1

CORPORATION LAW 1. Artificial being

2. Created by operation of law
 Corporation is one of the types of business 3. Right of succession
organizations. It is also the most important in 4. Powers, attributes and properties expressly
economic development. authorized by law or incident to its existence.

INTRODUCTION  Doctrine of limited capacity

 Sole proprietorship - Only such powers as are expressly granted to it by

law and by its articles of incorporation including
- One man form of business entity, personally
others which are incidental to such conferred
answers all liabilities, but enjoys all the profits with
powers, those reasonably necessary to accomplish
the exclusion of others
its purpose and those which may be incidental to its
- Limited shareholders responsibility
existence
- Paid subscription in full, you are no longer liable
- Can do things as the law asks or allows it to do
 Partnership
- If it does anything beyond, it shall be considered as
- Based on mutual trust and confidence ULTRA VIRES

 Joint venture  General rule: Moral damages cannot be granted to

corporations
- one time grouping of persons whether they be
 Exception: Filipinas Broadcasting Network Inc. vs.
natural or juridical
Ago Med
- does not entail continuity because after the
undertaking is completed it is already the end - In cases of slander, libel and other forms of
- particular partnership and joint venture would be defamation (should not qualify because the code
similar, but there is already a decision of the does not qualify whether natural or juridical) Art.
Supreme Court declaring them as different 2219 of the civil code:
- when they do not register, it does not exist
- Foreign corporations enters into an agreement with Art. 2219. Moral damages may be
a domestic corporation, it must be registered. recovered in the following and analogous cases:
Generally they do not need to be registered.
(1) A criminal offense resulting in physical injuries;
 Corporations
(2) Quasi-delicts causing physical injuries;
-They may enter into joint venture, but generally
they cannot enter into a partnership, but there are (3) Seduction, abduction, rape, or other lascivious
exceptions allowed by the SEC: the 3 exceptions acts;
must go hand in hand
1. The articles of incorporation expressly (4) Adultery or concubinage;
authorized the corporation to enter into
contracts of partnership; (5) Illegal or arbitrary detention or arrest;
2. The agreement or articles of partnership must
provide that all the partners will manage the (6) Illegal search;
partnership; and
3. The articles of partnership must stipulate that (7) Libel, slander or any other form of defamation;
all the partners are and shall be jointly and
severally liable for all obligations of the (8) Malicious prosecution;
partnership.
DEFINITION AND ATTRIBUTES (9) Acts mentioned in Article 309;

 4 attributes of a corporation
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(10) Acts and actions referred to in Articles 21, 26,
27, 28, 29, 30, 32, 34, and 35.
The parents of the female seduced, abducted, raped,
or abused, referred to in No. 3 of this article, may
also recover moral damages.
The spouse, descendants, ascendants, and brothers
and sisters may bring the action mentioned in No. 9
of this article, in the order named.
 Advantages (SEE LADIA BOOK)
- No. 2 may also be a disadvantage
- No. 5 may also be a disadvantage
 A corporation is a person, therefore protected by
the due process clause and equal protection clause
of the Constitution
CLASSIFICATION OF CORPORATIONS
 Section 3 Stock and non-stock
- Importance of knowing, determining what
provisions of the code or the law may be applicable
Section 3. Classes of corporations. -
Corporations formed or organized under this Code
may be stock or non-stock corporations.
Corporations which have capital stock divided into
shares and are authorized to distribute to the
holders of such shares dividends or allotments of
the surplus profits on the basis of the shares held
are stock corporations. All other corporations are
non-stock corporations. (3a)
 Non-stock- title 10
 Stock- section 51
 Stockholders must generally cast their votes in the
meeting; section 4 governed primarily by the law
creating them
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)
 Section 3
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- The two requisites must always concur
1. That they have a capital stock divided into shares;
and,
2. That they are authorized to distribute dividends or
allotments as surplus profits to its stockholders on
the basis of the shares held by each of them.
 Section 4
- Created by a special law, they have their own
character
- They are not immune from suit unless provided by
the law of their creation
- Primarily governed by the law creating them
- Their subsidiaries are entirely different or
independent from that of the other
 Close corporation
- There is no exemption it is absolute
 Public corporation
- Political or governmental purposes
- Those formed or organized for the government or a
portion of the State or any of its political
subdivision and which have for their purpose the
general good and welfare
 Private Corporation
- Immediate benefit, aim or advantage of private
individuals
- Those formed for some private purpose, benefit,
aim or end
- Distinction: public for governmental purpose
 Corporation Sole
- Exemption to the rule because it is composed only
of one person
- An incorporator may also be a juridical person
 Close corporation
- There is exclusivity of shares of stock
- Section 96-105
- Restrictions to transfer shares
- Only those indicated can own shares
- Article must provide that there will be no public
offering
 Open corporation
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- openly admit investors - Provision that states, cannot be issued less than par,
- example: stock exchange exception is treasury shares because it can be issued
less than par
 Domestic/ Foreign
 A corporation commences only upon issuance of
 Test the certificate, prior thereto it has no being and
cannot transact business. Promoters cannot act for a
- Incorporation test
projected corporation
- If incorporated under the laws of the Philippines it
is a domestic corporation  Metro Manila- paid up capital requirement is 10 M

ME Gray vs. CA  Non- stock- mere mention of the operating capital

- Parent or Holding/ subsidiaries and affiliates  Mention the authorized capital

- Affiliates- no majority vote
SMC 12%  Restrictions

- Mandatory in close
HERSHEY CBPl 12% - Not mandatory in ordinary
CBP
12%
 Non-stock
Affiliate is subject to common control by the 12 % owners
 De jure - If value is not more than 100,000

- cannot be attached by the state even in a quo  A corporation cannot use any other name unless it
warranto proceeding has been amended

 De facto  Section 19

- exists by virtue of colorable compliance - If confusingly similar it will not be allowed to be

- Attached directly only by the state in a quo registered
warranto proceeding - Verification slip from the records officer

 Corporation by estoppel Section 19. Commencement of corporate

existence. - A private corporation formed or
So defectively formed, but still considered
- organized under this Code commences to have
corporation, but only in relation to those who corporate existence and juridical personality and is
cannot deny their existence section 20 and 21 deemed incorporated from the date the Securities
and Exchange Commission issues a certificate of
FORMATION AND ORGANIZATION
incorporation under its official seal; and thereupon
 3 stages the incorporators, stockholders/members and their
1. Creation successors shall constitute a body politic and
2. Re-organization or quasi-reorganization corporate under the name stated in the articles of
3. Dissolution/winding-up incorporation for the period of time mentioned
 Purpose clause therein, unless said period is extended or the
corporation is sooner dissolved in accordance with
- Defining the scope of authority of the corporate law. (n)
enterprise pr undertaking. Both confirmed and
limited - Words corporation or inc. either in full or
 4 limitations of purpose clause abbreviated form must be included
1. Lawful
2. Specific or stated concisely
Section 18. Corporate name. - No
3. More than one, the primary and secondary corporate name may be allowed by the Securities
must be specified and Exchange Commission if the proposed name is
4. Lawfully combined identical or deceptively or confusingly similar to

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that of any existing corporation or to any other
name already protected by law or is patently
deceptive, confusing or contrary to existing laws.
When a change in the corporate name is approved,
the Commission shall issue an amended certificate
of incorporation under the amended name. (n)
 Doctrine of secondary meaning
- A word or phrase originally incapable of exclusive
appropriation [usually generic] with reference to an
article in the market, because of geographically or
otherwise descriptive, might nevertheless have been
used so long and so exclusively by one producer
with reference to his article that, in that trade and to
that branch of the purchasing public, the word or
phrase has become to mean that the article was his
product.
 Section 18
- Lyceum of the Philippines case, the additional
geographical name does not make it confusingly
similar
- actual confusion is not necessary - Philips case “it is
enough that there is probable confusion”
 2 requisites must be proven
- that the complainant corporation acquired a prior
right over the use of such corporate name
- identical, deceptively or confusingly, patently
deceptive
 principal office
- statement of principal office is required
- city and municipality not only province must be
specified
- principal office NOT operations office
- necessary because it will establish the residence of
corporations
- venue of actions for or against the corporations
- venue of meetings
- section 51 meetings may only be within the
boundaries of the city where the principal office
- non-stock may be held anywhere in the Philippines,
if provided in its by-laws
- where summons may be served
- registration of chattel mortgage must be registered
in the register of deeds where the principal office is
located
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Clavecilla Radio System vs. Antillon
- action not upon a written contract
- city where the defendant resides
 term of existence
- corporate term required
- determining what point in time the juridical
personality will cease to exist
- enter into contract only when it has juridical
personality
- once it ceases to exist, it no longer has personality
- exist for another 3 years only for purposes of
liquidation
- Dissolution- it is automatic
 When should extension be made?
- General rule: Not earlier than 5 years
- Exception: unless there are justifiable reasons
 May it be extended after expiration?
- Alhambra cigar vs. SEC once it ceases to exist it
has no vested politic, exist only for a period of 3
years only for liquidation and for that purpose only
 Article 5 How many incorporators should there be?
- 5-15
 May a corporation be an incorporator?
- General rule: only natural persons
- Exception: cooperatives and corporation primarily
organized to hold equities in rural banks
 How about minors?
- NO, because they must be of legal age
 May a corporation organized by incorporators
consisting solely of foreigners
- Yes, there is no nationality requirement only
residence, as long as majority are residents of the
Phil
 Define incorporators <sec.5>
- Those person mentioned in the articles as originally
forming the corporation and who are signatories of
the articles of incorporation.

- Must be signatories to be incorporators
Section 5. Corporators and incorporators,
stockholders and members. - 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)
 Define corporators <sec.5>
- All persons who compose the corporation at any
given time and need not be among those who
execute the articles of incorporation at the start of
its formation and organization.
- Originally or subsequently
- Section 5 provides:
Corporators in a stock corporation are
called stockholders or shareholders. Corporators in
a non-stock corporation are called members. (4a)
 May a corporation be a corporator?
- YES. There is nothing to prevent a corporation
from being a stockholder
 Incorporator must subscribe to 1 share
 There are those that are exclusively reserved to
Filipinos
 An incorporator maybe a corporator as long as he is
a stockholder
 section 6
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
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be provided for in the articles of incorporation:
Provided, however, That banks, trust companies,
insurance companies, public utilities, and building
and loan associations shall not be permitted to issue
no-par value shares of stock.
Preferred shares of stock issued by any
corporation may be given preference in the
distribution of the assets of the corporation in case
of liquidation and in the distribution of dividends,
or such other preferences as may be stated in the
articles of incorporation which are not violative of
the provisions of this Code: Provided, That
preferred shares of stock may be issued only with a
stated par value. The board of directors, where
authorized in the articles of incorporation, may fix
the terms and conditions of preferred shares of
stock or any series thereof: Provided, That such
terms and conditions shall be effective upon the
filing of a certificate thereof with the Securities and
Exchange Commission.
Shares of capital stock issued without par
value shall be deemed fully paid and non-assessable
and the holder of such shares shall not be liable to
the corporation or to its creditors in respect thereto:
Provided; That shares without par value may not be
issued for a consideration less than the value of five
(P5.00) pesos per share: Provided, further, That the
entire consideration received by the corporation for
its no-par value shares shall be treated as capital
and shall not be available for distribution as
dividends.
A corporation may, furthermore, classify
its shares for the purpose of insuring compliance
with constitutional or legal requirements.
Except as otherwise provided in the
articles of incorporation and stated in the certificate
of stock, each share shall be equal in all respects to
every other share.
Where the articles of incorporation
provide for non-voting shares in the cases allowed
by this Code, the holders of such shares shall
nevertheless be entitled to vote on the following
matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the
corporate property;

4. Incurring, creating or increasing
indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with
another corporation or other corporations;
7. Investment of corporate funds in another
corporation or business in accordance with this
Code; and
8. Dissolution of the corporation.
Except as provided in the immediately
preceding paragraph, the vote necessary to approve
a particular corporate act as provided in this Code
shall be deemed to refer only to stocks with voting
rights. (5a)
 How many directors should there be?
- General rule: Not less than 5 not more than 15
- Exceptions:
1. Educational corporations registered as non stock
corporation whose number of trustees, though not
less than five and not more than [15] should be
divisible by five [5], meaning they must have either
five, ten, or fifteen trustees and no other;
2. In close corporations where all the stockholders are
considered as members of the board of directors
thereby effectively allowing twenty members in the
board.
3. The by-laws of a corporation may provide for
additional qualifications and disqualifications of its
members of the board of directors or trustees.
However it may not do away with the minimum
disqualifications lay down by the Code.
 Qualifications of the governing board
- Requires mere residency <sec. 23>
Section 23. The board of directors or
trustees. - Unless otherwise provided in this Code,
the corporate powers of all corporations formed
under this Code shall be exercised, all business
conducted and all property of such corporations
controlled and held by the board of directors or
trustees to be elected from among the holders of
stocks, or where there is no stock, from among the
members of the corporation, who shall hold office Capital structure
for one (1) year until their successors are elected
and qualified. (28a)
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bonded Every director must own at least one (1)
share of the capital stock of the corporation of
which he is a director, which share shall stand in his
name on the books of the corporation. Any director
who ceases to be the owner of at least one (1) share
of the capital stock of the corporation of which he
is a director shall thereby cease to be a director.
Trustees of non-stock corporations must be
members thereof. A majority of the directors or
trustees of all corporations organized under this
Code must be residents of the Philippines.
 May a domestic corporation have a governing
board consisting solely of foreigners?
- YES, section 23 majority of them must be residents
of the Philippines, no nationality requirement
 Anti-dummy act <sec.2-A>
- If the business undertaking or activity is only
partially nationalized, aliens can be elected as such
directors, [unless the law provides otherwise] but
their number shall only be in proportion to their
equity or participation in the capital stock of the
corporation.
 Disqualifications <sec.27>
- The disqualifications provided for is absolute and
may not be done away with. Corporate by-laws
may, however, provide for additional qualifications
and disqualifications.
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, shall qualify as a director, trustee or
officer of any corporation. (n)
 Section 27 and 23 minimum disqualifications and
qualifications
Lee vs. CA
- By laws may provide for additional
 Gov’t vs. El hogar Filipino, Gokongwei vs. SMC
Foundation- minimum paid-up capital 3M

Authorized capital 1 M No. of shares 1M shares
par value 1.00
Amount of shares subscribed
50 K A
50 K B
C 250K
D the stockholders;
E -
PAID UP =62,500
Corporation cannot exceed more than 1 M it is the maximum
amount it cannot issue more unless amended
Maximum shares it can issue is 1M shares unless amended
 How much shares should be subscribed?
- Must be at least 25% of the authorized capital stock
 Paid- up must be at least 25%-minimum
 Section 30
- Total subscription compliance with minimum 25%
total
- Any combination would comply with the minimum
required by section 30
Section 30. Compensation of directors. -
In the absence of any provision in the by-laws
fixing their compensation, the directors shall not
receive any compensation, as such directors, except
for reasonable per diems: Provided, however, That
any such compensation other than per diems may
be granted to directors by the vote of the
stockholders representing at least a majority of the
outstanding capital stock at a regular or special
stockholders' meeting. In no case shall the total
yearly compensation of directors, as such directors,
exceed ten (10%) percent of the net income before
income tax of the corporation during the preceding
year. (n)
 Minimum for a domestic corporation?
- In no case shall the paid- up capital be less than 5k
 Is there a minimum authorized capital imposed by
the code?
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- If there is minimum paid-up logically there should
also be a minimum capital =5000
 Minimum paid-up capital for a financing company
metro manila 10 M if located in MM
 Shares of stock
 Purpose of classification
- To specify and define the rights and privileges of
For regulation and control of the issuance of sale of
corporate securities for the protection of purchasers
and stockholders.
- As a management control device.
- To comply with statutory requirements particularly
those which provide for certain limitations on
foreign ownership and shares like overseas
employment agencies requiring to own at least 75%
of the shares of stock thereof.
- To better insure return on investment which can be
affected through the issuance of redeemable shares
or preferred shares, i.e., granting the holders
thereof, preference as to dividends and/or
distribution of assets in case of liquidation; and,
- For flexibility in price, particularly, no par shares
may be issued or sold from time to time at different
price depending on the net worth of the company
since they do not purport to represent an actual of
fixed value.
 Section 6
- Each shall be equal in all respects to every other
share
 Preferred shares
- Specific preference
- Dividends or during liquidation
 No par
- Can sell it with the network of the corporation
 Distinction between the subscribed and outstanding
stocks?

- Section 137
Section 137. Outstanding capital stock
defined. - The term "outstanding capital stock", as
used in this Code, means the total shares of stock
issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or
partially paid, except treasury shares. (n)
- Voting and dividend rights, it refers to the
outstanding capital stocks
- Only outstanding stocks are allowed to vote and
receive dividends
- Actually the same
 Treasury shares
- are also subscribed shares
- while they remain in the treasury, no voting and
dividend rights
- may be reissued by the corporation
- once reissued they become outstanding stocks again
 common shares
- carry the right to vote
 preferred shares
- grants the holder preference
- preference as to dividends
- preference as to distribution of the remaining assets
upon dissolution or
- both
- YOU MUST STATE THE PREFERENCE
BECAUSE IF NOT THEY ARE PRESUMED TO
BE EQUAL
- It may include such other preferences not
inconsistent with the Code. This is so because
Section 6 of the said law allows a stock corporation
to issue preferred shares subject only to the
limitations imposed therein which are:
a. They can be issued only with sated par value; and,
b. The preferences must be stated in the articles of
incorporation and in the certificate of stock,
otherwise, each share shall be, in all respect, equal
to every other share.
 Participating
- Must be stated because the presumption is that it is
participating
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 Cumulative
- Irrespective of whether or not they where earned
 Preferred
- May be denied
- Unless denied they are still entitled
 What if hindi i-declare kahit na may dividends
rights for the previous years? May they be denied
dividend rights because they are non holders of
non-cumulative? NOTE: YOU CANNOT
COMPEL THE CORPORATION TO DECLARE
DIVIDENDS UNLESS IT EXCEEDS 100 % PAID
UP CAPITAL SEC. 43
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 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)
- It depends because there are three types of non-
cumulative preferred shares
- Discretionary dividend type
- Mandatory if earned
- Earned cumulative or dividend credit type
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 Compare cumulative share from non-cumulative, incorporation may be given certain rights and
earned cumulative or dividend credit type privileges not enjoyed by the owners of other
stocks, provided that where the exclusive right to
- Cumulative share –whether or not earned vote and be voted for in the election of directors is
- Non-cumulative earned cumulative or dividend granted, it must be for a limited period not to
exceed five (5) years subject to the approval of the
credit type- only if earned Securities and Exchange Commission. The five-
year period shall commence from the date of the
 Par aforesaid approval by the Securities and Exchange
Commission. (n)
- stated par value; shall not be issued less than par
 Do you include non-voting shares in passing a valid
 No par
corporate act?
- without stated par value
- Even non-voting shares are entitled to vote under
- once fully paid no longer liable section 6

 Corporations cannot use its capitals in declaring  Redeemable shares

dividends; not all can issue no par value section 6
- Discretionary/optional
 Voting
- Obligatory or mandatory
- entitled to vote at any motion brought up in writing
 Generally a corporation can reacquire its own
 Non-voting shares if it has unrestricted retained earnings

- not entitled to vote  Exception: redeemable shares may be reacquired

irrespective of retained earnings
 What types of shares may be denied of the right to
vote?  Treasury shares

- Preferred and redeemable shares - They are treasury while in the treasury account of
the corporation
 Is it correct to state that common shares can never
be denied the right to vote?  May they be reissued by the corporation?

- Only preferred and redeemable shares are denied - YES

unless provided in this code
 If they are reissued will they be denied the right to
- PWEDENG MA-DENY YUNG COMMON vote?
SHARES, KASI YUNG FOUNDER’S SHARES
- Once reissued they shall become outstanding stocks
MERON SILANG EXCLUSIVE RIGHTS NA
again and purchasers shall be entitled to all the
SILA LANG ANG MERON, SO PWEDE
rights and privileges as the other holders have
SILANG BUMOTO WITH REGARDS TO
SOMETHING NA HINDI NA SAKOP NG  Section 57 treasury shares have no voting and
COMMON SHARE RIGHTS dividend rights. Why not?
- Example: founders shares- may be given certain
Section 57. Voting right for treasury
rights and privileges
shares. - Treasury shares shall have no voting right
as long as such shares remain in the Treasury. (n)
- Even common shares may be denied the right to
vote of founders’ shares issued <sec.7>
- Answer: commissioner vs. manning page 62 first
par.
Section 7. Founders' shares. - Founders'
shares classified as such in the articles of
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“Although authorities may differ on the
exact legal and accounting status of so-called
treasury shares, they are more or less in agreement
that treasury shares are stocks issued and fully paid
for and reacquired by the corporation either by
purchase, donation, forfeiture or other means.
Treasury shares are therefore issued shares but
being in the treasury they do not have the status of
outstanding shares. Consequently, although a
treasury share, not having been retired by the
corporation re-acquiring it, may be re-issued or sold
again, such shares, as long as it is held by the
corporation as a treasury share, participates neither
in dividends, because dividends cannot be declared
by the corporation to itself, nor in meetings of the
corporation as voting stock, for otherwise equal
distribution of voting powers among stockholders
will be effectively lost and the directors will be able
to perpetrate their control of the corporation,
though it still represents a paid for interest in the
property of the corporation. The foregoing essential
features of a treasury stocks are lacking in the
questioned shares.
In this case, and under the terms of the
trust agreement, the shares of stock of Reese
participated in dividends which the trustee received
and the said shares were voted upon by the trustee
in all corporation meetings. They were not,
therefore, treasury shares.”
 When the law speaks of outstanding rights it does
not include treasury shares
 Treasury shares may be reissued
- They are actually assets of the corporation
- Once re-issued they become outstanding stocks
again
- The corporation may cancel them; in effect there
will be a reduction in the outstanding capital stocks
- The code does not require ordinary corporations to
provide for restrictions, but it does not likewise
prohibit restrictions
- Example: right of first refusal
- The restriction must be contained in the articles of
incorporation
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- If provided in by-laws but not in the articles of
incorporation then it will not be binding
- Restrictions and preferences are mandatorily
required in close corporations
- If it does not provide restrictions it is not a close
corporation
- Specified persons- close corporations
- If not one of those specified you are not included
because there is exclusivity in close corporations
- Should also be in the by-laws not only in the
articles of incorporation
 No transfer clause
 Execution clause
 Acknowledgment
 Treasurer affidavit part of the articles of
incorporation
 Section 23-27 minimum qualifications, but there
may be additional
 Grounds for disapproval
- Only substantial and not strict is required
 May the SEC refuse or reject registration?
- <Section 17>
Section 17. Grounds when articles of
incorporation or amendment may be rejected or
disapproved. - The Securities and Exchange
Commission may reject the articles of incorporation
or disapprove any amendment thereto if the same is
not in compliance with the requirements of this
Code: Provided, That the Commission shall give
the incorporators a reasonable time within which to
correct or modify the objectionable portions of the
articles or amendment. The following are grounds
for such rejection or disapproval:
1. That the articles of incorporation or any
amendment thereto is not substantially in
accordance with the form prescribed herein;
2. That the purpose or purposes of the corporation
are patently unconstitutional, illegal, immoral, or
contrary to government rules and regulations;

3. That the Treasurer's Affidavit concerning the
amount of capital stock subscribed and/or paid is
false;
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.
No articles of incorporation or amendment
to articles of incorporation of banks, banking and
quasi-banking institutions, building and loan
associations, trust companies and other financial
intermediaries, insurance companies, public
utilities, educational institutions, and other
corporations governed by special laws shall be
accepted or approved by the Commission unless
accompanied by a favorable recommendation of the
appropriate government agency to the effect that
such articles or amendment is in accordance with
law. (n)
- But the grounds in section 17 are not exclusive
 When will the corporation commence to exist?
- Section 19
Section 19. Commencement of corporate
existence. - A private corporation formed or
organized under this Code commences to have
corporate existence and juridical personality and is
deemed incorporated from the date the Securities
and Exchange Commission issues a certificate of
incorporation under its official seal; and thereupon
the incorporators, stockholders/members and their
successors shall constitute a body politic and
corporate under the name stated in the articles of
incorporation for the period of time mentioned
therein, unless said period is extended or the
corporation is sooner dissolved in accordance with
law. (n)
 A corporation de jure can come into existence only
upon the issuance of the certificate of registration
by the SEC? TRUE OR FALSE?
- TRUE
- EXCEPTION: CORPORATION SOLE <sec. 112>
Section 112. Submission of the articles of
incorporation. - The articles of incorporation must
be verified, before filing, by affidavit or affirmation
of the chief archbishop, bishop, priest, minister,
rabbi or presiding elder, as the case may be, and
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accompanied by a copy of the commission,
certificate of election or letter of appointment of
such chief archbishop, bishop, priest, minister,
rabbi or presiding elder, duly certified to be correct
by any notary public.
From and after the filing with the
Securities and Exchange Commission of the said
articles of incorporation, verified by affidavit or
affirmation, and accompanied by the documents
mentioned in the preceding paragraph, such chief
archbishop, bishop, priest, minister, rabbi or
presiding elder shall become a corporation sole and
all temporalities, estate and properties of 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)
- CORPORATION SOLE- upon filing of the verified
articles of incorporation, once filed it is vested with
a judicial capacity
 General rule section 19
- Vested with judicial capacity upon issuance of the
certificate by the SEC
o However it is not accurate according to
atty. Ladia because there are those that can
issue for example cooperatives- BUREAU
OF COOPERATIVES which register,
home insurance guaranty corporation-
HOME OWNERS
Cagayan Fishing vs. Sandika
- Corporations are created by law
- Commence to exist upon issuance by the
CONCERNED government corporation or agency
- Prior there to it has no being
- The transfer of the property was not valid, it
likewise did not have the right to transfer
 De jure
- Strict or substantial compliance

 De facto
- 4 requisites must go hand in hand take out anyone
of them there can be no de facto corporation
1. There is a valid statute under which the corporation
could have been created as a de jure corporation.
2. An attempt, in good faith, to form a corporation
according to the requirements of law, which goes
far enough to amount to a “colorable compliance”
with the law;
3. A user of corporate powers, the transaction of
business in some way as if it were a corporation;
and,
4. Good faith in claiming to be and doing business as
a corporation.
 Are the rights and obligations between officers and
directors of a de jure and de facto the same?
- YES. Governed by the same law, rules and
regulations
 Only important in determining, is for the purpose of
applying the rules with regards to the direct and
collateral attack
 The existence of a de jure cannot be questioned
even by the State, either directly or indirectly
 Existence of a de facto can be questioned only by
the State directly in a quo warranto proceeding only
Municipality of Malabang vs. Benito
- What is the missing link so as to consider it a de
facto? A law, because the executive order is
unconditional
- An unconditional act affords no rights, creates no
office
- Legal contemplation it was never passed at all
- It can therefore be questioned by any person
 If the certificate of registration has not been issued,
may a corporation de facto exist?
- NO!
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- Number 4 requirement, good faith in claiming to be
and doing business as a corporation
Hall vs. Piccio
- Missing link is good faith
- The certificate was not yet issued by the SEC, the
members knew and therefore they were not acting
in good faith, therefore anybody can question its
existence
 Corporation by estoppel
- So defectively formed so that they are not to be
considered a de jure or de facto
- General partners- liable even beyond his promise
even his personal properties are prone to attachment
Lozano vs. Delos Santos
- Founded on principle of equity
- Exercise corporate powers
- Enters with business with 3rd parties
- When there is no 3rd persons involved and the
problem arises between there members, therefore
they themselves know that there is no corporation
by estoppel
Albert vs. University
- 1965 case, no section 21 yet
- Applied where the rules governing agency
- A person purporting in behalf of a non existing
corporation
- Section 21, you arrive at the same decision
Chiang Kai Siek vs. CA
- SC based its decision from the provision of the
education act
- It cannot immune itself by virtue of its non
compliance with the law
 Assuming there was no law?

- YES, it may still be sued as a school for the past 32
years the school represented itself as possessed of
juridical personality
 General rule: a 3rd party transacting with a non
existent corporation shall be estopped to deny
Asia banking vs. standard products
- General rule: absence of fraud a person who has
dealt with a non incorporated corporation shall be
stopped to deny from actions in which it had
benefited
- Exemptions: when there is fraud the general rule
shall not apply
Salvatierra vs. Garlitos
- As a general rule a person who has contracted it a
corporation lacking personality
- Doctrine is not applicable where fraud takes part in
the transaction
 Another exemption
International express travel and tours vs. CA
- No fraud in this case
- How come Kahn was made liable?
- Doctrine of incorporation
- Applies only if that person is trying to escape from
a contract where he is benefited
- In this case petitioner is not trying to escape
liability, but rather the one claiming from the
contract
 Would this apply to foreign corporation?
- YES, it may apply
- Georg Grotjahn vs. Isnami
 A foreign corporation cannot gain access to our CORPORATE CHARTER AND ITS AMENDMENTS
courts unless they attain a license to engage in
business in the Philippines but applying corporation  What do you understand by the word charter? Is it
by estoppels, the court allowed
 Municipality of Malabang case
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- No law, hence may be questioned by any person
- An unconstitutional act is not a law, t confers no
rights, it imposes no duties, it affords no
protections, it crates o office, it is in legal
contemplation, as inoperative as though it had
never been passes
 Hall vs. Piccio
- No good faith
 Corporation by estoppel
- Admission, conduct or agreement
- Will not apply among members themselves there
must be a 3rd party
- Cannot escape when benefited
- General rule: you deal with a corporation, as to
estop it
- Exceptions: 1. fraudulently misrepresents the third
person may file an action directly to those
members, 2. 3rd party will not be estopped if he is
not trying to escape liability
 2 possible remedies
- Chiang kai siek case
- Albert case
 What would be the effect if the corporation failed to
commence transaction?
- Automatic
 Operated but becomes subsequently inoperative for
5 years only a ground for suspension, proper notice
and hearing
 Commencement
- Example realty company
the same as articles of incorporation?
- Corporate charter is broader

 Franchise
- Primary power granted by the state to be and act as
a corporation
- Secondary franchise is the right or privilege that the
corporation may exercise
 You cannot issue investment contracts without a
secondary franchise, kailangan primary muna hindi
pwede mauna secondary kasi sa section 19 it does
not exist until issued with a certificate of
registration or incorporation
 Corporate entity
- Corporation exist separately and independently
from the stockholders
- Stockholders cannot bring an action, to bring back
the properties of a corporation
- Corporation has no interest in the individual
properties of its members
Sulo ng Bayan vs. Araneta
- Corporation cannot bring an action for the recovery
of the properties of its members
Caram vs. CA
- Stockholders cannot be held liable for the
legitimate obligations of the corporation, they exist
separately and independently from one another
Cruz vs. Dalisay
- Final judgment against a corporation cannot be
enforced against stockholders
Rustan Pulp vs. CA
- Corporation exist separately and independently
- Corporation are juridical entities, they exist only in
legal contemplation, can act only through its
authorized representatives
Soriano vs. CA
- They are not personally liable
- They where signed for and in behalf of the
corporation
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Palay inc. vs. Clave
- Liabilities incurred by the corporation cannot be
enforced against stockholders, etc., even if
stockholders, etc. happens to own a substantial
interest in the corporation, mere ownership does not
disregard the corporate entity theory
 Corporate entity for legal or legitimate purposes
only
 Two or more corporations, one of them will be
treated as a mere alter-ego
 You cannot pierce the veil of corporate fiction
when there are no facts attendant in the case
 Corporate Entity Theory
- The corporation is possessed with a personality
separate and distinct from the individual
stockholders or members and is not affected by the
personal rights, obligations or transactions of the
latter
 Instrumentality rule
- Where one corporation is so organized and
controlled and its affairs are conducted so that it is,
in fact, a mere instrumentality or adjunct of the
other, the fiction of the corporate entity of the
“instrumentality” may be disregarded
- Courts are concerned with reality and not form
- Mere ownership of all or substantially all of the
shares of stock of a corporation is not, in itself,
insufficient ground for disregarding the separate
corporate personality. And for the separate
personality of the corporation to be disregarded, the
wrong doing must be clearly and convincingly
established
- Fraud must be proven by clear and convincingly
evidence amounting to more than preponderance. It
cannot be justified by speculation and can never be
presumed. And only if it sought to hold the
stockholders liable directly for corporate debt
Palacio vs. Fely
- Piercing the veil of corporate fiction

- Fely trans and the other corporation is one and the
same
Marvel bldg. vs. David
- There must be facts before the court will be
justified in piercing the veil of corporate fiction
- Corporation was a mere extension of
personality of the person
Yutivo and sons vs. Court of Tax Appeals
- What where the facts or circumstances arrived by
the court here?
- Subscribed capital where all advanced by Yutivo,
the board where the same as Yutivo
Commissioner of Internal Revenue vs. Norton and
Harrison
- Court applied the general rule
- Mere substantial ownership does not mean that
it has a same corporate entity
La Campana Coffee Factory, Inc. vs. KKM
- Two corporations managed by the same family,
workers were made interchangeably
Emilio Cano vs. CIR
- Sued in there official capacity
- Reverse of Soriano vs. CA (signed in their official
capacity)
Tesco vs. WCC
- The two corporations where located in the same
office
Claparols vs. CIR
- Same as NAFLU and A.C. Ransom
Concept builders vs. NLRC
- Instrumentality rule. What is the instrumentality
rule? “where one corporation is so organized and
controlled and its affairs are conducted so that it is,
in fact, a mere instrumentality or adjunct of the
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other, the fiction of the corporate entity of the
“instrumentality” may be disregarded.”
- Has no separate mind of its own. What is the degree
of control?
1. Control, not mere majority or complete stock
control, but complete domination, not only of
the finances but of policy and business practice in
respect to the transaction attacked so that the
corporate entity as to this transaction had at the
time no separate mind, will or existence of its own.
2. Such control must have been used by the defendant
to commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty
or dishonest and unjust act in contravention of
plaintiff’s legal rights; and,
3. The aforesaid control and breach of duty must
proximately cause the injury or unjust loss
complained of.
- The absence of one of the elements prevents
“piercing the corporate veil.” In applying the
“instrumentality” or “alter ego” doctrine, the courts
are concerned with reality and not form, with how
the corporation operated and the individual
defendant’s relationship to that operation.
 There must facts and circumstances before warrant
piercing the veil of corporate fiction
 The control necessary does not mean stock
ownership
MCConnel vs. CA
- were located in the same floor
- “while the mere ownership of all or nearly all of the
capital stock of a corporation does not necessary
mean that it is a mere business conduit of the
stockholder, that conclusion is amply justified
where it is shown, as in the case before us, that the
operations of the corporation were so merged with
the stockholders as to be practically
indistinguishable from them. To hold the latter
liable for the corporation’s obligations is not to
ignore the corporation’s separate entity, but merely
to apple the established principle that such entity
cannot be invoked or used for purposes that could
 16

not have been intended by the law that created that - Twin ace was only a subsequent interested party
separate personality.”
- Assets and machineries
Tan boon bee vs. Jarencio
 Amendment of the articles of incorporation
- Why would a drug company need a printing
machine - Express power granted to a corporation

- The property must be in pursuance of a company  Section 16

business
- Appraisal right
Cease vs. CA
- Section 81 to object on certain acts and transactions
- Alter-ego or the extension of the person of forest
ware does the court pierced the veil of corporate Section 81. Instances of appraisal right. -
fiction Any stockholder of a corporation shall have the
right to dissent and demand payment of the fair
- As to not deprive the holders of their successional value of his shares in the following instances:
rights
1. In case any amendment to the articles of
- Mere ownership of all or substantially all is not a incorporation has the effect of changing or
justification of piercing the veil of corporate fiction restricting the rights of any stockholder or class of
shares, or of authorizing preferences in any respect
superior to those of outstanding shares of any class,
 Fraud must be proven by clear and convincing
or of extending or shortening the term of corporate
evidence cannot presume or speculate, there must existence;
be facts and circumstances
2. In case of sale, lease, exchange, transfer,
 Fraud must be clear and convincing evidence more
mortgage, pledge or other disposition of all or
than preponderance substantially all of the corporate property and assets
as provided in the Code; and
Remo Jr. vs. IAC
3. In case of merger or consolidation. (n)
- The resolution was not entered to defraud anyone

Del Rosario vs. National Labor Commission - Right granted only in specified instances

- The wrongdoing must be clearly established Are non-voting shares included in amending the articles of
incorporation
- There must be facts to support
1 100/s
- Payment of claims cannot thus be presumed XYZ-----ABC

Indophil Textile Mill vs. CALICA 2 100/s

- How do you distinguish this ruling to La Campana, To

having the same issues:
10 100/s
- La campana, one payroll, employees were made
=1M/S what would be
interchangeable. Acrylic had its own standards
the 2/3?
PNB vs. Ritratto Group
Section 6 last paragraph
- Control test
Voting shares are excluded except the foregoing
- Not mere majority but rather complete instances

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1 1
2 2
3 3
4 4
5 5
6 6
1 & 2=absent
1&2=absent but gave their written assent
3 & 4= objected
3&4=objected
5 & 6= approved the amendment 5&6=approved
Would there be a valid amendment
 Special amendments 37 & 38 shortening that would
result to dissolution require prior approval by the
SEC
Section 37. Power to extend or shorten
corporate term. - A private corporation may extend
or shorten its term as stated in the articles of
incorporation when approved by a majority vote of
the board of directors or trustees and ratified at a
meeting by the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock or
by at least two-thirds (2/3) of the members in case
of non-stock corporations. Written notice of the
proposed action and of the time and place of the
meeting shall be addressed to each stockholder or
member at his place of residence as shown on the
books of the corporation and deposited to the
addressee in the post office with postage prepaid, or
served personally: Provided, That in case of
extension of corporate term, any dissenting
stockholder may exercise his appraisal right under
the conditions provided in this code. (n)
Section 38. Power to increase or decrease
capital stock; incur, create or increase bonded
indebtedness. - No corporation shall increase or
decrease its capital stock or incur, create or increase
any bonded indebtedness unless approved by a
majority vote of the board of directors and, at a
stockholder's meeting duly called for the purpose,
two-thirds (2/3) of the outstanding capital stock
shall favor the increase or diminution of the capital
stock, or the incurring, creating or increasing of any
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bonded indebtedness. Written notice of the
proposed increase or diminution of the capital stock
or of the incurring, creating, or increasing of any
bonded indebtedness and of the time and place of
the stockholder's meeting at which the proposed
increase or diminution of the capital stock or the
incurring or increasing of any bonded indebtedness
is to be considered, must be addressed to each
stockholder at his place of residence as shown on
the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or
served personally.
A certificate in duplicate must be signed
by a majority of the directors of the corporation and
countersigned by the chairman and the secretary of
the stockholders' meeting, setting forth:
(1) That the requirements of this section have been
complied with;
(2) The amount of the increase or diminution of the
capital stock;
(3) If an increase of the capital stock, the amount of
capital stock or number of shares of no-par stock
thereof actually subscribed, the names, nationalities
and residences of the persons subscribing, the
amount of capital stock or number of no-par stock
subscribed by each, and the amount paid by each on
his subscription in cash or property, or the amount
of capital stock or number of shares of no-par stock
allotted to each stock-holder if such increase is for
the purpose of making effective stock dividend
therefor authorized;
(4) Any bonded indebtedness to be incurred,
created or increased;
(5) The actual indebtedness of the corporation on
the day of the meeting;
(6) The amount of stock represented at the meeting;
and
(7) The vote authorizing the increase or diminution
of 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 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)
 The vote must be cast at the meeting called for that
purpose
 Written assent would not suffice
 When do amendments become valid and effective?
- Only upon the approval of the SEC TRUE OR
FALSE?
- FALSE because it can be valid upon the date of
filing if not acted upon within 6 months without
fault attributable to the corporation
 Why is it retroactive?
 What provision may be amended, altered or
repealed
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 Can you change name, address for example she
married or changed address?
- NO. you cannot change that
 Fait accompli, are beyond the powers or authority
of the corporation to change, alter or modify. These
would include the following:
- Names of the incorporators and
- The incorporating directors or trustees,
- The name of the treasurer originally or first elected
by the subscribers or members to act as such until
his successor has been duly elected and qualified,
- The number of shares and amount originally
subscribed and paid out of the original authorized
capital stock of the corporation,
- The date and place of execution of the articles of
incorporation,
- The signatories and acknowledgment thereof.
- All other provisions or matters stated or contained
in the articles are subject to amendment.
 Founder’s or signatories hindi pwede palitan
 Names, nationalities- you cannot
 Capital- right granted by law to all corporation
 Paid up capital- NO
 Restriction and transfer of shares in ordinary stock
corporations
- You can, but close corporation cannot
- Section 96, otherwise it will not be a close
corporation
Section 96. Definition and applicability of
Title. - A close corporation, within the meaning of
this Code, is one whose articles of incorporation
provide that: (1) All the corporation's issued stock
of all classes, exclusive of treasury shares, shall be
held of record by not more than a specified number
of persons, not exceeding twenty (20); (2) all the
issued stock of all classes shall be subject to one or
more specified restrictions on transfer permitted by
this Title; and (3) The corporation shall not list in

any stock exchange or make any public offering of - All of them involved are institutions of learning, it
any of its stock of any class. Notwithstanding the
foregoing, a corporation shall not be deemed a
close corporation when at least two-thirds (2/3) of
its voting stock or voting rights is owned or BOARD OF DIRECTORS/TRUSTEES
controlled by another corporation which is not a
close corporation within the meaning of this Code.  Section 23
Any corporation may be incorporated as a
close corporation, except mining or oil companies,
stock exchanges, banks, insurance companies,
public utilities, educational institutions and
corporations declared to be vested with public
interest in accordance with the provisions of this
Code.
The provisions of this Title shall primarily
govern close corporations: Provided, That the
provisions of other Titles of this Code shall apply
suppletorily except insofar as this Title otherwise
provides.
 Transfer clause, executor clause, acknowledgment,
treasury affidavit-NO
Philippine First Insurance case
- Mere change in the name of a corporation or by
merely complying with the law is general
amendment
- It does not change its personality. It is the same
person in a different name. the charter is the same
 Amendment of a corporate term
- Extending the same can never be made 7 years
prior? TRUE or FALSE
- FALSE. It can be if there are justifiable reasons for
earlier extension as may be determined by the SEC
 Can you extend the corporate term if it has already
expired?
- Once the term expires without an amendment
having happen it ceases to exist as a body politic. It
is dissolved automatically on the day it expires.
 Alhambra cigar and PNB case
 Instances when the SEC allowed extension whose
term has already expired
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was the case in order to avoid confusion that would
arise later on.
Section 23. The board of directors or
trustees. - Unless otherwise provided in this Code,
the corporate powers of all corporations formed
under this Code shall be exercised, all business
conducted and all property of such corporations
controlled and held by the board of directors or
trustees to be elected from among the holders of
stocks, or where there is no stock, from among the
members of the corporation, who shall hold office
for one (1) year until their successors are elected
and qualified. (28a)
Every director must own at least one (1)
share of the capital stock of the corporation of
which he is a director, which share shall stand in his
name on the books of the corporation. Any director
who ceases to be the owner of at least one (1) share
of the capital stock of the corporation of which he
is a director shall thereby cease to be a director.
Trustees of non-stock corporations must be
members thereof. A majority of the directors or
trustees of all corporations organized under this
Code must be residents of the Philippines.
- Controlled by the board of directors
- Authority are however restricted to the day to day
- Stockholders may have all the profit but will turn
over the management to the governing board
- But unless the law provides the power may be
delegated
 General rule
- Corporations must sit and act as a body
- Will be bound by corporate officers if they acted
within the 5 classification page 150
Ramirez vs. Orientalist co.
- What was the position of Fernandez in this case?
TREASURER
 20

- Why did the court rule that actions of Fernandez
bound the corporation when he is not even a board
of director?
“if a man is found acting for a corporation
with the external indicia of authority, any person
not having notice of want of authority, may usually
rely upon those appearances; and if it be found that
the directors had permitted the agent to exercise
that authority and thereby held him out as a person
competent to bind the corporation, or had
acquiesced in a contract and retained the benefit
supposed to have been conferred by it, the
corporation will be bound, notwithstanding the
actual authority may never have been granted.”
- Contracts must be made by the director and not the
stockholders
- Actions of the stockholders in such matters is only
advisory and not in any way binding in the 1 A-100t/S
corporation be a director?
- By-laws may provide additional qualifications and
disqualifications
- To qualify as a director he must own at least 1 share
 Should the stockholder be the equitable or
beneficial owner in order to qualify as a director?
- NO, it is not necessary, as long as you are listed in
the books as owner of one share
Lee vs. CA
- As long as you are listed in the books as owner of
one share
- Under the old law he must be the beneficial owner
and legal owner thereof but in the new law it is not
required as long as it stands in his name he is
qualifies
B (own in the trust of X) is B qualified to

Barreto vs. La previsora Filipina 2

- Everything emanates from the board of directors 3-10

- Stockholders action is merely advisory except their 2– transferring there voting rights in favor of VT
approval or vote is necessary to prove a valid
corporate act Other rights will accrue in favor of them, but not the voting
rights
 Qualifications:
voting rights must be recorder in the books of the
- No citizenship requirement, at least majority must corporation that it is transferred
be residents
PNB-IFL- wholly owned subsidiary of PNB
- Can have a governing board consisting solely of
foreigners PNB will assign to PNB-IFL nominal shares and PNB-IFL
now will be able to be nominated
- But we have to take into consideration partly
 Gen. Rule:
nationalized industries and other laws which
prohibits or limits foreign ownership
- Term of one year who will serve as such until there
- Anti-dummy act successors are elected and qualified

 Exception:
- Utilization development of natural resources 60%
must be owned by Filipino citizens, therefore they - Non-stock corporation can serve for a term of 3
only own 40%---10 members they can only have 4 years
seats, but not entirely correct because the law may
provide otherwise; educational institutions - Educational non-stock- term of the governing board
restricted to Filipinos, but there are exceptions can be 5 years
when created by religious and charitable
institutions.  May this term exceed one year?

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 21

- Yes, they may serve in a hold over capacity until
their successors have been duly elected and
qualified
Detective and protective bureau vs. Cloribel
- In the by-laws, managing director must be elected
from among themselves
- Must be duly elected and qualified
How are the directors elected?
 Who wins? Or who gets elected?
- No vote requirement, the one who gets the most
number of votes gets elected, section24.
 What is cumulative voting?
- Process of multiplying the number of shares to the
number of director to be elected
- Matter of right granted to stockholders in a stock
corporation

1-100T/S 1 to 5 has 200k/s and members of the same family- majority

800k they have 4M votes they are guaranteed 4 seats
2-100T/S
6 to 10 are not related- 1 seat 1M votes
3-100T/S
 Cumulative to allow the minority to have a rightful
to 10=1M/S representation in the board

 Do you include the vote of 1 & 2 to have a quorum  Is it allowed in a non-stock corporation?
to have a valid meeting?
- Not generally available
- NO, quorum requirements is 401,000
- Section 89 unless the articles or by-laws allow
Quorum requirement is 501k cumulative voting
Holders of non-voting shares are only entitled to vote in last
Section 89. Right to vote. - The right of
par. Of section 6
the members of any class or classes to vote may be
limited, broadened or denied to the extent specified
1-200k
in the articles of incorporation or the by-laws.
Unless so limited, broadened or denied, each
2-200k
member, regardless of class, shall be entitled to one
vote.
3-200k

4-100k Unless otherwise provided in the articles

of incorporation or the by-laws, a member may vote
5-100k by proxy in accordance with the provisions of this
Code. (n)
6-100k
Voting by mail or other similar means by
7-50k members of non-stock corporations may be
authorized by the by-laws of non-stock
8-40k corporations with the approval of, and under such
conditions which may be prescribed by, the
9-5k Securities and Exchange Commission.

10-5k

=1MS  Other corporate officers other than the governing

board section 25
1&2 is absent, 3&4 ayaw tumakbo and hindi nagvote 6-10,
tumakbo and ninominate nila yung sarili nila and cast all Section 25. Corporate officers, quorum. -
their shares on themselves Immediately after their election, the directors of a

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 22

corporation must formally organize by the election 5

of a president, who shall be a director, a treasurer
who may or may not be a director, a secretary who  Is it absolute?
shall be a resident and citizen of the Philippines,
and such other officers as may be provided for in - NO, except in the election because it requires the
the by-laws. Any two (2) or more positions may be majority of all the members of the board
held concurrently by the same person, except that
no one shall act as president and secretary or as - If by-laws or articles provide a higher voting
president and treasurer at the same time.
requirement

The directors or trustees and officers to be  Artificial beings must act through its members and
elected shall perform the duties enjoined on them act as a body to have a valid corporate act
by law and the by-laws of the corporation. Unless
the articles of incorporation or the by-laws provide  Exception:
for a greater majority, a majority of the number of
directors or trustees as fixed in the articles of
- Delegation
incorporation shall constitute a quorum for the
transaction of corporate business, and every
- Expressly conferred
decision of at least a majority of the directors or
trustees present at a meeting at which there is a
quorum shall be valid as a corporate act, except for - Where the officer or agent is clothed with actual or
the election of officers which shall require the vote apparent authority
of a majority of all the members of the board.
- Otherwise it will not bind the corporation
Directors or trustees cannot attend or vote
by proxy at board meetings. (33a)  Yao ka sin trading case “already asked in the bar”

- Only bind the corporation to the extent of authority

 Is the president required to be a stockholder. YES
confined to him or virtue of customs, usage and
 The chairman may be another person policy

 The president may also be another person - Must pass first the controller and counsel

 Prohibited is president to be secretary or treasurer  What if the notice requirement is not complied
at the same time with?

 Board of director must sit and act as a body to
arrive at a corporate act
 What would constitute a quorum if 5 then 3 must be
present
 May the vote of 2 members past a 5 man governing
board pass a valid corporate act?
- YES. Voting requirement is majority of directors
present at which there where a quorum
Lopez realty vs. Fotencha
- Notice requirement must be complied with hence it
should have been with force and effect, but
according to the SC, it may be ratified expressly if
there is a subsequent meeting called for that
purpose
- Impliedly through acts
- Asuncion was aware of the corporations obligation

1 1 and 2 present=valid voting - There was implied ratification or she was estopped
requirement
Pua casim vs. Neumark and Co.
2 1 and 2 voted yes
- Considered 3 circumstanced
3 3 voted no
- Check which was the proceed of the loan which
4 was endorsed and deposit in the corporate account

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 23

- Neumark as president and also stockholder But that Board itself, by its acts and through
acquiescence, practically laid aside the by-law
Yu chuck vs. Kong Li Po requirement of prior approval.

- General manager usually has the power to hire but
the SC said the contract must be reasonable
- The contract here is so onerous that it would throw
the corporation into insolvency
- Kalaw signed alone and said contracts were
submitted to the board of directors after its
consummation and not before
Buenaseda vs. Bowen

Francisco vs. GSIS - Express ratification is made through a formal board

action
- GSIS cannot evade the binding effect of the
telegram - Implied ratification is through: silence or
acquiescence, acceptance benefits and lastly
- Only 15 months later that the corporation said there
recognition or adoption
was a mistake
 An unauthorized act may nevertheless be binding
- The silence coupled with the unconditional either by express or implied by estoppels
acceptance of the other subsequent remittances is
binding to the corporation  By virtue of silence the board had impliedly
accepted the act
Board of liquidators vs. Kalaw
 By recognition or adoption
“Settled jurisprudence has it that where
similar acts have been approved by the directors as  By virtue of payment of obligations arising
a matter of general practice, custom and policy, the therefore- Lopez realty
general manager may bind the company without
formal authorization of the board of directors. In  May directors or trustees be disqualified to act as
varying language, existence of such authority is such?
established, by proof of the course of business, the
- YES, crime, etc. disqualifications in book
usages and practices of the company and by the
knowledge which the board of directors has, or
- Possess or dispossess any of the qualifications or
must be presumed to have, of acts and doings of its
disqualifications , cease to hold at least one share
subordinates in and about the affairs of the
corporation. So also, “xx authority to act for and  May directors be ousted from office?
bind a corporation may be presumed from acts of
recognition in other instances where the power was - At least 2/3 of members representing outstanding
in fact exercised.” “xx Thus, when, in the usual capital stock. Again notice requirement must be
course of business of a corporation, an officer has complied with
been allowed in his official capacity to manage its
affairs, his authority to represent the corporation 1-200 1-5 same
may be implied from the manner in which he has family
been permitted by the directors to manage its
2-200
business.”
3-200
In the case at bar, the practice of the
corporation has been to allow its general manager 4-100
to negotiate and execute contracts in its copra
trading activities for and in NACOCO’s behalf 5-100 electing
without prior board approval. If the by-laws were to
be literally followed, the board should give its 6-100 6 to 10 not
stamp of prior approval on all corporate contracts. related

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7-50
8-40
9-5
10-5 outstanding
director
 Meetings called by the president or the secretary
ordered by the president
 It depends if the removal is without cause they
cannot do so because removal without cause shall
not deprive the minority stockholders or members
of the right of representative
 If with cause they can even if it will prejudice the
rights of the minority, provided of course additional
requirements by-laws and articles of incorporation
 Who will fill up the vacancy created due to the
ouster of a member of the board of directors
<section 29>
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 or 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 in the same
meeting authorizing the increase of directors or
trustees if so stated in the notice of the meeting. (n)
 Other than by removal or expiration of term they do
not have the power
 When will the vacancies be filled up?
 Is notice required, to fill up vacancies due to
removal?
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24
 What if the vacancy is due to an increase, can it be
filled up in the same meeting where in the number
is increased?
 Election due to removal-in the same meeting notice
is not required
 Election due to increase in number- it must be so
stated in the meeting
 Section 30
Section 30. Compensation of directors. -
In the absence of any provision in the by-laws
fixing their compensation, the directors shall not
receive any compensation, as such directors, except
for reasonable per diems: Provided, however, That
any such compensation other than per diems may
be granted to directors by the vote of the
stockholders representing at least a majority of the
outstanding capital stock at a regular or special
stockholders' meeting. In no case shall the total
yearly compensation of directors, as such directors,
exceed ten (10%) percent of the net income before
income tax of the corporation during the preceding
year. (n)
- Generally not entitled to receive compensation
because they render it gratuitously
- Unless the by-laws allows
- Stockholders may also grant pursuant to a majority
vote
- Must not exceed net income of 10% tax of the
preceding year
- Acting in special capacity
- In, sum directors may receive compensation when
1. there is a provision in the by-laws to that effect
2. When the stockholders, by a majority vote of the
outstanding capital stock grant the same; and,
3. If the director renders extra-ordinary or unsual
service
Central cooperative exchange vs. Tibe
- By-laws may allow, stockholders may also allow
such

 What do you understand by the phrase “as such
directors”
Western institute vs. Salas
- Compensation was granted without by-laws
authority
- Prohibition is not a sweeping rule
- Members of the board may receive when they
receive in a special capacity
- Mere act of the board will suffice
 Is the 10% ceiling applicable to other officers?
- NO. the phrase “as such director” was used twice
<Section 30>
- The SC ruled that the 10% ceiling will not likewise
apply if they acted in a capacity other than “as such
directors”
Government vs. El Hogar
- Judicial intervention is not proper
- The appropriates remedy is to those who can make
or unmake the by-laws
 Liability of corporate officers
- Obligations incurred by those acting for and in
behalf of the corporations are not there’s BUT there
are exceptions even if they are acting for and in
behalf of the corporation
Tramat vs. CA
- General rule was applied in the case
- Ong acted as officers and acted within the scope of
his authority
- Court laid down 4 instances when even if acting
within the scope of his authority he is held
solidarily liable
1. He assents (a) to a patently unlawful act of the
corporation, or (b) for bad faith, or gross negligence
in directing its affairs, or (c) for conflict of interest,
resulting in damages to the corporation, its
stockholders or other persons;
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25
2. He consents to the issuance of watered stocks or
who, having knowledge thereof, does not forthwith
file with the corporate secretary his written
objection thereto;
3. He agrees to hold himself personally and solidarily
liable with the corporation;
4. He is made, by a specific provision of law, to
personally answer for his corporate action.
- Watered stocks- issued, fully paid up when in fact
they have not been fully paid or promised as such
Llamado vs. CA
- The corporate entity theory cannot be used as a
defense to escape liability in violation of B.P. 22
- Where the check is drawn by a corporation the
persons who signed the check shall be liable.
Uichico vs. NLRC
- Labor case corporate directors and officers are
solidarily liable with the corporation for the
termination of employment of corporate employee
done with malice and bad faith
 3 fold duty of directors
- obedient
- diligent
- loyal
 Business judgment rule
- Questions of policy and management are left solely
to the honest decision of the board of directors and
the courts are without authority to substitute its
judgment as against the former. The directors are
the business managers of the corporation and as
long as they act in good faith, its actuations are not
subject to judicial review. Montelibano vs. Bacolod
Murcia Milling
- questions of policy and management are left solely
to the board of directors
- BOD, business manager of the corporation and as
long as they act in good faith, its actuations are not
subject to judicial review
 26

- They are not insurer of the property of the
company, they were guarantors that the enterprise
undertaken by the corporation shall be successful
Montelibano vs. Bacolod Murcia Milling Co.
- Directors are not liable due to imprudence or honest
error of judgment
- If the acquisition is merely that of a business
opportunity which has not been reposed in him in
confidence, the same may be subject to ratification
by the stockholders.
Director x co.
A-REALTY

- Duty of loyalty of corporate directors B

- 31,32,33,34 C Z owns property and is going

abroad never to Return, he wants
- 31,32,33- specific instances when corporate officers to sell for 25M the fair market
may violate loyalty value is 30M

- 32,33 self-dealing and interlocking director D

 Corporate opportunity doctrine E

- It places a director of a corporation in the position
of a fiduciary and prohibits him form seizing a
business opportunity and/or developing it at the
expense and with the facilities of the corporation.
He cannot appropriate to himself a business
opportunity which in fairness should belong to the
corporation.
 Last paragraph of section 31 and the provision of
section 34 make reference to recovery of
“forbidden profits”
E goes to Z and offers to pay the property for 26 M and later
he sells it for 30M making 4M profit, one of the
stockholders learned and complains that he should submit
the profits. E said that he will move for ratification of his
actuation. Can it be ratified?
- It can be ratified he merely acquired a business
owning to the corporation
- It would be different if it was entrusted in his
confidence

 Distinction between section 31 and 34 relative to Another scenario:

the ratification by the stockholders
Had A not attended the meeting he would not have known
- The second paragraph of section 31 which makes a of the sale it is then a matter reposed in him in confidence
director liable to account for profits if he attempts
 A corporation cannot reaquire its share if it has no
to acquire or acquires any interest adverse to the
restricted unretained earnings
corporation in respect to any matter reposed in him
in confidence as to which equity imposes a Strong vs. Rapide
disability upon him to deal in his own behalf is not
subject to ratification by the stockholders. Whereas, - What duty did he violate?
in section 34 if a director acquires for himself a
business opportunity which should belong to the - He violated his duty of loyalty
corporation, he is bound to account for such profits
unless his act is ratified by the stockholders owning - The law would be impotent if the sale were not
ore representing at least 2/3 of the outstanding invalidated
capital stock.
 Self-dealing director and interlocking director
- If reposed in him in confidence, not subject to
 What is a self-dealing director?
ratification
- Director of a corporation dealing or transacting
business with his corporation
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 Are the contracts and dealing of a self0dealing
director valid?
 General rule: voidable
 May the contracts of a self-dealing director be valid
per se.
- YES. If all the 4 conditions are present they will be
valid per se
1. That the presence of such director or trustee in the
board meeting in which the contract was approved
was not necessary to constitute a quorum for such
meeting;
2. That the vote of such director or trustee was not
necessary for the approval of the contract;
3. That the contract is fair and reasonable under the
circumstances; and
4. That in case of an officer, the contract has been
previously authorized by the board of directors.
 When do they become voidable?
- When any of the two requisites are absent it is
voidable, but subject to ratification by 2/3 of the
outstanding capital stock or 2/3 of the member
 Requisites for ratification (subject to ratification by
the stockholders holding or representing at least 2/3
of the outstanding capital stock or 2/3 of the
members.)
- it must be at a meeting called for the purpose
- full disclosure of the adverse interest of the director
concerned must be made
- the contract is fair and reasonable under the
circumstances
 Problem if self-dealing director involved owns all
or substantially all of the shares of stock of the
corporation thereby making it easily possible to
have the contract ratified
- last sentence of section 32 should be made to apply
by determining the reasonableness and fairness of
the contract
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Section 32. Dealings of directors, trustees
or officers with the corporation. - A contract of the
corporation with one or more of its directors or
trustees or officers is voidable, at the option of such
corporation, unless all the following conditions are
present:
1. That the presence of such director or trustee in
the board meeting in which the contract was
approved was not necessary to constitute a quorum
for such meeting;
2. That the vote of such director or trustee was not
necessary for the approval of the contract;
3. That the contract is fair and reasonable under the
circumstances; and
4. That in case of an officer, the contract has been
previously authorized by the board of directors.
Where any of the first two conditions set
forth in the preceding paragraph is absent, in the
case of a contract with a director or trustee, such
contract may be ratified by the vote of the
stockholders representing at least two-thirds (2/3)
of the outstanding capital stock or of at least two-
thirds (2/3) of the members in a meeting called for
the purpose: Provided, That full disclosure of the
adverse interest of the directors or trustees involved
is made at such meeting: Provided, however, That
the contract is fair and reasonable under the
circumstances. (n)
Prime white cement vs. IAC
- a director of a corporation owes a position in trust
- in case of conflict between himself and that of the
corporation, he cannot sacrifice the interest of the
corporation to his own advantage
- as a director he should have acted in a manner as
not to unduly prejudice the corporation
- he cannot be allowed to enrich himself
 May corporate directors purchase the corporate
property?
Mead vs. Mccullogh
- interlocking director- a director of one corporation
who deals and transacts business with another
corporation who is himself a director
 28

A- director of X company also a director of Y - Remedy granted by law to stockholders to institute

corporation a case to remedy a wrong done directly to the
corporation and indirectly to the stockholders, if the
B- board refuses to do so. Otherwise if not they would
be left without any recourse
C-
 Available suits
D-
 individual or personal
E-
- Wrong done against his person as a stockholder
 Both companies enter into a contract and A sits, is
the contract valid?
 Class suit
- Yes on the ground of fraud or if it is unfair
- Filed by a stockholder in representation of other
- May be subject to the provision of section 32 stockholders

- Section 32 contract may become voidable, hence it - A wrong or redress done, a derivative suit in nature
may also be ratified
 Intra-corporate remedies
X Co.
- Demand to the BOD to institute such action
Y Co.
- Negated by the BOD
A owe 20%
A owe 20% - The one who instituted must be a stockholder at the
date when the act was done, must have been a
Is it generally valid or voidable? VALID
stockholder by that time
25%
 Demand will not be required if the majority of the
25% VALID
BOD are the one’s guilty of the wrong charged
15%
 The corporation must be made a party in the case
25% VOIDABLE SUBJECT TO section 32
whatever side will not matter because under
More than 20 substantial Philippine law misjoinder is not a ground for
dismissal
 BOD mismanages corporate officers. Who may file
a suit?  Non-joinder is a ground for dismissal

- General rule: BOD which can institute a case  Any benefit should inure to the corporation
because it has all the powers. To allow stockholders
 Stockholder bringing the action is entitled to
to file would violate the doctrine of corporate entity
reimbursement such as attorney’s fee ONLY IF the
and may result to multiplicity of suits
case is SUCCESSFUL to avoid harassment suit to
- Stockholders cannot therefore generally file a case their management
EXCEPT of course in a DERIVATIVE SUIT
Pascual vs. Orozco
 Derivative suit
- By virtue of the fact that he is a stockholder, may
- An action based on injury to the corporation-to maintain a derivative suit
enforce a corporate right- wherein the corporation
- Depend on how, when and what reason
itself is joined as a necessary party, and recovery is
in favor of and for the corporation. - Seeking for the years 1898 all the way 1907

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- Only became a stockholder in 1903
- He can sue only in 1903 forward because he must
be a stockholder
- The right of action is personal in nature. He became
a stockholder only in 1902
 Derivative suit
- By a stockholder to address a wrong done against
the corporation and the stockholder indirectly
- Essential requisite must have been a stockholder
from the time the act complained of took place
- Cannot institute an action from the years he was
still not a stockholder
Everett vs. Asia Banking
- Stockholders cannot ordinarily commence suit in
equity and such is in the hands of its BOD however
there are exceptions when the BOD will not sue
since they are themselves principals to the fraud.
Republic vs. Cuaderno
- The facts constitute sufficient cause of action
- It is not the corporate interest to shield one from
criminal prosecution which is personal interest
- Perez is not suing in his behalf, but in behalf of the
corporation
Western institute vs. Salas
- Assuming it was filed in the proper forum would
there argument that it is a derivative suit prosper?
NO. it is people of the Philippines vs. individual
director, it must be stated in the complaint that it is
being instituted as a derivative suit and for and in
behalf of the corporation
- Granting arguendo, that this is a derivative suit, the
same is still outrightly dismissible for having been
wrongfully filed in the regular court devoid of any
jurisdiction to entertain the complaint. The case
should have been filed with the SEC which
exercises original and exclusive jurisdiction over
derivative suits, they being intra-corporate disputes,
per Section 5 (b) of P.D. 902-A
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San Miguel vs. Khan
- Was a demand made? NO
- It is not necessary because he objected in the board
meeting, but still it was adopted therefore it was
useless
Chase vs. Buencamino
- Argument that he should be in estoppels since he
filed in the U.S.
- Assuming the case prospered in the U.S. would not
estoppels apply as against him? NO for estoppels to
step in it must be a case by the corporation
Reyes vs. tan
- Corporate director are guilty of breach of trust
- A stockholder may institute an action to remedy a
wrong done
- Fraud in the conduct of corporate affairs
Gamboa vs. Victoriano
- Is derivative suit appropriate in this case
- They are not vindicatory damage done to the
corporation, but rather they where vindicating
damage against him
- Violation of their rights as individuals, hence
derivative suit is not the remedy
Evangelista vs. Santos
- Derivative suit is not proper
- Claim is not for the benefit of the corporation, but
rather his individual benefit
 From the cases above cited, these are the
requirements and the procedures that must be
followed in order that a derivative suit may prosper
1. That the party bringing the suit should be a
stockholder as of the time the act or transaction
complained of took place, or whose shares have
evolved upon him since by operation of law. This
rule, however, does not apply if such act or
transaction continues and is injurious to the

stockholder or affect him specifically in some other
way.
The number of his hares is immaterial since he is
not suing in his own behalf or for the protection or
vindication of his own right, or the redress of a
wrong done against him, individually, but in behalf
and for the benefit of the corporation.
2. He has tried to exhaust intra-corporate remedies, he
has made a demand on the board of directors for the
appropriate relief but the latter had failed or refused
to heed his plea. Demand, however, is not required
if the company is under the complete control of the
directors who are the very ones to be sued (or
where it becomes obvious that a demand upon them
would have been futile and useless) since the law
does not require a litigant to perform useless acts;
3. The stockholder bringing the suit must allege in his
complaint that he is suing on a derivative cause of
action on behalf of the corporation and all other
stockholders similarly situated, otherwise, the case
is dismissible. This is because the cause of action
actually devolves on the corporation and not to a
particular stockholder.
4. The corporation should be made a party, either as
party-plaintiff or defendant, in order to make the
court’s judgment binding upon it, and thus, bar
future litigation of the same issues. On what side
the corporation appears loses importance when it is
considered that it lay within the power of the court
to direct the making of amendment of the pleading,
by adding or dropping parties, as may be required
in the interest of justice. Misjoinder of parties is not
a ground to dismiss action; and,
5. Any benefit or damages recovered shall pertain to
the corporation. This is so because in all instances,
derivative suit is instituted for and in behalf of the
corporation and not for the protection or vindication
of a right or rights of a particular stockholder,
otherwise, the aggrieved stockholder should
institute, instead, an individual or personal suit to
vindicate his personal or individual right. Or, for
that matter, representative or class suit for all other
stockholders whose rights are similarly situated,
injured or violated, personally or individually.
 Executive committee
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- Not allowed under the OLD law
 How may executive committee created and
constituted?
- Section 35
Section 35. Executive committee. - The
by-laws of a corporation may create an executive
committee, composed of not less than three
members of the board, to be appointed by the
board. Said committee may act, by majority vote of
all its members, on such specific matters within the
competence of the board, as may be delegated to it
in the by-laws or on a majority vote of the board,
except with respect to: (1) approval of any action
for which shareholders' approval is also required;
(2) the filing of vacancies in the board; (3) the
amendment or repeal of by-laws or the adoption of
new by-laws; (4) the amendment or repeal of any
resolution of the board which by its express terms is
not so amendable or repealable; and (5) a
distribution of cash dividends to the shareholders.
- Said committee may act and bind the corporation
by the majority vote of all its members except with
respect to those matters provided for in sec. 35
these are:
1. Approval of any action for which shareholders’
approval is also required
2. The filing of vacancies in the board;
3. Amendment or repeal of by-laws or the adoption of
new by-laws;
4. Amendment or repeal of any resolution of the board
which by its express terms is not so amenable or
repealable; and,
5. Distribution of cash dividends to the shareholders.
 May the board alone create an executive committee
without any authority provided for the by-laws?
- NO board of directors must sit and act as a body to
have a valid transaction
 May a non-member of the board of directors be a
member of the executive committee?
- NO, all of them must be members of the board of
directors
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- BOD cannot act by proxy it would be abdication of the limitations prescribed by law and the
powers Constitution;

 Purpose clauses necessary because it confers and 8. To enter into merger or consolidation with other
also limits the actual authority of the corporation corporations as provided in this Code;

CORPORATE POWERS AND AUTHORITY 9. To make reasonable donations, including those

 Corporate authority may be classified into three
classes namely:
1. Those expressly granted or authorized by law
inclusive of the corporate charter or articles of
incorporation;
2. Those impliedly granted as are essential or
reasonably necessary to the carrying out of the
express powers;
3. Those that are incidental to its existence.
 Section 36 to 45- POWER GRANTED BY LAW
for the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes:
Provided, That no corporation, domestic or foreign,
shall give donations in aid of any political party or
candidate or for purposes of partisan political
activity;
10. To establish pension, retirement, and other
plans for the benefit of its directors, trustees,
officers and employees; and
11. To exercise such other powers as may be
essential or necessary to carry out its purpose or
purposes as stated in the articles of incorporation.
(13a)

Section 37. Power to extend or shorten corporate

Section 36. Corporate powers and capacity. - Every
term. - A private corporation may extend or shorten its term
corporation incorporated under this Code has the power and
as stated in the articles of incorporation when approved by a
capacity:
majority vote of the board of directors or trustees and
ratified at a meeting by the stockholders representing at least
1. To sue and be sued in its corporate name; two-thirds (2/3) of the outstanding capital stock or by at least
two-thirds (2/3) of the members in case of non-stock
2. Of succession by its corporate name for the corporations. Written notice of the proposed action and of
period of time stated in the articles of incorporation the time and place of the meeting shall be addressed to each
and the certificate of incorporation; stockholder or member at his place of residence as shown on
the books of the corporation and deposited to the addressee
3. To adopt and use a corporate seal; in the post office with postage prepaid, or served personally:
Provided, That in case of extension of corporate term, any
4. To amend its articles of incorporation in dissenting stockholder may exercise his appraisal right under
accordance with the provisions of this Code; the conditions provided in this code. (n)

5. To adopt by-laws, not contrary to law, morals, or Section 38. Power to increase or decrease capital
public policy, and to amend or repeal the same in stock; incur, create or increase bonded indebtedness. - No
accordance with this Code; corporation shall increase or decrease its capital stock or
incur, create or increase any bonded indebtedness unless
approved by a majority vote of the board of directors and, at
6. In case of stock corporations, to issue or sell
a stockholder's meeting duly called for the purpose, two-
stocks to subscribers and to sell stocks to
thirds (2/3) of the outstanding capital stock shall favor the
subscribers and to sell treasury stocks in accordance
increase or diminution of the capital stock, or the incurring,
with the provisions of this Code; and to admit
creating or increasing of any bonded indebtedness. Written
members to the corporation if it be a non-stock
notice of the proposed increase or diminution of the capital
corporation;
stock or of the incurring, creating, or increasing of any
bonded indebtedness and of the time and place of the
7. To purchase, receive, take or grant, hold, convey, stockholder's meeting at which the proposed increase or
sell, lease, pledge, mortgage and otherwise deal diminution of the capital stock or the incurring or increasing
with such real and personal property, including of any bonded indebtedness is to be considered, must be
securities and bonds of other corporations, as the addressed to each stockholder at his place of residence as
transaction of the lawful business of the corporation shown on the books of the corporation and deposited to the
may reasonably and necessarily require, subject to
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addressee in the post office with postage prepaid, or served of the corporation lawfully holding office at the time of the
personally. filing of the certificate, showing that at least twenty-five
(25%) percent of such increased capital stock has been
A certificate in duplicate must be signed by a majority of the subscribed and that at least twenty-five (25%) percent of the
directors of the corporation and countersigned by the amount subscribed has been paid either in actual cash to the
chairman and the secretary of the stockholders' meeting, corporation or that there has been transferred to the
setting forth: corporation property the valuation of which is equal to
twenty-five (25%) percent of the subscription: Provided,
(1) That the requirements of this section have been further, That no decrease of the capital stock shall be
complied with; approved by the Commission if its effect shall prejudice the
rights of corporate creditors.
(2) The amount of the increase or diminution of the
capital stock; 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-
(3) If an increase of the capital stock, the amount of thirds (2/3) of the members in a meeting duly called for the
capital stock or number of shares of no-par stock purpose.
thereof actually subscribed, the names, nationalities
and residences of the persons subscribing, the
amount of capital stock or number of no-par stock Bonds issued by a corporation shall be registered with the
subscribed by each, and the amount paid by each on Securities and Exchange Commission, which shall have the
his subscription in cash or property, or the amount authority to determine the sufficiency of the terms thereof.
of capital stock or number of shares of no-par stock (17a)
allotted to each stock-holder if such increase is for
the purpose of making effective stock dividend Section 39. Power to deny pre-emptive right. - All
therefor authorized; stockholders of a stock corporation shall enjoy pre-emptive
right to subscribe to all issues or disposition of shares of any
(4) Any bonded indebtedness to be incurred, class, in proportion to their respective shareholdings, unless
created or increased; such right is denied by the articles of incorporation or an
amendment thereto: Provided, That such pre-emptive right
shall not extend to shares to be issued in compliance with
(5) The actual indebtedness of the corporation on laws requiring stock offerings or minimum stock ownership
the day of the meeting; by the public; or to shares to be issued in good faith with the
approval of the stockholders representing two-thirds (2/3) of
(6) The amount of stock represented at the meeting; the outstanding capital stock, in exchange for property
and needed for corporate purposes or in payment of a previously
contracted debt.
(7) The vote authorizing the increase or diminution
of the capital stock, or the incurring, creating or Section 40. Sale or other disposition of assets. -
increasing of any bonded indebtedness. Subject to the provisions of existing laws on illegal
combinations and monopolies, a corporation may, by a
Any increase or decrease in the capital stock or the majority vote of its board of directors or trustees, sell, lease,
incurring, creating or increasing of any bonded indebtedness exchange, mortgage, pledge or otherwise dispose of all or
shall require prior approval of the Securities and Exchange substantially all of its property and assets, including its
Commission. goodwill, upon such terms and conditions and for such
consideration, which may be money, stocks, bonds or other
One of the duplicate certificates shall be kept on file in the instruments for the payment of money or other property or
office of the corporation and the other shall be filed with the consideration, as its board of directors or trustees may deem
Securities and Exchange Commission and attached to the expedient, when authorized by the vote of the stockholders
original articles of incorporation. From and after approval by representing at least two-thirds (2/3) of the outstanding
the Securities and Exchange Commission and the issuance capital stock, or in case of non-stock corporation, by the vote
by the Commission of its certificate of filing, the capital of at least to two-thirds (2/3) of the members, in a
stock shall stand increased or decreased and the incurring, stockholder's or member's meeting duly called for the
creating or increasing of any bonded indebtedness purpose. Written notice of the proposed action and of the
authorized, as the certificate of filing may declare: Provided, time and place of the meeting shall be addressed to each
That the Securities and Exchange Commission shall not stockholder or member at his place of residence as shown on
accept for filing any certificate of increase of capital stock the books of the corporation and deposited to the addressee
unless accompanied by the sworn statement of the treasurer in the post office with postage prepaid, or served personally:
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Provided, That any dissenting stockholder may exercise his directors or trustees and ratified by the stockholders
appraisal right under the conditions provided in this Code. representing at least two-thirds (2/3) of the outstanding
capital stock, or by at least two thirds (2/3) of the members
A sale or other disposition shall be deemed to cover in the case of non-stock corporations, at a stockholder's or
substantially all the corporate property and assets if thereby member's meeting duly called for the purpose. Written
the corporation would be rendered incapable of continuing notice of the proposed investment and the time and place of
the business or accomplishing the purpose for which it was the meeting shall be addressed to each stockholder or
incorporated. member at his place of residence as shown on the books of
the corporation and deposited to the addressee in the post
After such authorization or approval by the stockholders or office with postage prepaid, or served personally: Provided,
members, the board of directors or trustees may, That any dissenting stockholder shall have appraisal right as
nevertheless, in its discretion, abandon such sale, lease, provided in this Code: Provided, however, That where the
exchange, mortgage, pledge or other disposition of property investment by the corporation is reasonably necessary to
and assets, subject to the rights of third parties under any accomplish its primary purpose as stated in the articles of
contract relating thereto, without further action or approval incorporation, the approval of the stockholders or members
by the stockholders or members. shall not be necessary. (17 1/2a)

Nothing in this section is intended to restrict the power of Section 43. Power to declare dividends. - The
any corporation, without the authorization by the board of directors of a stock corporation may declare
stockholders or members, to sell, lease, exchange, mortgage, dividends out of the unrestricted retained earnings which
pledge or otherwise dispose of any of its property and assets shall be payable in cash, in property, or in stock to all
if the same is necessary in the usual and regular course of stockholders on the basis of outstanding stock held by them:
business of said corporation or if the proceeds of the sale or Provided, That any cash dividends due on delinquent stock
other disposition of such property and assets be appropriated shall first be applied to the unpaid balance on the
for the conduct of its remaining business. 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
In non-stock corporations where there are no members with stock dividend shall be issued without the approval of
voting rights, the vote of at least a majority of the trustees in stockholders representing not less than two-thirds (2/3) of
office will be sufficient authorization for the corporation to the outstanding capital stock at a regular or special meeting
enter into any transaction authorized by this section. duly called for the purpose. (16a)

Section 41. Power to acquire own shares. - A stock Stock corporations are prohibited from retaining surplus
corporation shall have the power to purchase or acquire its profits in excess of one hundred (100%) percent of their
own shares for a legitimate corporate purpose or purposes, paid-in capital stock, except: (1) when justified by definite
including but not limited to the following cases: Provided, corporate expansion projects or programs approved by the
That the corporation has unrestricted retained earnings in itsboard of directors; or (2) when the corporation is prohibited
books to cover the shares to be purchased or acquired: under any loan agreement with any financial institution or
creditor, whether local or foreign, from declaring dividends
1. To eliminate fractional shares arising out of stock without its/his consent, and such consent has not yet been
dividends; secured; or (3) when it can be clearly shown that such
retention is necessary under special circumstances obtaining
2. To collect or compromise an indebtedness to the in the corporation, such as when there is need for special
corporation, arising out of unpaid subscription, in a reserve for probable contingencies. (n)
delinquency sale, and to purchase delinquent shares sold
during said sale; and Section 44. Power to enter into management
contract. - No corporation shall conclude a management
3. To pay dissenting or withdrawing stockholders entitled to contract with another corporation unless such contract shall
payment for their shares under the provisions of this Code. have been approved by the board of directors and by
(a) stockholders owning at least the majority of the outstanding
capital stock, or by at least a majority of the members in the
Section 42. Power to invest corporate funds in case of a non-stock corporation, of both the managing and
another corporation or business or for any other purpose. - the managed corporation, at a meeting duly called for the
Subject to the provisions of this Code, a private corporation purpose: Provided, That (1) where a stockholder or
may invest its funds in any other corporation or business or stockholders representing the same interest of both the
for any purpose other than the primary purpose for which it managing and the managed corporations own or control
was organized when approved by a majority of the board of more than one-third (1/3) of the total outstanding capital

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stock entitled to vote of the managing corporation; or (2)
where a majority of the members of the board of directors of
the managing corporation also constitute a majority of the
members of the board of directors of the managed
corporation, then the management contract must be
approved by the stockholders of the managed corporation
owning at least two-thirds (2/3) of the total outstanding
capital stock entitled to vote, or by at least two-thirds (2/3)
of the members in the case of a non-stock corporation. No
management contract shall be entered into for a period
longer than five years for any one term.
The provisions of the next preceding paragraph shall apply
to any contract whereby a corporation undertakes to manage
or operate all or substantially all of the business of another
corporation, whether such contracts are called service
contracts, operating agreements or otherwise: Provided,
however, That such service contracts or operating
agreements which relate to the exploration, development,
exploitation or utilization of natural resources may be
entered into for such periods as may be provided by the
pertinent laws or regulations. (n)
Section 45. Ultra vires acts of corporations. - No
corporation under this Code shall possess or exercise any
corporate powers except those conferred 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)
Section 36
 Where should the corporation be sued?
- principal office is important because it establishes
the residence of the corporation and determining
service of summons, venue of action
- it can be sued in the city or municipality where its
principal office is found
 Principal office is also important for venue of
meetings
 Non-stock corporation may provide in its by-laws
that the venue of meeting be anywhere in the
Philippines
 Upon whom service of summons be made?
- Section 11. Service upon domestic private juridical
entity- when the defendant is a corporation,
partnership or association organized under the laws
of the Philippines with a juridical personality,
service may be made upon the president, managing
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partner, general manager, corporate secretary,
treasurer, or in house counsel.
Delta motor vs. Mangosing
- strict compliance is necessary
- should be served to those named in the statute
- secretary of a dep’t are not those included in the
statute
E.B. Villarosa vs. Benito
- decision En Banc repeals all other pronouncement
- section 13 Rule 14 was repealed
- the old rules was ambiguous and broad and at all
time illogical
 the particular revision under Section 11 of Rule 14
was explained by retired Supreme Court Justice
Florenz Regalado, thus:
“xxx the then section 13 of this Rule
allowed service upon a defendant
corporation to “be made on the president,
manager, secretary, cashier, agent or any
of its directors.” The aforesaid terms were
obviously ambiguous and susceptible of
broad and sometimes illogical
interpretations, especially the word
“agent” of the corporation. The Filoil case,
involving the litigation lawyer of the
corporation who precisely appeared to
challenge the validity of service of
summons but whose very appearance for
that purpose was seized upon to validate
the defective service, is an illustration of
the need for this revised section with
limited scope and specific terminology.
Thus the absurd result in the Filoil case
necessitated the amendment permitting
service only on the in-house counsel of the
corporation who is in effect an employee
of the corporation, as distinguished from
an independent practitioner.”
o notes: additional knowledge
- special appearance enter for that particular
appearance you are not the counsel in the case
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- would apply only if it does not involve an intra- - Exception to the rule in the constitution
corporate controversy (controversy between and
among the stockholders) - Alienable public land

- upon any of the statutory officers or officers fixed - Converts the property to a private land
in the by-laws any secretary, any of the directors; automatically once converted it can now be
any managers in the by-laws registered

 Seal  Power to make donation

- merely ministerial or permissive - Limitation section 36 par.9

 Power to amend - These are circumstances, however, under which a

donation by a corporation may be to its benefit as a
- section 16 means of increasing its business or promoting
patronage. Thus, paragraph 9 of section 36
- special 37,38,120 expressly authorizes a corporation to make
donations. The only limitations imposed are the
 Power to adopt by-laws
following:
- section 46-48
1. The donation must be “reasonable”;
 Power to issue or sell stocks and to admit members
2. It must be for public welfare, or for hospital,
- stock of stockholders and provision governing non- charitable, scientific, cultural or similar purpose;
stock and,

 Power to acquire or alienate real or personal 3. It shall not be in aid of political party or candidate,
property or for purposes of partisan political activity.

 Power to establish pension

- is there any limitation? YES
- Include any act to promote and improve the
- Two specific limitation
convenience, welfare and benefit of the employees
1. Section 36, as lawful transactions of business of the or offices
corporation may reasonably and necessarily require
Republic vs. Acoje
2. Constitution and law
- While as a rule an ultra-vires act is one committed
Luneta vs. A.D. Santos outside the object for which a corporation is
created as defined by law, there are however
- Importance of the purpose clause certain corporate acts that may be performed
outside of the scope of the powers expressly
- Cannot have the power to acquire conferred if they are necessary to promote the
interest or welfare of the corporation. Thus, it has
- Cannot engage in land transportation
been held that “although not expressly authorized
- Doctrine of limited capacity to do so a corporation may become a surety where
the particular transaction is reasonably necessary or
Gov’t vs. El Hogar proper to the conduct of its business,” and here it is
undisputed that the establishment local post office
- As the lawful transaction of its business may is a reasonable and proper adjunct to the conduct of
reasonably represent the business of appellant company. Indeed, such
post office is a vital improvement in the living
Director of Lands vs. CA condition of its employees and laborers who came

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to settle in its mining camp which is far removed
from the postal facilities or means of
communication accorded to people living in a city
or municipality.
 Power to exercise such other powers essential or
necessary to carry out its purpose (implied power)
1. Acts in the usual course of business;
2. Acts to protect debts owing to the corporation;
3. Embarking in a different business;
4. Acts in part or wholly to protect or aid employees;
and,
5. Acts to increase business
Teresa Electric and Power Co. vs. P.S.C.
- Examined the articles of incorporation to arrive at
its decision
National Power vs. Vera
- For purpose of prohibiting the NAPOCOR
- The court must decide whether or not a logical and
necessary relation exists between the act
questioned and the corporate purpose expressed in
the NPC charter
 Importance of PLACE of registration
- Residence
- Venue
- Place of meetings
- Place or registration of chattel mortgage
 Power to extend its terms
- Once its term expires, already dissolved
automatically, thus can no longer ask for extension
- After dissolution, it has 3 years to windup
 What are the modes of increasing capital stock?
1. Increasing the par value of the existing number of
shares without increasing the number of shares;
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2. Increasing the number of existing shares without
increasing the par value thereof; and,
3. Increasing the number of existing shares and at the
same time increasing the par value of the shares.
 Why a corporation increases it capital stock?
- Generate funds, business expansion, or payment of
liabilities, purposes of acquiring other business.
(example: to buy cars for the officers, purpose of
acquiring other business, expansion, other valid
reasons)
 How do you decrease capital stock and why a
corporation decreases?
- Reduce or wipeout existing deficit where no
creditors would thereby be effected
- When capital is more than necessary to procreate
the business or reduction of capital surplus
- To write down the value of its fixed assets to reflect
those present and actual
o NOTE: any increase or decrease of capital stock
requires approval of government agency like SEC it
can never take place unless SEC approves the same
 Relevance of decrease of capital?
1. To reduce or wipe out existing deficit where no
creditors would thereby be affected;
2. When the capital is more than what is necessary to
procreate the business or reduction of capital
surplus; or,
3. To write down the value of its fixed assets to reflect
there present actual value in case where there is a
decline in the value of the fixed assets of the
corporation.
- Examples: Php 10M capital for grocery business,
mayor didn’t want to issue license/permit because
mayor has 3 other grocery stores, only allowed sari-
sari store permit, reduce capital for sari-sari so that
the money will not sleep in bank
- Example: car rental agencies-Php 10M capital for
20 taxi’s, after some time each taxi is only 250K,
nagmura ang taxi, to reduce capital is to show
actual assets

 Limitation imposed by law
- Decrease shall not in any way affect the rights of
the creditors
 Philippine Trust Company vs. Rivera
- Without the appraisal of SEC, a decrease in capital
stocks has no effect
 TRUST FUND DOCTRINE:
- Subscription to capital stock of a corporation
constitute a fund to which the creditors have a right
to look upon for satisfaction of their claims and that
the assignee in insolvency can maintain an action
upon any unpaid stock subscription in order to
realize assets for the payment of its debts.
Madrigal vs. Zamora
- Decrease in capital has a subterfuge to evade
payment
- Thus not valid and effective
- Must not prejudice creditors which includes the
employees
 Bond
- Commonly understood as an obligation of a state,
its subdivision or a private corporation, represented
by a certificate or an instrument for the principal
and by detachable coupons for the payment of
interests. In its simplest term, it is one where an
obligor obliges himself to pay a certain sum of
money to another at a day named.
- There are different kinds of bond but before they
may be issued or floated by the corporation, the
same must be registered and approved by the SEC
subject to the rules and regulations that may be
adopted by that agency. The procedure and
requirements set forth in section 38 is the same as
in increasing or decreasing the capital stock except
that the certificate does not have to state the matters
required in sub-section 2 & 3 thereof.
 Pre-emptive rights
- A right granted by law to all existing stockholders
of a stock corporation to subscribe to all issues or
disposition of shares of any class, in proportion to
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their respective stockholdings, subject only to the
limitations imposed under section 39 of the Code.
- Internationally granted
 Pre-emptive rights, why it is granted?
- In order that the existing stockholders may maintain
their proportionate right as not to dilute their right
 Power to deny pre-emptive rights
Section 39. Power to deny pre-emptive
right. - All stockholders of a stock corporation shall
enjoy pre-emptive right to subscribe to all issues or
disposition of shares of any class, in proportion to
their respective shareholdings, unless such right is
denied by the articles of incorporation or an
amendment thereto: Provided, That such pre-
emptive right shall not extend to shares to be issued
in compliance with laws requiring stock offerings
or minimum stock ownership by the public; or to
shares to be issued in good faith with the approval
of the stockholders representing two-thirds (2/3) of
the outstanding capital stock, in exchange for
property needed for corporate purposes or in
payment of a previously contracted debt.
 May it be denied? How?
- Yes, if provided by articles of incorporation or by
an amendment
- However, pre-emptive rights is unavailable to
shares in trading in stock exchange otherwise
stockholders must waive first their right before they
may sell such.
 Exceptions
1. When the shares to be issued is in compliance
with laws requiring stock offerings or
minimum stock ownership by the public
2. Shares to be issued in good faith with the
approval of the stockholders representing 2/3
of the outstanding capital stock either
a. In exchange for property needed for
corporate purpose or,
b. In payment of a previously contracted debt
- The exceptions, however will not apply to
stockholders of a close corporation by virtue of a

subsequent and specific provision of the Code
which provides that the “pre-emptive right of a
stockholder in a close corporation shall extend to
all stock to be issued, including reissuance of
treasury shares, whether for money, property or
personal services or in payment of a corporate debt,
unless the articles of incorporation provide
otherwise, if not entirely absolute, in that it extends
to all issuance and disposition of shares
- Such right of pre-emption may be lost by waiver of
the stockholder, expressly or impliedly by his
inability or failure to exercise it after having been
notified of the proposed issuance or disposition of
shares
 When is it unavailable?
- In shares traded openly in stock exchange/market
 Is it applicable to close corporations?
- See section 96, close corporations must provide it
first on its articles of incorporation, that its articles
does not really deny such pre-emptive rights.
 Section 102, will not apply to close corporations
 The right of pre-emptive rights is absolute in close
corporations
“All issues or depositing shares of any class” form part of
ACS
 Certain instances when a stockholder may
nevertheless be unable to exercise this right:
- Issued for public ownership
- Issued in good faith, with approval of 2/3 of
outstanding capital stock either a) in exchange for
property needed or b) for payment of a previously
contracted debt
 Pre- emptive rights of stockholders in ordinary
stock corporations may be denied
- if the shares are to be issued in compliance with
laws requiring stock offering or minimum stock
ownership by the pubic
- In exchange for property needed for corporate
purposes
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- In payment of previously contracted debts
 This rule, however, does not apply in a close
corporation as the pre-emptive rights of the
stockholders thereof is broadened to include all
issues without exceptions unless, of course, denied
or limited by the articles of incorporations. Section
102 provides:
Section 102. Pre-emptive right in close
corporations. - The pre-emptive right of
stockholders in close corporations shall extend to
all stock to be issued, including reissuance of
treasury shares, whether for money, property or
personal services, or in payment of corporate debts,
unless the articles of incorporation provide
otherwise.
 Denial will not apply to a close corporation,
ABSOLUTE
- section 96
 May a stock holder in a close corporation insist in
the exercise of his pre-emptive rights?
- Yes, section 102
 What type or shares are covered by pre-emptive
rights?
 Does it include those originally unsubscribed?
- NO. Benito vs. SEC
 Will the stockholders be able to exercise their pre-
emptive right with respect to the old unissued
shares?
- Pre-emptive rights is applicable only to new issued
shares and not to the old unissued shares because it
is presumed that the original subscribers is deemed
to have taken his shares knowing that they form a
definite proportionate part of the whole number of
authorized shares
- When the shares, left unsubscribed are re-offered,
he cannot therefore claim. DILUTION OF
INTEREST
 Will the acquiring purchaser be liable for debts of
the former corporation?
 39

- Generally no, corporate entity theory because there
may be instances when purchasing corporation may
be held liable
 May a corporation acquire its own shares?
- If the remaining unsubscribed shares are issued, it’s
an issuance of any class
 May a corporation sell/dispose all or substantially
all of its corporate assets and liabilities?

- Yes - YES

 Is there any restriction provided for by law in - 1) RESOLUTION 2) AUTHORIZATION 3)

reacquiring its own shares?
- Yes, it must have been unrestricted retained
earnings appearing in the books of corporation
 A corporation can never acquire its own shares if it
has no unrestricted retained earnings
- False, exception close corporation and redeemable
shares
RATIFICATION 4) PRIOR WRITTEN NOTICE
5) SALE SUBJECT TO PROVISIONS OF
EXITING LAWS 6) DISSENTING
STOCKHOLDERS HAVE THE RIGHT TO
EXERCISE THEIR APPRAISAL RIGHT
 If a corporation sells substantially all of it assets
and properties, will the buyer assume liability?
- NO, EXCEPT

EXAMPLE: 1) Express or implied agreement to the purchase

ACS 2M 2) Where the transaction amounts to consolidation or
merger of the corporations
SUBSCRIBED 1M
3) When purchasing corporation is merely a
PAID UP 1M
continuation of the selling corporation
1 100K
4) Where the transaction is entered into fraudulently in
2 100K order to escape liability for such debt

TO  Legitimate purpose: for a corporation to reacquire

its own shares
10 100K
- Limitation: it must have surplus/unrestricted
 If 1-5 became 200K each, may 6-10 demand the retained earnings
exercise their pre-emptive right?
- Exception: may redeem irrespective of unrestricted
- YES retained earnings

 May 1-5 subscribe to the unsubscribed capital stock 1) Exercise of stockholders’ right to compel “close
to the exclusion of 6-10? corporation” to purchase his shares

- If a corporation makes 2M unrestricted retained 2) Where corporation has sufficient assets in its books
earnings, it is the shares and not the number of to cover its debts and liabilities exclusive of capital
persons that matters stock

 May 6-10 complain for a dilution of their interest? ACS 1M

- YES, it’s an internationally recognized right SUBSRIBED 1M

because it includes “all issues and disposition of
shares of any class” and all kinds of shares new or PAID-UP 1M
old
ASSETS 500K

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 40

1M PROFITS 5. The sale of the assets shall be subject to the

provisions of existing laws on illegal combinations
- 500K LIABILITIES and monopolies

____________________ 6. Any dissenting stockholder shall have the option to

exercise his appraisal right
500K RESERVES IN A CLOSE
CORPORATION IT CAN USE THIS TO REACQUIRE IDP vs. CA
ISSUED STOCKS
- Consent of the members was not secured
X – REALTY CORPORATION
Edward Nell Co. vs. Pacific Farms
 THE ONLY
PROPERTY OF THE - Generally where one corporation sells or otherwise
CORPORATION transfers all of its assets to another corporation, the
latter is not liable for the debts and liabilities of the
 BOARD OF transferor, except:
DIRECTORS
DECIDED TO SELL IT 1. Where the purchaser expressly or impliedly
agrees to assume such debts;
Will it need the approval of the stockholders?
2. Where the transaction amounts to a
- NO, if the same is necessary in the usual and consolidation or merger of the corporations;
regular course of business of said corporation or if
the proceeds of the sale or other disposition of such 3. Where the purchasing corporation is merely a
property and assets be appropriated for the conduct continuation of the selling corporation;
of its remaining business
4. Where the transaction is entered into
 If X is a manufacturing company, then it can sell its fraudulently in order to escape liability for such
only property upon approval of the stockholders debts.
because it will render itself capable of continuing
its business, BUT if the proceeds will be used to  Power to acquire own shares
purchase a better one for the continuance of its
business, then it does not need the approval of the Section 41. Power to acquire own shares.
- A stock corporation shall have the power to
stockholders
purchase or acquire its own shares for a legitimate
corporate purpose or purposes, including but not
 Conditions for the valid exercise of this power are
limited to the following cases: Provided, That the
the following corporation has unrestricted retained earnings in its
books to cover the shares to be purchased or
1. Resolution by the majority vote of the board of acquired:
directors/trustees
1. To eliminate fractional shares arising out of stock
2. Authorization from the stockholders representing at dividends;
least 2/3 of the outstanding capital stock or 2/3 of
the members; 2. To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a
3. The ratification of the stockholders or members delinquency sale, and to purchase delinquent shares
must be made at a meeting duly called for that sold during said sale; and
purpose
3. To pay dissenting or withdrawing stockholders
4. Prior written notice of the proposed action and of entitled to payment for their shares under the
the time and place of meeting must be made provisions of this Code. (a)
addressed to all stockholders of record, either by
mail or personal service;
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 The corporation must at all times have “unrestricted
retained earnings” to exercise this corporate power
Steinberg vs. Velasco
- For as long as there are debts and liabilities, a
corporation may not reacquire its shares (subject to
exceptions)
- Creditors of a corporation have the right to assume
that so long as there are outstanding debts and
liabilities, the board of directors will not use the
assets of the corporation to purchase its own stock,
and that it will not declare dividends to
stockholders when the corporation is insolvent.
 Power to invest funds <sec.42>
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: 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)
- For any other purpose other than the primary
purpose, stockholder’s consent or approval is
necessary
- Thus, if it’s for the secondary purpose, it is
necessary
- If it’s in connection with the primary purpose, only
board resolution is necessary
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 Requirements and steps to be followed for a valid
investment of corporate funds are:
1. Resolution by the majority of the board of directors
or trustees;
2. Ratification by the stockholders representing at
least 2/3 of the outstanding capital stock or 2/3 of
the members in case of non-stock corporations;
3. The ratification must be made at a meeting duly
called for that purpose;
4. Prior written notice of the proposed investment and
the time and place of the meeting shall be made,
addressed to each stockholder or member by mail
or by personal service, and;
5. Any dissenting stockholder shall have the option to
exercise his appraisal right
Dela rama vs. Ma-ao Sugar
- There is a substantial and not remote connection
between the sugar bags and the sugar manufacture,
thus stockholder’s approval is not necessary for
validity
- A private corporation, in order to accomplish its
purpose as stated in its articles of incorporation, and
imposed by the Corporation Law, has the power to
acquire, hold, mortgage, pledge, or dispose of
shares bonds, securities and other evidences of
indebtedness of any domestic or foreign
corporation. Such an act, if done in pursuance of
the corporate purpose, does not need the approval
of the stockholders; but when the purchase of
shares of another corporation is done solely for
investment and not to accomplish the purpose of its
incorporation, the vote of approval of the
stockholders is necessary.
Gokongwei vs. SEC
- Investments made by SMC is necessarily connected
with its primary purpose and this was ratified in a
meeting
- Submission of previous action is a sound corporate
practice
 Redeemable shares
 Closed corporation (see section 105)

- For any reason, compel the value of shares
“withdrawal shares” provided corporation has
sufficient funds to cover its debts and liabilities
Section 105. Withdrawal of stockholder or
dissolution of corporation. - In addition and
without prejudice to other rights and remedies
available to a stockholder under this Title, any
stockholder of a close corporation may, for any
reason, compel the said corporation to purchase his
shares at their fair value, which shall not be less
than their par or issued value, when the corporation
has sufficient assets in its books to cover its debts
and liabilities exclusive of capital stock: Provided,
That any stockholder of a close corporation may, by
written petition to the Securities and Exchange
Commission, compel the dissolution of such
corporation whenever any of acts of the directors,
officers or those in control of the corporation is
illegal, or fraudulent, or dishonest, or oppressive or
unfairly prejudicial to the corporation or any
stockholder, or whenever corporate assets are being
misapplied or wasted.
 If shares are reacquired, what happens?
- It becomes treasury shares
 Stockholder’s consent/ approval is not necessary
and mere board action is sufficient if in accordance
with primary purpose
 The logical relation of act done and primary
purpose of corporation and between the board of
directors to undertake submission of acts is a sound
corporate practice
 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 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)
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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)
 What are dividends?
- Corporate profits set aside, declared and ordered by
the Board of Directors to be paid to the
stockholders.
 What are property dividends?
- Those paid in property surplus
 Like tables and chairs? Can tables and chairs make
surplus profits?
- No, they do not make surplus, bonds, etc.
 Where should dividends come from?
- Stock dividends are declared as stocks coming from
corporation
 Who declares dividends to be declared? Do
stockholders have any say?
- Board of Directors, if stock approval of 2/3
outstanding capital stock
ACS-1M SUB-1M P.U.-1M 1M-
U.R.E. (surplus profits of the corporation)
1-100k
2-100k
To
10-100k
1M
 43

 Board decides to declare 1M, how much will each - REMAINS THE SAME
receive? May the board declare stock dividend
- Exception: when stock dividends will result in a
- NO. that would be over issuance of shares, fractional share
violation of securities regulation code
ACS-2M 1-100K 200 (10%)
- It must have a free portion *VOTING AND DIVIDEND RIGHTS STILL
THE SAME
- The corporation may increase its capital
SUB-1M TO
 Z co. 1M to X Co. is 2/3 of Xco. Stockholders 10%
reacquired?
PU-1M 10-100K
- No, because in property 2/3 is not required
ACS 2M
 What is the effect of declaration of dividends with
regards to the assets of a company? SUB 1M

- As compared to stock dividends, the declaration of PU 1M

cash or property dividends have the effect of
1M RE
reducing corporate assets to the extent of dividends
declared. 1 100K
- Neither would stock dividends increase the 2 100K
proportionate interest of the stockholders of the
corporation although it will have the effect of TO
increasing the subscribed and paid-up capital of the
corporation. It gives the stockholders nothing in the 10 100K
way of distribution of assets but merely divides his
1M
existing shares into smaller units.
 May they be compelled?
 Earnings belong to the corporation until declared or
given - NO. You cannot declare if it does not come from
unrestricted retained earnings.
 Revocation
1. 1M-U.R.E. (is it true there is no way to compel?)
- No revocation of dividend may be has unless it has
not been officially communicated to the 2. 2M-U.R.E.
stockholders or is in the form of stock dividends
which is revocable at any time prior to distribution.  May they be compelled to declare dividends

 Stock dividends- no reduction, you capitalize your - Mandatory if earned, the board may be compelled
restricted retained earnings, what is issued is a to declare dividends
piece of paper. The restricted earnings remain in the
corporation - if exceeds 100% of the paid-up capital the boards
may be compelled
 Cash and property- reduces corporate assets
ACS 2M 1M U.R.E.
 Stock dividends increase corporate assets? No, it
will only have the effect of increasing the SUB 1M
subscribed and paid-up capital of the corporation
PU 800K
 Will there be a corresponding increase in their
proportionate interest? 1-100K 50K PU

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2-100K 50K  Insofar as 1 and Y who has a better right? Already

TO
10-100K
1M
 Will 1 and 2 receive full amount of dividends?
- YES. They are entitled however if they are declared
delinquent, the amount due them shall first be
applied to his delinquency plus expenses.
 Delinquency occurs, you are called to pay, but you
failed to pay. In case of stock dividend, the
delinquent stock holder will not be entitled thereto
until he has paid his subscription in full.
 Are non-stockholders entitled to receive dividends?
- No, tock dividends are civil fruits of the original
investment, and to the owners of the shares belong
the civil fruits.
 How did the court decide dividends in the case of
Neilsen
declared, but not yet paid?
- Right to receive vest upon declaration. Who ever
owns at the time of declaration owns the dividends
- Unless there is a stipulation to the contrary
 TRUST FUND DOCTRINE
- The power to declare it if paid-up capital is not
maintained or is impaired
- Trust fund must be kept intact for the protection of
creditors who have the right to rely on such
subscription and the paid-up capital for the
satisfaction of their claims
 Cannot accumulate surplus unreasonably
 Basis is the paid-up capital
 Entitled to dividends
 Irrespective of whether the subscription is full
 Illegally declared

- Stock dividends cannot be issued to a person who is - Declare dividend with the belief that it formed part
not a stockholder in payment of services rendered. of the U.R.E., but yun pala sa capital

- Whether cash, property or stock, only stockholders  Directors are not liable, unless sec31 acted in bad
may receive dividends. Dividends are fruits of faith or gross negligence in the conduct of
investments. They come from the U.R.E. or surplus corporate affairs
profits of the corporation.
 Directors even if acting in behalf of the corporation,
ACS 2M 1M U.R.E. may still be held solidarily liable

SUB 1M JULY 24 DECLARATION  Power to enter into management contract

JULY 31
- New provision
PU 1M
Section 44. Power to enter into
1 100K 100T JULY 26-Y(NEW management contract. - No corporation shall
ONE WAS DECLARED TO Y) JULY 30- conclude a management contract with another
100K corporation unless such contract shall have been
approved by the board of directors and by
2 stockholders owning at least the majority of the
outstanding capital stock, or by at least a majority
TO TO HAVE THE TRANSFER of the members in the case of a non-stock
RECORDED corporation, of both the managing and the managed
corporation, at a meeting duly called for the
purpose: Provided, That (1) where a stockholder or
10 100K
stockholders representing the same interest of both
the managing and the managed corporations own or
1M
control more than one-third (1/3) of the total
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outstanding capital stock entitled to vote of the
managing corporation; or (2) where a majority of
the members of the board of directors of the
managing corporation also constitute a majority of
the members of the board of directors of the
managed corporation, then the management
contract must be approved by the stockholders of
the managed corporation owning at least two-thirds
(2/3) of the total outstanding capital stock entitled
to vote, or by at least two-thirds (2/3) of the
members in the case of a non-stock corporation. No
management contract shall be entered into for a
period longer than five years for any one term.
The provisions of the next preceding
paragraph shall apply to any contract whereby a
corporation undertakes to manage or operate all or
substantially all of the business of another
corporation, whether such contracts are called
service contracts, operating agreements or
otherwise: Provided, however, That such service
contracts or operating agreements which relate to
the exploration, development, exploitation or
utilization of natural resources may be entered into
for such periods as may be provided by the
pertinent laws or regulations. (n)
 The requirement for a valid management contract
are as follows:
1. Resolution of the board of directors
2. Approval by the stockholders holding or
representing a majority of the outstanding capital
stock or majority of the members in case of non-
stock corporation of both the managing and the
managed corporation
3. The approval of the stockholders or members must
be made at the meeting called for that purpose
4. The contract shall not be for a period longer than 5
years for any one term, except those which relate to
exploration, development or utilization of natural
resources which may be entered into for such
periods as may be provided by pertinent laws and
regulations
 Every corporate act emanates from the BOARD
 Is the voting requirements of a majority stockholder
ABSOLUTE?
- Not only a majority but 2/3 of the outstanding
capital stock or 2/3 of the members in a non-stock
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corporation would be required for the approval of a
management contract in the following instances:
1. Where the stockholders representing the same
interest of both the managing and managed
corporation own or control more than 1/3 of the
total outstanding capital stock of the managing
corporation; and
2. Where a majority of the members of the board of
directors of the managing corporation also
constitute a majority of the directors of the
managed corporation
3. Where the contract would constitute the
management or operation of all or substantially all
of the business of another corporation, whether
such contracts are called service contracts. If it will
not constitute the management of all or
substantially all of the business of another
corporation the first paragraph of section 44 will
apply and not that of the second, that is, only the
vote of the stockholders holding or representing at
least a majority of the outstanding capital stock or
majority of the members in the case of non-stock
corporation will be required.
 How long?
- Not longer than 5 years for any one term
- Exception: exploration, development or utilization
of natural resources
 What is an ultra-vires act or contract?
- Doctrine of limited capacity. Corporation can do
such acts and things as it is allowed to do
- Acts beyond it will be ultra vires, allowing a
collateral attack
- If not illegal per se merely voidable. Can be ratified
expressly or impliedly or even stopped as equitable
grounds
- Ultra-vires acts which are not illegal per se may
become binding and enforceable either by
satisfaction, estoppels or equitable grounds
 Consequences of ultra-vires acts?
1. On the corporation itself

- The proper forum, in accordance with the
provisions of PD 902-A, as amended and R.A. No.
8799 may suspend or revoke, after proper notice
and hearing, the franchise or certificate of
registration of the corporation for serious
misrepresentation as to what the corporation can do
or is doing to the great damage or prejudice of the
general public
2. On the rights of the stockholders
- A stockholder may bring either an individual or
derivative suit to enjoin a threatened ultra-vires act
or contract. If the act or contract has already been
performed, a derivative suit for damages against the
directors may be filed, but their liability will
depend on whether they acted in good faith and
with reasonable diligence in entering into the
contract.
3. On the immediate parties
- The courts have not agreed as to the legal effect of
a corporate contract outside of its authorized
business but Ballatine gives the following summary
of the doctrines evolved:
a. If the contract is fully executed on both sides,
the contract is effective and the courts will no
interfere to deprive either party of what has
been acquired under it
b. If the contract is executory on both sides, as a
rule, neither party can maintain an action for its
non-performance
c. Where the contract is executor on one side
only, and has been fully performed on the
other, the courts differ as to whether an action
will lie on the contract against the party who
has received benefits of performance under it.
Majority of the courts, however, hold that the
party who has received benefits from the
performance is estopped to set up that the
contract is ultra-vires to defeat an action on the
contract. This is more in conformity with the
doctrine that no person shall be allowed to
enrich himself at the expense of another
Privano vs. Dela Rama
- Court looked into the purpose clause
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- The purpose clause empowers and limits
- Articles likewise provide that it may deal with any
of its money
- “deal” broad enough to cover the donation it is not
then ultra-vires
- Not illegal per se hence (law of agency) excess
powers are subject to ratification
- Ratified by passing the resolution in question
Carlos vs. Mindoro sugar Co.
- PTC- trust company as such, it also has implied
powers as to make them more attractable
- Not ultra-vires in pursuance of its legitimate
business
Japanese war notes vs. SEC
- Non-stock corporations cannot make profits and
distribute profits to its shareholders
- Ultra-vires because Japanese war notes is a non-
stock corporation
Crisologo-Jose vs. CA (ALWAYS ASKED BY
DEAN SUNDIANG)
- The negotiable instruments law which holds an
accommodation party liable on the instrument to a
holder for value, although such holder at the time of
taking the instrument knew him to be only an
accommodation party, does not include nor apply to
corporations which are accommodation parties.
This is because the issue or indorsement of
negotiable paper by a corporation without
consideration and for the accommodation of
another is ultra-vires
- Corporate officers may guarantee or endorse an
accommodation only if specifically authorized
Section 36 paragraph 11
Section 10
Section 14 and 15
 Corporate powers depend on the agreement of the
stockholders rather than any director

- It may sell and it may guarantee, contract not
necessarily illegal, it will in the absence of proof to
the contrary presumed within its power.
Corporations are presumed to contract with in its
powers- CARLOS CASE
- Purpose clause may be stretched to cover PLDT
internet. It may be within its business.
- May it sell computers? NO! other line of business.
Its trading!
BY-LAWS
 By-Laws
- Rule adopted by the corporation for its internal
governance
 Is the adoption of by-laws mandatory?
 When should the by-laws be adopted or filed? Can
it not be adopted earlier?
- After incorporation- within 1 month (emanates
from the BOARD)
- Prior-more convenient (signed by the incorporators)
 Who will sign the adoption clause?
- Majority of the stockholders or members attested to
by the corporate secretary
 What happens if the corporation fails to adopt the
by-laws from the tie provided by the law? Would
there be an automatic revocation or suspension?
- Proper notice and hearing, must first be complied
with
Loyola grand villas vs. CA
- Not the SEC, but the HIGC
- Must – not always imperative
- Filing of by-laws mandatory
- Empowered by SEC
- Merely a ground, there must be proper notice and
hearing
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- Not affect the status of the corporation as a juridical
person
- Subject the corporation to a fine, as may be issued
by the SEC
 When do by-laws become effective?
- Until and unless the SEC gives it stamped of
approval
- Suspension of any government agency. The
permission must first be secured- section 46
 Elements of a valid by-law
1. It must not be contrary to law, public policy or
morals;
2. It must not be inconsistent with the articles of
incorporation;
3. It must be general and uniform in its effect or
applicable to all alike or those similarly situated;
4. It must not impair obligations and contracts or
vested rights; and’
5. It must be reasonable.
- Must not be inconsistent with existing laws. Not be
inconsistent with articles of incorporation
 By-laws
- None filing would not affect the status of the
corporation, Loyola grand villas case
- The word “must” is not always imperative
- Stockholders are conlusively presumed to know the
provisions of the by-laws
 How about 3rd persons?
- NO. unless there is actual knowledge of the same
they are not presumed to know of the provisions of
the by-laws
Fleischer vs. Botika Nolasco
- Shares of stock are personal properties
- Shares of stock may transfer to whom ever he
wishes

- The by-laws is contrary to law
 Articles of incorporation
- May provide reasonable restriction
- By-laws merely internal laws
- Articles is the contract between and among the
parties and corporation
Gov’t vs. El Hogar
- Did the court categorically ruled here that the
provision in the 5th cause of action is valid?
- Rules governing equity, considering the fact that
there was always lack of quorum
- Section 29 BOD if still constituting a quorum may
fill up a vacancy other than by removal, etc.
Gokongwei vs. SEC
- Section 48 allows a corporation to amend it by-laws
- Section 47 of the code, the by-laws may provide for
the qualification and disqualification
- It cannot be said Gokongwei has a vested rights
- Prevent directors from taking advantage of position
to promote his individual interest to the damage of
others
- The validity or reasonableness of a by-laws is a
question of law
- Subject to the limitations that reasonableness of a
by-law is a mere matter of judgment
- Rule of the majority and not the tyranny of the
minority
 May the by-laws be amended altered or appealed?
- YES. HOW? Two modes
1. By a majority vote of the directors or trustees and
the majority vote of the outstanding capital stock or
members in a non-stock corporation, at a regular or
special meeting called for that purpose;
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2. By the board of directors alone when delegated by
2/3 of the outstanding capital stock or 2/3 of the
members in a non-stock corporation.
- This delegated power, however, is considered
revoked whenever a majority of the outstanding
capital stock or members shall so vote at a regular
or special meeting.
 If it is to be amended what is the proceeding?
- Section 48 2nd paragraph provides:
Section 48. Amendments to by-laws. - The
board of directors or trustees, by a majority vote
thereof, and the owners of at least a majority of the
outstanding capital stock, or at least a majority of
the members of a non-stock corporation, at a
regular or special meeting duly called for the
purpose, may amend or repeal any by-laws or adopt
new by-laws. The owners of two-thirds (2/3) of the
outstanding capital stock or two-thirds (2/3) of the
members in a non-stock corporation may delegate
to the board of directors or trustees the power to
amend or repeal any by-laws or adopt new by-laws:
Provided, That any power delegated to the board of
directors or trustees to amend or repeal any by-laws
or adopt new by-laws shall be considered as
revoked whenever stockholders owning or
representing a majority of the outstanding capital
stock or a majority of the members in non-stock
corporations, shall so vote at a regular or special
meeting.
Whenever any amendment or new by-laws
are adopted, such amendment or new by-laws shall
be attached to the original by-laws in the office of
the corporation, and a copy thereof, duly certified
under oath by the corporate secretary and a
majority of the directors or trustees, shall be filed
with the Securities and Exchange Commission the
same to be attached to the original articles of
incorporation and original by-laws.
The amended or new by-laws shall only be
effective upon the issuance by the Securities and
Exchange Commission of a certification that the
same are not inconsistent with this Code. (22a and
23a)
Baretto vs. La Previsora
- Any corporate act emanates from the board
- Directors themselves cannot amend the by-laws if
they were not granted the same
 49

 Section 48 - It may be postponed on a reasonable date

 The power granted is not subject to revocation T or  Notice requirement?

F?
- Regular- 2 weeks prior notice
- FALSE
- Special- 1 week
 If the by-laws are amended when will they become
valid?  May the notice requirement be lessened?

- Upon issuance of the SEC that they are not
inconsistent
 What if the SEC failed to act within 10 months
without fault attributable to the corporation?
 T or F any amendment of the by-laws will never
become valid until it gives its stamp of approval
even after 1 year
- By-laws may provide a longer or a shorter duration
 What if the notice requirement is not complied
with?
 What happened to any act passed in a meeting
when notice requirement was not required with?
- Voidable, subject to ratification

- TRUE. Articles of incorporation and by-laws are Board of directors vs. Tan
different
- Notice requirement is the by-laws is a mandatory
MEETINGS requirement

 Meetings - Improperly served, any action will be invalidated at

the objection of any stockholder or member
- Meetings of stockholders 1. Date fixed in
the by-laws or by-law  Must be held in the proper place

- Meetings of director or trustees  Where should it be held?

 Meetings are regular and special
 Meetings of stockholders
 What is regular and what is special?
 When are regular meetings of the stockholders
held?
- Fixed date provided by the by-laws
 What if there is no date?
- April
 Why april?
- Point in time the audited financial statement have
been prepared
 What if in the date specified in the by-laws or by
the law itself the meeting was not convened, for
instance lack of quorum or force majeure?
- Apparent from the foregoing provision is that
meetings of stockholders must, at all times, be held
in the city or municipality where the principal
office of the corporation is located and, as far as
practicable, in the principal office of the
corporation.
 May the by-laws of a corporation provide that
meetings be held anywhere in the Philippines?
- While there is no provision authorizing a stock
corporation to hold stockholders’ meetings outside
of the City of Municipality where the principal
office is located, the law allows a non-stock
corporation to provide in its by-laws any place of
members’ meeting provided that proper notice is
sent to all members indicating the date, time and
place of the meeting which shall be within the
Philippines.

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 T or F the by-laws of a stock corporation may
validly provide that meetings shall be held
anywhere in the Philippines?
- FALSE. Non-stock corporations lang pwede
provided nakalagay sa by-laws and provided proper
notice is given
 Corporation can do only such things as the law
allows it to do, DOCTRINE OF LIMITED
CAPACITY
 San Miguel office located in Ortigas Center. May
stockholders meeting be held in PICC center?
- YES. Metro Manila, one single city
 Must be called by the proper party
 Who calls?
- President until and unless there is a provision ,
secretary on order of the president
 What if there is nobody who can call?
- The petitioner, stockholder may petition the court
 What if there is a person who can call, but he fails
or neglects to call the meeting? May a stockholder
petition to authorize a meeting?
- Ponce case only applies when there is NO person
authorized to call the meeting. If there is a person,
but neglects his duty. Ponce will not apply.
 Writ of injunction may never be issued ex parte
 Is there any exception?
- Section 28 only instance
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
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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, the call for the meeting may be addressed
directly to the stockholders or members by any
stockholder or member of the corporation signing
the demand. Notice of the time and place of such
meeting, as well as of the intention to propose such
removal, must be given by publication or by written
notice prescribed in this Code. 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)
 Cases of removal or ouster of a director
 Mandamus would be appropriate remedy if there is
a person authorized but refuses
 Quorum and voting requirement
- Majority stockholders or members constitute a
quorum
 Is the presence of the majority owners of the
outstanding capital stock ABSOLUTE to have a
quorum?
- NO. when the code requires a higher quorum it
must also be equivalent to the vote required
 Do you include non-voting shares in arriving at the
voting requirement to have a valid corporate act?
- It depends.
- Section 6 last par. If it falls within the penultimate
par. Of section 6
 Five requisites of a valid meeting
1. It must be held on the date fixed in the by-laws or
in accordance with law
2. Prior notice must be given

3. It must be held at he proper place
4. It must be called by the proper party
5. Quorum and voting requirements must be met
 Date not complied with, notice, place, not complied
with and the person who called not authorized,
what happens to any resolution called?
- Section 51, any meeting shall be valid provided all
the stockholders are present or duly represented and
provided it is within the power of the corporation.
3RD paragraph of 324
- If the voting requirement is met, any resolution
passed in the meeting, even if improperly held or
called will be valid if all the stockholders or
members are present or duly represented thereat.
The last paragraph of section 51 is clear on the
matter when it provides:
“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.”
 Directors/trustees meeting
 Regular (monthly) and special (anytime)
 May that be restricted (within or outside the Phil)
- YES. unless the by-laws provide otherwise.
 Is there any notice requirement?
- YES. 1 day unless otherwise provided by the by-
laws
 What happens if notice is not complied with?
- If the notice requirement is not complied with the
meeting is illegal and will not bind the corporation
except when subsequently ratified or in the case of
a close corporation where the act of any one
director may bind the corporation even without a
meeting under the special provision of Section 101
of the Code.
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 Can notice be waived? <sec.53>
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 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)
- YES. Expressly and impliedly
- SEC ruling
A special meeting is valid without notice
where the directors are all present or
where they consent to the meeting.
Presence at the meeting waives the want of
notice. Moreover, it has been ruled that the
meeting of the directors without a formal
call first being had, and notice thereof
given to the members, did not operate to
invalidate it or to render the proceedings
which were taken at it void, for every
member of the board were present, and
their joint action had completely bound the
corporation as if the meeting has been
called with due formality, and everyone of
the directors had received proper notice.
 What is the quorum and voting requirement in the
directors meeting?
- Majority of the members of the board of directors
(entire membership)
 Vote required to pass a valid corporate act?
- Majority of those present at which there is a
quorum (3 present, vote of 2 sufficient)

- Exception, majority of all the members of the board
in case of election of corporate officers, unless the
articles provide for a greater quorum or voting
requirement
 Should the director or trustees be physically
present?
- General rule, must sit and act as a body to have a
valid corporate act
 Five man member board, a meeting was called
today, should the physical presence or warm bodies
requires to constitute a quorum?
- NO. it is not required. Teleconference or video
conference is allowed, E- commerce law
 Membership subject to laws
 Stockholder not yet
 May director vote by proxy?
- NO
 If A is a director and a meeting is called for the
purpose of electing a new set of BOD can A vote
by proxy?
- YES. Because it is a stockholders meeting
 If directors meeting, cannot vote by proxy
 Stockholder’s right to vote
- Inherent in stock ownership
- However this right is not always inherent, because
it may be denied:
1. Redeemable and preferred shares, however if
founders shares are issued others may be
denied the right to vote.
2. May be denied by the articles of incorporation
or contracts
- When not denied they may do so in person or by
proxy
 May the right to vote by proxy be denied?
 May the articles of incorporation deny?
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 May the by-laws validly provide that proxy voting
is not allowed?
- NO
 Only non-stock may be denied proxy voting (may
be broaden, limited or denied)
 Proxy voting is a matter of right granted by law
 Requirements of a valid proxy?
- Section 58
Section 58. Proxies. - Stockholders and
members may vote in person or by proxy in all
meetings of stockholders or members. Proxies shall
in writing, signed by the stockholder or member
and filed before the scheduled meeting with the
corporate secretary. Unless otherwise provided in
the proxy, it shall be valid only for the meeting for
which it is intended. No proxy shall be valid and
effective for a period longer than five (5) years at
any one time. (n)
 How long may a proxy exist?
- Maximum of 5 years
- Valid for the meeting in which it is intended
 Is proxy revocable?
- Generally revocable, unless coupled with interest
 Revocation
- A proxy, like agency in general is revocable unless
coupled with an interest and revocation need not be
made by formal notice in writing. Revocation may
be expressed to the proxy holder, to the election
committee, by a subsequent proxy to another or by
sale of the shares. Thus it may be revoke orally by
conduct such that appearing and asserting the right
to vote at a meeting by the registered owner of the
shares revokes a proxy previously given.
 Must be submitted to a validation committee
 By-laws of non-stock corporations may deny proxy
voting
 What is voting trust agreement?

- One created by an agreement between a group of
stockholders of a corporation and a trustee, or a
group of identical agreements between individual
stockholders and a common trustee, whereby it is
provided that for a term o years or for a period
contingent upon a certain event, or until the
agreement is terminated, control over the stock
owned by such stockholders, shall be lodged in the
trustee, either with or without reservation to the
owners or persons designated by them the power to
direct how such control shall be issued.
- It is a devise of binding stockholders to vote as a
unit and thus assuring a desirable stability and
continuity in management in situations where it is
needed.
 What is the effect of a voting trust agreement
relative to the rights?
- Lee vs. CA must pass these criteria
1. That the voting rights of the stock are separated
from the other attributes of ownership;
2. That the voting rights granted are intended to be
irrevocable for a definite period of time; and,
3. That the principal purpose of the grant of voting
rights is to acquire voting control of the
corporation.
 During the duration of the trust they are irrevocable
unless there is a violation either by fraud
 Requisites
- Section 59
Section 59. Voting trusts. - One or more
stockholders of a stock corporation may create a
voting trust for the purpose of conferring upon a
trustee or trustees the right to vote and other rights
pertaining to the shares for a period not exceeding
five (5) years at any time: Provided, That in the
case of a voting trust specifically required as a
condition in a loan agreement, said voting trust may
be for a period exceeding five (5) years but shall
automatically expire upon full payment of the loan.
A voting trust agreement must be in writing and
notarized, and shall specify the terms and
conditions thereof. A certified copy of such
agreement shall be filed with the corporation and
with the Securities and Exchange Commission;
otherwise, said agreement is ineffective and
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unenforceable. The certificate or certificates of
stock covered by the voting trust agreement shall be
cancelled and new ones shall be issued in the name
of the trustee or trustees stating that they are issued
pursuant to said agreement. In the books of the
corporation, it shall be noted that the transfer in the
name of the trustee or trustees is made pursuant to
said voting trust agreement.
The trustee or trustees shall execute and
deliver to the transferors voting trust certificates,
which shall be transferable in the same manner and
with the same effect as certificates of stock.
The voting trust agreement filed with the
corporation shall be subject to examination by any
stockholder of the corporation 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.
Any other stockholder may transfer his
shares to the same trustee or trustees upon the terms
and conditions stated in the voting trust agreement,
and thereupon shall be bound by all the provisions
of said agreement.
No voting trust agreement shall be entered
into for the purpose of circumventing the law
against monopolies and illegal combinations in
restraint of trade or used for purposes of fraud.
Unless expressly renewed, all rights
granted in a voting trust agreement shall
automatically expire at the end of the agreed period,
and the voting trust certificates as well as the
certificates of stock in the name of the trustee or
trustees shall thereby be deemed cancelled and new
certificates of stock shall be reissued in the name of
the transferors.
The voting trustee or trustees may vote by
proxy unless the agreement provides otherwise.
(36a)
 Does it need to be notarized?
- Yes, otherwise it is ineffective and unenforceable
 Only legal ownership is transferred
 Being still the beneficial owner they may transfer
these rights
 54

 Is the right granted to a voting trust agreement  Voting trust agreements

absolute? (to inspect)
- Normally executed in favor of banking and
- NO. financial institutions

- The voting trust agreement filed with the - So that they can vote a certain set of directors
corporation shall be subject to examination by any
stockholder of the corporation in the same manner - They will be more secured
as any other corporate book or record. Provided,
 Voting pull agreement
that both the transfer and the trustee or trustees may
exercise the right of inspection of all corporate - Enters into an agreement
books and records in accordance with the
provisions of this Code. - Pull all their shares to cast one vote

 Legal title is transferred to the voting trustee - Covered by rules governing contracts

 May the voting trustee vote by proxy? - By pulling their votes they can decline the
resolution passed by the board
- Yes, legal owner may vote by proxy
 END OF MIDTERMS
 May the proxy holder vote by proxy?

- NO, (AGENT) an agent can have no other agent

unless specifically allowed by the principal STOCKS AND STOCKHOLDERS

 Stockholder executing as a proxy, is he qualified to  3 modes

be voted as a director?
1. By a contract of subscription with the corporation;
 Why is he qualified to act as a director if the
stockholder executes as a director? 2. By purchase of treasury shares from the
corporation; and,
- The beneficial owner of the shares in a voting trust
is disqualified to be a director in a voting trust 3. By purchase or acquisition of shares from existing
whereas in a proxy, the owner of the shares may be stockholders.
elected as such since legal title thereof remains with
him  Section 60 subscription

- YES he remains to be the owner - Any contract

 Is the stockholder executing in a voting trust - Whether existing or still to be formed

agreement, is he qualified to act as a director?
- NO. ceases to be stockholder of record, no longer
the legal owner of shares
 May the corporation enforce the voting trust
agreements executed by its stockholders?
Section 60. Subscription contract. - Any contract
for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed shall be
deemed a subscription within the meaning of this Title,
notwithstanding the fact that the parties refer to it as a
purchase or some other contract. (n)

- NO. NIDC vs. AQUINO  Under the old law the 4th mode is PURCHASE

- Not a privy to the contract  Purchase

- Reciprocal in nature
- Rights liabilities of a stockholder are there in their
individual capacity- corporate entity theory
- Purchaser can neither require the issuance
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Xco. Inc. - First example galing sa unissued stock

P - 2nd example galling sa treasury shares hindi sa

unissued share

 NO such thing as purchase of unissued stocks

Authorized capital 1M
 A subscription contract can be conditional provided
500 SUBSCRIBED there is nothing in the charter or statute prohibiting
it and not against public order, law, etc.
500 UNISSUED STOCKS (AS LONG AS GALING
DITO)  Must it be in writing?
Z wants to acquire 100K - NO, it may be oral
Entered in June 50% shall be down payment remainder
 5M should it be in writing to be valid and binding
December 08
as a subscription?
o he will not be considered a stockholder unless he
- NO, statutes of frauds only applies to SALES
has paid in full
Trillana vs. Quezon College
August 08 property is ravaged by fire all are turned into
shares - Counter proposal, therefore there was a need for an
acceptance
 Is Z liable to pay the balance of his acquisitions?
- Facultative because it is in his own free will, it is
- YES, no matter how the party refer to it, it is
void
considered subscription
 What may be used as a consideration and how
- Once you subscribe, you become a stockholder
much should be the consideration?
which is entitled to all the liabilities of a
stockholder - Section 62 provides:

Z- subscribed to 100T/S of XCo.

Section 62. Consideration for stocks. -
Amount he paid 50k Stocks shall not be issued for a consideration less
than the par or issued price thereof. Consideration
for the issuance of stock may be any or a
Z did not pay on the date called and was declared a
combination of any two or more of the following:
delinquent share

 Corporation paid 100T/S therefore the corporation
reacquired the shares again, what are they called?
- Treasury shares
Y- 80T/S DECEMBER 08
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received
by the corporation and necessary or convenient for
its use and lawful purposes at a fair valuation equal
to the par or issued value of the stock issued;

40 % (AUGUST) WAS DESTROYED BY FIRE, IS HE 3. Labor performed for or services actually

STILL LIABLE TO PAY THE UNPAID PORTION? rendered to the corporation;

 IT WAS AGREED THAT IT WAS A PURCHASE 4. Previously incurred indebtedness of the

AND WILL BE A STOCKHOLDER ONLY IF corporation;
PAID IN FULL IS HE LIABLE?
5. Amounts transferred from unrestricted retained
- NO, because that was a purchase earnings to stated capital; and

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6. Outstanding shares exchanged for stocks in the
event of reclassification or conversion.
Where the consideration is other than
actual cash, or consists of intangible property such
as patents of copyrights, the valuation thereof shall
initially be determined by the incorporators or the
board of directors, subject to approval by the
Securities and Exchange Commission.
Shares of stock shall not be issued in
exchange for promissory notes or future service.
The same considerations provided for in
this section, insofar as they may be applicable, may
be used for the issuance of bonds by the
corporation.
The issued price of no-par value shares
may be fixed in the articles of incorporation or by
the board of directors pursuant to authority
conferred upon it by the articles of incorporation or
the by-laws, or in the absence thereof, by the
stockholders representing at least a majority of the
outstanding capital stock at a meeting duly called
for the purpose. (5 and 16)
 “Amounts transferred from unrestricted retained
earnings to stated capital” what does it mean?
- Stock dividends will in effect capitalize the
unrestricted retained earnings
 After 5 years the founders shares may be converted
into common shares or other kinds of shares
 May shares of stocks be issued
consideration? Why?
- NO, two reasons by the SC, discriminatory against
other stockholders and second unlawful, it
prejudices the right of the creditors “Trust Fund
Doctrine”
 If issued without a consideration
- Section 65, they will be considered as watered
stocks
Section 65. Liability of directors for
watered stocks. - Any director or officer of a
corporation consenting to the issuance of stocks for
a consideration less than its par or issued value or
for a consideration in any form other than cash,
valued in excess of its fair value, or who, having
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knowledge thereof, does not forthwith express his
objection in writing and file the same with the
corporate secretary, shall be solidarily, liable with
the stockholder concerned to the corporation and its
creditors for the difference between the fair value
received at the time of issuance of the stock and the
par or issued value of the same. (n)
- Subscribers may be compelled to pay the value
 Issuance of a certificate of stock is another thing
 What are the requisites for the issuance of a valid
certificate of stock?
1. It must be signed by the president or vice-president
and countersigned by the secretary or assistant
secretary;
2. It must be sealed with the corporate seal; and the
entire value thereof (together with interest or
expenses, if any) should have been paid.
While it appears, that a subscriber to shares of stock
cannot be entitled to the issuance of a certificate of
stock until the full amount of his subscription
together with interest and expenses (in case of
delinquent shares) if any is due, has been paid, a
subscriber to shares of stock, even if not yet fully
paid, is entitled to exercise all the rights of a
stockholder and the corresponding liability that
attach thereunder. Thus, the Code provides:
Section 72. Rights of unpaid shares. -
Holders of subscribed shares not fully paid which
without are not delinquent shall have all the rights of a
stockholder. (n)
 Is the issuance of a certificate of stock necessary to
consider the subscriber a stockholder?
- NO, shall be considered a stockholder even without
a certificate of stock
 Instances when he may not be able to exercise his
rights as such stockholder
- Declared delinquent
- When he exercises his appraisal right
 Are certificate of stocks transferrable?
- YES

 Are certificate of stocks considered negotiable?
- Quasi-negotiable
 Why are they considered quasi-negotiable when it
may be transferred through endorsement and
delivery?
100t/s 001 10/s
Abc co.
B stole and forged the signature
C is purchaser in good faith and for value will C acquire title
Endorsement from
When issued by owner
Endorsed by owner- strict compliance
ANSWER: a certificate of stock is not regarded as
negotiable in the same sense that a bill or note is negotiable,
even if it is endorsed in blank. Thus, while it may be
transferred by endorsement coupled with delivery thereof,
and therefore merely quasi-negotiable, it is nonetheless non-
negotiable in that the transferees takes it without prejudice to
all the rights and defenses which the true and lawful owner
may have except in so far as the principles governing
estoppels may apply.
He acquired it by virtue of a forged instrument; no matter
how innocent the purchaser is because it is subject to all the
rights and defenses
 What if A endorsed it?
- He is estopped, unless there are other available
defenses
 Transfer is required to be recorded in the books of
the corporation, however even if not recorded, it
will be valid between the parties. Non-registration
will not however, affect the validity thereof at least
in so far as the contracting parties are concerned.
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Section 63. Certificate of stock and
transfer of shares. - The capital stock of stock
corporations shall be divided into shares for which
certificates signed by the president or vice
president, countersigned by the secretary or
assistant secretary, and sealed with the seal of the
corporation shall be issued in accordance with the
by-laws. Shares of stock so issued are personal
property and may be transferred by delivery of the
certificate or certificates indorsed by the owner or
his attorney-in-fact or other person legally
authorized to make the transfer. No transfer,
however, shall be valid, except as between the
parties, until the transfer is recorded in the books of
the corporation showing the names of the parties to
the transaction, the date of the transfer, the number
of the certificate or certificates and the number of
shares transferred.
No shares of stock against which the
corporation holds any unpaid claim shall be
transferable in the books of the corporation. (35)
 “Until registration is accomplished, the transfer,
though valid between the parties, cannot be
effective as against the corporation. Thus the,
unrecorded transfer cannot enjoy the status of a
stockholder; he cannot vote nor be voted for, and he
will not be entitled to dividends. The corporation
will be protected when it pays dividend to the
registered owner despite a previous transfer of
which it had no knowledge. The purpose of
registration therefore is twofold: to enable the
transferee to exercise all the rights of a stockholder
and to inform the corporation of any change in
shares ownership so that it can ascertain the persons
entitled to the rights and subject to the liabilities of
a stockholder.”
Thus, it was also ruled by the High Court
in Nautica Canning Corp. vs. Yumul that
“A transfer of shares not recorded in the
stock and transfer book of the corporation
is non-existent in so far as the corporation
is concerned.” This is so because “the
corporation looks only through its books
for the purpose of determining who its
stockholders are.”
 Registration is necessary for the following:
1. To enable the corporation to know who its
stockholders are;

2. To enable the transferee to exercise his rights a s
stockholders;
3. To afford the corporation an opportunity to object
or refuse registration of the transfer in case allowed
by law;
4. To avoid fictitious and fraudulent transfers; and,
5. To protect creditors who have the right to look
upon stockholders, in case of no-payment or
watered shares, for the satisfaction of their claims.
 Duty of the secretary is ministerial, hence
mandamus will lie if the secretary refuses to record
the transfer, but he cannot be compelled when the
transferee’s title to the said shares has no prima
facie validity or uncertain
 Transfer- absolute and unconditional transfer to
warrant registration in the books of the corporation
in order to bind the latter and other third persons.
 Other restrictions on the right to transfer shares
would include:
1. It is not valid, except as between the parties, until
recorded in the books of the corporation;
2. Shares of stock against which the corporation holds
any unpaid claim shall not be transferable in the
books of the corporation; unpaid claims, refer to
claims arising from unpaid subscription and not to
any indebtedness which a stockholder may owe the
corporation such as monthly dues;
3. Restrictions required to be indicated in the articles
of incorporation, by-laws and stock certificates of a
close corporation;
4. Restrictions imposed by special law, such as the
Public Service Act requiring the approval of the
government agency concerned if it will vest unto
the transferee 40% of the capital of the public
service company;
5. Sale to aliens in violation of maximum ownership
of shares under the Nationalization Laws;
6. Those covered by reasonable agreement of the
parties.
Monserat vs. Ceron
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- Does it include mortgage?
- NO, it is not an absolute transfer
- Will not affect the transfer through mortgage
- Absolute and unconditional transfer
- Only the transfer or absolute conveyance of the
ownership of the title to a share need be entered and
noted upon the books of the corporation in order
that such transfer may be valid, therefore, inasmuch
as a chattel mortgage of the aforesaid title is not a
complete and absolute alienation of the dominion
and ownership thereof, its entry and notation upon
the books of the corporation is not necessary
requisite to its validity
 Chua guan vs. Magsasaka
- Was the mortgage valid and effective as against
subsequent third parties
- Register of deeds where the corporation resides and
if different in the register of deeds of owner’s
domicile
 Unson vs. Dinamito
- All transferred not register will not have a valid
force and effect
 Right to transfer may be regulated
 May not be unreasonably restricted
 Violation of nationalization law- Central Bank
Lambert vs. Fox
- Valid , may be reasonably regulated, restricted by
agreement of parties
- Reasonable agreement by the parties
- Reasonable as to length of time
Padgett vs. Babcock
- Any attempt to restrain transfer
- SC, in the absence of a valid lien upon its shares
- Valid restrictions shares are applicable

- Any restriction on a stockholder’s right to dispose
of his shares must be construed strictly; and any
attempt to restrain a transfer of shares is regarded as
being in restraint of trade, in the absence of a valid
lien upon its shares, and except to the extent that
valid restrictive regulations and agreements exist
and are applicable. Subject only to such restrictions,
a stockholder cannot be controlled in or restrained
from exercising his right to transfer by the
corporation or its officers or by other stockholders,
even though the sale is to a competitor of the
company, or to an insolvent person, or even though
a controlling interest is sold to one purchaser.
 Certificate of stocks are transferrable
- By endorsement and delivery of the stock
certificate to the transferee
 In order to be valid, must be registered in the
books. If not, will only be binding among parties
 How may shares of stock be transferred?
- Endorsement of stock certificate by owner or
attorney-in-fact with delivery
Embassy farms vs. CA
- Must be endorsed by owner or attorney-in-fact
coupled with delivery
- Endorsed not delivered
- Proper mode and manner must be complied with
Razon vs. IAC
- Delivered not endorsed
- Reverse of Embassy Farms
- Endorsement alone is not sufficient nor delivery
without endorsement is not allowed
- Endorsement plus delivery is mandatory
 Is there any other mode of transferring stock?
- Notarized deed
- Deed of assignment
Rural bank of Salinas vs. CA
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- If denied or refused without good cause, mandamus
will lie
Tay vs. CA
- Mandamus may issue if petition has a clear legal
right
- Never issued in doubtful cases
- Petitioner failed to establish a clear legal right and
alleged ownership is without merit
- Did not acquire ownership by virtue of the contract
of pledge
- In a contract of pledge there must be foreclosure
- In the case there was no attempt to foreclose
- Petitioner must have a prima facie right
Nava vs. Peers Marketing
- A stock subscription is a subsisting liability from
the time the subscription is made
- The subscriber is as much bound to pay his
subscription as he would be to pay any other debt
- No stock certificate was issued. Without stock
certificate, which is the evidence of ownership of
corporate stock, the assignment of corporate shares
is effective only between the parties to the
transaction
 Exception to the general rule
Rural Bank of Lipa vs. CA
- By notarized deed
- Certificate of stocks already issued must be coupled
with delivery, exception (TAN vs. SEC)
 Stock certificate has already been issued it must be
coupled with the delivery
 After certificate of stock is issued, may it be
effectively transferred even without endorsement or
delivery of the stock certificate?
- Person sought to be a stockholder is an officer and
has custody
 60

 Endorsement and delivery is not necessary (TAN
vs. SEC)
Tan vs. SEC (FULL KNOWLEDGE, HE IS
ESTOPPED)
- Persons sought to be stockholder is officer and has
custody of the book (estopped)
 General Rule for valid transfer
- Certificate of stock must be endorsed by owner or
attorney-in-fact coupled with delivery
- Although a stock-certificate is sometimes regarded
as quasi-negotiable, in the sense that it may be
transferred by endorsement, coupled with delivery,
it is well settled that the instrument is non-
negotiable, because the holder thereof takes it
without prejudice to such rights or defenses as the
registered owner or creditor may have under the
law, except insofar as such rights or defenses are
subject to the limitations imposes by the principles
governing estoppels.
 Unauthorized issuance of stock certificates

 Exceptions 100/s 100

- Section 63 uses the word “may” XYZCo
- Showing that there may be other modes of
transferring shares 100 pesos per share
Stolen by B and forged the signature of A
 Is there a time frame or fixed period as when B sells to C will C acquire title? NO
transfer can be made?

- NO, (WON vs. WACK WACK)

Won vs. Wack Wack

- Valid between contracting parties even if not

recorded in corporation books
ENDORSEMENT FORM
- Right accrues only if refused
 C armed with the endorsement form certificate, sold
- Statute of limitations does not apply in registration to D (innocent purchaser for value), will D acquire
of shares of stock title?

- Must determined from the time of refusal
 Why are they non-negotiable when they may be
transferred?
- Transferees pays it without prejudice to all the
rights and defenses as the true and lawful owner
may have under the law except insofar as such
rights and defenses are subject to the limitations
imposed by the principles governing estoppels
De los Santos vs. Republic
- NO, subject to such rights and defenses as the true
and lawful owner may have
 What if C now goes to the corporation and presents
the form?
- Then the corporation shall cancel the old certificate
and issues a new one, now in the name of C, now
registered in the name of C, will C acquire title?
 A found out what happened and goes to the
corporation who has a better title C or A?

- Why is he, not considered as the owner of shares? - A, A cannot be deprived of his right by virtue of an
When it has been said that when endorsed by the unauthorized transfer
owner it is considered as strict certificate? Because
certificate of stocks are non-negotiable  Corporation can compel C to deliver the new stock
certificate because he made a representation that the
certificate where good.
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 Armed with the new certificate issued to C, C
delivers to D a purchaser in good faith and for
value will D acquire title?
- D will acquire title took the shares not by virtue of a
forged or unauthorized transfer, but on the reliance
that the stock certificate is valid and owned by C
 Stock certificate now in possession of D. A knew of
what happened and went to the corporation and
complains. Who will have a better title?
- the corporation may be compelled to recognize both,
A as stockholder (non-negotiable) D, reliance that
the stock certificate is valid and existing and owned
by C
 Forged transfers
- If the corporation should issue a new certificate in
pursuance of a forged transfer, the corporation
incurs no liability to the person in whose favor it is
issued and it may demand its return for
cancellation. The corporation in such case has been
guilty of no misrepresentation. On the other hand, it
is the duty of the purchaser to determine that the
indorsement of the owner is genuine. However, if
the new certificate issued to the purchaser comes
into the hands of a bona fide purchaser for value,
the corporation will be stopped from denying
validity thereof, since by issuing such new
certificate it represents that the person named
therein is a stockholder of the corporation. The
corporation is thus forced to recognize both the
original certificate and new certificate-the original,
because the true owner could not be deprived of his
title by a forged transfer, and the new, because of
its representation that the person named therein is
the owner of shares in the corporation. But if the
recognition of both stockholders would result in an
over issue of shares, then only the original and true
owner can be recognized as a stockholder. The
bona fide purchaser of the new certificate will
however have a right of damages against the
corporation. The corporation, in turn, would have a
right of action against the person who made false
representations and in whose favor it issued a new
certificate. The true owner of the shares which were
wrongfully transferred would of course have a right
to compel the corporation to issue him a certificate
in lieu of the original one which was wrongfully
cancelled.
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 Authorized capital stock 1M shares
 All are subscribed who will the corporation
recognize as rightful owner A or D? if both will be
recognized there will be over issuance
- only A citing citizens national bank vs. state (but if
recognition of both stockholders would result in an
over issue of shares, then only the original and true
owner can be recognized as a stockholder)
- by virtue of the doctrine of non-negotiability of
certificate of stocks
 The true and lawful owner will never be deprived
of his rights
 What happens to D?
- D will have a cause of action against the corporation
for the value of his acquisition cost inclusive of
damages, attorney’s fees and cost of suit
 D sues the corporation for the value of his
acquisition cost, inclusive of damages, attorney’s
fees and cost of suit. What may the corporation do?
- NO defense, no valid defense, because it was
represented to other parties that the certificate of
stocks is valid, subsisting, etc.
 2nd situation, what cause of action may the
corporation have? Remedy?
- Third party complaint against C, but what if he is a
purchaser for value? 4th party claim against B
 When may certificate of stocks be issued?
- Section 64 provides:
Section 64. Issuance of stock certificates. -
No certificate of stock shall be issued to a
subscriber until the full amount of his subscription
together with interest and expenses (in case of
delinquent shares), if any is due, has been paid. (37)
 A certificate of stock cannot be issued unless he
fully paid the amount subscribed
 Subscription to the capital stocks of the corporation
are indivisible
 Clear mandate of section 148 of the code is that the
ruling of the court in Baltazar vs. Lingayen Gulf, no
longer holds true

Section 148. Applicability to existing
corporations. - All corporations lawfully existing
and doing business in the Philippines on the date of
the effectivity of this Code and heretofore
authorized, licensed or registered by the Securities
and Exchange Commission, shall be deemed to
have been authorized, licensed or registered under
the provisions of this Code, subject to the terms and
conditions of its license, and shall be governed by
the provisions hereof: Provided, That if any such
corporation is affected by the new requirements of
this Code, said corporation shall, unless otherwise
herein provided, be given a period of not more than
two (2) years from the effectivity of this Code
within which to comply with the same. (n)
 Subscription to shares of stocks are indivisible
 Also apparent is that once a subscriber has paid his
subscription in full, he becomes entitled to be
issued a stock certificate and in the event that the
corporation refuses to do so, the stockholder my
institute a case for mandamus with damages. Thus,
it has been said that the duty of the corporate
officers to issue stock certificates to those entitled
thereto is a ministerial duty enforceable by
mandamus.
Fua Cun vs. Summers and China Banking Corp.
- The court erred in holding the plaintiff as the owner
of 250 shares of stock; “the plaintiff’s rights consist
in equity in 500 shares and upon payment of the
unpaid portion of the subscription price he becomes
entitled to the issuance of certificate for said 500
shares in his favor.”
- No certificate of stock until the full amount has
been paid.
 Watered stock
- One which is issued by the corporation as fully
paid-up shares, when in fact the whole amount of
the value thereof has not been paid.
- Basis is par value and not the fair market value
 Section 62 states that stocks shall not be issued for
a consideration less than par or issued price thereof,
while section 13 states that in no case shall be paid-
up capital be less than five thousand [P5000] pesos.
 If issued below par, issued value considered as
water
 How may watered stocks be issued?
1. For a monetary consideration less than its par or
issued value;
2. For a consideration in property, tangible or
intangible, valued in excess of its fair market value;
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3. Gratuitously or under an agreement that nothing
shall be paid at all; or
4. In the guise of stock dividends when there are no
surplus profits of the corporation.
 Why is stock watering illegal?
1. The corporation is deprived of its capital thereby
hurting its business prospects, financial capability
and responsibility;
2. Stockholders who paid their subscriptions in full, or
promised to pay the same, are injured and
prejudiced by the reduction of their proportionate
interest in the corporation; and,
3. Present and future creditors are deprived of the
corporate assets for the protection of their interest.
- Corporation is prejudiced
- Stockholders, dilution of interest
- Creditors are prejudiced, virtue of right to look
upon corporations properties for the satisfaction of
their claims
 What is the effect of issuance of watered stocks
1. As to the corporation - when a corporation is guilty
of ultra-vires or illegal acts which constitute an
injury to or fraud upon the public, or which will
tend to injure or defraud the public, the State may
institute a quo-warranto proceeding to forfeit its
charter for the misuse or abuse of its franchise.
2. As between the corporation and the subscriber- The
subscription is void. Such being the case, the
subscriber is liable to pay the full par or issued
value thereof, to render it valid and effective.
3. As to the consenting stockholders - They are
stopped from raising any objection thereto;
4. As to dissenting stockholders - In view of the
dilution of their proportionate interest in the
corporation, they may compel the payment of the
“water” in the stock solidarily against the
responsible and consenting directors and officers
inclusive of the holder of the watered stocks;
5. As to creditors - They may enforce payment of the
difference in the price, or the water in the stock,
solidarily against the responsible directors/officers
and the stockholders concerned; and’
6. As against transferees of the watered stock – His
right is the same as that of his transferor. If,
however, a certificate of stock has been issued and
duly indorsed to a bona fide purchaser, without
knowledge, actual or constructive, the latter cannot
be held liable, at least as against the corporation,
since he took the shares on reliance of the
misrepresentation made by the corporation that the
stock certificate is valid and subsisting. This is

because a corporation is prohibited from issuing
certificates of stock until the full value of the
subscriptions have been paid and could not,
therefore, deny the validity of the stock certificate it
issued as against a purchaser in good faith. Thus,
Ballentine states that whether there is any liability
on the part of the transferee of watered stock is
made to depend upon whether he acquired the same
without notice, either as purchaser or donee. If he
had knowledge thereof, he is subject to the same
liability as his transferor.
 What is the nature of the liability of the corporate
directors consenting to the issuance of watered
stocks and the extent of their liabilities?
- Solidarily liable with the holder of the watered
stocks to the extent of the water from said shares of
stocks
 Will all the directors be liable? What if you
objected will you also be liable?
- If you do not issue a written objection, you are still
liable
- Even passive directors may be liable
- Those having knowledge thereof, but did not
interpose their objection shall be liable
- Section 65 provides:
Section 65. Liability of directors for
watered stocks. - Any director or officer of a
corporation consenting to the issuance of stocks for
a consideration less than its par or issued value or
for a consideration in any form other than cash,
valued in excess of its fair value, or who, having
knowledge thereof, does not forthwith express his
objection in writing and file the same with the
corporate secretary, shall be solidarily, liable with
the stockholder concerned to the corporation and its
creditors for the difference between the fair value
received at the time of issuance of the stock and the
par or issued value of the same. (n)
 ACS-100M 100M/S PAR VALUE-
1.00
SUBSCRIBED-50M FAIR
MARKET VALUE-12.00/S
UNSUBSCRIBED-50M
A
B computed from such date until full payment. If
C within thirty (30) days from the said date no
D payment is made, all stocks covered by said
E subscription shall thereupon become delinquent and
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There is a denial of pre-emptive rights and directors
A,B,C,D,E decided to issue the remaining 50M and
subscribed for 10M each at 2 per share.
 Is there stock watering if the fair market value is
12.00?
- No stock watering
- The basis is the par value
- The shares where in fact paid more than the par
value indicated in the articles of incorporation
3 days later they sold their 10M share for P11.00 each,
therefore making a profit.
 Can you question there actuations? What would be
the cause of action?
- It may be questioned.
- Duty of loyalty or fiduciary duty as such directors
- They cannot advance their own motives to the
damage prejudice of the corporation which they
represents and stockholders as a whole instead of it
being sold outside
- 500M would have gone to the coffers of the
corporation, 500M should be there for the
protection of creditors
- They are placed in a fiduciary relationship
- Sila lang ba ang kikita, pano naman yung
corporation, opportunity na yun para kumita
 When are unpaid subscriptions due and payable?
- Section 67. Payment of balance of subscription. -
Subject to the provisions of the contract of
subscription, the board of directors of any stock
corporation may at any time declare due and
payable to the corporation unpaid subscriptions to
the capital stock and may collect the same or such
percentage thereof, in either case with accrued
interest, if any, as it may deem necessary.
Payment of any unpaid subscription or any
percentage thereof, together with the interest
accrued, if any, shall be made on the date specified
in the contract of subscription or on the date stated
in the call made by the board. Failure to pay on
such date shall render the entire balance due and
payable and shall make the stockholder liable for
interest at the legal rate on such balance, unless a
different rate of interest is provided in the by-laws,
shall be subject to sale as hereinafter provided,
unless the board of directors orders otherwise. (38)

 Remedies of the corporation to enforce payment of
unpaid subscription
1. By board action in accordance with the procedure
laid down in sections 67 to 69 of the code
2. By a collection case in court as provided for in
section 70
 Are subscribers of shares of stocks not fully paid,
liable to pay interest?
- General rule is they are not liable to pay interest
because the code says unless requires in the by-
laws
- Aside from the mandate of the law that subscribers
to shares of stock must pay the full value of their
subscription, they may likewise be required to pay
interest on all unpaid subscriptions if so imposed in
the contract or in the corporate by-laws at such rate
as may be indicated thereat or the legal rate if not
so fixed. Unless so required or provided, however,
subscribers to shares of stock, not fully paid, are not
liable to pay interest on their unpaid subscriptions.
The code thus provides:
Section 66. Interest on unpaid
subscriptions. - Subscribers for stock shall pay to
the corporation interest on all unpaid subscriptions
from the date of subscription, if so required by, and
at the rate of interest fixed in the by-laws. If no rate
of interest is fixed in the by-laws, such rate shall be
deemed to be the legal rate. (37)
 Until a call is made, they are not due and payable,
but still subject to the provisions of the contracts
 Procedures in case of sale of delinquent stocks
- Section 68. Delinquency sale. - The board of
directors may, by resolution, order the sale of
delinquent stock and shall specifically state the
amount due on each subscription plus all accrued
interest, and the date, time and place of the sale
which shall not be less than thirty (30) days nor
more than sixty (60) days from the date the stocks
become delinquent.
Notice of said sale, with a copy of the
resolution, shall be sent to every delinquent
stockholder either personally or by registered mail.
The same shall furthermore be published once a
week for two (2) consecutive weeks in a newspaper
of general circulation in the province or city where
the principal office of the corporation is located.
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Unless the delinquent stockholder pays to
the corporation, on or before the date specified for
the sale of the delinquent stock, the balance due on
his subscription, plus accrued interest, costs of
advertisement and expenses of sale, or unless the
board of directors otherwise orders, said delinquent
stock shall be sold at public auction to such bidder
who shall offer to pay the full amount of the
balance on the subscription together with accrued
interest, costs of advertisement and expenses of
sale, for the smallest number of shares or fraction
of a share. The stock so purchased shall be
transferred to such purchaser in the books of the
corporation and a certificate for such stock shall be
issued in his favor. The remaining shares, if any,
shall be credited in favor of the delinquent
stockholder who shall likewise be entitled to the
issuance of a certificate of stock covering such
shares.
Should there be no bidder at the public
auction who offers to pay the full amount of the
balance on the subscription together with accrued
interest, costs of advertisement and expenses of
sale, for the smallest number of shares or fraction
of a share, the corporation may, subject to the
provisions of this Code, bid for the same, and the
total amount due shall be credited as paid in full in
the books of the corporation. Title to all the shares
of stock covered by the subscription shall be vested
in the corporation as treasury shares and may be
disposed of by said corporation in accordance with
the provisions of this Code. (39a-46a)
 Who is the winning bidder in a delinquency sale?
- Bidder who shall “offer to pay the full amount of
the balance on the subscription together with
accrued interest, cost of advertisement and
expenses of sale, for the smallest number of shares
or fraction of a share.”
X Co. has 1M authorized capital stock
500 thousand is already subscribed
A subscribed to 100 thousand shares, 50 thousand
is already paid leaving 50 thousand unpaid
The corporation is at a loss of 250 thousand, the
board decides to make a call for the payment of the
unpaid subscriptions, however A could not paid,
hence declared delinquent and decides to sell his
share at a public auction

55 thousand is to be paid, remaining balance plus
cost and expenses
BIDDERS:
X-55K FOR 99,900 shares
Y-55K FOR 99,500 shares
Z-55K FOR 99,000 shares (winning bidder)
 Assume there is no bidder, may the corporation
bid?
- NO. It cannot bid because the law says, subject to
the provisions of this CODE. Section 68 and 41
should be reconciled. Section 68 states that:
Should there be no bidder at the public
auction who offers to pay the full amount of the
balance on the subscription together with accrued
interest, costs of advertisement and expenses of
sale, for the smallest number of shares or fraction
of a share, the corporation may, subject to the
provisions of this Code, bid for the same, and the
total amount due shall be credited as paid in full in
the books of the corporation. Title to all the shares
of stock covered by the subscription shall be vested
in the corporation as treasury shares and may be
disposed of by said corporation in accordance with
the provisions of this Code. (39a-46a)
- There was no unrestricted retained earnings in the
example given therefore the corporation cannot
bid , section 41, it states that:
Section 41. Power to acquire own shares.
- A stock corporation shall have the power to
purchase or acquire its own shares for a legitimate
corporate purpose or purposes, including but not
limited to the following cases: Provided, That the
corporation has unrestricted retained earnings in
its books to cover the shares to be purchased or
acquired:
1. To eliminate fractional shares arising out of stock
dividends;
2. To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares
sold during said sale; and
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3. To pay dissenting or withdrawing stockholders
entitled to payment for their shares under the
provisions of this Code. (a)
 What if the shares of A were sold without
compliance of the requirements? May A question
the sale?
- The law prescribes two conditions before an action
to recover delinquent stocks irregularly sold may be
allowed. These are:
1. The party seeking to maintain such action first pays
or tenders to the party holding the stock the sum for
which the same was sold, with interest from the
date of the sale at the legal rate; and,
2. The action shall be commenced by the filing of a
complaint within six months from the date of the
sale.
- The reason for such is the stability of transactions
of the shares of stock
 Suppose in the example, since there are no
unrestricted retained earnings, hence the
corporation cannot bid, is the corporation left
without any recourse?
- Section 70. Court action to recover unpaid
subscription. - Nothing in this Code shall prevent
the corporation from collecting by action in a court
of proper jurisdiction the amount due on any unpaid
subscription, with accrued interest, costs and
expenses. (49a)
Velasco vs. Poizat
- The subscriber is as much bound to pay the amount
of the share subscribed by him as he would be to
pay any other debt, and the right of the company to
demand payment is no less incontestable.
- Two available remedies: the first and most special
remedy given by the statute consist in permitting
the corporation to put up the unpaid stock and
dispose of it for the account of the delinquent
subscriber. The other remedy is by action in court.
De Silva vs. Aboitiz and Co.
- Discretionary on the part of the board of directors
to do whatever is provided in the said article
relative to the application of the part of the 70
percent of the profit distributable in equal parts on

the payment of the shares subscribed to and fully
paid
Lingayen Gulf vs. Baltazar
- Exception: pursuant to a bona fide compromise or
to set off a debt due from the corporation, a release
supported by consideration, will be effectual as
against dissenting stockholders and subsequent and
existing creditors. A release which might originally
have been held invalid may be sustained after a
considerable lapse of time
Apocada vs. NLRC
- Set-off is without any legal basis
- It was premature
- Unpaid subscriptions will become due and payable
only upon certain instance
- Call or if there is a stipulation in contract
- If no call and no stipulation in contract then it will
not be demandable or payable at all
Lumanlan vs. Cura
- Trust Fund Doctrine- subscription to the capital of a
corporation constitute a fund to which the creditors
have a right to look for satisfaction of their claims
and that the assignee in insolvency can maintain an
action upon any unpaid stock subscription in order
to realize assets for the payment of its debts.
PNB vs. Bitulak
- Where it not for the promise, the defendants would
have not subscribed
- Trust Fund Doctrine, it is established doctrine that
subscriptions to the capital of a corporation
constitute a fund to which creditors have a right to
look for satisfaction of their claims and that the
assignee in insolvency can maintain an action upon
any unpaid stock subscription in order to realize
assets for the payment of its debts.
- A corporation has no power to release an original
subscriber to its capital stock from the obligation of
paying for his shares, without a valuable
consideration for such release; and as against
creditors a reduction of the capital stock can take
place only in the manner and under the conditions
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prescribed by the statute or the charter or the
articles of incorporation.
Edward Keller and Co. vs. COB
- May the stockholder be held liable for the debts of
the corporation? YES. To the extent of their unpaid
subscription
- As to the liability of the stockholders, it is settled
that a stockholder is personally liable for the
financial obligations of a corporation to the extent
of his unpaid subscriptions
 Is there a prescriptive period wherein a demand for
unpaid subscription should be made?
- NO. Garcia vs. Suarez case
Garcia vs. Suarez
- Never became due and payable until there is a call
made
- Prescription will not run until and unless there is
demand
- Prescription should be determined from the time
demand has been made and not from the time of
subscription
 If declared delinquent, what would be the effect as
to the owner of said shares?
- Section 71. Effect of delinquency. - No delinquent
stock shall be voted for or be entitled to vote or to
representation at any stockholder's meeting, nor
shall the holder thereof be entitled to any of the
rights of a stockholder except the right to dividends
in accordance with the provisions of this Code,
until and unless he pays the amount due on his
subscription with accrued interest, and the costs and
expenses of advertisement, if any. (50a)
- However if the shares are not delinquent,
subscribers to the capital of a corporation, though
not fully paid, are entitled to all the rights of a
stockholder, according to section 72
Section 72. Rights of unpaid shares. -
Holders of subscribed shares not fully paid which
are not delinquent shall have all the rights of a
stockholder. (n)

 May the rules governing delinquency sale apply to
a non-stock corporation? Are there unpaid shares in
a non-stock corporation?
- Rules governing stock corporations, when
applicable, also applies to a non-stock corporation
- There are delinquent shareholders also in a non-
stock corporation. Example is membership dues
 A corporation paid 50% of subscription and was
later on declared delinquent when he could not pay
upon call; A is also a director of the corporation.
Will A, upon declaration of delinquency , still be
able to exercise his right as a director?
- Yes, he loses all his right as a stockholder except
his right to receive dividends
- He remains to be a director, only qualification to be
a director is he must own at least 1 share and since
it still stands in his name pending the sale, he
remains to be and act as a director
- Even if there is sale, he may still be director
because the winning bidder may not bid or pay for
all the shares or there might be remaining shares,
which would be credited in favor of the delinquent
stockholder
- Section 43 provides:
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 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
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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)
 When a certificate of stock is loss or destroyed,
what must be done by the owner thereof?
- Section 73. Lost or destroyed certificates. - The
following procedure shall be followed for the
issuance by a corporation of new certificates of
stock in lieu of those which have been lost, stolen
or destroyed:
1. The registered owner of a certificate of
stock in a corporation or his legal representative
shall file with the corporation an affidavit in
triplicate setting forth, if possible, the
circumstances as to how the certificate was lost,
stolen or destroyed, the number of shares
represented by such certificate, the serial number of
the certificate and the name of the corporation
which issued the same. He shall also submit such
other information and evidence which he may deem
necessary;
2. After verifying the affidavit and other
information and evidence with the books of the
corporation, said corporation shall publish a notice
in a newspaper of general circulation published in
the place where the corporation has its principal
office, once a week for three (3) consecutive weeks
at the expense of the registered owner of the
certificate of stock which has been lost, stolen or
destroyed. The notice shall state the name of said
corporation, the name of the registered owner and
the serial number of said certificate, and the number
of shares represented by such certificate, and that
after the expiration of one (1) year from the date of
the last publication, if no contest has been presented
to said corporation regarding said certificate of
stock, the right to make such contest shall be barred
and said corporation shall cancel in its books the
certificate of stock which has been lost, stolen or
destroyed and issue in lieu thereof new certificate
of stock, unless the registered owner files a bond or
other security in lieu thereof as may be required,
effective for a period of one (1) year, for such
amount and in such form and with such sureties as
may be satisfactory to the board of directors, in
which case a new certificate may be issued even
before the expiration of the one (1) year period
provided herein: Provided, That if a contest has

been presented to said corporation or if an action is
pending in court regarding the ownership of said
certificate of stock which has been lost, stolen or
destroyed, the issuance of the new certificate of
stock in lieu thereof shall be suspended until the
final decision by the court regarding the ownership
of said certificate of stock which has been lost,
stolen or destroyed.
Except in case of fraud, bad faith, or
negligence on the part of the corporation and its
officers, no action may be brought against any
corporation which shall have issued certificate of
stock in lieu of those lost, stolen or destroyed
pursuant to the procedure above-described. (R.A.
201a)
- The rationale of the above-quoted law is to avoid
duplication of certificates of stock and the
avoidance of fictitious and fraudulent transfers.
 When will the replacement certificate be issued?
- The code provides that:
after the expiration of one (1) year from
the date of the last publication, if no contest has
been presented to said corporation regarding said
certificate of stock, the right to make such contest
shall be barred and said corporation shall cancel in
its books the certificate of stock which has been
lost, stolen or destroyed and issue in lieu thereof
new certificate of stock,
 Could it be issued earlier than 1 year?
- Yes it can be, the code states that:
unless the registered owner files a bond or
other security in lieu thereof as may be required,
effective for a period of one (1) year, for such
amount and in such form and with such sureties as
may be satisfactory to the board of directors, in
which case a new certificate may be issued even
before the expiration of the one (1) year period
provided herein: Provided, That if a contest has
been presented to said corporation or if an action is
pending in court regarding the ownership of said
certificate of stock which has been lost, stolen or
destroyed, the issuance of the new certificate of
stock in lieu thereof shall be suspended until the
final decision by the court regarding the ownership
of said certificate of stock which has been lost,
stolen or destroyed.
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 May corporate officers be held liable for the
unauthorized issuance?
- YES, the code provides that:
Except in case of fraud, bad faith, or
negligence on the part of the corporation and its
officers, no action may be brought against any
corporation which shall have issued certificate of
stock in lieu of those lost, stolen or destroyed
pursuant to the procedure above-described. (R.A.
201a)
 Assuming the last paragraph is not there; would it
be not the same, that they should be held liable due
to fraud, bad faith or negligence?
- YES. Section 31 provides that:
Section 31. Liability of directors, trustees
or officers. - Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful
acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the
corporation or acquire any personal or pecuniary
interest in conflict with their duty as such directors
or trustees shall be liable jointly and severally for
all damages resulting there from suffered by the
corporation, its stockholders or members and other
persons.
When a director, trustee or officer attempts
to acquire or acquires, in violation of his duty, any
interest adverse to the corporation in respect of any
matter which has been reposed in him in
confidence, as to which equity imposes a disability
upon him to deal in his own behalf, he shall be
liable as a trustee for the corporation and must
account for the profits which otherwise would have
accrued to the corporation. (n)
 Certificate of stock was lost, the owner transfers his
shares by way of a notarized deed will it be valid?
- He cannot do so, if a certificate of stock is issued
by a corporation, a mere notarized deed will not
suffice
- Deed of assignment was not sufficient since there
was no endorsement (Rural Bank of Lipa vs. CA)
 Rights and liabilities of stockholders
- RIGHTS
 69

1. Participation in the management of the corporate 16. Also in the case of a close corporation, to withdraw
affairs by exercising their right to vote and be voted therefrom, for my reason, and compel the
upon either personally or by proxy as provided for corporation to purchase his shares as provided for
under sections 50 and 58 of the code; under section 105.

2. To enter into a voting trust agreement subject to the

procedure, requirements and limitations imposed
under section 50;

3. To receive dividends and to compel their

declaration if warranted under section 43;

4. To transfer shares of stock subject only to

reasonable restrictions such as options and
preferences as may be allowed by law inclusive of
the right of the transferee to compel the registration
of the transfer in the books of the corporation as
provided for in section 63;

5. To be issued a certificate of stock for fully paid-up

shares in accordance with 64;

6. To exercise pre-emptive rights as provided for in

section 39;

7. To exercise their appraisal right in accordance with

the provision of section 81 and in those instance
allowed by law such as section 42 and 105;

8. To institute and file a derivative suit;

9. To recover shares of stock unlawfully sold for

delinquency as may be allowed under section 69;

10. To inspect the books of the corporation subject only

to the limitations imposed by section 73;

11. To be furnished by the most recent financial

statement of the corporation as by section 75;

12. To be issued a new stock certificate in lieu of the

lost or destroyed one subject to the procedure laid
down in section 73;

13. To have the corporation dissolved under section

118 to 121, and section 105 in a close corporation;

14. To participate in the distribution of the assets of the

corporation upon dissolution under section 122;

15. In the case of a close corporation, to petition the

SEC to arbitrate in the event of a deadlock as
allowed under section 104; and,

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- LIABILITIES
1. To pay to the corporation the balance of his unpaid
subscriptions subject to the provision of section 67
to 70;
2. To pay interest on his unpaid subscription if
required by the by-laws or by the contract of
subscription in accordance with section 66;
3. To answer to the creditors for the unpaid portion of
his subscription under the TRUST FUND
DOCTRINE;
4. To answer the “water” in his stocks as provided for
in section 65;
5. To be liable, as general partners, for all debts,
liabilities and damages of a determinable
corporation as envisioned under section 21
(corporation by estoppel); and,
6. To be personally liable for torts, in the event that a
stockholder in a close corporation actively
participates in the management of the corporate
affairs.
CORPORATE BOOKS AND RECORDS
 What are these books and records that are required
to be kept?
- Section 74. Books to be kept; stock transfer agent. -
Every corporation shall keep and carefully
preserve at its principal office a record of all
business transactions and minutes of all
meetings of stockholders or members, or of the
board of directors or trustees, in which shall be
set forth in detail the time and place of holding
the meeting, how authorized, the notice given,
whether the meeting was regular or special, if
special its object, those present and absent, and
every act done or ordered done at the meeting.
Upon the demand of any director, trustee,
stockholder or member, the time when any
director, trustee, stockholder or member entered
or left the meeting must be noted in the minutes;
and on a similar demand, the yeas and nays
must be taken on any motion or proposition, and
a record thereof carefully made. The protest of
any director, trustee, stockholder or member 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
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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.
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.)
 To summarize:
1. Records of all business transactions which include,
among others, journals, ledger, contracts, vouchers
and receipts, financial statements and other books
of accounts, income tax returns, and voting trust
agreements which must be kept and carefully
preserved at its principal office;
2. Minutes of all meetings of stockholders or members
and of the directors or trustees setting forth in detail
the date, time, and place of meeting, how
authorized, the notice given whether the same be
regular or special, and if special, the purpose
thereof shall be specified, those present and absent,
and every act done or ordered done there at
which ,must likewise be kept at the principal office
of the corporation; and,
3. Stock and transfer book showing the names of the
stockholders, the amount paid or unpaid on all
stocks for which subscription has been made, a
statement of every alienation, sale or transfer of
stock made, if any the date thereof, and by whom
and to whom made which must also be kept at the
principal office of the corporation or in the office of
its stock transfer agent.
These corporate books and records, inclusive of all
business transactions and minutes of meetings, are
subject to inspection by any of the directors,
trustees, stockholders or members of the
corporation at reasonable hours on business days
and a copy of excerpts of said records may be
demanded. In fact, in so far as financial statement is
concerned, the Code clearly provides:
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.
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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)
 May books and records be examined? Who may
examine? Can they copy them? In whose expense?
- Yes, according to the code:
“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. “
 Is there any defense available that could be raised?
By the corporate officers to justify the refusal?
- Yes, the code provides that:
“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.”
 What is the stock and transfer? Where should stock
and transfer be kept? Can it be kept elsewhere?
“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. “
 Stock and transfer agent

- Records every movement
- Person who monitors movement by the minutes or
by the hours
- Non-stock corporation- stock and transfer books
- Club share- membership
 Are stockholders entitled to financial statements?
- Yes, they are entitled to a copy, the code provides
that:
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)
- Audited financial statement filed in the SEC, 120
days from the end of the final year, or must be filed
on or before April of each year
- Must be stamp received by the BIR
 Those in the stock exchange
- Disclosure of any matter that have to do with
increasing and decreasing
- If not “kulong” violation of securities and
regulation act
 Why is this right of inspection granted to a
stockholder?
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- The basis of the right of the stockholder to inspect
the books and records of the corporation for a
proper purpose is to protect his interest as a
stockholder. Thus, it has been said that:
“The right of the shareholders to ascertain
how the affairs of his company are being
conducted by its directors and officers is
founded by his beneficial interest through
ownership of shares and the necessity of
self-protection. Managers of some
corporations deliberately keep the
shareholders in ignorance or under
misapprehension as to the true condition of
its affairs. Business prudence demands that
the investor keep a watchful eye on the
management and the condition of the
business. Those in charge of the company
may be guilty of gross incompetence or
dishonesty for years and escape liability if
the shareholders cannot inspect the records
and obtain information.”
 Is there any distinction of the right of inspection of
a stockholder and that of a director?
- Yes, as compared to a stockholder or member, the
right of a director or trustee to inspect and examine
corporate books and records is considered absolute
and unqualified and without regard to motive. This
is because a director supervises, directs and
manages corporate business and it is necessary that
he be equipped with all the information and data
with regard to the affairs of the company in order
that he may manage and direct its operations
intelligently and according to his best judgment in
the interest of all the stockholders he represents.
Thus, while stockholders and members are entitled
to inspect and examine the books and records as
provided in sections 74 and 75 they may not gain
access to highly sensitive and confidential
information. In the case of directors. “it is not
denied” that they have such access. This would
include, among others,
a. Marketing strategies and pricing structure;
b. Budget for expansion and diversification;
c. Research and development;
d. Sources of funding, availability of personnel,
proposals of mergers or tie-ups with other
firms

 May this right be exercised, other than by the
stockholders themselves?
- Yes, while the right is founded on stock ownership
thus personal in nature it may be made by the
stockholder’s agent or representative since it may
be unavailing in many instances
 What if the right of the stockholder to inspect is
denied? What is his remedy?
1. Mandamus
2. Damages either against the corporation or
responsible officer who refused the inspection
3. Criminal complaint for violation of his right to
inspect and copy excerpts of all business
transactions and minutes of meeting. Section 74
provides that 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. The
latter provision imposes a penalty of a fine of not
less than P1,000 but not more than P10,000 or an
imprisonment for not less than 30 days but not
more than 5 years, or both, at the discretion of the
court. If the refusal is pursuant to a resolution or
order of the board, the liability shall be imposed
upon the directors or trustees who voted for such
refusal.
 Defense of the responsible corporate officer
1. That the person demanding has improperly used
any information secured through any prior
examination of the records or minutes of such
corporation or of any other corporation;
2. That he was not acting in good faith or for a
legitimate purpose in making his demand;
3. The right is limited or restricted by special law or
the law of it creation.
W.G. Philpotts vs. Philippine Manufacturing Co.
- The right of inspection given to a stockholder can
be exercised either by himself or by any proper
representative or attorney-in-fact, and either with or
without the attendance of the stockholder
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- The right may be regarded as personal, in the sense
that only a stockholder may enjoy it; but the
inspection and examination may be made by
another. Otherwise it would be unavailing in many
instances.
o Note: Usually hires an auditor or accountant to
safeguard his interest
Pardo vs. Hercules Lumber Co.
- The law is clear, it may be exercised during
reasonable hours on any business days, the by-laws
cannot deny this right all together
- The general right given by the statute may not be
lawfully abridged to the extent attempted in this
resolution. It may be admitted that the officials in
charge of a corporation may deny inspection when
sought at unusual hours or under other improper
conditions; but neither the executive officers nor
the board of directors have the power to deprive a
stockholder of the right altogether.
- The corporation, or its responsible directors and
officers cannot unduly restrict this right of
inspection and may not arbitrarily set a few days of
the year within which the stockholder may make
the inspection.
- A by-law unduly restricting the right of inspection
is undoubtedly invalid
Vegaruth vs. Isabela Sugar Co.
- Directors of a corporation have the unqualified
right to inspect the books and records of the
corporation at all reasonable hours.
- We do not conceive, however, that a director or
stockholder has any absolute right to secure
certified copies of the minutes of the corporation
until these minutes have been written up and
approved by the directors.
 May a stockholder of a holding company inspect
the books and records of a subsidiary?
- It depends
- The right of the stockholders to examine corporate
books extends to wholly-owned subsidiary which is
completely under the control and management of
the parent company where he is such a stockholder.
But if the two entities (subsidiary and parent) are

legally being operated as separate and distinct
entities, there is no such right of inspection on the
part of the stockholder of the parent company.
AYALA- HOLDING COMPANY/PARENT
COMPANY
SUBSIDIARIES: BPI/GLOBE/AYALA LAND
(not wholly-owned subsidiary)
o HOLD ATLEAST 50 +1 shares in order to be
a PARENT COMPANY
 A, is a stockholder of Ayala, does he have a right to
inspect the records of its subsidiaries?
- If wholly owned pwede, but its subsidiaries are not
wholly owned kaya hindi pwede
Gokongwei vs. SEC
- San Miguel corporation owns all of the shares of
stock of San Miguel International
- It is wholly-owned
- It would be in accord with equity, good faith and
fair dealing to construe the statutory right of
petitioner as stockholder to inspect the books and
records of such wholly-owned subsidiary which are
in respondent corporation’s possession and control
 If being operated as separate and distinct
corporations, there is no such right
 Telecommunications- special franchise, it is a
legislative grant
Gonzales vs. PNB
MERGER AND CONSOLIDATION
- Provisions of the old law was unqualified, when it
granted stockholders the right to inspect
- However, whole seemingly enlarging the right of
inspection, the new code has prescribed limitations
to the same. It is now expressly required as a
condition for such examination that the one
requesting it must not have been guilty of using
improperly any information secured through a prior
examination and that the person asking for such
examination must be acting in good faith and for a
legitimate purpose in making his demand
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- Admittedly, he sought to be a stockholder in order
to pry into transactions entered into by the
respondent bank even before he became a
stockholder. His obvious purpose was to arm
himself with materials he can use against the
respondent bank for acts done by the latter when
the petitioner was a total stranger to the same.
- Bank was created by a special law, it has its own
charter and primarily governed by the law creating
them
- The bank is only subject to the inspection of the
Central Bank and any information pertaining to the
bank is confidential and shall not be revealed to any
person other than the President of the Philippines,
the Secretary of Finance and the Board of
Directors, nor shall any information relative to the
funds in its custody, its current accounts or deposits
belonging to private individuals, corporations or
other entities except by order of a Court of
Competent Jurisdiction, hence inspection sought to
by the petitioner is violative of the provisions of its
charter and is even subject to penal sanctions
 Assuming you are a stockholder of PNB, and then
it was privatized, may you already have the right to
inspect?
- No, unless its charter has been altered or repealed it
is still subject to the same law
 3 stages in the life of a corporation
- Formation or birth
- We now discuss the union of the corporation
- The last would be its death or dissolution
 Merger and consolidation
- In corporate parlance it is called spin-off
- Almost a year ago San Miguel separated its
brewery business
- San Miguel Corporation is now a full time holding
company; it can later on absorb the company
- Corporations are granted by the code to merge or
consolidate

- most common type of corporate recognition
- not the same in every case
- but most common in the weal financial or insolvent
condition, aim is to bring it back to its financial
capability
- also a method of recapitalization
o purchase and sale of corporate assets is another
form of corporate reorganization
 How do you value the assets of the merging
corporation, do you consider goodwill?
 First secure favorably recommendation
government agency
- Section 79. Effectivity of merger or
consolidation. - 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: Provided, That in the case of merger or
consolidation of banks or banking institutions,
building and loan associations, trust companies,
insurance companies, public utilities,
educational institutions and other special
corporations governed by special laws, the
favorable recommendation of the appropriate
government agency shall first be obtained. If the
Commission is satisfied that the merger or
consolidation of the corporations concerned is not
inconsistent with the provisions of this Code and
existing laws, it shall issue a certificate of merger
or of consolidation, at which time the merger or
consolidation shall be effective.
If, upon investigation, the Securities and
Exchange Commission has reason to believe that
the proposed merger or consolidation is contrary to
or inconsistent with the provisions of this Code or
existing laws, it shall set a hearing to give the
corporations concerned the opportunity to be heard.
Written notice of the date, time and place of
hearing shall be given to each constituent
corporation at least two (2) weeks before said
hearing. The Commission shall thereafter proceed
as provided in this Code. (n)
 Merger
- A union effected by absorbing one or more existing
corporations by another which survives and
continues the combined business
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- It is the uniting of two or more corporations by the
transfer of property to one of them which continue
in existence, the other or the others being dissolved
and merged therein.
A B
A transfers all assets, properties, rights, obligations,
liabilities to B
B issues shares of stocks in exchange of the transfer
A is then dissolved and B SURVIVES
o Parties to a merger are called constituent
corporation
of
 Consolidation
- The uniting or amalgamation of two or more
existing corporations to form a new corporation
- In merger there is a surviving corporation, the
others are dissolved, while in consolidation, all
constituent are dissolved and a new one organized
A B
C
 Like all other corporate acts, it emanates from the
board
1. The board of directors or trustees of each
constituent corporations shall approve a plan of
merger or consolidation setting forth the matters
required in section 76;
2. Approval of the plan by the stockholders
representing 2/3 of the outstanding capital stock
or 2/3 of the member in non-stock corporations
of each of such corporations at separate corporate
meetings called for the purpose;
3. Prior notice of such meeting, with a copy or
summary of the plan of merger or consolidation
shall be given to all stockholders or members at
least two (2) weeks prior to the scheduled meeting,
either personally or registered mail stating the
purpose thereof;

4. Execution of the articles of merger or consolidation
by each constituent corporations to be signed by
the president or vice-president and certified by
the corporate secretary or assistant secretary
setting forth the matters required in section 78;
5. Submission of the articles of merger or
consolidation in quadruplicate to the SEC
subject to the requirement of section 79 that if it
involve corporations under the direct supervision of
any other government agency or governed by
special laws the favorable recommendation of the
government agency concerned shall first be secured
and;
6. Issuance of the certificate of merger or
consolidation by the SEC at which time the
merger or consolidation shall be effective. If the
plan, however, is believed to be contrary to law, the
SEC shall set a hearing to give the corporations
concerned an opportunity to be heard upon proper
notice and thereafter, the Commission shall proceed
as provided in the Code.
 Although merger and consolidation is an express
power granted to corporation, it is subject to
limitations, as maybe proscribed by law
 What would be the effect of merger
consolidation? <sec. 80>
1. There will only be a single corporation. In case of
merger, the surviving corporation or the
consolidated corporation in case of consolidation;
2. The termination of the corporate existence of the
constituent corporations, except that of the
surviving corporation or the consolidated
corporation;
3. The surviving corporation or the consolidated
corporation will possess all the rights, privileges,
immunities and powers and shall be subject to all
the duties and liabilities of a corporation organized
under the Code;
4. The surviving or consolidated corporation shall
possess all the rights, privileges, immunities and
franchises of the constituent corporations, and all
property and all receivables due, including
subscriptions to shares and other choses in action,
and every other interest of, or belonging to or due
to the constituent corporations shall be deemed
transferred to and vested in such surviving or
consolidated corporation without further act and
deed; and,
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5. The rights of creditors or any lien on the property
of the constituent corporations shall not be impaired
by the merger or consolidation.
 Is there a liquidation process in case of merger or
consolidation?
- None, there is nothing to distribute
Associated Bank vs. CA
- By virtue of a specific provision in the merger
agreement
- Although the subject promissory note names CBTC
as the payee, the reference to CBTC in the note
shall be construed, under the very provision of the
merger agreement, as a reference to petitioner bank,
“as if such reference (was a) direct reference to the
latter for all intents and purposes
- Section 80 par. 4 states:
The surviving or the consolidated
corporation shall thereupon and thereafter possess
all the rights, privileges, immunities and franchises
of each of the constituent corporations; and all
or property, real or personal, and all receivables due
on whatever account, including subscriptions to
shares and other choses in action, and all and every
other interest of, or belonging to, or due to each
constituent corporation, shall be deemed transferred
to and vested in such surviving or consolidated
corporation without further act or deed; and
- Without further acts, meaning it is automatic
 When do merger and consolidation become
effective? What if the SEC fails to act on it without
fault attributable to the corporation involved?
- It will never become valid until and unless the SEC
gives its stamp of approval
- It will be up to the constituent corporation to follow
it up
- It will never take effect until the SEC gives its
approval and issues the articles of merger
o Granted 3 years to wing up unless there is a
trustee to wing up its affairs

 Could there be liquidators and winding up with
respect to the corporation in consolidation and
merger?
- No, there is none
- No assets properties or rights to collect, they are
transferred
- No debts and liabilities to pay because they become
the liabilities of the surviving corporations
- No properties transferred because they will be the
properties of the surviving corporations
o Hardest part is the financial act, regarding how
many shares would be issued, probability of
collection and the like
o In merger and consolidation, there is due
diligence and an economist is usually hired
APPRAISAL RIGHT
 Define appraisal
- Right to withdraw from the corporation and
demand payment of the fair value of his shares after
dissenting from certain corporate acts involving
fundamental changes in corporate structure <sec.
81>
 What property? When may this right be exercises?
- Section 81 provides:
Section 81. Instances of appraisal right. -
Any stockholder of a corporation shall have the
right to dissent and demand payment of the fair
value of his shares in the following instances:
1. In case any amendment to the articles of
incorporation has the effect of changing or
restricting the rights of any stockholder or class of
shares, or of authorizing preferences in any respect
superior to those of outstanding shares of any class,
or of extending or shortening the term of corporate
existence;
2. In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets
as provided in the Code; and
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3. In case of merger or consolidation. (n)
 May it be exercised by a stockholder who dissents
to the act of a business other than a primary
purpose?
X Co. inc
Principal office is in Quezon city, it was changed to
Paranaque
A objects and makes a written demand. May he
exercise his right of appraisal?
- It is not available in all amendments of the
corporation
- It must be changing or restricting the rights of any
stockholder
 What if the principal office is changed from QC to
TAWI-TAWI, will it change or affect the rights of
A?
- To some it may change or restrict the rights to
others it may not
 How is the right exercised?
- According to section 82 of the code:
Section 82. How right is exercised. - The
appraisal right may be exercised by any stockholder
who shall have voted against the proposed
corporate action, by making a written demand on
the corporation within thirty (30) days after the date
on which the vote was taken for payment of the fair
value of his shares: Provided, That failure to make
the demand within such period shall be deemed a
waiver of the appraisal right. If the proposed
corporate action is implemented or affected, the
corporation shall pay to such stockholder, upon
surrender of the certificate or certificates of stock
representing his shares, the fair value thereof as of
the day prior to the date on which the vote was
taken, excluding any appreciation or depreciation in
anticipation of such corporate action.
If within a period of sixty (60) days from
the date the corporate action was approved by the
stockholders, the withdrawing stockholder and the
corporation cannot agree on the fair value of the
shares, it shall be determined and appraised by
three (3) disinterested persons, one of whom shall
be named by the stockholder, another by the
corporation, and the third by the two thus chosen.
The findings of the majority of the appraisers shall

be final, and their award shall be paid by the
corporation within thirty (30) days after such award
is made: Provided, That no payment shall be made
to any dissenting stockholder unless the corporation
has unrestricted retained earnings in its books to
cover such payment: and Provided, further, That
upon payment by the corporation of the agreed or
awarded price, the stockholder shall forthwith
transfer his shares to the corporation. (n)
X Co.
Principal Office- QC, it was changed to Manila
A objects and makes a written demand for payment
of fair value of shares. Can he make a demand of
payment of shares?
 True or False, no stockholder in a stock corporation
can ever demand if the principal office is amended,
changing it from QC to Manila
- False, a stockholder in a close corporation may for
any reason compel the close corporation that he be
paid the fair value of his shares
Can he exercise his appraisal rights in the first
place? He hasn’t even paid his subscription in full.
 May a stockholder who hasn’t paid his subscription
in full exercise his appraisal rights?
- Yes, he can exercise his appraisal rights, by
reconciling the provisions of section 72, section 82
and section 86
Section 72. Rights of unpaid shares. -
Holders of subscribed shares not fully paid which
are not delinquent shall have all the rights of a
stockholder. (n)
Section 82. How right is exercised. - The
appraisal right may be exercised by any stockholder
who shall have voted against the proposed
corporate action, by making a written demand on
the corporation within thirty (30) days after the date
on which the vote was taken for payment of the fair
value of his shares: Provided, That failure to make
the demand within such period shall be deemed a
waiver of the appraisal right. If the proposed
corporate action is implemented or affected, the
corporation shall pay to such stockholder, upon
surrender of the certificate or certificates of
stock representing his shares, the fair value
thereof as of the day prior to the date on which the
vote was taken, excluding any appreciation or
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depreciation in anticipation of such corporate
action.
If within a period of sixty (60) days from
the date the corporate action was approved by the
stockholders, the withdrawing stockholder and the
corporation cannot agree on the fair value of the
shares, it shall be determined and appraised by
three (3) disinterested persons, one of whom shall
be named by the stockholder, another by the
corporation, and the third by the two thus chosen.
The findings of the majority of the appraisers shall
be final, and their award shall be paid by the
corporation within thirty (30) days after such award
is made: Provided, That no payment shall be made
to any dissenting stockholder unless the corporation
has unrestricted retained earnings in its books to
cover such payment: and Provided, further, That
upon payment by the corporation of the agreed or
awarded price, the stockholder shall forthwith
transfer his shares to the corporation. (n)
Section 86. Notation on certificates;
rights of transferee. - Within ten (10) days after
demanding payment for his shares, a dissenting
stockholder shall submit the certificates of stock
representing his shares to the corporation for
notation thereon that such shares are dissenting
shares. His failure to do so shall, at the option of
the corporation, terminate his rights under this
Title. If shares represented by the certificates
bearing such notation are transferred, and the
certificates consequently cancelled, the rights of the
transferor as a dissenting stockholder under this
Title shall cease and the transferee shall have all the
rights of a regular stockholder; and all dividend
distributions which would have accrued on such
shares shall be paid to the transferee. (n)
- Notation is not mandatory, it is even discretionary
because the code provides “at the option of the
corporation” because it never issued one for that
matter since the subscriptions are not yet fully paid
 May the corporation be compelled to pay the
interest of A
300 T, 150T, 150T and 0 unrestricted retained
earnings
 No stockholder may be able to compel the
corporation to pay the value of his shares if the
corporation has no unrestricted retained earnings
- False, a stockholder of a close corporation may for
any reason, provided only that the corporation has
sufficient assets to cover its debts and liabilities

o General rule: there should be unrestricted
retained earnings
o Exception: section 105 “close corporation”
 The procedure and requirements for the valid
exercise of this rights are:
1. The stockholder must have voted against the
proposed corporate action in any of the instances
allowed by law for the exercise of the right of
appraisal;
2. The written demand for payment must be made by
the dissenting stockholder within thirty (30) days
after the date on which the vote was taken thereon.
Failure to make the demand within the said period
shall be deemed a waiver on the part of the
stockholder concerned to exercise his appraisal
right;
3. Surrender of the certificate of stock by the
dissenting stockholder for notation in the corporate
books and the payment by the corporation of the
fair market value of the said shares as of the day
prior to the date on which the vote was taken. If the
stockholder and the corporation cannot agree on the
fair market value thereof, the same shall be
determined in accordance with the provision of
paragraph 2 of section 82;
4. The fair value of the shares of the dissenting
stockholder must be paid by the corporation only if
it has “unrestricted retained earnings” in its books
to cover such payment. If the corporation has no
unrestricted retained earnings, the dissenting
stockholder may not, therefore, be able to
effectively exercise his appraisal rights;
5. Upon payment of the shares by the corporation, the
dissenting stockholder shall transfer his shares to
the corporation.
 What would be the effect if the stockholder
exercises his appraisal rights? What happens to his
voting and dividend rights if he exercises his
appraisal rights?
- It will be suspended, with a limitation of 30 days,
as provided for by section 83 of the code:
Section 83. Effect of demand and
termination of right. - From the time of demand for
payment of the fair value of a stockholder's shares
until either the abandonment of the corporate action
involved or the purchase of the said shares by the
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corporation, all rights accruing to such shares,
including voting and dividend rights, shall be
suspended in accordance with the provisions of
this Code, except the right of such stockholder to
receive payment of the fair value thereof:
Provided, That if the dissenting stockholder is
not paid the value of his shares within 30 days
after the award, his voting and dividend rights
shall immediately be restored. (n)
 How do you compare the rights of a stockholder,
declared delinquent compared to a dissenting
stockholder exercising his appraisal rights
 What if a stockholder exercising his appraisal rights
is also a director, will he also lose his rights as a
stockholder?
- The shares remain to stand in his name until he is
paid, unless there is a stipulation in the by-laws
 When may the right to be paid the value of his
shares cease? Can he withdraw his right of
appraisal?
- Yes, he may withdraw, but there must be consent
by the corporation as provided for by section 83 of
the code:
Section 84. When right to payment ceases.
- No demand for payment under this Title may be
withdrawn unless the corporation consents thereto.
If, however, such demand for payment is
withdrawn with the consent of the corporation, or if
the proposed corporate action is abandoned or
rescinded by the corporation or disapproved by the
Securities and Exchange Commission where such
approval is necessary, or if the Securities and
Exchange Commission determines that such
stockholder is not entitled to the appraisal right,
then the right of said stockholder to be paid the fair
value of his shares shall cease, his status as a
stockholder shall thereupon be restored, and all
dividend distributions which would have accrued
on his shares shall be paid to him. (n)
 Instances when the right of a dissenting stockholder
to be paid the fair value of his shares ceases.
1. When he withdraws his demand for payment and
the corporation consents thereto;
2. When the proposed action is abandoned or
rescinded by the corporation;
3. When the proposed action is disapproved by the
SEC where such approval is necessary;

4. When the SEC determines that he is not entitled to
exercise his appraisal right;
5. When he fails to submit the stock certificate within NON-STOCK CORPORATIONS
ten (10) days from demand to the corporation for
notation that such shares are dissenting shares; and,  What is a non-stock corporation?
6. If the shares are transferred and the certificate
subsequently cancelled.
 Who bears the cost of appraisal?
- It depends
- The corporation bears the cost if
a. The price offered by the corporation is lower
than the fair value of the shares of the
dissenting stockholder as determined by the
appraisers;
b. Where an action is filed by the dissenting
stockholder to recover such fair value and the
refusal of the stockholder to receive payment is
found by the court to be justified.
- Dissenting stockholder will be liable for the cost
and expenses of appraisal when
a. When the price offered by the corporation is
approximately the same as the fair value
ascertained by the appraisers;
b. Where the action filed by the dissenting
stockholder and his refusal to accept payment
is found by the court to be unjustified.
 The dissenting stockholder may also sell, transfer
or assign his shares
Section 86. Notation on certificates;
rights of transferee. - Within ten (10) days after
demanding payment for his shares, a dissenting
stockholder shall submit the certificates of stock
representing his shares to the corporation for
notation thereon that such shares are dissenting
shares. His failure to do so shall, at the option of the
corporation, terminate his rights under this Title. If
shares represented by the certificates bearing
such notation are transferred, and the
certificates consequently cancelled, the rights of
the transferor as a dissenting stockholder under
this Title shall cease and the transferee shall
have all the rights of a regular stockholder; and
all dividend distributions which would have
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accrued on such shares shall be paid to the
transferee. (n)
- A non-stock corporation is one where no part of its
income is distributable as dividends to its members,
trustees, or officers, subject to the provisions of this
code on dissolution
 What provision of the code will govern non-stock
corporations? Would the provision governing stock
corporations also apply to non-stock corporations?
- Yes, 2nd par. Of section 87 provides:
The provisions governing stock
corporation, when pertinent, shall be applicable to
non-stock corporations, except as may be covered
by specific provisions of this Title. (n)
 How is the right to vote exercised in a non-stock
corporation compared to a stock corporation
 May a member in a non-stock corporation vote
cumulatively?
- General rule is NO
 May it be granted or allowed by the by-laws?
- Yes
 May the right to cumulative voting be denied in a
stock corporation?
- No, Doctrine of Limited Capacity
 May members in a non-stock corporation vote by
proxy?
- Yes, section 89 provides that:
“Unless otherwise provided in the articles
of incorporation or the by-laws, a member may vote
by proxy in accordance with the provisions of this
Code. (n) “
 May the right to vote by proxy be validly denied in
a stock corporation?
- No, it is a matter of right in a stock corporation

 May member of a non-stock corporation cast their
vote by text?
- Yes, subject to the approval and terms and
conditions of the SEC <sec. 89>
“Voting by mail or other similar means by
members of non-stock corporations may be
authorized by the by-laws of non-stock
corporations with the approval of, and under such
conditions which may be prescribed by, the
Securities and Exchange Commission. “
 How about in stock?
- Voting by mail or other similar means may also be
authorized and allowed by the by-laws of non-stock
corporations. Generally, in stock corporations, the
vote must be cast at a duly constituted meeting. The
only exception, in case of the latter, is in the matter
of general amendment of the articles of
incorporation where the written assent of the
stockholder may be sufficient.
 How is the governing board constituted in a non-
stock corporation? How many members?
- It may exceed 15 in a non-stock corporation unless
the AOI or by-laws provide otherwise, as provided
for by section 92 of the code:
Section 92. Election and term of trustees. -
Unless otherwise provided in the articles of
incorporation or the by-laws, the board of trustees
of non-stock 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)
 Qualifications?
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1. He is a member of the association;
2. Majority thereof must be residents of the
Philippines; and,
3. Other qualifications as may be provided for in the
by-laws.
 Governing board in a non-stock
- Board of Trustees, however section 138 provides
that:
Section 138. Designation of governing
boards. - The provisions of specific provisions of
this Code to the contrary notwithstanding, non-
stock or special corporations may, through their
articles of incorporation or their by-laws,
designate their governing boards by any name
other than as board of trustees. (n)
 Disqualifications
- Section 27 also applies to a non-stock corporation,
same holds true to the manner of removal <sec. 29
ad 30>
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, shall qualify as a director, trustee or
officer of any corporation. (n)
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 or 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 in the same
meeting authorizing the increase of directors or
trustees if so stated in the notice of the meeting. (n)

Section 30. Compensation of directors. -
In the absence of any provision in the by-laws
fixing their compensation, the directors shall not
receive any compensation, as such directors, except
for reasonable per diems: Provided, however, That
any such compensation other than per diems may
be granted to directors by the vote of the
stockholders representing at least a majority of the
outstanding capital stock at a regular or special
stockholders' meeting. In no case shall the total
yearly compensation of directors, as such directors,
exceed ten (10%) percent of the net income before
income tax of the corporation during the preceding
year. (n)
 Who elects the other officers?
- Directly by the general members unless the by-laws
or articles provide otherwise. <sec.92>
“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) “
 In stock corporations who elect officers?
- Directors
 The provision that stock corporations cannot
validly provide that members cannot be voted by
stockholders is only a general rule because there is
an exception section 97 of the code states that:
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
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elected or appointed by the stockholders, instead
of by the board of directors.
 Nature of membership is non-transferrable and
personal in nature unless the articles of
incorporation or by-laws provide otherwise
Section 90. Non-transferability of
membership. - Membership in a non-stock
corporation and all rights arising there from are
personal and non-transferable, unless the articles of
incorporation or the by-laws otherwise provide. (n)
 How is a membership requirement in a non-stock
corporation
A holds a membership certificate
B goes to the corporation and compels the
corporation to record the transfer in his name
- Membership in non-stock corporations may be
acquired by complying with the provisions of its
rules prescribed in the by-laws. This is in
consonance with the express power granted by law
under section 36, paragraph 6 of the code,
authorizing them to admit members thereof and that
authority carries with it the power to prescribe rules
on membership. It has thus been stated that in the
absence of charter or statutory restrictions, non-
stock corporations may determine who shall be
admitted to membership and how they shall be
admitted.
Section 36. Corporate powers and
capacity. - Every corporation incorporated under
this Code has the power and capacity:
6. In case of stock corporations, to issue or sell
stocks to subscribers and to sell stocks to
subscribers and to sell treasury stocks in accordance
with the provisions of this Code; and to admit
members to the corporation if it be a non-stock
corporation;
- They can provide the manner in which to admit
depending on their own rules
 The power or authority to terminate members in
non-stock corporations is said to be inherent but
strict compliance with the manner and procedure
laid down in the by-laws must be observed,
otherwise it may render the expulsion ineffective
and invalid.

Section 91. Termination of membership. -
Membership shall be terminated in the manner and
for the causes provided in the articles of
incorporation or the by-laws. Termination of
membership shall have the effect of extinguishing
all rights of a member in the corporation or in its
property, unless otherwise provided in the articles
of incorporation or the by-laws. (n)
 Power is inherent and may be exercised in certain
situations:
1. When an offense is committed which, although
it has no immediate relation to a member’s
duty as such, it is so infamous as to render him
unfit for society of honest men, which is
indictable at common law;
2. When the offense is a violation of his duty as
member of the corporation; and,
3. When the offense is of a mixed nature, being
both against his duty as a member of the
corporation, and also indictable at common
law.
If the conduct of the member comes within any of
this cases, it is a ground for valid expulsion
although it may not be expressly made so by the
by-laws
Chinese YMCA vs. Ching
- Right of the corporation to choose who the
members are, cannot be inquired or intervened by
the court
- The appealed decision thus contravened the
establish principle that the courts cannot strip a
member of a non-stock corporation of his
membership therein without cause.
Lions Club International vs. CA
- Courts will not generally interfere on matters
involving the internal affairs of an unincorporated
association such as election contest unless the acts
complained of are arbitrary, oppressive, fraudulent,
violative of civil rights and the like
- General rule is that the courts will not interfere with
the internal affairs of an unincorporated association
so as to settle disputes between the members, or
questions of policy, discipline, or internal
government, so long as the government of the
society is fairly and honestly administered in
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conformity with its by-laws and the law of the land,
and no property or civil rights are involved.
- Exceptions are the following:
a. Where law and justice so require, and the
proceedings of the association are subject to
judicial review where there is fraud,
oppression, or bad faith, or where the action
complained of is capricious, arbitrary, or
unjustly discriminatory
b. To grant relief in case property or civil rights
are invaded, although it has also been held that
the involvement of property rights does not
necessarily authorize judicial intervention, in
the absence of arbitrariness, fraud or collusion.
c. Are violative of the laws of the society, or the
law of the land, as by depriving the person of
due process of law
d. There is lack of jurisdiction on the part of the
tribunal conducting the proceedings, where the
organization exceeds its powers, or where the
proceedings are otherwise illegal
 Corporations, stock and non-stock, may be
dissolved in accordance and pursuant to the
provisions of Sections 118 to 121 of the
Corporation Code and the pertinent provisions of
P.D. 902-A, as amended. If such be the case, the
assets of the corporation are to be distributed in
accordance with law and established jurisprudence.
 If a non-stock corporation is dissolved how will its
properties be distributed?
Section 94. Rules of distribution. - In case
dissolution of a non-stock corporation in
accordance with the provisions of this Code, its
assets shall be applied and distributed as
follows:
1. All liabilities and obligations of the
corporation shall be paid, satisfied and
discharged, or adequate provision shall be
made therefore;
2. Assets held by the corporation upon a
condition requiring return, transfer or
conveyance, and which condition occurs by
reason of the dissolution, shall be returned,
transferred or conveyed in accordance with
such requirements;

3. Assets received and held by the corporation
subject to limitations permitting their use only
for charitable, religious, benevolent,
educational or similar purposes, but not held
upon a condition requiring return, transfer or
conveyance by reason of the dissolution, shall
be transferred or conveyed to one or more
corporations, societies or organizations
engaged in activities in the Philippines
substantially similar to those of the dissolving
corporation according to a plan of distribution
adopted pursuant to this Chapter;
4. Assets other than those mentioned in the
preceding paragraphs, if any, shall be
distributed in accordance with the provisions of
the articles of incorporation or the by-laws, to
the extent that the articles of incorporation or CLOSE CORPORATIONS
the by-laws, determine the distributive rights of
members, or any class or classes of members,
or provide for distribution; and
5. In any other case, assets may be distributed
to such persons, societies, organizations or
corporations, whether or not organized for
profit, as may be specified in a plan of
distribution adopted pursuant to this Chapter.
(n)
 Non-stock corporations with 4Billion funds, may it
be distributed for and among its members?
- Section 94 number 3 provides:
3. Assets received and held by the
corporation subject to limitations permitting their
use only for charitable, religious, benevolent,
educational or similar purposes, but not held upon a
condition requiring return, transfer or conveyance
by reason of the dissolution, shall be transferred or
conveyed to one or more corporations, societies or
organizations engaged in activities in the
Philippines substantially similar to those of the
dissolving corporation according to a plan of
distribution adopted pursuant to this Chapter;
- If there is no distributive agreement then they may
do so through a plan of distribution under section
95
Section 95. Plan of distribution of assets. -
A plan providing for the distribution of assets, not
inconsistent with the provisions of this Title, may
be adopted by a non-stock corporation in the
process of dissolution in the following manner:
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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)
 Section 96. Definition and applicability of Title. -
A close corporation, within the meaning of this
Code, is one whose articles of incorporation
provide that: (1) All the corporation's issued
stock of all classes, exclusive of treasury shares,
shall be held of record by not more than a
specified number of persons, not exceeding
twenty (20); (2) all the issued stock of all classes
shall be subject to one or more specified
restrictions on transfer permitted by this Title;
and (3) The corporation shall not list in any
stock exchange or make any public offering of
any of its stock of any class. Notwithstanding the
foregoing, a corporation shall not be deemed a
close corporation when at least two-thirds (2/3) of
its voting stock or voting rights is owned or
controlled by another corporation which is not a
close corporation within the meaning of this Code.
- Between and among themselves, they feel and act
alike
- Not more than 20 stockholders
- Specified persons, if you are not specified, you
cannot be a stockholder
- All the issued stocks of all classes is subject to
restrictions
- Shall not be listed in the stock exchange not
publicly offered
- 3 qualifying conditions must be contained in the
articles of incorporation, to be considered as a close
corporation, if not, it will not be considered as such

and will be governed by the general provisions of
the code
- Even if 100 % is owned by one person it will not be
considered a close corporation without the 3
qualifying provisions
- Identity of stockholders, specified persons
- Active management either as directors or partners
in management
- Combination of the corporation and partnership
type of business
 May any type of corporation, be organized as such
close corporation?
- No, the 3 qualifying conditions must be present
 What if 2/3 of the outstanding capital stock is
owned by another corporation which is also a close
corporation, will it be a close corporation?
- No, it will only be a closed corporation if 2/3 of the
voting stocks of a close corporation is also owned
by a close corporation. It must be “voting” stocks
- Even if another corporation owns or controls 2/3 of
the voting stocks of a close corporation, the latter
may still be considered as such close corporation if
the corporation owning or controlling the shares is
also a close corporation.
“Notwithstanding the foregoing, a
corporation shall not be deemed a close corporation
when at least two-thirds (2/3) of its voting stock or
voting rights is owned or controlled by another
corporation which is not a close corporation within
the meaning of this Code.”
 What kind of corporations cannot be a close
corporation?
1. Mining or oil companies,
2. Stock exchange
3. Banks and insurance companies,
4. Public utilities
5. Educational institutions
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6. Corporations vested with public interest
 Classification of directors
- Ordinary stock- no such right
- Close corporation-yes there is such a right
 Section 97 is a permissive provision
Section 97. Articles of incorporation. -
The articles of incorporation of a close corporation
may provide:
1. For a classification of shares or rights and the
qualifications for owning or holding the same and
restrictions on their transfers as may be stated
therein, subject to the provisions of the following
section;
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.
 After classification what then?
- After classification, qualification and then
restriction as provided for under the 3 qualifying
conditions in section 96
 Cumulative voting is restricted in close
corporations if will be elected solely by a particular
class
 In a close corporation, the articles of incorporation
may provide for a greater quorum and voting
requirement in meetings of both stockholders or
directors to increase the veto power of minority
stockholders, unlike in a stock corporation wherein
only directors meetings may provide for greater
quorum requirement and in stockholders meeting
which may not be altered or increased, as provide
for in section 25, following the doctrine of limited
capacity
 The articles of a close corporation may likewise
provide that the business of the corporation shall be
managed by the stockholders rather than by the
board of directors. However the same must contain
the continuing provisions required in paragraph 2 of
section 97, that is:

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; and;
3. The stockholders of the corporation shall be
subject to all liabilities of directors.
 Liability of stockholders acting as directors in a
close corporation are more extensive since they are
personally liable for corporate torts unless the
corporation has obtained a reasonable adequate
liability insurance, unlike a ordinary stock
corporation, wherein directors thereof are only
liable for corporate torts only if they have been
negligent or acted fraudulently in the performance
of their functions.
 Restrictions
- In ordinary stock corporations, the restrictions must
appear in the articles of incorporation as well as the
certificate of stocks
- In a close corporation, the restrictions must appear
in the articles of incorporation, the by-laws and the
certificate of stocks. Otherwise, the same shall not
be binding on any purchaser thereof in good faith
 What if the stockholders do not want to exercise
their right or option to purchase may it be sold to
any person?
- Yes, any third person, section 98 provides:
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 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.
o ordinary stock corporations are liable only
if acted in Bad faith, fraud or negligence in
performance of duty
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 What if there are already 20 stockholders and they
want to add 2 more, may it compel?
- In ordinary stock corporations, they may compel by
mandamus
- In close corporations, may not be compelled to
admit because it breaches the qualifying conditions
 Since they cannot be compelled, may they admit?
- Yes, provided all the stockholders consented or
instead of consenting they decide to amend their
articles of incorporation
- Will have to amend the articles of incorporation to
accommodate other purchasers of share
- Will cease to be a close corporation if it amends
and becomes in excess of 20
o Unless all the stockholders consent they
“may”
 What if the other stockholders object to register?
What will be the remedy of the transferee?
- His remedy is rescission. The effect of rescission is
mutual restitution
 How about the stockholder, what is his recourse?
- He may compel the close corporation to purchase
his shares at their fair value for any reason,
provided the corporation has sufficient assets in its
books to cover the debts and liabilities exclusive of
capital
- In a close corporation, there is a withdrawing
stockholder, unlike in an ordinary stockholder
where there is none, they may only do so in the
exercise of appraisal rights
Section 105. Withdrawal of stockholder or
dissolution of corporation. - In addition and
without prejudice to other rights and remedies
available to a stockholder under this Title, any
stockholder of a close corporation may, for any
reason, compel the said corporation to purchase
his shares at their fair value, which shall not be
less than their par or issued value, when the
corporation has sufficient assets in its books to
cover its debts and liabilities exclusive of capital
stock: Provided, That any stockholder of a close
corporation may, by written petition to the

Securities and Exchange Commission, compel the
dissolution of such corporation whenever any of
acts of the directors, officers or those in control of
the corporation is illegal, or fraudulent, or
dishonest, or oppressive or unfairly prejudicial to
the corporation or any stockholder, or whenever
corporate assets are being misapplied or wasted.
 Agreements may also be entered in a close
corporation <sec.100>
- They can even agree to be partners in management
- Pre-incorporation
- Manner in which the business of the corporation
shall be managed
 Board resolution
- Ordinary stock corporations- sit and act as a body at
a duly constituted meeting, they may do so by
virtue of the E-Commerce Act through
teleconference or video conference
 Exception to the rule: other officers may be directly
appointed and hired by the stockholders
 Close corporations may validly act even without a
meeting provided the conditions are obtained
Section 101. When board meeting is
unnecessary or improperly held. - Unless the by-
laws provide otherwise, any action by the directors
of a close corporation without a meeting shall
nevertheless be deemed valid if:
1. Before or after such action is taken, 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
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.
 Pre-emptive rights in a close corporation is absolute
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Section 102. Pre-emptive right in close
corporations. - The pre-emptive right of
stockholders in close corporations shall extend to
all stock to be issued, including reissuance of
treasury shares, whether for money, property or
personal services, or in payment of corporate debts,
unless the articles of incorporation provide
otherwise.
 Why is it said to be absolute?
- Because there is no public offering in a close
corporation, otherwise it will not be considered as
close
 In a close corporation the pre-emptive rights is
broadened to include all issues without exception
unless denied or limited by the articles of
incorporation
 Section 39 is the governing provision concerning
rights of the stockholder in an ordinary stock
corporation and it may be denied. If it is not denied
a stockholder can exercise his pre-emptive rights
for all issues of shares whether money, property or
previously incurred indebtedness.
Section 39. Power to deny pre-emptive
right. - All stockholders of a stock corporation shall
enjoy pre-emptive right to subscribe to all issues or
disposition of shares of any class, in proportion to
their respective shareholdings, unless such right is
denied by the articles of incorporation or an
amendment thereto: Provided, That such pre-
emptive right shall not extend to shares to be issued
in compliance with laws requiring stock offerings
or minimum stock ownership by the public; or to
shares to be issued in good faith with the approval
of the stockholders representing two-thirds (2/3) of
the outstanding capital stock, in exchange for
property needed for corporate purposes or in
payment of a previously contracted debt.
 Are treasury shares covered in the exercise of pre-
emptive rights in ordinary stock corporations?
 As regards amendments
Section 103. Amendment of articles of
incorporation. - Any amendment to the articles of
incorporation which seeks to delete or remove any
provision required by this Title to be contained in
the articles of incorporation or to reduce a quorum
or voting requirement stated in said articles of
incorporation 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.
 What happens if there is a deadlock?
- Section 104 provides for a remedy
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
its board of directors, stockholders, or officers; (3)
directing or prohibiting any act of the corporation
or its board of directors, stockholders, officers, or
other persons party to the action; (4) requiring the
purchase at their fair value of shares of any
stockholder, either by the corporation regardless of
the availability of unrestricted retained earnings in
its books, or by the other stockholders; (5)
appointing a provisional director; (6) dissolving the
corporation; or (7) granting such other relief as the
circumstances may warrant.
A provisional director shall be an impartial
person who is neither a stockholder nor a creditor
of the corporation or of any subsidiary or affiliate
of the corporation, and whose further qualifications,
if any, may be determined by the Commission. A
provisional director is not a receiver of the
corporation and does not have the title and powers
of a custodian or receiver. A provisional director
shall have all the rights and powers of a duly
elected director of the corporation, including the
right to notice of and to vote at meetings of
directors, until such time as he shall be removed by
order of the Commission or by all the stockholders.
His compensation shall be determined by
agreement between him and the corporation subject
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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.
- Powers of the SEC in intra-corporate concerns has
been transferred to the proper commercial courts
- Prohibit, even if acting in good faith
- Provisional director appointed by the court
- Requiring the purchase, irrespective of unrestricted
retained earnings
- The provision of the law above-quoted gives the
SEC a very wide discretion in respect to
management of a close corporation in the event of a
deadlock. It may:
1. Cancel or alter any provision in the articles of
incorporation, by-laws or any stockholders
agreement
2. Cancel, alter or enjoin any resolution or other
act of the corporation or its board of directors,
stockholders or officers
3. Prohibit any act of the corporation or its board
of directors, stockholders or officers or other
persons party to the action;
4. Requiring the purchase of the par value of the
shares of any stockholders, either by the
corporation regardless of availability of
unrestricted earnings, or by the other
shareholders,
5. Appointment of a provisional director
6. Dissolving the corporation; or
7. Other relief as the circumstances may warrant.
 Section 105
- Dishonesty is a ground for dissolution of a close
corporation
- Even one stockholder may petition for dissolution
o when there is a relief available, dissolution
would not be available in an ordinary
corporation

CLOSE CORPORATION
1. The number of
stockholders cannot
exceed 20
2. To the extent that all
stockholders can be
deemed directors, the
number of directors can
effectively be more than
15
3. Shares of stock are
subject to specified
restrictions
4. Shares of stock are
prohibited from being
listed in the stock
exchange or offered for
sale to the public
5. Stockholders may take
an active part in
corporate management
by vesting management
to them rather than a
Board of Director
6. Those active in
management are
personally liable for
corporate torts unless the
corporation has obtained
an adequate liability
insurance
7. Directors can validly act
even without a meeting
8. Agreements between
stockholders regarding
the operations of the
business can validly be
made
9. To the extent that
directors may be
classified into one or
more classes and to be
voted solely by a
particular class of stock,
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ORDINARY STOCK cumulative voting may,
CORPORATION in effect, be restricted
No limitation as to number 10.The articles of Officers are elected by the
of shareholder incorporation may Board of Directors
provide that all officers
shall be elected or
Maximum number of appointed by the
directors is 15 stockholders
11.It may provide for Although the articles of
greater quorum and incorporation or by-laws
voting requirements in may provide for greater
meetings of stockholders quorum and voting
Generally no restriction on and directors requirements in directors’
transfer of shares meeting under section 25,
those for stockholders’
meeting cannot generally
be altered
No prohibition
12.Restriction on transfer Valid and binding if
of shares should be indicated in the articles of
indicated in the articles incorporation and stock
of incorporation, by-laws certificates
and stock certificates
Management is lodged in
the Board of Directors
13.Pre-emptive rights of Pre-emptive rights may be
stockholders is broader denied as provided for in
as it include all issues section 39
without exception
Directors are liable for torts 14.A stockholder may Unless he sells his shares, a
only if they have acted withdraw and compel the stockholder cannot get
negligently or fraudulently corporation to purchase back his investment nor
his shares for any reason compel the corporation to
with the limitation only buy his shares except in the
that the corporation has exercise of his appraisal
sufficient assets to cover right
its liabilities exclusive of
capital stock
Directors must, as a rule,
act as a body at a duly
constituted meeting 15.The proper forum may Courts cannot interfere I
interfere in the the business judgment of
management of a close the directors/stockholders
Not valid and binding since
corporation in case of “BUSINESS JUDGMENT
stockholders’ agreement
deadlocks under Section RULE”
cannot limit the discretion
104, even of the
of the Board to manage
directors/stockholders
corporate affairs
are acting in good faith
Ordinarily, no such
16.Any stockholder may Dissolution may be had
classification and no
petition the SEC for only on the grounds
restrictions on cumulative
corporate dissolution on provided by the provisions
voting
grounds among others, of the Code on dissolution
provides for in section and P.D. 902-A, as

105 amended
Manuel Dulay Enterprises vs. CA
- What was the position of Manuel Dulay here?
President, General Manager and Treasurer
- Cannot act both as president and treasurer at the
same time
- Since it is a close corporation owned by the family
of Manuel Dulay, save and except the secretary, it
should be governed by Title XII
- Petitioner is classified as a close corporation and
consequently a board resolution authorizing the sale
or mortgage of the subject property is not necessary
to bind the corporation for the action of its
president. At any rate, a corporate action taken at a
board meeting without proper call or notice in a
close corporation is deemed ratified by the absent
director unless the latter promptly files his written
objection with the secretary of the corporation after
having knowledge of the meeting which, in this
case, petitioner Virgilio Dulay failed to do.
- Virgilio Dulay is a signatory witness, he knows
very well about the deed of absolute sale, he is
estopped
Naguiat vs. NLRC
- Section 100 par. 5. To the extent that the
stockholders are actively engaged in the
management or operation of the business and
affairs of a close corporation, the stockholders shall
be held to strict fiduciary duties to each other and
among themselves. Said stockholders shall be
personally liable for corporate torts unless the
corporation has obtained reasonably adequate
liability insurance.
 Family corporations is not automatically a close
corporation the 3 qualifying conditions must be
present.
SPECIAL CORPORATIONS
 2 types of special corporations
1. Educational corporations
2. Religious corporations
2.1 Corporation Sole
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2.2 Religious Societies
 What provision governs educational corporations?
Section 106. Incorporation. - Educational
corporations shall be governed by special laws and
by the general provisions of this Code. (n)
- Special laws like they Education Act of the
Philippines
- These institutions of learning, once recognized by
the government as such are mandated by law to be
incorporated within ninety (90) days under the
provisions of the Corporation Code and must,
perforce, comply with the requirements and
procedure laid down there under. Their failure to so
will not immune the educational institution from
suit as a corporation. (Chiang Kai Siek Case)
- Favorable recommendation of government agency
involved
 Two types of educational corporations
- Certificate of completion in the academic field
- Vocational and technical one’s
o Recommendation of DECS if certificate of
completion in the academic field
 How is the governing board of an educational
institution instituted?
- Non-stock- multiples of 5 only (example: 5,10,15)
- Stock- can be anywhere between 5 to 15
 Can they consist of 7 or 9 members?
- Yes, if stock
 Can they be incorporated also as non-stock?
- Yes
- B.P. 232 allows the organization of an educational
institution that is stock corporation, only if they do
not issue a certificate of completion in the academic
field
 Qualifications and disqualifications of the
membership in the board of an educational
corporation

- Educational corporations are governed by special
laws and general provisions, hence if there is no
provision in the special law, you go back to section
25 and 27 of the general provisions
- Stock- must be a stockholder
- Non-stock- must be a member
- By-laws may provide for additional qualifications
and disqualifications
Section 25. Corporate officers, quorum. -
Immediately after their election, the directors of a
corporation must formally organize by the election
of a president, who shall be a director, a treasurer
who may or may not be a director, a secretary who
shall be a resident and citizen of the Philippines,
and such other officers as may be provided for in
the by-laws. Any two (2) or more positions may be
held concurrently by the same person, except that
no one shall act as president and secretary or as
president and treasurer at the same time.
The directors or trustees and officers to be
elected shall perform the duties enjoined on them
by law and the by-laws of the corporation. Unless
the articles of incorporation or the by-laws provide
for a greater majority, a majority of the number of
directors or trustees as fixed in the articles of
incorporation shall constitute a quorum for the
transaction of corporate business, and every
decision of at least a majority of the directors or
trustees present at a meeting at which there is a
quorum 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.
Directors or trustees cannot attend or vote by proxy
at board meetings. (33a)
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,
shall qualify as a director, trustee or officer of any
corporation. (n)
 Article 14 section 4 par. 2 of the Constitutions
Educational institutions, other than those
established by religious groups and mission boards,
shall be owned solely by citizens of the Philippines
or corporations or associations at least sixty per
centum of the capital of which is owned by such
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citizens. The Congress may, however, require
increased Filipino equity participation in all
educational institutions. The control and
administration of educational institutions shall be
vested in citizens of the Philippines.
No educational institution shall be established
exclusively for aliens and no group of aliens shall
comprise more than one-third of the enrollment in
any school. The provisions of this sub section shall
not apply to schools established for foreign
diplomatic personnel and their dependents and,
unless otherwise provided by law, for other foreign
temporary residents.
- Management is left solely to citizens of the
Philippines
- Board of Directors manages the corporate affairs,
foreigners cannot therefore be elected in the board
- Exceptions are, mission boards and religious
orders, which may have a governing board
consisting of foreigners
 Term of office of governing board in an educational
institutions
- Can serve a term of 5 years. If that be the case, 1/5
of their number shall expire every year
 Non-stock or stock, can they serve for a 1 year term
only?
- Yes, the articles of incorporation may provide that
it be 1 year only
 What are these religious corporations spoken off?
- Corporation sole and religious societies
 What is a corporation sole?
- Consists of one person only and his successor in
some particular station, who are incorporated by
law in order to give them some legal capacities and
advantages, particularly that of perpetuity, which in
their natural persons they could not have had
 May a corporation be organized by less than 5
natural persons?
- General rule, 5 to 15 natural persons(except
cooperatives and corporations primarily organized
to hold equities in rural banks and may rightfully
become incorporators thereof)

- Exception, corporation sole, consist of only one
person
 May any person form or organize a corporation
sole?
- No, not any person can form a corporation sole,
section 110 provides:
Section 110. Corporation sole. - For the
purpose of administering and managing, as trustee,
the affairs, property and temporalities of any
religious denomination, sect or church, a
corporation sole may be formed by the chief
archbishop, bishop, priest, minister, rabbi or other
presiding elder of such religious denomination, sect
or church. (154a)
 Is it required to file the articles of incorporation in
the SEC?
- Yes
 What should be contained in the articles of
incorporation?
- Section 111 and section 112 provides for the
contents and procedures
Section 111. Articles of incorporation. - In
order to become a corporation sole, the chief
archbishop, bishop, priest, minister, rabbi or
presiding elder of any religious denomination, sect
or church must file with the Securities and
Exchange Commission articles of incorporation
setting forth the following:
1. That he is the chief archbishop, bishop, priest,
minister, rabbi or presiding elder of his religious
denomination, sect or church and that he desires to
become a corporation sole;
2. That the rules, regulations and discipline of his
religious denomination, sect or church are not
inconsistent with his becoming a corporation sole
and do not forbid it;
3. That as such chief archbishop, bishop, priest,
minister, rabbi or presiding elder, he is charged
with the administration of the temporalities and the
management of the affairs, estate and properties of
his religious denomination, sect or church within
his territorial jurisdiction, describing such territorial
jurisdiction;
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4. The manner in which any vacancy occurring in
the office of chief archbishop, bishop, priest,
minister, rabbi of presiding elder is required to be
filled, according to the rules, regulations or
discipline of the religious denomination, sect or
church to which he belongs; and
5. The place where the principal office of the
corporation sole is to be established and located,
which place must be within the Philippines.
The articles of incorporation may include
any other provision not contrary to law for the
regulation of the affairs of the corporation. (n)
Section 112. Submission of the articles of
incorporation. - The articles of incorporation must
be verified, before filing, by affidavit or affirmation
of the chief archbishop, bishop, priest, minister,
rabbi or presiding elder, as the case may be, and
accompanied by a copy of the commission,
certificate of election or letter of appointment of
such chief archbishop, bishop, priest, minister,
rabbi or presiding elder, duly certified to be correct
by any notary public.
From and after the filing with the
Securities and Exchange Commission of the said
articles of incorporation, verified by affidavit or
affirmation, and accompanied by the documents
mentioned in the preceding paragraph, such chief
archbishop, bishop, priest, minister, rabbi or
presiding elder shall become a corporation sole and
all temporalities, estate and properties of 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)
 Is it required to indicate its terms of execution?
Why not?
- Not required because they are supposed to exist in
perpetuity
- However, it does not mean that it shall continue to
exist forever, it merely means that it has the
capacity of continuous existence during a particular
period until dissolved in accordance with law

 When will it acquire judicial personality? How do
you compare this to other types of corporation?
- After the filing the verified articles of incorporation
along with the documents required in Section 112
with the SEC, immediately becomes endowed with
corporate personality, this serves as an exception to
the rule that a corporation acquires juridical
personality only upon the issuance of a certificate
of incorporation by the said government agency.
- Upon filing of verified articles of incorporation
with the SEC, will not require the approval of SEC
 A corporation sole is possessed with the same
power, rights and privileges, to own, acquire and
hold or convey properties like any other
corporation? True or False
- False, they have the same power rights and
privileges, but when it comes to alienation and
acquisition, it must possess a court order, however
when there is a regulated method, a court order may
be dispensed with <sec. 113>
Section 113. Acquisition and alienation of
property. - Any corporation sole may purchase and
hold real estate and personal property for its church,
charitable, benevolent or educational purposes, and
may receive bequests or gifts for such purposes.
Such corporation may sell or mortgage real
property held by it by obtaining an order for that
purpose from the Court of First Instance of the
province where the property is situated upon proof
made to the satisfaction of the court that notice of
the application for leave to sell or mortgage has
been given by publication or otherwise in such
manner and for such time as said court may have
directed, and that it is to the interest of the
corporation that leave to sell or mortgage should be
granted. The application for leave to sell or
mortgage must be made by petition, duly verified,
by the chief archbishop, bishop, priest, minister,
rabbi or presiding elder acting as corporation sole,
and may be opposed by any member of the
religious denomination, sect or church represented
by the corporation sole: Provided, That in cases
where the rules, regulations and discipline of the
religious denomination, sect or church, religious
society or order concerned represented by such
corporation sole regulate the method of acquiring,
holding, selling and mortgaging real estate and
personal property, such rules, regulations and
discipline shall control, and the intervention of the
courts shall not be necessary. (159a)
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 Since a corporation sole is consists only of one
person, will the registration of the property in the
name of the corporation sole vest unto the head
thereof the ownership of the property?
- No, it will not vest unto the head, the head is acting
merely as a guardian
Roman Catholic Apostolic Adm. Of Davao, inc. vs.
Land Reg. Comm, et al.
- Act only as a guardian
- Ownership devolves upon the congregation or
religious denomination
- A corporation consists of one person only and his
successors (who will always be one at a time, in
some particular station), who are incorporated by
law in order to give them some legal capacities and
advantages, particularly that of perpetuity, which in
their natural persons they could not have had
- Roman Catholic Church has no nationality and that
the framers of the Constitution, as will be hereunder
explained, did not have in mind the religious
corporations sole when they provided that 60
percent of the capital thereof be owned by Filipino
citizens.
Director of Lands vs. CA
- Alienable public land is converted into private land
when the same has been openly, continuously and
exclusively in possession of the property as concept
of an owner for 30 years, automatically that is
Republic of the Philippines vs. IAC
- Determination of the character of the land should
be in mind
- If they still form part of public domain they cannot
be owned, but if they are converted into private
land, the constitutional prohibition will not apply
 If there is vacancy who will fill up the same? What
if there is none, what must the successor do?
- According to section 114:
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 shall exercise
all the powers and authority of the corporation sole
during such vacancy. (158a)
 If a corporation exists in equity may it not be
dissolved?
Section 115. Dissolution. - A corporation
sole may be dissolved and its affairs settled
voluntarily by submitting to the Securities and
Exchange Commission a verified declaration of
dissolution.
The declaration of dissolution shall set forth:
1. The name of the corporation;
2. The reason for dissolution and winding up;
3. The authorization for the dissolution of the
corporation by the particular religious
denomination, sect or church;
4. The names and addresses of the persons who are
to supervise the winding up of the affairs of the
corporation.
Upon approval of such declaration of
dissolution by the Securities and Exchange
Commission, the corporation shall cease to carry on
its operations except for the purpose of winding up
its affairs. (n)
- While section 115 of the code provides for the
process and procedure for the dissolution of a
corporate sole, there is nothing in the law itself
which would prohibit it from amending its articles
of incorporation
- It is believed that authorization for the dissolution
by the particular religious denomination, sect or
church, as required in sub-paragraph 3 of section
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115 would still be necessary in the case of
amending the articles of incorporation to affect
dissolution.
o Expiration of a corporate term will not
apply to a religious corporation
 May a corporation sole be dissolved by judicial
decree?
- General rule: No, because a corporation sole, is by
its very nature ecclesiastical and religious (doctrine
of separation of church and state)
- Exception: police power of the state, if its purpose
is being carried out and is instead being used for
illegal purpose, it may be so dissolved
 What are religious societies?
- Under common law, a religious society is a body of
persons associated together for the purpose of
maintaining religious worship.
 Is it also required to file its articles of incorporation
to the SEC?
- No <sec. 116> “may”
 What should be contained in the articles of
incorporation?
- Section 116 provides:
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 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 DISSOLUTION
incorporate, at a duly convened meeting of the
body;
 What is dissolution?
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)
 Is it required to indicate its term of existence?
- Likewise to exist in perpetuity, the law does not
require to indicate its term of existence
 When will it acquire juridical personality?
- Only a corporation sole may come into existence
without SEC approval, section 19 will thus govern,
Vested with judicial capacity upon issuance of the
certificate by the SEC
o However it is not accurate according to
atty. Ladia because there are those that can
issue for example cooperatives- BUREAU
OF COOPERATIVES which register,
home insurance guaranty corporation-
HOME OWNERS
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 How may religious societies be dissolved?
- Go to the general rules governing dissolution,
because the rules under special corporations do not
provide for such rule
- Extinguishment of the corporate franchise and the
termination of corporate existence
 3 modes of dissolution
1. By expiration of its term;
2. By voluntary surrender of its primary franchise
(voluntary dissolution);
3. By revocation of its corporate franchise
(involuntary dissolution)
Philippine National Bank vs. CFI
- When the period of corporate life expires, the
corporation ceases to be a body corporate for
purposes of continuing the business for which it is
organized. But it shall nevertheless be continued as
a body corporate for three years after the time when
it would have be dissolved, for the purpose of
prosecuting and defending suits by or against it and
for enabling it gradually to settle and close its
affairs to dispose of and convey its property and to
divide its assets. There is no need for the institution
of a proceeding for quo warranto to determine the
time and date of the dissolution of a corporation
because the period of corporate existence is
provided in the articles of incorporation. When
such period expires and without any extension
having been made pursuant to law, the corporation
is dissolved automatically insofar as the
continuation of its business is concerned.
- The rights of the lessor and the lessee over the
improvements which the latter constructed on the
leased premises are governed by Article 1678 of the
Civil Code. The provision gives the lessee the right
to remove the improvements if the lessor chooses
not to pay one half of the value thereof. However,
in the case at bar the law will not apply because the
parties herein have stipulated in the contract their
own terms and conditions concerning the
improvements before the termination of the lease.
Petitioner PNB as assignee of PBM succeeded to
the obligation of the latter under the contract of
lease. It could not possess rights more than what

PBM had as lessee under the contract. Hence,
petitioner was duly bound to remove the
improvements before the expiration of the period of
lease. Its failure to do so when the lease was
terminated was tantamount to a waiver of its rights
and interest over the improvements on the leased
premise.
o 3 modes of dissolution, 3 modes of
voluntary dissolution and 3 modes of
liquidation and winding up-
FREQUENTLY ASKED IN THE
FINALS
 What are the 3 modes of voluntary dissolution?
1. Voluntary dissolution where no creditors are
affected; <sec.118>
2. Voluntary dissolution where creditors are affected;
<sec. 119>
3. Shortening of corporate term. <sec. 120>
 Voluntary dissolution where no creditors are
affected <sec.118>
- The formal and procedural requirements necessary
are the following:
1. Majority vote of the board of directors or trustees;
2. Sending of notice of each stockholders or member
either by registered mail or personal delivery at
least thirty (30) days prior to the meeting
(scheduled by the board for the purpose of
submitting the board action to dissolve the
corporation for approval of the stockholder or
members.);
3. Publication of the notice of time, place and subject
of the meeting for three (3) consecutive weeks in a
newspaper published in the place where the
principal office of said corporation is located or in a
newspaper of general circulation in the Philippines;
4. Resolution adopted by the affirmative vote of the
stockholders owning at least 2/3 of the outstanding
capital stock or 2/3 of the members at the meeting
duly called for the purpose;
5. A copy of the resolution authorizing the dissolution
must be certified by a majority of the board of
directors or trustees and countersigned by the
corporate secretary;
6. Issuance of a certificate of dissolution by the SEC.
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 Should this be strictly complied with?
- Yes, compliance with the requirements and
formalities prescribed above is mandatory such that
failure to comply therewith will have no effect on
the legal existence of the corporation.
 Will dissolution be effective and valid by a mere
resolution of the BOD and stockholders?
- No, a mere resolution by the stockholders or the
BOD of a corporation to dissolve the same does not
affect the dissolution but that some other steps,
administrative or judicial is necessary. (Daguhoy
Enterprises vs. Ponce)
- Since it is the State which grants its right to exist, it
is only through the State which can allow the
termination of its existence; without consent of the
State, it will not be dissolved.
 Voluntary dissolution where creditors are affected
<sec.119>
- By virtue of a petition, when there are creditors
affected
- The following formalities would thus be required:
1. Affirmative vote of the stockholders representing at
least 2/3 of the outstanding capital stock or at least
2/3 of the members at a meeting duly called for that
purpose;
2. Petition for dissolution shall be filed with the SEC
signed by a majority of its board of directors or
trustees or other officers having the management of
its affairs, verified by the president or secretary or
one of its directors or trustees, setting forth all
claims and demands against it.
3. Issuance of an order by the SEC reciting the
purpose of the petition and fixing the date on or
before which objections thereto may be filed by any
person, which date shall not be less than thirty days
nor more than sixty days after entry of the order.
4. Before such date, a copy of the order must be
published once a week for three (3) consecutive
weeks in a newspaper of general circulation
published in the city or municipality where the
principal office is situated or in a newspaper of
general circulation in the Philippines.
5. Posting of the same order for three (3) consecutive
weeks in three (3) public places in such city or
municipality.

6. Upon five (5) days’ notice, given after the date on
which the right to file objections has expired, the
SEC shall hear the petition and try any issue made
by the objections filed.
7. Judgment dissolving the corporation and directing
of its assets as justice requires and the appointment
of a receiver (if necessary in its discretion) to
collect such assets and pay the debts of the
corporation.
o The foregoing are also mandatory
requirements
 Is the appointment of a receiver mandatory?
- No, it is merely permissive or discretionary on the
part of the court. The code uses the word “may”;
the law intended to let the shareholders have the
control of the assets of the corporation upon
dissolution and winding up.
- The directors may also undertake liquidation and
winding up of its corporate affairs, and sound
business judgment, on how they will wind up
 Dissolution by shortening of corporate term
<sec.120>
- Will be valid upon approval of the SEC, unlike
general amendments, which will be deemed
approved if not acted upon by the SEC within 6
months from the date of filing for a cause not
attributable to the corporation.
- Shortening of the corporate term partakes the nature
of an amendment of the articles of incorporation.
Section 16 under general amendments allows
“written assent” section 37 mandates that the vote
must be cast at a duly constituted meeting.
Section 120. Dissolution by shortening
corporate term. - A voluntary dissolution may be
effected by amending the articles of incorporation
to shorten the corporate term pursuant to the
provisions of this Code. A copy of the amended
articles of incorporation shall be submitted to the
Securities and Exchange Commission in
accordance with this Code. Upon approval of the
amended articles of incorporation of the expiration
of the shortened term, as the case may be, the
corporation shall be deemed dissolved without any
further proceedings, subject to the provisions of this
Code on liquidation. (n)
o Intra-corporate- special commercial courts
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 Another way of dissolving a corporation is through
involuntary dissolution
Section 121. Involuntary dissolution. - A
corporation may be dissolved by the Securities and
Exchange Commission upon filing of a verified
complaint and after proper notice and hearing on
the grounds provided by existing laws, rules and
regulations. (n)
- Dissolution is tantamount to the imposition of death
penalty
- Instead of dissolving the corporation, courts
normally enjoin the further commission of the
questioned act
- The relief of dissolution will be awarded only
where no other remedy is available and it will not
be allowed where the rights of the stockholders can
be, or are, protected in some other way (Republic
vs. Bisaya Land Trans. Co. Inc.)
 What are the grounds for involuntary dissolution?
- It is commenced through a verified complaint or
motu proprio by the proper courts
- Section 6 of PD 902-A provides for the grounds for
involuntary dissolution as follows:
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;
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.
- Other grounds are provided for in the corporation
code itself: among them are:
1. Violation of any provision of the Code under
section 144;

2. In case of deadlock in a close corporation as
provided for in section 105;
3. In a close corporation, any acts of directors, officers
or those in control of the corporation which is
illegal or fraudulent or dishonest or oppressive or
unfairly prejudicial to the corporation or any
stockholder or whenever corporate assets are being
misapplied or wasted under section 105.
- Mere dishonesty is also a ground in a close
corporation
- Other grounds can be found in other special laws
like the Securities Regulation Code and the General
Banking Act as well as the Insurance Code.
Government vs. Philippine Sugar Estate
- It is necessary in order to secure judicial
foreclosure of respondent’s charter to show a mis-
user of its franchise justifying such a forfeiture
- Object is to protect the public, and not to redress
private grievances, the mis-user must be such as to
work or threaten a substantial injury to the public,
or such as to amount to a violation of the
fundamental condition of the contract by which the
franchise was granted and thus defeat the purpose
of the grant
- Courts proceed with extreme caution which has for
their object the forfeiture of corporate franchise,
and forfeiture will not be allowed, except under
express limitation, or for plain abuse of power by
which the corporation fails to fulfill the design and
purpose of its organization. But when the abuse or
violation constitutes or threatens a substantial
injury to the public or such as to amount to a
violation of the fundamental conditions of its
charter, or its conduct is characterized by obduracy
or pertinacity in contempt of law, dissolution will
be granted
- Did the court dissolve the corporation? No, it did
not, it granted the corporation 6 months to cease
and desist the performance of the questioned act
otherwise it will be dissolved
Government vs. El Hogar
- 3 causes of action, the first is that the corporation
violated the law by holding on the property beyond
that provide for by law, the second is that the
corporation undertook the management f petitioners
belonging to delinquent shareholders of the
association, and lastly that the by-law provision,
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which empowers the BD to cancel shares and to
return to the owners thereof the balance returning
from the liquidation
 Compare to Philippine Sugar Estate, wherein the
court ruled conditional dissolution. Why decree
conditional dissolution in one and not in the other
case?
- Because in El Hogar the government was at fault,
the government wasn’t able to issue the certificate
of title on time
- When the case was instituted, El Hogar was already
able to dispose the properties in question, in
Philippine Sugar Estate it was still the holding the
properties in order to enrich itself at the expense of
the taxpayers
Republic vs. Security Credit and Acceptance Corp.
et al.
- The corporation here is a lending institution and not
a banking institution
- Defendant corporation violated the law because
before a corporation may engage into a banking
activity it must first obtain a secondary franchise
from the Central Bank
- Defendant corporation threatens substantial injury
to the general public, dissolution is warrant
- If there is a bank run kawawa naman yung
depositors
Republic vs. Bisaya Land Transportation Co. Inc
- The relief of dissolution will be awarded only
where no other remedy is available and it will not
be allowed where the rights of the stockholders can
be, or are, protected in some other way
- Misuse and misapplication of the funds and assets
of the respondent were committed particularly by
the corporate officers, where they can instead be
held personally liable
- Since there is another remedy available dissolution
is not warranted
 Assuming the above stated corporation is a close
corporation, would the court decree otherwise?
- Yes, because in a close corporation, mere
dishonesty is a ground for the dissolution

- Can even be dissolved by petition of only one
stockholder on the grounds stated in the code <
sec. 105>
Financing Corporation of the Philippines vs.
Teodoro
- Minority stockholders may not ask for the
dissolution of a corporation in private suits and that
such actions should be brought by the Government
through its legal officers, except in cases where
the intervention of the State, for one reason or
another, cannot be obtained, as when the State is
not interested because the complaint is strictly a
matter between the stockholders and does not
involve, in the opinion of the legal officer of the
Government, any of the acts or omissions
warranting quo warranto proceeding , in which
minority stockholders are entitled to have such
dissolution. It should be exercised if necessary in
order not to entirely ignore and disregard the rights
of said minority stockholders, especially when said
minority stockholders are unable to obtain redress
and protection of their rights within the corporation
itself. Stockholders should not be left without
recourse
 Present set up
- Any stockholder or member of a corporation can
institute a dissolution proceeding against his own
corporation before the proper forum
- Special Commercial Courts, shall hear and decide
intra-corporate disputes
 May a corporation ask for dissolution of the
corporation when there is no prejudice to the
general public?
- Yes, in a close corporation, a petition for the
dissolution of the corporation may be instituted by
any one individual shareholder on the ground, even
by mere dishonesty
 Effects of dissolution
- The dissolution of a corporation not only terminates
its primary franchise to be a corporation, but
generally prevents it from further exercising other
or secondary franchises which have been conferred
to its. It terminates its power to enter into contracts
or t o continue the business as a going concern.
- Based on this general rule, the Supreme Court held
that a corporation, whose corporate life expired,
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cannot lawfully pursue the business for which it
was organized. It cannot apply for a new certificate
or a secondary franchise for it is incapable of
receiving a grant. Neither can it enforce a contract
executed prior its dissolution for the purpose of
continuing the business of its organization.
- In general the rights and liabilities of the
corporation are not extinguished by its dissolution.
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)
Buenaflor vs. Camarines Sur Industry Corp.
- From that time on Camarines Sur was plying in an
activity that was illegal
- A corporation where the corporate life has expired
it cannot lawfully pursue the business for which it
was organized.
- the Supreme Court held that a corporation, whose
corporate life expired, cannot lawfully pursue the
business for which it was organized. It cannot apply
for a new certificate or a secondary franchise for it
is incapable of receiving a grant.
- Awarding it to Camarines Sur is tantamount to a
medal for its illegal acts
- It cannot apply for a new certificate or a secondary
franchise for it is incapable of receiving a grant. It
was not even a corporation de facto. And then,
there is no application subscribed by the new
corporation
- And yet as stated, the new corporation has not filed
any application for certificate of public
convenience in Sabang, and has not published such
application.
Cebu Port Labor Union vs. State Marine Co
- Even a cursory reading of the provision would
convey the idea clearly manifested in the limitation
“but not for the purpose of continuing the business
for which it was established,” that the 3-year period

allowed by the law is only for the purpose of
winding up its affairs.
Gonzales vs. Sugar Regulatory Administration
- Instead of applying the corporation code, the court
applied the constitutional provision
- Cannot be read as permitting to destroy the
substantive rights
- Such would collide with the non-impairment of
contracts clause of the constitution
- Complainants will have the right to follow the
assets of the corporation in the hands of SRA or
any other agency for that matter
 After dissolution what next?
- Liquidation and winding up should follow
 What is the definition of liquidation and winding
up?
- Collection of all corporate assets, the payments of
all its debts and settlement of its obligations and the
ultimate distribution of the corporate assets, if any
of it remains, to all stockholders in accordance with
their proportionate stockholdings in the corporation
or in accordance with their respective contracts of
subscription.
 Preference upon liquidation
- If there are preferred shares, the preference granted
to such should be complied with
- Preferred shares may give the holder thereof,
preference only in the dividends but also in the
distribution of corporate assets upon liquidation or
termination of the corporate existence. If such is the
intent, the contract of subscription must so indicate
lest they are placed on equal footing with common
shareholders
- Preference may be participating or non-
participating
 Dissolved corporations are granted a period of 3
years to liquidate
Section 122. Corporate liquidation. -
Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise,
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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.
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)
 However the 3 year period is not absolute
 Liquidation may be undertaken in either of the 3
ways
1. By the corporation itself through the BOD
- Usual method or procedure of liquidating a
corporation and although there is no law
authorizing it, neither is there anything that
prohibits the BOD from undertaking the same
- If this method is resorted to, the board will only
have a period of 3 years to finish its task of
liquidation
- Claims for or against the corporate entity not filed
within the period will become unenforceable as
there exist no corporate entity against which they
can be enforced

- Actions pending for or against the corporation
when the 3 year period expires, are abated since
after the period, the corporation ceases for all
intents and purposes and is no longer capable of
suing or being sued
2. By a trustee appointed by the corporation
- The corporation may opt to convey all corporate
assets to a trustees who will take charge of
liquidation
- If this method is used, the three year period
limitation imposed by section 122 will not apply
provided the designation of the trustee is made
within that period
3. By appointment of a receiver
- A receiver may be appointed by the proper forum
on petition or motu proprio upon the dissolution of
the corporation
- The appointment of a receiver is, however,
permissive rather than mandatory and the law tends
to recognize that in cases of voluntary dissolution
there is no occasion for the appointment of a
receiver except under special circumstances and
upon proper showing
- If a receiver is appointed, the 3 year period fixed by
law within which to complete the task of
liquidation will not likewise apply because the
dissolved corporation is substituted by the receiver
who may sue or be sued even after that period
o Mere appointment of a receiver without
anything more does imply in the
dissolution of a corporation
National Abaca other Fibers Co. vs. Pore
- Actions pending for or against the corporation
when the 3 year period expires, are abated since
after that period, the corporation ceases for all
intents and purposes and is no longer capable of
suing or being sued
- May be continued by the trustee provided done
within the 3 year period
- Should the corporation, therefore, finds it difficult
to finish its liquidation, it may, at any time during
the three year period, convey all its assets and
receivables to a trustee to prosecute and defend
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suits by or against the corporation begun before the
expiration of said period
- The effect of the conveyance is to make the trustees
the legal owners of the property conveyed, subject
to the beneficial interest therein of creditors and
stockholders
Sumera vs. Valencia
- Thus it was held that when a corporation is
dissolved and the liquidation of the assets is placed
in the hands of receiver or assignee, the period of 3
years prescribed by law is not applicable and the
assignee may institute all actions leading to the
liquidation of the corporation even after the
expiration of 3 years.
- If the corporation carries out the liquidation of its
assets through its own officers and continues and
defends the actions brought by or against it, its
existence shall terminate at the end of three years
from the time of dissolution; but if a receiver or
assignee is appointed, with or without a transfer of
its properties within 3 years, the legal interest
passes to the assignee, the beneficial interest
remaining in the members, stockholders, creditors
and other interested persons and said assignee may
bring an action, prosecute that which has already
been commenced for the benefit of the corporation,
or defend the latter against any other action already
instituted or which may be instituted even outside
of the period of three years fixed for the offices of
the corporation.
Board of Liquidators vs. Kalaw
- If there is a trustee, assignee or liquidator, it can
continue prosecuting suit even beyond the 3 year
period fixed by law because he becomes the legal
owner of the rights, assets and properties conveyed
to him
Gelano vs. CA
- “Trustee” as used in the corporation statute must be
understood in its general concept which could
include the counsel to whom was entrusted in the
instant case, the prosecution of the suit filed by the
corporation. The purpose in the transfer of the
assets of the corporation to a trustee upon its
dissolution is more for the protection of its creditors
and stockholders. Debtors like the petitioners herein
may not take advantage of the failure of the
corporation to transfer its assets to a trustee,
assuming it has any to transfer which petitioner has

failed to show, in the first place. To sustain
petitioners’ contention would be to allow them to
enrich themselves at the expense of another, which
all enlightened legal systems condemn.
- The counsel who prosecuted and defended the
interest of the corporation may be considered as a
“trustee” at least with respect to the matter in
litigation only
 May a corporation that is already dissolved, transfer
and assign its assets and properties to a new
corporation which will continue the business of the
dissolved one?
- Yes, provided all the stockholders gave their
consent (Chung Ka Bio vs. IAC)
Republic vs. Marsman Development Company &
Chung Ka Bio vs. IAC
- During the three year period granted to a
corporation to liquidate or wind up its affairs, the
BOD is not normally permitted to undertake any
activity outside the usual liquidation of the
corporation. There is, however, nothing to prevent
the stockholders from conveying their respective
shareholdings toward the creation of a new
corporation to continue the business of the old. This
is because winding up is the sole activity of the
dissolved corporation that does not intend to
incorporate a new. If it does, however, it is not
unlawful for the old board of directors to negotiate
and transfer the assets of the dissolved corporation
to the new corporation intended to be created as
long as the stockholders have given their consent
(Republic vs. Marsman Development Company)
- Winding up is the sole activity of a dissolved
corporation that does not intend to incorporate
anew. If it does, however, it is not unlawful for the
old board of directors to negotiate and transfer the
assets of the dissolved corporation to the new
corporation intended to be created as long as the
stockholders have given their consent (Chung Ka
Bio vs. IAC)
 What happens to the remaining assets and
properties of the dissolved corporation if
liquidation and winding up as provided in section
122 is not complied with, as a result of which the 3
year period has elapsed
- If the three year extended life has expired without a
trustee or receiver having been expressly
designated by the corporation within that period,
the board of directors o trustees itself, following the
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rationale of the Supreme Court’s decision in Gelano
vs. CA may be permitted to do so continue as”
trustees” by legal implication to complete the
liquidation. Still in the absence of a BOD or BOT,
those having any pecuniary interest in the assets,
including not only the shareholders but likewise the
creditors of the corporation, acting for and in its
behalf, might make proper representations with the
SEC, which has primary and sufficiently broad
jurisdiction in matters of this nature, for working
out a final settlement of the corporate concerns
(Clemente vs. CA)
o According to atty. Ladia the ruling of the
Supreme Court in the case of Clemente vs.
CA is wrong, opinion is further discussed
after the Clemente Case
Clemente vs. CA
- Who owns the properties? SOCIEDAD ANONIMA
- The termination of the life of a juridical entity does
not by itself cause the extinction or diminution of
the rights and liabilities of such entity or those of its
owners and creditors. If the three year extended life
has expired without a trustee or receiver having
been expressly designated by the corporation within
that period, the board of directors o trustees itself,
following the rationale of the Supreme Court’s
decision in Gelano vs. CA may be permitted to do
so continue as” trustees” by legal implication to
complete the liquidation. Still in the absence of a
BOD or BOT, those having any pecuniary interest
in the assets, including not only the shareholders
but likewise the creditors of the corporation, acting
for and in its behalf, might make proper
representations with the SEC, which has primary
and sufficiently broad jurisdiction in matters of this
nature, for working out a final settlement of the
corporate concerns
o the ruling is wrong according to atty.
Ladia
 According to atty Ladia: What happens to a
corporation that is already dissolved, that has not
been able to appoint a trustee with in the 3 year
period?
- a corporation dissolved which failed to exercise its
rights granted in section 122 after the 3 year period
has elapsed, ceases to exist for all intents and
purposes, it can no longer sue or be sued
- according to 122 of the code, the property should
be escheated, accordingly:

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.
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)
FOREIGN CORPORATIONS
 Definition
- 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 after it shall have obtained a
license to transact business in this country in
accordance with this Code and a certificate of
authority from the appropriate government agency.
(n)
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 What if the law of the state of the foreign
corporation does not allow Filipino citizens to do
business in their country?
- The phrase “and whose laws allow Filipino citizens
and corporations to do business in its own country
or state” is not, however, an accurate inclusion in
the definition as ay corporation registered or
organized under the laws of another state is
necessarily a foreign corporation whether or not the
state of its incorporation allow Filipino citizens or
corporations to do business in that forum.
- The said phrase was inserted by the framers of the
law only as a condition precedent to the grant of a
license of a foreign corporation to do business in
the Philippines.
 Composed of 100% Americans; organized under
the laws other than the Philippines
- The test is the “incorporation test”
- General rule: the place of its incorporation
irrespective of the nationality
- Exception: control test would apply in determining
the corporate nationality, i.e., the citizenship of the
controlling stockholders determines the nationality
of the corporation
 If a foreign corporation wants to transact business
in the Philippines, what must it do?
- Obtain a license
 How may it do so?
- According to sec. 125:
Section 125. Application for a license. - A
foreign corporation applying for a license to
transact business in the Philippines shall submit to
the Securities and Exchange Commission a copy of
its articles of incorporation and by-laws, certified in
accordance with law, and their translation to an
official language of the Philippines, if necessary.
The application shall be under oath and, unless
already stated in its articles of incorporation, shall
specifically set forth the following:
1. The date and term of incorporation;

2. The address, including the street number, of the
principal office of the corporation in the country or
state of incorporation;
3. The name and address of its resident agent
authorized to accept summons and process in all
legal proceedings and, pending the establishment of
a local office, all notices affecting the corporation;
4. The place in the Philippines where the
corporation intends to operate;
5. The specific purpose or purposes which the
corporation intends to pursue in the transaction of
its business in the Philippines: Provided, That said
purpose or purposes are those specifically stated in
the certificate of authority issued by the appropriate
government agency;
6. The names and addresses of the present directors
and officers of the corporation;
7. A statement of its authorized capital stock and
the aggregate number of shares which the
corporation has authority to issue, itemized by
classes, par value of shares, shares without par
value, and series, if any;
8. A statement of its outstanding capital stock and
the aggregate number of shares which the
corporation has issued, itemized by classes, par
value of shares, shares without par value, and
series, if any;
9. A statement of the amount actually paid in; and
10. Such additional information as may be
necessary or appropriate in order to enable the
Securities and Exchange Commission to determine
whether such corporation is entitled to a license to
transact business in the Philippines, and to
determine and assess the fees payable.
Attached to the application for license
shall be a duly executed certificate under oath by
the authorized official or officials of the jurisdiction
of its incorporation, attesting to the fact that the
laws of the country or state of the applicant allow
Filipino citizens and corporations to do business
therein, and that the applicant is an existing
corporation in good standing. If such certificate is
in a foreign language, a translation thereof in
English under oath of the translator shall be
attached thereto.
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The application for a license to transact
business in the Philippines shall likewise be
accompanied by a statement under oath of the
president or any other person authorized by the
corporation, showing to the satisfaction of the
Securities and Exchange Commission and other
governmental agency in the proper cases that the
applicant is solvent and in sound financial
condition, and setting forth the assets and liabilities
of the corporation as of the date not exceeding one
(1) year immediately prior to the filing of the
application.
Foreign banking, financial and insurance
corporations shall, in addition to the above
requirements, comply with the provisions of
existing laws applicable to them. In the case of all
other foreign corporations, no application for
license to transact business in the Philippines shall
be accepted by the Securities and Exchange
Commission without previous authority from the
appropriate government agency, whenever required
by law. (68a)
 Is there any deposit or security requirement?
- Yes, within 60 days after the issuance of the
license, a foreign corporation, except those engaged
in foreign banking or insurance, shall deposit with
the SEC, for the benefit of creditors, securities
consisting of bonds or other evidence of
indebtedness of the Philippine government or its
political subdivision, or of government owned or
controlled corporation, shares of stock in
“registered enterprises” as this term is defined in
R.A. 5186, shares of stock in domestic insurance
companies and banks or any combination thereof
with an actual market value of 100,000
- Additional securities may be required by the SEC if
the actual market value of the securities on deposit
has decreased by at least 10%. Section 126 of the
code provides:
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

surrendered, revoked, suspended or annulled in
accordance with this Code or other special laws.
Within sixty (60) days after the issuance of
the license to transact business in the Philippines,
the license, except foreign banking or insurance
corporation, shall deposit with the Securities and
Exchange Commission for the benefit of present
and future creditors of the licensee in the
Philippines, securities satisfactory to the Securities
and Exchange Commission, consisting of bonds or
other evidence of indebtedness of the Government
of the Philippines, its political subdivisions and
instrumentalities, or of government-owned or
controlled corporations and entities, shares of stock
in "registered enterprises" as this term is defined in
Republic Act No. 5186, shares of stock in domestic
corporations registered in the stock exchange, or
shares of stock in domestic insurance companies
and banks, or any combination of these kinds of
securities, with an actual market value of at least
one hundred thousand (P100,000.) pesos; Provided,
however, That within six (6) months after each
fiscal year of the licensee, the Securities and
Exchange Commission shall require the licensee to
deposit additional securities equivalent in actual
market value to two (2%) percent of the amount by
which the licensee's gross income for that fiscal
year exceeds five million (P5,000,000.00) pesos.
The Securities and Exchange Commission shall
also require deposit of additional securities if the
actual market value of the securities on deposit has
decreased by at least ten (10%) percent of their
actual market value at the time they were deposited.
The Securities and Exchange Commission may at
its discretion release part of the additional securities
deposited with it if the gross income of the licensee
has decreased, or if the actual market value of the
total securities on deposit has increased, by more
than ten (10%) percent of the actual market value of
the securities at the time they were deposited. The
Securities and Exchange Commission may, from
time to time, allow the licensee to substitute other
securities for those already on deposit as long as the
licensee is solvent. Such licensee shall be entitled to
collect the interest or dividends on the securities
deposited. In the event the licensee ceases to do
business in the Philippines, the securities deposited
as aforesaid shall be returned, upon the licensee's
application therefor and upon proof to the
satisfaction of the Securities and Exchange
Commission that the licensee has no liability to
Philippine residents, including the Government of
the Republic of the Philippines. (n)
 Other than section 125 and 126. What other
requirements are set under Philippine Law before a
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foreign corporation may transact business in the
Philippines
- Yes. A Resident agent is required. As a condition
precedent to the grant of a license to do or transact
business in the Philippines, the foreign corporation
is required to designate its resident agent on whom
summons and other legal processes may be served
in all actions or legal proceedings against such
corporation
- Section 128 provides:
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 against such corporation, and
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 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)
- The necessity of the appointment of a resident
agent is only for the purpose of receiving summons
and other legal processes in any legal action or
proceeding against the foreign corporation
 Who may be appointed as a resident agent?
- Section 127 provides that:
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)
 May a partnership be appointed as a resident agent?
- Yes, domestic corporation taken in its general sense
not legal sense
 If there is a resident agent appointed. May
summons be served to any officers of the
corporation?
- No, if there is a resident agent, the designation is
exclusive and service must be made only to the
resident agent or else the service is without force
and effect unless made to him
- Thus, while the law allows service upon the SEC or
any of its officers or agents within the Philippines
- The two modes may become effective only if the
foreign corporation failed or neglected to designate
such a person or an agent
- Summons must be made only to resident agent
except when there is no resident agent appointed
- Where such foreign corporation actually doing
business here has not applied for a license to do and
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has not designated an agent to receive summons,
then service of summons on it will be made
pursuant to the provisions of the rules of court. If
such foreign corporation has a license to do
business, then summons to it will be served on the
agent designated by it for the purpose, or otherwise
in accordance with the Corporation Law (General
Corporation of the Philippines vs. Union Insurance
Soc. Of Canton Ltd.)
 If the foreign corporation conducts business in the
Philippines without the license requirement. What
is the effect?
- Section 133 provides:
Section 133. Doing business without a
license. - No foreign corporation transacting
business in the Philippines without a license, or its
successors or assigns, shall be permitted to
maintain or intervene in any action, suit or
proceeding in any court or administrative agency of
the Philippines; 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. (69a)
- if they do so, the responsible officers may be
subjected to the penal sanctions provided for in
section 144 of the code, which may either be fine or
imprisonment
 What if it is not doing business without a license?
- If it is not transacting business in the Philippines,
even without a license, it can sue before the
Philippine Courts
 The general rule is that “it is not the lack of
required license but doing business without a
license which bars a foreign corporation form
access to our courts.”
 Exception:
1. Foreign corporations can sue before the
Philippine Courts if the act or transaction
involved is an “isolated transaction” or the
corporation is not seeking to enforce any legal
or contractual rights arising from, or growing
out of, any business which it has transacted in
the Philippines
2. Neither is a license required before a foreign
corporation may sue before the forum if the
purpose of the suit is to protect its trademark,
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trade name, corporate name, reputation or - The true test, however, seems to be whether the
goodwill; foreign corporation is continuing the body or
substance of the business or enterprise for which it
3. Or where it is based on a violation of the was organized or whether it has substantially retired
Revised Penal Code; from it and turned it over to another. The term
implies a continuity of commercial dealings and
4. Or merely defending a suit filed against it arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of
some of the functions normally incident to, and in
5. Or where a party is stopped to challenge the progressive prosecution of, the purpose and object
personality of the corporation by entering into of its organization (Mentholatum Co. Inc. vs.
a contract with it. Mangaliman)

 Rules laid down by the SC Mentholatum vs. Mangaliman

- The true test, however, seems to be whether the

A. As to whether or B. As to whether or foreign corporation is continuing the body or
not it can sue not it can be sued substance of the business or enterprise for which it
was organized or whether it has substantially retired
A foreign corporation A foreign corporation from it and turned it over to another. The term
transacting or doing transacting business in the implies a continuity of commercial dealings and
business in the Philippines Philippines with the arrangements, and contemplates, to that extent, the
with a license can sue requisite license can be performance of acts or works or the exercise of
before Philippine Courts sued in the Philippine some of the functions normally incident to, and in
Courts progressive prosecution of, the purpose and object
of its organization
Subject to certain A foreign corporation
exceptions, a foreign transacting business in the - Whatever transaction the Philippine-American
corporation doing business Philippines without a Drug Co. had executed in view of the law, the
in the country without a license can be sued in Mentholatum Co. did it itself. And the
license cannot sue in Philippine Courts Mentholatum Co. being a foreign corporation doing
Philippine Courts business in the Philippines without the license
required by section 68 of the Corporation Law, it
If it is not transacting if it is not doing business may not prosecute this action for violation of trade
business in the in the Philippines, it mark and unfair competition
Philippines, even without cannot be sued in
a license, it can sue before Philippine Courts for lack  Why is foreign corporations barred access from our
the Philippine Courts of jurisdiction courts if they do business without a license?
 A foreign corporation not doing business in the
Philippines, may it be sued? - Marshall-Wells Co. vs. Henry W. Elser and Co.

- If it is not transacting business in the country it Marshall-Wells Co. vs. Henry W. Elser and Co.
cannot be sued for lack of jurisdiction
- The object of the statute was to subject the foreign
 Is there any sanction that can be enforced to foreign corporation doing business in the Philippines to the
corporations which are doing business without the jurisdiction of its courts. The object of the statute
required license? was not to prevent the foreign corporation from
performing single acts, but to prevent it from
- Penal sanctions under section 144 acquiring a domicile for the purpose of business
without taking the steps necessary to render it
- Any violation of the code is subject to such penal amenable to suit in local courts.
sanctions
Bulakhidas vs. Navarro
 What would constitute doing business?
- It is settled that if a foreign corporation is not
engaged in business in the Philippines, it may not
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be denied the right to file an action in Philippine
courts for isolated transactions
- The object of section 68 and 69 of the Corporation
law was not to prevent the foreign corporation from
performing single acts, but to prevent it from
acquiring a domicile for the purpose of business
without taking the steps necessary to render it
amenable to suit in the local courts. It was never the
purpose of the Legislature to exclude a foreign
corporation which happens to obtain an isolated
order for business from the Philippines, from
securing redress in the Philippine courts
The Swedish East Asia Co., Ltd. Vs. Manila Port
Service
- It must stated that the section is not applicable to a
foreign corporation performing single acts or
“isolated transactions.” There is nothing to show
that the petitioner has been in the Philippines
engaged in continuing business or enterprise for
which it was organized, when the sixteen bundles
were erroneously discharged in manila, for it to be
considered as transacting business in the
Philippines. The fact is that the bundles, the value
of which is sought to be recovered, were landed not
as a result of a business transaction, isolated or
otherwise, but due to a mistaken belief that they
were part of the shipment of forty similar bundles
consigned to persons or entities in the Philippines,
there is no justification therefore, for invoking the
section
 There were 3 contracts entered into, how come they
were still not considered as doing business? (Antam
Consolidted, Inc. vs. CA)
- Every case shall be judged in the light of its
peculiar circumstances, where a single act or
transaction however, is not merely incidental or
casual but indicates the foreign corporation’s
intention to do other business in the Philippines,
said single act or transaction constitutes “doing” or
“engaging in” or “transacting” business in the
Philippines
- In the case at bar, the transaction entered into by the
respondent with the petitioners are not a series of
commercial dealings which signify an intent on the
part of the respondent to do business in the
Philippines but constitute an isolated one which
does not fall under the category of “doing
business.”
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- The records show that the only reason why the
respondent entered into the second and third
transactions with the petitioner was because it
wanted to recover the loss it sustained from the
failure of the petitioners to deliver the crude
coconut oil under the first transaction and in order
to give the latter a chance to make good on their
obligation. From these facts alone, it can be
deducted that in reality there was only one
agreement between the petitioners and the
respondent.
- The three seemingly different transactions were
entered into by the parties only in an effort to fulfill
the basic agreement and in no way indicate an
intent on the part of the respondent to engage in a
continuity of transactions with petitioners which
will categorize it as a foreign corporation doing
business in the Philippines
- 3 contracts, but according to the court was not
doing business in the Philippines
Far East Int’l import vs. Nankai Kogyo Co. Ltd.
- Only one contract , but according to the Supreme
Court was doing business in the Philippines
- Every case shall be judged in the light of its
peculiar circumstances, where a single act or
transaction however, is not merely incidental or
casual but indicates the foreign corporation’s
intention to do other business in the Philippines,
said single act or transaction constitutes “doing” or
“engaging in” or “transacting” business in the
Philippines
- In the instant case, the testimony of Atty. Pablo
Ocampo, that appellant was doing business in the
Philippines corroborated by no less than Nabuo
Toshida, one of appellant’s officers, that he was
sent to the Philippines to look into the operation of
mines, thereby revealing the defendant’s desire to
continue engaging in business here, after receiving
the shipment of the scrap iron under consideration,
making the Philippines a base thereof.
- In such a case, the single act of transaction is not
merely incidental or casual, but is of such character
as distinctly to indicate a purpose on the part of the
operations for the conduct of a part of corporation’s
ordinary business
 If a corporation appoints a distributor or a
representative, will it necessarily imply doing
business in the country?

- If the foreign corporation maintained an
independent status during the existence of the
disputed contract.
- Appointment of a distributor or representative in
the Philippines, unless it has an independent status
(transacts and does business in its own name and
for its account and not of the foreign corporation)
- if that be the case the mere appointment of a
distributor will not constitute doing business
 How do you know if it has an independent status?
- Communications Materials and Design vs. CA
Communications Materials and Design vs. CA
- A perusal of the agreements between petitioner
ASPAC and the respondents show that there are
provisions which are highly restrictive in nature,
such as to reduce petitioner ASPAC to a mere
extension or instrument of the private respondents
- ITEC was doing business without a license,
however ASPAC is estopped
- by entering into the Representative Agreement”
with ITEC, petitioner is charge with knowledge that
ITEC was not licensed to engage in business
activities in the country, and is thus stopped from
raising in defense such incapacity of ITEC, having
chosen to ignore or even presumptively take
advantage of the same
- In top-weld we ruled that a foreign corporation may
be exempted from the license requirements in order
to institute an action in our courts if its
representative in the country maintained an
independent status during the existence of the
disputed contract. Petitioner is deemed to have
acceded to such independent character when it
entered into the Representative Agreement with
ITEC
Western Equipment and Supply Co. vs. Reyes
- The company is not here seeking to enforce any
legal or contract rights arising from, or growing out
of any business which it has transacted in the
Philippine Islands. The sole purpose of the action is
to protect its reputation, its corporate name, its
goodwill, whenever that reputation, corporate name
or goodwill have through the natural development
of its trade, established themselves
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- And it contends that its rights to the use of its
corporate and trade name, is a property right, a right
in rem, which may assert and protect against all the
world, in any of the courts of the world even in
jurisdictions where it does not transact business just
the same as it may protect its tangible property, real
or personal, against trespass, or conversion
- Since it is the trade and not the mark that is to be
protected a trademark acknowledges no territorial
boundaries or municipalities or states or nations,
but extends to every market where the trader’s
goods have become known and identified by the
use of the mark
General Garments Corporation vs. Director of
Patents
- A foreign corporation which has never done
business in the Philippine Islands and which is
unlicensed and unregistered to do business here, but
is widely and favorably known in the Islands
through the use therein of its products bearing its
corporate and trade name has a legal right to
maintain an action in the Islands
- Mentholatum case was subsequently derogated
when Congress, purposely to “counteract the
effects” of said case, enacted R.A. 638, inserting
Section 21-A in the Trademark Law, which allows
a foreign corporation or juristic person to bring an
action in Philippine Courts for infringement of a
mark or trade-name, for unfair competition, or false
designation of origin and false description,
“whether or not it has been licensed to do business
in the Philippines under Act Numbered Fourteen
hundred and fifty-nine, as amended, otherwise
known as Corporation Law, at the time it brings
complaint.
Puma Sporschufabriken Rudolf Dassler, K.G. vs.
IAC and MIL-ORO MFG. Corp.
- Treaties for part of the law of the land
- Quoting the Paris Convention and the case of
Vanity Fair Mills Inc. vs. T. Eaton Co. this court
further said:
“By the same token, the petitioner should
be given the same treatment in the
Philippines as we make available to our
own citizens. We are obliged to assure to
nationals of countries of the Union an
effective protection against unfair
competition on the same way that they are

obligated to similarly protect Filipino
Citizen and firms
- The ruling in the aforecited case is in consonance
with the Convention of the Union of Paris for the
protection of Industrial Property to which the
Philippines became a party. Article 8 thereof
provides that a trade name shall be protected in all
the countries of the Union without the obligation of
filing or registration, whether or not it forms part of
the trademark
Le Chemiste Lacoste vs. Fernandez
- The French company may gain access to our courts,
in the first place it was not doing business in the
Philippines
- The marketing of its products in the Philippines is
done through an exclusive distributor, Rustan
Commercial Corporation. The latter is an
independent entity which buys and then markets not
only products of the petitioner but also many other
products bearing equally well-known and
established trademarks and trade-names
 Assuming Rustans had no independent status would
the SC grant Lacoste access to our courts?
- Even if Lacoste did business in the Philippines it
can bring action because the case involves a
violation of our penal code
- Such was a violation of article 189 of the RPC, if
prosecution follows after the completion of the
preliminary investigation being conducted by the
Special Prosecutor the information shall be in the
name of the People of the Philippines and no longer
the petitioner which is only an aggrieved party
since a criminal offense is essentially an act against
the State. It is the latter which is principally the
injured party although there is a private right
violated
- The records show that the goodwill and reputation
of the petitioner’s products bearing the trademark
Lacoste date back even before 1964 when Lacoste
clothing apparels were forst marketed in the
Philippines. To allow Hemandas to continue using
the trademark Lacoste for the simple reason that he
was the first registrant in the Supplemental Register
of a trademark used in international commerce and
not belonging to him is to render nugatory the very
essence of the law on trademarks and trade names
Atlantic Mutual Insurance Co. vs. Cebu
Stevedoring Co.
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- The law denies to a foreign corporation the right to
maintain suit unless it has previously complied with
a certain requirement, then such compliance, or the
fact that the suing corporation is exempt there from,
becomes a necessary averment in the complaint
- These are matters peculiarly within the knowledge
of appellants alone, and it would be unfair to
impose upon appellee the burden of asserting and
proving the contrary. It is enough that foreign
corporations are allowed by law to seek redress in
our courts under certain conditions: the
interpretation of the law should not go so far as to
include, in effect, an inference than those
conditions have been met from the mere fact that
the party suing is a foreign corporation
Olympia Business Machines Co. vs. E. Razon
- How do you distinguish this case with Atlantic?
- In Atlantic it dismissed the case, while in Olympia
it did not
Time Inc. vs. Reyes
- We fail to see how these doctrines can be a propos
in the case at bar, since the petitioner is not
“maintaining any suit” but is merely defending one
against itself; it did not file any complaint but only
a corollary defensive petition to prohibit the lower
court from further proceeding with a suit that it had
no jurisdiction to entertain
 What law govern foreign corporation doing and
transacting business in the Philippines with a
license
- Laws of the Republic of the Philippines save and
except that would normally be those matters which
concern its formation, organization or dissolution,
or those fixing the relationship, liabilities,
responsibilities, or duties of the stockholders,
members or officers of the foreign corporation or
their relations to each other.
- In effect, intra-corporate or internal matters not
affecting creditors or the public in general are
governed not by Philippine laws but the law under
which the foreign corporation was formed or
organized
Section 129. Law applicable. - Any
foreign corporation lawfully doing business in the
Philippines shall be bound by all laws, rules and
regulations applicable to domestic corporations of
the same class, except such only as provide for the

creation, formation, organization or dissolution of
corporations or those which fix the relations,
liabilities, responsibilities, or duties of
stockholders, members, or officers of corporations
to each other or to the corporation. (73a)
 Will the pre-emptive rights of a foreign corporation
be governed by the same section of the code? Is the
pre-emptive rights of a stockholder in a domestic
corporation same as the pre-emptive of a
stockholder of a foreign corporation.
- No
M.E. Grey vs. Insular Lumber Company
- PNB vs. Gonzales, will this apply to a foreign
corporation? How do you distinguish this case from
a Philippine law?
- Since it concerns the rights of stockholders it is the
law of New York that should govern
 Is the license to do business of a foreign
corporation subject to suspension or revocation?
What are the grounds?
- Section 134 provides:
Section 134. Revocation of license. -
Without prejudice to other grounds provided by
special laws, the license of a foreign corporation to
transact business in the Philippines may be revoked
or suspended by the Securities and Exchange
Commission upon any of the following grounds:
1. Failure to file its annual report or pay any fees as
required by this Code;
2. Failure to appoint and maintain a resident agent
in the Philippines as required by this Title;
3. Failure, after change of its resident agent or of
his address, to submit to the Securities and
Exchange Commission a statement of such change
as required by this Title;
4. Failure to submit to the Securities and Exchange
Commission an authenticated copy of any
amendment to its articles of incorporation or by-
laws or of any articles of merger or consolidation
within the time prescribed by this Title;
5. A misrepresentation of any material matter in
any application, report, affidavit or other document
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submitted by such corporation pursuant to this
Title;
6. Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully due to the
Philippine Government or any of its agencies or
political subdivisions;
7. Transacting business in the Philippines outside of
the purpose or purposes for which such corporation
is authorized under its license;
8. Transacting business in the Philippines as agent
of or acting for and in behalf of any foreign
corporation or entity not duly licensed to do
business in the Philippines; or
9. Any other ground as would render it unfit to
transact business in the Philippines. (n)
 SEC does not have the sole authority to suspend or
revoke the license of a foreign corporation doing
business in the Philippines, other government
agencies like the Central Bank , the Insurance
Commission may also do so within their respective
dominion, despite the provision of section 134
 If the SEC believes that revocation is warranted,
section 135 provides that:
Section 135. Issuance of certificate of
revocation. - Upon the revocation of any such
license to transact business in the Philippines, the
Securities and Exchange Commission shall issue a
corresponding certificate of revocation, furnishing a
copy thereof to the appropriate government agency
in the proper cases.
The Securities and Exchange Commission
shall also mail to the corporation at its registered
office in the Philippines a notice of such revocation
accompanied by a copy of the certificate of
revocation. (n)
 Voluntary withdrawal of license
- All 3 conditions must be complied with
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
3. The petition for withdrawal of license has been
published once a week for three (3) consecutive
weeks in a newspaper of general circulation in the
Philippines.
P.D. 902-A
 P.D. 902-A was amended by R.A. 8799 or the
SECURITIES REGULATION CODE in the year
2000
 The jurisdiction of SEC for cases falling under
section 5 thereof was transferred to the courts of
general jurisdiction designated by the SC, they
were called special commercial courts, the only
exceptions were revocation of corporate franchise
and calling of elections
 However the SEC retained receivership or
suspension payments within June 20,2000
 Jurisdiction of special commercial courts are
exclusive and original, jurisdiction is conferred by
law; 1 Special Commercial Court per region except
MAKATI and QUEZON CITY which has two
 Devices or Schemes
- Pyramid scheme (misrepresentation)-Special
Commercial Courts
- Syndicated estafa- not bailable
 Alleje case
- Falls squarely under sec. 5 (a) Special Commercial
Courts
- Allegation corporate officers employing schemes in
diverting
- Not only detrimental to corporation, but general
membership
- Fraud must be stated with particularity
Abad vs. CFI of Pangasinan
- Fraud must be stated with particularity otherwise it
may be filed to any court
 Intra-corporate
- Exclusive and original jurisdiction of special
commercial courts
- Sole criteria is there must be an intra-corporate
relationship
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- Pertaining to a controversy (speaks also of intra-
partnership controversy, that partnership must be
registered with the SEC)
 Rule now
1. Necessarily be an intra-corporate relationship; and,
2. The controversy must arise out of said relationship
 Intra-corporate relationship alone will not suffice to
put it in the ambit of special commercial courts and
courts of general jurisdiction may take cognizance
 Case of a transferee of shares of stock to compel
the corporation to recognize him as a stockholder
 How can it be intra-corporate when he is not yet
fully paid
- When the transferee has done all he can be required
to do to render the transfer effectual and the
corporation refuses to register the transfer, the
requirement of the registration is waived and the
transferee is considered technically a stockholder
who may sue to enforce the right to have the
transfer registered
 Florendo vs. rivera, Embassy Farms
- The transferor withheld the delivery, they are not
yet prima facie; it will not be considered intra-
corporate
 Controversies in the appointment (asked in the bar)
- Cases involving election, appointment and removal
 In Andaya the court said that a corporate officer
elected or appointed by the BOD is always a
corporate act
- The fact that petitioner sought payment of his back
wages, other benefits as well as moral and
exemplary damages and attorney’s fees in his
complaint will not operate to prevent the SEC from
exercising its jurisdiction under P.D. 902-A. The
jurisdiction will not wrest on the NLRC just
because of that
Tabang vs. NLRC
- Jurisdiction lies originally and exclusively to
special commercial courts and not in the NLRC
- SEC has jurisdiction over cases of removal from
employment of corporate officers
- The relationship of a person to a corporation,
whether as officer or as agent or employee or not
determined by the nature of the servides performed,
but by the incidents of the relationship on they
actually exist
- Corporate officers dismissal is always a corporate
act or intra-corporate controversy
Midland construction vs. Movilla

- NLRC will be possessed of jurisdiction exception
will not apply to mere recovery
 Main consideration
- Asserts his right to the office or questions the
propriety or validity of his ouster or removal, it will
be the special commercial courts and not the NLRC
 Securities Regulation Code
- Transferred jurisdiction of the SEC to Special
Commercial Courts
- Suspension of payment, appointment of
management receivership
 What is the reason for suspension of all claims?
- The reason for suspending actions for claims
against the corporation is not really to enable the
management committee or the rehabilitation
receiver to substitute the defendant in any pending
action against it before any court, tribunal or body.
The real justification is to enable the management
committee or rehabilitation receiver to effectively
exercise his powers free from any Judicial or extra-
judicial interference that might unduly hinder or
prevent the “rescue” of the debtor company. To
allow such other actions to continue would only
add to the burden of the management committee pr
rehabilitation receiver, whose time, effort and
resources would be wasted in defending claims
against the corporation instead of being directed
towards restructuring and rehabilitation.(PAL vs.
Spouses Sadic and Kurangking)
- To enable the receiver to effectively exercise his or
her power free form any judicial or extra-judicial
that may disturb
 3 types of suspension of payments
1. Simple suspension of payments
- where deferment of payment of claims against a
distress company; ask the court to be given time to
the payment of liability by postponing the payment
- When it has sufficient assets and liabilities but
forces the impossibility of meeting them when they
respectively fall due
2. Suspension of receiver with a management
committee with a rehabilitation play or suspension
of payments accompanied by a proposal for
rehabilitation (with or without rehabilitation)
- corporation has sufficient assets to cover its
liabilities, but sees the possibility; is or without
rehabilitation plans; normally would attach the
rehabilitation plan
- For purpose of economic development
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3. Suspension of payments when the corporation has
no sufficient assets to its liabilities
 May it still be revived?
- Yes, it may still be revived
 How can a corporation with more liabilities than
assets continue its operations profitably?
- Even if the distressed company has no sufficient
assets and liabilities it can go for suspension
- It asked for a management committee without a
receiver plan (Victorius Milling case)
 Convert their claims into equity
- Their liability was almost wiped out they became
stockholders instead of creditors
- After 5 years those who converted sold it back to
the corporation, thereby making profits
 Amendment is for the economic development of the
country
 What if walang amendment, e mas maraming
liabilities kesa assets
 Suspension order- all actions for claims against the
corporation are accordingly suspended at whatever
stage the proceedings maybe
 Effect of suspension- you cannot foreclose
 What are claims?
- Debts or demands of pecuniary nature. Assertion of
a right to have money paid
- Claims against the corporation shall be suspended,
assertion of a right to have money paid; it must
present a monetary claim, liquidated or
unliquidated
 Nullification of corporations does not present a
monetary claim of pecuniary nature
Union vs. CA
- It does not allow a mere individual to file the
petition which is limited to corporations partnership
or associations.
- Where no authority is granted to hear petitions of
individuals for suspension of payments, such
petition are beyond the competence of the SEC
 What happens if there is a suspension order?
 Explain the key phrase “quality is equity”
- All creditors stand on equal footing, secure or
unsecure, holding or lien or without a lien, no
creditor may enforce his lien while rehabilitation is
going (Alemar case)
- No preference shall be given
RCBC vs. IAC
- Decided on motion for reconsideration
- It court 7 years to decide authentication
 Rule of the thumb

- Automatic suspension even if not decreed in the
decision itself
- Once lifted the preferred creditors will regain their
preference
 Appointment of a management committee
- Take over the management committee of the
distressed corporation
- Extraordinary and drastic remedy
- Without any remedy
 What is an intra-corporate controversy?
- Section 5(B)
- Sole criteria is whether there exists an intra-
corporate dispute is that if there is an intra-
corporate relationship
 Why is there suspension of all actions against
claims when a receiver is appointed?
- To enable the management committee to exercise
its powers
Sy Chim vs. Sy Siy Ho (before a management
committee may be opt by a court)
- 2 requisites for a valid appointment of management
committee
1. Imminent danger of dissipation, loss, wastage or
destruction of assets or other corporate properties
2. Paralysis of business operations, the mere
apprehension of future misconduct based upon
prior management
- Save and except in the case of a close corporation
in case of deadlock management committee is
allowed to take over right away
Jacinto case
- 2nd par of page 676
- 2 requisites where present
- Wala ng mapautang, there was a paralyzation
Sy Chim
- Did not appoint a management committee
- In the absence of a strong showing of an imminent
danger of dissipation, loss wastage or destruction of
assets or other properties of a corporation and
paralysis of its business operations, the mere
apprehension of future misconduct based upon
prior mismanagement will not authorize the
appointment of a management committee
 Section 5 and 6(D) governed by separate rules;
interim rules and intra-corporate controversy
 Venue of actions
- Rules of court- where the parties are residing
- Intra-corporate- no matter where the parties are
residing it will be in the city or municipality where
the principal office is located
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 Rehabilitation proceedings venue
- In rem
- Acquired upon publication without furnishing the
creditors a copy of the petition and attachments
thereof
- A creditor may now file the suspension
proceedings; provides that creditors owns at least
25%
 Intra-corporate- rule 1 section 6
 Service of summons- rule 2 section 5
- Summons may be made to anyone
 In case of intra-corporate dispute, elections, fraud,
etc; if they are governed by interim rules of
procedure on intra-corporate controversies
 Venue
- Special commercial courts where principal office is
located/established (section 5 rule 1)
- Matters of payment/suspension must be filed in the
city/ municipality where corporation is located
 Under old rule, creditors have no right to institute
an action for receivership; now creditors, if they
sold 20% they can institute an action for
receivership
 Section 5
- Service of summons may be made by fax/e-mail
E.B. Villarosa vs. Benito
- Will apply only if it is not an intra-corporate
controversy
 If the controversy arose out of an intra-corporate
dispute rules on interim rules of procedure of intra-
corporate controversies shall govern
 Rule 4 section 17- immunity from suit
 Rehabilitation receiver shall not subject to any
action, claim or demand in connection with any act
done omitted by him in good faith in the exercise of
his functions and powers herein conferred
 Claim
- Right to payment, whether or not it is reduced to
judgment, liquidated or unliquidated, fixed or
contingent, matured or unmatured, disputed or
undisputed, legal or equitable and secured or
unsecured
 Investment contracts
- A contract, transaction or scheme whereby a person
invests his money in a common enterprise and is
led to expect profits primarily from the effects of
others
 The management committee and rehabilitation
receiver are empowered to:

1. Take custody and control of all assets of the
corporation
2. Evaluate assets and liabilities, earnings operations
of the corporation
3. Determine the best way to protect the investors and
creditors
4. Study, review evaluate the feasibility of continuing
operation and structures
5. Submit recommendations to the RTC regarding
rehabilitation plan
6. Rehabilitate the corporation if determined to be
feasible by the RTC
7. Report to the RTC until the corporation is dissolved
THE SECURITIES REGULATION CODE (RA8799)
- Also known as the Blue Sky Law since it was enacted to EXCEPT: Exempt Securities under Sec 9
protect the public from unscrupulous promoters who stake
business which have no basis and sell shares and interest
therein to investors, who are then left holding certificates
representing nothing more than a claim to a square of the
blue sky.
-SEC. 2. Declaration of State Policy. – The State shall
establish a socially conscious, free market that regulates
itself, encourage the widest participation of ownership in
enterprises, enhance the democratization of wealth, promote
the development of the capital market, protect investors,
ensure full and fair disclosure about securities, minimize if
not totally eliminate insider trading and other fraudulent or
manipulative devices and practices which create distortions
in the free market.
BROKER - person who buys and sells securities for the
account of others.
DEALER - person who buys and sells securities for his/her
own account in the ordinary course of business.
NOTE: No person shall engage in the
business of buying or selling securities in the AND Exempt Transactions under Sec 10
Philippines as a broker or dealer, or act as a
salesman, or an associated person of any
broker or dealer unless registered as such with
the Commission. (Sec 28)
SECURITES - shares, participation or interests in a
corporation or in a commercial enterprise or profit-making
venture and evidenced by a certificate, contract, instrument,
whether written or electronic in character. It includes:
CODE: COFDIPS
a) Certificates of assignments, certificates of
participation, trust certificates, voting trust
certificates or similar instruments;
b) Other instruments as may in the future be
determined by the Commission;
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c) Fractional undivided interests in oil, gas or other
mineral rights;
d) Derivatives like option and warrants;
e) Investment contracts, certificates of interest or
participation in a profit sharing agreement,
certificates of deposit for a future subscription;
f) Proprietary or non proprietary membership
certificates incorporations; and
g) Shares of stock, bonds, debentures, notes,
evidences of indebtedness, asset-backed securities;
GR: Securities shall not be sold or offered for sale or
distribution within the PH, without a registration statement
filed with and approved by SEC. Prior to such sale,
information on the securities, in such form and with such
substance as the Commission may prescribe, shall be made
available to each prospective purchaser. (Sec 8)
a) Any security issued or guaranteed by the
Government of the PH, or by any political
subdivision or agency thereof, or by any person
controlled or supervised by, and acting as an
instrumentality of said Government.
b) Any security issued or guaranteed by the
government of any country with diplomatic
relations with the PH, or by any state, province or
political subdivision thereof on the basis of
reciprocity: Provided, that the SEC may require
compliance with the form and content of disclosures
the Commission may prescribe.
c) Certificates issued by a receiver or by a trustee in
bankruptcy duly approved by the proper
adjudicatory body.
d) Any security or its derivatives the sale or transfer of
which, by law, is under the supervision and
regulation of the Office of the Insurance
Commission, Housing and Land Use Regulatory
Board, or the Bureau of Internal Revenue.
e) Any security issued by a bank except its own shares
of stock.
a) A judicial sale, or sale by an executor,
administrator, guardian or receiver or trustee in
insolvency or bankruptcy.
b) By or for the account of a pledge holder, or
mortgagee or any other similar lien holder selling or
offering for sale or delivery in the ordinary course
of business and not for the purpose of avoiding the
provisions of this Code, to liquidate a bona fide
debt, a security pledged in good faith as security for
such debt.
c) An isolated transaction in which any security is
sold, offered for sale, subscription or delivery by
the owner thereof, or by his representative for the
owner’s account, such sale or offer for sale,
subscription or delivery not being made in the

course of repeated and successive transactions of a
like character by such owner, or on his account by
such representative and such owner or
representative not being the underwriter of such
security.
d) Distribution by a corporation, actively engaged in
the business authorized by its AOI, of securities to
its stockholders or other security holders as a stock
dividend or other distribution out of surplus.
e) Sale of capital stock of a corporation to its own
stockholders exclusively, where no commission or
other remuneration is paid or given directly or
indirectly in connection with the sale of such capital
stock.
f) Issuance of bonds or notes secured by mortgage
upon real estate or tangible personal property,
where the entire mortgage together with all the
bonds or notes secured thereby are sold to a single
purchaser at a single sale.
g) Issue and delivery of any security in exchange for
any other security of the same issuer pursuant to a
right of conversion entitling the holder of the
security surrendered in exchange to make such
conversion: Provided, That the security so
surrendered has been registered under this Code or
was, when sold, exempt from the provisions of this
Code, and that the security issued and delivered in
exchange, if sold at the conversion price, would at
the time of such conversion fall within the class of
securities entitled to registration under this Code.
Upon such conversion the par value of the security
surrendered in such exchange shall be deemed the
price at which the securities issued and delivered in
such exchange are sold.
h) Broker’s transactions, executed upon customer’s
orders, on any registered Exchange or other trading
market.
i) Subscriptions for shares of the capital stock of a
corporation prior to the incorporation thereof or in
pursuance of an increase in its authorized capital
stock under the Corporation Code, when no expense
is incurred, or no commission, compensation or
remuneration is paid or given in connection with the
sale or disposition of such securities, and only when
the purpose for soliciting, giving or taking of such
subscriptions is to comply with the requirements of
such law as to the percentage of the capital stock of
a corporation which should be subscribed before it
can be registered and duly incorporated, or its
authorized capital increased.
j) The exchange of securities by the issuer with its
existing security holders exclusively, where no
commission or other remuneration is paid or given
directly or indirectly for soliciting such exchange.
k) The sale of securities by an issuer to fewer than
twenty (20) persons in the Philippines during any
twelve-month period.
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l) The sale of securities to any number of the
following qualified buyers: (i) Bank; (ii) Registered
investment house; (iii)insurance company; (iv)
Pension fund or retirement plan maintained by the
Government of the Philippines or any political
subdivision thereof or managed by a bank or other
persons authorized by the Bangko Sentral to engage
in trust functions; (v) investment company or; (vi)
Such other person as the Commission may by rule
determine as qualified buyers, on the basis of such
factors as financial sophistication, net worth,
knowledge, and experience in financial and
business matters, or amount of assets under
management.
PROTECTION OF SHAREHOLDERS INTEREST
1. Tender Offers (Sec 19)
2. Proxy solicitation (Sec 20)
3. Internal record keeping and accounting (Sec 22)
TENDER OFFER – A publicly announced intention acting
alone or in concert with others to acquire equity securities of
a company. (2002 Bar Exams)
Instances when Tender Offer is Required
1. When the person intends to acquire 15% or more of
the equity share of a public company pursuant to an
agreement made between or among the person and
one or more sellers;
2. When the person intends to acquire 30% or more of
the equity share of a public company within a
period of 12 months;
3. When the person intends to acquire shares that
would result in an ownership of more than 50% of
the equity shares of a public company.
PROXY SOLICITATION
NOTE: A broker or dealer who holds or acquires the proxy
for at least ten per centum (10%) or such percentage as the
Commission may prescribe of the outstanding share of the
issuer, shall submit a report identifying the beneficial owner
within ten (10) days after such acquisition, for its own
account or customer, to the issuer of the security, to the
Exchange where the security is traded and to the
Commission. (Sec 20.5)
FRAUDULENT TRANSACTIONS AND OTHER
MARKET MANIPULATIONS
1. Wash Sale (Sec 24.1(a)(i)) – any transaction in a
security which involves no change in the beneficial
ownership thereof.
2. Matched Order (Sec 24.1(a)(ii)) – order or orders
for the purchase or sale of security with the
knowledge that a simultaneous order or orders of
substantially the same size, time and price for the

sale or purchase of such security has, or will be
entered by or for the same or different parties.
Note: Wash sale and matched orders become
illegal when they are used as a means to create
false appearance of active trading in the security
concerned.
3. Marking the close – placing the purchase order, at
or near the close of the trading period. The price
that was closed will then be the price that will be
posted on the following trading day.
4. Painting the tape – involves a series of transactions
that are reported publicly to give the impression of
an activity in a security.
5. Squeezing the float – the part of an outstanding
security intentionally held by dealers or other
persons with a view of reselling them later for
profit.
6. Hype and dump – Act employed by a person or
group of persons of purchasing the outstanding
capital stock of a dormant public shell company for
a nominal amount and merge it with their privately
held company. They would then gain control of the
majority stocks of the merged entity. Stock
certificates are often re-issued in the name of the
merged entity to relatives and associates who act as
nominees of the person or persons employing the
device. They would then look for a broker-dealer
who would be willing to make a “hype” of the
securities. The broker-dealer then generates volume
and advance bid price. When the market reaches a
high price, they would “dump” their shareholdings
and bail out.
7. Boiler Room Operations – involves an intensive
selling campaign through numerous salesmen by
telephone or through direct mail offerings for
securities of either a certain type or from a specific
issuer. Investors are induced to purchase through
hard-sell based on unfounded predictions and
mailing of misleading market letters.
Note: Marking the close, Painting the tape,
Squeezing the float, Hype and dump, Boiler Room
Operations become unlawful if it is effected to
either raise the price or induce the purchase of a
security or of a controlling, controlled, or
commonly controlled company by others or to
depress the price to induce the sale of a security,
whether of the same or of a different class, of the
same issuer or of a controlling, controlled company
or common controlled company by others or to
create active trading to induce the purchase
through said devices or schemes.
INDEPENDENT DIRECTOR
8. Circulating or Disseminating Information –
circulating an information that any of the security corporation, its parent or subsidiaries, or any other individual
listed in the exchange will or is likely to rise or fall having a relationship with the corporation, which would
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because of manipulative market operations of any
one or more persons conducted for the purpose of
raising or depressing the price of the security and
thus inducing the purchase of such security.
9. Making False or Misleading Statements with
respect to any material fact which he knew or had
reasonable ground to believe was so false or
misleading for the purpose of inducing the purchase
or sale of such security.
10. Pegging or Fixing Or Stabilizing the price of
security effected either alone or with others through
any series of transactions for the purchase or sale
thereof, if done for such purpose.
11. Short sale – selling of security which the vendor
does not own unless done in accordance with the
rules and regulations of the SEC.
12. Insider Trading – the act of an insider to buy or sell
security of the issuer while in possession of material
information with respect to such security that is not
generally made known to the public unless (a) The
insider proves that the information was not gained
from such relationship; or (b) If the other party
selling to or buying from the insider (or his agent) is
identified, the insider proves: (i) that he disclosed
the information to the other party, or (ii) that he had
reason to believe that the other party otherwise is
also in possession of the information.
Note: When is information “material non-
public”? - if: (a) It has not been generally disclosed
to the public and would likely affect the market
price of the security after being disseminated to the
public and the lapse of a reasonable time for the
market to absorb the information; or (b) would be
considered by a reasonable person important under
the circumstances in determining his course of
action whether to buy, sell or hold a security.
Note: Who is an “insider”? - “Insider” means: (a)
the issuer; (b) a director or officer (or person
performing similar functions) of, or a person
controlling the issuer; (c) a person whose
relationship or former relationship to the issuer
gives or gave him access to material information
about the issuer or the security that is not generally
available to the public; (d) a government employee,
or director, or officer of an exchange, clearing
agency and/or self-regulatory organization who has
access to material information about an issuer or a
security that is not generally available to the
public; or (e) a person who learns such information
by a communication from any of the foregoing
insiders.
Person other than an officer or employee of the
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interfere with the exercise of independent judgment in

carrying out the responsibilities of a director.

Corporations which require an Independent Director

1. An exchange; or
2. Any corporation with a class of equity securities
listed for trading on an Exchange or with assets in
excess of P50M and having 200 or more holders, at
least 200 of which are holding at least 100 shares of
a class of its equity securities or which has sold a
class of equity securities to the public pursuant to an
effective registration statement shall have at least
two (2) independent directors or such independent
directors shall constitute at least 20% of the
members of such board, whichever is the lesser.

OPTION TRADING
 Put – a transferrable option or offer to deliver a
given number of shares of stock at a stated price on
any given time during the stated period.
 Call – a transferrable option to buy a specified
number of share at a stated price
 Straddle – a combination of put and call.

SETTLEMENT OFFERS
At any time, during an investigation or proceeding
under this Code, parties being investigated and/or charged
may propose in writing an offer of settlement with the
Commission. The Commission may only agree to a
settlement offer based on its findings that such settlement is
in the public interest. Any agreement to settle shall have no
legal effect until publicly disclosed. Such decision may be
made without a determination of guilt on the part of the
person making the offer.

DAMAGES
All suits to recover damages shall be brought before
the Regional Trial Court, which shall have exclusive
jurisdiction to hear and decide such suits. The Court is
authorized to award damages in an amount not exceeding
triple the amount of the transaction plus actual damages.

NOTES
 If there are goods involved in the multimarket, it is
beyond the jurisdiction of SEC (Ex First Quadrant)
 Criminal charge for violation of SRC is a
specialized dispute, hence it must be first referred
with SEC (Baviera vs. Paglinawan G.R. No.
168380 Feb 8, 2007)
 T3 Rule in trading of Securities – Trading day + 3
more days you must comply with your obligations.

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