Professional Documents
Culture Documents
Corpo Trans
Corpo Trans
Corpo Trans
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Q: What is the remedy available to the Q: Now, when are stockholders required
stockholder who is not in favor of to comply with 25% subscription and 25%
automatic conversion of corporate term to payment requirements?
perpetual existence of the corporation A: Only in case of increase of capital stock
organized prior to the effectivity of the
RCC? THERE ARE 2 WAYS WHICH SHARES OF
A: The stockholder nay exercise his appraisal STOCK MAY BE ISSUED TO STOCKHOLDERS:
right, meaning demand the payment of the 1. From unsubscribed portion of ACS
fair value of his shares, unless stockholders 2. Increase of capital stock
elect to retain the specific term –
1. Upon a vote of its stockholders 4. Concept of Emergency Board
representing a majority of its outstanding
capital stock
2. Notifies the Commission that it elects to SECTION 28. When the vacancy prevents
retain its specific corporate term pursuant the remaining directors from constituting a
to its AOI quorum and emergency action is required
to prevent grave, substantial, and
Normally there is a stockholders’ meeting irreparable loss or damage to the
where a stockholder expresses his dissent. corporation, the vacancy may be
Given that perpetual existence is an temporarily filled from among the officers
automatic conversion, there’s no need to of the corporation by unanimous vote of
amend the AOI and conduct stockholders’ the remaining directors or trustees. The
meeting action by the designated director or trustee
Q: When can you exercise Appraisal right shall be limited to the emergency action
when stockholders’ meeting is not necessary, and the term shall cease within
necessary because of the automatic a reasonable time from the termination of
conversion? the emergency or upon election of the
A: A stockholder can exercise anytime his replacement director or trustee, whichever
appraisal right, unless the stockholders by at comes earlier. The corporation must notify
least majority of the outstanding-capital the Commission within three (3) days from
stock, elect to retain the specific term of the the creation of the emergency board,
corporation. stating therein the reason for its creation.
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3. By unanimous vote by the remaining Q: Are there cases where there is absentia
Board of Directors or remote voting even though not specified
4. Those who will be elected must be in the by-laws of the corporation?
officers of the corporation A:
1. Corporations that are vested with
5. Electronic communication may now public interest may adopt even though
be permitted if such mode of notice is not specified in the by-laws
allowed by the bylaws. 2. When authorized by the BOD by at
least majority votes. The board may
adopt resolutions allowing such.
6. The RCC has allowed the use of
remote communication such as
7. RCC enumerate certain criminal
videoconferencing and teleconferencing
offenses not found in Old Corpo Code.
during stockholder meetings
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AS TO PARTNERSHIP CORPORATION
DEFINITION It is an agreement whereby It is an artificial being created by
two or more persons bind operation of law, having the right of
themselves to contribute succession and the powers, attributes,
money, property, or industry and properties expressly authorized by
to a common fund, with the law or incidental to its existence.
intention of dividing the
profits among themselves.
MANNER OF Created by agreement Created by the operation of law
CREATION
(General law: RCC which governs the
formation of all private corporation
Spec law: It is enacted by the congress to
create GOCC
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Note:
Directors/Trustees are liable jointly and
severally for all damages suffered by the
corporation, its stockholder or members
or other persons if –
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
down 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; or
4. He is made, by a specific provision of
law, to personally answer for his
corporate action.
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upon dissolution and liquidation of stock and not the properties of the
corporation. corporation.
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and the UP would like to charge the expenses RULING: If the complaint alleges bad faith
to the construction company and president or gross negligence against directors in
thereof. There is no doubt as to the liability of conducting the affairs of corporation, it is an
the construction company. However, the fact attempt likewise to pierce the veil of
that the president owns 99.99% of the corporate fiction. An attempt to make the
corporation, it is not enough to disregard corporation one and the same with the
separate juridical personality of corporation. directors and officers. Therefore, the
directors and officers are one and the same
b. Corporate directors and officers with the corporation, and can be compelled in
may be held solidarily liable with the the arbitration.
corporation for the termination of
employment only if done with malice d. The president should not be held
or in bad faith. (Torres v. Rural Bank solidarily liable with the corporation
of San Juan) for the unpaid commissions due to a
marketing agent because no
c. The corporation's representatives commission of an unlawful act, gross
are generally not bound by the terms negligence or bad faith was alleged in
of the contract executed by the the complaint, much less proven in
corporation. They are not personally the course of the trial. (Mactan Rock
liable for obligations and liabilities Industries v. Germo)
incurred on or in behalf of the
corporation. (Lanuza Jr and Olbes v. MACTAN ROCK INDUSTRIES V. GERMO
BF Corporation)
FACTS: The president hired a marketing
LANUZA JR AND OLBES V. BF consultant to sell water dispenser. The
CORPORATION marketing consultant was able to sign a
contract with ICTSI but he was not paid a
FACTS: BF corpo, a contractor, entered in a commission.
contract with Shangrila Corp. to construct a
Shangrila Mall in Mandaluyong. BF claims ISSUE: Can the president who signed the
there was underpayment so it filed an action contract engaging him as a managing
for collection against Shangrila Corp. consultant may be made liable with the
including its directors. The construction corporation?
agreement contains arbitration clause that no
party can go to court without first exhausting RULING: Corporation is liable but not the
arbitration proceedings. president because the complaint did not
allege bad faith or gross negligence in
ISSUE: Can corporate directors be commission of unlawful act. It must be
compelled to participate in the arbitration? alleged in the complaint and the same must
be clearly and convincingly proven.
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3. The cause of action available to the Q: May a corporation be liable for torts?
corporation cannot be generally enforced by A: Yes
its director, officer or stockholder and vice-
versa. A corporation is civilly liable in the same
a. The stockholders are not manner as natural persons for torts because
themselves the real parties in interest the rules governing the liability of a principal
to claim and recover compensation or master for a tort committed by an agent or
for the damages arising from the servant are the same whether the principal or
wrongful attachment of corporate master be a natural person or a corporation,
assets. Only the corporation is the real and whether the servant or agent be a natural
party in interest for that purpose. or artificial person. A corporation is liable,
(Stronghold Insurance Company, Inc. therefore, whenever a tortious act is
v. Cuenca) committed by an officer or agent under
express direction or authority from the
STRONGHOLD INSURANCE COMPANY, stockholders or members acting as a body, or,
INC. V. CUENCA generally, from the directors as the governing
body. (PNB V CA)
FACTS: A filed an action for collection
In a close corporation, stockholders who are
against X and Y with a prayer for the issuance
actively engaged in the management or
of preliminary attachment. The court granted
operation of the business and affairs of the
the attachment. A levied on attachment the
corporation shall be personally liable for
properties of XYZ Corp., not properties of X
corporate torts unless the corporation has
and Y. X and Y filed a petition with CA to
obtained reasonably adequate liability
nullify the attachment on the ground that it
insurance. (Naguiat v. NLRC)
was improperly issued.
RULING: No. X and Y has no legal FACTS: Corporation owned a fleet of Taxi
personality to file the petition to nullify the cab used as a common carrier. The
attachment. They are not real parties in corporation was phased out so they have to
interest because it is not their properties that terminate employment of taxi cab drivers and
were levied but the properties of XYZ corp. pay separation benefits.
Therefore only the corporation can file the
petition. SC added the only time that it can be ISSUE: Are stockholders liable to pay
justified is if X and Y file it via derivative separation benefits?
suit.
RULING: Yes, because it is a close
corporation and the stockholders actively
engaged in the management or operation of
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VILLA REY TRANSIT V. FERRER case had already ruled that the
contract of sale between the
corporation and its buyer was deemed
The paper trail the money trail lead to the perfected. There is forum shopping
operator of same bus transportation, he was where the stockholders, in a second
the one who funded the subscription. case, and in representation of the
corporation, seek to accomplish what
SC said, the other corporation was set up to the corporation itself failed to do in
avoid contractual obligation under existing the original case. In this case, the
contract. Therefore the legal personality of fiction was used to circumvent the
the other corporation was pierced. rule against non-forum shopping.
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A: To transfer the assets of the respondent to labor dispute, yielded the conclusion
the run-away corporation. And by the time that the transaction was made to
judgment is rendered against respondent remove the corporation's remaining
corporation, there are no assets to be levied assets from the reach of any judgment
on execution. Thus run away corporation was that may be rendered in the unfair
organized for the purpose of fraud, to evade labor practice cases filed against it.
the claim of laborers. (Times Transportation Company v.
Santos Sotelo)
Q: What is wrong in the case?
A: The run-away was set up when the case 3. The corporation closed its business
was pending. The assets were transferred but re-emerged through another
when the case is pending. The transferee or corporation. Piercing the veil of
run away corporation owned by same corporate fiction is warranted when a
directors, engaged in the same line of corporation ceased to exist only in
business, producing the same line of name as it re-emerged in the person of
products, occupying the same compound, another corporation, for the purpose
using the same pieces of machinery, of evading its unfulfilled financial
buildings, laboratory, bodega and sales and obligation under a compromise
accounts departments used by the first agreement. Thus, if the judgment for
corporation. money claim could not be enforced
against the employer corporation, an
Note: alias writ may be obtained against the
A. If the transferee or run away corporation other (new) corporation considering
was organized for the purpose of fraud the indubitable link between the
(where such corporation was set up when a closure of the first corporation and
case was pending, or it has the same directors, incorporation of the other. The link
same line of business with the first between the closure of first
corporation) corporation and incorporation of the
- Doctrine of piercing the corporate other was clearly established.
veil should be applied because the (Livesey v. Binswanger)
fiction was used to perpetuate fraud.
Q: What are the elements of the alter ego
B. In some cases, if the corporation that test?
acquired the assets of the transferor was set A: Case law lays down a three-pronged test
up long before the assets were sold or to determine the application of the alter ego
transferred theory, which is also known as the
- The sale per se would not warrant the instrumentality theory, namely:
piercing the corporate veil.
1. Control, not mere majority or
complete stock control, but complete
2. The sale of the corporation's domination IN SHARES,
franchise, as well as most of its bus FINANCES, AND BUSINESS
units, to a company owned by the PRACTICES, so that the corporate
daughter and family members of the entity as to this transaction had at the
controlling stockholder of the seller- time no separate mind, will on
corporation, right in the middle of a existence of its own;
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For example, BDO is a unibank. It is 3. The control and breach of duty must
not allowed to engage in insurance have proximately caused the injury or
business but BDO, as universal bank, unjust loss complained of.
can set up a wholly-owned insurance
company. If the insurance company The first prong is the "instrumentality" or
issues policies to clients, can policy "control" test.
holders enforced their claim to BDO? - This test requires that the subsidiary
No. Control in shares is not the only be completely under the control and
aspect. There must be control in domination of the parent. It inquires
shares, finances and business whether a subsidiary corporation is so
practices. organized and controlled and its
affairs are so conducted as to make it
PNB V RITRATTO a mere instrumentality or agent of the
parent corporation such that its
separate existence as a distinct
FACTS: PNB has wholly owned subsidiary
corporate entity will be ignored. In
in Hong Kong, PNB International. The
addition, the control must be shown to
subsidiary granted Trust receipt
have been exercised at the time the
accommodations in favor of Ritratto group
acts complained of took place.
secured by a mortgage on property located in
the Philippines. The mortgage agreement was
The second prong is the "fraud" test.
signed by Ritratto and PNB, as agent of PNB
- This test requires that the parent
International, not as parent company. The
corporation's conduct in using the
loan was not paid so PNB threatened to
subsidiary corporation be unjust,
foreclose the mortgage. To stop the
fraudulent, or wrongful.
foreclosure, Ritratto filed an action for
injunction against PNB as parent company
The third prong is the "harm" test.
of PNB International arguing that there are
- This test requires the plaintiff to show
payments that were not credited to the
that the defendant's control, exerted in
account of the mortgagor.
a fraudulent, illegal, or otherwise
unfair manner toward it, caused the
ISSUE: Will the action prosper?
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Can a judgment creditor pierce the veil of Also, control in the shares, finances or
corporate fiction of the non-stock non- practices is not the only aspect to warrant the
profit corporation to make it liable for the application of the alter-ego test. The control
judgment against the lessee incorporator? must be used to perpetrate fraud, violate the
A: YES. When the President uses the duty to the prevention of the plaintiff’s right
corporation to evade a legal process, the and the control and breach of duty must be
doctrine of reverse piercing should apply. In the proximate cause of the harm suffered by
that case, the assets of the President, which the third party.
was transferred to the corporation, can be
made liable for the liability of the President. For those reasons, the Supreme Court said
that there is no violation of the right of first
Q: Juan dela Cruz, upon the advice of his refusal. There is really no say in this case. It
tax lawyer and to save on estate tax upon is just a change in the form or nature of
his death, organized a holding company, ownership from unincorporated to
then he transferred his real property to the incorporated form of ownership.
holding company in exchange for shares of
stock.
LECTURE
Upon the advice of his lawyer, he gained
control of the transferee corporation to
ALTER EGO OR
make it a tax-exempt transaction under
the Tax Code. He was told it is a tax INSTRUMENTALITY CASES
avoidance scheme that is recognized as
valid by the Tax Code. It turns out that the Case law lays down a three-pronged test to
property that Juan transferred to the determine the application of the alter-ego
holding company is subject of a lease with theory, which is also known as the
right of first refusal in favor of the lessee. instrumentality theory, namely:
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ISSUE: Was the complaint validly couched? This test requires the plaintiff to show
(NO) that the defendant’s control, exerted in a
fraudulent, illegal, or otherwise unfair
RULING: The lender is not PNB parent manner toward it, caused the harm
company, the mortgagee is not PNB parent suffered. A casual connection between
company. The mortgagee is the lender- the fraudulent conduct committed
subsidiary in Hong Kong, PNB International through the instrumentality of the
Finance Ltd. Therefore, the correct way to subsidiary and the injury suffered or the
couch the complaint is PNB as agent of the damage incurred by the plaintiff should
subsidiary in Hong Kong, but not PNB as be established.
parent company of the subsidiary in Hong
Kong. They have separate legal personality NISCE V. EQUITABLE PCI BANK,
and the fact that PNB wholly owns the capital INC. (2007)
stock of the subsidiary is not enough reason
to pierce the corporate veil because there
FACTS:
ought to be other control.
v Nisce obtained a loan from Equitable
Bank at the same time Nisce had a
If the subsidiary has independent operations,
money-market placement with PCI Asia
ownership of the capital stock, all or nearly
Capital, a wholly-owned subsidiary of
all, by a parent company is not enough reason
PCI Bank.
to disregard its separate legal existence.
v Thereafter, Equitable and PCI merged
and Equitable Bank was the surviving
bank; it was renamed Equitable PCI
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ERSON ANG LEE DOING BUSINESS When Ty organized his own company,
AS “SUPER LAMINATION ABS-CBN hired him as a consultant and
SERVICES, V. SAMAHANG eventually engaged the services of his
MANGGAGAWA NG SUPER company. As a result of which CCI
LAMINATION (2016) decided to close its business operations as
it no longer carried services for the design
and construction of sets and props for use
v Three companies engaged in a work-
in the programs and shows of ABS-CBN,
pooling scheme, in which their workers
thereby terminating certain employees of
were constantly rotated and periodically
CCI.
assigned among the three establishments
to perform the same or similar tasks; they
v ABS-CBN clearly exercised control and
operated and hired employees through a
influence in the management and closure
common human resource department;
of CCI’s operations, which justifies the
and, they were under the control and
ruling of the appellate court and labor
management of the same party.
tribunals of disregarding their separate
corporate personalities and treating them
v It was held that the separate existence of
as a single entity.
the three companies must be disregarded
in order to safeguard the right of the
APPLICATION WHEN THE CORPORATE VEIL
workers and their unions as to engage in
MAY BE PIERCED IF THE COMPLAINT
collective bargaining.
ALLEGES THAT THE DIREC1TORS AND/OR
OFFICERS COMMITTED BAD FAITH OR
ABS-CBN BROADCASTING GROSS NEGLIGENCE IN CONDUCTING THE
CORPORATION V. HONORATO AFFAIRS OF THE CORPORATION
HILARIO (2019)
LANUZA V. BF CORPORATION
v The Internal Scenic Department which (2014)
initially handled the props and set designs
of ABS-CBN was abolished and shut
FACTS:
down and CCI was incorporated to cater
v The building contractor of Shangri-La
to the props and set design requirements
mall sued Shangri-La Properties for
of ABS-CBN, thereby transferring most
unpaid fees. The plaintiff impleaded the
of its personnel to CCI. Notably, CCI was
directors of the corporation for bad faith
a subsidiary of ABS-CBN and was
and gross negligence in conducting the
incorporated through the collaboration of
affairs of the corporation.
its former contractor (Ty) and the other
v The lower court, upon motion, suspended
major stockholders and officers of ABS-
the proceedings on the ground that the
CBN. CCI provided services mainly to
plaintiff failed to submit the case to
ABS-CBN and its other subsidiaries.
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NOTE: Full-blown trial is where you give GOLD LINE TOURS V. HEIRS OF
due process to the corporation whose MARIA CONCEPCION LACSA
corporate veil the court intends to pierce. (2012)
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real party in interest; it can be substituted for money claim could not be enforced
the nominal defendant to prevent multiplicity against the employer corporation, an alias
of suits to save the parties unnecessary writ may be enforced against the other
expense and delay as long as that corporation corporation considering the indubitable
was given due process in a summary hearing. link between the closure of the
corporation and the opening of the other.
❖ What were the circumstances In this case, the other corporation was not
that prompted the Supreme impleaded in this case.
Court to rule that Gold Line
and Travel & Tours Advisers FACTS:
are one and the same entity? v There was a judgment by compromise
A: between the judgment debtor and
1. They are owned by the judgment creditor. Unfortunately, the
same family corporation; terms of the compromise agreement were
2. They have a common not fully implemented on the part of the
president; judgment debtor.
3. They do business in the v Before the judgment creditor could
same premises; and enforce the compromise agreement, the
4. According to Chief judgment debtor corporation closed
Justice Bersamin, the business. Unable to fulfill its obligation
ponente, it was common under the compromise agreement, but he
knowledge in the entire emerged in the form of another
bioregion that Gold Line corporation, doing the same business and
Tours and Travel & Tours have the same officers.
Advisers are one and the
same entity ISSUE: If the judgment creditor files a
motion for an alias writ to levy the execution
LIVESEY V. BINSWANGER the properties of the re-emerged corporation,
PHILIPPINES (2014) will you grant the motion? (YES)
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liable for the judgment made against the as the broker is concerned so the writ of
original main corporation. execution issued in favor of Pacific
Rehouse was returned unsatisfied
PACIFIC REHOUSE because there were no leviable assets on
CORPORATION V. COURT OF the part of the stock broker’s firm.
APPEALS (2014) v Pacific Rehouse filed a motion for alias
writ against the parent company of the
stock broker’s firm and the RTC granted
This was asked in the BAR
the alias writ of execution, ruling that the
parent bank owns anyway the stock
v The Supreme Court, however, relied on
broker’s firm. The funds of subsidiary
the Kukan ruling in disposing of another
come from the parent company; the
case, when it held that where the court
lawyer, who represented the subsidiary,
rendered judgment against a stock
was the same lawyer who argues for the
brokerage firm directing the latter to
parent company. Because of these
return securities which it sold without
circumstances, the RTC judge said that
authority but the writ of execution was
the alias writ should be issued to make the
return unsatisfied, an alias writ could not
parent company liable for the judgment
be enforced against its parent company
debt against the subsidiary.
because the court has not acquired
jurisdiction over the latter and while the
ISSUE: Is that correct? (NO)
parent company owns and controls the
brokerage firm, there is no showing that
RULING: How can you pierce the corporate
the control was used to violate the rights
veil of the parent company if it was not
of the plaintiff.
brought to the court’s jurisdiction; there is no
case against it, it is only against the stock
FACTS:
broker subsidiary. The Supreme Court
v Pacific Rehouse owns securities held by
reiterated Kukan v. Reyes before it can pierce
a stock broker’s firm, which the holder
the corporate veil, there ought to be a full-
was a subsidiary of a bank, Export Bank.
blown trial involving a cause of action, which
v The broker’s firm sold shares of Pacific
involves the corporation brought to the
Rehouse without the latter’s consent.
court’s jurisdiction by service of summons or
Pacific Rehouse filed an action to recover
other modes of acquiring jurisdiction.
those securities and it be retrieved or
returned then the equivalent price plus
damages. PIONEER INSURANCE SURETY
v Judgment was rendered against the stock CORPORATION V. MORNING STAR
broker’s firm, directing it to return the TRAVEL AND TOURS (2015)
securities or to pay the equivalent amount
plus damages. It turns out that there were v The Supreme Court further affirmed that
no assets to be levied on execution so far compliance with the recognized modes of
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acquisition of jurisdiction cannot be v The Supreme Court said that the probate
dispensed with in piercing for veil of court in this case has not acquired
corporate fiction in a subsequent case. jurisdiction over the corporation and its
This involved an action for subrogation properties. Piercing the veil of corporate
against the travel agent after the insurer entity applies to the determination of
paid the former’s obligation to the liability not of jurisdiction. Hence, before
International Air Transport Association this doctrine can be even applied, based
(IATA) for unremitted collections. It was on the evidence presented, it is imperative
held that the insurer cannot hold an that the court must first have jurisdiction
unimpleaded corporation liable as it over the corporation. A corporation not
would offend due process. impleaded in a suit cannot be subject to
the court’s process of piercing the veil of
ISSUE: If there is a judgment against a travel its corporate fiction. Resultantly, any
agency, can that judgment be enforced proceedings against the corporation and
against its sister company? (NO) its properties would infringe on its right
to due process.
RULING: Compliance with the recognized
modes of acquiring jurisdiction cannot be FACTS:
dispensed with in piercing the corporate veil. v A stockholder of a corporation died. He
Effectively, the Supreme Court reiterated was the controlling stockholder; the
Kukan v. Reyes and Pacific Rehouse v. CA. corporation that he owned was an owner
You cannot pierce the corporate veil without of a building occupied by tenants when
first acquiring jurisdiction over the the stockholder died. His estate became
corporation, whose corporate veil you intend subject of settlement estate proceeding.
to pierce and that jurisdiction is acquired The court appointed an administrator.
through service of summons or other modes v One of the heirs filed a motion with the
of acquiring jurisdiction. court to order the lessees of the building
to remit the rentals to the administrator.
MANUELA AZUCENA MAYOR V. The issued the order, directing the lessees
EDWIN TIU (2016) the remit the rentals to the administrator.
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corporation, but the property of the deceased appearance, or other recognized modes of
stockholder, which are his shares of stock. acquiring jurisdiction.
With respect to jurisdiction, the Supreme v For academic purposes, it depends on the
Court said the probate court cannot make any similarity with the facts of each case. The
resolution binding on the corporation because author, though, believes that the
in the first place, it was not brought to the corporate veil may be pierced without
court’s jurisdiction. having to conduct a full-blown trial as
long the corporation, whose veil the court
Q: If the question has no reference to a wants to pierce, is given the opportunity
factual milieu or setting, and the question to be heard and based on the hearing,
is only hypothetical, can you pierce the albeit summary in nature, evidence exists
corporate veil over a corporation not to warrant the application of the doctrine.
brought to the court’s jurisdiction without This is necessary to prevent multiplicity
a full-blown trial? of suits and save on expenses. Due
A: You can pierce the corporate veil of the process, after all, can be afforded to the
corporation without having to conduct a full- corporation even without a full-blown
blown trial as long as the corporation, whose hearing. The Supreme Court has in fact
veil the court wants to pierce was given that ruled in other cases that a party whose
opportunity to be heard and based on the corporation is vulnerable to piercing its
hearing, although summary in nature, corporate veil cannot argue violations of
evidence exists to warrant the application of due process.
the doctrine.
Q: Is the doctrine of piercing the corporate
Due process is not always equated with a full- veil applicable to a non-stock non-profit
blown trial, due process can also be given or corporation and natural persons?
afforded in a summary hearing. What is A: Yes, the fact that the corporation involved
frowned upon is the lack of due process. is a non-stock non-profit corporation does not
What is important is that you have a basis to by itself preclude the court from applying the
pierce the veil of corporate fiction. equitable remedy of piercing the corporate
veil. The equitable character of the remedy
INTERNATIONAL ACADEMY OF permits a court to look to the substance of the
MANAGEMENT AND ECONOMICS organization and its decision is not controlled
V. LITTON COMPANY, INC. (2017) by the statutory framework under which the
corporation was formed and operated. While
it may appear to be impossible for a person to
v There appears to be a lack of conclusive
exercise ownership control over a non-stock
yardstick as to when the court may pierce
non-profit corporation, a person can be held
the veil of corporate fiction of a
personally liable under the alter ego theory if
corporation that has not been brought to
he evidence shows that the person controlling
its jurisdiction by summons, voluntary
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of the corporation. I/AME is basically the of the stockholders, its corporate veil was
corporate entity used by the lessee as his not pierced.
alter ego for the purpose of shielding his
assets from the reach of his creditors. v Tax avoidance, being valid and
legitimate, does not justify piercing the
NOTES: veil of corporate fiction.
v There is no hard and fast rule when to CORPORATIONS
apply the doctrines of separate legal
EFFECTS OF PIERCING THE
entity and piercing the veil of corporate
CORPORATE VEIL
fiction. Each case must be judged because
on its own peculiar factual circumstances.
The piercing of the corporate veil does not
v The undeniable yardstick though is that dissolve the corporation. It simply means that
lacking any harm or injury to another, or the stockholder and/or director and/or officer,
in the absence of abuse of the legal fiction whose action/s became the basis for the
of the corporation, the doctrine of application of the doctrine, and the
separate legal entity stands. corporation shall be treated as one and the
same entity.
DELPHERS TRADES
CORPORATION V. INTERMEDIATE In traditional piercing the corporate veil, the
APPELLATE COURT (1988) concerned stockholders, directors/trustees,
and officers become liable for the obligation
of the corporation. In reverse piercing the
v It was held that the corporation is a
corporate veil, the corporation becomes
business conduit of the stockholders
liable for the debts of the concerned
when the latter transferred their
stockholders/members, directors/trustees,
properties to a corporation in exchange
and officers of the corporation. In case the
for its shares of stock.
corporation is just an alter ego of another
corporation, both corporations become one
v The Supreme Court said that what the
and the same entity.
transferors did was to invest their
properties and change the nature of the
For instance, an accommodation mortgagor
ownership from unincorporated to
was made liable to pay the balance of the loan
incorporated form by organizing a
which was not satisfied by the proceeds of the
corporation to take control of their
foreclosure sale. Ordinarily, the liability of
properties and at the same time save on
the accommodation mortgagor is limited to
estate tax. There was no sale of property
the value of the mortgaged property. (see
that would violate the right of first refusal
exception in Heirs of Uy v. International
of the lessee over the said properties.
Exchange Bank)
Even though the corporation is a conduit
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same corporation that owns directly 40% the grandfather rule cumulatively with the
of the public utility. It turns out, however, control test.
that the subscriptions of the Filipinos in
the investing corporation were not paid. Q: Where lies the doubt in this case?
All the foreigner paid their subscription. A: The doubt is engendered by the fact that
the subscriptions of the Filipinos were not
How many shares are to recorded as paid. They may have subscribed on paper;
owned by Filipinos and how many are to they may have owned 60% on paper, but in
recorded as owned by foreigners? reality, they did not because they did not pay
Note: This question was not answered as it their subscriptions. This is enough to be the
was too difficult to visualize without a doubt as to where actual ownership and
diagram. control reside, then you apply the grandfather
rule. That is the ruling in the en banc decision
What test do we apply in this case? of Narra Nickel Mining v. Redmont.
Control test or grandfather rule or both?
A: Both. Since the corporation is involved in
nationalized activity, the two tests could be LECTURE
applied simultaneously. When you apply the
control test and it appears that there is a 60-
CLASSES OF CORPORATIONS
40 compliance with the nationality of the
corporation and when you go through the
different various corporations that would Corporations may be classified as follows:
compose that corporation and it is found that
there are layers that would constitute it as AS TO EXISTENCE OF SHARES OF STOCK
foreign corporation, then there appears to be
a doubt in the nationality of that corporation, 1. Stock Corporation – has a capital stock
we now proceed to apply the grandfather rule divided into shares and is authorized to
in order to see the extent of the people or distribute to the holders of such shares
foreign incorporators that would constitute dividends or allotments of the surplus
that corporation. profits based on the shares held. (Section
3, RCC)
DISCUSSION: We follow both the control
test and the grandfather rule. We usually The 2 characteristics of a stock
apply the control test. But the Supreme Court corporation:
said if records-wise or on paper, the investing a. The capital stock divided into
corporation is at least 60% owned by shares; and
Filipinos and 40% owned by foreigners, but b. Authorized to distribute
there is a doubt as to where actual beneficial dividends to its holders
ownership and control reside, then you apply
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1. De Jure – is one that has fulfilled all the 1. Domestic – formed, organized, or
requirements mandated by law and existing under Philippine laws.
successfully resist a suit by the State to
challenge its existence. De jure means “a 2. Foreign – formed, organized or existing
matter of law that validates the under any laws other than those of the
corporation as a legal entity.” Philippines and whose laws allow
Filipino citizens and corporation to do
2. De Facto – is one organized with business in its own country or State.
colorable compliance with the
requirements if a valid law. Its existence Two elements:
cannot be inquired collaterally. Such a. The place of incorporation; and
inquiry may be inquired only by a direct b. The laws of that corporation allow
attack by the State through a quo Filipino citizens and corporation
warranto proceeding. (Section 19, RCC) to do business in its own country
or State.
3. By Estoppel – it exists when two or more
persons assume to act as a corporation Q: What if there is no element of
knowing it to be without authority to do reciprocity? What if the laws of the
so. They are liable as general partners for foreign corporation do not permit
all debts, liabilities and damages incurred Filipinos to do business in its own
or arising as a result thereof: Provided, country or State? Is that still a foreign
however, that when any such ostensible corporation?
corporation is sued on any transaction A: Yes, as long as it is formed and
entered by it as a corporation or any tort organized under foreign laws. But if
committed by it as such, it shall not be there is no reciprocity, then that foreign
allowed to use as a defense its lack of corporation will never be allowed to do
corporate personality. One who assumes business in the Philippines.
an obligation to an ostensible corporation
as such, cannot resist performance DISCUSSION: If a corporation is
thereof on the ground that there was, in formed and organized under the laws of
fact, no corporation. (Section 20, RCC) Alaska, USA, composed entirely of
Filipinos, that is a foreign corporation
4. By Prescription – one which has despite the fact that it is owned by
exercised corporate powers for an Filipinos because it is organized abroad,
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under foreign laws. At the same time, it held directly or indirectly by one person.
is a Philippine national; therefore, it can It is NOT necessarily illegal for as long as
own shares of stock in mass media, it follows and observes the law
public utility and other nationalized throughout its existence and conducts its
activities because by definition, a business affairs lawfully, otherwise, the
Philippine national includes a foreign doctrine of piercing the veil may be
corporation as long as wholly owned by applied in such a case.
Filipinos and registered as doing
business in the Philippines. Q: If you only have 5 incorporators, is that
a closed corporation?
OTHER CLASSIFICATIONS A: Not necessarily because narrow
distribution of share ownership is not the only
1. Closed Corporation – it is one whose test to determine if it is a closed corporation
articles of incorporation provides that all or not. It is the possession of all the
of the corporation’s issued stock of all characteristics of a closed corporation as
classes, exclusive of treasury shares, shall embodied in the Articles of Incorporation. In
be held of record by not more than a other words, we have to see these features in
specified number of persons, not the Articles of the corporation to be
exceeding twenty (20); subject to considered as a closed corporation.
specified restrictions on transfers; and it
shall not list in any stock exchange or NOTE: It is very important to determine if a
make any public offering of its stocks of corporation is open or closed because there
any class. are certain rules applicable to open, but not
applicable to closed. For example, in a closed
Pertinently, a corporation is said to be corporation, a board meeting can be
“going public” when its shares are being dispensed with to effect a transaction.
made available for listing in the stock
exchange and for public offering/trading. Q: A de facto corporation is suing another
On the other hand, a corporation is “going corporation and the defendant
private” when it is adopting the features corporation moved to dismiss the
of a closed corporation. complaint on the ground that the de facto
corporation has no power to sue and be
2. Special Corporations – these include sued.
educational corporations and religious A: The motion has to be denied because what
corporations. Religious corporations is true for de jure is also true for de facto
include corporation sole and religious corporations. If de jure can sue and be sued,
societies. so can a de facto corporation.
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RULE I:
PUBLIC UTILITY
ABC 100,000
Outstanding Capital Stock
40,000
XYZ Foreigners
60% 40%
Filipino Foreigners
In this illustration, ABC is a public utility corporation. Under the Philippine Constitution, at least
60% of its capital must be owned by Filipinos. The outstanding capital stock is Php 10 million
divided into 100,000 shares with par value of 100/share. Of the 100,000 outstanding shares, 60%
is owned by XYZ while 40% is held by foreigners. XYZ, as investing corporation in ABC, in turn,
is 60% owned by Filipinos and 40% owned by the same foreigners who directly own 40% of ABC
Corporation.
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RULE II:
90,000 10,000
XYZ Foreigners
50% 50%
Filipino Foreigners
In this illustration, XYZ owns 90,000 shares of ABC while 10,00 are held by foreigners. XYZ, in
turn, is 50% owned by Filipinos and 50% by foreigners.
NOTE: In the actual cases, there were nominal shares issued in favor of incorporators to qualify
as such. The diagrams limited the number of shares held by corporations to illustrate the principles.
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RULE III:
ABC
60,000 40,000
XYZ FC
60% 40%
FC FC
FA
This case calls for the application of the grandfather rule. First, the control test is applied because
ABC appears to be 6% owned by a Philippine national, XYZ. XYZ is a Philippine national because
60% of its capital is owned by Filipinos. Let us assume, however, that the share subscriptions of
the Filipinos were not paid and the foreign held-corporation basically contributed all, or almost
all, of the capital of ABC, creating a doubt as to where the beneficial ownership and control
actually reside. Given such doubt, the grandfather rule then is cumulatively applied with the
control test. Under the grandfather rule, only the shares that correspond to the percentage owned
by Filipinos shall be registered as Filipino-owned. Therefore, only 60% of the 60,000 shares owned
by XYZ should be recorded as Filipino-owned while 40% of the 60,000 shares shall be registered
as foreign-owned. Adding the 24,000 shares that the foreign-held corporation indirectly owns in
ABC with the 40,00 shares it directly owns, the aggregate foreign shareholdings translate to 64,000
or 64% of the capital of ABC, in excess of the 40% allowable limit.
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RULE IV:
40,000
XYZ Foreigner
CORP 1
CORP 2
CORP 3
50% 50%
Filipino Foreigner
This illustration suggests corporate layering. In this illustration, ABC is a public utility with
800,000 outstanding capital stock. XYZ owns 60,000 and foreigner owns 40,000. XYZ is owned
by Corporation 1. Corporation 1 is owned by Corporation 2. Corporation 2 is owned by
Corporation 3. Eventually, you will have individual stockholders.
This shows that the ultimate stockholders are Filipinos and foreigners with foreigners owning 50%
and Filipinos owning 50% likewise, which is less than 60% to warrant the application of the control
test. It is called the Grandfather Rule because you trace the ultimate owners or stockholders of the
corporate entities and the ultimate owners of corporate entities have to show that the Filipinos own
at least 60% of the investing corporation; otherwise, you follow the Grandfather Rule.
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held as security for payment of dues and Q: What preferences may be given to
assessments, must be in the articles of preferred shares of stock?
incorporation, not only in the bylaws, A: A preferred shares of stock’s most
otherwise, it is invalid. common forms may be classified into two:
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Q: Can you declare dividends out of your Q: What is a no par value stock?
additional paid in capital meaning the A: It is a stock without a par value on the
amount in excess of par value? face of the stock certificate. It does not mean
A: The most recent opinion of the SEC is that it has no value because shares of stock
that you cannot declare even stock dividends have value, but there is no arbitrary amount
out of your additional paid in capital. fixed in the AOI or on the face of the stock
certificate. This type of stock is adopted to
Q: Is par value the actual value of the give the corporation flexibility in the
shares? determination of the issue value of the
A: No. Par value is neither the book value shares. No par value shares can be issued for
nor the fair market value of the shares. Par varying amounts provided that the value or
value is an arbitrary amount that the price for every issuance is not less than P5
corporation, through the incorporators or per share.
the board of directors, has fixed.
Thus, the board of directors may fix the
Book value is a market value ratio that issue price of the no par value stocks for P10
weighs stockholders’ equity against per share. After six months, the board may
outstanding shares. It is based on the fix a different price higher than the previous
formula – company’s assets minus issuance. Shares issued will have the same
liabilities/ number of outstanding shares. It rights even though acquired by the
stockholders in different amounts.
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Delinquent shares are also not entitled to The non-voting shares may vote only for
vote and similar to treasury shares, there is acts of ownership,
no need to deny them such right in the AOI
since denial is statutory. Unpaid shares that Q: What are founders’ shares?
are not delinquent can vote. Unpaid shares A: Shares that are classified as such in the
only become delinquent if not paid within AOI which may be given rights and
30 days from due date. privileges not enjoyed by the owners of
other stocks. Where the exclusive right to
INSTANCES WHERE THE LAW VEST THE vote and be voted for in the election of
RIGHT TO VOTE FOR NON-VOTING SHARES directors is granted, but only for a limited
(AASIIMID) period not exceeding 5 years from
1. Amendment of the AOI; incorporation.
2. Adoption and amendment of BL;
3. Sale, lease, exchange, mortgage, pledge REVISIONS UNDER THE RCC ON TE
or other disposition of all or substantially PROVISION ON FOUNDERS’ SHARES
all of the corporate property; 1. RCC made it clear that exclusive right of
4. Incurring, creating, or increasing bonded holders of the founders’ shares to vote
indebtedness; and be voted as directors shall not be
5. Increase or decrease of authorized allowed if its exercise will violate CA
capital stock; 108 (Anti Dummy Law), RA 7042
6. Merger or consolidation of the (Foreign Investments Act of 1991) and
corporation with another corporation or other pertinent laws.
other corporations; 2. The five-year limitation is counted from
7. Investment of corporate funds in another the date of incorporation and not from
corporation or business in accordance SEC’s approval
with the RCC;
8. Dissolution of the corporation. Note: Although you can say it’s
effectively same because the date of
Note: Except as provided above, the vote incorporation is based on the date of
required to approve a particular SEC’s approval.
corporate act under the RCC shall be
deemed to refer only to stocks with 3. There is no mention of the requirement
voting rights. of SEC’s approval before the exclusive
right to vote and be voted for in the
Holders of non-voting shares are not election of directors can be granted. The
included in the computation of outstanding approval of incorporation is effectively
capitals stock to elect directors of the the approval of the exclusive right to
corporation because it is not one of the 8 vote and be voted as directors.
cases listed above. These 8 cases are acts of
ownership and not just acts of management.
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SEC-OGC Opinion No. 02-10, January corporation from the holders of such shares
15, 2010 upon the expiration of a fixed period,
The 1:10 voting rights ratio for Founders’ regardless of the existence of unrestricted
shares is not subject to the limited period not retained earnings in the books of the
to exceed 5 years provided under Section 7 corporation, and upon such other terms and
of the RCC since this provision only applies conditions stated in the AOI and the
to the exclusive right to vote and be voted certificate of stock representing the shares,
for in the election of directors. subject to rules and regulations issued by the
SEC.
Q: ABC Corporation is a public utility
corporation, 60% owned by Filipinos, and The SEC requires a sinking fund to be set up
40% owned by foreigners. It has 10 by the corporation. It is a fund set aside the
directors as specified in the AOI. X and Z by corporation from time to time so that it
are foreigners who hold founders shares can redeem shares by the time they become
with the right to be voted as directors of due.
the corporation for a period of 5 years.
Can X and Y be voted as directors Q: Can the corporation be compelled to
together with 4 other foreigners whose redeem redeemable shares if it has no
collective shares are enough to be assured available surplus profits?
of four board seats? A: Yes. If the redeemable shares are
A: No. The right granted to founders’ shares mandatory in nature, the issuing corporation
cannot be exercised if it will violate the may be compelled to redeem the shares,
Anti-Dummy law. Foreigners can be elected regardless of the existence of unrestricted
to the board of directors of corporations retained earnings.
engaged in partially nationalized activities
only in proportion to their actual foreign It should be noted, however, that redemption
equity in the corporation. Foreigners are may not be made where the corporation is
allowed to own 40% of the equity of a insolvent or is such redemption will cause
public utility corporation. The right granted insolvency or inability of the corporation to
to X and Z to be voted as directors cannot be meet its debts as they mature.
exercised if it will result in foreigners
having more than the number of seats REPUBLIC PLANTERS VS AGANA
allowed by law, in violation of the Anti-
Dummy law and Foreign Investment Act.
FACTS: Private respondent Robes
Francisco Realty & Development
Q: What are redeemable shares?
Corporation secured a loan from petitioner.
A: These are shares classified as such in the
As part of the proceeds of the loan, preferred
AOI which may be issued by the corporation
shares of stocks were issued to private
when expressly provided in the AOI. They
respondent corporation. The stock certificate
are shares which may be purchased by the
of the preferred shares Said certificates of
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stock bear the following terms and retired, as long as they are not allowed to be
conditions: 1. The right to receive a reissued. If they can be reissued, they are
quarterly dividend of 1%, cumulative and treasury shares and not retired shares.
participating; 2. That such preferred shares
may be redeemed, by the system of drawing Q: What are treasury shares?
lots, at any time after 2 years from the date A: As provided in Section 9 of the RCC,
of issue at the option of the Corporation. these are shares of stock that have been
Private respondents proceeded against issued and fully paid for, but
petitioner and filed a complaint anchored on subsequently reacquired by the issuing
private respondents’ alleged rights to collect corporation through purchase, redemption,
dividends under the preferred shares in donation, or some other lawful means. Such
question and to have petitioner redeem the shares may again be disposed of for a
same. reasonable price fixed by the board of
directors.
ISSUE: Whether or not the bank the bank
can be compelled to redeem the shares Treasury shares are shares that have been
earlier issued and regarded as property
RULING: No. While the stock certificate acquired and currently owned by the
does allow redemption, the option to do so corporation and not by any of its
was clearly vested in the issuing stockholders. Being the owner of the
corporation. In any case, the redemption of treasury shares, the corporation may opt to
said shares cannot be allowed because the retire, sell, or distribute as property
Central Bank made a finding that the bank dividends said shares. (SEC-OGC
had been suffering from chronic reserve OPINION 16-16 June 27, 2016)
deficiency. Such findings resulted in the
directive prohibiting the bank from Q: Under what conditions may a
redeeming any preferred share on the ground corporation may acquire its own shares?
that said redemption would reduce the assets A: The SEC said there are 4 conditions: 1.
of the bank to the prejudice of its depositors retained earnings or surplus profit; 2.
and creditors. legitimate purpose; 3. situation of the
corporation warrants it; and 4. no third party
shall be prejudiced
Reiteration of the Dean Divina’s comment
during the recitiation But if you think about it, only two would
suffice – URE and legitimate purpose. If you
Dean Divina: Once those shares are have URE, then obviously situation of the
redeemed, it will result in the reduction of corporation warrants it and third party will
the capital stock, unless it can be reissued not be prejudiced. That’s why your
based on the articles of incorporation. Once corporation code only provides for two
redeemable shares are redeemed are conditions.
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When you practice corporation law later or Third purpose: to pay dissenting stockholder
if you become corporate secretary, make and exercise their appraisal right under
sure that the Board is likewise authorized to Section 80 of the RCC
acquire fractional shares when the
corporation declares stock dividends One of the remedies of a stockholder is to
because this is not executory. This has to be get out of the corporation and demand
implemented by an appropriate or payment of the fair value of his shares in
corresponding board resolution. case he disagrees with the proposed
corporate act of the corporation in cases
Second purpose: collect or compromise specified by law. (Will take up under
indebtedness to the corporation arising out Section 80)
of unpaid subscription, in a delinquency
sale, and to purchase delinquent shares sold Let’s take a case of merger – corporation
during said sale would merge with another corporation and
you’re not in favour. You can exercise your
One of the remedies available to the appraisal right and you can demand the
corporation in case of non-payment of payment of the fair value of your share.
subscription by a stockholder is to declare Once they have paid the value thereof, you
those stocks delinquent after non-payment have to surrender your shares to the
within 30 days and cause the sale of those corporation. Those surrendered shares then
delinquent shares and apply the proceeds to become treasury shares.
the unpaid subscription.
This list is not exclusive. There are other
Q: Can the corporation participate in the instances where the corporation may acquire
bid to acquire the delinquent shares? its own shares. By definition, treasury shares
A: No. The corporation may only acquire are reacquired through purchase. Let’s give
the delinquent share if there is no bidder an example of purchase.
willing to pay the full amount of
subscription plus interest, costs and Let’s say the corporation is publicly listed. It
expenses. If there is a bidder willing to pay is trading in the stocks exchange but trading
that amount, the corporation cannot below book value. Let’s say book value is
participate. But if there is none, the P50 but it is being sold in the market for
corporation may acquire those shares as long only P20 per share. It makes sense for the
as it has surplus profits. Those shares corporation to buy back those shares,
become treasury shares that can be sold assuming it has surplus profits, because it’s
again by the corporation upon approval of worth P50 and it is only being sold for P20
the board of directors. in the market. When economic conditions
improve, those shares can be sold for P50 or
even a higher.
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The treasury share may also be reacquired pago. Remember I told you about the
through donation. Stockholder may of purchase by Equitable Bank of PCI Bank
course donate shares to the corporation. resulting in Equitable PCI Bank and
eventually merged with Banco de Oro. I told
The treasury share may also be reacquired you that whatever shares the bank could not
through redemption. According to the SEC, acquire given the limits on equity
if a corporation will acquire its own shares, investments (single limit and aggregate
it needs surplus profit, except if the mode of limit) were acquired by its wholly owned
acquiring is redemption. In which case, by subsidiary using a loan obtained from the
law, it does need surplus profits and it only bank. The subsidiary paid the loan through
needs available funds to pay the amount of dacion en pago so it conveyed the shares
redemption. back to the parent corporation in payment of
a debt. Our problem then, Equitable PCI
What about other lawful means? It can mean Bank has no surplus profits in its books. The
dacion en pago – stockholder owes a debt to question now is, does the bank need to have
the corporation and he will pay not in cash surplus profits to be paid via dacion en
but in property. If this property is in shares, pago? Basically, can the bank accept shares
these shares can be conveyed to the in payment of a debt if it has no surplus
corporation in payment of a debt. Another profit? Similarly, can a corporation garnish
example would be execution sale – the shares, if it has not surplus profits?
corporation may garnish shares of a
judgment debtor to satisfy a judgment debt Our position was that in terms of dacion en
in favour of the corporation. pago or garnishment of shares to pay a debt,
there is no need for a corporation to have
SUMMARY: Other ways or means that a surplus profit. It is absurd to require a
corporation may reacquire its own shares corporation to have surplus profits before a
other than the purposes listed under corporation can be paid with shares of stock.
Section 40 of the RCC: We further said that the corporation needs
URE only if it will spend its own funds or
1. Purchase disburse funds to buy the shares.
2. Redemption The SEC said that given that you represent a
3. Donation bank, don’t come to us, go to BSP. We went
4. Dacion en pago to BSP and we asked to confirm our
5. Execution Sale - garnish shares of a opinion. The BSP said that we are a bank
judgment debtor but it requires interpretation of the
Corporation Code, go to the SEC. Neither
Dean Divina Story: agency want to issue an opinion over it, so
what did we do? We implemented it. We
There was one transaction where we have to had no problems because it’s common
ask the opinion of SEC regarding dacion en sense.
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SLIDE
PROMOTER
Q: How do you distinguish incorporator
SLIDE and corporators?
Q: What is a promoter?
A:
A: A promoter is a person who brings about a. Incorporators are mentioned in the
or causes to bring about the formation and AOI as those who originally form
organization of a corporation by bringing part of the corporation and are
together the incorporators or the persons signatories thereof, whereas
interested in the enterprise, procuring corporators are otherwise
subscriptions or capital to the corporation b. Incorporators are corporators while
and setting in motion the machinery which corporators are not necessarily
leads to the incorporation of the corporation
incorporators
itself.
c. Incorporators in a stock corporation
Under the securities regulation code, a should not exceed 15 whereas the
promotor is defined as person who, acting number of corporators may exceed
alone or with others, takes initiative in 15 taking into account the number of
founding and organizing the business or authorized shares in the corporation
enterprise of the issuer and receives
consideration therefore
DEAN DIVINA : It used to be a distinction
that majority of the incorporators should be
DEAN DIVINA: One who takes initiative
residence of the Philippines and no such
in founding and organizing a corporation but
requirement for incorporators. The RCC
you do not need promoters to form/espouse
eliminated this requirement.
the idea of incorporation. The incorporators
themselves can do this without the promoter.
Q: May juridical persons be
He brings about the formation of the
incorporators?
corporation
A: Yes, the RCC ALLOWS it
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DISCUSSION:
There was old case SC said that expiration
ipso facto dissolves, meaning you do not
need to file any petition with the SEC to
dissolve no board approval, no SH
APPROVAL. Not anymore, under the RCC
you can file for revival
SLIDE
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Note: Dean devoted 4 – 5 pages of his book outstanding, an issued share may not have
to various companies and their corresponding the status of outstanding shares like treasury
paid up capital. Outside these corporations, shares.
stock corporations are not required to have
minimum capital stock. Paid up capital stock is the portion of
authorized capitals stock which has been
Q: What do you mean by authorized subscribed and paid by the stockholders of
capital stock, subscribed capital stock, the corporation.
outstanding capital stock and paid-up
capital stock? Q: When do you pay the difference
A: between subscribed and paid up shares?
Authorized capital stock is the amount fixed A: It is payable on the date prescribed in the
in the AOI to be subscribed and paid by the prescription. If there is no date specified,
stockholders of the corporation. It is the upon call by the board of the directors.
maximum number of shares that the
corporation is legally allowed to issue
without amending the articles of MSCI-NACUSIP LOCAL CHAPTER V.
incorporation. When you multiply your NATIONAL WAGES AND PRODUCTIVITY
authorized share to the par value, that is your SEC AND MONOMER SUGAR CENTRAL,
authorized capital stock. Issuance of shares in INC.
excess of the authorized capital stock is void.
FACTS: The National Wages and
Subscribed capital stock is the portion of the
Productivity Commission approved the
authorized capital stock which is covered by
increase of minimum wage for a certain
subscription agreements whether fully or not.
region but exempting employer corporations
Standing of a person in a corporation is
which paid up capital is impaired by 25%.
measured by his subscription. So if Juan dela
Cruz subscribed to 1M shares but paid only
ISSUE: How do you compute paid up capital
P500,000, he can vote and get dividends for
in that regard? Do you include assets of the
the 1M shares, unless of course, it becomes
corporations or loans received by the
delinquent.
corporation?
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assets transferred to or received by the engaged in public utility, large scale mining,
corporation. and exploration of the natural resources
should be owned by Filipinos. What does the
term “capital” in this context? Is it
Q: How much of the authorized capital synonymous with outstanding capital stock?
stock should be subscribed and paid-up
upon incorporation? Dean Divina: This was asked in the Bar. Let
A: None. The RCC dispensed with the us formulate the answers in case this question
minimum subscription and paid-up capital will be asked again in the bar but now to be
requirement except as otherwise provided by answered based on Roy vs Herbosa.
special law. This does not mean there should
be no subscriptions or payment to the A public utility, just like large scale minings
subscriptions. But you don’t have a minimum and corporations engaged in exploration,
subscriptions and payment requirements development of natural resources, shall have
anymore. The amount of subscription and capital owned at least 60% by Filipinos. So
payment is determined by the corporation. what does capital mean in this context? Is that
synonymous with outstanding capital stock?
After incorporation, however, in case of
increase of capital stock, at least 25% of the A:
increase in capital stock must be subscribed Gamboa Capital means voting shares
and at least 25% of the amount subscribed vs Teves only and not the outstanding
should be paid in cash or property the capital stock
valuation of which is equivalent to at least
25% of the subscription. Therefore, Filipinos should
own 60% of the voting shares
Q: If a corporation will issue shares from of a public utility corporation
the unsubscribed portion of the ACS, s MR of The 60% requirement must
that subject to the requirement that you Gamboa not only pertain to the voting
have to pay 25% of the subscription? vs Teves shares, but likewise to the
A: No such requirement. The amount of beneficial ownership.
payment of the subscription if sourced or Therefore, the 60%
taken from the unsubscribed portion of the requirement must not only be
ACS depends on the approval of the board. limited to the voting shares,
but also to all the other types
Therefore, it is only when you increase your of shares. 60% of each type of
capital stock that there is a requirement on share must be Filipino owned.
how much you will subscribe and pay for
those subscriptions. Rationale: There are corporate
BAR Q: Under the Philippine Constitution, acts that the non-voting shares
at least 60% of the capital of corporations
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right to the use of such name, that the the RCC, the format for the said affidavit
name has been declared not is omitted as well.
distinguishable from a name already
registered or reserved for the use of Nature and Functions of the Articles of
another corporation, or that it is contrary Incorporation
to law, public morals, good customs or
public policy. It is a document prepared by the
incorporators organizing a corporation
Note: The template AOI under Section 14 containing the matters required by the RCC
includes this undertaking. In effect, the SEC and filed with the SEC. It offers the ultimate
may reject the AOI if it does not contain that evidence of the nature and purpose of a
undertaking. And yet, when you take a look at corporation and defines the contractual
the documents that you need to submit when relationships between the State and the
you incorporate, there is a joint affidavit by coporation, the stockholders and the State,
the incorporators to change if name if after and the corporation and the stockholders.
incorporation it is not distinguishable from a (Forest Hills Golf and Country Club vs
name already protected under the law or Gardpro, Inc, GR. 164686)
contrary to law. So if they allow affidavit, you
can dispense with the undertaking in the AOI. The powers of the corporation are found
That seems to be the implication. But to be in the AOI. The express powers of the
safe, don’t adopt an affidavit instead follow corporation can be found not only in the
the template in the RCC. RCC but also in the AOI. These powers tell
you what the corporation can do and
4. It provides that the corporation shall have cannot do. A basic principle in
perpetual existence or a fixed term as may Corporation Law is that any act of the
be indicated in the AOI. corporation must be consistent with the
5. There is no need to state that at least 25% express, implied and incidental powers of
of the ACS has been subscribed and that the corporation.
at least 25% of the total subscriptions
have been paid as this double 25% The express powers are found in the AOI.
requirement has been deleted. Implied powers are implied from the express
6. There is a requirement of certification of powers. Incidental powers are those
receipt of paid-up portion of subscription incidental to its existence.
by the Corporate Treasurer.
If the act of the corporation is not consistent
Note: This is in lieu of the Treasurer’s with, not in relation to, not in furtherance of
Affidavit. the purpose of the corporation, it is ultra
7. Since the requirement of Treasurer’s vires.
Affidavit has already been deleted under
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BAR Q (2009): Triple A Corporation was purpose, the AOI shall indicate the
incorporated in 1960, with 500 founders’ primary purpose and the secondary
shares and 78 common shares as its initial purpose/s; Provided, that a nonstock
capital stock subscription. However, Triple A corporation may not include a purpose
registered its stock and transfer books only in which would change or contradict its
1978 and recorded merely 33 common shares nature as such;
as the corporation’s issued and outstanding
shares. Note: You can have as many secondary
purposes as possible but only one primary
In 1982, Juancho, the sole heir of one of the purpose. I suggest having many secondary
original incorporators filed a petition with the purposes so that you don’t have to amend the
SC for the registration of his property rights AOI when you spend the funds of the
over 120 founder’s shares and 12 common corporation to the secondary purposes.
shares. The petition was supported by a copy
of AOI indicating the incorporators’ initial If the investment of funds is pursuant to the
capital stock subscription. Will the petition primary purpose, the board approval
be granted? Why or why not? suffices. Investment of funds for secondary
purpose is allowed but you have to get
Basically the question is, to determine how stockholders’ approval of 2/3 representing
many shares are owned by the stockholder, the OCS.
would you rely only on a Stock and Transfer
Book. 3. The place where the principal office of
the corporation is to be located, which
A: The STB is not conclusive to show the must be within the Philippines;
extent of the stockholder’s ownership. The
AOI, on the other hand, defines the charter of Note: The principal office of the corporation
the corporation and the contractual is the place specified in the AOI.
relationship between the State and the
coporation, the stockholders and the State, Dean Divina’s Story: (a bit off topic but
and the corporation and the stockholders. Its might be helpful for us someday)
contents are thus bnding upon both the
corporation and the stockholders, conferring This corporation owns a huge property in
on Juancho a clear right to have his Metro Manila. They transferred office, let’s
stockholdings recorded. say, from QC to Mandaluyong. An action was
filed against the corporation that involves the
CONTENTS OF THE AOI right over the property. The summons was
1. The name of the corporation; served in QC, which is the place specified in
2. The specific purpose/s for which the the AOI. No one was there to receive it
corporation is being formed. Where a because they were all in Mandaluyong. We
corporation has more than one stated
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were declared in default. That could have 4. The term for which the existence is to
been avoided if they amended the AOI. exist, if the corporation ahs not elected
perpetual existence;
One holistic approach in dealing with clients, 5. The names, nationalities, and residence
especially those wanting to put up a addresses of the incorporators.
corporation, we include in our opinion tax 6. The number of directors, which shall not
rates in different jurisdictions. Mandaluyong be more than fifteen (15) or the number
is cheaper than Makati, so you put your of trustees which may be more than
principal office in the border of fifteen (15);
Mandaluyong. Your tax rates applied is that 7. The names, nationalities, and residence
of Mandaluyong but you are doing business addresses of persons who shall act as
in Makati. directors or trustees until the first regular
directors or trustees are duly elected and
There’s this also a case which is quite a qualified in accordance with this Code;
controversial one. Our client is a power 8. If it be a stock corporation, the amount of
distributor in Iloilo. They had a franchise for its authorized capital stock, number of
95 years to provide electricity to City of shares into which it is divided, the par
Iloilo. After 95 years, the franchise was not value of each, names, nationalities, and
renewed and the franchise was given to the residence addresses of the original
third richest man in the Philippines. What is subscribers, amount subscribed and paid
peculiar about this case is that the franchise by each on the subscription, and a
allows the new franchisee to expropriate the statement that some or all of the shares
assets of the former franchisee. This is the are without par value, if applicable;
only time that there is a franchise that allows 9. If it be a nonstock corporation, the
the franchisee to take over the assets of the amount of its capital, the names,
former franchisee. We argued that it is a nationalities, and residence addresses of
corporate takeover in the guise of the contributors, and amount contributed
expropriation which violates the equal by each; and
protection clause. We filed a petition to 10. Such other matters consistent with law
declare that law unconstitutional. Take note, and which the incorporators may deem
the assets used to provide electricity is in necessary and convenient.
Iloilo. We filed in Mandaluyong and they
questioned the filing of petition in An arbitration agreement may also be
Mandaluyong because the assets are in provided in the AOI pursuant to Section 181
Iloilo. W argued that in the AOI, of the RCC.
Mandaluyong is the principal office of
PECO. As such, Mandaluyong has Q: What if the corporation maintains
jurisdiction. branch offices in some parts of the
countries? Can it be sued at any of these
places?
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A: No because the residence is still the place (this is a criminal complaint with
specified in the AOI. penalty of a fine); and
c. If the corporate name is used as a
RECIT tradename, file a complaint for
Q: If the term of the corporation expires, infringement of tradename (Example:
will that result to the automatic dissolution Divina Law Office doing business
of the corporation? under the tradename and style, Divina
A: No. In cases when the term of the Law).
corporation expires, the corporation may
seek the revival of its corporate existence. Q: Can you file a complaint for
infringement with the IPO for an
Q: What is another remedy available to unauthorized use simply of a corporate
the corporation whose term has expired? name?
A: The corporation may reincorporate. A: No. A complaint for infringement can
only be filed is the corporate name is used as
Q: Which is better, revival or a tradename.
reincorporation?
A: It will depend on the expenses the Q: Can Lyceum be adopted and
corporation may incur. appropriated as a corporate name?
A: No. Lyceum is a generic word to refer to a
Q: How do you prevent another school or institution of learning (from Dean’s
corporation from adopting a corporate book).
name which is similar to yours?
A: The remedies are as follows (from Dean’s Q: Can De La Salle be adopted and
book): appropriated as a corporate name?
a. File a petition with the SEC to compel A: Yes. De La Salle is fanciful, whimsical
the other corporation to change it. and arbitrary because there is no connection
Court action is not necessary. The between the words la salle and education.
SEC may order a change of corporate Even though la salle means classroom in
name based on its authority under the French, imagination is required in order to
RCC and the undertaking of the associate the term with an educational
corporation contained in its articles of institution and its particular brand of service.
incorporation to change its corporate Being arbitrary, it can be appropriated and the
name if it is not distinguishable from first one to acquire a prior right over such
that already reserved or registered for name can legally object to its use by another
the use of the corporation; school or institution. (From Dean’s book)
b. File a complaint against the
unauthorized use of the corporate Q: Can Family Bank be adopted and
name under Section 159 of the RCC appropriated as a corporate name?
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AOI. Amendments to the articles the BOD and the vote or written assent of the
shall be indicated by underscoring the stockholders representing at least 2/3 of the
change or changes made, and a copy OCS.
thereof duly certified under oath by
the corporate secretary and a majority For non-stock corporation, the AOI of a non-
of the directors or trustees, with a stock corporation may be amended by the
statement that the amendments have vote or written assent of a majority of the
been duly approved by the required trustees and at least 2/3 of its members.
vote of the stockholders or members,
shall be submitted to the SEC. If the In other words, it appears that for a stock
amendments pertain to the increase of corporation, the BOD should conduct a
capital stock, the certificate of meeting to vote on the proposed amendment
amendments must contain the matters while the stockholders’ may be done by mere
set forth in Section 37 of the RCC. written assent without having to conduct a
- When you amend the AOI, don’t stockholders’ meeting for such purpose,
just submit the amended portion unless the RCC or the bylaws of the
of the AOI. You have to submit corporation require otherwise.
both the original and the amended
AOI. So both the original and the For the non-stock corporation, the
amended AOI must have all the amendment may be approved by both the
requirements of the RCC. BOT and the members without having to
- In the amended AOI, you should conduct meetings unless the RCC or the
highlight the amendments. So, bylaws require a meeting for that purpose.
sections so and so are amended to
these and the BOD and Q: What amendments to the AOI require
stockholders approved these on stockholders or members meeting for
this date. approval?
d. The amendments will take effect A: Here, by express provisions of law, the
upon approval of the SEC or from the following amendments to the AOI require
date of filing with the SEC if not acted stockholders or members meeting for
upon within 6 months from the date approval:
of filing for a cause not attributable to a. Extension or shortening of corporate
the corporation. term
b. Increase or decrease of capital stock
Q: May the amendments be done by the c. Merger or consolidation
mere written assent of the BOD/T and d. Amendment to the AOI of a close
stockholders or members of the corporation which seeks to delete or
corporation? remove any provision, required to be
A: For a stock corporation, the amendment contained in the AOI of a close
should be approved by at least a majority of
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corporation or to reduce a quorum or any purpose other than the primary purpose
voting requirement stated in said AOI of the corporation do not require an
e. Voluntary dissolution of the amendment to the AOI.
corporation where no creditors are
affected Appraisal right has to be exercised under the
f. Voluntary dissolution where creditors conditions specified in Title X of the RCC.
are affected
Q: What is the basic concept of appraisal
These cannot be done by mere written assent. right at this point?
Outside of these cases, you can amend the A: The basic concept of appraisal right is you
AOI by a mere written assent of your can get out of the corporation and get back
stockholders or members. your contribution. Ordinarily, when you
invest your money in a corporation, you are
Q: What is the remedy available to the stuck in that investment. The only way you
stockholder in case of an amendment to can get out is if you sell your shares. If there
the AOI? is no taker, then you have no choice to live
A: He can exercise his appraisal right, with the management of the corporation. If
meaning, get out of the corporation and there is a wrongful act, you can file a
demand the payment of the fair value of his derivative suit. Ordinarily, you are stuck and
shares, after dissenting against the proposed you cannot get your money back except on
amendment to the AOI in the cases specified those cases provided by law. One of them is
by law. Appraisal rights cannot be exercised the amendment of the AOI but not all
in all cases of an amendment of the AOI but amendments to the AOI warrant exercise of
only in the cases provided by the law. These the appraisal right. For example, a violation
are: of your pre-emptive right. That restricts your
a. In case an amendment to the AOI has right to subscribe to new shares. Another
the effect of changing or restricting example is when the AOI is amended to issue
the rights of any stockholder or class new preferred shares and give new
of shares, or of authorizing preference for dividends as opposed to your
preferences in any respect superior to common shares.
those of outstanding shares of any
class, or of extending or shortening Q: Is appraisal right available for
the term of corporate existence; and members of a non-stock corporation?
b. In case of merger or consolidation. A: No, appraisal right is only available for
stockholders in a stock corporation. Members
The other instances of appraisal right such as of a non-stock corporation are entitled to the
in case of sale, lease, exchange, transfer, residual assets of the corporation only in case
mortgage, pledge or other disposition of all or of dissolution and their distributive rights to
substantially all of the corporate property and the assets are defined in the AOI, or provided
assets and investment of corporate funds for in a plan of distribution approved by at least
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majority of the BOT and 2/3 of entire was separated from those of non-
members. By allowing members of the non- stock corporation. The paragraph that
stock corporation to exercise appraisal right, pertains to appraisal right refers only
they, in effect, will be entitled to the return of to stock corporation and is not at all
their contribution to the corporation and the mentioned for a non-stock
residual corporate assets, even without corporation as may be seen from the
dissolution, contrary to the nature of non- provision itself.
stock corporation.
Q: Yenetic Corporation wants to increase
Q: Why do members of a non-stock its Authorized Capital Stock (which is
corporation do not have appraisal right? currently fully subscribed and issued) to
A: be able to increase its working capital to
1. The members of a non-stock undertake business expansions.
corporation are entitled to the residual
assets of the corporation only in case The BOD consults with you as legal
of dissolution and their distributive counsel on the proper answers to the
rights to the assets are defined in the following issues:
AOI, or provided in a plan of
distribution approved by at least If the increase in ACS is formally
majority of the BOT and 2/3 of entire submitted to the stockholders in a meeting
members. duly called for the purpose, what is the
- Then without the AOI and the vote necessary for the stockholders’
plan of distribution, the members ratification, and may the dissenting
of a nonstock corporation, even in stockholders exercise their appraisal
case of dissolution, cannot receive right?
the assets of the corporation.
Therefore, by allowing members A: Any provision or matter stated in the AOI,
of the non-stock corporation to including an increase of capital stock, may be
exercise appraisal right, they, in amended by a majority vote of the board of
effect, will be entitled to the directors and the vote or written assent of the
return of their contribution to the stockholders representing at least 2/3s of the
corporation and the residual OCS. Stockholders cannot exercise any
corporate assets, even without appraisal right in case of an amendment to the
dissolution, contrary to the nature AOI to increase capital stock because this is
of non-stock corporation not one of the cases allowed by law when
2. While the requirements for appraisal right may be exercised unless the
amendment of the AOI are common corporation is a close corporation where a
for both stock and non-stock stockholder may demand the payment of
corporation, the provision on their fair value of his shares for any reason
requirements for a stock corporation whatsoever.
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Q: What items in the AOI cannot be The liability of the corporation and its
amended? responsible officers is also provided
A: Matters of accomplished fact cannot be in case of failure to comply with the
amended, such as names and addresses of the SEC’s order.
incorporators, date and place of c. The primary basis for not allowing
incorporation, and the notary public before corporate name is that it is not
whom the AOI was acknowledges. Thus, the distinguishable from another
incorporator who, after obtaining marriage corporate name which is reserved or
annulment, wasn’t to change her name as registered for the use of another
incorporator to drop the surname of the corporation whereas under the OCC it
husband, may not legally do so. She can is identical or confusingly similar to a
however legally request the CorSec to change previously reserved or registered
her name as a stockholder. corporate name.
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2. The proposed corporate name is not name, “A Transport Co., Inc.” May this be
distinguishable from a name that is allowed?
reserved or registered for the use of
another corporation or the proposed a. No, it would be deceptive since he is
corporate name is not contrary to law, a proprietor, not a corporation.
rules, and regulations or the name b. No, since “A” is a generic name, not
itself is protected by law. suitable for registration.
c. Yes, since his line of business is
The word corporation, incorporated or their public transportation.
abbreviation should be part of the corporate d. Yes, since such name would give his
name. business a corporate identity.
A: a. No, it would be deceptive since he is a
Q: My Health Corporation asked us how proprietor, not a corporation.
do we stop My.Health Corporation from
adopting and using that name because it Q: Is the corporate name “GSIS Family
appears that it has been approved by the Bank – A Thrift Bank” distinguishable
SEC. What do you think is the remedy? from BPI Family Bank?
A: It was approved by the SEC so we cannot A: It is not. The only words that distinguish
file a complaint for an intra-corporate the two are “BPI”, “GSIS”, and “Thrift.” The
controversy. There is also no order stopping first two words are merely acronyms of the
or enjoining the corporation from using that proper names by which the two corporations
name. So, we file a petition with the SEC, not identify themselves; and the third word
a complaint or action, but a petition with the simply describes the classifications of the
SEC to direct that corporation to change its bank. The overriding consideration in
corporate name on the ground that it is similar determining whether a person, using ordinary
or confusingly similar or identical with our care and discrimination, might be misled is
name. The only think that distinguishes is the the circumstances that both corporation are
“.”. The SEC acted on our petition on the engaged in the same business of banking. The
basis of the undertaking by the incorporators word “family” cannot be separated from the
of My.Health that they will change their word “bank”. This coined phrase, neither
name even after approval of the SEC if that being generic nor descriptive, is merely
name turns out to be identical or confusingly suggestive and may properly be regarded as
similar with a name that is registered for the arbitrary. Arbitrary marks are words or
use of another corporation. More so now, phrases used as a mark that appear to be
since the undertaking is part of the AOI random in the context of its use. They are
already. generally considered to be easily
remembered because of their arbitrariness.
Q: “A”, the proprietor of a fleet of ten They are original and unexpected in relation
taxicabs, decides to adopt, as his business to the products they endorse, thus, becoming
themselves distinctive service.
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The mere change in the corporate name is not A: Your proposed corporate name must be
considered under the law as the creation of a distinguishable from that of another
new corporation; hence, the renamed corporation.
corporation remains liable for the illegal
dismissal of its employee separated under
INCORPORATION
that guise. The change of name did not give
the corporation the license to terminate
employees without just or authorized cause. Q: What are the procedural steps to be
The situation was not similar to that of an taken for the registration and
enterprise buying the business of another incorporation of a corporation?
company where the purchasing company had A:
no obligation to rehire terminated employees a. A person or group of persons desiring
of the latter. The amendments of the AOI to to incorporate shall submit the
change the corporate name did not produce intended corporate name to the SEC
the dissolution of the former as a corporation. for verification. If the SEC finds that
(Zuellig Freight v. NLRC) the name is distinguishable from a
name already reserved or registered
Change of stockholders, change of owners do for the use of another corporation, not
not change the legal personality of the protected by law and is not contrary
corporation. to law, rules and regulations, the
name shall be reserved in favor of the
Change of name is not an authorized cause of incorporators.
just cause to terminate the employment of its b. The incorporators shall submit to the
employees. Change of name is not a mode of SEC the documentary requirements
dissolution. listed below.
- AOI that must conform with form
Q: Is there any revision under the RCC prescribed by the code
regarding registration and incorporation - Bylaws
of a private corporation? - Endorsement of appropriate
A: It added the part which requires person/s government agency
desiring to incorporate to submit the intended - Certification by the treasurer on
corporate name to the SEC for verification. the amounts of paid-up capital
c. Payment of filing fees
This is done online. Before you apply for
incorporation, you have to have your If the SEC finds that the submitted
corporate name to be approved by the SEC. documents and information are fully
compliant with the requirements of the RCC,
Q: What is the keyword again or the most other relevant laws, rules and regulations, the
important word? SEC shall issue the certificate of
incorporation.
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Q: When does a corporation commence its A: No. The suit will not prosper because there
corporate existence and juridical is no corporation yet. It did not acquire
personality? personality until it has acquired the approval
A: A private corporation organized under the of the SEC and the issuance of the certificate
RCC commences its corporate existence and of incorporation.
juridical personality from the date the SEC
issues the certificate of incorporation under Thus, the owner, whose real property, was
its official seal and thereupon the contributed by another person as the latter’s
incorporators, stockholders/members and subscription to the shares of stock of the
their successors shall constitute a body proposed corporation, pending SEC approval
corporate under the name stated in the AOI of the incorporation. The suit should be
for the period of time mentioned therein, directed against the treasurer who receive the
unless said period is extended or the property in trust for the corporation.
corporation is sooner dissolved in accordance
with law. Q: What about corporation created under
special law? When does it acquire legal
A corporation does not acquire legal personality?
personality from the mere execution of the A: A corporation created under a special law
AOI or its filing with the SEC. No amount of acquires legal personality upon effectivity of
good faith on the part of the incorporators that the special law creating it OR compliance
they are duly organized will suffice. It with the conditions imposed by such law for
commences its corporate existence and the commencement of corporate existence. In
acquires juridical personality from the date one case, a sports federation was registered
the SEC issues the certificate of with the SEC but the SC held the registration
incorporation under its official seal. was not enough to confer upon it legal
personality because the law creating sports
Q: Let’s say Juan dela Cruz contributed federation, at that time, required accreditation
property to a property to a corporation from the appropriate government agency
pending incorporation. So, it was received before it can acquire legal personality.
by the treasurer in trust of the
corporation. So, basically, that’s his In International Express v. CA, it was held
contribution or subscription. So there is a that although the sports federation was
subscription in the form of real property. registered with the SEC, it has not acquired
legal personality because the special law
While pending incorporation, it turns out requires that it must be approved with the
that Juan dela Cruz is not the real owner. DECS at that time.
The real owner surfaced and filed an
action for reconveyance against the Q: Not being registered, is it a corporation
proposed corporation. Will the suit by estoppel?
prosper?
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A: No. Because the president of the sports Just keep in mind that what the de jure can
federation is only one. He who represents that do, the de facto can also do.
unincorporated corporation must be liable for
all obligations that it incurred. The doctrine Q: What are the elements of a de facto
of corporation by estoppel can only be corporation?
invoked by the aggrieved party. Not someone A:
who benefited from the contract or a. Existence of a valid law under which
transaction. it may be incorporated;
b. Attempt in good faith to incorporate;
Q: What is a de facto corporation? and
A: A de facto corporation is one that is c. Actual use or exercise in good faith of
organized with colorable compliance with the corporate powers.
requirements of incorporation under the law
and allowed to exist and exercise the powers As such, if the law under which it is
of a corporation until its corporate existence incorporated is declared unconstitutional,
is assailed by the State in a quo warranto there is neither de jure nor de facto existence.
proceeding.
Q: Congress enacted a special law to create
That is why it is called a de facto corporation. a private corporation. Is it de jure, de
It is allowed to exist in fact. It has all the facto, corporation by estoppel or none of
powers of a de jure corporation. the above?
A: None of the above. It is not de jure or de
Q: What are the powers of a de facto facto because it was not created under a valid
corporation? law. Congress cannot enact a special law to
A: A de facto corporation has all the powers create a private corporation. It can only enact
and authority of a de jure corporation until it a special law to create a GOCC. A law
is ousted of its corporate existence. Its enacted by the Congress to create a private
existence cannot be assailed collaterally in a corporation is unconstitutional.
private suit but only in a quo warranto
proceeding. Thus, if a collection suit is With regard to the second element, attempt in
initiated by a de facto corporation, a motion good faith to incorporate, at the very least,
to dismiss filed on the ground that the means obtaining a certificate of incorporation
corporation has no power to sue, should not from the SEC. The execution of AOI and
prosper. A de facto corporation, like a de jure adoption of bylaws, per se, are not enough to
corporation, may sue and that the existence of warrant de facto existence. In other words,
such de facto corporation cannot be there is no bona fide attempt to incorporate
questioned in a collateral proceeding like a until the SEC at the very least issues the
collection suit. certificate of incorporation.
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There can be no corporation by estoppel if ISSUE: Can the President of UPC be held
there is only one person. At any rate, that liable?
person who represents the unincorporated
corporation is liable for all obligations RULING: Yes. The person acting or
incurred by the unincorporated corporation. purporting to act on behalf of a
corporation which has no valid existence
Q: What are the liabilities under the assumes such privileges and obligations is
doctrine of corporation by estoppel? personally liable for contracts entered into
A: All persons who assume to act as a or for other acts performed as such agent.
corporation knowing it to be without Moreover, the Court held that he was the one
authority to do so shall be liable as general who reaped the benefits resulting from it, as
partners for all debts, liabilities, and damages such, responsibility under the judgment falls
incurred or arising as a result thereof; on him.
provided, however, that when any such
ostensible corporation is sued on any
transaction entered by it as corporation or on It is not the corporation being made liable
any tort committed by it as such, it shall not because there is no legal personality. Instead,
be allowed to use its lack of corporate those who claim to be a corporation are liable
personality as a defense. Anyone who as general partners. They are liable beyond
assumes an obligation to an ostensible their supposed contribution to the corporation
corporation as such cannot resist by estoppel.
performance thereof on the ground that there
was in fact no corporation. Q: Can the corporation by estoppel be
sued and be impleaded as party
defendant?
A: Yes. Answer is in Macasaet vs Co.
MACASAET V. CO
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FACTS: Abante Tonite was sued by Co for FACTS: The corporation recruited
alleged libelous articles published by it. employees for overseas employment,
Petitioners filed a motion to drop Abante collected placement fees, but failed to
Tonight as party-defendant because they provide jobs for the applicants. Applicants
were not registered in the SEC and thus not a sued the corporation. Judgment rendered
juridical person that could be impleaded as a against the corporation. It turns out that there
party in a civil action. The RTC denied said was no such corporation registered with the
motion. SEC.
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RULING: No. The Court held that Kahn performance thereof on the ground that there
cannot invoke the doctrine because he was was no corporation.
the one who benefited from the transaction.
Only the aggrieved party and not the LOZANO V. DELOS SANTOS
offender may invoke the Doctrine of
Corporation by Estoppel. Moreover, in this
FACTS: Two associations of Jeepney
case, only Henri Kahn represents PFF, and he
drivers and operators in Mabalacat,
who represents an unincorporated
Pampanga agreed to unify to create a
corporation is the one personally liable.
consolidated corporation, however, they
were not able to actually consolidate and
register with the SEC. They agreed to elect
In a more recent case of Missionary Sisters of directors and officers who would supposedly
Our Lady of Fatima vs Alzona, the Court held run the consolidated corporation. The losing
that the doctrine of corporation by estoppel if party contested the result. Thus a suit was
founded on principles of equity and is filed with the RTC acting as a Special
designed to prevent injustice and unfairness. Commercial Court despite the fact that they
As such, while the doctrine is generally in fact have not actually consolidated.
applied to protect the sanctity of the dealings
with the public, nothing prevents it from ISSUE: Is there a Corporation by Estoppel in
application in the reverse. Such that a person this case?
who has assumed an obligation in favour of a
non-existent corporation, having transacted RULING: None. If there is no third party
with the latter as if it was duly incorporated, involved, the doctrine of corporation by
is prevented from denying the existence of estoppel will not apply. Corporation by
the latter to avoid the enforcement of the estoppel is founded on principles of equity
contract. and is designed to prevent injustice and
unfairness, and where there is no third party
Note: Case was previously discussed in De involved and the conflict arises only among
Facto Corporation. those assuming to form a corporation, who
knew it has not been registered, there is no
To summarize, an ostensible corporation corporation by estoppel.
when sued on any transaction entered by it as
a corporation or on any tort committed by it
as such shall not be allowed to use its lack of
corporate personality as a defense. NON-USE OF CORPORATE
CHARTER
As provided in Section 20 of the RCC,
anyone who assumes an obligation to an
ostensible corporation as such cannot resist REVISIONS UNDER THE RCC REGARDING
THE NON-USE OF CORPORATE CHARTER
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1. The period to organize and commence Q: When should the corporation formally
business is fixed at 5 years from organize and commence its business?
incorporation. Under the OCC, it was A: It can be said that a corporation has
within 2 years from incorporation. organized and commenced business if the
2. The SEC is given authority to place a conditions subsequent to the registration have
corporation under the delinquent status been complied with, to wit:
but only after due notice and hearing, that
is, if a corporation has commenced its a. it should adopt and file its bylaws;
business but subsequently becomes b. the board of directors should meet,
inoperative for a period of at least 5 elect a set of officers, adopt pertinent
consecutive years. board resolution and submit
3. A delinquent corporation shall have a information sheet regarding its
period of 2 years to resume operations officers to the SEC;
and comply with all requirements that the c. it should register its corporate name
SEC shall prescribe. Upon compliance by or business name with DTI;
the corporation, the SEC shall issue an d. it should register itself with BIR and
order lifting the delinquent status. Failure SSS;
to comply with the requirements and e. it should establish an office and start
resume operations within the period its business operations. (SEC-OGC
given by the SEC shall cause the Opinion No. 23-07, December 4,
revocation of the corporation’s certificate 2007)
of incorporation.
Q: What is the consequence if the
There are two grounds that would warrant corporation is placed in delinquent status?
revocation of the certificate of incorporation: A: The delinquent status shall have a period
a. If it does not commence and of 2 years to resume operations and comply
organize business within 5 years from with all requirements required by the SEC.
incorporation Upon compliance by the corporation, the
b. It commenced business but it SEC shall issue an order lifting the delinquent
becomes inoperative for a period of 5 status.
years consecutively.
If the corporation failed to comply and
4. The SEC shall also give reasonable notice resume operations within the period given by
to, and coordinate with the appropriate the SEC, it shall cause the revocation of the
regulatory agency prior to the suspension corporation’s certificate of incorporation.
or revocation of the certificate of
incorporation of companies under their
special regulatory jurisdiction.
BOARD OF DIRECTORS OR
TRUSTEES
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REVISIONS UNDER THE RCC REGARDING other relationship which could, or could
BOARD OF DIRECTORS OR TRUSTEES reasonable be received to materially
1. The term of trustee was modified for a interfere with the exercise of independent
period not exceeding 3 years from its judgment in carrying out the
term of one year in the OCC. responsibilities as a director.
Note: This is for non-stock corporations only Note: Independent directors are elected by
shareholders present or entitled to vote in
2. There is no residence requirement for the absentia during the election of directors.
members of the Board. They are subject to rules and regulations
3. The RCC requires the election of governing qualification, disqualification,
independent directors for corporations voting requirements, duration and term limit,
vested with public interest who should maximum number of board memberships,
constitute at least 20% of such Board. and other requirements that SEC prescribes.
4. RCC enumerated the corporations that
are vested with public interest; to wit: Q: Can you be an independent director if
a. Corporations covered by Sec. you are a substantial stockholder?
17.2 of SRC such as those whose A: Not allowed.
securities are registered with the
SEC, corporations listed with an Q: How about if you are the counsel or
exchange or assets of at least adviser of the corporation?
P50M, having 200 or more A: Not allowed.
holders and each holding at least
100 shares of a class of equity Q: If you are the relative of the controlling
shares stockholder?
b. Banks and quasi-banks, NSSLAs, A: Not allowed because you have a
pawnshops, corporations engaged relationship with the corporation that could
in money service business, interfere of your exercise of independent
preneed, trust and insurance judgment in carrying out your duties.
companies and other financial
intermediaries; and We can say that independent directors are the
c. Other corporations engaged in soul of the corporation because they make
businesses vested with public sure that the corporation and directors will
interest similar to the above, as always act for the best interest of the
may be determined by the corporation and always be guided by the
Commission norms of good corporate governance.
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Tri-level Hierarchy of Authority or Three There are acts which are reserved for the
Levels of Control stockholders and there are acts which are
1. Stockholders: have the residual power reserved for the board. There are acts that
over fundamental corporate changes, like should be decided by both that stockholders
amendments of the AOI; exercise acts of and the board. Save for these provisions in
ownership; they elect and appoint the the RCC or the bylaws, the board decides for
members of the board of directors. the corporation. The board exercises the
2. Board of Directors: exercise the powers of the corporation.
management powers; responsible for
corporate polices and the general Q: What is the business judgment rule?
management of the business affairs of the A: Questions of policy and management are
corporatio; they appoint the officers left to the sound discretion and honest
who’ll implement these policies and decision of the officers and directors of a
plans adopted. corporation, and the courts are without
authority to substitute their judgment for the
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judgment of the boards of directors. The the stockholders are not satisfied with the
board is the manager of the corporation, and way the board exercises its powers or
so long as it acts in good faith, its orders are manages the corporation, their remedies
not reviewable by the courts (Cua, Jr. v. consist of:
Tan; Sales v. SEC) 1. Replacing the board members upon
expiration of their term;
Courts are barred from intruding into the 2. Vote for their removal under Section 27
business judgments of the corporation when of the RCC (vote needed: 2/3 of the
the same are made in good faith. OCS); or
(Balinghasay v. Castillo) 3. File a derivative suit on behalf of the
corporation to set aside the board’s
So policies, management and questions wrongful acts
related to this are left to the discretion of the But not to supplant the board’s business
board of directors and the officers that they judgment for their own.
have appointed.
To repeat, save for the authority granted to
The courts have no power to replace the them by law and the bylaws, stockholders
judgments of the board of directors. The cannot exercise corporate powers and have
stockholders cannot supplant the will of the no management rights. In the absence of
board for the will of the stockholders. That is gross negligence or bad faith, the board may
why they elect the board to run the not even be held liable for mistakes or errors
corporation. As long as the board acts in good in directing the affairs of the corporation.
faith and not contrary to laws, the acts of the
board are not reviewable by the courts and Q: Can the stockholders pass a resolution
cannot be overturned by the stockholders. revoking a board resolution in making an
investment and say that that is not a good
Q: Can the court, for example say, the price and not a good buy?
decision to buy this property is void, the A: That’s not allowed under the business
decision to invest in this enterprise is void? judgment rule.
A: No way. The board of directors decide
what is best for the corporation. As long as Exceptions to the business judgment rule:
those acts are in good faith and not contrary 1. If the act is contrary to law; or
to law, they bind the corporation. 2. If the act is done in bad faith
Similarly, under the same business judgment No amount of business judgment will make a
rules, stockholders cannot interfere with the void or invalid act valid. No amount of good
board in conducting the business affairs of intention can make a void act valid if it is
the corporation. They cannot, for instance, contrary to law.
revoke resolutions of the board or repudiate
their acts on account of mere disagreement. If
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Q: Can a corporation declare dividends would you pay bonuses to the officers when
based on revaluation surplus invoking the you are losing money?
business judgment rule? An example of
revaluation surplus is when a property is Conclusion: No amount of business judgment
acquired years ago for 5 million pesos, can make these resolutions valid.
revalued based on current price of 10
million pesos. Can the corporation declare The business judgment rule is not absolute.
dividend from the 5 million pesos (10M- Corporate acts cannot be justified under the
5M) re-appraisal or revaluation surplus business judgment rule if they are contrary to
invoking the business judgment rule? law. For instance, the board cannot invoke
A: No, because the board cannot declare this rule to declare dividends when there is no
dividends from revaluation surplus. It is not surplus profit or declare dividends out of re-
the surplus profit contemplated by law to appraisal surplus, or to pay compensation to
warrant dividend declaration. directors, as this power is lodged with the
stockholders. It cannot be relied upon to
Q: The corporation losing money for many support a request for a new stock and transfer
years so the board decided to pass book on the pretext that the original is lost
resolutions to motivate the board, the (when in fact it is not) and declare entries in
officers, stockholders to work harder for the supposed lost stock and transfer book as
the corporation that will result to profit for invalid. (Provident International
the corporation. So, they were armed with Resources v. Joaquin Venus, et al.)
good faith. The first resolution is
dividends for the stockholders. Was that PROVIDENT INTERNATIONAL v. JAOQUIN
valid? VENUS
A: Void because they cannot declare
dividends without surplus profit.
FACTS: The stock and transfer book (STB)
is not in the possession of the majority
Q: Second, they decided to pay
directors. There’s a change of control. There
compensation and bonuses to the
is a new controlling block in the corporation.
directors.
The STB is in the possession of the CorSec
A: Void because payment of compensation
but who sided with the minority block. The
for directors as such directors must be
new controlling block applied for a new STB
authorized by the bylaws or approval by the
and made a representation to the SEC that the
stockholders holding at least majority of the
old STB is lost. It turned out that it’s not lost.
OCS.
After obtaining a new STB, the board passed
a resolution that the entries on the old STB
Q: Third, payment of bonuses to officers.
were void and only the entries in the new
A: Void. Payment of bonuses to officers even
book are valid invoking the business
when the corporation is losing money. Why
judgment rule.
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ISSUE: Can the board invoke the business The only positions created under the RCC:
judgment rule? president, secretary, treasurer and
compliance officers for those corporations
RULING: NO. The board cannot invoke this vested with public interest.
rule to declare that all the entries in the new
book are valid and in the old book are void. It But the corporation may have a need for more
is for the court to decide. positions, more officers or more committees.
So, the board can create those positions.
Q: What if the previous CorSec refuse to
return the STB, what is your remedy? Examples: retirement committee, personnel
A: For bar exam purposes, your remedy is committee, legal oversight committee,
mandamus to compel the former CorSec to compensations committee, etc.
return the STB. You can even include a
prayer of mandatory injunction to direct the NOTE: The board cannot create a corporate
former CorSec to turnover the STB asap. You office. A corporate office is created by the
can also file a complaint for theft because the bylaws and not by the board of directors.
STB is a property of the corporation.
Q: What makes it a corporate office? Why
Q: Can the board of directors or trustees is it important?
create positions or committees? A: It is important to determine if it is a
corporate office or a non-corporate office. If
A: Yes, the board has the power to create
it is a corporate office, the holder is a
positions, committees, or offices as may be corporate officer and any issue about his
necessary to conduct the business affairs of election, appointment or removal is always
the corporation. This is covered by the an intra-corporate dispute cognizable by the
business judgment rule. It was held that the RTC.
determination of the necessity for additional
offices and/or positions is a management If he is now holding a non-corporate office,
he is not a corporate officer. Any issue about
prerogative which courts are not want to
his removal is a labor dispute cognizable by
review in the absence of any proof that such the Labor Arbiter.
prerogative was exercised in bad faith.
(Filipinas Port Services v. Victoriano Go) Q: What makes it a corporate office then?
A: There is only one test: is that office
This SC decision (Filipinas Port case) is now specified in the bylaws of the corporation?
part of the RCC empowering the board to
Scenario: For instance, the board created the
create positions, committees or offices. So,
office of VP for Legal and appointed the
the board can create a VP for legal, for person who will occupy the said position.
administration, for finance, for personnel, so
far and so on. Q: Is the creation of the office of VP for
Legal valid?
A: Yes, business judgment rule.
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Q: Can the board appoint the holder of the if it will act as a small BOD, will act on
VP for Legal? matters under the board’s competence - then
A: Yes. the board cannot create it.
Q: If the lawyer who heads the legal Q: Why can’t it make a small board?
department is removed, where does he go? A: It is the stockholders who can create such
A: Labor Arbiter because he is not a execom.
corporate officer. His position is not specified
in the bylaws of the corporation. So you can only have an execom if authorized
by the bylaws. The board cannot create it.
Q: What if the bylaws authorized the The board appoints the members but it must
board to create a corporate office and the be created first by the bylaws of the
board pursuant to that authority created corporation.
the office of VP for Legal and appointed
the person who will occupy it. Is the Q: What is this execom?
appointment valid? A: It is a small board that acts on whatever
A: Yes. matters that fall on the board’s competence.
Whatever the board can do, this small board
Q: Is the creation of the corporate office can also do.
valid?
A: It’s not. It is an ordinary office but not a Q: What if it is named execom but will not
corporate office. Even though the board is perform the said acts under Sec. 34?
authorized by the bylaws, the board cannot
Execom by name only.
create corporate office.
A: The board can create it under the business
Q: How do you make it a corporate office? judgment rule.
A: Amend the bylaws and make that office
part of the roster of offices specified in the Q: What is the term of the board of
bylaws. directors?
A: Section 22 of the RCC provides that the
In fact, this power is not explicit under the
board of directors shall hold office for one
RCC which provides that the board of
directors may create special committees of year. The Supreme Court has construed the
temporary or permanent nature and provision to mean that “the term of the
determine the members’ term, composition, members of the board of directors shall be
compensation, powers and responsibilities. only for one year; and that their term expires
one year after election to the office.” Clearly,
However, the board cannot create the the said provision is explicit in fixing the term
executive committee referred to under
of office of directors to only one (1) year. The
Section 34 of the RCC nor create a corporate
office, because these are required to be rationale is to protect the corporation, as well
created by the bylaws. as its creditors and the public dealing with it
so that if an improvident or wrongful act is
Q: Can the board create an execom? committed by the board of directors, the
A: If that committee will function like an subsequent board can redress or prevent the
execom under Sec. 34 of the RCC - meaning
perpetration of the wrong, and thereby
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protect its stockholders, creditors and the and the incumbent is holding the succeeding
public have dealings with it. The said term.
provision cannot be voided by the mere
expedient of providing otherwise in the Q: Can the bylaws then provide a 3-year
bylaws. Thus, bylaws of a stock corporation period for the term of director of a stock
cannot provide for a three-year term for the corporation?
members of its BOD. (Re: Query on A: No because the law is clear. It is one year
Validity of Bylaws, SEC-OGC No. 0812, and there is nothing in the law that says
May 17, 2012) unless otherwise provided by the bylaws of
the corporation. It’s for non-stock
Q: What about the provision that until corporation where you can have up to 3 years.
their successors elected and qualified?
A1 (Dean): It is not part of the term of the Q: What is the term of the board of
director so the holdover period is not part of trustees for a non-stock corporation?
the term of the director. During this holdover A: Trustees shall be elected for a term not
period, the director is allowed to exercise the exceeding 3 years. It can be one, it can be two
functions of the board and the powers of the or 3 years.
BOD but the holdover period is no longer part
of the regular term. Q: Can we say that the functions of the
holdover board is limited?
A2 (Slides): It means that if his successor is A: No. Whatever the regular board can do,
not elected and qualified, the director or the holdover board can also do.
trustee may continue to perform his duties in
a hold-over capacity. The holdover period is Q: What is the rationale for the holdover
not, however, part of the term of office of the period or holdover director?
director or trustee. A: Because it’s possible that there is no valid
election, no valid annual stockholder’s
It means that the term of the members of the meeting to elect the directors, you may not
BOD shall be only for one year; their term have a quorum, it is postponed. In the
expires on year after election to the office. meantime, the holdover board will run the
The holdover period – that time from the affairs of the corporation. The board shall
lapse of one year from a member’s election continue managing the corporation pending
to the Board and until his successor’s election the election of their successors.
and qualification – is not part of the director’s
original term of office, not is it a new term; Q: If a hold-over director resigns, how do
the holdover period, however, constitutes you fill the vacancy?
part of his tenure. Corollary, when an A: If a hold-over director resigns, the vacancy
incumbent member of the BOD continues to is due to the expiration of term and not
serve in a holdover capacity, it implies that resignation. Accordingly, the vacancy can
the office has a fixed term, which has expired, only be filled by the stockholders in a
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meeting called for the purpose and not by the A: The directors and trustees must have all
board of directors even though the remaining the qualification under Section 22, in relation
directors may still constitute quorum. to Sections 10, 13, and 91 of the RCC as well
as those provided under the bylaws, and none
Q: What is the distinction between term of the disqualifications under Section 26 of
and tenure? the RCC and the bylaws.
A: Term is the time during which the officer
may claim to hold the office as a right and Q: What are the qualifications under the
fixes the interval after which the several RCC?
incumbents shall succeed one another. The A:
term is fixed by statute and it does not change a. Since any person, partnership,
simply because of the office may have association or corporation, singly or
become vacant, nor because the incumbent jointly with others but not more than
holds over in office beyond the end of the 15 in number, may now organized a
term due to the fact that a successor has not corporation for any lawful purpose/s,
been elected and has failed to qualify. directors or trustees need not be
natural persons. However, juridical
Term is distinguished from tenue in that an persons, as directors, need to be
officer’s “tenure” represents his actual represented by their nominees.
incumbency. The tenure may be shorter (or, b. If the director or trustee is a natural
in case of holdover, longer) the term for person, he must be of legal age.
reasons within or beyond the power of the c. The director must own at least 1 share
incumbent. The former is fixed while the of stock of the corporation and the
latter extends until his successor is duly trustee must be a member of the
elected and qualified. (Valle Verde Country corporation.
Club v. Victor Africa) XPN: in case of an independent
trustee under Sec. 92 of the RCC
In short: d. The number of directors shall not be
1. Term: period provided by law more than 15 while the number of
2. Tenure: actual incumbency of the director trustees may be more than 15.
e. Except with respect to independent
Therefore, tenure may be longer or shorter trustees of nonstock corporations
than the term. Longer if there is a holdover vested with public interest, only a
period. Shorter in case of resignation, death, member of the corporation shall be
insanity or any vacancy before the expiration elected as trustee.
of the term set by law. f. Trustees of educational institutions
organized as nonstock corporations or
Q: What are the qualifications of directors religious societies shall not be less
or trustee? than 5 nor more than 15. However,
with respect to educational
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institutions, the number of trustees was held for 15 years cannot give rise to a
shall only be in multiples of 5. vested right and estoppel cannot forestall a
challenge against as an act that is contrary to
Q: Can juridical persons act as directors? law.
A: If they can act as incorporators then they
can act and be appointed as directors. But Q: What is another violation in the code as
obviously in the real world that directors are cited in the case of Grace Christian High
natural persons. School?
A: You cannot have a permanent
Q: Let’s say ABC is an incorporator. ABC representation in the BOD/T. It violates the
needs an agent, nominee or representative. one-year term limit.
The corporation adopted a resolution
naming Juan dela Cruz as its nominee. Q: How many trustees are allowed in a bar
Can Juan dela Cruz be elected as director review center?
on behalf of ABC? A: It can be more than 15 because trustees of
A: No, unless he is a stockholder or member non-stock, non-profit corporation may be
of the corporation. more than 15.
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Q: Is it necessary that the director be the The private respondents argued that the
owner of the share of the corporation in his voting trust agreement did not divest the
own right to qualify as such director? petitioners of their positions as president and
A: Generally, the director must have full executive vice-president of ALFA so that
ownership of the shares, i.e. both the legal service of summons upon ALFA through the
title and beneficial title. However, based on petitioners as corporate officers was proper.
Lee vs. Court of Appeals, the Supreme Court
ruled that a trustee, under a voting trust ISSUE: Whether or not the execution of the
agreement, can qualify as a director, and that voting trust agreement deprives the
in order to be eligible as a director, what is stockholder of his position as director of the
material is the legal title to, and not the corporation;
beneficial ownership of, the stock as
appearing on the books of the corporation. RULING: Yes. By its very nature, a voting
similarly, when a director loses his legal title trust agreement results in the separation of
over all his shares, he automatically forfeits the voting rights of a stockholder from his
his director position. Lee vs. CA other rights. The execution of a voting trust
agreement, therefore, may create a
LEE v. CA dichotomy between the equitable or
beneficial ownership of the corporate shares
FACTS: A complaint for a sum of money of stockholders, on the one hand, and the
was filed by the ICB against the private legal title thereto on the other hand.
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thought if they allow BDO to come in, BDO qualifications for directors other than the
may gobble up Equitable and merge with mandatory requirement under the RCC.
BDO. Those who [inaudible] to disqualify
BDO, nominees could not sit in the board. Therefore, can the bylaws say that a director
must own 1000 shares? Yes.
I remember I disqualified the nominees of
BDO on this ground. They are not 100,000 shares? Yes.
stockholders of record of the bank. They
made a mistake that the share ownership 1,000,000 shares? Yes.
was not in their names. Even though they
acquired millions of shares of the bank, the As long as they are not intended to deprive
ownership of the shares is not in their names minority representation.
but in the name of their broker. So the broker
acquired the shares on behalf of BDO and Art. 46 of the RCC makes it very clear that
they forgot to maintain ownership over these the bylaws may prescribe additional
shares in their names in the books of the qualifications for directors and trustees of the
corporation. So they were disqualified and corporation.
cited Lee vs. CA.
Q: Now, can the corporation impose
So you have to be a stockholder of record qualifications not set forth by law and not
on the date fixed by the bylaws or if not, found in the bylaws of the corporation?
upon your election as the director of the Can they require that only college degree
corporation. holders may be elected as director of the
corporation by way of board resolution?
Don’t get me wrong, BDO is now our client. Not allowed. If they want to prescribe more
qualifications, they have to be in the bylaws.
It cannot be approved by mere board
Q: Can the bylaws require that the resolution.
director own more than 1 share of stock?
Yes, the bylaws may enlarge the share Q: Are directors or trustees required to be
ownership requirement provided that it is not Filipino citizens?
intended to deprive minority representation. Similar to the OCC, the RCC does not require
Filipino citizenship for the directors or
As provided under Section 46 of the RCC, trustees of a corporation. however, if the
additional qualifications of directors and corporation is engaged in nationalized
trustees may be prescribed under the bylaws activities, citizenship becomes a
of the corporation. qualification. Foreigners cannot be appointed
to the board of corporations engaged in
In the absence of a provision in the bylaws, a wholly-nationalized activities. For partly
corporation cannot require additional nationalized activities, foreigners can be
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elected to the board of directors in proportion share in the capital of such entities, like
to their foreign equity as allowed by law. mining or development of natural resources,
in which the foreigners may even own 40%
This was asked in the bar: of the capital. 1985 Bar exam.
b. Supposing that Bohol Mining Somebody asked me this question: “Sir, can
Corporation is 70% Filipino-owned while they get proxy from Filipinos, because they
the 30% remaining stocks are owned by only need 0.3% (referring to the 2nd answer
foreigners, how many foreigners can be in the slide)? They need certain number of
elected to the board? shares to be able to own X number of shares
to be able to get 3 seats in the board. Is that
Answer: possible?”
It is not possible because those are not
a. The petition will not prosper. The election foreign-held shares, right? So they can be
of aliens as members of the board of directors represented to the board in proportion to their
or governing body of corporations or actual [inaudible]. It cannot include Filipino
associations, engaging in partially owned.
nationalized-activities, are allowed by law, in
proportion to their allowable participation or Q: What can they do?
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They can buy additional shares as foreigners. of term limit and number of board
They cannot get proxy form Filipino memberships for independent director.
stockholders.
You know, the retired members of the SC and
CA, they get elected as independent
INDEPENDENT DIRECTOR
directors.
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public company for the purpose of electing the number of independent directors for
independent directors. banks and public companies should
constitute 20% of the board, but not less than
The requirement of electing independent two (2).
directors was already laid down in the SRC
for public companies and in RA 8791 or the In any case, it will be best for affected
General Banking Law of 2000 for banks. corporations to have at least two (2)
Similarly, this requirement was listed in BSP independent directors to ensure more
Circular No. 459, Series of 2004 as a effective corporate governance.
precondition for banks and other non-bank
financial institutions to exercise quasi- This is a potential bar exam question:
banking functions.
Q: CMCI is required by the SRC to have
However, unlike the RCC which requires the two independent directors in its Board.
above-mentioned companies to have Thus, the Bylaws of CMCI provides for
independent directors constituting at least the segregation of casting of votes for the
twenty percent (20%) of the board, Section election of their regular and independent
38 of the SRC provides that the seats for directors, as follows:
independent directors may be limited to two
(2) even if this number is less than twenty “1. That the segregation of the votes for
percent (20%) of the total board seats. regular and independent directors is
Specifically, the SRC only requires public acceptable, such that one vote cast per
companies to have “at least two (2) independent director (since there are only
independent directors or such independent two nominees for independent director)
directors shall constitute at least twenty would already be sufficient to elect them.
percent (20%) of the members of such board, On the other hand, for the regular
whichever is the lesser.” directors, the nominees with the highest
votes cast in their favor would be elected.
On the other hand, Section 15 of the GBL Under this procedure, the losing nominee
provdes that “The provisions of the for regular director, even if he/she gets a
Corporation Code to the contrary higher number of votes than the
notwithstanding, there shall be at least five independent directors, would still not be
(5), and a maximum of fifteen (15) members elected.”
of the board of directors of bank, two (2) of
whom shall be independent directors.” While Is the segregate casting of votes for regular
the GBL did not mention the twenty percent and independent directors sanctioned by
(20%) rule on independent board seats, it is the Corporation Code?
submitted that the GBL and SRC should both The segregate casting of votes for regular and
be harmonized with the RCC instead of independent directors is not contrary to the
favoring their repeal or amendment. Thus, Corporation Code. The segregation of the
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voting for regular directors and independent name, multiplied by the number of directors
ones is a practical device in order to ensure to be elected, inclusive of the independent
that at least two independent directors are directors.
elected to the CMCI’s member Board of
Directors in accordance with SRC Rule 38. Q: How do you determine who are the
regular and independent directors of the
If you have 10 directors, and this corporation corporation?
is impressed with public interest, they require Those who obtained the highest number of
to have independent directors comprising votes among the nominees for regular
20% of the total directors. So if you have 10, directors are elected as such regular directors.
2 of them must be independent directors. Those who obtained the highest number of
votes among the nominees for independent
Q: How many votes can a stockholder directors are elected as such independent
cast? directors.
He can cast votes based on this formula:
Stocks in his name in the books of the Q: How do you call that?
corporation x number of directors to be Segregation of votes for the regular and
elected. independent directors.
Q: In our example, what can he do with the The top 8 among the nominees of the regular
10,000,000 votes? are elected as such. The top 2 among the
He can cumulate all of those votes in favor of independent directors are elected as such,
1 nominee for regular or 1 nominee for even if the votes for the independent director
independent; or he can spread or distribute may be less than the 9th or 10th nominee for
those votes among nominees for regular regular director.
directors or nominees only for independent
directors, or he can distribute those shares to Q: Why is it that you cannot elect
all 10 nominees for directors, so long as the independent to take the place of the
votes cast will not exceed the stocks in his regular directors?
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Because they may not have the qualifications founder’s shares. They are ceded as directors
of independent directors. of the corporation for a period not exceeding
5 years from the date of incorporation.
That’s why you need segregation of the votes
for regular and independent directors. B. When so authorized in the bylaws or by a
majority of the board of directors, the
stockholders or members may also vote
ELECTION OF DIRECTORS
through remote communication or in
absentia: Provided, That the right to vote
Q: What are the revisions under the RCC through such modes may be exercised in
regarding election of directors? corporations vested with public interest,
notwithstanding the absence of a provision in
A. The right of each stockholder or member the bylaws of such corporations.
to nominate any director or trustee is subject
to the exclusive right reserved for holders of Q: When can a stockholder participate
founders’ shares to be voted as directors. through remote communication or in
absentia?
Q: What does it mean? 1. If authorized by the bylaws;
We all know that only a stockholder can 2. Even if not authorized by the bylaws,
nominate a director; or a member can if approved by the majority of the
nominate a trustee to the corporation. board of directors; or
However, the right of a stockholder to 3. If not in the bylaws, but for those
nominate a director is subject to the right of corporations vested with public
the holders of founder’s shares to be voted as interest.
directors.
It does not really matter if you have no
Q: In what sense? If the holders of the provision in the bylaws for remote
founder’s shares don’t have enough shares communication or in absentia or if there is a
to be assured of a board seat, can they be provision in the bylaws for texting or sending
elected as directors just the same? votes through SMS or Wechat or Whatsapp.
Yes. That’s the concept of founder’s shares. It can still be allowed as long as the board
They have the right to be voted as directors if approves it by majority vote, and the board
given that right in the articles of adopts the mechanism to govern voting by
incorporation. electronic communication.
Q: Does it matter how many shares they C. A stockholder or member who participates
own? through remote communication or in
Ex. 15 directors, 2 members of founder’s absentia shall be deemed present for
shares with the right to be elected in the board purposes of quorum.
of directors. You can only elect 13. The 2
(seats) are reserved for the holders of
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D. it added a provision that the directors or Q: What do you mean by quorum in the
trustees elected shall perform their duties as election of directors of the corporation?
prescribed by law, rules of good corporate It is the majority of the outstanding capital
governance, and bylaws of the corporation. stock.
Q: What are the requisites for the election Q: When you compute the majority of the
of the directors or trustees to be valid? OCS, do you include the non-voting
preferred shares?
a. Except when the exclusive right to be Non-voting preferred shares are not included
voted as directors is reserved for in OCS to elect directors of the corporation.
holders of founders’ shares under It is not one of the 8 cases when the non-
Section 7 of the RCC, every voting shares can vote.
stockholder or member has the right
to nominate the director or trustee to Q: What about in case of amendment of
be elected. AOI or any of the 8 cases under Section 6
b. There must be a notice of meeting of the RCC. Are non-voting preferred
sent to the stockholders in accordance shares part of the OCS?
with the form and mode under the Yes.
bylaws. Section 50, RCC.
By the way, for stockholders/ meeting, it is
Q: Can the notice be sent electronically or not the number of persons present that will
publication or manually? give rise to a quorum, but shares represented.
It depends on what the bylaws provide. Now,
you can do it electronically, as long as you Q: Is it possible to have a quorum with
can prove that the recipients received a copy only 1 person present?
of the notice. Yes, if he owns majority of the OCS.
c. The owners of the majority of the I remember when I was still a Corporate
outstanding capital stock or the Secretary of a bank and many subsidiaries,
majority of the members entitled to and some of those subsidiaries have meetings
vote must be present, either in person abroad. I would attend as CorSec. The first
or by a representative authorized to question always asked: “Mr. Corporate
act by a written proxy. If voting Secretary, do we have a quorum?”
through remote communication or in
absentia will be allowed, such voter, I would always say: “Mr. Chairman, you are
voting through said means, shall be my quorum” because he has the proxy to the
deemed present for purposes of shares of stock of the bank as the parent
counting the majority/quorum. company of the subsidiaries. Only 1 person
present, but because was a proxy to 99.9% of
the corporation, then we have a quorum.
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d. The meeting must be presided by the Q: If you have 6 trustees. How many votes
officer indicated under the bylaws. can a member cast?
6 votes, right? But not more than 1 vote for 1
Q: In case of default, who presides during candidate, unless cumulative method of
the stockholders’ meeting? voting is allowed by the bylaws of the non-
It’s the chairman. No longer the president, stock corporation. The nominees receiving
but you can have a different person in the the highest numbers of votes shall be elected
bylaws, but usually it is the chairman. as the directors or trustees, subject to the
qualification that if there are independent
e. The election must be by ballot if directors then nominees receiving highest
requested by any voting stockholder number of votes among nominees for regular
or member. directors are elected as such, while nominees
receiving highest number of votes among
f. For stock corporations, the nominees for independent directors are
stockholders may cast such number of elected as such independent directors.
votes based on the shares registered in
their names in the books of Those directors must possess all of the
corporation multiplied by the whole qualifications and none of the
number of directors to be elected. disqualifications under the Code and the
bylaws of the corporation.
g. On the other hand, for non-stock
corporations, unless otherwise
provided in their articles of
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If they are elected despite the lack of Q: What is the rationale for this?
qualification, the SEC may motu proprio or To help minority obtain representation in the
upon motion may remove them as directors. board of directors. We said that in a
corporation, it is a numbers game. Paramihan
Q: How many votes are stockholders ng shares. More shares, more say in the
entitled to cast? corporation. if you only have 100 shares out
For stock corporations, the stockholders may of 100,000,000 shares in the corporation,
cast such number of votes based on the shares then it is impossible to be elected as director,
registered in their names in the books of the unless the other stockholders owning
corporation, at the time specified in the minority shares will cumulate all of their
bylaws, or by the board of directors or votes in favor of one nominee for one
trustees, multiplied by the total number of director.
directors to be elected.
I know a person, every year he gets elected
To illustrate, if a stockholder owns one as a director even though he has only few
thousand (1,000) shares and there are fifteen shares in his name. he would campaign to
the minority stockholders, “Give me your
(15) directors to be elected, said stockholder
proxy, and I will be your voice in the
is entitled to cast a total of fifteen thousand corporation. I will fight for your rights.” The
(15,000) votes. minority stockholders would then cumulate
their votes and give to this particular
Q: The important question here is, can the stockholder. So every year he gets elected as
bylaws deny to a stockholder the right to director. That cannot be exercised without
cumulative method of voting? cumulative voting.
Remember when we said that if the
stockholder owns 1,000,000 shares, there are
10 directors to be elected, then he has
10,000,000 votes. He can cumulate that vote
in favor of one nominee only if he wants to.
He can disperse or distribute among them, or
among regular nominees only or among
independent nominees only, or he can just
cumulate those votes to 1 nominee.
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Q: May the Board of Directors create Q: What about if the bylaws allows the
positions and offices?
Board to create offices and the Board,
A: The Board can also create ordinary
positions, offices and even departments pursuant to that authority, created the
under the Business Judgment Rule. However, office for legal and appointed the person to
the board has no power to create corporate occupy it. Thereafter, that person was
officers without first amending the corporate removed. Where should he go – the Labor
bylaws to include therein the newly created Arbiter or the RTC?
office. Though the board may create A: The Labor Arbiter because despite the
appointive positions, the persons occupying
authority granted under the bylaws, the Board
such positions cannot be viewed as corporate
officers under Section 24 of the RCC. cannot create a corporate office.
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Treasurer; (3) Secretary; and (4) such other RULING: The Supreme Court said that he is
officers as may be provided for in the bylaws. a corporate officer because his position is
required by law and likewise appearing in the
bylaws of the corporation.
WESLEYAN UNIVERSITY-PHILIPPINES V.
MAGLAYA, SR. (2017)
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and the Secretary Pro-Term to execute a designate the officer who will perform
power of attorney to a designated bank specified acts on behalf of the
officer clothing him with authority to corporation.
direct and manage corporate affairs,
including the appointment of legal In one case, it was held that a board
counsel. resolution authorizing a corporate officer
to obtain a law includes the authority to
If the corporation is a defendant or a assign receivables to secure the loan if the
plaintiff and attends pre-trial, the agent or resolution empowers the officer to agree
representative of the corporation must be to the terms and conditions of the loan
equipped with a Special Power of and to sign the implementing documents.
Attorney to represent the corporation. If
he is a natural person, it must be a Special PEOPLE’S AIRCARGO AND WAREHOUSING
Power of Attorney. If it is a corporation, CO., INC. V. COURT OF APPEALS AND
that authority comes by way of a board
SAÑO (1998)
resolution adopted by the Board,
confirming the authority of this lawyer to
represent the corporation and agree on Even in the absence of authority from the
those points that have been taken up articles of incorporation and/or the
during the pre-trial conference. bylaws or from the board of directors, the
acts of the officer are binding on the
FACTS: corporation if such acts are ratified by the
The lawyer who represented Citibank in corporation, either subsequent thereto or
this case was not equipped with a board under the doctrine of apparent authority.
resolution. What he had was an
appointment from the Executive Officer The Supreme Court held that in the
of Citibank Corporation. absence of charter or bylaw provision to
the contrary, the president is presumed to
ISSUE: Is that [appointment from the have the authority to act within the
Executive Officer] sufficient to authorize the domain of the general objectives of its
lawyer to represent the corporation? (YES) business and falls within the scope of his
usual duties, and even if a certain contract
RULING: It is sufficient because under the is outside the usual powers of the
bylaws of the corporation, that Executive president, the corporation’s ratification of
Officer is authorized to appoint the lawyer to the same and accordance of benefits
represent the corporation. Therefore, he make it binding.
derives authority from the bylaws of the
corporation.
Q: What is the doctrine of apparent
GREAT ASIAN SALES CENTER authority?
CORPORATION V. COURT OF APPEALS A: The doctrine of apparent authority
(2002) provides that a corporation will be estopped
from denying the agent’s authority if it
knowingly permits one of its officers or any
The board, on the other hand, as other agent to act within the scope of apparent
previously discussed, has the power to
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authority and it holds him out to the public as TERP CONSTRUCTION CORPORATION V.
possessing the power to do those acts. BANCO FILIPINO SAVINGS AND
MORTGAGE BANK (2019)
ADVANCE PAPER CORPORATION V. ARMA
TRADERS CORPORATION (2013)
Although an officer acts without, or in
excess of his actual authority if he acts
Apparent authority is derived not merely within the scope of an apparent authority
from practice. Its existence may be with which the corporation has clothed
ascertained through (1) the general him, by holding him out or permitting
manner in which the corporation holds him to appear as having such authority,
out an officer or agent as having the the corporation is bound thereby in favor
power to act or, in other words, the of a person who deals with him in good
apparent authority to act in general, with faith in reliance on such apparent
which it clothes him; or (2) the authority, as where an officer is allowed
acquiescence in his acts of a particular to exercise a particular authority with
nature, with actual or constructive respect to the business, or a particular
knowledge thereof, within or beyond the branch of its continuously and publicly,
scope of his ordinary powers. It is not the for a considerable time.
quantity of similar acts which establishes
apparent authority, but the vesting of a FACTS:
corporate officer with the power to bind This case is about an issuance of a bond
the corporation. by TERP Construction with a yield of
8.5%. One of the investors is Banco
FACTS: Filipino. The SVP of TERP Construction
The corporation purchased paper paid more than 8.5% interest. Those
products from the seller-corporation and payments were not objected to by TERP
furnished a contract signed by the officers Construction.
of the buyer-corporation. At a certain
point, they were not paid. So the seller- ISSUE: Can Banco Filipino enforce payment
corporation sued the buyer-corporation. of interest higher than the guaranteed yield?
The buyer-corporation repudiated the (YES)
authority of those officers, saying that
they were not authorized by the board to RULING: The Supreme Court said yes
enter into those contracts. under the Doctrine of Apparent Authority,
particularly because this SVP made payments
ISSUE: Is the buyer-corporation bound by above the guaranteed yield and those
the purchases made by those officers? (YES) payments were recognized by the
corporation.
RULING: Those officers were entrusted
with the management of the corporation.
They are being clothed with apparent
Q: Cite jurisprudence where the Supreme
authority by the corporation.
Court applied the doctrine of apparent
authority.
A:
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RURAL BANK OF MILAOR (CAMARINES which the bank and guaranteed that
subsequent releases from the loan would
SUR) V. OCFEMIA, ET AL. (2000)
be made directly to the seller, but the
manager released the loan instead to the
When a bank, by its act failure to act, has buyer who, however, failed to pay the
clearly clothes its manager with apparent seller.
authority to sell an acquired asset in the
normal course of business, it is legal FACTS:
obliged to confirm the transaction by The owner of a real property sold and
issuing a board resolution to enable the transferred title to the buyer on the
buyers to register the property in their strength of a certification by Allied Bank
names. It has a duty to perform necessary that the buyer has obtained a loan and that
and lawful acts to enable the other parties loan is earmarked in favor of the seller as
to enjoy all benefits of the contract which payment for the purchase price.
it had authorized. But, eventually, Allied Bank refused to
recognize the binding effect of that
FACTS: certification signed by its manager.
The manager sold a property and Allied Bank argues as follows: (1) That
acquired asset or property. The buyer certification is a guaranty and the bank is
paid the purchase price and went to the not allowed by law to enter into a
Register of Deeds to cancel the title of the guaranty agreement; and (2) even
seller and to issue a new title to the buyer. assuming that it is not a guaranty, we did
The Register of Deeds required the not authorize the manager to sign that
submission of a board resolution to certification.
confirm the authority of the officer who
signed the Deed of Sale. He was given the ISSUES:
run around by the corporation until the 1. Is that certification a guaranty? (NO)
seller-corporation repudiated or did not 2. Is the manager authorized to sign the
recognize the authority of the manager certification? (YES)
who signed the deed of sale.
RULING:
ISSUE: Is the corporation bound with the 1. If the bank only certifies that there is
sale entered into by the manager? (YES) a loan granted and the loan is for this
particular transaction, it is not a
RULING: The Supreme Court said yes, guaranty. So, the bank is not making
following the Doctrine of Apparent a promise or a commitment to pay. It
Authority. is just certifying a matter of fact.
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the transaction is not related to the function Q: What is the concept of emergency
of the officer of the corporation. quorum under the RCC?
A: Emergency quorum means that, in certain
cases, stock or membership represented in a
meeting called by the SEC may constitute a
REPORT OF ELECTION OF quorum to elect directors of corporation even
DIRECTORS, TRUSTEES AND though the number of shares or members
OFFICERS, NON-HOLDING OF present is less than majority of the
ELECTION AND CESSATION FROM outstanding capital stock or total members, or
OFFICE the quorum required under the articles and
bylaws of the corporation.
Q: What are the revisions under the RCC
relating to non-holding of election and For purposes of Section 25 of the RCC, the
cessation from office? attendants of the election, as summarily
A: ordered by the SEC, who are entitled to vote
a. The non-holding of elections and the shall constitute a quorum regardless of the
reasons therefor shall be reported to required number of attendants stated in the
the SEC within 30 days from the date Articles of Incorporation or bylaws of the
of the scheduled election. The report corporation.
shall specify a new date for the
election, which shall not be later than This finds basis in the Section 25 of the RCC
60 days from the scheduled date. that in case of non-holding of the election of
b. If no new date has been designated, or directors and no new date has been
if the rescheduled election is likewise designated, or it the rescheduled election is
not held, the SEC may, upon the likewise not held, the SEC may also
application of a stockholder, member, summarily order the holding of elections
director or trustee, and after should the reason for the non-holding of
verification of the unjustified non- election be found unjustifiable upon the
holding of the election, summarily application of any stockholder or member.
order that an election be held. The Notwithstanding any provision of the articles
SEC shall have the power to issue of incorporation or bylaws to the contrary,
such orders as may be appropriate, the shares of stock or membership
including orders directing the represented at such meeting called by SEC
issuance of a notice stating the time and entitled to vote shall constitute a quorum
and place of the election, designated for purposes of conducting an election.
presiding officer, and the record date
or dates for the determination of DISQUALIFICATION OF
stockholders or members entitled to DIRECTORS, TRUSTEES OR
vote. OFFICERS
c. Should a director, trustee, or officer
die, resign or in any manner cease to
hold office, the secretary, or the Q: What are the revisions under the RCC
director, trustee or officer of the regarding disqualifications of directors,
corporation shall, within 7 days from trustees or officers?
knowledge thereof, report in writing A: Under the OCC, grounds for
such fact to the SEC. disqualification were conviction by final
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judgment of an offense punishable by more being elected to the board, as a sanction in its
than 6 years or violation of the RCC administrative proceeding.
committed within 5 years prior to election or
appointment. The RCC expanded and Note that the bylaws may likewise provide
qualified the grounds such that a person shall for grounds for disqualification.
be disqualified from being a director, trustee
or officer of any corporation if, within 5 years Q: May the bylaws provide as a ground for
prior to the election or appointment as such, disqualification being a director or
the person was: stockholder of a competing corporation or
a. Convicted by final judgment: representing an interest in conflict with or
i. Of an offense punishable by adverse to the corporation?
imprisonment for a period A: Yes, sound principles of corporate
exceeding 6 years; management counsel against sharing
ii. For violating the RCC; and sensitive information with a director whose
iii. For violating Republic Act fiduciary duty of loyalty may well require
No. 8799, otherwise known as that he disclose this information to a
“The Securities Regulation competitive arrival. These dangers are
Code” enhanced considerable where the common
b. Found administratively liable for any director such as the petitioner is a controlling
offense involving fraudulent acts; and stockholder of 2 of the competing
c. By a foreign court or equivalent corporations. It would seem manifest that in
foreign regulatory authority for acts, such situations, the director has an economic
violations or misconduct similar to incentive to appropriate for the benefit of his
those enumerated in paragraphs (a) own corporation the corporate plans and
and (b) above. policies of the corporation where he sits as
director.
The foregoing is without prejudice to
qualifications or other disqualifications, GOKONGWEI, JR. V. SECURITIES AND
which the SEC, the primary regulatory EXCHANGE COMMISSION, ET AL. (1979)
agency, or the Philippine Competition may
impose in its promotion of good corporate
governance or as a sanction in its Indeed, access by a competitor to
administrative proceedings. confidential information regarding
marketing strategies and pricing policies
To be a ground for disqualification, it is not of the corporation would subject the latter
enough then that the violation of the RCC, be to a competitive disadvantage and
committed within 5 years prior to election. It unjustly enrich the competitor, for
is also required that there is a conviction by advance knowledge by the competitor of
final judgment. the strategies for the development of
existing or new markets of existing or
Based on the language of the law, the new products could enable said
administrative liability may be imposed by competitor to utilize such knowledge to
any government agency, different from the his advantage.
SEC, as long as it is an offense involving
fraudulent act. The SEC, by itself, is FACTS:
authorized to impose disqualification from
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Gokongwei acquired shares of stock of a. The SEC is given the authority, motu
San Miguel Corporation enough for a proprio, or upon verified complaint,
board seat. At the same time, he was the and after due notice and hearing, to
owner of other corporations and order the removal of a director or
businesses that compete with San Miguel trustee elected despite the
Corporation. disqualification, or whose
When San Miguel knew that Gokongwei disqualification arose or is discovered
had acquired enough shares to be assured subsequent to an election.
of a board seat, San Miguel amended the b. The removal of a disqualified director
bylaws and disqualified any director of a shall be without prejudice to other
competing corporation – any person sanctions that the SEC may impose
owning more than 10% of a competing on the board of directors or trustees
corporation or any person who represents who, with knowledge of the
an interest in conflict with or adverse to disqualification, failed to remove
the corporation. such director or trustee.
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stated in the agenda and notice b. The cause of the vacancy is not any of
of the said meeting; the 3 grounds referred to above but
iii. For all other cases, the the remaining directors do not
election must be held no later constitute a quorum; and
than 45 days from the time the c. The cause of the vacancy is not any of
vacancy arose. the 3 grounds referred to above, the
b. The RCC also introduced the concept remaining directors constitute a
of emergency board. quorum but the board of directors
referred the authority to fill the
Q: What if Congress enacts a law saying vacancy to the stockholders.
that all directors of a corporation who are
former Congressmen are disqualified The filling of vacancy by the stockholders is
from continuing their director positions? subject to the notice and quorum
Does that need stockholders’ approval? requirements under Section 24 of the RCC.
A: No. Non-voting shares are not included in the
computation of quorum because the election
Q: If the SEC would be the one to remove of directors is outside the 8 cases where non-
a director, does that require authority or voting shares are vested the right to vote.
approval of concerned stockholders?
A: No. The board of directors may fill the vacancy if
the following requisites are present:
Q: What are the grounds or causes of a. The cause of the vacancy is due to any
vacancy in the position of board director ground other than expiration of term,
or trustee? removal of director or increase in the
A: number of board seats; and
a. Vacancy in the position of director or b. The remaining directors constitute a
trustee may be due to expiration of quorum.
term, removal or increase in the
number of board seats; or Q: Within what periods should the
b. It may be due to resignation, vacancies be filed?
retirement, withdrawal, death, A:
abandonment or similar grounds, a. If the vacancy is due to term
other than those stated in the expiration, the election shall be held
preceding paragraph. no later than the day of such
expiration;
Q: Who may fill the vacancy? b. If the vacancy arises as a result of
A: The stockholders or the board of directors, removal by the stockholders or
depending on the circumstances may fill the members, the election may be held on
vacancy. the same day of the meeting
authorizing the removal. However,
The stockholders have the sole power to fill this fact must be so stated in the
the vacancy in the following cases: agenda and notice of the said meeting.
a. The cause of the vacancy is the c. For all other cases, the election must
expiration of term, removal of a be held no later than 45 days from the
director or increase in the number of time the vacancy arose.
board seats;
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It may not be amiss to point out that under the vacancies. Is there a way such that you
RCC, any directorship or trusteeship to be don’t have to call a stockholders’ meeting?
filled by reason of an increase in the number A: Yes, you can request that the resignation
of board of directors or trustees shall be filled be accepted on a staggered basis. You can
by an election at a regular or at a special arrange it in such that the resignation shall be
meeting of stockholders or members duly made in staggered basis – 5 will resign and
called for the purpose, or in the same meeting after their resignation, 5 will come in and
authorizing the increase of directors or after the 5 have been elected, the remaining 5
trustees is so stated in the notice of the of the 10 who were supposed to resign will
meeting. then resign to pave the way for the election or
appointment of the remaining 5 to create the
At best, the election is conditional because 15, as long as any given time you have a
the SEC is yet to approve the amendment to quorum.
the articles of incorporation on increasing the
number of board seats. Q: If there are 15 directors and 7 died in a
plane crash. The [other] 8 called a meeting,
Q: Who should fill the vacancy due to the can the 5 out of the 8 vote to fill the
resignation of a hold-over director? vacancy?
A: In the case of Valle Verde Country Club, A: Yes, because the law says majority of the
Inc. et. al. v. Africa, the Supreme Court ruled remaining directors present until they have a
that the resignation as holdover director will quorum. The law does not say majority of the
not change the nature of the cause of the board to fill the vacancy – it says majority of
vacancy which is due to the expiration of directors present if they have a quorum.
director’s term. The term of a holdover
director has expired. The holdover period is In simple words, majority of the quorum may
not part of his term. So, the cause of the fill the vacancy, unless the bylaws provide
vacancy is not resignation but the expiration otherwise.
of term. As such, the vacancy must be filled
by the stockholders in a regular or special Q: What are the requisites to create an
meeting called for the purpose pursuant to Emergency Board?
Section 29 of OCC. A:
a. The vacancy prevents the remaining
Q: Supposing that there are 15 directors in directors from constituting a quorum;
the corporation and 10 of the 15 are b. Emergency action is required to
nominees of the controlling stockholder. prevent grave, substantial and
The controlling stockholder decided to sell irreparable loss or damage to the
his shares to another investor. It is corporation;
customary for the buyer to require the c. The vacancy may be temporarily
resignation of the nominees of the seller to filled from among the officers of the
the board so that the buyer can nominate corporation;
his trusted allies or nominees in the d. The appointment must be made by the
corporation. unanimous vote of the remaining
directors or trustees; and
If you have 10 [directors] who will resign, e. The action by the designation director
you don’t have a quorum, right? You have or trustee shall be limited to the
to call a stockholders’ meeting to fill the emergency action necessary, and the
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term shall cease within a reasonable In other words, the directors presumably have
time from the termination of the significant equity stake in the corporation
emergency or upon the election of the since one generally cannot be elected to the
replacement director or trustee, board unless he has sufficient number of
whichever comes earlier. shares. The return on their equity is sufficient
motive or consideration for their work.
The corporation must notify the SEC within
three (3) days from the creation of the The exceptions to this rule are as follows:
emergency board, stating therein the reasons 1. The bylaws authorize the said
for its creation. compensation; or
2. The stockholders representing at least
a majority of the outstanding capital
COMPENSATION OF DIRECTORS
stock or a majority of the members
OR TRUSTEES
grant the directors or trustees with
compensation and approve the
Q: What are the revisions on the provision amount thereof at a regular or special
on compensation of directors or trustees? meeting.
A:
a. Section 29 of the RCC clarified that Q: “A” is the President of ABC
directors or trustees shall not Corporation, a corporation vested with
participate in the determination of public interest while X is a director and at
their own per diems or compensation. the same time Vice Chairman of the Board
with executive functions. The
Q: Who then can determine the per diem Compensation Committee of the Board of
allowance of directors? Directors fixed their compensation
A: Either the stockholders or the bylaws or package as President and Vice Chairman,
the board of directors but the resolution of the respectively. The Board of Directors
board on per diem should not apply to them. thereafter confirmed it. When their
b. It imposed an annual reportorial compensation package was reported to the
requirement in relation to the total stockholders during the regular meeting, a
compensation of each of the directors stockholder representing minority interest
or trustees for corporations vested argues that the compensation is invalid
with public interest. and irregular because it is not authorized
by the laws nor approved by the
Q: Are directors or trustees entitled to stockholders. Is he correct?
compensation for their services rendered A: He is not correct. The Supreme Court held
to the corporation in their capacity as in Western Institute of Technology, Inc. et.
such? al. v. Salas, et. al., that the above proscription
A: As a general rule, directors or trustees are against granting compensation to directors or
not entitled to compensation in their capacity trustees of a corporation is not a sweeping
as such, because they are supposed to render rule. The said provision itself delimits the
their services to the corporation gratuitously, scope of the prohibition to the compensation
and the return upon their shares adequately given to directors or trustees. The members
furnishes the motives for service, without of the board may receive compensation, in
compensation. addition to reasonable per diems, when they
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In sum, there are, therefore, 3 instances when Per diem (Latin term for each day) is a
directors or trustees may receive specific amount a corporation or organization
compensation, to wit: gives an individual per day to cover living
a. The bylaws authorize the said expenses when traveling and attending board
compensation, or meeting. The reasonableness depends on the
b. The stockholders representing at least amount, the statute of the directors, the
a majority of the outstanding capital income and size of the corporation, and other
stock or a majority of the members related considerations. Per diem of P35,000
grant the directors or trustees with for every board meeting is deemed to be
compensation and approve the reasonable.
amount thereof at a regular or special
meeting, or Q: Is there a limit on the amount of
c. They render services in their capacity compensation of directors or trustees?
other than as directors or trustees, A: Yes, total yearly compensation if directors
even though the payment of shall not exceed 10% of the net income
compensation is not authorized by the before income tax of the corporation during
bylaws of the stockholders. the preceding year.
Q: The Board of Directors adopted a Note that unlike the OCC, where the 10%
couple of resolutions, the first one limit applies to the annual compensation of
approving car and housing plans for the directors or trustees, as such, the 10% limit
board members and the second, fixing the under the RCC does not make any such
per diem allowance of directors to P35,000 qualification. It should, therefore, apply to all
for every board meeting. The board forms of compensation for services rendered
resolutions shall be applicable to directors by the directors or trustees to the corporation
who will be elected in the next in whatever capacity.
stockholders’ meeting. Are the resolutions
valid?
A: The first resolution is invalid. The housing
and car plan are considered forms of
compensation. They are to be given to
directors as a form of remuneration for their
services in their capacity as directors. These
require authority in the bylaws or approval by
the stockholders representing at least
majority of the outstanding capital stock in a
duly called stockholders meeting.
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The Supreme Court similarly held in Carag They are not, after all, insurers of the
vs. NLRC that the liability of the officers of profitability of this corporation. Their
the corporation is not determined by the liability will attach under this ground only if
Labor Code but by the Corporation Code, their acts amount to gross negligence or bad
particularly, sections 31 and 34 of the faith in directing the affairs of the
Corporation Code (now Section 30, RCC). corporation. Gross negligence is a
Carag vs. NLRC, G.R. No. 147590, April conscious, voluntary act or omission in
2, 2007. reckless disregard of a legal duty and of
the consequences to the other party. It is
Discussion: In this case, the issue is whether one that is characterized by the want of even
or not the failure of a director/officer to slight care, acting or omitting to act in a
inform the DOLE about the termination of situation where there is a duty to act, not
the employee due to authorized cause. inadvertently but willfully and intentionally
with a conscious indifference to
The answer is no because there is no law consequences insofar as other persons may
declaring such act to be unlawful. Therefore, be affected. Parenthetically, gross or willful
on the basis of such omission, that officer negligence could amount to bad faith. Lucia
cannot be held personally liable. Magaling, et al. vs. Peter Ong, G.R. No.
173333, August 13, 2008.
However, if the omission amounts to gross
negligence or bad faith, the officer shall be Discussion: The standard to make them
liable. liable is gross negligence or bad faith. They
are not liable for mere oversight, for
b. Gross Negligence or Bad Faith in imprudence or ordinary negligence. They
Directing the Affairs of the cannot be held liable just because they made
Corporation. a mistake in making a business decision.
They could not guarantee that their decisions
Directors, trustees and officers are not liable translate to profitability.
for oversight, imprudence, or ordinary
negligence. They cannot be held liable just Slide:
because they erred in their business decision. However, before a director or officer of a
Under the business judgment rule, questions corporation can be held personally liable for
of business policy and management are left to corporate obligations, the following
the sound discretion of the board and they requisites must concur:
cannot be held liable for any adverse iii. The complainant must allege in the
consequence of those decisions as long as complaint that the director or officer
they acted in good faith and not contrary to assented to patently unlawful acts of
law. Balinghasay vs. Castillo, G.R. NO. the corporation, or that the officer was
185664, April 8, 2015.
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guilty of gross negligence or bad commission but he was not given the
faith; and commission. He sued the president and the
iv. The complainant must clearly and corporation for non-payment of
convincingly prove such unlawful commission. Who is liable?
acts, negligence, or bad faith. Heirs A: Only the corporation because there was no
of Fe Tan Uy vs. International allegation of bad faith or negligence on the
Exchange Bank, G.R. No. 166282, part of the president.
February 13, 2013.
Slide: In one case, the Supreme Court
In Heirs of Fe Tan Uy vs. International considered the corporation president's casual
Exchange Bank, it was held that the President manner, insouciance, and nonchalance, nay,
of the corporation cannot be held personally indifference, to the predicament of the
liable for gross negligence or bad faith if the distressed corporation, as gleaned from his
complaint merely averred that he signed as a court testimony, glaringly exhibited a
surety to secure the obligation of the lackadaisical attitude from a top officer of a
corporation, but which surety turned out to be corporation, a conduct totally abhorrent in the
spurious. corporate world constitute gross negligence
that will impute liability to the corporate
Discussion: Since the surety agreement is officer for corporate obligations. Thus, under
spurious, the same is void and cannot be the circumstances, the investor who made
enforced against the President. placement with the corporation could recover
the same from the grossly negligent officer.
Q: So, can the corporation, now, the Lucia Magaling, et al. vs. Peter Ong, ibid.
lender, hold the president for bad faith
and gross negligence if the complaint Relating to a criminal case, the Supreme
alleges only suretyship as the basis for the Court said that approval of a loan during the
liability? incumbency as a director does not establish
A: The SC said you cannot make the probable cause absent showing of personal
president liable for bad faith or gross participation in any irregularity as regards
negligence because it is not alleged in the approval of the loan. Presidential
complaint. What is alleged in the complaint Commission on Good Government vs.
is the spurious suretyship agreement Hon. Ma. Merceditas Gutierrez, G.R. No.
The complaint must allege with particularity 189800, July 29,2018.
the patently unlawful acts or gross
negligence. It should be noted that the stockholders are
not included in the enumeration of persons
Q: In another case, one was signed as a who may be held personally liable.
marketing agent of a corporation to sell Stockholders are liable only to the extent of
water dispenser. He was able to get a their subscription unless they also act as
contract with ITCSI. He was entitled to the directors, officers, or agents of the
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corporation. Donnina Halley vs. Printwell, opportunity refers to a case when a director,
Inc., G.R. No. 157549, May 30, 2011. by virtue of his office, acquires for himself a
business opportunity which should belong to
Discussion: the corporation, thereby obtaining profits to
Q: The question we asked earlier is the the prejudice of such corporation. There is a
case of Remo. In this case, the corporation responsibility not just to account but to remit
authorized the purchase of a truck to the corporation any profit he realized from
approved by the board through a the venture.
resolution implemented by an officer. Who
is liable to pay the purchase price? Discussion: It is not enough that there is
A: Only the corporation, not the director and conflict of interest. The conflict should result
the officer who implemented it. in damage to the corporation.
Q: What if this time, the corporation lent Q: When do you know there is a conflict?
or granted a loan to a borrower. Let’s A: When you take a position adverse to the
assume that the corporation is corporation and that results in damage to the
sequestered. Will the directors who corporation.
participated in the approval of the loan be
made liable? Q: What are the consequences when a
A: The answer is NO if there is no irregularity director acquires a business opportunity
anyway as regards the approval of the loan that belongs to the corporation?
transaction. A: He is liable to account and remit profits
earned from that transaction.
Take note that you did not see in the
enumeration the stockholders. Directors, d. Consenting to the issuance of watered
officers, trustees, agent and no mention of the stocks.
stockholders because we are clear at the
outset that the liability of the stockholders Under Section 64 of the RCC, a director or
is limited to the extent of their subscription officer of a corporation who: (a) consents to
to the corporation unless they are also the issuance of stocks for a consideration less
directors, officers, or agents of the than their par or issued value; (b) consents to
corporation. the issuance of stocks for a consideration in
any form other than cash, valued in excess of
c. Acquiring any personal or pecuniary their fair value, or (c) having knowledge of
interest in conflict with their duty as the insufficient consideration, does not file a
directors or trustees. written objection with the corporate
secretary, shall be liable to the corporation or
This conflict of interest must result in its creditors, solidarily with the stockholder
damage to the corporation. In relation concerned for the difference between the
thereto, the doctrine of corporate value received at the time of the issuance of
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the stock and the par or issued value of the on the nature of the agreement he entered to
same. secure the obligation of the corporation. If he
signs a surety agreement, he is liable
Discussion: solidarity with the corporation. If it is a
Q: What do you mean by watered stocks guaranty agreement, he is liable subsidiarily
again? with the corporation because as a guarantor,
A: Watered stocks are those issued for an he has the right of excussion. However, if the
amount lower than par value for a stock with guaranty agreement waives the benefit of
par value. What about no par value share? If excussion, then he is liable solidarily with the
issued lower than the issued price as corporation. It is thus clear that the
approved by the board or the stockholders. It assumption of the corporation's liability does
is not correct to say that watered stocks are not always translate to solidary liability. It
issued for an amount lower than fair value. has to be read in conjunction with the
You use fair value if the consideration in the provisions of the Civil Code on guaranty.
issuance of the stocks is property and the
property is valued in excess of the fair value. In Security Bank and Trust Company vs.
In which case, the stocks issued are Cuenca, the president signed a surety
accordingly watered. agreement to secure the obligation of the
corporation. Thereafter, he lost his position
Q: Liable to whom? as he was not re-appointed. The Bank,
A: The corporation and the creditors of the subsequently, extended the term of payment.
corporation.
The question on the extent of liability of the
Q: Why do you hold the director and the president cannot be resolved by corporation
subscriber liable and for what amount? law. Reference should be made to the
A: They are liable for the difference between provisions of the Civil Code on guaranty.
the par or issued price and the amount Under the Civil Code, any material or
actually received by the corporation, adverse change in the terms and conditions of
the principal contract made without the
They are liable to the creditors because of the consent of the surety or guarantor shall
trust fund doctrine. The trust fund doctrine release him from liability. Extension of term
says that the totality of subscriptions are is a material adverse change to the principal
funds held in trust for the benefit of the contract. It was extended without his consent.
creditors. His consent could not be obtained as he was
no longer the president when the loan was
e. Contractual Liability extended. He is consequently released from
liability under the law on guaranty. Security
If a director or officer makes himself Bank and Trust Company vs. Cuenca,
contractually liable with the corporation, is G.R. No. 138544, October 3, 2000.
he automatically liable solidarity? It depends
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the extent of his subscription. They can prosecution the corporate agent who
proceed against B up to the extent of his knowingly and intentionally causes the
unpaid subscription. C is solidarily liable corporation to commit a crime. The
with the corporation for the payment of the corporation obviously acts and can act, only
creditor's claims because of C's gross by and through its human agents, and it is
negligence in directing the affairs of the their conduct which the law must deter. The
corporation. 1997 Bar Exam. Executive Secretary, et al. vs. Court of
Appeals, et al., G.R. No. 131719, May
Of course, even if the law does not impose 25,2004.
liability upon directors or officers for the
corporate act omission, the officers of the There is likewise jurisprudence that not only
corporation, other than the board of persons who participated in the act can be
directors, can be made criminally liable for made criminally liable. Even those with
their criminal acts if it can be proven that power to prevent the illegal act may be
they participated therein. Gregorio Singian, held criminally liable. Thus, to be held
Jr. vs. the Honorable Sandiganbayan and criminally liable for the acts of a corporation,
the Presidential Commission on Good there must be a showing that its officers,
Government, G.R. Nos. 160577-94, directors, and shareholders actively
December 16, 2005. participated in or had the power to prevent the
wrongful act. Securities and Exchange
Discussion: There are two instances where Commission vs. Price Richardson Corp.,
you can impose criminal liability upon et al, G.R. No. 197032, July 26, 2017.
directors or officers:
1. If they are made liable for the act of Discussion: In this case of SEC v. Price
the corporation (PD 115 is an Richardson, it turns out that the corporation
example); is engaged in selling unregistered securities.
2. Even if there is no law that imposes In paper, their purposes is legitimate because
liability upon them, if they they provided that they are engaged in the
themselves participated in the business of admin and housekeeping
commission of the criminal acts. activities.
Slide: Labor disputes such as that of illegal Q: Aside from the six circumstances
recruitment can also trigger the liability of discussed above, is there any other ground
employees and employers. An employee of a to hold a director or officer personally
corporation, engaged in illegal recruitment liable for corporate acts or omission?
may be held liable as principal, together with A: The abovementioned six circumstances
his employer, if it is shown that he actively where a director or officer can be held
and consciously participated in illegal personally liable for corporate acts or
recruitment because the existence of the omission are exclusive.
corporate entity does not shield from
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In one case, Restaurante Las Conchas vs. exception because when the corporate veil is
Llego, the Supreme Court held an exception pierced, the director/officers become one
to the rule that officers and members of the with the corporation. They cease to be
corporation are not personally liable for acts corporate representatives. They are no
done in the performance of their duties is longer being made liable for the act taken on
when the corporation is no longer existing behalf of the corporation as the corporation
and is unable to satisfy the judgment in favor ceases to have a separate legal personality.
of the employee. The officers in this case
should be liable for acting on behalf of the Besides, piercing the corporate veil assumes
corporation. There were also cases where the gross negligence, bad faith, or breach of
Supreme Court held that if the records do not fiduciary duties on the part of directors and
clearly identify the "officer or officers" officers and as such, subsumed under the 2nd
directly responsible for the payment of circumstance as previously discussed.
monetary benefits to the employees, the
president of the corporation, as the Q: What do you understand by the special
responsible officer of the corporation, may be fact doctrine?
ordered to respond personally in case of A: It is a doctrine holding that a corporate
closure of the corporation. These cases are officer with superior knowledge gained by
no longer controlling. As explained in virtue of being an insider owes a limited
Carag vs NLRC, the Supreme Court said fiduciary duty to a shareholder in transactions
that the liability of the director or officer is involving transfer of stock. This duty arises
determined not by the Labor Code but by because of the superior knowledge the officer
the provisions of the Corporation Code. holds by virtue of his or her position.
Just because the corporation has no Discussion: This is different from insider
available leviable assets should not make trading. Insider trading is buying or selling of
the directors or officers personally liable. securities by an insider while in possession of
There ought to be any of the abovementioned a material non-public information. The law
circumstances to make the officer or director defines who are the insider.
liable with the corporation.
Q: This special fact doctrine applies to a
The enumeration is therefore exclusive. corporate officer limited in scope not to all
The six instances have been reiterated in insiders but only to a corporate officer who
various cases without addition or secured knowledge gained by reason of
subtraction. him being an insider, being an officer of
the corporation. So what is his duty? Does
What about the application of the doctrine of he have duty, for example, to disclose such
piercing the veil of corporate fiction where information to all stockholders of the
the directors and officers are liable for the corporation or to the public for that
debts of the corporation? This is not really an matter?
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A: He has no such obligation but he has the directors voting to approve the material
duty to disclose if he is the one involved in contract.
the transaction. If acquires information on (Dean: The code has not defined yet what
account of being a corporate officer and he is are material contracts. It may be defined
a party to that transaction, he had the duty to by the corporation.)
disclose the same in favor of the counterparty
in the transaction. So only if he is involved in Q: What is the legal status of a contract
the sale transaction, he is required to disclose between the corporation and any of its
but is not required to disclose any directors, trustees or officers or their
information he knows about the corporation related interest?
to all stockholders unless it’s a public A: A contract of the corporation with one (1)
company and any material benefit against the or more of its directors, trustees, officers or
company has to be disclosed to the public and their spouses and relatives within the fourth
the SEC. civil degree of consanguinity or affinity is
voidable, at the option of such corporation,
Q: What do you mean by self-dealing? unless all the following conditions are
A: Basically, it is a transaction between the present:
corporation and its director or the corporation a. The presence of such director or trustee in
and its officer. the board meeting in which the contract
was approved was not necessary to
Q: What are the revisions under the RCC constitute a quorum for such meeting;
on self-dealing provision? b. The vote of such director or trustee was
A: not necessary for the approval of the
a. It expands the coverage of self-dealing contract;
provision to spouses and relatives within c. The contract is fair and reasonable under
the fourth civil degree of consanguinity the circumstances;
or affinity of the directors, trustees, d. In case of corporations vested with public
officers. interest, material contracts are approved
(Dean: The conditions or requisites that by at least two-thirds (2/3) of the entire
should be complied with for a contract membership of the board, with at least a
between the corporation and its director, majority of the independent directors
officer, trustee should now apply even to voting to approve the material contract;
a contract between the corporation and and
the relatives of director, officer, trustee e. In the case of an officer, the contract has
up to 4th degree of consanguinity.) been previously authorized by the board
b. In the case of corporations vested with of directors.
public interest, material contracts are
approved by at least two-thirds (2/3) of Where any of the first three (3) conditions set
the entire membership of the board, with forth in the preceding paragraph is absent, in
at least a majority of the independent the case of a contract with a director or
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trustee, such contract may be ratified by the cement. It entered into a contract with XX,
vote of the stockholders representing at least one of its directors, making him the
two-thirds (2/3) of the outstanding capital exclusive distributor of prime white
stock or of at least two-thirds (2/3) of the cement in the entire country. The contract
members in a meeting called for the purpose: further stipulated that the price of the
Provided, That full disclosure of the adverse cement is fixed at P9 pesos per bag for a
interest of the directors or trustees involved is period of five (5) years. Is the contract fair
made at such meeting and the contract is fair and reasonable under the circumstances?
and reasonable under the circumstances. Is it valid?
A: In the case of Prime White Cement
Under this provision, such a contract is Corporation vs. IAC, the Supreme Court held
voidable at the option of the corporation, that the transaction is covered by the self-
meaning valid, until annulled by the dealing provision under the Corporation
corporation. The option to void the contract Code. It is not valid because the contract is
ceases if the foregoing requisites are duly not fair and reasonable under the
complied with. circumstances. There is no hard and fast rule
in determining whether the contract is fair
Note further that the presence and vote of the and reasonable under the circumstances,
self-dealing director may be dispensed with hence the clause "under the circumstances."
in lieu of the ratification by the stockholders In this case, the Supreme Court held that it is
representing at least 2/3s of the outstanding not fair and reasonable because one cannot
capital stock or at least 2/3s of the members fix the price of cement for a period of five (5)
for a non-stock corporation in a meeting years, considering the fluctuation of market
called for the purpose. The condition that prices and nature of the commodity.
cannot be dispensed with is that the contract
must be fair and reasonable under the Another example is when a corporation hires
circumstances. one of its directors to serve as legal counsel
to handle an important case for the
Discussion: It is voidable so valid until corporation. The director should recuse
annulled so it may be annulled by the himself in presence and voting. He can waive
corporation. However, the option to declare it his fees or charge less what he would
void ceases if the aforementioned conditions ordinarily charge other clients for similar
are present. cases to fulfill the spirit against the rule on
self-dealing.
The one requirement that you cannot do away
with is that the contract is fair and reasonable Q: Let’s say ABC Corporation and XYZ
under the circumstances. Corporation entered into a contract and
they have the same directors or
Q: ABC Corporation is engaged in the interlocking directors. Can the contract
business of manufacturing prime white
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they entered into be invalidated on the fact for the quorum there and his vote is not
that they have interlocking directors? required to cover the contract or transaction
A: No except in cases of fraud and the there. You can dispense with these 2
contract is not fair. conditions upon approval of the 2/3 of the
outstanding capital stock of the other
Q: What is the legal status of a contract corporation.
between two corporations with
interlocking directors? Q: When do you say that one is substantial
A: Except in cases of fraud, and provided the and the other one nominal?
contract is fair and reasonable under the A: More than 20% is substantial. Below is
circumstances, a contract between two (2) or nominal.
more corporations having interlocking
directors shall not be invalidated on that Q: What if both are substantial?
ground alone: Provided, That if the interest of A: This rule will not apply. Meaning, you
the interlocking director in one (1) don’t subject the other corporation to the
corporation is substantial and the interest in rules under Section 31.
the other corporation or corporations is
merely nominal, the contract shall be subject Q: What if they are both nominal?
to the provisions of the preceding section A: Again, those conditions under Section 31
insofar as the latter corporation or will not apply.
corporations are concerned.
DBP v. CA
Stockholdings exceeding twenty percent
(20%) of the outstanding capital stock shall
Facts: DBP granted loan accommodations to
be considered substantial for purposes of
Marinduque Mining secured by mortgage on
interlocking directors.
the property of Marinduque Mining. Loan
In other words, the mere fact that there is a
was not paid. The bank foreclosed the
contract between two (2) corporations with
mortgage. Redemption right was not
common directors is not a ground to
exercised. Bank became the owner of the
invalidate the said contract. However, the
foreclosed assets. After that, the bank set up
contract must be fair and reasonable under
a new mining company called Nonoc Mining.
the circumstances and should not be tainted
It assigned the foreclosed assets to Nonoc
with fraud.
Mining. It turns out that Marinduque Mining
purchased steel products from Remington
Discussion: What does this mean? It means
Steel and did not pay the purchase price.
that the corporation where the interest of the
director is nominal, it’s as if it is a contract
Issue: Can Remington Steel, un unpaid seller
between the corporation and its director.
of Marinduque Mining, question the contract
With respect to the corporation with the
of assignment of foreclosed assets between
interest is nominal, his presence is not needed
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DBP and Nonoc just because they have underlying philosophy upon which such
common directors and officers? doctrine rests?
A: The doctrine of corporate opportunity
Ruling: No. Only the corporations involved means that if the director acquired for himself
having interlocking directors can question the a business opportunity that should belong to
contract, not a third party. Remington as a the corporation, he must account to the
third party has no legal personality to corporation for all the profits he obtained
question the contract just because the two unless his act was ratified by the stockholders
corporations have common or interlocking representing at least 2/3s of the outstanding
directors. It’s supposed to be the parties capital stock.
which entered into the contract itself.
Under such doctrine, a director of the
Q: Why do we have this rule? Why not corporation is prohibited from competing
prohibit corporations from dealing with with the business in which the corporation is
another corporation if they have common engaged in, as otherwise, he would be guilty
directors? of disloyalty, where profits he may realize
A: Because this is the reality of business. You will have to go to the corporate funds except
don’t farm out business to a competitor. You if the disloyal act is ratified. IENT vs. Tullett
farm out a business to an affiliate company, a Prebon, G.R. No. 189158, January 11,
company where you have a common director 2017
or you have a stake in.
This doctrine rests fundamentally on the
NOTE: There are special laws which unfairness, in particular circumstances, of an
prohibit contracts between corporations officer or directql taking advantage of an
having interlocking directors. opportunity for his own personal benefit
when the interest of the corporation should
Examples: director of a bank and a quasi- have been more paramount. 1985 and 2005
bank, director of an investment house, Bar Exams.
director of 2 thrift banks.
Under Section 33 of RCC, when a director
Remember, except for these special cases, seized an opportunity belonging to the
there is nothing wrong if a person sits as a corporation, there is an obligation to account
director of 2 corporations (even competing for and remit any profit he earned from that
corporations subject to the provisions of the venture or transaction. The obligation to
corporation’s bylaws disqualifying a account and remit is not excused even if he
stockholder from a competing corporation to risked his own funds unless the act was
be a director). ratified by the stockholders representing
at least two-thirds (2/3) of the outstanding
Q: What is the so-called “doctrine of capital stock.
corporate opportunity”? What is the
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Discussion: This doctrine has two facets: matters falling within the board’s
1. The director should not compete with competence.
the business of the corporation;
2. If there is a business opportunity An execom is basically a small board of
belonging to the corporation, he directors. A mini board of directors that can
should not take advantage of it. If he act on matters that fall within the board’s
does, he must account for any profit competence. Whatever the board can do, the
earned from that venture and remit execom can also do. Because the board is
the same to the corporation unless the appointed or elected by the stockholders, then
acts are ratified by the stockholders only the stockholders have right to determine
representing at least 2/3 of the or decide whether to create a small board of
outstanding capital stock. directors. So, it is an adjunct or an extension
of the board.
Q: Is there any revision under the RCC
relating to Executive Committee? Q: What’s the rational of the creation of
A: In Section 34 of the RCC, a new paragraph the executive committee?
was added in relation to the power of the A: Regular board meetings are often
board to create other special committees of conducted only once a month. There are
temporary or permanent nature and occasions where transactions require
determine the members' term, composition, corporate approval but cannot wait for the
compensation, powers, and responsibilities. Board to meet, given the urgency or the need
to make a prompt decision. The bylaws may
Discussion: Take note that the board cannot authorize the creation of an executive
create a corporate office. committee, which is an adjunct or extension
of the board, that can act on matters falling
Q: What is an executive committee? within the board's competence.
A: It is a committee that the board creates Q: Who may create the executive
pursuant to an authority granted under the committee?
corporation's bylaws, composed of at least A: The executive committee is created by the
three members of the Board, that can act on bylaws. Once created, the board may fill the
matters falling within the board's composition of the committee. As the power
competence. to adopt bylaws is lodged with the
stockholders, by parity of reasoning, only
Discussion: Let’s dissect this. It is created the stockholders may decide to create a
pursuant to an authority granted under the committee that will serve as an adjunct or
corporation’s bylaws. Therefore, there ought extension of the board of directors or a
to be a provision in the bylaws on execom or mini-board of directors.
the bylaws authorized the board to create it.
Without the authority, there can be no legal However, the board can create a committee
basis to create an execom that can act on and name it "executive committee" as long as
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present, met and decided on the following b. Corporations are now expressly allowed
matters: to enter into a partnership, joint venture,
or any other commercial agreement with
a. purchase of a delivery van for use in the natural and juridical persons.
corporation's retail business; c. It appears that there is no more
b. declaration and approval of the prohibition for domestic corporations to
13thmonth bonus; donate in favor of a political party or
c. purchase of an office condominium unit candidate.
at the Fort; and
d. declaration of P10.00 per share cash Q: What are the classifications of
dividend. corporate powers and capacity?
A: The powers of a corporation can be
Are the actions of the Executive classified as follows:
Committee valid? a. Express powers - those which are
expressly granted under the RCC and
A: The actions of the Executive Committee those embodied in the corporation's
are valid except for the declaration of cash articles of incorporation, as sanctioned by
dividends which is an act that cannot be the State
delegated by the Board of Directors to the b. Implied or incidental powers - these are
Executive Committee pursuant to Section 34 the corporation's "powers, attributes and
of the RCC. properties…incident to its existence",
which may be "essential or necessary to
NB: The answer is on the assumption that: a) carry out its purpose or purposes as stated
the Vice President is also a director because in its articles of incorporation."
only board directors can be appointed as Corporate Powers: Ultra Vires Acts,
regular and voting members of the Executive SEC-OGC Opinion No. 20-09, August
Committee; and, b) that it is the bylaws that 4, 2009.
created the Executive Committee and the (Dean: There can be no enumeration of
Board is simply authorized under the bylaws implied powers. It is implied because it is
to appoint the members. necessary for the purpose of the
corporation.
POWERS OF CORPORATIONS
If there is a power to obtain a loan, does
the corporation also have the power to
Q: What are the revisions under the RCC sign documents through its agent?
on corporate powers? Obviously, the answer is yes. The power
A:
to sign documents is implied from the
a. As previously discussed, corporations
power to obtain a loan.)
under the RCC may have perpetual
existence.
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c. Inherent powers - those which are not of the plant. The Court ruled that "a
expressly stated but are deemed to be corporation is not restricted to the exercise of
within the capacity of corporate entities. powers expressly conferred upon it by its
Incidental powers are also called inherent charter, but has the power to do what is
corporate powers and include those reasonably necessary or proper to promote
which a corporation can exercise by the the interest or welfare of the corporation".
mere fact of its corporate existence, such National Power Corp. vs. Vera, G.R. No.
as: 83558, Third Division, February 27, 1989,
a. Right to succession J. Cortes.
b. Right to have a corporate name
c. Right to adopt its own bylaws Discussion: In this case, the question is
whether NAPOCOR can hire its own
(Dean: In our code, the inherent powers are stevedores? The SC said that NAPOCOR has
also express powers. Every corporation has no power to engage stevedores and it is not
the right of succession, the right to adopt consistent to its purposes. However, in this
bylaws, the right to adopt a corporate name.) case, the hiring of the stevedore is for the
purpose of unloading the coal shipments into
The inherent powers of the corporation are the pier and for transmission to the power
also included in the enumeration of express plant. This, therefore, is incidental to the
powers under Section 35 of the RCC. operation of the plant. Therefore, implied
from the power of the corporation. This is the
Acts outside these powers are ultra vires case where the SC said that the powers of the
acts. The statutory provision prohibiting corporation are not restricted to what appears
them is Section 44 of the RCC. in the articles of incorporation.
Discussion: If the acts are ultra vires, they are The ultimate test is “Is that act or transaction
not enforceable against the corporation. For related to the purpose of the corporation?
an action to be valid and binding against the Incident to the purpose of the corporation?
corporation, it must be consistent with and Germane to the purpose of the corporation?”
not contrary to the express, implied or The purpose is what you see in the articles of
inherent powers of the corporation.) incorporation. If the answer is yes, then the
act is binding and enforceable.
Q: Give examples of implied or incidental
powers. Slide: Also, in the case of Teresa Electric &
A: In the case of National Power Corporation Power Co., Inc. vs. Public Service
vs. Vera, the stevedoring services which Commission and Filipinos Cement
involve the unloading of the coal shipments Corporation in interpreting a provision found
into the NPC pier for its eventual conveyance in respondent corporations articles of
to the power plant were considered as incorporation authorizing the corporation to
incidental and indispensable to the operation perform any and all acts connected with the
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business of manufacturing portland cement certificate that it shall bear the corporate
or arising therefrom or incidental thereto, the seal. However, the lack of corporate seal
Supreme Court concluded that the in the stock certificate does not invalidate
corporation must be deemed authorized to the document.)
operate and maintain an electric power plant d. To amend its articles of incorporation in
exclusively for its own use in connection with accordance with the provisions of the
the operation of its cement factory in a remote RCC;
barrio. The Supreme Court found that the e. To adopt bylaws, not contrary to law,
operation of such plant was necessarily morals or public policy, and to amend or
connected with the business of repeal the same in accordance with the
manufacturing cement. Teresa Electric & RCC;
Power, Co., Inc. vs. Public Service f. In case of stock corporations, to issue or
Commission, G.R. No. L-21804, sell stocks to subscribers and to sell
September 25, 1967. treasury stocks in accordance with the
provisions of the RCC and to admit
As a practical example, a corporation which members to the corporation if it be a
is expressly allowed by its articles of nonstock corporation;
incorporation to obtain a loan is impliedly g. To purchase, receive, take or grant, hold,
authorized to sign, execute and deliver convey, sell, lease, pledge, mortgage, and
documents and perform other acts necessary otherwise deal with such real and
to carry out the loan transaction. personal property, including securities
and bonds of other corporations, as the
Q: What is the theory of general capacity? transaction of the lawful business of the
A: Under the theory of general capacity, a corporation may reasonably and
corporation holds such powers which are not necessarily require, subject to the
prohibited or withheld from it by general limitations prescribed by law and the
laws. Constitution;
h. To enter into a partnership, joint venture,
The general powers of a corporation are merger, consolidation, or any other
enumerated under Section 35 of the RCC, to commercial agreement with natural and
wit: juridical persons;
a. To sue and be sued in its corporate name; (Dean: This is something new. Before
b. To have perpetual existence unless the corporations can only enter into joint
certificate of incorporation provides ventures. Now, they can enter into
otherwise; partnerships.)
c. To adopt and use a corporate seal; i. To make reasonable donations, including
(Dean: a corporate seal is used to identify those for the public welfare or for
the documents of the corporation. There hospital, charitable, cultural scientific,
are two provisions on corporate seal: this civic, or similar purposes: Provided, That
one (Sec. 35) and the provision on stock no foreign corporation shall give
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Wing Talk vs. Makasiar, G.R. No. 122452, Philippines, et al., G.R. No. 161838, April
January 29, 2001. 7, 2010.
It is also not lodged with the President of the In the case of Maranaw Hotels and Resort
corporation. In one case, it was held that a Corporation vs. Court of Appeals , G.R. No.
derivative suit should not prosper if it is filed 149660, First Division, January 20, 2009, ,
by the president, not authorized by the the Supreme Court ruled that the lawyer who
corporate shareholder for whose benefit the signed the pleading, verification and
shares are held. Nora Bitong vs Court of certification against forum shopping must
Appeals, G.R. No. 123553. July 13, 1998. be specifically authorized by the Board of
Directors of the Corporation to make his
The corporate power to sue and be sued actions binding on his principal. Similarly,
commences upon the issuance by SEC of the a petition filed, and the accompanying
certificate of incorporation. This power, as certification against non-forum shopping
previously pointed out, is exercised by the signed, by the Chief Legal Counsel and one
board of directors. The physical acts of the of the controlling stockholders of the
corporation, like the signing of documents, corporation is not valid unless he is
can be performed only by natural persons authorized by the board. Philippine Rabbit
duly authorized for the purpose by corporate Bus Lines vs. Aladdin Transit
bylaws or by a specific act of the board. Corporation, G.R. No. 166279, June 30,
Absent the said board resolution, a petition 2006.
may not be given due course. Ligaya
Esguerra vs. Holcim Philippines, Inc., Under the Revised Rules of Civil Procedure,
G.R. No. 182571, September 2, 2013. the authorization of the affiant to act on
behalf of a party, whether in the form of a
If the real party in interest is a corporate body, secretary's certificate or a special power of
an officer of the corporation can sign the attorney, should be attached to the
certification against forum shopping so long pleading. Failure to comply with the
as he has been duly authorized by a resolution foregoing requirements shall not be curable
of its board of directors. It was held that the by mere amendment of the complaint or other
lower court did not commit grave abuse of initiatory pleading but shall be cause for
discretion in dismissing the petition for lack dismissal of the complaint without prejudice,
of authority of the officer who signed the unless otherwise provided, upon motion and
certification of non-forum shopping in after hearing. Rule 7, Section 5 of the
representation of petitioner corporation. San Revised Rules of Procedure, AM No. 19-
Miguel Bukid Homeowners Association, 1020-SC (which took effect on May 1,
Inc. vs. City of Mandaluyong, et al., G.R. 2020)
No.153653, October 2, 2009; Republic of
the Philippines vs. Coalbrine International Cases abound that board resolution on the
authority of the agent of the corporation may
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be dispensed with if the verification and officers who committed a wrongful act
certification against forum shopping is signed against the corporation. Obviously, the
by the following corporate officers: directors who committed the wrongful act,
a. Chairperson of the Board of Directors; being in control of the corporation, are not
b. President; expected to adopt a resolution to authorize
c. General Manager; the filing of legal action to nullify their very
d. Personnel Officer; or own acts. To require a board resolution on the
e. Employment Specialist in labor case. part of the suing stockholder will render
illusory the right of a stockholder to file a
The reason they can sign the verification and derivative suit. In Tan Wing Talk case, it was
certification even without approval is that also held that the minority stockholder could
these officers are in the position to verify the have sued on a derivative cause of action but
truthfulness and correctness of the allegation he must allege and comply with the
in the petition. conditions for a derivative suit.
It is not settled yet whether the jurisprudence Discussion: If the corporation wants to sue,
on the authority of the foregoing officers to it needs the approval of the board of directors.
sign the initiatory pleading and certification The board shall authorize likewise the person
against non-forum shopping even without the who shall sign the pleadings and the
supporting board resolution ceases to apply complaint or petition on behalf of the
in view of the foregoing revision in the Rules corporation. If there is no board resolution
of Civil Procedure. The author believes that attached to the complaint, it will result to the
such jurisprudence should be deemed dismissal of the complaint or petition.
superseded by the new rules. While these
officers are in the position to certify as to the The exception is a derivative suit. A
accuracy and truthfulness of the allegations derivative suit does not need a board
of the initiatory pleading, it does not resolution. In fact, to require board resolution
necessarily mean that they have been on derivative suit is to render illusory the
authorized by the board to initiate the legal power of the minor stockholder to file such
action and verify the pleading accordingly. suit on behalf of the corporation.
For practitioners, it is also better to err in the
side of caution. Q: What is the essence of derivative suit?
A: The corporation is the aggrieved party.
The only instance that board resolution is not The ones who performed the wrongful acts
necessary in filing legal action on behalf of are the majority directors and/or corporate
the corporation is through a derivative suit. A officers or the ones who are in control of the
derivative suit is an action filed by a minority corporation. They refused to act on these
stockholder in the name and on behalf of the wrongful acts so someone has to act on behalf
corporation to enforce a corporate right or of the corporation to enforce a corporate right
cause of action against the directors and or a cause of action by filing that suit on
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behalf of the corporation to seek redress for (2) President; (3) General Manager (4)
the corporation. Human Resource Officer; and (5)
Employment specialist in labor cases.
In Ago v. Agro Realty, only the minority can
file derivative suit. The remedy of majority of Why is it they can sign the complaint or
stockholders to cause the board to issue a petition even without board resolution?
board resolution to authorize the filing of the Because by reason of the nature of their
suit. position, they are deemed to be familiar with
Derivative suit is only a last resort. the affairs of the corporation and therefore,
can certify as to the accuracy in the complaint
Q: A minority stockholder filed a or petition.
derivative suit on behalf of the corporation
to question the acts of the management on HOWEVER, under the Revised Rules of
the part of the board and the corporate Procedure, the authorization of the affiant to
officers. The board convened and passed a act on behalf of the party in the form of a
resolution instructing the counsel of the secretary certificate or a special power of
corporation to cause the dismissal of the attorney should be attached to the pleading.
derivative suit on the ground that it is not This procedure should supersede the
authorized by the board. Would you grant jurisprudence.
the motion to dismiss?
A: No. You will deny the motion to dismiss b. Power of the Corporation to Have
because you cannot subject a derivative suit Perpetual Existence
to the approval of the board. It does not
require any board approval. Otherwise, you As previously discussed, unlike the OCC
render illusory or meaningless the right of the which prescribed a maximum corporate term
stockholder to file derivative suit. of 50 years unless extended, corporations are
now expressly allowed to have perpetual
There is one case where the SC that board existence unless their certificate of
resolution is need to file derivative suit. It is incorporation provides otherwise.
because the stockholders suing is a corporate
stockholder. So, if the plaintiff is a corporate c. Power of the Corporation to Issue or
stockholder, then you need a board resolution Sell Stocks to Subscribers
from the corporate stockholder, not the board
resolution of the corporation whose acts of The power of the corporation to issue stocks
the board you are questioning. includes the authority to set the terms and
conditions of the issuance. These may
There are cases where the SC said certain include terms and dates of payment.
officers can sign a petition or complaint on Ordinarily, the 25% payment requirement for
behalf of the corporation even without board subscription only applies in case of an
resolution. These officers are: (1) chairman; increase of capital stock. The corporation,
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The RCC expressly allows corporations "to Other related laws include the General
purchase, receive, take or grant, hold, Banking Act.
convey, sell, lease, pledge, mortgage, and
otherwise deal with such real and personal e. Power of Corporation to Enter into
property, including securities and bonds of Commercial Agreement with Natural
other corporations. This, however, is subject and Juridical Persons
to the following limitations:
i. It must be in furtherance of the Another significant revision under the new
purpose for which the corporation law is the express grant of power to
was organized. corporations to enter into any commercial
agreement, including but not limited to
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But for joint venture, as far back as the case (i) To make reasonable donations,
of Aurbach vs. Sanitary Wares including those for the public welfare
Manufacturing Corporation, the Supreme or for hospital, charitable, cultural,
Court had already ruled that a joint venture is scientific, civic, Or similar purposes:
a form of partnership and should thus be Provided, That no foreign corporation
governed by the law of partnerships. The shall give donations in aid of any
Supreme Court, however, recognized a political party or candidate or for
distinction between these two business forms purposes of partisan political
and held that although a corporation cannot activity...
enter into a partnership contract, it may
however engage in a joint venture with As previously indicated, it appears that there
others. Aurbach vs. Sanitary Wares is no more prohibition for domestic
Manufacturing Corp., G.R. No. 75875, corporations to donate in favor of a
75951, 75975-76, Third Division, political party or candidate.
December 15, 1989.
Hence, the following are the requisites for a
Discussion: Now, expressly allowed to enter valid donation by a corporation:
into partnerships. The SEC said that the a. The donation must be reasonable;
corporation before it enter into a partnership, b. It must be for a valid purpose including
it must be authorized by its articles of public welfare or for hospital, charitable,
incorporation. cultural, scientific, civic, or similar
purposes; and
f. Power of Corporation to Make c. The donation must bear a reasonable
Donations relation to the corporation's interest and
must not be so remote and fanciful.
Section 36(9) Of the OCC reads:
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Providing gratuity pay is one of the express Q: What about retirement benefits? Can
powers of the corporation and therefore, the corporation grant retirement benefits
resolutions duly passed by the board superior to what the law provides?
approving the grant of gratuity pay to the A: Yes.
employees of the corporation are not ultra
vires. The grant of gratuity pay does not Q: What about inferior to what the law
require shareholders' approval as it is not provides?
tantamount to the sale, lease, exchange or A: No.
disposition of all or substantially all of the
corporation's assets. Lopez Realty, Inc. vs. Q: What is the theory of specific capacity?
Fontecha, G.R. No. 76801, Second A: Under the Theory of Specific Capacity, a
Division, August 11, 1995 corporation cannot exercise powers except
Discussion: The grant of gratuity pay does those expressly or impliedly given to it.
not require shareholders’ approval. The grant
of gratuity pay is not tantamount to sale, The specific powers of a corporation can be
lease, exchange of property. found in Sections 36 to 43 of the RCC.
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POWERS OF THE CORPORATION On the other hand, the corporate term may be
shortened for corporations with a specified
term in the articles of incorporation or even
Q: Is there any revision under the RCC on
those with perpetual existence.
modes of notice of meeting for any of the
corporate act requiring approval of
Discussion: May be exercised only in the
stockholders or members in a meeting
event when the corporation has a fixed term.
called for the purpose?
As we said, corporations under the RCC have
A: Under the RCC, notices of the meeting,
the perpetual existence and corporations
when allowed by the bylaws or done with the
organized prior to the effectivity of the RCC
consent of the stockholder, may be sent
likewise are deemed to have perpetual
electronically in accordance with the rules
existence.
and regulations of the SEC on the use of
electronic data messages. This is a new
Section 36 on the extension of term refers to
provision which cannot be found in BP Blg.
the corporations which opted or preferred to
68 and which can be uniformly seen in
have a fixed term specified in the articles of
Section 36 (Power to Extend or Shorten
incorporation.
Corporate Term), Section 37 (Power to
Increase or Decrease Capital Stock; Incur,
Q: What are the requirements for
Create or Increase Bonded Indebtedness),
extending or shortening the corporate
Section 39 (Sale or Other Disposition of
term?
Assets) and Section 41 (Power to Invest
A: The requirements are as follows:
Corporate Funds in Another Corporation or
a. At least majority vote of the board;
Business or for Any Other Purpose) of the
b. Ratification by the stockholders
RCC.
representing at least 2/3 of the
outstanding capital stock or by at least
Discussion: The revision or amendment is
2/3 of the members in case of non-
Notices can be sent electronically based on
stock corporations;
the rules of the SEC if provided for in the
c. Written notice of proposed action and
bylaws of the corporation. This goes through
the time and place of the meeting
all of the various corporate acts.
must be given to stockholders' or
members' residences, served
Q: When may the power to extend or
personally or sent electronically;
shorten the corporate term be exercised?
d. The extension or shortening of
A: This power to extend the corporate term
corporate term entails an amendment
may be exercised in case the corporation has
of the articles of incorporation. As
opted to have a fixed term, as specified in its
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shares. The properties exchanged for Q: The authorized capital stock of ABC
shares become the assets of the Corporation is Php100 million divided into
corporation. 100,000,000 shares with par value of Php
c. c. To support stock dividend declaration 1/share. The subscribed capital stock is
— if the unsubscribed shares of the P50,000,000 divided into 50,000,000 shares
authorized capital stock of the with par value of Php 1/share and fully
corporation are not sufficient to paid-up. The corporation posted a surplus
accommodate the shares that the profit of Php100,000,000 in the preceding
corporation may issue as a result of the year. The corporation would like to
stock dividends, the capital stock must be declare 200% stock dividends. What steps
increased to support such stock dividend. should the corporation take?
Over-issuance of shares is not allowed, A: The stock dividend declaration has to be
being an ultra vires act. 2001 Bar Exam. approved by the board of directors by at least
majority vote and the stockholders
Discussion: representing at least 2/3s of the outstanding
Q: What are the tools /remedies available capital stock.
to the corporation to raise funds?
A: The corporation should also increase the
a. To increase the capital stock capital stock. Their base figure for the
b. To issue shares from the unsubscribed declaration of stock dividends is the number
portion of the ACS of subscribed shares which is 50 million. The
c. Loans from creditors 200% stock dividend declaration translates to
d. Advances from SH 100 million shares. This means that the
corporation will have to issue this number of
Note: Advances from SH are not considered shares because of the 200% stock dividend
as equity. They are loans of SH to declaration. The only available shares are the
corporation until they decide to convert it to 50 million unsubscribed shares. The capital
equity. stock then has to be increased by at least P
150 million divided into 150 million shares to
Q: What is the difference between an support the stock dividend declaration.
advance and equity?
A: Discussion: The following are the steps that
a. Loan earns interest. Equity does not should be taken by the corporation:
earn interest; Equity will earn 1. Get the approval of the majority of the
dividends if declared by the Board and ⅔ of SH to declare stock
corporation. dividends
b. Loan is an obligation. Dividends are 2. Corpo must likewise increase the capital
not. stock by at least P150M to support the
stock dividend declaration.
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a. Why? Because the base figure for Php500,000,000 divided into 500,000,000
stock dividend declaration is the shares with par value of Php 1.00 per share
number of subscribed shares. while the paid-up capital stock is
Here, the subscribed shares is Php250,000,000 divided into 250,000,000
P50M, therefore 200% is based shares with par value of Php 1.00 per
on subscribed shares - P50M. share. ABC Corporation intends to
b. 200% of P50M means P100M increase its capital stock to Php2 billion
shares. This means that ABC corp pesos divided into 2 billion shares.
will have to issue P100M
a. May ABC corporation increase its
Unfortunately, for this corporation, the only capital stock even if its authorized
available shares are 50M unsubscribed capital stock is not yet fully
shares. Therefore, you have to increase the subscribed?
capital stock by at least P150M divided into b. Is the corporation required to collect
150 million shares to support the stock payment on the subscription to the
dividend declaration. increase in capital stock considering
that Php500,000,000 already amounts
Slide: Pertinently, the Supreme Court in the to 25% of the Php2 billion increased
case of Central Textile Mills, Inc. vs. capital stock?
National Wages and Productivity c. Are there other ways by which ABC
Commission, ruled that prior to the approval Corporation can increase its
by the SEC of the increase in the authorized authorized capital stock from Php 1
capital stock, subscription payments cannot, billion to Php 2 billion?
as yet, be deemed part of a corporation's paid-
up capital, technically speaking, because its A:
capital stock has not yet been legally a. Yes, a corporation is not prohibited from
increased. Such payments constitute deposits increasing its authorized capital stock
on future subscriptions, money which the even if the same has not yet been fully
corporation will hold in trust for the subscribed.
subscribers until it files a petition to increase (Dean: According to the SEC, the corpo
its capitalization and a certificate o f filing of is not prohibited from increasing its ACS
increase of capital stock is approved and even if the same has not yet been fully
issued by the SEC. Central Textile Mills, subscribed. There is no obligation to
Inc. vs. NWPC, G.R. No. 104102, Second subscribe in full the ACS before it can
Division, August 7, 1996. increase the same.)
Q: The authorized capital stock of ABC b. Yes, because the 25% subscription is
Corporation is Php 1 billion divided into 1 based on the P1 billion increase in the
billion shares with a par value of P 1.00 per capital stock and not on the total capital
share. The subscribed capital stock is stock as increased. The 25% subscription
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50,000,000 will mean the release or indebtedness and therefore will not require
condonation of the 10,000,000 unpaid SH approval and majority of the entire Board.
subscription, thereby causing prejudice to the
creditors as subscriptions to the capital stock NOTE: The bonds usually, but not all the
are funds held in trust for their benefit under time, are payable to bearer. So they are
the trust fund doctrine. transferred by delivery.
Discussion: No, because the decrease of Q: What are the characteristics or features
capital stock will prejudice the creditors. The of a bonded indebtedness?
reduction to P50M will mean the A: The two principal elements of distinction
condonation of the P10M unpaid are time duration and the division of the
subscription, in violation of the Trust Fund whole debt into like aliquot part units of
Doctrine. Capital Stock are funds held in round number denominations, represented by
trust for the benefit of the creditors. negotiable or assignable certificates of
indebtedness.
Q: What is bonded indebtedness? a. Such certificates are generally called
A: It is a borrowing by the corporation which bonds, the purpose being to enable the
is long term in nature involving a large corporation to make use of the borrowed
number of lenders and secured by the money for a long period of years, to
encumbrance on corporate assets. Since obtain from a large number of people and
bonds are securities, they should be to facilitate the transfer of the certificate
registered with the SEC. of indebtedness from hand to hand during
the term of the collective obligation.
Q: From this definition, what are the b. b. Such bond issues are usually secured
features and characteristics of bonded by the transfer to a trustee of specific
indebtedness? property to secure payment of the debt.
A: c. The bonds usually, but not necessarily,
1. Long term in nature - The corpo needs run to bearer and transferable by delivery.
longer time to use the money d. The effect of the creation and issuance of
2. Involving large number of lenders - You such obligations is borrowing from the
use a bond, and not a promissory note general public.
(PN is used when you borrow from a
bank) Whenever a corporation resorts to this
3. Encumbrance on corporate assets method of borrowing funds, the resulting
4. Registered with the SEC - because bonds obligations constitute a bonded indebtedness,
are considered as securities subject to the requirements of Section 37 as
to creation and increase.
NOTE: Regardless of the amount of
borrowing, if the borrowing does not have Discussion: Regardless of the amount of
these characteristics, it is not a bonded borrowing, if the borrowing does not have
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those characteristics and features, it is not a Note: It is a right and option but not an
bonded indebtedness that will require obligation.
stockholders’ approval or approval of the
majority of the board. Q: What is the rationale of pre-emptive
right?
Q: What is pre-emptive right? A: The foundation of this right is to maintain
A: It is the right of stockholders to subscribe the proportionate voting strength and control
to all issues or disposition of shares of any of existing SH, that is, the existing ratio of
class by the corporation, in proportion to their their interest and voting power in the
respective shareholdings. In practical terms, corporation. It prevents dilution and
this means that the shares of stock of the impairment of the SH interest in the
corporation should first be offered corporation.
proportionately to the stockholders before
they can be issued or sold to non- EXAMPLE: The ACS is P100M divided
stockholders. 2019 Bar Exam. into 100M shares with par value of P1.00
per share. P50M is fully subscribed. Of
Discussion: Check the first sentence. Right these, A, B, C, D, E subscribed to P10M
of stockholders. Obviously, available to all each. Each gets to receive 20% of the
stockholders. dividends that the corpo may declare. In
case of dissolution, they will also receive
NOTE: Right of SH to subscribe to all issues 20% each of the residual assets of the
All issues mean whether such is taken corporation. In case of new share issuance,
on increase of capital stock or the SH should be given the first
issuance of shares from the opportunity to subscribe thereto, in
unsubscribed portion of ACS proportion to their shareholdings in the
Pre-emptive right also applies to corpo, before such new shares can be
disposition of Treasury shares issued to non-SH otherwise, the 20%
The phrase any class means that equity stake of each SH will be diluted.
preferred shares are also covered by
this right Dean: If you are the SH, you have the right to
Owners of Common shares are prevent the entry of any investor.
allowed to exercise this right even
when the new shares issued by the Q: Do stockholders have pre-emptive right
corpo are only preferred shares. to additional shares to be issued from
Why? Because it will dilute the stake existing authorized capital stock, or only in
of the owners of the common shares case of an increase of capital stock or both?
if they would not be allowed to A: The preemptive right applies to any and all
exercise pre-emptive right even to the issuance of shares by the corporation whether
newly issues preferred shares. sourced from the unissued portion of the
authorized capital stock or in case of an
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Dean: In the board resolution, there should NOTE: Only in these two cases that you are
be a period given to the SH to subscribe. allowed to issue shares to a non-stockholder
Failure to subscribe within the period without violating pre-emptive right as long as
constitutes an implied waiver on the part of the issuance is approved by the stockholders
SH. owned by at least 2/3 of the outstanding
capital stock.
c. Shares issued in compliance with the
laws requiring minimum stock Issuance of shares to a non-SH even
ownership by the public. though he may be an investor, is subject to
pre-emptive right. Even though it was
Public companies are required to have a approved by 99% of the stockholders, the 1%
portion of their outstanding capital stock owner should be entitled to pre-emptive right.
owned by the public. The current minimum
public ownership set by law is 10% of the Q: `X" Realty, Inc., a corporation engaged
corporation's outstanding capital stock. in the subdivision business, has an
Failure to comply with this requirement will authorized capital of P8, 000,000, all of
result to the delisting of the shares in the which has been fully subscribed. At a
Stock Exchange. Thus, the issuance of shares special meeting of the board of directors,
to comply with the minimum public the majority vote decided, on the basis of
ownership requirement is not subject to pre- the recommendation of its Executive
emptive right. Committee, that the corporation purchase
a 5-hectare property offered to It because
Dean: It was ideal for its subdivision business, the
1. Those companies whose shares are price offered was lower than the prevailing
traded in stock exchange market price, and John Roque, the owner
2. Failure to comply with this will result of the property, was willing to accept P2,
in the delisting of the shares in the 000,000 worth of shares of the corporation
stock exchange in exchange of, or as payment for, his
property. No cash was involved in the
d. Issuance of shares in exchange for transaction. Thus, the board approved a
property given for a corporate resolution increasing the authorized
purpose, if approved by the capital stock from P8,000,000 to P10
stockholders representing at least 2/3 Million, stipulating that the additional
of the outstanding capital stock P200,000 worth of shares shall be issued in
exchange for the 5-hectare property and
e. Issuance of share in payment of debt that the existing stockholders shall have no
made in good faith, if approved by the pre-emptive right to subscribe to the
stockholders representing 2/3 of the additional shares as the same were being
outstanding capital stock. issued to pay for the property.
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Was the action of the Board correct and capital stock requires approval by the
sufficient? board and the stockholders
A: The action of the Board of Directors was representing at least 2/3s of the
correct, but not sufficient. Under Sections 38 outstanding capital stock.
and 61 of the RCC, shares may be issued for - The resolution authorizing the
property needed for corporate purposes but issuance of shares to outside investors
subject to SEC approval to ensure that the is also valid. Shares may be issued to
real property is fairly valued, to prevent the non-stockholders but subject to
issuance of watered stocks. The increase of stockholders' pre-emptive right.
capital stock is also subject to the approval
of the stockholders representing at least B. What remedies, if any, are available to
2/3s of the outstanding capital stock. No dissenter?
A: Estrada, the dissenting stockholder,
SEC and stockholders approvals were
may exercise his pre-emptive right. Pre-
indicated in the problem.
emptive right is not applicable only if the
stockholders' approval representing 99%
Q: The stockholders of People Power, Inc.
of the outstanding capital stock pertains
("PPI") approved the following two
to issuance of shares for property needed
resolutions in a special stockholder's
for corporate purpose or in payment of
meeting: (i) Resolution increasing the
previously incurred indebtedness. He
authorized capital stock of PPI, and (ii)
cannot exercise his appraisal right
Resolution authorizing the Board of
because an increase in capital stock is not
Directors to issue for cash payment the
one of the instances where such right may
new shares from the proposed capital
be exercised under Section 80 of the
stock increase in favor of outside investors
RCC. 1987 Bar Exam.
who are non-stockholders. The foregoing
resolutions were approved by stockholders
Q: What is the remedy of the stockholder
representing 99% of the total outstanding
not in favor of an amendment to the
capital stock. The sole dissenter was Jose
articles of incorporation to deny pre-
Estrada who owned the rest 1% of the
emptive right?
stock.
A: He can exercise his appraisal right. It is
available in case of an amendment to the AOI
A. Are the resolutions binding on the
that has the effect of changing the rights of
corporations and its SH, including the
the SH or of any shares. If you deny pre-
dissenter?
emptive right to the SH, it restricts his right
A:
to subscribe to the issuance of the
- The resolution to increase capital
corporation.
stock is binding on the corporation on
the assumption that it was similarly
Q: What are the revisions under the RCC
approved by at least a majority of the
on the power of a corporation to sell,
board of directors. The increase of
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encumber, and dispose of its corporate and Iglesia Ni Cristo, G.R. No. 117897, May
assets? 14,1997.
A:
a. Approval of the Philippine Competition Dean: Approval by the majority vote of the
Commission should be obtained for sale Board and SH representing ⅔ of OCS
and purchase transactions covered by the
provisions of Republic Act No. 10667, Slide: Similarly, the assignment of the right
otherwise known as the "Philippine to redeem the only asset of the corporation
Competition Act". amounts to a sale of all or substantially all of
b. The determination whether the the corporate assets. As such, it requires
disposition involves the sale of all or approval by at least a majority of the board
substantially all corporate assets does not and the affirmative vote of the stockholders
rest solely on whether the corporation representing at least 2/3s of the outstanding
would be rendered incapable of capital stock. Rosita Pena vs. the Court of
continuing the business or accomplishing Appeals, et al., G.R. No. 91478, February
the purpose for which it was 7, 1991.
incorporated, it also must be read in
harmony with the revised provision PENA v. CA
essentially stating that it must be
Q: What if the corporation will assign the
computed based on its net asset value, as
right to redeem the only asset of the
shown in its latest financial statement.
corporation in favor of third party?
A: The assignment of the right to redeem the
Q: Where the assets to be disposed of
only asset is tantamount to sale of all or
constitutes the only property of the
substantially all of the corporate assets.
corporation, whose approvals are needed?
Hence, approval by majority of the Board and
A: Where an asset constitutes the only
SH representing ⅔ of the OCS is required.
property of the corporation, its sale to a third-
party is a sale or disposition of all the
Slide: In one case though, it was held that a
corporate property and assets of said
stockholder cannot invalidate the sale of
corporation falling squarely within the
corporate properties for failure to comply
contemplation of Section 39 of the RCC. In
with Section 40 of the Corporation Code
the case of Islamic Directorate of the
( now Section 39 of the RCC ), where the
Philippines vs. Court of Appeals, the Court
buyer relied on the secretary's certificate that
ruled that for such sale to be valid, the
the sale had been authorized by resolutions of
majority vote of the legitimate Board,
the board and stockholders. Being regular on
concurred in by the vote of at least 2/3 of the
its face, a Secretary's Certificate is sufficient
bona fide members of the corporation should
for a third party to rely on. It does not have to
have been obtained. Islamic Directorate of
investigate the truth of the facts contained in
the Philippines, et al., vs. Court of Appeals
such certification, otherwise business
transaction of a corporation would become
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company holds the company in trust of the the seller cannot continue with the
creditors of Juan dela Cruz. business for which it was organized.
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Will the sale of all assets and liabilities of EXPN: (where buyer is liable to assume the
MA Corporation to BBB Banking obligation of the seller)
Corporation automatically dissolve or 1. When the buyer expressly or impliedly
terminate the corporate existence of AAA assumes the liabilities of the seller (Art.
Corporation? Explain your answer. 2047 of Civil Code)
A: No, the sale of all the assets and liabilities 2. If the sale amounts to a merger or
of MA Corporation to BBB Banking consolidation (Title X of RCC)
Corporation will not result in the automatic 3. If the sale is entered into fraudulently or
dissolution or termination of the existence of made in bad faith (Art. 1388 of Civil
the former. Such sale is not one of the modes Code)
of dissolution under the Corporation Code. 4. If the buyer is merely a continuation of
Moreover, having assets is not a condition for the personality of the seller or the
the continuation of juridical existence. business-enterprise transfer rule
(Dean: That’s why even when you sell your (Business-Enterprise Transfer Rule)
assets, you continue to exist.)
Q: Under the Nell Doctrine, so called
Q: Is there a merger between AAA and because it was first pronounced by the
BBB? Or only a sale transaction/? Supreme Court in the 1965 ruling in Nell
A: There can be no merger without a vs. Pacific Farms, Inc. , the general rule is
certificate of merger issued by the SEC. It is that where one corporation sells or
only a sale of all of the assets from the seller otherwise transfers all of its assets to
to buyer. Therefore, the buyer is not liable to another corporation, the latter is not liable
all the remaining liabilities of the seller, for the debts and liabilities of the
despite the transfer of all the assets and transferor.
liabilities. THIS IS NELL DOCTRINE.
State the exceptions to the Nell Doctrine.
Q: Is there a de facto merger? A: The exceptions to the Nell doctrine are as
A: None. A de facto merger takes place when follows:
a corporation acquires the assets and
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a. When the buyer expressly or impliedly damages suffered. Thus, if there is fraud in
assumes the liabilities of the seller; the transfer of all the assets of the transferor
b. If the sale amounts to a merger or corporation, its creditors can hold the
consolidation; transferee liable.
c. If the sale is entered into fraudulently or
made in bad faith; and The legal basis of the last in the four (4)
d. If the buyer is merely a continuation of exceptions to the Nell Doctrine, where the
the personality of the seller or the so purchasing corporation is merely a
called business- enterprise transfer rule. continuation of the selling corporation, is
2017 Bar Exam. challenging to determine.
Q: State the legal basis of each of the In other words, in this last exception, the
exceptions. transferee purchases not only the assets of the
A: The first exception under the Nell transferor but also its business. As a result of
Doctrine, where the transferee corporation the sale, the transferor is merely left with its
expressly or impliedly agrees to assume the juridical existence, devoid of its industry and
transferor's debts, is provided under Article earning capacity. Fittingly, the proper
2047 of the Civil Code. When a person binds provision of law that is contemplated by this
himself solidarily with the principal debtor, exception would be Section 39 of the RCC.
then a contract of suretyship is produced.
Necessarily, the corporation which expressly The purpose of the business-enterprise
or impliedly agrees to assume the transferor's transfer is to protect the creditors of the
debts shall be liable to the same. business by allowing them a remedy against
the new owner of the assets and business
The second exception under the doctrine, as enterprise. Otherwise, creditors would be left
to the merger and consolidation of "holding the bag," because they may not be
corporations, is well-established under Title able to recover from the transferor who has
X of the RCC. If the transfer of assets of one "disappeared with the loot." or against the
corporation to another amounts to a merger transferee who can claim that he is a
or consolidation, then the transferee purchaser in good faith and for value. Based
corporation must take over the liabilities of on the foregoing, as the exception of the Nell
the transferor. doctrine relates to the protection of the
creditors of the transferor corporation, and
Mother exception of the doctrine, where the does not depend on any deceit committed by
sale of all corporate assets is entered into the transferor-corporation, then fraud is
fraudulently to escape liability for transferor's certainly not an element of the business
debts, can be found under Article 1388 of the enterprise doctrine, Y-I Leisure Philippines
Civil Code. It provides that whoever acquires vs. James Yu; G.R. No, 207161, September
in bad faith the things alienated in fraud of 13, 2015
creditors, shall indemnify the latter for
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In the Y-1 Leisure case, James Yu purchased seller obtained funds from the buyer, which
golf and country club shares from a funds may be garnished by the seller's
corporation organized to establish a golf creditors?
course in Arayat, P'ampanga. When he
visited the site, he discovered that the golf With respect to employment agreements, the
and country club was non-existent. He filed Supreme Court held that in asset sales, the
an action for collection against the seller- rule is that the seller in good faith is
corporation and its President. Meanwhile, the authorized to dismiss the affected employees,
property was conveyed to Y-1 Leisure. The but is liable for the payment of separation pay
latter was made liable because the seller under the law, The buyer in good faith, on the
corporation, after the sale, had been rendered other hand, is not obliged to absorb the
incapable of continuing the business for employees affected by the sale, nor is it liable
which it was organized the development of for the payment of their claims. The most that
the golf course) and the buyer-corporation it may do, for reasons of public policy and
acquired the property to complete the social justice, is to give preference to the
development of the project. It was held that qualified separated personnel of the selling
two requisites must concur for the business- firm. SME Bank, Inc_ et al., vs. Peregrin de
enterprise rule to apply: (a) the transferor Guzman, et al., G.13. No. 186M1, October 8,
corporation sells all or substantially all of its 2013.
asserts to another entity.; and (b) the
transferee corporation continues the business Y-1 LEISURE PH v. JAMES YU
of the transferor corporation. Both were
accordingly present.
FACTS: James Yu bought a certificate of
membership in a corporation that was
Based on this case, which incidentally is an
organized for the purpose of constructing a
en bane decision, it appears that if the
golf course. After a few months, there is no
transferee acquires all of the assets of the
development. He wanted a refund of his
transferor corporation and continues the
investments from the President of the
business of the transferor, the transferee
Corporation. The obligation was
should be liable to pay the claims of the
acknowledged by the corporation and the
transferor's creditors. There is a very thin line
president. The corporation transferred the
between the mere sale of all or substantially
property to another corpo and another corpo.
all of the assets and tie business-enterprise
rule because in most cases, the transferee
ISSUE: WON James Yu can recover his
devotes the acquired assets for a purpose
claim from the buyer of the property of the
similar, if not exactly the same, to the
seller corporation
business of the transferor. Does it mean that
the buyer is now liable for the obligations of
RULING: In this case, what was transferred
the seller? Can we still say that the creditors
is not only the assets of the seller but also the
of the seller are holding an "empty bag" if the
business, because the buyer will continue the
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months from the time of its purchase or And the balance is payable on the later date.
acquisition, be sold or disposed of at a public Such later date maybe specified in the
or private sale. contract of subscription or upon call of the
BOD.
Q: Cite examples of legitimate corporate
purposes to warrant acquisition or If the shares are not paid 30 days from due
purchase by the corporation of its own date, it become delinquent stocks. Being
shares of stock. delinquent stock there are two remedies
available to the corporation:
A: a. To eliminate fractional shares arising
out of stock dividends. 1. File an action for collection to enforce
payment of the unpaid subscription
A fractional share is less than one (1) share. 2. Extrajudicial Sale – done through
For example, a stockholder owns 250 shares auction sale
and the corporation declares 25% stock
dividends. 25% of 250 is 62.5; the .5 is the Q: Can a corporation participate in the bid
fractional share that the corporation may for delinquent shares?
acquire.
A: GR: It cannot.
Fractional share cannot vote. But if one XPN: if there is no bidder willing to pay or
fractional share added to another fractional able to pay the balance of the subscription,
share became a composite share. the law allows the corporation to acquire the
delinquent shares as long as it has surplus
b. To collect or compromise an indebtedness profit.
to the corporation, arising out of unpaid
subscription, in a delinquency sale, and to c. To pay dissenting or withdrawing
purchase delinquent shares sold during the stockholders entitled to payment for their
said sale. shares under the provisions of the RCC.
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exercising his appraisal right if the project stockholders. Board approval suffices. (Del
goes through. He, therefore, demands that Rama vs. Maao Sugar Central, G.R. No.
the project be submitted to the 175041 Feb. 28, 1969)
stockholders for approval, but the board
refuses to do so on the ground that there is Q: Stikki Cement Corporation
no need for such approval and that the ("STIKKI") was organized primarily for
calling of a special stockholder's meeting cement manufacturing. Anticipating
would entail too much expenses. substantial profits, its President proposed
that STIKKI invest in (a) a power plant
M thus cannot have the opportunity to project, (b) a concrete road project, and (c)
exercise his appraisal right. He wants to quarry operations for limestone used in
sue the board to compel it to submit the the manufacture of cement.
matter to the stockholders and to enjoin it
from pursuing the project until the What corporate approvals or votes are
stockholders shall have approved it. needed for the proposed investments?
Explain.
Do you think the matter needs the
stockholders' approval or is the action of A: Unless the power plant and the concrete
the Board of Directors sufficient? Explain. road project are reasonably necessary to the
manufacture of cement by STIKKI (and they
A: No, it does not need stockholders' do not appear to be so), then the approval of
approval. Under Section 41 of the RCC, a the said projects by a majority of the Board
corporation may, as a general rule, invest its of Directors and the ratification of such
funds in another business or in any purpose approval by the stockholders representing at
other than the primary purpose for which it least 2/3 of the outstanding capital stock
was organized, when approved by the Board would be necessary.
of Directors and by the stockholders
representing at least 2/3 of the outstanding As for the quarry operations for limestone,
capital stock in a meeting duly called for the the same is an indispensable ingredient in the
purpose. Any dissenting stockholder may manufacture of cement and may, therefore,
exercise his appraisal right. be considered reasonably necessary to
accomplish the primary purpose of STIKKI.
However, where the investment is reasonably In such a case, only the approval of the Board
necessary to accomplish its primary purpose, of Directors would be necessary.
the approval of the stockholders is not
necessary. In this case, the manufucture of This provision likewise refers to property.
bottles is reasonably necessary for the The property of the corporation must be
corporation's primary business of devoted to attain the primary purpose. If the
manufactunng soft drinks and does not, property would be devoted to attain the
therefore, need the approval of the
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Let’s say, the corporation obtained a loan that Q: Are profits the same as dividends?
loan can be secured by a mortgage of the
property. So the mortgage is connected to the A: NO
primary purpose of the corporation. Because
the loan is obtained to accomplish the Profits are the sources of dividends. Profits
purpose of the corporation. Thus, the are dividends only when they have been set
mortgage is reasonably necessary or aside for distribution to stockholders under
connected to the loan transaction. the conditions specified by law.
In order to secure obligation of another, you Profits belong to the corporation while
need amendment. If it is done for secondary dividends once declared, belong to the
purpose, you need board and stockholders’ stockholders.
approval.
Q: Under what conditions may the
Q: What if the amendment, is to make the corporation declare dividends?
corporation a bonding company?
A:
A: You don’t need stockholders’ approval a. The corporation must have
anymore because the bonding company’s unrestricted retained earnings as of
business is to secure the obligation of the last fiscal or calendar year.
another. It becomes the primary purpose and b. The dividends shall be payable in
board approval will suffice. cash, in property, or in stock to all
stockholders based on outstanding
stock held by them.
POWER TO DECLARE DIVIDENDS c. The cash dividend declaration must
be approved by the board of
Q: What are dividends? directors. In case of stock dividends,
in addition to board approval, the
declaration must likewise be
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NOTE: SEC approval is not needed in Slide: The total subscriptions are deducted
declaring dividends. SEC approval are from the assets to determine the availability
only required in increasing capital stock of retained earnings because, under the trust
as a result of stock dividends declaration. fund doctrine, subscriptions to the capital
stock constitute a fund to which creditors
Q: What are retained earnings? have a right to look for the satisfaction of
their claims and which the corporation is not
A: Retained Earnings are the accumulated allowed to impair to their prejudice.
profits realized out of normal and continuous
operations of the business after deducting Q: What are unrestricted retained
therefrom distributions to stockholders and earnings?
transfers to capital stock or other accounts.
The Retained Earnings shall be the amount as A: Unrestricted retained earnings represent
shown in the financial statements audited by the amount of accumulated profits and gains
the company's independent auditor. If realized out of the normal and continuous
applicable, such amount shall refer to the operations of the company after deducting
retained earnings of the parent company but therefrom distributions to stockholders and
not the consolidated financial statements. transfers to capital stock or other accounts,
and which are: (1) not appropriated by its
Stated otherwise, the corporation has retained Board of Directors for corporate expansion
earnings if its assets exceed the total projects or programs: (2) not covered by a
liabilities and combined subscriptions to the restriction for dividend declaration under a
capital stock of the corporation. This may be loan agreement; and (3) not required to be
expressed in the following formula: retained under special circumstances
obtaining in the corporation such as when
Retained Earnings = Assets - Liabilities and there is a need for a special reserve for
Subscriptions probable contingencies.
Such retained earnings or portion thereof are Therefore, the retained earnings are
unrestricted if there are no legal and unrestricted if they are not appropriated for
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BOD expansion, not covered by restriction dividend policy and the fact of payment of
declaration of dividends under loan dividends or the reasons for the nonpayment
agreement, and not required to be retained thereof.
under special circumstances if there is a need
for a special reserve for probable Q:May the corporation
contingencies. revaluation/appraisal surplus?
Q: Is it a ministerial duty of the A: No, the SEC opined that an increase in the
corporation to declare dividends if surplus value of a fixed asset as a result of its
profit is available? revaluation is not retained earnings. Such are
mere increments in the value of corporate
A: The declaration of dividends is assets which may fluctuate from time to time.
discretionary, covered by the business
judgment rule. However, stock corporations Thus, if a parcel of land originally acquired
are prohibited from retaining surplus profits for P 10,000,000 had doubled in value after
in excess of one hundred percent (100%) of three years, the recognition in the corporate
their paid-in capital stock, except: (a) when books of the revaluation does not justify
justified by definite corporate expansion dividend declaration. It is the gain arising
projects or programs approved by the board from the sale of the revalued property which
of directors; or (b) when the corporation is may serve as the basis for the declaration of
prohibited under any loan agreement with dividends. (1987 BAR EXAM)
financial institutions or creditors, whether
local or foreign, from declaring dividends It is only when the property is sold in the
without their consent, and such consent has higher price that the gain arising from the sale
not yet been secured; or (c) when it can be of the revalued property can be served as a
clearly shown that such retention is necessary basis for declaration of dividends.
under special circumstances obtaining in the
corporation, such as when there is need for Q: What are the kinds of dividends?
special reserve for probable contingencies.
A: Either cash, stock or property dividends.
Thus, the board of directors may be
compelled to declare dividends if the surplus NOTE: For the purposes of approval, any
profit is in excess of 100% of its paid-in dividends not payable in stock or shares is
capital and no justifiable reasons exist to considered cash dividends. So, property
withhold dividend declaration (Section 42, dividend is considered cash dividend. It only
RCC). requires BOD’s approval. Same as bond
dividend.
Under Section 49 of the RCC, however, the
board of directors must endeavor to present
to the stockholders an explanation on
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A: Yes, they are property dividends. Q: Was the resolution declaring the
Dividends as a result of the investment in issuance of stock dividends valid? Explain
another corporation. Board’s approval only. your answer.
Slide: Dividends may either be cash or stock. A: Yes, the resolution of the Board of
Any dividend other than from the unissued Directors declaring the issuance of stock
shares of the corporation is, in contemplation dividends was valid, but still insufficient for
of law a cash dividend. Thus, property purposes of stock dividend.
dividend is essentially a cash dividend.
Stockholders' approval, therefore, is not Q: What step or steps need to be taken so
required for property dividends. that the decision of the board could be
implemented? State the required vote.
A stock dividend is one that is declared and
paid out from the unissued shares of the A: The aforesaid approval of the Board of
corporation. It is paid in shares of stock Directors for the declaration of stock
instead of cash. dividends should still be concurred in by the
stockholders representing not less than 2/3 of
Q: Discuss the concept of stock dividends. the outstanding capital stock, at a regular or
special meeting called for the purpose. In
A: Stock dividend is actually a two-step addition, the authorized capital stock must be
process: increased to accommodate the stock
(1) a dividend, and (2) the enforced use of the dividends since the authorized capital stock
dividend money to purchase additional shares of Palmavera Corporation is fully subscribed.
of stock at par value to be proportionately The increase in capital stock is subject to SEC
distributed to the stockholders on the basis of approval.
the shares held.
Q: When you declare stock dividends and
Slide: Palmavera Corporation has an you increase ACS, do you need to collect
authorized capital stock of P500,ooo,ooo all money from the stockholders to be able to
subscribed and outstanding as of December comply with 25% subscription and
31, 2019. The corporation also has payment requirement in case of increase in
unrestricted retained earnings in its book ACS?
amounting to P375,ooo,ooo. Since the
corporation needed the cash surplus to carry A: No, it is cash coming from the corporation
out its expansion projects, the board of to fund the increase.
directors, in its meeting held on January 5,
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It must be noted, however, that the trust fund NOTE: Properties cannot distributed to the
doctrine is not limited to the stockholders' stockholders except in cases of dissolution
subscriptions. The scope of the doctrine and liquidation, redemption of redeemable
encompasses not only the capital stock but shares and reduction of capital stock.
also other property and assets generally
regarded in equity as a trust fund for the Q: Does the additional paid-in capital
payment of corporate debts. ("APIC"), that is, the premium above par
value, form part of the trust fund
Q: When is the trust fund doctrine doctrine?
violated?
A: APIC forms part of the equity emanating
A: The Trust Fund Doctrine is violated in the from the original subscription agreement.
following cases: APIC, as a premium, forms part of the capital
a. The corporation has distributed its capital of the corporation and therefore, falls within
among the stockholders without providing the purview of the trust fund doctrine.
for the payment of creditors
b. It released the subscribers to the capital There have been previous SEC Opinions that
stock from their unpaid subscriptions in fraud stock dividends can be declared out of APIC
of its creditors. but the most recent SEC regulation, as
c. It transferred corporate property by way of previously pointed out, is that APIC shall
dissolution neither be declared as dividend nor shall it be
reclassified to absorb deficiency except
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Q: ABC Corporation ("ABC") obtained a BMPI then place with Printwell several
loan from XYZ Bank secured by a orders on credit totaling P316, 342.76.
mortgage on its real property. ABC Considering that the former paid only
defaulted. To stave off foreclosure, A, the P25,ooo.oo, the latter sued the former for
controlling stockholder of ABC invited the collection of the unpaid balance.
investor X to invest in ABC. X subscribed Impleaded as defendants are all the
to shares of stock of ABC and became a original stockholders and incorporators of
significant stockholder. In further BMPI to recover on their unpaid
consideration of his investment, X and A subscriptions.
agreed on how to manage the corporation.
Unfortunately, the two stockholders had a May Printwell collect the unpaid
disagreement, with each one claiming a subscription of Halley?
breach of the subscription agreement.
May A rescind the subscription of X? A: Yes, a creditor is allowed to maintain an
action upon any unpaid subscriptions (in the
A: No, the rescission of the Subscription same collection suit against the corporation)
Agreement will effectively result in the and thereby steps into the shoes of the
unauthorized distribution of the capital assets corporation for the satisfaction of the debt.
and property of the corporation, thereby To make out a prima facie case in a suit
violating the Trust Fund Doctrine. Rescission against stockholders of an insolvent
of a subscription agreement is not one of the corporation to compel them to contribute to
instances when the distribution of capital the payment of its debts by making good the
assets and property of the corporation is balances upon their subscriptions, it is only
allowed. The Trust Fund Doctrine provides necessary to establish that the stockholders
that subscriptions to the capital stock of a have not in good faith paid the par value of
corporation constitute a fund to which the the stocks of the corporation. Subscriptions to
creditors have a right to look for the the capital stock of a corporation constitute a
satisfaction of their claims. fund to which creditors have the right to look
for the satisfaction of their claims.
Q: Halley was an incorporator and
original director of Business Media In PNB v. Bitulok Sawmill, that the only time
Philippines, Inc. (BMPI ) which originally the unpaid subscribers can be made liable to
had an ACS of Php 3,000,000.00 with a par corporation’s creditors or corporate creditors
value of Php 10.00 0 of which 75,000 were may enforce payment of the unpaid
initially subscribed. BMPI commissioned subscription, is when the corporation
Printwell for the printing of a magazine becomes insolvent. So you need formal
that BMPI published and sold. For that
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That is why the corporate creditors must wait Q: What if between record date and
first for the insolvency of the corporation payment date, the stockholder sold his
before they can run after the unpaid shares. Who gets the dividends in payment
subscribers. Not anymore in the case of date? The owner or stockholder of record?
Halley v. Printwell.
A: Stockholder of record, the one who is
In the case of Halley v. Printwell, lnc., there entitled to the rights of the stockholder. As far
was no insolvency proceeding and yet the as the corporation is concerned, dividends are
Supreme Court affirmed the right of the payable to the stockholders as of this
creditor to enforce the payment of the unpaid particular date.
subscription in the same collection suit
against the corporation. POWER TO ENTER INTO
MANAGEMENT CONTRACT
It is submitted that the correct thing to do is
to enforce the judgment against the Q: What is a management contract?
corporation first and it is only when the writ
of execution is returned unsatisfied for lack A: A management contract is an agreement
of leviable assets sufficient to satisfy the under which a corporation delegates the
judgment debt that the judgment against the management of its affairs to another
unpaid subscriber may be enforced. corporation for a certain period of time. The
Otherwise, the unpaid subscriber effectively contract can have a different nomenclature
becomes solidarily liable with the but falls within the purview of a management
contract for so long as the intention is to
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Q: What are the requirements for the As a rule, the period of management contracts
exercise of the power to enter into is five (5) years for any one (1) term, and for
Management Contracts? so long as it is between two corporations.
However, the following are some of the
A: exceptions:
a. Such contract shall have been approved by
the board of directors and by stockholders a. Management contract between two
owning at least the majority of the corporations pursuant to the Mining Act of
outstanding capital stock, or by at least the 1995. Under this law, the contract may be for
majority of the members in the case of a 25 years.
nonstock corporation, of both the managing
and the managed corporation, at a meeting b. Technical/Financial Service Agreement or
duly called for the purpose; Production Agreement can be for 25 years.
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because it is governed by Oblicon and not by which the corporation was created as defined
RCC. in the law of its organization, and therefore,
beyond the powers conferred upon it by law.
ULTRA VIRES ACTS OF
CORPORATIONS LEONEN: Corporations are artificial entities
granted legal personalities upon their creation
Q: What is the test to determine whether by their incorporators in accordance with
or not an act is within the powers of the law. Unlike natural persons, they have no
corporation? inherent powers. Third persons dealing with
corporations cannot assume that corporations
A: The test to be applied is whether the act in have powers. It is up to expressly defined by
question is in direct and immediate the law and their articles of incorporation.
furtherance of the corporation’s business,
fairly incident to the express powers and A corporation may exercise its powers only
reasonably necessary to their exercise. If so, within those definitions. Corporate acts that
the corporation has the power to do it; are outside those express definitions under
otherwise not. It is a question therefore in the law or articles of incorporation or those
each case of the logical relation of the act to committed outside the object for which a
the corporate purpose expressed in the corporation is created are ultra vires. The
charter. If the act, which is lawful in itself and only exception to this rule is when acts are
not otherwise prohibited, is done for the necessary and incidental to carry out a
purpose of serving corporate ends, and is corporation's purposes and to the exercise of
reasonably tributary to the promotion of powers conferred by the Corporation Code
those ends, in a substantial, and not in a and under a corporation's articles of
remote sense, it may fairly be considered incorporation.
within the powers.
Tersely, an ultra vires act is an act done by a
NOTE: The powers of the coporation is not corporation outside of the express and
restricted to what appears on AOI. It is not incidental powers vested in it by its charter
everything that can be captures by the AOI. and by law.
It also extends to incidental powers or
powers implied to expressed powers. Or Q: Is ultra vires act limited to any act
simply any act that is related to furtherance which is outside the express and incidental
of the purpose of the corporation. powers of the corporation?
Q: What is an ultra vires act of the A: No, there are three types of ultra vires acts:
corporation?
a. Acts done beyond the powers of the
A: The term is used to describe a corporate corporation as provided in the law or its
transaction that is outside the objects for articles of incorporation.
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Cite instances where the corporate acts are Q: Y, as President of and on behalf of AAA
within the powers of the corporation but Corporation, as a way to accommodate X,
are considered ultra vires because they one of its stockholders, endorsed the check
were entered into on behalf of the issued by X. Which statement is most
corporation by persons w h o h ave no accurate?
corporate authority or have exceeded the
scope of their authority. a. It is an ultra vires act;
b. It is a valid indorsement;
a. Another, a contract to sell cement signed c. The corporation will be held liable to
by the president and chairman of the any holder in due course;
corporation is not binding upon it where they d. It is an invalid indorsement.
were not authorized by the board of directors
to enter into a contract and the company Answer: a. It is an ultra vires act.
board of directors disapproved the contract
and the bylaws conferred the power to Q: Is an ultra vires act illegal?
manage the business of the corporation upon
the general manager. A: It depends. If the act is illegal then that act
is void. But not all ultra vires act are illegal
b. Also, the assignment of certificates of act. If act is illegal it is automatic ultra vires.
indebtedness belonging to a corporation Ultra vires acts are those acts outside the
made without the authorization of the board powers of the corporations but not contrary to
of directors does not bind the corporation. law and can be ratified.
c. There is also ultra vires act on the part of Slide: An illegal act, such as one that is
the board of directors when it performs a contrary to law, is necessarily ultra vires but
corporate act without the affirmative or an ultra vires act is not necessarily an illegal
ratificatory vote of the stockholders in those act if it only one that is outside the conferred
instances where the RCC so requires. powers of the corporation.
And there is an ultra vi res act on the part of The term ultra vires should be distinguished
the corporate officers when they performed from an illegal act for the former is merely
acts, purportedly on behalf of the voidable which may be enforced by
corporation, without having been so performance, ratification, or estoppel, while
expressly or impliedly authorized by the the latter is void and cannot be validated. It
bylaws or board of directors, even when the being merely voidable, an ultra vires act can
act or contract falls within the Corporation’s be enforced or validated if there are equitable
express, implied or incidental power, unless grounds for taking such action.
the acts are ratified by the corporation.
Q: May an ultra vires act be ratified?
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A: Yes, as long as it is not contrary to law. It employees and laborers who came to settle in
can be ratified based on equitable grounds. its mining camp which is far removed from
the postal facilities or means of
Slide: In the Pirovano vs. Dela Rama communication accorded to people living in
Steamship, the board authorized the a city or municipality.
corporation to obtain insurance policy on the
life of Pirovano making his children as And even assuming it is ultra vires, it is
beneficiaries. This was done in recognition of deemed ratified because the corporation
Pirovano's immense contribution to the requested for it and agreed to the conditions
growth of the corporation. Upon Pirovano's imposed by the government and as such,
death, however, the corporation questioned estopped from claiming otherwise.
the obtention of the insurance policy arguing
that it is ultra vires. The Supreme Court held In the case of Metropolitan Bank & Trust
that even assuming it is an ultra vires act, it is Co. vs. Quilts & All, Inc., a mortgage on a
deemed ratified by the corporation. A careful corporate property accepted by a bank as the
reading of the case shows, however, that that basis for restructuring a personal loan cannot
the ratio decidendi was more on estoppel be annulled even though it could not have
rather than ratification. been authorized by the board of directors (for
lack of quorum) where the bank relied on the
In Republic vs. Acoje Mining Co., a mining secretary's certificate attesting to the
company requested the Director of Post to existence of a board resolution approving the
establish a postal office inside the mining mortgage.
camp. The latter agreed but subject to the
condition that the company shall indemnify Q: What are the consequences of Ultra
for any loss or damage that the government Vires Acts?
would suffer by reason of the act of the
person designated as postal officer by the A: Unenforceable
mining company. The latter agreed and
adopted the corresponding board resolution. Q: What is the remedy of the stockholder
When the postal officer incurred cash against an ultra vires act?
shortage and Director of Posts demanded
payment for it, the mining company denied A: If the act is yet to be done, the remedy is
liability arguing that the establishment of the one of injunction to enjoin the performance
postal office is ultra vires. The Supreme or continued performance of the ultra vires
Court held that "although not expressly act.
authorized to do so, the establishment of the
local post office is a reasonable and proper If the act has already been performed, a
adjunct to the conduct of the business of a stockholder may file a derivative suit on
mining company for such post office is a vital behalf of the corporation to set aside the ultra
improvement in the living condition of its vires act.
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BYLAWS
Q: What is then the status of the
-Recitation- corporation?
Q: ABC Corporation allows the BOD to A: The corporation may be considered as a de
amend the bylaws. The bylaws is approved facto corporation whose right to exercise
by all the stockholders, not just the corporate powers may not be inquired into
majority and not just 2/3. Let’s just say collaterally in any private suit to which such
that they filed and approved the bylaws corporation may be a party.
prior to incorporation. So pursuant to the
authority delegated by the SH to the Dean’s Book: It is submitted that a
board, the board amended the bylaws to corporation which has not adopted bylaws,
reduce the number of votes needed to after incorporation, should be considered a de
disqualify a competitor. The board facto corporation. It has all the powers and
adopted a resolution and effected the privileges of a corporation under the RCC
amendment to the bylaws. If you are the until the State assails its existence in a direct
SEC, will you approve the amendment to proceeding. But because the one-month
the bylaws? period to submit the bylaws was removed, it
A: No, because there is no valid delegation of may adopt the bylaws anytime and the basis
authority. Under the RCC, the delegation of of the suit against the corporation is only the
authority by the SH to the BOD to amend the inaction or refusal of the corporation to
bylaws must be embodied in a stockholders’ adopt and submit bylaws despite the order
resolution. from the SEC.
Q: What if the delegation of authority is in In actuality, the bylaws are submitted prior to
the bylaws? Is it valid? incorporation. SEC will not act on the
A: No, delegation found in the bylaws is application without the bylaws. (Divina,
invalid. Being a part of the bylaws, it is 2020)
difficult to withdraw or revoke the authority
granted to the BOD. (One of the significant -Slide-
amendments under the RCC) Q: What are the revisions under the RCC
on bylaws?
Q: If the bylaws are not submitted within A:
one (1) month from incorporation, is that a. It removed the option of adopting and
a ground to dissolve the corporation? submitted the bylaws of the corporation
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to the SEC within a period of one month of the outstanding capital stock, or of at least
from the former’s incorporation but, a majority of the members in case of non-
nevertheless, retained the option of the stock corporations, shall be necessary. The
corporation to adopt bylaws after bylaws shall be signed by the stockholders or
incorporation. members voting for them and shall keep in
b. On the contents of the bylaws, it included the principal office of the corporation, subject
the provisions on the mode of notice to to the inspection of the stockholders or
the stockholders or members and the members during office hours. A copy thereof,
modes by which they may attend duly certified by a majority of the directors or
meetings; the guidelines for setting the trustees and countersigned by the secretary of
compensation of directors or trustees and the corporation, shall be filed with the SEC
officers, and the number of other board and attached to the original articles of
representations that an independent incorporation.
director or trustee may have which shall,
in no case, be more than the number -Discussion-
prescribed by the SEC; and other matters There are two (2) ways of adopting bylaws:
as may be necessary for the promotion of 1. Prior to incorporation
good governance and anti-graft and shall be signed by the stockholders
corruption measures. voting for them (basically, all the
c. It also allows the inclusion of an incorporators); and
arbitration agreement in the bylaws. shall keep in the principal office of
the corporation subject to the
Q: What are the nature and functions of inspection
bylaws? 2. After incorporation was approved by
A: Bylaws are set of rules and regulations the SEC
adopted by the corporation for its internal Shall be approved by the stockholders
government, and to regulate the conduct and representing at least a majority of the
prescribe the rights and duties of its members members of the outstanding capital
towards itself and among themselves in stock (or majority of members in case
reference to the management of its affairs. of nonstock corporation)
(John Gokongwei, Jr. vs. SEC, L-45911, As you can see, the BOD has no participation
Aprill 11, 1979) The corporation has the regarding the adoption and approval of
inherent and, at the same time, express power bylaws. Bylaws are set of rules adopted by
to adopt bylaws. the owners of the corporation.
Who are the owners? Stockholders owning
Q: How are the bylaws adopted? the corporation but only requires the majority
A: For the adoption of bylaws by the of the outstanding capital stock.
corporation, the affirmative vote of the What is the participation of the BOD? The
stockholders representing at least a majority copy of the bylaws, as approved by the
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stockholders, must be kept and filed with the for setting the compensation of directors
SEC. The copy with the corporation must be or trustees and officers, and the maximum
certified by the majority of the directors and number of other board representations
countersigned by the Corporate Secretary of that an independent director or trustee
the corporation. This is to make sure that this may have which shall, in no case, be more
is the bylaws approved by the stockholders than the number prescribed by the SEC;
and by the SEC or that there are no two sets g. The time for holding the annual election
of bylaws. of directors or trustees and the mode or
Special Corporations (i.e. banks, insurance manner of giving notice thereof;
companies, building and loan association, h. The manner of election or appointment
public utility, educational institution, or and the term of office of all officers other
other special corporations governed by than directors or trustees;
special laws) i. The penalties for violation of the bylaws;
The bylaws must be indorsed favorably by j. In the case of stock corporations, the
the appropriate government agency. So, SEC manner of issuing stock certificates; and
will not accept any application for approval k. Such other matters as may be necessary
of bylaws or its amendment if there is no for the proper or convenient transaction
indorsement from the appropriate of its corporate affairs for the promotion
government agency. of good governance and anti-graft and
corruption measures.
Q: What are the contents of bylaws? An arbitration agreement may be provided in
A: the bylaws pursuant to Sections 46 and 181
a. The time, place and manner of calling and of the RCC.
conducting regular or special meetings of
the directors or trustees; (a and b)
b. The time and manner of calling and If you compare A and B, you will notice that
conducting regular or special meetings with respect to the meetings of directors, the
and mode of notifying the stockholders or bylaws included “place,” right?
members thereof; The bylaws allows a venue for board
c. The required quorum in meetings of meetings. Meetings of the board may be held
stockholders or members and the manner anywhere, even outside the country. Unless,
of voting therein; the bylaws provides otherwise.
d. The modes by which a stockholder, BUT FOR STOCKHOLDERS’ MEETING,
member, director or trustee may attend that option is not available. This is because
meetings and cast their votes; the place of stockholders’ meeting is fixed by
e. The form for proxies of stockholders and law. i.e. principal office of the corporation
members and the manner of voting them; and if not practicable, in the city or
f. The directors’ or trustees’ qualifications, municipality where the principal office is
duties and responsibilities, the guidelines located.
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Mode of Notice: The RCC included the Corporation vested with Public Interest:
electronic notice if allowed by the bylaws. even if not in the bylaws, they can participate
Before RCC, the usual modes of giving thru electronic communication.
notice are the ff: (e)
1. Personal notice; Proxies: Forms and Manner of Voting
2. Notice by Publication; and RCC provides that proxies must be in writing
3. Notice, electronically, thru email. and filed with the Corporate Secretary before
What is the most practical and most the meeting. Meaning? The bylaws may
convenient mode of giving notice? Still, require additional requirement/s for a valid
publication. Because personal notice, you proxy. E.g. (1) it must be notarize to ensure
have to prove that you have given notice to authenticity. (2) period to file the proxy with
all the stockholders. For electronic notice, the Corporate Secretary. For public
you have to go to so many processes of companies, it is at least five (5) days before
authentication whether or not the notice was the scheduled meeting.
received by the stockholder concerned. (f)
Whereas, in publication, all you have to Qualifications of Directors:
present to prove notice is the affidavit of the They must have the basic qualifications
publisher that publication was done in under the Code and the Bylaws.
newspaper of general circulation in the city The RCC provides for the duties and
where the principal office of the corporation responsibilities of the directors but the
is located and following the frequency bylaws may expand such.
prescribed by the bylaws of the corporation. Compensation of the Directors:
(c) Cannot be fixed by the directors. Can only be
Required quorum in SHs’ meetings: fixed by the bylaws or the stockholders
It can be less than outstanding capital stock. owning the majority OCS. The bylaws may
Except when the RCC requires majority OCS provide for the guidelines in setting their
or 2/3 capital stock as the case may be. compensations.
(d) Independent Directors:
Modes in attending meetings: The maximum number of other board
This refers to the mode on how the representations that an ID may have may also
stockholders may be present in the meeting be provided by the bylaws. But such must be,
and cast their votes. in no case, more than the number prescribed
1. In Person by the SEC.
2. Proxy SEC prescribes: maximum of 9.
3. Remote Communication Public Companies are required to have at
4. In Absentia least 2 IDs. Justices of the SC are appointed
If allowed by the bylaws or not, by approval as ID in various public companies. Public
of the board that is majority of the companies usually appoint retired justices.
members(?) (g)
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Time for Holding the Annual Election: Having an arbitration agreement, any court
Dean only read it. suit, without resorting first to arbitration
(h) proceedings, will be premature.
Term of Office of All Officers:
Q: Can the bylaws provide that the term of all
officers is 1 year subject to reappointment? If CHINA BANKING CORPORATION VS. CA
you are not reappointed, then your term has
117504 | MARCH 26, 1997
prescribed and you lose your job.
A: the “officers” in letter “h” pertains to Q: Are the bylaws of the corporation
corporate officers and other officers binding on third parties?
A: No, bylaws are only binding among the
holding their positions based on trust and
confidence. Remember, when you are stockholders and members of the
holding on a bylaws position, you are a corporation. To be bound, a third party must
corporate officer. Meaning, this cannot be have acquired knowledge of the pertinent
construed to mean non-corporate officers. bylaws at the time the transaction or
Non-corporate officers are protected by agreement was entered into.
security of tenure under our Labor Laws. Thus, a provision in the bylaws of a country
club granting it a preferred lien over the share
(i)
of stock of a member for unpaid dues is not
Penalties for Violation of the Bylaws:
As long as they are not contrary to law, the binding on the pledgee of the same share of
bylaws may provide for such. stock if the latter had no actual knowledge of
e.g. directors who failed to pay dues and it when the shares were assigned to it as
assessment or who are absent for 3 security for a loan transaction.
consecutive meetings may be removed by the Fully Paid Shares: The consent of the
board. corporation is not required. In case of
Of course, the removal by director is void subscription which are not fully paid, the
because only stockholders can remove a corporation may refuse the transfer of shares.
director. BUT the penalties mentioned above Correlate it to Sec. 62, RCC: “unpaid claim”
will provide as the just cause that may pertains to unpaid subscription, nothing
warrant the removal of a minority director. more/less.
(j)
Manner of Issuing Stock Certificates:
Dean only read it. PMI COLLEGES VS. NLRC AND GALVAN
(k) 121466 | AUGUST 15, 1997
Other matters: Dean only read it.
Arbitration Agreement: ❖ The bylaws provides that the
Can be in the AOI or in the bylaws. employment contracts must be signed
by the Chairman of the Board of the
school. Is the employment contract
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entered into by the school and the Under Section 47 of the RCC, bylaws may be
instructors still valid if the Chairman is amended by at least majority of the BOD or
not a signatory thereon? BOT and the owners of at least majority of
the OCS in case of a stock corporation or of
Yes, it is still valid. Bylaws cannot affect or the members in case of a non-stock
prejudice third persons who deal with the corporation, at a regular or special meeting
corporation, unless they have knowledge of duly called for the purpose.
the contents of bylaws. Owners of 2/3 of the OCS of stock
corporation or 2/3 of the members in a
Q: When do bylaws become effective? nonstock corporation can delegate to the
A: Under Section 45 of the RCC, bylaws board of directors or trustees the power to
become effective only upon the issuance of amend or repeal the bylaws or adopt new
the SEC of a certification that the bylaws are bylaws. This delegation is revoked by the
in accordance with the RCC. vote of stockholders owning or representing
Amended or new bylaws become effective a majority of the OCS or a majority of the
upon the issuance by the SEC of a members at a regular or special meeting.
certification that the same is in accordance Whenever the bylaws are amended or new
with the RCC and other relevant laws. bylaws are adopted, the corporation shall file
with the SEC such amended or new bylaws
IN PRACTICE: When applying for the and, if applicable, the SHs’ or Ms’ resolution
incorporation make sure you have the authorizing the delegation of the power to
following documents: amend and/or adopt new bylaws, duly
1. Certificate of Incorporation or certified under oath by the corporate
Registration secretary and a majority of the directors or
o signed by Director for trustees. (Sec. 47, RCC)
Company Monitoring and
administration department Delegation – 2/3 of the OCS
2. Certification of filing of Articles of Revocation – Majority of the OCS only.
Incorporation; and
3. Certification of filing of Bylaws. Q: May the bylaws reflect the actual
delegation of authority to the board of
Q: Is there any revision under the RCC on directors to amend the bylaws?
the amendment of bylaws? A: No, the bylaws may not reflect the actual
A: Yes, the delegation of authority by the delegation. The delegated authority is
stockholder or members to the BOD or BOT temporary. If the delegation is in the bylaws,
to amend the bylaws must be embodied in a the authority cannot be simply recalled for it
SHs’ or Ms’ Resolution. would have required an amendment to the
bylaws itself. (SEC-OGC Opinion 18-08,
Q: How are bylaws amended or revised? dated April 20, 2018)
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the bylaws and sent by the proper officer SEC; provided that the mode of notice
authorized therein. conforms to what the bylaws provide.
c) It must be called by the proper person.
The person authorized to call the meeting RICAFORT VS. DICDICAN
is normally stated in the bylaws. If no
202647-50 | MARCH 9, 2016
person is designated in the bylaws, the
authority to call a stockholders’ meeting
rests with the board of directors. ❖ Q: When is regular stockholder
d) It must be held in the proper place. It is meeting valid even without notice to
mandatory that stockholders’ meetings the stockholders?
must be held in the principal office of the
corporation, as indicated in the AOI, and A: The regular stockholders’ meeting is valid
if not practicable, in the city or despite lack of written notice to the
municipality where the principal office of stockholders if the bylaws specify the date
the corporation is located. and time of the annual meeting. It was held
e) The quorum and voting requirements that the failure to give notice of the regular or
must be met. annual meetings, when the date thereof is
-Discussion- fixed in the bylaws, as in “at twelve-thirty
(c) P.M., on the THIRD MONDAY OF AUGUST
Called by the Proper Person in each year, if not a legal holiday, and if a
It used to be the President. Now, it is the legal holiday, then on the first day following
Chairman. Usually, the bylaws already which is not a legal holiday,” will not affect
provides for the person authorized to call the the validity of the regular or annual
meeting. stockholders’ meeting or the proceedings
(d) therein. (This is yet to be asked in the bar.)
Proper Place
Old Code: in the city or municipality and if ❖ Q: Is it an election contest if it is filed
practicable, in the principal office of the by a stockholder questioning the
corporation. results of the election, even though the
RCC: reversed. Principal office and if not petitioner is not aspiring for a seat in
practicable, in the city or municipality where the board?
the principal office of the corporation is
located. A: Yes, it is an election contest. Election
contest is not limited to a petition filed by
Q: What are the modes of notice of someone who is aspiring for a board seat. It
meeting to stockholders? includes nullifying the results of the election.
A: Notices can be made personally, or by This became important because election
mail or by publication or through electronic contest can only be filed within 15 days after
mail or other modes as may be allowed by the election.
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This petition is therefore barred for being Q: Pledgee or creditors with security
filed out of time. interest cannot vote the shares even
though the security agreement is recorded
-Recitation- in the books of the corporation.
Q: TRUE OR FALSE: Quorum and A: They are not allowed to vote. Only
voting requirements are the same. stockholders of record are allowed to vote
A: FALSE. Quorum is the number of and participate in the stockholders meeting.
stockholders/directors required to be present
to conduct a meeting. Voting requirements Q: Can they be allowed to vote by
are the number of votes needed, under the agreement?
bylaws, to approve a corporate act. A: Yes, provided that it is expressly stated
and recorded in the books of the corporation.
Q: TRUE OR FALSE: The quorum for
board meeting is majority of the directors Q: When the law says that notices must be
as fixed under the bylaws. sent to the stockholders, it means the day
A: FALSE. It is the majority of the directors it was mailed and not the day it was
as fixed by the articles of incorporation. received.
A: Case decided by former CJ Serreno and
Q: Can the bylaws prescribed a lesser or express provision of the RCC, it is the date of
greater number than what the AOI mailing.
required? Dean’s book: It must be the date of receipt
A: No. The bylaws cannot. date of mailing.
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To be more precise, for stock corporations, Quorum in NSC: numerical equivalent of all
the quorum is the majority of the outstanding members who are entitled to vote. In other
stocks whereas for a nonstock corporation, words, majority of the voting members,
the basis in determining the presence of unless the bylaws requires otherwise.
quorum in nonstock corporations is the
numerical equivalent of all members who are Q: Is it permissible for the bylaws to
entitled to vote, unless some other basis is provide quorum of stockholders’ meetings
provided by the bylaws of the corporation. which is less than a majority?
(Lim vs. Moldex) A: A corporation can state in its bylaws that
The bylaws, for instance, may provide that a quorum shall be less than the majority or
members who are delinquent in the payment greater than what was provided for in the
of their dues are not entitled to vote, in which RCC unless the RCC specifically provides
case, they are not included in the computation otherwise. (Sec. 51, RCC)
of quorum. (SEC-OGC Opinion No. 31-19, Worthy of note, however, is that the bylaws
September 9,2019) provision on quorum will not apply in
instances where the RCC explicitly requires
Stock Corporation a specific number of stockholders or
To be more precise: It is the majority of members necessary to resolve or carry out a
outstanding voting stock, unless the bylaws particular corporate proposal. (based on RCC
or the RCC provide otherwise. and SEC Opinion)
Reason: There are certain cases where
preferred shares may vote and therefore, part Q: What are the modes of voting in a
of the OCS. There are certain cases that they stockholders’ or members’ meeting under
cannot vote and therefore, not part of the the RCC?
OCS. A: The right to vote of stockholders or
For the purpose of electing directors: We members may be exercised in person,
all know that non-voting preferred shares are through a proxy, or when so authorized in the
not included in the computation of majority bylaws, through remote communication or in
of OCS. absentia.
For the purpose of increasing the capital At all elections of directors or trustees, the
stock or amending the AOI (any of the 8 right to vote through remote communication
cases enumerated in Sec 6 of the RCC): or in absentia may be exercised in
Non-voting preferred shares are given the corporations vested with public interest,
right to vote and considered part of the OCS. notwithstanding the absence of a provision in
HENCE, TO BE MORE PRECISE, it is the bylaws of such corporations. A
the majority of the outstanding voting stock, stockholder or member who participates
unless the bylaws or the RCC provide through remote communication or in absentia
otherwise. shall be deemed present for purposes of
Nonstock Corporation quorum.
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The board may allow such mode of voting A: In Lopez Realty, Inc. vs. Spouses
even if the bylaws are silent on such Tanjangco, the Supreme Court held that such
provision. Should the board, however, board meeting is legally infirm considering
resolve to allow voting through remote that there is a failure to comply with the
communication or in absentia, it has to requirements or formalities of the law or the
approve the guidelines and procedure corporation’s bylaws. As such, any action
therefor. taken during the said meeting may be
challenged. However, said action may be
Q: What is the effect of the stockholder’s subsequently ratified by the board.
abstention during stockholders’ meetings? Ratification can be made either expressly or
A: In those cases specified by law on impliedly. Implied ratification may take
instances of appraisal right, a stockholder various forms – like silence or acquiescence,
present in a meeting but abstains, is not acts showing approval or adoption of the act,
entitled to exercise such right. He cannot or acceptance and retention of benefits
demand payment of the fair value of his flowing therefrom.
shares, because one of the elements of
appraisal right is his vote against the Q: What is the quorum for board
proposed corporate act. As such, abstention is meetings?
tantamount to a waiver of appraisal right. A: Based on Section 52 of the RCC, a
Stockholders who abstain from voting are, majority of the directors or trustees as stated
however, counted for quorum purposes. in the AOI shall constitute a quorum to
transact corporate business, unless the AOI or
Q: What are the requisites of a valid board the bylaws provides for a greater majority.
meeting? Furthermore, every decision reached by at
A: least majority of the directors or trustees
a. The meeting must be held on the date constituting a quorum, except for the election
specified in the bylaws or in accordance with of officers which shall require the vote of a
law; majority of all the members of the board,
b. Prior written notice of such meeting must shall be valid as a corporate act.
be sent to all directors/trustees;
c. It must be called by the proper party; Q: Under the Bylaws of the Corporation
d. It must be held at the proper place; and A, its BOT is composed of five members,
e. Quorum and voting requirements must be two of whom are nominated and appointed
met. by the three original members. Further,
under Section 2, Article I of the Bylaws,
Q: What is the effect of failure to give only a majority of the three original
notice of the board meeting to even one members of the Board shall be necessary
director? at all meetings to constitute a quorum. Is
Section 2, Article I of the Bylaws of
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Q: What are the corporate acts under the York). The board meeting was 2pm (2am in
RCC requiring only majority of the California, 11pm in New York). The
quorum? directors were already in their 80s.
A: 1. Declaration of dividends (Sec. 42) Even before the RCC, teleconference and
2. Entering into a management contract videoconference were already allowed.
(Sec. 43) However, what are the mechanics in order
3. Fixing the issued price of no-par value to conduct telecon/videocon?
shares (Sec. 62) 1. The director must express his intention to
4. And such other corporate acts which participate thru remote communication;
under the RCC and the bylaws do not 2. He must be identified during the meeting;
require approval by at least majority of and
the entire board. 3. The meeting must be recorded all
This is because under Section 52 of the RCC throughout.
or the RCC, unless the RCC or the bylaws So as the CorSec, I asked:
require otherwise, every decision reached by “Mr. X do you confirmed and affirmed your
a majority of the directors or trustees intention to participate through remote
constituting a quorum shall be valid. communication?” YES
Thus, whenever the RCC or the bylaws “Are you the director of the ABC
require board approval, as opposed to the Corporation?” YES
majority of the entire board, it means the And then we went on the meeting…
majority of the quorum of the directors. Even before I could reach that part of the
meeting where we needed their votes, they
Q: How can a director or trustee cast vote already said “we are in favor of item 8.”
in a meeting via remote communication? Hence, I have to redo the agenda and make
A: The director or trustee in the meeting via item 8 the first item.
remote communication may cast his vote
through electronic mail, messaging service or Q: Is the director who abstained or
such other manner as may be provided in recused himself from voting on a
internal procedures. The vote shall be sent to particular measure counted for quorum
the Presiding Officer and the Corporate purposes?
Secretary for notation. (Sec. 8, SEC Memo A: A director who abstained or recused
Circular No. 6 series of 2020) himself from voting should be considered as
present for quorum purposes. His abstention,
DEAN: There was a board meeting. I was the however, may have a bearing on the validity
Corporate Secretary. It was a very important of the board approval depending on whether
meeting because we needed to get the the RCC or the bylaws require the majority of
approval for certain important measures. the entire board or simply, majority of the
Unfortunately, two (2) of our directors were quorum.
in the United States (1 in California, 1 in New
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shares: Provided, That when the shares are a reasonable time before the scheduled
owned in an “and/or” capacity by the holders meeting.
thereof, any one of the joint owners can vote DEAN: So in case the CorSec rejects the
said shares or appoint a proxy therefor. (Sec. proxy, the stockholder must be given time to
55, RCC) contest it.
DEAN: b. Unless otherwise provided in the proxy
A and B = both must be present in order to form, it shall be valid only for the meeting
vote for the said shares for which it is intended.
A and/or B = any can vote said shares c. No proxy shall be valid and effective for
a period longer than five (5) years at any
d. Treasury shares one time. While the proxy cannot exceed
Treasury shares shall have no voting right as five years, a new proxy can always be
long as such shares remain in the treasury. given with another five-year period.
(Sec. 56, RCC) d. No broker or dealer shall give any proxy,
consent or any authorization, in respect of
Q: What is a proxy? any security carried for the account of the
A: A proxy is the written instrument signed customer, to a person other than the
by the stockholder authoring another person customer, without written authorization
to exercise the voting rights of the former. It of the customer. (This is found in the SRC
may also refer to the person exercising the and not in the RCC.)
voting authority granted by the stockholder.
DEAN: Why do you need a proxy? Q: What is a voting trust?
To ensure quorum. A: It is an agreement where one or more
There are many cases where stockholders stockholders of a stock corporation confer
may not/cannot want to attend. They have upon a trustee or trustees the right to vote and
more important concerns to attend to than to other rights pertaining to the shares for a
attend the stockholders’ meeting. period generally not exceeding 5 years at any
Through proxy the stockholder can time.
participate indirectly to the meeting. By its nature, a voting trust agreement creates
Another purpose of proxy is to ensure a dichotomy between the voting rights of the
management control. stockholder and his other rights. (Lee vs. CA)
The transferring stockholder parts away with
Q: What are the limitations on proxies? his voting rights but retains equitable or
A: beneficial ownership over the stock. As such,
a. Proxies shall be in writing, signed and he has the right to receive dividends and
filed, by the stockholder or member, in other rights a stockholder is entitled to, until
any form authorized in the bylaws and the dissolution and liquidation of the
received by the corporate secretary on the corporation. He also retains his right to
date fixed in the bylaws but not later than inspection which he can exercise
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concurrently with the voting trustee. But, Does the demand of the Company tally
having conveyed the legal title to the trustee, with the concept of a Voting Trust
the transferring stockholder is disqualified Agreement? Explain briefly.
form being elected as a director. A: No, the demand of the Company does not
tally with the concept of a VTA. Under a
LEE VS. CA VTA, the transferring stockholder merely
conveys to the trustee the right to vote and
other rights of a stockholder over the
❖ What is the effect of VTA executed by
transferred shares except for proprietary
a director during his term?
rights.
If he executes the voting trust agreement
The consequence of the foreclosure of the
during his term as a director, he shall cease to
mortgaged properties is distinct and separate
be a director of the corporation.
from the VTA and its effects.
Why? Because he ceases to be a stockholder
owning legal title to the shares of the
DEAN: What is the purpose why a
corporation.
stockholder would convey legal title to the
shares and lose the right to vote those
Q: A distressed company (“Company”)
shares and render him disqualified for
executed a voting trust agreement for a
aspiring a director position?
period of three years over 60% of its
It is usually one of the requirements of
outstanding paid-up shares in favor of a
lenders.
bank to whom it was indebted, with the
bank named as trustee. Additionally, the
Q: What are the formalities and
Company mortgaged all its properties to
limitations on voting trust agreement?
the bank.
A:
Because of the insolvency of the company,
a. It should not exceed five years at any time,
the bank foreclosed the mortgaged
provided, that in case of a voting trust
properties and as the highest bidder,
specifically required as a condition in a loan
acquired said properties and assets of the
agreement, said voting trust may be for a
Company.
period exceeding five years but shall
The three-year period prescribed and the
automatically expired upon full payment of
Voting Trust Agreement having expired,
the loan.
the Company demanded the turn-over and
b. A VTA must be in writing and notarized
transfer of all its assets and properties,
and shall specify the terms and conditions
including the management and operation
thereof.
of the Company, claiming that under the
c. A certified copy of such agreement shall be
Voting Trust Agreement, the bank was
filed with the corporation and wit the SEC;
constituted as trustee of the management
otherwise, the agreement is ineffective and
and operations of the Company.
unenforceable.
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The presence of
trustor does not
revoke the authority
of the trustee.
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versa. As you will see, there were cases the aggrieved party in a representative suit
decided by the Supreme Court where an are the stockholders similarly situated.
individual suit is pursued as a derivative suit
but there are elements of individual suit that LIM VS. LIM-YU, IN HER CAPACITY AS A
must be present before that remedy can be MINORITY STOCKHOLDER OF LIMPAN
pursued. INVESTMENT CORPORATION
Therefore, if it is derivative suit, it
(G.R. No. 138343, Third Division,
cannot be pursued as an individual suit or
February 19, 2001).
vice versa.
For instance, if it is proper for a
derivative suit then the corporation must be In one case, it was held that the suit
impleaded as a defendant. Otherwise, it is cannot be characterized as derivative,
dismissible. This is the case of Florete vs. because she was complaining only of the
Florete. violation of her pre-emptive right and was
merely praying that she be allowed to
subscribe to the additional issuance of stocks
in proportion to her shareholdings to enable
FLORETE VS FLORETE
her to preserve ger percentage of ownership
(G.R. No. 177275, J. Leonen). in the corporation. She was therefore not
acting for the benefit of the corporation.
❖ Should the derivative suit implead the Quite the contrary, she was suing on her own
corporation as a defendant? behalf, out of a desire to protect and preserve
Yes. Otherwise, it is dismissible. her preemptive rights.
Court held in the case of Evangelista v. and on behalf of the corporation to enforce a
Santos, that the stockholders may not corporate right or cause of action to set aside
directly claim those damages for the wrongful acts committed by the board,
themselves for that would result in the directors and officers.
appropriation by, and the distribution Let us dissect that definition.
among them of part of the corporate 1. It is an action filed by a minority
assets before the dissolution of the stockholder.
corporation and the liquidation of its Why by a minorty stockholder?
debts and liabilities something which Because we learned in the case of Go Realty
cannot be legally done in view of vs. Go if the suing stockholder belongs to the
Section 16 of the Corporation Law ..." majority, then the remedy for him is to cause
iii. the filing of such suits would the board of directors to pass the appropriate
conflict with the duty of the resolution authorizing a corporate act.
management to sue for the protection of Remember that case that a minority
all concerned; stockholder constructed a restaurant on the
iv. it would produce wasteful property of the corporation. A majority
multiplicity of suits; and stockholder on behalf of the corporation filed
v. it would involve confusion in a derivative suit to remove the improvements
ascertaining the effect of partial on the property of the corporation.
recovery by an individual on the The SC said it is not proper for the
damages recoverable by the derivative suit. It should be seen as a last
corporation for the same act. (Asset remedy and a board action should take
Privatization Trust vs. Court of precedence over derivative suit. The remedy
Appeals, et. al., G.R. No. 121171, is not to file a derivative suit but to issue a
December 29, 1998). resolution authorizing the removal of the
property that was constructed without
Q: What is a derivative suit? authority from the corporation.
Discussion:
This is yet to be discussed in the bar. 2. It is filed in the name and on behalf of
There have been many questions on the corporation.
whether or not it is proper for a derivative suit Why? Because the aggrieved party
but so far, there has been no question yet in here is the corporation and the whole body of
the bar on what is a derivative suit. stockholders. The harm is inflicted against
A derivative suit is an action filed by the corporation.
stockholder in the name and on behalf of the
corporation to enforce a corporate right or
cause of action to set aside the wrongful acts Q: How do you caption a derivative suit?
of the corporation's directors and officers. A: If it is not captioned properly, there have
In Go Realty vs. Go, it is an action been cases where the SC dismissed this kind
filed by a minority stockholder in the name of suit because it was not properly couched.
We saw this under Section 35 that the association, as the case may be,
power to sue or be sued is lodged with the provided, that:
Board of Directors. This is an exception a. He was a stockholder or member at
because the suit is not authorized by the board the time the acts or transactions
of directors but filed by a stockholder on subject of the action occurred and at
behalf of the corporation. the time the action was filed;
However, the SC said in so many exhausted all the remedies that specified the
cases that it is implied that in every articles bylaws and rules of the Corporation
derivative suit that it is filed in the name then you can avail yourself of this remedy.
and on behalf of the corporation to enforce
a corporate right or cause of action. Q: You remember we also discussed the that
While you don't see it as an element the bylaws or the articles may contain an
in the rules, it is implied in every derivative arbitration agreement. So how do we
suit that it is a corporate cause of action. correlate now this element of derivative suit
to the presence of arbitration agreements in
As a rule, the plaintiff should be a the bylaws or articles of incorporation?
stockholder both at the time of transaction A: So it means that if you have an arbitration
and at the time the action was filed. UNLESS agreement in the bylaws or articles, you must
the cause of action is continuing in nature exhaust the arbitration procedure before you
in which case it is enough that he is a can resort likewise to this remedy. Otherwise,
stockholder at the time of filing of the your cause of action will be premature.
action.
YU VS. YUKAYGUAN
Q: There was one bar exam question:
(GR No. 177549, January 18, 2009)
supposing Juan dela Cruz became a
stockholder June 1, 2020. Can he question by
Q: The need to exert efforts for these
way of derivative suit payment of fees made
remedies. Is this available even for a closed
to a law firm before he became a stockholder
corporation?
on the ground that the fees were exorbitant?
A: When you come to think about it, this
A: Of course the answer is NO because he
should not apply to a closed corporation.
never became a stockholder when the act or
Why? Because in a closed corporation, there
transaction subject of the action occurred. He
is the remedy of appraisal right. At any time
became a stockholder a day after.
for any purpose or reason whatsoever, a
The exception is when the cause of
stockholder may demand the payment for fair
action is continuing in nature as when the
value of his shares in a closed corporation.
engagement of a law firm is continuing basis.
If you can demand for any purpose or
In that case, he can file the suit.
reason the payment of the fair value of these
shares that means the element of no appraisal
Q: Third exhaustion of intracorporate
right will not be present. Therefore, there
remedies. What does this mean?
should be no right to file this kind of suit in a
A: It means that if the articles or the bylaws
closed corporation.
or the rules of the corporation provide for the
However, the SC said the need to
remedies for the right violated then he must
exhaust intracorporate remedies also
allege with particularity exhaustion of those
applies to a closed corporation.
intra proper demolitions showed must be
seen as a last remedy and only if you have
I think it is not a good decision given price of P175,000.00 per share even when
the reason that I cited but in passing the bar, the current market value is P200,000.00.
you have to answer it that way. In behalf and for the benefit of the
corporation, Peter, a stockholder, filed a
Slide: derivative not against the members of the
In case of a nuisance Or harassment suit. the Board for breach of trust for selling the
court shall forthwith dismiss the case. The shares at P25,000.00, lower than its market
fifth requisite for filing derivative suit, value, and asked for the nullification of the
while not included in the enumeration, is sales and the removal of the board
implied in the first paragraph of Rule 8. members. Peter claims the Club incurred
Sect. 1 of the Interim Rules: The action a loss of PS million. The Board presented
brought by the stockholder or member the defense that in its honest belief any
must be 'in name of [the] corporation or delay in the payment of the arrearages will
association to enforce a corporate right or be prejudicial to the Club as the mortgage
cause of action. (Oscar C. Reyes vs. Hon. on its assets will be foreclosed and the sale
Regional Trial Court of Makati, Branch 142, at a lower price is the best solution to the
Zenith Insurance Corporation, and Rodrigo problem. Decide the suit and explain.
C. Reyes, G.R. No. 165744, 11 August 2008; A: The derivative suit will not prosper
Anthony Yu, et al., vs. Joseph Yukayguan, et because while it was filed by a stockholder on
al., GR No. 177549, January 18, 2009; behalf of the corporation the complaint did
Juanita Ang, for and In behalf of Sunrise not allege the other elements of derivative
Marketing (Bacolod), Inc vs. Sps. Roberto suit namely; a) exhaustion of intra corporate
and Rachel Ang, G.R. No. 201675, June 19, remedies available under the articles of
2013; Alfredo L. Villamor, Jr., vs. John S.. incorporation, bylaws and rules and
Umale, G.R. Nos. 172843 & 172881, 24 regulations governing the corporation to
September 2014; Nestor Ching vs. Subic Bay obtain the relief the stockholder desires; b) A
Golf And Country Club, Inc., et, al., G.R. No. is not a nuisance suit; and c) appraisal right
174353 September 10, 2014). not available. Ching vs. Subic Bay Golf and
Country Club, GR no. 174353. September
Q: Royal Links Golf Club obtained a loan 10, 2014.
from a bank which is secured by a Furthermore, there was no wrongful
mortgage on a titled lot where holes 1, 2, 3 act on the part of the Board of directors for
and 4 are located. The bank informed the simply selling the treasury shares below
Board of Directors ("Board") that if the market value given the circumstances
arrearages are not paid within thirty (30) obtaining M the corporation. The terms and
days, it will extrajudicially foreclose the conditions of the sale of treasury shares are
mortgage. The Board decided to offer to reasonably determined by the board of
the members 200 proprietary membership directors under the business judgment rule.
shares, which are treasury shares, at the Under such rule, questions of policy and
management are left to the sound discretion
of the board of directors and their acts are him from filing the suit. It is also not
valid for as long as they acted In geed faith necessary that a stockholder be a director to
and not contrary to law. 2016 Bar Exam. be entitled to file a derivative suit. San
Miguel Corporation vs. Kahn, G.R.
Q: A became a stockholder of prime Real No.85339, August 11, 1989.
Estate Corporation (°PREC") on July 10, In one case, A was held that a person
2018, when he was given one share by who is merely holding In trust the shares of
another stockholder to qualify him as a stock M her name cannot file a derivative suit
director. A was not re-elected director in since she is not a stockholder in her own
the July 1, 2019 annual meeting but he right. And where the date of the issuance of a
continued to be a registered shareholder of stock certificate was antedated, the
PREC. stockholder cannot file a derivative suit to
When he was still a director, A discovered question the transaction before the true date
that on January 5, 2018, PREC issued free of its issuance. Bitong vs. Court of Appeals,
of charge 10,000 shares to X, a lawyer who G.R. No. 123553, July 13,1988.
assisted in a court case involving PREC.
a. Can A now bring an action in the name Q: AA, a minority stockholder, filed a suit
of the corporation to question the issuance against BB, CC, CC, and EE, the holders
of the shares to X without receiving any of majority shares of MOP Corporation,
payment? for alleged misappropriation of corporate
A: As a general rule, A cannot bring a funds. The complaint averred, inter alia,
derivative suit in the name of the corporation that MOP Corporation is the corporation
concerning an act that took place before he in whose behalf and for whose benefit the
became a stockholder because one of the derivative suit is brought. In their capacity
elements of a derivative suit is that he must as members of the Board of Directors, the
be a stockholder at the time the questioned majority stockholders adopted a
acts occurred and at the time of the filing of resolution authorizing MOP Corporation
the complaint. However, if the act to withdraw the suit. Pursuant to said
complained of is a continuing one, A may do resolution, the corporate counsel filed a
so. The act subject of the suit as indicated in motion to dismiss in the name of the MOP
the problem is not, however, continuing in Corporation.
nature. Hence, the suit should not prosper. Should the motion be granted or denied?
Reason briefly.
b. Can X question the right of A to sue him A: The motion should be denied. The
on behalf of the corporation on the ground complaint is in the nature of derivative suit.
that A has only one share in his name? In Conmart (Phils.) Inc. vs. Securities and
A: No. Since a stockholder filing a derivative Exchange Commission, it was held that to
suit is not suing M his own behalf but in grant to the corporation concerned the right
behalf of the corporation, the fact that his of withdrawing or dismissing the suit at the
shareholding is significant does not preclude instance of the majority stockholders and
directors who themselves are the persons the requisites for the existence of a derivative
alleged to have committed the breach of trust suit. Omar C. Reyes vs. Hon. Regional Trial
against the interest of the corporation would Court of Makati, Branch 142, Zenith
be to emasculate the right of minority Insurance Corporation, and Rodrigo Reyes,
stockholders to seek redress for the G.R. No.165744, 11August 2008.
corporation. Filing such action as a derivative
suit even by a lone stockholder is one of the c. Petitioners, members of the board for
protections extended by law to minority 2003-2004, sought the nullification of the
stockholders against abuses of the majority. election composed of the new board of
2000 Bar Exam. directors for 2004-2005, who pushed through
with the election even it petitioners had
Slide: adjourned the meeting allegedly due to lack
Cite jurisprudence where resort to derivative of quorum. Petitioners are the injured party,
suit was held to be improper for failure to whose rights to vote and to be voted upon
meet the fifth requisite for its filing — it were directly affected by the election of new
should be filed in the name of the corporation set of board of directors. The party-in-interest
to enforce a corporate right or cause of action. are the petitioners as stockholders, who wield
such right to vote. The cause of action
a. A derivative suit filed by stockholders of a devolves on petitioners, the condominium
corporation against the bank that foreclosed corporation, which did not have the right to
the mortgage of the property of the vote. Hence, the complaint for nullification
corporation, but without impleading the of the election is a direct action by
corporation in the suit. Asset Privatization petitioners, who were members of the Baord
Trust vs Court of Appeals, GR No. 121171, of Directors of the corporation before the
December 29,1988 election, against respondents, who are the
newly elected Board of Directors. Under the
b. Whether as an individual or as a derivative circumstances, the derivative suit filed by
suit, the RTC—sitting as special commercial petitioners on behalf of the condominium
court —has no jurisdiction to hear the corporation is improper. Legaspi Towers 300,
plaintiff's complaint since what is involved Inc., vs. Muer, GR No.170783, June 18,
determination and distribution of 2012, 2014 Bar Exam.
successional rights to the shareholdings of his
mother, as the controlling shareholder of the Discussion:
corporation. Plaintiff's proper remedy, under An action to nullify the results of an
the circumstances, is to institute a special election is an election contest, not a
proceeding for settlement of the estate of the derivative suit. If you want to nullify the
deceased. The bare claim that the complaint elections as we saw in the case of Ricafort vs
is a derivative suit will not suffice to confer Dicdican, it is an election contest.
jurisdiction on the RTC (as special To be clear, both election contests and
commercial court) if he cannot comply with derivative suits are governed by the Rules on
Intra Corporate Disputes. Even though you the assets of Sunrise Marketing
have one set of rules for this type of action, Corporation.
each one is different from the other. On maturity of the loan, one of the
partners were willing to pay but the other
Slide: one is not. So the willing brother filed an
d. The complaint filed by a stockholder to action on behalf of the corporation to
compel another stockholder to settle his share compel his other brother who is also
of the loan because non-payment would stockholder of the corporation to pay the
affect the financial viability of the sister on the ground that non-payment of
corporation could not be considered as a the loan to the sister threatens the financial
derivative suit because the loan was not a viability of the corporation. Is it proper for
corporate obligation but a personal debt of derivative suit?
the stockholders. There is no damage caused A: NO. There is no loan obtained by the
to the corporation. The fact that the corporation. It is a debt of the stockholder.
stockholders attempted to constitute a There is no damage to the corporation
mortgage over their pro-indiviso share in a whatsoever. There is no mortgage of
corporate asset cannot affect the corporation corporate property and the corporation did
since shares only represent an aliquot interest not likewise guarantee the obligation.
in the property of the corporation. The right Since there is no harm to the
of a stockholder to the corporate property is corporation, it can never be proper for
only inchoate which will ripen into full derivative suit.
ownership only upon dissolution and
liquidation of the corporation. Juanito Ang, Q: What about the fact that the loan is
for and in behalf of Sunrise Marketing secured by the stockholder's share in the
(Bacolod), Inc. vs. Sps. Roberto and assets of the corporation? Will it now
Rachel Ang. G.R. No. 201675, June 19, qualify for derivative suit because there
2013. will be harm against the corporation?
A: Still NO. As we all know, the right of the
Discussion: stockholder to property is only inchoate. It
This was penned by Justice Tony Carpio. will ripen into full ownership only upon
Again, not yet asked in the bar. dissolution and liquidation of the
corporation.
ANG, FOR AND IN BEHALF OF SUNRISE It would have been different if the
MARKETING (BACOLOD), INC. VS. SPS. loan is secured by the mortgage on the
ANG property of the corporation. That is obviously
ultra vires and can be set aside. The
(G.R. No. 201675, June 19, 2013.)
stockholder can have it nullified but none of
Q: What happened in this case is we have
that is present because this case is simply a
two brothers who are also stockholders of
loan of the stockholder where there will be no
Sunrise Marketing who obtained a loan
damage whatsoever to the corporation.
from their sister, secured by their share in
VILLAMOR VS UMALE been proper for a derivative suit but the suing
stockholder did not bring the action for
(G.R. No. 172843, September 24, 2014)
benefit of the corporation. Instead, he alleged
that the acts of the corporate directors were
This is yet to be asked in the bar.
detrimental to his individual interest as a
Q: The corporation has an option to lease a
stockholder. I
prime property in Ortigas. Do you know
In filing an action, therefore, his
Home Depot in Ortigas? This corporation has
intention was to vindicate his individual
the option to lease the valuable property. This
interest and not that of the corporation. He
Corporation assigned that lease option in
did not even allege that he was filing on
favor of Atty. Villamor.
behalf of the corporation. The nonderivative
Atty. Villamor assigned the lease
character of the respondent may also be
option and earned substantial income. Is this
gleaned horn his allegations in the trial court
proper for derivative suit? It could have been
complaint where he described the nature of
proper right? Since the aggrieved property is
his action as an action under Rule 1, Section
the corporation? That lease option could have
l(a)(l) of the Interim Rules, not an action
translated into income for the corporation. It
under Rule 1, Section 1(a)(4), of the Interim
was assigned without anything in return. That
Rules, which refers to derivative suits. Rule
is certainly a wrongful act against the
1, Section 1 (a)(1) of the Interim Rules refers
corporation. Would it be proper for derivative
to acts of the board, associates, and officers,
suit?
amounting to fraud or misrepresentation,
However, in the complaint, he alleged
which may be detrimental to the interest of
that the acts of the directors were detrimental
the stockholders. This is different from a
to his own interest.
derivative suit.
It would have been proper for a
derivative suit except that the suing
While devices and schemes of the board of
stockholder did not bring the action in the
directors, business associates, or officers
name and for the benefit of the corporation.
amounting to fraud under Rule 1, Section
He alleged the acts of the directors were
1(a)(1) of the Interim Rules are causes of a
detrimental to his own interests and not of the
derivative suit, it is not always the case that
corporation. Obviously in filing the action, he
derivative suits are limited to such causes or
does not want to vindicate the right of the
that they are necessarily derivative suits.
corporation but his own individual right. It is
Hence, they are separately enumerated in
not proper for derivative suit.
Rule 1, Section 1 (a) of the Interim Rules. See
Alfredo L. Villamor, vs. John S. Umale, G.R.
Slide:
Nos. 172843 172881, 24 September 2010,
e. In one case, the corporation, without any
valuable consideration, assigned its option to
The reliefs sought In the complaint, namely
lease a prime property in favor of another.
that of enjoining defendants from acting as
The assignee leased out the property and
officers and Board of Directors of the
earned substantial income. This could have
corporation, the appointment of a receiver, the benefits of membership and the right to
and the prayer for damages in the amount of receive the assets upon dissolution and
the decrease in the value of the shares of liquidation of the corporation.
stock, clearly show that the complaint was Make it not proprietary the enjoyment
filed to curb the alleged mismanagement of of the benefits of membership but without
the corporation. The causes of action pleaded any right to receive the assets upon the
by petitioners do not accrue to a single dissolution and liquidation. As a
shareholder or a class of shareholders but to consequence, the value of the share dropped.
the corporation itself. Ching alleged mismanagement on the part of
the corporation's board of trustees. Is it
While there were allegations in the proper for derivative suit?
Complaint of fraud in their subscription In the bar exam, every time you see
agreements, such as the misrepresentation of an allegation of mismanagement, the
the Articles of Incorporation, petitioners do question is could this be pursued as a
not pray for the rescission of their derivative suit? The answer should be yes
subscription or seek to avail of their appraisal except that the way it was couched is what is
rights. Instead, they ask that defendants be wrong in this case.
enjoined from managing the corporation and He is not suing on behalf of the
to pay damages for their mismanagement. corporation. He is suing for his own interests.
Petitioners' only possible cause of action as So if the aggrieved party is the corporation, it
minority stockholders against the actions of should be one for derivative suit but you have
the Board of Directors is the common law to comply with the elements of derivative
right to file a derivative suit. However, a suit. What is wrong here is "Ching vs Subic
derivative suit cannot prosper without first Bay Golf and Country Club" should have
complying with the legal requisites for its been "Ching on behalf of Subic Bay Golf and
institution. In this case, the requisite missing Country Club vs. the trustees who
is that the action was not filed on behalf of mismanaged the corporation.
the corporation. Nestor Ching vs. Subic Bay
Golf and Country Club, Inc., Et Al., G.R. No. g. There is no derivative suit where the action
174353 September 10, 2014. is clearly not for the benefit of the
corporation, particularly where a judgment in
Discussion: favor of the plaintiff, in his capacity as third
This is yet to be asked in the bar. party mortgagor would mean recovery of his
Basically what happened here is that own properties. Bangko Sentral ng Pilipinas
Subic Bay Golf and Country Club Board of vs. Vicente Jose Campa, Jr. ,G.R. No. 1859
Trustees amended the certificate of March 16, 2016.
membership from proprietary to non-
proprietary. h. .The action should be a proper derivative
What do you mean by proprietary and suit even if the assailed acts do not pertain to
non-proprietary? In proprietary, you enjoy all a corporation's transactions with third
certificates. Republic vs Estate of Hans sold it and then after that the buyer sold to
Menzi, G.R. No 152578, November 23, 2005. another party, Vertex Sales. So vertex sales
to each nominee allowed to enjoy all the
Discussion: This has been asked in the Bar. benefits of membership but because the
stocks were not delivered right away, Vertex
Q: When is the sale of shares perfected? filed an action to rescind the same. Can the
A: Sale of share is perfected not upon sale be rescinded even though vertex has
meeting of the minds by the parties on the enjoyed all the privileges and benefits of
cause, consideration and object of the sale but membership?
upon compliance with the formalities Yes it because the sale has not been
prescribed by the RCC. consummated there was no delivery of the
sales certificate within a reasonable time
In one case, the buyer of the shares had fully from transaction.
paid the purchase price but the stock In this case, the binibigay ni seller
certificate was only delivered after close to yung certificates but it does not cure the
three years from the sale. The seller clearly defect. It should have been done within a
failed to deliver the stock certificates to the reasonable time and not anytime you like.
buyer representing the shares of stock
purchased by the buyer, within a reasonable Q: This is not in the presentation but in my
time from the transaction. This was a book. Can the corporation whose shares
substantial breach of their contract that are the subject of said transaction be the
entitles the buyer the right to rescind the sale one to appeal the decision?
under article 1191 of the Civil Code. It is not A: It is not the corporation whose shares were
entirely correct to say that a sale had already sold that should appeal but the contracting
been consummated as the buyer already party aggrieved by the decision.
enjoyed the rights a shareholder can exercise. The corporation whose shares were
The enjoyment of these rights cannot suffice sold is not a party to the sale. Its appeal does
where the law, by express terms, requires a not toll the running of the period to file an
specific form to transfer ownership. Fil- appeal.
Estate Golf and Development, Inc. vs. Vertex
Sales And Trading, Inc., G.R. No.202021, Q: What is the nature of delivery that the law
June 10,2013. contemplates for the transfer of shares?
A: The delivery contemplated in Section 63
Discussion: (now 62 of the RCC), pertains to the delivery
This has not yet been asked in the bar of the certificate of shares by the transferor to
so take note. the transfere, that is, from the original
So this is the Corporation that put up stockholder named in the certificate to the
a golf course I think in Rizal. A very beautiful person of entity the stockholder was
golf course. Anyway, so the certificate when transferring shares to, whether by sale or
he sold it to the contractor and the contractor
some other valid form of absolute cannot be required to issue a new certificate
conveyance of ownership. unless the original certificate is produced and
It Is the delivery of the certificate, surrendered.
coupled with the endorsement by the owner Surrender and cancellation of the old
or his duly authorized representative that is certificates serve to protect not only the
the operative act of transfer of shares from the corporation but the legitimate shareholder
original owner to the transferee. Anna Teng and the public as well, as it ensures that there
vs. Securities and Exchange Commission, is only one document covering a particular
G.R. No.184332. February 17, 2016. share of stock. Anna Teng vs. SEC, ibid.
In another case, it was held that where
the teller indorsed the stock certificates but Q: Can the corporate secretary refuse the
did not deliver them, ownership of the shares record in the books of the corporation?
cannot be transferred to the buyer. For an A: No. SC through Justice Reyes said that
effective transfer of shares of stock, the mode under the Corporation Code, the
and manner or transfer as prescribed by law requirements for the transfer are
should be followed Embassy Farms, vs. indorsement, delivery and taxes likewise paid
Court of Appeals, G.R. No. 80682, August and if the shares are fully paid. To require the
13.1990. surrender of the stock certificate of the seller
is to impose a condition not contemplated by
Q: What other steps should the transferee law.
take for the registration of the transfer of
shares and the issuance of the stock Q: Can the buyer ask the corporation for the
certificate in his favor? issuance of a new stock certificate given that
A: He should pay the taxes due on the the certificate of the seller should be
transaction, if any, then obtain from the cancelled by reason of the same?
Bureau of Internal Revenue a certificate A: The buyer cannot require the certificate of
authorizing registration ("CAR"). The cancellation of the seller without a surrender
transferee should present the CAR and the to the Corporate Secretary. Without
document evidencing the conveyance, and surrender of the certificate, you cannot ask
surrender the duly endorsed stock certificate likewise for the issuance of a new one in
to the secretary of the corporation who shall favor of the buyer-transferor.
then cancel the stook certificate of the
transferor and issue a stock certificate to the It depends on how the question will
transferee. be couched. If the question is "is the
In one case, the SC ruled that with surrender of the certificate required for
regard to the issuance of a new certificate of recordation of the transfer books of the
stock, the surrender of the original certificate corporation?" The answer is NO because
of stock is necessary before the issuance of a it adds a condition not contemplated by
new one so that the old certificate may be law.
cancelled. A corporation is not bound and
If the question is "can a new not subject to tax. Thereafter, the CTA issued
certificate be issued to the buyer without a ruling to the effect that there is no longer
surrender of the stock certificate of the the need to present proof of payment of tax
seller?" The answer is NO under Teng vs. where it is sure that it is not subject to tax to
SEC. record the transfer.
Q: Is the payment of the capital gains tax Q: Who can validly register the transfer in
on the part of the seller, assuming there the books of the corporation?
was a gain in the sale, a requirement for A: Being the custodian of the corporate
the validity of the sale or assignment or records, the corporate secretary alone can
transfer of the shares to the buyer? validly cause the registration of the
A: No. Non-payment of capital gains tax does transfer in the books a the corporation.
not affect the validity of the as between the Thus, in one use, the corpora. secretary
seller and the buyer. However, if the capital refused to perform his ministerial duty of
gains tax is not paid, the sale or the transfer recording the transfer of shares. As a result,
of shares shall not be registered in the books the nominees of the controlling stockholder
of the corporation by the transfer agent or could not qualify for the election of directors.
secretary of the corporation. Transfer of The controlling stockholder made the entries
Shares; Documentary Requirements, SEC- himself in the stock a. transfer book to record
OGC Opinion No. 06-07, April 19, 2007. the assignment of shares to his nominees. The
Supreme Court ruled that the registration is
Discussion: not valid. Torres vs. Court of Appeals, G.R.
Payment of capital gains tax is not an No. 120138 Septembers, 1997.
element for the validity of the sale or The remedy of the controlling
assignment or transfer of shares to the buyer. stockholder, in this case, is to file a petition
While this principle applies to capital for mandamus with prayer for the issuance of
gains tax, the same principle holds whether it a preliminary mandatory injunction to
is succession or donation. compel the corporate secretary to cause the
transfer. He cannot take the law Into his own
Q: What if the transaction is not subject to hands.
tax? Is there a need for proof of payment The stock a. transfer agent, being an
of tax? extension of the office of the corporate
A: For peace of mind of the parties, they get secretary may also cause the transfer of
a CAR (Certificate Authorizing Registration) shares of mask involving large corporations
from the BIR whether taxes have been paid or public companies.
or it is not subject to tax for good measure.
Discussion:
Discussion: In Torres vs. CA, the controlling
We handled a similar case with the stockholder nominated persons to be
BIR for exchange of shares of stock which is directors. Since you cannot have directors
who do not have a share in the corporations, unrecorded transfer Garcia vs. Jomouad,
that is what he did. He transferred some G.P. No. 133969, January 26, 2000.
shares to his nominees. Upon the death of a shareholder,
However, the CorpSec refused. What the heirs do not automatically become
he did was the controlling stockholder stockholders of the corporation and
himself made entries in the stock and transfer acquire the rights and privileges of the
book to record the assignment to his deceased as shareholder of the
nominees. The SC said the registration is not corporation. The stacks must be distributed
valid. He should have filed a petition for first to the heirs in estate proceedings, and the
mandamus with prayer for issuance of a transfer of the stocks must be recorded in the
preliminary mandatory injunction to compel books of the corporation. Joselito Musni
the CorpSec to cause the transfer. Puno vs. Punao Enterprises, Inc.,
represented by Jesusa Puno, No.177066,
Q: What is the effect if the transfer is not September 11, 2009.
recorded in the books of the corporation?
A: The transfer is valid only between the Discussion:
contracting parties but not effective and The SC said there are some
binding as against the corporation and exceptions where the non-recording in the
third parties. The right of the transferee, stock and transfer book still produces effect.
as stockholder, accrues only upon entry of In one case, where the transfer is
his name in the books of the corporation. ministerial, meaning it should have been
Consequently, the transferee cannot recorded but was not, the non-recording in
enjoy the status of a stockholder, cannot vote the STB still produces effect against the
or be voted for and will not be entitled to corporation and the whole world.
dividends insofar as assigned shares are This is only an exception to the
concerned. Parenthetically, the assignors general rule.
cannot, as yet, he deprived of their rights as
stockholders, until and unless the issue of Q: How may partially paid shares be
ownership and transfer of the shares in transferred?
question are resolved with finality. Rural A: Because partially paid shares are not
Rank of Lipa City, Inc., vs Court of Appeals covered yet by a stock certificate, and as
G.R. No. 124535, September 28, 2001; De such, there is no certificate which can be
Erquiga vs. Court of Appeals, G.R. No. endorsed and delivered to the transferee as
42706, September 27, 1989. required by Section 62 of the RCC, the
subscriber, as the owner of the shares, may
The unrecorded transfer of a assign his right to the contract of
proprietary ownership certificate is not valid subscription in favor of the assignee.
as against the judgment creditor of the The corporation, may, however,
transferor who can, therefore, levy the shares refuse the transfer of shares based on Section
pursuant to a judgment despite the 62 of the RCC which provides that the
Q: What is the appropriate legal remedy if After many years, the SC had the
the corporation refuses to register the opportunity to reassess Ponce.
transfer of shares? In the case of Andaya vs Rural Bank
A: Because it is a ministerial duty to of Cabadbaran.
register the transfer of shares of the
corporation, if it refuses without good Slide:
cause to make such transfer, may be Subsequently, in Andaya vs. Rural Bank of
compelled to do so by mandamus. Cabadbaran, the Supreme Court held that
The only limitation imposed by transferees of shares of stock are real
Section 63 of the OCC (now Section 62 of parties in interest having a cause of action
the RCC) is when the corporation holds for mandamus to compel the registration
any unpaid claim against the shares of the transfer and the corresponding
intended to be transferred. issuance of stock certificates. In this case,
the transferee was able to establish that be is
Q: The question is who can file the petition a bone fide transferee of the shares of stock
for mandamus? as evidenced by the following documents: (1)
A: The transferor or the transferee. a notarized Sale of Shares of stocks; (2) a
Documentary Stamp Tax Declaration/
Slide: Return: (3) a Capital Gains Tax Return; and
In Ponce vs. Alsons Cement (4) stock certificates covering the subject
Corporation, though, the Supreme Court shares duly endorsed by the transferor. There
ruled that only the transferor may file the is no doubt that the transferee had the
petition for mandamus. The transferee cannot standing to initiate an action for mandamus to
compel the corporate secretary to cause the compel the corporation to record the transfer
registration and issuance of a stock certificate of shares in its stock and transfer book and to
because the transferee has not acquired issue new stock certificates in his name. G.R.
standing yet in the books of the corporation No.188769, August 3, 2016.
and that the transferee can only file such
petition if he has been authorized by the Discussion:
transferor to cause such transfer. G.R. No. The SC said in Andaya that either
139802, December 10, 2002. the transferor or the transferee can file a
petition for mandamus.
Discussion:
This case is unfair because the Slide:
transferee is denied legal personality because In contrast, at the crux of this petition
he has not acquired legal personality yet in are the registration of the transfer and the
the books of the corporation which is why he issuance of the corresponding stock
wants to file a mandamus because he wants certificates. Requiring petitioner to register
to be recognized in the books of the the transaction before he could institute a
corporation yet he cannot do so. It is absurd. mandamus suit in supposed abidance by the
ruling in Ponce was a palpable error. It led to A: No the term "unpaid claim" only refers to
an absurd, circuitous situation in which the "any unpaid claim arising from unpaid
petitioner was prevented from causing the subscription. It does include any
registration of the transfer, ironically indebtedness which a subscriber or
because the shares had not been registered. stockholder may owe the corporation arising
With the logic resorted to by the RTC, from any other transaction. It does not, for
transferees of shares of stock would never be instance, include monthly dues imposed by
able to compel the registration of the transfer the corporation for the use of its facilities.
and the issuance of new stock certificates in China Banking Corporation vs. Court of
their favor. They would first be required to Appeals, and Valley Golf and Country Club,
show the registration of the transfer in their Inc., G.R. No. 117604, March 26, 1997.
names — the ministerial act that is the subject
of the mandamus suit in the first place. Discussion:
Transferees of shares of stock are real parties We already discussed this before. If a
in interest then having a cause of action for stockholder owes money from the
mandamus to compel the registration of the corporation or even purchased property from
transfer and the corresponding issuance of the corporation and has not paid in full the
stock certificates. purchase price, the corporation cannot refuse
to transfer because the term "unpaid claim"
Q: When may a corporation refuse to should be understood as unpaid subscription.
register the transfer of shares in the books
of the corporation? Q: Are transactions where the shares of
A: stock are subjected to security interest or
a. If the formalities prescribed by law encumbrance required to be recorded in
for the transfer of shares, which are the books of the corporation in order to
endorsement of the stock certificate make the transfer effective as against the
and delivery to the transferee, are not corporation and third persons?
complied with. A: Only the transfer of shares resulting in a
b. If the above-stated formalities have change of ownership is required to be
been complied with but the registered in the books of the corporation.
corresponding taxes for the transfer These include sale, donation or succession.
have not been paid. Encumbrances, like security interest on
c. If the corporation holds any unpaid shares, are not required to be registered to
claim on the shares. bind the corporation and third persons. They
are binding and enforceable against third
Q: Does "unpaid claim", which justifies persons if they are registered with the
the corporation to refuse the registration appropriate registration registry under RA
of the transfer, include any obligation or 11057, otherwise known as the Personal
liability that the subscriber may owe to the Property Security Act.
corporation?
Q: The corporation's articles and bylaws no reason why they cannot be applied to open
has the right of first refusal giving the or regular corporations.
stockholder the option to buy the shares of
a certain stockholder for 50% above par Q: Mr. A is a stockholder/founding
value. member of Rural Bank of Maria Aurora
Par value is P100. 50% above par value is Incorporated, (RBMAI for brevity).
P150. Previously, he was able to sell shares of
There is a buyer of the shares for stock of RBMAI.
P200 per share. Can the stockholder However, at present, Mr. A could not sell
exercise the option to buy it at P150 even if his shares to outsiders since the new
it is being sold for P200? manager/majority stockholder imposed a
A: Yes. The law does not say upon the same new policy that the shares should be sold
terms and conditions offered by the buyer but only to insiders, particularly, to the
only upon reasonable terms and conditions employees who are also stockholders of
stated in the offer. RBMAI. Mr. A is now questioning the new
policy since these employees/stockholders
Q: Does this restriction apply to mortgages buy at very low prices while there are
or involuntary dealing? Can a mortgagee third-party buyers willing to buy his
foreclose the mortgage without having shares at a higher price.
first to recognize the right of first refusal Is the restriction on the transfer of shares
of the stockholder? to insiders a valid restriction?
A: Mortgage is not contemplated or covered A: The company policy restricting the
by this restriction. This only covers voluntary transferability of shares is not valid.
transfer and not involuntary. In order to be valid and enforceable,
any restriction on the transfer of shares of
Q: Can a judgment creditor garnish the stock must be explicitly provided for in the
shares of a judgment debtor stockholder articles of incorporation and in the certificate
and acquire the shares in the sale without of stocks.
having to recognize the right of first Restrictions on the transfer of shares
refusal by the other stockholders? Or are essentially contractual in nature between
should they give the other stockholders the the stockholders and the corporation. Hence,
option to buy before it can be sold in such restrictions must be embodied in their
auction? contract, i.e. the articles of incorporation.
A: No. Involuntary dealings or
transactions are not covered by this Q: What are the remedies available to a
provision. creditor, who is a successful bidder in an
auction sale of shares of stocks of a
Discussion: corporation, in the event that the
Although these restrictions are found corporate secretary refuses to issue
in the chapter on closed corporation, there is certificates of stock and record the auction
sale in the stock and transfer book in his again sell without having to pull out the stock
favor? certificate.
A: If the corporation wrongfully refuses to
issue a certificate of stock, the following are Q: What is a certificate of stock?
the remedies available to an assignee or A: A certificate of stock is a written
transferee of shares of stock: instrument signed by the proper officer of a
1. File a suit for specific performance corporation stating or acknowledging that
of an express or implied contract; the person named therein is the owner of a
2. File for an alternative relief by way designated number of shares of its stock. It
of damages where specific performance indicates the name of the holder, the number,
cannot be granted; and kind and class of shares represented, and the
3. File a petition for mandamus to date of issuance.
compel issuance of a certificate. Pertinently, it was held that the mere
Refusal to Issue Certificates of Stock; inclusion as a shareholder in the General
Remedies of a Successful Bidder In an Information Sheet of a corporation is not
Auction Sale of Shares of Stock, SEC 000 sufficient proof that one is a shareholder of
Opinion No. 21-06, March 23, 2006. such corporation. David C. Lao n vs. Dionisio
Lao, G.R. No. 170585, October 6, 2008.
Q: Is there any revision under the RCC on
the issuance of stock certificates? Discussion:
A: Yes, the SEC may require corporations Even in the absence of stock
whose securities are traded in trading markets certificates, you can still vote these stocks by
and which can reasonably demonstrate their presenting the contract of subscription. It is
capability to do so to issue their securities or important to have a stock certificate but it is
shares of stocks in uncertificated or scripless not essential to the exercise of the right of a
form in accordance with the rules of the SEC. stockholder.
Possession of the stock certificate is
Discussion: not indispensable for the exercise of
Uncertificated or scripless form is stockholder's rights.
important for public companies where shares
are traded in the stock exchange. Q: This was asked in the bar. May a
Shares actively traded in the stock corporation consider the portion paid by a
exchange is very cumbersome to follow the shareholder as full payment for the
usual formalities required. In this case, the corresponding number of shares and
shares can be in uncertificated or scripless cancel the subscription as to the rest?
form. A: Upon the acceptance of a stock
Shares can be in the name of the subscription by a corporation, the
broker where shares are held for the benefit subscription becomes a binding contract to
of the customer so that the customer can which the subscriber cannot withdraw.
Q: What is the liability of directors or Q: Can treasury shares be sold for a price
officers relating to the issuance of watered below par value? If yes, are they not
stocks? considered watered shares?
A: Yes, treasury shares may be sold for a unless a different interest rate is provided in
price below par value; provided that such the subscription contract. The interest shall
price is reasonable under the circumstances be computed from the date specified, until
as determined by the board of directors. They full payment of the subscription.
are not watered stocks because rule against If no payment is made within thirty
watered stocks only applies to the issuance of (30) days from the said date, all stocks
original or primary shares and not covered by the subscription shall thereupon
disposition of existing shares. become delinquent and shall be subject to
sale as hereinafter provided, unless the board
Q: When should the balance of subscription of directors orders otherwise.
be paid? The subscriber is also liable to pay
A: The balance of subscription should be paid interest on the unpaid subscription.
on the date specified in the contract of
subscription. In the absence of due date in the Q: What are the remedies available to the
contract of subscription, the board of corporation to enforce the payment of the
directors may, at any time, declare due and unpaid subscription?
payable to the corporation unpaid A:
subscriptions and may collect the same or a. The corporation may declare the shares as
such percentage thereof, in either case, with delinquent and subject such delinquent shares
accrued interest, if any, as it may deem to sale; or
necessary. b. It may collect, through court action, the
The due date for the payment of the unpaid subscription.
balance is either the stipulated date or in the
absence of such stipulation, the call or Discussion:
demand by the Board of Directors. I have not seen a corporation file an
Demand is not necessary to put the action for collection because it requires filing
subscriber in default if the due date of fees. It is easier to have it the delinquent
payment is specified in the contract of shares sold.
subscription based on Article 1169 of the When is filing an action for collection
Civil Code that demand is not necessary to a better option? If there is no bidder willing
put the debtor in default when the law so to pay the balance of the subscription and the
declares. corporation has no surplus profit.
Can it be sold on piece-meal basis?
Q: What are the legal consequences if the The SEC said NO. The contract of
balance of the subscription is not paid on subscription is indivisible.
the due date?
A: Failure to pay the subscription on the due Q: Does the subscriber have any right as a
date shall render the entire balance due and stockholder despite the failure to pay the
payable and shall make the stockholder liable subscription?
for interest at the legal rate on such balance,
A: The subscriber retains all his rights as Q: Juan subscribed to 1,000,000 shares of
a stockholder despite his failure to pay the stock of ABC Corporation with par value
balance of the subscription on the date of Php 1.0o per share. The subscription
specified in the contract of subscription or amount is Php 1,000,000. He paid Php
upon call made by the board of directors 250,000.00.
("due date"). He is entitled to such rights a. When should Juan pay the balance of
until his stocks become delinquent. the subscription?
Stocks become delinquent only if He should pay on the date specified in
not paid within 30 days from due date. This the contract of subscription, If the contract is
is consistent with Section 71 of the RCC silent on the due date, the balance should be
which states that holders of subscribed shares paid upon call or demand made by the board
not fully paid which are not delinquent shall of directors,
have all the rights of a stockholder.
If the stocks are delinquent, the b. Assume that the due date is June 15,
only right available to the subscriber is to 2020 and Juan failed the pay the balance
right to the dividends which should be of subscription on such date. The
exercised in accordance with law. This corporation called a regular stockholder's
means the cash dividends due on meeting on June 30, 2020 to elect the board
delinquent stack shall be applied against of directors.
the unpaid balance on the subscription Can Juan vote his shares in the
plus interest, cost and expenses while the corporation? If yes, how many shares can
stock dividends shall be withheld until full he vote?
payment of the subscription. Yes, he can vote. Non-payment on
due date does not mean that the stocks
Q: What are the effects of delinquency? covered by the subscription have become
A: No delinquent stock shall be: delinquent. Stocks become delinquent only if
a. Voted for not paid after 30 days from the due date of
b. Be entitled to vote payment. Under Section 71 of the RCC,
c. Be represented at any stockholder's holders of unpaid shares that are not
meeting delinquent have all the rights of a
d. Nor shall the holder thereof be stockholder.
entitled to any of the rights of a stockholder He can vote the entire 1,000,000
except the right to dividends in accordance share, The standing of the stockholder is
with the provisions of the RCC, until and measured by his subscription and not on his
unless payment is made by the holder of such paid-up shares. He retains his rights based on
delinquent stock for the amount due on the his subscription until the stocks become
subscription with accrued interest, and the delinquent.
costs and expenses of advertisement, if any.
c. Is Juan qualified to be elected as a
director of the corporation?
Yes, for the reasons stated above, Delinquent Shares; Delinquency Sale, SEC-
Juan remains to be a stockholder on the CMC Opinion No. 0516, March 31, 2016.
election date and is qualified to be elected as
a director. However, once the shares become Discussion:
delinquent, he should be deemed to have When can the corporation apply the
forfeited his director position because share cash dividends against the unpaid
ownership is a continuing requirement. subscription?
1. When the contract of subscription
d. Assume further that on July 10, 2020, allows it;
the corporation declared cash dividends of 2. When the stockholders concerned
P1.00 per share, is Juan entitled to receive give their consent thereto; and
the dividends? If yes, how many shares are 3. If the stocks are declared
entitled to dividends? delinquent
Yes, Juan is entitled to dividends for
his entire 1,000,000 shares. This is for the f. May stock dividends be used to pay the
same reason stated above that holders of balance of the unpaid subscriptions?
unpaid shares that are not delinquent have all A stockholder's indebtedness to a
the rights of a stockholder. corporation under a subscription agreement
cannot be compensated with the amount of
e. Can the corporation apply the cash shares given to him under a stock dividend
dividends against the unpaid declaration, there being no relation of
subscription? creditor and debtor with regard to such
The corporation cannot apply the shares. Under Section 42 of the RCC, "stock
dividends against the unpaid subscription dividends shall be withheld from the
unless the contract of subscription allows it. delinquent stockholder until full payment of
This is because the corporation is only the subscription. In other words, under the
allowed to apply the cash dividends against said provision, it is now allowed to apply
the unpaid subscription only for delinquent stock dividends to unpaid subscription.
stocks.
In other words, cash dividends Q: On June 15, 2019, Pedro subscribed to 1
cannot be withheld from the subscribers million shares of XYZ Corporation in the
who have not fully paid their subscriptions amount of Php 1,000,000. He paid P
unless they are delinquent on thew unpaid 250,000.00 and agreed to pay the balance on
subscriptions. The corporation may use the June 15, 2020 as specified in the contract of
cash dividends to pay off stockholders' subscription. The contract stipulated that the
subscription but which have not been balance of the subscription shall earn 12%
declared delinquent only if the stockholders interest from the date of the contract until full
concerned give their consent thereto. Re: payment. Pedro failed to pay on the due date.
Indivisibility of Subscription Contract; Despite demands, the balance remained
Payment of Balance of Unpaid Subscriptions; unpaid after 30 days from June 15, 2020.
who offers the highest amount for the subscription and not for only the unpaid
purchase of property. portion of the subscription.
The principle of indivisibility of
d. Does Pedro have any right to the shares subscription is absolute as Section 63 of the
after the auction sale? RCC speaks of no exception. Thus, partial
Under Section 67 of the RCC, the payment to a subscription contract shall be
stock so purchased during the public auction deemed forfeited and the whole subscription
shall be transferred to such purchaser in the shall be declared delinquent.
books of the corporation and a certificate for
such stock shall be issued in the purchaser's e. May the corporation participate in the
favor. The remaining shares, if any, shall be public auction for the sale of delinquent
credited in favor of the delinquent shares?
stockholder who shall likewise be entitled to The corporation may bid for the
the issuance of a certificate of stock covering delinquent shares only if there is no bidder at
such shares. the public auction who offers to pay the full
Therefore, C shall be issued a stock amount of the balance on the subscription
certificate for 750,000 shares corresponding together with accrued interest, costs of
to the stocks he purchased while Pedro will advertisement, and expenses of sale, for the
be issued a stock certificate covering 250,000 smallest number of shares or fraction of a
shares. share. After the bid, the total amount due
shall be credited as fully paid in the books of
Discussion: the corporation. Title to all the shares of stock
It is not correct to say that the stock covered by the subscription shall be vested in
certificate shall be cancelled because in the the corporation as treasury shares and troy Ise
first place, there is no stock certificate issued disposed of by said corporation in accordance
yet there being no full payment of the with the provisions of the RCC.
subscription.
What will happen is the corporation Q: What is the remedy available to the
will issue 2 certificates. One to the winning corporation in case of conflicting claims of
bidder but only corresponding to the shares ownership over the same shares of stock
he purchased during the bidding and the issued by the corporation?
difference in favor of the original A: The corporation may bring an action for
stockholder. interpleader to compel the claimants to
interplead and litigate their claims between or
Slide: among themselves (Rule 62 of the 1997
In the event, however that the auction is Rules of Court). The corporation will
successful but there is only one bidder who basically recognize the claimant who will be
offered to pay the full amount for the entire adjudged by the court as the owner of the
delinquent stocks, the corporation must issue shares.
a certificate of stock covering the entire
Q: Juan is the registered owner of 100,000 cancelled and is no longer outstanding in the
shares of stock of ABC Corporation books of the corporation. The remedy of
covered by stock certificate no. 143. He Pedro is to file an action against Juan.
claims to have lost his stock certificate. He
fled an affidavit stating the circumstances c. Suppose Juan did not really lose the
surrounding the loss of his certificate. The stock certificate but had previously
affidavit further contains all the endorsed it to Maria. After obtaining the
information required by the Corporate replacement stock certificate, Juan
Secretary. The Corporation caused the endorsed it to Anna.
publication of the notice of loss once a Who has a better right, Maria as endorsee
week for three consecutive weeks in a of the purportedly lost certificate, or
newspaper of general circulation in the Anna, the endorsee of the replacement
city where the principal office of the stock certificate?
corporation is located. There being no The endorsee of the replacement
claimant after the one year publication certificate has a better right because the lost
period, the Corporation cancelled the certificate of Juan had already been cancelled
stock certificate and issued a replacement and is no longer outstanding in the books of
in favor of Joan. the corporation.
Thereafter, Pedro came forward
claiming that the stock certificate was in
TITLE VIII
fact endorsed to him pursuant to a sale
transaction and asked the Corporation to CORPORATE BOOKS AND
cancel the replacement certificate issued to RECORDS
Juan.
a. Is the Corporation liable for Q: What are the revisions under the RCC
issuing a replacement certificate? on corporate records and stockholders'
b. Can the corporation be right of inspection?
compelled to cancel the replacement A:
certificate? a. It required all information about the
corporation to be preserved, and
a. No, except in case of fraud, bad faith, or expanded the list of records required to
negligence on the part of the corporation and be kept by the corporation at its
its officers, no action may be brought against principal office.
any corporation which shall have issued b. Inspecting/reproducing party is
certificate of stock in lieu of those lost, stolen bound by confidentiality rules.
or destroyed pursuant to the procedure laid However, a person who is not a
down in Section 72 of the RCC. stockholder or member of record, a
b. No, because in the books of the competitor, or who represents the
corporation, the stock certificate of Juan as interests of a competitor is prohibited to
purportedly sold to Pedro had already been Inspect/reproduce corporate records.
from Ten thousand pesos (P10,000.00) to Fourth. Where the officer or agent of
Two hundred thousand pesos (P200,000.00), the corporation sets up the defense
at the discretion of the court, taking into that the person demanding to
consideration the seriousness of the violation examine and copy excerpts from the
and its implications. When the violation of corporation's records and minutes
this provision is injurious or detrimental to has improperly used any
the public, the penalty is a fine ranging from information secured through any
Twenty thousand pesos (20,000.00) to Four prior examination of the records or
hundred thousand pesos (P400,000.00). minutes of such corporation or of
any other corporation, or was not
Q: Did the RCC de-criminalize violation of acting in good faith or for a
stockholder's right of inspection? legitimate purpose in making his
A: The RCC did not de-criminalize the demand, the contrary must be shown
violation of stockholder's right of inspection. or proved.
It only removed the penalty of imprisonment
and limited the penalty to monetary fines. Thus, in a criminal complaint for
violation of Section 74 of the Corporation
Q: What are the requisites before the Code (now Section 73 of the RCC), the
penal provision may be applied in a case of defense of improper use or motive is M the
violation of a stockholder or member's nature of a justifying circumstance that
right to inspect the corporate would exonerate those who raise and are able
books/records? to prove the same.
The elements of the offense are: Accordingly, where the corporation
First. A director, trustee, stockholder denies inspection on the ground of improper
or member has made a prior demand motive or purpose, the burden of proof is
in writing for a copy of excerpts from taken from the shareholder and placed on the
the corporation's records or minutes; corporation.
Second. Any officer or agent of the However, where no such improper
concerned corporation shall refuse to motive or purpose is alleged, and even
allow the said director, trustee, though so alleged, it is not proved by the
stockholder or member of the corporation, then there is no valid reason to
corporation to examine and copy said deny the requested inspection. Sy Tiong
excerpts; Shiou, et al., vs Sy Chim, et. al., G.R. No.
Third. If such refusal is made 179438, 30 March 2009.
pursuant to a resolution or order of
the board of directors or trustees, the Q: What are the remedies of a stockholder
liability under this section for such if the corporation denies or does not act on
action shall be imposed upon the his demand for inspection?
directors or trustees who voted for A: The remedies are as follows:
such refusal; and
a. If the corporation denies or does not No, a criminal action based on the
act on a demand for inspection and/or violation of a stockholder's right to examine
reproduction, the aggrieved party may or inspect the corporate records and the stock
report such denial or inaction to the and transfer book of a corporation can only
SEC. Within five (5) days from receipt be maintained against corporate officers or
of such report, the SEC shall conduct a any other persons acting on behalf of such
summary investigation and issue an corporation.
order directing the inspection or A violation of Section 74 of the OCC
reproduction of the requested records; (now Section 73 of the RCC) contemplates a
b. He may file with a criminal situation wherein a corporation, acting thru
complaint for violation of his right of one of its officers or agents, denies the right
inspection; and, of any of its stockholders to inspect the
c. He may file a petition for inspection records, minutes and the stock and transfer
of corporate records (Ruled of the book of such corporation.
Rules of Procedure for Intra-Corporate The proprietary right of the
Controversies). corporation to the in possession of such
records and book though certainly legally
Discussion: enforceable by other means, cannot be
These remedies can be pursued enforced by a criminal prosecution based on
simultaneously. a violation of the Corporation Code.
the records available to you but your client Q: Cite examples of improper purposes
can't make a peek of the sensitive which may justify denial of the right of
information. inspection.
What is the point of giving access to A: Among the improper purposes which may
records but not to the ones you want? So justify a denial of the right of inspection are:
basically the CA affirmed the RTC ruling. (1) obtaining of information as to
I was hoping they will go up to the SC business secrets or to aid a competitor;
to enrich jurisprudence but they did not. So it (2) to secure business "prospects" or
is only a CA decision that trade secrets investment or advertising lists;
outweigh the right of inspection. (3) to find technical defects in
After a few years, I got my validation corporate transactions in order to bring
not in a case we handled but a different case "strike suits" for purposes of blackmail
Terelay Investment vs Yulo where the SC or extortion.
ruled that trade secrets are outside the right
of inspection. Q: Is the right of inspection extinguished
by the dissolution of the corporation?
Q: Cite examples of legitimate purposes to A: The termination of the life of a juridical
warrant the exercise of the right of entity does not, by itself, cause the extinction
inspection. or diminution of the rights and liabilities of
A: Among the purposes held to justify a such entity nor those of its owners and
demand for inspection are the following: creditors. Thus, the revocation of the
(1) to ascertain the financial condition corporation's registration does not
of the company or the propriety of automatically strip off the stockholder of his
dividends; right to examine pertinent documents and
(2) to determine the value of the shares records of the corporation. Alejandro D.C.
of stock for sale or investment; Roque vs. People of the Philippines, G.R. No.
(3) to determine whether there has been 211108, June 7, 2017.
mismanagement; The rights and remedies against, or
(4) in anticipation of shareholders' liabilities of, the office shall not be
meetings, to obtain a mailing list of removed or impaired by reason of the
shareholders to solicit proxies or dissolution of the corporation. Corollary
influence voting; then, a stockholder's right to inspect
(5) to obtain information in aid of corporate records subsists during the
litigation with the corporation or its period of liquidation. Accordingly, if the
officers as to corporate transactions. stockholder was deprived of the exercise of
Terelay Investment and Development an effective right of inspection, offenses had
Corporation vs. Cecilia Teresita J. in fact been committed, regardless of lack of
Yulo; G.R. No. 160924, 05 August criminal intent. Alfredo L. Chua vs. People of
2015, the Philippines, G.P. No. 216146, August 24,
2016.
liabilities of both constituent corporation. absorbed the employees of the seller. But, the
buyer must give preference to the employees
Distinguish merger from asset sale of the seller corporation if they are qualified.
between corporations.
Merger Asset Sale Q: In 2015, Total Bank (“Total”) proposed
to sell to Royal Bank (“Royal”) its banking
the constituent both the seller business for P10 billion consisting of
cease to exist except corporation and specified assets and liabilities. The parties
the surviving buyer corporation reached an eventual agreement, which
continue to exist. they termed as "Purchase and Assumption
corporation which
The seller Agreement" (“P&A”) in which Royal
retains its corporate corporation is not
identity but acquires would acquire Total's specified assets and
dissolved even liabilities, excluding contingent claims,
all the rights and though it may not with the further stipulation that it should
liabilities of the have any asset left. be approved by the Bangko Sentral ng
acquired Pilipinas (“BSP”). BSP imposed the
corporation/s condition that Total should place in escrow
the surviving the buyer, as a Pl billion to cover for contingent claims
corporation general rule, does against it. Total complied. After securing
not assume the the approval of the BSP, the two banks
assumes all the
liabilities of the signed the agreement. BSP thereafter
liabilities of the issued a circular advising all bank and
seller.
absorbed non-bank intermediaries that effective
corporation January 1, 2016 the banking activities of
Total Bank and Royal Bank have been
Q: You have a publishing company that consolidated and the latter has carried out
wanted to be acquired because it is not their operations since then."
making money. You decides to sell it. The
buyer only bought the assets only not the Was there a merger and consolidation of
shares of the stockholders. Is it obligated the two banks in point of the Corporation
to absorbed the writers, editors staff of Code? Explain.
publishing company?
A: No. It is not a merger but simply a sale of A: There was no merger or consolidation of
assets, even all the assets of seller. the two banks in point of the Corporation
Code. The Supreme Court ruled in Bank of
The seller is justified in terminating the Commerce vs. Radio Philippine Network,
employment of his employees because he Inc. that there can be no merger if the
have no business. He shall pay the separation requirements and procedure for merger were
benefits. not observed and no certificate of merger was
issued by the SEC.
Q: Is the seller dissolved?
A: No, even though it may not have any In the actual case, the Supreme Court said
assets. You may have a corporation even that all the require specified in the law must
without a single asset. be complied with in order for the take effect.
Here, Traders Royal Bank (“TRB") and Bank
As to the buyer, the buyer is not obligated to of Commerce (“BOC") remained separate
corporations with distinct personalities. What disposed of the sale in favor of bank of
happened is that TRB sold to BOC identified commerce. How will RPN 9 enforce its
recorded assets in consideration of BOC's judgment against TRB?
assumption of TRB’s identified recorded
liabilities, including booked contingent A: Remember there is an escrow? That could
accounts. There is no law that prohibits this be the source of fund for the judgment. But
kind of transaction especially when it is done bank of commerce is not liable because it is a
openly and with appropriate government pure sale.
approval.
Q: What is meant by a de facto merger?
BANK OF COMMERCE VS. RADIO Discuss.
A: De facto merger means that a corporation
PHILIPPINE NETWORK
called the Acquiring Corporation acquired
FACTS: In this case there is an acquisition of the assets and liabilities of another
all assets in exchange of assumption of corporation in exchange for an equivalent
liabilities. No cash consideration instead it value of shares of stock of the Acquiring
only acquire the assets and for buying those Corporation making the other corporation a
assets, it will pay the obligations particularly stockholder of the Acquiring Corporation.
Bank of Commerce v. Radio Philippines
to its depositors and set an escrow deposit to Network Inc. G.R. No. 195615, 21 April 2014
answer for the liabilities that are not specific
in the agreement. In the present case, there is no de facto
merger because the Acquiring Corporation
There was a judgment in favor of RPN acquired the assets and liabilities of the other
against TRB. RPN filed a motion for issuance corporation but not in exchange for stocks.
The assets were acquired in exchange for the
of writ of execution, it learned that assets of
assumption of liabilities.
TRB were acquired by bank of commerce.
Thus it filed a motion for issuance of writ of Distinguish merger from consolidation.
execution against bank of commerce. Merger Consolidation
union whereby one union of two or
ISSUE: Is bank of commerce liable to pay the
corporation absorbs more existing
judgment debt in favor of RPN.
one or more existing corporations to
corporations, and form a new
RULING: No. Because it is not a merger. It
the absorbing corporation called
is simply a sale of all of the assets. There is
corporation the consolidated
no merger because there is no certificate of
survives and corporation.
merger issued by the SEC. The certificate of
continues the
merger can be issued only upon compliance
combined business.
with the procedure for merger set by RCC.
all constituents, all the constituents
except the surviving are dissolved and
Q: If bank of commerce is not liable to pay
corporation, are absorbed by the new
RPN, from whom RPN 9 get payment?
TRB has no more assets since it has dissolved.
f. The articles shall be submitted to the SEC A: In a merger, the shares of stock held by the
for its approval provided that in the case of stockholders of the absorbed corporation will
merger or consolidation of special be exchanged for shares of stock of the
corporations governed by special laws, the surviving corporation. The exchange or swap
favorable recommendation of the appropriate ratio is spelled out in the plan of merger
government agency shall first be obtained. taking into account the respective fair values
(sec. 78 RCC) of the assets and liabilities of the constituent
corporations.
g. If upon investigation, the SEC has reason
to believe that proposed merger or The RCC requires the articles of
consolidation is contrary or inconsistent with incorporation to reflect items (d) to (f) to
the provisions of the RCC or existing laws, it allow the concerned shareholders or
shall set a hearing to give the corporations members and the SEC to ascertain if the
concerned the opportunity to be heard. (Sec. exchange is fair and reasonable, considering
78, RCC) the pre-merger and post-merger or
consolidation information. The aggregate fair
h. Where the SEC is satisfied that the merger value of shares that will be issued by the
or consolidation of the corporations surviving or consolidated corporation should
concerned is not inconsistent with the generally approximate the adjusted net asset
provisions of the RCC and existing laws, it value of the constituent Corporation/s. The
shall issue a certificate of merger or same will be established using the carrying
consolidation, at which time the merger or amounts and fair value of the assets and
consolidation shall be effective. (Sec. 78, liabilities of the respective companies as of
RCC) the agreed cut-off date, vis-à-vis the method
to be used in the merger or consolidation of
Dean: accounts of the companies. The RCC:
1. Plan of merger Theories and Applications: Herbosa and
2. Approved by majority of each of the board Recalde, 2019, p. 296
3. Notice of stockholder’s meeting which
include purpose of the pl Importance: it is by agreement by the
4. Approval of stockholders of 2/3 OCS of corporations. It is not by law.
Q: What are the effects of merger or Register of deed wanted to see the transfer
consolidation? (SCPAL) of title from Equitable PCI bank to BDO
The following are the effects of merger or before BDO can sell to third party buyer.
consolidation: That is expensive because there will be 2
a. The constituent corporations shall set of taxes. BDO can sell property even
become a single corporation which, in though the title is in the name of equitable
case of merger, shall be the surviving because the property is deemed
corporation designated in the plan of transferred to BDO. You present to the RD
merger; and, in case of consolidation, shall even though the TCT is on the name of
be the consolidated corporation Equitable PCI bank the certificate of
designated in the plan of consolidation. merger, the operative document.
b. The separate existence of the
constituent corporations shall cease, e. The surviving or consolidated
except that of the surviving or the corporation shall be responsible for all the
consolidated corporation liabilities and obligations of each
c. The surviving or the consolidated constituent corporation as though such
corporation shall possess all the rights, surviving or consolidated corporation
privileges, immunities, and powers and had itself incurred such liabilities or
shall be subject to all the duties and obligations; and any pending claim
liabilities of a corporation organized under action or proceeding brought by or against
the RCC any constituent corporation may be
d. The surviving or the consolidated prosecuted by or against the surviving
corporation shall possess all the rights, consolidated corporation. The rights of
privileges, immunities and franchises of creditors or liens upon the property of
each constituent corporation; and all real such constituent corporations shall not
or personal property, all receivables due be impaired by the merger or
on whatever account, including consolidation.
subscriptions to shares and other whatever
account including subscriptions to shares Q: Can a debtor of absorbed
and other choses in action, and every other corporation invoke the defense of
interest of, belonging to or due to each novation?
constituent corporation, shall be deemed A: No, “rights of creditors or liens upon
transferred to and vested in such the property of such constituent
surviving or consolidated corporation corporations shall not be impaired by the
without further act or deed. (assets) merger or consolidation.”
be able to increase its working capital to A: Any provision or matter stated in the AOI
undertake business expansions. may be amended by a majority vote of the
board of directors and the vote or written
The Board of Directors consults with you assent of the stockholders representing at
as legal counsel or proper answers to the least 2/3 of the outstanding capital stock.
following issues: Stockholders cannot exercise any appraisal
right in case of amendment to the articles of
Can Yenetic's Articles of Incorporation incorporation to increase capital stock
(“AOI”) be formally to remove the right of because this is not one of the cases allowed
appraisal on all dissenting stockholders in by law where appraisal right may be
all matters under the law which requires a exercised unless the corporation is a close
ratification vote of the stockholders? corporation where a stockholder may
demand the payment of the fair value of his
A: Yenetic's AOI cannot be amended to shares for any reason whatsoever.
remove appraisal right of the stockholders on
matters requiring stockholders’ approval if Q: What are the requisites for the valid
the law grants them such appraisal right, like: exercise of appraisal right?
1. In case an amendment to the articles The requisites are:
of incorporation has the effect of a. It can only be exercised in the cases
changing or restricting the rights of specified by law
any stockholder or class of shares, or b. The dissenting stockholder must have
of authorizing preferences in any voted against a proposed corporate
respect superior to those of action specified by law.
outstanding shares of any class, or of c. The stockholder must make a written
extending or shortening the term of demand on the corporation for the
corporate existence; payment of the fair value of shares
2. In case of sale, lease, exchange, held within thirty (30) days from the
transfer, mortgage, pledge or other date on which the vote was taken
disposition of all or substantially all d. If the proposed corporate action is
of the corporate property and assets. implemented, the corporation shall
3. In case of merger pay the stockholder, upon surrender
4. In case of investment of corporate of the certificate or certificates of
funds for any purpose other than the stock representing the stockholder’s
primary purpose of the corporation. shares, the fair value thereof as of the
day before the vote was taken,
Appraisal right is a statutory right. It cannot excluding any appreciation or
be denied to the stockholders in cases where depreciation in anticipation of such
the law allows such right. 2018 Bar Exam. corporate action.
e. The fair value must be determined in
Q: If the increase in Authorized Capital accordance with the mechanism set
Stock is formally submitted to the forth by law.
stockholders in a meeting duly called for f. Within ten (10) days after demanding
the purpose, what is the vote necessary for payment for shares held, a dissenting
the stockholders' ratification, and may the stockholder shall submit the
dissenting stockholders exercise their certificates of stock representing the
appraisal right? shares to the corporation for notation
AOI because investment in shares is not a just that its allowed to use the word
business activity. As long as the income from foundation. If you use the word foundation as
those investments are used to attain the part of your corporate name as nonstock
purpose of the corporation. corporation, your subject to a higher capital
contribution from the members.
Foundation
It is a nonstock nonprofit corporation. It’s
DECEMBER 8, 2020
Discussion: According to the SEC, the
SORIANO
answer is YES. You have to keep in mind that
what Ayala intends to sell are products
Recit related to the purpose of the corporation – to
*No recording promote the culture of the Philippines. Online
*The question was about the case of Lim v. sale of these products is allowed because it is
Moldex found in pp. 478-479 of the book incidental to the purpose of the corporation.
propose? Can you propose the amend the of any of its members. To include these
bylaws? members without voting rights in the total
A: You cannot because to amend the bylaws, number of members for purposes of quorum
you need majority of the members and the would be superfluous for although they may
board. You cannot even afford to maintain a attend a particular meeting, they cannot cast
quorum. How can you amend the bylaws. their vote on any matter discussed therein.
Q: So what is the remedy? Usually, one member has one voting right.
A: The remedy here is the concept of So, if the corporation has 100 members who
emergency quorum. Any member may ask or all have voting rights, then the quorum is 51.
petition the SEC to call a meeting and if the Majority of 51 members will be needed to
SEC finds that there was unjustified holding approve a corporate act unless the RCC
of the members’ meeting, then it may requires either majority or 2/3s of the entire
authorize that member to call the meeting and membership, or the bylaws require a number
whoever is present in that meeting, regardless greater than majority. In some cases though,
of number or less than the majority required the bylaws may provide that one member
in the bylaws of the corporation, will be your may have more than one voting right. This is
quorum. mostly true in condominium corporations. A
member will be counted as one for quorum
Q: What is the quorum for the members’ purposes but can have more than one voting
meeting? right corresponding to the number of
A: To constitute a quorum, there should be condominium units registered in his name.
present a majority (50% plus 1) of the total
interest of all members who are entitled to Discussion: Quorum is generally the
vote and not delinquent, unless the bylaws majority of the voting members unless the
provide otherwise. SEC-OGC OPINION bylaws provide otherwise. The bylaws may
31-2019. provide that quorum is less than majority of
total number of members for nonstock
The majority of the quorum is needed to corporation or less than the majority of the
approve a corporate act unless the law or by- outstanding capital stock in a stock
laws requires otherwise. corporation. That is allowed for members or
stockholders’ meeting but not for board’s
The basis in determining the presence of meetings. For the board, quorum is the
quorum in non-stock corporations is the majority of the number of the board as
numerical equivalent of all members who are indicated in the in the AOI unless the bylaws
entitled to vote, unless some other basis is prescribes a greater number.
provided by the bylaws of the corporation.
The qualification "with voting rights" simply For stockholder and members’ meetings, the
recognizes the power of a non-stock quorum may be less than the majority as long
corporation to limit or deny the right to vote
by-laws and even The by-laws may of the corporation is located. However,
when the by-laws likewise authorize located. the place of meeting
are silent, in case of members to vote shall be within
corporations vested through remote Any city or Philippine territory.
with public interest. communication municipality in (Section 92, RCC)
However, the and/or in absentia. Metro Manila,
election must be by Metro Cebu, Metro Dean: It can be held
ballot if requested Dean: Regional or Davao, and other anywhere as long as
by any voting district voting, as Metropolitan areas it is within
stockholder or long as it is are considered city Philippine territory.
member. (Section provided in the or municipality.
23, RCC) bylaws. It should be (Section 50, RCC)
allowed.
Dean: Venue is
There is no fixed by law.
distinction with Can you remove a A member may be
remote stockholder who is expelled for the
communication in fully paid? No. grounds specified in
the sense that There is no the bylaws.
members may provision to remove
participate also a stockholder under Can the bylaws
through remote the RCC. You can expel a member
communication remove a director without hearing if
and/or in absentia but never a he propagates
when authorized by stockholder. teachings contrary
the bylaws, by the to the tenets of his
board for those church? It is valid if
vested with public the ground is
interest. provided for in the
Stockholders' The by-laws may bylaws.
meetings shall be provide that the Assets of stock Assets of non-stock
held in the principal members of a non- corporation shall be corporation shall be
office of the stock corporation distributed in the distributed as
corporation as set may hold their following order: follows:
forth in the articles regular or special a. Payment of a. Payment of
of incorporation, or, meetings at any claims of claims of
if not practicable, in place even outside creditors who creditors;
the city or the place where the are not b. Assets held on
municipality where principal office of stockholders condition
the principal office the corporation is (based the requiring return
or the corporation.
grantor; Dean: The (Section 91, RCC)
2. Assets to be stockholders cannot
used only elect the officers of
for the corporation
religious,
benevolent, Q: May a non-stock corporation be
educational converted to a stock corporation by the
or similar mere amendment of the AOI?
purposes. A: No, this will amount to the distribution of
assets to the members of the corporation and
GR: The other subscription to the stock corporation out of
assets shall be these assets. This will then violate Section 86
distributed to the of the RCC which allows distribution of
members only if assets to the members of the non-stock
their rights to corporation only upon dissolution of the
distribution are corporation and only to the extent that their
stated in the AOI or distributive rights are defined in the articles
BL. of incorporation or pursuant to a plan of
XPN: When you distribution adopted by at least majority of
have a plan of the board of trustee and approved by at least
distribution 2/3s of members. The remedy is to dissolve
approved by the non-stock corporation, adopt a
majority of the distribution plan, distribute the assets to the
trustees and 2/3 of members based on such plan and use the
the members. assets as their contribution to the stock
corporation to be formed. 2001 Bar Exam.
What happens when
you don’t have any? Discussion: No. Why? The only way you can
So can members distribute the assets of a nonstock corporation
distribute the assets is through dissolution. Now, if you convert
to themselves? NO. nonstock to stock, in effect, you are
distributing the assets of the corporation to
What will happen? the members as their contribution to the stock
Forfeited to the corporation and short of dissolution.
national Therefore, you violate the norm that assets
government. can only be given to the members if you
The Board appoints The members can dissolve the corporation.
the officers of the directly elect the
corporation. officers of the
corporation just because a man and his wife their efforts and managerial skill that they
own 98.86% of its subscribed capital stock; expect the business to grow and prosper, it is
So too, a narrow distribution of ownership quite understandable why they would not
does not, by itself, make a close corporation. trust outsiders to come in and interfere with
The features of a close corporation under the their management of the business, and much
Corporation Code must be embodied in the less share whatever fortune, big or small, that
Articles of Incorporation to make it as one. the business may bring.
San Juan Structural and Steel
Fabricators, Inc. vs Court of Appeals, GR Discussion: In open corporations, acts of
No. 129459, September 29,1998 management belong to the board. Acts of
ownership belong to the stockholder. In a
Q: What corporation cannot be close corporation, you have a fusion of stock
incorporated as a close corporation? ownership and management.
A: (Mnemonic: MOSBIPEP)
Q: What are the principal characteristics
Any corporation may be organized as a close of close corporations?
corporation except the following: A: The principal characteristics of close
a. Mining or oil companies; corporations are the following:
b. Stock exchanges; a. The business of the corporation may be
c. Banks; managed by the stockholders of the
d. Insurance companies; corporation rather than by a board of
e. Public utilities; directors.
f. Educational Institutions; and
g. Corporations declared to be vested Stockholders who are actively involved
with public interest in accordance in the management of the corporation are
with the provisions of the RCC. liable in the same manner as directors are
liable. They are personally liable for
Q: What is the main difference between a corporate torts unless the corporation has
close corporation and other corporations? obtained reasonably adequate liability
A: The main difference between a close insurance. An example of corporate tort
corporation and other corporations is the is the non-payment of separation benefits
identity of stock ownership and active of employees who were terminated due to
management, that is, all or most of the authorized cause. Sergio Naguiat and
stockholders of a close corporation are active Clark Field taxi, Inc. vs. NLRC, G.R. No.
in the corporate business either as directors, 116123, March 13, 1997.
officers or other key men in management.
Where business associates belong to a small, While Section 97 of the Corporation
closely-knit group, they usually prefer to Code (now Section 96, RCC) only
keep the organization exclusive and would specifies that "the stockholders of the
not welcome strangers. Since it is through corporation shall be subject to all
Q: Can you have a close corporation with Dean: Remember, pre-emptive right
a board of directors? applies to the issuance of shares to a non-
A: Yes. stockholder.
same shall not be binding on any to 60 days or even more, depending on the
purchaser in good faith. circumstances surrounding the case.
b. Restrictions shall not be more onerous
than granting the existing stockholders or The disputed provision does not provide for
the corporation the option to purchase the an option period for the existing
shares of the transferring stockholder stockholders/corporation and the transferring
with such reasonable terms, conditions or stockholder who desires to transfer/encumber
period stated. his stocks. It only provides that the other
c. Upon the expiration of said period parties shall give their written consent thereto
(period to exercise the option to purchase before such encumbrance can be realized.
shares), the existing stockholders or the The SEC had previously opined that a
corporation fails to exercise the option to restriction clause is not valid and enforceable
purchase, the transferring stockholder if it absolutely prohibits the sale or transfer of
may sell their shares to any third person. stock without the consent of the Board of
Directors and/or stockholders, as this would
Q: ABC Incorporated, a close corporation violate the general law on free alienability of
provides for the following restriction on shares of stock as personal property.
the transferability of its shares in the
Articles of Incorporation, to wit: In view of thereof, the provision on
"Encumbrance of Shares. The encumbrance of shares in the articles of
shareholders may mortgage, pledge, or incorporation of ABC Incorporated is not
otherwise encumber all or part of their valid. The provision, as it stands, does not
shares in the Corporation; provided that, provide for an option period to be exercised
the other parties shall give their written by the other stockholders or the corporation
consent thereto; provided further that, vis-a-vis the transferring stockholder. The
written notice to the other parties shall be result of the absence of such an option period
sufficient if the mortgagee or pledgee is a is to absolutely prohibit the mortgage, pledge
banking or financial institution." or encumbrance of such stock without the
written consent of the other stockholders.
Is the aforementioned provision of the This violates the general law on free
Articles of Incorporation valid? alienability of shares of stock as personal
A: The restrictions on the transfer of shares property. Validity of Provision Restricting
shall not be more onerous than granting the Transferability of Shares in Close
existing stockholders or the corporation the Corporations, SEC-OGC Opinion No. 19-
option to purchase the shares of the 061 March 13, 2006; Answer modified based
transferring stockholder with such reasonable on RCC.
terms, conditions or period stated therein. Q: The board of directors of the
The SEC has previously opined that the corporation adopted a resolution that no
reasonable option period may range from 30 stock holder can sell his fully paid shares
in favor of any person without the prior
consent of the corporation. Is the buyer, while not bound by these documents,
restriction valid? is charged with notice because the restriction
A: It is void. While the corporation may also appears in the stock certificate.
impose restrictions on share transfers, to be
valid, the restrictions should be embodied in Also, the restriction on pricing is not more
all of the articles of incorporation, by-laws onerous than the right of first refusal. In fact,
and stock certificate of the corporation and the law does not require that the option to
cannot be more onerous than the right of first purchase the shares of the transferring
refusal. In this case, the restriction is only by stockholder be on the same price, terms and
way of board resolution. Most importantly, conditions. It is enough they are based on
securing the consent of the corporation prior reasonable terms. The option to buy shares at
to the sale of fully paid shares is a restriction 25% above par value is a reasonable
more onerous than the right of first refusal. provision.
Q: The bylaws of the corporation provide Q: When is any corporate action taken by
that a stockholder has the option to directors valid even without a meeting
purchase the shares of a transferring called properly?
stockholder for a price equivalent to 25% A: Section 100 of the RCC provides that any
above par-value but the offer price of the action taken by the directors of a close
buyer of the shares of the selling corporation without a meeting called
stockholder is 100% above the par value of properly and with due notice shall
the share. Is such restriction valid? nevertheless be deemed valid, unless the
A: It is void because the restriction is only in bylaws provide otherwise, if:
the bylaws.
a. Before or after such action is taken, a
Q: Assuming that the restriction is written consent thereto is signed by all the
similarly incorporated in the AOI and directors; or
embodied in the stock certificate but the b. All the stockholders have actual or
offer price of the buyer of the shares of the implied knowledge of the action and
selling stockholder is 100% above the par make no prompt objection in writing; or
value of the share, may the existing c. The directors are accustomed to take
stockholder validly enforce the pricing informal action with the express or
provision restriction? implied acquiescence of all the
A: Yes, the restriction may be enforced. The stockholders; or
selling stockholder cannot complain that the d. All the directors have express or implied
offer of the buyer is higher than the option knowledge of the action in question and
price granted to existing stockholders none of them makes a prompt objection
because he is bound by the restrictions as in writing.
appearing in the articles of incorporation and
bylaws of the corporation. The proposed
Q: Regarding the power of the President the conditions enumerated in the provision
of a close corporation, can he or she decide cited above is present. Re: Close
on matters like needed renovations, major Corporations; Powers of the President; Right
or minor, of a property/building without of Inspection, SEC-OGC Opinion No. 23-14,
the approval of the Board and then just ibid.
have it ratified in the next meeting?
A: Yes, a President of a close corporation Q: How do you distinguish pre-emptive
may not even need later ratification of the right in ordinary corporation from the
Board of Directors or Trustees for the acts same right in close corporation?
previously made. A: Pre-emptive right in an ordinary
corporation does not extend to issuance of
Presidents of corporations are often given shares in exchange for property given for a
general supervision and control of the corporate purpose or in payment of debt
business as chief executive officers from made in good faith, if approved by the
which is to be inferred that contracts or acts stockholders representing at least 2/3 of the
made or done by the President in the ordinary outstanding capital stock.
course of business are presumed to be duly
authorized unless the contrary appears. The pre-emptive right of stockholders in
Unless there is a charter or by-law provision close corporations shall extend to all stock to
to the contrary, the President may, as a be issued, including reissuance of treasury
general rule, bind the corporation on a shares, whether for money, property or
contract in the ordinary course of business, personal services, or in payment of corporate
provided that the same is reasonable under debts, unless the articles of incorporation
the circumstances. provides otherwise.
A: A corporation sole may sell or mortgage Discussion: Basically, the corporation must
real property held by it by obtaining an order petition to the court to sell, mortgage,
for that purpose from the Regional Trial encumber or dispose of the property of the
Court of the province where the property is corporation.
situated upon proof that the notice of the
application for leave to sell or mortgage has The only exception is if the rules of the
been made through publication or as directed church regulate the method of acquiring,
by the Court, and that it is in the interest of holding, selling, encumbering such property
the corporation that leave to sell or mortgage of the corporation. In which case, the
be granted. The application for leave to sell intervention of the court is no longer
or mortgage must be made by petition, duly necessary.
verified, by the chief archbishop, bishop,
priest, minister, rabbi, or presiding elder In the case of Iglesia Filipina, take note that
acting as corporation sole, and may be the sale was not void but only unenforceable.
opposed by any member of the religious
denomination, sect or church represented by Q: How is a corporation sole dissolved?
the corporation sole: Provided, That in cases A: A corporation sole may be dissolved and
where the rules, regulations, and discipline of its affairs settled voluntarily by submitting to
the religious denomination, sect or church, the SEC a verified declaration of dissolution,
religious society, or order concerned setting forth:
represented by such corporation sole regulate a. The name of the corporation;
the method of acquiring, holding, selling, and b. The reason for dissolution and
mortgaging real estate and personal property, winding up;
such rules, regulations and discipline shall c. The authorization for the dissolution
govern, and the intervention of the courts of the corporation by the particular
shall not be necessary. religious denomination, sect or
church; and
In one case, the foregoing provision was d. The names and addresses of the
applied for the sale of real property by a persons who are to supervise the
religious corporation. The sale was ruled to winding up of the affairs of the
be unenforceable because it was made by the corporation.
Supreme Bishop in contravention of the rule4
s of the corporation. Under the rules of the Upon approval of such declaration of
corporation, the sale required the dissolution by the SEC, the corporation shall
concurrence of the laymen's committee and cease to carry on its operations except for the
other officials of the church, but which purpose of winding up its affairs.
approval was not given. Iglesia Filipina
Independiente vs. Heirs of Bernardino Discussion:
Taeza, G.R. No. 179597, February 3, 2014.
Q: Can the OPC appoint a president other Q: Can a person own more than 1 OPC?
than the sole stockholder? A1: Yes, provided that it has all the resources
A: No. Remember that you cannot be a to put up more than 1 OPC.
president unless you are a director and you A2: Yes, there is no prohibition under the law
cannot be a director unless you are a and the OPC has a separate and distinct
stockholder. There is only one stockholder. personality from that of the stockholder.
Obviously, he is the only one qualified to
become a president of the corporation. Dean: No opinion yet but there is no
prohibition so it is allowed as long as they do
Q: Can he occupy the position of not overlap.
treasurer?
A: Yes, provided that he will give a bond.
LECTURE
Q: How much is the bond?
A: Based on the graduated amount approved Q: What is a One Person Corporation
by the SEC, redeemable every 2 years. (“OPC”)?
A: OPC is a corporation with a single
Dean: But he cannot be the president and stockholder: Provided, that only a natural
secretary at the same time. person, trust, or an estate may form a OPC.
Q: Can he be the compliance officer? Is it Q: What is the rationale for the RCC
required to have a compliance officer? provision on OPC?
A: Only corporations which are vested with A: The provision for OPC, aims to encourage
public interest are allowed or required to have the formation of businesses in the country by
a compliance officer. An OPC is not a making it easier for entrepreneurs to start a
corporation vested with public interest. limited liability company. In turn, this will
benefit our economy where micro, small and
medium enterprises comprise the majority of custodian or any other person exercising
the business establishments and would fiduciary duties?
generate more jobs in the Philippines. A: If the single stockholder is a trustee,
administrator, executor, guardian,
Discussion: Those in colorum businesses conservator, custodian or any other person
may be recognized by law as a valid entity to exercising fiduciary duties, proof of authority
generate more taxes. to act on behalf of the trust or estate must be
submitted at the time of incorporation.
Q: May a foreign natural person
organized a OPC? Q: Which corporations are not allowed to
A: Yes. In case of a natural person the only incorporate as OPC?
requirement under the RCC is that he/she A: Banks and quasi-banks, preneed, trust,
must be of legal age. There is no provision on insurance, public and publicly-listed
any nationality requirement. Thus, subject to companies, and non-chartered government-
the applicable constitutional and statutory owned and -controlled corporations may not
restrictions on foreign participation in certain incorporate as OPC: Provided, further, That a
investment areas or activities, a foreign natural person who is licensed to exercise a
natural person may organize a OPC. Section profession may not organize as a OPC for the
15, SEC MC No.7. purpose of exercising such profession except
as otherwise provided under special laws.
Discussion: As long as he is not engaged in
any nationalized activity. Q: Can a bank as a trustee organize an
OPC?
Q: What is the “trust” referred to under A: No. Not allowed.
the RCC which can organize a OPC?
A: The “trust” as used by the law does not Q: Can a natural person as trustee
refer to a trust entity, but to the subject being organized an OPC?
managed by the trustee. A: Yes.
Discussion: For example, Juan dela Cruz Q: Can a corporation, not a bank, as
holds funds for Pedro Reyes. So, Juan dela trustee organized an OPC?
Cruz can put up an OPC as a trustee of the A: Yes.
funds he is managing for Pedro Reyes. Pedro,
of course, can organize his own. GR: A natural person can organize an OPC.
XPN: A natural person cannot organize an
Q: What is the additional requirement for OPC for the purpose of exercising a
incorporation of a OPC if the single profession.
stockholder is a trustee, administrator,
executor, guardian, conservator, Q: Can you organize an OPC for the
practice of law?
A: No because it is not allowed by any law. (Dean: This is very important. The SEC
shall not act on the application of the OPC
Q: What is the term of existence of a OPC? unless the single stockholder designates a
A: Like other corporations, the term of nominee and an alternate nominee. When
existence of the OPC shall be perpetual. the nominee becomes the single
However, if the OPC is a trust or estate, the stockholder in case of death or incapacity
term of existence shall be co-terminus with of the single stockholder, the alternate
the existence of the trust or estate. nominee becomes the nominee. )
Q: What are the characteristics of OPC? g. The liability of the single stockholder
A: A OPC has the following characteristics: shall be limited to his subscription to the
a. It has a single stockholder. corporation unless there is ground to
b. It is not required to have a minimum pierce the veil of corporate fiction.
authorized capital stock except as (Section 130, RCC)
otherwise provided by special law. (Dean: It should also be adequately
Further, no portion of the authorized financed and there is no commingling of
capital is required to be paid up at the properties.)
time of the incorporation, unless
otherwise required by applicable laws or Q: Distinguish sole proprietorship from
regulations. (Section 117 of the RCC and OPC.
Section 8 of MC No. 7) A: Sole proprietorship has no separate legal
c. It is not required to submit and file personality from the proprietor conducting
corporate bylaws. (Section 119, RCC) the business whereas a OPC has a legal
(Q: Why? personality separate and distinct from the
A: Because the single stockholder sole stockholder of the corporation.
administers the rules of his corporation)
d. It is required to indicate the letters "OPC" The assets of the sole proprietorship are
either below or at the end of its corporate similarly owned by the proprietor conducting
name. (Section 120, RCC) the business whereas, in a OPC, the assets of
e. The single stockholder shall be the sole the OPC are not owned by its sole
director and president of the OPC. stockholder and should be independent of the
(Section 121, RCC) stockholder's personal property.
f. The single stockholder is required to
designate a nominee and an alternate The obligations that the sole proprietorship
nominee who shall, in the event of the incurred in conducting the business may be
single stockholder's death or incapacity, enforced against the proprietor whereas, in
take the place of the single stockholder as OPC, the obligations of the corporation
director and shall manage the cannot be enforced against its sole
corporation's affairs. (Section 124, RCC) stockholder unless the situation warrants
piercing the veil of corporate fiction.
Sole proprietorship is registered with the DTI Q: Who are the officers of a OPC?
while a OPC is registered with the SEC. A: OPC should appoint a treasurer, corporate
secretary, and other officers as it may deem
Q: What should the articles of necessary, within fifteen (15) days from the
incorporation of a OPC contain? issuance of its certificate of incorporation and
A: OPC shall file articles of incorporation in should 1:ie reported to the SEC within five
accordance with the requirements under (5) days from appointment.
Section 14 of the RCC. It shall likewise
substantially contain the following: The single stockholder may not be appointed
a. If the single stockholder is a trust or an as the corporate secretary.
estate, the name, nationality, and
residence of the trustee, administrator, A single stockholder who is likewise the self-
executor, guardian, conservator, appointed treasurer of the corporation shall
custodian, or other person exercising give a bond to the SEC in such a sum as may
fiduciary duties together with the proof of be required: Provided, That the said
such authority to act on behalf of the trust stockholder/treasurer shall undertake in
or estate; and writing to faithfully administer the OPC's
b. Name, nationality, the residence of the funds to be received as treasurer, and to
nominee and alternate nominee, and the disburse and invest the same according to the
extent, coverage and limitation of the articles of incorporation as approved by the
authority. SEC. The bond shall be renewed every two
(2) years or as often as may be required.
The articles of incorporation should also state
the names, residence addresses and contact Discussion: The single stockholder must be
details of the nominee and alternate nominee, the president. It is by law.
as well as the extent and limitations of their
authority in managing the affairs of the OPC. The SEC said that the single stockholder
cannot be the corporate secretary. Not just
The written consent of the nominee and may. He cannot be the corporate secretary.
alternate nominee shall be attached to the
application for incorporation. Such consent Q: Who shall take the place of the single
may be withdrawn in writing any time before stockholder in managing the affairs of the
the death or incapacity of the single corporation in case of the latter’s death or
stockholder. incapacity?
A: The nominee and alternate nominee
Q: What happens when the consent is designated by the single stockholder shall, in
withdrawn? the event of the single stockholder's death or
A: The single stockholder must designate incapacity, take the place of the single
another nominee. stockholder as director and shall manage the
corporation's affairs.
Q: What is the term of the nominee and Q: How does a OPC approve a corporate
alternate nominee? act?
A: When the incapacity of the single A: When action is needed on any matter, it
stockholder is temporary, the nominee shall shall be sufficient to prepare a written
sit as director and manage the affairs of the resolution, signed and dated by the single
OPC until the stockholder, by self- stockholder, and recorded in the minutes
determination, regains the capacity to assume book of the OPC. The date of recording in the
such duties. minutes book shall be deemed to be the date
of the meeting for all purposes under the
(Dean: Here, the nominee cannot say that the RCC.
stockholder does not have yet the capacity to
assume the duties. It is the stockholder who A OPC shall maintain a minutes book which
determines whether or not he has regained the shall contain all actions, decisions, and
capacity to assume the duties). resolutions taken by the OPC.
Q: If a single stockholder acquires all the Within sixty (60) days from the transfer of the
stocks of an ordinary stock corporation, is shares, the legal heirs shall notify the SEC of
it automatic that it gets converted to an their decision to either wind up and dissolve
OPC? the OPC or convert it into an ordinary stock
A: Obviously, not. You can have a corporation.
corporation owning the controlling capital
stock or even 99.99% of a corporation but The ordinary stock corporation converted
that does not make it as an OPC. But the law from a OPC shall succeed the latter and be
gives that option to be converted to an OPC. legally responsible for all the latter's
outstanding liabilities as of the date of
Q: When may an OPC be converted to an conversion.
Ordinary Stock Corporation?
A: OPC may be converted to an Ordinary Q: Whether or not a person can own more
Stock Corporation in the following cases: than 1 OPC.
a. After due notice to the SEC of such fact A: Since there is no prohibition, a person can
and of the circumstances leading to the own more than 1 OPC subject to condition
conversion, and after compliance with all that there must be no abuse or misuse of the
other requirements for stock corporations separate legal personality of each of the OPC.
under the RCC and applicable rules. Such If they are in different businesses, their
notice shall be filed with the SEC within separate legal personality shall be
sixty (60) days from the occurrence of the maintained.
circumstances leading to the conversion
Slide: Slide:
Q: What is Dissolution? This extended authority necessarily excludes
A: Dissolution is the extinguishment or the purpose of continuing the business for
cancellation of the corporate franchise and which it was established. The reason for this
the termination of its corporate existence for is simple: the dissolution of the corporation
business purposes. carries with it the termination of the
corporation's juridical personality. Any new
Discussion: business in which the dissolved corporation
So we have to qualify termination of would engage in, other than those for the
existence for business purposes, because as purpose of liquidation, will be a void
we all know a dissolve corporation does not transaction because of the non-existence of
mean it cannot perform any act. A dissolve the corporate party.
corporation retains its legal personality but Thus, a real estate mortgage executed by a
only for one purpose, that is to liquidate and corporation after its dissolution is void. The
to wind up its corporate affairs, but it does not redemption of the mortgaged property is
exist anymore for the purpose of continuing likewise void for being inconsistent with
the business it was organized. liquidation. A real estate mortgage is not part
of the liquidation powers that could have
Slide: been extended to the corporation. It could not
Q: What is the consequence of dissolution? have been for the purpose of prosecuting and
A: A corporation that has already been defending suits by or against it and enabling
dissolved, be it voluntarily or involuntarily, it to settle and close its affairs, to dispose of
retains no juridical personality to conduct its and convey its property and to distribute its
business save for those directed towards assets.
corporate liquidation. In other words, the
corporation ceases to be a body corporate for Discussion:
the purpose of continuing the business for This is the case that we discussed a while ago,
which it was organized. But it shall, a REM or a mortgage on a property signed by
the corporation after dissolution is void, the the corporation's certificate of incorporation.
redemption of the property likewise is void Even if said documents were executed years
for being inconsistent with liquidation. A after the dissolution of the corporation, the
REM is not part of the powers of liquidation same are still valid and binding upon the
that would have been extended to the parties and the dissolution will not erase its
corporation, because its not obviously for the consequences. Benigno M. Vigilla, et. al., Vs.
purpose of winding up and liquidating the Philippine College of Criminology Inc. G.R.
affairs of the corporation.
No. 200094, June 10, 2013.
Now, it would have been different if the
mortgage was executed before the dissolution Discussion:
of the corporation, in that case redemption Now, Vigilla vs Philippine College of
can be effected even after dissolution, Criminology, what happened in this case,
anyway it would not exceed 3 years because PCCR entered a contract with ABC labor
redemption is only within 1 year from agency and this agency provided manpower
registration of the sale, so the redemption of to PCCR, eventually that contract was
the property that was mortgage before the terminated so employees of the agency were
dissolution, SC said is valid. likewise terminated and they were able to
obtain their separation benefits from ABC
Labor Agency and they signed a quitclaim in
Slide:
Consequently, any redemption exercised by favor of the agency. Subsequently, they filed
the Corporation pursuant to this void real a claim against PCCR claiming that they are
estate mortgage is likewise void, and could employees of PCCR and not of the agency.
not be given any effect. If real estate To prove its arguments that these are not
mortgage agreement was entered prior to its employees of PCCR, they presented the
dissolution, then the redemption of the quitclaim signed by the personnel hired by
subject property, even if already after its ABC.
dissolution (as long as it would not exceed
three years thereafter), would still be valid Q: Are those waivers and quitclaims
because of the liquidation/winding up powers signed six years after the dissolution of the
accorded by the Corporation Code. Dr. Gil J. corporation, can those documents be given
Rich vs. Guillermo Paloma III, GR No. probative value? Are they still valid and
210538, March 7, 2018. binding despite the fact that they were
signed 6 years after dissolution?
A corporation whose term has expired and, A: SC said yes, emphasizing that no right or
ipso facto, dissolved can no longer exercise remedy available to or against the
an option to lease a property because the corporations, SHs or members will be
same is tantamount to the continuation of the impaired on account of dissolution.
business. Philippine National Bank vs. Court
of First Instance of Rizal, et. al., GR No. Slide:
63201, May 27, 1992. Barn filed an action to enjoin SN Company's
Board of Directors from selling a parcel of
In another case, the Supreme Court affirmed land registered in the corporation's name, to
the validity and binding effect of executed compel the corporation to recognize Barn as
releases, waivers and quitclaims of a stockholder with 50 shares, to allow him to
employees notwithstanding the revocation of inspect the corporate books, and to claim
damages against the corporation and its removed or impaired by the subsequent
officers. Subsequently, the corporation and dissolution of the corporation.
the individual defendants moved to dismiss The dissolution does not automatically
the complaint since the corporation's convert the parties into strangers or change
certificate of registration was revoked by the their intra corporate relationship. Neither
SEC during the pendency of Barn's case on does it terminate existing causes of action
the ground of non-compliance with which arose because of the corporate ties of
reportorial requirements. The special the parties. The cause of action involving an
commercial court granted the motion and intra-corporate controversy remains and must
reasoned that only action for liquidation of be filed as an intra corporate dispute despite
assets can be maintained when a cor-po-ra- the subsequent dissolution of the
tion has been dissolved and Barn cannot seek corporation.
reliefs which in effect lead to the continuation
of the corporation's business. The court also Discussion:
ruled that it lost jurisdiction over the intra- (As to first paragraph)
corporate controversy upon the dissolution of Whatever right or remedy available to the
the corporation. corporation cannot be extinguished just
because the corp. is dissolved.
a. Was the court correct? (As to second paragraph)
If it started as intra-corporate in nature, it
Discussion: continues to be intra-corporate despite
Here is a bar exam question based on Aguirre dissolution of the corporation. So the course
vs. FQB+7. When we analyze the facts, there of action is not changed, if it is intra-
are three questions or issues: corporate on the outset, it remains to be intra-
1. Whether or not an action to be recognized corporate despite dissolution.
as SH amounts to continuation of business. 2.
Whether or not the dissolution of the Slide:
corporation results in the court losing its The foregoing bar exam question is based on
jurisdiction and the case should now move to the case of Aguirre vs. FQB +7, Inc. In that
the liquidation court. case, the Supreme Court said that the
3. Whether or not a course of action is complaint does not show any intention to
changed or extinguished upon dissolution. continue the corporate business of FQB+7. It
does not seek to enter into contracts, issue
Slide: new stocks, acquire properties, execute
The court is not correct. An action to be business transactions, etc. Its aim is not to
recognized as a stockholder and to inspect continue the corporate business, but to
corporate documents is an intra-corporate determine and vindicate an alleged
dispute which does not constitute a stockholder's right to the return of his
continuation of the business. The dissolution stockholdings and to participate in the
of the corporation simply prohibits it from election of directors, and a corporation's right
continuing its business. Moreover, under to remove usurpers and strangers from its
Section 145 of the OCC (now Section 184 of affairs. Neither are these issues mooted by
the RCC), no right or remedy in favor of or the dissolution of the corporation. A
against any corporation, its stockholders, corporation's board of directors is not
members, directors and officers shall be rendered functus officio by its dissolution.
Since Section 122 of the OCC (now Section
139 of the RCC) allows a corporation to yet to be sold, as well as those considered
continue its existence for a limited purpose, open spaces that have not yet been donated to
necessarily there must be a board that will the local government of Muntinlupa City or
continue acting for and on behalf of the the Homeowner's Association. In September
dissolved corporation for that purpose. Thus, 2006, ADC learned that Alabang Hills
the determination of which group is the bona Village Association Inc. ("AHVAI”) started
fide or rightful board of the dissolved the construction of a multi-purpose hall and a
corporation will still provide practical relief swimming pool on one of the parcels of land
to the parties involved. The same is true with still owned by ADC without the latter's
regard to the shareholdings in the dissolved consent and approval, and that despite
corporation. A party's stockholdings in a demand, AHVAI failed to desist from
corporation, whether existing or dissolved, is constructing the said improvements. ADC
a property right which he may vindicate thus prayed that an injunction be issued
against another party who has deprived him enjoining AHVAI from continuing with the
thereof. The corporation's dissolution does construction. In its Answer, AHVAI claimed
not extinguish such property right. that the latter has no legal capacity to sue
since its existence as a registered corporate
Discussion: entity had been revoked by the SEC.
There is also a practical reason why the case
should continue, you have to determine who Discussion:
are the bona fide SH of the corporation to Q: So basic question is if the corporation is
determine the persons who will participate dissolved, can it still file an action?
in the dissolution and liquidation of the A: Before we know, yes right?
assets of the corporation.
Q: What if the action if filed after 3 years
Slide: from dissolution?
b. Four years later, SN Company files A: SC through Justice Peralta said: The
an action against Barn to recover action should not prosper because 3 years
corporate assets allegedly held by the after dissolution, the corporation has no more
latter for liquidation. Will this action legal capacity to sue.
prosper?
In this case likewise, the SC as you will see
Discussion: in the next slide, one of the arguments of
Take note that it says "four years later" ADC are the various jurisprudence upholding
the right of corporations to enforce whatever
Slide: remedy it has under the law, despite
The action cannot prosper because the dissolution, citing Sec. 145 , now 184, that no
corporation has no more legal capacity to sue right or remedy should be impaired on
after three years from its dissolution. Alabang account of dissolution.
Development Corporation vs. Alabang Hills
Village Association, GR no. 187456, June 2, Q: How was that argument addressed by
2014. the SC?
In a relevant case, Alabang Development A: It said that all of these cases that ADC
Corporation ("ADC") was the developer of cited point to cases filed by the corporation
Alabang Hills Village and claimed that it still during its lifetime or after dissolution but not
owns certain parcels of land therein that are exceeding 3 years from such dissolution.
similar to a request for dissolution where term to dissolve the corporation. G.R. No.
creditors are not affected. If creditors will be 63201, May 27, 1992.
affected, the rules similar to petition for
voluntary dissolution should be followed. Discussion:
The reason why I had to include this was
because it was asked in the bar. The case of
Q: Is there any distinction between PNB vs. CFI regarding the corporation
expiration of the original term and wanting to exercise an option to lease a
expiration of the shortened term as a property, the SC said that if the term expires
ground to dissolve the corporation? ipso facto, corporation is deemed dissolved
A: Expiration of the shortened term ipso facto
without having to file a petition for quo
results in the automatic dissolution of the
warranto or request for dissolution, no need
corporation. This is clear under Section 136
to file any document, basically, with the SEC
of the RCC which provides that upon the
when the term expires. Therefore, since it s
expiration of the shortened term, as stated in
dissolved, it cannot exercise the option to
the approved amended articles of
lease the property. So I say that, this case
incorporation, the corporation shall be
should now be construed to mean or to refer
deemed dissolved without any further
to corporations that shortened their term to
proceedings, subject to the provisions of the
dissolve the corporation not to a situation
RCC on liquidation. In the case of expiration
where the original term will expire, because
of corporate term, dissolution shall
of the provision of the RCC regarding the
automatically take effect on the day
corporation, the remedy of reviving the
following the last day of the corporate term
existence of the corporation.
stated in the articles of incorporation, without
the need for the issuance by the SEC of a
Q: So what are the grounds for
certificate of dissolution
involuntary dissolution?
A: A corporation may be dissolved by the
The expiration of term should be without
SEC motu proprio or upon filing of a verified
prejudice to the remedy available to the
complaint by any interested party. The
corporation to apply for a revival of its
following may be grounds for dissolution of
corporate existence. Since the law does not
the corporation:
prescribe the period to file it, the application
a. Non-use of the corporate charter as
may be filed prior to the liquidation of the
provided under Section 21 of
corporation.
the RCC.
Under Section 21 of the RCC, if a corporation
It is submitted that the Supreme Court
does not formally organize and commence its
decision in Philippine National Bank vs. The
business within five (5) years from the date
Court of First Instance of Rizal, Pasig, et al.
of its incorporation, its certificate of
that upon the expiration of the period fixed in
incorporation shall be deemed revoked as of
the articles of incorporation, the corporation
the day following the end of the five (5)-year
ceases to exist and is dissolved ipso facto and
period.
there is no need for the institution of a
proceeding for quo warranto to determine the
Discussion:
time or date of the dissolution of a
I'd like to refresh your memory, previously
corporation should now be construed to refer
it was 2 years, now its 5 years to organize
to corporations that shortened their corporate
and commence business.
iii. Repeatedly and knowingly Note further that while the three grounds
tolerated the commission of provided in paragraph (e) refer to
graft and corrupt practices or commission of graft and corrupt practices,
other fraudulent or illegal acts fraudulent or other illegal acts, these are
by its directors, trustees, distinct from one another. Under the first
officers, or employees. ground, the corporation was organized for the
purpose of creating, concealing or aiding in
If the corporation is ordered dissolved by the commission of the specified illegal acts.
final judgment pursuant to the grounds set Obviously, in this case, there was
forth in subparagraph (e) hereof, its assets, misrepresentation too as to the purposes of
after payment of its liabilities, shall, upon the corporation because the SEC will not
petition of the SEC with the appropriate approve the incorporation if the articles of
court, be forfeited in favor of the national incorporation, on its face, indicates as the
government. Such forfeiture shall be without corporation's purposes the commission of
prejudice to the rights of innocent illegal acts. Under the second ground, the
stockholders and employees for services corporation is lawfully organized and
rendered, and to the application of other conducting business but it committed or
penalties or sanctions under the RCC or other aided in the commission of the same
laws. specified illegal acts and its stockholders
The SEC shall give reasonable notice to, and knew about them. Under the third ground, the
coordinate with, the appropriate regulatory corporation is created for lawful purposes
agency prior to the involuntary dissolution of and legally conducting business but it
companies under their special regulatory repeatedly and knowingly tolerated the
jurisdiction. commission of graft and corrupt practices or
other fraudulent or illegal acts by its
Discussion: directors, trustees, officers, or employees.
Its not automatic that just because they
committed those violations of special laws as
Q: Are there other grounds to dissolve the
enumerated, the assets will be forfeited to the
corporation upon order of the SEC?
national government, the SEC must file with
A: Yes.
the appropriate court a petition to forfeit
The above-stated grounds under PD 902-A
those assets.
were reinforced by Section 158 of the RCC
Q: What about the other grounds for
which provides that, if, after due notice and
involuntary dissolution? Can the SEC file
hearing, the SEC finds that any provision of
a petition to forfeit those assets?
the RCC, rules or regulations, or any of its
A: No, only for those three grounds under
orders has been violated, the SEC may
subparagraph E:
impose any or all of the following sanctions,
Slide:
taking into consideration the extent of
Note that it is only on the grounds specified
participation, nature, effects, frequency, and
in paragraph (e) that the SEC may file a
seriousness of the violation:
petition with the appropriate court that the
a. Imposition of a fine ranging from
assets be forfeited in favor of the national
Five thousand pesos (P5,000.00) to
government but without prejudice to the
Two million pesos (P2,000,000.00),
rights of innocent stockholders and
and not more than one thousand pesos
employees for services rendered.
(P1,000.00) for each day of
continuing violation but in no case to
Q: What are the revisions under the RCC Q: Within what period should the
on the liquidation of private corporations? liquidation of the corporation be
A: concluded?
a. It provided that the liquidation of A: Every corporation whose charter expires
banks shall be covered by the New pursuant to its articles of incorporation, is
Central Bank Act and the Philippine annulled by forfeiture, or whose corporate
Deposit Insurance Corporation existence is terminated in any other manner,
Charter. shall nevertheless remain as a body corporate
b. In case of escheat, the properties shall for three (3) years after the effective date of
revert to the national government. dissolution, for the purpose of prosecuting
The OCC previously provided that and defending suits by or against it and
such properties will be escheated to enabling it to settle and close its affairs,
the city or municipality where such dispose of and convey its property, and
are located. distribute its assets, but not for the purpose of
continuing the business for which it was
Q: What is liquidation? established.
In the absence of a statutory provision to the can be done even after 3 years from
contrary, pending actions by or against a dissolution of the corporation
corporation are abated upon the expiration of Slide:
the three-year period allowed by law for the Yes, a corporation may still dispose of its
liquidation of its affairs. Mambulao Lumber assets despite the lapse of the three-year
Company vs. Philippine National Bank, G.R. period for liquidation of assets provided
No. L-22973, January 30, 1968. under Section 139 of the RCC.
Based on the above provision, there is, as a
Discussion: general rule, no juridical personality after
But as you will see later on, the 3 year period dissolution. If there is, it is only a juridical
is not an absolute period. Meaning, what personality to serve but one purpose –
happens if it is not done within 3 years? Does liquidation, culminating in the disposition
it mean that everything is stopped? It used to and distribution of the dissolved
be Mambulao vs. PNB where everything is corporation's remaining assets. As pointed
abated after three years, finished or not out, any matter entered into that is not for the
finished, pass your papers type of dissolution. purpose of liquidation will be a void
transaction because of the non-existence of
But not anymore, liquidation can go beyond the corporate party.
3 years from dissolution under various modes
as you will see in the next slides. Discussion:
Is it not when you liquidate, you have to
Slide: maximize asset recovery, you have to
Nevertheless, a corporation that has a generate cash, you have to collect receivables
pending action and which cannot be from debtors and you can sell property to
terminated within the three year period after generate cash then use that cash proceeds to
its dissolution is authorized under Sec. 139 of pay the creditors and distribute the remaining
the RCC to convey all its property to a trustee assets and cash to the SHs starting with
to enable it to prosecute and defend suits by preferred to common. So it does not make
or against the corporation beyond the three sense, therefore, to cut or to put a period in
year period. The trustee may commence a suit selling a property if it is incidental to
which can proceed to final judgment even liquidation.
beyond the three-year period.
Even if no trustee is formally appointed, the Slide:
directors of the dissolved corporation may be While Section 139 of the RCC gives a
permitted to continue as trustees to complete dissolved corporation three (3) years to
the liquidation of the corporation. Clemente continue as a body corporate for purposes of
vs. Court of Appeals, G.R. No. 82407, March liquidation, the disposition of the remaining
27, 1995. undistributed assets must necessarily
continue even after such period. This should
Q: May a corporation be allowed to not, however, be construed to prevent a
dispose of its remaining assets after three corporation from pursuing activities which
years from the time of its dissolution? would complete the final liquidation of a
A: The SEC said that it is absurd and dissolved corporation. Accordingly, it should
ridiculous to say otherwise. A property may be allowed to continue liquidating its
be disposed incident to the liquidation that remaining assets in order to complete the
process of dissolving the corporation.
Likewise, it should be allowed to distribute If you have 15 Directors for example, how
the proceeds from the said disposition to its will you get a quorum if it is already
stockholders or creditors if any. A contrary dissolved and they are not too motivated to
interpretation would have unjust and absurd fulfill their duties as directors? So its best to
results. appoint a trustee, either 1 or 3. But it is not
good for the BOD to be trustees given the
Discussion: difficulty of getting a quorum. But legally
In Clemente vs. CA, under the Corporation speaking, SC said even without a trustee
Code, as we have seen then and now, within formally appointed, the BOD shall serve as
three years a corporation must appoint a trustees to carry out liquidation.
trustee, and the trustee appointed will be the
one to carry out the liquidation of the 2. Gelano vs, CA, it is asked in the bar twice.
corporation even beyond 3 years from There was no trustee formally appointed but
dissolution. The implication here seems to be the lawyer handled the case is deemed the
that if there is no trustee appointed, then the trustee with respect to this case and therefore
corporation is bound by the three year period, it can continue beyond the 3 year period.
well not so, based on these cases: Slide:
1. Clemente vs. CA In the Gelano vs. Court of Appeals, the word
Slide: "trustee" as used in the corporation statute
In Clemente vs. Court of Appeals, the must be understood in its general concept
Supreme Court affirmed that if the three year which could include the counsel to whom
extended life has expired without a trustee or was entrusted in the instant case, the
receiver having been expressly designated by prosecution of the suit filed by the
the corporation within that period, the board corporation. The purpose in the transfer of
of directors (or trustees) itself, following the the assets of the corporation to a trustee upon
rationale of the Supreme Court's decision in its dissolution is more for the protection of its
Gelano vs. Court of Appeals, G.R. No. L- creditor and stockholders. Carlos Gelano vs.
39050, February 24, 1981, maybe permitted the Honorable Court of Appeals, et al., G.R.
to continue as "trustees" by legal implication No. L-39050 February 24, 1981.
to complete the corporate liquidation. Still, in
the absence of a board of directors or trustees, Q: Do liquidation and winding up of
those having any pecuniary interest in the corporate affair automatically follow after
assets including not only the shareholders but dissolution?
likewise the creditors of the corporation, A: Not necessarily, we saw this in Chung Ka
acting for and its behalf, might make proper Bio vs. IAC, regarding the term that expired
representations with the SEC which has but instead of liquidating, the SHs put up a
primary and sufficiently broad jurisdiction in new corporation and then the assets that
matters of this nature, for working out a final should have been distributed, were assigned
settlement of the corporate concerns. See to the new corporation as a subscription to the
SEC-OGC Opinion No. 31-09, December 9, shares of stock.
2009.
Slide:
Generally, liquidation is the necessary
Discussion:
consequence of dissolution. However,
Its very cumbersome of course, if your
winding up is the sole activity of a dissolved
trustees will carry out the liquidation are the
corporation that does not intend to
very same BOD of the corporation.
incorporate anew. If it does, however, it is not corporation. Rene Knecht and Knecht, Inc.,
unlawful for the old board of directors to vs. United Cigarette Corp., represented by
negotiate and transfer the assets of the Encarnacion Gonzales Wong, and Eduardo
dissolved corporation to the new corporation Bolima, Sheriff, Regional Trial Court,
intended to be created as long as the Branch 151, Pasig City, G.R. No. 139370,
stockholders have given their consent. Chung July 4, 2002.
Ka Bio vs. Intermediate Appellate Court,
G.R. No. 71837, July 26, 1988. Q: Can an appeal be taken from an
adverse ruling of the RTC if that appeal is
to be done after three years from
Discussion:
dissolution?
Liquidation is a necessary consequence of
A: Yes
dissolution, but its not the automatic
Slide:
consequence because the SHs may not want
A dissolved corporation may also maintain
to liquidate but put up a new corporation.
actions in court for the protection of its rights
including the right to appeal from an adverse
Q: May the following legal actions decision. Paramount Insurance Corp. vs.
involving the corporation be enforced by A.C. Ordoñez Corporation and Franklin
or against the corporation beyond the Suspine, G.R. No. 175109, August 6, 2008.
three-year liquidation period? Discussion:
1. Action filed during the lifetime of the Same reason, no right or remedy shall be
corporation? impaired on account of dissolution.
A:Yes
Slide: Slide:
The trustee (of a dissolved corporation) may Generally, liquidation is the necessary
commence a suit which can proceed to final consequence of dissolution. However,
judgment even beyond the three-year period winding up is the sole activity of a dissolved
of liquidation. No reason can be conceived corporation that does not intend to
why a suit already commenced by the incorporate anew. If it does, however, it is not
corporation itself during its existence, not by unlawful for the old board of directors to
a mere trustee who, by fiction, merely negotiate and transfer the assets of the
continues the legal personality of the dissolved corporation to the new corporation
dissolved corporation, should not be intended to be created as long as the
accorded similar treatment – to proceed to stockholders have given their consent. Chung
final judgment and execution thereof. Indeed, Ka Bio vs. Intermediate Appellate Court,
the rights of a corporation that has been G.R. No. 71837, July 26, 1988.
dissolved pending litigation are accorded
protection by Section 145 of the OCC (now 2. Action filed during the three-year
Section 184 of the RCC) which provides "no liquidation period?
right or remedy in favor of or against any A: Yes, the trustee appointed by the
corporation, its stockholders, members, corporation may initiate a suit during the
directors, trustees, or officers, nor any three year liquidation period, which may
liability incurred by any such corporation, continue even beyond the said period. As
stockholders, members, directors, trustees, or pointed out, in Gelano vs. Court of Appeals,
officers, shall be removed or impaired either it was held that the lawyer handling the case
by the subsequent dissolution of said for the corporation is deemed a trustee with
respect to that case. In Clemente vs. Court of c) by the receiver that the SEC may
Appeals, it was held that in the absence of a appoint upon judgment dissolving
trustee formally appointed, the board of the corporation after hearing the
directors shall be deemed the trustees of the corporation's petition for voluntary
corporation to carry out the liquidation of the dissolution; and
corporation. d) by the rehabilitation receiver or
Moreover, it is clear under Section 184 of the liquidator appointed by the
RCC that "no right or remedy in favor of or court after judgment on a petition for
against any corporation, its stockholders, liquidation involving an insolvent
members, directors, trustees, or officers, nor debtor.
any liability incurred by any such
corporation, stockholders, members, a. By the corporation itself
directors, trustees, or officers, shall be Under Section 139 of the RCC, the
removed or impaired either by corporation is granted a period of three years
the subsequent dissolution of said after dissolution, whether voluntary or
corporation. involuntary, to wind up it bffairs. Ideally, the
winding-up process should be completed in
3. Action filed more than three years from three years. Otherwise, it should appoint a
the dissolution of the corporation? trustee to carry out the liquidation even
A: No, As previously expounded, an action beyond three years. But, in the absence of an
filed more than three years from the appointed trustee, the board of directors shall
dissolution of the corporation should be be deemed the trustees of the corporation.
dismissed since by that time the corporation b. By the trustee appointed by the
lacks the capacity to sue because it no longer corporation
possesses juridical personality by reason of Under Section 139 of the RCC, at any time
its dissolution. during said three (3) year liquidation period,
While there are cases that a corporation may the corporation is authorized and empowered
still sue, even after it has been dissolved and to convey all of its property to a trustee for
despite the lapse of the three-year liquidation the benefit of stockholders, members,
period, the corporations involved in those creditors and other persons in interest. After
cases filed their respective complaints while any such conveyance by the corporation of its
they were still in existence. In other words, property in trust for the benefit of its
they already had pending actions at the time stockholders, members, creditors and others
that their corporate existence was terminated. in interest, all interest which the corporation
Alabang Corporation, Development vs. had in the property terminates, the legal
Alabang Hills Village Association and Rafael interest vests in the trustee, and the beneficial
Tinio, G.R. No. 187456, 02 June 2014. interest in the stockholders, members,
creditors or other persons-in-interest.
Slide: The trustee is not bound by the three-year
Q: What are the methods of liquidation? period. What is important is the completion
A: There are four methods of liquidation, of the liquidation process so that creditors
namely: will be paid and the residual assets are
a) by the corporation itself; distributed to the stockholders.
b) by the trustee duly appointed by the c. By the Receiver appointed by the
corporation; SEC
Under Section 135 of the RCC, the SEC shall jurisdiction of the regular courts. The trial
proceed to hear the petition (filed by a court is in the best position to convene all the
corporation where creditors are affected) and creditors of the corporation, ascertain their
try any issue raised in the objections filed; claims, and determine their preferences. GR
and if no such objection is sufficient, and the No. 161771, February 15, 2012.
material allegations of the petition are true, it
shall render judgment dissolving the Discussion:
corporation and directing such disposition of Q: Now is it the Special Commercial
its assets as justice requires, and may appoint Courts that has jurisdiction to ascertain
a receiver to collect such assets and pay the those claims?
debts of the corporation. A: There is one author that opined that it us
The receiver represents the SEC, as well as the SCA, but that's not me. It’s not the SCA,
the stockholders and creditors. The receiver its the RTC. Because those creditors may not
is not bound by the three year liquidation have intra-corporate relationship with the
period. Pepsi Cola Products Philippines vs. corporation so its more correct to say, that
Court of Appeals, G.R. No. 145855, RTC and not those designated to hear intra-
November 24, 2004.
corporate disputes.
Slide:
The appointment of a receiver operates to
It should be noted that the power of the SEC
suspend the authority of a corporation and its
to appoint a receiver existed even under the
directors and officers over its property and
OCC and retained under the RCC despite the
effects, such authority being reposed in
ruling in Bank of the Philippine Islands vs.
the receiver. Thus, a corporate officer had no
Eduardo Hong. It is submitted that the
authority to condone a debt. Victor Yam &
receiver may carry out the liquidation of the
Yek Sun Lent, doing business under the name
corporation if the creditors and the
and style of Philippine Printing Works vs. the
corporation are able to agree among
Court of Appeals and Manphil Investment
themselves on how the creditors' claims shall
Corporation, G.R. No. 104726, February 11,
be satisfied. Otherwise, the RTC should carry
1999.
out the liquidation process.
Discussion:
Q: In the case of BPI vs. Hong, who will d. By the rehabilitation receiver or the
carry out the liquidation of the liquidator appointed by the
corporation? is it the receiver appointed competent RTC in cases involving
by the SEC or the court? insolvent debtor under FRIA.
A: Slide: The receiver who may be appointed by the
In Bank of the Philippine Islands vs. Eduardo SEC is different from the rehabilitation
Hong, the Supreme Court held, however, that receiver that the competent Regional Trial
while the SEC has jurisdiction to order the Court may appoint in cases involving the
dissolution of a corporation, jurisdiction over rehabilitation of an insolvent debtor under
the liquidation of the corporation now FRIA.
pertains to the appropriate regional trial In cases falling under FRIA, the liquidation
courts. This is the correct procedure because of the debtor will be carried out by the
the liquidation of a corporation requires the rehabilitation receiver or the liquidator
settlement of claims for and against the appointed by the court.
corporation, which clearly falls under the
Under Section 25 of the FRIA, the incorporation. It has no debts but owns a
Rehabilitation Court may convert a petition prime property located in Quezon City.
for rehabilitation to liquidation if there is no How would the said property be liquidated
showing that the debtor may be rehabilitated. among the five stockholders of
In which case, the Rehabilitation Receiver the said corporation?
may perform the functions of the liquidator. A: The prime property of "X" Corporation
can be liquidated among the five
stockholders by dividing or partitioning it
The insolvent debtor may also file a petition
among themselves in any of the following
for voluntary liquidation or be the subject of
ways:
a petition for involuntary liquidation by his
a. By physical division or partition
creditors. In either case, if the petition is
based on the proportion of the values
sufficient in form and substance, the
of their stockholdings; or
Rehabilitation Court shall issue the Order of
b. Selling the property to a third person
Liquidation. Such order has the effect of
and dividing the proceeds among the
dissolving the corporation and title to the
five stockholders in proportion to
properties of the debtor shall be transferred to
their stockholdings; or
the Liquidator who will then carry out the
c. After the determination of the value
liquidation of the corporation.
of the property, by assigning or
transferring the property to one
stockholder with the obligation on
Q: How are the assets of the corporation the part of said stockholder to pay the
distributed during the liquidation other four stockholders the amount/s
process? in proportion to the value of the
The assets of the corporation shall be used to stockholding of each. 2001 Bar
pay off the claims of various creditors based Exam.
on the law on concurrence and preference of
Discussion:
credit. The residual assets shall then be
So if you have 5 SHs and the property is
distributed to the holders of the preferred
worth 50M, one of them will acquire it then
shares of stock, if any, then to the holders of
pay 10M (not sure, medyo inaudible) each to
common shares based on their agreement, if
the other SH in proportion to their
any, otherwise, in proportion to their
shareholdings.
respective shareholdings in the corporation.
Note that SEC approval is not required in the
In another bar exam question, there's another
approval of the distribution or liquidation of
option: whether or not the SEC will be the
the assets of the dissolved corporation. This
one to decide on how to distribute - now that
falls within the authority of the directors and
option is clearly not allowed because as we
stockholders or the duly appointed trustee or
said the SEC has not participation, no
receiver.
authority, no say in the liquidation of the
Any asset distributable to the creditor or
assets of the dissolved corporation.
stockholder or member who is unknown or
cannot be found shall be escheated in favor of
the national government.
Q: Are the rules on liquidation for private
Q: X” Corporation shortened its corporate corporations organized under the RCC
life by amending its articles of applicable for banks?
A: We took this up on SPCL, the case of not there, and would be tantamount to
Bokod Benguet, the issue is: W/N a bank may judicial legislation. There are substantial
be dissolved and liquidated without obtaining differences in the procedure for involuntary
tax clearance. dissolution and liquidation of a corporation
Slide: under the Corporation Code, and that of a
The rules on liquidation for corporations do banking corporation under the New Central
not apply for banks, which shall be covered Bank Act, so that the requirements in one
by the applicable provisions of Republic Act cannot simply be imposed in the other.
No. 7653, otherwise known as "The New Besides, to require a tax clearance prior to the
Central Bank Act," as amended, and dissolution, closure and liquidation of the
Republic Act No. 3591, otherwise known as bank will impair the authority of BSP to close
the Philippine Deposit Insurance Corporation a bank and of the PDIC to carry out the
Charter, as amended.
liquidation of the closed bank.
This provision of the RCC is based on the
Supreme Court decision in the case of in Re:
Petition for Assistance in the Liquidation of Discussion:
the Rural Bank of Bokod (BENGUET) vs. Q: May congress dissolve private
Bureau of Internal Revenue ("BIR"). In that corporations?
case, the BIR argued that Philippine Deposit A: Yes, congress may dissolve all private
Insurance Corporation( "PDIC" ) could not corporations even those organized under
proceed with the dissolution and liquidation special law. Why? because corporations are
of the bank without first securing tax creatures of law, the RCC governs the
clearance as required under the Tax Code and formation of private corporations and special
its agreement with the SEC. It was held that laws are passed to organized GOCCs. If
Section 30 of the New Central Bank Act lays congress repeals that special law, the special
down the proceedings for receivership and corp is dissolves. Similarly if Congress
liquidation of a bank. The said provision is repeals RCC, then all corporations organized
silent as regards securing a tax clearance under it is likewise dissolved but without
from the BIR. G.R. No. 158261, December prejudice is to vested rights. While it can be
18, 2006. done by Congress, it does not mean that it
should be done.
The omission, nonetheless, cannot compel
the Supreme Court to apply by analogy the Slide:
tax clearance requirement of the SEC, as Q: Other than dissolution when else may
stated in Section 52(C) of the Tax Code of the assets or property of the corporation
1997 and BIR-SEC Regulations No. 1, since, be distributed?
again, the dissolution of a corporation by the A: For reduction of course of capital stock:
SEC is a totally different proceeding from the Except by decrease of capital stock and as
receivership and liquidation of a bank by the otherwise allowed by the RCC, no
Bangko Sentral ng Pilipinas ("BSP"). The corporation shall distribute any of its assets
Supreme Court cannot simply replace any or property except upon lawful dissolution
reference by Section 52(C) of the Tax Code and after payment of all its debts and
of 1997 and the provisions of the BIR-SEC liabilities
Regulations No. 1 to the “SEC” with the
"BSP." To do so would be to read into the law
and the regulations something that is simply
latter issued a draft payable to the evidence of the truth of such factual
order of Llorente. allegation. If in fact, a foreign corporation
That draft was drawn against a bank does not do business here, that is a matter that
in Sydney. So Llorente is the payee, should be ventilated in the trial on the merits
he went to Australia, in Star City, to but not in a motion to dismiss. Signetics
play in their casino, and to be Corp. vs. Court of Appeals, G.R. No. 105141
upgraded and given certain privileges (Resolution), August 31, 1993.
he negotiated that draft to Star City,
thus the latter became the holder of
It does not follow that the insurer, as
the draft.
subrogee, has also no capacity to sue in this
Llorente claims that Star City,
jurisdiction simply because the insured party
cheated him, so he issued a stop
(which is a foreign corporation) has no legal
payment order to Banco de Oro, and
capacity to sue in the Philippines. The rights
the latter directed the drawee of the
inherited by the insurer pertain only to the
draft not to pay Star City.
payment it made to the insured and which
So when Star City presented the draft
amount it now seeks to recover from the
it was dishonored. Star City now filed
shipping company which caused the loss
an action to the Philippines to enforce
sustained by the insured. The capacity to sue
the liability of Equitable PCI bank as
is a right personal to its holder. It is conferred
drawer of the draft and Llorente.
by law and not by the parties. The insurer has
Q: Can Star City enforce the liabilities of
satisfactorily proven its capacity to sue, after
Banco de Oro?
having shown that it is not doing business in
A: Even though it has no license to do
the Philippines, but is suing only under an
business in the Philippines, the SC said that it
isolated transaction, i.e under the one marine
is a casual or an isolated transaction. The
insurance policy issued in favor of the
enforcement of the warranties of a drawer is
consignee/insured. Lorenzo Shipping Corp.
a casual or isolated transaction, departed,
vs. Chubb and Sons, G.R. NO. 147724, June
divorced or detached from the usual business
8, 2004.
of Star City. Thus, it does not need a license
to sue in the PH.
Q: When is a foreign corporation deemed
Slide: doing business in the Philippines?
Q: What confers upon the foreign A: The term "doing business" is not
corporation the legal capacity to sue in the specifically defined by the OCC and the
Philippines? RCC. There are certain activities, however,
A: The foreign corporation has the legal which are deemed as doing business under
capacity to sue if it has procured from the Republic Act No. 7042, otherwise known as
SEC a license to do business or it is suing on the Foreign Investments Act of 1991 (“FIA").
a casual or isolated transaction. Under the FIA, doing business shall include:
For purposes of acquiring jurisdiction by way a. soliciting orders;
of service of summons, there is no need to b. service contracts;
prove first the fact that the defendant is doing c. opening offices, whether called
business in the Philippines. Where a "liaison" offices or branches;
complaint alleges that the defendant has an d. appointing representatives or
agent in the Philippines, summons can distributors domiciled in the
validly be served thereto even without prior Philippines or who in any
calendar year stay in the country for conclusion that the foreign corporation is
a period or periods totaling one doing business:
hundred eighty (180) days or more; 1. The distributor or Rep. is domiciled in
e. participating in the management, the PH for 180 days or more.
supervision or control of any 2. The Dist. or rep. is exclusive to the
domestic business, firm, entity or foreign corporation without any
corporation in the Philippines, and dependent operations.
f. any other act or acts that imply a The moment that the distributor has
continuity of commercial dealings or dependent operations or not exclusive to the
arrangements, and contemplate to FC then the presence of the distributor on
that extent the performance of acts or behalf of the FC does not mean that it is doing
works, or the exercise of some of the business in PH
functions normally incident to, and
in progressive prosecution of, (E) Participation in the management:
commercial gain or of the purpose Take note what amounts to doing business is
and object of the business to participate in the management, supervision
organization. or control, not just to become a SH of the
corporation. So passive investment in the
equity, be a SH of a domestic corp, exercise
Discussion:
the right of SH, enforcement of those rights
(A) Soliciting orders:
in case of violation, all of those can be
This is the case of BMW vs Hahn. Before
pursued by FC despite of lack of license.
BMW entered into contracts with distributors
Voting, receiving dividends, right of pre-
in the Philippines, a person accepts orders on
emption is violated so FC sued to enforce this
behalf of BMW and once a customer places
right, no need for a license
an order with this person it is faxed or sent to
Q: What should the FC contend with if it
Germany and BMW will send or ship the car
is just investment in equity? What is the
to the buyer.
hurdle?
Q: So is that doing business?
A: W/N the investment exceeds or within the
A: Yes, soliciting orders is doing business.
limit allowed by law for a certain type of
economic activity.
(B) Service Contracts:
Rendering services post-sale or after sale of
(F) Any other act or acts:
the product owned, manufactured and
It says any other act, not necessarily more
produced by the foreign corporation.
than one act.
Q: So is it possible then that one act of a
(C) Opening offices:
FC means doing business?
Whether it is a liason office or a branch,
A: SC said yes, SEC likewise said yes, the so-
subsidiary, bottom line: the presence of the
called characterization test. If that one act is
foreign corporation in the Philippines by
of such a character that it shows the
opening offices is tantamount to doing
intention of the FC to obtain the purpose of
business.
incorporation here in the PH then that FC
needs the license from the SEC.
(D) Appointment of Distributors:
The classic example: The case of Hutchinson
Take note that there are 2 conditions so that
vs, SBMA, 2000
the appointment of a distributor warrants the
A: It is the misrepresentation.
RECITATION
DD: It is the basis, the misrepresentation
but what will be your relief when you file a
Recitation petition with the RTC for intracorporate
controversy?
Q: An investor purchased shares of stock
of ABC corporation, ABC sold securities A: Reimbursement
to investors and investors in our example
purchased shares from ABC Corporation DD: To get a REFUND to get the value of
based on the statement made by the issuer the shares, on the value of the investment
company in its registration statement, and that cannot be done or and or
basically highlighting the profits of ABC damages
corporation. It turns out that there was an
understatement of the loss and there and DD: Can you not file a claim for refund
overstatement of the income of the issuer with the SEC for the value of the shares?
corporation, basically there is A: No, because the refund or refund is mere
misrepresentation. Well, the question is incidental to the intracorporate dispute
what are the remedies available to Juan
dela cruz as a stockholder who bought DD: Can you ask the RTC to impose upon
stocks based on false misrepresentation? the corporation who sold the shares based
on false representation?
A: The remedy of the investor is to file a
complaint before the SEC for violation of the A: The SEC can impose admin sanctions
RCC.
DD: So you can file a petition with the
DD: So file a complaint, alright, with the RTC to file a refund, but the RTC cannot
SEC? impose admin sanctions, on or against the
corporation, the directors, officers,
A: The investor may file before the RTC responsible for the violation. Can you not
because it is an intra-corporate dispute. ask the RTC to dissolve the corporation?
DD: So he may file a petition which is A: No, you cannot.
intra-corporate in nature, so what would
the relief be prayed for in the petition? SECOND PERSON RECITATION
A: Collection for damages? DD: Do you agree with [] that the remedies
available to the investor are to file a
DD: Shouldn’t it be with the regular civil petition with the RTC to refund the value
courts? of the shares of investment plus damages,
and that the damages are only incidental
A: The special commercial court has to the claim for refund and will not affect
jurisdiction because it is mere incidental.
the intracorporate nature of the petition may impose sanctions after notice and
and second the RTC cannot impose hearing
administrative sanctions, but it is the SEC
and the remedy is to likewise file a Q: What are the sanctions that may be
complaint for violation of the SRC and the imposed under section 158 of the RCC?
imposition of the corresponding admin
sanctions? A: The SEC may issue a monetary fine
it is only one transaction because it shows the The rights of the director of the FC are
intention of the foreign corporation to attain violated, it can be enforced even without a
the purpose of its incorporation. Hutchinson license
Ports Limites v. Subic metropolitan
Authority. If the rights of a stockholder are violated such
as the right of preemption, inspection,
Discussion of dean divina: financial right, appraisal right if these rights
In Litton Mills v. CA, a FC made a 1 time of the FC may enforce those rights in the
purchase of soccer uniforms but involving Philippines without a license from the SEC
more than 3,000 pieces and since the FC is Any suit that is related to the enforcement to
engaged in sale of the jerseys, the one time the right of the FC as a stockholder does not
purchase is considered as doing business. need to have a license
Slide:
c. Where the contract provides the Discussion:
Philippine court as the exclusive Contract entered into FC without a license is
venue for court action, to the not void, it is merely voidable and the defect
exclusion of other courts can be cured by getting a license.
Stipulation as to venue which is not While the contracts may be cured by the act
permissive but exclusive in nature is of obtaining a license, it is without prejudice
binding to the parties. to criminal prosecution for doing business
without a license.
Discussion:
If it is exclusive, then the foreign corporation Slide:
has no other option but to file in the In IENT v. Tullett Prebon, the supreme court
Philippines, otherwise a motion to dismiss on however, rules that its declaration in Home
improper venue may be filed. insurance company v. Eastern shipping lines
that ”the prohibition against doing business
Slide: without first securing a license is now given
d. A license to engage in business a penal sanction which is also applicable to
granted subsequent to the transaction other violations of the corporation code under
enables the foreign corporation to sue the general provisions of section 144 of the
on contracts executed before grant of code” is unmistakably an obiter dictum. The
license. issue in the Home Insurance case was
whether or not a foreign corporation
In one case, the supreme court rules that previously doing business here without a
a contract entered into by a foreign license has the capacity to sue in the courts
corporation not licensed to do business in when it had already acquired the necessary
the Philippines is not void even as against license at the time of the filing of the
the erring foreign corporation. The lack complaints. The statement regarding the
of capacity at the time of execution of the supposed penal sanction was not essential to
contracts was cured by the subsequent the resolution of the case as none of the
grant of a license to engage in business. parties was being made criminally liable.
It was likewise held in this case that while
the grant of the license retroacts to the Slide:
date of the transaction, this is without e. When the unlicensed foreign
prejudice to criminal prosecution against corporation foreign corporation has
the foreign corporation for doing business domestic corporation as a co-
without a license. The basis of criminal plaintiff/petitioner
liability is section 144 of the OCC now
section 170 of the RCC THAT ANY This is necessary to prevent multiplicity of
VIOLATION of the provisions of the suits.
corporation code or its amendments not
otherwise specifically penalized therein Discussion:
shall be punished by a fine or by Let’s say we have a domestic borrower that
imprisonment (The RCC retained the obtained loans from various lenders. Let’s
language but removed the penalty of say the single borrower’s limit of a lender
imprisonment) bank, is not enough to accommodate the
single borrower’s unit for the borrower so contracted with and been benefited by said
they need a group of lenders, it’s called a corporation where such party is aware that
syndicated loan agreement which means a the foreign corporation is doing business in
loan facilitated by various lenders its because the Philippines without a license and received
the loan is so huge that the SBL of a single benefits from transacting business with it,
lender is not enough, so a pool is needed. one under the principle of estoppel. Merril Lynch
of those lenders is a foreign corporation Future, Inc. vs. Court of Appeals, GR NO.
There is a loan agreement signed by the 97816, July 24, 1992
borrower and various lenders and it is A party is estopped from challenging the
violated and one of the lenders filed in the personality of a corporation after having
Philippines and the FC split the cause of acknowledged the same by entering into a
action and filed abroad it is impractical, so contract with it. The principle is applied to
the foreign corporation can join the lender prevent a person contracting with a foreign
that filed here in the Philippines, and it does corporation from later taking advantage of its
need a license to avoid multiplicity of suits. non-compliance with the statutes, chiefly in
cases where such person has received the
Slide: benefits of the contract. Global Business
Holdings, Inc., vs. Surecomp Software, B.V.,
Slide: G.R. No. 173463, October 13, 2010;
F. Under the doctrine of estoppel when the Steelcase, Inc., vs. Design International
counterparty is estopped or precluded from Selections, Inc., G.R. No. 171995, April 18,
questioning the lack of legal capacity of the 2012.
foreign corporation, as held in the following
cases:
A foreign corporation which licensed a Slide:
domestic corporation to manufacture and Q: Who may be a resident agent ?
market its products and equipment is doing A: A resident agent may be either an
business in the Philippines and cannot sue the individual residing in the Philippines or a
domestic corporations if it has no license to domestic corporation lawfully transacting
do business in the Philippines and cannot sue business in the Philippines: Provided, that an
the domestic corporations if it has no license individual resident agent must be of good
to do business in the Philippines. For being in moral character and of sound financial
pari delicto, the domestic corporation cannot standing: Provided, further, That in case of a
ask the courts to prohibit the foreign domestic corporation who will act as a
corporation from terminating its contact and resident agent, it must likewise be of sound
giving the license to produce and market its financial standing and must show proof that
products to another. Top-Weld it is in good standing as certified by the SEC.
Manufacturing, Inc. vs. Eced, S.A., G.R. No. Note that the removal of the resident agent
L-44944, August 9, 1985; See also Granger and the failure to appoint a replacement can
Associates vs. Microwave Systems, Inc., G.R. be a ground for revocation or suspension of
No. 79986. September 14, 1990 its license to do business. 2012 Bar Exam.
Slide:
A foreign corporation doing business in the Discussion:
Philippines may sue in the Philippine courts For a grant of a license in favor of a FC the
although it has no license to do business here SEC requires that there must be a nomination
against a Philippine citizen who had of a resident agent, he is authorized to receive
summons and other court processes, there is c. Failure¸ after change of its resident
a need to appoint so that the FC is subject to agent or address, to submit to the SEC a
the jurisdiction of the court and subject to statement of such change as required by this
regulation by the SEC. Title;
d. Failure to submit to the SEC an
authenticated coy of any amendment to its
Q: Is the resident agent of a foreign articles of incorporation or bylaws or of any
corporation doing business in the articles of merger or consolidation within the
Philippines necessarily authorized to time prescribed by this Title;
execute the requisite certification against e. A misrepresentation of any material
non-forum shopping? matter in any application, report, affidavit or
other document submitted by such
A: The resident agent of a foreign corporation corporation pursuant to this Title;
doing business in the Philippines is not f. Failure to pay any and all taxes,
necessarily authorized to execute the imposts, assessments or penalties, if any,
requisite certification against forum lawfully due to the Philippine Government or
shopping. Under the Corporation Code, (then any of its agencies or political subdivisions;
and now) the resident agent was not g. Transacting business in the
specifically authorized to execute a Philippines outside of the purpose or
certificate of non-forum shopping as required purposes for which such corporation is
by the Rules of Court. This is because while authorized under its license;
a resident agent may be aware of actions filed h. Transacting business in the
against his principal, such resident agent may Phillipines as a agent of or acting on behalf
not be aware of actions initiated by its of any foreign corporation or entity not duly
principal, whether in the Philippines, against licensed to do business in the Philippines; or
a domestic corporation or private individual, i. Any other ground as would render it
or in the country where such corporation was unfit to transact business in the Philippines.
organized and registered, against a Philippine
registered corporation or a Filipino citizen. Discussion:
Expertravel & Tours, Inc. vs. CA, G.R. No. It is long enumeration but to summarize:
152392. May 26, 2005. 1. Violation by the terms of its license
2. violation of the laws or rules issued
Q: When may the SEC revoke or suspend by the SEC governing FC
the license of a foreign corporation to 3. violation of foreign laws in so far as it
transact business in the Philippines? affects the foreign license of the
A: Without prejudice to other grounds Philippines
provided under special laws, the license of a
foreign corporation to transact business in the
Philippines may be revoked or suspended by
the SEC upon any of the following grounds: Slide:
a. Failure to file its annual report or pay Upon the revocation of the license to transact
any fees as required by the RCC; business in the Philippines , the SEC shall
b. Failure to appoint and maintain a issue a corresponding certificate of
resident agent in the Philippines as required revocation, furnishing a copy thereof to the
by this Title; appropriate government agency in the proper
cases.
question demands the exercise of sounds SCB and certain officials for violation of the
administrative discretion requiring the SRC. The DOJ dismissed Baviera’s
specialized knowledge and expertise of said complaint for violation of the doctrine of
administrative tribunal to determine technical primary jurisdiction. Both the Court of
and intricate matters of fact. The Securities Appeals and the Supreme Court sustained the
Regulation Code (“SRC”) is a special law. Its Department of Justice.
enforcement is particularly vested in the Slide:
SEC. Hence, all complaints for any violations Q: What are the revisions under the RCC
of the SRC and its implementing rules and on the powers and functions of the SEC?
regulations should be filled with the SEC. A:
Discussion: So you need to file it first with a. The SEC may investigate an alleged
the SEC if it is criminal in nature and if the violation of the RCC or any of its own rules,
SEC finds that there is a violation, it will refer regulations, or orders.
it to the DOJ. There are some exceptions to b. It may publish its findings, orders,
this case. opinions, advisories, or information
You Cannot bypass the SEC when it comes concerning any such violation, as may be
to criminal violations like the SRC, if you do relevant to the general public or to the parties
so it will be dismissed. concerned, subject to the provisions of
The doctrine of primary jurisdiction is not Republic Act No. 10173, otherwise known as
applicable to civil liabilities, you can directly the “Data Privacy Act of 2012”, and other
file it to the RTC no need to go to the SEC pertinent laws. The SEC, however, shall give
first. reasonable notice to and coordinate with the
appropriate regulatory agency prior to any
Slide: such publication involving companies under
In the case of Manuel Baviera vs. Standard their regulatory jurisdiction.
Chartered Bank, et al., Baviera was the c. The SEC, through its designated
former head of the HR Service Delivery and officer, may administer oaths and
Industrial Relations of Standard Chartered affirmations, issue subpoena and subpoena
Bank-Philippines (“SCB”). SCB is a foreign duces tecum, take testimony in any inquiry or
banking corporation duly licensed to engage investigation, and may perform other acts
in banking, trust, and other fiduciary necessary to the proceedings or to the
business. It solicited from local residents investigations.
foreign securities called “GLOBAL THIRD d. Whenever the SEC has reasonable
PARTY MUTUAL FUNDS” (“GTPMF”), basis to believe that a person has violated, or
denominated in the US dollars. These is about to violate the RCC, a rule, regulation,
securities were not registered with the SEC. or order of the SEC, it may direct such person
Baveria entered into an Investement Trust to desist from committing the act constituting
Agreement with SCB wherein he purchased the violation.
securities upon the bank’s promise of a 40% Slide:
return on his investment and a guarantee that The SEC may issue a cease and desist order
his money is safe. Unfortunately, Baveria ex parte to enjoin an act or practice which is
learned that the value of his investment went fraudulent or can be reasonably expected to
down. After a few months, he demanded the cause significant, imminent, and irreparable
return of his investment but SCB rejected it danger or injury to public safety or welfare.
claiming Baviera’s investment is regular. The ex parte order shall be valid for a
Baverie filed a criminal complaint against maximum period of twenty (20) days,
without prejudice to the order being made g. Certain violations of the RCC are
permanent after due notice and hearing explicitly considered criminal offenses.
Thereafter, the SEC may proceed h. The penalty of imprisonment was
administratively against such person in removed for violations of right of inspection
accordance with Section 158 of the RCC, and other violation of the RCC. The
and/or transmit evidence to the Department imposable penalty is a fine.
of Justice for preliminary investigation or i. If the offender is a corporation, the
criminal prosecution and/or initiate criminal penalty may, at be discretion of the court, be
prosecution for any violation of the RCC, imposed upon such corporation and/or upon
rule, or regulation. its directors, trustee, stockholders, member,
officers, or employees responsible for the
e. It may cite for contempt, after notice violation or indispensable to its commission.
and hearing, any person who, without j. Anyone who shall aid, abet, counsel,
justifiable cause, fails or refuses to comply command, induce, or cause any violation of
with any lawful order, decision, or subpoena the RCC, or any rule, regulation, or order of
issued by the SEC and fined in an amount not the SEC shall be punished with a fine not
exceeding Thirty thousand pesos exceeding that imposed on the principal
(P30,000.00). When the refusal amounts to offenders, at the discretion of the court, after
clear and open defiance of the SEC’s order, taking into account their participation in the
decision, or subpoena, the SEC may impose offense.
a daily fine of One thousand pesos Discussion:
(P1,000.00) until the order, decision, or If these provisions are familiar to you, you
subpoena is complied with. have read them in the SRC, about CDO,
f. If, after due notice and hearing, the subpoena, about fine of course the data
SEC finds that any provision of the RCC, privacy are new most of these provisions are
rules or regulations, or any of the SEC’s found in the SRC, they are not a duplication.
orders has been violated, the SEC may These provisions are intended to enforce the
impose any or all of the following sanctions, RCC, the same provisions in SRC are
taking into consideration the extent of intended to strengthen the powers of the SEC
participation, nature, effects , frequency and to enforce and implement the SRC.
seriousness of the violation:
Q: What are the administrative sanctions
I. Imposition of a fine ranging from that the SEC may impose if it finds that
Five thousand pesos (P5,000.00) to Two any provision of the RCC or any of the
million pesos (P2,000,000.00). and not more SEC’s orders has been violated?
than One thousand pesos (P1,000.00) for
each day of continuing violation but in no A: The SEC may impose administrative
case to exceed Two million pesos sanctions against the corporation any or all of
(P2,000,000.00); the following sanctions, taking into
II. Issuance of a permanent cease and consideration the extent of participation,
desist oder; nature, effects, frequency and seriousness of
III. Suspension or revocation of the the violation.
certificate of incorporation; and a. Imposition of a fine ranging from
IV. Dissolution of the corporation and Five thousand pesos (P5,000.00) to Two
forfeiture of its assets under the conditions in million pesos (P2,000,000.00), and not more
Title XIV of the RCC than One thousand pesos (P1,000.00) for
A: They are different. The SRC is a different engage in any act or practice constituting a
sourcr of authority for the SEC to issue a violation of any provision of the SRC, any
cease and desisit order. rule, regulation or order thereunder, or any
The grounds under the CDO under SRC and rule of an exchange, registered securities
SEC are almost the same bu in the case of association, clearing agency or other self-
GSIS v CA. regulatory organization.
The provision additionally requires a finding
Slide: that “there is a reasonable likelihood of
In GSIS v. CA, GSIS was a stockholder of continuing [or engaging in] further or future
Merlaco. It was able to obtain a cease and violations by such person.” The maximum
desist order from the SEC to enjoin the Lopez duration of the CDO issued under section
family, then the controlling stockholder of 53.3. is 10 days
Merlalco, from using and voting the proxies
in the election of directors, for alleged Slide:
violation of the SRC rules on proxy The third basis for the issuance of a CDO is
solicitation. The CDO signed by only one section 64 of the SRC, This CDO is founded
SEC commissioner, did not accordingly state on a determination of an act or practice,
the exact provision of the SRC which was which unless restrained, will operate as a
violated. It was held that there are three fraud on investors or is otherwise likely to
distinct bases for the issuance by the SEC of cause grave or irreparable injury or prejudice
the cease and desist order. The first, under to the investing public.
Section 5(i) of the SRC, is predicated on a
necessity “to prevent fraud or injury to the Discussion:
investing public” No other requisite or detail Even if there are three grounds for the
is tied to this CDO authorized under Section issuance of a CDO the SC said for the CDO
5(i) SRC to be valid must specify the provision
applicable, is it under 5.1? 53.3? 64.1?
Discussion:
We know what a CDO is it is basically an There is no such thing as a shotgun CDO. It
injunction that the SEC issues to enjoin the must be specified what law is violated.
performance of an act but don’t call it an Following gsis v ca, If the CDO is issued
injunction it has the same effect as an under the SRC, the specific provision must be
injunction but from the perspective of the mentioned, without reference to the provision
regulator it is a cease and desist order. Even violated, it is void.
though you have provisions on the issuance
of the CDO under the RCC you likewise have Also the CDO, it must be signed also by 3 out
the same provisions of issuance under the of 5 commissioners, at least majority if
SRC, they are almost identical. But the SC signed by one only as in the GSIS case, it is
said in the GSIS case that under the SRC void.
there are three provisions governing the
issuance of the CDO 5.i, 53.3, and 64.1 Slide:
Section 64.1 plainly provides three
Slide: segregrate instances upon which the SEC
The second basis, found in Section 53.3 of the may issue the CDO under this provision (1)
SRC, involves a determination by the SEC after proper investigation or verification (2)
that “any person has engaged or is about to motu propio or (3) upon verified complaint
enemy so the RTC pasay has no jurisdiction the SEC even though the petition may
because this is not an ordinary civil dispute ostensibly raise a violation of the SRC. If the
so it is the rules on intra-corporate proxies were sought to be voted on any non-
controversy applies, so it should be filed in intra-corporate matter, such as approval of
the RTC of the city where the principal office certain corporate acts under the RCC, the
of Meralco is located or the SEC. SEC had jurisdiction to rule on issues related
We filed it in Pasay first, withdrew it to to validation of proxies. This ruling was
prevent forum shopping just to confuse the reiterated in Securities and exchange
enemy and we filed it before the SEC in the commission v. Omico and CA.
afternoon, and a CDO was issued by the SEC
to restrain the Lopez family from voting by Discussion of dean divina:
the use of proxies that it would cause fraud To simplify the SC said: if the proxies will be
and irreparable injury to the public. used in relation to election of directors, it is
The Lopez family defied the CDO in this an election contest it is cognizable by the
case, arguing that the SEC has no jurisdiction RTC by city where the principal office is
to issue a CDO to restrain the use of proxies. located if proxies will be used in non-
That’s your ruling GSIS v. CA intracorporate items or any corporate acts
which require stock holders approval, the
Slide: SEC has jurisdiction.
A singular CDO could not be founded on
Section 5.1, Section 53.3 and Section 64 Under the rules on intracorporate
collectively. At the very least, the CDO under controversy, the validation of proxies is part
section 53.3 and under Section 64 have their of an election contest and is under
respective requisites and terms. It is an error intracorporate use, thus if proxies are used in
on the part of the SEC in granting the CDO the election of directors, it is cognizable by
without stating which kind of CDO as it is an the RTC.
act that contravenes due process of law.
Also, the fact that the CDO was signed, much The ruling was reiterated in Omico. The
less apparently deliberated upon by only one corsec accepted as valid the proxies of
commissioner likewise renders the order stockbrokers even if there was no written
fatally infirm. The SEC is a collegial body consent from the beneficial owner. So those
composed of a chairperson and 4 proxies were admitted in favor of one
commissioners. In order to constitute a stockholder group, so the other sh group
quorum to conduct buisness the presence of claimed there was a violation because there
at least three commissioners is required. was a violation since there was no written
consent
Slide:
It is also in this case that the Supreme Court The SC said that the proxies were used to
rules that if the proxies were obtained on elect the directors of the corporation it is
matters which are intra-corporate in nature, cognizable by the RTC
like the election of directors or determination
of quorum for the election of directors, any If they are sought and be used on an
issue about the validity and legality of the intracorporate matter, it is the RTC otherwise
proxies partakes of an election contest, the SEC will have jurisdiction.
falling under the rules on intra-corporate
controversy and outside the jurisdiction of Slide:
defined under be
pertinent prima
statutes facie
eviden
When there is ce of
a finding that corpor
any of its ate
directors, liabilit
officers, y
employees, under
agents or this
representative sectio
s are engaged n
in graft and Section A corporation Fine
corrupt 167. that appoints ranging
practices, the Engaging an from
corporation’s intermediar intermediary P100,000
failure to ies for graft who engages to
install and corrupt in graft and P1,000,000
practices; corrupt .00
a) Safeg penalties practices for
uards the
for the corporation’s
transp benefit or
arent interest
and Section A director, Fine
lawful 168. trustee or ranging
delive Tolerating officer who from
ry of graft and knowingly P500,000
servic corrupt fails to to
es; practices; sanction, P1,000,000
and penalties report or file
b) Polici the
es, appropriate
code action with
of proper
ethics, agencies,
and allows or
proce tolerates the
dures graft and
agains corrupt
t graft practices or
and fraudulent
corrup acts
tion committed by
shall a
corporation’s penalized by a
directors, therein corporation
trustees, , the same
officers or may, after
employees notice an
Section Any person At the dhearing,
169. who, discretion be
Retaliation knowingly of the court, dissolved in
against and with be punished appropriate
whistleblo intent to with a fine proceeding
wers retaliate, ranging s before the
commits acts from SEC:
detrimental to P100,000 Provided,
a whistle to that such
blower such P1,000,000 dissolution
as interfering shall not
with the preclude
lawful the
employment institution
or livelihood of the
of the appropriate
whistleblower action
against the
A director,
whistleblower trustee, or
refers to any officer of
person who the
provides corporation
truthful responsible
information for said
relating to the violation:
SEC or Provided,
possible SEC further that
of any offense nothing in
or violation this section
under the shall be
RCC construed
Section Violations of Dine not to repeal
170. Other any of the less than the other
violations other P10,000 causes for
of the code; provisions of but not dissolution
separate the RCC or its more than of a
liability amendments P1,000,000 corporation
not otherwise ; if the provided in
specifically violation is the RCC.
committed Liability
court, after taking into account their penalty is a fine, you file the complaint with
participation in the offense. the prosecutor’s office.
A: It is not a security. It only discloses the A: Yes. The developer constructs, sells units
rights and obligations of the parties. and the owner surrenders possession back to
the subsidiary and the subsidiary manages
Q: What are securities? and offers it for belithing to guests or
A: [The answer is in the latter discussion in interested parties, they pay and then the
the slides so I took the answer nalang from income deducting expenses shared by the
the brief explanation] subsidiary and the owners of those units.
eliminate insider trading, it starts with the There is our SRC and former securities act
aspiration to MINIMIZE it. patterned after the blue sky law, it is blue sky
The declaration should say “eliminate” law because beneath the blue sky there is
insider trading, but here it’s as if that insider nothing but hollow clouds.
trading cannot really be eliminated.
Q: How do we translate this into securities,
In sum, these ends can be divided into two: what is the most important provision of the
(1) the development of the capital market SRC?
and (2) to protect the investing public
The development of the capital market, it is A: That is as securities as defined by law shall
subsumed by the first one, establish a socially not be offered to the public unless registered
conscious and enhance wealth distribution – with the SEC.
all of these are for the development of the
capital market Q: What does “registered” means
A: it means you need to apply for registration
And then to protect investors, why is there a with SEC, you need to get a permission to sell
need to ensure full and fair disclosure about securities from the SEC to the public,
securities, minimize if not totally eliminate securities as defined by law
insider trading and other manipulative
devices and practices which create distortions Q: And how is the permit to sell issued by
in the free market – to promote the investing the government?
public
A: When you comply with the requirements
SLIDE for registration.
Q:What is the principal purpose of laws That’s why the law says you need to file a
and regulations governing securities in the registration statement – you need to apply for
Philippines? registration of securities in so doing you need
to disclose all information about the issuer,
A: The principal purpose of laws and the one who will issue and sell the securities
regulations governing securities in the and the securities that you will issue to the
Philippines is to protect the public against public.
nefarious practices of unscrupulous brokers
and salesmen in selling securities and to Therefore you need to include the name of the
protect the public against the imposition of issuer, who are the persons involved, the
worthless ventures and the sale of securities directors, officers, nature of operations,
which have no basis at all. performance for the past five years, how the
proceeds of the funds to be generated how
Hence, securities law provide for a system of will it be used, how will the funds be
registration of securities, registration of deployed?
brokers and dealers of securities, prohibitions
against manipulations and practices What is the nature of the securities? Are they
detrimental to the investing public and shares of stocks, bonds, notes?
measures for the protection of investors.
Describe them, if they are SS are they
Discussion of dean divina: preferred? If they are preferred are they
participating? Non-participating? All the Can they just invite investors? Anyone
things discussed in corpo will now come into interested to become a member of this
play when you discuss the nature and kind of theme park association later on? So you
securities will have the right to use the theme park to
be constructed, you will have an income
The purpose is to inform the public so they from the venture once it is fully
can make a decision whether or not they will operational. Can this be done? Can you
buy or sell those securities. just issue brochures? Invitations?
Through internet? Print media, to entice
The law does not guarantee that the public the public to invest and join you in having
will make money when they invest in the the best theme park? Can you do that? But
securities that the issuer will sell what the law those are securities to sell in the public
guarantees is that the public will be informed because they will be entitled to have a
before making a decision whether or not to share or a participation interest in a profit
buy the securities offered by the issuer sharing venture. You need to apply first a
registration and get a permit to sell from
This is accomplished by the system of the SEC, you need to disclose all info about
registration, making sure that the only you and the securities to be sold, you need
persons credited by SEC can deal with to do this otherwise, you will violate the
securities, so brokers, dealers salesmen must law, despite the best intentions
be accredited by the SEC
Slide
Without the system of registration, the public Q: Why is the SRC called a “truth in
will be deceived into buying securities which securities law”?
are worthless, that are beautiful in the surface
but nothing in the surface A: The SRC is called truth in securities law
because it requires the issuer to make full and
That’s why it’s Blue sky law, it is beautiful fair disclosure of information about securities
but beneath it nothing but empty clouds. being sold or offered to be sold within the
Philippines and penalizes manipulative and
EXAMPLE: fraudulent acts, devices and schemes. (Bar
Let’s say a corp pre-covid would like to 2015)
construct a theme park that will rival
Sentosa in Singapore and ocean park in Discussion of dean divina: Read lang the
HK, before covid but there is no point in slide
constructing a theme park now, Disney
land just laid off 38,000 employees because Slide:
very few go to the themed resorts. So
before covid, they wanted to construct a Q: What are the salient features of the
theme park that will rival the best theme SRC that are intended to protect the
parks in asia. And based on their estimate, investing public?
they need some legacy 3 billion pesos to
have the theme park, based on the specs A:
they want. They have 1-2 billion internally The following are the salient features of the
generated but they need 1 billion more SRC that are intended to protect the investing
from the public to finish the theme park. public
Are those SS? No, because if they have no SC then said that even assuming if not used
voting rights, they are not shares of stocks, for loans, only used for deposits for future
they are securities, just right to share to PDRs subscriptions, there is another law violated,
cannot be issued without the permit to sell, The SRC as these are securities and before
without the registration filed with the SEC sold should be registered with the SEC
Other examples include commercial paper, that can be sold in the market. The SPV buys
also called CP which is a short-term debt it a discount then sells to the public
instrument issued by companies to raise participations in the pool of underlying
funds generally for a time period up to one assets. As the consumers pay their debts,
year. They are typically issued by large payments are proportionately distributed to
corporations to cover short-term receivables the holders of the ABS.
and meet short-term financial obligations.
Discussion of DD:
Discussion of DD: So if it is commercial It is called asset-backed because its security,
paper it is subject to registration thus if not the value of which is based on the underlying
registered it cannot be sold. assets.
Slide: Example:
Warren buffet said that these ABS is a
Q: Are checks considered as securities? weapon of mass destruction it was the
downfall of Liman brothers and various
A: Checks constitute mere substitutes for investment houses and other banks that dealt
cash if so issued in payment of obligations in with institutions all over the world. That’s
the ordinary course of business transactions. why you have the 2007 financial crisis.
But when they are issued in exchange for a When you borrow money from the bank, the
big number of individual non-personalized bank conducts a credit investigation about
loans solicited from the public, numbering your background, about your capacity to pay,
about 700 in this case, the checks ceased to about your means of payment and the bank
be such. In such a circumstance, the checks will only lend you if you can pay based on
assume the character of evidence of investigation and if you have collateral
indebtedness. Gabionza v CA Let’s say a bank has 1B of loans, receivables
so the bank will collect based on the PN
DD: When a corp issues checks as a means So someone from wall street thought of an
of obtaining funds from the public, it is not a idea, why can’t he buy 1B receivables from
mere substitute for cash but becomes an the bank but it is bought at a discount, say
indebtedness and should be registered with 900M dollars, so this is what the liman
the SEC brothers did so it is true that there is a
discount but the bank need to extend effort to
Slide: collect and they have cash right away so what
will liman brothers do with these pool of
Q: What are asset-backed securities? receivables?
A: It is a security whose income payments They will sell it ng tingi tingi, sold in retail to
and hence value are derived from and the counter parties of liman brothers, what do
collateralized by a specified pool of you mean counterpaties those who deal with
underlying assets. For instance, when liman brothers. Now these coumterparties
consumers take out loans, their debts become will sell to their own clients.
assets on the balance sheet of the lender.
The lender, in turn, can sell these assets to a BDO is a counterpart of the Liman brothers
trust or “special purpose vehicle which in the Philippines they will buy a portion and
packages them into an asset-backed security sell it tingi tingi to various customers in the
Philippines, as the Original borrowers pay enterprise and is led to expect profits
their loan, then the payments are distributed primarily from the efforts of others.
to the holders to the certificate of
participation DD: It is true. If it is principally based on the
The banks in the states became lenient, they efforts, That’s not howey test it must be
did not conduct a thorough investigation and primarily
resulted in the sub-prime mortgage since it is
packaged and sold to investment houses who Slide:
will sell to counter parties who will sell to The business scheme of power homes
customers all over in the world. The banks unlimited corporation (power homes) is
became very lenient in granting loans even to that an investor will enroll under its
those who cannot afford it. program, and the latter would be entitled
to recruit other investors and receive
If you are an investor in the Philippines, and commissions from the investments of those
you are dealing with someone who is directly recruited by him. Is power homes
reputable, Liman brothers were highly rated engaged in the sale of securities which
and well known, they were insured by the must be registered?
biggest insurer, and it was triple A rated so
what else can go wrong you have the biggest A: Yes. A corporation allowing a principal
insurer, so you can never go wrong investor to enroll in its program by paying a
certain amount, which in turn entitles him to
So what happened thereafter, it exploded, be paid a certain amount if the recruit was
those borrowers were not able to pay their able to get a minimum recruitment of four (4)
loans, and holder of the holders of certificate investors, is engaged in the sale or
of deposits were just holding empty distribution of an investment contract.
certificates
DD: Why is it an investment contract?
They stopped for a while and resurrected and A: because all the elements of an investment
called it under a different name contract are present in this case (1)
investment of money in an enterprise (2)
In the Philippines, this cannot be sold unless expectation of profits from various efforts of
registered by the SEC another
Slide: Slide:
It must be registered with the SEC before its
Q: What is an investment contract? sale or offer for sale or distribution to the
public, otherwise, the SEC cannot protect the
A: Investment contract is an investment of investing public from fraudulent securities is
money in a contract, transaction or scheme founded on the premise that the capital
with the expectation of profits primarily from markets depend on the investing public’s
the efforts of another. level of confidence in the system (Power
homes unlimited corporation v SEC GR
Slide: TRUE or FALSE no.164182, February 26, 2008) 2010 bar
The Howey Test is relevant in cases wherein
a person invests money in a common Slide:
Propsperity.com, Inc (PCI) sold computer products are bought from the store’s shelf and
software and hosted websites without where the buyer can become a down-line
providing internet service. It devised a seller, earning commissions from purchases
scheme in which a buyer could acquire from made by new buyers from whom he refers to
it an internet website with 15-MB capacity. the person who sold the product to him, is not
At the same time, by referring to PCI his own an investment contract (Securities and
down-line buyers, a first-time buyer could Exchange Commission v Prosperity Com Inc
earn commissions, interest in real estate and GR No. 164197 January 25, 2012)
insurance coverage. Is PCI’s scheme
considered an investment contract which Discussion of DD:
requires registration? The difference with powerhouse is that in this
case, it is just a pure referral scheme and just
A: investment of money. You refer a customer,
No. For an investment contract to exist, the you get a commission and you get insurance
following elements refereed to as the Howey coverage, you can use the wifi privilege of
test must concur (1) a contract, transaction or the company. No need to register with the
scheme (2) an investment of money (3) the SEC.
investment is made in common enterprise (4)
expectation of profits (5) profits arising In the first one, it is an investment contract
primarily from the efforts of others. Network because you need to invest money first before
marketing, a scheme adopted by companies you get commission for the recruits you refer
for getting people to buy their products to the company.
outside the usual retail system where
issuing corporation to recover short swing Wincorp basically enters into a credit line
transaction profits? agreement with a potential borrower, so that
Dean: 2 years from the discovery of the date the latter can draw or borrow X amount
of transaction. within a certain period of time. That is why
there’s a period to draw on the line, and
borrow or obtain a loan.
SECURITIES REGULATION CODE
Slide:
Slide: Westmont Investment Corporation Yes. In this jurisdiction, the Supreme Court
(Wincorp) offered to the public “sans employs the Howey test to determine
recourse” transactions with the following whether or not the security being offered
mechanics: Wincorp enters into a Credit takes the form of an investment contract.
Line Agreement for a specific amount with Under the Howey test, the following must
a corporation needing financial assistance concur for an investment contract to exist:
which the latter can draw upon in a series (1) A contract, transaction, or scheme;
of availments over a period of time. The (2) An investment of money;
agreement stipulates that Wincorp shall (3) Investment is made in a common
extend a credit facility on “best effort” enterprise;
basis and that every drawdown by the (4) Expectation of profits; and
accredited borrower shall be evidenced by (5) Profits arising primarily from the
a promissory note executed in favor of efforts of others. Indubitably all of the
Wincorp and/or the investor/s who elements are present in the extant
has/have agreed to extend the credit case.
facility. Wincorp then scouts for investors First, Wincorp offered what it purported to
willing to provide the funds needed by the be “sans recourse” transactions wherein the
accredited borrower. The investor is investment house would allegedly match
matched with the accredited borrower. An investors with pre-screened corporate
investor who provides the fund is issued a borrowers in need of financial assistance.
Confirmation Advice which indicates the
amount of his investment, the due date, the Second, Ng Wee invested the aggregate
term, the yield, the maturity and the name amount of P213,290,410.36 in the “sans
of the borrower. recourse” transactions through his trustees, as
embodied in the Confirmation Advices.
Are the “sans recourse” transactions
offered by Wincorp securities that must Third, prior to being matched with a
registered with the Securities and corporate borrower, all the monies infused by
Exchange Commission (SEC)? the investors are pooled in an account
maintained by Wincorp. This ensures that
Discussion: This case is about whether or not there are enough funds to meet large draw
this arrangement is an investment contract. downs by single borrowers.