CORPO NOTES

I. De Jure Corporation

- It has been issued a certificate of incorporation because it has complied with all the requirements
set forth by law
- A de jure corporation can sue and be sued in its own name as stated in the AOI. When impleaded
as a defendant, summons must be served in the principal office stated in the AOI. Here, if judgment
was rendered against the corporation, the properties subject of the levy would be that belonging to
the corporation alone.

II. De Facto Corporation

- Does not legally exist in so far as the state is concerned but merely exists as a fact.

A. Elements to be considered as a de facto corporation (LIPC)

1. There must be a valid law allowing the formation and incorporation of corporations;
2. There must be a bona fide attempt on the part of a group of persons to incorporate (meaning,
there is an agreement among a group of at least 5 persons trying to incorporate in good faith a
corporation)
3. There must be a bona fide user of corporate powers (meaning, the group of individuals started
assuming themselves as a corporation in good faith for the purpose of their corporation in the
latter’s name) – mere colorable title as a corporation
4. That the de facto corporation possesses a certificate of incorporation (here, the certificate was
issued in error because of some serious flaw in its incorporation; e.g. oversight)

- As far as all third persons, except the State, are concerned, a de facto corporation has all the rights
and powers as a de jure corporation. That is why, no collateral attack is allowed to question the
legal existence of a corporation. Only the state can question the same thru a Quo Warranto
proceeding

- Can a de facto corporation assert its rights against the Republic or the state? No because as far as
the state is concerned, it has no legal existence.

- A de facto corporation can also sue in its own name as stated in the AOI. When impleaded as a
defendant, summons must be served in the principal office stated in the AOI. Here, if judgment was
rendered against the corporation, the properties subject of the levy would be that belonging to the
corporation alone.

III. Section 21 – Corporation by Estoppel (a.k.a. Ostensible Corporation)

- This is not a corporation at all and its existence is based on the principle of estoppel.
- A group of persons misrepresenting themselves as a corporation knowing that the same is without
authority.
- In case of liability, they (the one forming it) are liable as general partners
- In a corporation by estoppel, the persons misrepresenting themselves as a corporation cannot sue
under the name of said corporation. Here, the persons impleaded are those who are
misrepresenting themselves as a corporation

- Example: A and B, doing business under the name and style of Pogi, Inc. Here, if judgment was
rendered against the ostensible corporation, the liability of the persons misrepresenting themselves
is akin to that of general partners (subsidiary and solidary). Subsidiary liability because there is a
need to exhaust first all the partnership assets.

IV. Once a certificate of incorporation was issued, the following subsequent conditions must be
complied with:

A. It must obtain a secondary franchise (a.k.a. Certificate of Authority to Engage in Business)

- Purpose: For the duly constituted corporation to lawfully engage in a business stated in the AOI
- This secondary franchise must be obtained from the appropriate agency which issued the favorable
recommendation
- This franchise is needed only when the business is regulated by law as when the business is
imbued with public interest (e.g. banking, insurance, transportation)

- The certificate of incorporation is the primary franchise.

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 B. The corporation must organize itself and commence its business or purpose within 2 years from the
date of incorporation (Sec. 22)
- This requires that the corporation must exercise its privilege thru positive acts
- Example: Ribbon-cutting; hiring of employees; actually entering into contracts etc., otherwise, the
corporation will be guilty of non-user of corporate powers
- Consequence of non-user of corporate powers within 2 years from the date of incorporation:
- In case of non-use of corporate powers, there is revocation of the Certificate of Incorporation
but the same is not Automatic. There is no such thing as an automatic dissolution of a
corporation; the corporation, although guilty of non-user of corporate powers, is still entitled to
notice and hearing.

- Non-user is not the same as continuous inoperation for a period of atleast 5 years. In
continuous inoperation, the presumption is that the corporation commences its business operation
within the first 2 years except that it was rendered inoperative for 5 years continuously. Continuous
inoperation is also a ground for the revocation of the certificate of incorporation upon notice and
hearing conducted by the SEC.

V. Theory of Corporate Fiction

- A corporation is an entity separate and distinct from those of persons comprising it.
- Under the Theory of Corporate Fiction, property belonging to the corporation is not the property of
its members. Likewise, its liability cannot be extended to those persons comprising it. The rights
granted to the corporation cannot be extended to its shareholders or board members. In other
words, the corporation and the stockholders or members are distinct and separate from each other.
- However, under the Doctrine of Corporate Fiction, the separate and distinct personality of a
corporation should be disregarded if the said personality was used to perpetuate fraud, commit
crime, defend wrongdoing, avoid lawful obligation, evade public convenience or confuse legitimate
issues. This is otherwise known as principle of Piercing the Veil of Corporate Fiction.

- Kapamilya, Inc. was sued by Vivian for illegal dismissal and damages. Kapamilya, Inc. was
ordered to pay damages amounting to 5M in favor of Vivian. When a writ of execution as
enforced there was no property to be seized in the name of the defendant. Would levy and
execution be proper on the personal and real property owned by Charot Santos who owns
90% of the OCS of Kapamilya, Inc.?
- No. Apply Doctrine of Corporate Fiction that the corporation has a distinct and separate
personality from that of its officers, stockholders or members. The exception here is when there
is convincing evidence that the veil of corporate fiction should be pierced.

VI. Piercing the Veil of Corporate Fiction (PFI)

- Piercing the veil of corporate fiction is applied in the following cases:

A. Fraud cases
- When the perpetration of malice, ill will, and other forms of deceit is concealed through a
corporation.
- A generic allegation of fraud committed under a corporate structure is sufficient to pierce the veil of
corporate fiction

B. Instrumentality or Alter-ego Cases

- Note that the mere fact that a corporation is the subsidiary of another corporation is not enough.
It must be further shown that the following indicative signs are present in the relationship of the
parent company and its subsidiary:
1. The parent and the subsidiary have the same members of the Board of Directors and other
key officers;
2. That the parent and the subsidiary have the same stockholders or that the parent company
owns the entirety of the capital stock of the subsidiary;
3. That the subsidiary was created precisely for the business of the parent company;
4. That the subsidiary engages in business with no other except the parent company;
5. That the entirety of the assets as well as the capital of the subsidiary were furnished by the
parent;
6. That the parent treats the subsidiary as a mere department or division;
7. That the employees of the subsidiary are treated as employees of the parent company

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 - When a majority of these facts are proved, the subsidiary is considered the same as that of the
parent company. Thus, any liability incurred by the subsidiary may be enforced against the parent
company. The subsidiary is treated as an ordinary adjunct or extension of the parent. But here, the
piercing must apply only to that particular action or situation.
- Here, the parent company is the principal whole the subsidiary is the agent (principal-agent
relationship)

- Requisites to pierce the veil of corporate fiction under alter-ego cases: (CFH)

1. Control test
- This shows that one corporation exercises absolute domination over another corporation.
- By absolute domination means not only majority control in the stockholdings but control in the
business policies and practices, finances, as well as in the management.
- The controlled corporation is left without a separate and independent will. It cannot act out of its
volition.

- Probative factors:
a. That between the two corporations, there is identity of stockholders;
b. Identity of businesses;
c. Identity of management including Board of Directors;
d. And other similar factors as would lead to the conclusion that one of these corporations is
merely used as a business conduit for the convenience of the other

- After satisfying the control test, the next is the fraud test.

2. Fraud test
- There must be a showing that the control exercised by a corporation over another facilitated or
in fact the principal motivating factor for the commission of the fraud to injure or prejudice the
plaintiff

3. Harm test
- The control exercised by one corporation over another is the proximate cause of the injury
suffered by the plaintiff

- The concurrence of the three tests is sufficient to pierce the veil of corporate fiction and to disregard
the corporate entity.

- Whether the corporate fiction is to be pierced is a question of fact. The purpose of piercing the veil
of corporation is not to dissolve the corporation but merely to determine liability.

VII. Section 16 – Amendment of AOI

- This can only be done after the issuance of the Certificate of Incorporation and all amendments to
the AOI or charter must be formally done
- This requires a majority vote of the BOD (majority of the number fixed in the AOI) with ratification of
shareholders of members representing at least 2/3rds of the outstanding capital stock (OCS)
A. The 2/3 votes may be obtained under Section 16 in two ways:

1. By written assent
- This does not require the conduct of actual meeting by the shareholders or members
- This is done by ballots sent to the addresses of stockholders or members of record (eg. Check
the box)

2. In a Meeting held for that purpose

- This must be with prior written notice to the stockholders or members on record
- If the proposed amendment seeks to reorganize the business or restructure the corporation if
involves substantial change in the nature and character of the corporation, the second option is
the only option – meaning, the 2/3 vote can only be obtained in a meeting called for that
purpose.
- After the 2/3 votes have been obtained, a copy of the original AOI along with the amendments
underscored shall be submitted to the SEC for approval.
- However, if the business of the corporation is regulated, then the favorable recommendation of
the appropriate government regulator must also be obtained.

B. When shall the amendments take effect?

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- The amended AOI cannot take effect without approval.

- However, approval may be obtained two ways:

1. Express on the part of SEC

- The amended AOI takes effect from the date of the said approval of SEC (proof: certificate of
amended articles)
- The following amendments must be expressly approved by the SEC:
1. Increase or decrease of the capital stock;
2. Merger or consolidation;
3. Any amendment that will dilute the existing rights of the current stockholders or would be
prejudicial to the existing stockholders

2. Through lapsation
- If within 6 months from the date the proposed amendments were submitted to the SEC and the
SEC does not take any specific course of action, then the amended AOI are deemed approved
and effective from the date of filing with the SEC (retroactive to the date of filing)

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 TITLE V – By Laws

I. By-Laws (BL)

- Set of instruments that confer but likewise limit power and authority within the corporation.
- This serves as the internal rules for government within the corporation and regulate the relationship
of the corporation and its SHs or members.
- Since the by-laws are merely internal in both enforcement and application, third persons have no
positive duty to know the corporate by-laws.

II. Section 46 – Kinds of BL Based on Time of Adoption:

A. Pre-Incorporation BL
- At the option of the incorporators, they may already draft and submit to the SEC along with the AOI
and favorable recommendation at the time when they applied for registration.
- This is optional.
- Here, all incorporators must sign the same.

B. Post-incorporation BL
- This is mandatory for all registrants who have not yet filed their BL with the SEC earlier.
- It must be submitted within 1 month from the issuance of the certificate of incorporation.
- Failure to file BL within the reglementary period is one ground under PD 902-A for involuntary
dissolution. Here, it is enough that the same is adopted and approved by a majority vote of Board
as well as a majority vote of the OCS or the members.

III. Section 47 - Contents of the BL

A. Contents (BSQPQ-EEPIO)
1. The time, place and manner of calling and conducting regular or special meetings of the
directors or trustees;
2. The time and manner of calling and conducting regular or special meetings of the stockholders
or members;
3. The required quorum in meetings of stockholders or members and the manner of voting therein;
4. The form for proxies of stockholders and members and the manner of voting them;
5. The qualifications, duties and compensation of directors or trustees, officers and employees;
6. The time for holding the annual election of directors of trustees and the mode or manner of
giving notice thereof;
7. The manner of election or appointment and the term of office of all officers other than directors
or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing stock certificates; and
10. Such other matters as may be necessary for the proper or convenient transaction of its
corporate business and affairs

B. General Attributes of Valid BL

1. Must be consistent with law, public policy, public order;
2. Must be consistent with the AOI; in case of conflict between the AOI and the BL, the AOI shall
prevail
3. Must be general and uniform in application (the BL cannot be used as a discriminatory tool
within the corporation)

C. The following had been invalidated by the SC:

1. A BL provision allowing a person to sit as a director even if he is not a SH;
2. In case of stock corporation, a BL provision which provide a term longer than 1 year for the
directors;

IV. Section 48 – Amendment to BL

- When the BL are amended, or was totally rejected and a new one was adopted, the following is the
method to amend or adopt BL:

A. By a majority vote of the Board and majority vote of the OCS or membership
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- Here, the majority vote of the OCS can only be obtained in a meeting. The vote must be reflected in
a Board Resolution which must be submitted to the SEC for approval

B. By majority vote of the Board only

- If earlier the Board was granted delegated authority or power to amend by the stockholders
representing atleast 2/3 of the OCS. The delegated power may be revoked by a mere majority of
the OCS.

- When the BL are amended and the amendment is approved by the SEC, there must be a
Certificate of Amended BL issued by the SEC.

- Amendment BL must always be with the approval of the SEC as opposed to AOI which can take
effect by mere lapsation

- The new BL cannot be given retroactive effect if the same would prejudice or impair vested rights.

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 TITLE III – Board of Directors/Trustees/Officers

I. Management of a Corporation

- One benefit of a corporate structure is that regardless of the number of owners of the capital stock,
the law always vests management of the business or the corporation in a collective collegial body
known as the Board of Directors (BOD) and that is why there is a centralized management in a
corporation.

II. Section 23 – The Board of Directors (BOD) of Trustees

A. Stock Corporation
- Management body is always called BOD
- Minimum no. is 5
- Maximum no. is 15, except for consolidated banks or merged banks where 21 BOD is allowed

B. Non-Stock Corporation
- In case of non-stock corporations – minimum of 5 trustees is required but there is no maximum
fixed by the law, as long as a definite number is chosen

C. Essential and indispensable qualifications

- All BOD must be owners of at least 1 share recorded in their name at the time of their election
- In case of trustees in a non-stock corporation, they must be at least members of record

- In case of BOD for stock corporations – ownership may be mere legal title over the share – he has
legal title if his/her name appears as owner of the shares in the stock and transfer book of the
corporation, whether or not held in trust or for the benefit of another – nominee director

- In case of non-stock corporation, to qualify as a trustee, he/she must be a voting member

D. Where will the candidates for directorship come from?

- The SH themselves
- All SH can file certificate of candidacy

III. Section 24 – Election of Directors or Trustees

A. How to install BOD/Trustees into office: 2 ways

1. Through election
- Popular vote on the part of the sovereign power of the corporation who are the voting stock
- Those SH who owns voting shares are not just entitled to vote but to be voted for, unless
there is a special class called;
2. founder’s shares – has the right to vote and be voted for but only for a maximum period of 5
years

B. How often should elections be held in the corporation?

- If it is stock corporation:
- GR: Every year – because maximum time of being a BOD is only 1 year
- If non-stock corporation
- If the AOI provides for a term of the Trustees longer than 1 year, then the election shall be held
at the end of such term – maximum term is 3 years
- For educational non-stock corporations, the maximum is 5 years

C. When should elections be conducted?

- Regular elections – Must be held on the date fixed in the AOI
- If BL/AOI is silent – on any day on April or under SEC Rules, along with the annual SH’s meeting as
fixed in the BL
- Under SEC Rules, the annual meeting of SH is on the 1 st Tuesday following the 1st Monday of the
year (1st Tuesday of the year)
- If the BL fixes the date and no election was conducted, an explanation in written form must be
submitted to SEC, otherwise penalties shall be imposed

IV. Section 25 – Corporate Officers, Quorum

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 A. During the election, upon prior notice, there must be a quorum
- There is quorum if there is majority of SH entitled to vote who are actually present or are
represented
- If there is no quorum and elections are conducted, the results are void, no one can sit as BOD

- There is presence when the owner of the share is actually, physically present in the room

- If represented – this is usually used by corporations owning shares – the following are the methods:
1. Proxy
2. Voting Trust Agreement (VTA)
3. Any other acceptable deed of assignment
4. Special Power of Attorney (SPA)

- Once there is a quorum, the elections must now be conducted in the manner prescribed in the BL
- If the BL requires balloting, that is the only manner by which elections must be held
- If BL is silent, Corporation Code requires voting viva voce – raising the hand

B. Who shall be proclaimed as winners?

- Those who obtained the plurality of the votes, not majority of votes
- Plurality of votes: Highest number of votes

V. Section 26 – Report of Election of Directors, Trustees and Officers

- Once a BOD is elected and proclaimed, the Corporate Secretary is required by the Corporation
Code to submit a report of the results of the elections. This is a mandatory positive duty

- Only the BOD whose names are registered and listed in the SEC can validly bind the
corporation.

VI. Section 30 – Compensation of Directors

- GR: Once elected as BOD, they are entitled to no salaries or compensation

- XPN: They are only entitled to such if:
1. The BL allows or grants them compensation; or
2. A subsequent resolution of a majority of SH or members is passed conferring salaries or
compensation to the BOD
- When compensation is allowed, there is a legal limit on how much they can receive. It should not go
beyond 10% of the annual net income of the corporation before taxes
- The law provides salary cap to prevent BOD from unduly benefitting from their position and to
provide a disincentive to commit conflicts of interest in other forms of corporate corruption

- If the BL is silent or if there is no resolution of the majority of OCS, can BOD, in the discharge of
their given duties demand salaries? – No. They serve pro bono. Therefore, are entitled only for
reasonable per diems – reimbursement of actual expenses incurred in the performance of official
functions

VII. Section 27 – Disqualification of Directors, Trustees or Officers & Section 28 – Removal of

Directors or Trustees

A. How long must BOD serve as such?

- For the term provided for under AOI, unless that term is cut short by any of the following events:

1. Resignation
- Resignation as BOD does not mean termination of relationship as a SH.

2. Death in office or during the term

3. Withdrawal as a SH
- This may take place thru transfer of all shares to another because the requirement that s/he
remains as SH is a continuing requirement

4. Disqualification during the term

- The following are statutory grounds to disqualify a BOD:

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 a. That s/he has been convicted of any crime involving the penalty of 6 years or more (Sec.
27)
b. Has committed a criminal violation of the Corporation Code committed within 5 years
prior to the election (Sec. 27)
- Other disqualifications may be provided for in the AOI or BL of the corporation

5. Removal
- Who can remove an incumbent BOD – the same power that elected such BOD – the SH
- To remove an incumbent BOD, there must be an actual meeting called and conducted and
at least 2/3 of the OCS must vote to remove
- Since BOD are elected based on trust and confidence, when removed, there is no need for
SH to show cause of removal because the law already presumed that it is a withdrawal or
revocation of the trust and confidence. SH need not present any ground
- However, if the BOD being removed is the one elected as the minority representative, there
must be a just and valid cause for the removal to prevent the majority from exercising their
powers with oppression.
- If the meeting to remove an incumbent BOD cannot be called by the President thru the
Corporate Secretary because they refuse, the meeting to remove may be held upon order of
the special commercial court – meaning, file a petition for conduct of a meeting to such
effect.

6. Expiration of term

7. Increase in the number of BOD

- These are the grounds for vacancy in the BOD
- This means that in the original AOI, there were fewer BOD but an amendment is later
approved to increase the same

VIII. Section 29 – Vacancies in the Office of Director or Trustee

Ground for Ending Filling up the vacancy

the Term
1. Resignation 1. Appointment
2. Death - This must be
3. Withdrawal done by the
4. Disqualification remaining
members of the
BOD for as long
as they still
constitute a
quorum
- Who can be
appointed: Can
choose among
the SH – BOD
must be SH
- The one
appointed will
only serve the
unexpired term;
have same power
as a regular BOD
and same
benefits

2. Special Election
- If there is no
longer a quorum
in the BOD
- There must be a
quorum of the
voting stock,
either present or
represented
- Votes must be
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 cast in the
manner provided
by the AOI/BL
1. Removal 1. Election by SH
2. Expiration of - The only way to
term fill up the vacancy
3. Increase in the
number of BOD

- Africa v. Valleverde
- A, B, C, D and E were enjoying their first term as duly elected BOD. Their first term is from
2011-2012. However, before their regular term expired, they already called for an election.
Notices were sent to SH but during the appointed time and date, very few showed up so there
was no quorum so any election cannot be conducted. As a matter of law, the incumbent BOD
cannot abandon their offices. Thus, if no subsequent election is held by the BOD, then the last
one elected must remain in a hold over capacity. By 2012-2013, A, B, C, D and E remained in
office in a hold over capacity – hold over BOD. Hold over BOD de facto officers because the
right to office has already ceased, the right to hold office is only for the purposes of preventing
vacuum in the management of the corporation. When the first hold over term was again about to
expire, they called for elections, but the same happened so they extended their hold over term
for another year. It was during the last hold over term that A and B resigned. C, D and E chose
X and Y to serve the remaining term of A and B. Is this valid?
- SC: The appointment of X and Y are void because the mere fact that C, D and E were already
in their hold over term at the time they appointed X and Y shows that their regular terms have
already expired and as such under the Corporation Code, when the terms had expired, there is
only one way to fill up the vacancy which is election. Hold over BOD can no longer fill up
vacancies in the BOD.

- Once directors have been chosen and elected and have qualified and their respective names
registered with the SEC, the power to represent the Corporation in all its acts is inherent upon them
and in fact the representative capacity or power shall likewise be considered as exclusive upon the
BOD. That is the power to give consent to contracts or perfect the contract or bind the corporation
in a suit is lodged exclusively upon the BOD.

IX. Delegated Powers

- Even the complexity of the business or purpose of the corporation, there may be a necessity for
practical purposes to delegate some powers of the BOD to some persons.
- Who may exercise in a limited and delegated capacity the power to represent a corporation?
(SBEM)
1. Statutory corporate officers
2. To those created and described in the BL
- May create additional corporate officers and provide for their specific tasks and
responsibilities and for as long as done within the scope of said authority, the acts of these
officers shall be binding upon the corporation
- Example: Vice-President, Vice-President for Finance, Vice-President for Academics, COO
3. Executive Committee
4. Managing Corporations under Management Contract
- Their acts are considered as valid and binding and enforceable upon the corporation for as long
as authorized by the BOD
- As far as the delegees and BOD are concerned, apply the principles of agency. They are
considered as agents of the corporation, therefore, for as long as they act within the scope of their
given authority, their acts are binding upon their principal – the corporation.
- And acting as mere agents, they cannot be held personally liable. Personal liability may arise from
breach of the so-called fiduciary duties of corporate directors and officers.

A. Who are Statutory Corporate Officers?

1. President
2. Secretary
3. Treasurer

- They can enter into contracts or perform acts in the name of the corporation for as long as:
1. There is prior approval of the BOD
- Any act entered into by these corporate officers cannot bind the corporation and cannot be
enforced against the corporation until and unless there is subsequent approval by the BOD
itself
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 - Once approved, it is as if it is the act of the BOD and therefore, the act of the corporation
2. In the absence of such approval, the BL or resolution of the BOD authorizes them to do so
- If the BL or a written resolution of the BOD authorizes the specific acts, they need not go
back to the BOD for approval or ratification, the act per se is valid and binding upon the
corporation because there is a written instrument allowing them to exercise such power or
enter into said contract

- Who is the President of the corporation?

- By law, s/he must come from the BOD itself. This means that you cannot have a President of a
corporation who is not incumbent BOD – this is violative of the Corporation Code
- The President shall be chosen in the manner prescribed in the BL. A foreigner can be a
president of the corporation.
- If BL is silent, then President can be chosen by the BOD itself from among themselves
- Inherent to the function of the President is that s/he is the chief executive or operating officer of
the corporation and therefore administers the day to day operation and management of the
business
- He is also the implementor and executor of the policies laid down by the BOD (policy-making
body)

- Who is the Corporate Secretary?

- S/he is the official custodian of all corporate books and records
- S/he has the legal duty to maintain and update and record transfer of all shares of stock in said
stock and transfer book – in case of non-stock corporation, to maintain the membership book
- S/he signs, along with the President, all stock certificates issued by the corporation
- S/he has the legal duty to take down and prepare minutes of meetings, whether of the BOD or
the SH
- S/he can represent the corporation in acts inherent to said office
- S/he may or may not be a BOD, this will largely depend on the qualification provided in the BL
but must be a resident of the Philippines

- Who is the Corporate Treasurer?

- Custodian of all corporate funds, money, and property, inclusive of those received by the
corporation out of the disposition of the capital stock
- Tasked by law to prepare and submit financial statements to the SEC and government
regulators
- S/he may or may not be a BOD, this will largely depend on the qualification provided in the BL

- Under Civil Procedure, service of summons upon a corporation must be made upon the President,
Managing Partner, General Manager, Corporate Secretary, Treasurer or In-House Counsel (Sec.
11, Rule 14, ROC)

- The law has put in place the system of checks and balances that is why:
1. President cannot concurrently serve as secretary not treasurer
2. Secretary can concurrently serve as treasurer

- Whether or not a person is a corporate officer is determined by the following:

a. If the position is provided for in the Corporation Code
b. If the position is provided for in the in the AOI or in the BL (the position must be named in the
AOI or BL)
- Other than these, they are not corporate officers

- Ringaw v. Sangu; Matling v. Coro

- The disputed positions here involved Vice-President and Comptroller, respectively. They
claimed that were illegally dismissed and as such they filed with the NLRC illegal dismissal
cases. The NLRC initially dismissed for lack of jurisdiction claiming that since they occupied a
very high rank in the corporation, this is not an ordinary labor case and this is in fact cognizable
by the special commercial court being an intra-corporate controversies. Are these corporate
officers?
- SC: The position of the Vice-President and Comptroller are not found in the Corporation Code
(president, secretary, treasurer, BOD). In the BL it stated that the BOD is granted the power to
create such other positions as the BOD may deem necessary and convenient but nothing in the
BL were these positions written. Thus, the positions are not corporate officers. Therefore, the
illegal dismissal case is not an intra-corporate controversy; it is an ordinary labor dispute
cognizable by the NLRC.

B. Executive Committee (Sec. 35)

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 - This is a mere adjunct of the BOD and can only be created if BL permits
- At minimum, the executive committee must be composed of at least 3 incumbent BOD, additional
officers may be provided for by the BL
- This may be tasked with specific powers and responsibilities to assist the BOD in the discharge of
its functions
- The source of the power of the executive committee may be the BL as well as resolutions of the
BOD
- Under the Corporation Code, the executive committee cannot perform the following acts, otherwise
it is void:
1. Pass a resolution that requires SH’s approval
2. Fill up vacancies in the BOD
3. Declare dividends
4. Amend the BL
5. Amend any resolution of the BOD that by its terms is not so amendable

C. Managing Corporations under Management Contract (Sec. 32)

- The delegated power here is the power to manage some or all of the business of another
corporation
- Who exercises the delegated power – managing corporation
-
- Requisites for validity and enforceability of management contract between 2 corporations:
1. Approval of the management contract by majority vote of their respective BOD; and
2. Majority of their respective capital stock or membership
- The management contract shall not exceed a period of 5 years, unless the contract is for
exploration development and utility of natural resources, in which case the Constitution and special
law that shall govern – co-production, joint-venture, profit sharing

D. Doctrine of Apparent Authority

- Some other persons, without authority may in fact bind the corporation under the Doctrine of
Apparent Authority or Doctrine of Ostensible Agency

- Requisites:
1. The unauthorized person must first have acted in a manner that would lead a reasonable
person to believe that s/he is an officer, employee or agent of the corporation
2. The corporation is guilty of knowledge of the acts of unauthorized person or acquiesced to said
acts
3. Third person relied on the appearance of said authority conferred by the corporation upon the
person
- The person really has no representative power as far as the corporation is concerned. However,
by performing acts that made it appear that authority or agency is present, when in truth there is
none and the corporation is guilty of allowing said person to act on its behalf, then the
corporation is bound.

X. Section 31 – Liability of Directors, Trustees of Officers – What are the duties of the BOD and
officers as fiduciaries? – 3-Fold Duty – ODL

- They are not acting as ordinary agents for and in behalf of the corporation, their position is reposed
with trust and confidence given that the BOD exercises all corporate powers, it is the BOD that has
custody of all corporate property and it is the BOD that undertakes and administers all business of
the corporation, they must observe their 3-fold duties as fiduciaries
- The 3-fold duty is expressed in the negative form under Sec. 31

A. Obedience
- Members of the BOD as well as all other officers of the corporation must observe the limits of their
authority by following the 1987 Constitution, all statutes specially the Corporation Code, and the law
that regulate their business. They must obey the AOI and the BL.
- Flagrant and deliberate violation of these instruments shall subject the offending BOD or officers to
criminal, civil and administrative liabilities.

B. Diligence
- Opposite of negligence
- Diligence is taking the necessary steps to prevent harm or injury
- The duty of diligence is imposed upon the BOD whenever they decide on matters or enter into acts
for and in behalf of the corporation

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 - Under the business judgment rule – decisions of the BOD regarding policies and practices
pertaining to the business of the corporation are not subject to judicial review and court has no
authority to substitute its own judgment with that of the BOD
- Such respect must be accorded to decisions of the BOD only if said decisions were arrived at with
honesty and good faith and for as long as these decisions are toward the best interest of the
corporation, the BOD be held personally liable even if he decisions would result to losses
- Losses alone suffered by the corporation in its operations is not enough to hold the BOD personally
liable

C. Loyalty
- During the incumbency of BOD, they cannot serve 2 masters at the same time
- This requires that in all cases and in all matters, the best interest and welfare of the corporation
must be upheld by its agents rather their own personal benefit even if it means personal sacrifice on
their part, they have to protect the corporation
- There are safeguards under the Corporation Code to make sure that loyalty is always observed by
BOD and officers of the corporation

XI. Self-Dealing Director or Officer

- Director who in his or her own capacity personally enters into a contract with the corporation in
which he is a director during his or her incumbency

-The contract entered into is voidable (This is the general rule) at the instance of the corporation
because the law presumes that there is either fraud or undue influence exerted in the corporation. But if
the presence of the self-dealing director is not necessary to obtain quorum in a meeting and to approve
the contract, and that the contract is fair and reasonable, the contract is valid.
-But even if the first two is absent that is (presence of the self-dealing director is not necessary to
obtain quorum in a meeting and to approve the contract), the contract can still be ratifies by 2/3rds vote
of the OCS and provided further that the contract is fair and reasonable.

XII. Section 33 – Contracts between Corporations with Interlocking Directors

- Another safeguard to ensure loyalty is the exceptional clause under Section 33 regarding contracts
between corporations with interlocking directors.
- Interlocking director – when one or some or all of the directors in one corporation are the directors
in another corporation.
- RULE: If the interest of the interlocking director in both corporations is substantial, the contract
entered into shall not be invalidated on that ground alone except if it is fraudulent or not fair and
reasonable. If the interest of the interlocking director in one corporation is substantial and nominal
in the other, the contract is valid provided that his presence where is not necessary for approval of
the contract, his vote is not necessary for quorum, and the contract is fair and reasonable. But
where any of the first two requirements is not complied with, contract can still be ratified by 2/3rds
vote of the OCS provided there is full disclosure of the adverse interest involved and contract is still
fair and reasonable.
- Nominal interest – 20% and below of the OCS
- Substantial interest – Above 20%

- The best way: the interlocking director should not participate at all in the decision.

XIII. Section 34 – Disloyalty of a Director

- Doctrine of Corporate Opportunity – A director commits disloyalty when he acquires or seizes a

business opportunity rightfully belonging to the corporation that the corporation is able to undertake
but which the director acquires for himself. In short, directors are liable whenever they compete
their own corporation.

A. Sanction
- All profits derived by the disloyal director in the competing business are deemed forfeited in favor of
the corporation even if he uses his own capital.
- You cannot profit from the idea of others.
- Under the law, the disloyal director is considered as a mere trustee of the corporation.
- If in the process, the disloyal director misappropriated corporate funds and property, then the entire
business may be forfeited in favor of the corporation.

B. Redeeming Clause in Section 34

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 - Those profits may be retained by the disloyal director upon ratification by 2/3 of the OCS.
- It is a form of condoning the disloyalty.

XIV. Violation of the 3-Fold Fiduciary Duties

- For violation of the three-fold fiduciary duties, go back to Section 31.

- Directors shall be liable for patently assenting to the unlawful or illegal acts of the corporation or for
gross negligence in conducting the affairs of the corporation or for acquiring a pecuniary benefit,
interest or advantage directly in conflict with that of their position as a director.

A. However, personal liability may also be borne or acquire by the directors or officers in the following
instances in addition to Section 31:
1. Section 65 for assenting to the issuance of watered down shares;
2. Failing to object in writing after knowing of said watered down shares;
3. If the directors agree to hold themselves personally liable with the corporation; and
4. When they are held liable by specific provision of law

- Example:
1. Under the Labor Code, directors or officers may be help personally liable for illegal dismissal if
they acted with evident bad faith or malice;
2. Under SEC, directors or officers may be help personally liable for insider trading or for
manipulation of security prices and other frauds;
3. Under BP 22, directors or officers may be help personally liable if they knowingly issue a check
which is unfunded or failing to maintain sufficient funds for the encashment of the said checks;
4. Under the Corporation Code, directors or officers may be held personally liable for willful
violation of the Corporation Code or for refusing without a valid cause the inspection and
examination rights of the SHs

B. How may the personal liabilities be enforced?

1. By way of a criminal case (here, there is a need for a specific provision of law imposing criminal
liability upon a specific officer);

2. Civil liability by way of a civil action against an erring director either by a SH or by a third person
who suffered an injury (individual action or class suit);

3. As a derivative suit – civil action to enforced the civil liability of the offending directors or officers
of a corporation
- It may be in the form of:
a. An action for damages or action for specific performance; or
b. By a petition for mandamus when a director failed or refuse to perform a ministerial duty; or
c. An action to annul a contract entered into by the Board such as in the case of Section 32; or
d. An action for injunction

- Requisites of derivative suit:

a. That it must be filed by a SH (regardless of the amount of shares held in the corporation) or
member at the time of the commission of the acts complained of;
b. That there is exhaustion of all available administrative or intracorporate remedies; (similar to
Article 151, FC)
c. That the corporation is impleaded or named in the derivative suit, otherwise, the case will be
dismissed (a derivative suit is a representative suit; the SH who initiates the suit is a mere
nominal party; the real-party-in-interest is the corporation because the suit is for its
protection against abusive officers); and
d. It must be proved that the appraisal right is not available – this is to prove that the derivative
suit is not a harassment suit filed by the minority SH

- A derivative suit is a deterrent to the members of the Board to continue with the business of the
corporation. It serves as checks against abuses committed by the Board.

- Quantum of evidence: Substantial evidence

- Once the offenses are proved, the damages awarded by the court will inure to the benefit of the
corporation since it is the real-party-in-interest. The SH who initiates the suit is only entitled to
reimbursement of the necessary expenses in bringing the suit, which expenses is recoverable by
way of cost.

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 - Since a derivative suit is for the protection of the corporation, it would be wrong for the court to
dissolve the corporation.

- As a rule, a corporation is not entitled to moral damages because a corporation cannot experience
mental anguish, etc. because it has no central nervous system. XPN: besmirched reputation or
tainted goodwill

C. Appraisal right
- The right of a SH to demand from the corporation that the latter pay back or repurchase the shares
of stocks; surrendering back the shares of stocks to the corporation and the corporation will pay
those shares; this terminates the intra-corporate relation between the SH and the corporation
- Appraisal right is available to the stockholders under those instances provided in Section 81.

XV. Doctrine of Forbidden Profits

- Refers to all kinds of profits of pecuniary advantages acquired by BOD of Officers of a corporation
in violation of their fiduciary duties. (Par. 2, Sec. 31, BP 68)

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 TITLE IV – Powers of Corporations

- A corporation can only enjoy rights or exercise powers that are expressly granted by law or implied
to those express powers or inherent or incidental to its existence as a corporation
- What a corporation can and cannot do is based on the law itself.

I. Section 36 – Corporate Powers and Capacity – Theory of Special Capacities

A. Powers granted under the Corporation Code (SSAAB-SRM-DPO)

1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the articles of incorporation
and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same
in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to
subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to
admit members to the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise
deal with such real and personal property, including securities and bonds of other corporations,
as the transaction of the lawful business of the corporation may reasonably and necessarily
require, subject to the limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided in this Code;
9. To make reasonable donations, including those for the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign,
shall give donations in aid of any political party or candidate or for purposes of partisan political
activity;
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers
and employees; and
11. To exercise such other powers as may be essential or necessary to carry out its purpose or
purposes as stated in the articles of incorporation.

- A corporation have general and special powers. Between the general and special powers, if an act
is related to the general powers, then only the Board needs to approve the same because it is part
of the ordinary course business unless the law or the AOI or BL require otherwise.
- On the other hand, the exercise of special corporate powers requires not only the approval of the
Board but assent of the OCS or membership.

- General powers of a corporation: In the exercise of these powers, only the approval of the members
of the Board is necessary because the same is pursuant to the business judgment prerogative of
the management of the corporation.

- Special Powers of the corporation: The exercise of these powers requires the approval of both the
members of the Board and the shareholders representing 2/3 of the OCS

- Power to donate: Valid if the following are present:

1. That the donation is approved by the proper authority within the corporation. Generally, this
would only require the approval of the Board regardless of the amount of the donation.
However, if the BL require the SHs approval, then the BL prevails. The approval must be in
accordance with the manner provided by the by – laws;
2. The amount of the donation must be reasonable. The reasonableness of the amount depends
upon the financial condition of the corporation at the time of the giving of the donation. Hence,
an insolvent corporation has no right to make a donation;
3. It must be for any of the following legitimate purposes: For charity or any charitable
organizations.

- However, no donation can be given by a corporation to any political candidate, political parties, or
partisan political activity (void donations)
- Rationale: Corporations are not voters. They cannot directly or indirectly influence the outcome of
the election. Political elections are left by the Constitution to the electorate.

II. Section 37 – Power to Extend or Shorten Corporate Term – Special Powers

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 - This power may be exercised anytime
- It is not dependent on the present financial condition of the corporation.

III. Section 38 – Power to Increase and Decrease Capital Stock – Special Powers

- The AOI must state the maximum number of shares, which the corporation is legally permitted to
issue. This is both a right and a limitation.

- This also requires formal amendment to the AOI expressly approved by the SEC and the
government regulator

A. What would prompt a decrease in the capital stock:

1. To eliminate surplus capital
2. To reflect the true value of the present assets of the corporation – assets of the corporation
depreciates through time
3. To forestall losses suffered by the corporation (losses represent liabilities)

- Instances when a corporation may reduce its capital stock.

- When there is amendment of the AOI and when the trust fund doctrine is followed
(meaning, there is no violation of the trust fund doctrine-a doctrine which states that all
corporate assets are primarily reserved for corporate creditors).

- In reducing the capital stock, there must first be a certification executed by the Secretary and
affirmed and signed by the majority of the BOD stating the present value of the assets, the
total liabilities of the corporation, and a certification that creditor’s rights are not affected by
the reduction – This should be done because the reduction of the capital stock also reduces the
trust fund reserve for corporate creditors.

- If the reduction of the capital stock would be prejudicial to the rights of the creditors of the
corporation, the SEC will not approve the reduction. Under the trust fund doctrine, the assets of
the corporation represent a fund that corporate creditors may look upon for the satisfaction of the
debts.

In case of increase in the capital stock take note of the SH pre-emptive right:

B. Pre-Emptive Right
- The disposition of the new shares is subject to the pre-emptive right of existing shareholders. This
is the statutory right of existing stockholders to be offered first and subscribe new shares to be
offered by the corporation.

- Rationale: to prevent dilution of the existing equity and interest of the existing SHs. In effect, to
maintain said interest or equity. The new shares must be offered first to the existing SHs in the
same proportion as their current interests in the corporation.

-Ex: A is a SH of XYZ corp holding 200 shares of the 2000 capital stock of XYZ corp. If XYZ corp will
decide add additional 2000 capital stock to its existing 2000 capital stock, 200 of that new 2000 shares
must be offered first to A pursuant to A’s pre-emptive right.

-In pre-emptive right offering, the Board may also set a time limit. This means that the offering must be
under reasonable terms and conditions as the Board may decide and at the price set by the Board. The
price here is not always at par value because the corporation has to make money. The customary
period for pre-emptive right offering is 30 days.

- If the corporation offers the shares to others without first offering the same to its existing SHs, then
any subsequent dispositions shall be considered null and void. The SHs who were prejudiced of
their rights may nullify the sales in order for them to exercise their pre-emptive right. However,
despite said offer, the SHs do not have the obligation to buy.

- Once the shareholder rejects the offer, the sale of the shares to others can no longer be
questioned, except in a close corporation. The pre-emptive right in a close corporation is
demandable in all cases and in every disposition of the shares.

C. The pre-emptive right cannot be asserted in the following instances: (PND)

1. When the issuances of the new shares are in compliance with legal requirements for minimum
ownership by the public
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 2. If the issuance of the shares is for the payment of the existing rights of the corporation or to
acquire property needed by the corporation for the business
- Example: Dacion en pago such as a loan for equity swap – This means that the bank would
agree to have the loan be paid by way of shares of stocks of the debtor. This means that the
creditor becomes the shareholder of the debtor corporation.
- Barter – Such as paying shares of stocks in exchange with the supply or equipment given

3. If the pre-emptive right is expressly denied in the AOI, either in the original or amended AOI

IV. Section 38 – Power to Incur, Create or Increase Bonded Indebtedness

- First form of corporate financing is sale of corporate Shares of Stocks (SS)

- Second form of corporate financing is to borrow money for the corporation to continue the purpose
for which it was organized

A. 2 Kinds of Corporate Borrowing

1. Ordinary Loans
- The New Civil Code shall apply
- In case of loan, the practice is that the borrower shall deliver some security or collateral –
specific property belonging to the corporation is used as a mortgage in order to ensure the
payment of the principal loan
- Corporate securitization – corporate assets are used to ensure the payment of the principal
obligation

2. Bonded Indebtedness
- Borrowing from the public in general in the form of bonds or similar evidence of debt
- Bond as Debt Insurance: Evidence on writing of an obligation contracted by the corporation that
the public may subscribe to at a predetermined interest rate
- Under SRC – Bonds may either be, as to maturity date:
a. Short Term – 365 or less from issue, the bond becomes demandable or considered to have
matured
b. Long Term – more than 1 year, the bond becomes demandable or considered to have
matured

- Who can buy the bonds?

- Anyone
- It means that the corporation is entering a contract with you to borrow an amount and that
the corporation guarantees that you will be paid back the amount or the fair value of the
bond after a stipulated date and a fixed interest

- Floating of Bonds
- Means public offer of bonds

- Bond holders are not SH, they are creditors of the corporation.

- What is the collateral?

- None. Unlike ordinary loans.
- The only collateral there are other general assets of the corporation. The owners are not
secured creditors.

- This activity must first have prior permit from the SEC

- To create such bonded indebtedness, there must be approval of the majority vote of the BOD
and 2/3 of the OCS

V. Section 40 – Sale or Other Disposition of all or substantially all of its Assets

- This does not necessarily require an amendment to the AOI but it always involves a restructuring of
the business itself.
- A corporation sells SS to finance the business and once the financing is ready, you now have cash
– you need the cash to buy the assets such as materials, equipment to further the business and
then you sell these assets.
- If the sale or disposition of all or substantially all of its assets renders the corporation unable to
pursue or continue the business for which it was originally organized, the sale requires majority vote
18
 of the BOD and 2/3 of the OCS – because this means abandonment of the original business and
therefore entails a change in the nature of the investment made by the SH – that is why they must
approve the same
- But the abandonment of the original business here does not necessarily result to the dissolution of
the corporation. It is an opportunity for the corporation to embark on an entirely new business.

- If the proceeds of the sale of all the assets are intended for an entirely new primary purpose, the
AOI must be amended.
- No amendment is necessary if the proceeds of the sale are to be invested for the secondary
purposes already laid down in the AOI.

- In all cases however, the sale must comply with the bulk sales law:
a. That the prior written consent of all the creditors of the seller must be procured
- Otherwise, the sale may be annulled at the instance of any of the creditors because the sale
may violate the trust fund doctrine– the asset of the corporation constitutes a trust fund
reserve by law for the corporate creditors – if you sell all assets, then the creditors are bereft
of such assets.

- If the sale of the assets is done in the ordinary course of the business, the transactions are
valid even without SH’s consent – e.g.: sale of mineral ores of mining companies

VI. Section 42 – Power to Invest Corporate Funds in Another Corporation or Business or for any
Other Purpose

- The investment of funds here must be construed as a means by which the corporation acquires
passive income or additional profits.
- If the investment of corporate funds is for its secondary purpose or in a corporation whose business
is not related to the business of the investing corporation, majority vote of the BOD and 2/3 of the
OCS is required
- The investment here is authorized by law but requires SH’s approval because it has both positive
and negative effect – positive because the investment tends to increase the sources of profits for
the corporation – negative because it poses a greater risk for the SH because their money will now
be used by the corporation to buy SS of another corporation, so there is additional risk for the SH of
the investing corporation
- If the investment is for a contract or a business or a corporation directly related or auxiliary to the
business of the investing corporation, SH’s assent is not necessary

VII. Section 41 – Power to Acquire its Own Shares

- In the reacquisition of its own shares, the corporation must meet the following requisites:

a. The reacquisition must be for a valid purpose – valid if legitimate and authorized by law or by
AOI and BL

Why re-acquire shares?

1) To eliminate fractional shares

2) To compromise any indebtedness owing to the corporation arising out of the sale of its
shares
- This arises from delinquency of subscription

3) To pay the fair value of its dissenting or withdrawing SH

- Pursuant to appraisal rights

4) To redeem the redeemable shares

b. The reacquisition is out of an unrestricted retained earnings or surplus profits (extra profits)
- In the absence of unrestricted retained earnings, the corporation cannot reacquire its own
shares except in the case of redeemable shares.

- Why? Because redeemable shares constitute debts incurred by the issuing corporation –
when they are redeemed or bought back this is tantamount to paying the obligations or
liabilities of the corporation – redemption of redeemable shares is not reacquisition of shares
per se but it is payment of debt by the corporation – payment of debt is not anchored on
unrestricted retained earnings
- The following are limitations:
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 1. The corporation must not be insolvent;
2. The corporation should not suffer from illiquidity as a consequence of such
redemption
- If in the meantime the corporation is suffering cash flow or liquidity problem the right of
the holder of the redeemable share is simply suspended until such time that the
corporation has sufficient cash but not invalidated – can still demand pay back from the
corporation

- Why does the law as a General Rule may require unrestricted retained earnings before a
corporation may reacquire its own shares – to protect the trust fund reserve for corporate
creditors because by obtaining the fund necessary for said reacquisition out of the
unrestricted retained earnings, then the legal capital of the corporation remains untouched
or unimpaired
-
VIII. Section 45 – Ultra Vires Act of Corporations

- Opposite of intra vires – refers to any act within the lawful exercise of the power of the corporation
- Power of the corporation – Express, implied or inherent powers
- If the act is intra vires, whether executed by the BOD or through any authorized officer – the
corporation will be bound by such transaction even if it creates liability on the part of the corporation
- If the act is ultra vires, the act or contract is outside the powers granted by law for corporations

A. 2 Kinds of Ultra Vires Act

1. Merely Outside of the Present Power or Rights of the Corporation

- Merely in excess of what the current powers of the corporation are and if the ultra vires act is
not illegal act, it is subject to ratification.
- Who can ratify an ultra vires but not illegal act?
a. BOD – If the ultra vires act was committed by an authorized employee or officer
b. SH – If the ultra vires act was committed by the BOD
c. Amend the AOI/BL – If the BOD or the 2/3 of the OCS committed the ultra vires act; conform
the instrument with the act

2. Illegal Acts
- Not all ultra vires acts are illegal but all illegal acts of the corporation are ultra vires

- Consequences:
a. As to the Corporation
- Sufficient ground for revocation of the certificate of incorporation
- PD 902-A – This is involuntary dissolution

b. As to the BOD or Officer

- They are held directly and personally liable for:
i. Any crime – corporation itself cannot commit a crime, any criminal liability is imputable
upon the agent or officer of the corporation
ii. Civil case filed by any party who may be injured
iii. Administrative case

c. As to SH
- They are held directly and personally liable for:
i. Any crime – corporation itself cannot commit a crime, any criminal liability is imputable
upon the agent or officer of the corporation
ii. Civil case filed by any party who may be injured
iii. Administrative case

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 TITLE VII – Stock and Stockholders
These provisions are optional for non-stock corporations and are mandatory for stock corporations

I. 3 General Ways for a Person to Own SS (shares of stocks)

1. By subscription – this is a special kind of sale contract

2. By repurchase of treasury shares which are reissued
3. By acquiring the shares of existing stockholders

First Way

II. Subscription Contract (Sec. 60)

- This is a contract for the sale and disposition of capital stock for the first time – this is the original or
first disposition of the capital stock
- This is a contract for the simultaneous disposition or acquisition of shares of stocks coming from the
original and unissued shares of the corporation (disposition of the capital stock for the first time).
This will always be treated as a subscription contract regardless of how the parties call it.

A. Parties
- Depends as to the time of perfection of the contract – As to time:

1. Pre-incorporation (before incorporation) subscription

- This is irrevocable from the moment of perfection.

- Once the draft of the AOI and the Treasurer’s Affidavit has been submitted to the SEC, no
revocation of the pre-incorporation subscription shall be permitted.
- The pre-incorporation subscriber’s name is listed in the AOI.
- Violation of this rule will justify denial of the issuance of the certificate of incorporation on the
ground of misrepresentation.

- Parties:
a. The promoter (whether acting in his own name of for and in behalf of the proposed
corporation); and
b. The subscriber

2. Post-Incorporation subscription

- Parties:
a. Corporation, as represented by the Board; and
b. The subscriber (individual or another juridical entity)

- Note:
a. With par value: the sale should not be below the par value
b. No par value: the sale should not be below the stated value which cannot be less than P
5.00

B. What makes a subscription contract unique are the following:

1. Subject matter: shares of stocks only
2. Like any contracts of sale, a creditor-debtor relationship is established.
- Here, the debtor is the subscriber as to the obligation to pay the full consideration. Once there is
full payment, the obligation of the corporation to issue certificate of stocks now arises.
(Reciprocal obligation)

- The obligation of the subscriber to pay is mandatory and absolute. The moment the contract
is perfected, the entirety of the consideration forms part of the trust fund.
- No rescission is allowed because it will be prejudicial to the creditors. The only remedy of
the corporation is to enforce the obligation.
- The trust fund doctrine should be observed in all subscription contracts.

C. How will the total consideration be paid? (Sec. 62)

1. Cash (Philippine legal tender or foreign currency)

- Promissory notes, checks and other debt instruments are not allowed because encashment is
uncertain.
21
 - Manager’s check or cashier’s check is allowed only when allowed by the BL or by the resolution
of the Board.

2. Property other than cash needed by the corporation for its business (real or personal)
- Form of barter
- The property must first be appraised by the Board and the appraisal shall be approved by the
SEC.
- This is to prevent the watering down of shares.

3. Labor or services
- Minimum requirement here is that the shares shall be issued only after the service has been
performed to the corporation. Hence, it always pertains to past services.
- The appraisal rule shall likewise be applied here.

4. Previously incurred indebtedness of the corporation

-A form of dacion en pago (property is given as payment of debt) wherein the corporation will issue
shares as payment of previously incurred indebtedness.
- In corporate rehabilitation, it is known as debt for equity swap.

D. When are shares issued in violation of Section 65? Watering down of shares
1. When shares are issued below par or stated value
2. When the stock dividends are declared and distributed to the shareholders without unrestricted
retained earnings
3. When shares are issued in exchange of property less than the par or stated value of the shares
4. When shares are donated by the corporation to another (the donation is void)

- Consequences when watered shares are issued:

- For the members of the Board who voted in favor, or those who need not vote but failed to
object in writing after obtaining knowledge of such watered down shares, shall be solidarily
liable with the subscriber who acquired the same. It becomes a personal obligation.

- How to enforce the personal liability?

- Action for sum of money under a derivative suit plus damages in case of fraud

E. When to pay the subscription price?

1. On the date stipulated by the parties

- The payment can be lump sum or fixed or by stated installments

2. If no date was stipulated, then the remaining balance is due upon Call by the Board. (meaning
when a Call is made by the BOD, you only have up to this time to pay the balance, if no
payment is made on that time, you are considered a s a delinquent SH)

- For as long as you are not yet delinquent, one who subscribes already has all the rights of a fully
paid stockholder even if the subscription is not yet paid or fully paid. He can already enjoy voting
and dividend rights as well as asset rights in case of dissolution. But, he cannot still have the right
to transfer the shares and demand a certificate of stock.
- For as long as not yet declared delinquent, one who subscribes already have all the rights of
a fully paid SH even if the subscription is not yet paid.
- As far as proprietary rights pertain to the shares concerned, there is really no crucial difference
between one who has paid in full and one who has not paid in full. In fact, once the subscription
contract has been perfected, the subscriber, even if did not pay anything; can already demand that
his/her name be entered in the corporate stock and transfer book or records.

Second Way

III. Treasury Shares

- Treasury shares are outstanding shares issued by the corporation and sold but which the
corporation reacquired through redemption, buy-back, donation or similar means.
- The holders of the same are not entitled to the following rights because they belong to the
corporation (they in the possession of the corporation not SH), they are the corporation’s own
shares:
1. The right to vote
2. The right to dividends
3. The right to the assets
22
 A. When the corporation has treasury shares, it has 2 options:

1. Cancel and retire the treasury shares

- There must be an appropriate reduction of the CS by amending the AOI

2. Reissue treasury shares

- Reselling
- The resale price can be below par because it is already used share like “wagwag”

IV. Section 70 – How may the Corporation Enforce the Delinquent Balance (meaning how to
collect the balance of subscription of the delinquent SH)

A. Judicially
- By filing an action for collection against the subscriber
- This is an intra-corporate controversy even if it is a simple collection case (if it is an intra corporate
controversy, the case will be filed on the special commercial court. Usually Regional Trial Courts
are designated as special commercial courts)
- Regardless of the amount due, it must be filed before the commercial court

B. Extra judicially
- Cheapest means
- By the corporation conducting a delinquency sale – auction – the highest bidder will be the
one who offers the least number of shares for the highest price
- A notice of delinquency must also be served upon the affected subscribers – so that they can
still pay before the auction
- What if there is No Bidder
- This is indicative that the corporation’s shares are not in demand in the market, there are no
investors willing to take that risk
- The corporation may acquire those delinquent shares provided that it has unrestricted retained
earnings

If subscription is already paid, it is now a ministerial duty on the part of the corporation to issue
a stock certificate. It must be:
1. In writing under the name of the corporation
2. Stating the number of shares
3. Par value or stated value
4. Name and address of SH
5. Serial number of the certificate
6. Signature of both president and corporate secretary.
- Once a stock certificate is issued by the corporation, the proper entry in the stock and transfer book
must now be made as well
- The certificate of stock, once issued is itself a personal property of the SH but it is paper
representative of ownership of capital stock in the corporation
- In general, a certificate is not necessary to enjoy rights as a SH. All that is sufficient is the name
must be in the stock and transfer book
- Because the issuance of stock certificate is ministerial on the part of the corporate secretary once
there is full payment, it may now be compelled by mandamus
- The stock certificate, being a property itself, is actually a convenient tool to transfer the
shares and the certificate itself. Thus comes the third way of acquiring the shares which is
acquiring the shares of an existing SH (3rd mode of how to acquire SS)

Third Way

- Under the Corporation Code, in order to transfer the property represented by the certificate and all
the rights pertaining thereto, there must be indorsement and delivery of the physical certificate to
the transferee
- A stock certificate is a quasi-negotiable instrument
- Example: X has now paid in full so all that he needs to do is follow the quasi-negotiability principle
as regard the stock certificate to sell his shares. Indorse the certificate of stock – the indorsement
must contain the name of the transferee. If it is indorsed in blank, it becomes a street certificate
– similar to negotiable instrument – it is now a bearer instrument – Street Certificate – Any
certificate of stock indorsed in blank – one that does not contain the name of the transferee
– that is why it becomes a bearer instrument.

23
 - When Y makes full payment, Y must insure that he obtains physical custody of the certificate,
that is why there must be indorsement plus delivery and from that moment on, when the 2 step
process has been completed, the transferee is placed in ownership over the property and has
now a right against the corporation to have the transfer registered.
- If it was indorsed but was not delivered – the transferee cannot compel the registration of the
transfer
- If it was delivered but was not indorsed – the corporate secretary can refuse registration
- Complete the 2 step process

- Once the transfer is complete and regular, it now becomes a ministerial duty on the art of the
corporation to register the same.

- There is valid transfer only if the indorsement and delivery was made by the SH of record or the
latter’s agent. If there was no valid transfer because it was unauthorized or a result of a forgery or
theft of the certificate – the corporate secretary can refuse to register the transfer – when the title of
the transferee is in doubt no registration can take place

V. Ownership of Shares in a Corporation Entails 3 Principal Rights in favor of the SH or

Subscriber

A. Right to Participate in the Management of the Corporation

- SHs in general, enjoy only limited residual management rights, limited to those instances where
their ratification or assent is required by the Corporation Code, by statute or by the AOI or BL
- It is merely residual management right because in a corporate set-up, there is a centralized
management vested by law in favor of the BOD
- How do SH exercise this residual management right – Through voting
- The right to vote includes the right to be voted for.

- However, this right to vote and be voted for cannot be invoked by the holders or owners of the
following shares:

1. Delinquent Shares
- Subscribed shares that have outstanding balances on their total subscription price and where
there is already default in the payment of said balance
- During the period of delinquency, the subscriber on record is deprived of the right to vote and be
voted for

2. Shares Subject to Appraisal

- Pursuant to the appraisal right stated in Sec. 81, from the moment that a written demand is
made by a dissenting SH upon the corporation to pay the fair value of said shares, then
the shares are suspended in all their rights, the only right remaining to the shares
subject of appraisal is the right to be paid by the corporation as part of the withdrawal
process

3. Treasury Shares
- Shares reacquired by the corporation which are former outstanding shares whether the
reacquisition is by redemption, buy-back or even donation to the corporation
- While they are in the treasury, they are not outstanding it would be absurd for the corporation to
vote its own treasury shares

4. Shares that are Classified as Non-Voting in the AOI

- Unless deprived, the right to vote in the AOI, all shares are deemed to be voting shares
- The kinds of shares that may be denied voting rights in the AOI – preferred or redeemable
- Even if the shares are classified as non-voting, the denial is limited to the right to vote directors.
They still enjoy the right to vote in (ABISIMID)

B. Right to a Share in the Profits Derived by the Corporation

- SH are investors, they use their own money or funds in order to acquire SS of the corporation and
by using their own funds to acquire said property, they invest and therefore acquire risk in said
acquisition

- Every SH has a reasonable expectation to receive a proportionate distribution of the profits of the
corporation in the form of dividends
- The power to declare dividends is exclusive to stock corporations, absolutely prohibited for non-
stock corporations
24
 - Dividends
- Constitutes a proportionate distribution of the profits earned by the corporation out of its
business
- The source of said dividends must be limited to the so-called surplus profits or unrestricted
retained earnings
- The basic rule is that no part of the Capital Stock, whether subscribed or paid-in may used by
the corporation to pay its own SH dividends
- Whenever the corporation has unrestricted retained earnings, it is absolutely discretionary upon
the BOD whether to declare all or some of the unrestricted retained earnings for distribution

- GR: The BOD cannot be compelled to declare dividends

- XPN: When the corporation has already accumulated surplus profits or unrestricted retained
earning (URE) in excess of 100% of its subscribed capital stock – totality of all shares which are
in the hands of persons other than the corporation subject of existing subscription contracts
whether fully paid or not
- The law allows an action for mandamus for the BOD to declare dividends in such situation – To
prevent the corporation from accumulating profits for its own and denying its investors their
rightful share to said profits

- Such action for mandamus may be dismissed based on the following: (Sec. 43)
1. URE or surplus profits are needed by the corporation to finance a definite expansion
program already approved by the BOD
2. That the corporation is bound by a subsisting agreement with a creditor prohibiting it from
declaring dividends without the consent of the creditor and such consent has not been
obtained
3. That there is a need to provide for possible contingencies such as probable losses and
similar external factors where the URE may be used

- The power to declare dividends is lodged on the BOD alone. But in case of declaration of
stock dividends, 2/3 of the OCS must assent.

- Kinds of Dividends that a Corporation may Declare

1. Cash Dividends
- Kind of dividend payable in actual cash denominated in a sum of money per share
belonging to a SH
- Whenever cash dividends are declared and already announced, the declaration is deemed
irrevocable and therefore, the corporation must now pay to the SHs of record

2. Property Dividends
- Actually cash dividends but they are payable by way of property belonging to the corporation
and no longer needed for the business

3. Stock Dividends
- This is the better alternative of cash and property dividends
- The URE derived by the corporation is used by the corporation to acquire unissued SS
- It is as if the URE will be used by the corporation to buy its own SS so that its own
shares will be distributed to its SHs – there is no diminution in the property, assets or
money of the corporation even if dividends are distributed – but on the part of the SH,
there is an increased in the actual number of shares held of record

C. Right to Assets
- The assets cannot be distributed to any of the shareholders for as long as the corporation is still
existing because those assets, whether in the form of cash, equipment, or land, are reserved by law
for the benefit of corporate creditors. (Trust Fund Doctrine)
- Any distribution of assets during the existence of the corporation may be questioned by the
creditors if such distribution impairs the rights of the creditors.

- Distribution of the assets during the term is allowed only in the following: If there is surplus capital.

VI. Citizenship of a Corporation –

TESTS IN DETERMINING THE CITIZENSHIP OF A CORPORATION

25
 a. Place of incorporation-the nationality of a corporation is determined by the state of the
incorporation regardless of the nationality of the stockholders.
b. Control test-in determining the nationality of a corporation, the control tests uses the nationality
of the controlling stockholders or members of the corporation.
c. The grandfather rule-used in case there is doubt in the citizenship of a corporation
d. Domiciliary test-nationality is determined by the principal place of business of the corporation

NOTES: In determining the citizenship of a corporation, where the corporation is engaged in activity,
enterprise or business which is wholly or partly nationalized, the said determination must be based on
the voting control and beneficial ownership. (Gamboa v. Teves)

- Public utilities (e.g. telecommunications): 60-40 requirements (this represents a maximum and a
minimum: 60% is the minimum for Filipino citizens while the 40% is the maximum for non – Filipino
citizens). Breach of this threshold is a violation of the Constitution.

A. Agencies tasked to encourage foreign investments (direct or indirect) in the Philippines:

1. SEC
2. Board of Investments (BOI)

VII. Right to Transfer SS

- The stock certificate serves as paper evidence of ownership of SS. As evidence of ownership, it
also serves as a convenient tool to transfer the SS themselves.
- The right to transfer shares possessed by a fully paid SH is almost an absolute and unbridled. As a
rule, any restrictions imposed by the corporation upon its own SH as to their right to transfer is
considered void as an undue restriction on trade.

A. The following provisions in the BL are held by SC as void:

1. Inscription on the stock certificate as well as on the AOI and BL classifying shares as non-
transferable
- This is void because it restricts the ownership right of the SH

2. Right of first refusal is void

- This is an imposition of restriction imposed by the corporation that before any SH can transfer or
convey the shares, the same must first be offered to the corporation or to the other existing SH
- This is void because it restricts the ownership right of the SH
- XPN: Close corporation – by their very nature and or as long as stated in the AOI, BL and
certificates, a right of first refusal is a valid one since ownership of shares in a close corporation
is subject to specified eligibilities

B. Valid Restrictions in the Exercise of the Right to Transfer

- While the right to transfer cannot be restricted it can be regulated

1. Manner by which the certificate may be transferred

- Such as indorsement + delivery – as long as this is present there is no need for a separate
instrument such as deed of sale executed by the parties

2. If the consent of the proper government agency is required to be obtained first prior to recording
of the transfer
- This is a legal regulation to allow the government to determine whether there is compliance with
citizenship requirement
- Example: For transfer of shares in corporations that are registered with the Department of
Tourism, the approval of the DOT Secretary must first be obtained; or companies which are
granted a franchise or privilege under Environmental Laws for Exploration Development and
Utilization of natural resources – DENR’s consent must first be obtained

3. No Transfer Clause
- Constitutionally founded
- This is any transfer that would reduce ownership that would reduce Filipino ownership that is
below that which prescribed by the Constitution or special law shall not be recorded in the
books of the corporation

- For as long as the transfer was validly made by the owner or the latter’s agent and in the manner
prescribed by the corporation and the law, whoever holds and whose name appears as the indorser

26
 of the certificate acquires all the rights founded thereon and therefore will have the right to compel
the corporation to register the transfer

VIII. Section 73 – Lost or Destroyed Certificate

- In case of lost or destroyed certificates, an affidavit of loss is required to be executed and published
at the expense of the SH concerned
- But no new certificate shall issue in case there is an ownership dispute as to the certificate and to
the shares and until such time that such dispute is resolved judicially

- Example: The certificate of stock of X was stolen by Y. Y sold the stolen certificate to Z for a
valuable consideration. X discovered the loss of the certificate and applies for the replacement of
the certificate with the corporate secretary – should the corporate secretary issue a new certificate?
- No.
- The certificate is not lost, it is with Z.
- Only when the certificate is lost or destroyed
IX.

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 TITLE VIII – Corporate Books and Records

- All valid transfers must be registered in the books of the corporation

I. Purpose for Recording in the Stock and Transfer Book (STB)

1. For the corporation to track change in the ownership of its capital stock
2. Enable the transferee to exercise the rights of a SH as against the corporation – including the
right to vote and be voted for
3. To allow the government to monitor the changes in the ownership and ascertain compliance
with law, rules and regulations

- Only those transfers that convey upon the transferee absolute title or ownership (like sale by way of
indorsement and delivery or donation) of the shares may be registered or should be registered
- Any transaction that creates a mere lien or encumbrance whether voluntary or involuntary of the
shares are not registerable

- Question: If you want to donate your SS covered by a certificate, do you need to indorse and
deliver the certificate?
- Yes. There is no need to execute a deed of donation as far as the corporation is concerned.
From the perspective of Civil Law, the deed of donation is necessary to show a perfected
donation – there must be acceptance by the donee

- Question: Writ of attachment over SS – can this be registered in the books of the corporation?
- No. it is not a complete transfer.

Question: Can the attaching creditor compel the corporate secretary to register the writ of
attachment in the books of the corporation?
- No because it is not an absolute conveyance of title
- Regardless of the writ of attachment issued by the court, the writ itself cannot be registered in
the books of the corporation – the corporate secretary cannot be compelled by mandamus to do
so

II. What Transfers are Not to be Registered in the Books of the Corporation

A. In all instances where the title of the transferee is in doubt the corporate secretary may validly
refuse any request or demand for registration
- When may such doubt arise or exist?
1. In case of unauthorized transfers
2. In case of forged indorsements or falsified indorsements
3. Where the certificate itself was stolen

B. Rules
1. The principle here is that while a certificate of stock is a quasi-negotiable instrument, it is not a
negotiable instrument because there are only 2 negotiable instrument under the Philippine law –
PN and BoE
2. In stock certificates, the holder in due course defense is not applicable.
- Whoever acquires even if in good faith, a certificate stock that was transferred without authority
from its lawful owner cannot assert rights superior to the lawful owner
- Regardless of how many transferees and no matter how innocent these subsequent transferees
are – no one can defeat the right of the owner

- XPN: The certificate holder/owner is negligent – negligence gives rise to estoppel

III. Other Rights of a SH

A. Right to Inspect and Examine Corporate Books and Records

- This stems from ownership of shares in stock corporation or membership in a non-stock
corporations because members pay contributions
- This right is inseparable from title of the property
- Not all books or records of the corporation are subject to these right

- Books that are required to be kept and maintained under the law
28
 1. Public and inspectable books and records
- Refer to all corporate books and records that are required to be submitted and filed with the
SEC, government regulator, as well as other government agencies pursuant to statute, rules
and regulations
- These refer to all official filings made by the corporation
- Example: AOI, BL, all amendments of the AOI, all amendments of the BL
- Once submitted pursuant to law, they acquire the character of public records – benefit of public
records in evidence – they enjoy the presumption of regularity in the discharge of official duties;
prima facie evidence of the correctness of entries
- Who may inspect: Anyone upon proper request

2. Non-public and inspectable books and records

- They are required to be kept and maintained within the corporation
- Books required under the Corporation Code
- They are inspectable only by SH or members of the corporation – they are not accessible to the
public in general – any subsisting SH or member of the corporation may demand as a matter of
right inspection and examination which includes the right to make copies and excerpts
- The inspection and examination right may be exercised directly by the SH of record or by the
latter’s duly authorized agent anytime during reasonable hours of business days of the
corporation
- Any restriction on this right, even if found in the BL should be nullified

- Examples:
a. All minutes of meetings of SH;
b. Minutes (reflects matters that are resolved or decided; summary) of all meetings of the BOD;
c. Records of all business transactions;
d. All contracts or dealings where the corporation is a party to, including all communications
prior to said contract and subsequent thereto;
e. For stock corporations – stock and transfer book which is an alphabetical listing of all
subscriber and SH of the corporation – beside the name if each must be the number of
shares; class of such share; par value; consideration or price; payment; balance to be paid;
and if fully paid, serial number of the certificate of stock
f. Financial statements
- Required for all stock and non-stock corporations on an annual basis
- These are under the custody of the corporate treasurer – any request must be forwarded to
him
- The financial statements include:
i. SALN of corporations
ii. Statement of financial condition
iii. Profit and loss statement
iv. Audit report by an independent auditor – required for all corporations

- Equivalent of a stock and transfer book in a stock corporation is a membership book

- Any unjustified denial of the right to inspect and examine corporate books and records gives
rise to personal liability on the part of the secretary and if the denial was affirmed by the BOD,
then all of them shall be solidarily liable to the injured SH

- When an action to compel access to the books and record is filed, and the same is denied, the
corporation through its BOD or corporate secretary may invoke the following grounds for denial:
a. That the requesting SH is not founded by a legitimate purpose or interest
b. That the requesting SH is motivated by bad faith in exercising the rights
c. That the requesting SH has misused information obtained from prior inspection to the
prejudice of the corporation

3. Non-public and non-inspectable books and records

- Non – public because the circulation of said information or record is very limited. Not even a
director or shareholder is allowed.
- Relates to trade secrets and other confidential information within the corporation that cannot be
open to its shareholders.
- The aim here is to protect the business interest of the corporation.

- PNB v. Gonzales

29
 - The right to inspect and examine corporate books and records must be coupled with a
legitimate purpose. It must be connected with the proprietary interest, which the stockholder has
in the corporation.

- Te v. Te
- Mere pendency of a criminal case against a shareholder who happens to be in this case to be
the corporate secretary will not terminate nor suspend inspection and examination rights. This
right is effective for as long as he or she is a shareholder.

IV. Section 74 – Stock and Transfer Agent

- For stock corporation, the stock and transfer book may be kept by the corporation which is
usually in the official custody of the corporate secretary, but at the discretion of the
corporation, a stock and transfer agent may be hired or engaged
- However, the stock and transfer agent must be licensed as such by the SEC
- This is especially necessary for corporations whose shares are listed in the Phil Stock Exchange

TITLE VI – Meetings

I. Exercising the Right to Vote through Representation

- Personally (written assent or attendance) or representation (proxy or VTA)

II. Section 58 – Proxies

- To be understood in 3 senses:

a. Legal authority conferred by the SH or subscriber to another for the latter to attend and vote in a
meeting – refers to agency

b. Refers to the written form containing such legal authority – under the Corporation Code it must
be in writing and submitted to the corporate secretary before the meeting, unless the BL
prescribes a different form
- Regardless of the provision in the BL, it is only for maximum period of 5 years
- If the proxy is silent, it is good and valid only for 1 year

c. It refers to the person authorized – agent – pursuant to the rules on agency, the agent can only
vote to what is instructed

- The proxy cannot be voted (only to vote) for on the basis of the proxy, he acquires no legal
title to the shares represented

III. Section 59 – Voting Trust Agreement (VTA)

- A form of express trust where power to vote shares of SH is conveyed to another called the
trustee. To bind the corporation, it must be submitted to the corporate secretary and the SEC.
- Example: X subscribed to 1M shares. X incurred a loan obligation from Y. Y imposed the
condition that as a collateral, X must issue a voting trust agreement.
- Unless the BL prescribes differently, the voting trust agreement must be duly notarized
- The trustee must cost the registration of the VTA in the books of records which is the duty
of the corporate secretary – the registration is a two-step process:
a. Corporate secretary will now cancel the stock certificate issued in the name of the trustor
b. A new stock certificate will be issued in the name of the trustee
- The new certificate will bear an annotation that it is pursuant to a VTA
- From this moment on, the trustee is the legal owner of the shares for a period of 5 years, unless
the VTA is pursuant to a loan contract, valid until the loan is extinguished
- In turn, the trustee must now issue and execute a voting trust certificate (VTC) after the
issuance of a new stock certificate. This must be delivered to the trustor. Thus, it has now the
following effects- legal title to the (trustee) and beneficial title to the (trustor) over the
shares.
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 - The voting trust certificate is transferable like a stock certificate by indorsement and delivery. The
VTC is held by the trustor so the trustor can indorse and deliver it to another even while the VTA is
still pending, however, the transferees of the VTC cannot vote because the right to vote is inherent
in the trustee.

- NOTE: In proxy, the representative can vote but cannot be voted for. In VTA, legal title
passes to the trustee, hence he can be voted for.

IV. When may the Right to Vote and be voted for be Exercised

- In the absence of specific dates prescribed in the subscription contract between the parties – GR:
Any portion of the entire balance of the subscription is due and must be paid when a call is made by
the BOD. A call is a demand of payment of the subscription and it must be embodied in a resolution
passed by the BOD stating the:
1. Amount of percentage of the total balance due
2. The date when payment must be made
3. Any interest and penalties that may be imposed on the balance
4. The same call must also carry a warning that if no payment is received by the corporation under
on the date specified, then the SS will be declared delinquent and may be sold at public auction
- Each affected subscriber is entitled to a notice of call at the address specified in the books of the
corporation
- For all SHs who received a valid call, they must pay as required
- In case they fail to pay, then those who renege on his obligation may now be declared
delinquent and therefor shall loss their right to vote and be voted for.

31
 TITLE X – Appraisal Right
- The appraisal right is the right to be paid the value of your shares after dissenting to a corporate
act. The corporation then will pay the stockholder and the corporation will reacquire the shares.

I. Section 81 – Instances of Appraisal Right

- This is a right that may be invoked only by the following:

A. Shareholders who dissented or objected to specific corporate acts (the dissenting vote must
be in writing or reflected in the minutes of the meeting)
- That it is invoked under the following instances:
1. Any amendment to the AOI with the following effects:
i. Restricting the rights of current shareholders
ii. Granting preferences not presently enjoyed by the OCS;
iii. Shortens or extends corporate term;
2. Proposed sale of all or substantially all assets of the corporation;
3. Merger or consolidation;
4. Investment of corporate funds in another corporation;
5. All other instances as may be described in the AOI or BL

B. That the dissenting stockholder has paid in full the subscription price

C. That the corporation must have unrestricted retained earnings

- The only right left to the dissenting stockholder at this point is the right to be paid the value of
the shares.
- Who will pay? – The corporation

II. Surrender Value (how much to pay)

A. The price voluntarily agreed upon by the parties;

B. If they did not agree, then the price fixed by the Corporation Code

C. Or Either:

1. By way of final judgment of a court in an appropriate proceeding (action for sum of money or
consignation) (this is an intra-corporate controversy)
- The decision of the court is considered final and executory and the cost of judicial appraisal
shall be borne by all.
- If the price determined is equal to or near the offer of the corporation, the shareholder pays for
the cost of judicial appraisal.
- If the price determined is equal to or close to the amount demanded by the dissenting
shareholder, the cost of judicial appraisal shall be borne by the corporation.

2. Extrajudicial means
- Convening an ad hoc committee of three:
a. Appointed by the corporation;
b. Appointed by the shareholder; and
c. Appointed by the both the corporation and the shareholder

- The decision of the committee is final and executory. The corporation must pay within 30 days.

III. Section 84 – When Right to Payment Ceases

- The right to be paid of the dissenting shareholder is extinguished under the following:
1. The corporation voluntarily abandons the proposed corporate act;
2. The proposed corporate act was disapproved by the SEC;
3. That the SEC determined that the dissenting shareholder is not entitled to appraisal;
4. When the shareholder transfers the shares to another; and
5. When the corporation has no unrestricted retained earnings

- The appraisal right is actually a peace-setting mechanism.

32
- Once paid, the stock certificate will be cancelled. The re-acquired shares are called treasury
shares.

33
 TITLE IX – Merger and Consolidation

I. Merger or Consolidation

- Marriage or union between 2 or more corporations to form among them a single entity.
- The parties here are called constituent corporations.

A. Merger
- A Corp + B Corp = A Corp
- Some of them being absorbed in one of them; the latter being the surviving corporation

B. Consolidation
- A Corp + B Corp = C Corp
- An entirely new corporation

II. Section 76 – Plan of Merger or Consolidation

- How to merge or consolidate: there must be Plan of Merger or Consolidation that must be perfected
among the constituent corporations. It must be a common one among them.

- The plan must include the following:

1. The name of the constituents;
2. Manner that would carry out the proposed merger or consolidation (what is included or excluded
as to assets, liabilities, etc.);
3. In case of merger, the provision in the AOI of the surviving entity that will be amended

- In case of consolidation, the plan, in writing, shall set forth all contents of the AOI that are required
by law (new corporation).

- Once the plan is complete, submit it for the approval of the constituents (majority vote and at least
2/3 OCS for each constituent).
- Thereafter, submit the plan to the SEC, Fair Competition Commission, and the government
regulator.

- The government regulator can reject the proposed merger or consolidation on the following:
1. Unlawful combinations of trade;
2. The merger or consolidation will result to unfair competition (takes place when one entity or
merchant gains undue advantage of a market segment – e.g. predatory pricing (pricing the
product too low)
3. If it creates monopoly

- If any of the said causes are not present, then the plan shall be approved. The SEC will issue the
so-called Articles of Merger or Consolidation which is an offshoot of the duly approved plan.

- The plan of merger or consolidation must be expressly approved by the SEC. Once approved, the
following are the legal consequences:
1. Only a single entity will exist (the surviving corporation or the new corporation);
2. That corporation will have powers and privileges like any corporation;
3. The corporate personality of the constituents shall be extinguished;
4. The assets and liabilities except those expressly excluded in the plan shall be transferred
without further act or deed.

- Example: Merger between A and B = approved

- EFFECTS:
- The properties of B become the properties of A, the surviving corporation.
- A is entitled to indemnity from an insurance secured by B. There is no transfer since B became
A.
- As to action filed in court, the action will be continued in the name of the surviving corporation.
Notify the court about the merger.
- As to employees, without any stipulation in the plan of merger, the employees of B automatically
become the employees of A.

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 TITLE XI – Non-Stock Corporations
I. Stock Corporation vs. Non-Stock Corporation

Stock Private Non-

Corporation Stock
Corporation
Purpose For profit or For non-profit
gain purposes (e.g.
charity,
education,
religious
purposes)

Specify the
purpose. The
secondary
purpose must
not contravene
the nature of the
corporation
itself.
Managemen Board of Board of
t Directors Trustees or
some other
name by which
the AOI refer to
the
management or
governing body
(minimum of 5;
can go beyond
15; for as long
as a definite
number is stated
in the AOI)
Director Must be a Must be
shareholder members of the
corporation and
their names
must appear in
the membership
book.

The directors
may be
classified in
such a way that
certain kinds of
members can
vote a specified
number. (e.g.
out of the 15
trustees, the 10
shall be voted
only by the
original
members and
the remaining 5
shall be voted
only by the
subsequent
members)
Same statutory officers
(President, Secretary, and
35
 Treasurer). For non – stock,
additional officers may be
provided in the by – laws.

II. Chapter 1 - Members

- The Board shall have the power to determine who may be qualified to be admitted as members.
- Provided that said qualifications are prescribed in the AOI and by-laws.
- The qualifications must be reasonable. The same is true with respect to the expulsion of members.

A. Section 90 – Non-Transferability of Membership

- In non-stock corporations, membership is purely personal.
- The State cannot interfere with the affairs of the corporation in such a way as to impose or dictate
as to who the members should be.
- Once membership is granted, the member cannot transfer the membership at will because
members shall pass the qualifications prescribed in the AOI. Here, non-transferability clause is
allowed. (as opposed to stock corporations)
B. Section 91 – Termination of Membership
- Payment of membership dues is one of the qualifications for the maintenance of one’s membership
in the corporation. Failure to continue paying the same can be a valid ground for expulsion.
Expulsion, however, cannot be arbitrarily exercised. Due process must be observed.
C. Who can be members?
- GR: Only natural persons
- XPN: Upon special application and for as long as written in the AOI and by-laws, juridical persons
can be admitted as members.
- However, they are denied the right to vote within the corporation and only non-stock
corporations may be admitted.
- Stock corporations cannot be members of non-stock corporations.
- The membership does not entitle the member to a share in the profits derived by the corporation.
- Dividend declarations are absolutely prohibited.
- All the profits earned by the corporation must be devoted to the furtherance of its non-profit
purpose.
- For taxation purposes, there must be proof that not more than 30% of the funds of the corporation
is used for administrative purposes and the remainder shall be utilized for its non – profit purposes.

- Non-stock educational and religious corporations – express exemption from Real Property Tax and
income tax under the Constitution.

TITLE XIII – Special Corporations

Chapter I – Educational Corporations

I. Section 106 – Incorporation

- Technically, it can be organized as stock or non-stock corporation.

- But beginning the Education Act of 1982, all educational corporations in the Philippines are required
to organize as non-stock.

II. Section 108 – Board of Trustees

- In educational corporation, whether stock or non-stock, the members of the Board must not go
beyond 15 and always in multiples of 5.
- The AOI may prescribe a maximum period of 5 years for the term of the members of the Board.
- They may also adopt a staggered system whereby 1/5 of the entire Board shall have terms expiring
every year.

III. Educational corporations are required to obtain a secondary franchise.

1. Basic education – DepEd

2. Higher/tertiary education – CHED

- Not all tertiary educational corporations can use the term university in their names.
- College: Bachelor’s degree only
- University: Confers post-graduate degrees

36
 - Chapter II – Religious Corporations

I. Classes of Religious Corporations

1. Corporation Sole
2. Corporation aggregate/religious society
- Both are organized principally to manage and administer the temporalities or properties of the
church and to promote and further their religious belief.
- They are covered by the freedom of religion under the Constitution.
- As such, once their AOI is filed to the SEC, it is deemed approved right away and the SEC has no
power to deny the same.
- The State has no power to involuntarily dissolve a religious corporation and cannot be subjected to
the usual regulatory mechanisms imposed on ordinary corporations such as reporting
requirements.
- They are not required to state a definite term. Hence, they can exist perpetually.

II. Section 110 – Corporation Sole

- Called the “freak” in corporation law

- Composed of only one individual; that individual may the bishop, archbishop, or the head of the
church or denomination that is seeking to organize.
- This merely serves as a fiduciary or trustee of the church as well as its properties.
- The beneficial owner of said properties is the members of the religious corporation.
- The only limitation to its power is that in case there is a necessity to dispose, alienate or mortgage
its properties of the church, there must be a petition filed with the Regional Trial Court (RTC) where
the property is located.
- The RTC will ascertain whether or not the sale or disposition is for the benefit of the members of the
church.
- If the corporation sole is changed, the substitute shall submit to the SEC a copy of the assignment,
designation or appointment.
- Once a voluntary dissolution (decided by the bishop, archbishop, or the head) is prayed for by the
corporation sole, there is no need to file a petition in court. A mere notice to the SEC is sufficient.

III. Section 116 – Religious Societies

- Corporation aggregate/religious society – religious corporation aggregate (e.g. CICM)

- It must still comply with the AOI prescribed under the Corporation Code.
- The filing thereof to the SEC shall be approved by the majority of the governing Board as well as
2/3 of the members.
- As to the term of the governing Board, the limitation imposed by the Corporation Code is not
necessary. The same is governed by the rules internal to the church.

- INC Methodica Case

- The members of the church do not have any right to the property of the church. A corporation
sole can be transformed into a corporation aggregate by merely amending the AOI. The
amendment will be approved by the corporation sole. He has the sole authority to amend or
dissolve whichever he chooses.

37
 TITLE XII – Close Corporations

I. Section 96 – Definition and Applicability of Title

- This is actually a stock corporation except that by law, it has the following unique features:
1. Based on the AOI, it shall have a limited number of shareholders which shall not exceed 20.
That number shall be fixed in the AOI.
2. Acquisition and ownership of shares in the corporation is subject to certain stated restricted
limitations and qualifications. Not everyone can buy shares of stocks in a close corporation.
3. No close corporation is permitted to list its shares in any exchange because the stock exchange
is the public market for shares of stocks. This contravenes the nature of a close corporation. If
more than 2/3 of the OCS is already owned by an open corporation, then the close corporation
losses its character as such.

- An example of a closed corporation is a family corporation but not all family corporations are closed
corporations.

- A close corporation is actually an incorporated partnership. It is organized primarily because of the

close affinity or perianal trust and confidence which the incorporators and shareholders enjoy with
one another.

II. Section 97 – Articles of Incorporation

- Special provisions which a close corporation may provide in its AOI:

A. As to its management, there are two ways by which it may decide to manage itself:

1. Thru the ordinary BOD

- Here the right to elect the members of the Board is given only to a certain class of shareholders
- Any meeting of the Board is rendered unnecessary in all cases in order for the Board to bind the
corporation

2. By all of the shareholders

- Here, all shareholders are directors; here, there is no need to conduct election; the
shareholders acquire all the rights, privileges and liabilities of directors except when they obtain
adequate insurance against such liability.
- The liability of the corporation becomes a personal liability of the shareholders.

B. In cases of dissention, the following are the remedies available:

1. Amendment of the provision of the AOI or by-laws
2. Amendment of any resolution of the Board or stockholders’ agreement
3. Appointment of a provisional director (must not come from the shareholders; appointed to break
the impasse within the corporation); he is entitled to all the emoluments of the office but the
same duties and responsibilities as well; shall serve until the tie is broken

- For actions which are intra-corporate in character, provisional remedies can only be resorted to by
way of an intra-corporate complaint. The SEC is no longer possesses of the authority to issue
provisional orders or remedies.
- Controversies within a close corporation are intra-corporate in nature; hence, it is RTC which has
jurisdiction.

- The most drastic provisional remedy is the order of the dissolution of the close corporation.

III. Section 105 – Withdrawal of Stockholder or Dissolution

- In a close corporation, every shareholder has the right to petition the dissolution of the corporation
for any ground but especially for the following as provided by the Corporation Code:
1. Dissipation or wastage corporate assets by the management or members of the Board
2. When any of the members of the governing body is guilty of fraud or misrepresentation

- The petition shall be filed either with the SEC or the RTC.

IV. Appraisal Right

- In a close corporation, shareholders have a broader appraisal right.

38
 - The said right can be exercised at any time regardless of the cause and the same is not anchored
on the presence of unrestricted retained earnings.
- The only limitation is that the corporation has sufficient assets to pay the withdrawing shareholders.
- Similar to a partnership, a shareholder cannot be forced to remain in a corporation.

V. Right of First Refusal

- Another unique right is the right of first refusal.

- It serves both as a right and a restriction. It is a restriction to the shareholders who are intending to
sell their shares. It is a right for the other shareholders of the corporation.
- Before any shareholder can sell or transfer the shares, the same must first be offered to the other
shareholders within the corporation. If none of them bought the shares, the sale shall be offered to
the corporation.
- Ownership and acquisition of shares in the close corporation are subject to certain requirements or
eligibilities.
- If the transferee did not pass the prescribed eligibilities, the disposition of the shares shall not be
binding upon the corporation.

39
 TITLE XIV – Dissolution

I. Section 117 – Methods of Dissolution

A. Expiration of the term or lapse of time when the term has not been extended or renewed by
amendment or if the extended period has also expired; it is ipso facto dissolved the day after its last
day
- Without waiting for the original period to elapse, the corporation may file a petition for the
shortening of its corporate term (amend the AOI to shorten the term = does not require the approval
of the Articles of the Amendment to take effect); dissolved upon the expiration of the shortened
term

B. By way of a petition
- This is voluntary because it is initiated by the corporation itself
- Must be approved by majority of the Board and 2/3 of the OCS (this must be alleged in the petition)
- SEC has jurisdiction.

- Two kinds of petition:

1. If at the time of the filing of the petition, the corporation has no existing liabilities, the corporation
is dissolved as of the date of filing of the petition with the SEC. (summary in nature and
immediately effective)
2. If there are unpaid obligations on the part of the petitioner, the petition must enumerate the
names of the creditors of the corporation so that once filed the SEC must set a date of hearing
and notify the creditors of the pendency of the said petition. The hearing enables the SEC to
verify the claims of the various creditors and to ensure that the petitioner corporation makes
adequate provisions to pay the creditors. The presence of the outstanding debts will not prevent
an issuance of an order dissolving the corporation. Here, the corporation is dissolved upon
finality of the order of the SEC dissolving it.

C. Section 121 – Involuntary dissolution

- Here there is a finding that the corporation has infringed its franchise or privilege.
- Dissolved from the date of finality of the order issued either by the SEC or RTC.
- This entails the revocation of the certificate of incorporation and may or may not carry with it the
revocation of the secondary franchise.

- Grounds for involuntary dissolution under P.D. No. 902-A:

1. Fraud or misrepresentation as to what the corporation can or is doing to the great damage and
prejudice of the public
2. Willful defiance to a cease and desist or other orders issued by the SEC or the government
regulator
3. Non-user or continuous inoperation
4. Failure to file the BL (when to file: within one month from the issuance of the certificate of
incorporation)
5. Failure to comply with the reportorial requirements (annual basis) (e.g. General Information
sheet, annual audited financial statements, current directors and officers)

- In involuntary dissolution, jurisdiction belongs either to the SEC or RTC depending on the ground.
1. SEC:
a. Failure to comply with the reportorial requirements
b. Non-user or continuous inoperation
c. Willful defiance to SEC

2. RTC
- All other grounds (since they affect the franchise, file a petition for quo warranto)

- Involuntary dissolution is forfeiture of the franchise.

- Voluntary dissolution is surrender of the franchise.
- Expiration is the lapse of the franchise.

- Once the corporation is dissolved, its civil personality is terminated but only for the purpose for
which it was created. That is why it is prohibited to enter into any transactions that would further its
business operations.

40
II. The dissolved corporation retains a limited civil personality for the following purposes
(powers at liquidation):

1. To prosecute and defend suits

2. To settle or wind up its affairs; Liquidate the assets and close the business
3. Convey assets or property in favor of another who will acquire legal title while retaining
beneficial ownership in favor of creditors and ultimately the shareholders or members

III. Section 122 – Methods of Corporate Liquidation – Who may Enjoy the Powers During the
Liquidation

A. Liquidation by the corporation itself

- Once the corporation decides to liquidate its own affairs the BOD ceased the power to manage the
affairs if the corporation and now convert and transfer their roles into liquidators – they cannot enter
into any contract that would further the business but they are still authorized to act for and in behalf
of the dissolved corporation to enter into any contract relevant to the following
1. Prosecute or defend the corporation in suits
2. Settle and wind up the business and affairs of the corporation
3. Convey legal title over the property or assets of the corporation
- When the corporation per se is liquidating itself, all the transactions arising from the above-
mentioned powers may still be entered into in the name of the dissolved corporation
- However, such powers are time bound that is why the BOD must observe the 3-year limitation–
after this, exercise of these powers can no longer be in the name of the corporation because for all
intents and purposes, the corporation has ceased when the 3-year period elapses – these powers
in the name of the corporation are abated

B. Receiver/Assignee
- The liquidator in case of involuntary dissolution of the corporation
- They are always court appointed and therefore cease the power of the BOD for purposes of closing
the business and enjoying transactions
- the liquidation process is not limited to the 3-year period unlike if the liquidation is taken by the
corporation itself

C. Trustee
- The trustee is voluntarily named by the corporation – not judicially appointed
- The selection of the trustee may be done prior to dissolution or during the 3-year period
- the liquidation process is not limited to the 3-year period unlike if the liquidation is taken by the
corporation itself – it may continue for as long as necessary until the business and all its affairs will
be finally terminated
- Example: Y Corporation was dissolved as of 31 December 2010. After its voluntary dissolution, the
corporation did not bother to appoint a trustee. So within the 3-year period from 31 December 2010
to 31 December 2013 – the corporation attempted to liquidate the corporation but could not finish all
the transactions. Within the 3-year period, the corporation may still enter into contracts under its
own name, prosecute and defend suits in its own name because the BOD is empowered to do
acting now as liquidators. But, by 01 January 2014, no new suit may be filed in the name of the
dissolved corporation. It should now be under the name of the receiver/assignee/trustee
- Example: Within the 3-year period, there is a case Pogi, Inc. v. X. This is still a valid complaint but
the corporation is no longer existing so indicated “duly registered corporation but has been
subsequently dissolved and the action is filed pursuant to its liquidation.” In case the liquidation is
done by some other entity or person – “A, on behalf of dissolved Pogi, Inc. v. X” – can be done
even after the 3-year period
- Questions:
1. Dissolved corporation sell shares – cannot be done within the 3-year period
2. Dissolved corporation declare dividends – if the dividends are earned by the dissolved
corporation, it is prohibited within the 3-year period; if liquidating dividends – a pro rata
distribution of the assets of the dissolved corporation after creditors has been paid – can be
done within the 3-year period
3. Dissolved corporation conducting an annual election – cannot be done within the 3-year period
4. Would the BOD be required to conduct meetings – can be done within the 3-year period
because they hold the powers at liquidation, unless they have appointee a receiver or trustee
5. Can the dissolved corporation enter or perfect contracts – can be done within the 3-year period
provided the contracts are related to liquidation
a. Contract for sale of its property – can be because this is inherent in liquidation
b. Purchase of new property or new assets – GR: No

41
 c. Perfect a lease or renew a lease – can be assuming it has no own office – necessary for
liquidation purposes. In one decision of the SC the dissolution of the corporation does not
ipso facto terminate a subsisting lease contract to which the corporation is a party. If the
lease is for a definite period and in the intervening period the corporation is dissolved, this is
not a valid ground for the lessor to pre-terminate the lease
6. Do the SH of such corporation has the same rights as against the corporation as they have prior
to dissolution (right to vote, right to be voted for, right to dividends, right to assets, right to
inspect and examine books, right to attend meetings) – No with respect to right to vote and be
voted for except in decisions necessary to liquidation where they have limited right. Right to
dividends is absolutely prohibited except for liquidating dividends. Right to inspect and examine
books still subsists for them to know how much is the asset of the corporation and their shares.
7. If after dissolution, still some of the SH has not yet paid in full their subscriptions – The balance
will not be extinguished, they must still pay the same

- If there is no receiver or trustee appointed

- Metrobank v. CA
- SC: In the absence of a duly appointed trustee or receiver or assignee, then the BOD are
ipso facto and ipso jure considered as trustees of the corporation. They must continue
representing their corporation in their capacity as their trustees. Even if the 3-year period
has been expired, the members of the BOD may still be sued and sue in their own name
representing the dissolved corporation because by law, they are now considered as
trustees.

- Helano v. CA
- The lawyer in this case filed a motion to be discharged as counsel of the corporation
alleging that the corporation has already been dissolved and he has experiencing difficulties
in continuing the case for lack of instruction from his principal. The case was already
appealed before the CA.
- SC: In such a situation in cases of pending litigation when no new trustee or receiver is
appointed, counsel of record is deemed to be the trustee of the corporation, therefore
cannot be discharged as counsel.

- Chung Ka Biok v. CA
- The corporation had so many assets that they were undivided several years after it was
dissolved. The members of the BOD abandoned their offices after dissolution after the
termination of the life of the corporation. Some of the SH petitioned for distribution of the
assets.
- SC: One of the SH was appointed as trustee of the corporation.

- Case
- SC: A creditor was appointed as trustee subject to specified safeguards in order to prevent
abuse.

D. Petition of Liquidation under FRIA

- When there is full distribution of the assets, the corporation ceases for all legal intents and
purposes, it is now considered as fully terminated but this corporation does not prevent it from
incorporating with the same persons and personalities. NO MORE TIME NO DISCUSSION ON
FRIA.

42
 TITLE XV – Foreign Corporations

I. Section 123 – Definition and Rights of Foreign Corporations

- Measure used by the Corporation Code as to whether or not a corporation is foreign is simple – it is
a foreign corporation if its was formed and organized under laws of another state
- Therefore, if a corporation is formed and organized under Philippine law, it is a domestic
corporation
- A corporation which is foreign has no legal personality outside the territory where it was created –
the conferment of a status as a corporation is a mere privilege exclusive to the state
- As such, outside of those territory, the corporation may be denied the right to exist or may be
subjected to certain requirements before it may be afforded legal recognition – we adopt this is in
the Philippines

II. Section 125 – Requirements to Allow a Foreign Corporation here in the Philippines – Apply
for a License

A. License
- That license is necessary whenever it seeks to engage or transact in business in the Philippines

B. Acts of doing or transacting business here in the Philippines: Under Foreign Investments Act

1. It solicits orders or purchases in the Philippines

2. It opens a branch or an office in the Philippines even if such office is called a liaison office
- not all foreign airlines are granted landing rights in the Philippines but they are able to sell
tickets here in the Philippine through agents or agencies or partnerships with other airlines to
sell ticket for them. If this is the case, they are considered as doing business here in the
Philippines. For the foreign airlines granted landing rights they are definitely doing business
here in the Philippines

3. Appointing any person or representative for the conduct of its business here in the Philippines
where such agent is domiciled in the Philippines for at least 180 days in a given year
- The 180 days may be continuous or cumulative
- From point of view of the Corporation Code, the domestic agents of foreign recruitment
agencies are in fact doing business here in the Philippines through their domestic licensees

4. Participating in the management of a domestic business whether organized as sole

proprietorship, partnership or corporation
- Mere exercise of a right as a SH should not be construed as doing business on the part of the
foreign corporation – means that if a foreign corporation happens to be a SH of a domestic
corporation and as a domestic corporation it is entitled to vote and be voted for this is an
exercise of his ordinary rights being a SH of the corporation and the foreign corporation should
not be construed as doing business for which it is required a license
- Participating in the management is tantamount to doing business in the Philippines and
therefore a license is required if the participation is active in character
- It is active participation is it is beyond the ordinary participation of a mere SH, like when the
foreign corporation is able to: - active participation here must amount to control in the
corporation
a. Elect its representative in the BOD or governing body
b. Appoint key officers
c. Dictate or even influence policies, rules and practices within the corporation

5. When the foreign corporation engages in series of commercial dealings intended to prosecute
and promote the main body of the business for which it was organized
- It is not the number of dealings but it is the nature and purpose of such dealing to determine
whether or not it is doing business
- If there is showing that the dealings entered into by the foreign corporation in the Philippines is
toward a progressive prosecution of its business, then it must obtain a license

C. Where should a license be applied?

- Principally, it is with the SEC
- Subject to Foreign Investors Act, which they also need to comply with certain documentary
requirements with the Board of Investments
43
 - The application for a license require certain documentary submissions such as:
1. Copy of the AOI and BL
2. Financial condition of the foreign corporation
3. List of current BOD and officers
- But, among these documents, it must also appoint a so-called resident agent

D. Section 127and 128 – Resident Agent

- Resident agent may be a natural or juridical person who is domiciled in the Philippines and is
authorized to receive and accept summons and papers for and in behalf of the foreign principal
- Service of summons upon the resident agent is service to the foreign corporation
- In case the resident agent previously appointed should die or resign and no one has been
appointed in the meantime, the foreign corporation is required to execute an undertaking that
service to the SEC is service to the foreign corporation – This is to prevent the foreign corporation
from thwarting any case against it on the mere lack of jurisdiction as a ground

- The application for license must specify the kind of business that the foreign corporation seeks to
engage in in the Philippines – if this business is regulated, a secondary franchise must also be
obtained from the BSP, IC, etc.
- The license to do business is limited to the business applied for and approved – no other
transactions may be validly entered into if it is not directly connected to the licensed business
- The license may be amended to add other businesses, subject to approval of SEC and other
government agencies

- Once the license has been issued, whether the original or the expounded one, the foreign
corporation is now subject to Philippine laws – agrees to bind itself to Philippine law, rules and
regulations

- Once it is already enjoying such license (privilege), it may surrender the same. However, as a
condition for such surrender, it must prove that it has paid all its outstanding liabilities in the
Philippines

E. Section 134 – Revocation of License

- The license may be cancelled or revoked by the SEC for reasons such as:
1. Failure to file its annual report or pay any fees as required by this Code;
2. Failure to appoint and maintain a resident agent in the Philippines as required by this Title;
3. Failure, after change of its resident agent or of his address, to submit to the Securities and
Exchange Commission a statement of such change as required by this Title;
4. Failure to submit to the Securities and Exchange Commission an authenticated copy of any
amendment to its articles of incorporation or by- laws or of any articles of merger or
consolidation within the time prescribed by this Title;
5. A misrepresentation of any material matter in any application, report, affidavit or other document
submitted by such corporation pursuant to this Title;
6. Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the
Philippine Government or any of its agencies or political subdivisions;
7. Transacting business in the Philippines outside of the purpose or purposes for which such
corporation is authorized under its license;
8. Transacting business in the Philippines as agent of or acting for and in behalf of any foreign
corporation or entity not duly licensed to do business in the Philippines; or
9. Any other ground as would render it unfit to transact business in the Philippines.

III. Power to Sue and be Sued

- One principal right that arises whenever a foreign corporation shows that it has obtained the
necessary license is that it has the power to sue and be sued

Doing Business
With Without License
License
To ✓ GR: ✗
sue By establishing domicile
in the Philippines for its
business without the
requisite authority, it
cannot seek the
intervention of Philippine
courts for the protection
44
of its interest.

XPNs: ✓
1. May prosecute any
case under the RPC
or other penal laws –
no need to show
license because
criminal cases in the
Philippines are
instituted in the name
of the People of the
Philippines –
therefore it may be a
private offended party
or complainant in a
criminal case – no
need to show capacity
to sue
2. Estoppel on the part
of the defendant to
question the legal
personality of the
corporation– no need
to show capacity to
sue

Case
- A foreign corporation
was a manufacturer of
computers and it
entered into 2
contracts for the sale
and repair or servicing
of these computers
sold in the
Philippines. The
contracts were called
representative
agreement. The
domestic dealer as
well as the domestic
providers for repairs
were not allowed to
enter in their own
name but always in
the name of the
foreign corporation
and before any
employee can be
hired by the domestic
corporation, the said
employee must first
be approved and
must pass the
standards imposed by
the foreign
corporation.
Furthermore, in all
communications
entered into by the
domestic dealer and
domestic service
provider, they must
always use the
letterhead provided
45
 for by the foreign
corporation. Under
the representative
agreement, all sales
made by the domestic
dealer it will be
entitled to a
commission, however
it is absolutely
prohibited from selling
computer products of
other companies and
it bound itself to sell
and distribute in the
Philippines only
products of the
foreign company. The
domestic service
provider, whenever it
enters into repair or
any of these
computers, he is also
entitled to only a
commission and does
not charge or fix the
fees for its services –
percentage
agreement. The
foreign corporation
discovered that the
dealer was selling
computers bearing
brands of other
companies and
because of such, the
foreign corporation
suffered losses by
reason of such breach
of trust and
confidence prompting
it to file a suit in the
Philippines against its
own dealer for breach
of contract and for
accounting and for
breach of damages.
In am motion to
dismiss filed by the
domestic corporation,
it alleged that the
plaintiff is an
unlicensed foreign
corporation and
therefore has no legal
capacity to sue. Is the
foreign corporation
doing business in the
Philippines, for which
a license was
necessary?
- SC: Yes. A scrutiny of
the representative
agreement shows that
the domestic dealer
and service provider
are both reduced to
46
 mere agents of the
foreign corporation
and they have no will
and volition of their
own as to the manner
by which the business
may be conducted
because the entire
methodology and
administration of the
business is dictated
by the foreign
corporation. Thus, the
domestic corporations
are agents of the
foreign corporation
and under the Foreign
Investment Act,
appointment of agents
is an act of doing or
engaging in business.
The foreign
corporation can also
maintain the
complaint because
the defendant is in
estoppel – after so
many years of
maintaining the
arrangement with the
unlicensed foreign
corporation, knowing
it to be without the
authority to do such
business, the
domestic corporations
reap benefits out of
said arrangement.
They cannot now
repudiate their
arrangement
whenever they are
held liable.

3. Foreign corporation is
merely defending
itself in an action filed
against it in the
Philippines

Time, Inc. v. Reyes

- This involves a civil
action for damages
filed by Enrile against
Time. Enrile felt
seriously impugned or
maligned and
embarrassed by a
particular story that
appeared in one of
the issues of Time
Magazine about the
1986 EDSA
Revolution. According
to Enrile, he was
pictured as a power
47
 hungry and a corrupt
defense minister. (In
libel, file the case
should be filed in the
RTC of the place
where the first
publication was
made.) Time
immediately filed a
motion to dismiss on
the ground of lack of
jurisdiction citing that
the suit should have
been filed in Makati
where the first
distribution was
made. The RTC judge
denied the motion to
dismiss. Felling
aggrieved, Time filed
a petition for certiorari
with CA (original
action although a
mode of review).
Enrile filed a motion to
dismiss this certiorari
case saying that Time
is doing business in
the Philippines
without a license and
therefore it has no
right to sue on a
certiorari.
- SC: Since Enrile sued
Time, Time is entitled
to avail of all
remedies that are
extended by the
Philippine law to all
defendants alike and
since defendants, if
feeling aggrieved, can
petition for certiorari
under Rule 65, when
Time availed of this
remedy, it was merely
defending itself in the
suit filed by Enrile
against it. The
certiorari case is an
offshoot of the case
filed by Enrile.

It is the licensed that

capacitates it to sue in
case a foreign
corporation wants to sue.
To ✓ ✓
be Can be Sanction for failing to
Sued held liable comply with Philippine
for any law.
claim
arising from How to sue: Where to
its business serve the summon – if it
in the has an office in the
Philippines
48
 Philippines, then send it
in their office or to the
person representing the
foreign corporation for its
business in the
Philippines
If it has no office here in
the Philippines: Amended
rules for service of
summon to unlicensed
foreign juridical entities
a. By personal
service of
summon to the
unlicensed
juridical entity at
the place of its
residence or
domicile abroad
through the DFA
and a court in said
foreign jurisdiction
b. Summons by
publication in a
newspaper of
general circulation
abroad where the
unlicensed foreign
corporation has its
domicile or last
known address –
this must be
accompanied by
proof of service
through registered
mail of the
summons
c. Electronic mail –
facsimile – cannot
use personal e-
mail to serve
summon it must
be the court’s e-
mail
d. Any other means
with leave of court

If all these are not

available, file the case
abroad

Not Doing Business

Not required to obtain a license
To GR: ✗
sue XPNs: ✓
1. Isolated transactions
- The suit must arise out of a contract
or transaction that is not directly
related to its main body of its
business
- It is not the number of transaction
but the nature and purpose of the
transaction that determines whether
he is doing business or not

49
- Case
- A foreign bank not licensed to
do business in the Philippines
was able to negotiate and
extended a loan to a domestic
company. All the phases of the
contract were done abroad and
the proceeds of the loan were
forwarded by the foreign bank to
the local deposit of the domestic
borrower. Unfortunately, the
domestic borrower reneged on
its obligation to pay back so it
negotiated for a loan
restructuring. Foreign
corporation agreed under new
conditions and terms but again
the domestic borrower failed to
pay the loan. Foreign bank files
an action in court for collection
of sum of money against the
domestic borrower. Borrower
moves to dismiss on the ground
that the foreign bank is doing
business without license. The
foreign bank raised the defense
that the suit arose from a single
loan contract and it cannot be
deemed doing business on the
basis of one loan transaction it
granted.
- SC: The business of banking is
the business of lending and
therefore, when it extended that
single loan to a domestic
borrower; it was already
engaged in business. The suit
was barred.

- Case
- Import-export transaction –
Importer: Japan; Exporter: US –
the exporter loaded the
imported cargo on board a
vessel, the vessel en route to its
final destination in Japan.
Vessel made a stop at the port
of Manila. Because of
negligence of the arrastre
operator, vessel and cargo got
burned. The importer and
exporter sued the arrastre
operator for negligence to
recover both the vessel and
cargo on board. Arrastre
operator filed a motion to
dismiss citing that these foreign
corporations are not licensed to
do business in the Philippines,
so they cannot file a case here
in the Philippines.
- SC: The suit is not related to
any of the business of these
foreign corporations. The suit
arose from a quasi-delict liability
enforced against the arrastre
50
 operator – this is an isolated
transaction – it should be given
due course

2. May sue to protect their intellectual

property rights (IPL)
- IPR is a right in rem and not
required to be registered
- Cases involving infringement or
unfair competition may be litigated
without necessity of showing
capacity to sue by virtue of a
license
- International norm is that intellectual
property rights must be afforded
protection (members of WTO)
To ✗
be Lack of jurisdiction
Sued

51
52
Securities Regulation Code

Republic Act No. 8799

53
 Table of Contents
CHAPTER I – Title and Definitions................................................................................................43
I. Securities Regulation Code.................................................................................................43
II. Capital Markets.................................................................................................................. 43
III. Section 31 – Definition of Terms – Securities....................................................................43
IV. In securities transactions, there are 2 stages regulated by the SRC: (1) Primary Market
Transaction............................................................................................................................... 44
V. How does SRC Regulate Primary Market Transaction – Registration Statement (Sec. 8),
Chapter III................................................................................................................................. 44
VI. In Securities Transactions, there are 2 staged regulated by the SRC: (2) Secondary Market
Transactions............................................................................................................................. 46
CHAPTER II – Securities and Exchange Commission.................................................................48
I. Securities and Exchange Commission (SEC).....................................................................48
II. Section 5 – Powers and Functions of the Commission......................................................48
III. Section 7 – Reorganization...............................................................................................49
CHAPTER VII – Prohibition on Fraud, Manipulation and Insider Trading..................................56
I. Insider Trading.................................................................................................................... 56
II. Tender Offer....................................................................................................................... 56
III. Margin Trading.................................................................................................................. 57
IV. Fraudulent Transactions and Manipulations of Security Prices.........................................58
V. Short Sale/Short Order.......................................................................................................59
CHAPTER XIII – General Provisions..............................................................................................61
I. Settlement Offer.................................................................................................................. 61

54
 CHAPTER I – Title and Definitions

I. Securities Regulation Code

- Primary legal and preparatory framework for capital markets in the Philippines

II. Capital Markets

- Capital Markets: Serves a function similar to all other financial markets in the Philippines

- Several Capital Markets in the Philippines

A. Financial Capital Market

- Where you go in case you need money for your business
- This serve as a financial intermediary – because they make available money, property or goods to
those in need from those who are in need of them – like banks

- Capital Market is further divided into 2:

1. Equities Market
- The underlying or principal asset sold here would be SS
- Provisions on the Corporation Code regarding transfer of SS

2. Debt Market
- What is being sold or traded here are debt instruments – the purpose of the debt is to raise
capital or finance a business
- Provisions on the Corporation Code regarding the power to create or increase bonded
indebtedness

- Capital market is governed by SRC that is why the primary object in the capital market are the so-
called securities – SS or debt instruments are securities
- Reason why there is a need to regulate this: To prevent unscrupulous parties from committing fraud
by promising high rate of return of investment – this is also called the Blue Sky Law
- Blue Sky because they promise very high impossible returns as high as the sky only that once
they get what they want they will leave you with nothing – run away with your money
- The SRC requires that no security shall be sold or offered for sale in the Philippines without a
permit or license from the SEC

B. Non-Capital Market
- You have the so-called commodities market (agricultural products), foreign exchange market – no
centralized location
- Forward Contracts – contract for the sale or delivery of future things – like oil companies
- This is not governed by the SRC

III. Section 31 – Definition of Terms – Securities

“Securities are shares, participation or interests in a corporation or in a

commercial enterprise or profit-making venture and evidenced by a certificate,
contract, instrument, whether written or electronic in character. It includes:
a. Shares of stock, bonds, debentures, notes, evidences of indebtedness,
asset-backed securities;
b. Investment contracts, certificates of interest or participation in a profit
sharing agreement, certificates of deposit for a future subscription;
c. Fractional undivided interests in oil, gas or other mineral rights;
d. Derivatives like option and warrants;
e. Certificates of assignments, certificates of participation, trust
certificates, voting trust certificates or similar instruments;
f. Proprietary or non-proprietary membership certificate in corporations;
and
g. Other instruments as may in the future be determined by the
Commission.”

- Securities may partake of shares, interests or participation of a:

1. Corporation
2. Commercial enterprise
3. Profit-making venture

55
 - Whether such share, interest or participation is evidenced by a written contract, agreement, or even
if the same is electronic or digital in form
- However, the definition under Sec. 3 go further by enumerating kinds of securities – such
enumeration shall not be considered as exclusive – this is a definition by enumeration
- Examples of Securities:
1. Shares of stocks – called equities
2. Bonds – debts instruments
3. Investment contracts
4. Similar profit sharing agreement
- The term securities should be understood in the sense that it is the Howey Test – it is essentially an
investment contract

A. Howey Test
- It is pursuant to the decision of the United States SC in the case of Howey v. SEC

- The following are the elements of securities or investment contract:

1. That there is investment of money or property
2. In a common or commercial enterprise
3. Where the investor is led to expectation of profit
4. Solely out of the efforts of another or third persons
- Meaning, an investment or securities transaction leads the investor to an expectation of passive
income or profit – the income here is passive because there are third persons who ensure that such
profits are gained and such gained profits are distributed to the various investors – all those who
buys SS in a company are investors, they are entering into an investment contract because they are
led to an expectation of profit – SH are investors and investors are risk takers

IV. In securities transactions, there are 2 stages regulated by the SRC: (1) Primary Market
Transaction
- Initial regulations of these contracts take place in the so-called primary market transactions
- Who are the parties in a primary market transaction:
a. Issuer
b. Initial subscribers of the security
c. Underwriter – between the 2

- Example: Pogi, Inc. after it recently amended its AOI to increase the capital stock – there are now
100M new common shares available for disposition. The issuer here the maker or originator of the
security. Pogi, Inc. is the issuer. It wants to raise, out of the 100M common shares, 1B worth of new
capital within a period of less than 6 months. For Pogi, Inc. to sell all 100M new shares – it may not
have the time or inclination to do so and it wants to do a public offering of such – what it can do is to
appoint an underwriter under an underwriting agreement so that the underwriter will guarantee that
all or a portion of the 100M new shares will be sold within a definite period. The 10M new shares
are the securities.
- The business of underwriting can be performed by investment houses as well as universal
banks
- BDO Capital, Inc. entered into an underwriting contract with Pogi, Inc. as the underwriter, BDO
guarantees that all 100M new shares of Pogi, Inc. shall be sold within 3 months. Thus, BDO
capital will sell or offer for sale to its own customers said 100M new shares under a so-called
Initial Public Offering (IPO) of those securities in the form of SS. They are being sold publicly
because the sale or disposition is being done unlimited to the existing SH of the corporation –
anyone who may have the money to buy can buy.
- Let us say the agreement is that within 3 months, BDO shall be able to sell those 100M shares
and generate in favor of Pogi the desired target of 1B. Within the 3-month period, out of the
100M shares, only 90M were sold. But despite best and diligent effort, 10M are unsold. For the
90M shares sold through BDO – A, B, C and so on are now considered as SH – Under a
clearing agency, their names will now be entered in the books of Pogi, Inc – they are required to
pay under the terms of IPO (usually in cash). The compensation of BDO is entitlement to a
commission.
- The 10M unsold – because BDO underwrote the entire 100M SS, it is now obligated for the
unsold shares – BDO capital is now the SH of Pogi, Inc. – in banking, a universal bank has the
power of a commercial bank as well as an investment house and every licensed investment
house does not just engaged in the business of underwriting but also it engages in the business
of securities dealer – this means BDO would be interested in acquiring this shares so that in
some future time, it can resell them (buys SS for its own account and in the ordinary course of
business)

56
 - From the time that Pogi, Inc. made available for sale or disposition those 100M shares and up to the
time the IPO period expired – the parties are the issuer and the subscribers
- From issuer to subscriber – that is a primary market transaction – it refers to the original disposition
of the security
- Under the Corporation Code, from corporation to another under a subscription contract – that is a
primary market transaction

V. How does SRC Regulate Primary Market Transaction – Registration Statement (Sec. 8),
Chapter III
- First requirement is that no security of any class or kind may be offered for sale in the Philippines
without a registration statement
- Registration statement is an application filed by the issuer with the SEC to obtain a license or permit
to sell the security publicly
- Example: Before Pogi, Inc. can offer these 100M new shares to the public, it must comply with a
registration statement

A. What must be contained in the Registration Statement:

- There must be a complete and detailed historical and financial information regarding the issuer and
the security sought to be offered publicly – describe who is the issuer; how long has it been in
business; kind of business; who are its officers and directors; what is his financial condition, etc.

B. Why is there a need for a registration statement?

- To inform the investing public regarding the issuer and the security
- The SRC does not guarantee that investors will generate profit out of their investment
- What the SRC guarantees is that the investing public is duly informed of all material facts relating to
the issuer and security to enable the investing public to make presumed investment decisions

C. Disclosure Regime
- It mandates that all necessary and relevant information for investment decisions are available to the
public
- How: Through requiring disclosures in every step of the securities transaction

D. Registration Statement must be accompanied by the Following:

1. Resolution of the BOD of the issuer authorizing the filing of registration statement
2. If any, a due diligence
- In securities transaction, a due diligence is actually an independent third party review of the
financial condition of the issuer and the security
3. Written consent of the SH if the public offering includes securities currently owned by person
other than the issuer
4. Prospectus
- This is the selling document that is circulated to the public
- SEC must approve the contents thereof

E. Who must Sign the Registration Statement

- This is a legal duty
- Chief/Principal Executive Officer (CEO/PEO), Principal/Chief Operating Officer (POO/ COO),
Principal of Chief Administrative Officer (PAO/CAO), Chief/Principal Financial Officer (CFO/PFO),
Comptroller and all other persons who have contributed to any portion of the registration statement
- Why: Because they are the persons who can be held liable for any false or misleading statement
contained in the registration statement or for omitting a material fact or statement in the said
document

F. Section 13 – Rejection and Revocation of Registration Securities

- Once the registration statement is submitted to the SEC – the power of the SEC to consider the
same is discretionary – the SEC may reject the same

- Grounds for Rejection:

1. Grounds based on Status or acts of the issuer

a. That the issuer is either judicially insolvent
b. That the issuer has committed, is about to commit or committing a fraudulent transaction
c. That the issuer has disobeyed any order of the SEC related to any of its securities
d. That the issuer has made any false or misleading statement regarding the security

57
 2. Grounds arising from the issuers officers and directors if any of them should have been
convicted by a final judgment for the following crimes:
a. Involving moral turpitude
b. Fraudulent transactions
c. Has been legally restrained from engaging in any securities transaction
- Such conviction by final judgment may come from a domestic or even foreign tribunal

3. Grounds based on the statement itself

- SEC will reject the registration statement if it contains false or misleading statements or omits to
state a material fact

- If rejected, the issuer or any of its Directors, Officers, Employees or Agents cannot sell or offer for
sale the security

- If the SEC approves the registration statement, the SEC will now issue in favor of the issuer a
license or permit to sell – this is the time that the issuer can publicly offer for sale the shares and
enter into an underwriting agreement with an underwriter or make any transaction related to that
original disposition
- The security now covered by the permit will now be entered by the SEC in its own registry of
securities
- All licensed securities must be entered in this registry of security

G. Section 9 – Exempt Securities

- Exempt from registration requirements – thus no permit is necessary from the SEC before these
securities may be sold in the Philippines

1. Those issued by the Republic of the Philippines or any of its agencies, instrumentalities,
including LGUs – Sovereign Bonds
- Treasury bonds – issuer is the Republic
- Code NGO v. BIR
- The Peace Bonds offered for sale and actually sold by Code NGO belong to this category of
exempt securities because, while the Philippine Government does not directly issue them,
the same guarantees them. In order for these Peace Bonds to be sold, there is no necessity
for them to be covered by the SEC – because sovereign bonds are licensed by a different
government agency – Department of Finance through the Bureau of Treasury

2. Securities Sold by a Foreign Government with who the Philippines enjoy diplomatic relations
and that also allows securities of the Philippine government to be sold in its territory
3. Securities Regulated by the Following Agencies:
a. HLURB – Contracts to Sell subdivisions or condominium units – you are already paying for a
unit when the building has not been constructed yet – this is an investment
b. Insurance Commissioner (IC) – Insurance contracts – this is an investment because
premium payments earn dividends overtime
c. BIR – Tax credit certificate (TCC) – these are overpayments to the BIR
d. Similar specialized government agencies

4. Issued by banks except its own SS

- Saving account is an investment contract – passive investors because the bank pays you
interest
- When a bank offers for sale to the public its own SS, it must obtain a permit not just from BSP
but also from the SEC

5. Securities which are authorized for sale but are by a court pursuant to a bankruptcy or
insolvency proceedings or other similar proceedings
- Increase of capital stock in FRIA – those new SS for a corporation under rehabilitation are
already judicially authorized

- These are exempt from registration because there is no need for a registration statement to protect
public interest because of the status of the issuer as a trusted entity and that the security is not
speculative in character – return to investor is somewhat guaranteed

- Non – speculative: The return to investor is somewhat guaranteed.

VI. In Securities Transactions, there are 2 staged regulated by the SRC: (2) Secondary Market
Transactions

58
- Under the SRC, all transactions involving securities shall likewise be registered.

A. Requirements:

1. Registration
- All transfers involving or arising from secondary market transactions must in themselves be
registered because of the disclosure regime enforced by the SRC so that people can keep track
of the changes in the ownership of the registered security.

- Two kinds of registration under the SRC:

a. Original registration; and
b. Subsequent registration
- Akin to registration of property.

- Exempt transactions: Registration is not required due to:

a. Limited scope of the offering;
b. Does not involve the public;
c. Small amount involved
- Examples:
a. Pre-incorporation subscriptions
- Means by which the corporation obtains the minimum capitalization. Atleast 5
incorporators are required; hence, the public is not involved.
b. Pre-emptive rights offering
- The offerer is the corporation and the offeree is its own existing shareholders. The public
is not involved here as it is limited to within the corporation.
c. Stock dividends:
- When declared, the unrestricted retained earnings is transferred to the capital stock. The
public is not involved here because only the shareholders are entitled to dividends.
d. Any transfer involving 20 persons or less:
- Same threshold in banking; not an offering to the public
e. Brokers’ transactions:
- Because they do not do it for their own account. The corporations involved are the one
who are required to report the same.
f. Sale of securities to any of the following:
i. Banks
ii. Investment houses
iii. Other trusted entities

2. The secondary transactions are likewise required to be reported to the SEC.

- Who must comply with the reportorial requirements: all public companies as defined under the
SRC

- A public company is any of the following:

a. Any corporation where any class of its securities are covered by a registration statement
with the SEC (all with permits or license to sell)
b. All companies whose shares are listed in any exchange
c. Those which have assets of atleast P 50 million, with atleast 200 shareholders on record
owning atleast 100 shares in their names

- Philippine Veterans Bank v. SEC

- The reportorial requirements is applicable even if the entity is a GOCC with original charter.

- Union Bank v. SEC

- SC: whenever a bank issues its shares of stocks, it is now governed by the provisions of
SRC. Hence, all reportorial requirements shall be filed with the SEC and not only with the
BSP.

B. Stock Exchange
- Stock Exchange = public market for shares of stocks. Transactions here are secondary market
transactions since the issuer corporation is no longer involved. The parties here are existing holders
of the security in favor of buyers. This is still governed by the SRC.
- Secondary market transaction under the Corporation Code is acquiring shares of stocks of an
existing shareholder. This is done by indorsement coupled with delivery.

- Securities broker:

59
 - A person, whether natural or juridical, licensed to engage in the business of buying and selling
securities for the account of others (either buyer or seller).
- They are required to incorporate.
- And for them to enjoy the facilities of the Philippine Stock Exchange (PSE), they must be
members of the PSE, Inc.
- They do business through associated persons who must in themselves be licensed by the SEC.
- The associated persons are those who are authorized to trade in the name of the broker. They
must be individually licensed. Salesmen are not necessarily associated persons.

- The transactions in the PSE are uncertificated because there are no certificates of stocks which are
indorsed and delivered. The PSE follows a digital book entry system.

60
 CHAPTER II – Securities and Exchange Commission

I. Securities and Exchange Commission (SEC)

- SEC, as far as the Corporation Code is concerned, is the primary government agency that is tasked
in enforcing and implementation of the provisions of the Corporation Code
- SEC has exclusive power, authority and jurisdiction and supervision over all associations and
corporations as well as partnerships that are the grantees of a primary franchise

A. However, the SEC also grants secondary franchises to the following corporations:

1. All financing companies

- Both primary and secondary franchise of these companies come from SEC

- Financing Company: A company or entity engaged in the business of lending for agricultural,
consumer or similar loans
- Financing: A special arrangement whereby the purchase price of certain facilities or equipment
shall be advanced by the financing company payable on installment by the borrower – aside
from banks, all financing companies are required to comply with the Truth and Lending Act

- Financial Leasing Company: A specie of financing; under the jurisdiction of the SEC – This is a
company advances the purchase price of certain machineries or equipment for purposes of
agriculture, industrial or commercial purposes and the borrower is given one or two or more
options: Metrobank v. CA
a. To pay rental on a regular or periodic basis
- At the end of the period fixed in the contract, the machinery or equipment shall be returned
to the financing company
- It is an ordinary lease arrangement
- The repairs will be paid by the financing company and not the borrower
b. Traditional financing scheme
- The borrower shall pay the purchase price back at periodic installment
- At the end of the period fixed in their contract, ownership shall vest upon the borrower
- If the machineries are in need of repair in the course of the period of the contract, the repair
is paid by the borrower because it is the borrower’s asset

2. Investment Houses
- Under Investment House Act, these are entities engaged in business of underwriting securities
- Business of underwriting: Guaranteeing the sale of any class of securities within the Philippines

3. All Entities Engaged in Securities Transactions under the SRC

- This entities are:
a. Securities Dealers: Those who buy and sell securities for their own account
b. Securities Brokers: Those who buy and sell securities for the account of others
c. Clearing and Settlement Agencies: Those who effect payment as well as delivery of
securities including SS between buyers and sellers (SRC)
d. Third Party Custodian: Those who are entrusted with either the digital or physical certificates
of stocks needed in securities transactions effected through a stock exchange
- Example: Bought SS through the stock exchange but you bought them without any intent of
buying and selling them in the ordinary course of business – you want them as a long term
investment – you will not meet the seller instead a clearing and settlement agency will
register your name in the books of the corporation as the buyer and current owner of the
property and pursuant to SEC rules, a third party custodian will be in-charged of getting your
certificate of stock from company secretary and delivering it to you physically
e. Stock exchanges as well as all the SROs under the SRC
- Stock Exchange: A public market for buying and selling of SS
- Self-Regulatory Organization (SRO): This may pertain to stock or non-stock corporations
engaged in providing facilities for a stock exchange (Philippine Stock Incorporated in the
Philippines operates and administers the PSE)

II. Section 5 – Powers and Functions of the Commission

A. Issue Certificates of Incorporation

B. Suspend or Revoke Certificates of Incorporation

61
 - In revoking certificates of stocks the SEC has concurrent power with the special commercial courts
depending on the ground

C. Investigate Compliance or Violations by Companies of the Corporation Code and All other Special
Laws placed under its enforcement

D. Pursuant to its Investigatory Powers, it can Issue Sub Poena

- Both duces tecum and ad testificandum
- If the SEC finds that there is indeed violation, it can only impose administrative fines and sanctions
- SEC does not have prosecutorial powers

E. Policy-Making Body
- Most important power of the SEC
- SEC has the power to promulgate rules and regulations

III. Section 7 – Reorganization

- Looking at the provisions of RA 8799, it reorganized and restructured the Securities and Exchange
Commission from its former structure designed under PD 902-A
- RA 8799 did not completely repealed PD 902-A
- Although PD 902-A created the SEC, RA 8799, merely reorganized the SEC and part of such
organization under RA 8799 is to focus the function of the SEC into capital market development
and part on the focus of capital market development is to remove from the SEC its quasi-judicial
powers
- Thus, the various cases formerly cognizable by the SEC under Sec. 5 of PD 902-A have now been
transferred, pursuant to RA 8799, to the RTC – that is why instead of quasi-judicial, these are now
judicial controversies or cases

A. The following are various categories of cases covered by the so called transferred jurisdiction (Sec.
5, PD 902-A)
- Special Commercial Courts (SCC)
- SEC has no quasi-judicial powers they are now judicial and special jurisdiction was conferred under
RA 8799 to the SCC, which is a branch of the RTC
1. Devices or schemes amounting to fraud or misrepresentation committed by the corporation,
partnership or association, its directors or officers, SH or members or their agents and
associates
2. All cases involving intra-corporate relations
3. All cases arising out of hiring or termination as well as election or appointment of corporate
officers
4. All petitions for suspension of payments by corporations
- However, under Financial Rehabilitation and Insolvency Act (FRIA) – the 4th cognizable cases
cognizable under the SCC is not limited to suspension of payments but petitions under the FRIA
– petitions under the FRIA but applicable to corporate debtors

B. SCC has the Power to Hear and Decide all so-called Intra-Corporate Controversies
- It is an intra-corporate controversy when:
- While it may appear on its face that it is an ordinary civil action, if the 2-pronged test is
applicable then it is the RTC that should exercise jurisdiction as a special commercial court – it
does not belong to the general jurisdiction of the MTC or RTC – usual rules on jurisdiction shall
not apply for this category of cases – because, first and foremost, under the 2-pronged test,
plaintiff and defendant has an existing intra-corporate relationship
- In order to vest jurisdiction upon the SCC, that intra-corporate relationship must have been
present and existing at the time when the dispute or controversy arose between the parties
- There is an intra-corporate relationship when:

1. Relationship Test

a. Corporation vis-a-vis:

i. State/Republic/Public – with respect to its franchise

- To the State: A quo warranto petition for the revocation of the certificate of incorporation
– involuntary dissolution – this falls under the jurisdiction of the SCC

- To the Public: Special jurisdiction is necessary in instances when the corporation or its
agents are guilty of committing corporate fraud, devises of schemes amounting to fraud
or misrepresentation even if the victim of such fraud is a SH or one who is a complete
62
 stranger to the corporation – for as long as the complaint specifically avers fraud
committed by a duly registered corporation or any of its duly constituted agents or
officers, whether the plaintiff or complainant is a SH or a stranger – the SCC must
exercise jurisdiction – it is the corporate fraud itself that characterizes special jurisdiction
- At present, M Incorporated (pyramiding). They did not deliver the money they
promised. You tried to recover your capital but they cannot be found. You will now
file an action for recovery of money or property. But since the fraud was committed
against you by a duly registered corporation, it is the SCC that has jurisdiction.
- The amount involved in cases of corporate fraud is immaterial – always with the SCC

- Aleje v. Shape, Inc.

- Shape, Inc. is a duly registered non-stock, non-profit company. It is a sports,
physical fitness and recreational corporation. It operated a gymnasium equipped
with facilities for fitness. In order to support the expenses incurred by the
company for the operation of such, it required membership. It had a long list of
members who were required to pay an initial membership fee and regular
monthly dues from all the members. One of its members was elected as
treasurer of the company. While acting as treasurer, he used company money
and property to put up a branch in another part of the city. He also called this
branch Shape, Inc. That branch solicited and maintained its own members’ list –
they also paid initial membership dues and regular monthly dues. All profits and
income from this branch were not submitted to the main office instead he
misappropriated them. Upon knowing such, he was terminated as a member and
company treasurer but he continued operating said branch and opened another
branch. A case was filed against him for recovery of public funds and property.
- SC: This is an intra-corporate controversy despite the fact that the defendant is
no longer a member or a treasurer of the company. First, because of the
presence of intra-corporate relationship between the parties at the time the
controversy started – he was still a treasurer and a member. When he continued
such fraud, he used company property to entice unwitting members of the public
to become members of the same. He did not tell them that he was merely
operating on his own and that they are not formally members of the main
corporation. He perpetrated a fraud upon the public and he used the corporation
as a device to continue such fraud. This case belongs to the SCC.
- All civil actions for recovery of money and property or for specific performance for a
fraud committed by a company must be filed with the SCC.

- Example: Pyramiding scams - Fraud was perpetrated or continued by the

corporation or any of its known associate, then the action to redress the fraud is an
intra-corporate controversy

ii. SH or members
- Under the relationship test, to confer special jurisdiction upon the RTC, there must exist
an intra-corporate relationship at the time of the commission of the act complained of

- Stock Corporation: When does an intra-corporate relationship begin between the

corporation and a SH – how a SH becomes a member of capital stock – 3 ways:
1) By subscription
2) By purchasing re-issued treasury shares
3) By acquiring SS of an existing SH

- Case:
- The following subscription contract was executed between the corporation and
another. For 100 SS at 100/share coming form the capital stock of the company
payable through a potestative condition (“kapag ako’y nakapagpahuli na ng
isda”)
- SC: This contract is void because the obligation to pay the subscription price is
entirely dependent on the sole will of the debtor – whether or not she will caused
fish to be harvested is left entirely to her discretion and therefore it is a purely
potestative one and a potestative condition makes a contract void
- If this is decided today when the corporation now judicially demands the payment
of the SS – it is the regular court that has jurisdiction – there is no intra-corporate
relationship because the contract is void because of the potestative condition –
the contract was never perfected at all

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 - Example: 1,000 SS at 1,000 per subscription – under the subscription contract, the
entire balance shall be payable upon call by the BOD. A call was made but
subscriber refuses to pay. Corporation decided to file a judicial action for collection of
sum of money from the subscriber. Is there an intra-corporate relationship between
the corporation and the subscriber?
- None. Nothing was paid yet. The intra-corporate relationship has not yet begun.
- Intra-corporate relationship, for purposes of fixing the jurisdiction, it begins during
the name of the subscriber is entered in the stock and transfer book of the
corporation.
- If the subscriber’s name is not indicated in the stock and transfer book –
collection of sum of money must be filed before the regular courts – depending
on the amount

- Example: If the name of the subscriber has been entered in the stock and transfer
book and that the entire consideration has been paid. Upon full payment, the
subscriber can now demand for a certificate of stock. The corporate secretary
refuses to issue one. Subscriber who has paid in full filed a mandamus. Is this intra-
corporate or not?
- Yes. Certificate of stock is not material for the exercise of a subscriber of his right
as such for as long as he is already fully paid; it becomes a matter of right for the
subscriber to be issued a certificate of stock.

- Example: A certificate of stock was issued to X. X now sells the shares to Y. Valid
method to transfer this is indorsement + delivery. The agreement between X and Y is
that the purchase price shall be paid by Y in 2 installments. There was initial
payment by Y so X indorsed the same but does not deliver the same until the final
payment is given by Y. Y now pays the last installment but X still refuses to deliver
the certificate. Y now requests the corporate secretary to register the stocks in his
name but the corporate secretary refuses.
- This is under the jurisdiction of the regular court because Y is a complete
stranger. Under the Corporation Code, to bind the corporation, there must be
indorsement + delivery. Y’s remedy is against X

- Embassy Farms v. CA
- Agreement between X and Y is for the sale and transfer of the SS covered by a
certificate. X owns 90% of the outstanding controlling stock of the company. The
agreement is that X shall deliver the 90% plus several other parcels of land
belonging to X (not to the corporation) in favor of Y. It is also stipulated that Y
shall pay in installments. Once Y has paid the earnest money, he will be given
control of the business operated by the company. Y did not pay. X now files an
action to rescind their agreement on the ground of non-payment. Is there an
intra-corporate relationship?
- SC: None. The company here was improperly impleaded because the company
here is not privy to the contract between X and Y. As such, it is an ordinary
breach of contract case between the seller and buyer. The mere fact that the
buyer was given temporary control over the business does not make him a SH of
the corporation specially that he has not yet paid in full.

- Razon v. IAC
- Pursuant to their conditional sale, buyer must first pay in full the contract price
before the seller will indorse the certificate of stock. Upon down payment, the
unendorsed certificate will be delivered to the buyer as a token of trust between
them, but the seller will not yet indorse it. The buyer will merely have physical
possession of the certificate. Full payment was already made but seller refuses
to indorse. Buyer presents the certificate of stock to the corporate secretary. Is
there an intra-corporate relationship?
- SC: None. Transfer is binding upon the corporation if there is indorsement +
delivery. The transfer was never complete under the law. There is no prima facie
title over the certificate.

- Example: Indorsed in blank and physically delivered (no specific transferee)

- Effect: The certificate of stock is converted into a street certificate (whoever holds it
is presumed to have acquired title over the certificate; same with bearer instrument)

- Case: Transferee pays in full and transferee presents the certificate to the corporate
secretary. The secretary refused to register the transfer on the following grounds:
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 - Violates the right of first refusal of the secretary (private agreement between the
transferor and the corporate secretary);
- SC: Despite the private agreement between the transferor and the corporate
secretary, that agreement did not divest the transferor of the right to sell the shares.
The remedy of the secretary is to file a case against the transferor. He cannot refuse
the registration because there was already an indorsement and delivery. Since the
transfer is complete, registration becomes ministerial.

- Example: A (registered owner). B stole the certificate and forged the indorsement. B
presents it to the corporate secretary for registration. The secretary refused to register. B
filed a case. Is there an intracorporate relationship?
- None. He did not acquire title to the certificate. The case is not within the jurisdiction
of the commercial court.

- Example: B (the thief) indorses and delivers the certificate to C, an innocent purchaser
for value. C presents the certificate to the secretary. The secretary refuses to register. C
appealed to the Board. The Board upheld the denial. C filed a mandamus case. Is there
an intracorporate relationship?
- None. C never became the owner of the shares because the certificate originated
from one who has no authority over the same.

- How to end the intra-corporate relationship? (here, the commercial court losses
jurisdiction over the case)

- Spouses Turner v. Lorenzo Shipping

- Here, the corporation refuses to pay the shareholders because of the absence of
unrestricted retained earnings. When Lorenzo Shipping realizes unrestricted retained
earnings, the spouses filed a civil action for collection.

- Is there still an intra-corporarte relationship? When does the intra-corporate relationship

between the dissenting stockholder and the corporation end?
- From the time that the certificate of the dissenting stockholder are cancelled in the
stock and transfer books.

iii. Directors/Trustees/Officers/Corporate Agents

- Dismissal of the corporate officers – If the controversy revolves around the legality of the
dismissal, the intra-corporate relationship remains until the final determination by the
court. The case is still cognizable by the special commercial courts.
- As corporate officers, they are entitled to security of tenure.

- Who are corporate officers?

1. Those whose positions are provided for by law (President, Secretary, Treasurer, and
the members of the Board);
2. Those created by the AOI of BL

- PSBA v. SEC
- During the stockholders meeting, elections were also conducted. After the election,
the Board immediately assumed office. As their first act, they declared all other
management positions in the corporation as vacant (termination). Hence, a case for
illegal dismissal was filed by the vice – president whose position was affected by the
said declaration.
- SC: Even if the position is not the AOI or BL of the corporation, there still remains an
intra-corporate relationship because by way of further allegations in his complaint, he
alleged that he was appointed as the Vice-President on the condition that he is a
stockholder. Meaning, for as long as stockholders are qualified to a particular
position, the Board would give preference to those inside the company. Aside from
that, his complaint also alleged that his position was declared vacant by an illegal act
of the Board because the meeting was without notice (illegal meeting). Hence, he
has the right to maintain an action against the Board. (Filing the case as a
stockholder)

b. SH or members among themselves

2. Nature of the Controversy Test

- After satisfying the relationship test, prove now that the nature of the controversy requires the
exercise of such special jurisdiction. Because even if there is an intra-corporate relationship
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 between the parties, if such relationship is merely incidental to the controversy, it is not an intra-
corporate controversy.

- Would the case survive in the special commercial court without the intra-corporate relationship?
- If no, it is not an intra-corporate controversy. If yes, it is.
- To make it an intra-corporate controversy the cause of action must pertain to the
enforcement of rights and obligations under the Corporation Code, and or the AOI or BL of
the corporation. If the cause of action is different, then regular courts have jurisdiction.

- Perrera v. IAC (nature of the controversy test)

- The corporation owned a building where it had its main office. One floor of the building is
used by the corporation as the employees’ canteen. The canteen is operated by a canteen
concessionaire who is a stockholder of the corporation. The concessionaire shall pay
regular rents and a portion of the sale. When there was failure to regularly pay the rent, a
notice to terminate and a notice to vacate was given by the corporation. The corporation
filed a case for collection of sum of money with a prayer to vacate. The concessionaire
questions the jurisdiction of the regular court raising that being a stockholder of the
corporation, then the matter should be resolve before a commercial court.
- SC: The intra-corporate relationship here is merely incidental to the issue. Hence, the
regular court has jurisdiction over the case. What belongs to the nature of the controversy
test as to make it an intra-corporate controversy is a derivative suit.

- Example of intra-corporate controversies:

1. Action to collect balance under a subscription contract;
2. Mandamus to compel the issuance of a certificate for fully paid shares;
3. To register the transfer when the right of the transferee is not in doubt;
4. Mandamus to compel the corporation to declare dividends = this happens when the
corporation has accumulated surplus profits in excess of its subscribed capital stock;
5. Petition to conduct an election

- If the two tests concur, then definitely, it shall be the special commercial courts that shall take
cognizance of the case.

- Ang Co v. NLRC
- He is a stockholder of a corporation but still has a pending subscription balance (balance is
payable upon call). He was chosen as a director and president of the Corporation. He later
resigned as President. He demanded that the corporation pay him his salaries and other money
claims. The corporation ignored said demand. He then filed a money claim with the NLRC.
Does the NLRC have jurisdiction?
- If a corporate officer is not questioning his dismissal and all he is questioning is his entitlement
to his money claims, then it should be the NLRC which has jurisdiction.
- Answer if the corporation = that the corporation refuses to pay his claim because the same was
applied to his pending subscription balance. As such, NLRC dismissed the case. The matter is
an intra-corporate controversy. As such, the matter was brought to the commercial court which
however dismissed the case on the ground that since the NLRC has already acquired
jurisdiction, then it should continue hearing the case. When the matter was brought back to the
NLRC, NLRC dismissed it again. Hence, the case was brought to the SC.
- SC: The answer effectively converted the matter into an intra-corporate controversy because
there is a need to determine the validity of the set-off alleged by the corporation. The fact that
he resigned as president did not terminate his relationship with the corporation as a stockholder.
The trial court should have heard the case.

- Sunset View v. Campos

- He bought a condominium unit and pursuant to the contract to sell, he paid a part of the
purchase price and the remainder is payable by monthly installment. Even if there is yet no full
payment, the possession of the condominium was already given to him. Part of the obligation is
the payment of monthly dues. Non-payment thereof for 6 months will entitle the seller to file an
action for ejectment against the buyer. When the buyer defaulted in the payment of the monthly
dues, an action for ejectment was filed with the MTC. The defendant questions the jurisdiction
of the MTC on the ground that having purchased a condominium unit, he automatically
becomes a member of the condominium corporation (to administer the common areas). As
such, the case should be filed with the commercial court.
- SC: The SC did an investigation to determine whether there is a stipulation in the contract to sell
as well as in the master or enabling deed that in fact automatically confers membership in the
corporation in favor of every buyer. There was none. Hence, there is a need to look into the
provision of the Condominium Act. And under the Condominium Act, a buyer becomes a
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 shareholder of the corporation only upon full payment of the purchase price. As such, MTC
retains jurisdiction.

- QPB+7, Inc. v. Aguirre

- The corporation was formed to operate an agri-business. It bought a parcel of land for the said
business. However, after that, the corporation becomes inactive. No meeting and election was
held. The initial set of directors and officers remain the same. Until Aguirre discovered recently
that election was being conducted without him being informed. He went to the SEC and learned
that for the past three years, elections and meetings were in fact held. He did not receive any
notice for these meetings. None of the elected directors and officers was known to him. He also
discovered that the land which was in the name of the corporation was in the possession of the
persons whom he calls impostors. He then filed a petition before the trial court for accounting,
recovery of the property, and nullification of the contract, elections, and meetings. The petition is
in the nature of a personal suit to protect his right and a derivative suit. The impostors moved to
dismiss on the ground that the special commercial court has no jurisdiction over the case
because at the time of the filing of the case, the corporation has already been dissolved by
order of the SEC for failure to comply with the reportorial requirements.
- SC: The dissolution of the corporation does not extinguish the intra-corporate relationship
between and among the parties. It is only upon final liquidation of a corporation that the
relationship dies.

- The derivative suit (action for accounting of corporate funds and property as well as nullification of
certain contracts) is actually a suit inherent/intrinsic in the liquidation process. There is necessity, in
liquidation, to gather all assets to pay off all creditors.

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 CHAPTER VII – Prohibition on Fraud, Manipulation and Insider Trading
ITMFS

I. Insider Trading
- Criminalization or prohibition of insider trading
- There is insider trading whenever insiders buy or sell securities while in possession of material non-
public information

A. Insiders refer to:

1. Issuer of shares of stocks

2. Directors or officers of the issuer when by virtue of their position they come into possession of
information which are not generally available to the public
- See: Section 31 and 34 of the Corporation Code

3. Any person who by virtue of said relationship or past relationship has access to material and
non-public information

4. Officers or employees of:

a. Government agencies (e.g. SEC)
b. Clearing agencies (these are entities engaged in the business of delivering securities for
settlement or payment)
c. Stock exchanges
d. Or other similar self-regulatory organizations that may have access to material non-public
information
e. Constructive insider: Any person who obtains material non-public information from any of the
above and this may include but is not limited to:
i. Spouse (legitimate or common law)
ii. ii. Relatives up to the 4th degree of consanguinity or affinity

B. Material information
- Any information that will affect or likely to affect the price of the security on being made public. This
refers to objective facts such as:
1. Any propose or plan merger of consolidation;
2. Infusion of new capital;
3. Increase or decrease in the capitalization;
4. Losses or profits in the operation of its business;
5. Election of officers or directors
6. In the case of companies engaged in wasting assets, discovery of new mines or minerals
7. Other similar information

- Under the SRC, all material information are required to be covered by a disclosure statement filed
with the SEC and publish in a newspaper of general circulation in the Philippines.

- The disclosure statement under the SRC is different from that of the Truth and Lending Act.

- Disclosure statement is also required for facts of special significance: These are facts that a
reasonably prudent person would consider important in making an investment decision (to buy, to
sell, or to hold on to those shares)
- Example: Apple Company (Steve Jobs)

- Strong v. Rapide
- The respondent here is the President of the company. He was appointed by the company to
negotiate with the Republic of the Philippines. The Philippine government offered to buy all the
lands belonging to the company. As a negotiator, he knew that the government is very willing to
buy the lands which would actually have a positive effect on the company as the market price of
the shares will eventually increase upon consummation of the contract. He then instructed his
brokers to buy shares of stocks of the existing shareholders of his company and not to his
disclose his identity to the sellers. After the contract, Rapide owned 80% of the shares.
- SC: Rapide is guilty of insider trading.

C. Defenses for insider trading:

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 1. That the material non-public information was not known to the insider at the time of the
transaction;
2. That the insider disclose the material non-public information to the other party; or
3. That the insider had reason to believe that the other party to the transaction also knew of the
material non-public information

- Insider trading warrants the imposition of imprisonment of 7 to 21 years or a fine of not more than P
1 million, but civilly, triple the amount of the transaction.
- Correlate with the duties of the officers and directors of the corporation not to take advantage of
information which come into their knowledge by reason of their position.

II. Tender Offer

- A tender made by a person or a group of persons acting in concert with one another to acquire the
controlling stockholdings or equity in a public company.
- It is one means by which a person (either a stockholder or third person) may gain control over the
management of the company by purchasing the OCS within the company.
- A tender offer may either be voluntary or mandatory.

A. Voluntary
- May be made at any time and for any reason

B. Mandatory

- Made in the following instances:

1. Whenever a person or a group of persons acquire in a single transaction atleast 15% of the
outstanding controlling equity in a company. If they acquired 30% (may be in a series of
transactions) over a 12 -month period, this is known as a creeping transaction.
2. Acquires more than 50%, whether in a single or a series of transactions regardless of the stand
of the company

- Current Rules on Mandatory Tender Offer: (pursuant to the rule-making power of the SEC)

- If a person or group of persons acquires in a single or series of transaction atleast 15% of the
outstanding equities in public company, then a declaration shall be filed with the SEC. the
declaration is tantamount to disclosure. The declaration, however, will not yet trigger a
mandatory tender offer.

- When is mandatory tender offer triggered? = When a person or group of persons actually
acquire atleast 35% of the outstanding voting equities in the company or acquires such
percentage of the outstanding voting stock as would influence and control the company. (Even
below 35% for as long as it translates to control)

- Example: Coca – Cola Company sought to buy a controlling interest in Cosmos Bottling (under
a Concepcion group of companies) without need of entering into a formal merger. Both of their
stocks are listed in the stock exchange; hence, both are public companies. Offer of Coca – cola
is to buy the shares at market price. The Concepcion family refused. Coca – cola made another
offer at P 5 per share. Again, it was refused. Next offer was P 20 above market price. The final
price was around P 70. This offer was accepted. (320 million shares were then bought by Coca
– cola). Thereafter, the members of the Concepcion family were removed in the Board since
they were no longer shareholders of Cosmos. Coca – cola then placed its own directors in the
Board without the necessity of calling for a meeting.

- The aim of the mandatory tender offer is to afford the minority stockholders of the public
company an equal opportunity to withdrawal under the same terms and conditions and for the
same price as the controlling shareholders

- A tender offer is not an unlimited tender offer. The acquirer can fix the time within which the
tender offer may be exercise by the minority shareholders. The customary period is 30 days.
When the tender offer is mandatory, it must be publish once a week for three consecutive
weeks in a newspaper of general circulation before the offer period begins.

- Before the CEMCO v. National life, the interpretation of the mandatory tender offer is limited to
direct acquisition.

- CEMCO v. National Life

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 - CEMCO is a stockholder of Union Cement (UC). It owns 30% OCS. The controlling state in
UC is held by UCHC. UCHC is owned by Atlas (21%), Bacnotan (30%), and CEMCO (9%).
CEMCO is both a direct and an indirect stockholder of UC. After a series of transactions,
both Atlas and Bacnotan sold their shares in UCHC in favor of CEMCO. Hence, CEMCO
now owns 60% of UCHC. National Life is a minority and direct stockholder of UC. It
demanded that CEMCO make a mandatory tender offer under the SRC.
- SC: A mandatory tender offer covers both direct and indirect acquisitions in the absence of
any provision under the SRC as to how control is gained in one company.

- If the mandatory tender offer is violated, the SEC will not approve the acquisition by the acquirer
and it has the power to invalidate it. This is to protect the minority shareholders.

III. Margin Trading

- Margin trading is highly regulated
- Margin trading is buying and/or selling shares of stocks on margin, meaning, on credit furnish by the
broker to the customer or investor.

- Example: X = investor and customer of broker A; he places an order of 1 million shares from Pogi,
Inc.. Usually, he must already pay the same. P 10 per share. Hence, pay 10 million. But X only has
P 1 million. X predicted that the amount of the shares will double the following year.

- Broker A can open a margin account for X (this must consist of a margin and debit balance = credit
advance or lent by the broker for the customer). Margin is the amount of cash deposited by the
customer to the broker to effect the transaction. This is a collateralized loan, the shares being the
collateral.

- Brokers earn by commission.

- The following year, the prediction of X came true. The shares are now at P 20 per share. X can then
get P 20 million from the sale of said shares.

- As a whole, he makes a profit of 10 million (20 million – 9 million loan – 1 million initial investment)

- If the prediction however proves to be wrong, then cut the losses by selling all shares
- The regulation of the margin trading is to protect the credit and banking system.

A. How is margin trading regulated:

- By prescribing maximum or ceiling to the lending or credit provided by the broker to the customer
(not the margin deposit)

- Maximum: The debit balance or credit cannot exceed 65% of the current market price of the
security (based on the trading price at the stock exchange) or 100% of the lowest market price over
the last 36 months but not more than 75% of current market price, whichever is higher

- Example: P 10 per share at trading price = 10 million for 1 million shares = can only lend P 6.5

- Example: In the last 36 months, the lowest market price of Pogi shares is P 2.00 per share. = only 2
million can be lent

- Between the two examples, the lending can be up to P 6.5.

B. If no deposit can be furnish, then the following are the options:

1. Reduce the volume of the transaction; or
2. Not execute the transaction at all

IV. Fraudulent Transactions and Manipulations of Security Prices

- There are various ways by which market manipulation may be committed
- The persons interested in performing market manipulation are either:
1. Those who have existing shares that they want to unload or sell off at a higher price; or
2. Those want to acquire more

A. Various Forms of Manipulation of Security Prices

1. By giving the false appearance of active trading of security

- Refers to dormant equities or SS

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- It might trigger manipulation when suddenly there is someone who bought in bulk a previously
inactive SS

2. By artificially increasing the price in order to effect a purchase thereof; or artificially decreasing
the price in order to effect a sale thereof

3. By disseminating or stipulating false information regarding the security

- Example: BW Resources Case

- It has its SS listed in the Philippines Stock Exchange (PSE) but for along time its shares
were dormant – meaning the existing SH even of they wanted to sell cannot sell because no
one was willing to buy. However, BW Resources was a company headed by the best friend
of then Pres. Estrada – Dante Tan. Dante Tan was able to make known publicly that he was
a close friend of the Pres. Estrada. To give the appearance of active trading over BW
Resources shares, he went on public relations campaign so that slowly his company will be
known. Dante Tan made the following press release: (1) BW Resources has applied a
gaming license with PAGCOR; (2) He is applying the first online gambling franchise in favor
of BW Resources; (3) He will go into gambling partnership with Stanley Ho; (4) Stanley Ho
will invest in a joint venture with Dante Tan not on land-based casinos but on floating
casinos; (5) Stanley Ho came into the Philippines and they went to Malacañang. From 1.00
per share, BW Resources’ shares went up to 140.00 per share. When Stanley Ho went bank
to Macau, he announced that he has no plans in investing in the Philippines. At this point,
BW Resources’ shares steeply went down.

4. Wash Sales
- Period is 60 days (under Tax Code)
- Under SRC, a wash sale involves a transaction or series of transactions involving the same
security of the same size or volume without a change in the beneficial ownership

- Example:

Time Broker Broker Price

(All on A B
the
same
day)
9:15 Sell 10.00
9:30 Buy 12.00
Investor X
Owner of 10:00 Sell 15.00
1M shares 10:30 Buy 20.00
of Pogi,
Inc. 11:00 Sell 22.00
11:30 Buy 30.00
- The seller is X and the buyer is also X. There is no change in the ownership. This is illegal.
The purpose here is to artificially increase or decrease – it is artificial because share prices
must be market driven – it depends on legitimate demand or supply. Here there is no
legitimate demand.

5. Illegal Match Order

6. Painting the Tape

- If the wash sale also has the result of an artificial price, whether increase or decrease, the
manipulation of the security price during the trading day
- At the time that there was a piece of paper generated by the machine, they erase to place the
artificial price and this will become known to other brokerage houses and announce to their own
customers – no legitimate demand

7. Marking the Close

- Manipulating the security prices at the end of the trading day
- Ends a few minutes before 12 noon in the PSE ends
- The last price at the end of the trading day will be the opening price the following day – either to
make it lower so that they can buy more or to make it higher so that they can sell more

8. Hype and Dump

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 - This is part of the strategy to give the false appearance of active trading in dormant security –
make a press release – circulate false information regarding the security just so you can
generate activity
- When you hype, there is a tendency that people will buy more and increase the price – it
because there is a limited supply, when you reach the level that you are comfortable with, this is
the time you dump the market with the shares – there is now an over supply making the prices
decrease

9. Squeezing the Float

- Float means the availability to the public
- When you hold, you stifle the supply side while the demand side is increasing – the tendency is
to increase the price
- The existing SH has the capacity to squeeze the float

10. Daisy Chain

- Series of wash sales

11. Boiler Room Operations

- This is a form of aggressive marketing of securities usually employing fraudulent promises to
lure investors – like using scare tactics

V. Short Sale/Short Order

- When you short a security, it means that you are selling the security which does not belong to you –
meaning the security is borrowed by the investor without knowledge of the true owner
- This contradict the fundamental rule in securities transaction that you buy low so that you can sell
high – in this case the investor buys high and then sells low
- This is usually done in conspiracy with brokers – because they hold in their custody the securities
purchased by their customers until such time that the loan is fully paid
- Example: X studied that Pogi, Inc. shares will go down. He borrowed Pogi shares from Broker A
which is owned by Y who is abroad. Y did margin trading and so his shares are in the custody if A.
X sells the 1M shares of Y for 25M. After 6 months, it went down to 15.00 from 25.00. This is the
time that he will purchase again for 15M only. He gained 10M from shares he does not own.
- What if his prediction is wrong – there will be a lost and the likelihood is that the security will no
longer be returned and an innocent 3rd person will be prejudiced

- The only agency that can investigate or make formal inquiries regarding such violation is the SEC
and it can invoke all of its powers in order to determine violations and impose administrative
sanction is whenever necessary
- All civil or criminal prosecutions involving violations of the SRC must come from an investigation
coming from the SEC
- Nonetheless, when a person or group of persons, natural or juridical, broker, dealers or investors,
are the subject of an inquiry by the SEC, they may stop said investigation by making a so-called
settlement offer to the SEC

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 CHAPTER XIII – General Provisions

I. Settlement Offer
- It is a combination of a consent decree and nolo contendere plea

- Consent decree: Usually in administrative investigations conducted by the federal commission in

the US if a person is found to be guilty of wrongdoing, such person may enter into such – I agree or
consent to any judgment being impose upon me (summary judgment) – this is not admission on
liability you just want to do away with litigation
- Nolo Contendere: This is used in criminal cases; neither a guilty or not guilty plea; to avoid negative
publicity brought about by long trials – I will not contend or contest – also not an admission of
criminal guilt

- Under settlement offer, the person under investigation may make an offer to the SEC which may
include a promise not to commit similar acts in the future as well as payment of a sum of money to
SEC
- The sum of money is not in the nature of a fine
- When settlement offer is received by the SEC the SEC must desire to meet based on the following:
1. Timing – if you make a settlement offer too late in the course of investigation and a decision is
about to be reached, SEC will accept it
2. Public Interest – If there is no material interest in the public confidence in the stock market
caused by said wrongdoing, the SEC may accept the settlement offer

- If settlement offer was accepted by the SEC, SEC must publish it and in the absence of any
objection, the SEC will conform said offer biding upon the offeror – so the offeror now must comply
with whatever is stipulated and then pay sum of money to SEC
- The acceptance of the settlement offer will stop the inquiry by SEC
- The money paid by the offeror to the SEC becomes public and not money to be paid to the victim

- Whether acceptance of the SEC of the settlement offer is tantamount to dismissal of criminal cases
– not yet settled by any jurisprudence – Ma’am Lulu: No – what evidence will you have, all the
records are with the SEC – under seal against the public – it takes a court order to unseal

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Financial Rehabilitation
and
Insolvency Act of 2010

FRIA

(RA No. 10142)

74
 Table of Contents
CHAPTER I – General Provisions..................................................................................................64
I. FRIA.................................................................................................................................... 64
II. Old Insolvency Law: Remedies for individual and corporate debtors.................................64
III. Remedies of Corporate Debtors under the FRIA:.............................................................64
IV. Corporate debtors under FRIA:.........................................................................................64
V. Since corporations exist for profit or gain, the operation of their business may be beset by
internal or external problems.....................................................................................................64
CHAPTER II – Court-Supervised Rehabilitation...........................................................................65
Remedies of Corporate Debtors................................................................................................65
I. Petition for Corporate Rehabilitation....................................................................................65
II. Petition for Approval of Pre-Negotiated Rehabilitation Plan...............................................70
III. Petition for Assistance in Out of Court/Informal Restructuring Agreement (OCRA)...........70
IV. Petition for Liquidation.......................................................................................................71

75
 CHAPTER I – General Provisions

I. FRIA
- It completely repealed the old insolvency act, which came into force in the Philippines in 1902.

II. Old Insolvency Law: Remedies for individual and corporate debtors
1. Filing of a petition for suspension of payments (a.k.a. technical insolvency) = allowed only if the
debtor has sufficient assets to cover all the liabilities but cannot pay the obligations as they fall
due because of lack of liquidity; the objective here is to defer and to re-schedule payments
2. Filing a petition for insolvency = the objective of insolvency is to effect a pro-rata distribution of
the assets of the debtor and to comply with the preferences and concurrences of credit under
the NCC

- In either petition, it shall be filed with the RTC of the place where the debtor resides.

III. Remedies of Corporate Debtors under the FRIA:

A. Petition for Corporate Rehabilitation

1. Voluntary
2. Involuntary

B. Petition for approval of a Pre-Negotiated Rehabilitation Plan

C. Petitions for OCRA

D. Petition for Liquidation

1. Voluntary
2. Involuntary

IV. Corporate debtors under FRIA:

A. Juridical Debtors
- Partnerships, corporations, associations duly registered with the SEC and even sole proprietorships
which are franchised by their respective LGUs and duly recorded in the DTI

B. Individual Persons
- Natural persons who operate business in their own name

V. Since corporations exist for profit or gain, the operation of their business may be beset by
internal or external problems.

A. Internal problems include:

1. Mismanagement
2. Inability to expand its operations or market based

B. External problems include:

1. Political events;
2. Radical adjustments as to the foreign currency of value of goods and services

- General notion: An uncompetitive enterprise shall be removed in the market place.

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 CHAPTER II – Court-Supervised Rehabilitation

Remedies of Corporate Debtors

I. Petition for Corporate Rehabilitation

- The objective here under the old SEC Rules is to prevent a closure of the business of the
corporation whole it is undertaking means and method to address it financial difficulties.
- RA 8799: Petition for corporate rehabilitation is now under the jurisdiction of special commercial
court
- The petition is by law a proceeding in rem.
- Rehabilitation refers to the restoration of financial solvency and economic viability of a corporation
where there is reasonable hope or expectation that its creditors will recover more by continuing the
business rather than liquidating or dissolving it. The corporation remains open for business despite
the pendency of the petition in court.

A. Two Kinds:

1. Voluntary
- This is a debtor-initiated petition.
- It is the financially distressed corporation itself that is filing the petition.

- Who is a debtor?
- Any of the juridical entities.
- But for purposes of corporate rehabilitation, it may include a group of companies who are
affiliated with one another.
- If it can be shown that the financial difficulties of one of the member group shall affect the
other companies within the same group, then the petition may cover all of them even those
who are not suffering from financial difficulties Because it may happen that the close
affiliation of these companies may pertain to certain commonality of ownership in the assets.

- The petition shall be approved by majority of the Board and 2/3 OCS.

- It must be alleged in the petition that the corporation is suffering from insolvency and that it
consistently failed to answer for its outstanding obligations as they fall due.

- The petition itself must already be accompanied by:

a. A draft or proposed rehabilitation plan with a list of nominees for appointment as receiver;
b. Financial statement;
c. Tax clearances from the BIR and BoC; and
d. All other annexes that are considered part and parcel of the petition

2. Involuntary
- Creditor-initiated petition

- To vest legal personality to file the petition, the following must be alleged and proved:

1. The creditors or group of creditors hold at least 1 million worth of liabilities or claims against
the corporation; or That their aggregate claims is equivalent to at least 25% of the
subscribed capital stock of the corporation, whichever is higher (non-compliance of this
requirement shall cause the dismissal of the case because the petitioner is devoid of any
right to initiate the proceeding)

- Example: SCS of the corporation is valued at 100 million representing 10 million shares
(25% of that is 25 million)
- Creditors X, Y, and Z = combined claim of 30 million, then X, Y, and Z can already file
the petition for corporate rehabilitation.

2. It must likewise be alleged that there is no substantial issue in fact regarding the outstanding
liabilities of the corporation;

3. That the corporation is remiss in paying its obligations to various creditors at least 60 days
prior to the petition; and

4. That another creditor/s not the petitioners have initiated foreclosure proceedings or about to
perfect a lien over the assets of the debtor.
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- Between ordinary and unsecured creditors and preferred and secured creditors, the former will
ordinarily file a petition for corporate rehabilitation.

- Once the petition has been filed in court, the court must immediately make an ex-parte
determination as to whether the petition is sufficient in form and in substance.
- If it sufficient in form and in substance, it must now issue a commencement order.
- On the other hand, if it finds that the petition is deficient either in form or in substance, then the
court can simply issue a corrective order to be addressed to the petitioner specifying the
rectifications to be made to the petition. It will require an amended petition.

- One common ground for a corrective order is the failure to attach a rehabilitation plan in the
petition.

B. Rehabilitation Plan
- This is a detailed plan specifying the various methods by which the rehabilitation or restoration of
financial viability of the corporation may be achieved.
- It must be based on logical assumptions as to how profit may be obtained to address the condition
of the corporation and to eliminate or reduce its current debts.

- It may include the following mechanisms or modes:

1. Debt restructuring agreement

- Form of objective novation; can reduce the debt or the interest or imposing a different rate of
interest, etc.

2. Debt condonation
- Gratuitous abandonment of the debt. It may pertain to accrued penalties and interest or
principal, or both

3. Debt for equity swap

- Dacion en pago; special form of payment whereby the monetary debts of the corporation is paid
by way of its own shares of stocks delivered to the creditors. Make the creditors as
shareholders.

4. Corporate restructuring or reorganization

- Example: lose some branches, eliminate non-profitable business, minimize the number of
corporate managers, retrenchment of employees, sale of all or some of the assets no longer
needed for the business, sale of the business or parts of the business, or proposal for the
infusion of new capital

5. White knight
- Infusion of new capital
- An entirely new entity or individual may express interest in bringing in new money to the
corporation in exchange for shares of stocks; a professional investor.
- The money is not necessarily from the white knight. Usually it is from investment baking
(consortium of lenders).
- The infusion of capital may also come from existing shareholders.

Voluntary Petition

In re: The Petition for Corporate

Rehabilitation of Pogi, Inc.

Pogi, Inc.,
Petitioner

Involuntary Petition

In re:
____________________________________

Creditors X, Y, and Z,
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 Petitioners

v.

Pogi, Inc.,
Defendant

C. Commencement Order
- Deemed effective from the date of issue.
- This is required to be publish is a newspaper of general and national circulation in the Philippines
once a week for two consecutive weeks after its issuance.
- Without the publication, the proceedings cannot commence formally to trial.

- The order must contain, among others, the following:

1. Set the case for initial hearing with a statement that all creditors of the debtor corporation must
file verified claims with the court at least 5 days before the said hearing.
- As a summary proceeding, the notice by publication vest jurisdiction upon the rehabilitation or
special commercial court not just jurisdiction upon the matter but also jurisdiction over all
persons.
- Should there be any creditor holding at least 10% of the total liabilities of the corporation, that
creditor is entitled to separate notice as a matter of right (separate summons). If the creditor is
not furnished with any notice, he can contest any matter taken up during the proceeding.

2. Declaration or pronouncement that the corporation is now under rehabilitation.

- Thus, such judicial pronouncement affects the legal capacity of the debtor corporation because
it can no longer freely enter into transactions.
- The commencement order serves as a valid and legal basis to declare null and void all
unauthorized or voluntary unilateral actions or acts made by the debtor from the moment that
the proceeding started. It is under court supervision.

3. Appoint a rehabilitation receiver.

- This may be a natural or juridical entity with known skills and expertise in the industry where the
business of the corporation is engaged in, whose character is beyond reproach and is not
suffering from a conflict of interest.
- The rehabilitation receiver is the extension of the court, hence, considered as an officer of the
court whose duty is to balance the competing interest of the creditors and debtor.

- The rehabilitation is suffering from a conflict of interest if:

1. He or she is the owner of the business; or
2. Shareholder of the corporation; or
3. One of the corporation’s creditors; or
4. Had such relationship with the debtor within 5 years prior to the filing of the petition; or
5. Relative by affinity or consanguinity of any of the above within the 4th degree;
6. In case of juridical entity, it must not be an underwriter of the securities of the debtor or its
creditors

D. Receiver
- The receiver must be capable of the exercise of independent judgment in order to prevent
allegations of fraud or partiality. He must not be in a position as to be materially influenced by either
party.
- There must be an investigation by the court to determine whether or not the nominees for
rehabilitation receiver are suffering from any of the disqualifications under the FRIA.

- The one who qualifies and is willing shall be appointed by the court as the receiver. Mere
appointment does not automatically vest powers upon the appointee because he is still required to
take an oath.

- The receiver has a series of positive legal duties under the FRIA, like:

1. Filing an initial report that would serve as a basis whether or not the rehabilitations court can
give due course or dismiss the petition. The report is due 20 days from the initial hearing.

2. To meet with creditors. At least one meeting for each class of the creditors to obtain the
approval of the creditors to any propose rehabilitation plan.

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 3. The most important duty of the receiver is to draft and finalize the rehabilitation plan so that it
may be approved by the creditors and confirmed by the court. Finalization of the rehabilitation
plan is by the receiver, approval thereof is by the creditors, and confirmation of the plan is by
the court.
- Once approved and confirmed, the plan must now be implemented. The plan is legally binding
upon all involved whether or not consented to by all.

4. The receiver shall ensure that the duly approved plan is properly implemented. Nonetheless,
the receiver will not directly manage or operate the business of the corporation because the
corporation still has its Board of Directors. The receiver, however, has the power to review the
action of the Board and recommend nullification or annulment of any transaction entered into by
the Board that would obstruct, delay or violate the rehabilitation plan.

- The receiver is entitled to compensation from the moment of assumption to the office. He is also
allowed to engage the services of professionals to assist the court in the proceedings (akin to
that of trial by commissioners).

- From the moment of appointment, all the assets of the corporation will be placed under custodia
legis and under trust by the receiver (fiduciary).

5. Prohibition imposed upon all suppliers of goods and services to the debtor from withholding or
stopping said supplies and delivery. This is because the corporation is still open for business.

6. Authorize the payment of administrative expenses (expenses incurred in the filing and
continuation of the court proceedings, expenses requiring payment incurred in the course of
business as well as professional fees of the receiver and the professionals engaged by the
receiver)

7. Stay or suspension order = equivalent to an injunction or restraining order.

- This covers the following:
a. All actions whether judicial or otherwise for the enforcement of claims against the debtor.
- A claim is a demand for money or otherwise against the debtor or its property whether
liquidated or unliquidated, fixed or contingent, matured or unmatured, including claims
against the corporation by the Republic of the Philippines for taxes, tariffs, customs fees
or duties.

- Conserve all present assets of the debtor for the benefit of all creditors and to prevent any of them
from taking said assets to the detriment of the others.

- The rehabilitation court shall notify the other courts (taking cognizance of cases involving the
debtor) regarding the rehabilitation proceeding. The petitioner (voluntary or involuntary petition) has
the duty to inform the rehabilitation court of the pendency of such cases. The parties involved in the
pending case/s shall file their respective claims in the rehabilitation court (consolidation of all claims
in one proceeding).

- The suspension of all actions has several exceptions like – not covered by suspension order:

1. Actions that are already pending before the SC;

2. All other actions pending against sureties (personal liability) of the debtors or those solidarily
liable with the debtor;

3. Actions against issuers of letters of credit;

- They are usually banks
- The other party here is the debtor – the debtor of credit is for payment of goods that are usually
imported abroad and those goods are necessary for the rehabilitation process – to maintain the
business of the corporation as an ongoing concern – that is why those are not stopped

4. Criminal Cases against the Directors, SH, Officers of the Debtor

- Panlilios v. CA
- Fanillo, et. al. are accused for violation of the SSS Law for non-remittance of SSS
contributions of both employees and employer. They are members of the BOD and Officers
of Puerto Azul Land Inc. It was discovered that over 10 years the employer and employee
contribution to the SSS were never remitted. While the criminal case was already pending,
Puerto Azul underwent rehabilitation. The Panlilios sought the outright dismissal of the
criminal cases against them citing that since there is now corporate rehabilitation ongoing,
80
 then the corporate rehabilitation proceedings pose a prejudicial question to their criminal
liability because the reason why they did not remit the contributions is that the corporation
did not have cash.
- SC: There is no prejudicial question because the mere fact that they deducted from the
salaries of their employees and the fact that they are registered with the SSS means that
they have the mandatory obligation, regardless of the financial condition of the corporation,
to remit said contributions.

5. Civil Cases initiated by the Debtor

- They may be allowed by the court
- The suspension is only over all actions for enforcement of claims against the debtor corporation
– so where the corporation is the defendant – but if it is the debtor who is the plaintiff at the
discretion of the rehabilitation court, it may be exempt form the coverage of the suspension
order

6. All other cases pending before highly specialized administrative or quasi-judicial tribunals
- At the discretion of the rehabilitation court
- If the rehabilitation court finds that these specialized administrative or quasi-judicial bodies can
resolve the claim more fairly, expeditiously, then the rehabilitation court can yield its authority –
this constitutes as a waiver on the part of the rehabilitation court for highly specialized courts
such as the Insurance Commission (dispute involving an insurance policy or claim by the
debtor) – rehabilitation court can waive its jurisdiction momentarily – or in favor of the SEC or
NLRC
- This is discretionary upon the rehabilitation court
- Without the express waiver by the rehabilitation court, all these cases are deemed consolidated
in the rehabilitation proceedings

- The enforcement of any judgment, attachment or provisional remedy against the debtor
- Even if there is already a writ of execution issue against the debtor corporation at the time when
the commencement took effect, no levy on execution, sale on execution must be conducted –
because if sale was remove, such property will be removed from the reaches of the
rehabilitation court – that is why there shall be no enforcement even of final judgment

- All forms of voluntary payment made by the debtor in favor of any of its creditors
- In fact, these are prohibited
- The only payments allowed, once the proceedings begin, would be the so-called administrative
expenses – expenses incurred in the ordinary course of business
- Extrajudicial claims or enforcement or remedies against the debtor are likewise prohibited and
suspended
- Example:
- As of December 5, 2015 – NLRC already rendered a final and executory judgment awarding
30M to several allegedly illegally dismissed employees of Pogi, Inc. – Effect of the stay
order on this judgment by the NLRC is that it cannot be enforced from December 15. The
illegally dismissed workers entitled to the award will have to file a claim with the
rehabilitation court. However, because the award is already final, it will be considered as an
undisputed claim – workers do not have to prove their right over the same before the
rehabilitation court
- For the current employees of Pogi, Inc. the schedule of payment of salaries is every 15th and
30th of the month. As of December 15 (first day of effectivity of commencement order)
should the employees be paid their salaries? – No payment shall be made if the expense or
obligation is incurred prior to commencement date
- Payroll for December 31 (from period of December 16-30) – it must be paid –
administrative expenses
- Rentals due from Pogi, Inc. for the period January 1, 2015 up to December 31, 2015 – the
lease contract stipulates that the rentals shall be paid per annum – should it be paid? – No
because it was incurred prior to the effectivity of the commencement order
- Present rentals should be paid if authorized by the rehabilitation court because they are
in the nature of administrative expense
- You represent a creditor-bank – that holds a mortgage right of a land belonging to Pogi, Inc.
The maturity date of such loan is November 30, 2015. After the period expired without
payment, the bank has the right to either demand cash or foreclose the mortgage. Can you
file for extrajudicial foreclosure of the mortgage? – Under Act No. 3135 – after December 15
no more – you must now file and prove your claim over the property with the rehabilitation
court

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- For purposes of commencement or stay order, all creditors are considered on equal footing – all of
them will be affected by the prohibition of transfer of assets, payments and suspension of all their
claims – this is to prevent one unscrupulous creditor from having unnecessary advantage to the
detriment of the others
- With all the assets reserved and in tact, it have the rehabilitation receiver the opportunity to craft a
rehabilitation plan
- From the time of filing, a rehabilitation plan must be approved and confirmed within 1 year – if none
is approved within said period, the proceedings are deemed terminated – the petition must be
dismissed by the court – dismissal on said ground will now restore the creditors to all their prior
rights and claims – all proceedings must now be resumed
- Once a petition for rehabilitation is filed, all taxes, fees and duties due to the Philippine Government
are waived for that 1 year period – the period is directory rather than mandatory

- While ideally, the rehabilitation plan, being reflective of collective nature process, must be
consented to by at least majority of the creditors per class should any of them object to any
proposed rehabilitation plan recommended by the receiver to the court, their objective may be
overridden, and the rehabilitation plan confirmed and implemented

- Pacific White v. Puerto Azul

- Despite the serious objections posed by the creditors against the rehabilitation plan submitted
for approval, the court confirmed it. Puerto Azul never gained profit that is why it filed a petition
for its own rehabilitation. By the time that a corporate rehabilitation was filed, it was already
indebted to 60B accumulated over 30 years. Initially, a group of creditors were able to negotiate
certain terms for the payment of their claims against Puerto Azul and was allowed by the
rehabilitation court. When a more comprehensive rehabilitation plan was recommended by the
rehabilitation receiver and approved by the court, the group of lenders objected citing that their
constitutional right (non-impairment clause) was violated. The rehabilitation plan imposed upon
these creditors a 50% cut on the principal; condonation of all accrued penalties and interest; for
the amounts remaining a new interest rate is allowed by the court – 2% per annum for the first 5
years as penalty - for the last 5 years, 5% per annum – all of these obligations were given a
new payment period; and only when there is cash available – because pay first the
administrative expenses.
- SC: We are not talking of a law here, the rehabilitation plan is a measure approved by the
rehabilitation court. That is why it is improper to raise the constitutionality of the rehabilitation
plan on the non-impairment clause because they are questioning a law but a rehabilitation plan.
Assuming that indeed that there is impairment of existing obligations of contracts – the FRIA
was intended to serve public policy and public interest and therefore, private contractual rights
in favor of these group of creditors must always give to the greater demands of the police power
of the State – the power of the State to enacts laws or measures to serve the common good
and general welfare – this is serve when the corporation rehabilitation plan is to be closed,
hundreds of employees and their respective families will be rendered without livelihood – the
State itself will be deprived of potential source of taxes and other revenues and the business to
be closed will open for the creditors to have the company pay without any rational allocation or
distribution. Thus, even objections of these creditors, they must accept the rehabilitation plan.

Express Investment v. BayanTel

- Two of the most salient provisions in the rehabilitation plan are: (1) For the group of foreign
creditors be allowed to take 77% of the common and outstanding stock of BayanTel in exchange for
payment of debt; (2) Abide by the pari passu provision in the rehabilitation plan. For the second
agreement, pari passu means equity in equality – it is commonly used as a principle in insolvency
proceedings whereby all creditors shall be treated alike and on equal footing in the distribution of
moneys and assets of the debtor. Since the debtor is already insolvent, the objective of pari passu
is to pay all creditors regardless of class by distributing those assets pro rata so that secured ad
preferred creditors will lose those securities and preferences and they will stand side by side with
ordinary unsecured creditors – disregards preferences and concurrence of credits. These foreign
banks objective to the second agreement stating the pari passu violate their security rights –
because they also held in a separate agreement the security over above 80% of all assets of
BayanTel.
- SC: Nullified the first agreement because as a telecommunication company, it must abide by the
citizenship requirements. For the second, applying the pari passu principle, it serves general
welfare and common good better than allowing these group of creditors to maintain and enjoy their
securities to the detriment of other creditors of BayanTel.

- Rehabilitation plan is a summary proceeding in rem. After the confirmation and approval of the
rehabilitation plan, all orders by the court may be issued ex parte.

82
 - Until such time that the corporation is rehabilitated or restored to financial viability, in such a case
the court will issue a termination order.
- If the rehabilitation plan is not successfully implemented, the court will likewise issue a termination
order to convert the proceedings into a liquidation petition.

II. Petition for Approval of Pre-Negotiated Rehabilitation Plan

- Less hostile
- Before going to court, the debtor and the creditors have already finalized extra-judicially and among
themselves a rehabilitation plan – this is tantamount to approval of the court of a compromise
agreement

- For judicial approval – it must be alleged and shown that the pre-negotiated rehabilitation plan is
with the consent of the debtor and creditors representing 2/3 of the total liabilities, provided that the
2/3 includes more than 50% of secured and 50% of the unsecured creditors
- Example: 30B outstanding liabilities of Pogi, Inc. A holds 20B with security – various real estate
mortgages. B and C hold 2.5 B each. The remaining 5B is to various hundred creditors. The parties
to the negotiated rehabilitation plan are Pogi, Inc. (debtor) and A. Should the court approve it?
- No. The 2/3 does not include the unsecured creditors.
- Assuming the minimum requirements are present, the court shall likewise issue, upon approval of
the petition a commencement order
- This is the same legal concept as the commencement order in a court supervised rehabilitation
– binding upon all even those who objected or even those who did not participate

III. Petition for Assistance in Out of Court/Informal Restructuring Agreement (OCRA)

- Actually a piecemeal judicial intervention
- They still are negotiating – they are still in the middle of negotiating a rehabilitation plan
- The policy of the law is to encourage such out of court to settle any dispute among the parties
- Parties to the negotiation are the debtor and the creditor

- Forms of Assistance the Law Gives the Parties Negotiating under OCRA

1. The law allows them a so-called “stand still”

- This is similar to an injunctive period
- It has the same effect as a commencement order
- During the stand still period, which is 120 days, none of the creditors of the debtor can enforce
or perfect a claim of lien against the debtor – similar to a status quo order because should any
creditor start claiming debt or requiring payment of enforcing mortgage rights – then the other
creditors who are still in the midst of negotiating with the debtor would be affected – it would
render useless any potential restructuring agreement
- The stand still may be considered binding upon all creditors for as long as it is published and it
is agreed upon by 50% of the secured and 50% of the unsecured creditors
- However, if during the stand still period there is restructuring agreement or rehabilitation plan
that is undertaken by the parties, the court can only recognize it if the OCRA is with the consent
of the following:
a. Debtor
b. Creditors representing 67% (2/3) of secured as well as 75% (3/4) of unsecured for as long
the totality is at least 85% of all creditors – totality of the claim that they have against the
debtor-corporation as against the totality of the obligation
- For the ongoing creditors, the parties to the ongoing negotiation must be approved of the 50%
of the unsecured and 50% of the secured – there shall be a stand still among them – once the
stand still agreement is in place, it shall be published and it shall be effective for a period of 120
days – so that they can complete their negotiation – if during the 120-day stand still period they
come up with an OCRA, the OCRA is binding upon all of them for as long as it is consented to
by the debtor and creditors representing 67% of secured as well as 75% of unsecured for as
long the totality is at least 85% of all creditors
- Once these minimum requirements are met, the publication of the OCRA makes it binding upon
all parties concerned, whether or not they took part on the OCRA negotiations
- Should any of them refuse to abide by the OCRA the court may issue a so called “cram-down”
- Being forced to accept it

IV. Petition for Liquidation

- This is court supervised liquidation

- How may the petition for liquidation of a corporation come about? 2 Ways

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 1. When a petition for rehabilitation is converted by the court into a liquidation petition

2. By a separate and distinct petition originally filed with the court

- This may either be:

a. Voluntary
- It is debtor-initiated
- It must be through a majority vote of the BOD of the debtor-corporation and 2/3 of the OCS
– secretary certificate must be attached
- Allegation: When the corporation is no longer able to discharge its obligations as they fall
due

b. Involuntary
- It is creditor initiated
- Requirement: Creditor or group of creditors holding at least 1M or at least 25% of the
equivalent of the subscribed capital stock, whichever is higher
- Allegations: (1) No substantial issue of fact or law; (2) That the debtor corporation has been
unable to pay its maturing obligation for the last 180 days

- In liquidation, there is no substantial likelihood of rehabilitation of the debtor

- The only recourse here is to extinguish its right to continue the business, close, settle, wind up said
business by reason of its insolvency
- If the petition is sufficient in form and in substance, within 5 days a liquidation order shall be issued
- The liquidation order shall state that the corporation is dissolved – can no longer continue the
business
- A liquidator must be appointed – same qualifications as a receiver except that the primary objective
of the liquidation court and the liquidator is to allocate the assets based on preferences and
concurrence of credits under the NCC and Labor Code – similar to a commencement order, from
the moment that the liquidation order takes effect (takes effect from issuance), all current actions or
pending actions against the debtor shall be suspended – the same must now be filed with the
liquidation court
- Who would be entitled to payment in liquidation: Only those creditors who have proved or
undisputed claims – those which are subject to judgment, no longer open to controversy, those
which were admitted and allowed by the liquidator

- RCBC v. CA
- If a corporation is ordered dissolved and liquidated, and its assets severely deficient to pay all
creditors, the court may order a pari passu distribution of the assets. Pari passu is equity in
equality that all creditors regardless of class or rank shall be treated alike.
- This is not as if you will disregard the preference

- Example: Total assets amount to 1B. Inclusive of the 1B are the mortgage assets amounting to
100M subject of other secured assets. Unsecured assets 600M. If there are 12 creditors who
hold liens or securities over these 400M worth of assets – apply pari passu – they do not really
lose their preference as far as these assets are concerned they will still be the first to be paid
except that it will be distributed pro rata among them. Out of the 12 creditors who hold 800M
total. From the 1B segregate the secured assets – they are the ones with preference. Therefore,
distribute that among them proportionately – from the 800M pay them 400M from the assets,
which they hold in their favor. The unpaid is 400M – add this to the unsecured claims. Among
themselves, they are equal but they enjoy priority from others.

- Alemars v. Ilbiñas
- The preferences were disregard. All were distributed pro rata.

- Property in trust held by the corporation in trust for another shall be excluded. These belong to the
beneficiary or the trustor.

84