2A Corporation Law - Atty.

Hofileña
Codal Provisions - Midterms

I. HISTORICAL BACKGROUND

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II. CONCEPTS Partnerships and associations

for private interest or purpose
are governed by the provisions of this Code
1. Definition of Corporation concerning partnerships. (36 and 37a)
6. Advantages and Disadvatanges of the Corporate Medium
Article 46.
i. Strong and solemn judicial personality
Juridical persons may
Sec. 2. Corporation defined. - acquire and possess property of all kinds,
as well as incur obligations and
A corporation is an artificial being bring civil or criminal actions,
created by operation of law, in conformity with the laws and regulations
having of their organization. (38a)
the right of succession and
the powers, attributes and properties Article 1775.
expressly authorized by law or
incident to its existence. Associations and societies,
whose articles are kept secret among the members, and
Article 44. wherein any one of the members may contract
in his own name
The following are juridical persons: with third persons,
shall have no juridical personality, and
3.Corporations, partnerships and associations shall be governed by the provisions
for private interest or relating to co-ownership. (1669)
purpose to which the law grants a juridical personality,
separate and distinct iii. Centralized Management
from that of each Section 23. The board of directors or trustees. -
shareholder,
partner or Unless otherwise provided in this Code,
member. (35a) the corporate powers of all corporations formed under this Code
shall be exercised,
Article 45. all business conducted and all property of such corporations
controlled and held
Juridical persons mentioned in Nos. 1 and 2 of the preceding article by the board of directors or trustees
are governed by the laws to be elected from among
creating or recognizing them. the holders of stocks, or
Private corporations are regulated where there is no stock,
by laws of general application on the subject. from among the members

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of the corporation, the number of shares transferred.

who shall hold office for one (1) year
until their successors are elected and qualified. (28a) No shares of stock against which
Every director must own the corporation holds any unpaid claim
at least one (1) share of the capital stock of the corporation shall be transferable in the books of the corporation. (35)
of which he is a director,
which share shall stand in his name b. Disadvantages of the Corporate Medium
on the books of the corporation.
Any director who ceases to be the owner of (1) Agency Cost: Abuse of Management; Breach of Trust
at least one (1) share of the capital stock of the corporation (2) Abuse of Limited Liability Feature
of which he is a director (3) High cost of maintenance of the Corporate Medium
shall thereby cease to be a director. (4) Double Taxation
Trustees of non-stock corporations 7. Compared with Other Business Media
must be members thereof.
A majority of the directors or trustees of all corporations b. Business Trusts
organized under this Code
must be residents of the Philippines. Article 1442.

iv. Free-transferability of “units of ownership" The principles of the general law of trusts,
Section 63. Certificate of stock and transfer of shares. - insofar as they are not in conflict with this Code,
the Code of Commerce,
The capital stock of stock corporations shall be divided into shares the Rules of Court and
for which certificates signed by the president or vice president, special laws
countersigned by the secretary or assistant secretary, and are hereby adopted.
sealed with the seal of the corporation
shall be issued in accordance with the by-laws. c. Partnerships
Shares of stock so issued Article 1768.
are personal property and
may be transferred by delivery of the certificate or certificates The partnership has a juridical personality
indorsed by the owner or separate and distinct from that of each of the partners,
his attorney-in-fact or even in case of failure to comply
other person legally authorized to make the transfer. with the requirements of article 1772, first paragraph. (n)
No transfer, however, shall be valid,
except as between the parties, Article 1775.
until the transfer is recorded in the books of the corporation
showing the names of the parties to the transaction, Associations and societies,
the date of the transfer, whose articles are kept secret among the members, and
the number of the certificate or certificates and wherein any one of the members may contract

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in his own name with third persons, on the basis of the shares held
shall have no juridical personality, and are stock corporations.
shall be governed by the provisions All other private corporations are
relating to co-ownership. (1669) nonstock corporations.

f. Cooperatives 3. Quasi-Public Corporations

Section 3. General Concepts. - 4. Government-owned or controlled corporations

A cooperative is a duly registered association of persons, b. As to place of incorporation

with a common bond of interest,
who have voluntarily joined together 1. Domestic Corporation
to achieve a lawful common social or economic end, 2. Foreign Corporation
making equitable contributions to the capital required and
accepting a fair share of the risks and benefits of the undertaking Section 123. Definition and rights of foreign corporations. -
in accordance with universally accepted
cooperative principles. For the purposes of this Code, a foreign corporation is
8. Classification of Corporations one formed, organized or existing
under any laws other than those of the Philippines and
a. In relation to the state: whose laws allow Filipino citizens and corporations
to do business in its own country or state.
1. Private Corporations
2. Public Corporations or Local Government Units It shall have the right to transact business in the Philippines
after it shall have obtained a license
Section 3. Corporations may be public or private. - to transact business in this country
in accordance with this Code and
Public corporations are those formed or organized a certificate of authority
for the government of a portion of the state. from the appropriate government agency. (n)
Private corporations are those formed
for some private purpose, benefit, aim, or end, c. As to purpose of Incorporation
as distinguished from public corporations,
which have for their purpose the general good and welfare. 1. Religious Corporation
Private corporations are divided into
stock corporations and Section 109. Classes of religious corporations. -
nonstock corporations.
Corporations which have a capital stock Religious corporations may be incorporated
divided into shares and by one or more persons.
are authorized to distribute to the holders of such shares Such corporations may be classified into
dividends or allotments of the surplus profits corporations sole and

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religious societies.
Religious corporations shall be governed
by this Chapter and
by the general provisions on non- stock corporations
insofar as they may be applicable. (n)
Section 116. Religious societies. -
Any religious society or religious order, or
any diocese, synod, or district organization
of any religious denomination, sect or church,
unless forbidden
by the constitution, rules, regulations, or discipline
of the religious denomination, sect or church
of which it is a part, or
by competent authority,
may, upon written consent and/or
by an affirmative vote at a meeting called for the purpose
of at least two-thirds (2/3) of its membership,
incorporate
for the administration of its temporalities or
for the management of its affairs, properties and estate
by filing with
the Securities and Exchange Commission,
articles of incorporation
verified by the affidavit of
the presiding elder, secretary, or clerk or
other member of such religious society or
religious order, or diocese, synod, or
district organization of
the religious denomination, sect or church,
setting forth the following:
1. That the religious society or religious order, or diocese,
synod, or district organization is
a religious organization of
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a religious denomination, sect or church;
2. That at least two-thirds (2/3) of its membership
have given their written consent or
have voted to incorporate,
at a duly convened meeting of the body;
3. That the incorporation of
the religious society or religious order, or
diocese, synod, or district organization desiring to incorporate
is not forbidden by competent authority or
by the constitution, rules, regulations or discipline
of the religious denomination, sect, or church
of which it forms a part;
4. That the religious society or religious order, or
diocese, synod, or district organization
desires to incorporate
for the administration of
its affairs, properties and estate;
5. The place where the principal office of the corporation
is to be established and located,
which place must be within the Philippines; and
6. The names, nationalities, and residences of the trustees
elected by the religious society or religious order, or
the diocese, synod, or district organization
to serve for the first year or
such other period as may be prescribed
by the laws of the religious society or
religious order, or of the diocese, synod, or
district organization,
the board of trustees to be
not less than five (5) nor
more than fifteen (15). (160a)
2. Educational Corporations
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shall be defined in the by-laws.

Section 106. Incorporation. -
Educational corporations shall be governed For institutions organized as stock corporations,
by special laws and the number and term of directors
by the general provisions of this Code. (n) shall be governed by the provisions
on stock corporations. (169a)
Section 107. Pre-requisites to incorporation. -
Except upon favorable recommendation of BP 232
the Ministry of Education and Culture, Section 25. Establishment of Schools -
the Securities and Exchange Commission
shall not accept or approve All schools shall be established in accordance with law.
the articles of incorporation and The establishment of new national schools and
by-laws of the conversion of existing schools
any educational institution. (168a) from elementary to national secondary or tertiary schools
shall be by law:
Section 108. Board of trustees. - Provided, That any private school proposed to be established
Trustees of educational institutions organized as non-stock corporations must incorporate as an non-stock educational corporation
shall not be less than five (5) nor in accordance with the provisions of
more than fifteen (15): the Corporation Code of the Philippines.
Provided, however, That the number of trustees This requirement to incorporate may be waived
shall be in multiples of five (5). in the case of family-administered pre-school institutions.
Unless otherwise provided in the articles of incorporation or the by-laws,
the board of trustees of Government assistance to such schools for educational programs
incorporated schools, colleges, or shall be used exclusively for that purpose.
other institutions of learning
shall, as soon as organized, so classify themselves 3. Non-stock & non-profit corporations: charitable scientific or vocational
that the term of office of one-fifth (1/5) of their number corporations
shall expire every year.
4. Business (For profit) Corporations
Trustees thereafter elected to fill vacancies,
occurring before the expiration of a particular term,
shall hold office only for the unexpired period.
d. As to Number of Members
Trustees elected thereafter to fill vacancies caused by expiration of term 1. Aggregate Corporation
shall hold office for five (5) years. 2. Corporation Sole
A majority of the trustees shall constitute a quorum
for the transaction of business. Section 110. Corporation sole. -
The powers and authority of trustees

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For the purpose of administering and managing, as trustee,
the affairs, property and temporalities of
any religious denomination, sect or church,
a corporation sole may be formed
by the chief archbishop, bishop, priest, minister,
rabbi or other presiding elder
of such religious denomination, sect or church.
according to the rules, regulations or discipline
of
the religious denomination, sect or church
to which he belongs; and
10. The place where the principal office of
the corporation sole is to be established and located,
which place must be within the Philippines.

Section 111. Articles of incorporation. - The articles of incorporation may include

any other provision not contrary to law
In order to become a corporation sole, for the regulation of the affairs of the corporation. (n)
the chief archbishop, bishop, priest,
minister, rabbi or presiding elder Section 112. Submission of the articles of incorporation. -
of any religious denomination, sect or church
must file with The articles of incorporation
the Securities and Exchange Commission must be verified, before filing,
articles of incorporation by affidavit or affirmation of
setting forth the following: the chief archbishop, bishop, priest, minister,
rabbi or presiding elder,
1. That he is the chief archbishop, bishop, priest, as the case may be, and
minister, rabbi or presiding elder accompanied by a copy of
of his religious denomination, sect or church and the commission,
that he desires to become a corporation sole; certificate of election or
7. That the rules, regulations and discipline of letter of appointment
his religious denomination, sect or church of such chief archbishop, bishop, priest, minister,
are not inconsistent with rabbi or presiding elder,
his becoming a corporation sole duly certified to be correct
and do not forbid it; by any notary public.
8. That as such chief archbishop, bishop, priest,
minister, rabbi or presiding elder, From and after the filing with the Securities and Exchange Commission
he is charged with the administration of the temporalities and of the said articles of incorporation,
the management of the affairs, estate and properties verified by affidavit or affirmation, and
of his religious denomination, sect or church accompanied by the documents mentioned
within his territorial jurisdiction, in the preceding paragraph,
describing such territorial jurisdiction; such chief archbishop, bishop, priest, minister,
9. The manner in which any vacancy occurring in the office of rabbi or presiding elder
chief archbishop, bishop, priest, minister, rabbi of presiding elder shall become a corporation sole and
is required to be filled, all temporalities, estate and properties of

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the religious denomination, sect or church
theretofore administered or managed by him
as such chief archbishop, bishop, priest, minister,
rabbi or presiding elder
shall be held in trust by him
as a corporation sole,
for the use, purpose, behalf and sole benefit
of his religious denomination, sect or church,
including hospitals, schools, colleges, orphan
asylums, parsonages and cemeteries thereof. (n)
Section 113. Acquisition and alienation of property. -
Any corporation sole
may purchase and hold real estate and personal property
for its church, charitable, benevolent or
educational purposes, and
may receive bequests or gifts for such purposes.
Such corporation may sell or mortgage real property held by it
by obtaining an order for that purpose
from the Court of First Instance of the province
where the property is situated
upon proof made to the satisfaction of the court
that notice of the application for leave
to sell or mortgage
has been given by publication or otherwise
in such manner and for such time
as said court may have directed, and
that it is to the interest of the corporation
that leave to sell or mortgage should be granted.
The application for leave to sell or mortgage
must be made by petition, duly verified,
by the chief archbishop, bishop, priest, minister,
rabbi or presiding elder acting as corporation sole, and
may be opposed by any member of
the religious denomination, sect or church
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represented by the corporation sole:
Provided, That in cases where the rules, regulations and discipline
of the religious denomination, sect or church,
religious society or order concerned
represented by such corporation sole
regulate the method of acquiring, holding, selling and mortgaging
real estate and personal property,
such rules, regulations and discipline shall control, and
the intervention of the courts shall not be necessary.
Section 114. Filling of vacancies. -
The successors in office of
any chief archbishop, bishop, priest, minister,
rabbi or presiding elder in a corporation sole
shall become the corporation sole
on their accession to office and
shall be permitted to transact business as such on the filing
with the Securities and Exchange Commission of
a copy of their commission,
certificate of election, or
letters of appointment,
duly certified by any notary public.
During any vacancy in the office of
chief archbishop, bishop, priest, minister,
rabbi or presiding elder
of any religious denomination, sect or church
incorporated as a corporation sole,
the person or persons authorized and empowered
by the rules, regulations or discipline of
the religious denomination, sect or church
represented by the corporation sole
to administer the temporalities and
manage the affairs, estate and properties
of the corporation sole during the
vacancy
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shall exercise all the powers and authority of the corporation sole
during such vacancy. (158a) 3. Corporation by Estoppel

Section 115. Dissolution. - Section 21. Corporation by estoppel. -

A corporation sole may be dissolved and All persons who assume to act as a corporation
its affairs settled voluntarily knowing it to be without authority to do so
by submitting to the Securities and Exchange Commission shall be liable as general partners
a verified declaration of dissolution. for all debts, liabilities and damages
incurred or arising as a result thereof:
The declaration of dissolution shall set forth: Provided, however, That when any such ostensible corporation
is sued on any transaction
1. The name of the corporation; entered by it as a corporation or
11. The reason for dissolution and winding up; on any tort committed by it as such,
12. The authorization for the dissolution of the corporation it shall not be allowed to use
by the particular religious denomination, sect or church; as a defense its lack of corporate personality.
13. The names and addresses of the persons
who are to supervise the winding up of the affairs On who assumes an obligation to an ostensible corporation
of the corporation. as such, cannot resist performance thereof
on the ground that there was in fact no corporation. (n)
Upon approval of such declaration of dissolution
by the Securities and Exchange Commission, f. As to Existence of Shares
the corporation shall cease to carry on its operations
except for the purpose of winding up its affairs. (n) Section 3. Classes of corporations. -

e. As to Legal Status Corporations formed or organized under this Code

1. De Jure Corporation may be stock or non-stock corporations.
2. De Facto Corporation Corporations which have capital stock
divided into shares and are
Section 20. De facto corporations. - authorized to distribute to the holders of such shares
dividends or allotments of the surplus profits
The due incorporation of any corporation on the basis of the shares held
claiming in good faith to be a corporation under this Code, and are stock corporations.
its right to exercise corporate powers, All other corporations
shall not be inquired into collaterally in any private suit are non- stock corporations. (3a)
to which such corporation may be a party.
Such inquiry may be made by the Solicitor General Section 5. Corporators and incorporators, stockholders and members. -
in a quo warranto proceeding. (n)

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Corporators are those who compose a corporation,

whether as stockholders or as members.
Incorporators are those stockholders or members
mentioned in the articles of incorporation
as originally forming and composing the corporation and
who are signatories thereof.

Corporators in a stock corporation

are called stockholders or shareholders.
Corporators in a non-stock corporation
are called members. (4a)

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III. NATURE AND ATTRIBUTES OF A CORPORATION for the restitution of goods

taken by robbery or theft within their houses
from guests lodging therein, or
1. Power to create a corporation is a legislative character (Sec 16, Article for the payment of the value thereof,
XII, 1987 Constitution) provided that such guests shall have notified in advance
the innkeeper himself, or
SECTION 16. the person representing him,
of the deposit of such goods
The Congress shall not, except by general law, within the inn; and
provide for the formation, organization, or regulation shall furthermore have followed the directions
of private corporations. which such innkeeper or his representative
Government-owned or controlled corporations may have given them
may be created or established by special charters with respect to the care and vigilance
in the interest of the common good and over such goods.
subject to the test of economic viability. No liability shall attach
in case of robbery with violence against or intimidation of persons
2. Corporation as a PERSON under the law unless committed by the innkeeper's employees.

3. Generally, Not Entitled to Practice a Profession Art. 103. Subsidiary civil liability of other persons. —

4. Corporations not entitled to moral and other damages
5. Corporations Can be Held Liable for Torts/Quasi-Delicts
6. Generally, No Corporate Criminal Liability
Art. 102. Subsidiary civil liability of innkeepers, tavernkeepers and
proprietors of establishments. —
In default of the persons criminally liable,
innkeepers, tavernkeepers, and any other persons or corporations
shall be civilly liable
for crimes committed in their establishments, in all cases
where a violation of municipal ordinances or
some general or special police regulation
shall have been committed
by them or their employees.
Innkeepers are also subsidiarily liable
The subsidiary liability established in the next preceding article
shall also apply to employers, teachers, persons, and corporations
engaged in any kind of industry
for felonies committed by their servants, pupils,
workmen, apprentices, or employees
in the discharge of their duties.
7. Corporate Nationality
a. Primary “Place of Incorporation Test”
Section 123. Definition and rights of foreign corporations. -
For the purposes of this Code, a foreign corporation
is one formed, organized or existing
under any laws other than those of the Philippines and
whose laws allow Filipino citizens and corporations
to do business in its own country or state.
It shall have the right to transact business in the Philippines

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after it shall have obtained as may be provided by law.

a license to transact business in this country
in accordance with this Code and In cases of water rights for irrigation, water supply,
a certificate of authority fisheries, or industrial uses other than the development of water power,
from the appropriate government agency. (n) beneficial use may be the measure and limit of the grant.
b. Ancillary “Control Test”
c. Sub-sets of the Control Test The State shall protect the nation’s marine wealth
d. Unlawful Corporate layering in its archipelagic waters,
e. Applications of Control Test territorial sea, and
1. In times of war exclusive economic zone, and
reserve its use and enjoyment
2. Exploitation of Natural Resources (Sec. 2 Art. VII of the Constitution) exclusively to Filipino citizens.
The Congress may, by law,
SECTION 2. allow small-scale utilization of natural resources
All lands of the public domain, waters, minerals, coal, petroleum, and by Filipino citizens,
other mineral oils, all forces of potential energy, fisheries, forests or as well as cooperative fish farming,
timber, wildlife, flora and fauna, and other natural resources with priority to subsistence fishermen and fishworkers
are owned by the State. in rivers, lakes, bays, and lagoons.

With the exception of agricultural lands, The President may enter into agreements
all other natural resources shall not be alienated. with foreign-owned corporations
The exploration, development, and utilization of natural resources involving either technical or
shall be under the full control and supervision of the State. financial assistance
for large-scale exploration,
The State may directly undertake such activities, or development, and
it may enter into utilization of
co-production, minerals,
joint venture, or petroleum, and
production-sharing agreements other mineral oils
with Filipino citizens, or according to the general terms and conditions provided by law,
corporations or associations based on real contributions to
at least sixty per centum of whose capital the economic growth and
is owned by such citizens. general welfare of the country.
In such agreements, the State
Such agreements may be for a period shall promote the development and use
not exceeding twenty-five years, of local scientific and technical resources.
renewable for not more than twenty-five years, and
under such terms and conditions The President shall notify the Congress

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of every contract entered into

in accordance with this provision, The State shall encourage equity participation in public utilities
within thirty days from its execution. by the general public.

3. Ownership of Private Land The participation of foreign investors

in the governing body of any public utility enterprise
SECTION 7. shall be limited to their pro portionate share in its capital,
and all the executive and managing officers of
Save in cases of hereditary succession, such corporation or association
no private lands shall be transferred or conveyed must be citizens of the Philippines.
except to individuals, corporations, or associations
qualified to acquire or hold lands of the public domain. 5. Mass Media (wholly owned)

SECTION 11.
(1) The ownership and management of mass media
shall be limited to citizens of the Philippines, or
4. Public Utilities (at least 60%) to corporations, cooperatives or associations,
The Congress shall regulate or prohibit
SECTION 11. monopolies in commercial mass media
when the public interest so requires.
No franchise, certificate, or No combinations in restraint of
any other form of authorization trade or unfair competition therein
for the operation of a public utility shall be allowed.
shall be granted
except to citizens of the Philippines or 6. Advertising Business
to corporations or associations SECTION 11.
organized under the laws of the Philippines
at least sixty per centum of whose capital (2) The advertising industry
is owned by such citizens, is impressed with public interest, and
nor shall such franchise, certificate, or authorization shall be regulated by law
be exclusive in character or for the protection of consumers and
for a longer period than fifty years. the promotion of the general welfare.

Neither shall any such franchise or right be granted Only Filipino citizens or corporations or associations
except under the condition that at least seventy per centum of the capital
it shall be subject to amendment, alteration, or repeal of which is owned by such citizens
by the Congress shall be allowed to engage in the advertising industry.
when the common good so requires.

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The participation of foreign investors and foster economic development.

in the governing body of entities in such industry
shall be limited to their proportionate share In recommending to the Batasang Pambansa corporations,
in the capital thereof, business or industries to be declared
and all the executive and managing officers of such entities vested with a public interest and
must be citizens o f the Philippines. in formulating proposals for limitations on stock ownership,
the National Economic and Development Authority shall consider
E. Limitations of Stock Ownership in Corporations Vested with Public the type and nature of the industry,
Interest the size of the enterprise,
Sec. 140. Stock ownership in certain corporations. - the economies of scale,
the geographic location,
Pursuant to the duties specified by Article XIV of the Constitution, the extent of Filipino ownership,
the National Economic and Development Authority the labor intensity of the activity,
shall, from time to time, make a determination of the export potential,
whether the corporate vehicle has been used as well as other factors
by any corporation or which are germane to
by business or industry the realization and promotion
to frustrate of business and industry.
the provisions thereof or
of applicable laws, and
shall submit to the Batasang Pambansa,
whenever deemed necessary,
a report of its findings, including recommendations
for their prevention or correction.
Maximum limits may be set by the Batasang Pambansa
for stockholdings in 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
related to each other by consanguinity or affinity or
by close business interests, or
whenever it is necessary to achieve national objectives,
prevent illegal monopolies or combinations
in restraint or trade, or
to implement national economic policies declared
in laws, rules and regulations
designed to promote the general
welfare

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IV. SEPARATE JURIDICAL PERSONALITY AND THE DOCTRINE OF PIERCING

THE VEIL OF CORPORATE FICTION

A. Main Doctrine

Art. 44. Sec. 2

The following are juridical persons:

(1) The State and its political subdivisions;
(1) Other corporations, institutions and entities for public interest or
purpose, created by law; their personality begins as soon as they have
been constituted according to law;
(2) Corporations, partnerships and associations for private interest or
purpose to which the law grants a juridical personality, separate and
distinct from that of each shareholder, partner or member. (35a)

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V. CORPORATE CONTRACT LAW to the Securities and Exchange Commission. (n)

1. Pre-Incorporation Contracts
c. Liability Rules for Promoter’s Contracts
a. Who is a Promoter? 2. De facto Corporation

Promoter Section 20. De facto corporations. -

- person, acting alone or with others,
- takes initiative in founding and organising business or enterprise of the The due incorporation of any corporation
issuer and claiming in good faith
- receives consideration thereof to be a corporation under this Code, and
its right to exercise corporate powers,
b. Nature of Pre-Incorporation Agreements shall not be inquired into collaterally in any private suit
to which such corporation may be a party.
Section 60. Subscription contract. - Such inquiry may be made by the Solicitor General
Any contract in a quo warranto proceeding. (n)
for the acquisition of unissued stock in
an existing corporation or 3. Corporation by Estoppel Doctrine
a corporation still to be formed
shall be deemed a subscription Section 21. Corporation by estoppel. -
within the meaning of this Title,
notwithstanding the fact that All persons who assume to act as a corporation
the parties refer to it knowing it to be without authority to do so
as a purchase or shall be liable as general partners
some other contract. (n) for all debts, liabilities and damages
incurred or arising as a result thereof:
Section 61. Pre-incorporation subscription. -
A subscription for shares of stock of a corporation still to be formed Provided, however, That
shall be irrevocable for a period of when any such ostensible corporation is sued
at least six (6) months from the date of subscription, on any transaction entered by it as a corporation or
unless all of the other subscribers consent to the revocation, or on any tort committed by it as such,
unless the incorporation of said corporation it shall not be allowed to use as a defense
fails to materialize its lack of corporate personality.
within said period or
within a longer period as may be stipulated One who assumes an obligation to an ostensible corporation
in the contract of subscription: as such, cannot resist performance thereof
Provided, That no pre-incorporation subscription may be revoked on the ground that there was in fact no corporation. (n)
after the submission of the articles of incorporation

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Section 41. Power to acquire own shares. -

a. Jurisprudential Background
A stock corporation
c. Nature of Doctrine shall have the power to purchase or acquire its own shares
d. Two Levels: i. With Fraud and ii. Without Fraud for a legitimate corporate purpose or purposes,
including but not limited to the following cases:
e. Can a Defenctive Attempt to form a corporation result at least in Provided, That the corporation has unrestricted retained earnings in its
partnership books
4. Trust Fund Doctrine to cover the shares to be purchased or acquired:

a. Common law Premise: Creditors preferred over equity holders to the 1. To eliminate fractional shares
assets of the business enterprise arising out of stock dividends;

Article 2236. 2. To collect or compromise an indebtedness to the corporation,

arising out of unpaid subscription,
The debtor is liable in a delinquency sale, and
with all his property, to purchase delinquent shares
present and future, sold during said sale; and
for the fulfillment of his obligations,
subject to the exemptions 3. To pay dissenting or withdrawing stockholders
provided by law. (1911a) entitled to payment for their shares
under the provisions of this Code. (a)
b. Power to purchase own shares
Section 43. Power to declare dividends. -
Section 8. Redeemable shares. -
The board of directors of a stock corporation
Redeemable shares may be issued by the corporation may declare dividends out of the unrestricted retained earnings
when expressly so provided which shall be payable in cash, in property, or in stock
in the articles of incorporation. to all stockholders
They may be purchased or taken up by the corporation on the basis of outstanding stock held by them:
upon the expiration of a fixed period,
regardless of the existence of unrestricted retained earnings Provided, That any cash dividends due on delinquent stock
in the books of the corporation, and shall first be applied to the unpaid balance on the subscription
upon such other terms and conditions plus costs and expenses,
as may be stated in the articles of incorporation, while stock dividends shall be withheld from the delinquent stockholder
which terms and conditions must also be stated until his unpaid subscription is fully paid:
in the certificate of stock representing said shares. (n)
Provided, further, That no stock dividend shall be issued

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without the approval of stockholders representing

not less than two-thirds (2/3) of the outstanding capital stock
at a regular or special meeting
duly called for the purpose. (16a)

Stock corporations are prohibited from retaining surplus profits

in excess of one hundred (100%) percent of their paid-in capital stock,
except:
(1) when justified by
definite corporate expansion projects or programs
approved by the board of directors; or

(2) when the corporation is prohibited under any loan agreement

with any financial institution or creditor,
whether local or foreign,
from declaring dividends without its/his consent, and
such consent has not yet been secured; or

(3) when it can be clearly shown that such retention is necessary

under special circumstances obtaining in the corporation,
such as when there is need for special reserve
for probable contingencies. (n)

Section 122. Corporate liquidation. - last paragraph

Except by decrease of capital stock and

as otherwise allowed by this Code,
no corporation shall distribute any of its assets or property
except upon lawful dissolution and
after payment of all its debts and liabilities. (77a, 89a, 16a)

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VI. ARTICLES OF INCORPORATION 1. The name of the corporation;

1. Nature of Charter 2. The specific purpose or purposes

for which the corporation is being incorporated.
a. Commencement of Corporate Existence Where a corporation has more than one stated purpose,
the articles of incorporation shall state
Section 19. Commencement of corporate existence. - which is the primary purpose and
which is/are the secondary purpose or purposes:
A private corporation formed or organized under this Code Provided, That a non-stock corporation may not include a purpose
commences to have corporate existence and juridical personality and which would change or contradict its nature as such;
is deemed incorporated
from the date the Securities and Exchange Commission 3. The place where the principal office of the corporation is to be located,
issues a certificate of incorporation which must be within the Philippines;
` under its official seal; and
thereupon the 4. The term for which the corporation is to exist;
incorporators,
stockholders/members and 5. The names,
their successors nationalities and
shall constitute a body politic and corporate residences
under the name stated in the articles of incorporation of the incorporators;
for the period of time mentioned therein,
unless said period is extended or 6. The number of directors or trustees, which shall not be
the corporation is sooner dissolved less than five (5) nor
in accordance with law. (n) more than fifteen (15);

2. Procedure and Documentary Requirements 7. The names,

Section 14. Contents of the articles of incorporation. -
All corporations organized under this code
shall file with the Securities and Exchange Commission
articles of incorporation
in any of the official languages
duly signed and acknowledged by all of the incorporators,
containing substantially the following matters,
except as otherwise prescribed
by this Code or by special law:
nationalities and
residences
of persons who shall act as directors or trustees
until the first regular directors or trustees
are duly elected and qualified in accordance with this Code;
8. If it be a stock corporation,
the amount of its authorized capital stock
in 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,

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the names, nationalities and residences of the original subscribers, and

the amount subscribed and paid by each on his subscription, and Unless otherwise prescribed by special law,
if some or all of the shares are without par value, articles of incorporation of all domestic corporations
such fact must be stated; shall comply substantially with the following form:

ARTICLES OF INCORPORATION
OF
9. If it be a non-stock corporation, __________________________
the amount of its capital, (Name of Corporation)
the names,
nationalities and KNOW ALL MEN BY THESE PRESENTS:
residences The undersigned incorporators, all of legal age and a majority of whom are
of the contributors and residents of the Philippines, have this day voluntarily agreed to form a
the amount contributed by each; and (stock) (non-stock) corporation under the laws of the Republic of the
Philippines;
10. Such other matters
as are not inconsistent with law and AND WE HEREBY CERTIFY:
which the incorporators may deem necessary and convenient. FIRST: That the name of said corporation shall be
".............................................., INC. or CORPORATION";
The Securities and Exchange Commission
shall not accept the articles of incorporation of any stock corporation SECOND: That the purpose or purposes for which such corporation is
unless accompanied by a sworn statement of incorporated are: (If there is more than one purpose, indicate primary and
the Treasurer elected by the subscribers showing that secondary purposes);
at least twenty-five (25%) percent of
the authorized capital stock of the corporation THIRD: That the principal office of the corporation is located in the
has been subscribed, and City/Municipality of............................................, Province
at least twenty-five (25%) of of................................................., Philippines;
the total subscription
has been fully paid to him FOURTH: That the term for which said corporation is to exist is...............
in actual cash and/or in property years from and after the date of issuance of the certificate of incorporation;
the fair valuation of which is equal to
at least twenty-five (25%) percent of FIFTH: That the names, nationalities and residences of the incorporators of
the said subscription, the corporation are as follows:
such paid-up capital being not less than NAME             NATIONALITY             RESIDENCE
five thousand (P5,000.00) pesos. .............................................................................................................

Section 15. Forms of Articles of Incorporation. -

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SIXTH: That the number of directors or trustees of the corporation shall
be............; and the names, nationalities and residences of the first directors
or trustees of the corporation are as follows:
NAME             NATIONALITY             RESIDENCE
.............................................................................................................
SEVENTH: That the authorized capital stock of the corporation
is................................................ (P......................) PESOS in lawful money of
the Philippines, divided into.............. shares with the par value
of.................................. (P.......................) Pesos per share.
(In case all the share are without par value):
That the capital stock of the corporation is.......................... shares without
par value. (In case some shares have par value and some are without par
value): That the capital stock of said corporation consists of.......................
shares of which...................... shares are of the par value
of............................. (P.....................) PESOS each, and of
which............................... shares are without par value.
EIGHTH: That at least twenty five (25%) per cent of the authorized capital
stock above stated has been subscribed as follows:
Name of Subscriber Nationality No of Shares Amount
Subscribed Subscribed
..................................................................................................
NINTH: That the above-named subscribers have paid at least twenty-five
(25%) percent of the total subscription as follows:
Name of Subscriber Amount Subscribed Total Paid-In
......................................................................................................
(Modify Nos. 8 and 9 if shares are with no par value. In case the
corporation is non-stock, Nos. 7, 8 and 9 of the above articles may be
modified accordingly, and it is sufficient if the articles state the amount of
capital or money contributed or donated by specified persons, stating the
names, nationalities and residences of the contributors or donors and the
respective amount given by each.)
TENTH: That...................................... has been elected by the subscribers as
Treasurer of the Corporation to act as such until his successor is duly
elected and qualified in accordance with the by-laws, and that as such
Page 21 of 128
Treasurer, he has been authorized to receive for and in the name and for
the benefit of the corporation, all subscription (or fees) or contributions or
donations paid or given by the subscribers or members.
ELEVENTH: (Corporations which will engage in any business or activity
reserved for Filipino citizens shall provide the following):
"No transfer of stock or interest which shall reduce the ownership of
Filipino citizens to less than the required percentage of the capital stock as
provided by existing laws shall be allowed or permitted to recorded in the
proper books of the corporation and this restriction shall be indicated in all
stock certificates issued by the corporation."
IN WITNESS WHEREOF, we have hereunto signed these Articles of
Incorporation, this.................. day of............................., 19.......... in the
City/Municipality of......................................., Province
of................................................, Republic of the Philippines.
........................................................................................
........................................................................................
................................................
(Names and signatures of the incorporators)
SIGNED IN THE PRESENCE OF:
........................................................................................
(Notarial Acknowledgment) 
TREASURER'S AFFIDAVIT
REPUBLIC OF THE PHILIPPINES )
CITY/MUNICIPALITY OF ) S.S.
PROVINCE OF )
I,..................................., being duly sworn, depose and say:
That I have been elected by the subscribers of the corporation as Treasurer
thereof, to act as such until my successor has been duly elected and
qualified in accordance with the by-laws of the corporation, and that as
such Treasurer, I hereby certify under oath that at least 25% of the
authorized capital stock of the corporation has been subscribed and at least
25% of the total subscription has been paid, and received by me, in cash or
property, in the amount of not less than P5,000.00, in accordance with the
Corporation Code.
.......................................
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Codal Provisions - Midterms

(Signature of Treasurer) to that of any existing corporation or

SUBSCRIBED AND SWORN to before me, a Notary Public, for and in the to any other name already protected by law or
City/Municipality of................................. Province is patently deceptive, confusing or
of........................................., this............ day of........................, 19.......; contrary to existing laws.
by........................................... with Res. Cert. No..................... issued
at................ on....................., 19.........  When a change in the corporate name is approved,
  the Commission shall issue an amended certificate of
NOTARY PUBLIC incorporation
    My commission expires on.........................., 19....... under the amended name. (n)
Doc. No...............;
Page No...............; Section 14. Contents of the articles of incorporation. -
Book No..............; All corporations organized under this code
Series of 19..... (7a) shall file with the Securities and Exchange Commission
a. As to number and residency of incorporators articles of incorporation in any of the official languages
duly signed and acknowledged by all of the incorporators,
Sec. 10. Number and qualifications of incorporators. - containing substantially the following matters,
except as otherwise prescribed
Any number of natural persons by this Code or by special law:
not less than five (5) but 1. The name of the corporation;
not more than fifteen (15),
all of legal age and Section 42. Power to invest corporate funds in another corporation or
a majority of whom are residents of the Philippines, business or for any other purpose. -
may form a private corporation
for any lawful purpose or purposes. Subject to the provisions of this Code, a private corporation
may invest its funds
Each of the incorporators of s stock corporation in any other corporation or business or
must own or for any purpose other than the primary purpose
be a subscriber for which it was organized when
to at least one (1) share of the capital stock approved by a majority of
of the corporation.. the board of directors or trustees and
ratified
b. Corporate Name (Secs. 18, 14[1], and 42) by the stockholders representing
at least two-thirds (2/3) of
Section 18. Corporate name. - the outstanding capital stock, or
No corporate name may be allowed by at least two thirds (2/3) of the members
by the Securities and Exchange Commission in the case of non-stock corporations,
if the proposed name at a stockholder's or member's meeting
is identical or deceptively or confusingly similar duly called for the purpose.

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Written notice of the proposed investment and
the time and place of the meeting
shall be addressed to each stockholder or member
at his place of residence as shown on the books of the corporation
and deposited to the addressee in the post office
with postage prepaid, or served personally:
Provided, That any dissenting stockholder
shall have appraisal right as provided in this Code:
Provided, however, That where the investment by the corporation
is reasonably necessary to accomplish its primary purpose
as stated in the articles of incorporation,
the approval of the stockholders or members
shall not be necessary. (17 1/2a)
i. Deceptively Similar Corporate Names
Sec MC No. 21 Series 2013
ii. Effect of Change of Corporate Name
c. Purpose Clauses
Section 14. Contents of the articles of incorporation. -
All corporations organized under this code
shall file with the Securities and Exchange Commission
articles of incorporation in any of the official languages
duly signed and acknowledged by all of the incorporators,
containing substantially the following matters,
except as otherwise prescribed
by this Code or by special law:
14. The specific purpose or purposes
for which the corporation is being incorporated.
Where a corporation has more than one stated purpose,
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the articles of incorporation shall state
which is the primary purpose and
which is/are he secondary purpose or purposes:
Provided, That a non-stock corporation
may not include a purpose
which would change or contradict its nature as such;
Section 42. Power to invest corporate funds in another corporation or
business or for any other purpose. -
Subject to the provisions of this Code, a private corporation
may invest its funds
in any other corporation or business or
for any purpose other than the primary purpose
for which it was organized when
approved by a majority of
the board of directors or trustees and
ratified
by the stockholders representing
at least two-thirds (2/3) of
the outstanding capital stock, or
by at least two thirds (2/3) of the members
in the case of non-stock corporations,
at a stockholder's or member's meeting
duly called for the purpose.
Written notice of the proposed investment and
the time and place of the meeting
shall be addressed to each stockholder or member
at his place of residence as shown on the books of the corporation
and deposited to the addressee in the post office
with postage prepaid, or served personally:
Provided, That any dissenting stockholder
shall have appraisal right as provided in this Code:
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Codal Provisions - Midterms
Provided, however, That where the investment by the corporation
is reasonably necessary to accomplish its primary purpose
as stated in the articles of incorporation,
the approval of the stockholders or members
shall not be necessary. (17 1/2a)
d. Corporate Term
Sec. 11. Corporate term. -
A corporation shall exist for a period
not exceeding fifty (50) years from the date of incorporation
unless sooner dissolved or
unless said period is extended.
The corporate term as originally stated in the articles of incorporation
may be extended for periods not exceeding fifty (50) years
in any single instance
by an amendment of the articles of incorporation,
in accordance with this Code;
Provided, That no extension can be made earlier than
five (5) years prior to the original or subsequent expiry date(s)
unless there are justifiable reasons for an earlier
extension
as may be determined
by the Securities and Exchange Commission.
e. Principal Place of Business
Section 51. Place and time of meetings of stockholders of members. -
Stockholder's or member's meetings, whether regular or special,
shall be held in the city or municipality
where the principal office of the corporation is located, and
if practicable in the principal office of the corporation:
Provided, That Metro Manila shall, for purposes of this section,
Page 24 of 128
be considered a city or municipality.
Notice of meetings shall be in writing, and
the time and place thereof stated therein.
All proceedings had and any business transacted
at any meeting of the stockholders or members,
if within the powers or authority of the corporation,
shall be valid
even if the meeting be improperly held or called,
provided all the stockholders or members
of the corporation
are present or
duly represented
at the meeting. (24 and 25)
f. Minimum Capitalization
Sec. 12. Minimum capital stock required of stock corporations. -
Stock corporations incorporated under this Code
shall not be required to have any minimum authorized capital
stock
except as otherwise specifically provided for
by special law, and
subject to the provisions of the following section.
g. Subscription and Paid-up Capital
Sec. 13. Amount of capital stock to be subscribed and paid for the
purposes of incorporation. -
At least twenty-five percent (25%) of the authorized capital stock
as stated in the articles of incorporation
must be subscribed at the time of incorporation, and
at least twenty-five (25%) per cent of the total subscription
must be paid upon subscription,
the balance to be payable
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Codal Provisions - Midterms

on a date or dates fixed in the contract of subscription is false;

without need of call, or
in the absence of a fixed date or dates,
upon call for payment by the board of directors:
Provided, however, That in no case shall the paid-up capital be
less than five Thousand (P5,000.00) pesos.
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.

h. Steps and Documents Required by the SEC No articles of incorporation or

amendment to articles of incorporation of
3. Grounds for Disapproval banks,
banking and quasi-banking institutions,
Sec. 17. Grounds when articles of incorporation or amendment may be building and loan associations,
rejected or disapproved. - trust companies and
other financial intermediaries,
The Securities and Exchange Commission insurance companies,
may reject the articles of incorporation or public utilities,
disapprove any amendment thereto educational institutions, and
if the same is not in compliance other corporations governed by special laws
with the requirements of this Code: shall be accepted or approved by the Commission
Provided, That the Commission shall give the incorporators unless accompanied by
a reasonable time within which to correct or modify a favorable recommendation of
the objectionable portions of the articles or amendment. the appropriate government agency
The following are grounds to the effect that such articles or amendment
for such rejection or disapproval: is in accordance with law.

1. That the articles of incorporation or any amendment thereto 4. Amendments to the Articles of Incorporation
is not substantially in accordance with the form prescribed herein;
Sec. 16. Amendment of Articles of Incorporation. -
2. That the purpose or purposes of the corporation
are patently unconstitutional, Unless otherwise prescribed by this Code or by special law, and
illegal, for legitimate purposes,
immoral, or any provision or matter stated in the articles of incorporation
contrary to government rules and regulations; may be amended
by a majority vote of the board of directors or trustees
3. That the Treasurer's Affidavit and
concerning the amount of capital stock subscribed and/or paid the vote or written assent of the stockholders
representing at least two-thirds (2/3) of
the outstanding capital stock,

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without prejudice to the appraisal right

of dissenting stockholders
in accordance with
the provisions of this Code, or
the vote or written assent of at least two-thirds (2/3) of
the members if it be a non-stock corporation.

The original and amended articles together

shall contain all provisions required by law
to be set out in the articles of incorporation.
Such articles, as amended shall be indicated
by underscoring the change or changes made, 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 amendments
have been duly approved by the required vote of
the stockholders or members,
shall be submitted to the Securities and
Exchange Commission.

The amendments shall take effect

upon their approval by the Securities and 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 attributable to the corporation.

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VII. BY-LAWS election or appointment and

the term of office of
1. Nature, function and contents all officers other than directors or trustees;

Sec. 47. Contents of by-laws. - 8. The penalties for violation of the by-laws;

Subject to the provisions of 9. In the case of stock corporations,

the Constitution, the manner of issuing stock certificates; and
this Code,
other special laws, and
the articles of incorporation, 10. Such other matters as may be necessary
a private corporation may provide in its by-laws for: for the proper or convenient transaction of
its corporate business and affairs. (21a) 
1. The time, place and manner of
calling and conducting regular or special meetings of a. Adoption Procedure fo By-Law
the directors or trustees;
Sec. 46. Adoption of by-laws. -
2. The time and manner of
calling and conducting regular or special meetings of Every corporation formed under this Code must,
the stockholders or members; within one (1) month after receipt of
official notice of the issuance of its certificate of incorporation
by the Securities and Exchange Commission,
3. The required quorum in meetings of adopt a code of by-laws for its government
stockholders or members and not inconsistent with this Code.
the manner of voting therein; For the adoption of by-laws by the corporation
the affirmative vote of the stockholders
4. The form for proxies of stockholders and members and representing at least a majority of
the manner of voting them; the outstanding capital stock, or
of at least a majority of the members
5. The qualifications, duties and compensation of in case of non-stock corporations,
directors or trustees, officers and employees; shall be necessary.
The by-laws
6. T he time for holding shall be signed
the annual election of directors of trustees and by the stockholders or members voting for them and
the mode or manner of shall be kept in the principal office of the corporation,
giving notice thereof; subject to the inspection of the stockholders or members
during office hours.
7. The manner of A copy thereof,

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duly certified to by a majority of the directors or trustees at least a majority of the outstanding capital stock, or
countersigned by the secretary of the corporation, at least a majority of the members of a non-stock corporation,
shall be filed with at a regular or special meeting duly called for the
the Securities and Exchange Commission purpose,
which shall be attached to may amend or repeal any by-laws or
the original articles of incorporation. adopt new by-laws.
The owners of
Notwithstanding the provisions of the preceding paragraph, two-thirds (2/3) of the outstanding capital stock or
by-laws may be adopted and filed prior to incorporation; two-thirds (2/3) of the members in a non-stock corporation
in such case, such by-laws may delegate to the board of directors or trustees
shall be approved and signed by all the incorporators and the power to amend or repeal
submitted to the Securities and Exchange Commission, any by-laws or
together with the articles of incorporation. adopt new by-laws:

In all cases, by-laws shall be effective Provided, That any power delegated to
only upon the issuance the board of directors or trustees
by the Securities and Exchange Commission of to amend or repeal any by-laws or
a certification that the adopt new by-laws
by-laws are not inconsistent with this Code. shall be considered as revoked
whenever stockholders owning or representing
The Securities and Exchange Commission shall not accept a majority of the outstanding capital stock or
for filing the by-laws or any amendment thereto of a majority of the members
any bank, banking institution, building and in non-stock corporations,
loan association, trust company, insurance company, shall so vote at
public utility, educational institution or a regular or special meeting
other special corporations governed by special laws,
unless accompanied by a certificate of Whenever any amendment or new by-laws are adopted,
the appropriate government agency such amendment or new by-laws shall be attached
to the effect that such by-laws or amendments to the original by-laws in the office of the corporation, and
are in accordance with law. (20a) a copy thereof, duly certified under oath by
the corporate secretary and
b. Amendments and Revisions of By-Laws a majority of the directors or trustees,
shall be filed with
Sec. 48. Amendments to by-laws. - the Securities and Exchange Commission
the same to be attached to the
The board of directors or trustees, original articles of incorporation and
by a majority vote thereof, and original by-laws.
the owners of

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The amended or new by-laws has the power and capacity:

shall only be effective upon the issuance
by the Securities and Exchange Commission of 1. To sue and be sued
a certification that the same are not inconsistent in its corporate name;
with this Code. (22a and 23a)
2. Of succession
2. Common Law Intramural Limitations on By-Laws by its corporate name
for the period of time stated in
a. By-laws cannot be contrary to law, public policy or the charter the articles of incorporation and
the certificate of incorporation;
c. By-law provisions cannot be unreasonable or be contrary to the
nature of by laws 3. To adopt and use
a corporate seal;
d. By-law provisions cannot discriminate among its stockholders or
members 4. To amend its articles of incorporation
in accordance with the provisions of this Code;
3. Binding Effects on By-laws on the dealing public
5. To adopt by-laws,
VIII. CORPORATE POWERS AND AUTHORITY not contrary to law, morals, or public policy, and
to amend or repeal the same
1. Corporate Power and Capacity in accordance with this Code;

a. Classification of Corporate Powers: Express, Implied and Incidental

6. In case of stock corporations,
b. Where Corporate Power is Lodged: Board of Directors, Trustees to issue or sell stocks to subscribers and
to sell stocks to subscribers and
Article 46. Civil Code to sell treasury stocks in accordance with
the provisions of this Code; and
Juridical persons may to admit members to the corporation
acquire and possess property of all kinds, if it be a non-stock corporation;
as well as incur obligations and
bring civil or criminal actions, 7. To purchase, receive, take or grant, hold, convey,
in conformity with the laws and regulations sell, lease, pledge, mortgage and otherwise deal
of their organization. (38a) with such real and personal property,
including securities and bonds of other corporations,
Section 36. Corporate powers and capacity. - as the transaction of the lawful business of the
corporation
Every corporation incorporated under this Code may reasonably and necessarily require,

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subject to the limitations prescribed 2. Express Powers

by law and
the Constitution; a. Enumerated Powers

8. To enter into merger or consolidation Section 36. Corporate powers and capacity. -
with other corporations
as provided in this Code; b. Extend or Shorten Corporate term

9. To make reasonable donations, including those Section 37. Power to extend or shorten corporate term. -
for the public welfare or
for hospital, charitable, cultural, A private corporation may extend or shorten its term
scientific, civic, or similar purposes: as stated in the articles of incorporation when
Provided, That no corporation, domestic or foreign, approved by a majority vote of
shall give donations the board of directors or trustees and
in aid of any political party or candidate or ratified at a meeting
for purposes of partisan political activity; by the stockholders
representing at least two-thirds (2/3) of
10. To establish pension, retirement, and other plans the outstanding capital stock or
for the benefit of its directors, trustees, officers and employees; by at least two-thirds (2/3) of the members
and in case of non-stock corporations.

11. To exercise such other powers Written notice

as may be essential or necessary to carry out of the proposed action and
its purpose or purposes as stated in the articles of incorporation. of the time and place of the meeting
shall be addressed to each stockholder or member
at his place of residence
as shown on the books of the corporation and
deposited to the addressee in the post office
Section 45. Ultra vires acts of corporations. - with postage prepaid, or
served personally:
No corporation under this Code
shall possess or exercise any corporate powers
except those conferred Provided, That in case of extension of corporate term,
by this Code or any dissenting stockholder
by its articles of incorporation and may exercise his appraisal right
except such as are necessary or incidental under the conditions provided in this code. (n)
to the exercise of the powers so conferred. (n)

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Section 81. Instances of appraisal right. - the incurring or increasing of

any bonded indebtedness
Any stockholder of a corporation is to be considered,
shall have the right to dissent and demand payment must be addressed to each stockholder at his place of residence
of the fair value of his shares as shown on the books of the corporation and
in the following instances: deposited to the addressee in the post office
with postage prepaid, or
1. In case any amendment to the articles of incorporation has the effect served personally.
of changing or restricting the rights
of any stockholder or class of shares, or A certificate in duplicate
of authorizing preferences in any respect must be signed
superior to those of outstanding shares of any class, or by a majority of the directors of the corporation and
of extending or shortening the term of corporate existence; countersigned by
the chairman and the secretary
c. Increase or Decrease Capital Stock of the stockholders' meeting,
setting forth:
Section 38. Power to increase or decrease capital stock; incur, create or
increase bonded indebtedness. - (1) That the requirements of this section
have been complied with;
No corporation shall
increase or decrease its capital stock or (2) The amount of the increase or diminution of the capital stock;
incur, create or increase any bonded indebtedness
unless (3) If an increase of the capital stock,
approved by a majority vote of the board of directors and, the amount of capital stock or
at a stockholder's meeting duly called for the purpose, number of shares of no-par stock
two-thirds (2/3) of the outstanding capital stock shall favor thereof actually subscribed,
the increase or diminution of the capital stock, or the names, nationalities and residences of
the incurring, creating or increasing of the persons subscribing,
any bonded indebtedness. the amount of capital stock or
number of no-par stock
Written notice subscribed by each, and
of the proposed increase or diminution the amount paid by each on his subscription
of the capital stock or in cash or property, or
of the incurring, creating, or increasing the amount of capital stock or
of any bonded indebtedness and number of shares of no-par stock
of the time and place of the stockholder's meeting allotted to each stockholder
at which the proposed increase or diminution of if such increase is for the purpose of
the capital stock or making effective stock dividend

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therefor authorized;
(4) Any bonded indebtedness
to be incurred, created or increased;
(5) The actual indebtedness of the corporation
on the day of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing
the increase or diminution of the capital stock, or
the incurring, creating or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or
the incurring, creating or increasing of any bonded indebtedness
shall require prior approval of
the Securities and Exchange Commission.
One of the duplicate certificates
shall be kept on file in the office of the corporation and
the other
shall be filed with the Securities and Exchange Commission and
attached to the original articles of incorporation.
From and after
approval by the Securities and Exchange Commission and
the issuance by the Commission of its certificate of filing,
the capital stock shall stand increased or decreased and
the incurring, creating or increasing
of any bonded indebtedness authorized,
as the certificate of filing may declare:
Provided, That the Securities and Exchange Commission
shall not accept for filing any certificate of increase of capital stock
unless accompanied by the sworn statement of
the treasurer of the corporation lawfully holding office
at the time of the filing of the certificate,
showing that at least twenty-five (25%) percent
of such increased capital stock
has been subscribed and
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that at least twenty-five (25%) percent
of the amount subscribed has been paid
either in actual cash to the corporation
or that there has been transferred to the corporation
property the valuation of which is equal to
twenty-five (25%) percent of the subscription:
Provided, further, That no decrease of the capital stock
shall be approved by the Commission
if its effect shall prejudice the rights of corporate creditors.
Non-stock corporations may
incur or create bonded indebtedness, or
increase the same, with the approval
by a majority vote of the board of trustees and
of at least two-thirds (2/3) of the members
in a meeting duly called for the purpose.
Bonds issued by a corporation
shall be registered with the Securities and Exchange Commission,
which shall have the authority to determine
the sufficiency of the terms thereof. (17a)
d. Incur, Create or Increase Bonded Indebtedness
Section 38. Power to increase or decrease capital stock; incur, create or
increase bonded indebtedness. -
e. Sell or Dispose of Assets
Section 40. Sale or other disposition of assets. -
Subject to the provisions of existing laws
on illegal combinations and monopolies,
a corporation may,
by a majority vote of its board of directors or trustees,
sell,
lease,
exchange,
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Codal Provisions - Midterms
mortgage,
pledge or
otherwise dispose of
all or substantially all of its property and assets,
including its goodwill,
upon such terms and conditions and
for such consideration,
which may be money, stocks, bonds or other instruments
for the payment of
money or other property or consideration,
as its board of directors or trustees may deem expedient,
when authorized by the vote of the stockholders
representing at least two-thirds (2/3) of
the outstanding capital stock, or
in case of non-stock corporation, by the vote of
at least to two-thirds (2/3) of the members,
in a stockholder's or member's meeting duly called for the
purpose.
Written notice
of the proposed action and
of the time and place of the meeting
shall be addressed to each stockholder or member
at his place of residence
as shown on the books of the corporation and
deposited to the addressee in the post office
with postage prepaid, or
served personally:
Provided, That any dissenting stockholder
may exercise his appraisal right
under the conditions provided in this Code.
A sale or other disposition
shall be deemed to cover substantially
all the corporate property and assets
if thereby the corporation would be rendered
incapable of continuing the business or
accomplishing the purpose for which it was incorporated.
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After such authorization or approval by the stockholders or members,
the board of directors or trustees
may, nevertheless, in its discretion,
abandon such sale, lease, exchange, mortgage,
pledge or other disposition of property and assets,
subject to the rights of third parties
under any contract relating thereto,
without further action or approval
by the stockholders or members.
Nothing in this section is intended to restrict the power of any corporation,
without the authorization by the stockholders or members,
to sell, lease, exchange, mortgage, pledge or otherwise dispose of
any of its property and assets if the same is necessary
in the usual and regular course of business
of said corporation or
if the proceeds of the sale or
other disposition of such property and assets
be appropriated for the conduct
of its remaining business.
In non-stock corporations where there are no members with voting rights,
the vote of at least a majority of the trustees in office
will be sufficient authorization
for the corporation to enter into any transaction
authorized by this section.
f. Invest Corporate Funds for Non-primary Purpose Endeavor
Section 42. Power to invest corporate funds in another corporation or
business or for any other purpose. -
Subject to the provisions of this Code,
a private corporation may invest its funds
in any other corporation or business or
for any purpose other than the primary purpose
for which it was organized
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when approved to all stockholders

by a majority of the board of directors or trustees and
ratified
by the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock, or
by at least two thirds (2/3) of the members
in the case of non-stock corporations,
at a stockholder's or member's meeting duly called for the
purpose.
Written notice of
the proposed investment and
the time and place of the meeting
shall be addressed to each stockholder or member
at his place of residence
as shown on the books of the corporation and
deposited to the addressee in the post office
with postage prepaid, or
served personally:
Provided, That any dissenting stockholder
shall have appraisal right as provided in this Code:
Provided, however, That where the investment by the corporation
is reasonably necessary to accomplish its primary purpose
as stated in the articles of incorporation,
the approval of the stockholders or members
shall not be necessary. (17 1/2a)
g. Declare Dividends
Section 43. Power to declare dividends. -
The board of directors of a stock corporation
may declare dividends out of the unrestricted retained earnings
which shall be payable
in cash,
in property, or
in stock
on the basis of outstanding stock held by them:
Provided, That any cash dividends due on delinquent stock
shall first be applied to
the unpaid balance on the subscription
plus costs and expenses,
while stock dividends shall be withheld
from the delinquent stockholder
until his unpaid subscription is fully paid:
Provided, further, That no stock dividend shall be issued
without the approval of stockholders
representing not less than two-thirds (2/3) of
the outstanding capital stock
at a regular or special meeting
duly called for the purpose. (16a)
Stock corporations are prohibited from retaining surplus profits
in excess of one hundred (100%) percent of
their paid-in capital stock,
except:
(1) when justified by
definite corporate expansion projects or programs
approved by the board of directors; or
(2) when the corporation is prohibited under any loan agreement
with any financial institution or creditor,
whether local or foreign,
from declaring dividends without its/his consent, and
such consent has not yet been secured; or
(3) when it can be clearly shown that such retention is necessary
under special circumstances obtaining in the corporation,
such as when there is need for special reserve
for probable contingencies. (n)
h. Enter into Management Contracts

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Section 44. Power to enter into management contract. -

4. Incidental Powers
No corporation shall conclude a management contract
with another corporation 5. Other Powers
unless such contract shall have been approved
by the board of directors and Section 36. Corporate powers and capacity. -
by stockholders owning at least
the majority of the outstanding capital stock, or a. Sell land and Other properties
by at least a majority of the members
in the case of a non-stock corporation, of e. Borrow Funds
both the managing and the managed corporation,
at a meeting duly called for the purpose: f. Power to sue and be sued
Provided, That
i. Power to Sue on Behalf of the Corporation
(1) where a stockholder or stockholders
representing the same interest of both ii. Certificate of Non-Forum Shopping
the managing and the managed corporations
own or control more than one-third (1/3) of iii. Service of Summons on Corporation
the total outstanding capital stock
entitled to vote of the managing corporation; or d. Hire Employees and Appoint Agents

(2) where a majority of the members e. Provide Gratuity Pay for Employees
of the board of directors
of the managing corporation Section 36. Corporate powers and capacity. -
also constitute a majority of the members
of the board of directors Every corporation incorporated under this Code
of the managed corporation, has the power and capacity:
then the management contract must be approved
by the stockholders of the managed corporation 10. To establish pension, retirement, and other plans
owning at least two-thirds (2/3) of for the benefit of its directors, trustees, officers and employees;
the total outstanding capital stock entitled to and
vote,
or by at least two-thirds (2/3) of the members
in the case of a non-stock corporation.
No management contract shall be entered into f. To make donations
for a period longer than five years for any one term.
Section 36. Corporate powers and capacity. -
3. Implied Powers

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Every corporation incorporated under this Code

has the power and capacity: i. General Judicial Attitude Towards the Ultra Vires Doctrine

9. To make reasonable donations, including those ii. Ratification of Ultra Vires Acts
for the public welfare or
for hospital, charitable, cultural, b. Ultra Vires of the second type: Doctrine of Centralized Management
scientific, civic, or similar purposes:
Provided, That no corporation, domestic or foreign, Sec. 23. The board of directors or trustees. -
shall give donations
in aid of any political party or candidate or Unless otherwise provided in this Code,
for purposes of partisan political activity; the corporate powers of all corporations
formed under this Code shall be exercised,
g. To enter into a partnership or JV all business conducted and
all property of such corporations
See SEC Opinions 29 Feb. 1980 & SEC Opinion No. 16-22 controlled and held by the board of directors or trustees
to be elected from among the holders of stocks, or
6. Ultra-vires Doctrine here there is no stock, from among the members of the
a. Ultra Vires of the First Type: Classic Ultra Vires Acts corporation, who shall hold office for one (1) year until their successors are
elected and qualified.
Sec. 2. Corporation defined. -
Every director must own
A corporation is an artificial being at least one (1) share of the capital stock of the corporation
created by operation of law, of which he is a director,
having which share shall stand in his name
the right of succession and on the books of the corporation.
the powers, attributes and properties Any director who ceases to be the owner
expressly authorized by law or of at least one (1) share of the capital stock of the corporation
incident to its existence. of which he is a director
shall thereby cease to be a director.
Sec. 45. Ultra vires acts of corporations. - Trustees of non-stock corporations must be members thereof.
a majority of the directors or trustees of all corporations
No corporation under this Code organized under this Code must be residents of the Philippines.
shall possess or exercise any corporate powers
except those conferred c. Ultra Vires of the Third Type
by this Code or
by its articles of incorporation and
except such as are necessary or incidental
to the exercise of the powers so conferred. (n) 

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IX. BOARD OF DIRECTORS/TRUSTEES AND OFFICERS (MANAGEMENT)

b. Theories on Source of Board Power
1. Doctrine of Centralized Management: Power of Board of Directors
i. Doctrine of Directly-vested power
Section 23. The board of directors or trustees. -
Tom vs. Rodriguez
Unless otherwise provided in this Code,
the corporate powers of all corporations formed under this Code ii. Delegated powers coming from the stockholders
shall be exercised,
all business conducted and
all property of such corporations controlled and held c. Must the Board Act As a body to bind the corporation and it’s affairs
by the board of directors or trustees
to be elected from among the holders of stocks, Sec. 25. Corporate officers, quorum. -
or where there is no stock,
from among the members of the corporation, Immediately after their election,
who shall hold office for one (1) year the directors of a corporation must formally organize
until their successors are elected and qualified. by the election of
a president,
Every director must own who shall be a director,
at least one (1) share of the capital stock of the corporation of a treasurer
which he is a director, who may or may not be a director,
which share shall stand in his name a secretary
on the books of the corporation. who shall be a resident and citizen
Any director who ceases to be the owner of the Philippines, and
of at least one (1) share of the capital stock such other officers
of the corporation of which he is a director as may be provided for in the by-laws.
shall thereby cease to be a director.
Trustees of non-stock corporations Any two (2) or more positions
must be members thereof. may be held concurrently by the same person,
A majority of the directors or trustees except that no one shall act
of all corporations organized under this Code as president and secretary or
must be residents of the Philippines. as president and treasurer
at the same time.
PSE vs. Litonjua
The directors or trustees and officers to be elected
a. Rationale for “centralized management” doctrine: shall perform the duties enjoined on them
by law and
Filipinas Port Services vs. Go the by-laws of the corporation.

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(5) the filing of vacancies in the board;

Unless the articles of incorporation or the by-laws
provide for a greater majority, (6) the amendment or repeal of by-laws or
a majority of the number of directors or trustees the adoption of new by-laws;
as fixed in the articles of incorporation
shall constitute a quorum (7) the amendment or repeal of any resolution of the board
for the transaction of corporate business, and which by its express terms is not so amendable or repealable; and
every decision of at least a majority of the directors or trustees
present at a meeting at which there is a quorum (8) a distribution of cash dividends to the shareholders.
shall be valid as a corporate act,
except for the election of officers which shall require
the vote of a majority of all the members of the board. 2. Business Judgement Rule

Directors or trustees a. BJR First Branch: On the Transactions Entered into

cannot attend or vote by proxy at board meetings.
g. BJR Second Branch: On the personal liability of the members of the
d. Effects of Acts by a “Bogus” Board board & officers

e. Executive Committee 3. Counter-veiling doctrines to protect Corporate contracts

Section 35. Executive committee. - a. Theories of Estoppel and Ratification

The by-laws of a corporation h. Doctrine of Laches or “Stale Demands”

may create an executive committee,
composed of not less than three members of the board, i. Doctrine of apparent authority
to be appointed by the board.
Article 1883.
Said committee may act,
by majority vote of all its members, If an agent acts in his own name,
on such specific matters within the competence of the board, the principal has no right of action against the persons
as may be delegated to it with whom the agent has contracted;
in the by-laws or neither have such persons
on a majority vote of the board, against the principal.
except with respect to:
In such case the agent is the one directly bound
(1) approval of any action in favor of the person with whom he has contracted,
for which shareholders' approval is also required; as if the transaction were his own,
except when the contract involves

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things belonging to the principal. of which he is a director

shall thereby cease to be a director.
Trustees of non-stock corporations
must be members thereof.
a majority of the directors or trustees of all corporations
organized under this Code must be residents of the Philippines.

Section 27. Disqualification of directors, trustees or officers. -

No person convicted by final judgment

of an offense punishable by imprisonment
for a period exceeding six (6) years, or
a violation of this Code committed
within five (5) years prior to the date
of his election or appointment,
4. Qualifications of Directors and Trustees shall qualify as
a director, trustee or officer
Sec. 23. The board of directors or trustees. - of any corporation. (n)

Unless otherwise provided in this Code, 5. Election of Directors and Trustees

the corporate powers of all corporations
formed under this Code shall be exercised, a. Directors
all business conducted and
all property of such corporations controlled and held Section 24. Election of directors or trustees. -
by the board of directors or trustees
to be elected from among the holders of stocks, At all elections of directors or trustees,
or where there is no stock, there must be present,
from among the members of the corporation, either in person or by representative
who shall hold office for one (1) year authorized to act by written proxy,
until their successors are the owners of a majority of the outstanding capital stock,
elected and qualified. or if there be no capital stock,
Every director must own a majority of the members entitled to vote.
at least one (1) share of the capital stock of the corporation The election must be by ballot
of which he is a director, if requested by any voting stockholder or member.
which share shall stand in his name In stock corporations, every stockholder entitled to vote
on the books of the corporation. shall have the right to vote
Any director who ceases to be the owner in person or
of at least one (1) share of the capital stock of the corporation by proxy

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the number of shares of stock standing,
at the time fixed in the bylaws,
in his own name
on the stock books of the corporation,
or
where the by-laws are silent,
at the time of the election; and
said stockholder may vote
such number of shares for as many persons
as there are directors to be elected or
he may
cumulate said shares and
give one candidate
as many votes as the number of directors to be elected
multiplied by the number of his shares shall equal, or
he may distribute them on the same principle
among as many candidates as he shall see fit:
Provided, That the total number of votes cast by him
shall not exceed the number of shares owned by him
as shown in the books of the corporation
multiplied by the whole number of directors to be elected:
Provided, however, That no delinquent stock shall be voted.
Unless otherwise provided
in the articles of incorporation or
in the by-laws,
members of corporations which have no capital stock
may cast as many votes as there are trustees to be
elected
but may not cast more than one vote for one candidate.
Candidates receiving the highest number of votes
shall be declared elected.
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
if, for any reason, no election is held, or
Page 40 of 128
if there are not present or represented by proxy,
at the meeting,
the owners of a majority of the outstanding capital stock,
or if there be no capital stock, a majority
of the member entitled to vote. (31a)
Section 26. Report of election of directors, trustees and officers. -
Within thirty (30) days
after the election of the directors, trustees and officers of the corporation,
the secretary, or
any other officer of the corporation,
shall submit to the Securities and Exchange Commission,
the names, nationalities and residences
of the directors, trustees, and officers elected.
Should a director, trustee or officer
die, resign or in any manner cease to hold office,
his heirs in case of his death,
the secretary, or
any other officer of the corporation, or
the director, trustee or officer himself,
shall immediately report such fact
to the Securities and Exchange Commission. (n)
j. Cumulative voting
See 5a
k. Election of Trustees
Section 92. Election and term of trustees. -
Unless otherwise provided in the articles of incorporation or the by-laws,
the board of trustees of nonstock corporations,
which may be more than fifteen (15) in number
as may be fixed in their articles of incorporation or by-laws,
shall, as soon as organized, so classify themselves
that the term of office of one-third (1/3) of their number
shall expire every year; and
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Codal Provisions - Midterms

subsequent elections of trustees to any elective office in a stock or non-stock corporation,

comprising one-third (1/3) of the board of trustees the validation of proxies,
shall be held annually and the manner and validity of elections, and
trustees so elected the qualifications of candidates,
shall have a term of three (3) years. including the proclamation of winners,
Trustees thereafter elected to fill vacancies to the office of director, trustee or other officer
occurring before the expiration of a particular term directly elected
shall hold office only for the unexpired period. by the stockholders in a close corporation or
by members of a non-stock corporation
No person shall be elected as trustee where the articles of incorporation or by-laws
unless he is a member of the corporation. so provide.

Unless otherwise provided in the articles of incorporation or the by-laws, SEC. 3. Complaint. –
officers of a non-stock corporation
may be directly elected by the members. (n) In addition to the requirements in section 4, Rule 2 of these Rules,
the complaint in an election contest must state the following:
Section 138. Designation of governing boards. -
1. The case was filed within fifteen (15) days from the date of the
The provisions of specific provisions of this Code election if the by-laws of the corporation do not provide for a
to the contrary notwithstanding, procedure for resolution of the controversy, or within fifteen (15)
non-stock or special corporations days from the resolution of the controversy by the corporation as
may, through their articles of incorporation or provided in its by-laws; and
their by-laws, 2. The plaintiff has exhausted all intra-corporate remedies in
designate their governing boards election cases as provided for in the by-laws of the corporation.
by any name other than as board of trustees. (n)
SEC. 4. Duty of the court upon the filing of the complaint. –
l. Election contests: Rule 6, Interim Rules of Procedure for Intra-
corporate controversies Within two (2) days from the filing of the complaint,
the court, upon a consideration of the allegations thereof,
RULE 6 ELECTION CONTESTS may dismiss the complaint outright
if it is not sufficient in form and substance, or,
SECTION 1. Cases covered. – The provisions of this rule shall apply to if it is sufficient, order the issuance of summons
election contests in stock and non-stock corporations. which shall be served,
together with a copy of the complaint, on the defendant
SEC. 2. Definition. – within two (2) days from its issuance.
SEC. 5. Answer. –
An election contest refers to
any controversy or dispute involving title or claim The defendant shall file his answer to the complaint,

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serving a copy thereof on the plaintiff,
within ten (10) days
from service of summons and the complaint.
The answer shall contain the matters
required in section 6, Rule 2 of these Rules.
SEC. 6. Affidavits, documentary and other evidence. –
The parties shall
attach to the complaint and
answer the affidavits of witnesses, documentary and other
evidence
in support thereof, if any.
6. Term of Office, vacancy and holdover principle
Section 29. Vacancies in the office of director or trustee. -
Any vacancy occurring in the board of directors or trustees other than
by removal by the stockholders or members or
by expiration of term,
may be filled by the vote
of at least a majority of the remaining directors or
trustees,
if still constituting a quorum;
otherwise, said vacancies must be filled
by the stockholders
in a regular or special meeting
called for that purpose.
A director or trustee so elected to fill a vacancy
shall be elected only
for the unexpired term of his predecessor in office.
Any directorship or trusteeship to be filled
by reason of an increase in the number of directors or trustees
shall be filled only by an election
at a regular or at a special meeting
of stockholders or members
duly called for the purpose, or
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in the same meeting authorizing the increase
of directors or trustees
if so stated in the notice of the meeting. (n)
7. Removal of directors and trustees
Section 28. Removal of directors or trustees. -
Any director or trustee of a corporation
may be removed from office
by a vote of the stockholders
holding or representing at least two-thirds (2/3)
of the outstanding capital stock, or
if the corporation be a non-stock corporation,
by a vote of
at least two-thirds (2/3) of the members entitled to vote:
Provided, That such removal shall take place either
at a regular meeting of the corporation or
at a special meeting called for the purpose, and
in either case, after previous notice
to stockholders or members of the corporation
of the intention to propose such removal
at the meeting.
A special meeting of the stockholders or members of a corporation
for the purpose of removal of directors or trustees, or any of
them,
must be called by the secretary
on order of the president or
on the written demand of the stockholders
representing or holding at least a majority
of the outstanding capital stock, or,
if it be a non-stock corporation,
on the written demand of a majority
of the members entitled to vote.
Should the secretary fail or refuse to call the special meeting
upon such demand or fail or refuse to give the notice, or
if there is no secretary,
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Codal Provisions - Midterms
the call for the meeting may be addressed
directly to the stockholders or members
by any stockholder or member of
corporation
signing the demand.
Notice of the time and place of such meeting,
as well as of the intention to propose such removal,
must be given by publication or
by written notice prescribed in this Code.
Removal may be with or without cause:
Provided, That removal without cause
may not be used to deprive
minority stockholders or members
of the right of representation
to which they may be entitled
under Section 24 of this Code. (n)
8. Directors or Trustees Meeting
Section 49. Kinds of meetings. -
Meetings of directors, trustees, stockholders, or members
may be regular or special. (n)
Section 53. Regular and special meetings of directors or trustees. -
Regular meetings of the board of directors or trustees of every corporation
shall be held monthly,
unless the by-laws provide otherwise.
Special meetings of the board of directors or trustees
may be held at any time
upon the call of the president or as
provided in the by-laws.
Meetings of directors or trustees of corporations
may be held anywhere in or outside of the Philippines,
unless the by-laws provide otherwise.
Notice of regular or special meetings stating
the the date, time and place of the meeting
must be sent to every director or trustee
at least one (1) day prior to the scheduled meeting,
unless otherwise provided by the by-laws.
A director or trustee may waive this requirement,
either expressly or impliedly. (n)
Section 54. Who shall preside at meetings. -
The president shall preside at all meetings
of the directors or trustee
as well as of the stockholders or members,
unless the by-laws provide otherwise. (n)
Section 92. Election and term of trustees. -
Unless otherwise provided in the articles of incorporation or the by-laws,
the board of trustees of nonstock corporations,
which may be more than fifteen (15) in number
as may be fixed in their articles of incorporation or by-laws,
shall, as soon as organized, so classify themselves
that the term of office of one-third (1/3) of their number
shall expire every year; and
subsequent elections of trustees
comprising one-third (1/3) of the board of trustees
shall be held annually and
trustees so elected
shall have a term of three (3) years.
Trustees thereafter elected to fill vacancies
occurring before the expiration of a particular term
shall hold office only for the unexpired period.
No person shall be elected as trustee
unless he is a member of the corporation.
Unless otherwise provided in the articles of incorporation or the by-laws,
officers of a non-stock corporation
may be directly elected by the members. (n)
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such other officers

10. Compensation of Directors as may be provided for in the by-laws.
Any two (2) or more positions may be held concurrently by the same
Section 30. Compensation of directors. - person,
except that no one shall act
In the absence of any provision in the by-laws fixing their compensation, as president and secretary or
the directors shall not receive any compensation, as president and treasurer
as such directors, at the same time.
except for reasonable per diems: The directors or trustees and officers to be elected
Provided, however, That any such compensation other than per diems shall perform the duties enjoined on them
may be granted to directors by law and
by the vote of the stockholders representing the by-laws of the corporation.
at least a majority of the outstanding capital stock Unless the articles of incorporation or the by-laws
at a regular or special stockholders' meeting. provide for a greater majority,
a majority of the number of directors or trustees
In no case shall the total yearly compensation of directors, as such as fixed in the articles of incorporation
directors, shall constitute a quorum
exceed ten (10%) percent of the net income for the transaction of corporate business, and
before income tax of the corporation every decision of at least
during the preceding year. (n) a majority of the directors or trustees present
at a meeting at which there is a quorum
11. Fiduciary Duties of directors and officers shall be valid as a corporate act,
except for the election of officers
a. Directors as Fiduciaries which shall require the vote of
a majority of all the members of the board.
Pre-corporation code fiduciary rule for corporate officers Directors or trustees
cannot attend or vote by proxy
m. Duty of Obedience at board meetings. (33a)

Section 25. Corporate officers, quorum. - n. Duty of Diligence

Immediately after their election, the directors of a corporation Section 31. Liability of directors, trustees or officers. -
must formally organize by the election of a president,
who shall be a director, Directors or trustees
a treasurer who wilfully and knowingly vote for or assent
who may or may not be a director, to patently unlawful acts of the corporation or
a secretary who are guilty of gross negligence or bad faith
who shall be a resident and citizen of the Philippines, and in directing the affairs of the corporation or

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acquire any personal or pecuniary interest in the venture. (n)

in conflict with their duty as such directors or trustees
shall be liable jointly and severally i. Doctrine of corporate opportunity
for all damages resulting therefrom
suffered by the corporation, ii. Using inside information
its stockholders or members and
other persons. iii. Self=dealings of directors and officers

When a director, trustee or officer Section 32. Dealings of directors, trustees or officers with the corporation. -
attempts to acquire or acquires, in violation of his duty,
any interest adverse to the corporation A contract of the corporation
in respect of any matter with one or more of its directors or trustees or officers
which has been reposed in him in confidence, is voidable,
as to which equity imposes a disability upon him at the option of such corporation,
to deal in his own behalf, unless all the following conditions are present:
he shall be liable as a trustee for the corporation and
must account for the profits 1. That the presence of such director or trustee
which otherwise would have accrued in the board meeting in which the contract was approved
to the corporation. (n) was not necessary
to constitute a quorum for such meeting;
o. Duty of Loyalty
15. That the vote of such director or trustee
Section 34. Disloyalty of a director. - was not necessary
for the approval of the contract;
Where a director, by virtue of his office,
acquires for himself a business opportunity 16. That the contract is fair and reasonable
which should belong to the corporation, under the circumstances; and
thereby obtaining profits
to the prejudice of such corporation, 17. That in case of an officer,
he must account to the latter for all such profits the contract has been previously authorized
by refunding the same, by the board of directors.
unless his act has been ratified
by a vote of the stockholders
owning or representing at least two-thirds (2/3) Where any of the first two conditions
of the outstanding capital stock. set forth in the preceding paragraph is absent,
This provision shall be applicable, in the case of a contract with a director or trustee,
notwithstanding the fact that such contract may be ratified
the director risked his own funds by the vote of the stockholders representing

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at least two-thirds (2/3) of the outstanding capital stock f. Duty to creditors or outsiders
or
of at least two-thirds (2/3) of the members Section 31. Liability of directors, trustees or officers. -
in a meeting called for the purpose:
Provided, That full disclosure of Directors or trustees
the adverse interest of the directors or trustees involved who wilfully and knowingly vote for or assent
is made at such meeting: to patently unlawful acts of the corporation or
Provided, however, That the contract is fair and reasonable who are guilty of gross negligence or bad faith
under the circumstances. (n) in directing the affairs of the corporation or
acquire any personal or pecuniary interest
e. Contracts between corporations with interlocking directors in conflict with their duty as such directors or trustees
shall be liable jointly and severally
Section 33. Contracts between corporations with interlocking directors. - for all damages resulting therefrom suffered by
the corporation,
Except in cases of fraud, and its stockholders or members and
provided the contract is fair and reasonable under the circumstances, other persons.
a contract between two or more corporations
having interlocking directors When a director, trustee or officer
shall not be invalidated on that ground alone: attempts to acquire or acquires, in violation of his duty,
Provided, That if the interest of the interlocking director in one corporation any interest adverse to the corporation
is substantial and in respect of any matter
his interest in the other corporation or corporations which has been reposed in him in confidence,
is merely nominal, as to which equity imposes a disability upon him
he shall be subject to the provisions of to deal in his own behalf,
the preceding section he shall be liable as a trustee for the corporation and
insofar as the latter corporation or corporations must account for the profits
are concerned. which otherwise would have accrued
to the corporation. (n)
Stockholdings exceeding twenty (20%) percent
of the outstanding capital stock g. Stakeholder Theory versus Maximization of Shareholder’s value
shall be considered substantial doctrine
for purposes of interlocking directors. (n)
12. Corporate Officers

a. Rules on corporate Officers’ Power to bind the Corporation

i. President
ii. Corporate Secretary

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iii. Corporate Treasurer every decision of at least

iv. Manager a majority of the directors or trustees present
at a meeting at which there is a quorum
shall be valid as a corporate act,
b. Board Power to appoint and terminate corporate officer except for the election of officers
which shall require the vote of
i. Nature of Exercise of Power to terminate officers a majority of all the members of the board.
ii. Who is a “corporate officer”?

Section 25. Corporate officers, quorum. - Directors or trustees

cannot attend or vote by proxy
Immediately after their election, the directors of a corporation at board meetings. (33a)
must formally organize by the election of a president,
who shall be a director, 13. Liabilities of Directors, Trustees, and Officers
a treasurer
who may or may not be a director, Section 31. Liability of directors, trustees or officers. -
a secretary
who shall be a resident and citizen of the Philippines, and Directors or trustees
such other officers who wilfully and knowingly vote for or assent
as may be provided for in the by-laws. to patently unlawful acts of the corporation or
Any two (2) or more positions may be held concurrently by the same who are guilty of gross negligence or bad faith
person, in directing the affairs of the corporation or
except that no one shall act acquire any personal or pecuniary interest
as president and secretary or in conflict with their duty as such directors or trustees
as president and treasurer shall be liable jointly and severally
at the same time. for all damages resulting therefrom
suffered by the corporation,
The directors or trustees and officers to be elected its stockholders or members and
shall perform the duties enjoined on them other persons.
by law and
the by-laws of the corporation. When a director, trustee or officer
attempts to acquire or acquires, in violation of his duty,
Unless the articles of incorporation or the by-laws any interest adverse to the corporation
provide for a greater majority, in respect of any matter
a majority of the number of directors or trustees which has been reposed in him in confidence,
as fixed in the articles of incorporation as to which equity imposes a disability upon him
shall constitute a quorum to deal in his own behalf,
for the transaction of corporate business, and he shall be liable as a trustee for the corporation and

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must account for the profits

which otherwise would have accrued
to the corporation. (n)

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AFTER MIDTERMS! The capital stock of stock corporations shall be divided into shares
for which certificates
X. RIGHTS OF STOCKHOLDERS AND MEMBERS signed by the president or vice president,
countersigned by the secretary or assistant secretary, and
1. What does “share” represent? sealed with the seal of the corporation
shall be issued in accordance with the by-laws.
Case: Stockholders of F. Guanson and Sons, Inc. vs. Register of Deeds of Shares of stock so issued
Manila are personal property and
may be transferred
2. Preemptive rights by delivery of the certificate or certificates
indorsed by
Section 39. Power to deny pre-emptive right. - the owner or
his attorney-in-fact or
All stockholders of a stock corporation shall enjoy pre-emptive right other person legally authorized
to subscribe to all issues or disposition of shares of any class, to make the transfer.
in proportion to their respective shareholdings, No transfer, however, shall be valid,
unless such right is denied except as between the parties,
by the articles of incorporation or until the transfer is recorded in the books of the corporation
an amendment thereto: showing
Provided, That such pre-emptive right the names of the parties to the transaction,
shall not extend the date of the transfer,
to shares to be issued in compliance with the number of the certificate or certificates and
laws requiring stock offerings or the number of shares transferred.
minimum stock ownership by the public; or
to shares to be issued in good faith No shares of stock against which
w/ the approval of the stockholders representing the corporation holds any unpaid claim
two-thirds (2/3) of the outstanding capital stock, shall be transferable in the books of the corporation. (35)
in exchange for property needed
for corporate purposes or Case: Forest Hills Golf & Country Club vs. Vertex Sales and Trading, Inc.
in payment of
a previously contracted debt. a. Restriction on transfers - in general

Case: Majority stockholders of Ruby industrial corp vs. Lim Case: Lambert vs. Fox

3. Right to transfer or dispose of shareholdings b. Right of first refusal

Section 63. Certificate of stock and transfer of shares. - Case: Fleischer vs. Botica Nolasco
Case: Padgett vs. Babcock & Templeton

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corporate expansion projects or programs

c. Remedy if registration is refused approved by the board of directors; or

Case: Hager vs. Bryan (2) when the corporation is prohibited under any loan agreement
Case: Andaya vs. Rural Bank of Cabadbaran with any financial institution or creditor,
Case: Batong Buhay Gold Mines vs. CA whether local or foreign,
from declaring dividends without its/his consent, and
4. Right to dividends such consent has not yet been secured; or

Section 43. Power to declare dividends. -
The board of directors of a stock corporation
may declare dividends out of the unrestricted retained earnings
which shall be payable in cash,
in property, or
in stock
to all stockholders on the basis of
outstanding stock held by them:
Provided, That any cash dividends due on delinquent stock
shall first be applied to the unpaid balance
on the subscription
plus costs and expenses,
while stock dividends shall be withheld
from the delinquent stockholder
until his unpaid subscription is fully paid:
Provided, further, That no stock dividend shall be issued
without the approval of stockholders
representing not less than two-thirds (2/3)
of the outstanding capital stock
at a regular or special meeting
duly called for the purpose. (16a)
Stock corporations are prohibited
from retaining surplus profit in excess of
one hundred (100%) percent of their paid-in capital stock,
except:
(1) when justified by definite
(3) when it can be clearly shown that such retention is necessary
under special circumstances obtaining in the corporation,
such as when there is need for special reserve
for probable contingencies. (n)
5. Right to attend and vote stockholders’/members’ meetings
Section 6. Classification of shares. -
The shares of stock of stock corporations
may be divided into classes or series of shares, or both,
any of which classes or series of shares
may have such rights, privileges or restrictions
as may be stated in the articles of incorporation:
Provided, That no share may be deprived of voting rights
except those classified and issued
as "preferred" or "redeemable" shares,
unless otherwise provided in this Code:
Provided, further, That there shall always be a class or series of shares
which have complete voting rights.
Any or all of the shares or series of shares
may have a par value or
have no par value
as may be provided for in the articles of incorporation:
Provided, however, That
banks,
trust companies,
insurance companies,

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public utilities, and for the purpose of insuring compliance

building and loan associations with constitutional or legal requirements.
shall not be permitted to issue
no-par value shares of stock. Except as otherwise
provided in the articles of incorporation and
Preferred shares of stock issued by any corporation stated in the certificate of stock,
may be given preference each share shall be equal
in the distribution of the assets of the corporation in all respects to every other share.
in case of liquidation and
in the distribution of dividends, or Where the articles of incorporation provide for non-voting shares
such other preferences as may be stated in the cases allowed by this Code,
in the articles of incorporation the holders of such shares shall nevertheless
which are not violative of be entitled to vote on the following matters:
the provisions of this Code:
Provided, That preferred shares of stock may be issued 1. Amendment of the articles of incorporation;
only with a stated par value.
The board of directors, where authorized in the articles of incorporation, 2. Adoption and amendment of by-laws;
may fix the terms and conditions of
preferred shares of stock or 3. Sale, lease, exchange, mortgage, pledge or other disposition
any series thereof: of all or substantially all of the corporate property;
Provided, That such terms and conditions
shall be effective upon the filing of a certificate thereof 4. Incurring, creating or increasing bonded indebtedness;
with the Securities and Exchange Commission.
5. Increase or decrease of capital stock;
Shares of capital stock issued without par value
shall be deemed fully paid and non-assessable and 6. Merger or consolidation of the corporation
the holder of such shares shall not be liable with another corporation or other corporations;
to the corporation or
to its creditors in respect thereto: 7. Investment of corporate funds
Provided; That shares without par value may not be issued in another corporation or business
for a consideration less than the value of in accordance with this Code; and
five (P5.00) pesos per share:
Provided, further, That the entire consideration received 8. Dissolution of the corporation.
by the corporation for its no-par value shares
shall be treated as capital and Except as provided in the immediately preceding paragraph,
shall not be available for distribution as dividends. the vote necessary to approve a particular corporate act
as provided in this Code
A corporation may, furthermore, classify its shares shall be deemed to refer only

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to stocks with voting rights. (5a)

b. Joint Ownership
Section 89. Right to vote. -
Section 56. Voting in case of joint ownership of stock. -
The right of the members of any class or classes to vote
may be limited, broadened or denied In case of shares of stock
to the extent specified in owned jointly by two or more persons,
the articles of incorporation or in order to vote the same,
the by- laws. the consent of all the co-owners shall be necessary,
Unless so limited, broadened or denied, unless there is a written proxy,
each member, regardless of class, signed by all the co-owners,
shall be entitled to one vote. authorizing one or some of them or
any other person
Unless otherwise provided in the articles of incorporation or the by-laws, to vote such share or shares:
a member may vote by proxy Provided, That when the shares are owned
in accordance with the provisions of this Code. in an "and/or" capacity by the holders thereof,
any one of the joint owners
Voting by mail or other similar means can vote said shares or
by members of non-stock corporations appoint a proxy therefor. (n)
may be authorized by the by-laws of non-stock corporations
with the approval of, and c. Pledgor, mortgagers and administrators
under such conditions which may be prescribed
by, the Securities and Exchange Commission. Section 55. Right to vote of pledgors, mortgagors, and administrators. -

a. Instances when stockholders entitled to vote:
- Amendment of articles of incorporation (Sec. 16)
- Election of directors and trustees (Sec. 24)
- Investment in another business or corporation (Secs. 36 and 42)
- Increase and Decrease of capital stock (Sec. 38)
- Incurring, or increasing bonded indebtedness (Sec. 38)
- Sale, disposition or encumbrance of all or substantially all of the
corporate assets (Sec. 40)
- Declaration of stock dividends (Sec. 43).
- Management contracts (Sec. 44)
- Adoption, amendment and repeal of by-laws (Sec. 48).
- Fixing of consideration of no par value shares (Sec. 62)
- Merger and consolidation (Sec. 72)
In case of pledged or mortgaged shares in stock corporations,
the pledgor or mortgagor shall have
the right to attend and vote at meetings of stockholders,
unless the pledgee or mortgagee is expressly given
by the pledgor or mortgagor
such right in writing which is recorded
on the appropriate corporate books. (n)
Executors,
administrators,
receivers, and
other legal representatives duly appointed by the court
may attend and vote in behalf of the stockholders or members
without need of any written proxy. (27a)

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d. Treasury share no voting rights

Section 57. Voting right for treasury shares. -
Treasury shares shall have no voting right
as long as such shares remain in the Treasury. (n)
e. Conduct of Stockholders’ meetings:
- Kinds and requirements of meetings
Section 49. Kinds of meetings. -
Meetings of directors, trustees, stockholders, or members
may be regular or special. (n)
Section 50. Regular and special meetings of stockholders or members. -
Regular meetings of stockholders or members
shall be held annually on a date
fixed in the by-laws, or
if not so fixed, on any date in April of every year
as determined by the board of directors or trustees:
Provided, That written 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 required by the by-laws.
Special meetings of stockholders or members shall be held
at any time deemed necessary or
as provided in the by-laws:
Provided, however, That at least one (1) week written notice
shall be sent to all stockholders or members,
unless otherwise provided in the by-laws.
Notice of any meeting may be waived,
expressly or impliedly,
by any stockholder or member.
Whenever, for any cause, there is no person authorized to call a meeting,
the Securities and Exchange Commission,
upon petition of a stockholder or member
on a showing of good cause therefor,
may issue an order
to the petitioning stockholder or member
directing him to call a meeting of the corporation
by giving proper notice required
by this Code or
by the by-laws.
The petitioning stockholder or member shall preside thereat
until at least a majority of the stockholders or members present
have chosen one of their number as presiding officer.
- Place and time of meeting
Section 51. Place and time of meetings of stockholders of members. -
Stockholder's or member's meetings, whether regular or special,
shall be held in the city or municipality
where the principal office of the corporation is located,
and if practicable
in the principal office of the corporation:
Provided, That Metro Manila shall, for purposes of this section,
be considered a city or municipality.
Notice of meetings
shall be in writing, and
the time and place thereof
stated therein.
All proceedings had and
any business transacted
at any meeting of the stockholders or members,
if within the powers or authority of the corporation,
shall be valid even if the meeting be
improperly held or called,

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provided all the stockholders or members filed before the scheduled meeting
of the corporation with the corporate secretary.
are present or duly represented Unless otherwise provided in the proxy,
at the meeting. (24 and 25) it shall be valid only for the meeting
for which it is intended.
Section 93. Place of meetings. - No proxy shall be valid and effective
for a period longer than five (5) years at any one time. (n)
The by-laws may provide that the members of a non-stock corporation
may hold their regular or special meetings at any place
even outside the place b. Voting Trust Agreements
where the principal office of the corporation is located:
Provided, That proper notice is sent to all members Section 59. Voting trusts. -
indicating the date, time and place of the meeting: and
Provided, further, That the place of meeting One or more stockholders of a stock corporation
shall be within the Philippines. (n) may create a voting trust
for the purpose of conferring upon a trustee or trustees
- Quorum the right to vote and
other rights pertaining to the shares
Section 52. Quorum in meetings. - for a period not exceeding five (5) years
at any time:
Unless otherwise provided for in this Code or in the by-laws, Provided, That in the case of a voting trust
a quorum shall consist of the stockholders representing specifically required as a condition in a loan agreement,
a majority of the outstanding capital stock or said voting trust may be for a period
a majority of the members exceeding five (5) years
in the case of non-stock corporations. (n) but shall automatically expire upon full payment
of the loan.
6. Contracts and agreement affecting shareholdings A voting trust agreement
must be in writing and notarized, and
a. Proxy shall specify the terms and conditions thereof.
A certified copy of such agreement shall be filed
Section 58. Proxies. - with the corporation and
with the Securities and Exchange Commission;
Stockholders and members may vote otherwise, said agreement is
in person or ineffective and unenforceable.
by proxy The certificate or certificates of stock covered by the voting trust
in all meetings of stockholders or members. agreement
Proxies shall in writing, shall be cancelled and
signed by the stockholder or member and new ones

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shall be issued all rights granted in a voting trust agreement

in the name of the trustee or trustees shall automatically expire at the end of the agreed period, and
stating that they are issued pursuant to said agreement. the voting trust certificates
In the books of the corporation, as well as the certificates of stock in the name of the trustee or trustees
it shall be noted that the transfer shall thereby be deemed cancelled and
in the name of the trustee or trustees new certificates of stock
is made pursuant to said voting trust agreement. shall be reissued
in the name of the transferors.
The trustee or trustees
shall execute and deliver to the transferors The voting trustee or trustees may vote by proxy
voting trust certificates, unless the agreement provides otherwise. (36a)
which shall be transferable in the same manner and
with the same effect as certificates of stock. Case: lee vs. CA

The voting trust agreement filed with the corporation c. Pooling agreements or shareholders’ agreements
shall be subject to examination
by any stockholder of the corporation Section 100. Agreements by stockholders. –
in the same manner as any other corporate book or
record:

Provided, That both the transferor and the trustee or trustees

may exercise the right of inspection
of all corporate books and records
in accordance with the provisions of this Code. 1. Agreements by and among stockholders
executed before the formation and organization
Any other stockholder may transfer his shares to the same trustee or of a close corporation,
trustees signed by all stockholders,
upon the terms and conditions stated in the voting trust shall survive the incorporation of such corporation and
agreement, shall continue to be valid and binding
and thereupon shall be bound between and among such stockholders,
by all the provisions of said agreement. if such be their intent,
to the extent that such agreements are not inconsistent
No voting trust agreement shall be entered into with the articles of incorporation,
for the purpose of circumventing the law irrespective of where the provisions of such agreements
against monopolies and illegal combinations are contained,
in restraint of trade or used for purposes of fraud. except those required by this Title
to be embodied in said articles of incorporation.
Unless expressly renewed,

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2. An agreement between two or more stockholders, d. Remedies of Right Denied: Mandamus

if in writing and signed by the parties thereto,
may provide that in exercising any voting rights, e. Criminal Sanction under Section 144
the shares held by them shall be voted
as therein provided, or f. Confidential Nature of SEC Examinations
as they may agree, or
as determined in accordance with 7. Rights to inspect and copy corporate records
a procedure agreed upon by them.
a. Basis of Right
3. No provision in any written agreement
signed by the stockholders, Case: Gokongwei Jr. vs SEC
relating to any phase of the corporate affairs, Case: Chua vs. People
shall be invalidated as between the parties
on the ground that its effect is to make them b. Specified Records Covered
partners among themselves.
Section 74. Books to be kept; stock transfer agent. -
4. A written agreement among some or all of the stockholders
in a close corporation Every corporation shall keep and carefully preserve at its principal office
shall not be invalidated on the ground that a record of all business transactions and minutes
it so relates to the conduct of of all meetings of stockholders or members, or
the business and affairs of the corporation of the board of directors or trustees,
as to restrict or interfere with the discretion or powers in which shall be set forth in detail
of the board of directors: the time and place of holding the meeting,
how authorized,
Provided, That such agreement shall impose on the stockholders the notice given,
who are parties thereto whether the meeting was regular or special,
the liabilities for managerial acts if special its object,
imposed by this Code on directors. those present and absent, and
every act done or ordered done at the meeting.
5. To the extent that the stockholders are actively engaged Upon the demand of any director, trustee, stockholder or member,
in the management or operation the time when any director, trustee, stockholder or member
of the business and affairs of a close corporation, entered or left the meeting
the stockholders shall be held to strict fiduciary duties must be noted in the minutes; and
to each other and among themselves. on a similar demand,
Said stockholders shall be personally liable for corporate torts the yeas and nays must be taken
unless the corporation has obtained on any motion or proposition, and
reasonably adequate liability insurance. a record thereof carefully made.
The protest of any director, trustee, stockholder or member

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on any action or proposed action
must be recorded in full on his demand.
The records of all business transactions of the corporation and
the minutes of any meetings
shall be open to inspection
by any director, trustee, stockholder or member of the
corporation at reasonable hours on business days
and
he may demand, in writing,
for a copy of excerpts from said records or minutes,
at his expense.
Any officer or agent of the corporation who shall refuse to allow
any director, trustees, stockholder or member of the corporation
to examine and copy excerpts from its records or minutes,
in accordance with the provisions of this Code,
shall be liable to
such director, trustee, stockholder or member
for damages, and
in addition, shall be guilty of an offense
which shall be punishable under Section 144 of this Code:
Provided, That if such refusal is made
pursuant to a resolution or order of the board of directors or trustees,
the liability under this section for such action
shall be imposed upon the directors or trustees
who voted for such refusal: and
Provided, further, That it shall be a defense to any action under this section
that the person demanding to examine and copy excerpts
from the corporation's records and minutes
has improperly used any information
secured through any prior examination
of the records or minutes of such corporation or
of any other corporation, or
was not acting in good faith or for a legitimate purpose
in making his demand.
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Stock corporations must also keep a book
to be known as the "stock and transfer book",
in which must be kept
a record of all stocks in the names of the stockholders
alphabetically arranged;
the installments paid and unpaid on all stock
for which subscription has been made, and
the date of payment of any installment;
a statement of every alienation,
sale or transfer of stock made,
the date thereof, and by and
to whom made; and
such other entries as the by-laws may prescribe.
The stock and transfer book
shall be kept
in the principal office of the corporation or
in the office of its stock transfer agent and
shall be open for inspection
by any director or stockholder of the corporation
at reasonable hours on business days.
No stock transfer agent or
one engaged principally in the business of registering transfers of stocks
in behalf of a stock corporation
shall be allowed to operate in the Philippines
unless he secures a license
from the Securities and Exchange Commission and
pays a fee as may be fixed by the Commission,
which shall be renewable annually:
Provided, That a stock corporation is not precluded
from performing or making transfer of its own stocks,
in which case all the rules and regulations
imposed on stock transfer agents,
except the payment of a license fee herein provided,
shall be applicable. (51a and 32a; P.B. No. 268.)
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Section 75. Right to financial statements. -
Within ten (10) days from receipt of a written request
of any stockholder or member,
the corporation shall furnish to him
its most recent financial statement,
which shall include a balance sheet
as of the end of the last taxable year and
a profit or loss statement for said taxable year,
showing in reasonable detail
its assets and liabilities and
the result of its operations.
At the regular meeting of stockholders or members,
the board of directors or trustees shall present
to such stockholders or members
a financial report of the operations of the corporation
for the preceding year,
which shall include financial statements,
duly signed and certified
by an independent certified public accountant.
However, if the paid-up capital of the corporation is less than P50,000.00,
the financial statements may be certified under oath
by the treasurer or
any responsible officer of the corporation. (n)
Section 141. Annual report or corporations. -
Every corporation, domestic or foreign,
lawfully doing business in the Philippines
shall submit to the Securities and Exchange Commission
an annual report of its operations,
together with a financial statement of its assets and liabilities,
certified by any independent certified public accountant
in appropriate cases,
covering the preceding fiscal year and
such other requirements as
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the Securities and Exchange Commission
may require.
Such report shall be submitted
within such period as may be prescribed
by the Securities and Exchange Commission. (n)
c. Limitations and conditions on right of inspection
Section 74. Books to be kept; stock transfer agent. -
Case: Gonzales vs. PNB
d. Remedies if right denied: mandamus
Case: PASAR vs. Lim
e. Criminal Sanction under Section 144
Case: Ang-Abaya vs. Ang
Case: Chua vs. People
f. Confidential Nature of SEC Examinations
Section 142. Confidential nature of examination results. - All interrogatories
propounded by the Securities and Exchange Commission and the answers
thereto, as well as the results of any examination made by the Commission
or by any other official authorized by law to make an examination of the
operations, books and records of any corporation, shall be 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. (n)
Case: Gonzales vs. PNB
8. Appraisal Right
Section 81. Instances of appraisal right. -
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representing his shares,

Any stockholder of a corporation the fair value thereof
shall have the right to dissent and demand payment as of the day prior to the date
of the fair value of his shares on which the vote was taken,
in the following instances: excluding any appreciation or depreciation
in anticipation of such corporate action.
1. In case any amendment to the articles of incorporation has the effect
of changing or restricting If within a period of sixty (60) days from the date
the rights of any stockholder or the corporate action was approved by the stockholders,
class of shares, or the withdrawing stockholder and the corporation
of authorizing preferences cannot agree on the fair value of the shares,
in any respect superior to those of outstanding shares it shall be determined and appraised
of any class, or by three (3) disinterested persons,
of extending or shortening one of whom shall be named by the stockholder,
the term of corporate existence; another by the corporation, and
the third by the two thus chosen.
2. In case of sale, lease, exchange, transfer, The findings of the majority of the appraisers shall be final, and
mortgage, pledge or other disposition their award shall be paid by the corporation
of all or substantially all of within thirty (30) days after such award is made:
the corporate property and assets Provided, That no payment shall be made to any dissenting stockholder
as provided in the Code; and unless the corporation has unrestricted retained earnings
in its books to cover such payment: and
3. In case of merger or consolidation. (n) Provided, further, That upon payment by the corporation
of the agreed or awarded price,
Section 82. How right is exercised. - the stockholder shall forthwith transfer his shares
to the corporation. (n)
The appraisal right may be exercised by any stockholder
who shall have voted against the proposed corporate action, Section 83. Effect of demand and termination of right. -
by making a written demand on the corporation
within thirty (30) days From the time of demand for payment of
after the date on which the vote was taken the fair value of a stockholder's shares
for payment of the fair value of his shares: until either
Provided, That failure to make the demand within such period the abandonment of the corporate action involved or
shall be deemed a waiver of the appraisal right. the purchase of the said shares by the corporation,
If the proposed corporate action is implemented or affected, all rights accruing to such shares,
the corporation shall pay to such stockholder, including voting and dividend rights,
upon surrender of shall be suspended
the certificate or certificates of stock in accordance with the provisions of this Code,

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except the right of such stockholder in which case they shall be borne by the latter.
to receive payment of In the case of an action to recover such fair value,
the fair value thereof: all costs and expenses shall be assessed against the corporation,
Provided, That if the dissenting stockholder unless the refusal of the stockholder to receive payment
is not paid the value of his shares was unjustified. (n)
within 30 days after the award,
his voting and dividend rights Section 86. Notation on certificates; rights of transferee. -
shall immediately be restored. (n)
Within ten (10) days after demanding payment for his shares,
Section 84. When right to payment ceases. - a dissenting stockholder shall submit the certificates of stock
representing his shares to the corporation
No demand for payment under this Title may be withdrawn for notation thereon that such shares
unless the corporation consents thereto. are dissenting shares.
His failure to do so shall, at the option of the corporation,
If, however, such demand for payment is withdrawn terminate his rights under this Title.
with the consent of the corporation, or If shares represented by the certificates bearing such notation
if the proposed corporate action is are transferred, and
abandoned or rescinded by the corporation or the certificates
disapproved by the Securities and Exchange Commission consequently cancelled,
where such approval is necessary, or the rights of the transferor as a dissenting stockholder
if the Securities and Exchange Commission determines under this Title
that such stockholder is not entitled to the appraisal right, shall cease and
then the right of said stockholder to be paid the transferee shall have all the rights
the fair value of his shares of a regular stockholder; and
shall cease, all dividend distributions
his status as a stockholder which would have accrued on such shares
shall thereupon be restored, and shall be paid to the transferee. (n)
all dividend distributions which would have accrued on his shares
shall be paid to him. (n) Section 105. Withdrawal of stockholder or dissolution of corporation. -

Section 85. Who bears costs of appraisal. -
The costs and expenses of appraisal
shall be borne by the corporation,
unless the fair value ascertained by the appraisers
is approximately the same as the price
which the corporation may have offered
to pay the stockholder,
In addition and without prejudice to other rights and remedies
available to a stockholder under this Title,
any stockholder of a close corporation may, for any reason,
compel the said corporation to purchase his shares
at their fair value,
which shall not be less than
their par or issued value,
when the corporation has sufficient assets in its books

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to cover its debts and liabilities exclusive of capital stock: fraud or misrepresentation which may be detrimental to the
Provided, That any stockholder of a close corporation interest of the public and/or of the stockholders, partners, or
may, by written petition to the Securities and Exchange Commission, members of any corporation, partnership, or association;
compel the dissolution of such corporation 2. Controversies arising out of intra-corporate, partnership, or
whenever any of acts of the directors, officers or association relations, between and among stockholders,
those in control of the corporation members, or associates; and between, any or all of them and the
is illegal, or corporation, partnership, or association of which they are
fraudulent, or stockholders, members, or associates, respectively;
dishonest, or
oppressive or 3. Controversies in the election or appointment of directors,
unfairly prejudicial trustees, officers, or managers of corporations, partnerships, or
to the corporation or any stockholder, or associations;
whenever corporate assets
are being misapplied or wasted. 4. Derivative suits; and

9. Right to file derivative suits 5. Inspection of corporate books.

Interim Rules of Procedure Governing Intra-corporate controversies under
RA No. 8799 (A.M. No. 01-2-04-SC; effective April 1, 2001)
Re: PROPOSED INTERIM RULES OF PROCEDURE GOVERNING INTRA-
CORPORATE CONTROVERSIES UNDER R. A. NO. 8799
(b) prohibition against nuisance and harassment suits. -
Nuisance and harassment suits are prohibited. In determining whether a
suit is a nuisance or harassment suit, the court shall consider, among
others, the following:

RESOLUTION 1. The extent of the shareholding or interest of the initiating

stockholder or member;
INTERIM RULES OF PROCEDURE FOR INTRA-CORPORATE CONTROVERSIES
1. Subject matter of the suit;
RULE 1 GENERAL PROVISIONS
2. Legal and factual basis of the complaint;
SECTION 1.
3. Availability of appraisal rights for the act or acts complained of;
(a) Cases covered. – and

These Rules shall govern the procedure to be observed in civil cases 4. Prejudice or damage to the corporation, partnership, or
involving the following: association in relation to the relief sought.

1. Devices or schemes employed by, or any act of, the board of In case of nuisance or harassment suits, the court may, moto proprio or
directors, business associates, officers or partners, amounting to upon motion, forthwith dismiss the case.

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SEC. 2. Suppletory application of the Rules of Court. –
The Rules of Court, in so far as they may be applicable and are not
inconsistent with these Rules, are hereby adopted to form an integral part
of these Rules.
SEC. 3. Construction. –
These Rules shall be liberally construed in order to promote their objective
of securing a just, summary, speedy and inexpensive determination of
every action or proceeding.
SEC. 4. Executory nature of decisions and orders. –
All decisions and orders issued under these Rules shall immediately be
executory. No appeal or petition taken therefrom shall stay the
enforcement or implementation of the decision or order, unless restrained
by an appellate court. Interlocutory orders shall not be subject to appeal.
SEC. 5. Venue. –
All actions covered by these Rules shall be commenced and tried in the
Regional Trial Court which has jurisdiction over the principal office of the
corporation, partnership, or association concerned. Where the principal
office of the corporation, partnership or association is registered in the
Securities and Exchange Commission as Metro Manila, the action must be
filed in the city or municipality where the head office is located.
SEC. 6. Service of pleadings. –
When so authorized by the court, any pleading and/or document required
by these Rules may be filed with the court and/or served upon the other
parties by facsimile transmission (tax) or electronic mail (e-mail. In such
cases, the date of transmission shall be deemed to be prima facie the date
of service.
SEC. 7. Signing of pleadings, motions and other papers. –
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Every pleading, motion, and other paper of a party represented by an
attorney shall be signed by at least one attorney of record in the attorney’s
individual name, whose address shall be stated. A party who is not
represented by an attorney shall sign the pleading, motion, or other paper
and state his address.
The signature of an attorney or party constitutes a certification by the
signer that he has read the pleading, motion, or other paper; that to the
best of his knowledge, information, and belief formed after reasonable
inquiry, it is well grounded in fact and is warranted by existing law or a
good faith argument for the extension, modification, or reversal of existing
jurisprudence; and that it is not interposed for any improper purpose, such
as to harass or to cause unnecessary delay or needless increase in the cost
of litigation.
If a pleading, motion, or other paper is not signed, it shall be stricken off
the record unless it is promptly signed by the pleader or movant, after he is
notified of the omission.
SEC. 8. Prohibited pleadings. –
The following pleadings are prohibited:
1. Motion to dismiss;
2. Motion for a bill of particulars;
3. Motion for new trial, or for reconsideration of judgment or order,
or for re-opening of trial;
4. Motion for extension of time to file pleadings, affidavits or any
other paper, except those filed due to clearly compelling reasons.
Such motion must be verified and under oath; and
5. Motion for postponement and other motions of similar intent,
except those filed due to clearly compelling reasons. Such motion
must be verified and under oath.
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SEC. 9. Assignment of cases. – 1. all facts material and relevant to the plaintiff’s cause or causes of
action, which
All cases filed under these Rules shall be tried by judges designated by the 2. shall be supported by affidavits of the plaintiff or his witnesses and
Supreme Court to hear and decide cases transferred from the Securities copies of documentary and other evidence supportive of such
and Exchange Commission to the Regional Trial Courts and filed directly cause or causes of action;
with said courts pursuant to Republic Act No. 8799, otherwise known as 3. the law, rule, or regulation relied upon, violated, or sought to be
the Securities and Regulation Cod enforced;
4. a certification that
RULE 2
1. the plaintiff has not theretofore commenced any action or filed
COMMENCEMENT OF ACTION AND PLEADINGS any claim involving the same issues in any court, tribunal or quasi-
judicial agency, and, to the best of his knowledge, no such other
SECTION 1. Commencement of action. – action or claim is pending therein;
2. if there is such other action or claim, a complete statement of the
An action under these Rules is commenced by the filing of a verified present status thereof; and
complaint with the proper Regional Trial Court. 3. if he should thereafter learn that the same or similar action or
claim has been filed or is pending, he shall report that fact within
SEC. 2. Pleadings allowed. – five (5) days therefrom to the court; and

The only pleadings allowed to be filed under these Rules are the
complaint,
answer,
compulsory counterclaims or cross-claims pleaded in the answer, and
the answer to the counterclaims or cross-claims.
SEC. 3. Verification. –
The complaint and the answer shall be verified by an affidavit stating that
the affiant has read the pleading and the allegations therein are true and
correct based on his own personal knowledge or on authentic records.
SEC. 4. Complaint. –
The complaint shall state or contain:
1. the names, addresses, and other relevant personal or juridical
circumstances of the parties;
1. the relief sought.
2.
SEC. 5. Summons. –
The summons and the complaint shall be served together not later than
five (5) days from the date of filing of the complaint.
1. Service upon domestic private juridical entities. –
If the defendant is a domestic corporation, service shall be deemed
adequate if made upon any of the statutory or corporate officers as fixed
by the by-laws or their respective secretaries. If the defendant is a
partnership, service shall be deemed adequate if made upon any of the
managing or general partners or upon their respective secretaries. If the
defendant is an association, service shall be deemed adequate if made
upon any of its officers or their respective secretaries.
1. Service upon foreign private juridical entity. –

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When the defendant is a foreign private juridical entity which is transacting
or has transacted business in the Philippines, service may be made on its
resident agent designated in accordance with law for that purpose, or, if
there be no such agent, on the government official designated by law to
that effect, or on any of its officers or agents within the Philippines.
SEC. 6. Answer. –
The defendant shall file his answer to the complaint, serving a copy thereof
on the plaintiff, within fifteen (15) days from service of summons.
In the answer, the defendant shall:
1. Specify each material allegation of fact the truth of which he
admits;
2.
3. Specify each material allegation of fact the truth of which he does
not admit. Where the defendant desires to deny only a part of an
averment, he shall specify so much of it as true and material and
shall deny only the remainder;
1. Specify each material allegation of fact as to which truth he has
no knowledge or information sufficient to form a belief, and this
shall have the effect of a denial;
1. State the defenses, including grounds for a motion to dismiss
under the Rules of Court;
1. State the law, rule, or regulation relied upon;
1. Address each of the causes of action stated in the complaint;
1. State the facts upon which he relies for his defense, including
affidavits of witnesses and copies of documentary and other
evidence supportive of such cause or causes of action;
1. State any compulsory counterclaim/s and cross-claim/s; and
1. State the relief sought.
Page 64 of 128
The answer to counterclaims or cross-claims shall be filed within ten (10)
days from service of the answer in which they are pleaded.
SEC. 7. Effect of failure to answer. –
If the defendant fails to answer within the period above provided, he shall
be considered in default. Upon motion or motu proprio, the court shall
render judgment either dismissing the complaint or granting the relief
prayed for as the records may warrant. In no case shall the court award a
relief beyond or different from that prayed for.
SEC. 8. Affidavits, documentary and other evidence. –
Affidavits shall be based on personal knowledge, shall set forth such facts
as would be admissible in evidence, and shall show affirmatively that the
affiant is competent to testify on the matters stated therein. The affidavits
shall be in question and answer form, and shall comply with the rules on
admissibility of evidence.
Affidavits of witnesses as well as documentary and other evidence shall be
attached to the appropriate pleading; Provided, however, that affidavits,
documentary and other evidence not so submitted may be attached to the
pre-trial brief required under these Rules. Affidavits and other evidence not
so submitted shall not be admitted in evidence, except in the following
cases:
1. Testimony of unwilling, hostile, or adverse party witnesses. A
witness is presumed prima facie hostile if he fails or refuses to
execute an affidavit after a written request therefor;
2.
3. If the failure to submit the evidence is for meritorious and
compelling reasons; and
1. Newly discovered evidence.
In case of (2) and (3) above, the affidavit and evidence must be submitted
not later than five (5) days prior to its introduction in evidence.
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RULE 3
MODES OF DISCOVERY
SECTION 1. In general. –
A party can only avail of any of the modes of discovery not later than
fifteen (15) days from the joinder of issues.
SEC. 2. Objections. –
Any mode of discovery such as interrogatories, request for admission,
production or inspection of documents or things, may be objected to within
ten (10) days from receipt of the discovery device and only on the ground
that the matter requested is patently incompetent, immaterial, irrelevant
or privileged in nature.
The court shall rule on the objections not later than fifteen (15) days from
the filing thereof.
SEC. 3. Compliance. –
Compliance with any mode of discovery shall be made within ten (10) days
from receipt of the discovery device, or if there are objections, from receipt
of the ruling of the court.
SEC. 4. Sanctions. –
The sanctions prescribed in the Rules of Court for failure to avail of, or
refusal to comply with, the modes of discovery shall apply. In addition, the
court may, upon motion, declare a party non-suited or as in default, as the
case may be, if the refusal to comply with a mode of discovery is patently
unjustified.
RULE 4 PRE-TRIAL
SECTION 1. Pre-trial conference; mandatory nature. –
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Within five (5) days after the period for availment of, and compliance with,
the modes of discovery prescribed in Rule 3 hereof, whichever comes later,
the court shall issue and serve an order immediately setting the case for
pre-trial conference and directing the parties to submit their respective
pre-trial briefs. The parties shall file with the court and furnish each other
copies of their respective pre-trial brief in such manner as to ensure its
receipt by the court and the other party at least five (5) days before the
date set for the pre-trial.
The parties shall set forth in their pre-trial briefs, among other matters, the
following:
1. Brief statement of the nature of the case, which shall summarize
the theory or theories of the party in clear and concise language;
2. Allegations expressly admitted by either or both parties;
3. Allegations deemed admitted by either or both parties;
4. Documents not specifically denied under oath by either or both
parties;
5. Amendments to the pleadings;
6. Statement of the issues, which shall separately summarize the
factual and legal issues involved in the case;
7. Names of witnesses to be presented and the summary of their
testimony as contained in their affidavits supporting their
positions on each of the issues;
8. All other pieces of evidence, whether documentary or otherwise
and their respective purposes;
9. Specific proposals for an amicable settlement;
10. Possibility of referral to mediation or other alternative modes of
dispute resolution;
11. Proposed schedule of hearings; and
12. Such other matters as may aid in the just and speedy disposition of
the case.
SEC. 2. Nature and purpose of pre-trial conference. –
During the pre-trial conference, the court shall, with its active participation,
ensure that the parties consider in detail all of the following:
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1. The possibility of an amicable settlement;
2. Referral of the dispute to mediation or other forms of dispute
resolution;
3. Facts that need not be proven, either because they are matters of
judicial notice or expressly or deemed admitted;
4. Amendments to the pleadings;
5. The possibility of obtaining stipulations and admissions of facts
and documents;
6. Objections to the admissibility of testimonial, documentary and
other evidence;
7. Objections to the form or substance of any affidavit, or part
thereof;
8. Simplification of the issues;
9. The possibility of submitting the case for decision on the basis of
position papers, affidavits, documentary and real evidence;
10. A complete schedule of hearing dates; and
11. Such other matters as may aid in the speedy and summary
disposition of the case.
SEC. 3. Termination. –
The preliminary conference shall be terminated not later than ten (10) days
after its commencement, whether or not the parties have agreed to settle
amicably.
SEC. 4. Judgment before pre-trial. –
If, after submission of the pre-trial briefs, the court determines that, upon
consideration of the pleadings, the affidavits and other evidence submitted
by the parties, a judgment may be rendered, the court may order the
parties to file simultaneously their respective memoranda within a non-
extendible period of twenty (20) days from receipt of the order. Thereafter,
the court shall render judgment, either full or otherwise, not later than
ninety (90) days from the expiration of the period to file the memoranda.
SEC. 5. Pre-trial order; judgment after pre-trial. –
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The proceedings in the pre-trial shall be recorded. Within ten (10) days
after the termination of the pre-trial, the court shall issue an order which
shall recite in detail the matters taken up in the conference, the actions
taken thereon, the amendments allowed in the pleadings, and the
agreements or admissions made by the parties as to any of the matters
considered. The court shall rule on all objections to or comments on the
admissibility of any documentary or other evidence, including any affidavit
or any part thereof. Should the action proceed to trial, the order shall
explicitly define and limit the issues to be tried and shall strictly follow the
form set forth in Annex "A" of these Rules.
The contents of the order shall control the subsequent course of the action,
unless modified before trial to prevent manifest injustice.
After the pre-trial, the court may render judgment, either full or partial, as
the evidence presented during the pre-trial may warrant.
RULE 5 TRIAL
SECTION 1. Witnesses. –
If the court deems necessary to hold hearings to determine specific factual
matters before rendering judgment, it shall, in the pre-trial order, set the
case for trial on the dates agreed upon by the parties.
Only persons whose affidavits were submitted may be presented as
witnesses, except in cases specified in section 8, Rule 2 of these Rules. The
affidavits of the witnesses shall serve as their direct testimonies, subject to
cross-examination in accordance with existing rules on evidence.
SEC. 2. Trial schedule. –
Unless judgment is rendered pursuant to Rule 4 of these Rules, the initial
hearing shall be held not later than thirty (30) days from the date of the
pre-trial order. The hearings shall be completed not later than sixty (60)
days from the date of the initial hearing, thirty (30) days of which shall be
allotted to the plaintiffs and thirty (30) days to the defendants in the
manner prescribed in the rep-trial order. The failure of a party to present a
witness on a scheduled hearing date shall be deemed a waiver of such
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hearing date. However, a party may present such witness or witnesses
within his remaining allotted hearing dates.
SEC. 3. Written offer of evidence. –
Evidence not otherwise admitted by the parties or ruled upon by the court
during the pre-trial conference shall be offered in writing not later than five
(5) days from the completion of the presentation of evidence of the party
concerned. The opposing party shall have five (5) days from receipt of the
offer to file his comments or objections. The court shall make its ruling on
the offer within five (5) days from the expiration of the period to file
comments or objections.
SEC. 4. Memoranda. –
Immediately after ruling on the last offer of evidence, the court shall order
the parties to simultaneously file, within thirty (30) days from receipt of the
order, their respective memoranda. The memoranda shall contain the
following:
1. A "Statement of the Case," which is a clear and concise statement
of the nature of the action and a summary of the proceedings;
2. A "Statement of the Facts," which is a clear and concise statement
in narrative form of the established facts, with reference to the
testimonial, documentary or other evidence in support thereof;
3. A "Statement of the issues," which is a clear and concise
statement of the issues presented to the court for resolution;
4. The "Arguments," which is a clear and concise presentation of the
argument in support of each issue; and
5. The "Relief," which is a specification of the order or judgment
which the party seeks to obtain.
No reply memorandum shall be allowed.
SEC. 5. Decision after trial. –
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The court shall render a decision not later than (90) days from the lapse of
the period to file the memoranda, with or without said pleading having
been filed.
RULE 6 ELECTION CONTESTS
SECTION 1. Cases covered. –
The provisions of this rule shall apply to election contests in stock and non-
stock corporations.
SEC. 2. Definition. –
An election contest refers to any controversy or dispute involving title or
claim to any elective office in a stock or non-stock corporation, the
validation of proxies, the manner and validity of elections, and the
qualifications of candidates, including the proclamation of winners, to the
office of director, trustee or other officer directly elected by the
stockholders in a close corporation or by members of a non-stock
corporation where the articles of incorporation or by-laws so provide.
SEC. 3. Complaint. –
In addition to the requirements in section 4, Rule 2 of these Rules, the
complaint in an election contest must state the following:
1. The case was filed within fifteen (15) days from the date of the
election if the by-laws of the corporation do not provide for a
procedure for resolution of the controversy, or within fifteen (15)
days from the resolution of the controversy by the corporation as
provided in its by-laws; and
2. The plaintiff has exhausted all intra-corporate remedies in election
cases as provided for in the by-laws of the corporation.
SEC. 4. Duty of the court upon the filing of the complaint. –
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Within two (2) days from the filing of the complaint, the court, upon a
consideration of the allegations thereof, may dismiss the complaint
outright if it is not sufficient in form and substance, or, if it is sufficient,
order the issuance of summons which shall be served, together with a copy
of the complaint, on the defendant within two (2) days from its issuance.
SEC. 5. Answer. –
b. Condition precedent: derivative suit can be effective only when
board cannot properly exercise its business judgement
Case: Chua vs. CA
Case: Lopez Realty Inc. vs. Spouses Tanjangco
Case: Ching vs. Subic Bay Golf and Country Club, Inc.

The defendant shall file his answer to the complaint, serving a copy thereof c. Requisites of derivative suit
on the plaintiff, within ten (10) days from service of summons and the
complaint. The answer shall contain the matters required in section 6, Rule Case: Yu vs. Yukayguan
2 of these Rules.
i. Who may bring a derivative suit
SEC. 6. Affidavits, documentary and other evidence. –
ii. Exhaustion of intra-corporate remedies
The parties shall attach to the complaint and answer the affidavits of
witnesses, documentary and other evidence in support thereof, if any. iii. Relief/remedies prayed for are for the benefit of the
corporation
Acting on the Memorandum of the Committee on SEC Cases submitting for
this Court’s consideration and approval the Proposed Interim Rules of iv. Lack of appraisal right
Procedure for Intra-Corporate Controversies, the Court Resolved to
APPROVE the same. Case: Villamor Jr. vs. Umales

The Interim Rules shall take effect on April 1, 2001 following its publication v. Must not be harassment
in two (2) newspapers of general circulation.
Case: Ang vs. Ang
March 13, 2001, Manila.
d. Venue for derivative suit
Section 1, Rule 1 thereof expressly lists derivative suits among the cases
covered by it. 10. Right to proportionate share of remaining assets upon dissolution

A “family” corporation is not exempt from complying with the clear Section 122. Corporate liquidation. -
requirements and formalities of the rules for filing a derivative suit. There is
nothing in the pertinent laws or rules which state that there is a distinction Every corporation
between family corporations and other types of corporations in the whose charter expires
institution by a stockholder of a derivative suit. by its own limitation or
is annulled by forfeiture or otherwise, or
a. Nature of the power to file derivative suit whose corporate existence for other purposes is terminated

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in any other manner,

shall nevertheless be continued as a body corporate Except by decrease of capital stock and
for three (3) years after the time as otherwise allowed by this Code,
when it would have been so dissolved, no corporation shall distribute any of its assets or property
for the purpose of prosecuting and defending suits except upon lawful dissolution and
by or against it and after payment of all its debts and liabilities. (77a, 89a, 16a)
enabling it
to settle and close its affairs,
to dispose of and convey its property and
to distribute its assets,
but not for the purpose of
continuing the business
for which it was established.

At any time during said three (3) years,

the corporation is authorized and empowered
to convey all of its property to trustees
for the benefit of stockholders,
members,
creditors, and
other persons in interest.
From and after any such conveyance
by the corporation of its property in trust
for the benefit of its stockholders, members,
creditors and others in interest,
all interest which the corporation had in the property
terminates,
the legal interest
vests in the trustees, and
the beneficial interest in the stockholders,
members, creditors or other persons in interest.

Upon the winding up of the corporate affairs,

any asset distributable
to any creditor or stockholder or member
who is unknown or cannot be found
shall be escheated to the city or municipality
where such assets are located.

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XI. CAPITAL STOCK; SHARES OF STOCK any of which classes or series of shares
may have such rights, privileges or restrictions
Generally, a corporation may obtain funds for capital expenditures by as may be stated in the articles of incorporation:
floating either shares of stock (equity) or bonds (debt) in the capital Provided, That no share may be deprived of voting rights
market. Shares of stock (or equity securities) represent ownership interest except those classified and issued
or participation in the issuer-corporation; bonds (or debts securities) are as "preferred" or "redeemable" shares,
evidences of indebtedness of the issuer-corporation. unless otherwise provided in this Code:
Provided, further, That there shall always be a class or series of shares
The power to issue shares of stock in a corporation is lodged in the Board which have complete voting rights.
of Directors and no stockholders’ meeting is required to consider it because Any or all of the shares or series of shares
additional issuances of shares of stock does not need approval of the may have a par value or
stockholders—what is only required is the board resolution approving the have no par value
additional issuance of shares. as may be provided for in the articles of incorporation:

But once issued, shares are not owned nor are they assets of the Provided, however, That
corporation—they are owned by the stockholders of record. The banks,
corporation whose shares of stock are the subject of transfer transaction trust companies,
(through sale, assignment, donation, or any other mode of conveyance) insurance companies,
need not be a part to transaction for it to be valid. However, to bind the public utilities, and
corporation, it is necessary that the transfer is recorded in its books. building and loan associations
shall not be permitted to issue no-par value shares of stock.
1. Concept of “Capital Stock”
Preferred shares of stock issued by any corporation
Section 137. Outstanding capital stock defined. - may be given preference
in the distribution of the assets of the corporation
The term "outstanding capital stock", as used in this Code, in case of liquidation and
means the total shares of stock issued in the distribution of dividends, or
under binding subscription agreements such other preferences as may be stated
to subscribers or stockholders, in the articles of incorporation
whether or not fully or partially paid, which are not violative of
except treasury shares. (n) the provisions of this Code:

3. Classification of Shares Provided, That preferred shares of stock may be issued

only with a stated par value.
Section 6. Classification of shares. - The board of directors, where authorized in the articles of incorporation,
may fix the terms and conditions of
The shares of stock of stock corporations preferred shares of stock or
may be divided into classes or series of shares, or both, any series thereof:

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3. Sale, lease, exchange, mortgage, pledge or other disposition

of all or substantially all of the corporate property;
Provided, That such terms and conditions
shall be effective upon the filing of a certificate thereof 4. Incurring, creating or increasing bonded indebtedness;
with the Securities and Exchange Commission.
5. Increase or decrease of capital stock;
Shares of capital stock issued without par value
shall be deemed fully paid and non-assessable and 6. Merger or consolidation of the corporation
the holder of such shares shall not be liable with another corporation or other corporations;
to the corporation or
to its creditors in respect thereto: 7. Investment of corporate funds
Provided; That shares without par value may not be issued in another corporation or business
for a consideration less than the value of in accordance with this Code; and
five (P5.00) pesos per share:
Provided, further, That the entire consideration received 8. Dissolution of the corporation.
by the corporation for its no-par value shares
shall be treated as capital and Except as provided in the immediately preceding paragraph,
shall not be available for distribution as dividends. the vote necessary to approve a particular corporate act
as provided in this Code
A corporation may, furthermore, classify its shares shall be deemed to refer only
for the purpose of insuring compliance to stocks with voting rights. (5a)
with constitutional or legal requirements.
1. Common Shares
Except as otherwise
provided in the articles of incorporation and 1. Preferred Shares
stated in the certificate of stock,
each share shall be equal 1. Participating or Non-participating
in all respects to every other share. 2. Cumulative or Non-cumulative
3. Par value or No Par Value
Where the articles of incorporation provide for non-voting shares
in the cases allowed by this Code, Case: Republic Planters Bank vs. Agana
the holders of such shares shall nevertheless
be entitled to vote on the following matters: 1. Redeemable Shares

1. Amendment of the articles of incorporation; Section 8. Redeemable shares. -

2. Adoption and amendment of by-laws; Redeemable shares may be issued by the corporation
when expressly so provided in the articles of incorporation.

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They may be purchased or taken up by the corporation by purchase, redemption, donation or

upon the expiration of a fixed period, through some other lawful means.
regardless of the existence of Such shares may again be disposed of
unrestricted retained earnings for a reasonable price
in the books of the corporation, and fixed by the board of directors. (n)
upon such other terms and conditions
as may be stated in the articles of incorporation, 1. Stock Warrants and Stock Options
which terms and conditions must also be stated
in the certificate of stock representing said shares. (n) 1. Reclassification and Exchange of Shares

Case: Republic Planters Bank vs. Agana 1. Hybrid Securities:

1. Founder Shares Case: Government vs. Phil. Sugar Estates

Section 7. Founders' shares. - 1. Quasi-Reorganization

Founders' shares 1. Reduction of Capital Stock

classified as such in the articles of incorporation
may be given certain rights and privileges Section 38. Power to increase or decrease capital stock; incur, create or
not enjoyed by the owners of other stocks, increase bonded indebtedness. -
provided that where the exclusive right No corporation shall
to vote and be voted for in the election of directors increase or decrease its capital stock or incur,
is granted, create or increase any bonded indebtedness
it must be for a limited period unless approved by a majority vote
not to exceed five (5) years of the board of directors and,
subject to the approval of the at a stockholder's meeting duly called for the purpose,
Securities and Exchange Commission. two-thirds (2/3) of the outstanding capital stock
The five-year period shall commence shall favor
from the date of the aforesaid approval the increase or diminution of the capital stock,
by the Securities and Exchange Commission. (n) or
the incurring, creating or increasing of
1. Treasury Shares any bonded indebtedness.
Written notice
Section 9. Treasury shares. - of the proposed increase or diminution of the capital stock or
of the incurring, creating, or increasing of any bonded
Treasury shares are shares of stock indebtedness
which have been issued and fully paid for, and of the time and place of the stockholder's meeting
but subsequently reacquired by the issuing corporation at which the proposed increase or diminution

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of the capital stock or 1. The actual indebtedness of the corporation

the incurring or increasing of any bonded indebtedness on the day of the meeting;
is to be considered, 1. The amount of stock
must be addressed to each stockholder at his place of residence represented at the meeting; and
as shown on the books of the corporation and 1. The vote authorizing
deposited to the addressee in the post office the increase or diminution of the capital stock, or
with postage prepaid, or the incurring, creating or increasing
served personally. of any bonded indebtedness.

A certificate in duplicate Any increase or decrease

must be signed by a majority of the directors of the corporation in the capital stock or
and the incurring, creating or increasing
countersigned by of any bonded indebtedness
the chairman and shall require prior approval of
the secretary of the stockholders' meeting, the Securities and Exchange Commission.
setting forth:
One of the duplicate certificates shall be kept on file
1. That the requirements of this section in the office of the corporation and
have been complied with; the other
1. The amount of the increase or diminution shall be filed with the Securities and Exchange Commission and
of the capital stock; attached to the original articles of incorporation.
1. If an increase of the capital stock, From and after
the amount of capital stock or approval by the Securities and Exchange Commission and
number of shares of no-par stock thereof the issuance by the Commission of its certificate of filing,
actually subscribed, the capital stock shall stand increased or decreased and
the names, nationalities and residences of the persons the incurring, creating or increasing
subscribing, of any bonded indebtedness authorized,
the amount of capital stock or as the certificate of filing may declare:
number of no-par stock subscribed by each, and Provided, That the Securities and Exchange Commission
the amount paid by each on his subscription shall not accept for filing any certificate
in cash or property, or of increase of capital stock
the amount of capital stock or unless accompanied by the sworn statement
number of shares of no-par stock of the treasurer of the corporation
allotted to each stock- holder lawfully holding office
if such increase is for the purpose of at the time of the filing of the certificate,
making effective stock dividend therefor authorized; showing that at least twenty-five (25%) percent
1. Any bonded indebtedness of such increased capital stock has been subscribed and
to be incurred, created or increased; that at least twenty-five (25%) percent of the amount subscribed

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has been paid either in actual cash to the corporation or

that there has been transferred to the corporation
property the valuation of which is equal to
twenty-five (25%) percent of the subscription:
Provided, further, That no decrease of the capital stock
shall be approved by the Commission
if its effect shall prejudice the rights of corporate creditors.

1. Stock Splits versus Stock Consolidations

1. Subscription Agreements

1. No Sale of unissued shares

Case: Bayla vs. Silang Traffic Co. Inc.

1. Assignment of subscription agreements

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XII. ACQUISITIONS, MERGERS AND CONSOLIDATIONS
1. Acquisitions and Transfers
1. Types of Acquisitions/Transfers
Case: Edward J. Nell Co. vs. Pacific
As a rule, a corporation that purchases the assets of another will not be
liable for the debts of the selling corporation, provided the former acted in
good faith and paid adequate consideration for such assets, Except when
any of the following circumstances is present:
1. where the purchasers expressly or impliedly agrees to assume the
debts;
2. where the selling corporation fraudulently enters into the
transactions to escape liability for those debts
3. where the purchasing corporation is merely a continuation of the
selling corporation, and
4. where the transaction amounts to a consolidation or merger of the
corporations.
Case: Caltex (Phils.) Inc. vs. PNOC Shipping and Transport Corp.
The disposition of the assets of a corporation shall be deemed to cover
substantially all the corporate property and assets, if thereby the
corporation would be rendered incapable of continuing the business or
accomplishing the purposes for which it was incorporated. Such a sale or
disposition must be understood as valid only if it does not prejudice the
creditors of the assignor, which necessarily implies that the assignee
assumes the debts of the assignor. Even under the provisions of the Civil
Code, a creditor has a real interest to go after any person to whom the
debtor fraudulently transferred its assets.
PSALM took ownership over most of NPC’s assets by operation of law—
these properties may be used to satisfy the Court’s judgment, and such
being the case, the employees may go after such properties.
1. Business Enterprise Transfers
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A business enterprise operated under a partnership and later incorporated,
or where a corporation assumed all the assets and liabilities of the
partnership, then the corporation cannot be regarded, for purposes of the
obligations imposed under the SSS Law, as having come into being only
from its incorpor-ation but from the date the partnership commenced.
The judgment in a suit for workmen’s compensation can be pursued against
the corporation organized by the controlling stockholder who as the sole
proprietor organized the corporation to insulate properties transferred
thereto against the judgment debt.
When the bus operations belonging to the estate of the deceased spouses
is duly incorporated by the administratrix with the intention to make the
corporation liable for past and pending obligations of the estate as the
transportation business itself, then that liability on the part of the
corporation, vis-à-vis the estate, should continue to remain with it even
after the percentage of the estate’s shares of stock in the corporation
should have been diluted.
Where a corporation transferred all its assets to another corporation “to
settle its obligations”, that would not amount to a fraudulent transfer, and
does not authorized application of the piercing doctrine to make the
transferee liable for labor claims against the transferor.
Settled now is the rule that where one corporation sells or otherwise
transfers all its assets to another corporation for value, the latter is not, by
that fact alone, liable for the debts and liabilities of the transferor.
Case: Y-I Leisure Phils. Inc. vs. Yu
An evaluation of our contract and corporation laws validates that the Nell
Doctrine is fully supported by Philippine statutes. The general rule
expressed by the doctrine reflects the principle of relativity under Article
1311 to 34 of the Civil Code. Contracts, including the rights and obligations
arising therefrom, are valid and binding only between the contracting
parties and their successors-in-interest. Thus, despite the sale of all
corporate assets, the transferee corporation cannot be prejudiced as it is
not in privity with the contracts between the transferor corporation and its
creditors. x x x Jurisprudence has held that in a business-enterprise
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transfer, the transferee is liable for the debts and liabilities of his transferor continues its existence while the life or lives of the other corporation(s) is
arising from the business enterprise conveyed. Many of the application of or are terminated.
the business-enterprise transfer have been related by the Court to the
application of the piercing doctrine. 1. Procedure

1. Equity Transfers 1. Plan of Merger or Consolidation

Case: PHIVIDEC vs. CA Section 76. Plan or merger of consolidation. -

The disposition by the controlling shareholder of all of its equity in the
corporation warrants the application of the alter ego piercing doctrine
since it shows that the transferor had complete control of the corporation.
Proper Doctrine: The mere fact that a stockholder sells his equity in the
corporation during the pendency of a collection case against the
corporation, does not make such stockholder personally liable for the
corporate debt, since the disposing stockholder has no personal obligation
to the creditor, and it is the inherent right of the stockholder to dispose of
his shares of stock anytime he so desires.
1. Merger and Acquisitions
1. Concepts
Two or more corporations
may merge into a single corporation
which shall be one of the constituent corporations or
may consolidate into a new single corporation
which shall be the consolidated corporation.
The board of directors or trustees of each corporation,
party to the merger or consolidation,
shall approve a plan of merger or consolidation
setting forth the following:
1. The names of the corporations proposing to merge or consolidate,
hereinafter referred to as the constituent corporations;

A consolidation is the union of two or more existing entities to form a new 1. The terms of the merger or consolidation and
entity called the consolidated corporation. A merger, on the other hand, is the mode of carrying the same into effect;
a union whereby one or more existing corporations are absorbed by
another corporation that survives and continues the combined business. 1.A statement of the changes, if any,
Since a merger or consolidation involves fundamental changes in the in the articles of incorporation of the surviving corporation
corporation, as well as in the rights of stockholders and creditors, there in case of merger; and,
must be an express provision of law authorizing them. with respect to the consolidated corporation in case of consolidation,
all the statements required to be set forth
Merger is a re-organization of two or more corporations that results in their in the articles of incorporation for corporations
consolidating into a single corporation, which is one of the constituent organized under this Code; and
corporations, one disappearing or dissolving and the other surviving. To
put it another way, merger is the absorption of one or more corporations 1. Such other provisions
by another existing corporation, which retains its identity and takes over with respect to the proposed merger or consolidation
the rights, privileges, franchises, properties, claims, liabilities and as are deemed necessary or desirable. (n)
obligations of the absorbed corporation(s). The absorbing corporation

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1. Stockholders’ or Members’ Approvals

Any amendment to the plan of merger or consolidation may be made,
Section 77. Stockholder's or member's approval. - provided such amendment is
approved by majority vote of
Upon approval by majority vote of the respective boards of directors or trustees
each of the board of directors or trustees of all the constituent corporations and
of the constituent corporations ratified by the affirmative vote
of the plan of merger or consolidation, of stockholders representing at least two-thirds (2/3) of
the same shall be submitted for approval the outstanding capital stock or
by the stockholders or members of two-thirds (2/3) of the members
of each of such corporations of each of the constituent corporations.
at separate corporate meetings Such plan,
duly called for the purpose. together with any amendment,
shall be considered as the agreement of merger or consolidation.
Notice of such meetings shall be given (n)
to all stockholders or members of the respective corporations,
at least two (2) weeks prior to the date of the meeting, 1. Articles of Merger or Consolidation
either personally or
by registered mail. Section 78. Articles of merger or consolidation. -
Said notice
shall state the purpose of the meeting and After the approval by the stockholders or members
shall include a copy or a summary of as required by the preceding section,
the plan of merger or consolidation. articles of merger or articles of consolidation
shall be executed by each of the constituent corporations,
The affirmative vote of stockholders to be signed by the president or vice- president and
representing at least two- thirds (2/3) of certified by the secretary or assistant secretary
the outstanding capital stock of each corporation of each corporation
in the case of stock corporations or setting forth:
at least two-thirds (2/3) of the members
in the case of non-stock corporations 1. The plan of the merger or the plan of consolidation;
shall be necessary for the approval of such plan.
1. As to stock corporations,
Any dissenting stockholder in stock corporations the number of shares outstanding, or
may exercise his appraisal right in the case of non- stock corporations,
in accordance with the Code: the number of members; and
Provided, That if after the approval by the stockholders of such plan,
the board of directors decides to abandon the plan, 1. As to each corporation,
the appraisal right shall be extinguished. the number of shares or members

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voting for and against such plan, respectively. (n) shall be effective.

1. Submission of Financial Statement If, upon investigation,

Requirements the Securities and Exchange Commission has reason to believe
that the proposed merger or consolidation
For applications of merger, the audited financial statements of the is contrary to or inconsistent with
constituent corporations (surviving and absorbed) as of the date not earlier the provisions of this Code or existing laws,
than 120 days prior to the date of filing of the application and the long- it shall set a hearing
form audit report for absorbed corporation(s) are always required. Long to give the corporations concerned
form audit report for the surviving corporation is required if it is insolvent. the opportunity to be heard.
Written notice of the date, time and place of hearing
1. Approval by SEC shall be given to each constituent corporation
at least two (2) weeks before said hearing.
Section 79. Effectivity of merger or consolidation. - The Commission shall thereafter proceed
as provided in this Code.
The articles of merger or of consolidation,
signed and certified as herein above required, —-
shall be submitted to the Securities and Exchange Commission
in quadruplicate for its approval: When the procedure for merger/consolidation prescribed under the
Provided, That in the case of merger or consolidation of Corporation Code are not followed, there can be no merger or
banks or banking institutions, consolidation, corporate separateness between the constituent
building and loan associations, corporations remains, and the liabilities of one entity cannot be enforced
trust companies, against another entity.
insurance companies,
public utilities, The issuance by the SEC of the certificate of merger is crucial because not
educational institutions and only does it bear out SEC’s approval but also marks the moment
other special corporations governed by special laws, whereupon the consequences of a merger take place. By operation of law,
the favorable recommendation of upon the effectivity of the merger, the absorbed corporation ceases to exist
the appropriate government agency but its rights, and properties as well as liabilities shall be taken and deemed
shall first be obtained. transferred to and vested in the surviving corporation.
If the Commission is satisfied that
the merger or consolidation of the corporations concerned 1. Approval by PCC for Mergers Exceeding 1Billion
is not inconsistent with in value
the provisions of this Code and
existing laws, RA 10667 AN ACT PROVIDING FOR A NATIONAL COMPETITION POLICY
it shall issue a certificate PROHIBITING ANTI-COMPETITIVE AGREEMENTS, ABUSE OF DOMINANT
of merger or of consolidation, POSITION AND ANTI-COMPETITIVE MERGERS AND ACQUISITIONS,
at which time the merger or consolidation

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ESTABLISHING THE PHILIPPINE COMPETITION COMMISSION AND
APPROPRIATING FUNDS THEREFOR
CHAPTER IV
MERGERS AND ACQUISITIONS
Section 16. Review of Mergers and Acquisitions. — The Commission shall
have the power to review mergers and acquisitions based on factors
deemed relevant by the Commission.
Section 17. Compulsory Notification. – Parties to the merger or acquisition
agreement referred to in the preceding section wherein the value of the
transaction exceeds one billion pesos (P1,000,000,000.00) are prohibited
from consummating their agreement until thirty (30) days after providing
notification to the Commission in the form and containing the information
specified in the regulations issued by the Commission: Provided, That the
Commission shall promulgate other criteria, such as increased market share
in the relevant market in excess of minimum thresholds, that may be
applied specifically to a sector, or across some or all sectors, in determining
whether parties to a merger or acquisition shall notify the Commission
under this Chapter.
An agreement consummated in violation of this requirement to notify the
Commission shall be considered void and subject the parties to an
administrative fine of one percent (1%) to five percent (5%) of the value of
the transaction.
Should the Commission deem it necessary, it may request further
information that are reasonably necessary and directly relevant to the
prohibition under Section 20 hereof from the parties to the agreement
before the expiration of the thirty (30)-day period referred. The issuance of
such a request has the effect of extending the period within which the
agreement may not be consummated for an additional sixty (60) days,
beginning on the day after the request for information is received by the
parties: Provided, That, in no case shall the total period for review by the
Commission of the subject agreement exceed ninety (90) days from initial
notification by the parties.
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When the above periods have expired and no decision has been
promulgated for whatever reason, the merger or acquisition shall be
deemed approved and the parties may proceed to implement or
consummate it. All notices, documents and information provided to or
emanating from the Commission under this section shall be subject to
confidentiality rule under Section 34 of this Act except when the release of
information contained therein is with the consent of the notifying entity or
is mandatorily required to be disclosed by law or by a valid order of a court
of competent jurisdiction, or of a government or regulatory agency,
including an exchange.
In the case of the merger or acquisition of banks, banking institutions,
building and loan associations, trust companies, insurance companies,
public utilities, educational institutions and other special corporations
governed by special laws, a favorable or no-objection ruling by the
Commission shall not be construed as dispensing of the requirement for a
favorable recommendation by the appropriate government agency under
Section 79 of the Corporation Code of the Philippines.
A favorable recommendation by a governmental agency with a competition
mandate shall give rise to a disputable presumption that the proposed
merger or acquisition is not violative of this Act.
3. Effects of Merger and Consolidation
It is settled that in the merger of two existing corporations, one of the
corporations survives and continues the business, while the other is
dissolved and all its rights, properties and liabilities are acquired by the
surviving corporation. The surviving corporation therefore has a right to
institute a collection suit on accounts of one of one of the constituent
corporations.
Global is bound by the terms of the contract entered into by its
predecessor-in-interest, Asian Bank. Due to Global’s merger with Asian
Bank and because it is the surviving corporation, it is as if it was the one
which entered into contract with Surecomp. In the same way, Global also
has the right to exercise all defenses, rights, privileges, and counter-claims
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of every kind and nature which Asian Bank may have or invoke under the
law.
4. De Facto Mergers
Case: Bank of Commerce vs. RPN
In his book, Philippine Corporate Law, Dean Cesar Villanueva explained that
under the Corporation Code, “a de facto merger can be pursued by one
corporation acquiring all or substantially all of the properties of another
corporation in exchange of shares of stock of the acquiring corporation.
The acquiring corporation would end up with the business enterprise of the
target corporation; whereas, the target corporation would end up with
basically its only remaining assets being the shares of stock of the acquiring
corporation.” No de facto merger took place in the present case simply
because the TRB owners did not get in exchange for the bank’s assets and
liabilities an equivalent value in Bancommerce shares of stock.
Bancommerce and TRB agreed with BSP approval to exclude from the sale
the TRB's contingent judicial liabilities, including those owing to RPN.
C. Effects on Employees of the Corporation
1. Assets only Transfers
“There is no law requiring that the purchaser of MDII’s assets should
absorb its employees … the most that the NLRC could do, for reasons of
public policy and social justice, was to direct [the buyer] to give preference
to the qualified separated employees of MDII in the filling up of vacancies
in the facilities.
Case: Sundowner Dev. Corp. vs. Drilon
Unless expressly assumed, employment contracts and CBAs are not
enforceable against a transferee of an enterprise, labor contracts being in
personam, thus binding only between the parties. A labor contract merely
creates an action in personam and does not create any real right which
should be respected by third parties.
Only the assets were purchased… hence, the employees will not follow the
new company
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1. Business-Enterprise Transfers
Case: Central Azucarera del Danao vs. CA
There is no law requiring that the purchaser should absorb the employees
of the selling company. Well-established is the principle “that it is within
the employer’s legitimate sphere of management control of the business to
adopt economic policies to make some changes or adjustments in their
organization or operations that would insure profit to itself or protect the
investments of its stockholders. As in the exercise of such management
prerogative, the employer may merge or consolidate its business with
another, or sell or dispose all or substantially all of its assets and properties
which may bring about the dismissal or termination of its employees in the
process.
Where a corporation is closed for alleged losses and its equipment are
transferred to another company which engaged in the same operations,
the separate juridical personality of the latter can be pierced to make it
liable for the labor claims of the employees of the closed company.
Case: Pepsi-Cola Bottling Co. vs. NLRC
Although a corporation may have ceased business operations and an
entirely new company has been organized to take over the same type of
operations, it does not necessarily follow that no one may now be held
liable for illegal acts committed by the earlier firm.
Under the principle of absorption, a bona fide buyer or transferee of all, or
substantially all, the properties of the seller or transferor is not obliged to
absorb the latter’s employees. The most that the purchasing company may
do, for reasons of public policy and social justice, is to give preference of
reemployment to the selling company’s qualified separated employees,
who in its judgment are necessary to the continued operation of the
business establishment. In the case of a transfer of all or substantially all of
the assets of a corporation (i.e., business enterprise transfers), the liabilities
of the previous owners to its employees are not enforceable against the
buyer or transferee, unless
(a) the latter unequivocally assumes them; or
(b) the sale or transfer was made in bad faith.
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1. Equity Transfers 1. Spin-offs

Where the change of ownership is done in bad faith, or is used to defeat Where a spin-off by the corporation of a division into another corporation
the rights of labor, the successor-employer is deemed to have absorbed the is done for a valid business reason and in good faith, the employees in the
employees and is held liable for the transgressions of his or her spun-off unit no longer belong to the bargaining unit of the mother
predecessor. company, and that the employees in the new corporations constitute new
bargaining unit.
Case: Manlilimos vs. NLRC
Where transfer of ownership is in good faith, the transferee is under no
legal duty to absorb the transferor’s employees as there is no law
compelling such absorption. For reasons of public policy and social justice,
transferee may give preference to the qualified separated employees in the
filling of vacancies in the facilities of the purchaser.

1. Mergers and Consolidations

Case: Filipinas Port Services vs. NLRC (1991)

In the case of merger or consolidation, the employees have a right to their
retirement benefits computed from the time worked with the predecessor-
constituent corporations, saying there was no break in the employer-
employee relationship.

Case: Filipinas Port Services vs. NLRC (1989)

Employees of a predecessor-constituent corporation cannot avail of their
previous tenure when determining their termination benefits with the
surviving corporation in the merger.

Case: BPI vs. BPI Employees Union

It is more in keeping with the dictates of social justice of according full
protection to labor to deem employment contracts as automatically
assumed by the surviving corporation in a merger, even in the absence of
an express stipulation in the articles of merger or the merger plan. This
ruling strengthens judicial protection of the right to security of tenure of
employees affected by a merger and avoids confusion regarding the status
of their various benefits.

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XIII. CORPORATE DISSOLUTION AND LIQUIDATION if no newspaper is published in such place,

then in a newspaper of general circulation
1. No Vested Rights to Corporate Fiction in the Philippines,
after sending such notice
No person who has a claim against a juridical entity can claim any to each stockholder or member
constitutional right to the perpetual existence of such entity. either by registered mail or
by personal delivery
1. Voluntary Dissolution at least thirty (30) days prior
to said meeting.
Section 117. Methods of dissolution. -
A copy of the resolution authorizing the dissolution
A corporation formed or organized under the provisions of this Code shall be certified by a majority of the board of directors or trustees
may be dissolved and countersigned by the secretary of the corporation.
voluntarily or
involuntarily. (n) The Securities and Exchange Commission
shall thereupon issue the certificate of dissolution. (62a)
1. When There are no Creditors Affected
1. When There are Creditors Affected
Section 118. Voluntary dissolution where no creditors are affected. -
Section 119. Voluntary dissolution where creditors are affected. -
If dissolution of a corporation
does not prejudice the rights of any creditor Where the dissolution of a corporation
having a claim against it, may prejudice the rights of any creditor,
the dissolution may be effected the petition for dissolution shall be filed
by majority vote of the board of directors or trustees, and with the Securities and Exchange Commission.
by a resolution duly adopted by the affirmative vote The petition shall be
of the stockholders owning signed by a majority of its board of directors or trustees or
at least two-thirds (2/3) other officers having the management of its affairs,
of the outstanding capital stock or verified by its president or secretary or
of at least two-thirds (2/3) of the members one of its directors or trustees, and
of a meeting to be held upon call of shall set forth
the directors or trustees all claims and demands against it, and
after publication of the notice of that its dissolution was resolved upon
time, place and object of the meeting by the affirmative vote of the stockholders
for three (3) consecutive weeks representing at least two-thirds (2/3) of
in a newspaper published in the place the outstanding capital stock or
where the principal office of said corporation by at least two-thirds (2/3) of the members
is located; and at a meeting of its stockholders or members

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called for that purpose. pay the debts of the corporation. (Rule 104, RCa)

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
objections thereto may be filed by any person,
which date shall not be less than thirty (30) days
nor more than sixty (60) days
after the entry of the order.
Before such date, a copy of the order shall be published
at least once a week for three (3) consecutive weeks
in a newspaper of general circulation
published in the municipality or city
where the principal office of the corporation is situated,
or
if there be no such newspaper,
then in a newspaper of general circulation
in the Philippines, and
a similar copy shall be posted for three (3) consecutive weeks
in three (3) public places
in such municipality or city.
Upon five (5) day's notice,
given after the date on which the right to file objections
as fixed in the order has expired,
the Commission shall proceed to hear the petition and
try any issue made by the objections filed; and
if no such objection is sufficient, and
the material allegations of the petition are true,
it shall render judgment
dissolving the corporation and
directing such disposition of its assets
as justice requires, and
may appoint a receiver
to collect such assets and
Section 122. Corporate liquidation. -
Every corporation
whose charter
expires by its own limitation or
is annulled by forfeiture or otherwise, or
whose corporate existence for other purposes is terminated
in any other manner,
shall nevertheless be continued as a body corporate
for three (3) years after the time
when it would have been so dissolved,
for the purpose of prosecuting and defending
suits by or against it and
enabling it to settle and close its affairs,
to dispose of and convey
its property and to distribute its assets,
but not for the purpose of continuing the
business
for which it was established.
At any time during said three (3) years,
the corporation is authorized and empowered
to convey all of its property to trustees
for the benefit of
stockholders, members, creditors, and
other persons in interest.
From and after any such conveyance by the corporation of its property
in trust for the benefit of
its stockholders, members, creditors and others in interest,
all interest which the corporation had
in the property terminates,
the legal interest vests in the trustees, and
the beneficial interest in the stockholders, members,
creditors or other persons in interest.

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When a corporation is contemplating dissolution, it must submit tax return

Upon the winding up of the corporate affairs, on the income earned by it from the beginning of the year up to the date of
any asset distributable to any creditor or stockholder or its dissolution and pay the corresponding tax due.
member who is unknown or cannot be found
shall be escheated to the city or municipality
where such assets are located.

Except by decrease of capital stock and

as otherwise allowed by this Code, 1. Involuntary Dissolution
no corporation shall distribute any of its assets or property
except upon lawful dissolution and Section 121. Involuntary dissolution. -
after payment of all its debts and liabilities. (77a, 89a, 16a)
A corporation may be dissolved
1. Shortening of Corporate Term by the Securities and Exchange Commission
upon filing of a verified complaint and
Section 120. Dissolution by shortening corporate term. - after proper notice and hearing
on the grounds provided by existing
A voluntary dissolution may be effected laws, rules and regulations. (n)
by amending the articles of incorporation
to shorten the corporate term P.D. 902-A REORGANIZATION OF THE SECURITIES AND EXCHANGE
pursuant to the provisions of this Code. COMMISSION WITH ADDITIONAL POWER AND PLACING THE SAID AGENCY
A copy of the amended articles of incorporation UNDER THE ADMINISTRATIVE SUPERVISION OF THE OFFICE OF THE
shall be submitted to the Securities and Exchange Commission PRESIDENT
in accordance with this Code.
Upon approval of the amended articles of incorporation Sec. 6. In order to effectively exercise such jurisdiction,
of the expiration of the shortened term, as the case may be, the Commission shall possess the following powers:
the corporation shall be deemed dissolved
without any further proceedings, (i) To suspend, or revoke, after proper notice and hearing,
subject to the provisions of this Code the franchise or
on liquidation. (n) certificate of registration
of corporations, partnerships or associations,
Case: Vesagas vs. Court of Appeals upon any of the grounds provided by law,
A board resolution to dissolve the corporation does not operate to so including the following:
dissolve the juridical entity, since to be effective “[t]he requirements
mandated by the Corporation Code should have been strictly complied [1] Fraud in procuring
with.” its certificate of registration;

[2] Serious misrepresentation

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as to what the corporation can do or is doing
to the great prejudice of or damage to the general public;
[3] Refusal to comply or defiance of any lawful order of the Commission
restraining commission of acts
which would amount to a grave violation of its franchise;
[4] Continuous inoperation
for a period of at least five (5) years;
[5] Failure to file by-laws
within the required period;
[6] Failure to file required reports in appropriate forms
as determined by the Commission
within the prescribed period;
1. Quo Warranto
Dissolution is a serious remedy granted by the courts only in extreme cases
and only to ensure that there is an avoidance of prejudice to the public.
Even when the prejudice were public in nature, the remedy is to enjoin or
correct the mistake; and only when it cannot be remedied that dissolution
is imposed.
Corporate dissolution due to mismanagement of majority stockholder is
too drastic a remedy, especially when the situation can be remedied such
as giving minority stockholders a veto power to any decision.
1. Non-user of Charter and Continuous In-operation
Section 22. Effects on non-use of corporate charter and continuous
inoperation of a corporation. -
If a corporation does not formally organize and commence
the transaction of its business or
the construction of its works
within two (2) years from the date of its incorporation,
its corporate powers cease and
the corporation shall be deemed dissolved.
However, if a corporation
has commenced the transaction of its business
but subsequently becomes continuously inoperative
for a period of at least five (5) years,
the same shall be a ground
for the suspension or revocation
of its corporate franchise or
certificate of incorporation. (19a)
‘To “organize” involves the election of officers, providing for the
subscription and payment of the capital stock, the adoption of by-laws, and
such other steps as are necessary to endow the legal entity with the
capacity to transact the legitimate business for which the corporation was
created. “Organization” relates merely to the systematization and orderly
arrangement of the internal and managerial affairs of the corporation.
The failure to file the by-laws does not automatically operate to dissolve a
corporation but is now considered only a ground for such dissolution.
1. Expiry of Term
Where the corporate life of a corporation as stated in its articles of
incorporation expired, without a valid extension having been effected, it
was deemed dissolved by such expiration without need of further action on
the part of the corporation.
1. Legal Effects of Dissolution
A corporation that has reached the stage of dissolution is no longer
qualified to receive a secondary franchise.
A corporation cannot extend its life by amendment of its articles of
incorporation effected during the three-year statutory period for
liquidation when its original term of existence had already expired, as the
same would constitute new business.

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When the period of corporate life expires, the corporation ceases to be a
body corporate for the purpose of continuing the business for which it was
organized.
The dissolution of a juridical entity does not by itself cause the extinction or
diminution of the rights and liability of such entity, since it is allowed to
continue as a juridical entity for 3 years for the purpose of prosecuting and
defending suits by or against it and enabling it to settle and close its affairs,
to dispose of and convey its property, and to distribute its assets.
A derivative suit is fundamentally distinct and independent from liquidation
proceeding s—they are neither part of each other nor the necessary
consequence of the other. There is therefore no basis from one action to
result in the other. Following the dissolution of a corporation, liquidation or
the settlement of its affairs consists of adjusting the debts and claims, i.e.,
collecting all that is due to the corporation, the settlement and adjustment
of claims against it and the payment of its just debts.
1. Methods of Liquidation

A corporation’s Board is not rendered functus officio by its dissolution, Section 122. Corporate liquidation. -
since Sec. 122 prohibits a dissolved corporation from continuing its
business, but allows it to continue with a limited personality in order to Every corporation
settle and close it affairs, including its complete liquidation. Necessarily whose charter
there must be a Board that will continue acting for that purpose. expires by its own limitation or
is annulled by forfeiture or otherwise, or
Case: Vigilla vs. Philippine College of Criminology, Inc. whose corporate existence for other purposes
The executed releases, waivers and quitclaims involving labor claims are is terminated in any other manner,
valid and binding notwithstanding that they were executed 6 years after shall nevertheless be continued
the revocation of the corporation’s certificate of incorporation—the as a body corporate
revocation does not result in the termination of its liabilities. Sections 122 for three (3) years after the time
and 145 provide for a 3-year winding up period for a corporation whose when it would have been so dissolved,
charter is annulled by forfeiture or otherwise to continue as a body for the purpose of
corporate for the purpose, among others, of settling and closing its affairs. prosecuting and defending suits
by or against it and
Case: Chua vs. People enabling it to settle and close its affairs,
Since Secs. 122 and 145 explicitly provide for the continuation of the body to dispose of and convey its property
corporate for 3-years after dissolution, then the rights and remedies and to distribute its assets,
against, or liabilities of, the officers shall not be removed or impaired by but not for the purpose of continuing
reason of the dissolution of the corporation. the business
for which it was established.
1. Meaning of Liquidation
At any time during said three (3) years,
Liquidation, in corporation law, connotes a winding up or settling with the corporation is authorized and empowered
creditors and debtors. It is the winding up of a corporation so that assets to convey all of its property to trustees
are distributed to those entitled to receive them. It is the process of for the benefit of stockholders,
reducing assets to cash, discharging liabilities and dividing surplus or loss. members,
creditors, and

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other persons in interest. Anytime Within the 3 year period - transfer all assets and liabilities to
trustees
From and after any such conveyance by the corporation Without appointing trustees - BOD is assumed to do the winding up
of its property in trust for the benefit of After 3 years - BOD also cease to exists as BOD
its stockholders, members, creditors and others in interest, Trustees, once appointed, personality exceeds beyond 3 years
all interest which the corporation had in the property If for some reason as a GR, ask board to be able to act a sa board for and
terminates, on behalf of corporation itself —may take action within 3 years, no longer a
the legal interest corporation beyond 3 years
vests in the trustees, and
the beneficial interest in What if actions to defend property is not yet complete and finished by the
the stockholders, time 3 year period arrives
members, ● actions may continue beyond 3 years
creditors or
other persons in interest. 1. The BOD/T Pursuing Liquidation; subject to the 3-year period

Upon the winding up of the corporate affairs,
any asset distributable to any creditor or stockholder or
member who is unknown or cannot be found
shall be escheated to the city or municipality
where such assets are located.
Except by decrease of capital stock and
as otherwise allowed by this Code,
no corporation shall distribute any of its assets or property
except upon lawful dissolution and
after payment of all its debts and liabilities. (77a, 89a,
16a)
Since the old Corporation Law did not contain any provision that allowed
any action after the 3-year period for liquidation, then all actions for or
against the corporation as abated after the expiration thereof.
Although a corporate officer is not liable for corporate obligations, such as
claims for wages, when, however, such corporate officer takes corporate
property to apply to his own claims against the corporation, he shall be
liable to the extent thereof to corporate liabilities, since knowing fully well
that certain creditors had similarly valid claims, he took advantage of his
position as general manager and applied the assets exclusively to his own
claims.

What is suppose to happened during the winding up period? It immaterial that the present action was filed after the expiration of the
Who are the plaintiffs in the case? three years, for at the very least, and assuming that judicial enforcement of
ABC Inc. plaintiff vs. Debtor taxes may not be initiated after said three years despite the fact that actual
Board can file an action liquidation has not 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 assessment aforementioned, made within the three years,
———————— definitely established the Government as a creditor for whom the
3rd Year 4th year liquidator is supposed to hold assets of the corporation.”
*Corp may file suit
** May no longer file new suit 1. Liquidation Pursued Thru a Court-Appointed Receiver

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Under the Corporation Law, Legislature intended to let the shareholders
have control of the assets of the corporation upon dissolution, by having
the directors and executive officers have charge of the winding up
operations, though there is the alternative method of assigning the
property of the corporation to the trustees for the benefit of its creditors
and shareholders. “While the appointment of a receiver rests within the
sound judicial discretion of the court, such discretion must, however,
always be exercised with caution and governed by legal and equitable
principles, the violation of which will amount to its abuse, and in making
such appointment the court should take into consideration all the facts and
weigh the relative advantages and disadvantages of appointing a receiver
to wind up the corporate business.”
When the liquidation of a dissolved corporation has been placed in the
hands of a receiver or assignee, the 3-year period prescribed by law for
liquidation cannot be made to apply, and that the receiver or trustee may
institute all actions leading to the liquidation of the assets of the
corporation even after the expiration of said period.
1. Liquidation Pursued Through a Trustee
Where the affairs of the dissolved corporation were placed in a Board of
Liquidators, they were duly constituted as trustees for the liquidation of
the corporate affairs, and there being no term placed on the Board, their
power to pursue liquidation did not terminate upon the expiration of the 3-
year period.
Case: Gelano vs. Court of Appeals
For purposes of dissolution and liquidation of a corporation, the term
“trustee” should include counsel of record who may be deem to have
authority to pursue pending litigation after the expiration of the 3-year
liquidation period.
**court considered counsel as trustee even though there wa son
conveyeance
Case: Clemente vs. Court of Appeals
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If the 3-year extended life has expired without a trustee or receiver having
been designated, the Board of Directors itself, following the rationale of the
decision in Gelano, may be permitted to so continue as “trustees” to
complete liquidation; and in the absence of a Board, those having
pecuniary interest in the assets, including the shareholders and the
creditors of the corporation, acting for and in its behalf, might make proper
representations with the appropriate body for working out a final
settlement of the corporate concerns.
A trustee appointed for purposes of liquidation does not become
personally liable for the outstanding obligations of the corporation.
Case: Vigilla vs. PCCI (done na this)
There is no time limit within which the trustees must complete a liquidation
placed in their hands. What is provided in Sec. 122 is that the conveyance
to the trustees must be made within the 3-year period. But it may be found
impossible to complete the work of liquidation within the 3-year period or
to reduce disputed claims to judgment. Furthermore, Sec. 145 clearly
provides that “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.”
Case: Alabang Dev. Corp. vs. Alabang Hills Village Assn.
The trustee may continue to prosecute a case commenced by the
corporation within 3 years from its dissolution until rendition of the final
judgment, even if such judgment is rendered beyond the 3-year period
allowed by Sec. 122. However, there is nothing in the said cases that allows
an already defunct corporation to initiate a suit after the lapse of the said
3-year period. To allow petitioner to initiate the subject complaint and
pursue it until final judgment, on the ground that such complaint was filed
for the sole purpose of liquidating its assets, would be to circumvent the
provisions of Sec. 122 of the Corporation Code.
1. Reincorporation
Case: Chung Ka Bio vs. IAC
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Codal Provisions - Midterms

The procedures on the sale of all or substantially all of the assets of the
corporation, allows stockholders to transfer the assets and business
enterprise of the dissolved corporation to a newly registered entity bearing
the same corporate name.

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XIV. CLOSE CORPORATIONS educational institutions and

corporations declared to be vested with public interest
1. Definition in accordance with the provisions of this Code.

Section 96. Definition and applicability of Title. - The provisions of this Title shall primarily govern close corporations:
Provided, That the provisions of other Titles of this Code
A close corporation, within the meaning of this Code, shall apply suppletorily
is one whose articles of incorporation provide that: except insofar as this Title otherwise provides.

(1) All the corporation's issued stock of all classes, The concept of a close corporation organized for the purpose of running a
exclusive of treasury shares, family business or managing family property has formed the backbone of
shall be held of record Philippine commerce and industry. Through this device, Filipino families
by not more than a specified number of persons, have been able to turn their humble, hard-earned life savings into going
not exceeding twenty (20); concerns capable of providing them and their families with a modicum of
material comfort and financial security as a reward for years of hard work.
(2) all the issued stock of all classes A family corporation should serve as a reward for years of hard work— as a
shall be subject to one or more specified restrictions on transfer rallying point for family unity and prosperity, not as a flashpoint for familial
permitted by this Title; and strife. It is hoped that people reacquaint themselves with the concepts of
mutual aid and security that are the original driving forces behind the
(3) The corporation formation of family corporations and use these tenets in order to facilitate
shall not list in any stock exchange or more civil, if not more amicable, settlements of family corporate disputes.
make any public offering of any of its stock of any class.
1. De Jure Close Corporations: Articles of Incorporation
Notwithstanding the foregoing, Requirements
a corporation shall not be deemed a close corporation
when at least two-thirds (2/3) of its Section 97. Articles of incorporation. -
voting stock or
voting rights The articles of incorporation of a close corporation
is owned or controlled by another corporation may provide:
which is not a close corporation
within the meaning of this Code. 1. For a classification
of shares or rights and
Any corporation may be incorporated as a close corporation, the qualifications
except mining or oil companies, for owning or holding the same and
stock exchanges, restrictions
banks, on their transfers as may be stated therein,
insurance companies, subject to the provisions of the following section;
public utilities,

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2. For a classification of directors into one or more classes,
each of whom may be voted for and elected
solely by a particular class of stock; and
3. For a greater quorum or voting requirements
in meetings of stockholders or directors
than those provided in this Code.
The articles of incorporation of a close corporation
may provide that the business of the corporation
shall be managed by the stockholders of the corporation
rather than by a board of directors.
So long as this provision continues in effect:
1. No meeting of stockholders
need be called to elect directors;
2. Unless the context clearly requires otherwise,
the stockholders of the corporation shall be deemed to be
directors
for the purpose of applying
the provisions of this Code; and
3. The stockholders of the corporation
shall be subject to all liabilities of directors.
The articles of incorporation may likewise provide
that all officers or employees or
that specified officers or employees
shall be elected or appointed by the stockholders,
instead of by the board of directors.
1. Restriction on Transfer of Shares
Section 98. Validity of restrictions on transfer of shares. -
Restrictions on the right to transfer shares
must appear in the articles of incorporation and in the by-laws
Page 91 of 128
as well as in the certificate of stock;
otherwise, the same shall not be binding
on any purchaser thereof in good faith.
Said restrictions shall not be more onerous
than granting the existing stockholders or the corporation
the option to purchase the shares of the transferring stockholder
with such reasonable terms, conditions or period
stated therein.
If upon the expiration of said period,
the existing stockholders or
the corporation
fails to exercise the option to purchase,
the transferring stockholder may sell his shares
to any third person.
Section 99. Effects of issuance or transfer of stock in breach of qualifying
conditions. –
1. If stock of a close corporation is issued or transferred
to any person who is not entitled
under any provision of the articles of incorporation
to be a holder of record of its stock, and
if the certificate for such stock conspicuously shows
the qualifications of the persons
entitled to be holders of record thereof,
such person is conclusively presumed
to have notice of the fact of his ineligibility
to be a stockholder.
2. If the articles of incorporation of a close corporation states
the number of persons, not exceeding twenty (20),
who are entitled to be holders of record of its stock, and
if the certificate for such stock conspicuously states such number, and
if the issuance or transfer of stock to any person
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Codal Provisions - Midterms

would cause the stock to be held if the transfer of stock,

by more than such number of persons,
the person to whom such stock is issued or transferred
is conclusively presumed to have notice of this fact.
3. If a stock certificate of any close corporation
conspicuously shows a restriction on transfer of stock
of the corporation,
the transferee of the stock is conclusively presumed
to have notice of the fact
that he has acquired stock
in violation of the restriction,
if such acquisition violates the restriction.
though contrary to subsections (1), (2) or (3),
has been consented to by all the stockholders
of the close corporation, or
if the close corporation has amended its articles of incorporation
in accordance with this Title.
6. The term "transfer", as used in this section,
is not limited to a transfer for value.
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.

4. Whenever any person 1. Pre-emptive Rights

to whom stock of a close corporation has been issued or
transferred ‘Section 102. Pre-emptive right in close corporations. -
has, or is conclusively presumed under this section
to have, notice either The pre-emptive right of stockholders in close corporations
shall extend to all stock to be issued,
(a) that he is a person not eligible including reissuance of treasury shares,
to be a holder of stock of the corporation, or whether for money, property or personal services, or
in payment of corporate debts,
(b) that transfer of stock to him unless the articles of incorporation
would cause the stock of the corporation to be held provide otherwise.
by more than the number of persons permitted
by its articles of incorporation 1. Amendment
to hold stock of the corporation, or
Section 103. Amendment of articles of incorporation. -
(c) that the transfer of stock is in violation
of a restriction on transfer of stock, Any amendment to the articles of incorporation
the corporation may, at its option, which seeks to delete or remove
refuse to register the transfer of stock any provision required by this Title
in the name of the transferee. to be contained in the articles of incorporation or
to reduce a quorum or voting requirement
5. The provisions of subsection (4) shall not be applicable stated in said articles of incorporation

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shall not be valid or effective
unless approved by the affirmative vote of
at least two-thirds (2/3) of the outstanding capital stock,
whether with or without voting rights, or
of such greater proportion of shares
as may be specifically provided
in the articles of incorporation
for amending, deleting or removing any of the aforesaid
provisions, at a meeting duly called for the purpose.
1. De Facto Close Corporation
Case: Manuel R. Dulay Enterprises vs. CA
The Court cannot lose sight of the fact that the enterprise is a closed family
corporation where the incorporators and directors belong to one single
family. It cannot be concealed that Manuel R. Dulay as president, treasurer
and general manager almost had absolute control of the corporation. The
nomenclature, if imprecise, however, fairly reflects the cohesiveness of a
group and the parochial instincts of the individual members of such an
aggrupation of which Manuel R. Dulay Enterprises, Inc. is typical: four-fifths
of its incorporators being close relatives namely, three (3) children and
their father whose name identifies their corporation. Hence, the contract is
valid and binding on the corporation even without formal Board resolution.
Case: Sergio F. Naguiat vs. NLRC
The petitioners conceded tha both CFTI and Naguiat Enterprises were
“close family corporations” owned by the Naguiat family. Section 100(5) of
the Corporation Code state: “(5) To the extent that the stockholders are
actively engaged(d) in the management or operation of the business and
affairs of a close corporation, the stockholders shall be held to strict
fiduciary duties to each other and among themselves. Said stockholders
shall be personally liable for corporate tors unless the corporation has
obtained adequate liability insurance.
BUT SEE: Case: San Juan Structual vs. CA
The articles of incorporation of Motorich Sales Corp. does not contain any
provision required under Sec. 96, and therefore from its very articles of
incorporation, it is not a close corporation. It does not become one either,
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just because Spouses Reynaldo and Nenita Gruenberg owned 99.866% of
its subscribed capital stock. The “[m]ere ownership by a single stockholder
or by another corporation of all or nearly all of the capital stock of a
corporation is not of itself sufficient ground for disregarding the separate
corporate personalities.”
Case: Andaya vs. Rural Bank of Cabadbaran
The application of Sec. 98 (validity of restrictions on transfer of shares)
applies only to close corporations. Before courts can allow the operation of
Sec. 98 to a case, there must first be a factual determination that the
corporation is indeed a close corporation. There needs to be a presentation
of evidence on the relevant restrictions in the articles and by-laws. Here,
there is no such determination or even allegation based on the records or
the RTC decision that would assist this Court in ruling on these two major
factual matters.
1. Binding Agreements by Stockholders
Stockholders can be the ones to manage the corporation
● become directly and personally liable
Ordinary Corporations
● how must corporate acts be done
○ act as a body
○ there must be a meeting in which vote will be obtained
In closed corporations
● actions may be done without a valid meeting
Section 100. Agreements by stockholders. –
1. Agreements by and among stockholders
executed before the formation and organization
of a close corporation,
signed by all stockholders,
shall survive the incorporation of such corporation and
shall continue to be valid and binding
between and among such stockholders,
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if such be their intent, in the management or operation

to the extent that such agreements are not inconsistent
with the articles of incorporation,
irrespective of where the provisions of such agreements
are contained,
except those required by this Title
to be embodied in said articles of incorporation.
of the business and affairs of a close corporation,
the stockholders shall be held to strict fiduciary duties
to each other and among themselves.
Said stockholders shall be personally liable for corporate torts
unless the corporation has obtained
reasonably adequate liability insurance.

2. An agreement between two or more stockholders, 1. No Necessity of Board

if in writing and signed by the parties thereto,
may provide that in exercising any voting rights, Section 101. When board meeting is unnecessary or improperly held. -
the shares held by them shall be voted
as therein provided, or Unless the by-laws provide otherwise,
as they may agree, or any action by the directors of a close corporation
as determined in accordance with without a meeting
a procedure agreed upon by them. shall nevertheless be deemed valid if:

3. No provision in any written agreement 1. Before or after such action is taken,

signed by the stockholders,
relating to any phase of the corporate affairs,
shall be invalidated as between the parties
on the ground that its effect is to make them
partners among themselves.
written consent thereto is signed by all the directors; or
2. All the stockholders
have actual or implied knowledge of the action and
make no prompt objection thereto in writing; or

4. A written agreement among some or all of the stockholders
in a close corporation
shall not be invalidated on the ground that
it so relates to the conduct of
the business and affairs of the corporation
as to restrict or interfere with the discretion or powers
of the board of directors:
3. The directors are accustomed to take informal action
with the express or implied acquiescence of all the stockholders;
or
4. All the directors have express or implied knowledge
of the action in question and
none of them makes prompt objection thereto in writing.

Provided, That such agreement shall impose on the stockholders If a director's meeting is held without proper call or notice,
who are parties thereto an action taken therein within the corporate powers
the liabilities for managerial acts is deemed ratified by a director who failed to attend,
imposed by this Code on directors. unless he promptly files his written objection
with the secretary of the corporation
5. To the extent that the stockholders are actively engaged after having knowledge thereof.

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its board of directors, stockholders, or officers;

1. Deadlocks/ Missed Opportunity
Directors are divided on an issue, board of 5, one vacancy, they took a vote
on something, 2 in favor, 2 against
Case: Ong Yong vs. Tiu
**Mised opportunity - perhaps SC could have looked at de facto closed
corp.
Section 104. Deadlocks. -
Notwithstanding any contrary provision
in the articles of incorporation or by-laws or
agreement of stockholders of a close corporation,
if the directors or stockholders are so divided
respecting the management of
the corporation's business and affairs
that the votes required for any corporate action
cannot be obtained,
with the consequence that the business and affairs
of the corporation can no longer be conducted
to the advantage of the stockholders generally,
the Securities and Exchange Commission,
upon written petition by any stockholder,
shall have the power to arbitrate the dispute.
In the exercise of such power,
the Commission shall have authority
to make such order as it deems appropriate,
including an order:
(1) cancelling or altering any provision contained
in the articles of incorporation, by-laws, or any stockholder's
agreement;
(2) cancelling, altering or enjoining
any resolution or act
of the corporation or
(3) directing or prohibiting any act
of the corporation or
its board of directors, stockholders, officers, or
other persons party to the action;
(4) requiring the purchase at their fair value of shares of any stockholder,
either by the corporation
regardless of the availability of
unrestricted retained earnings in its books, or
by the other stockholders;
(5) appointing a provisional director;
(6) dissolving the corporation; or
(7) granting such other relief
as the circumstances may warrant.
A provisional director shall be an impartial person who is neither a
stockholder nor a creditor of the corporation or of any subsidiary or affiliate
of the corporation, and whose further qualifications, if any, may be
determined by the Commission. A provisional director is not a receiver of
the corporation and does not have the title and powers of a custodian or
receiver. A provisional director shall have all the rights and powers of a duly
elected director of the corporation, including the right to notice of and to
vote at meetings of directors, until such time as he shall be removed by
order of the Commission or by all the stockholders. His compensation shall
be determined by agreement between him and the corporation subject to
approval of the Commission, which may fix his compensation in the
absence of agreement or in the event of disagreement between the
provisional director and the corporation.
1. Withdrawal and Dissolution
Section 105. Withdrawal of stockholder or dissolution of corporation. -

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In addition and without prejudice to other rights and remedies They can get out by causing the company to buy their shares
available to a stockholder under this Title, May cause dissolution
any stockholder of a close corporation Subject to restriction
may, for any reason, number of shareholders
compel the said corporation to purchase his shares Transfer restrictions
at their fair value, can’t sell publicly shares
which shall not be less than Comparing with partnership and corporation, somewhere in the middle
their par or issued value, Even though it is held by a family, does not make it a closed corporation
when the corporation has sufficient assets in its books
to cover its debts and liabilities
exclusive of capital stock:

Provided, That any stockholder of a close corporation

may, by written petition
to the Securities and Exchange Commission,
compel the dissolution of such corporation
whenever any of acts of the directors, officers or
those in control of the corporation
is illegal, or
fraudulent, or
dishonest, or
oppressive or
unfairly prejudicial to the corporation or
any stockholder, or
whenever corporate assets are being misapplied or
wasted.

*Pre-emptive right

Similar to appraisal rights - ANY REASON they may compel

Must have sufficient assets (instead of unrestricted retained earnings for

ordinary corporations)

SUMMARY:
Unique type of Corporation
Corporation nonetheless, it is by law given unique flexibilities
Become liable for corporate torts

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XV. NON-STOCK CORPORATIONS AND FOUNDATIONS

1. Theory on Non-stock corporation

Section 14. Contents of the articles of incorporation. -
All corporations organized under this code
shall file with the Securities and Exchange Commission
articles of incorporation
in any of the official languages
duly signed and acknowledged
by all of the incorporators,
containing substantially the following matters,
except as otherwise prescribed
by this Code or
by special law:
Provided, That any cash dividends due on delinquent stock
shall first be applied to
the unpaid balance on the subscription
plus costs and expenses,
while stock dividends shall be withheld
from the delinquent stockholder
until his unpaid subscription is fully paid:
Provided, further, That no stock dividend shall be issued
without the approval of stockholders representing
not less than two-thirds (2/3) of the outstanding capital stock
at a regular or special meeting duly called for the purpose. (16a)

2. The specific purpose or purposes
for which the corporation is being incorporated.
Where a corporation has more than one stated purpose,
the articles of incorporation shall state
which is the primary purpose and
which is/are the secondary purpose or purposes:
Provided, That a non-stock corporation may not include a purpose
which would change or contradict its nature as such;
Section 43. Power to declare dividends. -
The board of directors of a stock corporation
may declare dividends out of the unrestricted retained earnings
which shall be payable
in cash,
in property, or
in stock
to all stockholders
on the basis of outstanding stock held by them:
Stock corporations are prohibited from retaining surplus profits
in excess of one hundred (100%) percent of
their paid-in capital stock,
except:
(1) when justified by
definite corporate expansion projects or
programs approved by the board of directors; or
(2) when the corporation
is prohibited under any loan agreement
with any financial institution or creditor,
whether local or foreign,
from declaring dividends without its/his consent, and
such consent has not yet been secured; or
(3) when it can be clearly shown that such retention is necessary
under special circumstances obtaining in the corporation,
such as when there is need for special reserve
for probable contingencies. (n)

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*not setup for commercial business civic service, or

**NSC - allowed to earn profit but must be used for furtherance of the similar purposes,
purpose like trade,
***Good Shepherd - making profit BUT industry,
agricultural and
Section 87. Definition. - like chambers, or
any combination thereof,
For the purposes of this Code, subject to the special provisions of this Title
a non-stock corporation is one where no part of its income governing particular classes of non-stock corporations. (n)
is distributable as dividends
to its members, trustees, or officers, Section 94. Rules of distribution. -
subject to the provisions of this Code on dissolution:
In case dissolution of a non-stock corporation
Provided, That any profit which a non-stock corporation may obtain in accordance with the provisions of this Code,
as an incident to its operations its assets shall be applied and distributed as follows:
shall, whenever necessary or proper,
be used for the furtherance of the purpose or purposes
for which the corporation was organized, 5. In any other case, assets may be distributed to such
subject to the provisions of this Title. persons,
societies,
The provisions governing Stock Corporation, organizations or
when pertinent, corporations,
shall be applicable to non-stock corporations, whether or not organized for profit,
except as may be covered as may be specified in a plan of distribution
by specific provisions of this Title. (n) adopted pursuant to this Chapter. (n)

Section 88. Purposes. - It is not inconsistent with the nature of a non-stock corporation to
incidentally earn profits in pursuing its eleemosynary purpose. What is
Non-stock corporations may be formed or organized for prohibited is to operate the company for profit and/or distribute any
charitable, profits so earned to its officers and members.
religious,
educational, The incurring of profit or losses does not determine whether an activity is
professional, for profit or non-profit, and the courts will consider whether dividends
cultural, have been declared or its members or that is property, effects or profit was
fraternal, ever used for personal or individual gain, and not for the purpose of
literary, carrying out the objectives of the enterprise.
scientific,
social,

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A non-stock corporation may only be formed or organized for charitable,
religious, educational, professional, cultural, fraternal, literary, scientific,
social, civic or other similar purposes. It may not engage in undertakings
such as the investment business where profit is the main or underlying
purpose. Although it may obtain profits as an incident to its operation, such
profits are not to be distributed among its members but must be used for
the furtherance of its purposes.
In a mutual life insurance company organized as a non-stock non-profit
corporation, the so-called “dividends” received by members-policyholders
are not a portion of profits set aside for distribution to the stockholders.
One, a mutual company has no capital stock to which subscription is
necessary; there are no stockholders to speak of, but only members. Two,
the amount they receive does not partake of the nature of a profit or
income, such distribution represents overpayment, a benefit to which the
member-policyholder is equitably entitled.
1. Non-applicability of the nationalization laws to non-stock
corporations
A foreigner may become a member or an officer of a non-stock
corporation. Save for the position of the Secretary, who must be a Filipino
citizen and a resident of the Philippines, the prohibition of foreign citizens
becoming officers in corporations engaged in business does not apply to
the activities of a non-stock corporation which do not fall within the
coverage of a nationalized industry or area of business reserved by law
exclusively to Filipino citizens.
1. Voting Rights of Members
*membership is a personal right
**may provide so otherwise
***Proprietary shares/interest - you own it and you can transfer it.
Under the by-Laws, membership in the corporation shall, among others, be
terminated by the death of the member. Further, applying Section 91 that
provides that termination extinguishes all the rights of a member of the
corporation, unless otherwise provided in the articles of the incorporation
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or the by-laws, we hold that dead members who are dropped from the
membership roster in the manner for the cause provided for in the by-Law
are not to be counted in determining the requisite vote in corporate
matters or the requisite quorum for the annual members’ meeting. With 11
remaining members, the quorum in the present case should be 6;
therefore, there being a quorum, the annual members’ meeting, conducted
with six members present, was valid.
1. Delinquency of Membership Dues
Section 69 refers specifically to unpaid subscriptions to capital stock, the
sale of which is governed by Sec. 68, and utterly inapplicable to non-stock
corporations. In such recovery claims, Article 1140 of the Civil Code governs
and provides that an action to recover movables shall prescribe in 8 years.
Case: Valle Golf & Country Club v. Vda. De Caram, 585 SCRA 218 (2009).
A non-stock corporation may seize and dispose of the membership share of
a fully-paid member on account of his unpaid monthly dues, when such
corporation is authorized to do so under the by-laws, even when no
provision on the matter appears in the articles of incorporation, and in
spite of the fact that Sec. 67 on delinquency sale pertains to payment of
shares subscription. Section 91 provides that membership shall be
terminated in the manner and for causes provided in the articles of
incorporation or the by-laws of a non-stock corporation, then the right of a
non-stock corporation to expel a member through the forfeiture of such
member’s share may be established in the by-laws alone, and need not be
embodied in the articles of incorporation.
1. Board of Trustees and Corporate Officers
Section 108, although setting the term of the members of the Board of
Trustees at 5 years, has a proviso subjecting the duration to what is
otherwise provided in the articles of incorporation or by-laws of the
educational corporation—that contrary provision control on the term of
office. A trustee occupying his office in a hold-over capacity could be
removed at any time, without cause, upon the election or appointment of
his successor.
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By-Laws provisions [which allows the election of members of the Board of

Trustees distributed to two per district] is not contrary to the Corporation 1. What is a foundation
Code [which under Section 24 requires that in the election of trustees of a
non-stock corporation it is necessary that at least “a majority of the SEC. 30 Exemptions from Tax on Corporations -
members entitled to vote” must be present]. Section 89 pertaining to non- The following organizations shall not be taxed under this Title in respect to
stock corporations provides that “(t)he right of the members of any class or income received by them as such:
classes (of a non-stock corporation) to vote may be limited, broadened or
denied to the extent specified in the articles of incorporation or the by- (A) Labor, agricultural or horticultural organization
laws.” This is an exception to Section 6 where it is provided that “no share not organized principally for profit;
may be deprived of voting rights except those classified and issued as
‘preferred’ or ‘redeemable’ shares, unless otherwise provided in this (B) Mutual savings bank
Code.” not having a capital stock represented by shares, and
cooperative bank without capital stock
1. Conversion of Non-stock Corporation to Stock Corporation organized and operated for mutual purposes and
without profit;
The conversion of a non-stock educational institution into a stock
corporation is not legally feasible, as it violates Sec. 87 of Corporation Code (C) A beneficiary society, order or association,
that no part of the income of a non-stock corporation may be distributable operating fort the exclusive benefit of the members
as dividends to its members, trustees or officers. “Thus, the Commission such as a fraternal organization operating under the lodge system,
has previously ruled that a non-stock corporation cannot be converted into or mutual aid association or
a stock corporation by a mere amendment of the Articles of Incorporation. a nonstock corporation organized by employees
For purposes of transformation, it is fundamental that the non-stock providing for the payment of
corporation be dissolved first under any of the methods specified Title XIV life, sickness, accident, or other benefits
of the Corporation Code. Thereafter, the members may organize as a stock exclusively to the members of
corporation directed to bring profits or pecuniary gains to themselves.” such society, order, or association, or
nonstock corporation or
1. Conversion of Corporation Sole to Aggregate Religious their dependents;
Corporation
(D) Cemetery company owned and operated exclusively
By virtue of the provision under Sec. 109 that allows the application to for the benefit of its members;
religious corporations of the general provisions governing non-stock
corporations, a corporation sole may convert itself into a religious (E) Nonstock corporation or association
aggregate corporation, by formally amending its articles of incorporation, organized and operated exclusively
by approval of its sole corporator and ratified by at least two-thirds of its for religious, charitable, scientific, athletic, or cultural purposes, or
general membership, and without needlessly going through the process of for the rehabilitation of veterans,
dissolution. no part of its net income or asset
shall belong to or inures to the benefit of any member,
1. Tax Considerations for Non-stock Corporations organizer, officer or any specific person;

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(F) Business league chamber of commerce, or from any of their properties, real or personal, or
board of trade, from any of their activities conducted for profit
not organized for profit and regardless of the disposition
no part of the net income of which made of such income,
inures to the benefit of shall be subject to tax imposed under this Code.
any private stockholder, or individual;
SEC. 34. Deductions from Gross Income. -
(G) Civic league or organization
not organized for profit Except for taxpayers earning compensation income
but operated exclusively for the promotion of social welfare; arising from personal services
rendered under an employer-employee relationship
(H) A nonstock and nonprofit educational institution; where no deductions shall be allowed under this Section
other than under subsection (M) hereof,
(I) Government educational institution; in computing taxable income
subject to income tax under Sections 24 (A); 25 (A); 26;
(J) Farmers' or other mutual typhoon or fire insurance company, 27 (A), (B) and (C); and 28 (A) (1),
mutual ditch or irrigation company, there shall be allowed the following deductions
mutual or cooperative telephone company, or from gross income;
like organization of a purely local character,
the income of which consists solely of (H) Charitable and Other Contributions. -
assessments, dues, and fees
collected from members (1) In General. -
for the sole purpose of meeting its expenses; and
Contributions or gifts actually paid or made within the taxable year
(K) Farmers', fruit growers', or like association to, or for the use of the Government of the Philippines or
organized and operated as a sales agent any of its agencies or
for the purpose of any political subdivision thereof
marketing the products of its members and exclusively for public purposes, or
turning back to them the proceeds of sales, to accredited domestic corporation or
less the necessary selling expenses associations organized and operated
on the basis of the quantity of produce exclusively for
finished by them; religious,
charitable,
scientific,
youth and sports development,
Notwithstanding the provisions in the preceding paragraphs, cultural or
the income of whatever kind and character educational purposes or
of the foregoing organizations for the rehabilitation of veterans, or

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to social welfare institutions, or
to non-government organizations,
in accordance with rules and regulations
promulgated by the Secretary of finance,
upon recommendation of the Commissioner,
no part of the net income of which
inures to the benefit of
any private stockholder or individual
in an amount not in excess of ten percent (10%)
in the case of an individual, and
five percent (%)
in the case of a corporation,
of the taxpayer's taxable income
derived from trade, business or profession
as computed without the benefit of this and
the following subparagraphs.
(2) Contributions Deductible in Full. -
Notwithstanding the provisions of the preceding subparagraph,
donations to the following institutions or entities
shall be deductible in full;
(a) Donations to the Government. -
Donations
to the Government of the Philippines or
to any of its agencies or political subdivisions,
including fully-owned government corporations,
exclusively to finance, to provide for, or to be used
in undertaking priority activities in
education,
health,
youth and sports development,
human settlements,
science and culture, and
in economic development
according to a National Priority Plan
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determined by the National Economic and Development Authority (NEDA),
In consultation with appropriate government agencies,
including its regional development councils and
private philantrophic persons and institutions:
Provided, That any donation which is made
to the Government or
to any of its agencies or political subdivisions
not in accordance with the said annual priority plan
shall be subject to the limitations prescribed
in paragraph (1) of this Subsection;
(b) Donations to Certain Foreign Institutions or International Organizations.
-
Donations to foreign institutions or international organizations
which are fully deductible in pursuance of or in compliance with
agreements,
treaties, or
commitments
entered into by
the Government of the Philippines and
the foreign institutions or
international organizations or
in pursuance of special laws;
(c) Donations to Accredited Nongovernment Organizations. -
The term "nongovernment organization" means
a non profit domestic corporation:
(1) Organized and operated exclusively for
scientific,
research,
educational,
character-building and
youth and sports development,
health,
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social welfare,
cultural or
charitable purposes, or
a combination thereof,
no part of the net income of which
inures to the benefit of any private individual;
(2) Which, not later than the 15th day of the third month
after the close of the accredited nongovernment organizations taxable year
in which contributions are received,
makes utilization directly
for the active conduct of the activities
constituting the purpose or function
for which it is organized and operated,
unless an extended period is granted
by the Secretary of Finance
in accordance with the rules and regulations
to be promulgated,
upon recommendation of the Commissioner;
(3) The level of administrative expense of which shall, on an annual basis,
conform with the rules and regulations
to be prescribed by the Secretary of Finance,
upon recommendation of the Commissioner,
but in no case to exceed
thirty percent (30%) of the total expenses; and
(4) The assets of which, in the even of dissolution,
would be distributed to another nonprofit domestic corporation
organized for similar purpose or purposes, or
to the state for public purpose, or
would be distributed by a court to another organization
to be used in such manner as in the judgment of said court
shall best accomplish the general purpose
for which the dissolved organization was organized.
Subject to such terms and conditions
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as may be prescribed by the Secretary of Finance,
the term "utilization" means:
(i) Any amount in cash or in kind (including administrative expenses)
paid or utilized to accomplish one or more purposes
for which the accredited nongovernment organization
was created or organized.
(ii) Any amount paid to acquire an asset
used (or held for use) directly in carrying out
one or more purposes
for which the accredited nongovernment organization
was created or organized.
An amount set aside for a specific project which comes within one or more
purposes of the accredited nongovernment organization may be treated as
a utilization, but only if at the time such amount is set aside, the accredited
nongovernment organization has established to the satisfaction of the
Commissioner that the amount will be paid for the specific project within a
period to be prescribed in rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the Commissioner, but not
to exceed five (5) years, and the project is one which can be better
accomplished by setting aside such amount than by immediate payment of
funds.
(3) Valuation - The amount of any charitable contribution of property other
than money shall be based on the acquisition cost of said property.
(4) Proof of Deductions. - Contributions or gifts shall be allowable as
deductions only if verified under the rules and regulations prescribed by
the Secretary of Finance, upon recommendation of the Commissioner.
Revenue Regulations No. 2
Section 24 Proof of Exemption
In order to establish its exemption, and thus be relieve of the duty of filing
returns of income and paying the tax, it is necessary that every organisation
claiming exemption file an affidavit with the Commissioner of Internal
Revenue, showing the character of the organization, the purpose for which
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it was organised, its actual activities, the sources of its income and its
disposition, whether or not any of its income is credited surplus or inures or
may inure to the benefit of any private shareholder or individual, and in
general, all facts relating to its operations which affect its right to
exemption. To such affidavit should be attached a copy of the charter or
articles of incorporation, the By-laws of the organisation, and the latest
financial statement showing the assets, liabilities, receipts, and
disbursements of the organisation.
Upon receipt of the affidavit and other papers by the Commissioner of
Internal Revenue, the organisation will be informed whether or not it is
exempt. When an organisation has established its right to exemption, it
need not thereafter make and file a return of income as required under
Section 46 of the Tax Code. However, the organisation should file on or
before April 15 of each year, an annual information return under oath,
stating its gross income and expenses incurred during the preceding year
and a certificate showing that there has not been any substantial change in
its By-laws, Articles of Incorporation, manner of operation and activities as
well as sources and dispositions of income. (As amended by RR No. 7-64,
approved November 25, 1964)
Formal requirements of Rev. Reg. No. 2 are not mandatory and an entity
may, in the absence of compliance with such requirements, still show that
it falls under the provisions of NIRC as a tax-exempt corporation.
BIR-NEDA Regulation 1-81 as amended
For a foundation to qualify for full deduction, under BIR-NEDA Regulations
No. 1081, as amended, it must file with the Government and Tax Exempt
Corporation Division of the BIR a sworn statement showing the character or
the organization, the purpose for which it is organized, its actual activities,
the sources of income and its disposition; and other facts relating to their
operations which are relevant to their qualification as donee institutions.
Once the foundation is qualified as a donee institution by the issuance of
BIR Certificate of Registration, it must issue certificates of donations in the
form prescribed by the BIR on every donation or gift it receives within thirty
(30) days from receipt of the donation.
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For purposes of Corporate Law, with respect to corporate powers and
capabilities, and rules on internal management and membership relations,
there are no distinctions between foundations and regular non-stock
corporations, and there is no advantage enjoyed in this realm by
foundations over regular non-stock corporations. In fact, a foundation
would suffer a diminution of the extent of power by which to distribute its
net assets in the event of dissolution, as compared to a regular stock
corporation
In the realm of income taxation, both a foundation and a non-stock
corporation can equally enjoy tax- exempt status.
When it comes to charitable contributions, a foundation is limited in the
manner by which it disburses the same by the 30% limitation on its
administrative expenses, whereas no such limitation applies to regular non-
stock corporations. In addition, both the donors to, and the management
of, foundations are saddled with reportorial requirements on donations
given and received, as the case may be. On the other hand, because
donations to foundations which have qualified as donee institutions are
deductible in full, there may be greater motivation from benefactors to give
to foundations rather than to a regular non-stock corporation.
Formal requirements of Rev. Reg. No. 2 are not mandatory and an entity
may, in the absence of compliance with such requirements, still show that
it falls under the provisions of NIRC as a tax-exempt corporation.
1. Income-tax exemption
See Sec. 30, NIRC
“Non-profit” does not necessarily mean “charitable.” Collector of Internal
Revenue v. Club Filipino Inc. de Cebu considered a sports club organized for
recreation and entertainment of its stockholders and members and
primarily funded by membership fees and due, as being non-profit because
of its purpose and there was no evidence that it was engaged in a profit-
making enterprise. But that did not make it “charitable”, which term has
been defined in Lung Center of the Philippines v. Quezon City, 433 SCRA 119
(2004), as “a gift, to be applied consistently with existing laws, for the
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benefit of an indefinite number of persons, either by bringing their minds similar purposes,
and hearts under the influence of education or religion, by assisting them but not held upon a condition requiring
to establish themselves in life or [by] otherwise lessening the burden of return,
government.” As organization may be considered as non-profit if it does transfer or
not distribute any part of its income to stockholders or members; however, conveyance
despite its being a tax exempt institution, any income such institution earns by reason of the dissolution,
from activities conducted for profit is taxable, as expressly provided in shall be transferred or conveyed to one or more
Section 30 of the NIRC. corporations, societies or organizations
engaged in activities in the Philippines
1. Right of Members to proportionate share of remaining assets substantially similar to those of the dissolving corporation
upon dissolution according to a plan of distribution
adopted pursuant to this Chapter;
CHAPTER III
DISTRIBUTION OF ASSETS IN NON-STOCK CORPORATIONS 4. Assets other than those mentioned in the preceding paragraphs, if any,
shall be distributed in accordance with the provisions of
Section 94. Rules of distribution. - the articles of incorporation or the by-laws,
to the extent that the articles of incorporation or
In case dissolution of a non-stock corporation the by-laws,
in accordance with the provisions of this Code, determine the distributive rights of members, or
its assets shall be applied and distributed as follows: any class or classes of members, or
provide for distribution; and
1. All liabilities and obligations of the corporation
shall be paid, satisfied and discharged, or 5. In any other case,
adequate provision shall be made therefore; assets may be distributed to
such persons, societies, organizations or corporations,
whether or not organized for profit,
2. Assets held by the corporation as may be specified in a plan of distribution
upon a condition requiring return, transfer or conveyance, and adopted pursuant to this Chapter. (n)
which condition occurs by reason of the dissolution,
shall be returned, transferred or conveyed
in accordance with such requirements; Section 95. Plan of distribution of assets. -

3. Assets received and held by the corporation A plan providing for the distribution of assets,
subject to limitations permitting their use not inconsistent with the provisions of this Title,
only for charitable, may be adopted by a non-stock corporation
religious, in the process of dissolution
benevolent, in the following manner:
educational or

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The board of trustees shall, by majority vote,

adopt a resolution
recommending a plan of distribution and
directing the submission thereof to a vote
at a regular or special meeting of members
having voting rights.
Written notice setting forth
the proposed plan of distribution or
a summary thereof and
the date, time and place of such meeting
shall be given to each member entitled to vote,
within the time and in the manner provided in this Code
for the giving of notice of meetings to members.
Such plan of distribution shall be adopted
upon approval of at least two-thirds (2/3) of the members
having voting rights present or represented by proxy
at such meeting. (n)

As provided for under Secs. 94 and 95 of Corporation Code,

in the event of dissolution of a non-stock corporation,
its assets shall be distributed in accordance with the rules.
Unless, it is so provided in the articles of incorporation or by-laws,
the members are not entitled
to any beneficial or vested interest
over the assets of the non-stock corporation.
In other words,
non-stock, non-profit corporations hold their funds in trust
for the carrying out of the objectives and purposes
expressed in its charter

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XVI. FOREIGN CORPORATION under a license therefore issued to it,

shall continue to have such authority
1. Definition under the terms and condition of its license,
subject to the provisions of this Code and
Section 123. Definition and rights of foreign corporations. - other special laws. (n)
Section 125. Application for a license. -
For the purposes of this Code,
a foreign corporation is one formed, organized or existing A foreign corporation applying for a license
under any laws other than those of the Philippines and to transact business in the Philippines
whose laws allow Filipino citizens and corporations shall submit to the Securities and Exchange Commission
to do business in its own country or state. a copy of its articles of incorporation and by-laws,
It shall have the right to transact business in the Philippines certified in accordance with law, and
after it shall have obtained a license to transact business their translation to an official language of the Philippines,
in this country in accordance with this Code and if necessary.
a certificate of authority The application
from the appropriate government agency. (n) shall be under oath and,
unless already stated in its articles of incorporation,
Case: Avon Insurance PLC v. CA, 278 SCRA 312 (1997). shall specifically set forth the following:
A foreign corporation is one which owes its existence to the laws of
another state, and generally, has no legal existence within the State in 1. The date and term of incorporation;
which it is foreign. A foreign corporation illegally doing business here
because of its refusal or neglect to obtain the required license may not 2. The address, including the street number,
unfairly plead such lack to avoid service and thereby impugn the of the principal office of the corporation
jurisdiction of the local courts. Such danger does not exist among foreign in the country or state of incorporation;
corporations that are indubitably not doing business in the Philippines:
there would be no reason for it to be subject to the State’s regulation; for 3. The name and address of its resident agent
in so far as the State is concerned, such foreign corporation has no legal authorized to accept summons and process in all legal proceedings
existence. Therefore, to subject such foreign corporation to the local and, pending the establishment of a local office,
courts’ jurisdiction would violate the essence of sovereignty of the creating all notices affecting the corporation;
state.
4. The place in the Philippines
1. License to Do Business in the Philippines where the corporation intends to operate;

1. Application for license 5. The specific purpose or purposes

Section 124. Application to existing foreign corporations. - which the corporation intends to pursue
in the transaction of its business in the Philippines:
Every foreign corporation which on the date of the effectivity of this Code Provided, That said purpose or purposes
is authorized to do business in the Philippines are those specifically stated in the certificate of authority

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issued by the appropriate government agency; the jurisdiction of its incorporation,

attesting to the fact that
6. The names and addresses the laws of the country or state of the applicant
of the present directors and officers allow Filipino citizens and corporations
of the corporation; to do business therein, and
that the applicant is an existing corporation
7. A statement of in good standing.
its authorized capital stock and
the aggregate number of shares If such certificate is in a foreign language,
which the corporation has authority to issue, a translation thereof in English
itemized by under oath of the translator
classes, shall be attached thereto.
par value of shares,
shares without par value, and The application for a license to transact business in the Philippines
series, if any; shall likewise be accompanied by a statement under oath
of the president or
8. A statement of any other person authorized by the corporation,
its outstanding capital stock and showing to the satisfaction of
the aggregate number of shares the Securities and Exchange Commission and
which the corporation has issued, other governmental agency
itemized by in the proper cases that the applicant
classes, is solvent and in sound financial condition, and
par value of shares, setting forth the assets and liabilities
shares without par value, and of the corporation
series, if any; as of the date not exceeding
one (1) year immediately prior
9. A statement of the amount actually paid in; and to the filing of the application.

10. Such additional information as may be necessary or appropriate
in order to enable the Securities and Exchange Commission
to determine whether such corporation
is entitled to a license to transact business
in the Philippines, and
to determine and assess the fees payable.
Attached to the application for license shall be
a duly executed certificate under oath
by the authorized official or officials of
Foreign banking, financial and insurance corporations
shall, in addition to the above requirements,
comply with the provisions of existing laws applicable to them.
In the case of all other foreign corporations,
no application for license to transact business in the Philippines
shall be accepted by the Securities and Exchange Commission
without previous authority from
the appropriate government agency,
whenever required by law. (68a)

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1. Rational for Requiring License against such corporation, and

Case: Marshall-Wells v. Elser, 46 Phil. 71 (1924).
Sec. 69 of old Corporation Law was intended to subject the foreign
corporation doing business in the Philippines to the jurisdiction of our
courts, not to prevent the foreign corporation from performing single acts,
but to prevent it from acquiring domicile for the purpose of business
without taking the necessary steps to render it amenable to suit in the local
courts.
1. Appointment of a Resident Agent
Section 127. Who may be a resident agent. -
A resident agent may be either
an individual residing in the Philippines or
a domestic corporation lawfully transacting
business in the Philippines:
Provided, That in the case of an individual,
he must be of good moral character and
of sound financial standing. (n)
Section 128. Resident agent; service of process. -
The Securities and Exchange Commission shall require
as a condition precedent to the issuance of
the license to transact business in the Philippines
by any foreign corporation
that such corporation file
with the Securities and Exchange Commission
a written power of attorney
designating some person
who must be a resident of the Philippines,
on whom any summons and other legal
processes
may be served in all actions or
other legal proceedings
consenting that service upon such resident agent
shall be admitted and held as valid as if served
upon the duly authorized officers
of the foreign corporation at its home office.
Any such foreign corporation
shall likewise execute and file
with the Securities and Exchange Commission
an agreement or stipulation,
executed by the proper authorities of said corporation,
in form and substance as follows:
"The (name of foreign corporation) does hereby stipulate and agree,
in consideration of its being granted
by the Securities and Exchange Commission
a license to transact business in the Philippines,
that if at any time said corporation
shall cease to transact business in the Philippines, or
shall be without any resident agent in the Philippines
on whom any summons or other legal processes
may be served,
then in any action or proceeding
arising out of any business or transaction
which occurred in the Philippines,
service of any summons or other legal process
may be made upon
the Securities and Exchange Commission and
that such service shall have the same force and effect
as if made upon the duly authorized officers of
the corporation at its home office."
Whenever such service of summons or other process
shall be made upon the Securities and Exchange Commission,
the Commission shall, within ten (10) days thereafter,
transmit by mail
a copy of such summons or other legal process
to the corporation

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at its home or principal office.
The sending of such copy by the Commission
shall be necessary part of and
shall complete such service.
All expenses incurred by the Commission for such service
shall be paid in advance by the party
at whose instance the service is made.
In case of a change of address of the resident agent,
it shall be his or its duty to immediately notify in writing
the Securities and Exchange Commission
of the new address. (72a; and n)
1. Issuance of License
A licensed foreign corporation should be subjected to no harsher rules that
is required of domestic corporations—it should not be subject to
attachment on the pretense that such foreign corporation is not residing in
the Philippines.
Section 126. Issuance of a license. -
If the Securities and Exchange Commission is satisfied
that the applicant has complied with all the requirements
of this Code and other special laws, rules and regulations,
the Commission shall issue a license to the applicant
to transact business in the Philippines
for the purpose or purposes specified in such license.
Upon issuance of the license,
such foreign corporation may commence to transact business
in the Philippines and
continue to do so for as long as it retains its authority
to act as a corporation
under the laws of the country or state of its
incorporation, unless such license is sooner
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surrendered,
revoked,
suspended or
annulled
in accordance with this Code or
other special laws.
Within sixty (60) days after
the issuance of the license to transact business in the Philippines,
the licensee, except foreign banking or insurance corporation,
shall deposit with the Securities and Exchange Commission
for the benefit of present and future creditors
of the licensee in the Philippines,
securities satisfactory to the Securities and Exchange Commission,
consisting of bonds or other evidence of indebtedness
of the Government of the Philippines,
its political subdivisions and instrumentalities, or
of government-owned or controlled corporations and entities,
shares of stock in "registered enterprises"
as this term is defined in Republic Act No. 5186,
shares of stock in domestic corporations
registered in the stock exchange, or
shares of stock in domestic insurance companies and banks, or
any combination of these kinds of securities,
with an actual market value of at least
one hundred thousand (P100,000.) pesos;
Provided, however, That within six (6) months
after each fiscal year of the licensee,
the Securities and Exchange Commission
shall require the licensee to deposit additional securities
equivalent in actual market value
to two (2%) percent of the amount (X-5M)*2%
by which the licensee's gross income for that fiscal year
exceeds five million (P5,000,000.00) pesos.
The Securities and Exchange Commission shall also require
deposit of additional securities
if the actual market value of the securities on deposit
has decreased by at least ten (10%) percent
of their actual market value
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at the time they were deposited.
The Securities and Exchange Commission may at its discretion
release part of the additional securities deposited with it
if the gross income of the licensee has decreased, or
if the actual market value of the total securities on
deposit
has increased, by more than ten (10%) percent
of the actual market value of the securities
at the time they were deposited.
The Securities and Exchange Commission may, from time to time,
allow the licensee to substitute other securities
for those already on deposit
as long as the licensee is solvent.
Such licensee shall be entitled to collect the interest or dividends
on the securities deposited.
In the event the licensee ceases to do business in the Philippines,
the securities deposited as aforesaid shall be returned,
upon the licensee's application therefor and
upon proof to the satisfaction of
the Securities and Exchange Commission
that the licensee has no liability
to Philippine residents,
including the Government of
the Republic of the Philippines. (n)
but such corporation may be sued or proceeded against before Philippine
courts or administrative tribunals on any valid cause of action recognized
under Philippine laws.
Section 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
Under Sec. 123, a foreign corporation must first obtain a license to do
business before it can transact business in the Philippines. Without the
proper license, it cannot maintain any action or proceeding before
Philippine courts as provided in Section 133 of the Corporation Code.
Case: Home Insurance Co. v. Eastern Shipping Lines, 123 SCRA 424 (1983).
The contract itself is valid, but it is the standing to sue of the foreign
corporation that is missing, which can be remedied with the subsequent
obtaining of the license to do business.

Purpose of security deposit - provide something for creditors to lach on to. *not permitted to sue in courts and administrative agencies
**successors or assigns are not allowed to sue
1. Effects of Failure to Obtain License ***if he acquires a license subsequently, the prior violation is cured.
****licensing is not transaction specific
Section 133. Doing business without a license. –
If you acquire license subsequently, you are able to sue.
No foreign corporation
transacting business in the Philippines *how can it proceed? jurisdiction is required.
without a license,
or its successors or assigns, Summary of Rulings on Doing Business:
shall be permitted to maintain or intervene in any action,
suit or proceeding in any court or administrative agency of the Philippines;

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(1) if a foreign corporation does business in the Philippines without a to transact business in the Philippines
license, it cannot sue before Philippine courts; may be revoked or suspended
by the Securities and Exchange Commission
(2) if a foreign corporation is not doing business in the Philippines, it needs upon any of the following grounds:
no license to sue before Philippine courts on an isolated transaction or on a 1. Failure to
cause of action entirely independent of any business transaction; file its annual report or
pay any fees
(3) if a foreign corporation does business in the Philippines without a as required by this Code;
license, a Philippine citizen or entity which has contracted with said
corporation may be estopped from challenging the foreign corporation’s 2. Failure to appoint and maintain a resident agent in the Philippines
corporate personality in a suit brought before the Philippine courts; and as required by this Title;

(4) if a foreign corporation does business in the Philippines with the 3. Failure, after change of its resident agent or of his address,
required license, it can sue before Philippine courts on any transaction. to submit to the Securities and Exchange Commission
a statement of such change
1. Amendment of License as required by this Title;

Section 131. Amended license. -

4. Failure to submit to the Securities and Exchange Commission
A foreign corporation authorized to transact business in the Philippines an authenticated copy of any amendment
shall obtain an amended license to its articles of incorporation or by-laws or
in the event it changes its corporate name, or of any articles of merger or consolidation
desires to pursue in the Philippines within the time prescribed by this Title;
other or additional purposes,
by submitting an application therefor 5. A misrepresentation of any material matter
to the Securities and Exchange Commission, in any application, report, affidavit or
favorably endorsed by the appropriate government other document submitted by such corporation
agency pursuant to this Title;
in the proper cases. (n)
6. Failure to pay any and all
1. Revocation of License taxes,
imposts,
GROUNDS ARE BROAD assessments or penalties,
if any, lawfully due to the Philippine Government or
Section 134. Revocation of license. - any of its agencies or political subdivisions;
FASSMPTTO
Without prejudice to other grounds provided by special laws, 7. Transacting business in the Philippines
the license of a foreign corporation outside of the purpose or purposes

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for which such corporation is authorized under its license;

The phrase "doing business" shall include
8. Transacting business in the Philippines soliciting orders,
as agent of or service contracts,
acting for and in behalf of any foreign corporation or entity opening offices,
not duly licensed to do business in the Philippines; or whether called "liaison" offices or branches;
appointing representatives or distributors
9. Any other ground as would render it unfit domiciled in the Philippines or
to transact business in the Philippines. (n) who in any calendar year stay in the country
for a period or periods totalling
one hundred eighty (180) days or more;
Section 135. Issuance of certificate of revocation. - participating in the management, supervision or control
of any domestic business, firm, entity or corporation
Upon the revocation of any such license in the Philippines; and
to transact business in the Philippines, any other act or acts that
the Securities and Exchange Commission imply a continuity of
shall issue a corresponding certificate of revocation, commercial dealings or arrangements, and
furnishing a copy thereof contemplate to that extent
to the appropriate government agency the performance of acts or works, or
in the proper cases. the exercise of some of the functions
normally incident to, and
The Securities and Exchange Commission in progressive prosecution of,
shall also mail to the corporation commercial gain or
at its registered office in the Philippines of the purpose and object
a notice of such revocation of the business organization:
accompanied by a copy of the certificate of revocation.
(n) Provided, however, That the phrase "doing business:
shall not be deemed to include
1. Concepts of “Doing Business in the Philippines mere investment as a shareholder by a foreign entity
in domestic corporations duly registered to do business,
1. Statutory Definition of Doing Business and/or the exercise of rights as such investor;
nor having a nominee director or officer
JURISPRUDENCE: no single definition to represent its interests in such corporation;
nor appointing a representative or distributor
Law —> memorise domiciled in the Philippines which transacts business
in its own name and
RA 7042 Foreign Investment Act of 1991 for its own account;
*might be outdated already

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FIA ’91 repealed Arts. 44-56 of Book II of the Omnibus Investments Code,
and enumerates in Sec. 3(d) not only the acts or activities which constitute
“doing business” but also those activities which are not deemed “doing
business”.
Under Sec. 3(d) of FIA ‘91, also Rule I, Sec. 1(f) of its IRR, the appointment
of a distributor is not sufficient to constitute “doing business” unless it is
under the full control of the foreign corporation. If the distributor is an
independent entity which buys and distributes products, other than those
of the foreign corporation, for its own name and its own account, the latter
cannot be considered to be doing business in the Philippines.
Section 3(d) provides that “The phrase ‘doing business’ shall include …
opening offices, whether called ‘liaison’ offices or branches,” leads to no
other conclusion than that Saudia is a foreign corporation doing business in
the Philippines, and it may be sued in the Philippines and is subject to the
jurisdiction of Philippine tribunals.
1. Jurisprudential Concepts of “Doing Business”
Case: Mentholatum vs. Mangaliman
It implies a continuity of commercial dealings and arrangements, and the
performance of acts or works or the exercise of some of the functions
normally incident to the main purpose or object for which a foreign
corporation has been organized.
Argument not valid: appointed Phil drug, estopped
If case decided at time foreign investments acts was enacted, would it be a
clearer case? YES.
DOING BUSINESS - appointing representatives or distributors domiciled in
the Philippines or who in any calendar year stay in the country for a period
or periods totalling one hundred eighty (180) days or more;
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NOT DOING BUSINESS - nor appointing a representative or distributor
domiciled in the Philippines which transacts business in its own name and
for its own account;
Foreign company similar to habitat for humanity - go to various
jurisdictions and help out by building homes.
Supplier supplied a defective pipe - didn’t get license to do business in the
philippines. can it sue?
*does the fact that it does not have a license, does it impede ability to sue?
● habitat for humanity - NOT A COMMERCIAL DEALING
DOCTRINE IS VERY FUNDAMENTAL CONCEPT
SOMETIMES, COURT RESORTS TO VARIOUS TESTS:
1. Territoriality Rule
Case: Marubeni Nederland B.V. vs. Tension
Doing business in the Philippines requires that the contract must be
perfected or ed. of business contracts constitutes doing business in the
Philippines.
Marubeni Netherlands - It wasn’t me
Court - Does not agree, agent was doing acts for Marubeni Netherlands
Principal and Agent - agent does on behalf of the principal
Its as if principal was the one who entered in the contract
Conduct business here - you could be deemed to be doing business
1. Profit Seeking transaction Rule
Case: Agilent Technologies Singapore (PTE) Ltd. vs. integrated Silicon
Technology Phil Corp.
Although each case must be judged in light of attendant circumstances,
jurisprudence has evolved several guiding principles for the application of
these tests. “By and large, to constitute ‘doing business,’ the activity to be
undertaken in the Philippines is one that is for profit-making.”
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Codal Provisions - Midterms
Even if foreign company contracts with local company by giving it materials
and the latter does the work, such is still a business transaction.
For you to say it is doing business in the Philippines, profit must be derived
from the transaction.
Foreign corp’s obligation - finance and pay
According to court, profit is necessary!
In the law, commercial gain is used.
Examples:
Insurance Business
● A foreign corporation with a Philippine settling agent which issues
twelve marine policies covering different shipments to the
Philippines is doing business here.
● A foreign corporation which had been collecting premiums on
outstanding policies is doing business in the Philippines.
● Foreign insurance companies who undertake the filing of
collection suits with Philippine courts arising from insurance
contracts entered into and premiums paid abroad are not doing
business in the Philippines.
Air Carriers
● Off-line air carriers having general sales agents in the Philippines
are engaged in business in the Philippines and that their income
from sales of passage here (i.e., uplifts of passengers and cargo
occur to or from the Philippines) is income from within the
Philippines.
1. Transactions with Agents and Brokers
Case: Granger Associates vs. Microwave Systems Inc
When it is shown that the foreign corporation exercised control over the
business of its brokers, then it is deemed doing business in the country.
Page 115 of 128
When it is shown that the foreign corp is managing/controlling the
business.
Entitled to 1 seat of MSI and bought 30% of shares
Acting as an agent, directs how he does business.
If you have an agent pursuing your business in the Philippines, you are
conducting business in the Philippines.
Bought 30% equity and entitled to 1 board seat, assuming that’s all he did,
is that doing business? No. Mere investment is not doing business in the
Philippines.
1. Special Cases on Infringement of Business Names and
Trademarks
Case: Western Equipment & Supply Co. vs. Reyes
The right to corporate name and trade name of a foreign corporation is a
property right in rem, which it may assert and protect in any of the courts
of the world even in countries where it does not personally transact any
business.
Manufacturer of equipment sold in Americas
Company is not licensed and not doing business in the Philippines.
Foreign company - no license, when does restriction apply?
● subject to rule are only those
○ not licensed
○ doing business in the Philippines
■ you will be penalised for not getting a license
You dont need to be licensed if you are not doing business in the Philippines
provided jurisdiction is acquired by proper service of summons
z
Infringement of trade name may be pursued in local courts separate from
the issue of whether there is the proper license to do business in the
Philippines.
1. Doctrine on Unrelated or Isolated Transactions
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Codal Provisions - Midterms
Isolated acts, contracts, or transactions of foreign corporations are not
regarded as carrying on of business. Typical examples of these are the
making of a single contract, sale with the taking of a note and mortgage in
the state to secure payment thereof, purchase, or note, or the mere
commission of a tort.
A foreign corporation needs no license to sue before Philippine courts on
an isolated transaction. Even a series of transactions which are occasional,
incidental and casual—not of a character to indicate a purpose to engage in
business—do not constitute the doing or engaging in business as
contemplated by law.
Case: Antam Consolidated vs. CA
The performance of services auxiliary to an existing isolated contract of sale
which are not on a continuing basis do not constitute “doing business in the
Philippines.”
One isolated purchase transaction
If you only do business once, why is it not considered doing business?
Continuity of business
But there are cases that such 1 transaction can be considered doing
business
● if so big
● so fundamental
○ shows an intent to pursue business in the Philippines
If based on the cases we’ve looked at on doing business
another approach on reaching conclusion that this is not doing business.
Foreign corporation - purchase something, you pay
● not deriving any profit
● it was paying the philippine corporation
● Using agilant case: not making profit —> can get out of this case
Practice
whatever is favourable to your argument, may be used
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1. Examples of Isolated Transactions
● Recovery on the collision of two vessels at the Manila Harbor.
● Loss of goods bound for Hongkong but erroneously discharged in
Manila.
● Recovery of damages on cargo shipped to the Philippines.
● Sale of construction equipment to the Government with no intent
of continuity of transaction.
● Recovering a Hongkong judgment from a Manila resident.
● Appointment of local lawyer by foreign movie companies who
have registered intellectual property rights over their movies in
the Philippines, to protect such rights for piracy: “We fail to see
how exercising one's legal and property rights and taking steps for
the vigilant protection of said rights, particularly the appointment
of an attorney-in-fact, can be deemed by and of themselves to be
doing business here.”
1. When single transactions constitute doing
business
Where a single act or transaction is not merely incidental or casual but
indicates the foreign corporation’s intention to do other business in the
Philippines, said single act or transaction constitutes doing business.
When a foreign corporation engaged in the manufacture of uniforms
purchases through a local agent 7,770 dozens of soccer jerseys from a local
company, it was engaged in business here for the single act was not merely
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.
Participating in a bidding process constitutes “doing business” because it
shows the foreign corporation’s intention to engage in business in the
Philippines. In this regard, it is the performance by a foreign corporation of
the acts for which it was created, regardless of volume of business, that
determines whether a foreign corporation needs a license or not.
2A Corporation Law - Atty. Hofileña
Codal Provisions - Midterms
1. Local Suits BROUGHT BY Foreign Corporations
1. Need to Allege Capacity to Sue
Case: Atlantic Mutual Inc. vs. Cebu Stevedoring Co.
The fact that a foreign corporation is not doing business in the Philippines
must be alleged if a foreign corporation desires to sue in Philippines courts
under the “isolated transactions rule.”
assertion must allege that you are not doing business here so that court
would know your capacity to sue
Case: Communication Materials vs. CA
The filing of an action by a foreign corporation before Philippine courts
would mean that by voluntary appearance, the local courts have actually
obtained jurisdiction over the “person” of the foreign corporation.
Requirement for license - sound policy
Cant thereafter raise capacity to sue of foreign corp if they knew all along
that it was not licensed and is doing business in the Philippines.
DEFENDANT: Foreign corp cant sue because it is not licensed
COURT: Not a question of jurisdiction, when foreign corp files a case, it is
voluntarily submitting itself tot the court’s jurisdiction. It is a question of
capacity to sue.
1. Need to Allege Resident Agent
A complaint filed by a foreign corporation is fatally defective for failing to
allege its duly authorized representative or resident agent in Philippine
jurisdiction.
1. Certificate of Non-forum shopping
A resident agent of a foreign corporation is not per se authorized to
execute the requisite certification against forum shopping—while a
resident agent may be aware of actions filed against his principal, he may
Page 117 of 128
not be aware of actions initiated by its principal, whether in the Philippines
or abroad.
1. Discredited Pari Delicto Doctrine
Case: Top-Weld Mfg. vs. ECED
The local party to a contract with a foreign corporation that does business
in the Philippines without license cannot maintain suit against the foreign
corporation just as the foreign corporation cannot maintain suit, under the
principle of pari delicto.
Enters in business transaction who knew that it should have a license but it
didn’t have, it is an illegal situation. Should be void because it is ilegal.
Either parties can’t claim to be innocent
Don’t hang hat on such doctrine. Still valid
1. Estoppel Doctrine
Case: Merrill Lynch Futures Inc. vs. CA
Under the principle of estoppel, a foreign corporation doing business in the
Philippines may sue in Philippine courts even without license to do business
against a Philippine citizen who had contracted with and been benefited by
said corporation and knew it to be without the necessary license to do
business.
Proper Doctrine: Case Eriks Ltd. vs. CA
Under the principle of estoppel, a foreign corporation doing business in the
Philippines may sue in Philippine courts even without license to do business
against a Philippine citizen who had contracted with and been benefited by
said corporation and knew it to be without the necessary license to do
business.
1. On Isolated Transactions
A foreign corporation not licensed to do business in the Philippines is not
absolutely incapacitated from filing a suit in local court.
1. Local Suits AGAINST Foreign Corporations
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Codal Provisions - Midterms
1. Jurisdiction Over Foreign Corporations
Rule 14 Section 12. Service upon foreign private juridical entities. —
When the defendant is a foreign private juridical entity
which has transacted business in the Philippines,
service may be made on its resident agent
designated in accordance with law for that purpose, or,
if there be no such agent,
on the government official
designated by law to that effect, or
on any of its officers or agents
within the Philippines. (14a)
For purposes of venue, a foreign corporation, its “residence” includes the
country where it exercises corporate functions or the place where its
business is done.
For service of summons under Sec. 14, Rule 14, it is sufficient that it be
alleged in the complaint that the foreign corporation is doing business in
the Philippines.
When a foreign corporation has designated a person to receive service of
summon, the designation is exclusive and service of summons on any other
person is inefficacious.
When a foreign corporation is doing business in the Philippines,
summons may be served on
(a) its designated resident agent;
(b) if there is no resident agent, the government official designated by law
to that effect; or
(c) any of its officers or agent within the Philippines.
The mere allegation in the complaint that a local company is the agent of
the foreign corporation is not sufficient to allow proper service to such
alleged agent; it is necessary that there must be specific allegations that
Page 118 of 128
establishes the connection between the foreign corporation and its alleged
agent with respect to the transaction in question.
1. Objection to Jurisdiction
Case: Avon Insurance PLC vs. CA
Appearance of a foreign corporation to a suit precisely to question the
tribunal’s jurisdiction over its person is not equivalent to service of
summons, nor does it constitute acquiescence to the court’s jurisdiction.
Case: General Corp. of the Phil vs. Union Insurance Society of Canton, Ltd.
Participation of a foreign corporation’s counsel in the trial process, e.g.,
cross-examination of witnesses,
agreement and objection to documentary evidence, and
the introduction of witnesses and documentary evidence,
vacates the plea of lack of jurisdiction
over such foreign corporation.
1. Odd Doctrine
Case: Facilities Management Corp vs. De la Osa
“Indeed, if a foreign corporation, not engaged in business in the
Philippines, is not barred from seeking redress from the courts in the
Philippines, a fortiori, that same corporation cannot claim exemption from
being sued in Philippine courts for acts done against a person or persons in
the Philippines.”
CONTRA Case: Signetics Corp vs. CA
Sine qua non requirement for service of summons and other legal
processes or any such agent or representative is that the foreign
corporation is doing business in the Philippines.
Present Rule: Case: Avon Insurance PLC vs. CA
There is no reason to subject to Philippine jurisdiction foreign corporations
not doing business here; insofar as the State is concerned, such foreign
corporations have no legal existence, and to subject foreign corporations
not doing business to the courts’ jurisdiction would violate the essence of
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Codal Provisions - Midterms

sovereignty. The Court is not persuaded by the position taken invoking the Whenever the articles of incorporation or by-laws of a foreign corporation
ruling in Facilities Management. authorized to transact business in the Philippines
are amended,
1. Stipulation on Venue such foreign corporation shall, within sixty (60) days
after the amendment becomes effective,
Case: Linger & Fisher GMBH vs. IAC file with the Securities and Exchange Commission, and
When the contract sued upon has a venue clause within the Philippines, it in the proper cases
is deemed a confirmation by the foreign corporation, even though not with the appropriate government agency,
doing business in the Philippines, to be sued in local courts. a duly authenticated copy of
the articles of incorporation or
1. Laws Applicable to Foreign Corporations by-laws, as amended,
indicating clearly in capital letters or
Section 129. Law applicable. - by underscoring the change or changes made,
duly certified by the authorized official or officials of
Any foreign corporation lawfully doing business in the Philippines the country or state of incorporation.
shall be bound by all laws, rules and regulations
applicable to domestic corporations of the same class, The filing thereof
except such only as provide for shall not of itself enlarge or alter the purpose or purposes
the creation, formation, organization or dissolution for which such corporation is authorized to transact business
of corporations or in the Philippines. (n)
those which fix
the relations, liabilities, responsibilities, or duties 1. Merger and Consolidation
of stockholders, members, or officers
of corporations Section 132. Merger or consolidation involving a foreign corporation
to each other or licensed in the Philippines. -
to the corporation. (73a)
One or more foreign corporations
The provision in the New York law which allowed only stockholders with a authorized to transact business in the Philippines
minimum number of shareholdings (3%) to be entitled to exercise the right may merge or consolidate
of inspection is valid in the case of a foreign corporation licensed to do with any domestic corporation or corporations
business in the Philippines which in its internal relationship was bound by if such is permitted under Philippine laws and
the New York law. by the law of its incorporation:
Provided, That the requirements on merger or consolidation
1. Amendment of Articles of Incorporation as provided in this Code are followed.

Section 130. Amendments to articles of incorporation or by-laws of foreign Whenever a foreign corporation
corporations. - authorized to transact business in the Philippines
shall be a party to a merger or consolidation

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in its home country or state

as permitted by the law of its incorporation, 3. The petition for withdrawal of license
such foreign corporation shall, has been published once a week
within sixty (60) days for three (3) consecutive weeks
after such merger or consolidation in a newspaper of general circulation in the Philippines.
becomes effective,
file with the Securities and Exchange Commission, and
in proper cases with the appropriate government agency,
a copy of the articles of merger or consolidation
duly authenticated by the proper official or officials
of the country or state
under the laws of which merger or consolidation
was effected:
Provided, however, That if the absorbed corporation
is the foreign corporation doing business in the Philippines,
the latter shall at the same time file a petition
for withdrawal of its license in accordance with this Title.

1. Withdrawal of Foreign Corporations

Section 136. Withdrawal of foreign corporations. -

Subject to existing laws and regulations,

a foreign corporation
licensed to transact business in the Philippines
may be allowed to withdraw from the Philippines
by filing a petition for withdrawal of license.
No certificate of withdrawal shall be issued
by the Securities and Exchange Commission
unless all the following requirements are met;

1. All claims which have accrued in the Philippines

have been paid, compromised or settled;

2. All taxes, imposts, assessments, and penalties, if any,

lawfully due to the Philippine Government or
any of its agencies or political subdivisions
have been paid; and

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XVII. PENALTY PROVISIONS OF THE CODE for a period exceeding six (6) years, or
a violation of this Code
1. Penalty Clause for Violations of the Corporation Code committed within five (5) years
prior to the date of his election or appointment,
Section 144. Violations of the Code. - shall qualify as a director, trustee or officer
of any corporation. (n)
Violations of 1. Specific Application: Denial of the Right of Inspection
any of the provisions of this Code or
its amendments not otherwise specifically penalized therein Section 74. Books to be kept; stock transfer agent. -
shall be punished by a fine of
not less than one thousand (P1,000.00) pesos Every corporation shall keep and carefully preserve at its principal office
but a record of all business transactions and
not more than ten thousand (P10,000.00) pesos minutes
or of all meetings of stockholders or members, or
by imprisonment for of the board of directors or trustees,
not less than thirty (30) days but in which shall be set forth in detail
not more than five (5) years, or the time and place of holding the meeting,
both, how authorized,
in the discretion of the court. the notice given,
If the violation is committed by a corporation, whether the meeting was regular or special,
the same may, after notice and hearing, if special its object,
be dissolved in appropriate proceedings those present and absent, and
before the Securities and Exchange Commission: every act done or ordered done at the meeting.
Provided, That such dissolution
shall not preclude the institution of appropriate action Upon the demand of any director, trustee, stockholder or member,
against the director, trustee or officer of the corporation the time when any director, trustee, stockholder or member
responsible for said violation: entered or left the meeting
Provided, further, That nothing in this section must be noted in the minutes; and
shall be construed to repeal the other causes on a similar demand,
for dissolution of a corporation the yeas and nays must be taken
provided in this Code. (190 1/2 a) on any motion or proposition, and
a record thereof carefully made.
1. Cross-reference The protest of any director, trustee, stockholder or member
on any action or proposed action
Section 27. Disqualification of directors, trustees or officers. - must be recorded in full on his demand.

No person convicted by final judgment The records of all business transactions of the corporation and
of an offense punishable by imprisonment the minutes of any meetings

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shall be open to inspection a record of all stocks in the names of the stockholders
by any director, trustee, stockholder or member of the alphabetically arranged;
corporation at reasonable hours on business days the installments paid and unpaid on all stock
and for which subscription has been made, and
he may demand, in writing, the date of payment of any installment;
for a copy of excerpts from said records or minutes, a statement of every alienation,
at his expense. sale or transfer of stock made,
the date thereof, and by and
Any officer or agent of the corporation who shall refuse to allow to whom made; and
any director, trustees, stockholder or member of the corporation such other entries as the by-laws may prescribe.
to examine and copy excerpts from its records or minutes,
in accordance with the provisions of this Code, The stock and transfer book
shall be liable to shall be kept
such director, trustee, stockholder or member in the principal office of the corporation or
for damages, and in the office of its stock transfer agent and
in addition, shall be guilty of an offense shall be open for inspection
which shall be punishable by any director or stockholder of the corporation
under Section 144 of this Code: at reasonable hours on business days.

Provided, That if such refusal is made No stock transfer agent or

pursuant to a resolution or order 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 for such refusal: and
Provided, further, That it shall be a defense to any action under this section
that the person demanding to examine and copy excerpts
from the corporation's records and minutes
has improperly used any information
secured through any prior examination
of the records or minutes of such corporation or
of any other corporation, or
was not acting in good faith or for a legitimate purpose
in making his demand.
Stock corporations must also keep a book
to be known as the "stock and transfer book",
in which must be kept
one engaged principally in the business of registering transfers of stocks
in behalf of a stock corporation
shall be allowed to operate in the Philippines
unless he secures a license
from the Securities and Exchange Commission and
pays a fee as may be fixed by the Commission,
which shall be renewable annually:
Provided, That a stock corporation is not precluded
from performing or making transfer of its own stocks,
in which case all the rules and regulations
imposed on stock transfer agents,
except the payment of a license fee herein provided,
shall be applicable. (51a and 32a; P.B. No. 268.)
1. Criminal Law: “No person shall be penalised for a crime not
defined as such by statutes”

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1. Historical background of Sec. 144 (Sec. 190 of the old corporation

Law)

Sec. 190 was not intended to make every casual violation of one of the
Corporation Law provisions ground for involuntary dissolution of the
corporation and that the court was entitled to exercise discretion in such
matters.

Penalties imposed in Sec. 190(A) for the violation of the prohibition in

question are of such nature that they can be enforced only by a criminal
prosecution or by an action of quo warranto. But these proceedings can be
maintained only by the Solicitor General in representation of the
Government.

1. Current Doctrine on the Coverage of Sec. 144

Section 133, unlike its counterpart Sec. 69 in the old Corporation Law which
specifically provided for penal sanctions for foreign corporations engaging
in business in the Philippines without obtaining the requisite license, should
be deemed to have a penal sanction by virtue of Sec. 144 of the
Corporation Code.

Case: Went vs. Tullett Prebon (Phils.), Inc.

The lack of specific language imposing criminal liability in Secs. 31 and 34
shows legislative intent to limit the consequences of their violation to the
civil liabilities mentioned therein. Had it been the intention of the drafters
of the law to define Sec. 31 and 34 as offenses, they could have easily
included similar language as that found in Section 74.

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2A Corporation Law - Atty. Hofileña
Codal Provisions - Midterms
XVII. MISCELLANEOUS
1. SEC Power and Supervision (P.D. 902-A)
PRESIDENTIAL DECREE No. 902-A March 11, 1976
REORGANIZATION OF THE SECURITIES AND EXCHANGE COMMISSION WITH
ADDITIONAL POWER AND PLACING THE SAID AGENCY UNDER THE
ADMINISTRATIVE SUPERVISION OF THE OFFICE OF THE PRESIDENT
WHEREAS, in line with the government's policy of encouraging
investments, both domestic and foreign, and more active public
participation in the affairs of private corporations and enterprises through
which desirable activities may be pursued for the promotion of economic
development; and, to promote a wider and more meaningful equitable
distribution of wealth, there is a need for an agency of the government to
be invested with ample powers to protect such investment and the public;
WHEREAS, to achieve these national objectives, it is necessary to
reorganize and restructure the Securities and Exchange Commission to
make it a more potent, responsive and effective arm of the government to
help in the implementation of these programs and to play a more active
role in national-building;
WHEREAS, it is necessary and desirable to professionalize such agency by
investing it with adequate powers so that it could avail itself of the services
of highly technical and qualified men in the government service;
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Republic of
the Philippines, by virtue of the powers vested in me by the Constitution,
do hereby order and decree that:
Section 1.
The administrative supervision of the Securities and Exchange
Commission is hereby transferred from the Department of Trade and shall
hereafter be under the direct general supervision of the President.
Page 124 of 128
Section 2. That the Commission shall be a collegial body composed of a
Chairman and two (2) Associate Commissioners who shall be appointed by
the President and the tenure of the office of each member shall be seven
(7) years:
Provided, however, That the Chairman and the Members of the
Commission first appointed by the President shall serve for a period of
seven (7) years, five (5) years and three (3) years, as fixed in their
respective appointments:
Provided, further, That upon the expiration of his term, a Member shall
serve as such until his successor shall have been appointed and qualified:
and
Provided, Finally, that no vacancy shall be filled except for the unexpired
portion of the term. The Chairman shall receive an annual salary of Fifty
Thousand (P50,000.00) Pesos and a monthly allowance of Two Thousand
(P2,000.00) Pesos and each Member shall receive an annual salary of Forty-
Two Thousand Five Hundred (P42,500.00) Pesos and a monthly
commutable allowance of One Thousand Five Hundred (P1,500.00) Pesos.
The Commission shall meet as often as may be necessary on such day or
days as the Chairman may fix. The notice of the meeting shall be given to all
members of the Commission and the presence of at least two (2) shall
constitute a quorum. In the absence of the Chairman, the more senior
associate commissioner shall act as presiding officer of the meeting.
The Chairman shall have the general executive control, direction and
supervision of the work and operation of the Commission and of its
members, bodies, boards, personnel and all of its administrative business.
There shall be a Secretary of the Commission, under the control and
direction of the Chairman, who shall be in charge of all the administrative
business of the Commission and shall perform such other duties and
functions as may be assigned to him. He shall be the recorder and official
reporter of the proceedings of the Commission and shall have authority to
administer oath in all matters coming under the jurisdiction of the
Commission. He shall be the custodian of all records, profiles, reports,
2A Corporation Law - Atty. Hofileña
Codal Provisions - Midterms
minutes and other documents and papers filed with the Commission or
entrusted to his care and shall be responsible therefor to the Commission.
There shall be an Executive Director of the Commission who shall be
responsible for the effective implementation of the policies, rules and
standards promulgated by the Commission, to coordinate and supervise
the activities of the different operating units; to report to the Chairman the
operations of such units; to report to the Chairman the operations of such
units; and to perform such functions as may be assigned to him by the
Chairman and/or by Commission. The position of the Executive Director is
hereby declared primarily confidential in nature.
Section 3. The Commission shall have absolute jurisdiction, supervision
and control over all corporations, partnerships or associations, who are the
grantees of primary franchise and/or a license or permit issued by the
government to operate in the Philippines; and in the exercise of its
authority, it shall have the power to enlist the aid and support of any and
all enforcement agencies of the government, civil or military.
Section 4. The Commission shall reorganize and restructure the present
staff and personnel of the agency. The proposed staffing pattern of the
Commission with the corresponding salary scale, attached as Annex "A" is
hereby approved: Provided, That except as to the technical staff and such
other positions as the Commission, with the approval of the President, may
declare to be highly technical, policy-determining or primarily confidential,
all positions in the Commission are subject to the Civil Service Law and
Rules.
Section 5. In addition to the regulatory and adjudicative functions of the
Securities and Exchange Commission over corporations, partnerships and
other forms of associations registered with it as expressly granted under
existing laws and decrees, it shall have original and exclusive jurisdiction to
hear and decide cases involving.
a) Devices or schemes employed by or any acts, of the
board of directors,
business associates,
its officers or partnership,
Page 125 of 128
amounting to fraud and misrepresentation
which may be detrimental to the interest
of the public and/or
of the stockholder, partners,
members of associations or organizations
registered with the Commission.
b) Controversies arising out of intra-corporate or partnership relations,
between and among stockholders, members, or associates;
between any or all of them and the corporation,
partnership or association of which they are
stockholders, members or associates, respectively; and
between such corporation, partnership or association and
the state insofar as it concerns
their individual franchise or right to exist as such entity;
c) Controversies in the election or appointments of
directors, trustees, officers or managers
of such corporations, partnerships or associations.
Section 6. In order to effectively exercise such jurisdiction,
the Commission shall possess the following powers:
a) To issue preliminary or permanent injunctions, whether prohibitory or
mandatory, in all cases in which it has jurisdiction, and in which cases the
pertinent provisions of the Rules of Court shall apply;
b) To punish for contempt of the Commission, both direct and indirect, in
accordance with the pertinent provisions of, and penalties prescribed by,
the Rules of Court;
c) To compel the officers of any corporation or association registered by it
to call meetings of stockholders or members thereof under its supervision;
d) To pass upon the validity of
the issuance and use of proxies and voting trust agreements
for absent stockholders or members;
2A Corporation Law - Atty. Hofileña
Codal Provisions - Midterms
e) To issue subpoena duces tecum and summon witnesses to appear in
any proceedings of the Commission and in appropriate cases order search
and seizure or cause the search and seizure of all documents, papers, files
and records as well as books of accounts of any entity or person under
investigation as may be necessary for the proper disposition of the cases
before it;
f) To impose fines and/or penalties for violation of this Decree or any
other laws being implemented by the Commission, the pertinent rules and
regulations, its orders, decisions and/or rulings;
g) To authorize the establishment and operation of stock exchanges,
commodity exchanges and such other similar organization and to
supervise and regulate the same; including the authority to determine
their number, size and location, in the light of national or regional
requirements for such activities with the view to promote, conserve or
rationalize investment;
h) To pass upon, refuse or deny, after consultation with the Board of
Investments, Department of Industry, National Economic and Development
Authority or any other appropriate government agency, the application for
registration of any corporation, partnership or association or any form of
organization falling within its jurisdiction, if their establishment,
organization or operation will not be consistent with the declared national
economic policies.
i) To suspend, or revoke, after proper notice and hearing, the franchise or
certificate of registration of corporations, partnerships or associations,
upon any of the grounds provided by law, including the following:
1. Fraud in procuring its certificate of registration;
2. Serious misrepresentation as to what the corporation can do or is doing
to the great prejudice of or damage to the general public;
3. Refusal to comply or defiance of any lawful order of the Commission
restraining commission of acts which would amount to a grave violation of
its franchise;
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4. Continuous in operation for a period of at least five (5) years;
5. Failure to file by-laws within the required period;
6. Failure to file required reports in appropriate forms as determined by
the Commission within the prescribed period;
j) To exercise such other powers as implied, necessary or incidental to the
carrying out the express powers granted to the Commission or to achieve
the objectives and purposes of this Decree.
In the exercise of the foregoing authority and jurisdiction of the
Commission, hearings shall be conducted by the Commission or by a
Commissioner or by such other bodies, boards, committees and/or any
officer as may be created or designated by the Commission for the
purpose. The decision, ruling or order of any such Commissioner, bodies,
boards, committees and/or officer may be appealed to the Commission
sitting en banc within thirty (30) days after receipt by the appellant of
notice of such decision, ruling or order. The Commission shall promulgate
rules of procedures to govern the proceedings, hearings and appeals of
cases falling within its jurisdiction.
The aggrieved party may appeal the order, decision or ruling of the
Commission sitting en banc to the Supreme Court by petition for petition
for review in accordance with the pertinent provisions of the Rules of
Court.
Section 7. The Commission is authorized to recommend to the President
the revision, alteration, amendment or adjustment of the charges and fees,
which by law, it is authorized to collect.
Section 8. With the approval of the President, the Commission is further
authorized to create additional positions as it may deem necessary to carry
out the provisions and intents of this Decree.
Section 9. So much amount as may be needed to implement the provisions
of this Decree taken from the income of the Commission not to exceed
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Codal Provisions - Midterms

twenty-five (25%) per cent thereof and any unexpended balance in the 1. SEC endowed with Quasi-Leigslative Power to
current appropriation is hereby authorized to be appropriated. Implement Code

Section 10. When the exigency of the service so requires and with the Section 143. Rule-making power of the Securities and Exchange
approval of the President, funds may be set aside from the appropriation Commission. -
provided for the Commission and/or from the fees collected under existing
laws, decrees, rules and regulations to defray expenses to be incurred by The Securities and Exchange Commission
the Commission. shall have the power and authority
to implement the provisions of this Code, and
Section 11. The Commission shall submit an annual report to the President to promulgate rules and regulations
of the Philippines not later than January 31 of each year with such reasonably necessary to enable it
recommendations as may be necessary. to perform its duties hereunder,
particularly in the prevention of fraud and
Section 12. All laws, executive orders, decrees, rules and regulations or abuses
parts thereof, contrary to or inconsistent with the provision of this Decree on the part of the controlling stockholders,
are hereby repealed, amended or modified accordingly. members, directors, trustees or officers. (n)

This decree shall take effect immediately.
1. Annual Report and Submission of Financial Statements
to the SEC
Sec. 141. Annual report or corporations. -
1. Issue IRR to enable it to perform its duties, including the
prevention of fraud and abuses or part of the controlling
stockholders, members, directors, trustees or officers.
Section 143. Rule-making power of the Securities and Exchange
Commission. -

Every corporation, domestic or foreign,
lawfully doing business in the Philippines
shall submit to the Securities and Exchange Commission
an annual report of its operations,
together with a financial statement
of its assets and liabilities,
certified by any independent certified public accountant
in appropriate cases,
covering the preceding fiscal year and
such other requirements
as the Securities and Exchange Commission may require.
Such report shall be submitted within such period
as may be prescribed by the Securities and Exchange Commission.
1. Corporations Created by Special Laws or Charters: Code has
Suppletory Application
Section 4. Corporations created by special laws or charters. -
Corporations created by special laws or charters
shall be governed primarily by the provisions of
the special law or charter creating them or
applicable to them,
supplemented by the provisions of this Code,
insofar as they are applicable. (n)
1. Existing Corporation at Adoption of the Code: Deemed to have
been authorised, licensed, registered under the code

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Except as expressly provided by this Code,

Section 148. Applicability to existing corporations. - all laws or parts thereof
inconsistent with any provision of this Code
All corporations lawfully existing and doing business in the Philippines shall be deemed repealed. (n)
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. (n)

1. Applicability of Other Provisions of the Old Corporation Law

Section 145. Amendment or repeal. -

No right or remedy in favor of or against

any corporation, its stockholders, members,
directors, trustees, or officers,
nor any liability incurred
by any such corporation, stockholders, members,
directors, trustees, or officers,
shall be removed or impaired either
by the subsequent dissolution of said corporation or
by any subsequent amendment or repeal
of this Code or
of any part thereof. (n)

Section 146. Repealing clause. -

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