Corporation Law Fabian 2020 TSN Prelims 1

CORPORATION LAW
FROM THE LECTURES OF:

ATTY. JESSIELLE ANN C. FABIAN, CPA, Esq
CONTRIBUTORS 2020-2021
Abrasaldo, Averell Chew, Mary Grace Estrosas, Hazel Diane
Acevedo, Val Joseph Concepcion, Elaizza Maglinte, Jurilex
Andamon, Honey Charish Del Rosario, Inah Narciso, Girly Mae
Aying, Leah Lisette Delgado, Mikel Hofileña Pizarro, Lorenzo Antonio
Bahalla, Carlo Dingal, Johanna Reyes, Desiree Mae
Balindong, Abdul Jabar Du, Kelvin John Rojo, Pauline Kay
Campaner, Faith Angeli Enano, Nembrod Sioson, Keziah
Igbalic-Cerro, Anna Lou Escritor, Vanessa Ugdang, Nellie III
Estremos, Dominic
Ateneo de Davao
FIRST EXAM COVERAGE
College of Law
CORPORATION LAW | ATTY. JESSIELLE ANN C. FABIAN 2
It will not affect special laws and those bodies governing special types of
businesses. Everything has to come from a law.
Republic Act 11232 (Effective: February 23, 2019)
Transcribed by: Keziah M. Sioson
However, RCCP applies on matters not covered by special laws. For banks
and insurance companies, SEC regulates the corporate aspect of their
Transcribed by: ZU Ugdang business, but still the BSP and Insurance Commission shall exercise primary
Introduction authority over them.
We were governed by the CCP, we were almost governed for 40 years (since
1980). Not all provisions of the CCP were revised, but the legislature simply How about the 15-day rule on publication?
decided not to amend the provisions but to re-enact certain provisions. It Remember, we are just talking about the RCCP as a law.
remained unchanged and included new provisions. They re-enacted it with Section 188. Effectivity. – This Act shall take effect upon completion of its
the amendments (already included). publication in the Official Gazette or in at least two (2) newspaper of general
circulation.
Purpose
Enhance the means of doing business because now, more and more foreign The RCCP did not require the 15 days to expire before it can take effect.
businesses are coming in to invest in the Philippines. So, to cope up with Unlike in some other laws where it needs 15 days after publication before it
that, we passed the RCCP. takes effect.
It is also passed to prioritize corporate stockholder provisions, so if you read Hence, this law became effective on February 23, 2019 in Manila Bulletin.
the RCCP there are more provisions there that outline the liabilities of
corporate officers, so that the stockholders of a corporation would be Purpose for Passage of RCCP
protected from fraud. To enhance the doing business, RCCP simplified the name-verification
process, changed the existence to perpetual existence of corporation, and no
Other Purposes more five-incorporator requirement. They allowed remote voting, as well.
 To instill, corporate and civic responsibility
 To adopt the best practices on good corporate governance As to the shareholders’ protection, they allowed the creation of
 To strengthen the powers of SEC to exercise regulatory authority emergency boards in case there is no quorum so the corporation can continue
over corporations. their daily operations.
These were adopted to adapt to the recent developments. As to corporate responsibilities, more liabilities to fines and punishment.
Section 42 As to corporate governance, that provision in arbitration as an option

If you look at Sec. 42, it now allows electronic notices to the stockholders added. Also, there is a provision there preventing hold-overs by directors and
and members. Before there was no provision on electronic notices. Since now instilling independence to directors. Also, more disclosure requirements as to
everything is in the computer therefore, electronic notices are now allowed. salary and compensation of the directors, and more reportorial requirements.
Deleted Section 107 As to strengthening the SEC, there are more grounds for dissolution for
Since the RCCP deleted 107, there is no more requirement of prior the SEC to oversee.
indorsement of the DepEd if you want to incorporate an educational
institution. That’s just one of the few amendments of the RCCP. Basically, the purpose of the law is to allow the Philippines to compete with
other countries as a viable corporate destination and business friendly
jurisdiction. That is to make it easier for the investors to come in.
Effect of Repeal
No right or remedy in favor of or against any corporations, its stockholders,
You will see how easier it is now, unlike under the CCP before.
members, directors, trustees or officers of any liability incurred by any such
situation shall be removed or impaired either by the subsequent dissolution
of the said corporations, or by any subsequent amendment of this Code.
So, all of the rights and remedies of the corporation still applies. It was not
impaired, it was not removed, so, those rights and remedies are still available
to them. Whatever rights you have under the CCP, that is carried over and
not revised by the RCCP.
Applicability to Existing Corporations

Section 185. Applicability to Existing Corporations. – A corporation
lawfully existing and doing business in the Philippines affected by the new
requirements of this Code shall be given a period of not more than two (2)
years from the effectivity of this Act within which to comply.
The old corporations before, have 2 years to comply with the provisions of
the RCCP.
How does the RCCP affect other laws?

Section 183. Applicability of the Code. - Nothing in this Act shall be
construed as amending existing provisions of special laws governing the
registration, regulation, monitoring and supervision of special corporations
such as banks, nonbank financial institutions and insurance companies.
Notwithstanding any provision to the contrary, regulators such as the Bangko

Sentral ng Pilipinas and the Insurance Commission shall exercise primary
authority over special corporations such as banks, nonbank financial
institutions, and insurance companies under their supervision and regulation.
Basically, it will not affect other laws. Banks would still be governed by the
general banking law, and the new Central Bank Act and the insurance
companies are still governed by the Insurance Code.
ABRASALDO | ACEVEDO | ANDAMON | AYING | BAHALLA | BALINDONG | CAMPANER | IGBALIC-CERRO | CHEW | CONCEPCION | DEL ROSARIO
MANRESA 2020-2021 DELGADO | DINGAL | DU | ENANO | ESCRITOR | ESTREMOS | ESTROSAS | MAGLINTE | NARCISO | PIZARRO | REYES | ROJO | SIOSON | UGDANG
[2] Those covered by Section 17.2 of the Securities Regulation
Code.
TITLE ONE 17.2. The reportorial requirements of Subsection 17.1 shall apply to the
GENERAL PROVISIONS, DEFINITIONS AND CLASSIFICATION following:
(a) An issuer which has sold a class of its securities pursuant to a registration
Section 1. Title of the Code. – This Code shall be known as the “Revised
Corporation Code of the Philippines”. under Section 12 hereof: Provided, however, That the obligation of such
issuer to file reports shall be suspended for any fiscal year after the year such
registration became effective if such issuer, as of the first day of any such
Corporation fiscal year, has less than one hundred (100) holders of such class of
The statutory definition of a corporation is provided under Section 2 of the securities or such other number as the Commission shall prescribe and it
RCCP which refers only to private corporations or to corporations organized notifies the Commission of such;
under the RCCP.
(b) An issuer with a class of securities listed for trading on an Exchange; and
New Kinds of Corporations under the RCCP:
(c) An issuer with assets of at least Fifty million pesos (P50,000,000.00) or
[1] One Person Corporation such other amount as the Commission shall prescribe, and having Two
Section 116. One Person Corporation. - A One Person Corporation is a hundred (200) or more holders each holding at least One hundred (100)
corporation with a single stockholder: Provided, That only a natural person, shares of a class of its equity securities: Provided, however, That the
trust, or an estate may form a One Person Corporation. obligation of such issuer to file reports shall be terminated ninety (90) days
after notification to the Commission by the issuer that the number of its
[2] Corporation Vested with Public Interest holders holding at least one hundred (100) shares is reduced to less than
There are provisions specifically applicable with corporations vested with One hundred (100).
public interest.
 Section 22, they require independent directors. [3] Banks and quasi-banks
 Section 23, it governs the right to vote in the elections through [4] Other financial intermediaries
remote communication. [5] Other corporations engaged in business vested with public
 Section 24 interest
 Section 29
 Section 31 Definition of Corporation
 Section 91 Section 2. Corporation Defined. – A corporation is an artificial being
 Section 95 created by operation of law, having the right of succession and the powers,
 Section 176 attributes, and properties expressly authorized by law or incidental to its
 Section 177 existence.
Does the RCCP have a definition of a corporation vested with public

interest? No, but Section 176 provides different factors to determine if it is Attributes of a Corporation
vested with public interest. 1. It is an artificial being;
2. It is created by operation of law;
For example, they shall consider the type and nature of the industry, size of 3. It has the right of succession; and
the enterprise, economies of scale, geographic location, extent of Filipino A corporation must have the capacity of continuous
ownership, labor intensity of the activity, export potential, as well as other existence, despite whatever happens to its
factors which are germane to the realization and promotion of business and shareholders or its members.
industry.
4. It has only the powers, attributes and properties expressly
Does the RCCP have an enumeration of corporations vested with authorized by law or incidents to its existence. [Doctrine of
public interest? Limited Powers]
[1] Section 22 of the RCCP Transcribed by: Pau Rojo

Everything has to come from a law.
Section 22. The Board of Directors or Trustees of a Corporation;
Qualification and Term. – XXX The board of the following corporations Artificial Being
vested with public interest shall have independent directors constituting at A corporation is a legal or juridical person with a personality separate and
least twenty percent (20%) of such board: apart from its individual stockholders or members and from any other legal
entity to which it may be connected. It is not in fact and in reality a person
(a) Corporations covered by Section 17.2 of Republic Act No. 8799,
but the law treats it as though it were a person by process of fiction.
otherwise known as "The Securities Regulation Code", namely those whose
securities are registered with the Commission, corporations listed with an
exchange or with assets of at least Fifty million pesos (50,000,000.00) and A corporation is regarded as a person, resident or citizen within the purview
having two hundred (200) or more holders of shares, each holding at least of those terms as used in statutory provisions. Whenever a law mentions
one hundred (100) shares of a class of its equity shares; persons or citizens, it necessarily includes the corporations as well.
(b) Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in The mere fact that its personality is owing to a legal fiction and that is
money service business, preneed, trust and insurance companies and other necessarily has to act thru its agents, does not make the latter personality
financial intermediaries; and liable on a contract duly entered into, or for an act lawfully performed by
them for and in its behalf. Vasquez vs. Borja 74 Phil 560 (1944)
(c) Other corporations engaged in businesses vested with public interest
similar to the above, as may be determined by the Commission, after taking Just because the corporation is represented by agents, does not make the
into account relevant factors which are germane to the objective and purpose agents liable for the acts of corporation.
of requiring the election of an independent director, such as the extent of
minority ownership, type of financial products or securities issued or offered
to investors, public interest involved in the nature of business operations, and
other analogous factors.
The following are consequences of a corporation being an artificial being. We Those are the reasons why they are now holding the corporations more
can find these in our jurisprudence, also the list is not exclusive. accountable.
Consequences of Corporation Being an Artificial Being Aside from payment of fines, there is also forfeiture of license or revocation
of franchise. Those are the types of penalties under the RCCP.
1. It can act only through natural persons;
Another example of special law, that involves criminal liabilities against a
It exercises its powers through its BOD or duly authorized officers and agents. corporation is under the Trust Receipts Law. It provides that, if a violation
Likewise, the physical acts of the corporations, like the signing of the is committed by a corporation or other juridical entities the penalty shall be
documents or sending notices – through its by-laws or by issuing a board imposed on the directors or officials. But, it can be committed by a
resolution giving such person the power. corporation.
The corporation cannot act by itself, unless there is a board resolution by the 5. It can have a residence, as principal place of business;
board of director. For example, a forum shopping certification – wherein the 6. It enjoys constitutional rights and the same protection
corporations, through its authorized representative must sign a separate the law grants to individuals;
forum shopping certification that its officers and members of the BOD. It has
a separate being from its corporate directors or officers. So, it has to sign a As to rights, it pertains to the corporation, it cannot be invoked by the
different forum shopping certification. stockholders, officers, directors or members, even if the latter owns the
substantial majority of the shares in that corporation.
2. It can acquire and possess properties;
The rights or the defenses can only be used by the corporation. The officers
As to properties, the stockholders are not the owners of corporate properties cannot use that same defense in case they are sued for a certain act or any
or assets and vice versa. Even if you are a dominant shareholder, its other liability.
personality s separate and distinct from the corporation.
7. It can be covered by specific tax exemptions.
Even if you owned 100%, or you are a one-person corporation (OPC), it does
not mean that you have separate and distinct personality. The interest of the Tax exemption for corporations cannot be used by the stockholders, it can
stockholders over the properties of the corporation is merely inchoate. only be used by the corporation itself.
It is subject to the condition that upon dissolution, all the charges or debts Transcribed by: ZU Ugdang
of the corporation are paid, and the remainder will be divided by the International Express Travel v. CA
stockholders. Hence, the stockholders have no personality themselves to 343 SCRA 674 (2000)
interfere in a collection case covering the loans of the corporation. The
stockholders cannot enforce the rights of the corporation, because the Issue: Whether the Federation has a separate and distinct juridical
corporation can enforce that through authorized representatives. personality which would free Henri Kahn from liability.
3. It can bring civil and criminal actions in its name; Held: State’s consent, either in the form of a special law or general enabling
act is important before a corporation may acquire juridical personality. While
4. It can be held civilly and criminally (fines and penalties there is a special law enabling the creation of the Philippine Football
only, no imprisonment) liable; Federation (RA 3135, PD 604), this does not automatically create a
corporation
As to liabilities, the stockholders are not personally liable for the debts of
the corporation and vice versa. So, the stockholders are not liable for The failure to comply with the statutory requirements does not warrant the
corporate acts, unless otherwise provided by law. corporation to acquire a separate juridical personality, even if it adopts the
constitution and by-laws. Here, therefore, the buyer of the tickets was made
As to liability for torts, a corporation is civilly liable in the same manner personally liable for the unpaid tickets.
the natural persons for torts – so, they are still liable for torts and damages.
A corporation may be held liable for tort for the commission of negligence of Smith Belle and Company v. Natividad
its agent, because the principle of servant or agent under the command of 40 Phil. 136 (1919)
the principal is not affected by the fact that a corporation is an artificial being.
So, the rules on agency still applies to officers and agents of the corporation. Private corporation can exercise the right to equal protection.
The guaranties of due process of law and equal protection of the laws are
As to criminal liability, you cannot imprison a corporation because universal in their application to all persons. The word “person” here was
obviously there is no physical existence. It is incapable of intent. Remember extended to private corporations insofar as their property is concerned.
that crime, hence, it cannot commit felonies under the RPC.
Since Smith, Bell & Co. is a person by fiction of law, it is entitled as well to
But there are laws which can make the corporation liable for fines and the guarantees of due process and equal protection of laws.
penalties. So, while you cannot imprison them, you can make them pay for
fines and penalties under a criminal statute or special law. However, even if it was entitled to due process and equal protection of laws,
the Philippine legislature can validly deny to corporations the right to register
This RCCP, is one of the special laws giving criminal liabilities of crimes or vessels in the Philippines as an exercise of its police power which should not
penalties against corporations. Before RCCP (so CCP), only the officers are offend the constitutional provision.
criminally liable, then the corporation is dissolved. But now, under Section
117 of RCCP, if the offender is a corporation, the penalty may be directly
imposed upon such corporation and/or upon the directors, stockholders, Right Against Unreasonable Searches and Seizures
members, officers or employees responsible for the violation or indispensable
to its commission. So, you can now sue the corporation itself. Stonehill v. Diokno
20 SCRA 383 (1967)
The intention of the legislature here is to hold accountable these corporations
and to instill corporate and civil responsibilities to the extent of imposing Petitioners have no cause of action to assail the legality of the
corporate criminal liability. So, there is now such a term called “corporate contested warrants and of the seizures made against the
criminal liability.” corporations.
It is because said corporations have their respective personalities, separate
Also, penalties for graft and corruption. This refers to the issues in GOCCs. and distinct from the personality of the petitioners, regardless of the amount
For example, a fictitious GOCC is created, wherein the government money is of shares of stock or of the interest of each of them in said corporations, and
being transferred. whatever the offices they hold therein may be.
Indeed, it is well settled that the legality of a seizure can be contested only Entitlement to Moral Damages
by the party whose rights have been impaired thereby. And that the objection Generally, a juridical person is not entitled to moral damages under Article
to an unlawful search and seizure is purely personal and cannot be availed 2217 because, not being a natural person, it cannot experience physical
of by third parties. suffering or such sentiments as wounded feelings, serious anxiety, mental
anguish, or moral shock.
Consequently, the right to object to the unlawful search and seizure belongs
exclusively to the corporations, from whom the seized effects belong, and However, a juridical person such as a corporation can validly complain for
may not be invoked by the corporate officers in proceedings against them in libel, slander, or any other form of defamation and claim for moral
their individual capacity. damages under Article 2219.
If invoked “as officers”, then valid, because the corporation is entitled to the In such a case, there must be proof of the existence of the factual basis of
right against unreasonable searches and seizures. See the difference if they the damage and its causal relation to the defendant’s acts.
invoked it in their individual capacity? They didn’t invoke it as in their capacity
as officers of the corporation. Because a corporation may acquire good will and reputation of its own, and
the same is tarnished or besmirched by any libelous statement, then it
In other words, the corporation itself has the right, or, it can invoke the right entitles the corporation to moral damages.
against unreasonable searches and seizures.
Transcribed by: Pau Rojo
It cannot be availed of by the officers of the corporation who alleged it for MAMBULAO LUMBER CO. vs. PNB
their personal interest. So, the right of the corporation against unreasonable 22 SCRA 359 (1968)
searches and seizures, can only be invoked by the corporation, it being a
separate and distinct personality. General Rule: An artificial person (corporation) like Mambulao Lumber
Transcribed by: Keziah M. Sioson Company cannot experience physical sufferings, mental anguish, fright,
serious anxiety, wounded feelings, moral shock or social humiliation which
Manila Gas Corporation vs. Collector of Revenue are basis of moral damages.
71 Phil. 513 (1936)
Exception: A corporation may have a good reputation, which if besmirched,
Issue: WON the Collector of Revenue properly withheld taxes on the income may also be a ground for the award of moral damages.
distributed by Manila Gas to its stockholders which are foreign corporations
In this case, the court held that the same cannot be considered under the
Ruling: Yes. The Collector of Revenue is correct in assessing and collecting facts of this case, because it is admitted that appellant had already ceased in
said withholding taxes, because a corporation has a personality distinct from its business operation at the time of the foreclosure sale of the chattels.
that of its stockholders which means that the taxing power, in this case BIR, Therefore, Mambulao Lumber is not entitled to moral damages.
may collect taxes from the income of foreign corporations which are derived
from the domestic corporation, Manila Gas.
ABS-CBN BROADCASTING vs. CA
A corporation has a personality distinct from that of its stockholders, enabling 301 SCRA 589 (1999)
the taxing power to reach the latter when they receive dividends from the
corporation. It must be considered as settled in this jurisdiction that dividends Moral damages are in the category of an award designed to compensate the
of a domestic corporation, which are paid and delivered in cash to foreign claimant for actual injury suffered and not to impose a penalty on the
corporations as stockholders, are subject to the payment in the income tax, wrongdoer. The award is not meant to enrich the complainant at the expense
of the defendant, but to enable the injured party to obtain means, diversion,
the exemption clause in the charter of the corporation notwithstanding.
or amusements that will serve to obviate the moral suffering he has
undergone.
The Collector of Internal Revenue was justified in withholding income taxes
on interest on bonds and other indebtedness paid to non-resident
The award of moral damages cannot be granted in favor of a corporation
corporations because this income was received from sources within the
because being an artificial person and having existence only in legal
Philippine Islands as authorized by the Income Tax Law.
contemplation, it has no feelings, no emotions, no sense. It cannot therefore
experience physical
Who is exempted from tax in this case?
As a rule in taxation, those foreign corporations are exempt from paying
income taxes from sources derived outside the Philippines. However, in this What about this mentioning of Article 2219 of NCC?
case, it was held that the income of Manila Gas was sourced from the If you would check Article 2219 of the NCC, it enumerates there where moral
Philippines since it offered its services and operated within the Philippines damages can be recovered.
providing gas services in Metro Manila.
Article 2219. Moral damages may be recovered in the following and
analogous cases:
Bataan Shipyard & Engineering Co. Inc. vs. PCGG (1) A criminal offense resulting in physical injuries;
150 SCRA 181, 234 (1987) (2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other lascivious acts;
The right against self-incrimination has (4) Adultery or concubinage;
no application to juridical persons. (5) Illegal or arbitrary detention or arrest;
While an individual may lawfully refuse to answer incriminating questions (6) Illegal search;
unless protected by an immunity statute, it does not follow that a corporation, (7) Libel, slander or any other form of defamation;
vested with special privileges and franchises, may refuse to show its hand (8) Malicious prosecution;
when charged with an abuse of such privileges. Otherwise stated, the right (9) Acts mentioned in article 309;
against self-incrimination may not be invoked by a corporation since it is (10) Acts and actions referred to in articles 21, 26, 27, 28, 29, 30, 32, 34,
dealing with testimonial evidence. and 35.
It cites Article 21. This was mentioned in the case and used as a ground by
RBS.
Article 21. Any person who wilfully causes loss or injury to another in
manner that is contrary to morals, good customs or public policy shall
compensate the latter for the damage.
In relation to Article 2219: It is also important to remember the requirement for proof of existence of
RBS's claim for moral damages could possibly fall only under item (10) of factual basis when you try to claim moral damages as a corporation.
Article 2219, thereof which reads:
Transcribed by: Desiree Mae Reyes
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34,
and 35. Creation by Operation of Law
No corporation can exist without the consent or grant of the sovereign. This
Moral damages are in the category of an award designed to compensate the means that corporations cannot come into existence by mere agreement of
claimant for actual injury suffered. and not to impose a penalty on the the parties.
wrongdoer. The award is not meant to enrich the complainant at the expense
of the defendant, but to enable the injured party to obtain means, diversion, They require special authority or grant from the state, either by a special
or amusements that will serve to obviate then moral suffering he has incorporation of law or charter which directly creates the corporation or
undergone. It is aimed at the restoration, within the limits of the possible, of by means of a general corporation law under which individuals desiring
the spiritual status quo ante, and should be proportionate to the suffering to be and act as a corporation may incorporate.
inflicted.
The juridical existence of a corporation is dependent on the consent or grant
The award of moral damages cannot be granted in favor of a corporation of the state. From a strict legal standpoint and under theory of concession a
because, being an artificial person and having existence only in legal corporation cannot come into being by mere consent of the parties. There
contemplation, it has no feelings, no emotions, no senses, it cannot, must be a law granting it otherwise stated, there ought to be a law from
therefore, experience physical suffering and mental anguish, which call be which a corporation derives its existence. This can either be a general
experienced only by one having a nervous system. The statement in People corporation law (RCCP) or a special law or a charter.
v. Manero and Mambulao Lumber Co. v. PNB that a corporation may recover
moral damages if it "has a good reputation that is debased, resulting in social Note: The Constitution prohibits the passing of a special law specifically
humiliation" is an obiter dictum. On this score alone the award for damages forming a private corporation. Laws such as those are unconstitutional. They
must be set aside, since RBS is a corporation. can only create GOCCs.
As a recap of your Lab Rel/Pub Corp, if private corporations or GOCCs without

FILIPINAS BROADCASTING NETWORK, INC. vs. AMEC-BCCM original charter then it is under RCCP and the Labor Code. If it’s a GOCC with
G.R. No. 141994 (2005) original charter, meaning there is a special law creating it, then it is under
that special law and the CSC laws.
AMEC is entitled to damages.
A juridical person is generally not entitled to moral damages because, unlike
a natural person, it cannot experience physical suffering or such sentiments
Theory of Concession
By the consent of the State that there is a corporation. The corporation
as wounded feelings, serious anxiety, mental anguish or moral shock.
derives all of its powers and legalities from a general corporation law.
In this case, AMEC’s claim for moral damages falls under item 7 of Article
2219 of the Civil Code. This provision expressly authorizes the recovery of
moral damages in cases of libel, slander or any other form of defamation.
Article 2219(7) does not qualify whether the plaintiff is a natural or juridical Right of Succession
person. Therefore, a juridical person such as a corporation can validly A corporation has a capacity of continuous existence irrespective of the
complain for libel or any other form of defamation and claim for moral death, withdrawal, insolvency, or incapacity of the individual stockholders or
damages. members and regardless of the transfer of their interest or shares of stock.
Please check Article 2219 of the NCC, where it grants moral damages. Based Its capacity to continue existence is not affected by the changes of its
on the enumeration, a corporation does not experience seduction, abduction, membership or its composition of corporators or stockholders.
rape, or other lascivious acts, adultery or concubinage and all of those
grounds for moral damages. Powers, Attributes, and Properties of a Corporation
It can experience item number 7 which is, libel, slander or any other form of
defamation. Doctrine of Limited Powers
A corporation has no power except those expressly conferred on it by the
• Malicious prosecution, I have yet to see a case which Corporation Code and those that are implied or incidental to its existence.
maliciously prosecuted a corporation. Monfort Hermanos Agricultural Dev. Corp. vs Monfort III 434 SCRA 27 (2004)
• As to item number 10, look into those articles and read
There are basically express powers, implied powers, and inherent powers. To
them, whether they can apply to corporations.
act outside of these granted powers such becomes ultra vires.
Reference: Read Articles 21, 26-35 of the New Civil Code. The test is whether the corporate act or transaction is related to or in
furtherance of the purposes of the corporation as stated in the AOI. That is
MANILA ELECTRIC COMPANY vs. T.E.A.M. ELECTRONICS why we will discuss later why it is so important to specify the primary purpose
CORPORATION and the secondary purpose because if it is not one of those and it is not
540 SCRA 62 (2007) incidental or inherent and it’s not under the RCCP then it is an ultra vires act.
MERALCO is not entitled to damages.

As a rule, a corporation is not entitled to moral damages because, not being Partnership Corporation
a natural person, it cannot experience physical suffering or sentiments like Law Which Governs
wounded feelings, serious anxiety, mental anguish and moral shock. The only Civil Code RCCP
exception to this rule is when the corporation has a reputation that is Manner of Creation
debased, resulting in its humiliation in the business realm. But in such a case, Mere agreement of the parties Law or operation
it is imperative for the claimant to present proof to justify the award. It is Number of Incorporators
essential to prove the existence of the factual basis of the damage and its
At least two. (Cannot be a partner by One but not more than fifteen (We
causal relation to petitioner's acts. In the present case, the records are bereft yourself) now have one person corporation
of any evidence that the name or reputation of TEC/TPC has been debased [OCP])
as a result of petitioner's acts. Besides, the trial court simply awarded moral Commencement of Juridical Personality
damages in the dispositive portion of its decision without stating the basis From moment of the parties agree From the date of issuance of
thereof. to form a partnership. Registration certificate of incorporation by SEC.
with the SEC is only for
convenience (e.g licenses and 3. Like a partnership, a corporation (except an OPC) is an
permits) organization composed of an aggregate of individuals;
Term of Existence 4. Like a partnership, a (stock) corporation distributes its profits to
Any period of time stipulated by Perpetual existence unless its AOI those who contribute capital to the business (although an
the partners. provides otherwise. industrial partner also shares in partnership profits);
Firm Name 5. Like a partnership, a corporation can be organized only where
Limited partnership required to Corp may adopt any firm name there is law authorizing its organization; and
add word “Ltd” provided it is distinguishable from 6. A partnership, no matter how created or organized, is taxable as
a corporation, subject to income tax.
any registered or reserved firm
name. (Key Word is distinguishable
that is the operative word no longer Transcribed by: Pizarro, Lorenzo
“confusingly similar” because the latter Is a corporation more advantageous or disadvantageous?
is for IP) There is no definite answer. The answer may vary for each particular case,
Powers taking into consideration the existing circumstances.
Partnership may exercise any Corporation can only exercise
power authorized by partners powers expressly granted by law The following are some of the advantages and disadvantages of a
provided not contrary to law, or implied from those granted or corporation:
morals, good customs, public incident to its existence.
order, and public policy Advantages Disadvantages
Management  Strong juridical personality  Complicated to form and costly
Managing partner, if not agreed Power to manage vested in board  Continuity of existence  Administratively tedious to maintain
upon, every partner is agent of directors or trustees.  Stronger credit, larger  Credit weakened by limited liability
Effect of Mismanagement capital  Lack of personal element
Partner can sue to co-partner who Suit against member of BOD or  Centralized management  Greater degree of governmental
mismanages trustees who mismanages must  Limited liability of investors control
be in the name of corp.  Transferability of stocks  Tendency for abuse by management
 Voting rights have become
Extent of Liability to 3rd Persons
theoretical
Partners (except limited partners) Stockholders (who are not
 Limited liability feature abused
are liable personally and directors) are liable only to extent
 Double taxation
subsidiarily (sometimes solidarily) of the shares subscribed by them.
for partnership debts to 3rd
Elaboration on Some of the Advantages:
persons
Transferability of Interest
Strong Juridical Personality
Partner cannot transfer his Stockholder has generally the The strong separate juridical personality of a corporation has been
interest so as to make transferee right to transfer his shares who considered as the attribute or privilege most characteristic of a corporation.
a partner without consent of prior consent of the corporation or
others. Delectus Personae other stockholders. Stronger Credit, Stronger Capital
Right of Succession More people are bringing in investments, especially if the corporation has
None. There is. undergone through initial public offering (or it is already in the stock
Dissolution exchange). So, a corporation has a strong credit and believability.
May be dissolved at any time by Can only be dissolved with
the will of any or all of the consent of State. (There are Centralized Management
partners. reportorial requirements you have to A (stock) corporation is governed by a Board of Directors to whom all the
submit to the SEC if you want to corporate powers are granted, as provided under Section 23 [now Section 22
dissolve a corporation)
of the RCCP]; and the shareholders are not agents of the corporation, nor
can they bind the corporation (unlike in a partnership setting).
As compared to SOLE PROPRIETORHSIP:
 Do not have a separate juridical personality (he will be liable for Limited Liability
all). Thus the personal assets of the proprietor himself is liable for Investors are not personally liable for corporate debts.
all the obligations incurred by that sole proprietorship.
Transferability of Stocks
Other Forms of Business Organization No consent needed – you don’t need permission for you to transfer your
stocks. If you own a stock, it is for you to dispose of.
Joint Venture
The legal concept of a joint venture is of common law origin. It has no precise Explanation on Some Disadvantages:
legal definition, but it has been generally understood to mean an organization
formed for some temporary purpose. Complicated (and costly) to Form
It is quite complicated to incorporate. It is more expensive to form than
There can be two (2) types: partnerships.
1. Contractual Joint Ventures (Law on Partnership applies) – they
don’t have registration as a JV with the SEC. Administratively Tedious to Maintain
2. Corporate Joint Venture (Law on Corporation applies) – it has a There are so many reportorial requirements with respect to the corporation
separate juridical personality that have to be submitted every year. These requirements include audited
financial statements, as well as minutes of all meetings – which have to be
Joint Account submitted to the SEC every year.
A transaction where two persons agree to contribute the amount of capital
agreed upon and participating in the favorable and unfavorable outcomes in Lack of Personal Element
the proportion they may determine. There is, ordinarily, a lack of personal element in view of the transferability
of shares, and the vesting of management powers in the Board of Directors,
As distinguished from a Partnership, it does not have firm name and has no who may be professional managers.
juridical personality.
Tendency for Abuse by Management
Similarities Between Partnership and Corporation A corporation, in view of its nature, is prone to abuse on the part of its
1. Like a partnership, a corporation has juridical personality separate management.
and distinct from that of the individuals composing it;
2. Like a partnership, a corporation can act only through agents;
Voting Rights Have Become Theoretical depend on the consent or acts of the parties but upon express provision of
There is such an agreement, embodied in a document, known as a “voting law.
trust agreement” (which we will discuss later on). On the strength of this
agreement, a shareholder gives his voting power to somebody else to vote
Good Earth Emporium, Inc. v. CA
for him. Also, if, for example, you only have one share out of 1,000,000
GR No. 82797; February 27, 1991
shares in a corporation, then, in actuality, your voting power doesn’t much
Second Division (Paras, J.)
have “teeth.” So, voting rights, in effect, have become theoretical. Voting
rights, in actual practice, focus only on those who have large portions of the
Issue: Was Good Earth Emporium, Inc. (GEE) able to fully satisfy its
shares.
judgment obligation to Roces-Reyes Realty, Inc. (ROCES)? No.
Double Taxation
Ruling: There is no indication in the receipt that it was in payment, full or
Corporations have always been the subject of heavier taxation than other
partial, of the judgment obligation. Likewise, there is no indication in the
forms of business organizations. The profits of a corporation are subject to
pacto de retro sale which was drawn in favor of Jesus Marcos Roces and
corporate income tax. When these profits are declared as dividends, such
Marcos V. Roces, that the obligation embodied therein had something to do
dividends are also subject to a separate tax on dividends.
with GEE’s judgment obligation to ROCES.
Article 1240 of the Civil Code provides that payment shall be made to the
person in whose favor the obligation has been constituted, or his successor-
in-interest, or any person authorized to receive it.
The Doctrine of Corporate Entity
In the case at bar, the supposed payments were not made to ROCES or to
(Doctrine of Separate Juridical Personality) its successor-in-interest, nor is there positive evidence that the payment was
The idea of the corporation as a legal entity, or person apart from its made to a person authorized to receive it. No such proof was submitted but
members, is a mere fiction of law introduced for convenience in conducting merely inferred by the RTC from Marcos Roces having signed the Lease
the business in this privileged way. Contract as President which was witnessed by Jesus Marcos Roces. Marcos
Roces, however, was no longer President or even an officer of ROCES at the
The general rule is that the officer cannot be held personally liable with the
time he received the money and signed the sale with pacto de retro. He, in
corporation, whether civilly or otherwise, for the consequences of his acts, if
fact, denied being in possession of authority to receive payment for ROCES,
he acted for and in behalf of the corporation, within the scope of his authority
nor does the receipt show that he signed in the same capacity as he did in
and in good faith. In such cases, the officer’s acts are properly attributed to
the Lease Contract at a time when he was President for ROCES.
the corporation.
On the other hand, Jesus Marcos Roces testified that the amount of P1 million
If the corporation is a one person corporation (OPC), does it still
evidenced by the receipt (Exhibit “1”) is the payment for a loan extended by
have a juridical personality, separate and distinct to that of its
him and Marcos Roces in favor of Lim Ka Ping. The assertion is borne by the
individual stockholder?
receipt itself whereby they acknowledged payment of the loan in their names
Yes. Even if it is a one person corporation, a separate juridical personality
and in no other capacity.
still exists in its favor. Section 130 of the RCCP provides that the principles of
piercing the corporate veil applies with equal force to one person corporations
A corporation has a personality distinct and separate from its individual
as with other corporations. However, a sole shareholder claiming limited stockholders or members. Being an officer or stock-holder of a corporation
liability has the burden of affirmatively showing that the corporation was does not make one’s property also of the corporation, and vice-versa, for
adequately financed. If not, and the single stockholder cannot prove that the they are separate entities. Shareowners are in no legal sense the owners of
property of the OPC is independent of the stockholder's personal property,
corporate property (or credits) which is owned by the corporation as a distinct
the stockholder shall be jointly and severally liable for the debts and other
legal person. As a consequence of the separate juridical personality of a
liabilities of the OPC. Its separate juridical personality is, therefore, pierced.
corporation, the corporate debt or credit is not the debt or credit of the
stockholder, nor is the stockholder’s debt or credit that of the corporation.
So, technically, there is still a separate juridical personality on the part of a
OPC. However, the single stockholder has the burden of proving that the OPC
has capital. Transcribed by: Girly Mae Narciso
DBP vs. NLRC
Traders Royal Bank v. CA Issue: WON the creditor (DBP) is liable for the unpaid wages of employees
GR No. 78412; September 26, 1989 of debtor (LIRAG) corporation?
First Division (Griño-Aquino, J.)
Ruling: No. A distinction should be made between a preference of credit and
The SEC did not validly acquire jurisdiction over Ching. a lien. A preference applies only to claims which do not attach to specific
Although Ching was impleaded in SEC Case, as a co-petitioner of PBM, the properties. A lien creates a charge on a particular property. The right of first
SEC could not assume jurisdiction over his person and properties. The SEC preference as regards unpaid wages recognized by Article 110 does not
was empowered, as rehabilitation receiver, to take custody and control of the constitute a lien on the property of the insolvent debtor in favor of workers.
assets and properties of PBM only, for the SEC has jurisdiction over It is but a preference of credit in their favor, a preference in application. It is
corporations only and not over private individuals, except stockholders in an a method adopted to determine and specify the order in which credits should
intra-corporate dispute. Being a nominal party in the SEC Case, Ching’s be paid in the final distribution of the proceeds of the insolvent's assets. It is
properties were not included in the rehabilitation receivership that the SEC a right to a first preference in the discharge of the funds of the judgment
constituted to take custody of PBM’s assets. Therefore, Traders Royal Bank debtor.
was not barred from filing a suit against Ching, as a surety for PBM. An
anomalous situation would arise if individual sureties for debtor corporations Saverio vs Puyat
may escape liability by simply co-filing with the corporation a petition for 710 SCRA 747
suspension of payments in the SEC whose jurisdiction is limited only to
corporations and their corporate assets. Ching can be sued separately (before Issue: Whether a stockholder (Nuccio) is jointly and severally liable for the
the RTC) to enforce his liability as surety for PBM, as expressly provided by debts of the corporation (NSI)?
Article 1216 of the New Civil Code.
Ruling: No, the general rule applies. The rule is settled that a corporation is
It is elementary that a corporation has a personality distinct and separate vested by law with a personality separate and distinct from the persons
from its individual stockholders or members. Being an officer or stockholder composing it. Following this principle, a stockholder, generally, is not
of a corporation does not make one’s property the property also of the answerable for the acts or liabilities of the corporation, and vice versa. The
corporation, for they are separate entities. obligations incurred by the corporate officers, or other persons acting as
corporate agents, are the direct accountabilities of the corporation they
Ching’s act of joining as a co-petitioner with PBM in SEC Case did not vest in represent, and not theirs. A director, officer or employee of a corporation is
the SEC jurisdiction over his person or property, for jurisdiction does not generally not held personally liable for obligations incurred by the corporation
and while there may be instances where solidary liabilities may arise, these Consequences of Piercing the Corporate Veil
circumstances are exceptional. In Umali vs Court of Appeals has held that when the piercing doctrine is
applied in a case, the consequences will be that the members or stockholders
Incidentally, we have ruled that mere ownership by a single stockholder or of the corporation will be considered as the corporation, that is, liability will
by another corporation of all or nearly all of the capital stocks of the attach directly to the officers and stockholders.
corporation is not, by itself, a sufficient ground for disregarding the separate
corporate personality. Other than mere ownership of capital stocks, However, compliance with the recognized modes of acquisition of jurisdiction
circumstances showing that the corporation is being used to commit fraud or cannot be dispensed with in piercing of veil cases. (Pioneer Insurance vs Morning
proof of existence of absolute control over the corporation have to be proven. Star Travel and Tours)
In short, before the corporate fiction can be disregarded, alter-ego elements
must first be sufficiently established. In other words, if you pierced the veil it does not mean that the personality
pierced ceases to exist, or that the corporation is dissolved when you pierce
Fortun vs Quinsayas its veil. It simply means that the stockholders or the directors having done
690 SCRA 336 (2013) those actions become liable for those liabilities. They are just treated as one
and the same entity. Moreover, this is reference only to a particular
Issue: Whether a principal corporation (ABS-CBN) is liable for the acts of the transaction involved. So if it has fraudulent transactions, then you just
subsidiary corporation (SNN)? pierce the veil regarding that particular transaction. You do not pierce the
veil of all transactions of the corporation.
Ruling: No. We have ruled that a subsidiary has an independent and
separate juridical personality distinct from that of its parent company and Instances Where Veil is Pierced
that any suit against the latter does not bind the former and vice-versa. A  Where a corporation functions for the benefit of a single person
corporation is an artificial being invested by law with a personality separate who has complete control over the funds and the said person is
and distinct from that of other corporations to which it may be connected. the sole owner thereof.
Hence, SNN, not ABS-CBN, should have been made respondent in this case.  Where a corporation is a mere instrumentality of the individual
stockholders.
Doctrine of Piercing the Veil of Corporate Entity  Where a domestic Philippine corporation is controlled by aliens.
 Where a corporation is organized by an insolvent debtor to
Courts, as a general rule, disregard this theory of separate entity under
defraud his creditors.
certain circumstances, as when the privileged is misused by the corporation.
 Where a subsidiary company is created by a parent company
merely as an agency of the latter.
The separate personality of the corporation will be disregarded where the
 Where a corporation is formed by a person for the purpose of
fiction of the corporate entity is being used as a cloak or cover for fraud or
evading his individual contract.
irregularity, or “to defeat public convenience, justify a wrong, protect
 Where a corporation is dissolved and its assets are transferred to
fraud or defend a crime”.*
another corporation to avoid financial liability of the first
corporation.
Note: The fraud must be proven by clear and convincing evidence and
cannot be presumed. Piercing the corporate veil may apply to non-stock
Note: This is not an exhaustive list. There is a lot of instances where the SC
corporations and natural persons.
pierced the veil.
If you answer in your exam, use these terms* because these are the legal
Transcribed by: Jurilex Maglinte
terms used under jurisprudence, as well as codals.
The effect in case the separate corporate identity is disregarded, the
corporation is treated merely as an association of persons and the
This non-recognition of corporate entity is also known as doctrine of piercing
stockholders are considered as the corporation themselves.
the corporate entity or disregarding the fiction of the corporate entity or the
doctrine of corporate alter ego. You can use that interchangeably.
What factors or circumstances are insufficient to disregard
corporate entity?
Rationale of Doctrine of Piercing the Corporate Veil  Mere ownership by a single stockholder or by another corporation
To remove the barrier between the corporation from the persons comprising of all or nearly all of the capital stock corporation.
it to thwart the fraudulent and illegal schemes of those who used the  The existence of interlocking directors corporate officers, and
corporate personality as a sealed for undertaking certain prescribes activities. shareholders.
Piercing in fraud cases, therefore, is an assurance to the dealing public that  The fact that the businesses are related
in cases of mischief by the actors behind the corporation, the piercing Such as if it involved the same name, or are located
doctrine allows them to remedy against these actors themselves. So this at the same premises.
safety hatch makes the corporate entity attractive, not only for the
businessman who employs it but on the part of the parties who have a
contract with such corporate entities. The doctrine requires the court to see It is not in itself sufficient to disregard the corporate entity. There is no hard
through the protective shield which exempts these stockholders from and fast rule.
liabilities that ordinarily they could not be subject to, or distinguishes one
corporation from a seemingly separate one, where it not for the existing 3 Basic Areas where Piercing the Veil Applies
corporate fiction, otherwise without the fraud cases of piercing then the 1. Equity Cases
corporate entity will become a shield behind which unscrupulous Defeat of public convenience, as when the corporate conviction is
businessmen can hide and even become dangerously aggressive in used as a vehicle for evasion of an existing obligation.
undertaking shady deals.
2. Fraud Cases
That is the reason why they allow you to pierce the veil of corporate entity.
Fraud cases or when the corporate entity is used to justify a wrong,
So you can go after the properties of these individual stockholders. Moreover,
protect a fraud, or defend a crime.
for the corporate entity to be disregarded, the wrong doing must be clearly
and convincingly established, it could not be presumed. The 3. Alter Ego Cases
presumption is that, stockholders or officers of the corporation are distinct Where a merely a farce since it is a mere alter ego or business
entity, so the burden of proving otherwise is on the party seeking to have conduit of a person, or where the corporation is so organized and
the court pierce the veil. The burden is on the person trying to pierce the controlled and its affairs are so conducted as to make it merely an
veil.
instrumentality, agency, conduit or adjunct of another corporation.
The piercing of the corporate veil applies equally to non-stock corporations Equity cases are what they term as dumping ground. Everything falls under
and even to natural persons. When we think of piercing the corporate veil is equity if there is no fraud or alter ego circumstances. Of the three types of
corporation first, then you pierce it to go after individuals. But actually, there
piercing cases, it would seem therefore the most restrictive one are the fraud
is such a thing that you pierce the individual first, then you go after the
cases, since the court has required the allegations of fraud must be clearly
corporation properties. proven to make the stockholder or officer liable. Hence, it is more difficult to
prove. Alter ego cases of the piercing doctrine tend to have wider leeway in 5. Failure to maintain corporate minutes or adequate corporate records;
application and even without intending to do malice by being practical like 6. Identical equitable ownership in two entities;
taking shortcuts, alter ego cases can be applied to pierce the veil. 7. Identity of the directors and officers of two entities who are
responsible for supervision and management (a partnership or sole
Test in Determining the Applicability of the Doctrine of proprietorship and a corporation owned and managed by the same
parties);
Piercing the Veil of Corporate Fiction in Fraud Cases 8. Failure to adequately capitalize a corporation for the reasonable risks
1. Control Test of the corporate undertaking;
Control, not mere majority or complete stock control, but 9. Absence of separately held corporate assets;
complete domination, not only in the finances but of policy and 10. Use of a corporation as a mere shell or conduit to operate a single
business practice in respect to the transaction attacked so that the venture or some particular aspect of the business of an individual or
corporate entity as to its transaction had at the time no separate another corporation;
mind, will or existence of its own. 11. Sole ownership of all the stock by one individual or members of a
single family;
2. Fraud Test
12. Use of the same office or business location by the corporation and
Such control must have been used by the defendant to commit a
its individual shareholder(s);
fraud or a wrong to perpetuate the violation of statutory or other 13. Employment of the same employees or attorney by the corporation
positive legal duty, or dishonest and unjust act in contravention of and its shareholder(s);
plaintiff’s rights. 14. Concealment or misrepresentation of the identity of the ownership,
management or financial interests in the corporation, and
3. Harm Test concealment of personal business activities of the shareholders (sole
The aforesaid control and breach of duty must proximately cause shareholders do not reveal the association with a corporation, which
the injury or unjust loss complained of.
makes loans to them without adequate security);
15. Disregard of legal formalities and failure to maintain proper arm's
The absence of any one of these elements prevents piercing the corporate length relationships among related entities;
veil. In applying the instrumentality or alter ego doctrine, the courts are 16. Use of a corporate entity as a conduit to procure labor, services or
concerned with reality and not form with how the corporation operated in
merchandise for another person or entity;
the individual defendant relationship to that Corporation. 17. Diversion of corporate assets from the corporation by or to a
stockholder or other person or entity to the detriment of creditors,
Proximate cause is defined as the cause which in a natural continuous
or the manipulation of assets and liabilities between entities to
sequence unbroken by any efficient intervening cause produces the injury
concentrate the assets in one and the liabilities in another;
and without which the result would not have occurred. 18. Contracting by the corporation with another person with the intent
to avoid the risk of nonperformance by use of the corporate entity;
So you have to establish those 3 tests. The shareholder must have control,
or the use of a corporation as a subterfuge for illegal transactions;
they use it to commit fraud and there was a harm committed. All those three
and
must be used to pierce the corporate veil. 19. The formation and use of the corporation to assume the existing
liabilities of another person or entity.
Factors in Alter Ego Cases
This must be mentioned in your cases. You cite there in your answer but it must be taken as a whole.
a. The parent corporation owns all or most of the capital stock of the Reverse Piercing of the Corporate Veil
subsidiary. As held in C.F. Trust, Inc. v. First Flight Ltd (U.S. Case) a Traditional Veil-
b. The parent and subsidiary corporations have common directors or Piercing Action, a court disregards the existence of the corporate entity so a
officers. claimant can reach the assets of the corporate insider. In a reverse veil-
c. The parent corporation finances the subsidiary. piercing action, court disregards the existence of the corporate entity so a
d. The parent corporation subscribes to all the capital stock of the claimant can reach the assets of the corporate insider.
subsidiary or otherwise causes its incorporation.
e. The subsidiary has grossly inadequate capital. Reverse piercing flows in the opposite direction for traditional corporate veil-
f. The parent corporation pays the salaries and other expenses or piercing and makes the corporation liable for the debt of the
losses of the subsidiary. shareholders.
g. The subsidiary has substantially no business except with the parent
corporation or no assets except those conveyed to or by the parent
So if the stockholder has debts and his only property are those in the
corporation. company like his stocks then you pierce the natural persons identity to go
h. In the papers of the parent corporation or in the statements of its after the corporate assets.
officers, the subsidiary is described as a department or division of
the parent corporation, or business or financial responsibility is
Two Types
referred to as parent corporation's own.
1. Outsider Reverse Piercing occurs when a party with a claim against
i. The parent corporation uses the property of the subsidiary as its own. an individual or corporation attempts to be repaid with assets of a
j. The directors or executives of the subsidiary do not act
corporation owned or substantially controlled by the defendant.
independently in the interest of the subsidiary but take their orders
from the parent corporation. 2. Insider Reverse Piercing where the controlling members will
k. The formal legal requirements of the subsidiary are not observed. attempt to ignore the corporate fiction in order to take advantage of
a benefit available to the corporation, such as an interest in a lawsuit
All those factors are considered in alter ego cases.
or protection of personal assets.
Totality of Circumstances Test Does piercing the veil also apply in non-stock non-profit
To aid in the determination of the presence or absence of fraud, the factors corporation?
in the “Totality of Circumstances Test” are as follows: Yes. This is discussed in the case of:
1. Commingling of funds and other assets of the corporation with those
of the individual shareholders; INTERNATIONAL ACADEMY OF MANAGEMENT v. LITTON
2. Diversion of the corporation's funds or assets to non-corporate uses 848 SCRA 437 (2017)
(to the personal uses of the corporation's shareholders);
3. Failure to maintain the corporate formalities necessary for the Piercing May Apply to Non-Stock Corporations
issuance of or subscription to the corporation's stock, such as formal The mere fact that the corporation involved is a nonprofit corporation does
approval of the stock issue by the board of directors; not by itself preclude a court from applying the equitable remedy of piercing
4. An individual shareholder representing to persons outside the the corporate veil. The equitable character of the remedy permits a court to
corporation that he or she is personally liable for the debts or other look to the substance of the organization, and its decision is not controlled
obligations of the corporation; by the statutory framework under which the corporation was formed and
operated. While it may appear to be impossible for a person to exercise Transcribed by: Hazel Diane Estrosas
ownership control over a nonstock, not-for-profit corporation, a person can CONCEPT BUILDERS vs. NLRC
be held personally liable under the alter ego theory if the evidence shows 257 SCRA 149
that the person controlling the corporation did in fact exercise control, even
though there was no stock ownership. Piercing of the veil of the corporate entity is proper.
Piercing the Corporate Veil Doctrine of Piercing the veil of Corporate Entity
May Apply to Natural Persons It is a fundamental principle of corporation law that a corporation is an entity
The piercing of the corporate veil may apply to corporations as well as natural separate and distinct from its stockholders and from other corporations to
persons involved with corporations. This Court has held that the "corporate which it may be connected. But, this separate and distinct personality of a
mask may be lifted and the corporate veil may be pierced when a corporation corporation is merely a fiction created by law for convenience and to promote
is just but the alter ego of a person or of another corporation. justice. So when the notion of separate juridical personality is used to defeat
public convenience, justify wrong, protect fraud or defend crime, or is used
Reverse Piercing of the Corporate Veil as a device to defeat the labor laws, this separate personality of the
Outsider reverse piercing occurs when a party with a claim against an corporation may be disregarded or the veil of corporate fiction pierced. This
individual or corporation attempts to be repaid with assets of a corporation is true likewise when the corporation is merely an adjunct, a business conduit
owned or substantially controlled by the defendant. or an alter ego of another corporation.
In contrast, in insider reverse piercing, the controlling members will attempt Probative factors of identity that will justify the application the
to ignore the corporate fiction in order to take advantage of a benefit Doctrine of Piercing the veil of Corporate Entity.
available to the corporation, such as an interest in a lawsuit or protection of The conditions under which the juridical entity may be disregarded vary
personal assets. according to the peculiar facts and circumstances of each case. No hard and
fast rule can be accurately laid down, but certainly, there are some
It just depends on who is trying to pierce the veil. probative factors of identity that will justify the application of the doctrine
of piercing the corporate veil, to wit:
What kind of reverse veil piercing is happening here?  Stock ownership by one or common ownership of both corporations.
Outsider reverse veil-piercing is applicable in the instant case. Litton, as  Identity of directors and officers.
judgment creditor, seeks the Court's intervention to pierce the corporate veil  The manner of keeping corporate books and records.
of I/AME in order to make its Makati real property answer for a judgment  Methods of conducting the business.
against Santos, who formerly owned and still substantially controls I/AME.
The test in determining the applicability of the doctrine of piercing
In the U.S. case Acree v. McMahan, the American court held that "outsider the veil of corporation fiction is as follows:
reverse veil-piercing extends the traditional veil-piercing doctrine to permit a Control, not mere majority or complete stock control, but complete
third-party creditor to pierce the veil to satisfy the debts of an individual out domination, not only of finances but of policy and business practice in respect
of the corporation's assets." to the transaction attacked so that the corporate entity as to this transaction
had at the time no separate mind, will or existence of its own;
The Court has pierced the corporate veil in a reverse manner in the instances
when the scheme was to avoid corporate assets to be included in the estate Such control must have been used by the defendant to commit fraud or
of a decedent as in the Cease case and when the corporation was used to wrong, to perpetuate the violation of a statutory or other positive legal duty,
escape a judgment to pay a debt as in the Arcilla case. or dishonest and unjust act in contravention of plaintiff’s legal rights; and
The aforesaid control and breach of duty must proximately cause the injury
Nell Doctrine or unjust loss complained of.
This was cited in the case of Maricalum v. Florentino (2018). When the issue
involves the transfer of all the assets of one corporation to another, it was The absence of any one of these elements prevent ‘piercing the corporate
discussed that: veil.’ In applying the ‘instrumentality’ or ‘alter ego’ doctrine, the
courts are concerned with reality and not form, with how the
General Rule: Where one corporation sells or otherwise transfers all of its corporation operated and the individual defendant’s relationship to
assets to another corporation, the latter is not liable for the debts and that operation. Thus, the question of whether a corporation is a mere alter
liabilities of the transferor. ego, a mere sheet or paper corporation, a sham or a subterfuge is purely one
of fact.
Exceptions:
1. Where the purchaser expressly or impliedly agrees to assume such In this case: The NLRC noted that, while petitioner claimed that it ceased
debts; its business operations on April 29, 1986, it filed an Information Sheet with
2. Where the transaction amounts to a consolidation or merger of the Securities and Exchange Commission on May 15, 1987, stating that its
the corporations; office address is at 355 Maysan Road, Valenzuela, Metro Manila. On the other
3. Where the purchasing corporation is merely a continuation of the hand, HPPI, the third-party claimant, submitted on the same day, a similar
selling corporation; and information sheet stating that its office address is at 355 Maysan Road,
4. Where the transaction is entered into fraudulently in order to Valenzuela, Metro Manila.
escape liability for such debts.
Furthermore, the NLRC stated that: "Both information sheets were filed by
If any above-cited exceptions are present, then the transferee corporation the same Casiño as the corporate Secretary of both corporations. It
shall assume the liabilities of the transferor. would also not be amiss to note that both corporations had the same
president, the same board of directors, the same corporate officers, and
substantially the same subscribers.
Business Enterprise Rule
Jurisprudence held that in a business enterprise transfer, the transferee is
From the foregoing, it appears that, among other things, Concept Builders
liable for the debts and liabilities of his transferor arising from the business and the third-party claimant, HPPI, shared the same address an/or premises.
enterprise conveyed. Under this circumstance, it cannot be said that the property levied upon by
the sheriff were not of Concept Builders. Clearly, petitioner ceased its
business operations in order to evade the payment to private respondents of
back wages and to bar their reinstatement to their former positions.
HPPI is obviously a business conduit of petitioner corporation and its

emergence was skillfully orchestrated to avoid the financial liability that
already attached to petitioner corporation.
LANUZA Jr. vs. BF Corporation "now known" as either CBB (Chesterton Blumenauer Binswanger or as
737 SCRA 275 Chesterton Petty, Ltd., in the Philippines;
 the use of Binswanger of CBB’s paraphernalia (receiving stamp) in
Issue: Whether petitioners (Board of Directors) should be made parties to connection with a labor case where Binswanger was summoned by the
the arbitration proceedings, pursuant to the arbitration clause provided in the authorities, although Elliot claimed that he bought the item with his own
contract between BF Corporation and Shangri-La, thereby piercing the veil of money; and
corporate fiction? Yes.  Binswanger’s takeover of CBB’s project with the PNB.
Held: A corporation's existence is only by fiction of law, it can only exercise While the ostensible reason for Binswanger’s establishment is to continue
its rights and powers through its directors, officers, or agents, who are all CBB’s business operations in the Philippines, which by itself is not illegal, the
natural persons. A corporation cannot sue or enter into contracts without close proximity between CBB’s disestablishment and Binswanger’s coming
them. into existence points to an unstated but urgent consideration which, as we
earlier noted, was to evade CBB’s unfulfilled financial obligation to Livesey
Piercing the corporate veil is warranted when “the separate personality of a under the compromise agreement.
corporation is used as a means to perpetrate fraud or an illegal act, or as a
vehicle for the evasion of an existing obligation, the circumvention of What happened to CBB, we believe, supports Livesey's assertion that De
statutes, or to confuse legitimate... issues." Guzman, CBB's former Associate Director, informed him that at one time Elliot
told her of CBB 's plan to close the corporation and organize another for the
When corporate veil is pierced, the corporation and persons who are normally purpose of evading CBB 's liabilities to Livesey and its other financial liabilities.
treated as distinct from the corporation are treated as one person, such that This wrongful intent we cannot and must not condone, for it will give a
when the corporation is adjudged liable, these persons, too, become liable premium to an iniquitous business strategy where a corporation is formed or
as if they were the corporation. Among the persons who may be treated as used for a non-legitimate purpose, such as to evade a just and due obligation.
the corporation itself under certain circumstances are its directors and
officers. What is the ruling of the Supreme Court regarding acquiring
jurisdiction of an entity? Are you required to acquire jurisdiction
When there are allegations of bad faith or malice against corporate directors over the corporation first before you can pierce the veil of that
or representatives, it becomes the duty of courts or tribunals to determine if corporation, or not? Do you need to have a full-blown hearing so
these persons and the corporation should be treated as one. you can pierce the corporate veil?
Yes, in certain instances. The corporate veil may be pierced without
Hence, when the directors, as in this case, are impleaded in a case against a conducting a full-blown hearing when a corporation ceased to exist only in
corporation, alleging malice or bad faith on their part in directing the affairs name as it re-emerged in the person of another corporation to avoid
of the corporation, complainants are effectively alleging that the directors fulfilment of an obligation. Thus, if the judgment for money claims cannot be
and the corporation are not acting as separate entities. Here, the BOD enforced against the employer corporation such as in this case, then an alias
members may be compelled to submit to the arbitration proceedings. writ may be enforced against the other corporation. This is to avoid
multiplicity of suits and to save the parties from unnecessary expenses.
Who signed this arbitration agreement?
The Board of Directors of Shangri-La EX: Corporation A vs. Corporation B
Q: Corporation A has employees and then Corporation A does not
Who are they trying to bind with this arbitration agreement? want to pay so they created Corporation B. Do you really have to acquire
Shangri-La. jurisdiction over Corporation A which is already non-existent before you can
pierce its veil and go after Corporation B?
How about the officers who signed the agreement? Are they not
enforcing it against the officers? Are they just enforcing it to the A: No more. It does not require to conduct a full-blown hearing. Who will
corporation? Yes. they serve? Corporation A is already dispersed because it becomes
Corporation B. So, who will you serve notices? In those cases, as long as the
persons involved in Corporation A were given due process, and opportunity
LIVESEY vs. BINSWANGER PHILIPPINES
to be heard then the Corporation will just say that we can…(Ma’am’s voice
719 SCRA 433
disconnected ).
The doctrine of piercing the veil of corporate fiction is applicable.
In this case of Livesey, CBB ceased to exist in name and re-emerged as
Piercing the veil of corporate fiction is an equitable doctrine developed to
address situations where the separate corporate personality of a corporation Binswanger that’s why the Supreme Court said there’s no need to acquire
is abused or used for wrongful purposes. Under the doctrine, the corporate jurisdiction over CBB since the persons involved who are in Binswanger
Corporation were given opportunity to be heard.
existence may be disregarded where the entity is formed or used for non-
legitimate purposes, such as to evade a just and due obligation, or to justify
Compare Livesey vs. Binswanger to Mayor vs. Tiu.
a wrong, to shield or perpetrate fraud or to carry out similar or inequitable
considerations, other unjustifiable aims or intentions, in which case, the
fiction will be disregarded and the individuals composing it and the two MAYOR vs. TIU
corporations will be treated as identical. G.R. No. 203770
In the present case, we see an indubitable link between CBB’s closure and The doctrine of piercing the corporate veil is not warranted.
Binswanger’s incorporation. CBB ceased to exist only in name; it re-emerged The probate court in this case has not acquired jurisdiction over Primrose and
in the person of Binswanger for an urgent purpose — to avoid payment by its properties. Piercing the veil of corporate entity applies to determination of
CBB of the last two installments of its monetary obligation to Livesey, as well liability not of jurisdiction; it is basically applied only to determine established
as its other financial liabilities. Freed of CBB’s liabilities, especially that owing liability. It is not available to confer on the court a jurisdiction it has not
to Livesey, Binswanger can continue, as it did continue, CBB’s real estate acquired, in the first place, over a party not impleaded in a case. This is so
brokerage business. because the doctrine of piercing the veil of corporate fiction comes
to play only during the trial of the case after the court has already
Livesey’s evidence, whose existence the respondents never denied, acquired jurisdiction over the corporation. Hence, before this doctrine
converged to show this continuity of business operations from CBB to can be even applied, based on the evidence presented, it is imperative that
Binswanger. It was not just coincidence that Binswanger is engaged in the the court must first have jurisdiction over the corporation.
same line of business CBB embarked on:
 It even holds office in the very same building and on the very same Hence, a corporation not impleaded in a suit cannot be subject to the
floor where CBB once stood; court's process of piercing the veil of its corporate fiction.
 CBB’s key officers, Elliot, no less, and Catral moved over to Binswanger, Resultantly, any proceedings taken against the corporation and its properties
performing the tasks they were doing at CBB; would infringe on its right to due process.
 notwithstanding CBB’s closure, Binswanger’s Web Editor (Young), in an
e-mail correspondence, supplied the information that Binswanger is In the case at bench, the probate court applied the doctrine of piercing the
corporate veil ratiocinating that Rosario had no other properties that
comprise her estate other than her shares in Primrose. Although the probate ABS-CBN BROADCASTING CORPORATION vs. HILARIO
court's intention to protect the decedent's shares of stock in Primrose from G.R. No. 193136, July 10, 2019
dissipation is laudable, it is still an error to order the corporation's tenants to
remit their rental payments to the estate of Rosario. ISSUE: Whether petitioner is jointly and severally liable with CCI for the
dismissal of respondents.
Transcribed by: Dominic Estremos
No occasion to apply piercing the corporate veil if it had not acquired HELD: YES. The doctrine of piercing the veil of corporate fiction is a legal
jurisdiction yet. Without the conduct of a full-blown hearing, as long as the precept that allows a corporation's separate personality to be disregarded
corporation whose veil it wants to pierce is given the opportunity to be heard under certain circumstances so that a corporation and its stockholders or
and based on the hearing, albeit summary in nature, evidence exists to members, or a corporation and another related corporation should be treated
warrant the application of the doctrine. Due process, after all, can be afforded as a single entity. In PNB v. Hydro Resources Contractors Corp., the Court
to the corporation even without a full-blown hearing. said that:
In fact, the Supreme Court ruled in International Academy of Management The doctrine of piercing the corporate veil applies only in three (3) basic
and Economics vs. Litton (G.R. No. 191525, December 13, 2017), “a party areas, namely:
whose corporation is vulnerable to piercing of its corporate veil cannot argue 1. defeat public convenience as when the corporate fiction is used as a
violation of due process.” Hence, if they have grounds to ‘pierce your veil’, vehicle for the evasion of an existing obligation;
do not violate due process because if they find grounds (through the Fraud 2. fraud cases or when the corporate entity is used to justify a wrong,
Test, Harm Test, Control Test), then they will pierce your corporate veil. protect fraud, or defend a crime; or
3. alter ego cases, where a corporation is merely a farce since it is a mere
MARICALUM MINING CORPORATION vs. FLORENTINO alter ego or business conduit of a person, or where the corporation is
G.R. No. 221813, July 23, 2018 so organized and controlled and its affairs are so conducted as to make
it merely an instrumentality, agency, conduit or adjunct of another
ISSUE: Whether the transfer of assets from Maricalum Mining to G Holdings corporation.
is enough to invoke the equitable remedy of piercing the corporate veil.
The present case falls under the third instance where a corporation is merely
HELD: NO. In order to properly analyze G Holdings's role in the instant a farce since it is a mere alter ego or business conduit of person or in this
dispute, the Court must discuss its peculiar relationship (or lack thereof) with case a corporation. "The corporate mask may be removed or the corporate
Maricalum Mining and Sipalay Hospital. veil pierced when the corporation is just an alter ego of a person or of another
corporation." By looking at the circumstances surrounding the creation,
The doctrine of piercing the corporate veil applies only in three (3) basic incorporation, management and closure and cessation of business operations
areas, namely: of CCI, it cannot be denied that CCJ's existence was dependent upon Ty and
1. defeat of public convenience as when the corporate fiction is used as a petitioner:
vehicle for the evasion of an existing obligation (equity cases);
2. fraud cases or when the corporate entity is used to justify a wrong, [Maam: What are the factors found by the court that indicate that it
protect fraud, or defend a crime; or was just an alter ego which pierce the veil?]
3. alter ego cases, where a corporation is merely a farce since it is a mere
alter ego or business conduit of a person, or where the corporation is  First, the internal Scenic Department which initially handled the props
so organized and controlled and its affairs are so conducted as to make and set designs of petitioner was abolished and shut down and CCI was
it merely an instrumentality, agency, conduit or adjunct of another incorporated to cater to the props and set design requirements of
corporation. petitioner, thereby transferring most of its personnel to CCI.
While the veil of corporate fiction may be pierced under certain instances,  Notably, CCI was a subsidiary of petitioner and was incorporated
mere ownership of a subsidiary does not justify the imposition of liability on through the collaboration of Ty and the other major stockholders and
the parent company. It must further appear that to recognize a parent and a officers of petitioner. CCI provided services mainly to petitioner and its
subsidiary as separate entities would aid in the consummation of a other subsidiaries. When Edmund Ty organized his own company,
wrong. Thus, a holding corporation has a separate corporate existence and petitioner hired him as consultant and eventually engaged the services
is to be treated as a separate entity; unless the facts show that such separate of his company DWVEI.
corporate existence is a mere sham, or has been used as an instrument for
concealing the truth.  As a result of which CCI decided to close its business operations as it
no longer carried out services for the design and construction of sets
In the case at bench, complainants mainly harp their cause on the alter ego and props for use in the programs and shows of petitioner, thereby
theory. Under this theory, piercing the veil of corporate fiction may be terminating respondents and other employees of CCI.
allowed only if the following elements concur:
1. Control-not mere stock control, but complete domination-not only of Petitioner clearly exercised control and influence in the management and
finances, but of policy and business practice in respect to the closure of CCI's operations, which justifies the ruling of the appellate court
transaction attacked, must have been such that the corporate entity as and labor tribunals of disregarding their separate corporate personalities and
to this transaction had at the time no separate mind, will or existence treating them as a single entity.
of its own;
2. Such control must have been used by the defendant to commit a fraud Another notable fact is that in the Certification dated August 22, 2011 issued
or a wrong, to perpetuate the violation of a statutory or other positive by petitioner as to the employment status of Ty, it was stated that the latter
legal duty, or a dishonest and an unjust act in contravention of plaintiffs was holding the position of Vice-President and Managing Director of its
legal right; and Division, CCI, from February 1, 1996 up to October 5, 2003, the date of
3. The said control and breach of duty must have proximately caused the effectivity of CCI's closure. This shows that Ty was in fact considered a
injury or unjust loss complained of. regular employee of petitioner and CCI was considered a division of petitioner
which bolster the conclusion that petitioner should be held jointly and
Accordingly, complainants failed to satisfy the second and third tests to justify severally liable with CCI for the illegal dismissal of respondents.
the application of the alter ego theory. This inevitably shows that the CA
committed no reversible error in upholding the NLRC's Decision declaring How about the services they rendered? Did they have other
Maricalum Mining as the proper party liable to pay the monetary awards in customers or clients?
favor of complainants. CCI was a subsidiary with ABS-CBN and provided services mainly to ABS-
CBN subsidiaries. They just work for ABS-CBN.
What type of case did the court use?
Alter ego cases.
GALA vs. ELLICE AGRO-INDUSTRIAL CORP. Transcribed by: Johanna Dingal, Kelvin Du, Vanessa Escritor
418 SCRA 431
CLASSES OF CORPORATIONS
It is always sad to see families torn apart by money matters and property
disputes. The concept of a close corporation organized for the purpose of SEC. 3. Classes of Corporations. – Corporations formed or organized
running a family business or managing family property has formed the under this code maybe stock or nonstock corporations. Stock Corporations
backbone of Philippine commerce and industry. Through this device, Filipino are those which have capital stock divided into shares and are authorized to
families have been able to turn their humble, hard-earned life savings into distribute to the holders of such shares, dividends, or allotment of the surplus
going concerns capable of providing them and their families with a modicum profits on the basis of the shares held. All other corporations are nonstock
of material comfort and financial security as a reward for years of hard work. corporations
A family corporation should serve as a rallying point for family unity and
prosperity, not as a flashpoint for familial strife. It is hoped that people
reacquaint themselves with the concepts of mutual aid and security that are
Stock Corporation
the original driving forces behind the formation of family corporations and So classes of corporations, corporations are formed under the RCP maybe
use these tenets in order to facilitate more civil, if not more amicable, Stock or Nonstock Corporation capital stock divided into shares and are
settlements of family corporate disputes. authorized to distribute to the holders of such shares, dividends, or allotment
of the surplus profits on the basis of the shares held. So basically that's the
definition of Stock Corporation.
Atty. Fabian shares that she has heard many times of real-life stories in Davao
City of conflicts in family corporations because of shares of stocks, properties
held by the corporation, etc. Instead of being a helpful way to conduct Nonstock Corporation
business, it now tears the family apart. The last sentence is the definition of a Nonstock Corporation. If you
cannot provide any other answer, that is the definition of both corporations.
Atty. Fabian further shares that she was struck with Fr. Gus’ line. He said,
“You cannot expect a family to become more harmonious just because they So they just rephrased basically the definition of a Stock Corporation but it's
have formed it to a corporation. You can have as much harmony as you basically the same as in the CCP.
already possess. There is no law that can make up for what is lacking in
human experience.” Stock Corporation vs. Nonstock Corporation
Stock Corporations Nonstock Corporations
As to Definition
Corporations which have capitals All other private corporations.
divided into shares
and are authorized to distribute to
the holders of such shares
dividends or allotments of the
surplus profits on the basis of the
shares held.
As to Essence
Essence of a stock corporation it Essence of a nonstock corporation
can distribute portions of it does not distribute profits or
accumulated profits to dividends
shareholders in proportion to their
shares
What happens to the surplus profits of nonstock corporations?

It gets circulated back into the business of the corporation into the business
of the corporation. So that's that pretty straightforward. So Stock Corporation
is usually followed by the modifier, “profit corporation.” Nonstock Corporation
is usually followed by a modifier, “nonprofit corporation”.
If the articles of incorporation or the by laws:

 only state the amount of authorized capital stock
 but not how many number of shares?
The law says that “it should be divided in capital stocks and in a number of
shares” but what if only states the amount and not the number of shares?
For example, authorized capital stock is P 1,000,000 but as to number of
shares it does not provide 100,000 shares it is not mentioned.
Is that allowed?
No, so based on Section 3 it is not allowed. It must be divided into shares.
So it always has to have 100,000 shares 1,000 shares and 1,000,000 shares
– number of shares.
If the articles of incorporation or the bylaws is:

 silent as to dividends
Does it make it a nonstock or nonprofit corporation?

No. Remember, the difference of both corporations is that one is for profit
and the other is not for profit. The power to declare dividends under
the RCCP should be read into the Articles of Incorporation. So
presumed it is for profit. It is not presumed for nonprofit or nonstock
corporation.
As well as silence in the distribution of assets does not automatically make it

into a nonstock nonprofit corporation. Because nonstock nonprofit has a
provision “at the end of the life of the corporation the assets will be
distributed to its members.” So absent that it doesn't make it automatically
a nonstock corporation. It has to be defined by the articles of incorporation later on so after nonstop any place
or in the bylaws or it is otherwise presumed a Stock Corporation. in the Philippine is provided for by
the bylaws (Sec 50)
Distinctions Between Stock and Nonstock Corporations Transferability of Interest or Membership Interest
Transferable Membership in a nonstock
STOCK CORPORATIONS NONSTOCK CORPORATIONS corporation and all rights arising
Definition therefrom are personal and non-
transferable unless the articles of
Corporations which have capital All other private corporations.
incorporation or the by-
stock divided into shares and are
laws otherwise provide. (Sec 89)
authorized to distribute the holders One where no part of its income is
of the shares, dividends, or distributable as dividends to its
allotment of the surplus profits on members, trustees, or officers. An example of a nonstock corporation is the American Chamber of Commerce
the basis of the shares (Sec 3) Provided, that at any profit which in Davao City.
a nonstock corporation may obtain
incidental to its operations shall, How about Lakas Atenista?
whenever necessary or proper be Maybe if they incorporate then they can fall into nonstock.
used for the furtherance of the
For “fraternal” Fraternal Order of Saint Thomas More it also falls under that.
purpose or purposes for which the
Educational if it if it's registered as a nonstock corporation maybe a school
corporation was organized, subject
perhaps or a religious corporation.
to the provisions of this Title (Sec
86)
As to Transferability of Interest or Membership Interest
Purpose
So they are different. In stock corporation it is transferable while in
Primarily to make profits for its Nonstock Corporations may be
nonstock membership it is purely personal. For example, you are a member
shareholders. formed or organized for charitable, in a fraternity or in an exclusive Golf Club Organization, or in the
religious, educational, gym that's purely personal and nontransferable. How I wish a gym
professional, cultural, fraternal, membership in Anytime Fitness is transferable but it's not.
literary, scientific, social, civic
service, or similar purposes like These distinctions are not exclusive, although they are numerous. There
trade, industry, agricultural, and
are many intricacies between the two corporations. There are possibly a lot
like chambers, or any combination
more distinctions these are the most significant ones
thereof subject to the
special provisions of this Title
governing particular classes of Director of Internal Revenue vs. Club Filipino
nonstock corporations. (Sec 87) 5 SCRA 321 (1962)
Distribution of Profits
Club Filipino is a non-stock corporation.
Profit is distributed to the Whatever incidental profit made is
The facts that the capital stock of the Club is divided into shares, does not
shareholders. not distributed among its members
mean that it is not engaged in the business of operator of bar and restaurant.
but is used for furtherance of its
What is determinative of whether or not the Club is engaged in such business
purpose. AOI or by-laws may
is its object or purpose, as stated in its articles and by-laws. It is a familiar
provide for the distribution of its
rule that the actual purpose is not controlled by the corporate form or by the
assets among its members upon
commercial aspect of the business prosecuted, but may be shown by extrinsic
dissolution. Before then, no profit
evidence, including the by-laws and the method of operation. From the
may be made by members.
extrinsic evidence adduced, the Tax Court concluded that the Club is not
Composition engaged in the business as a barkeeper and restaurateur.
Stockholders Members
Scope of Right to Vote Moreover, for a stock corporation to exist, two requisites must be complied
Each stockholder votes according Each member, regardless of class, with, to wit:
to the proportion of his shares in is entitled to one (1) vote UNLESS 1. A capital stock divided into shares and
the corporation. No shares may such right to vote has been 2. An authority to distribute to the holders of such shares, dividends or
be deprived of voting rights limited ,broadened, or denied in allotments of the surplus profits on the basis of the shares held (sec. 3,
except those classified and the AOI or by-laws (Sec 88) act no. 1459).
issued as “preferred” or
“redeemable” shares, and as In the case at bar, nowhere in its articles of incorporation or by-laws could
otherwise provided by this be found an authority for the distribution of its dividends or surplus profits.
Code. (Sec 6) Strictly speaking, it cannot, therefore, be considered a stock corporation,
Governing Body within the contemplation of the corporation law.
Board of Directors Board of Trustees
Term of Office Other Classifications of Corporations
Directors shall hold office for one They shall hold office for not more
(1) year and until their successors than three (3) years until their In relation to the State:
are elected and qualified (Sec 22) successors are elected and 1. Public Corporations – those created for political purposes connected
qualified (Sec 91) with the public good in the administration of the civil government.
Election of Officers 2. Private corporations – those created for purposes other than
Officers are elected by the Board of Officers may directly be elected by government or governmental purposes but who carry out private
Directors. (Sec 24) except in close the members UNLESS the AOI or purposes and interests.
corporations where the the by-laws provide otherwise (Sec
stockholders themselves may elect 91) As to place of incorporation:
(Sec 96) 1. Domestic Corporations – is one incorporated under the laws of the
Place of Meetings Philippines.
Generally, the meetings must be Any place within the Philippines, if 2. Foreign Corporations – is one incorporated under the laws other than
held at the principle place of the provided for by the by-laws (Sec the laws of the Philippines.
corporation, if practicable. If not 92)
then any place in the city or
municipality where the principal
office of the Corporation is located
so we will delve deeper into that
As a review in your PubCorp and in your LabRel: Section 4. Corporations Created by Special Laws or Charters. –
 Public Corporations – are GOCCs with original charter or under Corporations created by special laws or charters shall be governed primarily
special laws and is governed by the CSC laws. by the provisions of the special law or charter creating them or applicable to
 Private Corporations – are GOCCs without original charter who are them, supplemented by the provisions of this Code, insofar as they are
under the Corporation Code and governed by the Labor Code. applicable.
This is heavily tested in the bar exams because it applies to a lot of topics.
Charter Test
As to legal status: Essentially, the “charter test” as it stands today provides: The test to
1. De Jure Corporation determine whether a corporation is government owned or controlled, or
2. De Facto Corporation private in nature is simple. Is it created by its own charter for the exercise of
3. Corporation by Estoppel a public function, or by incorporation under the general corporation law?
4. Corporation by Prescription Those with special charters are government corporations subject to its
provisions, and its employees are under the jurisdiction of the Civil Service
De Jure Corporation Commission, and are compulsory members of the Government Service
One that fulfilled all the requirements mandated by law. Meaning, it is Insurance System. [Baluyot v. Holganza, 382 Phil. 131, 136-137 (2000)]
perfect. “De jure” in Latin means “a matter of law”. It can resist a suit by the
State to challenge its existence. It is not subject to any attack, collateral or Basically, the charter test distinguishes public from private corporations. Note
direct, as to its juridical existence. that if the charter of a corporation is a law, it means it is created by law.
Therefore, if it is created by law, it must be for a public purpose. It cannot
De Facto Corporation be for a private purpose, then it is prohibited under the Constitution.
One organized with colorable compliance with the requirements of a valid
law. Its existence cannot be collaterally attacked but its personality can be Private corporations are created by operation of law. If it is for a private
directly attacked by the State in a quo warranto proceeding. purpose, it must be by operation of law. The charter must be granted by the
[This might come out in our exam.] SEC, after fulfilling all the requirements of the RCCP.
Corporation by Estoppel NDC vs. Phil. Veterans Bank

One which in reality is not a corporation, either de jure or de facto, because G.R. No. 84132-33 | 192 SCRA 257 | Dec. 10, 1990
it is so defectively formed. It is a status acquired by persons who assume to
act as a corporation knowing it to be without authority. Issue: WON the formation of New Agrix, Inc pursuant to P.D. No. 1717, a
special law, is in accordance with the law. No, the new corporation, being
While it is called “corporation by estoppel” (or “partnership by estoppel” as neither owned nor controlled by the Government, should have been
to partnerships), it is not strictly or technically a corporation. It has a liability created only by general and not special law.
as a corporation.
Ruling: The new corporation is neither owned nor controlled by the
Corporation by Prescription government. The National Development Corporation was merely required to
One which has exercised corporate powers from an indefinite period without extend a loan to New Agrix, Inc. Pending payment thereof, NDC would
interference on the part of the sovereign. (e.g. Roman Catholic Church) undertake the management of the corporation, but with the obligation of
making periodic reports to the Agrix board of directors. After payment of the
As to relationship of management and control: loan, the said board can then appoint its own management. The stocks of
the new corporation are to be issued to the old investors and stockholders of
1. Holding Company AGRIX upon proof of their claims against the abolished corporation. They
A corporation organized to hold the stock of another or other shall then be the owners of the new corporation. New Agrix, Inc. is entirely
corporations. private and so should have been organized under the Corporation Law in
accordance with the Constitution.
2. Subsidiary
A company whose parent company is a majority shareholder that owns Basically, you cannot create a private corporation by passing a specific,
more than 50% of all the subsidiary company’s shares. special law.
3. Affiliate
A company with a parent company that only possesses less than 50% Primary Franchise vs. Secondary Franchise
in the ownership of the affiliate. A franchise is a special privilege conferred by governmental authority, and
which does not belong to citizens of the country generally as a matter of
What if it is exactly 50%? common right.
No one knows. Under the rules, it does not state if exactly 50%.
General or Primary Special or Secondary
As to their openness to the public: Franchises Franchises
The franchise to exist as a The franchise that confers rights
1. Close Corporations corporation. and privileges upon existing
One which is limited to selected persons or members of a family. One corporations. It is a franchise over
of its distinctive characteristics is that the shareholders in a closed a franchise.
corporation must not exceed 20 persons. Vested in individuals who Vested in a corporation itself.
compose the corporation.
2. Open Corporations Cannot be conveyed, cannot be Can ordinarily be conveyed,
One which is open to any person who may wish to become a executed upon in the absence of a mortgaged, alienated, and even
stockholder or member thereto. More than 20 stockholders or members legislative authority so to do. executed upon or made liable as a
is an open corporation. lien, under a general power
It is a special privilege to exist as granted to a corporation to
Which among these classifications are specifically mentioned in the an entity. dispose of its property.
RCCP?
1. Domestic corporations
2. Foreign corporations
3. Close corporations
4. Special corporations – religious, educational
5. One-person corporations (OPC)
Why is this relevant? Nationality of Corporations
Let’s go to the nationality of corporations which may get tricky for everybody.
Rizal Light & Ice Co. vs. Municipality of Morong, Rizal Basically, you determine here if it’s a domestic corporation or foreign
G.R. No. L-20993 | 25 SCRA 285 | Sept. 28, 1968 corporation. If the stockholder are natural persons, then it’s easy. It’s just
the citizenship of one person versus the citizenship of another. Just compute
Issue: WON a primary franchise (certificate of incorporation) is a condition the percentage of ownership of each individual stockholder; but it becomes
sine qua non to the issuance of a secondary franchise. No. tricky if the stockholders or shareholders are corporations. That’s why we
have these tests.
Ruling: It is not necessary that Morong Electric be first incorporated before
a certificate of public convenience (secondary franchise) would be validly
issued in its favor. Incorporation Test
That is determined by the state of incorporation, regardless of the nationality
The juridical personality and legal existence of Morong Electric began only of the stockholders.
when its certificate of incorporation was issued by the SEC. Before that, or
pending the issuance of said certificate of incorporation, the incorporators Domiciliary Test
cannot be considered as de facto corporation. But the fact that Morong Based on the principal place of business of the corporation. That’s how the
Electric had no corporate existence on the day the franchise was granted in nationality of the corporation is determined.
its name does not render the franchise invalid, because later Morong Electric
obtained its certificate of incorporation and then accepted the franchise in Control Test
accordance with the terms and conditions thereof. This view is sustained by Determined by the nationality of the controlling stockholders or members.
eminent American authorities. This is the test applied in times of war.
The fact that a company is not completely incorporated at the time the grant
is made to it by a municipality to use the streets does not, in most
Grandfather Test /Rule
The nationality of a corporation engaged in nationalized or partly nationalized
jurisdictions, affect the validity of the grant. But such grant cannot take effect
areas of activities is accurately computed by attributing the nationality of the
until the corporation is organized. An ordinance granting the franchise may
second or even the subsequent tier of ownership to determine the nationality
be presented before the corporation grantee is fully organized, where the
of the corporate shareholder.
organization is completed before the passage and acceptance.
SEC OPINION 11-04
While a franchise cannot take effect until the grantee corporation is
Under the Philippine jurisdiction, the primary test is always the place of
organized, the franchise may, nevertheless, be applied for before the
incorporation test. We adhere to the doctrine that the corporation is a
company is fully organized. A grant of a street franchise is valid although the
creature of the state, whose laws it has been created. A corporation
corporation is not created until afterwards.
organized in a foreign country, irrespective of the nationality of the person in
whose control it is, necessarily is a foreign corporation. If it was incorporated
In the matter of the secondary franchise the authorities are numerous in
in Singapore, then it is a Singaporean corporation. Wa koy labot kung ang
support of the proposition that an ordinance granting a privilege to a
corporation is not void because the beneficiary of the ordinance is not fully
stockholders didto is Filipino. It’s Singaporean. That’s it.
organized at the time of the introduction of the ordinance. It is enough that
The control test and the principal place of business test are mere adjunct
organization is complete prior to the passage and acceptance of the
tests, according to this SEC Opinion. When the place of incorporation test
ordinance. The reason is that a privilege of this character is a mere
indicates that the subject corporation is organized in the Philippine law, you
license to the corporation until it accepts the grant and complies
use the control test and the domiciliary test if it’s registered here in the
with its terms and conditions.
Philippines. And then you look if it really is domestic or foreign. But the first
test is the incorporation test. If it’s incorporated outside, it’s outside. But if
The incorporation of Morong Electric and its acceptance of the franchise as
it’s inside, you use the domiciliary test or control test to determine.
shown by its action in prosecuting the application filed with the Commission
for the approval of said franchise, not only perfected a contract between the
Basically, if it is registered outside the Philippines, then it is a foreign
municipality and Morong Electric but also cured the deficiency pointed out by
corporation. No need to use the control test or the domiciliary test. And then
the petitioner in the application of Morong EIectric.
if it’s registered here, then you go to the control test and the domiciliary test.
Was there a reason or a logical basis why they allowed the

secondary franchise to be granted despite the primary franchise to
Control Test
not have been complied with? If the capital is at least 60% owned by Filipinos, then the entire
Rizal Lights here was a previous provider for electricity services in the shareholdings of the corporation shall be recorded as Filipino-owned; thus,
Municipality of Morong but it was subsequently revoked. When Morong making both the investing and investee corporations, Philippine nationals.
Electric applied for a certificate of public convenience, the Court took notice
of the necessity that during that time there was no electricity in Morong. Grandfather Test
To arrive at the actual Filipino ownership and control in a corporation, both
Apart from the circumstances at that time wherein they really need electricity direct and indirect shareholdings of the corporation are determined. In case
plus the fact that Morong Electric later obtained the certificate of of multi-tiered corporation, the stock attribution rule must be allowed to
incorporation of the SEC. They just allowed that to push through because of run continuously along the chain of ownership, until it finally reaches
necessity. individual stockholders. The purpose of this rule is to trace the nationality to
the stockholder or investor-corporations, to ascertain the nationality of the
corporation where the investment is made.
In layman’s term, you reach all the individual stockholders, those natural
persons. You trace the stockholdings to the individual natural persons.
Where Control Test Applies SEC. 3. Definitions. – As used in this Act:
If you look at your 1987 Constitution, under Section 2, Article XII: a) the term “Philippine National” shall mean a citizen of the Philippines or a
domestic partnership or association wholly owned by citizens of the
Philippines; or a corporation organized under the laws of the Philippines of
SECTION 2. All lands of the public domain, waters, minerals, coal, petroleum,
which at least sixty percent (60%) of the capital stock outstanding and
and other mineral oils, all forces of potential energy, fisheries, forests or
entitled to vote is owned and held by citizens of the Philippines or a
timber, wildlife, flora and fauna, and other natural resources are owned by
the State. With the exception of agricultural lands, all other natural resources corporation organized abroad and registered as doing business in the
Philippine under the Corporation Code of which one hundred percent (100%)
shall not be alienated. The exploration, development, and utilization of
of the capital stock outstanding and entitled to vote is wholly owned by
natural resources shall be under the full control and supervision of the State.
Filipinos or a trustee of funds for pension or other employee retirement or
The State may directly undertake such activities, or it may enter into co-
separation benefits, where the trustee is a Philippine national and at least
production, joint venture, or production-sharing agreements with Filipino
sixty percent (60%) of the fund will accrue to the benefit of Philippine
citizens, or corporations or associations at least sixty per centum of whose
nationals: Provided, That where a corporation and its non-Filipino
capital is owned by such citizens. Such agreements may be for a period not
stockholders own stocks in a Securities and Exchange Commission (SEC)
exceeding twenty-five years, renewable for not more than twenty-five years,
and under such terms and conditions as may be provided by law. Xxx registered enterprise, at least sixty percent (60%) of the capital stock
outstanding and entitled to vote of each of both corporations must be owned
and held by citizens of the Philippines and at least sixty percent (60%) of the
In Section 7, Article XII, it says: members of the Board of Directors of each of both corporations must be
citizens of the Philippines, in order that the corporation shall be considered a
SECTION 7. Save in cases of hereditary succession, no private lands shall Philippine national; (as amended by R.A. 8179).
be transferred or conveyed except to individuals, corporations, or
associations qualified to acquire or hold lands of the public domain. Under the Implementing Rules of FIA,
In Section 11, Article XII: SECTION 1. DEFINITION OF TERMS. – For purposes of these Rules and
Regulations: xxx
SECTION 11. No franchise, certificate, or any other form of authorization for
the operation of a public utility shall be granted except to citizens of the b. Philippine national shall mean a citizen of the Philippines or a domestic
Philippines or to corporations or associations organized under the laws of the partnership or association wholly owned by citizens of the Philippines; or a
Philippines at least sixty per centum of whose capital is owned by such corporation organized under the laws of the Philippines of which at least sixty
citizens, nor shall such franchise, certificate, or authorization be exclusive in percent (60%) of the capital stock outstanding and entitled to vote is owned
character or for a longer period than fifty years. xxx and held by citizens of the Philippines; or a corporation organized abroad and
registered as doing business in the Philippines under the Corporation Code
Lastly, Section 11, Article XVI: of which 100% of the capital stock outstanding and entitled to vote is wholly
owned by Filipinos; or a trustee of funds for pension or other employee
retirement or separation benefits, where the trustee is a Philippine national
SECTION 11. (1) The ownership and management of mass media shall be and at least sixty percent (60%) of the fund will accrue to the benefits of
limited to citizens of the Philippines, or to corporations, cooperatives or Philippine nationals; Provided, That where a corporation and its non-Filipino
associations, wholly-owned and managed by such citizens. stockholders own stocks in a Securities and Exchange Commission (SEC)
registered enterprise, at least sixty percent (60%) of the capital stock
The Congress shall regulate or prohibit monopolies in commercial mass outstanding and entitled to vote of each of both corporations must be owned
media when the public interest so requires. No combinations in restraint of and held by citizens of the Philippines and at least sixty percent (60%) of the
trade or unfair competition therein shall be allowed. members of the Board of Directors of each of both corporations must be
citizens of the Philippines, in order that the corporation shall be considered a
(2) The advertising industry is impressed with public interest, and shall be Philippine national. The control test shall be applied for this purpose.
regulated by law for the protection of consumers and the promotion of the
general welfare. Compliance with the required Filipino ownership of a corporation shall be
determined on the basis of outstanding capital stock whether fully paid
Only Filipino citizens or corporations or associations at least seventy per or not, but only such stocks which are generally entitled to vote are
centum of the capital of which is owned by such citizens shall be allowed to considered.
engage in the advertising industry. xxx
For stocks to be deemed owned and held by Philippine citizens or Philippine
Those are the prohibitions under the Constitution. But there are many more nationals, mere legal title is not enough to meet the required Filipino
under the Foreign Investments Act (RA No. 7042). equity. Full beneficial ownership of the stocks, coupled with
appropriate voting rights is essential. Thus, stocks, the voting rights of
Foreign Investments Act (RA No. 7042) which have been assigned or transferred to aliens cannot be
considered held by Philippine citizens or Philippine nationals.
RA No. 7042 is the basic law that governs foreign investments in the
Philippines. It is considered a landmark legislation because it liberalizes the Individuals or juridical entities not meeting the aforementioned
entry of foreign investments into the country. Under this law, foreign
qualifications are considered as non-Philippine nationals.
investors are allowed to invest 100% equity in companies engaged in almost
all types of business activities, subject to certain restrictions provided in the
Meaning, only voting stocks are considered to determine outstanding capital
Foreign Investment Negative List (FINL).
stock. The name that it has in the Certificate of Stock does not govern. There
are instances where foreigners try to escape this provision by executing
Foreign Investment Negative List (FINL)
voting trust agreements. Basically, it is when shareholders execute an
The FINL is a short list of investment areas or activities, which may be open agreement saying they own this share, but they give the voting rights to
to foreign investors, or reserved to Filipino nationals. The FINL are classified somebody else, and that somebody else is a foreigner. That’s what the last
as List A and List B.
paragraph of this article is addressing. It is not legal title, but beneficial
ownership. Basically, the beneficial ownership of that – the power to control
of that – because the voting right is held by foreigners, is with the foreigners.
If the beneficial ownership is held by somebody else, you include that in
computing the 60-40.
Transcribed by: Mikel Hofileña Delgado SEC OPINION (FEB. 6, 2012)
Foreign Negative List If the real property to be acquired is a condominium unit, or any interest
The Foreign Investment Negative List is a list which outline the scope and therein, the following rules shall be taken into consideration:
limitations of foreign ownership in businesses is specific industries.  If the condominium is set up on leased land, the condominium
corporation may be wholly foreign-owned.
The list is divided into:  Where the condominium corporation is a Filipino corporation,
 LIST A: FOREIGN OWNERSHIP IS LIMITED BY MANDATE OF THE which owns the land on which the condominium is located, no
CONSTITUTION AND SPECIFIC LAWS interest in the condominium may be transferred to foreign
 LIST B: FOREIGN OWNERSHIP IS LIMITED FOR REASONS OF individuals or corporations, more than 40% capital stock of which
SECURITY, DEFENSE, RISK TO HEALTH, AND MORALS AND is owned by foreign nationals.
PROTECTION OF SMALL AND MEDIUM SCALE ENTERPRISES.  When the common areas are held by a condominium corporation,
the transfer condominium units to foreign individuals may be
made only up to the point where it would not cost the <inaudible>
The 11th Foreign Investment Negative List foreign interest to exceed 40%.
LIST A: FOREIGN OWNERSHIP IS LIMITED BY MANDATE OF THE So, Condominium Corporation also requires 40-60. List A are those mandated
CONSTITUTION AND SPECIFIC LAWS by the Constitution and specific laws.
NO FOREIGN EQUITY LIST B: FOREIGN OWNERSHIP IS LIMITED FOR REASONS OF SECURITY,
1. Mass media, except recording and internet business DEFENSE, RISK TO HEALTH AND MORALS AND PROTECTION OF SMALL AND
2. Practice of professions, including radiologic and x-ray technology, law,
MEDIUM SCALE ENTERPRISES
criminology, and marine deck officers and marine engine officers.
a. Subject to the Annex on Professions indicating professions This is no longer based on the Constitution but for reasons of security,
where foreigners are allowed to practice in the Philippines defense, risk to health and morals and protection of small and medium scale
subject to reciprocity and where corporate practice is allowed
enterprises.
b. Foreigners may teach at higher education levels if subject being
taught is not a professional subject (included in a government UP TO FORTY PERCENT (40 %) FOREIGN EQUITY
board or bar examination).
1. Manufacture, repair, storage, and/or distribution of products and/or
3. Retail trade enterprises with paid-up capital of less than US$2.5 million
ingredients requiring Philippine National Police (PNP) clearance:
4. Cooperatives
 Firearms (handguns to shotguns), parts of firearms and
5. Organization and operation of private detective, watchmen or security
ammunition therefor, instruments or implements used or
guards agencies
intended to be used in the manufacture of firearms;
6. Small-scale mining
 Gunpowder;
7. Utilization of marine resources in archipelagic waters, territorial sea,
 Dynamite;
and exclusive economic zone as well as small-scale utilization of natural  Blasting supplies;
resources in rivers, lakes, bays and lagoons  Ingredients used in making explosives:
8. Ownership, operation and management of cockpits
 Chlorates of potassium and sodium;
9. Manufacture, repair, stockpiling and/or distribution of nuclear weapons
 Nitrates of ammonium, potassium, sodium barium, copper
10. Manufacture, repair, stockpiling and/or distribution of biological,
(11), lead (11), calcium and cuprite;
chemical and radiological weapons and anti-personnel mines
 Nitric acid;
11. Manufacture of firecrackers and other pyrotechnic devices
 Nitrocellulose;
 Perchlorates of ammonium, potassium and sodium;
UP TO TWENTY-FIVE PERCENT (25%) FOREIGN EQUITY
 Dinitrocellulose;
1. Private recruitment, whether for local or overseas employment
 Glycerol;
2. Contracts for the construction of defense-related structures
 Amorphous phosphorus;
 Hydrogen peroxide;
UP TO THIRTY PERCENT (30%) FOREIGN EQUITY
 Strontium nitrate powder;
1. Advertising
 Toluene; and
 Telescopic sights, sniper scope and other similar devices.
UP TO 40% FOREIGN EQUITY
1. Subject to applicable regulatory frameworks, contracts for the
However, the manufacture or repair of these items may be authorized by the
construction and repair of locally-funded public works except:
Chief of the PNP to non-Philippine nationals; Provided that a substantial
A. Infrastructure/development projects covered in Republic
percentage of output, as determined by the said agency, is exported.
Act No. 7718
Provided further that the extent of foreign equity ownership allowed shall be
B. Projects which are foreign-funded or assisted and required
specified in the said authority/clearance.
to undergo international competitive bidding
2. Manufacture, repair, storage and/or distribution of products
2. Exploration, development and utilization of natural resources
requiring Department of National Defense (DND) clearance:
3. Ownership of private lands
 Guns and ammunition for warfare;
4. Operation of public utilities, except power generation and the supply
 Military ordnance and parts thereof (e.g., torpedoes,
of electricity to the contestable market and similar businesses or
depth charges, bombs, grenades, missiles);
services not covered by the definition of public utilities
 Gunnery, bombing and fire control systems and
5. Educational institutions other than those established by religious
components;
groups and mission boards, for foreign diplomatic personnel and their
 Guided missiles/missile systems and components;
dependents and other foreign temporary residents, or for short-term
 Tactical aircraft (fixed and rotary-winged), parts and
high-level skills development that do not form part of the formal
components thereof;
education system as defined in Section 20 of BP No. 232 (1982)
 Space vehicles and component systems;
6. Culture, production, milling, processing, trading except retailing, of
 Combat vessels (air, land and naval) and auxiliaries;
rice and corn and acquiring, by barter, purchase or otherwise, rice and
 Weapons repair and maintenance equipment;
corn and the by-products thereof
 Military communications equipment;
7. Contracts for the supply of materials, goods and commodities to
 Night vision equipment;
government-owned or controlled corporation, company, agency or
 Stimulated coherent radiation devices, components and
municipal corporation
accessories;
8. Operation of deep sea commercial fishing vessels
 Armament training devices; and
9. Ownership of condominium units
 Others as may be determined by the Secretary of the
10. Private radio communications network
DND.
However, the manufacture or repair of these items may be authorized by  Social work (Section 18, RA No. 4373, as amended)
the Secretary of National Defense to non-Philippine nationals; provided that  Teaching at elementary and secondary levels (Sections 15 and 24,
a substantial percentage of output, as determined by the said agency, RA No. 7836, as amended)
is exported. Provided further that the extent of foreign equity ownership  Veterinary medicine (Sections 15 and 31, RA No. 9268)
allowed shall be specified in the said authority/clearance  Other professions as may be provided by law or by treaty where
the Philippines is a party
3. Manufacture and distribution of dangerous drugs
4. Sauna and steam bathhouses, massage clinics and other like Corporate Practice
activities regulated by law because of risks posed to public health B. Corporate practice is allowed in the following professions, subject to the
and morals, except wellness centers requirements and conditions under the pertinent professional regulatory law:
5. All forms of gambling except those covered by investment
agreements with PAGCOR • Aeronautical engineering (Section 28, PD No. 1570)
6. Domestic market enterprises with paid-in equity capital of less • Agricultural and biosystems engineering (Section 29, RA No.
than the equivalent of US$200,000 10915)
7. Domestic market enterprises which involve advanced technology • Architecture (Section 37, RA No. 9266)
or employ at least fifty (50) direct employees with paid-in equity  Chemistry (Section 35, RA No. 10657)
capital of less than the equivalent of US$100,00 • Electronics engineering (Section 28, RA No. 9292)
 Environmental planning (Section 25, RA No. 10587)
You can see that List A is constitutionally based, trying to reserve the rights • Forestry (Section 25, RA No. 10690)
of Philippine lands to Filipinos while List B is more on security, morals, health, • Guidance and counseling (Section 27, RA No. 9258)
and safety. • Interior design (Section 26, RA No. 10350)
• Landscape architecture (Section 26, RA No. 9053)
It would be weird if our ammunition is manufactured by the Chinese for • Naval architecture (Section 30 [g], RA No. 10698)
example.  Psychology (Section 33, RA No. 10029) Real estate service (real
estate consultant, real estate appraiser, real estate assessor, real
Annex on Professions estate broker and real estate salesperson) (Section 32, RA No.
A. Foreigners are allowed to practice the following professions in the 9646)
Philippines provided that their home country allows Filipinos to be admitted  Sanitary engineering (Section 30, RA No. 1364)
to the practice of these professions: • Social work (Section 1[c), RA No. 4373, as amended)
 Accountancy (Sec. 34, RA No. 9298) Note: There is no legal practice. Foreigners cannot practice law in the
 Aeronautical engineering (Section 14, PD No. 1570) Philippines. Unlike in America you can practice there even if you are a
 Agricultural and biosystems engineering (Sections 15 and 31, RA foreigner.
No. 10915)
 Agriculture (Section 27, PRC Resolution No. 2000-663) JACOBUS BERNHARD HULST vs. PR BUILDERS, INC.
 Architecture (Sections 13 and 27, RA No. 9266) G.R. No. 156364 September 3, 2007
 Chemical Engineering (Section 30, RA No. 9297)
 Chemistry (Sections 16, 18 and 34, RA No. 10657) Under Republic Act (R.A.) No. 4726, otherwise known as the
 Civil engineering (Section 25, RA No. 544, as amended) Condominium Act, foreign nationals can own Philippine real estate
 Customs brokers (Section 25, RA No. 9280) through the purchase of condominium units or townhouses constituted
 Dentistry (Secs. 14 and 31, RA No. 9484) under the Condominium principle with Condominium Certificates of Title.
 Electrical engineering (Section 38, RA No. 7920) Section 5 of R.A. No. 4726 states:
 Electronics engineering (Sections 13 and 33, RA No. 9292)
 Electronics technician (Sections 13 and 33, RA No. 9292) SECTION 5. Any transfer or conveyance of a unit or an apartment, office
 Environmental planning (Sections 18 and 28, RA No. 10587) or store or other space therein, shall include the transfer or conveyance
 Fisheries (Section 27, PRC Resolution No. 2000-664) of the undivided interest in the common areas or, in a proper case, the
 Forestry (Sections 14 and 27, RA No. 10690) membership or shareholdings in the condominium corporation; Provided,
 Geodetic engineering (Section 26, RA No. 8560) however, That where the common areas in the condominium project are
 Geology (Sections 17 and 33, RA No. 10166) held by the owners of separate units as co-owners thereof, no
 Guidance and counseling (Sections 13 and 29, RA No. 9258) condominium unit therein shall be conveyed or transferred to persons
 Interior design (Sections 15 and 29 RA No. 10350) other than Filipino citizens or corporations at least 60% of the capital
 Landscape architecture (Sections 13 and 29, RA No. 9053) stock of which belong to Filipino citizens, except in cases of hereditary
 Librarianship (Sections 15 and 28, RA No. 9246) succession. Where the common areas in a condominium project
 Master plumbing (Section 21, RA No. 1378) are held by a corporation, no transfer or conveyance of a unit
 Mechanical engineering (Section 39, RA No. 8495) shall be valid if the concomitant transfer of the appurtenant
 Medical technology (Section 27, RA No. 5527, as amended) membership or stockholding in the corporation will cause the
 Medicine (Section 9, RA No. 2382, as amended) alien interest in such corporation to exceed the limits imposed
 Metallurgical engineering (Sections 17 and 34, RA No. 10688) by existing laws.
 Midwifery (Section 22, RA No. 7392)
 Mining engineering (Sections 15, 16 and 28, RA No. 4274) The law provides that no condominium unit can be sold without at the
 Naval architecture (Sections 13 and 31, RA No. 10698) same time selling the corresponding amount of rights, shares or other
 Nursing (Sections 13 and 20, RA No. 9173) interests in the condominium management body, the Condominium
 Nutrition and dietetics (Sections 15 and 31, RA No. 10862) Corporation; and no one can buy shares in a Condominium Corporation
 Optometry (Section 34, RA No. 8050) without at the same time buying a condominium unit. It expressly allows
 Pharmacy (Sections 14 and 21, RA No. 10918) foreigners to acquire condominium units and shares in condominium
 Physical and occupational therapy (Sections 15 and 21, RA No. corporations up to not more than 40% of the total and outstanding
5680) capital stock of a Filipino-owned or controlled corporation. Under
 Psychology (Sections 12, 13 and 24, RA No. 10029) this set up, the ownership of the land is legally separated from the unit
itself. The land is owned by a Condominium Corporation and the unit
For purposes of the Revised Foreign Investment Negative List, ergotherapy, owner is simply a member in this Condominium Corporation. As long as
speech therapy, homeopathy and acupuncture are not considered part of the 60% of the members of this Condominium Corporation are
medical profession and are therefore open to foreigners. Filipino, the remaining members can be foreigners.
 Real estate service (real estate consultant, real estate appraiser, Considering that the rights and liabilities of the parties under the Contract
real estate assessor, real estate broker and real estate to Sell is covered by the Condominium Act wherein petitioner as unit
salesperson) (Section 24, RA No. 9646) owner was simply a member of the Condominium Corporation and the
 Respiratory therapy (Sections 13 and 34, RA No. 10024) land remained owned by respondent, then the constitutional proscription
 Sanitary engineering (Section 32 RA No. 1364) against aliens owning real property does not apply to the present case.
There being no circumvention of the constitutional prohibition, the Court's As a general rule, unlicensed foreign non-resident corporations
pronouncements on the invalidity of the Contract of Sale should be set cannot file suits in the Philippines. Section 133 of the Corporation
aside. Code specifically provides:
EX: In terms of a condominium corporation there are ten (10) units, per SECTION 133. No foreign corporation transacting business in the
floor, one unit is one floor. One floor is one shareholder. How many units or Philippines without a license, or its successors or assigns, shall be
floors can be owned by foreigners? permitted to maintain or intervene in any action, suit or proceeding in any
court or administrative agency of the Philippines, but such corporation
Only four floors equating to a maximum of 40% shares. It is okay may be sued or proceeded against before Philippine courts or
for foreigners to own condominium units as long as it does not 40% of the administrative tribunals on any valid cause of action recognized under
condominium’s shareholdings. Philippine laws.
SEC. 3. Definitions. – As used in this Act: A corporation has legal status only within the state or territory in which it
was organized. For this reason, a corporation organized in another
d) The phrase “doing business” shall include country has no personality to file suits in the Philippines. In order to
 soliciting orders, service contracts, opening offices, whether called subject a foreign corporation doing business in the country to the
“liaison” offices or branches; jurisdiction of our courts, it must acquire a license from the Securities and
 appointing representatives or distributors domiciled in the Philippines or Exchange Commission (SEC) and appoint an agent for service of process.
who in any calendar year stay in the country for a period or periods Without such license, it cannot institute a suit in the Philippines.
totaling one hundred eighty (180) days or more;
 participating in the management, supervision or control of any domestic However, there are exceptions to this rule. In a number of cases, we have
business, firm, entity or corporation in the Philippines; and declared a party estopped from challenging or questioning the capacity
 any other act or acts that imply a continuity of commercial dealings of an unlicensed foreign corporation from initiating a suit in our courts.
or arrangements, and contemplate to that extent the performance of In a decided case, a foreign corporation instituted an action before our
acts or works, or the exercise of some of the functions normally incident courts seeking to enjoin a local corporation, with whom it had a
to, and in progressive prosecution of, commercial gain or of the purpose "Representative Agreement", from using its corporate name, letter heads,
and object of the business organization: Provided, however, That the envelopes, sign boards and business dealings as well as the foreign
phrase “doing business” shall not be deemed to include mere corporation’s trademark. The case arose when the foreign corporation
investment as a shareholder by a foreign entity in domestic discovered that the local corporation has violated certain contractual
corporations duly registered to do business, and/or the exercise of commitments as stipulated in their agreement. In said case, we held that
rights as such investor; nor having a nominee director or officer to a foreign corporation doing business in the Philippines without license
represent its interests in such corporation; nor appointing a
may sue in Philippine Courts a Philippine citizen or entity that had
representative or distributor domiciled in the Philippines which transacts
contracted with and benefited from it.
business in its own name and for its own account;
Hence, the party is estopped from questioning the capacity of a foreign
Keyword: Continuity of commercial dealings or arrangements. This comes corporation to institute an action in our courts where it had obtained
out in the bar exams. benefits from its dealings with such foreign corporation and thereafter
committed a breach of or sought to renege on its obligations. The rule
The phrase “doing business” shall not be deemed to include mere relating to estoppel is deeply rooted in the axiom of commodum ex injuria
investment as a shareholder. Presence in the Philippines is needed to be sua non habere debet—no person ought to derive any advantage from
considered as doing business in the Philippines. his own wrong.
Related to this is the provisions on foreign corporations in the RCCP under In the case at bar, petitioners have clearly not received any benefit
Articles 140-153. Scan a little if you can. from its transactions with the German Consortium. In fact, there
is no question that petitioners were the ones who have expended a
EUROPEAN RESOURCES AND TECHNOLOGIES, INC. and DELFIN considerable amount of money and effort preparatory to the
J. WENCESLAO vs. INGENIEUBURO BIRKHAHN + NOLTE implementation of the MOA. Neither do petitioners seek to back out from
G.R. No. 159586 July 26, 2004 their obligations under both the MOU and the MOA by challenging
respondents’ capacity to sue. The reverse could not be any more
There is no general rule or governing principle laid down as to what accurate. Petitioners are insisting on the full validity and implementation
constitutes "doing" or "engaging in" or "transacting" business in the of their agreements with the German Consortium.
Philippines. Thus, it has often been held that a single act or transaction
may be considered as "doing business" when a corporation performs acts To rule that the German Consortium has the capacity to institute an action
for which it was created or exercises some of the functions for which it against petitioners even when the latter have not committed any breach
was organized. The act of participating in a bidding process of its obligation would be tantamount to an unlicensed foreign corporation
constitutes "doing business" because it shows the foreign gaining access to our courts for protection and redress. We cannot allow
corporation’s intention to engage in business in the Philippines. this without violating the very rationale for the law prohibiting a foreign
In this regard, it is the performance by a foreign corporation of corporation not licensed to do business in the Philippines from suing or
the acts for which it was created, regardless of volume of maintaining an action in Philippine courts. The object of requiring a
business, that determines whether a foreign corporation needs license is not to prevent the foreign corporation from performing single
a license or not. acts, but to prevent it from acquiring domicile for the purpose of business
without taking the steps necessary to render it amenable to suits in the
Consequently, the German Consortium is doing business in the Philippines local courts. In other words, the foreign corporation is merely prevented
without the appropriate license as required by our laws. By participating from being in a position where it takes the good without accepting the
in the bidding conducted by the CDC for the operation of the waste bad.
management center, the German Consortium exhibited its intent to
transact business in the Philippines. Although the Contract for Services The amount or volume of the business is of no moment, for even a singular
provided for the establishment of a local corporation to serve as act cannot be merely incidental or causal if it indicates the foreign
respondents’ representative, it is clear from the other provisions of the corporation’s intention to do business.
Contract for Services as well as the letter by the CDC containing the
disapproval that it will be the German Consortium which shall manage If it is a foreign corporation doing business in the Philippines, can
and conduct the operations of the waste management center for at least it be sued in the Philippines?
twenty-five years. Moreover, the German Consortium was allowed to Yes.
transact with other entities outside the CSEZ for solid waste collection.  If it has no permit, it can be sued, but it cannot sue.
Thus, it is clear that the local corporation to be established will merely act  If it has a permit or license, it can sue and be sued.
as a conduit or extension of the German Consortium.
There is an exception regarding foreign corporations not doing business in
the Philippines. They can actually sue in the Philippines but only for singular
or one-time transactions. But if they are deemed to have oftentimes sued, As to #8
where it would seem that they have a presence and doing business in the Performing services auxiliary to an existing isolated contract of sale which
Philippines, then the court will look into that whether they have a permit to are not on a continuing basis, such as installing in the Philippines machinery
transact in the Philippines. it has manufactured or exported to the Philippines, servicing the same,
training domestic workers to operate it, and similar incidental services.
But generally, if they have no business in the Philippines, they can actually
transact singular transactions only. The distinction arises only if they are This is what I was referring to earlier that the company may sue for isolated
actually doing business in the Philippines. contracts.
Transcribed by: Inah Bautista del Rosario For the rest you can read Section 2 and 3 of FIA.
In European vs. Birkhahn, basically since the German company bid in a
project to be executed here in the Philippines, the court required it to procure RA 7042, FOREIGN INVESTMENTS ACT OF 1991
a permit to sue in the Philippines. Section 2. Declaration of Policy. - It is the policy of the State to attract,
promote and welcome productive investments from foreign individuals,
partnerships, corporations, and governments, including their political
Steelcase vs. Design International Selections subdivisions, in activities which significantly contribute to national
GR 171995, Apr 18, 2012 industrialization and socioeconomic development to the extent that foreign
investment is allowed in such activity by the Constitution and relevant laws.
Steelcase it is not doing business in the Philippines. Foreign investments shall be encouraged in enterprises that significantly
The phrase doing business is clearly defined in Section 3(d) of RA 7042 (FIA). expand livelihood and employment opportunities for Filipinos; enhance
This definition is supplemented by its IRR, Rule I, Section 1(f) which economic value of farm products; promote the welfare of Filipino consumers;
elaborates and enlists the acts that shall not be deemed “doing business” in expand the scope, quality and volume of exports and their access to foreign
the Philippines. markets; and/or transfer relevant technologies in agriculture, industry and
support services. Foreign investments shall be welcome as a supplement to
The acts are: Filipino capital and technology in those enterprises serving mainly the
1. Mere investment as a shareholder by a foreign entity in domestic domestic market.
corporations duly registered to do business, and/or the exercise of
rights as such investor; As a general rule, there are no restrictions on extent of foreign ownership of
2. Having a nominee director or officer to represent its interest in such export enterprises. In domestic market enterprises, foreigners can invest as
much as one hundred percent (100%) equity except in areas included in the
corporation;
negative list. Foreign owned firms catering mainly to the domestic market
3. Appointing a representative or distributor domiciled in the shall be encouraged to undertake measures that will gradually increase
Philippines which transacts business in the representative's or Filipino participation in their businesses by taking in Filipino partners,
distributor's own name and account; electing Filipinos to the board of directors, implementing transfer of
4. The publication of a general advertisement through any print or technology to Filipinos, generating more employment for the economy and
broadcast media; enhancing skills of Filipino workers.
5. Maintaining a stock of goods in the Philippines solely for the purpose of
having the same processed by another entity in the Philippines; Section 3. Definitions. - As used in this Act:
6. Consignment by a foreign entity of equipment with a local company to a) The term "Philippine national" shall mean a citizen of the Philippines or a
be used in the processing of products for export; domestic partnership or association wholly owned by citizens of the
7. Collecting information in the Philippines; and Philippines; or a corporation organized under the laws of the Philippines of
8. Performing services auxiliary to an existing isolated contract of sale which at least sixty percent (60%) of the capital stock outstanding and
which are not on a continuing basis, such as installing in the Philippines entitled to vote is owned and held by citizens of the Philippines; or a trustee
machinery it has manufactured or exported to the Philippines, servicing of funds for pension or other employee retirement or separation benefits,
the same, training domestic workers to operate it, and similar incidental where the trustee is a Philippine national and at least sixty (60%) of the fund
services. will accrue to the benefit of the Philippine nationals: Provided, That where a
corporation and its non-Filipino stockholders own stocks in a Securities and
Exchange Commission (SEC) registered enterprise, at least sixty percent
The appointment of a distributor in the Philippines is not sufficient to
(60%) of the capital stocks outstanding and entitled to vote of both
constitute “doing business” unless it is under the full control of the corporations must be owned and held by citizens of the Philippines and at
foreign corporation. least sixty percent (60%) of the members of the Board of Directors of both
corporations must be citizens of the Philippines, in order that the
If the distributor is an independent entity which buys and distributes corporations shall be considered a Philippine national;
products, other than those of the foreign corporation, for its own name and
its own account, the latter cannot be considered to be doing business in the b) The term "investment" shall mean equity participation in any enterprise
Philippines. organized or existing under the laws of the Philippines;
 DISI was not a mere conduit through which Steelcase conducted its
business. DISI was founded in 1979 and is independently owned and c) The term "foreign investment" shall mean as equity investment made by a
managed by Spouses Bantug. The dealership agreement between non-Philippine national in the form of foreign exchange and/or other assets
Steelcase and DISI was a buy and sell arrangement. DISI is an actually transferred to the Philippines and duly registered with the Central
independent contractor, distributing various products of Steelcase and Bank which shall assess and appraise the value of such assets other than
of other companies, acting in its own name and for its own account. foreign exchange;
 No sale was concluded with Phinma. Had Steelcase indeed been doing
d) The praise "doing business" shall include soliciting orders, service
business in the Philippines, it would have readily accepted and serviced
contracts, opening offices, whether called "liaison" offices or branches;
the orders from the abovementioned Philippine companies. Its decision
appointing representatives or distributors domiciled in the Philippines or
to voluntarily cease to sell its products in the absence of a local who in any calendar year stay in the country for a period or periods totalling
distributor indicates its refusal to engage in activities which might be one hundred eighty (180) days or more; participating in the management,
construed as "doing business." supervision or control of any domestic business, firm, entity or corporation
in the Philippines; and any other act or acts that imply a continuity of
What was the distinguishing factor to rule it was not doing business commercial dealings or arrangements, and contemplate to that extent the
in the Philippines? performance of acts or works, or the exercise of some of the functions
DISI was also getting furniture from other suppliers – not just from Steelcase. normally incident to, and in progressive prosecution of, commercial gain or
Therefore, it is not a mere conduit of DISI. In other words, the entity in the of the purpose and object of the business organization: Provided, however,
Philippines transacts with other suppliers and distributes other products as That the phrase "doing business: shall not be deemed to include mere
well. investment as a shareholder by a foreign entity in domestic corporations duly
registered to do business, and/or the exercise of rights as such investor; nor
having a nominee director or officer to represent its interests in such
If DISI only sold the furniture of Steelcase, then you may say that it is foreign corporation; nor appointing a representative or distributor domiciled in the
owned. Philippines which transacts business in its own name and for its own account;
Editor’s Note: For acts, not deemed “doing business” in the Philippines, e) The term "export enterprise" shall mean an enterprise which produces
refer to highlighted portion in the case. goods for sale, or renders services to the domestic market entirely or if
exporting a portion of its output fails to consistently export at least sixty The issue is whether you base the 60-40 just on the common shares or both
percent (60%) thereof; and the common and preferred non-voting shares.
Transcribed by: Elaizza Concepcion
g) The term "Foreign Investments Negative List" or "Negative List" shall All of these are outstanding capital stocks.
mean a list of areas of economic activity whose foreign ownership is limited
to a maximum of forty percent ownership is limited to a maximum of forty Do you add the non-voting preferred shares in determining the 60-40?
percent (40%) of the equity capital of the enterprise engaged therein. Because if you do, it looks like it’s minority foreigners and majority Filipino
but actually, only the controlling voting shares are common shares, majority
Determining Capital is foreign-owned. So, the foreigners have the say in the operation of the
This is very contentious. There are a lot of rulings here that keep on getting company, if this is your basis in what Judge Carpio said in this case. So,
overturned. hopefully you understood that.
The term “capital” in Section 11, Article XII of the Constitution refers only to In the decision, the Supreme Court said, “Capital” refers only to shares
shares of stock entitled to vote in the election of directors, and thus allowed to vote in an election because that equates to effective control.
in the present case only to common shares, and not to the total outstanding
capital stock comprising both common and non-voting preferred shares. However, upon the Motion for Reconsideration (MR), the Supreme Court
(Gamboa vs. Teves Decision) realized that, even non-voting preferred shares have the right to vote in eight
(8) specific instances provided under the Corporation Code which we will
If a corporation, engaged in a partially nationalized industry issues a mixture discuss later on. There are major decisions in the corporation that non-voting
of common and preferred non-voting shares, at least 60% of the common shares are still allowed to vote on. So, if they have the right to vote, the
shares and at least 60 percent of the preferred non-voting shares Supreme Court said that it is imperative that the 60% non-voting
must be owned by Filipinos. (Gamboa vs. Teves Resolution) preferred shares is already included in the computation but then it’s
complicated because they realized in the MR that these non-voting preferred
Gamboa vs. Teves shares also have rights.
(GAMBOA DECISION)
652 SCRA 690 (2011) Gamboa Resolution
In the MR, the Court said that preferred shares denied the right to vote in
Issue: Whether the term “capital” in Section 11, Art. XII of the Constitution the election of directors are anyway still entitled to vote on the eight (8)
refers to the total common shares only or to the total outstanding capital specific corporate matters mentioned in the Revised Corporation Code. Thus:
stock (combined total of common and non-voting preferred shares) of PLDT,
a public utility. If a corporation engaged in a partially nationalized industry, issues a mixture
of common and preferred non-voting shares, at least 60 percent of the
common shares and at least 60 percent of the preferred non-voting shares
THE TERM “CAPITAL” IN SECTION 11, ART. XII OF THE must be owned by Filipinos.
CONSTITUTION REFERS ONLY TO SHARES OF STOCK THAT CAN
VOTE IN THE ELECTION OF DIRECTORS. Of course, if a corporation issues only a single class of shares, at least 60
This interpretation is consistent with the intent of the framers of the percent of such shares must be Filipino-owned. In short, the 60-40 ownership
Constitution to place in the hands of Filipino citizens the control and requirement in favor of Filipinos must apply separately in each class of
management of public utilities. In the deliberations of the Constitutional share whether common, preferred or non-voting.
Commission, “capital” refers to the voting stock or controlling interest of a
corporation. So, what’s the difference now?
Section 3 of FIA provides that the definition of a “Philippine National” is a Basically, in the first case, this was the decision:
corporation under the laws of the Philippines of which at least 60% of the The term capital in Section 11, Article XII of the Constitution
capital stock outstanding and entitled to vote is owned and held by refers only to shares of stock entitled to vote in the
citizens of the Philippines. The IRR of the FIA also provides that the election of directors, and thus in the present case only to
Filipino ownership of a corporation shall be determined on the basis of common shares, and not to the total outstanding capital stock
outstanding capital stock whether fully paid or not, but only such stocks comprising both common and non-voting preferred shares.
which are generally entitled to vote are considered. For stocks to be deemed
owned and held by Philippine citizens or Philippine nationals, mere legal title In the second case (MR), this is the decision:
is not enough to meet the required Filipino equity. Full beneficial ownership “If a corporation, engaged in a partially nationalized industry,
of the stocks, coupled with appropriate voting rights is essential. Thus, issues a mixture of common and preferred non-voting shares,
stocks, the voting rights of which have been assigned or transferred to aliens at least 60 percent of the preferred non-voting shares
cannot be considered held by Philippine citizens or Philippine nationals. must be owned by Filipinos.”
Otherwise, the corporation is considered as a non-Philippine national.
So, you compute 60:40 here (referring to her left hand) and you compute
If the term “capital” is construed as to include the total outstanding capital 60:40 here (referring to her right hand) in the preferred non-voting shares
stock, including both common and non-voting preferred shares, it grossly and then, if it complied with the 60:40 then it’s Filipino. Again, you compute
contravenes the intent and the letter of the Constitution that the State shall it like this, 60 in the common shares, 60 in the preferred non-voting, basically
develop a self-reliant and independent national economy effectively 60:40 in each type of share.
controlled by Filipinos. A broad definition unjustifiably disregards who owns
the all-important voting stock, which necessarily equates to control of the Let us go to the examples as stated in this case.
public utility. Just like in this case, foreigners hold 64.27% of the total number
of PLDT's common shares, while Filipinos hold only 35.73%. Since holding a
majority of the common shares equates to control, it is clear that foreigners
exercise control over PLDT. Such amount of control unmistakably exceeds
the allowable 40 percent limit on foreign ownership of public utilities
expressly mandated in Section 11, Article XII of the Constitution.
There are:
 COMMON SHARES which have voting rights and
 PREFERRED NON-VOTING SHARES.
Let’s say foreigners have 64% of the common shares and Filipinos hold only
35%. The majority of common shares are owned by the foreigners. While
the preferred shares are 99.44% Filipino-owned.
Gamboa Ruling: Illustration Let us try to understand what it means. First is that the 60-40 should be
100,000 COMMON SHARES applied to the total outstanding capital stock entitled to vote.
80,000-Foreign owned Common voting or preferred voting and the total outstanding shares of
20,000-Filipino owned capital as a whole including those that are not entitled to vote. So, that is
what the memorandum says.
100,000 NON-VOTING PREFERRED SHARES
100%-Filipino owned After SEC passed that, a lawyer named Jose Roy III filed a petition assailing
the validity of SEC Memorandum Circular No. 8 for not conforming to the
Basically, this is what happened in the case. So, is it compliant with the letter and spirit of the Gamboa decision and resolution and for having issued
requisite of 60-40 Filipino-Foreign ownership? by the SEC with grave abuse of discretion because if you look at the SEC
memorandum, it seems like it is conflicting because the Gamboa ruling
Using the first decision of the Gamboa case, the Supreme Court held that the resolution says that it should be per class. So, per class 60-40 but then the
term capital refers only to the shares of stock that can vote in the election of SEC issued this memorandum which says voting versus all outstanding capital
directors. Is this compliant? The answer is no. stock.
While Filipinos own 120/200 that is 100,000 (non-voting preferred shares) In the SEC Circular, the letter (a) is what they call as the voting control test
plus 20,000 (common shares) of the outstanding capital stock which is all of and the letter (b) is called beneficial ownership test. We will discuss that in
these or 60% of the outstanding capital stock, they own less than 60% of the cases.
the voting common shares. So, it’s easy. Basta 60% of the voting shares lang
daw based on the Gamboa ruling in the first case. How to determine “capital”?
Illustration II: Full Beneficial Ownership Test

Instead of NON-VOTING preferred shares, let’s change it to 100,000 VOTING Mere legal title is not enough to meet the required Filipino equity, which
preferred shares. So, now, it looks like all of the shares are voting. means that it is not sufficient that a share is registered in the name of a
100,000 COMMON SHARES Filipino citizen or national, i.e., he should also have full beneficial ownership
80,000-Foreign owned of the share.
20,000-Filipino owned
Jose Roy III v Herbosa
100,000 VOTING PREFERRED SHARES GR No. 207246, November 2016 and April 18, 2017
100%-Filipino owned
In this case, the court ruled that mere legal title is not enough to meet the
As we know, after the MR, the Supreme Court changed its mind and said required Filipino equity, which means that it is not sufficient that a share is
that, 60% Filipino ownership applies across the board to all classes of shares registered in the name of a Filipino citizen or national, i.e., he should also
regardless of nomenclature and category comprising the capital of the have full beneficial ownership of the share.
corporation.
In this case, there was an issue on locus standi as to whether or not Atty.
Gamboa Decision: Compliant Roy III can question SEC memorandum No. 8. The court said that he has no
If we use the first decision, it should be 60% of the voting so 60% of 200,000 standing. To establish the standing, Atty, Roy merely claimed that he was
(common and voting shares) which means 60% of the shares that have right standing to question SEC memorandum No. 8 as a concerned citizen, an
to vote. If that is the basis, this is compliant because it is 120% Filipino- officer of the court and as a taxpayer as well as senior law partner in his own
owned (100,000 voting preferred shares plus 20,000 common shares). firm and a subscriber of PLDT. So those are his reasons why he questioned
this SEC memorandum circular, but the person’s interest invoked here by
Gamboa Resolution: Not Compliant Atty. Roy as a citizen and member of the bar in validity of the SEC
If based on the resolution in the MR wherein it says that the 60-40 is based memorandum is at best equivocal and totally insufficient.
on each category of shares, it is not compliant with the requisite of 60-40
Filipino-Foreign ownership. Further, in this case, the Supreme court said in this case that the Gamboa
resolution did not modify the Gamboa decision but merely clarified the
In the common shares, did it comply with the 60-40? decision.
No. So in the common shares alone, it did not comply.
Transcribed by: Mary Grace Chew
In the voting preferred shares? Roy vs. Herbosa
Yes, it complied with the 60-40. GR. No. 207246, November 2016 and April 18, 2017
But even though the Filipinos owned 120/200, under the Gamboa resolution, Issue: Whether or not the SEC gravely abused its discretion in issuing the
this will not be compliant because 60-40 must be mirrored in each class of SEC Memorandum Circular No. 8. in the light of the Gamboa Decision and
shares meaning Filipinos should earn likewise 60% of the outstanding capital Gamboa Resolution.
stock.
Ruling: No. The Supreme Court reiterated and went on again to discuss the
SEC Memorandum Circular No. 8 s. 2013 ratio Gamboa Decision and Gamboa Resolution. Wherein in that case the
RE: Guidelines on compliance with the Filipino-Foreign Ownership Supreme Court defined the term Capital under 1987 Constitution which refers
requirements prescribed in the Constitution and/or existing laws by only shares of stock entitled to vote in the election of the directors. In that
corporations engaged in nationalized and partly nationalized activities. Gamboa Case only to common shares and not to total outstanding capital
stock comprising votes common and preferred shares.
Section 2. All covered corporations shall, at all times, observe the
constitutional or statutory ownership requirement. For purposes of In that Gamboa resolution the Supreme Court reiterated that both voting
determining compliance therewith, the required percentage of Filipino control test and beneficial test should be applied to determine whether a
ownership shall be applied to BOTH: corporation is a Filipino national.
(a) the total number of outstanding shares of stock entitled to vote in the
election of directors; AND Foreign Investment Act defines Filipino national as a Filipino citizen or
(b) the total number of outstanding shares of stock, whether or not entitled domestic corporation whose capital stock outstanding and entitled to vote is
to vote in the election of directors. owned by a Filipino citizen and at least 60% of it.
After the Gamboa Ruling was passed, there were still so many questions With the definition of the Filipino national, this is important in relation to the
about what capital is. So, SEC passed this memorandum circular. definition of the *whole* beneficial ownership test which can be found
under the Implementing Rules of the Securities Regulation Code. Here,
beneficial ownership refers to any person who, directly or indirectly, through
any contract, arrangement, understanding, relationship or otherwise, has or
shares voting power (which includes the power to vote or direct the voting
of such security) and/or investment returns or power (which includes the vote in an election and 60-40 of all total outstanding shares. This is
power to dispose of, or direct the disposition of such security). now the controlling ruling.
It is important to point out the explanation under Foreign Investment Act Let’s try an example of the Roy Ruling. Based on our new learning under the
Implementing Rules that for stocks to be deemed owned and held by Filipino Roy Ruling. What can you derive from this? Based on this situation. Try to
nationals, mere legal title is not enough to meet the required Filipino analyze. If this complies or does not comply under the Roy Ruling and also
equity. Which means that full beneficial ownership of stocks coupled with under the SEC Memorandum Circular No. 8. Do you think it complies?
the appropriate voting rights is essential. With that the Foreign Investment
Act practically reiterates and confirms the interpretation of the definition of If we follow the meaning alleged by Atty. Roy that it’s 60-40 of each type of
the capital under the 1987 Constitution, which refers to shares with voting shares. Then here, it would pass. 60-40. But here, it would fail. Right? Based
rights as well as with beneficial ownership. This is precisely because the right on that.
to vote in the election of board of directors coupled with the full beneficial
ownership of stock translates the effective control of a corporation. So that Court said that no, don’t do that. How do you do it based on the
correct method. So let’s answer. Try to go to Poll Everywhere. I will give you
Insofar as the assailed SEC memorandum circular is concerned, the court time to compute how many outstanding shares. So you get based on all the
ruled that there was no grave abuse of discretion in the issuance of such outstanding shares and then based on those voting shares. It should pass
memorandum circular because as provided in Section 2 it clearly reiterates those two tests.
the voting control test or the controlling interest requirement. Furthermore,
the Supreme Court stated that the Section 2 not only requires 60-40 There are two test: Voting Control Test – with regard to voting shares only
ownership in favor of Filipino nationals as to voting stock, it also requires 60- and the Beneficial Ownership Test – meaning all the outstanding capital
40 percentage ownership in the total number of the outstanding shares of stocks.
stocks, whether voting or not. With that, the formulation of that Section 2
merely adheres to the pronouncement of the Supreme Court which is that ROY RULING: ILLUSTRATION
the full and beneficial ownership of the 60% of the outstanding capital stock
coupled with 60% of the voting rights is required. The court said that the 100,000 COMMON SHARES
SEC memorandum circular cannot be said to be issued with grave abuse of 100% Filipino-Owned
discretion.
100,000 VOTING PREFERRED SHARES
How do you reconcile this with our statement that, those preferred non- 60,000 Filipino Owned
voting shares still have a right to vote in 8 items enumerated under Section 40,000 Foreign Owned
6?
100,000 NON-VOTING PREFERRED SHARES
What did the Supreme Court say in this case clarifying (in Gamboa 20,000 Filipino Owned
resolution) that it is not 60-40 on each class of share but rather it 80,000 Foreign Owned
is this SEC Memorandum which is 60-40 of the all outstanding and
60-40 voting share? Is it compliant with the required of 60-40 Filipino-Foreign
The Supreme Court reiterates and explained the principle that considering ownership?
that common shares have voting right which translates to a control as If we follow the SEC Memorandum Circular as well as the decision of the
opposed to preferred shares which usually has no voting rights, the term court in Roy, then the answer is yes. The answer is yes because Filipinos in
capital under the 1987 Constitution only pertains to common shares. But the this case own at least 60% of voting shares. Meaning 160 over 200. That
Supreme Court said that if that preferred shares also have the right to vote 80%.
in the election of directors, then the term shall include the term preferred
shares. Also, Filipinos own at least 60% of the outstanding capital stock. 100,000
plus 60,000 plus 20,000 divided by 300,000 of all the outstanding capital
What then is the value of the 8 items enumerated in Section 6 in stocks. So it must have a check of those two tests. Then you’re fine.
RCCP. What are those rights? Not necessarily voting rights to elect
a director, but the 8 items enumerated under the RCCP are what Transcribed by: Anna Lou S. Igbalic-Cerro
type of rights?
These preferred shares do not vote for the election but they vote for the 8
items like mergers, acquisition or sale of all or relatively assets. All of those REGISTER OF DEEDS OF RIZAL v. UNG SUI SI TEMPLE
enumerations. Is voting for those 8 items a form of control at a right to 97 Phil 28 | May 21, 1955
something else? A right to control or something?
Issue: Whether a deed of donation of a parcel of land executed in favor of
A: The Supreme Court realized that these preferred non-voting shares also a religious organization whose founder, trustees and administrator are
have rights to vote for the 8 items under the RCCP. But in this case, Roy vs. Chinese citizens should be registered or not. – No, it cannot be registered.
Herbosa, the Supreme Court clarified that they have a right to vote but it is
not to vote in terms of controlling the corporation because their voting is not Ruling: In view of the absolute terms of section 5, Title XIII, of the
for the election. Their vote is as an exercise of their right to ownership Constitution, the provisions of Act No. 271 of the old Philippine Commission
of the shares. So yes, they can vote for those 8 items but that is not a form must be deemed repealed since the Constitution was enacted, in so far as
of control but that is exercising their right as shareholders. Because their incompatible therewith. In providing that, —
shares of stocks are properties and they have a right of ownership over that.
So that is the purpose for the 8 items under the RCCP. That was clarified in “Save in cases of hereditary succession, no private agricultural land shall be
this case. transferred or assigned except to individuals, corporations or associations
qualified to acquire or hold lands of the public domain in the Philippines”
Also, the Supreme Court validated SEC Circular No. 8, that this is how you
compute the 60-40. The Constitution makes no exception in favor of religious associations.
Neither is there any such saving found in sections 1 and 2 of Article XIII,
Section 2. All covered corporations shall, at all times, observe the restricting the acquisition of public agricultural lands and other natural
constitutional or statutory ownership requirement. For purposes of resources to "corporations or associations at least sixty per centum of the
determining compliance therewith, the required percentage of Filipino capital of which is owned by such citizens" (of the Philippines).
ownership shall be applied to both
a. the total number of outstanding share of stock entitled to vote in The fact that the appellant religious organization has no capital stock does
the election of directors; and not suffice to escape the Constitutional inhibition, since it is admitted that its
b. the total number of outstanding shares of stock, whether or not
members are of foreign nationality. The purpose of the sixty per centum
entitled to vote in the election of directors.
requirement is obviously to ensure that corporations or associations allowed
to acquire agricultural land or to exploit natural resources shall be controlled
In the Gamboa Resolution, they said and Atty. Roy implied that 60-40 of each by Filipinos; and the spirit of the Constitution demands that in the absence
class of shares. Now, this clarifies that 60-40 of those shares entitled to
of capital stock, the controlling membership should be composed of Filipino Why were they able to obtain the facilities? Were the facilities
citizens. owned by them, registered under their names?
The Constitution requires a franchise for the operation of a public utility.
To permit religious associations controlled by non-Filipinos to acquire However, it does not require a franchise before one can own the facilities
agricultural lands would be to drive the opening wedge to revive alien needed to operate a public utility so long as it does not operate them to serve
religious land holdings in this country. We cannot ignore the historical fact the public.
that complaints against land holdings of that kind were among the factors
that sparked the revolution of 1896. The right to operate a public utility may exist independently and separately
from the ownership of the facilities thereof. One can own said facilities
As to the complaint that the disqualification under article XIII is violative of without operating them as a public utility, or conversely, one may operate a
the freedom of religion guaranteed by Article III of the Constitution, we are public utility without owning the facilities used to serve the public.
by no means convinced (nor has it been shown)
• that land tenure is indispensable to the free exercise and enjoyment of While EDSA LRT is the owner of the facilities necessary to operate the EDSA
religious profession or worship; or LRT III, it is not enfranchised to operate a public utility. It will have no
• that one may not worship the Deity according to the dictates of his own dealings with the public and the public will have no right to demand any
conscience unless upon land held in fee simple. services from it.
Even the mere formation of a public utility corporation does not ipso facto
What should they have done, to register the title into their name? characterize the corporation as one operating a public utility. The moment
The Constitution only requires that 60% of their members in their religious for determining the requisite Filipino nationality is when the entity applies for
sect and their trustees should be Filipino. So, they should accept Filipinos to a franchise, certificate or any other form of authorization for that purpose
join their religion.
Did they comply with the 60-40 requirements?
No answer.
TATAD v. GARCIA, JR.
243 SCRA 436 | April 6, 1995
IN RE: RAPPLER INC
Can respondent EDSA LRT Corporation, Ltd., a foreign corporation SP Case No. 08-17-001 | January 11, 2018
own EDSA LRT III; a public utility?
The Constitution, in no uncertain terms, requires a franchise for the operation Issue: WON Rappler Inc., violated the Constitutional and statutory Foreign
of a public utility. However, it does not require a franchise before one can Equity Restrictions in Mass Media. Yes.
own the facilities needed to operate a public utility so long as it does not
operate them to serve the public. Ruling: Rule 3.1.8 of the 2015 SRC-IRR defines “Control” - the power to
determine the financial and operating policies of an entity in order to benefit
In law, there is a clear distinction between the "operation" of a public utility from its activities; it does not equate “control” with either ownership of shares
and the ownership of the facilities and equipment used to serve the public. of stock or with management as director or officer. Control exists whenever
one entity has the power to “govern the financial and operating policies of
The right to operate a public utility may exist independently and separately another entity under a statute or agreement.” This is true even if the
from the ownership of the facilities thereof. One can own said facilities controlling entity does not own any equity.
without operating them as a public utility, or conversely, one may operate a
public utility without owning the facilities used to serve the public. The Respondents wrongly assume that “control” is limited to stock ownership;
devotion of property to serve the public may be done by the owner or by the they repeatedly stated in their Verified Explanation that: (1) All their
person in control thereof who may not necessarily be the owner thereof. stockholders (SH) are Filipino, and that (2) Any economic benefits derived by
foreign holders from the ON PDR are mere “distributions” and not strictly
This dichotomy between the operation of a public utility and the ownership “dividends”. Upon that erroneous premise, they proudly stated that Clause
of the facilities used to serve the public can be very well appreciated when 12.2.2 does not give Omidyar Network Fund LLC any form of control over
we consider the transportation industry. Enfranchised airline and shipping Rappler.
companies may lease their aircraft and vessels instead of owning them
themselves. It does not matter what capacity or device gives the foreigner
control, as stockholder, holder or otherwise, there must be none. It
While respondent is the owner of the facilities necessary to operate the EDSA. does not matter if control is only available in certain occasions,
LRT III, it admits that it is not enfranchised to operate a public utility. In view there must be no occasion.
of this incapacity, respondent and DOTC agreed that on completion date,
respondent will immediately deliver possession of the LRT system by way of Where mass media is concerned, no control whatsoever may be granted.
lease for 25 years. In other words, by the end of the three-year construction 100% Filipino control means 0% foreign control. “Control” is any influence
period and upon commencement of normal revenue operation, DOTC shall over corporate policy, and not limited to ownership of stock. Paragraph
be able to operate the EDSA LRT III on its own and train all new personnel 12.2.2 was specifically inserted by Rappler to grant such control. It colluded
by itself. to grant control, or to become a Dummy. Even if it later executed a waiver,
it was a private one, not subscribed before a Notary. The waiver would not
In sum, respondent will not run the light rail vehicles and collect fees from negate the fact that 12.2.2 was intentionally placed in the ON PDR.
the riding public. It will have no dealings with the public and the public will
have no right to demand any services from it. Aware of the Constitutional restrictions, and yet eager to receive capital from
its “global impact investors,” Rappler Inc. created an alter ego that would
Even the mere formation of a public utility corporation does not ipso facto validate the transfer of control. If RHC were not a mere alter ego of Rappler,
characterize the corporation as one operating a public utility. The moment Inc., it could issue its own stock; and yet, because it was, respondents opted
for determining the requisite Filipino nationality is when the entity applies for to issue instead the ON PDR.
a franchise, certificate or any other form of authorization for that purpose
Piercing the Corporate Veil
Primary liability for any violation of law arising out of the issuance of the ON
The Corporation owned the facilities that they were using.
PDR would clearly fall on the issuer, RHC. Several key facts suggest that
What the foreign corporation owns are the rail tracks, rolling stocks, stations,
Rappler Inc., is a mere alter ego of the issuer and thus its separate juridical
terminals and the powers, not a public utility. While a franchise is needed to
personality must be disregarded. If respondents are mere alter egos, liability
operate these facilities to serve the public, they do no themselves constitute
for the ON PDR issuance of RHC would extend to Rappler Inc. Conversely,
a public utility. What constitutes a public utility is not their ownership but
liability for circumventing the Foreign Equity Restrictions on Mass Media that
their use to serve the public.
apply to Rappler Inc. would extend to RHC.
Here, there is an undeniable overlap in the ownership and management of

both corporations – to the point that they are almost identical – they have
the same Chairman, Members of the Board, President, Treasurer, and
Secretary. Rappler Inc. evidently created Rappler Holdings Corporation (RHC) Transcribed by: Pet 😊
for the sole purpose of raising capital through the issuance of PDRs to foreign What are the indicators of these doubts?
entities.
Narra Nickel Mining vs Redmont Consolidated
Together, Rappler Inc and RHC partook of a scheme whereby stock G.R. No. 195580 | 2015-01-28
ownership and board management would strictly-speaking remain with
Filipinos, while control (i.e. the ability to influence corporate policy) would be Control Test vs. Grandfather Rule
granted to foreigners holding equity-derivative instruments. Paragraph 7 of DOJ Opinion No. 020, Series of 2005, adopting the 1967 SEC
Rules which implemented the requirement of the Constitution and other laws
There is substantial evidence that respondents intentionally created an pertaining to the controlling interests in enterprises engaged in the
elaborate scheme, upon which its receipt of over a million dollars from foreign exploitation of natural resources owned by Filipino citizens, provides:
investor would be theoretically defensible – the investor would never own
“stock” and would never receive “dividends”, and he would never become an Shares belonging to corporations or partnerships at least 60% of the capital
officer or director, but respondents would still be able to give him his money’s of which is owned by Filipino citizens shall be considered as of Philippine
worth in the form of negative control and cash distributions, all through a nationality, but if the percentage of Filipino ownership in the corporation or
private contractual arrangement. partnership is less than 60%, only the number of shares corresponding to
such percentage shall be counted as of Philippine nationality. Thus, if 100,000
This fraudulent scheme is a violation of the Securities Regulation Code; shares are registered in the name of a corporation or partnership at least
therefore, the ON PDR is void. Certificate of Incorporation on each 60% of the capital stock or capital, respectively, of which belong to Filipino
respondent – Rappler Inc. being the mass media entity that sold control to citizens, all of the shares shall be recorded as owned by Filipinos. But if less
foreigners and RHC being its alter ego, existing for no other purpose than to than 60%, or say, 50% of the capital stock or capital of the corporation or
affect a deceptive scheme to circumvent the Constitution – is revoked. partnership, respectively, belongs to Filipino citizens, only 50,000 shares shall
be counted as owned by Filipinos and the other 50,000 shall be recorded as
Where does Rappler operate? Is it mass media? belonging to aliens.
Rappler is not on TV, not on newspaper, it is on internet and mobile
technologies and tablet, other than TV or newspaper. In this case, the Control Test
Supreme Court said that it consists of mass media because of the constant The first part of paragraph 7, DOJ Opinion No. 020, stating “shares belonging
development of our technology. to corporations or partnerships at least 60% of the capital of which is owned
by Filipino citizens shall be considered as of Philippine nationality,” pertains
It is a requirement that it is limited or exclusive of Filipino ownership, the to the control test or the liberal rule. Under the liberal Control Test,
court emphasized it does not matter what capacity or device gives the there is no need to further trace the ownership of the 60% (or more)
foreigner control, as stockholder, holder or otherwise, there must be none. Filipino stockholdings of the Investing Corporation since a corporation which
It does not matter if control is only available in certain occasions, there must is at least 60% Filipino-owned is considered as Filipino.
be no occasion.
Grandfather Rule
Grandfather Rule On the other hand, the second part of the DOJ Opinion which provides, “if
the percentage of the Filipino ownership in the corporation or partnership is
Grandfather Rule determines the actual Filipino ownership and control in a
less than 60%, only the number of shares corresponding to such percentage
corporation by tracing both the direct and indirect shareholding in the
shall be counted as Philippine nationality,” pertains to the stricter, more
corporation.
stringent grandfather rule. Under the Strict Rule or Grandfather Rule, the
combined totals in the Investing Corporation and the Investee
The Grandfather test is not applied alone, only when the Control test is first
Corporation must be traced (i.e., “grandfathered”) to determine the total
complied with that the Grandfather rule may be applied in essence,
percentage of Filipino ownership. The ultimate Filipino ownership of the
Grandfather Rule supplements the Control Test.
shares must first be traced to the level of the Investing Corporation
and added to the shares directly owned in the Investee Corporation.
When Grandfather Rule Applied
1. When the corporation’s Filipino equity falls below 60% Grandfather rule is applicable in this case
constitutional threshold; or The Court finds that this case calls for the application of the grandfather rule
2. There exists a “doubt” as to the Filipino to foreign equity. since, as ruled by the POA and affirmed by the OP, doubt prevails and persists
in the corporate ownership of petitioners. Also, as found by the CA, doubt is
So, Control test first then the Grandfather Rule. In case there is no doubt, present in the 60-40 Filipino equity ownership of petitioners Narra, McArthur
then just use the control test. and Tesoro, since their common investor, the 100% Canadian corporation––
MBMI, funded them.
DOJ Opinion No. 025, s. 2008, [April 17, 2008]
Petitioners McArthur, Tesoro and Narra are not Filipino since MBMI, a 100%
As I mentioned a while ago, if the 60-40 Filipino-alien ownership is not in Canadian corporation, owns 60% or more of their equity interests, according
doubt, you do not need to use the Grandfather Rule, only when it is in doubt to evidence. Such conclusion is derived from grandfathering petitioners’
or less than 60% ownership, then you have to resort to grandfather rule, but corporate owners, namely: MMI, SMMI and PLMDC. MBMI’s Summary of
if it is more than 60% then apply Control test. Significant Accounting Policies statement– –regarding the “joint venture”
agreements that it entered involves SMMI, Tesoro, PLMDC and Narra. The
But if more than 60% and there is no doubt, then the control test applies, ownership of the “layered” corporations boils down to MBMI, Olympic or
it’s Filipino. Thus, if 100,000 shares are registered in the name of a corporations under the “Alpha” group wherein MBMI has joint venture
corporation or partnership, at least 60% belongs to Filipinos, all said shares agreements with, practically exercising majority control over the corporations
shall be recorded as Filipino owned. But if less than 60%, for example 50%, mentioned. Thus, whether looking at the capital structure or the underlying
then 50% would have to be counted as Filipino owned and the other 50% relationships between and among the corporations, petitioners are NOT
shall be counted as foreign owned. Filipino nationals and must be considered foreign since 60% or more of their
capital stocks or equity interests are owned by MBMI.
In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather
Rule or the second part of the SEC Rule applies only when the 60-40 Filipino-
foreign equity ownership is in doubt (i.e., in cases where the joint venture
corporation with Filipino and foreign stockholders with less than 60% Filipino
stockholdings [or 59%] invests in other joint venture corporation which is
either 60-40% Filipino-alien or the 59% less Filipino). Stated differently,
where the 60-40 Filipino-foreign equity ownership is not in doubt, the
Grandfather Rule will not apply.
After a scrutiny of the evidence extant on record, the Court finds that this Illustration 3: Under the following circumstances, is ABC a Filipino
case calls for the application of the grandfather rule since, as ruled by the Corporation?
POA and affirmed by the OP, doubt prevails and persists in the corporate
ownership of petitioners. Also, as found by the CA, doubt is present in the
60-40 Filipino equity ownership of petitioners Narra, McArthur and Tesoro,
since their common investor, the 100% Canadian corporation––MBMI,
funded them.
Obviously, the instant case presents a situation which exhibits a scheme

employed by stockholders to circumvent the law, creating a cloud of doubt
in the Court’s mind. To determine, therefore, the actual participation, direct
or indirect, of MBMI, the grandfather rule must be used.
Illustration 1: Under the following circumstances, is ABC a Filipino

Corporation?
ABC is Not a Filipino Corporation.
Same situation as illustration 1, however, there is doubt as to ABC’s
ownership because XYZ did not pay its subscription, so basically the foreign
corporation contributed all of the capital of XYZ. So, XYZ’s 60,000 OCS were
not paid by XYZ, it was paid for by the Foreign Corp. So there is doubt here.
Applying the grandfather rule, we compute the percentage that corresponds

to the share owned by Filipinos which should be registered in the corporation
as Filipino owned. So we:
 Compute the shares of ABC owned by Filipinos indirectly
(60%x60/100) which is 36%, and
 Compute the shares of ABC owned by Foreigners directly
(40k/100k) which is 40% and indirectly (40%x60/100) which is
24%, totaling 64%.
ABC Corporation is owned by a Foreigner and XYZ Corp, who is also owned  So, it is not compliant with the constitution.
by Foreigners and Filipinos.
ABC is a Filipino Corporation. Corporation?
Apply first the control test. Under the control test, if the corporation is owned
by at least 60% Filipinos, it is a Philippine national. Here, XYZ is a Philippine
national because 60% of its capital is likewise owned by Filipinos. Because
XYZ is at least 60% owned by Filipinos, then the entire 60,000 OCS must
be registered as Filipino owned, making both ABC and XYZ Philippine
nationals.
At this point it is incorrect to use the grandfather test. If that were the case,
ABC corporation would not be compliant because the foreigners own 40%
directly plus 24% indirectly (40% of 60K/100K), meaning 64% total. While
Filipino ownership is just 36% indirectly (60% of 60k/100k). If you use the
grandfather test, then you’d have 36,000 OCS (60,000 x 60%) as Filipino
owned and 64,000 OCS [(60,000x40%) +40,000] as foreign owned.
This illustration shows why the control test is often used as the liberal test in
determining the nationality of the corporation.

Corporation?
ABC is Not a Filipino Corporation
This is what they call “corporate layering”. Note that this structure is not
prohibited as long as it is not used to circumvent the rules on foreign
ownership restriction.
In case of a multi-tiered corporation, the stock attribution rule must be

allowed to run continuously along the chain of ownership until it finally
reaches individual stockholders. Here, the Filipino equity and control of XYZ
corporation is less than 60%, here applying the control test, 50% of the
60,000 shares should be registered as foreign owned, while the remaining
50% should be registered as Filipino owned.
So, foreign ownership of ABC would be 40% directly (40k/100k) and 30%
indirectly (50%x60k/100k) totaling 70%, while Filipino ownership is only
ABC is Not a Filipino Corporation. 30% indirectly (50%x60k/100k).
The control test cannot be adopted because XYZ is not at least 60% Filipino.
Instead, only the percentage that corresponds to the share owned by the
Filipino should be registered in the books of the corporation as Filipino
owned, the rest must be recorded as foreign owned. So. 45,000 OCS of XYZ
should be recorded as foreign, bringing ABC’s foreign owned shares to a total
of 55,000. While 45,000 shares is Filipino. So, ABC is not a Filipino
Corporation.
[2] Subscribers
Components of a Corporation Those who have agreed to take and pay for original, unissued shares of a
Section 5. Corporators and Incorporators, Stockholders and Members. corporation formed or to be formed.
– Corporators are those who compose a corporation, whether as
stockholders or shareholders in a stock corporation or as members in a A subscriber may not be a stockholder, because he becomes a stockholder
nonstock corporation. Incorporators are those stockholders and members only from the time his subscription is accepted by the corporation or the
mentioned in the articles of incorporation as originally forming and composing corporation’s offer is accepted by him. Technically, a person is not a
the corporation and those who are signatories thereof. stockholder or member yet unless he is recorded in the stock and transfer’s
book or member’s book.
a) Corporators
Those who compose the corporation, whether stockholders in a stock All incorporators are subscribers, but a subscriber need not be an
corporation or members in a non-stock corporation. incorporator.
[3] Underwriter
b) Incorporators Those who
Those corporators mentioned in the articles of incorporation as (a) has agreed, alone or with others, to buy at stated terms an entire issue
originally forming and composing the corporation and who executed of securities or a substantial part thereof; or
and signed the articles of incorporation and acknowledged the same (b) has guaranteed the sale of an issue by agreement to buy from the
before a notary public. issuing party any unsold portion at a stated price; or
(c) has agreed to use his "best efforts” to market all or part of an issue; or
(d) has offered for sale stock he has purchased from a controlling
c) Board of Directors/Trustees stockholder.
Those generally elected by the stockholders or members to conduct
the business, control the property, and exercise corporate powers. This is usually an investment banker.
May also be elected by their fellow members of the board.
Promoters as Agent
d) Officers Promoter is not in any sense the agent of the Corporation before it comes to
Those appointed to assist the Board to manage the affairs of the existence, for there cannot be an agency unless there is a principal.
corporation.
Since the principal Corporation has not yet existed, then there is no agency
yet but he may become the agency of the Corporation after it has been
Corporators include incorporators and stockholders or members who become
formed provided there is consent on the part of the Corporation. Consent or
as such after incorporation of the corporation. So, corporators is everybody
assent of the Corporation. Agents have fiduciary relationship with their
including previous incorporators as long as they are still with the corporation.
principal imbued with trust and confidence.
Incorporators, on the other hand, are corporators but a corporator is not
necessarily an incorporator.
Corporation is not liable for the contracts
entered into by the promoter prior to incorporation.
Transcribed by: Jabb Balindong
Prior to the incorporation, there is no agency between the promoter and the
inexistent corporation. There may be an agency between the promoter and
 Are all incorporators, corporators? Yes.
the future incorporators themselves, but this is not binding to the yet existing
 Are all corporators, incorporators? No.
corporation by virtue of corporate entity doctrine.
 Can corporators change? Yes.
After incorporation, it depends if the corporation consents to the to the
Corporators include incorporators, and stockholders or members who
agency or not. There can be either express or implied agency, implied
become as such after incorporation of the corporation.
authority or authority by estoppel.
Corporator is everybody including previous incorporators (as long as they are
still with the corporation). Promoter’s Contract
Contracts entered into by promoters with parties to incorporation.
Note: Incorporators on the other hand are corporators, but a corporator is
not necessarily an incorporator. All incorporators are corporators but a Types:
corporator is not necessarily an incorporator. 1. Pre-Incorporation Subscription Contracts
Special contract in the sense that they go beyond ordinary contracts.
Incorporators Cannot Change It is a type of promoter’s contract although subscription agreements
While the status of a corporator is temporary because one may cease to be are contracts between the subscriber and the Corporation, they are
a corporator, stockholder or member when he sells his shares or no longer at the same time deemed to be contracts among the stockholders
becomes a member. On the other hand, an incorporator will forever retain themselves.
his status as an incorporator notwithstanding that he has ceased to be a
corporator because being an incorporator is a historical event. 2. Other Pre-Incorporation Contracts
These are other expenses that they would have to incur to set up
The articles of incorporation cannot be amended by deleting the name of an the corporation in the future. i.e. feasibility studies, deed of
incorporator or substituting it with another who is not the original assignment that transfers capital, contract of lease.
incorporator because you can only incorporate once, so whoever are the
people in the first articles of incorporation you cannot amend their names Under the RCCP, there is no formal recognition accorded to promoter’s
anymore. contract except under Sections 59 and 60 where it deals with pre-
incorporation’s subscription.
Other Characters in a Corporation Liability of Promoters

[1] Promoters GR: Promoter’s contracts are not binding on the part of the corporation once
Those who bring about or cause to bring about the formation and it is formed.
organization of a corporation by bringing together the incorporators or the
persons interested in the enterprise, procuring subscriptions or capital for the Exception: When the corporation adopts, accepted, or ratified the contract.
corporation and setting in motion the machinery which leads to the
incorporation of the corporation itself. The general rule is that every promoter or representative of the Corporation
in the process of incorporation binds himself to ensure that the corporation
They are not necessarily incorporators. once formed will ratify the contract entered into. Otherwise, promoter
becomes personally liable for such contract in the event that corporation does
not so ratify it once it comes into existence.
Corporate Rights Under Promoter’s Contracts
In an American jurisprudence, it is not a requisite that a corporation adoption Should the other contracting party fail to perform, the corporation which has
or acceptance of a promoter’s contact be express. It may be inferred from adopted or ratified the contract may either sue for:
the acts or acquiescence on the part of the Corporation or its authorized 1. Specific Performance; or
agent as any similar original contract may be shown. Whatever may be the 2. Damages resulting from breach of contract.
proper legal theory by which a Corporation may be bound to the contract
either ratification, adoption, novation, or continuing offer, to be accepted or
rejected by the Corporation, it is necessary in all cases that the
Subscribers
Corporation should have a full knowledge of the facts, or at least
should be put upon such notice as would lead upon a reasonable ONG YONG v. DAVID TIU
inquiry to the knowledge of the facts. G.R. No. 144476 & 144629 | April 8, 2003
Rescission of the pre-subscription agreement was not proper.

CAGAYAN FISHING DEV. CORP. v. SANDIKO FLADC was originally incorporated with an authorized capital stock of 500K
65 Phil 223 | December 23, 1937 shares with the Tius owning the 450,200 shares representing the paid-up
capital. When the Tius invited the Ongs to invest in FLADC as stockholders,
The contract entered into by Tabora is binding with the Cagayan and increase of the authorized capital stock became necessary to give each
corporation, being made prior to the latter’s incorporation. group equal shareholding as agreed upon the pre-subscription agreement.
Under the law, a duly organized corporation has the power to purchase and
hold such real property as the purposes for which such corporation was The authorized capital stock was increased from 500K shared to 2M shares
formed may permit and, for this purpose may, enter into such contracts as with par value of P100 each. The subject matter of the contract was the 1M
may be necessary. However, before a corporation may be said to be lawfully unissued shares of FLADC stock allocated to the Ongs.
organized, many things have to be done. Among other things, the law
requires the filing of articles of incorporation. A subscription contract necessarily involves the corporations as one
of the contracting parties since the subject matter of the
In the case at bar, Cagayan Fishing did not possess juridical capacity to enter transaction is property owned by the corporation its shares of stock.
into the contract. The transfer made by Tabora to the Cagayan fishing was
effected on May 31 while the actual incorporation of said company was Thus, the subscription contract was one between the Ongs and FLADC and
effected later on October 22. In other words, the transfer was made almost not between the Ongs and the Tius.
five months before the incorporation of the company.
Considering therefore that the real contracting parties to the subscription
Promoters agreement were FLADC and the Ongs alone, a civil case for rescission on the
In reality, the contract was entered into not between Manuel Tabora and a ground of breach of contract filed by the Tius in their personal capacities will
non-existent corporation but between Manuel Tabora, as owner of the four not prosper.
parcels of lands on the one hand, and the same Manuel Tabora, his wife, and
others, as mere promoters of a corporations on the other hand. These Allows the distribution of corporate capital only in three instances:
promoters could not have acted as agent for a projected corporation since 1. amendment of the Articles of Incorporation to reduce the authorized
that which no legal existence could have no agent. A corporation, until capital stock,
organized, has no life and therefore no faculties. 2. purchase of redeemable shares by the corporation, regardless of the
existence of unrestricted retained earnings, and
There are circumstances where the acts of promoters of a corporation can 3. dissolution and eventual liquidation of the corporation.
be ratified by the corporation if and when subsequently organized. However,
under the peculiar facts and circumstances of the present case the Supreme
Court decline to extend the doctrine of ratification which would result in the Transcribed by: Carlo L. Bahalla
commission of injustice or fraud to the candid and unwary. What happened was the Ongs were already shareholders. Now, it becomes
an intracorporate controversy between a corporation and its stockholders.
Manuel Tabora was the registered owner of the four parcels of land, which It’s not anymore between future incorporators wherein they can rescind in
he succeeded in mortgaging to the PNB so that he might have the necessary case it doesn’t push through because here the corporation was already
funds with which to convert and develop them into fishery. He appeared to existing. They are already shareholders. Once they become shareholders,
have met with financial reverses. He formed a corporation composed of they have the rights of the shareholders and they cannot be rescinded and
himself, his wife, and a few others. From the articles of incorporation, it return their money.
appears that out of the P48,700, amount of capital stock subscribed, P45,000
was subscribed by Manuel Tabora himself and P500 by his wife. And out of The Supreme Court stated if that was allowed to happen, the Ongs would be
the P43,300 amount paid on subscription, P42,100 is made to appear as paid prejudiced because they’ve given the capital which allowed the mall to
by Tabora and P200 by his wife. Also, both Tabora and His wife were directors survive as well as management. And the Tius just came back and says “we
and the latter was treasurer as well. will return what you contributed and bye.”
In fact, to this day, the lands remain inscribed in Tabora's name. Sandiko It should be corporation versus stockholders case and not between
always regarded Tabora as the owner of the lands. He dealt with Tabora stockholders.
directly. The president of the Cagayan Fishing intervened only to sign the
contract in behalf of the plaintiff. Even the PNB, mortgagee of the four parcels
of land, always treated Tabora as the owner of the same. Two civil suits were
brought against Tabora and in both cases a writ of attachment against the
subject properties was issued. The Philippine National Bank threatened to
foreclose its mortgages. Tabora approached the defendant Sandiko and
succeeded in making him assume the payment of Tabora's indebtedness to
the Philippine National Bank. The promissory note was made payable to the
Cagayan Fishing so that it may not attached by Tabora's creditors, two of
whom had obtained writs of attachment against the four parcels of land.
NOTE: Here, the promoters are liable.
Classification of Shares Definitions

This is the gist and the bulk of the Corporation Code. As Father Gus would
say, this is the heart and soul of the Corporation Code. Capital Stock
It is the amount fixed in the articles of incorporation, to be subscribed and
paid in or agreed to be paid in by the stockholders of a corporation.
SEC. 6. Classification of Shares. – The classification of shares, their
corresponding rights, privileges, or restrictions, and their stated par value, if
any, must be indicated in the articles of incorporation. Each share shall Authorized Capital stock
be equal in all respects to every other share, except as otherwise provided It refers to the amount of capital stock as specified in the articles of
in the articles of incorporation and in the certificate of stock. incorporation. It is synonymous with capital stock where the shares of the
corporation have par value. If the shares of the stock have no par value, the
The shares in stock corporations may be divided into classes or series of corporation has no authorized capital stock.
shares, or both. No share may be deprived of voting rights except those
classified and issued as “preferred” or “redeemable” shares, unless It is the maximum number of shares that the corporation is legally allowed
otherwise provided in this Code: Provided, that there shall always be a to issue without amending its Articles of Incorporation. It is the initial max
class or series of shares with complete voting rights. amount. You don’t necessarily sell all of those because you have to reserve
in case you need capital in the future.
Who has the power to classify these shares?
Initially, it is by the incorporators because they sign the Articles of Additional shares on top of authorized capital stock may not be issued unless
Incorporation. Later on, it will be determined by the Board of Directors and the Articles of Incorporation is amended by vote of the stockholders. So, once
the shareholders. you reached your maximum authorized capital stock, then you have to amend
your Articles of Incorporation. You cannot issue above the authorized capital
The important thing to note here is that the classification has to be stock.
indicated in the Articles of Incorporation and in the Certificate of Stock. So,
therefore, the Board of Directors alone has no authority to classify shares of There is no provision requiring minimum authorized capital stock. Under the
stock where the Articles of Incorporation are silent on the matter. Old Corporation Code, there is a minimum paid-in capital of P5,000.
Furthermore, any special agreement between a particular subscriber in the
corporation, by which he is allowed to subscribe for shares upon different Subscribed Capital Stock
terms from other subscribers, is invalid. It is the amount of the capital stock covered by subscription agreements,
whether fully paid or not. Thus, it is interchanged with “issued” capital stock.
So, the classification in the Articles of Incorporation and the Certificate of
Stock is, that’s it. No special consideration for other shareholders which is It can be Subscribed Capital Stock, Issued Capital stock, or Outstanding
not available to everyone because of the doctrine of equality of Shares. Capital Stock. These are used synonymously to describe these types of shares
as distinguished from Certificate of Stock (the paper itself).
Doctrine of Equality of Shares
While every subscribed share is outstanding, an issued share may not have
In the absence of any provision in the articles of incorporation and in the
the status as outstanding shares. This is true in case of treasury shares.
certificate of stock to the contrary, all stocks regardless of their class
Treasury Shares are issued shares but they are held by the corporation, so
nomenclature, enjoy the same rights and privileges and subject to the same
they are not outstanding as they are inside the corporation.
liabilities.
This subscribed capital stock is the extent of the liability of the stockholders,
Stated otherwise, each share shall be equal in all respect to all other shares
meaning their subscriptions. They are liable for the subscription contract –
except as otherwise provided in the Articles of Incorporation or in the
to pay the full amount. So, the subscribed capital stock is the liability of the
Certificate of Stock. So, Preferred Shares have the same voting rights as
shareholders. You cannot subscribe by installment. If the corporation goes
common shares. That’s the general rule unless the preferred shares is denied
bankrupt, the entire subscription becomes due and demandable. He cannot
voting rights in Articles of Incorporation.
refuse the payment because that is a personal liability of the subscriber and
he is at the liberty to pay it.
So, remember in our discussion in the FIA law? Since the Constitution does
not distinguish between common and preferred shares, preferred shares
Paid-Up Capital Stock
should be included in the computation of the foreign ownership limitation for
It is that portion of the subscribed capital stock that is actually paid. It is paid
domestic corporations. This gives more weight to foreign ownership than
in cash or property.
Filipino ownership. So, general rule, all shares have voting rights unless
stipulated otherwise.
Outstanding Capital Stock
It is the portion of the capital stock which is issued and held by persons other
VALLEY GOLF AND COUNTRY CLUB VS. VDA. De CARAM than the corporation itself.
G.R. 158806  This is why treasury shares are not outstanding shares.
 It is total issued shares less treasury shares.
ISSUE: May the cause for termination of membership in a non-stock
corporation be established through the by-laws alone and need not be set Unissued Capital Stock
forth in the articles of incorporation – No, it must be established also in It is that portion of the capital stock that is not issued or subscribed. It
AOI and not in the by-laws alone. does not vote and draws no dividends.
RULING: The Articles of Incorporation of Valley Golf did not contain any Legal Capital
provision authorizing the corporation to create any lien on a member’s Golf The amount equal to the aggregate par value and/or issued value of the
Share as a consequence of the member’s unpaid assessments or dues to outstanding capital stock.
Valley Golf.
When par value shares are issued above par, the share premium or excess
The lien, therefore, is not valid because it is not established in the AOI. is not to be considered as part of legal capital. In the case of no-par value
Clearly, the right of a non-stock corporation, such as Valley Golf, to expel a shares, the entire consideration received forms part of legal capital and shall
member through the forfeiture cannot be established by by-laws alone. It not be available for distribution as dividends.
should be in the AOI and Certificate of Stock.
Capital
It is used broadly to indicate the value of the entire property or assets of the
corporation. It is the same amount that can loosely be termed as the trust
fund for the payment of the debts of the corporation to which the creditors
may look for satisfaction.
Share of Stocks 8. Founder’s Share (Section 7)
It represents the interest or right which the owner has.
Section 7. Founders' Shares. - Founders' shares may be given certain
It has three (3) aspects: rights and privileges not enjoyed by the owners of other stock. Where the
1. In the management of the corporation in which he takes part through exclusive right to vote and be voted for in the election of directors is granted,
his right to vote; it must be for a limited period not to exceed five (5) years from the date of
2. In a portion of the corporate earnings, if and when segregated in the incorporation: Provided, That such exclusive right shall not be allowed if its
form of dividends; and exercise will violate Commonwealth Act No. 108, otherwise known as the
3. Upon its dissolution and winding up, in the property and assets of "Anti-Dummy Law"; Republic Act No. 7042, otherwise known as the "Foreign
the corporation remaining after the payment of corporate debts and Investments Act of 1991"; and otherwise known as "Foreign Investments Act
liabilities to creditors. of 1991"; and other pertinent laws.
Basically, if you’re a shareholder, these are the rights that you get. Stated 9. Redeemable Share (Section 8)
differently, shares of stocks are forms of securities representing equity
ownership in a corporation divided up into units. They are the measure of
Section 8. Redeemable Shares. - Redeemable shares may be issued by
the stockholders’ proportionate interest in the corporation in terms of
the corporation when expressly provided in the articles of incorporation. They
the right to vote and to receive dividend as well as the right to share the are shares which may be purchased by the corporation. They are shares
assets of the corporation when distributed in accordance with law and equity. which may be purchased by the corporation from the holders of such shares
upon the expiration of a fixed period, regardless of the existence of
Certificate of Stock unrestricted retained earnings in the books of the corporation, and upon such
It is a written acknowledgment by the corporation of the interest, right, and other terms and conditions stated in the articles of incorporation and the
participation of a person in the management, profits, and assets of a certificate of stock representing the shares, subject to rules and regulations
corporation. issued by the Commission.
Nature of a Share of Stock

10. Treasury Share (Section 9)
The ownership of shares of stock confers no immediate legal right or title to
any of the property of the corporation. Each share merely represents a
distinct undivided share of interest in the common property of the Section 9. Treasury Shares. - Treasury shares are shares of stock which
corporation. Such interest is a mere expectancy or a right in the management have been issued and fully paid for, but subsequently reacquired by the
of a corporation and the share in the profits. issuing corporation through purchase, redemption, donation, or some other
lawful means. Such shares may again be disposed of for a reasonable price
fixed by the board of directors
It is an interest in the corporation, a corporate property, being equitable and
beneficial in nature. So, basically, it says that if you have a share of stock,
the right to the assets themselves are inchoate – mere expectancy. An 11. Other classification as provided not contrary to law
undivided share only.
Where again do you find these classes of shares?
A share of stock is not an indebtedness in the corporation to the shareholder, It’s not in the By-laws; it’s in the Articles of Incorporation. The By-laws
therefore, no credits as to make the stockholder creditor of the corporation. cover only internal mechanics and dynamics of the corporation, whereas
So, a share of stock is not a liability for the corporation. It is a contribution the AOI deals with the basic structure of the corporation in its
to the capital. incorporation.
Transcribed by: Leah Aying
Shares of Stock Certificate of Stock
Incorporeal or intangible Tangible property, you can hold.
property.
Represent the right or interest of Written evidence of such right or
a person in a corporation. interest.
May be issued even if the As a general rule, a certificate of
subscription is not fully paid, stock may not be issued unless
except no par (value) shares. the subscription is fully paid. So
you only get a certificate of stock
if you fully paid.
The situs of a share of stock is A certificate of stock may have a
deemed to be the state where situs at the place where it is
the corporation has its domicile, located or the domicile of the
which is ordinarily the state owner, even though the
under whose laws it was created. corporation has a domicile
elsewhere.
Classes of Share
1. Par value or no par value
2. Voting or non-voting
3. Common or preferred
a. Cumulative or non-cumulative
b. Participating or non-participating
4. Promotion share
5. Escrow share
6. Convertible share
7. Watered shares
Continuation of Section 6: 100 pesos or piso, then they put the par value on the certificate of stock
itself.
Section 6. Classification of Shares. - The classification of shares, their
corresponding rights, privileges, restrictions, and their stated par value, if any, The primary purpose of par value shares is to fix the minimum
must be indicated in the articles of incorporations. Each share shall be equal subscription or issue price of the shares. That’s why it has to be stated
in all respects to every other share, except as otherwise provided in the in the certificate itself – so that it can assure the creditors that the
articles of incorporation. Each share shall be equal in all respects to every corporation would receive a minimum amount for its stock.
other share, except as otherwise provided in the articles of incorporation and
in the certificate of stock.
A corporation may issue shares with different par values. So par values
The share stock corporations may be divided into classes or series of shares, can differ per class of share. Usually, the preferred share of stock is
or both. No share may be deprived of voting rights except those classified more expensive than a common share of stock, so they can have
and issued as "preferred" or "redeemable" shares, unless otherwise provided different par values.
in this Code: Provided, That there shall be a class or series of shares with
complete voting rights. Par values, because they don’t have a minimum amount (unlike no-par
values, which has to be 5 pesos), it can go as low as piso or even less
Holders of nonvoting shares shall nevertheless be entitled to vote on the
than piso. It can be 50 cents or lesser. But don’t be misled, the par value
following matters;
of the certificate, is not usually the price which the investors buy or sell
(a) Amendment of the articles of incorporation; the stock. If you go to the stock exchange, the buying price and selling
(b) Adoption and amendment of bylaws; price is different. It’s fluctuating. Sure, it’s par value, it has a value (but)
(c) Sale, lease, echange, mortgage, pledge, or other disposition of all or that’s just the amount stated in the certificate, which is the required
substantially all of the corporate property; minimum for the capital stock.
(d) Incurring, creating, or increasing bonded indebtedness;
(e) Increase or decrease of authorized capital stock; Par Value, Book Value, Fair Value
(f) Merger or consolidation of the corporation with another corporation or Par value is neither the book value of fair value of the shares. Par value
other corporations;
(g) Investment of corporate funds in another corporation or business in
is the arbitrary amount that the corporation through its incorporators or
accordance with this Code; and the Board of Directors has fixed. The par value is the nominal value or
(h) Dissolution of the corporation. the stated value per share. It is not the real value of the share of stock
of the corporation as it conducts its business.
Except as provided in the immediately preceding paragraph, the vote
required under this Code to approve a particular corporate act shall be Par value is the value indicated in the certificate of stock but it’s different
deemed to refer only to stocks with voting rights. from the book value which is the actual or true value which may be
determined by dividing the stock holder’s equity or the net value of the
The shares or series of shares may or may not have a par value: Provided,
total assets divided by the number of shares. Book value is assets minus
That banks, trust, insurance, and preneed companies, public utilities, building
and loan associations, and other corporations authorized to obtain or access liabilities equals shareholder’s equity, divided by total outstanding
funds from the public whether publicly listed or not, shall not be permitted to shares.
issue no-par value shares of stock.
Assets - Liabilities = Shareholder’s Equity
Preferred shares of stock issued by a corporation may be given preference
in the distribution of dividends and in the distribution of corporate assets in 𝑁𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
case of liquidation, or such other preferences: Provided, That preferred = 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠
shares of stock may be issued only with a stated par value. The board of
directors, where authorized in the articles of incorporation, may fix the terms
and conditions of preferred shares of stock or any series thereof: Provided, Market Value
further, That such terms and conditions shall be effective upon filing of a While Market Value is a price at which a willing seller would sell and a
certificate thereof with the Securities and Exchange Commission, hereinafter willing buyer would buy, assuming that both have reasonable knowledge
referred to as the "Commission". of facts and neither being under abnormal pressure. Market value is
affected by the law of supply and demand. When you go to the stock
Shares of capital stock issued without par value shall be deemed fully paid exchange market, then that’s market value. The buying and selling price,
and nonassessable and the holder of such shares shall not be liable to the which is different from the book value, which is computed using the
corporation or to its creditors in respect thereto: Provided, That no-par value
balance sheet of the corporation.
shares must be issued for a consideration of at least Five pesos (₱5.00) per
share: Provided, further, That the entire consideration received by the
corporation for its no-par value shares shall be treated as capital and shall The par value of stock remains the same regardless of the book value
not be available for distribution as dividends. and fair value because it’s in the stock certificate, you can’t change it.
A corporation may further classify its shares for the purpose of ensuring No-Par Value
compliance with constitutional or legal requirements. No-par value shares have no par value but it has an issued value which
is the consideration fixed by the corporation for its issuance, meaning
Par Value and No-Par Value issue price. While it doesn’t have a par value, it has an issue price. The
PAR VALUE NO-PAR VALUE issued price of no-par value shares may be fixed in the articles of
incorporation or by the board of directors pursuant to authority
One with a specific money value One without any stated value
conferred by the articles of incorporation or the bylaws, or if not so fixed,
fixed in the articles of appearing on the face of the
by the stockholders representing at least a majority of the outstanding
incorporation and appearing in certificate of stock. It should not
capital stock at a meeting duly called for the purpose. (Section 61)
the certificate of stock. be less than 5.00 pesos.
Let’s say, a no-par value share, doesn’t have a par value but it has an
Banks, trust, insurance, and preneed companies, public utilities, building
issue value.
and loan association, and other corporations authorized to obtain or
access funds from the public, whether publicly listed or not may only
Usually the issued value is fixed by the Board of Directors. Usually, it’s
issue par value shares. So banks and other entities must be par value
not advisable to fix an issue value of a no-par value in the AOI, otherwise
shares.
mawalaan sya’g use, there is no more use na no-par value pa siya if you
put an issue value in the AOI. The reason why you put no par value, is
Par Value
that you can change the value anytime or you can issue it for a bigger
The par value represents the minimum amount of consideration for the
price, wala sya’y minimum, or a lower price basta not less than 5 pesos
issuance of shares. If you see a certificate of stock, usually they put the
but if you fix it in the AOI, mura na sya’g par value. Usually, they don’t
par value at the upper right hand of the certificate. Either it’s 10 pesos,
fix it in the AOI. It will lose its flexibility in changing the issue value, so Any amount that you received for a no-par value, it goes directly to
in practice it is usually the Board of Directors who fixes the issue value, common stock, that’s capital. So, the share premium account, it shows
but it’s not in the AOI. up in the shareholder’s equity portion of the balance sheet.
No no-par value shares have the same rights as holders of par value  The share premium represents the difference between the par
shares. value of the issued shares, and the subscription or the issue
price of the shares (Subscription Price – Par Value).
Another distinction is that, the moment a no par value share is issued,  Share premium account is a statutory reserved account, one
the payment received is considered as full payment of the entire that is not distributable.
subscription. It can never be considered as partial payment. In no-par
value shares, there is no subscription by instalment. So upon issuance, Illustration of Balance Sheet:
full consideration must be paid.
Note that subscription is not identical to full payment in par value shares.
In par value shares you can pay your subscription by instalment.
However, if it’s no-par, because wala sya’y value, kung unsa man to
imong gihatag, mao na to iyang subscription price.
Advantages of Par Value Shares

1. Par value has more protection to creditors because it has a
guaranteed value.
2. There is unlikelihood of sale of subsequent issued share at a

lower price because there is a par value in the certificate. You
can’t sell it for anything less.
Disadvantages of Par Value Shares

Subscribers are liable to corporate creditors for their unpaid subscription,
applying the Trust Fund Doctrine. So par value shares, unlike the no-par
value, kung whatever amount you paid that is the subscription. Here
you can pay by installment. So in case you don’t fully pay, the creditors
can go after you to pay the remaining subscription price. That is also in
consonance with the Trust Fund Doctrine.
Share Premium Stock Holder’s Equity

Share premium is also called Capital Surplus or Additional Paid-in Capital If you look closely to the stock holder’s equity portion, it looks like this:
or Paid-in Capital in excess of Par Value.
PAR VALUE NON-PAR VALUE

Subscription P15/share Subscription P15/share
Price Price
Par Value P10/share Issue Value P15/share
Share Premium P5 Share Premium P0
PAR VALUE
Cash (P15 x 1000) 15,000
Common Stock (10 x 1000) 10,000
Share Premium-CS (P5x 1000) 5,000
NON-PAR VALUE
Cash (P15 x 1000) 15,000
Common Stock (15 x 1000) 15,000
You have here the common stock and the preferred stock based on their
par value. This is the par value of the common and he preferred stock,
For example, par value share, the subscription price is P15 per share
usually mas mahal ang preferred stock. For example, it’s 15, 000. And
which is indicated in the subscription contract but the par value in the
then the share premium is the amount in excess of the par value which
certificate is only P10, so there is a share premium of 5 pesos. (15-10=5)
you issued your stock for (subscription price-par value). Mao ni siyang
kanang mga gains na kuntahay sa corporation.
While in no-par value share, the subscription price, whatever you agree
on, that is the issue value, so there is no share premium because
In the retained earning you have:
everything goes into capital.
1. Restricted retained earnings
2. Unrestricted retained earnings
So, if you look at Section 6 Paragraph 7:
Shares of capital stock issued without par value shall be deemed fully
So pwede na sya irestrict or unrestrict sa corporation. Many times you
paid and non-assessable and the holder of such shares shall not be liable
will see that you can only buy Treasury Shares or you can only reacquire
to the corporation or to its creditors in respect thereto: Provided, That
Treasury Shares when the corporation has unrestricted retained
no-par value shares must be issued for a consideration of at least Five
earnings. So very important this term, very important value.
pesos (₱5.00) per share: Provided, further, That the entire
consideration received by the corporation for its no-par value
Common Stock
shares shall be treated as capital and shall not be available for
Common Stock, this is also known as ordinary share. Don’t be misled.
distribution as dividends.
Retained Earnings Voting vs. Non-Voting Shares
Retained earnings are the value of the earnings not paid out as  Voting Share- is share with right to vote.
dividends. Retained earnings are often used to pay off debts, reinvest  Non-Voting Share- is share without right to vote.
back in the company for research or development purpose or for any
new capital acquisition. Under the RCC, a corporation should always have a voting share. It is
generally customary to give the right to vote to common stock and to
Restricted Retained Earnings withhold it from preferred stock. That’s how they put value to their shares.
Restricted Retained Earnings refers to that amount of the company’s Common stock usually has a voting right; while preferred stock, because they
have preferential rights as to dividends, then they don’t have voting rights.
retained earnings that are not available for distribution as dividends. The
Usually. Not in all cases.
primary reason why the retained earnings are restricted is, example, to
pay dividends in arrears, to pay a loan, to invest in expansion, it depends If stock is originally issued as voting stock, it may not thereafter be deprived
on the corporation’s Board of Directors, if they would like to restrict it, the right to vote without the consent of the holder. Once it is a voting stock,
meaning not give it away as dividends, they want to hold on to it. That’s you have to get consent before you change it to non-voting stock.
the difference.
Non-Voting Share
Transcribed by: Honey Andamon, Val Acevedo, and Av Abrasaldo Only preferred and redeemable shares may be deprived of voting rights. So,
common shares must have voting rights. But founder’s share may be given
If you look at the definition in the RCCP, it has a peculiar definition of a the exclusive right to vote and be voted for in the election of directors for a
watered share. But if you research on the internet, the real definition is this: limited period. Look at Section 7.
Watered Shares In which case, voting common stocks will have no right to vote for directors.
Shares issued at a much greater value than the value implied by a company’s While it is stated that preferred and redeemable shares are the only ones
underlying assets, usually as part of a scheme to defraud investors. which can be deprived of voting, there’s also the founder’s share when they
are given exclusive right to vote for an election only for a specific period of
Watered shares are shares of stock of a corporation which have been issued time.
at a price that greatly exceeds its true value. It is a stock of a corporation
whose total worth is less than its invested capital. in this case, the actual It is necessary to denominate a non-voting share as “non-voting share”. It
value of all the shares is less than the value carried on the books of a has to be specifically and expressly stated in the certificate of stock. It is not
corporation. sufficient that preferred shares, to make it non-voting, you just indicate
“preferred shares”. It is not implied that if it’s preferred then it’s non-voting;
Basically, watered shares are bloated or inflated shares. you have to expressly state that.
[Photo of a Cow] – the term is believed to have originated from ranchers who In fact, there may be preferred or redeemable shares that have voting rights.
make cattle drink a large amount of water before taking them to the market. If the Articles of Incorporation do not provide for shares that have no voting
So, the weight of the consumed water would make the cattle deceptively rights, it is presumed “equality of shares” – all shares have voting rights.
heavier, enabling the ranchers to fetch higher prices for them.
Treasury Shares by their Nature Cannot Vote
This was also cited by Fr. Gus in his previous lectures – that watered shares Because who will vote for the shares? Who will represent the shareholders?
are inflated. You imagine it as inflated cows; they add fictitious value on top Treasury shares are shares which is in the possession of the corporation.
of the real value of the shares. And, you do not need to deny the voting rights of the treasury shares. Unlike
other shares where you have to say that “this is a non-voting share”, once it
EX: American stock promoters in the late 1800s could inflate their claims is treasury share – you do not need to state in the articles, in the bylaws, in
about a company’s asset and profitability and sells stocks and bonds in excess the stock that it is non-voting because in that case, it is implied.
of the company’s actual value. To do so, they would contribute property to a
new corporation in return for stock at an inflated par value. On the balance Delinquent Shares Not Entitled to Vote
sheet, the property would be the corporation’s only capital and because legal What are these delinquent shares? These are shares held by people who
capital was fixed to aggregate par value, the value of the property would go have delinquent subscriptions, those who have not yet fully paid. They are
up. While the promoter had $10,000 in stock, the corporation might only not entitled to vote until they fully pay the price of their stock. Again, there
have $5,000 worth of asset but would still be worth 10,000 on paper. That’s is no need to deny such right in the articles; the denial is already statutory.
how they did the watering of the shares before. You can see that in the RCCP. Since the RCCP is deemed read into the
articles, no need to state that specifically.
Under RCCP, it is only mentioned in Section 64. Some authors would say that
watered stocks are shares issued below par value but as I’ve mentioned, this Summary
is the real definition of a watered stock. Stocks that do not have right to vote:
1. Preferred and redeemable shares may be deprived.
All you have to remember is that - the issuance of watered stock under 2. Treasury shares and delinquent shares do not have the right to
Section 64 is against the Corporation Code. The director who consents vote and it is implied.
thereto will have to pay for the water in the stock. Meaning, the inflated
value. Let’s go to the 8 enumerations. These can be found in the RCCP.
Holders of nonvoting shares shall nevertheless be entitled to vote on the

following matters:
(a) Amendment of the articles of incorporation;

(b) Adoption and amendment of bylaws;
(c) Sale, lease, exchange, mortgage, pledge, or other disposition of all or
substantially all of the corporate property;
(d) Incurring, creating, or increasing bonded indebtedness;
(e) Increase or decrease of authorized capital stock;
(f) Merger or consolidation of the corporation with another corporation or
other corporations;
(g) Investment of corporate funds in another corporation or business in
accordance with this Code; and
(h) Dissolution of the corporation.
These consists of major corporate decisions that all stockholders must assets, or as to dividends. There can be many types of preferred shares and
participate in. Even if you have deprived the preferred share of voting rights, they can have more right over the different type of preferred shares.
they nevertheless have these 8 items to vote on.
[There are preferred shares nga more voting rights lang, or more assets lang
In this case, two-thirds of the outstanding capital stock (OCS) is required. so depende sa corporation.]
You see that in Section 15. So, if it involves 1 of these 8 items, then it has to
have 2 two-thirds of the OCS for approval. Limitations for Issuance of Preferred Shares
There are 4 limitations:
Note: It does not include the election of directors or trustees. Non-voting 1. Preferred shares deprived of voting rights in the articles of
may be denied the right to vote in an election. That is the actual point of why incorporation shall still be entitled to vote on the matters
they are deprived of voting rights; so that they cannot elect in the election. enumerated in Section 6 par. 6;
2. The preference of preferred shares must not be violative of the
Common vs. Preferred Shares of Stocks provisions of the RCCP;
3. The preferred shares may be issued only with par value; and
Common Share of Stock 4. The Board of Directors may fix the term and conditions of
One which entitles the holder thereof to a pro rata division of [all] the profits, preferred shares or stock or any series thereof only when so
if there are any, and in its assets upon dissolution, without any preference or authorized by the articles and such terms and conditions shall be
advantage in that respect over other stockholders or class of stockholders effective upon the filing of the certificate thereof with the SEC.
but equally with all other stockholders except preferred stock-holders.
Let’s go to a more specific type of preferred share.
Preferred Share of Stock
One with a stated par value which entitles the holder thereof to certain Cumulative Shares Non-Cumulative Shares
preferences over the holders of common stock. Those shares which are entitled to Those shares which are entitled
1. Preferred shares as to voting; payment not only of the current merely to the payment of current
2. Preferred shares as to assets; dividend but also of [all] dividends dividends but not dividends in
3. Preferred shares as to dividends. in arrears. arrears.
They have certain preference on voting, on assets and dividends. They have Cumulative shares are those dividends which were not paid, they still receive
more voting rights in certain instances; more rights as to assets upon it in the year wherein the corporation is able to pay the dividends. As to non-
liquidation of the corporation; and more rights as to dividends. cumulative shares, obviously, it is the opposite; if it’s arrears then it is TY
(thank you na lang sa lahat) they are only entitled to the current dividends.
If you look at the RCCP, you cannot actually read any mention of common
stockholder. It is so common, according to Fr. Gus, that it’s no longer Participating Shares Non-Participating Shares
mentioned as common shares. Participate with common shares in Receive the stipulated preferred
the remaining profits pro rata (or dividends and no more. The
It is so called as common because it is the basic class of stock which private in the proportion stated in the balance, if any, is given entirely to
corporations generally issue, hence, the name. Or because its stockholders Articles of Incorporation) after the the common stocks.
stand upon equal footing without extraordinary rights or privilege. common shares have been paid
the amount of the stipulated
Again, common shares cannot be deprived of voting rights. dividend at the same preferred
rate.
Common stock owners are the residual owners of the corporation because
they share whatever is left, equally. They will share the residual assets. They For participating shares, after the preferred shares get their dividends and
only get the assets left over in case of liquidation. While a preferred share of the common shares received their dividends, the preferred shareholders still
stock must have par value. participate along with the common shares in the remaining dividends.
 Common Share – can either be par or no-par For non-participating shares, generally, if it is preferred, you pay first the
 Preferred Share – must have par value preferred shares. Whatever is remaining is divided by the common shares.
[Don’t be confused because that may or may not come out in your exam.] Non-Cumulative, Non-Participating
In the absence of any agreement, express or implied, dividend should be
Preferred shares of stock, just by virtue of the shares being preferred, does deemed as non-cumulative and non-participating.
not mean that they are creditors of the corporation. Preferences do not give
them a lien on the property of the corporation or make them corporate General Rule: Non-cumulative, non-participating.
creditors.
Exception: Otherwise stated in the Articles of Incorporation and Certificate
Maybe it was in your Credit Transactions, you know that the right of creditors of Stock.
is always superior over shareholders. When you liquidate, you always pay the
creditors ahead of time and then shareholders, the last. Shareholders, What if the corporation is so complicated?
whether common or preferred, also bear their risk after paying creditors. There is such a thing as cumulative participating preferred shares. They can
combine any of these types (cumulative shares, non-cumulative shares,
As to preferred share, if you grant them additional voting rights or assets or participating shares or non-participating shares). They can mix and match
dividends right, these must be stated in the articles since it is not implied. whatever they prefer.
Guaranteed Stock
If you read through cases, it may refer to preferred stock as guaranteed stock
so that is sometimes used synonymously.
The fact that dividends are guaranteed, it does not make them creditors.
They are still stockholders. They are entitled to dividends only when there
are profits, out of which, dividends may be declared. Creditors would have
to be paid no matter what. Whether there’s no more retained earnings, the
creditor still to be paid; obviously preferred stockholders have to wait if there
is enough money to pay dividends.
If you are classified as a preferred share, there is such a thing as “preferred”

preferred share. There is preference among preferred shares. That is also
possible because a corporation may issue 1 class of preferred share as to
Illustration: Cumulative Shares [6] Founders' Share (Section 7 RCCP)
Shares issued to the organizers and promoters of a corporation in
Situation: 5,000 cumulative preferred shares with P1pp par value consideration of some supposed right or property. Such shares are often
entitled to preferred dividend rate of 10% per share (i.e. par x 10% given special privileges over other stock as to voting and as to division of
dividend rate = P10/dividend per share). No dividends were distributed profits and exclusive right to vote and be voted for in the election of
for 2 years, but declared dividends on the 3rd year. directors.
Non-Cumulative Cumulative Note: Promotion share is kind of the same with founder’s share, but
YR 1 (P10 X founder’s share has exclusive right to vote and be voted on in the election of
50,000 TY Year 1 = 0 directors, if so granted.
5K SHARES)
Year 2 = 0
YR 2 (P10 X
50,000 TY Year 3 = P150,000 SEC. 7. Founders’ Shares. – Founders’ shares may be given certain rights
5K SHARES)
P50,000 (1st Yr. Arrear) and privileges not enjoyed by the owners of other stocks. Where the exclusive
YR 3 (P10 X right to vote and be voted for in the election of directors is granted, it must be
50,000 TY + P50,000 (2nd Yr. Arrear)
5K SHARES) for a limited period not to exceed five (5) years from the date of incorporation:
+ P50,000 (3rd Yr. Current)
Provided, That such exclusive right shall not be allowed if its exercise will
Illustration: Participating
violate Commonwealth Act No. 108, otherwise known as the “Anti-Dummy
Law”; Republic Act No. 7042, otherwise known as the “Foreign Investments
Problem: 1,000 shares with a P100 per value. 300 of the shares are Act of 1991”; and other pertinent laws.
preferred, 700 shares are common. Preferred shares entitled to preferred
dividend rate of 10% per share (i.e. P100 par x 10% dividend rate = P10
 The last part of the provision is added to the RCCP. We have now the
[agreed or guaranteed dividend]/ dividend share). What if the corporation
Anti Dummy Law.
declares dividend of P5,100?
 The 5-year limitation is non-extendible. You cannot make another
founder’s share for another 5 years. You can only be a founder’s share
Non-Participating Participating
only once. You issue founder’s share in the incorporation. You can no
Dividends Dividends longer extend it.
P 5,100 P 5,100
Payable Payable  After the expiration of the limitation period, founders shall have equal
PS Dividend PS Dividend rights with the holders of the common shares.
P 3,000 P 3,000
(P10x300) (P10x300)  The RCCP makes it clear that the exclusive right to vote must not violate
CS Dividend the Anti-Dummy and FIA.
P 2,100 P 2,100
(P3x700)
PS Dividend As to the last paragraph, if the founder’s share belongs to foreigners and if
P 630
(P2.1x300) these foreigners exercise their founder’s share resulting in a Board of
CS Dividend directors composed of more than 40% foreign equity, it is not allowed. This
P 1,470
(2.1x700) is because perhaps under the control test and grandfather test, it is a Filipino
corporation, but the officers are mostly foreigners. It defeats the purpose.
[1] Promotion Share Thus, they added the last paragraph. They cannot exercise their founder’s
Share that is issued to promoters for incorporating the company, or for share if it will result in foreigners having more control and more power in the
services rendered in launching or promoting the welfare of the company. corporation, then that is allowed by law.
[2] Escrow Share Limitation: Foreigners cannot exercise their founder’s share if they will
Share subject to an agreement by virtue of which the share is deposited by exceed the number of seats in the Board of Directors as allowed.
the grantor or his agent with a third person to be kept by the depository until
the performance of a certain condition (usually the payment of the full [7] Redeemable share (Section 8 RCCP)
subscription price or a loan) or the happening of a certain event contained in Shares which may be purchased by the corporation from the holders of such
the agreement. shares upon the expiration of a fixed period, regardless of the existence
of unrestricted retained earnings in the books of the corporation, and
Escrow (held in trust). upon such other terms and conditions stated in the articles of incorporation
and the certificate of stock representing the shares.
The legal title of the shares to be conveyed remains in the grantor until the
condition is fulfilled. Thus, the issuance of the shares is subject to a SEC. 8. Redeemable Shares. – Redeemable shares may be issued by the
suspensive condition. Before the fulfilment of the condition, the grantee or corporation when expressly provided in the articles of incorporation. They are
holder is not yet the owner of the shares and consequently he is not entitled shares which may be purchased by the corporation from the holders of such
to the rights belonging to a regular stockholder (?). shares upon the expiration of a fixed period, regardless of the existence of
unrestricted retained earnings in the books of the corporation, and upon such
[3] Convertible Share other terms and conditions stated in the articles of incorporation and the
Share which is convertible or changeable by the stockholder from one class certificate of stock representing the shares, subject to rules and regulations
to another class such as from preferred to common, and no par to par. issued by the Commission.
This is often pricy shares of stock. Meaning of Redemption

It is to purchase or reacquire a stock whether or not the reacquired stock is
In the absence of an express provision in the Articles of Incorporation as to cancelled, retired or held in treasury.
their convertibility, preferred shares cannot be converted.
General Rule: Not convertible.

Regardless of the existence of
Exception: Unless otherwise provided in the Articles of Incorporation unrestricted retained earnings.
and in the Certificate of Stock. Can they redeem even if they are experiencing net loss because of phrase
regardless of the existence of unrestricted retained earnings?
Caveat: The conversion of no par value shares to per value shares is No. While unrestricted earning is not required, the corporation must have
allowed by SEC provided there would be no change in the stockholders sufficient assets to pay for the redemption price and enough to pay its
percentage interest in the total assets of the corporation. corporate liabilities. The redemption must not bring about the insolvency of
the corporation.
[5] Watered Shares (Section 64 RCCP)
Why relate this to Trust Fund Doctrine?
Because sometimes, the redemption of stock dividends previously issued is
sometimes used by the corporation as a veil for constructive distribution of
cash dividends. It is like they redeem the shares but they are actually giving Republic Planters Bank v. Agana
money as dividends violative of the trust fund doctrine. G.R. No. 51765 | March 3, 1997
SEC-OGC Opinion No.19-20 Issue: Whether RPB may be compelled to redeem the preferred shares of
stock? No.
For the protection of the stockholders the pertinent, the 1982 rules provide
that a corporation that has issued redeemable shares shall set up a sinking Preferred Share of Stock
fund to be deposited with a trustee bank which shall not be invested in risky A preferred share of stock, on one hand, is one which entitles the holder
and speculative venture. thereof to certain preferences over the holders of common stock. The
preferences are designed to induce persons to subscribe for shares of a
A sinking fund refers to a fund set up by a corporation where cash is gradually corporation. Preferred shares take a multiplicity of forms. The most common
set aside in order to accumulate the amount necessary to meet the forms may be classified into two:
redemption price of redeemable shares at specified dates in the future.
Under the old Corporation Law in force at the time the contract between the
What is effect of redemption? RPB and the Corporation was entered into, it was provided that "no
What happens now if the corporation redeems? corporation shall make or declare any dividend except from the surplus profits
A redemption by the corporation of its stock is in essence, a repurchase for arising from its business, or distribute its capital stock or property other than
its cancellation. The moment they are redeemed by the corporation, the logic actual profits among its members or stockholders until after the payment of
is that they are retired because you use capital to redeem the shares. its debts and the termination of its existence by limitation or lawful
dissolution." Similarly, the present Corporation Code provides that the board
Upon redemption, the redeemable share, lose their status as part of the of directors of a stock corporation may declare dividends only out of
outstanding or unissued authorized capital stock. unrestricted retained earnings. The Code, in Section 43, adopting the change
made in accounting terminology, substituted the phrase "unrestricted
When Considered as Treasury Shares After Redemption retained earnings," which may be a more precise term, in place of "surplus
They are considered treasury shares after redemption if by provision of the profits arising from its business" in the former law. Thus, the declaration of
articles, they can be reissued. dividends is dependent upon the availability of surplus profit or unrestricted
retained earnings, as the case may be. Preferences granted to preferred
Amendment of The Articles If There Is Retirement of a Share stockholders, moreover, do not give them a lien upon the property of the
Where the reissuance of the redeemed shares is prohibited, either expressly corporation nor make them creditors of the corporation, the right of the
or impliedly by silence, the number of the authorized shares of capital stock former being always subordinate to the latter. Dividends are thus payable
of the corporation is reduced accordingly, and the articles must be amended only when there are profits earned by the corporation and as a general rule,
to reflect such reduction. even if there are existing profits, the board of directors has the discretion to
determine whether or not dividends are to be declared. Shareholders, both
Once you retire a share, you have to amend your articles because in effect, common and preferred, are considered risk takers who invest capital in the
you are lessening the authorized capital. business and who can look only to what is left after corporate debts and
liabilities are fully paid.
If you redeem a share, you retire it.
Redeemable Shares
Transcriber’s Note: 39:00-40:00, I can no longer understand what Ma’am Redeemable shares are shares usually preferred, which by their terms are
is discussing because it is choppy. I tried to listen to it all over again, but it redeemable at a fixed date, or at the option of either issuing
is difficult to understand. I tried to find key words, pero lisod siya. ☹ corporation, or the stockholder, or both at a certain redemption
price. A redemption by the corporation of its stock is, in a sense, a
[8] Treasury Share (Section 9 RCCP) repurchase of it for cancellation. The present Code allows redemption of
Shares of stock which have been issued and fully paid for, but subsequently shares even if there are no unrestricted retained earnings on the books of
reacquired by the issuing corporation through purchase, redemption, the corporation. This is a new provision which in effect qualifies the general
donation, or some other lawful means. rule that the corporation cannot purchase its own shares except out of
current retained earnings. However, while redeemable shares may be
Redeemable Shares Treasury Shares redeemed regardless of the existence of unrestricted retained earnings, this
Redeemable shares are retired and Treasury shares are kept in is subject to the condition that the corporation has, after such redemption,
cannot be reissued. treasury and can be reissued. assets in its books to cover debts and liabilities inclusive of capital
stock. Redemption, therefore, may not be made where the corporation is
insolvent or if such redemption will cause insolvency or inability of the
Disappeared altogether. Treasury shares differ from retired
corporation to meet its debts as they mature.
or cancelled shares in that while
the latter has disappeared
RPB Cannot Be Compelled to Redeem
altogether, this can be sold.
While the stock certificate does allow redemption, the option to do so was
clearly vested in the RPB. The redemption therefore is clearly the type
Treasury Shares Must Be Distinguished
known as "optional". Thus, except as otherwise provided in the stock
from Authorized but Unissued Shares
certificate, the redemption rests entirely with the corporation and the
The acquisition of treasury shares does not reduce the number of issued
stockholder is without right to either compel or refuse the redemption
shares or the amount of stated capital and their sale does not increase the
of its stock. Furthermore, the terms and conditions set forth therein use
number of issued shares or the amount of stated capital.
the word "may". It is a settled doctrine in statutory construction that the
word "may" denotes discretion, and cannot be construed as having a
If you acquire treasury shares, it does not lessen your issued shares because
mandatory effect.
treasury shares are still considered issued, though not outstanding. It is still
issued but held by the corporation, only that your outstanding shares are
The redemption of said shares cannot be allowed. As pointed out by the RPB,
reduced.
the Central Bank made a finding that RPB has been suffering from chronic
reserve deficiency, and that such finding resulted in a directive, prohibiting
Preferred Shares of Stock the latter from redeeming any preferred share, on the ground that said
As to Assets As to Dividends redemption would reduce the assets of the Bank to the prejudice of
Share which gives the holder Share the holder of which is its depositors and creditors. Redemption of preferred shares was
thereof preference in the entitled to receive dividends on prohibited for a just and valid reason. The directive issued by the Central
distribution of the assets of the said share to the extent agreed Bank Governor was obviously meant to preserve the status quo, and to
corporation in case of liquidation. upon before any dividends at all prevent the financial ruin of a banking institution that would have resulted in
are paid to the holders of common adverse repercussions, not only to its depositors and creditors, but also to
stock. There is no guaranty, the banking industry as a whole. The directive, in limiting the exercise of a
however, that the share will right granted by law to a corporate entity, may thus be considered as an
receive any dividends exercise of police power.
Role of Bangko Sentral SEC-OGC Opinion No. 12-06, April 20, 2012
The Court just said here that no bank can redeem redeemable shares without
prior permission from the Banko Sentral ng Pilipinas. You can see many In sum, treasury shares are regarded as property owned by the corporation
sections in the Revised Corporation Code of the Philippines that specify that and cannot be distributed as property dividends among the stockholders in
this [particular section] is applicable to bank, quasi-bank, and financial the absence of unrestricted retained earnings other than the amount
intermediaries. So this is one of those. equivalent to the cost of treasury shares, because to do so would violate the
trust fund doctrine.
Treasury Shares
Section 9. Treasury Shares. - Treasury shares are shares of stock which But if there are unrestricted retained earnings arising from the business of
have been issued and fully paid for, but subsequently reacquired by the the corporation, treasury shares, being the property of the corporation may
issuing corporation through purchase, redemption, donation, or some properly be distributed as property dividends.
other lawful means. Such shares may again be disposed of for a reasonable
price fixed by the board of directors. SEC Opinion 6-12 asks the question that: If the corporation is holding
treasury shares, can it distribute the treasury shares as dividends? The SEC
A treasury share can be acquired by redemption. Redemption is a form of says that they cannot distribute the treasury shares as dividends if there are
acquisition of a share. Once you redeem it, it becomes treasury share unless no enough unrestricted retained earnings because it would violate the trust
if it is retired, then it’s called a redeemable share. fund doctrine.
Treasury Shares, When Allowed If you check Section 67 in the last paragraph, you would know there how the
As a general rule, a corporation can reacquire its own shares provided that it corporation would reacquire treasury shares.
has adequate amount of unrestricted retained earnings to support the cost
of the said share. The corporation, in the absence of a qualified bidder, may bid at public sale
of delinquent shares. So that is one way of reacquiring shares.
Effect of Treasury Shares on Capital Stock
Section 67, last paragraph. Delinquency Sale. Should there be no bidder at
By acquiring treasury shares, the treasury shares is no longer part of the
the public auction who offers to pay the full amount of the balance on the
outstanding capital stock. Treasury shares are not automatically retired subscription together with accrued interest, costs of advertisement, and
unless otherwise provided. Neither do they revert to being an issued shares. expenses of sale, for the smallest number of shares or fraction of a share,
They are already issued but they are just no longer outstanding. the corporation may, subject to the provisions of this Code, bid for the same,
and the total amount due shall be credited as fully paid in the books of the
The Corporation can treat the treasury shares as part of the issued shares as corporation. Title to all the shares of stock covered by the subscription shall
long as they are not cancelled or retired. Treasury stock is a contra equity be vested in the corporation as treasury shares and may be disposed of by
item in your balance sheet. So, it is not reported as an asset rather it is said corporation in accordance with the provisions of this Code.
subtracted from stockholder’s equity.
The presence of treasury shares will cause a difference between the number Rights of Treasury Shares
of shares issued and the number of shares outstanding.  Voting Rights – Treasury shares have no voting rights as long
as they remain in the treasury.
 Dividend Rights – Neither are treasury shares entitled to
Stockholder’s Equity dividends or assets because dividends cannot be declared by a
Paid In Capital corporation to itself.
Common stock, $0.10 par, 10,000 shares authorized, 2,000
shares issued, 1,900 outstanding $200 Being the owner of treasury shares, the corporation may opt to:
Paid-in Capital in excess of pair – common (aka Share a) Retire,
Premium – CS) 49,800 b) Sell, or
Total Paid-in capital 50,000 c) Distribute as property dividends said shares
Retained Earnings 28,000
Subtotal $78,000 If it has no rights to vote and no rights to dividends, what rights, if
Less: treasury stock, at cost (100 shares at $20) – 2,000 any, remain in treasury share?
Total Stockholder’s Equity $76,000 Perhaps, the right of the corporation to reissue that treasury shares for a
valuable consideration, then that is the right of the corporation, right? So that
Treasury stock here [ma’am encircles the 100 shares at $20 part] lessens the is the right remaining over the treasury shares.
amount, the number of shares outstanding [ma’am encircles the 1,900
outstanding]. “Being the owner of treasury shares, the corporation may opt to: a.) retire”
So, instead of 2,000 shares, it becomes 1,900 because 10 of those [I think If they retire, retirement can be effected by decreasing the capital stock.
ma’am meant 100] xxx be treasury. So that is the effect of treasury stock Meaning, you amend the Articles of Incorporation (AOI).
with the number of shares outstanding.
“Being the owner of treasury shares, the corporation may opt to: b.) sell”
Power to Acquire Treasury Stock
Section 40. Power to Acquire Own Shares. - Provided, That the corporation And then you can resell it. Section 9 says “may be disposed of for a
has unrestricted retained earnings in its books to cover the shares to be reasonable price fixed by the board of directors.”
purchased or acquired, a stock corporation shall have the power to
purchased or acquired, a stock corporation shall have the power to purchase Reasonable Price, Meaning
or acquire its own shares for a LEGITIMATE CORPORATE PURPOSE OR
Does it mean any price is allowed at all? Does it mean it can be issued at a
PURPOSES, including the following cases:
lesser than par value or issued value? Yes.
a. To eliminate fractional shares arising out of stock dividends;
b. To collect or compromise an indebtedness to the corporation, arising
out of unpaid subscription, in a delinquency sale, and to purchase The treasury shares may be sold even at less than par value or issued value.
delinquent shares sold during said sale; and This is because the corporation has already received the full value of the
c. To pay dissenting or withdrawing stockholders entitled to payment shares upon initial issuance. Upon initial issuance, upon the initial sell of the
for their shares under the provisions of this Code. shares, they already received the full amount.
So when the corporation reacquires and then he sells it, they can issue it at
As I have mentioned, you must have unrestricted retained earnings in its
less than par value or issued value. In that case, it is no longer a violation of
books to cover the shares to be purchased. So those are the instances when
a trust fund doctrine.
the corporation can reacquire their shares and classify them as treasury
shares.
Stockholder may, however, rightfully complain if the price is lower than the Why can’t we distribute treasury shares as property dividends?
reasonable. If the price already becomes too unreasonable. The cost of the treasury stock must be subtracted from the retained earnings
using the amount the company can distribute to stockholders as dividends.
In case of sale or reissue, the treasury shares, again, become outstanding
stock and regain whatever dividends and voting rights they may originally How can you distribute the treasury shares as property dividends?
have held. So, obviously if you sell and somebody owns it again, then it’s You accumulate enough retained earnings more than the cost of the treasury
outstanding then that share already has voting rights and dividend rights. shares. This is one of the reasons why a corporation would need to restrict a
That’s normal. retained earnings to restrict the retained earnings if they want to distribute
treasury shares as property dividends.
The share of treasury shares should be treated as a sale of ordinary property
of the corporation. Hence, the gain there is subject to tax. The purpose of So, you should have this much [ma’am encircling $63,000,000 under retained
the sale is to recover the amount paid by the corporation for the said shares. earnings] amount in your unrestricted retained earnings.
“Being the owner of treasury shares, the corporation may opt to: c.) Philippine Coconut Producers Federation v. Republic
distribute as property dividends said shares” G.R. Nos. 177857-58 | September 17, 2009
If you distribute as property dividends, it is not that easy. Treasury shares Facts: Salonga, et al., however, assert that the proposed conversion is
are regarded as property acquired and currently owned by the corporation. positively disadvantageous to respondent. They label the conversion as a
But accounting wise, treasury share is not recorded as an asset but is a contra "devious compromise favorable only to COCOFED and Cojuangco, Jr."
equity account. According to them, the conversion will result in the loss of voting rights of
PCGG in SMC and enable Cojuangco, Jr. to acquire the sequestered shares,
The presence of the treasury shares will cost a difference between the without encumbrances, using SMC funds
number of shares issued and the number of shares outstanding.
Issue: Whether or not the contention of Salonga, et al. is correct? No.
Treasury Shares
Held: The common shares after conversion and release from sequestration
When you acquire TS (Treasury Shares):
become treasury stocks or shares. Treasury shares under Sec. 9 of the
Treasury Shares P10,000
Corporation Code (Batas Pambansa Blg. 68) are "shares of stock which have
Cash P10,000
been issued and fully paid for, but subsequently reacquired by the issuing
corporation by purchase, redemption, donation or through some other lawful
When you retire TS (Treasury Shares):
means. Such shares may again be disposed of for a reasonable price fixed
Common Stock P10,000
by the board of directors."
A treasury share or stock, which may be common or preferred, may be
When you reissue TS (Treasury Shares):
used for a variety of corporate purposes, such as for a stock bonus plan for
Cash P10,000
management and employees or for acquiring another company. It may be
held indefinitely, resold or retired. While held in the company’s treasury,
the stock earns no dividends and has no vote in company affairs.
When you issue TS (Treasury Shares) as Dividends:
Thus, the CIIF common shares that would become treasury shares
Retained Earnings P10,000
are not entitled to voting rights. And should conversion push
Dividends Payable P10,000
through, SMC, not Cojuangco, Jr., becomes the owner of the
Dividends Payable P10,000
reacquired sequestered CIIF SMC common shares. Should SMC opt,
however, to sell said shares in the future, prospective buyers, including
possibly Cojuangco, Jr., have to put up their own money to acquire said
So this is how they record the treasury shares.
common shares. Thus, it is erroneous for intervenors to say that Cojuangco,
Jr., with the use of SMC funds, will be acquiring the CIIF SMC common
Stockholder’s Equity shares.
Capital stock:
Preferred stock, $100 It bears to stress that it was SMC which amended its articles of incorporation,
par value, 8% cumulative, $20,000,000 reclassifying the existing composition of the authorized capital stock from PhP
500,000 shares 4.5 billion common shares to PhP 3.39 billion common shares and PhP 1.11
authorized, 200,000 billion Series 1 Preferred Shares. The conversion in question is a legitimate
shares issued and exercise of corporate powers under the Corporation Code. The shares in
outstanding question will not be acquired with SMC funds but by reason of the
Common stock, $1 par reconfiguration of said shares to preferred shares.
value, 2,000,000 shares
400,000 $20,400,000
authorized, 400,000 Transcribed by: Enano, Nembrod G.
shares issued and 360,000 A treasury share or stock, which may be common or preferred, may be used
shares outstanding for a variety of corporate purposes, such as for a stock bonus plan for
Additional paid-in capital management and employees or for acquiring another company. It may be
Paid-in capital in excess held indefinitely, resold or retired. While held in the company’s treasury, the
of par – preferred stock $1,000,000
stock earns no dividends and has no vote in company affairs.
Paid-in capital in excess
of par – common stock 35,000,000 36,000,000
So treasury share may be used however the company wants since it is its
Total Paid-in capital $56,400,00 property subject to restrictions.
Retained earnings 6,600,000
$63,000,000
Trust Fund Doctrine
Less: Treasury stock,
(1,000,000) The "Trust Fund" doctrine considers this subscribed capital as a trust fund
40,000 shares at cost
for the payment of the debts of the corporation, to which the creditors may
Total stockholder’s
$62,000,000 look for satisfaction. Until the liquidation of the corporation, no part of the
equity
subscribed capital may be returned or released to the stockholder (except in
the redemption of redeemable shares) without violating this principle. Thus,
SEC-OGC Opinion No. 12-06: In case of declaration of treasury shares as
dividends must never impair the subscribed capital; subscription
property dividends, the corporation can only do so if the amount of the commitments cannot be condoned or remitted; nor can the corporation buy
retained earnings previously used to support their acquisition has not been its own shares using the subscribed capital as the consideration therefor.
subsequently impaired by losses. Consequently, the amount of such earnings
equivalent to the cost of the treasury shares being held cannot be declared
and distributed as dividends until said shares are reissued or retired.
(G.R. No. 127937 July 28, 1999 NATIONAL TELECOMMUNICATIONS
COMMISSION, vs. HONORABLE COURT OF APPEALS and PHILIPPINE LONG TITLE TWO
DISTANCE TELEPHONE COMPANY)
Incorporation and Organization of Private Corporations
Otherwise stated a corporation cannot use its paid up capital to buy
its own share. The corporation can only use accumulated profits or retained Documentary Requirements
earnings in excess to buy issued shares to make them treasury shares
because when the corporation uses paid up capital to buy issued shares that for Incorporation (Section 18 RCCP)
would be consider as unauthorized redistribution of profit.  Name Verification Slip (secured online or at SEC Name Verification unit)
 Articles of incorporation
ONG YONG v. DAVID TIU  By-laws
G.R. No. 144476 & 144629 | April 8, 2003  Certificate of Authority or favorable recommendation of the appropriate
Digest by: Anna Lou Igbalic – Cerro government agency for the incorporation of banks, banking and quasi-
banking institutions, preneed, and other financial intermediaries
The Trust Fund Doctrine provides that subscriptions to the capital stock of a  Joint affidavit of two incorporators to charge corporate name (not
corporation constitute a fund to which the creditors have a right to look for required if already stated in AOI)
the satisfaction of their claims.
Registration Requirements
This doctrine is the underlying principle in the procedure for the distribution
Section 18. Registration, Incorporation and Commencement of
of capital assets, embodied in the Corporation Code, which allows the Corporation Existence. - A person or group of persons desiring to
distribution of corporate capital only in three instances: incorporate shall submit the intended corporate name to the Commission for
verification. If the Commission finds that the name is distinguishable from a
(1) Amendment of the Articles of Incorporation to reduce the authorized name already reserved or registered for the use of another corporation, not
capital stock, protected by law and is not contrary to law, rules and regulation, the name
(2) Purchase of redeemable shares by the corporation, regardless of the shall be reserved in favor of the incorporators. The incorporators shall then
existence of unrestricted retained earnings, and submit their articles of incorporation and bylaws to the Commission.
(3) Dissolution and eventual liquidation of the corporation.
If the Commission finds that the submitted document s and information are
Furthermore, the doctrine is articulated in Section 41 on the power of a fully compliant with the requirements of this Code, other relevant laws, rules
corporation to acquire its own shares and in Section 122 on the prohibition and regulations, the Commission shall issue the certificate of
against the distribution of corporate assets and property unless the stringent incorporation.
requirements therefor are complied with.
A private corporation organized under this Code commences its
The distribution of corporate assets and property cannot be made to depend corporate existence and juridical personality from the date the
on the whims and caprices of the stockholders, officers or directors of the Commission issues the certificate of incorporation under its official seal
corporation, or even, for that matter, on the earnest desire of the court a thereupon the incorporators, stockholders/members and their successors
shall constitute a body corporate under the name stated in the articles of
quo "to prevent further squabbles and future litigations" unless the
incorporation for the period of time mentioned therein, unless said period is
indispensable conditions and procedures for the protection of corporate
extended or the corporation is sooner dissolved in accordance with law.
creditors are followed. Otherwise, the "corporate peace" laudably hoped for
by the court will remain nothing but a dream because this time, it will be the
creditors' turn to engage in "squabbles and litigations" should the court order When Corporation Commences its
an unlawful distribution in blatant disregard of the Trust Fund Doctrine. Corporate Existence and Judicial Personality
In the instant case, the rescission of the Pre-Subscription Agreement will Private Corporation Public Corporation
effectively result in the unauthorized distribution of the capital assets and
From the date the commission From the effectivity of the special
property of the corporation, thereby violating the Trust Fund Doctrine and
issues the certificate of law creating it or compliance of
the Corporation Code, since rescission of a subscription agreement is not one
incorporation the condition by such law for the
of the instances when distribution of capital assets and property of the
commencement of corporate
corporation is allowed.
existence.
Contrary to the Tius' allegation, rescission will, in the final analysis, result in
the premature liquidation of the corporation without the benefit of prior Articles of Incorporation
dissolution in accordance with Sections 117, 118, 119 and 120 of the It is the document prepared by the incorporators organizing a corporation
Corporation Code. The Tius maintain that rescinding the subscription contract containing the maters required by the RCCP and filed with the SEC.
is not synonymous to corporate liquidation because all rescission will entail
would be the simple restoration of the status quo ante and a return to the It offers the ultimate evidence of the nature and purpose of a corporation
two groups of their cash and property contributions. We wish it were that and defines the contractual relationship between the corporation and the
simple. Very noticeable is the fact that the Tius do not explain why rescission state, the stockholders and the state, and the corporation and its
in the instant case will not effectively result in liquidation. The Tius merely stockholders.
refer in cavalier fashion to the end-result of rescission (which incidentally is
100% favorable to them) but turn a blind eye to its unfair, inequitable and
disastrous effect on the corporation, its creditors and the Ongs.
Contents of AOI Section 17. Corporation Name. - No corporate name shall be allowed by the
Section 13. Contents of the Articles of Incorporation. - All corporations Commission if it is not distinguishable from that already reserved or
shall file with the Commission articles of incorporation in any of the official registered for the use if another corporation, or if such name is already
languages, duly signed and acknowledged or authenticated, in such form and protected by law, rules and regulations.
manner as may be allowed by the Commission, containing substantially the
following matters, except as otherwise prescribed by this Code or by special A name is not distinguishable even if it contains one or more of the following:
law:
(a) The word "corporation", "company", incorporated", "limited", "limited
(a) The name of corporation; liability", or an abbreviation of one if such words; and
(b) The specific purpose or purposes for which the corporation is being (b) Punctuations, articles, conjunctions, contractions, prepositions,
formed. Where a corporation has more than one stated purpose, the abbreviations, different tenses, spacing, or number of the same word or
articles of incorporation hsall indicate the primary purpose and the phrase.
secondary purpose or purposes: Provided, That a nonstock corporation
may not include a purpose which would change or contradict its nature The Commission upon determination that the corporate name is: (1) not
as such; distinguishable from a name already reserved or registered for the use of
another corporation; (2) already protected by law; or (3) contrary to law, rules
(c) The place where the principal office of the corporation is to be located, and regulations, may summarily order the corporation to immediately cease
which must be within the Philippines; and desist from using such name and require the corporation to register a
new one. The Commission shall also cause the removal of all visible
(d) The term for which the corporation is to exist, if the corporation has not signages, marks, advertisements, labels prints and other effects bearing such
elected perpetual existence; coroporate name. Upon the approval of the new corporate name, the
Commission shall issue a certificate of incorporation under the amended
(e) The names, nationalities, and residence addresses of the incorporators; name.
(f) The number of directors, which shall not be more than fifteen (15) or the If the corporation fails to comply with the Commission's order, the
number of trustees which may be more than fifteen (15); Commission may hold the corporation and its responsible directors or officers
in contempt and/or hold them administratively, civilly and/or criminally liable
(g) The names, nationalities, and residence addresses of persons who under this Code and other applicable laws and/or revoke the registration of
shall act as directors or trustees until the first regular directors or the corporation.
trustees are duly elected and qualified in accordance with this Code;
Now it’s is easier using the distinguishability test.
(h) If it be a stock corporation, the amount of its authorized capital stock,
number of shares into which it is divided, the par value of each, names, Transcribed by: ZU Ugdang
nationalities, and subscribers, amount subscribed and paid by each on The SEC has more power, this is a new provision. The SEC can also cause
the subscription, and a statement that some or all of the shares are the removal of the signages, etc. So, they have so much power.
without par value, if applicable;
SEC is granted the power to do a lot of things: cease and desist, removal,
(i) If it be a nonstock corporation, the amount of its capital, the names, revoke, sue you for contempt and make you civilly, administratively, and
nationalities, and residence addresses of the contributors, and amount criminally liable.
contributed by each; and
Just add here your learnings from IP. So, you have to know the deceptively
(j) Such other matters consistent with law and which the incorporators may
and confusingly similar. What cannot be registered? If it is contrary to law.
deem necessary and convenient.
You cannot register if it has for example: Davao City Bookstore. You cannot
An arbitration agreement may be provided in the articles of incorporation register that.
pursuant to Section 181 of this Code.
Importance of a Corporate Name
The Articles of incorporation and applications for amendments thereto may A name is peculiarly important as necessary to the very existence of a
be filed with the Commission in the form of an electronic document, in corporation. its name is one of its attributes, an element of its existence and
accordance with the Commission's rule and regulations on electronic filing. essential to its identity. The general rule as to corporations is that each
corporation must have a name by which it is to sue and be sued and do all
Note: legal acts.
 No more residence requirement for the incorporators
 25% paid up requirement is also removed The name of a corporation in this respect designates the corporation in the
 As to form look at sec 14 same manner as the name of an individual designates the person; and the
right to use its corporate name is as much a part of the corporate franchise
as any other privilege granted” (De La Salle Montessori International of
Corporate Name Malolos vs De La Salle Brothers, GR 205548 Feb. 7, 2018)
Section 18. Registration, Incorporation and Commencement of
Corporation Existence. - A person or group of persons desiring to Considering that now, since the RCCP, the De La Salle Montessori
incorporate shall submit the intended corporate name to the Commission for could be registered as a corporation despite having the “De La
verification. If the Commission finds that the name is distinguishable from a Salle” in its corporate name, the question is that, how would you
name already reserved or registered for the use of another corporation, not reconcile that with your IP?
protected by law and is not contrary to law, rules and regulation, the name
Let me reconcile it for you. The RCC took effect on 2019. This ruling was
shall be reserved in favor of the incorporators.
before that. So, let’s try to reconcile. Under the RCC, yes, you can register it
using the Distinguishability Test – as you can see here, one word is
different, it is different from others, “Montessori” is different from others.
But, as to the tradename, you treat that separately. If it is a tradename

already, then you can apply IP. You can register it under the corporate name,
but it should be different in the tradename. That would reconcile IP and RCC.
Infringement of tradename, etc. You can register it as a corporate name, but
as to tradename, you must not use the same that is similarly confusing as
compared to other corporations.
You can register it in SEC, but in practice, when you use it, then you have to
alienate your tradename with other people’s tradename.
GUIDELINES AND PROCEDURES IN THE REGISTRATION OF d] The meaning of initials used in a name shall be stated by the
CORPORATE, ONE PERSON CORPORATE AND PARTNERSHIP registrant in the Articles of Incorporation, Articles of Partnership or in a
NAMES (SEC MC No. 13-19) separate document signed by an incorporator, director or partner, as the
case may be.
Salient Points:
To keep abreast with developments in business and information technology 7. The name of an internationally known foreign corporation, or something
in the country, the Commission is adopting the following guidelines similar to it, cannot be used by a domestic corporation unless it is its
and procedures in the registration of corporate, one person corporate subsidiary and the parent corporation has consented to such use.
and partnership names: However, a name written in a foreign language, even if registered in
another country, shall not be registered if the name violates good
1. morals, public order or public policy, or has an offensive or indecorous
a) The corporate name shall contain the word "Corporation" or meaning in any of the country's official languages or major dialects.
"Incorporated," or the abbreviations "Corp." or "Inc." respectively;
b) In the case of a One Person Corporation, the corporate name shall 8. The name of a local geographical unit, site or location cannot be used
contain the word "OPC" either below or at the end of its corporate as corporate or partnership name unless it is accompanied by a descriptive
name; word or phrase, e.g. Pasay Food Store, Inc.
c) The partnership name shall bear the word "Company" or "Co." and
if it is a limited partnership, the word "Limited" or "Ltd.". A Those are the things that you need to include in your corporate name. These
professional partnership name may bear the word "Company," are just the salient points because there are a lot in SEC 13-19.
"Associates," or "Partners," or other similar descriptions;
d) The corporate name of a foundation shall use the word "Foundation"; Dissolved/revoked corporation’s name cannot be used.
e) The corporate name of all non-stock, non-profit corporations, GR: The name shall not be used by another corporation or partnership
including non-governmental organizations and foundations, within 5 years from the approval of the dissolution or 5 years from the date
engaging in microfinance activities shall use the word of revocation.
"Microfinance" or "Microfinancing"; provided that said corporations
shall state in the purpose clause of their Articles of XPN: Unless, its use has been allowed at the time of the dissolution or
Incorporation that they shall conduct microfinance operations revocation by the stockholders, members or partners who represent a
pursuant to Republic Act No. 8425 or the Social Reform and Poverty majority of the majority of the outstanding capital stock or
Alleviation Act. membership of the dissolved corporation or partnership as the case may be.
Application for re-registration of the expired corporation shall be
2. A term that describes the business of a corporation in its name should accompanied by the following documents:
refer to its primary purpose. If there are two such terms, the first should 1. Board Resolution, attesting that:
refer to the primary purpose and the second to the secondary purpose. a. The applicant for re-registration is a new corporation
intending to use the name of the expired corporation [specially
3. identifying the corporate name and registration number];
a) The name shall be distinguishable from other corporate or b. The re-registration is approved by majority vote of the
partnership name registered with the Commission, or with the directors or trustees and the vote of the stockholders
Department of Trade and Industry, in the case of sole representing the majority of the outstanding capital stock or
proprietorships; membership;
b) If the name applied for is similar to that of a registered c. They shall include a statement in the articles of incorporation
corporation or partnership, the applicant shall add one or of the new corporation that the same is using the name of the
more distinctive words to the proposed name to remove the expired corporation; and
similarity or differentiate it from the registered name; However, d. If applicable, they will no longer file a petition to set aside the
the addition of one or more distinctive words shall not be allowed order of revocation
if the registered name is coined or unique unless the board
of directors or majority of the partners of the subject
corporation or partnership gives its consent to the applied name. 2. Latest General Information Sheet of the expired corporation,
c) Punctuation marks, spaces, signs, symbols, and other similar stamped “received” by the Commission; and
characters, regardless of their form or arrangement,
shall not be acceptable as distinguishing words for 3. Secretary Affidavit attesting that:
purposes of differentiating a proposed name from a registered a. There is no properties owned by the dissolved/revoked
name. corporation due for liquidation, or in case there are properties
d) A name that consist solely of special symbols, punctuation marks owned by the expired corporation, no property is
or specially designed characters shall not be registered. transferred to the new corporation or, in case of stock
corporations, used for subscription payment, without
4. Business or trade name which is different from the corporate or undergoing corporate liquidation process;
partnership name shall be indicated in the articles of incorporation or b. There is no pending intra-corporate despite or claim
partnership. A company may have more than one business or trade name. involving the expired corporation (**provision from MC No. 14-
2017); and
5. A trade name or trademark registered with the Intellectual Property c. That the expired corporation has no derogatory information
Office may be used as part of the corporate or partnership name of a with the Commission at the time of its application for re-
party other than its owner if the latter gives its consent to such use. registration
6. You can only use it after 5 years from revocation or dissolution.

a) The full name or surname of a person may be used in a Indian Chamber of Commerce Phils., Inc. v.
corporate or partnership name if he or she is a stockholder, member Filipino Indian Chamber of Commerce
or partner of the said entity and has consented to such use; if the GR 184008 August 3, 2016
person is already deceased, the consent shall be given by his or her
estate; Issue: WON the corporate name Indian Chamber of Commerce Phils. Inc.
b] A single stockholder of a One Person Corporation (OPC) may use (ICCPI) is identical or deceptively or confusingly similar to that of Filipino
his/her name; provided, that said name shall be accompanied with Indian Chamber of Commerce in the Philippines, Inc." (FICCPI)? – YES.
descriptive words aside from the suffix OPC. The single stockholder
may also use the name of another person provided consent was given Ruling: Section 18 of the Corporation Code expressly prohibits the use of a
by the said person or if deceased, his estate. Provided that the name shall corporate name which is identical or deceptively or confusingly similar to that
be accompanied by the descriptive words other than the suffix OPC. of any existing corporation:
c] The Commission may require a registrant to explain to its
satisfaction the reason for the use of a person's name; No corporate name may be allowed by the Securities and Exchange
Commission if the proposed name is identical or deceptively or confusingly
similar to that of any existing corporation or to any other name already
protected by law or is patently deceptive, confusing or contrary to existing In this case, the court views 3 years, and in SEC memo. 5 years. So, just
laws. When a change in the corporate name is approved, the Commission mention that if it comes out in the bar.
shall issue an amended certificate of incorporation under the amended name.
Can a previous name which was amended, be re-registered or used
THE TEST by another corporation?
In Philips Export v. CA, to fall within the prohibition, two requisites must be No. The name shall not be registered or used by another corporation for a
proven, to wit: period of 3 years from the date of approval of the adoption of the new
(1) that the complainant corporation acquired a prior right over the use of corporate or partnership name. An earlier period may be allowed provided
such corporate name; and that the corporation which previously owned and used such name, gives its
(2) the proposed name is either identical; or deceptively or confusingly consent.
similar to that of any existing corporation or to any other name already
protected by law; or patently deceptive, confusing or contrary to The requirement to wit, as:
existing law. For Corporations:
a) Directors/Trustees’ Certificates approved by the majority of
In this case, the requisites are present. the Directors/Trustees approving the use of the former name
by another corporation or partnership; and
FIRST REQUISITE b) Secretary Certificate of the non-existence of the intracorporate
FICCPI acquired a prior right over the use of the corporate name dispute from the corporation that use the former corporate name.
Applying the priority of adoption rule to determine prior right, taking into
consideration the dates when the parties used their respective corporate For One Person Corporations:
names, FICCPI was incorporated on March 14, 2006. On the other hand, a) The consent of the sole stockholder or in cases of incapacity or
ICCPI was incorporated only on April 5, 2006. death, his/her designated nominee, given in a notarized
instrument and countersigned by the Corporate Secretary.
Citing also SEC Memorandum Circular No. 14-2000 , The name of a dissolved
firm shall not be allowed to be used by other firms within three (3) years What if I register an ABC corporation and then change it to EFG
after the approval of the dissolution of the corporation. corporation and then I amended it to EFG corporation. Can ABC be
used by someone else?
When the term of existence of the defunct FICCPI expired on November 24, No. the name cannot be used by someone else for a period of 3 years from
2001, its corporate name cannot be used by other corporations within three the approval of the adoption of the new corporate/partnership name. The
years from that date, until November 24, 2004. FICCPI reserved the name requirements are those previously mentioned.
"Filipino Indian Chamber of Commerce in the Philippines, Inc." on January
20, 2005, or beyond the three-year period. Can the name of the absorbed corporation be used?
YES. if it is the surviving corporation intending to use the said
SECOND REQUISITE absorbed/constituent corporate name.
ICCPl's name is identical and deceptively or confusingly similar to
that of FICCPI. BUT IF IT IS Another corporation may use the names of absorbed/constituent
corporation; PROVIDED, the consent of the surviving corporation is obtained
A. IDENTICAL such as:
ICCPI's name is identical to that of FICCPI. ICCPI's and FICCPI's corporate a) Directors certificate of the surviving corporation permitting the
names both contain the same words "Indian Chamber of Commerce." usage of the said absorbed/constituent corporation by another
corporation; and
Contention: ICCPI argues that the word "Filipino" in FICCPI's corporate b) Secretary’s certificate of the non-existence of intracorporate
name makes it easily distinguishable from ICCPI. It adds that confusion and dispute of the corporation from the surviving corporation.
deception are effectively precluded by appending the word "Filipino" to the
phrase "Indian Chamber of Commerce." Further, ICCPI claims that the Remedies Against Unauthorized Use of Corporate Name
corporate name of FICCPI uses the words "in the Philippines" while ICCPI 1. File a petition with SEC to compel the other corporation to change
uses only "Phils., Inc." name – even cite you in contempt if you don’t follow them (admin
remedy)
Ruling: These words do not effectively distinguish the corporate names. On 2. File a complaint against unauthorized use of corporate name (Sec.
the one hand, the word "Filipino" is merely a description, referring to a 159 RCCP) (civil remedy)
Filipino citizen or one living in the Philippines, to describe the corporation's 3. File a complaint for infringement of tradename (IP) (criminal
members. On the other, the words "in the Philippines" and "Phils., Inc." are remedy)
simply geographical locations of the corporations which, even if appended to
both the corporate names, will not make one distinct from the other.
Effect of a Change of Name
Under the facts of this case, these words cannot be separated from each Zuellig Freight and Cargo Systems v. NLRC
other such that each word can be considered to add distinction to the
corporate names. Taken together, the words in the phrase "in the Philippines" Issue: Whether or not Zuellig Freight can escape liability for illegal dismissal
and in the phrase "Phils. Inc." are synonymous-they both mean the location by changing its name? No.
of the corporation.
The change of name did not produce valid dissolution of business
B. DECEPTIVELY OR CONFUSINGLY SIMILAR and termination of employees under the law.
ICCPI's corporate name is deceptively or confusingly similar to that of FICCPI.
It is settled that to determine the existence of confusing similarity in Article 283. Closure of establishment and reduction of personnel. — The
corporate names, the test is whether the similarity is such as to mislead a employer may also terminate the employment of any employee due to the
person, using ordinary care and discrimination. In so doing, the court must installation of labor-saving devices, redundancy, retrenchment to prevent
examine the record as well as the names themselves. Proof of actual losses or the closing or cessation of operation of the establishment or
confusion need not be shown. It suffices that confusion is probably or likely undertaking unless the closing is for the purpose of circumventing the
to occur. provisions of this Title, by serving a written notice on the workers and the
Department of Labor and Employment at least one (1) month before the
In this case, the overriding consideration in determining whether a person, intended date thereof. x x x.
using ordinary care and discrimination, might be misled is the circumstance
that both ICCPI and FICCPI have a common primary purpose, that is, the The amendments of the articles of incorporation of Zeta to change the
promotion of Filipino-Indian business in the Philippines. corporate name to Zuellig Freight and Cargo Systems, Inc. did not produce
It is apparent that both from the standpoint of their corporate names and the dissolution of the former as a corporation. For sure, the Corporation
the purposes for which they were established, there exist a similarity that Code defined and delineated the different modes of dissolving a corporation,
could inevitably lead to confusion. and amendment of the articles of incorporation was not one of such modes.
The effect of the change of name was not a change of the corporate being, purpose, which says “to acquire, purchase, sell property of the corporation”,
for, as well stated in Philippine First Insurance Co., Inc. v. Hartigan: “The that is not strictly construed as secondary purpose, independent or distinct
changing of the name of a corporation is no more the creation of a from the primary purpose of the business, because that is a general power
corporation than the changing of the name of a natural person is begetting of a corporation allowed. They are allowed to purchase properties in
of a natural person. The act, in both cases, would seem to be what the pursuance of the primary purpose.
language which we use to designate it imports – a change of name, and not
a change of being. Note that it would be different if the qualifying phrase in Section 36(g), “in
pursuance of the primary purpose” is not stated, then they are deemed to be
Here, amendments of the articles of incorporation of Zeta were for the engaged in an all-together transaction of buying and selling property. Hence,
purpose of changing the corporate name, broadening the primary functions, must be stated as a secondary purpose. If they are deemed to be engaged
and increasing the capital stock; and that such amendments could not mean in a real property business, that would not seem to be in furtherance of the
that Zeta had been thereby dissolved primary purpose, then that would be considered as a secondary purpose
already.
A change in the corporate name does not make a new corporation,
whether effected by a special act or under a general law. It has no In a stock corporation, you have to consider the primary purpose from the
effect on the identity of the corporation, or on its property, rights, secondary purpose because stockholders have the right to expect that the
or liabilities. The corporation, upon such change in its name, is in funds and assets of the corporation will be primarily devoted to attain the
no sense a new corporation, nor the successor of the original primary purpose, not the secondary. Disbursements in pursuance of the
corporation. It is the same corporation with a different name, and primary purpose requires only the board approval because this is a day-to-
its character is in no respect changed day matters. However, the moment you invest in a secondary purpose, you
must abide with the meeting and approval requirement under the RCCP,
One and the Same Corporation which is majority board of directors and 2/3 of the outstanding capital stock.
In short, Zeta and petitioner remained one and the same corporation. The Because that is a secondary purpose, you have to have the consent of the
change of name did not give petitioner the license to terminate outstanding capital stock. That is the difference.
employees of Zeta like San Miguel without just or authorized cause.
The situation was not similar to that of an enterprise buying the business of Sample of Secondary Purpose
another company where the purchasing company had no obligation to rehire 1. To borrow or raise money from not more than 19 lenders necessary to
terminated employees of the latter. Petitioner, despite its new name, was the meet the financial requirements of its business by the issuance of
mere continuation of Zeta’s corporate being, and still held the obligation to bonds, promissory notes and other evidences of indebtedness, and to
honor all of Zeta’s obligations, one of which was to respect San Miguel’s secure the repayment thereof by mortgage, pledge, deed of trust of
security of tenure. The dismissal of San Miguel from employment on the lieu upon the properties of the corporation or to issue pursuant to law
pretext that petitioner, being a different corporation, had no obligation to the shares of its capital stock, debentures and other evidences of
accept him as its employee, was illegal and ineffectual. indebtedness in payment of properties acquired by the corporation or
for money borrowed in the prosecution of its lawful business;
Relate this to run-away corporation in Labor law, piercing the veil of 2. To invest and deal with the money and properties of the corporation in
corporate fiction, it is a good case because it applies a lot of doctrines. such manner as may from time to time be considered wise or expedient
for the advancement of its interests and to sell, dispose of or transfer
Transcribed by: Keziah M Sioson the business, properties and goodwill of the corporation of any part
thereof for such consideration and under such terms as it shall see fit
Purpose Clause to accept;
It is the corporation’s purpose clause which confers, as well as limits, the 3. To establish and operate one or more branch offices of agencies and to
powers which a corporation may exercise. carry on any or all of its operations and business without any restrictions
as to place or amount;
Primary Purpose 4. To conduct and transact any and all lawful business, and to do or cause
The primary purpose of the corporation, as stated in its articles of to be done any one or more of the acts and things herein set forth as
incorporation, is the first business to be undertaken by the corporation. its purposes, within and without the Philippines, and in any all foreign
Hence, the primary purpose determines its classification (as either for profit countries, and to do everything necessary, desirable or incidental to the
or nonprofit). accomplishment of the purposes of the exercise of any one or more of
the powers herein enumerated, or which shall at anytime appear
Secondary Purpose conducive to or expedient for the protection or benefit of this
Outside the primary purpose, the secondary purpose might determine a corporation.
corporation’s classification on the condition that the corporation is actually
engaged in the business stated therein.
Look at number one, “to borrow or raise money” which is related to
Section 37 which is the power to increase or decrease capital stock. So, you
Importance of Purpose Clause have to mention in there because it must be approved by the majority
All of these purposes have to be outlined, because other acts of the officers stockholders and 2/3 of the outstanding capital stock.
or the directors outside of the stated purposes under the articles of
incorporation are ultra vires acts. That is why it is important if there is issue Number two, “to invest and deal with the money and properties of
as to say for example, if the board has the authority to purchase this property the corporation from time to time”, which is related to Section 41 which
or to enter into this contract. Then, the lawyer has to really go into the is the power to invest corporate funds to another purpose or business. Again,
purpose clause under the AOI. subject to vote of the majority stockholders and 2/3 of the outstanding capital
stock.
So, the primary purpose includes the inherent power of the corporation under
Section 36 of the RCCP which is to purchase, receive, take, grant, or hold,
convey, sale, lease, pledge, mortgage, or otherwise deal with real or personal
Supervision of the SEC Re: Purpose Clause
Does the SEC have the authority to inquire whether the corporation
property including the securities and bonds of the corporation as the lawful
has purposes other than those stated in the AOI? (Can they go
transaction of the corporation may reasonably and necessarily require.
beyond the document submitted?)
 No, if the corporation’s purpose as stated in the AOI is lawful, SEC
All of those inherent powers of a corporation are deemed to be included in
has no authority to inquire further.
the primary purpose already. You don’t need to state that again, because
 Mandamus will lie to compel the issuance of the Certificate of
those are deemed included, no need to reiterate that in the purpose clause.
Incorporation (It has to be legal as stated in the AOI)
However, lawyers in actual practice include the same, because aside from its
fancy-looking, lengthy, it also establishes the powers stated. Good lawyers
do not include the inherent powers in the purpose clause.
What if the corporation committed misrepresentation as to its
Whether or not those inherent powers are stated in the AOI (purpose clause),
actual purpose?
the corporation can perform those acts. It is deemed to be within the scope
 SEC may revoke the corporate franchise and dissolve the
of the corporate powers. So, if you include Section 36 (g) in the secondary
corporation because of the fraud in the registration process.
 The Corporation may also be criminally liable for obtaining their a. In the event that a corporation whose principal office address as indicated
registration through fraud. in its Articles is already specific and complete, has moved or moves to
another location within the same city or municipality, the corporation
Note: When the complaint is for the ultra vires acts of the corporation, is not required to file an Amended Articles of Incorporation. However,
meaning going beyond to what is stated in the AOI, then the SEC as the it is encouraged to declare its new or current specific address in its GIS.
admin regulatory body has the jurisdiction over those types of complaint. “Metro Manila” shall not be considered a city or municipality for this purpose;
Principal Office b. Notwithstanding the above provision, a corporation is not precluded from
filing an Amended Articles of Incorporation to indicate its new location within
 The principal office is the address stated in the Articles of the same city or municipality of its former address;
Incorporation (regardless of the place of actual operations). c. In all other cases, the corporation must file an Amended Articles of
 It is important because it determines the corporation’s residence Incorporation to indicate its new location in another city or
or domicile. municipality within 15 days from transfer to said location;
If you know under your remedial law, your residence or domicile is where
d. Failure on the part of the corporation to file an Amended Articles of
you file your case. It is determinant for the filing of your legal action. Incorporation for change in address to another city or municipality within the
prescribed period shall constitute a violation of Section 16 of the Corporation
What if there are a lot of branches like Jollibee, PLDT? Code of the Philippines and shall subject the corporation to the imposition of
They have in Luzon, Visayas, and Mindanao. penalty in accordance with the existing scale of fines.
The fact that they have several branches does not mean that they can be
sued in different branches because to do so would create confusion and Corporate Term
inconvenience to the corporation. Section 11. Corporate Term. - A corporation shall have PERPETUAL
EXISTENCE unless its articles of incorporation provides otherwise.
So, when you want to file a case against the corporation for acts done by the
corporation, then you can sue the corporation in its principal office, the
This is one of the most significant changes in the RCCP, because before it
address stated in the AOI. The address in the AOI governs.
says 50 years. But it doesn’t mean that you have to be perpetual because it
says here that “unless its AOI provides otherwise”. So you can say na 20
For example, Jollibee, their principal office in their AOI is in Ortigas, Pasig
years lang, or for less than 50 years, etc. But if you don’t provide otherwise,
City. Then, you don’t sue them in the Tacurong Branch or Panabo Branch.
it would be presumed perpetual.
Side track to remedial law, if you remember, real party in interest. If you are
Transcribed by: Pau Rojo
not suing the corporation but you are suing the franchisee of that business
for torts, like slip and fall where you slide because of the fault or negligence Corporations with certificates of incorporation issued prior to the effectivity
of the franchisee, in that case you can sue their branch because you are of this Code, and which continue to exist, shall have perpetual existence,
suing the creator of that branch. unless the corporation, upon a vote of its stockholders representing a
majority of its outstanding capital stock, notified the Commission that it
elects to retain its specific corporate term pursuant to its articles of
But for example you are suing for the poisonous formula of the chicken joy,
incorporation: Provided, That any change in the corporate term under this
then that is against the corporation and you file that in their principal office.
section is without prejudice to the appraisal right of dissenting
stockholders in accordance with the provisions of this Code.
SEC Memorandum Circular No. 06-16
Section 1. All corporations and partnerships applying for registration with A corporate term for a specific period may be extended or shortened by
the SEC should state in their Articles of Incorporation or Articles of amending the articles of incorporation: Provided, That no extension may be
Partnership the following: (i) specific address of their principal office, which made earlier than three (3) years prior to the original or subsequent expiry
shall include, if feasible, the street number, street name, barangay, city date(s) unless there are justifiable reasons for an earlier extension as may
or municipality, and if applicable, the name of the building, number be determined by the Commission: Provided, further, That such extension of
of the building, and name or number of the room or unit; and (iii) the corporate term shall take effect only on the day following the original or
specific residence address of each incorporator, stockholder, director, trustee subsequent expiry date(s).
or partner.
A corporation whose term has expired may apply for REVIVAL of its
This is because the SEC found out in the AOI that there were a lot of corporate existence, together with all the rights and privileges under its
registration which only indicate the principal office as Metro Manila. certificate of incorporation and subject to all of its duties, debts and liabilities
existing prior to its revival. Upon approval by the Commission, the corporation
shall be deemed revived and a certificate of revival of corporate existence
Section 2. All foreign corporations applying for license to do business in the
shall be issued, giving it perpetual existence, unless its application for
country should indicate in their applications the following: (i) specific address revival provides otherwise.
of the principal office of the corporation in the country or state of
incorporation; (ii) specific address of the resident agent; (iii) specific location No application for revival of certificate of incorporation of banks, banking and
where the corporation shall hold office and place in the Philippines where the quasi-banking institutions, preneed, insurance and trust companies, non-
corporation intends to operate; and (iv) specific addresses of the present stock savings and loan associations (NSSLAs), pawnshops, corporations
directors and officers of the corporation. engaged in money service business, and other financial intermediaries shall
be approved by the Commission unless accompanied by a favorable
Section 3. All corporations are required to state in their GIS the specific recommendation of the appropriate government agency.
principal office address and the specific residence address of each
stockholder, officer, director or trustee. 1st Paragraph: Meaning they have to provide that they are sticking to 50
years otherwise they are deemed to be perpetual already. If one of the
Section 4. Pursuant to Memorandum Circular No. 9, series of 2015 Final stockholders do not want the corporation to be perpetual then he can
Extension for Amendment of the Principal Office Address, all existing exercise his right to appraisal right (discussed later).
corporations and partnerships whose Articles of Incorporation or Articles of
Partnership indicate a general address as their principal office address, such 2nd Paragraph: Very technical this paragraph.
that it refers only to a city, town, or municipality or “Metro Manila” were given
until 31 December 2013 to file an Amended Articles of Incorporation or 3rd Paragraph: A corporation whose term has expired for example those
Amended Articles of Partnership in order to specify their complete address. under the CCP. They are expired after 50 years. They may apply under the
RCCP for a revival of its corporate existence. So if you want to revive you can
Section 8. To ease the burden on the part of the affected corporations and opt to revive it only for a period of 50 years.
partnerships in effecting an amendment of their Articles whenever they 4th Paragraph: “unless accompanied by a favorable recommendation of the
transfer or move to a new location, the following shall be observed: appropriate government agency” What bank is this? The BSP.
Remedies of a Corporation if their Term Expires While incorporators are different from directors, technically. In actuality, the
1. They can either revive under this paragraph at any time. Because incorporators are usually the first members of the board of directors. That’s
reading the RCCP it does not mention the period within when to revive. how they usually do it.
You can revive even after 100 years. No time limit in the revival. Even
those corporations at the time of Marcos era can revive. They can use Is the share ownership of an incorporator a continuing
Section 11 of RCCP; or qualification?
The general rule an incorporator can leave the corporation by selling their
2. They can opt to reincorporate. As to practicality it may actually be shares but technically they are still incorporators because it’s part of history.
more practical to reincorporate because application for revival entails But if the corporator also serves as a director since one of the qualifications
payment of penalties, fines and liabilities. While reincorporating does of a director is that you must have 1 share so in that case if you are
not. You just have to file new filing fees and documentary stamp tax. incorporator and director at the same time then you have to maintain at least
1 share.
You have to weigh the pros and cons to know what is better before giving
advice either to revive or reincorporate. Also, if the corporation has assets, So let’s recap. Under the CCP it must be a natural person then minimum of
it may be more cost effective to apply for revival otherwise those assets 5. So what they did before they recruit people (ex. Neighbors, family
would be liquidated and the taxes would have to be paid. If there are members) to include in those 5 people even if in truth there are only 2
properties and it would be beneficial to just revive and continue the incorporators. Investors named individuals as incorporators with no real
existence then that’s good. interest in the corporation but only to comply with the legal requirements
before.
Section 10. Number and Qualifications of Incorporators. - Any person,
partnership, association or corporation, singly or jointly with others but not NAUTICA CANNING CORPORATION, FIRST DOMINION PRIME
more than fifteen (15) in number, may organize a corporation for any lawful HOLDINGS, INC. and FERNANDO R. ARGUELLES, JR. v. ROBERTO
purpose or purposes: Provided, That natural persons who are licensed to C. YUMUL
practice a profession, and partnerships or associations organized for the G.R. No. 164588 | October 19, 2005
purpose of practicing a profession, shall not be allowed to organize as a Digest by: Girly Mae A. Narciso
corporation unless otherwise provided under special laws. Incorporators who
are natural persons must be of legal age. Doctrine: Indeed, it is possible for a business to be wholly owned by one
individual. The validity of its incorporation is not affected when such
Each incorporator of a stock corporation must own or be a subscriber to at individual gives nominal ownership of only one share of stock to each of the
least one (1) share of the capital stock. other four incorporators. This is not necessarily illegal. But, this is valid only
between or among the incorporators privy to the agreement. It does bind the
A corporation with a single stockholder is considered a One Person
corporation which, at the time the agreement is made, was non-existent.
Corporation as described in Title XIII, Chapter III of this Code.
Thus, incorporators continue to be stockholders of a corporation unless,
subsequent to the incorporation, they have validly transferred their
1st Paragraph: “Any person, partnership, association or corporation, singly subscriptions to the real parties in interest. As between the corporation on
or jointly with others” – this is very important because the RCCP expressly the one hand, and its shareholders and third persons on the other, the
allows incorporators to be partnerships and corporations. Before there were corporation looks only to its books for the purpose of determining who its
a lot of SEC opinions regarding corporations being an incorporator of another shareholders are.
corporation. There were a lot of issues because we have the grandfather
rule. Now the RCCP says yes. Corporations can be an incorporator in Yumul is a stockholder of Nautica.
another corporation. So long as there is maximum requirement of 15. As you Each incorporator of a stock corporation must own at least (1) share of the
can see there are no minimum requirements of incorporators because as you capital stock (Sec. 10b, RCCP)
know one-person incorporator is allowed.
Nautica’s Articles of Incorporation and By-laws, as well as the General
2nd Paragraph: That is the qualification of an incorporator. They must own Information Sheet filed with the SEC indicated that Yumul was an
at least 1 share of stock. incorporator and subscriber of one share. Even granting that there was an
agreement between Yumul and Dee whereby the former is holding the share
If you compare the RCCP and the CCP, they have eliminated the residency in trust for Dee, the same is binding only as between them. From the
requirement for incorporators. Incorporators can be a resident of America, corporation’s vantage point, Yumul is its stockholder with one share,
Germany. considering that there is no showing that Yumul transferred his subscription
to Dee, the alleged real owner of the share, after Nautica’s incorporation.
Note that associations here mean non-profit organizations already
acquiring legal personality. They can be nonstock corporations under the law. The conduct of the parties also constitutes sufficient proof of Yumul’s status
Association means they are already registered before they can incorporate. as a stockholder. On April 4, 1995, Yumul was elected during the regular
It must be a legit association. annual stockholders’ meeting as a Director of Nautica’s Board of Directors.
Thereafter, he was elected as president of Nautica. Thus, Nautica and its
Summary: Number and Qualification of Incorporators stockholders knowingly held respondent out to the public as an officer and a
1. Incorporators must not be more than 15 (1 incorporator for an OPC, stockholder of the corporation. Section 23 of Batas Pambansa (BP) Blg. 68
but for others, at least 2); or The Corporation Code of the Philippines requires that every director must
own at least one share of the capital stock of the corporation of which he is
Discussion: actually for others the range is 2-5; OPC is 1 while a director. Before one may be elected president of the corporation, he must
normal corporation is 2-5 unless otherwise provided by special laws. be a director. Since Yumul was elected as Nautica’s Director and as President
For example, banks, quasi-banking institutions, financial thereof, it follows that he must have owned at least one share of the
intermediaries they require at least 5 but a maximum of 15 directors corporation’s capital stock. Thus, from the point of view of the corporation,
and incorporators [I think]) Yumul was the owner of one share of stock.
2. If the incorporator is a natural person, he or she must be of legal

age; Other Qualifications (SEC MC No. 16-19)
1. Partnership – SEC registered + Partner’s Affidavit
3. Each incorporator must be a member or stockholder (who must own
or subscribe to at least 1 share). 2. Domestic Corporation – SEC registered + Director/Secretary
Certificate indicating that necessary approvals were obtained.
Discussion: When corporations invest in another corporation
they have to have approval of the outstanding capital stock of the
stockholders. It has to state in the certificate.
How about if the incorporator is also a director of the corporation?
3. Foreign Corporation – Board Resolution or Director/Secretary
Certificate duly authenticated by the Philippine Consulate OR with
APOSTILLE affixed thereto, authorizing the foreign corporation to
invest in the corporation being formed and specifically naming the The foregoing is without prejudice to qualifications or other
designated signatory on behalf of the foreign corporation. disqualifications, which the Commission, the primary regulatory agency,
or Philippine Competition Commission may impose in its promotion of
How do they sign the AOI? good corporate governance or as a sanction in its administrative
The individual signing of the AOI or by-laws in behalf of these juridical entities proceedings.
must indicate the capacity upon which he or she is signing in the corporate
name of the entity he or she is representing. So the tin number of both the
principal and the agent should both be indicated in the AOI. If none then Before the RCCP there were only two disqualifications:
passport number. So that’s also very specific. 1. That no person convicted by final judgment of an offense
punishable by imprisonment for a period of more than 6 years; or
After incorporation, all foreign investors natural or juridical has to secure a 2. A violation committed under this Code within the period of 5 years
tin number in BIR and all documents filed with the SEC thereafter will not be prior to the date of his election or appointment.
accepted without everyone’s tin number.
But now, the following are the new provisions:
This was only passed in 2019. So this is a very new provision. We do not 1. For violating Republic Act No. 8799, otherwise known as "The
know if the bar examiners will ask you on this very specific provisions. It’s Securities Regulation Code.”
better for you to know. 2. Found administratively liable for any offense involving fraudulent
acts
Under Section 8 of this memorandum:
3. By a foreign court or equivalent foreign regulatory authority…
Section 8. Designation of Incorporators as Directors or Trustees An individual
who signs the Articles of Incorporation on behalf of an incorporator, which is
not a natural person, may not be named as a director or trustee in the same Layout for the list of Disqualifications:
Articles of Incorporation, unless when the said individual is also the owner of If the person was:
a. Convicted by final judgment:
at least one (1) share of stock, or is also a member, of the corporation being
formed. i. Of an offense punishable by imprisonment for a period
exceeding six (6) years;
So, this is a requirement to be a director if you’re acting on behalf of a ii. For violating this Code; and
juridical incorporator. iii. For violating Republic Act No. 8799, otherwise known
as "The Securities Regulation Code";
Number of Directors
b. Found administratively liable for any offense involving fraudulent
 Board of Directors: not more than fifteen (15)
acts; and
 Board of Trustees: may be more than fifteen (15)
c. By a foreign court or equivalent foreign regulatory authority for
Qualification of Directors and Trustees acts, violations or misconduct similar to those enumerated in
Section 22. The Board of Directors or Trustees of a Corporation; Qualification paragraphs (a) and (b) above.
and Term. – xxx A director who ceases to own at least one (1) share of
Within five (5) years prior to the election or appointment.
stock or a trustee who ceases to be a member of the corporation shall cease
to be such.
The foregoing is without prejudice to qualifications or other disqualifications,
which the Commission, the primary regulatory agency, or Philippine
I have mentioned before you must at least own 1 share of stock. If it is a Competition Commission may impose in its promotion of good corporate
non-stock corporation, you must be a member of that non-stock corporation. governance or as a sanction in its administrative proceedings.
Qualifications: The bylaws may even provide for qualifications. The cited provision as
1. Must own and continue to own at least (1) one share of stock if mentioned above is not an exclusive list. The SEC or Philippine Competition
Director Commission may provide other disqualifications, especially on banks or even
2. Must be and continue to be a member of the corporation it Trustee the incorporators themselves may provide in the bylaws for additional
3. If natural person, must be of legal age disqualifications.
4. If juridical person, must be represented by their nominee who
must be natural person of legal age For example, you can provide, no stockholder who is a director in a
competing corporation be a director in our corporation.
The same with incorporators. The RCCP has removed the residency
requirements for board of directors. So they can now be located anywhere. Convicted by Final Judgment
Plus, the RCCP also allows directors to be juridical persons.
In letter (a) that it is “convicted,” not merely an accused for violation of a
crime, it must be a conviction by final judgment.
The RCCP also allows the directors to be juridical persons. You allow juridical
Found Administratively Liable
persons to be incorporators, a corporation can be incorporators. Hence, that
for Any Offense Involving Fraudulent Acts
corporation can be a director. That’s a new addition to the RCCP, provided
In letter (b), it provides for an administrative liability which must be found
that their representative must be a natural person of legal age.
by a government agency, not just the SEC, as long as it involves fraudulent
acts. As compared to the grounds in letter (a), a finding of an administrative
Disqualifications liability is enough. So, a conviction with finality is not required.
Section 26. Disqualification of Directors, Trustees or Officers. - A person
shall be disqualified from being a director, trustee or officer of any
corporation if, within five (5) years prior to the election or appointment
as such, the person was:
(a) Convicted by final judgment:
(1) Of an offense punishable by imprisonment for a
period exceeding six (6) years;
(2) For violating this Code; and
(3) For violating Republic Act No. 8799, otherwise
known as "The Securities Regulation Code";
(b) Found administratively liable for any offense involving
fraudulent acts; and
(c) By a foreign court or equivalent foreign regulatory authority
for acts, violations or misconduct similar to those enumerated Minimum Capital Stock
in paragraphs (a) and (b) above.
Section 12. Minimum Capital Stock Not Required of Stock Corporations. - Section 15. Amendment of Articles of Incorporation. - Unless otherwise
Stock corporations shall NOT be required to have minimum capital stock, prescribed by this Code or by special law, and for legitimate purposes, any
except as otherwise specially provided by special law. provision or matter stated in the articles of incorporation may be amended by
a majority vote of the board of directors or trustees and the vote or written
This is a new provision. Before in CCP, there was a requirement for “at least assent of the stockholders representing at least two-thirds (2/3) of the
25% of the authorized capital stock stated as stated in the AOI must be outstanding capital stock, without prejudice to the APPRAISAL RIGHT of
subscribed at the time of incorporation, and at least 25% thereof must be dissenting stockholders in accordance with the provisions of this Code. The
articles of incorporation of a nonstock corporation may be amended by the
paid.”
vote or written assent of majority of the trustees and at least two-thirds (2/3)
of the members.
That was a requirement before in the CCP. However, under RCCP such is no
longer required. So, any amount of capital stock is allowed. The original and amended articles together shall contain all provisions
required by law to be set out in the articles of incorporation. Amendments to
Before, there was also a requirement which provides that, “in no case shall the articles shall be indicated by underscoring the change or changes made,
the paid-up capital be less than 5,000 pesos.” and a copy thereof duly certified under oath by the corporate secretary and a
majority of the directors or trustees, with a statement that the amendments
This means that, actually if you workback, that’s 80,000 of authorized capital have been duly approved by the required vote of the stockholders or
stock. Example, 5000 divided by 25% then divided by 25%, that is the members, shall be submitted to the Commission.
minimum authorized capital stock of 80,000 pesos if you workback. But now,
no more requirements of the minimum capital stock. The amendments shall TAKE EFFECT upon their approval by the
Commission or from the date of filing with the said Commission if not acted
So, this revision under Section 12 was a smart move. But honestly, in practice upon within six (6) months from the date of filing for a cause not attributable
this has not been ingrained yet to our practitioners. Since the RCCP is very to the corporation.
new, practitioners still gravitate towards putting this unnecessary 25%-25%
requirements. Lawyers still provide this 25%-25% requirement in AOI for the In the old CCP:
sake of registration. It is counter-intuitive when you have to still put that,  Vote – majority BOD/BOT
however the practitioners are also confused whether such 25%-25% is still  Vote or written assent – 2/3 OCS or 2/3 members
required.
Under the RCCP:
Anyway, if you still put that 25%-25% requirement in your AOI although it is Stock Corporation Non-Stock Corporation
no longer required anymore under the RCCP, the SEC will still accept. Vote – majority BOD Vote or written assent – majority
BOT
Except as otherwise specially provided by special law. Vote or written assent – 2/3 OCS
This provision refers to Banking Law for example. You know that universal Vote or written assent – 2/3
banks, commercial banks, thrift banks, rural banks, cooperatives and other members
financial intermediaries have required capital requirements as required by the
BSP. Without prejudice to the APPRAISAL RIGHT of dissenting
stockholders in accordance with the provisions of this Code.
What if you increase your capital, do you still need to comply with If you do not like the amendment of the AOI, then you can exercise your
the 25% subscribed, 25% paid requirement? appraisal right. Meaning, you can get out of the corporation and demand the
At first you might think that, since no minimum capital stock is required under fair value of your shares. That is basically the meaning of appraisal right.
Section 12 – you would think that if you will amend to increase the capital
stock, it should also not be a requirement to comply the 25%-25%. Who can exercise this appraisal right? Can non-stock members of a
corporation exercise appraisal right?
But, if you would look at Section 37 it provides that, Look at the provision, it is just connected to stock corporation. Obviously,
Section 37. Power to increase or Decrease Capital Stock; Incur, Create or non-stock corporation members cannot exercise appraisal rights since they
Increase Bonded Indebtedness. – “xxx Provided, That the Commission shall have no shares. Only a stockholder of a stock corporation has appraisal right.
not accept for filing any certificate of increase of capital stock unless Also, allowing the non-stock members to exercise appraisal right would be in
accompanied by a sworn statement of the treasurer of the corporation effect return of capital which is not allowed in non-stock corporations.
accompanied by a sworn statement of the treasurer of the corporation
lawfully holding office at the time of the filing of the certificate, showing that Please check Section 80 on appraisal rights.
at least twenty-five percent (25%) of the increase in capital stock has been
subscribed and that at least twenty-five percent (25%) of the amount Section 80. When the Right of Appraisal May Be Exercised. - Any
subscribed has been paid in actual cash to the corporation or that property, stockholder of a corporation shall have the right to dissent and demand
the valuation of which is equal to twenty-five percent (25%) of the payment of the fair value of the shares in the following instances:
subscription, has been transferred to the corporation. Xxx” (a) In case an amendment to the articles of incorporation has the effect of
changing or restricting the rights of any stockholder or class of shares,
or of authorizing preferences in any respect superior to those of
You will see there that you will need to have a treasurer certificate showing outstanding shares of any class, or of extending or shortening the term
showing that at least twenty-five percent (25%) of the increase in capital of corporate existence; (w/ meeting)
stock has been subscribed and that at least twenty-five percent (25%) of the (b) In case of sale, lease, exchange, transfer, mortgage, pledge or other
amount subscribed has been paid. disposition of all or substantially all of the corporate property and assets
as provided in this Code; (w/o meeting)
It seems to me that this requirement under Section 37 is unnecessary – such (c) In case of merger or consolidation; and (w/ meeting)
that if you will incorporate 25%-25% is not required, while on the other hand (d) In case of investment of corporate funds for any purpose other than the
if you will increase capital 25%-25% is required. Maybe the legislators forgot primary purpose of the corporation. (w/o meeting)
to edit this part.
Are all amendments of the AOI subject to appraisal rights, since it
But, if you will look closely there is actually a change in the phrasing of this appears that the provision does not qualify?
section. Meaning, they really intended to require the 25%-25% requirement If you look at Section 80, the answer is no.
in the increase of capital.
(a) In case an amendment to the articles of incorporation has the effect of
changing or restricting the rights of any stockholder or class of shares, or of
authorizing preferences in any respect superior to those of outstanding
shares of any class, or of extending or shortening the term of corporate
existence; (w/meeting)
These is the only instances of amendments wherein you can exercise your
Amendment of AOI AOI. Obviously, this provision does not include the amendment of corporate
name, so you cannot exercise your appraisal right in that instance. Also, other NO. Incorporators are part of a corporation’s history, and this history
amendments which are not mentioned therein. cannot be changed.
Requisites to Amend AOI Generally, a corporation may only be incorporated once. [The exception is
1. The amendment must be legitimate; where a previously expired corporation has been revived through the
2. The amendment must not be prohibited under the RCC or any issuance of a certificate of revival.]
special law;
3. If stock, vote of majority BOD + vote or written assent of at least Items Which Cannot Be Amended
2/3 OCS;  Names of the incorporators
4. If nonstock, vote or written assent o majority BOT + vote or  Names of the incorporating directors/trustees
 Names of the original subscribers to the capital stock, and their
written assent of at least 2/3 of the members.
subscribed and paid-up capital
 The treasurer in trust
File the following with the SEC (as provided under RCCP and/or SEC
[Example Scenario: This was part of the practice before
memorandum):
where there was a requirement that a percentage of the
1. Amended Articles of Incorporation
authorized capital stock be paid. For example, if the
2. Directors’ or Trustees’ Certificate requirement was that 25% of the authorized capital stock
Notarized and signed by majority of the directors or trustees and must be paid, then the payment for the said 25% was
the corporate secretary, certifying (i) the amendment of the AOI deposited in a bank. The treasurer then had to issue a
and indicating the amended provisions; (ii) the vote of the certificate that such payment was held in trust for the
directors or trustees and stockholders or members; (iii) the date incorporation.]
and place of the stockholders’ or members’ meeting; and (iv) the  Members who contributed the initial capital in non-stock
tax identification number of the signatories which shall be placed corporations
below their names.  Witnesses and the acknowledgment
3. Notarized Secretary’s Certificate on no pending case of
intra-corporate dispute What if an incorporator gets married? Can she change her name in
4. Compliance Monitoring Division (CMD) Clearance and/or the articles of incorporation?
NO. She cannot change the articles of incorporation so as to add her
clearance from other department of the Commission
husband’s name. [Note: She may, however, change her name in the stock
5. Endorsement/clearance from other government agencies, if
and transfer book (STB), and in certificates of stock.]
applicable
6. If the provision to be amended is the corporate name, submit: (a)
Grounds for Disapproval of the AOI
Name Verification Slip; (b) Affidavit of a director, trustees or
officer undertaking to change corporate name. (Not required if (or of an Amendment thereto)
already stated in the AI). Section 16. Grounds When Articles of Incorporation or Amendment May
be Disapproved. – The Commission may disapprove the articles of
Transcribed by: Pizarro, Lorenzo incorporation or any amendment thereto if the same is not compliant with the
requirements of this Code: Provided, That the Commission shall give the
Amendments That Require incorporators, directors, trustees, or officers a reasonable time from receipt
SH/Members Meeting for Approval of the disapproval within which to modify the objectionable portions of the
 Extension or shortening of corporate term (Section 36) articles or amendment. The following are grounds for such disapproval:
 Increase or decrease of capital stock (Section 37)
 Merger or consolidation (Section 76) a) The articles of incorporation or any amendment thereto is not
 Any amendment to the articles of incorporation of a close substantially in accordance with the form prescribed herein;
corporation which seek – (a) to delete or remove any provision
required to be contained in the articles of incorporation of a close b) The purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral or contrary to government rules
corporation, or (b) to reduce a quorum or voting requirement
and regulations;
stated in said articles of incorporation (Section 102)
 Voluntary dissolution of a corporation where no creditors are c) The certification concerning the amount of capital stock
affected (Section 134) subscribed and/or paid is false; and
 Voluntary dissolution of a corporation where creditors are affected
(Section 135) d) The required percentage of Filipino ownership of the capital stock
under existing laws or the Constitution has not been complied
Note: The stockholders’ meeting or members’ meeting mentioned here has with.
been duly called for any of the aforementioned purposes.
No articles of incorporation or amendment to articles of incorporation of
Please take a look, however, at Section 38 of the Revised Corporation Code banks, banking and quasi-banking institutions, preneed, insurance and trust
on the power to deny preemptive right: companies, NSSLAS, pawnshops, and other financial intermediaries shall be
Section 38. Power to Deny Preemptive Right. – All stockholders of a stock approved by the Commission unless accompanied by a favorable
corporation shall enjoy preemptive right to subscribe to all issues or recommendation of the appropriate government agency to the effect that
disposition of shares of any class, in proportion to their respective such articles or amendment is in accordance with law.
shareholdings, unless such right is denied by the articles of incorporation or
an amendment thereto: Provided, That such preemptive right shall not extend Note: Underlined terms/phrases are additions/amendments to the original
to shares issued in compliance with laws requiring stock offerings or minimum provisions under the Corporation Code (BP Blg. 68) brought by the passage
stock ownership by the public; or to shares issued in good faith with the of the Revised Corporation Code (RA 11232).
approval of the stockholders representing two-thirds (2/3) of the outstanding
capital stock, in exchange for property needed for corporate purposes or in Under Section 16, the incorporators, as well as the directors,
payment of a previously contracted debt. trustees, and officers are allowed to modify the objectionable
portions of the articles of incorporation or amendments thereto.
Section 38 does not mention of any “meeting.” Therefore, there is no This is a change brought by RA 11232 to the original provisions of the
stockholders’ meeting required to be held for the purpose of a corporation’s Corporation Code, which gave the said right to modify only to the
exercise of its power to deny the preemptive right by an amendment to its incorporators.
articles of incorporation. The stockholders’ votes for this purpose can be
communicated even without the holding of a stockholders’ meeting. The grounds under the original provision and the revised one are
substantially the same.
Can you change the name of an incorporator? Take note, however, of the third ground under Section 16, i.e., the
certification concerning the amount of capital stock subscribed and/or paid is
false. [Atty. Fabian’s opinion is that this is superfluous, as a corporation is extension of its corporate life. If the SEC finds out, after receipt of the said
(now) not required to have authorized capital stock.] applicant corporation’s requirements, that there are objectionable portions,
then the SEC shall afford the corporation reasonable time within which to
Note: There are, actually, other grounds apart from those provided address the objectionable portions. Such reasonable time may even go
under Section 16. One example is noncompliance with the conditions beyond the originally specified corporate term of the corporation.
imposed by the SEC, in relation to the filing of the registration of the articles
of incorporation or an amendment thereto. What if, in relation to the said By-Laws
example, the SEC required the payment of registration fees? Of course, if
such fees are not paid, then the SEC may disapprove the registration. Also,
another ground for disapproval not mentioned under Section 16 is violation Adoption of By-Laws
by the corporation of any law, rule or regulation administered by the SEC. Section 45. Adoption of Bylaws. – For the adoption of bylaws by the
corporation, the affirmative vote of the stockholders representing at least a
In SEC Opinion Dated April 10, 1985, the SEC found that the Davao majority of the outstanding capital stock, or of at least a majority of the
Mindanao Inc. has no other purpose than to support the KBL candidates in members in case on nonstock corporations, shall be necessary. The bylaws
the then upcoming elections, especially President Marcos. This was prohibited shall be signed by the stockholders or members voting for them and shall be
kept in the principal office of the corporation, subject to the inspection of the
under the Election Code of 1978, which prohibited partisan political activities
stockholders or members during office hours. A copy thereof, duly certified
outside the campaign period. Because the purpose of the Davao Mindanao
by a majority of the directors or trustees and countersigned by the
Inc. was illegal under the said Election Code, it is, then, a ground for
secretary of the corporation, shall be filed with the Commission and attached
disapproval of said corporation’s Articles of Incorporation under now Section to the original articles of incorporation.
16(b) of the RCCP (the purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral or contrary to government rules and Notwithstanding the provisions of the preceding paragraph, bylaws maybe
regulations.) adopted and filed prior to incorporation; in such case, such bylaws shall be
approved and signed by all the incorporators and submitted to the
SEC v. CHING BEE TRADING CORP. Commission, together with the articles of incorporation.
G.R. No. 205291 | November 12, 2014
In all cases, bylaws shall be effective only upon the issuance by the
Commission of a certification that the bylaws are in accordance with this
Issue: Is Ching Bee entitled to an additional time to file its amended AOI,
Code.
extending its corporate life? – YES.
The Commission shall not accept for filing the bylaws or any amendment
Extension of corporate term may be filed anytime within the 5 years thereto of any bank, banking institution, building and loan association, trust
prior to the expiration of its original term (Note: The then 5-year period company, insurance company, public utility, educational institution, or any
has been shortened to 3 years under Section 11 of the RCCP.) other corporations governed by special laws, unless accompanied by a
certificate of the appropriate government agency to the effect that such
The Code is silent as to how early within the 5-year period the application for by-laws or amendments are in accordance with law.
extension should be made. However, Section 11 reveals that an applicant
may seek the approval of the SEC for the extension of its life at any
Revisions
time within the given 5-year (now 3-year) period. Evidently, a
The Legislature has removed the option of adopting and submitting the by-
corporation may seek extension even one day prior to the date of
laws within a period of one (1) month from incorporation. This means that
expiration as the law does not impose an earlier limitation.
under the RCCP, the by-laws may be filed at any time after
incorporation. In practice, however, it is more common to file the by-laws
Section 17 (now Section 16) of the Code directs the SEC to provide
along with the articles of incorporation.
a reasonable time to an applicant within which to make the
necessary corrections should there be objectionable portions in the Note on the last paragraph: If the corporation is, for example, a bank, then
amendment.
there is a need for an approval on the part of the appropriate government
agency (in the form of a certification) that such bank’s by-laws or
Reasonable time is defined as so much time as is necessary under the
amendments thereto are in accordance with law.
circumstances for a reasonably prudent and diligent man to do, conveniently,
what the contract or duty requires that should be done, having regard for
the rights and possibility of loss, if any, to the other. In this case, the SEC- Nature and Functions of By-Laws
CRMD failed to at least provide CBTC a reasonable time within which By-laws are a set of rules and regulations adopted by the corporation for its
compliance with the requirements for extension may be made in full. internal government, and to regulate the conduct and prescribe the rights
and duties of its members towards itself and among themselves, in reference
What the SEC should have done was to give a formal notice to CBTC that the to the management of its affairs.
latter had one day to cure any defect before CBTC’s life would expire. That
one day which was lost because of miscommunication, would have been Not Binding on Third Persons
enough to complete the process of filing the application within the period On the basis of the foregoing definition, the rule is that by-laws are not
specified by the Code and would have been sufficed for the approval of the binding on third persons. By-laws are binding only on the corporation’s
corporate extension being requested. stockholders or members.
While the Court agrees that extension must happen before the expiration of To be bound, a third person must have acquired knowledge of the
the corporate term, the burden of doing so does not only fall to the applicant, pertinent by-laws at the time a particular transaction or agreement
but also on the SEC. To say that the corporation alone has this burden is was entered into.
unfair as the Code does not impose this obligation solely on the corporation.
Characteristics of a Valid By-Laws
For as long as the corporation opts to extend its term while it is still alive and 1. It must not be contrary to the Revised Corporation Code and
during the period allowed by the Code, that is, the filing of the necessary existing laws.
requirements, the burden shifts to the SEC to review, approve or disapprove 2. It must not impair the obligations of contracts.
the same before the corporation breathes its last. If no approval is secure 3. It must be general and uniform in its operation, and not directed
within that limited time, the fault would have to be on the part of the SEC. against particular individuals.
The Court believes that CBTC was deprived of its right to a reasonable one- An example of characteristic number (2) is that by-laws must not impair the
day period to complete the requirements. The CRMD should have notified right to security of tenure of an employee guaranteed by the Labor Code.
CBTC about the urgency of fulfilling the requirements prior to the expiration Specifically, there was a case in Labor Relations where a corporation’s by-
of the corporate term. laws was amended (to add a certain position or to modify the nature of
certain position) so as to “convert” a labor dispute into an “intra-corporate
According to this case, even if there is only one day remaining in a controversy.”
corporation’s life, such corporation may still file an application for the Will non-submission of the by-laws result in the automatic
dissolution of a corporation?
NO. This is because, as mentioned earlier, late submission of the by-laws is feasible to overlook the requirement for by-laws. Indeed in such an event, to
even allowed. There is no time limit as to its submission. insist on the submission of a separate document denominated as "By- Laws"
would be an undue technicality, as well as a redundancy.
What if a corporation never adopts a by-laws?
What is the status of the corporation in the meantime? Basically, this case is saying that if your AOI states everything necessary
In the meantime, the corporation shall be considered as a de facto those very intricate portions usually provided by the bylaws, then you can do
corporation. As such, it has all the powers and privileges of a corporation away with it. If you exerted so much effort to include in your AOI all the
under the RCCP until the State assails its existence in a direct proceeding procedures of the meetings and votings, then if that’s the case you can do
called a quo warranto. away with the separate requirements of the bylaws.
Transcribed by: Narciso, Girlie

China Banking Corp vs CA
(270 SCRA 503)
Gokongwei vs SEC
(89 SCRA 336) Issue: WON China Bank is bound by the corporate by-laws of VGCI? NO.
Petitioner was never informed of Calapatia's unpaid accounts and the
Issue: WON the amended by-laws of SMC of disqualifying a competitor from restrictive provisions in VGCCI's by-laws
nomination or election to the Board of Directors of SMC are valid and
reasonable? Ruling: In order to be bound, the third party must have acquired knowledge
of the pertinent by-laws at the time the transaction or agreement between
Ruling: Yes. It is recognized by authorities that 'every corporation has the said third party and the shareholder was entered into, in this case, at the
inherent power to adopt by-laws 'for its internal government, and to regulate time the pledge agreement was executed.
the conduct and prescribe the rights and duties of its members towards itself
and among themselves in reference to the management of its affairs. By-laws signifies the rules and regulations or private laws enacted by the
corporation to regulate, govern and control its own actions, affairs and
An amendment to the corporation by-law which renders a stockholder concerns and its stockholders or members and directors and officers with
ineligible to be director, if he be also director in a corporation whose business relation thereto and among themselves in their relation to it. In other words,
is in competition with that of the other corporation, has been sustained as by-laws are the relatively permanent and continuing rules of action adopted
valid. It is a settled state law in the United States, according to Fletcher, that by the corporation for its own government and that of the individuals
corporations have the power to make by-laws declaring a person employed composing it and having the direction, management and control of its affairs,
in the service of a rival company to be ineligible for the corporation's Board in whole or in part, in the management and control of its affairs and activities.
of Directors."
The purpose of a by-law is to regulate the conduct and define the duties of
This is based upon the principle that where the director is so employed in the the members towards the corporation and among themselves. They are self-
service of a rival company, he cannot serve both, but must betray one or the imposed and, although adopted pursuant to statutory authority, have no
other. It must be remembered that a director stands in a fiduciary relation to status as public law. Thus, Third persons are not bound by by-laws, except
the competition and its stockholders. Although directors of a private when they have knowledge of the provisions either actually or constructively.
corporation are not regarded as trustees, there cannot be any doubt that
their character is that of a fiduciary insofar as the corporation for the
collective benefit of the stockholders, “they occupy a fiduciary relation, and CITY BANK vs CHUA
in these sense the relation is one of trust.” (Not Assigned)
Are the bylaws of a foreign corporation valid and effective in the

Let’s reconcile the ruling in your case with the characteristics of a
Philippines, although they were not approved by SEC?
valid bylaws. Gokongwei’s contention is that the corporation cannot amend
Yes, since the SEC will grant license to the foreign corporation to do business
its bylaws because he will be disqualified for doing so, thus his right as a
in the Philippines, it follows that when it issues the license to do business,
director will be impaired.
the SEC has already check that the foreign corporation has satisfied all the
requirements of the law. Meaning, that the bylaws among other documents
Is that a violation of No.2, that it must not impair the obligations of
meet our legal requirements here.
contract?
No, it does not violate the non-impairment of obligations of contract. No
vested right of stockholder to be elected director. Any person "who buys Transcribed by: Jurilex Maglinte
stock in a corporation does so with the knowledge that its affairs are
dominated by a majority of the stockholders and that he impliedly contracts Sec 46. Contents of Bylaws –
that the will of the majority shall govern in all matters within the limits of the A private corporation may provide the following in its bylaws:
act of incorporation and lawfully enacted by- laws and not forbidden by law." a) The time, place and manner of calling and conducting regular
or special meetings of the directors or trustees;
b) The time and manner of calling and conducting regular or
So basically there is no contract between the stockholder and the corporation
special meetings and mode notifying the stockholders or
that he must be declared as a director. It does not fall under number 2.
members thereof;
c) The required quorum in meetings of stockholders or members
SMC vs Mandaue Packing Products Union-FFW and the manner of voting therein;
(467 SCRA 107) d) The modes by which a stockholder, member, director, or
trustee may attend meetings and cast their votes;
Issue: WON the failure of Union to submit its bylaws is fatal to its recognition e) The form for proxies of stockholders and members and the
as local chapter? manner of voting therein;
f) The directors’ or trustees’ qualifications, duties and
Ruling: No. By-laws has traditionally been defined as regulations, responsibilities, the guidelines for setting the compensation of
ordinances, rules or laws adopted by an association or corporation or the like directors or trustees and officers, and the maximum number of
for its internal governance, including rules for routine matters such as calling other board representations that an independent director or
meetings and the like. The importance of by-laws to a labor organization trustee may have which shall, in no case, be more than the
cannot be gainsaid. Without such provisions governing the internal number prescribed by the Commission;
governance of the organization, such as rules on meetings and quorum g) The time for holding the annual election of directors or trustees
and the mode or manner of giving notice thereof;
requirements, there would be no apparent basis on how the union could
h) The manner of election or appointment and the term of office
operate. Without a set of by-laws which provides how the local/chapter
of all officers other than directors or trustees;
arrives at its decisions or otherwise wields its attributes of legal personality, i) The penalties for violations of the bylaws;
then every action of the local/chapter may be put into legal controversy. j) In the case of stock corporations, the manner of issuing stock
certificates; and
However, if those key by-law provisions on matters such as quorum
requirements, meetings, or on the internal governance of the local/chapter
are themselves already provided for in the constitution, then it would be
k) Such other matters as may be necessary for the proper or SEC. 21. Effects of Non-Use of Corporate Charter and Continuous
convenient transaction of its corporate affairs for the promotion Inoperation. – If a corporation does not formally organize and commence its
of good governance and anti-graft and corruption measures. business within five (5) years from the date of its incorporation, its certificate
of incorporation shall be deemed revoked as of the day following the end of
An arbitration agreement may be provided in the bylaws pursuant to the five (5)-year period.
Section 181 of this Code.
If you did not start your business at all in 5 years then you are automatically
SEC. 47. Amendment to Bylaws. – A majority of the board of directors revoked.
or trustees, and the owners of at least a majority of the outstanding
capital stock, or at least a majority of the members of a nonstock However, if a corporation has commenced its business but subsequently
corporation, at a regular or special meeting duly called for the purpose, may becomes inoperative for a period of at least five (5) consecutive years, the
amend or repeal the bylaws or adopt new bylaws. The owners of two-thirds Commission may, after due notice and hearing, place the corporation under
(2/3) of the outstanding capital stock or two-thirds (2/3) of the members in a delinquent status.
nonstock corporation may delegate to the board of directors or trustees the
power to amend or repeal the bylaws or adopt new bylaws:
Once you are delinquent you have 2 years to resume your operations and
comply with the requirements of the SEC.
There are two portions of these provisions.
 They are either amending, adopting or repealing the by-laws
which is approved by majority of the BOD and majority of the A delinquent corporation shall have a period of two (2) years to resume
operations and comply with all requirements that the Commission shall
outstanding capital stock.
prescribe. Upon compliance by the corporation, the Commission shall issue
 While the delegation of the power to amend the bylaws is by the
an order lifting the delinquent status. Failure to comply with the requirements
vote of 2/3 of the outstanding capital stock.
and resume operations within the period given by the Commission shall
cause the revocation of the corporation’s certificate of incorporation.
There is a different voting requirement in delegation and when they
themselves amend, repeal or adopt the by-laws.
If you do not operate in the first place, after 5 years, automatically revoked.
But if you operate even for a brief period, then you become inoperative for
Provided, That any power delegated to the board of directors or trustees to
5 years, then you have 2 years to resume. In the present case, with the
amend or repeal the bylaws or adopt new bylaws shall be considered as
COVID situation, and the corporation is inoperative, then they have 2 years
revoked whenever stockholders owning or representing a majority of the
outstanding capital stock or majority of the members shall so vote at a regular to resume.
or special meeting.
The revocation due to non-use of charter is automatic. But if the corporation
Whenever the bylaws are amended or new bylaws are adopted, the has already operated, it is given 2 years to resume.
corporation shall file with the Commission such amended or new bylaws and,
if applicable, the stockholders’ or members’ resolution authorizing the The Commission shall give reasonable notice to, and coordinate with the
delegation of the power to amend and/or adopt new bylaws, duly certified appropriate regulatory agency prior to the suspension or revocation of the
under oath by the corporate secretary and a majority of the directors or certificate of incorporation of companies under their special regulatory
trustees. jurisdiction.
The amended or new bylaws shall only be effective upon the issuance by the When is a corporation deemed to have formally organized and
Commission of a certification that the same is in accordance with this Code commence its business?
and other relevant laws. a) It should adopt and file its bylaws;
b) The BOD should meet, elect a set of officers, adopt pertinent
Can the delegation of authority to amend, repeal or adopt a new board resolutions and submit information sheet regarding its
bylaws by the BoD be in the bylaws themselves? officers to the SEC;
You can delegate your power to amend the by-laws but can you include that c) It should register its corporate name with the Department of
delegation in the amended by-laws itself? Like “we authorize the BOD to Trade and Industry;
amend” but it is already in the filed amended bylaws. Is that allowed? d) It should register itself with the Bureau of Internal Revenue and
SSS and secure municipal or city license to operate its business;
In that case, it should be in a separate document. The delegation of authority and
should be made through a shareholder or member’s meeting, and they e) It should establish an office and start its business operations.
should come up with a resolution where they delegate the authority of the
BOD. It must be a separate document; the power delegating to the BOD and If they comply with the following requirements, they are no longer penalized
the new bylaws of the directors should be separate. under this provision.
This is necessary to explain because it should be a separate resolution, and

not included in the bylaws submitted. This is because the delegation of De Facto Corporations
authority to amend the bylaws is temporary in nature and may be revoked SEC. 19. De facto Corporations. – The due incorporation of any corporation
at any time by majority vote of the outstanding capital stock in a regular or claiming in good faith to be a corporation under this Code, and its right to
special meeting. That is why it must be a separate document because how exercise corporate powers, shall not be inquired into collaterally in any private
would you revoke that if it is in the bylaws themselves? It will be easier to suit to which such corporation may be a party. Such inquiry may be made by
revoke if it is in a separate document. the Solicitor General in a quo warranto proceeding.
If the delegation is in the bylaws then the authority cannot be recalled or A de facto corporation is one that is organized with colorable compliance with
revoked for it would require an amendment of the bylaws itself. the requirements of incorporation under the RCCP and allowed to exist and
exercise the powers of the corporation until its corporate existence is assailed
Non-Use of Corporate Charter and by the state in a quo warranto proceeding. It is by direct attack through a
quo warranto and not a collateral attack.
Continuous Inoperation
This is important and there is no other way but to memorize the number of
years. Powers of the De facto Corporation
It shall have all the powers and authority of a de jure corporation until its
The period to organize and commence a business is now 5 years (before existence is questioned in quo warranto proceedings.
amendment: 2 years). On the other hand, the 2-year period to resume
operations is a new provision. Elements of a De Facto Corporation
a) Existence of a valid law under which it may be incorporated;
Comment: If this law is declared unconstitutional then there is
neither a de jure or a de facto existence.
b) Attempt in good faith to incorporate; Corporation by Estoppel
Comment: At the very least means obtaining a Certificate of
Incorporation from the SEC. The execution of the Articles or Transcribed by: Hazel Diane Estrosas
Bylaws are not enough to warrant a de facto existence. It must Section 20. Corporation by Estoppel. - All persons who assume to act as a
be a Certificate of Incorporation. corporation knowing it to be without the authority to do so1 shall be liable as
general partners for all debts, liabilities and damages incurred or arising as
c) Actual use or exercise in good faith of corporate powers. a result thereof: Provided, however, That when any such ostensible
corporation is sued on any transaction entered by it as a corporation or on
any tort committed by it as such, it shall not be allowed to use on any its lack
Instances of a De Facto Corporation
of corporate personality as a defense.2 Anyone who assumes an obligation
 When there are defects in the incorporation papers (E.g., the AOI
to an ostensible corporation as such cannot resist performance thereof on
fails to state all the matters required by the RCCP to be stated or the ground that there was in fact no corporation. 3
states some of them incorrectly)
 The corporate name is undistinguishable from another registered 1
or a reserved name A corporation by estoppel is not strictly a corporation under the eyes of the
 If the incorporators are ineligible or disqualified law. It is actually a liability of people acting like a corporation, but it’s just
 If there are defects in the execution of incorporation papers termed as corporation by estoppel for everybody’s easy determination.
 If the treasurer’s affidavit is false 2
 If the Filipino ownership is not complied with The phrase colored in red is a new provision. This is to enforce to everybody
 If there is any misrepresentation in the content of the AOI that one cannot use this as a defense because before, this stipulation does
not exist, and everybody was making anything difficult. One cannot use lack
of corporate personality as an escape.
HALL v. PICCIO
G.R. No. L-2598 | June 29, 1950 3
So, if you know for a fact that you’re transacting with not properly
incorporated corporation, then you cannot use that to get away with your
All of the parties were informed that the SEC has not issued the contract. You have to stand by what you agreed upon.
corresponding certificate of incorporation. We ought to know that the
personality of a corporation begins to exist only from the moment such Do everyone who subscribed to a share in a proposed corporation not legally
certificate is issued. formed liable as general partners? What if you only contributed money, does
that automatically make you a general partner for all intents and purposes
The complaining associates have not represented to the others that they and all liabilities of the corporation by estoppel?
were incorporated any more than the latter had made similar representations
to them. And as nobody was led to believe anything to his prejudice and NO. The Doctrine of Corporation by Estoppel does not apply if your only
damage, the principle of estoppel does not apply. Obviously this is not an participation is to subscribe to stock. So, if you only contributed money, you
instance requiring the enforcement of contracts with the corporation through are only a passive subscriber, then you are not liable for their actions. Hence,
the rule of estoppel. you cannot be liable as a partner of those who engage in business under the
name of that pretended corporation. But if the passive subscriber obtains a
Not having obtained the certificate of incorporation, the Far Eastern Lumber benefit on the contract entered into by the other partners, then it is covered
— even its stockholders — may not probably claim "in good faith" to be a by Doctrine of Corporation by Estoppel; more so if that person actually did
corporation. something in behalf of that corporation by estoppel.
Under the Corporation Law, it is the issuance of a certificate of incorporation By just giving money alone is not enough to make you liable, but if you get
by the Director of the Bureau of Commerce and Industry which calls a a benefit or do something then you are liable as corporation by estoppel.
corporation into being. The immunity if collateral attack is granted to
corporations "claiming in good faith to be a corporation under this act."
May a corporation by estoppel be sued?
Such a claim is compatible with the existence of errors and irregularities; but MACASAET vs. FRANCISO
not with a total or substantial disregard of the law. Unless there has been an G.R. 156759, June 5, 2013
evident attempt to comply with the law the claim to be a corporation "under
this act" could not be made "in good faith." ISSUE: Whether or not Abante Tonite, a daily tabloid of general circulation,
can be considered as a corporation by estoppel – YES.
This is not a suit in which the corporation is a party.
This is a litigation between stockholders of the alleged corporation, for the RULING: An unincorporated association, which represents itself to be a
purpose of obtaining its dissolution. Even the existence of a de jure corporation, will be estopped from denying its corporate capacity in a suit
corporation may be terminated in a private suit for its dissolution between against it by a third person who relies in good faith on such representation.
stockholders, without the intervention of the state.
In this case, "Abante Tonite" is a daily tabloid of general circulation. People
Not being a de facto corporation, their personality can be collaterally all over the country could buy a copy of "Abante Tonite" and read it, hence,
attacked. Only those de facto corporations have the privilege of saying that it is for public consumption. The persons who organized said publication
there must be a direct attack. obviously derived profit from it.
Nor can we sustain petitioners’ contention that Abante Tonite could not be
SAWADJAAN v. COURT OF APPEALS
sued as a defendant due to its not being either a natural or a juridical person.
G.R. No. 141735| June 8, 2005
In rejecting their contention, the CA categorized Abante Tonite as a
corporation by estoppel as the result of its having represented itself
By its failure to submit its by-laws on time, the AIIBP may be considered a
to the reading public as a corporation despite its not being
de facto corporation whose right to exercise corporate powers may not be incorporated. Thereby, the CA concluded that the RTC did not gravely
inquired into collaterally in any private suit to which such corporations may
abuse its discretion in holding that the non-incorporation of Abante Tonite
be a party.
with the Securities and Exchange Commission was of no consequence, for,
otherwise, whoever of the public who would suffer any damage from the
Moreover, a corporation which has failed to file its by-laws within the
publication of articles in the pages of its tabloids would be left without
prescribed period does not ipso facto lose its powers as such. The SEC Rules
recourse.
on Suspension/Revocation of the Certificate of Registration of Corporations,
details the procedures and remedies that may be availed of before an order
As to Practicality: It is not, however, practical to sue a corporation by
of revocation can be issued. There is no showing that such a procedure has
estoppel because it can never have assets. That is why those who assume
been initiated in this case.
themselves as a corporation when they have no legal authority to do so are
liable as general partners (partners in a partnership).
Why are they treated as partners and not as incorporators in a Those who formed the corporation, are they the aggrieved party or
corporation? the donor is the aggrieved party?
It is because Corporation by Estoppel is technically not a corporation. In this case, the petitioners – Missionary Sisters of Our Lady of Fatima and
Mother Concepcion – can be considered the aggrieved parties because the
Who cannot invoke the doctrine of corporation by estoppel? intestate estate of Purificacion is trying to say that no contract had existed
It cannot be invoked by a person who misrepresented the corporation as duly thus, resulting to unjust enrichment since the respondents are trying to deny
organized as against his victim, and when the petitioner is not trying to the existence of the donation when in fact a donation took place. The
escape liability from the contract, but rather the one claiming from the petitioners felt aggrieved because they could not now acquire the properties
contract, the doctrine of corporation by estoppel is not applicable. that were donated which was in fact the intention of the parties during such
time.
In other words, the doctrine can only be invoked by the aggrieved party who
relied on the representation by others that they are legally formed as a Classification of the Hierarchy of Corporation
corporation. It cannot be invoked by the one who benefited from the 1. De Jure
transaction. A person who deals with a non-existent corporation is estopped 2. De Facto
from denying the latter’s legal existence in any action leading out of or Jurisprudence settled that "[t]he filing of articles of incorporation
involving such contract or dealing. So, only an aggrieved party can use and the issuance of the certificate of incorporation are essential
corporation by estoppel. You cannot use it as a mode to enforce your right for the existence of a de facto corporation." In fine, it is the act
but only to gain remedy. of registration with SEC through the issuance of a
certificate of incorporation that marks the beginning of an
MISSIONARY SISTERS OF OUR LADY OF FATIMA vs. ALZONA entity's corporate existence (Missionary Sisters of Our Lady of
G.R. 224307, August 6, 2018 Farima v. Alzona).
ISSUE: Whether or not the Missionary Sisters of Our Lady of Fatima, as 3. Corporation by Estoppel
donee, has the capacity to accept the donation – YES (In the absence of certificate of incorporation)
RULING: The doctrine of corporation by estoppel is founded on principles Transcribed by: Dominic Estremos
of equity and is designed to prevent injustice and unfairness. It applies Lozano vs. Delos Santos
when a non-existent corporation enters into contracts or dealings G.R. 125221, June 19, 1997
with third persons. In which case, the person who has contracted
or otherwise dealt with the nonexistent corporation is estopped to ISSUE: WON there exist an exist a corporation by estoppel so as to warrant
deny the latter's legal existence in any action leading out of or an intracorporate dispute in this case. No.
involving such contract or dealing. While the doctrine is generally
applied to protect the sanctity of dealings with the public, nothing prevents RULING: There is no intracorporate nor partnership relation between
its application in the reverse, in fact the very wording of the law which sets Lozano and Anda. The controversy between them arose out of their plan to
forth the doctrine of corporation by estoppel permits such interpretation. consolidate their respective jeepney drivers' and operators' associations into
Such that a person who has assumed an obligation in favor of a non- existent a single common association. This unified association was, however, still a
corporation, having transacted with the latter as if it was duly incorporated, proposal. It had not been approved by the SEC. Consolidation becomes
is prevented from denying the existence of the latter to avoid the effective not upon mere agreement of the members but only upon issuance
enforcement of the contract. of the certificate of consolidation by the SEC.
At the outset, it must be stated that as correctly pointed out by the CA, the KAMAJDA and SAMAJODA to which Lozano and Anda belong are duly
RTC erred in holding that the petitioner is a de facto corporation. registered with the SEC, but these associations are two separate entities. The
dispute between Lozano and Anda is not within the KAMAJDA nor the
Petitioner filed its Articles of Incorporation and by-laws on August 28, 2001. SAMAJODA. It is between members of separate and distinct associations.
However, the SEC issued the corresponding Certificate of Incorporation only Lozano and Anda have no intracorporate relation much less do they have an
on August 31, 2001, two (2) days after Purificacion executed a Deed of intracorporate dispute. The SEC therefore has no jurisdiction over the
Donation on August 29, 2001. Clearly, at the time the donation was made, complaint.
the Petitioner cannot be considered a corporation de facto. Rather, a review
of the attendant circumstances reveals that it calls for the application of the The Doctrine of Corporation by Estoppel advanced by Anda cannot
doctrine of corporation by estoppel as provided for under Section 21 of the override jurisdictional requirements. Jurisdiction is fixed by law and is not
Corporation Code. subject to the agreement of the parties. It cannot be acquired through or
waived, enlarged or diminished by, any act or omission of the parties, neither
In this controversy, Purificacion dealt with the petitioner as if it were a can it be conferred by the acquiescence of the court.
corporation. This is evident from the fact that Purificacion executed two (2)
documents conveying her properties in favor of the petitioner - first, on Corporation by estoppel is founded on principles of equity and is designed to
October 11, 1999 via handwritten letter, and second, on August 29, 2001 prevent injustice and unfairness. It applies when persons assume to form a
through a Deed; the latter having been executed the day after the petitioner corporation and exercise corporate functions and enter into business
filed its application for registration with the SEC. relations with third persons. Where there is no third person involved and the
conflict arises only among those assuming the form of a corporation, who
In this case, while the underlying contract which is sought to be enforced is therefore know that it has not been registered, there is no corporation by
that of a donation, and thus rooted on liberality, it cannot be said that estoppel.
Purificacion, as the donor failed to acquire any benefit therefrom so as to
prevent the application of the doctrine of corporation by estoppel. To recall, If they make actions together, what are they called?
the subject properties were given by Purificacion, as a token of appreciation Corporation by estoppel, or general partnership.
for the services rendered to her during her illness. In fine, the subject deed
partakes of the nature of a remuneratory or compensatory donation, having The moment they transact with somebody else, they become a corporation
been made "for the purpose of rewarding the donee for past services, which by estoppel. Why is this? You don’t use it because, technically, it is not a
services do not amount to a demandable debt." corporation. You cannot use between yourselves the fact that it is a
‘corporation by estoppel.’ It is a liability that applies if there is a third
Precisely, the existence of the petitioner as a corporate entity is upheld in person who is harmed. So if it just between or among yourselves only,
this case for the purpose of validating the Deed to ensure that the primary and you are aware that there is indeed no corporation, then there is no
objective for which the donation was intended is achieved, that is, to convey corporation by estoppel.
the property for the purpose of aiding the petitioner in the pursuit of its
charitable objectives. In relation to this, you have a concept in civil law, which is pari delicto. If
both parties are at fault, then the court will not involve itself and let you deal
with your problems.
3. controls and holds all property of the corporation. Its members have
TITLE THREE been characterized as trustees or directors clothed with a fiduciary
character (Sec. 22, Corp. Code).
Board of Directors, Trustees, and Officers
By denying Tom’s prayer for the issuance of a TRO and/or writ of preliminary
Section 22. The Board of Directors or Trustees of a Corporation; injunction, the CA effectively affirmed the RTC’s Order placing the
Qualification and Term. - Unless otherwise provided in this Code, the board management and control of GDITI to Rodriguez, a mere intervenor,
of directors or trustees shall exercise the corporate powers, conduct all on the basis of a MOA between the latter and Basalo, in violation of the
business, and control all properties of the corporation. foregoing provision of the Corporation Code. In so doing, the CA
committed grave abuse of discretion amounting to lack or excess of
DIRECTORS shall be elected for a TERM of one (1) year from among the jurisdiction, which is correctible by certiorari.
holders of stocks registered in the corporation's books, while TRUSTEES
shall be elected for a term not exceeding three (3) years from among the Note: In the PPT slide, the case of Filipinas Port Services v. Go is also
members of the corporation. Each director and trustee shall hold office until
assigned under this topic, aside from being under the topic Fiduciary Duties
the successor is elected and qualified. A director who CEASES to own at
in the subsequent discussions. However, Atty. Fabian decided to skip
least one (1) share of stock or a trustee who ceases to be a member of
the corporation shall cease to be such. discussing the case.
What is the Source of Board Power?

Revisions In the case of Angeles vs. Santos (G.R. No. L-43413, August 31, 1937), there
You could see it by the words highlighted in red. is such a thing as delegated powers coming from the stockholders. The SC
ruled that “the board of directors of a corporation is a creation of the
Before, the Board of Directors and the Board of Trustees all had one (1) year stockholders and controls and directs the affairs of the corporation by
period each. But now, Section 22 says the Trustees have a three (3) year delegation of the stockholders. But the board of directors, or the majority
period. Therefore: thereof, in drawing to themselves the power of the corporation, occupies a
 Board of Directors (BoD) – 1 year position of trusteeship in relation to the stockholders.”
 Board of Trustees (BoT) – 3 years
Therefore, the source of board power is the shareholders themselves.
Moreover, there is no more residence requirement and nationality
requirement for members of the board. However, if the corporation is
Tan vs. Sycip
engaged in nationalized activities (e.g., Financial Investments Act or FIA),
then citizenship becomes a qualification. It is always subject to Anti-Dummy 499 SCRA 216 (2006)
Law and the FIA. It is because, as we have discussed before, if the board of
While stockholders and members (in some instances) are entitled to receive
directors are only 5 for example, then only 40% of those directors are allowed
profits, the management and direction of the corporation are lodged
to be foreigners.
with their representatives and agents -- the board of directors or
trustees. In other words, acts of management pertain to the board; and
There is now a requirement also for independent directors for corporations
those of ownership, to the stockholders or members. In the latter case, the
vested with public interests.
board cannot act alone, but must seek approval of the stockholders or
members.
Function of the Board of Directors
The board of directors or trustees shall:
Basically, the gist here in relation to the Doctrine of Centralized Management
 exercise the corporate powers;
is that the only way that the shareholders can manage the corporation is by
 conduct all business; and
voting directors in their behalf and that is it. The moment they elect directors,
 control all properties of the corporation.
they relinquish their power to manage the corporation. So that is the best
management power that the shareholders have. It is through voting their
These functions are basically the Doctrine of Centralized Management.
representative/directors.
Doctrine of Centralized Management Fiduciary Duties of Directors, Trustees, and Officers

The corporate powers are vested in a body, called Board of Directors for a
This is what Atty. Fabian wants to lay down for everybody’s benefit. This is
stock corporation or a Board of Trustees for a non-stock corporation. Except
not usually discussed, and not even discussed during her time as a law
for those instances where stockholder’s or member’s approval is required for
student because she submits that it is not usually mentioned in our
certain acts under the RCCP or the corporation’s bylaws, it is the board which
jurisprudence. However, in America, they really discuss the duties
exercises corporate powers, not the stockholders or members.
enumerated below (care, loyalty, and good faith). This will help to
encapsulate each power and to what duty it falls, determine if there is
Section 22 expressly provides that the corporate powers of all corporations
violation of fiduciary duty, and know what duty is breached.
shall be exercised by the board of directors. Just as a natural person may
authorize another to do certain acts in his behalf, so may the board of
directors of a corporation validly delegate some of its functions to individual Three Types of Fiduciary Duties:
officers or agents appointed by it. Thus, contracts or acts of a corporation 1. Duty of Care
must be made either by the board of directors (through a resolution) or by a 2. Duty of Loyalty
corporate agent duly authorized by the board. Absent such valid 3. Duty of Good Faith
delegation/authorization, the rule is that the declarations of an individual
director relating to the affairs of the corporation, but not in the course of, or Duty of Care
connected with the performance of authorized duties of such director, are • Directors and officers of a corporation in making all decisions in their
held not binding on the corporation. (Manila Metal Container Corp. vs. capacities as corporate fiduciaries, must act in the same manner as
PNB, G.R. No. 166862, December 20, 2006) a reasonably prudent person in their position would.
• Business Judgment Rule
Tom vs. Rodriguez
761 SCRA 679 Transcribed by: Vanessa Escritor
Duty of Loyalty
ISSUE: What is the implication when the CA denied Tom’s prayer for the Officers and directors are expected to put the welfare and best interests of
issuance of a TRO and/or writ of preliminary injunction? the corporation above their own personal or other business interests.
RULING: It cannot be doubted that the management and control of GDITI,

being a stock corporation, are vested in its duly elected Board of
Duty of Good Faith
Directors, the body that: Directors and officers of a corporation in making all decisions in their
1. exercises all powers provided for under the Corporation Code; capacities as corporate fiduciaries, must act with a conscious regard for their
2. conducts all business of the corporation; and responsibilities as fiduciaries.
Business Judgment Rule If they have mistakes, but they are done in good faith and without gross
This means that the court will not interfere with the directional discretion negligence, then you have to accept it. As long as the courts believe that the
absence evidence of gross negligence or bad faith. Questions of policy and BOD acted rationally in a particular situation, no further action shall be taken
management, expediency of contracts or action, adequacy of consideration, against them.
lawful appropriation of corporate funds to advance corporate interest, are
left solely to the directors’ honest and unselfish decision although the results The business judgment rule is designed to ensure that the courts do not, in
show that what they did was unwise or inexpedient. a hindsight, reverse the judgment of corporate officers and directors, who
are presumed to have acted in good faith and in the best interest of the
It is only in a most unusual and extraordinary case that directors are held company.
liable for negligence in the absence of fraud, or improper motive, or personal
interest. Ingersoll vs. Malabon Sugar Co.
G.R. No. L-27770, December 31, 1927
Basically, the business judgment rule is a presumption that in making
business decisions, the director of the corporation acted in an informed ISSUE: WON the contract entered into between the BOD of the corporation
basis, they know what they are doing; and in good faith, and in honest and Ingersoll by which the latter was to be retained as counsel (for the
belief that their action taken was in the best interest of the company. This corporation for fees) is binding upon the corporation. YES.
is the general rule. They act in the best interest of the company.
RULING:
Board of Directors; Contracts
And the fact that it is a presumption, means that the business judgment rule
Under the law, as a general rule, in corporate affairs, the will of the majority
is not absolute. Corporate acts cannot be justified under the business controls, and that contracts intra vires entered into by the board of directors
judgment rule if it is contrary to law, or contrary to the RCCP (i.e. the are binding upon the corporation. And that the court will not interfere unless
declaration of dividends without sufficient unrestricted retained earnings, pay such contracts are unconscionable and oppressive as to amount to a wanton
of compensation to the directors without authority from the shareholders). destruction of the rights of the minority.
Aside from the exception that there should be no fraud, there should be no In the case at bar, although the fees demanded by Ingersoll may be larger
bad faith, and it should be done without conflict and negligence, it should than the Supreme Court would have allowed in the absence of a contract,
also not be done against the law or against the RCCP. the fee charges were still not unreasonable and unconscionable as to warrant
interference by the court.
Effect of Business Judgment Rule
The shareholder cannot interfere with the decisions of the board in You can refer to the acts within the board’s power as intra vires acts.
conducting the normal business affairs of the corporation. Dili sila pwede
maglabot-labot because they relinquish their right when they elect their Balinghasay vs. Castillo
directors. The shareholders cannot revoke the resolutions of the directors, G.R. No. 185664, April 8, 2015
or repudiate their acts on account of mere disagreement. Digest by: Jabb Balindong
If the shareholders are not satisfied, what should they do then? Issue: WON the court is prevented from acting on the derivate suit based
They should replace their Board of Directors upon expiration of their term, or on business judgment rule? – NO.
file a removal under Section 27, or file a derivative suit on behalf of the
Ruling: The petitioners who are MCPI directors are ultrasound investors, in
corporation, to satisfy their wrongful act or ultra vires act. The party attacking
violation of their duty as such directors, acquired an interest adverse to the
the board’s decision must prove that the board was so uninformed to
corporation when they entered into the ultrasound contract. By doing so,
amount to gross negligence. they have unjustly profited from the transaction which otherwise would have
accrued to MCPI.
The business judgment rule is also not applied in cases of gross
negligence. What is the concept of gross negligence? It’s the proper In fact, as reflected in the ultrasound income for the year 1997 to 2001, the
standard in determining if the business judgment was an informed one. In ultrasound investors earned a net share of P4,417,573.81. [The petitioners]
order to rebut the business judgment rule presumption, a shareholder- directors/ultrasound investors failed to inhibit themselves from participating
plaintiff must effectively provide that the board of directors, in reaching their in the meeting and from voting with respect to the decision to proceed with
challenge decision, breached any one of the triad of its fiduciary duties the signing of the MOA. Certainly, said [petitioners] directors/ultrasound
of loyalty, good faith, or due care. investors have dealt in their behalf and took an interest adverse to MCPI.
It is only when the transaction involves a conflict of interest or breach of It also appeared that at the time when the ultrasound was purchased, the
fiduciary duty that the burden shifts to the defendant-directors, to prove the corporation had enough money to buy and operate the ultrasound equipment
entire fairness of their transaction. In the absence of conflict of interest, bad without having to accommodate the investors. But for obvious reason, the
petitioner-investors who at the same time BOD pushed for the investment
faith, or gross negligence, the board may not be held liable for mistakes or
and the MOA.
errors in exercising their business judgment in directing the affairs of the
corporation.
Virata vs. Ng Wee
For example, if the BOD enters into a contract that the shareholders think G.R. No. 22096, 221058, xxx, July 5, 2017
that is very unprofitable or very unwise, that nobody in their right mind would Digest by: Gewee Bentayao
enter into such contract, but it is in fact legally binding, it is not contrary to
Issue: WON the Directors are personally liable to Ng Wee for the investment
law, then the shareholders cannot do anything about that; but they can just
he placed with Power Merge through WINCORP – YES.
wait to elect another set of directors to act on their behalf.
Ruling:
Rationale of the Business Judgment Rule
It is a recognition of the courts that in the inherently risky environment of Liabilities of the Board of Directors
business, the board of directors need to be free to take risk without a under Section 31 of the Corporation Code
constant fear of lawsuits affecting their judgment. It seeks to acknowledge
that the daily operation of a business can be innately risky and controversial; Section 31 of the Corporation Code provides:
therefore, the BOD should be allowed to make decisions without fear of being Section 31. Liabilities of Directors, trustees or officers- Directors or trustees
prosecuted afterwards. who willfully and knowingly vote for or assent to patently unlawful acts of
the corporation or who are guilty of gross negligence or bad faith in directing
The business judgment rule further assumes that it is unfair to expect those the affairs of the corporation or acquire any personal or pecuniary interest in
conflict with their duty as such directors or trustees shall be liable jointly and
management managing the company, to make perfect decisions all the time.
severally for all damages resulting therefrom suffered by the corporation, its You cannot use the Business Judgment Rule to claim something that is
stockholders or members and other persons. against the law. The Business Judgment Rule is not used if it is
violative of the three fiduciary duties of: care, loyalty and good
When a director, trustee or officer attempts to acquire or acquire in violation faith; and if it is violative of the law or the RCCP.
of his duty, any interest adverse to the corporation in respect of any matter
which has been reposed in him in confidence, as to which equity imposes a Can the Board (BOD/BOT) in the exercise of its business judgment
disability upon him to deal in his own behalf, he shall be liable as a trustee create positions or committees?
for the corporation and must account for the profits which otherwise would Yes, the board has the power to create positions, committees, or offices as
have accrued to the corporation. may be necessary to conduct the business affairs of the corporation. You
cannot expect 12 or 15 people to do everything for that big corporation.
Here the directors are guilty of fraud or at the very least guilty of gross
negligence. Because: Exception: The board cannot create (1) EXECOM or a (2) corporate office
because these are required to be created by the Bylaws.
The board is charged with the fiduciary duty which it failed to fulfil when it
did not heed the warning signs which would have cautioned it from approving The creation of the positions or committees or other employees they hire are
the loan in haste: covered by the Business Judgment Rule. In fact, this power is explicit in the
RCCP under section 34.
Power Merge has only been in existence for
two years when it was granted the credit facility
Filipinas Port Services v. Go
Power Merge was thinly capitalized with only P37.5 Million subscribed capital;
G.R. No. 161886, March 16, 2007
Power Merge was not an ongoing concern since it never secured the
necessary permits and licenses to conduct business. It never engaged in any
Issue: WON the BOD’s denial or justification are correct.
lucrative business and no reports were filed with SEC; and no security other
than promissory notes was demanded by WINCORP or was furnished by
Ruling: Yes. There is an explicit provision of the law that allows the BOD to
Power Merge in relation to the latter’s drawdown.
create such offices and increases which are well within their powers.
The court ruled that it is immaterial if Directors Cua and Cualopings did not
The raison d’etre behind the conferment of corporate powers on the board
sign the agreements. WINCORP could have avoided its troubles if they were
of directors is not lost on the Court. Indeed, the concentration in the board
vigilant enough to disapprove the Power Merge credit application.
of the powers of control of corporate business and of appointment of
corporate officers and managers is necessary for efficiency in any large
Also, Virata had existing obligations to WINCORP from the Hottick account.
organization. Stockholders are too numerous, scattered and unfamiliar with
However, the Board excluded Virata as a party respondent to its collection
the business of a corporation to conduct its business directly. And so the plan
suit against Hottick and on the same day approved the P1.3b credit line to
of corporate organization is for the stockholders to choose the directors who
Power Merge.
shall control and supervise the conduct of corporate business.
The proceeds of the credit line were released to power Merge before the
Besides, the determination of the necessity for additional offices and/or
corresponding agreements were signed. This lends credence to the claim that
positions in a corporation is a management prerogative which courts are not
WINCORP did not intend for Power Merge to be strictly bound by the terms
wont to review in the absence of any proof that such prerogative was
of the credit facility.
exercised in bad faith or with malice.
Transcribed by: Kelvin John Du This Business Judgment Rule is in relation to management prerogative, which
The board is charged with the fiduciary duty which it failed to fulfil when it we know from Labor Law as to termination. The creation [of the
did not heed the warning signs which would have cautioned it from approving positions/offices] is also a management prerogative.
the loan in haste.
Neither can the business judgment rule apply herein for it is elementary in Executive Committee
corporation law that the doctrine admits of exceptions: bad faith being one Section 34. Executive, Management, and Other Special Committees. – If
of them, gross negligence, another. Here, there was gross negligence on the the bylaws so provide, the board may create an executive committee
part of the BOD. composed of at least three (3) directors. Said committee may act, by majority
vote of all its members, on such specific matters within the competence of
Which fiduciary duty did they breach? the board, except with respect to the: (a) approval of any action for which
They breached their duty of care as to ascertaining whether or not Power shareholders’ approval is also required; (b) filling of vacancies in the board;
Merge is worthy to be granted the credit facility or loan. (c) amendment or repeal of bylaw or the adoption of new bylaws; (d)
amendment or repeal of any resolution of the board which by its express
The Business Judgment Rule presumption only applies when the directors terms is not amendable or repealable; and (e) distribution of cash dividends
acted on an informed basis and in good faith. The fact that they did not to the shareholders.
inform themselves properly before they entered into the contract, that makes
them grossly negligent. The board of directors may create special committees of temporary or
permanent nature and determine the members’ term, composition,
compensation, powers, and responsibilities.
The Business Judgment Rule cannot also be used to justify an act which is
contrary to law and the RCCP.
Executive Committee
Provident International vs. Venus It is a committee that the Board creates that can act on matters falling within
the board’s competence. Usually, this EXECOM handles day-to-day decisions
G.R. No. 167041, June 17, 2008
by the Board. You cannot expect all 12 or 15 of them to be in one room at a
time.
Issue: How did the Business Judgment Rule apply? What was their defense
as to why the new stock and transfer book was valid and the other was not?
What was their reason/defense/excuse? Rationale
How about the issue that they have lost the stock and transfers books and Because the Board members only meet just once a month, there may be
another one being issued? Was there a mention of that? instances where transactions require corporate approval immediately but
[These were not mentioned in the case.] cannot wait for the Board meeting, given the urgency of the matters.
In this case, the Court said that the Business Judgment Rule cannot be relied Who may create this EXECOM?
upon to support a request for a new stock and transfers book on the pretext “If the bylaws so provide”
that the original is lost when in fact it is not. Declared entries in the lost stock It is the shareholders that provide it in the bylaws. The shareholders should
allow the creation of the EXECOM. That is why the Board themselves cannot
and transfers book is invalid.
create the EXECOM.
Who can be EXECOM members? term of officers or directors. Such provision cannot be adopted for being
“Can create an executive committee composed of at least 3 directors” contrary to law.
Only directors can be part of the EXECOM. If non-directors are brought in,
which happens sometimes, they only serve in an advisory capacity. In this case, it was Southwestern University and before, in the CCP, the
trustees only have a term of 1 year so they were not allowed to state there
How about foreigner directors? a term of 3 years. You cannot state a longer term in your bylaws. Maybe now
As to the 60-40 limitation and the Anti-Dummy Law? under RCCP they will be allowed since it is already 3 years.
It still applies. If there are 3 in the EXECOM then 1 out of 3 of the EXECOM
members may be foreigner. You can apply the 60-40 in the EXECOM, BOD
and shareholders. Hold-Over Principle
“Hold-over” situation arises when no successor is elected due to valid and
There is a minimum of 3 directors. justifiable reasons. Thus, the incumbent holds over and continues to function
until another officer is chosen and qualified.
What is the maximum number of EXECOM members?
Logically and obviously, it should not be equal to the number of directors This means that if his successor is not elected or qualified, then the director
because it defeats the purpose. Why make an EXECOM with 15 members or trustee may continue to perform his normal duties as a director or trustee
when there are 15 directors? in a hold-over capacity.
What powers can these EXECOM have? This hold-over period is not, however, part of the term of office of the director
They have all powers that the board has as a whole. or trustee.
Except for: It means that term is only for 1 year. After the term expires, the period after
1. Approval of any action for which shareholders’ approval is also the lapse of the 1-year term is called a hold-over period. This is not part
required of the director’s original term of office, nor is it a new term.
2. Filling of vacancies in the board – that has to be decided the board
or by the stockholders (see Section 28) The term is different from the tenure. The term is the 1-year term. The
3. Amendment or repeal of bylaw or the adoption of new bylaws tenure is the actual period of service, including the hold-over period.
4. Amendment or repeal of any resolution of the board which by its
express terms is not amendable or repealable Does the hold-over principle apply also to nonstock corporations?
5. Distribution of cash dividends to the shareholders
Sec-OGC Opinion No. 05-19, December 5, 2005
It says cash dividends. So what if they distribute stock dividends or Yes. provisions of the Code governing stock corporations, when pertinent,
property dividends, is that allowed? shall be applicable to non-stock corporations.
No, it is not allowed. Check section 42 on the power to declare dividends:
Stock dividends require the approval of the shareholders. However, it has to be emphasized that “hold-over” is a situation that arises
only when no successors are elected due to valid and justifiable reasons.
Section 42. Power to Declare Dividends. – The board of directors of a stock Non-holding of annual meeting for the election of the Board of Directors and
corporation may declare dividends out of the unrestricted retained earnings Officers without justifiable reason is subject to Section 5(k) of the Securities
which shall be payable in cash, property, or in stock to all stockholders on the Regulation Code and the SEC Rules.
basis of outstanding stock held by them: Provided, That any cash dividends
due on delinquent stock shall first be applied to the unpaid balance on the Basically, you can hold-over if you have justifiable grounds why there is no
subscription plus costs and expenses, while stock dividends shall be withheld election or why there is no substitute or new director. But the non-holding of
from the delinquent stockholders until their unpaid subscription is fully paid: the annual meeting is not a valid reason for why you don’t have a new
Provided, further, That no stock dividend shall be issued without the approval director.
of stockholders representing at least two-thirds (2/3) of the outstanding
capital stock at a regular or special meeting duly called for the purpose. Stock It seems redundant. They did not hold a meeting so they do not have new
corporations are prohibited from retaining surplus profits in excess of one directors. That cannot be a reasonable ground why they don’t have a director
hundred percent (100%) of their paid-in capital stock, except: (a) when and why you can hold-over.
justified by definite corporate expansion projects or programs approved by
the board of directors; or (b) when the corporation is prohibited under any Sec-OGC Opinion No. 06-18, March 20, 2006
loan agreement with financial institutions or creditors, whether local or The bylaws can provide a disqualification that a director cannot seek another
foreign, from declaring dividends without their consent, and such consent has term of office. Absent such provision, an incumbent is not prohibited from
not yet been secured; or (c) when it can be clearly shown that such retention
seeking reelection. The hold-over principle does not prohibit re-
is necessary under special circumstances obtaining in the corporation, such
election.
as when there is need for special reserve for probable contingencies
Again, hold-over is different from a term. If there is nothing in the bylaws or
Term in the AOI that prohibits another term, then you can still get re-elected.
 Directors – 1 year
 Trustees – 3 years Sec-OGC Opinion No. 07-08, April 30, 2007
The Commission considered the resolution of an election protest or a political
upheaval which bar the holding of an election as valid and justifiable reason
Rationale of Term Limitation for the hold-over of the incumbent directors.
Why are we limiting it to 1 year?
To protect the corporation, as well as its creditors and the public dealing with So they can hold-over precisely because there are next directors for the
it so that if an improvident or wrongful act is committed by the board of corporation. That is a justifiable reason for a hold-over because there are
directors, the subsequent board can redress or prevent the perpetration of election protests pending.
the wrong, and thereby protect its stockholders, creditors and the public
having dealings with it. What are the implications?
So there will be check and balance. So they can change it. If they get elected
then meaning they have a good performance. If not, they have the recourse Valle Verde Country Club vs. Africa
to select anew. G.R. No. 151969, September 4, 2009
Can the bylaws provide a longer term? Issue: WON term includes the holdover period
Ruling: No. The holdover period is not part of the term of office of a
SEC-OGC Opinion No. 12-08, March 17, 2012 member of the BOD.
The provisions on limiting the term cannot be voided by the mere expediency
of providing otherwise in the bylaws. The bylaws of a stock corporation can This case also discusses Section 28 on vacancy (previously Section 29):
neither provide a 3-year term for the members of it BOD nor a perpetual
The reason why they are arguing between term and tenure as to vacancy is members of the association may have formally adopted the provision in
because there are different modes to fill in a vacancy. It is either the BOD question, but their action would be of no avail because no provision of the
when there is a quorum, or the shareholders. by-laws can be adopted if it is contrary to law.
Issue: What is the ground for the vacancy? Is it expiration of the term or is It is probable that, in allowing Grace Christian High School representative to
it resignation of the officer? sit on the board, the members of the association were not aware that this
was contrary to law. It should be noted that they did not actually implement
Ruling: With the expiration of Makalintal’s term of office, a vacancy resulted the provision in question – the allowance Grace Christian High School
which, under Section 29, must be filled by the stockholders of VVCC in a representative as an unelected member of the board of directors. It is more
regular or special meeting called for the purpose. His resignation as a accurate to say that the members merely tolerated GRACE CHRISTIAN HIGH
holdover director did not change the nature of the vacancy; the vacancy due SCHOOL representative and tolerance cannot be considered ratification.
to the expiration of Makalintal’s term had been created long before his
resignation. Nor can Grace Christian High School claim a vested right to sit in the board
on the basis of "practice." Practice, no matter how long continued, cannot
Here, the director served the term and then there was a hold-over period for give rise to any vested right if it is contrary to law.
a time and the director resigned at the end of the hold-over period. The
remaining directors wanted to fill in the seat of the director who resigned. Note: Obviously you cannot change the term. You cannot make into 15 years
or perpetual.
The distinction happens: if the ground or reason for the vacancy is
resignation then the Board, if they still reach a quorum, can fill in that Qualifications and Disqualifications
position. But if the ground is due to term expiration, there has to be We mentioned this before when we were discussing Articles of Incorporation.
shareholders’ voting. The BOD were arguing that it was just resignation so No longer discussed.
that they will be the ones to fill in the position.
Lee v. Court of Appeals
The Court said that it was not a resignation. The only reason why he was
serving after his original term is because of a hold-over. The reason for the GR No. 93695 February 4, 1992
vacancy is the expiration of the actual term. In between the end of the term Digest by: Vanessa Escritor
and the start of the hold-over, the position should have been filled up
because the term already expired. Issue: WON the summons to ALFA could be served through the petitioners
Lee and Lacdao. – No, the petitioners no longer have the authority to
be served the summons.
The reason for the vacancy here is not the resignation but the actual
expiration of the term. So, the BOD by themselves cannot fill it up but there
should be shareholders’ voting. Ruling
[Note: Might come out in the exam]
Note: Before we can answer this main issue, there is a need to discuss the
nature of a voting trust agreement, and its effects to the qualification and
Transcribed by: Mikel Hofileña Delgado disqualification of directors of a corporation.
Grace Christian High School v. Court of Appeals
381 SCRA 133 Voting Trust; Definition and nature
A voting trust is a trust created by an agreement between a group of the
Issue: WON Grace Christian High School may hold office as a permanent stockholders of a corporation and the trustee or by a group of identical
member of the board. No, the Corporation Code require as a general rule agreements between individual stockholders and a common trustee, whereby
that directors be elected or hold a particular office. it is provided that for a term of years, or for a period contingent upon a
certain event, or until the agreement is terminated, control over the stock
Ruling: The Corporation Code require as a general rule that directors be owned by such stockholders, either for certain purposes, it is to be lodged in
elected or hold a particular office-ex officio. the trustee, either with or without a reservation to the owners, or persons
designated by them, of the power to direct how such control shall be used.
§23. The Board of Directors or Trustees. — Unless otherwise provided in this
Code, the corporate powers of all corporations formed under this Code shall By its very nature, a voting trust agreement results in the separation of the
be exercised, all business conducted and all property of such corporations voting rights of a stockholder from his other rights such as the right to receive
controlled and held by the board of directors or trustees to be elected from dividends, the right to inspect the books of the corporation, the right to sell
among the holders of stocks, or where there is no stock, from among the certain interests in the assets of the corporation and other rights to which a
members of the corporation, who shall hold office for one (1) year and until stockholder may be entitled until the liquidation of the corporation.
their successors are elected and qualified.
Tests to Distinguish a Voting Trust Agreement from Other
These provisions of the former and present corporation law leave no room Agreements
for doubt as to their meaning: the board of directors of corporations must be To distinguish a voting trust agreement, it must pass the three criteria or
elected from among the stockholders or members. tests:
1. The voting rights of the stock are separated from the other attributes
There may be corporations in which there are unelected members in the of ownership;
board, the unelected members sit as ex officio members, i.e., by virtue of 2. The voting rights granted are intended to be irrevocable for a definite
and for as long as they hold a particular office. But in the case of Grace period of time; and
Christian High School, there is no reason at all for its representative to be 3. The principal purpose of the grant of voting rights is to acquire voting
given a seat in the board. control of the corporation.
Grace Christian High School does not claim a right to such seat by virtue of Effect of Voting Trust Agreement
an office held. In fact it was not given such seat in the beginning. It was only The law simply provides that a voting trust agreement is an agreement in
in 1975 that a proposed amendment to the by-laws sought to give it one. writing whereby one or more stockholders of a corporation consent to
transfer his or their shares to a trustee in order to vest in the latter voting
No Estoppel by Grace Village Association. or other rights pertaining to said shares for a period not exceeding five
There was merely tolerance. years upon the fulfilment of statutory conditions and such other terms and
conditions specified in the agreement.
Since the provision in question is contrary to law, the fact that for fifteen
years it has not been questioned or challenged but, on the contrary, appears Both under the old and the new Corporation Codes there is no dispute as to
to have been implemented by the members of the association cannot forestall the most immediate effect of a voting trust agreement on the status of a
a later challenge to its validity. Neither can it attain validity through stockholder who is a party to its execution — from legal titleholder or owner
acquiescence because, if it is contrary to law, it is beyond the power of the of the shares subject of the voting trust agreement, he becomes the
members of the association to waive its invalidity. For that matter the equitable or beneficial owner.
But they can add more qualifications but they have to stipulate it expressly
Change in Status Deprives the Stockholder of in the by-laws. Otherwise, only those that are provided in the RCCP are
the Right to Qualify as a Director required.
Under the old Corporation Code (Section 30 thereof), Transcribed by: Inah del Rosario
Every director must own in his own right at least one share of the capital Independent Director
stock of the stock corporation of which he is a director, which stock shall
SEC. 22. x x x An INDEPENDENT DIRECTOR is a person who, apart from
stand in his name on the books of the corporation. A director who ceases to
shareholdings and fees received from the corporation, is independent of
be the owner of at least one share of the capital stock of a stock corporation
management and free from any business or other relationship which could,
of which is a director shall thereby cease to be a director xxx or could reasonably be perceived to materially interfere with the exercise of
independent judgement in carrying out the responsibilities as a director.
The phrase “in his own right” was deleted in the new Corporation Code (CCP).
Independent directors must be elected by the shareholders present or
Under the old Corporation Code, the eligibility of a director, strictly speaking, entitled to vote in absentia during the election of directors. Independent
cannot be adversely affected by the simple act of such director being a party directors shall be subject to rules and regulations governing their
to a voting trust agreement inasmuch as he remains owner (although qualifications, disqualifications, voting requirements, duration of term and
beneficial or equitable only) of the shares subject of the voting trust term limit, maximum number of board memberships and other requirements
agreement pursuant to which a transfer of the stockholder's shares in favor that the Commission will prescribe to strengthen their independence and
of the trustee is required. align with international best practices.
But with the omission of the phrase "in his own right", the election of trustees  The first paragraph is the definition of an independent director.
and other persons who in fact are not beneficial owners of the shares  An independent director will be elected by the shareholders.
registered in their names on the books of the corporation becomes formally  In cases of corporations vested with public interest, they have a
legalized. It is then clear that in order to be eligible as a director, what requirement that their independent director should consist of 20%
is material is the legal title to, not beneficial ownership of, the stock of their total directorship.
as appearing on the books of the corporation.
SEC. 22. x x x The board of the following corporations vested with public
Petitioners Ceased to be Directors interest shall have INDEPENDENT DIRECTORS constituting at least twenty
The petitioners, by virtue of the voting trust agreement executed in 1981 percent (20%) of such board:
disposed of all their shares through assignment and delivery in favor of the a. Corporations covered by Section 17.2 of Republic Act No. 8799,
DBP, as trustee. Consequently, the petitioners ceased to own at least one otherwise known as “The Securities Code”, namely those whose
share standing in their names on the books of ALFA as required under Section securities are registered with the Commission, corporations listed with
23 of the new Corporation Code. They also ceased to have anything to do an exchange or with assets of at least Fifty million pesos (P50,000,000)
with the management of the enterprise. The petitioners ceased to be and having two hundred (200) or more holders of shares, each holding
directors. at least one hundred (100) shares of a class of its equity shares;
b. Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged
This is evidenced by paragraph 3 of the Voting Trust Agreement: in money service business, pre-need, trust and insurance companies,
xxx and other financial intermediaries; and
4. The TRUSTEE shall vote upon the shares of stock at all meetings of c. Other corporations engaged in business vested with public interest
ALFA, annual or special, upon any resolution, matter or business that may similar to the above, as may be determined by the Commission, after
be submitted to any such meeting, and shall possess in that respect taking into account relevant factors which are germane to the objective
the same powers as owners of the equitable as well as the legal and purpose of requiring the election of an independent director, such
title to the stock; xxx as the extent of minority ownership, type of financial produvts or
securities issued or offered to investors, public interest involved in the
nature of business operations, and analogous factors.
Considering that the voting trust agreement between ALFA and the DBP
transferred legal ownership of the stock covered by the agreement to the
DBP as trustee, the latter became the stockholder of record with respect to The corporations enumerated in Sec. 22, are corporations vested with public
the said shares of stocks. interest.
Conclusion Like corporations listed in the Sec. 17.2 of RA 8799 or the Securities Code.
In conclusion, by the fact that the petitioners ceased to be directors of ALFA
by virtue of the Voting Trust Agreement, they no longer have the authority Sec. 17.2. x x x
to receive summons for ALFA. a. An issuer which has sold a class of its securities pursuant to a
registration under section 12 hereof: Provided however, That the
obligation of such issuer to file reports shall be suspended for any fiscal
Where else did we learn about the Voting Trust Agreement vis-à-vis
year after the year such registration became effective if such issuer, as
foreign shareholdings?
of the first day of any such fiscal year, has less than one hundred (100)
For example, even if foreigners are the trustee of a voting trust agreement, holder of such class securities or such other number as the Commission
they are considered as foreign stocks in relation to the 60:40 percentage. In shall prescribe and it notifies the Commission of such;
such case, the legal title is with the Filipinos, but the person who exercises b. An issuer with a class of securities listed for trading on an Exchange;
the voting rights and dividends are foreigners. The Court would recognize it and
as foreign ownership because they have beneficial ownership. c. An issuer with assets of at least Fifty million pesos (50,000,000.00) or
such other amount as the Commission shall prescribe, and having two
In Lee v. Court of Appeals, in terms of qualifications of a director, refer to hundred (200) or more holder each holding at least one hundred (100)
the legal title not the beneficial ownership. share of a class of its equity securities: Provided, however, That the
obligation of such issuer to file report shall be terminate ninety (90) days
Can the by-laws enlarge the requirements under the RCCP? after notification to the Commission by the issuer that the number of its
Can you provide they have 10 or 100 shares of stock? It depends. But the holders holding at least one hundred (100) share reduced to less than
answer is generally yes. one hundred (100).
The by-laws can enlarge the share ownership requirement provided it is not Banks, quasi-banks and other corporations as well.
intended to deprive minority representation.
From here you can see that independent directors are necessary under the:
Under Section 46, the by-laws can prescribe additional qualifications of a 1. Securities and Regulations Code – wherein it provides that at
Board of Directors or Board of Trustees. In the absence of a provision in the least 2 or 10% of the Board, whichever is lesser, should be
by-laws, the corporation cannot require additional qualifications other than independent directors
the mandatory requirements under the RCCP. 2. General Banking Law – wherein it provides that the provision of
the CCP notwithstanding, 5 max of 15 members of the Board of
Directors of the bank, 2 of whom shall be independent directors.
While it may seem confusing, it is submitted that General Banking Law and qualifications and none of the disqualifications set forth in the RCCP as well
the Securities and Regulations Code should be harmonized with the RCCP, as the special laws and the by-laws if it provides additional qualifications and
instead of repealing the SRC and GBL. Meaning – disqualifications.
o the number of independent directors for banks and companies
should constitute 20% of the Board but not less than 2. Requisites in the Election of Directors or Trustees
1. Quorum
That is how you reconcile it. a. Majority of the outstanding capital stock OR
b. Majority of the members entitled to vote
How do you vote for regular and independent directors?
The election of regular and independent directors must be made together in 2. Mode of Voting
the same meeting. However, you can segregate the casting of votes from a. Voting in person
general and independent directors. b. Voting by a representative through written proxy
Example: (Under SEC Opinion 19-11) Written Proxies

Among 10 directors, there are 8 regular directors and 2 independent Proxy forms are usually attached to the notice of the meeting
directors. There are 18 candidates for regular directors and 5 candidates for for the election of the directors. There, the shareholder
independent directors. You segregate the votes for regulars and appoints a proxy who will vote in the shareholder’s behalf.
independent, respectively. You then count them differently. The top 8 out of
the 18 candidates vying for regular directorship will win. While the top 2 out c. Voting via remote communication or in absentia (if authorized
of the 5 candidates for independent directors will win. by By-laws or by majority BOD)
(Please read the full text of the following SEC issuances) Note that Sec. 23 provides that a stockholder or members who
participates through remote communication or in absentia shall
Summary: be deemed present for purposes of quorum.
SEC Memorandum Circular No. 05-12, July 13, 2012 3. Notice

 It adopts the policy of allowing independent directors to Must be done in accordance with the form and mode under the by-laws
participate in employees’ stock option plans. Provided, that their (Sec. 50)
shareholdings in the company do not exceed 2% of the
outstanding shares of the corporation. 4. Manner of voting
 Over than that, the independent director may not be that By ballot if requested by any voting stockholder or member.
independent anymore.
Is voting via remote communication and in absentia allowed?
SEC Memorandum Circular No. 16-02 You have to distinguish, that if it is a corporation vested with public interest,
 This are the guidelines of the nomination and election of the voting via remote communication or in absentia is allowed if not provided by
independent directors, even termination of directors. the by-laws. In other kinds corporations, voting via remote communication
 There are a lot there. I leave that up to you. and in absentia is only allowed if it is authorized by the by-laws or the
 Just go through them. I don’t expect you to memorize majority of the Board of Directors.
SEC Memorandum Circular No. 04-17

 Term limit of independent directors.
Voting Via Remote Communication and
in Absentia Not Self-Executory
SEC Opinion No. 04-13, April 18, 2013 Although the RCCP in Section 23, allows voting via remote communication or
 Limit on shareholdings of independent directors. in absentia, this provision is not self-executory as it requires the SEC to issue
implementing rules and regulations for the same. That is the ruling in SEC
Opinion No. 56-19.
Election of Directors or Trustees
SEC. 23. Election of Directors or Trustees. – Except when the exclusive Pursuant to that Opinion, the SEC issued Memorandum No. 06-20 or
right is reserved for holders of founders’ shares under Section 7 of this Code, otherwise known as the Guidelines on the Attendance and Participation of
each stockholder or member shall have the right to nominate any director or directors, trustees, stockholders, members and other persons of corporations
trustee who possesses all of the qualifications and none of the in regular and special meetings through teleconferencing, video conferencing
disqualifications set forth in this Code. or other video or electronic meets.
At all elections of directors or trustees, there must be present, either in person Continuation of Sec. 23:
or through a representative authorized to act by written proxy, the owners
of majority of the outstanding capital stock, or if there be no capital stock, a SEC. 23. x x x In STOCK CORPORATIONS, stockholders entitled to vote
majority of the members entitled to vote. When so authorized in the by-laws shall have the right to vote the number of shares of stock standing in their
or by a majority of the board of directors the stockholders or members may own names the stock books of the corporation or the time fixed in the books
also vote through remote communication or in absentia. Provided, That or where the by-laws are silent, at the time of the election. The said
the right to vote through such modes may be exercised in corporations vested stockholder may:
with public interest, notwithstanding the absence of a provision in the by-laws a. vote such number of shares for as many persons as there are directors
of such corporations. to be elected;
b. cumulate said shares and give one (1) candidate as many votes as the
A stockholder or member who participates through remote communication or number of directors to be elected multiplied by the number of the shares
in absentia, shall be deemed present for purposes of quorum. owned; or
c. distribute them on the same principle among as many candidates as
The election must be by ballot if requested by any voting stockholder or may be seen fit:
member. Provided, That the total number of votes cast shall not exceed the number of
shares owned by the stockholders as shown in the books of the corporation
multiplied by the whole number of directors to be elected. Provided, however,
Revisions: That no delinquent stock shall be voted. Unless otherwise provided in the
 The revisions here are those in red. articles of incorporation or in the by-laws, members of NON-STOCK
 There is express recognition of the founders’ share which we have CORPORATIONS may cast as many votes as there are trustees to be
discussed. They have the exclusive right to nominate any director or elected but may not cast more than one (1) vote.for one (1) candidate.
trustee, if it is reserved for the holders of founders’ shares. Nominees for directors or trustees receiving the highest number of
 There is also voting via remote communication or in absentia to keep votes shall be declared elected.
up with the developments in technology today.
The stockholders, if not exclusively reserved to holders of founders’ shares,

shall have the right to nominate any director or trustee who possesses all the
Cut-Off Date or Closing Date Is the fact that you have majority votes a guarantee that you will
This the cut-off date for those be elected as a director?
stockholders who are entitled to NO, it is not a guarantee that you will be elected because again, you have
vote. This is also known as the qualifications and disqualifications. So, even if you have all the power but
“At the time fixed in the by- closing date. you’re disqualified under the by-laws or under the law, then you will not be
laws” elected.
Example:
The stocks of a corporation Method of Voting in Non-Stock Corporation
registered in the PSE can be
OR bought and sold anytime until GR: Straight Voting (as many votes as there are trustees to be elected)
closing time. In order to avoid to EX: If cumulative voting is allowed in the AOI/By-laws
avoid that surprise where a
candidate purchases enough e.g. 6 trustees to be elected – member entitled to vote 6 votes
If the by-laws are silent, “At the shares midnight before election
time of the election” day to win. This is a circumvention Straight voting Cumulative Voting
and such practice is unfair. So, the Give 1 vote to 6 different candidates Give all 6 votes to 1 candidate or
by-laws usually provide for a cut- spread the 6 votes out as he deems fit
off where only those stockholders
are entitled to vote at a certain Method of Voting in a Non-Stock Corporation?
meeting. Kind of the same. The general rule is Straight Voting (as many votes as there
are trustees to be elected) and then the exception is if cumulative voting is
allowed in the AOI/By-laws.
Plurality of Votes
Nominees for directors or trustees receiving the highest number of votes So, for example, there are 6 trustees to be elected, member entitled to vote
will win. This is different from the majority of votes which is 50%+1. Here, 6 votes. One member times number of the trustees to be elected.
the winners are those garnering the highest number of votes even if it is not
at least 50%+1.  Straight Voting – give 1 vote to 6 different candidates
 Cumulative Voting - give all 6 votes to 1 candidate or spread the
6 votes out as he deems fit
Methods of Voting in Stock Corporations
So that’s how it is. It’s easier to understand if there is an example.
How many votes are the stockholders entitled to cast?
Such number of votes based on the shares registered in their names Please read SEC Opinion No. 9-14 because they gave examples of Straight
multiplied by the whole number of directors to be elected. voting and cumulative voting.
They can either do: Let’s go to the shares who are not entitled to vote in an election. Who are
these shareholders?
[1] Straight Voting
Vote such number of shares for as many persons as there are directors to be
Shares NOT entitled to vote in an election
elected.
Non-voting shares
[2] Cumulative Voting
Delinquent shares
 Give 1 candidate as many votes as the number of directors to be
Treasury shares
elected multiplied by the number of the shares owned; or
 Distribute them on the same principle among as many candidates as
may be seen fit. Delinquent shares are different from unpaid delinquent shares. You have to
be a certain type of delinquent to be classified as a delinquent share. So, if
Transcribed by: Elaizza Concepcion only unpaid but not yet delinquent then you can still vote but once you’re a
delinquent under the qualifications or provision of the by-laws then you are
Illustration
already not entitled to vote.
SH owns 1,000 shares; 5 directors to be elected
-the SH is entitled to cast 5,000 votes. Election
SEC. 23 xxx If no election is held, or the owners of majority of the outstanding
Straight voting Cumulative Voting Cumulative Voting capital stock or majority of the members entitled to vote are not present in
1000 votes – Candidate A for 1 candidate by distribution person, by proxy, or through remote communication or not voting in absentia
1000 votes – Candidate B at the meeting, such meeting may be ADJOURNED and the corporation shall
1000 votes – Candidate C 5,000 – Candidate A 2,500 – Candidate A proceed in accordance with Section 25 of this Code.
1000 votes – Candidate D 2,500 – Candidate B
1000 votes – Candidate E The directors or trustees elected shall perform their duties as prescribed by
law, rules of good corporate governance, and bylaws of the corporation.
If it is straight voting, you just distribute the votes equally among the
candidates. Effect if the Meeting is Adjourned
The outgoing directors or trustees shall serve in hold-over capacity
If it’s cumulative voting for one candidate, you can give all of your 5,000
shares to candidate A and if it’s cumulative voting by distribution, then you If no one will be elected or it is postponed or there is no quorum then hold-
can do whatever you like. You can distribute 5,000 shares and give it to over capacity.
anyone.
So, what is this Section 25? What is that referring to?
Under straight voting, shareholders owning a majority of 51% or more of the
shares can elect all of the directors. In that case, the minority would be
electing no one because they have so many number of votes, the majority Report on Election
shares. That is why cumulative voting was created in order to give the chance
to the minority stockholders through cumulative voting to at least give them
the opportunity to cumulate their shares and improve their chances of getting
at least one seat at the board of directors. So that’s why cumulative voting
came about because it is unfair for minority shareholders because they
cannot elect anybody or any director under straight voting.
Section 25. Report of Election of Directors, Trustees and Officers, Non- Example: If despite notices, a substantial number of stockholders are not
holding of Election and Cessation from Office. - Within thirty (30) days attending the stockholders meeting. So, if it’s a very big corporation with
after the election of the directors, trustees and officers of the corporation, the many stockholders but nobody really cares to join the meeting physically then
secretary, or any other officer of the corporation, the secretary, or any other notices are returned to the sender or no heirs or claimants claim the shares,
officer of the corporation, shall submit to the Commission, the names, nobody is acting for the shareholder, then to avoid that standstill, the RCCP
nationalities, shareholdings, and residence addresses of the directors, provides this emergency quorum for the purposes ONLY of conducting an
trustees and officers elected. election. So, don’t be misled if I put that in the exam. An emergency quorum
is ONLY for purposes of an election. There’s another type of emergency which
The non-holding of elections and the reasons therefor shall be reported to we will discuss later.
the Commission within thirty (30) days from the date of the scheduled
election. The report shall specify a new date for the election, which shall not
Proposed Interim Rules of Procedure
be later than sixty (60) days from the scheduled date.
Governing Intra-Corporate Controversies
under R.A. No. 8799, A.M. No. 01-2-04-SC, March 13, 2001
If no new date has been designated, or if the rescheduled election is likewise
not held, the Commission may, upon the application of a stockholder,
RULE 6
member, director or trustee, and after verification of the unjustifiable non-
ELECTION CONTESTS
holding of the election, summarily order that an election be held. The
Commission shall have the power to issue such orders as may be
SEC 1. Cases covered. -The provisions of this rule shall apply to election
appropriate, including other directing the issuance of a notice stating the time
contests in stock and non-stock corporations.
and place of the election, designated presiding officer, and the record date or
dates for the determination of stockholders or members entitled to vote.
SEC. 2. Definition. -An election contest refers to any controversy or dispute
involving title or claim to any elective office in a stock or non-stock
Notwithstanding any provision of the articles of incorporation or by
corporation, the validation of proxies, the manner and validity of elections,
laws to the contrary, the shares of stock or membership represented at
and the qualifications of candidates, including the proclamation of winners, to
such meeting and entitled to vote shall constitute a quorum for
the office of director, trustee or other officer directly elected by the
purposes of conducting an election under this section.
stockholders in a Close corporation or by members of a non-stock
corporation where the articles of incorporation or by-laws so provide.
Should a director, trustee or officer die, resign or in any manner case to hold
office, the secretary or the director, trustee or officer of the corporation, shall,
SEC. 3. Complaint. -In addition to the requirements in section 4, Rule 2 bf
within seven (7) days form knowledge thereof, report in writing such fact to
these Rules, the complaint in an election contest must state the following: (1)
the Commission.
The case was filed within fifteen (15) days from the date of the election if the
by-laws of the corporation do not provide for a procedure for resolution of
So, they are going to report the results of the election within 30 days. the controversy, or within fifteen (15) days from the resolution of the
controversy by the corporation as provided in its by-laws; and (2) The plaintiff
“If no new date has been designated, or if the rescheduled election is has exhausted all intra-corporate remedies in election cases as provided for
likewise not held, the Commission may, upon the application of a in the by-laws of the corporation.
stockholder, member, director or trustee, and after verification of the
unjustifiable non-holding of the election, summarily order that an election SEC. 4. Duty of the court upon the filing of the complaint. -Within two (2)
be held.” days from the filing of the complaint, the court, upon a consideration of the
allegations thereof, may dismiss the complaint outright if it is not sufficient in
Obviously, this is a new provision that they have put there to avoid people form and substance, or, if it is sufficient, order the issuance of summons
holding over their directorship without conducting elections. They are giving which shall be served, together with a copy of the complaint, on the defendant
the SEC the power to summarily order an election. That’s a big power on the within two (2) days from its issuance.
part of the SEC.
SEC. 5. Answer. -The defendant shall file his answer to the complaint,
serving a copy thereof on the plaintiff, within ten (10) days from service of
“The Commission shall have the power to issue such orders as may be
summons and the complaint. The answer shall contain the matters required
appropriate, including other directing the issuance of a notice stating the in section 6, Rule 2 of these Rules.
time and place of the election, designated presiding officer, and the record
date or dates for the determination of stockholders or members entitled to SEC. 6. Affidavits, documentary and other evidence. -The parties shall
vote.” attach to the complaint and answer the affidavits of witnesses, documentary
and other evidence in support thereof, if any.
So, aside from closing date, it is also referred to as record date. The SEC can
also determine that. SEC. 7. Effect of failure to answer. -If the defendant fails to file an answer
within the period above provided, the court shall, within ten (10) days from
“Should a director, trustee or officer die, resign or in any manner case to the lapse of said period, motu proprio or on motion, render judgment as may
hold office, the secretary or the director, trustee or officer of the be warranted by the allegations of the complaint, as well as the affidavits,
corporation, shall, within seven (7) days form knowledge thereof, report in documentary and other evidence on record. In no case shall the court award
writing such fact to the Commission.” a relief beyond or different from that prayed for.
In case of death or resignation or seizing office, report within 7 days. SEC. 8. Trial. -If the court deems it necessary to hold a hearing to clarify
specific factual matters before rendering judgment, it shall, within ten (10)
“Notwithstanding any provision of the articles of incorporation or by laws to days from the filing of the last pleading, issue an order setting the case for
the contrary, the shares of stock or membership represented at such hearing for the purpose. The order shall, in clear and concise terms, specify
meeting and entitled to vote shall constitute a quorum for purposes of the factual matters the court desires to be clarified and the witnesses, whose
affidavits have been submitted, who will give the necessary clarification. The
conducting an election under this section.”
hearing shall be set on a date not later than ten (10) days from the date of
the order and shall be completed not later than fifteen (15) days from the date
This is the provision on EMERGENCY QUORUM.
of the first hearing. The affidavit of a witness who fails to appear for
clarificatory questions of the court shall be ordered stricken off the record.
Emergency Quorum
Emergency quorum means that in certain cases, stock or membership SEC. 9. Decision. -The Court shall render a decision within fifteen (15) days
represented in a meeting called by the SEC may constitute a quorum to elect from receipt of the last pleading, or from the date of the last hearing as the
directors of a corporation even though the number of shares or members case may be. The decision shall be based on the pleadings, affidavits,
present is less than the majority of the outstanding capital stock or documentary and other evidence attached thereto and the answers of the
membership or the quorum required under the articles or the by-laws. witnesses to the clarificatory questions of the court given during the hearings.
So, meaning, the SEC can even provide a lesser number for quorum, that’s This is included but it is more on remedial, more on rules of procedure. This
the emergency quorum. When everything is so complicated already, the SEC is helpful. This involves election contests in case of elections of directors.
is given the power to decide on the emergency quorum.
They have a definition of election contest. An election contest refers to any That’s why that’s there because that’s for the stockholder to have a different
controversy or dispute involving title or claim to any elective office in a stock request. They can’t expect the secretary and the president to remove their
or non-stock corporation. friends.
For example, here, the validation of proxies, the manner and validity of The SEC can also actually remove directors if they are elected even if they
elections, and the qualifications of candidates, including the proclamation of are disqualified.
winners, and all of those.
So, this provision, “without prejudice to other sanctions”, there can be other
So, the complaint shall be filed within fifteen (15) days from the date of the sanctions which can be criminal, civil or administrative.
election if the by-laws of the corporation do not provide for a procedure for
resolution of the controversy, or within fifteen (15) days from the resolution This is the summarized version:
of the controversy by the corporation as provided in its by-laws.
Who can remove directors/trustees?
“The plaintiff has exhausted all intra-corporate remedies in election cases
as provided for in the by-laws of the corporation.” Stockholders/Members SEC
2/3 OCS Motu Proprio
This is the important provision in relation to remedial law. You must have 2/3 members Upon verified complaint and
exhausted all intra-corporate remedies in election cases before you go to after due notice and hearing
court.
Who calls for the meeting?
Removal of Directors or Trustees
Secretary
Section 27. Removal of Director or Trustees. - Any director or trustee of a 1. On order of the president, or
corporation may be removed from office by vote of the stockholders holding
2. Upon written demand of the stockholders representing majority of OCS
or representing at least two-thirds (2/3) of the outstanding capital stock,
or in a nonstock corporation, by a vote of at least two-thirds (2/3) of the stock or a majority of the members entitled to vote.
members entitled to vote: Provided, That such removal shall take place
either at a regular meeting of the corporation or at a special meeting called Can the board of directors or board of trustees remove their fellow
for the purpose, and in either case, after previous NOTICE to stockholders or directors?
members of the corporation of the intention to propose such removal at the No. They can remove officers, but they cannot remove fellow directors.
meeting. A special meeting of the stockholders or members for the purpose
of REMOVING any director or trustee must be called by the secretary on Obviously, you don’t see the majority board of directors in this provision
order of the president, or upon written demand of stockholders representing (Section 27). Diba usually that goes hand in hand, majority of the board of
or holding at least a majority of the outstanding capital stock, or a directors and 2/3 of OCS but here in this provision, you don’t see majority of
majority of the members entitled to vote. If there is no secretary, or the the board of directors because they don’t have a say in the removal. They
secretary, despite demand, fails or refuses to call the special meeting or to only call the meeting and order the meeting. They can vote as stockholders
give notice thereof, the stockholder or member of the corporation signing the but not as directors.
demand may call the special meeting or to give notice thereof, the
stockholder or member of the corporation signing the demand may call for Under SEC Opinion No. 09-06, the board of directors or trustees has no
the meeting by directly addressing the stockholders or members. Notice of power to remove one of its members as director or trustee. The reason is
the time and place of such meeting, as well as of the intention to propose
that, as officers deriving their title from the stockholders or members,
such removal, must be given by publication or by written notice prescribed in
directors or trustees can be removed ONLY by the power that appointed
this Code. Removal may be with or without cause: Provided, That removal
without cause may not be used to deprive minority stockholders or members them. Since the law expressly confers that authority to stockholders or
of the right representation to which they may be entitled under Section 23 of members, the board cannot indirectly usurp and disregard this.
this Code.
Transcribed by: Mary Grace Chew
The Commission shall, motu propio or upon verified complaint, and after I want to stress this. If the secretary does not call a meeting or refuses or
due notice and hearing, order the removal of a director or trustee elected failed to do so. It is the stockholder signing the demand who can call for the
despite the disqualification, or whose disqualification arose or is meeting. Whoever filed the complaint or the demand for the removal should
discovered subsequent to an election. The removal of a disqualified be the one who calls and presides the election. So, what are the grounds for
director shall be without prejudice to other sanctions that the Commission removal?
may impose on the board of directors or trustees who, with knowledge of the
disqualification, failed to remove such director or trustee. Grounds for Removal
 If majority director (elected by the majority shareholders)– with or
There should be a statement then that the purpose of this meeting is to without cause.
remove a director, but it is not required that you state there that, “this  If minority director (elected by the minority shareholders using via
meeting is called to remove director A”. You don’t need to specify the name cumulative voting– with cause.
of who you are going to remove as long as it states that it is a removal of a
director. You cannot remove a minority director without cause. I hope that’s clear. I
think this comes out in the bar.
“A special meeting of the stockholders or members for the purpose of
REMOVING any director or trustee must be called by the secretary on Bernas vs. Cinco
order of the president, or upon written demand of stockholders GR No. 163356 , July 1, 2015
representing or holding at least a majority of the outstanding capital
stock, or a majority of the members entitled to vote.” ISSUE: Whether or not the removal of Bernas is valid.
So, general rule, who will call? It’s the secretary. RULING: No. Under Section 18 of the Corporation Code on Removal of
Who will order? It’s the President. Trustees, it provides that A special meeting of the stockholders or members
of a corporation for the purpose of removal of directors or trustees, or any
So, what if it’s the secretary and/or the president who you want to remove? of them, must be called by the secretary on order of the president or on the
Will they ever call for a removal? I doubt. They will not. written demand of the stockholders representing or holding at least a
majority of the outstanding capital stock, or, if it be a non-stock corporation,
Therefore, this provision was added: on the written demand of a majority of the members entitled to vote
“or upon written demand of stockholders representing or holding at least a
majority of the outstanding capital stock, or a majority of the Sec 10 of MSC by-laws that Special meetings of stockholders shall be held at
members entitled to vote” the Clubhouse when called by the President or by the Board of Directors or
upon written request of the stockholders representing not less than one
hundred (100) shares. Only matters specified in the notice and call will be bring somebody from the officers of the corporation to act like a director. It
taken up at special meetings. can either be the secretary, or the treasurer if they are not directors, or the
vice president. They can pull that here by unanimous votes. But that person
But in this case MSCOC has no authority. It was not authorize to call for a have limited powers and only for that emergency action and only the
special meeting. Thus, the removal of Bernas here is not valid. existence of the emergency.
Why was it not authorized? If you screenshot this and read again the provision, you will understand ah
The MSCOC by-laws provides that only the president and the board for okay, that’s the meaning. It’s overwhelming so many words. But please read
directors are authorize to call for a special meeting. Here, there was no it again and understand where is this coming from.
authority.
Stockholder
How about the written demand from the stockholders? Were they - If by expiration of terms
not able to comply with that? How about the majority? Did they not - If by removal
try to do this? Did they have the majority support? - If by increase in number of Board seats
They have majority support but not through the written demand by the - If none of the above but the remaining directors do not constitute a
stockholders. They only seek the assistance of MSCOC to call for a special quorum
meeting. The court held here that it would be different if it has a written Ma’am: The stockholders can vote, can fill the vacancy.
demand or they sought the assistance of SEC to call for the special meeting. - If none of the above, the remaining directors constitute a quorum
but the board referred the authority to fill the vacancy to the
So if you want to have a special meeting, you really have to comply stockholders.
with the written demand requirement and you have to seek out the Ma’am: But I don’t think this happens very much. The directors like
SEC help or the commission’s help. to elect their own.
Vacancies in the Office of Director of Trustee Board of Directors (if with Quorum)
If by reason of death, retirement, resignation, withdrawal, abandonment,
Who May Fill the Vacancy? etc.
Section 28. Vacancies in the Office of Director of Trustee; Emergency
If it is the board of directors that will fill in the vacancies, when they still have
Board.- ANY VACANCY occurring in the board of directors of trustees other
than by removal or by expiration of the term may be filled by the vote of at the quorum under there circumstances, like there is death, retirement,
least a majority of the remaining directors or trustees, if still constituting a resignation, withdrawal, abandonment and the like which is not under the
quorum: OTHERWISE, said vacancies must be filled by the stockholders or *stockholders* grounds, provided it is not expiration, removal, increase in
members in a regular or special meeting called for that purpose. number of board seats. For example mental incapacity. They can fill the
vacancy if that is the case. Provided that in these 3 items (expiration,
When the vacancy is DUE TO TERM EXPIRATION, the election shall be held removal, increase in number of board seats) no quorum, then it is the
no later that the day of such expiration at a meeting called for that purpose. stockholders that will fill in the vacancy.
When the vacancy arises as a RESULT OF REMOVAL by the stockholders
or members, the election may be held on the same day of the meeting If it is by the expiration of the term, they will vote no later than the expiration.
authorizing the removal and this fact must be so stated in the agenda and Here you have a time limit as to the grounds when they have to vote. So
notice of said meeting. IN ALL OTHER CASES, the election must be held no please reconcile those. So if by expiration, the vote should be before the
later than forty-five (45) days from the time the vacancy arose. A director expiration. If by removal, it can be on the same day authoritzing removal or
or trustee elected to fill a vacancy shall be referred to as REPLACEMENT separate meeting call for that purpose. If it is an increase in the number
DIRECTOR OR TRUSTEE and shall serve only for the unexpired terms of board seat, you can vote at a regular or special meeting or in the same
the predecessor in office. meeting authorizing the increase in the number of board seat.
So you can remove as well as elect a new one in the same meeting. This Are non-voting shares included in the quorum or election? Are they
must be stated in the notice that it is removal and election. Vacancy is only including in the quorum or election? Are they included in the
for the remaining term of whoever died or resigned or removed. voting? Are they included here in the 2/3 outstanding capital stock?
Are they included in the election?
Is it mandatory to fill vacancies?
The obvious answer is no. It says “may”. As long as the remaining directors No. The non-voting shares are no longer included because they can be
or trustees still constitute a quorum, they can still not fill it immediately. There deprived of the right to vote in an election. This is outside the 8 cases where
is no time limit within which to elect a new one except in TERM EXPIRATION, the non-voting shares are required to vote. So because they are deprived of
RESULT OF REMOVAL and IN ALL OTHER CASES, it must be within 45 days. voting in an election, don’t use them or add them in the quorum requirement
because they are non-voting shares.
Section 28. xxx However, when the vacancy prevents the remaining
directors from constituting a quorum and emergency action is required to We have here an illustration. I did not put the answer first because I want
prevent grave, substantial and irreparable loss or damages to the you to figure this out.
corporation, the vacancy may be temporarily filled from among the officers of
the corporation by unanimous vote of the remaining directors or trustee. Illustration: 10 directors.
The action by the designated director or trustee shall be limited to the
emergency action necessary and the term shall cease within a reasonable 1. 4 resigned. Can the remaining 6 fill the 4 vacancies?
time from the termination of the emergency or upon election of the Yes. 6 directors constitute a quorum. So they can fill the 4
replacement director of trustee, WHICHEVER COMES EARLIER. The vacancies.
corporation must notify the Commission within three (3) days from the 2. If only 5 attended. Can the 4 fill the vacancies?
creation of the emergency board, stating therein the reason for its creation. Yes, because the law does not require the majority of the entire
EMERGENCY BOARD Any directorship or trusteeship to be filled by reason board to fill the vacancy. The majority of the remaining directors
of an INCREAE IN THE NUMBER OF DIRECTORS OR TRUSTEE shall be
present, if still constituting a quorum, may fill the vacancies.
filled only by an election as a regular or at a special meeting of stockholders
or members, duly called for
They still have the quorum. It is just that they did not appear at
the purpose, or in the same meeting authorizing the increase of directors of that time. Quorum in that case refers to the people still holding
trustees if so stated in the notice of the meeting. directorship position not present in the meeting but the number
of the directors are still constituting a quorum.
In all election to fill vacancies under this section, the procedure set forth in
Sections 23 and 25 of this Code shall apply. 3. If 6 resigned. Can the 4 fill the vacancies?
No. The SH must fill the vacancies because the remaining
directors do not constitute a quorum.
This is what they call as Emergency Board different from emergency quorum.
Emergency board in case they do not have the quorum anymore, they can
As to quorum: (2nd example) Compensation of the BOD/BOT
This is the important part is quorum meaning not the present in the meeting
Section 29. Compensation of Directors or Trustees. – In the absence of any
but the number of still existing directors. Hopefully that is understood. provision in the by-laws fixing their compensation, the directors or trustees
shall not receive any compensation in their capacity as such, except for
Tan vs. Sycip reasonable per diems: Provided however, that the stockholders
499 SCRA 216 representing at least a majority of the outstanding capital stock or
majority of the members may grant directors or trustees with compensation
Vacancy in the Board of Trustees and approve the amount thereof at a regular or special meeting, in no case
As regards the filling of vacancies in the board of trustees, Section 29 of the shall the TOTAL YEARLY COMPENSATION of directors exceed ten (10%)
Corporation Code provides: percent of the net income before income tax of the corporation during the
preceding year.
"SECTION 29. Vacancies in the office of director or trustee. -- Any vacancy
occurring in the board of directors or trustees other than by removal by the Directors or trustees shall not participate in the determination of their
stockholders or members or by expiration of term, may be filled by the vote own per diems or compensation.
of at least a majority of the remaining directors or trustees, if still constituting
Corporations vested with public interest shall submit to their
a quorum; otherwise, said vacancies must be filled by the stockholders in a
shareholders and the Commission, an annual report of the total
regular or special meeting called for that purpose. A director or trustee so
compensation of each of their directors or trustees.
elected to fill a vacancy shall be elected only for the unexpired term of his
predecessor in office."
Per diems means each day. It is a specific amount a corporation or
Undoubtedly, trustees may fill vacancies in the board, provided that those organization gives an individual per day to cover living expenses when
remaining still constitute a quorum. The phrase "may be filled" in Section 29 travelling and attending board meetings. The reasonableness depends on the
shows that the filling of vacancies in the board by the remaining directors or amount, stature of the directors, the income and the size of the corporation
trustees constituting a quorum is merely permissive, not mandatory. 48 and other related considerations.
Corporations, therefore, may choose how vacancies in their respective boards
may be filled up -- either by the remaining directors constituting a quorum, In the old Corporation Code, it says “in no case shall the total yearly
or by the stockholders or members in a regular or special meeting called for compensation as such directors exceed ten percent”, in the RCCP, it does not
the purpose. 49 say “as such directors”. Meaning, the ten percent limitation applies to all
forms of compensation for services rendered by the directors or trustees to
The By-Laws of GCHS prescribed the specific mode of filling up existing the corporation in whatever capacity. If you’re a director and a president,
vacancies in its board of directors; that is, by a majority vote of the remaining your total compensation for both should not exceed 10%. Before, you receive
members of the board. 50 salary as a president AND you receive compensation not exceeding 10% as
a director.
While a majority of the remaining corporate members were present,
however, the "election" of the four trustees cannot be legally upheld for the WESTERN INSTITUTE OF TECHNOLOGY v SALAS
obvious reason that it was held in an annual meeting of the members, not of
the board of trustees. We are not unmindful of the fact that the members of FACTS: According to petitioners, the minority stockholders of WIT, sometime
GCHS themselves also constitute the trustees, but we cannot ignore the on June 1, 1986 in the principal office of WIT at La Paz, Iloilo City, a Special
GCHS bylaw provision, which specifically prescribes that vacancies in the Board Meeting was held. In said meeting, the Board of Trustees passed
board must be filled up by the remaining trustees. In other words, these Resolution No. 48, s. 1986, granting monthly compensation to the private
remaining member-trustees must sit as a board in order to validly elect the respondents as corporate officers (Chairman, Vice Chairman, Corporate
new ones. Treasurer and Corporate Secretary) and retroactive June 1, 1985.
Indeed, there is a well-defined distinction between a corporate act to be done ISSUE: Whether the compensation of the board of directors as stated in
by the board and that by the constituent members of the corporation. The Resolution No. 48, series of 1996 violates Section 30 of the Corporation
board of trustees must act, not individually or separately, but as a body in a Code? - NO.
lawful meeting. On the other hand, in their annual meeting, the members
may be represented by their respective proxies, as in the contested annual Ruling:
members’ meeting of GCHS. The pertinent section of the Corporation Code provides:
Sec. 30. Compensation of directors — In the absence of any provision in the
Transcribed by: Faith Campaner, Jabb Balindong, and Carlo Bahalla by-laws fixing their compensation, the directors shall not receive any
compensation, as such directors, except for reasonable per diems: Provided,
Here, there is a clear distinction between directorship and being a however, That any such compensation (other than per diems) may be
stockholder. Now that I think about it, if you have a family corporation granted to directors by the vote of the stockholders representing at least a
wherein five members mo, and the father or mother dies, then you’d have to majority of the outstanding capital stock at a regular or special stockholders'
fill in the vacancy applying this provision. meeting. In no case shall the total yearly compensation of directors, as such
directors, exceed ten (10%) percent of the net income before income tax of
the corporation during the preceding year.
Requisites for Emergency Board (Sec. 28)
1. The vacancy prevents the remaining directors from constituting a There is no argument that directors or trustees, as the case may be, are not
quorum entitled to salary or other compensation when they perform nothing more
2. Emergency action is required to prevent grave, substantial, and than the usual and ordinary duties of their office. This rule is founded upon
irreparable loss or damage to the corporation a presumption that directors/trustees render service gratuitously, and that
3. The vacancy may be temporarily filled from among the officers of the return upon their shares adequately furnishes the motives for service,
the corporation without compensation. Under the foregoing section, there are only two (2)
4. The appointment must be made by unanimous vote of the ways by which members of the board can be granted compensation apart
remaining directors or trustees from reasonable per diems:
a. when there is a provision in the by-laws fixing their compensation; and
Limitations: b. when the stockholders representing a majority of the outstanding
 Acts limited to the emergency action necessary capital stock at a regular or special stockholders' meeting agree to give
 Term limited to a reasonable time after the termination of the it to them.
emergency or upon election of the replacement director or
trustee, WHICHEVER COMES EARLIER This proscription, however, against granting compensation to
directors/trustees of a corporation is not a sweeping rule. Worthy of note is
Notice the clear phraseology of Section 30 which states: ". . . [T]he directors shall
The corporation must notify the Commission within three (3) days from the not receive any compensation, as such directors, . . . ." The phrase as
creation of the emergency board, stating therein the reason for its creation. such directors is not without significance for it delimits the scope of the
prohibition to compensation given to them for services performed purely in
their capacity as directors or trustees. The unambiguous implication is that Why can’t the president hold the position of secretary and treasurer
members of the board may receive compensation, in addition to reasonable at the same time?
per diems, when they render services to the corporation in a capacity other Because it gives too much leeway and freedom in transactions without the
than as directors/trustees. proper check and balance.
In the case at bench, Resolution No. 48, s. 1986 granted monthly The Chairman of the Board of Directors can also be the president, which is
compensation to private respondents not in their capacity as members of the usually the case.
board, but rather as officers of the corporation, more particularly as
Chairman, Vice-Chairman, Treasurer and Secretary of Western Institute of How about the compliance officer?
Technology. Clearly, therefore, the prohibition with respect to granting Although the RCCP does not state so, the president and compliance officer
compensation to corporate directors/trustees as such under Section 30 is not should not be the same person because the latter is also a full time position.
violated in this particular case. Consequently, the last sentence of Section 30 Under SEC Memorandum Circular 19-16, for publicly listed companies, the
which provides: chairman and the CEO should be held by different individuals and each should
have clearly defined responsibilities.
In no case shall the total yearly compensation of directors, as such directors,
exceed ten (10%) percent of the net income before income tax of the SEC MEMORANDUM CIRCULAR 19-16
corporation during the preceding year. For publicly-listed companies, the Chairman and the CEO should be held by
different individuals and each should have clearly defined responsibilities.
Does not likewise find application in this case since the compensation is being This is intended to avoid conflict or a split board and foster an appropriate
given to private respondents in their capacity as officers of WIT and not as balance of power, peace, accountability, and better capacity for better
board members. decision-making.
Corporate Officers May officers be foreigners? Can the President be a foreigner?

Yes. Because the only requirement is that he must be a director. However,
Section 25. Corporate Officers. – Immediately after their election, the
the secretary cannot be a foreigner.
directors of a corporation must formally organize and elect: (a) a president,
who must be a director; (b) a treasurer, who must be a resident; (c) a
secretary, who must be a citizen and resident of the Philippines; and (d) But again, the corporate officers are still subject to the Anti-Dummy Law. So,
such other officers as may be provided in the bylaws. If the 60-40 number of foreign directors should still be followed in their roster of
CORPORATION IS VESTED WITH PUBLIC INTEREST, the board shall also officers.
elect a compliance officer. The same person may hold two (2) or more
positions concurrently, except that no one shall act as president and A provision of the Anti-Dummy Law:
secretary or as president and treasurer at the same time, unless PRESIDENTIAL DECREE No. 715 May 28, 1975
otherwise allowed in this Code. The officers shall manage the
corporation and perform such duties as may be provided in the bylaws AMENDING COMMONWEALTH ACT NO. 108, AS AMENDED,
and/or as resolved by the board of directors. OTHERWISE KNOWN AS "THE ANTI-DUMMY LAW"
Under the CCP, the qualification of a treasurer was “who may or may not be Section 1. Sec. 2-A of Commonwealth Act No. 108, as amended, is hereby
a director”. But now, they have provided that a treasurer and the secretary further amended to read as follows:
must be a resident, but only the secretary must be a citizen.
"Sec. 2-A. Any person, corporation, or association, which, having in its name
or under its control, a right, franchise, privilege, property or business, the
The exception “unless otherwise allowed in this Code”, with reference to
exercise or enjoyment of which is expressly reserved by the Constitution or
holding the positions of president and secretary or president and treasurer the laws to citizens of the Philippines or of any other specific country, or to
concurrently, is added because we already have the concept of a One Person corporations or associations at least sixty per centum of the capital of which
Corporation. So, obviously the president can be the secretary and the is owned by such citizens, permits or allows the use, exploitation or
treasurer since there is only one shareholder. But in that case, the president enjoyment thereof by a person, corporation or association not possessing the
can be a treasurer but he or she is required to give a bond. requisites prescribed by the Constitution or the laws of the Philippines; or
leases, or in any other way, transfers or conveys said right, franchise,
Who appoints the corporate officers? privilege, property or business to a person, corporation or association not
It is the directors, by a majority vote of all of its members. (Sec. 52) otherwise qualified under the Constitution, or the provisions of the existing
laws; or in any manner permits or allows any person, not possessing the
The director must have one share as a continuing requirement, so a president qualifications required by the Constitution, or existing laws to acquire, use,
must have that one share. To add to these, you must have all the exploit or enjoy a right, franchise, privilege, property or business, the exercise
qualifications and none of the disqualifications in the bylaws. and enjoyment of which are expressly reserved by the Constitution or existing
laws to citizens of the Philippines or of any other specific country, to intervene
Note that unlike the board of directors and board of trustees which has no in the management, operation, administration or control thereof, whether as
more residency and citizenship requirement, here the treasurer and secretary an officer, employee or laborer therein with or without remuneration except
has those requirements. technical personnel whose employment may be specifically authorized by the
Secretary of Justice, and any person who knowingly aids, assists, or abets in
These requirements under Section 25 cannot be omitted in the bylaws the planning, consummation or perpetration of any of the acts herein above
enumerated shall be punished by imprisonment for not less than five nor
because they are the minimum requirements.
more than fifteen years and by a fine of not less than the value of the right,
franchise or privilege enjoyed or acquired in violation of the provisions hereof
Should the secretary be a lawyer? but in no case less than five thousand pesos: Provided, however, that the
No, the only requirement under RCCP is that he is a resident and a citizen. president, managers or persons in violating the provisions of this section shall
However, we must check SEC Memorandum Circular 06-09 which provides be criminally liable in lieu thereof: Provided, further, That any person,
for the Revised Code of Corporate Governance. It has there more corporation or association shall, in addition to the penalty imposed herein,
qualifications for entities which are publicly listed, or companies that (a) sell forfeit such right, franchise, privilege and the property provisions of this Act;
securities, (b) have assets of 50M or at least 200 stockholders owning at least and Provided, finally, That the election of aliens as members of the board of
100 stocks, (c) listed in the Philippine Stock Exchange and (d) grantees of directors or governing body of corporations or associations engaging in
secondary licenses from SEC. partially nationalized activities shall be allowed in proportion to their allowable
participation or share in the capital of such entities.
Under SEC Opinion 10-17, if the corporation is covered by the Revised Code
of Corporate Governance then the Corporate Secretary also acts as a It is prohibited for foreigners to intervene in the management, operation,
compliance officer then it is preferred that the Corporate Secretary is a administration, or control of the corporation except technical personnel
lawyer. whose employment may be specifically authorized by the Secretary of Justice.
So, that’s why corporate officers are still subject to anti-dummy law except
So, if you’re a publicly listed entity and you are vested with public interest, technical personnel.
then it is preferred that the Corporate Secretary is a lawyer.
PEOPLE’S AIRCARGO & WAREHOUSING v. CA Removal of Corporate Officers
MATLING INDUSTRIAL v. COROS
ISSUE: Since no Board resolution is issued expressly authorizing the G.R. No. 157802 October 13, 2010
President in signing or confirming the second contract, whether or not the
isolated previous agreement without a board resolution expressly authorizing Conformably with Section 25, a position must be expressly mentioned in the
its President clothed the latter with apparent authority as to bind People’s By-Laws in order to be considered as a corporate office. Thus, the creation
Aircargo with the second contract. of an office pursuant to or under a By-Law enabling provision is not enough
to make a position a corporate office. Only officers of a corporation were
HELD: The Supreme Court held yes. those given that character either by the Corporation Code or by the By-Laws;
the rest of the corporate officers could be considered only as employees or
People’s Aircargo is liable to Sao despite the absence of board resolution subordinate officials.
expressly granting the President to confirm the agreement under its apparent
authority because eventhough it was only a single instance that they allowed An "office" is created by the charter of the corporation and the officer is
Punsalan to sign the contract, it was considered as under his apparent elected by the directors or stockholders. On the other hand, an employee
authority. occupies no office and generally is employed not by the action of the directors
or stockholders but by the managing officer of the corporation who also
Apparent Authority determines the compensation to be paid to such employee.
Existence of apparent authority may be ascertained through:
a) the general manner in which the corporation holds out an officer or In this case, respondent was appointed vice president for nationwide
agent as having the power to act or, in other words, the apparent expansion by the general manager, not by the board of directors of
authority to act in general, with which it clothes him; or petitioner. It was also the general manager who determined the
b) the acquiescence in his acts of a particular nature, with actual or compensation package of respondent. Thus, respondent was an employee,
constructive knowledge thereof, whether within or beyond the scope of not a "corporate officer." The case was properly with the NLRC, not the
his ordinary powers. SEC (now the RTC).
In this case, People’s Aircargo did not object or repudiate the first contract, Corporate officers are the President, Secretary, Treasurer and such other
thus clothing its president with the power to bind the corporation. Moreover, officers as may be provided for in the By-Laws. Accordingly, the corporate
it must be noted here that the first contract was consummated, implemented, officers in the context of PD No. 902-A are exclusively those who are given
and paid. that character either by the Corporation Code or by the corporation’s By-
Laws.
The Supreme Court also took consideration the nature of the President’s
position. It stated that the strict rule that said officer has no inherent power A different interpretation can easily leave the way open for the Board of
to act for the corporation is slowly giving way to the realization that such Directors to circumvent the constitutionally guaranteed security of tenure of
officer has certain limited powers in the transaction of the usual and ordinary the employee by the expedient inclusion in the By-Laws of an enabling clause
business of the corporation. In the absence of a charter or bylaw provision on the creation of just any corporate officer position.
to the contrary, the president is presumed to have the authority to act within
the domain of the general objectives of its business and within the scope of Whoever are the corporate officers enumerated in the by-laws are the
his or her usual duties. exclusive Officers of the corporation and the Board has no power to create
other Offices without amending first the corporate By-laws. However, the
The president of a corporation possesses the power to enter into a contract Board may create appointive positions other than the positions of corporate
for the corporation when the conduct on the part of both the president and Officers, but the persons occupying such positions are not considered as
the corporation shows that he had been in the habit of acting in similar corporate officers within the meaning of Section 25 of the Corporation Code
matters on behalf of the company and that the company had authorized him and are not empowered to exercise the functions of the corporate Officers,
so to act and had recognized, approved and ratified his former and similar except those functions lawfully delegated to them. Their functions and duties
actions. are to be determined by the Board of Directors/Trustees.
In this case again, the first contract was not repudiated or objected to by the Moreover, the Board of Directors of Matling could not validly delegate
corporation. Also, it was ratified because the corporation already received or the power to create a corporate office to the President, in light of
accepted the benefits from Sao. Section 25 of the Corporation Code requiring the Board of Directors itself to
elect the corporate officers. Verily, the power to elect the corporate officers
Can the by-laws designate 3 corporate officers as President? was a discretionary power that the law exclusively vested in the Board of
No. To allow three corporate officers to which would hold as President could Directors, and could not be delegated to subordinate officers or agents. The
mislead and create confusion as to who should perform the duties office of Vice President for Finance and Administration created by Matling’s
enumerated by the law to be performed by the President and as to whom President pursuant to By Laws was an ordinary, not a corporate, office.
such affirmation, qualification, and disqualification must apply. So, you
cannot have two or more presidents. There can only be one. Who appointed this person?
The one who appointed this position is the General Manager.
Now, you have the CEO, CFO, COO. So, you can have these new officers.
They have properly delineated their functions and responsibilities. These are What’s the requirement under the RCCP?
allowed. Under the RCCP, the position must be stated in the by-laws and the person
must be appointed by the board of directors for it to be considered as a
May the board create positions and offices? corporate officer.
 The board can create ordinary positions and offices, and even
departments under their Business Judgment Rule. So, aside from being in the by-laws, you have to be appointed by the board
 However, the Board has NO power to create corporate officers without of directors as well and not by the general manager.
first amending their by-laws to include therein the newly-created
corporate office.
So, they cannot just create offices. They have to amend their by-laws- to
include the name and the position in the by-laws. Though the board may
create appointive positions, the persons occupying such positions cannot be
viewed as corporate officer under Section 24.
In the case of Matling Industrial vs. Coros, a position must be expressly

mentioned in the by-laws in order to be considered as a corporate office.
WESLEYAN UNIVERSITY v. MAGLAYA, SR. allows third persons to believe his agents possesses. (Lewis vs. Michigan
Millers Mutual Inc. Co.)
ISSUE: Whether or not NLRC has jurisdiction over the case involving removal
of a corporate officer and where the nature of the controversy is an intra- Apparent Authority thus must be determined by the acts of the principal
corporate dispute. rather than the acts of the agent. (Nowak vs. Capital Motors)
RULING: No. It has no jurisdiction. Jurisdiction rests with the regular courts. So, it’s like blaming the principal for having clothed this person with apparent
authority. So, you look at the acts of the principal rather than the agent.
The Supreme Court ruled that the said issue revolves around the question on
whether Maglaya is a corporate officer or a mere employee for purposes of Definition under the Philippine jurisprudence:
identifying an intra-corporate controversy. The Court held that Maglaya as
president is one of the officers of the corporation. The doctrine of apparent Authority provides that a corporation will be
estopped from denying the agent’s authority if it knowingly permits one of
Under the By-laws of the WUP, it is stated there, specifically under Section its officers or any other agent to act within the scope of an apparent
2: authority, and it holds him out to the public as possessing the power to do
Section 2. Membership xxx President of the Wesleyan University-Philippines those acts. (People’s Aircargo vs. CA, G.R. No. 117847, 1998)
shall be honorary members of the Board.
Requisites of Doctrine of Apparent Authority
It is apparent from the By-laws of WUP that the president was one of the 1. The acts of the respondents justifying belief in the agency by the
officers of the corporation and was an honorary member of the Board. He petitioner;
was appointed by the Board and not by a managing officer of the corporation. 2. Knowledge thereof by the respondent which is sought to be held; and
Moreover, the office was specifically mentioned on the by-laws. 3. Reliance thereon by the petitioner consistent with ordinary care and
prudence
Since it is established that Maglaya is a corporate officer, we now proceed to  Respondent refers to the corporation
the issue of dismissal:  Petitioner refers to third person
A corporate officer's dismissal is always a corporate act, or an intra-corporate
controversy which arises between a stockholder and a corporation, and the INTER-ASIA INVESTMENTS INDUSTRIES VS. CA
nature is not altered by the reason or wisdom with which the Board of
Directors may have in taking such action. The issue of the alleged termination ISSUE: WON the President has apparent authority. – YES, the President
involving a corporate officer, not a mere employee, is not a simple labor of Inter-Asia has apparent authority to bind the corporation.
problem but a matter that comes within the area of corporate affairs and
management and is a corporate controversy in contemplation of the Authority; General Rule and Exception
Corporation Code. The general rule is that, in the absence of authority from the board of
directors, no person, not even its officers, can validly bind a corporation.
The long-established rule is that the jurisdiction over a subject matter is
conferred by law. Regional trial courts exercise exclusive jurisdiction over all SEC. 23. The Board of Directors or Trustees. - Unless otherwise provided in
controversies in the election or appointment of directors, trustees, officers or this Code, the corporate powers of all corporations formed under this Code
managers of corporations, partnerships or associations, and the same applies shall be exercised, all business conducted and all property of such
in the case at bar. corporations controlled and held, by the board of directors or trustees x x x.
To emphasize, the determination of the rights of a corporate officer dismissed However, the board of directors may validly delegate some of its functions
from his employment, as well as the corresponding liability of a corporation, and powers to officers, committees or agents.
if any, is an intra-corporate dispute subject to the jurisdiction of the regular
courts and not with the NLRC. Apparent Authority
A corporate officer or agent may represent and bind the corporation in
Can the Board delegate its power? transactions with third persons to the extent that the authority to do so has
 A corporation exercises its power and conducts its business through its been conferred upon him. This includes powers as, in the usual course of the
board of directors. particular business, are incidental to, or may be implied from, the powers
 However, the board of directors may validly delegate its functions and intentionally conferred, powers added by custom and usage, as usually
powers to its officers and its agents. pertaining to the particular officer or agent, and such apparent powers as the
corporation has caused person dealing with the officer or agent to believe
So, they can delegate some of their powers to their officers and employees. that it has conferred.
Relate this to your lessons in BUSORG-1 regarding Agency. Apparent authority is derived not merely from practice. Its existence may be
ascertained through:
So, nonetheless, the law and the jurisprudence recognize actual authority 1. the general manner in which the corporation holds out an officer or
and apparent authority as two types of authorities conferred upon a agent as having the power to act.
corporate officers or agents in dealing with third persons. The general 2. the acquiescence in his acts of a particular nature, with actual or
principles of agency governing the relationship between the corporation and constructive knowledge thereof, within or beyond the scope of his
representatives. ordinary powers.
Actual authority can either be expressed or implied. Express actual In the case at bar, as correctly argued by Asia Industries, an officer of a
authority refers to the power delegated to the agents by the corporation corporation who is authorized to purchase the stock of another corporation
while and agent’s implied authority can be measured by his or her prior has the implied power to perform all other obligations arising therefrom, such
acts which have been ratified by the corporation whose benefit have been as payment of the shares of stock. By allowing its president to sign the
accepted by the corporation. Agreement on its behalf, Inter-Asia clothed him with apparent capacity to
perform all acts which are expressly, impliedly and inherently stated therein.
On the other hand, apparent authority is based on the principle of
estoppel. Inter-Asia discusses apparent authority. It has the definition and
enumeration of apparent authority.
Doctrine of Apparent Authority
Definitions under the American Jurisprudence:
“Apparent authority” is not actual authority but is the authority the agent
is held out by the principal as possessing: it is a matter of appearances on
which third parties come to rely. Apparent authority is that semblance of
authority which a principal, through his own acts or inadvertence, causes or
BANATE v PHILIPPINE COUNTRYSIDE RURAL BANK Apparent authority is derived not merely from practice. Its existence may be
ascertained through:
ISSUE: Whether or not PCRB should be held liable for Mondigo’s (1) the general manner in which the corporation holds out an officer or
commitment– NO, PCRB cannot be held liable because Mondigo had agent as having the power to act or, in other words, the apparent
no apparent authority. authority to act in general, with which it clothes him; or
(2) the acquiescence in his acts of a particular nature, with actual or
Doctrine of Apparent Authority constructive knowledge thereof, whether within or beyond the scope of
Under the doctrine of apparent authority, acts and contracts of the agent, as his ordinary powers.
are within the apparent scope of the authority conferred on him, although no
actual authority to do such acts or to make such contracts has been It requires presentation of evidence of similar acts executed either in its favor
conferred, bind the principal. The principal’s liability, however, is limited only or in favor of other parties. It is not the quantity of similar acts which
to third persons who have been led reasonably to believe by the conduct of establishes apparent authority, but the vesting of a corporate officer with the
the principal that such actual authority exists, although none was given. In power to bind the corporation.
other words, apparent authority is determined only by the acts of the
principal and not by the acts of the agent. There can be no apparent authority The doctrine does not apply, however, if the principal did not commit any act
of an agent without acts or conduct on the part of the principal; such acts or or conduct which a third party knew and relied upon in good faith as a result
conduct must have been known and relied upon in good faith as a result of of the exercise of reasonable prudence.
the exercise of reasonable prudence by a third party as claimant, and such
acts or conduct must have produced a change of position to the third party’s The aforementioned circumstances are lacking and, indubitably, neither did
detriment. PNCDC act in good faith.
In the present case, the decision of the trial court was utterly silent on the Also, it must be stressed that the board of directors, not the president,
manner by which PCRB, as supposed principal, has "clothed" or "held out" its exercises corporate power. While in the absence of a charter or bylaw
branch manager as having the power to enter into an agreement, as claimed provision to the contrary the president is presumed to have authority, the
by petitioners. No proof of the course of business, usages and practices of questioned act should still be within the domain of the general objectives of
the bank about, or knowledge that the board had or is presumed to have of, the company's business and within the scope of his or her usual duties.
its responsible officers’ acts regarding bank branch affairs, was ever adduced
to establish the branch manager’s apparent authority to verbally alter the Here, PRHTAI is an association of professional horse trainers in the Philippine
terms of mortgage contracts. Neither was there any allegation, much less horse racing industry organized as a non-stock corporation and it is
proof, that PCRB ratified Mondigo’s act or is estopped to make a contrary committed to the uplifting of the economic condition of the working sector of
claim. the racing industry. It is not in its ordinary course of business to enter into
housing projects, especially not in such scale and magnitude so massive as
Power To Modify Or Nullify Corporate to amount to P101,150,000.00.
Contracts Remains Generally In The Board Of Directors
Further, we would be unduly stretching the doctrine of apparent authority Doctrine of apparent authority is not applicable against the Philippine Race
were we to consider the power to undo or nullify solemn agreements validly Horse Trainer’s Assoc. Inc. in the Construction Contract entered into by its
entered into as within the doctrine’s ambit. Although a branch manager, President Catajan with Fil-estate sans the PRHTA’s board of director’s express
within his field and as to third persons, is the general agent and is in general authorization. It must be stressed that the board of directors, not the
charge of the corporation, with apparent authority commensurate with the president, exercises corporate power. While in the absence of a charter or
ordinary business entrusted him and the usual course and conduct bylaw provision to the contrary the president is presumed to have authority,
thereof, yet the power to modify or nullify corporate contracts remains the questioned act should still be within the domain of the general objectives
generally in the board of directors. Being a mere branch manager alone is of the company's business and within the scope of his or her usual duties.
insufficient to support the conclusion that Mondigo has been clothed with
"apparent authority" to verbally alter terms of written contracts, especially Here, PRHTA is engaged in training horses. It is not within its ordinary course
when viewed against the telling circumstances of this case: the unequivocal of business to engage in housing project or construction business. Hence,
provision in the mortgage contract; PCRB’s vigorous denial that any there can be no apparent authority of Catajan in the Construction contract.
agreement to release the mortgage was ever entered into by it; and, the fact
that the purported agreement was not even reduced into writing considering UNIVERSITY OF MINDANAO v.
its legal effects on the parties’ interests. To put it simply, the burden of BANGKO SENTRAL NG PILIPINAS, ET AL.
proving the authority of Mondigo to alter or novate the mortgage contract
has not been established. Petalcorin did not have the authority to transact in behalf of
University of Mindanao, and as such University of Mindanao is not
It is a settled rule that persons dealing with an agent are bound at their peril, bound by the Mortgage Contracts.
if they would hold the principal liable, to ascertain not only the fact of agency
but also the nature and extent of the agent’s authority, and in case either is DOCTRINE OF APPARENT AUTHORITY
controverted, the burden of proof is upon them to establish it. As parties to This court has recognized presumed or apparent authority or capacity to bind
the mortgage contract, the petitioners are expected to abide by its terms. corporate representatives in instances when the corporation, through its
The subsequent purported agreement is of no moment, and cannot prejudice silence or other acts of recognition, allowed others to believe that persons,
PCRB, as it is beyond Mondigo’s actual or apparent authority, as above through their usual exercise of corporate powers, were conferred with
discussed. authority to deal on the corporation’s behalf.
The court explains that the Power to modify or nullify corporate The doctrine of apparent authority does not go into the question of the
contracts remains generally in the board of directors. corporation’s competence or power to do a particular act. It involves the
question of whether the officer has the power or is clothed with the
*Maam skipped the case of Advance Paper Corp v Arma Traders Corp. appearance of having the power to act for the corporation. A finding that
there is apparent authority is not the same as a finding that the corporate
PHILIPPINE RACE HORSE TRAINER'S ASSOCIATION, INC., v. act in question is within the corporation’s limited powers.
PIEDRAS NEGRAS CONSTRUCTION AND DEVELOPMENT
CORPORATION The rule on apparent authority is based on the principle of estoppel. The Civil
Code provides:
Doctrine of Apparent Authority is not applicable.
The doctrine of apparent authority provides that a corporation will be ART. 1431. Through estoppel an admission or representation is rendered
estopped from denying the agent's authority if it knowingly permits one of conclusive upon the person making it, and cannot be denied or disproved as
its officers or any other agent to act within the scope of an apparent against the person relying thereon.
authority, and it holds him out to the public as possessing the power to do
those acts. ART. 1869. Agency may be express, or implied from the acts of the principal,
from his silence or lack of action, or his failure to repudiate the agency,
knowing that another person is acting on his behalf without authority.
While the corporation may ratify the unauthorized act of its corporate officer,
There can be no apparent authority and the corporation cannot be estopped impliedly or expressly, taking out a loan or borrowing money requires a
from denying the binding effect of an act when there is no evidence pointing special power of attorney. In this case, there was no special power of
to similar acts and other circumstances that can be interpreted as the attorney conferring authority on De Villa. On its face, the loans were personal
corporation holding out a representative as having authority to contract on loans taken out by De Villa. The promissory notes evidencing the loans (who
its behalf. In Advance Paper Corporation v. Arma Traders Corporation, this was the President of ECMC) as borrower did not indicate in what capacity he
court had the occasion to say: was signing them. There was no mention also of the corporation.
The doctrine of apparent authority does not apply if the principal THE ACT OF DE VILLA WAS NOT RATIFIED BY ECMC EVEN WHEN IT
did not commit any acts or conduct which a third party knew and ADMITTED IN THE PRE-TRIAL THAT IT RECEIVED THE P1.3M LOAN.
relied upon in good faith as a result of the exercise of reasonable 1. Even if it received the money, it was not tantamount to ratification
prudence. Moreover, the agent’s acts or conduct must have because the money was received as an investment of De Villa.
produced a change of position to the third party’s detriment. 2. There was no showing that ECMC ever authorized de Villa to obtain the
loans on its behalf. The notes did not show that De Villa acted on behalf
Saturnino Petalcorin’s authority to transact on behalf of petitioner cannot be of ECMC. ECMC was a stranger to the transaction.
presumed based on a Secretary’s Certificate and excerpt from the minutes of 3. Yasuma himself did not consider the corporation to be his debtor
the alleged board meeting that were found to have been simulated. These because he allowed De Villa to make out the promissory notes as if it
documents cannot be considered as the corporate acts that held out were his personal liability.
Saturnino Petalcorin as petitioner’s authorized representative for mortgage 4. ECMC could not have ratified the act because there was no proof that
transactions. They were not supported by an actual board meeting. De Villa took the loan on ECMC’s behalf. Ratification is a voluntary
choice that is knowingly made. ECMC could not have ratified an act
it had no knowledge of.
Skipped Engineering Geosciences Inc v Philippine Savings Bank, and Kwok v
5. It merely accepted the loans in good faith which is always presumed in
Phil Carpet Manufacturing Corp.
the absence of showing of bad faith on the part of ECMC.
6. ECMC is not liable for the subsequent loss of money which it accepted
Review: Based on these cases, the doctrine of apparent authority will not
as an investment. As long as the investment was used for legitimate
apply if the transaction is not part of the function of the officer within the
corporate purposes, the investor bore the risk of loss.
corporation and or the transaction is not related to the purpose of the
corporation.
Since the loan was not ratified by ECMC, the mortgage which was
the accessory contract of the loan is also not ratified by ECMC.
As a simple example, the officer of the corporation in charged with the
Therefore, the loan nor the mortgage were not binding on ECMC. It
administration of the facilities can never bind the corporation for contract’s
cannot be held liable. A Special Power of attorney is necessary to create
relating to investment and securities as the latter transaction is not related
or convey real rights over immovable property. Furthermore, the special
to the function of the officer of the corporation. For the act to be binding, it
power of attorney must appear in a public document. In the absence of a
must be within the officer’s apparent scope of authority.
special power of attorney in favor of de Villa as president of the corporation,
no valid mortgage could have been executed by him. Since the mortgage
Doctrine of Estoppel/Ratification was void, it could not be ratified.
“Ratification” is a voluntary and deliberate confirmation or adoption of a
previous unauthorized act. It converts the unauthorized act of an agent into Transcribed by: Leah Aying
an act of the principal. It cures the lack of consent at the time of the execution In this case, the Court said, the principal, aside from being a voluntary act,
of the contract entered into by the representative, making the contract valid it must be with knowledge, done with knowledge. Here the Court said that
and enforceable. It is, in essence, consent belatedly given through express the principal must have full knowledge at the time of the ratification of all
or implied acts that are deemed a confirmation or waiver of the right to material facts and circumstances relating to the unauthorized act. If the
impugn the unauthorized act. Ratification has the effect of placing the material facts were suppressed or unknown, then there can be no valid
principal in a position as if he or she signed the original contract. (University ratification. This applies in all our contracts wherein agent-principal is
of Mindanao v BSP) involved, the principal must have full knowledge of all facts and circumstance.
YASUMA v. HEIRS OF CECILIO DE VILLA

Liabilities of Directors or Trustees
ECMC is not liable for the loan because it did not ratify the loan nor
the mortgage. Section 30. Liability of Directors, Trustees or Officers. - Directors or
trustees who willfully and knowingly vote for or assent to patently unlawful
acts of the corporation or who are guilty of gross negligence or bad faith
in directing the affairs of the corporation or acquire any personal or pecuniary
CORPORATION IS A JURIDICAL PERSON, SEPARATE AND DISTINCT
interest in conflict with their duty as such directors or trustees shall be liable
FROM ITS STOCKHOLDERS.
jointly and severally for all damages resulting therefrom suffered by the
Being a juridical entity, it may only act through its Board of Directors or its corporation, its stockholders or members and other persons.
officers and agents.
A director, trustee or officer shall not attempt to acquire, or any interest
The relations between the corporation and its officers and agents are adverse to the corporation in respect of any matter which has been reposed
governed by the general principles of agency. When authorized, their acts in them in confidence, and upon which, equity imposes a disability upon
can bind the corporation. When unauthorized, their acts cannot bind it. themselves to deal in their own behalf; otherwise, the said director, trustee or
officer shall be liable as a trustee for the corporation and must account for
DOCTRINE OF RATIFICATION. the profits which otherwise would have accrued to the corporation.
The corporation may ratify the unauthorized act of its corporate officer.
Ratification means that the principal voluntarily adopts, confirms and gives Under Section 30, we have the liabilities of directors or trustees who wilfully
sanction to some unauthorized act of its agent on its behalf. It is this and knowingly vote or assent to patently unlawful acts of corporation or who
voluntary choice, knowingly made, which amounts to a ratification of what are guilty of gross negligence or bad faith in directing the affairs of the
was theretofore unauthorized and becomes the authorized act of the party corporation or acquire any personal pecuniary interest in conflict with their
so making the ratification. The substance of the doctrine is confirmation after duties as directors.
conduct, amounting to a substitute for a prior authority. Ratification can be
made either expressly or impliedly. Implied ratification may take various These people shall be held liable jointly and severally.
forms - like silence or acquiescence, acts showing approval or adoption of
the act, or acceptance and retention of benefits flowing therefrom. Here (Section 30) are the acts, if they ratify patently unlawful acts. It should
be, again, patently unlawful acts. The directors or trustees shall not
ECMC IS NOT LIABLE FOR THE LOAN BECAUSE THERE WAS NO attempt to acquire or acquire any interest adverse to the corporation in
AUTHORITY EXPRESS, IMPLIED OR APPARENT GIVEN TO DE VILLA respect of any matter which has been reposed in them in confidence, and
TO BORROW MONEY FROM YASUMA. upon which, equity imposes a disability upon themselves to deal in their own
behalf; otherwise, the said director, trustee or officer shall be liable as a
trustee for the corporation and must account for the profits which otherwise We have here, enumerations of many special laws that provide personal
would have accrued to the corporation. liability to directors, trustees and officers.
From this, what type of fiduciary duty is being violated? Which one from the Q. What if the corporation has no more leviable assets, should the directors
four? Here under 2nd paragraph. So it is the duty of loyalty which is being and officers be personally held liable? Is that ground one of the six? The
breached here. corporation has no more properties, so who will they seek after? Can they
seek after the properties of the officers?
Personal Liabilities
General Rule: The General Rule is that directors and trustees are not A. No. The SC said that the 6 instances cited above are exclusive. The fact
personally liable, for any action taken in behalf of the corporation. Obligations that there is no more assets of the corporation is not one of those
incurred as a result of a director or officer’s act as a corporate agent, are not enumerated here. The directors and officers are not directly liable.
their personal liability but the direct responsibility of the corporation that they Specifically, Limited Liability Doctrine.
represent. (This is) so that they have the confidence to represent, and enter
into transactions without fear of reprisals and suits against them. Let’s go to Q. What about when we pierce the veil of corporate entity? Isn’t that a
the exceptions. ground, that when directors and officers are held personally liable?
Exceptions: A Director, Trustee or Officers may be held personally liable in A. The answer is actually, no. That is not an exception here in the 6 instances,
the following cases: (This enumeration is found in the case of Magaling vs. because when the veil is pierced, the directors and the corporation become
Ong) one and the same so they seize to be corporate representatives, in fact they
are the corporation itself.
1. Knowingly voting for or assenting to patently unlawful acts of the
corporation; It does not belong in this enumeration of exceptions. They are not made
liable for the acts of the corporations, but rather they are liable for their own
So it is not enough that the act is unlawful it must be patently unlawful, acts because the corporation and the shareholders are one and the same.
meaning without a doubt, whatsoever, the act is unlawful, so it must be
patently unlawful. I guess we can argue this in the cases. It’s factual, case So again, the enumeration of all the special laws holding the directors and
to case basis. Whether it’s patently unlawful, you can argue that in your trustees personally liable are these:
exam, is it patently unlawful or not?
 Anti-Dummy Law
2. Gross negligence or bad faith in directing the affairs of the  Trust Receipts Law
Corporation;  Anti-Money Laundering Act
 Comprehensive Dangerous Drugs Act
Here there is no hard and fast rule as to when an act amounts to ordinary or  Philippine Competition Act
gross negligence or bad faith. It depends on a case to case basis, depending  Insurance Code
on the surrounding circumstance.  Gov’t Procurement Reform Act
 Anti-Fencing Law
3. Acquiring any personal or pecuniary interest in conflict with their  Food And Drug Administration Act
duty as such directors or trustees or officer resulting in the  Labor Code
damage to the corporation;  Migrant Workers Act
 Revised Forestry Code
Here the conflict of interest must result to the damage of the  Education Act
corporation. As a reiteration, this is an application of the Doctrine of  Comprehensive Agrarian Reform Act
Corporate Opportunity, which refers to a case where a director, by virtue of  Milk Code: It provides for minimum amount of breast feed prices
his office, acquires for himself a business opportunity which belongs to the  Magna Carta For Persons With Disability
corporation, thereby obtaining profits to the prejudice of the corporation. So  Consumers Act
there is a responsibility not just to account but to remit to the corporation  Price Act
any profit he realized from the venture. So this is a reiteration of the Doctrine  Laundry Detergent Act: It provides ceiling for laundry detergent
of Corporate Opportunity.  Toxic Substances Act
 Ecological Solid Waste Management Act
4. Consenting to the issuance of watered stocks, or who, having  Tobacco Regulation Act
knowledge thereof, does not forewith file with the corporate  Optical Media Act
secretary his objection thereto;  National Metrology Act (Metric Units): It refers to standard metric
units, when you pack. Siguro when you repack something if it
What are watered stocks? The one with the cow. Remember our discussions says, 500g, it should be 500 g.
on Section 64.  Home Development Mutual Fund Law
 Pre-Need Code Of The Philippines Charter
5. Agreeing to hold himself personally liable with the corporation;  Philippine Red Cross Act
and  Girl Scouts of the Philippines Charter
 Philippine Disaster Risk Reduction And Management Act
This is actually contractual liability. This depends on the agreement entered  Data Privacy Act
into, if the director is signing as a guarantor or a surety.  Philippine Interior Design Act (Practice by foreign firm)
 Red Cross And Other Emblems Act: For the misuse of the Red
In Credit Transactions, what is the difference between a guarantee Cross emblem
and a surety?  Chemistry Profession Act
Benefit of excussion. It would apply to guaranty. The one who guaranteed  Strategic Trade Management Act
the performance of the obligation would have the benefit of excussion.  National Athletes And Coaches And Benefits And Incentives Act
If you have a friend who wants to enter into a debt, would you CARAG VS NLRC
rather be a guarantor or a surety? G.R. No. 147590 | April 2, 2007
Guarantor. The least onerous one is guaranty. Be a guarantor rather than a
surety. Issue: Can the officers be held personally liable? NO.
6. When he is made personally liable by a specific provision of law Ruling: As a General Rule, as discussed earlier, directors are not held
personally liable for the debts of the corporation because it has a separate
This is statutory liability in contrast with number five. For example here is the legal personality. One of the exceptions is that, for a wrongdoing to make a
Trust Receipts Law which imposes criminal liability to the directors or officer director personally liable for debts of the corporation, the wrong doing must
even to agents, for violation of the Trust Receipts Law. be approved or assented to by the director, which is patently unlawful act.
But the Court here said that the mere failure to comply with the notice
requirement under the Labor Code, does not amount to a patently unlawful means breach of a known duty through some ill motive or interest. It partakes
act. of the nature of fraud.
The court here said that patently unlawful acts are those declared unlawful NO BAD FAITH
by law which imposes penalties for commission of such unlawful acts. There There is nothing substantial on record to show that Reynaldo Magaling, as
must be a law declaring the act unlawful and penalizing the act. President of Termo Loans, has, indeed, acted in bad faith in inviting Ong to
invest in Termo Loans and/or in obtaining a loan from Ong for said
In this case, Article 283 of the Labor Code, requiring a one month prior notice corporation in order to warrant his personal liability. From all indications, the
to employees and the DOLE before any permanent closure of a company, proceeds of the investment and/or loan were indeed utilized by Termo Loans.
does not state that non-compliance with the notice is an unlawful act Likewise, bad faith does not arise just because a corporation fails to pay its
punishable under the Code. There is no provision in any other Article of the obligations, because the inability to pay one’s obligation is not synonymous
Labor Code declaring failure to give such notice an unlawful act and providing with fraudulent intent not to honor the obligations.
for its penalty.
But, liable for gross negligence:
Also, the application of the doctrine of piercing the corporate veil was He must be made personally liable for the debt of Termo Loans to Ong.
discussed and the Court said that it only applies when the corporate fiction
is used to defeat public convenience, justify wrong, protect fraud or defend Gross Negligence:
crime. In order to pierce the veil of corporate fiction for reasons of negligence by
the director, trustee or officer in the conduct of the transactions of the
In the absence of malice, bad faith, or a specific provision of law making a corporation, such negligence must be gross.
corporate officer liable, such corporate officer cannot be made personally
liable for corporate liabilities. Neither Article 212[e] nor Article 273 (now 272) Gross negligence is one that is characterized by the want of even slight care,
of the Labor Code expressly makes any corporate officer personally liable for acting or omitting to act in a situation where there is a duty to act, not
the debts of the corporation. inadvertently but willfully and intentionally with a conscious indifference to
consequences insofar as other persons may be affected; and must be
established by clear and convincing evidence.
MAGALING v. ONG
G. R. No. 173333 | August 13, 2008
The following testimony of Magaling were considered:
ISSUE: WON spouses MAGALING may be held liable for the obligation of the
Q. You did not go after your P1.8 Million?
corporation – YES; grossly negligent in directing the affairs of Thermo Loans
A. No more (sic), Your Honor, because "ako’y kinukunsensya rin ng aking
without due regard to the plight of its investors
sarili, bilang Katoliko’y ayaw ko nang makasali pa sa ibang bagay na sa banda
roo’y pera lang ho iyon."
General Rule: It is basic that a corporation is a juridical entity with legal
personality separate and distinct from those acting for and in its behalf and,
Q. "Nakukunsiyensya ka" but you were not being bothered for the money of
in general, from the people comprising it. The general rule is that obligations
the other investors? How can that be? Your conscience bothers you?
incurred by the corporation, acting through its directors, officers and
employees, are its sole liabilities, and vice versa.
A. If I will think about it, I might get sick. I did not bother to run after my
investment for reason of health x x x.
Exception:
From our standpoint, his casual manner, insouciance and nonchalance, nay,
BAD FAITH OR GROSS NEGLIGENCE
indifference, to the predicament of the distressed corporation glaringly
There are times, however, when solidary liabilities may be incurred, and the
exhibited a lackadaisical attitude from a top office of a corporation, a conduct
veil of corporate fiction may be pierced.
totally abhorrent in the corporate world.
Exceptional circumstances warranting such disregard of a separate
Reynaldo Magaling was grossly negligent in directing the affairs of Thermo
personality are summarized as follows:
Loans without due regard to the plight of its investors and thus should be
held jointly and severally liable for the corporate obligation of Thermo Loans
Peter Ong.
1. When directors and trustees or, in appropriate case, the officers of a
corporation: What would not allow him?
(a) vote for or assent to patently unlawful acts of the corporation; His conscience and being a Catholic. And that they were solidarily liable.
(b) act in bad faith or with gross negligence in directing the corporate
affairs; He gave the power to manage to somebody else and he did not make any
(c) are guilty of conflict of interest to the prejudice of the corporation, its efforts to collect. And he never attended the board meetings. Di siya
stockholders or members, and other persons; magaling.
2. When a director or officer has consented to the issuance of watered down
SECURITY BANK v. CUENCA
stocks or who, having knowledge thereof, did not forthwith file with the
G.R. No. 138544 | October 3,2000
corporate secretary his written objection thereto;
ISSUE: WON Cuenca is liable for the contract entered into by the
3. When a director, trustee or officer has contractually agreed or stipulated
corporation. – NO, considering that he was not notified of any
to hold himself personally and solidarily liable with the corporation or
modification.
4. When a director, trustee or officer is made, by specific provision of law,
RULING:
personally liable for his corporate action.
1. NOVATION. The debt of SIMC under the credit line memorandum
When can they be personally liable?
whereby Cuenca binds himself solidarily liable has been novated by the Loan
To hold a director, a trustee or an officer personally liable for the debts of
Restructuring Agreement. The 1989 Loan Agreement extinguished the
the corporation and, thus, pierce the veil of corporate fiction, bad faith or
obligation obtained under the 1980 credit accommodation.
gross negligence by the director, trustee or officer in directing the corporate
affairs must be established clearly and convincingly.
Under the restructured loan, it has absorbed, liquidated and settled the
previous loan.
Bad faith is a question of fact and is evidentiary.
Since the 1989 Loan Agreement had extinguished the original credit
Bad faith does not connote bad judgment or negligence. It imports a
accommodation, the Indemnity Agreement, an accessory obligation, was
dishonest purpose or some moral obliquity and conscious wrongdoing. It
necessarily extinguished also, pursuant to Article 1296 NCC.
2. No continuing surety or extension/renewal of the credit line. No such contract may be RATIFIED by the vote of the stockholders
waiver of consent. representing at least two-thirds (2/3) of the outstanding capital stock
1989 Loan Agreement expressly stipulated that its purpose was to "liquidate," or of at least two-thirds (2/3) of the members in a meeting called for the
not to renew or extend, the outstanding indebtedness. Moreover, Cuenca did purpose: Provided, That full disclosure of the adverse interest of the
not sign or consent to the 1989 Loan Agreement, which had allegedly directors or trustees involved is made at such meeting and the contract is
fair and reasonable under the circumstances.
extended the original P8 million credit facility. Hence, his obligation as a
surety should be deemed extinguished.
It is fundamental in the law of suretyship that any agreement between the They expanded the coverage to include spouses and relatives of the 4 th
creditor and the principal debtor which essentially varies the terms of the degree. It is no longer just directors, trustees or officers.
principal contract, without the consent of the surety, will release the surety
from liability. Even contracts entered into by their spouses and relatives within 4 th degree
of consanguinity or affinity is subject to this limitation.
While respondent held himself liable for the credit accommodation or any
modification thereof, such clause should be understood in the context of the Letter (d) is also a new provision. In case of those vested with public interest,
P8 million limit and the November 30, 1981 term. they have to be approved by a certain number of shares. That is 2/3s PLUS
majority of the independent directors.
IN RELATION TO LIABILITY OF
DIRECTORS, TRUSTEES OR OFFICERS As to the last portion of the provision, it now says “where any of the first 3
Special Nature of the JSS ("joint and solidary signature") It is a common conditions in the preceding paragraph is absent”; before, under the CCP, it
banking practice to require the JSS of a major stockholder or corporate says - only the first 2 conditions are required.
officer, as an additional security for loans granted to corporations.
Meaning, under the CCP, the condition that cannot be dispensed with was
There are at least two reasons for this. that: The contract was fair and reasonable (under letter c)
First, in case of default, the creditor's recourse, which is normally limited to Now under the RCCP, even if it is not fair and reasonable, you can ratify it
the corporate properties under the veil of separate corporate personality, already.
would extend to the personal assets of the surety.
[In the 1st par. note here the word “VOIDABLE”.]
Second, such surety would be compelled to ensure that the loan would be
used for the purpose agreed upon, and that it would be paid by the Let me just correct myself. Apparently, they included the 3 conditions but I
corporation. said a while ago that even if it is not fair and reasonable, they can ratify. But
actually, they have it in the last sentence - that there should be full disclosure
Following this practice, it was therefore logical and reasonable for the bank and the contract is fair and reasonable. So I’m not sure why they put the 3
to have required the JSS of respondent, who was the chairman and president conditions.
of Sta. Ines in 1980 when the credit accommodation was granted. There was
no reason or logic, however, for the bank or Sta. Ines to assume that he Anyway. What can you observe from this – the fact that the contract of the
would still agree to act as surety in the 1989 Loan Agreement, because at corporation is with a director, does not necessarily make it invalid per se; in
that time, he was no longer an officer or a stockholder of the debtor- fact, it is valid until annulled. However, the option is on the part of the
corporation. Verily, he was not in a position then to ensure the payment of corporation, not in the part of the directors.
the obligation. Neither did he have any reason to bind himself further to a
bigger and more onerous obligation. Transcribed by: Acevedo, Val Joseph L.
Prime White Cement Corp vs IAC 220 SCRA 103
[In relation to Sec. 30, Cuenca as then Chairman of the Board and President Digest by: Hazel Diane B. Estrosas
of SIMC, he has not committed acts prejudicial to the corporation as would
hold him jointly and severally liable.] DOCTRINE OF THE CASE: A director's contract with his corporation is not
in all instances void or voidable. If the contract is fair and reasonable under
The court here said that there is no reason or logic for the bank or Sta. Ines the circumstances, it may be ratified by the stockholders provided a full
to assume that he would still agree to act as surety when there is no longer disclosure of his adverse interest is made pursuant to Section 32 [Sec. 31,
an officer or a stockholder of a corporation. RCCP] of the Corporation Code.
Verily, because they agreed to extend the loan, there is already a novation.
Issue: Whether or not the dealership agreement entered into between
Novation of an agreement, changing of major terms has to be with the Alejandro Te and Prime White is valid and enforceable.NO.
consent. Because he did not consent, therefore he is not included anymore.
Under the Corporation Law, which was then in force at the time this case
arose, as well as under the present Corporation Code, all corporate powers
Self-Dealing Directors shall be exercised by the Board of Directors, except as otherwise provided by
Section 31. Dealings of Directors, Trustees or Officers with the law. The Board may expressly delegate specific powers to its President or
Corporation. - A contract of the corporation with one (1) or more of its any of its officers. In the absence of such express delegation, a contract
directors, trustees, officers or their spouses and relatives within the fourth entered into by its President, on behalf of the corporation, may still bind the
civil degree of consanguinity or affinity is VOIDABLE, at the option of corporation if the board should ratify the same expressly or impliedly.
such corporation, unless all the following conditions are present:
Furthermore, even in the absence of express or implied authority by
1. The presence of such director or trustee in the board meeting
ratification, the President as such may, as a general rule, bind the corporation
in which the contract was approved was not necessary to
by a contract in the ordinary course of business, provided the same is
constitute a quorum for such meeting;
2. The vote of such director or trustee was not necessary for the reasonable under the circumstances. These rules apply where the President,
approval of the contract; purportedly acting for the corporation, is dealing with a third person, i. e., a
3. The contract is fair and reasonable under the circumstances; person outside the corporation.
In case of corporations vested with public interest, material contracts are Self-Dealing Director
approved by at least (2/3) of the entire membership of the board, with The situation is quite different where a director or officer is dealing with his
at least a majority of the independent directors voting to approved the own corporation. In the instant case, Alejandro Te was not an ordinary
material contract; and stockholder; he was a member of the Board of Directors and Auditor of the
In case of an officer, the contract has been previously authorized by the corporation as well. He was what is often referred to as a "self-dealing"
board of directors. director.
Where any of the first three (3) conditions set forth in the preceding A director of a corporation holds a position of trust and owes a duty of loyalty
paragraph is absent, in the case of a contract with a director or trustee, to his corporation. In case his interests conflict with those of the corporation,
he cannot sacrifice the latter to his own advantage and benefit. This trust concerned. Treat as if like it is a self-dealing because you own substantial
relationship springs from the fact that they have the control of corporate amount, it is as if you own that one.
affairs and hence of the property interests of the stockholders.
Philippine National Bank vs. Hydro Resources Contractors
On the other hand, a director's contract with his corporation is not in all G.R. 167530, March 13, 2013
instances void or voidable. If the contract is fair and reasonable under the Digest by: Inah del Rosario
circumstances, it may be ratified by the stockholders provided a full
disclosure of his adverse interest is made pursuant to Section 32 [Sec. 31, DOCTRINE OF THE CASE: The existence of interlocking directors,
RCCP] of the Corporation Code. corporate officers and shareholders is not enough justification to pierce the
veil of corporate fiction in the absence of fraud or other public policy
The contract was neither fair nor reasonable. considerations.
In this case, Prime White was obligated to sell and supply to Te bags of white
cement at a fixed price of 9.70 per month. Te, as a businessman, is presumed Issue: Was the piercing of the corporate veil proper? NO.
to know that the prices of cement were expected to rise. He must have known
that within that period of six years, there would be a considerable rise in the Ruling: Piercing of the corporate veil based on the alter ego theory requires
price of white cement. In fact, Te's own Memorandum shows that in 1970, 3 elements:
the price per bag was P14.50, and by the middle of 1975, it was P37.50 per 1. control of the corporation by the stockholder or parent corporation,
bag. Despite this, no provision was made in the "dealership agreement" to 2. fraud or fundamental unfairness imposed on the plaintiff and
allow for an increase in price mutually acceptable to the parties. 3. harm or damage caused to the plaintiff by the fraudulent or unfair act
of the corporation.
Conclusion: With this, it is quite clear that Te was guilty of disloyalty to the
corporation; he was attempting in effect, to enrich himself at the expense of None of the tests were met in this case.
the corporation. There is no showing that the stockholders ratified the
"dealership agreement" or that they were fully aware of its provisions. The There is no control.
contract was therefore not valid and he cannot reap the fruits of his Evidence show that Hydro was dealing with NMIC as a distinct juridical person
disloyalty. acting through its own corporate officers.
1. Nothing in the records show that the corporate finances, policies and
Interlocking Directors (Section 32 RCCP) practices of NMIC were dominated by DBP and PNB in such a way that
NMIC could be considered to have no separate mind, will or existence
of its own but a mere conduit for DBP and PNB.
SEC. 32. Contracts Between Corporations with Interlocking Directors. – 2. On the contrary, Hydro knew and went through with the contract
Except in cases of fraud, and provided the contract is fair and reasonable knowing that it was dealing with NMIC and not with NMIC’s
under the circumstances, a contract between two (2) or more corporations stockholders.
having interlocking directors shall NOT BE INVALIDATED on that ground
3. The contract as well as the billing reports, progress reports, statement
alone:
of accounts and communications was addressed to and accepted by
NMIC
Provided, That if:
4. Hydro presented nothing to show that DBP and PNB had a hand in the
1. the interest of the interlocking director in one (1) corporation is
substantial and act complained of.
2. the interest in the other corporation or corporations is merely nominal,
the contract shall be subject to the provisions of the preceding section insofar THE EXISTENCE OF INTERLOCKING DIRECTORS, CORPORATE
as the latter corporation or corporations are concerned. OFFICERS AND SHAREHOLDERS IS NOT ENOUGH JUSTIFICATION
TO PIERCE THE VEIL OF CORPORATE FICTION IN THE ABSENCE OF
Stockholdings exceeding twenty percent (20%) of the outstanding capital FRAUD OR OTHER PUBLIC POLICY CONSIDERATIONS.
stock shall be considered: In this case, the finding that the Boards of NMIC, DBP and PNB were
 substantial for purposes of interlocking directors. interlocking had no basis.
1. The General Info Sheet submitted by NMIC to the SEC only showed
that PNB owned 43% and DBP owned 57% of the shares.
Rationale 2. There was no evidence that the 5 members of the NMIC’s Board of
It is a recognition of the reality that corporations normally deal with their
Directors, 4 were nominees of either DBP or PNB and only was was
affiliated companies with interlocking directors in order to promote business
a nominee of both DBP and PNB.
synergy and enhance operating efficiencies. A corporation is not expected to
3. Only two members of the board of directors of NMIC, Jose Tengco,
give its business to another corporation or competitor but would rather give
Jr. and Rolando Zosa, were established to be members of the board
it to an affiliate. Most likely, they would have interlocking directors. of governors of DBP and none was proved to be a member of the
board of directors of PNB. No director of NMIC was shown to be also
What makes it wrong is the existence of fraud and unfairness and NOT the
sitting simultaneously in the board of governors/directors of both
existence of interlocking directors.
DBP and PNB.
Self-Dealing Contract 2nd and 3rd requisites are also absent in this case.
[See the provided part of the above provision] Since DBP and PNB cannot be solidarily liable with NMIC, APT also is not
This means that if the director is a: liable. Only NMIC as a separate and distinct legal entity is liable to pay its
(1) substantial stockholder in one corporation and corporate obligation to Hydro amounting to P8,370,934.74. As trustee, APT
(2) a nominal stockholder in another corporation, then it is a considered as should ensure its compliance.
a self-dealing contract.
As To Nominal Corporation
Ex: Director Jessielle is a shareholder and director of the following: ABC
which she owns substantial shareholdings and XYZ wherein she holds
nominal shareholdings. Applying Sec. 32, insofar as XYZ (the one wherein
she has nominal shareholdings) is concerned, it is as if the contract is entered
between her and the corporation XYZ, it is like a self-dealing contract and
not between one corporation and another corporation. In which case, the
contract insofar as XYZ is concerned, should be subject to the requirements
under Sec. 31. When XYZ (nominal shareholdings) approved the contract,
the director [Jessielle] it is not necessary for her to make a quorum, not
Development Bank of the Philippines vs. CA
necessary to make a vote and the contract should have been reasonable
insofar as the corporation wherein she has some nominal shareholdings is G.R. 126200, August 16, 2001
The SC here ruled that third parties may not assail the contract if its only
ground is interlocking directorship. Only the party or the corporation
themselves may file it or argue if it is void or voidable.
TITLE IV
POWERS OF THE CORPORATION
Transcribed by: Av Abrasaldo, Nembrod Enano, and ZU Ugdang

Disloyal Director (Section 33 RCCP)
SEC. 33. Disloyalty of a Director. – Where a director, by virtue of such Three Classification of Corporate Powers
office, acquires a business opportunity which should belong to the 1. Express Powers – those which are expressly granted by the
corporation, thereby obtaining profits to the prejudice of such corporation, the RCCP or AOI.
director must account for and refund to the latter all such profits, unless the
act has been ratified by a vote of the stockholders owning or representing at Those are the powers enumerated under Section 35 to 45 of the RCCP.
least two-thirds (2/3) of the outstanding capital stock.
2. Implied or Incidental Powers – those powers incident to the
This provision shall be applicable, notwithstanding the fact that the director
corporation’s existence which may be essential or necessary to
risked one’s own funds in the venture.
carry out its purpose or purposes as stated in the AOI.
Corporate Opportunities Doctrine An example of this is letter (k) of Section 35.

The corporate opportunity doctrine is the legal principle providing that
directors, officers, and controlling shareholders of a corporation must not Section 35. Corporate Powers and Capacity. - Every corporation
take for themselves any business opportunity that could benefit the incorporated under this Code has the power and capacity:
corporation. xxx
(k) To exercise such other powers as may be essential or necessary to carry
The corporate opportunity doctrine is one application of the fiduciary duty of out its purpose or purposes as stated in the articles of incorporation.
loyalty.
EX: If the corporation is allowed in the articles to obtain a loan, then it is
This corporate opportunity doctrine represents one of the several applications impliedly authorized as well to sign, execute, and deliver documents and
of the duty of loyalty. A director or officer or in some cases, a controlling perform necessary acts to carry out the loan/transaction.
stockholder is obligated to disclose a corporate opportunity to the corporation
and if the corporation expressed an interest, then he or she must forego Those are its incidental powers. Since you are allowed to obtain a loan,
pursuing it as an individual. therefore, all acts to obtain a loan are implied or incidental to that express
power.
Applicability of the Doctrine of Corporate Opportunities
This doctrine applies with respect to a business opportunity that: 3. Inherent Powers – those which are not expressly stated but are
(1) A corporation is financially able to undertake; deemed to be within the capacity of corporate entities.
(2) Is in the corporation’s line of business; and
(3) An opportunity in which the corporation has an interest or reasonable You may find these terms used alternatively. Sometimes, implied and
expectancy. inherent are used simultaneously – they mean the same thing sometimes.
There are a lot of SEC Opinions regarding corporate powers.
SEC OPINION NO. 10-19, April 27, 2010

The power to operate communication system includes [meaning, its
incidental powers], the sale of device for the transmission of
telecommunications, both mobile or broadband, and peripheral devices and
accessories.
EX: WiFi devices that the telecommunication providers provide.
So, those are incidental powers.
SEC OPINION NO. 09-20, August 4, 2009

If the Articles of Incorporation says, “to carry out the business of trading
liquefied petroleum gas”.
Does this [phrase] include the importation of the gas? Yes. Even if the word
importation was not included in the primary cause, it is subsumed in the word
“trading”. Thus, it is not ultra vires.
SEC OPINION NO. 07-14, July 18, 2007

How about if they are authorized to manufacture a certain goods? They are
allowed to manufacture cameras, for example. Does this include the
marketing and the selling of the cameras? If they put it in the primary
purpose that, “to manufacture cameras”, can they sell it as well?
The SEC said that yes. It is logically inferable that there must be an end-user
for the goods or products manufactured. Obviously, you have to sell it, not
just manufacture it.
Let’s change it. What if they engaged in the marketing and retail of goods.
Does this include the manufacture of the said goods? Does it go both ways?
The answer is no. The same could not be said for the business of selling as
covering the business of manufacturing.
It is because you can just sell without manufacturing. But you cannot
manufacture without selling. Otherwise, what is the purpose of your
manufacturing?
The underlying reason for this is that it is not necessary or indispensable that
the trader or dealer of good must also be the one manufacturing or producing So, it is all-encompassing. It is not limited, then they have it.
the same.
Theory of Specific Capacity
The specific capacity theory maintains that the corporation cannot exercise
EX: Ma’am’s sister was selling Papat’s Christmas Ham. But she was not the powers except those expressly/impliedly given.
one who produced such product. She just resells it. Thus, it is not necessary
that if you sell something, you also create that same thing. You can just be So it is more limited. They only have the powers which are specifically given
a reseller of a certain good or product. to them.
The important thing to note under the classification of corporate powers: if The general powers of the Corporation are enumerated under Section 35
it is outside these three powers, then the act is said to be ultra vires. So, if it while the specific powers of the corporation can be found from Sections 36
is not expressed; nor it is not in the RCCP nor AOI nor by-laws nor board to 43 of the RCCP.
resolution; it is not implied nor inherent – then it is ultra vires.
General Powers
However, there is no hard and fast rule that you would know that this
Section 35. Corporate Powers and Capacity. - Every corporation
particular action is automatically ultra vires because you have to first check
incorporated under this Code has the power and capacity:
the circumstances in the purpose or business of the corporation in a case-to- a. To sue and be sued in its corporate name;
case basis. b. To have perpetual existence unless the certificate of incorporation
provides otherwise;
NPC v. Vera c. To adopt and use a corporate seal;
G.R. No. 83558 | February 27, 1989 d. To amend its articles of incorporation in accordance with the
provisions of this Code;
Issue: Whether or not NPC is empowered to undertake stevedoring services e. To adopt bylaws, not contrary to law, morals or public policy, and
in it by its Charter? Yes. to amend or repeal the same in accordance with this Code;
f. In case of stock corporations, to issue or sell stocks to
Ruling: The primary business of NPC: NPC is a public utility, created under subscribers and to sell treasury stocks in accordance with the
special legislation engaged in the generation and distribution of electric provisions of this Code; and to admit members to the corporation
power and energy. It, therefore, enjoys the protective mantle of PD 818, if it be a nonstock corporation;
g. To purchase, receive, take or grant, hold, convey, sell, lease,
Section 1.
pledge, mortgage, and otherwise deal with such real and personal
property, including securities and bonds of other corporations, as
Further, as stated under Sections 1 and 2 of RA No. 6395, as amended [To
the transaction of the lawful business of the corporation may
carry out the national policy of total electrification of the country, specifically
reasonably and necessarily require, subject to the limitations
the development of hydroelectric generation of power and the production of prescribed by law and the constitution;
electricity from nuclear, geothermal and other sources to meet the needs of h. To enter into a partnership, joint venture, merger, consolidation, or
industrial development and dispersal and the needs of rural electrification], any other commercial agreement with natural and juridical persons;
the NPC was created and empowered not only to construct, operate and i. To make reasonable donations, including those for the public
maintain power plants, reservoirs, transmission lines, and other works, but welfare or for hospital, charitable, cultural, scientific, civic, or similar
also: purposes: Provided, That no foreign corporation shall give
donations in aid of any political party or candidate or for purpose s
To exercise such powers and do such things as may be reasonably necessary of partisan political activity;
to carry out the business and purposes for which it was organized, or which, j. To establish pension, retirement, and other plans for the benefit of
from time to time, may be declared by the Board to be necessary, useful, its directors, trustees, officers, and employees; and
incidental or auxiliary to accomplish said purpose [Section 3(1) of RA 6395]. k. To exercise such other powers as may be essential or necessary
to carry out its purpose or purposes as stated in the articles of
There must be a determination whether or not a logical and necessary incorporation.
relation exists between the act questioned and the corporate purpose
expressed in the NPC Charter. [a] To sue and be sued in its corporate name
Principle: For if that act is one which is lawful in itself and not otherwise This is in relation to Section 22. It is clear that the power to sue is lodged
prohibited, and is done for the purpose of serving corporate ends, and with the Board of Directors or Board of Trustees, for that matter.
reasonably contributes to the promotion of those ends in a substantial and
not in a remote and fanciful sense, it may be fairly considered within the A minority shareholder and member have no authority to sue on behalf of
corporation's charter powers. the corporation unless he is suing in a derivative suit. [We will learn more of
the derivative suits later on]
In one case, the SC ruled that a corporation is not restricted to the exercise
of powers expressly conferred upon it by its charter, but has the power to do
what is reasonably necessary or proper to promote the interest or welfare of
Derivative Suit
the corporation. It is a suit filed by a shareholder on behalf of the corporation to enforce the
corporation’s rights.
In this case: it is an undisputed fact that the pier located at Calaca,
Batangas, which is owned by NPC, receives the various shipments of coal It is also not lodged in the President of the corporation.
which is used exclusively to fuel the Batangas Coal-Fired Thermal Power Plant
of the NPC for the generation of electric power. The stevedoring services Who has the power to sue and be sued?
which involve the unloading of the coal shipments into the NPC pier It is the corporation represented by its board of directors. Not its president,
for its eventual conveyance to the power plant are incidental and not its officers, not its treasurer, but its board of directors.
indispensable to the operation of the plant. The Court holds that NPC
is empowered under its Charter to undertake such services, it being Power to Sue and be Sued, How Commenced
reasonably necessary to the operation and maintenance of the power plant. The power to sue and be sued commences or starts upon the issuance of the
certificate of incorporation. It is because we know, upon the issuance of the
certificate of incorporation, their existence already starts. Their corporate
existence arises.
Right to Sue, How Exercised

Theory of General Capacity The Corporation issues board resolution to authorize someone to sign a
The general capacity theory maintains that a corporation is said to hold such petition, a complaint, an answer, a verification, certification against forum
powers as are not prohibited or withheld from it by general law. shopping and all that is necessary under remedial law.
So, if an unauthorized person signs on behalf of the corporation, the court This must still comply with the constitutional prohibition of foreigners owning
can and will dismiss the case. lands Example the grant of gratuity does not require approval for it does not
tantamount to sale.
What happens is that the board would authorize the chairman of the board
or the president to sign these papers on behalf of the corporation. But there Section (g) is different from Section 39.
should be a board resolution. It is still an act of the board; they just authorize
someone to sign on their behalf. Section 35 (g) Section 39
Corporate Powers and Capacity Sale or Other Disposition of Assets
An unregistered corporation has no right to sue and be sued for want of To purchase, receive, take or Subject to the provisions of
corporate personality. grant, hold, convey, sell, lease, Republic Act No. 10667, otherwise
pledge, mortgage, and otherwise known as the "Philippine
You know also the relation of this to foreign entities with licensed to do deal with such real and personal Competition Act", and other
business in the Philippines. property, including securities and related laws a corporation may, by
bonds of other corporations, as the a majority vote of its board of
We have discussed before as to foreign entities with or without license/permit transaction of the lawful business directors or trustees, sell, lease,
to do business in the Philippines of the corporation may reasonably exchange, mortgage, pledge, or
and necessarily require, subject to otherwise dispose of its property
If it is a foreign corporation doing business in the Philippines, can the limitations prescribed by law and assets, upon such terms and
it be sued in the Philippines? Yes. and the constitution; conditions and for such
 If it has no permit, it can be sued, but it cannot sue. consideration, which may be
 If it has a permit or license, it can sue and be sued. money, stock, bonds, or other
instruments for the payment of
[b] To have perpetual existence unless the certificate of incorporation money or other property or
provides otherwise consideration, as its board of
directors or trustees may deem
expedient.
Power of the Corporation to have Perpetual Existence
You can opt out of perpetual existence if you provide so under your Articles A sale of all or substantially all of
of Incorporation. So, it is not mandatory. The corporation can opt to stay the corporation's properties and
with the 50-year or a shorter period. assets, including its goodwill, must
be authorized by the vote of
[f] In case of stock corporations, to issue or sell stocks to subscribers and stockholders representing at least
to sell treasury stocks in accordance with the provisions of this Code; and two-thirds (2/3) of the outstanding
to admit members to the corporation if it be a nonstock corporation capital stock, or at least two-thirds
(2/3) of the members, meeting
This is the Power of the Corporation to Issue or Sell Stocks to duly called for the purpose.
Subscribers according to the terms and conditions, payment
methods subscription method authorized under the Articles or the In nonstock corporations where
by-laws. there are no members with voting
rights, the vote of at least a
(g) To purchase, receive, take or grant, hold, convey, sell, lease, majority of the trustees in office
pledge, mortgage, and otherwise deal with such real and personal will be sufficient authorization for
property, including securities and bonds of other corporations, as the the corporation to enter into any
transaction of the lawful business of the corporation may reasonably and transaction authorized by this
necessarily require, subject to the limitations prescribed by law and the section.
constitution;
The determination of whether or
(h) To enter into a partnership, joint venture, merger, consolidation, or not the sale involves all or
any other commercial agreement with natural and juridical persons;
substantially all of the
corporation's properties and assets
(i) To make reasonable donations, including those for the public welfare
must be computed based on its net
or for hospital, charitable, cultural, scientific, civic, or similar purposes:
Provided, That no foreign corporation shall give donations in aid of any asset value, as shown in its latest
political party or candidate or for purpose s of partisan political activity; financial statements. A sale or
other disposition shall be deemed
(j) To establish pension, retirement, and other plans for the benefit of its to cover substantially all the
directors, trustees, officers, and employees; and corporate property and assets if
thereby the corporation would be
(k) To exercise such other powers as may be essential or necessary to rendered incapable of continuing
carry out its purpose or purposes as stated in the articles of incorporation. the business or accomplishing the
purpose of which it was
g) To purchase, receive, take or grant, hold, convey, sell, lease, pledge, incorporated.
mortgage, and otherwise deal with such real and personal property, including
securities and bonds of other corporations, as the transaction of the lawful Written notice of the proposed
business of the corporation may reasonably and necessarily require, subject action and of the time and place for
to the limitations prescribed by law and the constitution the meeting shall be addressed to
stockholders or members at their
places of residence as shown in the
Power to Deal with Properties books of the corporation and
See the qualifiers here, deposited to the addressee in the
 Reasonably post office with postage prepaid,
 and necessarily require served personally, or when allowed
by the bylaws or done with the
Therefore, it must be for the furtherance of which the corporation was consent of the stockholder, sent
organized. electronically: Provided, That any
dissenting stockholder may
These purchase, receive, take or grant, hold, convey, sell, lease, pledge, exercise the right of appraisal
mortgage must be done in the ordinary course of the business of the
corporation.
under the conditions provided in when allowed by the bylaws or
this Code. done with the consent of the
stockholders: Provided, That any
After such authorization or dissenting stockholder shall have
approval by the stockholders or appraisal right as provided in this
members, the board of directors or Code: Provided, however, That
trustees may, nevertheless, in its where the investment by the
discretion, abandon such sale, corporation is reasonably
lease, exchange, mortgage, necessary to accomplish its
pledge, or other disposition of primary purpose as stated in the
property and assets, subject to the articles of incorporation, the
rights of third parties under any approval of the stockholders or
contract relating thereto, without members shall not be necessary.
further action or approval by the
stockholders or members. Section 35 (h) Section 41
Corporate Powers and Capacity Power to Invest Corporate Funds
Nothing in this section is intended in Another Corporation or Business
to restrict the power of any or for Any Other Purpose
corporation, without the This must be again in relation to Is for any purpose other than the
authorization by the stockholders their primary purpose. primary purpose.
or members, to sell, lease,
exchange, mortgage, pledge, or
otherwise dispose of any of its (i) To make reasonable donations, including those for the public welfare or
property and assets if the same is for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided,
necessary in the usual and regular That no foreign corporation shall give donations in aid of any political party or
course of business of the candidate or for purpose s of partisan political activity;
corporation or if the proceeds of
the sale or other disposition of such Now only foreign corporations are prohibited to give donations in aid of any
property and assets shall be political party or candidate or for purpose s of partisan political activity. Again
appropriated for the conduct of its it must be a reasonable donation.
remaining business.
Requirements for a Valid Donation
Section 35 (g) Section 39  Donation must be reasonable
Corporate Powers and Capacity Sale or Other Disposition of Assets  It must be for a valid purpose
Necessary and reasonably fall Power to sell or dispose all or  Donation must have a reasonable relation to the corporation
within the primary purpose of the substantially all the assets- not interest it must not be fanciful
business necessary for the primary purpose  If the donation is foreign it must not in aid of any political party
of the corporation or candidate or for purpose s of partisan political activity
(h) To enter into a partnership, joint venture, merger, consolidation, or j.) To establish pension, retirement, and other plans for the benefit of its
any other commercial agreement with natural and juridical persons; directors, trustees, officers, and employees; and
Now corporations can be incorporators of a different corporations or a

k.) To exercise such other powers as may be essential or necessary to carry
partnership, joint venture, merger, consolidation, or any other commercial
out its purpose or purposes as stated in the articles of incorporation.
agreement with natural and juridical persons this is to ease commercial
dealings
A catch all phrase. Refers to the implied or incidental powers of the
Section 35 (h) Section 41 corporation.
Corporate Powers and Capacity Power to Invest Corporate Funds
in Another Corporation or Business Summary: General Powers
or for Any Other Purpose a. Power to sue and be sued in its corporate name
h) To enter into a partnership, joint Subject to the provisions of this b. Power to have perpetual existence
venture, merger, consolidation, or Code, a private corporation may c. Power to adopt and use a corporate seal
any other commercial agreement invest its funds in any other d. Power to amend its articles of incorporation
with natural and juridical persons; corporation, business, or for any e. Power to adopt bylaws and to amend or repeal the same
purpose other than the primary f. Power to issue or sell stocks and treasury stocks, and to admit
purpose for which it was members
organized, when approved by a g. Power to deal with properties
majority of the board of directors h. Power to enter into commercial agreement with natural and
or trustees and ratified by the juridical
stockholders representing at least i. persons
two-thirds (2/3) of the outstanding j. Power to make reasonable donations
capital stock, or by at least two- k. Power to provide gratuity pay
thirds (2/3) of the outstanding
capital stock, or by at least two- These general powers must be within the corporation’s primary purpose,
thirds (2/3) of the members in the under the theory of general capacity. If it’s not, then the powers must be
case of nonstock corporations at a granted under the theory of specific capacity, meaning under sec 36 to sec
meeting duly called for the 43 or articles of incorporation
purpose. Notice of the proposed
investment and the time place of
residence as shown in the books of
the corporation and deposited to
the addressee in the post office
with the postage prepaid. Served
personally, or sent electronically in Nora Bitong v. Court of Appeals
accordance with the rules and G.R. No. 123553 | July 13, 1998
regulations of the Commission on
the use of electronic data message,
Issue: Whether petitioner has legal standing to institute a derivative suit? The basis of a stockholder's suit is always one in equity. However, it
NO. Petitioner has no legal standing to institute the derivative suit. cannot prosper without first complying with the legal requisites for its
institution. The most important of these is the bona fide ownership by
Ruling: Section 63 of the Corporation Code envisions a formal certificate of a stockholder of a stock in his own right at the time of the transaction
stock which can be issued only upon compliance with certain requisites. complained of which invests him with standing to institute a derivative
action for the benefit of the corporation.
 First, the certificates must be signed by the president or vice-president,
countersigned by the secretary or assistant secretary, and sealed with Yap, Sr. v. Siao
the seal of the corporation. A mere typewritten statement advising a G.R. No. 212493| June 01, 2016
stockholder of the extent of his ownership in a corporation without
qualification and/or authentication cannot be considered as a formal Issue: Whether or not the certification against forum-shopping signed by
certificate of stock. Yap (president of the corporation) is valid without a board resolution. YES.
 Second, delivery of the certificate is an essential element of its issuance.
Hence, there is no issuance of a stock certificate where it is never Ruling:
detached from the stock books although blanks therein are properly
filled up if the person whose name is inserted therein has no control Officials/employees of the company who can sign the verification
over the books of the company. and certification without need of a board resolution.
 Third, the par value, as to par value shares, or the full subscription as The Court rendered a definitive rule that the following officials or employees
to no par value shares, must first be fully paid. of the company can sign the verification and certification without need of a
 Fourth, the original certificate must be surrendered where the person board resolution:
requesting the issuance of a certificate is a transferee from a 1) the Chairperson of the Board of Directors,
stockholder. 2) the President of a corporation,
3) the General Manager or Acting General Manager,
The certificate of stock itself once issued is a continuing affirmation or 4) Personnel Officer, and
representation that the stock described therein is valid and genuine and is at 5) an Employment Specialist in a labor case.
least prima facie evidence that it was legally issued in the absence of
evidence to the contrary. However, this presumption may be rebutted. The rationale behind the rule is that these officers are "in a position to verify
the truthfulness and correctness of the allegations in the petition."
There is overwhelming evidence that despite what appears on the
certificate of stock and stock and transfer book, petitioner was not a As the corporation's President and Manager, she is in a position to verify the
bona fide stockholder of Mr. & Ms. before March 1989 or at the time truthfulness and correctness of the allegations in the petition. In addition,
the complained acts were committed to qualify her to institute a such an act is presumed to be included in the scope of her authority to act
stockholder's derivative suit against private respondents. Aside from within the domain of the general objectives of the corporation's business and
petitioner's own admissions, several corporate documents disclose that her usual duties in the absence of any contrary provision in the corporation's
the true party-in-interest is not petitioner but JAKA. charter or by-laws.
Aside from petitioner’s own admissions, several corporate documents Substantial Compliance
disclose that the true party-in-interest is not petitioner but JAKA. It should Bolstering our conclusion that the certification of non-forum shopping is valid
be emphasized that JAKA executed, a deed of sale over 1,000 Mr. & Ms. is the subsequent appending of the board resolution to petitioners' motion
shares in favor of respondent Eugenio D. Apostol. On the same day, for reconsideration.
respondent Apostol signed a declaration of trust stating that she was the
registered owner of 1,000 Mr. & Ms. shares covered by a Certificate of Stock. Clearly, a defect in the certification is allowed on the ground of substantial
And, there is nothing in the records which shows that JAKA had revoked the compliance as in this case.
trust it reposed on respondent Eugenia D. Apostol. Neither was there any
evidence that the principal had requested her to assign and transfer the Applying the above-mentioned rule, the signatures of petitioners Gabriel Yap,
shares of stock to petitioner. In fine, the records are unclear on how Jr. and Hyman Yap are not indispensable for the validity of the certification.
petitioner allegedly acquired the shares of stock of JAKA. These petitioners indeed share a common cause of action with Gilbert Yap in
that they are impleaded as officers and directors of Cebu South Memorial
There is no doubt that petitioner was an employee of JAKA as its Garden, the very same corporation represented by Gilbert Yap.
managing officer. However, in the absence of a special authority from
the board of directors of JAKA to institute a derivative suit for and in At any rate, any objection as to compliance with the requirement of
its behalf, petitioner is disqualified by law to sue in her own name. verification in the complaint should have been raised in the proceedings
The power to sue and be sued in any court by a corporation even below, and not in the appellate court for the first time.
as a stockholder is lodged in the board of directors that exercises its
corporate powers and not in the president or officer thereof. In any case, we affirm the summary judgment rendered by the trial court, as
directed by the CA. Petitioners' complaint seeks for specific performance from
It is well settled in this jurisdiction that where corporate directors are respondents, i.e. to transfer ownership of the subject properties to petitioner
guilty of a breach of trust, not of mere error of judgment or abuse corporation based on the Certificate of Agreement. As their defense,
of discretion, and intracorporate remedy is futile or useless, a respondents challenge the validity of the Agreement. However, respondents
stockholder may institute a suit in behalf of himself and other filed a motion for support relying on the same Agreement that they are
stockholders and for the benefit of the corporation, to bring about a impugning. In view of this admission, respondents are effectively banking on
redress of the wrong inflicted directly upon the corporation and indirectly the validity of the Agreement. Thus, there are no more issues that need to
upon the stockholders. be threshed out.
The stockholder's right to institute a derivative suit is not based on any

The court here allowed the discrepancies just to not delay further
express provision of The Corporation Code but is impliedly recognized
proceedings for such small technicalities.
when the law makes corporate directors or officers liable for damages
suffered by the corporation and its stockholders for violation of their
fiduciary duties. Hence, a stockholder may sue for mismanagement,
waste or dissipation of corporate assets because of a special injury to
him for which he is otherwise without redress.
In effect, the suit is an action for specific performance of an obligation

owed by the corporation to the stockholders to assist its rights of
action when the corporation has been put in default by the wrongful
Lopez Realty, Inc. v. Fontecha et al
refusal of the directors or management to make suitable measures for
G.R. No. 76801 | August 11, 1995
its protection.
Issue: WON the resolutions passed by the board of directors during special letter J and no other, if the RCC does not require a 2/3 vote then only board
meetings on August 1, 1981 and September 1, 1981 were ultra vires for lack of directors’ approval is necessary to grant gratuity pay. There is no other
of notice – NO, the resolutions were not ultra vires for lack of notice. rules and sections requiring the 2/3 of the shareholders. That is the moral
lesson in Lopez Realty.
Ruling:
Specific Powers
General Rule 1. Sec. 36 Power to extend or shorten corporate term
A corporation, through its board of directors, should act in the manner and 2. Sec. 37 power to increase or decrease capital stock; incur, create
within the formalities, if any, prescribed by its charter or by the general law. or increase bonded indebtedness
Thus, directors must act as a body in a meeting called pursuant to the law 3. Sec. 38 power to deny preemptive right
or the corporation's by-laws, otherwise, any action taken therein may be 4. Sec. 39 sale or other disposition of assets
questioned by any objecting director or shareholder. 5. Sec. 40 power to acquire own shares
6. Sec. 41 power to invest corporate funds in another corporation or
Exception; Express or Implied Ratification business for any other purpose
An action of the board of directors during a meeting, which was illegal for 7. Sec. 42 power to declare Dividends
lack of notice, may be ratified either expressly, by the action of the directors 8. Sec. 43 power to enter into management contract
in subsequent legal meeting, or impliedly, by the corporation's subsequent
course of conduct. These are the corporate powers which the corporation is entitled only
because it is expressly provided under the RCC. If in the future, they remove
Ratification by directors may be by an express resolution or vote to that the power to deny the preemptive right, then the corporation does not have
effect, or it may be implied from adoption of the act, acceptance or the power to deny preemptive right anymore.
acquiescence. Ratification may be effected by a resolution or vote of the
board of directors expressly ratifying previous acts either of corporate officers So, it only exists because it is expressly granted under the RCC.
or agents; but it is not necessary, ordinarily, to show a meeting and formal
action by the board of directors in order to establish a ratification.
Power to Extend or Shorten Corporate Term
The unauthorized acts of an officer of a corporation may be ratified by the Section 36. Power to Extend or Shorten Corporate Term. - A private
corporation by conduct implying approval and adoption of the act in question. corporation may extend or shorten its term as stated in the articles of
Such ratification may be express or may be inferred from silence and inaction. incorporation when approved by a majority vote of the board of directors or
trustees, and ratified at a meeting by the stockholders or members
In the case at bench, it was established that petitioner corporation did not representing at least two-thirds (2/3) of the outstanding capital stock or of its
members. Written notice of the proposed action and the time and place of the
issue any resolution revoking nor nullifying the board resolutions granting
meeting shall be sent to the stockholders or members at their respective
gratuity pay to private respondents. Instead, they paid the gratuity pay,
place of residence as shown in the books of the corporation, and must be
particularly, the first two installments thereof.
deposited to the addressee in the post office with postage prepaid, served
personally, or when allowed in the bylaws or done with the consent of the
Despite the alleged lack of notice to Asuncion at that time the assailed stockholder, sent electronically in accordance with the rules and regulations
resolutions were passed it can be gleaned from the records that she was of the Commission on the use of electronic data messages. In case of
aware of the corporation's obligation under the said resolutions. More extension of corporate term, a dissenting stockholder may exercise the
importantly, she acquiesced thereto. As pointed out by private respondents, right of appraisal under the conditions provided in this Code.
Asuncion affixed her signature on Cash Vouchers evidencing the 2nd
installment of the gratuity pay.
I highlighted the meeting because I had given you an enumeration before
(of those that require a meeting) so, that’s why I highlighted the meeting.
Therefore, that the conduct of petitioners after the passage of resolutions
The last sentence (In case of extension…), I made this in bold letters, so, it
dated August, 17, 1951 and September 1, 1981, had estopped them from
says that it is ONLY in extension.
assailing the validity of said board resolutions.
What if it is for shortening the corporate term?
Ultra Vires; Definition
If you shorten the corporate term, even if it is not mentioned here, you still
Assuming, arguendo, that there was no notice given to Asuncion during the
have the right of appraisal. Check Section 80. When right of appraisal may
special meetings, it is erroneous to state that the resolutions passed by the be exercised, under letter A.
board during the said meetings were ultra vires.
In legal parlance, "ultra vires" act refers to one which is not within the Section 80. When the Right of Appraisal May Be Exercised. - Any
stockholder of a corporation shall have the right to dissent and demand
corporate powers conferred by the Corporation Code or articles of
payment of the fair value of the shares in the following instances:
incorporation or not necessary or incidental in the exercise of the powers so
a. In case an amendment to the articles of incorporation has the effect of
conferred. changing or restricting the rights of any stockholder or class of shares,
or of authorizing preferences in any respect superior to those of
A corporation has the power and capacity to establish pension, retirement outstanding shares of any class, or of extending or shortening the
and other plans for the benefit of its directors, trustees, officers and term of corporate existence;
employees.
You still have an appraisal right if its extending or shortening. Maybe they
The assailed resolutions cover a subject which concerns the benefit and
just forgot to put it there (the word “shortening”) so, if you [want to], you
welfare of the company's employees. To stress, providing gratuity pay for its
can right it on top of there, “shortening” as well.
employees is one of the express powers of the corporation under the
Corporation Code, hence, petitioners cannot invoke the doctrine of ultra vires
What if the SH or BOD, decided to shorten the life of the corporation
to avoid any liability arising from the issuance the subject resolutions.
for the purpose of dissolving the corporation?
Did it require shareholder’s approval? The grant of gratuity pay? EX: It decided to shorten the life to end in 2020, so the corporation has to
Yes. It is under the General Powers, the power to provide gratuity. expire because it is already 2021, they shortened it to dissolve it, so would
there still be appraisal right?
If it is a general power, does it require a shareholders approval? If
one of the items, as stated in the case of Lopez Realty. There would be no appraisal right anymore because it would be superfluous,
If without the stockholder’s approval, the board can grant a gratuity pay. It as they had shortened it to dissolve and dissolution entails distribution of
is one of the general powers. assets to the stockholders after satisfaction of claims of creditors.
Discussion: There are specific items in this section (of general powers) that They would now liquidate, and distribute, so why would you exercise
has specific sections under the RCC, (example) as to amendments, there are appraisal right? Why would you exercise appraisal right if they would
some amendments that would require the voting of 2/3 but other than that, dissolve? They shortened for the purpose of dissolution.
it (gratuity pay) has no other mention under the RCC, it’s just a mention in
Because then dissolution would require the distribution of assets already. Power to Increase or Decrease Capital Stock;
You can relate Sec. 36 to Sections 11 and 15.
Incur, Create, or Increase Bonded Indebtedness
Section 11. x x x A corporate term for a specific period may be extended or Section 37. Power to increase or Decrease Capital Stock; Incur, Create or
Increase Bonded Indebtedness. - No corporation shall increase or decrease
shortened by amending the articles of incorporation: Provided, That no
extension may be made earlier than three (3) years prior to the original or its capital stock or incur, create or increase any bonded indebtedness unless
subsequent expiry date(s) unless there are justifiable reasons for an earlier approved by a majority vote of the board of directors and by two-thirds
extension as may be determined by the Commission: Provided, further, That (2/3) of the outstanding capital stock at a stockholders' meeting duly called
such extension of the corporate term shall take effect only on the day for the purpose. Written notice of the time and place of the stockholders'
following the original or subsequent expiry date(s) meeting and the purpose for said meeting must be sent to the stockholders
at their places of residence as shown in the books of the corporation served
on the stockholders personally, or through electronic means recognized in
So, it requires the majority vote, so you relate that (appraisal right and the corporation's bylaws and/or the Commission's rules as a valid mode for
section 80) to section 11. So, meaning under sec. 11 the majority of the service of notices.
board plus 2/3 vote (of OCS) is for the purpose of amending the articles of
incorporation, the same as sec. 15 as well. Voting, meeting, and notice requirements are the same as the previous
Section 36. Note that this power to increase capital stock is different from a
Section 15. Amendment of Articles of Incorporation. - Unless otherwise corporation’s general power to issue shares of stock which is lodged with the
prescribed by this Code or by special law, and for legitimate purposes, any Board of Directors and does not require the shareholders approval. It is only
provision or matter stated in the articles of incorporation may be amended by the increase of decrease of the capital stock which needs the shareholders’
a majority vote of the board of directors or trustees and the vote or written approval.
assent of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, without prejudice to the appraisal right of dissenting
So you have authorized capital stock, once you have that you can issue
stockholders in accordance with the provisions of this Code. The articles of
incorporation of a nonstock corporation may be amended by the vote or shares to those who want to invest. But if you want to increase or decrease
written assent of majority of the trustees and at least two-thirds (2/3) of the the capital stock, that is when you need the approval of the shareholders.
members. It is better for you to relate this section to Section 35, so you can compare.
Reasons for Increasing Capital Stock

Review 11 and 15.  To obtain additional funds;
 To acquire corporate assets;
Requisites for Extending or Shortening Corporate Term  To support dividend declaration
1. Sec. 36 – approval by a majority vote of the BOD/BOT
2. Sec. 36 – ratification of at least 2/3 of OCS/Members In case of unsubscribed shares of the authorized capital stock is not enough,
3. Sec. 36 – (1) meeting called for the purpose (2) written notice of then you have to increase the authorized capital stock, because over issuance
the proposed action and (3) time and place of the meeting must above the authorized capital stock is not allowed for being ultra vires.
be sent to the SH’s residence and served personally or sent
electronically For example, you decide to issue stock dividends, then you have insufficient
4. Sec. 11 – if involves banks, banking and quasi-banking shares/ authorized capital stock available, then you have to increase the
institutions, preneed, insurance and trust companies, NSSLAS, authorized capital stock so you will have shares to distribute as stock
pawnshops and other financial intermediaries, amendment of AOI dividends.
must be accompanied by favorable recommendation of
appropriate government agency; and Ways of Increasing or Decreasing Capital Stock
5. Sec. 11 – extension must be done during the lifetime of the
1. By increasing or decreasing the number of shares and retaining
corporation but not earlier than 3 years prior to the original or
the par value
subsequent expiry date(s) unless there are justifiable reasons for
2. By increasing or decreasing the par value of existing shares and
an earlier extension as may be determined by the SEC.
retaining the number of shares
3. By increasing or decreasing both the number of shares and the
If there is only temporary cessation of corporate operations?
par value
Must relate 36 to 21, which we have discussed before as to the effects of
non-use of corporate charter and continuous cessation. So, what if there is
The most common and practicable way used in practice is number one. They
merely a temporary cessation, do you need the majority of the BOD or BOT
just retain the amount in the certificate. They don’t change the par value,
plus 2/3 OCS? Do you need their approval to temporarily stop operations?
they just issue more certificates.
A: SEC Opinion No. 43-04.
Why? Number two and three are not practical because you have to increase
the par value. You increase it by taking back all the certificates, change the
SEC Opinion No. 43-04 amount, and increase the par value. So basically, you will get all the
DOCTRINE OF THE CASE certificates back and reissue one with higher par value.
For approval of the temporary cessation of business, the following are Any of these, you have to amend the AOI.
required:
a. Stockholders — 2/3 approval of the outstanding capital stock;
How to Decrease the Number of Authorized Shares
b. BOD — majority approval
 By redemption of redeemable shares
 By acquiring own shares
Transcribed by: Keziah M Sioson  By canceling or retiring shares
The corporate powers under that SEC Opinion usually refers only to ordinary
business transactions of the corporation and do not extend beyond the Actually, if you think about it, there is no increase in the capital stock despite
management of ordinary corporate affairs nor beyond the limits of its redemption of the redeemable shares or the purchase of own shares.
authority. We have learned before that if you redeem or you acquire treasury shares,
it remains as treasury shares unless you cancel or retire the shares.
In that case, the issue of the temporary stoppage of the operations of the It is only when you cancel or retire the shares that you have to amend the
corporation can no longer be classified as an ordinary business transaction AOI to lessen your authorized capital stock.
such as to limit its approval to board of directors.
The cessation of business, though temporary is a fundamental concern which

should be decided by also by the stockholders. Therefore, even if it is only Is it required that the corporation has fully issued and subscribed
temporary cessation, you still need 2/3 vote of the stockholders. all its shares before it increases its authorized capital stock?
No, you need not exhaust all of the existing authorized capital stock. A
corporation is not prohibited from increasing its authorized capital stock even
if the same has not been fully subscribed yet.
treasurer of the corporation accompanied by a sworn statement of the
If kulang yung stock dividends, you just increase it as I already mentioned. treasurer…”
Let us go to the next section. This is a continuation of the Section 37.
I already mentioned this before, that they don’t have a minimum subscribed
Sec. 37 xxx A CERTIFICATE must be signed by a majority of the directors capital and paid up capital have any more requirement but when you increase
of the corporation and countersigned by the chairperson and secretary of or decrease capital you now need this certification.
the stockholders’ meeting, setting forth:
A. That the requirements of this section have been complied with; I mentioned this certification before: a sworn statement of the treasurer that
B. The amount of the increase or decrease of the capital stock; at least 25% of the capital has been subscribed and that 25% has been paid
C. In case of an increase of the capital stock, the amount of capital stock up by actual cash or property, and the valuation of the said property has
or number of shares of no-par stock thereof actually subscribed, the been transferred to the corporation.
names nationalities and addresses of the persons subscribing, the
amount of capital stock or number of no-par stock subscribed, the So, this is the conflict I was referring to during the previous discussion
names, nationalities and addresses of the persons subscribing, the because if you increase your capital stock required to do the 25% 25%
amount of capital stock or number of no-par stock subscribed by each, requirement.
and the amount paid by each on the subscription in cash or property, or
the amount of capital stock or number of shares of no-par stock allotted
Is the 25% subscription and 25% paid requirement computed from
to each stockholder if such increase is for the purpose of making
the total capital stock or the increase?
effective stock dividend therefor authorized;
The 25-25 requirement is based only on the capital stock increase and not to
D. Any bonded indebtedness to be incurred, created or increased;
E. The amount of stock represented at the meeting; and the total capital stock as increased. In other words yung dinagdag lang yung
F. The vote authorizing the increase or decrease of capital stock, or kailangan bayaran.
incurring, creating or increasing of bonded indebtedness.
EX: 20,000 shares and you decided to increase another 5,000 shares so the
25% is computed from the 5,000 so (25% x 5,000 = 1250) so 1250 ang
Director’s Certificate kailangan subscribed and the 25% of 1250 which is 313 must be paid.
Letter A to F are the contents of what you call a director’s certificate. If you
look at the provision “a certificate must be signed by a majority of the Note: This might come out in our exam or in the bar. Anyway in the bar if
directors of the corporation and countersigned by the chairperson and you cannot compute or you do not know how to compute, you can merely
secretary”, so it can be called a director’s certificate or a secretary’s write in the essay the procedure of the computation.
certificate.
The 25-25 Requirement is intended by the Senate to ensure that the
It will depend on who signed the certificate which is either the chairperson infusion of fresh capital in to the corporation. You want to increase the
of the board or the secretary. If you compare this to the previous Section 37, authorized capital stock, you can get new capital but as an assurance that
they deleted the requirement to state the actual indebtedness of the you really did get new capital then the treasurer has to do the 25-25
corporation on the day of the meeting hence no need to state it in the requirement. It is to make sure that there is an increase and you really
certificate. received money.
SEC. 37. Xxx Any increase or decrease in the capital stock or the incurring, Transcribed by: Pau Rojo
creating or increasing of any bonded indebtedness shall require prior Just to make sure that you have increased, and you received money for the
approval of the Commission and where appropriate, of the Philippine said increase. It is just to make sure that there were investments made for
Competition Commission. The application with the Commission shall be the said increase in capital stock. So, that’s what they want to insure “infusion
made within six (6) months from the date of approval of the board of directors of fresh capital”
and stockholders, which period may be extended for justifiable reasons.
Should each subscriber pay 25% of their subscription? Should
Revision those who bought newly issued shares be required to pay the 25%
They added the requirement of getting a PCCC or the Philippine Competition immediately? How should they pay?
Commission’s approval aside from SEC approval in certain cases. The law actually does not require that each subscriber pay 25% of their own
subscription. The amount of payment depends on the terms of their
Where appropriate the PCCC’s approval is required for an increase or subscription, but the 25% paid up requirement is based on the total amount
decrease of capital stock. Take note here, there is now a time limit as stated of subscription (which refers to the increased).
the application with the Commission shall be made within 6 months from the
date of approval of the board of directors. As long as the 25% of the increase is paid, it does not matter if one of the
subscribers pays only 5% of their shares or even if they don’t pay at all.
Before, there was no time limit but now we have to report it to the Again, as long as a whole, the 25% of the increase is paid up.
Commission within 6 months. The application to get approval from the SEC If there are different types of shares, it does not matter that the preferred
must be within 6 months from the board of directors or shareholders’ shares are only paid up to 5%, as long as the aggregate paid up is 25% for
approval but it is extendable for justifiable reasons. They already stated it is all classes of shares.
extendible so why require it already.
Let us go to the last sentence of Section 37, “Provided further, That no
Copies of the certificate shall be kept on file in the office of the corporation decrease in capital stock shall be approved by the Commission if its effect
and filed with the Commission and attached to the original articles of shall prejudice the rights of corporate creditors.”
incorporation. After approval by the Commission and the issuance by the
Commission of its certificate of filing may declare: Provided, That the What does this last sentence recognize?
Commission shall not accept for filing any certificate of increase of capital This is an application of Trust Fund Doctrine. It is a recognition of such
stock unless accompanied by a sworn statement of the treasurer of the doctrine – That, no distribution of capital is allowed to prejudice the creditors.
corporation accompanied by a sworn statement of the treasurer of the No decrease of capital is allowed to the prejudice of creditors.
corporation lawfully holding office at the time of the filing of the certificate,
showing that at least twenty-five percent (25%) of the increase in capital Requisites for Increase Or Decrease Capital Stock Or Incur, Create,
stock has been subscribed and that at least twenty-five percent (25%) of Or Increase Bonded Indebtedness
the amount subscribed has been paid in actual cash to the corporation or  SEC. 37. Approval by a majority vote of the BOD;
that property, the valuation of which is equal to twenty-five percent (25%)  SEC. 37. Ratification of at least two-thirds (2/3) of the OCS;
of the subscription, has been transferred to the corporation: Provided,  SEC. 37 Meeting called for the purpose. Written notice of the
further, That no decrease in capital stock shall be approved by the proposed action and the time and place of the meeting must be
Commission if its effect shall prejudice the rights of corporate
sent to the SH’s residence and served personally or sent
creditors.
electronically;
 SEC. 37. A certificate signed a majority of BOD and
“Provided, That the Commission shall not accept for filing any certificate of countersigned by the chairperson and secretary of the
increase of capital stock unless accompanied by a sworn statement of the stockholders’ meeting setting forth letter (a) to (f);
 SEC. 37. If increase of capital stock with sworn statement of period of years, to obtain it from a large number of people, and to facilitate
the treasurer that at least 25% of the increase has been the transfer of the certificate of indebtedness from hand to hand during the
subscribed and at least 25% thereof has been paid in cash or term of collective obligations.
property;
 SEC. 37. Prior approval of SEC or PCC where appropriate; and Such bond issues are usually secured by the transfer to a trustee of a specific
 SEC. 16. If involves banks, banking and quasi-banking institutions, property to secure the payment of debt.
preneed, insurance and trust companies, NSSLAS, pawnshops,
and other financial intermediaries, amendment of AOI must be The effect of the creation and issuance of such obligation is a borrowing from
accomplished by favorable recommendation of the the general public.
appropriate government agency.
SEC opines that “bonded indebtedness” refers to negotiable corporate bonds
which are secured by mortgage on corporate property.
Central Textile Mills, Inc. vs. NWPC
260 SCRA 368 The effect of the creation and issuance of such obligation is a borrowing from
the general public. It is an indebtedness to the public. It is an indebtedness
No Increase in Capital Stock of Central Textile Mills. to whoever is the holder of the bond that the corporation has to pay, if the
These payments cannot as yet be deemed part of petitioner’s paid-up capital, bond is surrendered.
technically speaking, because its capital stock has not yet been legally
increased. Such payments constitute deposits on future subscriptions, money Review:
which the corporation will hold in trust for the subscribers until it files a  If it is a negotiable corporate bond, you need shareholder approval
petition to increase its capitalization and a certificate of filing of increase of based on Section 37.
capital stock is approved and issued by the SEC.  If it is a promissory note (a loan, not a bond), does not require
shareholders’ approval.
As a trust fund, this money is still withdrawable by any of the subscribers at  If it is a promissory note with mortgage, it still does not require
any time before the issuance of the corresponding shares of stock, unless shareholders’ approval.
there is a pre-subscription agreement to the contrary, which apparently is  If it is a non-negotiable note, there is still no need for
not present in the instant case. shareholders’ approval, again only if it is a negotiable instrument.
Consequently, if a certificate of increase has not yet been issued by the SEC,
the subscribers to the unauthorized issuance are not to be deemed as
Interim Guideline for the Registration of Bonds,
stockholders possessed of such legal rights as the rights to vote and SEC Rules and Regulations, December 14, 1987
dividends. Bonds shall refer to securities representing denominated units of
indebtedness issued by a corporation to raise money or capital obliging the
This case basically teaches you that before you can claim that you have issuer to pay the maturity value at the end of a specific period which should
increase your authorized capital stock, you should first procure the approval be not less than 360 days, and where applicable, payment of interest on
of the SEC. Here, they were trying to claim for an exception, however the stipulated dates.
SEC did not yet approve their increase of capital stock. Therefore, Central
Textile Mills was not qualified to claim for an exception. Bonds secured by mortgage on specific corporate property shall be created
under Sec. 38 (37) of the Corporation Code prior to registration.
Powers to Increase or Decrease Capital Stock; Incur, Create, or
Note: Please read the other provisions of the Guideline.
Increase Bonded Indebtedness
This is the last paragraph of the provision.
SEC. 37. Xxx Nonstock corporations may incur, create or increase bonded Power to Deny Preemptive Right
indebtedness when approved by a majority of the board of trustees and of at SEC. 38. Power to Deny Preemptive Right. – All stockholders of a stock
last two-thirds (2/3) of the members in a meeting duly called for the purpose. corporation shall enjoy preemptive right to subscribe to all issues or
disposition of shares of any class, in proportion to their respective
Bonds issued by a corporation shall be registered with the Commission, shareholdings, unless such right is denied by the articles of incorporation or
which shall have the authority to determine the sufficiency of the terms an amendment thereto: Provided, That such preemptive right shall not extend
thereof. to shares issued in compliance with laws requiring stock offerings or minimum
stock ownership by the public; or to shares issued in good faith with the
Bonded Indebtedness approval of the stockholders representing two-thirds (2/3) of the outstanding
capital stock, in exchange for property needed for corporate purposes or in
It is a borrowing by the corporation which is long term in nature involving a payment of a previously contracted debt.
large number of lenders and secured by the encumbrance on corporate
assets.
The preemptive right is already expressly granted by the RCCP. However, it
A bond is a type of security which must be registered with the SEC. By now, can be denied by the articles of incorporation or an amendment thereto.
you should be able to distinguish the difference between bonds and stocks.
There are government bonds, private bonds. Also, bond is actually a liability SEC OPINION 19-15
on the part of the corporation. March 13, 2019
Bonds Differ from Loans The grant of preemptive right is mandatory. The shareholders whose name
In loans, even if a significant amount it is not subject to shareholder approval. appear in stocks and transfer book of the corporation, on date of the meeting
But the issuance by the corporation of negotiable bonds to the public are authorizing the issuance of shares are entitled to preemptive right under
subject to shareholders’ approval. Section 38.
Bonds are same as shares, they have papers to evidence the bond, then they
negotiate the bonds like shares. They can pass it from one person to another
person. Then, whoever is the holder of the bond can claim the value of the
amount of bonds.

SEC OPINION, April 29, 1987
You can only see here articles and amended articles it does not include by-
Characteristics of a Bonded Indebtedness laws nor board resolution.
“Bonds” are negotiable certificate of indebtedness, the purpose of which are The only way you can deny pre-emptive right:
to enable the corporation to make use of the borrowed money for a long 1. Articles of Incorporation; or
2. Amended Articles of Incorporation. and the present action has been instituted precisely for the purpose of
protecting the true and legitimate interests of Ruby against the Majority
If you compare this to the previous sections 37 and 36, you cannot see any Stockholders. On this score, the Supreme Court, has ruled that
mention here of a meeting. I’ve mention this before that meeting is not
required to deny pre-emptive right. A vote can be communicated without a "Generally speaking, the voice of the majority of the stockholders is the law
meeting. of the corporation, but there are exceptions to this rule. There must
necessarily be a limit upon the power of the majority. Without such a limit
Pre-Emptive Right the will of the majority will be absolute and irresistible and might easily
It is the right of stockholders to subscribe to all issues or disposition of shares degenerate into absolute tyranny.x x x"
of any class, in proportion to their respective shareholdings.
Liquidation Proceedings As Only Hope For Minority
It means, that the shares of stock of the corporation should first be offered Lamentably, the SEC refused to heed the plea of the minority stockholders
proportionately to the stockholders before they can be issue or sold to non- and MANCOM for the SEC to order RUBY to commence liquidation
stockholders. proceedings, which is allowed under Sec. 4-9 of the Rules on Corporate
Recovery. Under the circumstances, liquidation was the only hope of the
They should be first. They have priority to buy the shares of stock. minority stockholders for effecting an orderly and equitable settlement of
RUBYs obligations, and compelling the majority stockholders to account for
Rationale all funds, properties and documents in their possession, and make full
It is so that the shareholder can maintain their proportionate voting strength disclosure on the nullified credit assignments. Oblivious to these pending
and control of existing stockholders. That is how the existing ratio of their incidents so crucial to the protection of the interest of the majority of
interest and voting power in the corporation is maintained. This is to prevent creditors and minority shareholders, the SEC simply stated that in the interim,
dilution and impairment of the shareholder’s interest in the corporation. RUBYs corporate term was validly extended, as if such extension would
provide the solution to RUBYs myriad problems.
EX: A B C and D owns 25% each. In the new share issuance, they are entitled
to the first opportunity to subscribe to 25% thereof. So, whatever new Extension of corporate term requires the vote of 2/3 of the outstanding
increase or decrease issuance, they are entitled to buy 25% of that. capital stock in a stockholders meeting called for the purpose. The actual
percentage of shareholdings in RUBY as of September 3, 1996 -- when the
This is actually similar to a term you know in Oblicon or Sales, right to first majority stockholders allegedly ratified the board resolution approving the
refusal. They are used interchangeably but actually right to pre-emptive right extension of RUBY's corporate life to another 25 years was seriously disputed
is a technical term under the RCCP. Under section 38. It is a technical term by the minority stockholders, and we find the evidence of compliance with
for subscribing shares to be issued by the corporation. I will discuss their the notice and quorum requirements submitted by the majority stockholders
difference later. insufficient and doubtful. Consequently, the SEC had no basis for its ruling
denying the motion of the minority stockholders to declare as without force
MAJORITY OF STOCKHOLDERS OF RUBY INDUSTRIAL v. LIM and effect the extension of RUBY's corporate existence.
G.R. No. 165887 | June 7, 2011
Instances When Pre-Emptive Right Does Not Apply
The minority’s pre-emptive rights were violated.
[1] Denial of pre-emptive right in the AOI or amendment thereto
The Minority’s pre-emptive rights.
Sec. 39 of the Corporation Code refers to the right of a stockholder of a stock [2] Waiver of such right by the SH whether express or implied
corporation to subscribe to all issues or disposition of shares of any class, in
proportion to their respective shareholdings. The right may be restricted or If there is a waiver, if the board prescribes a certain number of days within
denied under the articles of incorporation, and subject to certain exceptions which to exercise the right of pre-emptive right and the shareholder fails to
and limitations. The stockholder must be given a reasonable time within exercise such right within the prescribed period then there is implied
which to exercise their pre-emptive rights. Upon the expiration of said period, waiver;
any stockholder who has not exercised such right will be deemed to have
waived it. If the majority shareholders waive their pre-emptive rights, can the
minority be forced to waive theirs?
The validity of issuance of additional shares may be questioned if Under SEC Opinion 808-08-08, no. The waiver of right is personal and to be
done in breach of trust by the controlling stockholders. executed individually by the stockholders and cannot be waived by others in
Thus, even if the pre-emptive right does not exist, either because the issue their behalf without their authority/SPA. Hence, a shareholder cannot be
comes within the exceptions in Section 39 or because it is denied or limited forced to waive his right even if the majority shareholders opt to waive it. It
in the articles of incorporation, an issue of shares may still be objectionable can only be denied if provided in the articles or amendment thereto.
if the directors acted in breach of trust and their primary purpose is to
perpetuate or shift control of the corporation, or to "freeze out" the minority [3] Shares issued in compliance with the laws requiring minimum stock
interest. In this case, the following relevant observations should have ownership by the public
signalled greater circumspection on the part of the SEC -- upon the third and
last remand to it pursuant to our January 20, 1998 decision -- to demand EX: Public companies under the Philippine stocks exchange. Current
transparency and accountability from the majority stockholders, in view of minimum public ownership is 10% of the outstanding capital stock otherwise
the illegal assignments and objectionable features of the Revised your shares are delisted from the BSP. That is why there are laws requiring
BENHAR/RUBY Plan. minimum stock ownership by the public. That 10% minimum is not subject
to the pre-emptive right.
There can be no gainsaying the well-established rule in corporate practice
and procedure that the will of the majority shall govern in all matters within [4] Issuance of shares in exchange for property given for a corporate
the limits of the act of incorporation and lawfully enacted by-laws not purposed, if approved by SH representing 2/3 OCS
proscribed by law. It is, however, equally true that other stockholders are
afforded the right to intervene especially during critical periods in the life of [5] Issuance of shares in payment of debt made in good faith, if approved
a corporation like reorganization, or in this case, suspension of payments, by SH representing 2/3 OCS
more so, when the majority seek to impose their will and through fraudulent
means, attempt to siphon off Ruby’s valuable assets to the great prejudice Disposition
of Ruby itself, as well as the minority stockholders and the unsecured Under Section 38 what does this issue or disposition mean? Does it mean
creditors. that the shareholders have pre-emptive right as to unissued shares only or
only in case of increase of capital stock or both? When do they have
Certainly, the minority stockholders and the unsecured creditors are given preemptive right? Is it only as to what is left of the shares or in case the
some measure of protection by the law from the abuses and impositions of corporation increases the authorized capital stock or both?
the majority, more so in this case, considering the give-away signs of private
respondents perfidy strewn all over the factual landscape. Indeed, equity The pre-emptive right applies to any and all issuances of shares whether
cannot deprive the minority of a remedy against the abuses of the majority, sourced from the unissued portion of the authorized capital stock or in case
of increase of capital stock as well as the disposition of treasury shares. This Accordingly, pre-emptive right is available to existing shareholders of PSE in
is in the SEC Opinion 41-11. It includes all dispositions by the corporation the instant case because:
shares. (1) the law in granting pre-emptive rights to existing shareholders makes
no distinction between newly issued shares and unsubscribed original
SEC-OGC OPINION NO. 11-41 authorized capital stock;
October 5, 2011 (2) PSE's Articles of Incorporation do not deny pre-emptive rights to its
Digest by: Sette Aying shareholders; and,
(3) the issuance of shares to potential strategic investors does not fall
DOCTRINE OF THE CASE among the exceptions enumerated in Section 39 of the Corporation
Unless denied in the articles of incorporation or the issuance falls under any Code.
of the enumerated exceptions, all existing stockholders of record are entitled
to exercise pre-emptive right to subscribe to all issues or disposition of shares Is the pre-emptive right enforceable against the other shareholders
of any Class of a stock corporation. who are planning to sell their shares to 3rd parties?
The answer is found in SEC Opinion 19-51. This discussed the difference
PSE’s Assertion: between right of first refusal and pre-emptive right.
• Pre-emptive rights are recognized only with respect to new issues of
shares and not with respect to unsubscribed authorized capital shares. SEC-OGC OPINION No. 19-51
• The sale to the strategic investors is in compliance with the legal limit October 11, 2019
provided under Section 33.2(c) of the Securities Regulation Code (SRC), Digest by: Jab Balindong
and therefore, falls under the exceptions enumerated in Section 39 of
the Corporation Code. This pertains to the queries of Carlos Eustaquio before the SEC. Relevant to
Sec 38 is his query No.4 which states that:
Power to Deny Pre-Emptive Right
At the outset, Section 39 of the Corporation Code explicitly states that unless “In the absence of right of first refusal in the Universidad de Zamboanga Inc.
denied in the articles of incorporation or the issuance falls under (UDZ) Articles of Incorporation or By-Laws, can a stockholder sell his/her
any of the enumerated exceptions, all existing stockholders of share without offering to other stockholders?”
record are entitled to exercise pre-emptive right to subscribe to all
issues or disposition of shares of any Class of a stock corporation. [Essentially, the SEC emphasized the difference between pre-emptive right
and right of first refusal]
Since Section 39 uses the phrase all issues or disposition of shares of any
class" pre-emptive right extends not only: to issuance of new shares resulting The right of first refusal is a right that arises only by virtue of contractual
from an increase in capital stock, but also to issuance of previously stipulations, in which case the right is construed strictly against the right of
unsubscribed shares which form part of the existing authorized capital stock, persons to dispose of or deal with their property. It may also be provided for
as well as to disposition of treasury shares. Where the law does not in specified statutory provisions, such as that provided for in section 98 of
distinguish, courts should not distinguish. the code on close corporation.
Considering that Section 39 of the Corporation Code does not distinguish Unlike pre-emptive right which pertains to stockholders by common law and
between newly issued shares and previously unsubscribed shares, we opine does not require any statutory enabling provision, the right of first refusal, if
that pre-emptive right is available to existing shareholders of PSE not provided for by-law or by the articles of incorporation, does not exist at
upon its issuance of unsubscribed authorized capital stock to all.
potential strategic investors.
[Here, Mr. Eustaquio was advised to check the UDZ’s AOI or by-laws to
Although the Supreme Court held in the Benito case and Dee case that determine whether a right of first refusal is granted to its stockholders. In
preemptive rights are recognized only with respect to new issues of shares, case the AOI or by-laws are silent, a stockholder may freely sell his
it must be emphasized that the events which gave rise to said cases (Le. the shareholdings to others without offering it to the corporation or to its
issuance of shares) took place under the old Corporation Law wherein pre- stockholders.]
emptive right is not expressly provided. Thus, when the Corporation Code
expressly granted and broadened the extent of pre-emptive right, the Discussion:
principles stated in said two cases no longer apply. Thus, the right of first refusal must be provided in the articles or the bylaws
and the certificate of stock for it to be binding to 3rd persons. If it is silent
It was further opined in SEC Opinion dated 10 March 2000 to RPN that all then a shareholder is free to sell to whoever they want the shares that they
issuances or disposition of shares by a corporation after the effectivity of the possess. We have transmissibility of shares. That’s exactly the point of that.
Corporation Code shall be subject to Section 39 of the Corporation Code. They have the right to sell to anybody unless such right is restricted and
provided in the certificate of stock itself. That is also found under sec 98
The Issuance of Shares to Potential Strategic Investor Do Not Fall under closed corporations. Under sec 97 provides for the validity of
Under the Exceptions Enumerated In Section 39 restrictions of transfer of shares. It must appear in the articles, by-laws, as
Neither is the issuance of shares to potential strategic investors fall under the well as the certificate of stock otherwise the same shall not be binding on
exceptions enumerated in Section 39 of the Corporation Code. any purchaser in good faith.
It is apparent from Section 39 that pre-emptive right does not extend to the Pre-Emptive Right Right Of First Refusal
issue of shares made in compliance with laws requiring stock offerings or Right of a current shareholder to Shareholder’s right to match a
minimum stock ownership by the subscribe to a corporation’s prospective buyer’s offer to
public. However, PSE's issuance of shares to potential strategic investors to issuance. purchase his co-shareholder’s
comply with Section 33.2(c) of the SRC cannot be considered as one in share.
compliance with laws requiring stock offerings or minimum stock ownership. [Use that against the corporation]
[Between shareholders]
Section 33.2(c) of the SRC clearly provides a maximum, not the minimum, Term under corporation law Term in a contract
limit on stock ownership, and does not necessarily require the issuance of
shares to comply with the legal requirements provided therein.
Further, it must be emphasized that when the statute itself enumerates the
Transcribed by: Pizarro, Lorenzo Antonio
exceptions to the application of the general rule, the exceptions are strictly
What is the remedy of a stockholder who is not in favor of an
but reasonably construed. The exceptions extend only as far as their
amendment to the articles of incorporation denying preemptive
language fairly warrants, and all doubts should be resolved in favor of the
right?
general provision rather than the exceptions.
The remedy of such dissenting stockholder is to exercise his appraisal
right.
The foregoing situation is one of the instances where the appraisal right may  Under the fourth paragraph of Section 39:
be exercised as provided under Section 80 of the Revised Corporation  The determination of whether or not the sale involves all or
Code. Said Section provides that “any stockholder of a corporation shall have substantially all of the corporation’s properties and assets must
the right to dissent and demand payment of the fair value of the shares . . . be computed based on its net asset value, as shown in
in case an amendment to the articles of incorporation has the effect its latest financial statements.
of changing or restricting the rights of any stockholder or class of  A sale or other disposition shall be deemed to cover
shares.” substantially all the corporate property and assets if thereby
the corporation would be rendered incapable of
The denial of preemptive right effectively restricts the continuing the business or accomplishing the purpose
shareholder’s right to subscribe to new issuances of the shares of for which it was incorporated.
the corporation. For this reason, a stockholder dissenting to an amendment
to the articles of incorporation denying preemptive right may exercise his Note:
right of appraisal. 1. Before the RCCP, the standard used in determining whether or not a
sale involves all or substantially all of the corporation’s properties and
Sale or Other Disposition of Assets assets was limited to whether thereby the corporation would be
rendered incapable of continuing the business or accomplishing the
purpose for which it was incorporated. With the enactment of the
Section 39. Sale or Other Disposition of Assets. – Subject to the RCCP, a new standard was introduced – i.e. that the determination
provisions of Republic Act No. 10667, otherwise known as “Philippine must be computed based on the corporation’s net asset value, as
Competition Act”, and other related laws, a corporation may, by a majority shown in its latest financial statements.
vote of its board of directors or trustees, sell, lease, exchange, mortgage, 2. (Atty. Fabian thinks that) SEC Opinions mention that financial
pledge, or otherwise dispose of its property and assets, upon such terms and
statements must have been audited to serve as bases for the
conditions and for such consideration, which may be money, stocks, bonds,
foregoing determination.
or other instruments for the payment of money or other property or
consideration, as its board of directors or trustees may deem expedient.
 If the corporation, through its board of directors/trustees, engages in a sale
A sale of all or substantially all of the corporation’s properties and assets, of all or substantially all of its properties and assets, then such sale must
including its goodwill, must be authorized by the vote of the stockholders be approved by at least two-thirds (2/3) of the outstanding capital stock
representing at least two-thirds (2/3) of the outstanding capital stock, or at or of the members, as the case may be. However, if the board of
least two-thirds (2/3) of the members, in a stockholders’ or members’ meeting directors/trustees later on decides to ABANDON such sale, then
duly called for the purpose. such abandonment DOES NOT require any further action or
approval on the part of the stockholders/members based on the
In nonstock corporations where there are no members with voting rights, the Business Judgment Rule.
vote of at least a majority of the trustees in office will be sufficient
authorization for the corporation to enter into any transaction authorized by  The corporation may, without the authorization by the stockholders
this section. or members, sell, lease, exchange, mortgage, pledge, or otherwise
dispose of any of its property and assets if:
The determination of whether or not the sale involves all or substantially all a. the sale or other disposition is necessary in the usual and
of the corporation’s properties and assets must be computed based on its net regular course of business of the corporation; or
asset value, as shown in its latest financial statements. A sale or other b. the proceeds of the sale or other disposition shall be
disposition shall be deemed to cover substantially all the corporate property appropriated for the conduct of the corporation’s
and assets if thereby the corporation would be rendered incapable of remaining business.
continuing the business or accomplishing the purpose for which it was
incorporated.
Therefore, if a disposition is necessary in the usual and regular course of
Written notice of the proposed action and of the time and place for the business of the corporation (or, say, for the corporation’s primary
meeting shall be addressed to stockholders or members at their places of purpose), then such disposition does not require authorization from the
residence as shown in the books of the corporation and deposited to the stockholders/members.
addressee in the post office with postage prepaid, served personally, or when
allowed by the bylaws or done with the consent of the stockholder, sent Take note that a corporation may make dispositions of its properties and
electronically: Provided, That any dissenting stockholder may exercise the assets, where such dispositions are necessary in its usual and regular
right of appraisal under the conditions provided in this Code. course of business. This is one of the incidental powers of a corporation.
After such authorization or approval by the stockholders or members, the Two (2) Types of Disposition of Corporate Assets
board of directors or trustees may, nevertheless, in its discretion, abandon “In the ordinary course “Other than in the ordinary
such sale, lease, exchange, mortgage, pledge, or other disposition of
of business” course of business”
property and assets, subject to the rights of third parties under any contract
relating thereto, without further action or approval by the stockholders or Needs only: Requires:
members. “board approval” – i.e. “majority “approval of at least a majority of
of the quorum of the Board of the Board of Directors/Trustees”
Nothing in this section is intended to restrict the power of any corporation, Directors/Trustees” +
without the authorization by the stockholders or members, to sell, lease, “approval of the stockholders
exchange, mortgage, pledge, or otherwise dispose of any of its property and representing at least two-thirds
assets if the same is necessary in the usual and regular course of business (2/3) of the outstanding capital
of the corporation or if the proceeds of the sale or other disposition of such stock, or at least two-thirds (2/3)
property and assets shall be appropriated for the conduct of its remaining of the members”
business.
In nonstock corporations where there are no members with voting
Discussion: rights, the vote of at least a majority of the Board of Trustees will be
 An addition to Section 39 brought by the enactment of the Revised sufficient authorization for the corporation to enter into any transaction
Corporation Code is the requirement that the approval of the authorized by Section 39.
Philippine Competition Commission (PCC) be secured with
respect to the transactions covered by RA 10667 (or the
Philippine Competition Act). Note: To determine whether the sale is made in the ordinary course of
business, the test is NOT on the amount involved BUT on the nature
 Under Section 39, it is only in case of a sale of all or substantially all of the transaction. Therefore, although a sale may be very small in
of the corporation’s assets is the approval of at least two-thirds amount, but if it already involves all of the corporation’s existing properties,
(2/3) of the outstanding capital stock, or of the members, such transaction may then be considered as not made in the ordinary course
required. NOT ALL dispositions of the corporation’s assets require this of business.
shareholder-approval requirement.
When can a sale be considered as “a sale of all or substantially all
of corporate property and assets” in a Publicly-listed Company? Bulk Sales Law
The sale is in bulk in the following cases:
Under SEC Memorandum Circular No. 12-20, Dated April 7, 2020
a. Sale, transfer, mortgage, or assignment of properties other than
1. The sale or disposition of corporate property and assets amounting to
in the ordinary course of business;
at least 51% of the corporation’s total assets shall be considered
as a sale of all or substantially all of corporate property and assets, b. Sale, transfer, mortgage, or assignment of all, or substantially all,
whether such sale accrued in a single transaction or in several of the business or trade of the vendor; and
transactions taking place within one (1) year from the date of the first c. Sale, transfer, mortgage, or assignment of all, or substantially all,
transaction (aggregate sale transactions). of the fixtures and equipment used in and about the business of
the vendor.
2. In a sale of corporate assets and property falling under the preceding
paragraph, the vote of the stockholders representing at least two-thirds Three (3) Requirements That Must Be Complied
(2/3) of the outstanding capital stock in a stockholders’ meeting duly With In Case Of A Sale In Bulk:
called for the purpose shall be required prior to the execution of the 1. The seller must provide the buyer with a verified list of the
sale transaction. creditors containing the names of the creditors, their addresses,
the amount owing to each and their respective maturity dates.
3. In aggregate sale transactions, shareholder approval shall be required 2. There must be a fully-detailed inventory of the properties or
for the sale transaction that breaches the 51%-corporate-asset assets to be sold, including their cost or acquisition prices.
threshold. 3. The inventory and the list must be filed with the Department of
Trade and Industry (DTI).
4. The determination of whether or not the sale amounts to at least 51%
of the corporation’s assets must be computed based on its total Under Section 4 of the Bulk Sales Law, if the sale in bulk failed to comply
assets, as shown in its latest audited financial statements, with the three (3) abovementioned requirements, and the vendor does not
provided that the computation may also be based on the latest quarterly apply the purchase price of the properties to the pro-rata payment of
financial statement or a special purpose financial statement prepared in creditors’ claims, then (a) the vendor shall be deemed to have violated the
connection with the execution of the transaction. Bulk Sales Law; and (b) such sale, transfer or mortgage shall be fraudulent
and void. The buyer shall hold in trust properties of the vendor for the
Other Laws Governing the benefit of the creditors, with the concomitant right to require the return of
Disposition of Corporate Properties the purchase price and ask for damages. (Note: The sale, transfer or
 The Philippine Competition Act (RA 10667) mortgage is deemed to be a transaction in fraud of creditors.)
 The Bulk Sales Law (RA 3952)
 The General Banking Law (RA 8791) – for banks Transcribed by: Girly Mae A. Narciso
General Banking Law
The three (3) aforementioned laws shall be discussed in relation to Section Section 52. Acquisition of Real Estate by Way of Satisfaction of
39 of the RCCP. Claims. - Notwithstanding the limitations of the preceding Section, a bank
may acquire, hold or convey real property under the following circumstances:
 52.1. Such as shall be mortgaged to it in good faith by way of
The Philippine Competition Act (RA 10667) security for debts;
 52.2. Such as shall be conveyed to it in satisfaction of debts
Three (3) Prohibited Acts (under Sections 14-23, RA 10667;
previously contracted in the course of its dealings, or
Section 3, IRR of RA 10667):
1. Anti-Competitive Agreements;  52.3. Such as it shall purchase at sales under judgments, decrees,
2. Abuse of Dominant Position; and mortgages, or trust deeds held by it and such as it shall purchase
3. Anti-Competitive Mergers and Acquisitions. to secure debts due it.
Any real property acquired or held under the circumstances enumerated in

Important Note: It is advised that the Philippine Competition Act be read
concurrently with the study of Corporation Law. the above paragraph shall be disposed of by the bank within a period of five
(5) years or as may be prescribed by the Monetary Board: Provided, however,
Compulsory Notification (Rule 4, IRR of RA 10667). – Merger or That the bank may, after said period, continue to hold the property for its
own use, subject to the limitations of the preceding Section. (25a)
acquisition agreements, wherein the value of the transaction exceeds One
Billion Pesos, are prohibited from being consummated until after thirty (30)
days from notification thereof to the Philippine Competition Commission. Note: This happens if the bank is the purchaser of the assets of the
corporation.
EX: Where a corporation enters into a sales transaction, and the
consideration of which exceeds One Billion Pesos, notice of such sale must We already discussed this Nell Doctrine, let’s have a review because it is
be given to the Philippine Competition Commission. The sale may only be actually related to the sale of all and substantially all of the properties.
consummated after the lapse of thirty (30) days from said notification.
Nell Doctrine
(Note: In relation to Section 39 of the RCCP, a sale of this magnitude may General Rule: Where one corporation sells or otherwise transfers all of its
very well be a sale of all or substantially all of a corporation’s properties and assets to another corporation, the latter is not liable for the debts and
assets.) liabilities of the transferor.
Two (2) Thresholds for Compulsory Notification Exception:

1. Where the purchaser expressly or impliedly agrees to assume such
[1] Size of the Person Test debts;
Parties to a merger or acquisition are required to provide notification when 2. Where the transaction amounts to a consolidation or merger of
the aggregate annual gross revenues in, into or from the Philippines, or value the corporations;
3. Where the purchasing corporation is merely a continuation of the
of the assets in the Philippines of the ultimate parent entity of at least one of
selling corporation; and
the acquiring or acquired entities, including that of all entities that the
4. Where the transaction is entered into fraudulently in order to
ultimate parent entity controls, directly or indirectly, exceeds One Billion
Pesos (PhP1,000,000,000.00). (Rule 4, Section 3 (a), IRR of RA 10667) escape liability for such debts.
[2] Size of the Transaction Test If the above cited exemptions are present, then the transferee corporation
Parties to a merger or acquisition are required to provide notification when shall assume the liabilities of the transferor.
the value of the transaction exceeds One Billion Pesos
(PhP1,000,000,000.00). (Rule 4, Section 3 (b), IRR of RA 10667)
“Business Enterprise Rule” Sale is null and void for having been done without the consent of
Jurisprudence has held that in a business enterprise transfer, the transferee the IDP through a legitimate BOT and for being violative of Section
is liable for the debts and liabilities of his transferor arising from the business 40 of the Corporation Code.
enterprise conveyed.
Sale of real property of the corporation
The exception establishes the Business Judgement Rule. The exceptions to without the consent of the legitimate BOD is null and void.
the Nell Doctrine relates to the protection of the creditors of the transferor Premises considered, all acts carried out by the Carpizo Board, particularly
corporation and does not depend on any deceit committed by the transferee the sale of the Tandang Sora property, allegedly in the name of the IDP, have
corporation. Therefore, fraud is not an element of the Business Enterprise to be struck down for having been done without the consent of the IDP thru
Rule. a legitimate Board of Trustees. Article 1318 of the New Civil Code lays down
the essential requisites of contracts: There is no contract unless the following
Note that there is a very thin line between the mere sale of all or substantially requisites concur: (1) Consent of the contracting parties; (2) Object certain
all of the assets of the business or the corporation and the Business which is the subject matter of the contract; (3) Cause of the obligation which
enterprise rule. Can you recall our discussion? Suffice it to say that the issue is established.
in each case must be decided in its own peculiarities.
All these elements must be present to constitute a valid contract. For, where
even one is absent, the contract is void. As succinctly put by Tolentino,
PENA vs. CA, YAP and PAMBUSCO
consent is essential for the existence of a contract, and where it is wanting,
G.R. No. 91478 | February 7, 1991
the contract is non-existent.
Resolution of PAMBUSCO assigning its right of redemption is void.
In this case, the IDP, owner of the subject parcels of land, never gave its
consent, thru a legitimate Board of Trustees, to the disputed Deed of
No quorum as stated in the By-laws of the Corporation.
Absolute Sale executed in favor of INC. This is, therefore, a case not only of
Apparently, only three (3) out of five (5) members of the board of directors
vitiated consent, but one where consent on the part of one of the supposed
of respondent PAMBUSCO convened on November 19, 1974 by virtue of a
contracting parties is totally wanting. Ineluctably, the subject sale is void and
prior notice of a special meeting. There was no quorum to validly transact
produces no effect whatsoever.
business since, under Section 4 of the amended by-laws hereinabove
reproduced, at least four (4) members must be present to constitute a
The Carpizo Group-INC sale is further deemed null and void ab initio because
quorum in a special meeting of the board of directors of respondent
of the Carpizo Group's failure to comply with Section 40 of the Corporation
PAMBUSCO.
Code pertaining to the disposition of all or substantially all assets of the
corporation.
Under Section 25 of the Corporation Code of the Philippines, the articles of
incorporation or by-laws of the corporation may fix a greater number than
The Tandang Sora property, it appears from the records, constitutes the only
the majority of the number of board members to constitute the quorum
property of the IDP. Hence, its sale to a third-party is a sale or disposition of
necessary for the valid transaction of business. Any number less than the
all the corporate property and assets of IDP falling squarely within the
number provided in the articles or by-laws therein cannot
contemplation of the foregoing section. For the sale to be valid, the
constitute a quorum and any act therein would not bind the
majority vote of the legitimate Board of Trustees, concurred in by
corporation; all that the attending directors could do is to adjourn.
the vote of at least 2/3 of the bona fide members of the corporation
should have been obtained. These twin requirements were not met as
Moreover, the records show that respondent PAMBUSCO ceased to operate
the Carpizo Group which voted to sell the Tandang Sora property was a fake
as of November 15, 1949 as evidenced by a letter of the SEC to said
Board of Trustees, and those whose names and signatures were affixed by
corporation dated April 17, 1980. Being a dormant corporation for several
the Carpizo Group together with the sham Board Resolution authorizing the
years, it was highly irregular, if not anomalous, for a group of three (3)
negotiation for the sale were, from all indications, not bona fide members of
individuals representing themselves to be the directors of respondent
the IDP as they were made to appear to be. Apparently, there are only fifteen
PAMBUSCO to pass a resolution disposing of the only remaining asset of the
(15) official members of the petitioner corporation including the eight (8)
corporation in favor of a former corporate officer.
members of the Board of Trustees.
As a matter of fact, the three (3) alleged directors who attended the special
All told, the disputed Deed of Absolute Sale executed by the fake Carpizo
meeting on November 19, 1974 were not listed as directors of respondent
Board and private respondent INC was intrinsically void ab initio.
PAMBUSCO in the latest general information sheet of respondent PAMBUSCO
filed with the SEC dated 18 March 1951.imilarly, the latest list of stockholders
of respondent PAMBUSCO on file with the SEC does not show that the said CALTEX (PHILS) INC. vs PNOC
alleged directors were among the stockholders of respondent PAMBUSCO. 498 SCRA 400
No confirmation at a subsequent PTSC is bound by the agreement and is liable to Caltex.

stockholders meeting duly called for the purpose
Under Section 30 of the then applicable Corporation Law, only persons who Caltex May Recover from PSTC Under the Terms of the Agreement
own at least one (1) share in their own right may qualify to be directors of a Caltex may recover the judgment debt from PSTC not because of a stipulation
corporation. Further, under Section 28 1/2 of the said law, the sale in Caltex's favor but because the Agreement provides that PSTC shall assume
or disposition of an and/or substantially all properties of the all the obligations of LUSTEVECO.
corporation requires, in addition to a proper board resolution, the
affirmative votes of the stockholders holding at least two-thirds In this case, LUSTEVECO transferred, conveyed and assigned to PSTC all of
(2/3) of the voting power in the corporation in a meeting duly called LUSTEVECO's business, properties and assets pertaining to its tanker and
for that purpose. No doubt, the questioned resolution was not confirmed bulk business "together with all the obligations relating to the said business,
at a subsequent stockholders meeting duly called for the purpose by the properties and assets."
affirmative votes of the stockholders holding at least two-thirds (2/3) of the
voting power in the corporation. The same requirement is found in Section When PSTC assumed all the properties, business and assets of LUSTEVECO
40 of the present Corporation Code. pertaining to LUSTEVECO's tanker and bulk business, PSTC also assumed all
of LUSTEVECO's obligations pertaining to such business. The assumption of
Since the disposition of said redemption right of respondent PAMBUSCO by obligations was stipulated not only in the Agreement of Assumption of
virtue of the questioned resolution was not approved by the required number Obligations but also in the Agreement of Transfer. The Agreement specifically
of stockholders under the law, the said resolution, as well as the subsequent mentions the case between LUSTEVECO and Caltex, docketed as AC-G.R. CV
assignment executed assigning to respondent Enriquez the said right of No. 62613, then pending before the IAC. The Agreement provides that PSTC
redemption, should be struck down as null and void. may demand and receive any claim out of counter-suits or counterclaims
arising from the actions enumerated.
ISLAMIC DEPARTMENT OF THE PHILIPPINES vs CA
Disposition of Assets Should Not Prejudice Creditors
272 SCRA 454 (1997)
Even without the Agreement, PSTC is still liable to Caltex. The disposition of willing to pay much more if he could get the "good will" of the business,
all or substantially all of the assets of a corporation is allowed under Section meaning by this, the good will of the customers, that they may continue to
40 of CCP. tread the old footpath to his door and maintain with him the business
relations enjoyed by the seller.
While the Corporation Code allows the transfer of all or substantially all the
properties and assets of a corporation, the transfer should not prejudice the In other words, in this last exception, the transferee purchases not only the
creditors of the assignor. The only way the transfer can proceed without assets of the transferor, but also its business. As a result of the sale, the
prejudice to the creditors is to hold the assignee liable for the obligations of transferor is merely left with its juridical existence, devoid of its industry and
the assignor. The acquisition by the assignee of all or substantially all of the earning capacity. Fittingly, the proper provision of law that is contemplated
assets of the assignor necessarily includes the assumption of the assignor's by this exception would be Section 40 of the Corporation Code.
liabilities, unless the creditors who did not consent to the transfer choose to
rescind the transfer on the ground of fraud. To allow an assignor to transfer Section 40 refers to the sale, lease, exchange or disposition of all or
all its business, properties and assets without the consent of its creditors and substantially all of the corporation's assets, including its goodwill. The sale
without requiring the assignee to assume the assignor's obligations will under this provision does not contemplate an ordinary sale of all corporate
defraud the creditors. The assignment will place the assignor's assets beyond assets; the transfer must be of such degree that the transferor corporation
the reach of its creditors. is rendered incapable of continuing its business or its corporate purpose.
Here, Caltex could not enforce the judgment debt against LUSTEVECO. The Section 40 suitably reflects the business-enterprise transfer under the
writ of execution could not be satisfied because LUSTEVECO's remaining exception of the Nell Doctrine because the purchasing or transferee
properties had been foreclosed by lienholders. In addition, all of corporation necessarily continued the business of the selling or transferor
LUSTEVECO's business, properties and assets pertaining to its tanker and corporation. Given that the transferee corporation acquired not only the
bulk business had been assigned to PSTC without the knowledge of its assets but also the business of the transferor corporation, then the liabilities
creditors. Caltex now has no other means of enforcing the judgment debt of the latter are inevitably assigned to the former.
except against PSTC.
It must be clarified, however, that not every transfer of the entire corporate
If PSTC refuses to honor its written commitment to assume the obligations assets would qualify under Section 40. It does not apply (1) if the sale of the
of LUSTEVECO, there will be fraud on the creditors of LUSTEVECO. PSTC entire property and assets is necessary in the usual and regular course of
agreed to take over, and in fact took over, all the assets of LUSTEVECO upon business of corporation, or (2) if the proceeds of the sale or other disposition
its express written commitment to pay all obligations of LUSTEVECO of such property and assets will be appropriated for the conduct of its
pertaining to those assets, including specifically the claim of Caltex. remaining business. Thus, the litmus test to determine the applicability of
LUSTEVECO no longer informed its creditors of the transfer of all of its assets Section 40 would be the capacity of the corporation to continue its business
presumably because PSTC committed to pay all such creditors. Such transfer, after the sale of all or substantially all its assets.
leaving the claims of creditors unenforceable against the debtor, is fraudulent
and rescissible. To allow PSTC now to welsh on its commitment is to sanction Fraud is Not an Essential Consideration
a fraud on LUSTEVECO's creditors. in a Business-Enterprise Transfer
It does not require the existence of fraud against the creditors before it takes
full force and effect. Indeed, under the Nell Doctrine, the transferee
Note: You have to relate this case to your discussion on Badges of Fraud in
corporation may inherit the liabilities of the transferor despite the lack of
Oblicon and Sales. The Court reiterated here the badges of fraud, and our
fraud due to the continuity of the latter's business.
topic under section 39 falls in one of those badges of fraud, specifically
number 5, which is the transfer of all or nearly all of the properties by the
The purpose of the business-enterprise transfer is to protect the creditors of
debtor especially when he is insolvent or greatly embarrassed financially. So,
the business by allowing them a remedy against the new owner of the assets
you can see there that it was the transfer or the sale made to defraud their
and business enterprise. Otherwise, creditors would be left "holding the bag,"
creditors. In that case, the buyer was held liable.
because they may not be able to recover from the transferor who has
"disappeared with the loot," or against the transferee who can claim that he
Y-I Leisure Philippines, Inc. vs Yu is a purchaser in good faith and for value. Based on the foregoing, as the
GR 207161 | September 8, 2015 exception of the Nell doctrine relates to the protection of the creditors of the
transferor corporation, and does not depend on any deceit committed by the
WON petitioners may be held jointly and severally liable to Yu despite the transferee-corporation, then fraud is certainly not an element of the business
absence of fraud in the sale of assets and bad faith. YES, fraud is not an enterprise doctrine.
essential element.
Requisites of Business-Enterprise Transfer Rule
Nell Doctrine 1. The transferor corporation sells all or substantially all of its assets to
Generally, where one corporation sells or otherwise transfers all of its assets another entity; and
to another corporation, the latter is not liable for the debts and liabilities of 2. The transferee corporation continues the business of the transferor
the transferor, except: corporation.
1. Where the purchaser expressly or impliedly agrees to assume such
debts; Business Enterprise Transfer Rule Applies
2. Where the transaction amounts to a consolidation or merger of the MADCI had assets consisting of 120 hectares of landholdings in Pampanga,
corporations; to be developed into a golf course, pursuant to its primary purpose. Because
3. Where the purchasing corporation is merely a continuation of the selling of its alleged violation of the MOA, however, MADCI was made to transfer all
corporation; and its assets to the petitioners. No evidence existed that MADCI subsequently
4. Where the transaction is entered into fraudulently in order to escape acquired other lands for its development projects. Thus, MADCI, as a real
liability for such debts. estate development corporation, was left without any property to develop
eventually rendering it incapable of continuing the business or accomplishing
The Nell Doctrine states the general rule that the transfer of all the assets of the purpose for which it was incorporated.
a corporation to another shall not render the latter liable to the liabilities of
the transferor. If any of the above-cited exceptions are present, then the Petitioners Solidarily Liable to Yu
transferee corporation shall assume the liabilities of the transferor. While the Corporation Code allows the transfer of all or substantially all of
the assets of a corporation, the transfer should not prejudice the creditors of
Third Exception; Business-Enterprise Transfer Rule the assignor corporation. Under the business-enterprise transfer, the
In such transfer, the transferee corporation's interest goes beyond the assets petitioners have consequently inherited the liabilities of MADCI because they
of the transferor's assets and its desires to acquire the latter's business acquired all the assets of the latter corporation. The continuity of MADCI's
enterprise, including its goodwill. land developments is now in the hands of the petitioners, with all its assets
and liabilities. There is absolutely no certainty that Yu can still claim its refund
When one were to buy the business of another as a going concern, he would from MADCI with the latter losing all its assets. To allow an assignor to
usually wish to keep it going; he would wish to get the location, the building, transfer all its business, properties and assets without the consent of its
the stock in trade, and the customers. He would wish to step into the seller's creditors will place the assignor's assets beyond the reach of its creditors.
shoes and to enjoy the same business relations with other men. He would be
Thus, the only way for Yu to recover his money would be to assert his claim  If the other business is not the primary or secondary, there has to
against the petitioners as transferees of the assets. be an amendment of the AOI otherwise it is ultra vires.
Note: I recommend everybody this case because it is a fairly recent case Power to Declare Dividends
and it is an application of the doctrines to any of the exceptions of the Nell
SEC. 42. Power to Declare Dividends. – The board of directors of a stock
Doctrine.
corporation may declare dividends out of the unrestricted retained earnings
Transcribed by: Jurilex Maglinte
which shall be payable in cash, property, or in stock to all stockholders on
the basis of outstanding stock held by them: Provided, That any cash
Power to Acquire Own Shares dividends due on delinquent stock shall first be applied to the unpaid
balance on the subscription plus costs and expenses, while stock
SEC. 40. Power to Acquire Own Shares. – Provided that the corporation has
dividends shall be withheld from the delinquent stockholders until their
UNRESTRICTED RETAINED EARNINGS in its books to cover the shares to
unpaid subscription is fully paid: Provided, further, That no stock dividend
be purchased or acquired, a stock corporation shall have the power to
shall be issued without the approval of stockholders representing at least
purchase or acquire its own shares for a legitimate corporate purpose or
two-thirds (2/3) of the outstanding capital stock at a regular or special
purposes, including the following cases:
meeting duly called for the purpose.
a) To eliminate fractional shares arising out of stock dividends;
Stock corporations are prohibited from retaining surplus profits in excess
b) To collect or compromise an indebtedness to the corporation, arising
of one hundred percent (100%) of their paid-in capital stock, except:
out of unpaid subscription, in a delinquency sale, and to purchase
delinquent shares sold during said sale; and
a) when justified by definite corporate expansion projects or programs
c) To pay dissenting or withdrawing stockholders entitled to payment
approved by the board of directors; or
for their shares under the provisions of this Code.
b) when the corporation is prohibited under any loan agreement with
financial institutions or creditors, whether local or foreign, from declaring
We discussed this partially on our discussion with treasury shares. Here we dividends without their consent, and such consent has not yet been
have again the requirement that there should be unrestricted retained secured; or
earnings, otherwise it violates the Trust Fund Doctrine. (This will come out c) when it can be clearly shown that such retention is necessary under
in your exam). special circumstances obtaining in the corporation, such as when there
is need for special reserve for probable contingencies.
Note that by express provision of law, a corporation may redeem redeemable
shares regardless of the existence of retained earnings. You check back on Note that the 2/3 is attached to the issuance of stock dividends, not cash
the provision on redeemable shares. dividends.
Fractional shares happen when you buy ½ share, like there’s stock dividends. To whom are dividends payable?
Example, they declared 25% stock dividends and you have 250 shares. 25% To stockholders as of the record date fixed in the by-laws of the BoD.
of 250 shares is 62.5. So you have .5 fractional share. In order to avoid Although in the provision it says “all stockholders on the basis of outstanding
fractional share, the corporation will recover or will re-acquire .5 fractional stock held by them”, it means the record date. All stockholders on the record
shares. date required under the by-laws or by the BoD in their resolution in the
absence of the by-laws. If no record date is fixed by the corporation then the
Power to Invest Corporate Funds Dividends are payable to stockholders of record as of the time of declaration.
SEC. 41. Power to Invest Corporate Funds in Another Corporation or
What if they sold the share but it is not recorded in the Stock and
Business or for Any Other Purpose. – Subject to the provisions of this Code,
Transfers Book?
a private corporation may invest its funds in any other corporation,
business, or for any purpose other than the primary purpose for which it If you sell you share, it is only legitimate in the corporation if it is recorded
was organized, when approved by a majority of the board of directors or in the stock and transfers book.
trustees and ratified by the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock, or by at least two thirds (2/3) of the If it is not recorded in the book, it is the stockholder of record who gets the
members in the case of nonstock corporations, at a meeting duly called for dividend. The seller receives the dividends in trust for the buyer. Subject to
the purpose. Notice of the proposed investment and the time and place of the their own agreement and remedies as to each other. But a corporation absent
meeting shall be addressed to each stockholder or member at the place of any notice of a transfer or sale will pay the dividend to the stockholder of
residence as shown in the books of the corporation and deposited to the record.
addressee in the post office with postage prepaid, served personally, or sent
electronically in accordance with the rules and regulations of the Commission Since it is stated that the stock corporations are prohibited from
on the use of electronic data message, when allowed by the bylaws or done retaining surplus profit in excess of 100%. Does that mean it is
with the consent of the stockholders: Provided, That any dissenting ministerial that they should declare dividends all the time?
stockholder shall have appraisal right as provided in this Code: Provided, No, the declaration of dividends is still discretionary and covered by the
however, That where the investment by the corporation is reasonably Business Judgment Rule. However, they are prohibited from retaining
necessary to accomplish its primary purpose as stated in the articles of retained earnings in excess of 100% of paid-in capital. Thus, if it exceeds
incorporation, the approval of the stockholders or members shall NOT 100%, the BoD can be compelled to declare dividends if the surplus profit is
BE NECESSARY. in excess of 100% of paid-in capital and there is no justifiable reason (Sec.
42(a), (b), and (c)) to exist to hold dividend declaration.
The important part is in the last sentence. Even if is not mentioned in the
primary or secondary purpose but if it is reasonably necessary to accomplish Dividend
the primary purpose then no need for shareholder’s approval.
A dividend is a distribution of a portion of a company’s earnings, decided by
the board of directors. The purpose of dividends is to return wealth back to
This was applied in Gokongwei v. SEC wherein the primary purpose of the
the shareholders of a company.
corporation was to manufacture and market beer. They were allowed to
purchase beer manufacturing facilities in foreign countries because it was an
There are two main types of dividends: cash and stock. Although sec. 42
investment in the same business as stated in the primary purpose in its AOI. mentions dividends payable in “cash, property, or in stock”, cash covers
That is an important consideration as long as it is reasonably necessary. You property.
might be misled by your examiners about this.
Summary:
 If it is for primary purpose, Board approval will suffice.
 If it is for other kinds of investments like secondary purpose, then
you need shareholder’s approval.
Cash vs. Stock Dividend Not exactly a dividend. It is a return of capital upon the dissolution of the
Cash Dividend Stock Dividend corporation.
A cash dividend is a payment A stock dividend is an increase in
made by a company out of its the number of shares being given Power to Enter into Management Contract
earnings to investors in the form to shareholders. SEC. 43. Power to Enter into Management Contract. – No corporation shall
of cash (check or electronic conclude a management contract with another corporation unless such
transfer). contract is approved by the board of directors and by stockholders owning
This transfer of economic value Like the cash dividend, the share at least the majority of the outstanding capital stock, or by at least a
causes the company’s share price price will decrease to adjust for majority of the members in the case of a nonstock corporation, of both the
to drop by roughly the same the dividend payout. managing and the managed corporation, at a meeting duly called for the
amount as the dividend. purpose: Provided, That (a) where a stockholder or stockholders
Cash dividends must pay tax on Stock dividend do not generally representing the same interest of both the managing and the managed
the value of the distribution. have to pay taxes on the value. corporations own or control more than one-third (1/3) of the total outstanding
capital stock entitled to vote of the managing corporation; or (b) where a
majority of the members of the board of directors of the managing corporation
also constitute a majority of the members of the board of directors of the
Which one is better? managed corporation, then the management contract must be approved by
For stock investors seeking gratification as a reward having placed their funds the STOCKHOLDERS OF THE MANAGED CORPORATION owning at least
in profitable companies, it would seem that receiving cash dividends is always two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by
the better option. However, that is not necessarily true. at least two-thirds (2/3) of the members in the case of a nonstock
corporation.
In many ways it may be better for both the company to the shareholder to
pay and receive stock dividends at the end of a profitable fiscal year. Despite These shall apply to any contract whereby a corporation undertakes to
of dividend be as good as cash (because they can sell their shares to manage or operate all or substantially all of the business of another
somebody else) with the added benefit that no taxes have to be paid corporation, whether such contracts are called service contracts, operating
receiving the same. agreements or otherwise: Provided, however, That such service contracts or
operating agreements which relate to the exploration, development,
EX: 100 shares of Microsoft bought at $21 per share in 1986 ballooned to exploitation or utilization of natural resources may be entered into for such
$28, 800 shares for 25 years. This turns Bill Gates one of the richest man in periods as may be provided by the pertinent laws or regulations.
the world. This is why some people hold on to stock dividends rather than
cash dividends. No management contract shall be entered into for a period longer than five
(5) years for any one (1) term.
However, while stock dividends are often seen as preferable to cash, that is
not always true considering sometimes the volatile nature of the stock These shall be approved by BoD not majority of the BoD, which means it is
market. Case in point, in February 2020 the sale of stocks in the Stock only the majority of the quorum of the BoD.
Exchange was chaotic due to the coronavirus pandemic.
Management Contract
Cash Dividend Stock Dividend An agreement under which a corporation delegates the management of its
BOD approval suffice BOD approval + 2/3 OCS affairs to another corporation for a certain period of time.
As to Delinquent Shares:
First applied to the unpaid balance Withheld from the delinquent Transcribed by: Hazel Dianne Estrosas
on the subscription plus costs and stockholders until their unpaid
expenses. subscription is fully paid. Ultra Vires Act
Section 44. Ultra Vires Acts of Corporations. – No corporation shall
If stock dividends lead to an increase in the capital stock, then you would possess or exercise corporate powers other than those conferred by this
have to amend your AOI. Code or by its articles of incorporation and except as necessary or
incidental to the exercise of the powers conferred.
Can the corporation offset the cash dividends against any debt the
stockholders have to the corporation? Even if it is not in the articles of incorporation as primary or secondary
Yes, because as cash dividends are declared, the shareholder becomes the purpose, it may be necessary and incidental. It will fall under the incidental
creditors of the corporation for the amount of cash dividends. If the cash is powers. Hence, not an ultra vires act.
declared, they are obligated to pay out the cash dividends. They are creditor
and debtor to each other. Offset and legal compensation apply. Test to Determine Whether Within the Power of the Corporation
In Montelibano vs Bacolod-Murcia Milling Co., the Supreme Court ruled that
There is no discussion on dividends on non-stock corporation because it is “the test to be applied is whether the act in question is in direct and
not for profit. If they declare dividends, then they are not non-stock immediate furtherance of the corporation’s business, fairly incident to the
corporation. express powers and reasonably necessary to their exercise. If so, the
corporation has the power to do it; Otherwise, not.”
Instances When Corporation May
Declare Dividends Without Unrestricted Retained Earnings Ultra Vires Act – Definition
A corporate transaction that is outside the objects for which the corporation
was created as defined in the law of its organization, and therefore, beyond
Wasting Asset Doctrine the powers conferred upon it by law. Otherwise stated, an ultra vires is an
Under this doctrine a wasting asset corporation or an entity engaged in the act done by a corporation outside its express and incidental powers vested
extraction of natural resource can pay dividend not only to the extent of the in it by its charter and by-law.
retained earnings but also to the extent of the accumulated depletion. The
amount paid in excess of the retained earnings is in fact paid out of capital, 3 Types
which is being consumed in the regular course of operations.
1. Acts done beyond the powers of the corporation as provided in
the law or its AOI
EX: Mines for mining companies, or timber for companies, quarrying etc.
2. Acts entered into on behalf of the corporation by persons who
Natural resources are wasting assets. It is an exception to the trust fund
have no corporate authority or exceeded the scope of their
doctrine.
authority
3. Acts or contracts, which are illegal per se as being contrary to law
Liquidating Dividend
When a corporation is dissolved, the residual assets are distributed to the Are all illegal acts, ultra vires? YES (refer to No. 3 above)
stockholders. Not technically a dividend but a mere return of capital upon the Are all ultra vires acts, illegal? NO.
dissolution of the corporation.
Nature of Ultra Vires Act constructive thereof, whether within or beyond the scope of his ordinary
Ultra vires should be distinguished from an illegal act for the former is powers.
merely voidable which may be enforced by performance,
ratification, or estoppel, while the latter is void and cannot be In this case, Zomer first maintained a stoic silence and adopted a “hands
validated. It being merely voidable, an ultra vires act can be enforced or off” stance. It was only when the bank filed a petition for extrajudicial
validated if there are equitable grounds for taking such action (Republic vs. foreclosure of the REM when Zomer finally awoke from its slumber and
Acoje Mining, G.R. No. l-18062, February 28, 1963). assailed the authority of its BOD to approve the said resolution and of its
treasurer and general manager to execute the deed and brand said
Ultra vires act, some of them if not illegal, can be ratified, estopped, can be resolution and said deed as ultra vires and hence, not binding on Zomer.
made effective while illegal acts are always void for violation of law. If it is
an ultra vires act for being illegal (which is No. 3 above), then it is void and One must heed to the equity rule that if one maintains silence, when in
cannot be ratified. Not all ultra vires acts are illegal; only no. 3 is illegal. conscience he ought to speak, equity will debar him from speaking when,
in conscience, he ought to remain silent. He who remains silent when he
What is the remedy of a shareholder against ultra vires acts? ought to speak cannot be heard to speak when he ought to be silent.
It’s either file an injunction to prevent the ultra vires acts or file derivative
suit. More, the transactions between Zomer and IEB over its properties are
neither malum in se or malum prohibitum. Hence, cannot hide behind the
MONTELIBANO vs. BACOLOD-MURCIA MILLING CO. cloak of "ultra vires" for a defense.
5 SCRA 36 (1962)
REPUBLIC vs. ACOJE MINING
In determining whether an act is ultra vires, one must look into the logical G.R. No. I-18062 | February 28, 1963
relation of the act to the corporate purpose expressed in the charter. If that
act is one which is lawful in itself, and not otherwise prohibited, is done for FACTS: Acoje Mining requested for the opening of a post in its mining
the purpose of serving corporate ends, and is reasonably tributary to the camp. The Director of Posts replied that the request will be granted if,
promotion of those ends, in a substantial and not in a remote and fanciful among others, the company assigns a responsible employee to perform
sense, it may be fairly be considered within charter powers. The test to be the duties of a postmaster, and that the company assume direct
applied is whether the act in question is in direct and immediate responsibility for whatever pecuniary loss may be suffered by the Bureau
furtherance of the corporation’s business, fairly incident to the of Posts by reason of any act of dishonesty, carelessness, or negligence
express powers and reasonably necessary to their exercise. If so, on the part of the employee assigned to be a postmaster. A resolution
the corporation has the power to do it; Otherwise, not. was adopted by the BOD of the company expressing conformity to this
condition.
Since the Resolution was passed in good faith by the BOD, it is valid and
binding. As to whether or not it will cause losses or decrease the profits of When the government demanded payment from Acoje due to shortage
the central, the court has no power to review them. This is because it is a of account, the company contended that the resolution was ultra vires.
well-known rule of law that questions of policy or of management
are left solely to the honest decision of officers and directors of a ISSUE: Whether the BOD resolution adopted by the company is ultra
corporation, and the court is without authority to substitute its vires and thus frees it from liability – NO
judgement of the board of directors; the board is the business of the manager
of the corporation, and so long as it acts in good faith its orders are not RULING:
reviewable by the courts. While as a rule an ultra vires act is one committed outside the
object for which a corporation is created as defined by the law of
its organization and therefore beyond the powers conferred upon it by
ZOMER DEVELOPMENT CO vs. INT’L EXCHANGE BANK
law, there are however certain corporate acts that may be
G.R. NO. 150694 l March 13, 2009
performed outside of the scope of the powers expressly
conferred if they are necessary to promote the interest or
FACTS: The BOD of Zomer Development Company approved a resolution
welfare of the corporation.
authorizing, among others, to secure and guarantee the term loan and
other credit facility of Prime Aggregates Corporation with the Bank.
The resolution here covers a subject which concerns the benefit,
convenience and welfare of its employees and their families. It is
Prime Aggregates obtained a term loan from the bank. Zomer, through
undisputed that the establishment of the local post office is a
its treasurer and general manager, executed a REM covering three
reasonable and proper adjunct to the conduct of the business of the
parcels of land to secure the transactions. Additional loans were obtained
company. Indeed, such post office is a vital improvement in the living
but failed to pay.
condition of its employees and laborers who came to settle in its mining
camp which is far removed from the postal facilities or means of
Zomer filed a complaint alleging that the REM was null and void because
communication accorded to people living in a city or municipality.
the treasurer and the general manager were authorized to execute it to
secure only one obligation of Prime Aggregates, thus, ultra vires.
Even assuming arguendo that the resolution constitutes an ultra vires act,
the same is not void for it was approved not in contravention of law,
RULING:
customs, public order or public policy. The term ultra vires should be
distinguished from an illegal act for the former is merely
No Ultra Vires Act
voidable which may be enforced by performance, ratification, or
The plea of "ultra vires" will not be allowed to prevail, whether
estoppel, while the latter is void and cannot be validated. It being
interposed for or against a corporation, when it will not advance justice
merely voidable, an ultra vires act can be enforced or validated if there
but, on the contrary, will accomplish a legal wrong to the prejudice of
are equitable grounds for taking such action.
another who acted in good faith.
Modern authorities favor the rule that where the ultra vires
The contemporaneous and subsequent acts of Zomer, the bank, and the
transaction has been executed by the other party and the
Prime Aggregates can show the intention of the BOD in approving the
corporation has received the benefit of it, the law interposes an
resolution.
estoppel, and will not permit the validity of the transaction or
contract to be questioned, and this is especially true where there is
There can be no equivocation that, indeed Zomer conformed to and
nothing in the circumstances to put the other party to the transaction on
ratified, and hence, is bound by the execution, by its Treasurer
notice that the corporation has exceeded its powers in entering into it.
and General Manager, of the "Real Estate Mortgage" in favor of
The acceptance of benefits arising from the performance by the
IEB, with its properties used as securities for the payment of the credit
other party may give rise to an estoppel, precluding repudiation
and loan availments of Prime Aggregates on the basis of the "Resolution"
of the transaction.
approved by its Board of Directors. Ratification and/or approval by the
corporation of the acts of its agents/officers may be ascertained through
In this case, it is evident that the company cannot now complain that it
the acquiescence in his acts of a particular nature, with actual or
is not liable for the irregularity committed by its employee upon the
technical plea that the resolution approved by its BOD is ultra vires. The MAGALLANES WATERCRAFT ASSOCIATION, INC. vs. AUGUIS
resolution benefited the employees of the company. Hence, the company AND BASNIG
cannot go back on its plighted word on the ground of estoppel. G. R No. 211485 | May 30, 2016
HARDEN vs. BENGUET CONSOLIDATED MINING Ultra Vires Acts; Nature and Definition
G.R. No. L-37331 | March 18, 1933 A corporation has: (1) express powers, which are bestowed upon by law
or its articles of incorporation; and (2) necessary or incidental powers to
FACTS: The Benguet Consolidated Mining Company was organized in 1903 the exercise of those expressly conferred. An act which cannot fall under
as a Sociedad anonima under the Spanish law while Balatoc Mining Company a corporation's express or necessary or incidental powers is an ultra vires
was organized in 1925 under the Corporation Law. act.
When the Balatoc Mining was organized, it was still undeveloped with limited If that act is one which is…done for the purpose of serving corporate
capital, hence, under a resolution, the latter approached the Benguet ends, and reasonably contributes to the promotion of those ends
Company to secure capital necessary for the development of the Balatoc in a substantial and not in a remote and fanciful sense, it may be fairly
property. A contract between them was executed featuring among others, considered within the corporation's charter powers.
that the Benguet Company should receive from Balatoc Mining 600,000
shares in payment for the first P600,000 advanced by the former to the latter. The Act of MWAI is not Ultra Vires
In this case, MWAI's By-Laws obligated its members to pay the
Mr. Harden, acting in his own behalf and of the stockholders of Balatoc membership dues of which they were delinquent. Furthermore, the fact
Mining, filed an action to annul the contract on the ground that the holding alone that neither the articles of incorporation nor the bylaws of MWAI
of any interest in a mining corporation of the Benguet Company is unlawful granted its Board the authority to discipline members does not make
since Section 75 of the Act Congress of July 1, 1902 (Philippine Bill), generally the suspension of the rights and privileges of the respondents
prohibits corporations engaged in mining and members of such from being ultra vires.
interested in any other corporation engaged in mining.
MWAI can properly impose sanctions on Auguis and Basnig for being
ISSUE: Whether the act of holding interest by Benguet Consolidated Mining delinquent members considering that the payment of membership dues
in Balatoc Mining violated the law, and hence an ultra vires act – NO enables MWAI to discharge its duties and functions enumerated under its
charter. Moreover, they were obligated by the by-laws of the association
RULING: to pay said dues. The suspension of their rights and privileges is not an
ultra vires act as it is reasonably necessary or proper in order to further
No Proper Action the interest and welfare of MWAI.
The action was improperly instituted. Plaintiffs have no right of action against
the Benguet Company for the infraction of law supposed to have been SUMMARY
committed.
Corporate Powers and Voting Requirements
Our Corporation Law (Act No. 1459) did not contain any appropriate clause
directly penalizing the act of a corporation, a member of a corporation, in Board of
Powers of the Corporation OCS/Members
acquiring an interest contrary to said Act. Hence, a provision was inserted Directors
forming Section 190 (A) for Penalties. However, the penalties imposed in Majority of 2/3
Section 190 (A) of the Corporation Law for the violation of the prohibition in Sec. 15. Amendment of AOI
BOD/BOT OCS/members
question are of such nature that they can be enforced only by a criminal
prosecution or by an action of quo warranto. But these proceedings can be Majority of
Sec. 23. Election of Directors
maintained only by the Attorney-General in representation of the OCS/members
Government. Sec. 24. Appointment of Majority of
Corporate Officers BOD/BOT
What room then is left for the private action which the plaintiffs seek to assert
in this case? Majority of
Removal of Corporate Officers
BOD/BOT
The Benguet Company has committed no civil wrong against the Balatoc 2/3
Sec. 27. Removal of BOD/BOT
Mining Co stockholders, and if a public wrong has been committed, the OCS/members
directors of the Balatoc Company, were the active inducers of the commission Sec. 28. Filing vacancy of the
of that wrong. BOD/BOT
 If not expiration, removal,
Majority of
The contract, supposing it to have been unlawful in fact, has been performed increase of number and
on both sides, by the building of the Balatoc plant by the Benguet Company remaining
remaining BOD/BOT
BOD/BOT
and the delivery to the latter of the certificate of 600,000 shares of the constitutes a quorum
Balatoc Company.  If expiration, removal,
increase in number, or if Majority of
CONCLUSION: remaining BOD/BOT do not OCS/members
In Compania Azucarera de Carolina v. Registrar, a corporation can exercise constitute a quorum
all powers of ownership, though limited by its charter, until the State acts. It Sec. 29. Payment of Majority of
has an absolute title against all the world except the state after a proper Compensation to BOD/BOT OCS/members
proceeding is begun in a court of law. Sec. 32. Creation of ExeCom (if Majority of the
provided in Bylaws) quorum
Applying such analogously in the case at bar, until the contract is assailed in Sec. 32. Creation of Special Majority of the
a direct proceeding by the Attorney-General, the contract by which the Committees quorum
interest was acquired will be treated as valid (and not as a result of an ultra Sec. 36. Extension/Shortening of Majority of 2/3
vires act), as between the parties. The Attorney-General is the exclusive corporate term BOD/BOT OCS/members
officer who is confided with the right to attack the corporation.
Sec. 37. Incurring or Increasing
Bonded Indebtedness or Majority of 2/3
Increasing or Decreasing capital BOD/BOT OCS/members
stock
Incurring debt in the ordinary Majority of
course of business BOD/BOT
Sec. 39. Sale or other disposition
of assets
 In the ordinary course Majority of
of business quorum
 All or substantially all Majority of the 2/3
of corporate assets BOD/BOT OCS/members
Sec. 41. Invest Funds in the Majority of the
Primary Purpose quorum
Invest Funds to Incidental Majority of the
Purpose quorum
Invest Funds in a Secondary Majority of the 2/3
Purpose or another business BOD/BOT OCS/members
Sec. 42. Declaration of Cash Majority of the
Dividends quorum
Sec. 42. Declaration of Stock Majority of the 2/3
Dividends quorum OCS/members
Majority of
Majority of the
OCS/members
quorum for
Sec. 43. Enter into Management of each
both managed
Contract managed and
and managing
managing
corporation
corporation
But if with interlocking directors 2/3

and SHs OCS/members
Majority of
Sec. 45. Adoption of Bylaws
OCS/Members
Majority of Majority of
Sec. 47. Amendment of Bylaws
BOD/BOT OCS/members
Delegation of Authority to amend 2/3

Bylaws OCS/members
Revocation of Authority to Majority of
amend Bylaws OCS/members
Majority of the
Sec. 61. Fixing the Issued Value quorum
Or Majority of
of No Par Value Shares (if not (pursuant to
OCS/members
fixed in the AOI) AOI and
Bylaws)
Majority of 2/3
Sec. 75. Merger or Consolidation
BOD/BOT OCS/members
Sec. 102. Amendment of AOI of Majority of 2/3
Closed Corporation BOD/BOT OCS/members
Sec. 132. Voluntary Dissolution Majority of Majority of
where no creditors are affected BOD/BOT OCS/Members
Sec. 135. Voluntary Dissolution Majority of 2/3
where creditors are affected BOD/BOT OCS/members
NOTE: This is everything. Memorize the contents of this table.
End of First Exam Coverage
“Oo ate… oo ate…puro na lang ako oo ate! Daig ko pa ang

manikang de susi. Nakagapos na nga ang paa't kamay ko,
pati ba naman puso, nakagapos pa din?”
Sharon Cuneta in Nakagapos na Puso (1986)

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CORPORATION LAW

FROM THE LECTURES OF:

Section 42 As to corporate governance, that provision in arbitration as an option

Applicability to Existing Corporations

How does the RCCP affect other laws?

Notwithstanding any provision to the contrary, regulators such as the Bangko

Does the RCCP have a definition of a corporation vested with public

[1] Section 22 of the RCCP Transcribed by: Pau Rojo

As a recap of your Lab Rel/Pub Corp, if private corporations or GOCCs without

MERALCO is not entitled to damages.

HPPI is obviously a business conduit of petitioner corporation and its

What happens to the surplus profits of nonstock corporations?

If the articles of incorporation or the by laws:

If the articles of incorporation or the bylaws is:

Does it make it a nonstock or nonprofit corporation?

As well as silence in the distribution of assets does not automatically make it

Corporation by Estoppel NDC vs. Phil. Veterans Bank

Was there a reason or a logical basis why they allowed the

Illustration II: Full Beneficial Ownership Test

Here, there is an undeniable overlap in the ownership and management of

Obviously, the instant case presents a situation which exhibits a scheme

Illustration 1: Under the following circumstances, is ABC a Filipino

Applying the grandfather rule, we compute the percentage that corresponds

Illustration 2: Under the following circumstances, is ABC a Filipino

In case of a multi-tiered corporation, the stock attribution rule must be

Other Characters in a Corporation Liability of Promoters

Rescission of the pre-subscription agreement was not proper.

NOTE: Here, the promoters are liable.

Classification of Shares Definitions

Nature of a Share of Stock

Advantages of Par Value Shares

2. There is unlikelihood of sale of subsequent issued share at a

Disadvantages of Par Value Shares

Share Premium Stock Holder’s Equity

PAR VALUE NON-PAR VALUE

Holders of nonvoting shares shall nevertheless be entitled to vote on the

(a) Amendment of the articles of incorporation;

If you are classified as a preferred share, there is such a thing as “preferred”

This is often pricy shares of stock. Meaning of Redemption

General Rule: Not convertible.

But, as to the tradename, you treat that separately. If it is a tradename

6. You can only use it after 5 years from revocation or dissolution.

2. If the incorporator is a natural person, he or she must be of legal

Transcribed by: Narciso, Girlie

Are the bylaws of a foreign corporation valid and effective in the

This is necessary to explain because it should be a separate resolution, and

What is the Source of Board Power?

Doctrine of Centralized Management Fiduciary Duties of Directors, Trustees, and Officers

RULING: It cannot be doubted that the management and control of GDITI,

Example: (Under SEC Opinion 19-11) Written Proxies

SEC Memorandum Circular No. 05-12, July 13, 2012 3. Notice

SEC Memorandum Circular No. 04-17

The stockholders, if not exclusively reserved to holders of founders’ shares,

Corporate Officers May officers be foreigners? Can the President be a foreigner?

In the case of Matling Industrial vs. Coros, a position must be expressly

YASUMA v. HEIRS OF CECILIO DE VILLA

Transcribed by: Av Abrasaldo, Nembrod Enano, and ZU Ugdang

Corporate Opportunities Doctrine An example of this is letter (k) of Section 35.