEE by virtue hereof
Batjak. 5 years therafter, or on Aug. 31, 1970, Batjak represented by shall be returned and delivered to the undersigned stockholders as the
majority stockholders, through Atty. Amado Duran, legal counsel, wrote to absolute owners thereof, upon surrender of their respective voting
NIDC inquiring if the atter was still interest in negotiating the renewal of trust certificates, and the duties of the TRUSTEE shall cease and
the VTA, but there was no reply even with the second letter sent on Sept. terminate.-
22, 1970.
Under the aforecited provision, what was to be returned by NIDC as trustee
On Sept. 23, 1970, legal counsel of Batjak wrote another letter asking for a to Batjak's stockholders, upon the termination of the agreement, are the
complete accounting of the assets, properties, management and operation certificates of shares of stock belonging to Batjak's stockholders, not the
of Batjak, preparatory to their turn-over and transfer to the stockholders of properties or assets of Batjak itself which were never delivered, in the first
Batjak. place to NIDC, under the terms of said Voting Trust Agreement.
NIDC replied that it had no intention to comply with such demand. Batjak In any event, a voting trust transfers only voting or other rights pertaining
filed an action for mandamus with preliminary injunction which was to the shares subject of the agreement or control over the stock. The law
granted. on the matter is Section 59, Paragraph 1 of the Corporation Code (BP 68)
which provides:
ISSUE: WON Batjak has the personality to enforce the voting trust
agreement executed by its stockholders and whether it may compel the Sec. 59. Voting Trusts — One or more stockholders of a stock
trustee to turn over the assets of the corporation? corporation may create a voting trust for the purpose of conferring
upon a trustee or trusties the right to vote and other rights pertaining
HELD: No. In support of the third ground of their motion to dismiss, PNB to the shares for a period not exceeding five (5) years at any one
and NIDC contend that Batjak's complaint for mandamus is based on its time: ...
claim or right to recovery of possession of the three (3) oil mills, on the
ground of an alleged breach of fiduciary relationship. Noteworthy is the fact The acquisition by PNB-NIDC of the properties in question was not made or
that, in the Voting Trust Agreement, the parties thereto were NIDC and effected under the capacity of a trustee but as a foreclosing creditor for the
certain stockholders of Batjak. Batjak itself was not a signatory thereto. purpose of recovering on a just and valid obligation of Batjak.
Under Sec. 2, Rule 3 of the Rules of Court, every action must be
prosecuted and defended in the name of the real party in interest. Applying
the rule in the present case, the action should have been filed by the CHAPTER 10: STOCKS AND STOCKHOLDERS
stockholders of Batjak, who executed the Voting Trust Agreement with
NIDC, and not by Batjak itself which is not a party to said agreement, and A person may become a stockholder in a corporation in either of three
therefore, not the real party in interest in the suit to enforce the same. ways:
1. By a contract of subscription with the corporation;
In addition, PNB claims that Batjak has no cause of action and prays that 2. By purchase of treasury shares from the corporation; and
the petition for mandamus be dismissed. A careful reading of the Voting 3. By purchase or acquisition of shares from existing stockholders.
Trust Agreement shows that PNB was really not a party thereto. Hence,
mandamus will not lie against PNB. A. SUBSCRIPTION CONTRACT
Batjak has no clear right to be entitled to the writ prayed for. A “subscription”, properly speaking, is the mutual agreement of the
What Batjak seeks to recover is title to, or possession of, real subscribers to take and pay for the stocks of the corporation. A
property (the three (3) oil mills which really made up the assets of “subscription contract”, on the other hand is specifically defined in Sec. 60:
Batjak) but which the records show already belong to NIDC. It is
not disputed that the mortgages on the three (3) oil mills were foreclosed Sec. 60. Subscription contract. - Any contract for the acquisition of
by PNB and NIDC and acquired by them as the highest bidder in the unissued stock in an existing corporation or a corporation still to be formed
appropriate foreclosure sales. Ownership thereto was subsequently shall be deemed a subscription within the meaning of this Title,
consolidated by PNB and NIDC, after Batjak failed to exercise its right of notwithstanding the fact that the parties refer to it as a purchase or some
redemption. The three (3) oil mills are now titled in the name of NIDC. other contract.
From the foregoing, it is evident that Batjak had no clear right to be
entitled to the writ prayed for. In Lamb vs. Philippines (22 Phil. 456) citing SUBSCRIPTION VS. PURCHASE: In the latter, the buyer becomes a
the case of Gonzales V. Salazar vs. The Board of Pharmacy , 20 Phil. 367, shareholder only upon full payment of the price. UNISSUED shares cannot
the Court said that the writ of mandamus will not issue to give to the be the subject of a “purchase”.
applicant anything to which he is not entitled by law.
“We may add that the law in force in this jurisdiction makes no distinction,
in respect to the liability of the subscriber, between shares subscribed pahuli ng isda) pesos as my initial payment and the balance
before incorporation is effected and shares subscribed thereafter. All like payable in accordance with law and the rules and regulations of
are bound to pay full value in cash or its equivalent, and any attempt to the Quezon College. I hereby agree to shoulder the expenses
discriminate in favor of one subscriber by relieving him of this liability connected with said shares of stock. I further submit myself to all
wholly or in part is forbidden. In what is here said we have reference of lawful demands, decisions or directives of the Board of Trustees
course primarily to subscriptions to shares that have not been previously of the Quezon College and all its duly constituted officers or
issued. It is conceivable that the power of the corporation to make terms authorities (ang nasa itaas ay binasa at ipinaliwanag sa akin sa
with the purchaser would be greater where the shares which are the wikang tagalog na aking nalalaman).
subject of the transaction have been acquired by the corporation in course
Very respectfully,
of commerce, after they have already been once issued. But the shares
(Sgd.) DAMASA CRISOSTOMO
with which are here concerned are not of this sort.” (National Exchange
Signature of subscriber
Co., Inc. vs. Dexter)
EXAMPLE: If X corporation had P1M authorized capital divided into 1M Nilagdaan sa aming harapan:
shares with a par value of P1. 500,000 has already been subscribed: JOSE CRISOSTOMO
1. Z “purchased” 100,000 of the UNISSUED shares paying 50% down EDUARDO CRISOSTOMO
payment and the balance payable after 6 months, with a condition
that he will not be considered a shareholder until full payment. – He is
still liable for the balance because this will be considered a On Oct. 26, 1948, Crisostomo died. As no payment on the subscriptions
subscription no matter how the parties refer to it and accordingly, Z is appear to have been made, herein appellant filed a claim in her testate
liable as a shareholder therein. proceedings for P20,000 which was opposed by the administrator, and
2. Z was declared a delinquent shareholder and X Co. was declared as dismissed by the CFI.
the winning bidder by paying P100,000 and acquired the delinquent
shares. Later on, 20,000 of the shares were sold to Y – here, the ISSUE: WON the subscription is valid and enfroceable?
shares being from treasury and not from unissued shares, may be the
proper subject of a “purchase” and thus, a condition that Y would not HELD: No. It appears that the application sent by Damasa Crisostomo to
became a shareholder until full payment may be valid. the Quezon College, Inc. was written on a general form indicating that an
applicant will enclose an amount as initial payment and will pay the balance
FORM: A subscription contract need not be in writing such that an oral in accordance with law and the regulations of the College. On the other
contract of subscription is valid and enforceable under the Statute of hand, in the letter actually sent by Damasa Crisostomo, the latter (who
Frauds. Thus, it was ruled by the SC that such an agreement does not requested that her subscription for 200 shares be entered) not only did not
seem to fall within the definition of a sale under our substantive law, and is enclose any initial payment but stated that "babayaran kong lahat
therefore believed that an oral subscription agreement as distinguished pagkatapos na ako ay makapagpahuli ng isda." There is nothing in the
from sale of stock is valid and enforceable. record to show that the Quezon College, Inc. accepted the term of
payment suggested by Damasa Crisostomo, or that if there was any
CONDITION: Subscriptions may be made upon a condition precedent or acceptance the same came to her knowledge during her lifetime. As the
upon special terms (condition subsequent). A conditional subscription, application of Damasa Crisostomo is obviously at variance with the terms
or one made upon a condition precedent, does not make the subscriber a evidenced in the form letter issued by the Quezon College, Inc., there was
stockholder, or render him to pay the amount of his subscription, until absolute necessity on the part of the College to express its agreement to
performance of the condition. A subscription upon special terms, on Damasa's offer in order to bind the latter. Conversely, said acceptance was
the other hand, is an absolute subscription, making the subscriber a essential, because it would be unfair to immediately obligate the Quezon
stockholder, and rendering him liable as such, as soon as the subscription College, Inc. under Damasa's promise to pay the price of the subscription
is accepted, the special term being an independent stipulation. after she had caused fish to be caught. In other words, the relation
between Damasa Crisostomo and the Quezon College, Inc. had
In case of doubt in the intention of the parties, a subscription should be only thus reached the preliminary stage whereby the latter
considered as an absolute subscription upon special terms, rather than offered its stock for subscription on the terms stated in the form
conditional. The policy of giving protection to creditors and other letter, and Damasa applied for subscription fixing her own plan of
subscribers has led to the adoption of this rule of construction favoring the payment, — a relation, in the absence as in the present case of
immediate liability of the subscriber. acceptance by the Quezon College, Inc. of the counter offer of
Damasa Crisostomo, that had not ripened into an enforceable
Conditional Subscriptions are valid provided: (1) there is nothing in the contract.
charter or enabling act prohibiting the same; and (2) provided the
conditions are not such as to render their performance beyond the powers Indeed, the need for express acceptance on the part of the Quezon
of the corporation or in violation of law or contrary to public policy. College, Inc. becomes the more imperative, in view of the proposal of
Damasa Crisostomo to pay the value of the subscription after she has
NAZARIO TRILLANA, administrator-appellee, harvested fish, a condition obviously dependent upon her sole will and,
vs. therefore, facultative in nature, rendering the obligation void, under article
QUEZON COLLEGE, INC., claimant-appellant 1115 of the old Civil Code which provides as follows: "If the fulfillment of
(GR No. L-5003; June 27, 1953) the condition should depend upon the exclusive will of the debtor, the
conditional obligation shall be void. If it should depend upon chance, or
FACTS: Damasa Crisostomo sent the following letter to the Board of upon the will of a third person, the obligation shall produce all its effects in
Trustees of the Quezon College: accordance with the provisions of this code." It cannot be argued that the
condition solely is void, because it would have served to create the
June 1, 1948 obligation to pay, unlike a case, exemplified by Osmeña vs. Rama (14 Phil.,
The BOARD OF TRUSTEES 99), wherein only the potestative condition was held void because it
Quezon College referred merely to the fulfillment of an already existing indebtedness.
Manila
In the case of Taylor vs. Uy Tieng Piao, et al. (43 Phil., 873, 879), this
Gentlemen: Court already held that "a condition, facultative as to the debtor, is
Please enter my subscription to dalawang daan (200) shares of obnoxious to the first sentence contained in article 1115 and renders the
your capital stock with a par value of P100 each. Enclosed you whole obligation void."
will find (Babayaran kong lahat pagkatapos na ako ay makapag-

B. PRE-INCORPORATION SUBSCRIPTION
“ISSUE”: is generally employed to indicate the making of a share contract
Pre-incorporation subscriptions make reference to subscriptions for shares or contract of subscription, that is, transaction by which a person becomes
of stock of a corporation still to be formed while post-incorporation the owner of shares and by which new share contracts are created. It is
subscriptions are those made or executed after the formation or often associated with the execution and delivery of a share certificate but
organization of the corporation. the issuance of the shares is not dependent on the delivery of a certificate
of stock.
Sec. 61. Pre-incorporation subscription. - A subscription for shares of
stock of a corporation still to be formed shall be irrevocable for a period of at “PAR” or “ISSUED PRICE”: while it may not reflect the true value of the
least six (6) months from the date of subscription, unless all of the other shares which constantly fluctuates, merely indicates the amount which the
subscribers consent to the revocation, or unless the incorporation of said original subscribers are supposed to contribute to the corporate capital as
corporation fails to materialize within said period or within a longer period as the basis of the privilege of profit sharing with limited liability.
may be stipulated in the contract of subscription: Provided, That no pre-
incorporation subscription may be revoked after the submission of the articles PROPERTY: If shares are issued in exchange for property, the value of
of incorporation to the Securities and Exchange Commission. such should at least be equal to the par or issued value of the stocks. Such
value, may be determined with reference to
IMMEDIATE BINDING EFFECT: This new provision gives an immediate a. REAL PROPERTY - (1) independent appraiser’s appraisal report; (2)
binding effect on pre-incorporation subscriptions as against the subscribers BIR Zonal Valuation; or (3) Market Value indicated in the Real Estate
of the capital stock of a corporation still to be formed. Pre-incorporation Tax Declaration.
subscriptions are, in fact, mandatory as may be culled from the provisions b. INTANGIBLE PROPERTY – as determined by the incorporators or the
of Sec. 13 and 14 of the Code which mandates that a corporation may be BOD subject to the approval of the SEC.
registered as such only if at least 25% of its authorized capital stock has
been subscribed and that at least 25% of the subscribed capital has been TRUE VALUE RULE: the motives and intent of those making the valuation
paid. 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.
IRREVOCABLE: Pre-incorporation subscriptions are irrevocable:
1. For a period of at least 6 months from the date of subscription unless GOOD FAITH RULE: is based on the proposition that the value of the
(a) all the subscribers consent to the revocation; or (b) the property or services is a matter about which there can be an honest
incorporation fails to materialize within said period or within a longer difference of opinion. Therefore, if the parties have acted in good faith
period as may stipulated in the contract of subscription; and without fraud or intentional over-valuation, the transaction cannot be
2. After submission of the AOI to the SEC. overturned even if it later becomes evident that the property or services
were in fact worth much less than the value fixed on them initially.
C. STOCK ISSUANCE
Most jurisdiction follow the GOOD FAITH rule.
Stock issuance is generally the initial and primary source of corporate
capital. Other sources may include corporate borrowings, loans and STOCK DIVIDENDS: Sec. 62(5) which states that “amounts transferred
advances from creditors or stockholders. Corporate earnings may also be a from unrestricted retained earnings to stated capital” refer to stock
source of corporate funds if it is reinvested or ploughed back to the dividends where corporate earnings are capitalized rather than being
company. distributed as cash dividend. It merely converts income into capital, the
consideration being the retained earnings itself which would have accrued
Sec. 62. Consideration for stocks. - Stocks shall not be issued for a to the stockholders in proportion to their respective stockholdings.
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 NO CONSIDERATION: stocks may not be issued without consideration
following: for the following reasons: (1) it is discriminatory against other stockholders;
and (2) it prejudices the rights of creditors under the Trust Fund Doctrine.
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and RECLASSIFICATION: Sec. 62(6) which provides that “outstanding shares
necessary or convenient for its use and lawful purposes at a fair valuation exchanged for stocks in the event of reclassification or conversion” speaks
equal to the par or issued value of the stock issued; of shares of stock surrendered to the corporation in exchange for new or
3. Labor performed for or services actually rendered to the corporation; different type of shares. Example: Found Shares which, after 5 years, may
4. Previously incurred indebtedness of the corporation; be converted to common stocks.
5. Amounts transferred from unrestricted retained earnings to stated capital;
and PROHIBITED CONSIDERATIONS: Shares of stock may not be issued in
6. Outstanding shares exchanged for stocks in the event of reclassification or exchange for (1) promissory notes; or (2) future services – as their
conversion. realization are not certain.
Where the consideration is other than actual cash, or consists of intangible THE NATIONAL EXCHANGE CO., INC., plaintiff-appellee,
property such as patents of copyrights, the valuation thereof shall initially be vs.
determined by the incorporators or the board of directors, subject to approval I. B. DEXTER, defendant-appellant
by the Securities and Exchange Commission. (GR No. L-27872; Feb. 25, 1928)
Shares of stock shall not be issued in exchange for promissory notes or future FACTS: On August 10, 1919, the defendant, I. B. Dexter, signed a written
service. subscription to the corporate stock of C. S. Salmon & Co. in the following
form:
The same considerations provided for in this section, insofar as they may be
applicable, may be used for the issuance of bonds by the corporation. I hereby subscribe for three hundred (300) shares of the capital stock of
C. S. Salmon and Company, payable from the first dividends declared on
The issued price of no-par value shares may be fixed in the articles of any and all shares of said company owned by me at the time dividends
incorporation or by the board of directors pursuant to authority conferred are declared, until the full amount of this subscription has been paid
upon it by the articles of incorporation or the by-laws, or in the absence
thereof, by the stockholders representing at least a majority of the Upon subscription, defendant Dexter paid P15,000 from the dividends
outstanding capital stock at a meeting duly called for the purpose. declared by the company and supplemented by money supplied personally

by the subscriber. No other payment was made. the headnote is not justified by anything in the reported decision; for what
the court really held was that the making of such promise by the agent of
ISSUE: WON the subscription to be paid out of the dividends declared on the corporation who sold the stock is admissible in evidence in support of
the shares has the effect of relieving the subscriber from personal liability the defense of fraud and failure of consideration. Moreover, even if the
in an action to recover the value of the shares? decision had been to the effect supposed, the rule announced in the
headnote, could have no weight in a jurisdiction like this where there is a
HELD: No. Under the American regime corporate franchises in the statutory provision prohibiting such agreements.
Philippine Islands are granted subject to the provisions of section 74 of the
Organic Act of July 1, 1902, which, in the part here material, is D. CERTIFICATE OF STOCK AND THEIR TRANSFER
substantially reproduced in section 28 of the Autonomy Act of August 29,
1916. In the Organic Act it is among other things, declared: "That all Share of Stock: may rightfully be described as a profit sharing contract, a
franchises, privileges, or concessions granted under this Act shall forbid the series of units of interest and participation in a corporation in consideration
issue of stock or bonds except in exchange for actual cash or for property of a proportionate right to participate in dividend and other distributions.
at a fair valuation equal to the par value of the stock or bonds so issued; . . They are personal properties and the owners thereof have the unbridled
. ." (Act of Congress of July 1, 1902, sec. 74.) right to transfer the same to anyone they please subject only to reasonable
charter provisions.
Pursuant to this provision we find that the Philippine Commission inserted
in the Corporation Law, enacted March 1, 1906, the following provision: ". . Certificate of Stock: is the piece of paper or document which evidences
. no corporation shall issue stock or bonds except in exchange for the ownership of shares and a convenient instrument in the transfer of the
actual cash paid to the corporation or for property actually title.
received by it at a fair valuation equal to the par value of the stock
or bonds so issued." (Act No. 1459, sec. 16 as amended by Act No. Sec. 63. Certificate of stock and transfer of shares. - The capital stock
2792, sec. 2.) of stock corporations shall be divided into shares for which certificates signed
by the president or vice president, countersigned by the secretary or
The prohibition against the issuance of shares by corporations except for assistant secretary, and sealed with the seal of the corporation shall be
actual cash to the par value of the stock to its full equivalent in property is issued in accordance with the by-laws. Shares of stock so issued are personal
thus enshrined in both the organic and statutory law of the Philippine property and may be transferred by delivery of the certificate or certificates
Islands; and it would seem that our lawmakers could scarcely have chosen endorsed by the owner or his attorney-in-fact or other person legally
language more directly suited to secure absolute equality stockholders with authorized to make the transfer. No transfer, however, shall be valid, except
respect to their liability upon stock subscriptions. Now, if it is unlawful to as between the parties, until the transfer is recorded in the books of the
issue stock otherwise than as stated it is self-evident that a stipulation corporation showing the names of the parties to the transaction, the date of
such as that now under consideration, in a stock subscription, is the transfer, the number of the certificate or certificates and the number of
illegal, for this stipulation obligates the subscriber to pay nothing shares transferred.
for the shares except as dividends may accrue upon the stock. In
the contingency that dividends are not paid, there is no liability at
No shares of stock against which the corporation holds any unpaid claim shall
all. This is a discrimination in favor of the particular subscriber,
be transferable in the books of the corporation.
and hence the stipulation is unlawful.
REQUISITES FOR THE ISSUANCE OF CERTIFICATE OF STOCK:
The general doctrine of corporation law is in conformity with this
1. It must be signed by the president or vice-president and
conclusion, as may be seen from the following proposition taken from the
countersigned by the secretary or assistant secretary;
standard encyclopedia treatise, Corpus Juris:
2. It must be sealed with the corporate seal, and
3. The entire value thereof (together with the interest or expenses, if
Nor has a corporation the power to receive a subscription upon
any) should have been paid.
such terms as will operate as a fraud upon the other subscribers
or stockholders by subjecting the particular subcriber to lighter
RIGHTS OF SUBSCRIBERS: While it appears, that a subscriber to shares
burdens, or by giving him greater rights and privileges, or as a
of stock cannot be entitled to the issuance of a certificate of stock until the
fraud upon creditors of the corporation by withdrawing or
full amount of his subscription together with interest and expenses (in case
decreasing the capital. It is well settled therefore, as a general rule,
of delinquent shares) if any is due, has been paid, a subscriber, even if not
that an agreement between a corporation and a particular subscriber, by
yet fully paid, is entitled to exercise all the rights of a stockholder and the
which the subscription is not to be payable, or is to be payable in part
corresponding liability that attach thereunder:
only, whether it is for the purpose of pretending that the stock is really
greater than it is, or for the purpose of preventing the predominance of
Sec. 72. Rights of unpaid shares. - Holders of subscribed shares not fully
certain stockholders, or for any other purpose, is illegal and void as in
paid which are not delinquent shall have all the rights of a stockholder.
fraud of other stockholders or creditors, or both, and cannot be either
enforced by the subscriber or interposed as a defense in an action on the
subscription. (14 C. J., p. 570.) In essence, the issuance of a certificate of stock is not a condition sine qua
non to consider a subscriber a stockholder. To all intents and purposes, a
The rule thus stated is supported by a long line of decisions from numerous subscriber is a shareholder upon subscription and entitled to the all the
courts, with little or no diversity of opinion. As stated in the headnote to rights as such, except:
the opinion of the Supreme Court of United States in the case of Putnan vs. 1. For the issuance of a certificate of stock;
New Albany, etc. Railroad Co. as reported in 21 Law. ed., 361, the rule is 2. If his shares are declared delinquent; or
that "Conditions attached to subscriptions, which, if valid, lessen 3. When he exercises appraisal right under Sec. 83.
the capital of the company, are a fraud upon the grantor of the
franchise, and upon those who may become creditors of the NEGOTIABILITY: A certificate of stock is not regarded as “negotiable” in
corporation, and upon unconditional stockholders." the sense same sense as a bill or a not, even if its endorsed in blank. Thus,
while it may be transferred by endorsement coupled with delivery thereof,
In the appellant's brief attention is called to the third headnote to Bank vs. it is nonetheless non-negotiable in that the transferee takes it without
Cook (125 Iowa, 111), where it is stated that a collateral agreement with a prejudice to all the rights and defenses which the true and lawful owner
subscriber to stock that his subscription shall not be collectible except from may have except in so far as the principles governing estoppel may apply.
dividends on the stock, is valid as between the parties and a complete
defense to a suit on notes given for the amount of the subscription. A NON-REGISTRATION: of shares disposed of by the holder will not affect
careful perusal of the decision will show that the rule thus broadly stated in the validity of the transfer at least in so far as the contracting parties are

concerned. As regards, the corporation, the transferee will not be Nationalization Laws; and
recognized as such stockholder and could not exercise the rights until the 6. Those covered by reasonable agreement of the parties.
transfer has been duly recorded in the stock and transfer book. As such,
“he cannot vote or be vote for, and he will not be entitled to dividends. The TRANSFER: as used in the Corporation Code, refers to absolute and
corporation may be protected when it pays dividends to the registered unconditional transfer to warrant registration in the books of the
owner despite a previous transfer of which it had no knowledge. The corporation in order to bind the latter and other third persons.
purpose of registration therefore is two-fold: (1) to enable the transferee to
exercise all the rights of stockholder, and (2) to inform the corporation of ENRIQUE MONSERRAT, plaintiff-appellee,
any change in share ownership so that it can ascertain the person entitled vs.
to the rights and subject to the liabilities of a corporation” (De Erquiga vs. CARLOS G. CERON, ET AL., defendants.
CA) ERMA, INC., and, THE SHERIFF OF MANILA, respondents
(G.R. No. 37078; September 27, 1933)
REGISTRATION: is necessary to:
1. Enable the corporation to know who its stockholders are; FACTS: Enrique Monserrat, president and manager of the Manila Yellow
2. Enable the transferee to exercise his rights as a stockholder; Taxicab Co., Inc. (MYTC), assigned to Carlos G. Ceron the usufruct of his
3. Afford the corporation an opportunity to object or refuse registration 1,200 shares in consideration of the interest shown and the financial aid
of the transfer in cases allowed by law (as when it has unpaid claims extended him (Monserrat) in the organization of the corporation. This
on the shares transferred); assignment allowed Ceron to derive the right to enjoy the profits (during
4. Avoid fictitious and fraudulent transfers; and his lifetim) that may be derived from the shares but prohibited him from
5. Protect creditors who have the right to look upon stockholders, in case acts of absolute ownership, such acts and the right to vote, reserved to
of non-payment or watered shares, for the satisfaction of their claims. Monserrat and his heirs. Such assignment was recorded in the books of the
corporation and the corresponding shares certificate was issued to Ceron.
MANDAMUS: If the corporate secretary refuses to registered or record the
transfer, mandamus will lie to compel the registration. This is because such Later on, Ceron mortgaged the shares to herein defendant Eduardo Matute,
duty is ministerial. HOWEVER, he cannot be compelled to do so when the the latter without knowledge of the existence of the assignment. Due to
transferee’s title to said shares has no prima facie validity or is uncertain. non-payment, Matute foreclosed the mortgage and the shares were sold at
a public auction.
TWO MODES OF TRANSFERRING STOCKS:
1. Endorsement and delivery of certificate of stock; Monserrat claims ownership over the shares and the lower court rendered
2. Notarized deed. judgment in his favor, holding that the mortgage on the shares was null
and void, but the mortgage on the usufruct is valid.
The SEC has, however, ruled that when a corporation has already issued
stock certificates, any transfer of the shares can only be effectively made ISSUE: WON it is necessary to enter upon the books of the corporation a
by endorsement and delivery of the stock certificate. A deed of transfer, mortgage constituted on shares of stock in order that such mortgage may
sale or assignment alone would not suffice (as affirmed by the SC in Rural be valid and may have force and effect as against third persons?
Bank of Lipa City, Inc. vs. CA) for to rule otherwise would open the door to
fraudulent or fictitious transfer which the SEC seeks to avoid. In effect, HELD: No. Section 35 of the Corporation Law provides the following:
while a formal contract of sale in a notarized document is equivalent to
actual delivery of the certificate itself, this mode of transfer is available only SEC. 35. The capital stock of stock corporations shall be divided into
if no certificate of stock has been issued. shares for which certificates signed by the president or the vice-
president, counter signed by the secretary or clerk and sealed with the
RIGHT TO TRANSFER SHARES OF STOCK: may not be unreasonably seal of the corporation, shall be issued in accordance with the by-laws.
restricted prohibited. Thus, in Padgett vs. Bobcock & Templeton and Shares of stock so issued are personal property and may be transferred
Fleischer vs. Botica Nolasco, the SC held that every owner of corporate by delivery of the certificate indorsed by the owner or his attorney in fact
shares has the same uncontrollable right to alienate them and is under no or other person legally authorized to make the transfer. No transfer,
obligation from selling them at his sacrifice and for the welfare and benefit however, shall be valid, except as between the parties, until the transfer
of the corporation and other stockholders. But while unreasonable is entered and noted upon the books of the corporation so as to show
restrictions may not be allowed, the right to transfer may be “regulated” to the names of the parties to the transaction, the date of the transfer the
give the corporation protection against colorable or fraudulent transfer or number of the certificate, and the number of shares transferred.
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 No share of stock against which the corporation hold, any unpaid claim
and/or the corporation, giving them the first option to purchase the shares shall be transferable on the books of the corporation.
of a selling stockholder within a reasonable period not exceeding thirty
days provided that the same is contained in the AOI and in all the stock The legal provision just quoted does not require any entry except of
certificates to be issued. This is considered “reasonable” since it merely transfers of shares of stock in order that such transfers may be valid as
suspends the right to transfer within the period specified. against third persons. Now, what did the Legislature mean in using the
word "transfer"?
OTHER RESTRICTIONS:
1. It is not valid, except as between the parties, until recorded in the Inasmuch as it does not appear from the text of the Corporation Law that
books of the corporation; an attempt was made to give a special signification to the word "transfer",
2. Shares of stock against which the corporation holds any unpaid claim we shall construe it according to its accepted meaning in ordinary parlance.
shall not be transferrable in the books of the corporation. Unpaid
claims, refer to claims arising from unpaid subscription and not to any The word "transferencia" (transfer) is defined by the "Diccionario de la
indebtedness which a stockholder may owe the corporation such as Academia de la Lengua Castellana" as "accion y efecto de transferir" (the
monthly dues; act and effect of transferring); and the verb "transferir", as "ceder o
3. Restrictions required to be indicated in the AOI, bylaws and stock renunciar en otro el derecho o dominio que se tiene sobre una cosa,
certificates of a close corporation; haciendole dueno de ella" (to assign or waive the right in, or absolute
4. Restrictions imposed by special law, such as the Public Service Act ownership of, a thing in favor of another, making him the owner thereof).
requiring the approval of the government agency concerned if it will
vest unto the transferee 40% of the capital of the public service In the Law Dictionary of "Words and Phrases", third series, volume 7, p.
company; 589, the word "transfer" is defined as follows:
5. Sale to aliens in violation of maximum ownership of shares under the

"Transfer" means any act by which property of one person is vested in vs.
another, and "transfer of shares", as used in Uniform Stock Transfer Act SAMAHANG MAGSASAKA, INC., and SIMPLICIO OCAMPO, ADRIANO G.
(Comp. St. Supp., 690), implies any means whereby one may be SOTTO, and EMILIO VERGARA, as president, secretary and treasurer
divested of and another acquire ownership of stock. (Wallach vs. Stein respectively of the same, defendants-appellees
[N.J.], 136 A., 209, 210.)" (G.R. No. L-42091; November 2, 1935)
In view of the definitions cited above, the question arises as to whether or FACTS: To secure the payment of a debt, Gonzalo H. Co Toco mortgage
not a mortgage constituted on certain shares of stock in accordance with his shares to Chua Chiu, such assignment recorded in the Office of the
Act No. 1508, as amended by Act No. 2496, is a transfer of such shares in Register of Deeds and the books of the corporation. For non-payment, the
the abovementioned sense. mortgage was foreclosed and the shares were sold at a public auction with
plaintiff Chua Guan as the highest bidder.
Section 3 of the aforesaid Act No. 1508, as amended by Act No. 2496,
defines the phrase "hipoteca mobiliaria" (chattel mortgage) as follows: The Company refused to cancel the certificates of stock and issue new ones
to herein plaintiff alleging that prior to the date of plaintiff’s demand, nine
SEC. 3. A chattel mortgage is a conditional sale of personal property as attachments had been issued and served and noted on the books of the
security for the payment of a debt, or the performance of some other corporation. Thus, a prayer for a writ of mandamus.
obligation specified therein, the condition being that the sale shall be
avoided upon the seller paying to the purchaser a sum of money or The validity of the assignments and the mortgage is not in question.
doing some other act named. If the condition is performed according to
its terms the mortgage and sale immediately become void, and the ISSUE: WON the registration of the mortgage in the registry of chattel
mortgage is hereby divested of his title. mortgage in the office of the register of deeds give constructive notice to
the said attaching creditors and thus gave preference to the mortgage over
According to the legal provision just quoted, although a chattel mortgage, the other debts?
accompanied by delivery of the mortgaged thing, transfers the title and
ownership thereof to the mortgage creditor, such transfer is not absolute HELD: No. In passing, let it be noted that the registration of the said
but constitutes a mere security for the payment of the mortgage debt, the chattel mortgage in the office of the corporation was not necessary and
transfer in question becoming null and void from the time the mortgage had no legal effect. (Monserrat vs. Ceron, 58 Phil., 469.) The long mooted
debtor complies with his obligation to pay his debt. question as to whether or not shares of a corporation could be
hypothecated by placing a chattel mortgage on the certificate representing
In the case of Noble vs. Ft. Smith Wholesale Grocery Co. (127 Pac., 14, 17; such shares we now regard as settled by the case of Monserrat vs. Ceron,
34 Okl., 662; 46 L. R. A. [N.S.], 455), cited in Words and Phrases, second supra. But that case did not deal with any question relating to the
series, vol. 4, p. 978, the following appears: registration of such a mortgage or the effect of such registration. Nothing
appears in the record of that case even tending to show that the chattel
A "transfer" is the act by which owner of a thing delivers it to another mortgage there involved was ever registered anywhere except in the office
with the intent of passing the rights which he has in it to the latter, and of the corporation, and there was no question involved there as to the right
a chattel mortgage is not within the meaning of such term. of priority among conflicting claims of creditors of the owner of the shares
Therefore, the chattel mortgage is not the transfer referred to in Section 4 of Act No. 1508 provides two ways for executing a valid chattel
section 35 of Act No. 1459 commonly known as the Corporation mortgage which shall be effective against third persons. First, the
law, which transfer should be entered and noted upon the books possession of the property mortgage must be delivered to and retained by
of a corporation in order to be valid, and which, as has already the mortgagee; and, second, without such delivery the mortgage must be
been said, means the absolute and unconditional conveyance of recorded in the proper office or offices of the register or registers of deeds.
the title and ownership of a share of stock. If a chattel mortgage of shares of stock of a corporation may validly be
made without the delivery of possession of the property to the mortgagee
If, in accordance with said section 35 of the Corporation Law, only the and the mere registration of the mortgage is sufficient to constructive
transfer or absolute conveyance of the ownership of the title to a notice to third parties, we are confronted with the question as to the proper
share need be entered and noted upon the books of the place of registration of such a mortgage. Section 4 provides that in such a
corporation in order that such transfer may be valid, therefore, case the mortgage resides at the time of making the same or, if he is a
inasmuch as a chattel mortgage of the aforesaid title is not a non-resident, in the province in which the property is situated; and it also
complete and absolute alienation of the dominion and ownership provides that if the property is situated in a different province from that in
thereof, its entry and notation upon the books of the corporation which the mortgagor resides the mortgage shall be recorded both in the
is not necessary requisite to its validity. province of the mortgagor's residence and in the province where the
property is situated.
It is obvious, therefore, that the defendant entity Erma, Inc., as a
conditional purchaser of the shares of stock in question given as security If with respect to a chattel mortgage of shares of stock of a corporation,
for the payment of his credit, acquired in good faith Carlos G. Ceron's right registration in the province of the owner's domicile should be sufficient,
and title to the 600 common shares of stock evidenced by certificate No. 7 those who lend on such security would be confronted with the practical
of the MYTC, and as such conditional purchaser in good faith, it is entitled difficulty of being compelled not only to search the records of every
to the protection of the law. province in which the mortgagor might have been domiciled but also every
province in which a chattel mortgage by any former owner of such shares
In view of the foregoing considerations, we are of the opinion and so hold might be registered. We cannot think that it was the intention of the
that, inasmuch as section 35 of the Corporation Law does not legislature to put this almost prohibitive impediment upon the
require the notation upon the books of a corporation of hypothecation of shares of stock in view of the great volume of business
transactions relating to its shares, except the transfer of that is done on the faith of the pledge of shares of stock as collateral.
possession and ownership thereof, as a necessary requisite to the
validity of such transfer, the notation upon the aforesaid books of It is a common but not accurate generalization that the situs of shares of
the corporation, of a chattel mortgage constituted on the shares stock is at the domicile of the owner. The term situs is not one of fixed of
of stock in question is not necessary to its validity. invariable meaning or usage. Nor should we lose sight of the difference
between the situs of the shares and the situs of the certificates of shares.
The situs of shares of stock for some purposes may be at the domicile of
GONZALO CHUA GUAN, plaintiff-appellant, the owner and for others at the domicile of the corporation; and even
elsewhere. (Cf. Vidal vs. South American Securities Co., 276 Fed., 855;

Black Eagle Min. Co. vs. Conroy, 94 Okla., 199; 221 Pac,, 425 Norrie vs. entered, as here required, on the books of the corporation. And it is
Kansas City Southern Ry. Co., 7 Fed. [2d]. 158.) It is a general rule that equally clear to us that all transfers of shares not so entered are
for purposes of execution, attachment and garnishment, it is not invalid as to attaching or execution creditors of the assignors,
the domicile of the owner of a certificate but the domicile of the as well as to the corporation and to subsequent purchasers in
corporation which is decisive. (Fletcher, Cyclopedia of the Law of good faith, and indeed, as to all persons interested, except the
Private Corporations, vol. 11, paragraph 5106. Cf. sections 430 and 450, parties to such transfers. All transfers not so entered on the
Code of Civil Procedure.) books of the corporation are absolutely void; not because they
are without notice or fraudulent in law or fact, but because they
By analogy with the foregoing and considering the ownership of shares in a are made so void by statute.
corporation as property distinct from the certificates which are merely the
evidence of such ownership, it seems to us a reasonable construction of To us the language of the legislature is plain to the effect that the right of
section 4 of Act No. 1508 to hold that the property in the shares may the owner of the shares of stock of a Philippine corporation to
be deemed to be situated in the province in which the corporation transfer the same by delivery of the certificate, whether it be
has its principal office or place of business. If this province is also regarded as statutory on common law right, is limited and
the province of the owner's domicile, a single registration restricted by the express provision that "no transfer, however,
sufficient. If not, the chattel mortgage should be registered both shall be valid, except as between the parties, until the transfer is
at the owner's domicile and in the province where the corporation entered and noted upon the books of the corporation." Therefore,
has its principal office or place of business. In this sense the the transfer of the 75 shares in the North Electric Company, Inc.,
property mortgaged is not the certificate but the participation and made by the defendant Diosomito to the defendant Barcelon was
share of the owner in the assets of the corporation. not valid as to the plaintiff-appellee, Toribia Uson, on January 18,
1932, the date on which she obtained her attachment lien on said
In view of the premises, the attaching creditors are entitled to priority over shares of stock which still stood in the name of Diosomito on the
the defectively registered mortgage of the appellant and the judgment books of the corporation.
appealed from must be affirmed without special pronouncement as to costs
in this instance.
CYRUS PADGETT, plaintiff-appellee,
TORIBIA USON, plaintiff-appellee, vs.
vs. BABCOCK & TEMPLETON, INC., and W. R. BABCOCK, defendants-
VICENTE DIOSOMITO, ET AL., defendants. appellants
VICENTE DIOSOMITO, EMETERIO BARCELON, H.P.L. JOLLYE and NORTH (G.R. No. L-38684; December 21, 1933)
ELECTRIC COMPANY, INC., appellants.
(G.R. No. L-42135; June 17, 1935) FACTS: The appellee was an employee of the appellant corporation and
rendered services as such from January 1, 1923, to April 15, 1929. During
FACTS: In a civil action filed by herein plaintiff-appellee Uson, an that period he bought 35 shares thereof at P100 a share at the suggestion
attachment was levied on Jan. 18, 1932 upon the property of defendant of the president of said corporation. He was also the recipient of 9 shares
Vicente Diosmomito including the question 75 shares of North Electric by way of bonus during Christmas seasons. In this way the said appellee
Company, Inc.. On March 20, 1933, the said shares were sold at a public became the owner of 44 shares for which the 12 certificates, Exhibits F to
auction to satisfy the claim of Uson. F-11, were issued in his favor. The word "nontransferable" appears on each
and every one of these certificates. Before severing his connections with
In the present action, appellant HPL Jollye claims ownership of said shares. the said corporation, the appellee proposed to the president that the said
Apparently, these shares were sold by Diosomito to Emetertio Barcelon on corporation buy his 44 shares at par value plus the interest thereon, or that
Feb. 3, 1931 but the certificates were cancelled and a new one issued only he be authorized to sell them to other persons. The corporation bought
on Sep. 16, 1932. Later on, the same shares were sold to Jollye and similar shares belonging to other employees, at par value. Sometime later,
registered in the books on Feb. 13, 1933. the said president offered to buy the appellee's shares first at P85 each and
then at P80. The appellee did not agree thereto.
ISSUE: WON a bona fide transfer of the shares of a corporation, not
registered or noted on the books of the corporation, is valid as against a ISSUE: WON the restriction imposed on the right to transfer the shares is
subsequent lawful attachment of said shares, regardless of whether the valid?
attaching creditor had actual notice of said transfer or not?
HELD: No. The opinion seems to be unanimous that a restriction
HELD: Section 35 of the Corporation Law is as follows: imposed upon a certificate of shares, similar to the ones under
consideration, is null and void on the ground that it constitutes
SEC. 35. The capital stock of stock corporations shall be divided into and unreasonable limitation of the right of ownership and is in
shares for which certificates signed by the president or the vice- restraint of trade.
president, countersigned by the secretary or clerk and sealed with the
by-laws. Shares of stock so issued are personal property and may be Shares of corporate stock being regarded as property, the owner of such
transferred by delivery of the certificate indorsed by the owner or his shares may, as a general rule, dispose of them as he sees fit, unless the
attorney in fact or other person legally authorized to make the transfer. corporation has been dissolved, or unless the right to do so is properly
No transfer, however, shall be valid, except as between the parties, until restricted, or the owner's privilege of disposing of his shares has been
the transfer is entered and noted upon the books of the corporation so hampered by his own action. (14 C. J., sec. 1033, pp. 663, 664.)
as to show the names of the parties to the transaction, the date of the
transfer, the number of the certificate, and the number of shares Any restriction on a stockholder's right to dispose of his shares must be
transferred 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
We prefer to adopt the line followed by the Supreme Courts of upon its shares, and except to the extent that valid restrictive regulations
Massachusetts and of Wisconsin. ( See Clews vs. Friedman, 182 Mass., 555; and agreements exist and are applicable. Subject only to such
66 N.E. 201, and In re Murphy, 51 Wis., 519; 8 N.W., 419.) In this case the restrictions, a stockholder cannot be controlled in or restrained from
court had under consideration a statute identical with our own section 35, exercising his right to transfer by the corporation or its officers or by
supra, and the court said: other stockholders, even though the sale is to a competitor of the
company, or to an insolvent person, or even though a controlling interest
We think the true meaning of the language is, and the obvious intention is sold to one purchaser. (Ibid., sec. 1035, pp. 665, 666.)
of the legislature in using it was, that all transfers of shares should be

In the case of Fleischer vs. Botica Nolasco Co. (47 Phil., 583), we have a beneficial purpose, results in the protection of the corporation
discussed the validity of a clause in the by-laws of the defendant as well as of the individual parties to the contract, and is
corporation, which provided that, under the same conditions, the owner of reasonable as to the length of time of the suspension. We do not
a share of stock could not sell it to another person except to the defendant here undertake to discuss the limitations to the power to suspend the right
corporation. In deciding the legality and validity of said restriction, we held: of alienation of stock, limiting ourselves to the statement that the
suspension in this particular case is legal and valid.
The only restraint imposed by the Corporation Law upon
transfer of shares is found in section 35 of Act No. 1459. This EMBASSY FARMS, INC., petitioner,
restriction is necessary in order that the officers of the vs.
corporation may know who are the stockholders, which is HON. COURT OF APPEALS (INTERMEDIATE APPELLATE COURT), HON.
essential in conducting elections of officers, in calling meetings ZENAIDA S. BALTAZAR, Judge of the Regional Trial Court, Branch CLVIII,
of stockholders, and for other purposes. But any restriction of (158), Pasig, Metro Manila, VOLTAIRE B. CRUZ, Deputy Sheriff, Branch
the nature of that imposed in the by-law now in question, is CLVIII, Regional Trial Court, Pasig, Metro Manila and EDUARDO B.
ultra vires, violative of the property rights of shareholders, and EVANGELISTA, respondents
in restraint of trade. (Id., p. 592.) (G.R. No. 80682 August 13, 1990)
It is obvious, therefore, that the restriction consisting in the word FACTS: Alexander G. Asuncion and Eduardo B. Evangelista entered into a
"nontransferable", appearing on the 12 certificates, Exhibits F to F-11, is Memorandum of Agreement (MOA) with the following obligations:
illegal and should be eliminated.
 EVANGELISTA:
ISSUE2: WON the corporation may be compelled to buy the shares of a 1. To transfer to Asuncion 19 parcels of agricultural land registered
selling stockholder? in his name, together with the stocks, equipment and facilities of
Embassy Farms, Inc. wherein 90% of the shares of stock is
HELD: No. There is no existing law nor authority in support of the owned by Evangelista;
plaintiff's claim to the effect that the defendants are obliged to buy his 2. To cede, transfer and convey “in a manner absolute and
shares of stock value at par value, plus the interest demanded thereon. In irrevocable any and all of his shares of stocks” in Embassy
this respect, we hold that there has been no such contract, either express Farms, Inc. to Asuncion or his nominees “until the total of said
or implied, between the plaintiff and the defendants. In the absence of a shares of stock so transferred shall constitute 90% of the paid-in
similar contractual obligation and of a legal provision applicable thereto, it equity of said corporation” within a reasonable time from signing
is logical to conclude that it would be unjust and unreasonable to compel the document.
the said defendants to comply with a non-existent or imaginary obligation.  ASUNCION:
Whereupon, we are likewise compelled to conclude that the judgment 1. To pay Evangelista P8,630,999;
originally rendered to that effect is untenable and should be set aside 2. To organize and register a new corporation with an authorized
capital stock of P10M which upon registration will take over all
LEON J. LAMBERT, plaintiff-appellant, the rights and liabilities of Asuncion.
vs.
T. J. FOX, defendant-appellee Effective control and management of the piggery at Embassy Farms, Inc.
(G.R. No. L-7991; January 29, 1914) was transferred by Evangelista to Asuncion pursuant to clause 8 of the
MOA. In accordance with clause 15, Evangelista served as President and
FACTS: Defendant and plaintiff, became two of the largest shareholders of Chief Executive of Embassy Farms.
John R. Edgar & Co., Inc. was incorporated. They were former creditors
who agreed to aid the financially distressed predecessor John R. Edgar & Evangelista also endorsed in blank all his shares of stock including that of
Co.. They entered into an agreement a few days after incorporation as his wife and three nominees with minor holdings but retained possession of
follows: said shares and opted to deliver to Asuncion only upon full compliance of
the latter of his obligations under the MOA.
Whereas the undersigned are, respectively, owners of large amounts of
stock in John R. Edgar and Co, Inc; and, For failure to comply with his obligations, Evangelista intimated the
institution of the appropriate legal action. But Asuncion eventually filed for
Whereas it is recognized that the success of said corporation depends, the rescission of the MOA.
now and for at least one year next following, in the larger stockholders
retaining their respective interests in the business of said corporation: ISSUE: WON Evangelista has a better right to the shares and control of
Therefore, the undersigned mutually and reciprocally agree not to sell, the corporate affairs?
transfer, or otherwise dispose of any part of their present holdings of
stock in said John R. Edgar & Co. Inc., till after one year from the date HELD: Yes. From the pleadings submitted by the parties it is clear that
hereof. although Evangelista has indorsed in blank the shares outstanding in his
Either party violating this agreement shall pay to the other the sum of name he has not delivered the certificate of stocks to Asuncion because the
one thousand (P1,000) pesos as liquidated damages, unless previous latter has not fully complied with his obligations under the MOA. There
consent in writing to such sale, transfer, or other disposition be obtained. being no delivery of the indorsed shares of stock Asuncion cannot
therefore effectively transfer to other person or his nominees the
Notwithstanding this contract the defendant Fox on October 19, 1911, sold undelivered shares of stock. For an effective transfer of shares of stock
his stock in the said corporation to E. C. McCullough of the firm of E. C. the mode and manner of transfer as prescribed by law must be followed
McCullough & Co. of Manila, a strong competitor of the said John R. Edgar (Navea v. Peers Marketing Corp., 74 SCRA 65). As provided under Section 3
& Co., Inc. of Batas Pambansa Bilang 68, otherwise known as the Corporation Code of
the Philippines, shares of stock may be transferred by delivery to
A complaint was filed and the trial court decided in favor of defendant. the transferree of the certificate properly indorsed. Title may be
vested in the transferree by the delivery of the duly indorsed
ISSUE: WON the stipulation in the contract is valid? certificate of stock (18 C.J.S. 928, cited in Rivera v. Florendo, 144 SCRA
643). However, no transfer shall be valid, except as between the parties
HELD: Yes. It is urged by the appellee in this case that the stipulation in until the transfer is properly recorded in the books of the corporation (Sec.
the contract suspending the power to sell the stock referred to therein is an 63, Corporation Code of the Philippines).
illegal stipulation, is in restraint of trade and, therefore, offends public
policy. We do not so regard it. The suspension of the power to sell has

In the case at bar the indorsed certificate of stock was not actually corporation which clearly shows that he was a stockholder of the
delivered to Asuncion so that Evangelista is still the controlling stockholder corporation. (See Section 30, Corporation Code) From the point of view of
of Embassy Farms despite the execution of the memorandum of agreement the corporation, therefore, Chuidian was the owner of the 1,500 shares of
and the turn-over of control and management of the Embassy Farms to stock. In such a case, the petitioner who claims ownership over the
Asuncion on August 2, 1984. questioned shares of stock must show that the same were transferred to
him by proving that all the requirements for the effective transfer of shares
When Asuncion filed on April 10, 1986 an action for the rescission of of stock in accordance with the corporation's by laws, if any, were followed
contracts with damages, the Pasig Court merely restored and established (See Nava v. Peers Marketing Corporation, 74 SCRA 65 [1976]) or in
the status quo prior to the execution of the MOA by the issuance of a accordance with the provisions of law.
restraining order on July 10, 1987 and the writ of preliminary injunction on The petitioner failed in both instances. The petitioner did not present any
July 30, 1987. It would be unjust and unfair to allow Asuncion and his by-laws which could show that the 1,500 shares of stock were effectively
nominees to control and manage the Embassy Farms despite the fact that transferred to him. In the absence of the corporation's by-laws or rules
Asuncion, who is the source of their supposed shares of stock in the governing effective transfer of shares of stock, the provisions of the
corporation, is not asking for the delivery of the indorsed certificate of Corporation Law are made applicable to the instant case.
stock but for the rescission of the MOA. Rescission would result in mutual
restitution (Magdalena Estate v. Myrick, 71 Phil. 344) so it is but proper to The law is clear that in order for a transfer of stock certificate to
allow Evangelista to manage the farm. Compared to Asuncion or his be effective, the certificate must be properly indorsed and that
nominees Evangelista would be more interested in the preservation of the title to such certificate of stock is vested in the transferee by the
assets, equipment and facilities of Embassy Farms during the pendency of delivery of the duly indorsed certificate of stock. (Section 35,
the main case. Corporation Code) Since the certificate of stock covering the questioned
1,500 shares of stock registered in the name of the late Juan Chuidian was
ENRIQUE RAZON, petitioner, never indorsed to the petitioner, the inevitable conclusion is that the
vs. questioned shares of stock belong to Chuidian. The petitioner's
INTERMEDIATE APPELLATE COURT and VICENTE B. CHUIDIAN, in his asseveration that he did not require an indorsement of the certificate of
capacity as Administrator of the Estate of the Deceased JUAN T. stock in view of his intimate friendship with the late Juan Chuidian cannot
CHUIDIAN, respondents. overcome the failure to follow the procedure required by law or the proper
(G.R. No. 74306 March 16, 1992) conduct of business even among friends. To reiterate, indorsement of the
certificate of stock is a mandatory requirement of law for an effective
VICENTE B. CHUIDIAN, petitioner, transfer of a certificate of stock.
vs.
INTERMEDIATE APPELLATE COURT, ENRIQUE RAZ0N, and E. RAZON, Moreover, the preponderance of evidence supports the appellate court's
INC., respondents factual findings that the shares of stock were given to Juan T. Chuidian for
(G.R. No. 74315 March 16, 1992) value. Juan T. Chuidian was the legal counsel who handled the legal affairs
of the corporation. We give credence to the testimony of the private
FACTS: E. Razon, Inc. was organized by petitioner Enrique Razon in 1962. respondent that the shares of stock were given to Juan T. Chuidian in
However, it began operations only in 1966 since the other incorporators payment of his legal services to the corporation. Petitioner Razon failed to
withdrew from the said corporation. The petitioner then distributed the overcome this testimony.
stocks previously placed in the names of the withdrawing nominal
incorporators to some friends, among them the late Juan T. Chuidian to
whom he gave 1,500 shares. RURAL BANK OF SALINAS, INC., MANUEL SALUD, LUZVIMINDA TRIAS
and FRANCISCO TRIAS, petitioners,
The shares of stocks were registered in the name of Chuidian only as vs.
nominal stockholder and with the agreement that the said shares of stock COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION,
were owned and held by the petitioner but Chuidian was given the option MELANIA A. GUERRERO, LUZ ANDICO, WILHEMINA G. ROSALES,
to buy the same FRANCISCO M. GUERRERO, JR., and FRANCISCO GUERRERO , SR.,
respondents
Chuidian delivered to petitioner the stock certificate in 1966, and since then (G.R. No. 96674 June 26, 1992)
petitioner had in his possession such certificate, until the time, he delivered
it for deposit with PBCom under the parties’ joint custody pursuant to their FACTS: On June 10, 1979, Clemente G. Guerrero, President of the Rural
agreement embodied in the trial court’s order. Bank of Salinas, Inc., executed a Special Power of Attorney in favor of his
wife, private respondent Melania Guerrero, giving and granting the latter
ISSUE: WON petitioner Razon is the rightful owner of the shares? full power and authority to sell or otherwise dispose of and/or mortgage
473 shares of stock of the Bank registered in his name (represented by the
HELD: No. In the case of Embassy Farms, Inc. v. Court of Appeals (188 Bank's stock certificates nos. 26, 49 and 65), to execute the proper
SCRA 492 [1990]) we ruled: documents therefor, and to receive and sign receipts for the dispositions.
. . . For an effective, transfer of shares of stock the mode and manner of Pursuant to said SPA, private respondent Melania Guerrero, as Attorney-in-
transfer as prescribed by law must be followed (Navea v. Peers Fact, executed the following assignments of shares of stocks: Luz Andico
Marketing Corp., 74 SCRA 65). As provided under Section 3 of Batas (457 shares); Wilhelmina Rosales (10 shares); Francisco Guerrero, Jr. (5
Pambansa Bilang, 68 otherwise known as the Corporation Code of the shares); and Francisco Guerrero, Sr. (1 share). The last share was
Philippines, shares of stock may be transferred by delivery to the transferred 2 months before the death of Clemente.
transferee of the certificate properly indorsed. Title may be vested in the
transferee by the delivery of the duly indorsed certificate of stock (18 Subsequently, Melania Guerrero presented the Deeds of Assignments and
C.J.S. 928, cited in Rivera v. Florendo, 144 SCRA 643). However, no requested for the cancellation of the certificates of stock and new ones to
transfer shall be valid, except as between the parties until the transfer is be issued in the name of transferees. However, petitioner Bank refused.
properly recorded in the books of the corporation (Sec. 63, Corporation
Code of the Philippines; Section 35 of the Corporation Law) Melania Guerrero filed for an action for mandamus with the SEC. Maripol
Guerrero, a legally adopted daughter of Melania and Clemente filed for
In the instant case, there is no dispute that the questioned 1,500 shares of intervention claiming that two weeks before filing the action for mandamus,
stock of E. Razon, Inc. are in the name of the late Juan Chuidian in the a petition for the administration of the estate of Celemente has been filed
books of the corporation. Moreover, the records show that during his and that the deeds of assignment were fictitious and antedated. SEC
lifetime Chuidian was elected member of the Board of Directors of the denied the motion for intervention.

on its part, is to render nugatory and ineffectual the spirit and intent of
Maripol filed a complaint before the CFI for the annulment of the Deeds of Section 63 of the Corporation Code. Thus, respondent Court of Appeals did
Assignment. not err in upholding the Decision of respondent SEC affirming the Decision
of its Hearing Officer directing the registration of the 473 shares in the
Later on, the SEC rendered a decision granting the action for mandamus stock and transfer book in the names of private respondents. At all events,
which was affirmed by the SEC en banc and still later, by the CA. the registration is without prejudice to the proceedings in court to
determine the validity of the Deeds of Assignment of the shares of stock in
ISSUE: WON the mandamus was properly granted for the registration of question.
the transfer of the 473 shares in question?
LIM TAY, petitioner,
HELD: Yes. Respondent SEC correctly ruled in favor of the registering of vs.
the shares of stock in question in private respondent's names. Such ruling COURT OF APPEALS, GO FAY AND CO. INC., SY GUIOK, and THE
finds support under Section 63 of the Corporation Code, to wit: ESTATE OF ALFONSO LIM, respondents
(G.R. No. 126891; August 5, 1998)
Sec. 63. . . . Shares of stock so issued are personal property and may
be transferred by delivery of the certificate or certificates indorsed by FACTS: To secure their separate loans, respondent Sy Guiok and Alfonso
the owner or his attorney-in-fact or other person legally authorized to Lim, each executed a contract of pledge covering their respective 300
make the transfer. No transfer, however, shall be valid, except as shares in favor of petitioner Lim Tay where they indorsed in blank and
between the parties, until the transfer is recorded in the books of the delivered their shares of stock to Tay.
corporation . . .
For non-payment, Lim Tay filed a Petition for Mandamus in the SEC against
In the case of Fleisher vs. Botica Nolasco , 47 Phil. 583, the Court Go Fay & Compny, Inc. to cancel the old certificates and issue a new one in
interpreted Sec. 63 in his wise: his name, which was granted by the SEC but reversed by the CA.
Said Section (Sec. 35 of Act 1459 [now Sec. 63 of the Corporation ISSUE: WON the rulings in the Abejo case and the Rural Bank of Salinas
Code]) contemplates no restriction as to whom the stocks may case will apply?
be transferred. It does not suggest that any discrimination
may be created by the corporation in favor of, or against a HELD: No. Petitioner's reliance on the doctrines set forth in Abejo v. De la
certain purchaser. The owner of shares, as owner of personal Cruz and Rural Bank of Salinas, Inc. v. Court of Appeals is misplaced.
property, is at liberty, under said section to dispose them in
favor of whomever he pleases, without limitation in this ABEJO: the Abejo spouses sold to Telectronic Systems, Inc. shares of
respect, than the general provisions of law. . . . stock in Pocket Bell Philippines, Inc. Subsequent to such contract of sale,
the corporate secretary, Norberto Braga, refused to record the transfer of
The only limitation imposed by Section 63 of the Corporation the shares in the corporate books and instead asked for the annulment of
Code is when the corporation holds any unpaid claim against the sale, claiming that he and his wife had a pre-emptive right over some
the shares intended to be transferred, which is absent here. of the shares, and that his wife's shares were sold without consideration or
consent.
A corporation, either by its board, its by-laws, or the act of its officers,
cannot create restrictions in stock transfers, because: At the time the Bragas questioned the validity of the sale, the contract had
already been perfected, thereby demonstrating that Telectronic Systems,
. . . Restrictions in the traffic of stock must have their source in Inc. was already the prima facie owner of the shares and, consequently, a
legislative enactment, as the corporation itself cannot create such stockholder of Pocket Bell Philippines, Inc. Even if the sale were to be
impediment. By-laws are intended merely for the protection of the annulled later on, Telectronic Systems, Inc. had, in the meantime, title over
corporation, and prescribe regulation, not restriction; they are always the shares from the time the sale was perfected until the time such sale
subject to the charter of the corporation. The corporation, in the was annulled. The effects of an annulment operate prospectively and do
absence of such power, cannot ordinarily inquire into or pass upon the not, as a rule, retroact to the time the sale was made. Therefore, at the
legality of the transactions by which its stock passes from one person time the Bragas questioned the validity of the tranfers made by the Abejos,
to another, nor can it question the consideration upon which a sale is Telectronic Systems, Inc. was already a prima facie shareholder of the
based. . . . (Tomson on Corporation Sec. 4137, cited in Fleisher vs. corporation, thus making the dispute between the Bragas and the Abejos
Nolasco, Supra). "intra-corporate" in nature. Hence, the Court held that "the issue is not on
ownership of shares but rather the non-performance by the corporate
The right of a transferee/assignee to have stocks transferred to his name is secretary of the ministerial duty of recording transfers of shares of stock of
an inherent right flowing from his ownership of the stocks. Thus: the corporation of which he is secretary."
Whenever a corporation refuses to transfer and register stock Unlike Abejo, however, petitioner's ownership over the shares in this
in cases like the present, mandamus will lie to compel the case was not yet perfected when the Complaint was filed. The
officers of the corporation to transfer said stock in the books contract of pledge certainly does not make him the owner of the
of the corporation" (26, Cyc. 347, Hyer vs. Bryan, 19 Phil. 138; shares pledged. Further, whether prescription effectively transferred
Fleisher vs. Botica Nolasco, 47 Phil. 583, 594). ownership of the shares, whether there was a novation of the contracts of
pledge, and whether laches had set in were difficult legal issues, which
The corporation's obligation to register is ministerial. were unpleaded and unresolved when herein petitioner asked the corporate
In transferring stock, the secretary of a corporation acts in purely secretary of Go Fay to effect the transfer, in his favor, of the shares
ministerial capacity, and does not try to decide the question of pledged to him.
ownership. (Fletcher, Sec. 5528, page 434).
In Rural Bank of Salinas: Melenia Guerrero executed deeds of
The duty of the corporation to transfer is a ministerial one assignment for the shares in favor of the respondents in that case. When
and if it refuses to make such transaction without good the corporate secretary refused to register the transfer, an action for
cause, it may be compelled to do so by mandamus. (See. 5518, mandamus was instituted. Subsequently, a motion for intervention was
12 Fletcher 394) filed, seeking the annulment of the deeds of assignment on the grounds
that the same were fictitious and antedated, and that they were in fact
For the petitioner Rural Bank of Salinas to refuse registration of the donations because the considerations therefor were below the book value
transferred shares in its stock and transfer book, which duty is ministerial of the shares.

in the contracts of pledge and as required by Article 2112 of the
Like the Abejo spouses, the respondents in Rural Bank of Salinas were Civil Code. Therefore, ownership of the shares could not have
already prima facie shareholders when the deeds of assignment were passed to him. The pledgor remains the owner during the pendency of
questioned. If the said deeds were to be annulled later on, respondents the pledge and prior to foreclosure and sale, as explicitly provided by
would still be considered shareholders of the corporation from the time of Article 2103 of the same Code:
the assignment until the annulment of such contracts.
“Unless the thing pledged is expropriated, the debtor continues to be the
ISSUE2: WON petitioner is entitled to the relief of mandamus as against owner thereof.”
the company?
RICARDO A. NAVA, petitioner-appellant.
HELD: No. Petitioner prays for the issuance of a writ of mandamus, vs.
directing the corporate secretary of respondent corporation to have the PEERS MARKETING CORPORATION, RENATO R. CUSI and AMPARO
shares transferred to his name in the corporate books, to issue new CUSI, respondents-appellees
certificates of stock and to deliver the corresponding dividends to him. (G.R. No. L-28120; November 25, 1976)
In order that a writ of mandamus may issue, it is essential that FACTS: Teofilo Po was an incorporator who subscribed to 80 shares and
the person petitioning for the same has a clear legal right to the paid 25% of the subscription. No certificate of stock was issued to him.
thing demanded and that it is the imperative duty of the
respondent to perform the act required. It neither confers powers Later on, Po sold to herein petitioner Nava 20 of the 80 shares at par value
nor imposes duties and is never issued in doubtful cases. It is of P100, or P2,000. Nava requested herein private respondents, officers of
simply a command to exercise a power already possessed and to Peers Marketing Corporation, to register him as owner of the shares, but
perform a duty already imposed. they refused, Po being delinquent in the payment of the balance due his
subscription.
In the present case, petitioner has failed to establish a clear legal right.
Petitioner's contention that he is the owner of the said shares is completely Po filed an action for mandamus in the CFI of Negros but it was dismissed.
without merit. Quite the contrary and as already shown, he does not have
any ownership rights at all. At the time petitioner instituted his suit at the Po claims that the trial court erred in applying the ruling in Fua Cun vs.
SEC, his ownership claim had no prima facie leg to stand on. At best, his Summers and China Banking Corporation wherein it was ruled that the
contention was disputable and uncertain Mandamus will not issue to payment of one-half of the subscription does not entitle the subscriber to a
establish a legal right, but only to enforce one that is already clearly certificate for one-half of the number of shares subscribed.
established.
ISSUE: WON Peers Marketing Corporation may be compelled by
ISSUE3: WON by Guiok and Lim’s failure to pay, the ownership of the mandamus to enter in its stock and transfer book the sale made by Po to
shares automatically passed to Lim Tay? Nava of the 20 shares forming part of Po’s subscription of 80 shares, it
being admitted that the corporation has an unpaid claim of P6,000 as the
HELD: No. On appeal, petitioner claimed that ownership over the shares balance on said subscription?
had passed to him, not via the contracts of pledge, but by virtue of
prescription and by respondents' subsequent acts which amounted to a HELD: No. We hold that the transfer made by Po to Nava is not the
novation of the contracts of pledge. We do not agree. "alienation, sale, or transfer of stock" that is supposed to be recorded in
the stock and transfer book, as contemplated in section 52 of the
At the outset, it must be underscored that petitioner did not acquire Corporation Law.
ownership of the shares by virtue of the contracts of pledge. Article 2112 of
the Civil Code states: As a rule, the shares which may be alienated are those which are
covered by certificates of stock, as shown in the following provisions of
“The creditor to whom the credit has not been satisfied in due time, may the Corporation Law and as intimated in Hager vs. Bryan, 19 Phil. 138
proceed before a Notary Public to the sale of the thing pledged. This sale (overruling the decision in Hager vs. Bryan, 21 Phil. 523. See 19 Phil. 616,
shall be made at a public auction, and with notification to the debtor and notes, and Hodges vs. Lezama, 14 SCRA 1030).
the owner of the thing pledged in a proper case, stating the amount for
which the public sale is to be held. If at the first auction the thing is not SEC. 35. The capital stock of stock corporations shall be divided into
sold, a second one with the same formalities shall be held; and if at the shares for which certificates signed by the president or the vice-
second auction there is no sale either, the creditor may appropriate the president, countersigned by the secretary or clerk and sealed with the
thing pledged. In this case he shall be obliged to give an acquittance for seal of the corporation, shall be issued in accordance with the by-laws.
his entire claim.” Shares of stock so issued are personal property and may be transferred
by delivery of the certificate indorsed by the owner or his attorney in fact
Furthermore, the contracts of pledge contained a common proviso, which or other person legally authorized to make the transfer. No transfer,
we quote again for the sake of clarity: however, shall be valid, except as between the, parties, until the transfer
is entered and noted upon the books of the corporation so as to show
“3. In the event of the failure of the PLEDGOR to pay the amount within the names of the parties to the transaction, the date of the transfer, the
a period of six (6) months from the date hereof, the PLEDGEE is hereby number of the certificate, and the number of shares transferred.
authorized to foreclose the pledge upon the said shares of stock hereby
created by selling the same at public or private sale with or without No share of stock against which the corporation holds any unpaid claim
notice to the PLEDGOR, at which sale the PLEDGEE may be the shall be transferable on the books of the corporation.
purchaser at his option; and "the PLEDGEE is hereby authorized and
empowered at his option to transfer the said shares of stock on the SEC. 36. (re voting trust agreement) ...
books of the corporation to his own name, and to hold the certificate
issued in lieu thereof under the terms of this pledge, and to sell the said The certificates of stock so transferred shall be surrendered and
shares to issue to him and to apply the proceeds of the sale to the cancelled, and new certificates therefor issued to such person or
payment of the said sum and interest, in the manner hereinabove persons, or corporation, as such trustee or trustees, in which new
provided;” certificates it shall appear that they are issued pursuant to said
agreement.
There is no showing that petitioner made any attempt to foreclose xxx xxx xxx
or sell the shares through public or private auction, as stipulated

As prescribed in section 35, shares of stock may be transferred by delivery the Villanueva spouses ignored. Their shares were converted into Treasury
to the transferee of the certificate properly indorsed. "Title may be vested shares.
in the transferee by delivery of the certificate with a written assignment or
indorsement thereof" (18 C.J.S. 928). There should be compliance with the The Villanueva spouses questioned the legality of the such conversion and
mode of transfer prescribed by law (18 C.J.S. 930). filed with the SEC a petition for annulment of the stockholders’ meeting and
election of directors and officers because they were not notified of such
The usual practice is for the stockholder to sign the form on the back of the meeting.
stock certificate. The certificate may thereafter be transferred from one
person to another. If the holder of the certificate desires to assume the The SEC hearing officer dismissed the application for issuance of a
legal rights of a shareholder to enable him to vote at corporate elections preliminary injunction, but was granted on reconsideration. The decision
and to receive dividends, he fills up the blanks in the form by inserting his was affirmed by the SEC en banc and later by the CA.
own name as transferee. Then he delivers the certificate to the secretary of
the corporation so that the transfer may be entered in the corporation's ISSUE: WON the transfer of the shares is ineffective for non-indorsement
books. The certificate is then surrendered and a new one issued to the and non-delivery of the certificate of stocks?
transferee. (Hager vs. Bryan, 19 Phil. 138, 143-4).
HELD: Yes. The Corporation Code specifically provides:
That procedure cannot be followed in the instant case because, as already
noted, the twenty shares in question are not covered by any certificate of SECTION 63. Certificate of stock and transfer of shares . — The capital
stock in Po's name. Moreover, the corporation has a claim on the said stock of stock corporations shall be divided into shares for which
shares for the unpaid balance of Po's subscription. A stock certificates signed by the president or vice president, countersigned by
subscription is a subsisting liability from the time the subscription the secretary or assistant secretary, and sealed with the seal of the
is made. The subscriber is as much bound to pay his subscription corporation shall be issued in accordance with the by-laws. Shares of
as he would be to pay any other debt. The right of the corporation stocks so issued are personal property and may be transferred by
to demand payment is no less incontestable. (Velasco vs. Poizat, 37 delivery of the certificate or certificates indorsed by the owner or his
Phil. 802; Lumanlan vs. Cura, 59 Phil. 746). attorney-in-fact or other person legally authorized to make the transfer.
No transfer, however, shall be valid, except as between the parties, until
A corporation cannot release an original subscriber from paying the transfer is recorded in the books of the corporation so as to show
for his shares without a valuable consideration (Philippine National the names of the parties to the transaction, the date of the transfer, the
Bank vs. Bitulok Sawmill, Inc., L-24177-85, June 29, 1968, 23 SCRA 1366) number of the certificate or certificates and the number of shares
or without the unanimous consent of the stockholders (Lingayen transferred.
Gulf Electric Power Co., Inc. vs. Baltazar, 93 Phil 404).
No shares of stock against which the corporation holds any unpaid claim
Under the facts of this case, there is no clear legal duty on the part of the shall be transferable in the books of the corporation. (Emphasis ours)
officers of the corporation to register the twenty shares in Nava's name,
Hence, there is no cause of action for mandamus Petitioners argue that by virtue of the Deed of Assignment, private
respondents had relinquished to them any and all rights they may have had
As already stressed, in this case no stock certificate was issued to Po. as stockholders of the Bank. While it may be true that there was an
Without stock certificate, which is the evidence of ownership of assignment of private respondents' shares to the petitioners, said
corporate stock, the assignment of corporate shares is effective assignment was not sufficient to effect the transfer of shares
only between the parties to the transaction (Davis vs. Wachter, 140 since there was no endorsement of the certificates of stock by the
So. 361). owners, their attorneys-in-fact or any other person legally
authorized to make the transfer. Moreover, petitioners admit that the
The delivery of the stock certificate, which represents the shares to be assignment of shares was not coupled with delivery, the absence of which
alienated , is essential for the protection of both the corporation and its is a fatal defect. The rule is that the delivery of the stock certificate
stockholders (Smallwood vs. Moretti, 128 So. 2d 628). duly endorsed by the owner is the operative act of transfer of
shares from the lawful owner to the transferee. Thus, title may be
vested in the transferee only by delivery of the duly indorsed
THE RURAL BANK OF LIPA CITY, INC., THE OFFICERS AND certificate of stock.
DIRECTORS, BERNARDO BAUTISTA, JAIME CUSTODIO, OCTAVIO
KATIGBAK, FRANCISCO CUSTODIO, and JUANITA BAUTISTA OF THE We have uniformly held that for a valid transfer of stocks, there must be
RURAL BANK OF LIPA CITY, INC., petitioners, strict compliance with the mode of transfer prescribed by law. The
vs. requirements are: (a) There must be delivery of the stock
HONORABLE COURT OF APPEALS, HONORABLE COMMISSION EN certificate: (b) The certificate must be endorsed by the owner or
BANC, SECURITIES AND EXCHANGE COMMISSION, HONORABLE ENRIQUE his attorney-in-fact or other persons legally authorized to make
L. FLORES, JR., in his capacity as Hearing Officer, REYNALDO VILLANUEVA, the transfer; and (c) To be valid against third parties, the transfer
SR, AVELINA M. VILLANUEVA, CATALINO VILLANUEVA, ANDRES must be recorded in the books of the corporation. As it is,
GONZALES, AURORA LACERNA, CELSO LAYGO, EDGARDO REYES, compliance with any of these requisites has not been clearly and
ALEJANDRA TONOGAN and ELENA USI, respondents sufficiently shown.
(G.R. No. 124535; September 28, 2001)
It may be argued that despite non-compliance with the requisite
FACTS: Private respondent Reynaldo Villanueva Sr., a stockholder of Rural endorsement and delivery, the assignment was valid between the parties,
Bank of Lipa City, Inc. executed a Deed of Assignment wherein he assigned meaning the private respondents as assignors and the petitioners as
his shares, as well as those of eight stockholders under his control with a assignees. While the assignment may be valid and binding on the
total of 10,457 shares, in favor of stockholders of the Bank represented by petitioners and private respondents, it does not necessarily make the
its BOD. At the same time, He and his wife executed an agreement wherein transfer effective. Consequently, the petitioners, as mere assignees,
he acknowledge their indebtedness of P4M and stipulated that the said cannot enjoy the status of a stockholder, cannot vote nor be voted
debt will be paid out of the proceeds of the sale of their real property for, and will not be entitled to dividends, insofar as the assigned
described in the agreement. shares are concerned. Parenthetically, the private respondents cannot,
as yet, be deprived of their rights as stockholders, until and unless the
The Villanueva spouses failed to settle their obligation on the due date, and issue of ownership and transfer of the shares in question is resolved with
the BOD sent a demand letter for the surrender of the said shares and for finality.
the delivery of sufficient collateral to cover the balance of the debt, which

There being no showing that any of the requisites mandated by law was
complied with, the SEC Hearing Officer did not abuse his discretion in For all intents and purposes, however, since this was already cancelled
granting the issuance of the preliminary injunction prayed for by petitioners which cancellation was also reported to the respondent
in SEC Case No. 02-94-4683 (herein private respondents). Accordingly, the Commission, there was no necessity for the same certificate to be
order of the SEC en banc affirming the ruling of the SEC Hearing Officer, endorsed by the petitioner. All the acts required for the transferee
and the Court of Appeals decision upholding the SEC en banc order, are to exercise its rights over the acquired stocks were attendant and
valid and in accordance with law and jurisprudence, thus warranting the even the corporation was protected from other parties,
denial of the instant petition for review. considering that said transfer was earlier recorded or registered in
the corporate stock and transfer book.
ALFONSO S. TAN, Petitioner,
vs. Following the doctrine enunciated in the case of Tuazon v. La Provisora
SECURITIES AND EXCHANGE COMMISSION, VISAYAN EDUCATIONAL Filipina, where this Court held, that:
SUPPLY CORP., TAN SU CHING, ALFREDO B. UY, ANGEL S. TAN and
PATRICIA AGUILAR, Respondents But delivery is not essential where it appears that the persons
(G.R. No. 95696; March 3, 1992) sought to be held as stockholders are officers of the
corporation, and have the custody of the stock book . . . (67 Phi.
FACTS: With the withdrawal of two of the original incorporators, petitioner 36).
Alfonso Tan assigned 50 of his 400 shares (covered by Stock Certificate No.
2) to his brother Angel S. Tan, private respondent. Furthermore, there is a necessity to delineate the function of the stock
itself from the actual delivery or endorsement of the certificate of stock
Petitioner’s stock certificate was cancelled by the corporate secretary, itself as is the question in the instant case. A certificate of stock is not
Patricia Aguilar, by virtue of Resolution No. 1981(b), while petitioner was necessary to render one a stockholder in corporation.
still the president and member of the board.
Nevertheless, a certificate of stock is the paper representative or
With the cancellation of Certificate of stock No. 2 and the subsequent tangible evidence of the stock itself and of the various interests
issuance of Stock Certificate No. 6 in the name of Angel S. Tan and for the therein. The certificate is not stock in the corporation but is
remaining 350 shares, Stock Certificate No. 8 was issued in the name of merely evidence of the holder's interest and status in the
petitioner Alfonso S. Tan, Mr. Buzon, submitted an Affidavit (Exh. 29), corporation, his ownership of the share represented thereby, but
alleging that: is not in law the equivalent of such ownership. It expresses the
contract between the corporation and the stockholder, but is not
9. That in view of his having taken 33 1/3 interest, I was personally essential to the existence of a share in stock or the nation of the
requested by Mr. Tan Su Ching to request Mr. Alfonso Tan to make relation of shareholder to the corporation. (13 Am. Jur. 2d, 769)
proper endorsement in the cancelled Certificate of Stock No. 2 and
Certificate No. 8, but he did not endorse, instead he kept the cancelled Under the instant case, the fact of the matter is, the new holder, Angel S.
(1981) Certificate of Stock No. 2 and returned only to me Certificate of Tan has already exercised his rights and prerogatives as stockholder and
Stock No. 8, which I delivered to Tan Su Ching. was even elected as member of the board of directors in the respondent
corporation with the full knowledge and acquiescence of petitioner. Due to
10. That the cancellation of his stock (Stock No. 2) was known by him in the transfer of fifty (50) shares, Angel S. Tan was clothed with rights and
1981; that it was Stock No. 8 that was delivered in March 1983 for his responsibilities in the board of the respondent corporation when he was
endorsement and cancellation. elected as officer thereof.
Besides, in Philippine jurisprudence, a certificate of stock is not a
Petitioner filed with the SEC a case questioning the cancellation of the negotiable instrument. "Although it is sometime regarded as
aforesaid Stock Nos. 2 and 8. quasi-negotiable, in the sense that it may be transferred by
endorsement, coupled with delivery, it is well-settled that it is
ISSUE: WON the cancellation and transfer of stock certificate no. 2 was non-negotiable, because the holder thereof takes it without
valid? prejudice to such rights or defenses as the registered owner/s or
transferror's creditor may have under the law, except insofar as
HELD: Yes. Petitioner claims that "(T)he cancellation and transfer of such rights or defenses are subject to the limitations imposed by
petitioner's shares and Certificate of Stock No. 2 (Exh. A) as well as the the principles governing estoppel." (De los Santos vs. McGrath, 96
issuance and cancellation of Certificate of Stock No. 8 (Exh. M) was Phil. 577)
patently and palpably unlawful, null and void, invalid and fraudulent."
(Rollo, p. 9) And, that Section 63 of the Corporation Code of the Philippines To follow the argument put up by petitioner which was upheld by the Cebu
is "mandatory in nature", meaning that without the actual delivery and SEC Extension Office Hearing Officer, Felix Chan, that the cancellation of
endorsement of the certificate in question, there can be no transfer, or that Stock Certificate Nos. 2 and 8 was null and void for lack of delivery of the
such transfer is null and void. cancelled "mother" Certificate No. 2 whose endorsement was deliberately
withheld by petitioner, is to prescribe certain restrictions on the transfer of
Contrary to the understanding of the petitioner with respect to the use of stock in violation of the corporation law itself as the only law governing
the word "may", in the case of Shauf v. Court of Appeals, (191 SCRA 713, transfer of stocks. While Section 47(s) grants a stock corporation the
27 November 1990), this Court held, that "Remedial law statues are to be authority to determine in the by-laws "the manner of issuing certificates" of
construed liberally." The term 'may' as used in adjective rules, is only shares of stock, however, the power to regulate is not the power to
permissive and not mandatory. prohibit, or to impose unreasonable restrictions of the right of
stockholders to transfer their shares. (Emphasis supplied)
This Court held in Chua v. Samahang Magsasaka, that "the word "may"
indicates that the transfer may be effected in a manner different from that In Fleisher v. Botica Nolasco Co., Inc ., it was held that a by-law which
provided for in the law." (62 Phil. 472) prohibits a transfer of stock without the consent or approval of all the
stockholders or of the president or board of directors is illegal as
Moreover, it is safe to infer from the facts deduced in the instant case that, constituting undue limitation on the right of ownership and in restraint of
there was already delivery of the unendorsed Stock Certificate No. 2, which trade. (47 Phil. 583)
is essential to the issuance of Stock Certificate Nos. 6 and 8 to angel S. Tan
and petitioner Alfonso S. Tan, respectively. What led to the problem was LEE E. WON alias RAMON LEE, plaintiff-appellant,
the return of the cancelled certificate (No. 2) to Alfonso S. Tan for his vs.
endorsement and his deliberate non-endorsement. WACK WACK GOLF and COUNTRY CLUB, INC., defendant-appellee

(G.R. No. L-10122; August 30, 1958) aforementioned shares of stock.
FACTS: The defendant corporation issued membership certificate no. 201 Defendant Attorney General of the US contends that the shares were
to Iwao Teruyama which on April 1944, was assigned to MT Reyes and on bought by Vicente Madrigal, in trust and for the benefit, of the Mistsui
the same year assigned to herein plaintiff-appellant. On April 26, 1955, the Bussan, abranch office of a Japanese company; and that Madrigal endorsed
plaintiff filed an action against the defendant alleging that shortly after its in blank and delivered the shares to Mistsui for safe keeping; that Mitsui
rehabilitation after the war, plaintiff asked that the assignment be never sold or otherwise disposed of the said shares; and that the stock
registered in the books of the defendant and that the latter refused and still certificates must have been stolen or looted during the emergency from the
refuses to do so unlawfully. liberation.
Defendant filed a motion to dismiss on the ground that 11 years have ISSUE: WON plaintiffs are the rightful owners of the shares?
elapsed from the time of the assignment up to the time of the filing of the
complaint, beyond the 5 year period provided under Art. 1149 of the Civil HELD: No. Even, however, if Juan Campos and Carl Hess had sold the
Code. The trial court dismissed the action and denied reconsideration. shares of stock in question, as testified to by De los Santos, the result,
insofar as plaintiffs are concerned, would be the same. It is not disputed
ISSUE: WON plaintiff was bound to present and register the certificate that said shares of stock were registered, in the records of the Lepanto, in
assigned to him within any definite or fixed period? the name of Vicente Madrigal. Neither is it denied that the latter was, as
regards said shares of stock, a mere trustee for the benefit of the Mitsuis.
HELD: No. The defendant has not made herein any pretense to that effect; The record shows — and there is no evidence to the contrary — that
but it contends that from the moment the certificate was assigned to the Madrigal had never disposed of said shares of stock in any manner
plaintiff, the latter's right to have the assignment registered commenced to whatsoever, except by turning over the corresponding stock certificates,
exist. This contention is correct, but it would not follow that said right late in 1941, to the Mitsuis, the beneficial and true owners thereof. It has,
should be exercised immediately or within a definite period. The moreover, been established, by the uncontradicted testimony of Kitajima
existence of a right is one thing, and the duration of said right is and Miwa, the managers of the Mitsuis in the Philippines, from 1941 to
another. 1945, that the Mitsuis had neither sold, conveyed, or alienated said shares
of stock, nor delivered the aforementioned stock certificates, to anybody
On the other hand, it is stated in the appealed order of dismissal that the during said period. Section 35 of the Corporation Law reads:
plaintiff sought to register the assignment on April 13, 1955; whereas in
plaintiff's brief it is alleged that it was only in February, 1955, when the The capital stock corporations shall be divided into shares for which
defendant refused to recognize the plaintiff. If, as already observed, there certificates signed by the president or the vice-president, countersigned
is no fixed period for registering an assignment, how can the by the secretary or clerk and sealed with the seal of the corporation,
complaint be considered as already barred by the Statute of Limitations shall be issued in accordance with the by-laws. Shares of stock so issued
when it was filed on April 26, 1955, or barely a few days (according to the are personal property and may be transferred by delivery of the
lower court) and two months (according to the plaintiff), after the demand certificate endorsed by the owner or his attorney in fact or other person
for registration and its denial by the defendant. Plaintiff's right was violated legally authorized to make the transfer. No transfer, however, shall
only sometime in 1955, and it could not accordingly have asserted any be valid, except as between the parties, until the transfer is
cause of action against the defendant before that. entered and noted upon the books of the corporation so as to
show the names of the parties to the transaction, the date of the
The defendant seems to believe that the plaintiff was compelled transfer, the number of the certificate, and the number of shares
immediately to register his assignment. Any such compulsion is obviously transferred.
for the benefit of the plaintiff, because it is only after registration that the
transfer would be binding against the defendant. But we are not here Pursuant to this provision, a share of stock may be transferred by
concerned with a situation where the plaintiff claims anything against the endorsement of the corresponding stock certificate, coupled with
defendant allegedly accruing under the outstanding certificate in question its delivery. However, the transfer shall " not be valid, except as
between the date of the assignment to the plaintiff and the date of the between the parties," until it is "entered and noted upon the
latter’s demand for registration and issuance of a new certificate. books of the corporation." no such entry in the name of the plaintiffs
herein having been made, it follows that the transfer allegedly effected by
APOLINARIO G. DE LOS SANTOS and ISABELO ASTRAQUILLO, Juan Campos and Carl Hess in their favor is "not valid, except as between"
plaintiffs-appellees, themselves. It does not bind either Madrigal or the Mitsuis, who are not
vs. parties to said alleged transaction. What is more, the same is "not valid,"
J. HOWARD MCGRATH ATTORNEY GENERAL OF THE UNITED or, in the words of the Supreme Court of Wisconsin (Re Murphy, 51 Wisc.
STATES, SUCCESSOR TO THE PHILIPPINE ALIEN PROPERTY 519, 8 N. W. 419) — which were quoted approval in Uson vs. Diosomito
ADMINISTRATION OF THE UNITED STATES, defendant-appellant. (61 Phil., 535) — "absolutely void" and, hence, as good as non-existent,
REPUBLIC OF THE PHILIPPINES, intervenor-appellant insofar as Madrigal and the Mitsuis are concerned. For this reason,
(G.R. No. L-4818; February 28, 1955) although a stock certificate is sometimes regarded as quasi-
negotiable, in the sense that it may be transferred by
FACTS: Plaintiff delos Santos alleges that he purchased 55,000 shares of endorsement, coupled with delivery, it is well settled that the
Lepanto Consolidated Mining Co., Inc. from Juan Campos, and later instrument is non-negotiable, because the holder thereof takes it
200,000 shares from Carl Hess and much later 800,000 still from Hess (for without prejudice to such rights or defenses as the registered
the account and benefit of Astraquillo). Both of the supposed vendors, now owner or creditor may have under the law, except insofar as such
deceased. rights or defenses are subject to the limitations imposed by the
principles governing estoppel.
By virtue of vesting order P-12, title to the 1,600,000 shares in dispute
was, however, vested in the Alien Property Custodian of the US. In due Certificates of stock are not negotiable instruments (post, Par. 102),
course, the Vested Property Claims Committee of the Philippine Alien consequently, a transferee under a forged assignment acquires no title
Property Administration made a “determination” allowing said claims, which which can be asserted against the true owner, unless his own negligence
were considered and hear jointly. But upon personal review of the has been such as to create an estoppel against him (Clarke on
Philippine Alien Property Administrator, the “determination” was reversed Corporations, Sec. Ed. p. 415). If the owner of the certificate has
and decreed that “title to the shares in question shall remain in the name endorsed it in blank, and it is stolen from him, no title is acquired by an
of the Philippine Alien Property Administrator”. innocent purchaser for value (East Birmingham Land Co. vs. Dennis, 85
Ala. 565, 2 L.R.A. 836; Sherwood vs. mining co., 50 Calif. 412).
Consequently, plaintiffs instituted the present action to establish title to the

In the case at bar, neither madrigal nor the Mitsuis had alienated shares of has paid the full amount of his subscription.
stock in question. It is not even claimed that either had, through
negligence, given — occasion for an improper or irregular disposition of the Sec. 64. Issuance of stock certificates. - No certificate of stock shall be
corresponding stock certificates. issued to a subscriber until the full amount of his subscription together with
interest and expenses (in case of delinquent shares), if any is due, has been
E. FORGED AND UNAUTHORIZED TRANSFERS paid.
FORGED AND UNAUTHORIZED TRANSFERS VS. UNAUTHORIZED INDIVISIBILITY: As the law stands now, subscription to shares of stock
ISSUANCE OF STOCK CERTIFICATE: In the former, what is forged or are deemed indivisible and no certificate of stock can be issued unless and
unauthorized is the transfer of the certificate from the true and lawful until the full amount of his subscription including interest and expenses, if
owner to another person. While the latter refers to the act of the any is paid.
corporation in issuing the certificate, either fraudulently or by mistake.
The ruling, therefore, in Baltazar vs. Lingayen Gulf Electronic Power Co
In forged or unauthorized transfer: where a subscriber may opt to apply his partial payment to a corresponding
1. The purchaser or purchasers, no matter how innocent they may have number of shares, will not hold true. Thus, even if under the old law,
been, will acquire no title as against the lawful owner by virtue of the where a corporation may, under a by-law provision or by custom, practice
doctrine of non-negotiability of certificates of stock; or tradition, issue stock certificates covering the number of shares that
2. The purchaser will have no right or remedy against the corporation might have been correspondingly paid, this authority or practice is valid
because he took the shares not by virtue of a misrepresentation made only two years after the effectivity of the Corporation Code and after which
by the corporation but on the faith of a forged endorsement or corporations, registered under the said law should comply with the
unauthorized transfer; mandatory requirement of Sec. 64. The Corporation Code thus provides:
3. The corporation incurs no liability to the person in whose favor the
certificate is endorsed or issued. Sec. 148. Applicability to existing corporations. - All corporations
4. If the old certificate is cancelled and new one is issued by the lawfully existing and doing business in the Philippines on the date of the
corporation, the holder thereof may be required to return the same for effectivity of this Code and heretofore authorized, licensed or registered by
its cancellation; the Securities and Exchange Commission, shall be deemed to have been
5. However, if new certificates are issued and passes into the hands of a authorized, licensed or registered under the provisions of this Code, subject
subsequent bona fide purchaser, the latter may rightfully acquire title to the terms and conditions of its license, and shall be governed by the
thereto since the corporation will be estopped to deny the validity provisions hereof: Provided, That if any such corporation is affected by the
thereof; new requirements of this Code, said corporation shall, unless otherwise
6. The subsequent purchaser in good faith took the shares, not by virtue herein provided, be given a period of not more than two (2) years from the
of a forged or unauthorized transfer but on reliance to the effectivity of this Code within which to comply with the same.
genuineness of the certificate issued by the corporation or by virtue of
the representation made by the corporation that the same is valid and MANDAMUS: Once a subscriber has paid his subscription in full, he
therefore, compel the corporation to recognize him as a stockholder or becomes entitled to be issued a stock certificate and in the event that the
claim reimbursement and damages against the latter. corporation refuses to do so, the stockholder may institute a case for
mandamus with damages, such issuance being ministerial.
Example: A owns 100 shares of X Co., B stole the stock certificate and
forged A’s signature: FUA CUN (alias Tua Cun), plaintiff-appellee,
a. If B indorsed and sold it to C: vs.
1. C will not acquire title to the shares whether he is innocent or RICARDO SUMMERS, in his capacity as Sheriff ex-oficio of the City of
not; Manila, and the CHINA BANKING CORPORATION, defendants-appellants
2. C cannot compel the corporation to register him as stockholder; (G.R. No. L-19441; March 27, 1923)
3. X Co. does not incur any liability in favor of C
b. If X Co. cancelled the certificate and issued a new one to C: FACTS: Chua Soco subscribed to 500 shares of defendant Bank paying
1. If A later on finds out that his certificate was stolen, C may still 50% of the subscription price and a corresponding receipt being issued
be required to return the new certificate; therefor. Such shares were mortgaged to plaintiff Fua Cun to secure a loan
2. If C sold it to D, an innocent purchaser, D may rightfully acquire evidenced by a promissory note, together with the receipt, which was
thereto since X Co. is estopped to deny the validity of the endorsed and delivered to plaintiff mortgagee. Plaintiff informed the
certificate; manager of the Bank about the transaction but was told to await action by
3. If A later on finds out that his certificate was stole, X Co. may be the BOD.
compelled to recognize both A and D as stockholders.*
In the meantime, Chua Soco became indebted to the bank, and in the
*This is so because the A cannot be deprived of his rights as owner by action for recovery of money, his 500 shares were attached.
virtue of a forged transfer, and B, because of X Co.’s representation that
the person named therein is the owner of shares in the corporation. Fua Cun thereupon instituted the present action maintaining that the
payment of 50% of the subscription entitled Chua Soco to 250 shares and
c. If (b3) above would result in over-issuance of shares prayed that his lien on the shares by virtue of the chattel mortgage be
1. Only A, the rightful owner may be recognized and A will have a declared to have priority over the claim of defendant Bank.
right to compel X Co. to issue him a new certificate;
2. D will be entitled to damages from the X Co.; The trial court rendered judgment in favor of plaintiff.
3. X Co. will have a right of action against the who made false
representation and in whose favor a new certificate is issued.** ISSUE: (1) WON Chua Soco became entitled to 250 shares or the
proportionate share to his partial payment? (2) WON plaintiff had a
**In this sense, if D sues X Co., the latter will have no valid defense, but superior claim over that of the Bank?
he may institute a third party complaint against C. If C is an innocent
purchaser, X Co., may file a fourth party complaint against B. HELD: (1) No. (2) Yes. Though the court below erred in holding that Chua
Soco, by paying one-half of the subscription price of five hundred shares, in
ISSUANCE OF STOCK CERTIFICATION effect became the owner of two hundred and fifty shares, the judgment
appealed from is in the main correct.
Subscriptions to shares of stock are indivisible such that a subscriber to
such shares will not be entitled to the issuance of a stock certificate until he

The claim of the defendant Banking Corporation upon which it brought the payment of the water in the stocks issued, thus, it applies to all creditors
action in which the writ of attachment was issued, was for the non- whether prior or subsequent to the issuance of the watered stock.
payment of drafts accepted by Chua Soco and had no direct connection
with the shares of stock in question. At common law a corporation has no SOLIDARY LIABILITY: All consenting directors and officers are solidarily
lien upon the shares of stockholders for any indebtedness to the liable for the “water” in the stock.
corporation (Jones on Liens, 3d ed., sec. 375) and our attention has not
been called to any statute creating such lien here. On the contrary, section NON-CONSENTING DIRECTORS: may be absolved of liability by their
120 of the Corporation Act provides that "no bank organized under this Act written dissent. Otherwise, if they did not issue such written dissent or are
shall make any loan or discount on the security of the shares of its own passive, they may be held liable for not objecting thereto.
capital stock, nor be the purchaser or holder of any such shares, unless
such security or purchase shall be necessary to prevent loss upon a debt ISSUANCE OF WATERED STOCKS: may be effected in the following
previously contracted in good faith, and stock so purchased or acquired ways:
shall, within six months from the time of its purchase, be sold or disposed 1. For a monetary consideration less than its par or issue value;
of at public or private sale, or, in default thereof, a receiver may be 2. For a consideration in property, tangible or intangible, valued in
appointed to close up the business of the bank in accordance with law." excess of its market value;
3. Gratuitously or under an agreement that nothing shall be paid at all;
There can be no doubt that an equity in shares of stock may be assigned or
and that the assignment is valid as between the parties and as to persons 4. In the guise of stock dividends when there are no surplus profits of
to whom notice is brought home. Such an assignment exists here, though it the corporation.
was made for the purpose of securing a debt. The endorsement to the
plaintiff of the receipt above mentioned reads: ILLUSTRATION: X Co. has P10M Authorized Capital Stock divided into:
(1) 5M shares at P1.00 par value; and (2) 1M no par value shares with
For value received, I assign all my rights in these shares in favor of issued value at P5.00. A acquired 1M of the par value shares for P.80 and
Mr. Tua Cun. 100,000 no par value shares at P4.00:
1. WATERED STOCK: There is stock watering for both shares. Sec. 65
Manila, P. I., May 18, 1921. speaks of issuance of shares at “less than its par or issued value”;
(Sgd.) CHUA SOCO 2. LIABILITY FOR PAR VALUE SHARES: The directors who consented to
the issuance or were passive about it, without written dissent, are
This endorsement was accompanied by the delivery of the receipt to the solidarily liable with A for the difference of P.20;
plaintiff and further strengthened by the execution of the chattel mortgage, 3. LIABILITY FOR NO PAR VALUE SHARES: A cannot be held liable
which mortgage, at least, operated as a conditional equitable assignment. because the no par value shares are “deemed fully paid and non-
assessable” (Sec. 6). Accordingly, only the directors or officers
As against the rights of the plaintiff the defendant bank had, as we have consenting to the issuance are liable.
seen, no lien unless by virtue of the attachment. But the attachment was
levied after the bank had received notice of the assignment of Chua Soco's ILLUSTRATION2: X Co. has P100M Authorized Capital Stock divided into
interests to the plaintiff and was therefore subject to the rights of the 100M shares at P1.00 par value, there is a provision in the by-laws denying
latter. It follows that as against these rights the defendant bank holds no the pre-emptive right of the shareholders. The Board of Directors
lien whatever. subscribed to 1M of the unissued shares at P2.00 each when the fair
market value of the shares was P12.00.
As we have already stated, the court erred in holding the plaintiff as the 1. WATERED STOCK: No stock watering, since the shares were
owner of two hundred and fifty shares of stock; "the plaintiff's rights subscribed for more than the par value, notwithstanding if it less than
consist in an equity in five hundred shares and upon payment of the unpaid the fair market value;
portion of the subscription price he becomes entitled to the issuance of 2. If 3 days later, the members of the Board sold those purchased shares
certificate for said five hundred shares in his favor." at P12.00 per share, making a profit of P10.00 per share, they cannot
be held liable for stock watering but they can be question on their
The judgment appealed from is modified accordingly, and in all other duty of loyalty. Since the whole P12.00 per share could’ve gone to the
respects it is affirmed, with the costs against the appellants Banking coffers of the corporation instead of them reaping the profits for
Corporation. So ordered. themselves.
F. WATERED STOCKS EFFECTS OF ISSUANCE OF WATERED STOCKS:

1. The corporation is deprived of its capital thereby hurting its business
DEFINITION: Watered stocks may be defined as one which is issued by prospects, financial capability and responsibility;
the corporation as fully paid-up shares, when in fact the whole amount of 2. Stockholder who paid their subscriptions in full, or promised to pay the
the value thereof has not been paid. If the shares have thus been issued by same, are injured and prejudiced by the reduction of their
the corporation as fully paid, when in fact it has intentionally and knowingly proportionate interest in the corporation; and
received or agreed to receive nothing at all for them, or less than their par 3. Present and future creditors are deprived of the corporate assets for
value, either in money, property or services, the shares are said to be the protections of their interest.
“watered” or “fictitiously paid-up” to the extent to which they have not
been issued or are not to be paid for” BASIS OF LIABILITY:
1. “Trust Fund Doctrine” – the capital stock of the corporation is treated
Sec. 65. Liability of directors for watered stocks. - Any director or as inclusive of the unpaid portion of subscriptions to said capital, as a
officer of a corporation consenting to the issuance of stocks for a “trust fund” which the creditors have a right to look up to for the
consideration less than its par or issued value or for a consideration in any satisfaction of their claims. Stockholders, therefore, are mandated to
form other than cash, valued in excess of its fair value, or who, having pay the full value of their shares.
knowledge thereof, does not forthwith express his objection in writing and 2. “Fraud or Misrepresentation Theory” – liability is based on the false
file the same with the corporate secretary, shall be solidarily liable with the representation made by the corporation and the stockholder
stockholder concerned to the corporation and its creditors for the difference concerned to the creditors that the true par value or issued price of
between the fair value received at the time of issuance of the stock and the the shares has been paid or promised to be paid in full.
par or issued value of the same.
CONSEQUENCES OF ISSUANCE OF WATERED STOCKS
RIGHT OF CORPORATION AND CREDITORS: The law does not make (FLETCHER):
any distinction as to the right of the corporation and its creditors to enforce 1. As to the corporation – when a corporation is guilty of ultra-vires or

illegal acts which constitute an injury to or fraud upon the public, or
which will tend to injure or defraud the public, the State may institute Sec. 67. Payment of balance of subscription. - Subject to the provisions
a quo-warranto proceeding to forfeit its charter for the misuse or of the contract of subscription, the board of directors of any stock corporation
abuse of its franchise; may at any time declare due and payable to the corporation unpaid
2. As between the corporation and the subscriber – the subscription is subscriptions to the capital stock and may collect the same or such
void. Such being the case, the subscriber is liable to pay the full or par percentage thereof, in either case with accrued interest, if any, as it may
or issued value thereof, to render it valid and effective; deem necessary.
3. As to the consenting stockholders – they are estopped from raising
any objection thereto; Payment of any unpaid subscription or any percentage thereof, together with
4. As to dissenting stockholders – in view of the dilution of their the interest accrued, if any, shall be made on the date specified in the
proportionate interest in the corporation, they may compel the contract of subscription or on the date stated in the call made by the board.
payment of the “water” in the stock solidarily against the responsible Failure to pay on such date shall render the entire balance due and payable
and consenting directors and officers inclusive of the holder of the and shall make the stockholder liable for interest at the legal rate on such
watered stock; balance, unless a different rate of interest is provided in the by-laws,
5. As to creditors – they may enforce payment of the difference in the computed from such date until full payment. If within thirty (30) days from
price, or the water in the stock, solidarily against the responsible the said date no payment is made, all stocks covered by said subscription
directors/officers and the stockholders concerned; and shall thereupon become delinquent and shall be subject to sale as hereinafter
6. As against the transferees of the watered stocks – his right is the provided, unless the board of directors orders otherwise.
same as that of his transferor. If, however, a certificate of stock has
been issued and duly indorsed to a bona fide purchaser, without Sec. 68. Delinquency sale. - The board of directors may, by resolution,
knowledge, actual or constructive, the latter cannot be held liable, at order the sale of delinquent stock and shall specifically state the amount due
least as against the corporation, since he took the shares on reliance on each subscription plus all accrued interest, and the date, time and place of
of the misrepresentation made by the corporation that the stock the sale which shall not be less than thirty (30) days nor more than sixty (60)
certificate is valid and subsisting. This is because a corporation is days from the date the stocks become delinquent.
prohibited from issuing certificates of stock until the full value of the
subscriptions have been paid and could not, therefore, deny the Notice of said sale, with a copy of the resolution, shall be sent to every
validity of the stock certificate it issued as against a purchaser in good delinquent stockholder either personally or by registered mail. The same shall
faith. Thus, Ballantine states that whether there is any liability on the furthermore be published once a week for two (2) consecutive weeks in a
part of the transferee of watered stock is made to depend upon newspaper of general circulation in the province or city where the principal
whether he acquired the same without notice, either as purchaser or office of the corporation is located.
donee. If he had knowledge thereof, he is subject to the same liability
as his transferor. Unless the delinquent stockholder pays to the corporation, on or before the
date specified for the sale of the delinquent stock, the balance due on his
LIABILITY FOR INTEREST: Aside from the value of their subscription, subscription, plus accrued interest, costs of advertisement and expenses of
subscribers may likewise be required to pay interest on all unpaid sale, or unless the board of directors otherwise orders, said delinquent stock
subscriptions if so imposed in the contract or in the corporate by-laws at shall be sold at public auction to such bidder who shall offer to pay the full
such rate as may be indicated thereat or the legal rate if so not fixed. amount of the balance on the subscription together with accrued interest,
Unless so required or provided, however, the subscribers to shares of costs of advertisement and expenses of sale, for the smallest number of
stock, not fully paid, are not liable to pay interest on their unpaid shares or fraction of a share. The stock so purchased shall be transferred to
subscriptions. such purchaser in the books of the corporation and a certificate for such
stock shall be issued in his favor. The remaining shares, if any, shall be
Sec. 66. Interest on unpaid subscriptions. - Subscribers for stock shall credited in favor of the delinquent stockholder who shall likewise be entitled
pay to the corporation interest on all unpaid subscriptions from the date of to the issuance of a certificate of stock covering such shares.
subscription, if so required by, and at the rate of interest fixed in the by-laws.
If no rate of interest is fixed in the by-laws, such rate shall be deemed to be Should there be no bidder at the public auction who offers to pay the full
the legal rate. amount of the balance on the subscription together with accrued interest,
costs of advertisement and expenses of sale, for the smallest number of
G. ENFORCEMENT OF PAYMENT OF SUBSCRIPTIONS shares or fraction of a share, the corporation may, subject to the
provisions of this Code*, bid for the same, and the total amount due shall
TIME OF PAYMENT: Unpaid subscription or any percentage thereof, be credited as paid in full in the books of the corporation. Title to all the
together with interest if required by the by-laws or the contract of shares of stock covered by the subscription shall be vested in the corporation
subscription, shall be paid either: as treasury shares and may be disposed of by said corporation in accordance
1. On the date or dates fixed in the contract or subscription; with the provisions of this Code.
2. On the date or dates that may be specified by the BOD pursuant to a
“call” declaring any or all unpaid portion thereof to be so payable. PROCEDURE:
1. The BOD, by a formal Resolution, declares the whole or any
REMEDIES TO ENFORCE PAYMENT ON UNPAID SUBSCRIPTION: percentage unpaid subscriptions to be due and payable on a specified
1. By board action in accordance with the procedure laid down in Sec. 67 date. However, if the contract of subscription provides the date or
to 69 of the Code; and dates when payment is due, no ”call” or declaration by the board is
2. By a collection case in court as provided for in section 70. necessary;
2. The stockholders concerned are given notice of the board resolution
CREDITOR/RECEIVER: Failure or refusal of the BOD to enforce or collect by the corporation either personally or by registered mail. Publication
payment of unpaid subscription will not prevent the creditors or the of the notice of call is not required unless the by-laws provide
receiver of the corporation to institute a court action to collect the unpaid otherwise. Notice is not likewise necessary if the contract of the
portion thereof. This is because the capital of the corporation is the basis of subscription stipulates a specific date when any unpaid portion is due
the credit of and financial responsibility of the corporation. Persons dealing and payable;
with a corporation and extending credit to it have a right to insist that the 3. Payment shall be made on the date specified in the call or on the date
unpaid subscription shall be paid in when this becomes necessary for the provided for in the contract of subscription;
satisfaction of their claims. This is otherwise known as the Trust Fund 4. Failure to pay on the date required in the call or as specified in the
Doctrine which states that subscriptions to the capital of a corporation contract of subscription will render the entire balance due and payable
constitute a fund to which creditors have the right to look up to for the and making the stockholder liable for the interest;
satisfaction of their claims. 5. If within 30 days from the date, no payment is made, all the stock
covered by the subscription shall become delinquent and shall be interest from the date of the sale at the legal rate; and
subject to a delinquency sale; 2. The action shall be commenced by the filing of a complaint within 6
6. The board, by resolution, orders the sale of the delinquent stock months from the date of sale.
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 ACTION BY THE CORPORATION:
from the date the stocks become delinquent;
8. Publication of the notice of sale must be made once a week for 2 Notwithstanding the provisions of Sec. 67 to 69, the corporation may
consecutive weeks in the newspaper of general circulation in the enforce payment of unpaid subscriptions by court action.
province or city where the principal office is located;
9. Sale at public auction, if no payment is made by the delinquent Sec. 70. Court action to recover unpaid subscription. - Nothing in this
stockholder, in favor of the bidder who offered to pay the full amount Code shall prevent the corporation from collecting by action in a court of
of the balance in the subscription, inclusive of interest, cost of proper jurisdiction the amount due on any unpaid subscription, with accrued
advertisement and expenses for the smallest number of shares; interest, costs and expenses.
10. Registration or transfer of the shares of stock in the name of the
bidder and corresponding issuance of the stock certificate covering the CALL: Consistent with Art. 1169 of the Civil Code, a “call” is a condition
shares successfully bidded; precedent before the right of action to institute a recovery suit accrues.
11. If there be any remaining shares, the same shall be credited in favor This is because a demand is required before a debtor may incur a delay in
of the delinquent stockholder who shall be entitled to the issuance of the performance of his obligation. As earlier said however, a call is not
a certificate of stock covering such shares; necessary if the contract of subscription provides for a date or dates when
12. If there is no bidder at the public auction, the corporation may, payment is due, or when the corporation has become insolvent.
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; MIGUEL VELASCO, assignee of The Philippine Chemical Product
and Co. (Ltd.), plaintiff-appellant,
13. The shares so purchased by the corporation shall be vested in the vs.
latter as treasury shares. JEAN M. POIZAT, defendant-appellee
(G.R. No. L-11528; March 15, 1918)
HIGHEST BIDDER: in the case of sale of delinquent stock, and as
indicated in number 10 above, is such bidder who shall offer to pay the full FACTS: Defendant Jean M. Poizat subscribed to 20 shares of stock of The
amount of the balance on the subscription together with accrued interest, Philippine Chemical Product Co., of which 5 were paid. In an action
cost of advertisement and expenses of sale, for the smallest number of instituted by Miguel Velasco as assignee of the company, he seeks to
shares or fraction of a share. It should be properly termed “Lowest” Bidder recover the balance of the subscription. The CFI rendered a judgment
because the bidders are offering to pay the same amount, and their bids dismissing the complaint. Hence, this appeal.
are based on the number of shares they are willing to receive, the lowest of
which is the winning bid. ISSUE: WON defendant is liable for the balance?
Ex. A subscribed to 100 shares of stock for P100.00 each and paid only HELD: Yes. We think that Poizat is liable upon this subscription. A stock
50% and later on declared to be delinquent. For the full amount of P5,000 subscription is a contract between the corporation on one side, and the
(unpaid balance) and the interests, costs, and expenses, the following subscriber on the other, and courts will enforce it for or against either. It is
bidders are willing to accept - X: 70 shares; Y: 80 shares; Z: 90 shares. In a rule, accepted by the Supreme Court of the United States, that a
this case, X would be the highest bidder. The remaining 30 shares would subscription for shares of stock does not require an express
be credited to A. promise to pay the amount subscribed, as the law implies a
promise to pay on the part of the subscriber. (7 Ruling Case Law, sec.
*NO BIDDER: If there was no bidder, the company has to have 191.) Section 36 of the Corporation Law clearly recognizes that a stock
unrestricted retained earnings in order to acquire the shares as thus subscription is subsisting liability from the time the subscription is made,
provided under Sec. 41 of the Corporation Code (Power to Acquire Own since it requires the subscriber to pay interest quarterly from that date
Shares). Accordingly, if the company has no unrestricted retained earnings, unless he is relieved from such liability by the by-laws of the corporation.
it cannot acquire the said shares by virtue of a delinquency sale, however, The subscriber is as much bound to pay the amount of the share
it may institute an action for the recovery of the subscription price under subscribed by him as he would be to pay any other debt, and the
Sec. 70. right of the company to demand payment is no less incontestable.
MAY A DIRECTOR DECLARED TO BE DELINQUENT ON HIS The provisions of the Corporation Law (Act No. 1459) has given recognition
SUBSCRIPTION BE ALLOWED TO CARRY OUT HIS FUNCTIONS AS of two remedies for the enforcement of stock subscriptions. The first and
SUCH DIRECTOR? Yes. He is still a shareholder entitled to all the rights most special remedy given by the statute consists in permitting
as such, and pending the sale, the shares still stand in his name. Even after the corporation to put up the unpaid stock for sale and dispose of
the sale, he may still be credited to some of the shares and he only needs it for the account of the delinquent subscriber. In this case the
1 to qualify as a director. provisions of section 38 to 48, inclusive of the Corporation Law are
applicable and must be followed. The other remedy is by action in
QUESTIONING A SALE ON IRREGULARITY OR DEFECT IN THE court, concerning which we find in section 49 the following provision:
NOTICE OR IN THE SALE ITSELF:
“Nothing in this Act shall prevent the directors from collecting, by
Sec. 69. When sale may be questioned. - No action to recover action in any court of proper jurisdiction, the amount due on any
delinquent stock sold can be sustained upon the ground of irregularity or unpaid subscription, together with accrued interest and costs and
defect in the notice of sale, or in the sale itself of the delinquent stock, unless expenses incurred.”
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 ARNALDO F. DE SILVA, plaintiff-appellant,
the date of sale at the legal rate; and no such action shall be maintained vs.
unless it is commenced by the filing of a complaint within six (6) months from ABOITIZ & COMPANY, INC., defendant-appellee
the date of sale (G.R. No. L-19893; March 31, 1923)
TWO CONDITIONS: FACTS: Plaintiff de Silva subscribed to 650 shares of defendant company
1. The party seeking to maintain such action first pays or tenders to the and paid 200 of such subscription leaving a balance of P225,000. On April
party holding the stock the sum for which the same was sold, with 22, 1922, he was informed by the corporate secretary that he has been
declared delinquent by the BOD and that he should pay the unpaid FACTS: Herein defendant Irineo Baltazar subscribed to 600 shares, at
subscription otherwise such shares shall be sold at a public auction. P100.000 par value per share, of the plaintiff corporation paying P15,000
and making further payments leaving a balance of P18,500.
De Silva filed a complaint in the CFI of Cebu, contending among others that
the resolution adopted was violative of Art. 46 of the by-laws stating that On July 23, 1946, the stockholders, including herein defendant, approved
all shares subscribed and were not paid at the time of the incorporation Resolution No. 17 agreeing: (1) to “call” of the balance of the unpaid
shall be paid out of the 70% of the profit obtained until such shares are subscription to be paid: 50% within 60 days beginning Aug. 1, 1946; the
paid in full. De Silva contends that such article provides for the operative remaining 50% 60 days beginning October 1, 1946; (2) that all unpaid
method of payment of the shares, and by declaring the unpaid subscription unpaid subscriptions after the due dates of both calls to be subject to 12%
to have become due and payable on May 31 st and in publishing the notice interest per annum; (3) that after the expiration of a grace period of 60
declaring his shares to be delinquent, the company has exceeded its days, all unpaid subscribed shares would revert to the corporation.
executive authority.
A demand was made against defendant, but was ignored. Hence this
ISSUE: WON the BOD may declare the unpaid shares delinquent or collect action.
or enforce payment of the same despite the provision of the by-laws?
ISSUE: WON Baltazar is liable to pay the unpaid portion of his subscription
HELD: Yes. It is discretionary on the part of the board of directors to do
whatever is provided in the said article relative to the application of a part HELD: No. We agree with the lower court that the law requires that
of the 70 percent of the profit distributable in equal parts on the payment notice of any call for the payment of unpaid subscription should
of the shares subscribed to and not fully paid. be made not only personally but also by publication. This is clear
from the provisions of section 40 of the Corporation Law, Act No. 1459, as
If the board of directors does not wish to make, or does not make, use of amended.
said authority it has two other remedies for accomplishing the same
purpose. As was said by this court in the case of Velasco vs. Poizat (37 It will be noted that section 40 is mandatory as regards publication, using
Phil., 802): the word "must". As correctly stated by the trial court, the reason for the
mandatory provision is not only to assure notice to all subscribers, but also
“The first and most special remedy given by the statute consists in to assure equality and uniformity in the assessment on stockholders. (14
permitting the corporation to put the unpaid stock for sale and dispose C.J. 639).
of it for the account of the delinquent subscriber. In this case the
provisions of sections 38 to 48, inclusive, of the Corporation Law are We find the citation of authorities made by the plaintiff and appellant
applicable and must be followed. The other remedy is by action in inapplicable. In the case of Velasco vs. Poizat (37 Phil. 805), the
court.” corporation involved was insolvent, in which case all unpaid stock
subscriptions become payable on demand and are immediately recoverable
Admitting that the provision of article 46 of the said by-laws maybe in an action instituted by the assignee. Said the court in that case:
regarded as a contract between the defendant corporation and its
stockholders , yet as it is only to the board of directors of the corporation “. . . . it is now quite well settled that when the corporation becomes
that said articles gives the authority or right to apply on the payment of insolvent, with proceedings instituted by creditors to wind up and
unpaid subscriptions such amount of the 70 percent of the profit distribute its assets, no call or assessment is necessary before the
distributable among the shareholders in equal parts as may be deemed fit, institution of suits to collect unpaid balance on subscription.”
it cannot be maintained that the said article has prescribe an operative
method for the payment of said subscription continuously until their full But when the corporation is a solvent concern, the rule is:
amortization.
“It is again insisted that plaintiffs cannot recover because the suit
In the instant case, the defendant corporation, through its board of was not proceeded by a call or assessment against the defendant
directors, made use of its discretionary power, taking advantage of the first as a subscriber, and that until this is done no right of action
of the two remedies provided by the aforesaid law. On the other hand, the accrues. In a suit by a solvent going corporation to collect a subscription,
plaintiff has no right whatsoever under the provision of the above cited and in certain suits provided by statute this would be true;. . . . . ( Id.)”
article 46 of the said by-laws to prevent the board of directors from
following, for that purpose, any other method than that mentioned in the ISSUE 2: WON the Baltazar is correct in claiming that Resolution No. 17 of
said article, for the very reason that the same does not give the 1946 of the BOD released him from the obligation to pay for his unpaid
stockholders any right in connection with the determination of the question subscription?
whether or not there should be deducted from the 70 percent of the profit
distributable among the stockholders such amount as may be deemed fit HELD: No. There must be unanimous consent of the stockholders of the
for the payment of subscriptions due and unpaid. Therefore, it is evident corporation. We quote some authorities:
that the defendant corporation has not violated, nor disregarded any right
of the plaintiff recognized by the said by-laws, nor exceeded its authority in Subject to certain exceptions, considered in subdivision (3) of this section,
the discharge of its executive functions, nor abused its discretion when it the general rule is that a valid and binding subscription for stock
performed the acts mentioned in the complaint as grounds thereof, and, of a corporation cannot be cancelled so as to release the
consequently, the facts therein alleged do not constitute a cause of action. subscriber from liability thereon without the consent of all the
stockholders or subscribers. Furthermore, a subscription cannot
LINGAYEN GULF ELECTRIC POWER COMPANY, INC., plaintiff- be cancelled by the company, even under a secret or collateral
appellant, agreement for cancellation made with the subscriber at the time
vs. of the subscription, as against persons who subsequently
IRINEO BALTAZAR, defendant-appellee. subscribed or purchased without notice of such agreement. (18
(G.R. No. L-4824; June 30, 1953) C.J.S. 874).
LINGAYEN GULF ELECTRIC POWER COMPANY, INC., plaintiff- “(3) Exceptions.

appellee,
vs. In particular circumstances, as where it is given pursuant to a bona
IRINEO BALTAZAR, defendant and appellant fide compromise, or to set off a debt due from the corporation, a
(G.R. No. L-6244; June 30, 1953) release, supported by consideration, will be effectual as against dissenting
stockholders and subsequent and existing creditors. A release which might

originally have been held invalid may be sustained after a considerable interests.
lapse of time. (18 C.J.S. 874).”
Pending appeal, the parties entered into an agreement where Lumanlan
In the present case, the release claimed by defendant and appellant does would dismiss the appeal and the corporation would collect only 50% of
not fall under the exception above referred to, because it was not given the amount subscribed by him for stock, provided that in case the 50% was
pursuant to a bona fide compromise, or to set off a debt due from the inufficient to pay Valenzuela he should pay an additional amount not to
corporation, and there was no consideration for it. exceed the judgment against him in that case. Lumanlan paid Valenzuela
the sum of P11,840 including interest.
In conclusion we hold that under the Corporation Law, notice of call for
payment for unpaid subscribed stock must be published, except Disregarding the agreement, appellant company asked for and order of
when the corporation is insolvent, in which case, payment is execution of the CFI decision which was granted and the provincial sheriff
immediately demandable. We also rule that release from such levied upon two parcels of land of Lumanlan.
payment must be made by all the stockholders.
ISSUE: WON Lumanlan is still liable to the corporation?
ERNESTO M. APODACA, petitioner,
vs. HELD: Yes. In the promissory note given by the corporation to Valenzuela
NATIONAL LABOR RELATIONS COMMISSION, JOSE M. MIRASOL and the former obligated itself to pay Valenzuela the sum of P8,000 with
INTRANS PHILS., INC., respondents interest at 12 per cent per annum and, upon failure to pay said sum and
(G.R. No. 80039; April 18, 1989) interest when due, 25 per cent of the principal as expenses of collection
and judicial costs in case of litigation.
FACTS: Petitioner, an employee of respondent company, subscribed to
1,500 shares at P100 per share. He paid an initial payment P37,500. On By virtue of these facts Lumanlan is entitled to a credit against the
Sept. 1, 1975, he was appointed President and General Manager of the judgment in case No. 37492 for P11,840 and an additional sum of P2,000,
company but on Jan. 2, 1986, he resigned. which is 25 per cent on the principal debt, as he had to file this suit to
collect, or receive credit for the sum which he had paid Valenzuela for and
He filed a complaint with the NLRC claiming unpaid wages, cost of living in place of the corporation, or a total of P13,840. This leaves a balance due
allowance, the balance of his gasoline and representation expenses and his Dizon & co., Inc., of P1,269 on that judgment with interest thereon at 6 per
bonus compensation for 1986. Respondent admitted that petitioner was cent per annum from August 30, 1930.
entitled to P17,060.07 but the same was already set-off against his unpaid
subscription. Petitioner questioned such set-off claiming that no call or It appears from the record that during the trial of the case now under
notice was made. consideration, the Bank of the Philippine Islands appeared in this case as
assignee in the "Involuntary Insolvency of Dizon & Co., Inc. That bank was
The Labor Arbiter decided in favor of petitioner. On appeal, such decision appointed assignee in case No. 43065 of the Court of First Instance of the
was reversed by the NLRC. City of Manila on November 28, 1932. It is therefore evident that there are
still other creditors of Dizon & Co., Inc. This being the case that corporation
ISSUE: WON the set-off was properly made? has a right to collect all unpaid stock subscriptions and any other amounts
which may be due it.
HELD: No. Firstly, the NLRC has no jurisdiction to determine such intra-
corporate dispute between the stockholder and the corporation as in the It is established doctrine that subscriptions to the capital of a
matter of unpaid subscriptions. This controversy is within the exclusive corporation constitute a fund to which the creditors have a right
jurisdiction of the Securities and Exchange Commission. to look for satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid stock
Secondly, assuming arguendo that the NLRC may exercise jurisdiction over subscription in order to realize assets for the payment of its
the said subject matter under the circumstances of this case, the unpaid debts. (Philippine Trust Co. vs. Rivera, 44 Phil., 469, 470.)
subscriptions are not due and payable until a call is made by the
corporation for payment. Private respondents have not presented a PHILIPPINE NATIONAL BANK, plaintiff-appellee,
resolution of the board of directors of respondent corporation calling for the vs.
payment of the unpaid subscriptions. It does not even appear that a notice BITULOK SAWMILL, INC., DINGALAN LUMBER CO., INC., SIERRA
of such call has been sent to petitioner by the respondent corporation. MADRE LUMBER CO., INC., NASIPIT LUMBER CO., INC., WOODWORKS,
INC., GONZALO PUYAT, TOMAS B. MORATO, FINDLAY MILLAR LUMBER
What the records show is that the respondent corporation deducted the CO., INC., ET AL., INSULAR LUMBER CO., ANAKAN LUMBER CO., AND
amount due to petitioner from the amount receivable from him for the CANTILAN LUMBER CO., INC., defendants-appellees.
unpaid subscriptions. No doubt such set-off was without lawful basis, if not (G.R. Nos. L-24177-85; June 29, 1968)
premature. As there was no notice or call for the payment of unpaid
subscriptions, the same is not yet due and payable. FACTS: In various suits decided jointly, PNB as creditor, and therefore the
real party in interest, was allowed by the lower court to substitute the
BONIFACIO LUMANLAN, plaintiff-appellee, receiver of the Philippine Lumber Distributing Agency in these respective
vs. actions for the recovery from the defendant lumber producers the balance
JACINTO R. CURA, ET AL., defendants. of their stock subscriptions.
DIZON & CO., INC., ETC., appellant.
(G.R. No. L-39861; March 21, 1934) The defendant lumber producers were convinced by the late President
Manuel Roxas to form a cooperative and ensure the stable supply of lumber
FACTS: Lumanlan subscribed to 300 shares of stock of appellant company in the country and to eliminate alien middlemen. To induce them, the
at a par value of P50. president promised and agreed to invest P9.00 for every P1.00 that the
members would invest therein.
Layag was appointed the receiver of said company, at the instance of its
creditors Julio Valenzuela, Pedro Santos and Francisco Escoto, to collect the There was no appropriation made by congress for the P9.00 investment.
unpaid subscriptions, there appearing that the company had no assets The President then instructed Hon. Emilio Abello, then Executive Secretary
except the credits against those who had subscribed for shares of stock. and chairman of the BOD of PNB to grant an overdraft of P250,000 (later
increased to P350,000) which was approved by the BOD of PNB with
The CFI rendered a decision in favor of Julio Valenzuela and held Lumanlan interest at 6%.
liable for the unpaid subscription and loans and advances together with

The Philippines did not invest the P9.00 for every peso coming from P400.
defendant lumber producers. The loan extended by PNB was not paid.
Hence, these suits which the trial court dismissed. Plaintiff-appellee Garcia was appointed by the court as receiver of the
company, to collect the unpaid subscription, among others. On June 18,
ISSUE: WON the lumber producers are liable for the full value of their 1931, Garcia brought an action to recover from Suarez and other
subscriptions? shareholders the balance of their subscriptions, but the complaint was
dismissed for lack of prosecution.
HELD: Yes. In Philippine Trust Co. v. Rivera, citing the leading case of
Velasco v. Poizat, this Court held: "It is established doctrine that On Oct. 10, 1935, a similar action was instituted which was granted by the
subscriptions to the capital of a corporation constitute a fund to which CFI holding defendant liable for the balance of his unpaid subscription and
creditors have a right to look for satisfaction of their claims and that the interest. On appeal, the defendant raises the issue of prescription.
assignee in insolvency can maintain an action upon any unpaid stock
subscription in order to realize assets for the payment of its debt.... A ISSUE: WON defendant Suarez is liable?
corporation has no power to release an original subscriber to its capital
stock from the obligation of paying for his shares, without a valuable HELD: Yes. The premise of the argument is wrong because it confuses two
consideration for such release; and as against creditors a reduction of the distinct obligations: the obligation to pay interest and that to pay the
capital stock can take place only in the manner and under the conditions amount of the subscription. The said section 37 of the Corporation Law
prescribed by the statute or the charter or the articles of incorporation. provides when the obligation to pay interest arises and when payment
Moreover, strict compliance with the statutory regulations is necessary...." should be made, but it is absolutely silent as to when the subscription to a
The Poizat doctrine found acceptance in later cases. One of the latest stock should be paid. Of course, the obligation to pay arises from the
cases, Lingayen Gulf Electric Power v. Baltazar , Speaks to this effect: "In date of the subscription, but the coming into being of an
the case of Velasco v. Poizat, the corporation involved was insolvent, in obligation should not be confused with the time when it becomes
which case all unpaid stock subscriptions become payable on demand and demandable. In a loan for example, the obligation to pay arises from the
are immediately recoverable in an action instituted by the assignee." time the loan is taken; but the maturity of that obligation, the date when
the debtor can be compelled to pay, is not the date itself of the loan,
It would be unwarranted to ascribe to the late President Roxas the view because this would be absurd. The date when payment can be demanded
that the payment of the stock subscriptions, as thus required by law, could is necessarily distinct from and subsequent to that the obligation is
be condoned in the event that the counterpart fund to be invested by the contracted.
Government would not be available. Even if such were the case, however,
and such a promise were in fact made, to further the laudable purpose to By the same token, the subscription to the capital stock of the
which the proposed corporation would be devoted and the possibility that corporation, unless otherwise stipulation, is not payable at the
the lumber producers would lose money in the process, still the plain moment of the subscription but on a subsequent date which may
and specific wording of the applicable legal provision as be fixed by the corporation. Hence, section 38 of the Corporation Law,
interpreted by this Court must be controlling. It is a well-settled amended by Act No. 3518, provides that:
principle that with all the vast powers lodged in the Executive, he
is still devoid of the prerogative of suspending the operation of “The board of directors or trustees of any stock corporation formed,
any statute or any of its terms. organized, or existing under this Act may at any time declare due and
payable to the corporation unpaid subscriptions to the capital
EDWARD A. KELLER & CO., LTD., petitioner-appellant, stock . . . .”
vs.
COB GROUP MARKETING, INC., JOSE E. BAX, FRANCISCO C. DE The board of directors of the Compañia Hispano-Filipino, Inc., not having
CASTRO, JOHNNY DE LA FUENTE, SERGIO C. ORDOÑEZ, TRINIDAD C. declared due and payable the stock subscribed by the appellant, the
ORDOÑEZ, MAGNO C. ORDOÑEZ, ADORACION C. ORDOÑEZ, TOMAS C. prescriptive period of the action for the collection thereof only commenced
LORENZO, JR., LUIZ M. AGUILA-ADAO, MOISES P. ADAO, ASUNCION to run from June 18, 1931 when the plaintiff, in his capacity as receiver and
MANAHAN and INTERMEDIATE APPELLATE COURT, respondents-appellees. in the exercise of the power conferred upon him by the said section 38 of
(G.R. No. L-68097; January 16, 1986) the Corporation Law, demanded of the appellant to pay the balance of his
subscription. The present action having been filed on October 10, 1935, the
FACTS: Petitioner-appellant appointed defendant COB Group Marketing, defense of prescription is entirely without basis.
Inc. as exclusive distributor of its household products in Panay and Negros.
Under its sales agreement, Keller sold on credit its products to COB Group
Marketing. DELINQUENT: 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
The BOD of COB Group Marketing were apprised by Jose E. Bax that the dates fixed in the contract of subscription without need of call, or on the
firm owed Keller about P179,000. date specified by the BOD pursuant to a call made by it in accordance with
the provisions of Sec. 67.
Keller sued COB Marketing and its stockholders.
EFFECT OF DELINQUENCY: The stockholder thereof immediately loses
ISSUE: WON Keller can collect the unpaid subscriptions of the the right to vote and be voted upon or represented in any stockholders
stockholders? meeting as well as all the rights pertaining to a stockholder except the right
to receive dividends in accordance with the Code.
HELD: Yes. It is settled that a stockholder is personally liable for
the financial obligations of a corporation to the extent of his Sec. 71. Effect of delinquency. - No delinquent stock shall be voted for be
unpaid subscription (Vda. de Salvatierra vs. Garlitos 103 Phil. 757, 763; entitled to vote or to representation at any stockholder's meeting, nor shall
18 CJs 1311-2). the holder thereof be entitled to any of the rights of a stockholder except the
right to dividends in accordance with the provisions of this Code, until and
GERARDO GARCIA, plaintiff-appellee, unless he pays the amount due on his subscription with accrued interest, and
vs. the costs and expenses of advertisement, if any.
ANGEL SUAREZ, defendant-appellant
(G.R. No. L-45493; April 21, 1939) RIGHT TO RECEIVE DIVIDENDS: Sec. 43 provides that “any cash
dividend due on delinquent stockholders shall first be applied to the unpaid
FACTS: Appellant Suarez subscribed to 16 shares of Compania Hispano- balance on his subscription plus cost and expenses, while stock dividends
Filipina, Inc. and paid the value of 4 shares, at P100 par value each, or shall be withheld until his unpaid subscription is paid in full”
RIGHTS OF UNPAID SHARES: If the shares are not delinquent, ISSUANCE OF NEW CERTIFICATES:
however, subscribers to the capital stock of a corporation though not fully 1. After the above procedures have been complied with, the new
paid, are entitled to all the rights of a stockholder (Sec. 72) EXCEPT the certificate will be issued 1 year from the date of the last publication;
issuance of certificate of stocks (Sec. 64). They can vote and be voted 2. Nevertheless, the stockholder may file a bond or other security to
upon and entitled to receive all dividends due their shares. have the shares issued before the 1 year prescribed.
3. If a contest has been present to the corporation or an action is
Sec. 72. Rights of unpaid shares. - Holders of subscribed shares not fully pending in court, the issuance of the new certificate shall be
paid which are not delinquent shall have all the rights of a stockholder. suspended until final decision.
NON-STOCK CORPORATIONS: The rules on delinquent shareholders H. RIGHTS AND LIABILITIES OF STOCKHOLDERS
applies to non-stock corporations, such as when members are delinquent in
paying membership dues. RIGHTS OF A STOCKHOLDER:
1. Participation in the management of the corporate affairs by
RIGHT TO SECURE THE ISSUANCE OF A NEW STOCK exercising their right to vote and be voted upon either personally or
CERTIFICATE: by proxy as provided for under Sec. 50 and 58 of the Code;
2. To enter into a voting trust agreement subject to the procedure,
Sec. 73. Lost or destroyed certificates. - The following procedure shall requirements and limitations imposed under Sec. 50;
be followed for the issuance by a corporation of new certificates of stock in 3. To receive dividends and to compel their declaration if warranted
lieu of those which have been lost, stolen or destroyed: under Sec. 43;
4. To transfer shares of stock subject only to reasonable restrictions
such as the options and preferences as may be allowed by law
1. The registered owner of a certificate of stock in a corporation or his legal
inclusive of the right of the transferee to compel the registration of the
representative shall file with the corporation (A) an affidavit in triplicate
transfer in the books of the corporation as provided for in Sec. 63;
setting forth, if possible, (1) the circumstances as to how the certificate
5. To be issued a certificate of stock for fully paid-up shares in
was lost, stolen or destroyed, (2) the number of shares represented by
accordance with Sec. 64;
such certificate, (3) the serial number of the certificate and (4) the
6. To exercise pre-emptive rights as provided for in Sec. 39;
name of the corporation which issued the same. He shall also submit such
7. To exercise their appraisal right in accordance with the provision
(B) other information and evidence which he may deem necessary;
of Sec. 81 and in those instance allowed by law such as Sec. 42 and
105;
2. After verifying the affidavit and other information and evidence with the
8. To institute and file a derivative suit;
books of the corporation, said corporation shall publish a notice in a
9. To recover shares of stock unlawfully sold for delinquency as
newspaper of general circulation published in the place where the corporation
may be allowed under Sec. 69;
has its principal office, once a week for three (3) consecutive weeks at the
10. To inspect the books of the corporation subject only to the
expense of the registered owner of the certificate of stock which has been
limitations imposed by Sec. 75;
lost, stolen or destroyed. The notice shall state (1) the name of said
11. To be furnished by the most recent financial statement of the
corporation, (2) the name of the registered owner and (3) the serial
corporation as by Sec. 75;
number of said certificate, and (4) the number of shares represented by
12. To be issued a new stock certificate in lieu of the lost or
such certificate, and that after the expiration of one (1) year from the date of
destroyed one subject to the procedure laid down in Sec. 73;
the last publication, if no contest has been presented to said corporation
13. To have the corporation dissolved under Sec. 118 to 121, and
regarding said certificate of stock, the right to make such contest shall be
Sec. 105 in a close corporation;
barred and said corporation shall cancel in its books the certificate of stock
14. To participate in the distribution of assets of the corporation
which has been lost, stolen or destroyed and issue in lieu thereof new
upon dissolution under Sec. 122;
certificate of stock, unless the registered owner files a bond or other
15. In the case of a close corporation, to petition the SEC to arbitrate
security in lieu thereof as may be required, effective for a period of one (1)
in the event of a deadlock as allowed under Sec. 104; and
year, for such amount and in such form and with such sureties as may be
16. Also in the case of a close corporation, to withdraw therefrom, for
satisfactory to the board of directors, in which case a new certificate may be
any reason, and compel the corporation to purchase his shares
issued even before the expiration of the one (1) year period provided herein:
as provided for in Sec. 105.
Provided, That if a contest has been presented to said corporation or if an
action is pending in court regarding the ownership of said certificate of stock
OBLIGATIONS AND LIABILITIES:
which has been lost, stolen or destroyed, the issuance of the new certificate
1. To pay the corporation the balance of his unpaid subscriptions
of stock in lieu thereof shall be suspended until the final decision by the court
subject to the provision of Sec. 67-70;
regarding the ownership of said certificate of stock which has been lost,
2. To pay interest on his unpaid subscription, if required by the by-
stolen or destroyed.
laws or by the contract of subscription in accordance with Sec. 66;
3. To answer to the creditor for the unpaid portion of his
Except in case of fraud, bad faith, or negligence on the part of the
subscription under the Trust Fund Doctrine;
corporation and its officers, no action may be brought against any
4. To answer the “water” in his stocks as provided for in Sec. 65;
corporation which shall have issued certificate of stock in lieu of those lost,
5. To be liable, as general partners, for all debts, liabilities and
stolen or destroyed pursuant to the procedure above-described.
damages of determinable corporation as envisioned under Sec. 21
(corporation by estoppel); and
RATIONALE: 6. To be personally liable for torts, in the event that a stockholder in
1. To avoid duplication of certificates of stock; a close corporation actively participates in the management of
2. To avoid fictitious and fraudulent transfers; and corporate affairs.
3. To protect the corporation against damage from whatever source
arising from the issuance of the duplicate certificate inluding liability to CHAPTER 11: CORPORATE BOOKS AND RECORDS
the holder of the original certificate or to innocent holders of
certificate based on the duplicate. A. BOOKS AND RECORDS TO BE KEPT
Thus, the BOD has the authority to decide the amount and the kind of
Sec. 74. Books to be kept; stock transfer agent. - Every corporation
surety bond that may be required for the issuance of a certificate of stock,
shall keep and carefully preserve at its principal office a record of all business
in liey of the lost or destroyed one, if the same is to be issued prior to the
transactions and minutes of all meetings of stockholders or members, or of
expiration of the 1 year period provided by Sec. 73.
the board of directors or trustees, in which shall be set forth in detail the time

and place of holding the meeting, how authorized, the notice given, whether of the corporation or in the office of its stock transfer agent.
the meeting was regular or special, if special its object, those present and
absent, and every act done or ordered done at the meeting. Upon the STOCK AND TRANSFER AGENT: is the person who records every
demand of any director, trustee, stockholder or member, the time when any movement of the shares by the minute or by the hour.
director, trustee, stockholder or member entered or left the meeting must be
noted in the minutes; and on a similar demand, the yeas and nays must be NON-STOCK CORPORATIONS: can also have a stock and transfer agent
taken on any motion or proposition, and a record thereof carefully made. The for purposes of the club share-membership.
protest of any director, trustee, stockholder or member on any action or
proposed action must be recorded in full on his demand. INSPECTION & COPIES: These books are subject to inspection by any of
the directors, trustees, stockholders or members of the corporation at
The records of all business transactions of the corporation and the minutes of reasonable hours on business days and a copy of excerpts of said records
any meetings shall be open to inspection by any director, trustee, stockholder may be demanded. In fact, in so far as Financial Statements are concerned,
or member of the corporation at reasonable hours on business days and he the Code provides:
may demand, writing, for a copy of excerpts from said records or minutes, at
his expense. Sec. 75. Right to financial statements. - Within ten (10) days from
receipt of a written request of any stockholder or member, the corporation
Any officer or agent of the corporation who shall refuse to allow any director, shall furnish to him its most recent financial statement, which shall include a
trustees, stockholder or member of the corporation to examine and copy balance sheet as of the end of the last taxable year and a profit or loss
excerpts from its records or minutes, in accordance with the provisions of this statement for said taxable year, showing in reasonable detail its assets and
Code, shall be liable to such director, trustee, stockholder or member for liabilities and the result of its operations.
damages, and in addition, shall be guilty of an offense which shall be
punishable under Section 144 of this Code: Provided, That if such refusal is At the regular meeting of stockholders or members, the board of directors or
made pursuant to a resolution or order of the board of directors or trustees, trustees shall present to such stockholders or members a financial report of
the liability under this section for such action shall be imposed upon the the operations of the corporation for the preceding year, which shall include
directors or trustees who voted for such refusal: and Provided, further, That financial statements, duly signed and certified by an independent certified
it shall be a defense to any action under this section that the person public accountant.
demanding to examine and copy excerpts from the corporation's records and
minutes has improperly used any information secured through any prior However, if the paid-up capital of the corporation is less than P50,000.00, the
examination of the records or minutes of such corporation or of any other financial statements may be certified under oath by the treasurer or any
corporation, or was not acting in good faith or for a legitimate purpose in responsible officer of the corporation.
making his demand.
BASIS OF RIGHT: is to protect his interest as a stockholder. Thus, it has
Stock corporations must also keep a book to be known as the "stock and been said that: “The right of the shareholders to ascertain how the affairs
transfer book", in which must be kept a record of all stocks in the names of of his company are being conducted by its directors and officers is founded
the stockholders alphabetically arranged; the installments paid and unpaid on by his beneficial interest through ownership of shares and the necessity of
all stock for which subscription has been made, and the date of payment of self-protection. Managers of some corporations deliberately keep the
any installment; a statement of every alienation, sale or transfer of stock shareholders in ignorance or under misapprehension as to the true
made, the date thereof, and by and to whom made; and such other entries condition of its affairs. Business prudence demands that the investor keep a
as the by-laws may prescribe. The stock and transfer book shall be kept in watchful eye on the management and the condition of the business. Those
the principal office of the corporation or in the office of its stock transfer in charge of the company may be guilty of gross incompetence or
agent and shall be open for inspection by any director or stockholder of the dishonesty for years and escape liability if the shareholders cannot inspect
corporation at reasonable hours on business days. the records and obtain information.”
No stock transfer agent or one engaged principally in the business of BOOKS OF SUBSIDIARY: The right of the stockholder to examine
registering transfers of stocks in behalf of a stock corporation shall be corporate books extends to a wholly owned subsidiary which is completely
allowed to operate in the Philippines unless he secures a license from the under the control and management of the parent company where he is
Securities and Exchange Commission and pays a fee as may be fixed by the such a stockholder. But if the two entities are legally being operated as
Commission, which shall be renewable annually: Provided, That a stock separate and distinct entities, there is no such right of inspection on the
corporation is not precluded from performing or making transfer of its own part of the stockholder of the parent company.
stocks, in which case all the rules and regulations imposed on stock transfer
agents, except the payment of a license fee herein provided, shall be INSPECTION BY AGENT: while the right is founded on stock ownership,
applicable. thus personal in nature, it may be made by the stockholder’s agent or
representative since it may be unavailing in many instances.
THE FOLLOWING SHALL BE KEPT AND MAINTAINED BY THE
CORPORATION: INSPECTION BY DIRECTOR/TRUSTEE: As compared to a stockholder
1. Records of all business transactions which include, among or member, the right of a director or trustee to inspect and examine
others, (1) journals, (2) ledger, (3) contracts, (4) vouchers and corporate books and records is considered absolute and unqualified and
receipts, (5) financial statements and other books of accounts, (6) without regard to motive. This is because a director supervises,
income tax returns, and (7) voting trust agreements - which must be directs and manages corporate business and it is necessary that
kept and carefully preserved at its principal office; he be equipped with all the information and data with regard to
2. Minutes of all meetings of stockholders or members and of the the affairs of the company in order that he may manage and direct
directors or trustees setting forth in detail (1) the date, time and place its operations intelligently and according to this best judgment in
of meeting, (2) how authorized, (3) the notice given, (4) whether the the interest of all the stockholders he represents. Thus, while stockholders
same be regular or special, and if special, the purpose thereof shall be and mmebers are entitled to inspect and examine the books and records as
specified, (5) those present and absent, and (6) every act done or provided in Sec. 74 and 75 they may not gain access to highly sensitive and
ordered done thereat - which must likewise be kept at the principal confidential information . In the case of directors, “it is not denied” that
office of the said corporation; and they have such access. This would include, among others, (a) marketing
3. Stock and Transfer Book showing the (1) names of the strategies and pricing structure; (b) budget for expansion and
stockholders, (2) the amount paid or unpaid on all stocks for which diversification; (c) research and development; and (d) sources of
the subscription has been made, (3) a statement of every alienation, funding, availability of personnel, proposals for mergers or tie-ups
sale or transfer of stock made, if any (4) the date thereof, and (5) by with other firms.
whom and to whom - which must also be kept at the principal office
REMEDIES OF STOCKHOLDERS UNJUSTIFIABLY REFUSED THE corporations, it is unnecessary here to refer to other cases announcing the
RIGHT TO INSPECT THE CORPORATE BOOKS: (MDC) same rule.
1. Mandamus. In such event, the corporate secretary shall be included
as a party respondent since he is customarily charged with the The demurrer is overruled; and it is ordered that the writ of mandamus
custody of all documents or records of the corporation and against shall issue as prayed, unless within 5 days from notification hereof the
whom personal order of the court would be made; respondents answer to the merits.
2. Damages either against the corporation or the responsible officer
who refused the inspection; or ANTONIO PARDO, petitioner,
3. Criminal complaint for violation of his right to inspect and copy vs.
excerpts of all business transactions and minutes of meetings. The THE HERCULES LUMBER CO., INC., and IGNACIO FERRER,
officer or agent who refused the examination or copying thereof, shall respondents
be guilty and liable of an offense punishable under Sec. 144 of the (G.R. No. L-22442; August 1, 1924)
Code. Sec. 144 imposes a penalty of a fine of not less than P1,000 but
not more than P10,000 or an imprisonment for not less than 30 days FACTS: Petitioner Antonio Pardo seeks to obtain a writ of mandamus to
but not more than 5 years, or both, at the discretion of the court. If compel respondent company to permit petitioner and his duly authorized
the refusal is pursuant to a resolution or order of the board, the agent and representative to examine the records and business transactions
liability shall be imposed upon the directors/trustees who voted for of said company.
such refusal.
Respondents raised the defense that under Art. 10 of the by-laws, it is
DEFENSE OF CORPRATE OFFICERS: (INL) declared that “every shareholder may examine the books of the company
1. That the person demanding has improperly used any information and other documents pertaining to the same upon the days which the
secured through any prior examination of the records or minutes of board of directors’ shall annually fix”. And thus was set from 15 th to 25th of
such corporation or any other corporation; March by virtue of a board resolution.
2. That he was not acting in good faith or for a legitimate purpose in
making his demand; or ISSUE: WON the BOD may choose specific performance and particular
3. The right is limited or restricted by special law or the law of its dates when the right of inspection may be exercised?
creation.
HELD: No. The general right given by the statute may not be
W. G. PHILPOTTS, petitioner, lawfully abridged to the extent attempted in this resolution. It may
vs. be admitted that the officials in charge of a corporation may deny
PHILIPPINE MANUFACTURING COMPANY and F. N. BERRY, inspection when sought at unusual hours or under other improper
respondents. conditions; but neither the executive officers nor the board of
(G.R. No. L-15568; November 8, 1919) directors have the power to deprive a stockholder of the right
altogether. A by-law unduly restricting the right of inspection is
FACTS: Petitioner seeks to obtain a writ of mandamus to compel the undoubtedly invalid. Authorities to this effect are too numerous and direct
respondents to permit him, in person or by some authorized agent or to require extended comment. (14 C.J., 859; 7 R.C.L., 325; 4 Thompson on
attorney, to inspect and examine the records of the business by Philippine Corporations, 2nd ed., sec. 4517; Harkness vs. Guthrie, 27 Utah, 248; 107
Manufacturing Company, of which he is a stockholder. Am., St. Rep., 664. 681.)
Respondents interposed a demurrer. The demurrer is, therefore, sustained; and the writ of mandamus will issue
as prayed, with the costs against the respondent.
ISSUE: WON the right the law concedes to a stockholder may be exercised
by a proper agent or attorney? EUGENIO VERAGUTH, Director and Stockholder of the Isabela Sugar
Company, Inc., petitioner,
HELD: Yes. The right of inspection given to a stockholder can be vs.
exercised either by himself or by any proper representative or ISABELA SUGAR COMPANY, INC., GIL MONTILLA, Acting President,
attorney in fact, and either with or without the attendance of the and AGUSTIN B. MONTILLA, Secretary of the same corporation,
stockholder. This is in conformity with the general rule that what a man respondents.
may do in person he may do through another; and we find nothing in the (G.R. No. L-37064; October 4, 1932)
statute that would justify us in qualifying the right in the manner suggested
by the respondents. FACTS: Petitioner Eugenio Veraguth seeks to obtain a final and absolute
writ of mandamus to be issued to each and all of the respondents to,
This conclusion is supported by the undoubted weight of authority in the among others, place at his disposal at reasonable hours the minutes,
United States, where it is generally held that the provisions of law documents and books of Isabela Sugar Company, Inc. (which he is a
conceding the right of inspection to stockholders of corporations are to be director and stockholder) for his inspection and to issue immediately, upon
liberally construed and that said right may be exercised through any other payment of the fees, certified copies of any documentation in connection
properly authorized person. As was said in Foster vs. White (86 Ala., 467), with said minutes, documents and the books of the aforesaid corporation.
"The right may be regarded as personal, in the sense that only a
stockholder may enjoy it; but the inspection and examination may Director Veraguth telegraphed the secretary of the company, asking the
be made by another. Otherwise it would be unavailing in many latter to forward in the shortest possible time a certified copy of the
instances." An observation to the same effect is contained in Martin vs. resolution of the board of directors concerning the payment of attorney's
Bienville Oil Works Co. (28 La., 204), where it is said: "The possession of fees in the case against the Isabela Sugar Company and others. To this the
the right in question would be futile if the possessor of it, through lack of secretary made answer by letter stating that, since the minutes of the
knowledge necessary to exercise it, were debarred the right of procuring in meeting in question had not been signed by the directors present, a
his behalf the services of one who could exercise it." In Deadreck vs. certified copy could not be furnished and that as to other proceedings of
Wilson (8 Baxt. [Tenn.], 108), the court said: "That stockholders have the stockholders a request should be made to the president of the Isabela
the right to inspect the books of the corporation, taking minutes Sugar Company, Inc. It further appears that the board of directors adopted
from the same, at all reasonable times, and may be aided in this a resolution providing for inspection of the books and the taking of copies
by experts and counsel, so as to make the inspection valuable to "by authority of the President of the corporation previously obtained in
them, is a principle too well settled to need discussion." Authorities on this each case."
point could be accumulated in great abundance, but as they may be found
cited in any legal encyclopedia or treaties devoted to the subject of ISSUE: WON the corporate secretary is justified in refusing to furnish

copies of the minutes of the meeting of the BOD? right to examine the books of the corporation must be exercised
in good faith, for specific and honest purpose, and not to gratify
HELD: Yes. The Corporation Law, section 51, provides that: curiosity, or for specific and honest purpose, and not to gratify
curiosity, or for speculative or vexatious purposes. The weight of
“All business corporations shall keep and carefully preserve a record of judicial opinion appears to be, that on application for mandamus to enforce
all business transactions, and a minute of all meetings of directors, the right, it is proper for the court to inquire into and consider the
members, or stockholders, in which shall be set forth in detail the time stockholder's good faith and his purpose and motives in seeking inspection.
and place of holding the meeting was regular or special, if special its Thus, it was held that "the right given by statute is not absolute and
object, those present and absent, and every act done or ordered done at may be refused when the information is not sought in good faith
the meeting. . . . or is used to the detriment of the corporation." But the "impropriety
of purpose such as will defeat enforcement must be set up the corporation
The record of all business transactions of the corporation and the defensively if the Court is to take cognizance of it as a qualification. In
minutes of any meeting shall be open to the inspection of any director, other words, the specific provisions take from the stockholder the burden
member, or stockholder of the corporation at reasonable hours.” of showing propriety of purpose and place upon the corporation the burden
of showing impropriety of purpose or motive. It appears to be the general
The above puts in statutory form the general principles of Corporation Law. rule that stockholders are entitled to full information as to the management
Directors of a corporation have the unqualified right to inspect the books of the corporation and the manner of expenditure of its funds, and to
and records of the corporation at all reasonable times. Pretexts may not be inspection to obtain such information, especially where it appears that the
put forward by officers of corporations to keep a director or shareholder company is being mismanaged or that it is being managed for the personal
from inspecting the books and minutes of the corporation, and the right of benefit of officers or directors or certain of the stockholders to the
inspection is not to be denied on the ground that the director or exclusion of others."
shareholder is on unfriendly terms with the officers of the corporation
whose records are sought to be inspected. A director or stockholder cannot While the right of a stockholder to examine the books and records
of course make copies, abstracts, and memoranda of documents, books, of a corporation for a lawful purpose is a matter of law, the right
and papers as an incident to the right of inspection, but cannot, without an of such stockholder to examine the books and records of a wholly-
order of a court, be permitted to take books from the office of the owned subsidiary of the corporation in which he is a stockholder is
corporation. We do not conceive, however, that a director or a different thing.
stockholder has any absolute right to secure certified copies of the
minutes of the corporation until these minutes have been written Some state courts recognize the right under certain conditions, while others
up and approved by the directors. (See Fisher's Philippine Law of Stock do not. Thus, it has been held that where a corporation owns
Corporations, sec. 153, and Fletcher Cyclopedia Corporations, vol. 4, Chap. approximately no property except the shares of stock of subsidiary
45.) corporations which are merely agents or instrumentalities of the holding
company, the legal fiction of distinct corporate entities may be disregarded
Combining the facts and the law, we do not think that anything improper and the books, papers and documents of all the corporations may be
occurred when the secretary declined to furnish certified copies of minutes required to be produced for examination, and that a writ of mandamus,
which had not been approved by the board of directors, and that while so may be granted, as the records of the subsidiary were, to all incontents
much of the last resolution of the board of directors as provides for prior and purposes, the records of the parent even though subsidiary was not
approval of the president of the corporation before the books of the named as a party. Mandamus was likewise held proper to inspect both the
corporation can be inspected puts an illegal obstacle in the way of a subsidiary's and the parent corporation's books upon proof of sufficient
stockholder or director, that resolution, so far as we are aware, has not control or dominion by the parent showing the relation of principal or agent
been enforced to the detriment of anyone. In addition, it should be said or something similar thereto.
that this is a family dispute, the petitioner and the individual respondents
belonging to the same family; that a test case between the petitioner and On the other hand, mandamus at the suit of a stockholder was refused
the respondents has not been begun in the Court of First Instance of where the subsidiary corporation is a separate and distinct corporation
Occidental Negros involving hundreds of thousands of pesos, and that the domiciled and with its books and records in another jurisdiction, and is not
appellate court should not intrude its views to give an advantage to either legally subject to the control of the parent company, although it owned a
party. We rule that the petitioner has not made out a case for relief by vast majority of the stock of the subsidiary. Likewise, inspection of the
mandamus. books of an allied corporation by stockholder of the parent company which
owns all the stock of the subsidiary has been refused on the ground that
GOKONGWEI VS. SEC (supra, CHAPTER 7 and 8) – ISSUE: WON the stockholder was not within the class of "persons having an interest."
petitioner may be properly denied examination of the books and records of
San Miguel International, Inc., a fully owned subsidiary of SMC? In the Nash case, The Supreme Court of New York held that the
contractual right of former stockholders to inspect books and records of the
HELD: No. Pursuant to the second paragraph of section 51 of the corporation included the right to inspect corporation's subsidiaries' books
Corporation Law, "(t)he record of all business transactions of the and records which were in corporation's possession and control in its office
corporation and minutes of any meeting shall be open to the inspection of in New York."
any director, member or stockholder of the corporation at reasonable
hours." In the Bailey case, stockholders of a corporation were held entitled to
inspect the records of a controlled subsidiary corporation which used the
The stockholder's right of inspection of the corporation's books and records same offices and had identical officers and directors.
is based upon their ownership of the assets and property of the
corporation. It is, therefore, an incident of ownership of the corporate In the case at bar, considering that the foreign subsidiary is wholly owned
property, whether this ownership or interest be termed an equitable by respondent San Miguel Corporation and, therefore, under its control, it
ownership, a beneficial ownership, or a ownership. This right is predicated would be more in accord with equity, good faith and fair dealing to
upon the necessity of self-protection. It is generally held by majority of the construe the statutory right of petitioner as stockholder to inspect
courts that where the right is granted by statute to the stockholder, it is the books and records of the corporation as extending to books
given to him as such and must be exercised by him with respect to his and records of such wholly-owned subsidiary which are in
interest as a stockholder and for some purpose germane thereto or in the respondent corporation's possession and control.
interest of the corporation. In other words, the inspection has to be
germane to the petitioner's interest as a stockholder, and has to The Court voted unanimously to grant the petition insofar as it prays that
be proper and lawful in character and not inimical to the interest petitioner be allowed to examine the books and records of San Miguel
of the corporation. In Grey v. Insular Lumber, this Court held that "the International, Inc., as specified by him.

action under this section that the person demanding to examine and
RAMON A. GONZALES, petitioner, copy excerpts from the corporation's records and minutes has improperly
vs. used any information secured through any prior examination of the
THE PHILIPPINE NATIONAL BANK, respondent. records or minutes of such corporation or of any other corporation, or
(G.R. No. L-33320; May 30, 1983) was not acting in good faith or for a legitimate purpose in making his
demand.”
FACTS: Petitioner Ramon A. Gonzales instituted in the CFI of Manila a
special civil action for mandamus against the herein respondent PNB As may be noted from the above-quoted provisions, among the changes
praying that the latter be ordered to allow him to look into the books and introduced in the new Code with respect to the right of inspection
records of PNB to satisfy himself as to the truth of the published report that granted to a stockholder are the following (1) the records must be
(1) the respondent has guaranteed the obligation of South Negros kept at the principal office of the corporation; (2) the inspection
Development Corporation in the purchase of a US$ 23M sugar-mill to be must be made on business days; (3) the stockholder may demand
financed by Japanese suppliers and financiers; that the respondent; (2) the a copy of the excerpts of the records or minutes; (4) and the
respondent is financing the construction of the P21M Cebu-Mactan Bridge refusal to allow such inspection shall subject the erring officer or
to be constructed by VC Ponce, Inc.; and (3) the construction of Passi agent of the corporation to civil and criminal liabilities.
Sugar Mill at Iloilo by the Homion Philippines, Inc.; as well as (4) to inquire
into the validity of said transactions. However, while seemingly enlarging the right of inspection, the new Code
has prescribed limitations to the same. It is now expressly required as
The CFI dismissed the special civil action. a condition for such examination that (1) the one requesting it
must not have been guilty of using improperly any information
Assailing the conclusions of the lower court, the petitioner has assigned the through a prior examination, and (2) that the person asking for
single error to the lower court of having ruled that his alleged improper such examination must be "acting in good faith and for a
motive in asking for an examination of the books and records of the legitimate purpose in making his demand."
respondent bank disqualifies him to exercise the right of a stockholder to
such inspection under Section 51 of Act No. 1459, as amended. Said The unqualified provision on the right of inspection previously contained in
provision reads in part as follows: Section 51, Act No. 1459, as amended, no longer holds true under the
provisions of the present law. The argument of the petitioner that the right
Sec. 51. ... The record of all business transactions of the corporation and granted to him under Section 51 of the former Corporation Law should not
the minutes of any meeting shall be open to the inspection of any be dependent on the propriety of his motive or purpose in asking for the
director, member or stockholder of the corporation at reasonable hours. inspection of the books of the respondent bank loses whatever validity it
might have had before the amendment of the law. If there is any doubt in
Petitioner maintains that the above-quoted provision does not justify the the correctness of the ruling of the trial court that the right of inspection
qualification made by the lower court that the inspection of corporate granted under Section 51 of the old Corporation Law must be dependent
records may be denied on the ground that it is intended for an improper on a showing of proper motive on the part of the stockholder demanding
motive or purpose, the law having granted such right to a stockholder in the same, it is now dissipated by the clear language of the pertinent
clear and unconditional terms. He further argues that, assuming that a provision contained in Section 74 of Batas Pambansa Blg. 68.
proper motive or purpose for the desired examination is necessary for its
exercise, there is nothing improper in his purpose for asking for the ISSUE2: WON petitioner is in good faith in the exercise of his right to
examination and inspection herein involved. inspect the books of PNB?
HELD: No. Although the petitioner has claimed that he has justifiable
ISSUE: WON Petitioner is correct in saying that he has an unqualified right motives in seeking the inspection of the books of the respondent bank, he
to inspect the books as provided under Sec. 51 of the Corporation Law? has not set forth the reasons and the purposes for which he desires such
inspection, except to satisfy himself as to the truth of published reports
HELD: No. Petitioner may no longer insist on his interpretation of Section regarding certain transactions entered into by the respondent bank and to
51 of Act No. 1459, as amended, regarding the right of a stockholder to inquire into their validity. The circumstances under which he acquired one
inspect and examine the books and records of a corporation. The former share of stock in the respondent bank purposely to exercise the right of
Corporation Law (Act No. 1459, as amended) has been replaced by Batas inspection do not argue in favor of his good faith and proper motivation .
Pambansa Blg. 68, otherwise known as the "Corporation Code of the Admittedly he sought to be a stockholder in order to pry into transactions
Philippines." entered into by the respondent bank even before he became a stockholder.
His obvious purpose was to arm himself with materials which he can use
The right of inspection granted to a stockholder under Section 51 of Act against the respondent bank for acts done by the latter when the petitioner
No. 1459 has been retained, but with some modifications. The second and was a total stranger to the same. He could have been impelled by a
third paragraphs of Section 74 of Batas Pambansa Blg. 68 provide the laudable sense of civic consciousness, but it could not be said that his
following: purpose is germane to his interest as a stockholder.
“The records of all business transactions of the corporation and the ISSUE3: WON the right of a stockholder to inspect the books provided
minutes of any meeting shall be open to inspection by any director, under Sec. 74 of the Corporation Code is applicable to PNB?
trustee, stockholder or member of the corporation at reasonable hours
on business days and he may demand, in writing, for a copy of excerpts HELD: No. We also find merit in the contention of the respondent bank
from said records or minutes, at his expense. that the inspection sought to be exercised by the petitioner would be
violative of the provisions of its charter. (Republic Act No. 1300, as
Any officer or agent of the corporation who shall refuse to allow any amended.) Sections 15, 16 and 30 of the said charter provide respectively
director, trustee, stockholder or member of the corporation to examine as follows:
and copy excerpts from its records or minutes, in accordance with the
provisions of this Code, shall be liable to such director, trustee, Sec. 15. Inspection by Department of Supervision and Examination of
stockholder or member for damages, and in addition, shall be guilty of the Central Bank. — The National Bank shall be subject to
an offense which shall be punishable under Section 144 of this Code: inspection by the Department of Supervision and Examination
Provided, That if such refusal is made pursuant to a resolution or order of the Central Bank'
of the board of directors or trustees, the liability under this section for
such action shall be imposed upon the directors or trustees who voted Sec. 16. Confidential information. —The Superintendent of Banks and
for such refusal; and Provided, further, That it shall be a defense to any the Auditor General, or other officers designated by law to inspect or

investigate the condition of the National Bank, shall not reveal to any respective corporations, at least two (2) weeks prior to the date of the
person other than the President of the Philippines, the meeting, either personally or by registered mail. Said notice shall state the
Secretary of Finance, and the Board of Directors the details of purpose of the meeting and shall include a copy or a summary of the plan of
the inspection or investigation, nor shall they give any merger or consolidation. The affirmative vote of stockholders representing at
information relative to the funds in its custody, its current least two-thirds (2/3) of the outstanding capital stock of each corporation in
accounts or deposits belonging to private individuals, the case of stock corporations or at least two-thirds (2/3) of the members in
corporations, or any other entity, except by order of a Court of the case of non-stock corporations shall be necessary for the approval of
competent jurisdiction,' such plan. Any dissenting stockholder in stock corporations may exercise his
appraisal right in accordance with the Code: Provided, That if after the
Sec. 30. Penalties for violation of the provisions of this Act .— Any approval by the stockholders of such plan, the board of directors decides to
director, officer, employee, or agent of the Bank, who violates or permits abandon the plan, the appraisal right shall be extinguished.
the violation of any of the provisions of this Act, or any person aiding or
abetting the violations of any of the provisions of this Act, shall be Any amendment to the plan of merger or consolidation may be made,
punished by a fine not to exceed ten thousand pesos or by imprisonment provided such amendment is approved by majority vote of the respective
of not more than five years, or both such fine and imprisonment. boards of directors or trustees of all the constituent corporations and ratified
by the affirmative vote of stockholders representing at least two-thirds (2/3)
The Philippine National Bank is not an ordinary corporation. Having a of the outstanding capital stock or of two-thirds (2/3) of the members of
charter of its own, it is not governed, as a rule, by the Corporation Code of each of the constituent corporations. Such plan, together with any
the Philippines. Section 4 of the said Code provides: amendment, shall be considered as the agreement of merger or
consolidation.
SEC. 4. Corporations created by special laws or charters . — Corporations
created by special laws or charters shall be governed primarily by the Sec. 78. Articles of merger or consolidation. - After the approval by the
provisions of the special law or charter creating them or applicable to stockholders or members as required by the preceding section, articles of
them. supplemented by the provisions of this Code, insofar as they are merger or articles of consolidation shall be executed by each of the
applicable. constituent corporations, to be signed by the president or vice-president and
certified by the secretary or assistant secretary of each corporation setting
The provision of Section 74 of Batas Pambansa Blg. 68 of the new forth:
Corporation Code with respect to the right of a stockholder to
demand an inspection or examination of the books of the 1. The plan of the merger or the plan of consolidation;
corporation may not be reconciled with the abovequoted
provisions of the charter of the respondent bank. It is not correct 2. As to stock corporations, the number of shares outstanding, or in the case
to claim, therefore, that the right of inspection under Section 74 of non-stock corporations, the number of members; and
of the new Corporation Code may apply in a supplementary
capacity to the charter of the respondent bank. 3. As to each corporation, the number of shares or members voting for and
against such plan, respectively.
CHAPTER 12: MERGER AND CONSOLIDATION Sec. 79. Effectivity of merger or consolidation. - The articles of merger
or of consolidation, signed and certified as herein above required, shall be
Sec. 36, par. 8 of the Corporation Code of the Philippines expressly submitted to the Securities and Exchange Commission in quadruplicate for its
empowers a corporation to merge or consolidate with another corporation approval: Provided, That in the case of merger or consolidation of banks or
subject to the requirements and procedure prescribed in TITLE IX. banking institutions, building and loan associations, trust companies,
insurance companies, public utilities, educational institutions and other
Sec. 76. Plan or merger of consolidation. - Two or more corporations special corporations governed by special laws, the favorable recommendation
may merge into a single corporation which shall be one of the constituent of the appropriate government agency shall first be obtained. If the
corporations or may consolidate into a new single corporation which shall be Commission is satisfied that the merger or consolidation of the corporations
the consolidated corporation. concerned is not inconsistent with the provisions of this Code and existing
laws, it shall issue a certificate of merger or of consolidation, at which time
The board of directors or trustees of each corporation, party to the merger or the merger or consolidation shall be effective.
consolidation, shall approve a plan of merger or consolidation setting
forth the following: (NTSO) If, upon investigation, the Securities and Exchange Commission has reason to
believe that the proposed merger or consolidation is contrary to or
1. The names of the corporations proposing to merge or consolidate, inconsistent with the provisions of this Code or existing laws, it shall set a
hereinafter referred to as the constituent corporations; hearing to give the corporations concerned the opportunity to be heard.
Written notice of the date, time and place of hearing shall be given to each
2. The terms of the merger or consolidation and the mode of carrying the constituent corporation at least two (2) weeks before said hearing. The
same into effect; Commission shall thereafter proceed as provided in this Code.
3. A statement of the changes, if any, in the articles of incorporation of Sec. 80. Effects of merger or consolidation. - The merger or
the surviving corporation in case of merger; and, with respect to the consolidation shall have the following effects:
consolidated corporation in case of consolidation, all the statements required
to be set forth in the articles of incorporation for corporations organized 1. The constituent corporations shall become a single corporation which, in
under this Code; and case of merger, shall be the surviving corporation designated in the plan of
merger; and, in case of consolidation, shall be the consolidated corporation
4. Such other provisions with respect to the proposed merger or designated in the plan of consolidation;
consolidation as are deemed necessary or desirable.
2. The separate existence of the constituent corporations shall cease, except
Sec. 77. Stockholder's or member's approval. - Upon approval by that of the surviving or the consolidated corporation;
majority vote of each of the board of directors or trustees of the constituent
corporations of the plan of merger or consolidation, the same shall be 3. The surviving or the consolidated corporation shall possess all the rights,
submitted for approval by the stockholders or members of each of such privileges, immunities and powers and shall be subject to all the duties and
corporations at separate corporate meetings duly called for the purpose. liabilities of a corporation organized under this Code;
Notice of such meetings shall be given to all stockholders or members of the
4. The surviving or the consolidated corporation shall thereupon and 2. Approval of the plan by the stockholders representing 2/3 outstanding
thereafter possess all the rights, privileges, immunities and franchises of each capital stock or 2/3 of the member in non-stock corporations of each
of the constituent corporations; and all property, real or personal, and all of such corporations at separate corporate meetings called for the
receivables due on whatever account, including subscriptions to shares and purpose;
other choses in action, and all and every other interest of, or belonging to, or 3. Prior notice of such meeting, with a copy or summary of the plan of
due to each constituent corporation, shall be deemed transferred to and merger or consolidation shall be given to all stockholders or members
vested in such surviving or consolidated corporation without further act or at least 2 weeks prior to the scheduled meeting, either personally or
deed; and by registered mail stating the purpose thereof;
4. Execution of the articles of merger or consolidation by each
5. The surviving or consolidated corporation shall be responsible and liable constituent corporations to be signed by the president or vice-
for all the liabilities and obligations of each of the constituent corporations in president and certified by the corporate secretary or assistant
the same manner as if such surviving or consolidated corporation had itself secretary setting forth the matters required in Sec. 78;
incurred such liabilities or obligations; and any pending claim, action or 5. Submission of the articles of merger or consolidation in quadruplicate
proceeding brought by or against any of such constituent corporations may to the SEC subject to the requirement of Sec. 79 that if it involve
be prosecuted by or against the surviving or consolidated corporation. The corporations under direct supervision of any other government agency
rights of creditors or liens upon the property of any of such constituent or governed by special laws the favorable recommendation of the
corporations shall not be impaired by such merger or consolidation. government agency concerned shall first be secured; and
6. Issuance of the certificate of merger or consolidation by the SEC at
REASON FOR REORGANIZATION: The reasons inducing a which time the merger or consolidation shall be effective. If the plan,
reorganization are not in every case the same, but for the most part, they however, is believed to be contrary to law, the SEC shall set a hearing
are to be found in the weak financial or insolvent condition of the particular to give the corporations concerned an opportunity to be heard upon
corporations. The aim of corporate reorganization or combination is notice and thereafter, the Commission shall proceed as provided in the
generally to put the company upon a sound financial basis and to enable it Code.
to take care of its obligations thereby avoiding liquidation or bankruptcy.
But in some cases, a reorganization is effected notwithstanding the fact EFFECTS OF MERGER OR CONSOLIDATION:
that the corporation is solvent. 1. There will only be a single corporation. In case of merger, the
surviving corporation or the consolidate corporation in case of
ILLEGAL COMBINATIONS: While a merger or consolidation is a right, consolidation;
granted by law, to corporations registered under the Code, Act 3518 2. The termination of corporate existence of the constituent
proscribes illegal combination. It provides, under Sec. 20 thereof that “no corporations, except that of the surviving corporation or the
corporation engaged in commerce may acquire, directly or indirectly, the consolidated corporation;
whole or any part of the stock or other share capital of another 3. The surviving corporation or the consolidated corporation will possess
corporation or corporations engaged in commerce, where the effect of such all the rights, privileges, immunities and powers and shall be subject
acquisitions may be to substantially lessen competition between the to all the duties and liabilities of a corporation organized under the
corporation or corporations whose stock is so acquired and the corporation Code;
making the acquisition, or between any of them, or to restrain such 4. The surviving or consolidated corporation shall possess all the rights,
commerce in any section community, or ten to create a monopoly of any privileges, immunities and franchises of the constituent corporations,
line of commerce.” Corollary to this is Art. 186 of the Revised Penal Code and all property and all receivables due, including subscriptions to
which imposes a penalty of imprisonment and/or fine on any person who shares and other choses in action, and every other interest of, or
enters into a contract or conspiracy to create monopolies and combinations belonging to or due to the constituent corporations shall be deemed
in restraint of trade. transferred to and vested in such surviving or consolidated corporation
without further act or deed; and
MERGER: is a union effected by absorbing one or more existing 5. The rights of creditors or any lien on the property of the constituent
corporations by another which survives and continues the combined corporations shall not be impaired by the merger or consolidation.
business. It is the uniting of two or more corporations by the transfer of
property to one of them which continue in existence, the other or the
others being dissolved and merged therein. LIQUIDATION: There would be no need to liquidate or wind-up the
affairs of the corporation because (1) there are no assets to distribute; (2)
Example: It was agreed that B Company will take over and acquire all the no debts and liabilities to pay – since all these are transferred to the
business, assets, properties, rights and liabilities of C Corporation and by surviving or consolidated corporation.
virtue of which B will absorb C which is to be dissolved.
ASSOCIATED BANK, petitioner,
CONSOLIDATION: is the uniting or amalgamation of two or more existing vs.
corporations to form a new corporation. It signifies a union as necessarily COURT OF APPEALS and LORENZO SARMIENTO JR., respondents.
results in the creation of a new corporation and the termination of (G.R. No. 123793; June 29, 1998)
existence of old ones. The united concern resulting from such union is
called consolidated corporation. FACTS: Associated Banking Corporation and Citizens Bank and Trust
Company merged to form Associated Citizens Bank which subsequently
Thus, in the example given, if B and C agreed to form a new corporation, A changed its corporate name to Associate Bank.
Company, which will absorb both business, and all of B’s and C’s assets,
properties, rights and liabilities are transferred to A which will continue The defendant Lorenzo Sarmiento Jr. executed a promissory note in favor
their combined business while B and C will be dissolved, a consolidation of Associated Bank for P2.5M of which P2.25M remains unpaid. Despite
takes place. repeated demands, the defendant failed to pay the sum due.
In effect, in a consolidation, the constituent corporations are all dissolved, Defendant denied all pertinent allegations in the complaint and alleged as
while in a merger, the absorbing or surviving corporation is not, only the affirmative and/or special defense that Associated Bank is not the real party
absorbed. in interest because the promissory note was executed in favor of Citizens
Bank and Trust Company.
REQUIREMENTS AND PROCEDURE TO ACCOMPLISH MERGER OR
CONSOLIDATION: Defendant was declared in default for not appearing in the Pre-Trial
1. The BOD/T of each constituent corporations shall approve a plan or Conference and the plaintiff was allowed to present evidence ex-parte, the
merger or consolidation setting for the matters required in Sec. 76; Motion to Life Order of Default and or Reconsideration of the Order being

dismissed. The trial court ruled in favor of Associated Bank. On appeal, the CBTC shall be understood as pertaining to the surviving bank,
CA reversed the trial court. herein petitioner. Since, in contrast to the earlier aforequoted provision,
the latter clause no longer specifically refers only to contracts existing at
ISSUE: WON Associated Bank, the surviving corporation, may enforce the the time of the merger, no distinction should be made. The clause must
promissory note made by Sarmiento in favor of CBTC, the absorbed have been deliberately included in the agreement in order to protect the
company after the effectivity of the merger? interests of the combining banks; specifically, to avoid giving the merger
agreement a farcical interpretation aimed at evading fulfillment of a due
HELD: Yes. Ordinarily, in the merger of two or more existing obligation.
corporations, one of the combining corporations survives and
continues the combined business, while the rest are dissolved and Thus, although the subject promissory note names CBTC as the payee, the
all their rights, properties and liabilities are acquired by the reference to CBTC in the note shall be construed, under the very provisions
surviving corporation. Although there is a dissolution of the of the merger agreement, as a reference to petitioner bank, "as if such
absorbed corporations, there is no winding up of their affairs or reference [was a] direct reference to" the latter "for all intents and
liquidation of their assets, because the surviving corporation purposes."
automatically acquires all their rights, privileges and powers, as
well as their liabilities. No other construction can be given to the unequivocal stipulation. Being
clear, plain and free of ambiguity, the provision must be given its literal
The merger, however, does not become effective upon the mere meaning and applied without a convoluted interpretation. Verba lelegis non
agreement of the constituent corporations. The procedure to be est recedendum.
followed is prescribed under the Corporation Code. Section 79 of said Code
requires the approval by the Securities and Exchange Commission (SEC) of In light of the foregoing, the Court holds that petitioner has a valid cause of
the articles of merger which, in turn, must have been duly approved by a action against private respondent. Clearly, the failure of private respondent
majority of the respective stockholders of the constituent corporations. The to honor his obligation under the promissory note constitutes a violation of
same provision further states that the merger shall be effective only petitioner's right to collect the proceeds of the loan it extended to the
upon the issuance by the SEC of a certificate of merger. The former.
effectivity date of the merger is crucial for determining when the
merged or absorbed corporation ceases to exist; and when its BANK OF THE PHILIPPINE ISLANDS, Petitioner,
rights, privileges, properties as well as liabilities pass on to the vs.
surviving corporation. BPI EMPLOYEES UNION-DAVAO CHAPTER-FEDERATION OF
UNIONS IN BPI UNIBANK, Respondent
Consistent with the aforementioned Section 79, the September 16, 1975 (G.R. No. 164301; August 10, 2010)
Agreement of Merger, which Associated Banking Corporation (ABC) and
Citizens Bank and Trust Company (CBTC) entered into, provided that its FACTS: On March 23, 2000, the Bangko Sentral ng Pilipinas approved the
effectivity "shall, for all intents and purposes, be the date when the Articles of Merger executed on January 20, 2000 by and between BPI,
necessary papers to carry out this [m]erger shall have been approved by herein petitioner, and FEBTC. This Article and Plan of Merger was approved
the Securities and Exchange Commission." As to the transfer of the by the Securities and Exchange Commission on April 7, 2000.
properties of CBTC to ABC, the agreement provides:
Pursuant to the Article and Plan of Merger, all the assets and liabilities of
“10. Upon effective date of the Merger, all rights, privileges, powers, FEBTC were transferred to and absorbed by BPI as the surviving
immunities, franchises, assets and property of [CBTC], whether real, corporation. FEBTC employees, including those in its different branches
personal or mixed, and including [CBTC's] goodwill and tradename, and across the country, were hired by petitioner as its own employees, with
all debts due to [CBTC] on whatever act, and all other things in action their status and tenure recognized and salaries and benefits maintained.
belonging to [CBTC] as of the effective date of the [m]erger shall be
vested in [ABC], the SURVIVING BANK, without need of further act or BPI has an existing Union Shop Clause agreement with the BPI Employees
deed” Union-Davao Chapter-Federation of Unions in BPI Unibank (BPI Union)
whereby it is a pre-condition that new employees must join the union
The records do not show when the SEC approved the merger. Private before they can be regularized otherwise they will not have a continued
respondent's theory is that it took effect on the date of the execution of the employment. By reason of the failure of the FEBTC employees to join the
agreement itself, which was September 16, 1975. Private respondent union, BPI Union recommended to BPI their dismissal. BPI refused. The
contends that, since he issued the promissory note to CBTC on September issue went to voluntary arbitration where BPI won but the Court of Appeals
7, 1977 — two years after the merger agreement had been executed — reversed the Voluntary Arbitrator. Hence, this petition.
CBTC could not have conveyed or transferred to petitioner its interest in
the said note, which was not yet in existence at the time of the merger. ISSUE: WON employees of a dissolved corporation in a merger are
Therefore, petitioner, the surviving bank, has no right to enforce the considered absorbed by the surviving corporation?
promissory note on private respondent; such right properly pertains only to
CBTC. HELD: No. Absorbed FEBTC Employees are neither assets nor
liabilities. In legal parlance, however, human beings are never embraced
Assuming that the effectivity date of the merger was the date of its in the term "assets and liabilities." Moreover, BPI’s absorption of former
execution, we still cannot agree that petitioner no longer has any interest in FEBTC employees was neither by operation of law nor by legal
the promissory note. A closer perusal of the merger agreement leads to a consequence of contract. There was no government regulation or law
different conclusion. The provision quoted earlier has this other clause: that compelled the merger of the two banks or the absorption of
the employees of the dissolved corporation by the surviving
Upon the effective date of the [m]erger, all references to [CBTC] in any corporation. Had there been such law or regulation, the
deed, documents, or other papers of whatever kind or nature and absorption of employees of the non-surviving entities of the
wherever found shall be deemed for all intents and purposes, references merger would have been mandatory on the surviving corporation.
to [ABC], the SURVIVING BANK, as if such references were direct In the present case, the merger was voluntarily entered into by both banks
references to [ABC]. . . . presumably for some mutually acceptable consideration. In fact, the
Corporation Code does not also mandate the absorption of the
Thus, the fact that the promissory note was executed after the employees of the non-surviving corporation by the surviving
effectivity date of the merger does not militate against petitioner. corporation in the case of a merger. Section 80 of the Corporation
The agreement itself clearly provides that all contracts — Code provides.
irrespective of the date of execution — entered into in the name of

This Court believes that it is contrary to public policy to declare the former Justice Brion takes the position that because the surviving corporation
FEBTC employees as forming part of the assets or liabilities of FEBTC that continues the personality of the dissolved corporation and acquires all the
were transferred and absorbed by BPI in the Articles of Merger. Assets and latter’s rights and obligations, it is duty-bound to absorb the dissolved
liabilities, in this instance, should be deemed to refer only to property rights corporation’s employees, even in the absence of a stipulation in the plan of
and obligations of FEBTC and do not include the employment contracts of merger. He proposes that this interpretation would provide the necessary
its personnel. A corporation cannot unilaterally transfer its employees to protection to labor as it spares workers from being "left in legal limbo."
another employer like chattel. Certainly, if BPI as an employer had the right
to choose who to retain among FEBTC’s employees, FEBTC employees had However, there are instances where an employer can validly discontinue or
the concomitant right to choose not to be absorbed by BPI. Even though terminate the employment of an employee without violating his right to
FEBTC employees had no choice or control over the merger of their security of tenure. Among others, in case of redundancy, for example,
employer with BPI, they had a choice whether or not they would allow superfluous employees may be terminated and such termination would be
themselves to be absorbed by BPI. Certainly nothing prevented the FEBTC’s authorized under Article 283 of the Labor Code.
employees from resigning or retiring and seeking employment elsewhere
instead of going along with the proposed absorption. The lack of a provision in the plan of merger regarding the transfer of
employment contracts to the surviving corporation could have very well
Employment is a personal consensual contract and absorption by BPI of a been deliberated on the part of the parties to the merger, in order to grant
former FEBTC employee without the consent of the employee is in violation the surviving corporation the freedom to choose who among the dissolved
of an individual’s freedom to contract. It would have been a different corporation’s employees to retain, in accordance with the surviving
matter if there was an express provision in the articles of merger that as a corporation’s business needs. If terminations, for instance due to
condition for the merger, BPI was being required to assume all the redundancy or labor-saving devices or to prevent losses, are done in good
employment contracts of all existing FEBTC employees with the conformity faith, they would be valid. The surviving corporation too is duty-bound to
of the employees. In the absence of such a provision in the articles of protect the rights of its own employees who may be affected by the merger
merger, then BPI clearly had the business management decision as to in terms of seniority and other conditions of their employment due to the
whether or not employ FEBTC’s employees. FEBTC employees likewise merger. Thus, we are not convinced that in the absence of a stipulation in
retained the prerogative to allow themselves to be absorbed or not; the merger plan the surviving corporation was compelled, or may be
otherwise, that would be tantamount to involuntary servitude. judicially compelled, to absorb all employees under the same terms and
conditions obtaining in the dissolved corporation as the surviving
There appears to be no dispute that with respect to FEBTC employees that corporation should also take into consideration the state of its business and
BPI chose not to employ or FEBTC employees who chose to retire or be its obligations to its own employees, and to their certified collective
separated from employment instead of "being absorbed," BPI’s assumed bargaining agent or labor union.
liability to these employees pursuant to the merger is FEBTC’s liability to
them in terms of separation pay, retirement pay or other benefits that may Even assuming we accept Justice Brion’s theory that in a merger situation
be due them depending on the circumstances. the surviving corporation should be compelled to absorb the dissolved
corporation’s employees as a legal consequence of the merger and as a
Although not binding on this Court, American jurisprudence on the social justice consideration, it bears to emphasize his dissent also
consequences of voluntary mergers on the right to employment and recognizes that the employee may choose to end his employment at any
seniority rights is persuasive and illuminating. We quote the following time by voluntarily resigning. For the employee to be "absorbed" by BPI, it
pertinent discussion from the American Law Reports: requires the employees’ implied or express consent. It is because of this
human element in employment contracts and the personal, consensual
Several cases have involved the situation where as a result of mergers, nature thereof that we cannot agree that, in a merger situation,
consolidations, or shutdowns, one group of employees, who had employment contracts are automatically transferable from one entity to
accumulated seniority at one plant or for one employer, finds that their another in the same manner that a contract pertaining to purely proprietary
jobs have been discontinued except to the extent that they are offered rights – such as a promissory note or a deed of sale of property – is
employment at the place or by the employer where the work is to be perfectly and automatically transferable to the surviving corporation.
carried on in the future. Such cases have involved the question whether
such transferring employees should be entitled to carry with them their That BPI is the same entity as FEBTC after the merger is but a legal fiction
accumulated seniority or whether they are to be compelled to start over at intended as a tool to adjudicate rights and obligations between and among
the bottom of the seniority list in the "new" job. It has been recognized in the merged corporations and the persons that deal with them. Although in
some cases that the accumulated seniority does not survive and cannot be a merger it is as if there is no change in the personality of the employer,
transferred to the "new" job. there is in reality a change in the situation of the employee. Once an FEBTC
employee is absorbed, there are presumably changes in his condition of
In Carver v Brien (1942) 315 Ill App 643, 43 NE2d 597, the court saying employment even if his previous tenure and salary rate is recognized by
that, absent some specific contract provision otherwise, seniority rights BPI. It is reasonable to assume that BPI would have different rules and
were ordinarily limited to the employment in which they were earned, and regulations and company practices than FEBTC and it is incumbent upon
concluding that the contract for which specific performance was sought the former FEBTC employees to obey these new rules and adapt to their
was not such a completed and binding agreement as would support such new environment. Not the least of the changes in employment condition
equitable relief, since the railroad, whose concurrence in the arrangements that the absorbed FEBTC employees must face is the fact that prior to the
made was essential to their effectuation, was not a party to the agreement. merger they were employees of an unorganized establishment and after
the merger they became employees of a unionized company that had an
Indeed, from the tenor of local and foreign authorities, in voluntary existing collective bargaining agreement with the certified union. This
mergers, absorption of the dissolved corporation’s employees or presupposes that the union who is party to the collective bargaining
the recognition of the absorbed employees’ service with their agreement is the certified union that has, in the appropriate certification
previous employer may be demanded from the surviving election, been shown to represent a majority of the members of the
corporation if required by provision of law or contract. The dissent bargaining unit.
of Justice Arturo D. Brion tries to make a distinction as to the terms and
conditions of employment of the absorbed employees in the case of a Likewise, with respect to FEBTC employees that BPI chose to employ and
corporate merger or consolidation which will, in effect, take away from who also chose to be absorbed, then due to BPI’s blanket assumption of
corporate management the prerogative to make purely business decisions liabilities and obligations under the articles of merger, BPI was bound to
on the hiring of employees or will give it an excuse not to apply the CBA in respect the years of service of these FEBTC employees and to pay the
force to the prejudice of its own employees and their recognized collective same, or commensurate salaries and other benefits that these employees
bargaining agent. In this regard, we disagree with Justice Brion. previously enjoyed with FEBTC.

As the Union likewise pointed out in its pleadings, there were benefits C. REQUIREMENTS AND PROCEDURE
under the CBA that the former FEBTC employees did not enjoy
with their previous employer. As BPI employees, they will enjoy all Sec. 82. How right is exercised. – The appraisal right may be exercised
these CBA benefits upon their "absorption." Thus, although in a sense BPI by any stockholder who shall have voted against the proposed corporate
is continuing FEBTC’s employment of these absorbed employees, BPI’s action, by making a written demand on the corporation within thirty (30)
employment of these absorbed employees was not under exactly the same days after the date on which the vote was taken for payment of the fair value
terms and conditions as stated in the latter’s employment contracts with of his shares: Provided, That failure to make the demand within such period
FEBTC. This further strengthens the view that BPI and the former FEBTC shall be deemed a waiver of the appraisal right. If the proposed corporate
employees voluntarily contracted with each other for their employment in action is implemented or affected, the corporation shall pay to such
the surviving corporation. stockholder, upon surrender of the certificate or certificates of stock
representing his shares, the fair value thereof as of the day prior to the date
on which the vote was taken, excluding any appreciation or depreciation in
CHAPTER 13: APPRAISAL RIGHT anticipation of such corporate action.
A. DEFINITION If within a period of sixty (60) days from the date the corporate action was
approved by the stockholders, the withdrawing stockholder and the
Appraisal Right is the method of paying a shareholder for the taking of his corporation cannot agree on the fair value of the shares, it shall be
property. It is a statutory means whereby a stockholder can avoid the determined and appraised by three (3) disinterested persons, one of whom
conversion of this property into another property not of his own choosing shall be named by the stockholder, another by the corporation, and the third
and is given to a shareholder as compensation for the abrogation of the by the two thus chosen. The findings of the majority of the appraisers shall
common-law rule that a single stockholder could block a certain corporate be final, and their award shall be paid by the corporation within thirty (30)
act such as merger. days after such award is made: Provided, That no payment shall be made to
any dissenting stockholder unless the corporation has unrestricted retained
PURPOSE: is to protect the property rights of dissenting stockholders from earnings in its books to cover such payment: and Provided, further, That
actions by the majority shareholders which alters the nature and character upon payment by the corporation of the agreed or awarded price, the
of their investment. In effect, it is a right granted to dissenting stockholder shall forthwith transfer his shares to the corporation.
stockholders on certain corporate or business decisions to demand payment
of the fair market value of their shares. REQUIREMENTS AND PROCEDURE FOR THE VALID EXERCISE OF
THIS RIGHT ARE:
B. WHEN EXERCISED 1. The stockholder must have voted against the proposed corporate
action in any of the instances allowed by law for the exercise of the
Sec. 81. Instances of appraisal right.- Any stockholder of a corporation right of appraisal;
shall have the right to dissent and demand payment of the fair value of his 2. The written demand for payment must be made by the dissenting
shares in the following instances: stockholder within 30 days after the date on which the vote was
taken. Failure to make the demand within the said period shall be
3. In case any amendment to the articles of incorporation has the effect of deemed a waiver on the part of the stockholder concerned to exercise
changing or restricting the rights of any stockholder or class of shares, his appraisal right;
or of authorizing preferences in any respect superior to those of 3. Surrender of the certificate of stock by the dissenting stockholder for
outstanding shares of any class, or of extending or shortening the term notation in the corporate books and the payment of the corporation of
of corporate existence; the fair market value of the said shares as of the day prior to the date
on which the vote was taken. If the stockholder and the corporation
4. In case of sale, lease, exchange, transfer, mortgage, pledge or other cannot agree on the fair market value thereof, the same shall be
disposition of all or substantially all of the corporate property and assets determined in accordance with the provisions of par.2 of Sec. 82;
as provided in the Code; and 4. The fair value of the shares of the dissenting stockholder must be paid
by the corporation only if it has “unrestricted retained earnings” in its
3. In case of merger or consolidation. books to cover such payment. If the corporation has no unrestricted
retained earnings, the dissenting stockholder may not, therefore, be
ENUMERATION NOT EXCLUSIVE: it may also cover: able to effectively exercise his appraisal right, EXCEPT in the case of a
1. Investment of funds in another corporation or business or for any close corporation under Sec. 105;
other purpose other than its primary purpose as provided in Sec. 42; 5. Upon payment of the shares by the corporation, the dissenting
2. Likewise, in a close corporation, a stockholder has the unbridled right stockholder shall transfer his shares to the corporation.
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, D. EFFECT OF EXERCISE OF APPRAISAL RIGHT
when the corporation has sufficient assets to cover its debts and
liabilities, exclusive of capital stock (Sec. 105). Sec. 83. Effect of demand and termination of right. - From the time of
demand for payment of the fair value of a stockholder's shares until either
NOT ALL AMENDMENTS: the right may only be exercised in cases of the abandonment of the corporate action involved or the purchase of the said
amendment which “has the effect of changing or restricting the rights of shares by the corporation, all rights accruing to such shares, including voting
any stockholder or class of shares, or of authorizing preferences in any and dividend rights, shall be suspended in accordance with the provisions of
respect superior to those of outstanding shares of any class, or of this Code, except the right of such stockholder to receive payment of the fair
extending or shortening the term of corporate existence”. value thereof: Provided, That if the dissenting stockholder is not paid the
value of his shares within 30 days after the award, his voting and dividend
Accordingly, if the amendment is to increase or decrease the number of rights shall immediately be restored.
directors, or change the corporate name, or change of principal office, the
appraisal right is not available. SUSPENSION OF STOCKHOLDER RIGHTS: Upon completion of the
steps provided in Sec. 82, the stockholder concerned is regarded as having
STOCKHOLDER WITH UNPAID SUBSCRIPTION: He MAY exercise the made an election to withdraw from the corporate enterprise and take the
appraisal right, since the subscriber is entitled to all the rights of a value of his stock. Such a procedure suspends (for a maximum period of 30
stockholder under Sec. 72 and although Sec. 82 provides for the days) certain ownership rights associated with stockholder status, such as
submission of certificate of stock, Sec. 86 provides that the notation to the right to receive dividends or distribution and the right to vote which
such certificate of stock is OPTIONAL at the instance of the corporation. cannot be restored without compliance with the governing statutory
conditions.
and the transferee shall have all the rights of a regular stockholder; and all
DIRECTOR EXERCISING APPRAISAL RIGHT: may still continue to dividend distributions which would have accrued on such shares shall be paid
function as such, prior to payment, unless there is a contrary provision in to the transferee.
the by-laws.
PURPOSE: to give notice and guide to the corporation to determine the
E. WHEN RIGHT TO PAYMENT CEASES respective rights of stockholder.
Sec. 84. When right to payment ceases. - No demand for payment SALE: The law does not prohibit the dissenting stockholder to sell, transfer
under this Title may be withdrawn unless the corporation consents thereto. or assign his shares. If such be the case, the right of the dissenting
If, however, such demand for payment is withdrawn with the consent of the stockholder to be paid the fair value of his shares shall cease and the
corporation, or if the proposed corporate action is abandoned or rescinded by transferee will acquire all the rights of a regular stockholder inclusive of all
the corporation or disapproved by the Securities and Exchange Commission dividends which would have accrued on such shares.
where such approval is necessary, or if the Securities and Exchange
Commission determines that such stockholder is not entitled to the appraisal
right, then the right of said stockholder to be paid the fair value of his shares CHAPTER 14: NON-STOCK CORPORATIONS (TITLE XI)
shall cease, his status as a stockholder shall thereupon be restored, and all
dividend distributions which would have accrued on his shares shall be paid A. DEFINITION
to him.
Sec. 87. Definition. - For the purposes of this Code, a non-stock
INSTANCES WHEN THE RIGHT OF A DISSENTING STOCKHOLDER corporation is one where no part of its income is distributable as dividends to
TO BE PAID THE FAIR VALUE OF HIS SHARES CEASES: its members, trustees, or officers, subject to the provisions of this Code on
1. When he withdraws his demand for payment and the corporation dissolution: Provided, That any profit which a non-stock corporation may
consents thereto; obtain as an incident to its operations shall, whenever necessary or proper,
2. When the proposed action is abandoned or rescinded by the be used for the furtherance of the purpose or purposes for which the
corporation; corporation was organized, subject to the provisions of this Title.
3. When the proposed action is disapproved by the SEC where such
approval is necessary; The provisions governing stock corporation, when pertinent, shall be
4. When the SEC determines that he is not entitled to exercise his applicable to non-stock corporations, except as may be covered by specific
appraisal right; provisions of this Title.
5. When he fails to submit the stock certificate within ten (10) days from
demand to the corporation for notation that such shares are CAPITAL STOCK: the old notion is that a non-stock corporation is one
dissenting shares; and, which has no capital stock divided into shares – this may no longer hold
6. If the shares are transferred and the certificate subsequently true under the definition provided by Sec. 87. Thus, even if it may have
cancelled. capital stock divided into shares, proprietary or otherwise, a corporation is
considered “non-stock” so long as it does not distribute dividends to its
F. COST OF APPRAISAL members and officers. We have, for instance, Club shares issued t the
members, the totality of which may rightfully represent “capital” of the
If the corporation and the dissenting stockholder do not agree, an appraisal corporation but whose income (if there be any) is not distributed by way of
to be made by three disinterested person may be made. dividends during its corporate existence. The corporation, in such a case, is
legally “non-stock”.
Sec. 85. Who bears costs of appraisal. - The costs and expenses of
appraisal shall be borne by the corporation, unless the fair value ascertained PROFITS: A non-stock corporation is generally not allowed to engage in
by the appraisers is approximately the same as the price which the any business undertaking or activity for profit as it would run counter to its
corporation may have offered to pay the stockholder, in which case they shall very nature as a non-profit entity. However, as may be allowed and
be borne by the latter. In the case of an action to recover such fair value, all specified in its AOI or incidental to the objects and purposes indicated
costs and expenses shall be assessed against the corporation, unless the therein, it may engage in certain money-making ventures or economic
refusal of the stockholder to receive payment was unjustified. activities provided that any profits derived therefrom shall be used for the
furtherance of the purposes for which the corporation was organized or to
THE CORPORATION BEARS THE COST IF: defray the operating expenses of the entity. It has thus been said that the
a. The price offered by the corporation is lower than the fair value of the fact that a non-profit corporation earns a profit, gain or income for the
shares of the dissenting stockholder as determined by the appraisers; corporation or members does not make it a profit-making corporation
b. Where an action is filed by the dissenting stockholder to recover such where such profit or income is used for the purpose set forth in the AOI
fair value and the refusal of the stockholder to receive payment is and is not distributable to its incorporators, members or officers, since
found by the court to be justified. mere intangible or pecuniary benefits to the members do not change the
nature of the corporation.
DISSENTING STOCKHOLDER WILL BE LIABLE FOR THE COST AND
EXPENSES OF APPRAISAL WHEN: The determination of whether or not a non-stock corporation can engage in
a. When the price offered by the corporation is approximately the same profit-making business or activity depends largely on the purpose or
as the fair value ascertained by the appraisers; purposes indicated in the AOI. If the business activity is authorized in the
b. Where the action filed by the dissenting stockholder and his refusal to said articles, necessary, incidental or essential thereto, the same may be
accept payment is found by the court to be unjustified. undertaken by the corporation, otherwise, not, as it would be an ultra-vires
act under Sec. 45
G. NOTATION
B. PURPOSE
Sec. 86. Notation on certificates; rights of transferee. - Within ten
(10) days after demanding payment for his shares, a dissenting stockholder Sec. 88. Purposes. - Non-stock corporations may be formed or organized
shall submit the certificates of stock representing his shares to the for charitable, religious, educational, professional, cultural, fraternal, literary,
corporation for notation thereon that such shares are dissenting shares. His scientific, social, civic service, or similar purposes, like trade, industry,
failure to do so shall, at the option of the corporation, terminate his rights agricultural and like chambers, or any combination thereof, subject to the
under this Title. If shares represented by the certificates bearing such special provisions of this Title governing particular classes of non-stock
notation are transferred, and the certificates consequently cancelled, the corporations.
rights of the transferor as a dissenting stockholder under this Title shall cease
Non-stock corporations may be organized or formed for any purpose or lodged with the BOT since it is the body that exercises all corporate powers
purposes allowed or indicated in the above provision. The enumeration, as enunciated in Sec. 23 of the Code.
however, is not exclusive as the law itself recognizes similar or allied
purpose or purposes for which non-stock corporations may be organized. SPECIAL CASES: the law itself may provide certain limitations or even
Recreational, sports club, athletic or allied activities of similar import, for perhaps proscription on transfer of membership. Thus, RA 4726, otherwise
instance, may likewise be lawful purpose of a non-stock corporation. known as the Condominium Act requires that membership therein shall not
be transferred separately from the condominium unit of which it is
C. MEMBERSHIP AND VOTING RIGHTS appurtenant and that when a member ceases to own a unit, he shall
automatically cease to be a member.
Sec. 89. Right to vote. - The right of the members of any class or classes
to vote may be limited, broadened or denied to the extent specified in the TERMINATION OF MEMBERSHIP: Membership may be terminated in
articles of incorporation or the by-laws. Unless so limited, broadened or the manner and for causes provided in the AOI or by-laws and when a
denied, each member, regardless of class, shall be entitled to one vote. member is so terminated it shall extinguish all his rights in the corporation
or in its property unless otherwise provided in the said articles or by-laws.
Unless otherwise provided in the articles of incorporation or the by-laws, a
member may vote by proxy in accordance with the provisions of this Code. The power or authority to terminate members in non-stock corporations is
said to be inherent but strict compliance with the manner and procedure
Voting by mail or other similar means by members of non-stock corporations laid down in the by-laws must be observed, otherwise it may render the
may be authorized by the by-laws of non-stock corporations with the expulsion ineffective and invalid.
approval of, and under such conditions which may be prescribed by, the
Securities and Exchange Commission. In the absence of any provision in the AOI or by-laws relative to the
manner and causes of termination or expulsion of member, the decided
CUMULATIVE VOTING: GENERAL RULE: Cumulative voting is not weight of authority is to the effect that the power is inherent and may be
allowed, accordingly, even if the members may cast as many votes are exercised in certain situations, namely:
there are trustees to be elected, he may not cast more than one vote for 1. When an offense is committed which, although it has no immediate
one candidate, UNLESS: allowed in the AOI or the by-laws. 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
CLASSIFICATION: The by-laws or the AOI may provide for classification law;
as to members with voting or non-voting rights, since it is provided that 2. When the offense is a violation of his duty as member of the
“the right of the members of any class or classes to vote may be limited, corporation; and
broadened or denied”. 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.
PROXY VOTING: Generally, allowed unless disallowed by the AOI or the
by-laws. 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
VOTING OTHER THAN IN PERSON: may also be allowed by the AOI or authority to strip a member of his membership without cause.
by-laws. Contrary to a stock corporation, a stockholder has to vote in the
meeting called for the purpose except in case of a general amendment CHINESE YOUNG MEN'S CHRISTIAN ASSOCIATION OF THE
where “written assent” is allowed. PHILIPPINE ISLANDS, WILLIAM GOLANGCO, in his capacity as Director
and President of the said Association, and JUANITO K. TAN, in his capacity
Sec. 90. Non-transferability of membership. - Membership in a non- as Recording Secretary of the said Association, petitioners,
stock corporation and all rights arising therefrom are personal and non- vs.
transferable, unless the articles of incorporation or the by-laws otherwise VICTOR CHING and THE COURT OF APPEALS, respondents
provide. (G.R. No. L-36929; June 18, 1976)
Sec. 91. Termination of membership. - Membership shall be terminated FACTS: Respondent Ching, a member of the BOD of petitioner Chinese
in the manner and for the causes provided in the articles of incorporation or YMCA, filed an action in the CFI, alleging that on the Membership
the by-laws. Termination of membership shall have the effect of Campaign of the Chinese YMCA held from Sept. 27, 1965, only 175
extinguishing all rights of a member in the corporation or in its property, applicants were submitted, canvassed and accepted on the last day of the
unless otherwise provided in the articles of incorporation or the by-laws. membership campaign, which was Nov. 26, 1965, NOT more than 240, as
reported in the Nov. 28, 1965 issue of the Chinese Commercial News.
MEMBERSHIP: non-stock corporations have the right to adopt rules
prescribing the mode and manner in which membership thereat can be The trial court rendered a decision in favor of herein respondent declaring
obtained or maintained. This includes the right to limit membership. In that only 174 applications constitute the present active membership of the
other words, membership in non-stock corporations may be acquired by association.
complying with the provisions of its rules prescribed in the by-laws. This is
in consonance with the express power granted by law under Sec. 36, par. 6 ISSUE: WON the trial court is justified in stripping members of their
of the Code, authorizing them to admit members thereof and that authority membership in a non-stock corporation?
carries with it the power to prescribe rules on membership.
HELD: No. The documentary evidence itself as cited by the trial court,
It has thus been stated that in the absence of charter or statutory consisting of the applications and the receipts for payment of the
restrictions, non-stock corporations may determine who shall be admitted membership fees show that they were filed and paid not later than the
to membership and how they shall be admitted. It may exclude any person November 26, 1965 deadline, and this was further supported by the bank
whom it deems unfit for membership. Indeed, in the absence of statement of the petitioner YMCA deposit account with the China Banking
restrictions, it may act arbitrarily and exclude any persons it may see fit, Corporation and the checks paid by certain members to the YMCA which
and the courts have no power to interfere. In other words, it is free to fix show that the application fees corresponding to the questioned 74
qualifications for membership and to provide for termination of applications (that raised the total to 249 from 175) were already paid to
membership. petitioner YMCA as the time of the said deadline. (Exhibits 4, 6, 6-A, 6-B
and 6-C). No evidence could be cited by the trial court to rebut this well
AUTHORITY TO ADMIT MEMBERS: the provisions in the by-laws, if any, nigh conclusive documentary evidence other than respondent's
shall govern. Absent any provision to the contrary, it must necessarily be unsupported suspicion which the trial court adopted in a negative manner
with its statement that it is "not improbable" that "some of those

applications filed after said deadline". If there were indeed any applications During the meetings dated April 4, 1997 and May 30, 1997 of the CCCI
filed after the deadline, they certainly should have been positively pin- Board of Directors, action on respondent’s application for proprietary
pointed and specifically annulled. membership was deferred. In another Board meeting held on July 30,
1997, respondent’s application was voted upon. Subsequently, or on
What is worse, 175 membership applications were undisputedly filed within August 1, 1997, respondent received a letter from Julius Z. Neri, CCCI’s
the deadline (including the 75 withdrawn by respondent) and yet the 100 corporate secretary, informing him that the Board disapproved his
remaining unquestioned memberships were nullified by the questioned application for proprietary membership.
decision without the individuals concerned ever having been impleaded or
heard (except the individual petitioners president and secretary). On August 6, 1997, Edmundo T. Misa, on behalf of respondent, wrote CCCI
a letter of reconsideration. As CCCI did not answer, respondent, on October
The appealed decision thus contravened the established principle that the 7, 1997, wrote another letter of reconsideration. Still, CCCI kept silent. On
courts cannot strip a member of a non-stock non-profit November 5, 1997, respondent again sent CCCI a letter inquiring whether
corporation of his membership therein without cause. Otherwise, any member of the Board objected to his application. Again, CCCI did not
that would be an unwarranted and undue interference with the reply.
well-established right of a corporation to determine its
membership, as announced by Fletcher, as follows: Consequently, on December 23, 1998, respondent filed with the Regional
Trial Court (RTC), Branch 71, Pasig City a complaint for damages against
Compliance with provisions of charter, constitution or by-laws. —In order petitioners, docketed as Civil Case No. 67190.
that membership may be acquired in a non-stock corporation and valid
by-laws must be complied with, except in so far as they may be and are After trial, the RTC rendered its Decision dated February 14, 2001 in favor
waived. *** But provisions in the by-laws as to formal steps to be taken of respondent.
to acquire membership may be waived by the corporation, or it may be
estopped to assert that they have not been taken. [12A Fletcher On appeal by petitioners, the Court of Appeals, in its Decision dated
Cyclopedia Corporations, Perm. ed., pp. 583-585; emphasis supplied.] January 31, 2003, affirmed the trial court’s Decision and denied the Motion
for Reconsideration subsequently filed.
Finally, the appealed decision did not give due importance to the
undisputed fact therein stated that "at the board meeting of the association Hence, the present petition.
held on December 7, 1965, a list of 174 applications for membership, old
and new, was submitted to the board and approved by the latter, over the ISSUE: WON in disapproving respondent’s application for proprietary
objection of the petitioner [therein private respondent] who was present at membership with CCCI, petitioners are liable to respondent for damages?
said meeting." Such action of the petitioner association's board of directors
approving the 174 membership applications of old and new members HELD: Yes. Petitioners contend, inter alia, that the Court of Appeals erred
constituting its active membership as duly processed and screened by the in awarding exorbitant damages to respondent despite the lack of evidence
authorized committee just be deemed a waiver on its part of any that they acted in bad faith in disapproving the latter’s application; and in
technicality or requirement of form, since otherwise the association would disregarding their defense of damnum absque injuria.
be practically paralyzed and deprived of the substantial revenues from the
membership dues of P17,400.00 (at P100.00 per application). For his part, respondent maintains that the petition lacks merit, hence,
should be denied.
WHEREFORE the respondent court's decision is hereby set aside and in lieu
thereof judgment is rendered dismissing private respondent's petition in the CCCI’s Articles of Incorporation provide in part:
Court of First Instance of Manila and dissolving the preliminary injunction,
with costs against private respondent. SEVENTH: That this is a non-stock corporation and membership therein
as well as the right of participation in its assets shall be limited to
CEBU COUNTRY CLUB, INC., SABINO R. DAPAT, RUBEN D. qualified persons who are duly accredited owners of Proprietary
ALMENDRAS, JULIUS Z. NERI, DOUGLAS L. LUYM, CESAR T. LIBI, Ownership Certificates issued by the corporation in accordance with its
RAMONTITO* E. GARCIA and JOSE B. SALA, petitioners, By-Laws.
vs.
RICARDO F. ELIZAGAQUE, respondent Corollary, Section 3, Article 1 of CCCI’s Amended By-Laws provides:
(G.R. No. 160273 ; January 18, 2008)
SECTION 3. HOW MEMBERS ARE ELECTED – The procedure for the
FACTS: Cebu Country Club, Inc. (CCCI), petitioner, is a domestic admission of new members of the Club shall be as follows:
corporation operating as a non-profit and non-stock private membership (a) Any proprietary member, seconded by another voting proprietary
club, having its principal place of business in Banilad, Cebu City. Petitioners member, shall submit to the Secretary a written proposal for the
herein are members of its Board of Directors. admission of a candidate to the "Eligible-for-Membership List";
(b) Such proposal shall be posted by the Secretary for a period of thirty
Sometime in 1987, San Miguel Corporation, a special company proprietary (30) days on the Club bulletin board during which time any member may
member of CCCI, designated respondent Ricardo F. Elizagaque, its Senior interpose objections to the admission of the applicant by communicating
Vice President and Operations Manager for the Visayas and Mindanao, as a the same to the Board of Directors;
special non-proprietary member. The designation was thereafter approved (c) After the expiration of the aforesaid thirty (30) days, if no objections
by the CCCI’s Board of Directors. have been filed or if there are, the Board considers the objections
unmeritorious, the candidate shall be qualified for inclusion in the
In 1996, respondent filed with CCCI an application for proprietary "Eligible-for-Membership List";
membership. The application was indorsed by CCCI’s two (2) proprietary (d) Once included in the "Eligible-for-Membership List" and after the
members, namely: Edmundo T. Misa and Silvano Ludo. candidate shall have acquired in his name a valid POC duly recorded in
the books of the corporation as his own, he shall become a Proprietary
As the price of a proprietary share was around the P5 million range, Benito Member, upon a non-refundable admission fee of P1,000.00, provided
Unchuan, then president of CCCI, offered to sell respondent a share for that admission fees will only be collected once from any person.
only P3.5 million. Respondent, however, purchased the share of a certain
Dr. Butalid for only P3 million. Consequently, on September 6, 1996, CCCI On March 1, 1978, Section 3(c) was amended to read as follows:
issued Proprietary Ownership Certificate No. 1446 to respondent. (c) After the expiration of the aforesaid thirty (30) days, the Board may,
by unanimous vote of all directors present at a regular or special

meeting, approve the inclusion of the candidate in the "Eligible-for- a special non-proprietary member of CCCI, he should have been treated by
Membership List". petitioners with courtesy and civility. At the very least, they should have
informed him why his application was disapproved.
As shown by the records, the Board adopted a secret balloting known as
the "black ball system" of voting wherein each member will drop a ball in The exercise of a right, though legal by itself, must nonetheless be in
the ballot box. A white ball represents conformity to the admission of an accordance with the proper norm. When the right is exercised arbitrarily,
applicant, while a black ball means disapproval. Pursuant to Section 3(c), unjustly or excessively and results in damage to another, a legal wrong is
as amended, cited above, a unanimous vote of the directors is required. committed for which the wrongdoer must be held responsible. It bears
When respondent’s application for proprietary membership was voted upon reiterating that the trial court and the Court of Appeals held that
during the Board meeting on July 30, 1997, the ballot box contained one petitioners’ disapproval of respondent’s application is characterized by bad
(1) black ball. Thus, for lack of unanimity, his application was disapproved. faith.
Obviously, the CCCI Board of Directors, under its Articles of Incorporation, As to petitioners’ reliance on the principle of damnum absque injuria or
has the right to approve or disapprove an application for proprietary damage without injury, suffice it to state that the same is misplaced. In
membership. But such right should not be exercised arbitrarily. Articles 19 Amonoy v. Gutierrez, we held that this principle does not apply when there
and 21 of the Civil Code on the Chapter on Human Relations provide is an abuse of a person’s right, as in this case.
restrictions.
As to the appellate court’s award to respondent of moral damages, we find
In GF Equity, Inc. v. Valenzona , we expounded Article 19 and correlated it the same in order. Under Article 2219 of the New Civil Code, moral
with Article 21, thus: damages may be recovered, among others, in acts and actions referred to
in Article 21. We believe respondent’s testimony that he suffered mental
“This article, known to contain what is commonly referred to as the anguish, social humiliation and wounded feelings as a result of the arbitrary
principle of abuse of rights, sets certain standards which must be denial of his application.
observed not only in the exercise of one's rights but also in the
performance of one's duties. These standards are the following: to act ISSUE2: WON the liability is solidary considering that only one voted for
with justice; to give everyone his due; and to observe honesty and good disapproval?
faith. The law, therefore, recognizes a primordial limitation on all rights;
that in their exercise, the norms of human conduct set forth in Article 19 HELD: Yes. Section 31 of the Corporation Code provides:
must be observed. A right, though by itself legal because
recognized or granted by law as such, may nevertheless become SEC. 31. Liability of directors, trustees or officers. — Directors or trustees
the source of some illegality. When a right is exercised in a who willfully and knowingly vote for or assent to patently unlawful acts
manner which does not conform with the norms enshrined in of the corporation or who are guilty of gross negligence or bad faith in
Article 19 and results in damage to another, a legal wrong is directing the affairs of the corporation or acquire any personal or
thereby committed for which the wrongdoer must be held pecuniary interest in conflict with their duty as such directors, or trustees
responsible. But while Article 19 lays down a rule of conduct for the shall be liable jointly and severally for all damages resulting
government of human relations and for the maintenance of social order, therefrom suffered by the corporation, its stockholders or members and
it does not provide a remedy for its violation. Generally, an action for other persons. (Emphasis ours)
damages under either Article 20 or Article 21 would be proper.
(Emphasis in the original)” WHEREFORE, we DENY the petition. The challenged Decision and
Resolution of the Court of Appeals in CA-G.R. CV No. 71506 are
In rejecting respondent’s application for proprietary membership, we find AFFIRMED with modification in the sense that (a) the award of moral
that petitioners violated the rules governing human relations, the basic damages is reduced from P2,000,000.00 to P50,000.00; (b) the award of
principles to be observed for the rightful relationship between human exemplary damages is reduced from P1,000,000.00 to P25,000.00; and (c)
beings and for the stability of social order. The trial court and the Court of the award of attorney’s fees and litigation expenses is reduced from
Appeals aptly held that petitioners committed fraud and evident bad faith in P500,000.00 and P50,000.00 to P50,000.00 and P25,000.00, respectively.
disapproving respondent’s applications. This is contrary to morals, good
custom or public policy. Hence, petitioners are liable for damages pursuant D. TRUSTEES AND OFFICERS
to Article 19 in relation to Article 21 of the same Code.
The word “trustees” as used in Sec. 92 makes reference to the governing
It bears stressing that the amendment to Section 3(c) of CCCI’s Amended board or body in a non-stock corporation.
By-Laws requiring the unanimous vote of the directors present at a special
or regular meeting was not printed on the application form respondent Sec. 92. Election and term of trustees. - Unless otherwise provided in
filled and submitted to CCCI. What was printed thereon was the original the articles of incorporation or the by-laws, the board of trustees of non-stock
provision of Section 3(c) which was silent on the required number of votes corporations, which may be more than fifteen (15) in number as may be
needed for admission of an applicant as a proprietary member. fixed in their articles of incorporation or by-laws, shall, as soon as organized,
so classify themselves that the term of office of one-third (1/3) of their
Petitioners explained that the amendment was not printed on the number shall expire every year; and subsequent elections of trustees
application form due to economic reasons. We find this excuse flimsy and comprising one-third (1/3) of the board of trustees shall be held annually and
unconvincing. Such amendment, aside from being extremely significant, trustees so elected shall have a term of three (3) years. Trustees thereafter
was introduced way back in 1978 or almost twenty (20) years before elected to fill vacancies occurring before the expiration of a particular term
respondent filed his application. We cannot fathom why such a prestigious shall hold office only for the unexpired period.
and exclusive golf country club, like the CCCI, whose members are all
affluent, did not have enough money to cause the printing of an updated No person shall be elected as trustee unless he is a member of the
application form. corporation.
Unless otherwise provided in the articles of incorporation or the by-laws,
It is thus clear that respondent was left groping in the dark officers of a non-stock corporation may be directly elected by the members.
wondering why his application was disapproved. He was not even
informed that a unanimous vote of the Board members was QUALIFICATIONS OF TRUSTEES:
required. When he sent a letter for reconsideration and an inquiry 1. He is a member of the association;
whether there was an objection to his application, petitioners 2. Majority thereof must be residents of the Philippines; and
apparently ignored him. Certainly, respondent did not deserve this 3. Other qualifications as may be provided for in the by-laws.
kind of treatment. Having been designated by San Miguel Corporation as

DISQUALIFICATIONS and REMOVAL: Sec. 27 as to disqualifications, binding and conclusive and not subject to review or collateral attack in the
and Sec. 29 and 30 as to removal also apply to Trustees. courts. " (7 C.J.S. pp. 38- 39).
NUMBER OF TRUSTEES: may exceed 15 as may be fixed in the AOI or The general rule of non-interference in the internal affairs of associations
by-laws, contrary to a stock corporation whose BOD must not exceed 15 is, however, subject to exceptions, but the power of review is extremely
members. limited. Accordingly, the courts have and will exercise power to
interfere in the internal affairs of an association where (1) law
TERM: Sec. 92 allows the AOI or by-laws to provide a desired term of and justice so require, and (2) the proceedings of the association
office and may vary depending on the needs of a specific corporation. By are subject to judicial review where there is fraud, oppression, or
analogy of the provisions of Sec. 7, however, a term in excess of 5 years is bad faith, or (3) where the action complained of is capricious,
not allowed as it would unduly deprive other members to take active part in arbitrary, or unjustly discriminatory. Also, the courts will usually
corporate management. entertain jurisdiction to grant relief (4) in case property or civil rights
are invaded, although it has also been held that the involvement of
STAGGERED TERM: The term of office may also be staggered unless the property rights does not necessarily authorize judicial intervention, in the
AOI or by-laws otherwise provide. If such be the case, the board shall absence of arbitrariness, fraud or collusion. Moreover, the courts will
classify themselves in order that 1/3 of their number shall expire every year intervene (5) where the proceedings in question are violative of the
and subsequent elections of trustees comprising 1/3 shall be held annually. laws of the society, or the law of the land, as by depriving a
The trustees so elected to fill up any vacancy occurring before the person of due process of law. Similarly, judicial intervention is
expiration of a particular term shall hold office only for the unexpired warranted (6) where there is a lack of jurisdiction on the part of the
portion of his predecessor. tribunal conducting the proceedings, where the organization
exceeds its powers, or where the proceedings are otherwise
GOVERNING BOARDS: While the Code speaks of the BOT as the illegal. (7 C.J.S., pp. 39-41).
governing board or body in a non-stock corporation the same law allows a
non-stock corporation or any other special corporation to designate their In accordance with the general rules as to judicial interference cited above,
governing board by any other name other than BOD/T. The Rotary Club for the decision of an unincorporated association on the question of an election
instance, designates it as Board of Governors while the Evangelica to office is a matter peculiarly and exclusively to be determined by the
Independence Metodista En Las Islas Filipinas calls it as the Consistory of association, and, in the absence of fraud, is final and binding on the courts.
Elders. (7 C.J.S., p. 44).
ELECTION BY MEMBERS OF OFFICERS: One of the significant features The instant controversy between petitioner So and respondent Josefa falls
of a non-stock corporation is that it allows the AOI or by-laws to provide squarely within the ambit of the rule of judicial non-intervention or non-
that the officers thereof shall be directly elected by the members. Unlike in interference. The elections in dispute, the manner by which it was
a stock corporation where corporate officers are elected by the BOD. conducted and the results thereof, is strictly the internal affair that
concerns only the Lions association and/or its members, and We find from
Section 138. Designation of governing boards. - The provisions of specific the records that the same was resolved within the organization of Lions
provisions of this Code to the contrary notwithstanding, non-stock or Clubs International in accordance with the Constitution and By-Laws which
special corporations may, through their articles of incorporation or are not immoral, unreasonable, contrary to public policy, or in
their by-laws, designate their governing boards by any name other contravention of the laws of the land
than as board of trustees.
At the meeting of the International Board of Directors held on June 27,
LIONS CLUBS INTERNATIONAL and JAMES L. SO, petitioners, 1982, the election of petitioner James L. So to serve as District Governor of
vs. District 301-Al for the fiscal year 1982-83 was approved and said petitioner
HON. AUGUSTO M. AMORES, Presiding Judge of the Court of First was duly informed thereof by Richard G. Rice, Manager, District Operations
Instance of Manila, Branch XXIV, COURT OF APPEALS and VICENTE Department, Lions Clubs International in his letter dated July 8, 1982 and
JOSEFA, respondents. marked Annex "K" to the petition, p. 79, Records. Petitioner attended and
(G.R. No. L-61259; April 26, 1983) completed the District Governors' Executive Seminar as District Governor of
301-Al (see Annex "L", P. 80, Records). On June 29, 1982, petitioner So
FACTS: Vicente Josefa and James L. So entered into an agreement was proclaimed, sworn to and installed to office as District Governor of
whereby So would withdraw his candidacy for the post of Governor of District 301-Al by the President of Lions International at the close of the
District 301-A of herein petitioner Lions Club International. Such withdrawal 65th Lions Clubs International Convention held in Atlanta, Georgia, U.S.A
was accepted by Governor Huang, however news items were published
conveying the idea that So had not withdrawn from the gubernatorial race. The findings upon the evidence submitted and examined at the hearing of
the election protest before the Committee personally attended by both
Josefa filed a complaint before the CFI for quo warranto, injunction or at petitioner So and respondent Josefa may not be disturbed by the courts.
least a temporary restraining order alleging irregularities in the election; The decision of the Association's tribunal, the International Board of
that although at the old site of the election, Josefa won, the Lions Club Directors, is controlling since respondent Josefa alleges no invasion of this
Internation unlawfully recognized So as the winner. property or civil rights and neither is it claimed that the government of the
Association is not fairly and honestly administered in conformity with its
The trial court issued the TRO which was later on lifted and on appeal, the laws and the law of the land.
CA issued a new TRO.
E. PLACE OF MEETINGS
ISSUE: WON the dispute between petitioners and Josefa is a justiciable
issue cognizable by the courts? Sec. 93. Place of meetings. - The by-laws may provide that the members
of a non-stock corporation may hold their regular or special meetings at any
HELD: No. We adopt the general rule that "... the courts will not place even outside the place where the principal office of the corporation is
interfere with the internal affairs of an unincorporated association located: Provided, That proper notice is sent to all members indicating the
so as to settle disputes between the members, or questions of date, time and place of the meeting: and Provided, further, That the place of
policy, discipline, or internal government, so long as the meeting shall be within the Philippines.
government of the society is fairly and honestly administered in PLACE OF MEETING: another distinctive feature of a non-stock
conformity with its laws and the law of the land, and no property corporation is that membership meeting may be held anywhere in the
or civil rights are invaded. Under such circumstances, the decision of Philippines whereas in a stock corporation, the stockholders’ meeting is
the governing body or established private tribunal of the association is mandated to be held or conducted within the city or municipality where the
principal office is located, and as far as practicable, within the principal of persons, not exceeding twenty (20); (2) all the issued stock of all classes
office of the corporation. shall be subject to one or more specified restrictions on transfer permitted by
this Title; and (3) The corporation shall not list in any stock exchange or
F. DISTRIBUTION OF ASSETS UPON DISSOLUTION make any public offering of any of its stock of any class. Notwithstanding the
foregoing, a corporation shall not be deemed a close corporation when at
Corporations, stock and non-stock, may be dissolved in accordance and least two-thirds (2/3) of its voting stock or voting rights is owned or
pursuant to the provisions of Sections 118 to 121 of the Corporation Code controlled by another corporation which is not a close corporation within the
and the pertinent provisions of P.D. 902-A, as amended. If such be the meaning of this Code.
case, the assets of the corporation are to be distributed in accordance with
law and established jurisprudence. Any corporation may be incorporated as a close corporation, except mining or
oil companies, stock exchanges, banks, insurance companies, public utilities,
Sec. 94. Rules of distribution. - In case dissolution of a non-stock educational institutions and corporations declared to be vested with public
corporation in accordance with the provisions of this Code, its assets shall be interest in accordance with the provisions of this Code.
applied and distributed as follows:
The provisions of this Title shall primarily govern close corporations:
1. All liabilities and obligations of the corporation shall be paid, satisfied and Provided, That the provisions of other Titles of this Code shall apply
discharged, or adequate provision shall be made therefore; suppletorily except insofar as this Title otherwise provides.
2. Assets held by the corporation upon a condition requiring return, transfer The ultimate effect of the special provisions of the law on close
or conveyance, and which condition occurs by reason of the dissolution, shall corporations is to furnish another form of business organization – a “de
be returned, transferred or conveyed in accordance with such requirements; facto corporation with a corporate shell”. It is referred to sometimes as a
hybrid of both the corporate and partnership forms, an “incorporated
3. Assets received and held by the corporation subject to limitations partnership” or “corporation de jure but a de facto partnership”.
permitting their use only for charitable, religious, benevolent, educational or
similar purposes, but not held upon a condition requiring return, transfer or This is because a close corporation may partake the nature of a partnership
conveyance by reason of the dissolution, shall be transferred or conveyed to in that the stockholders thereof take an active role in the management of
one or more corporations, societies or organizations engaged in activities in the corporate affairs either as directors, officers or even perhaps as
the Philippines substantially similar to those of the dissolving corporation partners in management which is akin to the partnership form of business.
according to a plan of distribution adopted pursuant to this Chapter; This, in fact, is the main distinction between a close corporation and the
ordinary stock corporation where, in the latter, the stockholders have
4. Assets other than those mentioned in the preceding paragraphs, if any, hardly a voice in management except perhaps to elect the directors.
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 Despite this, the stockholders who are active in management still enjoy
or the by-laws, determine the distributive rights of members, or any class or limited liability to the extent of their subscription in so far as corporate
classes of members, or provide for distribution; and obligations are concerned. It will be noted, however, that under no. 5 of
Sec. 100 of the Code, they are made personally liable for corporate torts
5. In any other case, assets may be distributed to such persons, societies, unless they have obtained a reasonably adequate insurance liability.
organizations or corporations, whether or not organized for profit, as may be
specified in a plan of distribution adopted pursuant to this Chapter. CLOSE CORPORAIONS: must contain the three provisions required to be
indicated in the AOI as provided by Sec. 96. Absent any of the provisions
Sec. 95. Plan of distribution of assets. - A plan providing for the required by the said section, the corporation, will not, for all legal intents
distribution of assets, not inconsistent with the provisions of this Title, may and purposes, be considered as a close corporation and would thus not be
be adopted by a non-stock corporation in the process of dissolution in the governed by TITLE XII of the Code, but by the general provisions
following manner: governing ordinary corporation. “A corporation does not become a close
corporation just because man and his wife owns 99.86% if the capital
The board of trustees shall, by majority vote, adopt a resolution stock” (San Juan Structural Steel vs. CA). The qualifying conditions requreid
recommending a plan of distribution and directing the submission thereof to a by law must be complied with.
vote at a regular or special meeting of members having voting rights. Written
notice setting forth the proposed plan of distribution or a summary thereof 2/3 OWNED BY ANOTHER CORPORATION: Even if another
and the date, time and place of such meeting shall be given to each member corporation owns or controls 2/3 of the “voting” stocks of a close
entitled to vote, within the time and in the manner provided in this Code for corporation, the latter may still be considered as such close corporation if
the giving of notice of meetings to members. Such plan of distribution shall the corporation owning or controlling the shares is also a close corporation.
be adopted upon approval of at least two-thirds (2/3) of the members having
voting rights present or represented by proxy at such meeting. BUSINESS WITH PUBLIC INTEREST: may not be formed as close
corporation under the second paragraph of Sec. 95. Sec. 140 of the Code
Culled from the law is that non-stock corporations may provide in the AOI lays down a similar policy authorizing NEDA to recommend to the
or by-laws, for the distribution of its assets among its members subject to legislature the setting of maximum limits to family or group ownership of
the provisions of Sec. 94 and 95. That is, the exception relative to assets stock in corporations vested with public interest, and the determination of
which it holds upon some trust. In which event, the claims of the state, whether or not it should be vested with public interest within its domain.
beneficiaries, rightful owners or donors will have to be considered. Thus,
assets not subject to the provisions of number 2-4 of Sec. 94 may be B. PERMISSIVE PROVISIONS
distributed in accordance with a plan of distribution thereof in accordance
with the rule established in Sec. 95 of the Code. Sec. 97. Articles of incorporation. - The articles of incorporation of a
close corporation may provide:
CHAPTER 15: CLOSE CORPORATION
1. For a classification of shares or rights and the qualifications for owning or
A. DEFINITION holding the same and restrictions on their transfers as may be stated therein,
subject to the provisions of the following section;
Sec. 96. Definition and applicability of Title. - A close corporation, 2. For a classification of directors into one or more classes, each of whom
within the meaning of this Code, is one whose articles of incorporation may be voted for and elected solely by a particular class of stock; and
provide that: (1) All the corporation's issued stock of all classes, exclusive of 3. For a greater quorum or voting requirements in meetings of stockholders
treasury shares, shall be held of record by not more than a specified number or directors than those provided in this Code.
ELECTION OF OFFICERS: Sec. 97 likewise allows the AOI of a close
The articles of incorporation of a close corporation may provide that the corporation to provide that all officers or employees shall be elected or
business of the corporation shall be managed by the stockholders of the appointed by the stockholders instead of the BOD.
corporation rather than by a board of directors. So long as this provision
continues in effect: C. EFFECT OF BREACH OF QUALIFYING CONDITIONS
1. No meeting of stockholders need be called to elect directors; Sec. 98. Validity of restrictions on transfer of shares. - Restrictions on
2. Unless the context clearly requires otherwise, the stockholders of the the right to transfer shares must appear in the articles of incorporation and in
corporation shall be deemed to be directors for the purpose of applying the the by-laws as well as in the certificate of stock; otherwise, the same shall
provisions of this Code; and not be binding on any purchaser thereof in good faith. Said restrictions shall
3. The stockholders of the corporation shall be subject to all liabilities of not be more onerous than granting the existing stockholders or the
directors. corporation the option to purchase the shares of the transferring stockholder
with such reasonable terms, conditions or period stated therein. If upon the
The articles of incorporation may likewise provide that all officers or expiration of said period, the existing stockholders or the corporation fails to
employees or that specified officers or employees shall be elected or exercise the option to purchase, the transferring stockholder may sell his
appointed by the stockholders, instead of by the board of directors. shares to any third person.
CLASSIFICATION OF SHARES: Under no. 1 above, the close corporation The restriction must be indicated not only in the AOI and the stock
may classify its shares into different classes to be held of record only by certificates but also in the by-laws. The restrictions, however, shall not be
specified persons. Example: Classes A, B and C. Class A is to be held only more onerous than granting existing stockholders or the corporation the
by the incorporators; Class B by their relatives within the third civil degree option to purchase the shares of the selling or transferring stockholder
of consanguinity or affinity; Class C by their close business associates. within reasonable terms, conditions and period. If, after the expiration of
the period, the existing stockholders or the corporation fails to exercise the
CLASSIFICATION OF DIRECTORS: Under no. 2 above, a close option, the stockholder concerned may transfer his shares to any third
corporation may provide for a classification of directors into one or more person subject to the provisions, however, of Sec. 99:
class, each of whom may be voted for and elected solely by a particular
class of stock. Example: 1,000 Class A shares; 500 Class B shares; and 200 Sec. 99. Effects of issuance or transfer of stock in breach of
Class C shares. The AOI may provide that each class shall have a qualifying conditions. –
representation in the BOD regardless of the number of shares within each
class. So, if the close corporation has 5 directors, then the AOI may 1. If stock of a close corporation is issued or transferred to any person who is
allocate 3 directors for Class A shares, 1 for B and 1 for C. Within each not entitled under any provision of the articles of incorporation to be a holder
class, cumulative voting may also be exercised by the stockholders of such of record of its stock, and if the certificate for such stock conspicuously
class to elect their representative in the board. But to the extent that each shows the qualifications of the persons entitled to be holders of record
class can elect its own directors regardless of the number of shares in such thereof, such person is conclusively presumed to have notice of the
class, cumulative voting may, in effect be restricted. This is so because if fact of his ineligibility to be a stockholder.
there is no provision for a classification of directors, then Class A
stockholders, by cumulating their votes (5x1000) will have 5,000 votes and 2. If the articles of incorporation of a close corporation states the number of
can elect 3 directors with 1,666 votes each. Class B shares, having 2,500 persons, not exceeding twenty (20), who are entitled to be holders of record
votes can vote 2 members and Class C shares having only 1,000 votes of its stock, and if the certificate for such stock conspicuously states such
cannot be guaranteed to any seat in the board. number, and if the issuance or transfer of stock to any person would cause
the stock to be held by more than such number of persons, the person to
QUORUM AND VOTING REQUIREMENT: a close corporation may whom such stock is issued or transferred is conclusively presumed to
provide for a greater quorum or voting requirement under no. 3 above. have notice of this fact.
Although the AOI or by-laws of other stock corporations may provide for
greater quorum and voting requirements in directors’ meeting as provided 3. If a stock certificate of any close corporation conspicuously shows a
in Sec. 25 of the Code, those for stockholder’ meeting, unlike in a close restriction on transfer of stock of the corporation , the transferee of the stock
corporation, may not be altered or increased. This provisions in effect, is conclusively presumed to have notice of the fact that he has
increases the veto power of the minority stockholders. acquired stock in violation of the restriction, if such acquisition
violates the restriction.
DIRECT MANAGEMENT BY STOCKHOLDERS: the AOI of the close
corporation may provide that the corporation shall be managed by the 4. Whenever any person to whom stock of a close corporation has been
stockholders rather than by the BOD. If such be the case, the stockholders issued or transferred has, or is conclusively presumed under this section to
are deemed directors and are subject to all the rights and liabilities of a have, notice either (a) that he is a person not eligible to be a holder of stock
director. However, their liability would be more extensive in that they are of the corporation, or (b) that transfer of stock to him would cause the stock
personally lilable for torts unless, again, the corporation has obtained of the corporation to be held by more than the number of persons permitted
reasonably adequate liability insurance. As distinguished from the ordinary by its articles of incorporation to hold stock of the corporation, or (c) that the
stock corporation, directors hereof are liable for corporate torts only if they transfer of stock is in violation of a restriction on transfer of stock, the
have been negligent or acted fraudulently in the performance of their corporation may, at its option, refuse to register the transfer of
functions. As to what is “reasonably adequate liability insurance” would stock in the name of the transferee.
vary depending on the facts and circumstances of the case.
5. The provisions of subsection (4) shall not applicable if the transfer of
In order that the provision allowing a close corporation to do away with a stock, though contrary to subsections (1), (2) of (3), has been consented
BOD may be effective, the same must contain the continuing provisions to by all the stockholders of the close corporation, or if the close
required in par. 2 of Sec. 97: corporation has amended its articles of incorporation in accordance
1. No meeting of stockholders need be called to elect directors; with this Title.
2. Unless the context clearly requires otherwise, the stockholders of the
corporation shall be deemed to be directors for the purpose of applying the 6. The term "transfer", as used in this section, is not limited to a transfer for
provisions of this Code; and value.
3. The stockholders of the corporation shall be subject to all liabilities of
directors. 7. The provisions of this section shall not impair any right which the
transferee may have to rescind the transfer or to recover under any
applicable warranty, express or implied.
is because stockholders’ agreement in the latter cannot limit or restrict the
SALE OF SHARES: Apparently, a selling stockholder may not be able to discretion and powers of the BOD to manage the corporate affairs.
transfer his shares if to do so would violate the qualifying conditions
indicated in the AOI unless of course, all the stockholder consents to the E. WHEN BOARD MEETINGS NOT NECESSARY:
transfer or the AOI is amended (no. 5 above).
As a rule, directors in ordinary stock corporations must act as a body at a
STOCKHOLDER: concerned is not, however, left without any recourse as duly constituted meeting to have a valid corporate transaction. In a close
he may compel the close corporation to purchase his shares at their fair corporation, directors may validly act even without a meeting subject only
value for any reason subject only to the condition laid down in Sec. 105. to the conditions laid down in the Code under Sec. 101:
TRANSFEREE: may rescind the transaction or to recover from the Sec. 101. When board meeting is unnecessary or improperly held. -
transferor under any applicable warranty, express or implied. Unless the by-laws provide otherwise, any action by the directors of a close
corporation without a meeting shall nevertheless be deemed valid if:
D. STOCKHOLDERS’ AGREEMENT
1. Before or after such action is taken, written consent thereto is signed by all
Sec. 100. Agreements by stockholders. – the directors; or
1. Agreements by and among stockholders executed before the formation 2. All the stockholders have actual or implied knowledge of the action and
and organization of a close corporation, signed by all stockholders, shall make no prompt objection thereto in writing; or
survive the incorporation of such corporation and shall continue to be valid
and binding between and among such stockholders, if such be their intent, 3. The directors are accustomed to take informal action with the express or
to the extent that such agreements are not inconsistent with the articles implied acquiescence of all the stockholders; or
of incorporation, irrespective of where the provisions of such agreements
are contained, except those required by this Title to be embodied in said 4. All the directors have express or implied knowledge of the action in
articles of incorporation. question and none of them makes prompt objection thereto in writing.
2. An agreement between two or more stockholders, if in writing and signed If a director's meeting is held without proper call or notice, an action taken
by the parties thereto, may provide that in exercising any voting rights, the therein within the corporate powers is deemed ratified by a director who
shares held by them shall be voted as therein provided, or as they may failed to attend, unless he promptly files his written objection with the
agree, or as determined in accordance with a procedure agreed upon by secretary of the corporation after having knowledge thereof.
them.
F. PRE-EMPTIVE RIGHTS
3. No provision in any written agreement signed by the stockholders, relating
to any phase of the corporate affairs, shall be invalidated as between the Sec. 102. Pre-emptive right in close corporations. - The pre-emptive
parties on the ground that its effect is to make them partners among right of stockholders in close corporations shall extend to all stock to be
themselves. issued, including reissuance of treasury shares, whether for money, property
or personal services, or in payment of corporate debts, unless the articles of
4. A written agreement among some or all of the stockholders in a close incorporation provide otherwise.
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 G. AMENDMENTS TO ARTICLES OF INCORPORATION
interfere with the discretion or powers of the board of directors:
Provided, That such agreement shall impose on the stockholders who are Sec. 103. Amendment of articles of incorporation. - Any amendment to
parties thereto the liabilities for managerial acts imposed by this Code on the articles of incorporation which seeks to delete or remove any provision
directors. required by this Title to be contained in the articles of incorporation or to
reduce a quorum or voting requirement stated in said articles of incorporation
5. To the extent that the stockholders are actively engaged in the shall not be valid or effective unless approved by the affirmative vote of at
management or operation of the business and affairs of a close least two-thirds (2/3) of the outstanding capital stock, whether with or
corporation, the stockholders shall be held to strict fiduciary duties to each without voting rights, or of such greater proportion of shares as may be
other and among themselves. Said stockholders shall be personally specifically provided in the articles of incorporation for amending, deleting or
liable for corporate torts unless the corporation has obtained removing any of the aforesaid provisions, at a meeting duly called for the
reasonably adequate liability insurance. purpose.
PRE-INCORPORATION AGREEMENTS: under par.1 do not ordinarily H. DEADLOCKS

survive the corporation in ordinary stock corporations unless it has been
ratified or adopted by the corporation after incorporation. Only in such case Sec. 104. Deadlocks. - Notwithstanding any contrary provision in the
may the corporation be bound by said agreement. In a close corporation, articles of incorporation or by-laws or agreement of stockholders of a close
these pre-incorporation agreements survive and continue to be valid and corporation, if the directors or stockholders are so divided respecting the
binding, if such be the intent of the stockholders, provided that the management of the corporation's business and affairs that the votes required
agreement is not inconsistent with the AOI 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
VOTING AGREEMENTS or rights or the manner of exercising voting advantage of the stockholders generally, the Securities and Exchange
rights under par. 2 may be the subject of agreement of stockholders, such Commission, upon written petition by any stockholder, shall have the power
as to vote for a specific person or group or to maintain a certain to arbitrate the dispute. In the exercise of such power, the Commission shall
stockholder as their president or chairman. have authority to make such order as it deems appropriate, including an
order: (1) canceling or altering any provision contained in the articles of
CONDUCT OF CORPORATE AFFAIRS under par. 3 and 4, may be the incorporation, by-laws, or any stockholder's agreement; (2) canceling,
subject of an agreement, in writing, and will be effective and binding altering or enjoining any resolution or act of the corporation or its board of
despite the fact that it may make them partners among themselves. directors, stockholders, or officers; (3) directing or prohibiting any act of the
Agreements may also be entered into by and between the stockholders of a corporation or its board of directors, stockholders, officers, or other persons
close corporation which relates to the management of the corporate affairs party to the action; (4) requiring the purchase at their fair value of shares of
which would not otherwise be valid and binding in other corporations. This any stockholder, either by the corporation regardless of the availability of
unrestricted retained earnings in its books, or by the other stockholders; (5)
appointing a provisional director; (6) dissolving the corporation; or (7) specified restrictions of shares
granting such other relief as the circumstances may warrant. Shares of stock are prohibited No prohibition
from being listed in the stock
A provisional director shall be an impartial person who is neither a exchange or offered for sale to the
stockholder nor a creditor of the corporation or of any subsidiary or affiliate public
of the corporation, and whose further qualifications, if any, may be Stockholders may take an active Management is lodged in the
determined by the Commission. A provisional director is not a receiver of the part in corporate management by Board of Directors
corporation and does not have the title and powers of a custodian or vesting management to them
receiver. A provisional director shall have all the rights and powers of a duly rather than a Board of Director
elected director of the corporation, including the right to notice of and to vote Those active in management are Directors are liable for torts only if
at meetings of directors, until such time as he shall be removed by order of personally liable for corporate they have acted negligently or
the Commission or by all the stockholders. His compensation shall be torts unless the corporation has fraudulently
determined by agreement between him and the corporation subject to obtained an adequate liability
approval of the Commission, which may fix his compensation in the absence insurance
of agreement or in the event of disagreement between the provisional Directors can validly act even Directors must, as a rule, act as a
director and the corporation. without a meeting body at a duly constituted meeting
Agreements between stockholders Not valid and binding since
The provision above-quoted gives the SEC a very wide discretion in respect regarding the operations of the stockholders’ agreement cannot
to management of a close corporation in the event of a deadlock. It may: business can validly be made limit the discretion of the Board to
1. Cancel or alter any provision in the AOI, by-laws or any stockholders’ manage corporate affairs
agreement; To the extent that directors may Ordinarily, no such classification
2. Cancel, alter or enjoin any resolution or other act of the corporation or be classified into one or more and no restrictions on cumulative
its BOD, stockholders or officers; classes and to be voted solely by a voting
3. Prohibit any act of the corporation or its BOD, stockholders or officers particular class of stock,
or other persons party to the action; cumulative voting may, in effect,
4. Requiring the purchase of the par value of the shares of any be restricted
stockholders, either by the corporation regardless of availability of The articles of incorporation may Officers are elected by the Board
unrestricted retained earnings, or by the other shareholders; provide that all officers shall be of Directors
5. Appointment of a provisional director; - the second paragraph of Sec. elected or appointed by the
104 will govern. The provisional director may break the deadlock by stockholders
casting the deciding vote. It may provide for greater quorum Although the articles of
6. Dissolving the corporation; or and voting requirements in incorporation or by-laws may
7. Other relief as the circumstances may warrant. meetings of stockholders and provide for greater quorum and
directors voting requirements in directors’
I. WITHDRAWAL OF STOCKHOLDERS/DISSOLUTION meeting under section 25, those
for stockholders’ meeting cannot
If a stockholder wishes to withdraw therefrom, he may do so “for any generally be altered
reason” and compel the corporation to purchase his shares at their fair Restriction on transfer of shares Valid and binding if indicated in
value provided only that the corporation has sufficient assets in its books to should be indicated in the articles the articles of incorporation and
cover its debts and liabilities exclusive of capital stock. This can be done by of incorporation, by-laws and stock certificates
a stockholder in ordinary stock corporation only upon the exercise of his stock certificates
appraisal right in those instances allowed under Sec. 81 of the Code.
Pre-emptive rights of stockholders Pre-emptive rights may be denied
is broader as it include all issues as provided for in section 39
Likewise a corporation may be dissolved on petitioner of only one
without exception
stockholder on the grounds indicated in Sec. 105 which include even mere
A stockholder may withdraw and Unless he sells his shares, a
dishonesty. It provides:
compel the corporation to stockholder cannot get back his
purchase his shares for any reason investment nor compel the
Sec. 105. Withdrawal of stockholder or dissolution of corporation. -
with the limitation only that the corporation to buy his shares
In addition and without prejudice to other rights and remedies available to a
corporation has sufficient assets to except in the exercise of his
stockholder under this Title, any stockholder of a close corporation may, for
cover its liabilities exclusive of appraisal right
any reason, compel the said corporation to purchase his shares at their fair
capital stock
value, which shall not be less than their par or issued value, when the
The proper forum may interfere in Courts cannot interfere I the
corporation has sufficient assets in its books to cover its debts and liabilities
the management of a close business judgment of the
exclusive of capital stock: Provided, That any stockholder of a close
corporation in case of deadlocks directors/stockholders “BUSINESS
corporation may, by written petition to the Securities and Exchange
under Section 104, even of the JUDGMENT RULE”
Commission, compel the dissolution of such corporation whenever any of acts
directors/stockholders are acting
of the directors, officers or those in control of the corporation is illegal, or
in good faith
fraudulent, or dishonest, or oppressive or unfairly prejudicial to the
Any stockholder may petition the Dissolution may be had only on
corporation or any stockholder, or whenever corporate assets are being
SEC for corporate dissolution on the grounds provided by the
misapplied or wasted.
grounds among others, provides provisions of the Code on
for in section 105. dissolution and P.D. 902-A, as
J. CLOSE CORPORATION VS. ORDINARY STOCK CORPORATION
amended
CLOSE CORPORATION ORDINARY STOCK
MANUEL R. DULAY ENTERPRISES, INC., VIRGILIO E. DULAY AND
CORPORATION
NEPOMUCENO REDOVAN, petitioners,
The number of stockholders No limitation as to number of
vs.
cannot exceed 20 shareholder
THE HONORABLE COURT OF APPEALS, EDGARDO D. PABALAN,
To the extent that all stockholders Maximum number of directors is MANUEL A. TORRES, JR., MARIA THERESA V. VELOSO AND CASTRENSE C.
can be deemed directors, the 15 VELOSO, respondents.
number of directors can effectively (G.R. No. 91889; August 27, 1993)
be more than 15
Shares of stock are subject to Generally no restriction on transfer
FACTS: Manuel Dulay, president of petitioner Manuel Dulay Enterprises, Appellant Virgilio E. Dulay's protestations of complete innocence to the
Inc., through Board Resolution No. 18 sold the subject property, known as effect that he never participated nor was even aware of any meeting or
the Dulay Apartment, to private respondent Maria Theresa Veloso where a resolution authorizing the mortgage or sale of the subject premises (see
Memorandum to the Deed of Absolute Sale was executed giving Manuel par. 8, affidavit of Virgilio E. Dulay, dated May 31, 1984, p. 14, Exh.
Dulay within 2 years to repurchase the property. "21") is difficult to believe. On the contrary, he is very much privy to the
transactions involved. To begin with, he is a incorporator and one of the
Respondent Veloso mortgaged said property to secure a loan from private board of directors designated at the time of the organization of Manuel
respondent Manuel Torres. For non-payment of the said loan, Torres R. Dulay Enterprise, Inc. In ordinary parlance, the said entity is loosely
foreclosed the mortgage and was declared the highest bidder in the public referred to as a "family corporation". The nomenclature, if imprecise,
auction. however, fairly reflects the cohesiveness of a group and the parochial
instincts of the individual members of such an aggrupation of which
For Dulay’s and Veloso’s failure to redeem said property, Torres applied for Manuel R. Dulay Enterprises, Inc. is typical: four-fifths of its
consolidation of title, to which petitioner Virgilio Dulay, vice president of the incorporators being close relatives namely, three (3) children and their
corporation intervened alleging that Manuel Dulay was never authorized by father whose name identifies their corporation (Articles of Incorporation
the corporation to sell the property. Instead of impleading Virgilio Dulay, of Manuel R. Dulay Enterprises, Inc. Exh. "31-A").
Torres withdrew his petition and moved for its dismissal which was
granted. Besides, the fact that petitioner Virgilio Dulay on June 24, 1975 executed
an affidavit that he was a signatory witness to the execution of the post-
Later on, Torres and Edgardo Pabalan, real estate administrator of Torres, dated Deed of Absolute Sale of the subject property in favor of private
filed an action against petitioners (Redovan as tenant of Dulay Apartment) respondent Torres indicates that he was aware of the transaction executed
for the recovery of possession, sum of money and damages with between his father and private respondents and had, therefore, adequate
preliminary injunction. knowledge about the sale of the subject property to private respondents.
Private respondents and Torres later on filed an action against spouses Consequently, petitioner corporation is liable for the act of Manuel Dulay
Florentino Manalastas, a tenant of Dulay Apartment with petitioner and the sale of the subject property to private respondents by Manuel
corporation for ejectment. Dulay is valid and binding. As stated by the trial court:
The MTC decided in favor of respondents which was affirmed by the RTC . . . the sale between Manuel R. Dulay Enterprises, Inc. and the spouses
and later by the CA. Maria Theresa V. Veloso and Castrense C. Veloso, was a corporate act of
the former and not a personal transaction of Manuel R. Dulay. This is so
ISSUE: WON the sale of the subject property between private respondents because Manuel R. Dulay was not only president and treasurer but also
spouses Veloso and Manuel Dulay has no binding effect on petitioner the general manager of the corporation. The corporation was a closed
corporation as Board Resolution No. 18 which authorized the sale of the family corporation and the only non-relative in the board of directors was
subject property was resolved without the approval of all the members of Atty. Plaridel C. Jose who appeared on paper as the secretary. There is
the board of directors and said Board Resolution was prepared by a person no denying the fact, however, that Maria Socorro R. Dulay at times acted
not designated by the corporation to be its secretary? as secretary. . . ., the Court can not lose sight of the fact that the
Manuel R. Dulay Enterprises, Inc. is a closed family corporation where
HELD: No. Section 101 of the Corporation Code of the Philippines provides: the incorporators and directors belong to one single family. It cannot be
concealed that Manuel R. Dulay as president, treasurer and general
Sec. 101. When board meeting is unnecessary or improperly held. Unless manager almost had absolute control over the business and affairs of the
the by-laws provide otherwise, any action by the directors of a close corporation.
corporation without a meeting shall nevertheless be deemed valid if:
1. Before or after such action is taken, written consent thereto is signed SERGIO F. NAGUIAT, doing business under the name and style SERGIO
by all the directors, or F. NAGUIAT ENT., INC., & CLARK FIELD TAXI, INC., petitioners,
2. All the stockholders have actual or implied knowledge of the action vs.
and make no prompt objection thereto in writing; or NATIONAL LABOR RELATIONS COMMISSION (THIRD DIVISION),
3. The directors are accustomed to take informal action with the express NATIONAL ORGANIZATION OF WORKINGMEN and its members,
or implied acquiese of all the stockholders, or LEONARDO T. GALANG, et al., respondents.
4. All the directors have express or implied knowledge of the action in (G.R. No. 116123; March 13, 1997)
question and none of them makes prompt objection thereto in writing.
FACTS: Private respondents were employed as taxi drivers of Clark Field
If a directors' meeting is held without call or notice, an action taken Taxi, Inc. which held a concessionaire’s contract with Army Air Force
therein within the corporate powers is deemed ratified by a director who Exchange Services (AAFES) for the operation of taxi services within the
failed to attend, unless he promptly files his written objection with the Clark Air Base.
secretary of the corporation after having knowledge thereof.
Due to the phase-out of the US Military Bases in the Philippines, which
In the instant case, petitioner corporation is classified as a close Clark Air Base was not spared, the AAFES was dissolved and the services of
corporation and consequently a board resolution authorizing the sale individual respondents were officially terminated.
or mortgage of the subject property is not necessary to bind the
corporation for the action of its president. At any rate, corporate The AAFES Taxi Drivers’ Association (drivers union) and CFTI agreed on a
action taken at a board meeting without proper call or notice in a close separation pay of P500 per year of service to which private respondents did
corporation is deemed ratified by the absent director unless the latter not agree.
promptly files his written objection with the secretary of the corporation
after having knowledge of the meeting which, in his case, petitioner Virgilio Private respondents filed a complaint against Sergio Naguiat, president of
Dulay failed to do. CFTI, doing business under the name and style of Sergio F. Naguiat
Enterprises, Inc., AAFES and the drivers’ union for separation pay which
Petitioners' claim that the sale of the subject property by its president, was granted by the Labor Arbiter at P1,200 per year of service for
Manuel Dulay, to private respondents spouses Veloso is null and void as the humanitarian considerations.
alleged Board Resolution No. 18 was passed without the knowledge and
consent of the other members of the board of directors cannot be On appeal, the NLRC granted separation pay to private respondents.
sustained. As correctly pointed out by the respondent Court of Appeals:

ISSUE: WON Sergio F. Naguiat Enterprises, Inc., may be held solidarily Nothing in the records show whether CFTI obtained "reasonably
liable with CFTI? adequate liability insurance;" thus, what remains is to determine whether
there was corporate tort.
HELD: No. From the evidence proffered by both parties, there is no
substantial basis to hold that Naguiat Enterprises is an indirect employer of Our jurisprudence is wanting as to the definite scope of "corporate tort."
individual respondents much less a labor only contractor. On the contrary, Essentially, "tort" consists in the violation of a right given or the omission of
petitioners submitted documents such as the drivers' applications for a duty imposed by law. Simply stated, tort is a breach of a legal duty.
employment with CFTI, and social security remittances and payroll of Article 283 of the Labor Code mandates the employer to grant separation
Naguiat Enterprises showing that none of the individual respondents were pay to employees in case of closure or cessation of operations of
its employees. Moreover, in the contract between CFTI and AAFES, the establishment or undertaking not due to serious business losses or financial
former, as concessionaire, agreed to purchase from AAFES for a certain reverses, which is the condition obtaining at bar. CFTI failed to comply with
amount within a specified period a fleet of vehicles to be "ke(pt) on the this law-imposed duty or obligation. Consequently, its stockholder who was
road" by CFTI, pursuant to their concessionaire's contract. This indicates actively engaged in the management or operation of the business should
that CFTI became the owner of the taxicabs which became the principal be held personally liable.
investment and asset of the company.
As pointed out earlier, the fifth paragraph of Section 100 of the Corporation
Private respondents failed to substantiate their claim that Naguiat Code specifically imposes personal liability upon the stockholder actively
Enterprises managed, supervised and controlled their employment. It managing or operating the business and affairs of the close corporation.
appears that they were confused on the personalities of Sergio F. Naguiat
as an individual who was the president of CFTI, and Sergio F. Naguiat The Court here finds no application to the rule that a corporate officer
Enterprises, Inc., as a separate corporate entity with a separate business. cannot be held solidarily liable with a corporation in the absence of
They presumed that Sergio F. Naguiat, who was at the same time a evidence that he had acted in bad faith or with malice. In the present case,
stockholder and director of Sergio F. Naguiat Enterprises, Inc., was Sergio Naguiat is held solidarily liable for corporate tort because he had
managing and controlling the taxi business on behalf of the latter. A closer actively engaged in the management and operation of CFTI, a close
scrutiny and analysis of the records, however, evince the truth of the corporation.
matter: that Sergio F. Naguiat, in supervising the taxi drivers and
determining their employment terms, was rather carrying out his Antolin T. Naguiat was the vice president of the CFTI. Although he carried
responsibilities as president of CFTI. Hence, Naguiat Enterprises as a the title of "general manager" as well, it had not been shown that he had
separate corporation does not appear to be involved at all in the taxi acted in such capacity. Furthermore, no evidence on the extent of his
business. participation in the management or operation of the business was
proferred. In this light, he cannot be held solidarily liable for the obligations
And, although the witness insisted that Naguiat Enterprises was his of CFTI and Sergio Naguiat to the private respondents.
employer, he could not deny that he received his salary from the office of
CFTI inside the base. CHAPTER 16: SPECIAL CORPORATIONS (TITLE XIII)
Another driver-claimant admitted, upon the prodding of counsel for the A. CHAPTER I – EDUCATIONAL INSTITUTIONS
corporations, that Naguiat Enterprises was in the trading business while
CFTI was in taxi services. Sec. 106. Incorporation. - Educational corporations shall be governed by
special laws and by the general provisions of this Code.
In addition, the Constitution of CFTI-AAFES Taxi Drivers Association which,
admittedly, was the union of individual respondents while still working at EDUCATIONAL INSTITUTIONS are those that provide facilities for
Clark Air Base, states that members thereof are the employees of CFTI and teaching or instruction. It includes both public and private schools or
"(f)or collective bargaining purposes, the definite employer is the Clark colleges and universities and are subject to the provisions of special laws
Field Taxi Inc." and by the general provisions of the Code.
ISSUE2: WON Sergio F. Naguiat and his son Antolin Naguiat, officers of PUBLIC SCHOOLS or those created by the government are, however,
CFTI may be solidarily liable with CFTI? subject to the law of their creation. UP for instance has its own special
charter and would thus be governed by the special law creating it. Insofar
HELD: Only Sergio F. Naguiat. Sergio F. Naguiat, in his capacity as as they may be applicable however, the provisions of any special law or the
president of CFTI, cannot be exonerated from joint and several liability in Corporation Code supplement the law of their creation.
the payment of separation pay to individual respondents.
PRIVATE SCHOOLS OR COLLEGES include any private institutions for
Sergio F. Naguiat, admittedly, was the president of CFTI who actively teaching, managed by private individuals or corporations which offer
managed the business. Thus, applying the ruling in A.C. Ransom, he falls courses of kindergarten, primary, intermediary or secondary instructions or
within the meaning of an "employer" as contemplated by the Labor Code, superior courses in vocational, technical, professional or special schools by
who may be held jointly and severally liable for the obligations of the which diploma or certificates are to be granted or titles and degrees
corporation to its dismissed employees. conferred (Sec. 2, Act No. 2076, as amended by CA 180).
Moreover, petitioners also conceded that both CFTI and Naguiat These instructions of learning once recognized by the government as such
Enterprises were "close family corporations" owned by the Naguiat family. are mandated by law to be incorporated within 90 days under the
Section 100, paragraph 5, (under Title XII on Close Corporations) of the provisions of the Corporation Code and must, perforce, comply with the
Corporation Code, states: requirements and procedure laid down thereunder. (Sec. 5, supra)
(5) To the extent that the stockholders are actively engage(d) in the Their failure to do so will not immune the educational institution from suit
management or operation of the business and affairs of a close as a corporation (Chang Kai Shek School vs. CA; April 18, 1989, supra)
corporation, the stockholders shall be held to strict fiduciary duties to
each other and among themselves. Said stockholders shall be The SEC, however, shall not act on the incorporation of any educational
personally liable for corporate torts unless the corporation has corporation, unless the provision of Sec. 107 is complied with:
obtained reasonably adequate liability insurance. (emphasis supplied)
Sec. 107. Pre-requisites to incorporation. - Except upon favorable
recommendation of the Ministry of Education and Culture, the Securities and
Exchange Commission shall not accept or approve the articles of
incorporation and by-laws of any educational institution C. CORPORATION SOLE
BOARD OF DIRECTORS/TRUSTEES: or the governing board by any CORPORATION SOLE: consists of one person only and his successor in
name of an educational institution is similar in number as to any other some particular station, who are incorporated by law in order to give them
corporation except that in case it is non-stock, the number must be in some legal capacities and advantages, particularly that of perpetuity, which
multiples of five (5). As compared to stock corporation, their number may in their natural persons they could not have had.
be within the vicinity of five (5) to fifteen (15).
PURPOSE OF INCORPORATION AND PERSONS WHO MAY
TERM OF OFFICE: Members of the Board may hold office for five years INCORPORATE:
but they shall be staggered so that 1/5 of their number shall expire every
year. Sec. 108 provides: Sec. 110. Corporation sole. - For the purpose of administering and
managing, as trustee, the affairs, property and temporalities of any religious
Sec. 108. Board of trustees. - Trustees of educational institutions denomination, sect or church, a corporation sole may be formed by the chief
organized as non-stock corporations shall not be less than five (5) nor more archbishop, bishop, priest, minister, rabbi or other presiding elder of such
than fifteen (15): Provided, however, That the number of trustees shall be in religious denomination, sect or church.
multiples of five (5).
CONTENTS OF THE ARTICLES OF INCORPORATION:
Unless otherwise provided in the articles of incorporation or the by-laws, the
board of trustees of incorporated schools, colleges, or other institutions of Sec. 111. Articles of incorporation. - In order to become a corporation
learning shall, as soon as organized, so classify themselves that the term of sole, the chief archbishop, bishop, priest, minister, rabbi or presiding elder of
office of one-fifth (1/5) of their number shall expire every year. Trustees any religious denomination, sect or church must file with the Securities and
thereafter elected to fill vacancies, occurring before the expiration of a Exchange Commission articles of incorporation setting forth the following:
particular term, shall hold office only for the unexpired period. Trustees
elected thereafter to fill vacancies caused by expiration of term shall hold 1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding
office for five (5) years. A majority of the trustees shall constitute a quorum elder of his religious denomination, sect or church and that he desires to
for the transaction of business. The powers and authority of trustees shall be become a corporation sole;
defined in the by-laws. 2. That the rules, regulations and discipline of his religious denomination,
sect or church are not inconsistent with his becoming a corporation sole and
For institutions organized as stock corporations, the number and term of do not forbid it;
directors shall be governed by the provisions on stock corporations. 3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding
elder, he is charged with the administration of the temporalities and the
CONSTITUTIONAL PROVISION ON FILIPINO OWNERSHIP: par. 2, management of the affairs, estate and properties of his religious
Sec. 4 of Article XIV (Education, Science and Technology, Arts, Culture and denomination, sect or church within his territorial jurisdiction, describing such
Sports) territorial jurisdiction;
4. The manner in which any vacancy occurring in the office of chief
Educational institutions, other than those established by religious groups and archbishop, bishop, priest, minister, rabbi of presiding elder is required to be
mission boards, shall be owned solely by citizens of the Philippines or filled, according to the rules, regulations or discipline of the religious
corporations or associations at least sixty per centum of the capital of which denomination, sect or church to which he belongs; and
is owned by such citizens. The Congress may, however, require increased 5. The place where the principal office of the corporation sole is to be
Filipino equity participation in all educational institutions. The control and established and located, which place must be within the Philippines.
administration of educational institutions shall be vested in citizens of the
Philippines. The articles of incorporation may include any other provision not contrary to
law for the regulation of the affairs of the corporation.
No educational institution shall be established exclusively for aliens and no
group of aliens shall comprise more than one-third of the enrollment in any PROCEDURE FOR THE ORGANIZATION:
school. The provisions of this sub section shall not apply to schools
established for foreign diplomatic personnel and their dependents and, unless Sec. 112. Submission of the articles of incorporation. - The articles of
otherwise provided by law, for other foreign temporary residents. incorporation must be verified, before filing, by affidavit or affirmation of the
chief archbishop, bishop, priest, minister, rabbi or presiding elder, as the case
Culled from this is that while foreigners may own a maximum of 40% of may be, and accompanied by a copy of the commission, certificate of election
the capital stock of an educational corporation, not one of them may sit as or letter of appointment of such chief archbishop, bishop, priest, minister,
a member of the governing board thereof. Neither may they act as an rabbi or presiding elder, duly certified to be correct by any notary public.
officer with the power of control and administration of the institution. In
effect their ownership of any capital would be limited to “non-controlling” From and after the filing with the Securities and Exchange Commission of the
interest. said articles of incorporation, verified by affidavit or affirmation, and
accompanied by the documents mentioned in the preceding paragraph, such
B. CHAPTER II - RELIGIOUS CORPORATIONS chief archbishop, bishop, priest, minister, rabbi or presiding elder shall
become a corporation sole and all temporalities, estate and properties of the
REGLIGIOUS CORPORATIONS are those composed entirely of spiritual religious denomination, sect or church theretofore administered or managed
persons, which are created for the furtherance of religion or perpetuating by him as such chief archbishop, bishop, priest, minister, rabbi or presiding
the rights of the church or for the administration of church or religious elder shall be held in trust by him as a corporation sole, for the use, purpose,
work or property. behalf and sole benefit of his religious denomination, sect or church,
including hospitals, schools, colleges, orphan asylums, parsonages and
CLASSES OF RELIGIOUS CORPORATIONS: cemeteries thereof.
Sec. 109. Classes of religious corporations. - Religious corporations may TERM OF EXISTENCE: As can be gleaned from the law, the AOI of a
be incorporated by one or more persons. Such corporations may be classified corporation sole does not require a provision for its term of existence. For
into corporations sole and religious societies. obvious reasons, since a corporation sole is supposed to exist in perpetuity.
It may, however, be dissolved in accordance with Sec. 115 of the Code.
Religious corporations shall be governed by this Chapter and by the general
provisions on non-stock corporations insofar as they may be applicable. BEGINNING OF CORPORATE EXISTENCE: is upon filing of the verified
AOI with the SEC and the documents required under Sec. 112. This serves
as an exception to the rule that a corporation acquires juridical personality Register of Deeds referred the matter to the Land Registration Commission
only upon the issuance of a certificate of incorporation by the said which held that by virtue of the provisions of Sec. 1 and 5 of Art. XIII of
government agency. the Philippine Constitution, the vendee was not qualified to acquire private
lands in the Philippines in the absence of proof that at least 60% of the
POWER TO ALIENATE PROPERTIES, LIMITATION: The extent of the capital, property, or assets of the Roman Catholic Apostolic Administrator of
its power to mortgage or sell real properties is, however, subject to certain Davao, Inc. was actually owned or controlled by Filipino citizens.
restriction, that is, a proper court order must first be secured for that
purpose, which is not otherwise imposed in any other corporation. ISSUE: WON the corporation sole may register the property transferred?
Intervention of the court may dispensed with only if the rules, regulations
and discipline of the religious denomination, sect or church concerned HELD: Yes. In solving the problem thus submitted to our consideration,
provide or regulate the manner or method of holding or alienating We can say the following: A corporation sole is a special form of
properties. Sec. 113 provides: corporation usually associated with the clergy. Conceived and
introduced into the common law by sheer necessity, this legal creation
Sec. 113. Acquisition and alienation of property. - Any corporation sole which was referred to as "that unhappy freak of English law" was designed
may purchase and hold real estate and personal property for its church, to facilitate the exercise of the functions of ownership carried on by the
charitable, benevolent or educational purposes, and may receive bequests or clerics for and on behalf of the church which was regarded as the property
gifts for such purposes. Such corporation may sell or mortgage real property owner (See I Couvier's Law Dictionary, p. 682-683).
held by it by obtaining an order for that purpose from the Court of First
Instance of the province where the property is situated upon proof made to A corporation sole consists of one person only, and his successors
the satisfaction of the court that notice of the application for leave to sell or (who will always be one at a time), in some particular station,
mortgage has been given by publication or otherwise in such manner and for who are incorporated by law in order to give them some legal
such time as said court may have directed, and that it is to the interest of the capacities and advantages, particularly that of perpetuity, which
corporation that leave to sell or mortgage should be granted. The application in their natural persons they could not have had. In this sense, the
for leave to sell or mortgage must be made by petition, duly verified, by the king is a sole corporation; so is a bishop, or dens, distinct from their several
chief archbishop, bishop, priest, minister, rabbi or presiding elder acting as chapters (Reid vs. Barry, 93 Fla. 849, 112 So. 846).
corporation sole, and may be opposed by any member of the religious
denomination, sect or church represented by the corporation sole: Provided, That leaves no room for doubt that the bishops or archbishops, as
That in cases where the rules, regulations and discipline of the religious the case may be, as corporation's sole are merely administrators
denomination, sect or church, religious society or order concerned of the church properties that come to their possession, in which
represented by such corporation sole regulate the method of acquiring, they hold in trust for the church. It can also be said that while it is true
holding, selling and mortgaging real estate and personal property, such rules, that church properties could be administered by a natural persons,
regulations and discipline shall control, and the intervention of the courts problems regarding succession to said properties can not be avoided to rise
shall not be necessary. upon his death. Through this legal fiction, however, church properties
acquired by the incumbent of a corporation sole pass, by operation of law,
OWNERSHIP OF PROPERTY: does not vest unto the head upon upon his death not his personal heirs but to his successor in office. It could
registration of real property in the name of the corporation sole, such be seen, therefore, that a corporation sole is created not only to administer
devolving upon the church or congregation acquiring it. the temporalities of the church or religious society where he belongs but
also to hold and transmit the same to his successor in said office. If the
CONSITUTIONAL LIMITATION, RE: 60% FILIPINO OWNED: does ownership or title to the properties do not pass to the administrators, who
not apply to corporation sole with regards ownership of real property in its are the owners of church properties?.
own name. It has thus been held that the Roman Catholic Church of the
Philippines, a corporation sole, has no nationality and that the framers of Bouscaren and Elis, S.J., authorities on cannon law, on their treatise
the Constitution did not have in mind the religious corporation sole when comment:
they provided that 60% of the capital of the corporation acquiring it must
be owned by Filipino citizens. In matters regarding property belonging to the Universal Church and to
the Apostolic See, the Supreme Pontiff exercises his office of supreme
CHARACTER OF THE LAND: at the time of institution of registration administrator through the Roman Curia; in matters regarding other
proceedings must first be determined before a corporation sole, or any church property, through the administrators of the individual moral
private corporation for that matter, can acquire the land must first be persons in the Church according to that norms, laid down in the Code of
determined. If it does not form part of public domain, the constitutional Cannon Law. This does not mean, however, that the Roman Pontiff is
prohibition against its acquisition by private corporation will not apply. the owner of all the church property; but merely that he is the supreme
Thus, it has likewise been earlier held that under the Public Land Act, guardian (Bouscaren and Ellis, Cannon Law, A Text and Commentary, p.
alienable public land may be subject to registration by a possessor if he, 764).
personally or through his predecessors-in-interest, had openly continuously
and exclusively possessed the same for 30 years as the same is converted We must therefore, declare that although a branch of the Universal Roman
into private property by mere lapse or completion of the said period. Catholic Apostolic Church, every Roman Catholic Church in different
countries, if it exercises its mission and is lawfully incorporated in
THE ROMAN CATHOLIC APOSTOLIC ADMINISTRATOR OF DAVAO, accordance with the laws of the country where it is located, is considered
INC., petitioner, an entity or person with all the rights and privileges granted to such
s. artificial being under the laws of that country, separate and distinct from
THE LAND REGISTRATION COMMISSION and THE REGISTER OF the personality of the Roman Pontiff or the Holy See, without prejudice to
DEEDS OF DAVAO CITY, respondents its religious relations with the latter which are governed by the Canon Law
(G.R. No. L-8451; December 20, 1957) or their rules and regulations.
FACTS: Mateo Rodis executed a Deed of Sale in favor of the Roman The Corporation Law also contains the following provisions:
Catholic Apostolic Administrator of Davao, Inc., with Mgr. Clovit Thibault, a
Canadian citizen, as actual incumbent. When the deed of sale was SECTION 159. Any corporation sole may purchase and hold real estate
presented to the Register of Deeds of Davao for registration, the latter and personal; property for its church, charitable, benevolent, or
required the corporation to submit an affidavit declaring that 60% of the educational purposes, and may receive bequests or gifts of such
members thereof were Filipino citizens. purposes. Such corporation may mortgage or sell real property held by it
upon obtaining an order for that purpose from the Court of First Instance
Entertaining some doubts as to the registrability of the deed of sale, the of the province in which the property is situated; but before making the

order proof must be made to the satisfaction of the Court that notice of person, private respondent in particular, is disqualified under the 1973
the application for leave to mortgage or sell has been given by Constitution from applying for registration in its name alienable public land,
publication or otherwise in such manner and for such time as said Court as such land ceases to be public land "only upon the issuance of title to any
or the Judge thereof may have directed, and that it is to the interest of Filipino citizen claiming it under section 48[b]" of Commonwealth Act No.
the corporation that leave to mortgage or sell must be made by petition, 141, as amended. These are precisely the cases cited by petitioner in
duly verified by the bishop, chief priest, or presiding elder acting as support of its theory of disqualification.
corporation sole, and may be opposed by any member of the religious
denomination, society or church represented by the corporation sole: Since then, however, this Court had occasion to re-examine the rulings in
Provided, however, That in cases where the rules, regulations, and these cases vis-a-vis the earlier cases of Carino v. Insular Government, 41
discipline of the religious denomination, society or church concerned Phil. 935, Susi v. Razon, 48 Phil. 424 and Herico v. Dar, 95 SCRA 437,
represented by such corporation sole regulate the methods of acquiring, among others. Thus, in the recent case of Director of Lands v.
holding, selling and mortgaging real estate and personal property, such Intermediate Appellate Court, 146 SCRA 509, We categorically stated that
rules, regulations, and discipline shall control and the intervention of the the majority ruling in Meralco is "no longer deemed to be binding
Courts shall not be necessary. precedent", and that "[T]he correct rule, ... is that alienable public land
held by a possessor, personally or through his predecessors-in-
It can, therefore, be noticed that the power of a corporation sole to interest, openly, continuously and exclusively for the prescribed
purchase real property, like the power exercised in the case at bar, it is not statutory period [30 years under the Public Land Act, as amended]
restricted although the power to sell or mortgage sometimes is, depending is converted to private property by mere lapse or completion of
upon the rules, regulations, and discipline of the church concerned said period, ipso jure." We further reiterated therein the timehonored
represented by said corporation sole. If corporations sole can purchase and principle of non-impairment of vested rights.
sell real estate for its church, charitable, benevolent, or educational
purposes, can they register said real properties? As provided by law, lands The crucial factor to be determined therefore is the length of time private
held in trust for specific purposes me be subject of registration (section 69, respondent and its predecessors-in-interest had been in possession of the
Act 496), and the capacity of a corporation sole, like petitioner herein, to land in question prior to the institution of the instant registration
register lands belonging to it is acknowledged, and title thereto may be proceedings. The land under consideration was acquired by private
issued in its name (Bishop of Nueva Segovia vs. Insular Government, 26 respondent from Aquelina de la Cruz in 1947, who, in turn, acquired by
Phil. 300-1913). Indeed it is absurd that while the corporations sole that same by purchase from the Ramos brothers and sisters, namely: Eusebia,
might be in need of acquiring lands for the erection of temples where the Eulalia, Mercedes, Santos and Agapito, in 1936. Under section 48[b] of
faithful can pray, or schools and cemeteries which they are expressly Commonwealth Act No. 141, as amended, "those who by themselves or
authorized by law to acquire in connection with the propagation of the through their predecessors-in-interest have been in open, continuous,
Roman Catholic Apostolic faith or in furtherance of their freedom of religion exclusive and notorious possession and occupation of agricultural lands of
they could not register said properties in their name. As professor Javier J. the public domain, under a bona fide claim of acquisition or ownership, for
Nepomuceno very well says "Man in his search for the immortal and at least thirty years immediately preceding the filing of the application for
imponderable, has, even before the dawn of recorded history, erected confirmation of title except when prevented by war or force majeure" may
temples to the Unknown God, and there is no doubt that he will continue to apply to the Court of First Instance of the province where the land is
do so for all time to come, as long as he continues 'imploring the aid of located for confirmation of their claims, and the issuance of a certificate of
Divine Providence'" (Nepomuceno's Corporation Sole, VI Ateneo Law title therefor, under the Land Registration Act. Said paragraph [b] further
Journal, No. 1, p. 41, September, 1956). Under the circumstances of this provides that "these shall be conclusively presumed to have performed all
case, We might safely state that even before the establishment of the the conditions essential to a Government grant and shall be entitled to a
Philippine Commonwealth and of the Republic of the Philippines every certificate of title under the provisions of this chapter." Taking the year
corporation sole then organized and registered had by express provision of 1936 as the reckoning point, there being no showing as to when the
law the necessary power and qualification to purchase in its name private Ramoses first took possession and occupation of the land in question, the
lands located in the territory in which it exercised its functions or ministry 30-year period of open, continuous, exclusive and notorious possession and
and for which it was created, independently of the nationality of its occupation required by law was completed in 1966.
incumbent unique and single member and head, the bishop of the
dioceses. It can be also maintained without fear of being gainsaid that the The completion by private respondent of this statutory 30-year period has
Roman Catholic Apostolic Church in the Philippines has no dual significance in the light of Section 48[b] of Commonwealth Act No.
nationality and that the framers of the Constitution, as will be 141, as amended and prevailing jurisprudence: [1] at this point, the land in
hereunder explained, did not have in mind the religious question ceased by operation of law to be part of the public domain; and
corporations sole when they provided that 60 per centum of the [2] private respondent could have its title thereto confirmed through the
capital thereof be owned by Filipino citizens. appropriate proceedings as under the Constitution then in force, private
corporations or associations were not prohibited from acquiring public
THE DIRECTOR OF LANDS vs. CA (supra, POWER TO ACQUIRE lands, but merely prohibited from acquiring, holding or leasing such type of
PROPERTY) land in excess of 1,024 hectares.
FACTS: Private respondent Iglesia Ni Cristo applied with the CFI of Cavite If in 1966, the land in question was converted ipso jure into private land, it
for registration of a parcel of land which it claimed to have acquired by remained so in 1974 when the registration proceedings were commenced.
virtue of a Deed of Absolute Sale from Aquelina de la Cruz, alleging that This being the case, the prohibition under the 1973 Constitution would
the applicant and its predecessors-in-interest have been in actual, have no application. Otherwise construed, if in 1966, private respondent
continuous, public, peaceful and adverse possession and occupation of the could have its title to the land confirmed, then it had acquired a vested
said land for more than 30 years, which was opposed by the Government right thereto, which the 1973 Constitution can neither impair nor defeat.
as represented by the Director of Lands. The CFI and the CA ruled in favor
of INC. REPUBLIC OF THE PHILIPPINES, petitioner,
vs.
ISSUE: WON the registration of the land should be upheld? INTERMEDIATE APPELLATE COURT, ROMAN CATHOLIC BISHOP
OF LUCENA, represented by Msgr. Jose T. Sanchez, and REGIONAL
HELD: As observed at the outset, had this case been resolved immediately TRIAL COURT, BRANCH LIII, LUCENA CITY, respondents
after it was submitted for decision, the result may have been quite adverse (G.R. No. 75042; November 29, 1988)
to private respondent. For the rule then prevailing under the case of Manila
Electric Company v. Castro-Bartolome et al., 114 SCRA 799, reiterated in FACTS: The ROMAN CATHOLIC BISHOP of Lucena, represented by Msgr.
Republic v. Villanueva, 114 SCRA 875 as well as the other subsequent Jose T. Sanchez, filed an application for confirmation of title to 4 parcels of
cases involving private respondent adverted to above', is that a juridical land which were said to have been obtained either by purchase or donation
dating as far back as 1928, which was granted by the CFI.
In solving the problem thus submitted to our consideration, We can say
Against this decision, the Solicitor General filed a Motion for reconsideration the following: A corporation sole is a special form of corporation usually
on the following grounds: associated with the clergy. Conceived and introduced into the common
law by sheer necessity, this legal creation which was referred to as "that
1. Article XIV, Section 11 of the New Constitution(1973) disqualifies a unhappy freak of English Law" was designed to facilitate the exercise of
private corporation from acquiring alienable lands for the public domain; the functions of ownership carried on by the clerics for and on behalf of
the church which was regarded as the property owner (See 1 Bouvier's
2. In the case at bar the application was filed after the effectivity on the Law Dictionary, p. 682-683).
New Constitution on January 17, 1973;
A corporation sole consists of one person only, and his successors (who
which was denied by the lower court for lack of merit. will always be one at a time), in some particular station, who are
incorporated by law in order to give them some legal capacities and
Still insisting of the alleged unconstitutionality of the registration (a point advantages, particulary that of perpetuity, which in their natural persons
which, incidentally, the appellant never raised in the lower court prior to its they could not have had.
Motion for Reconsideration), the Republic elevated this appeal, and the IAC
affirmed the lower court’s decision. There is no doubt that a corporation sole by the nature of its Incorporation
is vested with the right to purchase and hold real estate and personal
ISSUE: WON private respondent, corporation sole, is entitled to property. It need not therefore be treated as an ordinary private
confirmation of its title to the 4 parcels of land? corporation because whether or not it be so treated as such, the
Constitutional provision involved will, nevertheless, be not applicable.
HELD: The parties herein do not dispute that since the acquisition of the
four (4) lots by the applicant, it has been in continuous possession and In the light of the facts obtaining in this case and the ruling of this Court in
enjoyment thereof, and such possession, together with its predecessors-in- Director of Lands vs. IAC, (supra, 513), the lands subject of this petition
interest, covering a period of more than 52 years (at least from the date of were already private property at the time the application for confirmation of
survey in 1928) with respect to lots 1 and 2, about 62 years with respect to title was filed in 1979. There is therefore no cogent reason to disturb the
lot 3, all of plan PSU-65686; and more than 39 years with respect to the findings of the appellate court.
fourth parcel described in plan PSU-11 2592 (at least from the date of the
survey in 1940) have been open, public, continuous, peaceful, adverse
against the whole world, and in the concept of owner. VACANCY: in the office of the “head” of the corporation, the person
authorized by the rules, regulations or discipline of the denomination shall
Petitioner argues that considering such constitutional prohibition, private exercise all the powers and authority of the corporation sole during such
respondent is disqualified to own and register its title to the lots in vacancy and until such vacancy has been filled-up. The manner in which
question. Further, it argues that since the application for registration was the vacancy is to be filled in clearly spelled out in Sec. 114 of the Code:
filed only on February 2, 1979, long after the 1973 Constitution took effect
on January 17, 1973, the application for registration and confirmation of Sec. 114. Filling of vacancies. - The successors in office of any chief
title is ineffectual because at the time it was filed, private corporation had archbishop, bishop, priest, minister, rabbi or presiding elder in a corporation
been declared ineligible to acquire alienable lands of the public domain sole shall become the corporation sole on their accession to office and shall
pursuant to Art. XIV, Sec. 11 of the said constitution. (Rollo, p. 41) be permitted to transact business as such on the filing with the Securities and
Exchange Commission of a copy of their commission, certificate of election,
The questioned posed before this Court has been settled in the case of or letters of appointment, duly certified by any notary public.
DIRECTOR OF LANDS vs. Intermediate Appellate Court (146 SCRA 509
[1986]) which reversed the ruling first enunciated in the 1982 case of During any vacancy in the office of chief archbishop, bishop, priest, minister,
Manila Electric Co. vs. CASTRO BARTOLOME, (114 SCRA 789 [1982]) rabbi or presiding elder of any religious denomination, sect or church
imposing the constitutional ban on public land acquisition by private incorporated as a corporation sole, the person or persons authorized and
corporations which ruling was declared emphatically as res judicata on empowered by the rules, regulations or discipline of the religious
January 7, 1986 in Director of Lands vs. Hermanos y Hermanas de Sta. denomination, sect or church represented by the corporation sole to
Cruz de Mayo, Inc., (141 SCRA 21 [1986]). In said case, (Director of Lands administer the temporalities and manage the affairs, estate and properties of
v. IAC, supra), this Court stated that a determination of the character the corporation sole during the vacancy shall exercise all the powers and
of the lands at the time of institution of the registration authority of the corporation sole during such vacancy.
proceedings must be made. If they were then still part of the public
domain, it must be answered in the negative. Under the above-provision, it is required that the successor, in order to be
permitted to transact business as a corporation sole, must file with the SEC
If, on the other hand, they were already private lands, the constitutional a copy of his commission, certificate of election, or letter of appointment,
prohibition against their acquisition by private corporation or association duly certified by a notary public.
obviously does not apply. In affirming the Decision of the Intermediate
Appellate Court in said case, this Court adopted the vigorous dissent of the DISSOLUTION:
then Justice, later Chief Justice Claudio Teehankee, tracing the line of cases
beginning with CARINO, in 1909, thru SUSI, in 1925, down to HERICO, in Sec. 115. Dissolution. - A corporation sole may be dissolved and its affairs
1980, which developed, affirmed and reaffirmed the doctrine that open, settled voluntarily by submitting to the Securities and Exchange Commission
exclusive and undisputed possession of alienable public land for the period a verified declaration of dissolution.
prescribed by law creates the legal fiction whereby the land, upon
completion of the requisite period ipso jure and without the need of judicial The declaration of dissolution shall set forth: (NRAN)
or other sanction, ceases to be public land and becomes' private property. 1. The name of the corporation;
(DIRECTOR OF LANDS vs. IAC, supra, p. 518). 2. The reason for dissolution and winding up;
3. The authorization for the dissolution of the corporation by the particular
It must be emphasized that the Court is not here saying that a corporation religious denomination, sect or church;
sole should be treated like an ordinary private corporation. 4. The names and addresses of the persons who are to supervise the
winding up of the affairs of the corporation.
In Roman Catholic Apostolic Administration of Davao, Inc. vs. Land
Registration Commission, et al. (L-8451, December 20,1957,102 Phil. 596). Upon approval of such declaration of dissolution by the Securities and
We articulated: Exchange Commission, the corporation shall cease to carry on its operations
except for the purpose of winding up its affairs. certificate of registration by the SEC. Absent any specific provision of the
law, it must be deemed to fall within the general rule under Sec. 19.
DISSOLUTION BY JUDICIAL DECREE: is generally not allowed because
of the doctrine of separation of the Church and the State. However, the CHAPTER XVII: DISSOLUTION (TITLE XIV)
State may exercise its police power if the corporation is being carried out
and is being used for illegal purposes. A. DISSOLUTION is the extinguishment of the corporate franchise and
the termination of corporate existence.
D. RELIGIOUS SOCIETIES
When a corporation is dissolved, it ceases to be a juridical entity and can
Under common law, a religious society is a body of persons associated no longer pursue the business for which it was incorporated. It will
together for the purpose of maintaining religious worship. The religious nevertheless continue as a body corporate for another period of three years
society and the church are distinct bodies, independent of each other, from the time it is dissolved but only for the purpose of winding up its
though they may exist with each other. affairs and the liquidation of its assets.
Under Philippine Law, a religious society, order, diocese, synod or district B. METHODS OF DISSOLUTION
organization of any religious denomination, sect or church may incorporate
for the administration of its temporalities or for the management of its THREE WAYS OF DISSOLUTION:
affairs, properties and estate in accordance with the Code: 1. Expiration of its corporate term;
2. Voluntary surrender of its primary franchise (voluntary dissolution);
Sec. 116. Religious societies. - Any religious society or religious order, or and
any diocese, synod, or district organization of any religious denomination, 3. The revocation of its corporate franchise (involuntary dissolution)
sect or church, unless forbidden by the constitution, rules, regulations, or
discipline of the religious denomination, sect or church of which it is a part, or Sec. 117, however, mentions only two methods:
by competent authority, may, upon written consent and/or by an affirmative
vote at a meeting called for the purpose of at least two-thirds (2/3) of its Sec. 117. Methods of dissolution. - A corporation formed or organized
membership, incorporate for the administration of its temporalities or for the under the provisions of this Code may be dissolved voluntarily or
management of its affairs, properties and estate by filing with the Securities involuntarily.
and Exchange Commission, articles of incorporation verified by the affidavit
of the presiding elder, secretary, or clerk or other member of such religious This is rightfully so, because the expiration of corporate term can be
society or religious order, or diocese, synod, or district organization of the considered voluntary dissolution t being the intention of the stockholders
religious denomination, sect or church, setting forth the following: that it shall exist only for such period.
1. That the religious society or religious order, or diocese, synod, or district C. EXPIRATION OF CORPORATE TERM
organization is a religious organization of a religious denomination, sect or
church; A corporation registered under the Corporation Code, with the exception of
religious ones, is required to indicate its term of existence in the AOI. It
2. That at least two-thirds (2/3) of its membership have given their written ceases to exist and is deemed automatically dissolved upon the expiration
consent or have voted to incorporate, at a duly convened meeting of the of the term indicated thereat without the need of any formal proceedings.
body;
EXTENSION: It is to be observed, however, that the original term of
3. That the incorporation of the religious society or religious order, or existence indicated in the AOI is subject to extension in accordance with
diocese, synod, or district organization desiring to incorporate is not the provisions of Sec. 11 and 37 of the Code. If such be the case, the
forbidden by competent authority or by the constitution, rules, regulations or corporation continues to be possessed with juridical personality and may
discipline of the religious denomination, sect, or church of which it forms a carry out its business for the period of time granted by virtue of such
part; extension.
4. That the religious society or religious order, or diocese, synod, or district The extension should nonetheless be made before the expiration of the
organization desires to incorporate for the administration of its affairs, original term, but not earlier than 5 years prior to such expiration,
properties and estate; otherwise the corporation is dissolved, ipso facto.
5. The place where the principal office of the corporation is to be established PHILIPPINE NATIONAL BANK, petitioner,
and located, which place must be within the Philippines; and vs.
THE COURT OF FIRST INSTANCE OF RIZAL, PASIG — BRANCH XXI,
6. The names, nationalities, and residences of the trustees elected by the PRESIDED BY JUDGE GREGORIO G. PINEDA, CHUNG SIONG PEK @
religious society or religious order, or the diocese, synod, or district BONIFACIO CHUNG SIONG PEK AND VICTORIA CHING GENG TY @
organization to serve for the first year or such other period as may be VICTORIA CHENG GENG TY, and THE REGISTER OF DEEDS OF RIZAL,
prescribed by the laws of the religious society or religious order, or of the PASIG, METRO MANILA AND/OR HIS DEPUTIES AND AGENTS, respondents
diocese, synod, or district organization, the board of trustees to be not less (G.R. No. 63201; May 27, 1992)
than five (5) nor more than fifteen (15).
FACTS: Philippine Blooming Mills, Inc. (PBM), a corporation with corporate
Apparent from the foregoing, is that a religious society is not mandated by existence of 25 years, entered into a lease contract with private
law to register as a corporation but may do so to acquire juridical respondents, whereby the latter shall lease the parcels of land owned by
personality and for the purpose of administration of its temporalities and them to PBM for a period of 20 years, extendible to another 20 years,
properties and even to acquire properties of its own. Thus, it has been held provided that PBM extend its corporate existence in accordance with law.
that an unincorporated religious association cannot acquire private
agricultural lands in the Philippines (Register of Deeds vs. Ung Sui Temple) PBM introduced improvements on the land which were annotated with the
Register of Deeds.
TERM OF EXITENCE: Like the corporation sole, the AOI of a religious
society need not contain a term of its existence as it is supposed to exist in Later on, PBM executed a deed of assignment in favor of PNB over its
perpetuity. leasehold rights and later on a real estate mortgage covering all the
improvements to secure a loan.
BEGINNING OF CORPORATE EXISTENCE: is upon issuance of the
PBM filed a petition for registration of improvements in the titles of real The rights of the lessor and the lessee over the improvements which the
property of private respondents which was opposed by private respondents latter constructed on the leased premises is governed by Article 1678 of the
on the ground that PBM failed to renew the contract of lease and apply for Civil Code.
extension of its corporate existence.
The provision gives the lessee the right to remove the improvements if the
The CFI issued an order directing the cancellation of the inscriptions on lessor chooses not to pay one-half of the value thereof. However, in the
respondents’ certificates of title. case at bar, the law will not apply because the parties herein have
stipulated in the contract their own terms and conditions concerning the
ISSUE: WON the cancellation of entries on respondents’ title is valid and improvements, to wit, that the lessee, namely PBM, bound itself to remove
proper? the improvements before the termination of the lease. Petitioner PNB, as
assignee of PBM succeeded to the obligation of the latter under the
HELD: Yes. The contract of lease expressly provides that the term of the contract of lease. It could not possess rights more than what PBM had as
lease shall be twenty years from the execution of the contract but can be lessee under the contract. Hence, petitioner was duty bound to remove the
extended for another period of twenty years at the option of the lessee improvements before the expiration of the period of lease as what we have
should the corporate term be extended in accordance with law. Clearly, the already discussed in the preceding paragraphs. Its failure to do so when
option of the lessee to extend the lease for another period of twenty years the lease was terminated was tantamount to a waiver of its rights and
can be exercised only if the lessee as corporation renews or extends its interests over the improvements on the leased premises.
corporate term of existence in accordance with the Corporation Code which
is the applicable law. Contracts are to be interpreted according to their D. SURRENDER OF FRANCHISE (VOLUNTARY DISSOLUTION)
literal meaning and should not be interpreted beyond their obvious
intendment. Thus, in the instant case, the initial term of the contract of MODES OF VOLUNTARY DISSOUTION:
lease which commenced on March 1, 1954 ended on March 1, 1974. PBM 1. Voluntary Dissolution where no creditors are affected (Sec. 118);
as lessee continued to occupy the leased premises beyond that date with 2. Voluntary Dissolution where creditors are affected (Sec. 119);
the acquiescence and consent of the respondents as lessor. Records show 3. Shortening of corporate term (Sec. 120).
however, that PBM as a corporation had a corporate life of only twenty-five
(25) years which ended an January 19, 1977. It should be noted however 1. VOLLUNTARY DISSOUTION WHERE NO CREDITORS ARE
that PBM allowed its corporate term to expire without complying with the AFFECTED:
requirements provided by law for the extension of its corporate term of
existence. Sec. 118. Voluntary dissolution where no creditors are affected. - If
dissolution of a corporation does not prejudice the rights of any creditor
Section 11 of Corporation Code provides that a corporation shall exist for a having a claim against it, the dissolution may be effected by majority vote of
period not exceeding fifty (50) years from the date of incorporation unless the board of directors or trustees, and by a resolution duly adopted by the
sooner dissolved or unless said period is extended. Upon the expiration of affirmative vote of the stockholders owning at least two-thirds (2/3) of the
the period fixed in the articles of incorporation in the absence of outstanding capital stock or of at least two-thirds (2/3) of the members of a
compliance with the legal requisites for the extension of the period, the meeting to be held upon call of the directors or trustees after publication of
corporation ceases to exist and is dissolved ipso facto (16 Fletcher 671 the notice of time, place and object of the meeting for three (3) consecutive
cited by Aguedo F. Agbayani, Commercial Laws of the Philippines, Vol. 3, weeks in a newspaper published in the place where the principal office of
1988 Edition p. 617). When the period of corporate life expires, the said corporation is located; and if no newspaper is published in such place,
corporation ceases to be a body corporate for the purpose of continuing then in a newspaper of general circulation in the Philippines, after sending
the business for which it was organized. But it shall nevertheless be such notice to each stockholder or member either by registered mail or by
continued as a body corporate for three years after the time when it would personal delivery at least thirty (30) days prior to said meeting. A copy of the
have been so dissolved, for the purpose of prosecuting and defending suits resolution authorizing the dissolution shall be certified by a majority of the
by or against it and enabling it gradually to settle and close its affairs, to board of directors or trustees and countersigned by the secretary of the
dispose of and convey its property and to divide its assets (Sec. 122, corporation. The Securities and Exchange Commission shall thereupon issue
Corporation Code). There is no need for the institution of a the certificate of dissolution.
proceeding for quo warranto to determine the time or date of the
dissolution of a corporation because the period of corporate FORMAL AND PROCEDURAL REQUIREMENTS:
existence is provided in the articles of incorporation. When such 1. Majority vote of the board of directors or trustees;
period expires and without any extension having been made 2. Sending of notice of each stockholders or member either by registered
pursuant to law, the corporation is dissolved automatically insofar mail or personal delivery at least thirty (30) days prior to the meeting
as the continuation of its business is concerned. The quo warranto (scheduled by the board for the purpose of submitting the board
proceeding under Rule 66 of the Rules of Court, as amended, may be action to dissolve the corporation for approval of the stockholder or
instituted by the Solicitor General only for the involuntary dissolution of a members.);
corporation on the following grounds: a) when the corporation has 3. Publication of the notice of time, place and subject of the meeting for
offended against a provision of an Act for its creation or renewal; b) when three (3) consecutive weeks in a newspaper published in the place
it has forfeited its privileges and franchises by non-user; c) when it has where the principal office of said corporation is located or in a
committed or omitted an act which amounts to a surrender of its corporate newspaper of general circulation in the Philippines;
rights, privileges or franchises; d) when it has mis-used a right, privilege or 4. Resolution adopted by the affirmative vote of the stockholders owning
franchise conferred upon it by law, or when it has exercised a right, at least 2/3 of the outstanding capital stock or 2/3 of the members at
privilege or franchise in contravention of law. Hence, there is no need for the meeting duly called for the purpose;
the SEC to make an involuntary dissolution of a corporation whose 5. A copy of the resolution authorizing the dissolution must be certified
corporate term had ended because its articles of incorporation had in effect by a majority of the board of directors or trustees and countersigned
expired by its own limitation. by the corporate secretary;
6. Issuance of a certificate of dissolution by the SEC.
Considering the foregoing in relation to the contract of lease between the
parties herein, when PBM's corporate life ended on January 19, 1977 and FAILURE TO COMPLY: with the above requirements will have no effect
its 3-year period for winding up and liquidation expired on January 19, on the legal existence of the corporation. Elsewise stated, a corporation
1980, the option of extending the lease was likewise terminated on January benig a creation of the law by the grant of its existence by the State, may
19, 1977 because PBM failed to renew or extend its corporate life in only be dissolved in the manner prescribed by the law of its creation. Since
accordance with law. From then on, the respondents can exercise their it is the State that grants its right to exist, it is only through the State which
right to terminate the lease pursuant to the stipulations in the contract. can allow th termination of existence. Unless dissolved pursuant thereto, a
corporation does not cease to have a juridical personality.
held by the High Court, “tends to recognize that in cases of voluntary
A mere resolution by the stockholders or the BOD of a corporation to dissolution, there is no occasion for the appointment of a receiver except
dissolve the same does not affect the dissolution but that some other steps, under special circumstances and upon proper showing” (China Bank vs.
administrative or judicial is necessary (Daguhoy Enterprises vs. Ponce) Michellin)
2. VOLUNTARY DISSOLUTION WHERE CREDITORS ARE 3. DISSOLUTION BY SHORTENING CORPORATE TERM

AFFECTED
Sec. 120 was inserted to incorporate the long standing practice of
Sec. 119. Voluntary dissolution where creditors are affected. - Where dissolving a corporation by amendment of the AOI by shortening the
the dissolution of a corporation may prejudice the rights of any creditor, the corporate existence.
petition for dissolution shall be filed with the Securities and Exchange
Commission. The petition shall be signed by a majority of its board of A corporation may exist for 50 years, but there is no law which prevents
directors or trustees or other officers having the management of its affairs, the shareholders thereof to shorten that period and effect a dissolution of
verified by its president or secretary or one of its directors or trustees, and the corporation.
shall set forth all claims and demands against it, and that its dissolution was
resolved upon by the affirmative vote of the stockholders representing at PERPETUAL SUCCESSION: In fact, a corporation may be given the
least two-thirds (2/3) of the outstanding capital stock or by at least two- capacity of “perpetual succession” like the corporation sole and the
thirds (2/3) of the members at a meeting of its stockholders or members religious society. It does not mean, however, that it shall continue to exist
called for that purpose. forever. It merely means that it has the capacity of continuous existence
during a particular period or until dissolved in accordance with law.
If the petition is sufficient in form and substance, the Commission shall, by
an order reciting the purpose of the petition, fix a date on or before which It may thus amend its AOI and provide a term of existence or shorten it
objections thereto may be filed by any person, which date shall not be less which may have the effect of a dissolution. Thus, while Sec. 115 of the
than thirty (30) days nor more than sixty (60) days after the entry of the Code provides for the process and procedure for the dissolution of a
order. Before such date, a copy of the order shall be published at least once corporation sole, there is nothing in the law itself which would prohibit it
a week for three (3) consecutive weeks in a newspaper of general circulation from amending its AOI. It is believed, however, that authorization for the
published in the municipality or city where the principal office of the dissolution by the particular religious denomination, sect or church, as
corporation is situated, or if there be no such newspaper, then in a required in sub-paragraph 3 of Sec. 115 would still be necessary in the case
newspaper of general circulation in the Philippines, and a similar copy shall of amending the AOI to affect dissolution.
be posted for three (3) consecutive weeks in three (3) public places in such
municipality or city. Sec. 120. Dissolution by shortening corporate term. - A voluntary
dissolution may be effected by amending the articles of incorporation to
Upon five (5) day's notice, given after the date on which the right to file shorten the corporate term pursuant to the provisions of this Code. A copy of
objections as fixed in the order has expired, the Commission shall proceed to the amended articles of incorporation shall be submitted to the Securities and
hear the petition and try any issue made by the objections filed; and if no Exchange Commission in accordance with this Code. Upon approval of the
such objection is sufficient, and the material allegations of the petition are amended articles of incorporation of the expiration of the shortened term, as
true, it shall render judgment dissolving the corporation and directing such the case may be, the corporation shall be deemed dissolved without any
disposition of its assets as justice requires, and may appoint a receiver to further proceedings, subject to the provisions of this Code on liquidation.
collect such assets and pay the debts of the corporation.
SPECIAL AMENDMENT: Shortening of the corporate term with the effect
FORMAL AND PROCEDURAL REQUIREMENTS: of dissolution is a special type of amendment covered and governed by the
1. Affirmative vote of the stockholders representing at least 2/3 of the special provisions of Sec. 37 of the Code. Thus, while the general provision
outstanding capital stock or at least 2/3 of the members at a meeting on amendment under Sec. 16 allows “written assent” in determining the
duly called for that purpose; voting requirement for ordinary amendments, sec. 37 mandates that the
2. Petition for dissolution shall be filed with the SEC (the proper vote must be cast at a duly constituted meeting.
forum) signed by a majority of its board of directors or trustees or
other officers having the management of its affairs, verified by the Likewise, sec. 16 provides that amendment of the AOI is deemed approved
president or secretary or one of its directors or trustees, setting forth if not acted upon by the SEC within 6 months from the date of filing for a
all claims and demands against it. cause not attributable to the corporation. This is not applicable in case of
3. Issuance of an order by the SEC reciting the purpose of the petition shortening the corporate term which will have the effect of dissolution in
and fixing the date on or before which objections thereto may be filed Sec. 120, which requires the approval of the SEC.
by any person, which date shall not be less than thirty days nor more
than sixty days after entry of the order. E. INVOLUNTARY DISSOLUTION
4. Before such date, a copy of the order must be published once a
week for three (3) consecutive weeks in a newspaper of general Sec. 121. Involuntary dissolution. - A corporation may be dissolved by
circulation published in the city or municipality where the principal the Securities and Exchange Commission upon filing of a verified complaint
office is situated or in a newspaper of general circulation in the and after proper notice and hearing on the grounds provided by existing
Philippines. laws, rules and regulations.
5. Posting of the same order for three (3) consecutive weeks in three
(3) public places in such city or municipality. Culled from the above provision is that this is a dissolution is by judicial
6. Upon five (5) days’ notice, given after the date on which the right to decree.
file objections has expired, the SEC shall hear the petition and try
any issue made by the objections filed. JURISDICTION OVER DISSOLUTION CASES: In a ruling laid down by
7. Judgment dissolving the corporation and directing of its assets as the SC, actions, for quo warranto against corporations or against persons
justice requires and the appointment of a receiver (if necessary in its who usurps an office in a corporation fall under the jurisdiction of the SEC
discretion) to collect such assets and pay the debts of the corporation (Unilongo, et. al. vs. CA; GR No. 123910; April 5, 1999).
APPOINTMENT OF A RECEIVER: While the foregoing are mandatory This, however, is no longer exclusive and absolute in view of the
requirements, the appointment of a receiver is only permissive. As can be amendments introduced by the Securities Regulations Code (SRC) of 2000,
gleaned from the second paragraph of Sec. 119, it uses the phrase “and or RA 8799, which transferred the jurisdiction of the SEC under Sec. 5 of
may appoint a receiver”, showing the clear intent of the aw that the same PD 902-A to the regional trial courts as designated by the SC (Sec. 5.2, RA
is merely discretionary on the part of the proper forum. Such language, 8799). The jurisdiction of the courts and the SEC over revocation
proceedings seems to be concurrent under the present set up since Sec. 5 except such as may be reasonably necessary to enable it to carry out the
of RA 8799, particularly par. (m) thereof, provides that the SEC has the purposes for which it is created, . . . . Corporations, however, may loan
power to “suspend, or revoke, after proper notice and hearing the franchise funds upon real estate, security, and purchase real estate when
and certificate of registration of corporations, partnership or associations, necessary for the collection of loans, but they shall dispose of real estate
upon any ground provided by law”. This, despite the transfer of its so obtained within five years after receiving the title . . .
jurisdiction under the SRC.
The defendant corporation entered into a contract with The Tayabas Land
GROUNDS FOR INVOLUNTARY DISSOLUTION: as provided under Company (TLC) where PSEC invested P400,000 in the TLC and that “All
Sec. 6 of PD 902-A: (FSRCFF) lands bought or which may be bought with the credit, which The Philippine
Sugar brings to The Tayabas Land Company and which lie within and
1. Fraud in procuring its certificate of registration; without the railway line from Pagbilao to Lopez, shall be held as security for
2. Serious misrepresentation as to what the corporation can do or is such credit, at their respective cost price, until their alienation, except the
doing to the great prejudice of or damage to the general public; part thereof which pertains to D. Mariano Lim in The Tayabas Land
3. Refusal to comply or defiance of any lawful order of the Company” and that if TLC is to sell the land and its improvements at a price
Commission restraining commission of acts which would amount to a lower than P0.50 per square meter TLC is to obtain the consent of PSEC
grave violation of its franchise; first.
4. Continuous inoperation for a period of at least five (5) years;
5. Failure to file by-laws within the required period; An action for quo warranto was brought by the Attorney General for and in
6. Failure to file required reports in appropriate forms as determined behalf of the Government of the Philippine Islands for the purpose of
by the Commission within the prescribed period. having the charter of the defendant corporation PSEC declared forfeited for
engaging in the “buying and selling of real estate” along the right of way of
OTHER GROUNDS PROVIDED FOR IN THE CORPORATION CODE: Manila Railroad Company with the view of reselling the same to Manila
1. Violation of any provision of the Code under section 144; Railroad for a profit; that it had continuously offended against the laws of
2. In case of deadlock in a close corporation as provided for in section the Philippine Islands and had misused its corporate authority, franchise
105; and privileges and had assumed privileges and franchises not granted.
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 ISSUE: WON defendant corporation should be dissolved?
oppressive or unfairly prejudicial to the corporation or any stockholder
or whenever corporate assets are being misapplied or wasted under HELD: No. Section 212 of Act No. 190 provides a judgment which may be
section 105. rendered in said case:
INVOLUNTARY DISSOLUTION: is a harsh remedy akin to a capital When in any such action, it is found and adjudged that the corporation
punishment. Thus, it has been laid to rest in the case of Government vs. has, by any act done or omitted surrendered, or forfeited its corporate
Philippine Sugar Estate that courts proceed with extreme caution which rights, privileges, and franchise, or has not used the same during the
have for their object the forfeiture of corporate franchise, and forfeiture will term of five years, judgment shall be entered that it be ousted and
not be allowed, except under express limitation, or for plain abuse of power excluded therefrom and that it be dissolved; but when it is found and
by which the corporation fails to fulfil the design and purpose of its adjudged that a corporation has offended in any matter or
organization. But when the abuse or violation constitutes or threatens a manner which does not by law work as a surrender or
substantial injury to the public or such as to amount to a violation of the forfeiture, or has misused a franchise or exercised a power not
fundamental conditions of its charter, or its conduct is characterized by conferred by law, but not of such a character as to work a
“obduracy or pertinacity in contempt of law”, dissolution will be granted. surrender or forfeiture of its franchise, judgment shall be
rendered that it be ousted from the continuance of such offense
Likewise, it has been held that the relief of dissolution will be awarded only or the exercise of such power.
where no other adequate remedy is available and it will not be allowed
where the rights of the stockholders can be, or are, protected in some It will be seen that said section (212) gives the court a wide discretion in its
other way. judgment in depriving corporations of their franchise. High, in his work on
Extraordinary Legal Remedies, says at page 606:
THE GOVERNMENT OF THE PHILIPPINE ISLANDS, plaintiff-appellant,
vs. It is to be observed in the outset that the courts proceed with
THE PHILIPPINE SUGAR ESTATES DEVELOPMENT CO. (LTD.) extreme caution in the proceeding which have for their object
defendant-appellant the forfeiture of corporate franchises, and a forfeiture will not
(G.R. No. L-11789; April 2, 1918) be allowed, except under express limitation, or for a plain abuse
of power by which the corporation fails to fulfill the design and
FACTS: Defendant corporation by its charter is authorized among others: purpose of its organization.
j) To buy shares of the Compañia de Navegacion, Ferrocarriles, Diques, y In the case of State of Minnesota vs. Minnesota Thresher Manufacturing
Almacenes de Depositos, and, in this manner or otherwise, to engage in Co. (3 L.R.A. 510) the court said (p. 518):
any mercantile or industrial enterprise.
The scope of the remedy furnished by its ( quo warranto) is to forfeit the
(k) With no other restrictions than those provided by law, place funds of franchises of a corporation for misuser or nonuser. It is therefore
the corporation in hypothecary or pignorative loans, in public securities necessary in order to secure a judicial forfeiture of respondent's charter
of the United States, in stocks or shares issued by firms, corporations, or to show a misuser of its franchises justifying such a forfeiture. And as
companies that are legally organized and operated, and in rural and already remarked the object being to protect the public, and not to
urban property. It may also contract and guarantee all kinds of redress private grievances, the misuser must be such as to work or
obligations, in conformity with existing laws threaten a substantial injury to the public, or such as to amount to a
violation of the fundamental condition of the contract by which the
These powers are necessarily limited by Sec. 75 of of the Act of Congress franchise was granted and thus defeat the purpose of the grant; and
of July 1, 1902, and by the section 13 Act of 1459, the latter being a ordinarily the wrong or evil must be one remediable in no other form of
reproduction of the former, which is as follows: judicial proceeding.
That no corporation shall be authorized to conduct the business of Courts always proceed with great caution in declaring a forfeiture of
buying and selling real estate or be permitted to hold or own real estate franchises, and require the prosecutor seeking the forfeiture to bring the

case clearly within the rules of law entitling him to exact so severe a
penalty. (People vs. North River Sugar Refining Co., 9 L.R.A., 33, 39; It has been held by this court that a purchaser of land registered under the
State vs. Portland Natural Gas Co., 153, Ind., 483.) Torrens system cannot acquire the status of an innocent purchaser for
value unless his vendor is able to place in his hands an owner's duplicate
While it is true that the courts are given a wide discretion in ordering the showing the title of such land to be in the vendor (Director of Lands vs.
dissolution of corporations for violations of its franchises, etc., yet Addison, 49, Phil., 19; Rodriguez vs. Llorente, G. R. No. 26615 1). It results
nevertheless, when such abuses and violations constitute or that prior to May 7, 1921, El Hogar Filipino was not really in a position to
threaten a substantial injury to the public or such as to amount to pass an indefeasible title to any purchaser. In this connection it will be
a violation of the fundamental conditions of the contract (charter) noted that section 75 of the Act of Congress of July 1, 1902, and the similar
by which the franchises were granted and thus defeat the purpose provision in section 13 of the Corporation Law, allow the corporation "five
of the grant, then the power of the courts should be exercised for years after receiving the title," within which to dispose of the property. A
the protection of the people. fair interpretation of these provisions would seem to indicate that the date
of the receiving of the title in this case was the date when the
Under the law the people of the Philippine Islands have guaranteed the respondent received the owner's certificate, or May 7, 1921, for it
payment of the interest upon cost of the construction of the railroad which was only after that date that the respondent had an unequivocal
occupied or occupies at least some of the lands purchased by the and unquestionable power to pass a complete title. The failure of
defendant. Every additional dollar of increase in the price of the land the respondent to receive the certificate sooner was not due in
purchased by the railroad company added that much to the costs of any wise to its fault, but to unexplained delay on the part of the
construction and thereby increased the burden imposed upon the people. register of deeds. For this delay the respondent cannot be held
The very and sole purpose of the intervention of the defendants in the accountable.
purchase of the land from the original owners was for the purpose of
selling the same to the Railroad Company at profit — at an increased price, The question then arises whether the failure of the respondent to get rid of
thereby directly increasing the burden of the people by way of additional the San Clemente property within five years after it first acquired the deed
taxation. The purpose of the intervention of the defendant in the thereto, even supposing the five-year period to be properly counted from
transactions in question, was to enrich itself at the expense of the that date, is such a violation of law as should work a forfeiture of its
taxpayers of the Philippine Islands, who had, by a franchise granted, franchise and require a judgment to be entered for its dissolution in this
permitted the defendant to exist and do business as a corporation. The action of quo warranto.
defendant was not willing to allow the Railroad Company to purchase the
land of the original owners. Its intervention with The Tayabas Land Upon this point we do not hesitate to say that in our opinion the
Company was to obtain an increase in the price of the land in a resale of corporation has not been shown to have offended against the law in a
the same to the railroad company. The conduct of the defendant in the manner that should entail a forfeiture of its charter. Certainly no court with
premises merits the severest condemnation of the law. any discretion to use in the matter would visit upon the respondent and its
thousands of shareholders the extreme penalty of the law as a
The judgment of the lower court should be modified. It is hereby ordered consequence of the delinquency here shown to have been committed.
and decreed that the franchise heretofore granted to the defendant by
which it was permitted to exist and do business as a corporation in the The law applicable to the case is in our opinion found in section 212 of the
Philippine Islands, be withdrawn and annulled and that it be disallowed to Code of Civil Procedure, as applied by this court in Government of the
do and to continue doing business in the Philippine Islands, unless it shall Philippine Islands vs. Philippine Sugar Estates Development Co. (38 Phil.,
within a period of six months after final decision, liquidate, 15). This section (212), in prescribing the judgment to be rendered against
dissolve and separate absolutely in every respect and in all of its a corporation in an action of quo warranto, among other things says:
relations, complained of in the petition, with The Tayabas Land
Company, without any findings to costs. . . . When it is found and adjudged that a corporation has offended in
any matter or manner which does not by law work as a surrender or
forfeiture, or has misused a franchise or exercised a power not conferred
THE GOVERNMENT OF THE PHILIPPINE ISLANDS (on relation of by law, but not of such a character as to work a surrender or forfeiture
the Attorney-General), plaintiff, of its franchise, judgment shall be rendered that it be outset from the
vs. continuance of such offense or the exercise of such power.
EL HOGAR FILIPINO, defendant
(G.R. No. L-26649; July 13, 1927) This provision clearly shows that the court has a discretion with
respect to the infliction of capital punishment upon corporation
FACTS: The Attorney General of the Government of the Philippine Islands and that there are certain misdemeanors and misuses of
instituted the present quo warranto for the purpose of depriving defendant franchises which should not be recognized as requiring their
corporation of its franchise upon 17 distinct causes of action, the first of dissolution.
which is:
Government of the Philippine Islands vs. Philippine Sugar Estates
Plaintiff “alleged illegal holding by the respondent of the title to real Development Co.: (38 Phil., 15): In the PSEC, case, it was found that the
property for a period in excess of five years after the property had been offending corporation had been largely (though indirectly) engaged in the
bought in by the respondent at one of its own foreclosure sales. The buying and holding or real property for speculative purposes in
provision of law relevant to the matter is found in section 75 of Act of contravention of its charter and contrary to the express provisions of law.
Congress of July 1, 1902 (repeated in subsection 5 of section 13 of the Moreover, in that case the offending corporation was found to be still
Corporation Law.) In both of these provisions it is in substance declared interested in the properties so purchased for speculative at the time the
that while corporations may loan funds upon real estate security and action was brought. Nevertheless, instead of making an absolute
purchase real estate when necessary for the collection of loans, they shall and unconditional order for the dissolution of the corporation, the
dispose of real estate so obtained within five years after receiving the title” judgment of ouster was made conditional upon the failure of the
corporation to discontinue its unlawful conduct within six months
ISSUE: WON the corporation should be dissolved on the first cause of after final decision . In the case before us the respondent appears to
action? have rid itself of the San Clemente property many months prior to the
institution of this action. It is evident from this that the dissolution of the
HELD: No. It is evident that the strict letter of the law was violated by the respondent would not be an appropriate remedy in this case. We do not of
respondent; but it is equally obvious that its conduct has not been course undertake to say that a corporation might not be dissolved for
characterized by obduracy or pertinacity in contempt of the law. Moreover, offenses of this nature perpetrated in the past, especially if its conduct had
several facts connected with the incident tend to mitigate the offense. exhibited a willful obduracy and contempt of law.

view we are unable to concur. The obnoxious by-law, as it stands, is a
Third cause of action . — Under the third cause of action the mere nullity, and could not be enforced even if the directors were to
respondent is charged with engaging in activities foreign to the attempt to do so. There is no provision of law making it a misdemeanor to
purposes for which the corporation was created and not incorporate an invalid provision in the by-laws of a corporation; and if there
reasonable necessary to its legitimate ends. The specifications were such, the hazards incident to corporate effort would certainly be
under this cause of action relate to three different sorts of largely increased. There is no merit in this cause of action.
activities. The first consist of the administration of the offices in
the El Hogar building not used by the respondent itself and the REPUBLIC OF THE PHILIPPINES, petitioner,
renting of such offices to the public. vs.
SECURITY CREDIT AND ACCEPTANCE CORPORATION, ROSENDO
The second specification under the third cause of action has reference to T. RESUELLO, PABLO TANJUTCO, ARTURO SORIANO, RUBEN
the administration and management of properties belonging to delinquent BELTRAN, BIENVENIDO V. ZAPA, PILAR G. RESUELLO, RICARDO D.
shareholders of the association BALATBAT, JOSE SEBASTIAN and VITO TANJUTCO JR., respondents.
(G.R. No. L-20583; January 23, 1967)
The third specification under this cause of action relates to certain activities
which are described in the following paragraphs contained in the agreed FACTS: The AOI of defendant corporation were registered with the SEC on
statements of facts: March 27, 1961. Based on the opinion of legal counsel of the Central Bank
of the Philippines, that the defendant corporation is a banking institution,
El Hogar Filipino has undertaken the management of some parcels of the Monetary Board promulgated Resolution No. 1095, declaring that the
improved real estate situated in Manila not under mortgage to it, but corporation is performing banking operations without having first complied
owned by shareholders, and has held itself out by advertisement as with the provisions of Sec. 2 and 6 of RA No. 337. Despite such resolution,
prepared to do so the company still continued with its operations and was able to establish 74
branches all over the Philippines and induced the public to open 59,643
For the services so rendered in the management of such properties El savings deposit accounts.
Hogar Filipino receives compensation in the form of commissions upon
the gross receipts from such properties at rates varying from two and The Solicitor General initiated this quo warranto proceeding to dissolve said
one-half per centum to five per centum of the sums so collected, company.
according to the location of the property and the effort involved in its
management. ISSUE: WON the company should be dissolved?
The administration of property in the manner described is more befitting to HELD: Yes. Although, admittedly, defendant corporation has not secured
the business of a real estate agent or trust company than to the business the requisite authority to engage in banking, defendants deny that its
of a building and loan association. transactions partake of the nature of banking operations. It is conceded,
however, that, in consequence of a propaganda campaign therefor, a total
ISSUE2: WON the defendant should be dissolved on the above-ground? of 59,463 savings account deposits have been made by the public with the
corporation and its 74 branches, with an aggregate deposit of
HELD: No. It is a general rule of law that corporations possess only P1,689,136.74, which has been lent out to such persons as the corporation
such express powers. The management and administration of the deemed suitable therefor. It is clear that these transactions partake of the
property of the shareholders of the corporation is not expressly authorized nature of banking, as the term is used in Section 2 of the General Banking
by law, and we are unable to see that, upon any fair construction of the Act.
law, these activities are necessary to the exercise of any of the granted
powers. The corporation, upon the point now under the criticism, has Accordingly, defendant corporation has violated the law by engaging in
clearly extended itself beyond the legitimate range of its powers. But it banking without securing the administrative authority required in
does not result that the dissolution of the corporation is in order, Republic Act No. 337.
and it will merely be enjoined from further activities of this sort.
That the illegal transactions thus undertaken by defendant corporation
warrant its dissolution is apparent from the fact that the foregoing
Fourth cause of action . — It appears that among the by-laws of misuser of the corporate funds and franchise affects the essence
the association there is an article (No. 10) which reads as follows: of its business, that it is willful and has been repeated 59,463
times, and that its continuance inflicts injury upon the public,
The board of directors of the association, by the vote of an owing to the number of persons affected thereby.
absolute majority of its members, is empowered to cancel
shares and to return to the owner thereof the balance resulting Wherefore, the writ prayed for should be, as it is hereby granted and
from the liquidation thereof whenever, by reason of their defendant corporation is, accordingly, ordered dissolved.
conduct, or for any other motive, the continuation as members
of the owners of such shares is not desirable. REPUBLIC OF THE PHILIPPINES, petitioner-appellee,
vs.
ISSUE3: WON if the above by-law is invalid, the corporation may be BISAYA LAND TRANSPORTATION CO., INC., MIGUEL CUENCO,
dissolved? MANUEL CUENCO, LOURDES CUENCO, JOSE P. VELEZ, JESUS P. VELEZ
and FEDERICO A. REYES (Original Respondents); and ANTONIO V.
HELD: No. This by-law is of course a patent nullity, since it is in direct CUENCO, CARMEN CUENCO, DIOSCORO B. LAZARO and MANUEL V.
conflict with the latter part of section 187 of the Corporation Law, which CUENCO, JR. (New Directors of respondent corporation), respondent-
expressly declares that the board of directors shall not have the power to appellees.
force the surrender and withdrawal of unmatured stock except in case of MIGUEL CUENCO, respondent-crossclaimant-appellant.
liquidation of the corporation or of forfeiture of the stock for delinquency. It (G.R. No. L-31490; January 6, 1978)
is agreed that this provision of the by-laws has never been enforced, and in
fact no attempt has ever been made by the board of directors to make use FACTS: The Solicitor General initiated this quo warranto proceedings
of the power therein conferred. against respondent corporation on the following nine causes of action:
It is supposed, in the fourth cause of action, that the existence of this 1. To conceal its illegal transaction, respondent corporation falsely
article among the by-laws of the association is a misdemeanor on reconstituted its articles of incorporation in July 1948 by adding new
the part of the respondent which justifies its dissolution. In this cattle ranch, agriculture, and general merchandise;

2. On May 25, 1948, respondent corporation through its Board of supra).
Directors, adopted a resolution authorizing it to acquire 1,024 hectares
of public land in Zamboanga and 10,000 hectares of timber concession ACCORDINGLY, without prejudice to the rights of the private parties herein
in Mindanao in violation of Section 6, Act No. 143); to take proper steps to enforce whatever causes of action they may have
3. In May, 1949, respondent office constituting themselves as Board of against each other, the order of the lower court embodied in its
Directors of respondent corporation, passed a resolution authorizing "Resolution" dated April 3, 1968, granting the Solicitor General's motion to
the corporation to lease a pasture land of 2,000 hectares of cattle dismiss the quo warranto proceedings is hereby upheld.
ranch on a public land in Bayawan, Negros Occidental;
4. From August 1946 to the end of 1952, respondent corporation FINANCING CORPORATION OF THE PHILIPPINES and J. AMADO
operated a general merchandise store, a business which is neither for, ARANETA, petitioners,
nor incidental to, the accomplishment of its principal business for vs.
which it was organized, i.e., the operation of land and water HON. JOSE TEODORO, Judge of the Court of First Instance of
transportation; Negros Occidental, Branch II, and ENCARNACION LIZARES VDA.
5. Respondent corporation snowed Mariano Cuenco and Manuel Cuenco DE PANLILIO, respondents
to act as president in 1945 to 1948 and 1953 to 1954, respectively, (G.R. No. L-4900; August 31, 1953)
when at that time, neither of them owned a single stock;
6. In violation of its charter and articles of incorporation, as well as FACTS: In civil case No. 1924 of the Court of First Instance of Negros
applicable statutes concerning its operation, it engaged in mining by Occidental, Asuncion Lopez Vda. de Lizares, Encarnacion Lizares Vda. de
organizing the Jose P. Velez Coal Mines, and allowing said corporation Panlilio and Efigenia Vda. de Paredes, in their own behalf and in behalf of
to use the facilities and assets of respondent corporation; the other minority stockholders of the Financing Corporation of the
7. It imported and sold at black market prices to third persons truck Philippines, filed a complaint against the said corporation and J. Amado
spare Parts, the of which were appropriated by respondent directors; Araneta, its president and general manager, claiming among other things
8. It paid its laborers and employees wages below the minimum wage alleged gross mismanagement and fraudulent conduct of the corporate
law to the great prejudice of its labor force, and in violation of the affairs of the defendant corporation by J. Amado Araneta, and asking that
laws of the state, manipulating its books and records so as to make it the corporation be dissolved; that J. Amado Araneta be declared personally
appear that its laborers and employees were and have been paid their accountable for the amounts of the unauthorized and fraudulent
salaries and wages in accordance with the minimum wage law; disbursements and disposition of assets made by him, and that he be
9. It deliberately failed to maintain accurate and faithful stock and required to account for said assets, and that pending trial and disposition of
transfer books since 1945 up to the filing of the petition, enabling it to the case on its merits a receiver be appointed to take possession of the
defraud the state, mislead the general public, its creditors, investors books, records and assets of the defendant corporation preparatory to its
and its stockholders by not accurately and faithfully making dissolution and liquidation and distribution of the assets. Over the strong
objection of the defendants, the trial court granted the petition for the
a. an adequate, accurate and complete record of dividend distribution, appointment of a receiver and designated Mr. Alfredo Yulo as such receiver
and with a bond of P50,000.
b. an adequate, accurate and complete record of transfers of its stocks
ISSUE: The main contention of the petitioners in opposing the
Later on, the Solicitor General filed a motion for the dismissal of the appointment of a receiver in this case is that said appointment is merely an
complaint which was granted by the lower court. auxiliary remedy; that the principal remedy sought by the respondents in
the action in Negros Occidental was the dissolution of the Financing
ISSUE: WON the lower court is correct in not dissolving the corporation? Corporation of the Philippines; that according to the law a suit for the
dissolution of a corporation can be brought and maintained only by the
HELD: Yes. After a very careful and deliberate consideration of the State through its legal counsel, and that respondents, much less the
evidence adduced by petitioner, the lower court came to the conclusion minority stockholders of said corporation, have no right or personality to
that the same did not really warrant a quo warranto by the State that could maintain the action for dissolution, and that inasmuch as said action cannot
truly justify to decapitate corporate life, and that the corporate acts or be maintained legally by the respondents, then the auxiliary remedy for the
missions complained of had not resulted in substantial injury to the public, appointment of a receiver has no basis.
nor were they wilful and clearly obdurate. The court found that the several
acts of misuse and misapplication of the funds and/or assets of the Bisaya HELD: True it is that the general rule is that the minority stockholders of a
Land Transportation Co., Inc. were committed new particularly by the corporation cannot sue and demand its dissolution. However, there are
respondent Dr. Manuel Cuenco with the cooperation of Jose P. Velez, for cases that hold that even minority stockholders may ask for dissolution,
the commission of which they may be personally held liable. There appears this, under the theory that such minority members, if unable to obtain
to be no reason for us to disregard the findings of the trial court, which, redress and protection of their rights within the corporation, must not and
applying well settled doctrines, ought to be given due weight and credit should not be left without redress and remedy. This was what probably
(De la Rama vs. Ma-ao Sugar Central, L-17504 & L-17506, Feb. 28, 1969). prompted this Court to state in the case of Hall, et al. vs. Judge Piccio,*
Besides, the court a quo found that the controversy between the G.R. No. L-2598 (47 Off. Gaz. No. 12 Supp., p. 200) that even the
parties was more personal than anything else and did not at all existence of a de jure corporation may be terminated in a private suit for
affect public interest. its dissolution by the stockholders without the intervention of the State.
The Solicitor General himself asserts that the only purpose of his ration for We repeat that although as a rule, minority stockholders of a
the of this quo warranto is to take the State out of an unnecessary court corporation may not ask for its dissolution in a private suit, and
litigation, so that the dismissal of the case would result in the disposition that such action should be brought by the Government through its
solely of the quo warranto by and between petitioner Republic of the legal officer in a quo warranto case, at their instance and request,
Philippines and the respondents named therein. Other interested parties there might be exceptional cases wherein the intervention of the
who might feel aggrieved, therefore, would not be without their remedies State, for one reason or another, cannot be obtained, as when the
since they can still maintain whatever claims they may have against each State is not interested because the complaint is strictly a matter
other. It has been held that relief by dissolution will be awarded between the stockholders and does not involve, in the opinion of
only where no other adequate remedy is available, and is not the legal officer of the Government, any of the acts or omissions
available where the rights of the stockholders can be, or are, warranting quo warranto proceedings, in which minority stockholders
protected in some other way (16 Fletcher Cyc. Corporations, 1942 Ed., are entitled to have such dissolution. When such action or private suit is
pp. 812-813, citing "Thwing vs. McDonald", 134 Minn. 148,156 N.W. brought by them, the trial court had jurisdiction and may or may not grant
780,158 N.W. 820, 159 N.W. 564, Ann. Cas. 1918 E 420; Mitchell vs. Bank the prayer, depending upon the facts and circumstances attending it. The
of St. Paul, 7 Minn. 252, cited in De la Rama vs. Ma-ao Sugar Central, trial court's decision is of course subject to review by the appellate tribunal.

Having such jurisdiction, the appointment of a receiver pendente lite is left found an “implied condition” that the contract shall terminate in such
to the sound discretion of the trial court. As was said in the case of Angeles event.
vs. Santos (64 Phil., 697), the action having been properly brought and the
trial court having entertained the same, it was within the power of said PERIOD OF LIQUIDATION: Despite its dissolution, a corporation
court upon proper showing to appoint a receiver pendente lite for the nonetheless, continues to be a body corporate for a period of 3 years for
corporation; that although the appointment of a receiver upon application purposes of liquidation and winding up its affairs (Sec. 122). Upon
of the minority stockholders is a power to be exercised with great caution, expiration of the 3 year period to wind up its affairs, the juridical
nevertheless, it should be exercised necessary in order not to entirely personality of the corporation ceases for all intent and purposes, and as a
ignore and disregard the rights of said minority stockholders, especially general rule, it can no longer sue and be sued (see Gelano vs. CA).
when said minority stockholders are unable to obtain redress and
protection of their rights within the corporation itself. JAIME T. BUENAFLOR, petitioner,
vs.
CAMARINES SUR INDUSTRY CORPORATION, respondent
PRESENT STATE OF LAW: any stockholder or member of a corporation (G.R. Nos. L-14991-94; May 30, 1960)
can institute a dissolution proceeding against his own corporation before
the proper forum. This is clear from the provisions of PD 902-A, as FACTS: In Aug. and Sept. 1957, Jaime Buenaflor filed applications before
amended, when it provides that the SEC, now the Special Commercial the Public Service Commission for the construction of a 5-ton ice plant and
Courts, shall hear and decide cases involving “intra-corporate dispute or to establish a cold storage and refrigeration service of about 6,000 cubic
partnership relations between and among stockholders, members or feet capacity in Sabang, respectively. After being served a copy of the
associates; between any or all of them and the corporation, partnership or application of petitioner, respondent corporation also filed the same
association of which they are stockholders, members or associates, applications on Oct. 1957.
respectively; and between such corporations, partnerships or association
and the State insofar as it concerns their individual franchise or right to Counsel for Buenaflor presented a motion to dismiss on the ground that the
exist as such entity” (Sec. 5(b) as further amended by Sec. 5.2 of RA corporate life of respondent already expired in Nov. 1953. Respondent
8799). Of note, however, is that under Sec. 5(m) of RA 8799, the SEC Corporation then registered on Oct. 1957, a new AOI and transferred all
appears to have concurrent jurisdiction to “suspend or revoke, after proper assets of the old corporation together with existing certificate of public
notice and hearing, the franchise or certificate of registration of convenience to the new corporation.
corporations, partnerships or associations upon any of the grounds
provided by law. The PSC provisionally approved the transfer of the assets, as well as the
certificate of public convenience to the new corporation.
It has thus been held as early as 1950 that “even the existence of a de jure
corporation may be determined in a private suit for its dissolution between On Nov. 1957, the new corporation answered the motion to dismiss by
stockholders, without the intervention of the state” (Hall vs. Piccio). alleging its recent incorporation.
Likewise, in a close corporation, a petition for the dissolution of the
corporation may be instituted by any one individual shareholder on the ISSUE: WON Buenaflor’s application should be approved?
ground, even by mere dishonesty.
HELD: Yes. It is admitted — and the Commission found – that the needs of
F. EFFECTS OF DISSOLUTION Sabang Barrio will be conveniently served with the establishment of a 5-ton
ice plant. But it elected to deny Buenaflor's application, even as it awarded
Dissolution terminates its power to enter into contracts or to continue the the privilege to the new Camarines Corporation on the ground that it (the
business as a going concern. old corporation) had been serving ice in Sabang up to the time of
Buenaflor's application, and was, consequently, the pioneer operator there.
The SC held that a corporation, whose corporate life expired, cannot
lawfully pursue the business for which it was organized. It cannot apply for The fact, however, is that since 1953, the old Corporation had been
a new certificate or a secondary franchise for it is incapable of receiving a illegally plying its business of selling ice in Sabang because, under the
grant (Buenaflor vs. Camarines Sur Industry Corp). Neither can it enforce a Corporation Law, Sec. 77, after November 1953, it could not lawfully
contract executed prior to its dissolution for the purpose of continuing the continue the business for which it had been established (operate ice plant,
business of its organization (Cebu Ports vs. State Marine). sell ice, etc). After November 1953, it could only continue to exist for three
years for the purpose of prosecuting and defending suits by or against it,
Debts due to or by a corporation are not extinguished. It has thus been and of enabling it gradually to settle and close its affairs, to dispose and
held that the termination of the life of a juridical entity does not, by itself, convey its property and to divide its capital stock. It could not, without
imply the diminution or extinction of rights demandable against such violating the law, continue to sell ice. And yet, the Commission awarded the
juridical entity (Gonzales vs. Sugar Regulatory Adm.) certificate on the basis of such serve and distribution of ice — applying the
"prior operator" rule. In other words, the new Camarines Corporation is
Sec. 145. Amendment or repeal. - No right or remedy in favor of or rewarded, precisely because the old corporation, its predecessor, had
against any corporation, its stockholders, members, directors, trustees, or violated the law during that period (1953-1957). We cannot, and should
officers, nor any liability incurred by any such corporation, stockholders, not countenance such anomalous result.
members, directors, trustees, or officers, shall be removed or impaired either
by the subsequent dissolution of said corporation or by any subsequent On the other hand, when the old Camarines Corporation docketed its
amendment or repeal of this Code or of any part thereof. application October 1, 1957, it had no juridical personality, it had
ceased to exist as a corporation and could not sue nor apply for
PROPERTY RIGHTS: Thus, a lease to a corporation may, by its terms, certificate, for it was incapable of receiving a grant. It was not
terminate where the corporation cease to exist. But unless the lease so even a corporation de facto. And then, there is no application
provides, the rights and obligations thereunder are not extinguished by the subscribed by the new Camarines Corporation. Far from being mere
corporation’s dissolution since leases affect property rights and survives the technicality, these point support a conclusion which appears to be just and
death of the parties. The stockholders succeed to the rights and liabilities of equitable, not only for the reasons already indicated, but also to
the dissolved corporation in an unexpired leasehold state which may be compensate Buenaflor's diligence and courage in exposing the irregular
enforced by or against the receiver or liquidating trustee. practice of a "ghost" corporation foisting its services upon the unsuspecting
public of Sabang and neighboring territory — enjoying a franchise without
CONTRACTS FOR PERSONAL SERVICE: This rule, however, may not paying, perhaps, the corporate income tax and other burdens attached to
hold true in cases of contracts for personal services which are deemed corporate existence.
terminated by the dissolution of the corporation. In such cases, there is
Remembering the Camarines Corporation's automatic cessation in SPOUSES RAMON A. GONZALES and LILIA Y. GONZALES,
November 1956 (three years after November 1953) we must decline to petitioners,
regard the new Camarines Corporation (formed October 30, 1957) as a vs.
continuation of the old . At most, it is the transferee of the properties of the SUGAR REGULATORY ADMINISTRATION, respondent
old corporation (or more properly, the assets of the stockholders) plus the (G.R. No. 84606; June 28, 1989)
certificate of public convenience to operate the ice plant in Naga and
Magarao. And yet, as stated, the new corporation has not filed any FACTS: Petitioner spouses file a complaint seeking cancellation of a
application for certificate of public convenience in Sabang, and has not mortgage and recovery of a sum of money for the overpayment they made,
published such application on a loan secured from RP Bank, by virtue of an alleged deduction made by
Philippine Sugar Commission (Philsucom) of the proceeds of sugar exports.
Wherefore, revoking the appealed decision in so far as it awarded the
certificate to said Corporation, we hereby approve Buenaflor's application Petitioners filed an amended complaint which assailed the constitutionality
for five tons, instead of one ton, subject to the usual conditions imposed by of EO No. 18 abolishing Philsucom which in effect destroyed petitioners’
the Public Service Commission on ice plant establishments. right to recover from PSC. They assert that the transfer from Philsucom to
SRA are unconstitutional and ineffective.
CEBU PORT LABOR UNION, represented by this President ALEJO
CABABAJAY, petitioner, On Aug. 2, 1988, the trial court granted the motion to dismiss insofar as
vs. SRA is concerned while denying that same motion insofar as RP Bank and
STATES MARINE CORPORATION, NICASIO PANSACALA, Philsucom were concerned.
ANDRESTURA, ALFONSO VILLAJAS, and PERPETUO REGIS,
respondents ISSUE: WON SRA could be made a party-respondent liable to the claim of
(G.R. No. L-9350; May 20, 1957) the petitioners?
FACTS: On Sept. 12, 1953, petitioner filed a petition for “recognition of HELD: Yes. The termination of the life of a juridical entity does not by itself
stevedoring services and injunction” against respondents claiming that it imply the diminution or extinction of rights demandable against such
was awarded a contract for the exclusive right of loading and unloading of juridical entity.
the cargoes of the vessel MV Bisayas formerly owned by Elizalde & CO.,
though at the time of the filing of the petition it was owned and operated Executive Order No. 18, promulgated on 28 May 1986, abolished the
by the States Marine Corporaiton. Philsucom, created the SRA and authorized the transfer of assets from
Philsucom to SRA. Section 13 of Executive Order No. 18 reads in part:
Respondent corporation filed a motion to dismiss on the ground that it has
no legal capacity to sue or be sued, it having been dissolved on Oct. 17, Assets and records that, as determined by the Sugar Regulatory
1952 and therefore has no personality to enter or refuse to enter into any Administration, are required in its operation are hereby transferred to the
contract, much less of threatening the petitioner as alleged in the petition. Sugar Regulatory Administration.
Petitioner relied on Sec. 77 to include said corporation as party respondent Although the Philsucom is hereby abolished, it shall nevertheless
despite the fact that counsel for the other respondents called already the continue as a juridical entity for three years after the time when it would
attention of the Court that the State Marine Corporation was non-existing have been so abolished, for the purpose of prosecuting and defending
and suggested that proper substitution or amendment of the petition be suits by or against it and enabling it to settle and close its affairs, to
made. dispose of and convey its property and to distribute its assets, but not
for the purpose of continuing the functions for which it was established,
ISSUE: WON State Marine Corp can be made a party respondent? under the supervision of the Sugar Regulatory Administration.
HELD: Section 77 of the Corporation Law reads as follows: We believe, that Section 13 of Executive Order No. 18 is not to be
interpreted as authorizing respondent SRA to disable Philsucom from
SEC. 77. Every corporation whose charter expires by its own limitation or paying Philsucom's demandable obligations by simply taking over
is annulled by forfeiture or otherwise, or whose corporate existence for Philsucom's assets and immunizing them from legitimate claims against
other purposes is terminated in any other manner, shall nevertheless be Philsucom. The right of those who have previously contracted with, or
continued as a body corporate for three years after the time when it otherwise acquired lawful claims against, Philsucom, to have the assets of
would have been so dissolved, for the purpose of prosecuting and Philsucom applied to the satisfaction of those claims, is a substantive right
defending suits by or against it and of enabling it gradually to settle and and not merely a procedural remedy. Section 13 cannot be read as
close its affairs, to dispose of and convey its property and to divide its permitting the SRA to destroy that substantive right. We think that such an
capital stock, but not for the purpose of continuing the business for interpretation would result in Section 13 of Executive Order No. 18 colliding
which it was established. with the non-impairment of contracts clause of the Constitution insofar as
contractual claims are concerned, and with the due process clause insofar
Even a cursory reading of the above-quoted provision would convey the as the non-contractual claims are concerned. To avoid such a result, we
idea clearly manifested in the limitation "but not for the purpose of believe and so hold that should the assets of Philsucom remaining in
continuing the business for which it was established", that the 3-year Philsucom at the time of its abolition not be adequate to pay for
period allowed by the law is only for the purpose of winding up its affairs. all lawful claims against Philsucom, respondent SRA must be held
Petitioner-appellee prayed that it be declared to have the right to liable for such claims against Philsucom to the extent of the fair
stevedoring work in question "thereby respecting the contract entered into value of assets actually taken over by the SRA from Philsucom, if
by petitioner and the Elizalde & Co. and subsequently enforced and any. To this extent, claimants against Philsucom do have a right to
continued by the respondent States Marine Corporation". It appearing follow Philsucom's assets in the hands of SRA or any other agency
that the said States Marine Corporation was already dissolved at for that matter.
the time said petition was filed, and the vessel subject of the
agreement having changed hands, it cannot be compelled now to We conclude that dismissal of petitioners' complaint against respondent
respect such agreement specially considering the fact that it SRA was clearly premature. Petitioners have a cause of action against SRA
cannot even be made a party to this suit (See. 1, Rule 3, of the Rules to the extent that they are able to prove lawful claims against Philsucom,
of Court. which claims Philsucom is or may be unable to satisfy, and to the extent
respondent SRA did, or does, in fact take over all or some of the assets of
Philsucom. At the very least, the motion to dismiss was not shown to rest

upon indubitable grounds and should, therefore, have been denied not only liabilities in an action filed against it through its trustee even if the
in respect of Philsucom but also in respect of respondent SRA. case is filed beyond the 3 year period of liquidation.
G. LIQUIDATION AND WINDING UP 3. By appointment of a receiver

a. A receiver may be appointed by the proper forum on petition or motu
During the course of liquidation and winding up, the assets will be collected proprio upon the dissolution of the corporation (Sec. 119)
and realized, the rights and claims of creditors will be settled or provided b. The appointment of a receiver is, however, permissive rather than
for and a distribution of the remaining assets to the shareholders who are mandatory and the law tends to recognize that in cases of voluntary
entitled thereto. dissolution there is no occasion for the appointment of a receiver
except under special circumstances and upon proper showing (China
Therefore, liquidation or winding up of corporate affairs therefore means Banking vs. Michelin)
the collection of all corporate assets, the payments of all its debts and c. If a receiver is appointed, the 3 year period fixed by law within which
settlement of its obligations and the ultimate distribution of corporate to complete the task of liquidation will not likewise apply because the
assets, if any of it remains, to all stockholders in accordance with their dissolved corporation is substituted by the receiver who may sue or be
proportionate stockholdings in the corporation or in accordance with their sued even after that period (Sumera vs. Valencia).
respective contracts of subscription. d. Thus, it has been held that when a corporation is dissolved and the
liquidation of assets is placed in the hands of a receiver or assignee,
After dissolution, a body corporate continues to exist for 3 years for the the 3 year period is not applicable and the assignee may institute all
purpose of liquidation and winding up of its affairs: actions leading to the liquidation of the corporation even after the
expiration of 3 years.
Sec. 122. Corporate liquidation. - Every corporation whose charter e. Note however, that a receiver may be appointed by the court even
expires by its own limitation or is annulled by forfeiture or otherwise, or while the corporation is a going concern and does not always imply
whose corporate existence for other purposes is terminated in any other dissolution of a corporation.
manner, shall nevertheless be continued as a body corporate for three (3)
years after the time when it would have been so dissolved, for the purpose of NATIONAL ABACA AND OTHER FIBERS CORPORATION, plaintiff-
prosecuting and defending suits by or against it and enabling it to settle and appellant,
close its affairs, to dispose of and convey its property and to distribute its vs.
assets, but not for the purpose of continuing the business for which it was APOLONIA PORE, defendant-appellee
established. (G.R. No. L-16779; August 16, 1961)
At any time during said three (3) years, the corporation is authorized and FACTS: On Nov. 3, 1953, plaintiff filed a complaint before the Municipal
empowered to convey all of its property to trustees for the benefit of Court of Tacloban, Leyte, against defendant for the recovery of advances
stockholders, members, creditors, and other persons in interest. From and the latter failed to account for, amounting to P1,213.34. The court
after any such conveyance by the corporation of its property in trust for the rendered a decision holding that defendant is liable for P272.49.
benefit of its stockholders, members, creditors and others in interest, all
interest which the corporation had in the property terminates, the legal Said court denying reconsideration, plaintiff appealed before the CFI to
interest vests in the trustees, and the beneficial interest in the stockholders, which a motion to dismiss was filed by defendant on the ground that EO
members, creditors or other persons in interest. No. 372 abolished plaintiff and thus it no longer had capacity to sue.
Upon the winding up of the corporate affairs, any asset distributable to any Plaintiff objected there to on the ground that the said EO granted plaintiff
creditor or stockholder or member who is unknown or cannot be found shall to continue in existence for 3 years from Nov. 30, 1950, the effectivity date
be escheated to the city or municipality where such assets are located. of the EO, for the purpose of prosecuting and defending suits by or against
it and of enabling the Board of Liquidators to gradually settle the its affairs
Except by decrease of capital stock and as otherwise allowed by this Code, and that the case was filed on Nov. 14, 1953, or before the expiration of
no corporation shall distribute any of its assets or property except upon the 3 year period.
lawful dissolution and after payment of all its debts and liabilities.
ISSUE: WON the action commenced within the 3 year period may be
LIQUIDATION MAY BE UNDERTAKEN IN EITHER OF THREE WAYS: continued after the expiration of the said period?
1. By the corporation itself through the BOD HELD: No. The rule appears to be well settled that, in the absence
a. This is the usual method or procedure of liquidating a corporation of statutory provision to the contrary, pending actions by or
(China Banking Corp vs. Michelin) and although there is no law against a corporation are abated upon expiration of the period
authorizing it, neither is there anything that prohibits the BOD from allowed by law for the liquidation of its affairs.
undertaking the same
b. If this method is resorted to, the board will only have a period of 3 It is generally held, that where a statute continues the existence of a
years to finish its task of liquidation corporation for a certain period after its dissolution for the purpose of
c. Claims for or against the corporate entity not filed within the period prosecuting and defending suits, etc., the corporation becomes defunct
will become unenforceable as there exist no corporate entity against upon the expiration of such period, at least in the absence of a provision
which they can be enforced. to the contrary, so that no action can afterwards be brought by or
d. Actions pending for or against the corporation when the 3 year period against it, and must be dismissed. Actions pending by or against the
expires are abated, since after the period, the corporation ceases for corporation when the period allowed by the statute expires, ordinarily
all intents and purposes and is no longer capable of suing or being abate.
sued (National Abaca & Other Fibers Co. vs. Pore)
. . . This time limit does not apply unless the circumstances are
2. By a trustee appointed by the corporation such as to bring the corporation within the provision of the
a. The corporation may opt to convey all corporate assets to a trustees statute. However, the wording of the statutes, in some jurisdictions
who will take charge of liquidation authorize suits after the expiration of the time limit, where the statute
b. If this method is used, the three year period limitation imposed by provides that for the purpose of any suit brought by or against the
section 122 will not apply provided the designation of the trustee is corporation shall continue beyond such period for a further named
made within that period. period after final judgment. (Fletcher's Cyclopedia on Corporations, Vol.
c. Thus, during the period of liquidation, but before the completion 16, pp. 892-893.).
thereof, a dissolved corporation is still liable for all its debts and
Our Corporation Law contains no provision authorizing a corporation, after provides that "Every corporation whose charter expires by its own limitation
three (3) years from the expiration of its lifetime, to continue in its or is annulled by forfeiture or otherwise, or whose corporate existence for
corporate name actions instituted by it within said period of three (3) years. other purposes is terminated in any other manner, shall nevertheless be
In fact, section 77 of said law provides that the corporation shall "be continued as a body corporate for three years after the time when it would
continued as a body corporate for three (3) years after the time when it have been so dissolved, for the purpose of prosecuting and defending suits
would have been . . . dissolved, for the purpose of prosecuting and by or against it and of enabling it gradually to settle and close its affairs to
defending suits by or against it . . .", so that, thereafter, it shall no longer dispose of and convey its property and to divide its capital stock, but not
enjoy corporate existence for such purpose. For this reason, section 78 of for the purpose of continuing the business for which it was established."
the same law authorizes the corporation, "at any time during said three And section 77 of the same Act provides, "At any time during said three
years . . . to convey all of its property to trustees for the benefit of years said corporation is authorized and empowered to convey all of its
members, stockholders, creditors and other interested", evidently for the property to trustees for the benefit of members, stockholders, creditors,
purpose, among others, of enabling said trustees to prosecute and defend and others interested. From and after any such conveyance by the
suits by or against the corporation begun before the expiration of said corporation of its property in trust for the benefit of its members,
period. Hence, commenting on said sections, Judge Fisher, in his work stockholders, creditors, and others in interest, all interest which the
entitled Philippines Law on Stock Corporations (1929 ed.), has the following corporation had in the property terminates, the legal interest vests in the
to say: trustees, and the beneficial interest in the members, stockholders,
creditors, or other persons in interest.
It is to be noted that the time during which the corporation, through its
own officers, may conduct the liquidation of its assets and sue and be Fletcher, in volume 8, page 9226, of his Encyclopedia of Private
sued as a corporation is limited to three years from the time the period Corporations, says:
of dissolution commences; but that there is no time limit within the
trustees must complete a liquidation placed in their hands. It is 6537. Effect of expiration of statutory extension of life. — In general. —
provided only (Corp. Law, Sec. 78) that the conveyance to the The qualified existence after dissolution, as provided for by statute,
trustees must be made within the three-year period. It may be terminates at the expiration of the time fixed, or, no time is fixed, at the
found impossible to complete the work of liquidation within the three- expiration of a reasonable time. Where the extreme limit to which the
year period or to reduce disputed claims to judgment. The authorities statute has extended the life of a corporation after its dissolution has
are to the effect that suits by or against a corporation abate when it expired, it has no offices which can bind it by agreement, but only has
ceased to be an entity capable of suing or being sued (7 R.C.L. Corps., statutory trustees. After the expiration of such time, it is generally held
Par. 750); but trustees to whom the corporate assets have been not only that the corporation cannot sue or be sued but that actions
conveyed pursuant to the authority of section 78 may sue and be sued pending at such time are abated. But a statute authorizing the
as such in all matters connected with the liquidation. By the terms of the continuance of a corporation for three years to wind up its affairs, does
statute the effect of the conveyance is to make the trustees the not preclude an action to wind up brought after the three years.
legal owners of the property conveyed, subject to the beneficial
interest therein of creditors and stockholders. (pp. 389-390; see In the light of the legal provisions and authorities cited, interpretative of
also Sumera v. Valencia [67 Phil. 721, 726-727). said laws, if the corporation carries out the liquidation of its assets
through its own officers and continues and defends the actions
Obviously, the complete loss of plaintiff's corporate existence after the brought by or against it, its existence shall terminate at the end of
expiration of the period of three (3) years for the settlement of its affairs is three years from the time of dissolution; but if a receiver or
what impelled the President to create a Board of Liquidators, to continue assignee is appointed, as has been done in the present case, with
the management of such matters as may then be pending. The first or without a transfer of its properties within three years, the legal
question must, therefore, be answered in the negative. interest passes to the assignee, the beneficial interest remaining
in the members, stockholders, creditors and other interested
Wherefore, actions commenced within the 3 year period of liquidation may persons; and said assignee may bring an action, prosecute that
be continued by the trustee despite the expiration of the said period. which has already been commenced for the benefit of the
corporation, or defend the latter against any other action already
instituted or which may be instituted even outside of the period of
TIBURCIO SUMERA, as receiver of the corporation "Devota de three years fixed for the offices of the corporation.
Nuestra Señora de la Correa", plaintiff-appellant,
vs. For the foregoing considerations, we are of the opinion and so hold that
EUGENIO VALENCIA, defendant-appellee when a corporation is dissolved and the liquidation of its assets is
(G.R. No. 45485; May 3, 1939) placed in the hands of a receiver or assignee, the period of three
years prescribed by section 77 of Act No. 1459 known as the
FACTS: Devota de Nuestra Senora de la Correa filed for a voluntary Corporation Law is not applicable, and the assignee may institute
dissolution which was approved by the CFI of Bulacan on Feb. 14, 1928 all actions leading to the liquidation of the assets of the
appointing Damaso Nicolas as assignee to take charge of liquidation. corporation even after the expiration of three years.
Nicolas was substituted by herein appellant Sumera who filed a motion with
the court asking defendant Valencia to deliver to him the P400.00 funds of Wherefore, the order appealed from is reversed and it is ordered that the
the corporation which was denied, reserving, however to said assignee the case be remanded to the court of origin to the end that it may decide the
right to bring the proper action. Accordingly, on June 5, 1936, Sumera filed same on the merits, with costs against the appellee.
the present complaint for recovery of money.
THE BOARD OF LIQUIDATORS representing THE GOVERNMENT OF THE
The defendant interposed the defense that the right against him had REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,
already prescribed which was found by the lower court to be tenable, the vs.
case not being filed within the 3 year period prescribed under Sec. 77 of HEIRS OF MAXIMO M. KALAW, JUAN BOCAR, ESTATE OF THE
Act No. 1459. DECEASED CASIMIRO GARCIA, and LEONOR MOLL, defendants-appellees
(G.R. No. L-18805; August 14, 1967)
ISSUE: WON the 3 year period prescribed by the Corporation Law is
applicable if the liquidation is placed on the hands of a receiver or FACTS: A suit was filed by the Board of Liquidators for the recovery of a
assignee? sum of money from National Coconut Corporation’s (NACOCO) general
manager and board chairman Maximo Kalaw and other defendants as
HELD: No. Passing now to discuss the question raised by plaintiff and directors.
appellant in his sole assignment of alleged error, section 77 of Act No. 1459

The defendants pose that since the three year period has elapsed since its given to him, without the knowledge and consent and did not benefit the
abolition by virtue of EO 372, the Board of Liquidators may not now family.
continue with, and prosecute, the present case to its conclusion.
On May 29, 1959, the corporation, through its lawyer, filed a complaint for
ISSUE: WON the Board of Liquidators has personality to proceed as party- collection against petitioners.
plaintiff in this case?
Meanwhile, the corporation amended its AOI to shorten its term of
HELD: Yes. The executive order abolishing NACOCO and creating the existence up to Dec. 31, 1960 only which was approved by the SEC but the
Board of Liquidators should be examined in context. The proviso in Section trial court was not notified of such amendment.
1 of Executive Order 372, whereby the corporate existence of NACOCO was
continued for a period of three years from the effectivity of the order for On Nov. 20, 1964, almost 4 years after the dissolution, the trial court
"the purpose of prosecuting and defending suits by or against it and of rendered a decision in favor of private respondent.
enabling the Board of Liquidators gradually to settle and close its affairs, to
dispose of and convey its property in the manner hereinafter provided", is ISSUE: WON a corporation whose corporate life had ceased by the
to be read not as an isolated provision but in conjunction with the whole. expiration of its term of existence, could still continue prosecuting and
So reading, it will be readily observed that no time limit has been defending suits after its dissolution and beyond the period of 3 years to
tacked to the existence of the Board of Liquidators and its wind up its affairs, without having undertaken any step to transfer its
function of closing the affairs of the various government owned assets to a trustee or assignee?
corporations, including NACOCO.
HELD: Yes. In American corporate law, upon which our Corporation Law
By Section 2 of the executive order, while the boards of directors of the was patterned, it is well settled that, unless the statutes otherwise provide,
various corporations were abolished, their powers and functions and duties all pending suits and actions by and against a corporation are abated by a
under existing laws were to be assumed and exercised by the Board of dissolution of the corporation. Section 77 of the Corporation Law provides
Liquidators. The President thought it best to do away with the boards of that the corporation shall "be continued as a body corporate for three (3)
directors of the defunct corporations; at the same time, however, the years after the time when it would have been ... dissolved, for the purpose
President had chosen to see to it that the Board of Liquidators step into the of prosecuting and defending suits By or against it ...," so that, thereafter,
vacuum. And nowhere in the executive order was there any mention of the it shall no longer enjoy corporate existence for such purpose. For this
lifespan of the Board of Liquidators. A glance at the other provisions of the reason, Section 78 of the same law authorizes the corporation, "at any time
executive order buttresses our conclusions. during said three years ... to convey all of its property to trustees for the
benefit of members, Stockholders, creditors and other interested," evidently
Not that our views on the power of the Board of Liquidators to proceed to for the purpose, among others, of enabling said trustees to prosecute and
the final determination of the present case is without jurisprudential defend suits by or against the corporation begun before the expiration of
support. The first judicial test before this Court is National Abaca and Other said period
Fibers Corporation vs. Pore, L-16779, August 16, 1961. In that case, the
corporation, already dissolved, commenced suit within the three-year When Insular Sawmill, Inc. was dissolved on December 31, 1960, under
extended period for liquidation. That suit was for recovery of money Section 77 of the Corporation Law, it still has the right until December 31,
advanced to defendant for the purchase of hemp in behalf of the 1963 to prosecute in its name the present case. After the expiration of said
corporation. She failed to account for that money. We there said that "the period, the corporation ceased to exist for all purposes and it can no longer
rule appears to be well settled that, in the absence of statutory sue or be sued.
provision to the contrary, pending actions by or against a
corporation are abated upon expiration of the period allowed by However, a corporation that has a pending action and which cannot be
law for the liquidation of its affairs ." We there said that "[o]ur terminated within the three-year period after its dissolution is authorized
Corporation Law contains no provision authorizing a corporation, after under Section 78 to convey all its property to trustees to enable it to
three (3) years from the expiration of its lifetime, to continue in its prosecute and defend suits by or against the corporation beyond the
corporate name actions instituted by it within said period of three (3) Three-year period. Although private respondent did not appoint any
years." However, these precepts notwithstanding, we, in effect, trustee, yet the counsel who prosecuted and defended the interest
held in that case that the Board of Liquidators escapes from the of the corporation in the instant case and who in fact appeared in
operation thereof for the reason that "[ o]bviously, the complete behalf of the corporation may be considered a trustee of the
loss of plaintiff's corporate existence after the expiration of the corporation at least with respect to the matter in litigation only.
period of three (3) years for the settlement of its affairs is what Said counsel had been handling the case when the same was
impelled the President to create a Board of Liquidators, to pending before the trial court until it was appealed before the
continue the management of such matters as may then be Court of Appeals and finally to this Court. We therefore hold that
pending. there was a substantial compliance with Section 78 of the
Corporation Law and as such, private respondent Insular Sawmill,
CARLOS GELANO and GUILLERMINA MENDOZA DE GELANO, Inc. could still continue prosecuting the present case even beyond
petitioners, the period of three (3) years from the time of its dissolution.
vs.
THE HONORABLE COURT OF APPEALS and INSULAR SAWMILL, The word "trustee" as sued in the corporation statute must be
INC., respondents understood in its general concept which could include the counsel
(G.R. No. L-39050; February 24, 1981) to whom was entrusted in the instant case, the prosecution of the
suit filed by the corporation. The purpose in the transfer of the assets
FACTS: Private respondent Insular Sawmill, Inc. lease the paraphernal of the corporation to a trustee upon its dissolution is more for the
property of petitioner-wife Guillermina Mendoza de Gelano. It was while protection of its creditor and stockholders. Debtors like the petitioners
private respondent was leasing the property that its officers and directors herein may not take advantage of the failure of the corporation to transfer
had come to know petitioner-husband Carlos Gelano who received from the its assets to a trustee, assuming it has any to transfer which petitioner has
corporation cash advances on account of rent to be paid by the corporation failed to show, in the first place. To sustain petitioners' contention would be
to the land. to allow them to enrich themselves at the expense of another, which all
enlightened legal systems condemn.
Despite repeated demands by the private respondent refused to pay the
cash advances. Petitioner-wife refused to pay on the ground that the cash REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
advances was for the personal account of her husband asked for by, and vs.
MARSMAN DEVELOPMENT COMPANY and/or F.H. BURGESS, in his

capacity as Liquidator of the Marsman Development Company,
defendants-appellants. INCORPORATION OF A NEW CORPORATION: During the 3 year
(G.R. No. L-18956; April 27, 1972) period granted to a corporation to liquidate or wind up its affairs, the BOD
is not normally permitted to undertake any activity outside of the usual
FACTS: Sometime before Oct. 15, 1953, an investigation was conducted liquidation of the corporation. There is, however, nothing to prevent the
on the business operation and activities of defendant corporation leading to stockholders from conveying their respective shareholdings toward the
the discovery of deficiency taxes on logs produced from its concession. creation of a new corporation to continue the business of the old. This is
because winding up is the sole activity of a dissolved corporation that does
The Collector of Internal Revenue demanded payment for forest charges not intend to incorporate a new. If it does, however, it is not unlawful for
and 25% surcharge. After further investigation, another assessment was the old BOD to incorporate and transfer the assets of a dissolved
sent to the defendant by the BIR demanding a total sum of P45, 541.66 corporation to the new corporation intended to be created as long as the
representing deficiency taxes, forest charges, surcharges and penalties. stockholders have given their consent (Chung Ka Bio vs. IAC)
Later on, another assessment was sent to defendant corporation for
discharging lumber without permit. LAPSE OF THE THREE YEAR PERIOD: If the 3 year period of liquidation
has elapsed and no effort to finally settle or close the corporate affairs was
Defendant contend that the present action was barred by Sec. 77 of the undertaken, those having pecuniary interest in the corporate assets,
Corporation Law which allows corporate existence to continue after including not only the stockholders but likewise the creditors, acting for and
dissolution only for a period of 3 years. That the company was extra- in behalf, may make proper representations with the SEC for working out a
judicially dissolved on April 23, 1954, the orginal complaint was filed only final settlement of the corporate concern (Clemente vs. CA).
on Sept. 8, 1958 and the amended complaint on Aug. 26, 1956.
RECEPIENT UNKNOWN OR CANNOT BE FOUND: Any asset
The trial court ruled in favor of the government holding that the amended distributable to any creditor or stockholders or member who is unknown or
complaint was precisely to include FH Burgess, liquidator of the company, cannot be found shall be escheated to the city or municipality where such
as party defendant. assets are located (Sec. 122).
ISSUE: WON the case should prosper? CHUNG KA BIO, WELLINGTON CHUNG, CHUNG SIONG PEK,
VICTORIANO CHUNG, and MANUEL CHUNG TONG OH, petitioners,
HELD: Yes. It is to be recalled that the assessments against appellant vs.
corporation for deficiency taxes due for its operations since 1947 were INTERMEDIATE APPELLATE COURT (2nd Special Cases Division),
made by the Bureau of Internal Revenue on October 15, 1953, September SECURITIES and EXCHANGE COMMISSION EN BANC, HON. ANTONIO R.
13, 1954 and November 8, 1954, such that the first was before its MANABAT, HON. JAMES K. ABUGAN, HON. ANTERO F.L. VILLAFLOR, JR.,
dissolution and the last two not later than six months after such dissolution. HON. SIXTO T.J. DE GUZMAN, JR., ALFREDO CHING, CHING TAN, CHIONG
Thus, in whatever way the matter may be viewed, the Government became TIONG TAY, CHUNG KIAT HUA, CHENG LU KUN, EMILIO TAÑEDO,
the creditor of the corporation before the completion of its dissolution by ROBERTO G. CENON and PHILIPPINE BLOOMING MILLS COMPANY, INC.,
the liquidation of its assets. Appellant F.H. Burgess, whom it chose as respondents
liquidator, became in law the trustee of all its assets for the (G.R. No. 71837; July 26, 1988)
benefit of all persons enumerated in Section 78, including its
creditors, among whom is the Government, for the taxes herein FACTS: Chung Ka Bio and other petitioners are stockholders of the old
involved. To assume otherwise would render the extra-judicial Philippine Blooming Mills Company, Inc. (PBM) which has been
dissolution illegal and void, since, according to Section 62 of the reincorporated on July 14, 1977 after the old was dissolved on Jan. 19
Corporation Law, such kind of dissolution is permitted only when 1977. The assets and liabilities of the old PBM was transferred by the BOD
it "does not affect the rights of any creditor having a claim against to the new PBM.
the corporation." It is immaterial that the present action was filed after
the expiration of three years after April 23, 1954, for at the very least, and Ching Ka Bio and other petitioners filed with the SEC a petition for
assuming that judicial enforcement of taxes may not be initiated after said liquidation of both the old and new PBM (for non-usage of its charter and
three years despite the fact that the actual liquidation has not been failure to operate within 2 years).
terminated and the one in charge thereof is still holding the assets of the
corporation, obviously for the benefit of all the creditors thereof, the ISSUE: WON the BOD was justified to convey all the assets of the old PBM
assessment aforementioned, made within the three years, definitely to the new corporation without the express consent of its stockholders?
established the Government as a creditor of the corporation for whom the
liquidator is supposed to hold assets of the corporation. And since the suit HELD: Yes. As the contention is based on the negative averment that no
at bar is only for the collection of taxes finally assessed against the stockholders' meeting was held and the 2/3 consent vote was not obtained,
corporation within the three years invoked by appellants, their assignment there is no need for affirmative proof. Even so, there is the presumption of
of error cannot be sustained. regularity which must operate in favor of the private respondents, who
insist that the proper authorization as required by the Corporation Law was
Judgment of the trial court is affirmed. duly obtained at a meeting called for the purpose. (That authorization was
embodied in a unanimous resolution dated March 19, 1977, which was
reproduced verbatim in the deed of assignment.) Otherwise, the new PBM
STOCKHOLDERS UPON DISSOLUTION: Upon dissolution of a would not have been issued a certificate of incorporation, which should also
corporation, it is considered in equity, even in the absence of a statute that be presumed to have been done regularly. It must also be noted that under
its assets are held for the benefit of its stockholders after payment of its Section 28-1/2, "any stockholder who did not vote to authorize the action
debts and will be so distributed to the said stockholders in accordance with of the board of directors may, within forty days after the date upon which
their proportionate interest in the corporation or their contracts of such action was authorized, object thereto in writing and demand payment
subscription. for his shares." The record does not show, nor have the petitioners alleged
or proven, that they filed a written objection and demanded payment of
PREFERRED SHAREHOLDERS: It must herein be remembered that their shares during the reglementary forty-day period. This circumstance
holders of preferred shares may be granted certain rights or privileges should bolster the private respondents' claim that the authorization was
upon dissolution of the corporation. The preference may be in the form of unanimous.
receiving a certain part or portion of corporate assets upon dissolution.
And, depending on their contracts of subscription, they may or may not be While we agree that the board of directors is not normally
entitled to share any of the assets remaining, after they may have received permitted to undertake any activity outside of the usual
their respective preference in accordance therewith. liquidation of the business of the dissolved corporation, there is

nothing to prevent the stockholders from conveying their
respective shareholdings toward the creation of a new corporation The corporation continues to be a body corporate for three (3) years after
to continue the business of the old. Winding up is the sole activity its dissolution for purposes of prosecuting and defending suits by and
of a dissolved corporation that does not intend to incorporate against it and for enabling it to settle and close its affairs, culminating in
anew. If it does, however, it is not unlawful for the old board of the disposition and distribution of its remaining assets. It may, during the
directors to negotiate and transfer the assets of the dissolved three-year term, appoint a trustee or a receiver who may act beyond that
corporation to the new corporation intended to be created as long period. The termination of the life of a juridical entity does not by
as the stockholders have given their consent. This was not itself cause the extinction or diminution of the rights and
prohibited by the Corporation Act. In fact, it was expressly allowed by liabilities of such entity (see Gonzales vs. Sugar Regulatory
Section 28-1/2. Administration, 174 SCRA 377) nor those of its owners and creditors.
If the three-year extended life has expired without a trustee or receiver
What the Court finds especially intriguing in this case is the fact that having been expressly designated by the corporation within that period, the
although the deed of assignment was executed in 1977, it was only in 1981 board of directors (or trustees) itself, following the rationale of the
that it occurred to the petitioners to question its validity. All of four years Supreme Court's decision in Gelano vs. Court of Appeals (103 SCRA 90)
had elapsed before the petitioners filed their action for liquidation of both may be permitted to so continue as "trustees" by legal implication to
the old and the new corporations, and during this period, the new PBM was complete the corporate liquidation. Still in the absence of a board of
in full operation, openly and quite visibly conducting the same business directors or trustees, those having any pecuniary interest in the
undertaken earlier by the old dissolved PBM. The petitioners and the assets, including not only the shareholders but likewise the
private respondents are not strangers but relatives and close business creditors of the corporation, acting for and in its behalf, might
associates. The PBM office is in the heart of Metro Manila. The new make proper representations with the Securities and Exchange
corporation, like the old, employs as many as 2,000 persons, the same commission, which has primary and sufficiently broad jurisdiction
personnel who worked for the old PBM. Additionally, one of the petitioners, in matters of this nature, for working out a final settlement of the
Chung Siong Pek was one of the directors who executed the deed of corporate concerns.
assignment in favor of the old PBM and it was he also who received the
deeded assets on behalf and as treasurer of the new PBM. Surely, these WHEREFORE, the decision appealed from is AFFIRMED.
circumstances must operate to bar the petitioners now from questioning
the deed of assignment after this long period of inaction in the protection ISSUE AS TO CLEMENTE CASE: The SC should have applied Sec. 122,
of the rights they are now belatedly asserting. Laches has operated against such that, in the absence of a known stockholder, member of the BOD or
them. creditor, the properties should have been escheated in favor of the local
government. Following the rule laid down in Clemente will open the door to
LUIS C. CLEMENTE, LEONOR CLEMENTE DE ELEPAÑO, HEIRS OF fraud in a way that any person claiming interest as heir of the corporation
ARCADIO C. OCHOA, represented by FE O. OCHOA-BAYBAY, CONCEPCION, may still go to the SEC to make proper representations with the SEC for
MARIANO, ARTEMIO, VICENTE, ANGELITA, ROBERTO, HERNANDO AND working out a final settlement. Moreover, the corporation being non-
LOURDES, all surnamed ELEPAÑO, petitioners, existent for all intents and purposes, after the expiration of the three year
vs. period provided by law, could not have legally transferred such property to
THE HON. COURT OF APPEALS, ELVIRA PANDINCO-CASTRO AND any person. The Gonzales case is misapplied, because SRA was a successor
VICTOR CASTRO, respondents. of Philsucom, while in the Gelano case, there was a lawyer who prosecuted
(G.R. No. 82407; March 27, 1995) the case who was deemed as trustee. In the Clemente case, there was no
such successor nor a lawyer who can be deemed a trustee.
FACTS: Petitioners herein initiated an action to be declared owners of the
property in question and to received rentals and other fruits as CHAPTER 18: FOREIGN CORPORATIONS
consequence of such ownership.
A. DEFINITION: As to the Philippines, any corporation, which owe its
The trial court rendered a decision in favor of respondents holding, among existence to the laws of another state, government or country is a
others, that since there is no liquidation, it is the corporation, not the “foreign corporation”. Elsewise stated, a foreign corporation is one
stockholders, which can assert, if at all, any title to the corporate assets. created or organized under the laws of any state or government other
than those of the forum.
ISSUE: WON petitioners can be held, given their submissions, to have
succeeded in establishing for themselves a firm title to the property in Sec. 123. Definition and rights of foreign corporations. - For the
question? purposes of this Code, a foreign corporation is one formed, organized or
existing under any laws other than those of the Philippines and whose laws
HELD: No. Like the courts below, we find petitioners' evidence to be direly allow Filipino citizens and corporations to do business in its own country or
wanting; all that appear to be certain are that the "Sociedad Popular state. It shall have the right to transact business in the Philippines after it
Calambeña," believed to be a "sociedad anonima" and for a while engaged shall have obtained a license to transact business in this country in
in the operation and management of a cockpit, has existed sometime in the accordance with this Code and a certificate of authority from the appropriate
past; that it has acquired the parcel of land here involved; and that the government agency.
plaintiffs' predecessors, Mariano Elepaño and Pablo Clemente, had been
original stockholders of the sociedad. Except in showing that they are the “AND WHOSE LAWS ALLOW FILIPINO CITIZENS AND
successors-in-interest of Elepaño and Clemente, petitioners have been CORPORATIONS TO DO BUSINESS IN ITS OWN COUNTRY OR
unable to come up with any evidence to substantiate their claim of STATE”: is not an accurate inclusion in the definition as any corporation
ownership of the corporate asset. registered or organized under the laws of another state is necessarily a
foreign corporation WON the state of its corporation allow Filipino citizens
If, indeed, the sociedad has long become defunct, it should behoove or corporations to do business in that forum.
petitioners, or anyone else who may have any interest in the corporation,
to take appropriate measures before a proper forum for a peremptory The said phrase was inserted by framers of the law only as a condition
settlement of its affairs. We might invite attention to the various modes precedent to the grant of a license to do business in the Philippines.
provided by the Corporation Code (see Sees. 117-122) for dissolving,
liquidating or winding up, and terminating the life of the corporation. INCORPORATION TEST: is applied in determining whether a corporation
Among the causes for such dissolution are when the corporate term has is domestic or foreign. If it is incorporated in another state, it is a foreign
expired or when, upon a verified complaint and after notice and hearing, corporation, while if it is registered under Philippine laws, it is deemed a
the Securities and Exchange Commission orders the dissolution of a Filipino or domestic corporation irrespective of the nationality of its
corporation. stockholders.
Attached to the application for license shall be a duly executed certificate
Thus, a corporation registered under the Foreign Investments Act of 1991 under oath by the authorized official or officials of the jurisdiction of its
(RA No. 7074) or the Trade Liberalization Law of 2000 (RA No. 8762) with incorporation, attesting to the fact that the laws of the country or state of the
100% foreign equity is considered a Filipino or domestic corporation and applicant allow Filipino citizens and corporations to do business therein, and
not foreign. that the applicant is an existing corporation in good standing. If such
certificate is in a foreign language, a translation thereof in English under oath
CONTROL TEST: In times of war and for purposes of security of the state, of the translator shall be attached thereto.
however, the “control test” would apply in determining the corporate
nationality, i.e., the citizenship of the controlling stockholders determines The application for a license to transact business in the Philippines shall
the nationality of the corporation. likewise be accompanied by a statement under oath of the president or any
other person authorized by the corporation, showing to the satisfaction of the
CORPORATE PERSONALITY BEYOND BORDERS: Securities and Exchange Commission and other governmental agency in the
proper cases that the applicant is solvent and in sound financial condition,
B. APPLICATION FOR LICENSE and setting forth the assets and liabilities of the corporation as of the date
not exceeding one (1) year immediately prior to the filing of the application.
Under Sec. 123, a foreign corporation cannot transact business in the Foreign banking, financial and insurance corporations shall, in addition to the
Philippines unless it has obtained a license or permit to do so in accordance above requirements, comply with the provisions of existing laws applicable to
with the laws of the country and a certificate of authority from the them. In the case of all other foreign corporations, no application for license
appropriate government agency such as the Banko Sentral ng Pilipinas for to transact business in the Philippines shall be accepted by the Securities and
banking institutions or the Office of the Insurance Commission for Exchange Commission without previous authority from the appropriate
insurance companies, etc. government agency, whenever required by law.
A certificate of authority from the Board of Investments is no longer Foreign corporations already issued a license to transact business in the
required under RA 7042. Said certificate of authority is only necessary for Philippine prior to the effectivity of the Code continues to have such
the purpose of availing the incentives granted and allowed under the authority under the terms and conditions of the license. Sec. 124 provides:
Omnibus Investments Code.
Sec. 124. Application to existing foreign corporations. - Every foreign
The manner in which a foreign corporation may obtain a license to do corporation which on the date of the effectivity of this Code is authorized to
business in the Philippines is laid down in Sec. 125: do business in the Philippines under a license therefore issued to it, shall
continue to have such authority under the terms and condition of its license,
Sec. 125. Application for a license. - A foreign corporation applying for a subject to the provisions of this Code and other special laws.
license to transact business in the Philippines shall submit to the Securities
and Exchange Commission a copy of its articles of incorporation and by-laws, Upon compliance with the provision of Sec. 125, other special laws and the
certified in accordance with law, and their translation to an official language rules and regulations implementing them, the SEC shall thereafter issue the
of the Philippines, if necessary. The application shall be under oath and, license.
unless already stated in its articles of incorporation, shall specifically set forth
the following: Within 60 days after the issuance of the license, a foreign corporation,
except those engaged in foreign banking or insurance, shall deposit with
1. The date and term of incorporation; the SEC, for the benefit of creditors, securities consisting of (1) bonds or
other evidence of indebtedness of the Philippine government or its political
2. The address, including the street number, of the principal office of the subdivision, or of a GOCC, (2) shares of stock in “registered enterprises” as
corporation in the country or state of incorporation; this term is defined under RA 5186, (3) shares of stock in domestic
corporations registered in the stock exchange and (4) shares of stock in
3. The name and address of its resident agent authorized to accept summons domestic insurance companies and banks or any combination thereof with
and process in all legal proceedings and, pending the establishment of a local an actual market value of P100,000.00.
office, all notices affecting the corporation;
Additional securities may be required by the SEC if the market value of the
4. The place in the Philippines where the corporation intends to operate; securities n deposit has decreased by at least 10%. Sec. 126 provides:
5. The specific purpose or purposes which the corporation intends to pursue Sec. 126. Issuance of a license. - If the Securities and Exchange
in the transaction of its business in the Philippines: Provided, That said Commission is satisfied that the applicant has complied with all the
purpose or purposes are those specifically stated in the certificate of authority requirements of this Code and other special laws, rules and regulations, the
issued by the appropriate government agency; Commission shall issue a license to the applicant to transact business in the
Philippines for the purpose or purposes specified in such license. Upon
6. The names and addresses of the present directors and officers of the issuance of the license, such foreign corporation may commence to transact
corporation; business in the Philippines and continue to do so for as long as it retains its
authority to act as a corporation under the laws of the country or state of its
7. A statement of its authorized capital stock and the aggregate number of incorporation, unless such license is sooner surrendered, revoked, suspended
shares which the corporation has authority to issue, itemized by classes, par or annulled in accordance with this Code or other special laws.
value of shares, shares without par value, and series, if any;
Within sixty (60) days after the issuance of the license to transact business in
8. A statement of its outstanding capital stock and the aggregate number of the Philippines, the license, except foreign banking or insurance corporation,
shares which the corporation has issued, itemized by classes, par value of shall deposit with the Securities and Exchange Commission for the benefit of
shares, shares without par value, and series, if any; present and future creditors of the licensee in the Philippines, securities
satisfactory to the Securities and Exchange Commission, consisting of bonds
9. A statement of the amount actually paid in; and or other evidence of indebtedness of the Government of the Philippines, its
political subdivisions and instrumentalities, or of government-owned or
10. Such additional information as may be necessary or appropriate in order controlled corporations and entities, shares of stock in "registered
to enable the Securities and Exchange Commission to determine whether enterprises" as this term is defined in Republic Act No. 5186, shares of stock
such corporation is entitled to a license to transact business in the in domestic corporations registered in the stock exchange, or shares of stock
Philippines, and to determine and assess the fees payable. in domestic insurance companies and banks, or any combination of these
kinds of securities, with an actual market value of at least one hundred
thousand (P100,000.) pesos; Provided, however, That within six (6) months sourcing or procurement of raw materials and components, corporate
after each fiscal year of the licensee, the Securities and Exchange finance advisory services, marketing control and sales promotion,
Commission shall require the licensee to deposit additional securities training and personnel management, logistic service, research and
equivalent in actual market value to two (2%) percent of the amount by development services and the like.
which the licensee's gross income for that fiscal year exceeds five million
(P5,000,000.00) pesos. The Securities and Exchange Commission shall also The Regional or Area Headquarters and Regional Operating
require deposit of additional securities if the actual market value of the Headquarters are granted certain tax incentives such as exemption
securities on deposit has decreased by at least ten (10%) percent of their from all kinds of local taxes, fees or charges imposed by local
actual market value at the time they were deposited. The Securities and government units except real property tax on land improvements; tax
Exchange Commission may at its discretion release part of the additional and duty-free importation of training materials and equipment; and
securities deposited with it if the gross income of the licensee has decreased, importation of motor vehicles.
or if the actual market value of the total securities on deposit has increased,
by more than ten (10%) percent of the actual market value of the securities 6. Regional Warehouse – one whose activities are limited to serving
at the time they were deposited. The Securities and Exchange Commission as supply depot of Regional or Area Headquarters or Regional
may, from time to time, allow the licensee to substitute other securities for Operating Headquarters in the Philippines, after securing a license
those already on deposit as long as the licensee is solvent. Such licensee therefor from the Philippine Economic Zone Authority (PEZA) or the
shall be entitled to collect the interest or dividends on the securities concerned ecozone authorities. The regional warehouse shall only be
deposited. In the event the licensee ceases to do business in the Philippines, used for the storage, deposit and safekeeping of its spare parts,
the securities deposited as aforesaid shall be returned, upon the licensee's components, marking, labelling and cutting or altering to customer’s
application therefor and upon proof to the satisfaction of the Securities and specifications but shall not directly engage in trade nor solicit
Exchange Commission that the licensee has no liability to Philippine residents, business, promote any sale nor enter into contracts for the sale or
including the Government of the Republic of the Philippines. disposition of goods in the Philippines, except those for delivery to an
authorized distributor in the country.
OBJECTIVE OF LICENSE: is not to prevent the foreign corporation from
performing isolated or single act, but to prevent it from acquiring a domicile 7. Joint Venture – is a one-time grouping of two or more persons,
for the purpose of pursuing its business without taking steps to render it natural or juridical, for carrying out a specified undertaking. Under
amenable to suit in the local courts. If the foreign corporation transacts Sec. 1, L of RA 7042, it is combination of property, money, efforts,
business in the Philippines without the requisite license, its officers may be skill or knowledge to carry out a single business enterprise for profit,
subjected to the penal provisions of Sec. 144 of the Code. which is duly registered with the SEC as a corporation or partnership.
No license to do business is required on the part of the foreign
corporation entering into such kind of a business venture since mere
C. MODE OF ENTRY OF FOREIGN CORPORATIONS investment does no constitute doing business as per the
Implementing Rules and Regulations of RA 7042 unless, of course,
1. Branch Office – of a foreign corporation is one which carries out the the foreign corporation actively participates in the management
business activities of the foreign corporation itself and derives income thereof.
from the Philippines (Sec. 1, C, IRR of RA No. 7042) . As such, the
juridical entity involved is one and the same; D. RESIDENT AGENT
2. Representative or Liason Office – one which deals directly with As a condition precedent to the grant of license to do or transact business
the clients of the parent company but does not derive income from in the Philippines, the foreign corporation is required to designate its
the host country and is fully subsidized by the head office. It resident agent on whom summons and other legal processes my be served
undertakes activities such as but not limited to information in all actions or legal proceedings against such corporation. Sec. 128
dissemination and promotion of the company’s products; provides:
3. Local Subsidiary – A foreign corporation may form or organize a Sec. 128. Resident agent; service of process. - The Securities and
separate corporation under the Foreign Investment Act (RA 7042) by Exchange Commission shall require as a condition precedent to the issuance
making at least a majority of the investments therein. The corporation of the license to transact business in the Philippines by any foreign
thus formed becomes known as a local subsidiary of the investing corporation that such corporation file with the Securities and Exchange
foreign corporation which becomes a legally independent unit Commission a written power of attorney designating some person who must
governed by the laws of the Philippines. Ballantine calls it be a resident of the Philippines, on whom any summons and other legal
“domestication” in the sense that the foreign corporation is granted processes may be served in all actions or other legal proceedings against
the right to obtain a charter or organize itself into a domestic such corporation, and consenting that service upon such resident agent shall
corporation under the general laws of the other state; be admitted and held as valid as if served upon the duly authorized officers
of the foreign corporation at its home office. Any such foreign corporation
4. Regional or Area Headquarters – is an office whose purpose is to shall likewise execute and file with the Securities and Exchange Commission
act as an administrative branch of a multinational company engaged an agreement or stipulation, executed by the proper authorities of said
in international trade which principally serves as a supervision, corporation, in form and substance as follows:
communications and coordinating center for its subsidiaries, branches
or affiliates in the Asia-Pacific Region and other foreign markets and "The (name of foreign corporation) does hereby stipulate and agree, in
which does not earn or derive income in the Philippines (Sec. 2(2), RA consideration of its being granted by the Securities and Exchange
8756). It cannot in any manner, participate in the management of any Commission a license to transact business in the Philippines, that if at any
subsidiary or branch office in the Philippines nor shall it market goods time said corporation shall cease to transact business in the Philippines, or
and services in behalf of its mother company, branches or affiliates. shall be without any resident agent in the Philippines on whom any summons
or other legal processes may be served, then in any action or proceeding
5. Regional Operating Headquarters – is a foreign business entity arising out of any business or transaction which occurred in the Philippines,
which is allowed to derive income in the Philippines by performing service of any summons or other legal process may be made upon the
qualifying services exclusively to its affiliates, subsidiaries or branches Securities and Exchange Commission and that such service shall have the
in the Philippines, in the Asia-Pacific Region and in other foreign same force and effect as if made upon the duly-authorized officers of the
markets (Sec. 2(3), RA 8756). corporation at its home office."
Qualifying services, under RA 8756, include among others: general Whenever such service of summons or other process shall be made upon the
administration and planning, business planning and coordination, Securities and Exchange Commission, the Commission shall, within ten (10)

days thereafter, transmit by mail a copy of such summons or other legal 3. If it is not transacting business in the Philippines, even without a
process to the corporation at its home or principal office. The sending of such license, it can sue before the Philippine Courts.
copy by the Commission shall be necessary part of and shall complete such
service. All expenses incurred by the Commission for such service shall be “It is not the lack of required license but doing business without a
paid in advance by the party at whose instance the service is made. license which bars a foreign corporation from access to our
courts” (Universal Shipping vs. IAC)
In case of a change of address of the resident agent, it shall be his or its duty
EXCEPTIONS:
to immediately notify in writing the Securities and Exchange Commission of
1. Foreign corporations can sue before the Philippine Courts if the act or
the new address.
transaction involved is an “isolated transaction” or the corporation
is not seeking to enforce any legal or contractual rights arising from,
As to who may be appointed as resident agent, the Corporation Code
or growing out of, any business which it has transacted in the
provides:
Philippines (Western Equipment Supply vs. Reyes)
2. Neither is a license required before a foreign corporation may sue
Sec. 127. Who may be a resident agent. - A resident agent may be
before the forum if the purpose of the suit is to protect its
either an individual residing in the Philippines or a domestic corporation
trademark, trade name, corporate name, reputation or goodwill;
lawfully transacting business in the Philippines: Provided, That in the case of
(Western Equipment Supply vs. Reyes)
an individual, he must be of good moral character and of sound financial
3. Or where it is based on a violation of the Revised Penal Code (Le
standing.
Chemise Lacoste, SA vs. Fernandez);
4. Or merely defending a suit filed against it (Time, Inc. vs. Reyes)
Culled from the provisions of Sec. 128 is that the necessity of the 5. Or where a party is estopped to challenge the personality of the
appointment of a resident agent is only for the purpose of receiving corporation by entering into a contract with it (Communications
summons and other legal processes in any legal action or proceeding Materials and Design, Inc. vs. CA and ITEC)
against the foreign corporation. And, when a foreign corporation has
designated a person to receive summons in judicial proceedings affecting WHETHER OR NOT IT CAN BE SUED:
the corporation that designation is exclusive and service of summons is 1. A foreign corporation transacting business in the Philippines with the
without force and effect unless made on him (Poizat vs. Mogan). Thus, requisite license can be sued in Philippine Courts;
while the law allows service upon the SEC (Sec. 128), or any of its officers 2. A foreign corporation transacting business in the Philippines without a
or agents within the Philippines (Sec. 13, Rule 14, Rules of Civil Procedure) , license can be sued in Philippine Courts;
the latter two modes may become effective only if the foreign corporation 3. If it is not doing business in the Philippines, it cannot be sued in
failed or neglected to designate such a person or an agent. In a decision, Philippine Courts for lack of jurisdiction.
therefore, rendered by the SC in the case of General Corporation of the
Philippines vs. Union Insurance Soc. Of Canton Ltd (87 Phil 313) , it was “DOING BUSINESS”: As to what constitutes “doing business” or
held that “where such foreign corporation actually doing business here has “transacting business” which would bar a foreign corporation from access
not applied for a license to do and has not designated an agent to receive to our courts, no general rule or governing principle can be laid down.
summons, then service of summons on it will be made pursuant to the Indeed, such case must be judged in the light of its peculiar environmental
provisions of the Rules of Court”. If such foreign corporation has a license circumstance. However, the TRUE TEST seems to be whether the foreign
to do business, then summons to it will be served on the agent designated corporation is continuing the body or substance of the business or
by it for the purpose, or otherwise in accordance with the Corporation Law. 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
E. DOING BUSINESS WITHOUT LICENSE AND ITS EFFECT commercial dealings and arrangements and contemplates, to the extent,
the performance of acts or works or the exercise of some functions
A foreign corporation must secure the necessary license before it can normally incident to and in progressive prosecution of, the purpose and
transact or do business in the Philippines. This is the clear import of Sec. objects of its organization (Metholatum, Inc. vs. Mangaliman)
123 when it states that it shall have the right to transact business in the
Philippines after it shall have obtained a license. Without such a license, the PRESENT STATE OF LAW AS TO “DOING BUSINESS”: under the
law provides for certain consequences: Foreign Investment Act (Sec. 3, d), “doing business” would include:
1. Soliciting orders, service contracts;
Sec. 133. Doing business without a license. - No foreign corporation 2. Opening offices, whether called “liason offices” or branches;
transacting business in the Philippines without a license, or its successors or 3. Appointing representatives or distributor domiciled in the Philippines
assigns, shall be permitted to maintain or intervene in any action, suit or or who in any calendar year stay in the country for a period or periods
proceeding in any court or administrative agency of the Philippines; but such totalling 180 days or more;
corporation may be sued or proceeded against before Philippine courts or 4. Participating in the management, supervision or control of any
administrative tribunals on any valid cause of action recognized under domestic business, firm, entity or corporation in the Philippines;
Philippine laws. 5. Any other act that imply a continuity of commercial dealings or
arrangements, and contemplate to that extent the performance of
RESPONSIBLE OFFICERS: of a foreign corporation doing business in the acts or works, or the exercise of functions normally incident to and in
Philippines without the requisite license may be subject to the penal progressive prosecution of commercial gain or of the purpose and
sanctions provided for in Sec. 144 of the Code which may either be object of the business organization.
imprisonment or fine.
Provided, however, that the phrase “doing business” shall not be deemed
CAPACITY TO SUE and BE SUED: The corporation may not likewise sue to include mere investment as a shareholder by a foreign entity in domestic
or intervene in any action, suit or proceeding in any court or administrative corporations duly registered to do business, and/or exercise of rights as
agency of the Philippines while it may be sued or proceeded against before such investor, nor having a nominee director or officer to represent its
such court or agency on any valid cause of action recognized under the interest in such corporation; nor appointing a representative or distributor
law. domiciled in the Philippines which transacts business in its own name and
for its own account.
WHETHER OR NOT IT CAN SUE:
1. A foreign corporation transacting or doing business in the Philippines ISOLATED TRANSACTION: even if it is pursuant of the usual business
with a license can sue before Philippine Courts; does not constitute doing business the doing of which would not bar a
2. Subject to certain exceptions, a foreign corporation doing business in foreign corporation from access to Philippine Courts (Facilities Mgt. vs. Dela
the country without a license cannot sue in Philippine Courts; and Osa)

THE MENTHOLATUM CO., INC., ET AL., petitioners, ISSUE: WON obtaining a license is required before a foreign corporation
vs. can maintain any kind of action in the courts of the Philippine Islands?
ANACLETO MANGALIMAN, ET AL., respondents
(G.R. No. L-47701; June 27, 1941) HELD: No. The object of the statute was to subject the foreign
corporation doing business in the Philippines to the jurisdiction of
FACTS: A complaint was filed by herein petitioner, a foreign corporation its courts. The object of the statute was not to prevent the foreign
having Philippine-American Drug Co. as its sole distributor, for infringement corporation from performing single acts, but to prevent it from
of trademark for its product “Mentholatum” and unfair competition alleging acquiring a domicile for the purpose of business without taking
that herein respondents Anacleto and Florencio Mangaliman prepared a the steps necessary to render it amenable to suit in the local
medicament and salve named “Mentholiman” which they sold to the public courts. The implication of the law is that it was never the purpose of the
packed in the same size, color and shape as its product Metholatum. Legislature to exclude a foreign corporation which happens to obtain an
isolated order for business from the Philippines, from securing redress in
ISSUE: WON petitioner corporation is transacting business in the the Philippine courts, and thus, in effect, to permit persons to avoid their
Philippines? contracts made with such foreign corporations. The effect of the statute
preventing foreign corporations from doing business and from bringing
HELD: No. No general rule or governing principle can be laid down actions in the local courts, except on compliance with elaborate
as to what constitutes "doing" or "engaging in" or "transacting" requirements, must not be unduly extended or improperly applied. It
business. Indeed, each case must be judged in the light of its should not be construed to extend beyond the plain meaning of its terms,
peculiar environmental circumstances. The true test, however, considered in connection with its object, and in connection with the spirit of
seems to be whether the foreign corporation is continuing the the entire law.
body or substance of the business or enterprise for which it was
organized or whether it has substantially retired from it and The law simply means that no foreign corporation shall be
turned it over to another. (Traction Cos. v. Collectors of Int. Revenue permitted "to transact business in the Philippine Islands," as this
[C. C. A. Ohio], 223 F. 984, 987.) The term implies a continuity of phrase is known in corporation law, unless it shall have the
commercial dealings and arrangements, and contemplates, to that extent, license required by law, and, until it complies with the law, shall
the performance of acts or works or the exercise of some of the functions not be permitted to maintain any suit in the local courts. A contrary
normally incident to, and in progressive prosecution of, the purpose and holding would bring the law to the verge of unconstitutionality, a result
object of its organization. (Griffin v. Implement Dealers' Mut. Fire Ins. Co., which should be and can be easily avoided.
241 N. W. 75, 77; Pauline Oil & Gas Co. v. Mutual Tank Line Co., 246 P.
851, 852, 118 Okl. 111; Automotive Material Co. v. American Standard The order appealed from shall be set aside and the record shall be returned
Metal Products Corp., 158 N. E. 698, 703, 327 III. 367.) to the court of origin for further proceedings. Without special finding as to
costs in this instance, it is so ordered.
In its decision of June 29, 1940, the Court of Appeals concluded that "it is
undeniable that the Mentholatum Co., through its agent, the Philippine- HATHIBHAI BULAKHIDAS, petitioner,
American Drug Co., Inc., has been doing business in the Philippines by vs.
selling its products here since the year 1929, at least." This is assailed by THE HONORABLE PEDRO L. NAVARRO, as Presiding Judge of the
petitioners as a pure conclusion of law. This finding is predicated upon the Court of First Instance of Rizal, Seventh Judicial District, Pasig,
testimony of Mr. Roy Springer of the Philippine-American Drug Co., Inc., Metro Manila, Branch 11 and DIAMOND SHIPPING
and the pleadings filed by petitioners. The complaint filed in the Court of CORPORATION, respondent.
First Instance of Manila on October 1, 1935, clearly stated that the (G.R. No. L-49695; April 7, 1986)
Philippine-American Drug Co., Inc., is the exclusive distributing agent in the
Philippine Islands of the Mentholatum Co., Inc., in the sale and distribution FACTS: Petitioner, a foreign partnership, filed a complaint for damages
of its product known as the “Mentholatum." The object of the pleadings against respondent Diamond Shipping Corporation having failed to deliver
being to draw the lines of battle between litigants and to indicate fairly the the goods shipped to it by petitioner to their proper destination.
nature of the claims or defenses of both parties, a party cannot
subsequently take a position contradictory to, or inconsistent with, his Said complaint alleged that the plaintiff is “not doing business in the
pleadings, as the facts therein admitted are to be taken as true for the Philippines” and that it is “suing under an isolated transaction”.
purpose of the action. It follows that whatever transactions the Philippine-
American Drug Co., Inc., had executed in view of the law, the Mentholatum Defendant filed a motion to dismiss on the ground that plaintiff has no
Co., Inc., did it itself. And, the Mentholatum Co., Inc., being a foreign capacity to sue which was granted.
corporation doing business in the Philippines without the license required
by section 68 of the Corporation Law, it may not prosecute this action for ISSUE: WON a corporation not engaged in business in the Philippines can
violation of trade mark and unfair competition. institute an action before our courts?
The writ prayed for should be, as it hereby is, denied, with costs against HELD: Yes. This issue is already well-settled in this jurisdiction. In Aetna
the petitioners. Casualty and Surety Co. vs. Pacific Star Lines , 80 SCRA 635, is a case
similar to the present one in that the action is also one for recovery of
ISOLATED TRANSACTION damages sustained by cargo shipped on defendants' vessels. Defendants
set up the defense that plaintiff is a foreign corporation not duly licensed to
MARSHALL-WELLS COMPANY, plaintiff-appellant, do business in the Philippines and, therefore, without capacity to sue and
vs. be sued. In overruling said defense, this Court said:
HENRY W. ELSER & CO., INC., defendant-appellee
(G.R. No. 22015; September 1, 1924) It is settled that if a foreign corporation is not engaged in
business in the Philippines, it may not be denied the right to file
FACTS: Plaintiff sued defendant for the unpaid balance of a bill of goods an action in Philippine courts for isolated transactions.
amounting to P2,660.74, for which the plaintiff holds accepted drafts.
The object of Sections 68 and 69 of the Corporation law was not to
Defendant demurred on the ground that plaintiff had no capacity to sue prevent the foreign corporation from performing single acts, but to
which the trial court granted. And in as much as the plaintiff could not prevent it from acquiring a domicile for the purpose of business without
allege compliance with the statute, the order was allowed to become final taking the steps necessary to render it amenable to suit in the local
and no appeal was perfected. courts. It was never the purpose of the Legislature to exclude a foreign

corporation which happens to obtain an isolated order for business from at the rate of 6% per annum from March 13, 1961, the date of the filing of
the Philippines, from securing redress in the Philippine courts. the complaint, until the amount shall have been fully paid, and the sum of
P600 as attorney's fees. Costs against the respondents.
And in Eastboard Navigation, Ltd. et al vs. Juan Ysmael & Co., Inc., this
Court held that: ANTAM CONSOLIDATED, INC., TAMBUNTING TRADING
CORPORATION and AURORA CONSOLIDATED SECURITIES and
(d) While plaintiff is a foreign corporation without license to INVESTMENT CORPORATION, petitioners,
transact business in the Philippines, it does not follow that it vs.
has no capacity to bring the present action. Such license is not THE COURT OF APPEALS, THE HONORABLE MAXIMIANO C.
necessary because it is not engaged in business in the ASUNCION (Court of First Instance of Laguna, Branch II [Sta.
Philippines. In fact, the transaction herein involved is the first business Cruz]) and STOKELY VAN CAMP, INC., respondents
undertaken by plaintiff in the Philippines, although on a previous (G.R. No. L-61523; July 31, 1986)
occasion plaintiff's vessel was chartered by the National Rice and Corn
Corporation to carry rice cargo from abroad to the Philippines. These two FACTS: Respondent Stokely Van Camp, Inc., a corporation organized and
isolated transactions do not constitute engaging in business in the existing under the laws of the state of Indiana, filed a complaint against
Philippines within the purview of Sections 68 and 69 of the Corporation Banahaw Milling Corporation, Antam Consolidated, Inc., Tambunting
Law so as to bar plaintiff from seeking redress in our courts. (Marshall Trading Corporation, Aurora Consolidated Securities and Investment
Wells Co. vs. Henry W. Elser & Co. 49 Phil., 70; Pacific Vegetable Oil Corporation and United Coconut Oil Mills, Inc. (Unicom) for collection of
Corporation vs. Angle O. Singson, G.R. No. L-7917, April 29, 1955.) sum of money.
Again, in Facilities Management Corporation vs. De la Osa 89 SCRA 131, One of respondent’s subdivision “Capital City Product Company” (Capital
139, following Aetna Casualty & Surety Co. vs. Pacific Star Line, supra, held City) entered into a contracts where Coconut Oil Manufacturing (Phil), Inc.
a foreign corporation not engaged in business in the Philippines is not (Comphil) were to sell to the former 500 long tons of crude coconut oil at
barred from seeking redress from the courts of the Philippines. US$0.30/lb, which it failed to comply with and Capital City was forced to
buy its coconut oil needs from the open market at a higher price resulting
WHEREFORE, the order of respondent Court dismissing the petitioner's in a loss of US$103,600.
complaint is hereby set aside and the case remanded for further
proceedings, with costs against private respondent. A 2nd contract was entered into to settle Capital City’s loss, Comphil was
supposed to repurchase the coconut oil earlier purchased from the open
THE SWEDISH EAST ASIA CO., LTD., petitioner, market at a price of US$ 0.3925/lb, but the latter failed to pay.
vs.
MANILA PORT SERVICE AND/OR MANILA RAILROAD COMPANY, To compensate for the loss, Comphil entered into a 3 rd contract agreeing to
respondents sell the same quantity of coconut oil at a price of US$0.3425/lb which was
(G.R. No. L-26332; October 26, 1968) below the market price. That by the discounted amount, Comphil would
have compensated for the loss Capital City sustained. But still, Comphil
FACTS: MS SUDAN, owned and operated by petitioner, a swedish company failed to deliver.
without license in the Philippines, discharged cargo to herein respondent.
By mistake, cargo destined for Hongkong consisting of 16 bundles of “lifts Petitioners filed a motion to dismiss the complaint on the ground that
and mild steel tees window sections” covering which the petitioner had respondent had no personality to maintain a suit which was denied. The
issued a bill of lading to a Hongkong consignee, were also landed at Manila. subsequent petition for certiorari was dismissed by the appellate court.
The erroneous discharge was obviously engendered by the fact that the
same ship on the same day discharged 40 similar bundles destined for ISSUE: WON respondent is doing business in the Philippines?
consignee in the Philippines.
HELD: No. In the case of Top-Weld Manufacturing, Inc. v. ECED, S.A. (138
Petitioner, through a complaint filed in the CFI of Manila, sought for the SCRA 118,127-128), we stated:
recovery of the value of the missing goods which it paid to the Hongkong
consignee, which was granted by the lower court. There is no general rule or governing principle laid down as to
what constitutes ‘doing' or 'engaging in' or 'transacting
On appeal, the CA reversed the trial court’s decision. business in the Philippines. Each case must be judged in the
Light of its peculiar circumstance (Mentholatum Co. v. Mangaliman,
ISSUE: WON petitioner should be barred from access to our courts? 72 Phil.524). Thus, a foreign corporation with a settling agent in the
Philippines which issues twelve marine policies covering different
HELD: No. The respondents challenge the petitioner's capacity to sue, it shipments to the Philippines (General Corporation of the Philippines v.
being admittedly a foreign corporation without license to engage in Union Insurance Society of Canton, Ltd., 87 Phil. 313) and a foreign
business in the Philippines, citing section 69 of the Corporation Law. It corporation which had been collecting premiums on outstanding policies
must be stated however that this section is not applicable to a (Manufacturing Life Insurance Co., v. Meer, 89 Phil. 351) were regarded
foreign corporation performing single acts or "isolated as doing business here. The acts of these corporations should be
transactions." There is nothing in the record to show that the petitioner distinguished from a single or isolated business transaction or occasional,
has been in the Philippines engaged in continuing business or enterprise for incidental and casual transactions which do not come within the meaning
which it was organized, when the sixteen bundles were erroneously of the law. Where a single act or transaction , however, is not merely
discharged in Manila, for it to be considered as transacting business in the incidental or casual but indicates the foreign corporation's intention to do
Philippines. The fact is that the bundles, the value of which is other business in the Philippines, said single act or transaction
sought to be recovered, were landed not as a result of a business constitutes 'doing' or 'engaging in' or 'transacting' business in the
transaction, "isolated" or otherwise, but due to a mistaken belief Philippines. (Far East International Import and Export Corporation v.
that they were part of the shipment of forty similar bundles Nankai Kogyo, Co., 6 SCRA 725).
consigned to persons or entities in the Philippines. There is no
justification, therefore, for invoking the provisions of section 69 of the In the Mentholatum Co. v. Mangaliman case earlier cited, this Court
Corporation Law. held:
xxx xxx xxx
ACCORDINGLY, the judgment of the Court of Appeals is reversed, and
another judgment is hereby rendered ordering the respondents, jointly and ...The true test, however, seems to be whether the foreign
severally, to pay the petitioner the sum of P2,349.62 with interest thereon corporation is continuing the body or substance of the business

or enterprise for which it warning-organized or whether it has
substantially was retired from it and turned it over to another. HAVING A REPRESENTATIVE IN THE PHILIPPINES
(Traction Cos. v. Collectors of Int. Revenue [CCA., Ohio], 223 F. 984,
987.) The term implies a continuity of commercial dealings and FACILITIES MANAGEMENT CORPORATION, J. S. DREYER, and J. V.
arrangements, and contemplates, to that extent, the performance of acts CATUIRA, petitioners,
or workers or the exercise of some of the functions normally incident to, vs.
and in progressive prosecution of, the purpose and object of its LEONARDO DE LA OSA AND THE HONORABLE COURT OF
organization. (Griffin v. Implement Dealers' Mut. Fire Ins. Co., 241 N.W. INDUSTRIAL RELATIONS, respondents
75, 77, Pauline Oil & Gas Co. v. Mutual Tank Line Co., 246 P. 851, 852, (G.R. No. L-38649; March 26, 1979)
118 Okl. 111; Automotive Material Co. v. American Standard Metal
Products Corp., 158 N.E. 698, 703, 327 111. 367.) ' FACTS: Respondent Leonardo dela Osa filed a petition for reinstatement
with recovery of his overtime compensation, swing shift and graveyard shift
In the case at bar, the transactions entered into by the differentials.
respondent with the petitioners are not a series of commercial
dealings which signify an intent on the part of the respondent to Petitioner corporation filed a letter-answer interposing special defenses:
do business in the Philippines but constitute an isolated one which 1. Facilities Management Corporation and JS Deyer are domiciled in
does not fall under the category of "doing business." The records Wake Islands and is beyond the territorial jurisdiction of the Philippine
show that the only reason why the respondent entered into the second and Government; and
third transactions with the petitioners was because it wanted to recover the 2. JV Catuira, though an employee of respondent corporation and
loss it sustained from the failure of the petitioners to deliver the crude stationed in Manila does not have power and authority of legal
coconut oil under the first transaction and in order to give the latter a representation; and
chance to make good on their obligation. Instead of making an outright 3. The employment of respondent is with approval of the Department of
demand on the petitioners, the respondent opted to try to push through Labor of the Philippines.
with the transaction to recover the amount of US$103,600.00 it lost. This
explains why in the second transaction, the petitioners were supposed to Subsequently, a motion to dismiss was filed which was denied.
buy back the crude coconut oil they should have delivered to the
respondent in an amount which will earn the latter a profit of ISSUE: WON petitioner, FMC, has been doing business in the Philippines to
US$103,600.00. When this failed the third transaction was entered into by vest the Philippine court with jurisdiction?
the parties whereby the petitioners were supposed to sell crude coconut oil
to the respondent at a discounted rate, the total amount of such discount HELD: Yes. From the facts of record, the petitioner may be considered as
being US$103,600.00. Unfortunately, the petitioners failed to deliver again, doing business in the Philippines within the scope of Section 14, Rule 14 of
prompting the respondent to file the suit below. the Rules of the Court which provide:
From these facts alone, it can be deduced that in reality, there was only SEC 14. Service upon private foreign corporations . If the defendant is a
one agreement between the petitioners and the respondent and that was foreign corporation or a non-resident joint stock company or association:
the delivery by the former of 500 long tons of crude coconut oil to the doing business in the Philippines, service may be made on its resident
latter, who in turn, must pay the corresponding price for the same. The agent designated in accordance with law for that purpose or, if there be no
three seemingly different transactions were entered into by the parties only such agent, on the government official designated by law to that effect, or
in an effort to fulfill the basic agreement and in no way indicate an intent on any of its officers or agents within the Philippines.
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 Indeed, the petitioner, in compliance with Act 2486 as implemented by
in the Philippines. Thus, the trial court, and the appellate court did not err Department of Labor Order No. IV dated May 20, 1968 had to appoint
in denying the petitioners' motion to dismiss not only because the ground Jaime V. Catuira, 1322 A. Mabini, Ermita, Manila as agent for FMC with
thereof does not appear to be indubitable but because the respondent, authority to execute Employment Contracts and receive, in behalf of that
being a foreign corporation not doing business in the Philippines, does not corporation, legal services from and be bound by processes of the
need to obtain a license to do business in order to have the capacity to sue Philippine Courts of Justice, for as long as he remains an employee of FMC
(Annex 'I', rollo, p. 56). It is a fact that when the summons for the
We agree with the respondent that it is a common ploy of defaulting local petitioner was served on Jaime V. Catuira he was still in the employ of the
companies which are sued by unlicensed foreign companies not engaged in FMC.
business in the Philippines to invoke lack of capacity to sue. The
respondent cites decisions from 1907 to 1957 recognizing and rejecting the In his motion to dismiss Annex B', p. 19, Rollo), petitioner admits that Mr.
improper use of this procedural tactic. (Damfschieffs Rhedered Union v. Cia Catuira represented it in this country 'for the purpose of making
Trans-atlantica, 8 Phil. 766 11907]; Marshall-Wells Co. v. Henry W. Elser & arrangements for the approval by the Department of Labor of the
Co., 49 Phil. 70 [1924]; Western Equipment Co. v. Reyes, 51 Phil. 115 employment of Filipinos who are recruited by the Company as its own
[1927]; Central Republic Bank v. Bustamante, 71 Phil. 359 [1941]; Pacific employees for assignment abroad.' In effect, Mr. Catuira was an officer
Vegetable Oil Co. v. Singson, 96 Phil.-986 [1955]; Eastboard Navigation, representing petitioner in the Philippines.
Ltd. v. Juan Ysmael and Co., Inc., 102 Phil. 1 [1957]). The doctrine of lack
of capacity to sue based on failure to first acquire a local license is based Under the rules and regulations promulgated by the Board of
on considerations of sound public policy. It intended to favor domestic Investments which took effect Feb. 3, 1969, implementing Rep.
corporations who enter was never into solitary transactions with unwary Act No. 5455, which took effect Sept. 30, 1968, the phrase 'doing
foreign firms and then repudiate their obligations simply because the latter business' has been exemption with illustrations, among them
are not licensed to do business in this country. The petitioners in this case being as follows:
are engaged in the exportation of coconut oil, an export item so vital in our
country's economy. They filed this petition on the ground that Stokely is an xxx xxx xxx
unlicensed foreign corporation without a bare allegation or showing that
their defenses in the collection case are valid and meritorious. We cannot (f) the performance within the Philippines of any act or combination of
fault the two courts below for acting as they did. acts enumerated in section l(l) of the Act shall constitute 'doing business'
therein. in particular, 'doing business includes:
WHEREFORE, IN VIEW OF THE FOREGOING, the petition is DISMISSED for
lack of merit. The Temporary Restraining Order dated February 2, 1983 is
hereby DISSOLVED. Costs against the petitioners. (1) Soliciting orders, purchases (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 SEC. 14. Service upon private foreign corporations . — If the defendant is
conditions of sales or service contracts, regardless of whether the a foreign corporation, or a non-resident joint stock company or
contracts are actually reduced to writing, shall constitute doing business association, doing business in the Philippines, service may be made on
even if the enterprise has no office or fixed place of business in the its resident agent designated in accordance with law for that purpose,
Philippines. xxx or, if there be no such agent, on the government official designated by
law to that effect, or on any officer or agent within the Philipines. (Rule
(2) Appointing a representative or distributor who is domiciled 7).
in the Philippines, unless said representative or distributor has
an independent status, i.e., it transacts business in its name and The above rule indicates three modes of effecting service of
for its own account, and not in the name or for the account of summons upon a private, foreign corporation, viz: (1) by serving
the principal. upon the agent designated in accordance with law to accept
service of summons; (2) if there is no resident agent, by service
xxx xxx xxx on the government cial designated by law to that effect; and (3)
(4) Opening offices, whether called 'liaison'offices, agencies or branches, by serving on any officer or agent of said corporation with
unless proved otherwise. Philippines. The plaintiff complied with the third stated above, for it has
xxx xxx xxx been shown that Mr. Ishida, who personally signed the contract for the
purchase of the scrap in question in behalf of the Nankai Kogyo, the Trade
(10) Any other act or acts that imply a continuity of commercial dealings Manager of said Company, Mr. Tominaga the Chief of the Petroleum
or arrangements, and contemplate to that extent the performance of Section of the same company and Mr. Yoshida was the man-in-charge of
acts or works, or the exercise of some of the functions normally incident the Import Section of the company's Tokyo Branch. All these three,
to, or in the progressive prosecution of, commercial gain or of the including the first two who were served with Summons, were officers of the
purpose and objective of the business organization defendant company.
Indeed, if a foreign corporation, not engaged in business in the Philippines, Not only did appellant allege non-jurisdictional grounds in its pleadings to
is not banned from seeking redress from courts in the Philippines, a fortiori, have the complaint dismissed, but it also went into trial on the merits and
that same corporation cannot claim exemption from being sued in presented evidence destined to resist appellee's claim. Verily, there could
Philippine courts for acts done against a person or persons in the not be a better situation of acquired jurisdiction based on consent.
Philippines. Consequently, the provision of the contract wherein it was agreed that
disputes should be submitted to a Board of Arbitration which may be
WHEREFORE, THE PETITION IS HEREBY DENIED WITH COSTS AGAINST formed in Japan (in the supposition that it can apply to the matter in
THE PETITIONERS dispute - payment of the scrap), seems to have been waived with
appellant's voluntary submission. Apart from the fact that the clause
SINGLE ACT WITH INTENTION TO CONTINUE DOING BUSINESS employs the word "may".
FAR EAST INTERNATIONAL IMPORT and EXPORT CORPORATION, From the proven facts obtaining in this particular case, the appellant's
plaintiff-appellee, defense of lack of jurisdiction appears unavailing. The case of Pacific
vs. Micronesian Line, Inc. v. Baens del Rosario, et al., G.R. No. L-7154,
NANKAI KOGYO CO. LTD., ET AL., defendants, October 23, 1954, relied upon in the Motion to Dismiss and other pleadings
NANKAI KOGYO CO., LTD., defendant-appellant presented by defendant-appellant, stand on a different footing. Therein,
(G.R. No. L-13525; November 30, 1962) We made the following pronouncements:
FACTS: Plaintiff Far East entered into a contract with herein appellant . . . . And the only act it did here was to secure the services of Luceno
Nankai for the sale of steel scrap. Only 1,058.6 metric tons were delivered Pelingon to act as cook and chief steward in one of its vessels
upon the expiration of the export license of Far East. authorizing to that effect the Luzon Stevedoring Co., Inc., a domestic
corporation, and the contract of employment was entered into on July
Far East later on wrote to Everett Steamship Corporation, requesting the 18, 1951. It further appears that petitioner has never sent its ships to
issuance of a complete set of the Bill of Lading for the shipment, in order the Philippines nor has it transported nor even solicited the
that payment thereof be effected against the letter of credit opened by transportation passengers and cargoes to and from the Philippines. In
Nankai. words, petitioner engaged the services of Pelingon not as part of the
operation of its business but merely to employ him as member of the
For failure of Nankai and the shipping agent to comply, Far East filed a crew in one of its ships. That act apparently is an isolated one,
complaint for specific performance. incidental, or casual, and "not of a character to indicate a purpose to
engage in business" within the meaning of the rule. (Emphasis ours.)
Nankai filed a motion to dismiss, on the ground of lack of jurisdiction over
its person and the subject matter, which was denied. ISSUE2: WON the single act done in this case can be considered as doing
business in the Philippines?
ISSUE: WON the trial court acquired jurisdiction over the subject matter
and over the person of the defendant-appellant through the proper service HELD: Yes. In the instant case, the testimony of Atty. Pablo Ocampo that
of summons? appellant was doing business in the Philippines corroborated by no less
than Nabuo Yoshida, one of appellant's officers, that he was sent to the
HELD: Yes. Defendant contends that Philippine Courts have no jurisdiction Philippines by his company to look into the operation of mines, thereby
to take cognizance of the case because the Nankai is not doing business in revealing the defendant's desire to continue engaging in business
the islands; and that while it has entered into the transaction in question, here, after receiving the shipment of the iron under consideration, making
same, however, does not constitute "doing business", so as to make it the Philippines a base thereof.
amenable to summons and subject it to the Court's jurisdiction. It bolstered
this claim by a provision in the contract which provides that "In case of The rule stated in the preceding section that the doing of a single act
disputes, Board of Arbitration may be formed in Japan. Decision of the doesnot constitute business within the meaning of statutes prescribing
Board of Arbitration shall be final and binding on both BUYER and SELLER". the conditions to be complied with the foreign corporations must be
qualified to this extent, that a single act may bring the corporation.
The rule pertinent to the questions in issue provides — In such a case, the single act of transaction is not merly incidental or
casual, but is of such character as distinctly to indicate a purpose on the
part of the foreign corporation to do other business in the state, and to

make the state a basis of operations for the conduct of a part of without taking steps necessary to render it amenable to suit in the local
corporation's ordinary business. (17 Fletchers Cyc. of Corporations, sec. courts. The implication of the law is that it was never the purpose of the
8470, pp. 572-573, and authorities cited therein.) (Emphasis ours.) legislature to exclude a foreign corporation which happens to obtain an
isolated order for business from the Philippines, and thus, in effect, to
WHEREFORE, the judgment appealed from is hereby affirmed, with costs permit persons to avoid their contracts made with such foreign
against defendant-appellant Nankai Kogyo. corporations.
ESTOPPED TO QUESTION PERSONALITY TO SUE There is no exact rule or governing principle as to what constitutes "doing"
or "engaging" or "transacting" business. Indeed, such case must be judged
COMMUNICATION MATERIALS AND DESIGN, INC., ASPAC MULTI- in the light of its peculiar circumstances, upon its peculiar facts and upon
TRADE, INC., (formerly ASPAC-ITEC PHILIPPINES, INC.) and the language of the statute applicable. The true test, however, seems to be
FRANCISCO S. AGUIRRE, petitioners, whether the foreign corporation is continuing the body or substance of the
vs. business or enterprise for which it was organized.
THE COURT OF APPEALS, ITEC INTERNATIONAL, INC., and ITEC,
INC., respondents Article 44 of the Omnibus Investments Code of 1987 defines the
(G.R. No. 102223; August 22, 1996) phrase to include:
FACTS: Respondent ITEC entered into a contract with petitioner ASPAC “soliciting orders, purchases, service contracts, opening offices,
referred to as “Representative Agreement” where ASPEC was assigned as whether called "liaison" offices or branches; appointing
ITEC’s “exclusive representative” in the Philippines for the sale of ITEC’s representatives or distributors who are domiciled in the
products. Philippines or who in any calendar year stay in the Philippines
for a period or periods totalling one hundred eighty (180) days
By virtue of said contract, ASPAC sold electronic products exported by or more; participating in the management, supervision or
ITEC, to their sole customer PLDT. ASPAC and PLDT executed a document control of any domestic business firm, entity or corporation in
entitled “PLDT-ASPAC/ITEC PROTOCOL” which defined the project detais the Philippines, and any other act or acts that imply a continuity
for the supply of ITEC’s Interface Equipment in connection with the 5 th or commercial dealings or arrangements and contemplate to
Expansion Program of PLDT. that extent the performance of acts or works, or the exercise of
some of the functions normally incident to, and in progressive
ITEC later on terminated its representative agreement with ASPAC and fied prosecution of, commercial gain or of the purpose and object of
a complaint alleging that the latter and another corporation Digital Base the business organization.”
Communications, Inc. (DIGITAL), the president of which is Francisco
Aguirre who is also the president of ASPAC, used knowledge and Thus, a foreign corporation with a settling agent in the Philippines which
information of ITEC’s product specifications to develop their own line of issued twelve marine policies covering different shipments to the
equipment and product support, which are similar, if not identical to ITEC’s Philippines and a foreign corporation which had been collecting premiums
own and offering them to ITEC’s customers. on outstanding policies were regarded as doing business here.
Defendants filed a motion to dismiss on the ground that ITEC had no legal The same rule was observed relating to a foreign corporation with an
capacity to sue as it is a foreign corporation doing business in the "exclusive distributing agent" in the Philippines, and which has been selling
Philippines without the required license, which was denied. On appeal, the its products here since 1929, and a foreign corporation engaged in the
CA affirmed the decision of the trial court. business of manufacturing and selling computers worldwide, and had
installed at least 26 different products in several corporations in the
ISSUE: WON private respondents ITEC is an unlicensed corporation doing Philippines, and allowed its registered logo and trademark to be used and
business in the Philippines, and WON it is barred from invoking the made it known that there exists a designated distributor in the Philippines.
injunctive authority of the courts?
In Georg Grotjahn GMBH and Co. vs. Isnani, it was held that the
HELD: Yes and No (by estoppel). Generally, a "foreign corporation" uninterrupted performance by a foreign corporation of acts
has no legal existence within the state in which it is foreign. This pursuant to its primary purposes and functions as a regional area
proceeds from the principle that juridical existence of a headquarters for its home office, qualifies such corporation as one
corporation is confined within the territory of the state under doing business in the country.
whose laws it was incorporated and organized, and it has no legal
status beyond such territory. Such foreign corporation may be excluded These foregoing instances should be distinguished from a single
by any other state from doing business within its limits, or conditions may or isolated transaction or occasional, incidental, or casual
be imposed on the exercise of such privileges. Before a foreign corporation transactions, which do not come within the meaning of the law,
can transact business in this country, it must first obtain a license to for in such case, the foreign corporation is deemed not engaged in
transact business in the Philippines, and a certificate from the appropriate business in the Philippines.
government agency. If it transacts business in the Philippines
without such a license, it shall not be permitted to maintain or Where a single act or transaction, however, is not merely incidental or
intervene in any action, suit, or proceeding in any court or casual but indicates the foreign corporation's intention to do other business
administrative agency of the Philippines, but it may be sued on in the Philippines, said single act or transaction constitutes "doing" or
any valid cause of action recognized under Philippine laws. "engaging in" or "transacting" business in the Philippines.
In a long line of decisions, this Court has not altogether prohibited foreign In determining whether a corporation does business in the Philippines or
corporation not licensed to do business in the Philippines from suing or not, aside from their activities within the forum, reference may be made to
maintaining an action in Philippine Courts. What it seeks to prevent is a the contractual agreements entered into by it with other entities in the
foreign corporation doing business in the Philippines without a license from country. Thus, in the Top-Weld case ( supra), the foreign corporation's
gaining access to Philippine Courts. LICENSE AND TECHNICAL AGREEMENT and DISTRIBUTOR AGREEMENT
The purpose of the law in requiring that foreign corporations doing with their local contacts were made the basis of their being regarded by
business in the Philippines be licensed to do so and that they appoint an this Tribunal as corporations doing business in the country. Likewise, in
agent for service of process is to subject the foreign corporation Merill Lynch Futures, Inc. vs. Court of Appeals, etc., the FUTURES
doing business in the Philippines to the jurisdiction of its courts. CONTRACT entered into by the petitioner foreign corporation weighed
The object is not to prevent the foreign corporation from performing single heavily in the court's ruling.
acts, but to prevent it from acquiring a domicile for the purpose of business

With the above-stated precedents in mind, we are persuaded to conclude duties, act with justice, give everyone his due, and observe honesty and
that private respondent had been "engaged in" or "doing business" in the good faith."
Philippines for some time now. This is the inevitable result after a scrutiny
of the different contracts and agreements entered into by ITEC with its Concededly, corporations act through agents, like directors and officers.
various business contacts in the country, particularly ASPAC and Telephone Corporate dealings must be characterized by utmost good faith and
Equipment Sales and Services, Inc. (TESSI, for brevity). The latter is a local fairness. Corporations cannot just feign ignorance of the legal rules as in
electronics firm engaged by ITEC to be its local technical representative, most cases, they are manned by sophisticated officers with tried
and to create a service center for ITEC products sold locally. Its management skills and legal experts with practiced eye on legal problems.
arrangements, with these entities indicate convincingly ITEC's purpose to Each party to a corporate transaction is expected to act with utmost candor
bring about the situation among its customers and the general public that and fairness and, thereby allow a reasonable proportion between benefits
they are dealing directly with ITEC, and that ITEC is actively engaging in and expected burdens. This is a norm which should be observed where one
business in the country. or the other is a foreign entity venturing in a global market.
In its Master Service Agreement with TESSI, private respondent required its As observed by this Court in TOP-WELD (supra), viz:
local technical representative to provide the employees of the technical and
service center with ITEC identification cards and business cards, and to The parties are charged with knowledge of the existing law at the time they
correspond only on ITEC, Inc., letterhead. TESSI personnel are instructed enter into a contract and at the time it is to become operative. (Twiehaus
to answer the telephone with "ITEC Technical Assistance Center.", such v. Rosner, 245 SW 2d 107; Hall v. Bucher, 227 SW 2d 98). Moreover, a
telephone being listed in the telephone book under the heading of ITEC person is presumed to be more knowledgeable about his own state law
Technical Assistance Center, and all calls being recorded and forwarded to than his alien or foreign contemporary. In this case, the record shows that,
ITEC on a weekly basis. at least, petitioner had actual knowledge of the applicability of R.A. No.
5455 at the time the contract was executed and at all times thereafter. This
What is more, TESSI was obliged to provide ITEC with a monthly report conclusion is compelled by the fact that the same statute is now being
detailing the failure and repair of ITEC products, and to requisition monthly propounded by the petitioner to bolster its claim. We, therefore sustain the
the materials and components needed to replace stock consumed in the appellate court's view that "it was incumbent upon TOP-WELD to know
warranty repairs of the prior month. whether or not IRTI and ECED were properly authorized to engage in
business in the Philippines when they entered into the licensing and
A perusal of the agreements between petitioner ASPAC and the distributorship agreements." The very purpose of the law was circumvented
respondents shows that there are provisions which are highly restrictive in and evaded when the petitioner entered into said agreements despite the
nature, such as to reduce petitioner ASPAC to a mere extension or prohibition of R.A. No. 5455. The parties in this case being equally guilty of
instrument of the private respondent. violating R.A. No. 5455, they are in pari delicto, in which case it follows as
a consequence that petitioner is not entitled to the relief prayed for in this
The "No Competing Product" provision of the Representative Agreement case.
between ITEC and ASPAC provides: "The Representative shall not
represent or offer for sale within the Territory any product which competes The doctrine of lack of capacity to sue based on the failure to
with an existing ITEC product or any product which ITEC has under active acquire a local license is based on considerations of sound public
development." Likewise pertinent is the following provision: "When acting policy. The license requirement was imposed to subject the foreign
under this Agreement, REPRESENTATIVE is authorized to solicit sales corporation doing business in the Philippines to the jurisdiction of its courts.
within the Territory on ITEC's behalf but is authorized to bind ITEC only in It was never intended to favor domestic corporations who enter
its capacity as Representative and no other, and then only to specific into solitary transactions with unwary foreign firms and then
customers and on terms and conditions expressly authorized by ITEC in repudiate their obligations simply because the latter are not
writing." licensed to do business in this country.
When ITEC entered into the disputed contracts with ASPAC and In Antam Consolidated Inc. vs. Court of Appeals, et al. we expressed our
TESSI, they were carrying out the purposes for which it was chagrin over this commonly used scheme of defaulting local companies
created, i.e., to market electronics and communications products . which are being sued by unlicensed foreign companies not engaged in
The terms and conditions of the contracts as well as ITEC's conduct business in the Philippines to invoke the lack of capacity to sue of such
indicate that they established within our country a continuous business, foreign companies. Obviously, the same ploy is resorted to by ASPAC to
and not merely one of a temporary character. prevent the injunctive action filed by ITEC to enjoin petitioner from using
knowledge possibly acquired in violation of fiduciary arrangements between
Notwithstanding such finding that ITEC is doing business in the country, the parties.
petitioner is nonetheless estopped from raising this fact to bar ITEC from
instituting this injunction case against it. By entering into the "Representative Agreement" with ITEC, Petitioner is
charged with knowledge that ITEC was not licensed to engage in business
A foreign corporation doing business in the Philippines may sue in activities in the country, and is thus estopped from raising in defense such
Philippine Courts although not authorized to do business here against a incapacity of ITEC, having chosen to ignore or even presumptively take
Philippine citizen or entity who had contracted with and benefited by said advantage of the same.
corporation. To put it in another way, a party is estopped to
challenge the personality of a corporation after having In Top-Weld, we ruled that a foreign corporation may be exempted from
acknowledged the same by entering into a contract with it. And the the license requirement in order to institute an action in our courts if its
doctrine of estoppel to deny corporate existence applies to a foreign as well representative in the country maintained an independent status during the
as to domestic corporations. One who has dealt with a corporation of existence of the disputed contract. Petitioner is deemed to have acceded to
foreign origin as a corporate entity is estopped to deny its corporate such independent character when it entered into the Representative
existence and capacity: The principle will be applied to prevent a person Agreement with ITEC, particularly, provision 6.2 (supra).
contracting with a foreign corporation from later taking advantage of its
noncompliance with the statutes chiefly in cases where such person has IN VIEW OF THE FOREGOING PREMISES, the instant Petition is hereby
received the benefits of the contract. DISMISSED. The decision of the Court of Appeals dated June 7, 1991,
upholding the RTC Order dated February 22, 1991, denying the petitioners'
The rule is deeply rooted in the time-honored axiom of Commodum ex Motion to Dismiss, and ordering the issuance of the Writ of Preliminary
injuria sua non habere debet — no person ought to derive any advantage Injunction, is hereby affirmed in toto.
of his own wrong. This is as it should be for as mandated by law, "every
person must in the exercise of his rights and in the performance of his TRADEMARK INFRINGEMENT

Since it is the trade and not the mark that is to be protected, a
WESTERN EQUIPMENT AND SUPPLY COMPANY, WESTERN trade-mark acknowledges no territorial boundaries of
ELECTRIC COMPANY, INC., W. Z. SMITH and FELIX C. REYES, municipalities or states or nations, but extends to every market
plaintiffs-appellees, where the trader's goods have become known and identified by
vs. the use of the mark
FIDEL A. REYES, as Director of the Bureau of Commerce and
Industry, HENRY HERMAN, PETER O'BRIEN, MANUEL B. DIAZ, It is very apparent that the purpose and intent of Herman and his
FELIPE MAPOY and ARTEMIO ZAMORA, defendants-appellants. associates in seeking to incorporate under the name of Western Electric
(G.R. No. L-27897 December 2, 1927) Company, Inc., was to unfairly and unjustly compete in the Philippine
Islands with the Western Electric Company, Inc., in articles which are
FACTS: The present case was filed and tried on the following facts: manufactured by, and bear the name of, that company, all of which is
1. Petitioner Western Equipment and Supply Company, through its duly prohibited by Act No. 666, and was made known to the defendant Reyes by
authorized agent, the plaintiff, Felix Reyes, applied to the defendant the letter known in the record to the defendant Reyes by the letter known
Director of Bureau of Commerce and Industry (BCI) for the issuance in the record as Exhibit A.
of a license to engage in business in the Philippine Islands which was
granted on Aug. 23, 1926. The plaintiff, Western Electric Company, Inc., has been in existence as a
corporation for over fifty years, during which time it has established a
2. On the other hand, Western Electric Company, Inc, also organized and reputation all over the world including the Philippine Islands, for the kind
existing under the laws of Nevada, was not issued such license but it and quality of its manufactured articles, and it is very apparent that the
was alleged that it has never engaged in business herein. whole purpose and intent of Herman and his associates in seeking to
incorporate another corporation under the identical name of Western
3. That a Philippine corporation known as Electric Supply Company, Inc., Electric Company, Inc., and for the same identical purpose as that of the
where defendant Henry Herman was president, has been importing plaintiff, is to trespass upon and profit by its good name and business
the manufactures of plaintiff Western Electric Company, Inc. reputation. The very fact that Herman and his associates have sought the
use of that particular name for that identical purpose is conclusive evidence
4. That defendant Henry Herman signed and filed AOI with the of the fraudulent intent with which it is done.
defendant Fidel Reyes, as Director of BCI, with the intention to
organize a domestic corporation to be known as “Western Electric The judgment of the lower court is affirmed, with costs
Company, Inc.” for the purpose, among others things, of
manufacturing, buying, selling and dealing generally in electrical and GENERAL GARMENTS CORPORATION, petitioner,
telephone apparatus and supplies” in violation of a trademark over vs.
“Western Electric” existing in Washington, DC. THE DIRECTOR OF PATENTS and PURITAN SPORTSWEAR
CORPORATION, respondents
The lower court decided in favor of plaintiffs. (G.R. No. L-24295; September 30, 1971)
ISSUE: WON plaintiff corporation can maintain an action to restraint FACTS: Respondent Puritan Sportswear Corporation, a corporation
residents and inhabitants of the Philippines from organizing a corporation, organized and exiting under the laws of the state of Pensylvania, USA filed
when said inhabitants have knowledge of the existence of such foreign a petition with the Philippine Patent Office for the cancellation of the
corporation? petitioner’s trademark “Puritan”, alleging ownership and prior use in the
Philippines of the said trademark for assorted men’s wear, such as
HELD: Yes. In the case of Marshall-Wells Co. vs. Henry W. Elser & Co. (46 sweaters, shirts, jackets, undershirts and briefs, which has not been
Phil., 70, 76), this court held: abandoned. It further alleged that the registration thereof by petitioner had
been obtained fraudulently and in violation of Sec. 17(c) of RA 166, in
The noncompliance of a foreign corporation with the statute may be relation to Sec. 4(d) thereof.
pleaded as an affirmative defense. Thereafter, it must appear from the
evidence, first, that the plaintiff is a foreign corporation, second, that it is Petitioner filed a motion to dismiss on several grounds which may be
doing business in the Philippines, and third, that it has not obtained the synthesized to respondent’s lack of capacity to maintain suit in the
proper license as provided by the statute. Philippines which was denied.
If it had been stipulated that the plaintiff, Western Electric Company, Inc., ISSUE: WON Respondent Puritan Sportswear can maintain the suit?
had been doing business in the Philippine Islands without first obtaining a
license, another and a very different question would be presented. That HELD: Yes. That respondent is a juridical person should be beyond serious
company is not here seeking to enforce any legal or contract rights arising dispute. The fact that it may not transact business in the Philippines unless
from, or growing out of, any business which it has transacted in the it has obtained a license for that purpose, nor maintain a suit in Philippine
Philippine Islands. The sole purpose of the action: courts for the recovery of any debt, claim or demand without such license
(Secs. 68 and 69, Corporation Law) does not make respondent any less a
"Is to protect its reputation, its corporate name, its goodwill, juridical person. Indeed an exception to the license requirement has been
whenever that reputation, corporate name or goodwill have, recognized in this jurisdiction, namely, where a foreign corporation sues on
through the natural development of its trade, established an isolated transaction. As first enunciated in Marshall-Wells Co. v. Elser &
themselves." And it contends that its rights to the use of its corporate Co. "the object of the statute (Secs. 68 and 69, Corporation Law) was not
and trade name: to prevent the foreign corporation from performing single acts, but to
prevent it from acquiring a domicile for the purpose of business without
Is a property right, a right in rem, which may assert and protect against all taking the steps necessary to render it amenable to suit in the local
the world, in any of the courts of the world — even in jurisdictions where it courts ... the implication of the law (being) that it was never the purpose of
does not transact business — just the same as it may protect its tangible the legislature to exclude a foreign corporation which happens to obtain an
property, real or personal, against trespass, or conversion. Citing sec. 10, isolated order for business from the Philippines, from securing redress in
Nims on Unfair Competition and Trade-Marks and cases cited; secs. 21-22, the Philippine Courts. ..." The principle has since then been applied in a
Hopkins on Trade-Marks, Trade Names and Unfair Competition and cases number of other cases.
cited." That point is sustained by the authorities, and is well stated in
Hanover Star Milling Co. vs. Allen and Wheeler Co. (208 Fed., 513), in A more or less analogous question arose in Western Equipment & Supply
which they syllabus says: Co. v. Reyes, 51 Phil. 115. The syllabus of the report, which is a correct
statement of the doctrine laid down in the decision, reads as follows:

reciprocity between the Federal Republic of Germany and the Philippines be
A foreign corporation which has never done ... business in the Philippine pleaded; that such reciprocity arrangement is embodied in and supplied by
Islands and which is unlicensed and unregistered to do business here, the Union Convention for the Protection of Industrial Property Paris
but is widely and favorably known in the Islands through the use therein Convention) to which both the Philippines and Federal Republic of Germany
of its products bearing its corporate and trade name has a legal right to are signatories and that since the Paris 'Convention is a treaty which,
maintain an action in the Islands. pursuant to our Constitution, forms part of the law of the land, our courts
are bound to take judicial notice of such treaty, and, consequently, this fact
Parenthetically, it may be stated that the ruling in the Mentholatum case need not be averred in the complaint.
was subsequently derogated when Congress, purposely to "counteract the
effects" of said case, enacted Republic Act No. 638, inserting Section We agree.
21-A in the Trademark Law, which allows a foreign corporation or
juristic person to bring an action in Philippine courts for In the leading case of La Chemise Lacoste, S.A .v. Fernandez , (129 SCRA
infringement of a mark or trade-name, for unfair competition, or 373), we ruled:
false designation of origin and false description, "whether or not it
has been licensed to do business in the Philippines under Act But even assuming the truth of the private respondents allegation that
Numbered Fourteen hundred and fifty-nine, as amended, the petitioner failed to allege material facto in its petition relative to
otherwise known as the Corporation Law, at the time it brings capacity to sue, the petitioner may still maintain the present suit against
complaint." respondent Hernandes. As early as 1927, this Court was, and it still is, of
the view that a foreign corporation not doing business in the
Petitioner argues that Section 21-A militates against respondent's capacity Philippines needs no license to sue before Philippine courts for
to maintain a suit for cancellation, since it requires, before a foreign infringement of trademark and unfair competition. Thus, in
corporation may bring an action, that its trademark or tradename has been Western Equipment and Supply Co. v. Reyes (51 Phil. 11 5), this Court
registered under the Trademark Law. The argument misses the essential held that a foreign corporation which has never done any business in the
point in the said provision, which is that the foreign corporation is allowed Philippines and which is unlicensed and unregistered to do business
there under to sue "whether or not it has been licensed to do business in here, but is widely and favorably known in the Philippines through the
the Philippines" pursuant to the Corporation Law (precisely to counteract use therein of its products bearing its corporate and tradename, has a
the effects of the decision in the Mentholatum case). legal right to maintain an action in the Philippines to restrain the
residents and inhabitants thereof from organizing a corporation therein
In any event, respondent in the present case is not suing for infringement bearing the same name as the foreign corporation, when it appears that
or unfair competition under Section 21-A, but for cancellation under Section they have personal knowledge of the existence of such a foreign
17, on one of the grounds enumerated in Section 4. The first kind of action, corporation, and it is apparent that the purpose of the proposed
it maybe stated, is cognizable by the Courts of First Instance (Sec. 27); the domestic corporation is to deal and trade in the same goods as those of
second partakes of an administrative proceeding before the Patent Office the foreign corporation.
(Sec. 18, in relation to Sec. 8). And while a suit under Section 21-A requires
that the mark or tradename alleged to have been infringed has been Quoting the Paris Convention and the case of Vanity Fair Mills, Inc. v. T.
"registered or assigned" to the suing foreign corporation, a suit for Eaton, Co. (234 F. 2d 633), this Court further said:
cancellation of the registration of a mark or tradename under Section 17
has no such requirement. For such mark or tradename should not have By the same token, the petitioner should be given the same treatment in
been registered in the first place (and consequently may be cancelled if so the Philippines as we make available to our own citizens. We are
registered) if it "consists of or comprises a mark or tradename which so obligated to assure to nationals of 'countries of the Union' an effective
resembles a mark or tradename ... previously used in the Philippines by protection against unfair competition in the same way that they are
another and not abandoned, as to be likely, when applied to or used in obligated to similarly protect Filipino citizens and firms.
connection with goods, business or services of the applicant, to cause
confusion or mistake or to deceive purchasers; ..."(Sec. 4d). In the case of of Cerverse Rubber Corporation V. Universal Rubber
Products, Inc. (174 SCRA 165), we likewise re-aafirmed our adherence to
WHEREFORE, the petition is dismissed, and the resolution of the Director of the Paris Convention:
Patents dated August 6, 1964 is affirmed, with costs.
The ruling in the aforecited case is in consonance with the Convention of
PUMA SPORTSCHUHFABRIKEN RUDOLF DASSLER, K.G., petitioner Converse Rubber Corporation v. Universal Rubber Products, Inc. (I 47
vs. SCRA 165), we likewise re-affirmed our adherence to the Paris
THE INTERMEDIATE APPELLATE COURT and MIL-ORO Convention: the Union of Paris for the Protection of Industrial Property to
MANUFACTURING CORPORATION, respondents which the Philippines became a party on September 27, 1965. Article 8
(G.R. No. 75067; February 26, 1988) thereof provides that 'a trade name [corporation name] shall be
protected in all the countries of the Union without the obligation of filing
FACTS: Petitioner, a corporation organized and existing under the laws of or registration, whether or not it forms part of the trademark.'
the Federal Republic of Germany filed a complaint of patent or trademark
infringement against herein respondent before the RTC of Makati. The mandate of the aforementioned Convention finds implementation in
Section 37 of RA No. 166, otherwise known as the trademark Law:
Private respondent filed a motion to dismiss on the ground that petitioner
had no capacity to sue which was denied. On appeal, the CA reversed the Rights of Foreign Registrants. — Persons who are nationals of, domiciled
trial court. in, or have a bona fide or effective business or commercial establishment
in any foreign country, which is a party to an international convention or
ISSUE: WON petitioner had capacity to sue? treaty relating to marks or tradenames on the represssion of unfair
competition to which the Philippines may be party, shall be entitled to
HELD: Yes. Petitioner maintains that it has substantially complied with the the benefits and subject to the provisions of this Act ...
requirements of Section 21-A of Republic Act R.A. No. 166, as amended.
According to the petitioner, its complaint specifically alleged that it is not Tradenames of persons described in the first paragraph of this section
doing business in the Philippines and is suing under the said Repulbic Act; shall be protected without the obligation of filing or registration whether
that Section 21-A thereof provides that "the country of which the said or not they form part of marks.
corporation or juristic person is a citizen, or in which it is domiciled, by
treaty, convention or law, grants a similar privilege to corporate or juristic We, therefore, hold that the petitioner had the legal capacity to file the
persons of the Philippines" but does not mandatorily require that such action below.
Asserting a distinctly different position from the Leviton argument,
SUING FOR VIOLATION OF THE PENAL CODE AND AGENT DOING Hemandas argued in his brief that the petitioner was doing business in the
BUSINESS UNDER ITS OWN NAME Philippines but was not licensed to do so. To support this argument, he
states that the applicable ruling is the case of Mentholatum Co., Inc. v.
LA CHEMISE LACOSTE, S. A., petitioner, Mangaliman: (72 Phil. 524) where Mentholatum Co. Inc., a foreign
vs. corporation and Philippine-American Drug Co., the former's exclusive
HON. OSCAR C. FERNANDEZ, Presiding Judge of Branch XLIX, distributing agent in the Philippines filed a complaint for infringement of
Regional Trial Court, National Capital Judicial Region, Manila and trademark and unfair competition against the Mangalimans.
GOBINDRAM HEMANDAS, respondents.
(G.R. No. L-63796-97; May 2, 1984) The argument has no merit. The Mentholatum case is distinct from and
inapplicable to the case at bar. Philippine American Drug Co., Inc., was
GOBINDRAM HEMANDAS SUJANANI, petitioner, admittedly selling products of its principal Mentholatum Co., Inc., in the
vs. latter's name or for the latter's account. Thus, this Court held that
HON. ROBERTO V. ONGPIN, in his capacity as Minister of Trade "whatever transactions the Philippine-American Drug Co., Inc. had
and Industry, and HON. CESAR SAN DIEGO, in his capacity as executed in view of the law, the Mentholatum Co., Inc., did it itself. And,
Director of Patents, respondents the Mentholatum Co., Inc., being a foreign doing business in the Philippines
(G.R. No. L-65659 May 2l, 1984) without the license required by Section 68 of the Corporation Law, it may
not prosecute this action for violation of trademark and unfair competition."
FACTS: Petitioner, a corporation organized and existing under the laws of
France and not doing business in the Philippines, filed with the NBI a letter- In the present case, however, the petitioner is a foreign corporation not
complaint alleging therein the acts of unfair competition being committed doing business in the Philippines. The marketing of its products in the
by respondent Hemandas and requesting their assistance in his Philippines is done through an exclusive distributor, Rustan Commercial
apprehension and prosecution, after Hermandas acquired a patent for the Corporation. The latter is an independent entity which buys and then
use of “CHEMISE LACOSTE & DEVICE”. markets not only products of the petitioner but also many other products
bearing equally well-known and established trademarks and tradenames. In
NBI filed with the respondent court for two search warrant which was other words, Rustan is not a mere agent or conduit of the petitioner.
issued and for which a motion to quash was filed by Hermandas alleging
that his trademark is different from that of petitioner, which was granted The rules and regulations promulgated by the Board of Investments
by respondent court. pursuant to its rule-making power under Presidential Decree No. 1789,
otherwise known as the Omnibus Investment Code, support a finding that
ISSUE: WON petitioner, having a representative, is doing business in the the petitioner is not doing business in the Philippines. Rule I, Sec. 1
Philippines? (g) of said rules and regulations defines "doing business" as one" which
includes, inter alia:
HELD: No. Respondent states that not only is the petitioner not doing
business in the Philippines but it also is not licensed to do business in the (1) ... A foreign firm which does business through middlemen
Philippines. He also cites the case of Leviton Industries v. Salvador (114 acting on their own names, such as indentors, commercial brokers or
SCRA 420) to support his contention The Leviton case, however, involved a commission merchants, shall not be deemed doing business in the
complaint for unfair competition under Section 21-A of Republic Act No. Philippines. But such indentors, commercial brokers or commission
166 which provides: merchants shall be the ones deemed to be doing business in the
Philippines.
Sec. 21 — A. Any foreign corporation or juristic person to which a mark
or tradename has been registered or assigned under this Act may bring (2) Appointing a representative or distributor who is domiciled
an action hereunder for infringement, for unfair competition, or false in the Philippines, unless said representative or distributor has
designation of origin and false description, whether or not it has been an independent status, i.e., it transacts business in its name and for
licensed to do business in the Philippines under Act numbered Fourteen its account, and not in the name or for the account of a principal. Thus,
Hundred and Fifty-Nine, as amended, otherwise known as the where a foreign firm is represented by a person or local company which
Corporation Law, at the time it brings the complaint; Provided, That the does not act in its name but in the name of the foreign firm the latter is
country of which the said foreign corporation or juristic person is a doing business in the Philippines.
citizen, or in which it is domiciled, by treaty, convention or law, grants a xxx xxx xxx
similar privilege to corporate or juristic persons of the Philippines.
Applying the above provisions to the facts of this case, we find and
We held that it was not enough for Leviton, a foreign corporation organized conclude that the petitioner is not doing business in the
and existing under the laws of the State of New York, United States of Philippines. Rustan is actually a middleman acting and transacting
America, to merely allege that it is a foreign corporation. It averred in business in its own name and or its own account and not in the name or for
Paragraph 2 of its complaint that its action was being filed under the the account of the petitioner.
provisions of Section 21-A of Republic Act No. 166, as amended.
Compliance with the requirements imposed by the above-cited provision ISSUE2: WON the criminal case can be maintained even if the foreign
was necessary because Section 21-A of Republic Act No. 166 having corporation is doing business without a license?
explicitly laid down certain conditions in a specific proviso, the same must
be expressly averred before a successful prosecution may ensue. It is HELD: Yes. But even assuming the truth of the private respondent's
therefore, necessary for the foreign corporation to comply with these allegation that the petitioner failed to allege material facts in its petition
requirements or aver why it should be exempted from them, if such was relative to capacity to sue, the petitioner may still maintain the present suit
the case. The foreign corporation may have the right to sue before against respondent Hemandas. As early as 1927, this Court was, and
Philippine courts, but our rules on pleadings require that the qualifying it still is, of the view that a foreign corporation not doing business
circumstances necessary for the assertion of such right should first be in the Philippines needs no license to sue before Philippine courts
affirmatively pleaded. for infringement of trademark and unfair competition.
In contradistinction, the present case involves a complaint for Our recognizing the capacity of the petitioner to sue is not by any means
violation of Article 189 of the Revised Penal Code. The Leviton case novel or precedent setting. Our jurisprudence is replete with cases
is not applicable. illustrating instances when foreign corporations not doing business in the
Philippines may nonetheless sue in our courts. In East Board Navigation
Ltd, v. Ysmael and Co., Inc. (102 Phil. 1), we recognized a right of foreign

corporation to sue on isolated transactions. In General Garments Corp. v. It creates a legally binding obligation on the parties founded on
Director of Patents (41 SCRA 50), we sustained the right of Puritan the generally accepted principle of international law of pacta sunt
Sportswear Corp., a foreign corporation not licensed to do and not doing servanda which has been adopted as part of the law of our land.
business in the Philippines, to file a petition for cancellation of a trademark (Constitution, Art. II, Sec. 3).
before the Patent Office.
We have carefully gone over the records of all the cases filed in this Court
More important is the nature of the case which led to this petition. What and find more than enough evidence to sustain a finding that the petitioner
preceded this petition for certiorari was a letter complaint filed before the is the owner of the trademarks "LACOSTE", "CHEMISE LACOSTE", the
NBI charging Hemandas with a criminal offense, i.e., violation of Article 189 crocodile or alligator device, and the composite mark of LACOSTE and the
of the Revised Penal Code. If prosecution follows after the completion of representation of the crocodile or alligator. Any pretensions of the private
the preliminary investigation being conducted by the Special Prosecutor respondent that he is the owner are absolutely without basis. Any further
the information shall be in the name of the People of the ventilation of the issue of ownership before the Patent Office will be a
Philippines and no longer the petitioner which is only an superfluity and a dilatory tactic.
aggrieved party since a criminal offense is essentially an act
against the State. It is the latter which is principally the injured party The records show that the goodwill and reputation of the petitioner's
although there is a private right violated. Petitioner's capacity to sue products bearing the trademark LACOSTE date back even before 1964
would become, therefore, of not much significance in the main when LACOSTE clothing apparels were first marketed in the Philippines. To
case. We cannot snow a possible violator of our criminal statutes to escape allow Hemandas to continue using the trademark Lacoste for the simple
prosecution upon a far-fetched contention that the aggrieved party or reason that he was the first registrant in the Supplemental Register of a
victim of a crime has no standing to sue. trademark used in international commerce and not belonging to him is to
render nugatory the very essence of the law on trademarks and
ISSUE3: WON petitioner has a right to maintain a suit for infringement of tradenames.
trademarks?
WHEREFORE, the petition in G.R. NOS. 63797-97 is hereby GRANTED. The
HELD: Yes. We are moreover recognizing our duties and the rights of order dated April 22, 1983 of the respondent regional trial court is
foreign states under the Paris Convention for the Protection of Industrial REVERSED and SET ASIDE.
Property to which the Philippines and France are parties. We are simply
interpreting and enforcing a solemn international commitment of the F. CAPACITY TO SUE
Philippines embodied in a multilateral treaty to which we are a party and
which we entered into because it is in our national interest to do so. GENERAL RULE: A corporation’s capacity to sue must be affirmatively
pleaded in order that it may proceed and effectively institute a case in
The Paris Convention provides in part that: Philippine courts. Thus, in the case for instance of a complaint for unfair
labor competition under Sec. 21-A of RA No. 166, it was held that it is
ARTICLE 2 necessary for the foreign corporation to comply with the provision thereof
(2) Nationals of each of the countries of the Union shall as regards the or aver why it should be exempted from them, if such be the case. The
protection of industrial property, enjoy in all the other countries of the foreign corporation may have the right to sue before our courts but our
Union the advantages that their respective laws now grant, or may rules on pleadings require that the qualifying circumstances necessary for
hereafter grant, to nationals, without prejudice to the rights specially the assertion of such right should first be affirmatively pleaded (Leviton
provided by the present Convention. Consequently, they shall have the Industries vs Salvador).
same protection as the latter, and the same legal remedy against any
infringement of their rights, provided they observe the conditions and EXCEPTIONS:
formalities imposed upon nationals.
EFFECT OF NON-PLEADING: If the dismissal of the case is based on the
xxx xxx xxx 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
ARTICLE 6 allowed, especially so if it would be an idle, circuitous ceremony
(1) The countries of the Union undertake, either administratively if their considering the absence of any meritorious substantial defense of the
legislation so permits, or at the request of an interested party, to refuse defendant. Technical rules should not be accorded undue importance to
or to cancel the registration and to prohibit the use of a trademark which frustrate and defeat a plainly valid claim (Olympia Business Machines vs. E.
constitutes a reproduction, imitation or translation, liable to create Razon, Inc.)
confusion, of a mark considered by the competent authority of the
country of registration or use to be well-known in that country as being COMPLAINT BASED ON VIOLATION OF RPC OR THE
already the mark of a person entitled to the benefits of the present CORPORATION IS MERELY DEFENDING ITSELF: averment of
Convention and used for Identical or similar goods. These provisions capacity to sue is not likewise necessary as laid down in the case of
shall also apply when the essential part of the mark constitutes a Chemise Lacoste vs. Fernandez, or when the foreign corporation is not
reproduction of any such well-known mark or an imitation liable to create suing or maintaining a suit but is merely defending itself from one filed
confusion therewith. against it (Times, Inc. vs. Reyes).
xxx xxx xxx ATLANTIC MUTUAL INSURANCE COMPANY and CONTINENTAL

INSURANCE COMPANY, plaintiffs and appellants,
ARTICLE 8 vs.
A trade name shall be protected in all the countries of the Union without CEBU STEVEDORING CO., INC., defendant and appellee
the obligation of filing or registration, whether or not it forms part of a (G.R. No. L-18961; August 31, 1966)
trademark.
xxx xxx xxx FACTS: Plaintiff-appellants, organized and existing under the laws of the
US, sued herein defendant-appellee, as subrogee to the shipper and
ARTICLE 10bis consignee, alleging that the latter undertook to carry a shipment of copra
(1) The countries of the Union are bound to assure to persons entitled to for delivery to P&G Company at Cebu City but upon discharge, a portion of
the benefits of the Union effective protection against unfair competition the copra was found damaged.
A treaty or convention is not a mere moral obligation to be Defendant moved to dismiss on the ground that the complaints on the
enforced or not at the whims of an incumbent head of a Ministry. ground of failure to allege compliance with Sec. 69 of the Corporation Law

which was granted after failure of the plaintiff to comply with the so and that it cannot maintain suit in this jurisdiction. But once again,
amendment of the complaint. Razon failed to appear at the pre-trial, as a result, the trial court revived
the decision.
ISSUE: WON plaintiff-appellants have the right to sue as to the defects n
the pleadings and procedures? On appeal, the IAC reversed the decision holding, among others, that
California failed to allege in the complaint its capacity to sue.
HELD: No. It should be noted that insofar as the allegations in the
complaint have a bearing on appellants' capacity to sue, all that is averred ISSUE: WON the failure of California to aver its capacity to sue is fatal?
is that they are both foreign corporations existing under the laws of the
United States. This averment conjures two alternative possibilities: either HELD: The slightest reflection will however immediately make — Tear that
they are engaged in business in the Philippines or they are not so engaged. between the factual settings of the Atlantic Mutual case and the case at
If the first, they must have been duly licensed in order to maintain this suit; bar, there are distinctions of no little significance. In the former, Atlantic
if the second, if the transaction sued upon is singular and isolated, no such Mutual Insurance Co. and Continental Insurance Co., two (2) American
license is required. In either case, the qualifying circumstance is an firms, brought suit as subrogees of the shipper and/or consignee of the
essential part of the element of plaintiffs' capacity to sue and must be goods ensured without joining the latter. In the case at hand, the action
affirmatively pleaded. was instituted by both the subrogee, California Insurance Co.,
Ltd., and the subrogor, a domestic corporation, Olympia
To be sure, under the Rules of Court (Section 11, Rule 15) in force prior to (Philippines) about whose capacity to sue no dispute exists. In
the promulgation of the Revised Rules on January 1, 1964, it was not Atlantic Mutual, the plaintiffs' lack of capacity to sue was raised
necessary to aver the capacity of a party to sue except to the extent by the defendant at the earliest opportunity, through a motion to
required to show jurisdiction of the court. In our opinion, however, such dismiss filed within the reglementary period to answer in
rule does not apply in all situations and under all circumstances. The theory accordance with Rule 16 of the Rules of Court. In the case at bar,
behind a similar rule in the United States is "that capacity ... of a party for the defendant was twice declared in default, and the defense of
purpose of suit is not in dispute in the great bulk of cases , and that lack of capacity to sue, was not raised until after 'the first
pleading and proof can be simplified by a rule that an averment of such declaration of default had been lifted. Moreover, there Is a
matter is not necessary, except to show jurisdiction." 1 But where as in the pronouncement by the Court of Appeals in the instant case, that the
present case, the law denies to a foreign corporation the right to maintain defendant had no meritorious defenses save that of lack of capacity to sue
suit unless it has previously complied with a certain requirement, then such on the part of the plaintiff.
compliance, or the fact that the suing corporation is exempt therefrom,
becomes a necessary averment in the complaint. These are matters These circumstances proscribe the application to the controversy at bar of
peculiarly within the knowledge of appellants alone, and it would be unfair the doctrine in Atlantic Mutual. The defendant's conduct in this case
to impose upon appellee the burden of asserting and proving the contrary. strongly indicates the absence of any valid defense on its part
It is enough that foreign corporations are allowed by law to seek redress in against the plaintiffs' claims: the defendant failed to appear for pre-
our courts under certain conditions: the interpretation of the law should not trial despite notice, not once, but twice and was in consequence twice
go so far as to include, in effect, an inference that those conditions have declared in default. The lack of any meritorious defense on its part was in
been met from the mere fact that the party suing is a foreign corporation. fact confirmed by the declaration of the Court of Appeals, which it has not
challenged, that three (3) errors attributed by it to the Trial Court were
It was indeed in the light of these and other consideration that this Court "unmeritorious except the second," i. e., plaintiff's lack of capacity to sue.
has seen fit to amend the former rule by requiring in the Revised Rules Even assuming incapacity on the part of California, no such incapacity may
(Section 4, Rule 8) that "facts showing the capacity of a party to sue or be be attributed to its co-plaintiff, Olympia Business Machines Co. (Phil.), Inc.
sued or the authority of a party to sue or be sued in a representative And if strictly necessary, the latter could quite easily execute a cancellation
capacity or the legal existence of an organized association of persons that of the deed of subrogation or of re-assignment of the right of action from
is made a party, must be averred." California back to Olympia. Moreover, the dismissal of the case at this
stage, would not bar the institution by California of the same action, this
The orders appealed from are affirmed, with costs against plaintiffs- time alleging in its complaint that it was suing on a single, isolated
appellants transaction. But this would be an Idle, circuitous ceremony in the light of
the unchallenged declaration by the Court of Appeals of the absence of any
OLYMPIA BUSINESS MACHINES CO. (PHIL.) INC. and CALIFORNIA meritorious substantial defense on the part of defendant Razon. This would
INSURANCE CO., LTD., petitioners, be to accord undue importance and significance to technical rules, to allow
vs. an inflexible, unreasoning adherence to such technical rules to frustrate
E. RAZON, INC., TOYO LINE, LTD., and SEA BRIDGE CONTAINER and defeat a plainly valid claim.
SHIPPING LINES, INC., respondents.
(G.R. No. 75631; October 28, 1987) WHEREFORE, the judgment of the Intermediate Appellate Court subject of
the appeal is reverse and that of the Trial Court, dated February 1, 1980
FACTS: Olympia Office Machines, Ltd., a foreign corporation with offices at reinstated and affirmed, with costs against the respondents.
Hongkong, shipped 300 portable typewriters to its sister company in
Manila, Olympia Business Machines Company (Phil.), Inc., such shipment TIME, INC., petitioner,
insured with California Insurance Co., Ltd. another foreign corporation. vs.
HON. ANDRES REYES, as Judge of the Court of First Instance of
The typewriters were discharged at North Harbor, Manila into the custody Rizal, ELISEO S. ZARI, as Deputy Clerk of Court, Branch VI, Court
of the carrier’s agent which in turn turned it over to E. Razon, Inc. While in of First Instance of Rizal, ANTONIO J. VILLEGAS and JUAN PONCE
the latter’s possession, part of the shipment was stolen. California ENRILE, respondents.
Insurance was subrogated to the claim for loss after paying Olympia (Phil). (G.R. No. L-28882; May 31, 1971)
Both Olympia (Phil.) and California thereafter brought a suit against E. FACTS: Herein respondents Antonio Villegas and Juan Ponce Enrile sought
Razon, Inc., the carrier and the container company, which had earlier to recover from herein petitioner damages upon an alleged libel arising
refused to make good the loss of the goods. from a publication of Time (Asia Edition) magazine, in its issue entitled
“Corruption in Asia”.
For E.Razon’s failure to appear at the pre-trial and after ex-parte reception
of evidence, the trial court decided for California. On Razon’s motion, the Petitioner filed a motion to dismiss on lack of jurisdiction and improper
order was set aside and Razon amended his answer that California is a venue which was deferred until after the trial of the case.
foreign corporation doing business in the Philippines without a license to do

ISSUE: WON the petition for certiorari and prohibition will prosper? Plaintiff raises the Corporation Law which does not provide such
requirements and gives any stockholder the right to examine the books of
HELD: The dismissal of the present petition is asked on the ground that the corporation. Such law, being the law upon which the defendant
the petitioner foreign corporation failed to allege its capacity to sue in the corporation was issued a license to do business in the Philippines.
courts of the Philippines. Respondents rely on section 69 of the Corporation
law, which provides: ISSUE: WON appellant, as a stockholder, is entitled to inspect and
examine the books and records of transactions of appellee?
SEC. 69. No foreign corporation or corporations formed, organized, or
existing under any laws other than those of the Philippines shall be HELD: Under ection 77 Stock Corporation Law of New York. Under this
permitted to ... maintain by itself or assignee any suit for the recovery of law, plaintiff has the right to be furnished by the treasurer or other fiscal
any debt, claim, or demand whatever, unless it shall have the license officer of the corporation with statement of its affairs embracing a
prescribed in the section immediately preceding. ..." ...; particular account of all its assets and liabilities. In the third place,
inasmuch as plaintiff, either at the hearing or in his motion for new trial,
They also invoke the ruling in Marshall-Wells Co. vs. Elser & Co., Inc . 7 that did not ask to have the stipulation of facts altered or changed, he cannot
no foreign corporation may be permitted to maintain any suit in the local now, for the first time on appeal, raise the question that aside from the
courts unless it shall have the license required by the law, and the ruling in right conferred upon him by section 77 of the Stock Corporation Law of
Atlantic Mutual Ins. Co., Inc. vs. Cebu Stevedoring Co., Inc . 8 that New York, he also entitled under the common law to examine and inspect
"where ... the law denies to a foreign corporation the right to maintain suit the books and records of the defendant corporation. In the fourth place,
unless it has previously complied with a certain requirement, then such neither can this right under the common law be granted the defendant in
compliance or the fact that the suing corporation is exempt therefrom, the present case, since the same can only be granted at the discretion of
becomes a necessary averment in the complaint." We fail to see how the court, under certain conditions, to wit:
these doctrines can be a propos in the case at bar, since the
petitioner is not "maintaining any suit" but is merely defending (a) That the stockholder of a corporation in New York has the right to
one against itself; it did not file any complaint but only a corollary inspect its books and records if it can be shown that he seeks
defensive petition to prohibit the lower court from further information for an honest purpose (14 C. J., 853), or to protect his
proceeding with a suit that it had no jurisdiction to entertain. interest as stockholder. (In re Steinway, 159 N. Y., 250; 53 N. E., 1103;
45 L. R. A., 461 [aff. 31 App. Div., 70; 52 N. Y. S., 343]).
Petitioner's failure to aver its legal capacity to institute the present petition
is not fatal, for ... (b) That said right to examine and inspect the books of the corporation
must be exercised in good faith, for a specific and honest purpose, and
A foreign corporation may, by writ of prohibition, seek relief against the not to gratify curiosity, or for speculative or vexatious purposes. (14 C.
wrongful assumption of jurisdiction. And a foreign corporation J., 854, 855.)
seeking a writ of prohibition against further maintenance of a
suit, on the ground of want of jurisdiction in which jurisdiction The appellant has made no effort to prove or even allege that the
is not bound by the ruling of the court in which the suit was information he desired to obtain through the examination and inspection of
brought, on a motion to quash service of summons, that it has defendant's books was necessary to protect his interests as stockholder of
jurisdiction. the corporation, or that it was for a specific and honest purpose, and not to
gratify curiosity, nor for speculative or vexatious purposes.
WHEREFORE, the writs applied for are granted: the respondent Court of
First Instance of Rizal is declared without jurisdiction to take cognizance of In view of the foregoing, we affirm the judgment of the lower court, with
its Civil Case No. 10403; and its orders issued in connection therewith are costs against the appellant.
hereby annulled and set aside,. Respondent court is further commanded to
desist from further proceedings in Civil case No. 10403 aforesaid. Costs
against private respondents, Antonio J. Villegas and Juan Ponce Enrile. H. AMENDMENTS TO THE ARTICLES OF INCORPROATION
G. LAWS GOVERNING FOREIGN CORPORATIONS Sec. 130. Amendments to articles of incorporation or by-laws of
foreign corporations. - Whenever the articles of incorporation or by-laws
Sec. 129. Law applicable. - Any foreign corporation lawfully doing of a foreign corporation authorized to transact business in the Philippines are
business in the Philippines shall be bound by all laws, rules and regulations amended, such foreign corporation shall, within sixty (60) days after the
applicable to domestic corporations of the same class, except such only as amendment becomes effective, file with the Securities and Exchange
provide for the creation, formation, organization or dissolution of corporations Commission, and in the proper cases with the appropriate government
or those which fix the relations, liabilities, responsibilities, or duties of agency, a duly authenticated copy of the articles of incorporation or by-laws,
stockholders, members, or officers of corporations to each other or to the as amended, indicating clearly in capital letters or by underscoring the
corporation. change or changes made, duly certified by the authorized official or officials
of the country or state of incorporation. The filing thereof shall not of itself
M. E. GREY, plaintiff-appellant, enlarge or alter the purpose or purposes for which such corporation is
vs. authorized to transact business in the Philippines.
INSULAR LUMBER COMPANY, defendant-appelle
(G.R. No. L-45144; April 3, 1939) I. AMENDMENT OF LICENSE
FACTS: Herein defendant-appellee Insular Lumber Company is a Sec. 131. Amended license. - A foreign corporation authorized to transact
corporation existing and organized under the laws of the State of New York business in the Philippines shall obtain an amended license in the event it
licensed to engage business in the Philippines. changes its corporate name, or desires to pursue in the Philippines other or
additional purposes, by submitting an application therefor to the Securities
The plaintiff-appellant Grey, holder of 57 shares (which is less than 3% of and Exchange Commission, favorably endorsed by the appropriate
the outstanding capital stock of defendant corporation), was denied access government agency in the proper cases.
to the books and records of the company because, as alleged, the laws of
New York provide that only a stockholder who own at least 3% of the J. MERGER/CONSOLIDATION
outstanding capital stock of a corporation may make a written request to
the treasurer or other fiscal officer for a statement of its affairs; that Sec. 132. Merger or consolidation involving a foreign corporation
plaintiff neither has the 3% requirement nor made the written request. licensed in the Philippines. - One or more foreign corporations authorized
to transact business in the Philippines may merge or consolidate with any
domestic corporation or corporations if such is permitted under Philippine
laws and by the law of its incorporation: Provided, That the requirements on 1. All claims which have accrued in the Philippines have been paid,
merger or consolidation as provided in this Code are followed. compromised or settled;
Whenever a foreign corporation authorized to transact business in the
Philippines shall be a party to a merger or consolidation in its home country 2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the
or state as permitted by the law of its incorporation, such foreign corporation Philippine Government or any of its agencies or political subdivisions have
shall, within sixty (60) days after such merger or consolidation becomes been paid; and
effective, file with the Securities and Exchange Commission, and in proper
cases with the appropriate government agency, a copy of the articles of 3. The petition for withdrawal of license has been published once a week for
merger or consolidation duly authenticated by the proper official or officials of three (3) consecutive weeks in a newspaper of general circulation in the
the country or state under the laws of which merger or consolidation was Philippines.
effected: Provided, however, That if the absorbed corporation is the foreign CHAPTER 19: MISCELLANEOUS PROVISIONS (TITLE XVI)
corporation doing business in the Philippines, the latter shall at the same time
file a petition for withdrawal of it license in accordance with this Title. Sec. 137. Outstanding capital stock defined. - The term "outstanding
capital stock", as used in this Code, means the total shares of stock issued
K. REVOCATION OF LICENSE under binding subscription agreements to subscribers or stockholders,
whether or not fully or partially paid, except treasury shares.
Sec. 134. Revocation of license. - Without prejudice to other grounds
provided by special laws, the license of a foreign corporation to transact Sec. 138. Designation of governing boards. - The provisions of specific
business in the Philippines may be revoked or suspended by the Securities provisions of this Code to the contrary notwithstanding, non-stock or special
and Exchange Commission upon any of the following grounds: corporations may, through their articles of incorporation or their by-laws,
designate their governing boards by any name other than as board of
1. Failure to file its annual report or pay any fees as required by this Code; trustees.
2. Failure to appoint and maintain a resident agent in the Philippines as Sec. 139. Incorporation and other fees. - The Securities and Exchange
required by this Title; Commission is hereby authorized to collect and receive fees as authorized by
law or by rules and regulations promulgated by the Commission.
3. Failure, after change of its resident agent or of his address, to submit to
the Securities and Exchange Commission a statement of such change as Sec. 140. Stock ownership in certain corporations. - Pursuant to the
required by this Title; duties specified by Article XIV of the Constitution, the National Economic and
Development Authority shall, from time to time, make a determination of
4. Failure to submit to the Securities and Exchange Commission an whether the corporate vehicle has been used by any corporation or by
authenticated copy of any amendment to its articles of incorporation or by- business or industry to frustrate the provisions thereof or of applicable laws,
laws or of any articles of merger or consolidation within the time prescribed and shall submit to the Batasang Pambansa, whenever deemed necessary, a
by this Title; report of its findings, including recommendations for their prevention or
correction.
5. A misrepresentation of any material matter in any application, report,
affidavit or other document submitted by such corporation pursuant to this Maximum limits may be set by the Batasang Pambansa for stockholdings in
Title; corporations declared by it to be vested with a public interest pursuant to the
provisions of this section, belonging to individuals or groups of individuals
6. Failure to pay any and all taxes, imposts, assessments or penalties, if any, related to each other by consanguinity or affinity or by close business
lawfully due to the Philippine Government or any of its agencies or political interests, or whenever it is necessary to achieve national objectives, prevent
subdivisions; illegal monopolies or combinations in restraint or trade, or to implement
national economic policies declared in laws, rules and regulations designed to
7. Transacting business in the Philippines outside of the purpose or purposes promote the general welfare and foster economic development.
for which such corporation is authorized under its license;
8. Transacting business in the Philippines as agent of or acting for and in In recommending to the Batasang Pambansa corporations, business or
behalf of any foreign corporation or entity not duly licensed to do business in industries to be declared vested with a public interest and in formulating
the Philippines; or proposals for limitations on stock ownership, the National Economic and
Development Authority shall consider the type and nature of the industry, the
9. Any other ground as would render it unfit to transact business in the size of the enterprise, the economies of scale, the geographic location, the
Philippines. extent of Filipino ownership, the labor intensity of the activity, the export
potential, as well as other factors which are germane to the realization and
Sec. 135. Issuance of certificate of revocation. - Upon the revocation of promotion of business and industry.
any such license to transact business in the Philippines, the Securities and
Exchange Commission shall issue a corresponding certificate of revocation, Sec. 141. Annual report or corporations. - Every corporation, domestic
furnishing a copy thereof to the appropriate government agency in the proper or foreign, lawfully doing business in the Philippines shall submit to the
cases. Securities and Exchange Commission an annual report of its operations,
together with a financial statement of its assets and liabilities, certified by any
The Securities and Exchange Commission shall also mail to the corporation at independent certified public accountant in appropriate cases, covering the
its registered office in the Philippines a notice of such revocation preceding fiscal year and such other requirements as the Securities and
accompanied by a copy of the certificate of revocation. Exchange Commission may require. Such report shall be submitted within
such period as may be prescribed by the Securities and Exchange
L. WITHDRAWAL OF FOREIGN CORPORATIONS Commission.
Sec. 136. Withdrawal of foreign corporations. - Subject to existing laws Sec. 142. Confidential nature of examination results. - All
and regulations, a foreign corporation licensed to transact business in the interrogatories propounded by the Securities and Exchange Commission and
Philippines may be allowed to withdraw from the Philippines by filing a the answers thereto, as well as the results of any examination made by the
petition for withdrawal of license. No certificate of withdrawal shall be issued Commission or by any other official authorized by law to make an
by the Securities and Exchange Commission unless all the following examination of the operations, books and records of any corporation, shall be
requirements are met; kept strictly confidential, except insofar as the law may require the same to

be made public or where such interrogatories, answers or results are
necessary to be presented as evidence before any court.
Sec. 143. Rule-making power of the Securities and Exchange

Commission. - The Securities and Exchange Commission shall have the
power and authority to implement the provisions of this Code, and to
promulgate rules and regulations reasonably necessary to enable it to
perform its duties hereunder, particularly in the prevention of fraud and
abuses on the part of the controlling stockholders, members, directors,
trustees or officers.
Sec. 144. Violations of the Code. - Violations of any of the provisions of

this Code or its amendments not otherwise specifically penalized therein shall
be punished by a fine of not less than one thousand (P1,000.00) pesos but
not more than ten thousand (P10,000.00) pesos or by imprisonment for not
less than thirty (30) 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.
Sec. 145. Amendment or repeal. - No right or remedy in favor of or

against any corporation, its stockholders, members, directors, trustees, or
officers, nor any liability incurred by any such corporation, stockholders,
members, directors, trustees, or officers, shall be removed or impaired either
by the subsequent dissolution of said corporation or by any subsequent
amendment or repeal of this Code or of any part thereof.
Sec. 146. Repealing clause. - Except as expressly provided by this Code,

all laws or parts thereof inconsistent with any provision of this Code shall be
deemed repealed.
Sec. 147. Separability of provisions. - Should any provision of this Code

or any part thereof be declared invalid or unconstitutional, the other
provisions, so far as they are separable, shall remain in force.
Sec. 148. Applicability to existing corporations. - All corporations

lawfully existing and doing business in the Philippines on the date of the
effectivity of this Code and heretofore authorized, licensed or registered by
the Securities and Exchange Commission, shall be deemed to have been
authorized, licensed or registered under the provisions of this Code, subject
to the terms and conditions of its license, and shall be governed by the
provisions hereof: Provided, That if any such corporation is affected by the
new requirements of this Code, said corporation shall, unless otherwise
herein provided, be given a period of not more than two (2) years from the
effectivity of this Code within which to comply with the same.
Sec. 149. Effectivity. - This Code shall take effect immediately upon its
approval.

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THE CORPORATION CODE OF THE PHILIPPINES

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

d. PRINCIPAL OFFICE NAME NATIONALITY RESIDENCE

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

4. ORGANIZATION AND COMMENCEMENT OF BUSINESS THREE-FOLD CONTRACT:

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Were we to sustain petitioners, the legal fiction of separate corporate

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

H. POWER TO ENTER INTO MERGER OR CONSOLIDATION Sec. 36. Xxx

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

B. DIRECTORS’/TRUSTEES’ MEETING PROXY VOTING: is allowed or through a voting trust agreement, or by

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.