- Thus, the par value of the shares is the minimum value or price that the
MODULE 3 – Corporation Law
Let's continue. This is part three of our review of the Revised Corporation
Code. So with this, we will be starting with shares and shareholders. I think
this is the heart of the Revised Corporation Code. So the question we'd like
to ask is this - "How does one become the owner of shares of stocks in a
stock corporation?"
The answer lies on the following:
1. on shares of stocks in a stock corporation by, of course, purchasing or
buying re issued treasury shares of the corporation.
- We've already discussed re-issuance of treasury shares, which are
made outstanding a new, and we said that the resale of corporate
treasury shares are not subject to the rule that they must be
equivalent to the par or stated value of the shares.
2. one becomes a stockholder of a corporation by subscription contract.
3. by acquiring the shares of an existing stockholder.
Now, since the shares are the object of an acquisition, how are shares
classified?
The CLASSIFICATION of shares is found in the articles of incorporation and
this is within the part containing the authorized capital stock, where we
said the authorized capital stock represents the total number of shares
that a corporation is legally permitted to issue. The total may be divided
into fractions or aliquot portions known as shares of stocks, and the shares
of stocks in turn may be classified into several types.
Common Classification of SHARES OF STOCKS would be:
• between PAR vs NO-PAR VALUE;
• between COMMON vs PREFERRED SHARES; and
• between VOTING and NON VOTING SHARES.
PAR VALUE vs. NO-PAR VALUE SHARES
PAR VALUE SHARES
- are shares of stocks that have a minimum or nominal value that is fixed
in the articles of incorporation.
corporation is bound to sell or offer for sale those shares during their
first disposition or transfer.
- Therefore, if a share has a par value in the articles of incorporation as
one peso, the same must be reflected in the corresponding
subscription contract and/or in the certificate of stock that may later
be issued.
In case the corporation sells a Share below its par value, that would result
to watering down of shares and we'll discuss it in a while.
NO PAR VALUE SHARES
- they have value except that it is not set, or fixed in the articles of
incorporation.
- The power to set the price for the disposition of the no par value shares
may be left to the Board of Directors, unless the articles also require
that the same must be concurred in by the shareholders of the
corporation.
- the law requires that they can only be issued at the price stated, or set
by the board of directors and/or the shareholders of the corporation,
but once issued they're deemed fully paid, and therefore non
assessible.
- This simply means that no par value shares, when issued and therefore
deemed fully paid, cannot be subjected to delinquency.
- Furthermore, no par value shares have flexibility in pricing, because the
corporation is not bound by a fixed price in the articles of incorporation.
As the corporation finds the necessity to dispose of more and more no par
value shares, then the minimum price can get adjusted depending on the
needs of the corporation.
However, not all corporations are permitted to sell or have no par value
shares in their capital stock, so all corporations that are vested with public
interest must only contain par value shares in their capital stock.
This is to afford complete transparency in their financial condition, and in
the valuation of their capital stock because these businesses are invested
with public interest, it is to the interest of the public that at any given time,
the value of the capital stock of that corporation is easily ascertainable
because there is the likelihood that the true valuation of the assets of the
corporation for purposes of the trust fund for example, may be concealed
by way of the no par value shares.
COMMON vs. PREFERRED SHARES
Aside from that classification, shares of stocks may also be divided
between so called common shares and preferred shares. Let's start with
preferred shares.
voting. And, by law, only the preferred shares, or redeemable shares may
be denied voting rights in the articles of incorporation.
Therefore, those that are not denied or deprived of voting rights are, by
law, considered as voting shares.
When the articles of incorporation are silent, all the shares are considered as
voting shares.

PREFERRED SHARES Nevertheless, if a particular number of shares are classified as

- The articles may grant a certain portion of the authorized capital NON-VOTING, they still enjoy the statutory right to vote on the following:
stock special rights and privileges that are not otherwise enjoyed a. amendments to the articles of incorporation
by the so called common shares, and b. amendments to the bylaws,
- these preferences may be with respect to dividends or preferred c. increasing bonded into bonded indebtedness,
as to the assets of the corporation when there is dissolution and d. increasing or decreasing the capital stock
distribution or preferred insofar as voting rights are concerned. e. sale of all or substantially all of the assets,
Founder shares f. investment in another corporation
g. mergers or consolidations, and
- are actually preferred shares in respect to voting rights, because for a h. dissolution of the corporation.
maximum period of five years, founder shares enjoy the exclusive right
to vote and be voted for.
- So they're the only ones that concur with the decisions of the board of NON-VOTING SHARES
directors, and the holders of the founder shares are the only ones who
can aspire to be directors during that limited period. - may therefore be denied only the right to participate during
- Once the five year period special privilege of the founder shares has elections for directors of the corporation, or certain other matters
expired, please take note, they acquire the character of preferred that are not included in the statutory grant of voting power.
shares without such priority in voting or managerial rights. There are certain instances when a corporation may be organized in such
COMMON SHARES a way that it has a mixed class of shares. That's why in mixing or classifying
shares, the mix of the shares must comply with the minimum requirements
- they are the ones that enjoy only a residual pro-rata distribution of of the law.
the profits by way of dividends, after the preferred shares have
been paid. What are the minimum requirements?
- But normally it's the common shares that enjoy full voting rights • that there must always be a particular class of shares that enjoy full
within a corporation. voting rights
• only preferred shares or redeemable shares may be deprived of
voting rights
VOTING vs. NON-VOTING SHARES • preferred shares and redeemable shares must always have more
The articles of incorporation may provide that a certain class of shares, be value.
deprived of voting rights. That's why the articles can classify them as non
 That way, the combinations must not breach these minimum standards
under the law.
So it's really up to the incorporator or incorporators to design how the
capital stock shall be structured in such a way as to make these shares of
stocks appealable or attractive to the market, if they are to be sold later on
during the life of the corporation.
Now, in classifying the shares, ALL CLASSIFICATIONS, including special
rights and privileges must be written in the articles of incorporation.
if the classification is not found in the articles of incorporation, then we
follow the DOCTRINE OF EQUALITY OF SHARES.
Under the doctrine of equality shares, all issued shares of the corporation
are considered equal in all respects. That's the presumption.
11:01 – 22:01
What is the doctrine of equality of shares?
The doctrine of equality of shares holds that where the
articles of incorporation do not provide for any distinction of
the shares of stock, all shares issued by the corporation are
presumed to be equal and enjoy the same rights and privileges
and are also subject to the same obligations.
In short, under the doctrine of equality of shares, all issued shares of the
corporation are considered equal in all respects. That’s the presumption.
That’s why in the case of Sales v. SEC, this is an older case, the shares of
stocks of the corporation were classified by series – Series A and then
Series B. But the custom within the corporation is that only Class A shares
enjoy voting rights (the right to vote and be voted for). And by practice and
usage within the corporation, the owners of the Class B shares are non-
voting shares.
It so happens that a stockholder acquired Class B shares. Thus, when he
got wind of the forthcoming elections for the Board of Directors and
meeting of the stockholders, he insisted that he be allowed to attend and
participate not just during the meeting but also during the voting. The
Corporate Secretary refused to accede to his request, citing that since he
owns Class B shares, he is denied voting rights.
What is a redeemable share?
• These are shares of stocks issued by a corporation which
said corporation can purchase or take up from their
holders upon expiry of the period stated in the certificates
of stock representing said shares.
• After a redemption, it is required that the corporation
should have sufficient assets in its books to cover debts
and liabilities, inclusive of capital stock. Redemption,
therefore, may not be made where the corporation is
insolvent or if such redemption will cause insolvency or
inability of the corporation to pay its liabilities
What are the rules on non-voting shares?
• Preferred shares may be deprived of voting rights,
together with redeemable shares but if so, there must be
a class/series which shall have full voting rights.
• Nevertheless, even if voting rights are not enjoyed, holders
of such shares shall still vote in the following instances:
(1) Amendment of articles
(2) Adoption or amendment of by laws
(3) Sale, lease, exchange, pledge or other disposition of all or
substantially all of corporate property
(4) Increase/Decrease of corporate bonded indebtedness
(5) Increase/Decrease of capital stock
(6) Merger/Consolidation
(7) Investment in another corporation or business, and
(8) Dissolution
The Supreme Court held here that the classification of the shares and the
denial of voting right is in complete violation of the Corporation Code.
Why?
Because under the law, only those that are classified as preferred or
redeemable shares can be deprived of voting rights. There is no statement
whatsoever in the Articles of Incorporation of this corporation that the
Class B shares are preferred or redeemable, that’s why they cannot be
deprived of the managerial rights accorded to all classes of shares.

Therefore, applying the doctrine of equality of shares, Class A shares and

Class B shares are considered equal in all respects and therefore, they are
voting shares. That is with respect to non-voting.

What is a redeemable share?

This is a special class of preferred share because it actually represents
indebtedness on the part of the corporation. When a corporation issues a
redeemable share, the price paid by the stockholder or subscriber is
considered a debt contracted or borrowed by the corporation.
That’s why redeemable shares are usually sold or issued by the corporation
at a stated and stipulated and guaranteed interest rate. Similar to a loan,
interest is monetary in character and therefore, the corporation is bound
to pay the same to the holders of the redeemable shares.
However, unlike ordinary loan obligations, one who holds a redeemable
share is deemed both a stockholder and a creditor of the corporation.
However, as the term implies, when the period provided for in the
subscription contract has expired, then redeemable share may now be
repurchased or redeemed or bought back by the corporation from its
current owner. So the right or power to redeem is really at the option of
the corporation.
Therefore, when the redeemable shares are redeemed, then they become
treasury shares of the corporation, and that will sever the relationship
between the corporation and the owner of the redeemable share. He or
she ceases to be a stockholder of the corporation in respect to the
redeemable shares.
I’ve already described what a treasury share is. This is a former outstanding
share regardless of class but which the corporation reacquired.
Now, let’s go to the second method by which a person becomes the owner
of shares of stocks in a corporation. This is by way of a subscription.
A subscription contract is actually a special kind of a sales contract. Why?
First and foremost, because the object of a subscription contract is not any
ordinary property. It refers to unissued shares of stocks coming from the
authorized capital stock of a corporation.
So the object of a subscription contract is always unissued capital stock
being disposed of by the corporation for the first time. That disposition,
first time disposition of unissued capital stock is called an issue. And
therefore, the corporation that offers or sells this unissued capital stock is
called the issuer. That term is material later on when we discussed the
Securities Regulation Code.

In certain cases, after redemption of the redeemable shares, they are

converted into preferred or even common shares, provided that such
conversion right is prescribed in the Articles of Incorporation.
 Now, a subscription contract, insofar as the subscriber is concerned,
imposes the absolute unconditional obligation to pay the entire
consideration stipulated in the contract.
What is a subscription
General Rule: In case of non-payment of the entire consideration by the
contract? subscriber as fixed in the Articles of Incorporation based on par value, the
• It is a contract for the failure of the subscriber to pay the whole consideration stipulated in the
acquisition of unissued subscription contract does not make the subscription contract rescissible.
shares in an existing
corporation or one that is Unlike an ordinary sales contract, where default on the part of the buyer in
to be formed regardless paying the purchase price warrants either rescission of the contract or
of the way the contract is specific performance, in a subscription contract, rescission is not possible.
denominated. Why?
• They can be either be a
Because from the moment that the subscription contract is perfected
pre-incorporation or
between the corporation issuer and the buyer subscriber, the number of
post-incorporation shares and the value agreed upon in the subscription contract already
subscription contract. forms part of the trust fund.
• A pre-incorporation
subscription contract is We stated earlier that no withdrawal or depletion from the trust fund shall
irrevocable for a period be allowed for as long as the corporation has subsisting debts or liabilities.
of 6 months from date of Therefore, if the total consideration are price agreed upon between the
subscription unless all corporation and let’s say Brad, who subscribed to one million shares, the
other subscribers total consideration is ten million. If Brad is rendered unable to pay the
consent or the whole ten million price, then the corporation has no option to rescind the
contract.
corporation fails to
materialize within the
The only way to address the default is by way of enforcement of the
period. However, it payment of the price or specific performance. So that’s the general rule
becomes absolutely with respect to subscription contracts. They are not rescissible in case of
irrevocable if the articles non-payment.
have been filed with the
SEC. Now, that would be for purposes of preserving the trust fund.
The first party in a subscription contract is the issuer – the corporation that
created those shares of stocks. The other party to the subscription The subscription contract may either be pre-incorporation, because it was
contract, for lack of better term, is of course, the subscriber. entered into even before the corporation existed. This is in relation to the
duty of the promoter. The promoter may actually be a party to such pre-
incorporation subscription.
General rule for a pre-incorporation subscription contracts, they are
irrevocable because the amount stated in the pre-incorporation
subscriptions need to be reflected in the Articles of Incorporation.
Therefore, once the Articles of Incorporation have been submitted to the
SEC, no revocation of the pre-incorporation subscription shall be allowed.
However, before submission to the SEC of the Articles of Incorporation,
the pre-incorporation subscription may be revoked, first, upon unanimous
consent of all pre-incorporation subscribers, and second, even without
their consent, unilaterally, by the pre-incorporation subscriber, if the
condition that the corporation will be formed within six (6) months from
execution of the pre-incorporation subscription is not fulfilled.
So a pre-incorporation subscription carries with it an incipient or implied
condition: That the corporation will in fact be formed. Failure of that
condition justifies revocation of the pre-incorporation subscription, unless
the Articles of Incorporation have been filed with the SEC.
In an ordinary subscription contract, usually these are entered into after
the certificate of incorporation has been issued by the SEC, so during the
life or existence of the corporation itself.
This is one way, we said, of raising capital or money to enable the
corporation to pursue its business or purpose. We said one way of
financing the business is by selling shares of stocks, and the most common
mode of selling shares of stocks is of course, the only mode in fact, of
selling original shares of stocks would be by way of subscription.
*Ma’am refers to the sample of a subscription contract that she
downloaded from the internet. Eto po yata yun:
https://images.app.goo.gl/TBnoYzHb2H6nyyP7A
What is the doctrine of individuality of subscription?
The doctrine of individuality of subscription holds that a subscription is one
entire and indivisible whole contract. It cannot be divided into portions.
Once a subscription contract is perfected, we apply the doctrine of the
individuality of the subscription. This means that regardless of the number
of shares stated in the subscription contract whether it’s for 10 common
shares or 1 million common shares, please take note that the subscription
contract must be treated as an indivisible contract. Therefore, it is one
entire contract and the performance of the obligation to pay the
subscription price, generally, cannot be divided into parts.
Given the principle of individuality of a subscription contract, how then can
the subscriber pay the subscription price?
- The Corporation Code enumerates the valid considerations for
shares of stocks subject of subscription. Meaning, these are what
a subscriber can pay to the corporation in exchange for the shares
of stocks to be issued to the subscriber.
Consideration for Shares of Stocks
Stocks shall not be issued for a consideration less than the par or issued
price thereof. Consideration for the issuance of stock may be:
(a) Actual cash paid to the corporation;
(b) 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;
(c) Labor performed for or services actually rendered to the corporation;
(d) Previously incurred indebtedness of the corporation;
(e) Amounts transferred from unrestricted retained earnings to stated
capital;
(f) Outstanding shares exchanged for stocks in the event of reclassification
or conversion;
(g) Shares of stock in another corporation; and/or
(h) Other generally accepted form of consideration.
Where the consideration is other than actual cash, or consists of intangible
property such as patents or copyrights, the valuation thereof shall initially
be determined by the stockholders or the board of directors, subject to the
approval of the Commission.
Note: Checks, generally, can only be received or accepted by the
corporation if permitted by the by laws and the payment is deemed made
only when the check is encashed; and it is only from the time that the check
is encashed that the subscription contract is deemed perfected.
Subscription price may also be paid by way of other property not cash such
as parcels of land, or other movable assets that a corporation would need
for the undertaking of its business.
When property other than cash is used to pay for the price of the shares in
a subscription contract, the law requires that the board of directors must
first appraise the value of said property and the appraisal by the board is
to be approved by the Securities and Exchange Commission (SEC).
- The purpose of the requirement is to prevent watering down of the
shares where shares of stocks may be issued and disposed of by
the corporation in exchange for property that is actually
overvalued. In that case, the corporation suffers diminution in the
value of its assets. Ultimately, it is the creditors that are impaired
in their rights.
Shares of stocks may be issued by the corporation through subscription in
exchange for labor or services actually rendered to the corporation. Legal
counsels of corporations sometimes get paid by way of shares of stocks of
their client corporation. However, please take note that it must be for PAST
SERVICES. No shares shall be issued for future services.
Furthermore, shares of stocks may be issued by the corporation to pay
previously incurred indebtedness. So this a dacion en pago.
Shares of stocks may also be issued in consideration of amounts
transferred from unrestricted retained earnings. This is simply referring to
stock dividends. So capitalizing the surplus profits of the corporation in
exchange for shares of stocks to the existing stockholders.
Shares of stocks may be issued by the corporation for generally accepted
other form of consideration or pursuant to certain conversion rights that
the Articles of Incorporation may prescribe.
- For example: Conversion of redeemable or preferred shares into
common shares.
The rule is that: For a valid subscription of shares of stocks, the
consideration itself must be a valid one.
Therefore, in one case, the Supreme Court invalidated the subscription
contract because of the following stipulation:
“…that the subscriber shall pay his obligation to the corporation out of any
future dividends that the corporation may pay on the subscribed shares.”
According to the SC, this is an invalid stipulation because it releases the
subscriber from his or her obligation to pay the consideration in exchange
for the shares of stocks. It now becomes a burden on the part of the
corporation to declare dividends and use those dividends to pay itself for
the shares it transferred to the subscriber. That’s why the SC nullified the
transaction.
Furthermore, according to the SC, dividends are uncertain and if the
corporation does not declare dividend because it has no unrestricted
retained earnings, then it effectively condones the obligation of the
subscriber.
Remember: Once a subscription contract is perfected, it imposes upon the
subscriber the absolute unconditional obligation to pay the entire
consideration.
Given these considerations that may be validly accepted by the
corporation, what then are watered shares?
Watered shares
The shares disposed of without consideration or for less than par or stated
value are called "watered" shares. The nullity of watered shares is
consistent with the Trust Fund Doctrine. (See Lirag Textile Mills v. SSS, 31
August 1987, Nava v. Peers Markeling, 25 November 1976)
Watered shares may result from:
• Disposition of the shares for less than par value or stated value, except
for reissued treasury shares.
• Gratuitous transfer of shares.
• Stock dividends distribution absent unrestricted retained earnings.
• Exchange of shares of stocks for property other than cash, where the
property is fraudulently overvalued.
The law forbids the issuance of watered shares because it violates the trust
fund reserved by law for corporate creditors.
When do we say that there is issuance of watered shares?
1. When shares are disposed for less than the par or stated value.
We said that the par value is the minimum prize because it is the one fixed
in the AOI. On the other hand, in the case of no par value shares, the
minimum prize is called the stated value and it is the one fixed by the board
and it is the flexible prize.
Nevertheless, if for example, a common share issued by the corporation
contains a par value of Php10 but it was sold at a discount by the
corporation for only for Php4. So there is a Php6 discount - take note that
that is a watered share.
The water is the difference between the par value and the actual selling
price. So that creates liability on the part of the subscriber as well as the
directors or officers who consented or participated in the issuance of said
watered shares.
2. Shares of stocks that were gratuitously transferred by the
corporation to another. Meaning, the only consideration is
liberality.
Thus, corporations are generally prohibited from donating their own
shares to another. Because, again, the same would be prejudicial to the
rights of the creditors pursuant to the trust fund doctrine.
What the corporation can donate would be the shares of stocks of the
corporation that it owns in another corporation, because those are the
property of the donor corporation.
3. Watering of the share will also take place when stock dividends are
distributed to the existing stockholders without any unrestricted
retained earnings. It means that it was the subscribed capital stock
or the legal capital that was used to pay for those stock dividends.
4. Whenever there is an overvaluation of property used in payment
of the shares of stocks of the corporation or when the subscription
contract is actually a fictitious one. Meaning, it is simulated.
Rationale: The rationale behind watering down of shares is to protect the
corporate creditors, because we said that the value or price in a
subscription contract is already part of the trust fund from the moment
that the subscription contract is perfected. Therefore, for as long as the
corporation has subsisting unpaid debts, it must comply with the trust fund
doctrine and therefore, it cannot issue shares below the stated price or the
par value; OR it cannot donate or gratuitously convey its own shares of
stocks.
QUESTION: When should the consideration for the shares of stocks be
paid?
That would really depend on the stipulation agreed upon between the
issuer corporation and the subscriber or buyer of the shares of stocks. So
they can stipulate that the entire price shall be paid in lump sum at the time
of the signing of the subscription contract or they may agree on partial
payments or payment by installments.
Note: If there is agreement to pay by installment, the arrival of the
installment date makes the amount already due and there is no need for
demand on the part of the corporation.
In some instances, there is a partial payment or down payment required,
and then the balance is payable upon call of the Board of Directors.
If the contract is silent, the presumption is that the balance on the
subscription shall be payable by the subscriber only upon call by the BOD.
This is the instance where the subscription contract is partly paid (down
payment) and the balance is still payable upon demand by the corporation.
The call is the technical name given under the Revised Corporation Code
for demand for payment. A call is evidence by resolution passed by the
BOD.
A call is evidenced by a resolution passed by the board of directors, and
that resolution or call must contain:
1. The amount due;
2. Any interest on said amount;
3. The due date of the said balance on the subscription;
4. The time within which the payment must be made; and
5. Of course a warning that if no payment is received by the
corporation within the periods of such fixed in the call, then the
corporation through its board may declare the shares as
delinquent.
Usually, upon the arrival of the expiration of the date fixed in the call, a
grace period may also be provided.
This is just an illustration of what happens when a subscriber fails to heed
the call made by the board of directors. Once a call is made, notice of said
call must be given to the affected subscriber. And then the affected
subscriber must now make payment within the time. So, the check or the
cash need must be tendered to the corporation.
If, let’s say a subscriber pays, then the call, as far as that subscriber is
rendered functus officio and therefore the consequences of full payment
will now arise.
But if one subscriber who receives the call forgets or omits to pay, that’s
the time the that the corporation can now declare the shares of that
defaulting subscriber as delinquent.
The delinquency must be again be with notice to the affected subscriber,
and from the moment that there is declaration of delinquency, then all the
rights of the affected subscriber or delinquent subscriber to vote and to be
voted for are suspended until such time full payment is made.
Now, despite notice of delinquency, please take note, the affected
subscriber may still be given a last chance to pay. When? During the
delinquency sale; or if the affected subscriber does not wish to participate
during the delinquency sale, then he stands to lose the shares that he made
partial payment for.
Thus, in our example, let’s say the brad, the defaulting subscriber missed
his last chance, thus the corporation will now order a delinquency sale.
A delinquency sale, is actually an auction sale,so the highest bidder is the
one who offers the highest price for the least numbers of share.
Now, once the highest bid is recieved by the corporation, the shares
covered by the bid must now be delivered to the bidding subscriber, or to
the bidder. And the corresponding stock certificate will be issued to the
winning bidder.
Now, what if the winning bidder is not the defaulting subscriber, then the
defaulting subscriber will lose his initial investment, meaning the partial
payment that was paid.
How about if the winning bid is only as to the portion of the delinquent
share. For example, the total delinquent shares are 1 million, and the
unpaid amount is P8 million because a partial payment was made of P2
million and then the winning bid is only for P800, 000 of those delinquent
shares but for a price of P10 million. Now, the bid the covers only the
P800,000, how about P200, 000 which are also delinquent, this is the time
when the corporation may enter into a compromise. In that case the
corporation may either opt to award the 200, 000 shares to the defaulting
subscriber because after all he made a partial payment. Or, without
offering such compromise treat the 200, 000 shares as treasury shares.
Provided, that the corporation has unrestricted retained earnings.
The rules Is that the corporation can participate in the delinquency sale as
a bidder only in the absence of any other bidder and provided that the
corporation has unrestricted retained earnings. So that’s the process for
payment of subscriptions.
Now, once as subscription contract has been fully paid, meaning the
subscriber, whether or not delinquent, but for as long as the full payment
has been made upon said subscription, please keep in mind that the
obligation of the subscriber has been fulfilled, so his end of the contract
has been extinguished.
What arises now will be the duty of the corporation to issue a stock
certificate.
What is a certificate of stock? A stock cert is merely paper evidence of
ownership of shares in the capital stock of a corporation. So, again, in this
PowerPoint presentation, I downloaded from the internet, is a sample of
stock certificate. this one is of Philippine Long-Distance Telephone
Corporation. But even if it is just paper evidence of ownership of shares in
a corporation.
The certificate of stock is per se property, tangible property, evidencing
intangible property. I think that’s a better way of putting it.
Possession of a stock certificate is prima facie proof that the owner or
person whose name appears in the stock certificate is the owner of he
shares stated in the stock certificate, whether the shares are common or
preferred.
And the issuance of a stock certificate implies that the entire consideration
has been paid in full. Why? Because by law no stock certificate shall be
issued by the corporation to the subscriber until and unless there is full
payment.
Thus, in our earlier example, what if, let’s say X, subscribed to a total of 1
million shares for a price of P10 million, and then he made a down payment
of P2 million. The par value of the said shares, let’s say P10, so 1 million
shares at P10 pesos subscription price for a total consideration of 10 million
pesos. Down payment of P2 million was made. That leaves a balance of P8
million, payable by X to the corporation.
If a call is made and X is unable to pay the balance of P8 million, can he say
that he has paid in full for the 200, 000 shares corresponding to the partial
payment of P2 million? No, because we go back to the principle or doctrine
of individuality of shares - that the entire subscription contract is an
indivisible contract, and therefore, the P2 million partial payment made by
X should be applied pro rata to all the 1 million subscribed shares.
And under that pro rata application, it means that his partial payment of P2
million was applied to all the 1 million shares, meaning that all 1 million
shares are partially paid, but not a single one of them is fully paid.
That’s why all the shares are deemed delinquent if he does not heed the
call made by the board of directors. That’s the meaning of individuality of
shares, in so far as the right to demand a stock certificate is concerned. He
cannot demand a stock certificate to correspond to the number of shares
as would be considered as fully paid based in his partial payment because
the subscription contract is an indivisible contract.
Now, once a stock certificate is issued by the corporation the name of the
stock holder, the subscriber is now a stock holder, must now be entered in
the books in the corporation as having fully paid the subscription. Pleas
take note that from the moment that the subscription contract is entered
into, and perfected with the corporation, the name of the subscriber is
entered and recorded in the stock and transfer book.
Even if it have not been paid in full, they already enjoy voting rights (the
right to vote and the right to be voted for), and it is only in instances of
delinquency that there is suspension of such managerial rights. In fact,
even delinquent shares are entitled to dividends subject to application of
cash dividends on the outstanding unpaid balance.
Now, certain instances may take place that would prevent the corporation
from issuing a certificate of stock despite full payment. This is what we call
“uncertificated shares.” So, we follow the book entry system. Even if the
shares are uncertificated for as long as the stock and transfer book reflect
the true condition of those shares, i.e., that they have been fully paid, etc.,
then the stockholder of record already possesses all rights pertinent to the
shares.
UNCERTIFICATED SHARE – is a subscription duly recorded and paid in the
corporate books but has no corresponding certificate of stock yet issued.
The rule is that one who is in possession of a stock certificate, and
therefore, giving rise to the implication that the shares have been paid in
full, already possess the power to transfer the shares. That is where a stock
certificate is convenient because it provides a written evidence of the
transfer of the shares itself. Thus, for certificated shares, the only way to
transfer the shares is by endorsement and physical delivery of the
certificate of stock from the current owner to the transferee.
Of course, that is not possible in cases of uncertificated shares of stock. In
fact, transactions in the stock market pertain to uncertificated shares of
stocks because of the constant change in the ownership of the shares. But,
where a certificate of stock had already been issued by the corporation,
then the only way by which a transfer can be acknowledged or recognized
by the corporation is when there is endorsement and delivery of the
physical certificate by the registered owner in favor of the transferee. So,
these are the requirements for a valid transfer of shares:
a. There must be delivery of the stock certificate;
b. The certificate must be endorsed by the owner or his attorney-in-
fact or other persons legally authorized to make the transfer; and
c. To be valid against third parties, the transfer must be recorded in
the books of the corporation. (See Bitong v. CA, 292 SCRA 503)
The fact that endorsement and delivery is what would effectively transfer
title to the shares of stocks and the corresponding certificate means that
a stock certificate is a “quasi-negotiable instrument.” The quasi
negotiability, however, pertains merely to the manner by which the same
may be transferred. But a stock certificate is not a negotiable instrument.
What does that mean? The non-negotiability of a stock certificate precedes
from the following:
1. In PH law there are only two negotiable instruments, i.e., a
promissory note & a bill of exchange, and a stock certificate is not
that;
2. Whenever there is fraudulent transfer of a stock certificate, e.g., it
was stolen and then the endorsement thereon was forged, the rule
on holder in due course cannot apply because holders in due
course is only recognized for negotiable instruments.
Therefore, if a stock certificate is fraudulently transferred by one who has
no authority or by a thief thereof, whoever acquires the same stock
certificate cannot acquire better title than the registered owner.
Let’s say the registered owner is A. B stole the certificate of A and forged
the latter’s signature making it appear that A endorsed and delivered it to
B. B is not just a thief but also a forger.
➢ At that point, B cannot acquire title over the property, meaning the
shares as well as the certificate because a thief cannot benefit from
his own wrongdoing.
But what if B transfers the same to C. C pays valuable consideration for the
shares of stocks to B, and the former is unaware that the latter merely stole
merged the certificate. Can C, a purchaser in good faith, acquire title over
the certificate and the shares of stocks?
➢ No, because you still have A, who is the lawful owner of that
shares. Thus, between the registered owner and a subsequent
 transferee in good faith of a forged or falsified stock certificate, the
former will always prevail. Meaning he cannot be ousted from his
title or ownership over the shares of stocks and the certificate that
represents the same.
Now, once a valid transfer (meaning that the certificate of stock has been
endorsed and delivered by the owner or the latter’s duly authorized agent
to the transferee) has been made, then the transferee would now have the
interest in having the transfer in his or her favor registered in the books of
the corporation.
RULES IN THE TRANSFER & REGISTRATION OF SHARES
1. No registration of transfer shall be recorded in the books of the
corporation over shares of stocks that the corporation still has an
unpaid claim.
- Thus, if the transfer was made by a subscriber to a third person
but the former has not yet paid in full, then any such
assignment or transfer cannot be recorded in the books of the
corporation by reason of the unpaid claim.
- That the corporation is not bound to acknowledged or
recognized the assignee or transferee because the former has
not yet received the full price, therefore, it can deny the
registration in favor of that assignee or transferee.
- The remedy of the assignee or transferee: To pay valuable
consideration to the corporation (meaning paid the unpaid
claim or balance on the subscription upon which the
corporation may now give its consent).
2. The registration of the transfer in the books of the corporation
must pertain only to transfers that convey absolute title over the
shares of stocks.
- If the transfer is only for mere liens or encumbrances, e.g., a
pledge or chattel mortgage over the shares of stocks, that is
not a conveyance or transfer that can be registered in the
books of the corporation.
Managerial rights refer to the right to vote and to be voted for.
- A writ of attachment over personal properties can be
registered in chattel mortgage registry, etc. but it cannot be
registered in the books of the corporation.
- The only possible instance when a transfer short of absolute
title can be recorded in the books of the corporation would be
in the case of court orders requiring registration of the
transfer.
RATIONALE OF REGISTRATION OF TRANSFER OF SHARES
1. To enable the corporation to identify who are its current
stockholders so that it can accord all rights and duties to them;
2. To vest legal personality upon the transferee to demand from the
corporation those rights arising from acquisition of ownership of
the shares of stocks. The transferees are subrogated in all these
rights, as if they were the original subscribers;
3. To facilitate monitoring by the SEC and other regulators of the
changes in ownership of the capital stock of the firm, and
determine whether or not violations of law on corporate
citizenship, insider trading, tender offers, and the like are being
committed.
OBLIGATIONS OF THE SHAREHOLDERS/STOCKHOLDERS
1. Obligation to pay the corporation the consideration for his
subscription, including interest when required;
2. Obligation to pay the creditors of the corporation to the extent of
their subscription, or beyond, in case the doctrine of piercing the
veil of corporate fiction is applicable.
- That Is why unpaid subscribers can be made directly liable by
the creditors of the corporation in so far as the unpaid balance
of the subscription is concerned, and only if the corporation is
insolvent.).
MANAGERIAL RIGHTS OF THE STOCKHOLDERS
 2. the power to grant compensation;
3. the power to ratify acts of self-dealing directors
4. the power to delegate to the Board amendments of the By-Laws
5. the power to call for a meeting when no person is authorized.
All of which are exclusive to the stockholders of the corporation.
HOWEVER, certain powers as we have mentioned awhile ago may be
shared by the Board. An example of which is under the voting
requirements [refer to the slide; malabo talaga sa slide ni Ma’am]

1.) Voting

The right to vote implies the right to attend meetings called for by the
Board for the stockholders to attend. They may be the regular annual
meetings of the stockholders or members; or they may be special meetings
of the stockholders.
- this is just a listing of the aspects of the management rights of a
stockholder.

- these instances when stockholders vote, assent, or concurs is

required by the RCCP.
Since managerial right in essence pertain to the right to vote and be voted NEXT:
for, there are certain powers of a corporation that is reserved by the RCCP
EXCLUSIVE to the stockholders. We said earlier that the power to manage
the business of the corporation belongs largely to the Board as well as to
the Corporate Officers, however, certain manegerial powers are reserved
by the law for the exclusive exercise of the stockholders of the
corporation. Examples of which would be [refer to the slide above]
1. the power to remove directors or trustee;
 - in instances where meetings are called, stockholders of record are
entitled to notices. The notice must be in the form prescribed in
- This case of Lim v. Moldex actually pertains to a non-stock
the By-Law containing the name of the SH or members, date, time,
condominium corporation but it is really instructive as to the
place of the meeting. Under the RCCP, the notice of the meeting
conduct of meetings.
must CONTAIN agenda of the meeting which refers to the matters
- The SC held in this case that for a valid meeting, it must meet the
which will be taken up during the meeting.
above-cited requirements:
- This is to of course enable the subscriber or SH to prepare
1. the meeting must be held on the date fixed in the Articles or
intelligently for the forthcoming meeting.
By-Laws EXCEPT if it is a special meeting in which case, it may
Q: What is the effect of lack of notice to meetings? be held anytime at the discretion by the Board to meet the
A: If by reason of the failure of the notice, a SH is unable to attend and exigency;
failed to vote during said meeting, the meeting is not necessarily void. We 2. there must be a prior written notice of said meeting sent to all
have to do further inquiry. If by reason of such lack of notice, there was no SH/members of record ENTITLED TO VOTE;
quorum and yet the meeting proceeded, then all proceedings, 3. it must be called by the proper party – the PRESIDENT of the
agreements, and actions taken during such meeting are VOID. Why? Kasi, corporation unless a different personality or officer is specified
without a quorum, no valid actions can be undertaken. in the Articles or By-Laws;
On the other hand, if despite such absence due to failure of notice, there 4. It must be held at the proper place, meaning principal place of
was a quorum, then the ONLY REMEDY of the aggrieved SH here is to FILE business of the corporation;
AN ACTION FOR DAMAGES against the corporate secretary who may have 5. there must be a quorum and voting compliance.
deliberately omitted the notice in favor of said SH or subscriber. This means
Q: When do we say that there is a quorum?
that in that case, there was a quorum except for 1 SH, the unnotified SH, all
A: The SC held in the case of Lim v. Moldex that the computation of quorum
proceedings are valid subject to the right of that aggrieved SH to damages.
differs between a stock and a non-stock corporation. In a STOCK
CORPORATION, the computation of quorum is easier because THE
QUORUM IS BASED ON THE NUMBER OF OUTSTANDING VOTING STOCKS.
It refers to the total number of the standing voting shares, then you
compute ½ +1, either present or represented. So it is a simple majority.
In a non-stock corporation on the other hand, QUORUM IS BASED
ON ONLY THOSE WHO ARE ACTUAL, LIVING MEMBERS WITH VOTING
RIGHTS SHALL BE COUNTED IN DETERMINING THE EXISTENCE OF A
QUORUM. Hence, it is determined by the actual number of living members
with voting rights. So, it is a warm-body count. You count the warm bodies
of the members who are alive and who possess voting rights in the non-
stock corporation.
A: If of the 31 members of good standing, let us say there are 29 who are
entitled to cast only 1 vote, and then #30 and #31 are entitled to vote 15
EACH. Member #30 and 31, each own 15 votes because that can happen
even in a non-stock corporation. So you have 29+30, you have 64 [di ko
gets bakit 64???? haha] So the majority of the 64 majority voting rights is 33
(1/2 +1). It is not based on the warm bodies to approve a particular
corporate act. The quorum is 31 but the approval through vote must be
determined on the number of the voting rights. [just refer to the slide
above, it is what Ma’am had discussed in this paragraph]

Now, the case of meetings of directors, please take note that directors or
trustees may attend such meetings in person or through remote
Once you meet the quorum, the NEXT INQUIRY is this [refer to slide], HAVE communication. However, unlike in SH meetings which can be attended to
THE VOTING RIGHTS BEEN PROPERLY EXERCISED? by way of a proxy, proxy attendance in Board Meetings is EXPRESSLY
Q: When do we say that there is proper exercise of voting privilege during PROHIBITED.
a meeting?
A: In the case of Lim v. Moldex, for a non-stock corporation, we said that
quorum is based on number of actual living members with voting rights,
BUT the SC held that quorum is different from voting rights. Therefore, if
there are 100 members in a non-stock corporation, 60 members of who are
in good standing, then the presence of 50%+1 of those members in good
standing will constitute a quorum. Meaning, they must be actually present
during the meeting unless the By-Laws permit a proxy.
Out of those 60 who are members in good standing, 31 would be
the quorum.
Q: What if there is a particular matter requiring concurrence of the SH of
the corporation? With the quorum of 31, the meeting can now proceed, KEEP THIS IN MIND:
how do you carry out the particular corporate act or approve the same?
What is the level of voting approval? \
GENERAL RULE: Voting by SH can be done in person, actual physical
presence OR by virtue of presence if authorized in By-Laws, meaning
through remote communication or in absentia.
EXCEPTION: No need for authorization by the By-Laws or through the
Board to exercise in absentia voting or remote communication voting IF
the corporation is invested with public interest.
The other way to attend and vote during meeting is through another,
meaning through representation. What are these?
1. Proxy
- the first kind of representative authority.
- the proxy refers to the legal authority conferred by a SH upon
another to attend and vote during a meeting or can also be
understood as refering to the FORM of such agency and this is an
example of the form [refer to slide]
- at minimum, it must be in writing, and must specify the number of
meetings for which the proxy is executed. If not, then it is deemed
valid only for 1 meeting.
- Proxy may also refer to the person or agent actually authorized.
General Rule: Apply the principles of agency insofar as prosecution and
fulfillment of the proxy is concerned.
There are rules on proxy solicitation.
Proxy Solicitation
- Action to secure the right to vote of so much a number of shares
to ensure the approval of a proposed corporate action/s.
- The principal purpose of regulating proxy solicitations by requiring
the filing of a proxy statement is to provide shareholders with
appropriate information to permit an intelligent decision on
whether to permit their shares to be voted as solicited for a
particular matter at a forthcoming stockholders meeting.
Proxy solicitation may take place because even minority shareholders will
be important when gathered and collected together because they can
determine the outcome of elections or certain corporate acts. When a
proxy solicitation is being made for or to invite other stockholders to cede
and surrender their power to vote in favor of another, the rule is that the
proxy solicitation as to the form itself must comply with that prescribed by
the Securities and Exchange Commission. So a proxy solicitation refers an
action to secure the right to vote of other shareholders in a corporation.
(go back to the purpose)
That’s why the proxy solicitation is actually an invitation sent to you,
authorizing you: “you’re being invited to authorize me to vote your shares
during the meeting”. That is important especially during elections. If I hold
your proxy solicitation, I can vote your shares in my favor if I am intending
to run as a director.
Since proxy solicitation and proxies can concentrate voting power in one
and the same stockholder, issues pertaining to proxies and proxy
solicitations may arise. So that can give rise to certain contests.
Resolution of Proxy Issues
While the law and principles on proxies appear plain and simple, proxy
validity issues arise from:
(1) Defects in the authorization;
(2) Several proxies received from the same stockholder which conflict
with each other;
(3) Proxies given to two or more persons in the alternative in one
instrument;
(4) Lack of authentication for proxies executed abroad;
(5) Undated proxies; and
(6) Proxies issued by “and/or” owners.
Example:
Let’s say the law requires 2/3 of the outstanding capital stock must approve The issue may be sophisticatedly concealed as a simple proxy issue, but if
a particular corporate act. During the meeting, the 2/3 is equivalent to at the bottom thereof, it is in fact an election issue, then go to the RTC. Do
600,000 shares. During the counting, 200,000 of the 600,000 recorded not go to the SEC.
shares were given by way of proxy. The one who used that proxy did not
secure the authorization of the true owner of the shares of stocks or that The other way to vote shares of stocks by one who is not the original
the proxy presented to the corporate secretary was formally defective. In stockholder or owner thereof is through a voting trust agreement.
that case, the 200,000 shares that were deemed in favor of the particular
corporate act will now be under question. So the entire decision that was Voting Trust Agreement
arrived at by the stockholders using the proxy would be in jeopardy. - It is an agreement whereby one or more stockholders transfer
their shares of stocks to a trustee, who thereby acquires for a
Thus, whenever proxy issues arise, who can resolve the same? period of time the voting rights (and/or any other specific rights)
- Ideally, it should be resolved internally within the corporation. over such shares; and in return, trust certificates are given to the
stockholder/s, which are transferable like stock certificates,
SEC v. CA and Omico Corporation, 22 October 2014 subject, to the trust agreement.
- There was a conflict between the jurisdiction of the SEC and the - This is a specie of an express trust described in the Civil Code of the
Special Commercial Court that is vested with power to resolve Philippines.
intra-corporate disputes. - Under this agreement, a stockholder entrusts his/her shares to
- It settles who has the power to resolve proxy issues. another. And by entrusting those shares, the trustee now acquires
- If the issue relating to the proxy is as to the form or usage thereof legal title over the shares of stocks.
in ordinary stockholders meeting, then it is the SEC that has the - It may simply be a security transaction between the trustor and the
power to resolve the same. trustee. So similar to a mortgage, it is an additional collateral or
- SEC has the jurisdiction to regulate proxies. The power of the SEC undertaking to secure an obligation.
to investigate violations of its rules on proxy solicitation is
unquestioned when proxies are obtained to vote on matters Similar to a proxy, the voting trust agreement cannot exceed 5 years,
unrelated to the cases enumerated under Section 5 of Presidential subject to renewal.
Decree No. 902-A.
- However, when the issues relate to the election of the directors to
the board, it is the regular courts (Special Commercial Court under
R.A. 8799), and not the SEC, which will have jurisdiction. Why?
Because the heart of the proxy issue related to elections of
directors of the corporation. And all election contests or
controversies are intra-corporate disputes.
- The test is whether the controversy relates to such election.
- When proxies are solicited in relation to the election of corporate
directors, the resulting controversy, even if it ostensibly raised the
violation of the SEC rules on proxy solicitation, should be seen as
an election controversy within the original and exclusive
jurisdiction of the trial courts.
 Process flow for a voting trust agreement as prescribed in the RCCP.

1. Execution of the VTA in 2. File VTA

notarized form, between a with SEC
stockholder or group of and
stockholders in favor of a Corporate
trustee. Secretary

5. Upon expiration of the VTA period,
renew. Otherwise, restore TRUSTORS to
their original title by cancelling stock
certificate of TRUSTEE and issuing new
ones to the trustors.
3. Coporate Secretary Registers VTA. Stock
Certificate of Trustors cancelled, new stock
certificates issued in the name of Trustee,
with annotation of the VTA. LEGAL TITLE IS
NOW CONVEYED TO TRUSTEE.

4. CORPORATE SECRETARY
AND TRUSTEE execute and
issue Voting Trust Certificates
to the Trustors-Shareholders
as evidence that BENEFICIAL
TITLE IS RETAINED.
Process Flow:
1. There must be, between the trustor and the trustee, a duly notarized
voting trust agreement.
2. Once they have executed the same, a copy of the notarized voting
trust agreement must be submitted and filed with the SEC. Another
one must be recorded in the books of the corporation by the Corporate
Secretary.
3. Once the Corporate Secretary is in receipt of voting trust agreement,
the Corporate will register the VTA by erasing in the stock and transfer
book the name of the trustor and enter the name of the trustee.
However, that registration must contain an annotation that it is
pursuant to a voting trust agreement which is on file with the
Corporate Secretary.
From that moment on, the trustee acquires legal title over the shares.
Therefore, during the next stockholders meeting, the notice must be
sent to the trustee because legally, the trustee is not the owner of the
shares.
Since legal title is now vested in favor of the trustee by reason of
recording of his/her name in the books of the corporation, as far as the
entrusted shares are concerned, the trustee under the voting trust
agreement is now qualified to be elected as a director. It is not just the
right to vote that is acquired by the trustee, but also the right to be
voted for. Under the RCCP, the requirement that to qualify as a director
is that s/he must be the owner of at least one share in his/her name in
the books of the corporation. That refers to legal title, not necessarily
beneficial or full title.
When do we say there is legal title?
We say that there is legal title when the name is entered in the books
of the corporation.
Thus, the trustee owns legal title. This is a benefit that cannot be
acquired by a mere proxy because a proxy does not have legal title over
the shares that are voted during the meeting. So for the duration of
the voting trust agreement, the voting power of the shares that are
entrusted will now rest and will be exercised by the trustee. Because
effectively, the trustee is the legal stockholder.
4. From the moment that the entrusted shares are registered in the
books of the corporation, a new stock certificate will be issued by the
corporation to the entrustee or trustee. And the Certificate of Stock
will bear the annotation that it is pursuant to a VTA.
On the other hand, the trustee must now execute a Voting Trust
Certificate in favor of the trustor. The Voting Trust Certificate is the
paper evidence that the trustor still holds the equitable or beneficial
title over the shares of stocks.
Once that is done, the voting trust certificate now in the possession of
the trustor may be transferred like a stock certificate. Except that the
transferee of the voting stock certificate does not acquire the voting
or managerial rights over the shares because the same is separated in
favor of the trustee. That is the essence of a voting trust agreement. It
dichotomized voting power from all other rights arising from the
ownership of the shares of stocks.
5. After the period of the voting trust agreement, there will be
restoration to the status quo ante.
Does not acquire the voting or managerial rights over the shares
because the same is separated in favor of the trustee. That’s the essence
of a voting trust agreement. It dichotomizes voting power from all other
rights arising from the ownership of the shares of stocks. And then after
the period of Voting Trust Agreement, there will be restoration to the
status quo ante.
Proprietary Rights of Share holders
Ownership of shares in the corporation also entails certain proprietary
rights and the foremost of which would be dividends.
 Dividends
 Generally dividends may be given in cash or in stock.
 The right of a stockholder to the dividend is immediate
if it is cash dividend. The corporation becomes a debtor
of the stockholder. If it is a stock dividend, it is subject
to a stockholder vote and an increase of capital stock, if
it comes from new issuance.
 However, that any cash dividend due on delinquent
stock shall first be applied to the unpaid balance, costs,
and expenses or if be a stock dividend, it is withheld
until unpaid subscription.
Of course, stockholder in a stock corporation have a natural legal
expectation to be paid dividends out of the surplus profits of the
corporation or unrestricted retained earnings. The forms of the dividends
would be immaterial, it may be in cash, in property or by way of stock
dividends. What is important here is that, in the distribution of the
dividends the corporation has surplus profit or unrestricted retained
earning.
When and how can dividends be declared?
 The Board may declare dividends out of the
unrestricted retained earnings or total assets less
liabilities and legal capital, they must be accumulated
from normal and continuous operations not allocated
for any managerial, contractual or legal purpose and
which are free for distribution to stockholders as
dividends payable in cash, in property or in stock to all
stockholders on the basis of outstanding stock held by
them.
The dividends must be declared by the Board of Directors unless the
dividends are in the form of stock in which case the declaration of stock
dividends must be concurred in by 2/3 of the outstanding capital stock.
Can a declaration of dividends be compelled?
 Dividends declaration are generally discretionary but
becomes mandatory when its surplus profits are in
excess of 100% of paid in capital stock. However, the
mandatory character shall not obtain:
(a) When justified by definite corporate expansion
projects or programs approved by the Board;
(b) When it is prohibited by a loan agreement with any
financial institution or creditor from declaring dividends
without its consent and the consent is not yet obtained;
(c) When it can be shown that such retention is
necessary under special circumstances obtaining in the
corporation, as there is a need for special reserve for
probable contingencies.
Can the stockholders compelled the corporation to pay the dividends?
No, because whether or not surplus profits be distributed to the
stockholders by way of dividends is left to the business judgement of the
corporation. What the corporation Board can do is to re-invest the surplus
profits into the enterprise or a portion may be used to re-acquire the
corporation’s own shares and leave nothing for dividends. Nevertheless,
the rule is that since the discretion to declare dividends is left by law to the
Board of Directors, mandamus will not lie to compel declaration in
distribution of dividends except in the following instance:
When the total surplus profit or Unrestricted Retained Earnings
has gone beyond 100% of the value of the subscribed capital stock.
In that case, it would be wrong for the Board of Directors to deny the
shareholders of the corporation their rightful share in the profits earned
by the business. Actually, it is the Board of Directors that would have the
interest in declaring more and more dividends because while they are not
entitled to salaries as a general rule, the dividend declaration or
distribution provides incentives for the members of the Board to ensure
that during their term the corporation will earn profits. And, if the Board
of Directors through their effort leads the corporation to profitability
therefore, the corporation will have more surplus profits to declare by way
of dividends. And who would be entitled to those dividends? The
shareholders. And remember, the controlling shareholders are the
directors. That’s the reason why the directors are not entitled to
compensation in general, because they can be entitled to dividends
out of their efforts in managing the success of the corporation.
Right to Inspect and Examine Corporate Books and Records
Right to Information
Remember, stockholders whenever called upon in a meeting can
participate only if they are duly informed of what is going on in the
corporation. So, the right to inspect and examine the corporate book and
records is actually under the umbrella of the right to information.
Books subject to Inspection/Examination Rights
These books or records to be kept by the corporation and which
shall be open to the inspection of any director, trustee,
stockholder or member, include:
(a) The article of incorporation and bylaws of the corporation and
all their amendments;
(b) The current ownership structure and voting rights of the
corporation, including lists of stockholders or members group
structures, intra-group relations, ownership data and beneficial
ownership.
(c) The names and addresses of all the members of the board of
directors or trustees and the executive officers;
(d) A record of all business transactions;
(e) A record of the resolutions of the board of directors or trustees
and of the stockholders or members;
(f) Copies of the latest reportorial requirements submitted to the
Commission; and
(g) The minutes of all meetings of stockholders or members, or of
the board of directors or trustees. Such minutes shall set forth in
detail, among others: the time and place of the meeting held, how
it was authorized, the notice given, the agenda therefor, whether
the meeting was regular or special, its object if special, those
present and absent, and every act done or ordered done at the
meeting. Upon the demand of a 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 a director, trustee, stockholder or member on any action
or proposed action must be recorded in full upon their demand.
These are the books and records that under the Revised Corporation Code
must be open for access, inspection, examination and copying by the
stockholders, directors or even officers of the corporation. Of course,
copies of the articles and bylaws, that is why copies must always be kept
by corporate secretary. Current ownership structure and voting rights
within the corporation and then the names and addresses of all the
members of the board of directors or board of trustees. A record of all
business transactions, copies of the latest reports that were submitted to
the SEC or to the regulators such as BSP for compliance purposes, minutes
of all meetings whether by the Board or of the stockholders.
However, please take note in the case of Gokongwei v. SEC (landmark
decision of SC), the question here is raised by Gokongwei. San Miguel
Corporation owns another corporation, the one located in Hongkong by
100%. Meaning, the Hongkong corporation is 100% owned subsidiary by San
Miguel Corporation here in the Philippines. John Gokongwei is a
stockholder of San Miguel Corporation but he is not a stockholder of
record of that Hongkong Brewery because that Hongkong Brewery only
has one stockholder, San Miguel Corporation. However, Gokongwei
demanded that he be allowed to inspect and examine the books not of
SMC but of Hongkong Brewery. Board of Directors of San Miguel refused.
He went to the Supreme Court. According to the Supreme Court, San
Miguel Corporation must allow Gokongwei to inspect and examine the
books of the Hongkong Brewery. Why? Because Hongkong Brewery is 100%
owned by San Miguel Corporation and Gokongwei is a stockholder of SMC.
Gokongwei has indirect interest in the affairs and in the business of
Hongkong Brewery. However, the right to inspect and examine the books
of a wholly owned subsidiary is subject to one condition:
That the books and records of that wholly owned subsidiary are in
the custody of the parent company. In this case, SMC. So, there was a need
to prove on the part of Gokongwei whether the records of Hongkong
Brewery are in fact in the Philippines in the possession of SMC.
Gokongwei v. SEC, 21 April 1980
➢ The statutory right of a stockholder to
inspect the books and records of a corporation
extends - in consonance with equity, good faith and
fair dealing - to a foreign subsidiary wholly owned by
the corporation.
 There are limitations under the current law as to exercise on the right
to inspect and examine corporate books and records. Of course, the other
limitations are already lifted from the old Corporation Code, it must be
exercise within reasonable hours on given days and it must not be, for
purposes of misusing information gained from the exercise of inspection,
that it must be in good faith and for a legitimate purpose.
Under the Revised Corporation Code, the inspection and
examination rights are now subject to the rules under the Data Privacy Act
because some information gain from inspection may in fact be personal
information or sensitive personal information which a re qualified under
the Data Privacy Law or they may be information relating to trade secrets
protected under Intellectual Property Law or they may certain to certain
inside information that cannot be disclosed without first reporting the
same to the Securities and Exchange Commission.
Nevertheless, the right to inspect and examine is proprietary right that
is why the owners of the share may appoint some other person to make
copies or take excerpts of the corporate books or records.
Limitations
• The inspecting or reproducing party shall remain bound
by confidentiality rules under prevailing laws, such as the rules on
trade secrets or processes under Republic Act No. 8293, otherwise
known as the "Intellectual Property Code of the Philippines", as
amended, Republic Act No. 10173 otherwise known as the “Data
Privacy Act of 2012" Republic Act No. 8799, otherwise known as
"The Securities Regulation Code", and the Rules of Court.
• A requesting party who is not a stockholder or member of
record, or is a competitor, directory officer controlling stockholder
or otherwise represents the interests of a competitor shall have
no right to inspect or demand reproduction of corporate records.
• Any stockholder who shall abuse the rights granted under this
section shall be penalized under Section 158 of this Code, without
prejudice to the provisions of Republic Act No. 8293, otherwise
known as "Intellectual Property Code of the Philippines”, as
amended , and Republic Act No. 10173 otherwise known as the
“Data Privacy Act of 2012" .
Please take not, unjustified denial of the right to examine corporate books
and records may pose and subject the corporate secretary and/or the
Board to criminal, civil as well as administrative liabilities.
Right of Appraisal
What is the right of appraisal?
➢ The right of appraisal is the right of stockholder to
demand payment of the fair value of his shares after
dissenting from a proposed corporate action involving
a fundamental change in the corporation in the cases
provided for by law.
➢ It is available when
(a) Articles are amended and such has the effect of
changing or restricting the rights of a shareholder or a
class of shares or authorizing preferences in any
respect superior to those outstanding share of any
class
(b) Extending or shortening the corporate term
(c) In cases of sale, lease, exchange transfer,
mortgage, pledge or disposition of all or substantially
all of corporate assets or property
(d) In cases of mergers/consolidations
(e) Investment by the corporation in another
corporation or business other than its primary purpose
(f) A stockholder in a close corporation for any
reason may compel the said corporation to allow the
exercise of his appraisal right.
An appraisal right is the right of dissenting stockholders to demand
that the corporation pay back the value of their shares. So, take note of
the instances when the appraisal right is available usually when there are
fundamental changes in the character or nature in the corporation by way
of amendments or when there is restrictions in the rights of existing
stockholders or when there is merger or consolidation or investment in
other corporation.
 So that changes the nature of investment made by the stockholder
when he or she first bought shares of stock of the corporation. So,
whenever those major changes take place, those who dissented are
entitled to withdraw from the corporation. That is why the right of
appraisal is the withdrawal right of the dissenting stockholders. By
withdrawing from the corporations, they are entitled to be paid back the
value of their shares.

So, if I bought shares of stock, a subscription price of 1 Million and then

during a meeting, an amendment to an articles of Incorporation denying
pre-emptive rights was approved, I was the only one who dissented and
stung by that rejection I decide to exercise my appraisal right. In that sense
I am now withdrawing from the corporation.

I was the only one who dissented and standing by that rejection, I decided
to exercise my appraisal right. In that sense, I am now withdrawing from
the corporation. So, the corporation must pay me back the subscription
price I paid, in some instances at interest or at mark up price- depending
on how much is the unrestricted retained earnings. So there is a procedure
for the exercise of appraisal right. BUT this is available only to those who
dissented to the corporate act that was approved.
TURNER V. LORENZO SHIPPING- an important decision of the SC because
this is when the right to appraisal may in fact be suspended.
FACTS: The Turner spouses voted against the amendment of the AOI of
Lorenzo shipping that would insert a provision to deny preemptive right.
So, they ensured that their negative vote was recorded in the books of the
corporation. Then they made a written demand for the corporation to pay
them back. The corporation offered them P50/share but the spouses
wanted to be paid P250/share. There is a huge difference between the
price offered by the corporation and the price demanded by the dissenting
shareholders. They decided to convene an ad hoc committee of appraisers.
Under the RCCP, the decision of that ad hoc committee of appraisers is
final and executory. They arrived at a P275/share surrender value. Of course
the Turner spouses were happy because they will leave the corporation
with a payment much higher than they anticipated. They demanded that
the corporation pay P275/share belonging to the Turner spouses so that
they can return those shares to the corporation. However, the latter kept
ignoring their demand prompting the spouses to go to court on an action
for collection with specific performance enforcing the P275/share that was
arrived at and finalized by the committee. The corporation moved to
dismiss the complaint on the ground that it has no unrestricted retained
earnings or surplus profit. In short, for lack of cause of action. This is under
the old rules of Civil Procedure kasi ngayon, there are very limited grounds
for a motion to dismiss. During the hearing on the motion to dismiss,
Lorenzo Shipping presented official documents showing that indeed, it
lacks surplus profit. This is why the court dismissed the complaint.
According to the SC, the dismissal of the complaint is warranted because
until such time that thee corporation realizes unrestricted retained
earnings, any demand for payment of the surrender value of the dissenting
stockholders is premature.
With that initial decision, the Turner spouses one important issue: WHAT IF
BY THE TIME THE CORPORATION REALIZES UNRESTRICTED RETAINED
EARNINGS, THE PRESCRIPTIVE PERIOD TO ENFORCE THAT OBLIGATION
OF THE CORPORATION HAS ALREADY ELAPSED? [their action is now
barred by prescription]
According to the SC, that fear is unfounded. For the first time, the SC held
that the prescriptive period to demand payment of the surrender or
appraisal value of the dissenting stockholders will arise only when the
corporation realizes unrestricted retained earnings. So this is actually a
Solomonic decision of the SC.
TAKEAWAY: Premature action to file for demand to pay on the part of the
corporation if the corporation has no unrestricted retained earnings, that
is why it is dismissible. But the prescriptive period to file the action does
not begin to run until after the corporation has unrestricted retained
earnings.
REMEDIAL RIGHTS OF SHAREHOLDERS
-There are certain instances when the managers of the corporation or even
members of the Board may commit acts that would prejudice the rights of
the corporation’s stockholders or that would impair the exercise of certain
obligations or duties.
A) To inspect corporate books
B) To recover stocks unlawfully sold for delinquency
-A delinquency sale may be questioned only for
irregularities in the conduct of the sale or irregularities in the notice
C) To demand payment in the exercise of appraisal right [remedial
right as illustrated in the Turner v. Lorenzo Shipping case]
D) To be furnished with recent financial statements or reports of the
corporation’s operations
E) To bring suits (derivative suits, individual suits, and representative
suits)
PERSONAL SUIT- an action filed by the stockholder in order to seek redress
for his/her grievance or injury suffered and unique by that stockholder; one
brought by a stockholder against the corporation for direct violation of his
contractual rights
CLASS or REPRESENTATIVE SUIT- if the action of the management or the
Board affects many stockholders similarly; one brought by a person in his
own behalf and on behalf of all similarly situated
DERIVATIVE SUIT- one brought by one or more stockholders or members
in the name and on behalf of the corporation to redress wrongs committed
against it or to protect or vindicate corporate rights, whenever the officials
of the corporation refuse to sue or are the ones to be sued or hold control
of the corporation
-this is a representative suit where the real party in interest is the
corporation, except that the usual agents of the corporation cannot
authorize the derivative suit because they are the one being brought to
court. So the defendants are the members of the Board and officers of the
corporation- you cannot expect them to initiate the derivative suit.
-subject to the rules of forum shopping
REQUISITES: [In the case of Hi-Yield Realty, Inc. v. CA, 590
SCRA 548, and reiterated in Lisam Enterprises, Inc. v. BDO, 670
SCRA 310) [these cases only provided a, b, c, while d and e were
included in the discussion]
a. The party bringing the suit should be a shareholder of
record as of the time of the act or transaction complained of, the
number of shares not being material;
-even if the stockholder only owns one share, the suit will prosper
-what is material is TIME:
b. He has tried to exhaust intra-corporate remedies;
-this is why there must first be resort to appraisal right or intra-
corporate grievance machineries, unless the exhaustion of intra-
corporate remedies is futile
Example: If there is only one of the ten directors being accused of
wrongdoing, the other 9 directors can still take corrective action.
So a derivative suit in that case will be premature. On the other
hand, if all 10 directors are the ones being accused of wrongdoing,
then the minority stockholder has no other place to go except to
the court, no need to allege exhaustion of intra-corporate
remedies. The SEC here does not matter, so it is not an
administrative remedy to the SEC first. This is not what we mean.
c. The cause of action actually devolves on the corporation,
the wrongdoing or harm having been caused by the corporation,
and not the particular stockholder bringing the suit.
d. There must be proof that the derivative suit is not a
harassment suit
-this is under the rules of intra-corporate controversies
e. The derivative suit must be filed in the name of the
corporation
-after all, it is the real party in interest
When these requisites were present, all reliefs granted in the derivative
suit inure to the benefit of corporation because it is for its own protection
NATIONALITY OF CORPORATION
Important in 2 accounts:
1) Foreign corporation cannot be recognized in the philippines unless
they are license; and
2) Under Citizenship/ Nationality Test, only certain corporations are
allowed to engage in certain activities, businesses or enterprises
because the same is limited partially or fully to citizens of the
philippines.
Thus, in determining the nationality or citizenship of the
corporation, we use 2 test:
A. Incorporation Test: nationality is determined by place of
incorporation.
B. Control Test as a means of determining the nationality
looks at the nationality of the stockholders or members of
the corporation. (which may lead to grandfather rule test)
Grandfather Rule as a means of determining the
nationality looks at the percentage of foreign holdings in a
corporation which is a stockholder in a Filipino corporation
to determine whether or not the percentage requirement
of Filipino ownership has been met.
LAW OF INCORPORATION TEST
- A foreign corporation is a corporation which is formed, organized
or existing under any law other than those of the Philippines, and
whose laws allow Filipino citizens and corporations to do business
in its own country or state.
 - The basis of authority over it is : a) consent and; b) doing business
in the Philippines
- The rule is that a corporation being a mere artificial being is only
considered a person or entity within the territory of the State
which allows it or grants it authority to exist as a corporation.
- Under the rules on Conflict of law, if a corporation is formed and
organized in HongKong, then it is a corporation so far as HongKong
is concerned. When it seeks to do business in the Philippines or
elsewhere, it can be denied existence as a corporation because its
existence as a corporation is territorial in character. Hence, States
may deny legal recognition of froeign corporation or grant them
limited recognition under certain conditions.
- So in the Philippines, we allow foriegn corporations. We do not
completely deny their existence. But we grant them a limited
recognition under the condition that they possess a license from
the SEC. That license is necessary before they can establish a
domicile for the business they seek to prosecute in the Philippines.
Q: How do we know that they are doing business in the Philippines?
A: We apply the following 3 test:
1. Continuity test - doing business implies a continuity of commercial
dealings and arrangements, and contemplates to some extent the
performance of acts or works or the exercise of some functions
normally incident to and in progressive prosecution of, the
purpose and object of its organization;
2. Subsequent test - a foreign corporation is doing business in the
country if it is continuing the body or substance of the enterprise
of business for which it was organized.
3. Contract test - whether the contracts entered into by the foreign
corporation, or by an agent acting under the control and direction
of the foreign corporation, are consummated in the Philippines.
The contract point is in the Philippines. It does not matter if it is a single or
series of contracts so long as the contract is perfected, consummated and
performed in the Philippines and in pursuit of profit or gain by the froeign
corporation.
Ultimately, regardless of the test, the intent here must be shown by the
acts of the foreign corporation.
Q: Why is there a need for a foreign corporation to obtain a license to
transact business?
A: The purpose of the law in requiring that a foreign corporation doing
business in the Philippines to be licensed is to subject it to the jurisdiction
of the courts. The object is not to prevent foreign corporations from
performing single acts but to prevent it from acquiring a domicile for the
purpose of business without taking necessary steps to render it amenable
to suits in local courts.
That is why when the corporation complied with the condition precedents,
the SEC will issue a license. That makes the foreign corporation a legal
entity in the Philippines. As such it can now establish its domicile in the
Philippines. It is now a Philippine resident even if it is not a Philippine
national. It can operate business, acquire rights as any ordinary
corporation in the Philippines.
EFFECTS OF GRANT OF LICENSE
As a general rule, only foreign corporations that have been issued a license
to operate a business in the Philippines have the capacity to sue and be
sued.
The power to sue it can invoke the aid of Philippine courts for redress of
injuries or wrongs committed against it.
The power to be sued gives the opportunity to present its side and avoid
liability.
UNLICENSED FOREIGN CORPORATION DOING IN THE PHILIPPINES
GR: Cannot sue, cannot maintain any action for lack of capacity but it can
be sued.
But in limited basis, it can still maintain action without need to prove its
capacity to sue in the following cases:
1) If the action is a criminal case because in our legal system, criminal
cases are initiated by the People of the Philippines and not by the
 injured party. Hence, the foreign corporation does not need to
proof its capacity to sue;
2) If the unlicensed foriegn corporation is merely defending itself in
the suit filed against it;
3) If the defendant that is suing in the Philippines is actually
estopped in denying or repudiating the legal personality plaintiff
foreign corporation. Even the lack of license, it may place the
defendant in estoppel.

FOREIGN CORPORATION NOT DOING BUSINESS IN THE PHILIPPINES

-it does not need to apply for a license in the Philippines. Nevertheless, it
can commence and maintain suit in the Philippines only in the following
cases:
1. For isolated transactions. This refers to a suit that arises not out of
the main body of the business of the corporation. Meaning a suit
arises in an act or omission made by a defendant not connected at
all to the profit purpose of the suing or plaintiff corporation. If the
suit is a direct offshoot of the business of the foreign corporation
then it will be barred if it is not licensed. It is a subject of Motion to
Dismiss.

2. For violation of Intellectual Property Rights violated in the

Philippines.

Q: Can an unlicensed corporation that is not doing business in the

Philippines?
A: General rule, no, for lack of jurisdiction. Because it is not doing business
in the Philippines.

Q: What constitutes doing business?

A: Please take note of the provisions of the Foriegn Investment Act. It
includes, soliciting orders, service contracts, opening offices ( called liason
offices or branches), appointing representatives that will represent it in its
business in the Philippines who is also domicile in therein for a period of
180 days for a given year, participating in the management of a domestic
business except when such participation arises from its rights as a
stockholder of a domestic company or a foreign corporation is deemed to
be doing business in the PH if it engages in continuity of acts that implies
the progressive intent to obtain profit out of said business.

So, these are the acts of doing business. Whether or not it is doing business
is a question of fact. But the SC has held that mere intent to do business in
the Philippines by participating in bidding for government infrastructure
projects is already indicative of doing business in the PH, even if in that
bidding process, the foreign corporation lost. It should have procured a
license.
The other way of determining the citizenship or nationality of a
corporation is, pursuant again to the Foreign Investment Act and
correlated to the provisions of the 1987 constitution and other special laws,
In this Negative List, you will find instances where no foreign equity is
allowed. So, mass media is one of them. But, you will also find, for example,
a listing of instances where 25% foreign equity is allowed or up to 30%
foreign equity: advertising, that is under the constitution. Or 40% foreign
equity: usually for natural resources extraction, utilization and
development, ownership of private lands. So, these are the most common,
yung 60-40, up to 40% foreign equity.

Remember, the 1987 constitution and special laws limit certain activities
either fully or partially to Filipino citizens, and these activities, which we
shall describe as “nationalized activities” are contained in the Foreign
Investment Negative List; List A or List B.
 Yung Negative List B lists down the instances when 40% foreign equity is
allowed, and activities are defense-related or security-related or they are
But, you will also find in this Negative List instances or business where 100%
public-health affected, like sauna, bath houses.
foreign equity is permitted. And in the 11th Negative List, Domestic Market
Enterprises, as well as Export Market Enterprises, where coupled with the
Given this Negative List or nationalized activities, the Foreign Investment
following additional businesses-internet, teaching in higher education
Act defines who a Philippine National is. Why? Because in those instances
except yung mga professional subjects, for example, engineering, nursing,
where Philippine equity is required, for example yung 60-40 for ownership
law subjects.
of lands, who is actually a Philippine National?
These are not allowed for foreigners. But if they teach, for example, social
There are four under the Foreign Investment Act:
sciences, gen. Ed. classes, foreigners are allowed. Training Centers- yung
a. A citizen of the PH regardless of residence is a PH national;
mga TESDA courses na high level- those are allowed for foreigners now.
(see list in the slide below) b. A domestic partnership 100% of the capital stock belongs to Filipino
citizens;
And this is a good improvement because it now allows technology and c. A corporation organized abroad, for example a corporation
skills transfer in the Philippines. Adjustment companies are now allowed to formed and incorporated in Japan but where the outstanding
be 100% foreign-owned. And wellness centers- I think this is to attract voting stock to the extent of 100% belongs to Filipino stockholders-
foreign investment in the PH on a greater scale. that is a PH national. So, it is not the incorporation test that is
applied here but the control test.
d. A trustee of pension, retirement and similar benefits for as long as,
regardless of where it was incorporated, the beneficiaries of such
retirement, pension and other benefit funds are Filipino citizens to
 the extent of 60%, meaning 60% of those funds inure to Filipino
beneficiaries.
It is the last enumeration of a Philippine National that is often the source
of confusion. And this is what the SC has called the “COLATILLA”- where a
corporation has non-Filipino stockholders to the maximum extent of 40%-
then that corporation is considered a PH national. Where the same
corporation owns shares of stocks in another Philippine corporation, and
between the two, the ownership is 60-40, and that in the Boards of these
two corporations, 60% of the seats are occupied by Filipino directors, then
both corporations are considered as PH nationals.
It is in that Colatilla that we apply the so-called CONTROL TEST.
And I reiterate that the Control Test is necessary to determine WON there
is compliance with the 60-40, 70-30, 75-25, 80-20 requirement in the
constitution, or 100% requirement.
And this interpretation of the control test was first laid down in the case of
Gamboa v. Teves, and in the MR in Heirs of Gamboa v Teves. Later on, in
express investment v Bayantel and elaborated in Narra Nickel v Redmont,
and most recently in Roy III v Herbosa.
What is the principal ruling in the landmark case of Gamboa v Teves?
Gamboa involves an interpretation of the meaning of the word “capital”,
as used in the 1987 constitution repeatedly. In stock corporations, capital
refers to shares of stocks that are given the right to vote or elect directors
of the corporation. Why? Because of the CENTRALIZED MANAGEMENT
PRINCIPLE- in a corporate setting, the stockholders do not directly manage
the affairs of the corporation, management is centralized in the Board of
Directors. And the entity of the group that manages the corporation
controls the corporation.
So, it is in that respect that the SC interpreted capital to shares of stock
that exercise control, and shares that exercise control are shares that get
to elect directors. Because it is the directors who control the corporation.
So that is the logic.
In using the control test, I have given an illustrative example in this
powerpoint:
So that, for as long as, the outstanding voting shares in the corporation out
of the total belong to Filipino citizens, whether that Filipino shareholder is
an individual or a corporation, and only 40% are held of record by
foreigners, the under the contral test, the citizenship of the controlling
stockholder that determines the citizenship of the corporation. That is why
using the interpretation in Gamboa, on the control test and the language
of the foreign investment act, that corporation which meets the minimum
60% for Filipinos is a PH national. There may be instances where the control
test is insufficient.
According to the SC, in companion to the control test: THE GRANDFATHER
RULE must be adopted when there is doubt as to the true actual citizenship
of the corporation itself.
Q: How do we employ the grandfather rule?
A: Relevant only when one corporation owns shares of stocks in another
corporation. Thus, in the collatilla found or written in the foreign
investment act.
I have illustrated how the grandfather rule was used because it is the exact
same formula that was adopted by the SC in the case of Narra-Nickel v.
Redmond. When we speak of the grandfather rule, we trace the nationality
or citizenship of the owners of the capital stock of the corporation. If
various layers of corporations are organized, then we go up those layers in
order to determine the identity and nationality of the ultimate owners of
the corporation. Thus, this is possible if one corporation is the stockholder
of another corporation and in that corporation you have corporate
stockholders. It is by a series of corporate layering that doubt arises as to
the true and exact nationality or citizenship of the owners of the
corporation. There is a need to inquire further up into those layers by first
multiplying the number of shares held by one corporation against the
shares held by it in another corporation.
Q: Why was it called the grandfather rule?
A: We need three layers.
ILLUSTRATION: GRANDFATHER RULE
B, G, and M are Filipinos who own 60% and the remaining 40% is held of
record by Xi, who happens to be a Chinese stockholder. Since B, G and M
collectively own 60% of POGI Inc., and 40% is owned by a foreigner, POGI is
under the control test, a PH national. IF Pogi owns shares of stocks in Cute,
Inc., then the citizenship of Cute becomes doubtful. If Cute is also partly
owned by a foreigner. Thus, Cute becomes the grandchild corporation,
POGI is the child corporation and the grandfathers are B, G, M and Xi.
In adopting the grandfather rule, we measure the interest that the
foreigner has in the grandchild corporation. By measuring such interest,
we compute both direct and indirect interest. This illustration will show us
that the grandchild corporation is in fact NOT a PH national. That is why in
the case of Gamboa v. Teves, the SC required PLDT with the 60-40
requirement because it found out that 64% of the controlling voting shares
of PLDT is held by foreigners and 34% of the voting controlling share is held
by Filipinos. It is the exact reverse by what was prescribed in the
corporation. In the same case, Filipinos have no control of PLDT because,
as beneficial ownership is concerned, the Filipinos only participate to a
small degree as far as dividends and other proprietary benefits are
concerned. Gamboa v. Teves and Heirs of Teves must be read. These are
important cases.
SAMPLE COMPUTATION FORMULA OF THE GRANDFATHER RULE:
FORMULA: GRANDFATHER RULE

As mentioned earlier, when we speak of controlling stock, we refer only to
those shares of stocks that are entitled to vote directors of the
corporation.
Gamboa v. Teves: Controlling Shares refer to voting and beneficial control.
It is not just the right to vote but also the control in the dividends as well
as the proprietary benefits.
MERGERS AND CONSOLIDATIONS
- Form of corporate reorganization or restructuring.
A merger is marriage between two or more corporations (A + B = A)
The difference is in a merger, if A combines with B, it results with A as a
surviving corporation. One of the constituents is the surviving corporation.
In this kind of corporate combination, B is absorbed in A and B ceases to
be a separate and distinct person because it is part and parcel of A.
In a consolidation, A combines with B in order to create C, a new
corporation (A+B=C) it depends on what type of marriage you want.
Choose your marriage of convenience.
Steps to Mergers and corporations:
A. There must be a plan.
B. The plan must be approved by majority vote of the board or ⅔ of
the outstanding capital stock or membership of the participating
corporations.
C. The plan of merger must be reviewed by the ff.agencies:
1. SEC
2. Regulator
- usually on grounds of whether or not the merger will
result in a monopoly or unlawful combination of trade.
3. PH competition commission - if the merger for example will
result in substantial lessening of competition in the market
or will create a monopoly or will result in abuse of
dominant position. THese are practices that are frowned
upon for being anti-competitive. It will revoke or minimize
the agreed upon corporatie combination. If none of those
grounds appear then…
D. Articles of incorporation or merger will not be issued by the
SEC. This shows approval by the government of the proposed
corporate marriage.
What is the effect of the merger or consolidation?
- This is in the law and this is copied from the former corporation
code.
- If there is a merger or consolidation, it implies or results in
automatic transfer of all assets and all liabilities.
- IN the case of BPI employees union v. BPI: the SC said that in the
absence of express stipulation in the plan of merger or
consolidation as to how the employees of the surviving
corporation will deal with the employees of the absorbed
corporation then the rule is that the employees of the absorbed
corporation are deemed transferred automatically to the surviving
company. This is consistent with the protection of labor under the
1987 Constitution as an aspect of social justice. We cannot say that
the employees of the absorbed corporation are automatically
terminated because that will not serve the constitutional precept
or standard of social justice. That is why they are deemed
 automatically transferred as well to the surviving entity. They are
neither assets neither are they liabilities, but it is important to know
that the principle applies.
Special Corporations
Special Stock Corporations
Close Corporations – is a stock corporation with the following
special features: All the stocks of the corporation are subject to restrictions
on transfer and ownership. Furthermore, all the issued stocks of the
corporations shall be held on record by persons not exceeding 20, so the
maximum number of shareholders of a close corporation is 20 regardless
of the number of shares. A closed corporation can have a 100M shares but
at any given time, stockholders of record should not go beyond 20. The
number should be fixed in the Articles, reiterated in the by-laws and every
stock certificate. The restrictions on transfer and ownership, same must be
in the Articles, reflected in the by-laws and reiterated in the certificate of
stocks. It is for these purposes that a closed corporation is prohibited from
selling its shares in the stock exchange. However, when an open
corporation acquires 2/3 of the outstanding voting stocks in a closed
corporation, the latter ceases to be a closed one. So it must amend its
Articles.
Special Provisions of a closed Corporation that must be contained in the
Articles:
1.That there will be no Board of Directors, instead it would be the
stockholders who will manage the affairs of the corporation, because they
are only a limited number of them.
2. A closed corporation can prescribe a higher quorum requirement both
for actions of the board and actions of the stockholders. To enter into a
merger, it can be prescribed that unanimous consent of the board, and 90%
of the capital stock must approve the same – that is valid.
3. Pre-emptive right in closed corporations applies to all kinds of
dispositions or re-disposition of shares. Meaning it is considered as an
unlimited offer meaning everytime that there are issuances of new shares
or treasury shares, the corporation must keep offering them to its existing
stockholders because of the restrictions on who can become a stockholder
4. a stockholder of a close corporation may exercise appraisal rights
anytime for whatever purpose. Why? This is the character of a closed
corporation it is similar to a partnership. The persons who compose it
usually are friends or closely related individuals. That is why many family
corporations are usually organized as closed corporations. However,
withdrawal from the closed corporation must be supported by the
corporation having sufficient assets covering its liabilities. So, there is no
need to prove the presence of a restricted retained earnings because it is
to guarantee that any stockholder who withdraws is paid outright.

Because of the possibility that a deadlock may ensue within a corporation
especially if all 20 of them are managing the business of the corporation
too many cooks for the broth, 10 in favor and 10 against, and in that
situation affects negatively the way the business of the corporation is
managed, then there are certain ways by which the deadlock can be
resolved. Amend the Articles, amend the by-laws, amends the holders’
agreement, amend the resolution of the board, require purchase of the
shares of some of the stockholder, appoint a provisional director, or a
petition for dissolution of the closed corporation.
One Person Corporation – is actually a stock corporation. In the
RCCP, an OPC was introduced in order for small and medium-scale
enterprises. In many instances, these are businesses who constitute the
underground economy in the PH and are really a supportive environment.
In these cases, for MSME (Micro, Small, Medium Enterp.) usually one
person or only two persons in the enterp, yet they cannot avail the benefits
of a corporation because under the Corpo Code there was a necessity to
get 5. So that in itself is a discouragement to form corporations for MSME.
SO this is the response of Congress – to allow an OPC. That is why, there is
no need to prove the number of incorporators because you can have 1 or 2
or 3 or 5 but not more than 15 incorporators.
Who may form an OCP? - any individual with legal capacity or a trust or an
estate of a deceased person. An estate of a deceased person is actually one
way of incorporating the inheritance. This is one way of avoiding taxes
when you incorporate the inheritance. In Trust, this is to incorporate the
express trust of given by way of contract so that ultimate benefit would be
renown to the beneficiary. However, an OCP cannot be and can never be
formed by a bank, quasi-bank, trust company, public corporation or a
publicly-listed company or a non-charitable GOCCs. If the business of the
OPC is vested with public interest, it cannot be an OPC
This is a response to the fact that in the PH, 99% of businesses are MSMEs.
Benefit of Organizing OPC
Separate legal personality. Unlike in sole proprietorship where the
distinction is blurred between the business and the owner of the business
, an OPC draws that wall. It separates the owner of the business from the
business itself—the business itself is the OPC. Then you insulate against
the liabilities/obligations of the OPC the business owner. In that way, the
business owner’s personal private property and non business property are
protected. Nevertheless, whenever an OPC incurs liability, the business
owner or single stockholder can raise the difference of separate and
distinct personalities. However, the other party may invoke the piercing
doctrine if the business owner cannot prove that he separated his assets.
This means that when there is commingling of personal assets with
business assets that is the time that the piercing doctrine can apply and the
business owner cannot be protected by a corporate shield.
Requirements once an OPC is organized:

The term “OPC” must be added to the corporate name

The single stockholder is the self appointed president, director, and

treasurer. The SS may appoint/name the treasurer but usually it is self
appointed. The SS however cannot assume the position of secretary. This
is also required because the life of the OPC is co-existent with the life of
the single stockholder to prevent immediate dissolution. The OPC/SS can
appoint a nominee and alternate nominee that will continue the OPC
incase of death of the single individual.

OPCs are required to file its Article of Incorporation.

Existing corporations may convert it into an OPC just by notifying the SEC
and then complying with other administrative requirements. Similar to
other corporations there is no minimum capitalization requirement for an
OPC. In an ordinary corporation minimum capitalization is made only to be
fulfilled if required by special law depending on the business.

Non-stock Corporations
- Absolutely prohibited from distributing dividends
- All profits must be used in furtherance of the purpose
- Membership is personal, non-transferable
- Non-stock religious and educational corporations subject to
constitutional tax exemptions

Basic distinction between stock and non-stock would be:

a. As to purpose
b. As to the governing body - because in a non-stock corporation they
are called board of trustees or any other fancy name that the
articles may provide. That is why in non-stock corporations the
governing body may be called board of regents/board of
councilors/board of experts/circle of friends. For stock
corporations only the Board of directors.
 c. Membership - in non-stock corporations, membership is
considered personal, therefore non-transferable. It is based on
qualifications. These qualifications prescribed by the entity,
therefore once admitted it inhere to the person and it cannot be
separated from that person. Thus, death of the member
extinguishes the membership or expulsion of the member,
extinguishes the membership. While, in a stock corporation, one
becomes a stockholder by merely buying shares (capacity to pay or
acquire more shares) and that shares are essentially transferable.
Non-stock corporations are formed for non-profit purposes. However,
there are two special kinds of non-stock corporations:
Religious Non-stock, may be formed as:
a. Corporation sole - as prior to OPC, Corporation sole is a unique
corporation because there is really only one person there the
Archbishop, Bishop, Chief Minister, or the Head of the Church
(Acting as trustee for the management of the property of the
church)
b. Religious Society - this must comply with the usual requirement
of minimum 5 incorporators.
- For both Corporation sole and Religious Society, the Revised
Corporation Code should be applied suppletorily because it is the
rules, doctrines, and practices within the church shall prevail as far
as management operation of the affairs of religious corporations
are concerned.
- In a decision of the SC, it was held that conversion from a
corporation sole to a religious society can be done by mere
amendment of the Articles of Incorporations. It is upon the lone
discretion of the Archbishop acting as Corporation Sole.
Take note: Religious non-stock corporations are protected by free exercise
clause in the 1987 Constitution, thus, from the moment that they file their
articles of incorporation with the SEC, those Articles are deemed approved
and for that reason the State cannot file for involuntary dissolution of a
religious non-stock corporation.
Educational Corporation
- Any school that is established or organized as a stock corporation
shall be ineligible for any form of government subsidy, incentive
or assistance, except those given to individual students and
teachers in the form of scholarships, student loans or other forms
of subsidy as already mandated under existing laws. Government
assistance to non-stock schools for educational programs shall be
used exclusively for that purpose.
a. Stock
b. Non-Stock
DISSOLUTION AND LIQUIDATION OF CORPORATIONS
Dissolution - represents the time of death of the corporation for the
business/purpose. May be thru (CAUSES OF CORPORATE DISSOLUTION):
a. Voluntary petition
- This referring to : (a) where no creditors are affected; (b) where
creditors are affected; and (c) by shortening of the corporate term
- Petition must be filed with the SEC upon approval of majority vote
of the Board and ⅔ of the outstanding capital stock.
- Considered pre-termination at the instance of corporation itself
b. Expiration of the term
- Corporation may file for their revival with the SEC
c. Involuntary dissolution
- By way of state action for causes due to fault of the corporation
GROUNDS:
(a) expiration of the corporate term;
(b) non-user;
(c) continuous inoperation for a period of at least 5 years;
(d) legislative actions; and
(e) SEC action in cases of violation of the Code (fraud,
misrepresentation, wilful defiance to any order issued by SEC or
regulator)
 - There appears to be concurrent jurisdiction between the SEC as
well as the RTC. The rule is that by way of quo warranto, it is within
courts jurisdiction (Judicial Dissolution). Other than that, upon
complaints on other grounds, it is with the SEC.
- If the ground for involuntary dissolution is fraud in procuring the
certificate of incorporation or misrepresentation as to what the
corporation is doing, these would be judicial, all other causes, the
revocation of the certificate of incorporation can be done by the
SEC.
Doctrine of Relation
- This refers to the retroactivity of the filing of the amendment to
extend the corporate term to the date of the passage of the
appropriate resolutions to extend the term in instances when the
failure to file the amended articles is due to the neglect of the
officer with whom it is required to be filed or wrongful refusal to
receive it.
- This is also known as the “relating back doctrine”
- Assume that the corporation is in its last few days of its existence
but for some reason the board as well as the stockholders forgot
to take early action. So on the last day of the corporation, majority
vote of the board and the 2/3 of the outstanding capital stock
approved an extension, let’s say for another 50 years. So the
amendments were filed with the SEC. However, upon
investigation, the SEC discovered that some necessary documents
in support of the extension were missing. So, there is a defect in
the filing of the corporation in the SEC.
Application of the doctrine: Doctrine of relation refers to the retroactivity
of the filing of the amendment to extend the corporate term to the date of
the passage of the appropriate resolutions to extend the term in instances
when the failure to file the amended articles is due to neglect of the officer
with whom it is required to be filed or a wrongful refusal to receive it. Under
the doctrine of relation, apply the rule of liberality. Technically, by the time
the error was discovered by the SEC, the corporation’s term had already
expired. Under this doctrine, a belated fulfillment of the deficient
documents or supportive papers should be supported by the SEC.
Therefore, once completed, if the SEC approves the amendment of the AOI
extending the term of the corporation, the extension should begin
retroactive. In that way, the life of the corporation is kept by legal fiction
as continuous from the original term to the extension or renewal. This is
also known as the relating back doctrine.
Modes of Corporate Liquidation
● A corporation may liquidate within the statutory period through:
9a) by corporation itself or its board of directors or trustees; (b) by
a trustee to whom the assets of the corporation had been
conveyed; and (c) by a management committee or rehabilitation
receiver appointed by the SEC.
● A corporation is allowed a 3-year-period to enable it to close its
business, collect from debtors and settle with creditors.
● Liquidation can continue beyond the 3-year-period
● Receivers or trustees can act as such beyond the 3-year period.
● Pending suits upon expiration of the 3-year-period may still be
prosecuted by the handling lawyer who will then be constituted as
a trustee for such purpose.
When a corporation is dissolved, it is prohibited from engaging in
any business or activity that would further the purpose for which it was
organized. Its legal personality for the business purpose is extinguished.
However, its legal personality to liquidate, wind up, and close its affairs is
not yet extinguished. That’s why the liquidation phase follows the
dissolution. Dissolution happens in one instance and it follows that we
refer to it as liquidation. In (a), the board will convert themselves into
board of liquidators; in (b) or by the receiver appointed by the court, for
example a petition under the FRIA for the liquidation of the corporation or
by any person appointed by the court for the dissolved corporation.
Thus, the maximum period for liquidation in the name of the
corporation is 3 years. Within the 3 years, the corporation can still enter
into contracts under its name for conveyance of property in the name of
the legal title holder or trustee, with the beneficial title retained by the
stockholders or creditors of the corporation. Within that 3 years,
transactions to sell or alienate or otherwise liquidate and convert the
assets into cash, may be done in the name of the corporation. Likewise,
suits may be prosecuted and defended in the name of the corporation
within that 3 years. However, when the 3-year-period has already expired,
for all legal intents and purposes, the corporation is completely dissolved.
There is termination of the total civil personality of the corporation.
Q: What happens to the pending cases and contracts?
A: They shall be continued in the name of the trustee or of the receiver or
of the liquidator. Once the trustee/ receiver/ liquidator takes over, then
there is no time limit anymore.so the liquidation can take time as long as
necessary to fully distribute the remaining assets of the corporation, and
to close the business and wind up its affairs because this time all
transactions will now be entered in the name of the trustee/ receiver/
liquidator as the lawful representative of the dissolved corporation’s
stockholders and creditors.
SECURITIES EXCHANGE COMMISSION
All the provisions of the RCC are supposed to be administered and
enforced by the SEC.Technically, the SEC is the registrar of private
corporations. However, it is also, by law, the regulator, licensing authority
and supervisor of the private corporations in the Philippines. It regulates
the businesses of the following: entities granted primary franchise;
investment houses; financing companies; or securities dealers/ securities
brokers/ securities professional/ SROs/ Stock and Bond Exchanges.
United Church of Christ in the Philippines, Inc v Bradford United
Church of Christ, Inc (674 SCRA 92): SEC shall have absolute jurisdiction,
supervision and control over all corporations. Even with their religious
nature, the SEC may exercise jurisdiction over them in matters that are
legal and corporate.
Additional Powers of SEC under RCC
The RCC has strengthened the powers of the SEC to ensure faithful
compliance and obedience with the provisions of the law. Since the law is
geared toward greater transparency and fidelity on the part of the
corporate directors and officers, there are new crimes that are punished
under the RCC; and the powers of the SEC to impose administrative fines
and sanctions and remedies has likewise been expanded. There is also
whistleblower protection. A whistleblower is one who has intimate
knowledge of wrongdoing within a corporation, and therefore, can seek
assistance with the SEC against retaliation from this offending directors or
officers.
Q: Who are liable?
Section 171. Liability of Directors, Trustees, Officers, or Other Employees. -
If the offender is a corporation, the penalty may, at the discretion of the
court, be imposed upon such corporation and/or upon its directors,
trustees, stockholders. members, officers, or employees responsible for
the violation or indispensable to its commission.
Section 172. Liability of Aiders and Abettors and Other Secondary Liability.
- Anyone who shall aid, abet, counsel, command, induce, or cause any
violation of this Code, or any rule regulation or order of the Commission
shall be punished with a fine not exceeding that imposed on the principal
offenders, at the discretion of the court, after taking into account their
participation in the offense.
When it imposes civil and administrative sanctions, the RCC can
impose solidary civil liability as well not just upon the insiders in the
corporation but also the persons that are complicit in the act.
INTRA-CORPORATE CONTROVERSIES
Q: When do we know that a certain dispute is intra-corporate?
A: we apply two concurrent tests:
a. Relationship test:
 We must limit ourselves to identifying who the parties in the
controversies are. Here, one party must be a corporation and the other
may be the Republic of the Philippines insofar as the franchise of the
corporation is concerned (Quo warranto); or a member of the public for
devices or schemes for fraud or misrepresentation committed by the
corporation; or director or officer of the corporation where the
controversy was about elections or appointments to office.
Illegal dismissal of a corporate officer is not an ordinary labor dispute, it’s
a corporate act that’s why it’s the RTC and not the NLRC that has
jurisdiction; There can also be cases where stockholders’ dispute pertains
to corporation on one hand and the stockholders on the other hand; or
dispute is between and among the stockholders in the corporation.
Knowing who the parties are is not enough. Knowing the cause of
action is equally important, so the next test is the nature of the controversy
test.
b. Nature of the controversy test.
Does the controversy involve enforcement of rights and obligations
between the parties provided for under the Revised Corporation Code,
the Articles of Incorporation and the By-laws of the Corporation?
If YES, then it is an intra-corporate controversy. If NO, it is not an intra-
corporate controversy even if there is an intra-corporate relationship
between the parties.
Atty. Lulu: “I think the better way to address the nature of the controversy
test is- would the case survive even in the absence of intra-corporate
relationship between the parties in the controversy, if the answer is YES, it
is not an intra-corporate controversy; if NO, then it is intra-corporate. "
Eg. A and B are parties to a pending civil case. A and B are the stockholders
of POGI Inc. So, under the relationship test, they are stockholders of the
same corporation. So, it is a dispute between and among stockholders of
the same corporation. But let's look at the allegations in the pleadings. A
sued B because of a boundary dispute. It is alleged that B built a fence on
the land belonging to A and exceeding the land boundary or perimeter that
belongs to B.
Q: Would the case survive without the intra-corporate relationship?
A: Yes. It is not an intra-corporate controversy.
But the dispute is this, it’s a derivative suit- definitely it is intra-corporate
or it's an action filed by the corporation against its subscriber who failed to
pay in full the balance on the subscription- intracorporate. (Nature of the
controversy test arises from provisions of the Revised Corporation Code.)
Or
It's a suit filed by a dissenting stockholder to demand payment of the fair
value or surrender value the shares - intracorporate. Because appraisal
right is in the Revised Corporation Code of the Philippines.
Importance: Knowing that it is an intra corporate controversy would guide
us where to go as far as filing the same. All intra-corporate controversies
are now cognizable by the Regional Trial Court vested with special
jurisdiction pursuant to Republic Act 8799. It's the Supreme Court that
designates which among the RTCs in a judicial region should act as a special
commercial court under the provisions of the law.
SLIDES:
SECTION 19 (1) and (8) of BP 129, as amended, provides:
Regional Trial Courts shall exercise original jurisdiction:
(1) In all civil actions in which the subject of the litigation is incapable of
pecuniary estimation;
xxx
(8) In all other cases in which the demand, exclusive of interest, damages
of whatever kind, attorney’s fees, litigation expenses, and costs or the
value of the property in controversy exceeds Three hundred thousand
pesos (P300,000.00) or, in such other cases in Metro Manila, where the
demand exclusive of the above-mentioned items exceeds Four hundred
thousand pesos (P400,000.00).
SECTION 5.2 of RA 8799 provides:
The Commission’s jurisdiction over all cases enumerated under section 5 of
Presidential Decree No. 902-A is hereby transferred to the Courts of
general jurisdiction or the appropriate Regional Trial Court: Provided, That
the Supreme Court in the exercise of its authority may designate the
Regional Trial Court branches that shall exercise jurisdiction over the cases.
The Commission shall retain jurisdiction over pending cases involving intra-
corporate disputes submitted for final resolution which should be resolved
within one (1) year from the enactment of this Code. The Commission shall
retain jurisdiction over pending suspension of payment/rehabilitation
cases filed as of 30 June 2000 until finally disposed.
SECTION 5 of PD 902-A:
In addition to the regulatory and adjudicative functions of the Securities
and Exchange Commission over corporations, partnerships and other
forms of associations registered with it as expressly granted under existing
laws and decrees, it shall have original and exclusive jurisdiction to hear
and decide cases involving.
a) Devices or schemes employed by or any acts, of the board of directors,
business associates, its officers or partnership, amounting to fraud and
misrepresentation which may be detrimental to the interest of the public
and/or of the stockholder, partners, members of associations or
organizations registered with the Commission.
b) Controversies arising out of intra-corporate or partnership relations,
between and among stockholders, members, or associates; between any
or all of them and the corporation, partnership or association of which they
are stockholders, members or associates, respectively; and between such
corporation, partnership or association and the state insofar as it concerns
their individual franchise or right to exist as such entity; and
c) Controversies in the election or appointments of directors, trustees,
officers or managers of such corporations, partnerships or associations.
Please take note intra-corporate controversies should be considered as
actions that are incapable of pecuniary estimation therefore regardless to
the amount involved it is the RTC that has jurisdiction.
SLIDE:
GONZALES V GJH LAND, INC., G.R.NO. 202664, NOV. 20,2015
For the guidance of the bench and the bar, this case provided guidelines
not only for intra-corporate disputes but also other commercial cases as
follows:
If a commercial case filed before the proper RTC is wrongly raffled to its
regular branch, the proper courses of action are as follows:
1.1. If the RTC has only one branch designated as a Special Commercial
Court, then the case filed shall be referred to the Executive Judge for re-
docketing as a commercial cae, and thereafter, assigned to the sole special
branch;
1.2. If the RTC has multiple branches designated as Special Commercial
Court, then the case filed shall be referred to the Executive Judge for re-
docketing as a commercial cae, and thereafter, raffled off among those
special branches; and
1.3. If the RTC has no internal branch designated as a Special Commercial
Court, then the case shall be referred to the nearest RTC with a designated
Special Commercial Court branch within the judicial region. Upon referral,
the RTC to which the case was referred to should re-docket the case as a
commercial case, and then:
a. If the said RTC has only one branch designated as a Special
Commercial Court, assign the case to the sole special branch; or
b. If the said RTC has multiple branched designated as a Special
Commercial Court, raffle off the case among those special
branches.
Discussion:
However, in the case of Gonzales vs GJH, Supreme Court was confronted
with a situation where it is an intra corporate controversy but by reason of
mistake in the raffle it was assigned to a regular regional trial court in that
case there is a special commercial court when the regular court schedule
the case for hearing the court discovered that it is in fact an intra corporate
controversy and therefore the judge dismissed the case citing that since it
is an intra corporate controversy he sits in the sala of regular trial court and
he lacks authority to act upon an intra-corporate controversy. So, he
dismisses it because of lack of jurisdiction.
The Supreme Court laid down the following rule:In case an intra-corporate
controversy is erroneously assigned to regular RTC it must not be
dismissed. Instead it must be returned to the clerk of court so that the clerk
of court can assign it to the appropriate of the RTC assigned as a special
commercial court. If there are several special commercial courts, then a
raffle must be conducted only between those special commercial courts.
To dismiss it would be erroneous. WHY? Because it is not true to say that
the RTC to whom the intra-corporate controversy was assigned lacks
jurisdiction because all RTCs are courts of general jurisdiction and
furthermore there is a practical aspect to that- because if the judge
dismisses it and there is a need to refile it they would be paying filing fees
again to the same RTC. It is the same RTC except that it is separated by
branches.
On the other hand if it is not an intra-corporate controversy but it was
raffled off or assigned to a special commercial court the special commercial
court must return it to the clerk of court so that it may be raffled to the
other RTCs. This is where a serious effect will arise: What if it is an intra-
corporate controversy and it is filed in the MTC? - then it will be dismissed.
ordinary illegal dismissal case but an intra-corporate controversy. On the
other hand if his employment with the corporation is not due to the fact
that he is also a stockholder of the corporation (meaning it is not an special
consideration, it doesn't matter that he was a stockholder or not; even if
he is not a stockholder he would have been hired anyway) in such case
there is no special consideration then the labor dispute is cognizable by the
NLRC.

Another aspect of intra-corporate controversies would be in cases of labor

disputes.
SLIDE:
WHEN IS A DISPUTE WITH AN INTRA-CORPORATE RELATIONSHIP WITHIN
THE JURISDICTION OF THE NLRC?
In the case of Cosare v. Broadcom Asia, Inc., GR NO 201298, February
5,2014, the NLRC was held to have jurisdiction over the dismissal of an AVP
for Sales, who was also a stockholder, as he is not a corporate officer
whose dismissal is cognizable by the RTC. A corporate officer was defined
as one who meets the following: (a) the creation of the position is under
the corporation’s charter or by-laws; and (b) the election of the officer is
by the directors of the stockholders.

Discussion: In the case of Cosare v. Broadcom Asia, Inc, a pro hac vice but
it is also important to see how the court rules in such unique cases. He
became an employer of the corporation because he happened to be a
stockholder but he is not a corporate officer. When he was terminated he
filed an illegal dismissal case with the NLRC but the NLRC dismissed the
case saying that since he is a stockholder of the corporation then the NLRC
is devoid of jurisdiction and it is an intra corporate controversy. On the
other hand, the RTC designated with special jurisdiction is saying that since
he is not a corporate officer nor a director, the controversy is a simple labor
dispute.

According to the Supreme Court here special consideration must be taken

into account. If he became a part of the corporation as an employee by
virtue of such special relationship that he was a stockholder of the
corporation then his appointment as employee is actually an intra
corporate act. His subsequent termination is therefore no longer just an