CD-GET NOTES – Corporation Law – Atty.
Ladia (2020) | 1
REVISED CORPORATION CODE
LADIA LECTURES – RECITATION
SY 2020-2021
“BASAHIN, INTINDIHIN, MADALING SAGUTIN.”
“THE CODE IS ALWAYS YOUR BEST BET IN THE STUDY
OF THE LAW.”
SEPT- 17 (T)
DEFINITION AND ATTRIBUTES:
1. Created By Operation Of Law – the formal requirement of
the State’s consent through compliance with the
requirements imposed by law is necessary for its creation
such that the mere agreement of the persons composing it or
intending to organize it does not warrant the grant of its
independent existence as a juridical entity;
2. Artificial Being – it has a juridical personality, separate and
distinct from the persons composing it.
Q: Is a corporation entitled to the award of moral damages?
= As a general rule, NO (Tamayo v. University of Negros 1962;
Mambulao Lumber v. PNB 1968; LBC v. CA 1994). Moral Damages
is awarded for recompense for physical suffering, mental anguish,
fright, moral shock, social humiliation and similar injury. A
corporation being an artificial person and having existence only in
contemplation of the law, has no emotions and has no senses, and
cannot does experience physical and mental suffering.
In 2005, in the case of Filipinas Broadcasting v. Ago Medical
Center, the high court cited Art. 2219 (7) where it enumerates the
instances when moral damages may be awarded. Said provision of the
Civil Code does not qualify whether the plaintiff is a natural or a
juridical person. Thus, a juridical person can validly complain for libel
and any other form of defamation and claim for moral damages. And
in the rule of statutory construction, when the law does not distinguish,
you do not distinguish.
This was reiterated in 2007 in the case of Meralco v. Team
Electronics, where it was ruled likewise, citing Art. 2219 (7) that when
the corporation has a reputation that is debased resulting in its
humiliation in the business realm, moral damages may be awarded.
(i.e., liber, slander, defamation)
It is now a Bedrock Rule, that a corporation not having a nervous
system may nonetheless be awarded moral damages in cases of libel,
slander or any form of defamation. Because the word ‘person’ as used
in the NCC does not distinguish whether it is natural or juridical.
3. Right Of Succession – unlike in a partnership, the death,
incapacity or civil interdiction of one or more of its
stockholder does not result in its dissolution; it persist to
exist despite such death, civil interdiction or incapacity.
4. Powers, Attributes And Properties Expressly Authorized
By Law – it can exercise only such powers and can hold only
such properties as are granted to it by the enabling statutes
unlike natural persons who can do anything as they please.
ADVANTAGES OF THE CORPORATE FORM OF BUSINESS
1. Capacity To Act As A Single Unit – any number of persons
may unite in a single enterprise without using their names,
without difficulty or inconvenience, and with the valuable
right to contract, to sue and be sued, and to hold or convey
property, in the corporate name;
Example:
PLDT, San Miguel, Jollibee have over 5000 stockholders but
it is not the 5000 stockholders who would enter into contract
with a third party. It is the corporation through the governing
board of directors, not more than 50 of them.
2. Limited Shareholder’s Liability – an individual
stockholder may contribute as much without risking more.
And in the absence of the statute to the contrary, that will be
the limit of his liability for the debts and obligation of the
corporation. Stockholders are not personally liable for the
debts of the corporation;
Example:
If the stockholders would subscribe to 1 Million Peso worth
of shares and has paid 1M subscription, any liability incurred
by the corporation, he will not be liable for any centavo.But
if he has unpaid subscription, it is considered as debt he owes
to the corporation. The unpaid portion of the subscription, as
the Trust Fund Doctrine states, constitutes a fund. It’s the
creditiors have derived to rely upon for the satisfaction of
their claims. We will note later on that this limited
shareholder’s liability can also be a disadvantage in a
corporate form of business.
3. Continuity Of Existence – rights and obligations of a
corporation are not affected by the death, incapacity or
replacement of the individual members. It is derived from
the attribute of right to succession. The corporate business
continues uninterrupted as long as the corpate entity
continues in accordance with the term of existence. Pag
namatay lahat ng stockholders within 5 years, eh 50 years
ang corporate existence, mapapalitan lang sila ng mga heirs.
Such heirs may ought to continue transacting the business by
which the corp was formed or organized. They will be
succeeded by their heirs.
4. Feasibility Of Greater Undertaking – it enables the
individuals to cooperate in order to furnish the large amounts
of capital necessary to finance large scale enterprises;
Example:
Jollibee. In the 80s it increased its capital stock before it go
to another 2 Million Shares. It used the facilities of the
Philippine Stock Exchange, otherwise known as initial
public opening and sold the shares openly to the public. A
lot of people rushed to acquire shares of stocks of Jollibee.
Before it was 1 peso per share. It raised a lot of capital and
because of that, it acquired Greenwich, Chowking, Red
Ribbon. It extended its business abroad. You cannot do that
in a sole proprietorship or partnership because there are no
shares you can share to the public.
5. Transferability Of Shares – unless reasonably restricted,
shares of stocks, being personal properties, can be
transferred by the owner to anyone without the consent of
the other stockholders, corporation itself and the board
6. Centralized Management – the vesting of powers of
management and appointing officers and agents in board of
directors gives to a corporation the benefit of a centralized
administration which is a practical business necessity in any
large organization
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Stockholders may have all the profits but shall turn over the
management of corporate affairs to the governing board of
directors
7. Standardized Method Of Organization, Management
And Finance –which are provided under a well-drawn
general corporation law. The corporation statutes enter into
the charter contract and these are constantly being
interpreted by courts. An established system of management
and protection of shareholders and creditors’ rights has thus
been and are being evolved.
Ano mangyayari if the corporate officer denies the
stockholder his right to inspect the book and record of the
corporation, which is an inherent right of the corporation? It
is there in the law that you can institute madamus with
damages and attorney’s fees.
DISADVANTAGES
1. To have a valid and binding corporate act, formal
proceedings, such as board meetings are required. According
to the code, in order for the board to pass a valid corporate
act, the quorum requirement is majority of their number, if
their number is 5, 3 is required to have a quorum
expansion). However it did not happen. Will take that up
later on.
5. The minority shareholders have practically no say in the
conduct of corporate affairs;
6. In large scale enterprises, stockholders’ voting rights may
become merely fictitious and theoretical because of
disinterest in management, wide-scale ownership and
inaccessible place of meeting;
7. “Double taxation” may be imposed on corporate income;
When I was taking up law, there was a provision in the NIRC
that when a corporation pays its corporate income tax, its
subsequently declares cash dividends to the stockholders.
The cash dividends risqué by stockholders are not subject to
income tax. However it was amended, subjecting the
dividend stockholders to another income tax, since magkaiba
naman sila ng personality (corporate and individual)
8. Corporations are subject to governmental regulations,
supervision and control including submission of reportorial
requirements not otherwise imposed in other business form.

2. The business transactions of a corporation is limited to the Due Process Clause – where every person, inclusive of juridical
State of its incorporation and may not act as such corporation entities, cannot be deprived of its rights and properties without due
in other jurisdiction unless it has obtained a license or process of law
authority from the foreign state;
Equal Protection Clause – no rights or remedy in favor or against any
3. The shareholders’ limited liability tends to limit the credit corporation, its stockholders, members, directors, trustees or officers
available to the corporation as a separate legal entity; shall be removed or impaired either by subsequent dissolution of said
corporation or by any subsequent amenedment or repeal of this code
Example: (SEC 184, CC)
Lucio Tan, Manny Villar, E. Razon, 2 siblings of Henry Sy.
The 2 siblings of Henry Sy their networths are similar—2 Impairment Against Obligations and Contracts – all contracts it enters
Billion US Dollars. Yung iba mas mayaman pa jan. So let’s into will thereby be respected.
say this 5 formed a corporation to engage in realty and
development. Capital Stock is 2B Pesos. Their subscriptions Corporation Partnership
are paid equally and fully. Let’s assume that that 2B Pesos As to creation By operation of law By mere agreement
was used to acquire a piece of property in the BGC area. (Secs 2 & 4) of the parties (Art.
They intend to put up a condo unit. In the process they need 1767, CC)
4B Pesos to put up the structure. To do it, they will secure a As to # of person Not more than 15 Two or more natural
loan from a financial banking institution. Do you think any required for its persons, natural or person (Art 1676)
financial or banking institution will give out a loan? NO. creation juridical (sec 10)
Assume that a banking institution released the loan and the
building was constructed, lumindol and nagiba yung Except: one-person
buildaing, ano macclaim ng creditor? Eh fully paid na yung corporation, only a
stock holders, wala na sila utang. Ang macclaim lang ng natural person, an
creditor is the lot of the land which is only 2B. Lugi sya bec estate or a trust
the bank cannot go after the shareholders dahil nga ang sabi (sec116)
natin ang ni Juan, hindi utang ni Pedro, unlike in the As to powers Can exercise only Can do anything by
partnership and sole proprietorship. such powers and agreement of the
functions expressly parties provided
4. Transferability of shares may result to uniting incompatible granted to it by law only that it is not
and conflicting interests; and those that are contrary to law,
necessary or morals, good
Kasi nga personal property yan, eh pano yung competitor ng incidental to its custom and public
corporation gusto bilhin yung shares ng stockholder? Tapos existence (sec 2 in order or policy.
binenta nya kasi mataas ang presyo? Aba! That happened in re sec 44)
the case of Gokongwei v. SEC and SMC (1979). As to who may GR: must transact GR: any one of the
Gokongweir acquired a number of shares in San Miguel exercise business through its partners may validly
Corp and Gokongwei at the time has a family business board of directors, bind the partnership,
engaged in a competition with SMC. The next election of the UNLESS validly UNLESS there is an
deed of SMC, John Gokongwei can elect himself as the delegated expressly agreement to the
member of the board (he would have been able to secure data or impliedly. (sec contrary. (art 1308
and information to which the corporation is being managed 22) par 1)
from trade secrets to marketing strategies, proposed
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As to the right of Has the right to No right to Please note the conjunction use in the definition, “and”, meaning they
succession succession (sec.2) succession, must both go hand in hand. Because for instance, the club shares (work
which presupposes dissolution results club, sports club etc.), their capital stocks divided into shares but
that is continues to upon incapacity or nowhere in their articles of incorporation defines its authority for the
exist despite death, civil interdiction or distribution of dividends of the members thereof. Legally and
withdrawal, mere withdrawal of technically, they are not Stock Corporation.
incapacity or civil a partner. (article
interdiction or mere 1830 par 6 and 7) Section 86 defines a Non-stock Corporation—it is one where no part
withdrawal of the of its income is distributable as dividends to its members, trustees, or
stockholder or officers. Any profit which a non-stock corporation may obtain
member, or a incidental to its operations be used for the furtherance of their purpose.
partner.
As to transferability A stockholder can A partner cannot How to classify Stock Corporation:
of rights/interest ordinarily transfer, transfer without the 1. Capital Stock divided into shares
sell, or assign his consent of the other 2. Authority to distribute allotment of its surplus profits
shares of stock partners (article by way of dividends to stock holders, members,
without the consent 1830 par 6 and directors
of other 7)
stockholders. (sec A Non-stock corporation may nonetheless make profits as an incident
62) to its operations but since it cannot use this profits for allotment or
As to extent of Stockholder or all partners are declaration of dividends, it can only be used for the furtherance of its
liability members has a liable pro rata with organization. As I’ve said, no income must be distributed as dividends
limited liability, it is all their properties to officers.
only to the extent of and after all the
their subscription or properties of the A non-stock corporation can declare dividends but they cannot
their promised partnership has been distribute it.
contribution. exhausted, for all
partnership liability, Collector v. Club Filipino Cebu
except limited
partner in a limited Note from Sir: Club Filipino operates a club house that sells wine,
partnership. (art liquour and other short order for their guests. Whatever profit it derive
1813) is used for overhead cost and improvement of facilities. At that point
As to term of A corporation shall May exist for an in time, percentage taxes where then imposed, requiring payment for
existence have a perpetual indefinite period persons engaged in the business of bar keeping or restaurateur. In the
existence unless its subject only to the case, it was paid under protest. Supreme Court declared that Club
article of causes of Filipino is not engaged in the business of bar keeping or restaurateur.
incorporation dissolution The plain and ordinary meaning of business is restricted to activities
provides provided where profit and livelihood is the purpose. However, the fact that the
otherwise (sec 11) by the law of its club makes profit does not make it a profit-making corporation because
for purposes of creation (art 1824) said two requisites must be complied. Nowhere in its article of
liquidation it shall incorporation can the two requisites be found. Hence, Club Filipino
be considered as Cebu is technically and legally considered as Non-Stock Corporation,
inexistence for 3 just like Wakwak Golden Country Club, Manila Polo Club, etc.
years (sec 139)
As to dissolution Cannot be dissolve The partners may Corporations Created by Special Law.
by mere agreement dissolve the Section 4 also provides that Stock Corporation may be granted tax
of the stockholders. partnership at will incentives as compared to Non-stock Corporation. Section 4 also
The consent of the or at anytime they provides another type of a corporation, the corporations created by
state is necessary for deem fit. (art 1824) special law or with their own charter. Congress passes a law creating a
it to cease as a body corporation.
corporate.
Q: What law governs this type of corporation?
CLASSIFICATION OF CORPORATIONS A: Primarily by the provisions of the special law or charter creating
Note: Knowing the type of corporation involve is also important for them. CC suppletory.
purposes determining what law or provision of the code itself may
apply to it. Example: Stock and Non-stock. Non-stock Corporation Section 4 is categorical, they are created by a special law and
may be entitled to certain tax exemptions that are not available to supplemented by the Corporation in so far as applicable. Example of
ordinary stock corporations. this is the case of Gonzales v. PNB. Although I don’t know if it’s still
applicable now since it was privatized.
Stock and Non-Stock Corporation
He wanted to inspect the records of the bank but he was denied. SC
It is contained in Section 3, Stock Corporation are those which have ruled that he is not entitled to inspect the financial books and records
capital stock divided into shares and are authorized to distribute to the of the bank because, the PNB has its own charter and its charter
holders of such shares, dividends, or allotments of the surplus profits specifically provides that the financial books and records of the bank
on the basis of the shares held. All other corporations are non-stock shall be subject to inspection ONLY by the monetary board of the
corporations. central bank. In fact, there is a penal provision in the charter itself that
anyone who will violate the law may be subject to a fine and/or

imprisonment. So (?) ordinary Stock Corporation, he could have had
access ot the financial records of the bank but it is an inherent right of
every stock holder registered under the Corporation Code to inspect
the book and records of the corporation for purposes of self-
preservation.
They are primarily governed by the law creating them. Unless
otherwise provided by the law of their creation, they are not immune
from suit. It is well settled as early as the case of PNB v. Pabular that
when the government engages in a particular business through the
instrumentality of the corporation, it divests itself pro hac vice of its
sovereign character. So as to subject itself to the rules governing
private corporations, we have seen PNB sued left and right, and PNOC
at a point in time where it was still government owned have been sued
left and right.
Q: What law governs employer-employee relationship in GOCC or
those with special charter, will it be the Civil Service Law or the Labor
Law?
A: It depends on the manner of the corporation’s creation. If a
corporation is a GOCC and/or created by special charter, EER is
governed by the charter and supplemented by the Civil Service Law.
If one is organized under General Corporation Code, the Labor law.
PNOC-EDC v. NLRC
PNOC in this case is 100% owned by the government at that time.
During that time, it was created by a special law, it has its own charter.
During its existence, it organized the Energy Development
Corporation, it is 100% owned by PNOC and therefore indirectly
100% owned also by the government. EDC was registered by
following the procedures laid down by the Corporation Code. The EER
issue arose in PNOC-EDC and not in PNOC itself. It was filed before
the NLRC. PNOC-EDC moved to dismiss on the ground of lack of
jurisdiction. SC ruled that, under 1972 Constitution, NLRC has
jurisdiction over PNOC-EDC, since it was organized under
corporation code. Therefore, Labor Law shall apply. Different
Corporation are governed by different rules. This case was asked twice
in the bar already in Labor Law.
Public and Private Corporation
The old law or then Act No. 1459, also provided for Public and Private
Corporation.
Its distinction was eliminated due to the confusion that arose relating
to the government stock holdings in corporations registered under
corporation code. Though private, they are referred to as public only
because the shares are owned and controlled by the government. The
true test as to its nature as public or private is found in the relation of
the body to the state. Strictly speaking, a public corporation is one that
is created formed or organized for political and governmental
purposes. With political powers exercised for the purposed connected
with the public good and administration of civil government. So the
mere fact that the undertaking in which the corporation is engaged is
one which is the state itself might enter as part of its public works does
not make it a public corporation, nor would the fact that the state owned
some or substantial number of shares make it a public corporation.
Private corporations are those created for private purposes, benefit or
end. Created for the immediate benefit or individuals composing it.
The true distinction therefore is that, the former is organized for
political or governmental purposes while the other is not.
PNB with its own charter—banking—100% owned by the
government, before it was privatized, was it a public corporation? No,
because banking is not for a public purpose.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 4
PNOC at a point in time was also 100% owned, also has its own
charter. Private or public? Private because of its purpose.
National Coal Corporation v. CIR
NCC is created for the purpose of developing the coal industry of the
Philippines by the special act of the legislature. It has its own charter.
It was engaged in the mining of coal under Serblanz(?) belonging to
the Philippine government. It brought suit to the tax paid to the
defendant on the ground that it is a public corporation, the shares being
substantially owned or held by the government, 99%. SC ruled that it’s
not a public corporation and it’s not exempted from paying said taxes.
Government being a substantial stockholder does not make a
corporation public. Public corporation are those created for
governmental purposes and the mining of coal is not for political or
governmental purpose. Hence, it has no greater rights or privileges than
any other corporation organized under the same purpose. Certainly it
was not the intention of the legislature to give it a preference, right or
privilege over other legitimate other corporation in the mining of coal,
because if it was their intention it should have provided in the charter
itself that it shall be exempted from the said tax.
Ecclesiastical and Lay Corporations
Common law also provides for a classification of the corporation,
whether it is Ecclesiastical and Lay.
Ecclesiastical Corporation are those organized for spiritual purposes
or administering properties held by religious ones. These are the
religious corporation composed by ecclesiastics. Further under the
code, religious corporations are classified as:
 Corporation sole under Section 108 or
SEC. 108. Corporation Sole. – For the purpose of administering and
managing, as trustee, the affairs, property and temporalities of any
religious denomination, sect or church, a corporation sole may be
formed by the chief archbishop, bishop, priest, minister, rabbi, or other
presiding elder of such religious denomination, sect or church.
 Religious society under Section 114.
SEC 114 Religious Societies- Unless forbidden by competent
authority, the Constitution, pertinent rules and regulation, or
discipline of the religious denomination, sect or church of which it is
a part, any religious societies may upon written consent and/or
affirmative vote at a meeting called for the purpose of at least two third
(2/3) of its membership, incorporate for the administration of its
temporalities or for the management of its affairs, properties, and
estate.
Lay Corporations exist for secular and business purposes like
maintaining hospital and houses for the sick. They are further classified
as:
 Eleemosynary - those that are charitable and benevolent
purposes, established for creating hospitals, the sick and the
poor and/or the aging.
 Civil - organized for the benefit, pecuniary or otherwise, of
the members.
Aggregate and Sole Corporation
Aggregate corporations – those composed of a number of individuals
vested with corporate powers.
Corporations sole – those that consist of one person or individual only
and who are made as bodies corporate and politic in order to give them
some legal capacity and advantage which, as natural persons, they
cannot have.

One-person corporation
SEC. 116. One Person Corporation. – A One Person Corporation is
a corporation with a single stockholder: Provided, That only a natural
person, trust, or an estate may form a One Person Corporation.
Banks and quasi-banks, preneed, trust, insurance, public and publicly-
listed companies, and non-chartered government-owned-and-
controlled corporations may not incorporate as one Person
Corporations: Provided, further, That a natural person who is licensed
to exercise a profession may not organize as a One Person
Corporation for the purpose of exercising such profession except as
otherwise provided under special laws. (1:05:26.8)
Close and Open Corporation
Close Corporations are those whose shares of stock are held by a
limited number of persons like the family or other closely-knit group.
There are no public investors and the shareholders are active in the
conduct of the corporate affairs; recognized under Sec. 95 of the
Corporation Code.
There is exclusivity of stock ownership. There are 3 requirements to
be considered as close corporation:
a) all the corporation’s issued stock of all classes, exclusive of
treasury shares, shall be held of record by not more than a
specified number of persons, not exceeding twenty (20); -
if not one of those specified 20, you cannot
b) all the issued stock of all classes shall be subject to one (1)
or more specified restrictions on transfer permitted by this
Title; and
c) the corporation shall not list in any stock exchange or make
any public offering of its stocks of any class.
Open Corporations are those formed to openly accept outsiders as
stockholders or investors. They are authorized and empowered to list
in the stock exchange and to offer their shares to the public such that
stock ownership can widely be dispersed. Example: PLDT, Jollibee. If
you want to become a stock holder, call your broker
Domestic and Foreign Corporation
Domestic Corporations are those organized or created under or by
virtue of the Philippine laws, either by legislative act or under the
provision of the General Corporation Law.
The Retail Trade Liberalization Act now allows the retail trade
business to be owned exclusively by foreigners if the paid up capital is
at least 2M US Dollars. Let’s assume that is the case. The shares of
stocks of that particular retail trade business are owned exclusively by
Australians. Is that a Domestic Corporation or Foreign? It is a
Domestic Corp., because it is registered under the laws of the
Philippines
Foreign Corporations are those formed, organized or existing under
any laws other than those of the Philippines and whose laws allow
Filipino citizens and corporations to do business in its own country or
state (Sec. 140 Corporation Code).
SEC. 140. Definition and Rights of Foreign Corporations. – For
purposes of this Code, a foreign corporation is one formed, organized
or existing under laws other than those of the Philippines’ and whose
laws allow Filipino citizens and corporations to do business in its own
country or State. It shall have the right to transact business in the
Philippines after obtaining a license for that purpose in accordance
with this Code and a certificate of authority from the appropriate
government agency
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 5
Example
Let us see, immigrants in California orgnanzied a
corporation registered also I California. All the shares are
owned by the Filipinos. This is a Foreign Corporation
because it is registered under the laws of a state other than
Philippine Law.
= PRINCIPLE OF RECIPROCITY
Parent or Holding Companies and Subsidiaries and Affiliates
Parent Or Holding Company: a corporation who controls another
corporation, or several other corporations known as its subsidiaries.
Holding companies have been defined as corporations that confine
their activities to owning stock in, and supervising management of
other corporation. It owns a controlling interest (more than 50% of the
voting stock) in the corporation where it holds shares. Thus, control
the latter by virtue of its power to elect a majority of board of directors
of the subsidiary who are to manage the corporate affairs.
As may be differentiated from investment companies which are active
in the sale or purchase of shares of stock or securities, parent or holding
companies have a passive portfolio and hold the securities merely for
purposes of control and management.
Subsidiary Corporations those which another corporation owns atleast
a majority of the shares, and thus have control. A subsidiary has an
independent and separate juridical personality, distinct from that of its
parent company, hence any claim or suit against the latter does not bind
the former or vice versa.
Example:
Ayala Corporation – Holding Company, hold shares in the
following:
 BPI – 52%
 Ayala Land – 56%
 Globe Telecom – 58%
Ayala Co., controls the management of the subsidiaries
because it has the power to elect the majority of board of
directors in the 3 subsidiaries because MORE THAN 50%
OF VOTING STOCK. Meaning, if there are 5 members of
the board in BPI, Globe or Ayala Land, Ayala Corp can elect
3 members of the board which constitute a quorum, and a
vote of atleast 2 of them will also pass a valid corporate act.
Affiliates are those corporations which are subject to common control
and operated as part of a system. They are sometimes called “sister
companies” since the stockholdings of a corporation is not substantial
enough to control the former. No particular stockholder owns more
than 50% of the voting shares.
Example:
Coca-Cola INC holds shares in the following:
San Miguel Corp – 18%
Hershey Ph – 18%
Amatil Australia – 18%
Coca Cola Bottlers Labor Union – 18%
X = 16%
Y – 18%
These are called sister companies of Coca-Cola INC. Not
anyone of the stockholders there can control the affiliate
company because it is a sister company. San Miguel Corp.,
Hershey Phils., Amatil Australia, Coca-Cola Bottlers Labor
Union, X, and Y can elect one member of the board. That’s
why it operates as a sister company.

De Jure Corporations
Strict or substantial compliance with statutory requirements of
incorporation and whose rights to exist as such cannot be successfully
attacked even by the State in a quo warranto proceeding. They are, in
effect, incorporated by strict adherence to the provisions of the law of
their creation.
De Facto Corporations
Are those which exist by the virtue of an irregularity or defect in the
organization or constitution or from some omission to comply with the
conditions precedent by which corporations de jure are created, but
there was colorable compliance with the requirements of the law under
which they might be lawfully incorporated for the purposes and powers
assumed, and user of the rights claimed to be conferred by law. Its
existence can only be attacked by a direct action of quo warranto
proceedings.
Example:
You created a financing company located in Manila. Ang
paid up capital mo 8M lang. SEC registered it. It is a De
Facto Corportion because it did not comply with the
requirement of a paid up capital atleast 10M Pesos.
SEC. 19. De facto Corporations. – The due incorporation of any
corporation claiming in good faith to be a corporation under this
Code, and its right to exercise corporate powers, shall not be inquired
into collaterally in any private suit to which such corporation may be
a party. Such inquiry may be made by the Solicitor General in a quo
warranto proceeding.
Corporation by Estoppel
those which are so defectively formed as not to be either de jure or de
facto corporations but which are considered as corporations in relation
only to those who cannot deny their corporate existence due to their
agreement, admission or conduct. This corporation may apply for or
against a corporation, or for or against the person dealing with the
corporation itself.
SEC. 20. Corporation by Estoppel. – All persons who assume to act
as a corporation knowing it to be without authority to do so shall be
liable as general partners for all debts, liabilities and damages incurred
or arising as 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 its lack of corporate personality as a defense. Anyone
who assumes an obligation to an ostensible corporation as such cannot
resist performance thereof on the ground that there was in fact no
corporation.
FORMATION AND ORGANIZATION
PROCESS OF INCORPORATION
1. Promotional Stage
The act of getting the corporation organized including the procurement
of subscriptions to its capital stock. This is normally taken by a
promoter, who is an organizer or projector who brings person to unite
in forming the corporation.
This is undertaken by the organizers or promoters who bring together
persons interested in the business venture. They enter into contract
either in their own names or in the name of the proposed corporation.
Liability of promoters
: (d) The term for which the corporation is to exist, if the corporation
GENERAL RULE: a promoter, although he may assume to act for and
on behalf of a projected corporation and not for himself, will be held
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 6
personally liable on contracts made by him for the benefit of a
corporation he intends to organize. The personal liability continues
even after the formation of the corporation unless there is novation or
other agreement to release him from liability. As such, the promoter
may do either of the following options:
a. He may make a continuing offer on behalf of the corporation,
which, if accepted after incorporation, will become a
contract. In this case, the promoter does not assume any
personal liability, whether or not the corporation will accept
the offer;
b. He may make a contract at the time binding himself, with the
understanding that if the corporation, once formed, accepts
or adopts the contract, he will be relieved of responsibility;
or
c. He may bind himself personally and assume responsibility
of looking to the proposed corporation, when formed, for
reimbursement.
2. Process of Incorporation
Formal or procedural requisite which includes the drafting of the
Articles of Incorporation, preparation and submission of additional and
supporting documents, filing with the SEC, and the subsequent
issuance of the Certificate of Incorporation.
3. Organization and Commencement of Business
Certain overt acts after incorporation such as the election of corporate
officers, president, secretary, treasurer; adoption of the corporate by-
laws; and other acts showing intent in transacting business
CONTENTS OF ARTICLES OF INCORPORATION
Preparation and submission of additional and supporting documents
that may be required by the government agency that may have
supervision of the affairs of the corporation and more of the SEC. Your
filing thereof with the same agency and the subsequent issuance of the
certificate of incorporation.
Requirements from documentary to final structure may vary depending
on the nature of the business of the proposed corporation intends to
undertake. All things must be considered prior to the drafting of the
articles of incorporation such as the limitation and restriction on the
corporate name, minimum paid-up capital requirement imposed by
law, rules and regulations for such undertaking and the like.
SEPT- 22 (D)
Section 13. Contents of the Articles of Incorporation. - All
corporations shall file with the Commission articles of incorporation
in any of the official languages, duly signed and acknowledged or
authenticated, in such form and manner as may be allowed by the
Commission, containing substantially the following matters, except as
otherwise prescribed by this Code or by special law:
(a) The name of corporation;
(b) The specific purpose or purposes for which the corporation is being
formed. Where a corporation has more than one stated purpose, the
articles of incorporation shall indicate the primary purpose and the
secondary purpose or purposes: Provided, That a nonstock
corporation may not include a purpose which would change or
contradict its nature as such;
(c) The place where the principal office of the corporation is to be
located, which must be within the Philippines;
has not elected perpetual existence;

(e) The names, nationalities, and residence addresses of the
incorporators;
(f) The number of directors, which shall not be more than fifteen (15)
or the number of trustees which may be more than fifteen (15);
(g) The names, nationalities, and residence addresses of persons who
shall act as directors or trustees until the first regular directors or
trustees are duly elected and qualified in accordance with this Code;
(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, nationalities, and subscribers, amount subscribed and paid by
each on the subscription, and a statement that some or all of the shares
are without par value, if applicable;
(i) If it be a nonstock corporation, the amount of its capital, the names,
nationalities, and residence addresses of the contributors, and amount
contributed by each; and
(j) Such other matters consistent with law and which the incorporators
may deem necessary and convenient.
An arbitration agreement may be provided in the articles of
incorporation pursuant to Section 181 of this Code.
The Articles of incorporation and applications for amendments thereto
may be filed with the Commission in the form of an electronic
document, in accordance with the Commission's rule and regulations
on electronic filing.
Section 14. Form of Articles of Incorporation. - Unless otherwise
prescribed by special law, the articles of incorporation of all domestic
corporations shall comply substantially with the following form:
Articles of Incorporation
of
_____________
____________________
(Name of Corporation)
PREFATORY PARAGRAPH
The undersigned incorporators, all of legal age, have voluntarily
agreed to form a (stock) (nonstock) corporation under the laws of the
Republic of the Philippines and certify the following:
It must specify the nature of the corporation being organized to prevent
difficulties of administration and supervision. Thus, the corporation
should indicate whether it is a stock or non-stock corporation, a close
corporation, one-person corporation, or a religious corporation, etc.
Different corporations are subject to different prefatory requirements
on the SEC.
“We, the undersigned, majority of whom are residents of the
Philippines, have this day voluntarily associated ourselves to form a
(type) corporation, and hereby certify:”
CORPORATE NAME
First: That the name of said corporation shall be
"_________________", Inc. Corporation or OPC";
It is essential to its existence since it is through it that it can act and
perform all legal acts. The name of the corporation designates the
corporation in the same manner as the name of an individual designates
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 7
the person. This is so because it is the principal means of distinguishing
it not only from its stockholders or members but also from other firms
and entities.
Only a corporation can append the word ‘Corporation’ or
‘Incorporated’, as they choose, whether in full or in abbreviated form.
A corporation, once formed, cannot use any other name, unless it has
been amended in accordance with law, just like the Anti-Alias Law as
when it comes to natural persons, as this would result in confusion and
may open the door to fraud and evasion as well as difficulties of
administration and supervision.
Thus, the organizers must make sure that the name they intend to use
is distinguishable from any other name already registered, or if the
same is already protected by law, or when it is contrary to exiting laws,
rules and regulations, since the SEC would refuse registration.
Section 17. Corporation Name. - No corporate name shall
be allowed by the Commission if it is not distinguishable
from that already reserved or registered for the use if
another corporation, or if such name is already protected by
law, rules and regulations.
A name is not distinguishable even if it contains one or more
of the following:
(a) The word "corporation", "company", incorporated",
"limited", "limited liability", or an abbreviation ofone if such
words; and
(b) Punctuations, articles, conjunctions, contractions,
prepositions, abbreviations, different tenses, spacing, or
number of the same word or phrase
.
The Commission upon determination that the corporate
name is: (1) not 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 and
regulations, may summarily order the corporation to
immediately cease 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
signages, marks, advertisements, labels prints and other
effects bearing such corporate name. Upon the approval of
the new corporate name, the Commission shall issue a
certificate of incorporation under the amended name.
If the corporation fails to comply with the Commission's
order, the Commission may hold the corporation and its
responsible directors or officers in contempt and/or hold
them administratively, civilly and/or criminally liable under
this Code and other applicable laws and/or revoke the
registration of the corporation.
RESTRICTIONS AND LIMITATIONS ON THE USE OF A
CORPORATE NAME:
1. In the case of a corporation, it must append the word
‘Corporation’ or ‘Incorporated’ or ‘OPC’ (One-person
Corporation), either in full or abbreviated form.
2. When the corporation intends to use the name of a person as
part of its corporate name, there must be a basis for the use
of such name such as it is the name of one of the
incorporators or stockholders.
3. If the name used is that of another person, the consent of the
latter or his heirs, if already deceased, should be secured and
submitted to the SEC.

4. ‘Finance’/’Financing’ cannot be used as part of a corporate
name unless it is engaged in that particular activity.
5. ‘Banks’, ’Banking’, ‘Savings’, and ‘Loan Associations’
cannot be used as part of the corporate name unless
authorized to be used by the Central Bank.
6. ‘Philippines’ in close-open parenthesis must be included in
the corporate name if the corporation formed or organized is
a subsidiary of a foreign corporation.
7. RA No. 544, as amended by RA 1582, reserves the exclusive
use of the words ‘Engineers’ and ‘Architects’ for
professional partnership.
RED LINE TRANSPORT vs. RURAL TRANSIT
The incorporators "constitute a body politic and corporate under the
name stated in the certificate." (Section 11, Act No. 1459, as amended.)
A corporation has the power "of succession by its corporate name."
The name of a corporation is therefore essential to its existence. It
cannot change its name except in the manner provided by the statute.
By that name alone is it authorized to transact business.
The law gives a corporation no express or implied authority to assume
another name that is unappropriated; still less that of another
corporation, which is expressly set apart for it and protected by the law.
If any corporation could assume at pleasure as an unregistered trade
name the name of another corporation, this practice would result in
confusion and open the door to frauds and evasions and difficulties of
administration and supervision.
UNIVERSAL MILLS vs. UNIVERSAL TEXTILE MILLS
The business names “Universal Mills Corporation” and “Universal
Textile Mills, Inc.” though not identical are so similar as to cause
confusion to the general public, particularly where the former included
the manufacture, dyeing and selling of fabrics of all kinds in which the
latter had been engaged for more than a decade ahead of the
petitioner.—The corporate names in question are not identical, but they
are indisputably so similar that even under the test of “reasonable care
and observation as the public generally are capable of using and may
be expected to exercise” invoked by appellant We are apprehensive
confusion will usually arise, considering that under the second
amendment of its articles of incorporation of August 14, 1964,
appellant included among its primary purposes the “manufacturing,
dyeing, finishing and selling of fabrics of all kinds” in which
respondent had been engaged for more than a decade ahead of
petitioner. Factually, the Commission found existence of such
confusion, and there is evidence to support its conclusion. Since
respondent is not claiming damages in this proceeding, it is, of course
immaterial whether or not appellant has acted in good faith, but We
cannot perceive why of all names, it had to choose a name already
being used by another firm engaged in practically the same business
for more than a decade enjoying well-earned patronage and goodwill,
when there are so many other appropriate names it could possibly
adopt without arousing any suspicion as to its motive and, more
importantly, any degree of confusion in the mind of the public which
could mislead even its own customers, existing or prospective.
PRIORITY OF ADOPTION IN THE CORPORATE NAME –
whoever has the prior right thereto will be the one protected.
LYCEUM OF THE PHILIPPINES vs. CA
Fact that other schools use "Lyceum" as part of their school's name is
not a deceptive use thereof relative to Lyceum of the Philippines.—We
do not consider that the corporate names of private respondent
institutions are "identical with, or deceptively or confusingly similar"
to that of the petitioner institution. True enough, the corporate names
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 8
of private respondent entities all carry the word "Lyceum" but
confusion and deception are effectively precluded by the appending of
geographic names to the word "Lyceum." Thus, we do not believe that
the "Lyceum of Aparri" can be mistaken by the general public for the
Lyceum of the Philippines, or that the "Lyceum of Camalaniugan"
would be confused with the Lyceum of the Philippines.
DOCTRINE OF SECONDARY MEANING - "x x x a word or
phrase originally incapable of exclusive appropriation with reference
to an article on the market, because geographically or otherwise
descriptive, might nevertheless have been used so long and so
exclusively by one producer with reference to his article that, in that
trade and to that branch of the purchasing public, the word or phrase
has come to mean that the article was his product."
Q: Why was it not applied in favor of Lyceum of the Philippines?: The
appellant does not fall under the principle of ‘priority of adoption’
since the Court took judicial notice that Western Pangasinan Lyceum
has been using the word ‘Lyceum’ for 17 years even before the
Lyceum of the Philippines was born.
Q: What if Western Pangasinan Lyceum was the one who filed said
petition, would the Court grant the application of the doctrine of
secondary meaning in its favor for the exclusive use of the word
‘Lyceum’?: NO. The intent of the law is to avoid confusion, deception
and/or fraud; such may be precluded by inclusion of geographic
locations of the different institution of learning in this case. Nobody
will be confused anymore.
Q: ‘Malabanan’ is a generic word. Can you put up a corporation by
the name of ‘Malabanan Sipsip Inc.’.
A: No. Pag nagka-problema ang inidoro niyo, sinong tinatawag niyo?
Malabanan. Since the 60s, that has always been the case.
‘Ang Tibay’ is also a generic word could refer to the leather producer
of Marikina. You cannot put up a corporation by the name of ‘Ang
Tibay Leather Goods’. It has already acquired secondary meaning.
It has been used so long and exclusively, that by the mere mention of
it, it can particularly refer to that said product or person.
Section 17 may also apply for or against foreign corporations. A
foreign corporation which has never done business in the Philippines,
but is widely and favorably known in the country through the use
therein of its product bearing its corporate and trade name has a legal
right to maintain action to protect its name or goodwill. (By virtue of
the Union Convention for the Protection of Industry Property known
as the Paris Convention [Sec.8], which provides that “tradename shall
be protected in all of the countries of the Union without the obligation
of filing or registration”]
PURPOSE CLAUSE
Second: That the purpose or purposes for which such corporation is
incorporated are: (If there is more than one purpose, indicate primary
and secondary purposes);
The statement of the objects or purpose in the articles of incorporation
result practically in defining the scope of the authority of the corporate
enterprise or undertaking. It confers and also limits the actual authority
of the corporate representatives.
Section 44. Ultra Vires Acts of the Corporations. - No
corporation shall possess or exercise corporate powers
other than those conferred by this Code or by its articles of
incorporation and except as necessary or incidental to the
exercise of the powers conferred.

DOCTRINE OF LIMITED AUTHORITY – once the State, through
SEC, issued the certificate of incorporation, it practically granted that
juridical entity the power to carry out the purpose or purposes indicated
in the AOI.
REASONS FOR REQUIRING A STATEMENT OF THE
PURPOSES OR OBJECTS IN THE AOI:
1. In order that the stockholder who contemplates on an
investment in a business enterprise shall know within what
lines of business his money is to be put at risk;
2. So that the board of directors and management may know
within what lines of business they are authorized to act; and
3. So that anyone who deals with the company may ascertain
whether a contract or transaction into which he contemplates
entering into is within the general authority of the
corporation or board of directors.
Although the RCC does not restrict nor limit the number of purpose or
purposes which a corporation may have, Sec. 13 thereof, requires that
if it has more than one purpose, the primary purpose as well as the
secondary ones must be indicated therein.
REASON: Sec. 41 of the Code – if a private corporation invest its
funds in any other corporation, business, or for any purpose other than
the primary purpose for which it was organized, it must be approved
by a majority of the board of directors or trustees and ratified by the
stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, or by at least two-thirds (2/3) of the outstanding capital
stock, or by at least two-thirds (2/3) of the members in the case of
nonstock corporations at a meeting duly called for the purpose, for its
validity.
If it is in relation to the primary purpose, no such requirement is
imposed.
Other special laws prohibit certain business undertaking from having
any other purpose not peculiar to them:
1. Educational, religious, and other non-stock corporation
cannot include any other purpose which would change or
contradict its nature or to engage in any enterprise to make
profits for its members;
2. Insurance companies cannot engage in commercial banking
at the same time, and vice-versa; and
Philamlife-Philam Bank; BPI- BPI Insurance (reason): It is
allowed if they are separate and distinct corporations. What
is prohibited is for one particular corporation to engage in
both activities.
3. Stock brokers can have no other line of business not peculiar
to them.
Some special statutes, rules and regulations, restrict or limit the
purpose or purposes that may be included in a business venture under
special circumstances or specialized lines of undertaking. Others
impose additional documentary requirements aside from the basic
supporting documents required by the SEC.
1. The purpose or purposes must be lawful. Hence, the SEC is
duty bound to determine the legality of the corporate
purpose/s before it issues the certificate of registration. If any
of the purposes is patently unconstitutional, illegal, immoral
or contrary to public order or public policy, the same shall
be rejected or disapproved by SEC.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 9
2. A corporation cannot be formed for the purpose of practicing
a profession like law, medicine or accountancy. These are
reserved exclusively for professional partnerships, unless
allowed by special law (there is no special law yet in the
present).
3. Retail Trade Liberalization Law: where the paid-up capital
is less than 2.5M USD or its peso equivalent are reserved
exclusively for Filipinos.
4. Corporations with foreign equity are not allowed to engage
in the restaurant business unless it is incidental or in
connection with the hotel or inn-keeping business.
5. Management consultants, advisers and/or specialists must
submit a personal information sheet of the incorporators and
directors in order that the SEC may be able to find out or
determine whether or not the applicant corporation is
qualified to act as such.
6. Financing companies are required by the SEC to submit
certain additional documents together with their applications
for registration to verify compliance with RA 8556. (see p.38
of Ladia book)
7. For bonded warehousing companies, an undertaking to
comply with the General Bonded Warehousing Act must be
submitted along with the AOI.
8. In case the applicant proposes to engage in the business of
hospital and/or clinic, the purpose clause must contain the
following proviso: “Provided that purely medical or surgical
services in connection therewith shall be performed by duly
qualified physician and surgeon who may or may not be
freely and individually contracted by the parties.”
9. In the case of Customs Brokerage business, the applicant
must submit the license of at least two customs broker
connected with the applicant corporation;
10. Transfer Agents, Broker and Clearing Houses must submit
the certificate of admission to the profession of the CPA of
any officer of the corporation;
If the corporate purpose or objective includes any purpose under the
supervision of another government agency, prior clearance and/or
approval of the concerned government agencies or instrumentalities
will be required pursuant to the last paragraph of Sec. 16 of the Code
Section 16. xxx No articles of incorporation or amendment
to articles of incorporation of banks, banking and quasi-
banking institutions, preneed, insurance and trust
companies, NSSLAs, pawnshops and other financial
intermediaries shall be approved by the Commission unless
accompanied by a favorable recommendation of the
appropriate government agency to the effect that such
articles or amendment is in accordance with law.
Section 16: Not inclusive –
 Educational institutions, lower education – DECS
 Fire Education
 College of Law – Legal Education Board
 Recruitment of workers for placement abroad – POEA
 Security Services – PNP
 Manufacture, processing and packing of foods, drugs and
cosmetics – Bureau of Food and Drugs
 Transportation company –
o Land – LTFRB
o Water- MARINA
o Air – Civil Aeronautics Boards
 Cockfighting – Philippine Gamefowl Commission
 Hotels and resorts – Department of Tourism

GENERAL LIMITATIONS ON THE PURPOSE CLAUSE
1. The purpose or purposes must be lawful;
2. The purpose must be specific or stated concisely although
in broad or general terms;
3. If there are more than one purpose, the primary as well as
the secondary ones must be specified;
4. The purpose must be capable of being lawfully combined.
PRINCIPAL OFFICE
Third: That the principal office of the corporation is located in the
City/Municipality of _______________, Province of
______________________, Philippines;
It must be located within the Philippines. The AOI should specify not
only the province but also the city/municipality where the principal
office is located.
The principal office may be in one place but the business operations
are actually conducted in other areas, which places are not required to
be stated in the AOI.
Such statement of the location of the principal office of the corporation
is necessary to establish the residence of the corporation, which is
important in the determination:
1. as to where chattel mortgage of shares should be registered
(Registry of Deeds in the city/municipality of its principal
office; if the owner resided in another city or municipality,
it must also be registered in the Registry of Deeds where the
owner resides)
2. As to the venue of actions for or against the corporation.
3. Service of summons on the corporation;
4. As to the validity of meetings of stockholders or members
in so far as venue thereof is concerned under Section 50 of
the Code.
Section 50. Place and Time of Meetings of Stockholders or
Members. - Stockholders' or members' meetings, whether
regular or special, shall be held in the principal office of the
corporation as set forth in the articles of incorporation, or if
not practicable, in the city or municipality where the
principal office of the corporation is located: Provided, That
any city of municipality in Metro Manila, Metro Cebu, Metro
Davao, and other Metropolitan areas shall, for purposes of
this section, be considered a city or municipality. xxx
CLAVECILLA RADIO SYSTEMS vs. ANTILLON
Domicile of a corporation.— The residence of a corporation is the
place where its principal office is established. It can be sued in that
place, not in the place where its branch office is located.
Actions; Venue; Venue of a tort action against a, corporation in inferior
court.—Where the action filed against a corporation in the inferior
court is based on tort, it should be filed in the place where the
corporation has its principal office, not in the place where it has its
branch office. To allow an action against a corporation to be instituted
in any place where a corporate entity has its branch offices would
create confusion and work untold inconvenience to the corporation.
When provision, “may be served with summons”, applies.—The
phrase “may be served with summons” in section 1, Rule 4 of the
Revised Rules of Court does not apply when the defendant resides in
the Philippines, for, in such a case, he may be sued only in the
municipality of his residence, regardless of the place where he may be
found and served with summons.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 10
Same; Plaintiff may not choose venue of action.— The laying of the
venue of an action is not left to plaintiff’s caprice because the matter is
regulated by the Rules of Court.
TERMS OF EXISTENCE
Fourth: That the corporation shall have perpetual existence or a term
of ___________ years from the date of issuance of the certificate of
incorporation;
Section 11. Corporate Term. - A corporation shall have perpetual
existence unless its articles of incorporation provides otherwise.
Corporations with certificates of incorporation issued prior to the
effectivity of this Code and which continue to exist shall have perpetual
existence, unless the corporation, upon a vote of its stockholders
representing a majority of its articles of incorporation: Provided, That
any change in the corporate right of dissenting stockholders in
accordance with the provisions of this Code.
A corporate term for a specific period may be extended or shortened
by amending the articles of incorporation: Provided, That no
extension may be made earlier than three (3) years prior to the original
or subsequent expiry date(s) unless there are justifiable reasons for an
earlier extension as may be determined by the Commission: Provided,
further, That such extension of the corporate term shall take effect only
on the day following the original or subsequent expiry date(s).
A corporation whose term has expired may apply for revival of its
corporate existence, together with all the rights and privileges under
its 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 shall be issued, giving it perpetual
existence, unless its application for revival provides otherwise.
No application for revival of certificate of incorporation of banks,
banking and quasi-banking institutions, preneed, insurance and trust
companies, non-stock savings and loan associations (NSSLAs),
pawnshops, corporations engaged in money service business, and
other financial intermediaries shall be approved by the Commission
unless accompanied by a favorable recommendation of the
appropriate government agency.
They may now exist in perpetual, but there is nothing in the law which
bars the corporation to provide for a specific number of year under
which it would exist.
Corporations registered under the Old Corporation Code, and still
existing under the Revised Corporation Code is deemed to exist now
in perpetual unless the corporation notifies the SEC of its intention to
retain its specific term indicated in the AOI.
The corporate term is necessary in determining at what point in time
the corporation will cease to exist or have lost its juridical personality.
A corporation can sue or be sued and transact its business only while
it possesses a juridical personality. Once it cease to exist, its legal
personality also expires and could not thereafter, act in in its own name
for the purpose of executing its business.
Despite termination, the corporation continues as a body politic for a
period of three years for the purpose of prosecuting or defending suits
for or against it and by enabling it gradually to settle and close its
affairs, liquidation and winding up under Section 139.

Section 139. Corporate Liquidation. - Except for banks,
which shall be covered by the applicable provisions of
Republic Act No. 7653, otherwise known as "The New
Central Bank Act", as amended, and Republic Act No. 3591,
otherwise known as the Philippine Deposit Insurance
Corporation Charter, as amended, every corporation whose
charter expires pursuant to its article of incorporation is
annulled by forfeiture, or whose corporate existence is
terminated in any other manner, shall nevertheless remain
as a body corporate for three (3) years after the effective
date of dissolution, for the purpose of prosecuting and
defending suits by or against it and enabling it to settle and
close its affairs, dispose of and convey its property, and
distribute its assets, but not for the purpose of continuing the
business for which it was established.
Q: Assuming that a corporation has a fixed term indicated in the AOI,
may a corporate term be extended?
A: YES, by amending the AOI, provided, that no extension may be
made earlier than three (3) years prior to the original or subsequent
expiry date(s) unless there are justifiable reasons for an earlier
extension as may be determined by the Commission..
Q: The terms would expire 5 years from today, may the term be
extended now?
A: YES, if there are justifiable reasons for an earlier extension as may
be determined by the Commission.
EX: A Realty and Development Corporation leased out a parcel of land
to a lessee for 20 years. The agreement stipulates that the lessee shall
construct a 5-storey building on the said lot and at the end of such lease
period, the lessor shall own the building constructed. Eh mag-eexpire
5 years from now, how can it acquire that piece of property if 5-years
from today, patay na yung corporation? So it goes to the SEC and says,
“We want to extend the corporate terms now, so that when the
corporate term expire, the corporation would be able to acquire the said
property.”
INCORPORATORS
Fifth: That the names, nationalities, and residence addresses of the
incorporators of the corporation are as follows:
NAME NATIONALITY RESIDENCE
Section 10. Number and Qualifications of Incorporators. - Any
person, partnership, association or corporation, singly or jointly with
others but not more than fifteen (15) in number, may organize a
corporation for any lawful purpose or purposes: Provided, That
natural persons who are licensed to practice a profession, and
partnerships or associations organized for the purpose of practicing a
profession, shall not be allowed to organize as a corporation unless
otherwise provided under special laws. Incorporators who are natural
persons must be of legal age.
Each incorporator of a stock corporation must own or be a subscriber
to at least one (1) share of the capital stock.
A corporation with a single stockholder is considered a One Person
Corporation as described in Title XIII, Chapter III of this Code.
 An incorporator who is a natural person must be of legal age
because they are entering into a contract with the State
through the AOI.
 Incorporators must be stockholders; although the law does
not provide for any citizenship requirement, there are certain
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 11
areas of business activities where ownership of shares are
reserved fully or partially to Filipino citizens, so that the
maximum limit of stock ownership of foreigners if they are
to be incorporators must be taken into account.
o Retail Trade businesses where the paid-up capital
is less than 2.5M USD or its peso equivalent are
reserved exclusively for Filipinos. No foreigner
can be an incorporator because he cannot
subscribe to at least one share of the capital stock
o Mass media = 100% Filipino-owned
o Recruitment agencies for placement of workers
abroad = 75% Filipino; 25% Foreigner
o Pawnshops, advertising agencies = 70% Filipino
o (see page 43 for other enumeration)
Sixth: That the number of directors or trustees of the corporation shall
be ___________________; and the names, nationalities, and
residence addresses of the first directors or trustees of the corporation
are as follows:
NAME NATIONALITY RESIDENCE
DIRECTORS – refer to the governing board of a stock corporation.
TRUSTEES – Non-stock Corporation
Section 174. Designation of Governing Boards. - The
provisions of specific provisions of this Code to the contrary
notwithstanding, nonstock or special corporations may,
through their articles of incorporation or their bylaws,
designated their governing boards by any name other than as
board of trustees.
 Lions, Rotary Club = Board of Governments
 Educational Institution/Special corporations =
Board of Leaders
 Religious societies = Consistory of Elders
 Clubs, sports club = Directors not Trustees
Statement of number of directors is required under Section 14, which
could be, as a general rule, 1-15 directors in a stock corporation. They
are to be elected among the stockholders/members.
EXC: Trustees (More than 15)
Section 22. The Board of Directors or Trustees of a Corporation;
Qualification and Term. - Unless otherwise provided in this Code, the
board of directors or trustees shall exercise the corporate powers,
conduct all business, and control all properties of the corporation.
Directors shall be elected for a term of one (1) Year from among the
holders of stocks registered in the corporation's book while trustees
shall be elected for a term not exceeding three (3) years from among
the members of the corporation. Each director and trustee shall hold
office until the successor is elected and qualified. A director who
ceases to own at least one (1) share of stock or a trustee who ceases to
be a member of the corporation shall cease to be such.
The board of the following corporations vested with public interest
shall have independent directors constituting at least twenty percent
(20%) of such board:
(a) Corporations covered by Section 17.2 of Republic Act No. 8799,
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 having two hundred (200) or more holders of
shares, each holding at least one hundred (100) shares of a class of its
equity shares;
(b) Banks and quasi-banks, NSSLAs, pawnshops, corporations
engaged in money service business, preneed, trust and insurance
companies and other financial intermediaries; and
(c) Other corporations engaged in businesses vested with public
interest similar to the above, as may be determined by the Commission,
after taking into account relevant factors which are germane to the
objective and purpose 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.
An independent director is a person who apart from shareholdings and
fees received from any business or other relationship which could, or
could reasonable be received to materially interfere with the exercise
of independent judgment in carrying out the responsibilities as a
director.
Independent directors must be elected by the shareholders present or
entitled to vote in absentia during the election of directors.
Independent directors shall be subject to rules and regulations
governing their qualifications, disqualifications, voting requirements,
duration of term and term limit, maximum number of board
membership and other requirements that the Commission will
prescribed to strengthen their independence and align with
international best practices.
Section 91. Election and Term of Trustees. - The number of trustees
shall be fixed in the articles of incorporation or bylaw which may or
may not be more than fifteen (15). They shall hold office for not more
than three (3) years until their successors are elected and qualified.
Trustees elected to fill vacancies occurring before the expiration of a
particular term shall hold office for the unexpired period.
Except with respect to independent trustees of nonstock corporation
shall be elected as trustee.
Unless otherwise provided in the articles of incorporation or the
bylaws, the members may directly elect officers of a nonstock
corporation
 Educational non-stock corporation = it must be in multiple
of 5 only (5,10,15 trustees)
 Close corporation = may do away with the board of directors
by vesting the management to the stockholder directly.
Section 95. Definition and Applicability of Title. - A close
corporation, within the meaning of this Code, is one whose
articles of incorporation provides that: (a) all the
corporation's issued stock of all classes, exclusive of
treasury shares, shall be held of record by not more than a
specified number of persons, not exceeding twenty (20); (b)
all the issued stock of all classes shall be subject to one (1)
or more specified restrictions on transfer permitted by this
Title; and (c) the corporation shall not list in any stock
exchange or make any public offering of its stocks of any
class. Nothwithstanding the foregoing, a corporation shall
not be deemed a close corporation when at least two-thirds
(2/3) of its voting stock or voting rights is owned or
controlled by another corporation which is not a close
corporation within the meaning of this Code. xxx
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If there are 20 stockholders, and it does away with the board
of directors, effectively it will have 20 members of the board.
DISQUALIFICATIONS
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 in
paragraphs (a) and (b) above.
The foregoing is without prejudice to qualifications or other
disqualifications, which the Commission, the primary regulatory
agency, or Philippine Competition Commission may impose in its
promotion of good corporate governance or as a sanction in its
administrative proceedings.
The Code does not require any citizenship requirement to become a
director. Such being the case, even aliens may be elected as directors.
However, aliens may not be qualified or be elected as such in any
activity or business undertaking exclusively reserved to Filipino
citizens, like mass-media, management of educational institutions
(except educational institutions organized by mission boards,
charitable institutions, or religious order; aliens can sit as director),
those covered by Retail Trade Liberalization Law.
If the business undertaking or activity is only partially nationalized,
aliens can be elected as such directors, but their number shall only be
in proportion to their equity or participation in the capital stock thereof,
under the Anti-Dummy Act.
EX: Development and utilization of Philippine natural resources =
60% Filipino; 40% foreigner. The shares are classified as:
‘Common A’ shares = 600,000 to be held of record by Filipino citizens
‘Common B’ shares = 400,000 to be held by any other person
60% Filipino-owned; 40% foreign-owned. If there are 10 members of
the board, the foreigners can only have 4 seats. Their equity or
participation in the capital stock thereof is 40%. In excess thereof will
be a violation of the Anti-Dummy Law.
This qualifications and disqualifications under Sec. 22 and 26 of the
Code would be the minimum and may not be done away with, without
prejudice to qualifications or other disqualifications which the SEC or
the Philippine Competition Commission may provide. Likewise, the
corporate by-laws may also provide for additional qualifications and
disqualifications for the membership in the board as per Section 46.
Other special laws, rules and regulations may also provide other
disqualifications.

 Financing Company Act of the Philippines – the directors
named thereat are required to submit their NBI clearances.
A directors shall also be disqualified even if he is only
charged with physical injuries because he cannot submit his
NBI clearance.
 Banking institution – charged with a financial fraud, he
cannot be a director of a bank.
Sec. 22 = election of independent directors. Lifted from the provisions
of Sec. 17 of the Securities Regulation Code.
CAPITALIZATION
Seventh: That the authorized capital stock of the corporation is
____________________ PESOS (₱______), divided into in lawful
money of the Philippines, divided into ____ shares with the par value
of ____________PESOS (₱______) per share. (In case all the shares
are without par value): That the capital stock of the corporation is
__________________ shares without par value.
(In case some shares have par value and some are without par value):
That the capital stock of said corporation consists of _________
shares, of which ----- shares have a par value of
___________________________PESOS (₱_______) each, and of
which ____________________ shares are without par value.
SEC. 12. Minimum Capital Stock Not Required of Stock
Corporations. – Stock corporations shall not be required to
have a minimum capital stock, except as otherwise
specifically provided by special law.
There is no more minimum capital stock required. It was provided by
special law. Nonetheless, Sec. 13 and 14 still require an indication of
the authorized capital stock. The number of shares into which it is
divided, the par-value of the shares if any there is, because there is such
a thing as no-par value shares.
Eight: That the number of shares of the authorized capital stock-stated
has been subscribed as follows:
Name of Nationality No. of Amount Amount
Subscriber Shares Subscribed Paid
Subscribed
(Modify No. 8 if shares are with no-par value. In case the corporation
is nonstock, Nos. 7 and 8 of the above articles may be modified
accordingly, and it is sufficient if the articles state the amount of
capital or money contributed or donated by specified persons, stating
the names, nationalities, and residence addresses of the contributors
or donors and the respective amount given by each.)
The law now is silent as to how much of the authorized capital stock
should be subscribed and how much of the total subscriptions must be
paid.
AUTHORIZED CAPITAL STOCK – maximum amount fixed in the
AOI to be subscribed and paid in or secured to be paid by the
stockholders or subscribers.
The Corporation could only issue such number of shares as may be
indicated in the AOI, unless the said AOI is amended accordingly by
increasing the authorized capital.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 13
EX.
Authorized capital stock = 1 million pesos
Divided into: 1 million shares
With a par-value = 1.00 per share
The corporation cannot issue more than 1M shares without
amending the AOI increasing the authorized capital stock. If
it does so without any amendment it is a violation of the SRC
for over-issuance of shares.
We have contracted with the State through the
instrumentality of the SEC, that you will issue only 1M
shares. If you intend to issue more, you have to amend your
AOI.
SUBSCRIBED CAPITAL STOCK – total number of shares and its
total value for which there are contracts for their acquisition or
subscription. It is the stockholders’ equity account which has been paid
or promised to be paid, or that portion of the authorized capital stock
which has been subscribed by the subscribers or stockholders.
EX. Authorized capital stock = 1 million pesos
Subscribed capital stock = 500,000
PAID-UP CAPITAL STOCK (PAID-IN) – actual amount or value
which has been actually contributed or paid to the corporation in
consideration of the subscriptions made thereon, which may either be
in cash, property or in the form of services actually rendered to the
corporation.
EX. Authorized capital stock = 1 million pesos
Subscribed capital stock = 500,000
Paid-up capital stock = 250,000
In financing the corporation, it must be stressed that although the Code
does not require a minimum capital stock, there are instances where
the SEC by virtue of existing laws, rules or regulations will require a
minimum paid-up capital. So, the capital structure of a corporation
must be taken into account even prior to the drafting of the AOI.
The minimum paid up capital of:
 Financing companies –
o whose principal office is in Metro Manila = 10
million pesos
o in other cities = 5 million pesos
 Investment houses = 300M
 Insurance agencies = 5M
 Recruitment agencies = 2M or as provided by the POEA
 Any type of banks (savings, rural, commercial) = as
provided by the Central Bank
Section 61. Consideration for Stocks. - Stocks shall not be issued for
a consideration less than the par or issued price thereof. Consideration
for the issuance of stock may be:
(a) Actual cash paid to the corporation;
(b) Property, tangible or intangible, actually received by the
corporation and necessary or convenient for its use and lawful
purposes at a fair valuation equal to the par or issued value of the stock
issued;
(c) Labor performed for or services actually rendered to the
corporation;
(d) Previously incurred indebtedness of the corporation;
(e) Amounts transferred from unrestricted retained earnings to stated
capital;
(f) Outstanding shares exchanged for stocks in the event of
reclassification or conversion;

(g) Shares of stock in another corporation; and/or
(h) Other generally accepted form of consideration.
Where the consideration is other than actual cash, or consists of
intangible property such as patents or copyrights, the valuation thereof
shall initially be determined by the stockholders or the board of
directors, subject to the approval of the Commission.
Shares of stock shall not be issued in exchange for promissory notes
or future service. The same considerations provided in this section,
insofar as applicable, may be used for the issuance or bonds by the
corporation.
The issued price of no-par value shares may be fixed in the articles of
incorporation or by the board of directors pursuant to authority
conferred by the articles of incorporation or the bylaws, or if not so
fixed, by the stockholders representing at least a majority of the
outstanding capital stock at a meeting duly called for the purpose.
SEPT- 24 (D)
SHARES OF STOCKS AND CLASSIFICATION
Shares of stocks designate the units into which the proprietary interest
in a corporation is divided. They represent the proportionate integers
or units, the sum of which constitute the capital stock of the
corporation. It is the interest or right which the owners, called the
subscribers or stockholders, may have in the management of the
corporate affairs, in case a stockholder’s approval is required or their
vote in certain corporate acts.
For instance, A is 10% of the outstanding capital stock and the
corporation intends to invest its corporate funds in another business or
purpose other than their primary purpose; A has 10% vote.
In the surplus profits, in case in the declaration of dividends; if
dividends are declared, A will be entitled to 10% of the dividends
declared; and in case of dissolution, in all of its remaining assets after
payments of all its debts and liabilities. When a corporation is
dissolved, what ensues is the liquidation and winding up; and in
liquidation and winding up partakes the nature of collecting all assets,
properties, and rights.
The payment of all its debts and liabilities and the ultimate distribution
of the remaining assets and properties, again, in proportion to their
respective stockholdings or in accordance with the preference granted.
Shares of stocks should not, however, be confused with the certificate
of stock itself, which merely evidences the right of the holder thereof
in the corporation. It is in effect a piece of document or paper issued in
the name of the stockholders, which may be transferred by
endorsement or delivery thereof to the transferee.
Section 62 of Revised CC: certificates of stock may be transferred by
endorsement made by the owner or his attorney-in-fact and delivery
thereof to the transferee. Meaning, the operative act of transferring
shares is endorsement and delivery of the stock certificate. Once it is
done, there is a valid transfer of shares of stock, at least insofar as the
contracting parties themselves are concerned. However, to be valid and
binding against third parties and/or the corporation, it must be
registered in the books of the corporation.
Corporations under Sec. 6 are authorized to classify their shares. If
there is a classification but it does not specify as to what advantage,
privilege, or right one may have against the others, the presumption
under Sec. 6, is that they are equal in all respect.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 14
Let’s say: 1M shares in par-value of 100php per share; that’s 100M.
2M shares no-par value, 10php per share; that’s only 20M. The no-par
holders, unless there is specification in the articles of incorporation,
have greater voting and dividend rights because they have 2M shares.
The par-value holders, only 1M shares. It is the number of shares that
count, not the amount of their respective subscription. They are equal
in all respects.
DIFFERENT CLASSES OF SHARES:
1. Par value
2. No-par value
3. Common shares
4. Preferred shares
a. Participating
b. Non-participating
c. Cumulative
d. Non-cumulative
5. Founder’s shares
6. Redeemable shares
7. Treasury shares
8. Voting shares
9. Non-voting shares
PURPOSE OF CLASSIFICATION
1. TO SPECIFY OR DEFINE THE RIGHTS AND
PRIVILEGES OF STOCKHOLDERS.
For instance, the issuance of the voting and non-voting
shares. Only voting shares have the right to vote for the
election of the members of the Board who are to manage the
corporate affairs. Non-voting shares do not participate in
that particular matter.
Issuance of preferred shares: they may be granted the
preference to receive a certain amount or percentage of the
dividends declared, before any other shareholders may
receive their share of the dividends.
2. TO REGULATE AND CONTROL TRANSFERS OR
ISSUANCES OF SHARES FOR THE PROTECTION OF
THE PURCHASERS AND STOCKHOLDERS.
This is particularly true in cases of a close corporation or
those owned/controlled by closely-knit group (like family)
who would prefer to give the business between and among
themselves.
SECTION 95: governing close corporations. It provides that
the articles of incorporation must provide that all of its
shares of stocks exclusive of treasury shares shall be held of
record by not more than 20 specified persons. If you are not
covered by the specified persons indicated thereat, you
cannot be a stockholder.
They usually provide for qualifications for owning or
holding shares in the corporation.
3. MANAGEMENT CONTROL DEVICE.
Issuance of voting and non-voting shares: (same as #1)
Issuance of founder’s shares (Sec.7): they may be granted
the exclusive right to vote or be voted upon in the election of
directors for a period not exceeding 5 years from the
approval of the SEC. For that specified number of years, they
will have absolute control in the management of corporate

affairs for that period of time as specified in the articles of
incorporation.
4. TO COMPLY WITH STATUTORY REQUIREMENTS
PARTICULARLY THOSE WHICH PROVIDE FOR
CERTAIN LIMITATIONS ON FOREIGN OWNERSHIP
OF SHARES (PARTLY-NATIONALIZED
INDUSTRIES)
They may classify their share into ‘Common A’ and
‘Common B’ shares.
EX.
 Development and utilization of the Philippine
natural resources: at least 60% of the outstanding
capital stock shall be held by Filipino citizens.
The maximum stock ownership of foreigners =
40%.
Corporation may classify its shares into 600,000
‘Common A’ shares to be held of record only by
Filipino citizens; Common B shares = 400,000 to
be held of record by any other person.
SITUATION: (Let us assume that that is the exact
ratio = 60% Filipino; 40% foreigner) A Filipino
stockholder transfers its shares to a foreigner,
thereby, breaching the minimum stock ownership
of Filipino citizens. The foreign transferee goes to
the office of corporation to have the transfer
recorded in the books thereof, the corporate
secretary will not record the transfer to ensure
compliance with the nationalization clause. Why
not? Because it has a provision in the articles of
incorporation, the no-transfer clause, which
substantially provides that no transfer of shares of
stocks which will reduce the ownership of
Filipino citizens to lessen than that allowed by law
should be permitted to be recorded in the books of
the corporation.
If you are not a recorded stockholder, you are not
a stockholder.
5. TO BETTER INSURE RETURN ON INVESTMENT
WHICH CAN BE AFFECTED THROUGH THE
ISSUANCE OF REDEEMABLE SHARES OR
PREFERRED SHARES.
Holders of preferred shares are normally granted the right to
receive a certain amount or percentage of the dividends
declared by the corporation first before any other
stockholder receive their shares
Redeemable shares are likened to a bond which the
corporation is duty-bound to reacquire at a specified rate of
return, either on demand or on a fixed date.
6. FOR FLEXIBILITY IN PRICE.
No-par shares may be issued from time to time at different
prices, based on the net worth of the company since they do
not represent an actual or fixed value.
100,000 no-par shares, walang nakalagay kung anong value.
When you speak of voting and dividend rights, it refers only to the
holders of outstanding capital stock. If the holder thereof does not own
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 15
outstanding capital stock, he has no right to vote (unless they are non-
voting shares) or receive dividends.
SITUATION –
Authorized Capital: 1M
Par-value: 1php/share
Number of shares: 1M
Subscribed Capital: 500,000 shares
Paid-up Capital: 250,000 shares
The stockholders who subscribed the capital stock of the corporation
only paid half of their respective subscriptions. Assuming there are 5
stockholders, and each subscribed 100,000 and paid only 50,000 on
their respective subscription.
Q: What is the outstanding capital stock?
= 500,000
Section 173. Outstanding Capital Stock Defined. - The term
"outstanding capital stock", as used in this Code, shall mean the total
shares of stock issued under binding subscription contracts to
subscribers or stockholders, whether fully or partially paid, except
treasury shares.
Once there is a valid subscription contract, there is actual issuance of
shares. However, no certificate of stock shall issue unless the full
amount thereof is paid by the subscriber.
One of the modes by which the corporation may enforce payment of
unpaid subscription is to make the call for the payment, specifying
when it is to be paid.
Let’s assume that it did make a call for payment of the unpaid
subscription of A, who has paid only 50,000 of his 100,000
subscription. A did not pay on the date specified. What ensues would
be that his 100,000 subscribed shares will become delinquent shares.
The corporation has the option either to:
1. Institute a collection case in court; or
2. To sell the shares of the delinquent stockholder in a
delinquency sale
Assuming it sold the shares in a delinquency sale, under the Code, if
there are no bidders willing to pay the amount of the unpaid
subscriptions + cost, interest, and expenses, the corporation may bid.
Assuming no bidders appeared, and it was the corporation, the lone
bidder, who paid the subscriptions of A including costs and expenses,
the amount paid by the corporation would form part of the capital of
the corporation. Let’s say 51,000 including expenses and interest. So
the corporation, re-acquired the shares of A; meaning, the 100,000
shares of A become treasury share.
Q: What is now the outstanding capital stock?
= 400,000, because outstanding stocks excludes treasury shares.
COMMON SHARES – entitles the holder thereof to an equal or pro-
rata distribution of profits and properties, without preference or
advantage in that respect to any other stockholder or class of stock
holders, except preferred shareholders.
- Carries with it the right to vote and frequently the exclusive
right to do so.
- If there are more than one kind of shares, each share,
irrespective of classification, are equal in all respects to
every other share, unless the articles of incorporation or the
certificate of stock provides otherwise.
 CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 16

PREFERRED SHARES (par. 6, Sec 6) – entitles the holder thereof  If they are non-cumulative, they will be entitled only to the
a priority either to the distribution of dividends/principal or both, or dividends for the current year (2020) without any back
others as may be specified in the articles of incorporation; dividends or arrearages (100,000).

1. PREFERRED AS TO DIVIDENDS *If they are participating cumulative, they will still share with the
remaining 300,000 pro-rata.
SITUATION – Q: May a preferred non-cumulative stockholders be deprived of their
dividend rights if the BOD, in their discretion, refuses to declare
Authorized Capital: 1M dividends (preferred shares are usually denied the right to vote and
Outstanding Capital Stock: 1M may not have, therefore, any representation in the Board to whom the
discretion of declaring dividends are vested)?
SUBSCRIBERS:
A – 200,000 shares What if in 2020, hindi parin nag-declare ng dividend dahil “pupunta
B – 200,000 shares lang sa dalawang ungas na yan”, will they be denied the right to their
C – 200,000 shares dividends if the Board fails or refuses to declare dividends?
D – 200,000 shares = It depends on the type of non-cumulative preferred shares they are
E – 200, 000 shares holding:

A and B are the holders of the preferred shares and are entitled to
receive first 100,000 of the dividends to be declared by the corporation.
The corporation declared 200,000 unrestricted retained earnings.
(Dividends may be declared only out of unrestricted retained earnings
known as surplus profits.) The Board declares the entire 200,000 as
cash dividends. Pursuant to their contract subscriptions, A and B will
be entitled to the first 100,000 of the declared dividends; the remainder
to C, D, and E.
 DISCRETIONARY DIVIDEND – when the dividends are
declared on the discretion of the Board; and if they do, it will
only be for the current year, which would deprive the
preferred stockholder dividends even if they may have been
earned earlier, exclusive of arrearages or back dividends.
(See table: A and B will only be entitled to 100,000 from
2020, kasi wala silang back dividends/ arrearage)

There is a guaranteed rate of return of their investment.
Instead of only having 200,000 unrestricted retained earnings, the
corporation made 1M. Again, A and B (preferred shareholders) will be
entitled to the first 100,000 (50K each).
Q: Who will receive the remainder of 900,000?
= IT DEPENDS.
 It will only go to C, D and E if A and B’s preferred shares
are non-participating.
 If A and B’s preferred share are participating, they will still
share the entire 900,000 remainder equally (because they all
own 20% each) Therefore, A and B will receive 50,000 more
(from their preferred share) than C, D, E.
 MANDATORY – (nawalan audio si sir; chubby – might be:
imposes duty on directors to declare dividends every year
when profits are earned) they cannot, thus, deprive the
holders of this type of share their dividend rights due to
contractual rights and obligations. (Mandatory if there is
profit)
(See table: In 2017, it is their duty to declare dividends of at
least 100K in favor of the two preferred shareholder; In
2018… declare another 100K dividend; In 2019, no
earnings. No back dividends dahil walang na-earn; In 2020,
another 100K. They will receive 300K of the dividends
declared of a total of 400K [?????huhuhu???? timestamp =
53:50])

PRESUMPTION: They are non-participating, unless otherwise
indicated in the articles of incorporation or in their subscription
contracts. (non-participating, non-cumulative)
CUMULATIVE (PREFERRED) SHARES – entitled to arrearages
or back dividends for the years that dividends will not declare; once
profits are made and dividends are declared in subsequent years, all
arrearages or back dividends must be paid.
NON-CUMULATIVE (PREFERRED) SHARES – entitles only to
the current dividends declared by the Board without any back
dividends or arrearages.
 EARNED CUMULATIVE / DIVIDEND CREDIT TYPE
– it gives the holder the right to arrearages once profits are
earned but dividend not declared. (Cumulative if there is
profit)
(See table: Kumita nung 2017, hindi nag-declare. Kumita
nung 2018, hindi nag-declare. Walang kita nung 2019, kaya
hindi nag-declare. Nung 2020, dineclare nila yung buong
400K. They will be getting back dividends (100k each year)
from 2017, 2018, and 2020; hindi sa 2019 kasi wala ngang
na-earn. They will receive 300K. The remaining 100K will
again depends kung participating or non-participating. )

SITUATION – (46:25) Q: What is the distinction between the Cumulative and the Non-
Cumulative but Earned Cumulative/Dividend credit type, insofar as
2017 2018 2019 2020 both of them entitled to arrearages or back dividends?
Profit 200,000; 200,000 0 400,000
= In Cumulative Preferred Shares, they are entitled to back
Declared NO NO - YES dividends or arrearages whether or not profits were made;
Dividends?
(Sa 2017, 2018, 2019, 2020 may back dividends sila kahit walang
NON-PARTICIPATING CUMULATIVE - kinita nung 2019.)
 A and B, the holder of cumulative preferred shares, will
receive back dividends of 100,000 each year, from 2017 to
2020, except 2019.

= In Earned Cumulative/Dividend Credit type, they are not entitled
to back dividends for the year there are no profits made by the
corporation.
(Wala silang dividends sa 2019 kasi walang income ang corporation)
2. PREFERENCE UPON LIQUIDATION
Preferred shares may also be granted the right to receive a certain part
or percentage of the remaining assets of the corporation if it is
dissolved. When a corporation is dissolved, liquidation and winding up
ensues.
Liquidation and winding up partakes the nature of collecting all assets,
properties and rights, payments of its debts and liabilities, and the
ultimate distribution of its remaining assets to the stockholders either:
1. In proportion to their respective stockholdings; or
2. Their contract of subscription
Meaning, A and B as the preferred shareholders may also be granted
the right, for instance, to receive 100K of the remaining assets of the
dissolved corporation.
*If to be made participating, it must be so stated in the articles of
incorporation or in the contract of subscription.
Q: What are par and no-par value shares?
PAR VALUE SHARES – those whose value are fixed in the articles
of incorporation with a primary function to fix a minimum subscription
or original issue price of the share and indicates the amount which the
original subscribers are suppose to contribute to the capital as the basis
of the privilege of profit sharing with limited liability.
EX. Outstanding Capital Stock is 1M divided into 1M share with a par
value of 1php per share.
NO-PAR VALUE SHARES – are those issue price not stated in the
certificate of stock but which may be fixed in the AOI, or by the BOD
when so authorized by the said articles or by the by-laws, or in the
absence thereof, by the majority of the stockholders of the outstanding
capital stock.
EX. Outstanding Capital Stock is 1M divided into 1M no-par value
share (no stated value)
Q: Are there restrictions/limitations on the issuance of no-par value
share?
A: YES –
1. Such shares, once issued, are deemed fully paid and thus,
non-assessable;
2. The consideration for its issuance should not be less than 5
pesos.
3. The entire consideration for its issuance constitutes capital,
hence, not available for dividend declaration;
4. They cannot be issued as a preferred stock; and
5. They cannot be issued by banks, trust companies, insurance
companies, public utilities and building and loan
associations or other corporations authorized to obtain
access funds from the public
SITUATION: Let’s say that the determined issue value of a no-par
value share is 10 pesos per share, it may be allowed as long as it is not
less than 5 pesos.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 17
The corporation has 1M unissued no-par value share and the Board
decided to issue such today for only 8 pesos. Meaning, there is stock
watering under Sec. 64.
Section 64. Liability of Directors for Watered Stocks. - A director or
officer of a corporation who: (a) consents to the issuance of stocks for
a consideration less than its par or issued value: (b) consents to the
issuance of stocks for the consideration other than cash, valued in
excess of its fair value; or (c) having knowledge of the insufficient
consideration, does not file written objection with the corporate
secretary, shall be liable to the corporation or its creditors, solidarily
with the stockholder concerned for the difference between the value
receive at the time of issuance of the stock and the par or issued value
of the same.
WATERED STOCKS – stocks issued below the par-value or the
determined issue price of the no-par value share.
*The responsible officers who issue such watered stocks are liable
solidarily with the stockholder to whom they are issued for the
difference of the determined issue price or par value and the amount
for which they were issued.
Q: Let’s say that those 1M shares were acquired by Z for only 8 pesos,
instead of 10 pesos, there’s a difference of 200,000. Will the
stockholder to whom it is issued, Z, be solidarily liable with the
responsible officers to pay the 200,000 difference?
A: NO. Because Sec. 6 says, they are deemed fully paid. And the
holder of such no-par shares shall not be liable to the corporation-
creditor. YOU CANNOT ASSESS Z. Only the responsible officers
who issued the no-par value shares below the determined issue price
shall be liable.
SITUATION (1:09:48): HELLLLLLP, CHUBBY!!!
Determined issue price: 10 pesos per no-par value share;
Fair market value (in due time): 12 pesos per no-par value share
There are 1M unissued no-par value shares and the Board decides to
issue such. (nawala audio ni Sir)…. 10 x 1 million = 10 million pesos.
It has become 120M; there is a difference of 10M.
Q: May that 10M difference be included as income of the corporation
and be included likewise in payment of dividends?
A: NO. It shall constitute capital. It is not an earning, not a profit.
Dividends can be only declared out of the unrestricted retained
earnings of the corporation. But that difference of 10M constitute
capital. (Restriction #3)
 Sa share premium and punta pag mas malaki ang fair market
value, a price to which it was sold, compared sa determined
issue price
 Issuance of no-par value share: entire consideration
constitutes capital and not available for dividend declaration.
Q: What are voting and non-voting shares?
A:
VOTING SHARES – gives the holder thereof the right to vote and
participate in the management of the corporation, either at the election
of the BOD, or in any matter requiring stockholders’ approval.
NON-VOTING SHARES – does not grant the holder thereof, a voice
in the election of directors and some other matters requiring
stockholders’ vote.
(If there is no specification in the AOI, they have the same equal rights,
voting and dividend rights.)

Q: What type of shares MAY be denied the right to vote?
A:
Sec. 6. Classification of Shares – xxx no share may be deprived of
voting rights except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in this Code:
Provided, That there shall be a class or series of shares with complete
voting rights.
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.
1. Preferred shares
2. Redeemable shares
DOCTRINE OF LIMITED CAPACITY IN THE CORPORATE
FORM OF BUSINESS – as a general rule, “no corporation can
validly provide that common shares be denied the right to vote.”
(Gamboa v. Teves)
Exc: unless provided for in this Code.
Q: May common shares be effectively denied the right to vote?
A: Yes. By the issuance of founder’s shares, all other types of shares,
including common shares, will thereby be denied the right to vote in
the election of the members of the Board.
Section 7. Founders' Shares. - Founders' shares may be given certain
rights and privileges not enjoyed by the owners of other stock. Where
the exclusive right to vote and be voted for in the election of directors
is granted, it must be for a limited period not to exceed five (5) years
from the date of incorporation: Provided, That such exclusive right
shall not be allowed if its exercise will violate Commonwealth Act No.
108, otherwise known as the "Anti-Dummy Law"; Republic Act No.
7042, otherwise known as the "Foreign Investments Act of 1991"; and
otherwise known as "Foreign Investments Act of 1991"; and other
pertinent laws.
Q: Do you include non-voting shares in arriving at the voting
requirement imposed by the Code so that the stockholders may pass a
valid corporate act? For purposes of compliance with our
nationalization laws?
SITUATION: Development and utilization of the Philippine natural
resources –
1.2M Outstanding capital stock
600K = held by Filipino citizen
600K = Foreigners (400K voting shares; 200K non-voting shares)
Q.a; Is there a violation of our nationalization laws?
A: In Gamboa v. Tevez, non-voting shares are not included in
determining compliance with our nationalization laws, because they
are not outstanding capital stocks (OMG; THESE JUSTICES ARE
STUPID; THIS DECISION IS ERRONEOUS– Atty. L)
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 18
Ladia: Because in Sec. 173, as long as there is a valid subscription
agreement, fully or partially paid, they are outstanding capital stock.
There is no violation of our nationalization law because a Philippine
national is defined under special law as “citizens of the Philippines, or
a domestic partnership or corporations organized under the laws of the
Philippines of which at least 60% of the outstanding capital stock,
AND is entitled to vote, is owned and held by citizens of the
Philippines)
 1981 Omnibus Investment Code
 1987 Omnibus Investment Code
 Foreign Investment Act
600K Filipino; 600K Foreigner, but the 200k of foreigner is non-
voting. What is the extent of the outstanding capital stock entitled to
vote by the Filipinos? 60%, because the foreigners only hold 40% of
the outstanding capital stock entitled to vote.
Non-voting shares are not denied absolute the right to vote. (See
enumeration under Sec. 6)
SITUATION:
1M Outstanding capital stocks
400K = owned and held by A & B, the preferred shareholders
(non-voting)
Q: Assuming they are non-voting shares, will you include their votes,
their shares, in arriving at the voting requirement in entering to a
management contract, requiring the vote of the majority of the
outstanding capital stock?
A: NO. Majority vote will be based only on the 600K voting shares.
The vote required to pass that matter is 301K vote.
The vote necessary to approve a particular corporate act shall be
deemed to refer only to stocks with voting rights (Sec.6)
Or will you include them for the purpose of the voting requirement of
the Code for amendment of the by-laws?
A: YES, as it falls under the enumerated items of Sec.6. The basis will
be the entire 1M outstanding capital stock.
Or in the amendment of the articles of incorporation?
A: YES, as it falls under the enumerated items of Sec. 6. The basis will
be the entire 1M outstanding capital stock.
REDEEMABLE SHARES –
Section 8. Redeemable Shares. - Redeemable shares may be issued by
the corporation when expressly provided in the articles of
incorporation. They are shares 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 unrestricted retained
earnings in the books of the corporation, and upon such other terms
and conditions stated in the articles of incorporation and the
certificate of stock representing the shares, subject to rules and
regulations issued by the Commission.
They are likened to a bond with a fixed rate of return which the
corporation is bound to re-acquire either on a fixed date or on demand.

SEPT- 29 (E)
TREASURY SHARES
SEC. 9. Treasury Shares. – Treasury shares are shares of stock which
have been issued and fully paid for, but subsequently reacquired by the
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.
Treasury shares are shares issued and fully paid for, but reacquired by
the corporation either by purchase, redemption, donation, or some
other lawful means. And they are so called treasury shares because they
are in the treasury, or in the coffers of the corporation, and they may
be reissued or disposed of again because it’s the property of the
corporation. It says FOR A REASONABLE PRICE as may be
determined by the Board of Directors. That phrase “for a reasonable
price” would be dependent at the nature of articular corporation.
EXAMPLE:
If 10 pesos is the par value, and they are in dire need of funds to pay
its debts and liabilities, nobody is buying their shares, maybe 5 pesos
would be reasonable, depending on the needs of the corporation. Eh
kung piso, aba, eh ibang usapan na ‘yun.
**And while they are in the treasury, they have NO VOTING
RIGHTS as per Sec. 56, and under Sec. 173, they are not outstanding
capital stocks.
SEC. 56. Voting Right for Treasury Shares. – Treasury shares shall
have no voting right as long as such shares remain in the Treasury.
SEC. 173. Outstanding Capital Stock Defined. – The term
“outstanding capital stock”, as used in this Code, shall mean the total
shares of stock issued under binding subscription contracts to
subscribers or stockholders, whether fully or partially paid, except
treasury shares.
**So when the law speaks of voting and dividend rights, it speaks only
of the holders of these outstanding capital stocks.
The reason for the provision of Sec. 56 and Sec. 173 is the case of
Commissioner of Internal Revenue vs Manning. It was based on this
case which was handed down by the Supreme Court in 1975.
[Commissioner of Internal Revenue vs Manning]
Meaning and scope of treasury shares.—Although authorities may
differ on the exact legal and accounting status of so-called “treasury
shares,” they are more or less in agreement that treasury shares are
stocks issued and fully paid for and re-acquired by the corporation
either by purchase, donation, forfeiture or other means. Treasury
shares are therefore issued shares, but being in the treasury they do
not have the status of outstanding shares. Consequently, although a
treasury share, not having been retired by the corporation re-
acquiring it, may be reissued or sold again, such share, as long as it
is held by the corporation as a treasury share, participates neither in
dividends, because dividends cannot be declared by the corporation
to itself, nor in the meetings of the corporation as voting stock, for
otherwise equal distribution of voting powers among stockholders
will be effectively lost and the directors will be able to perpetuate
their control of the corporation, though it still represents a paid-for
interest in the property of the corporation. The foregoing essential
features of a treasury stock are lacking in the questioned shares.
Thus, (a) under paragraph 4(c) of the trust agreement, the trustees
were authorized to vote all stock standing in their names x x x; (b)
under paragraph 4(d), “Any and all dividends paid on said shares
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 19
after the death of the OWNER shall be subject to the provisions of
this Agreement;” (c) under paragraph 5(b) the amount of retained
earnings to be declared as dividends was made subject to the
approval of the trustees of the 24,700 shares; x x x. The manifest
intention of the parties to the trust agreement was, in sum and
substance, to treat the 24,700 shares of Reese as absolutely
outstanding shares of Reese’s estate until they were fully paid.
A stock dividend cannot be declared out of outstanding stock in the
guise of treasury stock dividend, but only from retained earnings.—
Such being the true nature of the 24,700 shares, their declaration as
treasury stock dividend in 1958 was a complete nullity and plainly
violative of public policy. A stock dividend, being one payable in
capital stock, cannot be declared out of outstanding corporate stock,
but only from retained earnings.
Where corporate earnings are used to purchase outstanding stock
treated as treasury stock as a technical, but prohibited device, to
avoid effects of income taxation, distribution of said corporate
earnings in the form of stock dividends will subject stockholders
receiving them to income tax.—The declaration of
MANTRASCO’s alleged treasury stock dividends in favor of the
former, brings, however, into clear focus the ultimate purpose
which the parties to the trust instrument aimed to realize: to make
the respondents the sole owners of Reese’s interest in
MANTRASCO by utilizing the periodic earnings of that company
and its subsidiaries to directly subsidize their purchase of the said
interests, and by making it appear outwardly, through the formal
declaration of non-existent stock dividends in the treasury, that they
have not received any income from those firms when, in fact, by
that declaration they secured to themselves the means to turn around
as full owners of Reese’s shares. In other words, the respondents,
using the trust instrument as a convenient technical device,
bestowed unto themselves the full worth and value of Reese’s
corporate holdings with the use of the very earnings of the
companies. Such package device, obviously not designed to carry
out the usual stock dividend purpose of corporate expansion re-
investment, e.g., the acquisition of additional facilities and other
capital budget items, but exclusively for expanding the capital base
of the respondents in MANTRASCO, cannot be allowed to deflect
the respondents’ responsibilities toward our income tax laws. The
conclusion is thus ineluctable that whenever the companies
involved herein parted with a portion of their earnings “to buy” the
corporate holdings of Reese, they were in ultimate effect and result
making a distribution of such earnings to the respondents. All these
amounts are consequently subject to income tax as being, in truth
and in fact, a flow of cash benefits to the respondents.
Where corporate earnings are used to buy out a majority
stockholder’s shares therein over a period of years, the income tax
burden on the beneficiaries of such plan shall correspond to the
annual corporate disbursement.—We are of the opinion, however,
that the Commissioner erred in assessing the respondents the total
acquisition cost (P7,973,860) of the alleged treasury stock
dividends in one lump sum. The records shows that the earnings of
MANTRASCO over a period of years were used to gradually wipe
out the holdings therein of Reese. Consequently, those earnings,
which we hold, under the facts disclosed in the case at bar, as in
effect having been distributed to the respondents, should be taxed
for each of the corresponding years when payments were made to
Reese’s estate on account of his 24,700 shares. With regard to
payments made with MANTRASCO earnings in 1958 and the years
before, while indeed those earnings were utilized in those years to
gradually pay off the value of Reese’s holdings in MANTRASCO,
there is no evidence from which it can be inferred that prior to the
passage of the stockholders’ resolution of December 22, 1958 the
contributed equity of each of the respondents rose correspondingly.

It was only by virtue of the authority contained in the said resolution
that the respondents actually, albeit illegally, appropriated and
partitioned among themselves the stockholders’ equity representing
Reese’s interests in MANTRASCO. As those payments accrued in
favor of the respondents in 1958 they are and should be liable, for
income tax purposes, to the extent of the aggregate amount paid,
from 1955 to 1958, by MANTRASCO to buy off Reese’s shares.
Q: Did they never become treasury shares?
A: They became treasury shares when they were fully paid in 1960.
**Nag-downpayment lang ang corporation di’ba? At the time that they
were not yet fully paid, they were NOT TREASURY SHARES. That
was the exact question that I was asking. They declared them as stock
dividends earlier on even before they were fully paid up. Nag-
downpayment lang ang corporation. Ang sabi nga natin sa definition,
“issued and fully paid but reacquired by the corporation.” Ni-
reacquire ng corporation hindi pa fully paid. THEY WERE NOT
TREASURY SHARES THEN. Why? Because they were not YET
fully paid. SO in 1962, when the corporation was assessed income tax,
they were not yet treasury shares. So, the Court here ruled that Reese’s
shares never became treasury shares prior to the full payment made by
the corporation. Because treasury shares do not participate in
dividends and have no voting rights. Otherwise, equal distribution of
voting powers and dividend rights will be effectively lost. The
incumbents, used this treasury shares to continuously elect themselves
in office. Second, kasi wala pa nga tayong definition ng outstanding
stocks noon eh, wala paring 56, that they have no voting rights, eh kung
gamitin nya lang yung 20% of the stocks, edi 20%, they will use it to
continue to elect themselves in office. How about dividend rights?
Hindi nga outstanding eh. That’s why we have now the definition of
173, because of this pronouncement of the court that they were not
outstanding stocks. Kung tinanggal mo ‘yung 20%, 80% nalang ‘yung
outstanding stocks. If the Corporation declares the dividends, yung
80% nalang yung title, hindi na kasama yung hindi outstanding.
Madilute yung dividend rights. Otherwise stated, it would have been
tantamount to taking money from its left pocket, and transferring it to
its right pocket. That is why, the express provisions now of Sec. 56 and
Sec. 173. There was no definition of what is outstanding stocks then.
But because of this, it is now defined. Sec. 56 is now categorical-that
they have no voting rights. Of course, if they will be reissued, they
will regain their status back as outstanding capital stocks. If they are
voting shares, so be it. If they are preferred shares, so be it. If they are
No Par shares, so be it.
RESTRICTIONS AND PREFERENCES
ON TRANSFERS OF SHARES
The Articles of Incorporation may also provide such other matters
consistent with the law and which the incorporators may deem
necessary and convenient. Like for instance, it may provide as to who
may call meetings of the stockholders, members and/or directors or
trusts. It may also provide for restrictions and preferences on transfers
of shares, but this is merely optional also, of course. It may provide
that the existing stockholders and/or the corporation itself may be
granted the preferential right to acquire the share of the selling
stockholder, specifying the number of days in which they may exercise
their preferential right. They are not required to provide it. But these
restrictions and preferences are sometimes important as they may serve
as protection, not only of the corporation and the stockholders thereof,
but also from other persons or between and among the stockholders
themselves. This is especially true in family owned corporations where
the stockholders would want to run the business between and among
themselves and where the entry of a stranger or third person might
prejudice the smooth flow of its business operation. They want it to be
operated by themselves.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 20
General Rule: Corporations may or may not provide for restrictions
and preferences regarding the transfer, sale or assignment of shares in
the articles of incorporation. It is discretionary.
Exception: Close corporations are required to subject their shares to
specified restrictions as required in
SEC. 95. Definition and Applicability of Title. – A close
corporation, within the meaning of this Code, is one whose articles
of incorporation provides that: (b) all the issued stock of all classes
shall be subject to one or more specified restrictions on transfer
permitted by this Title;
General Rule: Restrictions or preferences must be contained in the
articles of incorporation and in all stock certificates to be issued by the
corporation. However, In close corporations, such restrictions and
preferences must also be embodied in the by-laws.
Under Section 181, the AOI may also provide for an arbitration
agreement. In cases that there’s a dispute between and among the
stockholders, members, directors and officers, or any some or all of
them and the corporation, they may provide for an arbitration
agreement.
SEC. 181. Arbitration for Corporations. – An arbitration agreement
may be provided in the articles of incorporation or bylaws of a
corporation. When such an agreement is in place, disputes between the
corporation, its stockholders or members, which arise from the
implementation of the articles of incorporation or bylaws, or from
intracorporate relations, shall be referred to arbitration. A dispute
shall be non-arbitrable when it involves criminal offenses and interests
of third parties.
The arbitration agreement shall be binding on the corporation, its
directors, trustees, officers, and executives or managers.
To be enforceable, the arbitration agreement should indicate the
number of arbitrators and the procedure for their appointment. The
power to appoint the arbitrators forming the arbitral tribunal shall be
granted to a designated independent third party. Should the third party
fail to appoint the arbitrators in the manner and within the period
specified in the arbitration agreement, the parties may request the
Commission to appoint the arbitrators. In any case, arbitrators must
be accredited or must belong to organizations accredited for the
purpose of arbitration.
The arbitral tribunal shall have the power to rule on its own
jurisdiction and on questions relating to the validity of the arbitration
agreement. When an intracorporate dispute is filed with a Regional
Trial Court, the court shall dismiss the case before the termination of
the pretrial conference, if it determines that an arbitration agreement
is written in the corporation’s articles of incorporation, bylaws, or in
a separate agreement.
The arbitral tribunal shall have the power to grant interim measures
necessary to ensure enforcement of the award, prevent a miscarriage
of justice, or otherwise protect the rights of the parties.
A final arbitral award under this section shall be executory after the
lapse of fifteen (15) days from receipt thereof by the parties and shall
be stayed only by the filing of a bond or the issuance by the appellate
court of an injunctive writ.
The Commission shall formulate the rules and regulations, which shall
govern arbitration under this section, subject to existing laws on
arbitration.

THE TREASURER
Ninth: That _______________________ has been elected by the
subscribers as Treasurer of the Corporation to act as such until after
the successor is duly elected and qualified in accordance with the
bylaws, that as Treasurer, authority has been given to receive in the
name and for the benefit of the corporation, all subscriptions,
contributions or donations paid or given by the subscribers or
members, who certifies the information set forth in the seventh and
eighth clauses above, and that the paid-up portion of the subscription
in cash and/or property for the benefit and credit of the corporation
has been duly received.
The treasurer who may have been elected as such and who has been
authorized to receive payments of subscriptions to its capital stock or
donations to its operating capital, if it’s a non-stock corporation. The
treasurer who has been elected as such until his successor has been
elected and qualified in accordance with law.
UNDERTAKING TO CHANGE NAME
Tenth: That the incorporators undertake to change the name of the
corporation immediately upon receipt of notice from the Commission
that another corporation, partnership or person has acquired a prior
right to the use of such name, that the name has been declared not
distinguishable from a name already registered or reserved for the use
of another corporation, or that it is contrary to law, public morals,
good customs or public policy.
Unlike the Corporation Code then, the Revised Corporation Code now
requires the applicant corporation to undertake, to change its corporate
name. Upon receipt of notice from the SEC, that another corporation,
partnership, or person has acquired a prior right to acquire that name,
or it is not distinguishable from a name already registered, or it is
contrary to law, morals, good customs or policy. This is followed by
the NO TRANSFER CLAUSE.
NO TRANSFER CLAUSE
Eleventh: (Corporations which will engage in any business or activity
reserved for Filipino citizens shall provide the following):
“No transfer of stock or interest which shall reduce the ownership of
Filipino citizens to less than the required percentage of capital stock
as provided by existing laws shall be allowed or permitted to be
recorded in the proper books of the corporation, and this restriction
shall be indicated in all stock certificates issued by the corporation.”
xxx
Despite the provision of Section 14 of the Code requiring the
inclusions of the "no transfer clause" in corporations that is partly or
fully nationalized, the SEC still requires, as a matter of policy, the same
to be included in the articles of incorporation. In order to enable the
State [in cases where aliens subsequently own substantial interest
thereat] to determine whether such corporation would contribute to the
sound balanced development of the Philippine economy. This
guarantees faithful compliance with our nationalization.
THE EXECUTION CLAUSE
IN WITNESS WHEREOF, we have hereunto signed these Articles of
Incorporation, this ______ day of _____, 20___ in the
City/Municipality of _________________, Province of
________________, Republic of the Philippines.
_____________________________ _______________________
_____________________________ _______________________
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 21
_____________________________ _______________________
_____________________________ _______________________
_____________________________ _______________________
(Names and signatures of the incorporators)
____________________________
(Name and signature of Treasurer)
The execution clause is that part of the articles of incorporation where
the incorporators sign the AOI with a statement as to where and when
they signed the documents. The signatures of the incorporators as
witnessed by two disinterested persons are important as the articles of
incorporation serves as a contract between the signatories thereof, by
and among themselves, with the corporation, and the latter with the
State.
NOTARIAL ACKNOWLEDGMENT
The notarial acknowledgment is that part of the articles of
incorporation where the incorporators, signatories thereof,
acknowledge before a notary public that they have executed and signed
the same in their own free, voluntary act and deed.
We have already discussed the contents of the AOI. We have noted
the:
 Restrictions
 Limitations
 Minimum paid-up capital
 Percentage stock-ownership
 Qualifications and Disqualifications of incorporators,
directors, etc.
The applicant or proposed corporation is now ready to file the AOI
with the SEC. It may be filed in the form of electronic document in
accordance with the rules and regulations of the SEC. So, it was filed.
GROUNDS FOR DISAPPROVAL
Q: May the Securities and Exchange Commission deny the
registration of the AOI?
A: YES, under section 16 of the Revised Corporation code.
SEC. 16. Grounds When Articles of Incorporation or Amendment
may be Disapproved. – The Commission may disapprove the articles
of incorporation or any amendment thereto if the same is not compliant
with the requirements of this Code: Provided, That the Commission
shall give the incorporators, directors, trustees, or officers a
reasonable time from receipt of the disapproval within which to modify
the objectionable portions of the articles or amendment. The following
are grounds for such disapproval:
(a) The articles of incorporation or any amendment thereto is not
substantially in accordance with the form prescribed herein;
(b) The purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral or contrary to government rules and
regulations;
(c) The certification concerning the amount of capital stock subscribed
and/or paid is false; and
(d) The required percentage of Filipino ownership of the capital stock
under existing laws or the Constitution has not been complied with.
No articles of incorporation or amendment to articles of incorporation
of banks, banking and quasi-banking institutions, preneed, insurance
and trust companies, nonstock savings and loan associations
(NSSLAs), pawnshops, and other financial intermediaries shall be
approved by the Commission unless accompanied by a favorable
recommendation of the appropriate government agency to the effect
that such articles or amendment is in accordance with law.

Q: Is the enumeration provided under Section 16 all inclusive?
A: NO. There may be other reasons why the SEC will refuse
registration. One of them being that the minimum paid-up capital
requirement imposed by government agencies is not complied with.
EXAMPLE:
The POEA, initially when I first stepped into the halls of the SEC, it
was only PhP 500,000.00 minimum PUC. When I left the SEC, it was
already PhP1M. After some years, it is already PhP2M.
*Now, if there are no legal grounds under which the SEC will refuse
the registration of the corporation, of course it will issue the Certificate
of Incorporation pursuant to the constitutional provision of the right to
association.
COMMENCEMENT OF CORPORATE EXISTENCE
Q: When will the corporation commence to exist?
A: The determination as to when a corporation commences to exist is
reckoned with from the date of the issuance of its certificate of
incorporation or registration. It is only from that time that it acquires
juridical personality and legal existence.
Q: The Corporation was issued the Certificate of Incorporation
earlier at 3PM today, September 29. But before the issuance of
COI, at 10am, the corporation already engaged in business for
which it was formed or organized. Did the corporation validly
enter the agreement or contract?
A: YES. The law only provides that the existence of the corporation
commences to exist from the date of the issuance of the certificate of
incorporation by the SEC and it does not provide for a specific time.
Hence, the corporate existence of the Corporation is deemed to have
commenced on the date of the issuance of the COI.
SEC. 18. Registration, Incorporation and Commencement of
Corporate Existence. – A person or group of persons desiring to
incorporate shall submit the intended corporate name to the
Commission for verification. If the Commission finds that the name is
distinguishable from a name already reserved or registered for the use
of another corporation, not protected by law and is not contrary to
law, rules and regulations, the name shall be reserved in favor of the
incorporators. The incorporators shall then submit their articles of
incorporation and bylaws to the Commission.
If the Commission finds that the submitted documents and information
are fully compliant with the requirements of this Code, other relevant
laws, rules and regulations, the Commission shall issue the certificate
of incorporation.
A private corporation organized under this Code commences its
corporate existence and juridical personality from the date the
Commission issues the certificate of incorporation under its official
seal and thereupon the incorporators, stockholders/members and
their successors shall constitute a body corporate under the name
stated in the articles of incorporation for the period of time
mentioned therein, unless said period is extended or the corporation
is sooner dissolved in accordance with law.
*The difference between the old law and the revised is that under the
old law, the statement was “The Corporation commences to exist
UPON the issuance of the COI.” As the law stands now, “from the
date the SEC issues the COI”-VERY BIG DIFFERENCE
*From Atty- for me, the old law was much better. Di pa nai-issue yung
COI, nakikipag-kontrata ka na tapos VALID? OMG. Well, the law is
the law. Dura lex sed lex, wala tayong magagawa.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 22
*So remember, from the date the SEC issues the COI, there and only
then that it acquires juridical personality and legal existence to sue or
be sued, to enter into contracts, to own and convey properties and do
any legal acts in its own name. Prior thereto, it has no being.
Q: What are the exceptions to this general rule?
A: There are 5
1. Corporations with their own charter- Sec. 4, (This is an
XPN because according to Sec. 18, from the date the SEC
issues the COI, dito walang pake yung SEC dyan. It is the
legislature! The Congress passes a law creating the
Corporation)
2. Corporation Sole–Sec. 110 It commences to exist and gain
legal personality upon the FILING of the AOI with the SEC.
3. Corporation by Estoppel-Sec. 20- It is not a registered
corporation, but nonetheless exists for all intents and
purposes but only between the alleged corporation and the
third party dealing with it by virtue of their agreement or
conduct.
4. Homeowners’ Association- it is not also the SEC, but rather
the Home Insurance Guaranty Association that issues the
COI
5. Cooperatives- it is not also the SEC, but rather the Bureau
of Cooperatives that issues the COI.
*the General Rule was applied in the case of Cagayan Fishing
Development vs. Sandiko
[Cagayan Fishing Development vs. Sandiko]
TRANSFER MADE TO A NON-EXISTENT CORPORATION;
JURIDICAL CAPACITY TO ENTER INTO A CONTRACT.—The
transfer made by T to the C, F. D. Co,, Inc., was effected on May
31, 1930 and the actual incorporation of said company was effected
later on October 22, 1930. In other words, the transfer was made
almost five months before the incorporation of the company.
Unquestionably, a duly organized corporation has the power to
purchase and hold such real property as the purposes for which such
corporation was formed may permit and for this purpose may enter
into such contracts as may be necessary. But before a corporation
may be said to be lawfully organized, many things have to be done.
Among other things, the law requires the filing of articles of
incorporation. Although there is a presumption that all the
requirements of law have been complied with in the case before us
it can not be denied that the plaintiff was not yet incorporated when
it entered into the contract of sale. The contract itself referred to the
plaintiff as "una sociedad en vías de incorporación." It was not even
a de facto corporation at the time. Not being in legal existence then,
it did not possess juridical capacity to enter into the contract.
ID. ; ID. ; ID.—Corporations are creatures of the law, and can only
come into existence in the manner prescribed by law. General laws
authorizing the formation of corporations are general offers to any
persons who may bring themselves within their provisions; and if
conditions precedent are prescribed in the statute, or certain acts are
required to be done, they are terms of the offer, and must be
complied with substantially before legal corporate existence can be
acquired. That a corporation should have a full and complete
organization and existence as an entity before it can enter into any
kind' of a contract or transact any business, would seem to be self-
evident.
ID. ; ID.; ID.—A corporation, until organized, has no life and,
therefore, no faculties. It is, as it were, a child in ventre sa mere.
This is not saying that under no circumstances may the acts of
promoters of a corporation be ratified by the corporation if and
when subsequently organized. There are, of course, exceptions, but
under the peculiar facts and circumstances of the present case the

doctrine of ratification should not be extended because to do so
would result in injustice or fraud to the candid and unwary.
** Tabora transferred his 4 real properties in favor of the proposed
Corporation Cagayan Fishing Development May 31, 1930. The AOI
of the proposed corporation was filed only October 22, 1930. In 1931,
the corporation sold them to Sandiko
Issue: Is the sale made by the corporation in favor of Sandiko valid?
Held: NO. In the first place, the transfer made by Tabora to the
proposed corporation is not valid. Corporations are creatures of the
law, and can only come into existence in the manner prescribed by law.
As the law stands now, from the date the SEC issues the certificate of
incorporation. So it never acquired title to the real properties in the
first place. Meaning, it also did not have the resultant right to transfer
or dispose of them. They commenced to exist from the date the SEC
issues the COI. Then and only then that t will possess a juridical
personality to sue or be sued, to enter into contracts, to own, hold and
convey properties and do any legal acts in its own name. Prior thereto,
it is not a person.
DEFECTIVELY FORMED CORPORATIONS
A corporation de jure is one created in strict or substantial
compliance to the governing corporation statutes and whose right to
exist and act as such could not be attacked in a direct quo warranto
proceeding even by the State.
But under Philippine jurisprudence, a corporation may nonetheless
exist despite noncompliance, substantial or otherwise, of the law under
which they might been formed as a de jure corporation. They are
otherwise known as defectively formed corporations. And they are of
two types: (a) de facto corporation; and (b) corporation by estoppel.
They are governed by Sec. 19 and 20 of the Code.
**TAKE NOTE: Sections 19 and 20 do not define what they are, they
only provide for the effects of the de facto corporation and effects on
persons assuming to act as a corporation, knowing it wthout authority
to do so.
DE FACTO CORPORATIONS
A de facto corporation is one that is so defectively created as not to be
a de jure corporation but nevertheless exists, for all practical intents
and purposes, as a corporate body, by virtue of its bona fide attempt to
incorporate under existing statutory authority, coupled with the
exercise of corporate powers in good faith. While it may not be a de
jure corporation by virtue of an irregularity or defect in the
organization, constitution or from some omission to comply with
certain requirements by which it could have been legally created as a
de jure corporation, it nevertheless exist as a corporation separate and
distinct from the stockholders or members composing it IF ALL
(TAKE NOTE!!) the requisites as a de facto corporation are present:
REQUISITES (Atty’s discussion):
a. There is a valid or apparently valid statute under which the
corporation could have been formed or organized as a de jure
corporation;
b. “colourable compliance” in good faith with the legal
requirements imposed by law;
c. A user of corporate powers and functions IN GOOD FAITH.
They do not know that there is no issuance of certificate)
REQUISITES (from the book)
a. There is a valid statute under which the corporation could
have been created as a de jure corporation (or according to
some, an apparently valid stature);
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 23
b. An attempt, in good faith, to form a corporation according to
the requirements of law, which goes far enough to amount to
a "colorable compliance" with the law;
c. A user of corporate powers, the transaction of business in
some way as if it were a corporation; and,
d. Good faith in claiming to be and doing business as a
corporation.
SEC. 19. De facto Corporations. – The due incorporation of any
corporation claiming in good faith to be a corporation under this
Code, and its right to exercise corporate powers, shall not be inquired
into collaterally in any private suit to which such corporation may be
a party. Such inquiry may be made by the Solicitor General in a quo
warranto proceeding.
A de facto corporation is, in all respects, similarly situated with a de
jure corporation, except only that the State may question its existence,
but only in a DIRECT QUO WARRANTO PROCEEDING. That is if it
possessed with all the powers, attributes and liabilities that attach to a
de jure corporation. As long as the State acquiesce in its de facto
existence of course in relation with all persons. Meaning, these de facto
corporation and de Jure Corporation, the stockholders, directors,
officers or members, they have the same rights, liabilities and
obligations. For instance, the stockholder of a de jure corporation, can
examine the books and records of the de Jure Corporation. The same
holds true of a stockholder of a de facto corporation.
Q: Now in cases where the directors and offices refuse this right of
inspection, what is the remedy?
A: The stockholder of the de jure corporation may institute a case for
mandamus with a claim for damages and attorney’s fees against the
officers involved. The same also holds true of a de facto corporation.
Meaning, the only importance of the distinction between a de jure
corporation and a de facto corporation is only the right of the State. Its
existence cannot be questioned, directly or indirectly, even by the
State; much less by any other person, directly or collaterally the case.
But a de facto corporation’s existence, may be questioned but ONLY
by the state in a quo warranto proceeding.
(from the book)
Apparent from the foregoing provision of law is that the importance of
the distinction between a de jure and a de facto corporation may only
be for the purpose of determining the applicability of the rules on
collateral and direct attack against the corporate existence, Among
them are:
1. The corporate existence of a de jure corporation cannot be
directly attacked either directly or collaterally, even by the
State.
2. The corporate existence of a de facto corporation can be
directly attacked on a quo warranto proceeding. Only the
State, however, can institute a quo warranto proceeding to
directly attack the existence of a de facto corporation. Private
persons cannot directly, much less, collaterally attack its
existence; and,
3. While the corporate existence of a de facto corporation can
directly be attacked by the State, it is not subject to collateral
attack by any party.
[Municipality of Malabang vs. Benito]
Constitutional law; Municipal corporation; Inquiry into the legal
existence of a municipality reserved to the State; Rule not
applicable where municipal corporation a nullity.—An inquiry into
the legal existence of a municipality is reserved to the State in a
proceeding f or quo warranto or other direct proceeding, and that
only in a few exceptions may a private person exercise this function
of government. But the rule disallowing collateral attacks applies

only where the municipal corporation is at least a de facto
corporation. For where it is neither a corporation de jure nor de
facto, but a nullity, the rule is that its existence may be questioned
collaterally or directly in any action or proceeding by anyone whose
rights or interests are affected thereby, including the citizens of the
territory incorporated unless they are estopped by their conduct
from doing so.
Same; Same; Where municipal corporation cannot be considered a
de facto corporation.—In the cases where a de facto municipal
corporation was recognized as such despite the fact that the statute
creating it was later invalidated, the decisions could fairly be made
to rest on the consideration that there was some other valid law
giving corporate vitality to the organization. Hence, in the case ac
bar, the mere fact that Balabagan was organized at a time when the
statute had not been invalidated cannot conceivably make it a de
facto corporation, as, independently of the Administrative Code
provision in question, there is no other valid statute to give color of
authority to its creation.
Same; Unconstitutional act not a law.—An unconstitutional act is
not a law; it confers no right; it imposes no duties; it affords no
protection; it creates no off ice; it is, in legal contemplation, as
inoperative as though it had never been passed.
**Atty: Subject to a direct quo warranto proceedings only by the State.
Because in this particular case, it is not the State that questioned the
existence of the municipality, but rather of other barangays and/or
municipalities. Because in a de facto corporation, only the State can
question its valid existence as a corporation. The ruling of the court,
NO. Not a de facto corporation. Because the executive order creating
it is violative of the then administrative code, and therefore, INVALID.
Citing the Pelaez doctrine, an unconstitutional law or act is not a law.
It confers no rights. It imposes no duties. It affords no protection. And
it creates no office. It is in legal contemplation as though it never been
passed at all. So that is one of the requirements in order for a de facto
corporation to exist is that THERE IS AN APPARENTLY VALID
STATUTE UNDER WHICH THEY HAVE BEEN FORMED OR
ORGANIZED as a de jure corporation.
Q: In so far as the stockholders/incorporators themselves are
concerned, if the certificate of incorporation has not yet been
issued, may a de facto corporation exist?
A: NO. Under Sec. 19, there must be colorable compliance with good
faith)
[Hall vs. Piccio]
The first proposition above stated is premised on the theory that,
inasmuch as the Far Eastern Lumber and Commercial Co., is a de
facto corporation, section 19 of the Corporation Law applies, and
therefore the court had no jurisdiction to take cognizance of said
civil case number 381. Section 19 reads in part as follows:
“The due incorporation of any corporations claiming in good faith
to be a corporation under this Act and its right to exercise corporate
powers shall not be inquired into collaterally in any private suit to
which the corporation may be a party, but such inquiry may be had
at the suit of the Insular Government on information of the
Attorney-General."
There are at least two reasons why this section does not govern the
situation. Not having obtained the certificate of incorporation, the
Far Eastern Lumber and Commercial Co.—even its stockholders—
may not probably claim "in good faith" to be a corporation.
"Under our statute it is to be noted (Corporation Law, sec. 11) that
it is the issuance of a certificate of incorporation by the Director of
the Bureau of Commerce and Industry which calls a corporation
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 24
into being. The immunity of collateral attack is granted to
corporations 'claiming in good faith to be a corporation under this
act.' Such a claim is compatible with the existence of errors and
irregularities; but not with a total or substantial disregard of the law.
Unless there has been an evident attempt to comply with the law the
claim to be a corporation 'under this act' could not be made 'in good
faith.'"
Second, this is not a suit in which the corporation is a party. This is
a litigation between stockholders of the alleged corporation, for the
purpose of obtaining its dissolution. Even the existence of a de jure
corporation may be terminated in a private suit for its dissolution
between stockholders, without the intervention of the state.
There might be room for argument on the right of minority
stockholders to sue for dissolution; but that question does not affect
the court's jurisdiction, and is a matter for decision by the judge,
subject to review on appeal. Which brings us to one principal reason
why this petition may not prosper, namely: the petitioners have their
remedy by appealing the order of dissolution at the proper time.
Q: May it exist as a de facto corporation insofar as the stockholders
or incorporators themselves are concerned, if the certificate of
incorporation has not yet been issued?
A: NO. It may NOT exist as a de facto corporation. Remember the last
requirement. They cannot claim in good faith to be and act as a
corporation, because they are aware of the fact of then non-issuance
of the certificate of incorporation.
CORPORATION BY ESTOPPEL
Section 20 does not also define what corporations by estoppel are.
Corporation by Estoppel is one which may exist on the ground of
estoppel by virtue of the agreement, admission, or conduct of the
parties such that they will not be permitted to deny the fact of the
existence of the corporation. Section 20 only provides for the effects
on persons assuming to act as a corporation knowing it without
authority to do so. But the definition of corporation by estoppel is one
that is so defectively organized as not to be either a corporation de jure
or de facto corporation but nonetheless exist as a corporate body but
only insofar as the contracting parties themselves are concerned-
meaning the alleged corporation and the third person dealing with it
by virtue of the agreement, admission, or conduct.
SEC. 20. Corporation by Estoppel. – All persons who assume to act
as a corporation knowing it to be without authority to do so shall be
liable as general partners for all debts, liabilities and damages
incurred or arising as 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 its lack of corporate personality as a defense. Anyone
who assumes an obligation to an ostensible corporation as such cannot
resist performance thereof on the ground that there was in fact no
corporation.
Q: We were saying then that one of the advantages and also a
disadvantage of a corporate form of business is limited
shareholders LIABILITY. With respect to persons assuming to act
as a corporation knowing it without authority to do so, do they
have limited liability?
A: NO. Under section 20, they shall be liable as general partners for
all debts, liabilities and damages incurred or arising as a result thereof.
**applying the Partnership laws:
Under the partnership laws, a general partner may be held liable
even beyond his contribution or promised contribution to the enterprise
even his personal properties not contributed in the enterprise may be
subjected to attachment or foreclosure by the creditors.

Section 20 of the Corporation Code is very categorical and specific.
All persons who assume to act as a corporation knowing it to be
without authority to do so shall be liable as general partners for all
debts, liabilities and damages incurred or arising therefrom.
Q: Will a corporation by estoppel exist if the controversy arose
only between and among the stockholders or members of the
alleged corporation, meaning there was no third party dealing
with the ostensible corporation?
A: NO because there is no 3rd person involved. Corporation by
estoppel exists only between the 3rd party dealing with it and/or the
corporation by virtue of their agreement, admission or conduct. If there
is no 3rd party dealing with it, it cannot exist as a corporation, even by
estoppel. The ruling in Lozano vs Delos Santos. Sabi ko nga kanina
di’ba, it exists only when the contracting parties, the alleged
corporation and the 3rd party dealing with it. Sino ang nag-admit, sino
ang nag-agree, sino ang nag-conduct that there is a corporation
existing? WALA, there you go. It exists it exists only when the 3rd
parties dealing with it and/or the alleged corporation by virtue of their
agreement, admission or conduct. So kung wala yung 3rd party, walang
corporation by estoppel.
[Albert vs. University Publishing Co., Inc.,]
Corporations; Principle of corporation by estoppel; Not invokable
by one who misrepresented corporation as duly organized against
his victim.—One who has induced another to act upon his willful
misrepresentation that a corporation was duly organized and
existing under the law, cannot thereafter set up against his victim
the principle of corporation by estoppel.
Same; Person acting for corporation with no valid existence is
personally liable for contracts entered into as such agent.—A
person acting or purporting to act on behalf of a corporation which
has no valid existence assumes such privileges and obligations and
becomes personally liable for contracts entered into or for other acts
performed as such agent.
Parties to Action; Suit against corporation with no valid existence;
Real defendant is person who has control of its proceedings.—In a
suit against a corporation with no valid existence the person who
had and exercised the rights to control the proceedings, to make
defense, to adduce and cross-examine witnesses, and to appeal from
a decision, is the real defendant, and .the enforcement of a judgment
against the corporation upon him is substantial observance of due
process of law.
Same; Real party in interest; Person who acted as representative of
non-existent principal and who reaped benefits from its
contracts.—A person who acted as representative of a non-existent
principal, who reaped the benefits resulting from a contract entered
into by him as such, and who violated its terms, thereby
precipitating a suit, is the real party to the contract sued upon.
**This was handed down in 1965 when we did not yet have any
provision in the then Corporation Code relative to corporations by
estoppel. But Philippine jurisprudence had always been applying this
doctrine of corporation by estoppel in the Philippines. So, because of
the non-existence of the no Sec. 20, the high court has been using or
applying the rules on agency when it decides cases relative to this
matter of corporation by estoppel. 1965 kasi ito, eh My 1, 1980 yung
Corporation Code. So the Supreme Court applied the rules on agency.
An agent without a principal is himself the principal. A mere
citation now of section 20 will arrive at the same ruling or decision.
All persons who assume to act as a corporation knowing it to be
without authority to do so shall be liable as general partners for all
debts, liabilities and damages incurred or arising as a result thereof.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 25
[Chiang Kai Shek School vs. Court of Appeals]
Estoppel; Having contracted with respondent every year for 32
years and respondent itself is possessed of juridical personality, it
is now estopped from denying such personality to defeat
respondent’s claim.–––There should also be no question that
having contracted with the private respondent every year for thirty
two years and thus represented itself as possessed of juridical
personality to do so, the petitioner is now estopped from denying
such personality to defeat her claim against it. According to Article
1431 of the Civil Code, “through estoppel an admission or
representation is rendered conclusive upon the person making it and
cannot be denied or disproved as against the person relying on it.”
We hold against the petitioner on the first question. It is true that
Rule 3, Section 1, of the Rules of Court clearly provides that “only
natural or juridical persons may be parties in a civil action.” It is
also not denied that the school has not been incorporated. However,
this omission should not prejudice the private respondent in the
assertion of her claims against the school.
As a school, the petitioner was governed by Act No. 2706 as
amended by C.A. No. 180, which provided as follows:
Unless exempted for special reasons by the Secretary of Public
Instruction, any private school or college recognized by the
government shall be incorporated under the provisions of Act No.
1459 known as the Corporation Law, within 90 days after the date
of recognition, and shall file with the Secretary of Public Instruction
a copy of its incorporation papers and by-laws.
Having been recognized by the government, it was under obligation
to incorporate under the Corporation Law within 90 days from such
recognition. It appears that it had not done so at the time the
complaint was filed notwithstanding that it had been in existence
even earlier than 1932. The petitioner cannot now invoke its own
non-compliance with the law to immunize it from the private
respondent’s complaint.
There should also be no question that having contracted with the
private respondent every year for thirty two years and thus
represented itself as possessed of juridical personality to do so, the
petitioner is now estopped from denying such personality to defeat
her claim against it. According to Article 1431 of the Civil Code,
“through estoppel an admission or representation is rendered
conclusive upon the person making it and cannot be denied or
disproved as against the person relying on it.”
**Oh was surprised when she reported to the school that she did not
have a load for that particular semester. For the past 33 years, she was
teaching in that school. So she sued the school inclusive of separation
pay, damages, attorney’s fees, etc. The school sought exemption from
being sued as a corporation because it is not a registered entity. The
case went all the way to the Supreme Court. The Supreme Court ruled
that Chiang Kai Shek cannot immunize itself from being sued as a
corporation because of the law applicable. The law on education
institutions requires that every institution of learning recognized by the
government as such must incorporate in the period of 90 days from the
date of their recognition as such institution of learning. Even if there is
no law mandating them to incorporate as a corporation, Oh's services
was contracted by Chiang Kai Shek as a corporate body for the past 33
years. The corporation cannot now deny that they cannot be sued as a
corporate body. Because under the civil code, an admission is rendered
conclusive upon the person making it and cannot be denied or
disproved as against the person relying upon it.
**NOTE: This Corporation by estoppel doctrine may apply for or
against the corporation; or for or against the third party dealing with it.

It was applied against the person dealing with the ostensible
corporation in the case of Asia Banking vs Standard Product.
[Asia Banking Corporation vs. Standard Products Co.]
CORPORATION; CORPORATE EXISTENCE, ESTOPPEL FROM
DENYING.—In the absence of fraud, a person who has contracted
or dealt with an association in such a way as to recognize and in
effect admit its legal existence as a corporate body is thereby
estopped to deny its corporate existence in an action leading out of
or involving such contract or dealing, unless the existence is
attacked for causes which have arisen since making the contract or
other dealing relied on as an estoppel.
EVIDENCE.—The defendant having recognized the corporate
existence of the plaintiff by making a promissory note in its favor
and making partial payments on the same, and the defendant having
held itself out as a corporation and being therefore estopped from
denying its own corporate existence, it is unnecessary for the
plaintiff to present other evidence of the corporate existence of
either of the parties.
**The general rule as to when a 3rd party dealing with an ostensible
corporation may be estopped to deny the corporate existence in an
action arising out of the transaction, is when the contracted or
otherwise dealt with the association in such a way as to recognize it
and in effect admit its legal existence and capacity. That general rule,
however, has its exceptions.
[Vda. de Salvatierra vs. Hon. Garlitos etc, and Refuerzo]
CORPORATION LAW; LlABILITY OF PERSON DEALING WITH
ASSOCIATION AS A CORPORATE BODY; WHEN ESTOPPEL
MAY NOT BE INVOKED.—While as a general rule, a person who
deals with an association in such a way to recognize its existence as
a corporate body is estopped from denying the same in an action
arising out of such transaction, yet this doctrine may not be held to
be applicable where fraud takes a part in the said transaction. In the
instant case, on plaintiff's charge that she was unaware of the fact
that the defendant corporation had no juridical personality, its
president gave no confirmation or denial of the same and the
circumstance surrounding the execution of the contract lead to the
inescapable conclusion that plaintiff was really made to believe that
such corporation was duly organized in accordance with law.
LIABILITY OF MEMBERS WHO ACT AS AGENTS OF AN
UNINCORPORATED ASSOCIATION.—A corporation when
registered has a juridical personality separate and distinct from its
component members or stockholders and officers, such that a
corporation cannot be held liable for the personal indebtedness of a
stockholder even if he should be its president and conversely, a
stockholder cannot be held personally liable for any financial
obligation by the corporation in excess of his unpaid subscription.
But this rule is understood to refer merely to registered corporations
and cannot be made applicable to the liability of members of an
unincorporated association. The reason behind this doctrine is
obvious—an unincorporated association has no personality and
would be incompetent to act and appropriate for itself the power
and attributes of a corporation as provided by law, it cannot create
agents or confer authority on another to act in its behalf; thus, those
who act or purport to act as its representatives or agents do so
without authority and at their own risk. And as it is an elementary
principle of law that a person who acts as an agent without authority
or without a principal is himself regarded as the principal, possessed
of all the right and subject to all the liabilities of a principal, a person
acting or purporting to act on behalf of a corporation which has no
valid existence assumes such privileges and obligations and
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 26
becomes personally liable for contracts entered into or for other acts
performed as such agent
**When fraud takes part of the transaction. Salvatierra leased land
to the Philippine Fibers Producers Co., Inc., represented by Refuerzo,
whereby the latter will farm and plant crops and the former will be
compensated 30% of the harvest. Philippine Fibers failed to fulfill the
terms and Salvatierra sued for accounting, rescission and damages
against Philippine Fibers, impleading also Refuerzo. Refuerzo moves
exemption from liability since he merely signed as President.
The court ruled that Refuerzo may be held liable. As a general rule, a
person has contracted or dealt with an association in such a way as to
recognize its corporate existence and capacity as a corporate body, will
be estopped from denying the same to an action arising out of such
transaction. But this doctrine is not applicable where fraud takes part
of the transaction. In the charge that she was not aware that the
Philippine Fibers has no juridical personality, the defendant did not
confirm nor deny. The circumstances surrounding the execution of the
contract led to the inescapable conclusion that Salvatierra was really
made to believe that such corporation was existing and organized in
accordance with law. Thus, Refuerzo may be held liable. Because an
agent without authority and without a principal is himself regarded as
the principal possessing all the rights and subject to all liabilities of a
principal.
OCT- 01 (G)
CORPORATION BY ESTOPPEL
Corporation by estoppel- is a corporation that exists on the ground of
estoppel by virtue of the AGREEMENT, ADMISSION, or
CONDUCT of the PARTIES such that they will not be permitted to
deny the fact of the existence of the corporation.
SEC. 20. Corporation by Estoppel. – All persons who assume to act
as a corporation knowing it to be without authority to do so shall be
liable as general partners for all debts, liabilities and damages
incurred or arising as 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 its lack of
corporate personality as a defense.
Anyone who assumes an obligation to an ostensible corporation as
such cannot resist performance thereof on the ground that there was
in fact no corporation.
Doctrine of Corporation By Estoppel
- May either apply:
1. For/Or against the corporation
2. For/Or against the 3rd party dealing w/ it
3. For/Or against the party dealing with a foreign
corporation
RULES FOR 3RD PARTY DEALING WITH CORPORATION
WILL BE ESTOPPED TO DENY ITS CORPORATE
EXISTENCE:
GR: [laid down in Asia Banking v. Standard Products]
- it was held that a person who has contracted or otherwise
dealt w/ an association in such a way as to recognize and in
effect admit its legal existence WILL BE ESTOPPED to
deny the corporate existence in an action arising out of such
transactions. [based on equitable consideration]

- Doctrine: The general rule is that in the absence of fraud a
person who has contracted or otherwise dealt with an
association in such a way as to recognize and in effect admit
its legal existence as a corporate body is thereby estopped to
deny its corporate existence in any action leading out of or
involving such contract or dealing, unless its existence is
attacked for cause which have arisen since making the
contract or other dealing relied on as an estoppel and this
applies to foreign as well as to domestic corporations.
XPNS:
1. Where fraud takes part on the part of the association in
the transaction [Salvatierra v. Garlitos]
Doctrine: While as a general rule a person who has contracted or dealt
with an association in such a way as to recognize its existence as a
corporate body is estopped from denying the same in an action arising
out of such transaction or dealing, yet this doctrine may not be held to
be applicable where fraud takes a part in the said transaction.
- In this case, the plaintiff was unaware of the fact that the
Philippine Fibers Producers Co., Inc., had no juridical
personality, the defendant did not confirm nor deny and the
circumstances surrounding the execution of the contract lead
to the inescapable conclusion that plaintiff was really made
to believe that such corporation was existing and was duly
organized in accordance with law.
- If this is the case, he will NOT BE BARRED OR
ESTOPPED to claim liability against the supposed person or
persons assuming to act as a corporation.
2. If he is not trying to escape liabilities on a contract from
which he has benefited on the irrelevant ground of
defective incorporation, but rather the one claiming
under it.[International Express Travel & Tour services,
inc., v. Henri Kahn]
Doctrine: The doctrine of corporation by estoppel is mistakenly
applied by the respondent court to the petitioner. The application of the
doctrine applies to a third party only when he tries to escape liabilities
on a contract from which he has benefited on the irrelevant ground of
defective incorporation. In the case at bar, the petitioner is not trying
to escape liability from the contract but rather is the one claiming from
the contract.
Q1: Why is the ruling of the CA in International express travel v.
Henri Kahn misplaced?
A: Because the CA applied the GR that if a person contracted or
otherwise dealt w/ an association or ostensible corporation so as in a
way admit its legal existence and capacity will be estopped to deny the
existence of the corporation in a suit brought by him on the court.
- Eh It is not applicable in this case.
Q2: What is the rationale of the SC in ruling in favor of
interactional express travel and saying that the ruling of the CA
was misplaced?
A: The doctrine of corpo by estoppel applies to a 3rd party ONLY
when it tries to escape liabilities on a contract from which he has
benefited on the irrelevant ground of defective incorporation.
- In this case the plaintiff here is not trying to escape liability
from the contract from w/c he has benefitted but rather the
one claiming from the contract.
- If this is the case he will NOT BE BARRED OR ESTOPPED
FROM SUING THE ASSOCIATES OR THE PERSONS
ASUMING TO ACT AS A CORPORATION.
- NOTE: The corporation by estoppel doctrine may ALSO
apply For/Or against the party dealing with a foreign
corporation.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 27
The corporation by estoppel doctrine may ALSO apply For/Or
against the party dealing with a foreign corporation.
- Ruling from the case of [Georg Grotjahn GMBH & Co.,
vs. Isnani and Lanchinebre] applied this doctrine from the
case of Merrill Lynch Futures, Inc. vs. Court of Appeals
which provides that:
- "one who has dealth with a corporation of foreign
origin as a corporate entity is estopped to deny its
corporate existence and capacity."
- The principle "will be applied to prevent a person
contracting with a foreign corporation from later
taking advantage of its noncompliance with the
statutes chiefly in cases where such person has
received the benefits of the contract
Under foreign corporations, for a foreign corporation to do business in
the Philippines, it must secure a license to do business here.
- If the corporation does not secure a license then it is
supposed to be barred from access to our [Philippine] courts.
Recap of defectively formed corporations:
De Facto Corporation - is one that is so effectively formed as not to
be a de jure corporation, but nevertheless,exists, for all intents and
purposes, as a corporate body, by virtue of its bona fide attempt to
incorporate under existing statutory authority, coupled with the
exercise of corporate powers in good faith.
- While it may not be a de jure corporation, by virtue of an
irregularity in its organization, constitution, or from some
omission to comply w/ certain requirements by which it
could have been legally created as a de jure corporation, but
it nevertheless exists as a corporate body, separate and
distinct the stockholders and members. And therefore
governed by the same laws, rules and regulations that apply
to a de jure corporation.
- Except only as to the right of the State to attack its existence
is concerned. But, that would be only if ALL (w/ emphasis)
the conditions under w/c may be created as a de facto
corporation are meant or complied with.
REQUISITES OF A DE FACTO CORPORATION:
1. There is a valid statute OR apparently valid statute under
which the corporation may be formed as de jure corporation;
- This requisite was wanting or not available in the
case of [Municipality of Malabang v. Benito]
- The executive order creating the Municipality of
Malabang was declared null and void. There was
no law under w/c it may have been formed or
organized as a de jure corporation.
2. An attempt, in good faith, to form a corporation according to
the requirements of law which goes far enough to amount to
a “colourable compliance” therewith;
3. A user of corporate powers, the transaction of business in
some way as if it were a corporation;
4. Good faith in claiming to be and doing business as a
corporation.
- This requisite was wanting in the case of [Hall v.
Piccio] where the court ruled that insofar as the
incorporators and stockholders themselves are
concerned,if the certificate of incorporation has
not yet been issued, and being aware of that
fact, they CANNOT claim in good faith to be and
act as a corporation.

Although they may not be corporation de facto because of serious
defects in incorporation, it is still possible that a party may be
precluded or estopped from denying the corporate existence. --- the
doctrine may apply for or against the 3rd party dealing w/ it, OR for or
against the corporation itself.
- The doctrine will not apply, however, by and between, or
among the association or members themselves, as held in the
cases of [Lozano v. Delos Santos]
- Doctrine: for the doctrine to apply there must be
a third party DEALING w/ it, because it applies
only with the 3rd party dealing w/ it and the
corporation by virtue of their agreement.
- The doctrine is based on equitable considerations
[Chiang Kai Siek v. CA] - And as in the case of the de facto doctrine,
it is resorted to in fairness, to all parties concerned. So that when a 3rd
person has entered into a contract w/ an association, it has represented
itself as a corporation and it will be estopped from denying the
corporate existence and capacity on a suit brought against it by such
3rd person.
- it cannot allege lack of personality to be sued to evade
responsibility on a contract it has entered into and by which
it has received the benefits and advantages.
[Asia Banking v. Standard Products] - a party who has dealt w/ an
incorporated aoc may likewise be precluded from dei=nying the corpo
existence on a suit brought by the alleged corpo on the contract.
- He would still be precluded EVEN IF HE WAS
IGNORANT of the defects of the incorporation. Kasi nga a
person should not be allowed to escape liability on a contract
from w/c he BENEFITED, on the irrelevant ground of
defective incorporation.
- Though in this case, the situation is not one w/c gives rise to
a true estoppel, since the 3rd party has made NO
REPRESENTATION OF DUE INCORPORATION, the
term estoppel has been loosely used to PRECLUDE HIM on
the defense of defective corporation
- More accurately, the 3rd person MUST BE
DEEMED TO HAVE ADMITTED THE
EXISTENCE OF THE CORPO by the mere fact
that he dealt w/ it as a corporate body.
[Salvatierra v. Garlitos] and [Albert v. University Publishing] -
held that when the business associates fraudulently misrepresented the
existence of a corporation, and a 3rd party contracts w/ it without
knowledge of the serious defect of its incorporation, such 3rd party
MAY bring a suit against the INDIVIDUAL ASSOCIATES
PERSONALLY.
- The latter [incorporation] cannot claim that the plaintiff 3rd
party is estopped from asserting personal liability because he
had recognized its corporate existence.
- THEY CANNOT PROFIT BY THEIR OWN
MISREPRESENTATION.
Individual liability of stockholders or associates when neither the
de facto or estoppel doctrine may be applied in their favor may
either be as:
1. Partners, or
2. Principals
Q: But, as to the loss, who should bear it? Should it be the all
associates or only the active ones?
A: Only the active ones.
- BASIS - SEC. 20. Corporation by Estoppel. – All persons
who assume to act as a corporation knowing it to be without
authority to do so shall be liable as general partners for all
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 28
debts, liabilities and damages incurred or arising as a result
thereof:
- RELATE TO RULES ON ATAP TO BE IN ACCORD
w/ RULES ON AGENCY article 1897 - The agent is
personally liable if he exceeds the limits of his authority
W/O giving the other party sufficient notice of his power.
Edgar Fletcher (internationally recognized auto daw ng corpo-
When a corpo by estoppel is statutorily retained alongside another
statute imposing liability an individual assuming to have as a
corporation. [katumbas ng sec 20 ng corpo code natin eto]
Recovery from an individual shall be permitted only when the
individual w/ actual or constructive notice that no corporation exists.
The passive associates therefore should be limited in their liabilities,
only to their agreed contributions.
Three (3) possible remedies available to a party contracting with
an ostensible corporation:
1. He may file a suit against the ostensible corporation who can
revolver from the corporate properties [Chiang Kai Siek v.
CA]
2. He may file the case directly against the associates
personally who held out the association as a
corporation;[Albert v. University Publishing] and;
3. Against both the ostensible corporation and persons forming
it, jointly and severally (if you cannot claim from one you
can claim from the other and or vice versa)
ORGANIZATION AND COMMENCEMENT OF BUSINESS
SEC. 21. Effects of Non-Use of Corporate Charter and Continuous
Inoperation. – If a corporation does not formally organize and
commence its 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 the five (5)-year period.
However, if a corporation has commenced its business but
subsequently becomes inoperative for a period of at least five (5)
consecutive years, the Commission may, after due notice and hearing,
place the corporation under delinquent status.
A delinquent corporation shall have a period of two (2) years to resume
operations and comply with all requirements that the Commission
shall prescribe.
Upon compliance by the corporation, the Commission shall issue an
order lifting the delinquent status.
Failure to comply with the requirements and resume operations within
the period given by the Commission shall cause the revocation of the
corporation’s certificate of incorporation.
*process of structuring the corporation to enable it to effectively pursue
their purpose.
[Pelaez v. Balmaseda ] - organization and commencement of business
is the:
1. Election of the other officers like the president, secretary and
treasurer,
2. Providing for subscription and patent of the capital stock
3. Adoption of the corporate by laws
4. and such other steps as to allow the legal entity with the
capacity to transact the business or purpose for which it is
formed or created.

NOTE: Only substantial and NOT strict compliance is required.
The corporation is deemed to have formally organized if(1) it had
a governing board which directed its affairs, (2) as well as a treasurer
and a term, (3) and that through these instrumentalities, it actually
functioned and engaged in the business for which it is organized.
It cannot be held to have forfeited its charter because it has
not been shown that it also had a president and a secretary.
Commencement of business transaction - means that the corporation
has actually functioned and engaged in the business for which it was
organized.
This may take the form of entering into contracts which
tends to pursue its business undertaking or other related act therewith.
Example of commencing of corporate business: Realty and
Development Corporation - it enters into a service contract with a
geodetic engineer to subdivide a raw land belonging to so that they
may be able to sell them to the general public.
The Commission shall give reasonable notice to, and coordinate with
the appropriate regulatory agency prior to the suspension or
revocation of the certificate of incorporation of companies under their
special regulatory jurisdiction.
This provision shall not apply if the failure to organize, commence the
transaction of its businesses or the construction of its works, or to
continuously operate is due to causes beyond the control of the
corporation as may be determined by the Securities and Exchange
Commission.
CORPORATE CHARTER AND ITS AMENDMENTS
CORPORATE CHARTER - signifies an instrument or authority
from the sovereign power, bestowing rights or power, and is often used
convertibly with the term “act of incorporation”, where the corporation
was formed under a special law or merely following the general
requirements and provisions of the corpo code is regarded as a “three-
fold contract’.
THREE-FOLD CONTRACT:
1. Between and among the stockholders, members, directors and
officers insofar as their relationship with one another is concerned;
2. Between any, some, or all of the stockholders, members, directors
or officers and the corporation insofar as it concerns their respective
rights and obligations;
3. Between the corporation and the state, as the corporations right to
exist as such is concerned to be and act as a corporation
The corpo charter is BROADER than the articles of incorporation
- Because the charter consists, among others, of the AOI itself.
- also includes the relevant laws under w/c it is created (the
corpo code), the corpo bylaws, and all the pertinent
provisions of any statute governing them, including the rules
and regulations of the govt agencies concerned which are
empowered to promulgate rules for the implementation of
the law.
- Examples:
1. banking = banking laws
2. Insurance - insurance laws including
Corpo Charter v. Franchise:
1. Franchise – the right or privilege itself to be and act as a
corporation or to do a certain act.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 29
2. Charter - applies to the instrument by which the State vests
such right or privilege
Franchise may either be:
1. Primary – nothing more than the right or privilege of being
a corporation which the State vests upon the applicant for
that right for that faculty, it is merely the right to be and act
as a corporation; or
2. Secondary – the powers and privileges vested in, and to be
exercised by the corporate body as such. The grant of a right
or privilege to do certain acts.
3. Special or otherwise - e.g. provincial franchise, municipal
franchise.
Example: Telecommunications companies like SMART or
GLOBE require a congressional franchise before they can engage in
that particular activity.
Example: ABC company wants to incorporate a corporation that will
engage in placement of workers abroad. It files the AOI with the SEC
pursuant to Sec 16 of the code.
The SEC endorses it to the POEA for its favorable comment
and recommendation. POEA endorses it back to the SEC, stating that
it does not interpose any objections to the registration of ABC
Company Incorporated as a corporation with the collatilla to the effect
that it shall however secure its secondary franchise from this office
before it will actually engage in the recruitment of workers for
placement abroad.
So the SEC issues the Certificate of Incorporation meaning
ABC Company Inc is NOW possessed with the primary franchise to
be and act as a corporation.
Q: Can ABC COMPANY Inc now engage in the recruitment of
workers for placement abroad?
A: NO, because there are certain business activities requiring a
secondary franchise. Without the secondary franchise of the respective
agencies concerned it cannot engage in that particular activity YET.
- Usually, kapag nag issue si SEC ng Certificate of
Incorporation, may note yan below the certificate to the
effect that this will not authorize the corpo involved to
engage in any business activity which requires a second
franchise.
SEC. 18. Registration, Incorporation and Commencement of
Corporate Existence. – A person or group of persons desiring to
incorporate shall submit the intended corporate name to the
Commission for verification. If the Commission finds that the name is
distinguishable from a name already reserved or registered for the use
of another corporation, not protected by law and is not contrary to
law, rules and regulations, the name shall be reserved in favor of the
incorporators. The incorporators shall then submit their articles of
incorporation and bylaws to the Commission.
If the Commission finds that the submitted documents and information
are fully compliant with the requirements of this Code, other relevant
laws, rules and regulations, the Commission shall issue the certificate
of incorporation.
A private corporation organized under this Code commences its
corporate existence and juridical personality from the date the
Commission issues the certificate of incorporation under its official
seal and thereupon the incorporators, stockholders/members and their
successors shall constitute a body corporate under the name stated in
the articles of incorporation for the period of time mentioned therein,
unless said period is extended or the corporation is sooner dissolved
in accordance with law.

CORPORATE ENTITY THEORY
“Ang pag aari ni Juan, kay Juan yan, hindi kay Jos. Ang utang ni Jose,
hindi mo pwedeng pabayaran kay Juan”
In the last paragraph of Sec 18 - Corporate existence commences
from the date the commission issues the certificate of incorporation.
Only then will it acquire a juridical personality to sue and be sued, or
enter into contracts, hold or convey property, or perform any legal act
in its own name.
NOTE: As a legal entity, corporations are possessed with a
personality separate and distinct from the individual stockholders or
members.
- It is not affected by the personal rights, obligations or
transactions of the latter.
- Since corporate property is owned by the corporation as a
juridical person, the stockholders or members have no claim
on it as owners.
- Kahit na may expectancy or inchoate right ang owner sa
corpo properties, should any of it remain upon the
dissolution of the corpo and after all its debts and liabilities
had been paid.
- The stockholder therefore cannot bring an action
to recover the property of the corporation because
the right of action belongs to the corporation itself
to be exercised by the Board of Directors.
- Although the stockholders interest in the
corporation (yung shares nila daw) may be
attached by his personal creditor, the latter
CANNOT USE CORPO PROPERTIES TO
SATISFY THE CLAIM AGAINST
STOCKHOLDERS.
- Neither can the stockholders properties be levied
for obligation contracted by the corporation even
if the stockholders, president and majority of
stockholders.
Conversely, a corporation has no interest in the individual properties
of its stockholders/members UNLESS the same has been transferred
to the corporation so that the corporation does not have the personality
to bring an action for and in behalf of its stockholders or members for
the purpose of recovering properties belonging to them in their
personal or individual capacity.
[Sulu ng Bayan v. Gregorio Araneta]
Q: WON the Sulu ng Bayan, a non-stock corporation, may
institute an action for the purpose of recovering properties
belonging to its members?
A: NO, because properties of the corporation belong to it, and not the
stockholders or members. Although they may have an inchoate right.
Conversely, the properties of the stockholders or members
belong to them, and the corporation has not interest over them.
UNLESS it has been transferred to it.
DOCTRINE: It is a doctrine well-established and obtains both at law
and in equity that a corporation is a distinct legal entity to be
considered as separate and apart from the individual stockholders or
members who compose it, and is not affected by the personal rights,
obligations and transactions of its stockholders or members.
[Caram v. CA] –
DOCTRINE: As a bona fide corporation, the Filipinas Orient Airways
should alone be liable for its corporate acts as duly authorized by its
officers and directors.
The most that can be said is that they benefited from such
services, but that surely is no justification to hold them personally
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 30
liable therefor. Otherwise, all the other stockholders of the corporation,
including those who came in later, and regardless of the amount of their
share holdings, would be equally and personally liable also with the
petitioners for the claims of the private respondent.
- Stockholders are not solidarily liable for the obligations
incurred by the corporation.
- Since ang ka kontrata ni Caram ay yung corporation
(Filipinas Orient Airways)
[Rustan Pulp And Paper Mills vs CA]
DOCTRINE: the President and Manager of a corporation who entered
into and signed a contract in his official capacity, cannot be made liable
thereunder in his individual capacity in the absence of stipulation to
that effect due to the personality of the corporation being separate and
distinct from the person composing it
- The president and general managers CANNOT be held liable
for the contract that they signed for and on behalf of
corporation because of the corporate entity theory.
- Corporations are juridical beings existing only in
contemplation of the law and therefore they act through their
authorized officers or representatives.
- The officers and representatives who represent the
corporation and sign a contract for and on behalf of the
corporation within their powers acts in good faith, the acts
done by them are not theirs,but the corporation they
represent.
- Liability rests on the corporation itself and not on the
responsible corporate officers, authorized to act for and on
its behalf.
[Cruz v. Dalisay]
DOCTRINE: Considering the ministerial nature of his duty in
enforcing writs of execution, what is incumbent upon him is to ensure
that only that portion of a decision ordained or decreed in the
dispositive part should be the subject of execution. No more, no less.
That the title of the case specifically names the complainant as one of
the respondents is of no moment as execution must conform to that
directed in the dispositive portion and not in the title of the case.
- Court held in this case that a final judgment against the
corporation cannot be enforced against the stockholders
even if you happen to be president and the majority
shareholder
- Ang utang ni Juan ay hindi mo pwedeng pabayaran kay
Pedro.
[Palay Inc v. Clave] -
DOCTRINE: As a general rule, a corporation may not be made to
answer for acts or liabilities of its stockholders or those of the legal
entities to which it may be connected and vice versa.
However, the veil of corporate fiction may be pierced when
it is used as a shield to further an end subversive of justice; or for
purposes that could not have been intended by the law that created it;
or to defeat public convenience, justify wrong, protect fraud, or defend
crime.; or to perpetuate fraud or confuse legitimate issues; or to
circumvent the law or perpetuate deception; or as an alter ego, adjunct
or business conduit for the sole benefit of the stockholders.
- Onstott acted in his official capacity
- When they acted in their official capacity for and on behalf
of the corporation, and in good faith or sans fraud, their
actuation is not for themselves but for and on behalf of the
corporation, therefore they cannot be made personally or
solidarily liable with that of the corporation.
[Soriano v. CA]
DOCTRINE: It is the general rule that the protective mantle of a
corporation's separate and distinct personality could only be pierced
and liability attached directly to its officers and/or members-

stockholders, when the same is used for fraudulent, unfair or illegal
purposes.
- the president, general manager treasurer acted in their
official capacity.
PIERCING OF THE CORPORATE VEIL
Application of Corporate Entity Theory is confined to legitimate lists
and subject to equitable limitations to prevent its being used or
exercised for fraudulent, unfair or illegal purposes. If evidence is at
hand to show any of such purpose the courts will disregard the
corporate fiction or pierce the veil of corporate entities.
There are some probative factors of identity that will justify the
application of the doctrine of piercing the veil of corporate veil, to wit:
1. Stock ownership by one or common ownership of both
corporations;
2. Identity of directors and officers;
3. The manner of keeping corporate books and records;
4. Methods of conducting the business.
Test in determining the applicability of the doctrine of piercing the veil
of corporation fiction:
1. Control, not mere majority or complete stock control, but
complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so
that the corporate entity as to this transaction had at the time
no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and unjust
act in contravention of plaintiff's legal rights; and
3. The aforesaid control and breach of duty must proximately
cause the injury or unjust loss complained of.
(Instrumentality Rule, Concept Builders, Inc. vs. NLRC)
While no hard and fast rule exists as to when the corporate fiction
may pierced or disregarded
- BUT, GR: it is a fundamental principle in Corporation law
that a corporation is an entity separate and distinct from its
stockholders or members and from other corporations to
which it may be connected.
- XPN: But when the notion of legal entity is used to:
1. defeat public convenience,
2. Justify wrong,
3. Protect fraud,
4. Defend crime;
The law will regard the corporation as a mere association of
persons, or in the case of two corporations, merge them into one, the
one being merely regarded as part or instrumentality, alter ego,
business conduit or adjunct of the other.
The same is true where a corporation is a mere dummy and
serves no business purpose and is intended only as a blind, or an alter-
ego or business conduit for the sole benefit of the stockholders.
The main effect of disregarding the corpo fiction , is that the
stockholders will be held personally liable for the acts and contracts of
the corpo.
[International Management Academy v. Litton] 1st time reverse
piercing was used.
DOCTRINE: if it is shown "by clear and convincing proof that the
separate and distinct personality of the corporation was purposefully
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 31
employed to evade a legitimate and binding commitment and
perpetuate a fraud or like wrongdoings."
Reverse Piercing applies in this case.
Reverse Piercing of the Corporate Veil v. Traditional Piercing?
1. Reverse Piercing of the Corporate Veil - The corporate
entity is disregarded in order for the corporation itself to
become liable for the debts and liabilities of a corporate
insider or a stockholder.
- the plaintiff seeks to reach the assets of the
corporation to satisfy his claim against the
corporate insider or the stockholder
- flows in the opposite direction vis-a-vis the
traditional corporate piercing, and makes the
corporation liable for the debts of the stockholder.
2. Traditional Piercing - The corporate entity of a corporation
is disregarded in order for a plaintiff or claimant to reach the
assets of a corporate insider or stockholder.
Q: How about the argument that the piercing of the corporate veil
should not be applied because it is a non-stock corporation?
A: This does not hold water, because the code does not distinguish as
to where it should apply. SO it was held that if you are a member of a
stock or non-stock corporation and there are pieces of evidence that
would show that was fraud or defeat public convenience, the doctrine
will apply to both stock and non-stock corporations.
The last paragraph of 1st section of TITLE XI provides that -
provisions governing stock corporations, when pertinent, shall be
applicable to nonstock corporations, except as may be covered by
specific provisions of Title XI.
- there is nothing in title eleven regarding the piercing of the
corporate veil and therefore, it also applies to a non-stock
corporation.
It was held in this case that - piercing the veil of corporate fiction
may apply to corporations, as well as natural person involved in the
corporation.
- Corporate mask may be lifted and the corporate veil may be
pierced when the corporation is just but the alter ego of a
person or another corporation.
OCT- 06 (C )
REVERSE PIERCING THE VEIL OF CORPORATE FICTION
In International Academy case, the SC handed down the decision for
the first time in Philippine jurisprudence that there was such a thing as
Reverse Piercing of the Veil. Although earlier, it was applied under
Philippine laws, particularly in Marvel Bldg. v. David (1954) and in
Palacio v. Fely Transportation (1962).
In IAME v. Litton, it was stressed by the SC that piercing the veil of
corporate fiction apply to corporations as well as to natural persons
involved with corporations—either of them. The corporate mask may
be lifted and the corporate veil may be pierced when the corporation is
just but the alter ego, business conduit, adjunct, or just an extension
of a person or another corporation.
Our SC borrowed from the American parlance what is called Reverse
piercing of the veil, or piercing of the corporate veil in reverse.
TRADITIONAL PIERCING VS. REVERSE PIERCING
In the traditional piercing of the veil action, the court disregards the
existence of the corporation, so that the claimant/petitioner can reach
the assets of the corporate insider or the stockholder.

In reverse piercing action, however, the plaintiff/claimant seeks to
reach the assets of a corporation to satisfy the claims against the
corporate insider/stockholder. Reverse piercing flows in the opposite
direction and makes the corporation liable for the debts and liabilities
of the stockholders.
PALACIO v. FELY TRANSPORT
The petitioner here is seeking to claim against the corporation for the
wrongdoing of Calingasan, who is a stockholder of the corporation.
Issue: Whether or not Fely Transport may be held liable for the
subsidiary liability of Calingasan?
Fely Transport and Calingasan may be regarded as one and the same
person. The latter’s main purpose in forming the corporation was
precisely to evade the subsidiary liability resulting from the conviction
of his driver. The incorporators are himself and his family. The
corporation has no other properties other than the very same xxx itself
which was used as the paid-up capital of the corporation.
Again, the reverse piercing of the corporate veil.
MARVEL BLDG. v. DAVID
An action was brought by the corporation to enjoin CIR from selling
in a public auction various
Whether or not the properties of a corporation may be used to pay the
taxes levied or assessed against a stockholder (Maria Castro)
Yes. The circumstances of this particular case point to the fact that the
corporation is a mera extension, alter ego, adjunct, or business conduit
of Maria Castro:
(1) Endorsement in blank of the certificates of stock issued in the name
of the incorporators and the possession thereof by Maria Castro;
(2) The other incorporators did not have incomes in such amount,
during the time of the organization of the corporation or
immediately thereto, as to enable them to pay in full their supposed
subscriptions; and
(3) It should have been the supposed subscribers who should have
come to court to assert that they actually paid for their subscriptions
and are not mere dummies.
Maria Castro also had motive to hide her incomes. She advanced big
sums of money from the corporation without previous arrangements
and accounting. The book of accounts were also kept by her, as if it
belongs to her.
YUTIVO AND SONS v. CTA
The tax law then only requires sales tax on the original sale. And yutivo
sold them to SM and Yutivo paid the sales tax. Now, the CIR is saying
that it should not be the basis, but rather, the sale by Southern Motors.
Issue: Whether or not the sale made by Southern Motors should be
made the basis for the sales tax instead of the original sale made by
Yutivo in favor of Southern Motors.
Held: It should be based on the second sale made by Southern Motors
(SM), and not that made by Yutivo to SM. This is because SM was
merely an instrumentality of Yutivo.
For piercing the corporate veil, there must be facts/circumstances
attendant thereto in order that the court may be justified in doing so. In
this case, these are:
1. The subscribed capital by SM were advanced by Yutivo;
2. SM is under the management and control of Yutivo;
3. The controlling members of the board and officers of both
corporations are the same;
4. Both corporations have one common control;
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 32
5. SM funds were remitted to Yutivo, subject to withdrawal only
by Yutivo;
• Pera ni Pedro dinedeposito n’ya kay Juan, si Juan lang ang
pwedeng gumamit. Aba’y bakit?
6. SM and its branches treated Yutivo as its head or home office;
and
7. The arrastre charges for the unloading of cars and trucks
inclusive of overtime charges were paid for by SM, when the
importer is Yutivo.
Q: Is control sufficient to pierce the veil of corporate fiction?
A: Ownership of shares of stocks, whether substantially or completely,
alone, does not justify the piercing of the corporate veil. In PNB v.
Ritratto Group, the court did not disregard the notion of the corporate
entity despite PNB owning PNB-IFL.
CIR v. NORTON AND HARRISON & CO. (NHC)
Facts: NHC entered into an agreement with Jackbilt where the former
was made the sole and exclusive distributor of concrete blocks
manufactured by Jackbilt and accordingly every order of a customer of
NHC was transmitted to Jackbilt which delivered the merchandise
directly to the customer. Payment of the goods, however, is made to
NHC, which in turn pays Jackbilt the amount charged the customer
less a certain amount, as its compensation or profit.
During the existence of the agreement, Norton acquired by
purchase all the outstanding stocks of Jackbilt. Due to this, the
Commissioner of Internal Revenue, assess respondent NHC for
deficiency taxes making the basis of sales tax the sales of NHC to the
public, which is the higher price compare to the sale of Jackbilt to
NHC. The CTA decided in favor of Norton.
The SC in this case adopted the general rule, that mere ownership of
substantially or even of all of the shares do not necessarily mean the
identity of corporate interests.
But there are circumstances herein that says that the identity should be
disregarded:
8. NHC owns 99.9% of the outstanding stocks of Jackbilt;
9. NHC and Jackbilt has the same set of directors and officers;
10. NHC finances Jackbilt’s operations
11. NHC treats the employees of Jackbilt as its own
12. Compensation given to the BOD and officers of Jackbilt
indicated that it is a mere department of NHC — it was NHC
paying their compensation;
13. The offices are located in the same compound;
14. Payments were effected by Norton of accounts for Jackbilt
and vice versa;
15. Payments were also made to Norton of accounts due or
payable to Jackbilt and vice versa.
The circumstances presented by the facts of the case, yields to the
conclusion that Jackbilt is merely an adjunct, business conduit or alter-
ego of Norton and that the fiction of corporate entities, separate and
distinct from each other should be disregarded.
LA CAMPANA COFFEE FACTORY, INC. v. KAISAHAN NG
MGA MANGGAGAWA SA LA CAMPANA (KKM)
Tan Tong and his family are the sole incorporators and stockholders of
La Campana Guagua Packing who established as a matter of
convenience the La Campana Coffee Factory Inc, with the same
offices, same compound, single management, one pay roll, and the
employees are made interchangeable.
Issue: Whether or not the employees of the two corporations may be
considered as one single bargaining unit in order that the jurisdictional
number of the employees may be reached.

SC: YES. Two corporations, same office, same compound, one
management, one payroll. The corporate entity theory was introduced
as a matter of convenience and to subserve the ends of justice, and not
to defeat it.
EMILIO CANO ENTERPRISES, INC. VS. COURT OF
INDUSTRIAL RELATIONS (CIR)
This may just well be the reverse of Soriano v. CA. In that case, the
individual petitioners indicated the manner in which they signed the
deal. They signed the contract in their official capacity.
In this case, Emilio and Rodolfo as their official capacity as President
and manager, respectively. Having been sued as such, the case must be
deemed as having the representation of Emilio Cano Enterprises. The
corporate entity theory cannot be used as a shield to further an end
subversive of justice.
TELEPHONE ENGINEERING SERVICE CO. v. WCC
Santiago was the Vice President and general manager of Tesco. It has
a sister company, UMACOR, also under the management of Santiago.
Both corporations hold office in the same location.
Gatus was employed by UMACOR. He was detailed with Tesco on
May 1965. In Aug 1965, he reported back to UMACOR. In 1967, he
contracted illness. He returned to work, however, he died later on. The
widow then filed a claim for compensation with the WCC, claiming
that the deceased was employed with Tesco. The compensation was
awarded but when levied and attached against Tesco, it claimed that
there was no ER-EE relationship since he was employed in UMACOR.
SC: Although the corporate personality is the general rule, in
appropriate cases, the veil of corporate fiction may be pierced, as when
the same is used as a shield to confuse legitimate issues. In this case,
the changing of the guards from one corporation to another in order to
evade financial obligations to its employees.
CLAPAROLS v. CIR
An unfair labor practice was filed against Claparols Steel and Nail
Plant. In 1963, the CIR rendered the decision in favor of the
complainant. It appears however that Claparols Steel and Nail Plant
ceased operations in 1957, and was succeeded by Claparols Steel Corp.
Issue: May judgment be enforced against Claparols Steel Corp.?
SC: Yes. The latter corporation was a mere continuation and successor
of Claparols Steel Corp. Its organization and its emergence was
skilfully timed to avoid financial liability that already attached to its
predecessor, Clarapols Steel and Nail Plant. (1) Both predecessor and
successor were owned and controlled by the petitioner Eduardo
Clarapols; and (2) there was no break in the succession and continuity
in the same business. This avoiding-the-liability scheme is very patent,
considering that (3) 90% of the subscribed shares of stock of the second
corporation was owned by Clarapols himself, and (4) all assets of the
dissolved Clarapols Steel and Nail Plant were turned over to the
emerging Clarapols Steel Corporation.
It is very obvious that the second corporation seeks the protective
shield of a corporate fiction whose veil in the present case could, and
should be pierced as it was deliberately and maliciously designed to
evade its financial obligations to its employees.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 33
NATIONAL FEDERATION OF LABOR UNION (NAFLU) VS.
OPLE
Lawman Industrial Union filed a complaint against Lawman industrial
in Dec. 1982 for the corporation’s shutting down its operations in
August 1982 until Jan. 1983, despite promises to resume operations as
early as September ’82. It appears however that at night, Lawman
industrial’s machineries were moved out and installed at another
corporation, Libra Garments, which continued manufacturing the
goods of Lawman industrial. When this was discovered, Libra was
changed to Dolphin Garments.
Tourt here ruled that the protective shield of the corporate fiction
cannot be used to attain illegal purposes; in this case, to deliberately
and manifestly evade financial obligations to the employees.
AC RANSOM LABOR UNION-CCLU VS. NLRC
AC Ransom was sued for ULP. While the case was pending, Rosario
industrial corp. was organized by the same persons, with the same
offices, same line of business, occupying the same compound, using
the same machineries, owned and managed by the same family.
SC again ruled that the corporate fiction cannot be used as an
instrument to commit injustice or evade financial obligations to the
employees.
CONCEPT BUILDERS v. NLRC
The three elements or tests must go hand in hand. Absent any one of
them prevents piercing of the corporate veil:
1. Control, not mere majority or complete stock control, but complete
domination, not only in finances but of policy and business practice
in respect to the transaction attacked so that the corporate entity as
to this transaction had at the time no separate mind, will or existence
of its own;
2. Such control must have been used by the defendant to commit fraud
or wrong, to perpetuate the violation of a statutory or other positive
legal duty or dishonest and unjust act in contravention of plaintiff’s
legal rights; and
3. The aforesaid control and breach of duty must proximately cause the
injury or unjust los complained of.
The absence of one of the elements prevents piercing the corporate
veil. In applying the “instrumentality” or “alter-ego” doctrine, the
courts are concerned with reality and not form, with how the
corporation operated and the individual defendant’s relationship to that
operation. Thus, the question of whether a corporation is mere
alter-ego, a mere sheet of paper corporation, a sham or a subterfuge is
purely one of fact.
TAN BOON BEE & CO., INC. v. JARENCIO
Tan Boon Bee sold on credit paper products to Graphics, and the latter
failed to pay, hence, an action for the recovery of the amount was filed.
The lower court ordered Graphics to pay the balance and interest plus
cost. The sheriff attached and sold the printing machineries found n
Graphics’ premises. However, PADCO took exemption, claiming
ownership of the printing machines. The court ruled that PADCO’s
veil should be pierced.
First and foremost, PADCO was never engaged in the printing
business. When we take up the power of the corporation to hold, own,
and acquire properties under Sec. 35, there is a limitation or restriction.
It says that it must be as the lawful transaction of its business may
reasonably require. PADCO, as the name implies, is the Philippine
American Drug Company is engaged in the distribution of drugs. What
the hell does it need the printing machines for?

The BOD of Graphic and PADCO are the same. PADCO holds 50%
of Graphic. And the machineries have always been located with
Graphics, long before PADCO allegedly acquired title thereto.
CEASE v. CA
Tiaong Milling and Plantation Company was incorporated in 1908 by
Forrest Cease and 4 others. Eventually, Cease bought out the 4 other
incorporators, together with his children. The term of the corporation
expires in 1950. In aug 1959, Ernesto, Teresita, Cecilia (3 of the 5
children) and Bonifacia Terante re-incorporated under FL Cease
Plantation Company, to the objection of Benjamin and Florence who
wanted actual division of Forrest Cease’s shares. The latter two filed a
civil case asking to declare the corporation identical to FL Cease and
that its properties be divided among FL Cease’s children as his
intestate heirs which was granted by the trial court.
Whether or not the properties of Tiaong Milling Plantation Company
are also the properties of FL Cease Plantation Co.
YES, because the corporation is a mere business conduit and alter ego
of the deceased. The properties of Tiaong Milling are actually the
properties of Forrest Cease because the BOD and stockholders belong
to one family, controlled by Forrest Cease, who held the majority of
the stocks until 1947, because in 1947, he only held 9 shares. When his
children reached the age of majority, he continued distributing shares
to them. The accounts of the corporation and therefore its operation, as
well as that of the family appears to be indistinguishable and
apparently joined together. As admitted by the defendants, the
corporation “never” had any account with any banking institution or if
any account was carried in a bank on its behalf, it was in the name of
FL Cease. In brief, the operation of the Corporation is merged with
those of the majority stockholders, the latter using the former as his
instrumentality and for the exclusive benefit of all his family. From the
foregoing indication, therefore, there is truth in plaintiffs’ allegation
that the corporation is only a business conduit of his father and an
extension of his personality, they are once and the same thing. Thus,
the assets of the corporation are also the estate of FL Cease, the father
of the parties herein who are al legitimate children of full blood”
Were we to sustain petitioners, the legal fiction of separate corporate
personality shall have been used to delay and ultimately deprive and
defraud the respondents of their successional right to the estate of their
deceased father.
OCT- 08 (T)
WHEN PIERCING OF CORPORATE VEIL IS NOT
JUSTIFIED
GENERAL RULE:
1. Absent any showing of these circumstances will not be justified
in disregarding the corporat entity. Piercing the veil of
corporation is resorted to only in the cases where:
a. The corporation is used or is being used to defeat
public convenience
b. Justify wrong
c. Protect fraud
d. Defend crime
e. Confuse legitimate issues
f. Circumvent the law
g. Perpetuate deception
h. In the case of two corportions, one of them is a
mere alter-ego, adjunct or business conduit or
extension of the other
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 34
NOTE: The cases we earlier discuss would show that mere ownership
of substantially or all of the stocks of a corporation does not by itself
sufficient to pierce the notion of the corporate entity. (Cruz v Dalisay)
2. For the separate personality of the corporation to be disregarded,
the wrong doing must be clearly and convincingly established.
Fraud must be proven by clear and convincing evidence
amounting to more than preponderance of evidence. It can never
be justified by speculation and it can never be presumed.
REMO, JR. v. INTERMEDIATE APPELLATE COURT
The court ruled that there is no basis to pierce the veil of corporate
fiction in so far as Remo Jr. is concern because he never did any
wrongdoing or fraud to the private respond. While he was a participant
in the adoption of the resolution for the purchase of 13 trucks to be paid
out of a loan in a lending institution, it does not appear that the board
resolution was intended to defraud anyone. It was the president,
Coprada, who negotiated and sign the promissory note for and behalf
of the corporation. So that if there was any fraud or misrepresentation,
foisted on the private respondent, it should be Coprada who should
account for the same. As we were saying, fraud cannot be presumed
as it must be proven by clear and convincing evidence. There was no
wrongdoing on the part of Remo, and piercing the corporate fiction as
to make him personally liable cannot hold water.
DEL ROSARIO V. NLRC
The court stressed in this case that, for the corporate fiction to be
disregarded, the wrongdoing must be clearly and convincingly
established. It cannot be presumed. The conclusion that PHILSA
allowed its secondary license or franchise to be enact as a recruitment
agency to expand, so as to avoid the claims that’s not supported by the
facts. That’s why I always say, you need facts. The complaint was filed
in June 1985. The last renewal of the license expired, October. The
POEA dismissed the complaint in February 1986 and PHILSA was
delisted only in August. The judgement from NLRC was rendered only
in 1987. In short, PHILSA allowed its license to expire in 1985. Even
on the time it was delisted only in 1986, there was yet no judgment.
An intent to avoid payment of claims therefore cannot be be implied
from the expiration of PHILSA’s license and its delisting.
INDOPHIL TEXTILE MILLS V. GALICA
Q: So, the workers of the two corporations located at the same
compound, and owned and managed by the same family cannot be
considered as one single bargaining unit?
A: Yes.
Q: How do you compare this case to La Campana v. Kaisahan ng mga
Manggagawa, where they have the same issues and in that particular
case of La Campana, the SC ruled that the employees of 2 corporations
located in the compound and managed by the same family shall be
treated as one single bargaining unit?
A: In La Campana, two corporations located in the same compound,
owned and managed by the same family with one office, one control,
and one single payroll for employees that were interchangeable. This
circumstances are not attendant to Indophil. When Indophil was
organized, they have their own criteria to hire employees, as compared
to another corporation. That is the reason why the court held that it
cannot be considered as one single bargaining unit.
Q: What about in the case of Clarapols v. CIR?
A: In Clarapols, both corporations were substantially owned and
controlled by the same person and there was no break or cessation in
operations. Moreover, all the assets of the old were transferred to the
new corporation?
Q: What about in AC Ransom Labor Union-CCLU v. NLRC?

A: The distinguishing mark of fraud were clearly apparent in AC
Ransom, when such corporation ceased operation after the decision of
the CIR and new one replacing it which was owned by the same
family, engaging in the same business and operating in the same
compound. In the present case, not only has there been failure to
establish fraud, but it has also not been shown that petitioner is the
corporation officer responsible for PR’s predicament. It must be
emphasized that the claims were actually directed against the
employer, PHILSA became liable only because of its undertaking to
be jointly and severally bound with the foreign employer as required
by POEA rules.
PNB v. RITTRATTO GROUP
Q: So it appears that PNB holds or owns all the shares of stocks of
PNB-IFL, its subsidiary. Am I correct?
A: Yes.
Q: We were saying that PNB is a parent/holding company of PNB-IFL.
And, it appears that PNB-IFL is a wholly owned subsidiary of PNB,
meaning, all the shares are owned and held by the latter. May it be
said that PNB has absolute control over the availers (? not sure of the word,
chubby si sir) of PNB-IFL because it owns all the shares and therefore all
board members of PNB-IFL are the nominees of the PNB and PNB can
dictate what business practices, policies and finances shall be
applicable to the wholly-owned subsidiary?
A: Yes, PNB has absolute control over PNB-IFL because all board
members of PNB-IFL are the nominees of the PNB. But, there are 2
other elements or test in the application of the doctrine of piercing the
veil of corporate fiction, vis-a-vis, instrumentality. We have seen this
in the case of Concept Builders v. NLRC, where control is not there.
In this case, there is (1) control because PNB can elect all the members
of the board in PNB-IFL. The two other tests, as we have seen in
Concept Builders v. NLRC, are (2) control must have been used to
commit fraud, to perpetuate an unjust act in contravention of the
plaintiff’s legal right. PNB did not use any wrong doing or fraud. By
that alone, piercing the veil of corporate fiction is not available. The
last one, which is also not present is that, (3) the aforesaid control or
breach of duty must proximately cause injury or the unjust cause
complained of.
As we were saying in the case of Concept Builders v. NLRC, all three
test or elements must go hand in hand. Absence of one single element,
piercing the veil is not justified.
Aside from the fact that PNB-IFL is a wholly-owned subsidiary of
PNB, there is no indicative factors that the former is but an
instrumentality of the latter. Neither is the demonstration of the evil
sought to be prevented by the doctrine of piercing the veil of corporate
fiction exist. Thusly, piercing the veil of corporate fiction is not
justified in this particular case. This was further explained in the case
of Pacific Rehaus Corp. v. CA.
PACIFIC REHAUS CORP. v. COURT OF APPEALS
In that particular case, Pacific Rehaus Corp (PRC) also has a wholly-
owned subsidiary. The wholly-owned subsidiary incurred a liability
and it was being imposed against the parent company, PRC. PRC has
absolute control of the subsidiary because it wholly owns the shares of
stocks of the latter. But SC tells in the case that controlled corporation
is merely an instrumentality or business conduit of the parent
corporation. Even control over the financial or operational control of
the subsidiary does not by itself calls for piercing the veil of the
corporation. SC held that there must be a perpetuation of fraud behind
the control, or atleast fraudulent or illegal purpose behind the control
to justifiy the piercing of the veil. It held further that even the existence
of interlocking directors, meaning pare-pareho ang directors, corporate
officers and stock holders, is not enough justification to pierce the veil
of the corporate fiction in the absence of fraud or other public policy
consideration.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 35
YU v. NLRC
Q: At the time Tanduay was negotiating for the sale of its assets, who
was it negotiating with?
A: With First Pacific Metro Corporation (FPMC), sir.
Q: Paano pumasok ang Twin Ace eh ang kausap ng Tanduay ay
FPMC?
A: Where the termination notice was sent by Tanduay, it was still
negotiating with FPMC. However,
ISSUE: Whether or not Twin Ace, to whom the assets of Tanduay
finally sold, is liable for the sale of the retrenched of the employees?
RULING: NO. Duran et al. were employees in Tanduay seeking for
reinstatement of backwages but Tanduay sold all its assets. The first
proposed buyer was FPMC but it was finally sold to Twin Ace, and
they were claiming this backwages against Twin Ace. The ruled court
that such cannot be done. It’s a genuine nature of the sale to Twin Ace
as evidenct by the fact that it was only the subsequent interested buyer.
Note that the termination notices were sent to the employees, Tanduay
was still negotiating with FPMC for the sale of its assets. Only when
FPMC gave up its effort did Twin Ace came into the picture. The
respondent here did not present any proof as to the community of
ownership and management to support their theory that the 2
corporations are closely related.
The Doctrine of Piercing the Veil applies only when the corporation is
used defeat public convenience, justify wrong, protect fraud, defend
crime or in the case of two corportions, one of them is a mere alter-
ego, adjunct or business conduit or extension of the other. In fine, the
fiction of the corporate entity be in this case, disregarded. The least
indication that the second corporation, Twin Ace is a mere business
conduit, alter ego of the first. Note here that Twin Ace bought only the
assets of Tanduay and not the shares. If it bought the shares, it will only
become a stock holder. There will be a continuity of business of
Tanduay.
There are two modes of taking over businesses:
1. Buy the shares – The Corporation taking over becomes only a stock
holder. There will be a continuity of business. If that were the case,
Twin Ace will be liable, if you buy the shares, it means it is latched*
(1:19:20), stock and VAT, rights, obligations, liabilities, etc.
2. Buy the assets – It does not include rights and liabilities.
In most cases in corporate take overs, they exercise what is called Due
Diligence. They look into the financials of the corporation to determine
whether it is better to acquire the shares or just the assets. Nakita nila
sa financial statements, marami nga silang collectibles kaso nga
chances of recovery, maliit lang. So bakit nyo pa bibilhin yung shares?
Kung assets, hindi kasama ang liabilities and rights. What is bought
here is the assets, yung rights ng Tanduay, hindi kasama; collectibles,
di kasama; liabilities, hindi kasama.
Furthermore, the high Court ruled that the purchase of Tanduay’s
assets by Twin Ace also carried with it the goodwill and the name of
Tanduay. Hence, the spirit being produced by Tanduay still carries the
name Tanduay Rhum, even though it is no linger produced by Tanduay
Distillery.
The buyer (Twin Ace) did not buy TDI as a corporation, only most of
its assets, equiment and machinery.
Thus, Tanduay Distillers or Twin-Ace did not take over the corporate
personality of TDI although they manufacture the same product at the
same plant with the same equipment and machinery. Obviously, the
trade name ―Tanduay went with the sale because the new firm does
business as Tanduay Distillers and its main product of rum is sold as
Tanduay Rum.

There is no showing, however, that TDI itself was absorbed by Twin
Ace or that it ceased to exist as a separate corporation. In point of fact,
TDI is now herein a party respondent represented by its own counsel.
The fiction of separate and distinct corporate entities cannot, in
the instant case, be disregarded and brushed aside, there being not
the lease indication that the second corporation was a dummy or
serves as a client of the first corporate entity.
Corporate fiction cannot be disregarded in the absence of intent to
defraud in corporate transactions. (Remo, JR vs. IAC)
For the separate juridical personality of a corporation to be disregarder,
the wrongdoing must be clearly and convincingly established.
AMENDENT OF THE ARTICLES OF
INCORPORATION
Express power granted by law to all corporations registered under
the provisions of the code:
SEC. 35. Corporate Powers and Capacity. – Every corporation
incorporated under this Code has the power and capacity:
(d) To amend its articles of incorporation in accordance with the
provisions of this Code;
Requirements of procedures:
SEC. 15. Amendment of Articles of Incorporation. – Unless otherwise
prescribed by this Code or by special law, and for legitimate purposes,
any 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 assent of the stockholders representing at least two-
thirds (2/3) of the outstanding capital stock, without prejudice to the
appraisal right of dissenting stockholders in accordance with the
provisions of this Code. The articles of incorporation of a nonstock
corporation may be amended by the vote or written assent of majority
of the trustees and at least two-thirds (2/3) of the members.
The original and amended articles together shall contain all provisions
required by law to be set out in the articles of incorporation.
Amendments to the articles shall be indicated by underscoring the
change or changes made, and a copy thereof duly certified under oath
by the corporate secretary and a majority of the directors or trustees,
with a statement that the amendments have been duly approved by the
required vote of the stockholders or members, shall be submitted to the
Commission.
The amendments shall take effect upon their approval by the
Commission or from the date of filing with the said Commission if not
acted upon within six (6) months from the date of filing for a cause not
attributable to the corporation.
Discussion of the provision:
In any corporate act or transaction, it must emanate from the Board of
Directors by a majority vote and vote or written assent of
stockholder holding at least 2/3 of the outstanding capital stock.
This will be submitted and filed with the SEC. If there is any
stockholder objected thereto but was outvoted (the 2/3 vote), he may
exercise his appraisal right.
Appraisal right is a right granted to stock holders who object on
corporate act and transaction and compel the corporation that even if
he is outvoted, he be paid the fair value of the stocks. This is not
available in all instances. Section 80 enumerates specific instances
only: (1:25:00)
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 36
Section 80. When the Right of Appraisal May Be
Exercised. - Any stockholder of a corporation shall have the
right to dissent and demand payment of the fair value of the
shares in the following instances:
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;
b. In case of sale, lease, exchange, transfer, mortgage,
pledge or other disposition of all or substantially all of
the corporate property and assets as provided in this
Code;
c. In case of merger or consolidation; and
d. In case of investment of corporate funds for any
purpose other than the primary purpose of the
corporation.
The law says, vote or written assent of 2/3 of the outstanding capital
stock. All shares, as long as there is a valid subscription agreement not
fully or partially paid are considered outstanding capital stock under
Section 173:
Section 173 - Outstanding Capital Stock Defined. The term
"outstanding capital stock", as used in this Code, shall mean the total
shares of stock issued under binding subscription contracts to
subscribers or stockholders, whether fully or partially paid, except
treasury shares.
Example:
Q: So let’s assume that the corporation has 100M Outstanding Capital
Stock equally subscribed by A, B, C and D for 200,000 per piece. The
shares of A, B, C and D are preferred and non-voting. Of the 1M
outstanding capital stock, will you include the shares of A and B for
purposes of approval of the amendments in so far as stockholder’s
approval is concerned?
A: YES. Because nonvoting shares are not absolute barred from
voting. If the matter at hand will fall under any of the enumerated items
in the penultimate paragraph of Section 6, they will still have the right
to vote. Number 1 in this enumeration is the amendment of the articles
of incorporation. Meaning, the 2/3 vote requirement shall be based on
the entire 1M stock.
Section 15. Amendment of Articles of Incorporation. - xxx the vote or
written assent of the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock xxx Discussion:
Q: A and B – Non-voting shares for a total of 100K shares, all other 3
stockholders, C, D and E, were present. The 3 of them present
approved the change of name from XYZ Company Corporated to ABC
Company Corporated. But despite the absence of A, he still gave his
written assent. Is there a valid vote on the approval of the amendment
in the change of the corporate name?
A: Yes. The law says, the vote or written assent of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock,
is complied with.
Q: Will that apply if the amendment is consist of shortening the
corporate term or of increasing or decreasing the capital stock?
A: No. A reading from the provisions of Sections 36 and 37, would
show that the vote must be cast at the meeting called for that purpose.
Meaning, written assent will not be sufficient. Mind you also, that in
the revised corporation code, a stockholder can now vote in absentia.
If there is a provision in the articles of incorporation or by-laws
allowing such, they are deemed to be present in that meeting where the
matter is being taken up. But, even in the absence of the by-law or

articles of incorporation provision allowing them to vote in-absentia,
if the corporation is vested with public interest, stockholders may still
vote in-absentia.
Q: When will an amendment become valid and effective?
A: Section 15 says upon the approval of the SEC, or on the date of its
filing if not acted upon by the SEC within 6 months and without fault
attributable on the part of the corporation.
Q: Amendment of the corporate name from XYZ to ABC. It was filed
today, 7 months later, the SEC has not acted upon it without fault
attributable to the applicant corp. Is the amendment already valid?
A: YES, because the provision says, on the date of its filing if not acted
upon by the SEC within 6 months and without fault attributable on the
part of the corporation.
Q: When did it become valid and effective, 6 months after the filing?
A: No. It says, on the day of its filing. There is retroactivity. It does
not apply when there is special amendment under Section 36.
SPECIAL AMENDMENTS
1. Section 36 – Shortening of the corporate term, if it will cause the
dissolution of the corporation.
2. Section 37 – Increase or Decrease of Capital Stock – this may
prejudice the rights of creditors and other third parties.
If that is the case, the amendment will never be valid until the SEC
gives its stamp of approval. Will be taking more of this.
Section 15 also provides that ANY provision or matter stated in the
AOI may be subject to an amendment but please observe that that is
not all encompassing or correct. Some matters are beyond the powers
of corporation to amend or alter.
PROVISIONS SUBJECT TO AMENDMENT:
1. The corporate name – first article of the AOI can be changed
just like any other name of a natural person.
2. The purpose clause [second article]- from general construction
to realty business.
3. Principal Office [third]– From Bulacan to Makati, why not?
4. Term of existence [fourth]– under Section 36, the corporation
may shorten its term.
5. Number of Directors and Trustees [sixth]
6. Capitalization [seventh]– Section 37 says it may be increased or
decreased
7. Restrictions and preferences of transfer of shares in ordinary
stock corporation [eighth]- they may include or delete.
8. Arbitration Agreement – because it is only optional
PROVISIONS NOT SUBJECT TO AMENDMENT:
1. Names, Nationalities and Residences of Incorporators. [fifth]
Example:
The incorporators are A, B, C, and Maria Mabaho executed
and signed the AOI in December 1, 2015. 3 years later, Maria
Mabaho got married to Ruben Mabango, can the corporation
amend the AOI due to that? NO. That is a done deal.
2. Names and Nationalities of Directors and Trustees [sixth]– if
you take a look at Section 13 and 14, it refers to the first elected
directors or the incorporating directors. In the latest amendment
of AOI of San Miguel Corp., you will still see the name of Andres
Soriano Sr. as director.
3. Subscribed Capital Stock and Paid-up Capital [eighth]–
existed on the date of the execution of the AOI
4. Restrictions and preferences of transfer of shares in closed
corporations [eighth]- they cannot include nor delete, as
provided in Section 95. The provision provides that all or more
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 37
shall be subjected to 1 or more specified restrictions allowed by
the Code. If it deletes any one of its restriction on any one of its
classes of shares, it will no longer be considered as a close
corporation
5. No transfer clause [eleventh] – it is there for purposes of
compliance with our nationalization. It substantially provides that
no transfer or shares of stock be allowed to reduce the ownership
of Filipino citizens to less than that required by law to get
recorded in the books of the corporation. It cannot also be altered
or deleted.
6. Treasurer [ninth]– Mr. X is elected as treasurer of the
corporation, who is to serve as such. Until another treasurer has
been duly elected and qualified in accordance with law and who
has been authorized to receive subscriptions of the capital stock
of the corporation or donations to the operating capital of the non-
stock corporation, the treasurer will not be removed and deleted
in the AOI.
7. The undertaking to change the name of the corporation
[tenth] (1:47:25.0)– the old law did not require a corporation to
undertake its corporate. But the revised corporation code requires
that the applicant corporation must undertake to change its
corporate in the event that the SEC notifies the corporation that
the name that theyre using has been used or is being used prior
registry, or if it is not distinguishable from corporations already
registered, or if it’s contrary to law, morals and public policy—
that cannot also be amended or changed.
8. “IN WITNESS WHEREOF, we have hereunto signed these
Articles of Incorporation, this ______ day of _____, 20___ in
the City/Municipality of _________________, Province of
________________, Republic of the Philippines.” - cannot also
be changed. Kung pinirmahan nila nung December 13, 2017 sa
City of Manila, hindi na iyan pwedeng i-amend because those are
done deal.
9. Notarial Acknowledgement – done
Note: for better illustration of the format please see Section 14, open your codal, sizt <3
As you may gather here, 50% more or less of the provisions contain in
the AOI are not subject to amendment.
CHANGE IN THE CORPORATE NAME
Q: What happens if there is an amendment in the corporate name?
A: Nothing. It was first enunciated in Philippine First Insurance v.
Hartigan
PHILIPPINE FIRST INSURANCE v. HARTIGAN
FACTS: The name of the corporation is used to be “The Yek Tong
Lin Fire and Marine Insurance Co., Ltd”. It was changed to
“Philippine First Insurance” (PFI). PFI is seeking to enforce a
promisory note that was issue in favor of the old corporate name, Yek
Tong.
ISSUE: May PFI enforce the same?
RULING: YES. A mere change of the name of the corporation either
by legislative act—a corporation is registered by its own charter, or by
merely following the general corporation law, does not affect the
identity of the corporation, not it affect the rights, priviledges and
obligations previously acquired or incurred by it. It is the same person
or corporation but with a different namen. Its charter is no way
changed. It is reiterated in Republic Planter’s Bank v. CA, 1990.
Republic Planter’s Bank v. CA, 1992.—A change in the corporate
name does not make a new corporation, and whether effected by
special act or under a general law, has no effect on the identity of the

corporation, or on its property rights or liabilities. The corporation
continues, as before, responsible in its new name for all debts or other
liabilities which it had previously contracted or incurred.
AMENDMENT OF CORPORATE TERM – will be further
discussed under Section 36 and Section 136 in other Chapters.
OCT- 13 (D)
POWERS OF THE BOARD
Section 22. The Board of Directors or Trustees of a Corporation;
Qualification and Term. - Unless otherwise provided in this Code, the
board of directors or trustees shall exercise the corporate powers,
conduct all business, and control all properties of the corporation.
Directors shall be elected for a term of one (1) Year from among the
holders of stocks registered in the corporation's book while trustees
shall be elected for a term not exceeding three (3) years from among
the members of the corporation. Each director and trustee shall hold
office until the successor is elected and qualified. A director who
ceases to own at least one (1) share of stock or a trustee who ceases to
be a member of the corporation shall cease to be such.
The board of the following corporations vested with public interest
shall have independent directors constituting at least twenty percent
(20%) of such board:
(a) Corporations covered by Section 17.2 of Republic Act No. 8799,
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 having two hundred (200) or more holders of
shares, each holding at least one hundred (100) shares of a class of its
equity shares;
(b) Banks and quasi-banks, NSSLAs, pawnshops, corporations
engaged in money service business, preneed, trust and insurance
companies and other financial intermediaries; and
(c) Other corporations engaged in businesses vested with public
interest similar to the above, as may be determined by the Commission,
after taking into account relevant factors which are germane to the
objective and purpose 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.
An independent director is a person who apart from shareholdings and
fees received from any business or other relationship which could, or
could reasonable be received to materially interfere with the exercise
of independent judgment in carrying out the responsibilities as a
director.
Independent directors must be elected by the shareholders present or
entitled to vote in absentia during the election of directors.
Independent directors shall be subject to rules and regulations
governing their qualifications, disqualifications, voting requirements,
duration of term and term limit, maximum number of board
membership and other requirements that the Commission will
prescribed to strengthen their independence and align with
international best practices
All corporate powers, all business conducted, and all properties are
controlled by the Board of Directors. They are the corporate managers.
They have the control and management of the corporate affairs. Their
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 38
authority, however, is restricted only to the management of the day-to-
day business affairs of the corporation, unless, of course, more
extensive powers are expressly conferred in the AOI or by-laws.
Their authority does not extend to the fundamental changes in the
corporate charter. Such amendments of the AOI belongs to the
stockholders as a body. The equitable principle is that the stockholder
may have all the profits but shall turn-over the management of the
corporate affairs to the governing Board of Directors. This is not to
say, however, that only the Board of Directors can exercise such
corporate powers and functions. Unless the law so provides, they may
be delegated to other officers or agents. Whether the individual act of
the directors, officers, or agents, will bind the corporation will
necessarily depend on the agency created.
The corporation is bound by the acts of its corporate officers if they
acct within the scope of the five (5) classification of powers of
corporate agents:
1. Those expressly conferred or those granted by the AOI, the
by-laws or by the official act of the Board of Directors;
2. Those that are incidental or those acts as are naturally or
ordinarily done which are reasonable and necessary to carry
out the corporate purpose or purposes;
3. Those that are inherent or acts that go with the office;
For instance, a general business manager can ordinarily hire
the services of corporate employees, necessary to carry out
the purposes of its organization.
4. Those that are apparent or those acts which although not
granted, the principal knowingly allows or permits it to be
done; and
DOCTRINE OF APPARENT AUTHORITY (Ramirez v.
Orientalist, to the effect that if the corporation holds out an
agent with apparent authority to bind the corporation, it will
be estopped to deny such authority.)
5. Powers arising out of customs, usage or emergency.
RAMIREZ v. ORIENTALIST
CORPORATIONS; WANT OF AUTHORITY IN AGENT AS
SPECIAL DEFENSE.—Where a corporation seeks to evade liability
on a contract on the ground of lack of authority on the part of the person
who assumed to act for it, such defense should be specially pleaded.
CORPORATIONS; CONTRACTS; POWER OF BOARD;
RATIFICATION.—The power to make corporate contracts resides
primarily in the company's board of directors; but the board may ratify
an unauthorized contract made by an officer of the corporation.
Ratification in this case is held to have occurred when the board, with
knowledge that the contract had been made, adopted a resolution
recognizing the existence of the contract and directing that steps be
taken to enable the corporation to utilize its benefits.
In dealing with corporations the public at large is bound to rely to a
large extent upon outward appearances. If a man is found acting for a
corporation with the external indicia of authority, any person, not
having notice of want of authority, may usually rely upon those
appearances; and if it be found that the directors had permitted the
agent to exercise that authority and thereby held him out as a person
competent to bind the corporation, or had acquiesced in a contract and
retained the benefit supposed to have been conferred by it, the

corporation will be bound, notwithstanding the actual authority may
never have been granted. The public is not supposed nor required to
know the transactions which happen around the table where the
corporate board of directors or the stockholders are from time to time
convoked. Whether a particular officer actually possesses the authority
which he assumes to exercise is frequently known to very few, and the
proof of it usually is not readily accessible to the stranger who deals
with the 'corporation on the faith of the ostensible authority exercised
by some of the corporate officers. It is therefore reasonable, in a case
where an officer of a corporation has made a contract in its name, that
the corporation should be required, if it denies his authority, to state
such defense in its answer.
Corporate powers shall be exercised, and all corporate business
conducted. by the board of directors; and this principle is recognized
in the by-laws of the corporation in question which contain a provision
declaring that the power to make contracts shall be vested in the board
of directors, It is true that it is also declared in the same by-laws that
the president shall have the power, and it shall be his duty, to sign
contracts; but this has reference rather to the formality of reducing to
proper form the contracts which are authorized by the board and is not
intended to confer an independent power to make contracts binding on
the corporation.
The fact that the power to make corporate contracts is thus vested in
the board of directors does not signify that a formal vote of the board
must always be taken before contractual liability can be fixed upon a
corporation; for the board, can create liability, like an individual, by
other means than by a formal expression of its will.
The functions of the stockholders of a corporation are, it must be
remembered, of a limited nature. The theory of a corporation is that the
stockholders may have all the profits but shall turn over the complete
management of the enterprise to their representatives and agents,
called directors. Accordingly there is little for the stockholders to do
beyond electing directors, making by-laws, and exercising certain
other special powers defined by law. In conformity with this idea it is
settled that contracts between a corporation and third persons must be
made by the directors and not by the stockholders. The corporation, in
such matters, is represented by the former and not by the latter. This
conclusion is entirely accordant with the provisions of section 28 of
our Corporation Law already referred to. It results that where a meeting
of the stockholders is called for the purpose of passing on the propriety
of making a corporate contract, its resolutions are at most advisory and
not in any wise binding on the board.
BARRETO vs. LA PREVISORA
The law is settled that contracts between a corporation and third
persons must be made by or under the authority of its board of directors
and not by its stockholders. Hence, the action of the stockholders in
such matters is only advisory and not in any wise binding on the
corporation.
The funds of the corporation are properties of the corporation. The
stockholders have no right over them. It must emanate from the board
of directors. There was no Board resolution authorizing the
amendment of the by-laws to grant the directors continuing
compensation after their term have already expired.
In any corporate act, it emanates from the Board of Directors. The
amendment of by-laws in this case were passed and approved only the
stockholders; it did not emanate from the board of directors. Even the
petitioners themselves, the directors, when it was presented to them for
votation, they rejected it; any provision in the by-laws contrary to law
is deemed as if it is not written at all.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 39
QUALIFICATIONS AND DISQUALIFICATIONS
Q: What are the qualifications imposed by law so that a stockholder
may be elected to be a director?
A: In case of a stock corporation, he must own at least one stock; in a
non-stock corporation, he must be a member thereof. (Sec.22)
Q: Is there any nationality or residency requirement?
A: When it is provided for under the Constitution and special laws.
Q: May a foreigner be a director in a mass media outlet?
A: NO.
The Code only requires that he must a stockholder of at least one share
of stock. So even aliens may qualify as such as long as it hold at least
one share as appearing in the books of corporation. However, aliens,
whether resident or non-resident, may not be elected as such in any
activity or undertaking exclusively to Filipino citizens
 those governed by the Retail Trade Liberalization law – if
the paid-up capital is not more than 2.5M, all the shares are
to be held by Filipino citizens. NO FOREIGNER CAN
HOLD A SINGLE SHARE, hence, cannot be a director.
 Mass media outlet – all the shares must be held by Filipino
citizens.
 Educational institutions – the management shall be vested
in Filipino citizen.
o EXC: If created by mission co-op, charitable
organization or religious order or sect, they can
have foreigners as members of the Board.
If the activity is only partly nationalized, and there is no prohibition for
aliens to be elected as such, they may be elected as members of the
Board. But their number shall only be in proportion to their equity or
their participation in the capital stock of the corporation.
For instance, in the development and utilization of Philippine natural
resources, the Constitution requires that at least 60% of the outstanding
capital stocks must be held by Filipino citizens; maximum
stockholdings of foreigners are 40%:
Common A shares = 600K to be held of record only by
Filipino citizens; Common B shares of 400K to be held by
any person. Assuming there are 10 members of the board to
be elected, the foreigners can only have four seats (40%). If
more than that, it is violative of Anti-Dummy Act.
The by-laws, under Sec. 46, may also provide for additional
qualifications and disqualifications for membership in the Board.
Although, it may not go away with the minimum qualifications and
disqualifications as provided for under Sec. 22 and 26.
In Government v. El Hogar, the by-laws of the corporation required
that a stockholder in order to be qualified to be elected as director, he
must own at least (500, or 5K??) shares; the Court upheld its validity
because the by-laws may provide for such additional qualification.
As to disqualifications in John Gokongwei v. SMC and SEC, San
Miguel Corporation amended its by-laws to disqualify a stockholder to
be elected as a director if he is also a director or a stockholder which
own substantial interest (10% of the outstanding capital stock) in a
corporation engaged in a business directly in competition with SMC.
The Court also upheld its validity as it prevents the uniting of
incompatible interest in one particular corporation.
Q: Should the stockholder be the beneficial owner of the shares in
order that he may be elected as a director?

A: NO. The stockholder may not be the beneficial owner in order for
him to be qualified; it is sufficient that he possess legal title to the
shares.
Beneficial Owner” refers to any natural person(s) who ultimately
own(s) or control(s) or exercise(s) ultimate effective control over the
corporation. – wala sayo yung title pero ikaw makakakuha ng
benefits/dividends
“Legal Owner” means the natural or juridical person who, in
accordance with the pertinent provisions of Philippine law, owns or
has the controlling ownership interest over the corporation or has the
ability of taking relevant decisions within the corporation and impose
those resolutions – nasayo yung title.
Q: A, a holder of 1000 shares, transfers such to his brother B in trust
for the minor son of A. Any benefits that may accrue relative to the
1000 shares of A shall inure to the benefit of A. Such transfer is
recorded in the books of the corporation, meaning B does not have
beneficial ownership. Is B may be elected as a director?
A: YES. As there was assignment of shares and the fact that such fact
and his name was recorded in the books of corporation, made B to
possess legal title to the said share. Consequently, he may be elected
as director.
LEE v. CA
The law simply provides that a voting trust agreement is an agreement
in 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 or other rights pertaining to said shares for a period not
exceeding five years upon the fulfillment of statutory conditions and
such other terms and conditions specified in the agreement.
The law simply provides that a voting trust agreement is an agreement
in 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 or other rights pertaining to said shares for a period not
exceeding five years upon the fulfillment of statutory conditions and
such other terms and conditions specified in the agreement.
Every director must own at least one (1) share of the capital stock of
the corporation of which he is a director which share shall stand in his
name on the books of the corporation. Any director who ceases to be
the owner of at least one (1) share of the capital stock of the corporation
of which he is a director shall thereby cease to be a director.—Under
the old Corporation Code, the eligibility of a director, strictly speaking,
cannot be adversely affected by the simple act of such director being a
party to a voting trust agreement inasmuch as he remains owner
(although beneficial or equitable only) of the shares subject of the
voting trust agreement pursuant to which a transfer of the stockholder's
shares in favor of the trustee is required (section 36 of the old
Corporation Code). No disqualification arises by virtue of the phrase
"in his own right" provided under the old Corporation Code. With the
omission of the phrase "in his own right" the election of trustees and
other persons who in fact are not the beneficial owners of the shares
registered in their names on the books of the corporation becomes
formally legalized. Hence, this is a clear indication that in order to be
eligible as a director, what is material is the legal title to, not beneficial
ownership of, the stock as appearing on the books of the corporation.
It is a basic principle in Corporation Law that a corporation has a
personality separate and distinct from the officers or members who
compose it. Thus, the above rule on service of processes on a
corporation enumerates the representatives of a corporation who can
validly receive court processes on its behalf. Not every stockholder or
officer can bind the corporation considering the existence of a
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 40
corporate entity separate from those who compose it. The rationale of
the aforecited rule is that service must be made on a representative so
integrated with the corporation sued as to make it a priori supposable
that he will realize his responsibilities and know what he should do
with any legal papers served on him.
The effect of the execution of voting trust agreement is to confer upon
the voting trustee legal title to the shares of stocks covered by the
agreement. The stockholders executing them will merely be the
beneficial owners. Now, if one ceases to be a stockholder, he ceases to
be a director.
“In his own right” = both legal title and equitable ownership.
RATIONALE: to allow the stockholders to appoint nominees in the
BOD without parting with their beneficial ownership of their shares.
They are not dummies, but nominees.
SITUATION:
Natural persons A, B , C , D, E. They formed a corporation.
A = 800,000 of the 1M OCS
B = 50K
C = 50K
D = 50K
E = 50K
BCDE distrusted the majority stockholder, and any suggestions of A
are being blocked by the 4 directors. Vote required = majority of their
number. So palaging baldado si A, hence, he ordered that he may gain
the control of corporate affairs. He has to assign his shares to three of
his trusted friends/relatives in trust for him. In the next election of
directors, and if recorded in the books of the corporation; pursuant to
cumulative voting; 5-member board, 800K shares, A will 4M votes.
And by casting 1M votes each to himself and his nominees, A will
control the Board. They will have 4 seats.
Basta nakasulat ang pangalan niya sa books of corporation as a
stockholder, he is qualified.
Q: What is the term of office of the members of the Board?
A: GR: They shall serve a term of 1 year, except in non-stock
corporation, the trustees may serve for 3 years.
 Non-stock educational corporations = 5 years
 Close corporation (Sec. 96; as they may do away with the
BOD vesting management of corporate affairs directly to the
stockholders themselves; the stockholders themselves are to
be considered as the directors) = no specific number of years
(no term)
Q: Term vs. Tenure
A: Term is fixed by law or the period of time when the incumbent may
hold office as a matter of right. Tenure is the actual period of time that
the incumbent actually held the office. It may be longer or shorter
duration. (Valle Verde Country Club v. Africa)
SITUATION:
 Election, 6 months ago. A, one of the directors, resigned
today. His term is 1 year; but his tenure is only 6 months.
 Term = 1 year, until their successors are duly elected and
qualified in accordance with law. They were elected last
year. But, when their term expired, there was no election or
the successors are not qualified. Ofcourse, they will continue
in a hold-over capacity. Assume that 2 months ago when
their term expired, they continued in a hold-over capacity.

Meaning, their tenure is 1 year and 2 months. (Longer
duration)
Q: What is the meaning of the phrase “they shall serve for a term of 1
year until their successors are duly elected and qualified in
accordance with the law?”
A: The conjunction used in the law is “and”. They may have been an
election, but the elected is not qualified; He may be qualified but he
was not elected. What happens is that the incumbent will continue in
their hold-over capacity.
DETECTIVE AND PROTECTIVE BUREAU vs. CLORIBEL
To qualify as a director of a corporation, one must own at least one
share of stock therein.—Every director must own in his own right at
least one share of the capital stock of the stock corporation of which
he is a director, which stock shall stand in his name on the books of the
corporation (Sec. 30, Corporation Law). So that, if the By-Laws of the
Corporation provides that "The manager shall be elected by the Board
of Directors from among its members," one could not be a managing
director of said corporation unless he owns at least one share of stock
thereof.
ELECTION AND VOTING
Section 23. Election of Directors or Trustees. - Except when the
exclusive right is reserved for holders of founders' shares under
Section 7 of this Code, each stockholder or member shall have the right
to nominate any director or trustee who possesses all of the
qualifications and none of the disqualifications and none of the
disqualifications set forth in this Code.
At all elections of directors or trustees, there must be present, either in
person 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 majority of the members entitled to vote. When so
authorized in the bylaws or by a majority of the board of directors, the
stockholders or members may also vote through remote
communication or in absentia: Provided, That the right to vote
through such modes may be exercised in corporations vested with
public interest, notwithstanding the absence of a provision in the
bylaws of such corporations.
A stockholder or member who participates through remote
communication or in absentia, shall be deemed present for purposes
of quorum.
The election must be by ballot if requested by any voting stockholder
or member.
In stock corporations, stockholders entitled to vote shall have the right
to vote the number of shares of stock standing in their own names in
the stock books of the corporation at the time fixed in the bylaws or
where the bylaws are silent at the time of the election. The said
stockholder may: (a) vote such number of shares for as many persons
as there are directors to be elected; (b) cumulate said shares and give
one (1) candidate as many votes as the number of directors to be
elected multiplied by the number of shares owned; or (c) distribute
them on the same principle among as many candidates as may be seen
fit: 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, That no delinquent stock shall be voted.
Unless otherwise provided in the articles of incorporation or in the
bylaws, members of nonstock corporations may cast as many votes as
there are trustees to be elected by may not cast more than one (1) vote
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 41
for one (1) candidate. Nominees for directors or trustees receiving the
highest number of votes shall be declared elected.
If no election is held, or the owners of majority of the outstanding
capital stock or majority of the members entitled to vote are not present
in person, by proxy, or through remote communication or not voting
in absentia at the meeting, such meeting may be adjourned and the
corporation shall proceed in accordance with Section 25 of this Code.
The directors or trustees elected shall perform their duties as
prescribed by law, rules of good corporate governance, and bylaws of
the corporation.
Q: How are the directors elected?
A: At all elections of directors or trustees, there must be present, either
in person 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 majority of the members entitled to vote
Q: Who elects them (Quorum requirement for voting)?
A: In a stock corporation, the owners of majority of the outstanding
capital stock, excluding the non-voting shares; if there be no-capital
stock, a majority of the members entitled to vote.
Q: Do you include non-voting shares?
A: NO. Because it is not one of the instances when non-voting shares
are entitled to vote.
In fact, in a non-stock corporation it says that majority of the members
who are entitled to vote.
Q: What is the voting requirement in order that a director/trustee may
be elected? Who gets elected?
A: Those candidates receiving the highest number of votes.
SITUATION:
There are five directors to be elected. 1M outstanding capital stock.
Under cumulative voting, there are 5 million votes. A garnered 4M
votes; B, C, D, E, 250K votes each.
Q: Who gets elected?
A: All of them. Because there are five directors needed to be elected.
Silang lima yung naka-garner ng highest number of votes.
Q:What is cumulative voting?
A: A matter of right granted to stockholders to multiply their number
of shares by the number of the directors to be elected, sum of which is
his total number of votes, which he may cast in favor of only one
candidate or distribute them to many candidates as he may deem fit as
long as it will not exceed his total number of votes.
Let’s say the corporation has 1M outstanding capital stock. And A has
200K of those outstanding capital stock. Multiply it by 5 (number of
directors to be elected), he has 1M votes.
Q: Is cumulative voting available to a non-stock corporation (or other
kinds of corporation, other than stock)?
A: Sec 88 of the Code, relative to non-stock corporation, cumulative
voting is not a matter of rights.
Section 88. Right to Vote. - The right of the members of any class or
classes to vote may be limited, broadened, or denied to the extent
specified in the articles of incorporation or the bylaws. Unless so
limited, broadened, or denied, each member, regardless of class, shall
be entitled to one (1) vote. xxx
However, articles of incorporation or by-laws of a non-stock
corporation may broaden, limit or deny the voting rights of the

members. It may also be allowed if there are provision in the articles
or by-law. (Title 11)
Q: What is the purpose of cumulative voting? Why is it granted as a
matter of right to stockholders?
A: In order that the minority may have a right to representation in the
Board.
SITUATION:
1M outstanding capital stock; A, B, C, D, E are the majority
stockholders. F, G, H and I holds a total of 200K outstanding capital
stock (they are the minority stock)
Q: How may the minority have the right of representation in the
Board? (MIDTERMS EXAM QUESTION)
A: 200K shares x 5 directors to be elected = 1M number of votes. They
are secured one seat in the Board.
Suggested answer: They may be guaranteed a seat in the board because
they have 200K outstanding capital stock. Assuming that they are all
voting shares, you multiply it to 5 director, they have 1M votes. The
majority having only 800K outstanding capital stock (assuming that
these are voting shares) has 4M votes. 1M outstanding capital stocks x
5 directors to be elected = 5M votes. Therefore, to guarantee a seat,
one will need 1M votes. If F, G, H, I agrees that their 1M votes will be
cast to F, they are guaranteed a seat in the Board. No matter what they
do, the majority cannot outvote the 1M votes obtained by the minority
stockholder.
OTHER CORPORATE OFFICERS
Section 24. Corporate Officers. - Immediately after their election, the
directors of a corporation must formally organize an elect: (a) a
president, who must be a director; (b) a treasurer, who must be a
resident of the Philippines; (c) secretary, who must resident and citizen
of the Philippines and (d) such other officers as may be provided in the
bylaws. If the corporation is vested with public interest, the board shall
also elect compliance officer. The same person may hold two (2) or
more positions concurrently, except that no one shall act as president
and secretary or as president and treasurer at the same time, unless
otherwise allowed in this Code.
The officers shall manage the corporation and perform such duties as
may be provided in the bylaws and/or as resolved by the board of
directors.
Q: Who are the other corporate officers, other than the Board of
Directors, required to be elected by the corporation?
A: (See underlined enumeration in Sec. 24)
Q: Should the President be a stockholder?
A: Yes. Because a president should also be a director, and a director
shall own at least one share in the corporation.
Q: Who elects these other corporate officers?
A: GR: The members of the Board elects this other corporate officer.
EXC:
 Non-stock corporation (Sec.91) – other corporate
officers may be elected, unless the articles and by-
laws provides otherwise, directly by the members.
Section 91. Election and Term of Trustees. - The
number of trustees shall be fixed in the articles of
incorporation or bylaw which may or may not be
more than fifteen (15). They shall hold office for
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 42
not more than three (3) years until their successors
are elected and qualified. Trustees elected to fill
vacancies occurring before the expiration of a
particular term shall hold office for the unexpired
period.
Except with respect to independent trustees of
nonstock corporation shall be elected as trustee.
Unless otherwise provided in the articles of
incorporation or the bylaws, the members may
directly elect officers of a nonstock corporation.
 Close corporation (Sec. 96) – they are to be elected
by the stockholders, unless otherwise provided in
the articles or by-laws.
Q: May two positions be held concurrently by the same person?
A: The same person may hold two (2) or more positions concurrently,
except that no one shall act as president and secretary or as president
and treasurer at the same time, unless otherwise allowed in this Code.
Q: How about the Chairman of the Board? Can he be a treasurer or
secretary at the same time?
A: YES. He is not the president.
Q: May the corporate president be, at the same time, the treasurer?
A: Yes, if it is allowed in this Code.
Sec. 122 (second par): The president of a one-person corporation may
at the same time be the treasurer, but never the corporate secretary who
must be an independent person.
OCT- 15 (E)
VALIDITY AND BINDING EFFECT OF ACTIONS OF
CORPORATE OFFICERS
SEC. 52. Regular and Special Meetings of Directors or Trustees;
Quorum. – Unless the articles of incorporation or the bylaws provides
for a greater majority, a majority of the directors or trustees as stated
in the articles of incorporation shall constitute a quorum to transact
corporate business, and every decision reached by at least a majority
of the directors or trustees constituting a quorum, except for the
election of officers which shall require the vote of a majority of all the
members of the board, shall be valid as a corporate act. Xxxx xxx xxx
Corporations are juridical entities existing only in contemplation of the
law and they are enforced to act through their responsible corporate
officers, generally, the Board of Directors. Likewise, as a general rule,
the Board must sit and act as a body to have a valid corporate act or
transactions. Under the provisions of the then Section 25, it says that it
was transferred to the commissions on meetings (see 4:14, Oct 15 part
1).
Section 25. Corporate officers, quorum (old law). –The directors or
trustees and officers to be elected shall perform the duties enjoined on
them by law and the by-laws of the corporation. Unless the articles of
incorporation or the by-laws provide for a greater majority, a majority
of the number of directors or trustees as fixed in the articles of
incorporation shall constitute a quorum for the transaction of corporate
business, and every decision of at least a majority of the directors or
trustees present at a meeting at which there is a quorum shall be valid
as a corporate act, except for the election of officers which shall require
the vote of a majority of all the members of the board. Directors or
trustees cannot attend or vote by proxy at board meetings. (33a)

*The quorum requirement in order that they may pass a valid corporate
act or transaction is majority of their number as fixed or as stated
in the AOI. And in order to pass a valid corporate act or transaction,
the vote required is at least a majority of those present at which they
are called. This is a general rule because individual directors, officers
and/or agents may also rightfully and validly bind the corporation by
their individual acts either by:
1. Delegation of authority
2. Expressly conferred
3. Where the officer where the officer or agent is clothed with
actual or apparent authority to bind the corporation
This general rule is applied in the case of YAO KA SIN TRADING
VS. CA asked in the bar 6/5 months ago.
YAO KA SIN TRADING VS. CA
209 SCRA 763; June 15, 1992)
Corporations; Contracts; A contract signed by the President and
Board Chairman without authority from the Board of Directors is
void; Exceptions.—While there can be no question that Mr.
Maglana was an officer—the President and Chairman—of private
respondent corporation at the time he signed Exhibit "A", the above
provisions of said private respondent's By-Laws do not in any way
confer upon the President the authority to enter into contracts for
the corporation independently of the Board of Directors. That
power is exclusively lodged in the latter. Nevertheless, to expedite
or facilitate the execution of the contract, only the President—and
not all the members of the Board, or so much thereof as are required
for the act—shall sign it for the corporation. This is the import of
the words through the president in Exhibit "8-A" and the clear intent
of the power of the chairman "to execute and sign for and in behalf
of the corporation all contracts and agreements which the
corporation may enter into" in Exhibit "1-1". Both powers
presuppose a prior act of the corporation exercised through the
Board of Directors. No greater power can be implied from such
express, but limited, delegated authority. Neither can it be logically
claimed that any power greater than that expressly conferred is
inherent in Mr. Maglana's position as president and chairman of the
corporation.
The rule is of course settled that "[a]lthough an officer or agent acts
without, or in excess of, his actual authority if he acts within the
scope of an apparent authority with which the corporation has
clothed him by holding him out or permitting him to appear as
having such authority, the corporation is bound thereby in favor of
a person who deals with him in good faith in reliance on such
apparent authority, as where an officer is allowed to exercise a
particular authority with respect to the business, or a particular
branch of it, continuously and publicly, for a considerable time."
Also, "if a private corporation intentionally or negligently clothes
its officers or agents with apparent power to perform acts for it, the
corporation will be estopped to deny that such apparent authority is
real, as to innocent third persons dealing in good faith with such
officers or agents." This "apparent authority may result from (1) the
general manner by which the corporation holds out an officer or
agent as having power to act or, in other words, the apparent
authority with which it clothes him to act in general, or (2) the
acquiescence in his acts of a particular nature, with actual or
constructive knowledge thereof, whether within or without the
scope of his ordinary powers."
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 43
Q: the by-laws provide that the contracts should be signed by the
president. The contract here was signed by the President. Would
that not be tantamount to granting him apparent authority to bind
the corporation?
A: No. Because the by-laws state that contracts entered into shall be
signed by the president with the approval of the Board of Directors.
In this case, the President entered the contract without the approval of
the board.
*the court here ruled that the clear import of the by-law provision that
it shall be signed by the president, does not confer upon him to sign
contracts independently from the board of directors. The power is
exclusively lounged to the latter. And true it may be, that the private
corporation clothes another with apparent authority, or even
negligently for that matter, to another person-the doctrine of apparent
authority. The petitioner failed to prove that such power was conferred.
Like for instance, showing similar contracts signed by the president
alone, which bound or binds the corporation. It should be approved by
the board of directors.
Q: what is the effect of a board’s resolution passed during a
meeting improperly held, will it bind the corporation?
A: No. any action of the board without a meeting and without the
required voting and quorum requirement will not bind the corporation.
Q: is this absolute?
A: No. It will bind the corporation if it is subsequently ratified,
expressly or impliedly.
LOPEZ REALTY, INC. VS. FOTENCHA
(147 SCRA 183; Aug. 11, 1995)
Corporation Law; A corporation, through its board of directors,
should act in the manner and within the formalities, if any,
prescribed by its charter or by the general law.—The general rule is
that a corporation, through its board of directors, should act in the
manner and within the formalities, if any, prescribed by its charter
or by the general law. Thus, directors must act as a body in a
meeting called pursuant to the law or the corporation’s by-laws,
otherwise, any action taken therein may be questioned by any
objecting director or shareholder.
Same; An action of the board of directors during a meeting, which
was illegal for lack of notice, may be ratified either expressly, by
the action of the directors in subsequent legal meeting, or impliedly,
by the corporation’s subsequent course of conduct.—Be that as it
may, jurisprudence tells us that an action of the board of directors
during a meeting, which was illegal for lack of notice, may be
ratified either expressly, by the action of the directors in subsequent
legal meeting, or impliedly, by the corporation’s subsequent course
of conduct.
Same; “Ultra Vires” Acts; Words and Phrases; In legal parlance,
“ultra vires” act refers to one which is not within the corporate
powers conferred by the Corporation Code or articles of
incorporation or not necessary or incidental in the exercise of the
powers so conferred.—Assuming, arguendo, that there was no
notice given to Asuncion Lopez Gonzales during the special
meetings held on August 17, 1981 and September 1, 1981, it is
erroneous to state that the resolutions passed by the board during
the said meetings were ultra vires. In legal parlance, “ultra vires”
act refers to one which is not within the corporate powers conferred
by the Corporation Code or articles of incorporation or not
necessary or incidental in the exercise of the powers so conferred.

Same; Same; Providing gratuity pay for its employees is one of the
express powers of the corporation under the Corporation Code. —
The assailed resolutions before us cover a subject which concerns
the benefit and welfare of the company’s employees. To stress,
providing gratuity pay for its employees is one of the express
powers of the corporation under the Corporation Code, hence,
petitioners cannot invoke the doctrine of ultra vires to avoid any
liability arising from the issuance of the subject resolutions.
Same; Section 28 1/2 of the Corporation Law (now Section 40 of
the Corporation Code) requiring authorization of the stockholders
of record for action taken by the board of directors applies to the
sale, lease, exchange or disposition of all or substantially all of the
corporation’s assets.—Petitioners try to convince us that the subject
resolutions had no force and effect in view of the non-approval
thereof during the Annual Stockholders’ Meeting held on March 1,
1982. To strengthen their position, petitioners cite section 28 1/2 of
the Corporation Law (Section 40 of the Corporation Code). We are
not persuaded. The cited provision is not applicable to the case at
bench as it refers to the sale, lease, exchange or disposition of all or
substantially all of the corporation’s assets, including its goodwill.
In such a case, the action taken by the board of directors requires
the authorization of the stockholders on record.
Same; Where the stockholders of petitioner, except for one, also sit
as members of the board of directors, it will be illogical and
superfluous to require the stockholders’ approval of certain
resolutions adopted by the board of directors.—It will be observed
that, except for Arturo Lopez, the stockholders of petitioner
corporation also sit as members of the board of directors. Under the
circumstances in field, it will be illogical and superfluous to require
the stockholders’ approval of the subject resolutions. Thus, even
without the stockholders’ approval of the subject resolutions,
petitioners are still liable to pay private respondents’ gratuity pay.
Q: Was Gonzales notified of the meeting
A: No. He was not notified because he was abroad.
*NOTE THE DIFFERENCE OF THE 2 TYPES OF MEETINGS:
1. Directors meeting
2. Stockholders meeting
Do not be confused.
Q: You were saying that the Court ruled that an action of the BOD
during a meeting which was illegal may be ratified
expressly/impliedly. Do you agree with the statement of the Court
to that effect?
A: AN ILLEGAL ACT IS NULL AND VOID and it cannot be
ratified whether impliedly or expressly. OMG. The Supreme Court
Justice (who even became the Chief Justice) doesn’t even know how
to choose his words. It is not illegal. It was only improperly held. The
word used should be IMPROPERLY because there are 5 requisites
for a valid meeting. One of them is NOTICE MUST BE GIVEN.
Gonzales in this case was not notified. BUT NOTICE MAY BE
WAIVED expressly/impliedly. In this particular case, it was
WAIVED. Because she knew all the board meeting and the resolution
passed during the questioned gratuity pay arising out of the board
resolution. BUT she was the same person who signed the first 2
vouchers to pay the gratuity pay arising out of the questioned board
resolution. She may now be considered as ESTOPPED. It may
expressly ratified, impliedly ratified and even by estoppel.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 44
Ratification by directors may be by an express resolution or vote to
that effect, or it may be implied from adoption of the act, acceptance
or acquiescence. Moreover, the unauthorized acts of an officer of a
corporation may be ratified by the corporation by conduct implying
approval and adoption of the act in question. Such ratification may be
expressed or may be inferred from silence and inaction.
PUA CASIM & CO. VS. NEUMARK AND CO.
(46 Phil. 342; Oct. 2, 1924)
CORPORATION; AUTHORITY OF MANAGER TO BORROW
MONEY; GENERAL RULE IN THE ABSENCE OF EXPRESS
AUTHORITY CONFERRED BY THE BOARD OF DlRECTORS
OF A CORPORATION.—The general rule is that an officer of a
corporation has no implied power to borrow money in its behalf;
but where a general business manager of a corporation is clothed
with apparent authority to borrow and the amount borrowed does
not exceed the ordinary requirements of the business, it has often
been held that the authority is implied and that the corporation is
bound.
ID.; ID.; EXCEPTION TO THE GENERAL RULE.—Where it
appears that the corporation was in need of funds to carry on its
business and it does not appear that the amount borrowed was
disproportionate to the volume of the business, the corporation will
be held responsible for any loan obtained in its behalf by an officer
who, at the same time, was president, general manager, and
principal stockholder in said corporation and was clothed with
apparent authority to do everything necessary for the conduct of its
business.
*Neumark and Co. through the president, general manager and the
principal stockholder borrowed money from Pua Casim. So the
recovery thereof from the company. The defense of Neumark and Co
is that Neumark as the president general manager was not authorized
by the BOD. Because again, all corporate powers, all business that are
transacted, and all properties are controlled by the BOD. The case went
all the way to the SC. The Court ruled that the company is liable. Their
general business manager is clothed with the apparent authority to
borrow money and the amount involved does not exceed the
requirements of a business. The authority is implied. The corporation
will therefore be bound. There are three circumstances attendant to this
case that led the court to arrive at their decision.
1. The check was endorsed and deposited in the company’s
account.
 In a corporate account there is always 2
signatories: Neumark by himself cannot withdraw
the money.
2. The funds were necessary for the business of Neumark and
Co.
3. Neumark as president, general manager and principal
stockholder is clothed with apparent authority to do anything
designed for the conduct of the corporate business.
YU CHUCK VS. KONG LI PO
(46 Phil. 608; Dec. 3, 1924)
PRIVATE CORPORATIONS; BOARD OF DlRECTORS;
POWER TO BlND CORPORATION BY CONTRACT;
DELEGATION OF POWER.—It is a general rule that the power to
bind a corporation by contract rests in its board of directors or
trustees, but this power may either, expressly or impliedly, be
delegated to other officials or agents of the corporation.

ID.; ID.; ID.; CONTRACTS OF EMPLOYMENT.—Except where
the authority to employ servants and agents is expressly vested in
the board of directors or trustees, an officer or agent who has
general control and management of the corporation's business or a
specific part thereof, may bind the corporation by reasonable
contracts of employment of such agents and employees as are usual
and necessary in the conduct of such business.
ID.; ID.; ID.; ID.; BUSINESS MANAGER; UNREASONABLE
CONTRACTS.—Upon the facts of the present case, the business
manager of the defendant corporation had no implied authority to
employ printers for the corporation's newspaper for the term of
three years and upon conditions otherwise so onerous to the
corporation that the possibility of it thereby being thrown into
insolvency was expressly contemplated in the contract of
employment.
ID.; ID.; ID.; RATIFICATION OF CONTRACT; POWERS OF
PRESIDENT.—Before a contract can be ratified, knowledge of its
existence must be brought home to the parties who have the
authority to ratify it or circumstances must be shown from which
such knowledge may be presumed. Ordinarily, the president of a
corporation has no implied power by ratification to validate a
contract which has been improvidently entered into on behalf of the
corporation by an unauthorized agent or employee. The fact that the
president, by the by-laws of the corporation, is required to sign the
documents evidencing contracts of the corporation, does not give
him the power to make contracts.
ID.; ID.; ID.; ID.—The fact that the president of the defendant
corporation saw the plaintiffs work as printers in the office of the
defendant's newspaper is not sufficient proof of knowledge on his
part of the existence and terms of a written contract of employment.
ID.; ASSERTION OF POWERS BY BUSINESS MANAGER.—
Nearly a month after the contract of employment in question is
alleged to have been entered into, the defendant's business manager,
over his own signature, inserted an announcement in the defendant's
newspaper stating that "all contracts, agreements and receipts are
considered to be null and void unless signed by the general manager
of this paper." There was no evidence to show that the
announcement was ever brought to the attention of the officials of
the defendant corporation. Held: That, the announcement was
merely an assertion by the business manager that he would
recognize no contracts, agreements, or receipts not duly signed by
him, was not one of the circumstances which lead the plaintiffs to
think that the business manager had authority to make the contract
in question, and could not be considered a ratification of the
contract by the defendant corporation.
*In here the court stressed that the general business manager can hire
employees as a usual or necessary in the conduct of a corporate
business. Because that goes with his office. Meaning it is inherent
power. BUT the contract must be reasonable. The term of the
employment is unusually longt-3 years. And the conditions are so
onerous that the corporation may be thrown into insolvency. If they are
terminated prior to the 3-year term, even let’s say 10 days or what, they
shall be paid their entire 3-year salaries. This fact alone, ruled the court,
would have been sufficient to put the plaintiffs upon an inquiry as to
the extent of the agent’s authority, which they have no right to
presume, since the contract itself could bring about the ruling of the
corporation instantly.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 45
TRINIDAD J. FRANCISCO VS. GSIS
(7 SCRA 577; March 30, 1963)
Corporations; Binding effect of acts of corporate officers.—A
corporation cannot evade the binding effect produced by a telegram
sent by its board secretary, and the addressee of such telegram
cannot be blamed for relying upon it, because if every person
dealing with a corporation were held duty-bound to disbelieve
every act of its responsible officers no matter how regular it should
appear on its face, corporate transactions would speedily come to a
standstill.
Same; Same; When corporation estopped to deny apparent
authority of its officers.—If a private corporation intentionally or
negligently clothes its officers or agents with apparent power to
perform acts for it, the corporation will be estopped to deny that
such apparent authority is real, as to innocent third persons dealing
in good faith with such officers or agents.
Same; Same; Same; When notice of lands by a corporate officer is
notice to corporation.—Knowledge of facts acquired or possessed
by an officer or agent of a corporation in the course of his
employment, and in relation to matters within the scope of his
authority, is notice to the corporation, whether he communicates
such knowledge or not.
Same; Same; Same; Silence of corporation as ratification of
agreement.—the silence of the corporation, taken together with the
unconditional acceptance of three subsequent remit-tances from
plaintiff, constitutes a binding ratification of the original agreement
between them (Civil Code, Article 1393).
Same; Same; Same; Maxim that the one who made it possible for a
wrong to be done should suffer.—The equitable maxim that
between two innocent parties the one who made it possible for the
wrong to be done should be the one to bear the resulting loss,
applies when — as in the instant case — a corporation allows one
of its officers, now alleged to be without the proper authority, to
send a telegram binding the corporation.
Q: How was the redemption proposal of Atty. Francisco
approved?
A: It was approved through a telegram sent by the board secretary of
Rodolfo Andal
*The corporation cannot evade the binding effect of the telegram sent
by its Board Secretary, and the addressee cannot be blamed from
relying upon it. Because if every person dealing with a corporation will
disregard every act of its responsible officers, no matter how regular it
would appear on its face, corporate transactions would come to stand
still.
Note: The court here applied the bedrock rule that between two parties
the one who made the loss possible, shall bear the same.
It was in 1959 when the telegram approving the redemption of Atty.
Francisco was approved by GSIS. It was only 5-long-months thereafter
that the GSIS alleged that it was a mistake. And all along, Atty.
Francisco was remitting the payment of the loan, including the monthly
rentals of the properties. This silence coupled with the unconditional
acceptance of the benefits arising out of the acquiescence of Atty.
Francisco constituted binding ratification.

THE BOARD OF LIQUIDATORS VS. KALAW
(20 SCRA 987; Aug. 10, 1965)
Corporations; Three methods of winding up corporate affairs.—
Accepted in this jurisdiction are three methods by which a
corporation may wind up its affairs: (1) under Section 3, Rule 104,
of the Rules of Court (which superseded Section 66 of the
Corporation Law), whereby, upon voluntary dissolution of a
corporation, the court may direct "such disposition of its assets as
justice requires, and may appoint a receiver to collect such assets
and pay the debts of the corporation"; (2) under Section 77 of the
Corporation Law, whereby a corporation whose corporate existence
is terminated, "shall nevertheless be continued as a body corporate
for three years after the time when it would have been so dissolved,
for the purpose of prosecuting and defending suits by or against it
and of enabling it gradually to settle and close its affairs, to dispose
of and convey its property and to divide its capital stock, but not for
the purpose of continuing the business for which it was
established"; and (3) under Section 78 of the Corporation Law, by
virtue of which the corporation, within the three-year period just
mentioned, "is authorized and empowered to convey all of its
property to trustees for the benefit of members, stockholders,
creditors, and others interested,"
Board of Liquidators; Trustee for government.—By Executive
Order No. 372, the government, the sole stockholder, abolished the
National Coconut Corporation (NACOCO) and placed its assets in
the hands of the Board of Liquidators. The Board thus became the
trustee on behalf of the government. It was an express trust. The
legal interest became vested in the trustee, the Board of Liquidators.
The beneficial interest remained with the sole stockholder, the
government. The Board took the place of the dissolved government
corporations after the expiration of the statutory three-year period
for the liquidation of their affairs.
Same; No term for life of Board.—No time limit has been tacked to
the existence of the Board of Liquidators and its function of closing
the affairs of various government corporations. Its term of life is not
fixed.
Same; Right of Board of Liquidators to proceed as party-plaintiff;
Case at bar.—At no time had the government withdrawn the
property. Or the authority to continue the present suit, from the
Board of Liquidators. Hence, the Board can prosecute this case to
its final conclusion. The provisions of Section 78 of the Corporation
Law, the third method of winding up corporate affairs, find
application. The Board has personality to proceed as party-plaintiff
in this case.
Corporations; Implied authority of corporate officer to enter into
contracts.—A corporate officer, entrusted with the general
management and control of its business, has implied authority to
make any contract or do any other act which is necessary or
appropriate to the conduct of the ordinary business of the
corporation. As such officer, he may, without any special authority
from the Board of Directors, perform all acts of an ordinary nature,
which by usage or necessity are incident to his office, and may bind
the corporation by contracts in matters arising in the usual course
of business.
Same; Where similar acts of manager were approved by
directors.—Where similar acts have been approved by the directors
as a matter of general practice, custom, and policy, the general
manager may bind the company without formal authorization of the
board of directors. In varying language, existence of such authority
is established by proof of the course of business, the usages and
practices of the company and by the knowledge which the board of
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 46
directors has, or must be presumed to have, of acts and doings of its
subordinates in and about the affairs of the corporation. Where the
practice of the corporation has been to allow its general manager to
negotiate and execute contracts in its copra trading activities for and
in Nacoco's behalf without prior board approval, and the board
itself, by its acts and through acquiescence, practically laid aside
the by-law requirement of prior approval, the contracts of the
general manager, under the given circumstances, are valid corporate
acts.
Same; Ratification by corporation of unauthorized contract of its
officers.—Ratification by a corporation of an unauthorized act or
contract by its officers or others relates back to the time of the act
or contract ratified and is equivalent to original authority. The
corporation and the other party to the transaction are in precisely
the same position as if the act or contract had been authorized at the
time. The adoption or ratification of a contract by a corporation is
nothing more nor less than the making of an original contract. The
theory of corporate ratification is predicated on the right of a
corporation to contract, and any ratification or adoption is
equivalent to a grant of prior authority.
*Kalaw here, the then general manager of the NACOCO executed
forward sales contracts. These are the times where we did not yet have
what are called Commodity Futures Trading. Commodity Futures
Trading and forward sales contract are similar. We didn’t have
Commodity Futures Trading then but it was concerned with selling
commodities, goods or products when they are not yet available. You
sell them expecting that they will be real. So that’s what Maximo
Kalaw believed. He sold coconuts when it was not yet available.
Expecting of course, that they will be delivered or produced. But 4
devastating typhoons visited the Philippines, and the coconut produce
did not materialize, so NACOCO could not deliver the goods sold by
it. One particular person or company, which bought the said coconut,
(Dreyfus) instituted a complaint against NACOCO. But it was settled
out of court for about P1.3M. Later on, the new board of NACOCO
instituted an action against Kalaw and the other members of the Board
for negligence, bad faith and breach of trust. The case went all the way
to the SC. The issue is whether Kalaw et.al, are guilty of bad faith,
gross negligence and/or breach of trust.
The court held NO. Their similar acts have been approved by the
directors as a matter of general practice, custom, usage, emergency or
policy. The agent may bind the corporation without any formal
authorization from the Board. In this case, the corporate practice has
been to allow this general manager to negotiate and execute this
forward sales contract without prior approval of the Board. It even
appears from previous dealings that Kalaw signed these contracts by
himself alone. For the year ending 1947 NACOCO reaped gross profits
of over P3.5M and these contracts were executed by himself alone.
They were submitted to the Board not before, but after their
consummation. Even their predecessors, way back in the early 40s did
the same.
BUENASEDA VS. BOWEN & CO., INC.
(110 Phil. 464; Dec. 29, 1969)
CORPORATIONS; CONTRACTS ENTERED INTO BY THE
PRESIDENT; IMPLIED RATIFICATION BY BOARD OF
DIRECTORS.—The action of the Board of Directors of the
corporation in taking advantage of the benefits afforded by the
agreement entered into by the president in behalf of the corporation,
amounted to an implied ratification of the agreement and thereby
bound the corporation even without a formal resolution.

ID.; ID.; PAYMENT TO STOCKHOLDER OF PERCENTAGE
OF PROFITS FOR SERVICES RENDERED TO
CORPORATION.—Where a stockholder claims, or services
rendered, a certain percentage of the profits of the corporation under
an agreement entered into by and between him -and the corporation,
payment cannot be refused by the corporation on the ground that
since the profits form part of its assets, payment thereof requires a
declaration of dividends and/or resolution of the Board of Directors.
That the profits of the corporation form part of its assets and
payment of a certain percentage of the profits requires a declaration
of dividends and/or resolution of the BOD. Although the plaintiff is
a stockholder of the corporation he does not, however, claim a share
of the profits as such stockholder, but under the agreement between
him and the president of the corporation which has been impliedly
ratified by the BOD.
*the BOD knew of the agreement between Buenaseda and the
corporation. They did not repudiate. In the contrary, it acquiesced in
and took advantage of the benefits accorded by the agreement. Such
act, according to the court, is equivalent to imply the ratification and
binds the corporation even without formal board resolution.
So from all these cases we’ve discussed so far, an unauthorized act, or
non-approval of BOD maybe expressly or impliedly ratified. Express
of course, if there is a subsequent formal board meeting allowing or
approving the same. Implied, from the acts of the responsible
corporate officers.
1. It may be either by acquiescence or silence (Buenaseda vs
Bowen).
2. acceptance or retention of the benefits, (Francisco vs
GSIS)
3. recognition or adoption (Lopez Realty vs Fontecha)
REMOVAL AND FILLING UP OF VACANCIES
Q: May the directors or Trustees be disqualified from acting as
such?
A: Yes.
Q: How or when?
A: Yes when they possess the grounds set forth under Section 26
or under Section 22. Or even under the disqualifications set forth
under the AOI and by-laws. Because the AOI or by-laws may include
additional qualifications and disqualifications just like in the case of
Government vs El Hogar. In that case, the by-laws of the corporation
requires that the stockholders, I don’t know how many shares, I forgot,
hirap pag tumatanda, p*tang inang buhay to. Let’s assume it’s 500. The
director who has 500 shares disposed 200 of his shares, he will be
disqualified.
SEC. 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
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(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 in
paragraphs (a) and (b) above. The foregoing is without prejudice to
qualifications or other disqualifications, which the Commission, the
primary regulatory agency, or the Philippine Competition Commission
may impose in its promotion of good corporate governance or as a
sanction in its administrative proceedings.
SEC. 22. The Board of Directors or Trustees of a Corporation;
Qualification and Term. – xxx A director who ceases to own at least
one (1) share of stock or a trustee who ceases to be a member of the
corporation shall cease to be such. xxx
Q: May they be removed from office?
A: Yes. Pursuant to Section 27
SEC. 27. Removal of Directors or Trustees. – Any director or trustee
of a corporation may be removed from office by a vote of the
stockholders holding or representing at least two-thirds (2/3) of the
outstanding capital stock, or in a nonstock corporation, by a vote of at
least two-thirds (2/3) of the members entitled to vote: Provided, That
such removal shall take place either at a regular meeting of the
corporation or at a special meeting called for the purpose, and in either
case, after previous notice to stockholders or members of the
corporation of the intention to propose such removal at the meeting. A
special meeting of the stockholders or members for the purpose of
removing any director or trustee must be called by the secretary on
order of the president, or upon written demand of the stockholders
representing or holding at least a majority of the outstanding capital
stock, or a majority of the members entitled to vote.
If there is no secretary, or if the secretary, despite demand, fails or
refuses to call the special meeting or to give notice thereof, the
stockholder or member of the corporation signing the demand may call
for the meeting by directly addressing the stockholders or members.
Notice of the time and place of such meeting, as well as of the intention
to propose such removal, must be given by publication or by written
notice prescribed in this Code. Removal may be with or without cause:
Provided, That removal without cause may not be used to deprive
minority stockholders or members of the right of representation to
which they may be entitled under Section 23 of this Code.
The Commission shall, motu proprio or upon verified complaint, and
after due notice and hearing, order the removal of a director or trustee
elected despite the disqualification, or whose disqualification arose or
is discovered subsequent to an election. The removal of a disqualified
director shall be without prejudice to other sanctions that the
Commission may impose on the board of directors or trustees who,
with knowledge of the disqualification, failed to remove such director
or trustee.
*we recited cumulative voting last meeting
Q: A, B, C, D and E are siblings, they are the majority stockholders,
they hold the 800k out of the 1M of the outstanding capital stocks, F,
G, H and I holds 200k out of the 1M OCS. F was selected as a member
of the board by virtue of cumulative voting. 200k x 5 members of the
elected= 1M votes, so the directors A, B, C, D, E and F. Barely 2

weeks after their election, A, B, C, D and E, the majority, wanted to
oust F therefrom. May the majority shareholders (they’re holding 800k
Which is more than 2/3 of the OCS) be able to oust F therefrom?
A: YES. If he is ousted with cause. *basahin intindihin madaling
sagutin* Removal may be with or without cause, as the law says,
provided that removal without cause shall not prejudice the rights of
the minority derived from representation in the form or in accordance
with the provisions of this code. And that in accordance with the
provisions of this code refers their being elected by cumulative voting.
Q: Who has the power/ authority to remove a director/trustee?
May the directors by themselves oust or remove a fellow director?
A: NO. Because the power or authority to remove the director or
trustee is only vested to the stockholders
Q: is it only, because as we’ve discussed, the directors themselves
cannot oust their fellow directors/trustees. Is it only the
stockholders who may remove/ oust a director?
A: NO. According to section 26, it may also be vested to the
Commission, motu proprio or upon verified complaint, and after due
notice and hearing, order the removal of a director or trustee elected
despite the disqualification, or whose disqualification arose or is
discovered subsequent to an election.
Q: If the vacancy is by virtue of removal, natanggal si F sa example
natin. How may the vacancy be filled out?
A: Section 28 will apply.
SEC. 28. Vacancies in the Office of Director or Trustee;
Emergency Board. – Any vacancy occurring in the board of directors
or trustees other than by removal or by expiration of term may be filled
by the vote of at least a majority of the remaining directors or trustees,
if still constituting a quorum; otherwise, said vacancies must be filled
by the stockholders or members in a regular or special meeting called
for that purpose.
When the vacancy is due to term expiration, the election shall be held
no later than the day of such expiration at a meeting called for that
purpose. 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 authorizing the removal and this fact must be so stated in
the agenda and notice of said meeting. In all other cases, the election
must be held no later than forty-five (45) days from the time the
vacancy arose. A director or trustee elected to fill a vacancy shall be
referred to as replacement director or trustee and shall serve only for
the unexpired term of the predecessor in office.
However, when the vacancy prevents the remaining directors from
constituting a quorum and emergency action is required to prevent
grave, substantial, and irreparable loss or damage to the corporation,
the vacancy may be temporarily filled from among the officers of the
corporation by unanimous vote of the remaining directors or trustees.
The action by the designated director or trustee shall be limited to the
emergency action necessary, and the term shall cease within a
reasonable time from the termination of the emergency or upon
election of the replacement director or trustee, whichever comes
earlier. The corporation must notify the Commission within three (3)
days from the creation of the emergency board, stating therein the
reason for its creation.
Any directorship or trusteeship to be filled by reason of an increase in
the number of directors or trustees shall be filled only by an election at
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 48
a regular or at a special meeting of stockholders or members duly
called for the purpose, or in the same meeting authorizing the increase
of directors or trustees if so stated in the notice of the meeting.
In all elections to fill vacancies under this section, the procedure set
forth in Sections 23 and 25 of this Code shall apply.
Q: Who will elect them?
A: The Stockholder. (student’s answer na mali kaya may follow up
*see next question*)
Q: May not the BOD fill out the vacancy caused by the removal of
F, constituting a quorum, elect such?
A: NO. Basis: Section 28. Any vacancy occurring in the board of
directors or trustees other than by removal or by expiration of term may
be filled by the vote of at least a majority of the remaining directors or
trustees, if still constituting a quorum; otherwise, said vacancies must
be filled by the stockholders or members in a regular or special meeting
called for that purpose.
Q: so F here was removed from being a director. So there are 4
remaining directors here out of a 5-man member board. May the
remaining members of the board constituting a quorum fill up the
vacancy created by the removal of F?
A: NO. UNDERSTAND AND TAKE NOTE SECTION 28: Any
vacancy may be filled up by remaining BOD if still constituting a
quorum except by removal or expiration of term. F was removed!
So the board, even if they still constitute a quorum may not fill out the
vacancy
Q: In cases of removal by member of the board, when will the
vacancy be filled out?
A: the election may be held on the same day of the meeting authorizing
the removal and this fact must be so stated in the agenda and notice of
said meeting. In all other cases, the election must be held no later than
forty-five (45) days from the time the vacancy arose.
Q: if it is held in the same day of the removal, is notice required?
A: YES. Section 28 states that this fact must be so stated in the agenda
and notice of the said meeting. Such case is the same when it is held
at a subsequent stockholders meeting either by special or regular.
Because one of the essential requirements for a valid meeting is
NOTICE of the agenda.
Q: There is another matter whereby, directors resigned, namatay
or whatever. What happens if there is a 7-man member board and
there are only 3 of them left, which shall prevent the remaining
members of the board to constitute a quorum, and there is an
emergency matter that they are required to pass, who will act on
it para makaron sila ng quorum?
A: The vacancy may be temporarily filled from among the officers of
the corporation by unanimous vote of the remaining directors or
trustees. *TAKE NOTE*
Q: What will be the term of office of that director who will
temporarily be elected unanimously by the remaining members of
the directors or officers?
A: The action by the designated director or trustee shall be limited to
the emergency action necessary, and the term shall cease within a
reasonable time from the termination of the emergency or upon

election of the replacement director or trustee, whichever comes
earlier. Because of this phrase, the rule that the term shall cease within
a reasonable time is not absolute.
Q: A vacancy in the BOD may also occur by virtue of an increase
in their number. The board passes a resolution to increase the
number of the BOD from 5 to 7. It was approved at a meeting of a
stockholder, because it requires a stockholder’s approval today.
How will the vacancy be filled and who will fill up the vacancy?
A: Any directorship or trusteeship to be filled by reason of an increase
in the number of directors or trustees shall be filled only by an election
at a regular or at a special meeting of stockholders or members duly
called for the purpose, or in the same meeting authorizing the increase
of directors or trustees if so stated in the notice of the meeting.
Q: Can it not be filled up at the same meeting where the number
was increased?
A: Yes. Section 28: or in the same meeting authorizing the increase of
directors or trustees if so stated in the notice of the meeting.
Q: Who will fill up the vacancy? May it still be the BOD still
constituting a quorum?
A: NO. Because it is a subsequent provision from the statement that
the remaining members of the board may fill up a vacancy created in
the board except by removal or expiration. Meaning, under statutory
construction, the subsequent provision will apply. So NO. The
members of the board, even if they still constitute a quorum, cannot fill
up the vacancy created by an increase in the number of the directors
because that specific provision said by the stockholders.
These are the three instances when the BOD, even if they still
constitute a quorum, cannot be filled up by a vacancy created in
the board:
1. removal
2. expiration of term
3. increase in their number.
Q: A, B, C, D and F were elected as directors. 14 months ago, this
ordinary stock corporation, though their term of office expired 2
months ago. There was no election held or conducted, so they served
in a holdover capacity for 2 months now (meaning, their term expired
2 months ago). F resigned TODAY after 14 months of being a director.
May the remaining members of the board fill up the vacancy caused
by the resignation of F?
A: NO. because his term expired 2 months ago. The holdover capacity
implies that their term has already expired, therefor, under section 28,
they cannot fill up the vacancy. The law provides except by removal
or expiration of the term. The term of F expired 2 months ago,
therefor, only the stockholders or members can fill up the vacancy
created by a resignation of a holdover director.
Q: Is it necessary to make a report with the SEC regarding changes
on the constitution of the BOD?
A: Yes
Q: When should it be reported?
A: Pursuant to Section 25, within 30 days after the election
Q: Is that absolute?
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A: NO. Under the section 25 last paragraph, should a director, trustee
or officer die, resign or in any manner cease to hold office, the
secretary, or the director, trustee or officer of the corporation, shall,
within seven (7) days from knowledge thereof, report in writing such
fact to the Commission.
OCT- 20 (C)
COMPENSATION OF DIRECTORS OR TRUSTEES
SECTION 29. Compensation of Directors or Trustees. — In the
absence of any provision in the bylaws fixing their compensation, the
directors or trustees shall not receive any compensation in their
capacity as such, except for reasonable per diems: Provided, however,
That the stockholders representing at least a majority of the
outstanding capital stock or majority of the members may grant
directors or trustees with compensation and approve the amount
thereof at a regular or special meeting.
In no case shall the total yearly compensation of directors exceed ten
percent (10%) of the net income before income tax of the corporation
during the preceding year.
Directors or trustees shall not participate in the determination of their
own per diems or compensation.
Corporations vested with public interest shall submit to their
shareholders and the Commission, an annual report of the total
compensation of each of their directors or trustees.
[General Rule] Under the provisions of Sec. 29, corporate directors or
trustees are not generally entitled to compensation, except for
reasonable per diems.
[Exceptions] They are not generally entitled thereto but they may be
entitled nonetheless if: (1) there is a bylaw authorizing their
compensation; or (2) there is a grant of the majority of the OCS.
- Note that it is not absolute, because directors/trustees cannot
participate in the meeting where the SH would give them
compensation or per diems. Meaning, they have no voting rights
for purposes of determining their own compensation. So if they
hold 80% of the ACS, the basis of the quorum requirement for
voting is only 20%.
Q: If there is a grant by a provision in the by law for their compensation
or a vote a majority of the ACS, excluding the shares of the
directors/trustees themselves, how much will they be entitled thereto?
A: It shall not exceed ten percent (10%) of the net income before
income tax of the corporation during the preceding year.
- “Net income before income tax” is profit less cost and expenses.
CENTRAL COOPERATIVE EXCHANGE (CCE) v.
TIBE, JR.
Tibe, Jr., a director of CCE, appropriated money pursuant to a board
resolution which were said to be per diems and transportation
expenses, representation expenses and commutable discretionary
funds, contrary to the by-law provision reserving to the SH the power
to determine the compensation of the board.
SC: this cannot be done because directors are presumed to act without
compensation. In the absence of an agreement usually contained in the
bylaws, and the by-laws have already granted the SH to determine the
compensation of the members. And the SH have likewise spoken,
restricting the compensation the members of the board to actual
transportation expenses, per diem of a fixed amount, and actual
expenses.

Q: What does the phrase “in their capacity as such” mean?
A: They can only be denied compensation when they are acting as
directors or trustees.
WESTERN INSTITUTE v. SALAS
They are entitled to the compensation even without the bylaw
provision authorizing it or without the grant of the majority of the OCS.
The proscription in granting compensation to the directors/trustees is
not a sweeping rule.
Under the Old Law, “as such directors”; and under the Revised
Corporation Code, “in their capacity as such”. They are the same. If
they render services beyond their ordinary duties or functions as
directors, they may receive compensation by a mere board resolution.
The compensation granted to them here is in their capacities as
Chairman, Vice Chairman, Secretary, and Treasurer, and not in their
ordinary powers and functions as members of the BOD.
GOVERNMENT v. EL HOGAR FILIPINO
In the 6th cause of action filed by the SolGen, it is alleged that the BOD
is receiving large amounts of compensation, rather than serving
without pay. There is a bylaw provision granting the members of the
BOD compensation of 5% of the net profits to be distributed to them
with their respective participation during the board meetings. As the
law stands now, not more than 10% of the net income before tax. Ito
after tax na. So, the validity of that bylaw provision is at issue here.
SC: the judicial intervention is not proper since the power to fix the
same belongs to the corporation, to be determined by its bylaws. If a
mistake has been found, the remedy remains in the hands of the
corporation itself, through the SH and that would be for an appropriate
amendment of the bylaws
[Summary:] Directors may receive compensation when there is a
bylaw provision authorizing it and when there is a grant of the majority
of the OCS, excluding the directors themselves, and when they render
services other than their usual or ordinary functions as directors.
ROGERS vs. SHIELD
(One of the most famous cases in the US jurisprudence)
This case involves bonuses and option plans aside from the already-
large salaries of the president of the American Tobacco Company,
which came to over $2Million (around P100Million). One of the suits
brought involved the bonus payment approved by the majority of the
SH.
The US SC that much weight is to be given to the actions of the SH,
and that the bylaws is supported by the presumption of continuity and
regularity. But the rules prescribed by it cannot, against the protest of
the SH, be used to justify payment of sums of salaries so large as in
substance and in effect amounts to the spoilation or wastage of
corporate assets and funds. Further, if a bonus payment has no relation
to the value of services for which they are actually granted, it is in
reality a ???. And the majority SH has not power to give away
corporate assets and funds against the protest of the minority. Lastly,
if there is in effect wastage or spoilation of corporate assets and funds,
the reasonableness of the compensation may be looked into by the
court despite authorization from the SH and or by the grant of the
bylaw provision.
LIABILITY OF CORPORATE OFFICERS
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 interest in conflict with their duty as such
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directors or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.
A director, trustee or officer shall not attempt to acquire, or acquire
any interest adverse to the corporation in respect of any matter which
has been reposed in them in confidence, and 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 would have accrued to the corporation.
SECTION 33. Disloyalty of a Director. — Where a director, by virtue
of such office, acquires a business opportunity which should belong to
the corporation, thereby obtaining profits to the prejudice of such
corporation, the 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 least two-thirds (2/3) of the
outstanding capital stock. This provision shall be applicable,
notwithstanding the fact that the director risked one's own funds in the
venture.
Generally, under the corporate entity theory, corporate
directors/officers/agents are not liable for the obligations incurred by
the corporation through their acts, if they did so within their powers
and in good faith. Obligations incurred by them acting as corporate
agents are not ??? but the direct accountability of the corporations that
they represent. Secondary or even primary liability may be incurred by
them but only in exceptional circumstances may warrant.
In order to hold a corporate director/agent/officer primarily liable,
there are two requisites:
1. The complaint must allege that the director/officer voted or assented
to; and
2. The complainant must clearly and convincingly prove such
unlawful act, negligence or bad faith.
ZARAGOZA v. TAN
It was not proven because he was not summoned. He was not a party
to the case. So how can you prove that he acted in bad faith, gross
negligence, etc. when he was never a party to the case?
Respondent Tan was not at all impleaded in the illegal dismissal case.
Thus, her participation in the petitioner’s dismissal was never
established in any of the proceedings therein. Thus, she cannot be made
answerable for the corporate obligation.
TRAMAT MERCANTILE INC. v. CA
The corporate entity theory was applied in this case. Ong acted in his
official capacity perforce, he cannot be made personally or solidarily
liable with the corporation. The cause of action should be against the
corporation itself.
Nonetheless, the SC enumerated four specific instances when even a
director/officer is acting for an in behalf of a corporation, they may be
held personally/solidarily liable with the corporation. [Personal
liability of a corporate director, trustee or officer along (although not
necessarily) with the corporation may so validly attach, as a rule, only
when —]
1. He assents (a) to a patently unlawful act of the corporation, or
(b) for bad faith, or gross negligence in directing its affairs, or
(c) for conflict of interest, resulting in damages to the
corporation, its stockholders or other persons;
2. He consents to the issuance of watered stocks or who, having
knowledge thereof, does not forthwith file with the corporate
secretary his written objection thereto;

3. He agrees to hold himself personally and solidarily liable with
the corporation;
4. He is made, by a specific provision of law, to personally answer
for his corporate action. (See Llamado v. CA)
LLAMADO v. CA
This is the fourth instance of when an officer/director may be held
personally liable (i.e. corporate entity theory not applicable). Under the
BP 22, the person/s who actually signs the check for a corporation or a
juridical entity shall be held personally liable under the provisions of
that law. Wherefore, the defense of the corporate entity theory will not
hold water. Because they were made to be so personally liable by a
specific provision of the law.
UICHICO v. NLRC
In labor cases, the corporate directors or officers who retrenched
employees done with malice or In bad faith, may be held solidarily
liable with the corporations. Petitioners here where the one who
retrenched the private respondents on the plain ground of serious
business losses that has no basis in fact. This is indicative of bad faith.
Even if there is no provision in labor laws which provide for their
solidary liability, they may still be held such because of the first
instance (He assents (a) to a patently unlawful act of the corporation,
or (b) for bad faith, or gross negligence in directing its affairs, or (c)
for conflict of interest, resulting in damages to the corporation, its
stockholders or other persons.)
THREE-FOLD DUTY OF DIRECTORS
The liabilities of the corporate officers/trustees/directors may also be
based on the premise that they owe a threefold duty to the corporation
and the SH, i.e.
3. OBEDIENCE — Willfully and knowingly voting for or assent to
patently unlawful acts of the corporation is a violation of their duty
of obedience.
• If the law says, the SH can exercise their rights to examine the
books, they shall obey the same, otherwise, the SH can institute
a case of a Writ of Mandamus + Damages against them.
4. DILIGENCE — Gross negligence or bad faith in directing the
affairs of the corporation is a violation of their duty of diligence.
5. LOYALTY — Acquiring any personal or pecuniary interest in
conflict with their duty as such directors or trustees is a violation of
their duty of Loyalty.
The degree of diligence is relative — it should be such care and
diligence as an ordinary and prudent man shall reasonably exercise
under similar circumstances. Liability therefore shall rest upon the
common law principle which renders liable every agent who violates
his authority or neglects his duty to the damage of the corp.
The more fair and satisfactory rule is that degree of care and diligence
which an ordinary prudent director could reasonably be expected to
exercise in a like position under similar circumstances.
Nonetheless, if he is charged with the violation of duty of diligence,
they can always advance the business judgment rule to evade.
Business Judgment Rule — Although directors are commonly said to
be responsible both for reasonable care and also prudence, the formula
is continually repeated that they are not liable for losses due to
imprudence or honest error of judgment. The business judgment rule
in effect states that questions of policy and management are left solely
to the honest decision of the board of directors and the courts are
without authority to substitute its judgment as against the former. The
directors are business managers and as long as they act in good faith,
its actuations are not subject to judicial review.
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MONTELIBANO v. BACOLOD-MURCIA
MILLING CO., INC.
Directors are not liable for losses due to prudence or honest errors of
judgments. Questions of value and policy may be gross as to show their
unfitness to manage the corporation, but the court will not, in general,
undertake to review contracts or other business transactions authorized
by the board, because a large discretion is lodged unto them.
[Duty of Loyalty]
• Q: What is the duty of Loyalty?
A: Directors occupy a fiduciary relation to the corporation and the
SH as a body. They are trustees in relation to the SH ??? should
exercise the not only care and diligence but also utmost good faith
without taint of selfish motive. Sec. 30-31 provides for specific
instances when a director/officer may violate his duty of loyalty.
• Under the first paragraph, “any personal or pecuniary interest in
conflict with their duty as such directors or trustees,” and “attempt
to acquire, or acquire any interest adverse to the corporation in
respect of any matter which has been reposed in them in confidence
and upon which, equity imposes a disability upon themselves to
deal in their own behalf”
• And under Sec. 33, “Where a director, by virtue of such office,
acquires a business opportunity which should belong to the
corporation, thereby obtaining profits to the prejudice of such
corporation”. These provisions inclusive of Sec. 31-32 will be
taken up separately (ie, Self-dealing and interlocking directors). It
makes reference to what is called the Forbidden profits rule.
[Forbidden Profits Rule]
• Forbidden in the sense that directors/officers are fiduciary
representatives of the corporation and as such, they are not allowed
to retain a commission or bonus or personal profits for their official
actions. This may also refer to those arising from transactions of
directors with third persons which may involve misappropriation of
corporate opportunities and/or disloyal diversion of business.
Directors and officers are corporate ??? such that they cannot utilize
their positions for their personal advantage or benefits, to the
detriment of the corporation.
• A typical example of this is Goth vs. Loft Inc. (?) Goth, a director
of Loft Inc., appropriated and bought the Pepsi Cola formula using
Loft’s money to put up another corporation to process and
manufacture the product. Goth used the materials, tools,
implements, employees, and even the credit facilities available to
Loft to perfect the formula. When he did, he sold it to Loft for
distribution. At the instance of the minority SH, he required Goth to
return the forbidden the forbidden profit to Loft Inc. The case went
US SC ruled that Goth appropriated a business opportunity
rightfully belonging to the corporation, and must therefore be
account for all the profits he derived therein.
• This of course may also be known as the Corporate Opportunity
Doctrine, which the SEC had the occasion to apply in the case of
Bitong v. Costa (?), when it ruled that the corporate opportunity
doctrine is nothing new to the law. It places the director of a
corporation in a position of a fiduciary and prohibits him from
seizing a business opportunity at the expense and/or with the
facilities of the corporation. As the law stands now, even if the ???
It cannot appropriate to himself a business opportunity which
should belong to the corporation. Undivided loyalty shall always be
insisted upon, and personal gain will be denied to a director when
he has taken a position adverse to or in conflict to the best interest
of the corporation where he is a director.

[Distinction between Sec. 30 and Sec. 33]
• Note that there is a distinction between the second paragraph of Sec.
30 vs. Sec. 33 regarding the disloyal acts of a directors. One of them
is subject to ratification, the other is not.
• Q: A, B, C, D, and E are the directors of a realty corporation
engaged in the buying and selling of any and all types of realties. A
is the president. Z has a property located in the BGC Area, fair
market value is P110Million. Z is going abroad and does not intend
to come back here. Z approached A as a personal friend and said
“Pre, I will send you may property in BGC for P100Million.” A,
being a president of a realty company, knows that the FMV of the
property is P110Million so he acquired it. Later on, he sold it to the
corporation for P105Million. A minority SH questioned the disloyal
act of A, but A said “I will have my disloyal act ratified by the SH”.
May it be ratified?
A: It is subject to ratification, because he only acquired a business
opportunity rightfully belonging to him. (Sec. 33)
• Q: What if: Z approached A armed with a letter saying that “I will
sell my property to the corporation for P100Million, through the
president A, his good friend”, to which A said that he will call a
meeting to consider buying it. During the meeting and deliberation,
the directors unanimously agreed to acquire the property for
P100Million, but since they have no funds to pay immediately, they
also agreed to secure a loan. The following day, E, who also
personally knows Z, approached Z and said, “I will buy your
property for P105Million, instead of P100Million offer to the
corporation.” Z agreed. Later on, E sold it to the corporation,
making a P5-Million personal profit. A SH complained and sought
for the return of the forbidden profit.
A: It cannot be ratified because it was already a matter reposed in
him in confidence and as to which equity imposes a disability upon
him to deal on his own. E would not have known about the property
for sale were it not for the meeting called for. Anong ginawa ni E?
Trinaydor n’ya ang kanyang sariling korporasyon. It was a matter
reposed in him in confidence. (Sec. 30, par.2)
• The violation under Sec. 33 is merely an acquisition of a business
opportunity which may rightfully belong to the corporation, while
the violation under Sec. 30 par. 2, is a trust reposed in him in
confidence, not subject to ratification.
STRONG v. REPIDE
The Philippine Sugar State Developers owns friar lands. Mrs. Strong
is a SH of about 800 shares. Repide, a director of the corp and a
majority SH, sought to acquire the shares of Mrs. Strong. Repide
himself was appointed as the chief negotiations for the acquisition of
all friar lands by the governor generals. So, he should have known that
their shares would considerably increase in the future. So, Repide
employed Krauffman to acquire Mrs. Strong’s shares. He bought it for
16,000 Mexican Dollars (equivalent to 1/2 US $). 2.5 months later, the
shares have already pegged to 76,000 US dollars. Mrs. Strong then
sought to annul the sale.
SC: It should be annulled. The concealment of the purchaser was a
studied and intentional omission characterized by a deceitful
machination to obtain the purchase without giving information as to
the state and probable result to the vendor so that he could buy it at a
much lower price. Under all the facts, the law would be impotent if the
sale will not be sold aside.
Directors occupy a fiduciary relations with the corporation and the SH
as a body. They cannot advance their own selfish motives to the
damage and prejudice of their principal.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 52
OCT- 22 (G)
SELF DEALING DIRECTORS AND INTERLOCKING
DIRECTOR AND EXECUTIVE COMMITTEE
SELF DEALING DIRECTORS
SEC. 31. Dealings of Directors, Trustees or Officers with the
Corporation. – A contract of the corporation with (1) one or more of
its directors, trustees, officers or their spouses and relatives within the
fourth civil degree of consanguinity or affinity is voidable, at the option
of such corporation, unless all the following conditions are present:
(a) The presence of such director or trustee in the board meeting in
which the contract was approved was not necessary to constitute a
quorum for such meeting;
(b) The vote of such director or trustee was not necessary for the
approval of the contract;
(c) The contract is fair and reasonable under the circumstances;
(d) In case of corporations vested with public interest, material
contracts are approved by at least two-thirds (2/3) of the entire
membership of the board, with at least a majority of the independent
directors voting to approve the material contract; and
(e) In case of an officer, the contract has been previously authorized
by the board of directors. Where any of the first three (3) conditions
set forth in the preceding paragraph is absent, in the case of a contract
with a director or trustee, such contract may be ratified by the vote of
the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or of at least two-thirds (2/3) of the members
in a meeting called for the purpose: Provided, That full disclosure of
the adverse interest of the directors or trustees involved is made at
such meeting and the contract is fair and reasonable under the
circumstances.
Self-dealing director,definition [SDD for short] – a director of a
corporation which deals or transacts with his own corporation.
Status of a contract entered into by a Self Dealing Director
- GR: it is VOIDABLE at the option of the corporation.
Q: At who’s option is the contract voidable?
A: at the option of the corporation
Q: May the contract entered into by a SDD be valid per se?
A: Yes, if the conditions set forth under Sec 31 of the Revised Corpo
Code are met, and these are:
1. The presence of such director or trustee in the board meeting
in which the contract was approved was not necessary to
constitute a quorum for such meeting;
2. The vote of such director or trustee was not necessary for
the approval of the contract;
3. The contract is fair and reasonable under the
circumstances;
4. In case of corporations vested with public interest, material
contracts are approved by at least two thirds (2/3) of the
entire membership of the board, with at least a majority of
the independent directors voting to approve the material
contract; and
5. In case of an officer, the contract has been previously
authorized by the board of directors.

Q: if any of the three (3) conditions mentioned in Sec 31 are NOT
PRESENT, what would be the status of the contract?
A: The contract is voidable, because the contract may still be valid
despite the absence of the three (3) reqs mentioned in Sec 31 provided
that: [refer to (e) of Sec 31)
 In case of an officer, the contract has been previously
authorized by the board of directors. Where any of the first
three (3) conditions set forth in the preceding paragraph
is absent,
 in the case of a contract with a director or trustee, such
contract may be ratified by the vote of the stockholders
representing at least:
▪ two-thirds (2/3) of the outstanding capital stock or
▪ of at least two-thirds (2/3) of the members in a
meeting called for the purpose:
 Provided, That full disclosure of the adverse interest of the
directors or trustees involved is made at such meeting and
the contract is fair and reasonable under the circumstances.
NOTE: So a problem may arise in this situation if the SDD holds a
substantial block of the shares in the corporation itself, so he holds
the 2/3, because this would make it easier for him to ratify his own
contract.
Q: So what can we do in this case?
A: We apply the last paragraph of Sec 31. Where the courts may
determine the reasonableness and or fairness of a contract.
The courts will ask the ultimate question: whether the
contract was honest and beneficial to both the SDD and the corporation
because there is no legal yard stick. So, the question will always be that
of fact. So they must always determine whether the bargain was a good,
fair and honest one.
In effect, a contract should carry the earmarks of an “arms-
length bargain”. If it does not carry such then and or it was proven
that the contract was not beneficial and honest, then the courts will set
aside the contract.
[Prime White Cement v. IAC and Te]
DOCTRINE: A director of a corporation holds a position of trust and
as such, he owes a duty of loyalty to his corporation. In case his
interests conflict with those of the corporation, he cannot sacrifice the
latter to his own advantage and benefit. As corporate managers,
directors are committed to seek the maximum amount of profits for the
corporation. This trust relationship "is not a matter of
statutory or technical law. It springs from the fact that directors have
the control and guidance of corporate affairs and property and hence
of the property interests of the stockholders.
Q: Why was the contract entered by Te with his own corporation
set aside?
A: Because the contract entered by Te was VOID.
Members of the Board of Directors [BOD] has a duty of loyalty to its
corporation. In case of conflict of interest, he cannot advance his own
selfish desires for his own benefit, the well-being of the corporation
should be paramount to his own wants.
Te, being both a member of a BOD and the auditor of Prime White, he
should have known that the prices of cement will be increased in five
years, in fact even one of his own memorandums covered increase of
prices of cement. But, despite this, he did not include a provision in his
contract with Prime White to allow increase of prices that are mutually
acceptable to the parties, he set a fixed rate for 5 yrs. His contracts with
his dealers, on the other hand, where subject to price increase.
So, Te, as a director and auditor, has unduly prejudiced his own
corporation, and was disloyal to his own corporation. Hence the court
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 53
ruled that he cannot be allowed to reap the benefits of his own
disloyalty.
INTERLOCKING DIRECTORS
SEC. 32. Contracts Between Corporations with Interlocking
Directors. – Except in cases of fraud, and provided the contract is fair
and reasonable under the circumstances, a contract between two (2)
or more corporations having interlocking directors shall not be
invalidated on that ground alone: Provided, That if the interest of the
interlocking director in one (1) corporation is substantial and the
interest in the other corporation or corporations is merely nominal,
the contract shall be subject to the provisions of the preceding section
insofar as the latter corporation or corporations are concerned.
Stockholdings exceeding twenty percent (20%) of the outstanding
capital stock shall be considered substantial for purposes of
interlocking directors.
Interlocking Directors, Definition - An interlocking director is a
director in one corporation who deals or transacts with another
corporation of
which he is also a director. In such case, there may effectively be a dual
agency, a divided allegiance where allegiance in one corporation may
subordinated to the other.
Status of a contract entered into by an Interlocking Director
- GR: VALID
- unlike in the case of a contract entered into by an SDD which are
generally voidable at the option of the corporation generally because
when there is fraud or if the contract was not fair and or unreasonable,
the court may likewise set it aside.
Q1: When does it become voidable?
A: If an interlocking director in one (1) corporation is substantial and
the interest in the other corporation or corporations is merely nominal,
the contract shall be subject to the provisions of the preceding section
insofar as the latter corporation or corporations are concerned. So in
this case, the interlocking director will be considered as an SDD and is
subject to Sec 31 instead of Sec 32. Hence, his contract is now
voidable.
Q2: if it is voidable only, may it be ratified? And how?
A: Yes, in accordance with Sec 31.
Sec 31 provided that: [refer to (e) of Sec 31)
 In case of an officer, the contract has been previously
authorized by the board of directors. Where any of the first
three (3) conditions set forth in the preceding paragraph
is absent,
 in the case of a contract with a director or trustee, such
contract may be ratified by the vote of the stockholders representing at
least:
▪ two-thirds (2/3) of the outstanding capital stock or
▪ of at least two-thirds (2/3) of the members in a
meeting called for the purpose:
 Provided, That full disclosure of the adverse interest of the
directors or trustees involved is made at such meeting and the contract
is fair and reasonable under the circumstances.
Q1: A is a director of a realty company engaged in the buying and
selling of real properties. He is a director of the corporation. A
holds 20% of the outstanding capital stock (OCS) of the realty
company.
A is ALSO a director of construction company. He holds
18% of the OCS of the construction company.
The realty corpo and construction corpo enters into a
contract. What is the status of the contract?

A: VALID, because the interest of the director not more than 20% or
is NOT SUBSTANTIAL in both companies.
Q2: What if A owns 22% of the OCS in the realty company and
20% of the OCS only in the construction company. What is the
status of the contract?
A: VOIDABLE, at the option of the construction company because
according to Sec 31 if the interest of an interlocking director in one
corporation is a substantial one and nominal in the other corporation,
the contract shall be subject to Sec 31 insofar as the latter
corporation or corporations are concerned. Hence, it is at the
option of the construction company since A holds nominal stock there.
Substantial – More than 20%
Nominal – 20% and below
NOTE:
Contract is VALID:
1. If interlocking director holds substantial interest in BOTH
CORPORATIONS
2. if interlocking director holds nominal interest in BOTH
corporations
Contract is VOIDABLE and subjected to Sec 31 if – The
interlocking director owns substantial interest in one corporation and
nominal interest in the other. It will be voidable at the option of the
corporation where he holds nominal share kasi it says nga eh insofar
as the latter corporation or corporations are concerned..
DERIVATIVE SUIT
Q: In cases of mismanagement of a corporation, who may institute
a case to redress or remedy a wrong done against the corporation?
A: The board of directors because it owns corporate powers, all
business are conducted and all properties are controlled by the board
of directors.
GR: Stockholders CANNOT SUE FOR THE IMPAIRMENT OF
THE BODY OF THE SHARES BY VIRTUE OF
MISMANAGEMENT – Because to allow a stockholder to institute a
recovery suit may result in gaining preference corporate creditors, and
even perhaps, multiplicity of suits.
XPN: Derivative Suits
Three (3) Suits wherein a stockholder may be for or against the
corporation.
1. Derivative Suit - an action based on injury to the
corporation – to enforce a corporate right – wherein the
corporation itself is joined as a necessary party, and recovery
is in favor of and for the corporation. It is a suit granted to
any stockholder to institute a case to remedy a wrong done
directly to the corporation and indirectly to stockholders.
2. Individual/Direct Suit – instituted in the name of an
individual stockholder to redress or remedy a wrong done
against his personal right as a stockholder.
 Ex: He was denied of his right to inspect corporate
books and records or he was denied to exercise his pre-
emptive rights.
 In this case there is no damage to the corporation.
3. Representative/Class Suit – This is brought by a
representative stockholder in representation of all other
stockholders who may be similar in fate, either in a
derivative suit, if the damage or injury is caused by the
corporation, or, in an individual suit, if the damage or injury
is personal to the stockholders themselves.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 54
Q: So in order for the stockholder to institute this derivative suit,
what are the requirements?
A:
1. The party bringing the suit should be a stockholder at the
time of the act or transaction complained of;
2. he has tried to exhaust intra-corporate remedies such as he
made a demand to the BOD for appropriate relief;
3. The cause of action actually involves on the corporation the
wrongdoing or harm having been caused to the corporation,
and not to the stockholder bringing the suit.
Q: if there is a benefit derived from the institution of the action, to
whom would it inure to?
A: To the corporation because the corporation is the real party in
interest, and it is a suit brought for and in behalf of the corporation.
Q: May the stockholder instituting the suit for and in behalf of the
corporation be entitled to reimbursement of reasonable expenses
like expensive costs of suit and or atty fees?
A: Yes, the party instituting the suit for and in behalf of the corporation
will be entitled to reimbursement of reasonable expenses ONLY IF
THE SUIT IS SUCCESSFUL to avoid harassment suits that may be
filed left and right against those in charge of management.
[Pascual v. Orozco]
DOCTRINE: In suits of this character the corporation itself and not
the plaintiff stockholder is the real party in interest.
Q: Can he sue for the years 1899 to 1903?
A: Plaintiff in this case, by reason of the fact that he is a stockholder,
has the right to maintain a suit for and in behalf of the Bank but the
extent of such right depends when, how and what purpose he acquired
the shares of stock.
Plaintiff acquired the shares only in November 1903. Thus,
he can sue only from that day onward, and NOT on the year 1899 till
before he became a stockholder since the right to sue is incapable
transfer. As one of the requisites states, he must have been a
stockholder at the time the act or transaction complained of took place.
1899-October 1903, he was NOT YET a stockholder.
[Everette v. Asia Banking]
DOCTRINE: Invoking the well-known rule that shareholders
cannot ordinarily sue in equity to redress wrongs done to the
corporation, but that the action must be brought by the Board of
Directors.
All corporate powers, all business are conducted and all properties are
controlled by the Board of Directors. But it is subject to an exemption
particularly regarding demand on the board who instituted the action.
In this case, the company is under the complete control of the
defendants or the principal defendants where a demand on their part to
institute an action would be a useless exercise because they will not
sue themselves.
[Republic Bank v. Cuaderno]
DOCTRINE: Philippine jurisprudence is settled that an individual
stockholder is permitted to institute a derivative or representative
suit on behalf of the corporation wherein he holds stock in order
to protect or vindicate corporate rights, whenever
(1) the officials of the corporation refuse to sue, or
(2) are the ones to be sued or
(3) hold the control of the corporation. In such actions, the suing
stockholder is regarded as a nominal party, with the corporation
as the real party in interest
Perez, in this case, is not suing for his individual interest but
that of the company. It appears that it is futile to demand action by the

corporation since the majority of the directors are the nominees and the
creatures of Roman.
NOTE: stockholders MUST have been stockholders at the time the act
or transaction complained of took place.
It appears that the facts pleaded herein were sufficient to
constitute a cause of action because the appointments made by the
directors were made solely to protect Roman from criminal
prosecution. The money disbursed for their compensation would a
wastage of corporate assets or funds since it was not the intention of
the corporation to shield any of the corporate officers from
criminal prosecution, it is personal to the said officer.
[Western Union Tech v. Salas]
DOCTRINE: Among the basic requirements for a derivative suit to
prosper is that the minority shareholder who is suing for and on behalf
of the corporation must allege in his complaint before the proper forum
that he is suing on a derivative cause of action on behalf of the
corporation and all other shareholders similarly situated who wish to
join.
The issue here is WON the civil aspect of a criminal action may be
considered as a derivative suit and the court HELD NO.
A mere appeal on the civil aspect of a criminal action cannot
be treated as a derivative suit because among the basic requirements
for a derivative suit to prosper is that the stockholders suing for and on
behalf of the corporation.
The case instituted was a criminal action, the complainant
versus the defendant. There was no showing that case was instituted
for and on behalf of the corporation nor was the corporation ever
impleaded in the action, and one of the essential requisites that we were
saying was that corporation must be made a party to the case, because
it is the real party-in-interest. A suing stockholder is merely the
nominal party, hence it cannot be considered as a derivative suit
[San Miguel Corporation v. Khan]
DOCTRINE: The requisites for a derivative suit are as follows:
a) the party bringing suit should be a shareholder as of
the time of the act or transaction complained of, the number of his
shares not being material;
b) he has tried to exhaust intra-corporate remedies, i.e.,
has made a demand on the board of directors for the appropriate
relief but the latter has failed or refused to heed his plea; and
c) the cause of action actually devolves on the
corporation, the wrongdoing or harm having been, or being caused
to the corporation and not to the particular stockholder bringing
the suit.
The bona fide ownership by a stockholder of stock in his
own right suffices to invest him with standing to bring a derivative
action for the benefit of the corporation. The number of his shares
is immaterial since he is not suing in his own behalf, or for the
protection or vindication of his own particular right, or the redress
of a wrong committed against him, individually, but in behalf and
for the benefit of the corporation.
Q: Did De Los Angeles pay the demand on the part of the board
who instituted the action?
A: No, he actually impugned the resolution that the Board was trying
to pass in order to guarantee the loan undertaken by Neptunia
Corporation. It would be futile for De los Angeles to seek remedy from
the Board because the Board Members were actually trying to
perpetuate fraud upon San Miguel Corporation by guaranteeing or
paying of their loan to that corporation.
Demand is useless, because during the Board meeting in
which this was taken up, where he was present, he vehemently objected
tot he Board resolution, but he was outvoted by a majority of the
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 55
members the Board, hence a demand would be a useless exercise
because they will not sue themselves.
Note here that De los Angeles was a stockholder which only
holds 0.000016% or 1/16 of 1% but the law only requires that he must
have been a stockholder at the time the act or transaction complained
of occurred. It doesn't matter how many shares he holds.
[Chase v. Buecamino]
DOCTRINE: The evidence of defendants proves very clearly that
right from the start, Chase was by them recognized as a
stockholder and initial incorporator with 600 paid up shares
representing a 1/3 interest in Amparts, and that would be enough
for Chase to have the correct personality to institute this derivative
suit; the second place, it also appears apparently undenied that
Chase did not win in California so that he did not recover the
$150,000.00 that he had prayed for there against Overseas, which
if he had would really in the mind of the Court have put him in
estoppel to intervene in any manner as incorporator or
stockholder of Amparts; and in the third place and most important
it should not be forgotten that Chase has filed the present case not
for his personal benefit, but for the benefit of Amparts, so that to
the Court the argument of estoppel as against him would appear
to be out of place
Q: Can it not be said that Chase is in estoppel because he instituted
an action in California, and then he instituted an action here in the
CFI of Manila, or to say the least, will he not be guilty of forum
shopping?
A: NO, because in the suit filed by Chase in California did not implead
the corporation as a party and it was a direct suit instituted against an
individual. Whereas the suit filed in the Philippines was against the
members of the Board of Directors and a corporation was properly
impleaded in the case.
The suit filed in California was a direct individual suit, he
was the principal complainant. The suit he filed in the Philippines was
a derivative suit, to which the principal complainant was the
corporation. So neither will estoppel or even forum shopping will
apply because the party who instituted the case in the Philippines
is the corporation itself, it is not Chase himself, he is merely a
nominal party. The party that was prejudiced was not Chase but
rather the corporation itself.
[Reyes v. Tan]
DOCTRINE: where corporate directors are
guilty of a breach of trust — not of mere error of judgment or
abuse of discretion — and intracorporate remedy is futile or
useless, a stockholder may institute a suit in behalf of himself and
other stockholders and for the benefit of the corporation, to bring
about a redress of the wrong inflicted directly upon the
corporation and indirectly upon the stockholders.
Where corporate directors are guilty of breach of trust, or
abuse of discretion, an intra-corporate remedy will be an exercise. A
stockholder may institute a case in behalf of the corporation and all
other stockholders to bring about redress for the wrong done to the
corporation, and it directly to the stockholders as a body.
In this case, the importation of finished products instead of
raw materials and the failure of the Board to take appropriate actions
on those responsible for the business of company constituted from or
consented to.
That bad faith or fraud or voting or assenting to patently
unlawful things would render them personally or solidarily liable. A
breach of trust was present which justified the derivative suit.

[Gamboa v. Victorino]
DOCTRINE: An individual stockholder is permitted to institute a
derivative suit on behalf of the corporation wherein he holds stock
in order to protect or vindicate corporate rights, whenever the
officials of the corporation refuse to sue, or are the ones to be sued
or hold the control of the corporation. In such actions, the suing
stockholder is regarded as a nominal party, with the corporation
as the real party in interest. In the case at bar, however, the
plaintiffs are alleging and vindicating their own individual
interests or prejudice, and not that of the corporation. At any rate,
it is yet too early in the proceedings since the issues have not been
joined. Besides, misjoinder of parties is not a ground to dismiss an
action.
Derivative suit is a suit brought by a stockholder to remedy or redress
a wrong done to the corporation. In this case, the plaintiffs here are
redressing or remedying a wrong done against their persons, as
stockholders.
There was a point in time before the issuance of the 823
unissued shares that they were the majority stockholders. Let us
assume that they hold 52%, so that in the next election of the Board, as
we have said then they serve for a term of 1 year. They will gain control
of the corporate affairs. Assuming that there are 5 directors, they can
have 3 seats in the board.
And as we all know, the quorum requirement is 3 out of 5.
And that the vote of 2 members of those constituting a quorum can
pass a valid resolution, BUT, as we were saying, to forestall the take
over of the plaintiffs, the 823 shares left unsubscribed were subscribed
by the others, thereby diluting the 52% of the shares held by the
plaintiffs, meaning they can not elect anymore 3 of the 5 members of
the board.
So they questioned the actuation of the 4 other members.
Q: Is derivative suit the appropriate suit?
A: NO, because there are vindicating their own personal interest not
that of the corporation. A wrong done against their persons.
PREEMPTIVE RIGHT
Pre-emptive right is a right granted to the stockholders to subscribe to
all issues or dispositions of shares of the corporation. When these 823
shares were subscribed by them, they were no longer holders of 52%,
maybe just about 48% na lang, so it is a wrong done against their
person. There is no wrong done against the corporation, and
henceforth, derivative suit is not a proper suit, but rather an
individual or direct suit na lang dapat.
[Evangelista v. Santos]
DOCTRINE: The stockholders may not directly claim
those damages for themselves for that would result in the
appropriation by, and the distribution among them of part of the
corporate assets before the dissolution of the corporation and the
liquidation of its debts and liabilities, something which cannot be
legally done in view of section 16 of the Corporation Law.
Same as Gamboa case, the plaintiffs are the minority stockholders,
defendants holds more than 50%, and he is the president, manager and
treasurer of the corporation.
Defendants were sued negligence which allowed these concessions to
take place, and its properties and assets disappeared, causing complete
ruin of the corporation, and total depreciation of its assets.
Plaintiffs filed an action, and prayed that they be paid the fair value of
the shares held by them. Thus an action for mismanagement and
damages.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 56
Again, the court ruled that a derivative suit is brought by stockholders
of nominal part for the benefit of the corporation, which is the real
party-in-interest. In this case, the plaintiffs, as stockholders brought the
action not for the benefit of the corporation but for their own benefit
since they ask that the defendant make good the losses occasioned by
their mismanagement.
EXECUTIVE COMMITTEE
SEC. 34. Executive, Management, and Other Special Committees. –
If the bylaws so provide, the board may create an executive committee
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 the board, as may be
delegated to it in the bylaws or by majority vote of the board, except
with respect to the:
(a) approval of any action for which shareholders’ approval is also
required;
(b)filling of vacancies in the board;
(c) amendment or repeal of bylaws or the adoption of new bylaws;
(d) amendment or repeal of any resolution of the board which by its
express terms is not amendable or repealable; and
(e) distribution of cash dividends to the shareholders.
The board of directors may create special committees of temporary or
permanent nature and determine the members’ term, composition,
compensation, powers, and responsibilities.
Q: When may these committees be created?
A: These committees may be created if the by laws of the said
corporation provides that they may create such committees?
Q: SO, when there is no provisions in the by laws of the
corporation, allowing for creation of such committees, can theses
committees be created nonetheless?
A: NO, because if there are no provisions in the by laws of a
corporation allowing them to create these committees, they cannot be
created. As we said before, a corporation can only do such acts and
things as the law allows it to do.
It may create a special committee of temporary or permanent nature,
and that their mean their terms, compensation, composition, powers
and responsibilities.
These committees are granted to be created for purposes of
convenience, particularly in corporations with many directors and or
where quorum requirements may be difficult to obtain.
Q: if there a by law allowing the creation or constitution of such
committees, how may they be created and what would be their
constitution?
A: the board may create an executive committee composed of at least
three (3) directors.
Q: There was a 15 man member board, and there is a by law
provision authorizing the creation of these special committees.
The board decided to create this committee for a 5 man member
committee and they decided to appoint the 5 man member
committee, to be composed of 4 directors, and 1 stockholder, NOT
a director, who has just graduated magna cum laude with a Phd
in business management from Yale university. Will the
constitution be valid?
A: No, because the committees can only act upon the matters within
the competence of the board. If you grant a stockholder with the power

to act within the competence of the board that would be tantamount to
undue delegation of corporate powers and or authority.
OCT- 27 (C )
CORPORATE POWERS AND AUTHORITY
Significance of the purpose clause: It confers and it limits the powers
and authority of the corporate enterprise.
Along with these powers indicated in the AOI, the corporation may
also exercise the powers and authority conferred by the law,
particularly the provisions of Sec. 35-44. Those powers are necessary
and incidental to its existence. ter
Classifications of corporate powers:
1. Expressly provided for or authorized by law, inclusive of the
purpose clause.
- Once the State, through the SEC, issues the certificate of
incorporation, it practically gave that particular juridical
authority to carry out the purposes indicated in the AOI.
2. Those impliedly granted as may be essential or necessary to carry
out the express powers; and
3. Those that are incidental to its existence.
If it acts beyond such powers or authority the act performed such
powers or authority, the act is considered as an Ultra Vires act, under
Sec. 44.
[EXPRESSLY-GRANTED POWERS]
SECTION 35. Corporate Powers and Capacity. — Every corporation
incorporated under this Code has the power and capacity:
(a)To sue and be sued in its corporate name;
(b)To have perpetual existence unless the certificate of incorporation
provides otherwise;
(c)To adopt and use a corporate seal;
(d)To amend its articles of incorporation in accordance with the
provisions of this Code;
(e)To adopt bylaws, not contrary to law, morals or public policy, and
to amend or repeal the same in accordance with this Code;
(f)In case of stock corporations, to issue or sell stocks to subscribers
and to sell treasury stocks in accordance with the provisions of this
Code; and to admit members to the corporation if it be a nonstock
corporation;
(g)To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage, and otherwise deal with such real and personal property,
including securities and bonds of other corporations, as the
transaction of the lawful business of the corporation may
reasonably and necessarily require, subject to the limitations
prescribed by law and the Constitution;
(h)To enter into a partnership, joint venture, merger, consolidation, or
any other commercial agreement with natural and juridical
persons;
(i)To make reasonable donations, including those for the public
welfare or for hospital, charitable, cultural, scientific, civic, or
similar purposes: Provided, That no foreign corporation shall give
donations in aid of any political party or candidate or for purposes
of partisan political activity;
(j)To establish pension, retirement, and other plans for the benefit of
its directors, trustees, officers, and employees; and
(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
incorporation.
POWER TO SUE AND BE SUED
• Venue of Suit
- Q: If the defendant is a corporation, where may it be sued?
A: The principal office of the corporation. We have seen that
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 57
earlier in the case of Clavecilla Radio System, which was
reiterated in the case of Biang Autosupply v. CA. Under the rules
of court, it is where the defendant or any of the defendants reside.
And well-established is the doctrine is that the principal office of
the corporation establishes the residence of the corporation.
- Q: Does the venue apply to suits for or against the corporation?
A: Yes. Paano kung ang hinabla mo ay JRS tapos sa Tawi-Tawi
ka nag-file? The principal office establishes the residence of the
corporation.
• Service of Summons
Rule 14, Section 12 of the Rules of Court. Service upon domestic
private juridical entity. – When the defendant is a corporation,
partnership or association organized under the laws of the Philippines
with a juridical personality, service may be made on the president,
managing partner, general manager, corporate secretary, treasurer,
or in- house counsel of the corporation wherever they may be found,
or in their absence or unavailability, on their secretaries.
If such service cannot be made upon any of the foregoing persons, it
shall be made upon the person who customarily receives the
correspondence for the defendant at its principal office.
In case the domestic juridical entity is under receivership or
liquidation, service of summons shall be made on the receiver or
liquidator, as the case may be.
Should there be a refusal on the part of the persons above-mentioned
to receive summons despite at least three (3) attempts on two (2)
different dates, service may be made electronically, if allowed by the
court, as provided under Section 6 of this Rule. (11a)
- Service must be made upon the persons indicated by law,
otherwise, it would be insufficient and the court will not acquire
jurisdiction over the person of the corporation.
- But, the ruling in EB Villarosa case no longer applies because of
the new rules of court. All they retained are: “President,
Managing partner, General manager, Corporate secretary,
Treasurer, In-house counsel, of the corporation wherever they
may be found, or in their absence or unavailability, on their
secretaries.” Kahit nagbabakasyon sila sa Boracay, pag nakita
mo sila doon, sinerve mo, tinanggap — pwede ‘yon. It is valid
under the new rules of court.
- “If such service cannot be made upon any of the foregoing
persons, it shall be made upon the person who customarily
receives the correspondence for the defendant at its principal
office.”
๏ Let’s say they were all on vacation, and it has been usual for
the security guard to receive correspondence for the
corporation. And the mailman has been delivering
correspondence to the corporation at its principal office
through the security guards. The service is valid.
- “In case the domestic juridical entity is under receivership or
liquidation, service of summons shall be made on the receiver or
liquidator, as the case may be.”
๏ As I was saying then, we apply different laws in the study of
this subject.
- And now there's an addendum. Should there be a refusal on the
part of the above-mentioned, including the security guard, to
receive summons despite three attempts, on two different dates,
service must be made electronically, as allowed by the court.
[this may be asked in the next bar]

DELTA MOTOR SALES CORP. v. MANGOSIN
The court acquired no jurisdiction over the corporation. Under the then
Rules, summons may be served only to the president, manager,
secretary, agent, or any of its director. The secretary of the department
head is not one of those authorized ot receive it.
The words “agent and any of its director” has been repealed.
POWER TO HAVE A PERPETUAL EXISTENCE
The corporation may provide for a specific number of years for its valid
existence.
POWER TO ADOPT A COMMON SEAL
• Except perhaps with the issuance of a certificate of stock, here sec.
62 requires that it must be sealed with the corporates sealed, this
power is not mandatory, only permissive. Since the seal performs
no greater function than to impart ownership of a product or a
service, or a prima facie evidence of a due execution of a document
made by the corporation.
POWER TO AMEND THE ARTICLES OF INCORPORATION
• We have taken this up in Sec. 15, and the special amendments in
Sec. 36-37.
POWER TO ADOPT BY-LAWS
• This will be taken up in Sec. 45-47.
POWER TO ISSUE AND SELL STOCKS AND ADMIT
MEMBERS
• This will be taken up under Title 7 and Title 1.
POWER TO ACQUIRE, ALIENATE, HOLD, OWN, DISPOSE
PROPERTIES
• This is also an express power granted to corporations.
• Please note that there is a specific limitations in this power [to
dispose]. For instance, under the provisions relative to special
corporations particularly corporation sole, it cannot dispose or
alienate its real properties without leave of court. Unless the rules or
discipline provides for the manner of disposition.
• When it comes to acquisition or ownership of properties, there is
also a specific limitation, because unlike a natural person, a corp
may only do such act and things as the law allows it to.
• Limitations Imposed by Law or the Constitution:
1. Only transactions as the business may reasonably require,
otherwise, the corp may not own, hold, or acquire properties.
- We have seen this in the case of Tan boon bee, wherein the
sheriff attached printing machineries found in the premises of
Graphics, which is the debtor in that particular case. Graphics
is engaged in the printing business. But, PADCo claimed
ownership of those printing machines. The court did not
believe the claim of padco because it is engaged in the
distribution of drugs; Graphics is the one engaged in the
printing business. The machineries have always been within
the premises of Graphics. The court disbelieved the claims of
Padco, because what the hell does it need printing machines
for? That is one of the reasons why the court pierced the
corporate veil.
LUNETA MOTORS
Whether or not Luneta Motors may acquire the certificates of public
convenience for transportion of persons by land
The court looked into the purpose clause of Luneta to arrive at its
conclusion that no, it cannot. While the AOI allowed Luneta to engage
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 58
in the transportation business by water, it cnnot engage in the
transportation of persons by land, which is entirely a different line of
business. the acquisition thereof tdoes not have any relation to the
petitioner’s legitimate line of business. Thus, it is not as the lawful
transaction of business reasonably requires.
IGLESIA NI KRISTO
Q: Why was it converted to private land?
A: Through open, continuous possession of the land for 30 years.
Land of the public domain cannot be registered by any person,
Through the Commonwealth Act 141, the land ceased to be part of the
public domain.
Had this case been decided two months earlier, the decision would
have been adverse. Because from the early case of Meralco v.
Bartolome all the way to RP v. Villanueava, the majority view is that
no, they can only hold them for a specific number of years and for a
certain area. But in the case of RP v. Villanueva, then J. Teehankee
wrote a dissenting opinion citing the public land act or CA 141
providing that alienable land held by a possessor personally or though
his predecessor in interes openly, continuously, exclusively and in thc
concept of an owner, for the prescribed statutory period of 30 years,
converts the property into a private land by the mere lapse or
completion of the said period; and it said ipso jure—automatically.
And this is now what was adopted by the high court. And the SC also
reiterated the time-honored principle of non-impairment of vested
rights. If in 1966 (30 years after 1936), the land was ipso jure converted
into private land, it remains so in 1974 when the registration
proceedings were commenced by INC. thus, the prohibition under the
1973 Constitution will have no application on them.
POWER TO ENTER INTO PARTNERSHIP, MERGER, JOINT
VENTURE, OR CONSOLIDATION, OR ANY OTHER
COMMERCIAL AGREEMENTS WITH OTHER NATURAL
OR JURIDICAL PERSONS
• When it comes to merger and consolidation, we’ll take it up it Title
9 of the code.
• Q: What is your comment on the power of a corporation to enter
into a partnership agreement?
A: [Atty.’s opinion]
- First, in corporations, the BOD manages the corporate affairs. In
partnership, any one of the partners may bind the partnership. So
what happened to the rule that in corporations, the BOD must sit
and act as a body to have a valid corporate act. Meaning, if a
corporation is a part of a partnership, any one of the partners may
bind the partnership. It is violative of the rule that all corporate
powers, all business are conducted, and all powers are controlled
by the BOD, who must sit and act as a body to have a valid
corporate act/transaction.
- Second, what is the extent of liability of a general partner?
Unlimited. The general partner may be held liable for all the
debts and liabilities of the enterprise, even their personal
properties may be subject to attachment by their creditors. This
also violates the notion of limited shareholders liability of the
corporate form of business.
๏ Under the Corporation Code then, a corporation can only
enter into a partnership agreement under 3 specific
conditions: First, the AOI must provide that the corporation
may enter into a partnership agreement; second, all the
partners shall agree as to the manner in which the partnership
may be bound; and third, the articles of partnership may also
provide that all partners shall be solidarily and or severally
liable for the debts of the enterprise. That was then the policy

of the SEC pursuant to the ruling of Sanitary Wares v. CA. I
don't know will still enforce that same rule. But since it is an
express grant of the law, it depends of the SEC whether or not
they will adopt the same rule.
• The corporation may enter into a partnership by mere Board
Resolution because it is a power acquired by law.
POWER TO MAKE DONATION
• Specific limitation: It must be reasonable. And the purpose should
either be for hospitals, charitable, cultural, civic, scientific, or
similar purposes. It goes further saying, that provided, there is no
foreign corporation shall give donations in aid of any political
parties or candidate, or for any parties or partisan political activity.
Note, the law says no foreign corporation. Meaning, a domestic
corporation may donate to partisan political activities. That has
always been the case ever since.
POWER TO ESTABLISH PENSION, RETIREMENT, AND
OTHER PLANS
• This power is recognized in all jurisdiction in the world. As indeed,
the directors, officers, and the employees are the very persons
responsible for the success and growth of any business undertaking,
and granting Tham certain privileges would ultimately redound to
the benefit of the corporation. In fact, the power or authority will
include any act to promote the convenience, welfare, and benefit of
the employees and officers.
REPUBLIC v. ACOJE MINING
A post office was opened in the compound of Acoje Mining after they
requested such with the Director of the Post Office, conditioned upon
their assumption of liabilities if ever there are any pecuniary loss to be
suffered by the Bureau of Post. A Board Resolution was passed in
pursuit thereof, and an employee of Acoje was assigned as the head of
the post office branch. Said employee absconded with money from the
office. Bureau now seeks
The director imposed a condition for the company to accept full
responsibilities for all alleged cash received by the postmaster in the
company, and it was accepted by the company. So the post office was
opened.
Whether or not the company is liable for the missing funds.
Yes. An act is considered within the corporate powers if it is necessary
to promote the interest and welfare of the corp. the establishment of
the post office is a vital improvement of the living condition of its
employees.
[IMPLIED POWERS]
(Powers essential/necessary to carry out the purpose/s)
Ordinarily, an act would not be considered within the corporate powers
simply because it may result to the advantage of the corporation. The
tendency of the courts however is to uphold as within the implied
powers of the corporation those acts which directly tends to increase
the business of the corporation or those beneficial to it. No uniform
rule had been and can be laid down, and its case shall depend upon the
particular facts and circumstances.
Classification of implied powers:
1. Acts in the usual course of business
2. Acts to protect debts owing to the corporation
3. Embarking on a different business
4. Acts in part or wholly to protect or aid employees
5. Acts to increase business
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In the case of Montelibano v. Bacolod ???, it is a question of the logical
relation of the act done to the corporate purpose/s. If the act is one
which is lawful in itself, done with the purpose of serving corporate
ends, and is reasonably necessary to promote those ends in a substantial
and not in a remote sense, it may be fairly considered as within the
implied powers of the corporation.
The test to be applied under the same ruling is whether or not the act
in question is indirect and immediate furtherance of the corporation’s
business, fairly incident to the express powers and reasonably
necessary to their exercise. If so, it is within the implied powers of the
corporation, otherwise, no.
TERESA ELECTRIC v. PUBLIC SERVICE COMMISSION
Paragraph 7 of the AOI of Filipinas provides for authority to secure
from any governmental, state, municipality, or provincial, city or other
authority, and to utilize and dispose of in any lawful manner, rights,
powers, privileges, franchises and concessions – obviously necessary
or at least related to the operation of its cement factory. Moreover, said
AOI also provide that the corporation may generally perform any and
all acts connected with the business of manufacturing portland cement
or arising therefrom or incidental thereto.
It cannot be denied that the operation of an electric light, heat and
power plant is necessarily connected with the business of
manufacturing cement.
NAPOCOR v. VERA
In the instant case, it is an undisputed fact that the pier owned by NPC,
receives various shipment of coal 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 which involve
the unloading of the coal shipments into the NPC pier for its eventual
conveyance to the power plant are incidental and indispensable to the
operation of the plant. The Court holds that NPC is empowered under
its Charter to undertake such services, it being reasonably necessary to
the operation and maintenance of the power plant
POWER GRANTED TO THE CORPORATION TO EXTEND
OR SHORTEN THEIR CORPORATE TERM
SEC. 36. Power to Extend or Shorten Corporate Term. – A private
corporation may extend or shorten its term as stated in the articles of
incorporation when approved by a majority vote of the board of
directors or trustees, and ratified at a meeting by the stockholders or
members 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 meeting shall be sent to stockholders or
members at their respective place of residence as shown in the books
of the corporation, and must either be 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 stockholder, sent
electronically in accordance with the rules and regulations of the
Commission on the use of electronic data messages. In case of
extension of corporate term, a dissenting stockholder may exercise the
right of appraisal under the conditions provided in this Code.
REQUIREMENTS:
1. Approval by a majority vote of the board of directors or
trustees;
2. Ratification at a meeting by the stockholders or members
representing at least two-thirds (2/3) of the outstanding
capital stock or of its members.
3. Written notice of the proposed action and the time and place
of the meeting shall be sent to stockholders or members at

their respective place of residence as shown in the books of
the corporation
Note: In case of extension of corporate term, a dissenting stockholder
may exercise the right of appraisal under the conditions provided in
this Code.
SEC 80. When the Right of Appraisal May Be Exercised. – Any
stockholder of a corporation shall have the right to dissent and demand
payment of the fair value of the shares in the following instances: (A.1)
In case an amendment to the articles of incorporation has the effect of
(1) changing or restricting the rights of any stockholder or class of
shares, or (2) of authorizing preferences in any respect superior to
those of outstanding shares of any class, or (A.2) of extending or
shortening the term of corporate existence. Xxx xxx xxx
• Corporations may now be organized with perpetual existence, but
there is nothing in the law that prevents the provision of a specific
number of years for its existence. If it does, it may be extended or
shortened.
• It emanates from the BOD, by a majority vote. Notice is required
for the approval of the stockholders, either postage, prepaid, or
personally, or electronically, if allowed by the by laws or done with
the consent of the SH, in accordance with the rules and regulations
of the SEC, subject to the vote of at least 2/3 of the OCS or of the
members.
• In case of the extension of the corporate term, the dissenting SH who
are outvoted may exercise their appraisal right.
• Appraisal right is a right granted to SH to object on certain corporate
acts or transactions. And if they are outvoted, they can compel the
corpo that they be paid the fair value of their shares. This is under
Sec. 80. It is not always available when a SH objects and is outvoted.
• Note that non-voting shares are also entitled to vote in cases of
extending or shortening the corporate term. So meaning, the 2/3 vote
shall also include non-voting shares. Because under sec 6, that is
one of the instances when non-voting shares are also entitled to vote.
POWER TO INCREASE OR DECREASE THE CAPITAL
STOCK
SEC. 37. Power to Increase or Decrease Capital Stock; Incur,
Create or Increase Bonded Indebtedness. – No corporation shall
increase or decrease its capital stock or incur, create or increase any
bonded indebtedness unless approved by a majority vote of the board
of directors and by two-thirds (2/3) of the outstanding capital stock at
a stockholders’ meeting duly called for the purpose. Written notice of
the time and place of the stockholders’ 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 and served on the
stockholders personally, or through electronic means recognized in the
corporation’s bylaws and/or the Commission’s rules as a valid mode
for service of notices.
A certificate must be signed by a majority of the directors of the
corporation and countersigned by the chairperson and secretary of the
stockholders’ meeting, setting forth:
(a) That the requirements of this section have been complied with;
(b) The amount of the increase or decrease of the capital stock;
(c) In case of an increase of the capital stock, the amount of capital
stock or number of shares of no-par stock thereof actually subscribed,
the names, nationalities and addresses of the persons subscribing, the
amount of capital stock or number of no-par stock subscribed by each,
and the amount paid by each on the subscription in cash or property,
or the amount of capital stock or number of shares of no-par stock
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 60
allotted to each stockholder if such increase is for the purpose of
making effective stock dividend therefor authorized;
(d) Any bonded indebtedness to be incurred, created or increased;
(e) The amount of stock represented at the meeting; and
(f) The vote authorizing the increase or decrease of the capital stock,
or the incurring, creating or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating
or increasing of any bonded indebtedness shall require prior approval
of the Commission, and where appropriate, of the Philippine
Competition Commission. The application with the Commission shall
be made within six (6) months from the date of approval of the board
of directors and stockholders, which period may be extended for
justifiable reasons.
Copies of the certificate shall be kept on file in the office of the
corporation and filed with the Commission and attached to the original
articles of incorporation. After approval by the Commission and the
issuance by the Commission of its certificate of filing, the capital stock
shall be deemed increased or decreased and the incurring, creating or
increasing of any bonded indebtedness authorized, as the certificate of
filing may declare: Provided, That the Commission shall not accept for
filing any certificate of increase of capital stock unless 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
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 subscribed has been paid in actual cash to the corporation or
that property, the valuation of which is equal to twenty-five percent
(25%) of the subscription, has been transferred to the corporation:
Provided, further, That no decrease in capital stock shall be approved
by the Commission if its effect shall prejudice the rights of corporate
creditors.
Nonstock corporations may incur, create or increase bonded
indebtedness when approved by a majority of the board of trustees and
of at least two-thirds (2/3) of the members in a meeting duly called for
the purpose.
Bonds issued by a corporation shall be registered with the
Commission, which shall have the authority to determine the
sufficiency of the terms thereof.
Incurring, creating, or increasing bonded indebtedness. The same
emanates from the BOD, by a majority vote.
Notice requirement is the same as Sec. 36, subject again to the vote of
2/3 of the OCS.
Non-voting shares are again included, as increasing/decreasing the
capital stock partakes an amendment of the AOI.
It requires that the treasurer’s affidavit shall be filed that at least 25%
of the increase in capital shall be subscribed and at least 25% thereof
shall be paid.
The application for the increase/decr shall require the prior approval of
the SEC, and of the Philippine Competition Commission, when
appropriate.
There is nothing in the code that restricts a corporation when it
increases its capital stock. But there is a restriction or limitation when
it comes to the decrease of capital stock — it should not prejudice the
rights of creditors or other third parties.
[INCREASE IN CAPITAL STOCK]
• Q: What are the modes of increasing a capital stock?
A: [Modes of increasing capital stock]

i. Increase the par value of the existing number of shares
without increasing the number of shares;
ii. Increase the number of existing shares without increasing
the par value thereof;
iii. Increasing the number of shares and at the same
time increasing the par value of the shares
• Q: What are the reasons to increase the capital stock
A: [Reasons/Purposes for increasing Capital Stock]
i. Expansion;
ii. Payment of Debt Obligations;
iii. To acquire additional assets such as providing cars
to employees to
distribute the goods;
• There is no restriction/limitation on the right of the corporation to
increase its capital stock. Valid reasons may exist. Nanalo s’ya sa
lotto nang 100Million. Di n’ya alam kung san n’ya ilalagay yung
pera n’ya. Pwede sa corporation para tumaas yung stockholdings ko,
para pag na-dissolve yung corporation, pinakamarami akong
matatanggap.
• E.G. ACS — 1Million, Divided into 1Million shares. Par value of
P1/share. The corporation intends to increase it to P2Million. [sorry
di ko nakuha yung sinulat n’ya sa white board
- It may increase the capital by retaining the 1mil shares by
increasing the par value of the shares.
- Or it may increase the number of shares without increasing the
par value.
- Or it may increase both the number of shares and the par value.
[DECREASE IN CAPITAL STOCK]
• But when it comes to the decrease in capital stock, there is a
restriction — it should not prejudice the right of the creditors and
other third persons.
- Q: Why should a corporation decrease its capital stock?
A: [Reasons for Decreasing Capital Stock]
- Madrigal Co. manages the Rizal cement (sister company). Madrigal
- REASONS FOR DECREASE:
- 1. To reduce or wipe out existing deficit where no creditors
would thereby by affected;
- 2. When the capital is more than what is necessary to
procreate the business or reduction of
- capital surplus;
- 3. To write down the value of its fixed assets to reflect their
present actual value in case where
- there is a decline in the value of the fixed assets of the
corporation.
- laborers, which cannot be condoned. It should not prejudice the third
a. Reducing or wiping out deficits, where no creditors would
thereby be affected.
‣ For instance, the corp is engaged in the manufacturing of
???, 10Million Authorized Capital, fully subscribed and
fully paid. It used 5million to produce/manufacture toys
for the Christmas season. It appears however that some
parts of the toy were harmful to children. So instead of
selling them to the market, the corporation burned them.
So, they have a deficiency of 5 million. Can they reduce
their capital stock? Yes. Because total assets of the corpo
only stands now at 5 million. And the creditors can only
go after the total assets of the corporation. Therefore, no
creditors will thereby be affected.
b. Reduction of capital surplus, where the capital is more than
required to procreate a business.
‣ E.G. Realty and development corporation. 30Billion
capital, fully subscribed and paid. The corporation
acquired a property in Balara, QC, where they intend to
acquire a 30-story-bldg condo units. So they now only
have 29Billion. So armed with the proposal, they went to
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 61
the engineering office of QC, but the latter denied it
because the location was in the earthquake zone and they
can only build a 15-story structure in the area. What would
you do with 29Billion for a 15-story structure?
Nagsisimula ka pa lang naman eh, so mga 15 Billion lang
muna kailangan mo. So you return the investments of the
stockholders. There will also be no creditors to be affected.
c. To write down the value of the fixed assets where there is a
decline in its value.
‣ E.G. Car rental agency or taxi company. 10Million ACS
fully subscribed and paid. It used the 10 million to acquire
low-end cars at 500K each, for 20 units. Due to ordinary
wear and tear, after 2 years, the value of the cars went
down to 250K. So actually, the total assets of the
corporation now is only 5Million. It can reduce the capital
stock by that same amount because again there will be no
creditors affected, dahil nga the creditors can only go after
the total assets of the corporation.
PHILIPPINE TRUST
The reduction is ineffective as the formalities required by law were not
complied with. As I was saying then, there must be approval by the
government agency concerned [now the SEC]. Even if duly filed, said
government agency would not have approved it as well because of the
trust fund doctrine, which provides that subscriptions to the capital
stock of the corporation, including any unpaid portion thereof,
constitutes a fund which the creditor has the right to rely upon for the
satisfaction of their claim. It must not prejudice the rights or other third
parties.
MADRIGAL COMPANY v. ZAMORA
Co. Union sought for the renewal of its CBA expiring in Feb 1974. In
July 1974, Madrigal Co. reduced its capital stock from ~765,000 to
~267,000 through distribution of its marketable securities to its SH in
exchange for their shares in equivalent amount. The year after, using
the same scheme, the capital was reduced to ~100,000.
The court here ruled that the reduction was a subterfuge—a
deception—to camouflage the fact that it had been making profits and
consequently to justify the mass lay-off of its employees. It was
resorted to merely for the purpose of creating ??? shares due to the
parties. Just like in this case, the union is the third party.
OCT- 29 (T)
POWER TO DENY PRE-EMPTIVE RIGHTS
Section 38. Power to Deny Preemptive Right. - All stockholders of a
stock corporation shall enjoy preemptive right to subscribe to all
issues or disposition of shares of any class, in proportion to their
respective shareholdings, unless such right is denied by the articles of
incorporation or an amendment thereto: Provided, That such
preemptive right shall not extend 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 approval of the
stockholders representing two-thirds (2/3) of the outstanding capital
stock in exchange for property needed for corporate purposes or in
payment of previously contracted debt.
Q: What is pre-emptive right?
A: Pre-Emptive Right is a right granted by law to all existing
stockholders of a stock corporation to subscribe to all issues or

disposition of shares of any class, in proportion to their respective
holdings, subject only to the limitation imposed under Sec. 38.
Q: Why is this right granted?
A: To preserve existing ratio of the existing stockholders, proprietary
interest and voting power in the corporation and maintain their
respective rights. Meaning, so their voting and dividend rights not be
denied.
Example: A owns 10% of the outstanding capital stock and the
corporation issues additional schemes/scales. Hence, he should be
entitled to subscribe to 10% of the additional issuances so that he
retains his 10% voting and dividend rights.
The basis for the grant of this right is the preservation, unimpaired and
undiluted, of the old stockholders’ relative and proportionate voting
strength and control, that is, the existing ratio of their proprietary
interest and voting power in the corporation. To avoid dilution of the
holdings of the shareholders.
Q: Based on the foregoing facts, may this right be denied?
A: Yes, it may be denied by the provisions of the Articles of
Incorporation or any amendment thereto. [General Rule]
Q: Assuming that it is not denied by the provisions in AOI or any
amendment thereto, when may a stockholder, even if it is not denied,
be unable to exercise this right?
A: [Exception to the General Rule]
1. When shares to be issued is in compliance with laws
requiring stock offerings or minimum stock ownership by the
public.
a. Example: Telecommunication companies granted
by a special franchise of SEC through Congress.
Normally, congress would require them of atleast
40% of the shares that will be subject to public
subscription. The TLC have 1 Billion shares. 400
million shares are held by the general public. If it
increases the capital stock to 1B, then of course,
400 Million thereof shall also be subscribed by the
general public. Meaning, the existing stockholders
cannot exercise their pre-emptive right in so far as
the 400M for public offering is concerned.
2. Shares to be issued in good faith with the approval of the
stockholders representing 2/3 of the outstanding capital
stock either: (a) In exchange for property needed for
corporate purpose; or (b) In payment of a previously
contracted debt
3. Waiver, express or implied or inability or failure to exercise
it having been notified of the proposed disposition of shares.
–The corporation usually advise the stockholders that since
they are holding 10% of the OOS they are also entitled to
subscribe to additional 10% of the additional issuances.
Specifying that they have the right to do so within a specified
time. If they do not exercise that right, they are deemed to
have waived impliedly their right to subscribe to additional
stock.
Q: These three instances when a stock holder cannot exercise pre-
emptive right even if it is not denied in the provision of the AOI, will
it apply to a stockholder of a closed corporation?
A: No. The general rule also applies in the closed corporation.
Meaning, if it is not denied by a condition in the articles of
incorporation, a stockholder of a closed corporation, has an absolute
pre-emptive right.
Exception (1) –Will not apply. The basis is Section 95 (c) the
corporation shall not list in any stock exchange or make any public
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 62
offering of its stocks of any class. There’s no such animal in the public
offering as in the close corporation, because then, it will no longer be
considered, legally and technically, a closed corporation.
Section 95. Definition and Applicability of Title. - A close corporation,
within the meaning of this Code, is one whose articles of incorporation
provides that: (a) all the corporation's issued stock of all classes, exclusive
of treasury shares, shall be held of record by not more than a specified
number of persons, not exceeding twenty (20); (b) all the issued stock of all
classes shall be subject to one (1) or more specified restrictions on transfer
permitted by this Title; and (c) the corporation shall not list in any stock
exchange or make any public offering of its stocks of any class.
Notwithstanding the foregoing, a corporation shall not be deemed a close
corporation when at least two-thirds (2/3) of its voting stock or voting rights
is owned or controlled by another corporation which is not a close
corporation within the meaning of this Code.
Any corporation may be incorporated as a close corporation, except mining
or oil companies, stock exchanges, banks, insurance companies, public
utilities, educational institutions and corporations declared to be vested
with public interest in accordance with the provisions of this Code.
The provisions of this Title shall primarily govern close
corporations: Provided, That other Titles shall primarily govern close
corporations: Provided, That other Titles in this Code shall apply
suppletorily, except as otherwise provided under this Title
Exception (2) – Will not apply. A stockholder of a closed corporation,
whether for services, properties or payment of debt can exercise his
preemptive right. What applies is the general rule. Section 101 is the
basis.
Section 101. Preemptive Right in Close Corporations. - The preemptive
right of stockholders in close corporations shall extend to all stock to be
issues, including reissuance of services, or in payment or corporate debts,
unless the articles of incorporation provide otherwise.
Q: What types of shares does this pre-emptive right covers for a
stockholder to exercise such right?
A: The author of the corporation code, Estelito Mendoza, when he
interpolated during the deliberations in this particular topic in
Congress, he was asked what types of shares are covered by the right
of preemption. His categorical answer is ALL TYPES OF SHARES.
It says all existing stockholders shall have the right to subscribe to all
issues or disposition of shares of any class. Founder’s, Treasury,
Voting or whatever.
Q: Does it include originally unsubscribed portion of the original
authorized capital stock?
A: Yes – The ruling Benito v. SEC is wrong.
Benito v. SEC - When the corporation first issued the shares or
subscription, this deemed to offer all its shares for subscription. When
the corporation later on issues the originally unsubscribed portion of
the originally subscribed capital stock, they cannot claim the dilution
of the interest. In the old corporation law, although the right or pre-
emption has been recognized all over the world, there is no express
provision in our law then. But when the Corporation Code came in
consistent and effective in May 1, 1980, Section 38 then Section 39
specifically provided that the existing stockholders shall have the right
to subscribe to all issues or disposition of shares of any class.
POWER TO SELL/DISPOSE OF ALL OR SUBSTANTIALLY
ALL OF CORPORATE ASSETS/PROPERTIES
22:47
Section 39. Sale or Other Disposition of Assets. - Subject to the
provisions of Republic Act No. 10667, otherwise known as the
"Philippine Competition Act", and other related laws a corporation
may, by a majority vote of its board of directors or trustees, sell, lease,

exchange, mortgage, pledge, or otherwise dispose of its property and
assets, upon such terms and conditions and for such consideration,
which may be money, stock, bonds, or other instruments for the
payment of money or other property or consideration, as its board of
directors or trustees may deem expedient.
A sale of all or substantially all of the corporation's properties and
assets, including its goodwill, must be authorized by the vote of
stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, or at least two-thirds (2/3) of the members, meeting duly
called for the purpose.
In non-stock corporations where there are no members with voting
rights, the vote of at least a majority of the trustees in office will be
sufficient authorization for the corporation to enter into any
transaction authorized by this section.
The determination of whether or not the sale involves all or
substantially all of the corporation's properties and assets must be
computed based on its net asset value, as shown in its latest financial
statements. A sale or other disposition shall be deemed to cover
substantially all the corporate property and assets if thereby the
corporation would be rendered incapable of continuing the business
or accomplishing the purpose of which it was incorporated.
Written notice of the proposed action and of the time and place for the
meeting shall be addressed to stockholders or members at their places
of residence as shown in the books of the corporation and deposited to
the 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 electronically: Provided, That any dissenting
stockholder may exercise the right of appraisal under the conditions
provided in this Code.
After such authorization or approval by the stockholders or members,
the board of directors or trustees may, nevertheless, in its discretion,
abandon such sale, lease, exchange, mortgage, pledge, or other
disposition of property and assets, subject to the rights of third parties
under any contract relating thereto, without further action or approval
by the stockholders or members.
Nothing in this section is intended to restrict the power of any
corporation, without the authorization by the stockholders or
members, to sell, lease, exchange, mortgage, pledge, or otherwise
dispose of any of its property and assets if the same is necessary in the
usual and regular course of business of the corporation or if the
proceeds of the sale or other disposition of such property and assets
shall be appropriated for the conduct of its remaining business.
Q: When is a sale considered substantial?
A: When the corporation would be rendered incapable of continuing
the business for which it was organized, or for accomplishing the
purpose for which it was incorporated.
Q: Realty Company engaged in buying and selling of all types of real
property. It owns a piece of land in the BGC area. The Board decides
to sell the sole property of the company without the approval of the
stockholders. Is the sale valid?
A: Yes, it is valid. Stockholder’s approval is not required if the same
is necessary in the usual or regular course of business. It is a regular
course of business—the buying and selling of property.
Q: What if the business is a manufacturing concern and it has a
manufacturing plant, warehouse, and office headquarters in the BGC
area, will it require stockholder’s approval?
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 63
A: Yes. The corporation would no longer be capable of continuing the
business
Q: Will your answer will be the same If the proceeds of the sale will
be used to put-up a more modern, complex facility?
A: No. The code says, “nothing in this section is intended to restrict
the power of any corporation, without the authorization by the
stockholders or members, to sell, lease, exchange, mortgage, pledge,
or otherwise dispose of any of its property and assets if the same is
necessary in the usual and regular course of business of the
corporation or if the proceeds of the sale or other disposition of such
property and assets shall be appropriated for the conduct of its
remaining business.”
MAGIC WORD = FULL POINTS
YOUR CODAL IS YOUR BESTFIREND
ISLAMIC DIRECTORATE OF THE PHILIPPINES v. COURT
OF APPEALS
The Tandang Sora property, it appears from the records, constitutes the
only property of the IDP. Hence, its sale to a third-party is a sale or
disposition of all the corporate property and assets of IDP falling
squarely within the contemplation of Sec. 40. For the sale to be valid,
the majority vote of the legitimate Board of Trustees, concurred in by
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 the
Caprizo Groups which voted to sell the property was a fake Board and
those whose names and signatures were affixed by the Caprizo Group
together with the sham Board Resolution authorizing negotiation for
the sale were, from all indications, not bona fide members of the IDP
as they were made to appear to be.
Q: If the corporation sells all or substantially all its assets and
properties to another corporation will the purchaser be liable to
the assets and liabilities of the corporation?
A: Generally, NO. Because of the corporate entity (*). We have seen
that earlier on in the case of Yu v. NLRC. Twin Ace bought all the
assets and properties of Tanduay Distillery, but prior to that there were
employees retrenched by Tanduay. The employees were seeking to
hold the purchaser, Twin Ace, the liability of Tanduay for the
termination of the corporate affairs. The Court ruled that no, because
there was no showing that the purchasing corporation is just a business
conduit, alter-ego or an extension of the selling corporation.
EDWARD NELL v. PACIFIC FARMS
However, the case of Edward Nell v. Pacific Farms enumerates 4
specific instances when the purchasing corporation after buying the
assets and properties of the corporation, may be held liable for the
debts and obligations of the selling corporation:
1. Expressly or impliedly agrees to assume the debts or liabilities
of the corporation
2. Under specific provision of the law, if the transaction amounts
to the merger or consolidation.
3. Purchasing corporation is just a mere continuation of the selling
corporation.
4. If sale of transfer is fraudulent and is entered into merely to
escape liability.
This was asked in the bar. (0:45:23)
[0:45:34.8] this case is not included in the syllabus but was mentioned
Y1 Leisure v. CA:
Facts: There was a developer of a supposedly proposed golf course in
Pampanga. Somebody purchased a golf club in that particular

company. It was supposed to be finished in X number of years but it
did not happen. The purchaser of the golf club sought for the recovery
of the amount he paid of the golf share, it appears, however that the
Fortroper Developer of the golf club transfer it shares to Y1 Leisure.
Y1 Leisure was implicated impleaded in the action.
Issue: Is Y1- Leisure liable?
Ruling: Yes. Y1-Leisure continued to develop the golf course. The
purchasing corporation is a mere continuation of the selling
corporation.
POWER TO ACQUIRE OWN SHARES
Section 40. Power to Acquire Own Shares. - Provided, That the
corporation has unrestricted retained earnings in its books to cover the
shares to be purchased or acquired, a stock corporation shall have the
power to purchased or acquired, a stock corporation shall have the
power to purchase or acquire its own shares for a legitimate corporate
purpose or purposes, including the following cases:
(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 delinquent shares sold during said sale; and
(c) To pay dissenting or withdrawing stockholders entitled to payment
for their shares under the provisions of this Code.
Q: May a corporation acquire its own shares?
A: Yes, it can under section 40
Q: For what purpose or reasons may a corporation reacquire its own
shares?
A: There must be a legitimate purpose for the corporation to reacquire
its own shares.
Q: What would be the legitimate purposed for the corporation to
reacquire its own shares?
A:
1. To eliminate fractional shares arising out of stocks
When the corporation issues stock dividends, it normally refers or state
that for every shares held by stockholders, he shall be entitled to
additional X number share of stock.
Example:
Let’s assume that the corporation declares stock dividends,
and the declaration provides that a stockholder who owns 3
shares shall be entitled to additional 1 share. When A holds
10 shares and the declaration is 1 share for every 3 shares,
he is entitled to receive 3.333 shares. There is a fraction in
the answer but apparently fractional shares are no longer
allowed. Therefore A is entitled to additional 3 shares only.
A may be paid cash or property dividends for that purpose.
2. To collect or compromise an indebtedness to the corporation,
arising out of unpaid subscription, in a delinquency sale and to
purchase delinquent shares sold during said sale
There are 2 probable options of the corporation when enforce payment
in the unpaid subscription of the corporation:
(1) To institute a direct collection case in court, specific
performance, or the corporation may call for the unpaid
subscription of the stock, specifying the date when it is to be
paid. If the stockholder does not pay on the date specified,
the shares will thereby become delinquent.
(2) The corporation may also have the option to sell it at a
delinquency sale. If there are no bidders to such, the
corporation itself may bid. It pays the unpaid portion of the
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 64
delinquent stockholders, the shares will be reacquired by the
corporation.
3. To pay dissenting or withdrawing stockholders entitled to
payment for their shares
You are looking at the right of the stockholder to exercise his
appraisal right. Appraisal right is the right granted to stockholders to
object to certain corporate act or transaction and if he is outvoted he
may demand the payment of the fair value of the shares. Withdrawing
stockholder does not mean anything, it refers to stockholders of a
closed corporation, who, for any reason may compel the corporation
that it may give the fair value of the shares.
Q: Is there any limitation on the right of the corporation to reacquire
its shares?
A: Yes.
General Rule: It must have unrestricted retained earnings or surplus
profits. It cannot use its capital to reacquire its own shares
Exceptions:
1. Redemption of redeemable shares under Sec. 8;
Section 8. Redeemable Shares. - Redeemable shares may be issued
by the corporation when expressly provided in the articles of
incorporation. They are shares which may be purchased by the
corporation. They are shares 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 unrestricted retained
earnings in the books of the corporation, and upon such other terms
and conditions stated in the articles of incorporation and the
certificate of stock representing the shares, subject to rules and
regulations issued by the Commission.
Redeemable shares are likened to a bond. Utang yan ng
corporation
2. In cases of deadlock in the closed corporation, where the
proper forum may compel a stockholder to sell the shares
to the corporation regardless of the existence of the
unrestricted retained earnings.
Section 103. Deadlocks. Notwithstanding any contrary provision
in the close corporation's articles of incorporation, bylaws, or
stockholders' agreement, if the directors or stockholders are so
divided on the management of the corporation's business and
affairs that the votes required for a corporate action cannot be
obtained, with the consequence that the business and affairs that
the votes required for that the business of the corporation can no
longer be conducted to the advantage of the stockholders generally,
the Commission, upon written petition by any stockholder, shall
have the power to arbitrate the dispute. In the exercise o such
power, the Commission shall have authority to make appropriate
orders, such as: (a) cancelling or altering any provision contained
in the articles of incorporation, bylaws, ot any stockholders'
agreement; (b) cancelling, altering or enjoining a resolution or act
of the corporation or its board of directors, stockholders, officers,
or other person party to the action; (d) requiring the purchase at
their fair value of shares of any stockholder, either by the
corporation regardless of the availability or unrestricted
retained earnings in its, books or by the other stockholder; (e)
appointing a provisional director; (f) dissolving the corporation; or
(g) granting such other relief as the circumstances may warrant.
A provisional director shall be an impartial person who is neither
a stockholder nor a creditor of the corporation or any of its
subsidiaries or affiliates, and whose further qualifications, if any,
may be determined by the Commission. A provisional director is
not a receiver of the corporation and does not have the title and
powers of a custodian or receiver. A provisional director shall have
all the rights and powers of a duly elected director, including the
right to be notified of and to vote at meetings of directors until

removed by order of the Commission or by all the stockholders.
The compensation of the provisional director shall be determined
by agreement between such provisional director and the
corporation
3. A stock holder of a closed corporation may for any reason,
compel the corporation that he be paid the fair value of his
shares because further, provided that the corporation has
sufficient assets and liabilities exclusive of capital stock. It
cannot use its capital to reacquire its sold shares.
Section 104. Withdrawal of Stockholder or Dissolution of
Corporation. - In addition and without prejudice to other rights and
remedies available under this Title, any stockholder of a close
corporation may, for any reason, compel the corporation to
purchase shares held at fair value, which shall not be less than
the par or issued value, when the corporation has sufficient
assets in its books to cover its debts and liabilities exclusive of
capital stock: Provided, That any stockholder of a close
corporation may, by written petition to the Commission, compel
the dissolution of such corporation whenever any acts of the
directors, officers or those in control whenever any acts of the
directors, officers, or those in control of the corporation are illegal,
fraudulent, dishonest, oppressive or unfairly prejudicial to the
corporation or any stockholder, or whenever corporate assets are
being misapplied or wasted.
Q: The closed corporation made 2 Million in profits. It has 1 Million
liabilities to pay, the remaining 1Million profits were decided by the
board to be used for research for possible contingencies because it’s
engaged in the manufacturing concern and they expect the value of the
price of oil to increase in the near future. A, a stockholder therein
compels the corporation that it pay the fair value of shares without any
reason because it says “for any reason”. Ayaw na niya eh, period. The
fair market value of the shares of A is 500,000 Pesos. May the
corporation pay the fair value of the shares of A?
A: Yes. It may still pay the fair value of the shares. It only says that
“provided, a close corporation has sufficient assets to cover his debts
and liabilities exclusive of capital“. Naka-reserve na yung 1 Million
pang bayad ng liabilities. They can use the other 1 Million that is
reserved for research of possible contingencies. For paying the fair
market value of the shares of A. It cannot use its capital to use the
shares of the withdrawee stockholder.
STEINBERG v. VELASCO – not discussed
POWER TO INVEST FUNDS
Section 41. Power to Invest Corporate Funds in Another
Corporation or Business or for Any Other Purpose. - Subject to the
provisions of this Code, a private corporation may invest its funds in
any other corporation, business, or for any purpose other than the
primary purpose for which it was organized, when approved by a
majority of the board of directors or trustees and ratified by the
stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, or by at least two-thirds (2/3) of the outstanding capital
stock, or by at least two-thirds (2/3) of the members in the case of
nonstock corporations at a meeting duly called for the 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 accordance with the rules and regulations of the
Commission on the use of electronic data message, when allowed by
the bylaws or done with the consent of the
stockholders: Provided, That any dissenting stockholder shall have
appraisal right as provided in this Code: Provided, however, That
where the investment by the corporation is reasonably necessary to
accomplish its primary purpose as stated in the articles of
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 65
incorporation, the approval of the stockholders or members shall not
be necessary.
Majority vote of the directors subject the approval of the 2/3 of the
outstanding capital stock for members at a meeting called for that
purpose with prior notice, either by mail, or if the by-laws allowed or
with consent of the stockholders, by electronic data message.
Q: The Corporation is engaged in the realty business, the buying and
selling of all types of real properties. There are other secondary
purposes of that realty company including general construction. If the
board decides to invest its fund in the secondary purpose of general
construction, its stockholders approval?
A: Yes, because the provision says “other than the primary purpose”.
Meaning, if it is necessary related or in connection with the primary
purposes, stockholders approval will no longer be required for is
validity. A mere board resolution will be sufficient.
DE LA RAMA v. MA-AO SUGAR CENTRAL
Q: Why should they invest in a company engaged in sugar production
without the approval of the stockholders?
A; Ma-Ao is engaged in the sugar production and Philippine Fibers
manufcatures sugar bags. Sugar bags are necessary to sugar
production. It does not require stockholders’ approval since it is
necessary to accomplish its primary purpose. If there is a logical
relation to exist between the upland (?) and the primary purpose now,
it is well within the corporate powers or authority to undertake.
JOHN GOKONGWEI v. SEC
The objections of JG was that it was not approved by the stockholders
but at that point in time, SMC was still engaged in the brewery
business. Primary purpose nila. Stockholders’ approval is not required.
At this point in time, San Miguel Corp is now a full-pledged holding
company. It can now invest its funds in another business or in any other
purpose other than its primary purpose. Now, stockholders’ approval
is required. But at that time, it was still primarily engaged in brewery
and it invested its funds in the brewery of beer in Hongkong. Primarily,
no stockhodlers approval is required.
The court ruled that if the investment is made in a corporation, whose
business is important to the investing corporation and would aid in its
purpose, to require authority from stockholders could be to unduly
curtail the powers of the board of directors. And even if its required,
the concern of the stockholders, the investment was ratified the next
year during the stockholder’s meeting. When the board submitted all
its previous act for confirmation and ratification of the stockholders,
and it was so confirmed and ratified. This particular case, submission
of the previous acts of the board for confirmation and ratification of
the stockholders, is a sound corporate practice and policy.
Remember: Primary purpose lang ang hindi need ng stockholder’s
approval, all other purpose requires the approval of the stockholders.
But if there is a logical connection with the primary purpose and then
the stockholder’s approval is not needed anymore, kasi it is considered
as incidental to the primary purpose.
An unauthorized investment which is not illegal or void ab initio or not
contrary to law, morals, public order or public policy, is merely
voidable and may become binding and enforceable when ratified by
the stockholders. (Gokongwei, Jr. vs. SEC)
POWER TO DECLARE DIVIDENDS
Section 42. Power to Declare Dividends. - The board of directors of a
stock corporation may declare dividends out of the unrestricted
retained earnings which shall be payable in cash, property, or in stock
to all stockholders on the basis of outstanding stock held by

them: Provided, That any cash dividends due on delinquent stock shall
be first be applied to the unpaid balance on the subscription plus costs
and expenses, while stock dividends shall be withheld from the
delinquent stock holders until their unpaid subscription is fully
paid: Provided, further, That no stock dividend shall be issued without
the approval 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 corporations are prohibited from restraining surplus profits in
excess of one hundred percent (100%} of their paid-in capital stock,
except: (a) when justified by the definite corporate expansion projects
or programs approved by the board of directors; or (b) when the
corporation is prohibited under any loan agreement with financial
institutions or creditors, whether local or foreign, from declaring
dividends without their consent, and such consent has not yet been
secured; or (c) when it can be clearly shown that such retention is
necessary under special circumstances obtaining in the corporation,
such as when there is need for special reserve for probable
contingencies.
Q: What are Dividends?
A: Dividends are corporate profits set aside, declared and ordered by
the BOD to be paid to the stockholders. It is a fruit of investment, the
recurrent return, analogous to interest and rent upon other forms of
invested capital.
TYPE OF DIVIDENDS:
1. Cash dividends – payable in lawful money or currency;
2. Property dividends - those paid in the form property (e.g., bonds,
notes, shares in another corporation);
3. Stock dividends – corporation’s own shares of stock out of the
remaining unissued shares which would require the approval of the
stockholders representing 2/3 of the outstanding capital stock at a
regular or special meeting duly called for that purpose. This is to be
valued at par value or issue price.
Q: Arellano Law bought 3,000 chairs as they’re expecting 3,000
enrollees, only 1,500 enrolled. Can it declare 1500 chairs as property
dividends?
A: Such excess chairs are properties but it is not to be declared as
property dividends. The property dividends spoken here of is that there
is surplus in that form. Desks, chairs, boards do not make surpluses.
You are looking at bonds, notes which are evidence of indebtedness;
or securities or shares of stocks of another
TO WHOM LODGED:
The Board of Directors, primarily.
Q: Will the stockholders have nothing to do with the declaration of
dividends?
A: The approval of the stockholder will be required if it is a stock
dividend. The law requires that there be at least 2/3 of the outstanding
capital stock. If it is cash or property dividend, it is exclusively lodged
to the Board of the Directors.
Q: Where will dividends come from?
A: Dividends can only come from the unrestricted retained earnings of
the corporation. It cannot be paid out of the capital of the corporation.
Q: 10M authorized capital stock, 5M subscribed capital, 5
stockholders. All 5 stockholders subscribed to 1M each. 4M paid up
capital. B, C, D, and E, paid in full their 1M subscriptions. A did not
pay any single cent for her subscription. The corporation made 6M
unrestricted retained earnings. May the board declare the entire 6M as
stock dividends?
A: No. If it will declare the entire 6 million as stock dividends, what
will be the authorized capital stock of the corporation? 11 Million. One
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 66
of the requisites for a valid declaration of stock dividend, there must
be a portion of the authorized capital stock where the stock dividends
will come from. If the corporation declare the entire 6M, it will now
have 11 Million authorized capital stock. But we have said before that
the authorized capital stock is the maximum number of shares that the
corporation may issue, which in this case is 10 Million only. Doing so
would be a violation of its franchise—over issuance of share.
Q: 10M Authorized capital stock. 5M subscribed capital. 5
stockholders. All 5 stockholders subscribed to 1M each. 4M paid up
capital. B, C, D, and E, paid in full their 1M subscriptions. A did not
pay any single cent for her subscription. The corporation made 6M
unrestricted retained earnings. The corporation declared 5M as cash
dividends, how much will each stockholder receive as their share of
the cash dividends?
A: A is not a delinquent stockholder, A is still entitled to the full share
of the dividends * did not discuss the shares of other stockholders,
proceeded to discuss delinquent shares*
A stockholder’s share may only be considered as delinquent if it wasn’t
paid on the date specified on their contract of subscription, or on the
day made by the board of directors for the call of their payment of the
subscription. If a stockholder is not yet delinquent, he is still entitled
to the dividend due them.
If a stockholder is delinquent, any cash dividends due them shall first
be applied to the amount of the delinquency plus cost and expenses, if
any. If there’s a remainder, it will be paid to the stockholder. If it’s by
way of stock dividends, it shall be withheld from them until they pay
the full amount of their delinquent shares.
Q: Of the 4M paid up capital, X Corporation invested its funds, with
the consent and approval of the stockholders, to acquire 1M shares of
SMC. Assuming only, that there is only 1 peso per share. In due course,
of SMC declare stock dividends to the extent that every 2 shares held
by the stockholder shall be entitled to 1 share each. X Corp is a
stockholder. Meaning, X Corporation is entitled to 500,000 additional
shares of SMC. X Corp decided to declare the 500,000 shares as
dividends to its stockholders. Is stockholder’s approval required for its
validity?
A: Where there is surplus, the 500K additional shares of X Corp is the
property dividend, not a stock dividend.
Q: 10M authorized capital. 5M subscribed capital. 4M paid up capital.
The corporation made 6M unrestricted retained earnings. May the
board be compelled to declare dividends?
A: Yes. It may compel to declare dividends because the corporation is
prohibited from retaining unrestricted retained earnings in excess of
100% of its paid up capital. Since 4M is the paid up capital, the
corporation may be compelled to declare at least 2M as dividends in
whatever form they may be. But of course, as you are saying, it cannot
declare the entire 6M as stock dividends. Meaning, if that would be the
case, stockholder can compel the board to declare at least 2M which is
the excess of the paid up capital as dividends in whatever form they
may be.
Q: What if the unrestricted retained earnings is exactly 4M, may a
stockholder compel the board to declare dividends?
A: Yes. If the stockholder is holding a mandatory-if-earned type of
preferred shares. It is the mandatory duty of the board of directors to
declare dividends in so far as the holders of these type of shares
whenever profits are earned.
Q: Before the declaration of any dividends, the unrestricted retained
earnings of the corporation forms part and partially of the assets of the
corporation. In our example, 10M authorized capital; 5M subscribed
capital; 6M unrestricted retained earnings. So the total assets of the

corporation now is 6M plus 5M subscribed capital, or 11 Million. If
the corporation declares dividends, will there be a corresponding
decrease in the total asset of the corporation?
A: Yes if it is cash and property dividend, it will be a decrease in the
corporate asset. No as to stock dividends. Stock dividends are
considered as capitalization of the unrestricted retained earnings. What
the corporation can only do is to issue additional shares of stocks to the
stockholder. In consideration for the issuance of stock certificate, will
be from the unrestricted retained earnings. It will form part and parcel
of the capital stock of the corporation. There’s nothing that goes out of
the covers of the corporation. It will only be included in the capital
assets of the corporation. In the case of NTC v. PLDT, it was even
called other than that forced purchase of shares of stocks.
WHEN RIGHT TO DIVIDENDS VEST
As I was saying earlier, dividends may be paid out either on demand
or on a future date.
Q: E paid the subscription in full. Today the corporation declares cash
dividends. 5M out of 6M unrestricted retained earnings to be paid to
the stockholders of record, November 15 of this year. But E who has
already been issued a certificate of stock transferred his shares to Z
today also. 2 days later, A transferred his COS to Z. Z, after 5 days
went to the corporation to have the transfer recorded to the books of
the corporation. The corporation transferred the shares of E in favor Z.
It was already recorded in the books of the corporation comes Nov. 15.
The corporation paid Z 1M as his share of cash dividend. My Question,
as between E and Z, who has a better right to the dividend already
declared but not yet paid?
A: E has the better right. Whoever owns the shares at the time of the
declaration is presumed entitled to dividends already declared but not
paid. The corporation is right in paying 1M in favor of Z but in so far
as E, the transferee of shares, is concerned, E have a better right. Unless
they agreed otherwise. If the agreement stipulates any or all dividends
already declared but not paid, since nabayaran na si Z ng 1M, E can go
after Z to claim the 1M paid to him.
NOV-3 (E)
POWER TO DECLARE DIVIDENDS
We’re taking up the corporate power to declare dividend under section
42.
SEC. 42. Power to Declare Dividends. – The board of directors of a
stock corporation may declare dividends out of the unrestricted
retained earnings which shall be payable in cash, property, or in stock
to all stockholders on the basis of outstanding stock held by them:
Provided, That any cash dividends due on delinquent stock shall first
be applied to the unpaid balance on the subscription plus costs and
expenses, while stock dividends shall be withheld from the delinquent
stockholders until their unpaid subscription is fully paid: Provided,
further, That no stock dividend shall be issued without the approval 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 corporations are prohibited from retaining surplus profits in
excess of one hundred percent (100%) of their paid-in capital stock,
except: (a) when justified by definite corporate expansion projects or
programs approved by the board of directors; or (b) when the
corporation is prohibited under any loan agreement with financial
institutions or creditors, whether local or foreign, from declaring
dividends without their consent, and such consent has not yet been
secured; or (c) when it can be clearly shown that such retention is
necessary under special circumstances obtaining in the corporation,
such as when there is need for special reserve for probable
contingencies.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 67
*this provision grants every stock corporation the power to declare
dividends tout of the Unrestricted Retained Earnings (URE) or
otherwise most commonly known as Surplus profits to the
stockholders on the basis of the outstanding capital stock held by each
of them.
SITUATION:
If A holds 10% of the outstanding capital stock, and dividends are
declared. He’s entitled to 10% of the dividends declared by the
corporation. And the amount which the stockholder received as a share
of dividends is based therefore on the number or amount of stocks held
by him.
So that if A subscribed to 1M shares, with a par value of 1 peso per
share (or a total of Php1M), and the board declared cash dividends of
1 peso per share, (1M shares-1peso/share), that means he is entitled to
1M cash dividends. Although he may have paid only 50% out of his
subscription. However, if the shares have become delinquent, under
the 2nd paragraph of section 42, any cash dividends due him, will first
be applied to the amount of his delinquency plus costs, expenses and/or
interest if any.
If there remains more, it will be paid to him. However, if it is a stock
dividend, it will be withheld from him, until he pays the full amount of
his delinquency. Meaning, if he is not delinquent, he gets all the
dividends due him, although he has not paid his subscription in full.
This second paragraph of section 42 says delinquent shares only
when any cash dividends will not be paid to him, because it will first
be applied to the amount of his delinquency plus cost and expenses
and/or interest withheld. If there’s more, then it will be aid to him.
However, if it is a stock dividend, it will be withheld from him, until
he pays his delinquency.
This is because of the express provision of section 71. It provides that
subscribers to shares of stocks, not fully paid, and are not delinquent,
shall have all the rights of a stockholder.
*Section 71 is a very very important provision*
SEC. 71. Rights of Unpaid Shares, Non-delinquent. – Holders of
subscribed shares not fully paid which are not delinquent shall have
all the rights of a stockholder.
And the rights of the stockholders to be paid dividends will rest as soon
as the same has been declared by the BOD. From that time on, it
becomes a debt owing by the corporation to each of the stockholders.
And no revocation of dividends can be made unless the dividend
declaration has not yet been announced or communicated to the
stockholders, or unless it is a stock dividend, which is revocable prior
to its actual issuance.
WHY? Because stock dividends do not result to the increase of the
proportionate interest of the stockholders.
As we were saying, if A holds 10%, he’ll be entitled to 10% of the
stock dividends that year. If A has 5%, he will be entitled only to 5%
of the stock dividends that year. Meaning that he will still hold/own
10% or 5%. Other than that, it is irrevocable once communicated or
announced to the stockholder. This rule is based on reasons of policy
to prevent misleading investors and the probable effect which
revocation may have on the stability of stock transactions involving
shares of stocks.
SITUATION:
The Board declared cash dividends, A holds 1M shares, and the
corporation declares cash dividends of 1 peso per share, meaning A is
entitled to 1 peso per share, or 1M cash dividends. But declaration
provides that it will be payable to stockholders on record as of

November 15, 2020. So A practically owns 2M. (1m worth of shares,
and another 1M cash dividends on Nov 15). But A has a daughter/son
studying law in Arellano University, and he cannot wait for the said
dividends to be paid. So what he did was to sell his shares to Z,
inclusive of the dividends already declared but not yet paid. Total is
2M. He sold it only for 1.9M. If, that dividend declaration will be
revoked, what happens to stability of stock transactions, nagbayad si Z
ng 1.9M kay A. There you go, edi babalik ni A yung 900K, or 1M for
that matter.
Since the right to dividends will vest upon his declaration, whoever
owns the shares at the time of the declaration also owns the dividends.
A subsequent transfer of such stocks would, as a rule, not carry with it
the right to the dividends which have been declared but not yet paid.
Because many times, especially in widely held corporations, a
dividend declaration will expressly provide that it is payable to
stockholders on a certain specified date.
As we were saying a while back, the corporation declared cash
dividends today to be paid to stockholders of record as of November
15, 2020. In such case, whoever owns, or is the registered owner on
the specified date is, in so far as the corporation is concerned, entitled
thereto.
A holds 1M shares. The board declared 1eso per share today, kailangan
ni A ng pera, kasi may mga alaga sya sa Arellano Law na nag aaral,
wala syang pera. So what he did, right after the declaration of cash
dividends, was to sell his shares to Z for 1M. Tomorrow he will do
that. The day after, Z went to the corporate headquarters, armed with
the stock certificates endorsed by A for the cancellation of A’s stock
certificate, and the issuance of a new stock certificate in his name. the
corporation did just that. Nov. 15 came, and Z was paid the 1M cash
dividends, due to the fact that he is holding the 1M shares also.
Q: As between A, the transferor, and Z the transferee, who will have
the right to the dividends?
A: It will be A, UNLESS they have agreed to the contrary. So if the
corporation paid Z the 1M cash dividends, the transferor A can go after
Z, for the recovery of the 1M cash dividends paid by the corporation
in his favor, unless they have agreed to the contrary.
Q: Unless they have agreed to the contrary-What do I mean by that?
A: Hindi naman pala 1M binenta ni A yung shares nya. But rather
1.9M with the stipulation that it would include any and all dividends
already declared by the corporation, then so be it. AMEN
Like I was saying, the dividends are to be paid out only out of the URE
of the corporation or the surplus profits. So the question that may be
posed is:
Q: What happens if the dividends are illegally paid and/or declared,
out of the capital (because it cannot come from the capital it can only
be from the surplus profits/URE)? Will the directors be personally
liable?
A: NO. They are not personally liable for declaring dividends in
violation of law, unless they have acted willfully, with negligence, or
in bad faith.
This is consistent with the general rule that the courts will not interfere
the business judgement of the directors, unless it has been shown that
they have acted in bad faith or were negligent in the discharge of their
duties.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 68
So if the directors, in declaring dividends, rely on the financial
statements prepared by a dishonest employee, whom they have no
reasons to suspect; or on the legal advice of counsel that certain
proceeds were profits, where in fact they are not. No cause of action
would lie against them.
Like for instance, the limitations and restrictions of the issuance of the
no par value shares. The corporation has 1M unissued no par value
shares. And that the issue value had been originally determined to be
10PhP per share. In due course, the fair market value of the 1M no par
value shares have gone up to 20PhP per share. And the Board decides
to issue the 1M no par value shares for 20Php per share, or a total of
20M pesos. It was then determined to be issued at 10Php, so we have
a difference of P10M.
Q: May those P10M be considered as profits to be included for
purposes of declaration of cash dividends, or any dividends for that
matter?
A: The counsel said yes, because you earned P10M for that.
*but the counsel is not Atty. Ladia. I was consulted and I told them
“No you cannot include that” eh nabayad na, that cannot be done!
Why not, coconut?
Because under section 6, one of the express limitations on the right of
the corporations to issue no par value shares is that the entire of
consideration fort its issuance constitutes capital. The entire 20M paid
for the 1M no par shares constitutes capital. They are not earnings, they
are not profits. Hence, as you can see under section 6, not available for
declaration of dividends
SEC. 6. Classification of Shares. – xxx Provided, further, That the
entire consideration received by the corporation for its no-par value
shares shall be treated as capital and shall not be available for
distribution as dividends. xxx
If however, they are found to be negligent or in bad faith, they will be
liable to the corporation, or it has become insolvent, to its creditors for
the amount of dividends paid out of capital. Liability can attach under
section 30, as it stands now (then 31). The duty of obedience and
diligence.
SEC. 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 interest in conflict with their duty as such
directors or trustees shall be liable jointly and severally for all damages
resulting therefrom suffered by the corporation, its stockholders or
members and other persons.
A Director, Trustee or Officer shall not attempt to acquire, or acquire
any interest adverse to the corporation in respect of any matter which
has been reposed in them in confidence, and 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
would have accrued to the corporation.
Q: Now, if they have acted in good faith and with due diligence, they
cannot thus be held liable, may the creditors pursue the dividends paid
to the stockholders themselves?
(This issue has been the subject of conflicting opinions)
A: The majority view, however, is that in the absence of an express
provision of law, an innocent stockholder is not liable to return the

dividends received by him out of capital unless the corporation was
already insolvent at the time of payment. The view considers it unfair
and unreasonable to require innocent stockholders to repay dividends,
perhaps months, or even years, after they have spent them when they
received them in good faith from a solvent corporation, in the regular
course of its business.
The other matter that I like to take up also, is the case of Nielson & Co.
vs Lepanto Conslidated Mining.
Nielson & Company, Inc. vs. Lepanto Consolidated Mining
Company
26 SCRA 540, No. L-21601 December 28, 1968
Corporation law; Shares of stock; Consideration for which shares of
stock may be issued; A share of stock coming from stock dividends
declared cannot be issued to one who is not a stockholder of a
corporation.—From the provision of Section 16 of the Corporation
Law, the consideration for which shares of stock may be issued are: (1)
cash; (2) property; and (3) undistributed profits. Shares of stock are
given the special name "stock dividends" only if they are issued in lieu
of undistributed profits. If shares of stocks are issued in exchange of
cash or property then those shares do not fall under the category of
"stock dividends". A corporation may legally issue shares of stock in
consideration of services rendered to it by a person not a stockholder,
or in payment of its indebtedness. It is the shares of stock ,that are
originally issued by the corporation and forming part of the capital that
can be exchanged for cash or services rendered, or property; that is, if
the corporation has original shares of stock unsold or unsubscribed,
either coming from the original capitalization or from the increased
capitalization. Those shares of stock may be issued to a person who is
not a stockholder, or to a person already a stockholder in exchange for
services rendered or for cash or property. But a share of stock coming
from stock dividends declared cannot be issued to one who is not a
stockholder of a corporation.
Under Section 16 of the Corporation Law stock dividends cannot be
issued to a person who is not a stockholder in payment of services
rendered.
Same; "Stock dividend"; "Dividend"; Concept and nature.—A "stock
dividend" is any dividend payable in shares of stock of the corporation
declaring or authorizing such dividend. It is, as what the term itself
implies, a distribution of the shares of stock of the corporation among
the stockholders as dividends. A stock dividend of a corporation is a
dividend paid in shares of stock instead of cash, and is properly payable
only out of surplus profits (Sec. 16, Corporation Law). So, a stock
dividend is actually two things: (1) a dividend, and (2) the enforced use
of the dividend money to purchase additional shares of stock at par.
(Words and Phrases, p. 270). When a corporation issues stock
dividends, it shows that the corporation's accumulated profits have
been capitalized instead of distributed to the stockholders or retained
as surplus available f or distribution, in money or kind, should
opportunity offer. Far from being a realization of profits for the
stockholder, it tends rather, to postpone said realization, in, that the
fund represented by the new stock has been transferred from surplus to
assets and no longer available for actual distribution. Thus, it is
apparent that stock dividends are issued only to stockholders. This is
so because only stockholders are entitled to dividends. They are the
only ones who have a right to a proportional share in that part of the
surplus which is declared as dividends. A stock dividend really adds
nothing to the interest of the stockholder; the proportional interest of
each stockholder remains the same. If a stockholder is deprived of his
stock dividends—and this happens if the shares of stock forming part
of the stock dividends are issued to a non-stockholder—then the
proportion of the stockholder's interest changes radically. Stock
dividends are civil fruits of the original investment, and to the owners
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 69
of the shares belong the civil fruits (Art. 441, Civil Code). The term
"dividend" both in the technical sense and its ordinary acceptation, is
that part or portion of the profits of the enterprise which the
corporation, by its governing agents, sets apart for ratable division
among the holders of the capital stock. It means the fund actually set
aside, and declared by the directors of the corporation as a dividend,
and duly ordered by the directory, or by the stockholders, at a corporate
meeting, to be divided or distributed among the stockholders according
to their respective interests.
In the case, Nielson & Co. and Lepanto entered into a management
agreement. Whereby Nielson will receive, as consideration, 10% of the
dividends that will be declared by the corporation.
Q: Is Nielson a non-stockholder entitled to receive dividends? In the
case, it was stock dividends. (Are non-stockholders, entitled to receive
dividends?)
A: The court ruled no. This will be dilute the dividend rights of the
stockholders.
Q: How about cash or property?
A: It is still the same in whatever form they may be. (Still, NO)
Let’s assume the corporation made 1M, and they want to declare the
entire 1M URE as dividends, in whatever form it may be- cash,
property, or stock.
10 stockholders. If Nielson & company will be paid 10% of the one
million in whatever form they may be, the 10 stockholders holding
10% each, will not receive 10% of the dividends declared but only 9%.
It will dilute the dividend rights of the existing stockholder. May
contractual obligation ang lepanto, 10% of the dividends to be
declared. If that is the case, if the profits of the corporation is one
million, it cannot declare the entire 1M as dividends. (900K lang
ideclare nila dividends)
Q: Why?
A: It has debt to pay in favor of Nielson & company.
Tanggalin mo yung 10% ng one million. That will be your unrestricted
retained earnings. Hindi unrestricted lahat pala yung 1M eh, because
may babayaran kang 10% kay Nielson & company.
Q: So, tinanggal mo yung 100K, magkano natira?
A: 900K. We declare the 900K and the 10 stockholders will receive
10% each of the 900K. Because dividends are fruits of investments.
Hindi ka naman naginvest sa corporation eh, bakit ka entitled to
dividends? As the same goes in civil law, ‘yung nagtanim ng plant ang
magri-reap ng prutas. Hindi ka naman nagtanim eh, bat ka
makikinabang sa prutas ng plant na ’yan?
Student Q1: Regarding property dividends, with regards to delinquent
stockholder. The law only provides for cash and dividend stocks,
however it did not provide for property dividends?
A: your guess is just as good as mine, there you go, Me not know also.
Walang jurisprudence, walang statement sa law. Papaano kung
property? - We have the same question. Kaya nga I said I am being
honest-your guess is just as good as mine.”
-BOOK NOTES- (self-explanatory daw yung 43 or 44)

Power to Declare Dividends
Object of modern stock corporation- earn money or profits for their
stockholders.
* When such a corporation earns profits over and above the amount of
its paid-up capital, the stockholders have a right, subject to certain
conditions and limitations, to have such profits set apart from the
general mass of funds of the corporation, and distribute among them in
proportion to their shares or interest in the corporation.
Dividend
 Fruit of investment, the recurrent return, analogous to
interest and rent upon other forms of invested capital.
 Are corporate profits set aside, declared and ordered by the
Board of Directors to be paid to the stockholders.
Power to declare dividends
 inherent in every stock corporation and under Philippine
jurisprudence, it is also an express power granted by law
* The law requires that dividends are to be declared out of the
"unrestricted retained earnings" of the corporation.
Unrestricted Retained Earnings
 has been defined by the SEC as the "undistributed earnings
of the corporation which have not been allocated for any
managerial, contractual or legal purposes and which are free
for distribution to the stockholders as dividends"
*Implicit from Section 42- a corporation has no power to declare
dividends if its paid-up capital is not maintained or is impaired. This
capital, inclusive of any unpaid portion of the subscribed capital,
represents a "trust fund" which, at all times, must be kept intact for the
protection of creditors who have the right to rely on such subscription
and the paid-up capital for the satisfaction of their claims.
* The directors cannot declare dividends if there are no surplus
profit or when the corporation is insolvent.
Three types of dividends that may be distributed to the
stockholders:
1. Cash
2. Property
3. Stock
* may be a combination of two or all of them.
Cash dividends
 are those that are payable in lawful money or currency.
Property dividends
 are those that are paid in the form of property instead of
cash
Stock dividends
 refer to the corporation's shares of stock itself or the
certificates evidencing it
* The Board of Directors exercise exclusive authority as to whether or
not the corporation declare cash or property dividends. But as to the
declaration of stock dividends, the approval of the stockholders,
holding or representing at least 2/3 of the outstanding capital stock is
required.
*As compared to stock dividends, the declaration of cash or property
dividends have the effect of reducing corporate assets to the extent of
dividends declared. Neither would stock dividends increase the
proportionate interest of the stockholders of the corporation although
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 70
it will have the effect of increasing the subscribed and paid-up capital
of the corporation. It gives the stockholders nothing in the way of
distribution of assets but merely divides his existing shares into smaller
units.
PLDT vs. NTC
 "dividends, regardless of the form they are declared, ie, cash,
property or stock, are valued at the amount of the declared
dividend, taken from the unrestricted retained earnings of a
corporation
Thus, the value of declaration in case of stock dividends is the actual
value of the original issuance of said stocks. In case of stock dividends,
it is the amount that the corporation transfers from its surplus profit
account to its capital account (otherwise known as capitalization of
surplus profits) or it is the amount the corporation receives (retains) in
consideration of the original issuance of the shares.
* The amount which each stockholder receives as his share in the
dividends is based on the stock held by him regardless of whether he
has paid his subscription in full.
Authority to Declare Dividends Lodged With the Board
*The power or authority to declare dividends is likewise vested in the
BOD.
Authority of the board- absolute as long as they act in the exercise of
an honest and impartial judgment.
*A corporation may have a surplus or accumulated profits legally
available for dividends, but the right of the shareholders to the making
of any distribution is dependent upon the exercise of an honest
discretion of the directors as to its financial advisability at the time. If
the board, in its honest judgment therefore decides to use corporate
earnings for business expansion or for business reserves or reverses,
the stockholders are bound and have no right to complain.
GENERAL RULE:
The judgment of the board of directors in the matter of declaring
dividends is conclusive
EXCEPTION: when they act in bad faith, or for a dishonest purpose
or act fraudulently, oppressively, unreasonably or unjustly; or abuse
of discretion can be shown so as to impair the rights of the complaining
stockholders to their just proportion of corporate profits.
Essential test of bad faith
 Determine if the policy of the directors is dictated by their
personal interest rather than the corporate welfare.
* The board can not unreasonably accumulate profits on the excuse
that such earnings are needed for business expansion or reserves. If
such profits accumulate in excess of 100% of the corporation's paid-in
capital stock, the board may, under certain circumstances, be
compelled to distribute dividends. (Sec 42, Par 2)
When Dividend Rights Vest
RULE:
The right of the stockholders to be paid dividends vest as soon as they
have been lawfully and finally declared by the board of Directors.
From that time, the corporation becomes indebted to each stockholder
who may recover the debt, as an ordinary unsecured creditor may do,
against the corporation. And no revocation of dividend may be had
unless it has not been officially communicated to the stockholders or
is in the form of stock dividends which is revocable at any time prior
to distribution.

Basis: based on reasons of policy to prevent misleading investors and
the probable effect which revocation may have on the stability of stock
transactions
* The declaration of dividends may be revoked if it has not been made
public or communicated to the stockholders, and until such
announcement, the action of the directors is not final
There is a distinction between the power of the directors to rescind or
revoke a dividend payable by the corporation in its own shares and one
payable in cash and/or property. While there is some conflict of
authority, the current opinion favors the power of revocation of
declared stock dividends even if announced but not yet paid or issued.
There is no analogy between declaration of a dividend in cash or in
property and a stock dividend. A so-called stock dividend does not
result to the distribution of corporate assets but merely divides the
existing shares of a stockholder into smaller integers or units. Thus, the
irrevocability of an announced dividend should not apply to stock
dividends.
Any dividend already declared when shares are transferred belongs to
the owner of the shares at the time of the declaration. A subsequent
transfer of such stock would, as a rule, not carry with it the right to the
dividends which have been declared but not yet paid.
However, in widely held corporations- declaration of dividends
provides that it shall be payable to the stockholders of record on a
specified future date.
- In this case, whoever is the registered owner on a specified record
date is, as far as the corporation is concerned, entitled to the
dividends.
- As against his tran71sferor, however as transferee of stocks after the
declaration but before the specified date of payment, has presumably
the right to such dividends despite the failure to record the transfer
in the stock and transfer book, unless the contracting parties have
agreed to the contrary.
Power to Enter Into Management Contract
Old notion: management contract should be prohibited because the
law vest upon the board of directors or trustees the power and authority
to manage the corporate affairs and should not abdicate its
responsibility of running and managing its business may no longer
hold true in view of the express power granted to a corporation to enter
into management contract.
SEC. 43. Power to Enter into Management Contract. – No
corporation shall conclude a management contract with another
corporation unless such contract is approved by the board of directors
and by stockholders owning at least the majority of the outstanding
capital stock, or by at least a majority of the members in the case of a
nonstock corporation, of both the managing and the managed
corporation, at a meeting duly called for the purpose: Provided, That
(a) where a stockholder or stockholders representing the same interest
of both the managing and the managed 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
managed corporation, then the management contract must be approved
by the stockholders of the managed corporation owning at least two-
thirds (2/3) of the total outstanding capital stock entitled to vote, or by
at least two-thirds (2/3) of the members in the case of a nonstock
corporation.
These shall apply to any contract whereby a corporation undertakes to
manage or operate all or substantially all of the business of another
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 71
corporation, whether such contracts are called service contracts,
operating agreements or otherwise: Provided, however, That such
service contracts or operating agreements which relate to the
exploration, development, exploitation or utilization of natural
resources may be entered into for such periods as may be provided by
pertinent laws or regulations.
No management contract shall be entered into for a period longer than
five (5) years for any one (1) term.
*This provision was inserted because of the nature of the business of a
corporation or because of the loans a corporation may incur, it may be
necessary to assure not only technical competence but continuity in
management policy in running corporate affairs which can be achieved
through management contract.
Even long before the effectivity of the Code, Philippine jurisprudence
already recognized the validity of the management contract in the 1922
case of Philippine National Bank vs. Producers' Warehouse
Association. In that case, it was held that where one corporation
appoints another corporation its general manager with authority to
issue quedans in the name of the former, and the latter issued quedans
of the former in its own name and pledged them for value to the bank
as collateral, in the absence of fraud or collusion to which the bank was
a party, the quedans are valid and binding, and the former is liable to
the bank for the property therein described or its value.
The requirement for a valid management contract are as follows:
1. Resolution of the board of directors;
2. Approval by the stockholders holding or representing a
majority of the outstanding capital stock or majority of
the members in case of non-stock corporation of both
the managing and the managed corporation;
3. The approval of the stockholders or members must be
made at the meeting called for that purpose; and,
4. The contract shall not be for a period longer than five
(5) years for any one term, except those which relate to
exploration, development or utilization of natural
resources which may be entered into for such periods as
may be provided by pertinent laws and regulations.
Not only a majority but 2/3 of the outstanding capital stock or 2/3 of
the members in a non-stock corporation would be required for the
approval of a management contract in the following instances:
a) Where the stockholders representing the same interest of
both the managing and managed corporation own or control
more than 1/3 of the total outstanding capital stock of the
managing corporation; and,
b) Where a majority of the members of the board of directors
of the managing corporation also constitute a majority of the
directors of the managed corporation.
c) Where the contract would constitute the management or
operation of all or substantially all of the business of another
corporation, whether such contracts are called service
contracts. If it will not constitute the management of all or
substantially all of the business of another corporation the
first paragraph of Section 43 will apply and not that of the
second, that is, only the vote of the stockholders holding or
representing at least a majority of the outstanding capital

stock or majority of the members in the case of non-stock
corporation will be required.
Ultra-Vires Acts
Ultra-vires acts are those that cannot be executed or performed by a
corporation because they are not within its express, inherent, or implied
powers as defined by its charter or AOI. A corporation can only
perform and exercise such powers and functions as are granted to it by
law, its articles of incorporation or those that are necessary or
incidental to its existence. If it acts beyond such power or authority,
the act thus performed is ultra-vires allowing a collateral attack upon
the authority of the corporation to engage in such particular endeavor.
SEC. 44. Ultra Vires Acts of Corporations. – No corporation shall
possess or exercise corporate powers other than those conferred by this
Code or by its articles of incorporation and except as necessary or
incidental to the exercise of the powers conferred.
Jurisprudence- as within the corporate powers, acts which are clearly
beneficial to the company or necessary to promote the interest or
welfare of the corporation, its employees and their families, or in the
legitimate furtherance of its business.
* Any transaction which is fairly incidental or auxiliary to the main
business of the corporation may be undertaken. And it has been
succinctly said that whatever may be fairly regarded as incidental to
and consequential upon those things which are authorized by the
Charter of the company, ought not, unless expressly prohibited or
illegal, to be held by judicial construction, to be ultra-vires.
Ultra-vires act- may not necessarily be illegal but merely beyond the
power of the corporation to perform.
Illegal acts are those that are contrary to law, morals, public policy or
order and are thus void and unenforceable. Mere ultra-vires acts
which are not illegal per se may become binding and enforceable
either by ratification, estoppel or on equitable grounds unless the
public or third parties are thereby prejudiced.
Consequences of Ultra Vires Act
1. On the Corporation Itself
The proper forum, in accordance with the provisions of PD 902-A, as
amended, and R.A. No. 8799 may suspend or revoke, after proper
notice and hearing, the franchise or certificate of registration of the
corporation for serious misrepresentation as to what the corporation
can do or is doing to the great damage or prejudice of the general
public.
2. On the rights of the Stockholders
A stockholder may bring either an individual or derivative suit to
enjoin a threatened ultra-vires act or contract. If the act or contract has
already been performed, a derivative suit for damages against the
directors may be filed, but their liability will depend on whether they
acted in good faith and with reasonable diligence in entering into the
contract. 76
3. On the Immediate Parties
The courts have not agreed as to the legal effect of a corporate contract
outside of its authorized business but Ballantine gives the following
summary of the doctrines evolved:
a) If the contract is fully executed on both sides, the contract is
effective and the courts will not interfere to deprive either
party of what has been acquired under it;
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 72
b) If the contract is executory on both sides, as a rule, neither
party can maintain an action for its non-performance; and,
c) Where the contract is executory on one side only, and has
been fully performed on the other, the courts differ as to
whether an action will lie on the contract against the party
who has received benefits of performance under it. Majority
of the courts, however, hold that the party who has received
benefits from the performance is 'estopped' to set up that the
contract is ultra vires to defeat an action on the contract."
This is more in conformity with the doctrine that no person
shall be allowed to enrich himself at the expense of another.
Pirovano, et al. vs. De la Rama Steamship Co.,
96 Phil. 335, No. L-5377 December 29, 1954
POWERS OF A CORPORATION; ACTS PERFORMED WITHIN
THE POWERS GRANTED ARE NOT "ULTRA VIRES".—Where
the corporation was given broad and almost unlimited powers to carry
out the purposes for which it was organized among them, to aid in any
other manner any person in the affairs and prosperity of whom it has a
lawful interest, a donation made to the heirs of its late president in
recognition of the valuable services rendered by the latter which had
immensely contributed to its growth, comes within this broad grant of
power and can not be considered an ultra vires act.
"ULTRA VIRES" ILLEGAL ACTS DISTINGUISHED; EFFECT OF
RATIFICATION BY STOCKHOLDERS.—Illegal acts of a
corporation contemplate the doing of an act which is contrary to law,
morals, or public order, or contravene some rules of public policy or
public duty, and are, like similar transactions between individuals,
void. They can not serve as basis of a court action, nor acquire validity
by performance, ratification, or estoppel. On the other hand, ultra vires
acts or those which are not illegal and void ab initio but are merely
within the scope of the article of incorporation, are merely voidable
and may become binding and enforceable when ratified by the
stockholders.
"ULTRA VIRES" ACTS; RATIFICATION BY STOCKHOLDERS
OF "ULTRA VIRES" ACTS CURES INFIRMITY.—The ratification
by the stockholders of an ultra vires act which is not illegal cures the
infirmity of the corporate act and makes it perfectly valid and
enforceable, specially so if it is not merely executory but executed and
consummated and no creditors are prejudiced thereby.
Carlos vs. Mindoro Sugar Co.,
57 Phil., 343, No. 36207 October 26, 1932
In adopting this conclusion we have relied principally upon the
following facts and circumstances: Firstly, that the Philippine Trust
Company, although secondarily engaged in banking, was primarily
organized as a trust corporation with full power to acquire personal
property such as the bonds in question, according to both section 13
(par. 5) of the Corporation Law and its duly registered by-laws and
articles of incorporation; secondly, that being thus authorized to
acquire the bonds, it was given implied power to guarantee them in
order to place them upon the market under better, more advantageous
conditions, and thereby secure the profit derived from their sale:
"It is not, however, ultra vires for a corporation to enter into contracts
of guaranty or suretyship where it does so in the legitimate furtherance
of its purposes and business. And it is well settled that where a
corporation acquires commercial paper or bonds in the legitimate
transaction of its business it may sell them, and in furtherance of such
a sale it may, in order to make them the more readily marketable,
indorse or guarantee their payment." (7 R. C. L., p. 604 and cases
cited.)

"Whenever a corporation has the power to take and dispose of the
securities of another corporation, of whatsoever kind, it may, for the
purpose of giving them a marketable quality, guarantee their payment,
even though the amount involved in the guaranty may subject the
corporation to liabilities in excess of the limit of indebtedness which it
is authorized to incur. A corporation which has power by its charter to
issue its own bonds has power to guar-antee the bonds of another
corporation, which has been taken in payment of a debt due to it, and
which it sells or transfers in payment of its own debt, the guaranty
being given to enable it to dispose of the bond to better advantage. And
so guaranties of payment of bonds taken by a loan and trust company
in the ordinary course of its business, made in connection with their
sale, are not ultra vires, and are binding." (14-A C. J., pp. 742-743 and
cases cited) ; thirdly, that although it does not clearly appear in the deed
of trust (Exhibit 6) that the Mindoro Sugar Company transferred the
bonds therein referred to, to the Philippine Trust Company,
nevertheless, in the resolution of the board of directors (Exhibit 3), the
president of the Philippine Trust Company was expressly authorized
to purchase all or some of the bonds and to guarantee them; whence it
may be inferred that subsequent purchasers of the bonds in the market
relied upon the belief that they were acquiring securities of the
Philippine Trust Company, guar-anteed by this corporation; fourthly,
that as soon as P3,000,000 worth of bonds was issued, and by the deed
of trust the Mindoro Sugar Company transferred all its real property to
the Philippine Trust Company, the cause or consideration of the
transfer being, (1) the guarantee given by the purchaser to the bonds,
and (2) its' having likewise guaranteed its obligations and those of
Welch and Havemeyer in favor of the Philippine National Bank up to
the amount of P2,000,000; fifthly, that in transferring its real property
as aforesaid the Mindoro Sugar Com-pany was reduced to a real state
of bankruptcy, as the parties specifically agreed during the hearing of
the case, to the point of having become a nominal corporation without
any assets whatsoever; sixthly, that such operation or trans-action
cannot mean anything other than that the real intention of the parties
was that the Philippine Trust Company acquired the bonds issued and
at the same time guaranteed the payment of their par value with
interest, because otherwise the transaction would be fraudulent,
in-asmuch as nobody would be answerable to the bond-holders for
their value and interest; seventhly, that the Philippine Trust Company
had been paying the appellant the interest accrued upon the four bonds
from the date of their is-suance until July 1, 1928, such payment of
interest being another proof that said corporation had really become
the owner of the aforesaid bonds; and, eighthly, that the Philip-pine
Trust Company has not adduced any evidence to show any other
conclusions.
There are other considerations leading to the same result even in the
supposition that the Philippine Trust Company did not acquire the
bonds in question, but only guaranteed them. In such a case the
guarantee of these bonds would, at any rate, be valid and the said
corporation would be bound to pay the appellant their value with the
accrued interest in view of the fact that they become due on account of
the lapse of sixty (60) days, without the accrued in-terest due having
been, paid; and the reason is that it is estopped from denying the
validity of its guarantee.
"* * * On the other hand, according to the view taken by other
courts, which it must be acknowledged are in the majority, a recovery
directly upon the contract is permitted, on the ground that the
corporation, having re-ceived money or property by virtue of a contract
not im-moral or illegal of itself, is estopped to deny liability; and that
the only remedy is one on behalf of the state to punish the corporation
for violating the law." (7 R. C. L., pp. 680-681 and cases cited.)
"* * * The doctrine of ultra vires has been declared to be entirely
the creation of the courts and is of compa-ratively modern origin. The
defense is by some courts regarded as an ungracious and odious one,
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 73
to be sustained only where the most persuasive considerations of
public policy are involved, and there are numerous decisions and dicta
to the effect that the plea should not as a general rule prevail whether
interposed for or against the corpo-ration, where it will not advance
justice but on the con-trary will accomplish a legal wrong." (14-A C.
J., pp. 314-315.)
"The doctrine of the Supreme Court of the United States together with
the English courts and some of the state courts is that no performance
upon either side can validate an ultra vires transaction or authorize an
action to be maintained directly upon it. However, the great weight of
authority in the state courts is to the effect that a transaction which is
merely ultra vires and not malum in se or malum prohibitum although
it may be made by the state a basis for the forfeiture of the corporate
charter or the dissolution of the corporation, is, if performed by one
party, not void as between the parties to all intents and purposes, and
that an action may be brought directly upon the transaction and relief
had according to its terms." (14-A C. J., pp. 319-320.)
"When a contract is not on its face necessarily beyond the scope of the
power of the corporation by which it was made, it will, in the absence
of proof to the contrary, be presumed to be valid. Corporations are
presumed to con-tract within their powers. The doctrine of ultra vires,
when invoked for or against a corporation, should not be allowed to
prevail where it would defeat the ends of justice or work a legal
wrong." (Coleman vs. Hotel de France Co., 29 Phil., 323.)
"Guaranties of payment of bonds taken by a loan and trust company in
the ordinary course of its business, made in connection with their sale,
are not ultra vires, and are binding." (Broadway Nat. Bank vs. Baker,
57 N. E., p. 603.)
Japanese War Notes Claimants Association of the Philippines
Inc. vs. Securities and Exchange Commission,
101 Phil. 540, No. L-8987 May 23, 1957
PRIVATE CORPORATIONS; JAPANESE WAR NOTES
CLAIMANTS ASSOCIATION; EXERCISE OF POWERS NOT
GRANTED IN THE ARTICLES OF INCORPORATION, EFFECT
OF.—Although the articles of incorporation give petitioner the
privilege to work for the redemption of the Japanese war notes of its
members alone, it cannot offer its services to the public for a valuable
consideration, because there is nothing definite and tangible about the
redemption of the war notes and its success is speculative. Thus, when
petitioner engaged in the business of registering war notes for deposit
upon payment of fees, and of accepting and collecting fees for
reparation claims for civilian casualties and other injuries, it acted
beyond the powers embodied in its articles of incorporation.
Crisologo-Jose vs. Court of Appeals
177 SCRA 594, September 15, 1989
Negotiable Instruments Law; Corporations; Rule that an
accommodation party liable on the instrument to a holder for value
does not apply to corporations which are accommodation parties;
Reasons.—The aforequoted provision of the Negotiable Instruments
Law which holds an accommodation party liable on the instrument to
a holder for value, although such holder at the time of taking the
instrument knew him to be only an accommodation party, does not
include nor apply to corporations which are accommodation parties.
This is because the issue or indorsement of negotiable paper by a
corporation without consideration and for the accommodation of
another is ultra vires. Hence, one who has taken the instrument with
knowledge of the accommodation nature thereof cannot recover
against a corporation where it is only an accommodation party. If the
form of the instrument, or the nature of the transaction, is such as to
charge the indorsee with knowledge that the issue or indorsement of
 CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 74

the instrument by the corporation is for the accommodation of another,

he cannot recover against the corporation thereon.

Same; Same; Same; Same; Exception; An officer or agent of a

corporation shall have the power to execute or indorse a negotiable
paper in the name of the corporation for accommodation only if
specifically authorized to do so; Personal liability of signatories in the
instrument.—By way of exception, an officer or agent of a corporation
shall have the power to execute or indorse a negotiable paper in the
name of the corporation for the accommodation of a third person only
if specifically authorized to do so. Corollarily, corporate officers, such
as the president and vice-president, have no power to execute for mere
accommodation a negotiable instrument of the corporation for their
individual debts or transactions arising from or in relation to matters in
which the corporation has no legitimate concern. Since such
accommodation paper cannot thus be enforced against the corporation,
especially since it is not involved in any aspect of the corporate
business or operations, the inescapable conclusion in law and in logic
is that the signatories thereof shall be personally liable therefor, as well
as the consequences arising from their acts in connection therewith.

Exam coverage: Until Ultra-vires Acts

“The exam will consist of 20% true or false, 20% MCQ, 60% essay.
I may ask an objective as a bonus question.”

“As I was saying, there will be at least 12% question in your

midterm regarding dividends. I’m only saying at least 12%”

MIDTERM EXAM ANSWERS
1. A, B, C, D, and E are the five man governing board of X
company incorporated. On Oct 30, 2020, the BOD consisting of A,
B and C held and conducted a meeting to fill up teo vacancies
in the board by virtue of the removal of D by the stockholders and
the death of E. F was unanimously elected to replace D and G in
lieu of E. The election of F and G is/are:
A. Valid for BOTH
B. Invalid for BOTH
C. Not valid for F but valid for G
D. Not valid for G but valid for F
Answer: C because the election of F is invalid because she
replaced D who was removed by the stockholders. Only the
stockholders can elect a replacement of a director who was ousted
or removed by the stockholders. It is valid for G because E died
before the expiration of his term.
2. Non-voting shares are not included in the determining the voting
requirements imposed by the Code in cases of:
A. Providing for additional disqualification of directors in the bylaws
– the non-voting shares are included in the voting because this is
an amendment of the bylaws in accordance with Section 6 (2)
B. Changing the place of the principal office of the
corporation – this is an amendment of the AOI of the corporation
so non-voting rights are included.
C. Granting compensation of the members of the BOD by the majority
vote of the outstanding capital stock – this is the CORRECT
ANSWER because this is not one of those circumstances
enumerated in the Code where non-voting shares are entitled to vote
nonetheless.
D. Extension of corporate term – non-voting shares are included
because it is an amendment of the AOI of the corporation under
Sec 6 (1).
Answer: C because this is not one of those circumstances
enumerated in the Code where non-voting shares are entitled to vote
nonetheless.
3. A corporation was created by special law. After its creation
, however, the special law creating it was declared by the Court as
invalid of being unconstitutional. May the corporation be considered
as a de facto corporation?
A. Yes, because there was colorable compliance with the existing
law under which it may have been created as a de jure corporation.
B. No, because there was NO colorable compliance with the existing
law under which it may have been created as a de jure corporation.
C. Yes, because it was created prior to the declaration that the special
law was invalid and unconstitutional.
D. No, because there is no law under which it may have been created
as a de jure corporation.
Answer: D, this is the case of Municipality of Malabang vs
Benito, an unconstitutional act or law is not a law. It confers no rights,
imposes no duties and it creates no office, as though it was no
written at all.
4. A contract between corporations and interlocking directors will be
subjected to the provisions of Section 31 or it will become voidable
when:
A. When the interlocking directors own 20% of the OCS in one
corporation while 18% in the other. - wrong answer because they are
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 75
both nominal, it becomes voidable only if nominal in one and
substantial in the other.
B. When he owns 22% in one corporation while 25% in the
other - wrong answer because they are both substantial.
C. When he owns 20% in one corporation and 22% in the other - this
is the CORRECT ANSWER because 20% is nominal while 22% is
substantial.
D. He owns 25% in both corporations – wrong answer because both
substantial.
Answer: C because 20% is nominal while 22% is substantial.
5. Only the stockholders can fill up in the office of a director, that is
the general rule, if the said vacancy occurs:
A. By virtue of the death of a director prior to the expiration of his
term.
B. If the director ceases to be a stockholder. C. By the death of a
holdover director.
D. If the director is subsequently disqualified by virtue of bylaw
provisions.
Answer: C because the holdover director’s term already expired.
Under the Code, only the stockholders can fill up a vacancy created
by removal or expiration of term.
TRUE OR FALSE.
A – both statements are TRUE
B - both statements are FALSE
C – if 1st statement is TRUE and 2nd statement is FALSE
D. - if 1st statement is FALSE and the 2nd statement is TRUE
6. Answer: B
1st statement: A person may not act as a corporate secretary and
treasurer at the same time – FALSE because corporate secretary
and treasurer may hold their office concurrently.
2nd statement – A compliance officer is required to be elected in any
corporation under the corporation code - FALSE because there
is no requirement under the Code requiring the election of a
compliance officer.
7. Answer: B
1st statement – Outstanding Capital Stock means that the total
number of shares of stocks issued under binding subscription
contracts to subscribers whether or not fuly or partially paid be
inclusive of treasury shares - FALSE because the definition says
exclusive of treasury shares
2nd statement – redeemable shares are shares of stock which have
been issued and fully paid for but have subsequently been
reacquired thru purchase, redemption, donation or some other lawful
means. Such shares may be disposed of at a reasonable price by the
BOD – FALSE because it is referring to treasury shares
8. Answer: B
1st statement – If the corporation does not formally organize and
commence the transaction of its business w/in 3 years from the
date of its incorporation, its certificate of incorporation shall
be deemed revoked as of the day following the end of the
three year period. - FALSE because Section 21 says not three years,
but five years.

2nd statement – Stock holdings exceeding 25% of the OCS shall be
deemed substantial for the purposes of interlocking directors –
FALSE because the law is categorical, more than 20%.
9. Answer: C
1st statement – Private corporations may be created by special
law - TRUE
2nd statement – Public corporations are primarily governed by the
corporation code. - FALSE because under Section 4 they are
primarily governed by the law of their creation supplemented
only by the corporation code of the Philippines.
TRUE OR FALSE (w/ explanation if FALSE ang sagot)
1. In all cases only the stockholders or members may remove or oust a
director or trustee from said office.
– FALSE because the SEC also has the power, after proper notice and
hearing to remove or oust a director.
2. In all instances a corporation commences to exist and will be vested
with the juridical personality on the date of the issuance of the
certificate of incorporation by the SEC.
– FALSE because 1st we have the corporation by estoppel, it is
not registered. 2nd the corporation sole which commences to exist
upon the filing of the verified AOI with the SEC. 3rd corporations
created by special law, it is not the SEC which gives it life to be
and act as an incorporation. 4th homeowners association, it is
the HSIEC which gives it life to be and act as such. 5th the
cooperatives, it is not the SEC but the the Bureau of Cooperatives that
issues the certificate of incorporation.
3. In any incorporation, the president cannot legally be the corporate
secretary at the same time
– TRUE although the president may be the treasurer at the same
time in a one person corporation he cannto also be the corporate
secretary at the same time.
4. Insofar as the stockholders, directors and members of a de facto
corporation are concerned, they have the same rights, liabilities and
obligations as those of the de jure corporation.
- TRUE because if a stockholder of a de jure corporation can inspect
the records of the corporation, the same holds true for a stockholder
of a de facto corporation. If a director of a de jure corporation may
be held liable for disloyalty, the same holds true also for the
director of a de facto corporation.
5. Common shares cannot legally be deprived of the right to vote by
a provision in the AOI because of the doctrine of limited capacity
in the corporate form of business. A corporation can only to
such act and things as the law allows it to do, and the law says only
preferred and redeemable shares may be denied the right to vote. The
case of Gamboa vs Teves. Nonetheless, common shares may
however be effectively be denied the right to vote when founding
shares are issued granting the holders of such shares the exclusive to
vote and be voted upon in the election of directors for a period
not exceeding 5 years from the date of the approval of the SEC if that
is the case then all other types of shares inclusive of common
shares are denied the right to vote.
6. There is reverse piercing of the corporate veil when the plaintiff
seeks to reach the assets of the corporation for the liabilites of a
stockholder
- TRUE refer to the IME case.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 76
7. The doctrine of equality of shares is one where all shares of stock
issued by the corporation are equal in all respects unless the AOI
provides otherwise.
– TRUE if there is no indication in the AOI as to what
rights, privilege or advantage a type of share may have then they are
presumed to be equal in all aspects, the same voting and dividend
rights.
8. A domestic corporation may not have a governing board
consisting solely of foreigners.
– FALSE because their is no nationality requirement. For instance
the retail trade liberalization law, if the paid up capital is at least
2.5M us dollars then all the shares may be held by foreigners.
9. A self - dealing director refers to one whose shares is either nominal
or substantial in BOTH corporations.
– FALSE because you are referring to the interlocking directors.
10. Cumulative voting is the method of casting one vote per candidate
or director.
– FALSE, cumulative voting is the right granted to stockholders to
multiply his number of shares by the number of directors to be elected.
The sum of which the total number of votes which he may cast in favor
of only one candidate, or distribute to as many candidates as he
deem proper provided that it will not exceed his total number of votes.
CASE ANALYSIS
X company, Inc. has an ACS of 10M pesos divided into 10M
shares with a par value of 1 peso per share. 8M was subscribed
equally at 1M share each by 8 stockholders. 2M were thus left
unsubscribed. The 5 members of the Board consists of A, B, C, D,
and E.
A, B, and C are siblings and are aware the corporation has
made a hefty unrestricted retained earnings in the amount of 60M as
of the end of October which will be earmarked for cash dividend
declaration in the 1st quarter of 2021. A, B and C acquired the 2M
unissued stocks in order to have a much better dividend rights
than the other stockholders.
The other stockholders questioned the acquisitions of A, B, and
C, and that they are entitled to exercise their pre-emptive rights.
1. May the other stockholders exercise their pre-emptive rights as
to the originally unsubscribed portion of the original ACS. Why or why
not? (5 points)
ANSWER: Yes, because the law as it stands now says that
existing stockholders shall have the right to subscribe to all issues
or dispositions of shares of any class.
2. Disregarding the above, and assuming the entire 10M has been
subscribed. The five directors, A, B, C, D, and E passed a resolution
for the grant of their compensation subject to the approval of the
majority of the OCS.
A and B owns 20% each, total of 40%. While the three other directors,
10% each, or in total 70% of the OCS. 30% thereof are held by
other stockholders meaning 3M shares are held by the other
stockholders. What is the vote required in order that the stockholders
may validly grant the directors compensation? Explain. (5 points).
ANSWER: The vote required is majority of the 3M.
3M/2= 1.5M + 1 OCS = majority vote of the 3M.

This is because directors are not entitled to participate in
granting themselves compensation. They have no right to vote under
Sec 6.
3. Disregarding the above, and assume instead that the ACS of 10M,
5M was subscribed at 1M each by A, B, C, D, and E. And 4M was paid
up at 1M each by A, B, and C. And 500k each by D and E, leaving
these 2 a balance of 500k each on their respective subscription.
The corporation made 6M unrestricted retained earnings. May
the Board be compelled by a stockholder to declare dividends.
Why or why not? (3 points).
ANSWER: Yes under Sec 42 thew corporation is prohibited from
retaining more than 100% of its paid up capital vis-a-vis its
unrestricted retained earnings. Paid up capital is 4M and the
Unrestricted retained earnings is 6M, so they may be forced by the
stockholders to declare at least 2M as dividends
4. With the approval of the stockholders, may the entire 6M be
declared as stock dividends. Why or why not? (3 points)
ANSWER: No.
Subscribed Capital is 5M
Unrestricted Retained Earnings is 6M Authorized Capital is 10M
If the entire 6M will be declared as stock dividends it will result
into the corporation’s having 11M authorized capital, that will
constitute over-issuance of shares of stock. As we were saying
then, the ACS signifies the total number or amount of shares that
the corporation is authorized to issue.
5. If the corporation declares 5M cash dividends, how much will
the 5 stockholders receive as their share of the dividends?
Explain (4 points)
ANSWER: Each of them will receive 1M each because they are
subscribers of 20% each. Because the facts do not show that the shares
of D and E are already delinquent shares, and under Sec 71,
subscribers to shares of stocks not fully paid but are not
delinquent shall have all the rights of a stockholder. If their
shares are nonetheless, already delinquent, under Sec 42 2nd
par, any cash dividends due them shall 1st be applied to the
amount of delinquency plus costs, expenses or interest if any, and if
there remains more then it be paid to them. However, if it is by
way of stock dividend it shall be withheld from them until they have
paid the unpaid amount of their subscription or their delinquency.
6. Assume further that the corporation invested 1M of its funds
to buy SMC shares at 1 peso per share or 1M shares of SMC. In due
course, San Miguel Corporation declared stock dividends to its
stockholders, including X because it is a stockholder to the
extent of 1M shares, entitling all shareholders of SMC, one share
for every two shares held by them.
X company thus receives 500K SMC stock dividends. If the
corporation declares the 500K SMC shares as dividends to its
stockholders, will the stockholders approval be required for its
validity/ Why or Why not? (3points)
ANSWER: No, because that is not a stock dividend, it is rather a
property dividend. The 500K shares is the property of X
corporation. Stockholders approval will only be require if it is the
shares of stock of X company incorporated by itself.
7. Disregarding the above, and assume that the five man member
board, A, B, C, D, E, were elected as such on October 15, 2020.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 77
Two months, E sold all his shares to A. In a subsequent meeting of
the Board of Directors, for the purposes of amending the AOI, E
attended for the reason that he is still a member of the board and
that the elected directors shall serve for a term of 1 year, until
their successors are duly elected and qualified to be as such in
accordance with the law. Is the contention of E valid? Why or why
not? (3 points)
ANSWER: No, under the provisions of the Code, a director who
ceases to be a stockholder shall cease as such since he no longer
holds any one single share, he automatically ceases to be a director.
8. Assume that A, B, C, D, and E are still the 5 man governing board.
Right after their election, they have proceeded to elect the other
corporate officers. B was elected as president and as part of his
compensation included a Lexus X Hybrid SUV, 1 club share in Pico
De Loro, and I club share in Manila Polo Club which where in the
name of the corporation. After three years B resigned as president. He
refused to return the SUV and the 2 club shares on the contention that
he owns a portion of the corporate assets. Is the contention of B
correct? Why or why not?
ANSWER: No. The corporate entity theory. Ang pagaari ni Pedro
ay kay Pedro hindi kay Juan (eto rationale niya lol)
9. In contemplation of the resignation of the 3 members of the
Board, the corporation thru the Board members, issued and
approved a resolution, creating an executive committee. A careful
study of the resolution shows that the Board delegated all of its
powers to the said committee. Review of the AOI or the bylaws also
show that no provision conferring such power. Is the creation valid?
Why or why not? (5 points)
ANSWER: Not valid because there must be a bylaw provision
because the law says if the bylaws provides that the
corporation may create this committees, it may create them. If there is
no bylaw provision authorizing. And even if there was a bylaw
provision authorizes the said creation, it is still not valid because the
Board cannot delegate all its powers to an executive committee.
10. Among them, approval of any action is required
stockholders’ approval:
a. Filling up of the vacancies in the Board.
b. Adoption of the bylaws or amendment thereto, or repeal thereof
c. Amendment of any Board resolution by its express term, not
subject to amendment or repeal.
d. Distribution of cash dividends.
11. Assume that the other stockholders and the five man governing
Board, A, B, C, D, and E, conducted and held a meeting whereby
they passed a resolution granting the: President and Chairman of the
Board to A, Vice President to B, Corporate Secretary to C, Treasurer
to D, There being no other position for E, other than that of a
Director.
At a duly held and conducted meeting of the Board, they passed a
resolution, granting compensation in favor of the chairman, vice-
chairman, corporate secretary and treasurer, over the vehement
objection of F in view of the fact that there was no bylaw provision
authorizing it nor any direct grant from the stockholders. Rule on the
objection and explain (5 points).
ANSWER: The resolution is valid. The provision of Sec 29 is
categorical. They shall not receive compensation in their capacity as
such. That phrase is not without any significance for it delineates the
scope of the prohibition to the grant of their compensation. If they
 CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 78

render services in a capacity other than their regular or ordinary thereof are non-voting shares. Is there a violation of our nationalization
duties as directors, they may receive compensation by a mere laws, requiring Filipino nationals to own a minimum of 60% of the
resolution of the BOD. OCS? Why or why not?

12. If the corporation is engaged in the production of sugar and the
corporation decides to invest its corporate funds in the manufacture
of sugar bags without the approval of the stockholders, will the
investment be valid? Why or Why not? (3 points)
ANSWER: Yes. De La rama vs Ma-ao Sugar case. Ma-ao is
engaged in the sugar production, and was therefore necessary either
for Ma-Ao itself to produce the sugar bags or manifacture
sugar bags, or invest its funds in another coropration engaged
in the manufacture of sugar bags because it is the only convenient
way by which they may be transported to the end users. The
determining factor is whether or not a logical relation exists between
the act done and the primary purpose.
ANSWER: There is NO violation. Gamboa v. Teves because the word
Philippine National has been defined in three special laws, the
then Omnibus Investment Code of 1991, 1997 and the now Foreign
Investment’s Code. They all carried a definition of a Philippine
National, which is as one who is a citizen of the Philippines, or
corporations or partnership, 60% of the OCS and entitled to vote are
owned by such citizens. If you can gather from here, 60% of the
OCS and entitled to cote are still owned by Philippine
Nationals, the 10% therefore, which exceeds the 40% maximum
stock ownership of foreigners should NOT be included.
16. Give your comment on the express grant to enter into a partnership
agreement?

13. Assuming A the President and B the Treasurer issued a check
in payment of corporate obligations, but the check covering the
same bounced and the creditor sued them in their personal
capacities criminally and civilly under the Bouncing Checks Law.
They [President A and Treasurer B] interposed the defense of the
corporate entity theory to be absolved from liability. Will their
defense prosper?
ANSWER: No, because one of the instances when a corporate
director or officer may nonetheless be held liable personally or
solidarily for that matter is when the law specifically provides for
their personal or solidary liability. And under the Bouncing Checks
Law, Section 1 thereof, the person/persons who signed a check, for and
in behalf of a coropration, shall be personally liable for the
provisions under that Bouncing Checks Law.
14. Assume that X company is a holding company. It has a
wholly owned subsidiary company in the person of Z company which
is engaged in the hardware business. The 2 corporations have
the same sets of directors and officers.
ANSWER:
1. if a corporation enters into a partnership agreement and it is a
general partner, we all know that in a partnership business, any
one of the partners may bind the partnership. That would be violative
of the law of the creation of a corporation because this requires
that all corporate powers, all business are conducted and all
properties are controlled by the BOD and as a rule, they must seek
and act as a body to have a valid corporate act or transaction. So,
if any one of the partners can bind the corporation, because it is
a partner, then it defeats or violates the law of the creation of the
corporation.
2. Limited Shareholders’ Liability - if the corporation is a general
partner and we all know likewise, that in a general partnership, any
one of the partners may be held liable for all the debts and liabilities
of the enterprise. The limited shareholders’ liability in the corporation
will also be defeated.
---------------------- END OF MIDTERMS ---------------------------------

Z company sold flooring tiles to a 5 star Hotel which was later found
defective. The 5 star Hotel sued Z company for costs and damages
and was awarded 2M in damages plus cost of suit and attorneys fees.
On execution however, it was found out that Z company has no
sufficient assets to pay the same. May execution be imposed against
X company ?

ANSWER: No [PNB v. Ritratto Group and Pacific Rehaus Corp v.

CA] There are 3 tests for the purpose of piercing the veil of corporate
fiction vis-a-vis the instrumentality rule:

1. control, not only majority or complete stock control but absolute

dominion of the finances, business activities, policies so that the
controlled corporation have no mind, will or existence.

2. That control must have been used to perpetuate a fraud or

wrongdoing to the detriment of the plaintiff’s legal right.

3. That control and breach of duty must have been the immediate
cause of the wrong or injury complained of.

In this particular case, there was no fraud or any wrong done by

the holding company to the damage of the plaintiff’s legal right.
Basta mawala yung isa doon, the doctrine of piercing of corporate
veil will not apply.

15. Assume finally, that the corporation is engaged in the public

utility business. 50% of the OCS is owned by foreigners, but 10%

FINALS PERIOD
NOV. 17 (G)
BYLAWS
Definition - Bylaws are rules of action adopted by the corporation
for its own government. They are internal rules of the corporation
whose function is to regulate the conduct and define the duties of the
stockholders or members towards the corporation or between and
among themselves.
SEC. 45. Adoption of Bylaws. – For the adoption of bylaws by the
corporation, the affirmative vote of the stockholders representing
at least a majority of the outstanding capital stock, or of at least
a majority of the members in case of nonstock corporations, shall
be necessary. The bylaws 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 stockholders or
members during office hours. A copy thereof, duly certified by a
majority of the directors or trustees and countersigned by the secretary
of the corporation, shall be filed with the Commission and
attached to the original articles of incorporation.
Notwithstanding the provisions of the preceding paragraph,
bylaws may be adopted and filed prior to incorporation; in
such case, such bylaws shall be approved and signed by all the
incorporators and submitted to the Commission, together with the
articles of incorporation.
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 Code. The Commission shall not accept for filing the bylaws or
any amendment thereto of any bank, banking institution, building and
loan association, trust company, insurance company, public utility,
educational institution, or other special corporations governed by
special laws, unless accompanied by a certificate of the appropriate
government agency to the effect that such bylaws or
amendments are in accordance with law.
Q: When should the bylws be adopted or filed with the SEC? -
A: It may either be prior or after incorporation.
Q: May it be filed and/or adopted 6 years after incorporation?
A:
- If it is to be adopted prior to incorporation it must be filed
with the SEC simultaneously with the AOI.
- The filing and adoption of bylaws is part and parcel of
organization.
- Sec 21 includes among others the adoption of the bylaws.
Failure to organize w/in 5 years shall result to the
dissolution of the corporation the day following the
end of the 5 year period.
- So it must be filed and adopted w/the SEC prior to the end
of the 5 year period otherwise it says that the corporation
shall be deemed dissolved.
- Under the old law, it was only one month, but it was deleted
under the RCC, so that if the corporation do not adopt the
bylaws w/in 5 years, incorporation shall be deemed
dissolved the following the end of the 5 year period.
Q: When do bylaws become valid and effective?
A: Only upon the approval of the SECby the issuance and certification
that it is not contrary to law. Just like the AOI because if it is
contrary to law (i.e. purpose of incorporation) the SEC will NOT
issue the Certificate of Registration.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 79
CONTENTS OF THE BY-LAWS:
SEC. 46. Contents of Bylaws. – A private corporation may
provide the following in its bylaws:
(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 special
meetings and mode of notifying the stockholders or members
thereof;
(c) The required quorum in meetings of stockholders or members
and the manner of voting therein;
(d) The modes by which a stockholder, member, director, or trustee
may attend meetings and cast their votes;
(e) The form for proxies of stockholders and members and the manner
of voting them;
(f) The directors’ or trustees’ qualifications, duties and
responsibilities, the guidelines for setting the compensation of
directors or trustees and officers, and the maximum number of
other board representations that an independent director or trustee
may have which shall, in no case, be more than the number prescribed
by the Commission;
(g) The time for holding the annual election of directors or trustees
and the mode or manner of giving notice thereof;
(h) The manner of election or appointment and the term of office of all
officers other than directors or trustees;
(i) The penalties for violation of the bylaws;
(j) In the case of stock corporations, the manner of issuing stock
certificates; and
(k) Such other matters as may be necessary for the proper or convenient
transaction of its corporate affairs for the promotion of good
governance and anti-graft and corruption measures.
An arbitration agreement may be provided in the bylaws pursuant
to Section 181 of this Code.
The bylaws may also provide for an arbitration agreement under Sec
181 but this is not mandatory but only discretionary.
ELEMENTS OF A VALID BY-LAWS:
1. Not inconsistent with the existing law nor contrary to public
order, policy or morals;
a. Fleischer v. Nolasco - Section 13, paragraph
7 (of Act 1459), empowers a corporation to make
by-laws, not inconsistent with any existing
law, for the transferring of its stock. It
follows from said provision, that a by-law
adopted by a corporation relating to transfer of
stock should be in harmony with the law on the
subject of transfer of stock.
- by-laws of a corporation must be
reasonable and for a corporate
purpose, and always within the charter
limits. They must always be strictly
subordinate to the constitution and the
general laws of the land. They must not

infringe the policy of the state, nor be
hostile to public welfare.
- They must not disturb vested rights
or impair the obligation of a contract,
take away or abridge the substantial
rights of stockholder or member,
affect rights of property or create
obligations unknown to the law.
b. Government v. El Hogar - This by-law is of course
a patent nullity, since it is in direct conflict with
the latter part of section 187 of the Corporation
Law, which expressly declares that the board of
directors shall not have the power to force the
surrender and withdrawal of unmatured stock
except in case of liquidation of the corporation
or of forfeiture of the stock for delinquency.
2. It must not be inconsistent w/ the AOI.
3. It must be general and uniform in its effects or applicable
to all alike or those similarly situated;
4. It must not impair obligations or vested rights, and;
5. It must be reasonable.
Q: Are stockholders or members presumed to know the bylaws
of the corporation?
A: Yes, they are CONCLUSIVELY PRESUMED to know the contents
of the bylaws. Meaning, it is binding to all stockholders or
members, and they cannot presume innocence of the provisions of the
bylaws where they are stockholders or members.
Q: How about 3rd persons?
A: They are NOT presumed to know the provisions of the bylaws
of the corporation where they are not stockholders. BUT, They may
be bound by the provisions of the bylaws if they have actual or
constructive notice of the said provision.
FLEISCHER V. BOTICA NOLASCO
- The bylaw provision should not have any force and effect
since it is contrary to law, as we were saying it must NOT be
contrary to law.
- Any bylaw provision that is violative of the law is
deemed as if they were not written at all.
- Shares of stocks, being personal properties, just like a car
for instance, MAY BE TRANSFERRED BY THE
OWNER TO WHOMEVER HE WISHES.
- And even if the bylaw is valid, the bylaw does not bind
him because he had knowledge of the bylaw provision
when the shares were assigned to him.
- He obtained them in good faith and for a valuable
consideration.
- Said bylaw CANNOT DEFEAT HIS RIGHT AS A
PURCHASER FOR VALUE AND IN GOOD FAITH.
GOKONGWEI V. SEC
- Validity of an amendment of a bylaw whereby a director
may be disqualified from being elected as such the is
also a director/stockholder with substantial interest in the
amended bylaws of SMC.
- Substantial interest is 10% or more of the SMC shares,
means that he cannot be elected as a director
- Gokongwei Questioned this provision because he was
holding X number of shares, and that by casting his own
number of shares, he will be elected as a member of the
BOD.
- SC ruled that the amendment of the bylaws is VALID AND
BINDING because under the then provisions, Sec 46 as it
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 80
stands now, authorizes a corporation to provide in its
bylaws the qualifications of directors and officers.
- It cannot be said therefore, that Gokongwei has a vested
right to be elected as a director.
- An amendment which renders a director ineligible from
being elected as such is VALID.
- This is based on reasons of policy to prevent a director
from promoting his own individual interest or his own
individual corporation to the prejudice of the other
corporations.
Section 47. Amendment to Bylaws. - A majority of the board of
directors 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 corporation, at a regular or special meeting duly called
for the purpose, may amend or repeal the bylaws or adopt new
bylaws. The owner of two-thirds (2/3) of the outstanding capital
stock or two-third (2/3) of the members in a nonstock corporation
mat delegate to the board of directors or trustees the power to amend
or repeal the bylaws or adopt new bylaws: Provided, That any
power delegated to the board of directors or trustee to amend or
repeal the bylaws or adopt new bylaws shall be considered as revoke
whenever stockholders owning or representing a majority of the
outstanding capital stock or majority of the members shall so vote at
a regular or special meeting.
Whenever the bylaws are amended or new bylaws are adopted,
the corporation shall file with the Commission such amended or new
bylaws and, if applicable, the stockholders' or members' resolution
authorizing the delegation of the power to amend and/or adopt
new bylaws, duly certified under oath by the corporate secretary
and majority of the directors or trustees.
The amended or new bylaws shall only be effective upon the issuance
by the Commission of certification that the same is in accordance with
this Code and other relevant laws.
TWO MODES OF AMENDMENT, ALTER OR REPEAL OF
BYLAWS:
1. By the majority vote of the members of the BOD
subject to the approval of at least a majority of the OCS or
members at a meeting duly called for that purpose.
2. By the BOD alone, when delegated by at least 2/3s of the
OCS or of the members.
Note: this delegated power is subject to revocation under the last
sentence of the 1st paragraph of Sec 47. Whenever the stockholders
owning or representing a majority of the OCS or members shall so vote
at a regular or special meeting.
Q: When will the amendment of a bylaw become effective or binding?
A: Under Sec 47, only upon approval of the SEC. It has to issue a
certification that it is not contrary to law, morals, or public policy
as may be compared to Sec 15, the amendments of the AOI
which provides that amendments will be valid and binding on the date
of its filing if not acted upon by the SEC w/in a period of 6 mos from
the date of its filing w/o fault attributable to the corporation.
Note: Sec 15 speaks of amendment of AOI while Sec 47 speaks
of amendment of the bylaws. The AOI and the bylaws are two
different and distinct things.

NOV. 19 (T)
CHAPTER IX: MEETINGS
Meetings applies to every duly convened assembly either of
stockholders, members, directors or trustees, managers, etc. for any
legal purpose or the transaction of business of common interest.
Section 48. Kinds of Meetings. - Meeting of the directors,
trustees, stockholders, or members may be regular or special.
There are two kinds of meetings:
1. Stockholders/Members -
2. Directors/Trustees
Stockholders/Members’ Meeting
Stockholders/Members meetings are further classified into:
1. Regular; and
2. Special
Section 49. Regular and Special Meetings of Stockholders or
Members. - Regular meetings of stockholders or members shall be held
annually on a date fixed in the bylaws, or if not so fixed in the bylaws,
or if not so fixed, on any date After April 15 of every year as
determined by the board of directors or trustees: Provided,
further, That written notice of regular meetings may be sent to all
stockholders or members of record through electronic mail or such
other manner as the Commission shall allow under its guidelines.
At each regular meeting of stockholders or members, the board of
directors or trustees shall endeavor to present to stockholders or
members the following:
(a) The minutes of the most recent regular meeting which
shall include, among others:
(1) A description of the voting and the vote
tabulation procedures used in the previous
meetings;
(2) A description of the opportunity given to
stockholders or members to ask questions and
record of the question s asked and answers given;
(3) The matters discussed and resolutions reached;
(4) A record of the voting results for each agenda
item;
(5) A list of the director or trustees, officers and
stockholders or members who attended the
meeting; and
(6) Such other items that the Commission may
require in the interest of good corporate
governance and protection of minority
stockholders;
(b) A members' list for nonstock corporations and, for stock
corporations, material information on the current
stockholders, and their voting rights;
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 81
(c) A detailed, descriptive, balanced and comprehensible
assessment of the corporation's performance, which shall
include information on any material change in the
corporation's business strategy, and other affairs;
(d) A financial report for the preceding year, which shall
include financial statements duly signed and certified in
accordance wit this Code and the rules and the Commission
may prescribe, a statement on the adequacy of the
corporation's internal controls or risk management systems,
and a statement of all external audit and non-audit fees;
(e) An explanation of the dividend policy and the fact of
payment of dividends or the reasons for nonpayment thereof;
(f) Director or trustee profiles which shall include, among
others, their qualifications and relevant experience, length of
service in the corporation, trainings and continuing
education attended, and their board representation in other
corporations;
(g) A director or trustee attendance report, indicating the
attendance of each of the meetings of the board and its
committees and in regular or special stockholder meetings;
(h) Appraisals and performance reports for the board and the
criteria and procedure for assessment;
(i) A director or trustee compensation report prepared in
accordance with this Code and the rules the Commission
may prescribe;
(j) Director disclosures on self-dealings and related party
transactions; and/or
(k) The profiles of directors nominated ir seeking election or
reelection.
A director, trustee, stockholder, or member may propose any other
matter for inclusion in the agenda at may regular meeting of
stockholders or members.
Special meetings of stockholders or members shall be held at any time
deemed necessary or as provided in the bylaws: Provided,
however, That at least one (1) week written notice shall be sent to all
stockholders or members, unless a different period is provided in the
bylaws, law or regulation.
A stockholder or member may propose the holding of a special meeting
and items to be included in the agenda.
Notice of any meeting may be waived, expressly or impliedly, by any
stockholder or member: Provided, That general waivers of notice in
the articles of incorporation or the bylaws shall not be
allowed: Provided, further, That attendance at a meeting shall
constitute a waiver of notice of such meeting, except when the person
attends a meeting for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully called
or convened.
Whenever for any cause, there is no person authorized or the person
authorized unjustly refuses to call a meeting, the Commission, upon
petition of a stockholder or member on a showing of good cause

therefor, may issue an order, directing the petitioning stockholder or
member to call a meeting of he corporation by giving proper notice
required by this Code or the bylaws. The petitioning stockholder or
member shall preside thereat until at least a majority of the
stockholders or members present have chosen from among themselves,
a presiding officer.
Unless the bylaws provide for a longer period, the stock and transfer
book or membership book shall be closed at least twenty (20) days for
regular meetings and seven (7) days for special meetings before the
scheduled sate of the meeting.
In case of postponement of stockholders' or members' regular
meetings, written notice thereof and the reason therefor shall be sent to
all stockholders or members of record at least two (2) weeks prior to
the date of the meeting, unless a different period is required under the
bylaws, law or regulation.
The right to vote of stockholders or members may be exercised in
person, through remote communication or in absentia. The
Commission shall issue the rules and regulations governing
participation and voting through remote communication or in absentia,
taking into account the company’s scale, number of stockholders or
members, structure, and other factors consistent with the protection
and promotion of shareholders' or members' meetings.
REQUITES OF A VALID MEETING:
1. It must be held on the proper date;
Q: When should stockholders/members meeting be held?
A: Regular meetings of stockholders or members shall be held
annually on a date fixed in the bylaws, or if not so fixed in the bylaws,
or if not so fixed, on any date After April 15 of every year as
determined by the board of directors or trustees. Special meetings of
stockholders or members shall be held at any time deemed necessary
or as provided in the bylaws. (Sec. 49)
Note: If it cannot be held on the appointed date for valid reasons such
as force majeure or inability to attain a required quorum, it may be
postponed on a reasonable future date.
2. Prior notice must be given;
Q: How and when notice shall be given to stockholders/members?
A: How - written notice of regular meetings may be sent to all
stockholders or members of record through electronic mail or such
other manner as the Commission shall allow under its guidelines. (Sec.
49)
When - written notice of regular meetings shall be sent to all
stockholders or members of record at least twenty-one (21) days prior
to the meeting. Special meetings at least one (1) week written notice
prior to the meeting, unless a different period is provided in the bylaws,
law or regulation.
Q: May it be more than or less than 1 week?
A: Yes, the by-laws may provide for a different field for sending out
notices. It may be more than or less than 1 week.
Q: May notice be dispensed with?
A: Yes. Under Sec. 49, notice of any meeting may be waived,
expressly or impliedly, by any stockholder or member:
a) Provided, That general waivers of notice in the articles of
incorporation or the bylaws shall not be allowed:
b) Provided, further, that attendance at a meeting shall
constitute a waiver of notice of such meeting, except when
the person attends a meeting for the express purpose of
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 82
objecting to the transaction of any business because the
meeting is not lawfully called or convened.
Example is when a stockholder who is not notified, attends the meeting
in person or by proxy. Or, unless, if a person not notified or improperly
notified, attends the said meeting for the purpose of objecting to the
transaction of any business at that particular meeting because it was
not lawfully called or convened, or sends his proxy for that matter.
Note: if any of the requisites of a valid meeting are not complied with,
it may be set aside for being illegally held and/or conducted.
THE BOARD OF DIRECTORS AND ELECTION
COMMITTEE OF THE SMB WORKERS SAVINGS AND
LOAN ASSOCIATION, INC., ET AL., petitioners, vs. HON.
BIENVENIDO A. TAN, ETC., ET AL., respondents.
Facts: It is an action to annul the elections of the board of directors,
who SMB Workers Savings and Loan Association, and to compel
another election on the ground that the by-laws require 5-day
notice. The notice was posted only 2 days before the scheduled
meaning.
Issue: Is the election/meeting held for the purposes of the election
of the members of the board valid?
Ruling: The meeting is not valid. The by-law provision controls. It
requires a 5-day notice rule. The notice was only posted 2 days
before the scheduled meeting. The court here ruled that the by-laws
controls, and the election is null and void due to lack of notice
requirement. As we are saying, the by-laws may provide for a
different period for sending out notices.
3. Must be held in the proper place or venue;
Section 50. Place and Time of Meetings of Stockholders or Members. -
Stockholders' or members' meetings, whether regular or special, shall
be held in the principal office of the corporation as set forth in the
articles of incorporation, or if not practicable, in the city or
municipality where the principal office of the corporation is
located: Provided, That any city of municipality in Metro Manila,
Metro Cebu, Metro Davao, and other Metropolitan areas shall, for
purposes of this section, be considered a city or municipality.
Notice of meetings shall be sent through the means of communication
provided in the bylaws, which notice shall state the time, place and
purpose of the meetings.
Each notice of meeting shall further be accompanied by the following:
(a) The agenda for the meeting;
(b) A proxy which shall be submitted to the corporate
secretary within a reasonable time prior to the meeting;
(c) When attendance, participation, and voting are allowed
by remote communication or in absentia, the requirements
and procedures to be followed when a stockholder or
member elects either option; and
(d) When the meeting is for the election of directors or
trustees, the requirements and procedure for nomination and
election.

All proceedings and any business transacted at a meeting of the
stockholders or members, if within the powers or authority of the
corporation, shall be valid even if the meeting is improperly held or
called: Provided, That all the stockholders or members of the
corporation are present or duly represented at the meeting and not one
of them expressly states at the beginning of the meeting that the
purpose of their attendance is to object to the transaction of any
business because the meeting is not lawfully called or convened.
Q: Where should the meeting of stockholders or members be held?
A: It should be held on the principal office as stated in the AOI or if it
is not practicable, within the municipality or city where the principal
office is located or established. (Sec. 50)
Q: Will this hold true in the case of a non-stock corporation?
A: No, under Sec, 92, it provides that a non-stock corporation may hold
their members meeting within the Philippines, not necessarily in the
municipality or city where the principal office is located or established.
Q: May they do so without a by-law provision authorizing it?
A: No. Sec. 92 provides that there must be a by-law provision
authorizing such.
Section 92. List of Members and Proxies, Place of Meetings. - The
corporation shall, at all times, keep a list of its members and their
proxies of record twenty (20) days prior to any scheduled election. The
bylaws may provide that the members of a nonstock corporation may
hold their regular or special meetings at any place even outside the
place where the principal office of the corporation is
located: Provided, That proper notice is sent to all members indicating
the date, time, and place of meeting: Provided, further, That the place
of meeting shall be within the Philippine territory.
Notes:
 Sec. 92 says the by-laws of a non-stock corporation may
validly provide that members’ meetings may be held
anywhere in the Philippines. If there is no by-law provision
authorizing it, then the provision of Sec. 50 shall apply—at
the principal office of the corporation, and if it’s not
practicable, within the territorial boundaries of the city or
municipality where the principal office is located.
 If there is no by-law provision authorizing it, it cannot be
held anywhere in the Philippines because the general rule
shall apply under the provisions of Title 11. Meetings of the
stockholders or members it says, shall be held at the principal
office of the corporation. Because the provisions of the first
paragraph of Title 11 provides that the provisions governing
stock corporations when pertinent, shall also apply to a non-
stock corporation, unless otherwise specifically provided for
by Title 11. Title 11 only allows the by-laws of the non-stock
corporation to validly provide the meetings of the members
may be held anywhere in the Philippines.
Q: The principal office of SMC is in Mandaluyong City, but from
19821, all the way until now, they are holding the stockholders meeting
at the PICC Ground. Is the venue proper?
A: Yes, the law provides that “any city of municipality in Metro
Manila, Metro Cebu, Metro Davao, and other Metropolitan areas shall,
for purposes of holding their meetings, be considered one single city
or municipality”. The venue of SMC in holding their meetings is valid.
Q: The principal office of the corporation is situated in Pasay City.
May they hold their meetings in Valenzuela, Bulacan?
A: Yes. Valenzuela is now part and parcel of the Metro Manila. I asked
this in the exam years ago. You have to know your geography.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 83
4. Called by the proper party or officer
Q: Who calls meetings for stockholders or members?
A: The by-laws may provide for the proper person to call the meetings
of the stockhodlers or members: president, vice president, chairman of
the board, treasurer, secretary, or whatever.
Q: If there is a provision in the by-laws as to who may cal the meeting,
what happens if there’s no person authorized to call the meeting, or
the person authorized to call the same unjustly refuses to call one, and
the stockholders or members are very eager to have a meeting?
A: [44:03] Sec. 49 provides that “Whenever for any cause, there is no
person authorized or the person authorized unjustly refuses to call a
meeting, the Commission, upon petition of a stockholder or member
on a showing of good cause therefor, may issue an order directing the
petitioning stockholder or member to call a meeting of the corporation
by giving proper notice required by this Code or the bylaws. The
petitioning stockholder or member shall preside thereat until at least a
majority of the stockholders or members present have chosen from
among themselves, a presiding officer.”
Q: Who presides the meeting called for that purpose?
A: The petitioning stockholder or member shall preside.
Q: Until when does the petitioning stockholder or member presides?
A: Until at least a majority of the stockholders or members present
have chosen from among themselves, a presiding officer.
Q: Who and among the stockholders/members will be entitled to attend
and/or vote during that particular meeting? For instance, the meeting
was called for today. I was a transferee of shares of stocks, only 3 days
ago. I attended the meeting today, 3 days later. Can I attend or vote
during that meeting?
A: No. Sec. 49 states that the stock and transfer book or membership
book shall be closed at least twenty (20) days, for regular meetings,
and seven (7) days, for special meetings, before the scheduled date of
the meeting. Only those listed during the closed period shall be entitled
to vote or have the right to vote, nobody else. The corporation will not
look beyond its book to determine who its stockholders are who may
have the right to vote or be voted upon in a directors’ election.
Q: May the bylaws provide for a shorter period?
A: No, it may be longer but not shorter. The code says “unless the
bylaws provide for a longer period”.
5. Quorum and voting requirements must be complied with.
Section 51. Quorum in Meetings. - Unless otherwise provided in this
Code or in the bylaws, a quorum shall consist of the stockholders
representing a majority of the outstanding capital stock or a majority
of the members in the case of non-stock corporations.
Q: What is the quorum requirement in a meeting?
A: Majority of the stockholders representing outstanding capital stock
or members.
Q: Would the presence of the majority of the outstanding capital stock
or members, as the basis of determination of quorum requirement,
absolute?
A: No. Sec. 51 states, “Unless otherwise provided in this Code or in
the bylaws”.
Q: The board passed a resolution to amend the by-laws. The vote
required to pass the amendment of the by-laws is majority. The board
also passed a resolution to amend the articles of incorporation. The
vote required to approve an amendment of AOI is 2/3. The third
resolution was to grant their own compensation with the approval of

majority of capital stock. What will be your quorum requirement so
that stockholders may be able to take out the matters in particular
agenda?
A: It shall be 2/3 vote of stockholders representing the outstanding
capital stock or members, as required by the quorum requirement to
amend AOI. The amendment of the bylaws, the quorum requirement
is majority. The grant of compensation, the quorum requirement is
majority of the OCS, however in order to be valid, quorum and voting
requirements must be complied.
Q: 70% of OCS are owned and held by 5 directors. 10M shares is the
OCS, so the directors are holding 7M OCS. The other SH hold 30% or
3M shares. What will be your quorum and voting requirement?
A: For the purposes of approving the compensation, the directors shall
not take part in the determination, thus, the purpose of approving the
compensation, majority of the OCS which are not owned by the
directors. The majority of 3M shares is required which is the 51% or
1.530 M shares.
Notes:
- The general rule that the majority of OCS or members as the
basis for determining quorum requriements is not absolute.
Because where the voting requirement requires more than
the majority, the quorum rewuirement must be atleast equal
to the voting requirement. Like for instance, amendment of
the articles, majority of the OCS are present but the vote
required is 2/3. Kahit ano pang gawin nila sa meeting na
‘yan, they cannot pass a valid amendment of the AOI. Sa by-
laws, yes, because majority vote is OCS is requiews. Sa 3rd
issue, it’s not also majority of the OCS because they exclude
the 70% share of the directors because they cannot
participate, hence the quorum shall be based on the 3M only;
the majority shall be 50%+1 of 3M.
Q: We have noted in Directors v. Tan where there’s only 1 requisite
for a valid meeting of the stockholders that has not complied with—
that is notice. The principal office of the corporation is located in
Pasay City. It’s a stock corporation. A meting was called to be held in
Baguio City. The by-laws provides that the annual meeting of the
stockholders shall be April 15. The meeting is to be held November 13.
It was called by the treasurer instead of the secretary, as provided for
in the by-laws. The notice requirement was sent only 5 days before the
meeting instead of the 7 days required in the bylaws. What happens to
any resolution or act of the stockholders during that meeting
improperly held and/or called?
A: It’s valid. Sec. 50 provides that in all proceeding or any business
transacted in a meeting of the stockholders within its powers and
authority conferred by the law, shall be valid, even though it is
improperly held or called. Provided that, all the stockholders/members
of the corporation are present, or duly represented and none of them
objected on the transaction passed upon during that meeting for the
reason that it was not held/called properly.
Q: A is a director. A stockholders meeting is called. The principal
office of the corporation is located in Pasay City. It’s a stock
corporation. A meeting was called to be held in Baguio City. A cannot
attend the meeting, so A issued a proxy in favor of his brother, B, to
attend the meeting so he may cast his number of shares for the
purposes of electing him as member of the board. However, B cannot
also attend because he had stomach flu. A was not reelected as member
of the board. Can A question the validity of the meeting relative to the
election of the members of the board?
A: Yes, he can. The code says, “if he is present or duly represented”.
However, he was not duly represented.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 84
DIRECTORS/TRUSTEES’ MEETING
Section 52. Regular and Special Meetings of Directors or Trustees;
Quorum. - Unless the articles of incorporation or the bylaws provides
for a greater majority, a majority of the directors or trustees as stated
in the articles of incorporation shall constitute a quorum to transact
corporate business, and every decision reached by at least a majority
of the directors or trustees constituting a quorum, except for the
election of officers which shall require the vote of a majority of all the
members of the board, shall be valid as a corporate act.
Regular meetings of the board of directors or trustees of every
corporation shall be held monthly, unless the bylaws provide
otherwise.
Special meetings of the board of directors or trustees may be held at
any time upon the call of the president or as provided in the bylaws.
Meetings of directors or trustees of corporations may be held anywhere
in or outside the Philippines, unless the bylaws provide otherwise.
Notice of regular or special meetings stating the date, time and place
of the meeting must be sent to every director or trustee at least two (2)
days prior to the scheduled meeting, unless a longer time is provided
in the bylaws. A director or trustee may waive this requirement, either
expressly or impliedly.
Directors or trustees who cannot physically attend or vote at board
meetings can participate and vote through remote communication such
as videoconferencing, teleconferencing, or other alternative modes of
communication that allow them reasonable opportunities to
participate. Directors or trustees cannot attend or vote by proxy at
board meetings.
A director or trustee who has a potential interest in any related party
transaction must recuse from voting on the approval of the related party
transaction without prejudice to compliance with the requirments of
Section 31 of this Code.
Section 53. Who Shall Preside at Meetings. - The chairman or, in his
absence, the president shall preside at all meetings of the directors or
trustees as well as of the stockholders or members, unless the bylaws
provide otherwise.
TWO TYPES OF MEETINGS OF DIRECTORS AND
TRUSTEES:
1. Regular
2. Special
Q: When should regular meetings be held?
A: Sec. 52 provides that, “regular meetings of the board of directors or
trustees of every corporation shall be held monthly, unless the bylaws
provide otherwise.” Therefore it may also be held quarterly or every
six months as long as it’s provided by the bylaws.
Q: How about the special meetings?
A: Sec. 52 provides that, “special meetings of the board of directors or
trustees may be held at any time upon the call of the president or as
provided in the bylaws.”
Q: Where should they held the meetings?
A: The meetings of directors or trustees of corporations may be held
anywhere in or outside the Philippines, unless the bylaws provide
otherwise. If the bylaws does not provide otherwise, it may be held
within or without the Philippines. The bylaws may also validly provide
that the directors may only held meetings within the Philippines or at
the principal office of the corporation.

Q: Any notice requirement?
A: “Notice of regular or special meetings stating the date, time and
place of the meeting must be sent to every director or trustee at least
two (2) days prior to the scheduled meeting, unless a longer time is
provided in the bylaws. A director or trustee may waive this
requirement, either expressly or impliedly.”
Q: What is the quorum requirement?
A: GR: In director’s meeting, a majority of the directors or trustees as
stated in the articles of incorporation shall constitute a quorum to
transact corporate business, XPN: Unless the articles of incorporation
or the bylaws provides for a greater majority
Q: Vote required in order that the directors may pass a valid corporate
act or transaction:
A: Every decision reached by at least a majority of the directors or
trustees constituting a quorum shall be valid as a corporate act.
Q: Voting requirement?
A: Election of officers require the vote of a majority of all the members
of the board
Q: There are 7 members of the board, 2 members were going to the
meeting of the directors on record, pinalakpak sila ng mga drug agents
kasi drug lord sila. Both of them died. The article says there must be 7
members of the board. What is your quorum requirement?
A: 4. Because as stated in the AOI, there must be 7 members and
majority of 7 is 4.
Q: Having said that, may the vote of 2 members of a five-man
governing board pass a valid corporate act?
A: No. It did not meet the quorum requirements of 3.
Q: 5 man member board. May the vote of 2 members of the 5-man
governing board pass a valid corporate act or transaction again?
A: Yes. The quorum requirement of 5 member board is 3. The vote
required in order to make a valid corporate act is 2. [1:15:00]
Q: The rule is that quorum requirement is majority of their number as
fixed in the articles of incorporation, voting requirement is majority
vote of those present, thus if 3 of them are present and 2 of them voted
for a particular act or transaction then it is a valid corporate act. Do
you know of any exception to that rule that the vote of 2 members of 5
man governing board may pass a valid corporate act or transaction?
A: Yes. Under Sec 52 it provides for 2 exceptions:
(1) Unless the articles of incorporation or the bylaws provides for a
greater majority, which could be 4, in the case of a 5-man member
board; and the vote required shall be a majority of their number
constituting a quorum.
(2) Except in the case of election of officers which shall require the
vote of a majority of the entire members of the board.
Q: Should the directors, in the meeting of the board, be physically
present to have a valid corporate meeiting?
A: No. Directors or trustees who cannot physically attend or vote at
board meetings can participate and vote through remote
communication such as videoconferencing, teleconferencing, or other
alternative modes of communication that allow them reasonable
opportunities to participate. Directors or trustees cannot attend or vote
by proxy at board meetings.
The Revised Corporation Code adopted the rule on E-Commerce Law.
The e-commerce law then provides that D/T may vote via
teleconferencing or video-conferencing. If they do so, they are deemed
physically called for that purpose.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 85
Q: May the directors vote via proxy?
A: No. As directors, they are elected for their expertise in management
or business acumen. Hence, they are expected to personally attend and
vote on matters on a board meeting.
Q: Let us see. A, B, C, D and E are the five-man governing board.
Their term of office will expire in 1 week. A meeting was called for the
purpose of electing the successors of the five-man governing board. A,
one of the directors cannot attend. There’s nothing in the bylaws of the
corporation that allows the stockholders to vote via (sir forgot the
term, hirap daw tumatanda, but I think *proxy* is the term)—A
appointed his brother B to attend the meeting for the purpose of
electing a new set of members of the board. B attended the meeting. Is
the proxy signed by A in favor of his brother, valid?
A: Yes. The vote of B as proxy is valid. The prohibition of the law is
specific. Sec 52 provides that, “directors or trustees cannot attend or
vote by proxy at board meetings. The prohibition for voting by proxy
is not applicable in this case, because the purpose of voting is to elect
a new director, where A is a voting stockholder. In other words, B did
not represent A as director but as a stockholder. Furthermore, such
meeting is not a board meeting but a stockholders meeting.
STOCKHOLDERS RIGHT TO VOTE AND MANNER OF
VOTING
Section 54. Right to Vote of Secures Creditors and Administrators. -
In case a stockholder grants security interest in his or her shares in
stock corporations, the stockholder-grantor shall have the right to
attend and vote at meetings of stockholders, unless the secured creditor
is expressly given by the stockholder-grantor such right in writing
which is recorded in the appropriate corporate books.
Executors, administrators, receivers, and other legal representatives
duly appointed by the court may attend and vote on behalf of the
stockholders or members without need of any written proxy.
Note: The right to vote is an inherent right and incidental to stock
ownership. It is a property right. So much so that the stockholders can
vote shares the way he wishes. Only in so far that it may be reasonably
restricted by law, or reasonably limited by AOI or bylaws.
Q: What are the exceptions to stockholders inherent right to vote?
A: There are 4 exceptions:
1. Non-voting shares are not entitled to vote except in those
instances provided in the penultimate paragraph of Sec. 6 of
the Code; (note: only the PREFERRED and
REDEEMABLE shares may be deprived the right to vote)
2. Treasury shares have no voting rights while they remain in
the treasury (Sec. 56);
3. Shares of stock declared delinquent are not entitled to vote
at any meeting (SEC 70); and
4. Unregistered transferee of shares of stock. (SEC.__)
The right to vote is generally vested with the legal owner of the shares.
Whoever owns the shares as appearing in the books of the corporation,
therefore, can exercise the right to vote.
Section 55. Voting in Case of Joint Ownership of Stock. – The consent
of all the co-owners shall be necessary in voting shares of stock owned
jointly by two (2) or more persons, unless there is a written proxy,
signed by all the co-owners, authorizing one (1) or some of them or
any other person to vote such share or shares: Provided, That when the
shares are owned in an “and/or” capacity by the holders thereof, any
one of the joint owners can vote said shares or appoint a proxy therefor.

Q: If in case the shares are used as security for a loan, either by
mortgage or pledge. Who will have the right to vote on the shares?
A: Under Section 54, the general rule is that, it is the pledger or the
mortgagor who has the right to vote, unless there is a written agreement
which is recorded in the corporate books to the contrary.
Q: What happens if there’s an agreement?
A: The pledgee or mortgagee shall be the one entitled to vote, for as
long as there is a written agreement which is recorded in the corporate
books. If it’s not in writing, no way. If it’s not recorded in the corporate
books, no way.
Q: What happens if the stockholder is deceased or incapacitated, who
will have the right to vote on the shares of the deceased/incapacitated
person?
A: The voting rights of the deceased/incapacitated person shall be
exercised by the person appointed by the court. Meaning, this right
may be exercised by the executor or administrator or anyone who has
been duly authorized by the court. If there is no one appointed, no
person is legally capable to represent the vote.
Q: How about shares in common, who will have the right to vote the
shares?
A: Under Section 55, all of the owners of the shares that are owned in
common shall have the right to vote.
GR: In case of shares jointly owned, the consent of all the co-owners
shall be necessary. They must agree upon the vote.
XPN:
1. Unless there is a written proxy, signed by all the co-owners,
authorizing one (1) or some of them or any other person to vote such
share or shares; or
2. When the shares are owned in an “and/or” capacity by the holders
thereof, any one of the joint owners can vote said shares or appoint a
proxy therefor.
Q: SMC – 1M Shares; Owners – A and/or B and/or C. Who will have
the right to vote in the 1M Shares of San Miguel Corporation?
A: Anyone among A, B and C. However, A, B and C, may also
delegate a proxy. They must vote unanimously as to that.
Q: Let’s go further. Meeting ng SMC. The 3 of them in an “and/or
“capacity are holding 1M shares. It’s now for purposes of casting their
votes to elect directors. All 3 of them attended the meeting. All 3 of
them cannot agree in a manner to which the vote will be cast. A says
for Mar Roxas. B says for Binay. C says PRD. You are the corporate
secretary. The chairman and president of SMB asked you what do we
do about this, considering it is a swing vote?
A. We apply the rules governing co ownership under the civil code.
Under the civil code, the presumption is that, they have equal rights
and ownership of the 1M shares. Therefore, divide the 1M shares
equally to them, 1/3 each or 333, 333.333 shares each.
Q: If you are the corporate secretary, what will you do with the .333?
A: Under the code, the fractional shares shall be considered as void
vote since fractional shares are not allowed. In fact, there may be no
fraction at all, because I know for sure for that matter, that there are 15
members of the BOD of SMC and they have 1M shares, multiply that
by 15 members to be elected, they have 5 million votes each. If that is
the case, they can cast their own 5 million votes in favor of only 1
candidate.
Section 56. Voting Right for Treasury Shares. – Treasury shares shall
have no voting right as long as such shares remain in the Treasury.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 86
TRUSTEES AND VOTING TRUST AGREEMENT
Section 57. Manner of Voting; Proxies. – Stockholders and members
may vote in person or proxy in all meetings of stockholders or
members
When so authorized in the bylaws or by a majority of the board of
directors, the stockholders or members of corporations may also vote
through remote communication or in absentia: Provided, That the
votes are received before the corporation finishes the tally of votes.
A stockholder or member who participates through remote
communication or in absentia shall be deemed present for purposes of
quorum.
The corporation shall establish the appropriate requirements and
procedures for voting through remote communication and in absentia,
taking into account the company’s scale, number of shareholders or
members, structure and other factors consistent with the basic right of
corporate suffrage.
Proxies shall be in writing, signed and filed, by the stockholder or
member, in any form authorized in the bylaws and received by the
corporate secretary within a reasonable time before the scheduled
meeting. Unless otherwise provided in the proxy form, it shall be valid
only for the meeting for which it is intended. No proxy shall be valid
and effective for a period longer than five (5) years at any one time.
A proxy is the authority given by the stockholder or member to another
to vote for him at a stockholders’ or members’ meeting. The term is
also used to refer to the instrument or paper which is evidence of the
authority of an agent or the holder thereof to vote for and in behalf of
the stockholder or member.
The requisites, under Sec. 57, of the valid proxy are:
1. It must be in writing
2. Signed by stockholder or member
3. Filed with the corporate secretary within a reasonable time
within the scheduled meeting
4. Unless otherwise provided, it shall be valid only for the
meeting for which it was intended;
5. It shall be valid only for 5 years.
There are 2 kinds of proxies:
1. General – gives power to vote for the directors and proper
matters that may come before the meeting
2. Limited –gives the power to vote on specified matters only,
or it may even direct the manner in which the board’s vote is
to be cast.
This right to vote by proxy of the stockholders in a stock corporation,
cannot be curtail or prohibited. It is a matter of right under the Doctrine
of Limited Capacity in the corporate form of business. As we are
saying then, a corporation can only do acts and things as the law allows
it to do. A stock corporation cannot deny the right of a SH to vote by
proxy. However, under the provisions of Sec. 92 of the code, the by-
laws of a non-stock corp. may broaden, limit or deny the members of
the right to vote. Meaning, it may be denied by the provision in the by-
laws. But unless otherwise provided by the by-laws, they may also vote
by proxy, under Sec. 88 of the Code.
It may also be restricted by the bylaws or subject the rules and
regulations of the SEC pursuant to its power under sec. 179. For
instance, they have rules and regulation regarding proxies, under SRC
Rule 20 - for publicly listed corporation or those corporation listed in
stock exchange, proxies must be submitted at least 20 days prior to the
meeting in which it is intended to a validation committee. If it is the

BOD of the corporation that will solicit proxies, the corporation must
file a proxy statement attaching the proxy form with the SEC. The
proxy statement consist of no less than 25 pages including the agenda
of each for which the proxies are being solicited. Under the provisions
of SRC, if that is not complied with, the civil and penal sanctions of
the SRC may be imposed.
SEC also have rules regarding proxies in corporations not listed in
stock exchange like for instance it is the generally revocable. Under
SEC rules, if an SH executes a proxy but he nevertheless attends the
meeting, the proxy executed shall be deemed revoke. If he executes 2
proxies in favor of different persons, the one dated last will govern. If
they are both undated, the one submitted last will prevail. Those are
some of the rules of the SEC.
Section 58. Voting Trusts. – One or more stockholders of stock
corporation may create a voting trust for the purpose of conferring
upon a trustee or trustees the right to vote and other rights pertaining
to the shares for a period not exceeding five (5) years at any
time: Provided, That in the case of a voting trust specially required as
a condition in a loan agreement, said voting trust may be for a period
exceeding five (5) years but shall automatically expire upon full
payment of the load. A voting trust agreement must be in writing and
notarized, and shall specify the terms and conditions thereof.
A certified copy of such agreement shall be filed with the corporation
and with the Commission; otherwise, the agreement is ineffective and
unenforceable. The certificate or certificates of stock covered by the
voting trust agreement shall be cancelled and new ones shall be issued
pursuant to said agreement. The books of the corporation shall state
that the transfer in the name of the trustee or trustees is made pursuant
to the voting trust agreement.
The trustee or trustees shall execute and deliver to the transferors,
voting trust certificates, which shall be transferable in the same manner
and with the same effect as certificates of stock.
The voting trust agreement filed with the corporation shall be subject
to examination by any stockholder of the corporation in the same
manner as any other corporate book or record: Provided, That both the
trustor and the trustee or trustees may exercise the right of inspection
of all corporate books and records in accordance with the provisions of
this Code.
Any other stockholder may transfer the shares to the same trustee or
trustees upon the term and conditions stated in the voting trust
agreement, and thereupon shall be bound by all the provisions of said
agreement.
No voting trust agreement shall be entered into for purposes of
circumventing the laws against anti-competitive agreements, abuse of
dominant position, anti-competitive mergers and acquisitions,
violation of nationality and capital requirements, or for the
perpetuation of fraud.
Unless expressly renewed, all rights granted in a voting trust agreement
shall automatically expire at the end of the agreed period. The voting
trust certificates as well as the certificate of stock in the name of the
trustees shall thereby be deemed cancelled and new certificates of
stock shall be reissued in the name of the trustors.
The voting trustee or trustees may vote by proxy or in any manner
authorized under the bylaws unless the agreement provides otherwise.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 87
Voting Trust: It is an agreement whereby one or more SH confer upon
a trustee the rght to control vote or other rights pertaiing to the shares
for a certain period of time. The voting trustee becomes merely a sham
owner with a colorable and fictitious title” for the purpose of voting
upon shares that he does not actually own.
The higher court explained the effects of voting trust agreement as to
the right of the stockholder executing it vis-à-vis the right of the trustee
in the case of Lee vs CA, that it creates a dichotomy between the
equitable or beneficial ownership thereof of the corporate shares of a
stockholder, on the one hand, and the legal title thereto on the other
hand, is transferred to the trustee. Legal title is vested with the voting
trustee.
Proxys by their very nature are revocable unless coupled with an
interest, preceding the irrevocable proxy the VTA came into existence,
under this agreement the stockholders remain the beneficial or
equitable owner but legal ownership is transferred to the trustee.
The essence of the voting trust agreement, as compared to the proxy,
is that to ensure the election of a particular director or even set of
directors and remove from the stockholders the power to change the
management during the duration of the VTA, unless of course he
violates the trust by his misconduct and unless of course it is given by
virtue of a loan, which under the provision, would make the VTA
automatically expired upon full payment thereof.
REQUISITES FOR A VALID VTA:
1.) It must be in writing and notarized, and shall specify the
terms and conditions thereof;
2.) It should be for a period not exceeding five (5) years at any
time UNLESS the voting trust is specifically required as a
condition in a loan agreement, in which case, the voting trust
may be for a period exceeding five (5) years but shall
automatically expire upon full payment of the loan;
3.) A certified copy thereof must be filed with the corporation
and with the Securities and Exchange Commission,
otherwise, said agreement is ineffective and unenforceable;
4.) The certificate or certificates of stock covered by the voting
trust agreement shall be cancelled and new ones shall be
issued in the name of the trustee or trustees stating that they
are issued pursuant to said agreement. (example: A executes
a VTA in favor of Z, certificate stock of A will be canceled
then a new one shall be issued in favor of Z); thereafter
5.) The trustee or trustees shall execute and deliver to the
transferors voting trust certificates to the stockholder
thereof, which according to the code will have the same
manner and effect like any other stock certificate which the
beneficial owner may endorse and deliver to his transferee.
Please note that a certificate will be cancelled and a new one will be
issued to the the voting trustee. Meaning the legal title will be vested
with voting trustee but the beneficial ownership will be to the SH
executing it.
When we will be taking transfers of shares of stocks, the mode and
manner of transferring shares, if the COS is already been issued, is by
endorsement and delivery of COS. Since COS of SH executing the
VTA has been transferred and canclleded of the corporation and the
new one is issued in favor of the voting trustee.
Q: How will the beneficial owner transfer the beneficial ownership of
the shares covered by the voting trustee?
A: One of the requisites is that if the COS has been cancelled and a
new one is issued in favor of the voting trustee, the voting trustee shall

thereafter issue a voting trust certificate in favor of the SH executing
it. This will have the same effect as any other stock certificate which
may likewise endorsee and deliver to his transferee.
Note: If it was given by virtue of a loan agreement, it will expire
automatically if it has been fully paid. Under the ruling in National
Investments Corp. v. Aquino, the corporation has no personality to
enforce a VTA executed by its SHs to a trustee, because he is not a
signatory, he is not a part of the contract and therefore it has no
personality to enforce the same.
Voting Trust Agreement v. Proxies
1. In the VTA beneficial owner of the stockholder executing
the same ceases to be a SH, also held in Lee vs CA, the code
says if he ceases be a stockholder he thereby cease to be a
director, meaning it is automatic, while in the case of a
proxies the title remains with the stock holder executing. He
does not part ways with his legal ownership of the shares
covered by the proxy.
2. The trustee votes as a legal owner, while a proxy votes
merely as an agent or representative.
3. The beneficial owner of the VTA is disqualified to be elected
as member of the board because he does not have any title
over the shares covered by the VTAs, while the SH
executing the proxy has legal title, thus qualified.
4. The purpose of VTA is to acquire voting control of the
corporation where as in the case of proxy only to secure
voting and quorum requirements or merely for the purpose
of representing an absent stockholder
5. VTA is irrevocable, while proxy is revocable at any time.
6. The voting trustee may vote at any meeting because it is the
legal owner, while the proxy may only vote for the meeting
for which it is authorized.
7. The trustee may vote in person or by proxy because he is
deemed the real owner, while the proxy must vote in person
by virtue of the rules on agency, an agent can have no agent
unless expressly authorized in writing by the principal.
8. The VTA may exceed 5 years, unless given as a condition in
loan, proxy is of a shorter period it may not exceed 5 years.
9. The VTA must be notarized, proxy not necessarily it is
sufficient if in writing, not necessarily because it says
“unless the by-law provides otherwise”
10. In order that the VTA will be valid a certified copy thereof
must be filed with the SEC. Proxy as a general rule certified
copy is not required to be filed with the SEC in order to be
valid and enforceable.
The other kind of voting by representative is the “voting pool
agreement” we have actually seen this already when we were taking
up cumulative voting.
Q: The example then is that F, G, H, I minority stock holders they have
200T shares out of 1M OCS, how can they may have a right of
representation in the board?
A: By cumulative voting, 200T multiplied by 5 members of the board
to be elected, that’s 1M votes, 5 members of the board to be elected
OCS 1M total number of votes therefore 5M, in order that one may be
guaranteed a seat therefor 1M vote is required. The minority can agree
between and among themselves to cast the 1M vote in favor of only
one and they will be guaranteed a sit. If they do this here, they can
agree that they will cast in favor, every other year, to F G H I. This of
course is governed by the rules governing obligations and contracts as
I was saying we apply different rules in the study of this course.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 88
NOV. 24 (C)
CHAPTER X
STOCKS AND STOCKHOLDERS
A person natural or juridical may become a stockholder in either of
three ways only:
1. By a contract of subscription
2. By purchased acquisition from existing Stockholders, including
those that are acquired from the stock exchange
- E.G. A person wants to acquire stocks from San Miguel which
is a listed company, he will course it through a broker. He will
tell his broker that he wants to buy shares, and the broker will
find a seller. If he does, there will be a transfer of shares from
the existing Stockholders to the purchaser of the sales.
3. By purchase of treasury shares
SUBSCRIPTION CONTRACT
• “Subscription” is the mutual agreement of the subscribers to take
and pay for the stocks of a corporation.
• Under SEC. 59, “Any contract for the acquisition of unissued stock
in an existing corporation or a corporation still to be formed shall
be deemed a subscription within the meaning of this Title,
notwithstanding the fact that the parties refer to it as a purchase or
some other contract.”
- Thus, there is no distinction between subscription and the
purchase of unissued stocks.
- This provision was inserted by the framers of the law. Prior
thereto followed the American rule that a subscription contract
differs from the purchase of stock from the corporation. The
difference depends on the intention of the parties and the terms
of their agreement.
๏ If the intention is to withhold rights of the purchaser as a
Stockholders until he pays in full his acquisition cost, then it
is a purchase.
๏ On the other hand, a subscriber becomes a Stockholders once
the contract is executed and becomes effective. And will
thereafter enjoy all the rights of the stockholders and the
corresponding responsibilities, even if he has not paid in full
the shares.
- But as the law stands now, subscribers of shares not fully paid
but not delinquent shall have all the rights of a stockholders.
- This distinction between subscription contract and purchase of
shares was thus important to determine the rights, duties,
obligations and liabilities of the contracting party.
๏ If the agreement is one of purchase, the obligations of the
parties would be reciprocal and dependent on each other. The
corporation for instance cannot sue for specific performance
or for the purchase price unless it is ready, able, and willing
to issue the cert of stock. Neither can the purchaser require
the issuance of the certificate of stock unless it tenders
payment of the full purchase price. So that if the corporation
becomes insolvent, it can have no claim against the purchase
for the price since it is in no position issue a valid certificate
of stock; there will be no consideration. On the other hand, in
the contract of subscription, the subscriber becomes liable to
pay the shares even if the corporation becomes insolvent, for
his rights as a Stockholder is not dependent on the issuance of
the certificate of stocks. He becomes a debtor of the
corporation from the moment he subscribes to its shares.
Conversely, he acquires all the rights the rights of a
Stockholder from that time on.
๏ E.G. A corporation is engaged in manufacturing. It leased a
piece of land where it put up its warehouse and corporate
headquarter. A acquired unissued stocks of P5M worth. He
paid P2.5M out of the subscription. The agreement stipulated

that he shall not be considered a Stockholder until and unless
he pays the full amount of the subscription; and that he should
pay the balance of P2.5M on or before March 2021. On
October 2020, the compound was ravaged by fire. May A be
compelled to pay the balance of his unpaid acquisition?
‣ NO, [if] under the American law that we follow because
the corporation is no longer in the position to issue a valid
certificate of stocks; there will be no consideration.
‣ In the contract of subscription, the acquiring person
becomes the Stockholders from the moment he subscribes
to the shares. Conversely, he acquires all the rights of a
Stockholders from that time. This has been strongly
criticized because an investor, whether he be called a
purchaser or subscriber, undertakes to contribute to the
corporate capital, with the end and view of sharing
whatever profits the corporation should bring. Why should
he therefore instead of making profits, incur losses? Why
should he therefore be absolved from incurring the
liability? As a reaction to this criticism, then Batas
Pambansa Blg. 68, now Sec. 59, erased the distinction
between the purchaser and subscription of unissued stocks
of a corporation. It will be deemed a subscription no matter
how the parties be referred to. What is the effect of this
provision? A purchaser or subscriber of unissued stocks
will be entitled to all the rights and the corresponding
liabilities of a Stockholders, which would include the
payment of his unpaid subscription.
‣ [summary of the answer] In our earlier example, if we still
follow the American rule, he would not have been liable to
pay the balance of his acquisition because it was a
purchase. The corporation will not be able, ready, and
willing to issue a valid stock certificate. There will be no
consideration.
‣ But as the law stands now, whether they call it purchase,
sale, or whatever, it is deemed a subscription. And he will
be liable to pay the unpaid portion of his acquisition. Note
that it only refers to unissued stocks. Meaning, if the
person acquires treasury shares by way of sale, it may be
subjected to that same [american] rule because it is not a
subscription anymore. Treasury shares are issued shares
and fully paid up. Thus may be subjected to a contract of
sale.
• FORM OF THE SUBSCRIPTION CONTRACT
- A subscription contract need not be in writing.
- An oral contract of subscription, as distinguished with sale of
stocks, is valid under the statute of fraud. So much so that it has
been held in the Salvatierra and Keller cases that contract does
not seem to fall under the definition of a sale.
• CONDITIONAL SUBSCRIPTION CONTRACT
- Q: May subscription be made conditional?
- A: It may be conditional, as there is nothing in the law that
prohibits it. Provided that:
a. There is nothing in the charter prohibiting the same, and
b. The conditions are not such as to render their performance
beyond the power of the corporation or in violation of the law
or contrary to public policy.
- Q: A wants to acquire of 5Million of the unissued 10Million
shares of stocks of the corporation. He pays 50% out of its
acquisition cost. The stipulation is that the balance shall be paid
within the period of 6 months, and until and unless he pays the
full amount, he shall not be considered a Stockholder. Is the
condition valid?
๏ A: NO, as it is contrary to law. The law says that it is a
subscription. And as the subscription has been executed, he
becomes a Stockholder for all intents and purposes, entitled
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 89
to the rights of a Stockholder, even if he has not paid the entire
amount.
TRILLANA VS. QUEZON COLLEGE, INC.
OBLIGATIONS AND CONTRACTS STOCK SUBSCRIPTION;
OFFER AND ACCEPTANCE; FACULTATIVE CONDITION. —
As the appellant offered its stock for subscription on the terms stated
in a form letter, and D. C. applied for subscription <xing her own plan
of payment, the relation, in the absence of acceptance by the appellant
of the counter offer of D. C., had not ripened into an enforceable
contract. There was imperative need for express acceptance on
appellant's part, because the proposal of D. C. to pay the value of the
subscription after she had harvested fish, was a condition obviously
dependent upon her sole will and, therefore, facultative in nature,
rendering the obligation void under article 1115 of the old Civil Code.
DISCUSSION: Damasa Crisostomo filled up a subscription form of
the Quezon College: “I hereby subscribe to 200 shares of the Quezon
College,” but instead of making a downpayment, she wrote in the form
“babayaran kong lahat pagkatapos kong makapagpahuli ng isda.” She
died, and Quezon College wants to enforce the payment of the unpaid
subscription against her estate
The court ruled that it cannot because of the need for the acceptance of
the Quezon College relative to the counter-offer of Damasa. A wala
syang inenclose na pera, in view of the fact that she will pay upon
harvesting fish—a condition obviously dependent upon her sole will
and therefore, facultative nature. This renders the obligation void under
the civil code.
• PRE-INCORPORATION SUBSCRIPTIONS
- Types of subscriptions as to time of execution:
a. Pre-incorporation subscriptions – subscriptions for shares of
stock of a corporation still to be formed; and
b. Post-incorporation subscriptions – those made or executed
after the formation or organization of the corporation
- “SEC. 60. Pre-incorporation Subscription. – A subscription of
shares in a corporation still to be formed shall be irrevocable for
a period of at least six (6) months from the date of subscription,
unless all of the other subscribers consent to the revocation, or
the corporation fails to incorporate within the same period or
within a longer period stipulated in the contract of subscription.
No preincorporation subscription may be revoked after the
articles of incorporation is submitted to the Commission.”
- General Rule: A subscription for shares of stock of a
corporation still to be formed is irrevocable.
- Exceptions:
a. Lapse of a period of 6 months from the date of subscription;
b. Within six months from date of subscription and all the
subscribers consent to the revocation; or
c. The corporation fails to incorporate within the same period or
within a longer period stipulated in the contract of
subscription.
- Exception to the exceptions: No pre-incorporation subscription
may be revoked after the articles of incorporation is submitted to
the Commission.
- Note: Once there is a valid subscription, there is an actual
issuance of shares of stocks. We have to distinguish this from the
issuance of stock certificate itself.
- Consideration for the issuance of the shares of stocks
๏ Q: How much?
‣ A: It shall not be less than the par value.
๏ Q: What may be used as a consideration for its issuance?
a. Actual cash paid to the corporation

b. Property
‣ Requirements:
i. It must actually be received by the corporation and
necessary or convenient for its use and lawful
purposes; AND
ii. At a fair valuation equal to the par or issued value of
the stock issued.
c. Labor performed for or services actually rendered to the
corporation;
d. Previously incurred indebtedness of the corporation
e. Amounts transferred from unrestricted retained earnings to
stated capital
‣ Refers to the declaration and distribution of stock
dividends where corporate earnings are capitalized
rather than distributed as cash dividend. It merely
converts income into capital, the consideration being
the retained earnings itself which would have accrued
to the stockholders in proportion to their respective
stockholdings
‣ Note: stocks may not be issued without consideration
for the following reasons: (1) it is discriminatory
against other stockholders; and (2) it prejudices the
rights of creditors under the Trust Fund Doctrine.
f. Outstanding shares exchanged for stocks in the event of
reclassification or conversion
‣ Refers to stocks surrendered to the corporation in
exchange for a new or different type of shares.
‣ E.G. conversion of founder’s shares where they are
granted the exclusive right to vote and be voted upon at
the election of directors and officers for a maximum
period of 5 years, if after the 5 year period as far as ___
said founders shares may be reclassified or converted
to, let’s say, common shares and the value for which
this preferred shares (founders share) were issued will
be the same consideration for the issuance of the
converted common shares .
g. Shares of stock in another corporation;
h. Other generally accepted form of consideration; and
i. Any combination thereof
๏ Q: May a promissory note be used as a consideration?
‣ A: No, because its realization is not certain. Same holds
true for future services.
๏ Q: May shares of stocks be issued without any consideration?
For instance, the subscriber entered into a contract with a
contraction subscribing to P1Million worth of shares, but he
will not pay any out of the subscription, but will only be paid
out o the dividends to be declared by the corporation.
‣ A: No, because it is discriminatory against the other
Stockholder who have agreed to pay the whole amount of
their acquisition, and it is thus unlawful. It is likewise in
fraud of the creditors because of the Trust Fund Doctrine,
i.e., that subscriptions of the capital stocks of a corporation
inclusive of any unpaid portion thereof constitutes a fund
which the creditors have the right to rely upon for the
satisfaction of their credit.
CERTIFICATE OF STOCKS
• Q: When will certificates of stocks be issued?
- A: Requirements for the valid issuance of stock certificates
a. It must be signed by the president or vice-president and
countersigned by the secretary or assistant secretary;
b. It must be sealed with the corporate seal; and
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c. The full amount of subscription together with interest and
expenses (in case of delinquent shares) if any is due, has been
paid.
• Q: Are holders of subscribed shares not fully paid entitled to the
issuance of stock certificates? For instance, A subscribed to
1Million shares at P1 per share. He paid P500,000. Can he be issued
stock certificates covering the P500,000 that he has already paid for.
- A: No, because certificate of stocks can be issued only upon full
payment of the subscription.
๏ Rationale: Subscriptions to shares of stocks are deemed
indivisible. Meaning, the amonut paid by A will be applied to
the entire 1M shares he subscribed. Thus, he has not paid a
single share. He has only paid 50% or 50 cents per share he
subscribed.
• Q: If the stock certificate has not yet been issued, may they exercise
the rights of a Stockholder?
- A: Yes. Under Sec. 71, holders of subscribed shares not fully
paid which are not delinquent shall have all the rights of a
stockholder. Thus, the issuance of a stock certificate is not
necessary to consider to a subscriber as a Stockholder because
once there is a valid subscription, he acquires all the rights and
liabilities of a stockholder.
• TRANSFER OF STOCK CERTIFICATES
- Q: How do you transfer stock certificates?
๏ A: By endorsement and delivery
- Q: Who will endorse it?
๏ A: The owner of the stocks or his duly authorized
representative.
- Q: Being transferred by endorsement and delivery, are they
negotiable instrument?
๏ A: They are quasi-negotiable instruments in the sense that
they may be transferred by endorsement made by the owner
or his atty-in-fact and delivery thereof to the transferor. But
they are non-negotiable instruments in the sense that they are
subject to all the rights and defenses which the true or lawful
owner may have as may be obtained under a particular set of
facts or circumstances.
๏ This doctrine of the negotiability of shares of stocks has been
recognized in our jurisdiction and was in fact applied in the
case of xxx vs. Ledesma, Sta. Maria vs. Hong Kong and
Shanghain Bank, and Delos Santos vs. Mac??, where the SC
held that stock certificates are merely quasi-negotiable
instruments. If it is endorsed in blank, the transferee is
justified in believing that it belongs to the holder.
๏ This doctrine is however subject to the rules on estoppel.
Meaning the rule that a bona fide purchaser under a false or
unauthorized transfer acquires no right as against the true or
lawful owner does not have any application where estoppel
may come into play. As where the owner thereof clothes
another with apparent title or authority to dispose of the
stocks, he will be estopped to deny such authority as against
third person dealing with such person or agent.
‣ Q: A has a stock certificate. He kept it in his room. His
brother stole it and sold it to Z, purchaser for value and in
good faith. Will Z acquire title?
✤ A: No, because it is subject to the defenses of a true and
lawful owner. A did not deliver his stock cert to another
person; it was stolen.
‣ Q: A endorsed and deliver his stock certificate to his
brother, B, because PDEA is already after him B sold it to
C. Will C acquire title?
✤ A: Yes. The operative acts of transferring the stock
certificate, i.e. endorsement and delivery, were done by
A. B became presumably the owner thereof, and C thus
acquired title. A will now be in estoppel.

‣ Therefore, unless estoppel sets in, no matter how innocent
the purchaser may be, he acquires no title as against the
true and lawful owner.
- Registration of the transfer
๏ Q: In transferring shares of stocks, will the non-registration
thereof in the books of the corporation render the transfer
valid insofar as the contracting parties are concerned and/or
the corporation and third parties?
‣ A: It is valid only as between the contracting parties
because the operative act of transferring shares is
endorsement and delivery of the stock certificate. But, to
be valid against the corporation and other third parties, it
must be registered in the stock and transfer book of the
corporation.
๏ Q: What do you understand by the word “transfer” as used in
the code so as to require its registration in order to be valid
and binding against the corporation and third persons?
‣ A: Absolute and unconditional conveyance
MONSERRAT vs. CERRON, ET. AL
CORPORATIONS; TRANSFER OF POSSESSION AND
OWNERSHIP OF SHARES OF STOCK; NOTATION OF
MORTGAGE ON SHARES OF STOCK. — Inasmuch as section 35
of the Corporation Law does not require the notation upon the books
of a corporation of transactions relating to its shares, except the transfer
of the possession and ownership thereof, as a necessary requisite to the
validity of such transfer, the notation upon the said books of the
corporation of a chattel mortgage constituted on such shares is not
necessary to its validity.
DISCUSSION: Whether or not mortgage are required to be recorded
in the books of the corporation so as to be valid and binding against
third parties thereto.
SC: NO. “Transfer” as referred to in the law is one which is complete
and absolute alienation of dominion and ownership. Such being the
case, registration of a mortgage in the books does not affect the validity
of a mortgage. Since the mortgage is valid without having been entered
in the books, the sale at public auction is also valid.
CHUA GUAN vs. SAMAHANG MAGSASAKA, INC., ET. AL.
1. CORPORATIONS; MORTGAGE OF SHARES OF STOCK. —
The registration of the chattel mortgage in the office of the corporation
was not necessary and had no legal effect. (Monserrat vs. Ceron, 58
Phil., 469) The long mooted question as to whether or not shares of a
corporation could be hypothecated by placing a chattel mortgage on
the certificate representing such shares we now regard as settled by the
case above cited of Monserrat vs. Ceron.
2. ID.; ID.; SITUS OF SHARES. — It is a common but not accurate
generalization that the situs of shares of stock is at the domicile of the
owner. The term situs is not one of fixed or invariable meaning of
usage. The situs of shares of stock for some purposes may be at the
domicile of the owner and for others at the domicile of the corporation;
and even elsewhere. (Cf. Vidal vs. South American Securities Co., 276
Fed., 855; Black Eagle Min. Co. vs. Conroy, 94 Okla., 221 Pac., 425;
Norrie vs. Kansas City Southern Ry. Co., 7 Fed [2d], 158.)
3. ID.; ID.; ID.; DOMICILE. — It is a general rule that for purposes of
execution, attachment and garnishment, it is not the domicile of the
owner of a certificate but the domicile of the corporation which is
decisive. (Fletcher, Cyclopedia of the Law of Private Corporations,
vol. 11, paragraph 5106; Cf. sections 430 and 450, Code of Civil
Procedure.)
4. ID.; ID.; ID.; ACT NO. 1508, SECTION 4, CONSTRUED. — By
analogy with the foregoing and considering the ownership of shares in
a corporation as property distinct from the certificate which are merely
the evidence of such ownership, it is a reasonable construction of
section 4 of Act No. 1508 to hold that the property in the shares may
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 91
be deemed to be situated in the province in which the corporation has
its principal office or place of business. If this province is also the
province of the owner's domicile, a single registration is sufficient. If
not the chattel mortgage should be registered both at the owner's
domicile and in the province where the corporation has its principal
office or place of business. In this sense the property mortgaged is not
the certificate but the participation and share of the owner in the assets
of the corporation.
5. ID.; ID.; ASSIGNMENT AND DELIVERY OF CERTIFICATE. —
The only safe way to accomplish the hypothecation of shares of stock
of a Philippine corporation is for the creditor to insist on the assignment
and delivery of the certificate and to obtain the transfer of the legal title
to him on the books of the corporation by the cancellation of the
certificate and the issuance of a new one to him.
6. ID.; ID.; ACT NO. 1459, SECTION 35, CONSTRUED. — Section
35 of the Corporation Law (Act No. 1459) enacts that shares of stock
"may be transferred by delivery of the certificate endorsed by the
owner or his attorney in fact or other person legally authorized to make
the transfer." The use of the verb "may" does not exclude the
possibility that a transfer may be made in a different manner, thus
leaving the creditor in an insecure position even though he has the
certificate in his possession. The shares still standing in the name of
the debtor on the books of the corporation will be liable to seizure by
attachment or levy on execution at the instance of other creditors. (Cf.
Uy Piaoco vs. McMicking, 10 Phil., 286, and Uson vs. Diosomito, 61
Phil., 535) This unsatisfactory state of our law is well known to the
bench and bar. (Cf. Fisher, The Philippine Law of Stock Corporations,
pages 163-168.)
DISCUSSION: Under the mortgage law, if shares of stocks are
pledged or mortgaged, in order to be valid and binding against the
world, it must be registered in the Registry of Deeds where the owner
of resides, AND in the RD of the city/province of the principal office
of the corporation. Here, though it may have been registered in the RD
of Manila where the owner resides, it was not registered in the RD of
Cabanatuan where the principal office of the corporation is located.
๏ Rationale for the registering of the transfer of shares:
a. To enable the corporation to know its Stockholders. The
corporation will not look beyond its books to determine
who its Stockholders are.
b. To afford the corporation an opportunity to object or refuse
registration of the transfer in cases allowed by law (as
when it has unpaid claims on the shares transferred);
c. To enable the transferee to exercise his rights as a
stockholder;
d. To avoid fictitious and fraudulent transfers; and
e. To protect creditors who have the right to look upon
stockholders, in case of non-payment or watered shares,
for the satisfaction of their claims.
USON vs. DIOSOMITO ET. AL.
CORPORATIONS; UNREGISTERED TRANSFER OF SHARES OF
STOCK. — The right of the owner of the shares of stock of a
Philippine corporation to transfer the name by delivery of the
certificate, whether it be regarded as statutory or common law right, is
limited and restricted by the express provision that "no transfer,
however, shall be valid, except as between the parties, until the transfer
is entered and noted upon the books of the corporation." Therefore, an
attachment lien prevails over a prior unregistered bona fide stock
transfer.
DISCUSSION: Defendant in this case owned 75 shares of north
electric company which is sold to Barcelon. Barcelon in turn sold it to
Joylle. Three months before the sale could be xxx however, Uson filed
a case against the defendant and attached the shares which were
subsequently sold at a public auction where Uson was the highest
bidder. Joylle claims ownership. Is the sale to Joylle valid?

No. In the first place, insofar as the corporation and the third parties
are concerned, the sale to Barcelon is not valid for not having been
earlier recorded in the books of the corporation. All transfers not
registered in the books of the corporation, though valid between the
contracting parties, are not valid and without force and effect as to the
attaching or execution creditors, the corporation itself and subsequent
purchasers for value and in good faith.
• RESTRICTION IN THE TRANSFER OF SHARES
- Transfer of shares can be restricted either by the law itself or by
agreement of the parties, or even by the provisions of the articles
of incorporation. The right however may not be unreasonably
restricted or prohibited. As we seen earlier in xxx, the SC ruled
that every owner of corporate shares has the same uncontrollable
right to alienated them and is under no obligation to sell them for
the sacrifice and for the welfare and benefit of the corporation or
other Stockholders.
๏ But while unreasonable restriction may not be allowed, the
right to transfer may be regulated, to give the corporation
protection against colorable or fraudulent transfer; or to
enable it to know who its Stockholders are; and as a matter of
policy. The SEC allows, as a matter of policy, the grant of
preferential rights to existing stockholders and the
corporation itself to acquire the shares of a selling stockholder
within a reasonable period not exceeding 30 days if the same
is contained in the articles of incorporation. This is considered
by the SEC as reasonable as it does not unduly restrict the
ultimate transfer thereof but merely grants the existing
stockholder or the corporation itself the first option to
purchase the shares.
- Other restrictions on the right to transfer shares would include:
a. It is not valid, except as between the parties, until recorded in
the books of the corporation (Sec 62);
b. Restrictions imposed in a close corporation (Sec 95);
c. Restrictions imposed by special law;
‣ E.G. Under the General banking Law, if transfer of shares
in a banking institution would result to the transfer holding
more than 20% entitled to vote, the consent of the Central
Bank would be required for its validity.
‣ E.G. Public Service Act requiring the approval of the
government agency concerned if it will vest unto the
transferee 40% of the capital of the public service
company;
d. Sale to aliens in violation of maximum ownership of shares
under the Nationalization Laws; and
e. Those covered by reasonable agreement of the parties.
(Lambert vs Fox)
PADGETT v. BABCOCK & TEMPLETON, INC.
SHARES OF CAPITAL STOCK; ILLEGAL RESTRICTION
IMPOSED THEREON. — The restriction consisting in the word
"nontransferable" appearing on the twelve (12) certificates, Exhibits F
to F-11, is illegal on the ground that it constitutes an undue limitation
of the right of ownership and is in restraint of trade. It should, therefore,
be eliminated.
2. ID.; OBLIGATION TO PURCHASE. — There is no existing law
nor authority in support of the plaintiff's claim to the effect that the
defendants are obliged to purchase his shares at par value plus the
interest demanded thereon. In this respect it is hereby held that there
has been no such contract, either express or implied, between the
plaintiff and the defendants.
3. ID.; NON-EXISTENT OR IMAGINARY OBLIGATION. — In the
absence of a similar contractual obligation and a legal provision
applicable thereto, it is logical to conclude that it would be unjust and
unreasonable to compel the said defendants to comply with a non-
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 92
existent or imaginary obligation. Whereupon, the judgment originally
rendered to that effect is untenable and should be set aside.
DISCUSSION: The words “non-transferrable” were stamped in the
stock certificate itself. Padgett proposed to sell, but the president
offered only P85, and subsequently P80. Since the par value is P100,
he did not agree and sold the same to another.
A case was brought against the corporation because they refused to
record the transfer in its books.
SC: Any restriction on a stockholder's right to dispose of his shares
must be construed strictly; and any attempt to restrain a transfer of
shares is regarded as being in restraint of trade, in the absence of a valid
lien upon its shares, and except to the extent that valid restrictive
regulations and agreements exist and are applicable. Subject only to
such restrictions, a stockholder cannot be controlled in or restrained
from exercising his right to transfer by the corporation or its officers
or by other stockholders, even though the sale is to a competitor of the
company, or to an insolvent person, or even though a controlling
interest is sold to one purchaser.
It is obvious, therefore, that the restriction consisting in the word
“nontransferable,” appearing on the stock certificates is illegal and
should be eliminated.
LAMBERT vs. FOX
1. CONTRACTS; CONSTRUCTION AND ENFORCEMENT. —
Contracts should be enforced as they read. The first duty of courts in
enforcing contracts is to give attention to the words thereof. If from the
words the meaning is plain, the contract should be enforced according
to its words.
2. ID.; ID. — It is to be presumed that persons mean what they say;
and interpretation and construction should not be resorted to when the
English used is plain. Plain words should not be discarded or twisted
or given fanciful or unusual signification, even though such strained
signification seems to be in the interests of justice or to be necessary
to prevent hardship.
3. ID.; ID.; ENFORCEMENT OF PENALTY. — In this jurisdiction
contracts are enforced as they read; and parties who are competent to
contract may make such agreements within the limitations of the law
and public policy as they desire, and the courts will enforce them
according to their terms. A penalty imposed for the breach of a contract
not to sell shares of stock for one year will be enforced if the agreement
is broken, no matter whether the person seeking to enforce the penalty
has suffered damages or not.
4. ID.; ID.; ID. — The only case in which the courts are authorized to
intervene for the reduction of a penalty stipulated in a contract is when
the principal obligation has been partly or irregularly fulfilled and the
court can see that the party demanding the penalty has received the
benefits of such part or irregular performance. In such case the court is
authorized to reduce the penalty to the extent of the benefits received
by the party seeking to enforce the penalty.
5. ID.; ID.; ID. — In enforcing a contract which provides a penalty in
case of breach, the party enforcing the penalty is entitled to recover the
sum stipulated without proving damages.
6. ID.; SUSPENSION OF RIGHT TO SELL CORPORATE STOCK.
— Where the suspension of the right to sell stock in a corporation has
a beneficial purpose and results in the protection of the corporation as
well as of the individual parties to the contract and is reasonable as to
time, the suspension is legal.
DISCUSSION: An agreement between two major stockholders not to
sell their respective shares within a period of one year is valid because
it is for a beneficial purpose resulting not only in the protection of the
corporation but as well as the individual stockholders, and is
reasonable as to the length of time, is legal, and valid.
- Section 62 is the general rule on transferring shares of stocks.
“By endorsement made by the owner or his attorney-in-fact
AND the delivery thereof to the transferee.”

EMBASSY FARMS v. CA
DISCUSSION: The owner of the stock certificates endorsed them but
he did not deliver the same to the alleged transferee. Was there a valid
transfer?
SC: No. The law now and then, says “AND” the delivery thereof to the
transferee.
- The same holds true the other way around—delivered but not
transferred:
RAZON v. IAC
CORPORATION; SHARES OF STOCK; MODE AND MANNER
OF TRANSFERRING THEREOF. — In the case of Embassy Farms,
Inc. v. Court of Appeals (188 SCRA 492 [1990] we ruled: ". . . For an
effective transfer of shares of stock the mode and manner of transfer
as prescribed by law must be followed (Naveav. Peers Marketing
Corp., 74 SCRA 65). As provided under Section 3 of Batas Pambansa
Bilang 68, otherwise known as the Corporation Code of the
Philippines, shares of stock may be transferred by delivery to the
transferee of the certificate properly indorsed. Title may be vested in
the transferee by the delivery of the duly indorsed certificate of stock
(18 C.J.S. 928, cited in Rivera v. Florendo, 144 SCRA 643). However,
no transfer is properly recorded in the books of the corporation" (Sec.
63, Corporation Code of the Philippines; Section 35 of the Corporation
Law)
7. ID.; ID.; ID.; ID.; NOT COMPLIED WITH IN CASE AT BAR. —
In the instant case, there is no dispute the questioned 1,5000 shares of
stock of E. Razon, Inc. are in the name of the late Juan Chuidian in the
books of the corporation. Moreover, the records show that during his
lifetime Chuidian was elected member of the Board ofDirectors of the
corporation which clearly shows that he was a stockholder of the
corporation. (See Section 30, Corporation Code) From the point of
view of the corporation, therefore, Chuidian was the owner of the 1,500
shares of stock. In such a case, the petitioner who claims ownership
over the questioned shares of stock must show that the same were
transferred to him by proving that all the requirements for the effective
transfer of shares of stock in accordance with the corporation's by laws,
if any, were followed (See Nava v. Peers Marketing Corporation, 74
SCRA 65 [1976]) or in accordance with the provisions of law. The
petitioner failed in both instances. The petitioner did not present any
by-laws which could show that the 1,500 shares of stock were
effectively transferred to him. In the absence of the corporation's
bylaws or rules governing effective transfer of shares of stock, the
provisions of the Corporation Law are made applicable to the instant
case.
8. ID.; ID.; ID.; ID.; CERTIFICATE OF STOCK MUST BE DULY
INDORSED FOR EFFECTIVE TRANSFER. — The law is clear that
in order for a transfer of stock certificate to be effective, the certificate
must be properly indorsed and that title to such certificate of stock is
vested in the transferee by the delivery of the duly indorsed certificate
of stock. (Section 35, Corporation Code) Since the certificate of stock
covering the questioned 1,5000 shares of stock registered in the name
of the late Juan Chuidian was never indorsed to the petitioner, the
inevitable conclusion is that the questioned shares of stock belong to
Chuidian. The petitioner's asseveration that he did not require an
indorsement of the certificate of stock in view of his intimate
friendship with the late Juan Chuidian can not overcome the failure to
follow the procedure required by law or the proper conduct of business
even among friends. To reiterate, indorsement of the certificate of
stock is a mandatory requirement of law for an effective transfer of a
certificate of stock.
9. ID.; ID.; ID.; INCLUDES ALL CASH AND STOCK DIVIDENDS
AND ALL PRE-EMPTIVE RIGHTS ACCRUING THERETO. — In
G.R. No. 74315, petitioner Vicente B.Chuidian insists that the
appellate court's decision declaring his deceased father Juan T.
Chuidian as owner of the 1,5000 shares of stock of E. Razon, Inc.
should have included all cash and stock dividends and all the pre-
emptive rights accruing to the said 1,5000 shares of stock. The petition
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 93
is impressed with merit. The cash and stock dividends and all the pre-
emptive rights are all incidents of stock ownership. The rights of
stockholders are generally enumerated as follows: ". . . [F]irst, to have
a certificate or other evidence of his status as stockholder issued to him;
second, to vote at meetings of the corporation; third, to receive his
proportionate share of the profits of the corporation; and lastly, to
participate proportionately in the distribution of the corporate assets
upon the dissolution or winding up. (Purdy's Beach on Private
Corporations, sec. 554)" (Pascual v. Del Saz Orozco, 19 Phil. 82, 87).
DISCUSSION: Dineliver nga, hindi naman inendorse. Edi walang
valid transfer. The manner of transfer of shares must be complied with.
It says “AND”.
- There may be other modes of transferring stocks, because Sec.
62 says “may” be transferred by endorsement and delivery. In
the case of xxx, the SC ruled, citing 1462 of the civil code, that
a formal contract of sale set in a notarial deed is equivalent to the
delivery of the thing itself.
- So that if the corporate officer refuses to record the transfer in
the books, the transferee may institute an action for mandamus
and/or damages.
RURAL BANK OF SALINAS, INC., v. CA
COMMERCIAL LAW; SECURITIES AND EXCHANGE
COMMISSION; ORIGINAL AND EXCLUSIVE JURISDICTION
INVOLVING INTRACORPORATE CONTROVERSIES;
CONSTRUED. — Section 5 (b) of P.D. No. 902-A grants to the SEC
the original and exclusive jurisdiction to hear and decide cases
involving intracorporate controversies. An intracorporate controversy
has been defined as one which arises between a stockholder and the
corporation. There is no distinction, qualification, nor any exception
whatsoever (Rivera vs. Florendo, 144 SCRA 643 [1986]). The case at
bar involves shares of stock, their registration, cancellation and
issuances thereof by petitioner Rural Bank of Salinas. It is therefore
within the power of respondent SEC to adjudicate.
2. ID.; CORPORATIONS; SHARES OF STOCK; RIGHT OF THE
HOLDER TO TRANSFER THEREOF; LIMITATION. —
Respondent SEC correctly ruled in favor of the registering of the shares
of stock in question in private respondent's names. Such ruling Ends
support under Section 63 of the Corporation Code, to wit: "SEC. 63 . .
. Shares of stock so issued are personal property and may be transferred
by delivery of the certificate or certificates indorsed by the owner of
his attorney-in-fact or other person legally authorized to make the
transfer. No transfer, however, shall be valid, except as between the
parties, until the transfer is recorded in the books of the corporation . .
."
3. ID.; ID.; ID.; ID.; NO RESTRICTION CAN BE IMPOSED
THERETO. — In the case of Fleischer vs. Botica Nolasco, 47 Phil.
583, the Court interpreted Sec. 63 in this wise: "Said Section (Sec. 35
of Act 1459, [now Sec. 63 of the Corporation Code]) contemplates no
restriction as to whom the stocks may be transferred. It does not
suggest that any discrimination may be created by the corporation in
favor of, or against a certain purchaser. The owner of shares, as owner
of personal property, is at liberty, under said section to dispose them in
favor of whomever he pleases, without limitation in this respect, that
the general provisions of law . . . The only limitation imposed by
Section 63 of the Corporation Code is when the corporation holds any
unpaid claim against the shares intended to be transferred, which is
absent here. A corporation, either by its board, its by-laws, or the act
of its officers, cannot create restrictions in stock transfers, because: “…
Restrictions in the traffic of stock must have their source in legislative
enactment, as the corporation itself cannot create such impediment.
By-laws are intended merely for the protection of the corporation, and
prescribe regulation, not restriction; they are always subject to the
corporation, in the absence of such power, cannot ordinarily inquire
into or pass upon the legality of the transactions by which its stock
passes from one person to another, nor can it question the consideration

upon which a sale is based . . ." (Tomson on Corporation Sec. 4137,
cited in Fleischer vs. Nolasco, supra).
4. ID.; ID.; ID.; DUTY OF THE CORPORATION TO REGISTER
THE TRANSFER THEREOF IS PURELY MINISTERIAL;
MANDAMUS WILL LIE IN CASE OF REFUSAL THEREOF. —
The right of a transferee/assignee to have stocks transferred to his name
is an inherent right flowing from his ownership of the stocks. Thus:
"Whenever a corporation refuses to transfer and register stock in cases
like the present, mandamus will be to compel the officers of the
corporation to transfer said stock in the books of the corporation" (26,
Cyc. 347, Hyer vs. Bryan, 19 Phil. 138; Fleischer vs. Botica Nolasco,
47 Phil. 583, 594). The corporation's obligation to register is
ministerial. "In transferring stock, the secretary of a corporation acts in
purely ministerial capacity, and does not try to decide the question of
ownership." (Fletcher, Sec. 5528, page 434). "The duty of the
corporation to transfer is a ministerial one and if it refuses to make such
transaction without good cause, it may be compelled to do so by
mandamus." (Sec. 5518, 12 Fletcher 394)
DISCUSSION: Clemente Guerrero executed a special power of atty
in favor of his wife to sell and dispose of his 473 shares in the Rural
Bank of Salinas, inc. The wife assigned it by way of deeds of
assignment to Andico et. al. She presented the two deeds to the
corporation for transfer, but the corporation refuses. A mandamus case
was filed with the SEC, which was granted. The case went all the way
to the SC.
SC: SEC is affirmed. Sec. 62 uses the phrase “may” be transferred by
endorsement and delivery. It may therefore be done by other modes.
As in this case, by deeds of assignment. And the rights of assignee to
have the stocks transferred in his name in the corporate books is an
inherent right flowing from his ownership of stocks. Whenever the
corporation refuses to transfer and register his stocks, mandamus will
lie to compel the officer to register the transfer. The duty of the
corporate officers to record the transfer of stocks is ministerial, and if
it is refused without good cause, it may be compelled by mandamus.
Meaning, mandamus is not always an appropriate remedy, because
there may be good causes for the refusal. For instance, if there are
unpaid claims over the shares sought to be recorded as transferred in
the books, or violative of the the nationalization laws, or restrictions
on transfer of shares in a close corporation.
TAY v. CA
MERCANTILE LAW; CORPORATION LAW; OWNERSHIP OF
SHARES OF STOCKS; JURISDICTION LIES WITH REGULAR
COURTS AND NOT WITH THE SEC; REASON.— The registration
of shares in a stockholder's name, the issuance of stock certificates,
and the right to receive dividends which pertain to the said shares are
all rights that flow from ownership. The determination of whether or
not a shareholder is entitled to exercise the above-mentioned rights
falls within the jurisdiction of the SEC. However, if ownership of the
shares is not clearly established and is still unresolved at the time the
action for mandamus is 8led, then jurisdiction lies with the regular
courts. As a general rule, the jurisdiction of a court or tribunal over the
subject matter is determined by the allegations in the complaint. In the
present case, however, petitioner's claim that he was the owner of the
shares of stock in question has no prima facie basis. In his Complaint,
petitioner alleged that, pursuant to the contracts of pledge, he became
the owner of the shares when the term for the loans expired. However,
the contracts of pledge, which were made integral parts of the
Complaint, contain this common proviso: In the event of the failure of
the PLEDGOR to pay the amount within a period of six (6) months
from the date hereof, the PLEDGEE is hereby authorized to foreclose
the pledge upon the said shares of stock . . .."
DISCUSSION: Guiok and Lim secured from Tay a loan payable in 6
months, secured by pledge covering 300,000 shares of stocks in Go
Fay, Co. They endorsed the stock certificates to blank and delivered it
to Tay. They failed to pay the loan. Tay then filed a case for mandamus
to direct the corporation to register them in the books of the
corporation. Will the mandamus issue?
SC: No. Mandamus may issue if the petitioner has a clear legal right to
the thing demanded and that it is the imperative duty on the respondent
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 94
to perform the act required. It neither confers nor imposes, and it is
never issued in doubtful cases. In this particular case, the petitioner has
failed to establish a clear legal right. And his alleged ownership has no
leg to stand on. Petitioner did not acquire ownership by virtue of the
contract of pledge. The failure of the debtor to pay them upon maturity,
the civil code states that for the valid transfer of the thing pledged, a
sale a public auction is to be done. Corollary thereto is the provision in
their contract of pledge which empowered the creditor to foreclose the
shares by selling them at public or private shares. There was no
showing that the petitioner made any attempt to foreclose the shares.
Under the Art. 2013 of the NCC, the pledgor remains the owner of the
thing during the pendency of the pledge and prior to foreclosure sale.
In essence, the mandamus will not issue if the petitioner has no prima
facie title to the shares as may be compared in the Rural Bank of
Salinas case.
NOV. 26 (D)
TRANSFER OF SHARES (CONTINUATION)
SEC. 62. Certificate of Stock and Transfer of Shares. – The capital
stock of corporations shall be divided into shares for which certificates
signed by the president or vice president, countersigned by the
secretary or assistant secretary, and sealed with the seal of the
corporation shall be issued in accordance with the bylaws. Shares of
stock so issued are personal property and may be transferred by
delivery of the certificate or certificates indorsed by the owner, his
attorney-in-fact, or any other person legally authorized to make the
transfer. No transfer, however, shall be valid, except as between the
parties, until the transfer is recorded in the books of the corporation
showing the names of the parties to the transaction, the date of the
transfer, the number of the certificate or certificates, and the number of
shares transferred. The Commission may require corporations whose
securities are traded in trading markets and which can reasonably
demonstrate their capability to do so to issue their securities or shares
of stocks in uncertificated or scripless form in accordance with the
rules of the Commission.
GR: Endorsement AND delivery
In Embassy Farms v. IAC, endorsement alone without delivery is not
sufficient. Neither would delivery alone without indorsement would be
sufficient.
Mode and manner of transferring shares as provided for by law must
be complied with. The conjunction is “and”. However, the law only
uses the word “may be transferred”, so that there may be other modes
of transferring shares.
EXC: By notarized deed
Transfer by way of a notarized deed is equivalent to the delivery of the
thing itself. (Rural bank of Salinas case)
EXC. TO THE EXC.: If the certificate of stock has been issued, it
cannot be transferred by a mere notarized deed. (Rural bank of Lipa
vs. CA) It must still be coupled with indorsement of stock certificate
and the delivery thereof to the transferee.
RURAL BANK OF LIPA vs. CA
COMMERCIAL LAW; CORPORATION CODE; TRANSFER OF
SHARES OF STOCK; REQUISITES FOR VALIDITY. — We have
uniformly held that for a valid transfer of stocks, there must be strict
compliance with the mode of transfer prescribed by law. The
requirements are: (a) There must be delivery of the stock certificate;
(b) The certificate must be endorsed by the owner or his attorney-in-
fact or other persons legally authorized to make the transfer; and (c)

To be valid against third parties, the transfer must be recorded in the
books of the corporation.
ID.; ID.; ID.; ID.; EFFECT OF NON-COMPLIANCE THEREWITH;
CASE AT BAR. — While it may be true that there was an assignment
of private respondents' shares to the petitioners, said assignment was
not sufficient to effect the transfer of shares since there was no
endorsement of the certificates of stock by the owners, their attorneys-
in-fact or any other person legally authorized to make the transfer.
Moreover, petitioners admit that the assignment of shares was not
coupled with delivery, the absence of which is a fatal defect. The rule
is that the delivery of the stock certificate duly endorsed by the owner
is the operative act of transfer of shares from the lawful owner to the
transferee. Title may be vested in the transferee only by delivery of the
duly indorsed certificate of stock. . . .
Consequently, the petitioners, as mere assignees, cannot enjoy the
status of a stockholder, cannot vote nor be voted for, and will not be
entitled to dividends, insofar as the assigned shares are concerned.
Parenthetically, the private respondents cannot, as yet, be deprived of
their rights as stockholders, until and unless the issue of ownership and
transfer of the shares in question is resolved with finality.
SECURITIES AND EXCHANGE COMMISSION; R.A. NO. 8799;
SEC JURISDICTION OVER CASES FALLING UNDER SEC. 5 OF
PD NO. 902-A NOW COGNIZABLE BY THE RTC; CASE AT BAR.
— While this case was pending, Republic Act No. 8799 was enacted,
transferring to the courts of general jurisdiction or the appropriate
Regional Trial Court the SEC's jurisdiction over all cases enumerated
under Section 5 of Presidential Decree No. 902-A. One of those cases
enumerated is any controversy "arising out of intracorporate or
partnership relations, between and among stockholders, members, or
associates, between any and/or all of them and the corporation,
partnership or association of which they are stockholders, members or
associates, respectively; and between such corporation, partnership or
association and the state insofar as it concerns their individual
franchise or right to exist as such entity." The instant controversy
clearly falls under this category of cases which are now cognizable by
the Regional Trial Court.
The Court ruled that the operational act of transferring shares is
endorsement AND delivery of stock certificate. The owner of the
shares Villanueva Sr., executed a deed of assignment executing all his
shares of stocks inclusive of his nominees in favor of the stockholders
of the bank. He was issued already a stock certificate; he did not
indorse and delivery the said certificate.
Whether there is a valid transfer.
NO. If the certificate of stock has already been issued, a mere notarized
deed will not suffice. It must still be coupled with the indorsement and
delivery of the stock certificate to the transferee.
RATIONALE: To avoid fictitious and fraudulent transfers of shares of
stocks. For what would prevent a stockholder from indorsing and
delivering his stock certificate to a transferee, and later executing a
deed of assignment to another transferee. It would result to a double
sale.
EXC. TO THE EXC. OF THE EXC: Even if the certificate of stock
has already been issued, indorsement and delivery thereof will not
always be required for a valid transfer.
TAN vs. SEC
MERCANTILE LAW; CORPORATIONS; STOCK CERTIFICATE;
DELIVERY OF CERTIFICATE NOT ESSENTIAL TO EFFECT
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 95
TRANSFER. — Following the doctrine enunciated in the case of
Tuazon v. La Provisora Filipina, where this Court held, that: "But
delivery is not essential where it appears that the persons sought to be
held as stockholders are officers of the corporation, and have the
custody of the stock book . .
DEFINED. — A certificate of stock is the paper representative or
tangible evidence of the stock itself and of the various interests therein.
The certificate is not stock in the corporation but is merely evidence of
the holder's interest and status in the corporation, his ownership of the
share represented thereby, but is not in law the equivalent of such
ownership. It expresses the contract between the corporation and the
stockholder, but it is not essential to the existence of a share in stock
or the creation of the relation of shareholder to the corporation.
NOT A NEGOTIABLE INSTRUMENT. — In Philippine
jurisprudence, a certificate of stock is not a negotiable instrument.
"Although it is sometime regarded as quasi-negotiable, in the sense that
it may be transferred by endorsement, coupled with delivery, it is well-
settled that it is non-negotiable, because the holder thereof takes it
without prejudice to such rights or defenses as the registered owners or
transferor's creditor may have under the law, except insofar as such
rights or defenses are subject to the limitations imposed by the
principles governing estoppel."
BY-LAWS WHICH PROHIBITS TRANSFER OF STOCK
WITHOUT APPROVAL OF ALL STOCKHOLDERS OR OF THE
PRESIDENT OR BOARD OF DIRECTORS, ILLEGAL. — A by-law
which prohibits a transfer of stock without the consent or approval of
all the stockholders or of the president or board of directors is illegal
as constituting undue limitation on the right of ownership and in
restraint of trade.
Visayan Educational Supply Co. Alfonso Tan is an incorporator,
President and director of such corporation. Two other incorporators
assigned their shares to the corporation, in exchange of shares of stocks
in trade. So there are only of them left. To complete the 5-man member
board, Alfonso assigned 50 shares out of his 400 shares to his brother
Angel Tan, covered by Stock Certificate No. 2. While another
incorporator assigned also 50 shares out of his 400 shares to Teodora
Tan. The Certificate of Stock No. 2 was cancelled and Certificate No.
6 for 50 shares was issued in favor of Angel Tan. Certificate No. 8 was
issued in favor of the petitioner. The cancellation of Stock Certificate
No. 2 was known to him, being then the President, director and the
assignor himself of the shares. The assignee attended the meetings.
When he was dislodged as President, he withdrew from the corporation
on the condition that he be paid 33.3% of the stock in-trade. The Board
passed a resolution to cancel effectively Stock Certificates 2 & 8.
Almost 6 years later, he questioned the cancellation because of his non-
indorsement. Because of the wordings, endorsed AND delivered. The
Court ruled delivery and indorsement is not essential where it appears
that the person sought to be held as a stockholder is an officer of the
corporation and is in custody of the stock and transfer book. All the
acts required for the transferee to exercise his right over the acquired
stocks were attendant. And even if the corporation is protected from
other parties, considering that the said transfer was earlier recorded in
the stock and transfer book, the new holder Angel Tan has already
exercised his rights and prerogatives as stockholder. He was even
elected as a member of the Board with the full knowledge of the
petitioner. The latter may thus be considered already as in estoppel.
Q: In transfer of these shares of stocks, when should a demand be made
on the part of the corporation to record the transfer in the name of the
transferee? Is there a fixed or definite period within which a demand
 CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 96

should be made in order that the transfer be recorded in the books of the shares covered by that stock certificate.) Because it is registered in
the corporation? the name of Madrigal and the certificate of stocks are in the possession
A: NONE. The operative act of transferring of share is the indorsement of Delos Santos. [Can Delos Santos be presumed as the owner as it was
and the delivery of the stock certificate. Once it is done, there is a valid “indorsed” by the lawful owner/transferor?]
transfer. If the transferee does not yet want to exercise his rights as a
stockholder, who can prevent it? If there is any time frame, it must be A: NO. Such presumption may be disproved otherwise. In this case, it
reckoned with at the time the demand is made but unheeded. was disproved otherwise. It was Madrigal who bought shares of stocks
of Lepanto for the benefit of the Mitsui Corp. Then he received the
WON vs. WACK WACK GOLF & COUNTRY CLUB stock certificates in his name, indorsed and delivered them in favor of
the Mitsuis. The Mitsuis kept it in its office in the City of Manila. War
CORPORATIONS; ASSIGNMENT OF CERTIFICATES; broke out. Somehow, it found its way in the hands of Delos Santos who
REGISTRATION OF ASSIGNMENT WITHOUT PERIOD. — The claims that he acquired them from Campos and Hess. But the two
certificate in question contains a condition to the effect that no sources of this shares are already dead. The Mitsuis testified that the
assignment thereof shall be effective with respect to the appellee until never delivered the stock certificate to any other person. So it may have
such assignment is registered in its books, as provided in the by-laws. been looted or stolen during deliberation of Manila.
While the assignee's right to have the assignment registered
commenced from the moment the certificate was assigned to him, it The transfer was unauthorized. Being non-negotiable, if the owner
would not follow that said right should be exercised immediately or indorsed it in blank, and it was stolen from him, no title is acquired
within a definite period. The existence of a right is one thing, and the even by a purchaser in good faith and for value.
duration of said right is another.
There was no valid transfer.
ACTION TO COMPEL REGISTRATION; PRESCRIPTION. — For
purposes of prescription, the assignee's cause of action to compel FORGED AND UNAUTHORIZED TRANSFER
registration accrues only from the time the corporation denies the
demand for registration FORGED AND UNAUTHORIZED
UNAUTHORIZED ISSUANCE OF
TRANSFER OF CERTIFICATE OF STOCK
A case for mandamus was filed April 26, 1955 or barely a few days CERTIFICATE OF STOCK
(according to the lower court) or two months (according to the What is forged or unauthorized Fraudulent or Error in the
plaintiff) after the demand was denied. is the transfer of certificate from sssuance of a new certificate by
the lawful/real owner to a corporation
DE LOS SANTOS vs. MCGRATH another.
The original owner cannot be
CORPORATION LAW; SHARES OF STOCK, NATURE AND deprived of his right by the
TRANSFER OF; EFFECT OF UNREGISTERED TRANSFER. — forgery.
Shares of stock are personal property and may be transferred by REMEDY: Institute a case for
endorsement of the corresponding stock certificate, coupled with its conversion or to compel the
delivery. However, the transfer shall not be valid, except as between corporation that it be issued
the parties, until it is entered and noted upon the books of the another certificate in his favor,
corporation. (Section 35, Corporation Law). and the same be listed in the
stock and transfer book.
QUASI-NEGOTIABILITY AND NON-NEGOTIABILITY OF The purchaser of share to such
SHARES OF STOCK. — Although shares of stock are sometimes unauthorized transfer will have
regarded as quasi-negotiable, in the sense that they may be transferred no right or remedy against the
endorsement, coupled with delivery, they are nonnegotiable, because corporation because he took
the holder thereof takes them without prejudice to such rights or title not on the faith of the
defenses as the registered owner or creditor may have under the law, misrepresentation made by the
except insofar as such rights or defenses are subject to the limitations corporation but on the faith of a
imposed by the principles governing estoppel. forged or unauthorized transfer.

STOCKHOLDERS; RIGHTS OF REGISTERED STOCKHOLDERS
SUPERIOR TO THAT OF PURCHASER ON NOTICE OF FACTS
INDICATING NEED OF INQUIRING INTO REGULARLY OF
SALES. — Where the plaintiffs were, at the time of the alleged sales
in their favor of the shares stock in question, aware of sufficient facts
to put them on notice of the need of inquiring into the regularity of the
transactions and the title of the opposed vendors, they can not validly
claim, against the registered stockholder, the statue of purchasers in
good faith.
PRINCIPAL OF REGISTERED OWNER ENJOYS SAME RIGHTS
OF REGISTERED STOCKHOLDER. — The principal or beneficiary
of the registered owner of shares of stock is entitled to invoke such
rights as the registered stockholders may have under the law.
Q: Can they not be considered as Street certificates? (Indorsement in
blank: Once a certificate of stock is indorsed and is in the hands of
another person, the person holding them is presumably the owner of
EX. A is a holder of a stock certificate and kept by him in his vault in
their house. B, his brother, stole the stock certificate duly indorsed by
A; B transferred it to C, a purchaser for value and in good faith. Will
C acquire title?
- NO. It is subject to all the rights and defenses A may have.
He did not deliver the indorsed stock certificate to another
person.
As a purchaser of value and in good faith, C went to the corporate
headquarters with his stock certificate indorsed by A. In order that the
transfer be recorded in the books of the corporation. The corporation
checked the signature cards of A, and found nothing wrong of the
indorsement of A in the certificate of stock. So, the corporation
cancelled the stock certificate of A and issued a new one in favor of C
(Certificate No. 6). C, later then, transferred Certificate No. 6 in favor
of D, purchaser for value and in good faith. Will D acquire title?

- YES. He relied on the representation made by the
corporation that Certificate No. 6 is valid, subsisting and in
fact owned by C. Therefore, D can compel the corporation
that the shares of stocks covered by the certificate shall be
recorded in his name.
Will A be deprived of his rights?
- NO. It is subject to all the rights and defenses which A may
have. Thus, both A and D may now compel the corporation
that they recognize them both as stockholders of the
corporation.
- A by virtue of the doctrine of non-negotiability of stock
certificate; D by virtue of his reliance on representation made
by the corporation that certificate No. 6 is in the name of C,
valid, subsisting and in fact owned by the latter.
What happens if in recognizing both A and D as a stockholder, there
will be over-issuance of shares, the entire authorized capital stock has
been fully subscribed and paid, who among A and D will be recognized
as a stockholder by the corporation?
- Only the original and true owner can be recognized as a
stockholder.
- D, the purchaser for value and in good faith of the new
certificate, will have the right to recover the value of the
shares, the claim for damages and attorney’s fee against the
corporation. Because of the representation made by the
corporation that such certificate is valid and subsisting and
owned by C. It will be estopped to deny otherwise.
- The corporation who acted in good faith may file a third-
party claim against C because the latter made representation
that his title is good when in fact it was by virtue of a forged
or unauthorized transfer.
- C, if he acted in good faith, may file a fourth-party claim
against B, the source of the issue.
In the case of the beneficial owner of shares of stocks covered by a
Voting Trust Agreement, his certificate of stock is cancelled and a new
one is issued in the name of the Voting Trustee. It no longer have a
stock certificate. How may he validly transfer his beneficial ownership
over the shares covered by the VTA?
Sec. 58. Voting Trusts. xxx The certificate or certificates of stock
covered by the voting trust agreement shall be cancelled and new ones
shall be issued in the name of the trustee or trustees, stating that they
are issued pursuant to said agreement. The books of the corporation
shall state that the transfer in the name of the trustee or trustees is made
pursuant to the voting trust agreement.
The trustee or trustees shall execute and deliver to the transferors,
voting trust certificates, which shall be transferable in the same manner
and with the same effect as certificates of stock.
The stockholder executing such voting trust certificate may indorse
and deliver to his transferee. He may do so by mere notarized deed
because it has been issued a stock certificate.
ISSUANCE OF STOCK CERTIFICATES
Q: When are certificate of stocks issued?
A: Upon payment of the full amount of his subscription together with
interest and expenses (in case of delinquent shares), if any is due. (Sec.
64)
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Q: 1M shares subscribed valued at 1M pesos. The subscriber already
paid 500K out of the subscription. May a certificate of stock be issued
in his favor for the 500K shares.
A: NO. Subscriptions to the capital stock of the corporation are
indivisible. He has not paid any single share. The amount he paid will
be applied to the entire 1M shares he subscribed. Perforce, he only paid
50 centavos per 1 peso share.
SEC. 63. Issuance of Stock Certificates. – No certificate of stock shall
be issued to a subscriber until the full amount of the subscription
together with interest and expenses (in case of delinquent shares), if
any is due, has been paid.
WATERED STOCKS – one which is issued by the corporation as
fully paid-up shares, when in fact the whole amount of the value
thereof has not been paid or promised to be paid. It shall be considered
as “fictitiously paid-up” to the extent to which they have not been or
not to be paid for.
SEC. 61. Consideration for Stocks. – Stocks shall not be issued for a
consideration less than the par or issued price thereof. xxx
Determined issued price = no par value share
Q: What happens if they are issued below the par value or the
determined issued price?
A: It shall be considered as watered stocks.
Watered stock may be issued in either of the following ways:
1. For a monetary consideration less than its par or issued
value;
2. For a consideration in property, tangible or intangible,
valued in excess of its fair market value;
3. Gratuitously or under an agreement that nothing shall be paid
at all; or
4. In the guise of stock dividends when there are no surplus
profits of the corporation.
Stock watering is proscribed in view of its evil effects:
1. The corporation is deprived of its capital thereby hurting its
business prospects, financial capability and responsibility.
2. Stockholders who paid their subscriptions in full, or
promised to pay the same, are injured and prejudiced by the
reduction of their proportionate interest in the corporation;
and
3. Creditors are deprived of the corporate assets for the
protection of their interest under the Trust Fund Doctrine.
SEC. 64. Liability of Directors for Watered Stocks. – A director or
officer of a corporation who: (a) consents to the issuance of stocks for
a consideration less than its par or issued value; (b) consents to the
issuance of stocks for a consideration other than cash, valued in excess
of its fair value; or (c) having knowledge of the insufficient
consideration, does not file a written objection with the corporate
secretary, shall be liable to the corporation or its creditors, solidarily
with the stockholder concerned for the difference between the value
received at the time of issuance of the stock and the par or issued value
of the same.
Q: If there is issuance of watered stocks, what is the extent of the
liability of the corporate directors or officers in the issuance of
watered stocks?
A: Difference between the value received at the time of issuance of the
stock and the par or issued valued of the same.
Q: 1M unissued stocks, par-value shares. Par value is 1.00/share. It
also has 1M unissued no-par value share. Determined issue price is

10.00/share. X acquired the 1M par-value shares for only 80 centavos
per share. He also acquired the 1M no-par value share for only 8 pesos
per shares. Is there stock watering in both instances?
A: YES. As long as they are issued below the par or determined issued
price, they are watered stocks.
Q: What will be the extent of liability of the directors or officers
consenting to the issuance of watered stocks?
A: They shall be held solidarily liable with the stockholder concerned
to the corporation and its creditors for the difference between the value
received at the time of issuance of the stock and the par or issued value
of the same. (Sec. 64)
Q: X acquired 1M par-value shares only at 80centavos per share
instead of the par-value of 1 peso per share; 1M no-par value shares
was acquired only at 8 pesos per share instead of the 10 pesos
determined issued price. What is the extent of the liability of the
directors for the watered stocks?
A: The stockholder to whom the no-par value shares are issued is not
solidarily liable when it comes to the watered no-par value shares. It
is because according to Sec. 6, non-par value shares are deemed fully
paid and non-assessable. So the corporation or creditors cannot render
the stockholder to whom they are issued liable solidarily to the
directors or officer because it cannot be assessed against him.
But with respect with the watered par-value shares, the stockholder
shall be solidarily liable with the directors or officers.
Q: The par-value of the shares of stocks is 1 peso per share. But in due
course, the fair market value thereof has gone up to 12 pesos per share.
And, the corporation issues 1M par-value shares for only 2 pesos per
share. Is there stock watering?
A: NO. Because the determination shall be based on the par or
determined issued price and not the fair market value of the said shares
of stocks.
For as long as it is not below the par value or determined issued price,
there will be no stock watering.
Q: Are subscribers to shares of stocks not fully paid liable to pay
interest under unpaid subscriptions.
SEC. 65. Interest on Unpaid Subscriptions. – Subscribers to stocks
shall be liable to the corporation for interest on all unpaid subscriptions
from the date of subscription, if so required by and at the rate of interest
fixed in the subscription contract. If no rate of interest is fixed in the
subscription contract, the prevailing legal rate shall apply.
Subscribers to shares of stock must pay the full value of their
subscription may be required to pay interest on all unpaid subscription
if so imposed in the subscription contract.
Q: How much will be the interest?
A: At the rate of interest fixed in the subscription contract. If there is
no such indication, the prevailing legal rate shall apply.
ENFORCEMENT OF AND PAYMENT OF SUBSCRIPTION
SEC. 66. Payment of Balance of Subscription. – Subject to the
provisions of the subscription contract, the board of directors may, at
any time, declare due and payable to the corporation unpaid
subscriptions and may collect the same or such percentage thereof, in
either case, with accrued interest, if any, as it may deem necessary.
Payment of unpaid subscription or any percentage thereof, together
with any interest accrued shall be made on the date specified in the
subscription contract or on the date stated in the call made by the board.
Failure to pay on such date shall render the entire balance due and
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payable and shall make the stockholder liable for interest at the legal
rate on such balance, unless a different interest rate is provided in the
subscription contract. The interest shall be computed from the date
specified, until full payment of the subscription. If no payment is made
within thirty (30) days from the said date, all stocks covered by the
subscription shall thereupon become delinquent and shall be subject to
sale as hereinafter provided, unless the board of directors orders
otherwise.
Q: When are unpaid subscriptions payable?
A: Unpaid subscription or any percentage thereof, together with
interest if required by the contract of subscription, shall be paid either:
1. On the date or dates fixed in the contract of subscription; or
2. On the date or dates that may be specified by the board of
directors pursuant to a “call” declaring any or all unpaid
portion thereof to be so payable.
TWO POSSIBLE REMEDIES AVAILABLE TO THE
CORPORATION TO ENFORCE PAYMENT OF UNPAID
SUBSCRIPTION:
1. By board action (Sec. 66-67)
2. Direct collection case in court (Sec. 68)
Q: If a date of payment is fixed in the contract of subscription, will a
call or demand be necessary before payment should become due and
demandable?
A: NO. It is a contractual obligation and becomes the responsibility of
the subscriber to pay them when they respectively fall due.
A call is a condition precedent before the right of action to institute a
recovery suit accrues. A demand is required before a debtor may incur
a delay in the performance of his obligation.
Hence, a call is not necessary if:
1. The contract of subscription provides for a date when
payment is due; or
2. When the corporation becomes insolvent.
If they do not pay on the day it is due and demandable under the
contract of subscription, or they do not pay under the date of demand
by the corporation specifying the day they fall due, the shares will,
therefore, become delinquent.
The corporation has an option either to:
1. Sell the shares of delinquent stockholder in a delinquency
sale; or
2. The corporation may go directly in court for a suit for
specific performance.
Q: If the boards decides to sell the shares at a delinquency sale, what
are the requirements and procedures?
A: Sec. 67 to 68
SEC. 67. Delinquency Sale. – The board of directors may, by
resolution, order the sale of delinquent stock and shall specifically state
the amount due on each subscription plus all accrued interest, and the
date, time and place of the sale which shall not be less than thirty (30)
days nor more than sixty (60) days from the date the stocks become
delinquent.
Notice of the sale, with a copy of the resolution, shall be sent to every
delinquent stockholder either personally, by registered mail, or through
other means provided in the bylaws. The same shall be published once
a week for two (2) consecutive weeks in a newspaper of general
circulation in the province or city where the principal office of the
corporation is located.

Unless the delinquent stockholder pays to the corporation, on or before
the date specified for the sale of the delinquent stock, the balance due
on the former’s subscription, plus accrued interest, costs of
advertisement and expenses of sale, or unless the board of directors
otherwise orders, said delinquent stock shall be sold at a public auction
to such bidder who shall offer to pay the full amount of the balance on
the subscription together with accrued interest, costs of advertisement
and expenses of sale, for the smallest number of shares or fraction of a
share. The stock so purchased shall be transferred to such purchaser in
the books of the corporation and a certificate for such stock shall be
issued in the purchaser’s favor. The remaining shares, if any, shall be
credited in favor of the delinquent stockholder who shall likewise be
entitled to the issuance of a certificate of stock covering such shares.
Should there be no bidder at the public auction who offers to pay the
full amount of the balance on the subscription together with accrued
interest, costs of advertisement, and expenses of sale, for the smallest
number of shares or fraction of a share, the corporation may, subject to
the provisions of this Code, bid for the same, and the total amount due
shall be credited as fully paid in the books of the corporation. Title to
all the shares of stock covered by the subscription shall be vested in
the corporation as treasury shares and may be disposed of by said
corporation in accordance with the provisions of this Code.
SEC. 68. When Sale May be Questioned. – No action to recover
delinquent stock sold can be sustained upon the ground of irregularity
or defect in the notice of sale, or in the sale itself of the delinquent
stock, unless the party seeking to maintain such action first pays or
tenders to the party holding the stock the sum for which the same was
sold, with interest from the date of sale at the legal rate. No such action
shall be maintained unless a complaint is filed within six (6) months
from the date of sale.
SUMMARY FOR THE PROCEDURE OF DELINQUENCY
SALE
1. The board, by resolution, orders the sale of the delinquent
stock stating the amount due and the date, time and place of
the sale;
2. The sale shall be made not less than 30 days nor more
than 60 days from the date the stocks became delinquent;
3. Notice of the SALE, with the copy of the board resolution
should be sent to every delinquent stockholder either
personally or by registered mail or through other means
provided in the bylaws;
4. Publication of the notice of SALE must be made once a
week for two consecutive weeks in the newspaper of general
circulation in the province or city where the principal officer
is located;
5. Sale at public auction if no payment is made by the
delinquent stockholder in favor of the bidder who offered to
pay the full amount of the balance in the subscription,
inclusive of interest, cost of advertisement and expenses for
the smallest number of shares;
6. Registration or transfer of the shares of stock in the name
of the bidder and corresponding issuance of the stock
certificate covering the shares successfully bidded;
7. If there be any remaining shares, the same shall be credited
in favor of the delinquent stockholder who shall be
entitled to the issuance of a certificate of stock covering such
shares;
8. If there is no bidder at the public auction who offers to pay
the total amount due plus interest, cost and expenses, the
corporation may, subject to the provisions of the Code, bid
for the same and the total amount due shall be credited or
paid in full in the corporate books, Provided that there are
Unrestricted Retained Earnings; and
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Q: Who will be the winning bidder in a delinquency sale?
A: Lowest bidder – one who offered to pay the full amount of the
balance in the subscription, inclusive of interest, cost of advertisement
and expenses for the smallest number of shares;
Q: A subscribed to 1M shares worth 1M pesos. He paid 500K out of
his 1M subscription. What is the extent of the delinquency of A, if a call
was made and he did not pay on the date specified on the call?
A: The entire 1M. Because he has not paid any single share. His
payment of 500K of his total subscription will be applied to the total
1M shares. All 1M shares are delinquent. (Indivisibility of
subscriptions to the capital stock of a corporation)
Now the corporation wants to sell his shares in a delinquency shares.
500K + 3K for the cost, expenses, interest, etc. = 503K. X, Y and Z
appeared in the sale of his delinquent stocks, and all of them offer the
same amount of 503K. X offered to pay 503K for 900K shares; Y
offered to pay 503K for 800K shares; Z offered to pay the same amount
for 750K shares. The winning bidder is the lowest bidder, which is Z.
The 750K shares will be recorded in the name of Z. The remaining
250K shares be recorded in the name of the delinquent stockholder,
which are now fully paid-up.
Q: The corporation made a call for the payment of unpaid subscription
of stockholders because the corporation incurred losses last year, and
it has debts to pay. It is the very reason why the corporation made the
call for the payment of the unpaid subscription. They are going to sell
the shares of A in a delinquency sale but no bidders appeared. May the
corporation itself bid?
A: NO. The corporation may only bid for the same if there are
Unrestricted Retained Earnings.
Q: In relation to Sec. 40, general rule, in order that the corporation
may acquire its own shares, it must have Unrestricted Retained
Earning. So if there were no bidders in a delinquency sale, and the
corporation cannot bid because there is no URE, is the corporation
left now without recourse to enforce payment of unpaid subscriptions
of A?
A: The corporation may avail direct collection case in court under Sec.
69.
SEC. 69. Court Action to Recover Unpaid Subscription. – Nothing in
this Code shall prevent the corporation from collecting through court
action, the amount due on any unpaid subscription, with accrued
interest, costs and expenses.
Q: Assume that it was sold in a delinquency sale, but the requirements
of law was not complied with (there was only one publication made).
The shares of A was sold at public auction at that delinquency sale.
How may he question the validity of his shares in the delinquency sale?
A:
SEC. 68. When Sale May be Questioned. – No action to recover
delinquent stock sold can be sustained upon the ground of irregularity
or defect in the notice of sale, or in the sale itself of the delinquent
stock, unless the party seeking to maintain such action first pays or
tenders to the party holding the stock the sum for which the same was
sold, with interest from the date of sale at the legal rate. No such action
shall be maintained unless a complaint is filed within six (6) months
from the date of sale.
The law prescribes two conditions before an action to recover
delinquent stocks irregularly sold may be allowed:
1. The party seeking to maintain such action pays or tender to
the party holding the stock the sum for which the same was
sold, with interest from the date of sale at the legal rate; AND

2. The action shall be commenced by filing of a complaint
within 6 months from the date of sale.
DE SILVA vs ABOITIZ & CO.
It is discretionary on the part of the board of directors to do whatever
is provided in the said article (by-law provision) relative to the
application of a part of the 70 percent of the profit distributable in equal
parts on the payment of the shares subscribed to and not fully paid.
If the board of directors does not wish to make, or does not make, use
of said authority it has two other remedies for accomplishing the same
purpose.
“The first and most special remedy given by the statute consists in
permitting the corporation to put the unpaid stock for sale and
dispose of it for the account of the delinquent subscriber. In this
case the provisions of sections 38 to 48, inclusive, of the Corporation
Law are applicable and must be followed. The other remedy is by
action in court.”
Admitting that the provision of article 46 of the said by-laws maybe
regarded as a contract between the defendant corporation and its
stockholders , yet as it is only to the board of directors of the
corporation that said articles gives the authority or right to apply on the
payment of unpaid subscriptions such amount of the 70 percent of the
profit distributable among the shareholders in equal parts as may be
deemed fit, it cannot be maintained that the said article has prescribe
an operative method for the payment of said subscription continuously
until their full amortization.
In the instant case, the defendant corporation, through its board of
directors, made use of its discretionary power, taking advantage of the
first of the two remedies provided by the aforesaid law. On the other
hand, the plaintiff has no right whatsoever under the provision of the
above cited article 46 of the said by-laws to prevent the board of
directors from following, for that purpose, any other method than that
mentioned in the said article, for the very reason that the same does not
give the stockholders any right in connection with the determination of
the question whether or not there should be deducted from the 70
percent of the profit distributable among the stockholders such amount
as may be deemed fit for the payment of subscriptions due and unpaid.
Therefore, it is evident that the defendant corporation has not violated,
nor disregarded any right of the plaintiff recognized by the said by-
laws, nor exceeded its authority in the discharge of its executive
functions, nor abused its discretion when it performed the acts
mentioned in the complaint as grounds thereof, and, consequently, the
facts therein alleged do not constitute a cause of action.
APOCADA vs. NLRC
COMMERCIAL LAW; CORPORATION; UNPAID
SUBSCRIPTION; NOT DUE AND DEMANDABLE UNTIL A
CALL FOR PAYMENT IS MADE BY THE CORPORATION. —
The unpaid subscriptions are not due and payable until a call is made
by the corporation for payment. Private respondents have not presented
a resolution of the board of directors of respondent corporation calling
for the payment of the unpaid subscriptions. It does not even appear
that a notice of such call has been sent to petitioner by the respondent
corporation.
Petitioner subscribed to 1,500 shares, worth 150K pesos, of Intraw
Phils. Inc, and made initial payment of 37.5K. He was appointed as
general manager and president of the corporation but eventually
resigned.
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He filed a claim for unpaid wages, COLA, balance of his gasoline and
representation expenses. Respondents admitted the same but the
amount due was applied to his unpaid balance of his subscription.
Petitioner questions the set-off since there was no call that was made
for the payment of his unpaid subscription.
SC ruled that the set-off was without any leg to stand on, or premature.
As there was no notice or call made for the payment of his unpaid
subscriptions, the same is not yet due and payable.
LUMANLAN vs. CURA
CORPORATIONS; ACTION BY CREDITORS UPON UNPAID
SUBSCRIPTIONS TO THE CAPITAL STOCK. — It is established
doctrine that subscriptions to the capital of a corporation constitute a
fund to which the creditors have a right to look for satisfaction of their
claims and that the assignee in insolvency can maintain an action upon
any unpaid subscription in order to realize assets for the payment of its
debts.
The Corporation Law clearly recognizes that a stock subscription is a
subsisting liability from the time the subscription is made, since it
requires the subscriber to pay interest quarterly from that date unless
he is relieved from such liability by the by- laws of the corporation.
The subscribed by him as he would be to pay any other debt, and the
right of the company to demand payment is no less incontestable.
The Trust Fund Doctrine was applied in this case. Subscriptions to the
capital stock of a corporation inclusive of any unpaid portion thereof
constitutes a fund, which the creditors have the right to rely upon for
the satisfaction of their claims. The creditor or the assignee-insolvency
can institute an action to collect the unpaid subscriptions of the
stockholders in order to raise funds for the satisfaction of their claims.
PNB v. BITULOK SAWMILL
COMMERCIAL LAW; CORPORATIONS; STOCK
SUBSCRIPTION; PAYMENT OF BALANCE OF
SUBSCRIPTIONS IS DEMANDABLE LEGAL OBLIGATION. —
The obligation to pay the balance of stock subscriptions to the
Philippine Lumber Distributing Agency, Inc., to answer for the claims
of the creditors, like the Philippine National Bank, is one that stems
from a plain statutory command and must be complied with, equity
considerations notwithstanding. The doctrine is established that
subscriptions to the capital of a corporation constitute a fund to which
creditors have a right to look for satisfaction of their claims. The
corporation has no power to release an original subscriber to its capital
stock from the obligation of paying for his shares without valuable
consideration for such release. Against creditors, a reduction of the
capital stock can take place only in the manner and under conditions
prescribed by the statute, the charter, or the articles of incorporation.
Strict compliance with statutory regulations is necessary.
Case which would uphold the statement that we should never believe
the promises of the President of the RPh (lol). It involves a recovery
of unpaid subscriptions of those who subscribed to the capital stocks
of the Philippine Lumber. It appears that the defendants would not have
subscribed thereto were it not for the promises of the President that the
Government would back their investment by 9 pesos for every peso
subscribed, which was not complied with.
Again, the Trust Fund Doctrine was applied in this case. Subscriptions
to shares of stocks inclusive of any unpaid portion thereof constitutes

a fund which the creditors have the right to rely upon for the
satisfaction of their claims.
It was also held that the corporation has no power to release a
subscriber from the payment of the shares without any valuable
consideration for such a release. As against the creditors, a reduction
of the capital stock can only take place in the manner prescribed by law
(Sec. 37)
A reading from Sec. 37 would show that even if they may have filed
for the reduction of their capital stock, it would not have been allowed
because the law says it shall not prejudice the rights of creditors or
other third-parties.
KELLER vs. C.O.D GROUP
It is settled that a stockholder is personally liable for the financial
obligations of a corporation to the extent of his unpaid subscription.
Reiterates Lumanlan vs. Cura, granting the creditors the right to
institute an action either against the corporation itself or the
stockholders for the payment of their unpaid subscription for the
payment of claims of the creditors. It is not only the corporation that
may institute an action for the unpaid subscription of the stockholders
but also the creditors because of the Trust Fund Doctrine.
Q: Is there a prescriptive period within which the demand for the
payment for unpaid subscriptions should be made?
A: NONE. If there is any, it should be reckoned with from the date the
demand was made, not from the time of subscription.
There are instances that the corporations for the past 25 years has been
raking in a lot of profits. The corporation would not demand that; why
don’t you let your subscribers make use their money for other
purposes. The corporation don’t need them anyway.
If for instance, the Marcos family are really in possession of stock
certificates indorsed by the owners thereof of SMC or PLDT or Lucio
Tan Group of Companies, they still have the right to make a demand
that they shall be transferred in their respective books.
GARCIA vs. SUAREZ
CORPORATIONS; SUBSCRIPTION TO SHARES OF CAPITAL
STOCK; PAYMENT OF SUBSCRIPTION. — Section 37 of the
Corporation Law, amended by Act No. 3518, provides when the
obligation to pay interest arises and when payment should be made,
but it is absolutely silent as to when the subscription to a stock should
be paid. Of course, the obligation to pay arises from the date of the
subscription, but the coming into being of an obligation should not be
confused with the time when it becomes demandable. In a loan, for
example, the obligation to pay arises from the time the loan is taken;
but the maturity of that obligation, the date when the debtor can be
compelled to pay, is not the date itself of the loan, because this would
be absurd. The date when payment can be demanded is necessarily
distinct from and subsequent to that when the obligation is contracted.
The subscription to the capital stock of a corporation, unless otherwise
stipulated, is not payable at the moment of the subscription but on a
subsequent date which may be 􀁀xed by the corporation. Hence, section
38 of the Corporation Law, amended by Act No. 3518, provides that:
"The board of directors or trustees of any stock corporation formed,
organized, or existing under this Act may at any time declare due and
payable to the corporation unpaid subscriptions to the capital stock . .
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PRESCRIPTION OF ACTION FOR RECOVERY OF SHARES OF
A CORPORATION. — The board of directors of the Compañia
Hispano-Filipina, Inc., not having declared due and payable the stock
subscribed by the appellant, the prescriptive period of the action nor
the collection thereof only commenced to run from June 18, 1931 when
the plaintiff, in his capacity as receiver and in the exercise of the power
conferred upon him by the said section 38 of the Corporation Law,
demanded of the appellant to pay the balance of his subscription. The
present action having been filed on October 10, 1936, the defense of
prescription is entirely without basis.
RELEASE FROM OBLIGATION TO PAY SUBSCRIPTION. — Not
having established that the stockholders of the Compañia Hispano-
Filipina, Inc., have in any wise consented to release the appellant from
his obligation, or that the acting president, R. P., was expressly
authorized by the stockholders, or was authorized by the by-laws of the
corporation, to release the appellant from his obligation, the appealed
decision is affirmed.
EFFECT OF DELINQUENCY
Q: What happens when the shares are declared delinquent? What
happens to the stockholder holding such delinquent shares?
A:
SEC. 70. Effect of Delinquency. – No delinquent stock shall be voted
for, be entitled to vote, or be represented at any stockholder’s meeting,
nor shall the holder thereof be entitled to any of the rights of a
stockholder except the right to dividends in accordance with the
provisions of this Code, until and unless payment is made by the holder
of such delinquent stock for the amount due on the subscription with
accrued interest, and the costs and expenses of advertisement, if any.
The holder immediately loses the right to:
1. Vote or be voted upon; or
2. Represented in any stockholders’ meeting
3. As well as all the right pertaining to a stockholder;
However, they still have the right to receive dividends
The right to receive dividends. (Sec. 42: xxx That any cash dividends
due on delinquent stock shall first be applied to the unpaid balance on
the subscription plus costs and expenses, while stock dividends shall
be withheld from the delinquent stockholders until their unpaid
subscription is fully paid: xxx)
Q: A is delinquent to the extent of 250K. There are 5 stockholders. All
of them subscribed to 2M shares each. The corporation declared 10M
URE. Will A, who has not paid his subscription in full with his 250K,
be entitled to cash dividends?(2:05:20)
A: YES. (Di na niya sinabi kung magkano/up to what extent)
Q: If the delinquent stockholder is also a director, will he lose his
rights to be, and act as a director?
A: NO. Until all his shares are sold in a delinquency sale, he remains
to be a director because the shares still stand in his name in the books
of the corporation. And even if his shares are sold in a public auction,
he may still retain a certain number of shares because the winning
bidder is the lowest bidder (see principle). Therefore, he may still have
shares of stocks that will be recorded in his name in the books of the
corporation.
RIGHTS OF UNPAID SHARES
SEC. 71. Rights of Unpaid Shares, Nondelinquent. – Holders of
subscribed shares not fully paid which are not delinquent shall have
all the rights of a stockholder.

General Rule: Holders of subscribed shares not fully paid which are
not delinquent shall have all the rights of a stockholder.
Exception: Shares of stock not fully paid are not entitled to be issued a
certificate of stock. (SEC 63)
DEC- 1 (G)
LOST, DESTROYED, AND STOLEN CERTIFICATES
SEC. 72. Lost or Destroyed Certificates. – The following procedure
shall be followed by a corporation in issuing new certificates of stock
in lieu of those which have been lost, stolen or destroyed:
(a) The registered owner of a certificate of stock in a corporation or
such person’s legal representative shall file with the corporation an
affidavit in triplicate setting forth, if possible, the circumstances as to
how the certificate was lost, stolen or destroyed, the number of shares
represented by such certificate, the serial number of the certificate and
the name of the corporation which issued the same. The owner of such
certificate of stock shall also submit such other information and
evidence as may be deemed necessary; and
(b) After verifying the affidavit and other information and evidence
with the books of the corporation, the corporation shall publish a notice
in a newspaper of general circulation in the place where the corporation
has its principal office, once a week for three (3) consecutive weeks at
the expense of the registered owner of the certificate of stock which
has been lost, stolen or destroyed. The notice shall state the name of
the corporation, the name of the registered owner, the serial number of
the certificate, the number of shares represented by such certificate,
and shall state that after the expiration of one (1) year from the date of
the last publication, if no contest has been presented to the corporation
regarding the certificate of stock, the right to make such contest shall
be barred and the corporation shall cancel the lost, destroyed or stolen
certificate of stock in its books. In lieu thereof, the corporation shall
issue a new certificate of stock, unless the registered owner files a bond
or other security as may be required, effective for a period of one (1)
year, for such amount and in such form and with such sureties as may
be satisfactory to the board of directors, in which case a new certificate
may be issued even before the expiration of the one (1) year period
provided herein. If a contest has been presented to the corporation or
if an action is pending in court regarding the ownership of the
certificate of stock which has been lost, stolen or destroyed, the
issuance of the new certificate of stock in lieu thereof shall be
suspended until the court renders a final decision regarding the
ownership of the certificate of stock which has been lost, stolen or
destroyed.
Except in case of fraud, bad faith, or negligence on the part of the
corporation and its officers, no action may be brought against any
corporation which shall have issued certificate of stock in lieu of those
lost, stolen or destroyed pursuant to the procedure above-described.
if the certificate of stock is lost, stolen or destroyed what is the
process? Sec 72 says that the stockholder must execute an affidavit in
triplicate, specifying the circumstances as to how the certificates were
lost, destroyed or stolen, the number of shares represented by the
certificate and the stock certificate number.
Is there a publication requirement? - Yes, once a week for three
consecutive weeks at the expense of the stockholder.
And if there is no contest? - If after one (1) year there is no contest,
then the lost or destroyed certificate will be cancelled and a new one
will be issued or a replacement certificate will be issued in the name of
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the stockholder whose certificate of stock was lost, destroyed, or
stolen.
Is the one (1) year waiting period absolute?- NO, because the
replacement certificate may be issued earlier than 1 year if the
stockholder concerned files a BOND satisfactory to the BOD effective
for a period of 1 year. Upon filing thereof, a replacement certificate
may be issued thereafter.
What happens if there is a contest? - If a contest has been presented
to the corporation or if an action is pending in court regarding the
ownership of the certificate of stock which has been lost, stolen or
destroyed, the issuance of the replacement certificate shall be
suspended until final decision of the court.
Pending the issuance of the replacement certificate, may the owner
of the lost, destroyed or stolen certificate transfer the shares
covered by the lost, destroyed or stolen certificate by a notarized
deed? - NO, because of the case of Rural Bank of Lipa vs. CA which
held that if a certificate of stock has already been issued, a mere
notarized deed is NOT SUFFICIENT.
It must still be coupled with the endorsement and delivery
of the stock certificate.
Anong magaagwa mo kung nawala nga yung certificate, eh
wala ka ngang maeendrose. Kung nagmamadali siya dapat magpost na
lang siya ng bond na satisfactory sa BODso that thereafter a
replacement certificate may be issued, which he can now endorse and
deliver to his transferry. A mere notarized deed is NOT SUFFICIENT.
May the corporate officers be held liable for the unauthorized
issuance of the new certificate? - NO.as a general rule they cannot be
held liable.
Is there an exception? Yes, refer to last paragraph of Section 72 which
provides that “Except in case of:
1. fraud,
2. bad faith, or
3. negligence on the part of the corporation and its officers,
no action may be brought against any corporation which shall have
issued certificate of stock in lieu of those lost, stolen or destroyed
pursuant to the procedure above-described.”
In fact this is just a reiteration of Section 30 which provides
when directors or officers may be held liable.
Rationale of Section 72:
1. To avoid duplication of certificates of stock
2. To avoid fictitious and fraudulent transfers; and
3. To protect the corporation against damages from whatever
sources arising from the issuance of the duplicate certificate
including liability to the holder of the original certificate or
to innocent holders of certificate based on the duplicate.
Thus, the BOD has the authority to decide the amount and
the kind of surety bond that may be required for the issuance of a
certificate of stock, in lieu of the lost or destroyed one, if the same is
to be issued prior to the expiration of the 1 year period provided by
Sec. 72.
CHAPTER XI - CORPORATE BOOKS AND RECORDS
SEC. 73. Books to be Kept; Stock Transfer Agent. – Every
corporation shall keep and carefully preserve at its principal office all
information relating to the corporation including, but not limited to:
(a) The articles of incorporation and bylaws of the corporation and all
their amendments;

(b) The current ownership structure and voting rights of the
corporation, including lists of stockholders or members, group
structures, intra-group relations, ownership data, and beneficial
ownership;
(c) The names and addresses of all the members of the board of
directors or trustees and the executive officers;
(d) A record of all business transactions;
(e) A record of the resolutions of the board of directors or trustees and
of the stockholders or members;
(f) Copies of the latest reportorial requirements submitted to the
Commission; and
(g) The minutes of all meetings of stockholders or members, or of the
board of directors or trustees. Such minutes shall set forth in detail,
among others: the time and place of the meeting held, how it was
authorized, the notice given, the agenda therefor, whether the meeting
was regular or special, its object if special, those present and absent,
and every act done or ordered done at the meeting. Upon the demand
of a director, trustee, stockholder or member, the time when any
director, trustee, stockholder or member entered or left the meeting
must be noted in the minutes; and on a similar demand, the yeas and
nays must be taken on any motion or proposition, and a record thereof
carefully made. The protest of a director, trustee, stockholder or
member on any action or proposed action must be recorded in full upon
their demand.
Corporate records, regardless of the form in which they are stored,
shall be open to inspection by any director, trustee, stockholder or
member of the corporation in person or by a representative at
reasonable hours on business days, and a demand in writing may be
made by such director, trustee or stockholder at their expense, for
copies of such records or excerpts from said records. The inspecting or
reproducing party shall remain bound by confidentiality rules under
prevailing laws, such as the rules on trade secrets or processes under
Republic Act No. 8293, otherwise known as the “Intellectual Property
Code of the Philippines”, as amended, Republic Act No. 10173,
otherwise known as the “Data Privacy Act of 2012”, Republic Act No.
8799, otherwise known as “The Securities Regulation Code”, and the
Rules of Court.
A requesting party who is not a stockholder or member of record, or is
a competitor, director, officer, controlling stockholder or otherwise
represents the interests of a competitor shall have no right to inspect or
demand reproduction of corporate records.
Any stockholder who shall abuse the rights granted under this section
shall be penalized under Section 158 of this Code, without prejudice to
the provisions of Republic Act No. 8293, otherwise known as the
“Intellectual Property Code of the Philippines”, as amended, and
Republic Act No. 10173, otherwise known as the “Data Privacy Act of
2012”.
Any officer or agent of the corporation who shall refuse to allow the
inspection and/or reproduction of records in accordance with the
provisions of this Code shall be liable to such director, trustee,
stockholder or member for damages, and in addition, shall be guilty of
an offense which shall be punishable under Section 161 of this Code:
Provided, That if such refusal is made pursuant to a resolution or order
of the board of directors or trustees, the liability under this section for
such action shall be imposed upon the directors or trustees who voted
for such refusal: Provided, further, That it shall be a defense to any
action under this section that the person demanding to examine and
copy excerpts from the corporation’s records and minutes has
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improperly used any information secured through any prior
examination of the records or minutes of such corporation or of any
other corporation, or was not acting in good faith or for a legitimate
purpose in making the demand to examine or reproduce corporate
records, or is a competitor, director, officer, controlling stockholder or
otherwise represents the interests of a competitor.
If the corporation denies or does not act on a demand for inspection
and/or reproduction, the aggrieved party may report such to the
Commission. Within five (5) days from receipt of such report, the
Commission shall conduct a summary investigation and issue an order
directing the inspection or reproduction of the requested records.
Stock corporations must also keep a stock and transfer book, which
shall contain a record of all stocks in the names of the stockholders
alphabetically arranged; the installments paid and unpaid on all stocks
for which subscription has been made, and the date of payment of any
installment; a statement of every alienation, sale or transfer of stock
made, the date thereof, by and to whom made; and such other entries
as the bylaws may prescribe. The stock and transfer book shall be kept
in the principal office of the corporation or in the office of its stock
transfer agent and shall be open for inspection by any director or
stockholder of the corporation at reasonable hours on business days.
A stock transfer agent or one engaged principally in the business of
registering transfers of stocks in behalf of a stock corporation shall be
allowed to operate in the Philippines upon securing a license from the
Commission and the payment of a fee to be fixed by the Commission,
which shall be renewable annually: Provided, That a stock corporation
is not precluded from performing or making transfers of its own stocks,
in which case all the rules and regulations imposed on stock transfer
agents, except the payment of a license fee herein provided, shall be
applicable: Provided, further, That the Commission may require stock
corporations which transfer and/or trade stocks in secondary markets
to have an independent transfer agent.
The Code requires corporations to keep and maintain certain
books and records which are? -
1. The AOI and bylaws of the corporation and all their
amendments;
2. The current ownership structure and voting rights of the
corporation, including lists of stockholders or members,
group structures, intra-group relations, ownership data, and
beneficial ownership;
3. The names and addresses of all the members of the board of
directors or trustees and the executive officers;
4. A record of all business transactions;
5. A record of the resolutions of the board of directors or
trustees and of the stockholders or members;
6. Copies of the latest reportorial requirements submitted to the
SEC; and
7. Stock and transfer book for stock corporations or
membership books for non-stock corporations.
These books and records may be subject to inspection by the
stockholders and/or directors. It cannot be inspected by outsiders
without the consent of the corporation.
Stockholders may copy them at the expense of the stockholder
requesting them.
If a stockholder is refused this right of inspection - mandamus will
lie to compel the responsible officers to allow the stockholders to
inspect the books or records.
Are there any other sanctions? -
1. Damages under Sec 161

2. Fine of 10k - 200k at the discretion of the court.
3. Fine of 200k -400k w/o prejudice to contempt powers of the
SEC under Sec 157 - If injurious or detrimental to the public.
If the corporation denies or does not act on a demand for
inspection or reproduction - The aggrieved party may report the
same to the SEC.
W/IN 5 days from receipt of such report, the SEC shall
conduct a summary investigation and issue an order directing the
inspection or reproduction. The inspecting and reproduction party shall
be bound by the confidentiality rules under the prevailing laws.
Any stockholder who abuses the right shall be penalized
under the provisions of Sec 158 by a fine of 5k - 2M pesos.
Right to inspect books and records of corporation by a stockholder
is NOT ABSOLUTE - Because the directors and responsible
corporate officers may advance certain defenses to justify their failure
or refusal of stockholders to inspect the books or records of the
corporation.
The defenses of the directors and responsible corporate officers
are:
1. Improper use of information secured through previous
examination
2. He is not acting in good faith or for legitimate purpose.
Under rules and regulations of SEC, corporations are required to
submit 2 reportorial requirements, these are?
1. Financial Statement received by the BIR w/in 120 days at the
end of the fiscal year.
2. General information sheet (GIS) to be submitted w/in a
period of 30 days from the date of the meeting indicated in
the bylaws or actual meeting thereof. The GIS contains data
as to the top 10 stockholders, the executive officers, the
directors.
Basis for right to grant inspection to stockholders - founded by his
beneficial interest through ownership of shares, and the necessity of
self-protection or even preservation, because those in charge of
management may be guilty of gross incompetence or even dishonesty,
and to escape liability, stockholders cannot inspect the corporate books
or obtain information relative to the manner in which the corporation
is being run by responsible officers.
NOTE:There is a distinction between the right of stockholders to
inspection and vis-a-vis the directors or trustees.
The directors or trustees right to inspect the books of the corporation
is ABSOLUTE AND UNQUALIFIED - a director supervises, directs
and manages the corporate business, so it is therefore necessary that he
be equipped with all data and information with regard to the operation
of the company in order that he may direct and manage its affairs
diligently and in accordance with his best judgment. [Vegaruth vs
Isabela Sugar and Gokongwei vs SEC]
Nature of right of inspection - Personal to a stockholder
May it be exercised through another? - YES [W.G. Philpotts v. Phil
Mfg Corp.] it may be exercised by the agent or the representative of
the stockholder. It can be exercised either by the stockholder himself
or by any proper representative or atty- in-fact. This is in conformity
with the rule that what a man can do , he can do so in person or through
another, because while the right may be personal in nature , it may be
made by another since it may be unavailing in many instances. As the
provision stands now (par 2) “in person or by a representative.
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Even lawyers for that matter, may not be able to understand the
entries in the financial statement - he may need the skills of a CPA
in order to understand the date or figures indicated in the financial
statement. Useless lang kung siya lang mag-iinspect nung records kasi
hindi naman niya maintindihan , so he may do the inspection through
a duly authorized representative.
They may exercise this right during reasonable hours on any
business day - In the case of Pardo v. Hercules Lumber, the court
ruled that that bylaw provision that the stockholders may examine the
books on days which the BOD shall annually fix. which is March 15-
25 ONLY for stockholders to inspect the books and records of the
corporation was without any valid force and effect because as we
were saying any bylaw provision deemed contrary to law is
without any valid force and effect and are deemed as if they were
not written at all. Rules in favor of Pardo who filed a petition for
mandamus to be allowed to inspect the corporate record.
A corporation may deny inspection when sought in unusual
hours or other improper conditions, but it does not have the power to
deny this right altogether. The law says that it may be exercised during
reasonable hours, on any business days.
Doctrine of Limited Capacity - corporation can only do
such acts and things as the law allows it to do.
VEGARUTH V. ISABELA SUGAR
Also a mandamus case. The petitioner asked that the minutes,
documents and books of the corporation, to be placed at their disposal
at reasonable hours as a director thereof, and to issue immediately upon
payment of fees, certified copies of any documentation in connection
therewith. The secretary replied that they cannot do such because they
were not yet signed by the responsible corporate officers.
The SC ruled that the directors of a corporation have the
unqualified right to inspect the books and records of the corporation at
all reasonable hours, and make copies, abstracts, etc as incident thereto.
Furthermore, it cannot be conceived that a director or even a
stockholder has any absolute right to secure certified copies of the
minutes unless they have been written up, signed and approved by the
responsible corporate officer because during meetings of either the
stockholders or directors, after the meeting, the corporate secretary will
still prepare the meetings thereof, and the minutes will still be read and
approved bin the next stockholders or directors meeting.
This means that if the meeting was held 6 months ago at the
stockholders annual meeting, you cannot secure a copy of the meetings
6 months after because another 6 months will pass until the next
stockholders meeting will be held and conducted.
Agenda in subsequent annual meeting::
1. determination of the presence of a corp
2. reading and approval of the minutes of the meeting - if
approved, then and only then will it be finalized and signed
by the corporate officers.
- Prior to approval - NO CERTIFIED TRUE COPY OF THE
MINUTES OF MEETING MAY BE ISSUED.
- All that may be issued are the excerpts of the minutes of the
meeting - w/c is not exactly the same as the signed minutes
of the meeting by the directors.
Why are excerpts not the same as the minutes of the meeting? -
Because if naisulat ni corporate secretary na unanimous vote ng
stockholders, pero yun pala yung isa hindi pala nag-vote, so hindi
unanimous. So dapat may approval and signing para sure na corect
yung contents nung minutes.
Note: Same holds true for the director’s meetings, kung monthly ang
meeting nila, next month ka na makakakuha ng certified true copy of
the minutes, kasi next month na sila mag-mmeeting, and the prepared

minutes ng corporate secretary will be read and approved in the
subsequent meeting. Then and only then will they be able to issue a
certified true copy of the minutes of the meeting.
May a stockholder of a holding company inspect the books and
records of the subsidiary of that holding company if he is not also
a stockholder of the subsidiary? - IT DEPENDS.
Case: Gokongwei v. SEC - Ruling was yes, he may inspect the books
and records of the wholly-owned subsidiary. Since, San Miguel
International Inc was a subsidiary wholly-owned by San Miguel
Corporation, meaning all the shares are owned and held by Sam Miguel
corporation, it would be more in accord with equity, good faith and
fair-dealing to construe the statutory right to inspection to cover also
the books and records of a wholly owned subsidiary.
The right of a stockholder to examine the corporate books
extends to a wholly owned subsidiary under the control and
management of the parent or holding company where he is such a
stockholder.
But, if the two entities, the parent and or the subsidiary are
legally deemed operated as separate and distinct entities, there is no
such right of inspection on the part of the stockholder of the parent or
holding company if he is not also a stockholder of the subsidiary.
(Rogers vs Sherman Oil Company cited in the book of Fletcher).
Illustration:
Ayala Corp is a holding company. It has three subsidiaries, namely:
1. BPI - 52%
2. Globe 58%
3. Ayala Land - 58%
Let us assume that A is a stockholder of Ayala Land Corporation,
can he inspect the books and records of all or any of the three
subsidiaries if he is not also a stockholder of the subsidiaries - NO,
because they are not wholly owned subsidiaries, in fact all these 3 other
corporations or subsidiaries are treated and operated separately and
independently from under the Securities and Regulation Code. They
are listed companies, and they have independent directors for purposes
of protecting the general investing public.
It is only available to a stockholder of a holding company
with a wholly owned subsidiary. If it is not a wholly owned subsidiary
then the stockholder of the holding company cannot inspect the books
and record of the subsidiary if he is not a stockholder thereof.
GONZALES V. PNB
Poses the issue as to WOn a corporation can validly refuse to inspect
the books and records of the Philippine National Bank relative to its
guarantees and financing of certain projects. Previous thereto he has
instituted several cases questioning different transactions of the bank.
His right to sue was questioned, such that sometime later, he
acquired one share from an existing stockholder, after that he instituted
the action. He was denied the right of inspection and the case went all
the way to the SC.
The court ruled that the 1907 corporation law was
unqualified. There were no defenses available to offices to justify their
failure or refusal to the exercise of the right of inspection. Sec 73 and
74 as it stands now requires as a condition precedent for such
examination that the one requesting must not have been guilty of using
improperly any info secured through previous examination and that he
must have been acting in good faith and for a legitimate purpose.
The circumstances under which the petitioner acquired one
share do not argue in favor of good faith and proper motivation.
Admittedly, he wanted to be a stockholder in order to pry into the
transactions entered into by the bank even before he was a stockholder
or in fact done when he was still a total stranger to the corporation.
Even if he may have been acting in good faith and for a
legitimate purpose, we take note of the fact that PNB has its own job
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to do. As we said under Sec 4 of the code, they are primarily governed
by the law creating them, meaning the charter. And the charter of the
bank provides that inspection of the financial books and records of the
PNB is subject to the inspection only by the BSP itself, the monetary
board of the central bank, and the result of the investigation may only
be divulged to the president of the republic of the Philippines, secretary
of finance and the member of the board of PNBitself. In fact there's
even a provision that any person who violates the provisions of
violating the law of the PNB may suffer the penalty of a fine and
imprisonment.
So even if Gonzales may have been acting in good faith and
for a legitimate purpose, he would still not be able to examine the
books and records of PNB.
SEC. 74. Right to Financial Statements. – A corporation shall
furnish a stockholder or member, within ten (10) days from receipt of
their written request, its most recent financial statement, in the form
and substance of the financial reporting required by the Commission.
At the regular meeting of stockholders or members, the board of
directors or trustees shall present to such stockholders or members a
financial report of the operations of the corporation for the preceding
year, which shall include financial statements, duly signed and
certified in accordance with this Code, and the rules the Commission
may prescribe.
However, if the total assets or total liabilities of the corporation is less
than Six hundred thousand pesos (P600,000.00), or such other amount
as may be determined appropriate by the Department of Finance, the
financial statements may be certified under oath by the treasurer and
the president.
MERGERS AND CONSOLIDATION
Section 75. Plan of Merger or Consolidation. - Two (2) or more
corporations may merge into a single corporation which shall be one
of the constituents corporations or may consolidate into a new single
corporation which shall be the consolidated corporation.
The board of directors or trustees of each corporation, party to the
merger or consolidation, shall approved a plan of merger or
consolidation, shall approved a plan of merger or consolidation, shall
approve a plan of merger or consolidation setting forth the following:
(a) The names of the corporations proposing to merge or consolidate
hereinafter referred to as the constituent corporations;
(b) The terms of the merger or consolidation and the mode of carrying
the same into effect;
(c) A statement of the changes, if any, in the articles of incorporation
of the surviving corporation in case of merger; and, in case of
consolidation, all the statements required to be set forth in the articles
of incorporation for corporations organized under this Code; and
(d) Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or desirable.
Section 76. Stockholders' or Members' Approval. - Upon approval
by a majority vote of each of the board of directors or trustees of the
constituent corporations of the plan of merger or consolidation, the
same shall be submitted for approval by the stockholders or members
of each of such corporations at separate corporate meetings duly called
for the purpose. Notice of such meetings shall be given to all
stockholders or members of the respective corporations in the same
manner as giving notice of regular or special meetings under Section

49 of this Code. The notice shall state the purpose of the meeting and
include a copy or a summary of the plan of merger or consolidation.
The affirmative vote of stockholders representing at least two-thirds
(2/3) of the outstanding capital stock of each corporation in the case of
stock corporations or at least two-thirds (2/3) of the members in the
case of nonstock corporations shall be necessary for the approval of
such plan. Any dissenting stockholder may exercise the right of
appraisal in accordance with this Code: Provided, That if after the
approval by the stockholders of such plan, the board of directors
decides to abandon the plan, the right of appraisal shall be
extinguished.
Any amendment to the plan of merger or consolidation may be made:
Provided, That such amendment is approved by a majority vote of the
respective boards of directors or trustees of all the constituents
corporations and ratified by the affirmative vote of stockholders
representing at least two-thirds (2/3) of the outstanding capital stock or
of two-thirds (2/3) of the members of each of the constituents
corporations. Such plan, together with any amendment, shall be
considered as the agreement of merger or consolidation.
Section 77. Articles of Merger or Consolidation. - After the approval
by the stockholders or members as required by the preceding section,
articles of merger or articles of consolidation shall be executed by each
of the constituent corporations, to be signed by the president or vice
president and certified by the secretary or assistant secretary of each
corporation setting forth
(a) The plan of the merger or the plan of consolidation;
(b) As to stock corporations, the number of shares outstanding, or in
the case of nonstock corporations, the number of members;
(c) As to each corporation, the number of shares or members voting for
or against such plan, respectively;
(d) The carrying amounts and fair values of the assets and liabilities of
the respective companies as of the agreed cut-off date;
(e) The method to be used in the merger or consolidation of accounts
of the companies;
(f) The provisional or pro forma values, as merged or consolidated,
using the accounting method; and
(g) Such other information as may be prescribed by the Commission.
Section 78. Effectivity of Merger or Consolidation. - The articles of
merger or of consolidation, signed and certified as required by this
Code, shall be submitted to the Commission for its approval: Provided,
That in the case of merger or consolidation of banks or banking
institutions, loan associations, trust companies, insurance companies,
public utilities, educational institutions, and other special corporations
governed by special laws, the favorable recommendation of the
appropriate government agency shall first be obtained. If the
Commission is satisfied that the merger or consolidation of the
corporations concerned is consistent with the provisions of this Code
and existing laws, it shall issue a certificate approving the articles and
plan or merger or of consolidation, at which time the merger or
consolidation shall be effective.
If upon investigation, the Commission has reason to believe that the
proposed merger or consolidation is contrary to or inconsistent with he
provisions of this Code or existing laws, it shall set a hearing to give
the corporations concerned the opportunity to be heard. Written notice
of the date, time, and place of hearing shall be given to each constituent
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corporation at least two (2) weeks before said hearing. The
Commission shall thereafter proceed as provided in this Code.
Section 79. Effects of Merger or Consolidation. - The merger of
consolidation shall have the following effects:
(a) The constituent corporations shall become a single corporation
shall become a single corporation which, in case of merger, shall be
the surviving corporation designated in the plan of merger; and in case
of consolidation, shall be the consolidated corporation designated in
the plan of consolidation;
(b) The separate existence of the constituent corporations shall cease,
except that of the surviving or the consolidated corporation;
(c) The surviving or the consolidated corporation shall possess all the
right, privileges, immunities and franchises of each constituent
corporation; and all real or personal property, all receivables due on
whatever account, including subscriptions to shares and other choses
in action, and every other interest of, belonging to, or due to each
constituents corporation, shall be deemed transferred to and vested in
such surviving or consolidated corporation as though such surviving or
consolidated corporation had itself incurred such liabilities or
obligations; and any pending claim, action or proceeding brought by
or against any constituent corporation may be prosecuted by or against
the surviving or consolidated corporation. The rights of creditors or
liens upon the property of such constituent corporations shall not be
impaired by the merger or consolidation.
Mergers and Consolidation are the 2 most common types of corporate
reorganization, and the reasons inducing a reorganization are not in
every case the same, but for the most part they can be found in a weak,
financial or insolvent conditions of the corporations involved, the
usual aim is to put the company on a sound financial standing to enable
it to answer its obligations and liabilities but in some cases, a
reorganization is effected notwithstanding the fact that the corporation
is very much solvent.
Take kindly for instance the case of Equitable and PCI then. They were
the top banking institutions in the country. They merged.
We also have BPI and FETCB then, they were also the top banking
institutions in the country. They merged so that the wil be able to be
more competitive with the foreign banking institutions that came to
Philippine shores in the 80s.
Purchase of assets - another form of reorganization. Merger or
consolidation may therefore be used not only as a means of expansion
or acquisition of business by another corporation , but also a method
of reorganization or of recapitalization.
- Example: Direct Lending Institutions then. Under the law
the minimum paid up capital of lending institutions was then
100k and the Financing Company Act came into the picture
the minimum paid up capital was placed at 10M in Metro
Manila and 5M in other cities.
Many companies were affected by this so they
gave a moratorium to these direct lending companies to
come up with a minimum paid up capital requirement for a
period of three (3) years or compel them to merge or
consolidate with other lending companies to come up with
the 10M paid capital for Metro Manila, 5M for other cities
or municipalities.
Some merged, while others opted to fold up so
they may be valid grounds for merger and consolidation.

MERGER - a union effected by absorbing one or more existing
corporations by another which survives and continues the combined
business.
It is the uniting of two or more corporations by the transfer
of property, rights or assets to one of them which continue in
existence, the other or the others being dissolved and merged therein.
Illustration of a merger: A and B are existing corporations.
- B transferred all his rights, assets and properties to A
- A issues shares of stocks to B
- B is dissolved
- A continues the combined business
- That is a merger
CONSOLIDATION - is the uniting or amalgamation of two or more
existing corporations to form a new one.
It signifies a union as necessarily results in the creation of a
new corporation and the termination of existence of old ones. The
united concern resulting from such union is called consolidated
corporation.
Illustration of a merger: A and B are existing corporations.
- They transferred all his rights, assets and properties to a
corporation that is still to be formed.
- C issues them shares of stocks
- A and B will be dissolved
CONSTITUENT CORPORATIONS the parties in a merger or
consolidation.
- The Constituent corp in a consolidation are all dissolved
- The Constituent corp in a merger are NOT all dissolved
because there is a surviving corporation which continues the
whole business.
Mergers and Consolidation Process - are affected by following the
requirements and procedures laid down under sections 75-78.
- The Board of its constituents shall approve a plan of merger
and/or consolidation, setting forth the matters under Section
75.
- The plan will be subject to the approval of ⅔ of the OCS or
of the members in non-stock of each constituent corporations
- Prior in accordance with Section 49 with a copy of the
summary of plan will be given to the stockholders or
members stating the purpose thereof.
- If approved by the stockholders or members there will be an
execution of articles of merger or consolidation by each
constituent corporation to be signed by the president and or
vice president and certified to by the corporate secretary
setting forth the matters under section 77.
- These articles of merger or consolidation will be filed and
submitted with SEc subject to the requirements of Sec 78
that if it involves corporations under the supervision of other
government agencies or governed by special law, the
favorable recommendation of the government agency
concerned must be secured
- Finally, the issuance of the certificate of merger and or
consolidation.
Note: If the plan is believed to be contrary to law, then the SEC shall
set a hearing and the commission shall proceed as provided for in the
code.
Although this power to enter into merger and consolidation is
granted to corporations registered under the code, there are,
however, restrictions and limitations:
1. Act No. 3518 proscribes illegal combinations - Sec 20
thereof states that if the purpose is to lessen competition or
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to restrain commerce or tend to create a monopoly of any
kind of business is ILLEGAL.
2. Art 186 of the RPC - imposes a penalty of imprisonment
and/or fine on any person in contracts to create monopolies
and combinations in restraint of trade.
EFFECTS OF MERGERS AND/OR CONSOLIDATION - there
will only be one single corporation:
1. The constituent corporations shall become a single
corporation which:
a. in case of merger, shall be the surviving or
absorbing corporation designated in the plan of
merger; and,
b. in case of consolidation, shall be the consolidated
corporation designated in the plan of
consolidation;
2. The separate existence of the constituent corporations shall
cease, because there will be a termination of the corporate
existence except that of the surviving and the consolidated
corporation;
3. The surviving or the consolidated corporation will possess
all the rights, privileges, immunities, and powers and shall
be subjected to all the duties and liabilities of a corporation
organized under this Code;
Note: Nos. 4 and 5 are the most important effects.
4. The surviving or the consolidated corporation shall possess
all the rights, privileges, immunities and franchises of each
constituent corporation; and all real or personal property, all
receivables due on whatever account, including
subscriptions to shares and other choses in action, and every
other interest of, belonging to, or due to each constituent
corporation, shall be deemed transferred to and vested in
such surviving or consolidated corporation without further
act or deed; and - meaning it is automatic.
5. The rights of creditors or liens upon the property of such
constituent corporations shall not be impaired by the merger
or consolidation.
Case: Assoc Bank v CA - On Sept 1977 defendant executed a PN in
favor of Assoc Bank, it is being enforced by the surviving bank. Assoc
bank was absorbed by the merger.
The issue raised here is that may the surviving bank enforce
the PN executed by the absorbed corporation.
Ruling: YES, because of the merger agreement that upon the
effectivity thereof, all references to the absorbed corporation shall be
deemed for all intents and purposes, references to the surviving bank
as if such were direct references to the absorbed company and even
w/o any agreement now in the plan or articles. of merger or
consolidation, it is now automatic under Section 79 item 4 (without
any further act and deed).
Case: Bank of P.I. v BPI Employees Union: The original decision
was that employees of the absorbed corporation are not automatically
absorbed by the surviving or absorbing corporation because it refers to
chattel, assets, rights and liabilities. Employees are not any of these
things.
There was however, one dissenting justice that said that they
should also be automatically absorbed by the absorbing corporation.
And in a motion for reconsideration, the ruling of the court
is that it is more in keeping with the dictates of social justice and State
policy of according full protection to labor to deem employment
contracts as automatically assumed by the surviving corporation in a
merge even in the absence of an express stipulation in the merger and
the merger plan.

It went further ruling however, that nothing in this resolution
shall impair the right of the employer from terminating the
employment of an absorbed employee for a lawful purpose or
authorized cause, or the right of such employee to resign, retire or
otherwise severe his employment either before or after the merger
subject to existing contractual obligations.
Case: Ong v. BPI Family Savings Bank - The Bank of
Southeast Asia merged with BPI Family Savings Bank.
Ong had a loan from the Bank of Southeast Asia prior to the
merger. The agreement stipulated that he shall be granted a credit
facility and 5M cash credit advance but only 2.5M was given to Ong.
Ong did not pay when the merger occurred.
After the merger, BPI Family Savings Bank intended to
enforce the loan.
The case went all the way up to the SC. Section 79, item 5
was applied by the SC. The surviving corporation shall be responsible
and liable for all liabilities and obligations of each of the constituent
corporations in the same manner as if such surviving or consolidated
corporation had itself incurred such liabilities or obligations.
Applying the pertinent provisions of the code, BPI did not
only acquire all the rights and privileges and assets of the Bank of
Southeast Asia but have likewise acquired all the liabilities and
obligations of the latter as if BPI itself incurred thus applying, DBP v
Agriculture and Realty Development, the debtor Ong cannot incur
delay unless the creditor has fully performed his reciprocal obligation.
Since the additional 2M of the cash loan has not yet been released to
the debtor, it has not yet incurred any delay and the foreclosure of the
property that was used as security cannot be had.
Note: There is no liquidation and winding up of the absorbed
corporation in a merger or consolidation. Liquidation and winding up
partakes the nature of collecting all assets, properties and rights, the
payment of all its debts and liabilities, and the ultimate distribution of
all his remaining assets to the stockholders in proportion to their
respective stock holdings.
Is there liquidation and winding up as to the absorbed corporation
or dissolved corporations in a merger and/or consolidation? - No,
there are no liabilities to pay, no assets to collect because they have
been transferred to the absorbing or consolidating corporation.
Note: Mergers and Consolidation will become valid and effective
ONLY UPON THE APPROVAL OF THE SEC UNDER SEC 78 1ST
PARAGRAPH.
DEC. 3 (E)
APPRAISAL RIGHTS
*Please don’t be confused with the right of the stockholder to exercise
his preemptive right vis-à-vis appraisal rights. For the past 20 years
of my teaching. About 20% at the least, are confused with these 2
rights.
Pre-emptive right, as we’ve said before, is a right granted by law to all
existing stockholders of a stock corporation to subscribe to all issues
or subsequent disposition of shares of any class, in order that they may
retain their proportionate interest in the corporation, that is by voting.
Appraisal right on the other hand is a right granted by law to dissenting
stockholders on certain corporate acts or transactions, and if he is
outvoted, he may demand the payment of the fair market value of the
shares. I said “a certain corporate act” because it is not available in any
and all instances, when the stockholder is outvoted and the corporate
act/transaction is passed. It is available only in instances provided for
by the Code.
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Q: when may a stockholder exercise his appraisal right?
A:
Under sec 80 it may only be exercised in cases of:
(a) amendment to the articles of incorporation has the effect of
changing or restricting the rights of any stockholder, authorizing
preferences in any respect superior to those of outstanding shares of
any class, or of extending or shortening the term of corporate
existence;
(b) In case of sale, lease, exchange, transfer, mortgage, pledge or other
disposition of all or substantially all of the corporate property and
assets;
(c) In case of merger or consolidation; and
(d) In case of investment of corporate funds for any purpose other than
the primary purpose of the corporation.
Q: How do you compare this with a stockholder of a closed
corporation who may for any reason may compell the closed
corporation that he be paid the fair value of the shares? (Check
104)
A:
SEC. 104. Withdrawal of Stockholder or Dissolution of Corporation.
– In addition and without prejudice to other rights and remedies
available under this Title, any stockholder of a close corporation may,
for any reason, compel the corporation to purchase shares held at fair
value, which shall not be less than the par or issued value, when the
corporation has sufficient assets in its books to cover its debts and
liabilities exclusive of capital stock: Provided, That any stockholder of
a close corporation may, by written petition to the Commission,
compel the dissolution of such corporation whenever any acts of the
directors, officers, or those in control of the corporation are illegal,
fraudulent, dishonest, oppressive or unfairly prejudicial to the
corporation or any stockholder, or whenever corporate assets are being
misapplied or wasted.
*In a close corporation, Sec 104 says “a stockholder may “for any
reason” compel the corporation that he be paid the fair market value of
his shares provided only that the closed corporation has sufficient
assets to cover its debts and liabilities, exclusive of capital stock”.
(We’ll get to that later)
Q: how is this right of appraisal exercised?
A: This right may be exercised if the stockholder will vote against a
certain corporate act, and if he is outvoted, he must make a written
demand for the payment of the fair value of his shares within 30 days
from the dissent. He must surrender his certificate of stock to the
corporation within 10 days for notation of such shares in the book of
the corporation and please observe that payment can only be made if
the corporation has unrestricted retained earnings. Upon payment of
the Fair Market Value, the shares will be transferred to the corporation.
In case of disagreement between the stockholder and the corporation,
they may appoint 3 disinterested persons in order to finalize the amount
or appraise the amount of the shares.
Q: and in this state, what happens?
A: Once the stockholder has been paid, his shares will be transferred
to the corporation
Q: At what point in time point in time the Fair Market Value
representing the shares objecting to the corporate act thereto be
determined? A. will it be on the date of the meeting. Or B. will it
be on the date of the written demand that he wants to be paid of
his FMV; or C. will it be on the date that he is paid of his FMV of
his shares.
A: none of the above, it must be on the date before the meeting where
the particular corporate act or transaction was taken.

Q: what if the corporation has no URE to pay the shares of the
dissenting SH, may the dissenting SH be paid the FMV of the
shares?
A: NO, because it is required that before an appraisal right would be
exercised, there must be an URE in the books of the corporation
Q: The BOD passed a resolution to transfer its principal office
from QC to Manila. A, who is amputated in both legs objected.
Kasi si A, katabi nya lang si principal office ng corporation. And
he’s been regularly attending the stockholders meetings in person.
Sabi nya, ‘hindi ako papayag kasi di nako makakaattend sa mga
SH meetings personally”. He objected to the transfer of the
principal office, but he was outvoted. Can he exercise his appraisal
right?
A: this is one of the instances where there might be a disagreement
between the corporation and the SH concerned as to whether /not he
can exercise his appraisal rights under the provisions of Sec. 84.
It says- when the proper forum finds that the SH is not entitled to
exercise the right. Sabi ni A, I can exercise my right, dahil for me, as
a SH, it changed/restricted my right. On the other hand, the
corporation may disagree with it in a case they’ve instituted in the
proper forum. In the proper forum, they’ll decide of course, they’ll
decide whether or not he can exercise that right.
Q: If you were the proper forum, can he exercise his appraisal
rights?
A: NO. If that is his only excuse that he is advancing, NO, because we
all know that meetings of SH if the principal office is located in metro
manila, may be held anywhere in metro manila.
* Of course, the situation would be different if the transfer of the
principal office is from QC to Marawi City, eh etong si A nakabuntis
pa syang muslim, di niya pinakasalan, umuwi yung Mus;lim sa
Marawi, sabi ng mga kapatid ng babae niya doon sa marawi, putang
ina mo huwag ka magpakita dito, putol yung gitna nya, putol na nga
dalawang paa nya, putulin din namin yung gitna, eh may phobia pa
siya mag eroplano or mag barko, if that’s the case then maybe he can.
Q: Under Section 104, it said that a SH may, for any reason,
compel the corporation that he be paid the fair value. So let’s go
back to our example to the change of principal office from QC to
Manila. A is a SH of a closed corporation, they transferred the
principal office from QC to Manila, he objected but he was
outvoted. Can he compel the corporation that he be paid the fair
value of the shares?
A: YES. Because in a closed corporation, a SH, for any reason, may
compel the corporation that he be paid the fair value of his shares.
Q: The closed corporation made 1M profits. But it has 500T to pay
its liabilities. The BOD decided that the remaining 500T be used
as reserve for possible contingencies, because they’re engaged in
manufacturing. They expect the oil prices to increase sooner or
later. The FMV of the shares of A is 500T. May the corporation
pay him the fair value of the shares?
A: YES.It may use the 500T reserve for possible contingencies.
Because the closed corporation cannot use its own capital to acquire
its own share. 104 only provides that provided, the corporation has
sufficient assets in its books to cover its debts and liabilities exclusive
of capital stock.
Q: May a SH with unpaid subscriptions be able to exercise his
appraisal rights?
A: Yes, he may, because of sec 71, subscribers to shares of stock not
fully paid and are not delinquent shall have all the rights of a
stockholder.
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Q: one of the requirements for the valid exercise of apprasal right
is that he must surrender the stock certificate for notation that
they are dissenting shares. What certifate of stock will he
surrender if he has no certificate? (Follow up sa previous question)
A: That requirement is at the option of the corporation. The
corporation may opt to not require the submission of the stock
certificate
Q: the corporation through the BOD passed a resolution to amend
the AOI changing the primary purpose from general construction
to realty, by buying and selling all types of real properties. A, a
managing director, who is a civil engineer objected. But he was
outvoted by the 4 other SH because they have relative and friends
in La Union who they know will be selling their properties that will
be traversed by the TPLEX extension. Of course A, objected but
was outvoted by the 4 other BOD/SH. Exactly 30 days from the
date of the meeting, A made a written demand for the payment of
the fair value of his shares. All of the SH were in the corporate
headquarters. He presented his written demand for the payment
of the fair value of the shares. The 5 of them agreed with and
among themselves that the FMV of the shares is 10M. A agreed
that it is 10M, but at the time that they have made the written
demand, the corporation already used up all its funds to acquire
properties in La Union. So A was not paid the FV of his shares. If
a SH exercises his appraisal right, what happens to his rights as a
SH?
A: Section 82.
SEC. 82. Effect of Demand and Termination of Right. – From the time
of demand for payment of the fair value of a stockholder’s shares until
either the abandonment of the corporate action involved or the
purchase of the said shares by the corporation, all rights accruing to
such shares, including voting and dividend rights, shall be suspended
in accordance with the provisions of this Code, except the right of such
stockholder to receive payment of the fair value thereof: Provided,
That if the dissenting stockholder is not paid the value of the said
shares within thirty (30) days after the award, the voting and dividend
rights shall immediately be restored.
Q: For how long will it be suspended?
A: 30 days after the award or the agreement that the fair value is “x”.
If not paid within 30 day after the award, the voting and dividend rights
will thereby be restored.
Q: So they’ve agreed last year that the FMV of the shares of A is
10M. Then he made the demand 30 days later, from the date of the
objection, the corporation has no more URE. So he was not able to
be paid the FMV of the shares because the corporation already
spent all its funds to acquire prperties in La Union. 1 year from
the date of his demand, the corporation made 110M URE. That’s
1 year from the demand. May the corporation now pay the FMV
of the shares of A that is 10M, and later on declare that the
remaining 100M URE as cash dividends to his exclusion?
A: YES, because he did not withdraw his demand for the payment of
the FMV of his shares, the other instance when the right to be paid of
the FMV of his shares of dissenting stockholder ceases is when he
withdraws his demand, with the consent of the corporation.
*once exercised, it is there forever. UNLESS the right to be paid the
FMV of the shares ceases under the provisions of the code. And even
if he may have withdrawn his demand for the payment of the FMV, I
wouldn’t think that the remaining 4 stockholders, who exerted efforts
to go to La union to acquire properties of their friends and relatives
will agree. Sila ang naghirap, habang si A, nakaupo sa rocking chair
nya, nagbabasa lang ng nobela. Sabi nung apat “tang ina mo, di mo
kami tinulungan bumili ng properties. Eto yung 10M mo. May tig 20M
kaming apat. Ay 100M divided by 4 *inaudible TS: 40:25*

*And the other instances when the right to payment of the FMV of the
shares of the dissenting stockholder who was outvoted ceases is under
section 83.
SEC. 83. When Right to Payment Ceases. – No demand for payment
under this Title may be withdrawn unless the corporation consents
thereto. If, however, such demand for payment is withdrawn with the
consent of the corporation, or if the proposed corporate action is
abandoned or rescinded by the corporation or disapproved by the
Commission where such approval is necessary, or if the Commission
determines that such stockholder is not entitled to the appraisal right,
then the right of the stockholder to be paid the fair value of the shares
shall cease, the status as the stockholder shall be restored, and all
dividend distributions which would have accrued on the shares shall
be paid to the stockholder.
Note: No demand for payment may be withdrawn unless the
corporation consents thereto.
INSTANCES WHEN THE RIGHT OF A DISSENTING
STOCKHOLDER TO BE PAID THE FAIR VALUE OF HIS
SHARES CEASES:
1. When he withdraws his demand for payment and the corporation
consents thereto;
2. When the proposed action is abandoned or rescinded by the
corporation;
3. When the proposed action is disapproved by the SEC where such
approval is necessary;
4. When the SEC determines that he is not entitled to exercise his
appraisal right;
*As I’ve said there might be instances where the stockholder will
exercise his right to the disagreement to the corporation. And there may
be a case instituted in the SEC. If the SEC says that he can/cannot
exercise his rights then so be it.
5. When he fails to submit the stock certificate within ten (10) days
from demand to the corporation for notation that such shares are
dissenting shares, note: at the option of the corporation (sec 85); and,
6. If the shares are transferred and the certificate subsequently
cancelled. (sec 85)
We proceed with Title XI- Non-stock Corporations
Title XI- Non-stock Corporations
SEC. 86. Definition. – For purposes of this Code and subject to its
provisions on dissolution, a non-stock corporation is one where no part
of its income is distributable as dividends to its members, trustees, or
officers: Provided, That any profit which a non-stock corporation may
obtain incidental to its operations shall, whenever necessary or proper,
be used for the furtherance of the purpose or purposes for which the
corporation was organized, subject to the provisions of this Title.
The provisions governing stock corporations, when pertinent, shall be
applicable to non-stock corporations, except as may be covered by
specific provisions of this Title.
*Under the definition of sec. 86 to 94, Non-stock corporation is one
where no part of its income is distributable as dividends to its members,
directors, or officers. This definition is just the reverse of Sec. 3
defining a stock corporation as one with capital stock divided into
shares and are authorized to distribute allotment of their surplus
package by way of dividends to the stockholders in proportion to their
respective stockholders (? TS: 45:30- *side comment: feeling ko shares
ibig sabihin ni Atty dito.)
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There may be a corporation with capital stock divided into shares. But
if it has no authority to distribute allotment of their surplus package by
way of dividends it is nonetheless and/or technically a non-stock
corporation. There is nothing however to bar non-stock corporations to
make profits. But if it makes profits, it may only be used in the
furtherance of their business because they cannot be distributed to its
shareholders or members.
Q: what provisions of the code apply to a non-stock
corporation(NSC)?
A: All the provisions under Title XI, including the provisions governing
stock corporations in accordance with the second paragraph of section
86.
The provisions governing stock corporations, when pertinent, shall be
applicable to non-stock corporations, except as may be covered by
specific provisions of this Title.
Q: How is the right to vote exercised in a NSC vis-à-vis stock
corporations?
A:
Under the provisions of 88, each member shall be entitled to one vote
per candidate. But however, there is also an express provision under
Title XI that says that the voting rights of the NSC may be broadened,
limited or denied by a provision in the AOI or bylaws. So the AOI may
also allow cumulative voting on the right of the members of a NSC.
Proxy voting can also be denied in a NSC because of their express
mandate. While it is also a matter of right in a stock corporation. And
just like in a stock corporation, the bylaws of a NSC may authorize
voting through remote communication or in absentia.
Q: what is the nature of membership in a NSC?
A: Generally, membership in a nonstock corporation is personal and
nontransferable, unless the AoI or by-laws provides otherwise. Like for
instance these club shares, Manila Gold Club, Manila Polo Club and
all the clubs. Their shares are transferrable.
Q: If they are transferrable, and their owner endorsed and
delivered their stock certificates to the transferee, will the
transferee have the same right, power or privilege to demand the
corporation that the transfer be recorded in his name in the books
of the corporation in the same manner, as the transferee of the
shares of stocks in a stock corporation may have?
A: Just like any transferee of shares in a stock corporation, YES, the
rules governing stock corporations when pertinent also applies to a
nonstock corporation, there is nothing in title XI governing the
transfer.
So, you go back to the general provision. The right of the transferee of
shares to record his name in the book of the corporation is an inherent
right flowing from his stock ownership. And if he is denied without
good cause it may be compelled to do so by mandamus. It is the duty
of the corporation to record transfers of shares, it is ministerial. The
operative act of transferring shares is indorsement and delivery of the
stock certificate, ones these are done, there is a valid transfer between
transferor and transferee
Q: is being a stockholder and being a member the same?
A: NO. not just yet, membership is acquired through compliance with
the standard set by nonstock corporation, they can set their own
criteria or standard in their admission of members.
Q: So, if A, the shareholder and member of Wack Wack Golf and
Country Club, transferred his shares to his driver, mag aabroad
na sya, di na sya makapaglaro, endorsed his stock certificates to
his driver, does he now have the same right to compel the Wack
Wack Golf and Country Club that the share be registered in his
name in the books of the corporation?
A: YES. YES. YES. 86 second paragraph.

Q: follow up- is the driver now a member?
A: NO. there you go. He can compel the corporation to record his
shares to the books of the corporation but he is NOT YET a member.
Because being a stockholder and being a member are two different
things.
*konting flex ng clubs kung san sya member*
Because club shares usually has different kinds of shares. In particular
instance, celebrity sports club has three types of shares. A-
share/Individual share where the holder may apply for a membership
either for himself, or for another person. B-share/partnership shares-
two nominees for membership. C-shares-maximum of 5. My client was
a holder of *idk how many C shares he has* I was one of the nominees
of his C share and became a member, but I did not become a
stockholder. Because being a stockholder and being a member are two
different things. But he may consider, for instance, this exclusive club
shares, even your financial status or standing before they admit you as
a member.
*Chika about di tinanggap na member si Manny Pacquaio sa Manila
Polo Club*
*Side comment: nakakainis yung nagrerecite daming side comment
nakakaumay sa tenga.
Being a stockholder and being a member are two different things. We
have the case of Cebu Country Club versus Elizagaque.
Cebu Country Club, Inc. vs. Elizagaque, 542 SCRA 65, G.R. No.
160273 January 18, 2008
Human Relations; Principle of Abuse of Rights; Damages;
Corporation Law; While the Board of Directors, under the Articles of
Incorporation of a non-profit and non-stock membership club, may
have the right to approve or disapprove an application for proprietary
membership, right should not be exercised arbitrarily.—As shown by
the records, the Board adopted a secret balloting known as the “black
ball system” of voting wherein each member will drop a ball in the
ballot box. A white ball represents conformity to the admission of an
applicant, while a black ball means disapproval. Pursuant to Section
3(c), as amended, cited above, a unanimous vote of the directors is
required. When respondent’s application for proprietary membership
was voted upon during the Board meeting on July 30, 1997, the ballot
box contained one (1) black ball. Thus, for lack of unanimity, his
application was disapproved. Obviously, the CCCI Board of Directors,
under its Articles of Incorporation, has the right to approve or
disapprove an application for proprietary membership. But such right
should not be exercised arbitrarily. Articles 19 and 21 of the Civil Code
on the Chapter on Human Relations provide restrictions, thus: Article
19. Every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and
observe honesty and good faith. Article 21. Any person who willfully
causes loss or injury to another in a manner that is contrary to morals,
good customs or public policy shall compensate the latter for the
damage.
Same; Same; Same; Same; A right, though by itself legal because
recognized or granted by law as such, may nevertheless become the
source of some illegality—when a right is exercised in a manner which
does not conform with the norms enshrined in Article 19 and results in
damage to another, a legal wrong is thereby committed for which the
wrongdoer must be held responsible.—In GF Equity, Inc. v.
Valenzona, 462 SCRA 466 (2005), we expounded Article 19 and
correlated it with Article 21, thus: This article, known to contain what
is commonly referred to as the principle of abuse of rights, sets certain
standards which must be observed not only in the exercise of one’s
rights but also in the performance of one’s duties. These standards are
the following: to act with justice; to give everyone his due; and to
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 111
observe honesty and good faith. The law, therefore, recognizes a
primordial limitation on all rights; that in their exercise, the norms of
human conduct set forth in Article 19 must be observed. A right,
though by itself legal because recognized or granted by law as such,
may nevertheless become the source of some illegality. When a right
is exercised in a manner which does not conform with the norms
enshrined in Article 19 and results in damage to another, a legal wrong
is thereby committed for which the wrongdoer must be held
responsible. But while Article 19 lays down a rule of conduct for the
government of human relations and for the maintenance of social
order, it does not provide a remedy for its violation. Generally, an
action for damages under either Article 20 or Article 21 would be
proper. (Emphasis in the original)
Same; Same; Same; Same; The Court cannot fathom why a prestigious
and exclusive golf country club, like the petitioner Cebu Country Club,
Inc., whose members are all affluent, did not have enough money to
cause the printing of an updated application form.—It bears stressing
that the amendment to Section 3(c) of CCCI’s Amended By-Laws
requiring the unanimous vote of the directors present at a special or
regular meeting was not printed on the application form respondent
filled and submitted to CCCI. What was printed thereon was the
original provision of Section 3(c) which was silent on the required
number of votes needed for admission of an applicant as a proprietary
member. Petitioners explained that the amendment was not printed on
the application form due to economic reasons. We find this excuse
flimsy and unconvincing. Such amendment, aside from being
extremely significant, was introduced way back in 1978 or almost
twenty (20) years before respondent filed his application. We cannot
fathom why such a prestigious and exclusive golf country club, like the
CCCI, whose members are all affluent, did not have enough money to
cause the printing of an updated application form.
*Elizagaque in this case is a stockholder of Cebu Country Club. And
as we were saying, being a stockholder and being a member are two
different things. So he applied for a membership in Cebu Country
Club. So that he may avail of the facilities of the country club.
September 6, 1966. In the meeting of the board on April 1967, action
on his application was deferred. It was only on July 30, 1967 that the
application was voted upon. Then august 1, 1967, the respondent
received a letter through the corporate secretary advising him that his
application was disapproved. August 6, of the same year, he sent a
letter for reconsideration but the club did not answer. So another MR
was submitted, still the club kept silent. November 5, 1967, respondent
wrote a letter, whether any of the three man membership committed
objected his application, but again remained unanswered thus the
institution of the case. The case went all the way to the SC. The SC
acknowledged the fact that a non-profit non-stock membership club
may have the right to approve or disapprove members for proprietary
membership. BUT the right should not be exercised ARBITRARILY.
The application filled up by Elizagaque WAS THE OLD ONE. There
was no votes required so that he may be admitted as such. The usual
case then, that the majority vote of the membership board committee
is the only requirement BUT that AOI was amended 20 years before
he applied for membership. The amendment of the AOI now requires
the unanimous vote of the membership committee. He got 2 of 3 during
the meeting where the application was considered. The petitioner club
explained that the amendment was not printed on the application form
due to economic reasons. The SC found the excuse flimsy and
unconvincing. It held that such amendment, aside from extremely
significant, was introduced almost 20 years before Elizagaque filed his
application and ruled further that they cannot fathom why such a
prestigious and exclusive gold and country club whose members are
all affluent did not have enough money to cost its printing. The SC
applied the provisions of Article 19 of the civil code. Every person
must, in the exercise of his rights and in the performance of his duties,
act with justice, give everyone his due, and observe honesty and good

faith. So much so that the Sc directed the club to admit him as member
thereto.
Of course, membership may also be terminated on causes provided for
by the AOI or bylaws under section 90 of the Code.
The trustees are normally the governing board of the NSC. As we were
saying then, they may be, by any other appropriate name under Sec.
174. It can be the BOD, board of regents, etc etc.
Q: What are the qualifications and disqualifications for
membership in the board in a NSC?
A: for the qualifications- Section 91
QUALIFICATIONS OF TRUSTEES:
1. He is a member of the association, except if he is an independent
trustee of a nonstock corporation vested with public interest; and
2. Such other qualifications as may be provided for in the by-laws.
NOTE: as to the NUMBER OF TRUSTEES- The number of trustees
shall be fixed in the articles of incorporation or bylaws which may or
may not be more than fifteen (15).
SEC. 91. Election and Term of Trustees. – The number of trustees
shall be fixed in the articles of incorporation or bylaws which may or
may not be more than fifteen (15). They shall hold office for not more
than three (3) years until their successors are elected and qualified.
Trustees elected to fill vacancies occurring before the expiration of a
particular term shall hold office only for the unexpired period.
Except with respect to independent trustees of nonstock corporations
vested with public interest, only a member of the corporation shall be
elected as trustee.
Unless otherwise provided in the articles of incorporation or the
bylaws, the members may directly elect officers of a nonstock
corporation.
For the disqualifications, sec. 26 shall apply
SEC. 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 in
paragraphs (a) and (b) above.
The foregoing is without prejudice to qualifications or other
disqualifications, which the Commission, the primary regulatory
agency, or the Philippine Competition Commission may impose in its
promotion of good corporate governance or as a sanction in its
administrative proceedings.
Q: how many members should there be?
A: MAY or MAY NOT be more than 15. The provision is categorical
Q: What should be their term of office?
A: should not exceed 3 years
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Q: so their term may be 3 years?
A: yes as long as it does not exceed 3.
*So if that may be the case under your provisions in the code, they
shall organize themselves, that at least 1/3 of their number should
expire every year. Meaning, every year, there will be an election to fill
up the vacancies of 1/3 of their number.
(sabi ni sir TS 1:15:50 PEROOOO sabi sa amendments, deleted na
tong by batch na 1/3 na expiration huhu check nyo nalang. Sec 92 sa
old code, sec 91 sa new)
Q: How are the officers of the non-stock corporation may be
elected?
A: Unless otherwise provided in the articles of incorporation or the
bylaws, the members may directly elect officers of a nonstock
corporation. As compared to the stock corporation whereby the
corporate officers are elected by the BOD.
Q: where should meetings of a NSC be held?
A: Section 92
SEC. 92. List of Members and Proxies, Place of Meetings. – The
corporation shall, at all times, keep a list of its members and their
proxies in the form the Commission may require. The list shall be
updated to reflect the members and proxies of record twenty (20) days
prior to any scheduled election.
The bylaws may provide that the members of a nonstock corporation
may hold their regular or special meetings at any place even outside
the place where the principal office of the corporation is located:
Provided, That proper notice is sent to all members indicating the date,
time and place of the meeting: Provided, further, That the place of
meeting shall be within Philippine territory.
*Section 92 provides that the bylaws may provide that the members of
a nonstock corporation may hold their regular or special meetings at
any place in the Philippines. As compare to stock corporation, at the
principal office if practicable, if not practicable then anywhere within
the territorial boundaries of the principal office.
It is inserted in the then corporation code. This happened to the
National Public School Teacher Association. They held their meeting
in Baguio City while their principal office is in QC. The meeting was
declared null and void. So much so, that when the corporation code
came into the picture, they granted NSC to validly provide in their
bylaws that members meetings may be held anywhere in the
Philippines. Because there may be instances when these national
associations may have to go to different regions to address the concerns
of their constituents, so the bylaws now may provide that their
meetings may be held anywhere in the Philippines.
Q: What if the bylaws did not provide that their meetings may be
held anywhere in the Philippines, may they do so?
A:NO. 86 second paragraph.
PLACE OF MEETING: General Rule: Any place in the Municipality
or City where the principal office is located.
Exception: The bylaws may provide that the members of a nonstock
corporation may hold their regular or special meetings at any place
even outside the place where the principal office of the corporation is
located:
1. Provided, that proper notice is sent to all members indicating the
date, time and place of the
meeting:
2. Provided, further, that the place of meeting shall be within
Philippine territory.

*section 92 only allows NSC to validly provide in their bylaws that
they may hold their meetings anywhere in the Philippines. If there’s no
provision, the general rule applying to a stock corporation shall apply.
Section 50 of the code says that the stockholders or members’ meetings
shall be held at the principal office of the corporation. If not
practicable, it may be held at any place in the city or municipality
where the principal office is located.
Q: In case of dissolution of a NSC, how will the remaining
corporate assets and/or properties of the dissolved NSC be
distributed?
A: Section 93
SEC. 93. Rules of Distribution. – The assets of a nonstock
corporation undergoing the process of dissolution for reasons other
than those set forth in Section 139 of this Code, shall be applied and
distributed as follows:
(a) All liabilities and obligations of the corporation shall be paid,
satisfied and discharged, or adequate provision shall be made therefor;
(b) Assets held by the corporation upon a condition requiring return,
transfer or conveyance, and which condition occurs by reason of the
dissolution, shall be returned, transferred or conveyed in accordance
with such requirements;
(c) Assets received and held by the corporation subject to limitations
permitting their use only for charitable, religious, benevolent,
educational or similar purposes, but not held upon a condition
requiring return, transfer or conveyance by reason of the dissolution,
shall be transferred or conveyed to one (1) or more corporations,
societies or organizations engaged in activities in the Philippines
substantially similar to those of the dissolving corporation according
to a plan of distribution adopted pursuant to this Chapter;
(d) Assets other than those mentioned in the preceding paragraphs, if
any, shall be distributed in accordance with the provisions of the
articles of incorporation or the bylaws, to the extent that the articles of
incorporation or the bylaws determine the distributive rights of
members, or any class or classes of members, or provide for
distribution; and
(e) In any other case, assets may be distributed to such persons,
societies, organizations or corporations, whether or not organized for
profit, as may be specified in a plan of distribution adopted pursuant to
this Chapter.
Q: May they be distributed to the members?
A: YES. If the bylaws and AOI so provides that the members have
distributive rights.
*ONLY if their distributive rights in accordance with the AOI or the
Bylaws, if there is none, may they receive an aliquot part of the
remaining assets or properties? NO if that be the case, it shall be
transferred to a corporation of similar purpose and the distributive plan
must be as specified under sec 94-by the majority vote of the members
of the board and 2/3 vote of the members with voting rights unlike in
a stock corporation where it is automatic that the stockholders will
have distributive rights of the remaining assets or properties of the
dissolved corporation in proportion to their respective stockholdings.
So much so, that in most of this, their AOI or bylaws provode for
distributive rights of the stockholders or members.
Imagine for instance if wack wack Gold and Country Club, manila polo
club and Manila Golf Club will be dissolved-ang mamahal ng mga
properties nay an. If the members do not have distributive rights they
will not be entitled to any. Many for instance, if not most of them, the
members have distributive rights.
SEC. 94. Plan of Distribution of Assets. – A plan providing for the
distribution of assets, consistent with the provisions of this Title, may
be adopted by a nonstock corporation in the process of dissolution in
the following manner:
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a) The board of trustees shall, by majority vote, adopt a resolution
recommending a plan of distribution and directing the submission
thereof to a vote at a regular or special meeting of members having
voting rights;
b) Each member entitled to vote shall be given a written notice setting
forth the proposed plan of distribution or a summary thereof and the
date, time and place of such meeting within the time and in the manner
provided in this Code for the giving of notice of meetings; and
c) Such plan of distribution shall be adopted upon approval of at least
two-thirds (2/3) of the members having voting rights present or
represented by proxy at such meeting.
TITLE XII- CLOSE CORPORATIONS
Title XII is applicable only to close corporation. To reiterate, different
corporations governed by different provisions of the code. This title
XII applies only to Close corporation. Supplemented of course by
provisions governing stock corporations.
Title XII was inserted by the framers of the then BP 68, prior thereto
we did not have any provision regarding this type of a corporation and
when this was inserted to the corporation code, it would appear now
that most of the advantages that attach to the partnership form of
business can now be availed of by the formation of a corporation
known as the close corporation. For the business associates belong to
small closely knit group, like a family for instance, they usually prefer
to keep the business organization exclusively and will not welcome
strangers to interfere with their corporate affairs, since it is through
their efforts and managerial skills that they expect the business to grow
and prosper, despite understandable, why they do not welcome
strangers to come in and interfere with the management of the
corporation thereof and will share whatever profits the company may
earn, wishing to avail themselves of limiting their liability for business
reversals to the amount of their respective subscription or promised
contributions, which would have otherwise may have formed a
partnership. Because we noted then that a general partner will always
be a generally liable for all debts and liabilities incurred by the
partnership, that is why a close corporation is availed of.
However, the identity of the stockholder is important to his associates,
so that although they may consider their organization as a corporation
in their dealings with third persons, between and among themselves
they feel and act like partners. The old notion of family corporation
was supposed to have been organized that way. But there were no
safeguarding provisions in the old law, to guarantee the continued
existence of the family corporation as may have been intended by the
stockholders.
There were no provisions required as to the number of stockholders.
95 says that no more than 20. If it exceeds that, then it is no longer
considered as a closed corporation. There was also no specific
restriction as to who may qualify as stockholder. 95 says, not more than
20 specified stockholders. So if you are not one of those specified you
cannot be a stockholder. Although restrictions and preferences, such as
the right of first refusal was allowed under Act No 1459 then or the
corporation law, they were merely directive or permissive in the old
law, the present one requires and mandates that all of the shares of
stock of a close corporation of any class shall be subjected to one or
more specified restrictions allowed by the code. And shares of stocks
of family corporation under the then corporation law, were not
prohibited to be listed in the stock exchanged nor were they restricted
to offer their shares to the public.
As you may gather from Sec 95, it defines a close corporation as one
whose articles of incorporation provides for the 3 qualifying conditions
to be indicated thereafter. Absent anyone of them they will not be
considered legally and technically as a close corporation.

1. all of the corporations issued stock, exclusive of treasury shares,
shall be held of record by not more than 20 specified persons.
2. All the issued stock of all classes shall be subjected to one or more
specified restrictions on the transfer permitted by this code; and
3. the corporation shall not list in any stock exchange or make any
public offering of its stocks of any class.
That was the point in time when we still have 2 stockexchanges. We
only have one now.
The codal definition however, fails to mention what is perhaps the most
characteristic feature of a close corporation, that is “the identity of
stock ownership and active management”. It is most if not all of the
stockholder, take an active participation in the management of the
corporation either as directors, officers or even as partners in
management. This in fact is its main distinction from the other ordinary
corporations, where the stockholders hardly participate in the
management of the corporation, except perhaps their power or
authority to elect the directors who are to manage the corporation.
The ultimate effect of the special provision on close corporation is to
furnish another form of business organization in our jurisprudence. My
former professor calls it a de facto partnership with corporate share.
Others refers to it as a hybrid of both the corporate and partnership
form of business. While others still refer to it as an incorporated
partnership or a de jure corporation but a de facto partnership.
This is because sec 96 allows a close corporation to do away with the
board of directors, vesting the management of the corporate affairs
directly to the stockholders themselves and anyone of them may bind
the corporation just like partnership form of business
Likewise, even subparagraph 3 of section 99 considers a written
agreement of the stockholder, relating to any phase of corporate affairs,
making the stockholders as partners between and among themselves
valid and enforceable. And this will be true even if the agreement
relates the conduct of the business and affairs thereof, which are
normally matters addressed to the competence or sound discretion of
the board. As we were saying then, stockholders shall have all the
profits but in return turn the management of the corporate affairs to the
governing board of directors. But the significant difference between a
close corporation and the ordinary stock corporation is that, the
stockholder of a close corporation who will take an active participation
in the management of corporate affairs are made personally liable for
corporate torts unless the corporation has obtained a reasonably
adequate liability insurance under section 99. However, they still enjoy
limited liability, insofar as other corporate obligations are concerned.
Under section 95 it is clear to what close corporation is or are, for that
matter. They must contain all the three provisions required to be
indicated in the articles of incorporation. Take anyone of them, it will
not be a closed corporation and will thus be governed by the general
provisions pertaining to ordinary stock corporations.
It would seem, however, that the corporation may in fact be a close one
by deliberately omitting anyone of the provisions required in section
95, thereby avoiding at the same time the liability imposed on the
stockholders for corporate torts. However, it would not be legally
considered a close corporation, and would not thus be governed by the
provisions of title XII but rather the general provision applicable to
ordinary stock corporation.
The same section 95 provides that it cannot be considered a close
corporation when at least 2/3 of its voting stocks is owned or controlled
by another corporation which is not a close corporation within the
meaning of this code, note the words “voting stocks”. Notably
therefore even if another owns or controls 2/3 or more of the capital
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 114
stocks, if they are non-voting stocks, the formation or organization of
a close corporation will still be possible. And even if they may be
voting stocks if the corporation owning or holding the share (2/3) it can
still be organized as a close corporation. But not any type of a
corporation, business undertaking, may be formed as a close
corporation.
Sec 95 says that mining or oil companies, stock exchanges, banks,
insurance companies, public utilities, educational institutions and
corporations declared to be vested with public interest cannot however
be formed or
organized as a closed corporation. In banks for instance, under the
General Banking Act, no more than 20% of the voting stocks may be
owned by relatives within the 3rd degree of affinity or consanguinity.
Sec 176 of the code has laid down a similar punishment by authorizing
the NEDA to recommend to the legislature the setting of maximum
limits for stock ownership of individuals or groups of stocks vested
with public interest and the determination of whether or not it should
be vested with public interest is within the domain of the NEDA.
DEC. 8 - NO CLASS
DEC. 10 (T)
TITLE XII: CLOSED CORPORATION
Definition
Section 95. Definition and Applicability of Title. - A close corporation,
within the meaning of this Code, is one whose articles of incorporation
provides that: (a) all the corporation's issued stock of all classes,
exclusive of treasury shares, shall be held of record by not more than a
specified number of persons, not exceeding twenty (20); (b) all the
issued stock of all classes shall be subject to one (1) or more specified
restrictions on transfer permitted by this Title; and (c) the corporation
shall not list in any stock exchange or make any public offering of its
stocks of any class. Notwithstanding the foregoing, a corporation shall
not be deemed a close corporation when at least two-thirds (2/3) of its
voting stock or voting rights is owned or controlled by another
corporation which is not a close corporation within the meaning of this
Code.
Any corporation may be incorporated as a close corporation, except
mining or oil companies, stock exchanges, banks, insurance
companies, public utilities, educational institutions and corporations
declared to be vested with public interest in accordance with the
provisions of this Code.
The provisions of this Title shall primarily govern close
corporations: Provided, That other Titles shall primarily govern close
corporations: Provided, That other Titles in this Code shall apply
suppletorily, except as otherwise provided under this Title.
[No audio]…to be held of record only by the incorporators and their
relatives within 3rd degree of affinity/consanguinity. Common B to be
held only by the relatives of a shareholders within the 5th degree of
affinity/consanguity. Common C to be held only by the close business
associates of a shareholder. We have to take note of this because I have
no blackboard to illustrate it.
Sec. 95 provides that all of its shares of any class shall be subjected to
1 or more restrictions on transfers of shares. So much so that all these
3 common shares, A, B and C must have restrictions on the transfer of
shares for its debt.

Let’s say, it provides for instance, that the holder of Common A shares
sell or transfer the shares of stocks shall first offer the same to the
existing stockholders of A shares. If there are no takers, the corporation
itself. If the corporation is not willing to acquire it, then it may sell or
transfer them to any other person.
Same is true with the B share holders. If the shareholder of B shares
will sell and transfer the shares, it must first offer them to the existing
B shareholders. If there are no takers, then the corporation shall take
it. If not, then the corporation may transfer it to any other person.
The same is true with the Common C shareholders. It must first be
offered to the existing C shareholders, specifying the period of time in
which they exercise their preferential right. If no taker, corporation
itself. If not, it may be transferred to any other person.
So you have (1) all of the shares of any class which shall be subjected
to one or more specified restrictions allowed by the code, allowed by
Section 95. Of course, (2) the number of stockholders shall not exceed
20. And the third requirement, (3) it shall not list in any stock exchange
or make any public offering of its stocks of any class. If those 3
provisions are all contained in the AOI, and the SEC issues the COI, it
is a Closed Corporation.
Permissive Provisions
Section 96. Articles of Incorporation. - The articles of incorporation
of a close corporation may provide for:
(a) A classification of shares or rights, the qualifications for owning or
holding the same, and restrictions on their transfers, subject to the
provisions of the following section;
(b) A classification of director into one (1) or more classes, each of
whom may be voted for and elected solely by a particular class of
stock; and
(c) Greater quorum or voting requirements in the meetings of
stockholders or directors than those provided in this Code.
The articles of incorporation of a close corporation may provide that
the business of the corporation may provide that the business of the
corporation shall be managed by the stockholders of the corporation
rather than by a board of directors. So long as this provision continues
in effect, no meeting of stockholders need be called to elect
directors: Provided, That the stockholders of the corporation shall be
deemed to be directors for the purpose of applying the provisions of
this Code, unless the context clearly requires otherwise: Provided,
further, That the stockholders of the corporation shall be subject to all
liabilities of directors.
The articles of incorporation may likewise provide that all officers ro
employees or that specified officers or employees shall be elected or
appointed by the stockholders, instead of by the board of directors.
Permissive Provision 1: “A classification of shares or rights, the
qualifications for owning or holding the same, and restrictions on their
transfers, subject to the provisions of the following section”
Permissive Provision 2: “A classification of director into one (1) or
more classes, each of whom may be voted for and elected solely by a
particular class of stock”
This means that the close corporation has for instance 100 Class A
shares. 100 Common A shares, 50 Common B shares, and 20 Common
C shares. The AOI may provide that its class shall have a rightful
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 115
representation in the board regardless of the number of shares within
its class.
Thus, if the closed corporation has 5 directors, it may allocate 3 seats
for the A shareholders, 1 each for B and C shareholders. Within its
class, cumulative voting may also be exercised by the stockholders of
that particular class of shares to elect their respective representatives
in the BOD. Let us assume that A has 20 A shares, 3 to be elected from
the A shareholders. 20 times 3 is 60, A has 60 votes. A may cast those
vote to only 1 candidate or distribute them to as many candidates as he
deems fit. Same is true with the B and C shareholders, but to the extent
that its class can elect its own directors regardless of the number of
shares in that particular class of share. Cumulative voting is, in effect,
restricted. Why? Because if cumulative voting is exercised in its fullest
extent, the A shareholders having 100 shares, multiply that by 5 is 500
votes, and can elect atleast 3 members of the vote [500/3 is 166.66]. B
shares having 50 shares multiply that by 5 directors is 250 votes, and
can elect the remaining 2 members of the board. C having only 20
shares cannot elect any because they only have 100 votes. But to the
extent that AOI may validly provide that it may classify the directors
into 1 or more process, to be elected solely by a particular class of
shares, irrespective of the number of shares they may have in that
particular class of shares. The C shareholders cannot be denied of
atleast 1 seat in the board. So to that extent, cumulative voting may
effectively be limited or restricted in a close corporation.
Permissive Provision 3:” Greater quorum or voting requirements in
the meetings of stockholders or directors than those provided in this
Code.”
Although the AOI or by-laws of other stock corporations may provide
for a greater quorum or voting requirements in directors meeting under
Sec. 52, those for stockholders meeting cannot be altered or increased.
This provision, in effect, increases the veto power of the minority
stockholders or non-stock corporations. Under the code, investment of
corporate funds in another business or purpose other than the primary
purpose would require the vote of atleast 2/3 of the OSC. However, in
a close corporation, it may require ¾ vote. 2/3 is 66.661%; ¾ is 75%.
The AOI may likewise provide that the business of the corporation may
be managed by the stockholders themselves rather than the BOD. It
may do away with the BOD. However, their liability would be more
extensive in that they are personally liable for corporate torts, unless
the corporation has obtained a reasonably adequate liability insurance.
As distinguished from ordinary stock corporation, directors thereof are
liable for corporate torts only if they have acted fraudulently, in bad
faith or in gross negligence of the performance of their duties.
Lastly, the officers and or even employees of a closed corporation are
likewise allowed to be elected by the stockholders instead of the BOD
as required in ordinary stock corporations. So you have 2 exceptions:
GR: other corporate officers such as president, secretary, treasure are
to be elected by the BOD
XPNs:
1. Non-Stock Corporation – Title 11 says “unless the AOI or by-laws
provide otherwise, they are to be elected directly by the members”
2. Closed Corporation – “unless the AOI or by-laws provide otherwise,
they are to be elected directly by the stockholders” and it includes the
employees
And as regards to restrictions to the transfer of shares, the same must
appear (1) in the AOI, (2) in all the Stock Certificates issued by the
corporation, (3) and in the bylaws. Absent any one of it, it will not be
binding to any purchaser in good faith. In ordinary Stock Corporation
restriction on transfer of shares will be valid if it is indicated in its AOI
and in all of its Stock Certificate issued by the corporation. The
restriction shall not however be more onerous than granting the
existing stockholders or the corporation itself the preferential right of

purchasing the shares of a selling stockholder, within reasonable terms,
conditions, or period stated. If after the expiration of the period, the
stockholder or the corporation fails to exercise their option, the selling
stockholder may transfer it to any other third person.
Q: What happens if the transfer of shares will have the effect of a
breach of the qualifying condition indicated in the AOI, the bylaws,
and/or the stock certificate? Will the transferee of shares of stocks in
a closed corporation have the same right and/or privilege to compel
the corporation that the transfer be recorded in the books of the closed
corporation, like the other stockholders in other corporation? Like we
have said, in the case of Rural Bank v. Salinas, the right of the
transferee to have the transferee to record the transfer in the book of
the corporation, is an inherent right and if it’s refused without good
cause it may be compelled by mandamus.
A: NO. That’s what Sec. 98 says. For instance: “A” is a shareholder of
20 shares, he wants out, so he offers his shares to the stockholders.
There were no takers, so he also offered it to the corporation which is
also not in a position to acquire the shares, so he sells his 20 shares to
X and Y at 10 shares each, there are already 20 stockholders, including
A. A endorsed and delivered this stock certificate in favor of X and Y.
But X and Y are not qualified to be stockholders A’s shares. They’re
not incorporators nor relatives up to the 3rd degree of
affinity/consanguinity. Sec. 98 says, the corporation can refuse its
registration because the transferees will be conclusively presumed to
know of their ineligibility to be a stockholders, unless ALL
stockholders will consent thereof. Meaning, a the objection of any
stockholder, the corporation cannot register the transfer. If we will
admit X and Y, it will no longer be a closed corporation. If all
stockholders will consent thereto, the AOI shall be amended but it will
no longer be a closed corporation because there will now be 21
stockholders.
Q: If that is the case, what is the remedy available to the transferees?
A: Section 98 says RECISION, which results to a mutual restitution.
Agreements may also be entered into by and between by stockholders
of a closed corporation regarding the operation of the business of the
company which ordinarily would not be valid and binding in other
corporations. It’s because, other stockholders agreement in ordinary
stock corporations cannot limit the discretion of the board.
In fact, under Section 99 (c), they can also agree to make them partners
between and among themselves. That is why I’ve said that close
corporation is akin to the partnership form of business also.
Another distinctive provision and feature of a closed corporation is that
the directors may validly act even without a meeting. Subject only to
the conditions provided for under Sec. 100. In ordinary stock
corporations, the directors must, as a rule, sit and act as a body at a
duly constituted meeting to have a valid corporate act or transaction.
Then again, we have Sec. 30- Pre-emptive Rights. There is nothing
also under Title 12 that would bar a closed corporation from denying
pre-emptive rights of a stockholders. The general provision of the code
would also apply unless covered specifically by Title 12. Under the
general rule in (*) pre-emptive right, it is not denied by a provision of
AOI. Stockholders in ordinary stock corporation cannot exercise their
pre-emptive right. When (1) the shares are to be issued in compliance
with the law requiring minimum stock ownership by the public, or (2)
if the shares are to be issued either in exchange of the property needed
by the corporation, or (3) in payment of previously incurred
indebtedness. Those are the exceptions when a corporation and a
stockholder even if it is not denied by a provision in the AOI cannot
exercise their pre-emptive rights, but, that exception cannot apply to
the stockholder of a closed corporation if it is not denied by the AOI
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 116
the right of pre-emption. The stockholder of a stock corporation has an
absolute right to exercise his pre-emptive right. Why? Because of
Section 101, it says even for money, property or in payment of debts,
the stockholder of a closed corporation can exercise his pre-emptive
right. That is if it’s not denied by a provision of the articles of
incorporation. How about the first exception, shares issued in
compliance with the law complying minimum public ownership? That
will not also apply because there's no such thing as public offering in
closed corporation under Sec. 95 (c) – “the corporation shall not list in
any stock exchange or make any public offering of its stocks of any
class”.
In addition, a stockholder in a closed corporation may, for any reason,
compel the closed corporation to acquire shares which shall not be less
than par value. It also says, provided only that the corporation has
sufficient assets to cover its debts and liablitites exclusive of capital
stock under Sec. 104. In ordinary corporation, the stockholder cannot
get back its investment except in the exercise of the appraisal right or
if he sells his shares. A corporation amends the articles of
incorporation, changing the principal office from QC to Manila. “A”,
one of the stockholders objected because he’s amputated and the
principal office of the corporation is presently located just behind his
house in QC. He’s been attending meeting of stockholders every time
and taking active participation thereof. If this is an ordinary stock
corporation, this reason cannot hold water because meetings of
stockholders may be held in Metro Manila. In a closed corporation, A
can compel the corporation to pay the fair value of the shares because
Sec. 104 says “for any reason”. Of course there’s a general condition
by which the corporation may be able to pay the shares of the
stockholder seeking the payment of the value of the shares: it must
have unrestricted retained earnings.
Q: A objected to the transfer of principal office from QC to Manila. In
the preceding year, the corporation made profit of 1M Pesos. The
corporation has 500k liability to pay. The BOD decided that the
remainder of the profits shall be used as reserves for possible
contingencies. It is engaged in the manufacturing concern and it needs
oil in order that the corporation may continue its business. And the
corporation is expecting that the oil prices would increase in the near
future. Meaning all the 1M profits are already restricted. May the
corporation pay A the 100K fair market value of his shares?
A: Yes. It can use the 500k reserved. It can never use its capital stock
because it only says “provided only that the corporation has sufficient
debts, liabilities and assets exclusive of capital stock”. If it were an
ordinary corporation, generally NO. Because if they are redeemable
shares, it can even use its capital stock.
As regards amendments of the articles of incorporation, a special
provision is provided for in Section 102 of Title XII—just read it.
As we were saying in Section 96, it allows a close corporation to
provide in its AOI or by-laws, for greater quorum or voting
requirements in both directors and SH meetings. Such article may also
provide the management of the corporate affairs shall be vested with
the SH rather than with the BOD. The presence of this provisions and
the fact that in a close corporation the balance and control is often times
precarious and make the chances of deadlocks greater than in other
corporations. For instance, it may provide that in cases of investment
of corporate funds in another corporation, may validly require a voting
requirement of ¾ of the OCS, instead 2/3 as provided by law. The
close corporation can easily secure the 2/3 but the ¾ is a toll order. If
that’s the case, then there will be a deadlock.

EFFECTS OF BREACH OF QUALIFYING PROVISION
Section 97. Validity of Restrictions on Transfer of Shares. -
Restrictions on the right to transfer shares must appear in the articles
of incorporation, in the bylaws, as well as in the certificate of stock;
otherwise, the same shall not be binding on any purchaser in good faith.
Said restrictions shall not more onerous than granting the existing
stockholders or the corporation the option to purchase the shares of the
transferring stockholder may sell their shares to any third person.
Section 98. Effects if Issuance or Transfer of Stock in Breach of
Qualifying Conditions. -
(a) If a stock of a close corporation is issued or transferred to any
person who is not eligible to be a holder thereof under any provision
of the articles of incorporation, and if the certificate for such stock
conspicuously shows the qualifications of the persons entitled to be
holders of record thereof, such person is conclusively presumed to
have notice of the fact of the ineligibility to be a stockholder.
(b) If the articles of incorporation of a close corporation states the
number of persons, not exceeding twenty (20), who are entitled to be
stockholders of record, and if the certificate for such stock
conspicuously states such number, and the issuance or transfer of stock
to any person would cause the stock to be held by more than such
number of persons, the person to whom such stock is issued of
transferred is conclusively presumed to have notice of this fact.
(c) If a stock certificate of a close corporation conspicuously shows a
restriction on transfer of the corporation has been issued or transferred
has or is conclusively presumed to have notice of the fact that the stock
in violation of such restriction, the transferee is conclusively presumed
to have notice of the fact that the stock was acquired in violation of the
restriction.
(d) Whenever a person to whom stock of a close corporation has been
issued or transferred has or is conclusively presumed under this section
to have notice of: (1) the person's ineligibility to be a stockholder of
the corporation; or (2) that the transfer of stock would cause the stock
of the corporation to be held by more than the number of persons
permitted under its articles of incorporation ; or (3) that the transfer
violates a restriction on transfer of stock, the corporation may, at its
option, refuse to register the tansfer in the name of the transferee.
(e) The provisions of subsection (d) shall not be applicable if the
transfer of stock, though contrary to subsections (a), (b) or (c), has been
consented to by all stockholders of the close corporation, or if the close
corporation has amended its articles of incorporation in accordance
with this Title.
(f) The term "transfer", as used in this section, is not limited to a
transfeer for value.
(g) The provisions of this section shall not impair any right which the
transferee may have to either rescind the transfer or recover the stock
under any express or implied warranty.
STOCKHOLDERS’ AGREEMENT
Section 99. Agreements by Stockholders. -
(a) Agreements duly signed and executed by and among all
stockholders before the formation and organization of a close
corporation shall survive the incorporation and shall continue to be
valid and binding between such stockholders, if such be their intent, to
the extent that such agreements are consistent with the articles of
incorporation, irrespective of where the provisions of such agreements
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 117
are contained except those required by this Title to be embodied in said
articles of incorporation.
(b) A written agreement signed by two (2) or more stockholders may
provide that in exercising any voting right, the shares held by them
shall be voted as provided or as agreed, or in accordance with a
procedure agreed upon by them.
(c) No provision in a written agreement signed by the stockholders,
relating to any phase of corporate affairs, shall be invalidated between
the parties on the ground that its effect is to make them partners among
themselves.
(d) A written agreement among some or all the stockholders in a close
corporation shall not be invalidated on the ground that it relates to the
conduct of the business and affairs of the corporation as to restrict or
interfere with the discretion or powers of the board of
directors: Provided, That such agreement shall impose on the
stockholders who are parties thereto the liabilities for managerial acts
imposed on directors by this Code.
(e) Stockholders actively engaged in the management or operation of
the business and affairs of a close corporation shall be held to strict
fiduciary duties to each other and among themselves. The stockholders
shall be personally liable for corporate torts unless the corporation has
obtained reasonably adequate liability insurance.
WHEN BOARD MEETING NOT NECESSARY
Section 100. When a Board Meeting is Unnecessary or Improperly
Held. - Unless the bylaws provide otherwise, any action taken by the
directors of a close corporation without a meeting called properly and
with due notice shall nevertheless be deemed valid if:
(a) Before or after such action is taken, a written consent thereto is
signed by all the directors; or
(b) All the stockholders have actual or implied knowledge of the action
and make no prompt objection in writing; or
(c) The directors are accustomed to take informal action with the
express or implied acquiescence of all the stockholders; or
(d) All the directors have express or implied knowledge of the action
in question and none of them makes prompt objection in writing.
An action within the corporate powers taken at a meeting held without
proper call or notice is deemed ratified by a director who failed to
attend, unless after having knowledge thereof, the director promptly
files his written objection with the secretary of the corporation.
PRE-EMPTIVE RIGHT
Section 101. Preemptive Right in Close Corporations. - The
preemptive right of stockholders in close corporations shall extend to
all stock to be issues, including reissuance of services, or in payment
or corporate debts, unless the article s of incorporation provide
otherwise.
Section 102. Amendment of Articles of Incorporation. - Any
amendment to the articles of incorporation which seeks to delete or
remove any provision required by this Title or to reduce a quorum or
voting requirement stated in said articles of incorporation shall require
affirmative vote of at least two-thirds (2/3) of the outstanding capital,
whether with or without voting rights, or of such greater proportion of
shares as may be specifically provided in the articles of incorporation
 CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 118

for amending, deleting or removing any of the aforesaid provisions, at implementation of any resolution of SH/D? What happened to the
a meeting duly called for this purpose Business Judgment Rule? The court cannot interfere with the business
judgment of the directors and stockholders if they do so in good faith.
DEADLOCKS This was asked in the bar as to the remedy available if there is a
. deadlock in a closed corporation.
Section 103. Deadlocks. Notwithstanding any contrary provision in
the close corporation's articles of incorporation, bylaws, or WITHDRAWAL OF STOCKHOLDERS/ DISSOLUTION
stockholders' agreement, if the directors or stockholders are so divided
on the management of the corporation's business and affairs that the Section 104. Withdrawal of Stockholder or Dissolution of
votes required for a corporate action cannot be obtained, with the Corporation. - In addition and without prejudice to other rights and
consequence that the business and affairs that the votes required for remedies available under this Title, any stockholder of a close
that the business of the corporation can no longer be conducted to the corporation may, for any reason, compel the corporation to purchase
advantage of the stockholders generally, the Commission, upon written shares held at fair value, which shall not be less than the par or issued
petition by any stockholder, shall have the power to arbitrate the value, when the corporation has sufficient assets in its books to cover
dispute. In the exercise of such power, the Commission shall have its debts and liabilities exclusive of capital stock: Provided, That any
authority to make appropriate orders, such as: (a) cancelling or altering stockholder of a close corporation may, by written petition to the
any provision contained in the articles of incorporation, bylaws, ot any Commission, compel the dissolution of such corporation whenever any
stockholders' agreement; (b) cancelling, altering or enjoining a acts of the directors, officers or those in control whenever any acts of
resolution or act of the corporation or its board of directors, the directors, officers, or those in control of the corporation are illegal,
stockholders, officers, or other person party to the action; (d) requiring fraudulent, dishonest, oppressive or unfairly prejudicial to the
the purchase at their fair value of shares of any stockholder, either by corporation or any stockholder, or whenever corporate assets are being
the corporation regardless of the availability or unrestricted retained misapplied or wasted.
earnings in its, books or by the other stockholder; (e) appointing a
provisional director; (f) dissolving the corporation; or (g) granting such As to the dissolution of the closed corporation, the grounds are more
other relief as the circumstances may warrant. extensive than in ordinary Stock Corporation, any act prejudicial to any
stockholder—wastage, its application of facts (?), and even mere
A provisional director shall be an impartial person who is neither a dishonesty are grounds to the dissolution of a close corporation. And
stockholder nor a creditor of the corporation or any of its subsidiaries it may be dissolved on petition of anyone single stockholder. When we
or affiliates, and whose further qualifications, if any, may be will be taking up dissolution. In the case of Republic vs Visaya Land
determined by the Commission. A provisional director is not a receiver Transport, the Court ruled that dissolution is not warranted where the
of the corporation and does not have the title and powers of a custodian stockholders have other legal remedy. In this case, the responsible
or receiver. A provisional director shall have all the rights and powers officers of Visaya Land misapplied and misappropriated the funds of
of a duly elected director, including the right to be notified of and to the corporation. 2 of the stockholders instituted the dissolution of the
vote at meetings of directors until removed by order of the Commission corp. The high court ruled, NO, because they still have another legal
pr by all the stockholders. The compensation of the provisional director remedy. They can hold the 2 responsible officers under the now
shall be determined by agreement between such provisional director Section 30 of the code, “voting or assenting to patently unlawful acts
and the corporation. or for bad faith or gross negligence in the conduct of corporate affairs
will render them personally or solidarily liable”. But if it was a close
corporation the story would not be the same, because “any act
Q: What happens if there’s deadlock? prejudicial to the interest of the stockholder”, or “wastage or misuse of
A: The code itself provides for a remedy under Section 103. The corporate assets”, or even “dishonesty”, are grounds for the dissolution
provision grants the proper forum a very wide discretion in respect to of a close corporation.
the management of the closed corporation in cases of deadlocks. It may
prohibit the directors and/or stockholders from performing any act— CLOSE CORPORATION ORDINARY STOCK
(1) it may cancel any provision in the AOI, (2) bar the implementation CORPORATION
of any resolution passed by the board and/or stockholders, (3) require Number of stockholders cannot No limitation as to number of
the stockholder to sell shares to the corporation, “irrespective of the exceed 20 shareholder
existence of unrestricted retained earnings”. To the extent that all Maximum number of directors
stockholders can be deemed is 15
Review: We have 3 instances when a corporation may acquire the directors, the number of
shares of stockholders even if there are no unrestricted retained directors can effectively be
earnings: more than 15
1. Redeemable shares Shares of stock are subject to Generally no restriction on
2. Stockholder of a closed corporation, who for any reason, may specified restrictions transfer of shares
compel the corporation that he be paid the fair value of the shares Shares of stocks are prohibited No prohibition
provided only that the closed corporation has sufficient assets to covers from being listed in the stock
debts and liabilities exclusive of capital. exchange or offered for sale to
3. Deadlocks in the closed corporation. the public
Stockholders may take an active Management is logded in the
Deadlocks is where the proper forum may compel a stockholder to sell part in corporate management Board of Directors
shares to the corporation irrespective of the existence of URE, and in by vesting management to them
fact, the proper forum may even dissolve the closed corporation, or rather than a Board of Director
appoint a provisional director who may break the deadlock by casting Those active in management are Directors are liable for torts
the deciding vote. The provisional director is an appointee of the court. personally liable for corporate only if they have acted
Ibig sabihin, the court interferes in the management of the corporate torts unless the corporation has negligently or fraudulently
affairs. Imagine the proper forum prohibiting the obtained an adequate liability
stockholders/directors from performing any act, canceling the insurance

Directors can validly act even
without a meeting
Agreements between
stockholders regarding the
operations of the business can
validly be made
To the extent that directors may
be classified into one or more
classes and to be voted solely by
a particular class of stock,
cumulative voting may, in
effect, be restricted
The AOI may provide that all
officers shall be elected or
appointed by the stockholders
It may provide for greater
quorum and voting
requirements in meetings of
stockholders and directors
Restriction on transfer of shares
should be indicated in the
articles of incorporation, by-
laws and stock certificates
Pre-emptive rights of
stockholders is broader as it
include all issues without
exception
A stockholder may withdraw
and compel the corporation to
purchase his shares for any
reason with the limitation only
that the corporation has
sufficient assets to cover its
liabilities exclusive of capital
stock
The proper forum may interfere
in the management of a close
corporation in case of deadlocks
under Sec. 103, even of the
directors/ stockholders are
acting in good faith
Any stockholder may petition
the SEC for corporate
dissolution on grounds among
others, provides for in Sec. 104.
Deadlocks – Business Judgment
Rule will not apply nor the fact
that transferee of shares of
stocks of CC cannot compel the
corporation that transfer be
recorded his name in the book of
the corporation, unlike any
stockholder or transferee in an
ordinary stock corporation, it
wil breach any of the conditions
provided for in the articles, the
by-laws or the certificate of
stock.
Directors must, as a rule, act as
a body at a duly constituted
meeting
Not valid and binding since
stockholders’ agreement cannot
limit the discretion of the Board
to manage corporate affairs
Ordinarily, no such
classification and no restrictions
on cumulative voting
Officers are elected by the BOD
Although the AOI or by-laws
may provide for greater quorum
and voting requirements in
directors’ meeting under Sec.
23, those for stockholders’
meeting cannot generally be
altered
Valid and binding if indicated in
the articles of incorporation and
stock certificates
Pre-emptive rights may be
denied
Unless he sells his shares, a
stockholder cannot get back his
investment nor compel the
corporation to buy his shares
except in the exercise of his
appraisal right
Courts cannot interfere I the
business judgment of the
directors/stockholders
“BUSINESS JUDGMENT
RULE”
Dissolution may be had only on
the grounds provided by the
provisions of the Code on
dissolution and P.D. 902-A, as
amended
Business Judgment Rule
applies.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 119
San Juan Structural Sphere and Design v. CA
Spouses owned 98.8% of the outstanding capital stock of the
corpation, the remaining 2.2% is owned by their children. Is it a
closed corporation? No. Because not one of the mandatory
provisions required to be indicated in the Articles of Incorporation
is present. As we were saying, ALL THREE QUALIFYING
CONDITIONS MUST BE CONTAINED IN THE ARTICLES
OF INCORPRATION.
Dulay Enterprises v. CA
Q: Who will promptly object?
A: Virgilio Dulay, or the one contending that he is not present in
the meeting.
In this case, the president, the general manager and treasurer
executed a deed of sale for a certain property of Manuel Dulay
Enterprises. His son Virgilio Dulay, also a director, was the
signatory. Later on, Virgilio questioned the transfer of the property.
And that Manuel Dulay, not authorized by the board, disposed the
property. There was no meeting held. The case went all the way to
the SC. The Court ruled that except for the corporate secretary who
is a friend of Manuel Dulay, all shares of the corporation is held by
the family. Manuel is the patriarch. The petitioner corporation is
classified as a closed corporation . Thusly, a board resolution is not
necessary to bind the actions of the corporate resolutions. Sec. 100
(then, Sec. 101), provides that a corporate action without corporate
meeting in a closed corporation shall nevertheless be valid if the
absent director does not promptly file his written objection with the
corporate secretary after having knowledge thereof. As I was
saying, Virgilio Dulay who has questioning the validity of the
action of his father, was a signatory and witness of the deed of sale.
Meaning, he was aware of the transaction but never interpose his
written objections with the corporate secretary. Therefore, he may
rightfully now be considered as estopped.
Naguiat Enterprises v. NLRC
Sec. 99 (Then Sec. 100) was applied in this case. The stockholders
who take an active participation in the management of the affairs
of the CC are personally liable for corporate torts. The Court ruled
that CFTI and Naguiat Enterprises are closed family corporations
owned by the Naguiat Family. That’s why it applied the now Sec.
99. So much so that being the case, Sergio F. Naguiat can be held
liable can actively participated in the management in CFTI.
Antolin Naguiat on the other hand, have not been shown to have
acted in that capacity, hence, not liable.
As I was saying, the case of Manuel Dulay is very much familiar to me
because the counsel of Manuel Dulay is my classmate in the college of
law. When this was first filed, he asked me if MDE is a closed
corporation. When he brought me the files of MDE, it is not a closed
corporation. Then I left the SEC. Back then, there were only 3 closed
corporation. The first 2, I prepared the AOI. One of them has BOD, the
other has none. So, my classmate did not believe me that it was not a
close corp. They brought it all the way to the SC and the justices
believed him that it is a CC. But actually it is not. Not one single
provision required to be indicated in the AOI is present. Same is true
with Naguiat Enterprises and Club Field Taxi Inc, they’re not also
close corportaions. That’s why I’m ending the discussion in closed
corporation stating that there are already 3 cases when the SC applied
and misapplied the provisions of Title 12. It was correctly applied in
San Juan Structural Sphere and Design v. CA.

Manuel Dulay, who has the absolute control of the MDE, is the
patriarch of tha family, the president, the GE and the treasurer. At that
time the president cannot also be a treasurer at the same time. Can you
imagine that the RTC judge does not know the requirement? If you
apply Cis (?) v. CA, which we took up in Piercing the Corporate Veil,
the shares of his children emanated solely from the patriarch. Even if
you cannot apply those cases. You can apply the case of Lopez Realty
v. Fotencha. In that case, Asuncion questioned the validity of the
resolution of the BOD granting gratuity pay to the employees. But he
was herself the very one who signed the first 2 vouchers of gratuity
pay. She was rightfully considered estopped. In this particular case,
Manuel Dulay, the very same person who executed and signed the deed
of the transfer, can also be considered rightfully estopped.
As to Naguiat v. NLRC, we can also apply instead the case of Wichicko
(?) v. NLRC. In that particular case, it held that in labor cases, the
person or officer who terminates corporate employees done in bad faith
is personal and/or solidarily liable with the corporation.
TITLE XIII: SPECIAL CORPORATIONS
Chapter I: Educational Corporations
Section 105. Incorporation. - Education corporations shall be
governed by special laws and by the general provisions of this Code.
Q: What law governs educational corporations?
A: It shall be governed by special laws and by The Corporation Code.
The special law spoken of is Commonwealth Act 2076 as amended by
Commonwealth Act 180. That particular special law requires that once
they are recognized as education institutions, I am referring to those
that issue certificate of compliance in the academic field, they must
incorporate within 90 days from the date of their recognition as such
educational institution. And we’ve learned as early as Chiang Kai Shek
v. CA, when we were taking up Corporation by Estoppel, that it’s
failure to do so will not immune from school from being stood as a
corporation. As we all know, they are under the supervision of
government agencies. Thus, under the Code, the favorable
recommendation of such agencies concerned must first be secured,
even before the SEC shall issue the certificate of incorporation.
Lower education – Department of Education, Culture and Sports;
Higher education – Commission on Higher Education
College of Law – Legal Education Board
Section 106. Board of Trustees. - Trustees of educational institutions
organized as non-stock corporations shall not be less than five (5) nor
more than fifteen (15): Provided, That the number of trustees shall be
in multiples of five (5).
Unless otherwise provided in the articles of incorporation or bylaws,
the board of trustees of incorporated schools, colleges, or other
institutions of learning shall, as soon as organized, so classify
themselves that the term of office of one-fifth (1/5) of their number
shall expire every year. Trustees thereafter elected to fill vacancies,
occurring before the expiration of a particular term shall hold office
only for the unexpired period. Trustees elected thereafter to fill
vacancies caused by expiration of term shall hold office for five (5)
years. A majority of the trustees shall constitute a quorum for the
transaction of business. The powers and authority of trustees shall be
defined in the bylaws. For institutions organized as stock corporations,
the number and term of directors shall be governed by the provisions
on stock corporations.
Q: How is the governing board of an educational institution
constituted?
A: The trustees of educational institutions organized as non-stock
corporations shall not be less than five nor more than fifteen, provided
that the number of trustees shall be in multiples of five.
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Q: How about the stock-corporation?
A: Board of Director/Trustees or the governing board by any name of
an educational institution is similar in number as to any other
corporation which may be within the vicinity of five to fifteen.
Q: What is their term of office?
A: The term of office of the members of the board is 5 years but they
shall be staggered so that the term of office of one-fifth (1/5) of their
number shall expire every year
Q: Let us see. 15-man governing board. If 1/5 of their number expires
every year, how many will expire every year?
A: Three (3) of them will expire every year. Others term is 5 years.
Their term of office is 1 to 5 years. (not sure if ito yung tama kasi
tumaas boses tapos proceed na to next question, pa-double check plz)
Q: 15-man governing board of a non-stock corporation. If 1/5 of their
number expires every year, 1/5 of their number’s term is 5 years. Will
that hold true in a stock corporation?
A: No. It shall be governed by provisions on stock corporations. Their
term of office should be 1 years. Different corporations is governed by
different laws and different provisions of the Code itself. The basis is
Sec. 106 last paragraph and correlate with Sec. 22.
Q: What about the number, may anywhere from 5-15 in stock
corporations
A: Yes.
Q: How about in non-stock?
A: No. It can only be 5, 10 or 15. No more. Basahin mabuti ang code.
Q: May a foreigner be a member of the board of directors or trustees?
A: Yes, a foreigner may be a member of the board.
GR: NO
XPNs:
1. Established by religious corporations – UST, San Beda, SLU
2. Mission Boards – British School
3. Charitable Institutions
Basis: Sec. 4, Article 14 of the 1987 Constitution, “Educational
institutions, other than those established by religious groups and
mission boards, shall be owned solely by citizens of the Philippines or
corporations or associations at least sixty per centum of the capital of
which is owned by such citizens. And the control and management of
educational institution shall be vested in citizens of the Philippines.”
DEC. 15 (C)
RELIGIOUS CORPORATION
• The other type of special corporation is a Religious corporation, or
those composed entirely of spiritual persons, which are created for
the furtherance of religion or perpetuating the rights of the church
or for the administration of church or religious work or property.
• They are classified either as corporation sole or the religious
society.
- “SEC. 107. Classes of Religious Corporations. – Religious
corporations may be incorporated by one or more persons. Such
corporations may be classified into corporations sole and
religious societies.”
• CORPORATION SOLE
- “SEC. 108. Corporation sole. – For the purpose of administering
and managing, as trustee, the affairs, property and temporalities

of any religious denomination, sect or church, a corporation sole
may be formed by the chief archbishop, bishop, priest, minister,
rabbi, or other presiding elder of such religious denomination,
sect, or church.”
- The corporation sole consist of one person only, who may be
incorporated not just by any other individual, because he must
either be the Bishop, Archbishop, Priest, Rabbi, Minister, or
Head of a religious denomination, sect, or church.
- CORPORATION SOLE consists of one person only and his
successor in some particular station, who are incorporated by law
in order to give them some legal capacities and advantages,
particularly that of perpetuity, which in their natural persons they
could not have had.
- Purpose: It is incorporated for the purpose of managing the
affairs, properties, and temporalities of a particular church,
denomination, or sect as trust.
- Commencement of corporate existence
๏ Q: When does a corporation sole commence their
existence/acquire juridical personality? Because under Sec 19
of the code, the rule obtaining is that a corporation
commences to exist on the date the SEC issues the certificate
of incorporation.
‣ A: Upon filing of the verified AOI with the SEC and the
documents required under Sec. 110. [This serves as an
exception to the rule that a corporation acquires juridical
personality only upon the issuance of a certificate of
incorporation by the said government agency.] After that,
it is possessed with a juridical personality.
- Power to alienate properties (Sec. 111)
๏ Does it have the same right, power, and privilege to own,
hold, acquire, dispose, and alienate its properties just like any
other corporation?
‣ Yes. The corporation sole has the same right, powers, and
privilege to own, hold, acquire, dispose, and alienate its
properties, BUT when it comes to the disposition or
alienation of its real properties, a proper court order is
required for its validity.
๏ Is the court order always necessary?
‣ No. It can acquire, own, or hold properties in the same
manner as any other corpoaration may do so. But for
purposes of disposition and alienation of real properties, a
court order is required. But that court order is not required
if the corporation sole, has rules, regulation, or discipline
provided for the regulation, mode and manner, of
disposition or alienation of its real properties.
๏ Since it is headed by only one person, will the registration of
the property in the name of the corporation sole vest unto him
(the head of the corporation sole) ownership of the said
property?
‣ No. Sec. 107 says that he acts only as a trustee. It devolves
upon the church or the corporation.
THE ROMAN CATHOLIC APOSTOLIC ADMINISTRATOR
OF DAVAO, INC., v.
THE LAND REGISTRATION COMMISSION
1. CORPORATIONS SOLE; COMPONENTS AND PURPOSE OF;
POWER TO HOLD AND TRANSMIT CHURCH PROPERTIES TO
HIS SUCCESSOR IN OFFICE. — A corporation sole is a special form
of corporation usually associated with clergy . . . designed to facilitate
the exercise of the functions of ownership of the church which was
regarded as the property owner (I Bouvier’s Law Dictionary, p. 682-
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 121
683). It consists of one person only, and his successors (who will
always be one at a time), in some particular, who are incorporated by
law in order to give them some legal advantages particularly that of
perpetuity which in their natural persons they could not have . . . (Reid
v. Barry, 93 Fla. 849 112 So. 846). Through this legal fiction, church
properties acquired by the incumbent of a corporation sole pass, by
operation of law, upon his death not to his personal heirs but to his
successor in office. A corporation sole, therefore, is created not only to
administer the temporalities of the church or religious society where
he belongs, but also to hold and transmit the same to his successor in
said office.
2. ID.; PERSONALITY OF SEPARATE AND DISTINCT FROM
THAT OF ROMAN PONTIFF. — Although a branch of the Universal
Roman Catholic Apostolic Church, every Roman Catholic Church in
different countries, if it exercises its mission and is lawfully
incorporated in accordance with laws of the country where it is located,
is considered an entity or person with all the rights and privileges
granted to such artificial being under laws of that country, separate and
distinct from the personality of the Roman Pontiff or the Holy See,
without prejudice to its religious relations with the latter which are
governed by the Common Law or their rules and regulations.
3. ID.; ID.; POWER AND QUALIFICATION TO PURCHASE IN
ITS NAME PRIVATE LANDS; 60 PER CENTUM REQUIREMENT
NOT INTENDED TO CORPORATION SOLE. — Under the
circumstances of the present case, it is safe to state that even before the
establishment of the Philippine Commonwealth and of the Republic of
the Philippines every corporation sole then organized and registered
had by express provision of law (Corporation Law, Public Act. 1459)
the necessary power and qualification to purchase in its name private
lands located in the territory in which it exercised its functions or
ministry and for which it was created, independently of the nationality
of its incumbent unique and single number and head, the bishop of the
diocese. It can be also maintained without fear of being gainsaid that
the Roman Catholic Apostolic Church in the Philippines has no
nationality and that the frames of the Constitution did not have in mind
the religious corporation sole when they provided that 60 per centum
of the capital thereof be owned by Filipino citizens. Thus, if this
constitutional provision were not intended for corporation sole, it is
obvious that this could not be regulated or restricted by said provision.
This is a case decided by the court in 1957. It was ruled that a
corporation sole consist of one person only. Its successor will only be
one at a time. It is incoproratied by the law in order to give them some
legal capacities and advantages. Particularly that of perpetuity, which
in their natural person could not have had. He is not the owner of the
church properties, but merely a guardian or administrator thereof.
It was also ruled by the SC that the roman catholic church has no
nationality, and that the framers of the constitution did not have in
mind the corporation sole when they provided that at least 60% of the
capital stock must be owned by filipino citizens.
THE DIRECTOR OF LANDS vs. CA
This case traces the historical right of a juridical person to register
lands of the public domain in its own name. From the early case of
Meralco v. Bartolome to the case of Republic v. Villanueva which was
handed out two months before the decision in this case, the majority
rule is that a juridical person is disqualified under the constitution from
applying for the registration of alienable public land. In that particular
case however, Justice Teehankee brought a dissenting opinion, citing
the Public Land Act which provides that alienable public land is
converted into a private property if the same has been held by the
possessor or his predecessor in interest openly, continuously,
adversely, and exclusively in the concept of an owner for a period of
30 years — automatically.

And this dissenting opinion was applied in this case, that is why I was
saying that it traces the historical right of a corporation to register lands
of the public domain in its own name. If this case was filed two months
earlier, the decision would have been adverse Iglesia ni Kristo. So
much so that in the case of Republic v. IAC, a determination of the
charater of the land must be made in order to determine whether it is
registrable by a juridical entity. If they are still part of the public
domain, they cannot be registered. But if they are already private land,
the constitutional provision against the registration or acquisition by a
juridical person may not apply.
- Fililing up vacancies in a corporation sole
๏ In case of vacancy in the office of the head of the corporation
sole, who will fill up the same?
‣ The person authorized by the rules, regulations or
discipline of the denomination shall exercise all the powers
and authority of the corporation sole during such vacancy
and until such vacancy has been filled-up.
๏ Manner in which the vacancy is to be filled:
‣ SEC. 112. Filling of Vacancies. – The successors in office
of any chief archbishop, bishop, priest, minister, rabbi, or
presiding elder in a corporation sole shall become the
corporation sole on their accession to office and shall be
permitted to transact business as such upon filing a copy
of their commission, certificate of election, or letters of
appointment, duly certified by any notary public with the
Commission.
During any vacancy in the office of chief archbishop,
bishop, priest, minister, rabbi, or presiding elder of any
religious denomination, sect or church incorporated as a
corporation sole, the person or persons authorized by the
rules, regulations or discipline of the religious
denomination, sect or church represented by the
corporation sole to administer the temporalities and
manage the affairs, estate, and properties of the
corporation sole shall exercise all the powers and authority
of the corporation sole during such vacancy.
The successors in office shall become the corporation sole
and shall be permitted to transact business as such only
upon the filing with the SEC:
i. a copy of their commission;
ii. certificate of election;
iii. letters of appointment;
iv. duly certified by a notary public.”
- Dissolution of a corporation sole
๏ A corporation sole is suppose to exist in perpetuity, may it
nonetheless be dissolved?
‣ Yes.
๏ Q: How may it be dissolved?
‣ A: Through a voluntary dissolution.
‣ Note: There are three modes of dissolving a corporation:
✤ Expiration of term;
✤ Voluntary dissolution; and
✤ Involuntary dissolution or by judicial act
๏ Q: Can it be done by a judicial act or involuntary dissolution?
‣ A: No. Dissolution by a judicial act is generally not
allowed because it is religious and thus beyond the
jurisdiction of the court by virtue of the doctrine of
separation of the Church and the State. However, the State
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 122
may exercise its police power if the corporation is being
carried out and is being used for illegal purposes.
‣ Corporation sole nga but it is being used as a front for
prostitution, gambling, drugs, etc., the State can always
come in and intervene.
‣
• RELIGIOUS SOCIETIES [hindi diniscuss ni sir, read na lang daw
provision; ff are from baby notes]
- Under common law, a religious society is a body of persons
associated together for the purpose of maintaining religious
worship. The religious society and the church are distinct bodies,
independent of each other, though they may exist with each
other.
- Under Philippine Law, a religious society, order, diocese, synod
or district organization of any religious denomination, sect or
church may incorporate for the administration of its
temporalities or for the management of its affairs, properties and
estate in accordance with the Code:
๏ SEC. 114. Religious Societies. – Unless forbidden by
competent authority, the Constitution, pertinent rules,
regulations, or discipline of the religious denomination, sect
or church of which it is a part, any religious society, religious
order, diocese, synod, or district organization of any religious
denomination, sect or church, may, upon written consent
and/or by an affirmative vote at a meeting called for the
purpose of at least two-thirds (2/3) of its membership,
incorporate for the administration of its temporalities or for
the management of its affairs, properties, and estate by filing
with the Commission, articles of incorporation verified by the
affidavit of the presiding elder, secretary, or clerk or other
member of such religious society or religious order, or
diocese, synod, or district organization of the religious
denomination, sect or church, setting forth the following:
‣ (a) That the religious society or religious order, or diocese,
synod, or district organization is a religious organization
of a religious denomination, sect or church;
(b) That at least two-thirds (2/3) of its membership has
given written consent or has voted to incorporate, at a duly
convened meeting of the body;
(c) That the incorporation of the religious society or
religious order, or diocese, synod, or district organization
is not forbidden by competent authority or by the
Constitution, rules, regulations or discipline of the
religious denomination, sect or church of which it forms
part;
(d) That the religious society or religious order, or diocese,
synod, or district organization desires to incorporate for
the administration of its affairs, properties and estate;
(e) The place within the Philippines where the principal
office of the corporation is to be established and located;
and
(f) The names, nationalities, and residence addresses of the
trustees, not less than five (5) nor more than fifteen (15),
elected by the religious society or religious order, or the
diocese, synod, or district organization to serve for the first
year or such other period as may be prescribed by the laws
of the religious society or religious order, or of the diocese,
synod, or district organization.
- Purpose: the administration of its temporalities or for the
management of its affairs, properties and estate;
- Apparent from the foregoing, is that a religious society is not
mandated by law to register as a corporation but may do so to
acquire juridical personality and for the purpose of
administration of its temporalities and properties and even to

acquire properties of its own. Thus, it has been held that an
unincorporated religious association cannot acquire private
agricultural lands in the Philippines (Register of Deeds vs. Ung
Sui Temple)
- Commencement of corporate existence: Upon issuance of the
certificate of registration by the SEC. Absent any specific
provision of the law, it must be deemed to fall within the general
rule under Sec. 18.
- Who:
๏ General rule: any religious society, religious order, diocese,
synod, or district organization of any religious denomination,
sect or church, may, incorporate.
Except: When it is forbidden by competent authority, the
Constitution, pertinent rules, regulations, or discipline of the
religious denomination, sect or church of which it is a part.
ONE PERSON CORPORATION (OPC)
SEC. 115. Applicability of Provisions to One Person Corporations. –
The provisions of this Title shall primarily apply to One Person
Corporations. Other provisions of this Code apply suppletorily, except
as otherwise provided in this Title.
• An OPC is a corporation with one or a single stockholder.
• Q: May any person form or organize the OPC?
- No. Only a natural person, trust, or an estate may form a One
Person Corporation.
• Q: May it be formed for any type of business?
- A: No. It cannot be formed for any business activity however,
like banks and quasi-banks, pre-need, trust, insurance, public and
publicly-listed companies, and non-chartered government-
owned and -controlled corporations.
• Q: May it be formed by a person engaged in the practice of a
profession?
- A: No. Natural persons licensed to exercise a profession cannot
be organize as an OPC for the exercise of the profession unless
otherwise provided under special laws.
- ATTY: But to date, I still don't know of any special law allowing
the practice of a profession to be formed and organized as a
corporation. As it is stands, it is reserved only to professional
partnership.
• Q: What should be contained in the articles of incorporation?
- A: Aside from the requirements from Sec. 14, the AOI must
contain those enumerated under Sec. 118:
f. If the single stockholder is a trust or an estate, the name,
nationality, and residence of the trustee, administrator,
executor, guardian, conservator, custodian, or other person
exercising fiduciary duties together with the proof of such
authority and
g. Name, nationality, residence of the nominee and alternate
nominee, and the extent, coverage and limitation of the
authority.
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• The code requires corporations to adopt and file their by laws. Will
this apply also to a OPC?
- A: The OPC is not required to submit and file corporate bylaws.
- Note: This is the exception to the general rule that all
corporations registered under the provisions of the code must
adopt and file their bylaws. Bylaws are the rules of government
of the corporation for purposes of the relation of the stockholders
between and among themselves, or between them and the
corporation. And the corporation in this state insofar as it tries to
exist as such is concerned, since his only one, a bylaw is not
required.
• When we are taking up the other corporate officers, we noted the
rule that the corporate president cannot be the secretary of treasurer
at the same time. Will this apply to a OPC?
- A: NO. the corporate president may at the same time be the
corporate treasurer, under par. 2, but NEVER a corporate
secretary. There are special functions of a corporate secretary
under the code. There is nothing in the law that allows a president
to be the corporate secretary at the same time.
• Under Sec. 124, 125, and 126, the OPC must also designate a
nominee and alternate nominee specifying the term thereof and he
may change at any time the nominee or alternate nominee.
• Minute books, records in lieu of meetings, reportorial requirements
are also required. Should the OPC fail to submit to the SEC the
reportorial requirements, the SEC may place the OPC under
delinquent status. If three times consecutive or intermittently for a
period of 5 years, it may be dissolved.
• Liability of Single Shareholder
- “SEC. 130. Liability of Single Shareholder. – A sole shareholder
claiming limited liability has the burden of affirmatively
showing that the corporation was adequately financed.xxx”
๏ Ratio: There is no minimum paid-up capital or authorized
capital in the OPC
- “Xxx Where the single stockholder cannot prove that the
property of the One Person Corporation is independent of the
stockholder’s personal property, the stockholder shall be jointly
and severally liable for the debts and other liabilities of the One
Person Corporation.”
The principles of piercing the corporate veil applies with equal
force to One Person Corporations as with other corporations.”
• Q: May an ordinary corporation be converted to an OPC?
- A: An ordinary corporation may also be converted to an OPC
when a single stockholder acquires all the stocks of an ordinary
stock corporation, the latter may apply for conversion into a One
Person Corporation. The OPC converted from an ordinary stock
corporation shall succeed the latter and be legally responsible for
all the latter’s outstanding liabilities as of the date of conversion.
• Q: May an OPC be converted to ordinary corporation? Under what
circumstances?
- A: Yes. If the estate has been settled or the legal heirs have been
determined, nasa pangalan na ng mga heirs, it will now be a stock
corporation, upon due notice to the SEC of the circumstances
leading to the conversion.
- “SEC. 132. Conversion from a One Person Corporation to an
Ordinary Stock Corporation. – A One Person Corporation may

be converted into an ordinary stock corporation after due notice
to the Commission of such fact and of the circumstances leading
to the conversion, and after compliance with all other
requirements for stock corporations under this Code and
applicable rules. Such notice shall be filed with the Commission
within sixty (60) days from the occurrence of the circumstances
leading to the conversion into an ordinary stock corporation. If
all requirements have been complied with, the Commission shall
issue a certificate of filing of amended articles of incorporation
reflecting the conversion.
In case of death of the single stockholder, the nominee or
alternate nominee shall transfer the shares to the duly designated
legal heir or estate within seven (7) days from receipt of either
an affidavit of heirship or self-adjudication executed by a sole
heir, or any other legal document declaring the legal heirs of the
single stockholder and notify the Commission of the transfer.
Within sixty (60) days from the transfer of the shares, the legal
heirs shall notify the Commission of their decision to either wind
up and dissolve the One Person Corporation or convert it into an
ordinary stock corporation.
The ordinary stock corporation converted from a One Person
Corporation shall succeed the latter and be legally responsible
for all the latter’s outstanding liabilities as of the date of
conversion.”
• [Question from a student] Can a sole heir be a successor to a OPC
by becoming an OPC?
- ATTY. Yes, because if I own all the properties of the estate, di
benta ko na lang lahat, why should I incorporate? I don't know.
There is nothing in the code about that matter. Maybe he can.
But if you were that guy, will you do it?
DISSOLUTION, LIQUIDATION, AND WINDING UP
DISSOLUTION
• It is the extinguishment of the corporate franchise and the
termination of corporate existence.
• General Rule: When a corporation is dissolved, it ceases to be a
juridical entity and can no longer pursue the business for which it is
incorporated.
Exception: The Corporation will continue as a body corporate for
another period of 3 years from the time it is dissolved for the
purpose of winding up its affairs and the liquidation of its assets.
• Three Ways of Dissolution:
1. Expiration of its corporate term;
2. Voluntary surrender of its primary franchise (voluntary
dissolution); and
3. The revocation of its corporate franchise (involuntary
dissolution)
- Note: Sec. 133, however, mentions only two methods:
voluntarily or involuntarily. This is probably true because the
expiration of corporate term can be considered voluntary
dissolution, it being the intention of the stockholders that it shall
exist only for that particular period.
• EXPIRATION OF TERM
- Corporations may now exist in perpetuity, but they are not barred
to provide a specific period of time of existence. If they do so,
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they will cease to exist and is deemed automatically dissolved
upon the expiration of the term indicated thereat without the need
of any formal proceedings.
- Also note that the original term indicated in the AOI is subject to
extension in accordance to Sec. 37, in relation to Sec. 11.
- It may also opt to amend the AOI to have a perpetual existence
instead. If such be the case, the corporation will possess juridical
personality and may carry out its business during the period of
time granted it by virtue of such extension.
- But the extension must be made prior to the expiration,
otherwise, the corporation is dissolved ipso facto.
PHILIPPINE NATIONAL BANK v.
COURT OF FIRST INSTANCE
PNB and PBM entered into a contract of lease for 25 years, extendible
for another 20 years at the option of PBM should its term of existence
be extended. PBM was organized in January 1952, with the term of 25
years. So January 1977 is the expiration of its term.
PMB introduced improvements in the property leased, with it being
granted the right to remove them before the termination of the lease,
unless extended, subject also to the extension of its corporate term.
Corporation and the lease expired.
SC: When the period of corporate life expires, it ceases to exist as a
body corporate for the purpose of continuing the business for which it
is organized. There is no need to institute a proceeding for quo
warranto to determine the date and time of the dissolution because the
period of corporate existence is provided in the AOI (relation between
the corporation and the State, insofar as the corporation’s right to exist
as such is concerned).
So that when the period of its existence expires without having any
extensions having been made, the corporation dissolves automatically,
insofar as continuing its business is concerned.
Thus, failure of the lessee to remove the improvements prior to its
expiration constitutes a waiver. Art. 1678 of the Civil code
(reimbursement for the improvements) cannot be applied. Thus, such
improvements are now property of the lessor.
- Note: under the penultimate paragraph, a corporation whose term
expired may apply for the revival of the corporate existence
within 3 years from the expiration of its term or during the
liquidation period. Otherwise, the corporate entity will cease to
exist for all intents and purposes under the ruling of the SC in
Elano v. CA.
• VOLUNTARY DISSOLUTION
- Modes of voluntary dissolution:
h. Voluntary Dissolution where no creditors are affected (Sec.
134);
i. Voluntary Dissolution where creditors are affected (Sec.
135);
j. Shortening of corporate term (Sec. 136).
- VOLUNTARY DISSOLUTION WHERE NO CREDITORS
ARE AFFECTED:
๏ Requirements/Procedure:
a. Majority vote of the board of directors or trustees;
b. A resolution adopted by the affirmative vote of the
stockholders owning at least majority of the outstanding
capital stock or majority of the members of a meeting to
be held upon the call of the directors or trustees;

c. At least twenty (20) days prior to the meeting, notice shall
be given to each shareholder or member of record
personally, by registered mail, or by any means authorized
under its bylaws whether or not entitled to vote at the
meeting, in the manner provided in Section 50 of this Code
and shall state that the purpose of the meeting is to vote on
the dissolution of the corporation.
d. Notice of the time, place, and object of the meeting shall
be published ONCE prior to the date of the meeting in a
newspaper published in the place where the principal
office of said corporation is located, or if no newspaper is
published in such place, in a newspaper of general
circulation in the Philippines.
e. A verified REQUEST FOR DISSOLUTION shall be filed
with the Commission stating:
i. the reason for the dissolution;
ii. the form, manner, and time when the notices were
given;
iii. names of the stockholders and directors or members
and trustees who approved the dissolution;
iv. the date, place, and time of the meeting in which the
vote was made; and
v. details of publication.
f. The corporation shall submit the following to the
Commission: (1) a copy of the resolution authorizing the
dissolution, certified by a majority of the board of directors
or trustees and countersigned by the secretary of the
corporation; (2) proof of publication; and (3) favorable
recommendation from the appropriate regulatory agency,
when necessary.
g. Issuance of a certificate of dissolution by the SEC, within
fifteen (15) days from receipt of the verified request for
dissolution, and in the absence of any withdrawal within
said period
๏ The dissolution shall take effect only upon the issuance by the
Commission of a certificate of dissolution.
๏ Failure to comply with the above requirements will have no
effect on the legal existence of the corporation. Otherwise
stated, a corporation being a creation of the law by the grant
of its existence by the State, may only be dissolved in the
manner prescribed by the law of its creation. Since it is the
State that grants its right to exist, it is only through the State
which can allow the termination of existence. Unless
dissolved pursuant thereto, a corporation does not cease to
have a juridical personality.
๏ A mere resolution by the stockholders or the BOD of a
corporation to dissolve the same does not affect the
dissolution but that some other steps, administrative or
judicial is necessary. (Daguhoy Enterprises vs. Ponce)
• VOLUNTARY DISSOLUTION WHERE CREDITORS ARE
AFFECTED
- Requirements/Procedure:
a. A verified PETITION FOR DISSOLUTION shall be filed
with the Commission.
i. The petition shall be signed by a majority of the
corporation’s board of directors or trustees;
ii. verified by its president or secretary or one of its directors
or trustees;
iii. shall set forth all claims and demands against it;
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 125
iv. that its dissolution was resolved upon by the affirmative
vote of the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock or at least two-thirds
(2/3) of the members at a meeting of its stockholders or
members called for that purpose.
v. The petition shall likewise state:
(1) the reason for the dissolution;
(2)the form, manner, and time when the notices were
given; and
(3)the date, place, and time of the meeting in which the
vote was made.
b. The corporation shall submit to the Commission the
following:
i. a copy of the resolution authorizing the dissolution,
certified by a majority of the board of directors or trustees
and countersigned by the secretary of the corporation; and
ii. a list of all its creditors.
c. If the petition is sufficient in form and substance, the
Commission shall, by an order reciting the purpose of the
petition, fix a deadline for filing objections to the petition
which date shall not be less than thirty (30) days nor more
than sixty (60) days after the entry of the order.
d. Before such date,
i. a copy of the order shall be published at least once a week
for three (3) consecutive weeks in a newspaper of general
circulation published in the municipality or city where the
principal office of the corporation is situated, or if there be
no such newspaper, then in a newspaper of general
circulation in the Philippines; AND
ii. a similar copy shall be posted for three (3) consecutive
weeks in three (3) public places in such municipality or
city.
e. Upon five (5) days ’notice, given after the date on which the
right to file objections as fixed in the order has expired, the
Commission shall proceed to hear the petition and try any
issue raised in the objections filed; and if no such objection is
sufficient, and the material allegations of the petition are true,
it shall render judgment dissolving the corporation and
directing such disposition of its assets as justice requires, and
may appoint a receiver to collect such assets and pay the debts
of the corporation.
‣ Note: The appointment of a receiver is not mandatory, as
held in Chinabanking vs. Michelin, because the law only
used “may appoint a receiver”.
- SHORTENING OF THE CORPORATE TERM
๏ It is effected by amendment of the AOI.
๏ Corporation is to exist for the next 5 years from Dec. 15, 2020
but the corporation amends its AOI, shortening the term until
the end of Dec. 31, 2020. Effectively, there will be a
dissolution. When the day comes, it will be dissolved.
๏ Under SEc. 137, a withdrawal for the request for the
dissolution may be made in writing but it must not be more
than 15 days from the request, and it shall be in the form of a
motion.

• INVOLUNTARY DISSOLUTION/JUDICIAL DISSOLUTION
OR ADMINISTRATIVE ACT
- Upon the filing of a verified complaint, by any interested party,
or motu proprio, on the grounds provided for by law.
- Grounds under Sec. 138:
k. Non-use of corporate charter as provided under Section 21 of
this Code;
l. Continuous inoperation of a corporation as provided under
Section 21 of this Code;
m. Upon receipt of a lawful court order dissolving the
corporation;
n. Upon finding by final judgment that the corporation procured
its incorporation through fraud;
o. Upon finding by final judgment that the corporation:
i. Was created for the purpose of committing, concealing or
aiding the commission of securities violations, smuggling,
tax evasion, money laundering, or graft and corrupt
practices;
ii. Committed or aided in the commission of securities
violations, smuggling, tax evasion, money laundering, or
graft and corrupt practices, and its stockholders knew; and
iii. Repeatedly and knowingly tolerated the commission of
graft and corrupt practices or other fraudulent or illegal
acts by its directors, trustees, officers, or employees.
๏ Other grounds:
a. Violation of any provision of the Code under section 158;
b. In case of deadlock in a close corporation as provided for
in section 104;
c. In a close corporation, any acts of directors, officers or
those in control of the corporation which is illegal or
fraudulent or dishonest or oppressive or unfairly
prejudicial to the corporation or any stockholder or
whenever corporate assets are being misapplied or wasted
under section 104.
d. Violation of special laws
๏ Involuntary dissolution is a harsh remedy akin to a capital
punishment. Thus, it has been laid to rest in the case of
Government vs. Philippine Sugar Estate that courts proceed
with extreme caution which have for their object the forfeiture
of corporate franchise, and forfeiture will not be allowed,
except under express limitation, or for plain abuse of power
by which the corporation fails to fulfill the design and purpose
of its organization. But when the abuse or violation
constitutes or threatens a substantial injury to the public or
such as to amount to a violation of the fundamental conditions
of its charter, or its conduct is characterized by “obduracy or
pertinacity in contempt of law”, dissolution will be granted.
‣ Likewise, it has been held that the relief of dissolution will
be awarded only where no other adequate remedy is
available and it will not be allowed where the rights of the
stockholders can be, or are, protected in some other way.
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DEC. 17 (D)
INVOLUNTARY DISSOLUTION (CONTINUATION)
Involuntary dissolution is a harsh remedy that the courts, in most cases,
will not impose the same, because it is likened to a natural person, that
would be tantamount to the imposition of death penalty. Such that, the
courts usually will merely enjoin the furtherance of questioned act.
GOV’T VS. PHIL. SUGAR ESTATE
Under the facts stated in the decision, that the defendant and appellant
had, in the management of its business, violated the provisions of its
charter and should, therefore, be dissolved as a corporation and
prohibited from continuing to do business in the Philippine Islands
unless it complies with the conditions mentioned in the decision.
"When in any such action, it is found and adjudged that a corporation
has, by an act done or omitted, surrendered, or forfeited its corporate
rights, privileges, and franchise, or has not used the same during the
term of five years, judgment shall be entered that it be ousted and
excluded therefrom and that it be dissolved; but when it is found and
adjudged that a corporation has offended in any matter or manner
which does not by law work as a surrender or forfeiture, or has misused
a franchise or exercised a power not conferred by law, but not of such
a character as to work a surrender or forfeiture of its franchise,
judgment shall be rendered that it be ousted from the continuance of
such offense or the exercise of such power."
'The scope of the remedy furnished by it (quo warranto) is to forfeit the
franchises of a corporation-for misuser or nonuser. It is therefore
necessary in order to secure a judicial forfeiture of respondent's charter
to show a misuser of its franchises justifying such a forfeiture. And as
already remarked the object being to protect the public, and not to
redress private grievances, the misuser must be such as to work or
threaten a substantial injury to the public, or such as to amount to a
violation of the fundamental condition of the contract by which the
franchise was granted and thus defeat the purpose of the grant; and
ordinarily the wrong or evil must be one remediable in no other form
of judicial proceeding.
It was found that the offending corporation had been largely (though
indirectly) engaged in the buying and holding of real property for
speculative purposes in contravention of its charter and contrary to the
express provisions of law. Moreover, in that case the offending
corporation was found to be still interested in the properties so
purchased for speculative purposes at the time the action was brought.
Nevertheless, instead of making an absolute and unconditional order f
or the dissolution of the corporation, the judgment of ouster was made
conditional upon the failure of the corporation to discontinue its
unlawful conduct within six months after final decision.
The Philippine Sugar Estate was engaged in the buying and selling of
real property, which they usually sell to the Manila Railroad Company.
It is not authorized in the realty business by the AOI, and the
government instituted a quo warranto proceeding against the Phil.
Sugar Estate. The court did not immediately impose the extreme
penalty of dissolution and ruled that courts must proceed with extreme
caution which have for their objects the forfeiture of corporate
franchises. And a forfeiture will not be allowed, except upon express
limitation, or plain abuse of power for which the corporation fails to
fulfill the design and purpose of its organization. But if the abuse or
violation constitutes or threatens a substantial injury to the public, or
such as to amount a violation of the fundamental conditions of its
charter, dissolution would be warranted.

In the case at bar, the purpose of the corporation was to engage itself
at the expense of the taxpayers which according to the court would
merit the severest condemnation of the law. Despite that, the SC only
imposed a conditional dissolution, whereby granted the Phil. Sugar
Estate 6 months to cease and desist from further committing the
questioned act. If it does not, then that will be the point in time when
it shall be dissolved.
GOV’T VS. EL HOGAR FILIPINO
When it is found and adjudged that a corporation has offended in any
matter or manner which does not bylaw work as a surrender or"
forfeiture, or has misused a franchise or exercised a power not
conferred by law, but not of such a character as to work a surrender or
forfeiture of its franchise, judgment shall be rendered that it be ousted
from the continuance of such offense or the exercise of such power."
This provision clearly shows that the court has a discretion with respect
to the infliction of capital punishment upon corporations and that there
are certain misdemeanors and misusers of franchises which should not
be recognized as requiring their dissolution.
In the case before us the respondent appears to have rid itself of the
San Clemente property many months prior to the institution of this
action. It is evident from this that the dissolution of the respondent
would not be an appropriate remedy in this case.
INVALID BY-LAW; FORFEITURE OFFRANCHISE.—The
circumstance that one of the provisions contained in the by-laws of a
building and loan association is invalid as conflicting with the express
provision of statute is not a misdemeanor on the part of the corporation
for which the association can be penalized by the forfeiture of its
charter.
In this case, there were three causes of action relating to dissolution.
FIRST CAUSE OF ACTION: They have been holding titles of real
properties for a period in excess of 5 years after the property had been
bought by the corporation at one of its foreclosure sale. There was then
a law which required this financing/banking institution that when they
foreclose real properties, they must dispose of them within a period of
5 years.
The court ruled that while it is evident that the corporation has violated
that, it is equally obvious that the conduct is not characterized by
obduracy or pertinacity in contempt of the law. In this case, the said
properties were already disposed of several months before the
institution of quo warranto proceedings instituted against it. Likewise,
it is not entirely the fault of El Hogar Filipino that it could not dispose
the properties on time, since the government may have also contributed
to such failure, in view of its inability to issue the titles thereof within
a reasonable period.
SECOND CAUSE OF ACTION: Relative to the by-law empowering
the BOD to cancel the shares of stockholders, it is of a patent nullity
which cannot be enforced even if the directors would attempt to do so
as it runs counter to the Corporation Code.
Any provision in the by-laws which is contrary to law are deemed as
if they were not written at all.
REPUBLIC VS. SECURITY CREDIT
Banks; Nature of a bank; Accepting savings account deposits and
lending the amounts deposited constitute banking —A bank is a
moneyed institute founded to facilitate the borrowing, lending and
safekeeping of money and to deal in notes, bills of exchange and
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 127
credits. An investment company, which lends out the money of its
customers, collects the interest and charges a commission to both
lender and borrower, is a bank. Any person engaged in the business
carried on by banks of deposit, of discount, or of circulation is doing a
banking business, although but one of these functions is exercised. A
corporation. which accepted savings account deposits and lent the
money deposited to borrowers, engaged in banking, as the term is used
in Section 2 of the General Banking Act. It violated the law because it
did not secure any administrative authority to engage in banking.
Same; When corporation which engaged in illegal banking, may be
dissolved.—A corporation, which misused its corporate funds and
franchise by engaging in illegal banking, may be dissolved. Its acts
were willful, were repeated 59,463 times and the continuance of its
illegal operations causes public injury owing to the number of persons
affected thereby. A writ of quo warranto for its dissolution is proper,
Courts; Supreme Court has concurrent jurisdiction with Court of First
Instance to issue writ of quo warranto.—This Court is vested with
original jurisdiction, concurrently with the Courts of First Instance, to
hear and decide quo warranto cases. Where in a quo warranto
proceeding to dissolve a corporation there is no dispute as to the main
facts and the principal issue is legal, the Supreme Court may entertain
the quo warranto action, instead of remanding the case to the proper
Court of First Instance, and dispose of the case promptly as required
by the public interest. However, where a quo warranto case requires
the presentation of evidence, it should be filed in the proper Court of
First Instance, which is generally better equipped than an appellate
court for the taking of testimony and the determination of factual
issues.
In this case, the corporation is a direct lending institution which is
engaged in banking business without securing the secondary franchise
from the Central bank. It engaged in propaganda campaign resulting to
the opening of 59,000 saving accounts deposits. It was here that the SC
imposed the extreme penalty of dissolution, because the corporation
here involved has violated the law by engaging in business without
securing the administrative authority from the CB, and its continuance
threatens or inflicts a substantial injury to the public, which would be
the instance when the Court will impose the extreme penalty of
dissolution.
Under the rules of the CB, there are minimum paid-up capital in any
type of business activity from rural banks, savings, commercial, etc. In
this case, savings. Under the law, savings deposits are required to be
insured by the PDIC to the extent not less than 500K.
SO what would happen if there was a bank ran in a Security Credit
Corpo. The latter cannot pay back the depositors of what they have
deposit. They will point an accusing finger to the government for its
failure to check their responsibilities. Since it threatens a substantial
injury to the public, the SC, in this case, dissolved Security Credit
Corp.
REPUBLIC VS. BISAYA LAND TRANSPORTATION
Quo warranto; Dissolution; Evidence to prove quo warranto
dissolution of private corporation must be sufficient; When quo
warranto should not be granted.—After a very careful and deliberate
consideration of the evidence adduced by petitioner, the lower court
came to the conclusion that the same did not really warrant a quo
warranto by the State that could truly justify to decapitate corporate
life, and that the corporate acts or omissions complained of had not
resulted in substantial injury to the public, nor were they willful and
clearly obdurate. The court found that the several acts of misuse and
misapplication of the funds and/or assets of the Bisaya Land

Transportation Co., Inc. were committed more particularly by the
respondent Dr. Manuel Cuenco with the cooperation of Jose P. Velez,
for the commission of which they may be personally held liable. There
appears to be no reason for us to disregard the findings of the trial court,
which, applying well-settled doctrines, ought to be given due weight
and credit. x x x Besides, the court a quo found that the controversy
between the parties was more personal than anything else and did not
at all affect public interest.
Same; Same; Solicitor General’s motion to dismiss quo warranto
proceedings against private corporation, Purpose of; When relief by
dissolution awarded a party.—The Solicitor General himself asserts
that the only purpose of his motion for the dismissal of this quo
warranto is to take the State out of an unnecessary court litigation, so
that the dismissal of the case would result in the disposition solely of
the quo warranto by and between petitioner Republic of the
Philippines and the respondents named therein. Other interested parties
who might feel aggrieved, therefore, would not be without their
remedies since they can still maintain whatever claims they may have
against each other. It has been held that relief by dissolution will be
awarded only where no other adequate remedy is available, and is not
available where the rights of the stockholders can be, of are, protected
in some other way.
Same; Same; Same; Solicitor General’s power to discontinue State’s
litigation and to have quo warranto against private corporation
dismissed is subject to court approval and exceptions.—Meeting
squarely the issue of whether or not the Solicitor General is vested with
absolute and unlimited power to discontinue the State’s litigation and,
accordingly, to have the quo warranto petition dismissed, if and when
in his opinion this should be done, the general rule seems to be that the
plaintiff may do so with the approval of the court, subject to well-
defined exceptions (such as, for example, where the answer sets up a
counterclaim which cannot stand independently of the main action).
In this case, BLT was engaged in the transportation business. It falsely
reconstituted the AOI adding new purposes not originally included in
the AOI such as lumber concessions, cattle ranch, agriculture, general
merchandise, and even mining. Thereby, misusing and misapplying the
corporate funds. So, minority stockholder instituted an action for the
dissolution of the corporation.
The Court did not dissolve the corporation. Because the corporate acts
or omissions complained of had not resulted to substantial injury to the
public. This is because the several acts of misuse or misapplication of
funds and assets were committed more particularly by the responsible
corporate officers, for which they may be held personally liable under
Sec. 3_. If the stockholders are protected in other legal means, the
extreme penalty of dissolution will not be warranted. And they have
other legal remedies under Sec. 30 (?). Voting or assenting to patently
unlawful act or for bad faith or gross negligence in the conduct of
corporate affairs will render the directors or officers personally or
solidarily liable with the corporation.
Dissolution will only be warranted if the stockholders have no other
available remedy in law.
Q: What if the corporation involved in this case is a close corporation?
Would the court would have a change of heart?
A: Maybe, because it involves misapplication or misuse of corporate
funds, and that is one of the grounds for the dissolution of a close
corporation. It even says that any act prejudicial to the interest of any
stockholder, or even mere dishonesty, is a ground for dissolution of
close corporation.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 128
FINANCING CORP. VS. TEODORO
True it is that the general rule is that the minority stockholders of a
corporation cannot sue and demand its dissolution. However, there are
cases that hold that even minority stockholders may ask for dissolution,
this, under the theory that such minority members, if unable to obtain
redress and protection of their rights within the corporation, must not
and should not be left without redress and remedy. Even the existence
of a de jure corporation may be terminated in a private suit for its
dissolution by the stock holders without the intervention of the State.
CORPORATIONS ; INVOLUNTARILY DISSOLUTION ;
PETITION THEREFORE BYMINONRITY STOCKHOLDERS.—
Although as a rule minority stockholders of a corporation may not ask
for its dissolution in a private suit and such action should be brought
by the Government through its legal officer in a quo warranto case at
their instance and request, there might be exceptional cases wherein
the intervention of the State, for one reason or another, cannot be
obtained, as when the State, is not interested because the complaint is
strictly a matter between the stockholders and does not involve, in the
opinion of the legal officer of the Government, any of the acts or
omissions warranting quo warranto proceedings in which minority
stockholders are entitled to have such dissolution. When such action or
private suit is brought by them, the trial court has jurisdiction and may
or may not grant the prayer, depending upon the facts and
circumstances attending it.
Whether or not a stockholder may institute a dissolution proceedings
of the corporation? As the law stands now, any stockholder or member,
or even any interested party, can institute a dissolution proceeding
against the corporation before the proper court. This is clear from the
provision of PD 902-A, which provides that when the SEC, also now
the special commercial courts (RA 8799; SRC, Sec 5.2), shall hear and
decide cases involving intra-corporate disputes. Meaning, between and
among the stockholders, or between any or some of the directors or
officers, or between the corporation and the state insofar as it concerns
their individual franchise or right to exist as such entity.
One of the grounds for the dissolution of a corporation is fraud or
serious misrepresentation as to what the corporation can do, to the
damage of the investing _____. So, any person in interest who may
have been prejudiced by fraud or misrepresentation, and even the
stockholder themselves can institute an action for the dissolution of the
corporation on that ground.
Even the existence of a de jure corporation may be terminated in a
private suit for its dissolution between the stockholders without the
intervention of the State.
In a close corporation, a petition of such corporation may be instituted
by anyone individual stockholder on the ground even by mere
dishonest.
SEC. 138: The dissolution proceedings may even be instituted by any
interested party.
EFFECTS OF DISSOLUTION
1. The dissolution of a corporation not only terminates it
primary franchise to be and act as a corporation, but
generally prevents him from further exercising other or
secondary franchises which may have been conferred to it.
EX. Corporation. 50 years existence. It was also granted the
right of secondary franchise to operate a cold storage plant
by the Public Service Commission, also for 50 years. The

corporation was dissolved 25 years earlier. Can it still
engage in the operation of a cold storage plant? NO. The
secondary franchise will also be terminated.
2. It terminates its power to enter into contracts or to continue
the business as a going concern.
GR: A corporation, whose, corporate life expired, cannot
lawfully pursue the business for which it was organized.
3. It cannot apply for a new certificate or a secondary franchise
for it is incapable of receiving a grant.
Wala na siyang juridical personality.
4. It cannot enforce a contract executed prior its dissolution for
the purpose of continuing the business of its organization.
5. Debts due to or by the corporation are not extinguished.
Even in the absence of a statute, a court of equity will enforce
collection of debts due to or against a corporation, if brought
within the 3-year period of liquidation, for the benefit of
creditors and shareholders, and will satisfy debts due from
the corporation our of its assets.
Termination of the life of a juridical entity does not, by itself, imply
the diminution or extinction of rights demandable against such
juridical entity.
GR: The rights and liabilities of the dissolved corporation are not
extinguished by its dissolution.
SEC. 184. Effect of Amendment or Repeal of This Code, or the
Dissolution of a Corporation. – No right or remedy in favor of or
against any corporation, its stockholders, members, directors,
trustees, or officers, nor any liability incurred by any such corporation,
stockholders, members, directors, trustees, or officers, shall be
removed or impaired either by the subsequent dissolution of said
corporation or by any subsequent amendment or repeal of this Code
or of any part thereof.
Thus, a lease to a corporation may, by its terms, terminate where the
corporation ceases to exist. But unless the lease so provides, the rights
and obligations thereunder are not extinguished by the corporation’s
dissolution since leases affect property rights and survives the death of
the parties.
The stockholders succeed to the rights and liabilities of the dissolved
corporation in an unexpired leasehold state, which may have been
enforced by or against the receiver or liquidating trustee.
EXC: Contract for personal services = deemed terminated by
the dissolution of the corporation. (Implied condition that the
contract shall terminate in such event).
Despite its dissolution, a corporation nonetheless, continues to be body
corporate for a period of 3 more years for purposes of liquidation and
winding up of its affairs.
(See Sec. 139)
Upon the expiration of the 3-year period to wind-up its affairs, the
juridical personality of the corporation ceases for all intent and
purpose, and as a general rule, can no longer sue or be sued.
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BUENAFLOR VS. CAMARINES SUR INDUSTRY
CERTIFICATE OF PUBLIC CONVENIENCE; EXPIRATION OF
CORPORATE LIFE OF GRANTEE.—A corporation-grantee of a
certificate of public convenience to operate ice plant cannot lawfully
continue to sell ice after the expiration of its corporate life. Neither can
it apply for a new certificate for it is incapable of receiving a grant. It
can only continue to exist for three years for the purpose of winding up
its affairs.
Buenaflor filed an application to operate a cold storage plant in
CamSur. It was opposed by Camarines Sur Industry and likewise filed
a similar application. The application of Buenaflor was a 1-ton cold
storage. Buenaflor moved to dismiss the application/opposition of
Camarines Sur Industry because 4 year earlier, the corporate existence
of CamSur Industry expired. The latter, apparently and later registered,
a new AOI called the New Camarines Sur Industry, and assigned all
its assets, rights, and properties to the New Camarines Sur Industry.
The Public Service Commission provisionally granted the right to
operate the cold storage in favor of the New Camarines Sur Industry.
The SC ruled against such grant by the PSC. Because since 1953,
Camarines Sur Industry cease to exist and could not lawfully continue
its business. Also, when it applied in PSC, it no longer have the
personality to apply for a certificate of public convenience nor capable
acquiring any grant.
Once a corporation is dissolved, it can no longer pursue the business
for which it was organized inclusive of any secondary franchise that
were granted to it. Meaning from 1953 from which it was dissolved
until the date is applied for CPC is 1957, it was illegally applying for
such.
Such cold storage plant shall be granted in favor of Buenaflor.
CEBU PORT LABOR UNION VS. STATE MARINE
Section 77 of the Corporation Law in its stand to include the said
corporation as party respondent. Said Section 77 of the Corporation
Law reads as follows:
"SEC. 77. Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise, or whose corporate
existence for other purposes is terminated in any other manner, shall
nevertheless be continued as a body corporate for three years after the
time when it would have been so dissolved, for the purpose of
prosecuting and defending suits by or against it and of enabling it
gradually to settle and close its affairs, to dispose of and convey its
property and to divide its capital stock, but not for the purpose of
continuing the business for which it was established."
Even a cursory reading of the above-quoted provision would convey
the idea clearly manifested in the limitation "but not for the purpose of
continuing the business for which it was established", that the 3-year
period allowed by the corporation law is only for the purpose of
winding up its affairs. Petitioner-appellee prayed that it be declared to
have the right to the stevedoring work in question "thereby respecting
the contract entered into by petitioner and the Elizalde & Co. and
subsequently enforced and continued by the respondent States Marine
Corporation". It appearing that the said States Marine Corporation was
already dissolved at the time said petition was filed, and the vessel
subject of the agreement having changed hands, it cannot be compelled
now to respect such agreement specially considering the fact that it
cannot even be made a party to this suit.

Re: Executory Contracts
Cebu Port Labor Union filed for the recognition of a stevedoring
service. A motion to dismiss was filed on the ground that 1 year earlier,
the CPLU was dissolved, hence, it has no personality to enter to into
the contract.
An alleged stevedoring contract cannot be enforced on a dissolved
corporation even within the 3-year period of liquidation, as it would
violate the rule that the act ________ for the purpose of continuing the
business for which it is formed, organized, or established. Once
dissolved, it could no longer continue its business for which it was
formed or organized.
GONZALES vs. SUGAR REGULATORY ADMINISTRATION
Corporation Law; Termination of Life of Juridical Entities; The
termination of the life of a juridical entity does not by itself imply the
diminution or extinction of rights demandable against such juridical
entity.—It is petitioners’ position, as already noted, that dismissal of
the complaint as against SRA was erroneous because the abolition of
Philsucom and transfer of assets from Philsucom to respondent SRA
constitute an unconstitutional taking of property rights and, therefore,
ineffective. The implicit theory of petitioners is that they have a right
to follow Philsucom’s assets in the hands of the SRA. Petitioners’
argument on unconstitutionality is too impressionistic and needs to be
more sharply focused. One who asserts a claim against a juridical entity
has no constitutional right to the perpetual existence of such entity.
Juridical persons, whether incorporated or not, whether owned by the
government or the private sector, may come to an end at one time or
another for a variety of reasons, e.g., the fulfillment or the
abandonment of the business purposes for which a corporation was set
up. Thus, the Corporation Code provides for termination of corporate
life, the dissolution of the corporation, the winding up of its operations,
the liquidation of its assets, the payment of its obligations and
distribution of any residual assets to its stockholders. The termination
of the life of a juridical entity does not by itself imply the diminution
or extinction of rights demandable against such juridical entity.
Constitutional Law; Non-Impairment Clause; Administrative Law;
Executive Order No. 18; Civil Law; Obligations and Contracts; The
abolition of the PHILSUCOM and the transfer of its assets to the Sugar
Regulatory Administration by virtue of E.O. No. 18 should not impair
contractual obligations entered into by PHILSUCOM before its
abolition; claimants of Philsucom have a right to follow Philsucom’s
assets in the hands of the Sugar Regulatory Administration.—That the
assets of the Philsucom must respond for payment of lawful
obligations of Philsucom, does not appear to require demonstration.
The assets which, in accordance with the second paragraph of Section
13 of Executive Order No. 18, may be taken over by the SRA, can thus
be only net or residual assets, assets remaining after payment of the
valid and enforceable liabilities of Philsucom has been made or been
adequately provided for. We believe, in other words, that Section 13
of Executive Order No. 18 is not to be interpreted as authorizing
respondent SRA to disable Philsucom from paying Philsucom’s
demandable obligations by simply taking over Philsucom’s assets and
immunizing them from legitimate claims against Philsucom. The right
of those who have previously contracted with, or otherwise acquired
lawful claims against, Philsucom, to have the assets of Philsucom
applied to the satisfaction of those claims, is a substantive right and not
merely a procedural remedy. Section 13 cannot be read as permitting
the SRA to destroy that substantive right. We think that such an
interpretation would result in Section 13 of Executive Order No. 18
colliding with the non-impairment of contracts clause of the
Constitution insofar as contractual claims are concerned, and with the
due process clause insofar as non-contractual claims are concerned. To
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 130
avoid such a result, we believe and so hold that should the assets of
Philsucom remaining in Philsucom at the time of its abolition not be
adequate to pay for all lawful claims against Philsucom, respondent
SRA must be held liable for such claims against Philsucom to the
extent of the fair value of assets actually taken over by the SRA from
Philsucom, if any. To this extent, claimants against Philsucom do have
a right to follow Philsucom’s assets in the hands of SRA or any other
agency for that matter. This result appears no more than a dictate of
elementary fairness, particularly when one takes into account that
under Section 11 of Executive Order No. 18, the SRA will continue,
“until otherwise provided, as directed and ordered by the President of
the Philippines,” to collect and receive the proceeds of “levies, charges
and other impositions as [then] granted by law, decree and/or executive
order, to the [Philsucom].” Whether the deductions here assailed by
petitioners are included among the “levies, charges and other
impositions” then made by Philsucom and now continued by SRA,
must be determined by the trial court.
An Executive Order. 18 abolished the Philippine Sugar Commission
and created the Sugar Regulatory Administration, transferring all
assets, properties, rights, and records of the former to the latter.
Gonzales filed a complaint for a sum of money against Republic
Planters Bank, the SRA, and PhilSuCom.
Whether or not SRA may be held liable for the debts and liabilities of
Philsucom, the dissolved corporation? – YES
Section 13 of the EO cannot be read as permitting the SRA to destroy
the substantive right of those who have legal claims against the
PhilSuCom. Such an interpretation would collide with the non-
impairment clause of the Constitution, insofar as contractual claims are
concerned and with the due process clause, insofar as non-contractual
claims are concerned.
If the assets of the PhilSuCom at the time of its dissolution be not
adequate to pay all lawful claims against it, respondent SRA must be
held liable for such claims against PhilSuCom, at least to the extent of
the fair value of assets taken over by the SRA from the dissolved
corporation. To that extent, the complainant against PhiSuCom who
have the right to follow its assets in the hands of SRA or any agency
to which may have been transferred.
(Sec. 184 of the CC)
LIQUIDATION AND WINDING UP – collection of all corporate
assets of the dissolved corporation, the payments of all its debts and
settlement of its obligations and the ultimate distribution of the
corporate assets, if any of it remains, to all stockholders in accordance
with their proportionate stockholdings in the corporation or in
accordance with their respective contracts of subscription (preferred
shares).
SEC. 139. Corporate Liquidation. – Except for banks, which shall be
covered by the applicable provisions of Republic Act No. 7653,
otherwise known as the “New Central Bank Act”, as amended, and
Republic Act No. 3591, otherwise known as the Philippine Deposit
Insurance Corporation Charter, as amended, every corporation whose
charter expires pursuant to its articles of incorporation, is annulled by
forfeiture, or whose corporate existence is terminated in any other
manner, shall nevertheless remain as a body corporate for three (3)
years after the effective date of dissolution, for the purpose of
prosecuting and defending suits by or against it and enabling it to settle
and close its affairs, dispose of and convey its property, and distribute
its assets, but not for the purpose of continuing the business for which
it was established.
At any time during said three (3) years, the corporation is authorized
and empowered to convey all of its property to trustees for the benefit

of stockholders, members, creditors and other persons in interest. After
any such conveyance by the corporation of its property in trust for the
benefit of its stockholders, members, creditors and others in interest,
all interest which the corporation had in the property terminates, the
legal interest vests in the trustees, and the beneficial interest in the
stockholders, members, creditors or other persons-in-interest.
Except as otherwise provided for in Sections 93 and 94 of this Code,
upon the winding up of corporate affairs, any asset distributable to any
creditor or stockholder or member who is unknown or cannot be found
shall be escheated in favor of the national government
. When a corporation is dissolved and the liquidation of the
Except by decrease of capital stock and as otherwise allowed by this
Code, no corporation shall distribute any of its assets or property
except upon lawful dissolution and after payment of all its debts and
liabilities.
GR: Corporation dissolved is granted a period of 3-years to liquidate
and wind up its affairs.
THREE MODES OF LIQUIDATION AND WINDING UP
1. BY THE CORPORATION ITSELF THROUGH THE
BOD
- Although there is no express provision authorizing it, neither
is there that will prohibit the BOD undertaking the same, this
is the usual method or procedure of liquidating a corporation.
The power of the BOD to manage the corporate affairs is
broad enough to cover a situation where the corporate affairs
are to be liquidated.
If this method is resorted to, the board will only have a period
of 3 years to finish its task of liquidation.
Claims for or against the corporation not filed within the
period will become unenforceable as there exist no corporate
entity against which they can be enforced. Actions pending
for or against the corporation when the 3-year period expires
are abated since after that period, the corporation ceases for
all intents and purposes and is no longer capable of suing or
being sued.
2. BY ASSIGNEE OR TRUSTEE APPOINTED BY THE
CORPORATION
- The corporation may opt to convey all corporate assets to a
trustee/assignee who will take charge of liquidation.
If this method is resorted to, the 3-year period limitation will
not apply provided the designation of the trustee is made
within that 3-year period. Should the BOD, who initially
took the cordials of liquidating and winding up the affairs of
the dissolved corporation, finds it difficult to finish its task
of liquidation, it may, at any time within the 3-year period,
convey all its properties, assets or rights to a trustee/assignee
to continue its liquidation process. Unless the trusteeship is
limited in duration in the Deed of Trust, there is no time limit
within which the trustee must finish the task of liquidation.
EFFECT: the corporation, as represented by its trustee, may
sue or be sued even beyond the 3-year period fixed by law.
3. BY THE APPOINTMENT OF A RECEIVER OR
LIQUIDATOR.
- A receiver/liquidator may be appointed by the proper forum
(SEC or SCC) on petition or motu proprio upon the
dissolution of the corporation.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 131
The appointment of a receiver/liquidator is permissive rather
than mandatory, and the law tends to recognize that in cases
of voluntary dissolution, there is no occasion for the
appointment of a receiver except under special
circumstances and upon proper showing.
If a receiver/liquidator is appointed, the 3-year period fixed
by law within which to complete the task of liquidation will
not apply because the dissolved corporation is substituted by
the receiver who may sue or be sued even after that period.
assets is placed in the hands of receiver/liquidator, the period
of 3 years prescribed by law is not applicable and the
assigned may institute all actions leading to the liquidation
of the corporation even after the expiration of three years.
The mere appointment of a receiver without anything more
does not imply in the dissolution of corporation, as it may be
appointed by the court even while the corporation is a going
concern.
NATIONAL ABACA VS. PORE
Corporations; Dissolution; Status of pending actions by or against
dissolved corporations.—In the absence of statutory provision to the
contrary, pending actions by or against a corporation are abated upon
expiration of the period allowed bylaw for the liquidation of its affairs.
“It is generally held, that where a statute continues the existence of a
corporation for a certain period after its^ dissolution for the purpose of
prosecuting and defending suits, etc., the corporation becomes defunct
upon the expiration of such period, at least in the absence of a provision
to the contrary, so that no action can afterwards be brought by or
against it, and must be dismissed. Actions pending by or against the
corporation when the period allowed by the statute expires, ordinarily
abate.
Same; Absence of authority to continue in its corporate name actions
instituted by a dissolved corporation within three years from
dissolution.—The Corporation Law contains no provision authorizing
a corporation, after three years from the expiration of its lifetime, to
continue in its corporate name actions instituted by it within said period
of three years. In fact, section 77 of said law provides that the
corporation shall “be continued as a body corporate for three (3) years
after the time when it would have been x x x dissolved, for the purpose
of prosecuting and defending suits by or against it x x x,” so that,
thereafter, it shall no longer enjoy corporate existence for such
purpose. For this reason, section 78 of the same law authorizes the
corporation, “at any time during said three years x x x to convey all of
its property to trustees for the benefit of members, stockholders,
creditors and others in interest”, evidently for the purpose, among
others, of enabling said trustees to prosecute and defend suits by or
against the corporation begun before the expiration of said period.
ISSUE: Whether an action commenced within the 3-year period may
be continued even if after the expiration of such period. (In this case,
there was a trustee appointed for the corporation.) – YES
Pending actions by or against a dissolved corporation may be
continued even after the expiration of the 3-year period if there is a
trustee/assignee appointed. The action may be continued by the latter
to whom the corporate properties are conveyed or transferred within
the 3-year period even if the case will drag on beyond the said 3-year
period.

Sec. 139, par 2: The effect of the conveyance of the properties and or
rights of the dissolved corporation is to make the trustee/assignee the
legal owner of the properties conveyed, subject only to the beneficial
ownership of the stockholders and creditors alike. The trustee/assignee
will the principal, subject only to the beneficial interest of the
stockholders and creditors alike.
SUMERA VS. VALENCIA
In the light of the legal provisions and authorities cited, interpretative
of said laws, if the corporation carries out the liquidation of its assets
through its own officers and continues and defends the actions brought
by or against it, its existence shall terminate at the end of three years
from the time of dissolution; but if a receiver or assignee is appointed,
as has been done in the present case, with or without a transfer of its
properties within three years, the legal interest passes to the assignee,
the beneficial interest remaining in the members, stockholders,
creditors and other interested persons; and said assignee may bring an
action, prosecute that which has already been commenced for the
benefit of the corporation, or defend the latter against any other action
already instituted or which may be instituted even outside of the period
of three years fixed for the officers of the corporation.
CORPORATIONS; DlSSOLUTION AND LlQUIDATION;
RECEIVER OR ASSIGNEE; PERIOD WITHIN WHICH
THELATTER MAY BRING ACTIONS.—When a corporation is
dissolved and the liquidation of its assets is placed in the hands of a
receiver or assignee, the period of three years prescribed by section 77
of Act No. 1459 known as the Corporation Law is not applicable, and
the assignee may institute all actions leading to the liquidation of the
assets of the corporation even after the expiration of three years.
The corporation filed for a voluntary dissolution, which was granted,
with the appointment of an assignee to liquidate the affairs of the
dissolved corporation. It was later substituted by Sumera, who in 1936
filed an action for the recovery for sum of money plus interest against
Valencia.
Valencia questioned the claim advancing the argument that it has
prescribed; that the corporation was dissolved in 1928 and the
collection case was filed 1936.
The SC ruled that it has not prescribed because if the corporation
carries the liquidation by itself, its existence terminates at the end of
the 3-year period; but when a receiver/assignee is appointed within that
period, the assignee/receiver may bring action even beyond that 3-year
period.
BOARD OF LIQUIDATORS VS. KALAW
Corporations; Three methods of winding up corporate affairs.—
Accepted in this jurisdiction are three methods by which a corporation
may wind up its affairs: (1) under Section 3, Rule 104,of the Rules of
Court (which superseded Section 66 of the Corporation Law),
whereby, upon voluntary dissolution of a corporation, the court may
direct "such disposition of its assets as justice requires, and may
appoint a receiver to collect such assets and pay the debts of the
corporation"; (2) under Section 77 of the Corporation Law, whereby a
corporation whose corporate existence is terminated, "shall
nevertheless be continued as a body corporate for three years after the
time when it would have been so dissolved, for the purpose of
prosecuting and defending suits by or against it and of enabling it
gradually to settle and close its affairs, to dispose of and convey its
property and to divide its capital stock, but not for the purpose of
continuing the business for which it was established"; and (3)under
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Section 78 of the Corporation Law, by virtue of which the corporation,
within the three-year period just mentioned, "is authorized and
empowered to convey all of its property to trustees for the benefit of
members, stockholders, creditors, and others interested,"
Board of Liquidators; Trustee for government.—By Executive Order
No. 372, the government, the sole stockholder, abolished the National
Coconut Corporation (NACOCO) and placed its assets in the hands of
the Board of Liquidators. The Board thus became the trustee on behalf
of the government. It was an express trust. The legal interest became
vested in the trustee, the Board of Liquidators. The beneficial interest
remained with the sole stockholder, the government. The Board took
the place of the dissolved government corporations after the expiration
of the statutory three-year period for the liquidation of their affairs.
Same; No term for life of Board.—No time limit has been tacked to the
existence of the Board of Liquidators and its function of closing the
affairs of various government corporations. Its term of life is not fixed.
Same; Right of Board of Liquidators to proceed as party plaintiff; Case
at bar.—At no time had the government withdrawn the property. or
the authority to continue the present suit, from the Board of
Liquidators. Hence, the Board can prosecute this case to its final
conclusion. The provisions of Section 78 of the Corporation Law, the
third method of winding up corporate affairs, find application. The
Board has personality to proceed as party-plaintiff in this case.
GELANO VS. CA
Corporation Law; Attorneys; Trustee; A corporation with a pending
court action may still continue prosecuting or defending the same for
three years after its dissolution. Its legal counsel maybe considered its
trustee for that case only.—However, a corporation that has a pending
action and which cannot be terminated within the three-year period
after its dissolution is authorized under Section 78 to convey all its
property to trustees to enable it to prosecute and de fend suits by or
against the corporation beyond the three-year period. Although private
respondent did not appoint any trustee, yet the counsel who prosecuted
and defended the interest of the corporation in the instant case and who
in fact in behalf of the corporation may be considered a trustee of the
corporation at least with respect to the matter in litigation only. Said
counsel had been handling the case when the same was pending before
the trial court until it was appealed before the Court of Appeals and
finally to this Court. We therefore hold that there was a substantial
compliance with Section 78 of the Corporation Law and as such,
private respondent Insular Sawmill, Inc. could still continue
prosecuting the present case even beyond the period of three (3) years
from the time of its dissolution.
Same; Same; Same.—The word “trustee” as used in the corporation
statute must be understood in its general concept which could include
the counsel to whom was entrusted in the instant case, the prosecution
of the suit filed by the corporation. The purpose in the transfer of the
assets of the corporation to a trustee upon its dissolution is more for
the protection of its creditor and stockholders. Debtors like the
petitioners herein may not take advantage of the failure of the
corporation to transfer its assets to a trustee, assuming it has any to
transfer which petitioner has failed to show, in the first place. To
sustain petitioners’ contention would be to allow them to enrich
themselves at the expense of another, which all enlighted legal systems
condemn.
Complainant Insular Sawmill, Inc, thru counsel, filed a case for
collection of sum of money against Gelano. The corporation was
dissolved by shortening of its corporate term. Four years later, after the

dissolution of the corporation, the lower court rendered a decision in
favor of the dissolved corporation.
ISSUE: Can the dissolved corporation continue prosecuting/defending
suits beyond the 3-year period? – YES
‘Trustee’ must be understood in its general concept which would
include the counsel to whom the case it entrusted. Thus, while the
private respondent did not appoint a trustee/assignee, the counsel who
prosecuted and defended the suit or the interest of the dissolved
corporation may be considered as its trustee, at least to the respect to
the matter subject of the liquidation.
(PLEASE TAKE NOTE OF THIS CASE)
Walang inappoint na trustee, assignee, liquidator or receiver, basta nai-
file yung case thru counsel, within the three-year period, the counsel is
deemed the trustee/assignee. And he can continue
prosecuting/defending suit for or against the corporation.
CHUNG KA BIO VS. IAC
While we agree that the board of directors is not normally permitted to
undertake any activity outside of the usual liquidation of the business
of the dissolved corporation, there is nothing to prevent the
stockholders from conveying their respective shareholdings toward the
creation of a new corporation to continue the business of the old.
Winding up is the sole activity of a dissolved corporation that does not
intend to incorporate anew. If it does, however, it is not unlawful for
the old board of directors to negotiate and transfer the assets of the
dissolved corporation to the new corporation intended to be created as
long as the stockholders have given their consent. This was not
prohibited by the Corporation Act. In fact, it was expressly allowed by
Section 28-1/2.
What the Court finds especially intriguing in this case is the fact that
although the deed of assignment was executed in 1977, it was only in
1981 that it occurred to the petitioners to question its validity. All of
four years had elapsed before the petitioners filed their action for
liquidation of both the old and the new corporations, and during this
period, the new PBM was in full operation, openly and quite visibly
conducting the same business undertaken earlier by the old dissolved
PBM. The petitioners and the private respondents are not strangers but
relatives and close business associates. The PBM office is in the heart
of Metro Manila. The new corporation, like the old, employs as many
as 2,000 persons, the same personnel who worked for the old PBM.
Additionally, one of the petitioners, Chung Siong Pek, was one of the
directors who executed the deed of assignment in favor of the old PBM
and it was he also who received the deeded assets on behalf and as
treasurer of the new PBM.15 Surely, these circumstances must operate
to bar the petitioners now from questioning the deed of assignment
after this long period of inaction in the protection of the rights they are
now belatedly asserting. Laches has operated against them.
ISSUE: Whether or not a dissolved corporation may transfer all its
assets, property and/or rights to a new corporation that will continue
the business of the dissolved corporation. - YES
GR: Dissolved corporation cannot continue the business for which it
was formed or organized.
EXC: During the period of its liquidation with the consent of at least
2/3 of the outstanding capital stock, the dissolved corporation may
transfer all its rights and properties to a new corporation that will
continue the business of the dissolved one, because liquidation and
winding up is the sole activity of the dissolved corporation that does
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 133
not intend to incorporate anew. Therefore, it is not unlawful for the
corporation with the required consent, to transfer all its
properties/rights to a new one that will continue the business of the
dissolved corporation
SEC. 39: xxx A sale of all or substantially all of the corporation's
properties and assets, including its goodwill, must be authorized by the
vote of stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, or at least two-thirds (2/3) of the members,
meeting duly called for the purpose. xxx
CLEMENTE VS. CA
Corporation Law; Corporation Code; Dissolution; Sections 117 to
122 of the Corporation Code provide the various modes for dissolving,
liquidating or winding up, and terminating the life of the
corporation.—If, indeed, the sociedad has long become defunct, it
should behoove petitioners, or anyone else who may have any interest
in the corporation, to take appropriate measures before a proper forum
for a peremptory settlement of its affairs. We might invite attention to
the various modes provided by the Corporation Code (see Secs. 117-
122) for dissolving, liquidating or winding up, and terminating the life
of the corporation. Among the causes for such dissolution are when the
corporate term has expired or when, upon a verified complaint and
after notice and hearing, the Securities and Exchange Commission
orders the dissolution of a corporation for its continuous inactivity for
at least five (5) years.
Same; Same; Same; Corporation continues to be a body corporate for
three (3) years after its dissolution for purposes of prosecuting and
defending suits by and against it and for enabling it to settle and close
its affairs.—The corporation continues to be a body corporate for three
(3) years after its dissolution for purposes of prosecuting and defending
suits by and against it and for enabling it to settle and close its affairs,
culminating in the disposition and distribution of its remaining assets.
Same; Same; Same; The termination of the life of a juridical entity does
not by itself cause the extinction or diminution of the rights and
liabilities of such entity nor those of its owners and creditors.—It may,
during the three-year term, appoint a trustee or a receiver who may act
beyond that period. The termination of the life of a juridical entity does
not by itself cause the extinction or diminution of the rights and
liabilities of such entity nor those of its owners and creditors. If the
three-year extended life has expired without a trustee or receiver
having been expressly designated by the corporation within that
period, the board of directors (or trustees) itself, may be permitted to
so continue as “trustees” by legal implication to complete the corporate
liquidation. Still in the absence of a board of directors or trustees, those
having any pecuniary interest in the assets, including not only the
shareholders but likewise the creditors of the corporation, acting for
and in its behalf, might make proper representations with the Securities
and Exchange Commission, which has primary and sufficiently broad
jurisdiction in matters of this nature, for working out a final settlement
of the corporate concerns.
Sociedad are precursors of the corporation. (Spanish regime: Code of
Commerce). A juridical entity may be formed through the provisions
of COC of Spain, known as the Sociedad Anonima.
Under COC, they were also granted the right to exist for a period of 50
years. In 1906, the Corporation Law came into the picture. From then
on, no more Sociedad Anonimas were formed and organized as such.
They must only be formed either as partnership and/or as a corporation.
Assuming that the Sociedad Popular Calambena, which was engaged
in cockfighting, was formed and organized in 1905 can exist for a
period of 50 years (1905-1955). It acquired a certain piece of property

and yung mga apo sa tuhod ng dalawang stockholders are claiming
ownership of the property left by the corporation. However, the
petitioners failed to substantiate their claim of ownership.
The Court ruled the property still belongs to the corporation. The
termination of the life of a juridical entity does not, by itself, cause the
extinction or diminution of the rights and liabilities of such entity
(Gonzales vs. SRA) nor those of its owners or creditors.
If the three-year period has expired without a trustee having been
appointed, the BOD itself may be permitted to continue as trustees by
legal implication. In the absence of BOD, those having any pecuniary
interest in the corporate assets, including stockholders and creditors,
may make proper representations with the SEC for working out a final
settlement of a corporate concern.
APPLICABLE RULE: A dissolved corporation that does not liquidate
or wind-up its affairs, if there are no known creditors, no known
stockholders and directors, the property that the dissolved corporation
had shall be escheated in favor of the city/municipality where it has its
principal office.
If we apply, this decision of the SC (Clemente vs. CA), when can there
be an escheat proceeding? – NONE, because at any point in time,
somebody will claim ownership to the properties left behind by the
dissolved corporation 40 years ago. Escheat will never happen.
Gonzales vs. SRA: There was a successor corporation in the person of
SRA, it succeeded PhilSuComm.
There was no successor of the dissolved Sociedad Anonima.
Gelano vs. CA: There was a lawyer who prosecuted and defended for
or against the corporation.
There was nobody here that prosecuted and defended the interest of the
Sociedad Anonima.
READ THE 2nd PAR OF SEC. 139. THIS DECISION IS VERY
ERRONEOUS. Sabi ng decision, any person-in-interest make proper
representations to the SEC for the final settlement of the corporate
affairs. ANO GAGAWIN NG MGA TIGA-SEC? Alam naman ng
SEC na pag dissolved na ang corporation for more than 3 years, no
trustees/receiver/liquidator/assignee appointed, it is dissolved for all
intents and purposes. THIS CASE IS VERY ERRONEOUS
(CLEMENTE vs. CA). It may even open the door for fraud, because
anyone may falsely claim to such properties if such ruling will be
allowed.
DEC. 22 - BREAK
DEC. 29 – BREAK
JAN. 5 (E)
FOREIGN CORPORATION
Foreign Corporation is defined under Sec. 140 as one formed or
organized under any laws other than those of the Philippines and whose
laws allows Filipino citizens and corporations to do business in its own
country or State.
SEC. 140. Definition and Rights of Foreign Corporations. – For
purposes of this Code, a foreign corporation is one formed, organized
or existing under laws other than those of the Philippines’ and whose
laws allow Filipino citizens and corporations to do business in its own
country or State. It shall have the right to transact business in the
Philippines after obtaining a license for that purpose in accordance
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 134
with this Code and a certificate of authority from the appropriate
government agency.
The phrase “whose laws allow Filipino citizens and corporations to do
business in its own country or State” is not an accurate inclusion in the
definition of a foreign corporation as any corporation registered or
organized under the laws of another state is necessarily a foreign
corporation whether or not the state of its corporation allow Filipino
citizens or corporations to do business in that forum. The said phrase
was inserted by framers of the law only as a condition precedent to the
grant of a license to do business in the Philippines. If the state of
incorporation of that Foreign Corporation does not allow Filipino
citizens or corporation to do business in its own country or state, the
Philippines will not also grant a license to that corporation to do
business here in the Philippines. This is so because with respect to
particular state, a corporation created by the laws of that state is a
domestic corporation. And any corporation which owes to the
existence to the laws of another state, government or country is thus a
foreign corporation.
Otherwise stated, a foreign corporation is one created or organized
under the laws, state or government other than those of the forum.
From the definition of sec 140 the test in determining whether the
corporation is foreign or domestic is what we call the
INCORPORATION TEST.
The place of its incorporation irrespective of the nationalities of the
stockholders. For instance, under the trade liberalization law of the
Philippines, if the paid-up capital is atleast 2.5M USD or its peso
equivalent, all the shares may be held by foreigners. So assuming that
the paid-up capital is 2.5MUSD and all the shares are held by
Australians. It is a registered under the corpo code of the Philippines.
Is it a domestic or foreign Corporation? It is a domestic corporation
because it is registered under the laws of the Philippines.
Let’s see the reverse. Filipino immigrants in California. They live in
California; they formed a corporation under the laws of California- it
is a foreign corporation because it is registered under the laws of
another state or country.
However, this incorporation test will not apply in cases of war. As held
by the high Court in Filipinas Cia De Seguros vs Huenfeld, where the
court held that the “control test” determines the nationality of a
corporation in cases of war. The nationality of the controlling
stockholder determines the nationality of the corporation for purposes
of national security.
Like for instance as I was saying, the Tradde Liberalization Law, the
2.5MUSD paid-up capital and all the shares are owned by Australian
citizens. Assuming that the Philippines and Australia went to war. That
corporation registered under PH laws will be considered as a foreign
corporation (Australian Corporation) for purposes of national security.
BUT speaking of the control test, shares belonging to corporations or
partnerships, 60% of the capital stocks is owned by Filipino citizens
shall be considered as PH national, but if the percentage of Filipino
ownership on the corporation or partnership is less than 60%, only the
number of shares corresponding to such percentage shall be counted as
Philippine national. So that the 100K shares are registered on the name
of a corporation or partnership, at least 60% of the capital stock of
which belong to Filipino Citizens, all of the shares shall be recorded or
considered as owned by Filipinos. BUT if less than 60%, or say 50%
of the capital stock or partnership belongs to Filipino citizens. Only
50K shares shall be recorded as belonging to aliens.
Let’s take a look at this.

Narra Mining, Tesoro Mining and Tesoro Mining.
39.9% of the OCS of Narra mining are owned and held by MBMI,
a 100% Canadian-owned Corporation.
Tesoro Mining- 39.9% of its OCS are owned and held by MBMI, a
100% Canadian-owned Corporation.
McArthur Mining- which also 39.9% of its OCS are owned by
MBMI.
These three corporations are considered as fully-owned by citizens of
the Philippines. There you have it.
However, the Grandfather Rule will be applied if there is a doubt as
to the locus of the beneficial and/or the controlling interests of the
shares will be doubtful.
The ruling in the case of Narra Nickel Mining vs Redmont Mines.
Initially, at the outset, the case was decided by the SC sitting en banc,
I did not dare to discuss the matter because there was then an issue as
to this grandfather rule when it may be applicable. There is a
conflicting opinion between the SEC and the DOJ then. But in a motion
for reconsideration dated January 28, 2015, the SC came up with a
resolution and held that the corporation that complies with the 60-40
Filipino to foreign equity requirement can be considered as Filipino
corporation if there is NO DOUBT as to who has the beneficial
ownership and control of the corporation.
In that instance, there is no need for the dissection or a further inquiry
on the ownership of the corporate shareholdings in the investing and
the investee corporation OR the application of the grandfather rule.
As a corollary rule, even if the 60-40 Filipino to foreign equity
requirement is apparently met by the subject or the investee
corporation a resolve to the grandfather rule is necessary. IF DOUBT
EXISTS as to the locus of the beneficial ownership and control, if that
be the case, a further investigation as to the nationality of the
personalities with the beneficial ownership and control of the corporate
shareholders in both the investing and investee corporation is
necessary.
Narra Nickel Mining and Development Corporation vs. Redmont
Consolidated Mines Corporation, 777 SCRA 258, G.R. No.
202877 December 9, 2015
Corporations; Grandfather Rule; The Grandfather Rule was
originally conceived to look into the citizenship of the individuals who
ultimately own and control the shares of stock of a corporation for
purposes of determining compliance with the constitutional
requirement of Filipino ownership.—Sec. 2, Art. XII of the
Constitution reserves the exploration, development, and utilization of
natural resources to Filipino citizens and “corporations or associations
at least sixty percentum of whose capital is owned by such citizens.”
Similarly, Section 3(aq) of the Philippine Mining Act of 1995
considers a “corporation x x x registered in accordance with law at least
sixty percent of the capital of which is owned by citizens of the
Philippines” as a person qualified to undertake a mining operation.
Consistent with this objective, the Grandfather Rule was originally
conceived to look into the citizenship of the individuals who ultimately
own and control the shares of stock of a corporation for purposes of
determining compliance with the constitutional requirement of Filipino
ownership. It cannot, therefore, be denied that the framers of the
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 135
Constitution have not foreclosed the Grandfather Rule as a tool in
verifying the nationality of corporations for purposes of ascertaining
their right to participate in nationalized or partly nationalized activities.
Same; Same; To arrive at the actual Filipino ownership and control in
a corporation, both the direct and indirect shareholdings in the
corporation are determined.—As further defined by DeanCesar
Villanueva, the Grandfather Rule is “the method by which the
percentage of Filipino equity in a corporation engaged in
nationalized and/or partly nationalized areas of activities, provided for
under the Constitution and other nationalization laws, is computed, in
cases where corporate shareholders are present, by attributing the
nationality of the second or even subsequent tier of ownership to
determine the nationality of the corporate shareholder. “Thus, to
arrive at the actual Filipino ownership and control in a corporation,
both the direct and indirect shareholdings in the corporation are
determined.
Same; Same; The method employed in the Grandfather Rule of
attributing the shareholdings of a given corporate shareholder to the
second or even the subsequent tier of ownership hews with the rule that
the “beneficial ownership” of corporations engaged in nationalized
activities must reside in the hands of Filipino citizens.—The method
employed in the Grandfather Rule of attributing the shareholdings of a
given corporate shareholder to the second or even the subsequent tier
of ownership hews with the rule that the “beneficial ownership” of
corporations engaged in nationalized activities must reside in the hands
of Filipino citizens. Thus, even if the 60-40 Filipino equity requirement
appears to have been satisfied, the Department of Justice (DOJ), in its
Opinion No. 144, S. of 1977, stated that an agreement that may
distort the actual economic or beneficial ownership of a mining
corporation may be struck down as violative of the constitutional
requirement.
Same; Same; If the subject corporation’s Filipino equity falls below
the threshold sixty percent (60%), the corporation is immediately
considered foreign-owned, in which case, the need to resort to the
Grandfather Rule disappears.—The Grandfather Rule, standing alone,
should not be used to determine the Filipino ownership and control in
a corporation, as it could result in an otherwise foreign corporation
rendered qualified to perform nationalized or partly nationalized
activities. Hence, it is only when the Control Test is first complied
with that the Grandfather Rule may be applied. Put in another
manner, if the subject corporation’s Filipino equity falls below the
threshold 60%, the corporation is immediately considered foreign-
owned, in which case, the need to resort to the Grandfather Rule
disappears. On the other hand, a corporation that complies with the
60-40 Filipino to foreign equity requirement can be considered a
Filipino corporation if there is no doubt as to who has the
“beneficial ownership” and “control” of the corporation. In that
instance, there is no need for a dissection or further inquiry on the
ownership of the corporate shareholders in both the investing and
investee corporation or the application of the Grandfather Rule. As
a corollary rule, even if the 60-40 Filipino to foreign equity ratio is
apparently met by the subject or investee corporation, a resort to the
Grandfather Rule is necessary if doubt exists as to the locus of the
“beneficial ownership” and “control.” In this case, a further
investigation as to the nationality of the personalities with the
beneficial ownership and control of the corporate shareholders in both
the investing and investee corporations is necessary.
Same; Same; While the Grandfather Rule was originally intended to
trace the shareholdings to the point where natural persons hold the
shares, the Securities and Exchange Commission (SEC) had already
set up a limit as to the number of corporate layers the attribution of
the nationality of the corporate shareholders may be applied.—
Parenthetically, it is advanced that the application of the Grandfather

Rule is impractical as tracing the shareholdings to the point when
natural persons hold rights to the stocks may very well lead to an
investigation ad infinitum. Suffice it to say in this regard that, while the
Grandfather Rule was originally intended to trace the shareholdings to
the point where natural persons hold the shares, the SEC had already
set up a limit as to the number of corporate layers the attribution of the
nationality of the corporate shareholders may be applied. In a 1977
internal memorandum, the SEC suggested applying the Grandfather
Rule on two (2) levels of corporate relations for publicly-held
corporations or where the shares are traded in the stock exchanges, and
to three (3) levels for closely held corporations or the shares of which
are not traded in the stock exchanges. These limits comply with the
requirement in Palting v. San Jose Petroleum, Inc., 18 SCRA 924
(1966), that the application of the Grandfather Rule cannot go beyond
the level of what is reasonable.
Let’s go back to our illustration earlier
Narra Mining, Tesoro Mining and Tesoro Mining.
39.9% of the OCS of Narra mining are owned and held by MBMI,
a 100% Canadian-owned Corporation.
Tesoro Mining- 39.9% of its OCS are owned and held by MBMI, a
100% Canadian-owned Corporation.
McArthur Mining- which also 39.9% of its OCS are owned by
MBMI.
There is however, in this particular case of Narra Mining vs Redmont
Mines, corporate layering involved. The SC called it corporate
layering. Narra Mining, Tesoro Mining and McArthur Mining. X
Corporation is an investor in Narra Mining. And in X Corporation,
39.9% of its OCS are owned and held again by MBMI.
In Tesoro Mining Y corporation is an investor, and MBMI also holds
39.9% of the OCS of Y Corporation.
Same holds true in Z Corporation, MBMI also holds 39.9% of the OCS
of Z Corporation and it is also an investor of McArthur Mining
(May issue sa vid so nadistract si Atty ng slight)
We were saying that three corporations, Narra Mining, Tesoro Mining
and McArthur Mining may be rightfully considered as 100% Filipino
owned BUT in this particular case, there is what we call corporate
layering. There is another investor in Narra Mining- X Corporation.
And in X Corporation, MBMI, a Canadian Corporation, holds 39.9%
of the OCS of X Corporation. In Tesoro Mining Y corporation is an
investor, and MBMI also holds 39.9% of the OCS of Y Corporation.
Same holds true in Z Corporation, MBMI also holds 39.9% of the OCS
of Z Corporation and it is also an investor of McArthur Mining.
Now there is a doubt as to the extent of the stockholdings of MBMI
Corporation (Canadian corpo) in the 3 domestic corporations. Kasi nga
39.9% held by the Canadian Corpo in Narra Mining, 39.9% are held
by the Canadian corporation in Tesoro Mining and 39.9% are held by
the Canadian corporation in McArthur Mining. BUT that is not the
only thing. Because if that would have stopped there, then there would
have been no doubt as to the ownership and control of the
stockholdings of the foreign corporation. But because of this corporate
layering as I’ve mentioned, where there is another investor in Narra.
Tesoro and McArthur. And the investor is also a corporation where
the Canadian Corporation also holds 39.9% in those 3 particular
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 136
investors, there is now a doubt as to the ownership and control of the
shares of stocks in those 3 particular corporations.
And although the SC did not discuss why it ruled that effectively, the
MBMI, the foreign corporation, is actually holding more than at least
60% of the OCS of the 3 corporations- Narra, Tesoro and McArthur, it
ruled that it is more than 60%.
So I asked one of my students, a CPA, to compute the stockholdings
of the foreign corporation. After 3 minutes, he said the MBMI, the
Canadian corporation is actually holding 62% of the OCS of Narra
Mining, Tesoro Mining and McArthur Mining.
Meaning it is a violation of our constitutional provisions. Because 60%
of the OCS must be held by Filipino citizens and therefore, it cannot
engage in mining. There you go.
So, incorporation tests, control test and the grandfather rule- we have
covered them all.
A corporation has no legal existence beyond the boundaries of the
sovereign by which it was created. This proceeds from the principle
that the juridical existence of the corporation is confined within the
territorial boundaries of the state in which it was incorporated. And it
has no legal existence beyond such territory.
A state therefore may restrict the right of a foreign corporation to
engage in business within its limits and/or to sue within its courts. BUT
by virtue of state committee, a corporation created by the laws of one’s
state is usually allowed to transact business in other states and to sue
in its courts subject to restrictions and certain requirements imposed
therein. And under PH laws, the requirements will be under 142, 143,
144 of the Code. It has to obtain a license to do business in the PH
before it may transact business here in our country.
Under 144, it must also appoint a resident agent. This is necessary for
purposes of receiving summons and other legal process to the foreign
corporation. Because if a foreign corporation has designated a resident
agent, all summons and other legal processes may only be served upon
him/her to bind the foreign corporation.
SEC. 142. Application for a License. – A foreign corporation
applying for a license to transact business in the Philippines shall
submit to the Commission a copy of its articles of incorporation and
bylaws, certified in accordance with law, and their translation to an
official language of the Philippines, if necessary. The application shall

be under oath and, unless already stated in its articles of incorporation,
shall specifically set forth the following:
(a) The date and term of incorporation;
(b) The address, including the street number, of the principal office of
the corporation in the country or state of incorporation;
(c) The name and address of its resident agent authorized to accept
summons and process in all legal proceedings and all notices affecting
the corporation, pending the establishment of a local office;
(d) The place in the Philippines where the corporation intends to
operate;
(e) The specific purpose or purposes which the corporation intends to
pursue in the transaction of its business in the Philippines: Provided,
That said purpose or purposes are those specifically stated in the
certificate of authority issued by the appropriate government agency;
(f) The names and addresses of the present directors and officers of the
corporation;
(g) A statement of its authorized capital stock and the aggregate
number of shares which the corporation has authority to issue, itemized
by class, par value of shares, shares without par value, and series, if
any;
(h) A statement of its outstanding capital stock and the aggregate
number of shares which the corporation has issued, itemized by class,
par value of shares, shares without par value, and series, if any;
(i) A statement of the amount actually paid in; and
(j) Such additional information as may be necessary or appropriate in
order to enable the Commission to determine whether such corporation
is entitled to a license to transact business in the Philippines, and to
determine and assess the fees payable.
Attached to the application for license shall be a certificate under oath
duly executed by the authorized official or officials of the jurisdiction
of its incorporation, attesting to the fact that the laws of the country or
State of the applicant allow Filipino citizens and corporations to do
business therein, and that the applicant is an existing corporation in
good standing. If the certificate is in a foreign language, a translation
thereof in English under oath of the translator shall be attached to the
application.
The application for a license to transact business in the Philippines
shall likewise be accompanied by a statement under oath of the
president or any other person authorized by the corporation, showing
to the satisfaction of the Commission and when appropriate, other
governmental agencies that the applicant is solvent and in sound
financial condition, setting forth the assets and liabilities of the
corporation as of the date not exceeding one (1) year immediately prior
to the filing of the application.
Foreign banking, financial, and insurance corporations shall, in
addition to the above requirements, comply with the provisions of
existing laws applicable to them. In the case of all other foreign
corporations, no application for license to transact business in the
Philippines shall be accepted by the Commission without previous
authority from the appropriate government agency, whenever required
by law.
SEC. 143. Issuance of a License. – If the Commission is satisfied that
the applicant has complied with all the requirements of this Code and
other special laws, rules and regulations, the Commission shall issue a
license to transact business in the Philippines to the applicant for the
purpose or purposes specified in such license.
Upon issuance of the license, such foreign corporation may commence
to transact business in the Philippines and continue to do so for as long
as it retains its authority to act as a corporation under the laws of the
country or State of its incorporation, unless such license is sooner
surrendered, revoked, suspended, or annulled in accordance with this
Code or other special laws.
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Within sixty (60) days after the issuance of the license to transact
business in the Philippines, the licensee, except foreign banking or
insurance corporations, shall deposit with the Commission for the
benefit of present and future creditors of the licensee in the Philippines,
securities satisfactory to the Commission, consisting of bonds or other
evidence of indebtedness of the Government of the Philippines, its
political subdivisions and instrumentalities, or of government-owned
or -controlled corporations and entities, shares of stock or debt
securities that are registered under Republic Act No. 8799, otherwise
known as “The Securities Regulation Code”, shares of stock in
domestic corporations listed in the stock exchange, shares of stock in
domestic insurance companies and banks, any financial instrument
determined suitable by the Commission, or any combination thereof
with an actual market value of at least Five hundred thousand pesos
(P500,000.00) or such other amount that may be set by the
Commission: Provided, however, That within six (6) months after each
fiscal year of the licensee, the Commission shall require the licensee to
deposit additional securities or financial instruments equivalent in
actual market value to two percent (2%) of the amount by which the
licensee’s gross income for that fiscal year exceeds Ten million pesos
(P10,000,000.00).
The Commission shall also require the deposit of additional securities
or financial instruments if the actual market value of the deposited
securities or financial instruments has decreased by at least ten percent
(10%) of their actual market value at the time they were deposited. The
Commission may, at its discretion, release part of the additional
deposit if the gross income of the licensee has decreased, or if the
actual market value of the total deposit has increased, by more than ten
percent (10%) of their actual market value at the time they were
deposited.
The Commission may, from time to time, allow the licensee to make
substitute deposits for those already on deposit as long as the licensee
is solvent. Such licensee shall be entitled to collect the interest or
dividends on such deposits. In the event the licensee ceases to do
business in the Philippines, its deposits shall be returned, upon the
licensee’s application and upon proof to the satisfaction of the
Commission that the licensee has no liability to Philippine residents,
including the Government of the Republic of the Philippines. For
purposes of computing the securities deposit, the composition of gross
income and allowable deductions therefrom shall be in accordance
with the rules of the Commission.
SEC. 144. Who May be a Resident Agent. – A resident agent may be
either an individual residing in the Philippines or a domestic
corporation lawfully transacting business in the Philippines: Provided,
That an individual resident agent must be of good moral character and
of sound financial standing: Provided, further, That in case of a
domestic corporation who will act as a resident agent, it must likewise
be of sound financial standing and must show proof that it is in good
standing as certified by the Commission.
General Corporation of the Philippines vs Union Insurance, service to
the SEC or any of its officers found in the Philippines under the rules
of court will apply only if it has failed or neglected to appoint one.
As sec 145 states now, it requires the foreign corporation, to agree and
stipulate to an undertaking that it will be without resident agent, such
service of summons and other legal process will be made upon the
SEC.
SEC. 145. Resident Agent; Service of Process. – As a condition to
the issuance of the license for a foreign corporation to transact business
in the Philippines, such corporation shall file with the Commission a
written power of attorney designating a person who must be a resident
of the Philippines, on whom summons and other legal processes may

be served in all actions or other legal proceedings against such
corporation, and consenting that service upon such resident agent shall
be admitted and held as valid as if served upon the duly authorized
officers of the foreign corporation at its home office. Such foreign
corporation shall likewise execute and file with the Commission an
agreement or stipulation, executed by the proper authorities of said
corporation, in form and substance as follows:
“The (name of foreign corporation) hereby stipulates and agrees, in
consideration of being granted a license to transact business in the
Philippines, that if the corporation shall cease to transact business in
the Philippines, or shall be without any resident agent in the Philippines
on whom any summons or other legal processes may be served, then
service of any summons or other legal process may be made upon the
Commission in any action or proceeding arising out of any business or
transaction which occurred in the Philippines and such service shall
have the same force and effect as if made upon the duly authorized
officers of the corporation at its home office.”
Whenever such service of summons or other process is made upon the
Commission, the Commission shall, within ten (10) days thereafter,
transmit by mail a copy of such summons or other legal process to the
corporation at its home or principal office. The sending of such copy
by the Commission shall be a necessary part of and shall complete such
service. All expenses incurred by the Commission for such service
shall be paid in advance by the party at whose instance the service is
made.
It shall be the duty of the resident agent to immediately notify the
Commission in writing of any change in the resident agent’s address.
Now, the issue most important to this topic is WHAT IS THE EFFECT
OF THE FAILURE OF A FOREIGN CORPORATION TO SECURE
A LICENSE TO DO BUSINESS IN THIS COUNTRY, IF IT DOES
SO WITHOUT THE REQUISITE LICENSE?
That is section 150.
SEC. 150. Doing Business without a License. – No foreign
corporation transacting business in the Philippines without a license,
or its successors or assigns, shall be permitted to maintain or intervene
in any action, suit or proceeding in any court or administrative agency
of the Philippines; but such corporation may be sued or proceeded
against before Philippine courts or administrative tribunals on any
valid cause of action recognized under Philippine laws.
It cannot sue or intervene in any action, suit or proceeding in any court
or any administrative agency but may be sued or proceeded against on
any valid cause of action recognized under Philippine laws.
But please take note that the general rule is that it is not the lack of
the requisite license but rather DOING BUSINESS without the
license which bars a foreign corporation from access to our courts
-The ruling laid down in Universal Shipping vs IAC.
In the first case, THE MENTHOLATUM CO., INC., ET AL.,
petitioners, vs. ANACLETO MANGALIMAN, ET AL., respondents,
the ruling no longer holds true. But this is the only case that I’ve seen
that if a foreign corporation does business in the PH without the
requisite license, it cannot access to our courts.
Mentholatum is a corporation registered under the laws of Kansas,
USA. Mentholatum, through its agent, PADCO, has been doing
business in the Philippines by selling its products here in the country
since 1929.
PADCO being the exclusive distributive agent. The foreign
corporation filed a suit against Mangaliman for infringement ad unfair
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 138
competition. Since they registered Mentholatum as a trademark with
the same size, color and shape as that of the foreign corporation.
The issue: Did the corporation do business in the Philippines?
In this particular case, the court stressed, that this case must be judged
in light of its peculiar circumstances. But the true test however, is
whether the foreign corporation is continuing the body or substance of
the business for which it is organized?
The term implies a CONTINUITY OF COMMERCIAL DEALINGS.
That is your clue. If there is continuity of commercial dealings that
would constitute doing or transacting business so as to bar the foreign
corporation from access to our courts if it does so without the requisite
license.
It implies a continuity of commercial dealings, the performance of acts
or works incident to, and in progressive prosecution of, the purpose
and object of its organization. Whatever transactions the PADCO has
executed, the foreign corporation did it itself and Mentholatum, being
a foreign corporation doing business in the Philippines, and it may not
prosecute the actions for violation of trademark and unfair
competition.
Because I’ve said, this ruling no longer holds true today, in so far as
the institution of the case involved, because of the insertion of the
amendment of Section 21-A of the Trademark Law, (we will see that
later in General Garments vs Director) and, the Union Convention for
the Protection of Industrial and Property Rights otherwise known as
the Treaty of Paris, where the PH has become a signatory in 1965
(we’ll see this also later, in the case of Puma Sportschuhfabriken
Rudolf Dassler, K.G., vs. The Intermediate Appellate Court)
Mentholatum Co. vs. Mangaliman et al., 72 Phil. 524, No. 47701
June 27, 1941
1.FOREIGN CORPORATIONS; MEANING OF "DOING" OR
"ENGAGING IN" OR "TRANSACTING" BUSINESS.—No general
rule or governing principles can "be laid down as to what constitutes
"doing" or "engaging in" or "transacting" business. Indeed, each case
must be judged in the light of its peculiar environmental circumstances.
The true test, however, seems to be whether the foreign corporation is
continuing the body or substance of the business or enterprise for
which it was organized or whether it has substantially retired from it
and turned it over to another. (Traction Cos. vs. Collectors of Int.
Revenue [C. C. A. Ohio], 223 F., 984, 987.) The term implies a
continuity of commercial dealings and arrangements, and
contemplates to that extent, the performance of acts or works or the
exercise of some of the functions normally incident to, and in
progressive prosecution of, the purpose and object of its organization.
2.ID.; ID.; LICENSE REQUIRED BY SECTION 68 OF
CORPORATION LAW; EIGHT TO SUE AND BE SUED.—The
Mentholatum Co., Inc., being a foreign corporation doing business in
the Philippines without the license required by section 68 of the
Corporation Law, it may not prosecute this action for violation of trade
mark and unfair competition. Neither may the Philippine-American
Drug Co. Inc. maintain the action here for the reason that the
distinguishing features of the agent being his representative character
and derivative authority (Mechem on Agency, sec. 1; Story on Agency,
sec. 3; Sternaman vs. Metropolitan Life Ins. Co., 170 N. Y., 21), it
cannot now, to the advantage of its principal, claim an independent
standing in court.

MARSHALL-WELLS COMPANY, plaintiff-appellant, vs.
HENRY W. ELSER & CO., INC., defendant-appellee
Marshall-wells, a corporation registered under the laws of the state of
Oregon, sued Elser for unpaid balance in a bill of goods. Respondent
alleged lack of capacity to sue since it has no license to do business in
the Philippines. The court ruled that it can sue because the object of the
law is not to prevent the foreign corporation from performing single
act or isolated transaction. Kasi pag single act or isolated, there is no
continuity of business dealings, but rather to prevent it from acquiring
a domicile for the purpose of business without taking the steps
necessary to render it amendable to suits in our local courts. The law
simply means that no foreign corporations shall be permitted to
transact business- continuity of business dealings, unless it has
obtained a license. And until and unless it complies with the law, it
shall not be permitted to sue in our local courts.
But since it is not transacting business, or it is merely one single act or
isolated transaction, the prohibition will not apply. This ruling was
reiterated in Hathibhai Bulakhidas, vs. The Honorable Pedro L.
Navarro
Marshall-Wells Co. vs. Henry W. Elser & Co., 46 Phil. 70, No.
22015 September 1, 1924
1.FOREIGN CORPORATIONS, STATUS OF.—Corporations have
no legal status beyond the bounds of the sovereignty by which they are
created.
2.ID.; RIGHT TO ENGAGE IN BUSINESS AND TO SUE IN
OTHER JURISDICTIONS.—A state may restrict the right of a foreign
corporation to engage in business within its limits, and to sue in its
courts.
3.ID.; ID.—By virtue of state comity, a corporation created by the laws
of one state is usually allowed to transact business in other states and
to sue in the courts of the forum.
4.ID.; ID.; STATUTORY CONSTRUCTION; SECTIONS 68 AND
69 OF THE CORPORATION LAW CONSTRUED.—The object of
the Corporation Law (Act No. 1459) was to subject the foreign
corporation doing business in the Philippines to the jurisdiction of its
courts.
5.ID.; ID.; ID.; ID.—The effect of the statute preventing foreign
corporations from doing business and from bringing actions in the
local courts, except on compliance with elaborate requirements, must
not be unduly extended or improperly applied.
6.ID.; ID.; ID.; ID.—The statute should not be construed to extend
beyond the plain meaning of its terms, considered in connection with
its object, and in connection with the spirit of the entire law.
7.ID.; ID.; ID.; ID.; LICENSES.—The obtaining of the license
prescribed in section 68, as amended, of the Corporation Law, is not a
condition precedent to the maintaining of any kind of action in the
courts of the Philippine Islands by a foreign corporation. But no foreign
corporation shall be permitted "to transact business in the Philippine
Islands," as this phrase is known in corporation law, unless it shall have
the license required by law, and, until it complies with the law, shall
not be permitted to maintain any suit in the local courts.
8.ID.; ID.; ID.; ID.; ID.; PLEADING AND PRACTICE.—The
noncompliance of a foreign corporation with the statute may be
pleaded as an affirmative defense.
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9.ID.; ID.; ID.; ID.; ID.; ID.—It must appear from the evidence, first,
that the plaintiff is a foreign corporation; second, that it is doing
business in the Philippines; and third, that it has not obtained the proper
license as provided by the statute.
Hathibhai Bulakhidas, vs. The Honorable Pedro L. Navarro
In Hathibhai Bulakhidas, vs. The Honorable Pedro L. Navarro, the
court ruled that foreign corporation not engaged in business in the PH
can maintain a suit before our courts is already well-settled. The license
is not necessary in order that the foreign corporation may sue in PH
courts if it is not doing or transacting business in the PH.
Bulakhidas vs. Navarro, 142 SCRA 1, No. L-49695 April 7, 1986
Mercantile Law; Corporations; Foreign Corporations; A foreign
corporation not engaged in business in the Philippines can file an
action before Philippine courts for isolated transactions.—The issue of
whether or not a foreign corporation not engaged in business in the
Philippines can institute an action before our courts is already well
settled in this jurisdiction. Aetna Casualty and Surety Co. vs. Pacific
Star Lines, 80 SCRA 635, is a case similar to the present one in that
the action is also one for recovery of damages sustained by cargo
shipped on defendants’ vessels. Defendants set up the defense that
plaintiff is a foreign corporation not duly licensed to do business in the
Philippines and, therefore, without capacity to sue and be sued. In
overruling said defense, this Court said: “It is settled that if a foreign
corporation is not engaged in business in the Philippines, it may not be
denied the right to file an action in Philippine courts for isolated
transactions.
THE SWEDISH EAST ASIA CO., LTD., petitioner, vs.
MANILA PORT SERVICE AND/OR MANILA RAILROAD
COMPANY
It involves an erroneous discharge of cargo bound for Hongkong. It
was erroneously unloaded in the PH which it seeks to recover 16
bundles of "lifts of mild steel tees window sections" and the capacity
of the foreign corporation to sue was the issue. The case went all the
way to the SC. The court ruled that the foreign corporation can gain
access to our courts because the law does not apply to a foreign
corporation performing single acts or isolated transactions. The fact
that the bundles, the value of which is sought to be recovered were
landed not as a result of a business transaction, "isolated" or otherwise,
but due to a mistaken belief that they were part of the shipment of forty
similar bundles consigned to a Philippine national. There is no valid
reason that a foreign corporation should be barred from access to our
courts.
The Swedish East Asia Co., Ltd. vs. Manila Port Service, 25
SCRA 633, No. L-26332 October 26, 1968
Corporation law; Foreign corporation; Its capacity to sue; Section 69
of Corporation Law construed and applied; Case at bar.—The
respondents in the case at bar challenge the petitioner's capacity to sue,
it being admittedly a foreign corporation without license to engage in
business in the Philippines, citing section 69 of the Corporation Law.
It must be stated however that this section is not applicable to a foreign
corporation performing single acts or "isolated transactions." There is
nothing in the record to show that the petitioner has been in the
Philippines engaged in continuing business or enterprise for which it
was organized, when the sixteen bundles were erroneously discharged
in Manila, for it to be considered as transacting business in the
Philippines. The fact is that the bundles, the value of which is sought
to be recovered, were landed not as a result of a business transaction,
"isolated" or otherwise, but due to a mistaken belief that they were part
of the shipment of forty similar bundles consigned to persons or

entities in the Philippines. There is no justification, therefore, for
invoking the provisions of section 69 of the Corporation Law.
Antam Consolidated, Inc. vs. Court of Appeals
The general rule- continuity of business transactions, as we were
saying, it depends on the particular facts or circumstances attendant to
every particular case. Look for instance, the case of Antam
Consolidated vs CA (not in the syllabus but included in the book).
Stokely Van Camp. Inc. (Stokely) is an Indiana Corporation not
licensed to do business in the PH. It contracted with Banahaw, Antam,
et. al, domestic corporations for the delivery of 500 long tons of crude
coconut oil on August 1978 to be delivered in October/November 1978
. It failed to deliver and to settle the losses. A second contract was
entered into where the PH corporations will buy back the coconut oil
supposed to have been delivered by it. But it failed again. So a third
contract was executed whereby the PH corporations will deliver the
said 500 long tons at a discounted price. Again, they failed to do so. So
a suit was filed by the foreign corporation. A motion to dismiss was
filed because there is no capacity to sue because it has been doing
business in the PH.
The court ruled reiterating the general rule-that there is no governing
principle as to what constitutes doing or engaging or transacting
business. Each case must be judged in light of its peculiar
circumstances.
While it is true that it entered into 3 contracts, they were not a series of
commercial dealings nor a continuity thereof. The only reason why it
entered to the second and third contract was because it wanted to
recover the loss it sustained by the petitioner’s failure to deliver
coconut oils and in order to give the petitioners a chance to make good
on their obligation, which in no way indicate an intent in to engage in
a continuing business transactions so as to constitute doing or
transacting business here in the PH.
Antam Consolidated, Inc. vs. Court of Appeals, 143 SCRA 288,
No. L-61523 July 31, 1986
Mercantile Law; Corporations; Doing Business; Capacity to sue;
Where the three transactions indicate no intent by foreign corpora tion
to engage in a continuity of transactions, they do not constitute doing
business in the Philippines; Foreign corporation not doing business in
the Philippines, not required to obtain a license to do business to have
capacity to sue.—From these facts alone, it can be deduced that in
reality, there was only one agreement between the petitioners and the
respondent and that was the delivery by the former of 500 long tons of
crude coconut oil to the latter, who in turn, must pay the corresponding
price for the same. The three seemingly different transactions were
entered into by the parties only in an effort to fulfill the basic
agreement and in no way indicate an intent on the part of the
respondent to engage in a continuity of transactions with petitioners
which will categorize it as a foreign corporation doing business in the
Philippines. Thus, the trial court, and the appellate court did not err in
denying the petitioners’ motion to dismiss not only because the ground
thereof does not appear to be indubitable but because the respondent,
being a foreign corporation not doing business in the Philippines, does
not need to obtain a license to do business in order to have the capacity
to sue.
Same; Same; Same; Same; Common ploy of defaulting local
companies sued by unlicensed foreign companies not engaged in
business in the Philippines to invoke lack of capacity to sue,
recognized; Basis of doctrine of lack of capacity to sue.—We agree
with the respondent that it is a common ploy of defaulting local
companies which are sued by unlicensed foreign companies not
engaged in business in the Philippines to invoke lack of capacity to
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 140
sue. The respondent cites decisions from 1907 to 1957 recognizing and
rejecting the improper use of this procedural tactic. (Damfschieffs
Rhedered Union v. Cia Trans-atlantica, 8 Phil. 766 [1907]; Marshall-
Wells Co. v. Henry W. Elser & Co., 49 Phil. 70 [1924]; Western
Equipment Co. v. Reyes, 51 Phil. 115 [1927]; Central Republic Bank
v. Bustamante, 71 Phil. 359 [1941]; Pacific Vegetable Oil Co. v.
Singson, 96 Phil. 986 [1955]; Eastboard Navigation, Ltd. v. Juan
Ysmael and Co., Inc., 102 Phil. 1 [1957]). The doctrine of lack of
capacity to sue based on failure to first acquire a local license is based
on considerations of sound public policy. It was never intended to favor
domestic corporations who enter into solitary transactions with unwary
foreign firms and then repudiate their obligations simply because the
latter are not licensed to do business in this country. The petitioners in
this case are engaged in the exportation of coconut oil, an export item
so vital in our country’s economy. They filed this petition on the
ground that Stoke-ly is an unlicensed foreign corporation without a
bare allegation or showing that their defenses in the collection case are
valid and meritorious. We cannot fault the two courts below for acting
as they did.
Same; Same; Verification; Defect in verification by an attorney of the
allegations in the complaint in support of attachment, cured by his
affidavit that he had verified the allegations from the records of the
heal corporation and the SEC.—Anent the second issue they raise, the
petitioners contend that the trial court should not have issued the order
of attachment and the appellate court should not have affirmed the
same because the verification in support of the prayer for attachment
is insufficient. They state that the person who made such verification
does not personally know the facts relied upon for the issuance of the
attachment order. Petitioners capitalize on the fact that Renato Calma,
the assistant attorney of Bito, Misa, and Lozada, counsel for
respondent, stated in his verification that “he has read the foregoing
complaint and that according to his information and belief the
allegations therein contained are true and correct.” xxx We rule that
the defect in the original verification was cured when Renato Calma
subsequently executed an affidavit to the effect that the allegations he
made in support of the prayer for attachment were verified by him from
the records of Comphil and the Securities and Exchange Commission.
Moreover, petitioner had the opportunity to oppose the issuance of the
writ.
FAR EAST INTERNATIONAL IMPORT and EXPORT
CORPORATION vs. NANKAI KOGYO CO. LTD., ET AL.
Please note in the case of Nankai Kogyo, one single contract doing
business, sabi nga eh it depends on the facts and circumstances
attendant to a particular case. Far East is a domestic corporation and
Nakai Kogyo is a Japanese corpo. They entered into a one single
contract for a delivery of 5k metric tons of steel scraps. The buyer
Nankai, signed in Japan, the seller in Manila. But because of the
expiration of the export license, only 1,050 tons were delivered and
acknowledged. Far East seeks payment thereof. Nankai alleges lack of
jurisdiction on grounds that it is not doing business in the PH because
there is only one contract but the court ruled otherwise.
If the single act transaction or contract is not merely incidental or
casual, but is of such character as distinctly to indicate a purpose on
the part, of the foreign corporation to do other business in the state, and
to make the state a basis of operation, the act or transaction constitutes
doing of business. The h8igh court considered the fact that Nankai sent
one of its officers, Yoshida, to look into the operation of mines in the
PH, revealing its desire to continue engaging in business here in the
PH and making the country a base of its operations.

Far East Int’l Import and Export Corp. vs. Nankai Kogyo Co.,
Ltd., 6 SCRA 725, No. L-13525 November 30, 1962
Corporations; Foreign Corporations; Service of Summons; Three
Modes of Effecting Service.—Three modes of effecting service of
summons upon private foreign corporations are provided in section 14,
Rule 7 of the Rules of Court, to wit: (1) by serving upon the agent
designated in accordance with law to accept service of summons; (2)
if there is no resident agent, by service on the government official
designated by law to that effect; and (3) by serving on any officer or
agent of said corporation within the Philippines.
Same; Same; Same; When single act or transaction constitutes doing
of business.—Where a single act or transaction of a foreign corporation
is not merely incidental or casual, but is of such character as distinctly
to indicate a purpose on the part, of the corporation to do other business
in the state, and to make the state a basis of operation for the conduct
of a part of the corporation’s ordinary business, such act or transaction
constitutes doing of business within the meaning of statutes prescribing
the conditions under which a foreign corporation may be served with
summons.
Same; Same; Pleadings and Practice; Jurisdiction over Foreign
Corporations; How Jurisdiction is Acquired or Lost; Effect of Special
Appearance.—Even though the defendant objects to the jurisdiction of
the court, if at the same time he alleges any non-jurisdictional ground
for dismissing the action, the Court acquires jurisdiction over him.
Even though he does not intend to confer jurisdiction upon the court,
his appearance for some other purpose than to object to the jurisdiction
subjects him to the jurisdiction of the court. Even though he does not
wish to submit to the jurisdiction of the court, he cannot ask the court
to act upon any question except the question of jurisdiction, without
conferring jurisdiction upon the court. In the case at bar, not only did
appellant allege nonjurisdictional grounds in its pleadings to have the
complaint dismissed, but it also went into trial on the merits and
presented evidence destined to resist appellee’s claim. Verily, there
could not be a better situation of acquired jurisdiction based on
consent.
Facilities Management Corporation vs. De la Osa
Dela Osa sought reinstatement with full back wages inclusive of
overtime pays etc. against Facilities Management and J.S. Dryer
domiciled in Wake Islands.
ISSUE: Is recruitment of Filipino workers by non-resident foreign
corporations for its own use abroad constitutive of doing or transacting
business in the PH?
Held: YES. Because the foreign corpo appointed an agent in
compliance with Act No. 246. Petitioner appointed Catuira as agent of
Facilities Management with authority to execute employment contracts
and receive legal processes. The court applied the rules and regulations
implementing RA 5455. It enumerates some instances where certain
acts would constitute doing or transacting business in the PH.
1. Soliciting orders, purchase or service contracts
2. Appointing a representative or distributor domiciled in the
PH UNLESS said representative or distributor has an
independent status. And the distributor has an independent
status if it transacts business in its own name and for its own
account and not in the name or account of the foreign
corporation
3. Opening of offices whether it be called liaison agencies or
branches
4. Any act that imply continuity of commercial dealings which
contemplates the exercise of the functions normally incident
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to, or in the progressive prosecution of commercial gain for
the purpose and objective of the business of the foreign
corporation. (Now under The Foreign Investment Act)
Facilities Management Corporation vs. De la Osa, 89 SCRA 131,
No. L-38649 March 26, 1979
Corporations; A foreign corporation not doing business in the
Philippines may be sued here for acts done against persons in the
Philippine.—Indeed, if a foreign corporation, not engaged in business
in the Philippines, is not barred from seeking redress from courts in the
Philippines, a fortiori that same corporation cannot claim exemption
from being sued in Philippine courts for acts done against a person or
persons in the Philippines.
Communication Materials and Design, Inc. vs. CA
CMDI and Aspac Multi-Trade Inc, both domestic corporations, and
ITEC International of Alabama, entered into an exclusive
“Representative Agreement” for the sale of ITEC products (foreign
corpo) at a stipulated commission. It is renewed later on with a license
agreement where Aspac Incoprated used ITEC in its own name.
ASPAC, the domestic corporation, sold electronic products to PLDT-
the products of ITEC. But later, ITEC terminated their agreement, for
an alleged violation of contractual commitment by using knowledge
and information of ITEC products and developed their own line of
products which are similar, if not identical to those of ITEC.
It sought to enjoin the local companies from selling imitated products
and using ITEC’s name with a claim for damages and Atty’s fees. A
motion to dismiss was filed that ITEC has no legal capacity to sue
because it is doing business in the PH without a license. The lower
court denied the motion to dismiss and granted the writ of injunction.
The case went all the way to SC.
Issue: whether ITEC, unlicensed to do business in the PH, is barred
from invoking the injunctive relief or the authority of the courts.
Held: the court ruled in determining whether a foreign corporation is
doing or transacting business, aside from their activities in the forum,
reference is to be made to the contractual arrangements entered
into it with other entities in the country. As we’ve seen in the case
of Facilities Management, appointment of a representative or
distributor domiciled in the PH, does not necessarily constitute doing
or transacting business in the PH because, if the said representative has
an independent status, transacting in ots own name and for its own
account, that is NOT doing or transacting business in the Philippines.
A perusal of the agreement between the domestic corporations and
ITEC shows that there are, however, provisions that are highly
restrictive in nature so as to reduce the petitioner ASPAC, as a mere
agent, if not, an extension of ITEC. For instance, the NO
COMPETING PRODUCT clause. Whereby Aspac cannot sell
products which are in competition with those of ITEC. Also, it can bind
ITEC only in a representative capacity and only upon conditions
authorized by the foreign corporation. So much so that when ITEC
entered into the contract, it was carrying out the purpose of its
organization and that is to market its electronics and communications
products. The terms and conditions of the contract indicated that it
established within our country a continuous business and not merely
one of a temporary character. Nevertheless, the petitioner is estopped
from raising these facts to bar ITEC access to our courts. Citing its
earlier decision in Georg Grotjahn GMBH and Co. vs. Isnani, a party
will be estopped to challenge the personality of the corporation after
having acknowledged the same by entering into a contract with it. And
that one who has dealt with a corporation of a foreign origin as a
corporate origin will be estopped to deny its corporate existence and
capacity and the principle will be applied to prevent persons from

contracting with foreign corporations for later taking up with its
noncompliance with the law that is to secure a license to do business
in the Philippines specially in cases where such persons the benefits of
the contract. This is in accord with the provisions of article 19 of the
civil code, and the time-honored principle that no person to derive
advantage of his own wrong-doing. The lower court’s decision was this
affirmed by the SC.
Communication Materials and Design, Inc. vs. Court of Appeals,
260 SCRA 673, G.R. No. 102223 August 22, 1996
Corporations; Foreign Corporations; Actions; Conflict of Laws;
Generally, a “foreign corporation” has no legal existence within the
state in which it is foreign, and this proceeds from the principle that
juridical existence of a corporation is confined within the territory of
the state under whose laws it was incorporated and organized, and it
has no legal status beyond such territory.—Generally, a “foreign
corporation” has no legal existence within the state in which it is
foreign. This proceeds from the principle that juridical existence of a
corporation is confined within the territory of the state under whose
laws it was incorporated and organized, and it has no legal status
beyond such territory. Such foreign corporation may be excluded by
any other state from doing business within its limits, or conditions may
be imposed on the exercise of such privileges. Before a foreign
corporation can transact business in this country, it must first obtain a
license to transact business in the Philippines, and a certificate from
the appropriate government agency. If it transacts business in the
Philippines without such a license, it shall not be permitted to maintain
or intervene in any action, suit, or proceeding in any court or
administrative agency of the Philippines, but it may be sued on any
valid cause of action recognized under Philippine laws.
Same; Same; Same; The purpose of the law in requiring that foreign
corporations doing business in the Philippines be licensed to do so and
that they appoint an agent for service of process is to subject the foreign
corporation doing business in the Philippines to the jurisdiction of its
courts.—The purpose of the law in requiring that foreign corporations
doing business in the Philippines be licensed to do so and that they
appoint an agent for service of process is to subject the foreign
corporation doing business in the Philippines to the jurisdiction of its
courts. The object is not to prevent the foreign corporation from
performing single acts, but to prevent it from acquiring a domicile for
the purpose of business without taking steps necessary to render it
amenable to suit in the local courts. The implication of the law is that
it was never the purpose of the legislature to exclude a foreign
corporation which happens to obtain an isolated order for business
from the Philippines, and thus, in effect, to permit persons to avoid
their contracts made with such foreign corporations.
Same; Same; Same; Words and Phrases; The true test as to what
constitutes “doing” or “engaging” or “transacting” business seems to
be whether the foreign corporation is continuing the body or substance
of the business or enterprise for which it was organized.— There is no
exact rule or governing principle as to what constitutes “doing” or
“engaging” or “transacting” business. Indeed, such case must be
judged in the light of its peculiar circumstances, upon its peculiar facts
and upon the language of the statute applicable. The true test, however,
seems to be whether the foreign corporation is continuing the body or
substance of the business or enterprise for which it was organized.
Same; Same; Same; In determining whether a corporation does
business in the Philippines or not, aside from their activities within the
forum, reference may be made to the contractual agreements entered
into by it with other entities in the country.—In determining whether a
corporation does business in the Philippines or not, aside from their
activities within the forum, reference may be made to the contractual
agreements entered into by it with other entities in the country. Thus,
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 142
in the Top-Weld case (supra), the foreign corporation’s LICENSE
AND TECHNICAL AGREEMENT and DISTRIBUTOR
AGREEMENT with their local contacts were made the basis of their
being regarded by this Tribunal as corporations doing business in the
country. Likewise, in Merill Lynch Futures, Inc. vs. Court of Appeals,
etc. the FUTURES CONTRACT entered into by the petitioner foreign
corporation weighed heavily in the court’s ruling.
Same; Same; Same; A foreign corporation is deemed to have been
“engaged in” or “doing business” in the Philippines where its
arrangements with its Philippine business contacts indicate
convincingly its purpose to bring about the situation among its
customers and the general public that they are dealing directly with it
and that it is actively engaging in business in the country.—With the
above-stated precedents in mind, we are persuaded to conclude that
private respondent had been “engaged in” or “doing business” in the
Philippines for some time now. This is the inevitable result after a
scrutiny of the different contracts and agreements entered into by ITEC
with its various business contacts in the country, particularly ASPAC
and Telephone Equipment Sales and Services, Inc. (TESSI, for
brevity). The latter is a local electronics firm engaged by ITEC to be
its local technical representative, and to create a service center for
ITEC products sold locally. Its arrangements, with these entities
indicate convincingly ITEC’s purpose to bring about the situation
among its customers and the general public that they are dealing
directly with ITEC, and that ITEC is actively engaging in business in
the country.
Same; Same; Same; Estoppel; A party is estopped to challenge the
personality of a corporation after having acknowledged the same by
entering into a contract with it.—Notwithstanding such finding that
ITEC is doing business in the country, petitioner is nonetheless
estopped from raising this fact to bar ITEC from instituting this
injunction case against it. A foreign corporation doing business in the
Philippines may sue in Philippine Courts although not authorized to do
business here against a Philippine citizen or entity who had contracted
with and benefited by said corporation. To put it in another way, a party
is estopped to challenge the personality of a corporation after having
acknowledged the same by entering into a contract with it. And the
doctrine of estoppel to deny corporate existence applies to a foreign as
well as to domestic corporations. One who has dealt with a corporation
of foreign origin as a corporate entity is estopped to deny its corporate
existence and capacity. The principle will be applied to prevent a
person contracting with a foreign corporation from later taking
advantage of its noncompliance with the statutes chiefly in cases where
such person has received the benefits of the contract.
Same; Same; Same; Same; Each party to a corporate transaction is
expected to act with utmost candor and fairness and, thereby allow a
reasonable proportion between benefits and expected burdens, a norm
which should be observed where one or the other is a foreign entity
venturing in a global market.—Concededly, corporations act through
agents like directors and officers. Corporate dealings must be
characterized by utmost good faith and fairness. Corporations cannot
just feign ignorance of the legal rules as in most cases, they are manned
by sophisticated officers with tried management skills and legal
experts with practiced eye on legal problems. Each party to a corporate
transaction is expected to act with utmost candor and fairness and,
thereby allow a reasonable proportion between benefits and expected
burdens. This is a norm which should be observed where one or the
other is a foreign entity venturing in a global market.
Same; Same; Same; Conflict of Laws; The parties are charged with
knowledge of the existing law at the time they enter into a contract and
at the time it is to become operative—and, a person is presumed to be
more knowledgeable about his own state law than his alien or foreign
contemporary.—The parties are charged with knowledge of the

existing law at the time they enter into a contract and at the time it is
to become operative. (Twiehaus v. Rosner, 245 SW 2d 107; Hall v.
Bucher, 227 SW 2d 98). Moreover, a person is presumed to be more
knowledgeable about his own state law than his alien or foreign
contemporary. In this case, the record shows that, at least, petitioner
had actual knowledge of the applicability of R.A. No. 5455 at the time
the contract was executed and at all times thereafter. This conclusion
is compelled by the fact that the same statute is now being propounded
by the petitioner to bolster its claim.
Same; Same; Same; Equity; Pari Delicto; Where the parties are equally
guilty of violating the law, they are in pari delicto, in which case it
follows as a consequence that petitioner is not entitled to the relief
prayed for.—The very purpose of the law was circumvented and
evaded when the petitioner entered into said agreements despite the
prohibition of R.A. No. 5455. The parties in this case being equally
guilty of violating R.A. No. 5455, they are in pari delicto, in which
case it follows as a consequence that petitioner is not entitled to the
relief prayed for in this case.
Same; Same; Same; The doctrine of lack of capacity to sue based on
the failure to acquire a local license was never intended to favor
domestic corporations who enter into solitary transactions with unwary
foreign firms and then repudiate their obligations simply because the
latter are not licensed to do business in this country.— The doctrine of
lack of capacity to sue based on the failure to acquire a local license is
based on considerations of sound public policy. The license
requirement was imposed to subject the foreign corporation doing
business in the Philippines to the jurisdiction of its courts. It was never
intended to favor domestic corporations who enter into solitary
transactions with unwary foreign firms and then repudiate their
obligations simply because the latter are not licensed to do business in
this country.
Same; Same; Same; A foreign corporation may be exempted from the
license requirement in order to institute an action in our courts if its
representative in the country maintained an independent status during
the existence of the disputed contract.—In Top-Weld, we ruled that a
foreign corporation may be exempted from the license requirement in
order to institute an action in our courts if its representative in the
country maintained an independent status during the existence of the
disputed contract. Petitioner is deemed to have acceded to such
independent character when it entered into the Representative
Agreement with ITEC, particularly, provision 6.2 (supra).
Same; Same; Same; Conflict of Laws; Forum Non Conveniens; After
having acquired jurisdiction over a plaintiff foreign corporation by
virtue of the filing of the original complaint, the Philippine court now
has the discretion, based on the facts of the case, to either give due
course to the suit or dismiss it, on the principle of forum non
conveniens.—Thus, having acquired jurisdiction, it is now for the
Philippine Court, based on the facts of the case, whether to give due
course to the suit or dismiss it, on the principle of forum non
conveniens. Hence, the Philippine Court may refuse to assume
jurisdiction in spite of its having acquired jurisdiction. Conversely, the
court may assume jurisdiction over the case if it chooses to do so;
provided, that the following requisites are met: 1) That the Philippine
Court is one to which the parties may conveniently resort to; 2) That
the Philippine Court is in a position to make an intelligent decision as
to the law and the facts; and, 3) That the Philippine Court has or is
likely to have power to enforce its decision.
Western Equipment and Supply Co. vs. Reyes
Western Equipment Supply and Western Electric Company are foreign
corporations selling products in the PH with the words bearing their
trademark “Western Electric”. Defendant Reyes applied for
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 143
registration of Western Electric Companies. The foreign corporation
sought to enjoin which the lower court granted. The case went all the
way to SC. The SC ruled that the foreign corporation is not here
seeking to enforce any legal or contractual rights arising from or
growing out of any business which it has transacted in the Philippines.
The sole purpose of the action is to protect its reputation, its corporate
name or goodwill and it is a property right. Property rights are
proceedings in rem to protect against all the courts of the world even
in jurisdictions wherein it does not transact business in the same as it
may protect all its tangible properties against trespass, which was
adopted in the case of Philips Export vs CA. Since it is not the trade
but the mark that is to be protected, a trademark acknowledges no
territorial boundaries but extends to every market where the trader’s
goods have become known and identified by the use of the said mark.
Western Equipment and Supply Co. vs. Reyes, 51 Phil. 115, No.
27897 December 2, 1927
1.WHEN AN UNLICENSED FOREIGN CORPORATION CAN
MAINTAIN ACTION.—A foreign corporation which has never done
any business in the Philippine Islands and which is unlicensed and
unregistered to do business here, but is widely and favorably known in
the Islands through the use therein of its products bearing its corporate
and trade name, has a legal right to maintain an action in the Islands to
restrain the residents and inhabitants thereof from organizing a
corporation therein bearing the same name as the foreign corporation,
when it appears that they have personal knowledge of the existence of
such a foreign corporation, and it is apparent that the purpose of the
proposed domestic corporation is to deal and trade in the same goods
as those of the foreign corporation.
2.WHEN UNLICENSED FOREIGN CORPORATION CAN
MAINTAIN ACTION AGAINST AN OFFICER OF THE
GOVERNMENT.—An unregistered foreign corporation which has
not personally transacted business in the Philippine Islands, but which
has acquired valuable goodwill and high reputation therein through the
sale by importers and the extensive use within the Islands of its
products bearing either its corporate name or trade-mark, has a legal
right to restrain an officer of the Government, who has full knowledge
of those facts, from issuing a certificate of incorporation to residents
of the Philippine Islands who are attempting to organize a corporation
for the purpose of pirating the corporate name of the foreign
corporation and of engaging in the same business, for the purpose of
making the public believe that the goods which it proposes to sell are
the goods of the foreign corporation and of defrauding it and its local
dealers of their legitimate trade.
3.NATURE AND PURPOSE OF SUCH AN ACTION.—The purpose
of such a suit is to protect its reputation, corporate name and goodwill
which have been established through the natural development of its
trade over a long period of years, in the doing of which it does not seek
to enforce any legal or contract rights arising from, or growing out of,
any business which it has transacted in the Philippine Islands.
4. IT IS A RIGHT "IN REM."—Under such a state of facts, the, right
to the use of the corporate and trade name of a foreign corporation is a
property right, a right in rem, which it may assert and protect in any of
the courts of the world even in countries where it does not personally
transact any business.
5.IN SUCH A CASE, IT is THE TRADE WHICH is PROTECTED.—
In such a case, it is the trade and not the mark that is to be protected,
and a trade-mark does not acknowledge any territorial boundaries, but
extends to every market where the trader's goods have become known
and identified by the use of the mark.

General Garments Corporation vs. Director of Patents
This is the case which I said derrogated the ruling in Metholatum vs
Mangaliman. It no longer applies today. General Garments, a local or
domestic corporation, is the owner of a trademark PURITAN under
registration no. 10059, registered under the Philippine Patent Office.
Puritan Sportswear Corporation of the USA filed a petition with the Ph
Patent Office for cancellation of the trademark, alleging prior usage
thereof.
Issue: whether a foreign corporation who has never done business in
the Philippines and which is unlicensed to do business here but is
widely known in the Philippines through the use of its products bearing
its corporate name, has the legal right to maintain action in PH courts.
Held: YES because the case ruling in Mentholatum was already the
derogated when Congress precisely to counteract the effects of the said
case enacted RA 638 inserting 21-A of the trademark law, allowing a
foreign corporation to bring an action to the Philippines for
infringement of a trademark, unfair competition or false description of
origin whether or not licensed to do business here in the Philippines.
General Garments Corporation vs. Director of Patents, 41 SCRA
50, No. L-24295 September 30, 1971
Corporation law; Juridical personality; Puritan Sportswear
Corporation is a juridical person.—That respondent, Puritan
Sportswear Corporation, is a juridical person should be beyond serious
dispute. The fact that it may not transact business in the Philippines
unless it has obtained a license for that purpose, nor maintain a suit in
Philippine courts for the recovery of any debt, claim or demand without
such license (Secs. 68 and 69, Corporation Law) does not make
respondent any less a juridical person. Indeed an exception to the
license requirement has been recognized in this jurisdiction, namely,
where a foreign corporation sues on an isolated transaction.
Same; Object of the law.—The object of the statute (Secs. 68 and 69,
Corporation Law) was not to prevent the foreign corporation from
performing single acts, but to prevent it from requiring a domicile for
the purpose of business without taking the steps necessary to render it
amenable to suit in the local courts . . . the implication of the law (being
that it was never the purpose of the legislature to exclude a foreign
corporation which happens to obtain an isolated order for business
from the Philippines, from securing redress in the Philippine Courts.
The principle has since then been applied in a number of other cases.
Same; Foreign corporation; Rights of foreign corporation to maintain
action.—A foreign corporation which has never done business in the
Philippine Islands and which is unlicensed and unregistered to do
business here, but is widely and favorably known in the Islands through
the use therein of its pro ducts bearing its corporate and trade name has
a legal right to maintain an action in the Islands.
Same; Same; Same; Purpose of suit; Right to the use of corporate name
or trade name.—The purpose of such a suit is to protect its reputation,
corporate name and goodwill which has been established through the
natural development of its trade for a long period of years, in the doing
of which it does not seek to enforce any legal or contract rights arising
from, or growing out of any business which it has transacted in the
Philippine Islands. The right to the use of the corporate or trade name
is a property right, a right in rem, which it may assert and protect in
any of the courts of the world—even in jurisdictions where it does not
transact business—just the same as it may protect its tangible property,
real or personal against trespass or conversion.
Same; Right to use trademark by foreign corporation to the exclusion
of others; Purpose of Trademark Law.—In Asari Yoko Co., Ltd. v. Kee
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Boc (Jan. 20, 1961) 1 SCRA 1, the plaintiff, a Japanese corporation
which had acquired prior use in the Philippines of the trademark
“RACE” for men’s shirts and undershirts but which had not shown
prior registration thereof, successfully maintained a suit opposing the
application of the defendant, a local business, to register the same
trademark for similar goods produced by him. This Court said: “The
lawful entry into the Philippines of goods bearing the trademark since
1949 should entitle the owner of the trademark to the right to use the
same to the exclusion of others. Modern trade and commerce demands
that depredations on legitimate trademarks of non-nationals should not
be countenanced.” It may be added here that the law against such
depredations is not only for the protection of the owner of the
trademark who has acquired prior use thereof but also, and more
importantly, for the protection of purchasers from confusion, mistake
or deception as to the goods they are buying. This is clear from a
reading of Section 4(d) of the Trademark Law.
Trademark Law; Legislative intention.—Parenthetically, it may be
stated that the ruling in the Mentholatum case was subsequently
derogated when Congress, purposely to “counteract the effects” of said
case, enacted Republic Act No. 638, inserting Section 21-A in the
Trademark Law, which allows a foreign corporation or juristic person
to bring an action in the Philippine courts for infringement of a mark
or tradename, for unfair competition, or false designation of origin and
false description, “whether or not it has been licensed to do business in
the Philippines under the Corporation Law, at the time it brings
complaint.”
Same; Distinction between suit far infringement or unfair competition
under Section 21-A and cancellation under Section 17.—The first kind
of action, it may be stated, is cognizable by the Courts of First Instance
(Sec. 27); the second partakes of an administrative proceeding before
the Patent Office (Sec. 18, in relation to Sec. 8). And while a suit under
Section 21-A requires that the mark or trademark alleged to have been
infringed has been “registered or assigned” to the suing foreign
corporation, a suit for cancellation of the registration of a mark or
tradename under Section 17 has no such requirement. For such mark
or trade-name should not have been registered in the first place (and
consequently may be cancelled if so registered) if it “consists of or
comprises a mark or tradename which so resembles a mark or
tradename . . . previously used in the Philippines by another and not
abandoned, as to be likely, when applied to or used in connection with
goods, business or services of the applicant, to cause confusion or
mistake or to deceive purchasers.” (Sec. 4d)
Same; Section 37, when operative.—Section 37 of the Trademark Law
was incorporated in the law in anticipation of the eventual adherence
of the Philippines to any international convention or treaty for the
protection of industrial property. It speaks of persons who are nationals
of, domiciled in, or have a bona fide or effective business or
commercial establishment in any foreign country, which is a party to
any international convention or treaty relating to industrial property to
which the Philippines may be a party. In other words, the provision
will be operative only when the Philippines becomes a party to such
convention or treaty. That this was the intention of Congress is clear
from the explanatory note to House Bill No. 1157 (now Republic Act
166), in reference to Section 37, which is the only provision in Chapter
XI of the Trademark Law on Foreign Industrial Property: “The
necessary provisions to qualify the Philippines under the international
convention for the protection of industrial property have been
specifically incorporated in the Act.” In the meantime, regardless of
Section 37, aliens or foreign corporations are accorded benefits under
the law.

Puma Sportschuhfabriken Rudolf Dassler, K.G. vs. Intermediate
Appellate Court
Puma, a foreign corporation, filed a complaint for infringement of
patent and trademark with the prayer of the issuance of a writ of
preliminary injunction from using the word PUMA. The lower court
ruled in favor of Puma, restraining the use of the trademark or any repo
reproduction, counterfeit, copy or imitation and the withdrawal from
the market all products bearing the same mark. The IAC reversed the
lower court and ordered the lower court to dismiss on the ground of
lack of capacity to sue. The case went all the way to SC. The Sc
however applied the Union Convention for the Protection of Industrial
& Property Rights (otherwise known as the Paris Convention) to which
the Philippines became a signatory in 1965. We all know that treaties
form part of the law of the land. Section 8 of that treaty provides that a
trade or corporate name shall be protected in all countries of the union.
Meaning all the signatory countries without the obligation of filing or
registration whether or not it forms part of the trademark. The object
of the convention is to accord a national or member-nation extensive
protection against infringement or any other types of unfair
competition.
Puma Sportschuhfabriken Rudolf Dassler, K.G. vs. Intermediate
Appellate Court, 158 SCRA 233, No. L-75067 February 26, 1988
Corporation Law; Trademarks and Tradenames; Action; A foreign
corporation not doing business in the Philippines needs no license to
site before Philippine courts for infringement of trademark and unfair
competition.—In the leading case of La Chemise Lacoste, S.A. v.
Fernandez, (129 SCRA 373), we ruled: "But even assuming the truth
of the private respondent's allegation that the petitioner failed to allege
material facts in its petition relative to capacity to sue, the petitioner
may still maintain the present suit against respondent Hemandas. As
early as 1927, this Court was, and it still is, of the view that a foreign
corporation not doing business in the Philippines needs no license to
sue before Philippine courts for infringement of trademark and unfair
competition, Thus, in Western Equipment and Supply Co. v. Reyes (51
Phil. 115), this Court held that a foreign corporation which has never
done any business in the Philippines and which is unlicensed and
unregistered to do business here, but is widely and favorably known in
the Philippines through the use therein of its products bearing its
corporate and tradename, has a legal right to maintain an action in the
Philippines to restrain the residents and inhabitants thereof from
organizing a corporation therein bearing the same name as the foreign
corporation, when it appears that they have personal knowledge of the
existence of such a foreign corporation, and it is apparent that the
purpose of the proposed domestic corporation is to deal and trade in
the same goods as those of the foreign corporation."
Same; Same; Adherence to the Paris Convention re-affirmed.—In the
case of Converse Rubber Corporation v. Universal Rubber Products,
Inc. (147 SCRA 165). we likewise re-affirmed our adherence to the
Paris Convention: "The ruling in the aforecited case is in consonance
with the Convention of the Union of Paris for the Protection of
Industrial Property to which the Philippines became a party on
September 27, 1965. Article 8 thereof provides that 'a trade name
[corporation name] shall be protected in all the countries of the Union
without the obligation of filing or registration, whether or not it forms
part of the trademark.
Same; Same; Same; Object of the convention.—"The object of the
Convention is to accord a national of a member nation extensive
protection 'against infringement and other types of unfair competition'
[Vanity Fair Mills, Inc. v. T. Eaton Co., 234 F. 2d 633]." (at p. 165)
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La Chemise Lacoste, S.A. vs. Fernandez
Hemandas and Co., applied and was issued of Reg No-Supplemental
Register 2225 for the trademark Chemise Lacoste & Crocodile Device
in 1977. In 1982, the petitioner-French corporation filed for a
cancellation of the registration. In 1983, the NBI issued a warrants,
searched and seized various articles and was subsequently cancelled
and set aside and returned the seized items. Hemandas alleged that the
foreign corporation failed to allege essential facts bearing upon its
capacity to sue which must be affirmatively written.
Ruling: The case involves a violation of the Revised Penal Code.
Hence, Sec 21-A of RA 166 is not applicable. First and foremost,
Lacoste is not doing business in the Philippines. While it may be true
that this is appointed distributor of its products, in the Philippines in
the person of Rustan Commercial Corporation the latter has
independent stocks.
Rustan is marketing not only the product of the petitioner, but also
many other products, bearing equally known trademarks and
tradenames in competition of Lacoste. It was transacting in its own
name and for its own account and not for the account of Lacoste. Thus
it was not doing business in the PH. But even assuming that it has no
independent status, and therefore doing business in the PH, the act
complained of is a violation of our criminal statutes. The complainant
is not the principal party, but it will be the state. It will be the People
of the Philippines that is primarily injured. And the violator of the
criminal statute cannot escape prosecution upon a farfetched
contention that the complainant has no capacity to sue. The SC also
applied motu proprio the Paris Convention, Sec 8 that the trademark
shall be protected in all countries of the union without the obligation
of filing or registration whether or not it forms part of the trademark.
To allow Hermandas to continue using the trademark “Lacoste” for the
simple reason that she is the first registrant, but not belonging to her,
is to render nugatory the very essence of the law on trademarks and
trade names.
La Chemise Lacoste, S.A. vs. Fernandez, 129 SCRA 373, Nos. L-
63796-97, Nos. L-65659 May 21, 1984
Unfair Competition; Trademarks and Tradenames; Corporation Law;
Petitioner is not doing business in the Philippines.—Applying the
above provisions to the facts of this case, we find and conclude that the
petitioner is not doing business in the Philippines. Rustan is actually a
middleman acting and transacting business in its own name and/or its
own account and not in the name or for the account of the petitioner.
Same; Same; Same; A foreign corporation not doing business in the
Philippines needs no license to sue in the Philippines for trademark
violations.—But even assuming the truth of the private respondent’s
allegation that the petitioner failed to allege material facts in its petition
relative to capacity to sue, the petitioner may still maintain the present
suit against respondent Hemandas. As early as 1927, this Court was,
and it still is, of the view that a foreign corporation not doing business
in the Philippines needs no license to sue before Philippine courts for
infringement of trademark and unfair competition.
Same; Same; Same; Criminal Procedure; Where a violation of our
unfair trade lanes which provide a penal sanction is alleged, lack of
capacity to sue of injured foreign corporation becomes immaterial.—
More important is the nature of the case which led to this petition. What
preceded this petition for certiorari was a letter-complaint filed before
the NBI charging Hemandas with a criminal offense, i.e., violation of
Article 189 of the Revised Penal Code. If prosecution follows after the
completion of the preliminary investigation being conducted by the
Special Prosecutor the information shall be in the name of the People
of the Philippines and no longer the petitioner which is only an
aggrieved party since a criminal offense is essentially an act against

the State. It is the latter which is principally the injured party although
there is a private right violated. Petitioner’s capacity to sue would
become, therefore, of not much significance in the main case. We
cannot allow a possible violator of our criminal statutes to escape
prosecution upon a far-fetched contention that the aggrieved party or
victim of a crime has no standing to sue.
Same; Same; Same; Same; International Law; The Philippines being a
party to the Paris Convention for the Protection of Industrial Property,
the right of a foreign corporation to file suit in our courts to protect its
trademark is to be enforced.—In upholding the right of the petitioner
to maintain the present suit before our courts for unfair competition or
infringement of trademarks of a foreign corporation, we are moreover
recognizing our duties and the rights of foreign states under the Paris
Convention for the Protection of Industrial Property to which the
Philippines and France are parties. We are simply interpreting and
enforcing a solemn international commitment of the Philippines
embodied in a multilateral treaty to which we are a party and which we
entered into because it is in our national interest to do so.
Same; Same; Same; Same; Same; Foreign nationals are, by treaty,
entitled to the same protection as Filipino citizens against unfair
competition.—By the same token, the petitioner should be given the
same treatment in the Philippines as we make available to our own
citizens. We are obligated to assure to nationals of “countries of the
Union” an effective protection against unfair competition in the same
way that they are obligated to similarly protect Filipino citizens and
firms.
Same; Same; Same; Same; Patents Office; Director of Patents should
obey directive of Minister of Trade against registration of
internationally known brands in favor of persons other than their
original owners or users.—The memorandum is a clear manifestation
of our avowed adherence to a policy of cooperation and amity with all
nations. It is not, as wrongly alleged by the private respondent, a
personal policy of Minister Luis Villafuerte which expires once he
leaves the Ministry of Trade. For a treaty or convention is not a mere
moral obligation to be enforced or not at the whims of an incumbent
head of a Ministry. It creates a legally binding obligation on the parties
founded on the generally accepted principle of international law of
pacta sunt servanda which has been adopted as part of the law of our
land. (Constitution, Art. II, Sec. 3). The memorandum reminds the
Director of Patents of his legal duty to obey both law and treaty. It must
also be obeyed.
Same; Same; Criminal Procedure; A bare allegation that respondent’s
trademark is different from that of petitioner’s is a matter of defense.
It is not sufficient ground for a motion to quash a search warrant.—A
review of the grounds invoked by Hemandas in his motion to quash the
search warrants reveals the fact that they are not appropriate for
quashing a warrant. They are matters ot defense which should be
ventilated during the trial on the merits ot the case. For instance, on the
basis of the facts before the Judge, we fail to understand how he could
treat a bare allegation that the respondent’s trademark is different from
the petitioner’s trademark as a sufficient basis to grant the motion to
quash. We will treat the issue of prejudicial question later. Granting
that respondent Hemandas was only trying to show the absence of
probable cause, we, nonetheless, hold the arguments to be untenable.
Criminal Procedure; Words and Phrases; “Probable cause” defined.—
This concept of probable cause was amplified and modified by our
ruling in Stonehill v. Diokno, (20 SCRA 383) that probable cause
“presupposes the introduction of competent proof that the party against
whom it is sought has performed particular acts, or committed specific
omissions, violating a given provision of our criminal laws.”
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Same; An allegation that applicant for search warrant withheld certain
information from the court is not of itself a sufficient basis to quash the
search warrant issued.—True, the lower court should be given the
opportunity to correct its errors, if there be any, but the rectification
must, as earlier stated be based on sound and valid grounds. In this
case, there was no compelling justification for the about face. The
allegation that vital facts were deliberately suppressed or concealed by
the petitioner should have been assessed more carefully because the
object of the quashal was the return of items already seized and easily
examined by the court. The items were alleged to be fake and quite
obviously would be needed as evidence in the criminal prosecution.
Moreover, an application for a search warrant is heard ex parte. It is
neither a trial nor a part of the trial Action on these applications must
be expedited for time is of the essence. Great reliance has to be
accorded by the judge to the testimonies under oath of the complainant
and the witnesses. The allegation of Hemandas that the applicant
withheld information from the respondent court was clearly no basis to
order the return of the seized items.
Same; Unfair Competition, Trademarks and Tradenames; A certificate
of registration in the supplemental register is not prima facie evidence
of validity of a registration; Quashal of search warrant not justified.—
A certificate of registration in the Supplemental Register is not prima
facie evidence of the validity of registration, of the registrant’s
exclusive right to use the same in connection with the goods, business,
or services specified in the certificate. Such a certificate of registration
cannot be filed, with effect, with the Bureau of Customs in order to
exclude from the Philippines, foreign goods bearing infringement
marks or trade names (Rule 124, Revised Rules of Practice Before the
Phil. Pat. Off. in Trademark Cases; Martin, Philippine Commercial
Laws, 1981, Vol. 2, pp. 513-515).
Same; Same; Same; Same.—Registration in the Supplemental
Register, therefore, serves as notice that the registrant is using or has
appropriated the trademark. By the very fact that the trademark cannot
as yet be entered in the Principal Register, all who deal with it should
be on guard that there are certain defects, some obstacles which the
user must still overcome before he can claim legal ownership of the
mark or ask the courts to vindicate his claims of an exclusive right to
the use of the same. It would be deceptive for a party with nothing
more than a registration in the Supplemental Register to posture before
courts of justice as if the registration is in the Principal Register.
Same; Same; Same; Pendency of application for registration in the
Patent Office not a prejudicial question to the issuance of search
warrant on a charge of unfair competition.—By the same token, the
argument that the application was premature in view of the pending
case before the Patent Office is likewise without legal basis. The
proceedings pending before the Patent Office involving IPC No. 1658
do not partake of the nature of a prejudicial question which must first
be definitely resolved.
Same; Same; Same; Administrative Law; Patent Office; The Minister
of Trade has the power to direct the Patent Office not to register certain
trademarks except to its original users and to cancel those registered in
violation of its directive.—The Intermediate Appellate Court, in the La
Chemise Lacoste S.A. v. Sadhwani decision which we cite with
approval sustained the power of the Minister of Trade to issue the
implementing memorandum and, after going over the evidence in the
records, affirmed the decision of the Director of Patents declaring La
Chemise Lacoste S.A. the owner of the disputed trademark and
crocodile or alligator device.
Same; Same; Same; Same; Same.—Indeed, due process is a rule of
reason. In the case at bar the order of the Patent Office is based not
only on the undisputed fact of ownership of the trademark by the
appellee but on a prior determination by the Minister of Trade, as the

competent authority under the Paris Convention, that the trademark
and device sought to be registered by the appellant are well-known
marks which the Philippines, as party to the Convention, is bound to
protect in favor of its owners. It would be to exalt form over substance
to say that under the circumstances, due process requires that a hearing
should be held before the application is acted upon.
Same; Same; Same; Petitioner is the owner of the trademarks at bar.—
We have carefully gone over the records of all the cases filed in this
Court and find more than enough evidence to sustain a finding that the
petitioner is the owner of the trademarks “LACOSTE”, “CHEMISE
LACOSTE”, the crocodile or alligator device, and the composite mark
of LACOSTE and the representation of the crocodile or alligator. Any
pretensions of the private respondent that he is the owner are absolutely
without basis. Any further ventilation of the issue of ownership before
the Patent Office will be a superfluity and a dilatory tactic.
Same; Same; Same; Right of owner of a trademark cannot be
preempted by fact that another first secure its registration in the
Supplemental Register.—The records show that the goodwill and
reputation of the petitioner’s products bearing the trademark
LACOSTE date back even before 1964 when LACOSTE clothing
apparels were first marketed in the Philippines. To allow Hemandas to
continue using the trademark Lacoste for the simple reason that he was
the first registrant in the Supplemental Register of a trademark used in
international commerce and not belonging to him is to render nugatory
the very essence of the law on trademarks and tradenames.
From all these cases, it has been laid to rest that the foreign corporation
can sue in our courts:
1. Marshall-wells vs Elser, Swedish East Asia vs Manila Port:
if the act or transaction is an ISOLATED TRANSACTION/
SINGLE ACT.
2. Antam Consolidated vs CA: when the foreign corporation is
not seeking to enforce legal or contractual rights arising or
growing out of any business transaction it has contracted in
the Philippines.
3. Western Equipment vs Reyes, General Garments vs
Director: neither is a license required before a Foreign
Corporation may gain access to our courts if the purpose is
to protect its corporate name, trademark, tradename,
goodwill or reputation.
4. Lacoste vs Fernandez, when it is raised in a violation of the
RPC.
5. Communication Materials and Design, Inc. vs. CA- when the
party is estopped to challenge the personality of the foreign
corporation
6. If the foreign corporation is merely defending a suit filed
against it.- Time vs Reyes
NOTE: the capacity to sue of the foreign corporation must also be
affirmatively pleaded, in order that it may gain access to our courts.
And if it is not so pleaded, the general rule is that the case may be
dismissed (Atlantic Mutual Insurance vs Cebu Stevedoring).
General rule in a sense that if it involves a violation of the RPC
(Lacoste vs Fernandez) or it will be unnecessary or ineffectual
(Olympia vs Razon) or the foreign corporation is merely depending on
a suit filed against it (Time vs Reyes). Such an averment will not be
necessary. (These are the exceptions to the general rule)
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Atlantic Mutual Insurance vs Cebu Stevedoring
Atlantic Mutual Insurance and Continental Insurance, are foreign
corporations, they sued Cebu Stevedoring for damaged shipments of
copra that they insured. The trial court found the complaint deficit in
that they failed to aver their capacity to sue, but gave the foreign
corporation the opportunity to amend the complaint. They did not do
so. The lower court dismissed the case. The case went all the way to
the SC. The SC affirmed the decision of the lower court because all
that is averred is that they are both foreign corporations. Of course, this
conjectures two alternative possibilities: either they ae doing business
in the Philippines, or they are not. In the first, they must have been duly
licensed to maintain the suit. If in the second, no such license is
required. In either case, the qualifying circumstance is the essential part
of the element of the plaintiff’s capacity to sue and must therefore be
AFFIRMATIVELY PLEADED. Thus the SC sustained the dismissal
of the lower court.
Atlantic Mutual Ins. Co. vs. Cebu Stevedoring Co., Inc., 17 SCRA
1037, No. L-18961 August 31, 1966
Pleading and practice; Facts showing foreign corporation’s capacity to
sue should be pleaded.—A foreign corporation engaged in business in
the Philippines can maintain suit in this jurisdiction if it is duly
licensed. If a foreign corporation is not engaged in business in the
Philippines, it can maintain such suit if the transaction sued upon is
singular and isolated, in which case no license is required. In either
case, compliance with the requirement of license, or the f act that the
suing corporation is exempt therefrom, as the case may be, cannot be
inferred from the mere fact that the party suing is a foreign corporation.
The qualifying circumstance, being an essential part of the element of
the plaintiff’s capacity to sue, must be affirmatively pleaded.
Olympia Business Machines Co. (Phil.) Inc. vs. E. Razon, Inc.
Olympia Business Machines is a domestic corporation. It is a
subsidiary of a foreign corporation. Olympia Office Machines,
registered under the laws of Hongkong shipped 300 portable
typewriters to Olympia Business Machines Ph, issued against all risks
by California Insurance Co., a foreign corporation. They were
discharged in Manila through the courier’s agent, which in turn turned
it over to E. Razon. While in the latter’s possession, part of the
shipment was stolen. Olympia filed a claim for loss with California
Insurance which paid the former in full settlement of the claim.
Olympia PH, in consideration thereof, executed a subrogation receipt.
Both California and Olympia thereafter brought a suit against E.
Razon. Despite notice, E. Razon did not appear and was subsequently
declared in default. A motion of reconsideration was filed and the
default order was set aside. E. razon submitted an amended answer
alleging that California is a foreign corporation doing business in the
Philippines without a license and cannot thus maintain the suit. Once
again E. Razon failed to appear despite notice. The lower court revived
the default order.
ISSUE: is the failure of California to aver its capacity to sue fatal?
Held: NO, as may be compared to Atlantic case, the action here was
instituted by both the subrogee, foreign corporation and subrogor,
domestic corporation. Also, in the Atlantic case, the plaintiff’s lack of
capacity to sue was raised at the outset. In the case at bar, the defense
of lack of capacity to sue was not raised until the first declaration of
default has been lifted. And there was also a pronouncement in the
Atlantic Case that the defendant had no meritorious defense save and
exempt the lack of capacity to sue. Thus, even assuming incapacity on
the part of California, no such incapacity can be attributed to its co-
plaintiff Olympia PH. And if it is strictly necessary, the latter could
easily execute a cancellation of the deed of subrogation, or of

reassignment of the right of action from California back to Olympia
Ph.
Olympia Business Machines Co. (Phil.) Inc. vs. E. Razon, Inc.,
155 SCRA 208, No. L-75631 October 28, 1987
Remedial Law; Civil Procedure; Capacity to sue; Doctrine in Atlantic
Mutual Insurance Co. vs. Cebu Stevedoring Co. not applicable;
Absence of any valid or meritorious defense by defendant against
plaintiffs claim; Failure of defendant to appear for pre-trial resulting in
its declaration of default for two times.—These circumstances
proscribe the application to the controversy at bar of the doctrine in
Atlantic Mutual The defendant’s conduct in this case strongly indicates
the absence of any valid defense on its part against the plaintiffs’
claims: the defendant failed to appear for pretrial despite notice, not
once, but twice and was in consequence twice declared in default. The
lack of any meritorious defense on its part was in fact confirmed by the
declaration of the Court of Appeals, which it has not challenged, that
all three (3) errors attributed by it to the Trial Court were
“unmeritorious except the second,” i.e., plaintiff’s lack of capacity to
sue. Even assuming incapacity on the part of California, no such
incapacity may be attributed to its co-plaintiff, Olympia Business
Machines Co. (Phil.), Inc. And if strictly necessary, the latter could
quite easily execute a cancellation of the deed of subrogation or of re-
assignment of the right of action from California back to Olympia.
Same; Same; Same; Dismissal of case would not bar institution by
plaintiff of the same action but it is idle ceremony considering the
absence of any meritorious substantial defense of defendant; Technical
rules should not be accorded undue importance to frustrate and defeat
a plainly valid claim.—Moreover, the dismissal of the case at this
stage, would not bar the institution by California of the same action,
this time alleging in its complaint that it was suing on a single, isolated
transaction. But this would be an idle, circuitous ceremony in the light
of the unchallenged declaration by the Court of Appeals of the absence
of any meritorious substantial defense on the part of defendant Razon.
This would be to accord undue importance and significance to
technical rules, to allow an inflexible, unreasoning adherence to such
technical rules to frustrate and defeat a plainly valid claim.
Time, Inc. vs. Reyes
Antonio Villegas, then the mayor of Manila, and Juan Ponce Enrile
filed an action for damages against Time, a foreign corporation, upon
an alleged libel by virtue of Time’s publication of an essay entitled
“Corruption in Asia”. Time filed a motion to dismiss for lack of
jurisdiction. Because a foreign corporation not doing business in the
Philippines cannot be subject to sue in PH courts. However, the lower
court deferred action on the motion to dismiss until after trial. So Time
filed for a petition for certiorari and prohibit the court from proceeding
in the case
Issue: May Time institute the petition?
HELD: yes. The petitioner is not here maintaining any suit but I merely
defending one filed against it. It did not any complaint but only a
corollary defensive position to prohibit the court from further
proceeding with a suit that it has no jurisdiction to entertain the person.
Likewise, the petitioner’s failure to aver their capacity to sue is not
fatal because it is well-settled that a foreign corporation may, by writ
of prohibition, seek relief against wrongful assumption of jurisdiction.
A foreign corporation seeking a writ of prohibition against further
maintenance of a suit on the ground of want of jurisdiction will not be
bound by the ruling of the court in which the suit was brought. And the
motion to quash the service of summons that it has jurisdiction.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 148
Time, Inc. vs. Reyes, 39 SCRA 303, No. L-28882 May 31, 1971
Remedial law; When jurisdiction conferred is exclusive; Venue
provisions of Rep. Act 4363 is mandatory for party bringing action.—
The rule is that where a statute creates a right and .provides a remedy
for its enforcement, the remedy is exclusive; and where it confers
jurisdiction upon a particular court, that jurisdiction is likewise
exclusive, unless otherwise provided. Hence, the venue provisions of
Republic Act No. 4363 should be deemed mandatory for the party
bringing the action, unless the question of venue should be waived by
the defendant, which was not the case here. Only thus can the policy
of the Act be upheld and maintained. Nor is there any reason why the
inapplicability of one alternative venue should result in rendering the
other alternative also inapplicable.
Same; Foreign corporation may seek relief against wrongful
assumption of jurisdiction.—Petitioner's failure to aver its legal
capacity to institute the present petition is not fatal, for a foreign
corporation may, by writ or prohibition, seek relief against the
wrongful assumption of jurisdiction. And a foreign corporation
seeking a writ of prohibition against further maintenance of a suit, on
the ground of want of jurisdiction, is not bound by the ruling of the
court in which the suit was brought, on a motion to quash service of
summons, that it has jurisdiction.
Same; Certiorari or prohibition in case of denial or deferment of action
on a motion to dismiss for lack of jurisdiction.—The action of a court
in refusing to rule, or deferring its ruling, on a motion to dismiss for
lack of jurisdiction over the subject matter, or for improper venue. is
in excess of jurisdiction and correctible by writ of prohibition or
certiorari sued out in the appellate Court, even before trial on the merits
is had.
Same; Jurisdiction of court determined by allegations in the
complaint.—It is a settled rule that the jurisdiction of a court over the
subject-matter is determined by the allegations in the complaint; and
when a motion to dismiss is filed for lack of jurisdiction those
allegations are deemed admitted for purposes of such motion, so that
it may be resolved without waiting for the trial. Thus it has been held
that the consideration thereof may not be postponed in the hope that
the evidence may yield other qualifying or concurring data which
would bring the case under the court's jurisdiction.
LAWS GOVERNING FOREIGN CORPORATIONS
SEC. 146. Law Applicable. – A foreign corporation lawfully doing
business in the Philippines shall be bound by all laws, rules and
regulations applicable to domestic corporations of the same class,
except those which provide for the creation, formation, organization or
dissolution of corporations or those which fix the relations, liabilities,
responsibilities, or duties of stockholders, members, or officers of
corporations to each other or to the corporation.
It says all laws, rules and regulations applicable to a domestic
corporation of the same class, except those which provide for the
creation, formation, organization or dissolution of corporations or
those which fix the relations, liabilities, responsibilities, or duties of
stockholders, members, or officers of corporations to each other or to
the corporation itself. In effect, intra-corporate or internal matters not
affecting creditors or the public in general are governed not by PH laws
but by the law under which the foreign corporation was formed or
organized.
M. E. Grey vs. Insular Lumber Company
The defendant Insular Lumber is organized and registered under the
laws of New York and it is licensed to do business in the PH where the

petitioner is a stockholder of 57 shares or less than 3% of the OCS of
Insular Lumber. He sought to inspect the books and records of the
corporation but he was denied of that right. The case went all the way
to SC. The court ruled that he is not entitled thereto because the New
York law requires that a stockholder requiring the same must own at
least 3% of the OCS. M.E. Grey does not own 3%. Also, under New
York laws, it allows a stockholder to inspect the book and records if it
can be shown that it seeks the information for an honest purpose and
to protect his interest which must be exercised in good faith not to
gratify curiosity or for speculative or vexatious purposes. But the
appellant in this particular case has made no effort whatsoever nor even
alleged that the information he desired for examination or inspection
was necessary to protect his interest or for a specific or honest purpose
not to gratify curiosity or for speculative or vexatious purposes.
Because it involves the rights and responsibilities of a stockholder.
There you go. The law of the state of its incorporation will apply. If it
were the PH that would have been applied, it would have been the
reverse. There is no requirement that the stockholder must own a
specified number of shares, in order that he may inspect the books and
records of the corporation of which he is a stockholder.
Secondly, it is not the duty of the stockholder to specify that he is
acting in good faith or for a legitimate purpose that is only a remedy or
a defense on the part of the corporation or the officers to deny him the
right of inspection that he is not acting in good faith or for a legitimate
purpose. Baligtad yung New York Law sa PH laws.
M. E. Grey vs. Insular Lumber Company, 67 Phil. 139, No. 45144
April 3, 1939
1.CORPORATIONS; EXAMINATION OF BOOKS AND PAPERS
OF A CORPORATION BY A SHAREHOLDER.—The defendant
was and is a corporation organized and existing under the laws of the
State of New York, licensed to engage in business in the Philippines,
with offices in the City of Manila, in Fabrica, Occidental Negros, in
New York and in Philadelphia. Under the law of New York, the rights
of a stockholder to examine the books and records of a corporation
organized under the laws of that State, consist in making a written
request to the treasurer or other fiscal officer thereof for a statement of
its affairs, under oath, embracing a particular account of all its assets
and liabilities, and the treasurer shall make such statement and deliver
it to the person making the request within thirty days thereafter. The
plaintiff not being a stockholder owning at least three per cent of the
capital stock of the defendant corporation, has no right to examine the
books and records of the corporation nor to require a statement of its
affairs embracing a particular account of all its assets and liabilities.
2.ID. ; ID.—The appellant has made no effort to prove or even allege
that the information he desired to obtain through the examination and
inspection of defendant's books was necessary to protect his interests
as stockholder of the corporation, or that it was for a specific and
honest purpose, and not to gratify curiosity, nor for speculative or
vexatious purposes.
AMENDMENTS TO THE ARTICLES OF INCORPROATION
SEC. 147. Amendments to Articles of Incorporation or Bylaws of
Foreign Corporations. – Whenever the articles of incorporation or
bylaws of a foreign corporation authorized to transact business in the
Philippines are amended, such foreign corporation shall, within sixty
(60) days after the amendment becomes effective, file with the
Commission, and in proper cases, with the appropriate government
agency, a duly authenticated copy of the amended articles of
incorporation or bylaws, indicating clearly in capital letters or
underscoring the change or changes made, duly certified by the
authorized official or officials of the country or state of incorporation.
Such filing shall not in itself enlarge or alter the purpose or purposes
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 149
for which such corporation is authorized to transact business in the
Philippines.
Please just read this.
AMENDMENT OF LICENSE
SEC. 148. Amended License. – A foreign corporation authorized to
transact business in the Philippines shall obtain an amended license in
the event it changes its corporate name, or desires to pursue other or
additional purposes in the Philippines, by submitting an application
with the Commission, favorably endorsed by the appropriate
government agency in the proper cases.
Please just read this.
MERGER/CONSOLIDATION
SEC. 149. Merger or Consolidation Involving a Foreign
Corporation Licensed in the Philippines. – One or more foreign
corporations authorized to transact business in the Philippines may
merge or consolidate with any domestic corporation or corporations if
permitted under Philippine laws and by the law of its incorporation:
Provided, That the requirements on merger or consolidation as
provided in this Code are followed.
Whenever a foreign corporation authorized to transact business in the
Philippines shall be a party to a merger or consolidation in its home
country or state as permitted by the law authorizing its incorporation,
such foreign corporation shall, within sixty (60) days after the
effectivity of such merger or consolidation, file with the Commission,
and in proper cases, with the appropriate government agency, a copy
of the articles of merger or consolidation duly authenticated by the
proper official or officials of the country or state under whose laws the
merger or consolidation was effected: Provided, however, That if the
absorbed corporation is the foreign corporation doing business in the
Philippines, the latter shall at the same time file a petition for
withdrawal of its license in accordance with this Title.
Please just read this.
REVOCATION OF LICENSE
SEC. 151. Revocation of License. – Without prejudice to other
grounds provided under special laws, the license of a foreign
corporation to transact business in the Philippines may be revoked or
suspended by the Commission upon any of the following grounds:
(a) Failure to file its annual report or pay any fees as required by
this Code;
(b) Failure to appoint and maintain a resident agent in the
Philippines as required by this Title;
(c) Failure, after change of its resident agent or address, to
submit to the Commission a statement of such change as
required by this Title;
(d) Failure to submit to the Commission an authenticated copy
of any amendment to its articles of incorporation or bylaws
or of any articles of merger or consolidation within the time
prescribed by this Title;
(e) A misrepresentation of any material matter in any
application, report, affidavit or other document submitted by
such corporation pursuant to this Title;
(f) Failure to pay any and all taxes, imposts, assessments or
penalties, if any, lawfully due to the Philippine Government
or any of its agencies or political subdivisions;

(g) Transacting business in the Philippines outside of the
purpose or purposes for which such corporation is authorized
under its license;
(h) Transacting business in the Philippines as agent of or acting
on behalf of any foreign corporation or entity not duly
licensed to do business in the Philippines; or
(i) Any other ground as would render it unfit to transact
business in the Philippines.
Note: the last ground is all encompassing, giving the SEC a wide
discretion in revoking or suspending the license of a foreign
corporation. Depending on the seriousness of the acts objectionable
done by the foreign corporation.
It says WITHOUT PREJUDICE TO OTHER GROUNDS
PROVIDED BY SPECIAL LAWS. Meaning, there might be other
laws that would be a ground for the revocation of the license to do
business here in the PH. For instance, the General Banking Act, the
Foreign Investments Act, R.A. 8799 (stockbrokers), any violation of
the rules and regulations prescribed by Securities and Exchange
Commission.
SEC. 152. Issuance of Certificate of Revocation. – Upon the
revocation of the license to transact business in the Philippines, the
Commission shall issue a corresponding certificate of revocation,
furnishing a copy thereof to the appropriate government agency in the
proper cases.
The Commission shall also mail the notice and copy of the certificate
of revocation to the corporation, at its registered office in the
Philippines.
WITHDRAWAL OF FOREIGN CORPORATIONS
SEC. 153. Withdrawal of Foreign Corporations. – Subject to
existing laws and regulations, a foreign corporation licensed to transact
business in the Philippines may be allowed to withdraw from the
Philippines by filing a petition for withdrawal of license. No certificate
of withdrawal shall be issued by the Commission unless all the
following requirements are met:
(a) All claims which have accrued in the Philippines have been
paid, compromised or settled;
(b) All taxes, imposts, assessments, and penalties, if any,
lawfully due to the Philippine Government or any of its
agencies or political subdivisions, have been paid; and
(c) The petition for withdrawal of license has been published
once a week for three (3) consecutive weeks in a newspaper
of general circulation in the Philippines.
Withdrawal of the license to do business in the PH is by way of a
petition and subject to the conditions and requirements imposed by the
code. ALL THREE CONDITIONS MUST BE PRESENT, otherwise,
the license will not be withdrawn.
JAN. 7 (G)
TITLE XVI
INVESTIGATIONS, OFFENSES, AND PENALTIES
Section 154. Investigation and Prosecution of Offenses. - The
Commission may investigate an alleged violation of this Code, or of a
rule, regulation, or order of the Commission.
The Commission may publish its findings, orders, opinions, advisories,
or information concerning any such violation, as may be relevant to the
general public or to the parties concerned, subject to the provisions of
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 150
Republic Act No. 10173, otherwise known as the "Data Privacy Act of
2012", and other pertinent laws.
The Commission shall give reasonable notice to and coordinate with
the appropriate regulatory agency prior to any such publication
involving companies under their regulatory jurisdiction.
Section 155. Administration of Oaths, Subpoena of Witnesses and
Documents. - The Commission, through its designated officer, may
administer oaths and affirmations, issue subpoena and subpoena duces
tecum, take testimony in any inquiry or investigation, and may perform
other acts necessary to the proceedings or to the investigation.
Section 156. Cease and Desist Orders. - Whenever the Commission
has reasonable basis to believe that a person has violated, or is about
to violate this Code, a rule, regulation, or order of the Commission, it
may direct such person to desist from committing the act constituting
the violation.
The Commission may issue a cease and desist order ex parte to enjoin
an act or practice which is fraudulent or can be reasonably expected to
cause significant, imminent, and irreparable danger or injury to public
safety or welfare. The ex parte order shall be valid for a maximum
period of twenty (20) says, without prejudice to the order being made
permanent after due notice and hearing.
Thereafter the Commission may proceed administratively against such
person in accordance with Section 158 of this Code, and/or transmit
evidence to the Department of Justice for preliminary investigation or
criminal prosecution and/or initiate criminal prosecution for any
violation of this Code, rule, or regulation.
Section 157. Contempt. - Any person who, without justifiable cause,
fails or refuses to comply with any lawful order, decision, or subpoena
issued by the Commission shall, after due notice and hearing, be held
in contempt and fined in an amount not exceeding Thirty thousand
pesos (₱30,000.00). When the refusal amounts to clear and open
defiance of the Commission's order, decision, or subpoena, the
Commission may impose a daily fine of One thousand pesos
(₱1,000.00) until the order, decision, or subpoena is complied with.
Section 158. Administrative Sanctions. - If, after due notice and
hearing, the Commission finds that any provision of this Code, rules or
regulations, or any of the Commission's orders has been violated, the
Commission may impose any or all of the following sanctions, taking
into consideration the extent of participation, nature, effects, frequency
and seriousness of the violation:
(a) Imposition of a fine ranging from Five thousand pesos (₱5,000.00)
to Two million pesos (₱2,000,000.00), and not more that One thousand
pesos (₱1,000.00) for each day of continuing violation but in no case
to exceed Two million pesos (₱2,000,000.00);
(b) Issuance of the permanent cease and desist order;
(c) Suspension or revocation of the certificate of incorporation; and
(d) Dissolution of the corporation and forfeiture of its assets under the
conditions in Title XIV of this Code.
Section 159. Unauthorized Use of Corporate Name; Penalties. -
The unauthorized use of corporate name shall be punished with a fine
ranging from Ten thousand pesos (₱10,000.00) to Two hundred
thousand pesos (₱200,000.00).
Section 160. Violation of Disqualification Provision; Penalties. -
When, despite the knwoledge of the existence of a ground for

disqualification as provided in Section 26 of this Code, a director,
trustee or officer willfully holds office, or willfully conceals such
disqualification, such director, trustee or officer shall be punished with
a fine ranging from Ten thousand pesos (₱10,000.00) to Two hundred
thousand pesos (₱200,000.00) at the discretion of the court, and shall
be permanently disqualified from being a director, trustee or officer of
any corporation. When the violation of this provision is injurious or
detrimental to the public, the penalty shall be a fine ranging from
Twenty thousand pesos (₱20,000.00) to Four hundred thousand pesos
(₱400,000.00).
Section 161. Violation of Duty to Maintain Records, to Allow their
Inspection or Reproduction; Penalties. - The unjustified failure or
refusal by the corporation, or by those responsible for keeping and
maintaining corporate records, to comply with Section s 45, 73, 92,
128, 177 and other pertinent rules and provisions of this Code on
inspection and reproduction of records shall be punished with a fine
ranging from Ten thousand pesos (₱10,000.00) to Two hundred
thousand pesos (₱200,000.00), at the discretion of the court, taking into
consideration the seriousness of the violation and its implications.
When the violation of this provision is injurious or detrimental to the
public, the penalty is a fine ranging from Twenty thousand pesos
(₱20,000.00) to Four hundred thousand pesos (₱400,000.00).
The penalties impose under this section shall be without prejudice to
the Commission's exercise of its contempt powers under Section 157
hereof.
Section 162. Willful Certification of Incomplete, Inaccurate, False;
or Misleading Statements or Reports; Penalties. - Any person who
willfully certifies a report required under this Code, knowing that the
same contains incomplete, inaccurate, false, or misleading information
or statements, shall be punished with a fine ranging from Twenty
thousand pesos (₱20,000.00) to Two hundred thousand pesos
(₱200,000.00). When the wrongful certification is injurious or
detrimental to the public, the auditor or the responsible person may
also be punished with a fine ranging from Forty thousand pesos
(₱40,000.00) to Four hundred thousand pesos (₱400,000.00).
Section 163. Independent Auditor Collusion; Penalties. - An
independent auditor who, in collusion with the corporation's directors
or representatives, certifies the corporation's financial statements
despite its incompleteness or inaccuracy, its failure to give a fair and
accurate presentation of the corporation's condition, or despite
containing false or misleading statements, shall be punished with a fine
ranging from Eighty thousand pesos (₱80,000.00) to Five hundred
thousand pesos (₱500,000.00). When the statement or report certified
is fraudulent, or has the effect of causing injury to the general public,
the auditor or responsible officer may be punished with a fine ranging
from One hundred thousand pesos (₱100,000.00) to Six hundred
thousand pesos (₱600,000.00).
Section 164. Obtaining Corporate Registration Through Fraud;
Penalties. - Those responsible for the formation of a corporation
through fraud, or who assisted directly or indirectly therein, shall be
punished with a fine ranging from Two hundred thousand pesos
(₱200,000.00) to Two million pesos (₱2,000,000.00). When the
violation of this provision is injurious or detrimental to the public, the
penalty is a fine ranging from Four hundred thousand pesos
(₱400,000.00) to Five million pesos, (₱5,000,000.00).
Section 165. Fraudulent Conduct of Business; Penalties. - A
corporation that conduct its business through fraud shall be punished
with a fine ranging from Two hundred thousand pesos (₱200,000.00)
to Two million pesos (₱2,000,000.00). When the violation of this
provision is injurious or detrimental to the public, the penalty is a fine
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 151
ranging from Four hundred thousand pesos (₱400,000.00) to Five
million pesos (₱5,000,000.00).
Section 166. Acting as Intermediaries for Graft and Corrupt
Practices; Penalties. - A corporation used for fraud, or for committing
or concealing graft and corrupt practices as defined under pertinent
statutes, shall be liable for a fine ranging from One hundred thousand
pesos (₱100,000.00) to Five million pesos (₱5,000,000.00).
When there is a finding that any of its directors, officers, employees,
agents, or representatives are engaged in graft and corrupt practices,
the corporation's failure to install:
(a) safeguards for the transparent and lawful delivery of services; and
(b) policies, code of ethics, and procedures against graft and corruption
shall be prima facie evidence of corporate liability under this section.
Section 167. Engaging Intermediaries for Graft and Corrupt
Practices; Penalties. - A corruption that appoints an intermediary who
engages in graft and corrupt practices for the corporation's benefit or
interest shall be punished with a fine ranging from One hundred
thousand pesos (₱100,000.00) to One million pesos (₱1,000,000.00).
Section 168. Tolerating Graft and Corrupt Practices; Penalties. -
A director, trustee, or officer who knowingly fails to sanction, report,
or file the appropriate action with proper agencies, allows or tolerates
the graft and corrupt practices or fraudulent acts committed by a
corporation's directors, trustees, officers, or employees shall be
punished with a fine ranging from Five hundred thousand pesos
(₱500,000.00) to One million pesos (₱1,000,000.00).
Section 169. Retaliation Against Whistleblowers. - A whistleblower
refers to any person who provides truthful information relating to the
commission or possible commission of any offense or violation under
this Code. Any person who, knowingly and with intent to retaliate,
commits acts detrimental to a whistleblower such as interfering with
the lawful employment or livelihood of the whistleblower, shall, at the
discretion of the court, be punished with a fine ranging from One
hundred thousand (₱100,000.00) to One million (₱1,000,000.00).
Section 170. Other Violations of the Code; Separate Liability. -
Violation of any of the other provisions of this Code or its amendments
not otherwise specifically penalized therein shall be punished by a fine
of not less than Ten thousand pesos (₱10,000.00) but not more than
One million pesos (₱1,000,000.00). If the violation is committed by a
corporation, the same may, after notice and hearing, be dissolved in
appropriate proceedings before the Commission; Provided, That such
dissolution shall not preclude the institution of appropriate action
against the director, trustee, or officer of the corporation responsible
for said violation: Provided, further, That nothing in this section shall
be construed to repeal the other causes for dissolution of corporation
provided in this Code.
Liability for any of the foregoing offenses shall be separate from any
other administrative, civil, or criminal liability under this Code and
other laws.
Section 171. Liability of Directors, Trustees, Officers, or Other
Employees. - If the offender is a corporation, the penalty may, at the
discretion of the court, be imposed upon such corporation and/or upon
its directors, trustees, stockholders. members, officers, or employees
responsible for the violation or indispensable to its commission.
Section 172. Liability of Aiders and Abettors and Other Secondary
Liability. - Anyone who shall aid, abet, counsel, command, induce, or
cause any violation of this Code, or any rule regulation or order of the
Commission shall be punished with a fine not exceeding that imposed

on the principal offenders, at the discretion of the court, after taking
into account their participation in the offense.
Note: just go over the said provisions above, they are all self
explanatory naman daw.
There are no jurisprudence regarding any of them at this point in time.
They are insertions kasi of the RCC, pero since they are self-
explanatory naman.
TITLE XVII
MISCELLANEOUS PROVISIONS
Section 173. Outstanding Capital Stock Defined. - The term
"outstanding capital stock", as used in this Code, shall mean the total
shares of stock issued under binding subscription contracts to
subscribers or stockholders, whether fully or partially paid, except
treasury shares.
Section 174. Designation of Governing Boards. - The provisions of
specific provisions of this Code to the contrary notwithstanding,
nonstock or special corporations may, through their articles of
incorporation pr their bylaws, designated their governing boards by
any other than as board of trustees.
Section 175. Collection and Use of Registration, Incorporation and
Other Fees. - For a more implementation of this Code, the
Commission os hereby authorized to collect, retain and use fees, fines,
and other charges pursuant to this Code and its rules and regulations.
The amount collected shall be deposited and maintained in a separate
account which shall form a fund for its modernization and to augment
its operational expenses such as, but not limited to, capital outlay,
increase in compensation and benefits comparable with prevailing
rates in the private sector, reasonable employee allowance, employee
health care services, and other insurance, employee career
advancement and professionalization, legal assistance, seminars, and
other professional fees.
Section 176. Stock Ownership in Corporations. - Pursuant to the
duties specified by Article XIV of the Constitution, the National
Economic and Development Authority (NEDA) shall, from time to
time, determine if the corporate vehicle has been used by any
corporation, business, or industry to frustrate the provisions of this
Code or applicable laws, and shall submit to Congress, whenever
deemed necessary, a report of its findings, including recommendations
for their prevention or correction.
The Congress of the Philippines may set maximum limits for stock
ownership of individuals or groups of individuals related to each other
by consanguinity, affinity, or by close business interests, in
corporations declared to be vested with public interest pursuant to the
provisions of this section, or whenever necessary to prevent anti-
competitive practices as provided in Republic Act No. 10667,
otherwise known as the "Philippine Competition Act", or to implement
national economic policies designed to promote general welfare and
economic development, as declared in laws, rules and regulations.
In recommending to the Congress which corporations, businesses and
industries will be declared as vested with public interest, and in
formulating proposals for limitations on stock ownership, the NEDA
shall consider the type and nature of the industry, size of the enterprise,
economies of scale, geographic location, extent of Filipino ownership,
labor intensity of the activity, export potential, as well as other factors
which are germane to the realization and promotion of business and
industry.
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Section 177. Reportorial Requirements of Corporations. - Except
as otherwise provided in this Code or in the rules issued by the
Commission, every corporation, domestic or foreign, doing business
in the Philippines shall submit to the Commission:
(a) Annual financial statements audited by an independent certified
public accountant: Provided, That if the total assets or total liabilities
of the corporation are less than Six hundred thousand pesos
(₱600,000.00), the financial statements shall be certified under oath by
the corporation’s treasurer or chief financial officer; and
(b) A general information sheet.
Corporations vested with public interest must also submit the
following:
(1) A director or trustee compensation report; and
(2) A director or trustee appraisal or performance report and the
standards or criteria used to assess each, director or trustee.
The reportorial requirements shall be submitted annually and within
such period as may be prescribed by the Commission.
The Commission may place the corporation under delinquent status in
case of failure to submit the reportorial requirements three (3) times,
consecutively or intermittently, within a period of five (5) years. The
Commission shall give reasonable notice to and coordinate with the
appropriate regulatory agency prior to placing on delinquent status
companies under their special regulatory jurisdiction.
Any person required to file a report with the Commission may redact
confidential information from such required report: Provided, That
such confidential information shall be filed in a supplemental report
prominently labelled "confidential", together with a request for
confidential treatment of the report and the specific grounds for the
grant thereof.
Section 178. Visitorial Power and Confidential Nature of
Examination Results. - The Commission shall exercise visitorial
powers over all corporations, which powers shall include the
examination and inspection of records, regulation and supervision of
activities, enforcement of compliance, and imposition of sanctions in
accordance with this Code.
Should the corporation, without justifiable cause, refuse or obstruct the
Commission’s exercise of its visitorial powers, the Commission may
revoke its certificate of incorporation, without prejudice to the
imposition of other penalties and sanctions under this Code.
All interrogatories propounded by the Commission and the answers
thereto, as well as the results of any examination made by the
Commission or by any other official authorized by law to make an
examination of the operations, books, and records of any corporation,
shall be kept strictly confidential, except when the law requires the
same to be made public, when necessary for the Commission to take
action to protect the public or to issue orders in the exercise of its
powers under this Code, or where such interrogatories, answers or
results are necessary to be presented as evidence before any court.
Section 179. Powers, Functions, and Jurisdiction of the
Commission. - The Commission shall have the power and authority
to:
(a) Exercise supervision and jurisdiction over all corporations and
persons acting on their behalf, except as otherwise provided under this
Code;

(b) Pursuant to Presidential Decree No. 902-A, retain jurisdiction over
pending cases involving intra-corporate disputes submitted for final
resolution. The Commission shall retain jurisdiction over pending
suspension of payment/rehabilitation cases filed as of 30 June 2000
until finally disposed;
(c) Impose sanctions for the violation of this Code, its implementing
rules and orders of the Commission;
(d) Promote corporate governance and the protection of minority
investors, through, among others, the issuance of rules and regulations
consistent with international best practices;
(e) Issue opinions to clarify the application of laws, rules and
regulations;
(f) Issue cease and desist orders ex parte to prevent imminent fraud or
injury to the public;
(g) Hold corporations in direct and indirect contempt;
(h) Issue subpoena duces tecum and summon witnesses to appear in
proceedings before the Commission;
(i) In appropriate cases, order the examination, search and seizure of
documents, papers, files and records, and books of accounts of any
entity or person under investigation as may be necessary for the proper
disposition of the cases, subject to the provisions of existing laws;
(j) Suspend or revoke the certificate of incorporation after proper
notice and hearing;
(k) Dissolve or impose sanctions on corporations, upon final court
order, for committing, aiding in the commission of, or in any manner
furthering securities violations, smuggling, tax evasion, money
laundering, graft and corrupt practices, or other fraudulent or illegal
acts;
(l) Issue writs of execution and attachment to enforce payment of fees,
administrative fines, and other dues collectible under this Code;
(m) Prescribe the number of independent directors and the minimum
criteria in determining the independence of a director;
(n) Impose or recommend new modes by which a stockholder,
member, director, or trustee may attend meetings or cast their votes, as
technology may allow, taking into account the company’s scale,
number of shareholders or members, structure, and other factors
consistent with the basic right of corporate suffrage;
(o) Formulate and enforce standards, guidelines, policies, rules and
regulations to carry out the provisions of this Code; and
(p) Exercise such other powers provided by law or those which may be
necessary or incidental to carrying out the powers expressly granted to
the Commission.
In imposing penalties and additional monitoring and supervision
requirements, the Commission shall take into consideration the size,
nature of the business, and capacity of the corporation.
No court below the Court of Appeals shall have jurisdiction to issue a
restraining order, preliminary injunction, or preliminary mandatory
injunction in any case, dispute, or controversy that directly or
indirectly interferes with the exercise of the powers, duties and
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 153
responsibilities of the Commission that falls exclusively within its
jurisdiction.
Section 180. Development and Implementation of Electronic Filing
and Monitoring System. - The Commission shall develop and
implement an electronic filing and monitoring system. The
Commission shall promulgate rules to facilitate and expedite, among
others, corporate name reservation and registration, incorporation,
submission of reports, notices, and documents required under this
Code, and sharing of pertinent information with other government
agencies.
Section 181. Arbitration for Corporations. - An arbitration
agreement may be provided in the articles of incorporation or bylaws
of a corporation. When such an agreement is in place, disputes between
the corporation, its stockholders or members, which arise from the
implementation of the articles of incorporation or bylaws, or from
intra-corporate relations, shall be referred to arbitration. A dispute shall
be nonarbitrable when it involves criminal offenses and interests of
third parties.
The arbitration agreement shall be binding on the corporation, its
directors, trustees, officers, and executives or managers.
To be enforceable, the arbitration agreement should indicate the
number of arbitrators and the procedure for their appointment. The
power to appoint the arbitrators forming the arbitral tribunal shall be
granted to a designated independent third party. Should the third party
fail to appoint the arbitrators in the manner and within the period
specified in the arbitration agreement, the parties may request the
Commission to appoint the arbitrators. In any case, arbitrators must be
accredited or must belong to organizations accredited for the purpose
of arbitration.
The arbitral tribunal shall have the power to rule on its own jurisdiction
and on questions relating to the validity of the arbitration agreement.
When an intra-corporate dispute is filed with a Regional Trial Court,
the court shall dismiss the case before the termination of the pretrial
conference, if it determines that an arbitration agreement is written in
the corporation’s articles of incorporation, bylaws, or in a separate
agreement.
The arbitral tribunal shall have the power to grant interim measures
necessary to ensure enforcement of the award, prevent a miscarriage
of justice, or otherwise protect the rights of the parties.
A final arbitral award under this section shall be executory after the
lapse of fifteen (15) days from receipt thereof by the parties and shall
be stayed only by the filing of a bond or the issuance by the appellate
court of an injunctive writ.
The Commission shall formulate the rules and regulations, which shall
govern arbitration under this section, subject to existing laws on
arbitration.
Section 182. Jurisdiction Over Party-List Organizations. - The
powers, authorities, and responsibilities of the Commission involving
party-list organizations are transferred to the Commission on Elections
(COMELEC).
Within six (6) months after the effectivity of this Act, the monitoring,
supervision, and regulation of such corporations shall be deemed
automatically transferred to the COMELEC.
For this purpose, the COMELEC, in coordination with the
Commission, shall promulgate the corresponding implementing rules
for the transfer of jurisdiction over the abovementioned corporations.

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.
Section 184. Effect of Amendment or Repeal of This Code, or the
Dissolution of a Corporation. - No right or remedy in favor of or
against any corporation, its stockholders, members, directors, trustees,
or officers, nor any liability incurred by any such corporation,
stockholders, members, directors, trustees, or officers, shall be
removed or impaired either by the subsequent dissolution of said
corporation or by any subsequent amendment or repeal of this Code or
of any part thereof.
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.
Section 186. Separability Clause. - If any provision of this Act is
declared invalid or unconstitutional, the other provisions hereof are not
affect thereby shall continue to be in full force and effect.
Section 187. Repealing Clause. - Batas Pambansa Blg. 68, otherwise
known as "The Corporation Code of the Philippines", is hereby
repealed. Any law, presidential decree or issuance, executive order,
letter of instruction, administrative order, rule or regulation contrary to
or inconsistent with any provision of this Act is hereby repealed or
modified accordingly..
Section 188. Effectivity. - This Act shall take effect upon completion
of its publication in the Official Gazette or in at least two (2) newspaper
of general circulation.
Note: We have actually taken them up as we were discussing the main
contents of the RCC.
- We have the definition of the OCS. As long as there is a valid
contract of the acquisition of shares of stocks of a
corporation, unissued stocks, they are OCS there fully or
partially paid except treasury shares.
- We took that up in relation to treasury shares
Sec 174
- We took this up in the designation of the governing board of
a non-stock corporation and other special corporations. The
may designate their governing board by any other
appropriate terms. Board of Governors, the Lions Club,
Rotary Club, The Board of Regents, Educational
Corporation.
- There is nothing that barrs a non-stock corporation from also
referring to them as the BOD
- Like for instance, most of the club shares, they are
mostly referred to as the BOD
Sec 175
- Also self-explanatory
- The SEC they collect fees, fines and other charges
Sec 176
- Stock ownership in certain corporations
- we took this up in relation to the Close Corporations
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 154
- Where we were saying that the NEDA may recommend to
the legislature, the setting of maximum limits of ownership
in corporations vested with public interest
- Reportorial requirements are required to be filed and
submitted with the SEC
- The basic documents required are:
1. the audited financial statement which must be filed every
year w/in a 120 days from the end of fiscal year of the
particular corporation involved.
2. And the general information sheet (GIS) containing the date
of the top 10 stockholders and the members of the BOD of a
particular corporation.
- If these 2 documents are NOT SUBMITTED in due time for
THREE CONSECUTIVE OR INTERMITTENTLY W/IN
A PERIOD OF FIVE YEARS, the SEC will place the
corporation under a delinquent status.
Sec 179
- The power, functions and jurisdiction of the SEC.
- No court BELOW COURT OF APPEALS shall have
jurisdiction to issue any restraining order, preliminary
injunction, or preliminary mandatory injunction, in any case
dispute or controversy that interferes with the exercise of
powers of the SEC.
Sec 186
- Self-explanatory
- Development and Implementation of with electronic filing
and monitoring system
- Arbitration for corporations s practically a new provision
(wala sa old code which required a corporation to provide
for an arbitration agreement in their AOI or Bylaws in cases
of disputes between and among directors, stockholders,
members or officers or between any or some of them and the
corporation)
- but this is only PERMISSIVE
- To be enforceable, it should indicate the number of
arbitrators and the procedure for their appointment
- The power to appoint arbitrators shall be granted to a
designated 3rd party
- if the 3rd party fails to appoint in the manner and in the
period specified in the arbitration agreement, the parties may
request the SEC to appoint the arbitrators.
Arbitrators - must be credited or must belong to an organization
accredited for the purpose of arbitration
Arbitral Tribunal - Has the power to rule on its own jurisdiction and
on questions on the validity of the arbitration agreement when an intra-
corporate dispute is filed, it shall dismiss the case before the
termination of the pre-trial conference if it determines that an
arbitration agreement is written in their AOI or bylaws.
- It shall have the power to grant interim measures necessary
to ensure enforcement of the award, prevent a miscarriage of
justice or otherwise protect the interest of the parties, a final
arbitral award shall be executory after the lapse of 15 days
from receipt thereof by the parties and shall be stayed only
by the filing of a bond by the issuance of the appelate court
or of an injunctive writ.
Sec 182 -
- Jurisdiction Over Party-List Organizations has been
transferred to COMELEC
- Sec 183-Sec 188 they are all also self-explanatory, just go
over them.

There are two other special laws:
1. PD 902-A as amended
2. Securities Regulation Code
PD 902-A
Enacted during the martial law regime on March 11, 1976
It granted the SEC broad and extensive powers and authority from
administrative regulatory investigatory prosecutor and even
adjudicatory or quasi-judicial functions carved out from the original
jurisdiction of the RT.
At that point in time it was the only SECin the world who possess
adjudicatory functions, and was thus considered the most powerful
adjudicatory in the world
The SEC gave so much importance to its role as a quasi-judicial agency
controversial cases like the case of “Chemphil” involving the control
of corporate affairs between siblings, where one faction sought the
intervention of the army, while the other, the PNP, and you could see
tanks facing each other in the corporate office of Chemphil.
The BLTB case also involved the control of corporate affairs between
siblings resulting in the death of at least five persons including 2
security guards.
Even the Ayala Corporation case attempted to disenfranchise the
minority of the board. If there are 10 members of the BOD, what is
needed is 10% of the OCS in order that one may be guaranteed a seat
at the Board, if you reduce the members to 5, then you need 20%,
cumulative voting.
Even the Philippine Airlines Rehabilitation Case and other allied cases,
they were all originally and exclusively, within the original and
exclusive jurisdiction of the SEC.
It forgot its main task, to promote the capital market and minimize
fraudulent and other forms of market manipulation in the sale of
securities or shares of stock, the very purpose creating the SEC under
Commonwealth Act 83.
The interport case involving insider trading and the BLTB resource
misconduct came into the picture, the latter almost bringing into
collapse the Philippine Stock Exchange being the more published one.
The RA 8799 or the Securities and Regulation Code was fast tracked
and became effective in Aug 2000.
he took away from the SEC its original and exclusive jurisdiction in
cases falling under Sec 5 and Sec 6 D of PD902-A which was
transferred to the appropriate RTCs to be designated by the SC.
The SC made the designation in Nov 2000, and pursuant to that
administrative circular, they are now designated as the Special
Commercial Courts and for your information there is only one (1) in
every region. 1 in every city or municipality in Metro Manila except
Quezon City, Makait and Manila. These 3 have two (2) designated
commercial courts in their respective RTCs.
And these are the only courts that can hear and decide on cases
involving those falling under SEC 5 and 6 D of PD 902-A because
we all know that jurisdiction is conferred by law, and it says exclusive
and original jurisdiction.
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For instance, Region 3, kasama ang Pampanga at Cabanatuan. Let us
say that a stockholder residing in San Fernando Pampanga, decided
to institute an action to question his removal as an officer of the
corporation against the said company. Where will he file the action?
A: In Cabanatuan, because that is where the Special Commercial Court
of Region 3 is located and because no other court can hear and decide
the case.
As regards suspension and receivership, it has been taken over by the
Financial Rehabilitation and Insolvency Law which took effect in the
year 2010.
Sec 5 and 6 D of PD 902-A
- enumerate the instances when the case is supposed to be
lodged, tried and heard only by the Special Commercial
Courts.
Sec 5 A - devices the schemes amounting to fraud or misrepresentation
detrimental to the public and/or of a stockholder.
“ a) Devices or schemes employed by or any acts, of the board of
directors, business associates, its officers or partnership, amounting to
fraud and misrepresentation which may be detrimental to the interest
of the public and/or of the stockholder, partners, members of
associations or organizations registered with the Commission.”
Orosa Jr. vs CA and Alleje vs CA
- one of the early cases decided by the SC, that even if the
action is for the recovery of sums of money, paid or given to
the corporation through devices or schemes amounting to
fraud or misrepresentation detrimental to the public and/or
the stockholder, the same must be filed, tried and heard by
the Special Commercial Court.
Alleje vs CA - The complaint alleged that Alleje as an officer of the
non-stock corporation employed devices or schemes tantamount to
fraud and misrepresentation in order to divert corporate funds and
assets for his personal use resulting in heavy financial losses. The fraud
committed to the interest of not only the corporation itself, but also of
its members kasi non-stock nga eh, who have selfishly agreed between
and among themselves no part of its income shall inure to any of the
directors, members, or officers as we have said before, the definition
of a non-stock corporation is “one where no part of its income shall
inure to the benefit of the directors, members, or officers”.
However, the circumstances constituting fraud must be stated in
particularity to place the case within the ambit of the special
jurisdiction of the Special Commercial Court, as ruled by the SC in
Abad vs. CFI, otherwise, the case may be instituted in any ordinary
trial court.
Sec 5 B - Speaks of intra-corporate controversies
“b) Controversies arising out of intra-corporate or partnership
relations, between and among stockholders, members, or associates;
between any or all of them and the corporation, partnership or
association of which they are stockholders, members or associates,
respectively; and between such corporation, partnership or association
and the state insofar as it concerns their individual franchise or right to
exist as such entity;”
- Also within the original and exclusive jurisdiction of the
Special Commercial Court
- As to what constitute intra-corporate controversy was then
an issue and the subject matter of conflicting opinions in a
host of leading cases:

1. Sunset View Condominium vs Campus (1981)
2. Philex Mining vs Reyes (1982)
3. Union Glass Container Corp vs SEC (1983)
The existence of an intra-corporate relationship was the sole criteria in
determining the existence of intra-corporate controversy to place the
case within the special jurisdiction of the now Special Commercial
Court. As long as there is an intra-corporate relationship, and there is
a controversy arising out of that relationship, it is an intra-corporate
controversy subject only to the original and exclusive jurisdiction of
the Special Commercial Court.
However, 1984, this single tier ruled was qualified by the SC in the
case of PSBA vs Leano - That for an intra-corporate controversy to
exist, 2 requisites must concur:
1. There must be an intra-corporate relationship between and
among the directors, members, stockholders or officers or
between any, some or all of them and the corporation, or
between the corporation and the State, insofar as the right of
the corporation to exist as such is concerned, AND;
2. The controversy must arise out of that relationship, meaning
they must both go hand-in-hand.
So much so, that in Penera vs IAC handed down by the SC in 1990, in
that case the petitioner who is a stockholder of the corporation was
awarded the contractual right to operate the canteen of the corporation
where he is such a stockholder, and the controversy arose out of the
violation of the said contract relative to the operation of the canteen.
- The controversy cannot be qualified as an intra-corporate
controversy because its roots being a contractual bridge
separate and distinct front hat of the corporate relationship
between the petitioner and the corporation that is the
controversy did not arise out of intra-corporate relationship.
In another matter that may impose regarding intra-corporate
controversy is WON the right of a transferee of shares of stocks to
compel the corporation to record the transfer in his name in the books
thereof would fall within the ambit of the special jurisdiction of the
now Special Commercial Courts. The transferee was not a stockholder
of record when the transfer was made to him. Will there be an intra-
corporate controversy if he compels the corporation that he must be
recognized as a stockholder?
A: IT DEPENDS.
1. In Rivera vs Florendo (1986) - the SC ruled in the
NEGATIVE.
- In this case, petitioner Rivera, the supposed transferor of the
shares of stock refused to endorse the stock certificate to the
alleged transferee. The Court ruled that there was no intra-
corporate controversy since there was no intra-corporate
relationship, the transferee not yet being a stockholder then
of record.
2. However, in the case of Razon vs IAC, he delivered the
stock certificate but he did endorse the same, there is no valid
transfer of shares under Sec 63 of the RCC.
3. However, in the case of Abejo vs Dela Cruz (1987) the SC
ruled in the POSITIVE. in that case the stock certificate was
duly endorsed and delivered to the transferee, and the
corporation was notified of the transfer but it refused the
registration thereof.
- The requirements for a valid transfer in Sec 63 as it stands
now having been complied with and the transferee being a
prima faci e owner thereof, intra-corporate controversy
EXISTS, and should therefore be under the exclusive and
original jurisdiction of the Special Commercial Court.
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We can reconcile these cases, meaning:
1. if the person is merely seeking to be recognized as a
stockholder and the requirements for a valid transfer has
NOT been complied with, Sec 63 says that the
endorsement made by the owner or his atty-in-fact AND
the delivery thereof to the transferee, if that is not
complied with - the ordinary or regular courts can have
jurisdiction over the case under the said Rivera vs Florendo
Ruling, BUT;
2. If the transferee has done all that he was required to do
to render the transfer effective, sinurender niya yung
certificate na delivered and endorsed to him, which is the
operative fact of transferring shares - the requirement for
the registration is waived and the transferee is considered,
technically and legally, a stockholder. And the enforcement
of one’s right to be and act as a stockholder would
necessarily include the right to have the sales recorded and
transferred in the stock and transfer book of the corporation
upon and after due compliance with the mode and manner of
transferring shares under the now Sec 63 of the RCC.
Note: Embassy Farms vs. CA - The certificate of stock was endorsed
but it was not delivered to the transferee. There was no prima facie
evidence of his ownership. If that be the case, then that would not be
an intra-corporate controversy because there was no valid transfer of
shares yet.
Called from all these cases is that where the conflict involves
enforcement of rights and obligations under the RCC or the intra-
corporate affairs of the corporation, jurisdiction would fall within the
original and exclusive jurisdiction of the Special Commercial Court.
But, if it requires a mere determination of the contractual rights of the
parties under an ordinary agreement outside of corporate concepts, the
ordinary or regular trial courts can acquire jurisdiction.
Sec 5 C - controversies in the election, appointment and removal or
ouster of directors and other corporate officer or managers
“c) Controversies in the election or appointments of directors, trustees,
officers or managers of such corporations, partnerships or
associations.”
- also within the original and exclusive jurisdiction of the
Special Commercial Court
Bar exam Question Discussion (asked twice):
PSBA vs Leano, Andaya vs Abadia, Luzon vs NLRC, Espino vs
NLRC established the rule that ANY controversy in the election
appointment, removal or ouster of directors and other corporate
officers ELECTED or APPOINTED BY THE BOARD is within the
original and exclusive jurisdiction of the Special Commercial Court
even if the officer concerned may NOT be a stockholder of the
corporation (because if he is not a stockholder then there would be no
intra-corporate controversy) it will fall under Sec 5 C.
It would not fall under the NLRC and the fact that he is seeking
payment of back wages, other benefits such as moral and attys fees
will NOT operate to prevent the Special Commercial Court from
exercising it s exclusive and original jurisdiction for so long as the
officer is appointed or elected by the BOD and he questions the
propriety or validity of his removal or ouster therefrom, it will under
the exclusive and original jurisdiction of the Special Commercial
Courts under SEC 5 C.

It will not fall, however, under Sec 5 C, if the main cause of action is
for the recovery of unpaid wages and separation pay without
anything more. Meaning, he does not assert or questions the propriety
or validity of his removal or ouster therefrom, because if this were the
case, then this would purely be a LABOR DISPUTE cognizable by the
NLRC as per ruling of the SC in Midland Construction Inc vs
Movilla.
So much so, that the main consideration therefore for the purpose of
determining which will have jurisdiction is whether the officer
elected or appointed by the Board asserts his right to the office or
questions the propriety or validity of his removal or ouster
therefrom, if so it is within the ambit of the exclusive and original
jurisdiction of the Special Commercial Courts
SEC 5 - Receivership and Suspension of Payments
- is now covered by the Financial Rehabilitation and
Insolvency act
- is now included in Insolvency Law
- not discussed anymore AND NO QUESTION WILL BE
ASKED IN THIS SUBJECT
- baka daw kasi sabihin si sir ng insolvency law professors na
pinapakelaman ko yan eh hindi ko naman linya yan, so he’s
sorry about that :(
SEC 6 D - appointment of a management committee board or body
- The Special Commercial Court may appoint a management
committee board or body subject to the requirements of th
said provision
- and one of them is that if the business of the particular
corporation involved is under supervision of another
government agency, it must be with the request or favorable
recommendation of the particular government agency
concerned.
- Without that, the Special Commercial Court cannot appoint
a management committee board or body for the particular
corporation involved.
There are 2 specific requirements in order that a proper forum
may appoint a management committee (MANCOM), board or
body for a distressed corporation as held by the SC in Sy Chim vs
Sy Suy Ho & Sons in 2006
1. It must be shown that the corporate property and/or assets
are in danger of being wasted or destroyed, that the business
of the corporation is being diverted from the purpose by
which it was organized AND there is serious paralyzation of
its operation to the detriment of the stockholders, parties,
litigants and/or the general public. In the absence of a strong
showing of an imminent danger of dissipation, lost, wastage
or destruction of the corporate assets and/or properties AND
paralysis of its business operations, the mere apprehension
of future misconduct based upon prior mismanagement will
NOT authorize the appointment of a management committee
(MANCOM), board or body.
However, in the earlier case of RJ Jacinto vs First Women’s Credit
Corporation or FWCC (2003) - it was the 1st time that the SC ruled
that the mere disagreement amongst stockholders, as to the affairs of
the corporation would NOT by itself suffice as a ground for the
appointment of a management committee (MANCOM). AT LEAST
where there is no imminent danger of loss of corporate property or of
any injury to the stockholder, because management of the corporate
business should not be rested away from the duly elected officers who
are prima facie entitled to administer the affairs of the corporation and
place in the hands of a MANCOM, because if a MANCOM is
appointed, it takes the place of the BOD.
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- The MANCOM will now be the one managing the affairs of
the corporation and not the BOD
- As the term implies in the case of a receiver, he is just
holding the properties of a corporation for and in behalf of
the stockholders and creditors alike
- But in the case of a MANCOM, the members thereof will
manage the corporate affairs.
However, the ruling of the Court is still for the ascension among
stockholders would be such that a corporation cannot successfully
carry on its corporate business or functions, the appointment of a
MANCOM will become IMPERATIVE.
In the case of RJ Jacinto vs First Women’s Credit Corporation or
FWCC (2003) - The findings of the FWCC’s external auditor
embodied in an audit report which was not questioned by RJ Jacinto
and other directors and officers support the conclusion that the
petitioners’ continuous and unrestricted mismanagement of the
corporation poses an impending peril of the corporate assets.
FWCC in the 80’s was the 2nd largest private direct lending
corporation in the Philippines. it had branches all over the Philippines.
One of the stockholders was a Japanese, and RJ Jacinto lost in that case
filed with the SEC.
The SEC sitting en banc affirmed the decision of the hearing
of the case, and appointed an interim MANCOM.
The case went all the way to the SC on a petition by RJ
Jacinto.
The SC ruled that findings of the FWCC’s external auditor
embodied in an audit report which was not questioned or rebutted by
RJ Jacinto and other directors and officers tioned by RJ Jacinto and
other directors and officers support the conclusion that the petitioners’
continuous and unrestricted mismanagement of the corporation poses
an impending peril of the corporate assets.
The funds of the FWCC were transferred to the RJ Group of
Companies without any corresponding Board Resolution. Nalipat yung
mga funds ng FWCC sa RJ Group of Companies.
There was a drastic reduction of the number of branch offices
of FWCC all over the country. There was a suspension of lending
operations of FWCC, wala na silang perang maipautang eh, na kay RJ
Jacinto na lahat.
The limitation of FWCC’s operation to a mere collection of
receivables, wala na ngang maipautang so mangungulekta na lang sila
ng naipautang nila, as well as the inability of FWCC of its pressing
obligations amply support the conclusion that there is imminent danger
of dissipation, loss, wastage or destruction of the corporate assets
and/or properties.
SC affirmed the SC in its decision in a MANCOM.
Note: These provisions of PD 902-A are subject to the interim rules on
intra-corporate controversies but the said interim rule also provides
that it shall be supplemented by the ROC insofar as applicable.
For instance, venue of actions under Sec 5 and 6 D. Rule 5 Sec 1, it
must be filed, heard and tried, by the Special Commercial Court where
the principal office of the corporation is located or established.
Ex: Region 3, the Special Commercial Court in Region 3 is in
Cabanatuan. Pampanga is in Region 3 also. SO if San Fernando,
Pampanga stockholder institutes any action related to any sections of
Sec 5 and 6 D, he should file the same in the Special Commercial
Court at Cabanatuan City.
SEC6 RULE 1 - service of pleadings - may be by fax or even by email
but it says that if authorized by the Court. There are now prohibited
pleadings in Section 8 Rule 1, motions among other prohibitions to
dismiss or reconsideration or extension except those filed for
compelling reasons.

Service of Summons - we have taken this up already into the subject
matter, it is now subject to the revisions introduced by the revised
ROC.
SEC4 Rule 1 Executory nature of the decision s or orders of the
Special Commercial Court - decisions of the Special Commercial
Court are immediately executory unless restrained by an appellate
court.
JAN 12 (T)
SECURITIES REGULATION CODE (R.A. 8799)
Securities Regulation Code or RA 8799 replaced the then Revised
Securities Act or BP 178 and became effective on August 8, 2000. It
was aimed at establishing securities market that regulates itself,
encourage participation and ownership of enterprises, promote the
development of the capital market, protect investors and minimize
fraudulent and other forms of market manipulation and the share of
securities—that actually is the declaration of policies in the law,
u4nder the provision of Sec. 2.
Section 2. Declaration of State Policy. – The State shall establish a
socially conscious, free market that regulates itself, encourage the
widest participation of ownership in enterprises, enhance the
democratization of wealth, promote the development of the capital
market, protect investors, ensure full and fair disclosure about
securities, minimize if not totally eliminate insider trading and other
fraudulent or manipulative devices and practices which create
distortions in the free market. To achieve these ends, this Securities
Regulation Code is hereby enacted.
This RA 8799 is the deviation or departure from what was then called
As Merit Regulation under the old BP 178. SEC determines by itself
whether a particular security is worth investing into, to what is called
now the Full Disclosure Rule. So long as there is a full and complete
disclosure relative to the issue or security at hand, the investing public
shall determine for and by themselves whether it’s worth risking into.
That statement was already asked in the bar.
Fraudulent and Manipulative Devices in securities transaction are
more clearly spelled out and defined. administrative as well as penal
sanction including now the civil liabilities (there is no civil then) for
the violation of he law are more stringent than those of the old. Under
the old law, for instance, it provided for the penal sanction for any
violation of the code of BP 178, a fine of not less than 5,000 but not
more than 50,000 and or imprisonment of 7 to 21 years at the discretion
of the court. Sec. 73 now imposes a fine of not less than Fifty thousand
pesos (P50,000.00) nor more than Five million pesos (P5,000,000.00)
or imprisonment of not less than seven (7) years nor more than twenty-
one (21) years, or both in the discretion of the court.
Section 73. Penalties. – Any person who violates any of the provisions
of this Code, or the rules and regulations promulgated by the
Commission under authority thereof, or any person who, in a
registration statement filed under this Code, makes any untrue
statement of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading, shall, upon conviction, suffer a fine of not less than Fifty
thousand pesos (P50,000.00) nor more than Five million pesos
(P5,000,000.00) or imprisonment of not less than seven (7) years nor
more than twenty-one (21) years, or both in the discretion of the court.
If the offender is a corporation, partnership or association or other
juridical entity, the penalty may in the discretion of the court be
imposed upon such juridical entity and upon the officer or officers of
the corporation, partnership, association or entity responsible for the
violation, and if such officer is an alien, he shall in addition to the
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penalties prescribed, be deported without further proceedings after
service of sentence
SECURITIES DEFINED/ ENUMERATED
Section 3. Definition of Terms. - 3.1. "Securities" are shares,
participation or interests in a corporation or in a commercial enterprise
or profit-making venture and evidenced by a certificate, contract,
instruments, whether written or electronic in character. It includes:
(a) Shares of stocks, bonds, debentures, notes evidences of
indebtedness, asset-backed securities;
(b) Investment contracts, certificates of interest or participation in a
profit sharing agreement, certifies of deposit for a future subscription;
(c) Fractional undivided interests in oil, gas or other mineral rights;
(d) Derivatives like option and warrants;
(e) Certificates of assignments, certificates of participation, trust
certificates, voting trust certificates or similar instruments
(f) Proprietary or nonproprietary membership certificates in
corporations; and
(g) Other instruments as may in the future be determined by the
Commission. xxx
The last enumeration is broad and all-encompassing to include any
instrument, which may, in the furure be similarly situated as detrmined
by the SEC, with any other kind of bonds, notes, any evidence of
indebtedness etc. These securities cannot be sold, offered for sale, or
distributed to the oublic without a registration statement without
having been filed and approved by the SEC. That’s what Sec. 8 says.
If such are sold in violation of Sec. 8, the penal sanctions of Sec. 73
may be imposed.
Section 8. Requirement of Registration of Securities.– 8.1. Securities
shall not be sold or offered for sale or distribution within the
Philippines, without a registration statement duly filed with and
approved by the Commission. Prior to such sale, information on the
securities, in such form and with such substance as the Commission
may prescribe, shall be made available to each prospective purchaser.
8.2. The Commission may conditionally approve the registration
statement under such terms as it may deem necessary.
8.3. The Commission may specify the terms and conditions under
which any written communication, including any summary prospectus,
shall be deemed not to constitute an offer for sale under this Section.
8.4. A record of the registration of securities shall be kept in Register
Securities in which shall be recorded orders entered by the
Commission with respect such securities. Such register and all
documents or information with the respect to the securities registered
therein shall be open to public inspection at reasonable hours on
business days.
8.5. The Commission may audit the financial statements, assets and
other information of firm applying for registration of its securities
whenever it deems the same necessary to insure full disclosure or to
protect the interest of the investors and the public in general.
REGISTRATION OF SECURITIES
The filing of the registration statement, in the approval thereof by the
SEC, will not be necessary or required if the securities to be offered
for sale or distribution are covered by Secs. 9 and 10 – Exempt
Securities and Transactions, respectively. Just read them. Those among
others, issued by the government and banks.

Section 9. Exempt Securities. – 9.1. The requirement of registration
under Subsection 8.1 shall not as a general rule apply to any of the
following classes of securities:
(a) Any security issued or guaranteed by the Government of the
Philippines, or by any political subdivision or agency thereof, or by
any person controlled or supervised by, and acting as an
instrumentality of said Government.
(b) Any security issued or guaranteed by the government of any
country with which the Philippines maintains diplomatic relations, or
by any state, province or political subdivision thereof on the basis of
reciprocity: Provided, That the Commission may require compliance
with the form and content for disclosures the Commission may
prescribe.
(c) Certificates issued by a receiver or by a trustee in bankruptcy duly
approved by the proper adjudicatory body.
(d) Any security or its derivatives the sale or transfer of which, by law,
is under the supervision and regulation of the Office of the Insurance
Commission, Housing and Land Use Rule Regulatory Board, or the
Bureau of Internal Revenue.
(e) Any security issued by a bank except its own shares of stock.
9.2. The Commission may, by rule or regulation after public hearing,
add to the foregoing any class of securities if it finds that the
enforcement of this Code with respect to such securities is not
necessary in the public interest and for the protection of investors.
Section 10. Exempt Transactions. – 10.1. The requirement of
registration under Subsection 8.1 shall not apply to the sale of any
security in any of the following transactions:
(a) At any judicial sale, or sale by an executor, administrator, guardian
or receiver or trustee in insolvency or bankruptcy.
(b) By or for the account of a pledge holder, or mortgagee or any of a
pledge lien holder selling of offering for sale or delivery in the ordinary
course of business and not for the purpose of avoiding the provision of
this Code, to liquidate a bonafide debt, a security pledged in good faith
as security for such debt.
(c) An isolated transaction in which any security is sold, offered for
sale, subscription or delivery by the owner therefore, or by his
representative for the owner’s account, such sale or offer for sale or
offer for sale, subscription or delivery not being made in the course of
repeated and successive transaction of a like character by such owner,
or on his account by such representative and such owner or
representative not being the underwriter of such security.
(d) The distribution by a corporation actively engaged in the business
authorized by its articles of incorporation, of securities to its
stockholders or other security holders as a stock dividend or other
distribution out of surplus.
(e) The sale of capital stock of a corporation to its own stockholders
exclusively, where no commission or other remuneration is paid or
given directly or indirectly in connection with the sale of such capital
stock.
(f) The issuance of bonds or notes secured by mortgage upon real estate
or tangible personal property, when the entire mortgage together with
all the bonds or notes secured thereby are sold to a single purchaser at
a single sale.
(g) The issue and delivery of any security in exchange for any other
security of the same issuer pursuant to a right of conversion entitling
the holder of the security surrendered in exchange to make such
conversion: Provided, That the security so surrendered has been
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registered under this Code or was, when sold, exempt from the
provision of this Code, and that the security issued and delivered in
exchange, if sold at the conversion price, would at the time of such
conversion fall within the class of securities entitled to registration
under this Code. Upon such conversion the par value of the security
surrendered in such exchange shall be deemed the price at which the
securities issued and delivered in such exchange are sold.
(h) Broker’s transaction, executed upon customer’s orders, on any
registered Exchange or other trading market.
(i) Subscriptions for shares of the capitals stocks of a corporation prior
to the incorporation thereof or in pursuance of an increase in its
authorized capital stocks under the Corporation Code, when no
expense is incurred, or no commission, compensation or remuneration
is paid or given in connection with the sale or disposition of such
securities, and only when the purpose for soliciting, giving or taking of
such subscription is to comply with the requirements of such law as to
the percentage of the capital stock of a corporation which should be
subscribed before it can be registered and duly incorporated, or its
authorized, capital increase.
(j) The exchange of securities by the issuer with the existing security
holders exclusively, where no commission or other remuneration is
paid or given directly or indirectly for soliciting such exchange.
(k) The sale of securities by an issuer to fewer than twenty (20) persons
in the Philippines during any twelve-month period.
(l) The sale of securities to any number of the following qualified
buyers:
(i) Bank;
(ii) Registered investment house;
(iii) Insurance company;
(iv) Pension fund or retirement plan maintained by the Government of
the Philippines or any political subdivision thereof or manage by a
bank or other persons authorized by the Bangko Sentral to engage in
trust functions;
(v) Investment company or;
(vi) Such other person as the Commission may rule by determine as
qualified buyers, on the basis of such factors as financial
sophistication, net worth, knowledge, and experience in financial and
business matters, or amount of assets under management.
10.2. The Commission may exempt other transactions, if it finds that
the requirements of registration under this Code is not necessary in the
public interest or for the protection of the investors such as by the
reason of the small amount involved or the limited character of the
public offering.
10.3. Any person applying for an exemption under this Section, shall
file with the Commission a notice identifying the exemption relied
upon on such form and at such time as the Commission by the rule may
prescribe and with such notice shall pay to the Commission fee
equivalent to one-tenth (1/10) of one percent (1%) of the maximum
value aggregate price or issued value of the securities.
Please note that 9.2 and 10.2, it provides that the SEC may, by rule or
regulation, add any other security as exempt transactions or securities
if it finds that the enforcement of the code (SRC) is not necessary in
the public interest and/or protection of investors.

Example:
Take kindly, for instance, the hospitals. The SEC by virtue of a request
of the hospitals sought for exemption from the registration statement
of the SRC for the issuance of the securities or shares of stocks in the
hospitals. Their justification was that, they’ll be issued only to close
business associates/association (0:11:42.3)—meaning medical
profession. The SEC exmpetd them from the registration statement
required in The Code. But I understand that the SEC is taking a second
look at the exemption granted to them, because that is no longer the
case under the present set up. E.g Makati Med, Medical City, marami
na ‘yan shares, I don’t know if majority, less than or more than the
majority of the shares of stocks in Makati Med, are now owned and
held by MBP Group of Companies (Manuel B. Panganiban) and they
are not medical practitioner.
Note: When you say public issuance, it refers to more than 19 persons.
If they sell or more securities to more than 19 persons, a registration
statement is required to be filed and approved by the SEC before it may
be done.
REGULATION OF BROKERS, DEALERS AND SALESMEN
Section 28. Registration of Brokers, Dealers, Salesmen and
Associated Persons. – 28.1. No person shall engage in the business of
buying or selling securities in the Philippine as a broker or dealer, or
act as a salesman, or an associated person of any broker or dealer unless
registered as such with the Commission.
28.2. No registered broker or dealer shall employ any salesman or any
associated person, and no issuer shall employ any salesman, who is not
registered as such with the Commission.
28.3. The Commission, by rule or order, may conditionally or
unconditionally exempt from subsection 28.1 and 28.2 any broker,
dealer, salesman, associated person of any broker or dealer, or any
class of the foregoing, as it deems consistent with the public interest
and the protection of investors.
28.4. The Commission shall promulgate rules and regulation
prescribing the qualifications for registration of each category of
applicant, which shall, among other things, require as a condition for
registration that:
(a) If a natural person, the applicant satisfactorily pass a written
examination as to his proficiency and knowledge in the area of activity
for which registration is sought;
(b) In the case of a broker or dealer, the applicant satisfy a minimum
net capital as prescribed by the Commission, and provide a bond or
other security as the Commission may prescribe to secure compliance
with the provisions of this Code; and
(c) If located outside of the Philippines, the applicant files a written
consent to service of process upon the Commission pursuant to Section
65 hereof.
28.5. A broker or dealer may apply for registration by filing with the
Commission a written application in such forms and containing such
information and documents concerning such broker or dealer as the
Commission by rule shall prescribe.
28.6. Registration of a salesman or of an associated person of a
registered broker or dealer may be made upon written application filed
with the Commission by such salesman or associated person. The
application shall be separately signed and certified by the registered
broker or dealer to which such salesman or associated person is to
become affiliated, or by the issuer in the case of a salesman employed
appointed or authorized solely by such issuer. The application shall be
in such form and contain such information and documents concerning
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the salesman or associated person as the Commission by rule shall
prescribe. For purposes of this Section, a salesman shall not include
any employee of an issuer whose compensation is not determined
directly or indirectly on sales of securities if the issuer.
28.7. Applications filed pursuant to Subsections 28.5 and 28.6 shall be
accompanied by a registration fee in such reasonable amount
prescribed by the Commission.
28.8. Within thirty (30) days after the filing of any application under
this Section, the Commission shall by order: (a) Grant registrations if
it determines that the requirements of this Section and the
qualifications for registrations set forth in its rules and regulations have
been satisfied ; or (b) Deny said registration.
28.9. The names and addresses of all persons approved for the
registration as brokers, dealers, associated persons or salesman and all
orders of the Commission with respect thereto shall be recorded in a
Register of Securities Market Professionals kept in the office of the
Commission which shall be open to public inspection.
28.10. Every person registered pursuant to this Section shall file with
the Commission, in such form as the Commission shall prescribe,
information necessary to keep the application for registration current
and accurate, including in the case of a broker or dealer changes in
salesmen, associated persons and owners thereof.
28.11. Every person registered pursuant to this Selection shall pay to
the Commission an annual fee at such time and in such reasonable
amount as the Commission shall prescribe. Upon notice by the
Commission that such annual fee has not been paid as required, the
registration of such person shall be suspended until payment has been
made.
28.12. The registration of a salesman or associated person shall be
automatically terminated upon the cessation of his affiliation with said
registered broker or dealer or with an issuer in the case of a salesman
employed, appointed or authorized by such issuer. Promptly following
any such cessation of affiliation, the registered broker or dealer, issuer
as the case may be, shall file with the Commission a notice of
separation of such salesman or associated person.
Even if the securities involved are registered pursuant to a registration
statement, they cannot be traded by any person. They must be coursed
through a duly licensed broker, dealer or salesmen. For instance, the
broker must pass a licensure exam and register as such by the SEC.
The salesman must also be registered by the SEC.
Section 3. Definition of Terms. - xxx
3.3. "Broker" is a person engaged in the business of buying and selling
securities for the account of others.
3.4. "Dealer" means many person who buys sells securities for his/her
own account in the ordinary course of business.
3.13. "Salesman" is a natural person, employed as such as an agent, by
a dealer, issuer or broker to buy and sell securities. xxx
TENDER OFFER RULE
There is no Tender Offer Rule in BP 178.
Section 19. Tender Offers. – Any person or group of persons acting in
concert who intends to acquire at least 15% of any class of any equity
security of a listed corporation of any class of any equity security of a
corporation with assets of at least fifty million pesos (50,000,000.00)
and having two hundred(200) or more stockholders at least one
hundred shares each or who intends to acquire at least thirty
percent(30%) of such equity over a period of twelve months(12) shall
make a tender offer to stockholders by filling with the Commission a

declaration to that effect; and furnish the issuer, a statement containing
such of the information required in Section 17 of this Code as the
Commission may prescribe. Such person or group of persons shall
publish all request or invitations or tender offer or requesting such
tender offers subsequent to the initial solicitation or request shall
contain such information as the Commission may prescribe, and shall
be filed with the Commission and sent to the issuer not alter than the
time copies of such materials are first published or sent or given to
security holders.
(a) Any solicitation or recommendation to the holders of such a
security to accept or reject a tender offer or request or invitation for
tenders shall be made in accordance with such rules and regulations as
may be prescribe.
(b) Securities deposited pursuant to a tender offer or request or
invitation for tenders may be withdrawn by or on behalf of the
depositor at any time throughout the period that tender offer remains
open and if the securities deposited have not been previously accepted
for payment, and at any time after sixty (60) days from the date of the
original tender offer to request or invitation, except as the Commission
may otherwise prescribe.
(c) Where the securities offered exceed that which person or group of
persons is bound or willing to take up and pay for, the securities that
are subject of the tender offers shall be taken up us nearly as may be
pro data, disregarding fractions, according to the number of securities
deposited to each depositor. The provision of this subject shall also
apply to securities deposited within ten (10) days after notice of
increase in the consideration offered to security holders, as described
in paragraph (e) of this subsection, is first published or sent or given to
security holders.
(d) Where any person varies the terms of a tender offer or request or
invitation for tenders before the expiration thereof by increasing the
consideration offered to holders of such securities, such person shall
pay the increased consideration to each security holder whose
securities are taken up and paid for whether or not such securities have
been taken up by such person before the variation of the tender offer
or request or invitation.
19.2. It shall be lawful for any person to make any untrue statement of
a material fact or omit to state any material fact necessary in order to
make the statements made in the light of the circumstances under
which they are made, not mis-leading, or to engaged to any fraudulent,
deceptive or manipulative acts or practices, in connection with any
tender offer or request or invitation for tenders, or any solicitation for
any security holders in opposition to or in favor of any such favor of
any such offer, request, or invitation. The Commission shall, for the
purposes of this subsection, define and prescribe means reasonably
designed to prevent, such acts and practices as are fraudulent,
deceptive and manipulative.
This Tender Offer Rule under Sec. 19 was asked in the Bar 2002. When
I read the question, I said, “OMG. This is a very technical one.” It says:
Any person or group of persons who intends to acquire at
least 15% of any security of a listed corporation (those
whose shares are written/created in the stock exchange), or
of a corporation with assets of at least 50 Million Pesos and
having 200 or more stockholders, with at least 200 of them
holding at least 100 shares each, or who intends to acquire
at least 30% of such equity (meaning, the shares) over a
period of 10 months shall make a tender offer to the existing
stockholders by filing with the SEC a declaration to that
effect. How will you know that a corporation, other than
those listed in the stock exchange, because even you check
the business pages of newspapers whether the shares your
acquiring is a listed corporation? How will you know if the
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corporation you’re looking at owns 15% or 30% for the next
12 months, has assets of at least 50 Million Pesos? How will
you know if it has 200 stockholders or more and that atleast
200 of them own at least 200 shares each, in order that they
shall first make a tender offer?
A: If that’s the case, they shall make a tender offer to acquire
the shares of the existing shareholders under the same term
and conditions by which they intend to acquire 15% or 30%
in 12 months period of the shares of the particular company,
of course, you have to undertake due diligence—check their
filings with the SEC. Pag hindi mo chineck, covered pala ng
Tender Offer Rules, Sec. 73 ka.
PROXY SOLICITATION
Section 20. Proxy solicitations. - 20.1. Proxies must be issued and
proxy solicitation must be made in accordance with rules and
regulations to be issued by the Commission;
20.2. Proxies must be in writing, signed by the stockholder or his duly
authorized representative and file before the scheduled meeting with
the corporate secretary.
20.3. Unless otherwise provided in the proxy, it shall be valid only for
the meeting for which it is intended. No proxy shall be valid only for
the meting for which it is intended. No proxy shall be valid and
effective for a period longer than five (5) years at one time.
20.4. No broker or dealer shall give any proxy, consent or any
authorization, in respect of any security carried for the account of the
customer, to a person other than the customer, without written
authorization of such customer.
20.5. A broker or dealer who holds or acquire the proxy for at least ten
percent (10%) or such percentage as the commission may prescribe of
the outstanding share of such issuer, shall submit a report identifying
the beneficial owner of ten days after such acquisition, for its own
account or customer, to the issuer of security, to the exchange where
the security is traded and to the Commission.
Proxy Solicitation may also be asked. We didn’t have also this
provision back then. A broker or dealer who holds or acquires proxy
for atleast 10% shall submit a report to the SEC, identifying the
beneficial ownership within 10 days from said acquisition. If they do
not, Sec. 73 will come into play.
Under SRC Rule 20, if the management will be the one soliciting
proxies, it must file a proxy statement attaching therewith the proxy
form. The proxy statement consist of no less than 35 pages, which
would contain the agenda of the meeting for whch the proxy are being
solicited. Failure on the part to do so, Sec. 73 will apply because it says
any violation of the code or the rules and regulations of the SEC, Sec.
73 may be imposed.
THE INDEPENDENT DIRECTOR RULE
Section 38. Independent Directors. – Any corporation with a class of
equity securities listed for trading on an Exchange or with assets in
excess of Fifty million pesos (P50,000,000.00) and having two
hundred (200) or more holders, at least of two hundred (200) of which
are holding at least one hundred (100) shares of a class of its equity
securities or which has sold a class of equity securities to the public
pursuant to an effective registration statement in compliance with
Section 12 hereof shall have at least two (2) independent directors or
such independent directors shall constitute at least twenty percent
(20%) of the members of such board whichever is the lesser. For this
purpose, an "independent director" shall mean a person other than an
officer or employee of the corporation, its parent or subsidiaries, or any
other individual having a relationship with the corporation, which

would interfere with the exercise of independent judgment in carrying
out the responsibilities of a director.
The Independent Director Rule (IDR) provided under the SRC was
lifted and now also included in the Revised Corporation Code. This
IDR have been marked that it will be asked in the bar 2 years before
the issue was raised in the case of Equitable PCI Bank. In that case, E-
PCI Bank elected an independent director who is also a director of a
subsidiary of E-PCI Bank. It was in the papers for about 3 days. After
some consideration, perhaps, said independent director resigned. He’s
a partner in a big law firm and he must know what the law says.
Under the said provision of Sec. 38, any corporation, just like the
Tender Offer Rule, listed for trading in the stock exchange or
corporation with assests in excess of 50 Million Pesos and having 200
or more stockholders and at least 200 of them are holding at least 100
shares each, shall have at least 2 independent directors. Under the code,
20& must be independent directors. An independent director shall
mean a person other than an officer or employee of the corporation, its
parent or subsidiaries, or any other individual having a relationship
with the corporation, which would interfere with the exercise of
independent judgment in carrying out the responsibilities of a director;
and under SRC Rule 38, he must not own or hold more than 2 percent
of the outstanding capital stock. As I was saying, in Equitable PCI
Bank, the independent director is also a director of a subsidiary of E-
PCI Bank. Meaning, he’s not qualified. There you go.
INVESTMENT CONTRACT OR PYRAMIDING SCHEME
Note: Going back to the enumeration of securities under Sec. 3.
Investment Contracts are included in the said enumeration. It involves
an agreement for the placement of money for profit. It has something
to do with what is called the Poncy Scheme or more known as
Pyramiding Scheme, as may be compared to what is called the Multi-
level Marketing Activity. When it comes to multi-level marketing
activity, there are goods or services involved. The SEC is not without
any jurisdiction when it comes to that. It is in the jurisdiction of the
Department of Trade and Industry under the Consumer Protection Act.
Like for instance, Avon, Natasha, and like, the partner of Trade and
Industry already gave its thumbs up to undertake multilevel marketing
activity. If there are no goods and services involved, it is the SEC—it
will purely be an investment contract. In a particular country,
Singapore, multilevel marketing activity is prohibited. It is because,
the value of the goods will undoubtedly increase. Why? Yung direct
seller mo, bibigyan mo ng 5% commission, yung supervisor nya
bibigyan mo ng 4% commission, yung manager, bibigyang 2%
commission. So the cost of the shoe of Natasha, let’s say P 1,500.00
pag binenta na nila yan, P 2,500.00 na. It is allowed, perhaps, the DTI
is contemplating to give salesmen to make a living. If it’s disallowed
here, marami ang magpprotesta. There you go.
No goods and services – SEC. Because that would be tantamount to an
Investment Contract. There are many cases in SEC relative to
Investment Contract or what we called Pyramiding Scheme.
Pyramid Scheme Example:
OPERATOR
A managing it, the transaction is considered as an investment contract.
B C D We will take up only the more important matters.
B1 B2 B3 C1 C2 C3 D1 D2 D3
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Operator issues certificate of participation to the down lines.
A secures 3 certificates of participation from the operator, natural or
juridical that is, for 500 pesos each. A pays the operator P 1,500.00 for
3 certificates. A will sell them to B, C and D. B, C and D will pay 500
pesos each, and A regains his investment. B, C and D will also pay 500
each, because if they do not pay, they will not be issued 3 certificates
of participation. B, C, and D after having been issued 3 certificates of
participation will also sell them with their respective downlines. B1,
B2, and B3 will pay B 500 pesos each; the same is true with C and D.
B, C and D will regain their 1,500 investment. B1, B2, and B3 will also
pay A, 500 pesos each. Of course, B1, B2, and B3 will also pay the
operator 500 pesos each. Same is true with C and D. So, in the case of
prices, it involves a 7-level pyramid. If such is completed, the number
of persons involved would be 1,287 persons. It requires a registration
statement to be approved by the SEC. The amount involved, the person
on the top of the pyramid, wuld be receivnng—kasi nga tuwing may
participant babayaran si operator at A—will be receiving 1,093,500
pesos upon completion of the 7-level pyramid. Of course,
subsequently, B, C and D, will also have their own pyramid kasi wala
na si A e.
That is also the same in other investment contract. Like Ogami, Mateo
Group of Companies and Baladia. Kapag nag issue sila ng IOU for
value receipt, let’s say 1M, do hereby promise to pay A, 10%
everyminth. A gave 1M at 10% a month in 10 months time, he’ll
recover his 1M investment. Paano nila babayaran yung nakuha nila kay
A? Kuha sila kay B ng 1M. Paano nila babayaran si A and B, kuha sila
ng 1M kay C, D, E and so on. Eh hindi naman nila iniinvest yung
perang kinuha nila, paano nila babayaran? Question is what happens
in pyramiding scheme and this investment contract if the operator
amass so much wealth and they disappear or the persons below the
pyramid will be having an empty pocket?
During my stint with the SEC, at a point in time I was a head of the
prosecution department, I issued at least 22 ceased and deceased order
of the operators of this pyramiding scheme. I was eating death threats
for breakfast. They went to the SEC saying pinatay daw ng SEC ang
kabuhayan nila. But can you imagine, paano nga pag nawala yung
operator? The downlines will be left with empty pockets because wala
na magi-issue ng certificate of participation. Including 1 base in Italy,
the pentagon. My eldest sister participated. 50 dollars per certificate of
participation and you have to pay through off shore banking. I told her
it was illegal, and pinakawalan na nya yung hindi nya pa nabebentang
certificate. Namatay din yung pyramid nila.
That’s why the SEC now has an investor protection program. Katulad
For instance, in the case of People v. Letran, 2004, it involves
investment of money for purposes of foreign exchange training. The
court ruled that that is an investment contract. It is a security under Sec.
3. It cannot be issued, distributed or sold to more than 19 person
without a registration statement having been filed and approved by the
SEC. The Court stressed that, the touchstone of an investment contract
is the presence of an investment of a common venture, premised on a
reasonable expectation of profits, to be derived solely on the
entrepreneurial or managerial efforts others; such that when an investor
is relatively uninformed and turns over his money to others, essentially
depending upon their presentation and their honesty and skills in
OTHER FORMS OF FRAUDULENT TRANSACTIONS AND
MARKET MANIPULATIONS
Wash Sale – [Sec. 24 (a) ii] it is a transaction in a security buy and/or
sell, it involves no change in a beneficial ownership.

Matched Order – [Sec. 24 (a) ii] are order for the purchase and sale
of security with the knowledge simultaneuous order of the same
security, of substantially the same size, time and price, has and will be
entered by and for the same or different person. As I was saying, you
have to course your sale or purchase through a broker or salesman.
Section 24. Manipulation of Security Prices; Devices and Practices. –
24.1 It shall be unlawful for any person acting for himself or through a
dealer or broker, directly or indirectly:
(a) To create a false or misleading appearance of active trading in any
listed security traded in an Exchange of any other trading market
(hereafter referred to purposes of this Chapter as "Exchange"):
(i) By effecting any transaction in such security which involves no
change in the beneficial ownership thereof;
(ii) By entering an order or orders for the purchase or sale of such
security with the knowledge that a simultaneous order or orders of
substantially the same size, time and price, for the sale or purchase of
any such security, has or will be entered by or for the same or different
parties; or
(iii) By performing similar act where there is no change in beneficial
ownership.
(b) To affect, alone or with others, a securities or transactions in
securities that: (I) Raises their price to induce the purchase of a
security, whether of the same or a different class of the same issuer or
of controlling, controlled, or commonly controlled company by others;
or (iii) Creates active trading to induce such a purchase or sale through
manipulative devices such as marking the close, painting the tape,
squeezing the float, hype and dump, boiler room operations and such
other similar devices.
(c) To circulate or disseminate information that the price of any
security listed in an Exchange will or is likely to rise or fall because of
manipulative market operations of any one or more persons conducted
for the purpose of raising or depressing the price of the security for the
purpose of inducing the purpose of sale of such security.
(d) To make false or misleading statement with respect to any material
fact, which he knew or had reasonable ground to believe was so false
or misleading, for the purpose of inducing the purchase or sale of any
security listed or traded in an Exchange.
(e) To effect, either alone or others, any series of transactions for the
purchase and/or sale of any security traded in an Exchange for the
purpose of pegging, fixing or stabilizing the price of such security;
unless otherwise allowed by this Code or by rules of the Commission.
Example:
A is a shareholder of 10M shares of X Company listed in the stock
exchange and is a player in the stock exchange. He has 2 brokers –
Broker 1 (B1) and Broker 2 (B2). His account number in B1 and B2
are both A—that’s his name in both brokers. A calls B1, he told that
the going rates of shares of stocks of X Company is 1 peso and 20
centavo per share. Trading in this stock exchange starts at 9 and closes
at noon or 12 pm. A calls B1 and tells him to sell 1M shares of X
Company at P 1.30 (kahit na 1.20 ang going rate). 9:30 AM, A calls
B2, to buy 1M shares of X Company at P 1.30. The trade is confirmed,
may buyer and seller. There is Wash Sale. Why? Nilipat lang ni A yung
1M shares nya from kaliwang bulsa to kanang bulsa. There is no
change in the beneficial ownership of the shares. Likewise, there is
Matched Order. Why? Sya ang nag-benta eh. Alam nya, isang minute
lang na may nagbenta ng 1M shares ng X Company, same number of
shares, same price, almost at the same time.
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Q: Is it illegal?
A: Not necessarily. 24 says, if they are used as a means to create a false
or misleading appearance of active trading. One buy and one sell will
not create a false and misleading appearance of active trading. Siguro
mga walo, anim, sampo perhaps that would create a false and
misleading appearance of active trading
Painting the Tape - is the buying and/or selling of securities in order
to increase/decrease the price thereof during normal trading activities
during normal trading hours.
Example:
Let’s go back to A. A calls B1 at 9:30 AM to sell 1M X shares at P
1.30 per share. A calls B2 at 9:31 AM to sell 1M X shares at P 1.30 per
share. 10 AM, he calls B1 to sell 1M of X shares at P1.40. 10:01 AM,
he calls B2 to sell 1M of X shares at P1.40. 10, 15 AM, he calls B1 to
sell 1M of X shares at P1.50. A minute later, he calls B2 to buy 1M of
X shares at P1.50. He is now trying to increase the price of the
particular each during normal trading hours.
MARKING THE CLOSE
Example:
11:59.30 AM, just barely 30 seconds before the closing of the trade in
the stock exchange, A calls B1 to sell 1M of X shares at P2.00. It was
posted in the stockexchange on that particular time. So the trading
hours stop at 12 noon, no body can buy the shares. Why? You only
have 30 seconds. Dial mo palang phone mo, naubos na yung 30
seconds. Closed na ang trading hours. Meaning, he marked the close.
In the next trading day, everybody wll follow suit. Persons having X
shares will sell their shares also for P2.00 per share. Kung ikaw ba
naman may regular share, ibebenta mo pa ng P 1.90 eh may P2.00 na?
Sayang naman yung 100,000 pesos. That is marking the close.
SHORT SALE [1:04:30] to [1:12:00]
[Sec. 24.2] Such provision does not define what short sale is, it only
provides for the effects of a short sale. It says, no person, among others,
shall employ short sale, except in accordance with such rules and
regulations as the SEC may prescribe.
Under the old law, it was the reverse. Short sale is illegal if it is not in
accordance with the rules and regulations of the SEC.
Q: What is the distinction between the two?
A: Under the old law, the SEC does not have any rules and regulations
regarding short sale. Under the old law therefore, short sale is illegal if
not in accordance with SEC. So, it was not illegal because there was
no rules and regulations in the SEC relative to short sale. Am I clear
on that? Illegal if not in accordance with such rules and regulations as
the SEC may prescribe. Eh walang rules and regulations eh, edi wala
kang naccomit na violation. That is clear.
Ang ginawa ng SEC now, binaliktad. No person shall employ short
sale, except in accordance with such rules and regulations as SEC may
prescribe. As of now, wala pa. Meaning if any person now will employ
short sale in the sale of any security, it is illegal kasi walang rules and
regulations eh. You may employ short sale if it is in accordance with
such rules and regulations as the SEC may prescribe, but they do not
have rules and regulations yet. Hence, it is illegal per se.
Unlike in the old rule, YOU CAN. If it’s not in violation of rules and
regulation as prescribed by the SEC. Eh walang rules and regulations
eh. Can you sell something that you do not own and possess? Yes,
under the civil code; provided that at point in time, when you are to
deliver the same, you have it. [Old law = pwede]

[New law] But that is not true anymore in case of securities dahil wala
pang rules and regulations. [Mr. Santos confirmed that there are no
rules yet regarding short sale nor pending draft resolutions about it.]
Take note daw, iaask sa finals for 3 points. sorry for those who are
absent. Basta binaliktad lang yung rules. But the reversal is very
meaningful.
Old law = Valid. Why? No rules and regulations ang SEC. Under civil
code, valid you can sell something that you do not own provided that
at the time you have to deliver the goods, you have it. But in the sale
of securities we have the T3 rule.
T3 Rule – That from the date of trading, 3 days or 4 days later, you
have to deliver. Nagbenta ka, ideliver mo 3 or 4 days later. Bumili ka?
Bayaran mo in 3 o 4 days later. It was valid then (old law valid anf
short sale), but not now. No person shall employ short sale, unless it
was in accordance with rules and regulations of the SEC
INSIDER TRADING
Section 3. Definition of Terms.
3.8. "Insider" means (a) the issuer; (b) a director or officer (or any
person performing similar functions) of, or a person controlling the
issuer; gives or gave him access to material information about the
issuer or the security that is not generally available to the public; (d) A
government employee, director, or officer of an exchange, clearing
agency and/or self-regulatory organization who has access to material
information about an issuer or a security that is not generally available
to the public; or (e) a person who learns such information by a
communication from any forgoing insiders.
Section 27. Insider’s Duty to Disclose When Trading. – 27.1. It shall
be unlawful for an insider to sell or buy a security of the issuer, while
in possession of material information with respect to the issuer or the
security that is not generally available to the public, unless: (a) The
insider proves that the information was not gained from such
relationship; or (b) If the other party selling to or buying from the
insider (or his agent) is identified, the insider proves: (I) that he
disclosed the information to the other party, or (ii) that he had reason
to believe that the other party otherwise is also in possession of the
information. A purchase or sale of a security of the issuer made by an
insider defined in Subsection 3.8, or such insider’s spouse or relatives
by affinity or consanguinity within the second degree, legitimate or
common-law, shall be presumed to have been effected while in
possession of material nonpublic information if transacted after such
information came into existence but prior to dissemination of such
information to the public and the lapse of a reasonable time for market
to absorb such information: Provided, however, That this presumption
shall be rebutted upon a showing by the purchaser or seller that he was
aware of the material nonpublic information at the time of the purchase
or sale.
27.2. For purposes of this Section, information is "material nonpublic"
if: (a) It has not been generally disclosed to the public and would likely
affect the market price of the security after being disseminated to the
public and the lapse of a reasonable time for the market to absorb the
information; or (b) would be considered by a reasonable person
important under the circumstances in determining his course of action
whether to buy, sell or hold a security.
27.3. It shall be unlawful for any insider to communicate material
nonpublic information about the issuer or the security to any person
who, by virtue of the communication, becomes an insider as defined in
Subsection 3.8, where the insider communicating the information
knows or has reason to believe that such person will likely buy or sell
a security of the issuer whole in possession of such information.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 164
27.4. (a) It shall be unlawful where a tender offer has commenced or is
about to commence for:
(i) Any person (other than the tender offeror) who is in possession of
material nonpublic information relating to such tender offer, to buy or
sell the securities of the issuer that are sought or to be sought by such
tender offer if such person knows or has reason to believe that the
information is nonpublic and has been acquired directly or indirectly
from the tender offeror, those acting on its behalf, the issuer of the
securities sought or to be sought by such tender offer, or any insider of
such issuer; and
(ii) Any tender offeror, those acting on its behalf, the issuer of the
securities sought or to be sought by such tender offer, and any insider
of such issuer to communicate material nonpublic information relating
to the tender offer to any other person where such communication is
likely to result in a violation of Subsection 27.4 (a)(I).
(b) For purposes of this subsection the term "securities of the issuer
sought or to be sought by such tender offer" shall include any securities
convertible or exchangeable into such securities or any options or
rights in any of the foregoing securities.
An insider cannot transact in a security while he is in a possession of a
material, non-public information that may have the effect of increasing
or decreasing the value of the share. What you have to know here is
the material, non-public information, so as to bar the possessor thereof,
from trading in a particular security that he’s in possession thereof.
[FEEL KO KASAMA SA EXAM] Please note the definition, it
includes any person who may have relationship or former relationship
with any other insider.
Q: This was asked in the bar 2009. Manila Gas is engaged in the
discovery of natural gas, it is listed in the stock exchange. Note that: If
any matter that would take place, it should either decrease or increase
the value of the shares in the stock exchange, the law requires that it
must be disclosed with the SEC or PSD. The directors of Manila Gas
did not immediately disclose the discovery, it is of the commercial
quantity. Instead, they respectively called their respective brokers who
buy shares of Manila Gas, after which, they went to a printer to print
the matter of discovery so it may be disseminated with the general
public, SEC, and PSD. Before the printing, they call their brokers to
buy shares of the Manila Gas. The question was, What possible
violation did the directors and the printer under the SRC?
A: They both committed insider trading. The directors under the
definition, are insiders. Under the definition also, any person who
acquired the information buy virtue of relationship, or former
relationship of any of the insiders, is also an insider.
CIVIL AND ADMINISTRATIVE SANCTIONS
Section 58. Civil Liability of Fraud in Connection with Securities
Transactions. – Any person who engages in any act or transaction in
violation of Sections 19.2, 20 or 26, or any rule or regulation of the
Commission thereunder, shall be liable to any other person who
purchases or sells any security, grants or refuses to grant any proxy,
consent or authorization, or accepts or declines an invitation for tender
of a security, as the case may be, for the damages sustained by such
other person as a result of such act or transaction.
Section 59. Civil Liability for Manipulation of Security Prices. – Any
person who willfully participates in any act or transaction in violation
of Section 24 shall be liable to any person who shall purchase or sell
any security at a price which was affected by such act or transaction,
and the person so injured may sue to recover the damages sustained as
a result of such act or transaction.
Section 60. Civil Liability with Respect to Commodity Futures
Contracts and Pre-need Plans. – 60.1. Any person who engages in any

act or transactions in willful violation of any rule or regulation
promulgated by the Commission under Section 11 or 16, which the
Commission denominates at the time of issuance as intended to
prohibit fraud in the offer and sale of pre-need plans or to prohibit
fraud, manipulation, fictitious transactions, undue speculation, or other
unfair or abusive practices with respect to commodity future contracts,
shall be liable to any other person sustaining damages as a result of
such act or transaction.
60.2. As to each such rule or regulation so denominated, the
Commission by rule shall prescribe the elements of proof required for
recovery and any limitations on the amount of damages that may be
imposed.
Section 61. Civil Liability on Account of Insider Trading. – 61.1. Any
insider who violates Subsection 27.1 and any person in the case of a
tender offer who violates Subsection 27.4 (a)(I), or any rule or
regulation thereunder, by purchasing or selling a security while in
possession of material information not generally available to the
public, shall be liable in a suit brought by any investor who,
contemporaneously with the purchase or sale of securities that is the
subject of the violation, purchased or sold securities of the same class
unless such insider, or such person in the case of a tender offer, proves
that such investor knew the information or would have purchased or
sold at the same price regardless of disclosure of the information to
him.
61.2. An insider who violates Subsection 27.3 or any person in the case
of a tender offer who violates Subsection 27.4 (a), or any rule or
regulation thereunder, by communicating material nonpublic
information, shall be jointly and severally liable under Subsection 61.1
with, and to the same extent as, the insider, or person in the case of a
tender offer, to whom the communication was directed and who is
liable under Subsection 61.1 by reason of his purchase or sale of a
security.
Civil Liabilities are part of the insertions in the new law.
LIMITATION OF ACTIONS
Section 62. Limitation of Actions. – 62.1. No action shall be maintained
to enforce any liability created under Section 56 or 57 of this Code
unless brought within two (2) years after the discovery of the untrue
statement or the omission, or, if the action is to enforce a liability
created under Subsection 57.1 (a), unless, brought within two (2) yeas
after the violation upon which it is based. In no event shall an such
action be brought to enforce a liability created under Section 56 or
Subsection 57.1 (a) more than five (5) years after the security was bona
fide offered to the public, or under Subsection 57.1 (b0 more than five
(5) years after the sale.
62.2. No action shall be maintained to enforce any liability created
under any other provision of this Code unless brought within two (20
years after the discovery of the facts constituting the cause of action
and within five (5) years after such cause of action accrued.
Limitation of Actions is already been there since BP 178. It must be
brought within 2 years after the discovery of the fact constituting the
cause of action, and within 5 years after such cause of action accrued.
AMOUNT OF DAMAGES
Section 63. Amount of Damages to be Awarded. – 63.1. All suits to
recover damages pursuant to Sections 56, 57, 58, 59, 60 and 61 shall
be brought before the Regional Trial Court, which shall have exclusive
jurisdiction to hear and decide such suits. The Court is hereby
authorized to award damages in an amount not exceeding triple the
amount of the transaction plus actual damages.
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 165
Exemplary damages may also be awarded in cases of bad faith, fraud,
malevolence or wantonness in the violation of this Code or the rules
and regulations promulgated thereunder.
The Court is also authorized to award attorney’s fees not exceeding
thirty percentum (30%) of the award.
63.2. The persons specified in Sections 56, 57, 58, 59, 60 and 61 hereof
shall be jointly and severally liable for the payment of damages.
However, any person who becomes liable for the payment of such
damages may recover contribution from any other person who, if sued
separately, would have been liable to make the same payment, unless
the former was guilty of fraudulent representation and the latter was
not.
63.3. Notwithstanding any provision of law to the contrary, all persons,
including the issuer, held liable under the provisions of Sections 56,
57, 58, 59, 60 and 61 shall contribute equally to the total liability
adjudged herein. In no case shall the principal stockholders, directors
and other officers of the issuer or persons occupying similar positions
therein, recover their contribution to the liability from the issuer.
However, the right of the issuer to recover from the guilty parties the
amount it has contributed under this Section shall not be prejudiced.
Amount not exceeding triple of the amount of the transaction plus
actual and exemplary damages if any and attorney’s fees not exceeding
30% of the award.
SETTLEMENT OFFER
Section 55. Settlement Offers. – 55.1. At any time, during an
investigation or proceeding under this Code, parties being investigated
and/or charged may propose in writing an offer of settlement with the
Commission.
55.2. Upon receipt of such offer of settlement, the Commission may
consider the offer based on timing, the nature of the investigation or
proceeding, and the public interest.
55.3. The Commission may only agree to a settlement offer based on
its findings that such settlement is in the public interest. Any agreement
to settle shall have no legal effect until publicly disclosed. Such
decision may be made without a determination of guilt on the part of
the person making the offer.
55.4. The Commission shall adopt rules and procedures governing the
filing, review, withdrawal, form of rejection and acceptance of such
offers.
Settlement offer is also an insertion.
The party or parties being investigated or charged of na violation of he
code may propose, in writing, an offer of settlement with the SEC.
Commission may consider based on timing, the nature of the
proceeding, investigation and of the public interest.
Okay, that should cover the entirety of your course outline.
CASES:
Justee Terms Enterprises v. SEC
This case involves the pyramiding scheme employed by Justee.
Get a piece of paper… [please see Pyramiding Scheme example
above]
China Banking Corporation vs. Court of Appeals, 270 SCRA
503 , March 26, 1997
Securities and Exchange Commission; Actions; Jurisdiction; The
better policy in determining which body has jurisdiction over a case

would be to consider not only the status of relationship of the
parties but also the nature of the question that is the subject of their
controversy.—The basic issue we must first hurdle is which body
has jurisdiction over the controversy, the regular courts or the SEC.
P.D. No. 902-A conferred upon the SEC the following pertinent
powers: * * * The aforecited law was expounded upon in Viray v.
CA and in the recent cases of Mainland Construction Co., Inc. v.
Movilla and Bernardo v. CA, thus: . . . . The better policy in
determining which body has jurisdiction over a case would be to
consider not only the status or relationship of the parties but also
the nature of the question that is the subject of their controversy.
Same; Same; Same; Corporation Law; The purchase of a share or
membership certificate at public auction by a party (and the
issuance to it of the corresponding Certificate of Sale) transfers
ownership of the same to the latter and thus entitle it to have the
said share registered in its name as a member.—As to the first
query, there is no question that the purchase of the subject share or
membership certificate at public auction by petitioner (and the
issuance to it of the corresponding Certificate of Sale) transferred
ownership of the same to the latter and thus entitled petitioner to
have the said share registered in its name as a member of VGCCI.
It is readily observed that VGCCI did not assail the transfer directly
and has in fact, in its letter of 27 September 1974, expressly
recognized the pledge agreement executed by the original owner,
Calapatia, in favor of petitioner and has even noted said agreement
in its corporate books. In addition, Calapatia, the original owner of
the subject share, has not contested the said transfer. By virtue of
the afore-mentioned sale, petitioner became a bona fide stockholder
of VGCCI and, therefore, the conflict that arose between petitioner
and VGCCI aptly exemplifies an intra-corporate controversy
between a corporation and its stockholder under Sec. 5(b) of P.D.
902-A.
Same; Same; Same; Same; By-Laws; The proper interpretation and
application of a corporation’s by-laws is a subject which irrefutably
calls for the special competence of the SEC.—An important
consideration, moreover, is the nature of the controversy between
petitioner and private respondent corporation. VGCCI claims a
prior right over the subject share anchored mainly on Sec. 3, Art.
VIII of its by-laws which provides that “after a member shall have
been posted as delinquent, the Board may order his/her/its share
sold to satisfy the claims of the Club . . .” It is pursuant to this
provision that VGCCI also sold the subject share at public auction,
of which it was the highest bidder. VGCCI caps its argument by
asserting that its corporate by-laws should prevail. The bone of
contention, thus, is the proper interpretation and application of
VGCCI’s aforequoted bylaws, a subject which irrefutably calls for
the special competence of the SEC.
Same; Same; Same; Estoppel; The plaintiff who files a complaint
with one court which has no jurisdiction over it is not estopped from
filing the same complaint later with the competent court.—In
Zamora v. Court of Appeals, this Court, through Mr. Justice Isagani
A. Cruz, declared that: It follows that as a rule the filing of a
complaint with one court which has no jurisdiction over it does not
prevent the plaintiff from filing the same complaint later with the
competent court. The plaintiff is not estopped from doing so simply
because it made a mistake before in the choice of the proper forum.
..
Appeals; Procedural Rules; Remand of Cases; The remand of the
case or of an issue to the lower court for further reception of
evidence is not necessary where the Supreme Court is in position to
resolve the dispute based on the records before it and particularly
where the ends of justice would not be subserved by the remand
thereof.—Applicable to this case is the principle succinctly
CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 166
enunciated in the case of Heirs of Crisanta Y. Gabriel-Almoradie v.
Court of Appeals, citing Escudero v. Dulay and The Roman
Catholic Archbishop of Manila v. Court of Appeals: In the interest
of the public and for the expeditious administration of justice the
issue on infringement shall be resolved by the court considering that
this case has dragged on for years and has gone from one forum to
another. It is a rule of procedure for the Supreme Court to strive to
settle the entire controversy in a single proceeding leaving no root
or branch to bear the seeds of future litigation. No useful purpose
will be served if a case or the determination of an issue in a case is
remanded to the trial court only to have its decision raised again to
the Court of Appeals and from there to the Supreme Court. We have
laid down the rule that the remand of the case or of an issue to the
lower court for further reception of evidence is not necessary where
the Court is in position to resolve the dispute based on the records
before it and particularly where the ends of justice would not be
subserved by the remand thereof. Moreover, the Supreme Court is
clothed with ample authority to review matters, even those not
raised on appeal if it finds that their consideration is necessary in
arriving at a just disposition of the case.
Loans; Pledge; The contracting parties to a pledge agreement may
stipulate that the said pledge will also stand as security for any
future advancements (or renewals thereof) that the pledgor may
procure from the pledgee.—VGCCI assails the validity of the
pledge agreement executed by Calapatia in petitioner’s favor. It
contends that the same was null and void for lack of consideration
because the pledge agreement was entered into on 21 August 1974
but the loan or promissory note which it secured was obtained by
Calapatia much later or only on 3 August 1983. VGCCI’s
contention is unmeritorious. A careful perusal of the pledge
agreement will readily reveal that the contracting parties explicitly
stipulated therein that the said pledge will also stand as security for
any future advancements (or renewals thereof) that Calapatia (the
pledgor) may procure from petitioner.
Corporation Law; By-Laws; In order to be bound, a third party
must have acquired knowledge of the pertinent by-laws at the time
the transaction or agreement between said third person and the
shareholder was entered into.—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 said third party and the
shareholder was entered into, in this case, at the time the pledge
agreement was executed. VGCCI could have easily informed
petitioner of its by-laws when it sent notice formally recognizing
petitioner as pledgee of one of its shares registered in Calapatia’s
name. Petitioner’s belated notice of said by-laws at the time of
foreclosure will not suffice.
Same; Words and Phrases; A membership share is quite different
in character from a pawn ticket.—Similarly, VGCCI’s contention
that petitioner is duty-bound to know its by-laws because of Art.
2099 of the Civil Code which stipulates that the creditor must take
care of the thing pledged with the diligence of a good father of a
family, fails to convince. The case of Cruz & Serrano v. Chua A.
H. Lee, is clearly not applicable: In applying this provision to the
situation before us it must be borne in mind that the ordinary pawn
ticket is a document by virtue of which the property in the thing
pledged passes from hand to hand by mere delivery of the ticket;
and the contract of the pledge is, therefore, absolvable to bearer. It
results that one who takes a pawn ticket in pledge acquires
domination over the pledge; and it is the holder who must renew the
pledge, if it is to be kept alive. It is quite obvious from the
aforequoted case that a membership share is quite different in
character from a pawn ticket and to reiterate, petitioner was never
informed of Calapatia’s unpaid accounts and the restrictive
provisions in VGCCI’s by-laws.
 CD-GET NOTES – Corporation Law – Atty. Ladia (2020) | 167

of securities made by PIPC Corporation and/or PIPC–BVI to

Same; Same; The term “unpaid claim” in Sec. 63 of the
Corporation Code refers to “any unpaid claim arising from unpaid
subscription, and not to any indebtedness which a subscriber or
stockholder may owe the corporation arising from any other
transaction,” such as monthly dues.—Finally, Sec. 63 of the
Corporation Code which provides that “no shares of stock against
which the corporation holds any unpaid claim shall be transferable
in the books of the corporation” cannot be utilized by VGCCI. The
term “unpaid claim” refers to “any unpaid claim arising from
unpaid subscription, and not to any indebtedness which a subscriber
or stockholder may owe the corporation arising from any other
transaction.” In the case at bar, the subscription for the share in
question has been fully paid as evidenced by the issuance of
Membership Certificate No. 1219. What Calapatia owed the
corporation were merely the monthly dues. Hence, the aforequoted
provision does not apply.
certain individuals, specifically private complainants Sy and
Lorenzo by providing information on the investment products of
PIPC Corporation and/or PIPC–BVI with the end in view of PIPC
Corporation closing a sale.
While Santos was not a signatory to the contracts on Sy’s
or Lorenzo’s investments, Santos procured the sale of these
unregistered securities to the 2 complainants by providing
information on the investment products being offered for sale by
PIPC Corporation and/or PIPC–BVI and convincing them to invest
therein.
Thus, Santos violated Sec. 28 of SRC. Its elements are
as follows:
1. Engaging in the business of buying or selling securities in
the Philippines as a broker or dealer;
2. Acting as a salesman; or
3. Acting as an associated person of any broker or dealer,
unless registered as such with the SEC.

Securities and Exchange Commission v. Oudine Santos,.

G.R. No. 195542, March 19, 2014

FACTS:
Sometime in 2007, yet another investment scam was
exposed with the disappearance of its primary perpetrator Liew, a
self–styled financial guru and Chairman of the Board of
Directors of Performance Investment Products Corporation (PIPC–
BVI), a foreign corporation registered in the British Virgin
Islands.To do business in the Philippines, PIPC–
BVI incorporated herein as Philippine International Planning
Center Corporation (PIPC Corporation).
Because the head of PIPC Corporation had gone missing
and with it the monies and investment of a significant number of
investors, the SEC was flooded with complaints from 31 individuals
against PIPC Corporation, its directors, officers,
employees, agents and brokers for alleged violation of certain
provisions of the SRC, including Section 28 thereof. Santos was
charged in the complaints in her capacity as investment consultant
of PIPC Corporation, who supposedly induced private
complainants Lorenzo and Sy, to invest their monies in PIPC
Corporation.
On her defense, Santos alleged that she was merely an
employee of PIPC thus should not be personally liable.

ISSUE:
Whether or not Santos violated Sec. 28 of SRC which
punishes unregistered broker or dealer who engage in business of
buying or selling securities.

HELD:
YES. The Court held that Santos acted as an agent or
salesman of PIPC Corporation making her liable under Sec. 28 of
SRC.

There is no question that Santos was in the employ of

PIPC Corporation and/or PIPC–BVI, a corporation which sold or
offered for sale unregistered securities in the Philippines. To
escape probable culpability, Santos claims that she was a mere
clerical employee of PIPC Corporation and/or PIPC–BVI and was
never an agent or salesman who actually solicited the sale of or sold
unregistered securities issued by PIPC Corporation and/or PIPC–
BVI.
Solicitation is the act of seeking or asking for business or
information; it is not a commitment to an agreement.
Santos, by the very nature of her function as what she now
unaffectedly calls an information provider, brought about the sale