Corpo Book

Sec. 2 TITLE I.
GENERAL PROVISIONS,
DEFINITIONS AND CLASSIFICATIONS zB
(d) The interest of shareholders in corporate prop

erty is
purely inchoate and; therefore, does notentitle them
to intervene
in a litigation involving corporate property. (Ibid.)
(e) That one is president of a corporation does not render the
property he owns or possesses the property of the corporation,
since the president, as an individual, and the corporation, are
Separate entities. The power to “pierce the veil of corporate
entity” belongs to the court and the sheriff usurps this power
when he enforces a writ of execution, not against the property
of the corporation, the judgment debtor, but against that of its
president because they are one and the same. (Cruz vs. Dalisay,
152 SCRA 482 [1987]; see Rosario vs. Bascar, Jr, 206 SCRA 678
[1992]; Booc vs. Bantuas, 354 SCRA 279 [2001].)
(f) A tax exemption granted to a corporation cannot be

extended to include the dividends paid by such corporation
to its stockholders. (Manila Gas Corporation vs. Collector of
Internal Revenue, 71 Phil. 513 [1941].)
(g) The agreement of co-shareholders to mutually grant
the right of first refusal to each other, by itself, does not
violate the constitutional provision limiting land ownership to
Filipinos and Filipino corporations. If the foreign stockholders
of a landholding corporation exceed 40%, it is not the foreign’
» stockholders’ ownership which is adversely affected but the
capacity of the corporation to own land, ie., the corporation
becomes disqualified to own land: The corporation and its
shareholders being separate juridical entities, the right of first
refusal over shares pertains to the shareholders whereas the
capacity to own land pertains to the corporation. (J.G. Summit
Holdings, Inc. vs. Court of Appeals, 450 SCRA 169 [2005].)
(5) Acquisition by court of jurisdiction. — Where the appearance
in court of the president of a corporation was in the capacity of
counsel of another corporation and not as representative or counsel
of the first corporation, such appearance cannot be construed as a
voluntary submission of the corporation to the court’s jurisdiction.
The personality of the president of a corporation is distinct from
that of the corporation itself. In the absence of summons on the
corporation, a judgment against it is valid for lack of jurisdiction
and lack of due process. (Trimica, Inc. vs. Polaris Marketing Corp.,
60 SCRA 321 [1974].)
at
i
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26 THE REVISED CORPORATION CODE OF THE PHILIPPINES Sec, 2
The participation by the general manager of a corporation in an

action involving the corporation cannot equate to participation by
another corporation in the same proceedings, merely because the
general manager of the first corporation is also the chairman of the
board of the second corporation. (Padilla vs. Court of Appeals, 370
SCRA 208 [2001].)
(6) Changes in individual membership. — Likewise, as an entity
distinct from its members or stockholders, a corporation remains
unchanged and unaffected in its identity by changes in its individual
membership. The corporation, as an artificial person, continues to
exist as such “in like manner that the River Thames is still the same
river though the parts which compose it are changing every instant.”
(1 Fletcher, pp. 18-19; SEC-OGC Opinion No. 28-08,4 December 15,
2008.)
Corporation as a person, resident

or citizen.
A corporation is regarded as a “person,” “resident,” or
“citizen”
within the purview of those terms as used in const
itutional or
statutory provisions, whenever this becomes necessary to
give
full effect to the purpose or spirit of the Constitution or statut
e.
The tendency is to regard corporations, as far as their inher
ent
nature will permit, as on the same footing as ordinary individual
s.
Consequently, whether corporations are included within a statut
e
depends largely upon its object. (1 Fletcher, Sec. 53.)
(1) As a person. — Persons are divided into natural and artificial
persons. The term “person” prima facie includes both and, theref
ore,
as a general rule, includes corporation (18 Am. Jur. 2d 568.)
but in a
figurative sense only.
(a) A corporation has been held to be included by the
word
“person” in statutes concerning attachment,
taxation, usury,
insolvency and bankruptcy, limitations, prior notice
to bring
suit, right to appeal, allowing action of trespass,
prohibiting
the banking business, conferring a cause of action for
wrongful
death, allowing suit against usurpation of a public
office or
‘Citing De Leon, The Corporation Code of the Philippines Annotated, p. 19 [2003].
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Secie _TITLE I, GENERAL PROVISIONS, 27
DEFINITIONS AND CLASSIFICATIONS
panchise, allowing a petition to quiet title, and offering public

ands for appropriation “by all persons” who enter upon them.
(b) The word “person” has also been deemed to apply to a
corporation as used in statutes providing for suit because of the
wrongful exercise of a franchise by a “person,” punishing “any
PS son” employing a minor child, and providing for a civil action
against “any person” unlawfully holding a franchise. Where the
word “person” is used in a definition of libel, corporations are
included. (1 Fletcher, pp. 70-71.)
(c) A corporation is a “person” within the meaning of
Section 1, Article III (Bill of Rights) of the Constitution that “no
person shall be deprived of life, liberty or property without due
process of law” and that it is entitled to the equal protection of
the laws in like manner as other persons in the same situation,
provided the corporation is “within the jurisdiction” of the State
the protection of which is demanded.
(d) Insofar as liberty is concerned, however, a private
corporation is held not to be a person within the language of the
constitutional provision, the liberty guaranteed is the liberty of
natural, not artificial, persons. Neither is it a person within the
protection of Section 17, Article III of the Constitution against
self-incrimination. (18 Am. Jur. 2d 570-571.)
Thus, while an individual may lawfully refuse to answer
incriminating questions unless protected by an immunity
statute, it does not follow that a corporation, vested with special
privileges and franchises, may refuse to show its hand when
charged with an abuse of such privileges. (Bataan Shipyard &
Engineering Co., Inc. vs. PCGG, 150 SCRA 181 [1987].)
(e) But a corporation comes within the protection of Section
3 of the same Article insuring the right of the people to be secured
in their persons against ‘unreasonable seizures and searches. A
corporation is, after all, but an association of individuals under
an assumed name and with a distinct legal entity. In organizing
itself as a collective body, it waives no constitutional immunities
appropriate to such body. Its property cannot be taken without
compensation. It can only be proceeded against by due process
of law, and is protected against unlawful discrimination. (Bache
& Co. [Phils.], Inc. vs. Ruiz, 37 SCRA 823 [1971].)
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28 THE REVISED CORPORATION CODE OP THE PHILIPPINES Sec, 2
(2) As a resident or non-resident. — Since a corporation is a person

in the law, it is also to be deemed a resident or a non-resident of a
particular state or country within the meaning of a statute, it if is
within the purpose and intent of the statute, as in the case of statutes
defining the jurisdiction of the courts, or relating to venue, taxation,
etc. (18 CJ.S. 388.)
(a) A corporation formed in one State may be, for certain
purposes, domiciled or a resident in another State in which it has
its offices and transacts business, notwithstanding the fiction of
the law that a corporation dwells only in the State of its creation
and cannot migrate therefrom. (18 Am. Jur. 2d 694.)
Thus, in a case, it was held that a foreign corporation
licensed to do business in the Philippines (see Sec. 140.) is not a
non-resident within the meaning of Section 424 (par. 2.) of the
Code of Civil Procedure (now Sec. 1[f], Rule 57, Rules of Court.)
which allows the attachment of the property of the defendant in
an action where such defendant “resides out of the Philippines,
or on whom summons may be served by publication”
as to make
its property subject to attachment under the section.
(Claude
Neon Lights, Inc. vs. Phil. Advertising Corp. and
Santamaria,
57 Phil. 607 [1932].)
(b) For taxation, a foreign corporation may
be either a
resident or non-resident, the former referrin
g to a “foreign
corporation engaged in trade or business with
in the Philippines,”
and the latter, to a “foreign corporat
ion not engaged in trade
or business in the Philippines.” (see Sec.
22[H], [I], National
Internal Revenue Code.)
(3) Asa citizen, — “Citizenship” is
the status of a citizen with its
rights and privileges and correspon
ding duties and obligations. The
term “citizen,” as it is commonly unders
tood, implies membership
in a political body and, ther
efore, does not ordinarily
corporation, unless the general purpos include a
e and import of the statute in
which the term is found seem
to require it. (18 Am. Jur. 2d 569
.)
(a) Thereisno absolute and
inflexible
cannot be d
nthe meaning of astatute conferring
rights, defining the jurisdic tion of courts, or otherw
ise relating
to citizens, if the purpose and intent of
the statute renders it
EE eae >|
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TITLE I, GENERAL PROVISIONS,
re
29
©
applicable, and for such purpose it is, as a general rule, a

citizen of the State or country by or under the laws of which it
was created and exists without regard to the citizenship of its
stockholders or members, (18 C.J.S. 388.)
(b) “Most often when the term ‘citizenship’ is used in
connection with corporations, it is not used in the sense under
Political Law, but more in the sense of indicating the country
under whose laws the corporations were organized. In this
respect, ‘citizen,’ as used in connection with corporations, is
synonymous with domicile or residence. In fact, our Corporation
Law requires that the principal office of the corporation must be
located in the Philippines.
However, when the term ‘citizenship’ is used synonymously
with residence or domicile, said use is for jurisdictional
purposes only, for a corporation is subject to the jurisdiction of
the country under whose law it was organized. Therefore, the
citizenship of a corporation is not looked into unless citizenship
is an important factor in the determination or the enjoyment of
a privilege, exercise of a right or even the legality of a contract
into by the corporation.” (C.G. Alvendia, op. cit., pp. 10-11.)
Corporation as a collection of individuals.

(1) True in actual fact. — Although the doctrine that a corporation
is an artificial entity and a person in law, distinct from the members
who compose it, will always be recognized and given effect, both
at law and in equity, in cases within its reason and when there is
no controlling reason against it, a corporation is an aggregation
of peoples or a collection of individuals. In the case of modern
private corporations, it is really the individuals composing it who
own its property and carry on the corporate business, through
the corporation and its officers and agents, for their own profit or
benefit.
The idea of the corporation as a legal entity or person apart
from its members (individuals or corporate) is a mere fiction of the
law introduced for convenience in conducting the business in this
privileged way. (14 CJ,S. 59.) While courts, as a general rule, cannot
disregard this theory of separate entity, under certain circumstances,
as when the privilege is misused by the corporation, the fictive veil
of corporate personality may be pierced. (Infra.)
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30 THE REVISED CORPORATION CODE OF 118 PHILIPPINES See, 2
(2) Recognized for many purposes. — This conception of a

corporation as a collection of individuals owning the corporate
property and doing business through the corporation and in the
corporate name has always been recognized for many purposes as
between the stockholders or members themselves and as between
them and the corporation, to enforce and protect their rights. Thus,
the stockholders of a corporation are entitled to the profits by way
of dividends and may enforce their rights in this respect. They are
entitled to insist that the corporation shall keep within the powers
and purposes for which it was formed, and may sue in equity, if
necessary, to compel it to do so.
It is not only in cases like these that the law recognizes that a
corporation is in reality a collection of individuals and the corporate
entity a mere fiction, but the fiction also may be and often is
disregarded even for the purpose of giving effect to the acts of the
stockholders or members individually as the acts of the corporation.
(18 CJ.S. 379-380.)
Doctrine of piercing the veil of corporate

entity.
(1) Fiction of distinct corporate legal entity. — The doctrine that
a corporation is a legal entity or a person in law, distinct
from the
persons composing it or any other corporation to which it may
be
related, is merely a legal fiction for purposes of convenienc
e and
to subserve the ends of justice. This fiction, therefore,
cannot be
extended to a point beyond its reason and policy. (see 13 Am.
Jur. 2d
559.) Peculiar situations or valid grounds may exist to warra
nt the
disregard of its independent being and the piercing of the corporate
veil. (China Banking Corp. vs. Dyne-Sem Electronics Corp.,
494
SCRA 493 [2006].) The facts of each case are important.
(2) When legal fiction to be disregarded. — Being a mere creat
ure
of the law, a corporation may be allowed to exist solely for lawfu
l
purposes but where the fiction of corporate entity is used
as a cloak or
cover for fraud or illegality, or “to defeat public convenience, justif
y
wrong, protect fraud, or defend crime” (Yutivo Sons Hardware Co.
vs. Court of Tax Appeals, 1 SCRA 160 [1961].) or for ends subversive
of the policy and purpose behind its creation, especially where
the corporation is a closed family corporation (Emiliano Cano
Enterprises, Inc. vs. Court of Individual Relations, 13 SCRA 290
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Sec, 2 TITLE I. GENERAL PROVISIONS, “Bl
[1965].), on equitable considerations, this fiction will be disregarded

and the individuals composing it or two (2) corporations will be
treated as identical. (Liversey vs. Binswanger Philippines, Inc.,’ 719
SCRA 433 [2014].)
(a) The law will not recognize separate corporate existence
non-
with reference to the particular transaction involved. This
the veil
recognition is sometimes called the doctrine of piercing
(see
of corporate entity or disregarding the fiction of corporate entity
613 [1965];
Claparols vs. Court of Industrial Relations, 65 SCRA
s, Inc. vs.
Republic vs. Razon, 20 SCRA 234 [1967]; A.D. Santo
Inc. vs. Collector, 2
Vasquez, 22 SCRA 1156 [1968]; Liddel & Co.,
(9-A Words
SCRA 632 [1961].) or the doctrine of corporate alter ego.
and Phrases 377.)
corporation
The rationale is to remove the barrier between the
fraudulent and
from the persons comprising it to thwart the
personality as a
illegal schemes of those who use the corporate
. (Velarde vs.
shield for undertaking certain proscribed activities
o Motors vs. Court of
Lopez, Inc., 419 SCRA 422 [2003]; Francisc
Appeals, 309 SCRA 72 [1999].)
doctrine allows a corporation’s corporate
(b) The
circumstances so
personality to be disregarded under certain
or members, or another
that a corporation and its stockholders
e entity (Veltroos
related corporation could be treated as a singl
SCRA 1 [2017]. It
Federation of the Phil. vs. Montenego, 847
ve shroud which
requires the court to see through the protecti
ordinarily they
exempts its stockholders from liabilities that
corporation from a
could be subject to, or distinguishes one
existing corporate
seemingly separate one, were it not for the [2000];
vs. Court of Appeals, 323 SCRA 102
fiction. (Lim
A 620 [2001].)
Marubeni Corporation vs. Lirag, 362 SCR
(c) For the corporate legal entity to be disregarded, the
d (see
wrongdoing must be clearly and convincingly establishe
on, 187
Del Rosario vs. National Labor Relations Commissi Inc.
SCRA 777 [1990]; Matuguina Integrated Wood Products,
ronics
ys. Court of Appeals, 263 SCRA 490 [1996]; Complex Elect
Employees Assoc. VS. National Labor Relations Commission,
310 SCRA 403 [1999]; Solidbank Corporation vs. Mindanao
5Citing De Leon, The Corporation Code of the Philippines, p. 26 [2006].
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32 THE REVISED CORPORATION CODE OF THE PHILIPPINES
Sec. 2
Ferroalloy Corporation, 464 SCRA 409 [2005]; China Banking

Corp. vs. Dyne-Sem Electronics Corp., supra.) The application of
the doctrine is frowned upon. Any piercing of the corporate veil
has to be done with caution. (Reynoso IV vs. Court of Appeals,
345 SCRA 335 [2005]; Jardine Davies, Inc. vs. JRB Realty, Inc., 463
SCRA 555 [2005]; Kukan International Corporation vs. Reyes,
631 SCRA 596 [2010].) The wrongdoing cannot be presumed;
otherwise, an injustice never intended may result’ from an
erroneous application (Sarona vs. National Labor Relations
Commission, 663 SCRA 394 [2012]; Heirs of Fe Tan Uy vs.
International Exchange Bank, 690 SCRA 519 [2013]; Rosales vs.
New A.N,J.H. Enterprises, 767 SCRA 149 [2015].)
(d) Even if fraud is established, this alone cannot justify the
piercing of the corporate fiction where it is not sought to hold the
officers and stockholders personally liable for corporate debt.
Thus, where the petitioners are merely seeking the declaration
of the nullity of a foreclosure sale, piercing the corporate veil is
not the proper remedy, for such relief may be obtained without
having to disregard the legal corporate entity, and this is true
even if grounds exist to pierce it. (Umali vs. Court of Appeals,
supra.)
(e) The presumption is that the stockholders or officers
and the corporation are distinct entities. The burden of proving
otherwise is on the party seeking to have the court pierce the
veil. (Ramoso vs. Court of Appeals, 347 SCRA 463 [2000]; Land
Bank of the Phils. vs. Court of Appeals, 364 SCRA 375 [2001].)
For reasons of public policy and in the interest of justice, the
corporate veil will justifiably be impaled only when it becomes
a shield for fraud, illegality or inequity committed against third
persons. (Phil. National Bank vs. Hydro Resources Contractors
Corp., G.R. No. 167530, March 13, 2013.)
(f) When the veil of corporate fiction is pierced, the
corporate character is not necessarily abrogated. The corporation
continues for legitimate objectives. However, it is pierced in
order to remedy injustice. (Reynoso IV vs. Court of Appeals, 345
SCRA 335 [2000].)
(3) Effect as to liability. — In any of the cases where the separate
corporate identity is disregarded to protect the rights of third parties,
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TITLE I, GRNBRAL PROVISIONS,
the corporation Will be treated merely as an association or collection

of persons or individuals undertaking business as a group and the
stockholders or members will be considered as the corporation,
that is, liability will attach personally or directly to the officers and
stockholders (Umali vs. Court of Appeals, 189 SCRA 529 [1990].)
or, where there are two (2) corporations, they will be merged into
one, treating them as identical or as one and the same the one being
merely regarded as the instrumentality, agency, conduit or adjunct
of the other to protect the rights of third persons. (Koppel [Phils.],
Inc. vs. Yatco, 77 Phil. 496 [1946]; Cease vs. Court of Appeals, 93
SCRA 483 [1979]; Mayor vs. Tiu, 810 SCRA 256 [2016].)
(a) The transactions or acts of the real parties shall be dealt
with as though no corporation had been formed. (Republic vs.
Sandiganbayan, 266 SCRA 515 [1997].) The corporate character,
however, is not necessarily abrogated. The corporation
continues for other legitimate objectives. (Pamplona Plantation
Co., Inc. vs. Tingkil, 450 SCRA 421 [2005].) But absent proof that
the corporation’s separate and distinct personality was used as
a protective shield for any fraud or wrongdoing, the general
rule on corporate liability, not the exception, should be applied.
(Soriano vs. Court of Appeals, 174 SCRA 195 [1989]; Bayer-
Roxas vs. Court of Appeals, 211 SCRA 470 [1992].)
(b) Piercing the veil of corporate fiction is allowed, and
responsible persons may be impleaded, and be held solidarily
liable even after final judgment and on execution, provided that
ly
such persons deliberately used the corporate vehicle to unjust
evade the judgment obligation, or resorted to fraud, bad faith,
Inc. vs.
or malice in evading their obligation. (Dutch Movers,
Lequin, 809 Phil. 438-453 [2017].)
(4) Application of doctrine in three (3) areas. — The doctrine applie, s
namely:
only in three (3) basic areas or instances,
(a) defeat of public convenience as when the corporate
fiction is used as a vehicle for the evasion of an existing
obligation;
(b) fraud cases or when the corporate entity is used to
or
justify a wrong, protect fraud, or defend a crime;
farce
(c) alter ego cases, where a corporation is merely a
n, or
since it is a mere alter ego or business conduit of a perso
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34 THE REVISED CORPORATION CODE OF THE PHILIPPINES Sec. 2
where the corporation is so organized and controlled and its

affairs are so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation. (see Prisma
Construction & Development Corp. vs. Menchavez, 614 SCRA
590 [2010]; see Sarona vs. National Labor Relations Commission,
663 SCRA 394 [2010]; WPM International Trading, Inc. vs.
Libayen; 735 SCRA 297 [2014]; De Castro vs. Court of Appeals,
805 SCRA 265 [2016].)
Instances where doctrine applied.

The question of piercing the corporate veil is essentially a matter
of proof.§
In the instances given below and to further the ends of justice to
protect the rights of third persons, the courts have pierced the veil
of corporate entity, considering the corporation and the individual
or individuals owning all its stock and assets as identical, or, in the
case of two (2) corporations, merging them into one.
(1) Where the transaction was entered into by the president
who was also the treasurer and general manager of a close family
corporation where the incorporators and directors belong to one single
family, the corporation is liable for the contract and it cannot claim
it was entered into without the knowledge and consent of the other
members of the board. (M.R. Dulay Enterprises, Inc. vs. Court of
Appeals, 225 SCRA 678 [1993]; Camelcraft Corp. vs. National Labor
Relations Commission, 186 SCRA 393 [1990].)
(2) Where a corporation functions to benefit a single person who has
complete control over the funds and the said person is the sole owner
thereof. In such case, the corporate entity is but an alter ego or the
business conduit of the owner and the property of the corporation
may be considered the property of the controlling individual and
warrant
of the existence of any of the circumstances that would
“Theg deter
the liftin veilionof corporate fiction is purely a question of fact which cannot be
of theminat
the subject of a petition for review on certiorari under Rule 45 of the Rules of Court
Nevertheless, the Supreme Court can take organizations of factual issues if the findings
nce on record or are based on a
of the lower court are not supported byUy thevs. evide
Inter national Exchange Bank, 690 SCRA
misapprehension of facts. (Heirs of Fe Tan
519 [2013]; Phil. National Bank vs. Hydro Resourcesn ContrMornactors Corporation, 693 SCRA
ance & Suret y Corpo ratio vs. ing Star Travel and Tour,
294 [2013]; Pioneer Insur
Inc., 762 SCRA 283 [2015].)
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Sec. 2 _TITLE I, GENERAL PROVISIONS, a5
Corp.
may be seized in an action against the latter. (Marvel Bldg.
Visayas, 12
vs. David, 94 Phil. 376 [1954]; Collector vs. University of
iated
SCRA 193 [1964]; National Marketing Corporation vs. Assoc
ctor vs. Norton
Finance Company, Inc., 19 SCRA 962 [1967]; Colle
vs. National
& Harrison Co., 11 SCRA 714 [1964]; see Valderrama
Labor Relations Commission, 256 SCRA 466 [1996].)
50%
(a) The mere fact, however, that a corporation owns
Hotel Corp.
of the capital stock of another corporation (Manila
1 [2000].)
vs. National Labor Relations Commission, 343 SCRA
a corporation is
or the mere majority ownership of the stocks of
(Republic vs.
not per se a cause for piercing the corporate veils
mere fact that a
Sandiganbayan, 346 SCRA 760 [2000].), nor the
oration, taken
corporation owns all of the stocks of another corp
one entity. (MR
alone, sufficient to justify their being treated as vs.
Holdings, Ltd. vs. Bojar, 380 SCRA 617 [2002]; Borromeo
Court of Appeals, 550 SCRA 269 [2008].)
capital stock of
(b) The mere fact that all or nearly all of the
rolled by the same
one or more corporations are owned and cont
oration, or have the
or single stockholder or by another corp
nd for disregarding
same president is not in itself sufficient grou all
entities. There are three (3) elements,
separate corporate
(i.e., being a mere
of which must be present for the ground
nd. (Infra.)
instrumentality or alter ego) to sta
charter, even with a
(c) It is lawful to obtain a corporation
ge in a specific activity
single substantial stockholder, to enga
and such activity may co-exist with other private activities of the
tantial, conducted lawfully
stockholder. If the corporation is subs
and without fraud on anot her, its separate activity or personality
Inc. vs. Coll. of Internal
is to be respected. (see Liddel & Co., 124 SCRA
Inc. vs. Clave,
Revenue, 25 SCRA 632 [1961]; Palay,
s Commission, 127
638 [1983]; Sunio vs. National Labor Relation
Inc. vs. Court of
SCRA 390 [1984]; EPG Construction Company,
Bank vs. Court of
Appeals, 210 SCRA 230 [1992]; Traders Royal
., Inc. vs. National
Appeals, 269 SCRA 15 [1997]; Asionics Phils
[1998]; Complex
Labor Relations Commission, 290 SCRA 164 tions
Electronics Employees Assoc. vs. National Labor Rela
Mejia, 362
Commission, 310 SCRA 403 [1999]; Francisco vs.
o, 433 SCRA
SCRA 738 [2001]; Secosa vs. Heirs of E.S. Francisc
Phils. vs.
273 [2004]; Construction & Development Corp. of the
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36 THE REVISED CORPORATION CODE OF
THE PHILIPPINES Sec, 2
Cuenca, 466 SCRA 714. [2005]; Union Bank of

the Phils. vs. Ong,
506 SCRA 256 [2006]; “G” Holdings, Inc. vs. Nati
onal Mines and
Allied Workers Union, 604 SCRA 73 [2009].)
(d) Likewise, substantial identity of the incorporators
of two
corporations does not necessarily imply fraud. Agai
n, for the
Separate juridical personality of a corporation to be disr
egarded,
the wrongdoing must be clearly and convincingly estab
lished. It
cannot be presumed. (Del Rosario vs. National Labor Relat
ions
Commission, 187 SCRA 777 [1990]; Development Bank of the
Phils. vs. Court of Appeals, 363 SCRA 307 [2001]; Construc
tion
& Development Corp. of the Phils. vs. Cuenca, supra.) But
the
shield of corporate fiction will be disregarded if it is show
n that
itis designed as a mean to perpetuate an illegal act
or as a vehicle
for the evasion of existing and binding obligation
s. (Pabalan vs.
National Labor Relations Commission, 184
SCRA 495 [1970].)
(3) Where the corporation is a mere instrumentality
of the individual
stockholders, the latter must individually answ
er for corporate
obligations. To hold the stockholders liabl
e for the corporate
obligations is not really to ignore the corporat
ion’s separate entity
but merely to apply the established principle
that such entity cannot
be invoked or used for purposes that could
not have been intended
by the law that created that Separate pers
onality. (McConnel vs.
Court of Appeals, 1 SCRA 722 [1961]; also Rami
rez Telephone
Corp. vs. Bank of America, 29 SCRA 191
[1962]; AS] Corporation vs.
Evangelista, 545 SCRA 300 [2008]; Phil.
Commercial & International
Bank vs. Custodio, 545 SCRA 367 [2008
].)
(4) Where a corporation is merely an instrumental
ity,
an adjunct,
business conduit, or alter ego of another
corporation, the separate
personality of the corporation may be dis
regarded. (Tan Boon Bee &
Co. vs. Jarencio, 163 SCRA 153 [1988]; Heirs
of Ramon Durano, Sr. vs.
Sps.Uy, 344 SCRA 238 [2000]; Lipat vs. Pacific Ban
king Corporation,
402 SCRA 339 [2003]; Comm. of Internal
Rev
enue vs. Menguito,
565 SCRA 461 [2008].) The liability of the
parent corporation and
the subsidiary will be confined to those arising in thei
r respective
business. The courts may, in the exercise of judicial
discretion, step
in to prevent the abuses of separate entity Privilege and pierce
the veil of corporate entity. (Philippine National Bank vs. Retratto
Group, Inc., 362 SCRA 216 [2001].)
i
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Sec. 2 TITLE I. GENERAL PROVISIONS, 37
The corporate mask may be removed and the two seemingly

separate entities treated as one entity only. Thus:
(a) Where sales of cars are made by corporation X to
corporation Y which are later sold to the public at a higher price
and it appears that both corporations are owned and controlled
by the same taxpayer and corporation Y was the medium created
by corporation X to reduce the price and the sales tax liability
of corporation X on original sales of cars under the National
International Revenue Code, there is sufficient justification to
disregard the separate corporate identify of one from the other.
(b) Where three (3) security agencies are managed through
X Corporation with all their employees drawing their salaries
and wages from the latter entity, the agencies have common and
interlocking incorporators and officers, and their employees have
a single Mutual Benefit System and followed a single system of
compulsory retirement, with security guards of one (1) agency
being able easily to transfer to another and then back again by
simply filling up a pro forma slip called “Request for Transfer,”
be
the veil of corporate fiction of the three (3) agencies should
lifted to allow their employees to form a single labor union
without need of filing three (3) separate petitions for certification
election. (Phil. Scout Veterans Security & Investigation Agency
vs. Torres, 224 SCRA 682 [1993]; see Guatson International
Travel & Tours, Inc. vs. National Labor Relations Commission,
Inc. vs.
230 SCRA 815 [1994]; see Enriquez Securities Services,
Cabotaje, 496 SCRA 169 [2006].)
(c) Where it appears that three (3) business enterprises
engaged in the same line of business (construction of public
roads and bridges) and using the same equipment including
manpower services are owned, conducted and controlled by the
same parties, both law and equity will, when necessary to protect
the rights of third persons (illegally dismissed employees),
disregard the legal fiction that the three (3) corporations are
distinct entities and treat them as identical and extend the
liability of the corporations to the responsible officers acting in
the interest of the corporations for the monetary awards due from
the corporations for illegal dismissal. (Tomas Lao Construction
vs. National Labor Relations Commission, 278 SCRA 716 [1997];
see Vicmar Development Corporation vs. Elareosa, 777 SCRA
238 [2015].)
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A THE REVISED CORPORATION CODE OF THE PHILIPPINES Sec, 2
(d) Where two corporations have identical incorporation

and directors and are headed by the same official, only one
office and one payroll, and are under one management, a suit
by the employees against one corporation should be deemed
as a suit against the other. The attempt to make the two (2)
corporations appear as two (2) separate entities, insofar as the
workers are concerned, should be viewed as a devious but obvious
means to defeat the ends of the law. The corporate fiction must
yield to truth and justice.
(e) The mere fact, however, that:
1) the businesses of two or more corporations are
interrelated (Diatagon Labor Federation vs. Ople, 101
SCRA 534 [1980]; China Banking Corporation vs. Dyne-Sem
Electronics Corp., 494 SCRA 493 [2006].); or
2) a common director sits on the boards of directors
of all three (3) companies organized as separate corporate
entities (Sesbrefio vs. Court of Appeals, 222 SCRA 466
[1993].); or
3) even where some employees of one corporation
are the same persons manning and providing for auxiliary
services to the units of the other corporation and that
the physical plants, offices and facilities are in the same
compound (Indo-Phil. Textile Mill Workers Union vs. Calica,
205 SCRA 697 [1992].); or
s
4) two corporations are admittedly sister companie
vs. Court of
and sharing personnel and resources (Padilla
Appeals, 370 SCRA 308 [2001].); or
directors (see
5) the mere existence of interlocking
reholders (Velarde vs.
Sec, 33.), corporate officers and sha
Jardine Davies, Inc. vs.
Lopez, Inc., 419 SCRA 422 [2003];
5]; “G” Holdings, Inc.
JRB Realty Inc., 463 SCRA 555 [200 604 SCRA
vs. National Mines and Allied Workers Union,
vs. Presidential Agrarian
73 [2009]; Hacienda Luisita, Inc.
[2011]; Pioneer Insurance &
Reform Council, 660 SCRA 525 & Tours, Inc,
Star Travel
Surety Corporation vs. Morning corporations
762 SCRA 283 [2015].) especially where the two
tions and distinct business
have distinct business loca
Philippines, 792 SCRA 586
purposes (Malixi vs. Maxicare
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39
Sec. 2 TITLE 1. GENERAL PROVISIONS,
[2016].) absent clear and convincing proof showing that the

corporate entity was purposely used a shield to defraud
creditors and third persons of their rights, or perpetrate
wrong, or other public policy considerations, is not enough
justification for disregarding their separate personalities or
establish an alter ego relationship. (Infra.)
came
(f) Similarly, not because two foreign corporations
on certain
from the same country and closely worked together
actor of
projects (i.e., first corporation as the supplier and contr nd
ct tothe seco
the project hired and subcontracted the proje
the conclusion arise that one was the
corporation), would
the corporate
conduit of the other, thus justifying the piercing of [2001];
SCRA 620
veil. (Marubeni Corporation vs. Lirag, 362
[2004].)
Martinez vs. Court of Appeals, 438 SCRA 130
(g) The fiction of distinct corporate entities cannot be
cation that the
disregarded where there is not the least indi first
ion is a dummy or serves as a client of the
second corporat
r Relations Commission,
corporate entity. (Yu vs. National Labo ded
entity is disregar
245 SCRA 134 [1995].) The legal corporate
to hold the officers and stockholders directly
only if it is sought
on. (Umali vs. Court of
liable for a corporate debt or obligati
90].)
Appeals, 189 SCRA 529 [19
by a parent company
(h) Where a subsidiary company is created ckholders or
merely as anagency of the latter especially if the sto
substantially the same or
officers of the two corporations are
ions unified (Annotation: 1 A.R.L. 612; also
their system of operat RA
any vs. Court of Appeals, 1 SC
Yutivo Sons Hardware Comp
e parent company assumes complete control of
160 [1961].); or wher
the separate corporate
the operation of its subsidiary’s business, il. Veterans
arded. (Ph
existence of the subsidiary must be disreg
Appeals, 181 SCRA
Investment Development Corp. vs. Court ofeals, 35 SCRA 335
rt of App
669 [1990]; see Reynoso vs. Cou
(2001].)
(i) In workmen’s compensation cases, where there is
operating
admission that two corporations are sister companies,
under one single management, and house in the same building,
piercing the veil may be considered. (Telephone Engineering
& Service Co., Inc. vs. Workmen's Compensation Commission,
104 SCRA 354 [1998]; see Sibaga’t Timber Corp. vs. Garcia, 216
SCRA 470 [1992].)
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(j) Where the corporate fiction was used as a means to

perpetuate a social injustice or as a vehicle to evade obligations,
it would be discarded and the two (2) corporations would
be merged as one, the first being merely considered as the
instrumentality, agency, conduit or adjunct of the other. (Azcor
Manufacturing, Inc. vs. National Labor Relations Commission,
303 SCRA 26 [1999]; Pabalan vs. National: Labor Relations
Commission, 184 SCRA 495 [1990].)
(k) But even when there is dominance over the affairs of
the subsidiary, the doctrine applies only when such fiction is
used as a subterfuge to commit injustice and circumvent the
law. (Union Bank of the Philippines vs. Court of Appeals, 290
SCRA 198 [1998]; Reynoso IV vs. Court of Appeals, supra.) The
subsidiary corporations, too, are ordinarily independent of each
other. (18 Am. Jur. 2d 564-565.)
(1) Absent circumstances justifying disregard of the
corporate entity, a holding or parent corporation has
a separate
corporate existence and is to be treated as separate entity,
distinct
from the subsidiary, hence, any claim or suit against the
latter
does not bind the former, and vice-versa. (Villarde
vs. Lopez, 419
SCRA [2004]; Jardine Davies, Inc. vs. JRB Realty,
Inc., 463 SCRA
555 [2005]; Fortun vs. Quinsayas, 690 SCRA 623
[2013].) Thus,
that a corporation or a single stockholder owns
all the stocks
of another corporation, taken alone, is not suffic
ient to justify
their being treated as one entity. If used to perfo
rm legitimate
functions, a subsidiary’s Separate existence shall be respe
cted
and the liability of the parent corporation
and the subsidiary
will be confined to those arising in their respe
ctive business.
(MR Holdings, Ltd. vs. Bajar, 380 SCRA
617 [2002].)
(m)A wholly-owned subsidiary is a distinct
and separate
enti
ty from its mother corporation and
that the latter exercises
control over the former does not justify dis
regarding their
separate personality. (Luzon Iron Dev. Corp
. v. Bridestone Mining
and Dev. Corp., 815 SCRA 583 [2016].) It
has been however, that
the fictionholds lesser sway for subsidiary corporations
shares are wholly if not almost wholly-ow whose
ned by its foreign
parent company. The structural and system
s overlap inherent
in parent and subsidiary relations often render the subsidia
as a mere local branch, agency or adjunct of the ry
foreign parent
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corporation.’ (Mariano vs. Petron Corporation, 610 SCRA 487

[2010]; Koppel [Phils.], Inc. vs. Yatco, 77 Phil. 496 [1946].)
(5) Where it appears that a corporation is merely a business conduit
of its president who entered into a contract of administration and
supervision for the painting of the factory of another corporation,
and to evade liability, the first corporation claims that the president
acted as an agent of the second corporation. It is a legal truism that
when the veil of corporate fiction is made as a shield to perpetrate
a fraud and/or confuse legitimate issues (here, the facts relating
to employer-employee relationship), the same should be pierced.
(R.G. Sugay, Inc. vs. Reyes, 12 SCRA 700 [1964]; Jacinto vs. Court of
Appeals, 98 SCRA 211 [1991].)
Where the petitioner, as president of the corporation, was ordered
by the court to pay the amounts adjudged, that the obligation was
incurred in the name of the corporation and he had ceased to be
corporate president, would not free him from personal liability
in
where the court has pierced the veil of corporate fiction because
such case, for all legal intents and purposes, he and the corporation
120
are one and the same. (Arcilla vs. Court of Appeals, 215 SCRA
[1992].) |
(6) Where a domestic or Philippine corporation is controlled
by aliens, its nationality shall be deemed that of the controlling
thereof during wartime, for reasons of national
stockholders
& Co.,
security. . (Filipinas Cia de Seguros vs. Christen Huenefeld
Company,
Inc., 89 Phil. 54 [1951]; Davis Winship vs. Philippine Trust
90 Phil. 744 [1952].)
transferred to
(7) Where a corporation is dissolved and its assets are
corporation
another corporation to avoid a financial liability of the first
controlled by the
to its employees, both firms being owned and
ration should
same persons with the result that the second corpo
a continuation and successor of the first entity.
be considered
SCRA 496 [2010];
(Kukan International Corporation vs. Reyes, 631
ih
7In this case, the contract of lease was executed by PC (foreign parent company),
PC’s
(subsidiary company) acting as
as lessee. PC leased the property for the use of SC
Philippine branch, and consistently with such status, SC took possession of the property
of the contract, SC was a mere alter
after the execution of the contract. Held: For purposes
ego of PC.
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42 THE REVISED CORPORATION CODE OF THE PHILI
PPINES Sec. 2
Claparols vs. Court of Industrial Relations, supra;

see National
Federation of Labor Union [NAFLY] vs. Ople, 143
SCRA 124 [1986];
see A.C. Ransom Labor Union CCLU vs. National Labo
r Relations
Commission, 150 SCRA 498 [1987]; Cagayan Valley Enter
prises, Inc.
vs. Court of Appeals, 179 SCRA 218 [1989]; see Peps
i-Cola Bottling
Co. vs. National Labor Relations Commission, 210
SCRA 277 [1992];
Avon Dale Garments, Inc. vs. National Labor
Relations Commission,
246 SCRA 733 [1995]; Phil. Bank of Communicatio
ns vs. Court of
Appeals, 195 SCRA 567 [1985]; Concepts Builders,
Inc. vs. National
Labor Relations Commission, supra, Heirs of P.V. Pajar
illo vs. Court
of Appeals, 537 SCRA 96 [2007].)
(8) Where one corporation sells or otherwise transfers
all its assets
to another corporation for value, the latter is not,
by that fact alone,
liable for the debts and liabilities of the
transfer. “In sale of assets,
the purchaser is only interested in the raw
assets of the selling
corporation perhaps to be used to establish
his own business
enterprise or as an addition to his on-going
business enterprise.”
(Allied Banking Corp. vs. Dyne-Sem Electron
ics Corp., 494 SCRA
493 [2006], citing Villanueva, Philippine Corporat
e Law, 1998 Ed., p.
444.) Sale of assets is legally distinct from merger. (see
Sec. 80.)
(9) Where all the stockholders or members
of a corporation, acting
as individuals instead of formal corporate
action, enter into an illegal act
which, if done by formal corporate action,
would be a ground for
forfeiting the charter of the corporation and
dissolving it, the fiction
of corporate entity apart from the members will be disregarded,
such action of the stockholders or mem and
bers will be treated as the
action of the corporation in a proceedin
g by the State to forfeit the
charter. (18 C.J.S. 381- 382.)
(10) Where a corporation is formed
by a seller of a certificate of
public convenience to evade his individual
contract that he “shall not for
a period of ten (10) years from the date
of this sale, apply for any
TPU service identical or competing
with the buyer.” (see Villa Rey
Transit, Inc. vs. Ferr
er, 25 SCRA 845 [1968].)
(11) Where petitioner started his employment with X
Corporation and was later transferred to Y Corporation,
a sister
company, and the separation benefits giv
en to the petitioner by
reason of his (illegal) dismissal corres
pond only to the period in
which he was employed by Y Corporati
on, ignoring the period
when he was still in the employ of X Corpor
ation. The doctrine of
>
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Sec. 2 TITLE I, GENERAL PROVISIONS, 43
corporate entity was envisaged for convenience and to serve justice.

Therefore, it should not be used as a subterfuge to commit injustice
and circumvent labor laws. (Indino vs. National Labor Relations
(12) Where a corporation is organized by an insolvent debtor to
defraud his creditors and he transfers his properties to it to further
such fraudulent purpose. (Kelluz vs. Douglas County Back, 58 Conn.
43; see Palacio vs. Fely Transp. Co., 5 SCRA 1011 [1962].) Here, the
second corporation was purposely formed and operated to defraud
his creditors. (see Kukan International Corporation vs. Reyes,
supra.) But the mere amendment of the articles of incorporation
changing the name of the corporation is not an indication to evade
payment by one corporation of its obligations to another. (Remo, Jr.
vs. Intermediate Appellate Court, 172 SCRA 405 [1989].)
(13) Where a corporation is organized as a device to evade an
ut
outstanding legal or equitable obligation, the courts, even witho
rate
reference to actual fraud, refuse to apply the doctrine of corpo
entity.
(a) In a California case, a lessee corporation with intent to
of royalties under a lease, conveyed title
evade the payment
yed to
to a second corporation. The second corporation conve
of the
a third, with the same end in view. It appeared that all
had
three corporations had been formed by the same persons,
the
their offices together in the same room and had practically
actual fraud.
same officers. The court did not find there was any
ers
Without regard to this, however, it was held that the transf
and that
were constructively fraudulent as against the lessor
the payment of the
all three corporations were jointly liable for
royalties.
d by a
(b) In an old English case, a German vessel. owne
to London,
German corporation, while sailing. from Hamburg
ration,
was sold by telegraph on August 1 to an Englishst corpo
4, war was
controlledby the German corporation. On Augu
declared between Germany and England. Next day, the vessel
arrived in England and was seized as a prize. The English
seizure
corporation claimed that the transfer to it made the
the
illegal. The Prize Court held the seizure proper and that
claim was invalid. It would clearly seem that in such case the
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transfer was within the purview of the rule which holds a

transfer not valid when made in contemplation of war and to
avoid seizure as a prize. In such circumstances, it was held that
applying the doctrine of distinct corporate entity was uncalled
for. (1 Fletcher, pp. 62-63.)
(14) Where the evidence on record shows that at the time
respondent pawned her jewelry, the pawnshop was owned by
petitioner (Sicam) himself and all the pawnshop receipts issued
to respondent shall all bear the words “Agencia de R.C. Sicam,
notwithstanding that the pawnshop was incorporated creating the
impression to respondent and the public as well that the pawnshop
was owned solely by petitioner and not by a corporation.” (Sicam
vs.
Jorge, 529 SCRA 443 [2007].)
(15) The corporate fiction has also been disregarded in other
cases as where it was used:
(a) to shield a violation of the prohibition against foru
m
shopping (First Phil. International Bank vs. Court of Appea
ls,
252 SCRA 259 [1996].); or
(b) to avoid a judgment credit (Sibagat Timber Corp
. vs.
Garcia, 216 SCRA 470 [1992].); or
(c) to avoid the payment of higher taxes (Koppel
Phils., Inc.
vs. Yatco, 77 Phil. 496 [1946].); or
(d) to avoid inclusion of corporate assets as
part of the estate
of a decedent (Cease vs. Court of Appeals, 93
SCRA 483 [1979].);
or
(e) to promote unfair objectives (Villanu
eva vs. Adre, 172
SCRA 876 [1989].); or
(f) to violate a provision under the Labor
(see Code
Arts. 288, 289 thereof.) declared to be penal
in nature (Reahs
Corpor ation vs. National Labor Relations Com
mission, 271
SCRA 247 [1997].); or
(g) to confuse legitimate issues (Jacinto vs. Court of Appe
als,
198 SCRA 211 [1991].); or
(h) to avoid a judgment in favor of an emp
loyee where the
employer corporation is no longer existing
and is unable to
satisfy the judgment, the employee's recourse bein
g against the
officers of the corporation who were, in effect, acting in behalf of
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Sec. 2 TITLE I, GENERAL PROVISIONS, 45
Liego, 314 SCRA

the corporation (Restaurante Las Conchas vs.
24 [1999].); or
SSS contributions
(i) to escape liability for non-payment of
disregards the corporate
under R.A. No. 8282 which specifically
officers with respect
personality between the corporation and its
(Ambassador Hotel Inc. vs. Social Security
to its violations.
System, 827 SCRA 641 [2017].)
Application of the “instrumentality”

or “alter ego” rule.
question of whether a
(1) Question purely one of fact. — The
alter ego, a mere sheet or
corporation is a mere instrumentality or
erfuge, or whether petitioner
paper corporation, a sham or a subt
ce warranting the piercing
advanced the requisite quantum of eviden
ty, is purely one of fact.
of the veil of respondent's corporate enti
514, 237; Heirs of Ramon
(Phoenix Safety, Inc. vs. James, 28 Ariz.
e Corporation vs. Court
Durano, Sr. vs. Sps. Uy, supra; Pacific Rehous ,
applying the rule or doctrine
of Appeals, 719 SCRA 665 [2014].) In
not form, and with how the
the courts are concerned with reality ship to
endant's relation
corporation operated and the individual def l Corp.,
the operation. (Comm. of Customs vs. O’Link Internationa
728 SCRA 469 [2014].)
have been identified
(2) Common circumstances. — Some factors
that will justify the app lication of the treatment of the doctrine of
of Garrett v. Southern
the piercing of the corporate veil. The case
d in Philippine
Railway Co.* (173 F Supp. 915, E.D. Tenn. [1959].), cite
Ritratto Group, Inc. (362 SCRA 216 [2001].),
National Bank vs.
ful in determining
outlined the circumstances which may be use
mentality of the
whether the subsidiary is but a mere instru
parent-corporation.
employed by Lenoir
*This case involved the Southern Railway Co. Plaintiff was r, he sued
g for Lenoir. Howeve
Works and alleged that he sustained injuries while workin
ed the entire capital stock of
Southern Railway Company because Southern had acquir
mentality of the former.
Lenoir Car Works, hence, the latter corporation but a mere instru
rule the stock ownership alone by
The Tennessee Supreme Court stated that as a general
ation liable
one corporation of the stock of another does not render the dominant corpor
the separat e existen ce of the subsid iary is a mere
for the torts of the subsidiary unless ity or
an instrumental
sham, or unless the control of the subsidiary is such that it is but
adjunct of the dominant corporation.
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THE REVISED CORPORATION CODE OF THE PHILIPPINES Sec. 2
“The circumstances rendering the subsidiary an instrumentality,

It is manifestly impossible to catalogue the infinite variations of
fact that can arise but there are certain, common circumstances
which are important and which, if present in the proper
combination, are controlling.
These are as follows:
(a) The parent corporation owns all or most of the capital
stock of the subsidiary.
(b) The parent and subsidiary corporations have common
directors or officers.
(c) The parent corporation finances the subsidiary.
(d) The parent corporation subscribes to all the capital stock
of the subsidiary or otherwise causes its incorporation.
(e) The subsidiary has grossly inadequate capital.
(f) The parent corporation pays the salaries and other
expenses or losses of the subsidiary.
(g) The subsidiary has substantially no business except
with the parent corporation or no assets except those conveyed
to or by the parent corporation.
(h) Inthe papers of the parent corporationorinthe statements
of its officers, the subsidiary is described as a dependent or
division of the parent corporation, or its business or financial
responsibility is referred to as the parent corporation’s own.
(i) The parent corporation uses the property of the
subsidiary as its own.
(j) The directors or executives of the subsidiary do not act
independently in the interest of the subsidiary but take their
orders from the parent-corporation.
(k) The formal legal requirements of the subsidiary are not
observed. !
The Tennessee Supreme Court ruled:
“In the case at bar only two of the eleven listed indicia
occur,
namely, the ownership of most of the capital stock of Lenoif
by Southern, and possibly subscription to the capital stock of
Lenoir ... The complaint must be dismissed.”
>|
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TITLE 1. GENERAL PROVISIONS, 47
g
rt
Court has laid a three-

(3) Three-pronged test. — The Supreme
applicability of the doctrine
pronged control test in determining the
fiction if based on the
of piercing the corporate veil or corporate
“instrumentality” or “alter ego” rule, In applying this rule, the
with how the
courts are concerned with reality and not with form,
tionship to
corporation operated and the individual defendant's rela ow
ments bel
that operation. The absence of any of the three (3) ele
prevents, under the rule, piercing the corporate veil.
not mere
(a) Instrumentality or control test. — Control,
complete definition,
majority or complete stock control, but
ness in respect to
not only of finances but of policy and busi
e entity as to this
the transaction attacked so that the corporat or existence
mind, will,
transaction had at the time no separate
of its own;
have been used by the
(b) Fraud test. — Such control must to
of took place,
defendant at the time the acts complained or other positive
commit fraud or wrong, violation of a statutory
contravention of plaintiff's
duty, or dishonest and unjust act in
legal rights; and
The control and breach
(c) Harm/causal connection test. —
the injury or unjust loss
of duty must proximately cause ween
complained of. In other wor ds, the causal connection bet
through the instrumentality of the
the fraud committed f
or loss suffered by the plaintif
corporate form and the injury Labor
ncept Builders, Inc. vs. National
must be established. (Co
A 149 [1996]; Lim vs. Court of
Relations Commission, 257 SCR
Manila Hotel Corp. vs. National
Appeals, 323 SCRA 102 [2000];
SCRA 1 [2000]; Heirs of Ramon
Labor Relations Commission, 343 Appeals,’
see Ramoso vs. Court of
Durano, Sr. vs. Sps- Uy, supra;
335 (2000), the Supreme Court (First

‘
In Reynoso JV vs: Court of Appeals, 345 SCRA

————
ng General Credit Corporation (GCC),

Division) pierced the yei) of corporate entity, holdifor the obligations of CCC-QC basing
formerly Commercial Corporation (CCC), liable
ion of the Court of Appeals) “on the records.” The
its ruling (which reversed the decis
in favor of petitioner against CCC-
QC may be executed
issue was whether the judgment
case. The ruling directly conflicts with
against GCC which was not a formal party in the that of
me Court [Second Division] affirming
the above cited Kamose decision of the Supre that “the mere control on the part of GCC, one
the Court of Appeals and that of the SEC es of the
rough C CC Equit over the operation and business polici
y
of the respondents th es not necessar ily warrant piercing the corporate fiction without
franchise companies do et he r the ex is te nc e of the corporation should be pierced depend
s
proof of fr au d xxx Wh
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347 SCRA 463 [2000]; Lipat vs. Pacific Banking Corporation, 402
SCRA 399 [2005]; Martinez vs. Court of Appeals, 438 SCRA 132
[2004]; Child Learning Center, Inc. vs. Tagorio, 476 SCRA 236
[2005]; Nisce vs. Equitable PCI Bank, Inc., 516 SCRA 231 [2007];
Hi-Cement Corp. vs. Bank of Asia and America, 534 SCRA 269
[2007]; Yamamoto vs. Nishiro Leather Industry, Inc., 551 SCRA
447 [2008]; Phil. National Bank vs. Hydro Resources Contractors
Corp., 693 SCRA 294 [2013], Virata vs. Ng Wee, G.R. No. 220926,
July 5, 2017.)
With respect to the second element, even control over the
financial and operational concerns of a subsidiary company does
not by itself call for disregarding its corporate fiction. (NASECO
Guards Association vs. National Service Corporation, 629 SCRA 90
[2010].) The fraud or wrongful or dishonest and unjust act of at least
the intent to accomplish some fraudulent or illegal purpose behind
control must be clearly and convincingly established, otherwise the
Separate existence of the subsidiary and parent corporations must
be respected. The wrongdoing cannot be presumed. (supra.)
In Philippine National Bank,” the Supreme Court concluded:
“Aside from the fact that PNB-IFL, is a wholly-owned
subsidiary of petitioner PNB, there isno showing of the indicative
factors that the former corporation is mere instrumentality
of
the latter are present. Neither is there a demonstration
that
any of the evils sought to be prevented by the doctr
ine of
piercing the corporate veil exists. Inescapably, theref
ore, the
doctrine of piercing the corporate veil based on the
alter ego or
instrumentality doctrine finds no application in
the case at bar.
In any case, the parent-subsidiary relationship
between PNB
and PNB-IFL is not the significant legal relation
ship involved
in thiscase since the petitioner was not sued beca
use it is the
parent company of PNB-IFL. Rather, the
petitioner was sued
on questions of facts, appropriately pleaded. Mere alle ation that a co: tion is the
alter ego of the individual stockholders is insufficient. ; i armani
sh a this ei ie pone question
ed was one entered into between resp
PNB-IFL, not - in their complaint, respondents ondent and
admit that petiti PNB
attorney-in-fact for the PNB-IFL, with full power and auth
orityi to, inter
RAHDPa
alia,DMEforecam
closeet
e on
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Sec. 2 ‘TITLE I, GENERAL PROVISIONS, a2
IFL, in initiating
because it acted as an attorney-in-fact of PNB- ot
A suit against an agent cann
the foreclosure proceedings. considered a suit against the
without comp elli ng reas ons be
principal.”
Acquisition by court of jurisdiction over

corporation or corporations involved.
porate fiction and the
The principle of piercing the veil of cor the
resulting treatment of two (2) related corporation as one and
to a given transaction, is basically
same juridical person with respect
onl y to det erm ine est abl ish ed liability. It is not available to
applie d
confer on a court jurisdiction it has not acquired in first place, over
erwise put, a corporation not
a party not impleaded in a case. Oth
subject to the court’s process
impleaded in a court cannot be the
the cor por ate veil ; hen ce any proceedings (i.e., writ of
of piercing would infringe on its
tak en aga ins t it and its pro per ty,
execution)
right to due process:
court
comment is two-fold: (1) the
The implication of the above ons
over the corporation or corporati
must first acquire jurisdiction” trine
the doctrine; and (2) the doc
snvolved before it can apply duly
t be rai sed dur ing a ful l-b lown trial over a cause of action
mus the authority of
commenced involv ing parties duly brought under
poration, it
no jurisdiction over the cor
the court. If the court has corporate
follows that the court hasno business in piercing its veil of
due
ends the corporation’s right to
fiction because such action off
process.
motion to pierce the veil of corporate fiction is not the
A mere
yehicle for proceeding against a corporation for the
appropriate
debt of another principal action against the latter had
judgment identity of the two corporations.
been terminated, on the alleged
motion states a new cause of action, i.e., for the liability of the
Such should
debtor-corporation to be borne by another, which trial
judgment
another complaint and subsequent
be properly ventilated in
ei aoe ice of summons
WJurisdiction over the defendant is acquired either upon a validvolserv
unt ary appearance
on against him or the defendant 's
apprising him of a pending acti with summons or
por ati on con cer ned must have been properly served
in court. The cor court,t. Coroll
Co ary ther eto, it can not be subjected
jurisdic tion of the cour
properly subjected to the lation of the right of due process. (see
to a writ of execution meant for another in vio any, Inc.
ment and Economics vs. Litton and Comp
International Academy of Manage Reyes, 631 SCRA 596 [2010].)
848 SCRA 437 [2017]; Kukan International Corporation vs.
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where the doctrine can, if appropriate, be applied based on the

causes of action. Making another corporation, thru the medium of
a writ of execution, answerable for an adjudged liability against
another, is a clear case of altering a decision,
an instance of granting
relief not contemplated in the decision.sought to be executed.
(Kukan International Corporation vs. Reyes, 631 SCRA 596 [2010];
Pacific Rehouse Corporation vs. Court of Appeals, 719 SCRA 665
[2014]; Pioneer Insurance & Survey Corporation vs. Morning Start
Travel & Tours, Inc., 762 SCRA 283 [2015].)
Corporation as a creation of law

or by operation of law.
It is well-established that no corporation can exist without the
consent or grant of the sovereign, and that the power to create
corporation is one attribute of sovereignty. (18 Am. Jur. 2d 573.)
(1) Special authority or grant by the State required. — A corporation
is created by law or by operation of law. This means that corporations
cannot come into existence by mere agreement of the parties as in
the case of business partnerships. They require special authority or
grant from the State. This power is exercised by the State through
the legislature, either by a special incorporation law or charter which
directly creates the corporation or by means of a general corporation
law under which individuals desiring to be and act as a corporation
may incorporate.
In the Philippines, the general law which governs the creation
of private corporations is the Revised Corporation Code.” Private
corporations owned or controlled by the government can only be
created by special laws," (Constitution of the Philippines, Art. XI],
Sec. 16.), often called “charters.”
An exception to the rule that legislative grant or authority is
necessary for the creation of a corporation obtains with respect
to
corporations by prescription. (Infra.)
” Article 45 of the Civil Code provides, among other things, that “Privat
e corporations
are regulated by laws of general application on the subject. Partnerships and associations
for private interest or purpose are governed by the provisions of this Code concerning
partnerships.”
“Before the adoption of the 1935 Constitution, private corporations, whether
government-owned or -controlled or not, could be crea ted either by general or special
law.
a
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Sec. 2 TITLE 1, GENERAL PROVISIONS,
(2) Compliance with conditions prescribed by law. — Corporations

can only come into existence in the manner prescribed by law.
General laws authorizing the formation of corporations are,
in effect, general offers to any persons who may bring themselves
dents are prescribed
within their provisions; and if condition prece done, they are terms
in the statute, or certain acts are required to be
lly before legal
of the other and must be complied with substantia
corporate existence can be required. (18 C.J.5. 468.)
— A
(3) Enjoyment of privileges subject to laws and the charter.
porated
corporation as a creature of the State is presumed to be incor
and
for the benefit of the public. It receives certain special privileges
the
franchises and holds them subject to the laws of the State and
State and
limitations of its charter. There is a reserved right in the
in the State
the limitations of its charter. There is a reserved right
and whether
to inquire how these privileges had been employed,
g Co., Inc. vs.
they had been abused. (Bataan Shipyard & Engineerin
PCGG, 150 SCRA 181 [1987].)
Right of succession of a corporation.

existence despite
A corporation has a capacity of continuous
of the individual
the death, withdrawal, insolvency, or incapacity their
stockholders or members and regardless of the transfer of
ly said that an attribute
interest or shares of stock. Thus, it is frequent
perpetual succession.
of a corporation aggregate is immorality or
ortal.
But the corporation is by no means imm
life of the corporation
(1). Under the old Corporation Code, the
is limited to the period of time stated in the articles of incorporation
ation unless sooner
not exceeding 50 years from the date of incorpor r,
." (Sec. 11.) Howeve
dissolved or unless the period is extended
under the Revised Corporation Code, a corporation shall have
rporation provide
perpetual existence unless its articles of inco
otherwise. (Sec. 11.)
of its stock without

Mince ownership in the corporation may be transferred by a sale permanent — in
ation is highly
the assent of the other owners (see Sec, 63.), the corpor
College case, 1918, in which the United
some cases almost perpetual. Since the Dartmouth
was a binding
States Supreme Court held that a charter granted by a State to a corporation corporation
State withou t the consen t of the
contract and could not be altered by the years
fifty fe
or (C.L.
of the corporation usually to twenty
(see Sec. 16.), state laws limit the life are obtained without much difficulty.”
(see Sec. 11.) New charters, however, .)
Barnes & Noble College Outline Series
Principles of Economics, 9th ed., p. 46;
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52 THE REVISED CORPORATION CODE OF THE PHILIPPINES See, 2
(2) Corporations created by special laws have the right of

succession for the term provided in the laws creating them.
Powers, attributes, and properties

of a corporation.
A corporation, being purely a creation of law,* may exercise only
such powers as are granted by the law of its creation.’ An express
grant, however, is unnecessary. All powers which may be implied
from those expressly provided by law and those which are essential
or necessary to the corporation’s existence may also be exercised.
(see Secs. 35[k], 44.) The corporation exercises its powers through its
board of directors (or trustees) and/or its duly authorized officers
and agents.
Distinctions between a partnership
and a corporation.
The following are the distinctions:
(1) Manner of creation. — A partnership is created by mere
agreement of the parties, while a corporation is created by law or
by operation of law (Sec. 2.);
(2) Number of incorporators. — A partnership may be organized
by at least two (2) parties, while a corporation, by any person,
partnership, association or corporation, singly or jointly, with others
but not more than 15 (Sec. 10.);
(3) Commencement of juridical personality. — A partnership
acquires juridical personality from the moment of the execution
of the contract of partnership, while a corporation has corporate
existence and juridical personality only from the date of the issuance
Strictly speaking, this is true only with respect to corporation created by special
acts of the legislative. Those organized under the Revised Corporation Code, a general
law, are really the result of the contract of the parties. The State merely gives its approval
to their agreement.
The powers that may be exercised by a corporation are not entirely dependent
upon the State. The purpose or purposes of the corporation as stated in its articles of
incorporation determine to a large extent the powers it may exercise. (see Secs. 10,
36[11].) Subject only to certain restrictions, the incorporators, stockholders, or members
are entirely free to decide what the purpose or purposes of the corporation shall be. (see
Secs. 14[2], 15[2nd].)
A
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Sec. 2 TITLE 1, GENERAL PROVISIONS, ae
of the certificate of incorporation by the SEC under its official seal

(Sec. 18.);
(4) Powers. —A partnership may exercise any power authorized

by the partners provided it is not contrary to law, morals, good
customs, public order, or public policy (Art. 1306, Civil Code.),
ly granted
while a corporation can exercise only the powers express
c oy implied from those granted or incidental to its existence
ec. 2.);
nt is
(5) Management. — In a partnership, when the manageme
p, while
not agreed upon, every partner is an agent of the partnershi
d in the board of
in a corporation, the power to do business is veste
a corporation sole
directors or trustees (Sec. 22.) except in the,case of
and One Person Corporations (Secs. 115, et. seq.);
a partner as
(6) Effect of mismanagement. — In a partnership,
while in a corporation
such can sue a co-partner who mismanages, who
ctors or trustees
the suit against a member of the board of dire 22.);
the corporation (Sec.
mismanages must be in the name of
no right of succession
(7) Right of succession. — A partnership has (Sec. 2.);
(Arts. 1828, 1830, 1860 ); while a corporation has such right
— In a partnership,
(8) Extent of liability to third persons.
are liable personally and
the partners (except limited partners)
partnership debts to third
subsidiarily (sometimes solidarily) for
stockholders are liable only to
persons, while in a corporation, the
ented by the shares subscribed
the extent of their investment as repres
by them (see Secs. 63, 36.);
partnership, a partner cannot
(9) Transferability of interest. —Ina a
int ere st in the par tne rsh ip so as to make the transferee
transfer his sting partners because
partner withou t the consent of all the other exi
principle of delectus personarum,
the partnership is based on the
poration, a stockholder has
(Arts. 1707, 1804.), while in a stock tcorthe prior consent of the other
the rightto transfer his shares withou
ers bec aus e a cor por ati on is not based on this principle
stockhold
(see Sec. 62.);
nership may be established for
(10) Term of wistence. — A part
stipulated by the partners, while a corporation
any period of tim e
e unless its articles of incorporation
shall have perpetu al existenc11.);
provides otherwise (see Sec.
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(11) Dissolution. — A partnership may be dissolved at any time

by the will of any or all of the partners, while a corporation can
be dissolved only with the consent of the State except dissolution
shortening corporate term (see Secs. 133-139.); ‘and
(12) Laws which govern. —A partnership is governed by the Civil
Code, while a corporation is governed by the Revised Corporation
Code.
Similarities between a partnership

and a corporation.
The similarities are:
(1) Like a partnership, a corporation has a juridical personality
separate and distinct from that of the individuals composing it;”
(2) Like a partnership, a corporation can act only through
agents;
(3) Like a partnership, a corporation (except a corporation sole

and a One Person Corporation) is an organization usually composed
of an aggregate of individuals;
(4) Like a partnership, a (stock) corporation distributes its
profits to those who contribute capital to the business (although an
industrial partner also shares in partnership profits);
(5) Likewise, a partnership, a corporation can be organized
only where there is a law authorizing its organization, To organize
a corporation or a partnership that could claim juridical personality
of its own and transact business as such is not a matter of absolute
right but a privilege which may be enjoyed only under such terms
as the State may deem necessary to impose (Ang Pue & Co. vs. Sec.
of Commerce and Industry, 5 SCRA 645 [1962].); and
17A sole partnership does not possess a juridical personality separate and distinct
an
from that of the owner of the business. The Revised Corporation Code permits
individual to form a One Person Corporation (OPC) with a legal personality separate
such separate
from the sole shareholder with the difference that the burden of proving
that ie
personality when it is challenged is on the shareholder by affirmatively showing
stockholder
corporation was adequately financed and its property is independent of the
personal property. (see Sec. 130.)
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Sec. 2 .|. TITLE 1. GENERAL PROVISIONS, 55
©) A partnership, no matter how created or organized, is

taxable as a corporation, subject to income tax.'* (Sec. 24[a], NIRC.)
Corporation as a partner.
(1) General rule. — As a rule, corporations cannot ordinarily
enter into a partnership with other corporations or with individuals.
The reasons given are:
(a) A corporation can only act through its duly authorized
officers and agents and is not bound by the acts of anyone else,
while in a partnership, each member binds the firm when acting
within the scope of the partnership business. In entering into
a partnership, the identity of the corporation is lost or merged
with that of another and the direction of its affairs is placed in
other hands than those provided by the law of its creation (SEC
Opinion, Jan. 26, 1961, citing 6 Fletcher, pp. 325-326.);
(b) The limitation is based on grounds of public policy, since
in a partnership the corporation would be bound by the acts of
persons who are not its duly appointed and authorized agents
and officers, which would be inconsistent with the policy of the
law that the corporation shall manage its own affairs separately
and exclusively (13 Am. Jur. 830.) through the directors (or
trustees) or officers chosen by the stockholders (or members);
and
(c) Such an arrangement would permit the corporate assets
to be subjected to risks and liabilities not contemplated by the
stockholders at the time of making their investment. (19 Am.
Jur. 2d 505; SEC Opinion, Dec. 1, 1983; SEC Opinion, Dec. 22,
1966.) .
(2) Exception. — Under Section 35(h) of the Revised Corporation

venture
Code, a corporation may enter into a partnership or joint
with natural or juridical persons.
Corporation as incorporator.
Under the old Corporation Code, only natural persons not less
than five (5) but not more than 15, all of legal age, a majority of
whom are residents of the Philippines may form a corporation.
'8Except general professional partnership or “partnerships formed for the sole

purpose of exercising their common profession, no part of the income of which is derived
from engaging in any trade or business.” (see Sec. 22[B], NIRC.)
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Now, a corporation or partnership singly, or jointly with other

persons, partnerships, associations or corporations, not more than
15, may incorporate and organize a corporation for any lawful
purpose or purposes. (Sec. 10.) :
Advantages of a business corporation.

The advantages of a business corporation are:
(1) The corporation has a legal capacity to act and contract as a
distinct unit in its own name;
(2) It has continuity of existence because of its non-dependence
on the lives of those who compose it;
(3) Its credit is strengthened by such continuity of existence;
(4) Its management is centralized in the board of directors;
(5) Its creation, organization, management, and dissolution are
standardized as they are governed under one general incorporation
law;
(6) It permits high flexibility in obtaining and pooling capital

than any other private form;
(7) It makes feasible gigantic financial undertakings since it
enables many individuals to invest their separate funds in the
enterprise to furnish large amounts of capital upon which big
business depends, beyond the abilities of most individuals or even
groups of individuals acting in ordinary partnership;
(8) The liability of shareholders is limited to their capital
contribution;
(9) They are not general agents of the business; and
(10) The shares of stocks can be transferred with ease without
the consent of the other stockholders so that the enterprise need not
be liquidated for the investor to get back his money. Corporations
do not have exclusive possession of these advantages. For instance,
many of so-called corporate advantages can be worked into the
terms of a partnership agreement.
The Revised Corporation Code provides for the formation of a
One Person Corporation (OPC) where a single stockholder is also
the president and sole director.
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created not for profit but for the public good and welfare. (SEC-
OGC Opinion No. 43-03,! August 29, 2003.) Of this character are
most of the charitable, religious, social, literary, scientific, civic,
and political organizations and societies. Nonstock corporations
have no capital stock which can be subscribed by their members.
Their capital is sourced from contributions and donations. They
must have members.
(2) Generally, a corporation may be organized either as
a stock or nonstock. (see Secs. 105-106.) Some corporations
cannot be organized except in the form of stock corporations,
like banks. (R.A. No. 8791.) A religious corporation is always
nonstock. (see Sec. 107.) Nonstock corporations are primarily
governed by Title XI (Secs. 86-94.) of the Revised Corporation Code.
The provisions governing stock corporations, when pertinent,
apply to nonstock corporations except as may be covered by specific
provisions of Title XI. (Sec. 86.)
Other classifications of corporations.

There are other classifications of corporations, such as those
enumerated below.
(1) As to number of persons who compose them:
(a) Corporation aggregate is a corporation consisting of more
than one member or corporator; or
(b) Corporation sole is a special form of corporation usually

associated with the clergy and formed by one (1) person only.
Under the Revised Corporation Code, itisa religious corporation
which consists of one (1) member or corporator only and his
successors, such as a bishop. (Sec. 110.) All other corporations
must be corporation aggregate, that is, they must be formed
by
“not less than five (5)” persons.? (see Sec. 10.)
‘Citing De Leon, The Corporation Code of the Philippines Annota

ted, p. 45 [2002].
7A corporation aggregate does not become a corporation
sole by the mere fact that its
shares of stock become vested in one person because the shares may again be
transferred
or sold by the holder to others. In the meantime, however, the holder
and the corporation
may be treated as the same.
J
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(2) As to whether they are for religious purposes or not:

(a) Ecclesiastical corporation or one organized for religious
purposes. Under the Revised Corporation Code, religious
corporations are classified into corporations sole and religious
societies (Sec. 107, par. 2.); or
(b) Lay corporation or one organized for a purpose other than
for religion. Lay corporations may be eleemosynary or civil.
(3). As to whether they are for charitable purposes or not:
(a) Eleemosynary corporation or one established for, or
devoted to, charitable purposes or those supported by charity;
or
(b) Civil corporation or one established for business or profit,
d among
i.e., with a view toward realizing gains to be distribute
its members.
(4) As to State under or by whose laws they have been created:
laws
(a) Domestic corporation or one incorporated under the
of the Philippines; or
ing
(b) Foreign corporation or one formed, organized, or exist
includes
under any laws other than those of the Philippines. It
of another
multinational corporations created under the laws
gn corporation is
State. (see Sec. 140.) For tax purposes, a forei
(Supra.)
further classified into resident or non-resident.
(5) As to their legal right to corporate existence:
and in
(a) De jure corporation ora corporation existing in fact
law; or
existing in fact but
(b) De facto corporation or a corporation
not in law. (see Sec. 19.)
or not:
(6) As to whether they are open to the public
or
(a) Close corporation or one limited to selected persons
or
members of a family (see Secs. 95-104.);
may
(b) Open corporation or one open to any person who
des
wish to become a stockholder or member thereto. This inclu
publicly-listed companies.
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60 THE REVISED CORPORATION CODE OP THE PHILIPPINES Sec. 3
(7) As to their relation to another corporation:

(a) Parent or holding corporation or one so related to another
corporation that it has the power, either directly or indirectly,
through one or more intermediaries, to control or to elect the
majority of the directors of such other corporations;
(b) Subsidiary corporation or one so related to another
corporation that the majority of its directors can be elected, either
directly or indirectly, by such other corporation which become
its parent corporation. It is one in which another corporation‘
owns at least a majority (i.e., over 50%) of the shares and thus
has control over its financial and/or operating policies; or
(c) Affiliated corporation or one related to another by owning
or being owned by common management or by a long-term
lease of its properties or other control device. An affiliation
exists between a holding or parent company and its subsidiary,
or between two corporations owned or controlled by a third’
(E.L. Kholer, A Dictionary for Accountants, 1975 ed., p- 26.) It
may include interlocking directorates or ownership (see Sec.
33.) and sharing of employees, equipment, or facilities.
(8) As to whether they are for public (government) or private
purpose:
(a) Public corporations or those formed or organized for the
government of a portion of the State for the general good and
welfare; or
"It is a corporation organized to hold the stock of another or other corporations

enabling it to control or substantially influence the policies and management of such
corporation or corporations. It holds stock in other companies for purposes of control
rather than for mere investment.
‘Normally, a corporation is considered a wholly-owned subsidiary only if the rest
of the stockholders, other than the parent company, own one (1) share in the corporation
and only to qualify them as incorporators and/or directors. Where the corporation is not
such a wholly-owned subsidiary (i,¢., some stockholders own more than one share), the
SEC ruling that “dividends either in the form of cash or stock should be declared on the
basis of the outstanding capital stock held by the stockholders and any. transfer thereof
must be done only after the amount declared has been proportionately distributed to the
stockholders” is applicable, (SEC Opinion, Oct. 17, 1994.)
‘The term “conglomerate” is also used to refer to a conclusion or corporations
engaged in different businesses together usually involving a parent company, subsidiaries
and affiliates. A corporation may spin-off its business by organizing another corporation
(subsidiary) to which it transfers a portion of its assets in exchange for the stockholders
capital stock.
J
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Sec. 3 TITLE 1. GENERAL PROVISIONS, 61
(b) Private corporations or those formed for some private

purpose, benefit, or end; it may be a stock or nonstock
corporation, government-owned or -controlled corporation or
quasi-public corporation.’
The Revised Corporation Code does not classify corporations
into public or private for the reason it applies only to private
corporations.
Private corporations include:
1) Government-owned or -controlled corporations or those
created or organized by the government’ of which the
government is the majority stockholder.
Examples are the Government Service Insurance
System, National Power Corporation, Philippine National
Railway,’ and
by the
©The true test is the purpose of the corporation. If the corporation is created
connected with
State as its own agency or instrumentality for political or public purpose
it is a public corporat ion. If not, it is a private
the administration of government, then
corporation notwiths tanding that it is created to promote public good, interest, or
the corporation,
convenience although th e whole, or substantially the whole interest in
public corpora tions are the province s, cities,
belongs to the State in the Philippines, the
, the Constit ution mandate s the creation of
municipalities, and barangays. In addition
X, Sec. 1 thereof.)
autonomous region in Muslim Mindanao and the Cordilleras. (see Art.
ents.
These local units are also called municipal corporation or local governm
may be organized as a stock or nonstock corporation. A government
7Jt
or
instrumentality (e.g., Manila International Airport Authority), which is neither a stock
its governmental
nonstock corporation vested with corporate powers to perform efficiently
ion. It
functions, does not quality as a government-owned or -controlled corporat
ent machiner y although not integrate d with the
remains part of the national governm
department framework. (Manila Internati onal Airport Authorit y vs. Court of Appeals,
295 SCRA 591 [2006].) Unless the government instrumentality is organized as a stock
or nonstock corporation, it remains a government instrumentality exercising not only
government but also corporate powers. (Republic vs, City of Parafiaque, 677 SCRA 246
(2012].) Thus, a government instrumentality may be endowed with corporate powers
and at the same time retain its classification as a government “instrumentality” for all
other purposes. Government instrumentalities are vested with corporate powers but they
do not become stock or nonstock corporations which is a necessary condition before an
agency or instrumentality is deemed a government-owned and -controlled corporation.
(Basis Conversion and Development Authority vs, Commissioner of Internal Revenue,
867 SCRA 179 [2018]; for definition of “government instrumentality,” and “government-
owned and -controlled corporation,” see Sec, 2 (10) and (13) of the Introductory Provisions
of the Administrative Code of 1987,
*These corporations are private and not public corporations because they are not
established for the government of a portion of the State. Where the government engages
in a particular business thru the instrumentality of a corporation, it divests itself pro
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2) Quasi-public corporations or private corporations

which have accepted from the State the grant of franchise
or contract involving the performance of public duties (1
Fletcher, p. 216.) but which are organized for profit. They
have been defined also as corporations private in ownershi
but having an appropriate franchise from the State to
provide for a necessity or convenience of the general public,
incapable of being furnished through the ordinary channels
of private competitive business and dependent for its
exercise upon eminent domain or some agency of the
government. (Ibid., p. 217.) They are private corporations
that perform public service.’
hac vice of its sovereign character, so as to subject itself to the rules governing private
corporations. (Phil. National Bank vs. Pabalan, 83 SCRA 595 [1978].)
It has been ruled that employees of government-owned or -controlled corporations,
whether formed by special law or under the Corporation Code (except private
firms
taken over by the government in foreclosure or similar proceedings),
are governed by
the Civil Service Law (P.D. No. 807, as amended) and not by the
Labor Code (P.D. No.
442, as amended.) because of Art. XII-B, Sec. 1 of the 1973 Constitution,
which provides
“The Civil Service embraces every branch, agency, subdivision and
instrumentality of the
Government, including every government-owned or -controlle
d corporation.”
A dissenting opinion holds that the constitutional provision
those corporations created by special law. “Whether a contemplates only
corporation is government-
owned or -controlled depends upon the purpose of the
inquiry. A corporation may be
“government-owned or -controlled’ for one purpose but
not for another. In other words, it
is not possible to broadly categorize a corporation as
‘government-owned or -controlled.’
Thus, if the National Housing Corporation (which
was created pursuant to Act No. 1459,
the former Corporation Law) is not covered by
the Civil Service, it is not necessarily
covered by the Labor Code. For it may well be
that the NHC is in limbo.” (National
Housing Corp. vs. Juco, 134 SCRA 172 [1985].) The ruling in Juco
Under the present Constitution, only government-owned is no longer applicable.
“with original charter” (ie., created by special or -controlle d corporations
Code) are embraced within the Civil Service.
law and not under the Corporation
(Art. IX, B-Sec. 2[1] thereof.) But a private
corporation acquired by the government utilizing public funds, while
corporate existence, becomes a government-owned retaining its
constitutional precept of public accountability or -controlled corporation within the
are therefore, public servants, falling within (see Art. XI, Sec. 1, Ibid.) and the employees
of the Office of the Ombudsman for purposes the investigatory and prosecutor power
Act. (Quimpo vs, Tanodbayan, 146 of the Anti-Graft and Corrupt Practices
SCRA 137 [1986].) Neither are governme
or -controlled corporations organized as subsidiari nt-owned
Corporation Code are included in the es of such corporations under the
Civil Service. (Bliss Development Corp.
pays a Prt a 237 SCRA 271 [1994].) Their employees Employees
are subject to the provisions of
"These corporations are also known
corporations.” Examples of these corporationsas are
“public utilities” or “public service
telephone, and transportation
those organized as electric, water,
companies. Because the business in
engaged are impressed with a public interest, which they are
they may not engage in that business
without authority of the State in the form of franchise.
in that business unless the Neither may they cease engaging
state permits them to do so. A quasi-public corporati
on is given
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See. 3 TITLE 1, GENERAL PROVISIONS, 63
(9) As to whether they are corporations in a true sense or only

ina limited sense:
(a) True corporation or one which exists by statutory
authority; or
l
(b) Quasi-corporation or one which exists without forma
legislative grant. It is an exception to the general rule that a
corporation can exist only by authority of law. It may be:
1) Corporation by prescription or one which has
exercised corporate powers for an indefinite period
without interference by the sovereign power and
which by fiction of law is given the status of a
corporation” (1 Fletcher, p. 415.); or
of eminent domain — in order to

certain powers of a public nature — such as the power
enable it to discharge its dutiesfor the public benefit, in which respect it differs from an
exercised exclusively for
ordinary private corporation, the powers of which are given and
Jur. 2d 555.)
the profit and advantage of the stockholders. (18 Am.
That a certain juridic al entity is impres sed with public interest does not, by that
because a corporation may
circumstance alone, make the entity a public corporation, orated
character, incorp
be private although its charger contains provision of a public
be considered quasi-public
solely for the public good. This class of corporations may
public wants, or pursue other
corporations, which render public service, supply
the gain or benefit of its
eleemosynary objectives. While purposely organized for (Phil.
ons for the public benefit.
members, they are required by law to discharge functi
of
Society for the Prevention Cruelty to Animals vs. Commission on Audit, 534 SCRA
112 [2007].)
P.D. No. 198 have been
The juridical entities known as water districts created by
services and supplying public
held as quasi-public corporations, performing public
Corporation Code.
wants and are entirely distinct from corporations organized under the
ted to the Local Water Utilities
The function of supervision or control over them is entrus
by the decree. (Marilao
Administration (LWUA), a government corporation established
Appell ate Court, 201 SCRA 437 [1991].)
Water Consumers’ Assoc. VS. Intermediate iption
ation by prescr
10The Roman Catholic Church has been recognized as a corpor of time. According
having acted as such and assume corporate powers for a long period
any other personality
to the Supreme Court, it “antedates by almost a thousand years
in Europe and existed 'when the Grecian eloquence still flourished in Antioch and when
ul asso-
idols were still worshipped in the temples of Mecca.... Persecuted as an unlawf
days of its existe nce up to the time of Galien o, who was the first of
ciation since the early
of the
the Roman emperors to admit it among the juridical entities protected by the laws
depended for such ex-
Empire, it existed until then by mercy and will of the faithful and
istence upon pious gifts and offerings. Since the latter half of the third century, and more
inaugurated an
particularly since the year 313, when Constantine, by the Edict of Milan, exerci
d upon the se of Sree
era of protection for the church, the latter gradually entere
rights as were required for the acquisition, preservation, and transmission of property
the same as any other juridical entity under laws of the Empire...” (Barlin vs. Ramirez ‘
)
7 Phil. 41 [1906].
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64 THE REVISED CORPORATION CODB OF THE PHILIPPINES Sec, 3
2) Corporation by estoppel or one which in reality ig

not a corporation, either de jure or de facto, because it ig
so defectively formed, but is considered a corporation
in relation to those only who, by reason of their acts of
admissions, are precluded from asserting that it is not a
corporation. This legal assumption is not good, however, as
against the State but may arise only for purposes of private
litigation.
Corporation by estoppel is another instance whereby a
corporation may exist without formal statutory authority. It
has no real existence in law as has. a de facto corporation but
is a mere fiction. (8 Fletcher, pp. 218-219; see Sec. 20.)
Important distinctions between public

and private corporations.
The most important division of corporations is into public and
private, for there are many principles or law which apply to the
former and not to the latter.
(1) The most important distinction is with respect to
governmental control. Public corporations, being mere
instrumentalities of the State, are subject to governmental visitation
and control, whereas the charter of a private corporation is a contract
between the State and the corporation or incorporators, which,
under the provision of the Constitution prohibiting laws impairing
the obligation of contracts, renders such corporations not subject to
visitation, control, or change by the State, except in the exercise of
the police power.
(2) Another distinction is that a public corporation may be
created without the consent of the locality to be affected, whereas
the consent of the incorporators is necessary to the creation of a
private corporation.
(3) The distinction is also important with respect to taxation,
to the question of liability for the torts or negligence of officers and
agents, and to various other questions, (14 C.J.
72-73.)
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Sec. 4 TITLE I. GENERAL PROVISIONS, =
Dual status of public corporations.

A public or municipal corporation possesses two (2) kinds of
power, governmental or public and proprietary or private, and in
while as to
exercising the former, it is a “municipal government,”
9-A Words and
the latter, it is a “corporate legal individual.” (see
Phrases 391.)
corporation engaged in the performance of
A public
nce of peace and
governmental or public functions (e.g., maintena s
ary function
order) as distinguished from corporate or propriet liable for
t statute, is not
(e.g., operation of a public market), absen
gful actions of its
damages occasioned by the negligent or wron
inguishing the first
officers, agents, or employees. The test for dist
, in determining
kind of power from the second, and consequently
s, is whether the act
liability or non-liability for torts of its agent
her it is for the special
performed is for the common good or whet
ibid., p. 390.)
benefit or profit of the corporate entity. (see
Laws or Charters.
Sec. 4. Corporations Created by Special
laws or charters shall
— Corporations created by. special
isions of the special
be governed primarily by the prov
or applicable to them,
law or charter creating them
of this Code, insofar as
supplemented by the provisions
they are applicable.
poration
Incorporation of a private cor
by a special act.
ate corporations by
Section 4 authorizes the creation of priv creating a
special act
special laws or charters. The enactment of limitation that
ion is subject to the constitutional
private corporat
por ati on shal l be own ed or con trolled by the government.
such cor 16.)
XII, Sec.
(Constitution of the Philippines, Art.
is obvious:
The reason for the restriction
ng of special privileges to
(1) It is chiefly to prevent the granti
right to obtain them
one body of men without giving all others the
in the same conditions; and
(2) Perhaps, it is partly to prevent brib ery and corruption of the
ons, p. 45.)
legislature, (Clark on Corporati
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66 THE REVISED CORPORATION CODE OF: THE PHILIPPINES Sec. 4
A special law creating a private corporation! which is neither

owned nor controlled by the government is void for being violative
of the constitutional provision. (see National Development Co. vs.
Phil. Veterans Bank, 192 SCRA 257 [1990].) .
Governing law.
(1) A corporation created by a special incorporation law or
charter is primarily governed by such law and suppletorily, by the
Revised Corporation Code “insofar as they are applicable,” either
because they are not inconsistent with, or are made applicable by,
the special law.'
(2) Under the Constitution (Art. IX, B-Sec. 2[1] thereof.), officers
and employees of government-owned or -controlled corporations
with original charters, i.e., created by special law, are placed under
the Civil Service, and thus, subject to Civil Service Law. Those
incorporated under the general incorporation law, the Corporation
Code, are governed by the Labor Code.
(3) A. government-owned or -controlled’ corporation may
be organized under the Revised Corporation Code and not
by special law. Therefore, it would be proper to increase its
capitalization by amending its articles of incorporation (see Sec.
15.) under the Revised Corporation Code instead of Congress
passing legislation to this effect. (SEC Opinion, July 10, 1997.)
Government as a stockholder
of a corporation.
(1) Jurisdiction of SEC. — The SEC has no jurisdiction over
corporation with original charter or created by special law. It follows
'Thus, it has been held that the Philippine National Bank, having a charter of its own
(R.A. No. 1300, as amended.), was not governed, asa rule, by
the Revised Corporation
Code. In view of Secs. 15, 16, and 30 of the charter, the provision of Sec. 74 of the Revised
Corporation Code with respect to the right of a stockholder to demand
an inspection
or examination of the books of the corporation does not apply even in
a supplemental
capacity to said bank. (Gonzales vs. Phil. National Bank, 122
SCRA 489 [1983].) The
Philippine National Red Cross is a government-owned and -control
led corporation with
a senor charter under R.A. No. 95, as amended. (Baluyot
vs. Holganza, 325 SCRA 248
See P.D. No. 2029 (Feb. 4, 1986) “defining governme
nt-owned or -controlled corpo-
rations and identifying their role in national development.”
a
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Sec. 5 { TITLEI GENERAL PROVISIONS, 67
that it has no power to interpret the law creating it. However,

the SEC can rule on the status of corporation as to whether it is a
government-owned or -controlled corporation belonging to this
type. It has jurisdiction to determine this issue. (see Phil. National
Construction Corporation vs. Pabion, 320 SCRA 188 [1999].)
(2) Rights, power, or privileges. — As a member of a corporation,
the government never exercises its sovereignty; it acts merely as a
corporator. (18 Am. Jur.2d.584.) And the mere fact that the government
is a majority stockholder of a corporation does not make it a public
corporation. As a private corporation, it has no greater rights,
powers, or privileges than any other corporation organized for the
same purpose under the Corporation Code. (National Coal Co. vs.
Collector of Internal Revenue, 46 Phil. 583 [1924].) By engaging in
a particular business, through the instrumentality of a corporation,
the government divests itself pro hac vice of its sovereign character,
as to render the corporation subject to the rules governing private
corporations. (Light Rail Transit Authority vs. Mendoza, 767 SCRA
624 [2015].)
Sec. 5. Corporators and Incorporators, Stockholders

a
and Members. — Corporators are those who compose
shareholde rs
corporation, whether as stockholders or
Cc ati s b i n
i
Incorporators are those stockholders or
corporation.
ion as
members mentioned in the articles of incorporat
ration and
originally forming and composing the corpo
_ who are signatories thereof.
Components of a corporation.
posing a corporation are:
The four (4) classes of persons com
corporation, whether
(1) Corporators or those who compose the
ators and
stockholders ormembers. Hence, the termincludesincorpor
ation
stockholders or members who become as such after incorpor
of the corporation;
OF those corporators (whether natural or
(2) Incorporators
of incorporation as
juridical persons) mentioned in the articles
originally forming and composing the corporation and who executed
the same
and signed the articles of incorporation and acknowledged
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before a notary public. (see Secs, 10, 13, 14.) So all incorporators are
corporators but a corporator is not necessarily an incorporator)
(3) Stockholders or the owners of shares of stock in a stock
corporation. They are the owners of the corporation. They are also
called shareholders, They are the corporators in a stock corporation.
Stockholders may be natural or juridical persons.
Under Section 3, a corporation, to be classified as a stock
corporation, (a) must have capital stock divided into shares, and
(b) must be “authorized to distribute to the holders of such shares
dividends or allotments of the surplus profits on the basis of the
shares held”; and
(4) Members or corporator of a corporation which has no capital
stocks. All incorporators in a stock corporation must own or at least
be a subscriber to at least one (1) share of the capital stock of such
corporation. (Sec. 10.)
Three other classes.

There are three (3) other classes of persons who play important
roles in the formation and organization of a corporation, namely:
(1) Promoters or persons who bring about or cause to bring
about the formation and organization of a corporation by bringing
together the incorporators of the persons interestedin the enterprise,
procuring subscriptions or capital for the corporation and setting
in motion the machinery which leads to the incorporation of the
corporation itself. Simply signing and verifying the articles of
incorporation and subscribing for stock in the proposed company is
said, however, not to make one a promoter thereof. (18 Am. Jur. 2d
647.)
‘The incorporators are the initial subscribers for stock. The principal function of
incorporators is to incorporate the corporation and to enable the
it to become a body politic
and corporate under the law, They are in charge of the
the organization period, While the status of a corporatoraffairs of the corporation during
cease to be a stockholder
is temporary because one may
or member, an incorporator will forever retain his status
such, notwithstanding that he has ceased to be 4 corporator. as
The articles of incorporation
cannot be amended by deleting his name or substituting it with
that of another who is not
an incorporator, Only natural persons can be incorpo
rators, (Sec, 10.)
An “incorporator” must be distinguished from a
“subscriber,” The latter agrees
to buy shares in the corporation, i.e., he is an investor
and particip ant in the corporate
venture. An incorporator may be a subscriber of shares.
bee] CamScanner
See
Ss kts 5
TH 1. GENERAL PROVISIONS,
- hen used with corporations, the term refers to persons who

/ } 7. : ‘
un ertake the formation of a corporation without their being

incorporators. They lay the groundwork for corporate existence;
_ 2) Subscribers or “persons who have agreed to take and pay for
original, unissued shares of a corporation formed or to be formed.”
(Ballantine on Corporations, p. 375; see Secs. 59, 60.) He becomes a
stockholder only from the time his subscription is accepted by the
corporation or the corporation’s offer is accepted by him. Technically,
a person is not a stockholder (or member) unless he is recorded as
such in the books of the corporation. (see Sec. 62.)
All incorporators (Supra.) are subscribers but a subscriber need
not be an incorporator; and
(3) Underwriter or “a person, usually an investment banker, who
(a) has agreed, alone or with others, to buy at stated terms an entire
guaranteed
issue of securities or a substantial part thereof; or (b) has
party
the sale of an issue by agreement to buy from the issuing
to use his
any unsold portion at a stated price; or (c) has agreed
or (d) has offered for
“pest efforts” to market all or part of an issue;
sale stock he has purchased from a controlling stockholder.” (E.L.
under the Securities
Kohler, op. cit., p. 480; for definition of the term
], and under the
Regulation Code [R.A. No. 8799], see Sec. 3[1.15
Sec. [dd].)
Investment Company Act [R.A. No. 2629], see
ation.
Agreement or contract with a corpor
ntial to the
(1) Between corporators and corporation. — It is esse
be an agreement
existence of a private corporation that there shall ual
ting a contract
between the corporators and the corporation crea
relation between them. There can be no such thing as a corporation
cannot become a member
aggregate without members, and a person
tract.
except by his own agreement or con
ation. — Some writers and
(2) Between each member and corpor
t between the
some cases say that there must be an agreemen
between them, but this is
members creating a contractual relation.
inaccurate,
There is ordinarily no contract between individual members
een each
in the formation of a corporation. T he contract is betw
individual member and the whole body of members in their
that is, between
collective capacity, represented by the corporation,
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each member and the corporation. A subscription for shares, for

instance, in the organization of a corporation is not a contract
between the subscriber and the other subscribers individually, but it
is a contract between each subscriber and the corporate body. (Clark
on Corporations, Sec. 26.)
Sec. 6. Classification of shares. — The classification of
shares, their corresponding rights, privilege, or restrictions
and their stated par value, if any, must be indicated in the
articles of incorporation. Each share shall be equal in all
respects to every other share, except otherwise in the
articles of incorporation and in the certificate of stock. (SA)
The shares in stock corporations may be divided
into classes or series of shares, or both. No share may
be deprived of voting rights except those classified and
issued as “preferred” or “redeemable” shares, unless
otherwise provided in this Code: Provided, That there shall
always be a class or series of shares with complete voting
rights. (A)
Holders of nonvoting shares shall nevertheless be
entitled to vote on the following matters:
(a) Amendment of the articles of incorporation;
(b) Adoption and amendment of bylaws;
(c) Sale, lease, exchange, mortgage, pledge, or other
disposition of all or substantially all of the corporate
property;
(d) Incurring, creating, or increasing bonded
indebtedness;
(e) Increase or decrease of authorized capital stock;
(f) Merger or consolidation of the corporation with
another corporation or other corporation;
(g) Investment of corporate funds in another
corporation or business in accordance with this Code; and
(h) Dissolution of the corporation.
Except as provided in the immediately preceding
paragraph, the vote required under this Code to approve
a particular corporate act shall be deemed to refer only to
stocks with voting rights.
ad
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71
See. 6 TITLE 1, GENERAL PROVISIONS,
That banks, trust, insurance and

a@_par value: Provided,
public utilities, building and loan
preneed companies,
associations,
ar value shares of
not shall not be permitted to issue no-p
stock.
a corporation may
Preferred shares of stock issued by
dividengs i
be given preference in the distribution of
of corporate assets in case of liquidation,
distribution
the Provided, That preferred shares
or such other preferences:
The board of
of stock may be issued only with a par value.
of incorporation,
directors, where authorized in thea rticles
of preferred shares of
may fix the terms and conditions
ed, further, That such
stock or any series thereof: Provid
effective upon filing of
terms and conditions shall be
ri ties and Exchange
a certificate thereof with the Secu
mmission.”
Commission, hereinafter referred to as the “Co
hout par value shall
Shares of capital stock issued wit
essable and the holder of
be deemed fully paid and nonass
the corporation or to its
such shares shall not be liable to
vided, That no-par value
creditors in respect thereto: Pro least Five
tion of at
shares must be issued for a considera
her, That the entire
pesos (P5.00) pe r share: Provided, furt
corporation for its no-par
consideration received by the
capital and shall not be
value shares shall be treated as
as dividends.
available for distribution
sify its shares for the
A corporati on may further clas
lianc e with constitutional or
purpose of ensuring comp
legal requirements.
Power to classify shares.

may be divided into
(1) The shares in stock corporations
classification of shares, their
classes or series of shares, or both. The stated
corresponding hts, privileges or restrictions and their
rig
of incorporation not
value, if any must be stated in the articles
merely in the bylaws. (Title V.)
or the provision of its articles
(2) Unless restricted by the law has unrestricted
of incorporation (see Secs. 13, 14.), a corporation
prospects and
freedom to issue such classes or series of shares as the
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- THE REVISED CORPORATION CODE OP THE PHILIPPINES Sec, 6
needs of its business may require to attract investors, There shall

always be a class or series of shares with complete voting rights. A
“series” refers to a subdivision of a class of shares.
(3) The primary classification of shares is common and
preferred, each of which may be divided into other classes. (Infra.)
Thus, shares of stock may differ regarding voting rights, dividend
rights, and, in case of liquidation, rights to corporate assets.
(4) A corporation may issue only one class or kind of
share.
There must be at least one class of stock, and
under Section 6 (par.
2.), a corporation must have at least one class of stock
with voting
rights.
(5) No share may be deprived of voting rights exce
pt those
classified and issued as “preferred” or “redeemable”
shares, unless
othe rwise provided in the Revised Corporation Code
.
When classification of shares may be made
.
(1) By the incorporators. — The classes and
number of shares
which a corporation shall issue are not first
determined by the
incorporator s as stated in the articles of incorporation filed
SEG with the
(2) By the board of directors and the shar
eholders. — After the
corporation comes into existence, they
may be alte
red by the board
of directors and the stockholders by ame
nding the articles of
incorporation pursuant to Section 15." If the
amendment changes or
restricts the rights of any class of shares,
or authorizes preference in
any respect superior to those of outstandi
ng shares of arly class, any
stockholder shal l have the right to dissent and demand pay
the fair value of his shares, (Sec. 80.) ment of
Classification to comply with consti

tutional
or legal requirements,
(1) Minimum percentage of capital stock ownership
of Filipino
citizens. — A corporation may further classify its
shares to insure
‘Where no difference in “rights, privileges or

restrictions” is provided for as
requirement by Section 6, as where “the only difference between the series
B-1 Series shall be initially offered to the public and sold is that only
through the exchanges while
B-2 Series shall be similarly offered and sold at a later date as the
board of directors may
determine,” the classification should not be allowed. (SEC Opinion, March 15, 1989.)
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See. 6 TITLE 1. GENERAL PROVISIONS, 73
DELINITIONS AND CLASSIFICATIONS
compliance with constitutional or legal requirements (Sec. 6, par. 8.),

of capital
such as those which prescribe the minimum percentage
engaged in any
stock ownership of Filipino citizens in corporation
in corporations
business or activity reserved for stockholdings
declared by law to be vested with public interest.
shares of stock
Thus, the articles of incorporation may classify shares shall
Class “A”
into Class “A” and Class “B” and provide that
only, while Class “B” shares,
be held exclusively by Filipino citizens
In such case, aliens or
by either Filipino citizens or foreigners.’
shares. The articles, however,
foreign corporations cannot own “A”
es (unless foreign ownership
may permit aliens to buy “A” shar
requirements will be violated).
toring purpose. —
(2) Reason of expediency primarily for moni
expediency, primarily
Corporations classify shares for reasons for
one class of shares may
for monitoring. The par value or number of . 21,
Opinion No. 36-06,3 Sept
be more than the others. (SEC-OGC
shares of stocks into Class “A”
2006.) The classification of common orations
and Class “B” shares have never been obligatory. Some corp
which engage in business where there is a cap on foreign ownership
classify their shares with the number of B shares corresponding to
the maximum percentage of foreign ownership allowed so that they
.
can keep track of their foreign shareholders
. — The Constitution
(3) Computation of foreign ownership limit
and preferred shares,
does not distinguish between common
is dependent on foreign investments,

2with the general perception that the country
by creating a bigger demand for the shares
many local investors invest in ”B” shares, there hological advantage and a
loped a psyc
which are limited. The lopsided market has deve of “A” shares. The resulting premium
nse
dual pricing scheme for “B” shares at the expe gn fund managers who questioned the
for “B” shares has been under attac k from forei
s which are, with exemption on
wisdom of paying for a higher price than the “A” share and yield. In many cases, the
foreign ownership , the same security with the same risks of “B” shares in
strong performance
local investor are the ones maintaining the relative
the absence of foreign investors.
will invest more in.a particular issue not
Without the classification, local investors
of good potentials and foreigners can buy
because foreigners are investing but because limit prescribed by the Constitution and
ty
more shares if they do not exceed the equi sure that the limits on foreign
existing laws, This will require strict monitoring to make
ownership will always be observed, to remain classified as “A” and
The policy of SEC is to allow shares of listed firms c to declassify their shares.
s while requiring firms still planning to go publi
”B” share
ppines Annotated, p. 66 [2002].
3Citing De Leon, The Corporation Code of the Phili
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as the term “capital,” as used in Section 11, Article. XII thereof,

in the computation of the foreign ownership limit for domestic
corporations. Section 173 defines “outstanding capital stock” as
referring to “the total shares of stock issued xxx.” The Supreme
Court, however, has ruled that,the 40% limit refers only to common
stock entitled to vote directors. (Gamboa vs. Teves, 652 SCRA 690
[2011]; 682 SCRA 397 [2012].)
Shares presumed to be equal in all respect.

The law provides that except as otherwise provided in the article
of incorporation and in the certificate or stock, “each share shall be
equal in all respects to every other share.” (Sec. 6, par. 1.) This is
the doctrine of equality of shares. It means that absent any provision
in the articles of incorporation and in the certificate of stock to the
contrary, all stocks, regardless of their class nomenclature, enjoy
the same rights and privileges and subject to the same liabilities.
(1) Authority of the board of directors to classify shares. — The
board of directors has no authority to classify shares of stock
where the articles of incorporations are silent on the matter. Hence,
a corporation cannot, without express authority in the articles of
incorporation, and without amendment thereof, issue preferred
shares with superior rights and privileges than other shares.
Subscription contacts covering such shares are void. (see Art.
1409[1,3].)
(2) Consent of stockholders to change of terms and preference of shares.
— The articles of incorporation or the charter of a corporation being
considered as a contract between the corporation and stockholde
rs
(see Sec. 15.), the corporation is under obligation to obser
ve
the provisions thereof and it cannot without the conse
nt of the
stockholders, change the terms and preferences of classe
s of shares
of stocks provided therein. Thus, any special agreement
between a
particular subscriber and the corporation by which
he is allowed
_ ‘SEC
‘SE -OGC Opinion No. . 10-09, , citin g De Leon,
The Corporation Code of the
Philippines Annotated, pp. 67-68 [2002]. In the absen
ce of special provisions, the holders
of preferred stock ina corporation are in precisely the
same
the corporation itself and with respect to the creditors of the position, both with respect to
corporation, as the holders of
to the extent guaranteed or agagreed upon, before
y any y divid
divi end can be paid
i to the holders
of common stock. (SEC Opinion, July 16, 1996, citing Fletch
er Cyc. Cones Sec. 5290.)
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See. 6 TITLE 1, GENERAL PROVISIONS, 75
to subscribe for shares upon different terms other subscribers is

wor (SEC Opinion, April 18, 1985, citing Ballantine, Rev. ed.,
p. 459.
(3) Right to vote of all classes of shares. — If one class of shares has
the right to vote, all other classes are presumed to have the same
voting power. Stockholders have one vote for each share’ held by
them. Section 6 (par. 1.) is construed to mean that unless denied in
the articles of incorporation, all shares regardless of class (e.g., with
par value and without par value, common and preferred) enjoy all
the rights of a stockholder. Hence, said provision cannot be invoked
for a proposed amendment of the articles of incorporation whereby
Class “A” shares shall be entitled to, say, four votes per share, and
Class “B” shares, to one vote per share. (SEC Opinion, Aug. 11,
1988.)
But the right to vote may be denied by implication as where
the articles of incorporation provide that “only holders of common
stock shall have the right to vote.”
(4) Authority of board of directors to fix terms and conditions of
preferred shares. — The terms and conditions of preferred shares of
stock may be fixed by the board of directors only when authorized
in the articles of incorporation. (Sec. 6, par. 6.) In such case, the
preference enjoyed by the preferred stock will not appear in the
articles of incorporation.
Capital stock and capital explained.

(1) Capital stock is the amount fixed in the articles of
incorporation to be subscribed and paid-in or agreed to be paid-in
by the stockholders of a corporation, in money, property, services,
or other means at the organization of the corporation or afterwards
and upon which it is to conduct its business (see 2 Fletcher, p.
12.), such contribution being made either directly through stock
subscription (see Sec. 59.) or indirectly through the declaration of
stock dividends.’ (18 Am. Jur. 2d 735.)
"The capital stock is the money value assigned to a corporation’s issued shares,
constituting generally the legal capital (Infra.) of the corporation. (E.L. Kohler, op. cit.,
Pp. 84.) It represents the e quity of the stockholders in the corporate assets. It limits
© maximum amount or nu mber of each class ofc shares that may be issued by the
corporation without formal amendment of the articles of incorporation. (see Sec. 15.) It
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(a) Authorized capital stock refers to the amount of

capital stock as specified in the articles of incorporation. It is
synonymous with capital stock where the shares of the
corporation have par value. (see Secs. 13[h], 14[seventh].) If
the shares of stock have no-par value, the corporation has no
authorized capital stock, but it has capital stock the amount of
which is not specified in the articles of incorporation as it cannot
be determined until all the shares have been issued. (Ibid.) In
this case, the two (2) terms are not synonymous.
Additional shares may not be issued unless the articles of
incorporation are amended by vote of the stockholders. (see
Secs. 15, 37.) But unissued authorized shares may be issued at a
later date without amendment of the articles of incorporation or
approval of the stockholders.
(b) Subscribed capital stock is the amount of the capital stock
subscribed, whether fully paid or not. It connotes an original
subscription contract for the acquisition by a subscriber of
unissued shares in a corporation (see Secs. 59, 60.) and would,
therefore, preclude the acquisition of shares by reason of
subsequent transfer from a stockholder or resale of treasury
shares. (Sec. 9.)
(c) Outstanding Corporation capital stock is the portion of
the capital stock issued and held by persons other than the
corporation itself. The Revised Corporation Code defines
the term as “the total shares of stock issued under binding
subscription contracts to subscribers or stockholders, whether
or not fully or partially paid, except treasury shares.” (Sec. 173.)
It is thus broader than “subscribed capital stock.”
The terms “subscribed capital stock” and “issued” or
“outstanding” capital stock are used synonymously since
subscribed capital stock, as distinguished from the certificate
of stock, can be issued even if not fully paid. But while every
subscribed share (assuming there is a binding subscription
agreement) is “outstanding,” an issued share may not have the
status of outstanding shares. This is true in the case of treasury
shares. (Sec. 9.)
remains the same even though the actual value of the shares as determined by the assets
of the corporations is diminished or increased, unaffected by profits and losses.
A
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Sec. 6 i TITLE 1. GENERAL PROVISIONS, B
n of the subscribed or
(d) Paid-up capital stock is that portio The term actual
paid.
outstanding capital stock that is actually amount of the capital
capitalstock is also used to refer to the
stock actually subscribed and paid for.
Paid-up capital differs from paid-in capital. The former refers
is the
to shares actually subscribed and paid while the latter
sum of the amount paid for shares of stocks issued, plus the
paid over
additional paid-in capital, or the excess or premium
the par value of such shares. (SEC-OGC Opinion No. 40-19,
Sept. 16, 2019.)
(e) Unissued capital stock is that portion of the capital
drawn no
stock not issued or subscribed. It does not vote and
dividends.
property or
(2) Capital is used broadly to indicate the entire
invested by the
assets of the corporation. It includes the amount
less losses and
stockholders plus the undistributed earnings
expenses.
that portion of the
(a) In the strict sense, the term refers to
sideration for the
net assets paid by the stockholders as con
the prosecution
shares issued to them, which is utilized for
es all balances or
of the business of the corporation. It includ
of stock sold by it
installments due the corporation for shares
res.
and all unpaid subscription for sha
amount that
(b) In the case of stock dividends, it is the
s profit account to
the corporation transfers from its surplu
nt that can loosely be
its capital account. It is the same amou
59.) for the payment of the
termed as the “trust fund” (see Sec. y look for
creditors ma
debts of the corporation, to which the vs.
ations Commission
satisfaction. (National Telecommunic .)
[1999]
Court of Appeals, 311 SCRA 508
sly with the words
(c) The term is also used synonymou
scribed and paid-in
“capital stock,” as meaning the amount sub
conduct its operation’ (11
and upon which the corporation is to
subscribed and paid by the
The term “capital” denotes the sum total of the shares
of their nomenclature. It would, therefore,
stockholders or agreed to be paid irrespective of the common shares but not more than
be legal for foreigners to own more than 407 include both
al lim it of the outstandin g capital stock which would 8.) The Supreme
the 40% constitution sha res . (SE C Opi nio n, Feb . 15, 198
common and non-voting preferred
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Fletcher Cyc. Corp., p. 15 [1986 ed.].) and it is immaterial how

the stock is classified, whether as common or preferred.
(d) Legal capital is the amount equal to the aggregate par
value and/or issued value of the outstanding capital stock.
When par value shares are issued above par, the premium or
excess is not to be considered as part of the legal capital. (see Sec.
42.) In the case of no-par value shares, the entire consideration
received forms part of legal capital and shall not be available for
distribution as dividends. (see Sec. 6, par. 7.)
Under varying State laws, the term “stated capital” is used
instead of legal capital to refer to “the portion of the amount
contributed by purchasers of no-par value stock that is credited
to the capital account.” (E.L. Kohler, op. cit., 446.)
ILLUSTRATION:
Suppose the articles of incorporation of corporation X
provides that the authorized capital stock of the corporation
is P1,000,000.00 divided into 10,000 shares of the par value of
P100.00 per share. At its incorporation, only P250,000.00 of
the authorized capital stock was subscribed and 25% of the
subscription was paid; thus, only P62,500.00 was paid to the
treasurer of the corporation.
Therefore, the authorized capital stock of corporation X is
P1,000,000.00, the subscribed, outstanding, or issued capital
stock is P250,000.00, the paid-up capital stock is P62,500.00,
and the unissued capital stock is P750,000.00. The legal capital
is also P250,000.00.
Capital stock and capital distinguished.

(1) Capital is the actual corporate property. It is, therefore, a
concrete thing. Capital stock is an amount. It is, therefore, something
abstract.
(2) Capital fluctuates or varies from day, to day according
as there are profits or losses or appreciation or depreciation of
corporate assets. Capital stock is an amount fixed in the articles of
Court has ruled in Gamboa vs. Teves (652 SCRA 690 [2011]; 682 SCRA 397 [2012].), that the
term “capital” in Sec. 11, Art. XII of the Constitution (foreign equity in public utilities)
refers only to shares of stock entitled to vote in the election of directors. (see Sec. 140.)
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Sec. 6 TITLE 1. GENERAL PROVISIONS, 79
incorporation (where shares are with par value) and is unaffected

by profits and losses. Thus, capital may be greater or lesser than the
amount of the capital stock.
(3) It is said that capital belongs to the corporation and capital
stock when issued belongs to the stockholders, and that capital
may either be real or personal property but capital stock is always
personal. (18 Am. Jur. 2d 736.)
The term “capital,” however, is frequently used loosely in the
sense of capital stock.
Capital stock and legal capital

distinguished.
capital stock, legal capital is merely an amount and
Like
increased or
remains unchanged except as outstanding shares are
stock limits the
reduced in number or amount. But while capital
issued without
maximum amount or number of shares that may be
of the articles of incorporation (see Sec. 37.),
formal amendment
corporate assets
legal capital sets the minimum amount of the
not be lawfully
which for the protection of corporate creditors, may
distributed to stockholders.
Stock or share of stock defined.

Stock or share of stock is one of the units into whic
h the capital
which the owner
stock is divided. It re presents the interest or right
|
has —
\
he takes part
(1) in the management of the corporation in which
permitted for that
through his right to vote’ (if voting rights are
n);
class of stock by the articles of incorporatio
if segregated in the
(2) in a portion of the corporate earnings,
form of dividends; and
prop erty and
(3) upon its dissolution and winding up, in thet
men of corporate
assets of the corporation remai ning after the pay
, [1971 ed:].)
debts and liabilities to creditors. (see 11 Fletcher p. 18
consists primarily of their privilege to vote

7The stockholders’ right of management
s. (Secs. 23, 27.)
in the election and removal of director
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Capital stock and share of stock

distinguished.
As distinguished from capital stock, the term “stock” or “share
of stock” is commonly used in a distributive sense to refer to the
stock in the hands of the stockholders and, therefore, belongs to
them. On the other hand, the former is used in a collective sense to
signify the whole body of shares of stock in the corporation. (Ibid.)
Nature of share of stock.

(1) The ownership of share of stock confers no immediate legal
right or title to any of the property of the corporation. Each share
merely represents a distinct undivided share or interest in the common
property of the corporation. (18 Am. Jur. 2d 737.)
Such interest has been described as “indirect, contingent,
remote, conjectural, consequential, and collateral. It is purely
inchoate, or a mere expectancy of a right in the management of the
corporation and to share in the profits thereof and in the properties
and assets thereof on dissolution, after payment of corporate debts
and obligations.” Hence, stockholders of such are not entitled to
intervene in a litigation involving corporate property under Section
2, Rule 12 of the Rules of Court. (Saw vs. Court of Appeals, 195
SCRA 740 [1991].)
(2) Shares of stock constitute property distinct from the capital
or tangible property of the corporation and belong to the different
stockholders who enjoy the attributes of ownership which under
the Civil Code, include “the right to enjoy and dispose of a thing
without other limitations than those established by law.”
(Art. 428
thereof.)
Incorporeal in nature, the shares are personal property® (see Sec.
62.) of the stockholder (except treasury stock which belongs to the
corporation; see Sec. 9.) and this is true even where the proper
ty
of the corporation consists wholly or chiefly of real estate. This
“Art. 417. The following are also considered as personal proper

ty:...
stock of agricultural, commercial, and industrial entities, although they (2) Shares of
may have real
estate. (Civil Code)
Art, 2005. Incorporeal rights, evidenced by negotiable instruments, bills of lading,
shares of stock, bonds, warehouse receipts and similar documents may also be
pledged.
The instrument proving the right pledged shall be delivered to the
creditor, and if
negotiable, must be indorsed. (Civil Code)
>
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fee. 6 THLE) CPNPRAT PROVIGIONS, Al
DEPINTTIONS ANTS CLAGAIFIC ATIONS
necessarily follows from the fact that the property of a corporation

does not belong, in law, to the stockholders but to the corporation
as a distinct legal entity or artificial person. (Stockholders of F.
Guanzon & Sons, Ine. vs. Register of Deeds, 6 SCRA 373 [1962].)
(3) They are in the nature of choses in action but are not such
in a strict sense. They do not constitute an indebtedness of the
corporation to the shareholder (18 Am. Jur, 2d 738.) and are,
therefore, not credits as to make the stockholder a creditor of the
corporation. (Garcia vs. Lim Chu Sing, 59 Phil. 562 [1936].) Hence,
no action can be maintained against the corporation for the return
of the contributions of the shareholders as long as the corporation
needs them and is not under dissolution. (see Sec. 63, as to nature of
relation of stockholder to the corporation.)
(4) A share of stock only typifies a proportionate or aliquot part
of the corporation's property, or the right to share in its proceeds to
that extent when distributed according to law. It does not represent
property or a corporation. The corporation as a juridical person,
distinct from the members composing it, has property of its own
which consists chiefly of real estate.
As noted, a holder of shares is in no legal sense the owner of
any part of the capital of the corporation; nor is he entitled to the
possession of any define portion of its property or assets, nor a co-
owner of the corporate property (see Stockholders of F. Guanzon
& Sons, Inc. vs. Register of Deeds, supra; Boyer-Roxas vs. Court of
Appeals, 211 SCRA 470 [1992].), his interest in the corporate property
being equitable or beneficial in nature.
Certificate of stock defined.

Certificate of stock is a written acknowledgment by the
corporation of the interest, right, and participation of a person in
the management, profits, and assets of a corporation,
It is a formal written evidence of the holder's ownership of one
or more shares and is a convenient instrument for transferring title.
(see Sec, 62.)
Share of stock and certificate of stock

distinguished.
(1) Share of stock is incorporeal or intangible property, while
certificate of stock is tangible property;
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(2) Share of stock represents the right or interest of a personina

corporation, while certificate of stock is the written evidence of that
right or interest;
(3) Share of stock may be issued even if the subscription is not
paid (Sec. 173.), except in no-par shares. (Sec. 6, par. 6.) As a rule, a
certificate of stock may not be issued unless the subscription is fully
paid (Sec. 63.); and
(4) The situs of share of stock is deemed to be the State where

the corporation has its domicile which is ordinarily the State under
whose laws it was created, while a certificate of stock may have a
situs at the place where it is located or at the domicile of the owner,
even though the corporation is domiciled elsewhere. (2 Fletcher,
pp. 62-63, 95.) The situs of share of stock retains that of the issuing
corporation, even though the certificate is without the State and is
owned by a non-resident. (Ibid., p. 62.)
The possession of a certificate of stock is not essential to
ownership of stock because the right to shares of stock may exist
independently of the certificate.
Situs of shares of stock for certain

purposes.
(1) For purposes of execution, attachment, and garnishment. — The
situs of shares of stock is the domicile or residence of the corporation
(Chua Guan vs. Samahang Magsasaka, Inc., 62 Phil. 472 [1935].),
which is the place where the principal office of the corporation is
located. (see Sec. 13[c].)
“Stocks or shares, or an interest in stocks or shares of any
corporation or company” shall be attached by the officer executing
the order, “by leaving with the president or managing agent thereof,
a copy of the order and a notice stating that the stock or interest
of the party against whom the attachment is issued, is attached in
pursuance of such order.” (Rules of Court, Rule 57, Sec. 7[d].)
(2) For purposes of registration of chattel mortgages on shares of stock.
— The situs is the province or city in which the corporation has
its principal office or place of business. (Chua Guan vs. Samahang
Magsasaka, Inc., supra.)
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Sea. 6 TITLE I, GENERAL PROVISIONS, 83
(3) For purposes of property taxation. — The rule is that the situs
of intangible property is at the domicile or residence of the owner.
_ (a) The above principle, however, is not controlling when
it is inconsistent with express provisions of statute, or when
justice does not demand that it should be, as where the property
has in fact a situs elsewhere. (see 16 Am. Jur. 474-475.) Thus,
shares of stock in a domestic corporation of a non-resident
foreigner are taxable in the Philippines. The reason is that the
shares receive the protection and benefit of our law. (Wells Fargo
Bank and Union Trust Co. vs. Coll. of Internal Revenue, 70 Phil.
325 [1940].)
(b) Under the National Internal Revenue Code (R.A. No.
8424, as amended.), for purposes of the estate tax, the gross
estate of a resident decedent, whether citizen or alien, or a
citizen decedent, whether resident or non-resident, includes his
intangible personal property wherever situated. (see Sec. 104
thereof.)
Classes of shares in general.

Shares of stock may be:
(1) Par value or no-par value;
(2) Voting or non-voting;
(3) Common or preferred, and preferred shares may be voting,
convertible, or redeemable. (Infra.) They may be:
(a) Preferred as to assets in case of liquidation or preferred
as to dividends and the latter may be:
1) Cumulative or non-cumulative; or
2) Participating or non-participating;
(4) Promotion share;
(5) Share in escrow;
(6) Convertible share;
(7) Founders’ share (see Sec. 7.);
(8) Redeemable share (see Sec. 8.); and
(9) Treasury share. (see Sec. 9.)
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A corporation may issue such classes or series of shares as the

prospects and needs of its business may require. It may classify its
shares to insure compliance with constitutional legal requirements.
(Sec. 6, last par.)
Par value share.
Par value share is one with specific money value fixed in the
articles of incorporation and appearing in the certificate of stock.
(1) The primary purpose of par value is to fix the minimum
subscription or issue price of the shares, thus assuring creditors that
the corporation would receive a minimum amount for its stock. (see
Sec. 61.)
(2) A corporation may issue shares with different par values.
Shares issued less than par value are referred to a watered stock. (see
Sec. 64.)
(3) The par value of a stock remains the same regardless of the
market value or book value (Infra.) of the stock, unless there is a
stock split. (see annotation under Sec. 42.) It is not usually the price
at which investors buy or sell the stock.
No-par value share.

No-par value share is one with no stated value appearing on the
face of the certificate of stock. It is a stock which does not state how
much money it represents.
(1) A no-par value share has, therefore, no-par value but it
has always an “issued value,” i.e., the consideration fixed by the
corporation for its issuance. (see Sec. 61, last par.)
(2) A no-par value share does not purport to represent any
stated proportionate interest in the capital stock measured by value,
but only an aliquot part of the whole number of such shares of the
issuing corporation.
(3) Acorporation may issue no-par value only, or with par value
shares. No-par value stockholders have the same rights as holders
of par value stock.
(4) The capital stock of a corporation issuing only no-par shares
is not set forth by a stated amount of money, but instead is expressed
to be divided into a stated number of shares, such as 1,000 shares.
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Sec. 6 TITLE Il, GENERAL PROVISIONS, 85
This indicates that a shareholder of 100 shares is an aliquot sharer in

the assets of the corporation, no matter what value they may have, to
the extent of 100/1,000 or 1/10. Thus, by removing the par value of
shares, the attention of persons interested in the financial condition
of the corporation is focused upon the value of assets and the amount
of its debts. (Delpher Trades Corp. vs. Intermediate Appellate
Court, 157 SCRA 349 [1988], citing Agbayani, Commentaries and
Jurisprudence on the Commercial Laws of the Phils., Vol. III, 1980
Ed., p. 107.)
Voting share.
Voting share is share with the right to vote.
(1) Under SEC regulations (citing Section 23 of the Revised
Corporation Code, previously Section 24):
(a) One share is entitled to one vote. Voting will always
be based on number of shares and not on the number of
stockholders present in the stockholders’ meeting.
(b) Each common share shall be equal in all respects to
every other common share. Corporations are prohibited from
issuing multiple voting and non-voting common shares nor
can they limit the maximum number of votes per stockholder
irrespective of the number of shares he holds. (SEC Memo. Circ.
No. 4, series of 2004.)
However, it should be noted that Section 6 is broad enough
to authorize the creation of shares with multiple voting rights.
(2) Only shares classified and issued as “preferred” or
“redeemable” may be deprived of voting rights. Article 6 [par. 1.]
expressly prohibits the depreciation of voting rights except only as
to said shares. (Castillo vs. Balinghasay, 440 SCRA 442 [2004].) But
founders’ shares may be given the exclusive right to vote and be
voted for in the election of directors for a limited period (Sec. 7.)
in which case voting common stocks will have no right to vote for
directors.
(3) Under the Revised Corporation Code, whenever a vote
is necessary to approve a particular corporate act, such vote refers
only to stocks with voting rights except in certain cases when even
non-voting shares may also vote. (Sec. 6, pars. 3 and 4.) The rule is
not “one stockholder, one vote” but “one share, one vote” because
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representation in a corporation is commensurate to extent of

ownership. (see SEC Memo. Circ. No. 04-04, March 17, 2004.)
Non-voting share.
Non-voting share is share without right to vote.
(1) If stock is originally issued as voting stock, it may not
thereafter be deprived of the right to vote without the consent of the
holder.
(2) Under the Revised Corporation Code, no share may be
deprived of voting rights except those classified and issued as
“preferred” or “redeemable” shares, unless otherwise provided in
the Code. (Sec. 6, par. 2.) The proviso refers to fundamental matters
enumerated in Section 6 (par. 3[a-h].) on which holders of non-
voting shares in stock corporations shall nevertheless be entitled to
vote. Note that the enumeration in Section 6 does not include the
election of directors or trustees (see Sec. 24.) as one of the matters on
which non-voting shares may vote.
In nonstock corporations, Section 88 governs the right of the
members to vote on corporate matters.
(3) Where non-voting shares are provided for, the Revised
Corporation Code requires that there shall always be a class or
series of shares which have complete voting rights. (Sec. 6, par. 2.)
(4) Under Section 6 (par. 2.), only preferred or redeemable
shares may be denied the right to vote. The issuance of common
stock with a feature that voting rights thereof shall be exercised by
a trustee violates the rule that common shares cannot be deprived
of voting rights. The automatic assignment of voting rights is an
indirect violation of Section 6. (SEC Opinion, July 15, 1997.)
(5) In case any amendment of the articles of incorporation has
the effect of changing or restricting the rights of any stockholder, the
latter shall have the right to dissent and demand payment of the fair
value of his shares. (Sec. 80[1].) |
Common share.
; Common share of stock entitles the holder thereof to a pro rata

division of the profits, if there are any, and in its assets upo”
dissolution, with no preference or advantage in that respect over
ul
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ter f TITLE 1) GENERAL PROVISIONS a?
DEFINTTIONS ANT) CLASSIFICATIONS
other stockholders ot clase of stockholders but equally with all other

atackholders except preferred stockholders.
(1) It is so-called because it is the basis class of stock which
private corporations generally issue (hence, the name) or because its
holder stands upon an equal footing, without extraordinary rights
or privileges.
(2) Common shares have complete voting rights. They cannot
be deprived of said rights except as provided by law.
(3) Common stockholders are the residual owners of the
corporation. They get only the assets left over in case of liquidation
after all other securities holders are paid.
(4) Because of restrictions upon other classes of stock with
respect to voting rights, the common stock normally has preference
in the matter of management. (see 18 Am. Jur. 2d 741.)
(5) The simplest corporate structure has only one kind of stock
— all common. When only a single class of stock is issued, then all
shares are alike and all issues are common stock. A corporation may
issue more than one class of common stock, being designated “Class
A,” “Class B,” ete.
Preferred share.
Preferred share of stock is one with a stated par value which
entitles the holder thereof to certain preferences over the holders of
common stock.’
(1) Under the Revised Corporation Code, preferred shares

of stock may be issued only with a stated par value. (Sec. 5, par.
2.) More than one class of preferred shares may be issued usually
designated “first preferred,” “second preferred,” etc.
(2) The preferences are designated toinduce persons to subscribe
for shares of a corporation. They may consist in the payment of
dividends or the distribution of the assets of a corporation in case
of its dissolution ahead of the common stockholders, or such other
preferences as may be stated in the articles of incorporation which
citing De Leon, The

"Republic Planters Bank vs. Agana, Jr, 269 SCRA 1 (1997),
Corporation Code of the Philippines Annotated, p. 62 [1989 ed.].
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88 THE REVISED CORPORATION CODE OF THB PHILIPPINES Sec. 6
are not violative of the provisions of the Revised Corporation Code.

(Sec. 6, par. 6.)
As already stated, each share shall be in all respects equal to
every other share except as otherwise provided in the articles of
incorporation and stated in the certificate of stock. (Ibid., par. 1.)
Thus, unless otherwise so provided, preferred stocks are presumed
to be voting.
(3) The term guaranteed stock is sometimes used as synonymous
with preferred stock on which the payment of dividend is
guaranteed" and a distinction is sometimes drawn to the effect that
aranteed stock is entitled to arrears in dividends, while ordinary
preferred stock is not. (18 C.J.S. 650.)
(4) Interest-bearing stock on which the corporation agrees
absolutely to pay interest before dividends are paid to common
stockholders is legal only when construed as requiring payment of
interest as dividends from net earnings or surplus only." (see Sec.
43.) Such stock is, in effect, preferred stock, except perhaps that the
discretion of board of directors to use profits for other corporate
purposes may be more limited.
Common and preferred shares are the two main classes or forms
of stock. Holders of preferred shares do not lose the voting rights
in all matters affecting the corporation. Section 6 (par. 6.) provides
the cases when non-voting shares like preferred shares are granted
voting rights.
Promotion shares.
Promotion shares are such shares as are issued to promoters, or

those in some way interested in the company, for incorporating the
company, or for services rendered in launching or promoting the
welfare of the company, such as advancing the fees for incorporating,
advertising, attorney’s fees, surveying, etc. (11 Fletcher, p. 48;
Enright vs. Hekscher, 240 F. 863.)
They may mean such shares as are issued to those who may
originally own the mining or valuable rights connected therewith,
The guaranty merely mean that the holders are entitled to specified dividends if
there are profits out of which dividends may be paid. (see Sec. 43.)
Republic Planters Bank vs, Agana, Sr, supra, citing De Leon, supra, p. 62, note 9.
y
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Sec. 6 TITLB I, GENERAL PROVISIONS, 89
in consideration of their deeding the same to the mining company

when the company is incorporated. (Ibid.)
Share in escrow.
Share in escrow is share subject to an agreement by which the
share is deposited by the grantor or his agent with a third person
to be kept by the depository until the performance of a certain
condition (usually the payment of the subscription price) of the
happening of a certain event contained in the agreement. (Cannon
v. Handley, 12 P. 315.)
(1) The escrow deposit makes the depository a trustee under an
express trust. (see Arts. 1440, 1441, Civil Code.)
(2) The legal title to the subject matter to be conveyed remains
in the grantor until the condition is fulfilled. The issuance of the
shares is thus made subject to a suspensive condition. (Lunk vs.
Stevens, 64 Phil. 1054 [1937].)
(3) The holders of escrow shares are not entitled to the rights
pertaining to a stockholder until the conditions set forth for the
release of such shares are fully met. The reason lies in the fact that
the shares he is supposed to be entitled to are not yet actually issued
to him; thus, he is not yet the owner of the shares and consequently,
he cannot be accorded the rights belonging to a regular stockholder.
In this regard, the stockholder’s use of the subject shares and its
validity to determine quorum depends on whether the conditions
for release of the said shares were met, in accordance with the
escrow agreement. (SEC-OGC Opinion No. 60-19, Dec. 20, 2019.)
Convertible share.
Convertible share is share which is convertible or changeable
by the stockholder from one class to another class (such as from
preferred to common and vice-versa) at a certain price and within a
certain period.
(1) Except as restricted by the articles of incorporation or the
terms of the issuance, the stockholder may demand conversion at
his pleasure. The conversion ratio is the price at which the common
is to be valued as against the preferred.
(2) Where the corporation has issued stock to the entire
authorized limit, it cannot issue additional stocks if the authorized
common stock of the corporation is fully subscribed.
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(a) If it becomes necessary to create additional common

stocks into which preferred stocks can be converted, this can be
done simply by reclassifying the preferred shares intd common
in such amount as would be necessary to cover the conversion
through an amendment of the articles of incorporation in
accordance with Section 15.
(b) Thus, although the preferred shares possess the
quality of being convertible into common shares per articles of
incorporation, such conversion is not automatic. An amendment
of the articles of incorporation is required to formalize the
conversion which must not result in watering of stock (see Sec.
64.), or issuance of stock in excess of the authorized capital stock
of the corporation. (SEC Opinion, Sept. 3, 1990.)
Convertibility of shares.
(1) Preferred shares into common. — In the absence of an express
provision in the articles of incorporation as to their convertibility
feature, preferred shares cannot be converted into common. The
terms of the preferred share contract cannot be changed without the
consent of the stockholders. (Sec. 6, par. 1, SEC Opinion, May 19,
1992.)
(2) No-par value share to par value. — The conversion of no-par
value shares to par value is allowed by SEC provided there would
be no change in the stockholders’ percentage interest in the total
assets of the corporation.
If the conversion would result in the increase in the number of
shares, the same should be allocated to the existing stockholders in
proportion to the number of shares held by them without changing
the total peso amount of the total outstanding shares. The individual
allocation of the shares as converted should be based on the average
issue value of the no-par value shares and not in the individual actual
contribution of the stockholders. (SEC Opinion, July 7, 1992.)
Nature of par value/book value/

market value.
(1) Par value. — The par value” stated in the certificate of stock
12”Par” means equal, and “par value” means face value or value equal to the face of
the stocks or bonds. The par value of an interest-bearing bond on the day of its issuance is
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Sec. 6 | TITLE I, GENERAL PROVISIONS, 91
represents the minimum amount of money or property contributed

by the shareholder to the capital stock of the corporation. Patently,
the assets of a company cannot always be equal to the par value
of the outstanding stock, the assets being constantly in a state of
fluctuation as the business prospers or declines. (13 Am. Jur. 302.)
(2) Book value. — The par value does not always reflect its
book value or its actual or true value which may be determined
by dividing the total stockholders’ equity or the net value of the
total corporate assets (capital and surplus, if any) by the number of
shares issued or outstanding.
Since unpaid subscriptions (see Sec. 59.) are considered part of
the asset of a corporation which the board of directors may at any
time declare due and payable (see Sec. 66.), they should be included
in the computation of book value. But book value does not attach to
unissued or reacquired shares. (see Sec. 9.)
(3) Market value. — Par value and book value may be more or
less than market value which may be defined as the price at which
a willing seller would sell and a willing buyer would buy, if both
have a reasonable knowledge of the facts, and neither being under
abnormal pressure.
Market value is affected by law of supply and demand.”
ILLUSTRATION:
Suppose X Corporation has an authorized capital stock
of P1,000,000.00 divided into 10,000 shares with a par value
of P100.00 per share. The capital stock is fully subscribed and
the principal and the accrued interest. (31 Words and Phrases [1957 ed.] 559.) To say that a
bond is valued at par means that its value is equal to the face value of the bond. (Ibid., 63.)
“Im accounting practice, the journal entries for transactions are recorded in
historical value or cost. Thus, the purchase of properties of assets is recorded at acquisition
cost. The same is true with liabilities and equity transactions where the actual loan and
the amount paid for the subscription are recorded at the actual payment, including the
premiums paid for the subscription of capital stock.
Moreover, it is common practice that the values of the accounts recorded at
historical value or cost are not increased or decreased due to market forces. In the case of
properties, the appreciation in value is generally not recorded as income nor the increase
in the corresponding asset because the increase or decrease is not yet realized until the
property is actually sold. The same is true with the capital account. The market value
may be much higher than the actual payment of the par value and premium of capital
stock. Still, the books of account will not be reflected in the books of account.” (PLDT vs.
National Telecommunications Commission, 539 SCRA 365 [2007].)
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paid-up in cash. At this stage, the par value is the same as its
actual or book value. The book value is determined by dividing
P1,000,000.00, the net asset, by 10,000, the number of shares
issued or outstanding.
If the corporation makes a net profit of P100,000.00, the
increased book value of each share would be P110.00. On
the other hand, if the corporation suffers instead a loss of
P100,000.00, its net assets would then be reduced to P900,000.00,
thereby making the book value of each share at only P90.00.
The market value, however, of each share may not be
P100.00 or P110.00 or P90.00. Thus, the market value of each
share of X Corporation may be P150.00 when the book value is
P110.00 or it may be P60.00 when the book value is P90.00. The
market value of stocks may be influenced by the present and
prospective net income of the corporation, attractive dividend
payments, and other factors.
Presumption as to value of corporate

stock.
Corporate stock is “at par” when it is worth its face value, and
is “above par” or at a “premium” when it is worth more. According
to some authority, no presumption exists, absent supporting
evidence, that corporate stock is worth its par or face value. There is
another authority, however, that absent contrary evidence, there is a
presumption that corporate stock is worth its par or face value. (18
Am. Jur. 2d 750-751.)
It is difficult to determine the book or market value or price of a
corporation’s stock when it is not traded publicly.
ILLUSTRATION:
C, the president, treasurer, and a director of X Corporation,
decided to withdraw from the corporation. According to its
bylaws, the person withdrawing had to determine the book
value of his shares as of the date the person gave notice ‘of
withdrawal, which value would then be the purchase price
of the stock. The bylaws specified that book value should be
determined by sound and accepted accounting rules and
practices carried out by a certified public accounting firm. A
difference arose as to the book value, C using the straight line
method to determine asset cost rather than the accelerated
ua
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See. 6 TITLE 1, GENBRAL PROVISIONS, 93
depreciation method adopted by X Corporation, with the result

that his determination of the book value per share was higher.
Which method of depreciation is the correct one?
The book value of stock is the difference between the assets
and liabilities of a corporation. Depreciation covers the original
cost of each asset over its established useful life, in proportion
to the actual annual decrease in the value of such asset. Factors
affecting depreciation adjustments are the asset’s original cost,
its life in years, salvage value, and the method of depreciation
chosen.
The straight line method chosen by C permits an equal
amount to be charged off as expense during each year of the
asset’s life. The accelerated method adopted by X Corporation
allows a larger portion of depreciation expense to be charged
as an expense in the first year and lesser amounts in the
following years. Accounting practices permit several methods
of depreciation for different purposes. X Corporation used its
method for taxation purposes; C, to arrive at the value of the
stock.
According to the bylaws, the one withdrawing has the right
to choose the method to determine book value. (Chadwick v.
Cross, Abbot Co., 205 A. 2d 416 [Sup. Ct. Vt. 1964].)
Statutory restrictions regarding the issuance

of no-par value shares.
Any or all of the shares or series of shares issued by a stock
corporation may or may not have a par value.
The Revised Corporation Code imposes these limitations or
restrictions regarding the issuance of no-par value shares:
(1) Banks, trust, insurance and preneed companies, and
building and Joan associations and other corporations authorized
to obtain or access funds from the public, whether publicly listed or
not, shall not be permitted to issue no-par value shares of stock;
(2) Preferred shares of stock of a corporation may be issued
only with a stated par value (Ibid.);
(3) Shares of capital stock issued without par value shall be
deemed fully paid and nonassessable and the holder of such shares
shall not be liable to the corporation or to its creditors in respect
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thereto. This does not mean that the holder is no longer liable for the
shares if they are not yet fully paid." It only means that the holder
shall not be liable beyond the issued price, (see Sec. 61, Jast par.),
notwithstanding a change in their value;
(4) Shares without par value must be issued for consideration
at least five (5) pesos per share (Sec. 6, par. 7.); and
(5) The entire consideration received by the corporation for its
no-par value shares shall be treated as capital, and, therefore, shall
not be available for distribution as dividends. (Ibid.) The theory is
that shareholders intended that all the amounts paid for no-par
value shares shall be employed permanently to the prosecution of
the venture.
Consideration for no-par value shares.

Since the value of corporate stocks fluctuates and rarely
represents the par value, corporation are authorized to issue no-
par value shares. Such shares may aid the investor to understand
the factors which determine stock value. They also make it easier
for corporations to sell stock under circumstances which may
militate against the interest of the investor. (C.L. James, Principles
of Economics, supra, p. 50.)
(1) A no-par value share has no “par value” but it has always
an “issued value” based on the consideration for which it is issued.
Under Section 6, a no-par value share may not be issued for less
than P5.00 per share.
(2) No-par value stocks may be issued from time to time at
different prices or values although the holders of all these shares are
entitled to share equally in the distribution of the profits and assets
of the corporation. (see Sec. 61, last par.)
Advantages of par value shares.

Par value shares have these advantages:
(1) Par value shares are easily sold as the publicis more attracted
to buy this kind of shares;
‘Issued shares include subscribed shares which are unpaid or

partially unpaid. (see
Sec. 173.)
y
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See. 6 TITLE 1. GENERAL PROVISIONS, 95
(2), There is greater protection to creditors;

(3) There is unlikelihood of sale of subsequently issued shares ©
at a lower price; and
(4) There is unlikelihood of the distribution of dividends that
are only ostensible profits. (see Harold, Corporation Finance, p. 35.)
Disadvantages of par value shares.

Par value shares have these disadvantages:
their
(1) The subscribers are liable to corporate creditors for
unpaid subscription; and
ion
(2) The stated face value of the share is not an accurate criter
of its true value.
Advantages of no-par value shares.

No-par value shares have these advantages:
(1) No-par value shares are issued as fully paid and non-
assessable;
(2) Their price is flexible;

(3) Low-priced stocks (most no-par shares are low-priced)
enjoy wider distribution;
(4) They tellno untruth concerning the value of the stockholder’s
procedure. (Ibid.)
(5) Stock dividends are more easily issued, thereby simplifying
accounting procedure. (Ibid.)
Disadvantages of no-par value shares.

No-par value shares have these disadvantages:
(1) They legalize large issues of stock for property;
(2) They conceal the money or property represented by the
shares;
(3) They promote issuance of watered stock (19 Mich. L. Rev.
591-595; see Sec. 64.); and
(4) There is lesser protection to creditors.
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% THE REVISED CORPORATION CODE OF THE PHILIPPINES Sec, 6
Kinds of preferred shares.

They may be:
(1) Preferred share as to assets or share which gives the holder
preference in the distributions of the dividends and in the assets of
the corporation in case of liquidation. (Sec. 6, par. 6.)
It has been held that preferred stock, standing alone, creates a
preference only as dividends and not to assets in case of liquidation
(Hellmen v. Penn Electric Vehicle Co. 67 Atl. 834.); or
(2) Preferred share as to dividends or share which gives the holder
preference to receive dividends on the share to the extent agreed
upon before any dividends are paid to the holders of common stock.
(2 Fletcher, p. 44.)
There is no guaranty, however, that it will receive any dividend.
The corporation is not bound to pay dividends unless the board of
directors declares them. The preference simply means that holders
of common stock may receive dividends only after the satisfaction
of the prior claims on dividends of preferred stockholders.
Preference among preferred shares.

A corporation may issue more than one class of preferred stock
as to assets or as to dividends. Thus, certain preferred shares may be
given first preference or second preference on earnings.
Unless a classification is provided in the articles of incorporation,
preferred shares of stock enjoy the same preferences or privileges.
Thus, if the articles do not distinguish between those preferred
shares subscribed from the corporation and those acquired by other
modes, as far as preferences are concerned, the former cannot be
considered to enjoy privileges different from those of the latter.
(SEC Opinion, Dec. 4, 1981.)
Preferred stockholders not creditors

of corporation.
Like common shares, preferred shares are part of. the
corporation’s stock. Both common and preferred stockholders are
Republic Planters Bank vs. Agana, Sr, 269 SCRA 1 (1997), citing De Leon, The
Corporation Code of the Philippines Annotated p. 69 [1989 ed.].
ad
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Sec. 6 TITLE 1, GENBRAL PROVISIONS, 97
no different from ordinary investors willing to share in the profits

and losses of the enterprise.
(1) Lien upon corporate property. — Preferred shares of stock
issued by a corporation many be given such other preferences
as may be stated in the articles of incorporation. (Sec. 6, par. 6.)
Preferences granted to preferred stockholders do not give them a
lien upon the property of the corporation nor make them creditors
of the corporation, the rights of the former being always subordinate
to the latter.’
(2) Stock issued with a fixed interest. — Stock cannot be issued
with a fixed interest instead of dividends because this will make
the contract of subscription one of loan and make the corporation
a debtor of the subscriber. However, there may a fixed rate of
dividends.
Shareholders, both common and preferred, are risk takers who
invest capital in the business and who 'can look only to what is left
after corporate debts and liabilities are fully paid.” (SEC Opinion,
Feb. 10, 1989, citing Ballantine, p. 503.) They sink or swim with the
corporation and there is no obligation to return the value of their
shares by means of repurchase if the corporation incurs losses and
financial reverses, much less guarantee such repurchase through a
surety bond. (Lirag Textile Mills, Inc. vs. Social Security System, 153
SCRA 338 [1987].)
(3) Stock issued with dividend payable in the nature of interest.
— However, the dividends payable by the corporation may be in
the nature of interest as where the parties, under an agreement,
intended the repurchase by the corporation of preferred shares
of a fix percentage per annum, on
with agreed cumulative dividends
their respective scheduled dates to be an absolute or unconditional
obligation which does not depend upon the financial ability of
the corporation, especially so where the obligation is secured by a
surety, notwithstanding that the dividends are supposed to be paid
out of net profits and earned surplus. (Ibid.)
(4) Stock issued with dividends payable guaranteed. — The fact that
dividends are, in terms, guaranteed, does not make them creditors.
ees
eo
16Supra.
17 Ibid.
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They are entitled to dividends only when there are profits out of
which dividends may be declared. (SEC Opinion, Nov. 3, 1986.)
Such a guarantee may, however, have the possible effect of making
the dividends cumulative (Injfra.), that is, making the profits of one
year make up for the deficiencies of.the preceding year or years.
(SEC Opinion, Aug. 24, 1987, citing 11 Fletcher, Sec. 4294.)
(5) Stock issued to creditors. — It is immaterial how or where the
holder obtained his stock since the preference belongs to the stock
and not to the stockholder. Hence, that preferred stockholders were
formerly corporate creditors gives them no greater right as against
creditors. By abandoning their position as creditors, they lose their
rights as such. (Ibid.)
Limitations regarding issuance of preferred

shares.
There are four (4) legal limitations regarding preferred shares:
(1) Preferred shares deprived of voting rights in the articles of
incorporation (Sec. 6, par. 1.) shall still be entitled to vote on matters
enumerated in Section 6, par. 3., although they shall not be entitled
to vote on other matters (par. 4.);
(2) The preference of preferred shares must not be violative of
the Revised Corporation Code;
(3) Preferred shares may be issued only with a stated par value;
and
(4) The board of directors may fix terms and conditions of
preferred shares of stock or where authorized any series thereof
only when so authorized by the articles of incorporation and such
terms and conditions shall be effective upon filing ‘a. certificate
thereof with the SEC. (Ibid., par. 6.)
Authority of board of directors to fix terms

and conditions of preferred shares.
Section 6 empowers the board of directors, where authorized in
the articles of incorporation, to fix terms and conditions or preferred
shares of stock or any series thereof. The financing of an enterprise
goes on year after year, as business expands or the needs of capital
arise. (Ballantine, Rev. ed. 1 [1946], p. 471.)
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Sec. 6 TITLE I], GENERAL PROVISIONS, 9
(1) Benefits from authority given. — The authority enables the

board, without the delay and expense of amendment of the articles
in market
of incorporation, to “tailor its securities to meet changes
conditions which cannot be foreseen at the time of incorporation or
later amendment of the articles of incorporation. Typical of changes
is the variance of the dividend rate to meet the demands of the money
market... The resolution of the directors fixing such preferences
is generally required to be certified and filed or recorded in the
same manner as articles of incorporation, thus, providing certain
information as to the term of the contract.” (SEC Opinion, Jan. 11,
SL citing Ballantine, Law of Corp., pp. 502-503, and 2 Fletcher, p.
S31.
(2) Concurrence of stockholders not required. — It would not need
the concurrence of two-thirds (2/3) of the outstanding capital
under Section 15 for the board to fix the terms and conditions of the
n,
preferred shares were authorized by the articles of incorporatio
otherwise, it would defeat the very purpose for which the authority
was granted, which is to allow the corporation to respond quickly
11,
to the fluctuating conditions in the market. (SEC Opinion, Jan.
1982.)
(3) Blanket authority not contemplated. — It would be contrary
board
to Section 6 of the Revised Corporation Code to give the
tions of
of directors blanket authority to fix the terms and condi
s,
the preferred shares without stating the privileges, preference
es,
restrictions, or rights of the preferred shares. Unless certain featur
are stated
guidelines and standards as to the issue of preferred shares
rization
or spelled out in the articles of incorporation, such autho
rights
becomes a dangerous power which may adversely affect the
of shares already issued. (Ibid.)
Thus, as a matter of policy, the SEC does not allow a provision
giving the board of directors a blanket authority to fix the terms or
preferred shares unless such guidelines (e.g., setting a specific range
followed
of dividend rate with minimum and maximum limits) are
in the determination thereof. (SEC Opinion, May 24, 1994.)
Kinds of preferred shares
as to dividends.
Preferred shares may be cumulative, non-cumulative,
ting.
participating non-participating, and cumulative-participa
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(1) Cumulative preferred share entitles the holder not only to the
payment of current dividends but also. to dividends in arrears. If
the stipulated dividend is not paid in a given year, it shall be added
to the dividend which shall be due the following year and the
accumulated dividends must be paid to the holder of said preferred
share before any dividend may be paid to the holders of common
stock.
ILLUSTRATION:
Suppose S owns ten preferred shares of X Corporation with
a par value of P100.00 per share at 5% guaranteed cumulative
dividends.
If after 4 years the corporation declare the regular annual
dividend, S will receive P250.00 for the ten shares: P50.00 for
each year or P200.00 for the 4 years (representing the dividends
in arrears) plus the dividend of P50.00 for the current year.
All the dividends must be paid to S before any dividends
can be paid to the holders of common shares. This kind of share
protects preferred stockholders against manipulation of the
financial accounts of the corporation to conceal profits.
(2) Non-cumulative preferred share entitles the holder thereof to

the payment of current dividends only in preference to common
stockholders. If dividends are not declared in a given year, the right
to the dividends for that particular year is extinguished.
ILLUSTRATION:
In the preceding illustration, if the dividends of S were
non-cumulative, he would be paid only for the current year
at
P5.00 per share, or P50.00 for the ten shares.
(3) Participating preferred share is share that gives the holder not
only the right to receive the stipulated dividends at the prefe
rred
rate but also to participate with the holders of common shares in
the remaining profits pro rata (or in the Proportion
stated in the
articl
es of incorporation) after the common shares have been
the stipulated dividend at the same preferred rate.
paid
(4) Non-participating preferred share is share which entit

les
holder thereof to receive the stipulated preferred dividends and the
no
more. The balance, if any, is given entirely to the common
stocks.
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Sec. 7 TITLE I. GENERAL PROVISIONS,
DEFINITIONS AND CLASSIFICATIONS 401
ILLUSTRATION:
Suppose the capital stock of X Corporation is P100,000.00
dividend into 1,000 shares with a par value of P100.00 per
share. Three hundred (300) of the shares
If, a given year, the corporation declares a dividend of
P5,100.00, the 10% preference must first be paid to the owners
of preferred shares at P10.00 per share or P3,000.00. The balance
of P2,100.00 will be divided among the holders of common
shares at P3.00 each share.
If the dividends declared amount to P11,400.00, then the
holders of common stock be receiving P8,400.00 of P12.00 each
share. However, if the preferred shares are participating, the
owners thereof also in the remaining profits of P1,400.00 with
the holders of common stock after the latter have been granted
a share (P7,000.00) in the balance of P8,400.00 (P11,400.00 —
P3,000.00) at the same rate of 10%. Thus, each share will be
entitled to an additional dividend of P1.40 (P1,400.00 + 1,000).
Absent an agreement, express or implied, dividends should

be deemed non-cumulative and non-participating in accordance
with the presumption established in Section 6 (par. 5.) that shares
are equal in all respects unless otherwise stated in the article of
incorporation and in the certificate of stock.
(5) Cumulative-participating preferred share is a combination of
the cumulative share and participating share. This means that the
holder is entitled not only to dividends in arrears but also, after
receiving his preferred share of dividends, to participation with the
holders of common stock in the remaining profits.
Sec. 7. Founders’ Shares. — Founders’ shares may

be given certain rights and privileges not enjoyed by the
owners of other stocks. Where the exclusive right to vote
and be voted for in the election of directors is granted, it
must be for a limited period not to exceed five (5) years
from the date of incorporation: Provided, such exclusive
right shall not be allowed if its exercise will violate
Commonwealth Act No. 108, otherwise known as the “Anti-
mmy Law”; Republic No. 7042, otherwise known as
the “Foreign Investment of 1991”: and other pertinent laws.
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Founders’ shares.
Founders’ shares have been defined as “shares issued to the

organizers and promoters of a corporation in consideration of some
supposed right or property. Such shares usually share in profits only
after a certain percentage has been paid upon the common stock,
but are often given special privileges over other stock as to voting
and as to division of profits in excess of aminimum dividend on the
common stock.”! (Webster’s Second International Dictionary, p. 997.)
(1) Special rights and privileges. — The shares of stock of a
corporation, close or non-close (see Title XII.), may include founders’
shares classified as such in the articles of incorporation.
Such shares may be given special rights and privileges not
enjoyed by the owners of other stock including common stocks,
such as preference in the payment of dividends and/or distribution
of assets in case of liquidation, right to convert the shares into other
shares, right to cumulative dividends, etc. to encourage them to
make large investments in the proposed corporation.
"They are not to be confused with so-called management shares which are “corporate
stocks generally held by officers or directors of a company that receives no dividends
until a specified amount has been paid on the common stock but that receives a large
share of the residual profits.” (Ibid., [Third], p. 1372.) Both shares have their origin in
English common law.
Founders’ shares (also called managers’ shares and deferred shares) are issued
commonly in Great Britain, rarely in the United States. Their combined voting power is
usually equal to the voting power of the common stock, and they generally have a special
claim on earnings, either before or after the payment of dividends to other stockholders.
Their participation in the assets of the corporation in the event of dissolution is usually
limited to the remaining assets after other stockholders have received the amounts
to
which they are entitled, according to the provisions of the respective issues. (E.L. Kohler,
op. cit., p. 221.)
In the deliberation of the Batasang Pambansa on founders’ shares, it was the
consensus of the lawmakers that the SEC will have to take into account:...
whether those
persons to whom the prerogative or right is reserved have, shall we
say, contributed
substantially in the organization of the corporation or whether also
the business of the
corporation is of a character that is necessary for a period of time that is control
must be
to a certain loans or certain group of individuals. Otherwise, it may not
be able to obtain
certain concessions, certain loans or certain business because
these founders’
shares may
not only serve to remunerate possible promoters... because of
the existence of a certain
group of individual who have perhaps special qualifications to manage
a corporation
by reason of which it is in their competence only that certain other
the corporation may be dealing group with which
and willing or aggregate to enter into transactions with
the corporation but only if the management of that corporation is reserve d to thtthat group“il
xxx.” (Proceedings of the Batasang Pambansa, Nov. 12, 1979, cited j
26, 1981.) , cited in SEC Opinion, Ap
It is not clear whether founders’ shares w ould retain their charact z 4
they are transferred by their original owners. aracter as such in cas
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Sec. 8 | TITLE l. GENERAL PROVISIONS, 102
(2) Exclusive right to vote and be voted. — Where, however, the

exclusive right to vote and be voted for in the election of directors is
granted, such right must be for a limited period not exceeding five
(5) years from the date of incorporation.
(a) The SEC may approve or reject the grant of the exclusive
right having in mind as well the protection of the interests of
te
the corporation itself and the public if its exercise will viola
the Anti-Dummy Law, Foreign Investments Act, and other
pertinent laws.
Section 6
(b) Section 7 provides an exception to the rule in
except
(par. 1.) that “no share may be deprived of voting rights
e shares,’
those classified and issued as ‘preferred’ or ‘redeemabl
unless otherwise provided in this Code.”
exclusive
(c) The limitation in Section 7 refers only to the
directors, a
right to vote and be voted for in the election of
s, the class
right normally enjoyed by holders of common share
voting rights.
of shares which are supposed to have complete
ders shall have
After the expiration of the limitation period, foun
equal rights with the holders of common shares.
ion. Thus, a
(d) Section 7 applies to a nonstock corporat
of founders’ shares
corporation cannot provide that only holders
and be elected to the
may vote at any meeting of the members
s “from and after the
board of directors for a period of five year
Hills Golf and Country
formal turn-over of the project”. (Forest
No. 212833 (Notice),
Club, Inc. vs. Kings Properties Corp., G.R.
to vote and be voted must
[August 7, 2019].) The exclusive right
not exceed five (5) years from the date of incorporation.
provisions in Section
Preferred shares are not affected by the e-year
r expiration of the fiv
7. Their status remains even afte5.)
199
period. (SEC Opinion, Aug. 8,
Sec. 8. Rede emable

Shares. — Redeemable shares may
provided in
be issued by the corporation when expressly
are shares which may
the articles of incorporation. They rs of such
the holde
be purchased by the corporation from regardless
shares upon the expiration of a fixed period,
ned earnings in the
of the existence of unrestricted retai
books of the corporation, and upon such other terms and
rporation, and the
conditions stated in the articles of inco
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104 THE REVISED CORPORATION CODE OP THE PHILIPPINES Sec. 8
certificate of stock representing the shares, subject to

rules and regulations issued by the Commission.
Redeemable shares.
Redeemable or callable shares are shares, usually preferred, which
by their terms are redeemable at a fixed date or at the option of
either the issuing corporation or the stockholder or both at a certain
redemption price.'
(1) Meaning of redemption. — It is the repurchase or reacquisition
of stock by a corporation which issued the stock in exchange for
cash or property, whether or not the acquired stock is cancelled,
retired or held in the treasury. Essentially, the corporation gets back
some of its stock, distributes cash or property to the shareholder,
and continues in business as before.
The redemption of stock dividends previously issued is
sometimes used by corporations as a veil for ‘the constructive
distributions of cash dividends.? (Comm. of Internal Revenue vs.
(2) When redeemable shares may be issued. — Under Secti
on 8, they
refer to shares issued by a corporation which said corporatio
n may
purchase or take up from their holders upon the expiration
of a fixed
period and upon such terms and conditions expressly
provided in
the articles of incorporation and certificates of stock
representing
said shares. They may be issued only when expressl
y so provided
in the articles of incorporation.
(3) Redemption regardless of existence of unrestri
cted retained
earnings. — Upon the expiration of the period
fixed, they may be
taken up or purchased by the corporation, rega
rdless of the existence
of unrestricted earnings (see Sec. 42.)
in the books of the corporation.
(a) The rule in Section 40 is different. The
corporation to acquire its own shares power of the
for
the purposes stated
therein is subject to the condition tha
t there be unrestricted
retained earnings in its books to cov
er the shares purchased or
acquired. Section 3 (1) of the SEC Rules Governing Red
eemable
"Republic Planters Bank vs. Agana, Sr,
Corporation Code of the Philippines
269 SCRA 1 (1997), citing De Leon, The
Annota ted, P. 75 [1989 ed.].
See “Tax treatment of stock div |
idends,” under Sec. 42.
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Sec .8 me TITLE
ITLE 1, GENERAL PROVISIONS,
and Treasury Shares (the “1982 Rules”) also states that: “No
corporation shall redeem, repurchase or reacquire its own
shares, of whatever class, unless it has an adequate amount of
unrestricted retained earnings to support the cost of the said
shares. -” Hence, the existence of unrestricted retained earnings
is required before a corporation can redeem its shares. (SEC-
OGC Opinion No. 20-19, May 27, 2019.)
The requirement of unrestricted retained earnings to cover
the shares is based on the trust fund doctrine which means that
the capital stock, property and other assets of a corporation are
regarded as equity in trust for the payment of corporate creditors.
The rationale is that a corporation’s creditors are preferred over
the stockholders. (SEC-OGC Opinion No. 20-19, May 27, 2019.)
(b) In the case of redeemable shares, the shareholder is
conferred the right of a creditor to attract corporate financing.
The issuance of the shares may be likened to the issuance
of bonds or debt papers. Since the terms and conditions of
the purchase are in the articles of incorporation, and in the
corresponding certificates of stock, corporate creditors and
other shareholders are supposed to know the same.
(c) Strict compliance with statutory or contractual
provisions of redemption is essential. The retirement of stock
by a corporation differs from a purchase by a corporation of its
own stock. It is said that the manner in which a duly authorized
plan for retiring stock is to be carried out is part of the corporate
business, and absent fraud or bad faith, is not subject to judicial
control. (see 11 Fletcher, pp. 381-382 [1971].)
(4) Where corporation insolvent. — Redeemable shares may
be redeemed regardless of the existence of unrestricted retained
earnings, provided that the corporation has, after such redemption,
assets in its books to cover debts and liabilities inclusive of capital
stock. (Sec. 5, par. 5, SEC Rules Governing Redeemable and
Treasury Shares.) Therefore, redemption may not be made where
the corporation is insolvent or if such redemption would cause
insolvency or inability of the corporation to meet its debts as they
mature. (SEC Opinion, Jan. 23, 1985; see SEC-OGC Opinion No.
2019, May 27, 2019.)
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Such a limitation is based on the principle that corporate assets

are a trust fund for creditors.’ (see Sec. 40.)
(5) Terms and conditions. — Section 8 requires that all the terms
and conditions affecting such shares must be stated not only in
the articles of incorporation but also in the certificate of stock
representing said shares.
Provisions in the articles relating to the redemption of preferred
stock are, in effect, a contract between the issuing corporation and
the preferred stockholders and strict compliance thereof is essential.
Thus, the corporation cannot redeem its preferred shares before
the redemption period or at a discount price in contravention of
the articles of incorporation to improve its financial position. The
remedy is to amend the articles by changing the redemption features
of the preferred shares. (SEC Opinion, Jan. 23, 1985.)
(6) Redemption optional with corporation. — Except as otherwise
provided, the redemption rests entirely with the corporation, and
the stockholder is without right to either compel or refuse the
redemption of his stock, i.e., the payment of cash in exchange for
the stock. The redeemable shapes provided in Section 8 are of the
optional, not the obligatory type.‘
(7) Maintenance of a sinking fund. — For the protection of stock
holders, all corporations which have issued redeemable share
s with
mandatory redemption features are required by the SEC
to set up
and maintain a sinking fund where cash is gradually
set aside in
order to accumulate the amount necessary to meet
the redemption
Price of redeemable shares at specified dates in the
future.
The fund shall be deposited with a trustee bank
and shall not be
investedin risky or speculative ventures. (see SEC Rule
s Governing
Redeemable and Treasury Shares, [CCP] No.
1-1982.)
*Republic Planters Bank vs, Agana, Sr.,

269 SCRA 1 (1997); citing De Leon, p. 76
note 19,
If the redemption would prejudice the right rates
s of corporate creditors, the latter have
the right to question the same. In case of disso lution, hold
not entitled to any part of the corp ers of redeemable shares are
orate assets until corporate debts
fully paid. The rights should be deemed and liabilities
subordinate to the rights of corporate credi are
The rule then is that redeemable tors.
shares may be redeemed, regardle
unrestricted retained earnings, provided ss of the existence of
that after such redemption, the corporation
|
sufficient assets in the books to cover has
its debts and liabilities inclusive of the
“Ibid., citing De Leon, pp. 76-77, note 1. aa ital stock
.
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Sec. 8 TITLE I. GENERAL PROVISIONS, ay
erence for
(8) P urpose of redemption. — Redemption is not a pref cised in
the benefit of the shareholders but a restriction to be exer
rs
the discretion of the board of directors for the benefit of the owne
a safeguard to
of the corporation, holders of common shares. It is
claim on the earning,
enable a corporation to retire an obligation or a of
usually at a premium when it becomes advisable for purposes
financing.’ (Ballantine p. 509 [1946 ed.].)
Unless expressly provided in the articles of incorporation and
d
stated in the certificate of stock, preferred shares shall be deeme
irredeemable. (see SEC Opinion , Dec. 4, 1968.)
(9) Effect of redemption. — A redemption by the corporation of its
The retirement
stock is, in a sense, a repurchase of it for cancellation.‘ s of that
of a class of stock destroys all rights adhering to the share
class. (18 Am. Jur. 2d 805.)
the
(a) In the case of redeemable shares reacquired by
and no longer
corporation, the same shall be considered retired
incorporation.
issuable, unless otherwise provide in its articles of
rule is different
(see SEC Rules [CCP] No. 1-1982, supra.) The
with respect to treasury shares. (Infra.)
redemption, redeemable shares lose their status
Upon.
outstanding or unissued authorized capital
as part of the
Opinion No. 20-19, May 27, 2019.)
stock. (SEC-OGC
stock of
(b) The treasury shares will not decrease the capital
the corporation.’
hibited
(c) Where the reissuance of redeemed shares is pro of
or impliedly by silence, the number
either expressly
the corporation is
authorized shares of the capital stock of
its preferred stock only when it

‘It is generally held that a corporation may redeem and that it
tually reserved the right to do so,
is expressly authorized by 1 aw or hasct. contrac n v. Armour & Co., 17 II 2d. 43.)
has no inherent power in this respe (Bowma
Ibid. ally includes

The redemption price usu : the capital component, at par or stated value
per share, and if divi dends are cumulati
ve, any arrearages to the redemption date as
sum is frequently provided for as a
the dividend component. Payment of an additional ials on Corporations, 1969 ed.
“premium component.” (William L. Cary, Cases and Mater
p. 1616. )
[University Case Book Series], 2018.
7SEC-OGC Opinion No. 20-18, May 27,
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reduced accordingly, and the articles of incorporation must be

amended to reflect such reduction. (see Sec. 15.)
(10) Voting rights. — Redeemable shares may be deprived of
voting rights in the articles of incorporation, unless otherwise
provided in the Revised Corporation Code. (see Sec. 6, pars. 1, 3[a-
h].)
Sec. 9. Treasury Shares. — Treasury shares are shares

of stock which have been issued and fully paid for, but
subsequently reacquired by the issuing corporation
through purchase, redemption, donation, or some other
lawful means. Such shares may again be disposed of for a
reasonable price fixed by the board of directors.
Treasury shares.
Treasury shares are shares lawfully issued by the corporation
and fully paid for and later reacquired by the corporation either by
purchase, redemption, donation, forfeiture, or other lawful means.
(1) Status.— Section 40 expressly empowers a stock corporation
to purchase or acquire its own shares for legitimate corporate
purposes. Only unrestricted retained earnings may be used for the
purchase of the corporation’s own shares. Under Section 67 (last
par.), the corporation, absent a qualified bidder, may bid at the
public sale of delinquent shares and title to the shares purchased
shall be vested in the corporation as treasury shares.
(a) Treasury shares are not retired shares, They do not
revert to the unissued shares of the corporation but are regarded
as property acquired and owned by the corporation which
may be reissued or resold by the corporation. Being the owner
of the treasury shares, the corporation may opt to retire,
sell,
or distribute as property dividends these shares. (SEC
Rules
Governing Redeemable and Treasury Shares, [CCP]
No. 1-1992;
see SEC-OGC Opinion No. 16-15, June 27, 2016; SEC-OGC
Opinion No. 6-12, April 20, 2012.)
(b) Treasury shares are issued shares but bei
treasury (hence, the name), they ng in the
do not have the status of
outstanding shares (Comm. of Inte
rnal Revenue vs. Manning,
66 SCRA 14 [1975].), in the sense that
they do not constitute a
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Sec i 9 ny i
DENTE I. GENERAL PROVISIONS,
FINITIONS AND CLASSIFICATIONS 18
liability of the corporation. They are, therefore, not a part of

outstanding capital stock. (see Sec. 173.) This is so because the
amount paid for acquiring treasury shares does not represent
return of capital to the stockholders but an investment out of
retained earnings on a salable property known as treasury
shares. (SEC-OGC Opinion No. 16-16, June 27, 2016.)
(c) The acquisition of treasury shares does not reduce the
number of issued shares or the amount of stated capital and
their “sale” does not increase the number of issued shares or the
amount of stated capital. The redeemed shares (treasury shares)
are still part of the total shares of stocks issued to subscribers
or stockholders whether or not fully paid or partially paid but
no ae outstanding. (SEC-OGC Opinion No. 16-16,! June 27,
2016.
(d) Treasury shares must be distinguished from the

authorized but unissued shares in that the acquisition of the
former does not reduce the number of issued shares or the
amount of stated capital stock and their sale does not increase
the number of issued shares or the amount of stated capital.
(SEC Opinion, Jan. 14, 1993, citing 11 Fletcher, chap. 58, sec.
5088.)
(2) Disposition of treasury shares. — A treasury share or stock,
of
which may be common or preferred, may be used for a variety
corporate purposes, such as for a stock bonus plan for management
and employees, or for acquiring another company. It may be held
indefinitely, resold or retired. While held in the company’s treasury,
.
the stock earns no dividends and has no vote in company’s affairs
(Philippine Coconut Producers Federation, Inc. vs. Republic, 600
SCRA 102 [2009].)
(a) The corporation may, like any of its other properties, sell
or dispose the treasury shares for a reasonable price fixed by the
board of directors. Once sold or reissued, the treasury shares
again become outstanding stock and regain voting rights. (SEC-
OGC Opinion No. 06-12, April 20, 2012.) The price paid out of
retained earnings for the value of reacquired shares should be
treated in the corporate books as payment of the purchase of the
\Citing De Leon, the Corporation Code of the Philippines Annotated, p. 104 [2002].
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shares and an investment on such property. (SEC Opinion, Feb.

20, 1991.) é
(b) When stock has been issued and fully paid and
reacquired by the corporation to be disposed of for its benefits,
the corporation may dispose of the stock even at less than its
par value or acquisition cost, provided the price is reasonable,
as fixed by the board of directors. By “reasonable”, it would
mean that if it is issued at less than the par value or issued value,
the consideration for their issuance plus whatever profit the
corporation made in their acquisition shall not be below their
par or issued value. Otherwise, they might still be classified as
watered stock. (SEC Opinion, October 1, 1982; SEC Opinion,
July 17, 1984.)
(c) A corporation may eliminate the treasury shares by
reducing its authorized capital stock. (see Secs. 37, 56.). (SEC
Rules, CCP No. 1-1982.)
(d) Treasury shares, being unrealized income, are not
considered as part of earned or surplus profits, and therefore, not
distributable as dividends, either in cash or stock. But if there are
retained earnings arising from the business of the corporation,
treasury shares, being the property of the corporation, may
properly be distributed as property dividend. (SEC Opinion,
Oct. 1, 1985; SEC-OGC Opinion 06-12, April 20, 2012.) In
sum, treasury shares are regarded as property owned by the
corporation and cannot be distributed as property dividends
among the stockholders absent unrestricted retained earnings
other than the amount equivalent to the cost of treasury shares,
because to do so would violate the trust fund doctrine. (SEC-
OGC Opinion No. 06-12, April 20, 2012.)
In case of declaration of treasury shares as property dividends,
the corporation can only do so if the amount of the retained
earnings previously used to support their acquisition has not been
subsequently impaired by losses. Generally, a corporation can
reacquire its own shares for legitimate corporate purpose /s provided
it has sufficient amount of unrestricted retained earnings
to support
the cost of the shares. The amount of such earnings equivalent to
the cost of the treasury shares being held cannot be declared
and
distributed as dividends until the shares are reissued or retired. The
reason for this is that such amount of earnings equivalent to the cost
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Sec .9 he TITLE
, I, GENERAL PROVISIONS,
mM
of treasury shares is not considered part of earned or surplus profits

that is distributable as dividends.
On the other hand, if there are retained earnings arising from
the business of the corporation other than the amount equivalent
to the cost of treasury shares, treasury shares, being property of
the corporation, may be distributed among the stockholders as
property dividends. Any declaration and issuance of treasury shares
as property dividend shall be disclosed and properly designated as
property dividend in the books of the corporation and in its financial
statements. (SEC-OGC Opinion No. 06-12, April 20,2012.)
(3) Where acquisition from stockholders. — Shares may be acquired
by the corporation from stockholders by purchase, redemption, or
donation, or through some other lawful means.
(a) If the corporation acquires the shares by purchase from
stockholders, the transaction is, in effect, a return to them of the
value or the value of their investments in the company, and a
reversion of the shares to the corporation. It is required in such
cases, however, that the corporation must have surplus with
which to buy the shares so that the transaction will not impair
its capital. (see Sec. 40.)
(b) But if the share is donated to the corporation by the
stockholders, their act would simply amount to the surrender
of their stock without getting back their investments which are,
instead, voluntarily given to the corporation.
ore, the
In both kinds of acquisition of the corporation, theref
shares would have value but because they have been acquired
by the corporation, they would cease to represent any right. (SEC
cost.
Opinion, Nov. 22, 1966.) Treasury shares are recorded at
a
(4) Dividend restriction on retained earnings. — As a rule,
corporation can reacquire its own shares provided it has an adequate
amount of unrestricted retained earnings to support the cost of the
said shares. Thus, the capital stock is preserved.
The amount of such earnings equivalent to the cost of the
treasury shares being held, cannot be declared and distributed as
dividends. Such restriction shall be lifted only after the treasury
i aa
Sec. 40.
2For exceptions to this rule, see note under
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shares are reissued or retired in accordance with law. (SEC Rules,

CCP No. 1-1982.)
(5) Voting rights. — Treasury shares have no voting rights as
long as they remain in the treasury (Sec. 56.), i.e., uncancelled and
subject to reissue. A corporation cannot in any proper sense be a
stockholder in itself, and shares of its own stock, therefore, held
by it cannot be voted or be entitled to vote, for otherwise, equal
distribution of voting powers among stockholders will be effectively
lost and the directors will be able to perpetuate their control of the
corporation. (Comm. of Internal Revenue vs. Manning, supra; San
Miguel Corporation vs. Sandiganbayan, 340 SCRA 289 [2000].)
(6) Right to dividends. — Neither are treasury shares entitled
to dividends or assets because dividends cannot be declared by a
corporation to itself. (Ibid.) Such distribution of dividends would be
like making the corporation debtor and creditor of the same amount
at the same time’ or requiring it to take money or stock from one
of its pockets and putting the same in another, which would be
pointless. Hence, stock dividend (see Sec. 42.) may not be declared
on treasury stock even on the express condition that such dividend
shall also be treated as treasury stock.‘(SEC Opinion, Nov. 2, 1966.)
(7) Resale. — They may be sold by the corporation at any price
the board of directors sees fit to accept, even at less than par or *
issued value, the corporation having already received the full value
upon their initial issuance, provided such price is reasonable under
the circumstances:
(a) Stockholders may rightfully complain if the price is
lower than reasonable.
(b) In case of sale or reissue, the treasury shares again
becomes outstanding stock and regain whatever dividends and
voting rights they originally held.
°Art. 1275. The obligation is extinguished from the time the characters of creditor
and debtor are merged in the same person. (Civil Code)
*“So, what rights, if any, remain? Perhaps the tight of the corporation to reissue
its treasury shares for a valuable consideration it its charter permits but this is a mere
incident of incorporation which is applicable to unissued as well as to issued share
xcapital
x X”
(Ballantine, p. 615 [1946].) Treasury shares are no longer part of the “outstanding cap
Berp utstanding
stock.” (see Sec. 173.)
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Sec. 9 TITLE I. GENERAL PROVISIONS,
(c) Treasury shares differ from retired or cancelled shares in

that while the latter has disappeared altogether, the former may
be sold. Section 35(f) expressly authorizes stock corporations to
sell treasury shares subject to the provisions of Section 9.° Their
status on resale differs from that of newly created shares which
cannot be issued for less than the legal minimum consideration.
(see Sec. 61.)
— 000—
‘derable discussion among accountants, and some shifting of

ry.
opinio n. to the proper accounting treatment of purchases of shares for the treasu
out of surplus, it
Such shares are not, in fact, a corporate asset. When they are acquired
in states in which their acquisi tion out of capital is illegal, that
eeseems clear, particularly
jus should be reduce d or earmar ked as restricted to the extent of the amount paid
as earned
for See eda: But the restriction may be lifted and the surplus restored, even
amount received
surplus, if thereafter the treasury shares are resold (to the extent the (William I. Cary,
covers that has been paid to reacquire them), or if the shares are retired.
op. cit., p. 1615.)
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Title Il
INCORPORATION AND ORGANIZATION
OF PRIVATE CORPORATIONS
Sec. 10. Number and Qualifications of Incorporators.
— Any person partnership, as ociation or corporation
Singly or jointly with others,
TPAC
but not more than fifteen
(15), in number, may or anize a corp
Purpose or purposes: i
i Provided, 'That\| atural
: : persons who
7
or _ associations or g anized
fo r the purpose of
a_profession, shall practicing
not_be allowed to
corporation unless ot Organize _as a
herwise provided unde
Incorporators who are r special laws.
natural persons must
age. be o egal
Each incorporator
of a Stock corporatio
or be a subscriber to n mrt own
at least one (1) share
of the Capital
A corporation with a
single stockholder is
& One Person Corpor considered a
ation as described
Ill of this Code. (N) in Title XIII, Chapter
enly lon , trust or an eifite
> nat Shay whe wrt
Incorporation of a private shi apauny
Corporation “flr pow ds uncle Cpeaia
a mere privilege.
114
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GiAtfarm berporation “Steatal privilige
Sec. 10 TITLE II. INCORPORATION AND ORGANIZATION 115

In our jurisdiction, the right to be and act as a corporation does

not belong to any person as a natural and civil right, but as a special :
privilege conferred upon a group of persons by the sovereign pear How’
of the State. Until there is a grant of such right, therefore, whet er)
by4pecial act of the legislaturelcicl rgeneral law, there can beno
corporation. Under Section 10, the formation of acorporation “for
any lawful purpose or purposes,” provided it is in accordance with
thé’Revised Corporation Code, is a matter of right and cannot be
restrained. (see Sec. 17.)
Since a corporation is merely a creation of law, it can be dissolved
at any time by legislative enactment subject to certain limitations.
(see Sec. 184.1.) Light agenst inact ff oiqchiont and
yt bas Advantages of the corporate form. + nth G ie) vi = Pye NM Tad?

ssi The advantages of incorporation are so well understood
rate lih-that it seems almost superfluous to enumerate them. (see Sec.
' ay 2.). Nevertheless, it may be useful.to mention here only its chief
Me advantages as stated by a well-known authority.
hia Yi First, through the process of incorporation, several persons may
tic” unite in a single enterprise without using their own names, without
How aly difficulty or inconvenience, and with the valuable right to contract,
arte to sue and be sued, to hold or convey property in the corporate
name, and to act as a legal unit.
Second, an individual stockholder may invest in the corporate
enterprise as much or as little as he sees fit, without risking more,
and absent statutes to the contrary, this is the limit of his liability,
since stockholders are not personally liable for the debts of the
corporation. They can transfer their shares without the consent of
the other stockholders.
Third, the rights and obligations of a corporation are not
affected by the death or change of the individual members, but the
corporate business continues uninterrupted and unaffected so long
as the corporate entity continues. Its credit is strengthened by such
continuity of existence.
Fourth, the modern corporation makes great undertakings
feasible since it enables many individuals to corporate to coma
the large amounts of capital necessary to finance
the gigantic

j‘ ’
enterprises of modern times. (see 1 Fletcher, p. 42.) The resulting

large-scale enterprise may be more efficient, thus lowering the costs.
of production. (C.L. James, Principles of Economics, supra, p. 46.)
Corporations and associations distinguished. (/6 C

(lefinien (1) Concept of association. — A corporation is defined by Section
} 2 of the Revised Corporation Code. The word “association” is one of
vague meaning, used to indicate a,collection-of persons:who-have
joined.together.for,a:certain.object. The term is properly applied to
an unincorporated society or body of individuals;formed for moral,
‘benevolent, social patriotic, or politicalpurposes. (5 Am. Jur. 2d 430-
431.)
(2) Possession of juridical personality. — While. an association
may, in its broadest sénse; include a corporation, the two (2) terms
ordinarily are used to denote different conceptions. The principal
distinction lies in the fact that a corporation is a legal entity deriving
its existence from franchise, whereas an association;in the narrower
separate from.the.individuals:composing it. (7 C.J.S: 21.)
Itis clear from the foregoing that the two (2) terms, “corporati
on”
and “association,” denote two (2) different significat
ions in the strict
legal sense.
(3) Governing law. — Private corporations are gove
rned by
the Revised Corporation Code, while associations
are generally,
governed by-the Civil Code or’some*other laws.
(SE@*Opinion,
July 27, 1962.) Article 45' of the Civil Code Provides
corporations
that “private
are regulated by laws of general application
subject; while partnerships'andassociationsfor on the
private purposes are
governed by the provisions of this Code concerning, part
nerships.”
L (4) Capacity to act in its name, — Article sat So
’ Provides: “Juridical persons may acquir 46 of the Civil Code also

/ e and possess property to all
kinds as well as incur obl
igations and bring civil or criminal
in con for mit y wit actions
a a h the laws and regulations of their organization.”
us, an-association. cannot sue or be sued,-it
cannot enter into
«contracts in the name of the associat;
srorane
contracting party. (SEC Opinion,

or executing them liable to the other
July 23,1990.)

Sec. 10
RATION AN
OF PRIVATE CORPORDATOR GANIZATION
IONS 117
o
An
Secartesasso
upci
onatio
annothe
1S rnotauco
thom etent t O act as agent or create
agents
vatierra vs, Garlitos, 103

Phil. 757 [1958].)
(5) Eee and enforcement of acts. — The fact,
a group Of persons adopt @ Name and however, that
operate without first being
ee if not being a legal unit. (see Rules of Court,

Rule 3, Sec.
Although an
association has no juridica
subscription to the capital stock of a corporationlis personality, its
invalid. The subscr
not necessarily |
iption should not be taken and accepted under
such name. (SEC Opinion, March 11, 1969
.)
(6) Powers, rights and privileges.’— A society or association
not engaged in business ‘and ‘not ‘desirous of acquiring juridical
personality need not be registered ‘with the SEC. (SEC Opinion,
Aug. 22, 1989.) An unregistered organization, however, cannot
exercise the powers, rights, and privileges incident to incorporation
and expressly granted to registered corporations under Section 35 of
the Revised Corporation Code.
(7). Policy of juridical non-interference. — The general rule is that
courts will not interfere with the internal affairs of an unincorporated
association so as to settle disputes between the members on
questions of policy, discipline, or internal government. (Lions Clubs
International vs. Amores, 121 SCRA 621 [1983].)
Concept of franchise.
In common usage, the term “franchise” includes any special
privilege or right affected with public interest, conferred by the State
or corporations or persons and which does not belong to the citizens
of the country, generally as a matter of common right. (see J.R.S.
Business Corp. vs. Imperial Insurance, Inc.,
11 SCRA 634 [1964];
National Power Corporation vs. City of Cabanatuan; 401 SCRA
259
[2003].) To illustrate:
(1) No persons can make themselves a body corporate without
legislative authority. The right to exist, therefore, as a corporation

THE PHILIPPINES Sec. 10
isa (primary or corporate) franchise. No’

person can take another’s
property even for public use, without such authority, which is the
Same as to say that the right of eminent domain can only be ex
ercised
by virtue of a legislative grant. This right of eminent domain
is a
(secondary or special) franchise.
(2) As a privilege, a franchise is not exer
cised by private
individuals at their mere will and pleasure
only but under such
conditions, regulations, and restrictions as the
government ma
deem necessary to impose in the public interest
, security and safety.
Primary franchise and secondary franchise
defined and distinguished.
For practical purposes, franchise, so for. as relating to
corporations, have been divided into two (2) kinds:
(1) Primary or corporate franchise is the right or privilege granted
to individuals by the State to be and act as a corporation after its
incorporation. This privilege, which is granted to the inco
rporators,
enables them to act for certain designated purposes
as a single
individual and exempts them, unless otherwise especially prov
ided,
from individual liability for corporate debts. (18 Am. Jur.
2d 608-
609.)
The primary franchise (also called “general franchise”) is granted
to and vests in the individuals who compose the corporation and
not in the corporation itself.
(2) The right to exist as a corporation is thus distinguished
from the franchise to exercise powers and privileges granted to
such corporation to the business for which it was created, including
those conferred for purposes of public benefit such as the power of
eminent domain and other powers and privileges enjoyed by public
utilities, which is called secondary or special franchise.
‘Only quasi-public corporations or those affected with public

interest-are given
the power to institute condemnation Proceedings against owners
of private property.
It is unlawful to grant the right of eminent domain to purely private entities, exercis
ing
functions which are not public in nature. For in such cases, they would be using
to take property for private use. (SEC Opinion, Oct. 28, 1968.) the right

Sec. 10 TITLE Il. INCORPOR RATION AN D OR
OF PRIVATE GANIZATION
CORPORATIONS 119
a onan
after its incorporat franchise is conferred upon the
ion and Not the in
corporation.” dividuals who cocomrporation
pose the
Transferability of fr
anchise,
The term “franchise
” ;
by the State. It may mean 1S Seneric, coverin g all the rights granted
either the corpor
which is the right granted t 0 a gr a te or primary franchise
oup of individuals to
exist and
chise, which is vested in the

itself, may ordinarily be co corporation
nveyed or mortgaged under
power granted to a corpor a general
ation to dispose of its pro
such franchises as are charged perty, except
with a public used. (Ibid.)
(a) If the corporation is a public
utility, its franchise can be
sold only subject to the prior approval and authorization
(now defunct) Public Servic of the
e Commission. (Act No. 156, Sec.
20[g], as amended.)
———
It has been held by. the Supreme

1935 Constitution of the Philippines Court that the term “franchise”
used in the
that “no franchise, certificate or
authorization for the operation of any other forn\ of
a public utility shall be granted exce
Or other entitiesorganized und er the laws of the Philippines
pt to corporations
of which is owned by citizens sixty per centum of the capital
of the Philippines...” (Art. XIV,
XIL, Sec. 11 .), refers to sec
ondary franchise or the
Sec. 5 thereof, now Art.
© corporation has already come into bein privilege to operate as a public utility
€ mere formation of a public utility corp g. The Constitution does not proh
oration without the tequired proportionibit
Capital. What it does prohibit in the granting of
of a franchise or other form of authorizatio
© operation of a public utility for a corporation alre n
€ requisite Proportion of Filipino ady in existence but without
capital. (People vs. Quasha, 93 Phil.
Tuling must be qualified in view of Sec. 17(4) 333 [1935].) This
. (Infra.)
“It has been held that even if the
franchise is sold under execution
“ 8 the . Public Service Commission , such approval
is still necessary, (Raymundo vs.
- 880 [1973].) Absent such approval Lun eta Motor Co.,
franchise, th in the transfer of the Property cov
€ transferor or grantee continues to be ered by the
responsib] e under the franchis
e in

(b) A secondary franchise is subject:to levy and sale on

execution, with all the property necessary for the enjoyment
thereof. However, where the judgment does not contain any.
special decree making the franchise of a private corporation
answerable for its judgment debt, the inclusion of said
corporation’s franchise (e.g., to operate a messenger as delivery
service), trade name and capital stocks in the execution
sale of
its properties has no justification and such sale should
be set.
aside insofar as it authorizes such levy and sale.* (J.R.S. Business
Corp. vs. Imperial Insurance, Inc., supra.) 7
Steps in creating a corporation. TIF
There are three (3) steps in the creation and organiza
tion of a
corporation, namely; 1 SWmssion By interned :
(1) Promotion; 4
fs
(2) Incorporation (Sec. 18.); and
(3) Formal. organization and commencement of business
operations. (see Sec. 22.)
Promotion of corporations.
The term “promotion” is said to be not a legal but a
business
term, usefully summing up in a single word, a number
of business
operations peculiar to the commercial world by which a comp
any is .
generally brought into existence. (18 Am. Jur. 2d 647.)
The formation and organization of a corporation are brought
about generally at the instance and under the supervision
of one
or more so-called “promoters.” (see Sec. 4.) The activity by.
such
persons is not, strictly speaking, a formal part of the organizati
on:
of a corporation, because it occurs outside the corporate
form
and theoretically, at least, independent thereof. (Ibid.)
Upon.
relation to the SEC and to the public. The transferee holds the proper
ty as agent for the
registered owner as far as the law is concerned. (“Y” Transit Co.,
Inc. vs. National Labor
Relations SEC, 229 SCRA 508 [1994].)
4Under the former Corporation Law (Act No. 1459, as amende
d.), voluntary transfer
of franchise is not permitted. Secs. 51 to 61 of the law refer
to forced or involuntary
transfer or sale of secondary franchise under execution. But the
sale
decreed and ordered in the judgment” of the court and “confirmed by must be “especially
the court after due
notice.” (Sec. 56 thereof.)

Sec. 10 TI TLE I. aor ORPORATION
AND ORGANIZATION
RIVATE CORPORATIONS 121
incorporation, the practice j S for the boa

rd of
resolution ratifying th € contracts entered into directors to pass a
by the incorporators
with the promoters,
A corporation, however, May
incorporators themselves wi
be formed and organized by the
thout getting the services of so-called
promoters.
A promoter of Sworsnon is one who, alone or

with others takes
it upon himself to‘organize a corporation to procure the necessar
legislation, where that is necessary; tg2procure the y
necessary
subscribers to the articles of incor ation, where the corporation is
organized under general laws; td@¢e that the necessary document
is presented to the proper office to be recorded and the certificate
of incorporation issued; and generally, to “float the company.”® (18
CJ.S. 521-522.)
sK ;
They are the agents of the incorporators. ‘+t Poy torpor
Stages in corporate promotion. Pid )

A corporate promotion is said to include three (3) stages, to wit:
(1) Discovery. — This stage may represent a new product or
service, or the promoter may simply organize another company in
an existing line of business;
(2) Investigation. — This second phase involves an analysis of
needs — financial, management, plant, material and labor — and a
decision whether the estimated earnings justify the effort; and
(3) Assembly. — This last stage consists of bringing together
the property, money, and personnel into an organization. At this
Stage, the promoter must have some assurance of control lest third
Parties deprive him of the fruits of his efforts. Control may cover
such items, for example, as patents, leases, options on property, and
contracts for services.
i enesatiainiangummmiepmiceiiene
tt
; Promoter are often referred to especially in the English cases, as “projectors,”

‘agents,” “stewards,” or “trustees,” but whatever term is applied, it means “one who
acts in the formation, establishment, and control of a company prior to the incorporation
and the assumption of control by the boatd of directors.” (Ibid.)

Sec. 19
The above is a description of the promoter in the

economic senge.
At law, promoter problems arise in several cont
exts, For example
the extent of his rewards and the manner
sometimes be subj
of obtaining them May
ect to question. (W.L. Cary, Case
on Corporations, 1969 ed. [University Case s and Materials
Book Series], p. 86.)
Nature of relations of promoters. :
(1) To corporation. — A promoter has a
unique relation to a
corporation representing its interest when
it does not legally exist
or has just been created.
0
(a) The promoterofs a corporation are
not in any sense the
agents of the corporation before it com
es into existence, for there
cannot be an agency unless there is
a principal. But they may
become the agents of the corporation
after it has been formed
pro vided there is assent, express or imp
lied, by the corporation,
(18 CJ.S. 522.)
“'=0(b) Although promoters cannot occ
upy the relation of agent
of the corporation before its formation,
and although they are
not trustees in the proper sense, they occupy
a fiduciary or quasi-
trust relation towards the subscribers before its organi
zation, as
long as they are acting as promoters. (Ibid.)
;
(c) This fiduciary relation imposes upon the
promoters to
act in good faith in all dealings in behalf of the corporation to
protect the corporation from dishonest promoter
s. A promoter
violates this duty if, for example, he secretly acqu
ires property
which he knows the corporation will acquire and them
sells it to
the corporation at a secret profit.
(2) To subscribers or corporators. — Although promoters of a
corporation cannot be agents of the corporation before it is forme
d,
they may be agents of the subscribers or corporators.
(a) Since agency is a contract, it is essential there is an
agreement to this effect.
(b) Even when there is no agency, the relation between
the promoters and the persons who have become, or who
are expected to become, subscribers for its capital stock, or
corporators, or purchasers of stock from the corporation, is one
of trust and confidence, so as to impose upon the former the

Sec. 10 TITLE Il. INCORPORATION
OF PRIVATE CORPAN D ORGANIZATION
ORATIONS =
duty to act in perfec
t
subscribers and corpo 800d faith and in the interest of all the
rators.
(c) Subscribers for
Stock
without agreement to su in a Proposed corporation do not,
ch effect, become partners with the
promoters of it. (14 CJ,
254.)
3 (d) Stockholders of Corporation
cannot be held personally
liable for the compensation claimed by pr
omoters for services
performed by them in the Organi
zation of the corporation absent
any showing that said Stockhold
ers contracted such services.
That they benefited from such ser
vices is no justification to hold
them personall y liable therefore. The corporation sho
uld alone
be liable for its corporate acts as:duly-auth
orized by its officers
notice (Caram, Jr. vs. Court of Appe
als, 151 SCRA 372
1987].
(3) Inter me. — A partnership can be created,
as between the
parties themselves, only by agreement, and, therefore, promoter
s do
not become partners as between themselves, absent such
agreement,
by merely joining in an attempt to create‘a corporation, by
uniting
in subscriptions for stock, or by otherwise promoting the creation
of
the corporation. But such a relation may be created by agreement of
the parties, in which case it is governed by the general principles of
the law of partnership.’ (14 CJ. 254.)
Liability of corporation for promotion

fees.
(1) General rule. — In the absence of character or statutory
provisions, a corporation is not liable to its promoters in respect
for any payment in services rendered or expense incurred before
its incorporation in promoting it, unless after its incorporation it
expressly agrees to make such payment or from the other facts the
court can infer a new contract to reimburse.
‘It is however, unimportant to determine whether the relationship is a partnership

Or a mere joint venture since in both cases, the legal rules which apply and the
Which govern the parties are the same. Each member is bound principles
to the same scrupulous
800d faith toward his fellow members as through all were partners,
tight to demand from the others the utmost good faith in everythingand each has the
concerning the
Common interest. (18 Am. Jur. 2d 676.)

124 THE REVISED CORPORATION CODE OF THE PHILIPPINES _ See. 19
(a) It is more reasonable to hold services performed or

expenses incurred before organization of a corporation to have
been gratuitous because of the general good or private benefit
expected to result from the object of the corporation, and because
it is unjust to stockholders who subscribe and pay for stock, that
their property be subject to claims for which they have no voice
in creating.
(b) Itis a fraud for promoters to undertake to deci
de for the
future stockholders in the corporation to be organize
d thata large
part of the capital stock is a fair remuneration for their
services,
to issue that amount to themselves as such remu
neration, and
then to invite the public to subscribe to stock with
out disclosing
that fact and getting the subscribers consent to
the payment of
that remu neration. (18 Am. Jur. 2d 649.)
(2) Authorization by stockholders. — After due
nization of orga
the corporation, it may, with the consent of
all its stockholders
and where there is no question as to-the
rights of subsequent
stockholders, authorize the payment of comipensa
and the issu
tioto
n promoters
ance to them of stock unless prohibited by stat
ute. (Ibid.)
(3) Amount. — The amount of promotion fees that
allows depends principally upon the effort the SEC
exerted, the difficulties
encountered, and the expenses incurred in
Promoting and organizing
ad
the corp
oration.’ There is no hard and fast rule.
the SEC had authorized the payment of pro However, where
motion fees of mining
companies, the maximum fee allowed did not exceed 5% of the
amount paid and received on the subscription
s.
Liability of corporation on promoter’s
contracts.
(1) Before incorporation and organization. —
Until the certificate
of incorporation had been issued by the
SEC 19.),a(see Sec.
corporation has no being, franchise, or faculties.
Its promoters or
those engaged in bringing it into existenc
e are in no sense identical
with the corporation; nor do they represent it in any relation of
agency or have any authority to enter into prel
iminary contracts
binding upon the corporation. Therefore, since a
corporation
7Asarule, this Promotion fee is not given in lump sum but in stage
s as the company
Proceeds in its operations. (SEC Opinions, July
10, 1963 and July 22, 1970.)

Sec. 10 TITLE Il. INCORPORATION AND ORGANI
OF PRIVATE CO ZATION
RPORATIONS
t does not, by the incorporation of a

ontempl ated company, ‘ps0 facto become the contract of the
corporatio n.
of an ultra vires contract (see Sec. 45,)

than it can leg,
made by its promoters anymore
legally initiat e
such contract. (18 Am. Jur. 2d 600
Cagayan Fishing Dev. Co,, Inc. -601; see
vs. Sandiko, 65 Phil. 223 [1937].)
Until such assumption of lia
bility is made, the better rule seems
to be that contracts entered into
by promoters “should at most
deemed suspended, be
and enforceable only after the inc
and organization” of the corporation. orporation
(see C.G. Alvendia, op. cit., p.
135.)
Liability of promoters for failure

to organize corporation.
(1) To subscribers. —If money is paid to pro
moters or provisional
director
s by a subscriber for shares in a proj
ected corporation
preliminary to organization, and the
promoters or provisional
directors fail to organize the corporation according
to the prospectus
or other agreement or abandon the enterpri se before it
carried into execution, it is a case of money has been
paid ona consideration
which has failed. The subscriber may, therefore, reco
ver
the promoters or directors in an action at law althou it back from
as been applied in payment of preliminary expenses gh the money
(18 CJ.S. 537.
or otherwise
)
SF aneteceemeespmmnsenrconas,
®Where, however, the subscriber agrees that the amount paid on his subs
may be applied on certain promotional or cription
development expenses and it is so applied,
Promoters are not personally liable for the the
amou
Project'to organize the corporation is abandone nt paid on the subs crip tion wher e the
d. (18 Am. Jur. 2d 660.)

126 THE REVISED CORPORATION CODE OF THE PHILIPPINES —_ Sec, 19
It must be shown by the subscriber that ‘the person receiving

the money sought to be recovered to receive it for the promoters or
provisional directors or for the abortive corporation, and that he in
fact did so receive it. (14 C.J. 276.)
(2) To each other. — While it has been held that as between
themselves the rights of the stockholders ina defectively incorporated
association should be governed by the laws of the State relatin
thereto and not by the rules governing partners, it is ordinarily held
that persons who attempt, but fail, to form a corporation and who
carry on business under the corporate name, occupy the position of
partners inter se. (see Secs. 21-22.)
But such a relation should be implied only to do justi
the parties. So, one who takes no part except to subs ce between
cribe for stock
in a prop osed corporation never legally formed does
a partner with the other subscribers. (Pio
not become
neer Insurance & Surety
Corp. vs. Court of Appeals, 175 § RA 668 [1989].
Lire Gemmevitimene - Lava
Underwriting agreements. ?- i OF iothinn ll ha
Underwriting agreements are now resorted
to generally to float
stock issues of large corporations.
There are four (4) general types of underwrit
ing contract.
First, the syndicate? may make a firm commit
ment under which
the members severally but not jointly apes
les fake the whole
issue outright at a particular Price for resa
le at a price different to
the public, or to dealers who sell at another diff
erential to the public.
Second, the underwriters may*make an all-
or-nothing commitment
under which they agree to accept liability
for the purchase of an
issue at a given price only if the entire issu
e js not sold — usually
within a 30-day period.
Third, the syndicate may make a standby
commitment or
rights offering under which it will purchase
and distribute at
predetermined prices to the public any amount
of the issue not
taken by stockholders in exercising their pre
emptive rights.
’Underwriting syndicate is the term used to refer

who'have pooled their resources'to’share ii the profi to a grouprofinvestmentibankers,
basis
ts of an underwriting ona pro rata
according to the amount of underwriting risk assumed. Re p- 64.) The contr
may be entered into by the underwriter or underwriters with act
6 promoter before incorporation. the'c orpor
Ee eevee
ation or with the

Sec. 10 TITLE Il. INCORPORATIO
OF PRIV ATE O N AND ORG ANIZATION 127
ORPORATIONS
price but no guarantee on the quanti

Norton,
ty sold. (see J. Zwick & N.
“Investment Banking and Underwriting,” in The Stock
; d by F. Zarb & G. Kerekes, Vol. 1, 197
0 ed.,
Incorporation distinguished
from
creation.
The term “incorporation” is narr
ower in scope than the term
“creation.” :
The first “refers to the performance of
conditions, acts, deeds,
and writing by incorporators, and the offi
cial acts, certifications or
records which give the corporation its existence,”
But the second, “understood in its broadest
sense, includes all of
the acts and doings from the enactment of the gene
ral incorporation
law by the legislature through the promotion, und
erwriting,
Preparation and execution and filing of the incorpor
ation papers
and obtaining the certificate of charter, to the orga
nization and
first meeting and election which set the corporation in
motion full-
pledged.” (C.G. Alvendia, op. cit., p. 73.)
Incorporation distinguished from

corporation.
A corporation is a civil institution established by a law of the
State from considerations of public policy. Its existence,
its capacities
and its powers are all conferred by law from some real or
supposed
public benefit to result from it. Itis a political institution
of the State.
LS
The term “underwriting” is defined under the Investment Houses

129.) as “the act or process of guaranteeing the distr Law (PD. No.
ibution and sale 0 f securities of any
d issued by another corporation.” (Sec. 3[a] thereof.
)

The words “corporation” and “incorporation” are frequently

confounded, particularly in the old books. The distinction between
them is, however, obvious: one is a legal or juridical institution;
the other, only the act by which that institution is created. When
a corporation is said to be a person, it is understood to be so onl
in certain respects and for certain purposes, for it is strictly a legal
institution. (see 9-A Words and Phrases 453.)
Steps in incorporation.
Incorporation includes:
(1) Drafting and execution of the articles of incorporation by
the incorporators and other documents required for registration of
the corporation.
(a) The incorporators will file the articles of incorporation
(in the form prescribed by Section 14) and other inco
poration
document with the SEC. The documents may be in the
form of
electronic documents. (Sec. 13, last par.)
(b) If the proposed corporation is governed by
a special
law (e.g., educational institution), the incorporatio
n documents
must include a favorable recommendation of the
appropriate
government agency (i.e, Department of Education)
that such
articles of incorporation is in accordance with law
(see Sec. 16,
last par.); ;
(2) Payment of the registration, incorporation,
and other fees
(see Sec. 175.); and
(3) The issuance by the SEC of the certific
ate of incorporation if
all the papers filed after verification and
examination are found in
order. (see Sec. 18, par. 2.)
;
There are rules or requirements und
er special laws to be
complied with in organizing specific
business. (Sec. 16, last par.)
The Revised Corporation Code does not
or organization of corporations with prohibit the formation
the same stockholders/
incorporators, subject to Section 176,
Substantial compliance with req

uirements.
(1) Corporations governed by Revised Corpor
ati
the formation or organization of corporati on Code. — Where
ons is not governed

Sec. 10 TITLE Il. INCORPO
OF PRIVATRATIO N AND ORGANIZATI
E CORPO RATIONS 129
ee
by special laws (e.g.,, those e
the SEC may accept and :
.F 7 n a e
8aged in real estate development),
“
substantially” the matters enumerated, “exc ept as otherwise
provided by this Code or by special law,
” while Section 14 provides
that the articles of incorporation shal
l co mply
the form prescribed. Section 16(1) likewise “substantially” with
requires substantial
compliance with the form prescribed in the Revised
Corporation
Code relative to the approval of articles of incorpor
ation and any
amendment thereto. (Ibid.)
(3) Registration of proposed corporation becomes a matter of right.
—
Where there is substantial compliance with the legal requirements
,
the registration of the proposed corporation becomes a matter
of
right.
Number of incorporators.
For the purpose of forming a new domestic corporation under
the Revised Corporation Code, not more than 15 persons may
organize themselves and form a corporation.
Only a One Person Corporation (OPC) may have a single
stockholder and a sole director. Its registration must comply with
the corresponding separate guidelines on the establishment of an
OPC. (SEC Memo. Circ. No. 16-19, July 30, 2019.)
Qualifications of incorporators.
Incorporators are those stockholders or members mentioned in
‘the articles of incorporation as originally forming and composing
the corporation, and“Who are signatories thereof."
LD
"See Appendix A: SEC Memo. Circ. No. 16-19, July 30, 2019 (Guidelines on the
Number and Qualifications of Incorporations under the Revised Corporation
Code).

PHILIPPINES Sec. 10
130 THE REVISED CORPORATION CODE OF THE
oe fe a ue
(1) Each incorporator of a stock corporation
a subscriber to, at least one (1) share of the capita a i ace
incorporator of a nonstock corporation must be a member e
corporation.
(2) The incorporators may be any combination o natural
person/s, SEC-registered partnerships,” SEC-registered omestic
corporation/s or association/s, and foreign corporations,
partnerships, and associations. :
(3) Incorporators who are natural persons must be of legal age,
and must sign the articles of incorporation/bylaws." (Ibid.)
Beneficial ownership is unnecessary and a person who holds the legal title to stock
is qualified to become an incorporator. The law permits a scheme by which all the shares
are owned by a single individual, The validity of the incorporation is not affected by the
fact that it is formed in the interest of a single individual, and that the other persons are
under his control, without any substantial interest, or without individual responsibility
who may only be called “qualifying stockholders,” or who are popularly known as
dummies or “men of straw.” Nor is the existence of the corporation originally formed by
the required number of incorporators affected by the subsequent accumulation of all the
shares in the hands of one individual (18 CJ.S. 415-416.), unless circumstances exist to
justify the piercing of the veil of corporate entity. (see Sec. 2.) .
Under the old rule, only natural persons can be incorporators. Now, any “person,
partnership, association or corporation, singly or jointly, with others can be incorporators.
Since there is no more minimum limit to the number of directors, a corporation
can have
only one (1) director if its articles of incorporation so provide.
In any case, a corporation may become a stockholder in another corporation
subscribing to or purchasing the latter’s stock. (see Sec. 35[g].), for by
the power of one
corporation to own stock in another corporation is entirely different
from its power to
create or itself become one of the incorporators of another corporation.
414.) However, as a practical matter, a corporation could have (see 18 C.J.S.
stockholders directors,
or officers, acting as individuals, organize a new corporation and
thereafter the first
corporation could acquire the stock of the new corporation.
(15 Am. Jur. 2d 584.)
e incorporators are presumed to have the capacity to enter
into a valid contract, the
act of forming a corporation as between the parties being
contractual, although there is
no more requirement that the incorporators must be qualified
Purpose of its requirements in Sections 13 and 15 is to secure
to enter into a contract. The
the
against the possibility of any fictitious name being subscribed State and all concerned
furnish proof of the genuineness of the signatures. to the articles and ‘to
A married woman may be an incorporator without the
need of containing the
consent or her husband since under the law, “either
spouse may exercise any legitimate
Profession, occupation, business or activity without
the consent of the other” subject to
the right of the husband to “object only on valid, serious and
moral grounds.”
Family Code.) A minor who is emancipated either by marriage or by voluntary (Art. 73,
of the parents is not qualified concession
to be an incorporator because Section 10 requires
incorporators must be “all of legal age.” Article 236 that the
of the Family Code (E.O. No. 209,
July 6, 1987.), however, provides: “Emancipation for any
authority over the person and property of the child cause shall terminate parental
who shall then be qualified and
responsible for all acts of civil life.” The Corporation
Code is a special law. The Family
Code, however, has reduced the majority age
to 18 years. (Art, 234.)

én 10 TITLE EI
II. INCORPORATION AND ORGANIZATION
F PRIVATE CORPORATIONS toh
Se Persons licensed to practice a profession, and

ar Pp associations organized to practice a profession, are
not allowed to organize as a corporation unless otherwise provided
under special laws. (Sec. 10.)
The usual practice is for the incorporators to serve as first
directors of the corporation.
Juridical persons as incorporators.

(1) P artnerships. — In the event that an SEC-recorded
partnership is made an incorporator, the application for registration
must be accompanied by a Partners’ Affidavit, duly executed by all
the partners, to the effect that they have authorized the partnership
to invest in the corporation about to be formed and that they have
designated one partner to become a signatory to the incorporation
document. (SEC Memo. Circ. No. 16-19, July 30, 2019.) In effect, the
SEC seems to require that the partners unanimously approve the act
of the partnership in being an incorporator. This should not be the
case if the articles of partnership do not require a unanimous vote of
the partners.
with the
Partnerships under “dissolved” or. “expired” status
. (SEC Memo.
SEC shall not be authorized to become an incorporator
Circ. No. 16-19, July 30, 2019.)
— In the event that
(2) Domestic corporations or associations.
or association is made
‘an SEC-registered domestic corporation
corporation must be
an incorporator, its investment in the new
of directors or trustees and
approved by a majority of the board
t two-thirds (2/3)
ratified by the stockholders representing at leas
at least (2/3) of the members
of the outstanding capital stock, or by duly called for
a meeting
in the case of nonstock corporations, at or a Secretary’s
the purpose. Directors’/ Trustees’ Certificate
A
s, and the authorized
Certificate, indicating the necessary approval
be executed under
signatory to the incorporation document, shall
.
oath and submitted by the applicant
corporations under “delinquent”, “suspended”,
Domestic
shall not be authorized
“revoked” or “expired” status with the SEC 30,
. No. 16-19, July
to become an incorporator. (SEC Memo. Circ
2019.) :

DEOFTHEPHILIPPINES Sec. 10
ATION CO
132 THE REVISED CORPOR
n cor por ati ons . — Int he eve nt that a foreign corporation

(3) Foreig icati for regisistration must
de an incorpor ation, the application
ment (i.2., Seibel
He sceompartied by a copy of a docuficat
Certie, or its of sip sth
Directors’ Certificate, Secretary’s Epos
ulate se
authenticated® by a Philippine Cons Oe ‘i BY ion
authorizing
(marginal note) affixed thereto, one
ed and specifica y
to invest in the corporation being form
foreign corporation.
the designated signatory on behalf of the
Memo. Circ. No. 16-19, July 30, 2019.)
= No articles of
(4) Additional requirement on certain corporations.
ions,
incorporations of banks, banking and quasi-banking institut
preneed, insurance and trust companies, NSSLAS, pawnshops,
and other financial intermediaries shall be approved unless
accompanied by a favorable recommendation of the appropriate
government agency to the effect that the articles of incorporation
are in accordance with law. (Ibid.)
Signatories of the articles of incorporation.

(1) Each individual signing the articles of incorporation/
bylaws must indicate the capacity upon which he/she is affixing
his/her signature thereto (i.e., Incorporator or Representative of XYZ
Corp.). :
(2) An individual designated to sign the articles of
incorporation/bylaws on behalf of an incorporator, which is not
a natural person; must also indicate the corporate or partnership
name of the entity being represented and for whom he/she is
executing the articles of incorporation /bylaws.
(3) An individual who signs the articles of incorporation on
behalf of an incorporator, which is not a natural person, may not be
named as a director or trustee in the same articles of incorporation,
unless when the said individual is also the owner of at least one (1)
share of stock, or is also a member, of the corporation being formed.
(4) The inclusion of foreign nationals in the articles of
incorporation shall be subject to the applicable constitutional,
eee :
15
For documents
contracting parties.
executed in countries and territories which are not Apostille-
‘For documents executed mii countries and _territori i are Apostilille-
: countries.
contracting itories which

ue 11
T TITLE II, INCORPORATION AND ORGANI
ZATION 133
statutory, and regulato ry restrictions ve ns, regardi.ng

:
foreign - pation in
partici and conditio
cert ain investment areas or activities.””
(5) The Taxpayer Identification Number of
the designated signatory should both be stated the principal and
in the articles of
incorporation. No application for incorporation shall be acce
pted
unless the registration documents reflect the Tax Identification
Number or passport number of all its foreign investors other
than foreign corporations not yet issued a Taxpayer Identification
Number.
After incorporation, all the foreign investors, natural or juridical,
shall secure a Taxpayer Identification Number. All documents to be
filed with the SEC after incorporation (e.g., General Information
Sheets) shall not be accepted unless the Tax Identification Number
of all its foreign investors, natural or juridical, resident or non-
resident, are indicated. (SEC Memo. Circ. No. 16-19, July 30, 2019.)
Sec. 11. Corporate Term. — A corporation shall have

perpetual existence unless its articles of incorporation
provides otherwise.
Corporations with certificates of incorporation issued
prior to the effectivity of this Code, and which continue
to exist, shall have perpetual existence, unless the
corporation, upon a vote of its stockholders representing
a majority of its outstanding capital stock, notifies the
Commission that it elects to retain its specific corporate
term pursuant to its articles of incorporation: Provided,
That any change in the corporate term under this section
is without prejudice to the appraisal right of dissenting
of this
stockholders in accordance with the provisions
Code. (N)
By specific constitutional and _ legal Pree citizenship is fs pay

Je oe , rators in corporations in which of the capita
a certain percentage
a cece See te aed by Filipino citizens. (Infra., under Sec. 14[11th].) Foreign
shareholders may be debarred from certain nationalized activities which are exclusively
(see Secs. 11, 22.)
reserved for Filipino citizens. The rule applies to directors or trustees.
Enemy aliens cannot become incorporators, for subjects of one country cannot
lawfully nisaek with the subjects of the country with which it is at war. (White v.
Burneley, 20 How. 235.)

134 THE REVISED CORPORAT
ION CODE OF THE PHIL
IPPINES Sec, 1]
Proviguened_by amending the articles

Provided, That no exte
nsion may
of incorporatics
be made earlier than
r years prior to the original
date(s) unless there are or subsequent expiry
justifiable reasons for
extension as may be an earlier
determined by the Comm
Provided ,further, That such exte ission:
term nsion of the corporate
ll take onl h
or subsequent expiry following th igi
date(s),
A corporation whose term
has expired may apply for
a revival of its Corporate
existence, together with all
rights and Privileges the
under its certificate of inc
and subject to all of its dut orporation
ies, debts and liabilities exi
Prior to its revival. Upon sting
approval by the Commission
the corporation Shall be de ,
emed revived and a certif
of revival of Corporate exi icate
stence shall be issued, giv
it perpetual existence, unl ing
ess its application for reviva
Provides oth l
erwise. (N)
No application for revival of cert
ificate of incorporation
of banks, banking and quasi-bankin
g institutions, preneed,
ins urance and trust companies,
nonstock Savings and
loan associations (NSSLAs), Paw
nshops, corporations
engaged in money service busine
ss, and other financial
intermediaries shall be approved
by the Commission
unless accompanied by a favorable
recommendation of
the appropriate government agency. (N)
Perpetual corporate term.

(1) The old Corporation Code prescribed a maximum corporate
term of 50 years from the date of its incorporation and required
corporations to amend their articles of incorporation to extend the
corporate life. Its existence is deemed dissolved upon expiration of
the term.
(2) The Revised Corporation Code now provides that a
corporation shall have perpetual existence unless its articles of
incorporation provide otherwise.
i
1The transformation of a bank from a government-owned corporation to ivate
ae
one did not result in a break on its life as a juridical person. The same idea of on ie
cannot, however, be said of its employees when employment with it as Be eaayee
owned corporation ceased. Such privatization cannot deprive the governm

RATION AND ORGANIZATION
OF PRIVATE 135
CORPORATIONS
their corporate term to a certain

eriod.
ini (SEC-
20, Nov. 3, 2020; see also SEC-O¢C
Opion Ne Ban eae
SEC-OGC Opinion No. 28-19, July 22, 2019: SEC-OGC OpinioSnBgNo.
.
16-19, April 15, 2019.) Since the automatic conversion of the corporate
term to perpetual existence does not require an amendm
ent of the
on, the 2/3 affirmative vote of the outstanding
shares to amend the articles of incorporation would not be required.
(SEC-OGC Opinion No. 28-19, July 22, 2019.)
(3) The shift to perpetual term of existence would not only
remove the possibility of a premature expiration of the registration
of productive businesses, but also. foster. sustainable long-term
projects beyond the initial 50-year term. In some corporations, a
50-year period may still be short to achieve its business purposes.
Understandably, some corporations may prefer to keep their
corporate existence limited depending on their purposes and needs.
(4) The general provision on corporate term in Article 11 does
not apply to religious corporations. The specific provisions in XIII
for the religious corporations, particularly Sections 108 and 114
(Religious Societies) do not provide for the term of existence of
religious corporations, whether classified as corporation sole or
religious society. (SEC Opinion No. 04-11, Jan. 10, 2011.)
Change in corporate term for a specific period.

The extension or shortening of the original corporate term is
subject to these conditions:
(1) The specific period may be extended or shortened. by
amending the articles of incorporation;
(2) In case of extension, the same may be made no earlier than
three (3) years before the original or subsequent expiry date(s)
unless there are justifiable reasons for an earlier extension;
(3) Such extension shall take effect only on the day following
the original or subsequent expiry date(s);
invalicd ofrithe
ot ir saccrued benefits and compensation
: :
. (Ong vs. Philippin. e Nation
: ere:
+
al Bank,
621 SCRA 120 [2010].)

Sec. 11
(4) The change in the corporate term is without prejudice to the

appraisal right of dissenting stockholders; ae
(5) The amendment must be is effected? before the expiration of
the corporate term of existence, for after dissolution by expiration
of the corporate term, there is no more corporate life to extend.? The
corporation ceases to have judicial personality except for purposes
of liquidation under Section 139. Hence, ‘the extension cannot be
done during the three-year period of liquidation (Alhambra Cigar
vs. SEC, 24 SCRA 269 [1968]; see Sec. 139.); and
(6) The application for revival of certificate of incorporation of
banks, etc., shall not be approved by the SEC unless accompanied
by a favorable recommendation of the appropriate government
agency.
Effect of extension/expiration of term.

(1) The mere extension of the corporate term of existence made
before the expiration of the original term constitutes a continuation
of the old, and not the creation of a new, corporation.
ae
(2) Upon the expiration of the period fixed in the articles of

incorporation, absent compliance with the legal requisites for
the extension of the period, the corporation ceases to exist and is
dissolved ipso facto.
(3) The expiration of the term for which the corporation was
created does not, however, produce its immediate dissolution
for all
purposes. (Sec. 139.)
*The suspension of the activities and operations of a corporation during the

period
of enemy occupation may not be considered as having automatically operate
d to deprive
it of a corresponding part of its juridical life as fixed in its articles
of incorporation.
Consequently, the original term of existence cannot be extended without
violating the
law. (SEC Opinion, Nov. 21, 1962.) '
*Under the doctrine of relation which has been applied in American decision
the delay in effecting the amendment is due to the neglect of the officer s, where
application is required to be filed or to a wrongful refusal on his with whom the
part to receive it, the
same will be treated as having been filed before the expiry date.
The
apply where the delay is attributable to the corporation. (SEC Opinion doctrine does not
, May 14, 1987.)
€ occurrence of a fortuitous event (Act of God) or force
majeure (Act of Man)
is considered a meritorious reason by the SEC to justify the doctrine
by the SEC is whether under the particular circumstance there . The test applied
interference occurring without the corporation’s intervention was such insuperable
as could not have been
prevent ed by prudence, diligence, and care. However, since the privileg
purely statutory, all of the statutory conditions precedent for extensio e of extension is
n of corporate life
are not to be given a liberal interpretation. (SEC Opinion,
July 7, 1987.)

Sec. 11 TITLE I. INCORPORATIO
0 ION AND
F PRIVATE CORPORATORGA
IONS
NIZATION
et
Guidelines on Corporate term
(2) Corporations incorporated under B.P. No. 68 and

— The rules are: Act No. 1459.
a) The corporate term of a corporati
of Incorporation issued before the effectiv on with certificate
ity of the Revised
Corporation Code and which continue
to exist, shall be deemed
per petual upon the effectivity of the Revised
Corporation
Code, without any action on the part of the corporation. The
corporation, subject to payment of filing fees, may amend its
articles of incorporation to reflect its perpetual corporate term
by a vote of majority of its board of directors or trustees and
by a vote of its stockholders representing a majority of its
outstanding capital stock including the non-voting shares, or a
majority of the members, in case of a nonstock corporation.
(b). A corporation with certificate of incorporation issued
before the effectivity of the Revised Corporation Code and
which continue to exist, that elects to continue with: their
present corporate term pursuant to the corporation’s articles
of incorporation, shall notify the SEC by filing a notice with
attached directors’ certificate, certifying that the decision to
retain the specific corporate term as specified in the articles
of incorporation was approved in a meeting duly held for the
purpose by a majority vote of the board of directors or trustees
and by the vote of the stockholders representing a majority of
the outstanding capital stock, including the non-voting shares,
or a majority of the members, in case of a nonstock corporation.
‘See Appendix B: SEC Memo. Circ. No. 22-20, August 18, 2020 (Guidelines on
Corporate Term).
The SEC also issued guidelines governing the computation of the corporate term
(see SEC Memo. Circ. 21-14, November 28, 2014).

(c) The notice to be submitted to the SEC must be signed by

at least a majority of the members of the board of directors or
trustees, and attested by the corporate secretary.
(d) The notice must be submitted to the SEC, Company
Registration and Monitoring Department (CRMD), any SEC
Satellite Office or SEC Extension Office, within a period of
two years from February 23, 2019, or until February 23, 2021,
pursuant to Section 185 of the Revised Corporation’ Code. A
Certificate of Filing Notice to Retain Specific Corporate Term
shall be issued to the corporation.
(e) The corporate term of corporations which fail to comply
with the required notification shall be treated as perpetual after
the lapse of the two-year period. !
(3) Amendment to extend or shorten the corporate term. —
(a), Corporations incorporated under the _ Revised
Corporation Code whose articles of incorporation provi
de
for a specific term of existence and existing corpo
rations
incorporated under the Corporation Code and the Corporatio
n
Law that opted to retain its specific corporate term, may
file an
amendment of articles of incorporation to extend or short
en the
specific corporate term pursuant to Section 11, parag
raph 3 of the
Revised Corporation Code. The amendment must
be approved
by vote or written assent of majority of the board
of directors:
_ or trustees and vote or written assent of
the ‘stockholders |
representing at least two-thirds (2/3) of the outs
tanding capital
stock of the corporation.
(b) Inno case shall any extension of corpor
ations mentioned
in the preceding paragraph be made earl
ier than three (3)
years prior to the original or subsequent
expiration date of the
corporate term, unless there are justifiable
reasons for extension
as may be determined by the SEC.
(c) Extension of the corporate term shal
l take effect only on
the day following the original or subseq
uent expiry date(s).
(4) Amendment to change specific corp
orate term to perpetual
corporate term. — Corporations incorp
orated under the Revised
Corporation Cod
e whose articles of incorporation provid
specific term of existence and existing e for a
corporations incorporated
under the Corporation Code and the Corporation Law
that notified

OF PRIVATE TI
C ON RPAN
ORDA O RSANIZATIO N 139
Tepresen
(2/3) of the outstanding capital stock of ting at least two-thirds
the ne i
of the Philippines and the Corporation Law exis

ting at the time of
effectivity of the Revised Corporation Code whose corp
orate terms
were treated perpetual for failure to comply with
the notification
required by the SEC, and corporations that ame
nded their articles
of incorporation to reflect their perpetual term of
existence may
subsequently amend its perpetual term of existenc
e to specific
corporate term. The amendment must be app
roved by vote or
written assent of majority of the board of directors
or trustees and
vote or written assent of the stockholders representing
at least two-
thirds (2/3) of the outstanding capital stock of the corporation.
(6) Appraisal right of dissenting stockholders. — Any change in the

corporate term pursuant to Section 11 shall be without prejudice to
the appraisal right of dissenting stockholders in accordance with
€ provisions of the Revised Corporation Code. (SEC Memo. Circ.
No. 22-20, August 18, 2020.)
Petition for revival of corporate existence.

A corporation whose term has expired may, at any time, apply
for a revival of its corporate existence. (see Sec. 11; SEC-OGC
Opinion No. 48-19, Oct. 7, 2019.)
(1) Who may apply for revival. — Under the Guidelines on the
Revival of Corporate Existence (SEC Memo. Circ. No. 23-2019.)
these corporations may file the petition:
(a) Generally, a corporation whose term has expired;
Se IL
"See Appendix C: SEC Memo. Circ. No. 23-1
9, November 21, 2019 (Guidelines on the
Revival of Expired Corpor
ati
ons).

140 THE REVISED CORPORATION
CODE OF THE PHILIPPINES
Sec, 1]
(b) An expired corporation who

se certificate of registration
has been revoked for non-filing
of reports (e.g., general
information sheet, and audited
financial statements), provided
that it shal l file the proper petition to lift its rev
which may be incorporated in its oked Status,
petition to revive, and must
settle the corresponding penalties thereo
f;
(c) An expired corporation whose
certificate of registration
has been suspended, provided that it shall file the
to lift its Suspended Status, which proper petition
may be incorporated in its
Petition to Revive, and must settle
the corresponding penalties
thereof: or
(d) An expired corpor
ation whose corporate name
already been validly re-used, and is has
currently being used, by
another exi sting corporation duly registered wit
Provided that the former shall cha h the SEC,
nge its corporate, name
within 30 days from the issuance of its Certificate of
Corporate Existence. Revival of
(2) Who may not apply for revival. — The

se corporations are not
allowed to file a petition:
?
(a) An expired corporation which has completed the
liquidation of its assets;
(b) A corporation whose certificate of registra
tion has been
revoked for reasons other than non-filing of
repo rts (e.g., general
information sheet, and audited financial
statements);
(c) A corporation dissolved by virtue of Sect
ions 6(c) and
6(d) of Pres. Decree No. 902-A, as amended
by Pres. Decree No.
1799; or
(d) An expired corporation which already
availed of re-
registration, in accordance with Memora
ndum Circular No. 13,
series of 2019 (Amended Guidelines and Proc
edures on the Use
of Corporate and Partnership Names), or othe
r memorandum
circulars issued by the SEC pertaining to re-registration,
unless:
1) The re-registered corporation has given its consent to
the Petitioner to use its corporate name, and has undertaken
to undergo voluntary dissolution immediately after the
issuance of the Petitioner’s Certificate of Revival; or

Sec. 12
TITLE I, INCO
RPORA’
OF PRIVATE TION AND OR
GANIZATION 141
CORPORATIONS
, tiate revival, —
votes is at least a majority vote of the aie The required number of
of at least majority of the outstand;
corporations, at least a majori
ae ty vote of the board of trustees, and
the vote of at least majo rity of the members.
(4) Procedure of revival. — Other requirements:
(a) Petition and filing fees must be paid for
the revival.
(b) The Petition must be verified and mus
t contain the
statements or mattes enumerated in
Section 6 of the SEC Memo.
Circular No. 23-2019.
(c) The petitioner shall file with, and refer to in,
its Petition
the documents enumerated in Section 7.
(5) Appraisal right. — The revival of the corporate existence is
without prejudice to the appraisal right of dissenting stockholders
in accordance with the provisions of the Revised Corporation Code.
(6) Applicability of the Revised Corporation Code. — To extend to
the revived corporations a benefit similar to that provided in Section
185 of the Revised Corporation Code, a revived corporation shall be
given a period of two (2) years from the issuance of its Certificate
of Revival to comply with the Revised Corporation Code, unless
otherwise provided in these guidelines.
(7) When exemption may be given. — In the broader interest of
justice and to best serve public interest, the SEC may, in a particular
matter, exempt an expired corporation from the above guidelines or
requirements. In exceptional cases and apply such suitable, fair and
reasonable procedure to improve the delivery of public service and
to assist the parties in obtaining a speedy and judicious disposition
of cases.
Sec. 12. Minimum Capital Stock Not Required of Stock

Corporations. — Stock corporations shall not be required
to have a minimum capital stock except as otherwise
Specifically provided by special law. (A)

PHILIPPINES See. 12
Capital stock requirement.

The Revised Corporation Cod
e does not set a minimum Cap
stock. The former Corporation ital
Law (Act No. 1459.) has also
capital stock requirement. It no
merely requires that the articl
incorpora tion state the amount of the es of
corporation’s capital stock.
A minimum capital stock requir
ement is considered arbitr
and does not assure any practi
cal protection to corporate cre
Special laws may, however, requir ditors,
e a higher paid-up Capital, as in
the case of commercial banks,
insurance companies, and inv
estment
Minimum Subscription
and paid-up
Capital.
Section 13 (Amount of capita
l stock to be subscribed and
for purposes of incorporatio
n.
paid
— Repealed) of the old Code
that at least 25% of the am requires
ount of the authorized cap
been actually subs ital stocks has
cribed and that at least 25%
paid. In no case shall the of such subscription
paid-up capital be less tha
ued
These requirem ents were mandatory. Ac n P5,000.00.:

cordingly, if they, were not
i
in good faith? The minimu

m 257% subscription and
25% paid-up
is its working capital whi

International Corporation ch consists of the liquid assets of a given business.
vs, Reyes, 631 SCRA 596 [20 (Kukan
*If a corporation is organized 10].)
in such a way that thé cor and car ries on business without sub
stantial ital
its debts, it is inequitable tha ation is likely to have no sufficient assets available tocapmee
por
escape personal liability. Thet shareholders should set up such a flimsy organization t
attempt to do corporate to
Tesponsibility to creditors business without providing any
sufficient basis of financial
and will be ineffectual to exe is an
mpt the shareholders from cor abuse of the separate entity
porate debts. It is coming to be
this is a ground for denying

the
citing Ballantine, pp. 302-303, in Separate entity privilege,” (Keating, Judge [dissenting],
Walkov
“An obvious inadequacy of capi szky v. Carlton, 18 N.Y. 2d 414, 223 N.E. 2d 6.)
tal, measured by the nature and
magnitude of

T. ITLE Il, INCORPORATION
AND ORGANIZATION
=
capital was required not onl

;
also in case of inc rease of th € y authori
during 6 the in cor
i por ation period but
1, now Sec. 37, par. 4.) uthorized capital stock. (Sec. 38, par.
The Revised Corporation Code deleted the requ
irement.
However, the minimum 25% subscribed and 25% paid-up
reRuEMeNt 1S retained under Section 37 in case of an
increase in
capital stock.
Subscription of corporations.
Domestic corporations may subscri
be initially to the capital
stock of another proposed corpor ation.
With respect to foreign corporations, whether resi
dent (i.e.,
engaged in business in the Philippines) and non-resident
, they
may subscribe to the stocks of domestic corporations if they are
authorized by their charters to hold shares in other corporations.
_ Sec. 13.1 Contents of Articles of Incorporation. — All

corporations shall file with the Commission articles of
incorporation in any of the official languages, duly signed
and acknowledged. or authenticated in such form and
manner as may be allowed by the Commission containing
substantially the following matters, except as otherwise
prescribed by this Code or by special law: \\¢P+- \\y\
(a) The name of the corporation;
(b) The specific purpose or purposes for which the
corporation is being formed. Where a corporation has more
than one stated purpose, the articles of incorporation shall
indicate the primary purpose and the secondary purpose.
or purposes: Provided, That a nonstock corporation may
not include a purpose which would change or contradict
its nature as such;
(c) The place where the principal office of the
corporation is to be located, which must be within the
Philippines;
ny
Former Sec. 14 is now Sec. 13, Sec. 15, now Sec. 14, etc.

(d) The term for which the corporation is to exist, if the

corporation has not elected perpetual existence:
(e) The names, nationalities and residence addresses

of the incorporators;
(f) The number of directors, which shall not be more
than fifteen (15) or the number of trustees which may be
more than fifteen (15);
(g) The names, nationalities and residence addresses

of persons who shall act as directors or trustees until the.
first regular directors or trustees are duly elected and
qualified in accordance with this Code:
(h) If it be a stock corporation, the amount of its
authorized capital stock the number of shares into which
it is divided, the par value of each, the names, nationalities
and residence addresses of the original subscribers,
amount subscribed and paid by each on the subscription,
and a statement that some or all of the shares are without
par value, if applicable;
(i) If it be a nonstock corporation, the amount of its
capital, the names, nationalities and residence addresses
of the contributors and the amount contributed by each;
and, ry
(j) Such other matters consistent with law and which
the incorporators may deem necessary and convenient.
An arbitration agreement may be provided in the
articles of incorporation pursuant to Section 181 of this
Code. (N)
The articles of incorporation and applications for
amendments thereto may be filed with the Commission in
the form of an electronic document, in accordance with the
Commission’s rules and regulations an electronic filing.
(N)

N AND ORGANIZATION 145
Articl f Incorporati
of
(Name of Corporatio
n)
The undersigned incorp
orators, all of legal age
voluntarily agreed to fo have
rma (stock) (nonstock) corporati
under the laws of the Re publ on
ic of the Philippines and
certify the following: ~
First: That the name of Said corporation shall be
” Inc., Corporation or OPC.”
Second: That the Purpose of purpos
es for which such
corporation is incorporated are: (If ther
e is more than one
purpose, indicate primary and secondary
purposes);
Third: That the principal office of the corporation is
located in the City/Municipality of _
Province of
, Philippines;
Fourth: That the said corporation shall have perpetual
existence or a term of years from the date
of issuance of the certificate of incorporation;
Fifth: That the names, nationalities and residence
addresses of the incorporators of the corporation are as
follows: |
Name Nationality Residence
Sixth: That the number of directors or trustees of the

Corporation shall be _.- -———S}: sand the names,
nationalities and residence addresses of the first direc
tors
Or trustees of the corporation are as follows:

EN A™ATION CODE OF THE PHI
LIPPINES Sec. 14
Seventh: That the authorized capital stock of the

Corporation is PESOS (P );
divided into shares with the par value
of Pesos (P ) per share.
(In case all the shares are without par value): That the
Capital stock of the corporation is
shares without par value.
(In case some shares have par value and some
are without par value); That the capital stock of said
corporation consists of shares of
which shares have a par value
of PESOS (P ) each, and of which
shares are without par value.
Eighth: That the number of shares of the authorized
capital stock above-stated has been subscribed as follows:
~
Name of ‘' | : Nationality No. of Amount Amount

Subscriber Shares Subscribed Paid
Subscribed
(Modify No. 8 if shares are with no par value. In case the

corporation is nonstock, Nos. 7, and 8 of the above articles
may be modified accordingly, and it is sufficient if the
articles state the amount of capital or money contributed
or donated by specified persons, stating the names,
nationalities and residence addresses of the contributors
or donors and the respective amount given by each.)

Sec. 14
OF PRIVOR AT N
ATE IO
CORPORA RGANIZATION
147
Ninth: That
the subscribers 3. 7; has been elected by
such unt
ilafter the Treasurer of
the Corporation to act as
in accordance with
th e en ve ly elected and dualif
authority has been give ylaws, ied
benefit of the coniarsa nt © and that as
Treasurer,
receivive e j in the name and for
donations paid or given the
boeubtions,
.
contributions or
On Ss bscri | 2 ®
who. certifie Hiasntee nb y the Su
bscrib; ers or member
; Matio s
eight
ei clause
ght cl —Sess. abovove.
ause and n th set f orth in
i the seve
nth and
e, a n at the paid-up po
S bscri tion in rt io n
h and/or rope of the
Credit of the co hat the benefit
rporation ha and
S been
e dul y received.
d.
law, public morals, good , OF that it is contrary to

custom or public Policy. (N)
Eleventh: (Corporations
which will engage in any
business or activity reserved for Filipi
provide the following): no citizens shall
“No transfer of stock or int

erest which shall reduce
the ownership of Filipino citize
ns to less than the required
percentage of capital stock as
provided by existing
law s shall be allowed or permitted
ed in to be record
the proper books of the corporation a nd
this restriction
Shall be indicated in all stock certifica
tes issued by the
corpor ation.”
IN WITNESS WHEREOF, we have hereunto
Signed these
Articles of Incorporation, this day of
20___, in the City/Municipality of
Province of , Republic of
the Philippines.

(Names
signatures
and of the incorporators)
(Names
signatures
and of Treasurer)
Meaning of corporate charter.

A charter’ is an instrument or authority from the sovereign power
bestowing the right or privilege to be and act as a corporation.
(Humphrey v. Peues, 16 Wall. [U.S.] 244, 21 L. ed. 326.)
With regard to corporations, the term is correctly
used in its
limited sense only with reference to special incorporatio
n by act
of the legislature_In the case of a corporation organized unde
general
r a
law, however, the corporation’s charter is not limited
articles of incorporation. (see 18 Am. Jur. 2d 622.)
to its
al
Distinguished from franchise.

The term is sometimes loosely used in the sense
of “franchise.”
Properly speaking, corporate or primary franchis
e is the right and
Privilege itself of being a corporation. (see Sec.
10.)
On the other hand, corporate charter applies to the
instrumental
bestowing such right and privilege.
Components of corporate charter.

A charter represents the complete grant of auth
ority; hence,
the complete charter of a corporation does not rest
only upon one
instrument.
(1) As to corporations formed under the general inco
law, the charter consists of: rporation
|.) P) ps rerunki
(a) The law under which it is organized (R.A
.'No. 11232.);
(b) Articles of incorporation;
(c) Bylaws; and
(d) All applicable provisions of the Constitution
the general laws of the State in force when the corp and
oration is
incorporated which are as much a part of its char
ter as though
expressly written therein. (7 Fletcher, pp.
760-761.)
ria?
*See note 2 under Secs. 13-14,

Sec. 1 4 TITLE II. INCORPORATION AND
ORGANIZATION 149
a a2) As
e to : ns
corporatio created by special laws, the charter
(a) The special law which SEAA

c reates the corporation;
(b) Executive Orders of the President;
a Rules and tegulations applicable to such corporations,
an
(d) All laws applicable thereto, including the Revised
Corporation Code which apply suppletorily. (see Sec. 4.)
Nature of corporate charter.

The corporate charter describes several relationships. It is
described as a contract of a three-fold nature, that is, a contract
between the State and the corporation, a contract between the
corporation and its stockholders (or members), and a contract
between the stockholders inter se. (18 Am. Jur. 2d 625-626.)
(1) A contract between the State and the corporation. — It is
commonly said that corporations are created by an act of the
sovereign — by an act of the Legislature — and in a sense, this is
true. But it is not to be understood from this that the Legislature
can bring a private corporation into existence of its own accord, and
without the consent of the members who compose it. The charter
of a private corporation has been regarded as a contract between
the corporation ‘and the State. For this reason, courts apply to the
formation of a private corporation the principles governing offer and
~ acceptance in the formation of' contracts. (Clark on Corporations,
p. 55.) |
The consideration for the grant of power and privileges by the
State is found in the liabilities and duties which the incorporators
assume by accepting the terms specified in the charter. (18 Am. Jur.
2d 626.)
(a) Acceptance of original charter. —
‘E.g., the Uniform Charter for Government Corporations. (E.O. No. 399, Jan. 5,
1951.) See PD. No. 2029 and Letter of Instructions No. 1520 which apply to government-
owned or -controlled corporations, whether chartered by special law or organized under
~ Corporation Code, and Administrative Code of 1987 (E.O, No, 292.), Book IV, Chapter
, Sec. 42,

150 THE REVISED CORPORATION CODE OF THEPHILIPPINES Se, 44
1) If persons apply to the legislature for a charter, this ig

sufficient evidence of consent on their part and when the charter
is granted, no acceptance of it by them, other than will be
implied from their previous application, need be shown. The
may be considered as having made an offer, and the State ae
having accepted it.
2) If, however, without such application, the legislature
offers a charter, either to particular persons by a special act,
or to persons or a class of persons generally by a general law,
an acceptance must be shown. Until acceptance, the offer
of a
charter, either by a general or a special law, can have no effect.
An act of the legislature authorizing persons
to become a
corporate body by complying with certain terms and
conditions
is, until accepted by the persons authorized, only
an offer by
the State, which may be withdrawn by it at
any time; and it
is with
drawn, so as to be no longer open for acce
ptance, by
a repeal of the act by the legislature, or by
the adoption of a
cons
titutional provision rendering such an act
void.
(b) Acceptance of amendment to existing charter.
— The rule that a
charter mustbe accepted before it can have any effect
applies to acts
amending existing charters under a tigh
t reserved to the State when
the charter was granted; for though the State May rese
to amend the charter of a private corp
rve the right
oration, it cannot compel the
members to accept the charter as amended, any more than it coul
compel them to accept d
the original charter. If they do not adopt
amendment, they may the
give up their charter altogether.
The acceptance of an amendment, like the acceptance of
original charter, may be implied fro an
m the conduct of the corpo-
ration or its members and it will be
conclusively presumed if the
powers conferred by the amendator
y act are exercised. (Clark on
Corporations, p. 55.)
(2) A contract between the corpor
ation and the stockholders. —
It is generally held that a corpor
ate charter constitutes a contract
between the corporation and its
stockholders. The stockholders
presumed to have entered into such a contract are
with knowledge of
bound, and their tights as stockholders
are defined and limited by the charter.
(18 Am. Jur. 2d 626.)

INCORPORA
OF PRIVATE CORPO ATRSANIZATION
151
The arniedticles of in,
f NCOrpo
considered a contract; th ration or the ¢
Orporate charter bein
OF ‘bound to observe all th
“Pinion, Jan, 22, e
(3) A contract betw 1986.)
of a corporation eenconstititt the st ockholders inter se, —
The charter
which is entitled to ©S a contract between the stockholders
,
corporation, though Protection
authoriz as against
] attempted action by the
stockholders, ¥
insofar as th
concerned. Thus, th
regarding its stockhol
other that no funda
purposes of the corp Oration shal
l be made, at least
implied consent of the Stockholders th
ereto. (Ibid.; )
Meaning of articles of inco
rporation.
(1) The articles of incorporation’ is
the document prepared by the
persons establishing a corporation and filed with the SEC con
the matters required by the Revise d Cor taining
poration Code. De CaS
(2) It has been described as one that defi
nes the charter® of the
corporation and the contractual relationships bet
ween the State and
the corporation, the stockholders and the State,
and between the
corporation and the stockholders. (Government of the
Phil. Islands
vs, Manila Railroad Co., 52 Phil. 699,[1929].)
Contents and form of articles of incorporation.

(1) Section 13 enumerates the matters (mandatory provisions)
that must be stated in the articles of incorporation of domestic
5A corporation created by special law (see Sec, 4.) has no

ES
. e .
°A copy of the articles filed which is returned with the

certificate of incorporation
issued by the SEC under its official seal becomes its corporate charter enabling the
Corporation to exist and function as such. (see Sec. ms fis sa wal
: ating a government-owned or ~controlled
4,)is corpora
on See Sec.
ee ee oe ” ie es word, charter, at one time referred to an indi
vidual
Statute that through the first quarter of the 19th century was the only device employed
y American State Legislatures for permitting the establishment of a private corporation.
€ corporation iawebt the United States and foreign countries alike now prov
ide for the
creation. and licensing of a business corporation by action of administrati
ve authorities,
El, Kohler, op. cit.,
p. 36.)

152 THE REVISED CORPORATION CODE OF THE‘PHILIPPINES Sec. 14
corporations, except as otherwise prescribéd: by the Reviseg

Corporation Code or by special law. ay
(a) The articles of incorporation may include such other
matters as are not inconsistent with law and which they may
deem necessary and convenient (No. 10.), such as the classes of
shares which the corporation may issue (Sec. 6.), provisions on
preemptive right (Sec. 38.), etc. An arbitration agreement may
be provided in the articles of incorporation pursuant to Section
181 of the Revised Corporation Code.
(b) The contents of the articles of incorporation may be held
valid as an agreement between the parties thereto, even though
the validity of such may be subject to question. (18 Am. Jur.
2d
585.)
(c) The articles of incorporation may provide othe
r matters
or items (optional provisions) which the incorpor
ators may
deem necessary and convenient if they are not contrary
provisio
to any
n of the Revised Corporation Code or special
law.
(d) While under the Revised Corporati
on Code, there is no
general requirement of Philippine citizenship,
there are areas of
business and industry where ownership is reserved
, wholly or
Partially, in favor of Filipino citizens by virtue
of the Constitution
and special laws. To safeguard the interest
of transferees of stock
who may not know the citizenship requireme
nt and to secure
compliance with the limitation on alien
ownership, Section
14(Eleventh) requires the articles of incorpora
tion to provide the
restriction stated. Such restriction serves
as notice to all persons
who may be dealing with the stock of the corp
oration, and.is
intended to dete r the issue or transfer of shares in favor
in violation thereof. (SEC Opinion, of aliens
Aug. 14, 1990.)
(2) Section 14 Provides the form of the
articles of incorporation
of all domestic corporations, unless
otherwise prescribed by special
law.
(a) The SEC may reject the
articles of incorporation or
amendment thereto if the sa any
me is not substantially in accord
with the forms prescribed abo ance
ve. (see Sec. 16[1].) ,

Sec. 14 TITLE INCORPO
OF PRIVATRAETI¢ONORPAN D TR ANIZATION
ORA'
2
(b) tdThe articles
the official lang of ‘; COrporation
uages, L€., Engli must be written
sh or Filipino’ du in any of
ly signed
all of the incorporators.$ and
acknowledged or authenticated by
on file in the office. (18'A. m. Jur

. 2d 586.)
(2) Rule where co
rporation created by special law. — A cor
created by special | aw or charter poration
need not file with the SEC its
articles of incor por
ation and bylaws since the grantee
special charter draws its life not from compli of such a
ance wit h a general
law, but from a direct act of Congress.
(SEC Opinion, May 28, 1970.)
(3) Rule with respect to a joint venture. — The
SEC has ruled that
two or more corporations may enter into a
joint venture through
a contract if the nature of the venture is in
line with the business
aut horized by their charters. The contract need notbe reg
istered with
it, provided that the joint venture will not resu
lt in the formation of
anew partnership corporation.
’The Constitution provides that “the official

Filipino and until otherwise provided by law, English languages of the Philippines are
.” (Art.-XIV, Sec. 7 thereof.) Under
PD. No. 155 (issued March 15, 1973), however, it is provided that
“the Spanish language
shall continue to be recognized as an official language in the Philippines while import
documents in government files are in the Spanish language and not transl
ant
English or Filipino.” This will make Spanish an official langua ated either in
ge for an indefinite length
of time, fornobody can know when these “important docume
nts” will be translated in
English or Filipino. It is clear from the Constitution that Spanish is no
longer an official
language.
8An incorporator may delegate to an attorne ise
incorporation ina special power of attorney to such y-in-fact the signing of the articles of
effect. However, the acknowledgment
See Sec. 14.) must reflect this fact so that the same must be
prepared in the following tenor:
“<4 that Mr, A (agent) is signing for and in behalf of
B (incorporator) as his attorney-in-
fact after due presentation of his power or attorney.” (SEC Opinion,
Dec. 26, 1972.)
*SEC Memo. Circ. No. 16 (4/29/20) prescribes guidelines
on authentication of articles
of incorp oration in applications for registration of domestic corpor
With ations including those
foreign investments or equity.

PHILIPPINES Sec. 14
the joint venture

However, if the parties to the agreement want
onality
to be treated as a separate entity or have'a ‘separate pers
project a
because they intend to secure for the joint venture
au of
Taxpayer’s Identification Number of its own. from the Bure
y to have
Internal Revenue, registration with the SEC is necessar
a legal personality to obtain a separate Taxpayer’s Identification
Number. (SEC Opinion, March 30, 1995.)
Power of SEC to reject articles of incorporation.

(1) Compliance with statute. — The duty of the SEC, on
presentation of articles of incorporation and tender of proper fees, to
file the articles, and to issue a certificate of incorporation, is controlled
by the statute. If the articles of incorporation substantially comply
with the statute, the SEC has no discretion, but may be compelled
by mandamus to file them. The discretion to be exercised by the SEC
does not extend to the merits of an application for incorporation,
although it may be exercised as to matters of form. On the other
hand, it is under no duty to file articles of incorporation not entitled
to be filed for any reason, and hence, it will not be compelled by
mandamus to act in such a case.
Stated in another way, the duty of the SEC to file and record
incorporation papers exists only when they are in the form in
compliance with the statute. Furthermore, it should refuse to file for
record incorporation papers not complying with the statute.
(2) Truthfulness of matters stated. — Generally, the officer
concerned has no discretionary power to look beyond the face of
the incorporation papers and to determine from matters outside of
such papers whether or not to file the papers..He cannot consider
extraneous matters." Thus, he does not have to make inquiry outside
the articles of incorporation filed with him to determine whether
the matters stated are true, or whether all conditions precedent
Exception: In order to effectively exercise its jurisdiction over all corpora

partnerships, and other forms of associations, the tions,
SEC is given the power “to pass
upon, refuse or deny after consultation with the Board of Investments, Depart
ment of -
Industry (now Department of Trade and Industry), Nationa
l Economic and Development
Authority orany other appropriate government agency, the application
for registration of
any corporation, partnership or association or any form
of organization falling within its
jurisdiction, if their establishment, organization or operation will not be consist
ent with
the declared national policies.” (P.D. No. 902-A, Sec.
6[k].)

Sec. 14 TITLE I INCORPORA\
OF PRIVATE TION AND ORGA
CORPORATIONS 155
been f 3): ha ig
she ed
all origz
anaauth lea os eOrdinarily , if the association has complied
quisit requi remen ts, and its purpose is a lawful
and authorized
certificate. (see 1 Fletcher, pp. 511 p ed on grantting
one, conditions cannot be impos ing th the
; -515; see also 14 CJ. 147-148.)
In fine, although
=the SEC Must exercise some judgment in
the performance of its duty to determine slash atlas of
TT Ears pith ee form and entitled to be filed, it is
no judicial discret
7 ion or arbitrary power. (18 Am. Jur.
9d 587.)
@) Lawfulness of object or purpose. — But simply because the

duties of the SEC happen to be ministerial, it does not necessarily
follow that it has no authority to pass upon the lawfulness of the
object or purpose of the corporation as expressed in the articles of
incorporation. (Asuncion vs. De Yriarte, 28 Phil. 67 [1914].)
Its duties are ministerial and it has no authority to exercise
discretion in receiving and registering articles of incorporation, but it
may exercise judgment, that is, the judicial function, in determining
the question of law whether or not the objects of a proposed
corporation are lawful. If it errs in determining the question and
to file the articles of incorporation, its decision is subject to
refuses
review and correction by the court. (Asuncion vs. De Yriarte, ibid.)
Purpose or purposes of the corporation.

The clause in the articles of incorporation which ‘states the
specific purpose or purposes for which the corporation is being
incorporated is called the object or purpose clause. The Revised
Corporation Code allows corporations to have more than one stated
purpose.” |
(1) The statement of the purpose. or purposes operates as
an authorization to the management to enter into contracts and
transactions ‘which may be considered. as included within or
incidental to the attainment of said purposes. It also imposes implied
limitations on the powers of the corporation by excluding lines of
:
describes the ;
kinds 0 f business which may 3 be transacted
"Th ose clause distinguished from a power which refers
to the
by a cornchtion The purpose is to be
the carrying on its business or businesses.
authority exercised by a corporation in

N CODE OF THE PHILIPPINES Sec. 14
156 THE REVISED CORPORATIO
ic h are not cov ere d. All owe d to have separate “mo10 dus
activity wh
operandi” for each of the s tat
ed corporate purposes. (SEC Opinion,
Sept 9. 1993.)
articles of incorporation
(2) There isno legal need to repeat in the por p.
po we rs gra nte d by the law upon the cor ation. (Ballantine,
the
55 [1946 Ed.].)
e a purpose which
(3) A nonstock corporation may not includ
tion 88 enumerates
would change or contradict its nature as such. Sec
ck corporation may be
the allowable purposes for which a nonsto
organized.
Purpose or purposes must be lawful.

only
(1) Effect if unlawful. — A corporation may be organized
ration,
for “any lawful purpose or purposes.” (see Sec. 10.) A corpo
the primary object of which is without statutory authority can have
oses
no lawful existence, even though some of its declared purp
oses
may be lawful. (13 Am. Jur. 2d 580.) That the “purpose or purp
ral
of the corporation are patently unconstitutional, illegal, immo
the
or contrary to government rules and regulations” is one of
grounds for the rejection or disapproval by the’ SEC of the ‘articles
of incorporation (or the amendment thereof). (Sec. 16[2].)
(a) A corporation was held incorporated for an illegal
purpose where the object of the incorporators is to organize a
pueblo or barrio in a municipality into a separate corporation because
it seeks to deprive the municipality in which the pueblo or barrio
is situated of its property and its citizens of the right of enjoying
the same and would, if permitted, disrupt and destroy the
government of municipalities of the country and abrogate the
laws relating to the formation and government of municipalities.
(Asuncion vs. De Yriarte, 28 Phil. 67 [1914].)
(b) Where the purpose of the proposed corporation in
its articles of incorporation is “to study the possibility of the
Philippines becoming a member ..... of the American Union
and, for the purpose, to undertake surveys, polls, researches,
and hold seminars, and publish and disseminate the results of
De Leon, The Corporation Code of the Philippines Annotated, p. 120 [1989], cited
by the Supreme Court in Philippines Statehood U.S.A., Inc. vs. Securities and Exchange
Commission, L-82493, January 24, 1990.

sec. 14 TITLE II INCORP
ORATI O
OF PRIVATE CON AND ORGANIZATION 157
RPORATIONS
eun
ebeeBation hee aay of helping promote and enhance the |
M’ippines as an American State....,” this
portion of the Purpose for registration was held objectionable
eee the intention to Promote the statehood of the Philippines
shall adversely affect the independence and sovereignty of
the country. The denial of registration is not violative of the
freedom of association and expression guaranteed under the
Constitution which freedom can be exercised without a group
of individuals incorporating themselves to acquire juridical
personality.
But the purpose to conduct a study, survey, research, and
publish or disseminate the results thereof as a corporation is not
objectionable. (Philippines Statehood U.S.A., Inc. vs. Securities
and Exchange Commission, L-82493, Jan. 24, 1990.)
(2) Where powers merely unauthorized by law. — In authorizing
the formation of corporations for “any lawful purpose,” the word
“unlawful,” as applied in this connection, is not used by the Revised
Corporation Code exclusively in the sense of malum in se or malum
prohibitum. It is also used to designate powers which corporations
are.not authorized to exercise, or contracts. which they are: not
authorized to make, or acts which they are not authorized to do —
in other words, such acts, powers, and contracts as are ultra vires.
(18 Am. Jur. 2d 582; see Sec. 45.)
Thus, a. corporation cannot be formed for the practice of
professions absent express authority in the corporation law. (1
Fletcher, p. 339.) In the Philippines, no legislation authorize the
formation of professional corporations. The practice of a profession
is not a business and is open only to persons with the necessary
qualifications. In corporations, the profit motive is the principal
factor. |
3T> accommodate professionals, most states in the United States have enacted
Professional incorporation laws that give lawyers, accountants, doctors, and other
on. Under, the
Professionals the right to practice their profession through a corporati
ion Act, the professional
Proposed American Bar Association Model Professional Corporat
Corporation may practice only one profession and may not mix professional services with
non-professional services and only licensed professionals may perform the services of the
corporation. Non-licensed employees of the corporation may not assume a position of
their services to clients.
control over the acts of licensed professionals when they perform on
“... Congress has not adopted a unanimous position on the matter of prohibiti
On indirect practice of optometry by corporations, specifically on the hiring \and

THE REVISED CORPORATIO
N CODE OF THE PHILIPPIN
ES Sec. 14
The law, however, permits the form ation of a partnership for

€xercising a profession (Arts. 1767,
1783, Civil: Code.) for in such
Case, it is the individual partner and not the partnership
€xercises the profession and is responsible for his firm who
acts as such.
(3) Determination of question of lawfulness. — Asa tule, whether
the purposes for which a corporation has been formed are lawful is
to be determined by the description of those purposes as stated in
the articles of incorporation.
(a) A corporation is not illegal unless it is shown that the
end it has in view is illegal, or the means by which it Proposes
to attain that end are illegal.
(b) If, as expressed on the face of the instrument of
incorporation, the purpose for which the corporation is formed
is not necessarily unlawful, it will be presumed that it was for a
purpose for which a corporation might lawfully be formed; and
this presumption holds in case of a foreign corporation.
(c) Where the object of a corporation as expressed in the
articles of incorporation is not illegal, that such corporatio
n
afterwards entered upon illegal projects does not make
it an
illegal corporation and such illegal acts cannot be urged
as a
defense, in an action to recover unpaid subscription to the
capi-
tal stock. (14 CJ.S. 427-428.) :
(4) Inquiry into purpose other than those stated. — The best proof
of the purpose of a corporation is its articles of inco
rporation
(Supra.) and bylaws. (see Sec. 45.) The articles of incorporation
state the primary and secondary purposes of the corporation,
while the bylaws outline the administrative organization of
the
corporation which, in turn, is supposed to insure or facilitate the
accomplishment of the purposes. If the corporate ‘purpose as
employment of licensed optometrists by optical corporations

. It is clear that Congress
left the resolution of such issue for judicial determination,
and it is therefore proper for
this Court to resolve the issue. . . . In analogy, it is noteworthy
that private hospitals
are maintained by corporations incorporated for the purpose of furnis
hing medica l and
surgical treatment. In the course of Providing such treatments,
these corporations employ
physicians, surgeons and medical practitioners, in the same way that in the
course of
manufacturing and selling eyeglasses, eye frames, and optical lenses,
optical shops hire
licensed optometrists to examine, prescribe and dispense
ophthalmic lenses. No one
has ever charged that these corporations are engaged in the practice of medici
ne. There
is indeed no valid basis for treating corporations engaged in the
business of running
optical shops differently.” (Acebedo Optical Company vs. Court of Appeals, 329 SCRA
314 [2000].)

RATION
OF PRIVATE A
CORPORA RGANIZATION 159
Purpose or purposes my St
be stateq
with sufficient clarity,
the mice ore Tation a4 HS .a7 The Purpose or purposes stated in

need not set out wi iculari the
multitude of activities in wh with particularity
ich the corporation may
engage. Th
effect of broad purposes or objects is st
eak title diseletionaiy
authority upon the directors'and management of
the corporation as
hich it may engage. Dealings which are
entirely irrelevant to the pur poses are unauthorized and call
ed ultra
vires. (see Sec. 44.)
It is, therefore, important that the corporation’s purposes
be
specified in the articles of incorporation with sufficient clarity to
define with certainty the scope of its business. However, the articles
of incorporation of a manufacturing corporation need not state
the particular kind of manufacturing in which it is proposed to
engage, unless it is required by statute. And in forming a charitable
corporation, it is unnecessary to specify with exactness who are to
be the ultimate recipients of the charity. (see 1 Fletcher, pp. 372-386,
400-406; 14 C.J.S. 435-436.)
(2) May not be indefinitely stated. — While the purposes may be
in broad and general terms, they should not be so stated indefinitely;
otherwise, the articles of incorporation may be rejected. Thus, an
articles of incorporation authorizing the corporation “to carry on
any lawful business or purpose” (1 Fletcher, p- 367.) or one, after
stating certain distinct purposes, adding “and for such other
purposes as may be agreed upon by the corporation in the future,
will be rejected because the purpose or purposes are not definitely
Stated. (In re Chapter of Journalists Fund of Philadelphia, 8 Pa. 272.)
It is not also sufficient to state that the purpose is to carry on
any business which may be deemed profitable. Such all-embracing
Proviso cannot be stretched to include purpose not incidental,
implied or necessary to further the purposes stated in the articles of
Mcorporation.

PHILIPPINES Sec. 14
Primary purpose must be stated.

1YR
The purposes for which a corporation is organized, where it has
more than one stated purpose, shall state which is the
primary or
main purpose and which is/are the secondary or subsidiary purpo
se
or purposes." (Sec. 13[b].) The main purpose must be speci
fied. The
law allows a corporation to have secondary purposes becau
se the
primary purpose may not turn out to be profitable, and in
such case,
all it has to do is invest its funds in any such purposes inste
ad of
organizing a new corporation. Evidently, a corporation
may have
only one (1) primary purpose.
Under Section 41, a corporation is prohibited from
investing its
fund “for any purpose other than the primary purpose
i
for which it
was organized” unless it is approved by both its boar
d of directors
or trustees and its stockholders or members. No
such disclosure is
required in the case of a partnership. (SEC Opinion, March
28, 1985.)
Purposes must be capable of being
lawfully combined.
Although Section 10 allows the formation of corp
orations “for
any lawful purpose or purposes,” the purposes
, where there are
more than one (1), must be capable of being lawf
ully combined.
Thus, banks governed by the General Banking
Law (R.A. No.
8791.) are prohibited from directly engaging in insuranc
e business
as the insurer. (Sec. 53 thereof.) Similarly, insu
rance ‘companies
governed by the Insurance Code (PD. No. 612, as ame
nded by R.A.
No. 10607.) are not allowed to engage in banking operatio
ns. The
‘4A term that describes the business of a corporation in its name should
refer to its
primary purpose. If there are two (2) such terms, the first
should refer to the primary
purpose and the second, to the secondary purpose. (SEC Memo.
Circ. No. 5, Series of
2008.)
,
*The Act prohibits banks from engaging as principals in the insurance busines
throug
s or
h fully-owned subsidiaries but not investing in insurance companies themsel
ves.
The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) has classif
ied investments
in insurance companies as investments in allied undertakings, allowing univers
al banks
to increase their equity participation in these firms up to 51%. Through
“bancassurance,
an insurer utilizes bank branches to distribute insurance policies. Presently, the Bangko
Sentral ng Pilipinas (BSP) allows banks to sell insurance product at their branches. To
comply with the ownership rules, a major insurance company may set up a ce
and sells five percent (5%) equity to a bank. Under present rules, only commercial an
universal banks are authorized to enter into a bank assurance tie-up with insurers.

Sec. 14 TITLE I, INCORPO
RA
OFPRIVATE Ce Rea ORGANIZATION
ORPORATION
Saari religious corporations, may not include a purpose

which would change or contradict its nature as such
Titles XI, XIIL.), : although
it may be organized for any
(Sec. 13[b]; see
Coe
combination of
purposes mentioned in § ection 87. The SEC may rejec
t the articles of
incorporation of a nonstock cor
poration if its purpose is to engage
in election campaign or partisan political activity. (SEC Opinion,
April 10, 1983.)
Reasons for statement of purpose

or purposes.
“The law requires the statement of the purpose or the purposes
for which a corporation is formed in order that:
(1) A person who intends to invest his money in the business
corporation will know where and in what kind of business or
activity his money will be invested;
(2) The directors and the officers of the corporation will know
within what scope of business they are authorized to act; and lastly;
(3) A third person who has dealings with the corporation may
know by perusal of the articles whether the transaction or dealing he
has with the corporation is within the authority of the corporation
or not.
In other words, the main reason for stating the purpose ‘of
the corporation ‘is to determine whether the acts performed by
the corporation are authorized or beyond its powers. In the latter
case, they will be known as ultra vires acts. , (C.G. Alvendia, op.
Cit. p. 80.) Thus, the purpose clause of the articles of incorporation
indicates the extent as Well as the limitations of the powers which a
Corporation may exercise. (see Secs. 2, 35[11], 44.)

Effect where primary purpose/secondary

purposes unauthorized.
(1) If the primary purpose of the corporation as stated in the
articles of incorporation is unauthorized, the corporation has no
legal existence even though other secondary lawful purposes are
included.
(2) If a principal lawful. purpose is specified, but the articles
or certificate assumes for the corporation the existence of powers
which it is not permitted to exercise, then this additional and
unauthorized assumption may be. treated as surplus-age and the
corporation regarded as entitled to exercise the lawful powers only.
(18 Am. Jur. 2d 585.)
Effect where corporation engages in its secondary

instead of its primary purpose.
Generally, the primary purpose of a corporation as stated in the
articles of incorporation determines its classification.
However, where the corporation actually engages in one of its
secondary purposes instead of its primary purpose, the same may
be classified under said secondary purpose. Thus, a corporation
organized primarily to engage in mining and whose. secondary
purpose is agriculture is a mining corporation. If such corporation
engages in agriculture instead of mining, the same may be classified
as organized to engage in agriculture. (SEC Opinions, Nov. 8, 1972
and March 22, 1974.)
Place where principal office of corporation

located.
(1) City or municipality within the Philippines. — The articles of
incorporation must state the “place where the principal office of
the corporation is to be located, which place must be within the
Philippines.” (Sec. 13[c].) The purpose of the requirement is to fix
the residence of a corporation in a definite place, instead of allowing
it to be ambulatory (Young Auto Supply Co. vs. Court of Appeals,
223 SCRA 670 [1993].) for effective regulation and supervision of the
corporation.
Under SEC regulations, the articles of incorporation shall state
the specific address of the corporation’s principal office which shall

ec. 14 TITLE Il, INCORPORATIO
OF PRIVATE GoyaNA ND ORGANIZATION 163
include, if feasible,
= the Street numb
city or muni er, street
cipality. (SEC Memo. Circ. N i d
indication of a general 646 nine Mae The
addre
Manila is. no longer allowedSS1s such as city,erin municipality, or Metro
a $ bas ‘
);
°
2014.) (SEC ;
Memo. Circ. No. 6, Series of
C be in :
wh zs he aie a ee ecords are ordinarily kept and meetings
the place where the business 9 f the corp
oration is transacted but the
place where its books and rec ords are ordinarily kept and
its officers
usually meet to manage the affairs and transact the business of the
corporation. (1 Fletcher, p.
478, citing Harris v. McGregor, 20 Cal.
124; Sec. 73.)
Therefore, the principal office may be located
at one place and
the place of business at another.
(3) Residence at place where its principal office is located. —
A
corporation has no residence in the same sense in which this term is
applied to a natural person. But for practical purposes, a corporation
is in metaphysical sense a resident of the place where its principal
office is located as stated in its articles of incorporation (Ibid.; Cohen
vs. Benguet Commercial Co., Ltd., 34 Phil. 526 [1916]; Clavecilla
Radio System vs. Antillon, 19 SCRA 379 [1967].) filed with the SEC.
The place where the principal office of the corporation is located
determines its residence and the venue in an action by or against it.”
“It is required by the SEC that all corporations and partnerships applying for
registration should state in their Articles of Incorporation or Articles of Partnership the
“(i) specific address of their 'principal office, which shall include, if feasible, the street
number, street name, barangay, city or municipality; and (ii) specific residence address
of each incorporator, stockholder, director, trustee, or partner,” in line with the “full
disclosure” requirement of existing laws. “Metro Manila” is no longer allowed as address
of the principal office. (SEC Circ. No. 3, Series of 2006.) If applicable, the name of the
building the number of the building and name or number of the room or unit should be
indicated. (SEC Memo. Circ. No. 6, Series of 2014.)
There is no need to amend the articles of incorporation (AOI) if the principal office
of the corporation is merely to another floor of the same building, inasmuch as locating
the same will still be possible. However, if the change is from one (1) building to another
building, even if within the same city or municipality, an amendment of the AOI is
tequired, With more reason, when the transfer a street to another. (SEC Opinion No. 12-
12, Aug. 9, 2012.)
7A corporation has only one (1) residence at atime. The fact that itPere
maintains branch
Offices in some parts of the country does not mean it can be sued in any of
these places,
for to allow such action to be instituted would create confusion and work untold incon-
Venience to the corporation. (Clavecilla Radio System vs. Antillon, supra.) By the same

(4) Change of address. — In case of change of the principal office,

an amended articles of incorporation stating the new address must
be filed with the SEC. (Sec. 15.)
Incorporating directors or trustees.

The incorporating directors or trustees are those chosen by the
incorporators (Sec. 5.) and named in the articles of incorporation,
The term “trustees” is used to refer to members of the board of a
nonstock corporation.
(1) Matters to be specified in articles of incorporation. — The
articles of incorporation must specify the names, nationalities, and
residences of the incorporators. (Secs. 13[e], 14.)
The statement of the nationalities of the incorporators will enable
the SEC to determine prima facie compliance with constitutional
or legal requirements regarding ownership by Filipino citizens of
certain percentage of the capital stock of certain corporations. It is
also necessary that the articles of incorporation specify the names,
_ nationalities, and residence addresses of the persons who will be
the first directors or trustees of the corporation. (see Sec. 13 [g]; Sec.
14[Sixth]; Sec. 16[d].)
(2) Number. — Under Section 13[f], the number of the directors
is determined by the incorporators but such number “shall not be
more than fifteen (15) or the number of trustees which may be more
than fifteen (15);” (see Sec. 13.) Section 91 provides that the board of
trustees of a nonstock corporation “may or may not be more than
fifteen (15) as may be fixed in its articles of incorporation or bylaws.”
(3) Term of office. — The incorporating directors or trustees shall
hold office until their successors are duly elected and qualified.
(Ibid., [7].) They are intended to be replaced by the regularly elected
directors or trustees (see Sec. 23.) who shall hold office for one
‘—
(1) year (Secs. 22,'23.), when the corporation is organized by

the
adoption of bylaws (see Sec. 45.) at the first meeting of stockholders
or members. (see Sec. 49.)
token, a corporation cannot be allowed to file personal actions in a place other than its
principal place of business unless such place is also the residence of a co-plaintiff or a
defendant. (Young Auto Supply Co. vs. Court of Appeals, supra.)

sec. 14 TITLE IVINCOR
165
(4) Subscribers, to
director must own a Stock, Nder Sectio
i
corporation of which iy : (1) share of the pu
directors elected after incg sono” The requit ne of the
who must “be a subs ement applies to the
‘poration, an
criber to at | d to in ing directo
corporating di rs
stock of the corporat; On.” (see Sec. 10) one (1) share of the capital
Capital stock/capital an ‘
contributors. d subscribers/
(1) Stock corporations, —
corporation under Section 1
The arti
ticles of incorporation of a stock
3(h) must state:
(a) The amount of its authoriz
ed capital stock in pesos;"*
(b) The number of shares
into which it is divided;
(c) The par value of each
share;
(d) The names, nationalities,
aay : and residence addresses of the
original subscribers;
(e) The amount of capital stock subscribed and paid by
each on the subscription; and
(f) A statement that some or all of the shares are without
par value, if applicable.
(2) Nonstock corporations. — If the corporation is a nonstock
corporation, the articles of incorporators must state;
(a). The amount of its capital;
(b) The names, nationalities, and residence addresses of the
contributors; and
(c) The amount contributed by each. (Sec. 13[i].)
Where shares with par value.

Where the shares issued by a corporation have only one (1) par
value, the authorized capital stock would be the number of shares
multiplied by the par value.
: ayment on subscription of a proposed corporation

‘ *U.S. dollars EN Ee Peso so that the same may be treated as “cash”;
S ue be duly ODv jars shall be considered payment by way of property, in which
a tang the pane be subject to the requirements of Sec. 61. (SEC Opinion, July 28,
ent the paymen
1986.)

Each class of shares may be assigned varying par values, and

likewise, one class of shares may be more than the others. (SEC-OGC
Opinion No. 10-09, May 19, 2009.) If a corporation is authorize
to issue different classes of shares with different par values, the
authorized capital stock would be the total:of the products of the
number of shares in each class multiplied by the par value of such
class of shares.
Thus, where the number of shares authorized to be issued is
1,000,000 with a par value of P1.00 per share, the authorized capital
stock is P1,000,000.00.
If: for example, 600,000 of the shares are
classified into Class “A” with a par value of P1.00 and 400,000 of
the shares, into Class “B” with a par value of P1.50, the authorized
capital stock is P1,200,000.00, the total of the products of P600,000
multiplied by P1.00, or P600,000.00, and of 400,000 multiplied by
P1.50 or P600,000.00.
Where shares without par value.

If the capital stock consists of shares without par value, the
articles of incorporation need state only such fact, with the number
of shares into which the capital stock is divided.
If the shares have par value, the amount of the authorized
capital stock in pesos is specified in the articles, but if they have
no-par value, no amount of capital stock is specified in the articles
which need only state the number of shares into which the capital
stock is divided. (see Sec. 14[seventh].) The reason is that the price
of no-par value shares varies from time to time (see Sec. 61; last
par.) and, therefore, the total amount of the capital stock cannot be
known until all the shares are issued.
Where shares with par value and without
par value.
Ifsome of the shares of the capital stock have par value and some
are without par value, the articles of incorporation must state such
fact, the number of shares into which the capital stock is divided,
"Citing De Leon, The Corporation Code of the Philippines Annotated, p. 66 [2002].

Sec. 14 TITLE Il. I NCORPORATION AND ORGANIZATION
OF PRIVATE CORPORATIONS 167
the ee io shares with par value and their par value, and the
nu res without par value. (Sec. 14[seventh].)
Where business of corporation reserved

for Filipino citizens.
Corporations that will engage in any business or activity reserved
for Filipino citizens shall provide in their articles of incorporation
shall
the restriction against the “transfer of stock or interest which
reduce the ownership of Filipino citizens to less than the required
percentage of the capital stock as provided by existing laws”... (Ibid.
[eleventh].)
; If the required percentage of ownership has not been complied
with, the articles of incorporation will not be accepted by the SEC.
(Sec. 16[4].)
Filipino percentage ownership requirement

regarding corporate capital.
constitutional and legal provisions, Filipino
_By_ specific
capital stock or capital is
ownership of a certain percentage of the
required in certain cases, such as:
nt, and utilization of
(1) Corporation for exploration, developme
the capital of which is owned
natural resources. — At least 60% of
tion of the Philippines, Art.
by citizens of the Philippines. (Constitu
Sec. 2.) The wor d “ca pit al” in the above constitutional provision
XII, capital stock” in case
“outstanding
should be understood to mean
of stock corporation,
— At leas t tall of
apiita
60% of the cap
(2) Public ser vic e cor por atio ns. leas
the Philippin es. The participation
which is owned by citizens of erning body of any public utility
of foreign investors in the
gov
sha ll be lim ite d to the ir pro por tionate share in its capital,
enterprise of such corporation
officers
and all the executive and managing 11.);
XII, Sec.
must be Filipino citizens (Ibid., Art. ished
corporations. — Other than those establ
(3) Educational , at lea st 60% of the capital
and mis sio n boa rds
by religious orders the Philippines. The control and
is ow ne d by cit ize ns of
of which ons shall be vested in Filipino
administration of educational instituti
citizens (Ibid., Art. XIV, Sec. 4[2].);

4) Corporations engaged in mass media and advertising industry. Gs

hake atlel be wholly (ie, 100%) owned and managed by pica
citizens,” while at least 70% of the capital stock of anise’ must
be owned by citizens of the Philippines. The participation ei oreign
investors in the governing body of a corporation engaged in the
advertising industry shall be limited to their. proportionate share
in the capital thereof, and all the executive and managing officer of
such corporation must be Filipino citizens (Ibid., Art. XVI, Sec. 11.);
(5) Banking corporations. — At least 60% of the voting stock of
a domestic corporation shall be owned or controlled by Filipino
citizens (R.A. No. 8791, Sec. 11.); R.A. No. 1064 allows the full entry
of foreign bank in the Philippines subject to guidelines approved by
the Monetary Board of Bangko Sentral ng Pilipinas (BSP);
(6) Corporations engaged in retail trade. — Corporations with
less than U.S. $2.5 million paid-up capital are generally reserved
exclusively for Filipino citizens and corporations wholly-owned by
Filipino citizens (R.A. No. 8762, Sec. 5.);
(7) Rural banks. — Before, no less than 40% of the voting stocks of
which shall be owned by citizens of the Philippines or corporations
at least 60% of whose capital is owned by such citizen (R.A.'No.
7353, Sec. 4:); Foreign investors are now allowed to own acquir
e or
purchase up to 60% of a voting stock in a rural bank;
(8) Corporations engaged in coastwise shipping. — At
least 60% of
the capi
tal stock must be owned by citizens of the Philippines
No. 1464 [Tariff and Customs Code], Sec’ 806.); (PD.
(9) Corporations engaged in the pawnshop
business. — At least
707% of the
voting capital stock shall be owned by citizens
Philippines (P.D. No. 114, Sec. 8.); of the
(10) Corporations engaged in the
recruitment and placement of
workers, locally or overseas,
— At least 75% of the authorized
voting capital stock must be and
owned and controlled by Filipino
citizens (P.D. No. 442 [Labor Code],
as amen ded, Sec. 27.); and
|
an While a 60% Filipino/40%
Philippine National” (see Sec. forei
123.) for
it is not qualified to invest in bus
Figs iness activIvit
iti ies the o
Constitut ion or other special laws is limi ilipi
‘ the
wnership of which under
18, 1998.)

TI
OF PRIVATE CORPAN
ORDATOR
IOG“(hae aie 169
Acknowledgment, signatur
e, and veri fication.
Section 13 requires that the articl . i dul
signed and acknowledged or withered ine ee ation be duly
To become a corporation de jure (see Sec. 18.), the
provisions
requiring the mcorporation papers to be acknowledged and sig
must be complied with. Each signatory ned
must acknowledge his
signature to the articles and there is no corporation de
jure unless
acknowledged by the minimum number required by law. However,
unless otherwise provided by the statute, the acknow
ledgment of
the signatures of the incorporators is not a part of the articl
es of
incorporation.
The purpose of the law in requiring acknowledgment unde
r
oath is to secure the State and all concerned against the possibility of
any fictitious names being subscribed to the articles, and to furnish
proof of the genuineness of the signatures. (see 1 Fletcher, p. 506; 18
CJ.S. 440.)
Sec. 15. Amendment of Articles of Incorporation. — Unless

otherwise prescribed by this Code or by special law, and
for legitimate purposes, any provision or matter stated in
the articles of incorporation may be amended by a majority
vote of the board of directors or trustees and the vote or
written assent of the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock, without
prejudice to the appraisal right of dissenting stockholders
in accordance with the provisions of this Code. The
articles of incorporation of a nonstock corporation may be
amended by the vote or written assent of majority
of the
trustees and at least two-thirds (2/3) of the members.
The original and amended articles together shall
contain all provisions required by law to be set out in the
articles of incorporation. Amendments to the articles,
shall be indicated by underscoring the change or changes
made, and a copy thereof duly certified under oath by
the corporate secretary and a majority of the directors or

trustees with a statement that the amendments nave been

duly approved by the required vote of the stockho ers or
members, shall be submitted to the Commission.
The amendments shall take effect upon their approval
by the Commission or from the date of filing with the
said Commission if not acted upon within six (6) months
from the date of filing for a cause not attributable to the
corporation.
Reserved power of State to amend

corporate charter.
(1) Constitutional and statutory authority. — The certificate of
incorporation is a contract primarily between the State and the
corporation. (Dartmouth College v. Woodward, 4 Wheat. [U.S]
518.) Hence, it can be amended only by or under constitutional or
statutory authority. — )
(2) Exercise of power. — The reservation of the power is an
incident of the contract between the State and the incorporators.
The
dissolution of a corporation without cause is void as impai
ring the
obligation of a contract between the incorporators and
the State.
Note, however, that with respect to the
franchise of a public
utility, the only limitation is that the power
can be exercised only
“when the common good requires.”
Power of stockholders or member

s and the board
to amend articles of incorporatio
n.
(1) Power granted. —The authority of
stockholders or members
to amend the articles of incorpora
tion which forms part of the
corporate charter is conferred
by Section 15, )
The amendment must also
be approved b y the majority vote of
the board of directors
or trustees.
ee
(2) Matters not subject to am
endment, — Certain provis
matters stated in the a rticle ions or
s of incorporation cannot be
amended.
(a) The portion of the art
icl
names of the mcorporators an es of incorporation stating the
d the first set of directors / trustees
(see Sec. 14 [fifth and sixth].)
cannot be amended by subs
tituting

sec. 15 TITLE Il. INCORPORATIO
OF PRIV ATE C N AND ORGANIZATION
ORPORATIONS 171
for the name ‘of ‘an incor

reason that the
Same states
(b) Similarly, the names, etc. of the subscrib

ers, the treasurer
of the corporatio n elected by the subscribers (Ibid. [eighth,
ninth,
tenth].), and the witnesses cannot be amended except
to correct
mistakes.
Necessity of stockholders’ or members’ Mi (do nxt

meeting for amendment.
Sohne fact,
s)
nara sAlartt daw
(1) Under the first paragraph of Section /15, the amendment LH )
may also be effected by the “written assent’/ of the stockholders
representing at least 2/3 of the gtitstanding capital-stock of the
corporation or 2/3 of its members, meaning that such action need
not.be taken at'a meeting and upon a vote. Even holders of non-
voting shares, or non-voting members, as the case may be, are
entitled to vote on the amendment. (see Sec. 6, par. 3[a].)
Where written consent or assent is allowed, the same number
of votes shall be observed, and nothing can be done by proxy. (SEC
Memo. Circ. No. 4, Series of 2004; see Art. 58.)
(2) If the amendment consists in extending or shortening the
corporate term (Sec. 36.), or increasing or decreasing the capital stock
(Sec. 37.), a meeting of the stockholders or members is necessary.
(3) In a close corporation, if the amendment of the articles of
incorporation refers to the matters mentioned in Section 102, the
same shall not be valid or effective unless approved by the required
Vote of the stockholders at a meeting duly called for the purpose. A
Mere written assent would not also be sufficient.
rpm
Citing De Leon, The Corporation Code of the Philipp
eye: .
ines Annotated, pp. 118-119.

PHILIPPINES Sec. 15
Limitations on power of corporation to amend

Section 15 imposes limitations on the power of a corporation to
amend its articles of incorporation. They are: |
(1) The amendment of any provision or matters stated in the
articles of incorporation is not allowed when it will be contrary to
any provision or requirement prescribed by the Revised Corporation
Code or by special law, or change any provision in the articles of
incorporation stating an accomplished fact (Supra.);
(2) It must be “for legitimate purposes.” (see Sec. 15.) The
power of amendment must not be exercised in such a manner as
to work injustice. The majority stockholders owe a duty to at least
act fairly to the minority interest, and they cannot avoid that duty
merely because the amendment is legally authorized (In the Matter
of Ayala Corporation, SEC En Banc Decision, Sept. 1, 1989.);
(3) It must-be approved by the required vote of the board of
directors or trustees and the stockholders or members;
(4) The original articles and amended articles together must
contain all provisions required by law to be set out in the articles of
incorporation;
(5) Sucharticles, as amended, must be indicated by underscoring
the change or changes made, and a copy thereof duly certified under
oath by the corporate secretary and a majority of the directors or
trustees stating that the amendment or amendments have been duly
approved by the required vote of the stockholders or members must
be submitted to the SEC.
(6) Filing fees must be paid;
(7) The amendments shall take effect only upon their approval
by the SEC.
(a) They are deemed approved by the SEC from the date of
filing if not acted upon within six (6) months from said date for
a cause not attributable to the corporation, assuming that the
amendments are not illegal.
(b) If the cause is attributable to the corporation, the
amendment cannot take effect without approval thereof by the
SEC.

eae 16 TITLE MINCORPORATION
AND OR
F PRIVATE CORPORATIOGANIZATION 173
NS
i enn On automatic approval in Section 16

does not
apply to the voluntary dissolution of corporations
under Section
135 (SEC Opinion, March 30,
1982.): and
(8) If the corporation is §0verned by a special
law such as banks,
banking and quasi-ban King
institutions, insurance companies,
etc, the amendments must be accompanied by a favorable
recommendation of the appropr late gover
nment agency to the effect
that such amendments are in accordance
with law (Sec. 16, par. 2.);
(9) In the-case of foreign corporations authoriz
ed to transact
business in the Ph ilippines, they are merely required
to file, within
60 days after the amendment to the articles of incorporatio
n (or
bylaws) becomes effective, with the SEC and in prop
er cases, with
the appropriate government agency, a duly authenticated copy
of the
articles of incorporation (or bylaws) for record purposes
. The filing
thereof, however, shall not of itself enlarge or alter the purpose or
purposes for which such corporation is authorized under its license
to transact business in the Philippines (see Secs: 147, 142.);
(10) Such portion of the articles of incorporation which states
an established or accomplished fact at the time of incorporation,
e.g., the portion stating the names of the original subscribers or
incorporators (Sec. 5.), cannot be changed or amended.
Sec. 16. Grounds When Articles of Incorporation or

Amendment May be Disapproved. — The Commission may
disapprove the articles of incorporation or any amendment
thereto if the same is not compliant with the requirements
of this Code: Provided, That the Commission shall give the
incorporators, directors, trustees or officersa reasonable
time from
rece of the
ip disapp
t roval within which to modify
the objectionable portions of the articles or amendment.
The following are grounds for such disapproval:
(a) The articles of incorporation or any amendment
thereto is not substantially in accordance with the form
prescribed herein;
(b) That the purpose or purposes of the corporation

are patently unconstitutional, illegal, immoral, or contrary
to government rules and regulations;
(c) The certification concerning the amount of
Capital
Stock subscribed and/or paid is false; and

(d) The required percentage of Filipino ownership of

the capital stock under existing laws or the Con
has not been complied with.
No articles of incorporation or amendment to articles
of incorporation of banks, banking and quasi-banking
institution reneed, insurance, and_trus mpani
NSSLAs, pawnshops, and other financial intermediaries,
shall be approved by the Commission unless accompanied
by a favorable recommendation of the appropriate
government agency to the effect that such articles or
amendment is in accordance with law.
Grounds for disapproval of articles of incorporation

or amendment thereto.
Section 16 enumerates the grounds for the disappro
val or
rejection of the articles of incorporation’ or disa
pproval of any
amendment thereto. The grounds are not exclusive.
|
(1) The SEC is required to give the incorporators
time
reasonable
within which to correct or modify the objectionabl
e portions of
the articles of incorporation or amendment when
the same is rejected
or disapproval for non-compliance with the
Revised Corporation
Code. (see Secs. 13, 14 and 15.)
(2) Any decision of the SEC rejecting the articles
of incorporation
or disapproving any amendment thereto is
appealable by petition
for review in accordance with the provision
s of the Rules of Court.
(P.D. No. 902- A, Sec. 6, last sentence.)
_ (3) In case of corporations governed by spec
ial laws such as
banks, banking and quasi-banking institutions
, preneed, insurance
and trust companies, NSSLAs pawnshops
and other financial
intermediaries, the articles of incorporation or
amendment shall
not be approved by the SEC unless accomp
anied by a favorable
rec ommendation of the appropriate government
agency (e.g.,
Monetary Board of. the Central Bank, with
respect’ to banking
institutions) that such articles or ame
ndments are in accordance
with law.
1See note 3 under Secs. 13-14.

sec. 16 TITLE Il. INCORPORA: TION AN
OF PRIVATE CORPODRA ORGA
CANIZATION 175
suspension or revocation
Of certifi
of registration of c orp Oratioertificate
ns,
(1) Under Pres. Decr
ee No. 902 ~A?
revoke, after proper notice and h earing,— The SEC may suspend or
of registration of Corp the franchise or certificate
orations, p artnerships, or ass
the ground s provided by law, inc lud ociations upon
ing:
(a) Fraud in procurin g its Certificate of incorpor
ation (such
as making it appear th at it has cash paid
-up capital when
actually it has none, th © money being
merely borrowed and
returned to the lender a fter the incorporatio
n);
(b) Serious misrepresentation as to wha
t the corporation
can do or is doing to the great prejudice of, or damage to,
the
general public;
(c) Refusal to comply with or defiance of a lawful order
of
the SEC restraining the commission of acts which would‘am
ount
to a grave violation of its franchise; in be is
(d) Continuous inoperation for a period of at least five (5)
consecutive years (see Sec. 21, infra.);
(e) Failure to file bylaws within the required period; and
(f) Failure to file required reports in appropriate forms as
determined by the SEC within the prescribed period. (PD. No.
902-A, Sec. 6[1].)
(2) Under Sections 137 and 170. — The authority of the SEC to
suspend, cancel or revoke corporate franchise or registration also
emanates from Sections 137 and 170 of the Revised Corporation
Code.3
LS
It reorganized the SEC with additional powers and placed the said agency under
the administrative supervision of the Office of the President. This Decree is superseded
by the Securities Registration Code. (Appendix “A.”) The grounds provided by PD. No.
902-A still apply. (see Sec. 5[m], SRC.)
*An order of revocation of a corporation's certificate of registration is not tantamount
to the dissolution of the company in which case, the company may file a petition
to lift the
order of revocation. (SEC-OGC Opinion No. 38-11, Sept. 20, 2011.) SEC Memo.
Circ. No.
15 (Sept. 5, 2009) extends by one (1) year from the date of revocation
the period within
Which corporations whose certificates of registration were revoked by non-compliance
With reportorial requirements to file a petition to lift the order of revocation.

(a) It may not continue to operate its business (see Sec. 139,)
and issue shares.
(b) It may, however, sell its assets pursuant to Section 139
but it may only purchase property if such purchase will
be
consistent with liquidation.
(c) It may sue to recover its property. (SEC-OGC Opinion
No. 24-09, July 28, 2009.) The capacity of a corporation to
institute an ejectment suit is not affected by the subseque
nt
suspension and revocation of certificate of registration. (Pare
des
vs. Don Luis Dison Realty, Inc., 548 SCRA 273 [2008].)
4 corporation whose existence is deemed terminated may
allege not
in its complaint in court that itis a corporation duly
organized
and existing under Philippine laws. (Clemente vs.
Court of Appeals,
242 SCRA 717 [1995].)
(3) Lifting of order of revocation. — The lifting restores the
corporation to its original status as if there was no revocati
on order
issued against it, with the capacity to exerc
ise all the powers of a
duly registered corporation under the Corp
oration Code. (SEC-
OGC Opinion No. 29-09, Nov. 11, 2009.)
Sec. 17. Corporate Name. — No corpor

ate name shall be
allowed by the Commission if it is not
distinguishable from
that already reserved or registered
for the use of another
corporation or if such name is protected
by law or when its
use is contrary to existing law, rules
and regulations. (SA)
Aname is not distinguishable even if
it contains one or
mor e of the following:
(a) The word “corporation”, “company”,
“limited liability”, or an abbreviat
“limited”,
ion of one such words;
and
(b) Punctuations, articles, conjuncti
ons, contractions,
prepositions, abbreviations, different
tenses, spacing, or
number of the same word or phrase
. (N, from 2nd par. to
[b])
The Commission, upon determination that the
corporate name is: (1) not distinguishable
from a name N
already reserved or registered for the use of another
corporation; (2) already protected by law; (3)
contrary

cao, 1%
TITLE I; INCORP
ORAT ION AND
OF PRIV AT ORGANIZATION 177
E CORPORATIONS
» advertisements, labels, print

uch corporate name. Upon the
approval of the new Corporate name,
the Commission shall
issue a certificate of incorporation
under the amended
nam (N)
e.
If the corporation fails toc
omply with the Commission’s
order, the Commission may
hold the corporation and its
responsibleae directors or offi
, cers in contempt and/or hold
them administratively, civilly and/or criminally liable under
this Code and other applicable laws and/
or revoke the
registration of the corporation. (N)
Name of the corporation.

(1) Importance: —The corporation acquires juridical personality
under the name stated in the certificate of incorporation. (Sec. 17.)
A corporation has the power of succession by its corporate name.
(Sec. 35[2].) It is the name of the corporation which identifies and
distinguishes it from other corporations, firms, or entities in the
same manner as the name of an individual designates the person and
distinguishehims from other persons. By its name, a corporation is
authorized to transact business.’
The name of a corporation is, therefore, peculiarly essential to
its existence and to its identity.
(2).Nature. — A corporate name is regarded in the nature
of a trademark even though composed of individual names, and
its simulation may be restrained. After adoption, it follows the
corporation. (9-A Words and Phrases 391-392; see Sec. 18.)
A corporation’s right to use its corporate and trade name is a
Property right, a right in rem which it may assert and protect against
the whole world in the same manner as it may protect its tangible
Property against trespass or conversion. It cannot be impaired or
(unnpnannamunpnamemie meee es
.
'A corporation need not register with the Department of Trade and Industry if it
does not have the intention to use another business name other than the corporate name
Tegistered with the SEC. (SEC Opinion No. 21-04, April 2, 2004.)

178 THE REVISED CORPORATION CODE OF THE PHILIPPINE
S Sec. 17
defeated by subsequent appropriat

iatiion by another:corpora tion in th e
same field. (Philips Export B.V. vs. Court of Appeals, 206 SCRA 457
[1992].) Z
Limitations upon use of corporate name.,
(1) Similarity with, or not distinguishable from, another corporate
name. — Under the old Corporation Code, the corporate
name must
not be identical or deceptively or confusingly similar to that of
any
existing corporation, or is patently deceptive or confusing.
(see Sec.
18). Under the Revised Corporation Code, the corporate
name must
be distinguishable from that already reserved or regi
stered for use
of another corporation?
(a) A corporation acquires its name
by choice and need
not select a name identical with or similar to one already
appropriated by a senior corporation
while an individual’
name is thrust upon him. It can no mor
e use a corporate name
in violation of the rights of others than an ind
his name legally acquired so as to mis
ividual can use
lea d the public and injure
another. (Philips Export B.V. vs, Court
of Appeals, 206 SCRA 457
[1992].) ,
and Exchange Commission register

s any articles of incorporation, the
checked to make sure that the Propos records are
ed name is not identical with or clos
the name of an entity previously regi ely similar to
stered with it. Moreover, the registra
submit a written undertaking that the nt is required to
corporation will change its name in
another person, firm or entity has acqu the event that
ired a prior right to the use of the sam
one similar to it. (SEC Opinion, May e name or
26, 1968.) Such entity may be a foreign
whose trade name, being a property righ corporation
t, a tight in rem, is entitled to protecti
countries where it does not transact any on even in
business. (Western Equipment & Supp
Reyes, 51 Phil. 115 [1927].) A corporation ly Co. vs.
need not register with the Department
and Industry the SEC-approved corp
orate name if it does not have any
of Trade
another business name. (SEC Opinio intention to use
n No. 21-04, April 2, 2004 )
Neither the Corporation
Code nor the Guidelines contains any
the use of the words “United States” or provision restricting
the initials “U.S.” as part of the corporat
Hence, for as long as they would not
be deceptive in the light of the purpos
e name.
the corporation is organized, the es for which
use of such words may be allowed,
to the provision of any existing inte without prejudice
rnational agreement to the contrary. (SEC
April 12, 1988.) Opinion,
The SEC has prohibited
domestic Operations from using the names
corporations unless they are set up as subsidia ofmultinational
ries or affiliates of these multinational
corporations to prevent misimpressions created by new corporation organized
obscure investors. by

Sec. 17 TITLE I INCORPO
OF PRIVATE TICO
ON AND ORGANIZATI
RPORATIONS ON 179
For as long as
a Corporation is
in operation,
its: corporate existing whether or not it is
group. (SEC n a m e cannot be used by any other
Opini
On, Sept. 2, 1993.)
of the Philippines vs. Court

of Appeals, 390 SCRA 252
The enforcement of the [2002].)
p Totection accorded by Sec
corporate names is lodged exclusively
tion 17 to
Bank vs. BPI Family Bank, in the SEC. (GSIS Family
771 SCRA 284 [2015].) Not
the protection of the Corporati only for
ons involved but more so
protection of the public. It has for the
the authority to deregister at
all times and under all, ci cir
cum
stances corporate names which
in its estimation are likely to gen
erate confusion. (De La Salle
Montes sori International of Malolos, Inc: vs. The La Salle
Brothers, Inc., etc:, 855 SCRA 38
[2018].)
(c) A name is not distinguisha
ble even if contains one or
more of:
1) The word “corporation”, “company”,
“incorporated”, “limited”, “limit
ed liability”, or an
abbreviat ion of one of such words; and
2) . Punctuations, - articles, conjunctions, contractions,
preposition, . abbreviation, different tenses, spacing, or
number of the same word or phrase.
_(d) The SEC, upon determination
that the corporate name
is: (1) not distinguishable from a name already reserved or
registered for the use of another corporation;
(2) already
Protected by law; or (3) contrary to law,
rules and regulations,
may summarily order the corporation to immediately
cease
and desist from using such name and requ
ire the corporation to
Tegister a new one. The SEC shall also cause
the removal of all
visible signages, marks, advertisements, labels, prints and other
effec
ts bearing such corporate name.

If the corporation fails to comply with the SEC's order, the

SEC may hold the corporation and its responsible directors
or officers in contempt and/or hold them administratively,
civilly and/or liable under the Revised Corporation Code and
other applicable laws and/or revoke the registration of the
corporation. (Sec. 17.)
Rules on the use of corporate name.

The SEC has laid down these guidelines on the use of corporate
and partnership names:?
(1) The corporate name shall contain the word “Corporation” oy
“Incorporated,” or the abbreviations “Corp.” or “Inc.” respectively;
(2) In the case of a One Person Corporation, the corporate
name shall contain the word “OPC” either below or at the end of its
corporate name;
(3) The partnership name shall bear the word “Company” or
“Co.” and if it is a limited partnership, the word “Limited” or “Ltd.”
A professional partnership name may bear the word “Company,”
“Associates,” or “Partners,” or other similar descriptions;
(4) The corporate name of a foundation shall use the word
“Foundation”;
(5) The corporate name of all nonstock, non-profit corporations,
including non-governmental organizations and _ foundations,
engaging in microfinance activities shall use the word “Microfinance”
or “Microfinancing”; provided that said corporations shall state in
the purpose clause of their articles of incorporation that they shall
conduct microfinance operations pursuant to Republic Act No. 8425
or the Social Reform and Poverty Alleviation Act;
(6) A term that describes the business of a corporation in its
name should refer to its primary purpose. If there are two such
terms, the first should refer to the primary purpose and the second
to the secondary purpose; age
(7) The name shall be distinguishable from other corporate or
partnership name registered with the SEC or with the Department
of Trade and Industry, in the case of sole proprietorships;
*See Appendix D: SEC Memo. Circ. No. 13-19, June 21, 2019 (Amended Guidelines
and Procedures on the Use of Corporate and Partnership Names).

ec. 17 TITLE Il. INCORPO RATION AN
OF PRIVATE CORP D ORGANIZATION 181
ORATIONS
However, the addition of One

or more distinctive words shal
not be allowed if th © Tegistered l
name iscoined or unique unless
the board of direct ors Or majority of
corporation or partnership 8iv the partners of the subject
es its consent to the applied
name;
(9) Punctuation marks, spaces, sig
ns, symbols, and other similar
characters, regard less of their form or arrangeme
nt, shall not be
acceptable as distinguishing
proposed name from a regis
(10) Aname that consists s olely
of special symbols, punctuation
marks or specially designed c hara
cter s shall not be registered;
(11) Business. or trade name which is. different
from the
corporate or partnership name shall be indicate
d in the articles of
incorporation or partnership. A company may have
more than one
business or trade name;
(12) A trade name or trademark registered with the Intel
lectual
Property Office may be used as part of the corporate or
partnership
name of a party other than its owner if the latter gives its consent
to
such use;
(13) The full name or surname of a person may be used in a
corporate or partnership name if he or she is a stockholder, member
or partner of the said entity and has consented to such use; if the
person is already deceased, the consent shall be given by his or her
estate;
(14) A single stockholder of a One Person Corporation

(OPC) may use his/her name; provided, that said name shall be
accompanied with descriptive words aside from the suffix OPC;
The single stockholder may also use the name of another person
Provided consent was given by the said person or if deceased, his
estate. The name shall be accompanied by the descriptive words
other than the suffix OPC.
(15) The SEC may require a registrant to explain to its satisfaction
the reason for the use of a person’s name;

COD E OF THE PHILIPPINES Sec. 17
use d in a name idea t ete

(16) The me an in g of ini tia ls
ea = ip
of incorporation, articles O
the registrant in the articles director or
by an incorporator,
or in a separate document signed
partner, as the case may be;
ion,
(17) The name of an internationally known foreign corporat
ion
or something similar to it, cannot be used by a domestic corporat
unless it is its subsidiary, and the parent corporation has consented
to such use.
However, aname written in a foreign language, even if registered
in another country, shall not be registered if the name violates
good morals, public order or public policy, or has an offensive or
indecorous meaning in any of the country’s official languages or
major dialects;
(18) The name of a local geographical unit, site or location cannot
be used as corporate or partnership name unless it is accompanied
by a descriptive word or phrase, e.g., Pasay Food Store, Inc;
(19) Pursuant to existing laws, these words and phrases can be
used in the corporate or partnership name in the manner enumerated
below:
(a) “Finance Company,” “Financing Company,” “Finance
and Leasing Company,” and “Leasing Company,” “Investment
Company,” “Investment House” by entities engaged. in the
financing or investment house business (R.A. 8556 and Pres.
Decree 129);
(b) “Lending Company” and “Lending Investor” by lending
companies (R.A. 9474), or “Pawnshop” by entities authorized to
operate pawnshops (P._D. 114);
(c) “Bank,” “Banking,” “Banker,” “Savings and > Loan
Association” (R.A. 8367), “Trust Corporation,” “Trust Company”
or words of similar meaning by entities engaged in the banking
or trust business (R.A. 8791);
(d) “United Nations,” “UN,” in full or abbreviated: form
exclusively by the United Nations and its attached agencies
(R.A. 226);
oe “Bonded” by entities with licensed warehouses (R.A.

Sec. 17 TITLE Il! INCORPORATION AND
OF ORGANIZATION i
PRIVATE CORPORATIONS
(f) “SPV-AMC” by corporations
purpose vehicle (R.A. authorized to act as special
9182);
(g) Thenameof an international govern
such mental organization,
as “Int:ernational Criminal
(INTERPOL), Police gani
Orga niza
zati
tion
on”
International Monetary Fund”
International Labour Orga (IMF), and
nization” (ILO) may not be used
as part of a corporate or partnership
name unless when duly
authorized or allowed by the SEC; and
(h) ASEAN (protected under. Article 6ter of
Convention for the Protection of Ind the Paris
ustrial Property, adopted in
1883 and rev ised in Stockholm in 1967).
:
(20) The practice of a Profession, reg
ulated by a special law
which, among others, provides for the permissible use of the
profession’s name ina firm, partnership or associ
ation shall govern
the use of the name, e.g., “Engineer” or “Engineering
” (R.A: 1582),
“Architect” (R.A. 9266), or “Geodetic Engineer” (R.A
. 8560).
Notwithstanding the limitations mentioned above,
any
association registered by entities engaged in the listed activ
ities
may use the profession’s name, e. g., Association of Engineers
of the
Philippines, Inc. :
(21) Unless otherwise authorized by the SEC the words
and phrases enumerated below can be used: only by the entities
mentioned:
(a) “Investment(s)” or “Capital” by entities organized as
investment house or investment company;
(b) “Capital” by entities organized as investment house,

investment company or holding company;
(c) “Asset /Investment/ Fund/Financial Management,” or
“Asset/Investment/Fund/Financial Adviser,” or any similar
words or phrases by entities organized as investment company
adviser or holders of investment management activities (IMA)
license from the Bangko Sentral ng Pilipinas; ©
(d) “National,” “Bureau,” “Commission,” “State,” and
other similar words, acronyms, abbreviations that have gained
wide acceptance in the Philippines by entities that perform
governmental functions;

(e) “Association” and “Organization” or similar eee

which pertain to nonstock corporations by entities primarily
engaged in non-profit activities; and Hie
(f) “Stock | Exchange/Futures . Exchange / Derivatives
Exchange,” “Stock Broker/Securities Broker/ Derivatives
Broker,” “Commodity/Financial Futures Merchant/ Spey
“Securities Clearing Agency /Stock Clearing Agency,” “Plans’
or any similar words or phrases by entities organized as an
exchange, broker dealer, commodity futures broker, clearing
agency, or preneed company under the Securities Regulation
Code (R.A. 8799).
(22) Pursuant to Republic Act 10530, or “The Act Defining the
Use and Protection of the Red Cross, Red Crescent and Red Crystal
Emblems,” the use of the words “red cross,” “red crescent,” or “red
crystal” or their translation in any official language and dialect
cannot be used or registered as part of a corporate or partnership
name, unless with the consent of the Philippine Red Cross. (SEC
Memo. Circ.No. 13-19, June 21, 2019.)
Use of changed or abandoned corporate name.

(1) The name of a corporation or partnership that has
been
dissolved or whose registration has been revoked shall
not be used
by another corporation or partnership within five
(5) years from the
approval of dissolution or five (5) years from the
date of revocation,
unless its use has been allowed at the
time of the dissolution or
revocation by the stockholders, members or partners who
a majority of the outstandin § capital stoc represent
k or membership of the
dissolved corporation or par tnership
, as the case may be.
(2) A corporate orpartnership nam
used but become the subject of amendm e, which’ was previously
ent, shall not be re-registered
or used by another corporation or partnersh
(3) years from the date of the ip for a period of three
> approval of the adoption of
corporate or partnership na the new
me.
a An earlie 7
r period may be allowe
ee d for the registration
of the former corporate or or use
corporation or partnership,partne rship name provided tha
wh t the
corporate or partnershi
ic h Pr ev io us
u ly ow
) ned the used
p name, give s its consent.
|

al oi TITLE I. 'NCORPORAT
ION AND ORGA
RIVATE CORPORATIONSNIZATION 185
|
may use the names of ab

of the surviving corpora
19, June 21, 2019.)
Remedy of corporation whose name

has
been adopted by another,
(1) Injunction. — A corporation has an exclusive right to the

use of its name, which m ay be protected by injunction upon a
ya
principle similar to that u pon which persons are protected in Pusing
trademarks and trade names.
(a) Fraud upon the aggrieved corporation. — The use of a
name similar to one adopted by another corporation, whether
a business or a non-profit organization, if misleading or likely
to injure in the exercise of its corporate functions, regardless of
intent, may be prevented by the corporation having a prior right,
by a suit for injunction against the new corporation to prevent
the use of the name. (Philips Export B.V. vs. Court of Appeals,
206 SCRA 457 [1992]; Ang Mga Kaanib sa Iglesia ng Dios Kay
Kristo Hesus, H.S.K. sa Bansang Pilipinas, Inc. vs. Iglesias ng
Dios Kay Cristo Jesus, 372 SCRA 171 [2001].)
Such principle proceeds upon the theory that it is a fraud
on the corporation which has acquired a right to that name and
perhaps carried on its business, that another should attempt to
use the same name, or the.same name with slight variation in
such a way as to introduce persons to deal with it in the belief
that they are dealing with the corporation which has given a
reputation to the name. (Philips Export B.V. vs. Court of Appeals,
supra.)
(b) Interference with its business. — Broadly speaking, the
rule is that the right of a corporation to enjoin the use of a similar
; ti tic ame, first name, ? device or wor k used by

4A trade name is any individual name or surname,
Manufacturers, industrials, merchants and others to identify their businesses, vocations,
or occupations. It refers to the business and its goodwill while trademark refers to the
800ds. (Converse Rubber Corp. vs. Universal Rubber Products, supra.)

S Sec. 17
name by another depends upon whether such use has interfered

with the former’s business whatever it may be and without
-regard to whether it is commercial, trading or otherwise: Thus,
not only are corporations organized for pecuniary profit entitled
to protect their names by injunction, but it has also been held
that an injunction may issue to protect the name of a benevolent
fraternal society, a patriotic society, a social club, or a charitable
religious society. (see 6 Fletcher, pp. 26-47; 18 C.J.5. 579-580.)
(2) De-registration. — To restrain the wrongful assumption of a
name by a corporation is not to annul the corporation by. depriving
it of a name. If restrained from using a name chosen, it may choose
another name. (18 Am. Jur. 2d 684.) Section 17 empowers the SEC
to summarily order the corporation to immediately cease and desist
the use of a corporate name (see Ang Mga Kaanib sa Iglesia ng Dios
Kay Kristo Hesus, H.S.K. sa Bansang Pilipinas, Inc. vs. Iglesia ng
Dios Kay Cristo Jesus, supra.)
Change of corporate name.

(1) Compliance with formalities. — A corporate name is an
artificial name and is selected with an object, and may.be changed
and a new one taken. (9-A Words and Phrases 391:)
A corporation can change the name originally selected by it after
complying with the formalities prescribed by law, to wit; amendment
of the articles of incorporation and filing of the amendment with the
SEC. (Sec. 15.) Hence, the mere approval by the stockholders of the
amendment of the articles of incorporation changing the corporate
name does not automatically change the name of the corporation
as of that date. (Phil. First Inc. Co., Inc. vs. Hartigan, 34 SCRA 252
[1970].)
(2) Effectivity. — When a change of name is approved, it
is required that the SEC must issue an amended certificate of
incorporation under the amended name. (Sec. 15.)
The change of name is deemed effective as of the date of the
SEC’s approval of the amended articles or from the date of filing
with it if not acted upon within six (6) months from the date of filing
for a cause not attributable to the corporation. (Sec. 15, last par.) Said
change impliedly amends the corporate name as appearing in the

I
Sec.
OR
17
TITLE
I I
PORATION AND ORGA
NIZATION
RIVATE CORPOR
ATIONS 187
bylaws; hence, the

corporation ne . bylaws to reflect
its new corporate name. SEC ed not amend its
Opinion, Oct. 2, 1986.)
(3) Effect. — An
authorized change in the name of the
corporation, whether eff
ected by a Special act or under a general
law, has no more effect
upon its id entity as a corporation than a
change of name of natural
person u pon his identity.’
Effect of misnomer of a corpor
ation.
(1) Contracts. — The rule is that the mere misnomer of a
corporation in : bond, note, or other deed or contract does not
render the same invalid or inoperative.
Nor will a grant or conveyance to or by a corporation be avoi
ded
because of a misnomer. (18 C.J.S, 572-574; 1 Fletcher, pp. 742-743.)
This rule has also been applied in case of subscription to the stock of
a corporation. (18 Am. Jur. 2d 680.)
(2) Suit by, or against, corporation. — The corporation may sue
or be sued thereon in its true name with proper allegation and
proof that it is the corporation intended; and its identity may be
established by parol evidence.
Generally speaking, a corporation if sued by the wrong name is
bound if duly served. (21 R.C.L. 599.) If there is enough expressed
to show there is such artificial being and to distinguish it from
all others, the body corporate is well named although there is a
variation of words and syllables. (10 CJ.S. 572; Moultrie Country v.
Fairfield, 105 U.S. 370, 26 L. ed. 945.) |
‘The change of name does not affect the property, rights, or liabilities of the
corporation, nor lessen or add to its obligations. After a corporation has effected a change
in its name, it should sue and be sued in its new name. (18 Am. Jur. 2d 682-683.) It is in
No sense a new corporation, nor the successor of the original corporation. It is the same
corporation with a different name and its character is in no respect changed. Asa general
ee sien a enaiben ho acted in their capacity as agents of the corporation under
no personal liability for acts done or contracts entered
bythen ‘tdlaly aatont? ed. into
(Republic Planters Bank vs. Court of Appeals, 216 SCRA 738
[1992]; PC. Javier & Sons, Inc. vs. Court of Appeals, 462 SCRA 36 [2005}.)

Sec. 18. Registration, Incorporation and Commencement

of Corporate Existence. — A person or group of persons
desiring to incorporate shall submit the intended corporate
name to the Commission for verification. If the Commissi
on
finds that the name is distinguishable from a name already
reserved or registered for the use of another corpo
ration,
not protected by law and is not contrary
to law, rules and
regulations, the name shall be reserved
in favor of the
incorporators. The incorporators shall then
submit their
articles of incorporation and bylaws to
the Commission.
(N)
If the Commission finds that the submit
ted documents
and information are fully compliant with
the requirements
of this Code, other relevant laws, rule
s and regulations, the
Commission shall issue the certificate
of incorporation. (N)
A private corporation organized under this Code
commences its corporate existence and juridical
personality from the date the Commis
sion issues the
certificate of incorporation under its
Official seal and
thereupon the incorporators, stockholders/members
and their successors shall constitute a
body corporate
under the name stated in the articles of inc
orporation for
the period of time mentioned therein, unle
ss said period
is extended or the corporation is sooner
dissolved in
accordance with law. (A)
Issuance of certificate of incorporation.

A person or group of persons organized under the
Revised
Corporation Code commences corporate existence and juridical
personality from the date the SEC issues a certificate of incorporation
under its official seal; and thereupon the incorporators, stockhol
ders/
members and their successors shall constitute a body corpo
rate
under the name stated in the articles of incorporation for the perio
of time mentioned, unless the Period is extended or the corporation
d
is sooner dissolved in accordance with law.
An unregistered organization cannot exercise the powers,
rights,
and privileges expressly granted by the Revised Corp
oration Code
to registered corporations. Its status is that of an ordinary assoc
iation
which has no separate juridical personality. (SEC Opin
ion, Aug. 20,
1987.)

Sec. 18 TITLE I, INCORPOR
ATION AND ORGANI
F PRIV ATE CORPORATIONSZATION
189
Acquisition of
juridical Person
ality.
(1) Issuance of certificate
commences to have juridical of incorpor ation. — A cor oration
e li‘i i 1
from the moment the SEC iss BR te nba ticy only
ues to the incorporator
incorporation under its official seal. s a certificate of
(a) Such certificate
corporation’s right and co
lity has the status

of an “unregistered”
association and the me mbe
rs themselves shall be held personall
liable for their acts or cont y
racts, and not the association.
(b) It is the certificate of
incorporation that not only gives
juri
poe dicaeel personality to a corporation but places it under the
jurisdiction of the SEC. This jurisdiction is not
affected even
if the authority to Operate a certain specializ
withdrawn by the appropriate regulatory bod ed activity is
y other than the
SEC. (Filipinas Loan Company, Inc. vs. Securiti
es and Exchange
Com mission, 356 SCRA 193 [2001].)
(c) The issuance of the certificate calls the corporat
ion into
being but it is not ready to do business until it is
organized.
The corporation must formally organize and commence
the
transaction of its business within five (5) years from the date
of
its incorporation or, otherwise, its corporate powers shall ceas
e
and it shall be deemed dissolved. (Sec. 21.) The law under which
the corporation is organized may require.a separate permit or
license to operate from other government agencies.
(2) Filing of articles of incorporation. — In the case of religious
corporations, the Revised Corporation Code does not require the
SEC to issue a certificate of incorporation. (see Secs. 110, 133.) Section
110 states that from and after the filing with the SEC of the articles of
incorporation, the chief archbishop, etc., shall become a corporation
Sole. (par. 2.)
(3) Registration of cooperative. — A cooperative acquires juridical
Personality upon registration with the Cooperatives Development
Authority. (R.A. No. 11364, Sec. 4[c, f].) It need not be registered
again with the SEC.
The methods or causes of dissolution of corporations are
discussed under Title XIV.

Sec. 19. De Facto Corporations. — The due incorporation

of any corporation claiming in good faith to be a corporation
under this Code, and its right to exercise corporate powers,
Shall not be inquired into collaterally in any private suit
_ to which such corporation may be a party. Such inquiry
may be made by the Solicitor General in a quo warranto
proceeding.
De jure corporation/de facto corporation

defined.
(1) A de jure corporation is created in strict or substantial
conformity with the mandatory statutory requirements for
incorporation and the right of which to exist as a corporation cannot
be successfully attached or questioned by any party even in a direct
proceeding for that purpose by the State.
(2) A de facto? corporation is one which actually exists for all
practical purposes as a corporation but which has no legal right to
corporate existence as against the State. (8 Fletcher, pp. 62-63.) It is a
corporation from the fact of its acting as such, though not in law or
~~
right a corporation. (18 Am. Jur. 2d 593-594.)

It has not complied with all the requirements necessary to be
a de jure corporation but has complied sufficiently to be accorded
corporate status as against third parties although not against the
State.
Requisites of a de facto corporation.

It is essential to the existence of a de facto corporation that there
be:
(1) A valid law under which a corporation: with powers
assumed might be incorporated;
(2) Bona fide attempt to organize a corporation under such law;
and
(3) Actual use or exercise in good faith of corporate powers
conferred upon it by law. (see Seventh Day Adventist Conference
Church of Southern Philippines, Inc. vs. Northeastern Mindanao
“as
‘According to law.
In fact”

Existence of law.
In order that there can be a de facto corporation, there must

be
a law authorizing it to be a corporation de jure for there cannot be
a corporation de facto when there cannot be one
(1) de jure, even
though there may have been an assumption of corporate powers.
(1) There cannot be a corporation de facto under an
unconstitutional statute for such statute is void and a void
law is no
law. (Clark v. American Cannal Coal Co., 733 N.E. 1083.) A statute,
however, is presumed valid until it has been judicially declared
otherwise.
(2) Similarly, a corporation cannot be recognized as having a de
facto existence when its purpose is prohibited by law or contrary to
public policy. (Art. 1409, Civil Code.) |
(3) Neither can there be a corporation for the practice of alearned
profession absent a law expressly permitting the organization of
such corporations. (1 Fletcher, p. 339.)
Bona fide attempt to incorporate.

(1) Absence of bona fide attempt to incorporate. — When there has
been no attempt in good faith to create a corporation de jure, there can
be no de facto corporation. Any other rule might well open the door
to fraud upon the public. Mere intent is not sufficient. In addition,
there must be a bona fide attempt to comply with the requirements of
the law (8 Fletcher, pp. 102-103.), which goes far enough to amount
to “colorable compliance” with the law. (Ballantine, p. 77.)
(2) Defects precluding creation of corporation. — According to
the Supreme Court, “[t]he filing of articles of incorporation and
the issuance of the certificate of incorporation are essential for the
existence of a de facto corporation.” In fine, itis the act of registration
with the SEC through the issuance ofa certificate of incorporation that
marks the beginning of an entity’s corporate existence. (Missionary

Sisters of Our Lady of Fatima v. Alzona, G.R. No. 224307, August 6

2018, citing Seventh Day Adventist Conference Church of Southern
Philippines, Inc. v. Northeastern Mindanao Mission of Seventh Day
Adventist, Inc., 528 Phil. 647 [2006].)
Thus, these defects which will preclude the creation of even a de
facto corporation:
(a) Absence of articles of incorporation;
(b) Failure to file articles of incorporation with the SEC
(Cagayan Fishing Dev. Co. vs. Sandiko, 60 Phil. 223 [1934].); and
(c) Lack of certificate of incorporation from the SEC.
In these cases, the omissions would be fatal to de facto corporate
existence for even its stockholders may not probably claim good
faith in being a corporation. The filing of articles of incorporation
and the issuance of certificate of incorporation may, therefore, be
considered essential for the existence of a de facto corporation. (Hall
vs. Piccio, 86 Phil. 603 [1950]; see Albert vs. University Publishing
Co., Inc., 13 SCRA 84 [1965].) |
(3) Defects resulting in creation of de facto corporation. — These are
examples of defects which do not preclude the creation of a de facto
corporation:
(a) The articles of incorporation fail to state all the matters
required by the Revised Corporation Code to be stated, or state
some incorrectly;
(b) The name of the corporation closely resembles that of a
pre-existing corporation that it will tend to deceive the public;
(c) The number of incorporators is more than 15;
(d) An incorporator who is a natural person is not of legal
age, }
(e) The percentage of Filipino ownership of the capita

stock required for the businesses is less than that prescribed by
law; and
(f) The failure to submit its bylaws on time. (Sawadjaen VS.

ND ORGANIZATION
193
€ statut ©, but there need not be a substantial

compliance. A substanti
alc : .
de jure. (Clark on Corpeiation. pee the body a corporation
eer . fixed rule on how far the proceedings must

go or
WwW ps wil amount to this colorable compliance. It will depend
on the situation and kn ; ied
a see ere ni ked
etre parties.
of the
.
claim and assumption ofowledge
noEBE ais
give a pretended corporation the de facto status. It is not enough

to show that the associates have intended to incorporate and have
agreed among themselves to act and have acted as if they were
a
) corporatatiion. The efforts to incorpora
te must give an appearance
of sufficiency of compliance with statutory
requirements, so that
the associates may in good faith suppose that they have actually
become incorporated. (Ballantine, pp. 77-78.) ~
Use of corporate powers in good

faith.
To create a corporation de facto, it is not sufficient to show the
existence of a law under which a corporation might be formed and
an honest attempt to comply with the requirement thereof, but it is
also necessary to show an actual use or exercise of corporate powers
or franchise.
(1), Use contemplated..— In substance, use consists in an
enjoyment and exercise (although not rightful) of, such corporate
franchises and powers as would be given by the law to an association
had the attempted organization been perfected.’
The acts relied upon as showing use must be corporate acts as
distinguished from acts which might as well be performed by an
incorporate association, or from acts of individuals which would not
be corporate acts if there were a charter. But if the business is such
that it can only be carried on by a corporation,’ then the carrying on
>This element seems to be a factor of minor significance. (Ballantine, p- 77.)

‘Taking subscriptions to and issuing shares of stock, electing directors and officers,
adopting bylaws and buying a lot and constructing and leasing a building upon it, are
sufficient acts of user of corporate powers to constitute a corporation de facto. It is doubtful,

THE PHILIPPINES Sec..19
of such business is enough since its members must of

necessity act
as a corp oration, if they act at all. (8 Fletcher, pp. 149-159.
)
(2) Duty to correct defect if discovered. — Furthermore,
it ‘jg
essential that the corporation must act in good faith in clai
ming to
be a corporation and exercising corporate powers. (Sec. 19.)
Therefore, if after incorporation, the inco
rporators discovered
that they have not complied substantially with the law and
still
continued transacting business as a corporation, without doing
anything to correct the defect, the privilege of de facto
existence can
no longer be invoked. ac
Basis of de facto doctrine. .

The recognition of de facto existence has been foun
d necessary
to promote the security of business transactions and
to eliminate
quibbling over irregularities.
|
(1) A third person dealing with a corporation will rarel
y be
prejudiced if the company is recognized as\a corporat
ion despite
minor defects in its formation. ;
(2) Seldom would it be just to allow a wrongdoer to quibb
le
over such objections to escape liability for wrongdoing.
(3) Equally, it would be unjust to allow a claimant against a
Supposed company to assert the individual liability of innocent
Passive investors on the ground of flaws in the formal steps of
incorporation, when they have attempted in good faith to comply
with statutory requirements and the objecting party isnot prejudiced.
(Ballantine, p. 87.) 3
Questioning validity of corporate

existence.
The well-settled rule is that if a de facto corporation actually
exists, its existence as a corporation cannot be collaterally attacked
either by the State or by private individuals.
however, whether the mere organization of a corporation by the election of officers aN

adoption of a board resolution authorizing a contract preliminary to the actual doing ©
business with third parties will constitute “acts of user.” (Ballantine, pp. 81-82.)

Sec. 19 TITLE Il. INCORPORAT]
ON AND OR
OF PRIVATR COR POR Moke
ue
(1) By the State. — The State
(quo warranto) against th
ot Cia ora Ata acto is that one can successfully resist a suit by
and" the other
‘ Sn
cannot. directly to test the rightfulness of its existence ;
(2) By private individuals. — Ast

0 individuals dealing with it as
a corporation, there are no €ssential dis
tinctions. The stockholders
or members of both are alike pro
tected from individual liability
for debts except to the extent provided by the
charter or act of
incorporation. (9-A Words and Phra
ses 96.)
Direct attack/collateral attack of corporate

existence defined.
(1) Direct attack is one whereby the State, in a proceedi
ng
brought for that purpose, attacks the existence of an association
claiming to be a corporation. A direct attack can only be instituted
by the government through the Solicitor General by quo warranto
proceedings. (Sec. 19; see Sec. 137.)
_ (2).A collateral attack is one whereby corporate existence is

questioned in some incidental proceedings not provided by law for
the express purpose of attacking the corporate existence.
- ILLUSTRATION:
Upon failure of A to pay his debt, X Corporation sued A.
Can A interpose the defense that X, being a de facto corporation,
has no right to exist as a corporation and, therefore, has no
capacity to enter into any contract and to sue in its own name?
No, because A is attacking the existence of X collaterally.
The defense of A is merely an incident to the main action or
principal case the purpose of which is to enforce the contract
of X with A. The right of X to exist as a corporation can only
be inquired into directly in a quo warranto proceeding brought
precisely for the purpose and the proceeding can only be
instituted by the government through the Solicitor General
(Sec. 19.) and not by A.

196 THE REVISED CORPORATION CODE OF THE PHILI
PPINES See, 19
Rule against collateral attack.

(1) Rationale. —The rule against collateral attack upon corp
existence is based upon the ground, not of equitabl
orate
e estoppel (see
Sec. 20.), but of public policy.
(a) Individual right is not invaded;
it is the State’s right and
authority which are invaded and
usurped. If the State, Which
alone grants the authority to inc
orporate, remains silent, an
individual would not be allowed and
permitted to raise the
inquiry.
(b) It would produce endless con
probably destroy the cor
fusion and hardship anq
poration if the legality of
could be questioned in every sui its existence
t to which it is a party, for then
no judg ment could be rendered which
question. (18 Am. Jur. 2d 606 would finally settle the
.)
(c) Likewise, the Tule is in the intere
and is essential to the validi st of the public
ty of business transactions
Corp
orations. (Ibid., 594.)
with
(SEC-OGC Opinion No.
December 13, 2007.) 01-08,5
Where organization not

even a de facto
corporation.
Ifthere has beenabona fide at
temptto incorporate, and the
been so far complied with as law has
to make the association a co
rporation
es
*Citing De Leon, The Corpor
ation Code of the Philippin
[2002]. es Annotated, pp: 197-198

Sec, 19 TITLE Il, INCORPOR
OF PRIVATEATICOR
ON POR
ANDATIORG
ONSANIZ ON 197
de facto, the only Wa
y its Corporate exis
ten ce can be questioned is in
a direct proceeding by the State, bro
individuals cannot raise ught for the purpose. Private
the objection in such a nn
or indirectly, and nobody can aie directly
raise the objection collaterally.
(1) Direct or collateral attack. — If failure to com ly with
conditions precedent prev
g into Nisleriee of any
corporation either de jure or de facto, then,
on principle and in reason,
the question
a may be raised collateral
ly and directly, and by private
individuals and by the State, unless there is something to operate as
an estoppel.
When a private individual, therefore, raises the
objection that
conditions precedent has not been complied with,
the question,
absent elements of esto ppel, is whether
there is a corporation de
facto. If there is, he cannot object; otherwise, he
can.
(2) Capacity to sue or be sued. —If a party is not either
de jure or
de facto, it has no legal capacity to sue or be sued. And wher
e the
corporate existence of the plaintiff suing as a corporation
is defined,
the burden is on it to prove its corporate existence either de jure
or de
facto, or at least to show an estoppel on the part of the defendant to
deny such existence.
(3) Liability as partners. — If neither a de jure nor a de facto
corporation results, the incorporators should be held liable as
partners with stockholders who subscribed to stocks knowing the
failure of the attempted incorporation of the business. (Sec. 21.)
It is regular courts, not the SEC, that have jurisdiction over
disputes or controversies among them.
(4) Estoppel as a defense. — Where there is not even a corporation
de facto, a private person may, according to many cases, be barred
from raising the objection on the ground that he is estopped by
his conduct, as by having dealt with the pretended corporation as
a corporation, or by having held it out to the public as a legally
constituted corporation. (Ibid., Clark on Corporation, pp. 65-66.)
Proof of corporate existence.

(1) Proof of de jure existence. — The sufficiency of the proof of
corporate existence will depend upon the nature of the proceeding
in which the question is raised and the circumstances of the

particular case. In quo warranto proceedings by the State to test

the right of an alleged corporation to exercise corporate powers,
corporate existence de jure must be shown; and to show this, itmust
be made to appear that there is a valid law creating or authorizing
such a corporation, that there was a valid organization under it and
a substantial compliance with all condition precedent.
(2) Proof of de facto existence. — On the other hand, as has been
stated, if the question of corporate existence is raised collaterally, it
is sufficient if a de facto existence be shown. Such proof is admissible
whenever the question comes up collaterally as in a criminal
Prosecution for forgery or any. other crime against an alleged
corporation, or in any civil proceeding, other than proceedings by
the State to test the existence of the alleged corporation. It is only
necessary, to prove de facto corporate existence, to show a law
under
which the alleged corporation might have been formed, a colorable
bona fide compliance with that law, and an assumption
or user of
corporate powers.
(3) Proof of facts operating as an estoppel. — Again,
there are
many cases in which a party may, be his cond
uct, as by dealing
with or holding out a body as a corporation, be
estopped to deny its
existence as a corporate body. Here, it is unnecessary
a de facto corp
to prove even
orate existence. All that is necessary is to
facts that will operate as an estoppel.* (see Sec. show the
20.)
Powers and liabilities of a de facto
corporation.
(1) In general. — Such a corporation is prac
de jure corporation. It is deemed to have a subs tically as good:as a
tantial legal existence
and ordinarily, in its relation with all person
s except the State, has
the same powers and is subject to the same liabilities, duties and
responsibilities, as a corporation de jure,
and is bound by all such
acts as it mig ht rightfully perform if it were a corporati
on de jure.
ape as
®Where a person has contacted, or dealt
with an association as a corporation, proo
of that fact alone is prima facie evidence f
of the corporate existence of the body
him, as in action by the alleged corporat as against
ion
Corporations, Sec. 40.) Thus, an indorsee for aonnote a subscription to its stock. (Clark on
Prove the corporate capacity of the Payee payable to a corporation need not
since the maker “engages that he will pay
according to its tenor, and admits the existenc it
e of the payee and his then capacity to
indorse.” (Act No. 2031 [Negotiable Inst
ruments Law,] Sec. 60.)
__—i

gec-9 TITLE Il. INCORPORATION AND
OF PRIVATE CORPORATOR GANIZATION
IONS me
In other words, so long as the State acquiesces in its existence

and its exercise of corporate functions, it is under the protection
of the same law and governed by the same legal principles as de
jure corporations, and may legally do and perform every act and
thing which the same entity could do or perform were it a de jure
corporation. As to all the world except the paramount authority
under which it acts and from which it receives its charter, it occupies
the same position as though in all respects valid, and even as against
the State, except in direct proceedings to arrest its usurpation of
power, its acts are to be treated as efficacious.
(2) Liability to taxation.—So, the property of a de facto corporation
is subject to taxation in the same manner as though it were a de
jure corporation and under the statutes relative to the taxation of
corporations of the latter class. (1 Fletcher, pp. 627-628.)
(3) Binding effect of contracts. — Similarly, a transfer of property
to or by a corporation de facto is valid and binding against all persons
except the State; bonds, deeds, and mortgage executed by such a
corporation are valid, not only as against the corporation itself, but
also as against anyone making a claim against its assets, whether as
a creditor directly of the corporation or as a creditor of its creditors
or stockholders.
(4) Protection against unauthorized acts. — Whether a corporation
is de facto or de jure, itis entitled to protect itself from unauthorized
acts. (26 Am. Jur. 2d 583-584.)
Liabilities of officers and members

of a de facto corporation.
(1) In general. — The officers and directors (or trustees) of a
de facto corporation are subject to all the liabilities and penalties
attending to officers and directors duly chosen by a corporation de
jure, including liability under the criminal law, and their acts are
binding when such acts would be within the power of such officers
if the corporation were one de jure. (Ibid., p. 655.)
(2) Liability as partners to third persons. — The members of a de
facto corporation cannot be held liable as partners by third persons
who deal with them in their supposed corporate capacity, merely
because of a technical defect in the formation of the corporation.
This is especially true where the stockholders did not know of

Sec. 29
the defects and had no intent to become partners and because the
ostensible corporation is apparent to third persons. On the other
hand, where an attempt to organize a corporation fails by omission
of some substantial step or proceedings required by the law, its
members or stockholders are liable as partners.
The decisive question is always whether what has been done
toward incorporation and organization is sufficient to constitute a
corporation de jure or de facto. (Ibid., 600-601.)
(3) Liability among themselves. — In actions among the members
themselves, however, for advances, commissions, etc., the test of
whether the corporation is de jure or de facto has been disregarded,
When personsassociate together and dobusinessasacorporationand
the latter is defectively organized, their rights, duties, and liabilities,
as between themselves, should be determined and governed by the
express or implied terms, conditions, and limitations contemplated
by their agreement. They are not partners unless they have agreed
to be such.
The result thus obtained is the same as that reached ‘on the
theory or estoppel. (Ibid., 601.)
Sec. 20. Corporation by Estoppel. — All persons who

assume to act as a corporation knowing it to be without
authority to do so shall be liable as general partners for.
all debts, liabilities and damages incurred or arising as
a result thereof: Provided, however, That when any such
ostensible corporation is sued on any transaction entered -
by it as a corporation or on any tort committed by it as
such, it shall not be allowed to use its lack of corporate
personality as a defense. (A)
Anyone who assumes an obligation to an ostensible
corporation as such cannot resist performance thereof on
the ground that there was in fact no corporation.
Estoppel to deny corporate existence.

An incorporated association which represented itself to be a
corporation will be estopped from denying its corporate capacity in
a suit against it by a third person who relied in.good faith on such
representation. It cannot allege lack of personality to be sued to evade

Sec. 20 TITLE II. INCORPO
OF PRIVATE TION
C ORPAND
OR ORGA
ae N IZATION 201
vs. Nati . ne
No. 84502, June 30, 1989.) onal Labor Relations Commission, G.R.
faitad de facto corporation not applicable. — In certain

Ss, anaa organization
not a corporation de jure — or
peth aps ps n not even de facto — may,
pang epic sr auchby hee

so far as the parties to a given
eee
transaction are concerned, be re ard
An organization which has not complied with

the conditions
precedent to even de facto existence is not, for any purpose,
a
corporation. Nevertheless, the incidents ofa corporate existence may
exist as between the parties by virtue of an estoppel. Thus, besides
corporation de jure and de facto, there is sometimes a recognition of a
__ third class known as corporation by estoppel, also known as ostensible
corporation.! (18 Am. Jur. 2d 615.)
(2) Jurisdictional requirements not subject to estoppel. — The
doctrine of corporation by estoppel cannot override jurisdictional
requirements. Jurisdiction is fixed by law and. is not subject to
agreement of the parties. Thus, it cannot be acquired through,
or waived, enlarged or diminished by any act or omission of the
parties; neither can it be conferred by the acquiescence of the court
or SEC. (Lozano vs. De los Santos, 274 SCRA 452 [1997].)
(3) Foundation of doctrine. — Corporation by estoppel is founded
on principles of equity and is designed to prevent injustice and
unfairness. It applies when persons assume to form a corporation
and exercise corporate functions and enter into business relations
with third persons. Where there is no third person involved and the
conflict arises only among those assuming the form of a corporation
there is no
who, therefore, know that it has not been registered,
corporation by estoppel: ( bid.)
Nt is generally conceded that corporations by estoppel are not based upon the same
tl ations de facto. The doctrine of de facto corporation has nothing to
ees as Are eR estoppel. A corporation de facto cannot be created by estoppel, the
a : een sinppél being to prevent the raising of the question
as to the existence
of a corporation. (Ibid.)

While the doctrine is generally applied to protect the sanctity

of dealings with the public, nothing prevents its application in the
reverse. The very wording of the law which sets forth the doctrine
of corporation by estoppel permits such interpretation, such that a
person who has assumed an obligation in favor of a non-existent
corporation, having transacted with the latter as if it was duly
incorporated, is prevented from denying the existence of the latter
to avoid the enforcement of the contract.
Jurisprudence dictates that the doctrine of corporation by
estoppel applies for as long as there is no fraud and when the
existence of the association is attacked for causes attendant at the
time the contract or dealing sought to be enforced was entered into,
and not thereafter. (Missionary Sisters of Our Lady of Fatima vs.
Alzona, G.R. No. 224307, August 6, 2018.)
The application of the doctrine applies to a third party only when
he tries to escape liability on a contract from which he has benefited
on the irrelevant ground of defective incorporation. (International
Express Travel & Tour Services, Inc. vs. Court of Appeals, 343 SCRA
674 [2000].)
(4) Reason behind doctrine. — The reasons are obvious:
(a) An unincorporated association has no personality and
would be incompetent to act and appropriate for itself the
power and attributes of a corporation as provided by law;
(b) It cannot create against or confer authority on another
to act in its behalf; thus, those who act or purport to act as its
representatives or agents do so without authority and their own
risk; and
(c) As it is an elementary principle of law that a person
who acts as an agent without authority or without a principal
is himself regarded as the Principal, possessed of all the right
and subject to all the liabilities of a principal, a person
acting
or purporting to act on behalf of a corporation which has no
valid existence assumes such privileges and obliga
tions and
becomes personally liable for contracts entered into or for other
acts performed as such agent. (Lim Tong Lim vs. Philippines
Fishing Gear Industries, Inc., 317 SCRA 728 [1999]; International
Express Travel & Tour Services, Inc. vs. Court of Appeals,
supra.)

gec: 20 TITLE Il. INCORPO
OF PRIva\ AND ORGANIZATI O
TE CORPO RATION _ a
corporation by estoppel w;
de facto existence, without
ade facto corporation are p resent. Co ‘ ‘

may arise
even if no de facto corpora tion exists.‘poration by estoppel
(2) A corporation by estoppel has no real existence in law. It
is neither a de jure nor.a de facto corporation, but is a “mere fiction
existing for the particular case, and vanishing where the element of
estoppel is absent.” (8 Fletcher, p. 219.) It exists only between the
persons who misrepresented their status and the parties who relied
on the misrepresentation. Its existence may be attacked by any third
party unless the attacking party is estopped to treat the entity other
than as a corporation.
(3) Even if the ostensible corporation is proven to be legally
non-existent, a party. may be estopped from denying its corporate
existence. In order for one to be estopped to deny the corporate
existence of an organization, he must have contracted or dealt with
it as a corporation.
(a) Thus, where a mortgage, promissory note, or other
iving it
instrument is given. to, a, corporation, the party..g
ence as, a corporate
admits and is estopped to deny its exist
unless its existence
body involving such contract or dealing,
which have arisen, since making the
is attacked’ for causes
(Chinese Chamber
contract or dealing relied on as an estoppel.
of Commerce vs. Pua Te Ching, 14 Phil. 222 [1909]; Asia Banking
ucts Co., 46 Phil. 145 [1924].)
Corporation VS. Standard Prod
!
one deals with the mem bers of: a corporation as
_ (b) But.if hold such
a ail A he is not estopped to show this fact or
lia ble as par tners: (18 Am . Jur. 2 618.) However, one
individuals
. : *
EES
: ri estoppel s9PP all ents the de facto doctrine in case of serious defects
“e ‘The doctrine as to the purported corporation. (Ballantine, p.
88, epics to the thir Pa ila corporation as though itwere validly formed; he may
vn ‘ we a ae eae vationing the validity of the formation or the existence of the
estopped fro
€nterprises, PF

induced to deal with an apparent corporation by fraud will no}

be estopped to deny the corporate existence. (Ibid., 617-618.)
ILLUSTRATION:
Where a group of persons represented that their
organization called X & Co. is a corporation, when it is not,
to Y who recognized it as such, and on this representation,
entered into a contract with Y, and without assuming to act
as a corporation entered into another contract with Z, in an
action against them on such contracts, they are estopped from
denying the corporate existence of X & Co. as against Y but not
as against Z. Neither is Y allowed to question or challenge the
validity of the organization or formation of X & Co. in an action
by the latter against the former.
If not all the associates participated or consented to the
representation, as to them, the doctrine of estoppel will not
apply.
If the group of persons (would-be corporation) does ‘not
qualify as a corporation, whether de jure, de facto, or by estoppel,
there is no corporation and the stockholders are individually
liable.
Estoppel of persons dealing with

a corporation.
The doctrine of estoppel to deny corporate existence applies to
domestic and to foreign corporations.
(1) The stockholders or members of a pretended or ostensible
corporation who participated in holding it out as a corporation
are generally estopped or precluded to deny its existence against
creditors to escape liability for corporate debts or for unpaid part
of a subscription to stock. (8 Fletcher, pp. 275-278.) A corporation
which continues its business instead of liquidating its affairs after
the expiration of its corporate term, is a corporation by estoppel
for
the purpose of being sued on its contracts, not a corporation de facto
because it no longer exists in fact and in law as a body corporate,
except only for purposes of liquidating its affairs. (see Sec..139.)
(2) So, also are the third persons who deal with such a
corporation recognizing it as such and the pretended
corpor ation
itself, estopped from denying its corporate existence and raising

Sec. +¥ AAILE IT, INCORPORAT
IO
O F PRIVATE CORPORA
NAN TR CANIZATION
205
the defense of its lack of
gro?wing out of the
contra“Orporate Per: sonality to defeat a liability
entity (Compania Agri Ctual relation between them and such
stcola de Ult
284 [2015].), or any tort com omental University, Inc, 756 SCRA
taking advantage of th ~omunitted by it as such (Sec. 21.), or later
cases where such per Fe hoe compliance with the law, chiefly in
19 991.)ill Lynch Eitrres »
(Merr aie ave received the benefits of the contract.
Mc. vs. Court of Appeals, 211 SCRA 824
(3) i
Ee not stockholders or members who assume
to act
as a corporation Knowing it to be without authority to do so shall
be: liable as genaeral par tners for all debts, liabilities, and
damages
incurred or arising as a result thereof:
*The pertinent provisions of the Civil Code are:

Art. 1816. All partners, including industrial ones, shall be liable pro rata with all their
property and after all the partnership assets have been exhausted, for the contracts which
may be entered into the name and for the account of the partnership, under its signature
and by a person authorized to act for the partnership. However, any partner may enter
into a separate obligation to perform a partnership contract. (n)
Art. 1817. Any stipulation against the liability laid down in the preceding article
shall be void, except as among the partners. (n)
Art. 1822. Where, by any wrongful act or omission of any partner acting in the
ordinary course of the business of the partnership or with the authority of his co-partners,
loss or injury is caused to any person, not being, a partner in the partnership, or any
penalty is incurred, the partnership is liable therefore to the same extent as the partner so
acting or omitting to act. (n)
Art. 1823. The partnership is bound to make good the loss: ’
(1) Where one partner acting writiig the ore of a apparent authority receives
mines or oe misapplies
in theand course
ty oF aeird onperson it; an
of its business ;
receives money or property
(2) exer rty so received is misapplied by any partner
of a third person and the mone Se ta)
whileeg. tby iswiles * d
eee of e
oe partners. . .
liable solidarily .
abt poner F .
for everything
es : ‘ ticles 1822 an -(n
chargeable to thepartiiptship unl me s spoken or written or by conduct, represents
_ Art. 1825. whens Bi ie representing him to anyone, as a partner in an existing
himself, or consents more persons not actual partners, he is liable to any such
Partnership or with one oF tation has been made, who has, on the faith of such
Persons to whom such epee actual or apparent partnership, and if he has made
representation, given credit to me its being made in a public manner he is liable to such
: te :
such representation or consen tion has or has not been made or communicated to such
Person, whether the representa the knowledge of the apparent partner making the
Person so giving credit eo wis being made.
tepresentation or consentint©
g ability results, he is liable as though he were an actual
(1) When a partnership li
member of the partnership;

(4) TheSEC has opined that persons composing the organization

before its incorporation may be held personally and individually
liable to the extent of their entire obligation vis-a-vis third persons by
Section 20 which deals with corporation by estoppel: (SEC Opinion
dated February 22, 1983.)
Persons liable as general partners.

The Revised Corporation Code makes liable as general partners
“all persons who assume to act as a corporation,” and they include
persons who attempt, but fail, to form a corporation and who carry
on business under the corporate name. A de facto partnership among
them is created.
Are both active and inactive members ‘of an unsuccessfully
attempted corporation, neither de facto nor de jure, liable as partners?
In a case, the Supreme Court ruled that while “stockholders”
of a defectively incorporated association become, in legal
effect,
partners inter se, such a relation does not necessarily exist,
for
ordinarily persons cannot be made to assume the relation of
partners, as between themselves, when their purpose is that
no
partnership shall exist; it should be implied only when neces
sary to
(2) When no partnership liability results, he is liable pro rata

with the other persons,
if any, so consenting to the contract or Tepresentation as
to incur liability, otherwise
separately. :
When a person has been thus represented to be a partne
r in an existing partnership,
or with one or more persons not actual partners, he is
an agent of the persons consenting
to such representation to bind them to the same extent and in
the same manner as though
he were a partner in fact, with respect to persons who rely upon
the representation. When
all the members of the existing partnership consent to the
representation, a partnership
act or obligation results, but in all other cases, it is the
joint act or obligation of the person
acting and the persons consenting to the representation.
(n)
*The general rule under American law is that active manag
liable personally as partne
erial stockholders are
rs, upon failure of the attempted incorporatio
jure and de facto. (see Bacon v. Christian, 184 Ind. n, both de
517.) Thus, it has been held that the
managing stockholders were personally liable as partners, but that the subscribers
the stock of the supposed corporation were not person to
ally liable. (Baker v. Bates Street
Shirt Co., 7 Fed. [2d] 854.) The creditors of the suppo
sed corporation could recover from
subscribers to stock and inactive members of the
corporation to the extent only of their
unpaid subscription. (Stevens v. Episcopal Church Histor
y Co., 140 N.Y. Appl. Div. 570.)
The rule iscriticized. The emphasis, ‘it is said, should be
profits by the owners of a business, rather upon the laid upon the reaping of
management of the business. (see L.
Teller, Law of Partnership, 1949 Ed., pp. 18-19.)

see P TITLE Ni, 'NCORPORATION j
OF PRIVATE NDO
CORPORATION ZATION 207
behalf of a non-existent corporation

on any of the contracts entered by it.
Under the law on estoppel, those
acting in behalf of a corporation
and those benefi ted by it, knowing it to be without
are held liable as partners. (Lim Ton valid existence,
g Lim vs. Philippine Fishing
Gear Industries, Inc., 317 SCRA 728
[1999].)
Sec. 21. Effects on Non-Use of

Corporate Charter
and Continuous Inoperation. — If a
corporation does not Condidered és
formally organize and commence its
business within five dic al ned
(5) year s from the date of its incorporation, its certific
of
ate } (\0 "ud
incorpor
ation shall be deemed revoked as of the
day A
following the end of the five (5)-year period.
However, if a corporation has commenced its business

but subsequently becomes inoperative for a period of
at
least five (5) consecutive years, the Commission may,
after due notice and hearing, place the corporation under
delinquent status.
A delinquent corporation shall have a period of

two (2) years to resume operations and comply with
all requirements that the Commission Shall prescribe.
Upon compliance by the corporation, the Commission
Shall issue an order lifting the delinquent status.
Failure
to comply with the requirements and resume
operations
Within the period given by the Commission shall Cause
the
revocation of the corporation. (N)

The Commission shall give reasonable notice to,

and coordinate with the appropriate regulatory agency
prior to the suspension or revocation of the certificate of
incorporation of companies under their special regulatory
jurisdiction. (N)
Statutory requirements before and after

incorporation.
The right of exemption from personal liability resulting from
incorporation, being entirely statutory, can be acquired only on the
terms specified by the statute. (18 Am. Jur. 2d 578.) Our corporation
law contains various requirements and conditions which must be
complied with in order that persons desiring to be so may become
a body corporate.
(1) Mandatory and directory conditions. — The courts have
established between mandatory and directory conditions. The
tule is that as to provisions of the statute which are mandatory,
non-compliance with its terms will prevent the creation of a de jure
corporation but as to those provisions which are merely directory,
a departure will not have these consequences. Strict compliance
with the terms of the statute is not required. The law requires only
substantial compliance. (see Sec. 13, par. 1; Sec. 14, par. 1; Sec. 16[i].)
(2) Substantial compliance with mandatory conditions. — Of
course, what constitutes substantial compliance is a question to be
determined in each case. It does not follow, however, that because
a substantial compliance is sufficient, any positive statutory
requirement may be omitted on the ground that it is unimportant.
There are conditions that cannot be dispensed with. (see 18 Am. Jur.
2dd 578.)
Mandatory and directory provisions

explained.
Whether a_ particular provision is mandatory or merely
directory must be determined by ascertaining the intention of the
legislature, to be gathered from the statute and its purpose. (Clark
on Corporations, p. 62.)
Generally, mandatory provisions prescribe formalities for
incorporation designed to protect the public. When a provision is
ntial so
construed as directory, it is regarded as relatively inconseque

Sec. 21 TITLE II, INCORPOR
AT ION A ND ORGANIZATION
OF PRIVATE 209
CORPORATIONS
that failure to comply with a

a validwy: incorporation, (Steve dire ctory provision
isi : not be fatal to
will
Madi n on Corporations, pp. 112-114.)
andatory conditions be conditions
be precedent or
conditions subsequent, may
Conditions precedent ex
plained.
Conditions precedent are those
conditions non- compliance with
which will prevent the legal exi
stence of a corpora tion.
Examples are:
(1) Filing of the articles of
incorporation with the SEC as
required by Section 13; and
(2) The issuance of certificate of incorporation by the SEC under
Section 18,
Conditions subsequent explained.

Conditions subsequent are conditions
to be complied with after
acquiring corporate existence in order that a corporation may legally
continue as such.
Under Section 21, the two required acts of organization and
commencement ofits business operations are conditions subsequent,
failure to comply ‘with which, it has been held, will result in
automatic cessation of corporate powers and the dissolution of the
corporation. (Perez vs. Balmaceda, [C.A.] 40 O.G.'No. 9, Suppl. 194,
Aug. 30, 1941.)!
Formal organization and commencement

of business.
(1) Commencement of legal existence. — A corporation achieves
legal existence from the date the SEC issues a certificate of
IThe SEC has opined, however, that the dissolution contemplated by Sec. 21 of
the old Corporation Code is not automatic. The corporation continues to exist as such,
notwithstanding. its non-operational status until dissolution or ‘revocation has been
lawfully declared by the SEC after due notice and hearing. (SEC Opinion, Oct. 4, 1989;
See SEC Opinion dated April 20, 1987.) The SEC will take action on the non-operational
status of a corporation only after the lapse of the two Gh yea period as prescribed under
the second paragraph of Sec. 21.
Sec. 21. (SEC Opinion, May 22, 1998.) Note that under
(SEC Opinion, May 22, 1998.)

incorporation under its official seal (Sec. 18.) but formal organization
brings the corporation to life.
It would include the adoption of bylaws, the filing of the same
with the SEC (Sec. 45.), the election of the board of directors (or
trustees) and of the officers by the board pursuant to the bylaws
(Sec. 24.), the establishment of the principal office, providing for the
subscription and payment of the capital stock, and the taking of such
other steps as are necessary to enable the corporation to transact
the legitimate business or accomplish the purpose for which it was
created. (see Benguet Consolidated Mining Co. vs. Pineda, 98 Phil.
711 [1956]; SEC Rules, Dec. 29, 1992.)
(2) Substantial compliance sufficient. — Strict compliance with this
condition subsequent is not required. Thus, in a case, a corporation
was deemed to have formally organized, it appearing that from the
very day of its formation, the corporation had a governing board
which directed its affairs, and a treasurer and a clerk, and
that
through these instrumentalities, it actually functioned and engaged
in the business for which it was organized, and therefore, it could
not be held to have forfeited its charter simply because it had
not
specifically shown that it also had a president and a secretary. (Perez
vs. Balmaceda, supra.)
The substantial compliance rule is defined as “compliance with
the essential requirements, whether of a contract-or of a statute.”
(Black’s Law Dictionary, 5th Ed. [1979], p. 1280; Alvarez
vs. People,
677 SCRA 673 [2012].)
(3) Acts constituting commencement of business. — A corporation
shall be considered to have commenced its business when it has
performed preparatory acts geared toward fulfilling the purpos
es
for which it was established such as but not limited to entering
into
contracts or negotiation for lease or sale of properties to be used as
business or factory site; planning for and constructing the factory
;
and taking steps to expedite the construction of the corporation’s
working equipment. (SEC Rules, Dec. 29, 1992.)
The SEC has opined that a corporation has organized and
commenced business if the conditions subsequent to the registration
have been complied with, to wit:
(a) it should adopt and file its bylaws;

Sec. 21
TION AND ORGANIZATION 211
;
with the Department of Trade porate name or business name
and Industry;
(d) it should register
itself with the Bureau of Internal
Revenue and § Ocial Security System and secure
city license to o perate its bus municipal or
iness; and
(e) it should establish an Offi
ce and
t its business star
operations. (SEC-OGC Opinion No. 23-
07, December 4, 2007.)
(4) Effect of non-use of corporate charter. — If a corp
oration does
not formally organize and commence business
within five (5) years
from the date of its incorporation, its certificate
of incorporation
shall be deemed revoked as of the day following the end of the
five-year period.
(5) Effect of subsequent continuous inoperation. — Where
the
corporation has commenced the transaction of its business but
subsequently becomes inoperative for a period of at least five (5)
consecutive years, the SEC, after due notice and hearing, may place
the corporation in delinquent status.
(6) Resumption of operations. — A delinquent corporation
is given a period of two (2) years operation and comply with all
requirements that the SEC shall prescribe. Upon compliance by the
corporation, the SEC shall issue an order lifting the delinquent status.
Failure to comply with the requirements and resume operations
within the period given by the SEC shall cause the revocation of the
corporation’s certificate of incorporation.
eee ete of corporate charter or contin

uous inoperation of a corpor
ation is
due to causes beyond its control as found by the SEC, the effects mentio shall not take
place, Thus, where a corporation after its registration or incorporatio ned
n elected its board
of directors and its officers, and in accordance with its corporate purpose and in ord to
er
commence business operations made Se fetes investors but due to
the shift in the government's privatization pao i. pap suvestors and was not
able to continue with its business although it el inten a oO ie its business when
€ conditions are appropriate, there 1 no oe a — he ss '0 revoke or
Suspends its regulation its registration and, therefore, it cannot be deemed dissolved.
EC Opinion No. 23-07, Dec. 4, 2007:)

212 THE REVISED CORPORATION CODE OF THE PHILIPPINES Sec, 2]
The SEC shall give reasonable notice to, and coordinate with, the
appropriate regulatory agency prior to the suspension or revocation
of the certificate of incorporation of companies under their specja|
regulatory jurisdiction.
Under the old Corporation Code, Section 21 does not apply if
the failure to organize, commence the transaction of its businesses
or the construction of its works, or to continuously operate is due to
causes beyond the control of the corporation as determined by the
SEC. (see SEC-OGC Opinion No. 23-07, December 4, 2007.)
—oOo—

holoer oF the THe ty, Pe
fo del WHA hr the pete ORY /SY tne white cmt donee |
MH .
anther: . OP” / PONCE CAKRY — personfo whore benefit
nf ona vinci ( the rst We beay create;
QA Oreter wn ‘: ry) mei :
; l
BOAmiaRD to'sOF
i! \ Arist
DIRECTORS/TRUS TEES) ‘ink tr cl AJHythe
whe le NI i “tr Teg mee
sha iahr {OFFICERS hacia

Sec. 22. The Board of D
ein irectors or Trustees of a Cor, bes
Qualification
L and Terms. — Ofa
Corporation;
Unless otherwise provided
this Code, the board of dir in
ectors or trustees shall exerci
the corporate Powers, conduc se
t all business and control all
properties of (ec
the corporation controlled. (SA)
Directors shall be elected fora term of
one (1) year from
among the holders of stocks registered in
the corporation’s
books, while trustees shall be elected for a
term not
exceeding three (3) years from among the members of the
corporation. Each director and trustee shall hold office
until the successor is elected and qualified. A director who
ceases to own at least one (1) share of stock or a trustee
who ceases to be a member of the corporation shall cease
to be such. (SA)
The board of the following corporations vested
with public interest shall have independent directors
constituting at least twenty percent (20%) of such board:
(N) , |
(a) Corporations covered by Section 17.2 of Republic
Act No. 8799, otherwise known as “The Securities
Regulation Code”, namely those whose securities a
registered with the Commission, corporations listed wi
pesos
an exchange or with assets of at least Fifty million
d (200) 9 more
(P50,000,000.00) and having two hundre hun
holders of shares, each holding at least one
(N)
shares of a class of its equity shares;
and quasi-banks, NSSLAs, pawnshops,
(b) Banks service business
engaged in money
CO porations thier r
insu if ance comp antes ; and
trust and
: need :’
Pre
financial intermediaries; (N) and
213

ylag
ry
7 4 6) \Other:|torporations engaged in business vested

with public interest similar to, the, above, as may be
determined bythe] Commission, after taking into account
‘relevant! \factors‘which) }are germane to’the ‘objective and
{Purpose of requiring the election of an independent
- oe director, such as the extent of minority ownership, type
‘' “9f financial products or securities issued ‘or offered to
investors, public interest involved in-the nature of business
operations, and other analogous factors. (N)
An independent director is a person who, apart from
shareholdings and fees received from the corporation, is
independent of management and free from any business
or other relationship which could, or could reasonably
be perceived to materially interfere with the exercise of
independent judgment in carrying out the responsibilities
as a director. (N)
Independent directors must be elected by the
shareholders present or entitled to vote in absentia
during the election of directors. Independent directors
shall be subject to rules and regulations governing their
qualifications, disqualifications, voting _ requirements,
duration of term and term limit, maximum number of board
memberships and other requirements that the Commission
will prescribe to strengthen their independence and align
~~“
with international best practices. (N)
Structure of the corporate Srgantzatlon:

(1) Binding effects of acts or contracts. — Actions proposed to be
taken by a corporation involve two (2) basic questions:
First, to bind the corporation, who within the organization must
act on its behalf?
Second, what is the result if the statutory requirements are not
complied with and the proper parties do not act? :
(2) Tri-level structure. — The standard operating procedure for
corporations, frequently called a corporate norm, mightbe described
as pyramidal i in form.
At the base are the shareholders (or members) whose vote is
required to elect the board of directors (or trustees) and to pass on
other major corporate actions.

Sec. 22 TITLE Ill. BOARD ‘OF DIRE
/ TRU
CSTE
TESO/OF
RFIC
SERS 215
The next level. are ‘the officers tasked! to “execute policies

formulatAed UAE
by the'boat d’ s
tO DAWN yo ia OIL NACo fi ok) ph Ube
Finally,\atithe top ofthe pyramid is the,board of director
s who
constitute ‘the policy-making body of the corporation and select
the officers annually. The keystone of corporate procedure
is the
provisioh common to most corporate laws‘ that the business of a
corporation shall’be managed by its board of directors.
The board of directors and corporate officers are
frequently
called management. In its strict sense, the term refers to the corporat
e
officers given the authority to implement the policies determined
by the board of directors as the governing body of the corporat
ion.’
(3) Respective. powers, and. functions. — In- the light. of this
tri-level structure, the question then arises: What are the respective
functions and powers of officers, directors, and shareholders within
the corporate organization? _(W.L. Cary, Cases.and Materials on
Corporations, 1969 ed.,. pp. 151-152.) Corporate powers may be
directly conferred upon corporate officers or agents by\2tatute, the
@articles of incorporation, th vylaws, or byZesolution ofvther act of
the board of directors. (Citibank, N-A: vs. Chua, 220 SCRA 75 [1993].)
The rule is that absenteauthoritynfromimthesboarduomairectorsmaio
person (eveniits officers); canwva bind-li
a corpo
dl ratio
yn. (Olongapo
City s. Subic Water and Sewerage Co., Inc., 732 SCRA 132 [2014].)
Corporate powers exercised by board

of directors or trustees.
All corporations, existing only in contemplation of law, can
only act and contract through the aid and by means of individuals.
Such individuals may be those holding corporate offices or agents
Properly appointed by such officers. The same general principles
of law which govern the relation of agency for a natural person
govern the officer or agent of a corporation in respect to his power
or. authority to act for the corporation. a !
IThe Bangko Sentral ng Pilipinas (BSP), the Insurance Commission,

and the SEC have
all issued circulars and/or memoranda requiring corporat
ions to have at least two (2)
Independent directors, i.e, BSP Circular No. 296, IC Circu
‘mo. Circ. No. 6 (June 29,.2009) is the Revised Code oflar Letter 31-2005, and SEC
Corporate Governance. It
“uperseded SEC Memo. Circ. No. 2 (April 5, 2002).
| )

(1) Governing body of the corporation. — It is well established in

corporation law that the corporation, as a juridical entity, can act
only through the board of directors in the case of stock corporations,
or board of trustees in the case of nonstock corporations. The board
exercises most corporate power, lays down all corporate business
policies and is responsible for the efficient management. of the
corporation. ,
Section 22 provides that “unless otherwise provided in this Code,
the board of directors or trustees shall exercise the corporate powers,
conduct all business, and control all properties of the corporation,”?
The board of directors or trustees, therefore, not its officers, is the
governing body of the corporation chosen by the stockholders or
members.’ The officers have only such authority as given them by
the board. Thus, contracts or acts of a corporation must be made
za
either by the board of directors or trustees or by ‘a corporate officer '
duly authorized by the board. The rule ‘is that absent authority or
valid delegation from the board of directors or trustees, no person,
not even its officers, can validly bind a corporation. oS fee
(2) Binding. effect of stockholders’ action. — The stockholders
or members elect a board of directors (or trustees) to oversee the
management and operation of the corporation. They are not the
agents of the corporation and cannot bind it by their acts. They have
only indirect control of the corporation through their votes. With
the exception only of some powers reserved by law to stockholders
(or members), ethendirectorsy(onstrustees)zhavezsolevauthority:to
*Even if the corporate powers ofa corporation are reposed in the board
of directors,
it is of common knowledge and practice that the board is not directl
y engaged or charged
with the running of the recurring business affairs of the corporation.
the powers granted to them’by the/articles of incorpora Dependinon g
generally do not concern themselves with the day
‘the’tio
membe
n, rs of the board
to day
those corporate officers who are charged with running affairs of the corporation, except
and are concurrently membe the business of the corporation
rs of the board like the president. (Ty vs.
De Jemie, 638 SCRA
671 [2010]; see Calubad vs. Ricarcen Development
Corporation, 838 SCRA 303 [2017].)
The general principles of agency govern the relationship
representatives,
between a corporation and its
*Impliedly, it is not necessary for the stockholders (or
members) to ratify the acts of
the bard save instances wherein the Corporation
Code.or the bylaws provides otherwise,
e.g.,
investment of corporate funds (Sec. 41.))declaration of stockdividends
(Sec. 42.), and
eother acts where approval or’consent
of stockholders (or members) is necessary. (SEC
Opinion, May 21, 1982.) 4 i} i "

Sec. 22 TITLE Ill. BOARD “At
OF DIRECTORS / TRUSTEES/
OFFICERS 217
itsycharter, i.€., its articles of incorporation, bylaws, and relevant

provisions of law. ; phan
(a) Contracts between a corporation and the third persons
must be made by or under the authority of its board of directors
(or trustees) and not by its stockholders (or members). Hence,
theractiorvof 'the:stockholders:iny such:matters:is:only.advisory
ormrecom
"and im
otinmany
en mwis
da eabito
ndingson
ry mthe
eonporation (Barreto vs)'La Previsora’ Filipina, 57 Phil. 649
[1932].) ‘The power to modify or nullify corporate contracts
generally remains in the board of directors. (Bonate vs. Phil.
Countryside Rural Bank, Inc; 626 SCRA 21 [2010].)
(b) Because a corporation can_act only through the board
of directors, a resolution adopted at a meeting of stockholders
refusing to recognize a corporate contract effected with the.
approval of the board of directors or repudiating it;is without
effect.> (Ramirez vs. Orieritalist, 38 Phil’ 634 [1918].) ~
(c) Stockholders entrust their investments in the corporate
business to the management of the board of directors, thus
establishing a fiduciary relationship between them. It is the
prerogative and discretion of the board of directors of a parent
or holding corporation to choose its nominees in the board of
directors of its subsidiaries. The stockholders of the parent or
‘holding company cannot demand proportionate representation
in the board of directors of its subsidiaries. (SEC Opinion, Aug.
8,.1995.) | 1 fh :
Reason for the rule:.

The’ theory ‘of ‘évery ‘corporate organization is that the
stockholders may have all the profits but shall turn over to a
small and compact body ’— the board of directors — the exclusive
eae SNS ) a
‘Visayan vs, National Labor Relations Commission, 196 SCRA 410 (1991), citing De
Leon, The Corporation Code of the Philippines, p. 168 [1989].
‘It may well be recognized, however, that where the stockholders unanimously vote
that certain actions be taken, this should control the discretion of the directors. ‘Directors
ve no personal interest as such in their official acts. If the real parties in interest
a Danously agree on lawful corporate acts, their voice should control. (Ballantine,
» 123.)

218 THE REVISED CORPORATION CODE OF THE PHILIPPINES Sec.22
authority to rhanage and control the transaction of its business/ang

the use of its assets, the power of the stockholders being limited to\a
few specified matters concerning its internal affair. : !
This concentration of the power of control of the business and
of appointing of officers and managers in the board. of directors
(or trustees) is deemed necessary to efficiency especially in a
large organization. It is impractical and unwise to entrust the
administration of corporate management. Stockholders are too
numerous and scattered and unfamiliar with the business of a
corporation to conduct its business directly. It is the plan of corporate
organization that the stockholders shall choose the directors who
shall control and supervise the conduct of the corporate business.
ray
tin.
(see Ballantine, pp. 121-122; Ramirez vs. Orientalist, 38;Phil: 634

“Se
[1918]; Filipinas Port Services, Inc. vs. Go, 518 SCRA 483 [2007]; Cua,
Jr. vs. Tan, 607 SCRA 646 [2009].) If they are not satisfied with the
policies or management of the board of directors, the remedy of the
_ stockholders is togeplace them) (see Sec. 28:) oa stece ng.
In a¢closescorporation, however, ‘the;articles -of:incorporatiow
¢may provide that the business of the:corporation shall-be-managed.
by.the stockholders: of the-corporation rather than by a board of’a
iVdirectors: (Sec. 96, par. 2.)
Extent of judicial review. — eur et Shon ee

‘silongias'the ‘directors \(or'truistees)'actshonestly:and:their. acts
or contracts do not disregard the rights of the minority, the courts
will not interfere. They are not liable for losses if the cause is
merely error in business judgment, not amounting to bad faith or
negligence.
(1) Business judgment rule. — The members ofthe board of
directors hold such office charged, with the duty to act for the
corporation according to their best judgment, and in so doing’they
cannot be controlled in the reasonable exercise and performance of
such duty. It is a well-known rule of law that questions of policy
or of management are left solely to the honest decisions of officers
and directors of a corporation, and the court is without authority to
substitute its judgment for the board of directors; the-boardsis the
-business:manager of the corporation; and so long as it acts in good ‘
faith itsactsare notreviewable by.the courts. Courts cannot supplant
the discretion of the board on administrative matters as to which they

have legitimate power of action, and contracts which are intra-vires
entered into by the board are binding upon the corporation and the
courts will not interfere unless such contracts are so unconscion
able
and oppressive as to amount to a wanton destruction of the rights
of the minority. (SEC Opinion No. 15-05, Nov. 16, 2005; Gov’t. vs.
El Hogar Filipino, 50 Phil. 399 [1927]; Gamboa vs. Victoriano,’' 90
SCRA 40 [1979]; Ingersoll vs. Malabon Sugar Co., 53 Phil. 745 [1929];
rae vs. Pampanga Electric Cooperative, Inc., 596 SCRA 542
[2009}.
Stated differently:
‘In general, courts will not undertake to review the expediency
of thesbusiness; transactions authorized by the directors. A large
discretion is lodged in them. Hence, questions of value and poli
are for their business judgment and under the so called business
ae rule7, it is sufficient’ that reasonable diligence and care
have been exercised in the management of corporate affairs. . : The
business judgment rule exists to protect and promote the full and free
_ exercise of the power of management given to the directors... Thus,
‘in Auerbach v. Bennett, 47 NY2d 619, 419 NYS2d 920, 393 NE2d 994,
(cited in Fletcher, Supra., p. 49), the Court held: “Business judgment
rule bars judicial inquiry into.actions of corporate directors taken
in good faith and in the exercise of honest judgment in lawful and
legitimate furtherance of corporate purposes.” Likewise, in Fields
v. Sax, 123 Ill app 3d’ 460, 462 NE2d 983, (cited in Fletcher, Supra.,
p. 50), “absent bad faith, fraud or illegality, or gross overreaching,
the courts are not at liberty to interfere with the exercise of business
judgment by directors. Also, in Helfman v. American Light & Traction
Co.,121 NJEq. 1, 187 A 540, “Courts will not substitute its judgment
for that of directors in matters of purely business and economic
problems.” In Lewis v. S.L. & E. Inc., 62 F2d, 764, (CA2, 1980), citing
Fletcher Cyc. Corp., sec. 1239 (perm. ed.), it was further held that
“Business judgment rule places heavy burden on shareholders who
would attack corporate transactions.”(SEC Opinion, December 9,
1988.) EuT D2
(2) Questions of policy of management. — A corporation is but an
association of individuals, ‘allowed to transact under an assumed
corporate name, and with a distinct legal personality. As to its
Corporate and’ management decisions, the State will generally
Not interfere with the same. Questions,of,policysof-management
are-left-solely-to-the-honest«decision of-the board:as the business

S Sec. 22
managerofithe corporation, and-the,court,is without authority to

substitute its judgment for that of the board; and as long as it acts
in.good faith and inthe exercise of honest judgment in the interest
of the corporation; its orders are not reviewable by the courts.* (see
Montelibano vs. Bacolod-Murcia Milling Co., Inc., 5 SCRA 36 [1962],
Sales vs. Securities and Exchange Commission, 169 SCRA 109 [1989];
Philippine Stock Exchange, Inc. vs. Court of Appeals, 281 SCRA 232
[1997]; Filipinas Port Services, Inc. vs. Go, 518 SCRA 453 [2007]; Cua,
Jr. vs. Tan, 607 SCRA 645 [2009].) Its acts or contracts are presumed
to be valid and regular.
(a) Whether the business of a corporation should be Operated
at a lost during depression, or closed at a smaller loss, is a purel
y
business and economic problem to be determined by the direc
and not by the court. (SEC Opinion No. 03-04, Oct. 26, 2004.
tors
)
(b) A judicial order to decrease capital stock without the assen
of directors and stockholders violates the “business
t
judgment rule”.
(Ong Yong vs. Tiu, 405 SCRA 1 [2003].)
(c) The creation of additional paid-in capital is a matter
within
the business judgment of the corporation. (SEC-OGC
Opinion No.
14-19, March 28, 2019.) .
(d). Determining who shall be assessed association.
dues is
already within the business judgment of officers of
the condominium
corporation. (SEC-OGC Opinion No. 05-18, Mar
ch 19, 2018.)
(e) Compensation is an issue of business be judgment to
questioned only in case of clear abuse. (SEC Opi
nion No. 32-04, May
4, 2004.)
(3) Corporate transactions not requiring stockholders
’ or members’
approval. — Any corporate act which does not fall
under any of the
transact ions requiring stockholders’ or members’ approval
(see
‘The reason for the rule is aptly explained thus:

“Courts and other tribunals are
wont to override the business judgment of the
board mainly because courts are not in
the business of business, and the Iaissez faire rule
or the free enterprise system prevailing
in our social and economic set up dictates that
it is better for the State and its organs to
leave business to the businessmen; especially
so, when courts are ill-equipped to make
business decisions. More importantly, the social contr
act in the corporate family to decide
the course of the corporate business has been veste
d in the board and not with courts.”
(Ong Yong vs. Tiu, 405 SCRA 1 [2003], citin
g Cesar L. Villanueva, Philippine Corporat
Law, 1998 Ed., p. 228.) e
,

Sec. 22 TITLE III. BOARD OF DIRECTORS/ TRUSTE
/ OFFIC
ES ERS 221
Note 5.) can be carried out by mere board resolution although the
activities or transactions involved may span beyond the term of the
directors or trustees and entail obligations to be borne by succeeding
poards if the action was done in good faith and for the best interest
of the corporation. (SEC Opinion, Feb. 21,
1994.)
(4) Rule of the majority. — The minority directors or stoc
kholders
cannot come into court upon allegations of a want of
judgment
or lack of efficiency by the majority and change the course of
administration. Corporate elections furnish the only reme
dy for
internal dissensions, as the majority must rule so long as it keeps
within the powers conferred by the corporate charter. (Flynn v.
Brooklyn CityR. Co., 53 N.E. 520.)
Nature of powers of board of directors

__ or trustees,
(1) The powers of the board of directors or trustees are, ina
very important sense, original and undelegated. The stockholders
or members do not confer, nor can they revoke, those powers.
They are derivative only in the sense of being received from the -
State in the act of incorporation. They cannot: exercise powers
which the corporation does not possess, nor is their action valid
when inconsistent with: valid bylaws. Neither can’ they perform
constituent acts, that is, acts which involve fundamental changes in
the constitution of the corporation, and:which can be done only by
the stockholders or members as constituting the corporation. (14-A
CJ. 82.) :
Acts of management pertain to the board, and those of
ownership, to the stockholders or members. In the latter case, the
board cannot act alone, but must seek approval of the stockholders
or member. (Tan vs. Sycip, 499 SCRA 216 [2006], citing J. Campos, Jr.
& M.C. Campos, The Corporation Code, 1990, Vol. 1,p. 490.)Tt has
been ruled that the approval by 2/3 of the outstanding capital stock
either prior to the voting of the board or by subsequent ratification,
is required for the temporary stoppage of operation of a corporation.
The cessation of business, though temporary, is a fundamental
concern of the stockholders who stand to be primarily affected
by such event. It involves not a mere exercise of management
Prerogative. (SEC Opinion No. 03-04, Oct. 26, 2004.)

Vo] UW zea Very |
222 THE REVISED CORPORATION CODE OF THE PHILIPPINES, Sec. 22
(2) The other view favors the delegation theory, which holds
that the directors are the officers and agents of the corporation,
representing the interests of that abstract legal entity and of those
who own shares of stock (see Mead vs. McCullough, 21 Phil. 95
[1911]; Angeles vs. Santos, 64 Phil. 697 [1937].), and as such, they
can bind the corporation provided they act within the scope of their
authority.
(3). The powers of the board of directors or trustees are directly
conferred by statute and, as a rule, the stockholders or members
cannot control their actions or exercise of judgment vested in them
by virtue of their office. Once the directors or trustees are elected,
the stockholders or members relinquish corporate powers to the
board as provided by law.
In certain corporate acts, however, the approval or authorization
of the stockholders or members is necessary for their validity. It has
been held, however, that where, except for one, the stockholders of
a corporation also sit as members of the board of directors, it will
illogical and superfluous to require the stockholders’ approval of
subject resolutions requiring the authorization of the stockholders
on record. (Lopez Realty, Inc. vs. Fontecha, 247 SCRA 183 [1995].)
Limitations on powers of board of directors. ---

or trustees.
The managerial authority of the board of directors or trustees is
subject to Sections 30-33 of the Revised Corporation Code and to at
least three (3) limitations.
These are:
(1) Limitations or restrictions imposed by the Constitution,
- Statutes, articles of incorporation, or bylaws of the corpora
tion;
(2) The board cannot by itself, perform constituent acts, that
is, acts involving fundamental or major changes in the corporation
(such as amendment of the articles of incorporation under Sec: 15),
which require the approval or ratification of the stockholders or
members; and

gee. 22 TITLE III. BOARD OF DIRECTORS / TRU
STEES / OFFICERS 223
(3) It cannot exercise powers not possessed by the corporation.

(see Clark on Corporations, Sec. 192; SEC-OGC Opinion No. 43-04,
October 26, 2004.)
Powers exercised by board of directors

or trustees as a board.
(1) Acting together as a body in a meeting. — The board of directors

or trustees must act together as a body in a lawful meeting, not
individually or separately, to bind the corporation by their acts. In
other words, to exercise their powers, they must meet as directors or
trustees and act “at a meeting at which there is quorum.” (see Sec. 24
as to requisites for board meetings.) If they act or give their consent
separately or if they act at’a meeting which is not a legal meeting,
their action is not that of the corporation, although all may consent,
ow ee eae ne
valid authorization/delegation, the declarations of an individual

director or trustees relating to the affairs of the corporation, but not
in the course of, or connected with, the performance of authorized
duties of stich director, are not binding on the corporation. (Heirs of
Fausto C. Ignacio vs. Home Bankers Savings and Trust Co., G.R. No.
PV78S; Jatin 23; QUISJe eek ets el eae
(3) Exceptions to rule. — There are recognized exceptions to the
tule that a corporation cannot act except by authority of the board
of directors or trustees in a meeting duly convened. (Infra.)
SS
’The ‘corporate powers conferred upon the board of directors usually refer only
to the ordinary business transactions of the corporation and does not extend beyond the
management of ordinary corporate affairs nor beyond the limits of its authority. (SEC
Opinion, May 2, 1994.) There are powers reserved to the stockholders /members and,
erefore, cannot be exercise d solely by the directors/trustees until they are ratified'or
4Pproved by the stockholders/ members. It has been n heldhe! that the power of the board of
directors to control the corporation’s property and business does not empower them to.
Provide themselves compensation. The law is well-settled that directors of a corporation
Presumptively serve without compensation absent express agreement or resolution in
Co.,
"elation thereto, no claim can be asserted therefor. (Central Cooperative Exchange
©. Vs. Tiber, Jr,, 33 SCRA 593 [1970]; see Sec. 30.) :

224 THE REVISED CORPORATION CODE OF THE PRUILIPEINES Sec. 22
Reasons for the rule.

The rule that the directors or trustees can bind the corporation
only by action taken at a board meeting seems to rest upon two (2)
reasons:
(1) A meeting is necessary in order that any action may be
deliberately adopted, after opportunity for discussion and an
interchange of views; and
(2) As agents of the corporation managing its affairs, directors
(or trustees) have no power to act other than as a board. (Ballantine,
p. 124.) :
Unlike its asses (Sec. 24.), directors are not-the agents of the
corporation per se and they have no power acting individually
to
bind the corporation.
Exceptions to the rule.

The directors or trustees must act as a body and
personally (see
Sec. 51.) to bind the corporation; proxies cannot
act for them. This
requirement is not without any exception.
2
(1): It has been held that a contract ente
red into by the directors
without-a-meeting of the board is binding upon
where thal the corporation
Wirectors happen to be the sole stockholders.
Transportation Co. vs. Bachrach Motor (Zamboanga
Co., 52 Phil. 244 [1928].) :
(2) The corporation is similarly bound by-@
into by a corporate officer such as the general contract entered
by
manager, authorized
the board of directors either expressly or implie
contract. (Acufia vs. Batac Producers Cooper dly, to bind it by
ative Assoc., Inc., 20
SCRA 526 [1967].)
:
Settled jurisprudence has it that where
similar acts have been
approv by edthe directors as a matter of gen l prac
and policy, the general manager may bind era the
tice, custom,
formal authorization of the board
compan
y without
of directors. In varying language,
existence of such authority is established by
proof of the course
of business, the usages and
prac tices
knowledge which the board of director of the company, and by the
s has, or must be presumed
to have, of acts and doings
of its subordinates in and abo
affairs of the corporation, (Board of ut the.
Liquidators vs. Heirs of Maximo
Kalaw, 20 SCRA 987 [19 67].) :

Sec. 22 TITLE Ill. BOARD OF DIRE
CT ORS / TRUSTEES/ OFFICE
RS 225
(3) The corporation is also bound by a par

ticular transaction
ratified in a subsequent board meeting (Ramirez vs.
Orientalist Co.,
38 Phil. 634 [1918].); the ratification may be'express by
a formal
or by acceptance and retention of

benefits flowing therefrom (Acufi
vs. Batac a
Producers Cooperative Assoc., Inc., supra.) and
ratification relates back to the time of such
the contract and is equivalent
to original authority. (Board of Liquidators vs.
Heirs of Maximo
Kalaw, supra.) ar
(4) The corporation is likewise bound by
the acts of one of its
directors or age nts held out by the corporation to the public as pos
power to do those acts. (Yu Chuck vs. Kong LiPo, sessing
The authority to act
46 Phil. 608 [1924].)
for and bind the corporation may be presum
from acts of recognition in other instances, ed
where in the power was
in fact exercised with'no objection from its
board or stockholders.’
(People’s Aircargo & Warehousing, Co.,
Inc. vs. Court:of Appeals,
297 SCRA 170 [1998].)
)
The rule that the members of the board have
authority to act
only ‘when convened: in.a board meeting is for the benefi
shareholders which they are authorized to wai t: of:the
ve. The stockholders
are the residuary owners, and the rule requiring
directors’ meetings
to authorize acts is for, their benefit. (Merchant
s & FE. Bank v. Harris
Lumber Co., 103 Ark. 283.) Lea !
(5) Where the -stockholders, by acquiescence, -invest.
the
executive officers of the corporation with powers of the, dire
ctors
as the usual method of doing business, the. board being \inactive,
acts of such the
officers will bind the corporation according to-some
courts although not:authorized by,any vote either of
stockholders
or directors. (Ballantine, p. 126.)
(6) The adoption or ratification of a contract by a corporation
is
nothing more nor less than making of an original contr
act: The theory
of corporate ratification is predicated in the right of a corporat
ion to
Contract and any ratification or adoption is equivale
nt to a grant of
Priorauthority. The ratification may be implied. (Virata vs. Ng
860 SCRA 50 [2018].) Wee,
(7) The bylaws of ‘a corporation::may. create
tive an execu
“Ommittee with authority
to act on such specific matters within the

226 THE REVISED CORPORATION CODE
OF THE PHILIPPINES Sec. 22
Competence of the board, as may be

delegated to it in the bylaws of
€ corporation, or ona Majority vote of the
board, except on certain _
matters specified in Section 34
!
(8) A corporation is ‘allowed, subject to certain limitation
s
Provided in Section 43, to’ enter into ‘a management contra
ct under
which it delegates the management of lits affairs to another
corporation for a certain period of time.
cas
(9) Ina close corporation, any action by the directors without a
meeting or at a meeting improperly held, shall, unless the bylaws
otherwise provide be deemed valid or ratified in the cases mentioned
in Section 100. . i
Power of directors or trustees to delegate
_ authority. : fe sete Sa
; ! IS] TR IGT JOE ni
(1) General rule. —,The-rule is that, absent authority from,the
board of directors, no person, not even its officers, can validly
bind
a corporation: , The power to bind the corporation by contracts
rests
in its board of directors or trustees. TAS 2 &
The directors or trustees do not themselves exercise deleg
| ated
authority so“as tobe precluded from delegating powe
r by the
, maxim, delegata potestas non potest delegare.
bios
) (a), Just as a natural, person may authorize another ito
do,
_ certain acts for and in his behalf, the board may validly deleg
ate,
either expressly or impliedly, some of its powers and
functions
_ to other officers or agerits of the corporation
appointed by
it. (Yu Chuck vs. Kong Li'Po; 46 Phil. 608 [1924];
Visayan vs.
Nati onal Labor Relations Commission, '196 SCRA
‘410
Banate’ vs. Phil.‘ Countryside’ Rural ‘Bank, Inc, 626 [1991];
‘ [2010].) Although it cannot completely’ abdi
SCRA 21
cate ‘its power and’
responsibility to act for the juridical entity, the boar
d ‘may
expr essly delegate specific powers to the president or any
of its
. officers (Prime White Cement Corp. vs. Intermediate Appellate
Court, 220 SCRA 103 | [1993].), particularly with. respect. to
employment of lower level personnel. . ;
1G ‘biim 1B
| (b) The ‘board’ may delegate to agents of its own
appointment the performance of any act which itself can legally
perform. As the governing body
of the corporation vested with
the management \of its corporate affairs (Sec. 23.), it has ithe

Sec. 22 TITLE III. BOARD OF DIRECTORS / TRUSTEES/ OFFICERS
227
power and authority to adopt a resolution appointing one of its

members, or an executive committee, or a particular officer or
ie the power to perform purely ministerial acts. (19 CJ.S.
(c) The same is true even in matters involving the exercise of

judgment and discretion. Their authority, to a large extent, must
be implied from necessity and usage for the directors or trustees
cannot attend to the details and business of the corporation. (2
Fletcher, p. 495.) Whatever authority the officers or agents of
a corporation may have is derived from the board of directors
or other governing body, unless conferred by the charter of the
corporation. (Vicente vs. Geraldez, 52 SCRA 210 [1973].)
(d) The delegation. of corporate powers, except for the
executive committee, must be for specific purposes. Such
delegation to officers makes the latter agents of the corporation;
accordingly, the general rules of agency as to the binding effects
of their act would apply. (ABS-CBN Broadcasting vs. Court of
Appeals, 301 SCRA 572 [1999].)
(2) Exceptions. — The rule recognizing the power of the board to
delegate authority is not without limitations.
,_ (a) It has been held that discretionary powers which, by
provisions of law (e.g., to. declare dividends, Sec. 42.) or the
_ bylaws or by the vote of the stockholders, are vested exclusively
in the board of directors or:are especially delegated to them,
cannot be delegated to subordinate offices and agents. (Bliss v.
~“Kaweah Canal, etc., 65 Cal. 502; see Sec. 24, re other officers and
agents.) | es
(b) There is a limit, even to the power of the directors or
trustees to delegate authority. As their authority to delegate
is implied from the necessities in the management of the
corporation and from the ‘usage, so also, it is limited by the
. same considerations. It cannot delegate entire supervision and
control of the corporation to others for this is not only unnecessary
and contrary to usage, but it is inconsistent with’ Section 22,
which requires that “the corporate powers... shall be exercised,
all business conducted and all property of such corporation
~ controlled and held by its board of directors or trustees.” (see 2
Fletcher, pp. 378-379.)

(c) Neither can'the board delegate special powers especially

conferred upon it by a resolution of the stockholders or members
of the corporation. Unquestionably, it may’ delegate purely
ministerial duties. (2 Fletcher, p. 537.) |
(d) It is clear that the power of the board to delegate author-
ity is subject to restrictions as provided in the bylaws. 3
Terms of office of directors or trustees.
(1) One (1) year/three (3) years. — As a rule, the directors or

trustees/ officers of a corporation shall.serve only for.the term as
fixed in the bylaws. The-word “term,” in a legal sense, means the
fixed and definite period of time which the law prescribes that an
officer may hold office and a hold-over does not change the length
of the term ‘but results in shortening the period served ‘by his
successor.’ a)
Section 22 provides that the directors “shall be elected fora term
of one (1) year” and trustees, “for a term not exceeding three (3)
years.”
The rationale for fixing a term is to protect the corporation, and
its creditors and the public dealing with it so that if an improvidenor
t
wrongful act is committed by the board of directors; the subsequent
board can redress or prevent the perpetration
of the wrong, and
protect its stockholders, creditors and the’ public having dealings
with it. (SEC-OGC Opinion No. 08-12, May 17, 2012: |
(2), Hold-over. — They shall hold “office until their successors
are elected and qualified” (Sec. 22, par. 2.) meaning that their term
may be extended on a hold-over basis. 0 Te
*Being a fixed period, it cannot be split into two (2) or more terms so as to consider
the remaining period as another term. Thus, a. director (previously elected in the
immediately preceding election) who merely served the remaining period of the original
term of a resigned director (subsequently elected) is not covered by the prohibition in the
bylaws against serving more than two (2) consecutive terms unless the clear intention is
to cover such a situation, (SEC Opinion, Feb. 8, 1993.) Term is distinguished from tenure
in that the latter represents the period during which the incumbent actually hold office.
Thus, tenure may be shorter (or, in case of hold-over, longer) than the term for reasons
within or beyond the power of the incumbent. The holder-over period + that time from
the lapse of one year from a member’s election to the board and until his successor’s
election and qualification — is not part of the director’s original term of office, nor is it a
new term. (Valle Verde Country Club, Inc. vs. Africa, 598 SCRA 200 [2009].)

Sec. 22 TITLE III. BOARD OF DIRECT.
ORS /TRUSTEES/ OFFICERS
229
The principle’ of hold-over is sanctioned by

Section.22. Upon
failure of a quorum at an y meeting of the stockholders
or members
called for an election, the directors hold over and ‘continue
to
function until the successor directors are chosen and quali
fied. The
failure: to elect does not terminate the terms of incumbent officers
nor dissolve the corporation. Similarly, the failure to hold an annual
meeting does not affect the power of a corporation to transact
its
business since the directors in office continue in office with power
to act thereby averting the creation of a vacuum in the
operation of
the corporation.
(a) To “hold over” when applied:to an office impl
ies that
the office has a fixed term which has expired; and the incumbent
is holding the succeeding term.” (19 Words and Phrases 576.)
Although the members of the board are hold-over director
s
or trustees, they still possess the powers of bona fide member
s
until their successors are duly elected and qualified. Thus, a
hold-over board has the power to declare the position of the
president vacant and elect another. (SEC Opinion, Aug. 3, 1976.)
(b) The rule. that where the articles of incorporation or
bylaws of a corporation provide for the annual election directors
and no election is held, the former directors hold over until their
successors are elected and qualified, applies to a going concern
where there is no break in the exercise of duties of directors. (2
Fletcher Cyc. Corp., p. 138 [1982 ed.].) One occupying an office in
a hold-over capacity can be removed at any time, without cause,
upon the electionor appointment of his successor. (Barayaga vs.
Adventist University of the Phils., 655 SCRA 640 [2011].)
(c) Hold-over is a situation that arises when no successor is
elected due to valid and justifiable reason (e.g., pending election
protest on the outcome of the annual election), in which case the
incumbent holds over and continues to function until another
officer is chosen and qualified. (SEC Opinion, June 24, 1998.) The
corporation should, as soon as possible, call a special meeting
for such purpose with proper notice given to all stockholders or
members.
Election” is the choice of one man among a number to fill a certain office. Ina
hold-over. an officer is merely allowed to continue functioning as such. He is not chosen
°ver other contenders for the position he occupies.

(d) The hold-over doctrine has a purpose which is at

once legal as it is practical. It accords validity to what would
otherwise be deemed as dubious corporate acts and gives
continuity to a corporate enterprise in its relation to outsiders,
The old hold-over officer is a de facto officer and by fiction of law,
his acts as such are considered valid and effective. (Sefieres vs,
Commission on Elections, 585 SCRA 557 [2009].)
(e) Where the reason for hold-over is not for failure to
elect but to give the incumbents more time to learn, or for
reasons of economy and the uncertainty that a quorum can
be secured, the hold-over violates the provision requiring an
annual election of the directors or trustees (SEC Opinions, July
3, 1989 and May 18, 1993.), and this:is especially true where the
hold-over extends beyond the one (1)-year term: (SEC Opinion,
March 1, 1988.) Mp
The regular election of directors as stated in the bylaws cannot
be dispensed with the board to extend the term of the incumbents.
(SEC Opinion, Feb. 3, 1994.) :
(3) Modification of term. — Unlike in the’ case ‘of nonstock
corporations (see Sec. 91.) and educational corporations (see Sec.
106.), stock corporations under the general provisions of
Title II
are not authorized to divide the members of its board’of directors
into groups with each group having a different term of office.
(SEC
Opinion, Feb. 4, 1971.) bec tl Ew oy,
(a) Their term of office being fixed by law, the same
cannot
be shortened, or extended by agreement of: the
parties or by
those interested in the position. (SEC Opin
ion, Jan. 15, 1975.)
“An annual meeting required and stated for each
year cannot
be dispensed with and the directors cannot’so change
of the annual election so as to continue
the date
themselves
more than a year,” unless the reason in justifiable in office for
notice
and proper
of the postponement is given. (SEC Opinion,
Jan. 5, 1981,
citing 5 Fletcher, p. 22.) Bee ,
(b) The corporation should hold an annual
not merely call meeting and
a special election since the electionof directors
or trustees occurs during such meeting
of its members. The
non-holding of a regular meeting cannot
be justified merely
because huge expenses may be incurred in holding
another

Sec. 22 TITLE III. BOARD OF DIRECTORS/ TRUSTEES/ OFFI
CERS 231
meeting and/oror \that securing a quorum may be uncertai

(SEC-OGC b n.i
Opinion No. 11-31, July 13, 2011.)
Number of directors or trustees to be elected.

(1) Under ‘the Revised Corporation Code,’ the number of
directors in a stock corporation “shall not be more than fifteen (15)
(Sec. 13[f].). The size of the board should be not small to be ineffective
nor too large to be unwieldy and inefficient.
(2) In ordinary nonstock corporations, the number of trustees shall
be fixed in the articles of incorporation or bylaws which may be
more than fifteen (15). (see Sec. 91, par. 1.)
_ (3) In a close corporation, the articles of incorporation may
provide that the business of the corporation-shall be managed by
its stockholders rather than by a board of directors in which case no
meeting of stockholders need be held to elect directors. (see Sec. 96,
par. 2.) . |
(4) Trustees of nonstock educational corporation “shall not be less
than five (5) nor more than fifteen (15),”. with the term of office of
1/5 of their number expiring every year. (see Sec. 106, pars. 1, 2.)
(5) In ‘a corporation sole, there is no board of directors or trustees
as it consists of one member or corporator only. (Sec. 108.) .
(6) The board of trustees of religious societies “shall also be not
less than five (5) nor more than fifteen (15).” (see Sec. 114[f].)
The limitation as to the number of directors or trustees seeks
to give ample representation to stockholders or members of a
corporation to its board while at the same time avoiding that it will
be too unwieldy.
Election of less than the required number. |

The failure of the stockholders or members to elect the required
number of directors or trustees provided for by statute or its articles
"See Sec, 38 of the Securities Regulation Code with respect to corporations required
to have at least two (2) independent directors. They shall serve for a maximum cumulative
term of nine (9) years. In the instance that a company wants to retain an independent
director who has served for nine (9). years, the board should provide meritorious
justification /s and seek stockholder’s approval during the annual stockholder’s meeting.
(SEC Memo. Circ. No. 4, March 9, 2017.)

232 THE REVISED CORP
ORATION CODE OF
THE PHILIPPINES
may be filled up ina subseq

uent special stockholders’
called for the Purpose. (S meeting dul
EC Opinions, Feb. 2, 1987 y
1992.) ' ; an d Ju ne 10,
Qualifications of direct
ors or trustees.
(1) Stock corporations. —
prescribed for ‘a director unde The only mandatory qualification
that he should appear in the cor the Revised Corporation Code is
rporate books (i.e,, Stock and
book) as a stockholdeor r me
mber of the corporation. (S
transfer
Opinion No. 51-19, Octobe
r 11, 2019.) Thus, the re
EC-OGC
quirements are:
(a) Every director includin
g an incorporating director
own at least one (1) sha
re of must
the capital stock (see De
> Protective Bureau, Inc. tective &
vs. Cloribel, 26 SCRA 255
[1968].); and
(b):The share of stock held by
in his name on the books the director must bere
of the corporation; and” gistered
(c) Ever y director must c ontinuousl
, Stock during his term, y own at least a share of
other wise, he shall auto
be a director._' matically cease to
ry,
The election of'a’ person

necessarily mean that he has paidto the board of directors of 4 corporation does not
for the shares recorded in his name.
In most cases,
ominee directors do not pay for the qualifying shares assigned ‘to them.
(Baguio vs.
Court of Appeals, 226 SCRA 366 [1993].) '

Sec. 22 TITLE III. BOARD OR DIRE
CTORS / TRUSTEES/ OFFICE
RS 233
bylaws. (SEC-OGC Opinion

No. 07-18, March 27, 2018.)
(2) Nonstock corporations, —
Trustees of nonstock corporations
must be members in good standj ng thereof.
A person with the dis qualification mentioned in Section
not qualified to hold the p 27 is
Osition of director or truste
e.
Natural persons contemplated by law.
It is deducible from Section 22 that onl
y natural persons can be
elected as directors or trustees (I nfra.) and they
must be elected from
among the stockholders or members,
However, a corporation which owns shares of
stock or is a
corporate member in another corporation can
give qualifying shares
to a natu ral person so that such natural person can be
elected as
director.
Citizenship and residence requirements.

(1) There is no specific citizenship and resident requ
irement
demanded of the members of the board of directors or
trustees
under the Revised Corporation Code.
(2) Incorporationsnot organized under the Revised Corporat
ion
Code, certain citizenship requirements are established. Thus,
in case
of domestic banks, the General Banking Law of 2000 allows
non-
Filipino citizens to become members of the board of directors
to the
extent of the foreign participation in the equity of said bank
(Sec:
5, R.A. No. 2029.) and private development banks (Sec. 4, R.A: No.
4093.), all the members of the board of directors must be citizens of
the Philippines.
(3) Under the Constitution, aliens may not be elected as directors
Or officers of corporations engaged in business or industries whic
are totally or partially nationalized busin h
ess or industries," (Art.
XII, Sec. 10 thereof.)
nee TEI AFT
BA company engaged in the business of
real estate development whose primary
Secondary purpose includes ownership of land is cons and
idered as undertaking a partially-
nationalized activity. (SEC Opinion 02-16, Feb. 2, 2016.)

S Sec. 22
Stock ownership requirement.

(1) Holder of legal title. — The rule is that the person who holds
the legal title to the stock as shown by the books of the corporations
is qualified although some other person may be the beneficial owner
of the stock recorded in his name. (see Sec. 63.)
The former Corporation Law required that “every director
must own in his own right at least one share of the capital stock
of the corporation.” (Sec. 30 thereof.) Thus, under the former law,
the eligibility of director, strictly speaking, could not be adversely
affected by the simple act of such a director being a party toa voting
trust agreement (see Sec. 58.) inasmuch as he remained ‘owner
(although beneficial or equitable only) of the shares subject of the
agreement. (Lee vs. Court of Appeals, 205 SCRA 752 [1992]:)
The phrase “in his own right” is deleted in Section 23 of the
old Corporation Code (now Sec. 22.). A mere proxy who is not a
stockholder cannot be elected as a member of a corporation’s board
of directors or trustees. fé
(2) Voting trustee. — Whatever doubt may have existed before,
a voting trustee may now be considered _as the legal owner of the
shares transferred to him by virtue of a voting trust agreement and,
therefore, eligible to office of director. With the omission of the
phrase “in his own right,” the election of trustees and other persons
who, in fact, are not the beneficial owners of the shares registered
in their names on the books of the corporations becomes formally
legalized. (see Sec. 58.) P on <s
Consequently, the transferors who.cease to own at least one (1)
share standing in their names on the books of the corporation.
as
required under Section 22 also cease to be directors. (Lee vs. Court
of Appeals, supra.)
(3) Transferee of qualifying share. — A person to whom one share
of stock has been transferred for the express purpose
of qualifying
him as a director is eligible. Ownership of the qualifying
share need
only be in a nominal capacity, with the beneficial
title remaining in
the transferor who or which actually owns the share. It is sufficient
that the title to the stock, as it appears in the books of the corpo
ration,
is in the director. (SEC Opinion, Jan. 25, 1985.)

bie TITLE Ill, BOAR
D OR DIRECToR
S/ TRUSTEES /
OFFICERS
235
Said transfer woul
of “ownership,” hence
remain with the assigno
©. 03-21, Feb. 18, r 20nominee of the transferor.

21.)
The transfer need no
of incorporation such
; tc
omply with the restrictions in
as Siving the cor the articles
refusal thereon or Prohibiting
rule ot th ?
herwise would create
an
ers’ shares. To
who, under the law, inj rporate stockholders
have the 7;
is not disqualified when he

merely pledged his shares
into an executing contract to or entered
sell the same.
|
(6). Transferee of shares previously sol

a valid and effective transfer of
d.— Where a director makes
all his
sto
a director'and the subsequent purcha ckholdings, he ceasés to be
se by him of shares does not
reinvest him with title to his former pos
1971.) ition. (SEC Opinion, June 6,
(7) Transferee at time of assumption of

office. — It is not essential
‘0 the validi ty of the election of one as a director that he
be a legal
“The transfer is not violative of the transf
er restriction clause in the articles of
incorporation, as it would be more of a “trust”
ansferee should be described in the deed
and not a transf er of “ownership.” The
of assignment, corporate books, and certif
Stock merely as a qualifying stockholder or nomin icate ;
ee of the transferor or assignor, Such
“Scription serves as notice to the corporation and third parties that the holde
°€s not hold the share in his own right, but only r thereof
as nominee for the benefit of the real
ner, Any unpaid balan of the subscription to the qualifying share transferred would
"Main the liability of the cetransfer or-beneficial owner. (SEC Opinion, Aug.
4, 1995.)

236 THE REVISED CORPORATION CODE OF THE PHI
LIPPINES Sec, 29
Owner of stock at the time of the election as director

April 5, . (SEC Opinion,
1990.)
(8) Co-owners of shares. — Where the system
absolute of
community governs the property relations between
husband and
wife, the provisions on co-ownership shall apply to
the communi
of property. (see Arts. 75, 90, F amily Code.) Accordin
gly, the husband
or wife who desires to be elected as a member
of the board must
Secure standing by having their shares recorded in
the corporate
book
s as co-owned by them, in which case either of them
, not both,
may be voted for as director. Section 55 of the Revi
sed Corporation
Code applies.
As co-owners of the shares, the husband and wife shall be
considered as one stockholder. (SEC Opinion,
Sept. 4, 1990.)
Reason for the requirement.
The reason for Tequiring a director to own in the stock
corporation is simple enough. It is commonly
felt that a man with a
financial interest at stake will devote more atte
ntion to the business.
(SEC-OGC Opinion No. 06-09,% March 16, 2009.)
Today, however, management is chosen for its
professional
competence rather than its financial contribution. If
the financial
contribution of management is small, it is hardly an
incentive to the
individual director to be more careful or a deterrent to
carelessness.
On the other hand, to require a director that he invest subs
tantially
all of his fortune to the company of which he is a director woul
d
mean losing many valuable men. (Bonneville Dewey, and Kelle
y,
Organizing and Financing Business, 6th ed., p. 85.)
Additional qualifications in the bylaws.

(1) Consistency with corporation law. — The qualifications of
directors or trustees of the corporation, i.e., qualifications besides
those specified in Section 22 (par. 1.), may be prescribed by the
bylaws (Sec. 46[f].) but their qualifications may not be modified if
such modification would conflict with the requirements prescribed
by law.
‘SCiting De Leon, The Corporation Code of the Philippines Annotated, p. 235 [2002].

Sec. 22 TITLE Ill. BOARD OF
DIRECT ORS / TRUSTE
ES / OFFICERS
237
(a) For instance, the by

laws May not provide
need not be o that a director
: On, Is really a qualification expres

negative way. sed in a
(b) A provision in the corporate byl

persons elected to the board aw requiring that
of directors must be holders
shares of the paid-up value of of
a specified amount which shall
be held as security for their action, was
Section 21 (now Sec. 46.) of the held valid because
Corpor ation Law expressly gives
the power to the corporation
to provide in its bylaws for the
qualifications of directors and suc
h provision “is highly prudent
and in conformit y with good practice.” (Gov't. vs.
Phil. 399 El Hogar, 50
[1927].)
(c)
Similarly, an amendment to the byl
aws to the effect “that
no person shall qualify or be eligib
le for nomination or election
to the Board of Directors if he is eng
aged in any business (as
an officer, manager, or controlling per
son of, or the owner
of at least 10% of any of the outstandi
ng class of shares of a
competing corporation) which competes with
or isantagonistic
to that of the corporation” was sustained as
valid, upon the
principle that where the director is so employed in
the service
of a rival company, he cannot serve both but must bet
ray one or
the other."
(2) Approval by stockholders or members. — Additional
qualifications of directors or trustees cannot be enforced
unless
approved by the stockholders or members and contained in
the
bylaws of the corporations. (SEC Opinion, July 13, 1966.)
16“Sound principles of corporate management counsel against

sharing sensitive
information with a director whose fiduciary duty to loyalty may
well require that he
disclose this information toa competitive rival. These danger
s are enhanced considerably
Where the common director is a controlling stockholder of two (2)
Corporations.
of the competing
It would seem manifest that in such situations, the directo
r
has an economic
incentive to appropriate for the benefit of his own corporation the corpora
te plans and
Policies of the corporation where he sits as director.” (Gokongwei, Jr. vs. Securit
ies and
Exchange Commission, 89 SCRA 336 [1979].)

Effect of want of eligibility.

(1) As to corporation. — Votes cast for a person who is not eligible
as a director (or trustee) cannot elect him. In any event, one not
eligible as director because he does not own any stock is not a de
facto director where he never accepted the office, nor performed any
act as director, nor ever held himself out as director.
(2) As to third persons. — It does not follow, however, that
ineligibility of a person elected as an officer will invalidate
his acts. Persons dealing with a corporation are not required
to ascertain whether the directors or other officers of the
corporation have the qualifications prescribed by the
bylaws. Acts of a director or other officers are, therefore, valid so
far as third persons are concerned, although he may not possess the
qualifications prescribed, if he has been elected or appointed by the
corporation and permitted to act for it. (2 Fletcher, p. 98.)
Election of independent directors.

(1) The Revised Corporation Code requires corporations vested
with public interest to have independent directors constituting at
least 20%, of such board:” Such corporations are enumerated in
Section 22(a), (b), and (c). (see Sec. 179 [m].)
(2) An independent director is.a person who, apart from
shareholdings and: fees, received from. the corporation, is
independent of management and free from. any business or.other
relationship which could, or could reasonably, be perceived to
materially interfere with the exercise of independent judgment in
carrying out the responsibilities as a director,
“To promote and reinforce board independence and

17
tobe consistent with recognized
regional best practice, the Securities and Exchange
Commission in its en banc meeting on
09 March 2017 amended its rules on the term limit of
independent directors as follows:
(1) A company’s independent director shall serve for a
maximum cumulative term of
nine (9) years; (2) After which, the independent director
shall be perpetually barred from
re-election as such in the same company, but may
continue to qualify as anon-independent
director; (3) In the instance that a company wants to retain
an independent director who
has served for nine (9) years, the board should provide
meritorious justification/s and
seek shareholders’ approval during the annual shareholders’ meeting; and (4)
of the cumulative nine-year term is from 2012,” (SEC Reckoning
Memo. Circ. No, 4, March 10, 2017.)

trustee who PoSses
ses all of th
the disqualifications set
forth in this Code. (N)
“At all elections of
directo rs or trustees, the
be present, either in Per re must
son or through a repres
authorized to act by writte entative
n proxy, the Owners of maj
of the outstanding c apital ority
stock, or if'there be no
Stock, a majority oft he member capital
s entitled to vote. When
so
laws. or by a majority of the boa
rd of
S, the
. stockholders or members
also vote through remote commun may
ication or in absentia:
Provided, That the right to vote th
rough such modes may
be exercised in corporations vested
with public interest,
notwithsta nding the absence of a provision in the by
of such corporations. (SA) laws
A stockholder or member who Participates through
remote communicatioor n jin absentia, shall be deemed
Present for purposes of quorum. (N)
The election must be by ballot if requested by. any
voting stockholder or member.
“SEC Memo. Circ. No. 20-2020 (Aug.

11, 2020) prescribes the rules on the num
of independent directions and sectoral representations of ber
Markets, excha nges and other organ ized
? |

PHILIPPINES Sec, 23
In stock corporations, stockholders

entitled to vote
Shall have the right to vote the number
of shares of stock
standing, own names in the Stock boo
ks of the corporation
at the time fixed in the bylaws or whe
re the bylaws are
silent, at the time of the election. The said
stockholder
may: (a) vote such number of shares
for as many persons
as there are directors to be elected;
saiq (b) cumulate
shares and give one (1) candidate as
many votes as ‘the
num ber of directors to be elected multipli
ed by the number
of the shares owned: or (c) distribute the
m on the same
pri
nciple among as many candidates
as may be seen fit:
Provided, That the total number
of votes cast shall not |
exceed the number of shares owned by
the stockholders
as shown in the books of the corporati
on multiplied by the
whole number of director to be elec
ted: Provided, however,
That no delinquent stock shall be vote
d. Unless otherwise
pro vided in the articles of corporation or in the bylaws,
members of nonstock corporations, may y cast as man
votes as there are trustees to be elec
ted but may not cast
more than one (1) vote for one
(1) candidate. Nominees
for directors or trustees receiv
ing the highest number of
votes shall be declared elected. (A)
If no election is held, or the
owners of majority of the
outstanding capital stock
or majority of the member
entitled to vote are not Pre s
sent in person, by proxy,
through remote or
communication or not voting
at the meeting, such in absentia
meeting may be
adjourned and the
Corporation shall proceed in
accordance with Section 25
of this Code. (SA)
:
The directors or trustees ele
cted shall perform their
duties as prescribed
by law, rules’ of good cor
governance, and bylaws of porate
the Corporation. (N)
Election of directors or tru

stees.
These limitations or condition
s are imposed in the election
directors or trustees:! of
'The SEC has “original and

exclusive jurisdiction to hear
involving... controversies in the election and decide. cases
or
appointment of directors,
or managers of such corporat trustees, officers,
ions, partnerships, or associat
S[a].) Thus, in a labo ions.” (P.D. No. 902-A, Sec.
r case, the claim for unpaid salaries
filed with the Ministry (now

(b) Voting is on th
e base S of the number
share-one vote) in stoc of shares (one
k corpo rations and not on the
stockholders present in number of
the st ockholders’ meeting.
of all'the stockholders or memb

ers,
(2) The election must be by bal
lot if requested by any voting
)
is means that voting by ballot
Do
Department) of Labor and Employment

I , i ‘ saa ‘
stockholders and the general manager by complainant who was one of the controllin
Z 4 { : 4 ‘ i 5
of a'corporation who was su
'V 20858-78, 3rd Division, June 30, 1980; see Phil. Scho
Leafio, 127 SCR ol of Busine
A 778 [1984].) }
"The election can be held only at a meeting s wig l
of stockholders or members because Sec.
Tequires presence,either in person or proxy
. The bylaws of nonstock corporations
©wever, authorize voting through remote may,
Stockholder or member who particip communication and/or in absentia. (Sec.
ates through remote communication 88.)
Shall be deemed present for purposes of the or in absen tia
evidence to the contrary, the presum quorum. (Sec. 23, Par. 3.) In the absence of
ption is that the directors /trustees
as Such.
t
were duly elected
‘
rf

OF THE PHILIPPINES Sec,23
(3) A stockholder
cannot be deprived in the articles of
incorporation or in the bylaws of his statutory right
to use any of
the methods of voting in the election of directors;
(4) No stockholder delinquent for unpaid subscription
vote.
shall
A delinquent stock is not entitled to vote or
be represented for
any corporate purpose whatsoever;
(5) If a quorum is present, the candidate
s
number of votes shall be declared elected2 Thereceiving the highest
plur law requires only
ality, and not majority of the votes cast at the
Stock is not included in determining the election. Delinquent
existence of the required
quorum; ,
(6) In case of failure to ‘hold an ele
ction for any reason, the
meeting may be adjourned from
day to day or time to time but it
cannot be adjourned sine die or ind
efinitely;
ei (7) The requisite notice must
be given (see Sec. 49, par. 1.); and
| (8) Each stockholder or member
shall have the right tonominate
any director or trustee unless suc
h right is reserved exclusively
holders of founders shares under for
Section 7.
(9) The right to vote throug
absentia may be exercised only h remote communication or in
when so authorized by the by
or by a majority of the board
of directors or trustees. Such
laws
is not Tequired in corpor
ations vested with publ
authority
par. 2.) ic int erest. (Sec. 23,
Bh
°Deadlock-in corpor
an acceptable.corporate ate-elections ‘may: bedecided ‘by'the drawing of
practice) among the cand
ein the bylaws-on-the idates concernedsabsen 1ots"(which ig
matter. Thus, in the t'any provision
the winner shall be dete event of a tie for the
last regular director
rmined by drawing of slot,
number of votes, If
they do not agree on draw lots by the candidates receiving the same
may vote again and ing of lots,’ the stockhol
elect among them the ders or members
cannot be lef t for decision to remaini
the old board

Where directors or truste
es merely
designated.
Section 22 is clear that
the corporate power
s of ofall
all corporati
ti ons
shall be exercised by the b Oard ofFP powers
directors or trustees
.
Therefore, mere desi
Time of annual election.

Since Section 2? fixes the te rm
of office of directors and trustees
one (1) year and three (3) years, respec at
tively. The Revised Corporation
Code does not provide when the first electi
on of directors or trustees
shall be held. It, however, authorize
s the corporation to pro
vide in
its bylaws “the time for holding the ann
ual election of directors or
trustees.” (Sec. 46[g].)
Incidentally, the old Corporation Code
deleted Section 29 of
the former Corporation Law providing amo
ng others, that the first
election of directors shall be held “at the meeting
for the adoption of
the orig
inal bylaws, or at such subsequent meeting as
may be then
determined.”
Postponement of the election.

The board of directors cannot change the date of the annual
Meeting prescribed in the bylaws of the corporation so
as to
lengthen their terms ‘of office unless the reason is justifiable (e.g,
lack of quorum) and proper notice of the postponement is given
to the stockholders of members. (SEC-OGC Opinion No. 13-05,!
October 10, 2004; SEC Opinion, April 23,1987.)° ° . r
‘Citing De Leon, The Corporation Code of the Philippines Annotated

[1980].

If no election is held, the meeting may be adjour

ned and the
Corporat ion shall proceed in accordance with Section 25.
meeting must be held within a reasonable time
The
for the date it has
been postponed, with proper notice of the change
of date given to
all the stockholders of record. (SEC Opinion, April 17, 1986
.)
Methods of voting.
Every stockholder entitled to vote shall have the right to vote
in the numbers of shares of stock standing in his name in the stock
books of the corporation at the time fixed in the bylaws (e.g., as of 10
days before the election), in his own name on the stock books of the
corporation’ (see Sec. 23, par. 5.) or, where the bylaws are silent, at
the time of the election, and the stockholders may vote his shares in
any of the ways mentioned below. :
(1) Straight voting. — By this voting method, every stockholder
may vote such number of shares for as many persons as there are
directors to be elected.
ILLUSTRATION:
A owns 100 shares of stock in a corporation. If there are five’
(5) directors to be chosen, A is entitled to 500 votes obtained by:
multiplying 100 by 5. He may give to the five (5) candidates
he
wants to be elected 100 votes each.
Under this method, the votes are distributed equally
among the five candidates without preference. |
(2) ‘Cumulative voting for one candidate. — By this method, a
stockholder is allowed to concentrate his votes and
give one (1)
candidate as many votes as the number of director
s to be elected
multiplied by the number of the shares’ owned:
(see SEC-OGC
Opinion No, 10-14,5 June 2, 2014.) In other words, the
stockholder
has the number of votes which equals the number of
directors to be
elected. Needless to say, straight voting does not benefit mino
rity
‘The stockholder of record (as of the cut-off date
fixed in the bylaws, or where
the bylaws are silent, as of the day of the election) entitled
to vote may no longer be a
shareholder at the time of the election by reason of the
transfer of his shares before the
meeting. (see Sec. 63.) The buyer, however, has the right
to compel the record owner to
give him proxy to vote the stock sold.
‘Citing De Leon, The Corporation Code of the Philippines Annotate
d, pp. 238-239
[2006].

245
to,if the group controlling the majority of the

cumulate its votes shares does not
or cumulates them improperly.
(c) A director elected. because of the
vote of minority
stockholders who united in ‘cumulative voting cannot be
removed without cause. (Sec. 27, par. 2.)
(d) Minority stockholders cannot demand as
a matter of
tight for proportionate representation in the boar
d of directors
of its subsidiaries. It is the sole prerogative and discreti
on of the
board of directors of a parent or holding corporation to
choose
its nominees in the board of directors of its subsidiary.
However, the dealings of the parent company and its directors
with the subsidiary-will be subjected \to vigorous scrutiny, and
where their interest are adverse, they must be under a burden to
Prove not only the good faith of the transaction by also its fairness.
The fiduciary obligation is designed not only for the protection
of the minority stockholders but for the creditors as well. But the
fiduciary thereof will not be employed merely to enable a minori
to dictate corporate polices. (SEC Opinion, March 13, 1991, citing
Ballantine, pp. 326-328.)
ILLUSTRATIONS:
(1) If A owns 200 shares of stock and there are five (5)
directors to be elected, he is entitled to 1,000 votes all of which

PHILIPPINES Sec. 23
he may cast in favor of are candidate. If there are seven (7)

directors to be elected, each share has seven (7) votes. Thus, the
voting power of each stockholder depends upon the number of
directors to be elected. :
(2) Suppose that out of a total of 1,000 shares, A and B
(representing a group of stockholders) own 800 shares while C,
D, E, and F (representing another group of stockholders) own
200 shares.
If there are five (5) directors to be elected, A and B are
entitled to 4,000 votes and C, D, E and F, to 1,000 votes. The
highest number of votes thatA and B can give each of their four
(4) candidates is 1,000. Hence, by cumulating their 1,000 votes
in favor of a candidate, C, stockholders D, E, and F
would be
able to secure representation in the board of directors.
(3) If the majority group owns 501 shares and the minori
group, 499 shares, the former would have a total of 2,505
(501
x 5) votes, and the latter 2,495 (499 x5) votes.
By cumulating
its votes, the minority could elect’ two (2)
candidates (one
receiving 1,248 and the other, 1,247 votes
). - Under straight
voting, the majority could always elect all its
five candidates,
giving them 501 votes each, since the minority grou
p cold cast
only a maximum of 499 for each of its candidates.
Now assume that the majority group cast 501
votes each
for five (5) candidates, and the minority
group distributes its
votes (Infra.) to four (4) candidates (e.g.,
one [1] receiving 623
votes and the other three [3], 624 votes),
the minority would
have control of the board. The same js true if
group concentrates its votes, 831, 832, the minority
and 832 respectively,
while the majority group cumulates its
votes also on the three
(3) candidates giving them 830, 835 and
840 votes, respectively,
the mino rity will have three (3) candidate
s elected to the board.
(3) Cumulative voting by distribution
. —
By this method, a
stockholder may distribute the shares
distribute the
on the same principle
same among as many candidates as
shall see fit.
In electing directors by cumulative voti
ng, “the total number of
votes cast by a [stockholder] shall not exceed the
number of shares
owned by him as shown in the books of
the corporation multiplied
by the whole number of directors to be elected.”

Sec. 23 TITLE III‘ BOARD OF DI
RECTORS / TRUSTEES/ OF
FICERS 247
ILLUSTRATIONS:
of directors to be el
ected is 11. The total
can be cast for the 1] numb er of votes that
directors is 550,000 (50,000 x 11). What is
directors?
Under the cumulative voti

ng system, the number ma
calculated by using the fo y be
llowing formula:
1. AXB i 2..D+1X C=E
C +4 |
Where:
A = Total number of outstandin
g shares entitled to vote (at
meeting);
|
B = Number of directors desire
d to be elected;
C = Total number of directors
to be elected;
D = Number of shares necessary to elec
directors; and
t desired number of
E = Number of votes tequired to elec

directors. t desired number of
: | : -
Thus
A. Total no. of outstanding shares
)
entitled to vote _ — 50,000
B. No. of directors desired ,
to be elected 4 — x6
Divided by: Sum of:
300,000

PHILIPPINES
Sec, 23
C. Total no. of directors

to be elected +1 (11 + 1) — +12
25,000
Plus 1
— ek
D. =No. of shares necessary to
elect desired no. of directors — 25,001
Multiplied by:
C.. =Total no. of directors
to be elected cr ee9
E. =No. of votes required to
elect desired:no. of directors
==:510275,011
Thus, the 275,011 votes may be distributed equa

lly to six
(6) candidates for directors, five (5) of whom
will receive 45,835
votes and the sixth, 45,836 votes. If the remainin
g 24,999 shares
are controlled by another group, it can only
elect a maximum
of five directors with its 274,989 (24,999 x 11)
votes which, if
distributed equally to six (6) candidates, will give
each of them
only less than 45,835 votes.
(3) X, a stockholder, is a candidate to a
nine-man board.
He expects that out of 3,000 outstanding
shares, only 2,000
shares will be represented at the meeting. How
many of the
2,000 shares does X need to get elected? -
By applying the formula, X will ‘need 200
of the 2,000
shares to be elected. Now, if X seeks control of
the corporation
and desires to elect five directors, then, he
will need 1,001 (or
simp ly 5/10[B/C + 1] A + 1) shares to elect the five.
(4) Assume: 18,825 — total outstanding shares; 13.
-
numbers of directors to be elected; all shares
(244,725) will vote.
(a) to elect 13 directors:
1) 18,825(A) x 13 (B) = 244,725 +14 (13 + 1)
= 17,480.36 + 1 = 17,482 (D; rounded off)
X 13(C) =
227,266(E)
;
2) 17,481 X 13 =227,253. This number of share
s is
sufficient.
3) 244,725 - 227,266 = 17,459. This number of
shares cannot elect one (1) director.

Sec. 23 TITLE III: BOARD OF DIRECTORS
/TRUSTEES/ OFFICERS 249
4) 244,725 ~ 297,253 = 17,470. This number of

shares cannot also elect one
(1) director.
(b) to elect 12 directors:
1) 18,825 x 12(B) = 225,900'+
14 = 16,135.71 +1 =
16,137 (rounded off) X 13
= 209,781
2) 244,725 — 209,781 = 34,
944 +2 = 17,472
34,944 shares cannot elect
two (2) directors, only one
(1).
3) 209,781 +12 = 17,481
(c) to elect 11 directors:
1) 18,825 x 11= 207,075 + 14=14,7914+1
= 14,792
X 13 = 192,296
2) 244,725 - 192,296 = 52,429. This num
ber of
shares cannot elect three (3) director
s, only two (2).
192,296 + 11 = 17,481
52,429 +3 = 17,476:
(d) to elect 10 directors: ,
1) 18,825 x 10 = 188,250 +14 = 13,446
+ 1 = 13,447
X13 =174811
2) 244,725 -174,811 = 69,914. This number
of shares
cannot elect four (4) directors, only three (3).
174,811 + 10 = 17,481
69,914+4=17,478
(e) to elect three (3) directors:
1) 18,825 x 3= 56,475 + 14'= 4,034 + 1=4035
x 13
=52, |
2) 244,725 - 52,445 = 192,270. This number of
shares cannot elect,11 directors only 10.
192,+ 11 =17,
52,+3=17,
(f). to elect two (2) directors:

1) 18,825 X 2= 37,650 + 14= 2,689 +1=2,600 x.
13 =34970 .

2) 244,725 -34,970 = 209,755. This number

shares
cannot elect 12 directors, only/11.
209,755 + 12 = 17,479
34,970 + 2 = 17,485
(g) to elect one (1) director:
1) 18,825 X 1 =18,825+14 = 1,345 +
1 = 1,346 x
13 = 17,498
2) 244,725 - 17,498 = 227,227. This num
ber shares
- cannot elect 13 directors, only 12
227,227 + 13 = 17,479
17,499 + 1-= 17,499
Right of stockholder to use

cumulative voting.
Cumulative voting being a statut
ory right, a corporation is
without power to deprive the stockh
olders of its use (SEC Opinion,
October 4, 2001; SEC Opinio
n,’ Oct. 20, 1964:) or even
the right to vote to only one way the restrict
or method. A stockholder may
or may not exercise the right as “he
shall see fit.” (Sec. 23.) He may
contract with other stockh olders with reference to his sto
right. (see Secs. 58, 99.) ck or such
Cumulative votin
stealthily or indirect]
- Sanitary Wares Manufacturing Corp.,

SCRA 130 [1989].) 180
Situations involving cumula
tive voting.
In a study of proxy fights, situation
voting were generally of six s involving cumulative
(6) types:
(1) Cases towing out of con
spicuous management or board
failures;
’Citing De Leon, The Corporation

Code of the Philippines Annotated,
p. 209 [1993].

251
(2) Situations Srounded j; N conflicts of important. busine

interests among Stockholder Ss, ss
or between stockholders
management; and
(3) Where stockholders became
co
nvinced on rather gene
grounds that the board ral
of directors was unrepres
generally insensitive to, entative of, and
Stockholders’ interest;
(4) Instances involving
clashes of Strong personal
ities;
(5) Struggles for control
of the corporation in which
representation through cumulat
ive voting was an intermed
objective; and iate
(6) Cases of “anglers” — Op
position leaders who appear
seek board membership ed to
in order to Push narrow and selfish
of their own. (W.L. Cary, Cases an interest
d Materials on Corporation, 1969
ed., p. 285, citing C.M. Williams, Cumulati
ve Voting, 33 Harv. Bus.
Rev. 108, at 113 [May-June, 1955].
)
Arguments for cumulative vot

ing.
They have been summarized:
(1) Perhaps, foremost of the varied arg
uments made _ by
Proponents of cumulative voting is that
it is basically fair. They
argue that it is only equitable that stockhold
ers with a large stake in
the corporation can gain representation
on the board of directors, in
Proportion to their holdings; )
(2) Minority representation under cumulative
Not constitute a breakdown of the principle of
voting does
majority rule since
the number of directors electe
d by each group will vary wit
Proportions of ownership;? h its
(3) Significant conflicts of interest can develop
between
© stockholders’ groups (or the stockholders in
general) and
management and the board of directors. Unless mino
rity groups can
8ain representation on the board, they may fail
to get an adequate
Voice in policy (Illustration of conflict: dividend poli
cy or majority
Shareholders taking out profits in salaries);
a ante SLO
‘Thus, cumulative voting cannot be considered undemocratic.

(4)'In ‘the case of many larger corporations, proponents of

cumulative voting argue that the management virtually controls
the typical board of directors - the stockholders merely ratify that
selections. Thus, cumulative voting represents potential power to
assert stockholders’ points of view;
(5) The position of the management and the controlling interest
in generally very strong; the balance of power lies heavily with the
“ins” who hold great advantages in the event of a proxy fight; and
(6) Minority representation on the board can be helpful in
protecting or advancing the interests of minority groups. If the
board is composed of individuals who think essentially alike, and
operations are conducted in a private club atmosphere — as does
happen too often — an intelligent gadfly can prove useful. (Ibid, pp.
287-288.)
Arguments against cumulative voting.

They have been summarized:
(1) A basic argument against cumulative voting is that it means
the election of directors who are, by their nature, partisans of
particular interest groups; and the role of a partisan on the board
- of directors is inherently inconsistent with the proper function of a
director, which is to represent all interest groups in the corporation;
(2) The board of directors is an integral part of the management
team;
(3) Disharmony in the. board can dissipate and destroy the

energy of management and lead to an atmosphere of uncertainty
and inaction at the top level. Officers susceptible to unfriendly
criticism are like to avoid action which might result in failure and
hostility, even when such drastic and risky action is appropriate
and
necessary; |
(4) A director who cannot be trusted may leak such informatio
n
to the harm of the corporation;
(5) Too frequently, cumulative voting tend
s to be used in practice
by persons motivated by narrow selfish interest
rather than
broader interests of the stockholders (which they may profeby the
ss to
represent); and

Sec. 23 TITLE III. BOARD OF
DIRECTORS / TRUS
TEES / OFFICERS
253
(6) Not infrequently oppositi

to secure a toe-hold in a , P on Sroups
grou use cumulative voting
Voting in a nonstock Corporati

on.
Unless limited, broaden
ed, or denied in the articles of
incorporation or in the bylaws , each
member shall be entitled to one
vote. (see Sec. 88.)
ILLUSTRATION:
If Ais amember of a nonstock corporati
on and there are five
(5) directors to be elected, he is ent
itled only to five
(5) votes.
He may give one (1) vote to each of the
five (5) candidates he
wants to be elected.
If he has only one (1) candidate, he can cast
only one (1)
vote for said candidate unless cumulative voti
ng is authorized
in the articles of incorporation or in the bylaws.
Thus, where
cumulative voting exists, and there are nine (9) trustees
to be
elected, a member is entitled to cast nine (9) votes
for one (1)
candidate or to distribute the same among as many candidat
es
as he shall see fit.
‘
Separate voting by zones or regions

not allowed. ‘
. , It is clear from Section 23 that in the election of the trustees of a
nonstock corporation, it is necessary that at least “a majority of the
members entitled to vote” must be present at the meeting held for
the purpose. It follows that trustees cannot be elected by zones or
tegions, each zone or region electing independently and separately
a member of the board of trustees of the corporation, such method
being violative of Section 23. (SEC Opinions, Jan. 30, 1969 and
April
1, 1981.)
However, the bylaws of a nonstock corporation can validly
Provide in its bylaws for the election of trustees by category (e. Ru
age bracket, regional area), a practice followed by most corporations
With nationwide membership. (SEC Opinion, Feb. 22, 1972.)

254 THE REVISED CORPORATION CODE OF THE PHILIPPINES Sac. 94
To elect directors or trustees, the bylaws may divide the

members into groups, with each group entitled to nominate qualified
members coming from the group, but the nominated members shal]
be elected not by the group itself but by the entire members of the
Corporation in accordance with Sections 22 and 23. (SEC Opinion,
Oct. 29, 2001; see SEC Opinion, Sept. 4, 1989.)
Segregation of votes for regular and independent

directors.
The election procedure for segregation of votes for regular
and independent directors is not contrary to any provision of the
Revised Corporation Code or the Securities Regulation Code and its
implementing rules and regulations.
The segregation is a practical device to ensure that at least two
(2) nominees for independent directors are elected to the board in
accordance with Section 38 of the Securities Regulation Code. Thus,
it may be provided that one (1) vote cast for each of the two
(2)
nominees for independent director will already be sufficient to elect
them. (SEC Opinion No. 19-11, March 23, 2011.)
Sec. 24. Corporate Officers. — Immediately after their

election, the directors of a corporation
must formally
organize and elect: (a) a president, who
must be a director;
- (b) a treasurer, who must be a resident
: (c) a secretary,
who must be a citizen and resident of
the Philippines; and
(d) such other officers as may be prov
ided in the bylaws.
f ion isv with public interest, the boar
li fficer. The same person may
‘hold two (2) or more positions conc
urrently, except that no tay mi
one shall act as president and
Secretary or as president
and treasurer at the same time, unless otherw
in this Code. ise allowed
The officers shall manage
the corporation and perfor
such duties as ma y
be Provided in the by! aw m
resolved by the board s and/or as
of directors. (N)
* .
Citain ing De Leon, The Corpor ,

ation Code of the Philippin
es Annotated, p. 213 [1993]
.

Oi Ot Oe Wr 8 ee
OT a eg ee arr 0 COND
2 Conpures ofhtuy Iegue by Yo,
oi oA TITLE Ill. - BOARBOARD
D, OF 7 DI
ae RE CT
/ TRUS TEESOR
/ OFFIS
CERS 255
Corporate officers.
The board of directors or trustees, as
we have seen, formulate
the board policy of the corporation and directs
the conduct of its
business oper ations. (Sec. 22.) But the task ofldctual management °
and\¢arrying on the details of business operations and corporat
policy are delegated to the officers elected by it and over e
whom it
exercises supervision. Such officers shall manage the cor
d perform duties as may be provided in th poration
ylaws and/or as
Bresolved by the board of directors or trustees.
,
(1) Elected or appointed by the board of direc
tors. — The only
officers of a eee thosdlPlected or appointed by the
pense of directors and\who are given that character either by the
Revised Farrer ati on. Code, specifically, the president, the treasurer,
e secretary, “andGuch other officers asmaypro
be vided
for in its
/bylaws, (Sec. 24.) The“humber of corpogate officers is thus limited
_
A evised Corporation Code and tht’corporation’s bylaws. The
rest can be considered merely as employees or subordinate officials.
(Gurrea vs. Lezama, 103 Phil. 553 [1958]; SEC-OGC Opinion No. 17-
09,' July 22, 2009.)
(2) Mere designation as corporate officer. — The mere designation
as a high-ranking employee is not enough to consider one as a
corporate officer. There is a distinction between an employee
and a corporate officer, regardless of designation. Thus, although
the intention of the board of trustees of a corporation is to make
the “General Financial Secretary” an officer thereof, he cannot be
classified as such where the bylaws of the corporation discloses
that the position is not one of the officers provided therein. (SEC
Opinion, Nov. 1993.) ae
(3) ‘Scope of the term “officers.” — The scope of the term inthe
phrase’“and such other officers as may ‘be provided for in the
bylaws” (Sec. 25, par. 1.), would naturally depend on the bylaws
of the corporation. ‘(SEC Opinion, Dec. 4, 1991.) The president,
Vice-president, treasurer and secretary are commonly regarded as
the principal or executive officers of a corporation. (Tabang vs.
National Labor Relations Commission, 266 SCRA 462 [1997]; SEC-
OGC Opinion No. 17-09; July 22, 2009.)
*Citing De Leon, The Corporation Code of the Philippines Annotated, p. 252 [2002].

256 THE REVISED CORPORATION CODE OF THE PHI
LIPPINES dp)
However, if the bylaws enumerate

the board, the provision is conclusive, the officers to be e] €cted h
power to create new offices and the board is Without
for corporate officers without amendi
the bylaws unless it is empowered n
by the bylaws to create additional
officers as may be necessary.
(4) Appointive positions other than
those of corporate Officers, _
The board may create appointive
positions other than Positions of
corporate officers but the
persons occupying such positi
considered as corporate officers wit ons are Not
hin the meaning of Section 24
and are not em powered to exercise the
Officers, except those functions functions of the corporate
lawfully delegated to them. The
functionsand duties are to be determined ir
Opinion, Nov. 25, 1993.) -' by the board. (SEC
~
7 |
If, for ‘example, the general manager
listed as an officer, he is to be of a corporation ‘is -not
classi
fied as an employée althoy
he has always been considered
as one of the Principal officers
of
National: Labor Relations S Corporation vs.

Commission, 314 SCRA
WPP. Marketing Communicat 531 [1999]: see
ions, Inc. vs, Goltha, 616:
[2010].) : SCRA 422
(5) Position not expressly mentio
ned amon 8 Officers of the corporati
— Where the bylaws of the on.
corporation provides “and
other officers as the board of directors ma for such
fit to provide for” and “said Off y from time to time does
icers shall be elected ‘by majori
vote of the board of director
s,” ty
general manager which appo
in
(6) Corporate officerlordinary

position under the corporation’ employee. — The creation of the
s charter or bylaws and the electi
on
ordinary employee or off

icer. (Wesleyan University
Maglaya, Sr., 814 SCRA
171 [2017].)

Se)
he ane CUS
T RES) OFFICE
RS 257
Need for express mentio

n Of cor
office in bylaws, Rotate
Commission. (Matling Industri

Coros,? 633 SCRA 12 [2010]; Loc
sin vs. Nissan Lease Phils., Inc
SCRA 392 [2010]; Marc ., 634
II Marketing, Inc. vs. Joson, 662
[2011]; see Barbara vs. Liceo de Cagaya SCRA 35
n University, 686 SCRA 648
[2012].) 3
(2) In most cases the “bylaws may
and usually do provide
for such other officers” and that where
a corporate office is not
specifically stated in the roster of corpor
ate offices in the bylaws
of a corporation, the board of directors may
also be empowered
under the bylaws to create additional office
rs as may be necessary.*
(Nacpil vs. Intercontinental Broadcasting Corporation,
653 [2002].)
379 SCRA
Corporate employees.
(1) ‘Appointed, not elected. — An “office” has been defined as a
Cteation of the charter of a corporation. An employee is appointed,
"The dicta in Tabang vs. National Labor Relations Commission, 266 SCRA 462
(1997)
and Nacpil vs, International Broadcasting Corporation, 379 SCRA 653 (2002)
Controlli are no longer
ji
‘Thee: aa (2) circumstances which must concur in order for an individual to be
“Onsidered a corporate officer; as against an ordinary employee or officer: (1) the creation
of the position is under the corporation’s charter or
bylaws; and (2) the election of the
Officer jg by the board of directors or by the stockholders. (Cosare
vs. Broadcom Asia,
ine, 715 SCRA 345 [2014]; see Malcaba vs. ProHealth Pharma Philip
pines, Inc., 864 SCRA
18 [2018],
)

258 THE REVISED CORPORATIO
N CODE OF THE PHILIPPIN
ES Sec. 24
not elected, unless

h € is also a corporate officer. He
No office and usuall Occupi
is generally employed not by the act
ion of theel
dirit
ectors
e
Central
Nacpil vs. Intercontinental Glo bal Exposition, Inc., 371 P
Broadcasting Corporation, 379 3£SC818.
653 [2002]; Uy vs. Villanueva, RA
526 SCRA 73 [2007].)
(2) Duties of clerical or manual nat
the corporation are its employee ure. — Actually, all officers of
s, although in common usage
term “officers” is meant to refer to those elected by
the
stockholders / members, the board of
0 Vi iti
(3). Presidentas an employee. — When the

example, acts only as such, performin president, ' for
g his regular executive duties
pertaining to his office, he is not con
sidered an employee. However,
a corporation may hire its president
to perform services under
circumstances which will make him an
employee. (SEC Opinion,
May 9, 1989, citing 2 Fletcher, Chap. II,
Sec. 266.1.)
Election of officers by the board.

The directors or trustees of the corporation are
elected to their
office by the stockholders or members to represent them
in the
affai rs of the corporation at the stockholders’ or members’ meeting.
(Sec. 23.)
(1) The Revised Corporation Code requires no particular
designations or titles for corporate officers, except that there must
be a president, a treasurer, and secretary. (SEC Opinion No. 10-11,
March 7, 2011.) The election of the administrative officers, such as
the president, treasurer, secretary, and “such other officers as may
be provided for in the bylaws” is, in turn, entrusted to the board
of directors or trustees.’ Thus, pursuant to the bylaws, the. board
5 W Corporation obtained a loan from X Corporation and Y Corporation

si ea iy Z Cetdratiens the condition in the guaranty agrecen petit ath ae
X requiring all appointments to executive positions in W should be mma s y We
approval of X’s management, though intended to protect theinteres OFS ihe
board of directors of prerogative to elect corporate officers and vio

(2) The articles of inco
provide, however, that all poration of
officers or employees Sha
ll b
stockholders, instead of the
(3) In a nonstock corporati aes ,
elected by the members tanlens oth ny the officers may be directly
: : erwise
of incorporation or the bylaws. (Sec. 91, last patid e for ini the articles
‘
amended by P.D. No. 715.)

(5) The Revised Corporation Code requ
ires that the president
must be a director.(Sec. 24, par. 1.) Other officers may be elected
or appointed although they do not own shares of stock
of the
corporation. | ~ a
'
(6) Section 24 requires an, election of a new set of officers
immediately after the election of the newly elected members of the
board which is, therefore, not bound by the choice of the previous
board. Accordingly, a mere resolution of the stockholders and the
board of directors of a corporation amending the bylaws of the
stockholders and the board of directors of a corporationamending the
appointment of officers by the directors cannot be the subject of a valid contract between
the, directors and eine such appointment. (SEC Opinion, March 18, 1981.)
‘In a case, the board of directors, at its regular meeting declared vacant all corporate
Positions in order to effect a reorganization, and at the ensuing election of officers, the
Tespondent was not reelected as executive vice dies It at ioe that a create
Was fu: intra-corporate in nature and not a cas ismissal. a:
paren a would call for SEC (now Regional Trial Court) jurisdiction; a labor
ispute, that of the National Labor Relations Commission. The matter of whom to elect is
4 prerogative that belongs to the board, and involves the exercise of Seer ae ctelee and
€ faculty of discriminative selection. Generally speaking, a
* -Orporation,-
O
whether as officer or a: is not determined by. the nature
tor employee,
servicesofperformed,sbut
Of the School by the incidents’of the relationship.as they. actually-exist.
Phil Business Administration vs. Leafio, 127 SCRA 778 [1984].)

bylaws of the corporation which would provide that the incumbent

vice-chairman of the board of directors shall automatically be the
chairman of the succeeding board if he is elected as a member of the
said board, is invalid as it would deny the newly elected board the
prerogative to elect the new chairman. (SEC Opinion, Aug. 4, 1995)
(7) There is no prohibition as to the right of any elected boarq
member who is also a stockholder to participate in the electioofn
president or any other officer of a corporation. There is no conflict
of interest considering that a stockholder has the right to vote and
be voted upon in the corporate election process. (SEC Opinion No.
34-04, June 28, 2004.)
Compensation, terms of office, and removal.

(1) It is within the power of the board to fix the salaries of
corporate officers whom it appoints, for the power to employee
must necessarily include the power to grant compensation. It may
likewise grant bonuses to them subject to the test of reasonableness.
(2) The terms of office of these officers may be fixed in
the
bylaws; otherwise, they shall be deemed for one (1) year and
until
their successors shall have been elected by the board.
(a) It would seem that under Section 24 (par. 1.), the term
of the officers of the corporation cannot extend beyond
that
of the directors which under Section 22 is only one (1) year
(par. 1, thereof.), since they shall be elected immediately
after
the election of the board of ‘directors. Section 46(h), however,
permits a corporation to provide in its bylaws a term of office
longer than one (1) year for its corporate officers, other than
directors or trustees.
(b) In the case of the president, since he must also_be
a director, his term of office as such would necessar
ily be
co-t erminus with his term as director,
(c) Ithasbeena long-standing policy of the SEC not to allow
a provision in the articles of incorporation or bylaws providing
for a lifetime term of office of corporate officers to avoid possible
abuse of persons in power. Contracts of employment for life
or indefinite period of officers and other key personnel are
generally invalid because they bind the hands of future board of
directors. They also deprive other members of the corporation

Sec. 24 TITLE III. BOARD OR DI
RECTORS / TRUSTEES/ OF
FICERS 261
of the Opportunity to become

officers of the corporation. (SEC
Opinion, Dec. 16, 1991.)
(d) The SEC has ruled on several occasion
s that holdover
of incumbent cor porate officers whose term
allowable when no successors are elected has expired is
due to justifiable or
valid reas
ons. (SEC Opinion, April 5, 1995.) Non-holding
annual meeting for the election of the boa of the
rd is subj
ect to the SEC
Rules Governing the Filing of Information
Sheet by Domestic
Corporations. Violations of the rules have the cor
responding
penalty prescribed. (SEC Opinion, Oct.
16, 1995.)
(3) The power to remove an officer for cause inheres
in every
corporation as part of its existence. (SEC Opinion, July
3, 2002.)
The power to elect or appoint corporate officers being vested
with
the board, the power of removal must necessarily be exercised by it
as.an incident to its power of appointment. However, in nonstock
corporations, if the officers are elected by the members, as allowed
under Section 91, the power to remove them is also vested directly
in the latter. |
(a) In instances where the term of an officer is not fixed by
contract or in the bylaws, he may be removed at any time with
or without cause at the pleasure of the body. But the power must
not be exercised in bad faith or in‘such a manner-as to work in-
justice. me |
(b) Where the term of an officer as fixed in the bylaws or in
a contract of employment is for more than one (1) year, he has to
be reelected by the board until the expiration of the term; other-
wise, the corporation may be held liable for damages.
(c) The election of successors to.corporate officers after
the expiration of their term does not constitute their dismissal.
The matter of whom to elect is a prerogative that belongs to
the board and involves the exercise of deliberate choice and
the faculty of discriminate selection. Generally speaking, the
relationship of a person to a corporation, whether as officer or
as agent or employee is not determined by the nature of the
services performed, but by the incidents of the relationship as
’Citing De Leon, The Corporation Code of the Philippines Annotated, p. 217 [1993].
ee

262 THE REVISED CORPORATION COD
E OF THE PHILIPPINES Sec. 24
they actually exist. (Phil. School of Business

Administration vs.
Leafio, 127 SCR A 778 [1984].)
.
Positions concurrently held by
same person.
The directors or trustees and officers elec
ted shall perform the
duties enjoin ed on them by law and by the bylaws of the
Any two (2) or more positions may be held con corporation.
currently by the same
person except as provided in Section 24.8
(1) The same person may hold two (2) or
concurrently except that no corporate officer
more positions
shal l act as president
and secretary or treasurer at the same time unle
ss it is allowed in the
Revised Corporation Code. The positions of pres
ident and secret
or treasurer are considered by law as incompatible
with each other
due to the very nature appertaining to each office.
The rationale
behind the provision is to ensure the effective mon
itoring of each
offi cer’s separate functions. (Ong Yong vs. Tiu, 401
SCRA 1 [2003].)
(2) There is no prohibition in the law against
a stockholder
being a director or officer of two (2) or more corp
orations.
(3). The Revised Corporation Code does not prohibit a corp
orate
officer. from. occupying the same position in another.
corporation
organized for the same purp ge However, such a situa
tio ay be
' prohibited by pecial law, the<articles of corporation, or the ylaws
of the corporation.
Acceptance of office and taking of oath

Of office. ©
(1) To make one an officer of a corporation, his consent, and
an
appointment or election, is necessary. ,
(a) A, person who, is appointed/elected without his
knowledge, and who does not accept the office, or act.as an
officer, is not. an officer, although he may have received, stock
after his election. |
(b) No formal acceptance is necessary. If a person enters
upon the duties of an office after his election or appointment, it
§In American law, directors who are also officers of a corporation are old ne
directors. Too many inside directors create the danger of the board being under
control of officers.

sec. 24 TITLE III. BOARD OF
DIRECTORS / TRUSTE
ES / OFFICERS
263
is a sufficient acceptance
or, rather, efficient ground
acceptance, absent Pr for implying
oof to the con
may be presumed ‘without
any ‘act, absent evidence to
contrary.(2 Fletcher, pp. 99-100; 19 CJ.S. 64. the
)
(2) There is no provision in the Rev
ised Corporation Code
which requires taking an oath of office to qualify the elected direct
and officers. Oath of office constitutes no par ors
t of the office itself.
Acceptance of the office will suffice unless
by the corporate bylaws in which cas taking an oath is required
e, they are not de jure but de
facto officers (Infra.) until they have taken the oath.
Jan. 21, 1986.) (SEC Opinion,
Sources of powers or authority

of corporate officers.
The actual authority of corporate officers to bind the
corporation
is generally derived from laws, the articles of
incorpor ation, the
bylaws, or the resolutions of the board,. or authorization from
the
board impliedly given by habit, custom, or acquiesc
ence in the
general course of business. (People’s Aircargo & Wareho
using Co.,
Inc. vs. Court of Appeals, 287 SCRA 172 [1998]; Associat
ed Bank
vs. Pronstoller, 558 SCRA 113 [2008]; Cebu Mactan Member Cent
s er,
Inc. vs. Tsukahara, 593 SCRA 172 [2009].)
(1) Anofficer’s authority to act for the corporation in a particular
matter is determined by his actual office and not by the description
he may, use in acting for the corporation.
This authority may be derived from some provision of statute or
the articles of incorporation. It may be contained in a bylaw, if the
bylaw is deemed not to violate rules of law such as the provision of
the Revised Corporation Code vesting powers of management in
the board of directors or trustees. Authority may also be conferred
On an officer by a resolution of the board of directors or trustees,
Provided that the resolution does not attempt. to delegate non-
delegable powers. (W.L. Cary, op. cit., pp. 190-191.)
(2) Corporate officers shall perform the duties and functions
enjoined by the by law and the bylaws of the corporation. However,
Powers of corporate officers under the bylaws are always subject
to the rule in Section 23 that the board of direct
ors or trustees is
© governing body of the corporation. By virtue of Section 22,

the board may in its best judgment and for the best interest of the
corporation, appoint or authorize the president or another Officer
or agent to act for and on behalf of the corporation, but:in all cases
such officers shall be under the ultimate direction of the board.
(SEC Opinion, Jan. 18, 1995.) One may be an agent of a private
domestic corporation although he is not an officer thereof. (Aboitiz
International Forwarders, Inc. vs. Court of Appeals, 488 SCRA 492
[2006].)
It has been held that where the real party-in-interest is a body
corporate, neither the administrator of the agency or a project
manager could sign the certificate against forum shopping without
being duly authorized by resolution of the board of the corporation.
(Eslaban, Jr. vs. Onorio, 360 SCRA 230 [2001].)
Extent of powers or authority of corporate

_ Officers. é'
(1) Determination of authority. — The full extent of the powers
or authority of any particular officer of a corporation is to ‘be
determined by inquiring into:
(a) The authority which he has by virtue of his office;
(b) The authority expressly conferred upon him or is
inci-
dental to the effectualness of such express authority; and.
~ (c) As to third persons dealing with him without
notice
of any restriction thereof, the authority which the corp
oration
holds the officer out as Possessing or is estopped
to deny.
In determining the authority which certain officers
by virtue of their office, the nature of the corporat may exercise
also be considered.
e business must
:
Besides the foregoing, the act of an
officer though originally
unauthorized may become binding upon the corporation by a
subsequent ratification. (13 Am.
Jur, 875.)
(2) Exemption from liability.
acted for and in behalf of the —Corp
Officers of a corporation who
oration within the scope of
their authority and in. good faith do not become liable
corporation, whether with the
civilly or otherwise, for the cons
their acts. eque
nces of
Those acts are Properly attributed to the
corporation

Sec. 24 T ITLE II. BOARD
OF DIRECTORS / TRUSTEES
/ OFFICERS 265
alone and no personal liability ic;

Electric Cooper ativ ty is incurred by such officers. (Benguet
Inc. vs. National vis
209 Relations, 6 SCRA 719 [1962}) Labor Relations Commission,
unles ority, the corporation is not bound

Code.s) itor has ratif ied
it may be heldthem ex ressly
Pressly oror tacit ivil
tacitly (see Art. 1910, Civi
in estoppel. ( Infra.)
(3) Authority to bind by
contract, — The lack of authority
corporate officer to bind of a
’ the cor porate by contract exe
its na
me, is a defense which sho uld cuted in
corporation. (Lao vs. Cour be especially pleaded by the
t of Appeals, 325 SCRA 694 [2000].)
should first prove by clear evide nce that It
its corporate officers are not
in fact authorized to act in its b
ehalf the burden of evidence shifts to
the other party to prove, for ex ampl
e, that, by previous specific acts,
an officer was cloaked by the corporation
with apparent authority.’
(Westmont Bank vs. Inland C onstruction
and Development Corp.,
582 SCRA 230 [2009].)
Classification of powers or authority

of corporate officers.
The general principles of agency applicable to agents of
individuals govern the relation between the corporation and its
officers or agents, subject to the articles of incorporation, bylaws, or
relevant provisions of law.” (San Juan Structural & Steel Fabricators,
Inc. vs. Court of Appeals, 293 SCRA 631 [1998]; Litonjua, Jr. vs.
sp
*The general rule is that a contract, to be binding on the parties thereto, need not
be in writing, unless the law requires that such contract be in some form in order that it
may be valid or enforceable or that it be executed in a certain form. (see Art. 1356, Civil
Code.) Indeed, corporate policies need not be in writing. But
a verbal promise made
by the corporation, through its chairman and president, obligating itself, as a matter of
policy, to grant petitioner (who retired as general manager, after 36 years of service) the
cash value of his vacation and sick leave credits cannot bind the corporation absent
a
board resolution to that effect. (Kuok vs. Phil. Carpet
Manufacturing Corp., 457 SCRA
465[2005].) sare: (a) consent
Othe det petit jac elton os th peor Oe agents
; ! ; to establish the relationship;
of the parties ionship:
aS a representative and not for himself; and (d) the agent acts baie e aap of his
authority. (Yu Eng Cho vs. Pan American World Airways, inc,
ane He 15 [2005}.)
emere fact that an entity may be a 100% subsidiary corporation
does not necessarily mean that the former is a duly authorized agento oth niisethadeon
°r a contract of a fo to exist, it is essential that the consents so as toof the latter, because
act, (Apex Mining
©., Inc. vs, eas Mindanao Gold Mining Corp., 492 SCRA 355 [2006].)

Sec. 24
Eternal Corporation, 490 SCRA 204 [2006]; Philippine Rabbit

Bys
Lines, Inc. vs. Aladdin Transit Corp., 493 SCRA 358 [2006].)
(1) The inherent authority or power of an officer or agent is taken
to mean that authority to act and bind the corporation which the
officer has by reason of his office, although it may not be sanctioned
by express authority. (Ibid.) :
(2) The express authority of an officer or agent includes every
power or authority expressly conferred upon him by law and the
bylaws of the corporation.
(3) The implied authority of an officer or agent of a corporation
includes all such incidental authority as is necessary, usual, and
proper to effectuate the main authority expressly conferred.
(a) A corporate officer entrusted with the general
management and control of. the corporate. business has the
implied authority to act or contract for the corporation which
may be necessary or appropriate to conduct the ordinary
business. If the act or contract comes within corporate powers
but it is done without any express or implied authority therefor
from the bylaws, board resolution or corporate practices, such
unauthorized act or ‘contract does ‘not bind the corporation
unless ratified by the board of directors or the corporation may
be held ‘in estoppel (Infra.) from denying as against innocent
~ third persons the authority of the corporate officer. (Rural Bank
of Milaos vs. Ocfemia, 325 SCRA 99 [2000].)
(b) An officer of a corporation who is authorized to purchase
the stock of another corporation has the’ implied. power to
perform all other obligations arising there from such as payment
of the shares of stock. (Inter-Asia Investments Industries, Inc.
vs. Court of Appeals, 403 SCRA 452 [2003].) .
(4) When in the usual course of business of the corporation, an
officer or agent is held out by such corporation, or has been permitted
to act for it in such way as to justify third persons who deal with him -
in assuming that he is doing an act or making a contract within the
scope of his authority, the corporation is bound even though such
officer or agent does not have the actual authority to do such act or
make such contract. This authority is known as apparent or ostensible .
authority. It is essentially a question of fact.

267
or agent’s authority." (13 Am.

Jur. 869-871 ; BPI Family Savings
Bank, Inc. vs. Fir
st Metro Investment Corp., 429 SCR
Hydro Resources Corp. vs. Nati A 30 [2004];
onal Irrigation Administration,
44 1'SCRA 614 [2004]; D evelopment Bank of the
Phils. vs.'Ong,
460 SCRA.170 [2005].)
(b) The authority of a corporate officer to‘act for and bind
the corporation may be presumed 'from acts of recognition in
other ‘instances where the power was in fact exercised. Where
similar acts have been approved by the board of directors as a
matter of general practice, custom, and policy, a corporate officer
_ may bind the company without formal authorization of the
board.” ! |
(c) Apparent authority is derived not merely from corporate
practice (defined as frequent or customary action). Its existence
may be ascertained through: 1) the general manner in which the
corporation holds out an officer or agent as having the power
Thus, where the board secretary sent to VF a telegram purportedly signed by the
general manager of the GSIS accepting VF's offer to liquidate his daughter’s mortgage
indebtedness and pursuant to such telegram VF paid P30,000.00 for which 4 receipt
the telegram ishould
was issued by the GSIS and subsequently, /GSIS claimed that of the board’s
be disregarded in view of its failure to express accurately the contents
resolution due to the error of its minor employees and that the board secretary sent the
: f the general manager, it was held that GSIS could
Ease hi by the telegram within the general manager’s
: sactions would speedily come to a standstill where
every eet aia pe ipeeantnm held duty bound to are a - aE is
face: 0 pacer
Tesponsible officers no matter how regular they should appear on sir
Corporation Ye a6) i CRA
vs, GSIS, 7 SCRA 577 [1963]; see Maharlika Publishing 9 [1996].)
553 [1986]: First Phil. International Bank vs. Court of ppc
ie ; 7 Aa ractice of the corporation aE ow Tore manager to
es
Nepotiate and wie T epact! in its copra trading Pe retnoe S iaat ; 2 ;OY mea on
f
beh; alf without a board d approval,
prior ap E tha Pein
it was theheldbylaws’ requirement of prior approval.
. : id aside :
meen acquiescence, peachy aximo M. Kalaw, 20 SCRA 987 [1967]; see Lipat vs.
P ard of Liquidators vs. ‘402 SCRA 399 [2003].)
ACific Banking Corporation,

to act or, other words, the apparent authority to act in general,

with which it clothes him; or 2) the acquiescence in his acts
of a particular nature, with actual or constructive knowledge
_ thereof, whether within or beyond the scope of his ordinary
powers.
It requires presentation of similar act(s) executed either in
its favor or in favor of other parties. It is not the quantity of
similar acts which establishes apparent authority but the vesting
of a'corporate officer with the power to bind the corporation.
(People’s Aircargo & Warehousing, Co., Inc.-vs. Court of
Appeals, 297 SCRA 170 [1998]; Advance Paper Corporation vs.
Arma Travels Corporation, 713 SCRA 313 [2013].)
3 (d) Where a power is one, which would. otherwise be
possessed by an officer, it is generally held that a bylaw (or
a board. resolution or articles: of incorporation. provision)
restricting.
Thus, a corporation was held bound by a note signed by the
president and secretary where they had signed numerous
other
notes which had been paid, although there was no
evidence that
the plaintiff knew of this fact, notwithstanding a prov
ision of its
bylaws requiring checks or notes to be signed by ,the
president
and _ treasurer. (Ibid., citing Produce Exchange Trust .Co. v.
Bierberbach, 176 Mass. 58 N.E. 167 [1900].)
(e) The rule that knowledge of an officer
is considered
knowledge of the corporation applies only
whenthe officer
is acting within the authority given to him
corporation.
or her by the
The corporation will not be bound by una
uthorized
actions made on its account. (Univers
ity of Mindanao, Inc. vs.
Bangko Sentral ng Pilipinas, 778 SCRA 458
[2016].)
Extent of authority of particular Officers.
(1) Chairman of the Board. — The concept
of board chairman and
his functions as an executive vary So widely
in different companies
as to be indefinable. There is no settled practice.
(2 Fletcher, p. 541;
Ballantine, p. 142 [1946 ed.].)
(a) The typical pattern of executive duties is that the
president or the chairman of the board is designated usually
by the bylaws but sometimes, in board resolutions, as the

269
Opinion, May 15, 1985.)

(b) Where the president is the chief
typically, the dutie S of the chairman rela executive officer,
te to presiding at
_ meetings of the board and of commit
tees of which he is a
member, and of stockholders or members,
and carrying out such
other duties as the board shall assign. The duty of the cha
of the board as presiding officer is not an execut irman
ive one.
Thus, where the functions of the chairman of the
board
as provided in the bylaws consists merely of presiding at
the meetings of the board or of committees of which he is
a
member, an alien may qualify as chairman of the board in such
enterprises. (SEC Opinion, May 15, 1985, citing 2 Fletcher, p. 542
and Ballantine & Sterling, supra.)
(c) If a vice-chairman is appointed, he presides at the

meetings absent the chairman. He shall exercise such powers
and perform such duties and functions as the board may, from
time to time, assign to him.
(2) President. — Generally, a president of a corporation is
defined as the one placed in authority over others, a chief officer, a
Presiding or managing officer.
Customarily, he is given general superv
ision and management
of the business affairs of the corporation.
(SEC-OGC Opinion No.
13-15, Nov. 3, 2015.)
The president of a corporation is the pri
ncipal executive officer
of the corporation. In general, he supervises and controls the
Usiness and affairs of the corporation.
Fro th r foregoing, ie sen
© inferred that the position of a corporate prem sid ent is reposed with
uties and responsibilities provided by the law and jurisprudence,

which can be further expanded by its bylaws. Therefore, it serves

not merely as a title of prestige or status, but also serves as a basis
for its stockholders and the other persons/entities transacting with
it to. determine whether such person is clothed with authority to
perform the duties conferred by the law and the functions given
by the bylaws, within the general objectives of the corporation’s
business. (SEC-OGC Opinion No. 13-15, Nov. 3, 2015)
The president is the only officer required by law to be a member
of the board of directors. Upon the expiration of his term as member
of the board, he automatically ceases to be president for lack of
qualification. (Sec. 22, par. 2.)
(a) The powers of the president of the corporation are such
only as are conferred upon him. by ,the board of directors or
trustees or vested in him by the bylaws. If there is nothing in
the bylaws conferring any. particular authority upon him, he
has from his office and alone no more power over the corporate
property and business than has any other director. (Fisher,
op. cit., p. 357.) It is the board of directors or trustees, not the
president, that exercises corporate powers. (Safic Alcan & Cie
vs. Imperial Vegetable Oil Co., Inc., 355 SCRA 559 [2001].)
However, according to 'the view, taken by many authorities,
regard must be had to the fact that presidents of corporations
are often given general supervision and control of the busin
ess
as chief executive officers from which is to be inferr
ed that
contracts or acts made or done by the president in the ordin
ary
course of business are presumed to be duly authorized
unless
the contrary appears." (2 Fletcher, p. 443; SEC-OGC
No. 23-14,"
‘August 26, 2014.) Unless there is a charter or bylaw
provision to
a the contra ry, the president May, as a rule, bind the corpo
ration
Ay
_., "Even absent express delegation by the boar

d or implied authority by ratification,
unless there is a charter or bylaw provision
to the contrary, the president, as such, may,
as a general rule, bind the corporation by a
contract in the ordinary course of business,
provided that the same is reasonable under
the circumstances. (see Prime White Cement
Corp. vs. Intermediate Appellate Court
, 220 SCRA 103 [1993].) Furthermore,
dealing with the president of a corporation is entit a person
led to assume that he has the authority
to enter, on behalf of the corporation, into contr
acts that are within the scope of the powers
of the corporatio
n. (People’s Aircargo & Warehousing, Co., Inc. vs.
Court of Appeals, 297
SCRA 170 [1998].) r n
“Citing De Leon, The Corporation Code of the Philippine re
s Annotated, p. 261 [2006].

Sec. 24 TITLE Ill: BOARD
OF DIRECTORS /
TRUSTEES/ OFFICE
RS 271
| € corporation, it must, as
shown that he was duly a gene
authorized by the board ral rule, be
of directors.
(d) A contract entered into

by the president who was
the chairman of the board, also
in behalf of the corporation,
held void absent any prov . was
isio n in the bylaws conferring
him the authority to enter upon
into such contracts independ
of the board of directors, pa ently
rticularly because the corpor
had a general manager who, ation
under its bylaws, was given the
active management of the co
rporation, there being no evid
adduced to show that th ence
e corporation clothed him with ap
power to act for it. (Yao Ka Sin parent
Trading vs. Court of Appeals,
209 SCRA 763 [1992].)
(e) Absent specific provisions
governing the situation
and where circumstances of an eme
rgency nature arise which
Necessitate the exercise of discretion,
the rule on agency may
be applied. (SEC Opinion, June 11, 1974.) Article 188
“The agent must
1 provides:
act within the scope of the agency
. He ma
do such acts as may be conducive to
the accomplishment of the
Pur pose of agency.”
(f): The unauthorized act of an agentis subject to
ratification,
(Art. 1910, Civil Code.) Such ratification is
implied’ from the
acceptance of benefits as where a corporat
ion deposited in its
Current account the proceeds of a loan
allegedly without authority, retained obtained by its President,
and disbursed the same

for the corporate purposes. Such use may bebe |taken as evidence
to be lie the claim of lack of authority. (De Asis & Co. vs, Court
of Appeals, 136 SCRA 599 [1985].)
(g) Unless the bylaws provide otherwise, in the absence of
the chairman, the president shall preside at all meetings of the
directors or trustees. (Sec. 53.) or in the absence of the chairman
or vice-chairman.
(h) The president of a corporation, by the authority
of his
office alone, has no power to delegate the
powers and duties
of his position as president to any member of
the board of
director or trustees. Should he become incapacitated
to perf
orm
his functions, what should be done,
in the absence of a Vice-
president or any specific Provision in the bylaws
is for the board to temporarily elect on the matter,
an acting president.
Nevertheless, if the director, who
was allowed to discharge
the duties of president, performed his fun
over the board meetings without ctions and presided
objection on the part of the
other members of the board, it wou
ld seem that if no irregularity
has been committed by him, his
past actuations need not be the
subject of further inquiry. (SE
C Opinion, May 21, 1971.)
(i) In some corporations, the
chairman is made the chief
(k) To. allow.

three (3), more co
would each be called as Tporate officers, who
“President” co uld mislea
confusion as to who shou d and create
ld perform the duties en
the law to be pe rformed by the president, umerated by
qualifications/ disqualificati and as to whom su
ons must apply. (SEC-OGC Opinioch
No. 13-15, Nov. 3, 2015.) n

Sec. 24 TITLE I. BOARD
OR DIRECTORS / TR
USTEES /OFFICER
S 273
(3) Vice-President.
considered as an Office
— The vice- President has always been
to the president.
Pinion, May 20, 1975

774.) citing 2 Fletcher, p
He has no authorit
y by virtue of his of
contracts in behalf fice alone to enter in
of the Corporation. to
Ho
(b) Where the bylaws

provide that it
(4) Secretary. — The secret

ary must be a tesident and
of the Philippines." The as
sumption is that the sececrreta a citizen
Custodian of corporate reco ry , being the
rds, should at all times be
the regular conduct and op available in
erations of the corporatio
allowed to act as president an n. He is not
d secretary at the same time.
He need not be a director unl (Sec. 24.)
ess req uired by the bylaws.
"No aiizenahip
requirement is im
posed by the Revi
T€spect to other corpor sed Corporation
ate officers. However, in en Code with
totally or Partially reserv terprises or industries wh
ed for Filipino citizens, the elec ich are
or members of the board of tion of aliens as officers and/
°f the Constitution-a directors is prohibited or re
st
lipino citizen, a Filind special laws. (see Sec. 13,) Wher ricted under Specific Provisions
pino with dual citize
nship may bee elan officer Is requir
ected Provided thated prto bea
Such election he/she shall ha ior to
ve complied with the requir
€tention and Re-Acqui
sition Act of 2003 (R ements under the Citizenshi
.A, No. 9225.) and its impl p
Tegulations.” ementing rules

Seavy
(a) It is generally the duty of the

secretary of a Corporation
to make and keep its records and to make Proper, entries o¢
the votes, resolutions and proceedings
members) and directors
of the shareholders (or
(or trustees) in
corporation and all other matters req the management of the
uired to be entered on the
records. (Ballantine, p. 142.) As custod
corollarily, he keeps the stock and ian of corporate Tecords,
‘tr
proper and necessary entries. (Torre ansfer book and makes
278 SCRA 793 [19
s, Jr. vs. Court of Appeals,
97].)
(b) He issues notices of meetings and
has custody of the
corporate seal which he uses when
attesting the signatures of
the officers to important documents: The
other functions, secretary may perform
, |
Where the corporate bylaws state, amo
secretary shall also’ “send notices ng others, that the
of all regular and special
meetings of the member s and of the board of directors,”
connotes that the principal signat this
ory to such notices is the
corporate secretary. The term
“to send” may be deemed
synonymous with “issuance” of
the notices, in accordance with
sound corporate practices, suppor
ted by jurisprudence. (SEC
Opinion, Oct. 1, 1981.).
tortuously slow an
d
Court of Appeals, 26
7 SCRA 380 [1997].)
(e) The secreta
the corporation un
less h
(Bal
lantine, Pp. 142.)
Th

275
(a) The treasu

re of the co
entrusted wit ‘poration is the proper office
h the authorit
yto receive and keep the
r
the corporation money of
ang to disburse
them as he may be au
thorized.
is (b) Tewiewy is taken that
he has no inherent power
© corporation by contracts or to bind
corporation. (Ballantine, to
143: 13borrow money in behalf of the
an assistant treasurer. P89; 1S Am. Jur. 886.) There may be
effect the transfer of corporate funds out

of the country, for, in view
of his status
as a non-resident, he can easily leave the
country and
escape. (SEC Opinion, May 27, 1991.)
A comptroller differs from a treasurer. The former is
said to be
an officer appointed to control accounts and to check expe
nditures.
By virtue of his office, the authority of a comptroller is restricted
to
doing those things which are usual and necessary in the performance
of his duties. (19 Am. Jur. 24.599.) !
(6) General Manager.— The general business of corporations is
frequently entrusted to the management of a general manager or
managing officer who has power to bind the corporation by acts
within the scope of his apparent authority. Accordingly, the general
manager or managing officer has very broad powers, especially as
far as third persons are concerned.
oC tt has bazopine d, that there is all the more reas

on for the treasurer to also possess
is ,
eine ; . Being the holder of the purse, the treasurer is
quae bens AP a cate ian and disburse funds of the corporation.
ed with the autho rovide to local investors ample protection from the
ermore, there is a need IP eign nationals. Thus, while the Revised Corporation
danger of getting victimized by:
Code does not impose igre tapecy Faeerahid requirement, nevertheless, considering
corp¢porate April
* Nature of his functions, g00d practice dictates that the treasurer must be a
13, 1989 and Jan. 30 1990.)
"sident of the Philippines. (SEC Opinions,

transaction of the comp
any’s business, This
broadly de scribed as being co -ext Power has been
corporation itself unless ensive with the POwe
speci fically restricted rs of the
.
(b) He has implied au
thority to make any co
necessary or appropriat ntract or do an
e to the conduct of the
of the director or trustee. (SEC

26, 1969, citing 19
C.J.s, 96.) Opinion June
(2) Through a receiv ’
er, — Where the corporation is under
Teceiv ership, the appointm
terminates at least, fo en t of a receiver for a co
r the most part, the powe rporation
officers as to the Prop rs of the corporate
erty in po Ssession of the
receiver where the

Occupy the position of a trustees, its
authorized representative ma y be
elected as member of the board
if, under the bylaws, such r €presentative is also consid
ered as a
member of the corporation to qualify him as a tru
stee. (SEC Opinion,
Sept.2, 1991.) In such case, the trustee is not the
corporation but the
representative.
Sec. 25. Report of Election of Directors, Trustees and

Officers, Non-Holding of Election and Cessation from Office.
— Within thirty (30) days after the election of the directors,
trustees and officers of the corporation, the secretary, or
any other officer of the corporation, shall submit to the
Commission, the names, nationalities, shareholdings, and
residence addresses of the directors, trustees and officers
elected.
The non-holding of elections and the reasons therefor
shall be reported to the Commission within thirty (30) days
from the date of the scheduled election. The report shall
specify a new date for the election, which shall not be later
than sixty (60) days from the scheduled date. (N)
date has been designated, or ifthe rescheduled
aiden is likewise not held, the Commission may, upon
aflcal f or
the application of a stockholder, member, er , Te
trustee, and after verification of the
that Sectors
-holding of the election, summarily orderPowe rit sue Buc
held. The Commission shall have the ee ing
uding oneers
Orders as may be appropriate, incl
the issuance of a notice stating the Miele Ree: 9 ane
election, designate
det
d pres
erm ina tio n ofo atec
stockh o ldate or members
kivo
or date s for the
entitled to vote. (N)

—g,, 25
Notwithstanding any provision of the articles of

incorporation or bylaws to the contrary, the shares of stock
or membership represented at such meeting and entitled to
vote shall constitute a quorum for purposes of conducting
an election under this section. (N)
Should a director, trustee or officer die, resign or in any
manner cease to hold office, the secretary, or the director,
trustee or officer r ion, shall, withi Vv
days from knowledge thereof report in writing such fact to
)
the Commission.
Report of elections and vacancies.

Section 25 requires that:
(1) The secretary or any other officer of the corporation shall
submit to the SEC the names, nationalities, shareholdings and
residence addresses of the directors / trustees (see Sec. 13[7].)
and
officers elected, which must be done within 30 days after the meeting
in which they were elected;
(2) The non-holding of elections and the reasons thereof shall be
reported to the SEC within 30 days from the date of the-scheduled
election. The report shall specify a new date for the election.
(3) If no new date has been designated, or if the reschedule
d
election is likewise not held, the SEC may, upon the application of
a stockholder, member, director or trustee, and after verification
of
the unjustified non-holding of the election, summarily order that an
election be held. The SEC shall have the power to issué such orders
as may be appropriate in order that an election be held (see OGC-
SEC Opinion No. 49-19, Oct. 2, 2019); and :
(4), Should a director / trustee or officer die, resi
gn, or any manner
cease to hold office, the secretary or director /trustee or officer of
the corporation, shall within seven (7) days from know
ledge thereof
report in writing such fact to the SEC.
The filling of vacancies in the office
of director or trustees is
governed by Section 28.
Objective of Section 25. .

The objective sought to be achieved by Section 25 is to
public information, under sanction of oath of responsi give the
ble officers

. it ites. > ST DURECTORS/ TRUS
TEES/ OFFICERS
279
264 SCRA 1 [1996]: M

onfort Hermanos Agricultural
Corp. vs. Monfort III, Development
434 SCRA 27 [2004]; see SEC-OG
No. 9-14, June 2; 2014:) C-Opinion
e voluntarily or of their own

volition. However, if the members’ non-attendance results to no
quorum for at least two (2) attempts at meet
electing directors/ trustees, Sec ings for the purpose of
tion 25 of the Revi
sed Corporation
Code applies. (SEC-OGC Opinio
n No. 43-19, Sept. 19, 2019.)
Emergency quoruni.f% dinate ldy | and uch

To solve the recurring problem of “no quorum-no
meeting,”
the Revised Corporation Code provides for an emergency
quorum
under paragraph 4 for purposes of conducting an election: It stat
es
that notwithstanding any provision of the articles of incorporation
or bylaws to the contrary, “the shares of stock or membership
represented at such meeting and entitled to vote shall constitute a
quorum for purposes of conducting an election under this section.”
Based on this provision, if no election is held consecutive times,
or if the non-holding of election is unjustified, the SEC may, upon
application of a stockholder or member, director or officer and after
verification of the unjustified non-holding of the election, summarily
order that an election be held. The shares or members represented
at such a meeting and entitled to vote shall constitute a' quorum
for conducting an election. (SEC-OGC Opinion No. 37-19, Sept. 13,
2019.)
_ Disqualification of Directors, Trustees or Officers.

- ee shall be disqualified from being a director,
er of any corporation if, within five (5) years
ee ie eiccilon or appointment as such, the person
3 )
was:
ment;
(a) Convicted by final judg

280 THE REVISED CORPORAT
ION CODE OF THE PHIL
IPPINES Sec. 26
(1) Of an offense punishable by imp

a period exceeding six (6) yea
risonment for
rs;
(2) For violating this Code; and
(3) For violating Republic Act No: 8799
otherwise
known as “The Securities Regulatio
n Code”;
(b) Found administratively liable for any offense
involving fraudulent acts; and
(c) By a foreign court or equivalent for

eign regulatory
authority for acts, violations or miscon
duct similar to those
enumerated in paragraphs (a) and (b)
above. (N, from Par. 1
to [c].)
The foregoing is without prejudice
to qualifications
or other disqualifications, which
the. Commission, the
primary regulatory agency, or the
Philippine Competition
Commissio n | may, .impose , in, its promotion
corporate governance or as a sancti of good
on in its administrative
Proceedings. (N)
Disqualification of directors/trust
ees
or officers.
Section 26 disqualifies as a dir
ector’ or trustee a person:
(1)' convicted by final judgment
of an offense punishable by
imprisonment for a period exceed
ing six (6) years or for violating
( the
, or the Securitie
s Regulation Code (R.A.
No. 8799.); (2) found administrativel
y liable for an offense involving
fraudulent acts, or (3) found guilty
by a foreign court or regulatory
authority. of acts, violation
s or misconduct similar to those
The purpose is to avoid the above.
election or appointment of un
officers in view of the worthy
fiduciary character of their pos
itions.
The offense need not involve
moral turpitude.! The rule app
regardless of the nature or lies
classification of the offense
as long as
In the exercise of its

corporations, the SEC power of suspension,
reg
ma y require certificates of goo ulation and control over all
trustees and officers d moral character for director
of corporations, s/
™~

Sec. 26
The S i
Compeuton enemmis
Nesiaon) arTee Buemlapotowe
ry reagdencyby, Seanctdionthe26 Phto ilippine
qualifications or other impose
disqualifications in the
promotion of
good ‘corporate 8Overnance or « y a l ? 2
.
proceedings. as a san \ction in its i administ :
obs rative
De facto directors/trus
tees Or Officers.
A person is an officer or director de facto where
of the office and is exe Tcising the he isin possession
duti
es thereof under color or
appearance of right, butis not an officer or
director de jure on account
of irregula rity in his election; or ineligibility; or ‘disqualific
resulting from a non-residence or not bein
ation
g a stockholder; or failure
to take an oath of office or file a written atceptarice
of the trust when
required by statute or charter (19 CJ.S. 78.) or corporate
bylaws.
(1).,Where, for example, the directors are elected before the
amendment increasing the number of directors had become effective
upon its approval by the SEC (see Sec. 15.) and they act as such
without objection, they are de facto directors. (see SEC Opinion, Oct.
21, 1974.) oO
(2) Directors elected through voting. by the government of
shares sequestered by it and who in good faith assumed their duties
as such are de facto officers. Only the owners of the shares or their
duly authorized representatives or proxies may vote the sequestered
shares, Sequestration does not divest the owners of their ownership
of the shares, and the election of the board of directors is distinctly
and unqualifiedly an act of ownership. (Cojuangco, Jr. vs. Roxas,
195 SCRA 797 [1991].)
(3) Conversely, a person is not a de facto officer or director where
he is not holding office under some appearance or color of right, or
where he is not in actual possession of the office, or where he is not
a functions
i generallly
and performing the dutiei s thereo of genera l
a ae kes from the single instance in which his authority is
questioned.
“ “de facto officer”
icer” isi common ly applied3 to
Gees
i term
officers of a private corporation, yet, technically

PHILIPPINES Sec, 26
speaking, it applies to a public officer only. Generall

y, there cannot
be ade facto office, nor can there be a de facto offic
er,
Corresponding legally constituted office. (19 CJ.S where there ig no
. 78.)
Powers and rights of de facto officers
in general.
(1) All powers of the jure official. — De facto dire
may exercise all powers of de jure official
ctors and Officer
s so as to bind all persons
who acquiesce in their management and dire
ction, and they may
continue to exercisethese powers in such binding manner
are, through proper legal steps, removed until they
from office and replaced
by other legally constituted directors and officers.
Co., 30 F. Supp. 964 aff'd. 115 F [2d] 158; (In re Pearl Coal
2 Fletch er, p. 214, cited in
SEC Opinions, Oct. 21, 1974 and July
4, 1975.)
(2) Powers or acts within the scope
of corporate business. — A de
facto board of directors. may legally
perform such acts as are within the
scope of the business of the corporati
ons; and a de facto president may
such acts pending a det do
ermination of who are the lawful
the company, as are necessary to officers of
keep its machinery in motion.
Thus, a de facto board of directors
the stockholders to consider and may call a special meeting of
act upon any matter pertaining
the corporation, as to which, und to
er the law, the stockholders may
ock is registered in one’s name
on the
on capital stock.
(3) Right to possess office and to
salary. — While de facto officers
have the same powers as de jure
officers, they do not have the sam
tights since they may be ousted e
from office in a proper proceedin
and they cannot recover the g
salary of the office.
|
faith “are thereby legally entitled declared de facto officers in good

including salary, fees and other to the emoluments of the office
co
until they vacate the same” (2 Fletchmpensation attached to the office
er, pp. 213-214.) or are removed
in an action for quo warranto or
Persons, replaced by the election of other
\

Sec. 27 TITLE II, BOARD OF
DIRECTORS / TRUSTE
ES / OFFICERS
283
Validity of contracts an d acts

of de facto
offi cers.
scope of their authority, are jus

t as binding as the acts of the
de jure; at least officers
so far as third Persons are con
cerned. (Consumers
Alt. Co. v. Riggings, 208 Cal. 537, 282
Pac. 954; 2 Fletcher, p. 214.)
(1) Inasmuch ‘as de facto officers are hel
by the corporation as its tepresent d out to the world
atives and the corporation
has it within its power to Oust
a de facto officer and prevents
him from acting as its officer it is
unquestionably the rule that a
corporation is bound by the acts
of its de facto officers.
(2) Furthermore, so far as third
persons are concerned, the
rule that th e acts of de facto officers are bin
ding in their favor is
ordinarily merely another way of sta
ting that the corporation
is bound; and if a contract between de
facto officers and third
persons binds the latter, then it cannot
‘be attacked by the
cor poration as the act of de facto officers,
This rule seems based on the principle of esto
ppel. Thus, it
is no defense to the foreclosure of a corporate mor
tgage that the
directors authorizing the mortgage were not lega
lly elected as
such. (see 2 Fletcher, pp. 217-220; 19 CJ.S. 76-78.)
Sec. 27. Removal of Directors or Trustees. — Any

director
or trustee of a corporation may be removed
from office
by a vote of the stockholders holding or representing
two-thirds (2/3) of the outstanding capital Stock, or if
a
nonstock corporation by a vote of two-thirds (2/3) of the
members entitled to vote: Provided, That such removal shall
take place either at a regular meeting of the corporation or
at a special meeting called for the Purpose, and in either
Case, after previous notice to stockholders or members of
the corporation of the intention to propose such removal
at the meeting. A special meeting of the stockholders or
members for the purpose of removing any director ortr
ustee
must be called by the secretary on order of the presiden
t
Or upon written demand of the stockholders representing
or holding at least a majority of the outstanding capital
Stock, or a majority of the members entitled to vote.
If there
is no secretary, or if the secretary, despite demand
fails or

refuses to call the Special meeting

or to give any notice
thereof, the stockholder or member of the corporati
on
Signing the demand may call for the mee
ting by directly
addressing the stockholders or mem
bers. Notice of the
time and place of such meeting, as
well as of the intention
to propose such removal, must
be given by publication
or by written notice prescribed in the
Code. Removal may
be with or without cause: Provided, That removal without
Cause may not be used to deprive
minority stockholders or
mem bers of the right of representation to
which they may
be entitled under Section 23 of this
Code. (SA)
The Commission Shall, motu pro
prio or upon verified
complaint, and after due not
ice and hearing, order the
removal of a director or tru
stee elected despite the
disqualification, or whose dis
qualification arose or is
discovered Subsequent to an
election. The removal of a
disqualified director Shall be
without prejudice to other
Sanctions that the Commissio
n may impose on the board
of directors or trustees
who, with knowledge of
disqualification, failed to rem the
ove such director or trustee.
(N)
Power of Stockholders
or members to remove
directors or trustees
(1) Generally. — Section
27 prescribes the rules on
the directors or trustees of removal of
the corporation, by Providin
others, the persons author g, among
ized to call the meeting
of votes required for and the number
removal.
the ultimate masters, not

the directors, “to make the
S0vernment responsible to corporate
the ow
to continue in office to the comp ners”. If the directors have a right
letion of their term, despite
a change
The non-election of a director or tru

year is not a case of dismissal stee after serving for one (1)
or removal but expiration of
his term.
5|

Sec. +7 44ibuh, ill, DYAKD OF DIRECT
ORS / TRUSTEES / OF
FICERS
285
the minority against any abu

cumulative voting in the remo
The rule does not apply wh
ere the removal is initiated
minority stockholders or me by the
mbers themselves.
(3) Where removal done by elec
ting replacement. — The incumbent
directors or trustees cannot be tem
oved merely by electing a new set
of directors or trustees.
The reason is that the directors or truste
es can be removed onl
by at least 2/3 of the outstanding capital stock or of the
entitled to vote (Sec. 27.), while vacanc members
ies in the board, when they
exist, can be filled by mere majority (or
plurality) vote. (Sec. 23.)
.
Furthermore, the Revised Corporation Code
‘requires that the
removal “shall take place either at a regular or spe
cial meeting
called for the purpose,” and “after previous notice to
stockholders
or members of the corporation of the intention to pro
pose such
removal at the meeting.” (Roxas vs. De la Rosa, 49 Phil
. 609 [1926].)
(4) Where removal done for disqualification. —-A director or trustee
can be removed by following the procedure in Section 27. In case
of
disqualification by operation of law, there is no need to follow the -
Procedure. A mere declaration of such disqualification is sufficient
to remove him from office..(SEC Opinion, Oct. 6, 1994.)
(5) Where replacement elected not qualified. — It has been held

that a director removed by the stockholders who elected another
Person in his place cannot be compelled to vacate his’ office,
Where is shown that the successor is not qualified not being the
Owner of any share in the corporation and because under the
bylaws of the corporation, “directors shall serve until the election
and qualification of their duly qualified successors.” (Detective and
Protective Bureau, Inc. vs. Cloribel, 26 SCRA 255 [1968];
see Sec. 22:) :
Under Section 27, however, the removal of a director does not °
pend upon the qualification of his successors if the removal has
been duly made.

(6) Where authorized officer refuses, fails or neglects to call a meeting

— The SEG, in exercising its regulatory and rulentuvieene
to implement the Revised Corporation Code, is Seca to cal]
a special meeting upon petition of a stockholder or ae er and
upon showing good cause when there is an officer authorized to
call a meeting and that officer, despite demand, fails, refuses, fails
or
neglects to call a meeting. (Bernas vs. Cinco, 761 SCRA
104 [2015]:
see Sec. 49, par. 7.)
Power of the SEC to remove

directors or trustees.
(1) The SEC is given the power, motu
proprio or upon verified
complaint, and after due notice and
hea ring,
to.order the removal
of a director or trustee elected despite the
dis
disqualification, or whose
qualification arose or is discovered
after an election.
(2) The removal of a disqualif
ied director shall -be without
prejudice to other sanctions that the SEC
of directors or trustees who, with may i
knowledge of the disqualificatio
failed to remove such director or truste n
e.
Power of the board to
remove a member.
The board of directors (or tru
stees) has’ no power to’ remo
one (1) of its members as
director (or trustee), (Bruch
ve
Guarantee Credit Corp., ’v. National
116 A, 738.) Neither can
vacancy caused by remova l effected
it replace the
by the stockholders or memb
of the corporation. (see Sec
, 28.) ers
The reason is that as
Officers de Tiving their
stockholders (or member
s), they can be re
title‘ from the
that appointed them. (Ib moved only by the power
id.) Since the law expres
authority to stockholders sly confers the
usurp or disregard the
o; me mb er s, the bo ar d cannot indirectly
same. ( SEC Opinion, May
23, 198 5.)
Power of court to remo
ve directors
or tr ustees,
(1) General rule. — The
confer expressly upon Revised Corporation Co
the courts the de does not
trustee or any appoin
ted officer of a cor
mismanagemen t of its affairs,
Temoval is in the co
rp

EME ERD J NIE ILBND
287
“The reason for this rule ;

‘wer thet ete: sho is
uld be no that if the courts were given such
feason why the courts should
also be given the power to dec; not
‘houldb e substitu ting cm €signate the one to fill the office, which
jud
stockholders or member” “| Sment of the court for that of the
others appointed in their place

jurisdiction. (2 Fletcher, pp. 189-190.)
But where the properties and assets of the corporat
ion are
amp ly protected by the appointment of a receiver, such rem
unnecessary and unwarranted because of thé provisio oval is
ns prescribing
the manner of removal of directors or trustees, (see Ange
les vs.
Santos, 64 Phil. 697 [1937].)
Requisites for removal of directors or trustees.

Section 27 specifies these requisites for the removal of directors
or trustees:
(1) The removal must “take place either at a regular meeting of
the corporation or at a special meeting called for the purpose”;
(2), There must be “previous notice to the stockholders holding
or representing two-thirds (2/3) of the outstanding capital stock,
or if the corporation be a nonstock corporation, by a vote of
two-thirds (2/3) of the members entitled to vote;”
(3) The removal must be “by a vote of the stockholders holding |
or representing two-thirds (2/3) of the outstanding capital stock, or
by a vote of two-thirds (2/3) of the members entitled to vote.”
While a director or trustee can be removed from office as
Provided in Section 27, he cannot be removed as stockholder of
the corporation, depriving him of his ownership of shares of stock,
Without due process of law.
Requirement of notice of meeting.

(1) For removal. — Section 27 requires that the notice of the
Meeting called for the removal of any director or trustee must

expressly state “the intention to propose such removal.” A notice

of a special meeting to consider amendments of the bylaws and
“reorganization of the board of directors” cannot be considered as a
notice contemplated under Section 28 as it couched in general terms
and, therefore, the action of the members which passed a resolution
declaring vacant all the seats in the board and nominated and elected
a new set of directors, is not proper and may be questioned by the
directors who did not attend the meeting as this is tantamount to
their unjust removal from office. (SEC Opinion, Dec. 3, 1971.)
“Previous notice... of the intention to propose such removal” is
not required where the meeting is a regular annual meeting. There is
no removal involved when a director or trustee is reelected. (Supra.)
(2) For choosing replacements. — When the vacancy arises because
of removal by the stockholders or members, the election may be
held on the same day of the meeting authorizing the removal and
this fact must be so stated in the agenda and notice of the meeting.
(Sec. 27.) :
Resignation of directors or trustees.

(1) Right to resign. — The fact that the law requires directors:or
trustees (unless removed) to continue in office until their successors
are elected and qualified (Sec. 22.) does not prevent a director
or trustee from resigning at any time. A corporation, however,
continues to exist despite the resignation of the directors or trustees.
It can be dissolved only in the manner provided for by the Revised’
Corporation Code, particularly under Title XIV thereof. -
(2) Liability for wrongful resignation. — By reason, however, of
the fiduciary nature of the position they occupy, a director cannot
resign, as part of fraudulent scheme to prejudice the corporation
or its stockholders and make profit to his own advantage or
at an
unreasonable time if the immediate consequence would be to
leave
the interest of the corporation without prop
er care and protection.
(Ballantine, p. 217.) |
If a director quits under circumstances which occasioned ‘a
deprivation of profits to the corporation, it is but right that
he should
repair and make good such loss.’
(3) Form and report of resignation.’ — In the abse
nce of express
provision, a resignation ‘need not'be in any particular form. It may

Sec. 27 ALLE I, BOARD OF DIRECTORS/TR
USTEES / OFFICERS 289
be oral or in writing, but it must clearly and positively show an

intent to resign. (2 Fletcher, p. 140.) A mere statement, for example,
by a director that he has nothing more to do with the
corporation or
he is resigning from his position, is not sufficient.
_ The Revised Corporation Code requires the resignation of a
director or trustee to be reported to the SEC. (Sec. 25.)
(4) Effectivity of resignation. — As a rule, unless a future date
of acceptance by the corporation is required by the bylaws, the
resignation of a corporate official becomes complete and his
office becomes vacant the moment the resignation is made to the
proper officer or body, and it is unnecessary that the resignation be
accepted, or that someone be elected to take his place, to make the
resignation effective. This is the rule, notwithstanding a provision in
the statute, charter, or bylaws that the officers shall hold office until
their successors are duly elected.
The basis of the rule is that where a director (or trustee) thus
resigns, the inaction or refusal of the board of directors should not
impose upon him a future liability or responsibility which he does
not undertake. (SEC Opinion, Jan. 23, 1963, citing 2 Fletcher, pp. 105-
106.) )
Abandonment of office and failure to attend

meetings.
(1) Acceptance of incompatible office. — Where’a director (or
trustee) in a corporation accepts a position in which his duties are
incompatible with those as such director (or trustee), it is presumed
that he has abandoned his office as director .(or , trustee) of the
corporation. (Mead vs McCullough, 21 Phil. 95 [1991].)
(2) Absence for an unreasonable length of time. — Similarly, where
a director absented himself from all meetings for nearly a year and
announced his refusal to act as an officer and stockholder, there is
an abandonment of his position as director. (Dodge v. Kenwood
Ice Co., 204 Fed. 577.) Abandonment by a director of all his duties
for several years must be regarded as an implied resignation of his
Office as director. (Bartholomew v. Bentley, 1 Ohio St. 37.)
(3) Mere absence or continued failure to attend meetings. —However,
Mere absence of a director from the country, or continued failure to

attend meetings, etc. where there has been no resignation, does not
have the effect of vacating his seat or terminating his term of office
unless there is some express provision to such effect. (2 Fletcher, p.
132.) .
(4) Specified number of unjustified absences as ground for automatic
disqualification. — Where the general authority to remove directors
or trustees rests with the stockholders or members, .a corporation,
to protect its interests, is empowered to prescribe in the bylaws (see
Sec. 46[f].) attendance in board meetings as a qualification. device,
such that a specified. number of unjustified absences.may be a
ground for automatic disqualification which need not be approved
again by the stockholders or members as required under Section 27,
The bylaws are written into the charter of the corporation and
the corporation, directors, trustees, officers, and stockholders /
members are bound by and must comply with them. (SEC Opinion,
May 19, 1992.) pile’
Sec. 28. Vacancies in the Office of. Director or Trustee;
-. Emergency Board. — Any vacancy occurring in the board of
directors or trustees other than by removal or by expiration
of term, may be filled by the vote of at least a majority of
the remaining directors or trustees, if still.constituting a
quorum; otherwise, said vacancies must be filled by the
stockholders or members in a regular or special meeting
‘called for that purpose.
When the vacancy is due to term expiration, the election .
shall be held no later than the day of such expiration at a
meeting called for that purpose. When the vacancy arise
s
as a result of removal by the stockholders or members,
-
the election may be held on the same day of the meeti
ng
authorizing the removal and this fact must be so stated
in
the agenda and notice of said meeting. In all
other cases,
the election must be held no later than forty-five
(45) days
from the time the vacancy arose. A director.
or trustee
elected to fill a vacancy shall be referred to as repla
cement
director or trustee and shall serve for the une
xpired term
of the predecessor in office. (N)
_ However, when the vacancy prevents the remaining
directors from constituting a quorum and emergency

291
Any directorship or trusteeship

to be filled by reason
of an increase in the number of dir
ectors or trustees shall
be filled only by an election at a
regular or at a special
meeting of stockholders or member
s duly called for the
purpose, or in the same meeting author
izing the increase
of directors or trustees if So stated in the notice of the
meeting.
In all elections to fill vacancies under this sect
ion, the
procedure set forth in Sections 23 and 25 of
this Code
shall apply. (N)
Vacancies in the office of director

or trustee.
(1) Grounds for replacement during term. — A director or trustee
may be replaced during his term upon his resignation or removal
(see Sec. 27.) or when his position is otherwise lawfully vacated.
Temporary absence does not result in vacancy as contemplated in
Section 28. (SEC Opinion, April 25, 1985.)
(2) Tenure of successor. — The director or trustee elected to
fill a vacancy holds the office only for the unexpired term of his
Predecessor.
(3) Prohibition against election of alternate if temporary vacancy
curs, — In the absence of a vacancy, no one can be elected
88 an alternate, to replace an incumbent director or trustee ,whoevenis
temporarily absent only. To allow such an alternate would be to have
0 (2) directors or trustees for the same position, one (1) permanent
d the other temporary, a situation that finds no sanction in the law
and js irregular. (Ibid.
)

THE REVISED CORPORATION CODE OF THE PHILIPPINES Sec, 28
292
The procedure in Sections 23 and 25 shall apply in all elections

to fill vacancies in the office of director or trustee.
Filling of vacancies.
(1) By the stockholders or members. — A vacancy in the office of
director or trustee may be filled by the stockholders or members in a
regular or special meeting called for that purpose in these cases:
(a) If the vacancy results from the removal by the
stockholders or members, the election may be held on the same
day of the meeting authorizing the removal; or if due to the
expiration of term, the election shall be held not later than the
day of such expiration;
(b) If the vacancy occurs. other than by removal or by
expiration of term (see Sec. 28, par. 1.), such as death, resignation,
abandonment, or disqualification, if the remaining directors or
trustees do not constitute a. quorum to fill the vacancy;
(c) If the vacancy may be filled by the remaining directors
or trustees (Infra.) but the board refers the matter to the
stockholders or members; or
(d) If the vacancy is created by reason of an increase

in the
number of directors or trustees.
In requiring that vacancies in the board resulting from
resignation be filled up by the stockholders or
members in a regular
or special meet
ing called for the purpose if the remainin
do not constitute a quorum, the law seeks g trustees
to ensure the recognition
and strict implementation of the policy that only.
been elected by the shareholders or mem
those who-have
bers can rightfully exercise
and discharge the duties and function
s of a director or trustee, and
be made fully accountable to the
shareholders or members for the
same. (SEC-OGC Opinion No. 01-21, Jan. 18, 2021.)
by the Supreme Court in Valle As explained
Verde Country Club, Inc. vs. Afr
(G.R. No. 151969, Septembe r 4, 2009): ica
|
The board of directors is the dir
of the Corporation. It is a cre
ecting and controlling body
ation of the stockholders and de-
tives 1ts power to control and dir
ect the affairs of the corporation
from them. The board of directors
, in drawing to themselves the
powers of the corporati on, occupies a position of tru
steeship in

293
relation to the stockholders,

. not onl
exercise ,; in th e sense that the board should
Y care and diligence, but utmost good fai
the management of th in
corporate affairs,
:
The underlying Policy of
business and affairs of a Co the Corporation Code is that the
rpor
ation must be governed by
board of directors whose me
mbers have stood for election, a
who have actually been ele and
cted by the stockholders, on
nual basis. Only in that way can an an-
the directors’ continued ac-
countability to shareholders, an
d the legitimacy of their deci-
sions that bind the corporation’
s stockholders, be assured. The
itical to the theory that legitimiz
es the ex-
‘ercise of power by the directors or offi
cers over properties that
they do not own.
This theory. of delegated power of the
board of directors
similarly explains why, under Section 29 Inow
Section 28] of
the Corporation Code, in cases where the vacanc
y in the cor-
poration’s board of directors is caused not by the exp
iration of
a member’s term, the successor “so elected to fill
in a vacancy
shall be elected only for the unexpired term of his predec
essor
in office.” The law has authorized the remaining members of the
board to fill in a vacancy only in specified instances, so as not to
retard or impair the corporation’s operations; yet, in recognition
of the stockholders’ right to elect the members of the board, it
limited the period during which the successor shall serve only
to the “unexpired term of his predecessor in office.”
(2) By the members of the board. — If still constituting a quorum,
at least a majority of the members are empowered to fill any vacancy
occurring in the board other than by removal by the stockholders or
members or by expiration of term. (see SEC-OGC Opinion No. 43-
19, Sept. 19, 2019.)
When the vacancy prevents the remaining directors from
constituting a quorum and emergency action is required to prevent
grave, substantial, and irreparable loss or damage to the corporation,
the vacancy may be temporarily filled from among the officers of
the corporation by unanimous vote of the remaining directors or
trustees. The action by the designated director or trustee shall be
limited to the emergency action necessary, and the term shall cease
within a reasonable time from the termination of the emergency
or upon election of the replacement director or trustee, whichever
Comes earlier. (Sec. 28, par. 3.)

PHILIPPINES Sec, 28
(a) Allowing the remaining directors or trustees to fill u

vacancies avoid the expenses and inconveniences attending the
calling of stockholders’ or members’ meeting, especially Where
there are many of them. (SEC Opinion Jan. 3, 1986.)
(b) The power of the board of directors or trustees is not.
suspended by vacancies in the board unless the number jg
reduced below a quorum.
(c) The board has no power to fill any directorship Or
trusteeship by reason of an increase in the number of directors
or trustees. The amendment increasing the number of directors
or trustees which results in a vacancy becomes effective upon
its approval. This is deducible from the last clause of Section 28
which authorizes the filling of the vacancy “in the same meeting
authorizing the increase of directors ‘or trustees if so stated in
the notice of meeting.” . |
However, any amendment to the articles and bylaws requi
res
SEC approval.
;
ILLUSTRATION:
If four (4) of nine (9) directors died, the
remaining five (5)
director s still constitute a quorum, and a majority
(5) or three (3) may fill the four (4) vacancie of the five
s.’ But if five (5) of
_ the directors died, the vacancies will hav
stockholders in a regular or special meetineg to be filled by the
purpose.
duly called for the
. | ae es
(d) The phrase “may be filled”
in Section 28 indicates that
the filling of vacancies in the board
by the remaining directors
constituting a quorum is merely
permissive. Corporations may
choose how vacancies in the
ir board may be filled up,
by the remaining directors either
or trustees constituting
a quorum
"Note that the ele

the vote of majority of alctiloni Of of corpor
or all
made after the vacancie the membersateof oftheficeboar
rs other than dire
d. Sec. esctors or trustees requires
s in the boar d have been Aten nef i ay be
Be Sapa clacton ay
“i

sec. 2 9 TITLE ML: B OARD
OF DIRECTORS / TR
USTEES /OFFICERS
295
4) Where vacan nalite
Apne 16 git resignation of a hold-o
ver directo
members of the boar r, —
the power to elect not the femaining
a director to fill the d, have
— that time from vacancy. The hold-o
the lapse ofone (1) year after ver period
to the board and a member’s electi
unti] his Successor’s on
vacancy caused by the 0 shall possess the authority to

expirat; fill a
Country Club, Inc. vs Afr
ica, 598 SCRA 202 [2009]
.)
Successor to serve for
unexpired term
of predecessor.
The theory of delegated power
explains why, under Section
of the board of directors
28, in cases where the vacancy
corporation’s board of directors in the
is caused not by the expiration of
a member’s term, the successor so
elected to fill a vacancy shall be
elected only for the unexpired term
of his predecessor in office.
The law has authorized the remaining mem
bers of the board to
fill a vacancy only in specified instances so as not to retard
the corporation’s operations; yet, in rec
or impair
ognition of the stockholders’
tight to elect the members of the board, it limited the per
iod during
Which the successor shall serve only to the unexpired ter
Predecess
m of his
or in office. (Ibid.)
Sec. 29. Compensation of Directors or Trustees) — In

the absence of any provision in the bylaws fixing their
compensation, the directors or trustees shall not receive
any compensation, in their capacity as ‘such, except
for reasonable per diems: Provided, however, That the
Stockholders representing at least a. majority of the
Outstanding capital stock or
majo
of the
ri membe
ty rs may
grant
rant directo
di wi
rs or trustees ees compe
with nsation and approve
the amount thereof at a regular or meeting. In no case shall
the total yearly compensation of directors, exceed ten

percent (10%) of the net income before income tax of the.

corporation during the preceding year.
Directors or trustees shall not participate in the
determination of their own per diems or compensation. (N)
Corporations vested with public interest shall submit
to their shareholders and the Commission, an annual
report of the total compensation of each of their directors
or trustees. (N)
Compensation of directors or trustees.

(1) Authorization. — Under the law, a private corporation
is authorized to provide in its bylaws for the compensation’ of
directors
or trustees. (Sec. 46[f].) Absent any provision in the bylaws
fixing their compensation, the directors or trustees shall receive no
compensation, in their capacity as such, except for reasonable per
diems, unless authorized by a vote of the stockholders representing
at least a majority of the outstanding capital stock or.a majority of
the members entitled to vote. Any per diems or compensation to
the officers of a corporation without proper authorization in the
bylaws or by the vote of the stockholders may, be recovered in a
stockholder’s suit.
(2) Amount. — The amount of compensation of directors or
trustees must be fixed either in the bylaws or in the resolution of
the stockholders or members; hence, the stockholders or members
cannot delegate to the board of directors or trustees the authority to_
fix the amount of their own compensation.
If the corporation is vested with public interest, it shall submit
to its shareholders and the SEC an annual report of the’ total
compensation of each director or trustee. Here, transparency is the
objective. |
Directors without authority to grant

themselves compensation.
(1) The directors or trustees have no authority to grant
compensation or per diems to themselves.! They are prohibited
'There is a radical difference when a stockholder is voting strictly as a stockholder

and when voting as a director. When voting as a stockholder he has the legal right to
vote with a view of his own benefits and is representing himself only; but a director

297
(b) Forservicesoutside the

ir regular duties. — Inview
wording of Section 29, it of the clear
is doubtful whether a di
entitled to compensation
even when they ren
or unusual ser vices, i.e., services not properly
office and are rendered outside of incidental to their
their regular duties. (see SEC
Opinion, June 10, 1974.) Corp
orate directors presumptively
serve without compensation. While
they may assign themselves
additional duties, the
y are without power to vote for them
additional duties, they are without po selves
wer to vote for themselves
compensation for such additional duties
. (Central Cooperative
Exchange, Inc. vs. Enciso,.162 SCRA 706 [19
78].) Compensation
ma
y be granted to them by the corporat
ion when they serve the
_ corporation in another capacity.
(2) A stockholders’ resolution or agreement for the payment of
compensation for such services would be valid. (SEC Opinion,
Dec.
29, 1975.) But the stockholders cannot ratify a board of- direct
ors’
action fixing their own salaries. Such action being contrary to law,
cannot be ratified. The stockholders themselves, by the requisite
vote, must fix the compensation. (Supra.)
a ————$_<——
Tepre ; ity
u ea e dite te hi kholders in
ected the capacity of tru forsthe
t m e
andehe c
benefi t at theof expens
trus ot
e of the stockholders.PANO(Halde
hi
NSE s
V. Halocman 176 Ky. 635, 197 S.W. 376 [1917], cited in Sulpicio Gue man
vara, The Phil. Corp.
Law, , 1967 Rq +
ees A ha
p. 145.)s ding a corporate mee i g as suchch is is not enti
nes eae fi hidel? as antinown tled
tled to toper s s § for
er of stocks of the cor per diemtem
not enti
poration. (SEC
pinion, September 1971.)

Sec, 29
Limit to compensation.
Where compensation is granted either in
the bylaws or by the
vote of stockholders, the total yearly
compensation of directors
shall in no case exceed 10% of the net
income before income tax of
the corporation during the preceding
year.
This limitation seeks to curb the Practi
ce particularly of close
corporation to grant excessive bonuses
to their directors to reduce
the taxable income of such corporations
. It is also intended for
the protectio
n of the stockholders and the corporate cre
prospective investors.? ditors and
The phrase “as such directors” follow
ing the phrase “the total
yearly income of directors” in Section 30
of the old Code is deleted
on Section 29. (par. 2.)
The phrase delimits the prohibition to
compensation given to
them for services performed purely in thei
r capacity as directors or
trustees. The implication is that members
of the board may receive
compensation. besides reasonable per. diem
s, when they render
services to the corporation ina capacity oth
er than as directors or
trustees. (Western.
Institute of Technology vs. Salas, 278 SCR
[1997].) Now, the limitation applies to A 216
compensation for services
performed by directors for the corpor
ation “even not-as such
directors.”
Per diems of directors or trustees.

(1) Whether or not authorized by the bylaws
stockholders, directors are entitled to rec or by. the
eive reasonable per diems2
expense of, or to the detriment of,

its creditors. (SEC Opinion, Dec.
“It is a daily allowance “given, for each 8, 1987.)
day an officer or employee was away
home base or permanent station. from
” (Lexal Lab oratories vs. National Industries Worker his
Union-PAFLU, 25 SCRA s’
[1968 ].) It
and Phrases 17.) Per diems are paid per is limited to pay for a day’s service, (32 Words
668
attendance in board meetings. Other benef
emoluments of directors fall within its and
the term “compensation.”

Secti
aL not specify what amounts shall be
Paiee netbioo
‘ nable.” If the matter shall:be decided by the
directors or trustees: themselves, they may easily circumvent the
10% limitation. The stockholders, however, may approve or adopt
as its own (not ratify) a board resolution fixing or increasing the per
diems of Lies after inquiring into its reasonableness. What is
a reasonable per diem depends on the circumstances ,
(3) Per diems received without proper authorization or found
to be unreasonably excessive may ordinarily be recoverable in a
stockholders’ or members’ suit.
Compensation of corporate officers.

(1) Corporate officers: who are not directors. — The reason for
the general rule that directors of a corporation are not entitled to
compensation does not apply to-corporate officers who are not
directors. Such officers, not being directors and having no control
over the funds and property of the’ corporation, even though
they may be stockholders, do not occupy the relation of trustees
to the corporation. (Cheeney v. Lafayette, B.O.R. Co., 61 Il. 570.)
Accordingly, if they are elected or appointed to perform valuable
for the corporation under ‘circumstances indicating an
services
intention and expectation of payment, there are an implied promise
by the corporation to pay a reasonable compensation for services
p. 378.)
rendered, even absent an express contract. (5 Fletcher,
employee ‘hired “by the
This principle applies: as well to |
corporation.
Cor por ate off ice rs who are directors. — Directors who are
(2) sonable per diems
also corporate officers ar e entitled, bes
ides reaoe
rP rs, to compensa tion as such corporate officers, and the
as directo
‘se rvi ces ren der ed, like sal arye which is a
fs ‘It isi any give n for
ey . vast the month. It doe not s imp ly an im me di at payment, or
in paid regu en of cash far e or itssequ lent. aa
ivae .) e
(15p C.J.S. 652p ensation
Compa
ym ST m
Tect return, nor the pa ;
:
cis peat Or eee reine ement. (SEC Opinion, June 13, 1991.) Fare refers to money
‘ chan eably. ney
an
sons or goods.
Paid for transportation of per

amount thereof may be fixed by mere board resolution absen}
provision to the contrary in the bylaws and subject to the provision
of Section 31. (Infra.) It must appear that the intention is to give them
salaries as such officers.
(3) Form of compensation. — Compensation may take the form
of salary and fringe benefits, such as housing, membership in clubs,
company cars, stock options, etc. Needless to say, the compensation
must not be excessive.
ILLUSTRATION:
The bylaws of the corporation are silent as to the salary
of the president. While resolutions of the incorporators and
stockholders provide salaries for the general manager, secretary,
treasurer, and other employees, there was no provision for the
president's salary.
On the other hand, other resolutions provide for per diems
to be paid to the president and the directors for each meeting
attended. This leads to the conclusion that the president and the _-
board of directors were expected to serve without salary, and
that the per diems paid to them were sufficient compensation
for their services. (Lingayen Gulf Electric Power Co., Inc.’vs.
Baltazar, 93 Phil. 404 [1953].)
Sec. 30. Liability of Directors, Trustees or Officers. —

Directors or trustees who willfully and knowingly vote
for or assent to patently unlawful acts of the corporation
or who are guilty of gross negligence or bad faith in
directing the affairs of the corporation or acquire any
personal or pecuniary interest in conflict with their duty
as such directors or trustees shall be liable jointly and
severally for all damages resulting therefrom suffered by
the corporation, its stockholders or members and other
persons.
:
A director, trustee, or officer shall not attempt to
acquire or acquire any interest adverse to the corporation
in respect of any matter which has been reposed in them
in confidence, and upon which equity imposes a disability
upon themselves to deal in their own behalf; otherwise, the
Said director, trustee or officer shall be liable as a trustee
for the corporation and must account for the profits which
otherwise would have accrued to the corporation. (A)

Sec . 30 TITLE III. BOAR D OF DIRECTORS
/ TRUSTEES/ OFFICERS 301
Nature of director’s/trustees’
Position
The directors or trustees of th i shall
y erform the duties enjoined on them by! the au aad by the
bylaws of the corporation (see Sec, 46[f].) and in accordance with
the purposes for which it was organized. (Sec. 14.) In discharging
their responsibility and exercising their powers, they are held to
high standards. They have a three-fold duty of obedience, diligence,
and loyalty in exercising their powers as the governing body of the
corporation (Sec. 22.), violation of which will render them personally
liable under Section 30 and Section 170.
(1) Agents or trustees for the corporation. — The directors of a
corporation are its agents. Their duties are often referred to as
“fiduciary duties” and they are sometimes referred to as “fiduciaries”
because they also occupy a fiduciary relation to the corporation. By
numerous authorities they have been called “trustees” with certain
powers, and subject to certain duties analogous to those of a trustee,
in the management of its property, and each stockholder a cestui
que trust according to his interest and shares. In the performance of
their official duties, they are under obligations of trust and confidence
to the corporation and its stockholders and must act in good faith and
for the interest of the corporation or its stockholders with due care
and diligence and within the scope of their authority. (Jackson v.
Ludeling, 21 Wall. [U.S.] 616; Agdao Landless Residents Association,
Inc. vs. Maramion,? G.R. Nos. 188642, 189425 & 188888-89, October
17, 2016.)
It is settled that absent malice, bad faith, or specific provision of
law, a director or officer of a corporation cannot be made personally
liable for corporate liabilities. (Lowe, Inc. vs. Court of Appeals, 596
SCRA 140 [2009].)
The ordinary trust relationship of directors of a corporation
and stockholders is not'a matter of statutory or technical law. It
ev Omnapennmneppin pense sc coentas eae ‘ ’

1Art, 1173... If the law or contract does not state the diligence which is to be observed
d.
in the performance, that which is expected of a good father of a family shall be require
nce with the
Art, 1887. In the execution of the agency, the agent shall act in accorda
Nstruct3 i a pine 2 PP principah
l. do all that a good father of a family
‘ would do, as required
by theGnen of Feeiness. (CivilCode )
ration Code of the Philippines Annotated, p. 292 [2013].

JUL PME REVISED CORPORATION CODE OF THE PHILIPPINES Sec, 39
springs from the fact that directors have the control and guidance of
corporate affairs and property and, hence, of the prope
rty interest
of the stockholders. Equity recognizes that stockholders are the
proprietors of the corporate interest and are ultimately the only
beneficiaries thereof. (Gokongwei, Jr. vs. Securities and Exchange
aa 89 SCRA 336 [1979], citing Ashaman v. Miller, 101 Feg.
2d 85.
Thus, in Gokongwei, the Supreme Court held that “the offer
and assurance of petitioner,” a candidate for board membership in
San Miguel Corporation, under whose bylaws he was disqualified
for being engaged in any business which competes with or is
antagonistic to that of the corporation, “that to avoid any possibility
of his taking unfair advantage of his position as director of San
Miguel Corporation, he would absent himself from meetings at
which confidential matters would be discussed, would not detract
from the validity and reasonableness of the bylaws here involved.
Apart from. the impractical results that would ensue from such
arrangement, it would be inconsistent with petitioner’s primary
motive in running for board membership — which is to protect his
investments in San Miguel, Corporation. More important, such a
proposed norm of conduct would be against all accepted principles
underlying a director’s duty of fidelity to the corporation, for the
*The standard of fiduciary obligation of the directors of corporations has been

emphatically restated, this: “A director is fiduciary... Their powers in trust. He who
is in such fiduciary position cannot serve himself first and his cestuis second... He
cannot manipulate the affairs of his corporation to their detriment! and ‘in disregard of
the standards of common decency. He cannot by the intervention of a corporate entity
violate the ancient precept against serving two masters... He cannot utilize his inside
information and strategic position for his own preferment. He cannot violate rules of fair
play by doing indirectly through the corporation what he could not do so directly. He
cannot use his power for his personal advantage and to the detriment of the stockholders
and creditors no matter how absolute in terms that power may be and no matter how
meticulous he is to satisfy technical requirement. For that power is at all times subject to
the equitable limitation that it may not be exercised for the aggrandizement, preference,
or advantage of the fiduciary to the exclusion or detriment of the cestuis.” (Ibid., citing
Pepper v. Litton, 308 U.S. 309, 84 L. ed. 281, 289-291.)
“The law will not tolerate the passive attitude... without active and conscientious
participation in the managerial functions of the company. As directors, it is their duty to
control and supervise the day-to-day business activities of the company or to promulgate
definite policies and rules of guidance with vigilant eye toward seeing to it that these
policies carried out. It is only then that directors may be said to have fulfilled their duty
of fealty to the corporation.” (Gokongwei, Jr. vs. Securities and Exchange Commission,
supra, citing Olek, Modern Corp. Law, Vol. 2, Sec. 960; Commission, 89 SCRA 336 [1979],
citing Ashaman v. Miller, 101 Fed. 2d 85.)

TITLE
aaa NY BOARD OF DIRECTORS/ TRUSTEES / OFFICERS 303
olicy of the law is to e
management? "courage and enforce responsible corporate
poration or not, and must mana

property and assets with str ict ge its
regard’to their interest and if they are
themselves creditors while the ins
olvent
management, they will no tbe permit corporation is under.-their
by purchasing the corporate Property ted to secure to th
emselves
or otherwise acquiring any
per sonal advantage over other creditors, (Mead vs.
Phil. 952 [1911] McCullough, 21
.) |
Cases when directors/trustees or
officers
liable for damages.
Corporate officers, because of the separate legal personality of a
corporation, are not personally liable for their official acts unless it
is shown that they exceeded their authority.
(1) Under Section 30. — Section 30 enumerates the instances
when a director or trustee may be held liable for resulting damages
and thus, the veil of corporate fiction may be pierced: Wh
(a) He willfully and knowingly votes or assents to patently
unlawful acts of the corporation;
(b) He is guilty of gross negligence’ (not mere “want of
ordinary prudence” as held in Steinberg vs. Veloso, supra.) or
bad faith in directing the affairs of the corporation; and
(c) He acquires any personal or pecuniary interest in conflict
with his duty as such director or trustee;
‘Directors owe duties to the corporation as a whole rather to individual stockholders

or to indivi es ae adhareholder s.
Bid corporatio n who was authorized
to issue checks for
the corporation was held negligent for signing the confirmations letter requeste‘by d
the indorsee and the payee (indorser) of four (4) crossed checks issued by the treasurer
for the payee for the rediscounting of the crossed checks when the treasurer was aware
that the checks were strictly endorsed for deposit only to the payee’s account and
not to
be further negotiated, and made personally liable to'the resulting damage. (see Lynoil
Fishing Enterprises vs. Ariola, 634 SCRA 679 [2012].)

(d) He acquires, or to attempts to acquire,

any interest
adverse to the corporation in respect of any matter whic
h has
been reposed in him in confidence, and upo
n which equity
imposes a disability upon the director to deal in his own behalf,
In the above instances, the erring board members or officers shal]
be held jointly and severally (or solidarily) liable for all damages
resulting therefrom suffered by the’ corporation, its stock
holders
or members, or other persons. The complainant must
clearly and
convincingly prove the unlawful acts, gross negligen
ce,
or bad faith
of the defendant which must be alleged in the ‘complaint. (Cari
g
vs. National Labor Relations Commission, 520 SCRA 282 [2007];
Francisco vs. Mallen, Jr., 631 SCRA 118 [2010]; Heirs of Fe Tan Uy vs,
International Exchange Bank, G.R. No. 166282, Feb. 13, 2013; Bank
of Commerce vs. Nite, 763 SCRA 620 [2015].)
Note that even where personal liability attaches, not all the
officers are made accountable but only the “responsible officers,”
i.e., those responsible or who acted in, bad faith” in committing the
unlawful acts. (Guillermo vs. Uson, 785 SCRA 5463 [2016].)
(2) Other cases. — Personal liability of a corporate director/
trustee or officer along (although not necessarily) with the
corporation may also validly attach, as a rule: |
(a) When-he consents. to the issuance of watered stocks
or
who, having knowledge thereof, does not forthwith file with
the
corporate secretary his written objection thereto (see Sec.
64.);
(b) When he is made, by a specific provision of law, to
personally answer for his corporate action (see Sec. 144; PD.
No.
115 [Trust Receipts Law], Sec. 13:); and
(c) When he agrees to hold himself personally and
solidarily liable with the corporation. (Tramat Merc
antile, Inc.
Ei Bini uses ts Se
*Art. 1216, The creditor may proceed against anyo
ne of the solidary debtors or some
or all of them simultaneously. The demand made against
obstacle to those which may subsequently be directed agaione (1) of them shall not be an
nst the others, so long as the
debt has not been fully collected. (Civi
l Code)
The liability of corporate directors and officers
and solidarily liable with their company, there mustis not automatic. To make them jointly
be a finding that they were remiss
in directing the affairs of that company, such
illegal activities. (Sto. Tomas vs, Salac as sponsoring or tolerating the conduct of
, 685 SCRA 285 [2012].)

bz 30 TITLE Ill. BOAR DO
R DIRECTORS / TRUS
TEES / OFFICERS
305
238 SCRA 14 [1994]; Santos vs. National

Poot Aun bs ommission, 20 SCRA ‘sep [1967]; National
FCY Corporation ag of Appeals, 311 SCRA 700 [1999];
270 [2000]; Malayan aceséoit-,
Powton Conelor
VS: Court of Appeals, 323 SCRA
anan vs. Ramos, 357 SCRA 77 [2001];
§lomerate, Inc. vs. Agcolicol,
400 SCRA 523 [2003].)
Liability of directors/trus
tees Or officers
for bad faith or gross ne
gligence,
(1) Directors or trustee
. are
disposition of corporate assets P ersonally
ally liable
liable f for any wrongful
and for any loss or injury to the
Sross negligence or unauthorized
acts or violation of their duties. (see Steinber
g vs. Velasco, 52 Phil.
953 [1929].) :
(a) But they are not liable for busine
ss losses incurred —
bec ause of honest bad judgment not amo
unting to bad-faith
or gross negligence. (see Ballantine, p. 160; see
also Board of
Liquidators vs. Heirs of Maximo Kalaw,|20 SCR
A 987 [1967]:)
No one can guarantee the success of a business becaus
e there is
_always that element of risk. The officers of a corporation are
not
insurers of its success. hae
(b), Neither can a corporate officer be made personally liable
for the money claims of discharged corporate employees where
no malice or bad faith can be attributed to him in terminating
their employment., (Midas. Touch Food, Corp. vs...National
Labor Relations Commission, 259 SCRA 652 [1996].) As a rule,
corporate directors .and officers are solidarily liable -with the
corporation for the termination of employment of employees if
the termination:is done with malice:or in bad faith.’ (Progress
Homes vs. National: Labor Relations Commission, 269 SCRA
274 [1997]; Mandaue Dinghow Dimsum House Co,, Inc. vs.
National Labor Relations Commission, 547 SC402
RA [2008];
SHS Perforated Materials, Inc. vs. Diaz, 633 SCRA 258 [2010].)
(2). Bad faith or negligence on the part of a corporate officer
is a question of fact. It must be alleged in the complaint and the
Complainant has the onus of proving it. It has been said that “bad
faith does not simply mean bad judgment or negligence; it imparts
4 dishonest purpose or some moral obliquity and conscious doing
of wrong. It means breach of a known duty through some motive

306 THE REVISED CORPORATION CODE OF THE PHILIPPINES See, 31
or interest or ill-will; jt partakes of the natu

re of fraud.” (Ibid.) It
for reasons of negligence by the director, trustee
of officeinr the
conduct of the transactions of the corporation, such
negligence must
be gross. (Magalang vs, Ong, 562 SCRA 152 [2008];
Reyes vs, Ng
Wee, 860 SCRA 50 [2018].)
Liability of directors/trustees or offi

cers
for secret profits.
In the case mentioned in the second paragraph, the director/
trustee or officer guilty of violation of duty shall be held
accountable
for the profits which otherwise would have accr
ued to the
corporation. Private or secret profits obtained must be acco
unted for,
even though the transaction on which they are made
is advantageous
or is not harmful to the corporation, or even thou
gh the director /
trustee or officer acted without intent to injure the corporat
ion. That
the agreement whereby a person is'to receive a secret
profit is made
before he becomes an officer does not change the rule. And
the fact
that the profits were derived from transaction ultra vires
(see Sec,
44.) does not relieve the director / trustee or officer from
liability. (19
Am. 2d 688-689.) | :
Similarly, a director guilty of disloyal act against the
corporation
is required by Section 33 to account for and refund to the
corporation
for the profits obtained by him from a business opportunity
which
should belong to the corporation. |
Sec. 31. Dealings of Directors, Trustees or Offic
ers with the
Corporation. — A contract of the corporation with one (1) or
more of its directors, trustees, officers or their spo
nd relatives within the fourth deqree of consanqu
ini
or affinity is voidable, at the option of such corp
oration,
unless all the following conditions are present:
_ (a) The presence of Such director or trustee in
the
board meeting in which the contract was approved
was
not necessary to constitute a quorum for such meet
ing;
(b) The vote of such director or trustee was not
necessary for the approval of the contract;
(c) The contract is fair and reasonable under the
circumstances; and

307
roved by at least two-thirds

a majority of the inde P of the board, with at least
e : 5
the material contract: iN) and directors voting to approve
(e) In case of an off
. :
previously authorized by the cer, the contract has
board of directors.
been
Where any of the first

three (3) conditions set forth in
the preceding Paragrap his
absent, in the case of a contract
with a director or trus tee, such
contract may be ratified
by the vote of the stoc kholde
rs representing at least two-
thirds (2/3) of the outstanding capital stock or of at leas
two-thirds (2/3) of the members t
in a meeting called for
the purpose: Provided, That full disclosure of the
adverse
interest of the directors or trustees involved is mad
e at
such meeting and the contract is fair and reasonable
under the circumstances.
Self-dealing directors/trustees
or officers.
(1) Contract void. — Section 31 renders voidable at the option of
the corporation a contract of such corporation with one (1) or more
of its directors/trustees or officers, or their spouses and relatives
within the fourth civil degree of consanguinity or affinity. It can be
interpreted as allowing self-dealing of directors/trustees provided
the stated conditions are met.
Being its agents and entrusted with the management ofits affairs,
the directors or trustees and other officers of a corporation occupy a
fiduciary relation towards it, and cannot be allowed to contract with
the corporation, directly or indirectly, or to sell property to it, or
purchase property from it, where they act both for the corporation
and for themselves. (3 Fletcher, p. 387.) (Agdao Landless Residents
Association, Inc. vs. Maramion,' G.R. Nos. 188642, 189425 & 188888-
89, October 17, 2016.)
Section.31 does not require that the corporation suffers injury or
damage as a result of the contract.

S Sec, 39
(2) Exceptions. — In any of the following

cases, the contract Shall]
be valid and cannot be set aside merely because of the relationship
of the parties:
(a) All the conditions enumerated in Section 31 (sub
sections
a to e) are present;
(b) Not all the conditions set forth are present

but the
corporation (through the board) elects not to ques
tion the
validity of the contract without prejudice to the liability
of the
consenting directors or trustees for damages unde
r Section 30.
In such case, a dissenting stockholder.or member
may file a
derivative suit in behalf of the corporation; or
(c) In the case of a contract with a director or trustee, where
any of the first three (3) conditions is absent, such contr
act may
be ratified by the required vote of the stockholders
or members
in a meeting called for the purpose, provided that full
disclosure
of the adverse interest of the directors or trustees invol
made at
ved is
such meeting. If the contract is with an officer of
corporation, it must have been’ authorized by the
'the board, ie,
there is a prior board resolution authorizing the
contract.
Section 31 fails to specify whether the vote of
the self-dealing
director or trustee shall be counted in the stoc
kholders’ méeting for
the ratification of the contract.
(3) Ratification by stockholders or members:—
Even if the board
does not act on conflicts of interest issue, the sam
e can stillbe settled
favorably by the required vote of the stockh
olders or members in
a meeting called specifically to decide such
issue, as long as there
is full disclosure of the adverse interest of the dire
ctors or trustees,
and the contract is fair and reasonable under the circumst
par.) ances. (last
:
Sec. 32. Contracts Between Corporations
with Interlocking
Directors. - Except in cases of fraud,
and provided the
contract is fair and reasonable under
the circumstances,
a contract between two (2) or more cor
porations having
interlocking directors shall not be inva
lidated on that
ground alone: Provided, That if the inte
rest of the
interlocking director in one (1) corporation is subs
tantial
and the interest in the other corporation or corpor
ations
is merely nominal, the contract shall, be subject
to the

309
Contracts between cor porati i

interlocking direct Ors. a
(1) Validity. — Section 32
reco nize i
two or more corporations which hve ited
some, OF all of the direct doekine csctoss eos ome
ors in one co rporation is/
are also directory
directors in another corporation) as long as
there is no fraud and
the contract is fair and reasonable under the ci
rcumstances. (see
Sec. 43.) However, if the interest of the interlocking director in one
corporation is substantial, i.e., his stockhol
di
outstanding capital stock and in the other mengreslyexno
ceed 20% of the
minal, ie., his
stockholdings do not exceed 20%, the pr
ovision of Se ion 31 shall
apply to the contract insofar as the latter corporation orctcorporations
are concerned. (Sec. 33.)
(2) Application. — Section 32 pertains to transactions between
corporations with interlocking directors resulting in the prejudice to
one corporation. It does not apply where the corporation allegedly
prejudiced is a third party, not,one of the corporations with
interlocking directors. (Development Bank of the Phils. vs. Court of
Appeals, 363 SCRA 307 [2001].)
ILLUSTRATION: ::
P500,000.00 to
: X Corporation sold a parcel of land worth
board member of both
Y Corporation for only P50,000.00. Z is
corporations.
ength the contract is
If the purchase price is not arms-l
dable. But if the
not fair and reasonable and is therefore, voi
circumstances (e.g,.,
contract is fair and reasonable under the d Z’s interest
: ‘ .
liens and encumbrances) an
ation
land.ge.,sbi
Co rp
ecinke
or at io n is mer ely nominal and in Y corpor
in X ns + Section 31 must be present insofar
th e co nd it io
substantial, that the contract
is conceme® d, on the theory
as X Corporation
is with Z.
of X Corporation

310 THE REVISED CORPORATION CODE OF THE PHIL
IPPINES Sec, 3p
However, if Z’s interest in both corporations is nomi

nal oy
is substantial, the provision of Section 31
does not apply but the
contract shall be valid only if there is no fraud and the contract
is fair and reasonable under the circumstances. The corporat
ion
which seeks to uphold the contract has the burden to show that
it is fair and reasonable. ai | :
Evils of interlocking directorates.
(1) Validity of bylaws prohibiting interlocking directorates,
Byla
_
ws which prohibit a director of a corporation from Servi
ng at
the same time as a director of a corporation from serving
at the same
time as a director of a competing corporation, have been
valid and
upheld as
reasonable. (Gokongwei, Jr. vs. Securities and Exchange
Commission, 89 SCRA 336 [1979].) The’ reason has been aptly
explained, thus:
“The argument for prohibiting competing corporations

from sharing even one director is that the interlock perm
its the
coordination of policies between nominally independ
ent firms
to an extent that competition between them may be
completely
eliminated. Indeed, if a director, for example,
is to be faithful to
both corporations, some accommodation may resul
t. Suppose
X is a director of both Corporation A and Corp
oration B. X
could hardly vote for a policy by A that would injur
e B without
violating his duty of loyalty to B; at the same time,
he could
hardly abstain from voting without depriving A of his best
judgment. If the firms really do compete — in the sense of vyin
from economic advantage at the expense of the other g
—
can hardly be any reason for an interlock between comp there
etitors
other than the suppression of competition.” (Ibid., citin
g Travers,
Interlock in Corporate Management and the Anti-Trust
Law, 46
L. Rev., 819, 840 [1968].)
‘According to the Report of the House Judic

iary Committee of the US. Congress
on Section 9 of the Clayton Act, it was establishe
d that “By means of the interlocking
directorates one man or group of men have
been able to dominate and control a
great number of corporations . . . to the detrimen
t of the small ones depended upon
them and to the injury of the public.” (Ibid., citin
g 51 Cong
competing firms control a substantial segment of the marke . Rec. 9091.) Where two (2)
t, this could lead to collusion
and combination in restraint of trade. Reason and experience show that the inherent
tendency of interlocking directorates between comp
anies that are related to each other as
competitors is to blunt the edge of tivalry between the corporatio
compromising Opposing interests, and ns, to seek out ways of
thus, eliminate competition. (Ibid.)

gec. 33 TITLE I I. I. BOARD OF : DIR
ECTORS/ TRUSTEES / OFFICERS 311
(2) No absolute prohibition’ Of interlocking directorates.

— Under
Section 32, contracts betwee N corporations having interlocking
directors are not rendered voi dor voidable on that
ground alone.
An individual may be a stackholder in different corporations
and it is not unusual to find a director or corporate officer occupying
the same position in another corporation not only because he has
investment therein but also because ‘his services may have been
proven to be valuable. However, while such situation is allowable,
dealing of interlocking directors ‘are subject to Sections 31, 32, and
Sec, 33.) Disloyalty of a Director. — Where a director,

by virtue of such office, acquires a business opportunity
which should belong to the corporation, thereby obtaining
profits to the prejudice of such corporation, the director
must account for _and refund to the latter all such
profits, unless the act‘has been ratified by a vote of the
stockholders owning or representing at least two-thirds
(2/3) of the outstanding capital stock. This provision shall
be applicable, notwithstanding the fact that the director
risked one’s .own funds in the venture.
Doctrine of “corporate opportunity.”

Under this doctrine, a director who, by virtue of his office,
acquires for himself a business opportunity which should belong
’These transactions usually occur in a parent-subsidiary relationship between

corporations. Hence, in some cases, the contract between two (2) corporations may
tequire representatives of one (1) corporation to sit in the board of the other. To prohibit
business transactions of one corporation with another corporation controlled ,by the
former would discourage formation of business subsidiaries and investments and thus,
21, 1992.)
hamper capital market forma tion in the country. (SEC Opinion, Dec.
The law recognizes that interlocking directorates are very common in today’s
business world and to absolutely prohibit such contracts would be impractical and
unwise, But transactions between such corporations should be subjected to close judicial
Scrutiny to determine the absence or presence of fraud or unfairness.” For example,
Where the circumstances show that the transaction would be of great advantage to
ne corporation at the expense of the other, especialy where, in addition to this, the
Personal interests of the directors or any of them would be enhanced at the expense of
time
© stockholders, the transaction is voidable by the stockholders within a reasonable
)
er discovery of the fraud. (19 Am. Jur. 2d 714.
4

Sec. 33
to the corporation, thereby obtain

ing'profits to the prejudice of Suc
Corporation, is guilty of disloyalty arid’should, h
for and:refund to the latter for all therefore, account
such profits, notwithstanding that
he risked his funds in the ventur
e’:
(1) Where the directors ‘of a corporation
cancelled ‘a contract
of the corporation for exclusive sale of
a for
and after establishing a rival business the eign firm’s products
directors signed a new
contract themselves with the foreign
firm for exclusive sale of its
products, the court held that equity wou
ld regard the new contract
as an offshoot of the old contract and,
therefore, for the benefit of the
corporation, as a “faultless fiduciary
may not reap the fruits of his
misconduct, to the exclusion of his
principal.” (Gokongwei, Jr, vs.
Securities and Exchange Commission,
89 SCRA’ 336 [1979], ‘citin
Silakot Importing Corp. v. Berlin, 68 N.E.
2d'501;-503.) ' |
(2) An amendment to the bylaws of a
corporation requiring
that a director shall not be an officer,
manager or controlling person
of, or the owner (either of record or ben
eficially) of 10% or more of
any outstanding class of shares, of any
other corporation: or entity
engaged in any line of business compet
itive or antagonistic to that of
the former, was sustained as valid and reasonable, as “it
to prevent the creation of an Opport is obviously
unity for an officer or director
of San Mig
uel Corporation, who is ‘also the offi
competing corporation, from taking
cer or owner of 4
advant
which he acquires as director to promote his agofe the information
interests to the
individual or corporate
prejudice of San Miguel Corporation
stockholders. Certainly, where two (2) cor and its
porations are competitive
in substantial sense, it would seem
improvable, if not impossible,
for the dire
ctor, if he were to effectively discharge
his loyalty to both corporations and his duty, to satisfy
place the performance of his
corporation duties above his person
al3 concerns .” (Gokongwei, Jr.
vs. Securities and Exc hange Commission, supra.)
: 5
Poration upon the property interest and profits

55; Ontjes v, MacNilan, 5 N.W. 2d 860.)

Sec: 33
313
Section 33 applies to gi
an officer, he is liable ulides fie seat disloyalty is committed b
- Second par agraph of Section 30.
When doctrine not applicable,
ment of company’s resources, or

bracing Opportunity personally is
not brought into direct competi tion with
the
Words and Phrases 393 -394.) Under Section 33, corporation. (see 9-A
the profits must have
been obtained by the director to the prejudice of
the corporation.
(3) Opportunityceases to be a “corporate opportunity.” —
The
doctrine is pursuant to jurisprudence which rules
that one who
occu pies a fiduciary relationship to a corporation may not
acquire,
in opposition to the corporation, property in which the corporation
has an interest or tangible expectancy or which is essential to its
existence. (SEC Opinion, March 4, 1982, citing 11 Fletcher, Cy.
Corp. 227.) However, this property or business opportunity ceases
to'be a “corporate opportunity” and transforms into a “personal
°pportunity” where the corporation is definitely:no longer able
to avail itself of the opportunity, which may “arise from fina
ncial
insolvency, or from legal restrictions, or from any other factor which
Prevents it from acting upon the opportunity for its own advantag
(Ibid.
, citing 11 Fletcher, p. 241.) e.
Section
i 33 applies
i only where a business
i opportunity ong
ity belongs
to the Soon ari the director takes advantage of that business
»PPortunity for his own profit..(see ibid., citing Proceedings of the
atasang
1979 Pambansa on the proposed Corporation Code, Dec. 11,
)

314 THE REVISED CORPORATION CODE 'OF THE PHIL
IPPINES Sec. 34
Ratification by stockholders of disloyal act.

Under Section 33, the guilty director will be exempt only from
liability to the corporation to account for the profits he realized
i
his disloyal act is ratified by the vote of the stockholders Owning or
Tepresenting at least 2/3 of the outstanding capital stock. There isno
similar provision in Section 30.
Section 33 is silent on whether the disloyal director shall be
allowed to vote his shares in the ratification of his act.
Sec. 34. Executive, Management, and Other Special

Comm
— If
itthe bylaw
te s soes
provide,
,the board may
create an executive committee, composed of at least three
(3) directors. Said committee may act, by majority vote
of all its members, on such specific matters within the
competence of the board, as may be delegated to it in the
bylaws or by majority vote of the board, except with respect
to the: (a) approval of any action for which shareholders’
approval is also required; (b) filing of vacancies in the
board; (c) amendment or repeal of bylaws or the adoption
of new bylaws; (d) amendment or repeal of any resolution
of the board which by its express terms is not amendable
or repealable; and (e) a distribution of cash dividends to
the shareholders.
The board of directors may create special committees
of temporary or permanent nature and determine
the
members’ term, composition, compensation, power
s, and
responsibilities. (N)
Executive, management, and other

special committees.
(1) Need for an executive or management committee — Secti
on 34
recognizes an already existing corporat
e practice in the Philippines
(dictated by necessity owing to the growing comp
lexities of modern
business), whereby the board of directors
delegates to an executive
committe e composed of some members of the board corporate
powers to assure prompt and Speedy action and solution to
important matters without the need for
a board meeting, especially
wher e such meetings cannot readily be
held.

Port Services, Inc. vs. Go, 518 SCR
A 453 [2007].) Because of the
nature of the fun
ction of the executive committee, the aut
appoint such body should be expressly pro hority to
vided in the bylaws, and
a provision in the bylaws which states that
“authorizing the board
to create such committees as the board may deem
necessary,” is not
a sufficient reason for its creation and appointment.
(SEC Opinion,
Sept. 27, 1993.)
The board cannot create or appoint an “executive committee”
to perform some of its functions absent authority in the bylaws. In
such case, the principle on de facto officers may be applied insofar
as third persons are concerned. However, insofar as the corporation
is concerned, the unauthorized act of appointment of an executive
committee may be ‘subject to Section 170, which provides for
penalties in case‘ of violation ‘of the provisions of the Revised
Corporation Code. (SEC Opinion, Sept. 21, 1993.)
(4) Matters excepted from delegation by board. — The committee
may act on specific matters within the competence of the board, as
may be delegated to it by the board or in the bylaws, including those
involving the exercise of judgment and discretion, except those
matters enumerated (a to e) with respect to which only the board
duly called and assembled as such can act upon.
Thus. an executive committee can function as the board itself in
all matters delegated to iti other than the except ted matters.3 However
the board ait validly delegate to the executive committee blanket
pp nn pp
6 ‘Citing De Leon, The Corporation Code o
02].

316 THE REVISED CORPORATION CODE OF THE PHILIPPINES —_Sec. 34
or general authority to act for the board if the delegation constitutes

in effect an abdication of the corporate powers and duties vested in
it by law. The board cannot delegate entire supervision and contro]
of the corporation to an executive committee for this will violate
Section 22.
(5) Enlargement by board of restrictions. — The restrictions on the
power of the executive committee as provided in Section 34 may be
enlarged by the board to cover other matters.
Note that under (d), the executive committee may amend or
repeal any resolution of the board unless “by its express terms is not
amendable or repealable.”
(6) Authority to function as the board itself. — As a matter of
business practice, the use of an executive committee in many
companies may reduce the directors to little more than a supervising
and ratifying body. (SEC Opinion, July 29, 1985, citing Ballantine,
p. 135.) Subject to the statutory limitations, a properly constituted
committee composed of directors has all the authority of the board
to the extent provided in the resolution of the board or bylaws. (SEC
Opinion, Sept. 16, 1986.)
(7) Membership. — Non-members of the board may be appointed
as members of the executive committee provided that there are
at least three (3) members of the board who are members of the
committee. (Ibid.)
An “Executive Committee” is a “governing body” which
functions as the board itself. Thus, membership shall be governed by
the same law/rules applicable to the board of directors as provided
in Section 34, (SEC Opinion, June 3, 1998.)
(8) Ultimate control by the board. — Where the. committe
comprises, or includes persons who are not directors, such comm e
ittee
shall be subject to the normal restrictions and requ
irement relating
to.undue abdication of authority by the boar
d. Thus, while the
executive committee may manage the
day to day operation of the
business of the corporation, the business
affairs thereof shall be
SS
7An earlier opinion of the SEC states

must be directors of the corporat
that all
members of an executive committee
ion. However, if all the acts of
merely recommendatory in nature the committee will be
and shallnot be carried out without the form
approval of the board of directors acting al
through a Majority of the quorum, alte rnate
representation may be allowed in
the committee such that some ment
not be directors ofthe corporations. (SEC Opinion, the reof may
July 5, 1974.) ae

317
judgment of the board of directo

: ce aes at
provided in Section 34, *s subject to the specific limitations
(9) Quorum and voting. —
requirements is the same as th at The general rule for quorum
for board of directors. A majority
of the committee members (regardless of the classification of
membership into directors/ members or non-directors / mem
bers)
constitutes a quorum.
To bind the corporation, it is
essential that the executive
committee acts “by a Majority vote of all its
members.” From this,
itcan be inferred that the committee cannot delega
te its authority
even to one of its number. (see 18 Am. Jur. 2d 588.
)
(10) Membership of a foreigner. — While “for
eigners” are
disqualified from being elected /appointed as “corpora
te officers”
in wholly or partially nationalized business activities
, they are
allowed representation in the “board of directors” or “governi
ng
body” of said entities in proportion to their shareholdings. (Sec. 2-A,
Anti-Dummy Law; Sec. 11, Art. XII, Constitution.)
The reason for the exception is that the board of directors/
governing body performs specific duties as a “body.” Unlike
corporate officers, each member of the board of directors/ governing
body has no individual power or authority to perform management
function. The powers delegated to the board of directors/ governing
body can only be exercised by it acting as a body when a quorum
is present. Hence, there can be no intervention in the management,
Operation, administration, and control of the corporation by the
members thereof in their individual capacity.
(11) Special committees. — The executive Or management
Committee referred to in Section 34 should be distinguished from
other committees which are within the competence of the board
fo create at any time and whose actions require confirmation
by the board itself.. The board may create special committees of
temporary or permanent nature and. determine the members’ term,
‘oOmposition, process, and responsibilities.
— 000—

Title IV
POWERS OF CORPORATION
y
Sec. 35. Corporate we rs an d Capacity. — Ever
Po der this Code has the power
corporation incorporated un
and capacity:
(a) To sue and be sued in its ¢ orporate name,
ss the ce rtificate
(b) To have perpetual existence unle
of incorporation provides otherwise; (N)
(c) To adopt and use a corporate seal; |
(d) Toamend its articles of incorporation in accordance

with the provisions of this Code; a
(e) To adopt bylaws, not contrary to law, morals,
or public policy, and to. amend or repeal the same in
accordance with this Code; _ ke
(f) Incase of stock corporations, to issue or sell stocks
to subscribers and to sell treasury stocks in accordance
with the provisions of this Code; and to admit members to
the corporation if it be a nonstock corporation;
(g) To purchase, receive, take or grant; hold, convey,
sell, lease, pledge, mortgage and otherwise deal with
such real and personal property, including secur
ities and
bonds of other corporations, as the transaction
of. the
lawful business of the corporation may reas
onably and
necessaril y require, subject to the limitations i
by law and the Constitution: prescribed
(h) To enter into a partnership, joi
or consolidahi ation or any other commer
» Joint venture, merger,
cial agreement are
natural and juridical persons; (N) :
(i) To make reasonable donations, j includi
: abla ee|
for the public welfare or for hospital, ns,
chalit
318

Sec. 35 TITLE IV. POWERS OF CORPORATION
319
scientific, civic, a or similar Purposes: Provided, That

foreign corporation, shall give donations
in aid of be
political party or candidate or for u -
of partisan
purposes
political activity;
(j) To establish pension, retirement, and other plans
for the benefit of its directors, trustees. officers and
employees; and
(k) To exercise such other powers as may be essential
or necessary to carry out its purpose or purposes as stated
in the articles of incorporation.
Meaning of powers of a corporation.

The term powers of a corporation has reference to the corporation's
capacity or right under its charter and laws to do certain things. (6
Fletcher, p. 230.)
Distinguished from its franchise

and objects.
from
(1) The powers of a corporation must be distinguished
entity for the
its primary franchise, which is its right to exist as an
rs and from
purpose of doing the things embraced within its powe ing
ed to an exist
its secondary franchise, which is the right grant
c use, but with private
corporation to use public property for a publi
profit. (6-A Fletcher, p. 431.)
ed with its objects or
(2), Neither must its powers be confus the purpose of
business. A cor poration exercises its powers for
e, the power to issue promissory
attaining its objects. Thus, for exampl
bei ng obv iou sly con sisten t with the reasonably conducive to
notes, on, is a mere power
of the corporati
the furtherance of the objects (6 Fletcher, p. 231.)
and not an object orbusiness of the corporation.
persons/partnerships
Relative powers of natural
and corporations.
d. — An in di vi du al has absolute right
(1) Any act not prohibite his pr op er ties, to perform all acts
an d di sp os e of
to fully use, enjoy t an y con tro l ex cept when they are
s wi th ou
and to make all contract me is true of an ordinary partnership.
forbidden by the law. The sa

PHILIPPINES oec,
320 THE REVISED CORPORATION CODE OF THe aS
: hip do not owe the;

Since a natural person and an ordinary Part
existence to the State, they can perform any
ohibited by
law. si
e other hand, the civil rights.
(2) Only powers granted . — On th limitéd
:’ doctrine only powersy
such capacit
of limitea has
of a corporation are different. aire
adopted by our corporation law, a 0 d those that are necessarily
as are expressly granted on it by mk fea hich Meare ekincidental
eh a
implied from those expressly granted or those w
- ay ; ve
to its existence. (Sec. 2.) It is, therefore, not ore pliedly
corporation has the power to do all acts not expressly
prohibited.
the
In other words, the enumeration of corporate powers implies
exclusion of all other powers unless they are incidental or implied
in conformity with the generally accepted principle of statutory
construction “expressio unius est exclusion alterius.” The reason for
the doctrine is that a corporation owes its existence to the State and,
therefore, it has only such powers as are expressly and impliedly
granted by law. :
Classification of corporate powers.

A corporation exercises its power through its board of directors
(or trustees) and. through its officers and agents when duly
authorized by a board resolution or its bylaws. .
The three (3) classes of power
of a corporation are:
_ (1) Those expressly granted or authorized by law (Sec. 2.), ie.,
those conferred by the Revised Corporation Code and its articles of
incorporation; i PE eis :
(2) Those that are necessary to exercise the express or incidental
powers; and
(3) Those incidental to its existence. (Sec. 2.)
The powers of a corporation, how ever, frequent cut across
: , ’ ly
lines of the above classification:! oh vd ! }
sSesygrey princerns fOr 4 ; in :
directors in order is validly sign the certification, (BA Savings Bank vs. Sia, 336 SCRA ce

321
C annot exercise the powers, rights,

e ‘ ae,
registered with the SEC. Orporation Code to organizations
Determining whether an act or co

: ntract ithi
scope of corporate powers. wen
(1) Source of powers, —
In determining whethwhether a corporation
[
has power to do an act, it is necessary to: §
(a) first,.refer. to its special
charter. or its articles. of
incorporatioton see whether it is wi
thin the express, implied, or
incidental powers conferred; _
(b) then, to examine the statutes relating to corporations to
see if the act is allowed or prohibited; and
(c)' then, in some cases, to consult the general statutes to see
if the act is illegal even in case of natural persons. (see 6 Fletcher,
pp. 233-246; also Clark’on Corporations, p. 412.)
(2) Express or implied grant of powers. — Unless the power to
carry on a particular business is expressly or impliedly conferred, it
does not exist. It is illegal for a corporation to apply either its capital
or profits to business for purposes not contemplated by its charter.
(SEC Opinion, Jan.13 and 25, 1988.) Thus, it is important that the
corporation’s intended purposes are stated with sufficient clarity in
the articles of incorporation so as to define with certainty the scope
of its business.
(3) Essentialor necessary powers. Under Section 35, the corporation

can exercise such powers as may be essential or.necessary to carry
out its purposes or purposes as stated in the articles of incorporation.
is in direct
The test to be applied is whether the act of the corporation
TAL srporated vs. Court of Appeals, 352 SCRA 334 [2001]; BPI Leasing
Ce SE ie 416 SCRA 4 [2003]; Athena Computers, Inc. vs. Reyes, 532
SCRA 343 [2007]; Salenga vs. Court of Appeals, 664 SCRA 635 [2012].) The requirement
for signing the certificate applies even to corporation. The mandatory directions of the
Rules of eats make no distinction between natural and juridical persons. (Zulueta vs.
Asia Brewery, Inc., 354 SCRA 100 [2001].),

and immediate furtherance of its business, fairly incidental to the

express powers and reasonably necessary to their exercise. If so, the
corporation has the power to do it; otherwise, not. (6 Fletcher, pp.
198-199; Montelibano vs. Bacolod-Murcia Milling Co., Inc., 5 SCRA
36 [1962].)
Express powers explained.

Express powers are the powers expressly conferred upon the
corporation by law.
(1) These powers can be ascertained from the special law
creating the corporation, or if the corporation is formed under the
general incorporation law, from’such law, the general laws of the
land applicable to corporations, and its articles of incorporation.
(2) Section 35 contains an enumeration of powers expressly
given to corporations created under the general incorporation law.
The express powers may be exercised by the corporation whether
or not any such powers are stated in the articles of incorporation or
bylaws, for they are deemed vested in any corporation organized
under the Revised Corporation Code. ieee SEC-OGC Opinion No.
33-11,? July 29, 2011.) 7
(3) Unless otherwise provided by the. Revised Corporation
Code, the general powers conferred. by Section 35.are to be exercised
by the board of directors or trustees. (see Sec. 22.) :
(4) Other express powers of the corporation are specifically
provided in Sections 36 to 43, which also lay down the conditions
under which these powers are to be exercised.
The express powers mentioned in Nos. (b), (d), (e), (£), and (h) of
Section 35 are discussed under Sections 11 and 36, 15, 45-47, 61, and
75-79, TESpeCHVely,
Implied powers explained.

Implied powers are those powers reasonably necessary to execute
the express powers and to accomplish or carry out the purposes for
which the corporation was formed.

323
(2) Powers merely

free loans) are not implie t or useful (e.2., giving of interest-
the purposes or objects of
d if th e
_~y ate not essential, having in view
the corporation,
Implied powers classified.
Sometimes it is difficult to determine whether

is an implie
a certain activity
d
nine pow er. How ey er, this rough classification embraces
most of the implied powers: 3
(1) Acts in the usual course of business. —
This includes such
acts as borrowing money; making ordinary contracts; exec
) uting
promissory notes, checks or bills of exchange; taking
notes or other
securities; acquiring personal property for use in conn
ection with
the business; acquiring lands and buildings to be used as place
s of
business or in connection therewith; and selling, leasing, mortgaging
or other transfers of property of the corporation in connection with
the running of the business.
It is evident that all of such acts, under ordinary circumstances,
are necessary to run the business;
(2) Acts to protect debts owing to a corporation. —If a corporation
is a creditor, it may do such acts as may be necessary
‘to protect its
tight as such creditor. Thus, .a corporation may purchase property,
act as a guarantor or sometimes even run a business temporarily to
collect a debt, where otherwise it would have no power to do so;
(3) Embarking in different. business. — A corporation.may not
engage in a business different from that for which it was created
as a regular and a permanent part of its business. (see, however,
Sec. 41,) This is especially true with respect to those particular kinds
of corporate activities which are governed by special laws. (see
comments under Sec. 13[b].) Thus, a corporation not organized for
that purpose cannot go into the banking or insurance business but it
may do any isolated act of banking or insurance in connection with
Some express power.

Sec. 35
ly conduct an outside
A corporation may, however, temporari
business to collect a debt out of its profits;
loyees. — While the
(4) Acts in part or wholly to protect or aidh emp
suc acts as building homes,
cases are divided, the better view favors hin the
, etc. for employees, as wit
places of amusement, hospitals
corporate powers.’ (see Sec. 35[j].)
to incr ease busi ness . — Thu s, a corporation may conduct
(5) Acts
sion programs, OF promote fairs
contests or sponsor radio or televi rea se its business. (see 6
her ing s to adv ert ise and inc
and other gat
Fletcher, pp. 276-277.)
be
No fixed rules, however, can be laid down which could
cases of implied powers. The
applied mechanically in determining and circumstances
facts
question must necessarily depend upon t he
of each case.
Incidental or inherent powers explained.
ation can exercise
Incidental or inherent powers are powers a corpor essary to
or powers nec
by the mere fact of its being a corporation
granted. (Sec.
corporate existence and are, therefore, impliedly
35[a].) oh
l entity,
(1) As powers inherent in the corporation’ asa lega
44.) These
they exist independently of the express powers. (see Sec.
incidental powers are recognized by Sections 2 and 44.
(2) Some powers enumerated in Section 35 are: incidental
powers which can be exercised by a corporation even absent an
express grant.
3Under Sec. 35(a), a corporation, when necessary in the pursuit of its business,
may borrow money. In corporations other that those formed to engage in the business of.
loaning money, this activity is but incidental, and cannot be extended to purposes foreign
to the business and objects for which the corporation was related, However, they may
temporarily loan corporate funds provided certain conditions are complied with. (SEC
Opinion, Jan. 22, 1991; see note 2 under Sec. 42.)
‘In a case where the opening of a post office branch of the Bureau of Posts at a
mining camp of a corporation was undertaken at the request of the corporation to
promote the convenience and benefit of its employees and their families who have settled
at the mining camp, and after a resolution of the board of directors was passed wherein
the corporation assumed full responsibility for all cash received by the Postmaster, it
was held that the resolution adopted by the board is not an ultra vires act (see Sec 45 )
although it is outside the object for which the corporation was created since the re olution
covers a subject which concerns the benefit, convenience, and welfare of the c hs ation’s
employees and their families. (Republic vs. Acoje Mining Co., Inc., 7 SCRA 361 [1963] )

325
Construction of Po
wers granted.
Anactis presumed
to be within corporate powers and, therefore,
valid, unless clearly shown to be otherwise.
(1) In construing charters to determine the powers of

corporations, it is well-settled, as in other cases of legislative grants,
that they are to be construed strictly; any
ambiguity in the corporate
against the corporation and in favor of the
public.
(2) In determining what powers hav
e been conferred, the whole
instru ment is to be taken together, including provisos
final intention and purposes of the
as expressing the
part ies.
(3) On the other hand, since grants of corpor
ate franchises are
intended not only for private gain but also to subser
ve publicinterest,
they should be So construed as not to defeat the purpose
of their creation.
The intention of the legislature should always control,
it being the
gene ral rule that a thing within the intention of the legislatur
e is as
much within the statute as if it were within the letter.
(4) Charters are also to be construed in view of the circumstan
ces,
usages, and practices existing at the time they were granted and it is
not
the province of the course to enlarge the powers of a corporatio
n
beyond its charter limitations because circumstances have changed.
(5) If the charter is susceptible of two meanings, the one
restricting and the other extending the powers of the corporation,
that construction is to be adopted which works the least harm to the State.
(6) A general incorporation law may apply to corporations
Operating under special statutes with respect to the conduct or
government of such corporations as to which no specific provision
has been made. (19 Am. Jur. 2d 433-434.)
Application of rules.
(1) Acorporation incorporated as a railroad corporation has the
incidental power to build railroads because such power is necessary
for the accomplishment of the purpose for whi ch the corporation is
created.
(2) Acorporation expressly authorized to engage in agriculture
has implied authority to buy agricultural lands because such
authority is reasonably appropriate to carry outits express authority.

(3) A corporation engaged in the manufacture of cement could

sively
operate and maintain an electric plant for the purpose exclu
and to its employees
of supplying electricity to its cement factory the
living within its factory compound where it appears that
the business
operation of such plant is necessarily connected with
Inc. vs,
of manufacturing cement. (Teresa Electric and Power Co.,
.)
Public Service Commission, 21 SCRA 252 [1967]
r its articles
(4) Neither may a corporation authorized unde
in automobiles
of incorporation to operate and otherwise deal
in the transportation
and automobile accessories and to engage
land transportation
of persons by water, engage in the business of
such would have no
(e.g., operation of a taxicab service) because ness.
legitimate busi
necessary connection with the corporation’s 9].)
A 809 [196
(Luneta Motor Co. vs. A.D. Santos, Inc., 5 SCR
(5) Investment by a transportation company in an insurance
corporation with transportation operators as stockholders,
designed to reduce insurance costs, may be interpreted as an act
reasonably requisite and necessary to catry out the business of land
of the legitimate
transportation, because insurance costs form part
June 13, 1961.)
expenses 'of a transportation operator. (SEC Opinion,
uring
(6) °A ‘corporation engaged, among others, in manufact
ucts may
rubber ‘shoes, slippers, sandals, and other allied prod
pers to
be permitted to. buy. worn-out or, used shoes and, slip
be. used in
be.-reprocessed ' or reclaimed into raw materials: to
ement, it
manufacturing its products, and to manufacture rubber,c
same is
appearing that the main ingredient in manufacturing the
Dec.
rubber, and rubber cement is a rubber product. (SEC Opinion,
3 bre =
15, 1967.)
(7) Butacorporation engaged primarily in fishing, and to pursue
this, it is empowered by its articles of incorporation “to operate cold
storage plants xxx as may be necessary for the carrying on of the
said primary objective of all the corporation” cannot operate a cold
storage plant or an ice plant as a public service operator since it can
operate such plant only insofar as it may serve its primary ! purpose.
)
(SEC Opinion, Feb. 17, 1969.)
(8) The power to create or establish branch offices is generally
ws. In the
provided for in the articles of incorporation or in the byla
ion formed
absence, however, of such a provision, every corporat

sec. 35 TITLE IV. POWERS OF CORPORATION
eae
under the law has the im lied or inci tablish

or incidental. power to esta
the PhilipPpines or elsewhere as the needs and
Gisth in
branch “asoffices
exigencies of the business of the corporation may require. Thus, the
board of directors of a corporation may, even absent a provision
in
its articles of incorporation or bylaws, establish branch offices if it
is necessary or convenient for the Proper accomplishment of the
purpose for which the corporation has been created. (SEC Opinion,
March 2, 1970.)
(9) The Land Bank of the Philippines, being a commercial bank
clothed with authority to exercise all the general powers mentioned
in the Corporation Code and the General Banking Act, as provided
in its charter, among which is the power to write-off loans and
advances, has been held to also have the lesser power to charge
off or condone interests and penalties. (Land Bank of the Phils. vs.
Commission on Audit, 190 SCRA 154 [1990].) oe
(10) An educational institution is limited to developing human
capital through formal instruction. Hiring professors, instructors,
and personal acquiring equipment and real estate, establishing
housing facilities for personnel and students, hiring a concessionaire,
and other activities that can be directly connected to the operations
and conduct of the education business may be considered the
necessary and incidental acts of an educational institution. Securing
third party loans by mortgaging its properties does not appear to
have the remotest connection to the operations of the educational
institution’s conduct of business. (University of Mindanao, Inc. vs.
Bangko Sentral ng Pilipinas, 778 SCRA 458 [2016].)
(11) If “fund raising activity” is not embodied among the
corporation’s authorized purposes in its articles of incorporation or
is neither necessary nor incidental in the furtherance of its corporate
objectives, the same cannot legally be undertaken by the corporation.
(SEC Opinion, Jan. 17, 1995.) . Sica ro
Ratification of corporate acts.
_ (1) By stockholders (or
valid acts done or authorizmembe rs). — They may
ed by the board of direcratif
tors
y and render
(or trustees)
but which were beyond the powers of the direc
tors, or acts done or
authorized by the directors, provided the acts done are such as ma
be done or authorized by the stockholders. (2 Fletcher, p. 1103.) °°

: (2) By board of directors (or trustees).— Similarly, a transaction,

if within the powers of a corporation; may be consented to, ratified,
or acquiesced in by the board of directors (or trustees) if it could
be authorized ‘by them. If it is consented to or ratified with full
knowledge of the facts, it is finally and absolutely binding, and
neither the corporation nor individual stockholders (or members)
nor strangers can afterwards sue to set it aside or otherwise attack
its validity. (3 Fletcher, p. 361.)
Effect of ratification retroactive. |
Except as to intervening rights of strangers, ratification by
a corporation of an unauthorized act or contract by its officers or
others relates back to the time of the act or contract ratified, and
is equivalent to original authority. Omnis ratihabitio retrotrahitur. (2
Fletcher, pp. 1185-1188.) | Sees
Thus, if a corporation has, been empowered, as a secondary
purpose, to purchase stocks in other corporations by its articles of
incorporation, although the investment was made sans the prior
consent and imprimatur of the stockholders under Section 41 of
the Revised Corporation Code, this legal infirmity is cured by the
subsequent ratification of the required vote of the board of directors
and stockholders. (SEC Opinion, Dec. 5, 1963.)
Mode of exercising powers. 3 :

(1) No particular mode prescribed by charter. — If the charter of a
corporation prescribes no particular mode for exercising its powers,
they may be exercised in any mode, provided it is not contrary to
law, which the stockholders or officers may deem best. So, it has
been well said that corporations “may exercise all the powers within
the fair intent and purpose of their creation, which are reasonably
proper to give effect to powers expressly granted. In doing this,
they must have a choice of means adapted to ends, and are not be
confined to any one mode of operation.”
(2) Particular mode prescribed by charter. — If the charter requires
its powers to be exercised in any particular way by officers or agents,
they cannot be properly exercised in any other way, for the powers
of a corporation are measured by its charter, not only as to the things
which it may lawfully do, but also as to the mode of doing them.
However, as noticed in treating of the effect of ultra vires transactions

329
84-286.)
(3) Corporation organized und :
law —. Wher
er a special a
SEN ion mei a ranai s under a special law, the .rules governein
g
corp ganized or under the Rape
where the sp ec neral lawf have no application
ial statutes pro vide gemethods
control of the corporation. (19 Am. Juin ba 139). the regulation and
Power to sue and be sued.

This power (Sec. 35[a].) is an incidental to corporate existence.
As arule, suits are to be brought by or against the corporatio
n in its
own name.°
| “(1) Dissolved corporation. — Corporations de facto (Sec.

19.) may
sue or be sued but a corporation dissolved after the expiration of the
three-year winding-up period (Sec. 139.) ceases to exist de jure or de
facto.* yes W362 a 7
(2) Unregistered corporation. — A corporation not duly registered
in accordance with law has no legal capacity to sue. Foreign
corporation. — Neither can a foreign corporation which‘ transacts
business in the Philippines without the necessary license from the
SEC sue in Philippine courts. (Sec. 150.) i
(3) Right to claim moral damages. — An artificial person like
a corporation. cannot experience. physical suffering, mental
anguish, besmirched reputation, wounded feelings, moral shock,
social humiliation and similar injury. (see Art. 2217, Civil Code.)
Nevertheless, a corporation may have a good reputation or business
standing which, if besmirched or debased, may be a ground for
the award of moral damages (Mambulao vs. Phil. National Bank,
22 SCRA 359 [1968].) under the Civil Code, (Art. 2217 thereof.) But
in such case, it is imperative for the claimant to present proof to
*Lack
ete
acity to sue refers to'a + te
plaintiff's genera 1 disability too stie,
stie, such as on ac-
count pce ec Spokinh incompetence, lack of juridical personality or any other gen-
eral dis ualification of a party. A dissolved corporation no longer possesses juridical per-
aoKalite and, therefore, it has no legal capacity to sue because of lack of personality to sue.
(Alabang Development Corporation vs. Alabang Hills Village Association, 724 SCRA 321
(2014].) ;

justify the award by showing the existence of the factual basis of the
damage and its causal relation to the defendant's acts. (Development
Bank of the Phils. vs. Court of Appeals, 403 SCRA 460 [2005]; Manila
Electric Co. vs. TEAM Electronics Corp., 540 SCRA 62 [2007].)
(5) Real party-in-interest: — As a rule, the right and power of

a corporation to sue in any court must be'brought by the board of
directors or trustees that exercises its corporate powers (Sec. 23.) on
behalf of the corporation or by any of its duly authorized officer or
agent.6 (see Premium Marble Resources, Inc. vs. Court of Appeals,
264 SCRA 11 [1996]; Shipside Incorporated vs. Court of Appeals,
352 SCRA 334 [2001]; Philippine Rabbit Bus Lines, Inc. vs. Aladdin
Transit Corp., 493 SCRA 358 [2006]; Mufioz vs. People, 548 SCRA
473 [2008].)
(a) Under Section 35(a), read in relation to Section 22, where
a corporation is the injured party, its power to sue is lodged with
its board of directors or. trustees. A minority stockholder ,and
member of the board of directors has no such power or authority
to sue on the corporation’s behalf. (Tana Wing Tak vs. Makasiar,
350 SCRA 475 [2001]; see Mediserv, Inc. vs. Court of Appeals,
617 SCRA 284[2010].) = §
(b) Under. Section 3,; Rule 46 ,of, the);Rules of, Court, a
petitioner before the Court of Appeals must submit with the
of non-forum ‘shopping «and
- petition, a sworn certification.
failure to comply with the requirement is sufficient ground
for dismissal of the petition. The requirement applies even to
corporations, the Rules of Court making no distinction between
‘natural and juridical persons. A certification not signed by a
person not duly authorized by board resolution renders the
petition stibject to dismissal. (Gonzales vs. Climax Mining Ltd.,
452 SCRA 607 [2005]; MC Engineering, Inc. vs. National Labor
Relations Commission, 360 SCRA 183 [2001]; see Mediserv, Inc.
ys. Court of Appeals, 617 SCRA 284 [2012]; Cosco Philippines
Shipping, Inc. vs. Kemper Insurance Co., 670 SCRA 343 [2012].)
‘In a case, the corporate officer initially failed to show that she had the capacity to
sign the verification and institute the ejectment case on behalf of the lessor company. It
was held that “her act of immediately presenting the Secretary's Certificate confirming
her authority to represent the company may be considered as substantial .compliance
and call for the relaxation of the rules of procedure in the interest of justice. (Parichia vs.
Don Luis Dison Realty, Inc., 548 SCRA 273 [2008]; see Asean Pacific Planners vs. City of
Urdaneta, 566 SCRA 219 [2008].)
_ at

TITLE Iv. POWER
: RS OFC
ORPORATION
331
(c) Since the sion;

against forum shopping
e in Sve
: o
e
Verificatio NS and. cert

ifications
in behalf of a coy integral to the act
of filing cases
e Signing may not
be deemed as
to-cas
of the above corpora ing the authority
verification or certificate against
forum shopping is that they
are “in a position to verify the truthf
ulness and correctness of
theallegations in the petition.” (Cagayan Valley
Comm. of Intern
Drug Corp. vs.
al Revenue, 545 SCRA10 [2008]; South
Cotabato
Corp. vs. Sto. Tomas, 638 SCRA 566 [2010]
.) 34
_:(e) A. government-owned or controlled corporation can
act. only through its. duly authorized representatives. Ina
case in view of the absence of.a board resolution authoriz
in
petitioner’s officer-in-charge to represent it in the petition: for
review, the Supreme Court ruled the verification of non-forum
=o shopping executed by the officer failed to satisfy the Rules of
Court. (Public Estates Authority vs. Uy, 372 SCRA 180 [2001].)
(f) Where the corporate officer’s power as an agent of the
corporation did-not derive from a board resolution, it would
nonetheless be necessary to show a clear source of authority
from the charter, the bylaws, or the mnie acts otthe soveming
emium Marble Resources vs. Court of
ppeals, supra;
nee Cae vs. Commission on Audit, 384. SCRA 548
[2002].)
ing the rule that every action must be brought
or ie 3 qian name of the real party-in-interest (Rules
of Cok Rule 3, Sec. 2.), where a voting trust agreement was
executed by saeeain stockholders of a corporation which was not

a signatory thereto, the corporation is not real party-in-interest

in the suit to enforce the agreement. The action should be filed
the stockholders. (National Investment & Development
by
Corporation vs. Aquino, 163 SCRA 153 [1988].)
kholder
(h) In a derivative suit, however, the minority stoc
or stockholders may sue erring corporate officers in the name
of the corporation with the corporation as the real: party-in-
interest. (see comments under Sec. 63.)
(i) Although a criminal case can only be filed against
officers of a corporation and not against the corporation itself, it
does not follow from this, however, that the corporation cannot
be a real party-in-interest for the purpose of bringing a civil
action for malicious prosecution. (Comet vs. Court of Appeals,
301 SCRA 459 [1999].)
(j). While the power to sue and be sued is lodged with the
board of directors, the physical acts of the corporation like the
signing of documents can be performed only by natural persons
duly authorized for. the purpose by corporate bylaws or by
a specific act of the board of directors. Absent the said board
resolution, a petition may not be given due course. (Shipside
Incorporated vs. Court of Appeals, supra; United Paragon
Mining Corp. vs. Court of Appeals, 497 SCRA 638 [2006];
Republic vs. Coalbrine International Phils., Inc., 617 SCRA 491
[2010]; Esguerra vs. Holcim Philippines, Inc., 704 SCRA 490
[2013].)
(k) A resolution.of the board of directors may, authorize
a particular officer to represent the corporation in all suits
brought for or against it. (Grand Boulevard Hotel vs. Genuine
~ Labor Organizations, 406 SCRA 688 [2003].) The Supreme Court
has ruled that the subsequent submission of proof of authority
to act on behalf a corporation justifies the relaxation of the rules
to allow its petition for review on certiorari to be given due
course. (Pascual and Santos, Inc. vs. Members of Tramo Wakas
Neighborhood Assoc., Inc., 442 SCRA 438 [2004]; see Republic
vs. Coalbrine International Phils., Inc., 617 SCRA 491 [2010].)
(1) Where piercing the veil of corporate entity is justified,
a stockholder or corporate officer may be sued along with the
corporation. (see comments under Sec. 2.)

gee. 3
333
of Court, Rule 12, Sec. 2.); hehie immediate in character (see Rules
. : , they have 1 ‘ ‘
action for or against ; no right to intervene in
195 SCRA 740 (19911) * “otPoration. (Saw vs. Court of Appeals,
of the corpor
intervene in an action by a creditor to foreclose ati on was allowed to
the mortgage executed
by its officers, for “he is injuriously affected
by the mortgage” and
“is more virtually interested in the outcome of this case that [the
corporation].” (Phil. National Bank vs.
Phil. Vegetable Oil Co., 49
‘Phil. 857 [1927].)
(7) Service of summons. — The rationale of all rules with
respect
to service of summons on a corporation is that such service must
be
to an agent or a representative, in contemplation of Rule 14, Rules of
Court, so integrated with the corporation sued as to make it, a priori
supposable that he will realize his responsibilities and know what he
should do with any legal’ papers served on him; one who performs
vital functions in the corporation that it would-be reasonable to
presume that he would be able to discuss the importance of paper
delivered to him, and be responsible enough to transmit the same
to the corporation. (Villa Rey Transit, Inc. vs. Rapacon, 81 SCRA 298
[1978]; Vlason Enterprise Corp. vs. Court of Appeals, 310 SCRA 26
[1999].) |
(a). Therules onservice of processmake service onan “agent”
sufficient whether the agent be general or special: As such, it
does not necessarily connote an officer of the corporation'and
may include employees but not those whose duties are not so
~ integrated to the business that their absence or presence will not
toll the entire operation of the business. The job ofa bookkeeper
is so integrated with the corporation that his regular recording
of the corporation’s “business accounts and 5 essential facts
about the transaction of a business or enterprise” safeguards the

corporation from possible fraud. being committed ‘adverse to

its own corporate interest. Thus, service of summons was held
properly made to a corporation through a bookkeeper or a clerk
who was not even authorized to receive the same on behalf of the
the
corporation, since what is of paramount importance is that
the
purpose of the rule on summons has been attained thereby,
interest of speedy justice has been served. (Pabon vs. National
Labor Relations Commission, 296 SCRA 7 [1998].)
(b) Similarly, summons was held properly served on a
to
corporation through a claim employee who does not belong
the managerial staff, but whose role in the corporation is that of
a representative in relation to cases involving it, i.e., regularly
indorsing summons and complaints against the corporation,
following-up, and attending cases filed and against it. (Weena
Express, Inc. vs. Rapacon, 534 SCRA 288 [2007].)
(c) Although the corporation’s principal office and a
director’s residence are housed in the same building, the latter’s
housekeeper cannot be considered as a person-in-charge of
the corporation’s office authorized to receive a copy of a court
decision on behalf of the corporation and neither can the
housekeeper’s receipt suffice as service to the director absent
a showing that such housekeeper had been authorized by the
corporation to accept service. (Camper Realty Corp. vs. Najo
‘Reyes, 632 SCRA 491 [2010].)
(8) Failure to'implead corporation. — The filing of a complaint
against a ‘stockholder is not ipso facto a complaint against’ the
‘corporation. The failure to properly implead the corporation as a
‘defendant violates the fundamental principle that a corporation
has a legal personality separate and distinct from its stockholders.
Merely annexing a list of corporations ta the complaint is a violation
of their right to due process for it in effect be disregarding their
‘distinct and separate personality without a hearing.
Power to adopt and use a corporate seal.

A seal isa device (as an emblem, symbol, or word) used to
or organization and
identify or replace the signature of an individual
to authenticate (as under common law) written matter purportedly
emanating from such individual or organization. It may refer also

Gec. 35 TITLE] V. POWRRs
op CORPORATION
ts
to the impression 9 f su
stocks.’ (see Webste ice on do
r’s ae W‘ Int. D ~Ocuments like certificates of
(1) Any seal ado Ict., p.. 2046 .)
may be altered
by it atPted and useg b
Pleasure. Whe
for a special Occasion, different ¢ Te a corporation adopts a seal
adopted is the corporate S io
Words and Phrases 407.) eee
directory rather. than mandat ory. Ac : 3

g
withoutia seal. ty: Orporation may. exist even
(3) At common law, the rule prevailed for some

time that a
corporation could not make a parol contract
and could speak and
act only by its common seal. This technical rule of the common
law
soon gave way, however, and today in the transaction of its business
,
a seal is no more necessary to render valid the acts and contracts of a
purely business corporation.
But although it may not be necessary, the reason it is desirable
to attest all contracts and other acts of the corporation with its seal,
when this is possible, is that the presence of such seal establishes,
prima facie, that the instrument to which it is affixed is the act of the
corporation. (18 Am. Jur. 2d 689-698.)
Power to acquire and convey property.

(1) ‘As an incident to every corporation. — This power which is also
conferred under the law has always been regarded as an incidental
power. of every corporation. A corporation needs properties or
y its business.’
assets to carron . 1
“ "4 the same thing as a signature nor is it equivalent toa

jemi eh tte earn att of the formality of SSCHONS an aise Ae aera 8
filed on behalt of a corporation denying its signature on : no ‘i vee ection
‘
of the note is not admitted and the plaintiff is put to formal p
Words and Phrases 407.) the Supreme Court: “The owning of a business lot upon which
» {It has been held aie its offices is reasonably necessary to a corporation which
Ree oh an extent that its prospects of the future are such as to justify
its directors in making such acquisition. A different rule would compel important
irectors in

While a corporation may appoint agents to negotiate for the

purchase of real property needed by the corporation, the final say
will have to be with the board of directors whose approval will
finalize the transaction. (Firme vs. Bukal Enterprises & Dev. Corp,,
414 SCRA 190 [2003].)
(2) As necessary to the transaction of its lawful business. — The
power under Section 35(g) is qualified by the phrase “as the
transaction of the lawful business of the corporation may reasonably
and necessarily require.”
~ (a) Property obtained by a corporation whichis foreign to the
purposes for which it was organized is an unlawful acquisition.
For example, it is not within the power of a corporation engaged
in general shipping business to buy a provincial parcel
of land
purposely for redistribution to its stockholders, as the acquisition
is neither necessary nor incidental to further its business. (SEC
Opinion, Aug. 1,.1989.)
(b): A corporation may not validly purchase, sell, mortgage,
etc., assets if it is not in the legitimate furtherance of its purposes.
Accordingly, the exercise of such power cannot be validated thru
the inclusion of such purpose in the articles of incorporation has
no interest whatsoever in the subject transaction. (SEC Opinion,
_ Sept..25,:1991.) 2h
|. \(c). ‘The transfer or sale of shares owned by a‘corporation in
another corporation requires approval by the board of directors
of the seller corporation (Sec. 22.) and while a corporation is
empowered by Section 35(g) to dispose corporate “assets, such
power is subject to Section 39. (SEC Opinion, Aug. 21, 1995.)
(d) Inthe ordinary course of business, a corporation ‘can
borrow funds ‘or dispose of assets of the corporation only on
authority of the board of directors which normally ‘designates
one (1).or more corporate officers to sign loan documents or
enterprises’ to conduct their business exclusively in leased offices ~'a result which
would retard industrial growth ‘and be inimical to the best interests of society. Thus,
a corporation whose business may properly be conducted in a populous center may
acquire an appropriate lot and construct thereon an edifice with facilities in excess of its
own immediate requirement. If it has the power to acquire such lot, construct an edifice
and hold it beneficially, the beneficial administration by it of such parts of the building as
are let to a must necessarily be lawful.” (Government vs. El Hogar Filipino, 50 Phil.
399 [1927].

337
with the requirements prescribed.

(3) As subject to limitations or restrictions
. — The right or power
of private corporations to deal in real and personal proper
ty is also
subject to limitations or restrictions prescribed by spe
cial laws and
theConstitution. Thus: |
(a) Under the Constitution, no private corporation or
association may hold alienable lands: of. the public domain
except by lease for.a period not exceeding 25 years, renewable
for not more than 25.years, and not,to exceed 1,000 hectares in
area. (see Art. XII, Sec. 3 thereof.) Natural resources such as coal,
petroleum and other mineral oils belong to the State and cannot
be alienated. Their exploration, development and utilization
shall be under the full control and supervision of the State. (Ibid.,
Sec. 2 thereof.)
(b) Under the General Banking Law -of .2000, any. real
property acquired by a bank by way of satisfaction of claims
under the circumstances enumerated in the law shall be
disposed of by it within a period of five (5) years or as may be
prescribed by the Monetary Board. The bank may, after said
period, continue to hold the property for its own use, subject
to limitations with respect to ceiling on investments in certain
assets. (see Secs. 51, 52, R.A. No. 8791.) |
Power to acquire shares or securities. ~

(1) Shares
a private. of other. corporations. — Section 35(g) authorizes
corporation. to. acquire shares or securities of
other
corporations.
(a) Such an act. does. not need the ‘approval: of the
ose or purposes
stockholders if done in pursuance of the purp
of the corporation as stated in its articles of incorporation but

Sec, 35
the approval
when the purpose is done solely ‘for investment,
ssary. (De la
of the stockholders as required by Section 41 is nece
27 SCRA 247 [1969].)
Rama vs. Ma-ao Sugar Central Co., Inc.,
no power to
The prevailing view is thata corporation has ess it is one
purchase or hold stock in anothe r corporation unl
incorpora tion. (7 R.C.L.
activity permitted by its articles of
20, 1961.)
Corp., par. 535; see SEC Opinion, Nov.
other corporations
(b) The power to acquire ‘shares in
ablished by the Revised
is subject to specific limitations est
the Constitution. The
Corporation Code, special laws, and.
the provisions of Section
exercise of the power is also subject to
176.
and can be among
(c) Acorporation c an be an incorporator
a yet- to-be-incorporated
the initial subscribers:to the shares of
., corporation. (Sec. 10.)
Revised Corporation
(2) Shares of the acquiring corporation. — The
limitations stated therein
Code authorizes a corporation subject to last par., 76, 80, 104.) A
67,
to acquire its own stocks. (see Secs. 40, when ithas
ever, only
corporation may purchase its own stock, how shares to be purchased
ir anrestricted retained earnings” to cover the
or acquired. (see Sec. 40.)
ber.
Corporation as stockholder or mem
express provision
“’ The old Corporation Law contains no composed of other
prohibiting the organization of a corporation
a corporation with other
corporations. A corporation may organize hority in the
of aut
corporations. (Sec. 10.) ‘The decided weight a
United States supports the view that a corporation may become
n, Oct. 12, 1970.)
inember of another corporation. (SEC Opinio
subscription
(1) A private corporation may, either by original her
ber, of anot
or by purchase, become a. stockholder and. mem
g to such
corporation with all the rights and liabilities attachin
ute or its
relation, either when it is expressly authorized by stat
within
chatter to do So, ot when such subscription or purchase is
cising the
its implied powers as a necessary or proper means of exer
It may
other powers conferred on it. (Ibid., citing 18 CJ.S., Sec, 34.)
n any
enter into a partnership, joint venture, merger, consolidatio or
ons.
other commercial agreement with natural and juridical pers

339
Power to contribute to charity,
_ (1) Existence of power formerly unsettled. — Section 35(i) vests

in business corporations. the authority to. contribute for purely
ee purposes.’ Before, the existence of such authority was not
settled.
(2) Basis of power now expressly granted. —Section 35(i) recognizes
the growing tendency to regard charitable giftsas within the scope
*While donations to charities by business corporations have been sustained by

various courts in the United States, they were justified by the presence of some benefit
or advantage accruing to the corporations. The reason for this judicial attitude against
such power is most strongly expressed in a case as follows: “A business corporation
is organized and ‘carried on primarily for the profit of stockholders. The powers of the
directors are to be employed for that end. The discretion of directors is to be exercised in
the choice of means to’attain that end and ‘does not extend to a change in the end itself,
to the reduction of or to the non-distribution of profits among stockholders in order to
devote them to other purposes.” (Dodge v. Ford Motor Co., 204 Mich. 459, 507, cited by
Emiliano R. Navarro, “Corporate authority to contribute to charity,” 26 Phil. Law Journal
188-189 [Oct. 1951].)
“The uncertainty resulted from the absence of any provision in the former
Corporation Law vesting the power, although such authority was impliedly recognized
by the National Internal:Revenue Code of 1939 (C.A: No. 466, as amended.) in Sec. 30(h),
thereof which provision is also found in the National Internal.Revenue Code of 1986.
(PD. No. 1158, as amended.) Said Sec. 30(h) allows deduction of: “Charitable‘and other
contributions. — Contributions or gifts actually paid or made within the taxable year.to or
for the use of the Government of the Philippines or any political subdivision thereof for
exclusivel i oses, or to domestic corporations or associations organized and
seria TRatewiee religious, charitable, scientific, athletic, cultural, or educational
purposes or for the rehabilitation of veterans, or to societies for the.prevention of cruel
to children or animals, no part of the net income of which insures to the benefit of any
Private stockholder or individual to an amount not in excess of six per centum in the
case of an individual and three per centum in the case ofa corporation, of the taxpayer’s
taxable income as computed without the benefit ofthis paragraph. a i
Still, it, was not clear whether purely charitable gifts, . unconnected with the
corporation’s .business, could. be considered valid as constituting a, proper, use of
Corporate funds if made without stockholders’ authorization. Sec. 30(h) is now Sec. 34(H)
of the National Internal Revenue Code 1997. (R.A. No. 8424.)

340 THE REVISED CORPORATION CODE OF THE PH ILIPPINES Sec, 35
of corporate authority. It is based on the SE iew thatBrteiilees

aine business
corporations are not organized solely as pt a with-corresponding
but also as economic and social Se at ailiedeas
ublic responsibility to aid in bettering db are doing
nandlitions in the community in which such corpor
business."
ised Corporation
Limitations on power. — Under the Revise
Bie he only limitations imposed on the authority # ; Peet abie
to make donations are: (a) the amount thereof me geo ee a
and (b) the donations by a foreign corporation m SSA Sa ass
of any political party or candidate or for de ee edanieseinn
political activity. (see Sec. 95, B.P. Blg. 881 ! shinieaiines
Code].) Only’ foreign speorauans a ee ee o thibrslinar
iving such donations. Under the Corpo i /
absolute prohibition for corporations, both foreign and Somestic
from donating to any political party, candidate or,for ponte: an
political activity. (GSEC-OGC Opinion No. 08-15, July 27, :
It is not required by law that the donation should inure to the
direct financial benefit of the corporation if it is “reasonable under
the circumstances, considering the corporation’s financial
condition.
The limitation that the donations must be “reasonable”
provides
a check against scheming directors and officers who
‘may use the
authority as a screen to appropriate corporate
funds for personal
ends , —
"SEC-OGC Opinion No. 35-14, Nov

ember 27, 2014, citing De Leon,
Code of the Philippines Annotated, The Corporation
p. 332 [2002]. As has been better
“Many business have advoca ted social respo
stated:
-of business corporations

their public patronage, b
In the last analysis, corpor private enterprise.
ate donations, unless am
treasury, redound to the ben ounting to Piracy of the
efit of the corporation, the shareh corporate
public.” (E.R. Navarro, op. older, the creditors, and
cit., supra, pp, 191-192.) the
“As business is chiefly co
corporation, its nd uc te d thr o ugh the medium of cor
i shareholders, direct porations, it is the
ors, and officers, wh
social obliga tions to empl
oyees and customers; o are b eing mad e to realize their
n sistent with this develo
Co
pment is the
: ities. ». In times when so much
t to permit such associ , it is
Stevens on Co ations to mak.
rporations [1949], p. € contributions to charit clearly in the public
252.) y.” (Ih id., p. 191, citin,
Pee
F

Sec. 35 qT E Iv, POWERS
OF CORPORATION
oe
Power to establish Pension. reti

and other plans » retirement,
(1) Corporate purpose or
. urposes, — ‘
every corporation by Sectio n fag
35(j) t The‘ authority
‘ granted
j to
and other plans for the Bélichea te let Feo titecaaeceishae
Thus, it has been Tepeatedly held that granting bonus,

and incentive compensation to employees as gratuity,
a rewa
within the implied po Wers of a corporations. It is rd for work is
a well-established
practice of corporations. The implied power to build houses, scho
churches, and libraries for employees has also been ols,
sustained. (see
Wyat & Wyat
t t, Business Law: Principles and Cases [1963], p.
Lopez Realty, Inc. vs. Fontecha, 247 SCR 708;
A 183 [1995].)
(2) Better: relations with corporate employees. —
A corporation,
like an individual em ployer, is not limited to payment
of wages
to its employees. It may extend to them other benefits,
such as
paid vacations, sick benefits and medical treatment, and
pensions,
which are not necessaril y charitable acts but actually part of the
employment contract. — ,
Contributions by a corporation to programs directly benefiting
employees apart from the benefits granted under the Social Securi
Act (R.A. No. 1161, as amended.). are permitted by the Revised
Corporation Code on. the theory that such activities promote better
telations between the corporation and its employees..(19 Am. Jur.
2d 508-509.)
Power to act as guarantor.

(1) Power generally withheld. — The Revised Corporation Code
contains no provision authorizing a corporation to guarantee the
debt of another. The rule is that no corporation has the power, by
any form of contract or endorsement, to become a guarantor or
surety or otherwise lend its credit to another person or corporation.
(SEC-OGC Opinion No, 11-08," April 16, 2008.)
"Citing De Leon, The Corporation Code of the Philippines Annotated, p- 334 [2002].

THE PHILIPPINES Sec. 36
n. there is nothing in
—If
(2) Inclusion in the articles of incorporatiocorporation the power
its articles of inc orporation which confers a
suretyship, it is deemed that
to enter into a contract of guarantee or
so especially since such act
the corporation is not authorized to do
corporation. Entering into
could prove to be disadvantageous to the
according to the strict
such contracts would be ultra vires which,
the express, implied,
construction of the term, is an act not within
by the Revised
and incidental powers of the corporation conferred
tion: It is an act not
Corporation Code or the articles of incorpora
den for lack of express
positively forbidden, but impliedly forbid
1, April 16,
or implied authority. (SEC-OGC Opinion No. 08-1 of
If the articles
2008; SEC-OGC Opinion No. 16-14, July 7, 2014.) the corporation
ranty,
corporation do not provide the power to gua
even if it is provided in
does not have the power.to guaranty
il 16, 2008.) The
the bylaws. (SEC-OGC Opinion No. 08-11, Apr nion,
corporation must amend its articles of incorporation. (SEC Opi
March 24, 1982.)
may guarantee if it is one of its secondary
-A corporation
purposes. (SEC Opinion, July 30, 1987.)#»:
—
Sec. 36. Power to Extend or Shorten Corporate Term.
as
A private corporation may extend or shorten its term
approved by
stated in the articles of incorporation when
and
a majority vote of the board of directors or trustees
ratified at a:meeting by the stockholders or members
tanding
representing at ‘least two-thirds (2/3) of the outs
the
‘capital’ stock or of its members. Written’ notice of
proposed action and the time and place of the meeting
432 [2002].
8Citing De Leon, The Corporation Code of the Philippines Annotated, p.
ions of another
_ “The SEC has allowed mortgage of corporate assets to secure obligat
ion,
corporation: (a) when the mortgage is in furtherance of the interest of the corporat
to secure the debt
and in the usual and regular course of business, or (b) when it is made
of a subsidiary. (SEC Opinion, April 15, 1987.) Even if the third party mortgage does
restriction in
not fall under either of the two (2) instances, to wit: (a) there is no express
the articles of incorporation or bylaws; (b) the purpose of the mortgage is not illegal;
the
(c) the consent of all corporate creditors and stockholders has been secured; (d)
transaction is not used as a scheme to defraud or prejudice corporate creditors or result
in the infringement of the Trust Fund Doctrine; (e) the mortgage will not hamper the
continuous business operations of the corporation; and (f) the accumulated third party
involved in the mortgage is financially solvent and capable of paying the mortgagee/
creditor. (SEC Opinion, Dec. 10, 1991.)

343
, de s
in the post office wit Must be deposited to the addressee
h postage prepaid, served personally,
al roni in ordance with
n latio he Commission on the e of
r
| : - In case of extension of corporate
term, a dissenting stockholder may exercise the right of
appraisal under the Conditions provided in this
Code.
Power to extend or shorten
corporate
term. -—
The corporate term of a private corporation
created for a specific
period may be extended or shortened by an
amendment of the
articles of incorporation a pproved by the majority vote
of the board
of directors or trustees and ratified at a meeting of the
stockholders
or members representing at least 2/3.of the outstanding capita
l
stock or of its members incase of nonstock corporatio
ns.
(1) Unlike in Section 15 which governs the amendment
of
articles of incorporation, the amendment under Section 36 must
be
taken at.a meeting of the stockholders or members and upon a vote.
(see SEC-OGC. Opinion. No. 25-14, Sept. 4, 2014.) “Mere written
assent” would not be sufficient. However, the formal requirem
ents
in the second paragraph of Section 16 mustbe complied with.
(2) The provision on the taking effect of the amendment in the
third: paragraph of Section 15 upon its. approval by the
SEC is not
applicable because the date of approval by the SEC may be befor
e
the effectivity date’of the extension ‘or reductioofn the corporate
term. The effectivity of the amendment relates back
to the date of its
filing withthe SEC if the latter fails to act within
six (6) months from
such date for a cause not attributable to the corporation.
(3) A voluntary dissolution of a corporation may
be affected
by amending the articles of incorporation to shor
ten the corp orate
term. (Sec.136.)
|
pense Caranmummmiinpeenescmmsen gst cman
'Citing De Leon, The Corporation Code of the Phil“y3ippi:nes Annotate
d, p.'171 [2006].

Sec. 37
d in
(4) The extension of the corporate term as originally state
the articles of incorporation is subject to the limitations or conditions
provided in Section 11.
Appraisal right of dissenting stockholders.

stockholder
Section 36 grants appraisal right to a dissenting to demand
by law
(right of stockholder in the cases provided
of extension of
payment of the fair value of his shares) “in case ng
to a dissenti
corporate term.” Such right should also be available
recognized in
stockholder if the corporate term is shortened as it is
Section 80(a).
of a
Note that the appraisal right applies only to a stockholder
stock corporation.
tal Stock; _
Sec. 37. Power to ‘Increase or Decrease Capi
Create or Increase Bonded Indebtedness. — No
Incur,
stock or
corporation shall increase or decrease its capital
unless
incur, create or increase any bonded indebtedness
‘directors -
approved by a majority vote of the board’ of
al stock.
and by two-thirds (2/3) of the outstanding capit
ders’
Written notice of the time and place of the stockhol
meeting and the purpose said meeting must be sent to
the stockholders at their places of residence as shown
or
in the books of the corporation and served personally,
s
through electronic means recognized in the corporation’
bylaws and/or the Commission’s rules as a valid mode for
service or notice. (SA) e
A certificate must.be signed by a majority of the

directors of the corporation and. countersigned by the
chairperson and. the. secretary. of the. stockholders’
meeting, setting forth: ;
(a) That the requirements of this section have been —

complied with; ;
(b) The amount of the increase or decrease of th

a
capital stock;
(c) In case of an increase of the capital stock, the
amount of capital stock or number of shares of no-par
stock thereof actually subscribed, the names, nationalities
and addresses of the persons subscribing, the amount

«ee 3 7
TITL E IV, POWERS
OR CORPORATION
345
of capital stock or. num

ber of no-par stock subscr
each, and the amount paid by ea ibed by
cash or property, or the amount ch on the subscription in
of shares of no-par sto of capital stock or number
ck allo tted to each stockhold
such increase is for the er if
Purpose of making effective stock
dividend therefor autho rized;
(d) Any bonded indebted
ness to be incurred, created
or increased;
(e) The amount of stock represented at the meeting:
and
(f) The vote authorizin g
the increase or decrease of
the capital stock, or the in curring, crea
ting or increasing
of any bonded indebtedne SS.
Any increase or decrease in the capital stock
or the in-
curring, creating or increasing of any bonded indebted
ness
shall require prior approval of the Commission
and where
ropriate, of the Philippine Competition Comm
ission.
lication with the Commission shall be made withi
n
six.(6) months from the date of approval of.the board
of
directors and stockholders. which perio d may be extended
for justifiable reasons. eee
Copies of the certificate shall be kept on file in the
office of the corporation and filed with the Commission
and attached: to the original: articles of. incorporation.
After approval by the Commission’ and the issuance
by the Commission of its certificate of filing, the capital
stock shall be deemed increase[d] or decreased and
the incurring, ‘creating or increasing ‘of ‘any bonded
indebtedness authorized, as the certificate of filing may
declare: Provided, That the Commission shall not accept
for filing any. certificate of increase of capital stock unless
accompanied by a sworn statement of the treasurer of the
corporation lawfully holding office at the time of the filing
of the certificate, showing that at least twenty-five percent
(25%) of the increase in capital stock has been subscribed
and that at least twenty-five percent (25%) of the amount —
Subscribed has been paid in actual cash to the corporation
or that property the valuation of which is equal to twenty-
five percent (25%) of the subscription, has been transferred
to the corporation: Provided, further, That no decrease in

capital stock shall be approved by the Commission if its.

effect shall prejudice the rights of corporate creditors. (A)
increase
Nonstock corporations may incur, create or
bonded indebtedness, when approved by a majority of
the board of trustees and of at least two-thirds (2/3) of the
members in a meeting duly called for the purpose. (A)
Bonds issued by a corporation shall be registered
with the Commission which shall have the authority to
determine the sufficiency of the terms thereof.
Power to increase or decrease capital stock.

(1) Anincrease or reduction in the capital stock of the corporation
is a fundamental change in the corporation. The authority of the
is not to be implied but exists only
corporation to take such action
when expressly conferred. (Peck v. Elliot, 79 F. 10; 38 L.R.A. 616; 44
A.L.R. 1315.) The power is granted by Section 37.
(2) Section 37 prescribes the procedure to be complied with to
effect a legal increase or decrease of the capital stock (not capital).
(a) The increase or decrease is now subject to prior
approval of the SEC, and where appropriate, of the Philippine
Competition Commission. (par. 3.)
(b) Even holders of non-voting shares are entitled to vote
on the matter. (see Sec. ‘6, par. 3[e].)
(c) The written notice requirement (par. 1.) is mandatory
and is obviously designed to protect the interests of minority
stockholders.
(3) The Revised Corporation Code contains no prohibition for a
corporation to increase its authorized capital stock even if the same
has not yet been fully subscribed. Sent oe :
2An amended articles of incorporation is not required to be filed. with the SEC to
reflect an increase in the contributed capital of a nonstock/non-profit corporation. Such
requirement applies only to stock corporations. It is sufficient for purposes of updating
the SEC records, that such fact is reflected in the financial statements. (SEC Opinion, April
2, 1998.)

gec. 37 ‘TITLE IV. Po WERS OF CORPORATION
347
Limitations on the Power,
(2) The corporation: must submit

proof to the SEC that such
decrease will not prejudice the rights of corporate creditor
otherwise the SEC shall not approve s;
the dacietse::
(3) In: case of increase of capital stoc
k, at least 25% of such
increase has been subscribed and
at least 25% of the subscription
has been paidito the corporation in actual cash.
(4) A corporation cannot issue stock in excess of the
amount
limited by its articles of incorporation; such issue is ultra vires
and
the stock so issued is void even in the hands of a bona fide purchaser
for value; and
(5) A reduction or increase of the capital stock can take place
only in the manner and under the conditions prescribed by law. (see
Sec. 37.)
Necessity for increasing capital stock.

(1) Increase of corporate assets. — An increase of the amount of
the capital stock may be for the purpose of effecting an increase in
the corporate assets by authorizing:
(a) ‘the creation of new shares to be offered and issued at a
fixed valuation; or
(b) the increase of the par value shares authorized to be
issued.
(2) Issuance of stock. dividends. — The capital stock may also
be increased without any corresponding increase in the corporate
assets by issuing stock dividends.’ (18 Am. Jur. 2d 753-755.)
tre KS AaB ' 3 : : .

It ig considered as a‘ cardinal rule in accounting that any business entity has to
teflect at all times the actual business transactions and/or events in its books as they
appen. For this reason, the corporation can already enter the increase in its authorized

Necessity of new subscription for increase.

(1) An increase in the authorized capital stock cannot be
lawfully accomplished without an actual increase in the assets of
the corporation and additional subscriptions unless such increase
is to effect a stock dividend (Sec. 37, par. 2[c]} see Sec. 42.) previously
authorized.
(a) If the actual capital is increased by accumulated profits
and such profits are distributed to the stockholders in the form
profits
of stock dividends, the capital stock is increased, for the
are reinvested in the corporation by transferring the same from
surplus account to a capital account.
(b) The amount corresponding to the stock dividends
declared may cover the required 25% subscription to increase
the authorized capital stock and, if sufficient, will obviate the
necessity of taking in new subscription.
(2) If the increase of the authorized capital stock is for the
purpose of making effective stock dividends previously authorized, the
law requires to be stated in the certificate the matters mentioned
in paragraph 2(c). It is, therefore, clear that stock dividends once
declared and issued are paid, and this rule admits of no exception.
(SEC Opinion, Sept. 9, 1977.)
Effectivity of increase or decrease.

(1). After approval by. SEC. — Under. Section 37 (par. 4.), the
capital stock ofa corporation stands increased or decreased only
from and after approval and the issuance by the SEC of its certificate
of filing of increase or decrease of capital stock. Before the issuance
of the certificate of filing of increase of capital stock, the subscribers
to the proposed increase cannot be considered ‘as stockholders and
be accorded the rights as such for the shares subscribed by each.
capital stock as well as the stock dividends declared:in its books as soon as the same
has been approved by the, stockholders of the corporation. As to the increase of its
authorized capital stock, however, such increase becomes effective only after its approval
and issuance of the certificate filing of the increase by the SEC, and it ‘retroacts to the
day of the approval of such increase by the SEC making valid the entries made in the
books, The stock certificates corresponding to the stock dividends should bear the date of
actual issuance, which must be after the increase in the authorized capital stock has been
approved by the SEC. (SEC Opinion, July 28, 1972.)

nese eh re ys | of funds I, foris its
already a going concern, “in
bustnece seecationa * it is
sel : capital
th epPat to allow the use of the amount representing
a al Teceived on account of the proposed
increase
of ete ofthe woe da to pesret its operations even during the
pe ication for increase of : ‘
SEC. (SEC Opinion, Jan, 30,1975) aPital stock with the
The funds must be utilized purely for business operations and
duly accounted for or recorded in the books of the corporation,
and further, no loans or cash advances must be exte
nded to any of
the oesubscribers to the pro posed increase
in the capital stock. (SEC
Opinion, Dec. 9, 1981.)
Over-issue of shares.
(1) An issue of stock by a corporation in excess of the amount
prescribed or limited by its articles of incorporation is ultra vires and
the stock so issued is void even in the hands of a bona fide purchaser for
value. (18 Am. Jur. 2d 757.)
(2) An over-issue of stock does not avoid the original issue. Where
the corporation is permitted by law to increase its capital stock,
mere irregularities in effecting such increase will not necessarily
invalidate the increased issue. (Ibid., 758.)
(3) There is no over-issue where shares have been surrendered and
new shares issued in their stead. The new issue in such case merely
replaces the shares surrendered nor is there an over-issue where the
corporate structure provides for conversion of one class of stock into
another at the option of a stockholder, or where a stock certificate is
issued to replace lost certificates. (Ibid.)
Unauthorized increase of capital stock.

An attempted unauthorized increase of capital stock amounts
to an over-issue and such stock is, therefore, void and. cannot be
validated by application of the doctrine of estoppel. The same is true
of an increase which is unauthorized because it is attempted under
such conditions or in sucha manner that is not within statutory
authority to make the increase.

~ rN ee?
It follows that:
(1) Subscriptions for such stock are likewise void both on the
ground of illegality and for want of consideration;
(2) Subscribers for or purchasers of such stock acquire none of
the rights of stockholders, although bona fide purchasers of certificates
therefor may have a right of action against the corporation for
damages;
for or purchasers of such shares do not
(3) Subscribers
g up
become liable.to creditors of the corporation or on a windin
to a
as stockholders for unpaid subscriptions, and. are not subject
and
statutory liability to creditors imposed upon stockholders;
for or purchasers of such shares from the
(4) Subscribers
their
corporation may recover from it, money paid to it under
n, or
subscription of purchase as upon a failure ‘of consideratio
are
breach of warranty of the existence of the thing sold, unless they
precluded from such relief as parties in pari delicto.
Failure to make'a specific offer to return dividends received has
no material bearing upon the subscriber's right of action. Where the
corporation cancels the illegal shares and repays to the subscribers
the money. paid by. them therefor, they are not liable to. or for
creditors for the amount so repaid. (18 CJ.S. 750.) . Pod
Subscription requirement in case of increase

in capital stock. :
(1) Subscription and payments based on the increase in capital stock.
— Under Section 37, the treasurer of the corporation must file an
affidavit showing that at least 25% of the increase in capital stock is
subscribed and 25% of the subscription is paid.‘
(a) If the corporation has an authorized capital stock of
P20,000.00 and it is proposed to increase. it,to P50,000.00,.an
increase of P30,000.00 subscriptions must be obtained for not less
‘Where the stockholders authorized the increased the increase of the capital stock of
a corporation but the minimum legal requirement of 257% subscription and 25% payment
could not be met so that no certificate of increase in capital stock was filed with the SEC,
the board of directors, acting in good faith, may authorize the refund to the subscribers
of subscription payments to the proposed increase. (SEC Opinion, Feb, 3, 1971, p. 262.)

351
3 Or purposes of increase of capital stock

that every subscribes Shall pay 25% of ‘his subscription. The
paid-up requirement is met if “25% of the amount
is paid although some subscrib subscribed”
even have not paid7 any amount. ers have paid paid | less than 25%,25% OF
ait (c) It would seem that the minimum 25% paid-up
" requirement applies only to par valu
e shares because a subscriber
~ to no-par value shares must pay in full his subs
cription since
under Section 6, par. 7), “shares of capital stock issued without
par value shall be deemed fy
lly paid and nonassessable and the.
holder of such shares shall n. ot be liable to the corporat
ion or to
its creditors in respect thereto.”
Ways of increasing or decreasing authorized

capital stock. —
_. There are at least three (3) ways
3 b y which the authorized capital
stock may be.increased or decreased: . )
(1) By increasing or decreasing the number of shares authorized
to be issued without increasing or decreasing the par value thereof;
(2)-By’ increasing ‘or decreasing the par value ofeach share
without increasing or decreasing the number thereof; and
| (3) By increasing or decreasing both the number of shares
authorized to be issued and the par value thereof.
ILLUSTRATION:
Assume that the authorized capital stock of X Corporation
is fixed at P1,000,000 divided into 100,000 shares with a par
value ‘of P10.00 per share. The capital stock may be increased
(or decreased):
The number of shares is increased (decreased) to 150,000
(75,000) shares with the same par value of P10.00 each share; or
_ the par value per share is increased (decreased) to P15.00 (P5.00)
without increasing (decreasing) the number of authorized
Shares; or the number of shares is increased’ (decreased) to
150,000 (75,000) and atthe same time increasing (decreasing)
the par value of each share to P15.00 (P5.00).

352
Increase by way of stock dividends.

(1) Stock dividends (see Sec. 42.) are ordinarily declared
A
out of the authorized but unissued shares of the corporation.
by way of
corporation, however, may also increase its capital stock
if there are
stock dividends without touching its unissued shares
(see Sec. 61[e].)
sufficient retained earnings to cover the increase.
result in the issuance
(2) If the proposed stock dividend would
orized capital
of shares of stock in excess of the corporation's auth ion
declarat
stock, the over-issue is null and void. Such dividend
ly
may be validly done provided that the corporation simultaneous
increases its capital stock and applies the proposed stock dividends
as full payment of the subscriptions to the capital stock increase.
(SEC Opinion, July 30, 1969.)
Par value or no-par value shares for

the authorized increase.
Under the authority granted under Section 37 and under Section
6, the increased capital stock may be divided into par value shares
and no-par value shares. In other words, the increase in capital stock
could belong to any of these two (2) classes of shares or to both.
The issue of no-par value shares out of the authorized increase
affords a means by which the corporation may attract investors. In
the course of its business, the corporation may. meet reverses. Its
assets are reduced.and the true. money value of the.issued shares,
may be below their par value. Under the prohibition contained in
Section 61 (par. 1.), the unissued shares cannot be sold for less that
their par value. Buyers, however, will be reluctant to pay par value
because the outstanding shares have a book value or actual value
below par. Meanwhile, the corporation needs more capital. In this
particular case, it may issue no-par value shares, the selling price of
which may be fixed in the manner provided in Section 61 (last par.)
of the Revised Corporation Code. (C.G. Alvendia, op. cit., p. 199.)
Reduction of capital stock.

(1) By decrease of number of authorized shares. —.When a
compere is authorized to reduce its capital stock, it may do so
also: : | ah
(a) by redeeming redeemable shares (see Sec. 8.) OF
purchasing its shares (see Sec. 40.) and cancelling or retiring the
same, including treasury shares (see Sec. 9.);

TITLE Iv,
(b) by accepting a surrend

in exchange therefor a
provided no rights of cre
(c) by cancelling shares

not yet issued.
(2) By decrease of par value of
authorized shares. — When a
corporation lawfully redu ces its capital stock pursuant to Section
37, the shares which are reti
red
purpose. If'the = shares acquire or reduced ‘no longer
echexexist for an y
d are not retired or cancelled, no
decrease in capital stock is effected, for the shares exist as treasury
shares. (see Sec. 9.) The capital stock may be decreased, however,
without decreasing the number of authorized shares into which it is
divided as stated in the articles of incorporation by decreasing the
par value of such shares, |
The par value of shares. of stocks of a corporation may be
reduced to eliminate its deficit. shock |
The reduction or decrease surplus or surplus arising from the
reduction of capital stock under Section 37 in excess of the deficit
may be declared only as stock dividends since it partakes of the
nature or paid-in capital in excess of par value. (see SEC Opinion,
Aug. 8, 1991; see Sec. 139.)
Effect of reduction on liability for unpaid

subscription.
(1)'As against corporate creditors. — A corporation has no
power to release an original subscriber to its capital stock from the
obligation of paying for his shares without a valuable consideration
for such release, and as against creditors, a reduction of the capital
Stock can take place only in the manner and under the conditions
Prescribed by the statute. (18 C.J.S. 746, 873-874.) Section 37 (par. 4.)
°A statute providing that a corporation, “at any meeting called for the purpose,
May increase or reduce its capital’ stock and the number of shares therein,” does not
authorize a corporation to reduce its capital stock by purchasing the shares of a particular ,
Stockholder, unless all consent. In order that such reduction may operate justly to all the
Stockhold
olders, each ‘stockholder should be allowed to surrender such proportion of his
O
Stock as the amount of the proposed reduction bears to the whole amount of the capital
Stock. (6-A Fletcher,
p. 385.)

provides “that no decrease of the capital stock shall be approved by

the Commission, if its efféect'shall prejudice ae fight of corporate
creditors.”
Hence, “a resolution adopted at a meeting of. stockholders
to the effect that the capital should be reduced by 50% and the
subscribers released from their obligation to pay the unpaid balance
of their subscription in excess of 50% of the same, was an attempted
withdrawal of so much capital from the fund which the company’s
creditors were entitled ultimately to rely and having been effected
without complying ‘with the’ statutory requirements,: was wholly
ineffective.” (Phil. Trust Co. vs. Rivera, 44 Phil. 470 [1925]. )
(2) As between the corporation and the stockholders. — One object
of requiring capital. stock to be diminished, only at corporate
meetings formally called is to insure publicity and to warn the
public dealing with the corporation of the intended change. This is
incompatible with secret arrangements and contrivances reducing
capital ‘stock by buying in’ the shares or by other devices, so as to
release stockholders from their obligations to creditors. But failure
to give the prescribed notice, will not. invalidate the reduction, if it
is,otherwise valid.as between the corporation and.the stockholders
where all the stockholders consent (18 CJ.S. -747.), abies to the
rights of corporate creditors. .
Distribution of surplus on reduction.

(1) Where there is no impairment of capital: —Upor‘a reduction
of
capital stock, if capital has not been impaired by losses, there occurs
a surplus of assets to the extent of the reduction. Unless the rights of
creditors will be affected or the capital impaired, the directors may
make an equitable distribution of such surplus or so much thereof as
may. not be required in carrying on the business for the best interests
of the stockholders,
(2) Where reduction is made to meet impairment. —In other words,
there can be a distribution of only those assets over and above the
amount equal to the par value of the outstanding reduced capital
and the amount necessary to discharge the. existing, corporate
indebtedness. Thus, as a rule, where capital stock is impaired and a
reduction is made merely to meet that impairment, there will be no
ae er of assets among the shareholders. (18 Am. Jur. 2d 764-

TITLE IV. PO
gee 7 WERS OF CORPORATION 355
(3) Distribution resulting from decreas

¢ assets OF properties of a ¢ ree As a rule, distribution
awful dissolution of the corp
°rporation can be done only upon
Sh and after payment of its debts
and liabilities. The Revised C Orati 4
may De a distribution of asse Poration Code recognizes that there
ms ‘
; ts or properti . after
es ofek Ne ae tas
q decrease of its capital stoc k. (seeSee 139,
The Trust Fund doctrine consi ders subscribed capital as a trust
fund for the payment of the debts of the ebporatlonl to which
the creditors may look for satisfaction, Until the liquidation of the
corporation, no part of the subscribed capital may be returned
or released to the stockholder without violating this principle.
However,
ea a release of a subscrib er from the payment of his unpaid
subscription may be effected through a reduction of the capital
stock, and as against creditors, such reduction can take place only in
the manner and under the conditions prescribed by Section 37. (SEC
Opinion, May 13, 2002.)
Persons entitled to question increase

or decrease of capital stock.
(1) An unauthorized increase or reduction of capital stock may
be attacked and avoided by the corporation itself or by dissenting
stockholders absent an estoppel; or by creditors of the corporation,
or by a receiver or assignee representing them, insofar as the
transaction affects their rights.
(2) An unauthorized increase of stock may be. attacked by
subscribers for or purchasers of such stock in avoidance of their
subscriptions, or for the purpose of recovering what they have paid,
unless precluded as being in pari delicto. (18 C.J.S..753; see National
Exchange Co. vs. Dexter, 51 Phil. 610 [1928]; Salmon Dexter Co. vs.
Unson, 47 Phil. 649 [1925].)
Meaning of bonded indebtedness.

(1) A corporate bond is an obligation to pay a definite sum of |
Money at a future time at fixed rate of interest.
_ (2) In an opinion, the SEC explains the meaning of “bonded
Indebtedness”: )
A comparison of Section 37 of the Corporation Code of the
Philippines with Section 359 of the Civil Code of California shows

that our law on the subject of creation and increase of “bonded

indebtedness” isan adaptation of the law of California. Unfortunately,
neither the statutory law of that state nor its judicial decisions afford
any guidance as to the meaning of the term “bonded indebtedness.”
The only decision bearing upon the question which has been
rendered by the California'court up to the time is one articulated
in Underhill v. Santa Barbara Land & Building & Improvement Co.,
93 Cal. 300, 307, which holds that a non-negotiable note issued by
a corporation, although secured by mortgage, does not constitute
a “bonded indebtedness” and therefore does not require the
consent of shareholders. (cited in Fischer, the Philippine Law of
Stock Corporation, sec. 313, par. 180). The two principal elements
of distinction are time element and division of the whole debt into
like aliquot part units of round, denominations, represented by
negotiable certificate of indebtedness, generally called. “bonds”,
the purpose being to enable the corporation to make use of the
borrowed money for a long period of years, to obtain it from a large
number of people, and to facilitate the transfer of the certificate
of indebtedness from hand to hand during the term of collective
obligations. Such bond issues are usually secured by the transfer to
a trustee of a specific property to secure the payment of debt. The
_ effect of the creation and issuance of such obligation is a borrowing
from the general public. Hence, whenever the corporation adopts
this method of borrowing funds, the resulting obligations constitute
“bonded indebtedness” subject to the statutory provision of the
corporation law as to increase or creation. (SEC Opinion, April 29,
1987.)
Thus, the term “bonded indebtedness” refers to negotiable
corporate bonds which are secured by mortgage on corporate
property.”
Accordingly, if the notes are not secured by mortgage on
corporate property, the same need not comply with the requirements
of Section 37 of the Revised Corporation Code. (SEC Opinion, July
13, 1994; see SEC Opinion, April 6, 1990.) Similarly, if the debentures
are not secured by collaterals, they are not bonded indebtedness in
the true sense and will not require approval of the stockholders
although it is good corporate policy to require it. (SEC Opinion,
April 19, 1987.) .

- 9
TIT LE ly, P
OWERS op
CORPORATI
ON
power to i oe
ncur, Crea
te, o -
bonded indebtednage 28° Ss,
debt such as notes, bonds or Mortgag

Section 37 (par. 5.), nonstock Corpor
ations are authorized to incur,
create, or increase bonded indebt
ed ness. ( (see SEC Opinion,
Opinion, Nov. Nov 20,
1986; SEC Opinion, April 22, 1981.)
(2): Procedure and formalities, —
The procedure prescribed in
Section 37 for incurring bonded in debtedness is the same
as the
procedure for increasing or decreasing the capital stock except
that
the certificate need not state the matters in Nos. (2) and (3) and is not
required to be accompanied by the sworn statement of the treasurer
of the corporation concerning the amount of the increased capital
stock subscribed and paid. The prescription of the formalities with
respect to “bonded indebtedness” only, implied of necessity a
distinction. between debts which are “bonded” and all other debts.
(Fisher, op. cit, p. 312.)
(3) Shares and members entitled to vote. — Even holders of

non-voting shares or non-voting members, as the case may be, are
entitled to vote on the matter. (Sec. 6, par. 3[d].) -
(4) Prior approval of, and registration of bonds with SEC. — Any
incurring, creating, or increasing by the corporation of any bonded
indebtedness is subject to prior approval of the SEC. (Sec. 37, par.
4.) The bonds issued by the corporation have to registered with the
SEC which is given the authority to determine the sufficiency of the
terms thereof. (Ibid., last par.)
The same considerations for stocks as provided in Section 62
insofar as they may be applicable may be used for the issuance of
bonds by a corporation. (Sec. 61, par. 3.)

When obligations constitute bonded

indebtedness.
(1) Notes and bonds. — When a corporation borrows money, its
indebtedness may be evidenced by notes or bonds as its primary
security.
(a) If the amount borrowed is small and if it is borrowed in
a single sum, or from a few persons, or for a short time, notes are
usually given.
(b) If, however, the amount is large and obtained from
a number of people and extends over a period of years, the
corporate obligation is preferably and’ usually evidenced by
bonds. :
(2). Distinctions. — The difference between a corporate note
and a bond is not always clearly marked. Both are promises to pay
money. : : ,
, (a) The phrasing of the bond is usually more formal than
that of the note. | e |
| (b) Also, payment of bonds is usually, though not invariably,
- secured as to both principal and interest by certain specified
property held for the purpose under.aformal. deed of trust.
(c)”A bond issue consists of anumber of bonds which, while
they may vary as to denomination, some may be registered and
some unregistered, are all of like general tenor and, if secured,
are all secured. 3 |
(3) Other characteristics of bonds. — The two principal elements of
distinction are time duration and the division of the whole debt into
like aliquot part units of round number denominations, represented
by negotiable or assignable certificates of indebtedness.
- (a) Such certificates are generally called “bonds,” the
purpose being to enable the corporation to make use of the
borrowed money for long period of years, to obtain it from
a large number of people, and to facilitate the transfer of the
certificate of indebtedness from hand to hand during the term
of the collective obligation.
(b) Such bond issues are usually secured by the transfer to a
trustee of specific property to secure payment of the debt.

359
(c) The bonds usually, b |

are transferable by delivery ut not necessarily, run to bearer and
credit/loan accommodatio
each evidenced by a Promissory’ ‘not
payment of the Promissory note, e. As’ security for the
'X Corporation constituted a
mortgage in favor of each creditor,
Z, a bank,‘was appointed '
by X Corporation with the consent
of the creditors'as'common |
Trustee-Mortgagee. The mortgage is ‘co
vered by’an agreement
_ denominated as Mortgage Trust Indent
ure executed by X
Corporation to Z. eng teccth SE eer
. Inadditiontothe mortgage contract, Mortga
ge Participation
Certificates (MPC) were issued by Z to creditors
to evidence
the extent of their interest in the mortgaged property. As each
promissory note or amortization is’ paid, the correspon
din
MPC covering the same ig cancelled: This process enables g
X
Corporation to borrow again, using the same mortgaged
property via MPC as security with the same or‘a’new creditor
~
» protected by a first lien on the mortgaged property to the extent)
/ of his interest. ae eee boy
Ts the issuance of the MPC subject to the requirements of
bonded indebtedness under Section 382. °° 0 03 :
No. Whena corporation secures its indebtedness whether by
notes or bonds, such notes. or -bonds,, being the, primary
security on the principal obligations, are created under Section
38. From the features of the MPC, it is clear, however, that they
are issued by Z (trustee-mortgagee)’ merely to evidence the
*Whenever a corporation resorts to this method of

borrowing funds
obligations constitute a“bonded indebtedness,” subject to the requiremen, the resulting
ts of Sec. 38 of
€ Revised Corporation Code as to creation or increase. (H.C. Bentley, Corp
nance and Accounting, cited in Fisher, pp. 315- orat ion Fi-
316. )
4gainst its general credit are not covered by the provOther bonds issued by a corporation
isions of Sec. 38, but the SEC Rules
Tequire their submission to the SEC for approval
before they can be issued to the public.
(SEC Opinion, April 6, 1990.)

Sec. 37
undivided interests of the creditors in the mortgaged prope

rty
covered by the Mortgage Trust Indenture. They strengthen the
claim of the creditors to the mortgaged property and in case
of
~ default of X Corporation (debtor-trustor), the creditor will have
recourse to the mortgaged ‘property in the ‘hands of Z. (SEC
Opinion, Sept. 6, 1977.)
(2) X Corporation will borrow from a few lenders the
amount of P50 million to be evidenced by interest-bearing
promissory, notes, to . finance | its subdivision/housing
development projects. The credit transaction will. be fora
term of ten (10) years payable in periodic installments and the
principal,-interest and premium due-on outstanding balance,
will be secured by.a guaranty to be executed by Y Corporation,
in its capacity as parent company of X Corporation, and a real
estate mortgage over certain properties of Y Corporation.
Z Corporation, an affiliate of X Corporation, will underwrite
the mortgage note issue for X Corporation.
“Is the mortgage note issue an ordinary term loan or a bond
issue?” PaTOUL OTS ye bene (NLA) HID
._ The features of the transaction characterize a term loan, as.
distinguished from a bond issue. (SEC Opinion, Nov. 18, 1977.)
The corporate bond contract. ah cSsilachigkeenn

~ (1) °Parties. ~ There are three (3) parties toa corpo
ration bond
contract: the borrowing corporation, the bondholders,
andthe
trustee. The trustee is a bank or trust comp
paid by the corporation but serves mainly toany, which is chosen and
protect the bondholders.
(2), Trustee's functions. + They usually include:
p
\ (a)! Countersigning the bonds to assure
authenticity: ;
_ Ab), Collecting: interest and ‘principal. paymen
debtor-corporat
ts from. the
ion and distributing them to those entitled
;
(c) Acting as mortgagee or collateral holder
if the bonds are
secured;
(d) Verifying the performance of the deb
tor-corporation’s
promiseson behalf of the bondholders; and
: (e) Taking legal action on behalf of the bondholders
“nece
‘if
ssary. : !

| (3) PO indenture. — The Contract itself, known
as the “bond
indenture, 15 a complete, lengthy legal document which constitutes
the agreement between € parties. The bonds themselves are
certificates of Participation in their contract. In the indenture the
,
corporation promises to pay principal and interest promises ts pay
the trustee, promises to pay
ene its taxes and other debts, and promises
to maintain its property and conduct its business prudently.
me provisions, — The bond indenture will contain many

(4) Usual
other provisions, including:
(a) the total amount of the bonds authorized to be issued
under the indenture or a statement that the amount is unlimited;
(b): a statement that additional bonds may be issued in the
future (open indenture) or that the first issue will be the only one
permitted (closed indenture);
(c) statement of the purposes for which the additional
bonds may be issued, such as for construction or acquisition of
property,
(d) stipulation that all bonds must be identical in terms
or that a series of issues, possibly having different interest
rates, maturity dates, and call prices, may be sold under the
‘basic indenture (in the latter case, each series would’ have a
supplemental indenture detailing its special features),
(e) details of the collateral or mortgage security. to be
provided;
(f), mechanics of interest payments, registration of bonds,
and principal repayments, and
(g) terms of special features such as sinking funds, ‘call
and conversion options. (G.A. Christy & J.C.
provisions,
ed. [1978], pp.
Clendenin, “Introduction to Investments,” ‘7th
138-139.)

Bond terminology.
Corporate bond issue are commonly given titles which
undertake to describe the terms of the contract. Thus:
(1) Promissory instruments running five (5) years or longer are
“bonds” or “debentures,”’ shorter maturities are “notes.
(2) An equipment obligation (Philadelphia plan) may be a
“trust certificate.” ne
(3) To identify the type of lien, the word “mortgage,” leasehold
mortgage,” “collateral trust,” and “secured” are used.
(4) For further clarification, adjectives such as “first,” “second,”
° . e IM
“refunding,” “consolidated,” “general,” “divisional,” “prior,” and

e oe ‘Shh Si 4”
“adjustment” may be used singly or in combination.

(5) To describe the pledged property, such words as “bridge,”
“terminal,” or “equipment” may be included. é
(6) Additionally, such: descriptive terms as “income sinking
fund,” “purchase. money,” . “extended,”., “series,” “serial,”
“participating,” and “convertible,” are used: (Ibid., op. cit., p. 154.)
Type of bonds. |
(1) Common types. — They may be secured or unsecured.
The major types of secured bonds are: .
(a) Mortgage bonds or debt instruments of financing secured
by a lien on specifically named property. Land, building,
equipment, and other fixed assets are the kinds of property
most commonly pledged as security; |
(b) Collateral trust bonds or debt instruments secured bya
pledge of either stocks or bonds, or both which are deposited
with a trustee; and EEO
'»(c) Equipment obligations or debt instruments to’ secure
financing loans on locomotives, railway cars, buses, large trucks,
and similar equipment. The most outstanding characteristics
‘/The normal distinction between a corporate “bond”. (bonded

indebtedness ) and
a corporate “debenture” or “note” is that the former is usually secured by:a
mortgage
on corporate property while the latter usually is not. (5-A Words and Phrases
, p.
Debentures are serial obligations or notes issued on the basis of the general credit 128.)
of the
corporation and since they are not secured by corporate property, they are not bonded
indebtedness as contemplated in Sec. 38.

sec. 3 7 TITLE IV,V. POWERS OF CORPORATION
363
of an equipment oblj gation

is the r ailroad equipment trust
certificate secured b Y title to
rolling stock, such as cars and
locomotives.
Examples of unsecured bonds are:

(a) Straight debenture bo nds or
general credit bonds not
secured by any specific Prope
rty. The earning of the issuing
corporation protects the debenture bondh
olders;
(b) Guaranteed bonds or that type for whi
ch one or more
individuals or corporations other than
the issuer guarantees the
paymen t of interest or principal or both; and
(c) Subordinated debenture bonds or debt instruments
specifying that the holder’s rights are inferior in the event
or liquidation. or recognition to any existing and future debt
defined in the indenture as senior debt. (Soldofsky & Olive, op.
cit., pp. 64-65.)... eae " |
(2): Special types. — Besides the common types of bonds, there
are hybrid securities or bonds which have features similar to those
characteristics of common stock or preferred stock. These até:
(a) Convertible debentureor
s bonds which may be exchanged
for the common stock of the issuing corporation at a fixed
price by a predetermined redemption rate at the option of the
bondholder;
(b) Income bonds, sometimes called adjustment bonds, or debt
‘instruments with a fixed rate of interest payable only if earned
and declared by the board of directors. They are hybrid secu-
rities combining some of the characteristics of preferred and
straight bonds;and = . ee 3
ee Sree ee
» Under the Philadelphia (or equipment lease) plan, a manufacturer builds, equipment
to a railroad’s specifications and then sells the equipment to the trustee who leases the
equipment to the railroad. Equipment trust certificates are sold by the trustee to investors
to pay the manufacturer. The annual installment payments over a period of
15 years
Or less are at rates calculated to be well within the economic life of the equipment, and
ere is a substantial down payment as further protection. (Soldofsky & Olive, “Financial
Management,” 1974 Ed., pp. 62-65.) aie a bree :
Under the New York (conditional sale) plan, the trustee receives the equipment from
€ manufacturer and sells it to 'the purchasing corporation in return for ‘a series of
€quipment trust notes. These notes are interest-bearing and of serial maturities; ‘when
Sold to investors, they provide the money to pay the manufacturer, When the notes are
Paid off by the purchasing corporation, the conditional sale becomes final and ‘complete.
isty & Clendenin, op. cit., p. 144.)

(c) Bonds with warrant or stock purchase warrant, or an option

or a right, exercisable by its holder, to purchase stock at a stated
price during a stipulated period of time. Bond warrant issues
are usually debentures, and the warrants are detachable or
non-detachable. Detachable warrants are preferred by investors
because such warrants may be sold or exercised apart from
the bond, whereas non-detachable warrants cannot be sold or
exercised separately from the bond. (Soldofsky and Olive, op.
cit., 65-69.)
Sec. 38. Power to Deny Preemptive Right. — All

stockholders of a stock corporation shall enjoy preemptive
right to subscribe to all issues or disposition of shares of
any class, in proportion to their respective shareholdings,
unless such right is denied by the articles of incorporation
or an amendment thereto: Provided, That such preemptive
right shall not extend to shares to be issued in compliance
with laws requiring stock offerings or minimum stock
ownership by the public; or to shares to be issued in good
faith with the approval of the stockholders representing
two-thirds (2/3) of the outstanding capital stock, in
exchange for property needed for corporate purposes or
in payment of a previously contracted debt.
Right of preemption of stockholders.

Whenever the capital stock of a corporation is increased and
new shares of stock are issued, the new issue must be offered first to
the stockholders who are such at the time the increase was made in
proportion to their existing shareholdings! and on equal terms with
other holders of the original stocks before subscriptions are received
from the general public. (see SEC-OGC Opinion No. 3-13,? April 7,
2013.) For example, if a stockholder with preemptive right owns
'The mere fact that the subscriber is entitled by right of preemption to only a portion
of the total shares subscribed for does not militate against nor vitiate the validity of a
subscription contract (see Sec. 60.) partially paid for and duly recorded in the books of the
corporation, (SEC Opinion, Dec. 17, 1964.)
The corporation may still allow its stockholders who failed to exercise their
preemptive rights within the prescribed period, to subscribe at a later time especially
when fault is not attributable to the latter and provided all previous non-subscribing
stockholders are given the opportunity again. (SEC Opinion, Oct. 9, 1990.)

sec. 58 TITLE IV, POWE
RS OF CORPORA
TION
=
20% of the outstandin

g shares of the c
20% of any shares of stock issu he may subscribe
ed by dhe rcs on.
This is known as the 7 are
of
stockholders. right of preemption or preemptive right
Sametime whose names appear in the stock and transfer

book of the corporation on the date of the meeting authorizing the
issuance of shares are entitled to th € preemptive right under Section
38 of the Revised Corporation Code. (SEC-O inion No. No. 15-19,
15-19
March 13, 2019.) (SEC-OGC Opinion
(1) Availability of right to new issues of shares and unissued
shares. — The rule is that preemptive right is recognized only with
respect to new issue of shares, and not with respect to additional
issues of originally authorized shares. This is on the theory that
when a corporation at its first inception offers its first shares, it
is presumed to have offered all-of those which it is authorized to
issue. An original subscriber is deemed to have taken his shares
knowing that they form a definite proportionate part of the whole
number of authorized shares. When the shares left unsubscribed are
later reoffered,
he cannot therefore claim dilution of interest. (GEC
Opinion No. 03-05, April 27, 2005, citing Benito vs. SEC, 123 SCRA
722, 726 [1983].) |
(2) Acquisition by transferor of right. — When shares of stock are
sold by the holder after an increase of the capital stock has been
voted, the purchaser acquires, as an incident to the stock, the same
right of preference in subscribing for or purchasing the new stock as
was possessed by the transferor. (Hogg v. Eckhardt, 175 N.E. 382.)
This principle, however, does not apply to transfers
where the assignors. have exercised their preemptive rights to
subscribe to new. issues. To rule otherwise would allow the
preemptive right attached to the original stock to be exercised twice.
(SEC Opinion, Nov. 28, 1990.)
(3). Right subject to exceptions. — The application of the right of
Preemption in a stock corporation depends on a consideration of
all the surrounding circumstances of each case. In other words; the
tight is not absolute as it admits of certain exceptions.

Reason for the grant of right.

The rule aims to safeguard the right of a stockholder to preserve
unaltered and unimpaired his proportionate influence and interest
in the corporation and the relative value of his holdings.
This right is based on the principle that a stockholder, in
subscribing to shares of stock, does so under the understanding
that his equity is fixed by the relation which the number of shares
he subscribes bears to the total authorized capital stock, issued or
unissued, subscribed or unsubscribed, at the time of his subscription,
as shown in the company’s articles of incorporation, and should
not, therefore, be diluted. by the issuance of additional shares as
to affect his rights to vote, to dividends, and to the distribution of
assets upon liquidation, without first giving him the opportunity to
subscribe to such shares in proportion to his shareholdings. (SEC-
OGC Opinion No. 17-11, March 22, 2011.)
The purpose of the right’ is to protect from impairment
and dilution the basic rights of the existing stockholders in the
corporation, i.e., to voting control; to dividend. payments, and
to the net-assets of the corporation: However, a stockholder may
waive such right. The waiver should be given individually by the
stockholder concerned or by another by way of a special power of
attorney. Being a personal right, the waiver cannot be made by the
corporation itself through a stockholders’ resolution. (SEC Opinion,
Dec. 12, 1994.) :
Astockholder cannot be forced to waive the right even if majority
of the other stockholders opt to waive it. (SEC-OGC Opinion No. 08-
08, March 31, 2008.) eee
ILLUSTRATION:
X Corporation has an original stock of P100,000 divided
into 1,000 shares with a par value of P100 per share. A owns 500
shares. Subsequently, the ‘capital stock is increased to P200,000
ie 1,000 more shares). Both the old and new shares are voting
shares.
(1). Right to vote. — A must be given a right to subscribe to
500 of the new shares before they are offered to others. If A is
allowed to subscribe to only 100 shares of the increased stock,
his voting control would be reduced from 50 500/1,000) t to
% (500/1,000)
only 30% (600/2,000).

Se 38
’ \
367
(2) Right a
erpuieniGy ,
ars earnings as dividends. — Suppose. the
amount been dis net earnings of P50,000,00. Had this entire
each stockhol aa hae as cash dividends before the increase,
(P50,000.00/1,000 cluding A, would have received P50.00
Would Bex Sita Per share. After the increase, the dividend
to P25.00 (P50,000.00/2,000) per
share.
3) Right to net co rporate assets
after liq
j uidation. — Assume
new fee a total assets of the corpor
ation amount to P170,000,
with liabilities of P20,000.00 and surplus of
P50,000. Thus, its
| wt assets or net worth is P15
0,0 00.00. The
¥8 ue per share is P150.00 (P150,000.00 refore, the actual
/1,000). If the new
ares were to be issued at their par value of P100, the actual
value of the original shares would be reduced to P125.00
tis BE bi
(P250,000.00/2,000).
If the rule of preemption will not be observed, it is evident
that existing stockholders who are allowed to subscribe to..
more that their pro rata shares in the increase of the capital stock
_ and.new stockholders will unjustly benefit by P25.00 per share
_ at the. expense of the stockholders whose preemptive right is’.
violated. In the event of liquidation, each stockholder, old and.
new, will participate in the net assets of the corporation at the
rate of P125.00 per share.
Non-availability of preemptive right.

The preemptive right of stockholders of a stock corporation
of shares of any class in
“to subscribe to all issues-or. disposition
proportion to their respective shareholdings ‘may be “denied: by
the articles of incorporation or an amendment thereto” or may fall
under any of the exceptions.’ (Sec. 38.) .
(1) Unless so denied or excepted, the right should be granted to

a holder of shares although they are of a class different from those
issued or disposed of. For example, holders of Common “A” shares
are entitled to stibscribe to Common “B” shares in proportion to their
‘interest, but they cannot be required to subscribe to the Common
‘The SEC requires an explicit written waiver of the right of preemption from the
non-subscribing stockholders every time it processes an application for increase in capital
stock.

“B" shares, especially since the latter ate of a class different from the
class they are holding.
(2) A stockholder whose preemptive right is violated may
maintain an action to compel the corporation to give him that right.
If the denial is by an amendment to the articles of incorporation, he
may exercise his appraisal right under Section 80(a).
Shares to which right not available.

‘Under Section 38, the preemptive right of stockholders to
subscribe to all issues or disposition of shares in proportion to their
respective shareholdings extends “to all issues or disposition of
shares of any class” (such as treasury shares) unless denied by the
articles of incorporation or an amendment thereto (in which case
they are deemed to have waived the right), and except to:
(1) Shares to be issued in compliance with laws requiring stock
offerings or minimum stock ownership by the public;
(2) Shares to 'be issued in good faith with the approval of
stockholders representing 2/3 of the outstanding: capital stock in
exchange for property needed for corporate purposes; and
(3) Shares to be issued in good faith with the approval of the
stockholders representing 2/3 of the outstanding capital stock in
payment of previously contracted debt.
The preemptive right does not extend to the issue of shares
in No. (1) because of the need to comply with a legal requirement
which is paramount to the exercise of the right; and in Nos. (2) and
(3) for reasons based ‘upon practical convenience and necessity and
the exercise of discretion of the board of directors in making new
issues of shares to enable the corporation to carry on the corporate
business.
‘4On granting preemptive rights to existing shareholders, the law makes no distinction
between newly-issued shares and previously unsubscribed shares from the original
authorized capital stock. The right, however, may not be exercised by shareholders who
have already exceeded the ownership threshold laid down in Sec. 33.2(c) of the Securities
Regulations Code which takes precedence on Sec. 38 of the Corporation Code. (SEC-
OGC Opinion No. 41-11, Oct. 5, 2011.) It is not clear whether common stockholders have
a preemptive right to acquire preferred shares and preferred stockholders to acquire
common shares. But if the preferred stock is convertible to common, holders of common
shares must be given the right.
Under the Old Corporation Law (Act No. 1459.), preemptive rights are recognized
only with respect to new issue of shares.

Sec. 38
TITLE Iv. ‘POWERS
p
9 F CORPORATION 369
o Owner. (SEC Opinion, Feb:’15, 1991; see

SEC Opinion, May 21, 1986; SEC Opinion, Feb, 12, 1985.)
Offering of remaining unsubscribed
ae
shares.
(1) To public or any. person acceptable_to corporation. — If the

unissued shares, whether from the original or increased. capital
stock, corresponding to one stockholder are not subscribed ‘or
purchased by him within the period fixed for the exercise of. his
preemptive right, he is deemed to. have impliedly waived his
tight to subscribe to the same or to the balance if he subscribes
only to.a. portion, It does not follow that the shares should again
be offered on a pro rata basis to stockholders who took advantage
of their right of preemption. This is because
if they exercise their
preemptive rights, their relative and proportionate voting strength
in the corporation will not be affected adversely. (SEC Opinion, Sept.
24, 1974; citing C.G. Alvendia, The Law of Private ‘Corporations,
pp. 172-173.) Seep atie USES nie
Thus, the remaining unsubscribed shares may be offered to the
public on first-come, first-served basis or to any person acceptable
to the corporation without violating the Prema rights of such
stockholders. a Die ee aa
of policy, the SEC
of record. — As a matter
(2) To stockholders
‘ders ita sound corporate practice to offer always the remaining
i -kholders of record whenever practical'and feasible
shares to the stor tn to the public (Ibid.; May 14, 1990, Dec. 6, 1994,
og
r a P Sone ), 1 although this F“right of first refusal” is not provided
for in the articles of incorporation. .

THE:PHILIPPINES Sec, 3g
ILLUSTRATION:
A owns, 20% of, the capital. stock of Corporation X. He
exercised his. preemptive right to new shares issued by the
corporation. B, another stockholder, did not exercise his right
with respect to the shares corresponding to him. His shares
were offered to and purchased by stockholder C.
Here, A still-maintains' his 20% interest in.the corporation
although C’s proportionate holdings increased. A has no cause
for complaint if his 20% interest is not reduced.
Time within which the right may

be exercised.
The time within which a stockholder must exercise his
preemptive right is generally fixed in the resolution authorizing the
increase of capital stock. ~~ meee
A majority of the stockholders have a right to fix the time to suit
themselves and the interests of the corporation. The only limitation
upon the exercise of the prerogative is that every stockholder shall
be treated alike and shall be afforded a reasonable opportunity to
subscribe. (Hayt v. Great American Ins. Co., 200 Pa. 516, 50 A. 154.)
Parenthetically, such resolution may also require the stockholders
desiring to exercise his preemptive right to pay a deposit on the new
“Stock at the time of subscribing. (SEC Opinion, Dec. 29, 1976.)
Preemptive right as to treasury shares.

.--(1) In close corporations, the preemptive right of stockholders
extends. to all) stock to be! issued (i.e, old or
new) including
re-issuance of treasury shares, whether for money
or for. property
or personal services, or in payment of corporate debts, unles
s the
articles of incorporation provide otherwise.
(Sec. 101.)
(2) In widely-held ‘corporations, it would
seem: that: existing
stockholders have also a preemptive right
as to treasury shares
(Sec, 9.) beca use of the use of the phrase “disposition. of shar
es of
any class” in Section 38. Note, however, that sale or disp
the treasury stoc
osition of
k is not considered a new issue, (see SECOpinion
Ne: 03-05, April 27, 2005, citing Benito vs. SEC,
[1983].) 123 SCRA 722, 726
: 7

Sec. 38
7 TITLE
I V. POWERS O
F CORPOR
ATION
371
Since the funds
used j #3
from the surplus Profits ofthe ctuizing the treasury
shares come
declared instead aS divide
nds uOheey which could have been
the preemptive Tights of stockholde a desirable policy
to recognize
Price of new s
tock Offerings
(1). Interests of th
— The concept of
The power to determine the pri

ce must be exercised for the
benefit of the corporation and in the
interests of all stockholders.
(2) Where price far below fair market
value. — When new shares
are iss ued at prices far below their fair val
ue in a corporation with
only a limited market for its shares, exis
ting stockholders who do
not want to invest or cannot invest additional
funds can have their
equity interest in the corporation diluted to the vanishin
g point.
(3) Right of stockholders to maintain proportionate equity and
at the same time not to acquire additional shares. — One part of the
stockholders’ right to maintain proportionate equity in a corporation
by purchasing additional shares is the right not to acquire additional
shares without being confronted with dilution of his existing equity
if there is no valid business justification for the dilution. This right
not to acquire is seriously undermined if the stock offered is worth
substantially more than the offering price. Any share subscribed or
purchased at this price dilutes his interest and impairs the value of
his original holdings.
(4) Right of stockholders to insist on legally adequate price. —
A corporation is not permitted to dispose its stock fora legall
inadequate price at least where there is objection. While a stockholder
has no right to block a disposition of new shares for a fair price
merely because he disagreed with the wisdom of the plan, he has
the right to insist that the price be fixed in accordance with legal
requirements. (Katzowitz v. Sidler, 249 N.E. 2d 359 [Ct. Apps. N.Y.
1969].)

Availability of right to additional issue

of originally authorized shares.
A shareholder’s preemptive right is his option to subscribe to
allotment of shares, in proportion to his holdings of outstanding
shares, before new shares are offered to others. This doctrine applies
when a corporation increases its capital stock by declaring a stock
dividend, in which case it cannot discriminate between stockholders,
(1) All originally authorized shares initially offered for subscription.
— When one subscribes for shares in a corporation, he realizes that
his position is fixed based on the proportion between the number of
shares subscribed by him and the total number of shares which the
corporation is authorized to issue. This presupposes, however, that
the corporation at its inception offered all its originally authorized
shares, although such should. be the presumption. (see Datu
Tagoranao Benito. vs. Securities and Exchange Commission, 123
SCRA 722 [1983]; Dee vs. Securities and Exchange Commission, 199
SCRA 238 [1991].)
(2) Number of such shares initially offered specified. — Where the
number of shares initially offered for subscription was specified, such
that the original subscribers could not have insisted on subscribing
for more, the corporation must first offer the additional issue of
shares from the unsubscribed portion of the authorized capital stock
preemptively to stockholders before the same is offered to third
parties. In this case, the original subscriber.is deemed to have taken
his shares in relation to the number of shares then initially allotted
for subscription rather than to the total number of authorized shares
at the time of his subscription.
The subscriber cannot claim:a dilution of interest if additional
issues of originally authorized shares are purchased by others.’
‘The shareholders’ preemptive rights do not generally apply where the shares
belong to the original (or increased) capital stock of the corporation unsubscribed or
undisposed of, inasmuch as such shares constitute a part of the assets, and may be
sold
either to stockholders or to strangers as the corporation may deem best even without
notice to stockholders. They are not new issues.
The issuance of shares out of the unsubscribed shares of the authorized capital stock
of the corporation may be authorized by the board of directors thru a board resolution
without need of stockholders’ approval. (SEC Opinion No. 03-05, April 27, 2005.)

ILLUSTRATION:
Here, Z is not entitled to re :

remaining unissued 60,000 sHares i they die lhe opie ue
cannot claim a dilution of interest. Pega nis |
where thenumber of shares initially offered for subscription
gine EON, then Z may exercise his preemptive right
ae remaining 60,000 shares are subsequently. offered for
subscription to the extent of 1/10, or 6,000 shares,
we See. 39. Sale or Other Disposition of Assets. — Subject to

‘the provisions of Republic Act No. 10667, otherwise known
as “Phili ine Competition Act,” and other related laws, a
corporation may, by a majority vote of its board of directors
or trustees, sell, lease, exchange, mortgage, pledge or
‘otherwise dispose of its property and assets, upon such
_terms and conditions and for such consideration, which
_ may be. money, stocks, bonds or other instruments for the
payment of money or other property or consideration, as
its board of directors or trustees may deem expedient.
A sale of.all or substantially all of the corporation’s

properties and assets including, its goodwill must be |
authorized by the vote of the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock, or at
least two-thirds (2/3) of the members, in a stockholders’ or
members’ meeting duly called for the purpose.
s
In nonstock corporations where there are no member
with voting rights, the vote of at least a majority of the
ation for the
trustees in office will be sufficient authoriz
ed by
corporation to enter into any transaction authoriz
this section. (N)
The determination of whether or not the sale involves
all or substantially all of the corporation's properties and
assets must be computed based on its net asset value,
ce anon Intl financi ements. A sale or other

disposition shall be deemed to cover substantially all the

corporate property and assets if thereby the corporation
would be rendered incapable of continuing the business or
accomplishing the purpose for which it was incorporated.
Written notice of the proposed action and of the
time and place for the meeting shall be addressed to
stockholders or members at their place of residence as
shown in the books of the corporation and deposited to
the addressee in the post office with postage prepaid, or
served personally, or when allowed by the bylaws or done
with the consent of the stockholder, sent electronically:
Provided, That any dissenting stockholder may exercise
‘the right if appraisal right under the conditions provided
in this Code. (N) |
After such authorization or approval by the stock-
holders or members, the board of directors or trustees
may, nevertheless, in its discretion, abandon such sale,
lease, exchange, mortgage, pledge or other disposition of
property and assets, subject to the rights of third parties
under any contract relating thereto, without further action
or approval by the stockholders or members. .
Nothing in this section is intended to restrict the
power of any corporation, without the authorization by
the stockholders or members, to sell, lease, exchange,
mortgage, pledge or otherwise: dispose of any of its
property and assets if the same is necessary in the usual
and regular course of business of the corporation or if the
proceeds of the sale or other disposition of such property
and assets ‘shall be appropriated for the conduct of its
remaining business.
Power to sell, lease, etc. all or substantially

all corporate assets.
There are two (2) types of corporate acquisitions: asset sales and
stock sales. In asset sales, the corporate entity sells all or substantially
all of its assets to another entity. In stock sales;\the’ individual or
corporate stockholders sell a controlling block to new or. existing
stockholders. (SME Ban, Inc. vs. De Guzman, 707 SCRA 35 [2013];
see Secs. 75-78.) Section 39 deals with asset sales.

375
or trustees; approved by the board of directors
(b) The action of the board of directors or trustees must

be authorized by the vote of stockholders representing 2/3
of
the outstanding capital stock including holders of non-voting
shares (see Sec. 6, par. 6[c].)
or 2/3 of the members, as the case
may be; and !
_ (c). The authorization must be do
neat the stockholders’ or
members’ meeting duly called for that purpose after
written
notice.
(2) ‘Other legal ‘limitations. — As a safeguard against abuse of
power, Section 39 provides that the sale, etc., shall be subject to R.A.
No. 10667, otherwise'known as the “Philippine Competition Act,”
and-other ‘related:laws such.as those on illegal combinations and
monopolies. (see Sec.:176.) Furthermore, under the Bulk Sales Law
(Act. No: 3952,:Secs.'3, 4,,5.), the-sale, etc. of-all or-any portion of
a.stock. of goods; merchandise, provisions or materials otherwise
than in the ordinary course of business is declared fraudulent and
void as to creditors of the vendor unless specified formalities are
observed such as the giving by the vendor to the vendee of a list of
creditors to whom said vendor may be indebted. |
(3)..Sale of all assets without dissolution.,— Subject to the above
legal limitations, a!.corporation may sell all its assets. without
necessarily dissolving or terminating its existence. If such sale is
made to another corporation and there is no intent to combine, the
selling corporation may continue
(Balla
in a state of suspe
nded anima
tion
ntine, p. 666.), subject to the effect of non-u
se of corporate
powers and’ continued inoperation ofia corporation provided in
Section 21. (SEC Opinion, July 8, 1987.) The rights of creditors must
not be overlooked or disregarded when a corporation sells its entire
assets and turns over its business to another. (Ballantine, p. 676.)

PHILIPPINES Sec, 39
376 THE REVISED CORPORATION CODE OF THE.
e to the
The only way the transfer can proceed without prejudic
ilities of the assignor,
creditor is to make the assignee assume the liab
transfer choose to
unless the creditors who did not consent to the
(Caltex [Phils.], Inc. vs.
rescind the transfer on the ground of fraud.
400 [2006].)
PNOC Shipping Transport Corp., 498 SCRA
Authority of the board.

only sale but
(1) Stock corporations. — Se ction 39 covers not
also lease, exchange, mortgage, pledge
or other disposition’ of its
properties. a Bt .
s
(a) The board is given the right to decide upon the termn
consideratio
and conditions of the transaction including: the
transaction is
for the property disposed of, for, at any rate, the
members.
still subject to approval by the stockholders or
rtheless, in
(b) After ‘such’ approval, the board ‘may neve
further action
its discretion, abandon the ‘transaction, without
subject 'to the
or approval by the stockholders or members but
thereto: (par.
rights of third parties under any contract relating
3) i85 3 . |
of
(c) If the property to be sold constitutes merely ‘a'part
the sale
the assets of the corporation, even if substantial, and
thereof will not render the corporation incapable of continuing
may
its business (par.'4.), the board of directors ‘or trustees
need
dispose of the same as it may deem convenient without
of approval of the stockholdersor members of the corporation.
(SEC Opinion, Dec. 4, 1990.)
(2) Nonstock corporations. — Under the second paragraph,
the vote of the majority of the trustees in office will be sufficient
authorization for ‘the-corporation to enter into any ‘transaction
authorized by Section 39 in the'case of nonstock corporations where
there ate no members with voting rights. © laaetb. yfina .9
1The words “or otherwise dispose of” in Section 39 is very broad and in a sense,
covers a merger or consolidation. (see Bank of Commerce vs. Radion. Philippines~
Network, Inc., 722 SCRA 520 [2014].) 0 Sarees

Sec. 39 TITLE Iv. - Pow POW
ERS OF CORPORATION 377
shareholders’ approval of
of corp Sale, etc,
orate assets,
The Revised
or substantially steam considers a sale, etc. to cover all
TO
ae if erty the “s
corporation would be rendered HoABAbI by
:
or accomplishing the pu ontinuing the business

other words,
i “© diCisposition
c if the was incorporate
whichnot it render
“Pose fordoes d.” In
the corporation
incapable of continuing its ordinary course
: of business, the sale
may not require stockh olders’ or members’ approval. Under the
last paragraph, the authorization by the stockholders or members
is not required. It is understood, however, that the transaction is not
tainted with fraud or bad faith or prejudicial to the interest of the
corporation.
When sale considered as involving all or
substantially all of corporate assets.
-, Previously, the. test is not the amount of assets involved but
the nature or effect of the disposition. (see SEC-OGC Opinion
rather
No. 13-13, Dec. 5, 2013; SEC-OGC Opinion-No. 01-19, Jan. 31, 2019;
SEC Opinion,’ Oct. 21, 2002.) However, the Revised Corporation
Code has added the requirement that the determination of whether
the sale involves all or substantially all of the corporation’s properties
and assets must be computed based on its net asset value, as shown
in its latest financial statements. « _
Shareholders’ approval on sale of corporate

assets in publicly-listed companies
protection of
To promote good corporate governance and the r
power unde
minority investors, the SEC, pursuant to its regulatory
companies: ©
Section 179(d), issued these rules for publicly-listed
ty and assets
(1) ‘The'sale or disposal of corporate proper
total assets shall
amounting to at least 51% of the corporation’s
y all of corporate
be ‘considered as sale of all or substantiall
accrued in a single
property and assets, whether such sale
date of the
transaction, taking place within one (1) year from the
transactions).
first transaction (aggregate sale
; The Corpo ratio ilip ippine Annotated, p. 316 [1993].. ,

Code of the Phili
nration n Co
De Leon, p. 316 [1993]
Citing De Leon, The Corporation Code of the Philippine Annotated,
. Citing

(2) In sale of corporate assets or property falling under the

preceding paragraph, the vote of the stockholders representin
at least two-thirds (2/3) of the outstanding capital stock in a
stockholders’ meeting duly called for the purpose shall be
required prior to the execution of the sale transaction.
(3) In aggregate sale transactions, shareholder approval
shall be required for the sale transaction that breaches the 51%,
corporate asset threshold.
(4) The determination of whether or not the sale amounts
to at least 51% of the corporation’s assets must be computed
based on its total assets as shown in its latest audited financial
statements, provided that the computation may also be based
on the latest quarterly financial statement or a special purpose
financial statement prepared in connection with the execution
of the transaction.
If, after due notice and hearing, the SEC finds that any provision
of the Circular has been violated, it may impose any or all of the
sanctions provided under Section 158 of the Revised Corporation
Code. (SEC Memo. Circ. No. 12-2020, April 15, 2020.)
That the sale constituted at least 51% of the corporation’s total
assets should not trigger the need for stockholders’ approval. The
sale must render the corporation incapable of continuing the busine
ss
or accomplishing the purpose for which it was incorporated.
For
example, if a corporation engaged in the sale of services
decides to
permanently implement a work-from-home arrangemen
t because
of the pandemic, the sale of its’ office building constituting
at least
51% of the corporation’s total assets should not require
stockholders’
approval,
Appraisal right of dissenting stockholder.

It is to be noted that the exercise of the appraisa
l right of any
dissenting stockholder (par. 1; see Sec. 80[b].) is
predicated on the
“sale or other disposition of all or substantially all”
of the corporate
assets, the phrase being defined as such which would
corporation “inc render the
apable of continuing the business or acc
the purpose for which it was incorporated omplishing
.” The determination of
whether the sales involve all or substantially all the corporation’
properties and assets must be computed s
based on its net asset value,
as shown in the corporation’s latest financial statemen
par. 4.) ts. (Sec. 39,
i

Sec. 39
379
Liabila ite
ytof puprc
utha
s sing corporPoatraiotion
n jin case
Bee(1) For adebts of sellin § Corporation. — As a rule, a corporation that

purchases. ne assets of another will not be liable for the debts of
the selling corporation, provided the former acte
d in good faith and
paid adequate consideration for such assets, except when any of the
circumstance s is present: _ 7 .
(a) the purchaser expressly or impliedly agrees to assume
the debts; )
(b) the transaction amounts to a consolidation or merger of
the corporations;
(c) the purchasing corporation is merely a continuation of
the selling corporation; and os ,
(d) the transaction is fraudulently entered into in order to
escape liability for those debts. (Nell vs. Pacific Farms, Inc., 15
SCRA 415 [1965]; Philippine National Bank vs. Andrada Electric
& Engineering Company, 381 SCRA 244 [2002];.Mclead vs.
National Labor Relations Commission, 512 SCRA 222 [2007];
‘see Bank of Commerce vs. Radio Philippines Network, Inc., 722
SCRA 520 [2014].) |
If any of the above cited exceptions is present, the transferee
corporation shall assume the liabilities of the transferor. The general
tule is referred to by the Supreme Court as the “Nell Doctrine.” (Y-1
Leisure Philippines, Inc. vs. Yu, 770 SCRA 56 [2015].)
(2) To affected employees of selling corporation. — In asset sales,
the rule is that the seller in good faith is authorized to dismiss the
affected employees, but is liable for the payment of separate pay
under the law. The buyer in good faith, on the other hand, is not
obliged to absorb the employees affected by sale, nor is it liable
for the payment of their claims. The most it may do, for reasons of
Public policy and social justice, is to give preference to the qualified

separated personnel of the selling firm. (SME Bank, Inc. vs. De

Guzman, supra.)
Liability of purchasing corporation

in case of stock sales.
In contrast with asset sales, the transaction in stock sales take
place at the corporate stockholder level. A shift in the composition
of its stockholders will not affect the existence continuity of the
corporation because the corporation possesses a personality separate
and distinct from that of its shareholders. This, notwithstanding, the
stock sale, the corporation continues to be the employer of its people
and continues to be liable for the payment of their just claims.
Furthermore, the corporation or its new majority shareholders are
not entitled to lawfully dismiss corporate employees absent a just or
authorized cause.
In a stock sale, there is no transfer of ownership of business. The
transfer of only involves a change in the equity composition of the
corporation. This being so, the employment status of the employees
is not affected by the stock sale.and, therefore, the change should
not result in the automatic termination of the employment of the
corporation’s employees nor give the new majority shareholders
the right to legally dismiss the corporation’s employees, absent just
or authorized cause. (SME Bank, Inc. vs. De Guzman, supra.)
Business enterprise transfer.

In the last exception (1, d, supra.), the transferee purchases not
only the assets of the transferor but also its business. This is the sale
contemplated in Section 39 which refers not to an ordinary sale of
all corporate assets but to a transfer of such degree that the selling
or transferor corporation is rendered incapable of continuing its
business or its corporate purpose.
Given that the transferee corporation acquired not only the
assets but also the business’ of the transferor corporation, then
the
liabilities of the latter are inevitably assigned to the former. To protect
the ‘creditors of the transferor corporation against unscrupulous
conveyance of the entire corporate assets, the transfer under Section
39 must likewise carry with it the transfer of its liabilities. Fraud is
notan essential element for the application of the business
enterprise
transfer. (Y-1 Leisure Philippines, Inc. vs. Yu, 770 SCRA
56 [2015].)

at 10
TI TLE Iv
. POWER
S OF CORP
ORATI ON
381
Sec. 40, Po
;
the corporation t.-
to cover the ae Own Shares,
— Provided, that
shares
a icted farnings
corporation sha| in its books
| have the Purch “eed acquired, a stock
its own shares fo, a legit nt ©
: ;
purposes, including Purchase or acquire
ate Gai
the following purpose or
; arising Compro
the corporation,
. p mise iindebtedness
an to
delinquency sale, and to Purc Unpaid Subscription,
in a
during said Sale; an
d
hase delinquent shares sold
Power to acquire Ow
n shares.
Section 40 authorizes a s
its own. shares! subject to
for a legitimate corporate
purpose or Purposes and
unrestricted retained earnings that there be
? ( See Sec. 42.) in its books
shares acquired. to cover the
(1) Elimination of fractional shares
whi ch is less that one (1) cor
, — A fractional share is a share
por ation s hare. Thus, if'a stockh
older
—_—
‘Although shares thus purchased

shares,” and, under a discredited met are, unless formally “retired,” treated as treasury
“ = a”
“
hod of accounting, are carried on

books as an asset or are applied to reduce the corporation’s
is Sued, it is obvious that, althou “capi tal,” “ sta ted capi tal, ” or “capital stock”
gh the selling shareholder has giv
Corporation has not acquired one. Its en up an asset, the.
own shares are of no value to it unless
are resold: What has actually happen and until they
ed is that the corporation’s assets have
by the amount paid for the shares, whil been reduced
e the proportionate interest of each of
shareholder in the diminished asse
ts have been decreased by dimini the other
Outstanding shares. Legal capital is not shi ng the num ber of
(see Sec, 38.) may be made only by the red uce d by the tran sact ion. Red uct ion of capital
methods prescribed in the statutes. Onl
Statutes include reacquisition of shares
as such a method and then only in excep
y a few
circumstances, (WL. Cary, Cases and Materials tional
on Corporation Law, 1969 ed., p. 1592.)
| is requirement applies to an incor
porated Sports club that operates as a stock
©rporation with an authorized capital stock
Operations of the club do not gener consisting of no par value shares. While the
ate profit, this does not necessaril
y make ita non-profit
°rganization, Although its operations do not
generate unrestricted retained earnings, it
il has the capacity to generate retained earni
its shareholders. (SEC-OGC Opinion No. 14-10,ngsMarc and authority to distribute the same to
h 31, 2010.)

S Sec. 40
nd,
owns 250.shares and the corporation declares 257 stock divideonal
as fracti
his total shares will be 312 and 1/2 shares. Inasmuch
the corporation
shares cannot be represented at corporate meetings,
concerned or issue
may purchase the same from the stockholder
negotiate
fractional scrip certificates to such stockholder who may
owning fractional
for the sale thereof with other stockholders also
.
shares so as to convert them into full shares
. — Section 40(b)
(2) Satisfaction of indebtedness to corporations shares
se the
does not authorize a corporation to arbitrarily purit,chawhether at the
‘to
it issued to any of its stockholders indebted pose of applying
for the pur
prevailing market price or at par value
of its claim against them,
the proceeds thereof to the satisfaction
stockholders
and this is particularly true where the consent such bee
has n secured,
has not been secured. Even where their consent
conditions for the
the corporation can buy their shares only if the
. 11, 1961.)
purchase (Infra.) are present. (see SEC Opinion, Aug
holders. —
(3) Payment of shares of dissenting or withdrawing stock
kholder is
Section 40(c) refers to instances when a dissenting stoc
from
given appraisal right (see Sec. 80:) and the right to withdraw
les
the corporation as provided in Section 15 (Amendment of artic
corporate
of incorporation), Section 36 (Power to extend or shorten
e -assets),
term, Section 39 (Sale or other disposition of corporat
ion
Section 41 (Power to invest corporate funds in another corporat
or business or for any other purpose), Section 67 (Delinquency sale),
Section 76 (Stockholders’ or members’ approval [of plan of merger
or consolidation]), and Section 104 (Withdrawal of stockholder or
dissolution of [close] corporation).' int
(4) Other cases. — This power of the corporation to acquire its
own shares is not limited to the cases enumerated in Section 40.
(a) It may also be exercised under Section 9 (treasury
shares), eae | Ning HERON
(b) With respect to redeemable ‘shares, they may be
purchased by the corporation regardless of the existence of
unrestricted retained earnings in the books of the corporation.
(see Sec. 8.)
‘Fractional shares standing in the name of a stockholder may not be used as a basis
of voting for directors at a shareholders’ meeting, either cumulatively ‘or otherwise.
(Ballantine, p. 401.)

Sec. 40
383°,
(c) Shares
als
capital stock of a corporate
ited Bey at a decrease
in the
(d) Inclose Cor

poration where
there is a deadlock re
t
ines specting
s
8, 2009.) 7
Parar.
. 1[d]
1[d];; SEC-OG
a
Conditions for the exer

cise of the power.
_ The right and power of a Corpor
ation to acquire or purchase its
own shar es is not absolute, but de
pends upon the contingency
the condition of its affairs and
its relati of
on to creditors at the time of
the purchase. (Fisher, op. cit,
p- 287.)
‘Briefly, a corporation’s ri ght to purc
hase its shares according to
the weight of authority is s ubject to these
limitations:
_ (1) its capital is not thereby impaired;
(2) itis fora legitimate and proper corporate pur
pose;
, (3) there shall be unrestricted retained earnings (see Sec. 42.)
to
purchase the same;3
| (4) the corporation acts in good faith and without prejudice to
the rights of creditors and stockholders; and
5No corporation shall redeem, repurchase or reacquire its own shares, or whatever
class, unless it has an adequate amount of unrestricted retained earnings to support the
i , except:
a . The Geos ae reacquired in the redemption of redeemable shares of the
corporation or pursuant to the conversion right of convertible shares of the corporation,
in accordance with the provisions expressly provided for in its articles of incorporation
if k representing said shares;
ue beh ate wites are reacqiied to effect a decrease in the capital stock of the
ati the SEC;
ae Haare are reacquired by a close corporation pursuant to the order
of the SEC Hr to arbitrate a deadlock as provided for under Section 104 of the Cor-
poration Code of the Philippines. (Sec. III, CCP No. 1-Rules Governing Redeemable and
Treasury Shares, 1982; see Sec. 8.)

\
~
(5) ‘That the conditions of corporate affairs warrant it. (SEC-

OGC Opinion No. 11-09,” May 8, 2009; SEC Opinions, Sept. 11, 1985,
Oct. 12, 1992, and April 11, 1994.)
Although the existence of legitimate corporate purposes may
justify a corporation’s acquisition of its shares under Section 40, such
purpose cannot excuse the stockholder from the effects of taxation
arising from the redemption of stocks by the corporation. If the
issuance of stock dividends is part of a tax evasion plan and thus,
without legitimate business reasons, the proceeds of the redemption
may be deemed as taxable dividends.’ (Comm. of Internal Revenue
vs. Court of Appeals, 301 SCRA 152 [1991].)
Trust fund doctrine.

This doctrine, first enunciated by the Supreme Court in the case
of Philippine Trust Co. vs. Rivera (144 Phil. 469 [1923].); holds that the
assets of the corporation as represented by its capital stock are “trust
funds” to be maintained unimpaired and to be used to pay corporate
creditors in the sense that there can be no distribution of such assets
among the stockholders without provision being first made for
the payment of corporate debts and that any such disposition of
its assets to the prejudice of the creditors of the corporation who
extended credit to the corporation on the faith of its outstanding
capital stock is null and void. }
(1) Subscription to capital stock. — It is established doctrine
that subscriptions to the capital of corporation constitute a fund to
which creditors have a right to look for satisfaction of their claims
and that the assignee in insolvency can maintain an action upon any
unpaid stock subscription in order to realize assets for the payment
of its debts. (Donna C. Halley vs. Printwell, Inc., G.R. No. 157549, 30
6The SEC has exclusive supervision, control, and regulatory jurisdictio nto investig
ate
whether the corporation has unrestricted retained earnings to cover the payment for the
shares, and whether the purchase is for a legitimate corporate purpose as provided in
Secs, 40 and 139. (Boman Environmental Dev. Corp. vs. Court of Appeals, 167 SCRA 540
[1988].) Thus, if the aforementioned conditions are present, a corporation may acquire
requirements
the shares of alien stockholders to comply with ‘constitutional or legal
citizens'in
prescribing the minimum percentage of capital stock ownership of Filipino
nowy
certain corporations. (Ibid.; see Sec. 12.)
11, 1985, Oct. 12,
7(SEC-OGC Opinion No. 11-09, May 8, 2009; SEC Opinions, Sept.
1992, and April 11, 1994.)
8”Tax treatment of stock dividends,” under Sec. 42.

may be distri
y
buted ©
<P procee
akods Sbtin; ed i ee li
No. 60-19, Dec. 20, 2019.) olders,
annot be cancelled by the

‘ectors without justifiable cau
‘to “relieving an: original subs se. This is tantamount
criber from the subscription, a
“contractual obligation, whic
h a’ co rporation has’ no’ power
“to-do so." Thus, a corporation may.
not condone subscription
receivables due from shareholders a S it
violates the trust fund
.. doctrine. 4 a .
-\(c) Additional ‘paid-in capital (APIC) alread
y forms part
of equity emanating from the original subscript
ion agreement.
| APIG, asa premium, forms part of the capital
of the'corporation
“and therefore, falls within the purview of the trust fund doc
trine.
- Thus, APIC:is also governed ‘by the doctrines and restri
ctions
enunciated in the above-stated jurisprudence. (SEC-OCGC
Opinion No. 50-19, Oct. 11, 2019.)
Thus, the nullification of ‘APIC and:its subsequent conversion
into a loan violates'the trust fund doctrine. This is because the APIC
is considered a:contribution of a stockholder over ‘and above the
Par value of:shares:and falls under the concept of corporate trust
fund upon its recording in the books of the corporation. (SEC-OGC
Opinion No. 13-14, June 11;.2014.) robe 1
Similarly, the reversal ofthe APIC an dits conversion tosubscribed
capital mies the trust fund doctrine, When corporate funds will
be used for purposes other than those enumerated in Ong Yong,

l.e., to pay for the stockholders’ additional subscription to capital

stock, it will effectively result in the unauthorized distribution of
the corporate trust fund, thereby violating the Trust Funds doctrine,
If the reversal of the APIC and its conversion into subscribed capital
are allowed, the same would be tantamount to the corporation using
its corporate trust fund to pay for the subscription of its stockholder
for the issuance of its own shares. (SEC-OGC Opinion No. 13-14,
June 11, 2014.)
(2) Corporation generally without power to purchase its own shares.
— Jt could be inferred from our law that a corporation has generally
no power ito purchase its own shares of stock except otherwise
provided inthe Revised Corporation Code. This rule is dictated by
the necessity -of protecting the interests of, existing creditors who
might be adversely affected by the stock, purchase which, in effect,
may operate to reduce its capital stock to the.extent of the shares
purchased without complying with the formalities required by
Section 37. | in “ee
A stockholder has no right to demand refund of his investment
without complying with.the requirements, of Section 41 since this
will constitute acquisition by the corporation of its.own shares. (SEC
Opinion, Jan:'3, 1985.) ° 3 if
(3) Repayment to stockholders a fraud on corporate creditors. —
The purchase, in effect, constitutes fraud on corporate creditors as
it amounts to:repayment;to the stockholder ‘of his proportionate
share from the corporate assets and hence,:an. impairment of the
capital available for the benefit and protection of creditors who
are preferred over the stockholders in the distribution of corporate
assets. (see Sec. 139, last par.) > “4
(4) Existence of unrestricted retained earnings. — A corporation

must have restricted earnings before it may acquire its own shares,
based on the trust fund .doctrine that the capital! stock, property
and other assets of a:corporation are regarded as equally in trust
for the payment of corporate creditors. The prohibition against the
distribution of the capital of a corporation as cash dividend is also
based on the same doctrine. (see Sec. 42.) °
prohibited
Note 'that ‘under the doctrine, the corporation ‘is not
to use its assets for purposes of its business. °°" GUE!
I

Se c. 40 T ITLE
IV. POWERS OF CORPOR
ATION
387
Effects of purcha
se On cor
POrate Credi
(1) Impairment 0if tors.
capital,
, OF if th ve unresttict ed retain
i ed earnin
sngs
or
the surplus, the purc
hase
the selling shareholde
rs o bgt t
impairs capital. * Part of the capital, and to that extent
2 The impairment may be

unintentionally permanent
to the full amount paid, as wher
e the corporation finds itself
unable to resell the
th: shares, or to the extent of part of
' paid, as where it is unable to resell the amount
except at a lower price.
(2) Current creditorsandlong-termcreditors.—T
hese consequences
affect creditor
. s. But there ma y be a difference between curre
nt
creditors and long- term creditors. If the corporation
is solvent, the
former can enforce their claims. But the latter take the risk
of future
insolvency as they await maturity of their claims. (see WL. Cary,
Cases and Materials on Corporations, p. 1592 [1969] Ed.].)
Effects of purchase on remaining

stockholders.
In addition to diminishing assets and. thereby reducing the
creditors’ margin of safety, the purchase of shares by a corporation
is objectionable also in that it injures the rights of remaining
shareholders, although it may be advantageous also to those who
do not sell. 3
(1) In general. — The impact of this purchase on the rights of
remaining shareholders is discussed below:
“A reduction of capital must be an all-around affair; that
is, where capital is to be paid off or to be cancelled as lost or
unpresented by any available assets, or where the liability
of unpaid capital is to be reduced in each share this ratable
reduction would leave each shareholder the same proportionate
interest and rights which he had before. Any other scheme
would disturb or alter the relative positions of the members.

The purchase by a corporation of its own shares withdraws

part of the original capital from the venture and redistributes
and changes the relative rights of the remaining members,
Shareholders should have the right to insist on the preservation
of all the contributed capital for the prosecution of the venture,
except in case of legitimate reduction of capital which statutes
authorize and which shareholders are presumed to have
made part of their contracts with the corporation. The capital
subscribed is considered to be permanently devoted to the
enterprise by the shareholders and it constitutes a basic business
fund which must not be paid back except in entire or partial
liquidation of the corporation.
It might be said that when a corporation purchases its own
stock, a situation is created which is analogous to the non-
issuance of authorized stock. Non-issue of authorized stock is
one thing, retirement of issued, another thing. Issued capital
has contributed to the growth of the corporation on which the
public in giving credit, by purchasing or loaning on shares or
bonds or in many other ways, may rely.” (Jose S. Campos, Jr,
“The Purchase by a Corporation of its Own Shares,” Phil. Law
Journal, Oct. 1952, p. 707, quoting Prof. Nussbaum, “Acquisition
by a Corporation of its Own Stock,” 35 Col. L: Rev. 976, 982.)
(2) Share in dividends. — The stockholders would also be
adversely affected in the field of dividends. How a purchase
of shares by a corporation affects the rights to dividends of the
remaining stockholders is explained below:
“tf the shares are purchased at a price above the actual value.
of the shares, the remaining members’ share in the undivided
surplus is impaired and money is actually being taken from the.
ockets of the remaining members for the benefit of the retiring
shareholders. If the purchase is made at a price ‘commensurate
with the actual value of the shares, the surplus which would
ordinarily be devoted to dividends is instead tied up to effect
either an indirect and unauthorized reduction in capital, or
else the possibility of dividends is postponed until such time
as she treasury stock can be and is resold at an adequate price.
_And even when the price paid is less than their intrinsic value
and a profit is later realized when they are reissued at a higher
been
price, the distribution of the surplus as dividends has still

Get: 41 TITLE IV : POWER |
S OF CORPORATION 389
postponed.” (Ibid., quotin

its Own Stock” [1930], 15 Minn ieee by a Corporation of
(3) Share in possible losses, — e diminuti th ber of
shareholders may entail still other da SHEGE OF Oe MSS
. per e ngers. As treasury stock does
not Le me ene it may be contended that ie remaining
share as a result get a bigger individual share therein
by way of increased div per sh j
idends
shareae of possible losses: is ofeofr:h
prare,On asthe part
eel , inasmuch andy-tett
the workin
capital disappears. With this decrease in wworidng capital the chances
are, the profits will be less and, therefore, the proportionate share of
the remaining shareholders would also be decreased. (Ibid.)
(4) Others. oz The purchase has or may have a variety of other
consequences with respect to shareholders.
(a) On the one hand; it diminishes the number of shares,
so that each shareholder who does not sell has a larger interest
in a smaller total of assets. By reducing the number of shares, it
affects voting control, if the shares purchased are voting shares.
(b) If the shares are purchased at less than their value, it
benefits those who do not sell, and on the other hand, if the
price is unduly high, it enables the selling shareholders to retire
from the enterprise with corresponding disadvantage to other
shareholders.
(c) It enables the management to use corporate funds to
rid themselves of shareholders whose activities are believed by
venient to the
them to be detrimental to the enterprise or incon
management. (W.L. Cary, op. cit. p- 1592.)
in Another
Sec, 41. Power to Invest Corporate Funds
Corporation or Business or for Any Other Purpose. — Subject
to the provisions of this Code, a private corporatisson ormay
for
invest its funds in any other corporation or busine
any purpose other than the primary purpose for which rdit
was organized when approved by a majority of the boa
“re dire
of pre sen tinsg orat trus
ctor tees and ratified by the stockholders
least two-thirds (2/3) of the outstanding
of the members
capital stock, or by at least two-thirds (2/3)
a meeting duly
in the case of nonstock corporations, at ment
ed invest
called for the purpose. Notice of the propos

THE REVISED CORPORATION CODE OF THE PHI LIPPINES Se,—
390
and the time and place of the mee ting shall beaf. add ressed
residence
to each stockholder or member at the nae Senate te
as shown in the books of the corporation an S Hegas
the addressee in the post office wit Peat F P ag
ersonally, nical
the niles dt ions of th mission a e of
roni when allow he bylaws or
one with the consent of ckholders: Provided, That
any dissenting stockholder shall have appraisal ane
provided in this Code: Provided, however, That where the
investment by the corporation is reasonably necessary to
accomplish its primary purpose as stated in the articles
of incorporation, the approval of the stockholders or
members shall not be necessary.
Power to invest funds in other corporations

or for other purposes.
(1) Scope of the term “funds.” — The term, as used in Secti
on
41, includes any corporate property to be used
to further the
business: Thus, idle corporate property may be
temporarily leased
to make it productive absent express restrictio
ns in the articles of
incorporation or bylaws and the leasing
is not used as a scheme to
Prejudice corporate creditors, subject to
the requirements of Section
41. The term also includes “donation
s” received by the co
from other enti ties. (SEC Opinion, Nov. 3, 2003.)
(2) Compliance with requirements,
may invest its funds in any other cor In order that a corporation
—
poration or business or for
any purpose oth er than the pri

A corporation may be orean:
so long as the prima “anized wi
y hel Pinion No. 47-11,1 Nov. 25,

ae € corporation whethe t
power Sa
is is its articles of incorporation or lds GEC-OGCsuch
Se ont)
inion No. "2? June 24, 2019; : SEC-OGC
22-19, ys f
Opinion No. 33-11, July
A nonstock, Non-profit foundation-‘may invest its funds in
subscribe: tosh ares of another domestic corporation. Howeve or
r,
its pow
PS er to invest is limited b y its articles of incorporation. (SEC
Opinion No. 54, Nov. 3, 2003.):: OMe =
Purpose of the investment.

(1): Primary purpose. — Where the investment by the corporation
is reasonably necessary to accomplish its. primary purpose as stated:
in‘its articles of incorporation, the approval’only of the board of
directors or trustees is necessary. (Sec.:41; sec SEC-OGC Opinion
No. 03-20, Nov. 23, 2020; SEC Opinion, Nov. 3, 2003.)
Thus, the purchase of beer manufacturing facilities by a
corporation
in a foreign country for the manufacture and marketing
of-beer thereat was held’ as an.investment.in ‘the same business
Stated. as, its main purpose in its articles
of incorporation, which
is. to. manufacture and, market beer and, therefore, does not need
the approval of the stockholders. (Gokongwei, Jr. vs. Securities and
Exchange Commission, 89 SCRA 336 [1979].)
(2) Other than primary purpose. — Where the investment of funds
is made in any other corporation or business or for any purpose
other than the primary purpose for which the investing corporation
was organized, the approval by the majority of the board of directors
it oration Code of the Philippines Annotated, p. 327 [2002].

ate <i ib be Cieatiod Code of the Philippines Annotated, p. 267 [1993].

or trustees need the ratification by the stockholders representing at

least two-thirds (2/3) of the outstanding capital stock or by at least
two-thirds (2/3) of the members in case on nonstock corporation.
Corollary thereto, other purposes not allied or incidental to its
primary purpose shall be classified as secondary purposes. (SEC-
OGC Opinion No. 03-20, Nov. 23, 2020.)
(3). Not among the secondary purposes. — The other purposes for
which the funds may be invested without amending the articles
of incorporation must, be among those enumerated in the articles
of incorporation. In order.to legally engage in any of its secondary
purposes, the corporation must comply with Section 41.
A corporation is not allowed to engage in a business distinct
from those enumerated in the articles of incorporation without
amending the purpose clause of the articles* (see Secs. 13[2], 15.) to
include the desired business activity among its secondary purposes.
Ratification of defective investment.

(1) By stockholders. — A corporate transaction or contract
which is within the corporate powers, but which is defective from
a‘purported failure to observe ‘in its execution the requirement of
Section 41 that the investment must be authorized by the affirmative
vote’ of the’ stockholders ‘(or members), may be» ratified. The
requirement
is for the benefit of the stockholders who'may ratify
the investment and its ratification obliterates ‘any defect which ‘it
may.have had at the outset. (Ibid.) .
(2) ‘Investment merely vires, not illegal:— Mere ultra vires acts (see
Sec.'44.) or those which are not illegal and void ab initio, but are not
merely within the scope of the articles of incorporation, are merely
voidable and may become binding and enforceable when ratified by
the stockholders. (Pirovano vs. De La Rama Steamship Co., 96 Phil.
335 [1954].) TUN, * |
_ Corporate funds may be temporarily loaned even to stockholders, provided the fol-
lowing conditions are observed: (1) The funds are not presently used by the corporation
and the loaning is not made on a regular basis; (2) By lending the funds, the corporation
will make them productive instead of allowing them to remain idle; (3) There is no ex-
press restrictions in the articles of incorporation or bylaws; (4) There must be a collateral
or assurance that the borrower is capable of paying them at maturity date; (5) The lend-
ing is not used as a scheme to prejudice corporate creditors or result in the infringement
of the trust fund doctrine; and (6) Sec. 41 is complied with. (SEC Opinion, Jan. 11, 1991.)

393
ae cakes retained earnings which shall be

on the basis of outs ara » Or j n stock to all stockholders
» Prope
stockholders repres
outstanding capital Stock at a
regular or special meeting
duly called for the Purpose,
Stock corporations are

prohibited from retaining
surplus Profits in excess of one
hundred percent (100%)
of their paid-in capital stock, except
: (a) when justified
by definite corporate exp ansion projects
approved by the board of directors; or ,
rams or prog
(b) when the
corporation is prohibited under any loan agr
eement with
financial institutions or creditors, whether
local or foreign,
from declaring dividends without their consent,
and such
consent has not yet been secured; or (c) whe
n it can be
clearly shown that such retention is necessary under
Special circumstances obtaining in the corporation, such
as when there is need for Special reserve for probable
contingencies. (A)
Concept of dividends. : |
A stock corporation exists to make a profit and to distribute a
portion of the profits to its stockholders.
(1) Adividend is that part or portion of the profits of a corporation
set aside, declared and ordered by the directors to be paid ratably
to the stockholders at a fixed time. (Fisher vs. Trinidad,
43 Phil.
480 [1922]; Nielson & Co., Inc. vs. Lepanto Consolidated
Mining
Co., 26 SCRA 540 [1968].) It is a payment, ordinarily in cash,
to the
Stockholders of a corporation as a return upon their inve
stment. (see
Cojuangco vs. Sandiganbayan, 586 SCRA 790 [2009].) ;
= > ‘ ra. 4
‘Citing De Leon, The Corporation Code of the Phi1 :
lippines Ann
A
otated, p. 384 [2002]

(2) A dividend is a sum which can be divided among

stockholders without touching the capital stock. (Lockhart v. Van
Aestyne, 31 Mich. 76.) The term has been regarded as indicating
that there must be a surplus or profits to be divided. However, the
word has also been used with no reference to surplus or net profits,
e.g., to describe distributions made to stockholders on liquidation of
the corporation, and to distributing assets upon a reduction of the
capital stock. (19 Am. Jur. 2d 283.)
(3) A partnership has neither shares of stocks or. capital stock,
nor does it have a'board of directors that can declare dividends
out of its unrestricted retained earnings. Dividends’ are property
of the corporation and is payable only when the board of directors
declare them as dividends even if there are existing profits of the
corporation. On the other hand, in partnerships, profits are already
due to the partners during the life of the partnership /joint venture
in proportion to their interest as set forth in their agreement, and are
deemed to have been actually or constructively received in the same
taxable year. (SEC-OGC Opinion No. 13-17, Nov. 3,.2017.)
Valuation of, and share in, dividends.

(1)’ Dividends, regardless of the form these are declared, that is,
cash, property, or stocks, are valued at the amount of the declared
dividend taken from the unrestricted retained earnings of the
corporation. (PLDT vs. National Telecommunications Commission,
539 SCRA 365 [2007].) , |
(2) It is a characteristic of a dividend that all stockholders of
_ the same class share in it in proportion to the respective amounts of
stock which they hold. (18 Am. Jur. 2d 281-283.)
Concept of profits.
(1) In its usual and ordinary meaning, the term profit means
the “return to capital rather than earnings from labor performed
or services rendered.” (U.S. Employees Association, Employees
Association [USEAEA] vs. U.S. Employees Association [USEA], 107
SCRA 87 [1981], citing Ballantine’s Law Dict., 3 Ed.)
(2) It has also been defined as “the excess of return over
expenditure in a transaction or series of transactions,” or the
“excess of an amount received over the amount paid for goods and

TITLE IV. Pow
ERS OF CORPORATION 395
; . tof Appeals, 288 SCRA 307 [19

98], citing
9.1991.) -Dict,, p. 1986 and Barron’s Law Dictionary,
oxcepentonSoneyond& Co., 238 pen P. 289, 831, 41 ALR.oe 868.) It is the

e
en baie ts of anv
S Over, expenditures,
kj
citing American cases.) R that is, net earniings. (Ibid.,

To make profits is the main purpose or goal of a business
corporation. |
Dividends distinguished from profits

or earnings... ae ; :
(1) A dividend, as applied to corporate stock, is that portion of
the profits or net earnings which the corporation has set aside for
ratable distribution among the stockholders. Thus, dividends come
from profits, while profits are the source of dividends. — :
(2), Profits are not dividends until so declared.or set aside by the
corporation. They may, be,paid out in whole or.in part, in dividends.
In the meantime, all profits are’a part of the,assets of the corporation,
and do not belong to the stockholders individually. (19 Am. Jur. ad
284.) They may be incashandinkind. _ : ,
Nature of dividends received _

by a corporation.
kholder in’
Dividends received by a company which isa stoc corporate
another corporation are corporate earnings arising from :
investment.
The right to a share in such dividends, by way of salary increases,
may not be denied its employees when they are entitled thereto. It
is not a case of a corporation distributing dividends in favor of its
stockholders, in which case, such dividends would be the absolute |
property of the stockholders and hence, out of reach by creditors of
the corporation. (Madrigal & Company, Inc. vs. Zamora, 151 SCRA’
355 [1987].) |

Power to declare dividends.

The board of directors of a stock corporation has the power to
declare dividends out of the “unrestricted retained earnings” which
shall be payable in cash, in property, or in stock to all stockholders
“on the basis of the outstanding shares held by them.”
(1) Stock dividends. — In the case of stock dividend, it shall not
be issued without the approval of stockholders representing at least
2/3 of the capital stock then outstanding at a regular meeting of the
corporation or at a special meeting duly called for the purpose. (Sec.
42, par. 1.)
If the requisite vote for the declaration of stock dividends has
been secured, the stockholders who are opposed cannot legally
refuse to receive their participation in the stock dividends. However,
before stock dividends represented by one class of shares may be
given to holders of another class of shares, it is necessary that the
consent of such holders be first secured, they being given a class
of shares different from the class they are holding. (SEC Opinion,
March 1, 1973.) Thus, a corporation may declare stock dividends
to both holders of founders and common shares, since there is no
prohibition on the matter either in the Revised Corporation Code or
jurisprudence, provided the stockholders affected will agree to such
declaration. (SEC Opinion, Sept. 15, 1972.)
(2) Other dividends. — A mere majority of the quorum of the
board of directors is sufficient to declare other dividends. The board
may declare, other dividends other than stock without need of
stockholders’ approval. (Sec. 42, par. 1.)
Payment of dividends.
The dividends are paid to the registered owners of stock
as of a record date (Infra.), usually a date different from the date
of declaration. The record date determines the time when the
stockholders of record shall be ascertained.
The dividends are stated either at a given percent or a fixed
amount for each share.
2Dividends are declared and paid on the basis of the paid-up stock. The basis is the
number of shares held by the stockholders, not the amount paid in consideration thereof.
(see Sec. 137.)

Sec. 42
TITLE
hha?
Tv, POWERS of CORPORATION
407
Dividends Payable onl
retained earnings, Out of unrestricteg
par or issued value.
Reasons for the rule.
_(1) The main reason for the rule is that the

outstanding capital
stock: of a corporation, including unpaid
subscriptions, is.a trust
fund (supra.) for the se curity of creditors and cannot be
distributed
‘The Revised Corporation Code, in Sec. 42, adopting the chan ge made in accoun
ting
terminology, substituted the phrase “unrestricted retained earnrings,” which:
may ‘be
considered a more precise term, in place of “surplus profits arising from
its business,”
in the former law. “Surplus profits” was used in the past to mean “retained
earnings”
as presently understood. Indeed, the Revised Corporation Code still speaks of
“surplus
Profits” in the second paragraph of Sec, 42 in fixing the maximum earnings which may
be
retained by a corporation and in ae in defining stock corporations. The
Revised Code
eee ee beri “arisingi from its business. eit
t the term “unrestricted earnings,”
as used in the Revised
Corporation Code, refers to all the excess of assets of the corporation
over its liabilities
including the amount of the legal or
Profits of the corporation “arising fromstated capital. Hence, it is limited to accumulated net
its business” but may now comprehend also
other
gain such as those derived from the sale of fixed assets. But the term does not include the
unrealized increase in the value offixed assets. (Infra.) fre
‘For definition of “legal capital,” see comments under Sec.
6,

Sec. 42
ditors
; : di to the sto ckh olders as dividends, the cre;
to their prejudice holding the stockholders personally liable of
being precluded from
their claims.
bee n sta ted to be that the capital stock ofa
The reason has also
be div ert ed or wit hdr awn to the prejudice of its
corporation cannot for
and sto ckh old ers . Thi s latter statement of the reason
creditors for although a court will tre
at
we ve r, has bee n cri tic ize d,
the rule, ho
as a trust fund for its creditors
the assets of an insolvent corporation old of its
and stockholders, a corporation can , not be said to hold any
t and going concern.
property subject to a trust while it is a solven
retained earnings to cover
(2) The requirement of unrestricted ans that the
trine which me
the shares is based on the trust fund doc arded
ty and other assets of a corporation are reg
capital stock, proper
creditors. Hence,
as equity in trust for the payment of corporate ice of creditors is
any disposition of corporate funds to the prejud right to assume
null and void. Creditors of a corporation have the
ities, the board
that so long as there are outstanding debts and liabil se
ration to purcha
6f directors ‘will not use the assets of the’corpo
idends ‘is
its own stock: On this premise, “the declaration of’ div
estricted
dependent upon the availability of surplus profit or unr
retained earnings, as the case may be.” (SEC-OGC Opinion No. 03-
19, February 14, 2019.) si
- (3) Moreover, each stockholder is entitled as'a matter of right

to have the capital of the corporation unimpaired to carry out the
‘purpose for which the corporation has been created. The rationale
is that stockholders should receive dividends only from their
investment, and not from the investment itself. (18 C.J.S. 1097.)
Rule as to no-par value stock.

The Revised Corporation. Code makes it clear that with respect
to no-par values shares, the entire consideration (including paid-in
surplus, infra.) received from the same shall be treated as capital and
shall not be available for distribution as dividends, (Sec. 6, pat- 7.)
The theory. is that the, stockholders intended that’ all such
consideration shall. constitute the basic. business fund. of. the
corporation to be permanently devoted in the prosecution of the
corporate business. | | +

Sec. 42 TITLE IV. POWERS OF
CORPORATION
399
Dividends from pro
capital ise hi
e 8 pe
vestea. in i
which
— In the case of corporations

such as mining or timber-cutting,
‘iba cil in the regular course of operation,
eee: to the so-called “wasting assets”
assets” ” corporation,
:
the Capital
on an Engli
tines
8
ets exhausted
which is necessarily ye
in the carrying on of
of its Operations i
dividends out of net income without inal S
capital which is th kingDup fora ae
theic e ofaie
loss its
298.) us being constantly diminished.’ (19 Am. Jur. 2d
: aa. dividend payment represents a liquidation of

capital
assets.
(2) To utilize a lease or patent. —The same is true of a corporation
created for the purpose of utilizing a lease for a term of years, or a
patent:
(3), To liquidate a business. — Similarly, where a corporation is
formed for the purpose of liquidating the business of a partnership,
and selling all of its property and dividing the proceeds among its
stockholders, such as property is, in no ‘proper sense, its capital
stock within the meaning of the rule prohibiting a corporation from
distributing its capital in the form of dividends, but is rather to be
‘regarded as property held'by the corporation in trust for the benefit
of its stockholders, and which may be distributed by it to them in
the manner prescribed in the articles of incorporation,
at least where
the rights of creditors are not involved. (11 Fletcher, pp. 1079-1083.)
-\'5In other words, when a corporation is created for the purpose of investing its capital
_in property which will necessarily be consumed or exhausted in the ordinary course of
its operations, so that the depreciation in the value of the property cannot be repaired, it
is not subject to the same rules as other corporations. A mining company, for example,
of permanently using the property in which its capital
is not informed for the purpose
is invested, but for the purpose of investing in property which, in the nature of things,
“will be gradually consumed in making profits, and, in estimating the profits of such a
corporation for the purpose of determining whether it may lawfully declare a dividend,
of its use
no deduction is to be made for depreciation in the value of its mine by reason
and consumption in taking out the ore or other minerals. Dividends may. be lawfully
declared out of the net proceeds of its operations after deducting expenses anda debts and
p. 1079.)
a reasonable fund for contingencies. (11 Fletcher,

Unrestricted retained earnings explained.

(1) The retained earnings of a corporation is “the difference
between the total present value of its assets after deducting losses
and liabilities and the amount of its capital stock.” (11 Fletcher, p,
1041.) Capital stock, in this instance, should be understood to refer
to outstanding stock (see Sec. 137.), and not to the stated or nominal
(authorized) capital stock. (see Secs. 12, :13[h]:)
Stated otherwise, the ordinary way of determining whether
or not a corporation has retained earnings is to compute the value
of all its assets and deduct therefrom all of its debts and liabilities,
including legal capital. This may be expressed in the following
equation:
Retained earnings = Assets — Liabilities and Legal Capital
The difference: between the total assets and liabilities of a
corporation represents its net worth:or net assets or the stockholders’
equity consisting of the capital investing and the retained earnings.
Thus, the retained earnings will be the balance of the net worth or
net assets after deducting the value of the corporation’s outstanding
capital stock. They refer to the accumulated undistributed earnings
or profits realized by a corporation arising from the transaction of
its business and the management of its affairs, outof current and
prior years. : Sas
' Section 42 does not categorically state that the retained earnings
of a corporation from which dividends may be declared should arise
from its business as required by Section 16 of the former Corporation
Law.' However, sound accounting principles dictate that dividends
may be declared only out of the actual earnings or profits realized
from the business of the corporation.
' (2) Suchretained earningsor portion thereof are said tobe restricted
and, therefore, free for dividend distribution to stockholders, if they
have not been reserved or set aside by the board of directors for
some corporate purpose or for some other purpose.in accordance
with Se legal, or contractual requirements.’ (see Sec. 42,
par. 2. Wain !
‘Dividends from the profits may come from the current net profits, i.e., those earned in
the preceding year, or from the undistributed profits or earned surplus, i,e., the accumulated
profits realized during all prior years.

Gec. 42 TITLE IV, P
OWERS OF
CORPORATI
ON 401
SEC rules.
Provides these guidelines in

available for dividend declar
(1) Definitions, — ation.
The Circular
ae e amountas show in n
the financial statements
y the company’s independent
such amount shall] refer auditor. If applicable,
to’ the Tetained earnings’ of the parent
company but not the consolidated financial statements
.”
(b) The term “unrestricted retained earnings” refers to “the
amount of accumulated’ profits and ‘gains realized out of
the
on normal and continuous Operations of the business after deducting
se therefrom distributions to stockholders and
transfertos capital
~ Stock or other accounts, and which is: (1) not appropri
ated by its
boar d of directors for corporate'expansion projects or prog
rams:
(2) not.covered by. a restriction for, dividend declaration
under
a loan. agreement; and) (3) not Tequired. to, be retained. under
special circumstances obtaining in.the corporation such as,when
_ there is a need for a special reserve for probable contingencies.
(2) ‘tems affecting unrestric
' retai
ted ned earnings.'— These items
affect the unrestricted retained earnings account from ‘an accounting
ee eee eee ee :
~ (a) Nominal or temporary or income Statement. accounts
closed to income and expense summary at the end of the period to
determine actual results of operations during the period and further
closed to retained earnings account; 2 RS ah
: (b) Effects of changes in accounting policy; _
(c) Foreign exchange gains and losses;
(d) Actual 'gains or losses; ©
(e) Share in the’net income of associates/joint” ventures
accounted for under equity method of accounting; 9. |
_(£) Dividend declarations during the period; a
(g) Appropriations of retained earnings during the period;

(h) Reversals of appropriations;

(i) Effects of prior period adjustments; and
(j) Treasury shares.
(3) Retained earnings available for dividends. — Dividends,

whether cash, property or stock, shall be declared out of unrestricted
retained earnings of the corporation. Accordingly, ,a..corporation
cannot declare dividends when it has zero or negative retained
earnings otherwise known as retained earnings deficit. For such
purpose, the surplus profits or income must be a bona fide income
founded upon actual earnings or profits. The existence, therefore, of
surplus profits arising from the operation of corporate business is a
condition precedent to the declaration of dividend.
(4). Actual earning or profits. — For purposes of the Guidelines,
the phrase “actual earnings or profits” as mentioned refers to the
net income for the year based'on the audited financial statements,
adjusted for unrealized items discussed below, which are considered
not available for dividend declaration.
(a) Share/equity in-net income of the associate or joint
venture accounted for equity method as the same is not yet
actually earned or realized. It is only after the investee company
declares such income as dividend that said income is actually
realized or the earnings becomes, available, for dividend
declaration. Due tothe effect on the investment account, only
cash or property dividends declared by the investee company
shall be considered as earnings declarable as dividends by the
investor company;
(b) Unrealized foreign. exchange gains, except .. those
attributable to cash and cash, equivalents, for the time being
that they are not yet actual income prior to realization of such
foreign exchange gain;
(c) Unrealized actuarial gains which is the result when the
company chooses the option of recognizing actuarial gains or
losses directly to profit or loss statement;
(d) Fair value adjustment or the gains arising only from
marked-to-market valuation which are not yet realized;

Sec. 42
TITLE Iv, Pow ERS OF CORPORATION
403
(e) The amo

reduced the inti o recognized deferred tax asset that
net income and retainedennn tax expense and increased the
audit(f)ed Adj ustment due

financ ial stshein to deviation from PFRS/GAAP of the
ents which results to ga
in;
earnin
: under
foie ce pee about by certain transactions accounted for
en Stich as accretion income under IAS 39, Day
Tecognition of financial j
of revaluation incre : ancial instruments, reversal
ate ment to retained earnings, and negative
goodwill on investments in associate;
(h) Other adjustments that th
amending the Annex. at the SEC may prescribe by
“A” of these Guidelines.
The items above are defined in accordance with
the financial
reporting framework, “Le, Generally Accept
ed Accounting
Principles in the Philippines or Philippine Financial Report
ing
Standards (PFRS), followed by the company.
(5) Additional paid-in capital. — Additional Paid-In Capital Stock
shall neither be declared as dividend nor shall it be reclassified to
absorb deficiency except through an organizational restructuring
duly approved by theSEC. :
1982 rules on redeemable shares.
(1) The 1982 SEC Rules Governing Redeemable and Treasury
Shares provides that generally, treasury shares shall be deducted
from the unrestricted retained earnings to arrive at the ‘Retained
Earnings Available
for Dividend Declaration.’ “The reason for this
is that such amount of earnings equivalent to the cost of treasu
shares is not considered part of earned or surplus profits that ‘is
distributable as dividends.” Also under the same 1982 rules, an
exception has been drawn under section 4 (1) in relation to section
3 (1). Under the provided exception, redeemed redeemable shares,
although part of the treasury shares, is not: subtracted from: the
unrestricted retained earnings to arrive at the ‘Retained Earnings
Available for Dividend Declaration.’ (SEC-OGC Opinion No. 03-19,
Feb, 14, 2019.)
(2) There is no conflict between the general guide formula as
provided for in 2008 Guidelines and the explicit exception under

aN Se BE EEA ONDA N BPRS NINE OINAAIIUIN DUE UF LAB PFRILIPPINES Sec 42
the 1982 Rules, “It is well settled that a special and local statute or
rules, providing for a particular case or class of cases, is not repealed
by a subsequent statute or rule, general in its terms, provisions ang
application, unless the intent to repeal or alter is manifest, although
the terms of the general act are broad enough to include the cases
embraced in the special law.” Under this premise, the Tepealing
provision under the 2008 Guidelines, did not repeal previoys
guidelines and rules of the SEC which are not in conflict with the
current rules. In this regard, it is appropriate to note that the 2008
Guidelines, although making no distinction as to the manner in which
treasury shares are acquired, only enumerates “treasury shares” ag
one of the items affecting the unrestricted retained earnings account
from an accounting perspective. It does not specifically state that all
types of treasury shares, regardless of the nature of their acquisition,
should be deducted from the unrestricted retained earnings to arrive
at the ‘Retained Earnings Available for Dividend Declaration.’ In
this regard, no conflict is present.
As a summary, the annexes in the 2008 Guidelines and SEC
Rule 68 should be read in harmony with the 1982 Rules. The cost
of. treasury shares acquired from the redemption of redeemable
shares is not deducted; rather, it forms part of the ‘Retained
Earnings Available for Dividend Declaration.’ In effect, a dividend
declaration from the unrestricted retained earnings gross of the cost
of redeemed preferred shares acquired pursuant to the Articles of
Incorporation is considered as valid. (GSEC-OGC Opinion No. 03-19,
February 14, 2019.)
Existence of actual profits or earnings.

To justify the declaration of dividends, there must be an actual
bona fide surplus profits or earned surplus over and above all debts
and liabilities of the corporation. (Steinberg vs. Velasco, 52 Phil. 953
[1929].) Hence: | :
(1). Earnings of the corporation which have not yet been received
even though they consist in money which is due cannot be included in
the profits out of which dividends may be paid.’ (11 Fletcher, p. 1064.)
’Corporation X owns more than 20% of the voting common shares of Corporation Y.
Under the equity method of accounting, Corporation X is required to book its share in the
net earnings or loss of Corporation Y. Can Corporation X declare cash or stock dividend or
both from its recorded equity earnings in Corporation Y which are not yet receive in cash?

TITLE IV, po
WERS OF CORPORATION 405
(2) Asfor a borrowe

money,
rule, divd idepe
nds Cannot be declared out of borrowed
porrowed temporaril
make im
borrowed money, (18 Cj.s. 1102.)
(3) A corporation ma.
ac Y Properly pay dividends from
orpcu
titmufro
lam.
tedearsur
ninplu
gs,s out of Previous years although realiz
a
ing no
Sed the other hand, it cannot pay divi

dends although it has
realize actual Profits for the year in which dividends are
declared
until a has eliminated a deficit resulting from its operation of
preceding years. alk(William v. Western
Union Tel. Co., 93 N.Y. 162.) In
other words, dividends may not be declared if deficit exists. (Infra.)
(5) Treasury ‘shares (see Sec. 9.) not being part of earned or
surplus profits, are not distributable as dividends but if there are
retained earnings previously held to support their acquisition, they
may be declared as property dividend out of the earnings. (see infra.)
Deduction of expenses.
In addition to deducting the amount of the capital stock from the
value of the assets of the corporation, deduction must also, as a rule,
be made for all expenses incurred in the conduct of the business of
the company.
(1) Generally, net earnings are what remains of gross receipt
after deducting the expenses of producing them. The Supreme
Court of the United States has said: “The term ‘profits’, out of which
dividends alone can properly be declared, denotes what remains
after defraying every expense, including loans falling due, as well
as the interest on such loans.”
No. Retained earnings or surplus profits referred to under Sec. 43 from which dividends
can be legally declared do not include participation or share of a corporation in the profits
of its subsidiaries and affiliates, unless and until such profits are actually received in the
form of cash or property dividends. Thus, while for purposes of management account,
Corporation X can recognize as income its equity in the net earnings in Corporation Y,
€ same cannot be declared as dividends since it is not yet actually realized as income
as much as Corporation Y has not yet declared the same as dividends. (SEC Opinion,
Oct. 6, 1995.) s

406 THE REVISED CORPORATION CODE OF THE PHILIPPINES ge, 45
(2) Depreciation in the value of the corporation’s plant is a

proper expense charge and the same is true of expenditures for
maintenances and upkeep. And a reserve fund may be accumulated
for the purpose of making repairs and renewals.
(3) Taxes are properly treated as a part of the company’s
operating expenses, to be paid out of the earnings, and this is true
even though they are found upon an erroneous valuation of the
property upon which they are assessed.
Only such expenditures as have actually been made can properly
be claimed as a deduction from earnings. (11 Fletcher, pp. 1056-1060,
see also 18 C.J.S. 1100-1102.)
Distribution of paid-in surplus as dividends.

Under Section 16 (now Sec. 42.) of the former Corporation Law,
(Act No. 1459.) which reads: “No corporation shall make or declare
dividends except from the surplus profits arising from business, or
divide or distribute its capital stock or property other than actual
rofits...” dividends whether cash or stocks, must be declared only
out of surplus profits arising from corporate business.
The SEC has expressed the view that paid-in or premium surplus
(difference between the par value and higher price for which stock
is sold by the corporation) cannot be declared as cash dividends
No.
under Section 15 (SEC Opinion, May 7, 1968; see SEC Opinion
dividends
51-03, Oct. 21, 2003.) or even as stock dividends because
gs.® (SEC
can be declared only from the unrestricted retained earnin
Opinion, April 16, 1988.)
The SEC has allowed the declaration of the dividends from paid-
only
in surplus subject to thes e conditions: (a) they shall be declared
as stock dividends; (b) n o creditors shall be preju
diced therefrom,
and (c) there shall be no resulting i mpairment
of capital. (SEC
Opinion, Oct. 19, 1989; SEC Opinion, Oct. 2,
2001.) The reason is
sales of a corporation of its own

’The reason given is that “the entire proceeds of
are part of its capital stock (i.e., to be
stock, even when sold for more than par value be
earnings) and, therefore, cannot
regarded as paid-in capital, rather than as retained paid .:
of which dividends may be
profits earned through the conduct of its business out P. 540.) It also said that to per™
, 178
(Merchants and Insurance Reporting Co. v. Youtz dividend is a “fraud upon creditors wn?
this capital surplus to be distributed as cash Sec. 1210, p. 801.)
extend credit on the faith of its capital stock.” (14 CJ.

407
capital account and. issues share

(SEC Opinions, Aug. 16, 1993 an
Distribution
of the revaluation
as dividends. Someta
A corporation can have its fixed assets
like real estate revalued
to determine its current market value. The exce
ss increment on
the property ‘over the stated cost is credited to an
account called
revaluation or appraisal surplus to ‘show that such is the result of an
estimated increase in the value of the
| pani . (se Opininon,
(seee SEC Opinio
May 14, 1970.).. .
(1) General rule. — An increase in the value of the fixed assets
such as land as a result of mere valuation cannot be counted in the
computation of a surplus as basis for a dividend declaration.
The reason why purely conjectured. increase in valuation
cannot be considered for dividend declaration is because such
appraisal, however, justified for the time being, is subject to market
fluctuations, is merely anticipatory of future profits and may never
be actually realized as an asset of the corporation by the sale of the
property at the value it was appraised. The surplus of a corporation
which may be used for the payment of dividend must be a bona
fide and not ‘an artificial or fictitious one'and not be dependent for
its'existence'upon a theoretical estimate of an appreciation in the
value of the corporation’s assets. (SEC Opinion, Oct. 15, 1973, citing
Berkes Broadcasting Co.:v. Crawmer, 356 Ph. 620.)
Sound accounting ‘requires: that such unrealized appreciation
shall not be confused with’a paid-in surplus or an earned surplus
due to accumulated profits arising from the successful conduct of
, 541 :)
the business. (SEC Opinion, Dec.:7, 1971, citing Ballantinep:
(2) Bxcoetions! ‘The above ruling is not absolute as the
SEC allows certain exceptions making revaluation mnicrement\ Or
reappraisal surplus available for cash and stock dividend. Thus,
where a fixed asset is! being: depreciated based ‘on its appraisal
value, and the depreciation on the appraisal increment is charged
against operations, the earnings from operations in that period are

408 THE REVISED CORPORATION CODE OF THE PHILIPPINES Sec. c. 4 42
diminished by the amount of such depreciation which amount

therefore, is actual income shifted to and lodged in another account,
Whether such amount is restituted to retained earnings or not is of
no consequence. In such event, the portion of increase in the value
fixed assets as result of revaluation thereof may be declared as
dividends provided these conditions exist:
(a) The corporation has sufficient income from operations
from which the depreciation on the appraisal increase was
charged; :
(b) It has no deficit at the time the depreciation on the
appraisal increase was charged to operations; and
(c) Such depreciation’ on’ appraisal increase “previously
charged to operations has not been erased or impaired by
. subsequent losses; otherwise, only that portion is not.impaired
by subsequent losses is available for dividend. (SEC Opinion,
Oct. 2, 1981 and: March 19, 1992.)
Declaration of dividends. Ecueecen

(1) Conditions. A dividend declaration ordinarily requires the
Baurlbu
concurrence of two things, namely:
out of
(a) The existence of “unrestricted retained earnings”
which the dividends may be declared and paired; and
. of ., directors
(b), A..corporate _resolution:: of » the, board
ngs to the
declaring the payment of a portion or all of such earni
32) ca | ;
stockholders.
-- Cash dividends
(2) Additional requirements for stock dividends. are
Stock dividends
require only approval of the board of directors.
s and approval of the
issued by resolution of the board of director
of stock dividends,
resolution by the stockholders. For the declaration
number of authorized
the corporation must have also a sufficient
; otherwise, it must
unissued shares for distribution to stockholders
of the corporate earnings to be
increase its capital stock to the extent
37.)
declared and distributed as stock dividends. (see Sec.
uce the r etained
The distribution of the dividends ‘will: red out ‘to
unt paid
earnings of the: corporation by exactly ‘the’ amo
sferred to capital
stockholders in the case of cash dividend, or tran
account in the case of stock dividend. (Infra.)

Sec. 42
TITLE Iv. POW
ERS OF CORPOR
ATION
409
(3) SEC approval
. *—— It} is;
seek prio not atory for the corporation to
r approval/ advi
ce from chest EC
to
ollowing are ¢ omp declare cash and stock
(a) For cash divi lied with:
dend declaration:
1, :
fe enone OF Directors approval of the cash dividend
2.. Sufficient unrestri

cted ' retained earnings
last fiscal or cale
n dar yea
as of the
r.
(b) For stock dividend
declaration:
1. Board of Directors
approval of the stock
declaration: dividend
: 2. Stockholders’ approval repres

enting at least two-
thirds (2/3) of the outstanding capital and suf
of the present ficient portion
authorized capital; and
3. Sufficient. unrestricted Tetained
earnings as of the
last fiscal or calendar year
However, corporations may, at their option,
apply for
acknowledgment notice of their declaration of
the cash and/or stock
dividend out of the unissued portion of their previousl
y approved
authorized capital stock for what ever legal purpose
it may serve.
If they avail'of such option, they must submit the doc
umentary
requirements stated in the SEC’s website (Other Applications
—
Documentary Requirements) and pay the filing fee.
Further, if the stock dividend declaration requires an increase of
authorized. capital stock, an application therefor is mandated to
be
filed with the SEC pursuant to Section 37 of the Revised Corporation
Code. (SEC-OGC Opinion No. 23-19, June 17, 2019.) ©
Discretion of the board of directors
to declare dividends.
The board of directors has the responsibility to declare dividends
and determine the timing as well as their amount subject to the
tights of stockholders as to the order or preferences for the payment
of dividends on various classes of stock (e.g, preferred stock) as
fixed by the articles of incorporation.

410
prosecution
(1) That profits or earnings have accrued in the the
impose upon
of the corporate business does not necessarily
directors the duty to declare them as dividend s. (Wabask R. Co. y,
discretion over whether
Barclay, 280 U.S. 197.) They are given wide
dividends will be declared and paid.
honest judgment the directors reasonably
(2) If in their
the business, no court
determine that the profits should be kept in ribution in the
dist
has the power to compel them to make the
discretion, or such arbitra
absence of bad faith? or clear abuse of
breach of trust. The
or unreasonable conduct as amount to a
of dividends is
apportionment of the net earnings to the payment
retion of the board
largely a question of policy trusted to the disc
aring
of directors. If there is any doubt about the propriety of decl
nst
dividends, the directors are justified in resolving the doubt agai
such action. (19'Am. Jur. 2d 322-323.)
(3) So long as the board of directors acts in good faith, it is at
liberty to distribute at all any dividend subject to the prohibition in
the second paragraph of Section 42."° (Infra.)
Limit on retained earnings. ;

Stock| corporations are: prohibited ‘from: retaining surplus
profits in excess of 100% ‘of their paid-in capital stock except when
justified by the reasons mentioned. (Sec. 42, par. 2.) The prohibition
on retention ‘of profits provided in Section 42 ‘applies'to,all stock
corporations, -including wholly-owned subsidiaries..Section 42
°There are no infallible distinguishing earmarks of bad faith. The following facts
are relevant to the issue of bad faith and are admissible in evidence; intense hostility of
the controlling faction against the majority; exclusion of the minority from employment
by the corporation; high salaries or bonuses, or corporate loans made to the officers in
control; the fact that the majority group may be subject to high personal income taxes if
substantial dividends are paid; the existence of a desire by the controlling directors to
acquire the minority stock as cheaply as possible. But if they are not motivating causes,
they do not constitute bad faith as a matter of law. tt
The essential test of bad faith is to determine whether the policy of the directors
is directed by their personal interests rather, than the. corporate. welfare. Directors
are fiduciaries. Their cestui que are the corporation and the stockholders as a body.
Circumstances as those mentioned and any other significant factors, appraised in the
light of the financial condition and requirements of the corporation, will determine the
conclusion as to whether the directors have or have not been animated by personal,
distinct from corporate, considerations. (Gottfried v. Gottfried, 73 N.Y.S. 2d 696.)
In view of the restrictions imposed by Sec. 42, the “business judgment” rule whi
upholds judicial non-interference in corporate management (see Sec. 22.) has limited
application with regard to dividend declarations.

411
makes NO qualificati
(SEC Opinion, July 22, 1993 ) ing the words “
There may be som,
of profits is justified bi tice as to whether or not the retention
discretion ower of
te earnings. ary P
Action to enforce declaration of div
idends
i pe pags rite =. Since a stockholder has no individual

. s profits of a corporation until a dividend has been
decree the rule 1s that, before the declaration of a dividend, a
stockholder cannot maintain an action at law to recover his share of
Se profits. Mandamus is not a proper remedy in sucha
case.
(2) Where there exist sufficient net profits. — An action at law may
be maintained where it is alleged that sufficient net profits have
been earned to obligate the corporation to pay the amount agreed.
(a), The stockholders may sue the directors to compel them
to declare and pay dividend if they unreasonably accumulate
profits of the corporation but they must prove the justification
of declaring dividends.
(b) Before an action to compel the declaration and payment
of a dividend can be maintained, it maintained, it must appear
that the complaining stockholder has made application to the
directors of the corporation for the relief sought. |
(c) Where, however, it appears that the directors of a
corporation have wantonly violated their duty, and that an
application’ by “a stockholder to them for relief would be
inefficacious, such application need not be made. In such an
CJ.S.
action, the corporation is a necessary party defendant. (18
1142.) ° | eee : we
Time for declaration of dividends:

oration has a fiscal year to
(1) At the end of the year. — A corp the year — whet her it
determine the results of its operation during
se, such results may also
earned profits or incurred losses. Of cour but a summary .
ually,
be computed monthly, quarterly, or semi-annerm ine the performance
is always made at the end of the year to det
year.
of the company for the whole

E OF THE PHILIPPINES Sec, 42
(a) If the company earned profits dur

ing the past year, it
s not, the profits
may declare the same as dividends, but if it doe the company
C versely, if
Con
are carried over to the next fiscal year.
will record such
incurred losses during the past year, its books nings during the
loss and no profits, unl ess it accumulates ear
been distributed as dividends.
previous years which have not
may incur losses
If follows from this that a corporation
eof and still be able
during one fiscal year or any portion ther affect profits
h losses do not
to declare dividends, that is, if suc
that the company has accumulated. On the other hand, a
but because of
corporation may earn profits in one fiscal year
it may not be able to
losses suffered during the previous years,
declare dividends.
is the existence of
(b) From the foregoing, what is material
into account the
earned profits on the date of declaration, taking
e the finan-
results of the entire operations of the company. Sinc
the fiscal
cial statements are generally prepared after the end of
, after the fiscal
year, dividends are declared, as a general rule
.
period has ended, when retained earnings are shown to exist
The determination of the existence of retained earnings may
merely
be made even before the end of the fiscal year, but this is
to enable the management to map out its dividend policy for the
next fiscal year. |
(2), Before the end of the year. — As a rule, a corporation should

not declare dividends out of profits earned during an interim period
or before the end of the fiscal year, considering that profits earned
during say, the first half of the year may be wiped out by losses
incurred during the latter,part of the same year. (SEC Opinion,
July 16, 197 1.) However, a corporation may declare dividends even
before the end of the fiscal year, provided it has sufficiently earned
surplus for the purpose which will not be impaired by losses,
whether expected or not, during the remaining period of the fiscal
year." (SEC Opinion, Oct. 22, 1974.) 3
“Reduction surplus or surplus realized by the reduction of the capital stock effected
under Section 38 by decreasing the par value of authorized shares may be declared only
as stock dividend. (SEC Opinion, Aug. 8, 1991; see Sec. 38;)

© Temaining period of the year as well as the
ee eee mptions used shall be puldicittedlte the SEC. Should
ee pe tuOn sustain losses during the year, cash dividends
distributed to the Stockhold
; er of record must be t corresponding]
refunded to the corporation. (SE gly
C Opinion, July 24, 1991)
To sum
payable frommarthize a cor poration may declare cash dividends
e net earnings realized before the end of the relevant
year, subject to these conditions:
(a) The amount of dividends involved would not be impaired
by losses during the remaining period of the year;
(b) The projected income statement of the company for the
remaining period of the year and the bases and assumptions used
shall be submitted to the SEC; and
(c) Should the company sustain losses during the year,
cash dividends distributed to the stockholders of record must be
correspondingly refunded to the company. (see SEC Opinion, Jan.
15, 1986; SEC Opinion, July 24, 1991.) ©:
Validity of dividend determined

at time of declaration.
(1) Effect of subsequent insolvency
of corporation. —In determining
whether dividends were lawfully. made, the transaction must be .
viewed in the light of the time of its occurrence.
If net or surplus profits existed at that time, the payment of the
dividends is not rendered unlawful by the subsequent insolvency
of the corporation, and if the assets of a corporation are valued
honestly and fairly in view of all the facts known at the time of the
declaration, a\dividend is not rendered unlawful by the fact that
such assets subsequently prove to be worth less than the valuation
placed upon them.
(2) Effects of good faith in making payment out of capital. —
However, mere ignorance of facts showing the true condition of
the assets of a corporation which could have:been ascertained by
reasonable inquiry and examination is not sufficient to validate a
dividend which has been paid out of capital.

Whether the assets ofa corporation were so valued is not a

question to be determined by the board of directors of a corporation,
nor by a majority of its stockholders; hence, a finding but the
directors of a corporations that certain dividends, although in
fact paid out of capital, were declared fairly and in good faith, in
the light of what was known and believed at the time they were
declared, and a subsequent ratification of such finding by a majority
of the stockholders, do not validate the payment of such dividends,
(18 CJ.S. 1102.)
Payment of subscription from dividends.

(1) From dividends to be declared. — It has been held that a
stipulation to the effect that the subscription is “payable from the
first dividends declared on any and all shares of the company owned
by me at the time dividends are declared until the full amount of the
subscription has been paid” is illegal for it “obligates the subscriber
to pay nothing for the shares except as dividends may accrue upon
the stock.” In the contingency that dividends are not paid, there is
no liability. (National Exchange Co. vs. Dexter, 51 Phil. 601 [1928].)
(2) From cash dividends. — Where payment has been made on
stock subscription, the rule depends on whether the stockholder is
delinquent or not. ae :
(a) The stockholder is still entitled to receive cash dividends
due on delinquent stock but the dividends “shall first be applied
to the unpaid balance on the subscription, plus: ‘costs ‘and
expenses.” (Sec. 42, par. 1.) The cash dividends may be applied
as payment for,the unpaid subscription of all delinquent shares.
(see Sec. 70.)
(b) Cash dividends cannot be withheld from the subscribers
who have not fully paid their subscriptions ‘(unless they are
delinquent on their unpaid subscriptions). Basically, this is
because the balance of the unpaid subscription is ‘not yet due
and semendable, (SEC-OGC Opinion No. 05-16, March 31,
2016, .
(c) The corporation may use the cash dividends to
pay off
stockholders’ subscriptions but which have not been declared
delinquent only if the stockholders concerned give their consent
thereto. (SEC Opinion, March 18, 1991.)

Sec. 42 TITLE IV. POWERS OF CORPORATION ae
(3) From stock dividends. — A stockholder’s indebtedness to a

corporation under a subscription agreement cannot be compensated
with the amount of his shares in the same corporation, there being
no relation of creditor and debtor with regard to such shares. (see
Art. 1249, Civil Code.) Under Section 42 (par. 1.), “stock dividends
shall be withheld from the delinquent stockholder until his unpaid
subscription is fully paid.”
In other words, under the provision, it is not allowed to apply
stock dividend to unpaid subscription.”
(a) Astockholder, as such, is not a creditor of the corporation
for his shares although the latter is creditor of the former for the
unpaid balance of his subscriptions." It is the prevailing doctrine
that.the capital stock of a corporation is a trust fund to be used
more particularly for the security of creditors of the corporation
who presumably deal with ition the credit of its capital stock.
(18 CJ.S. 618.) In view of the foregoing, a stockholder’s liability
for unpaid subscriptions (although not yet delinquent) may not
be offset by the issuance and distributed of stock dividends.
_ (Supra.), '
(b) -A stock dividend requires a transfer of surplus to capital —
account and it cannot be made without issuing new shares. Since
the retained earnings of the corporation are already applied
as payment to the new issuance of shares, the same cannot be
reapplied to previous subscriptions still unpaid as this would
be, in effect, reacquiring its own shares, the proceeds of which
will be applied to the unpaid subscription, which case is not
allowed under Section 41. (SEC Opinion, July 4, 1984.)
(c) Section: 6 states that preferred shares may be given
preferential right inthe distribution of dividends among
others, but it does not prohibit holders of preferred shares from
acquiring shares of whatever class by the way of stock dividend.
As long as_.all. the requirements for the declaration of stock
dividend are complied with, the issuance of common shares in
-2Note that stock dividend can be withheld only from a delinquent stockholder.
Stock dividends may be declared out of retained earnings even if there are still unpaid
subscriptions.
3A subscription contract (see Sec. 60.) creates a creditor-debtor relationship between
the corporation and the subscriber.

. (SEC
favor of stockholders holding preferred shares in valid
Opinion No: 28-04, April 27, 2004.)
Instead of stock dividends, the corporation may declare cash
dividends, and use the said dividends to pay off the delinquent
stockholder’s unpaid subscriptions. (SEC Opinion, March 15, 1968.)
Liability of stockholders and directors

for illegally received dividends.
(1) Liability of stockholders to refund them to corporation Or its
creditors. — In case dividends are wrongfully or illegally declared
and paid, there is ample authority for the rule that the stockholders
who received them ican be held liable to refund them to the
corporation or its creditors. It is immaterial that the dividends were
mistakenly paid-out or were received in good faith. Since they do
not act ina corporate capacity in receiving the dividends, they do
not ratify the illegal act of the board as to preclude a’subsequent
recovery. (Lovington Life, F. & M. Ins. Co. v. Page, 66 Am: Dec. 165.)
(2) Where corporation insolvent at time of wrongful payment. — The
rule is especially true if the corporation is insolvent (McDonald v.
- ‘Williams,:174 U.S: 397.), although the authorities are conflicting
where the corporation: was solvent at the ‘time’ of the: wrongful
payment.
(a) It seems to be an unfair and unreasonable burden to
require innocent stockholders to repay dividends, perhaps
years after they have been spent, when they were received in
good faith from a solvent corporation in the regular course of
business, even if it has later become bankrupt. If a wrong was
done to the security of creditors by the directors, ‘they are the
ones to be held responsible. (Ballantine, p- 600.)
3 (b) In view, however of the trust fund theory adopted in
our jurisdiction, the payment of dividends from’ capital may
be considered a wrongful diversion of a'“trust fund” held for
the benefit of creditors, so that the fund May accordingl
y be
followed into the hands of stockholders. (see Phil.
Trust Co.
vs. Rivera, 44 Phil. 469 [1925]; Lumanlan vs. Cura, 59 Phil.
746
[1934].) The innocent stockholders can recover damages from
the guilty directors. | ;

Sec. 42
TITLE Iv. POWERS
OF CORPORATION
417
(3) Liability of g;
and without wee
to creditors for deslane, ae— If the directors acted in good faith,
are not liable to the corpor
not have done SO, and fh
ation or
PAYINg
dividends when they should
if they have been Builty of ey diminishing the capital stock. But
negligence, in paying divid @ fraudulent breach of trust, or of gross
ends when they had
they are Personally liable t i Y Nad nono right
rj h to pay th em,
damaged by the divider | creditors to the extent that creditors are
Liabilit
enforce y of Section
d under directorsan for . easai, :
Peay paid dividen ds may be
Remedies of corporate
creditors.
(1) If dividends are improperly
declared and paid when there
afr no net earnin
gs, they may be reclaimed by the co
or by a receiver or assignee rporate creditors
acting for. the benefit of the
from the creditors
hands of any one who is not an innoce
recipient of the same for a valu
nt purchaser. or
able considera tion:.
(2) Tf sucha wrong is ‘threatened’ a creditor ma
a suit for an’ injunction, since the fund to whic y maintain
h the creditors
loo k: 'for~ security would be ‘impaired: (Clark on Corporations,
pp.:435-436, Steinberg vs. Velasco, 52 Phil. 953 [1929].)
Persons entitled to dividends:. 3

The right ‘of one'to receive dividends from a corporation on
its stock is, manifestly, justified only on the theory that he is a
stockholder. In other words, the right to dividends is an incident to
ownership of stock, and this applies to stock dividends and to cash
dividends. (19 Am. Jur. 2d:370.) ‘~
(1) Unless the dividend is payable to stockholders of record on
a specified date, the real owner'of corporate stock at the time the
dividend is actually declared thereon is the person entitled to the
dividends (Ibid.), without regard to the time when the dividends
where earned or made payable. In other words, it is only the
stockholders of record as of the date of the declaration of dividends or holders
of record on a certain future date, as the case may be, who are entitled
‘to receive dividends unless the parties have agreed otherwise. (SEC

418 THE REVISED CORPORATION CODE OF THE PHILIPPINES Sec. c. 4 42
Opinion, 7 Nov. ° 12, ! 1986; 7 Cojuangco vs. . Sandiganbayan," 5

7 8
790 [2009].) eee mean bie
Naturally, the persons appearing as stockholders in the stock and
transfer book on the date fixed will be the ones entitled to dividends
and the date for payment is only indicated for convenience of the
company. With respect to the payment of dividends, there must
be no discrimination against any stockholders (1 Fletcher, pp. 882-
887.), so that the date for the purpose must ordinarily apply to all
stockholders. :
(2) As between. parties respectively entitled to capital and
to income of stock held in trust, the right to particular dividends
depends generally upon the creator of the trust, actual or presumed.
(19: Am. Jur. 2d 371.)
(3) A transfer of shares not recorded'in the books of the
corporation is valid only as between the parties (Sec. 63.); hence,
the transferor has the right to dividends as against the corporation
without notice of the transfer but he is the trustee of the real owner
of the dividends subject to the contract between the transferor and
transferee as to who is entitled to receive the dividends.
(4) Share subscriptions not‘ yet “recorded in ‘the stock and
transfer book on the date’ of dividend: declaration are not entitled
to dividends. Hence, subscribers to the increase of capital stock are
considered stockholders of record only at the time of the approval of said
increase by the SEC (see Sec. 37, par. 3.) and not.at the time of filing
of the certificate of increase of the capital stock. (see SEC Opinion,
Sept. 15, 1980.) sa :
Right of stockholders after declaration
of dividends. , |
(1) Cash dividends, — As soon as cash dividends are publicly
declared, the stockholders have the right to their pro rata share. (1
Fletcher, pp. 780-789.) : ;
“Citing De Leon, The Corporation Code of the Philippines., Annotated, p. 410, 2002
Ed.

gec. 42 TITLE IV, p OWERS OF CORPORATION
419
to the(a) person
In the a
who of a record date,"* the dividend belongs
of declaration, and € owner of the shares of stock at the time
of payment. The san to the owner of the shares at the time
is made, the S6rpotation L that when a dividend declaration
shareholder to distribon €comes debtor and the right of the
200 [1914],). P . 566; see

see Barretto
Barre
(b) It is the declaration
of the dividends whi
the dividends itself and the right of the
ates ean
and receive it. (SEC Opinion, Oct. 9, 1992.) So,
one who receives
| stock from a corporation immediately before a dividend is
declared has the same right as the other stockh
olders to share
unless he is excl
: uded b y the term of his contract. (SEC Opinion,:
Aug. 6, 1990, citing Fletcher, Sec. 5376.) =
(c) When a cash dividend is duly declared, the amount
due a stockholder belongs to him and it cannot, without his
consent,
be reverted to the surplus account of the corporation.
A record date is the date fixed in the resolution declaring dividends, when the
dividend shall be payable to those who are stockholders of record on a specified future
date or as of the date of the meeting declaring said dividend. (see Ballantine, pp. 566-567.)
The date fixed determines the stockholders who are to receive the dividends: The usual
practice is for the corporation to provide for the closing of its transfer books on a certain
date such that only stockholders as of the given date are entitled to dividends. Usually,
several days elapse between the time a person buys stock and the time the corporation
‘records the sale. Thus, a seller of stock who is still the stockholder of record on a specified
date may receive a dividend after he has sold his stock to another person. Thus, only
those whose ownership of shares are duly registered in the stock and transfer book are
considered stockholders of record and therefore, entitled to all rights of stockholders.
Because payments of stock dividends requiring an increase in the authorized capital
stock are contingent upon SEC’s approval (see Sec. 37.), record and payment dates are
ordinarily indicated as falling within a certain period following SEC’s approval of capital
increase. All cash dividends declared by a corporation shall have a record date which
‘shall not be less than ten or more than 30 days from the said declaration. In case, no record
date is specified, the date shall be deemed fixed at 15 days from declaration. Companies
obliged to pay dividends may have a single declaration for several cash dividends within
a year subject to the condition, that their record and payment dates are also explicitly
provided. (SEC Memo. Circ. No. 2, April 17, 2009; amending Sec. 3 of Amended Rules
Governing Preemptive and Other Subscription Rights and Declaration of Stock and Cash
Divi
ote Be ex dividends is used to indicate that the price of shares of a corporation
excludes the dividend payable on a certain future date to the stockholders of record on a
specified preceding date (E.L. Kohler, op. cit., p. 198.) or a previously declared dividend.
The buyer is entitled to the declared dividend when the stock is sold cum dividends or
dividends-on.

The company should exert real and sincere efforts to contact

and deliver the dividend to him, and only after the lapse of
the prescriptive period for claiming the dividend may the same
be reverted to the surplus account of the corporation. (SEC
Opinion, Jan. 29, 1971.)
It is preposterous to say that a debt can be cancelled by the
action of the debtor without the consent of the creditor. (McLaran v,
Crescent Planning Mill Co., 93 SW 819.)
(2) Stock dividends. — The above rule does not apply to stock
dividends as the declaration of such dividends may be rescinded at
any time before the actual issuance of the stock. (Stats v. Biograph
Co., 236 Fed. 454.)
(a) Unlike a cash dividend, a stock dividend requires, as a
general rule, more than mere declaration to make it effective.
The vote to increase stock is not per se an increase; and until the
stock is actually issued, or at least in some manner especially set
Am. Jur.
apart to the stockholder, its effect is not complete. (19
2d 317.)
(b) The stock dividend in shares of the kind already held
gives the shareholder nothing in the way of a distribution
of assets but merely divides his existing shares into smaller
the
units. There is not increase in his proportionate claim upon
corporate assets or income by reason of such a paper dividend.
stock
There is no obligation upon the corporation to declare
dividends, which are not distributions but only a change of the
share and capital structure. (Ballantine, p. 560.)
the declaration of stock dividend gives the
(c) Since
to a valid
stockholder nothing until all the formalities necessary
cation, therefore,
increase of stock are complied with, its revo
have
takes away nothing: But unless rescinded, the shareholders
s so
absolute right to their respective shares in the stock dividend
certificate is
declared and actual delivery of the corresponding
dividend.
not essential to make the shareholder the owner of the
er or his nominee by the

‘Check payments are mailed directly to the stockhold In
cates or those registered
company’s stock transfer agent. For unissued stock cer tifi remits payment to the
street name, checks are sent to the handling broker who, in turn,
beneficial owner of the shares.

Sec. 42
TITLE Iv, POWERS OF CORPORAT
ION 421
Time for payment

of dividends.
(1) Frequency and;
declared, one ata ite, 7] |
gederal ety Metin ase
(a)
Where the condition of the
Carnings are regarded as company is sound and the
constant, the directors may
meeting, declare dividends in adv , at one
ance for succee
ding quarters,
hardly even longer than a year altogether,
the dividend for each
succeeding qu arter being made payable as
of a certain date in
the same manner as the first dividend.
(b) Where the business of the corporation is running
along
in good shape, with abundant revenues with which to pay
dividends, the payment of the regular divi
dends on the various
classes of stock becomes a more or less routine matter,
called
to the attention of the board of directors by the trea
surer at the
directors’ meeting: prior to the expiration of the quarter
or the
half year or the year for which the dividends are to be paya
ble.
(19 Fletcher, pp. 220-221.)
(2) Date of payment. — There is no hard and fast rule describing
the interval of time between the date for the declaration of dividends,
the date of record of stockholders entitled thereto, and the date of
payment, the same being left to the sound and judicious discretion
of directors. (SEC Opinion, April 11, 1962.)
(a) It is customary for the directors to fix the time for
payment of a dividend. The payment date may be the same date
as the record date or it may also be a later date. But a corporation
cannot discriminate among the shareholders as to the time of
payment of dividends.
(b) Ifno time is fixed by the resolution declaring a dividend,
it is payable on demand, and if the resolution declares that it
shall be payable at such time as the board of directors may direct
and the board fixes no time, the law implies that it shall be paid
within a reasonable time. (18 Fletcher, pp. 887-888.)
Equal participation in the distribution

of dividends.
(1) General rule on all the stocks. — As a rule, dividends among
stockholders of the same class must always be pro rata, equal and
without discrimination and regardless of the time when the shares

S Sec, 42
were acquired. The dividends must be general on all the Stocks,

so that each stockholder wil] receive his proportionate share. The
directors have no authority to declare a dividend on any other
principle. They cannot exclude any other portion of the stockholders
from and equal participation in the profits of the company. The rule
against discrimination equally applies to stock dividends. Each
stockholder is entitled to receive new shares in proportion to the
stock held by him and any discrimination is illegal. (11 Fletcher, pp.
1101-1104.)
(2) Fractional shares included in computation. — For the same
reason that a corporation cannot exclude stockholders owning ful]
shares from equal participation in the distribution of dividends,
it cannot deny stockholders to fractional shares (see Sec. 40[a].)
from participation in the dividends to the extent of their respective
holdings. Thus, fractional shares resulting from a previous
distribution of dividend by a corporation shall be included in
sthe computation of stock dividend subsequently declared. (SEC
Opinion, July 12, 1961.)
Total subscription basis of share

in dividends. :
-(1) General rule. — As a general rule, and as applied to any
form of dividend declaration, the participation of each stockholder
in the earning of profits of the corporation is based on his total
subscription and not on the amount paid by him in account thereof.
(Secs. 42 [par. 1], 71.) For example, if a person subscribes for 1,000
shares of the par value of P10.00 per share and has paid P5,000 on
his subscription, he will participate in dividends based on of 1,000
shares, not 500 shares. Sane
The reason is that a stockholder’s entire subscription represents
his holdings in the company for which he pays interest on any unpaid
portion. (see Secs. 63, 65.) Subscribers are considered stockholders
not from the time they are issued stock certificates but from the time
their subscriptions are accepted by the corporation because it is
from this time that they are bound by their subscriptions, subjecting
them to all the liabilities and entitling them ‘to all ‘the rights of
stockholders. (SEC Opinion, Yuri 28, 1966.)
_ (2) Where stockholder delinquent. — Only where a stockholder
is delinquent in the payment of his unpaid subscription that
he loses his privilege in a corporation where he has holdings,
as

Sec. 42
TITLE IV, POWERS OF CORPORATION
Pe en 70, except his right to receive cash dividends,

b ? lowever, shall first be applied to his unpaid balance on the
subscription plus cost and expenses.
(Sec. 42, par. 1.)
Other modes of divisi
on of dividends.
The above rule is not absolute and is subject to the rule of conse
nt.
Thus, it has been opined under the old Code that the distribution of
dividends based on the paid-up shares
or any other mode which
itself is lawful may be adopted by a corporation,
but the unanimous
oat of the stockholders is indispensable. (SEC
Opinion, Dec. 7,
tis believed that the same scheme is still legally feasible under
Section 42 as it is not immoral nor against any public policy.”
Classes of dividends.
Dividends payable to shareholders may be classified:
(1) Cash dividend.— It is dividend payable in cash.
(a). Dividends on par value shares are made, at a stated
i percentage (¢.g., 10%) of the par value although they may also
be paid as fixed amount per share. . 3 o
"The SEC has rendered an opinion that dividends cannot be declared and paid
based on the paid-up stock. (SEC Opinion, Oct. 29, 1987.) ete .
‘. Tt is generally accepted auditing principle that cash means ‘cash on hand or in
bank.’ Standard test in accounting defines ‘cash’ as consisting of those items that serve as
a medium of exchange and provide a basis for accounting measurement..To be reported
as ‘cash,’ an item must be readily available and not restricted for use in the payment of
current obligations. A general guideline is whether an item is acceptable’for deposit at
face value by a bank or other financial institution.
Item classified as cash include coin and currency on hand, and unrestricted funds
available on deposit in a bank, which are often called demand deposits since they can be
withdrawn upon demand. Petty cash funds or change funds and negotiable instruments,
such as personal checks, travelers’ checks, cashiers’ check, bank drafts, and money orders
are also items commonly. reported as cash. The total of these items plus undeposited
coin and currency is sometimes called ‘cash on hand. Interest-bearing ‘accounts: or time
deposits, also are usually classified as cash, even though bank legally can demand prior
notification before a withdrawal can be made. In practice, banks generally do not exercise
this legal right.
Deposits not immediately available due to withdrawal or other restrictions
require separate classification as ‘restricted cash’ or ‘temporary investments,’ They are
not ‘cash’.” (Rueda, Jr. vs. Sandiganbayan, 346 SCRA 341 [2000],. citing Intermediate
Accounting Comprehensive Volume, Ninth Ed., by Smith, Jr. and Skousen, Brigham
Young University, Copyright 1987.)

(b) As to no-par value shares, dividends are payable in

terms of so many pesos or centavos (¢.g., P10.00, P0.01) per share
since there is no basis on which a percentage can be stated. In
other words, a stockholder participates in the dividends based
on the par value in case of par value shares, and the number of
shares in case of no par value shares, and not upon the amount
of the consideration paid by him for his shares.
3 (c) If, gift. certificates are given to stockholders’ as share
..,in the profits earned by the corporation, they may be treated
as dividend subject to the requirements of Section 42. (SEC
Opinion, Oct. 5, 1994.)
Cash and. stock dividends are the more common forms of
dividends.
(2) Property dividend. — It is dividend distributed to the
stockholders in the form of property, real or personal, such as
(see
warehouse receipts or shares of stock of another corporation.
Ballantine, p. 564.) 7
(a) A dividend payable in property is actually a cash
dividend. (see SEC Opinion, March 19, 1999.) The stockholder
the cash. A corporation
- can take the property, sell it, and realize
a
can, therefore, pay declared cash dividend in the form of
“property.””
(6). When a corporation has retained ‘earnings arising out
of its operations, properties which represent investments in the
capital stock of the: corporation may be declared as property
“dividend out of such retained earnings, provided said properties
constitute assets in excess of the other assets which are adequate
to support the issued and. outstanding capital. stock of the
corporation. (SEC Opinion, February 5, 1991.)
(c) Under the SEC’s Rules Regulating the ‘Declaration of
Property Dividends (June 9, 1992), the issuance of the property
dividends must conform with these conditions: (1) the property
to be distributed as dividends shall consist only of property
n
“which are no longer intended to be used in the operatio‘of
liquidating dividend ot
‘| -’The SEC allows the distribution of property dividend as that
s is in
where the distribution of the same is practicable, specifically where the surplu
of the business.
used in the opera tion
form (property) and it is no longer intended to be
(SEC Opinion, Feb. 5, 1991.)

Sec. 42 T ITLE Iv. POWERS OF CORPOR
ATION
the busines
be disteibutad, t the corporation and which are practicable to
dividends shall a lvidends; (2) the issuance of the property
property to the ot result to an inequitable distribution of
market Values Pee igers in terms of the book values and
thewill: distebuce Of thends property
any vide made
distributed;
wh
and (3) when
is ade where some stockholders
s receiv e cash and the others will receive property, the
revailing market value of the property, as agreed upon by th the
stockholders shall be consisidered a3 :
Tee ta
distribution of the total dividends. cee te ee
No actual distribution of ny
by the SEC. prop erty divi dends shall be made
unless app rov ed
5
may be declared as prproopererty ty didiv
(d) Treasury shares 198 4.)
n s.
dend
viide
(SEC Opinion, July 17,
GB) Stock or share dividend. — It is dividend payable in unissued

of in
or increased or additional shares of the corporation instead
of the
cash or in property out of the unrestricted retained earnings
corporation. A stock dividend may be declared only to the extent
of the :maximum number of shares authorized in the articles of
incorporation. 2
(a) Shares of stock are given the special name “stock
buted
dividends” only if they are issued in lieu of undistri
property, then
profits. If they are issued in exchange for cash or
dividends.”
they donot fall under.the category of “stock
(not as
.... »..(b)' A corporation may legally issue shares of stock
to it by a person
stock dividend) in consideration of services of
not a stockholder or in payment of its indebtedness. A share
issue d to pay for servi ces rende red is equivalent to stock
stock
se services is equivalent to
issued in exchange of property, becau
property. fee
of stock issued in payment of
~ (c) Likewise, 'a share
tedne ss is equiv alent to issui ng a stock in exchange: for
. indeb
7 : 3 e
cash.
res of sto ck ma y be iss ued to a non-stockholder ‘or
(d) Sha
wh o is not a sto ckh old er but shares of stock coming
to a person
sto ck di vi de nd s are pay abl e only to stockholders of the
from non-stockholders because
or
corporation and not to strangers to di vi dends. (Nielsen & Co.,
26
ders are en ti tl ed
only sharehol
SCRA 540 [1968].)

(e) Stock dividends are in the nature of shares of stock, the

consideration for which is the amount of unrestricted retained
earning converted into equity in the corporation’s books, [t
is actually two (2) things: 1) a dividend; and 2) the enforceg
use of the dividend money to purchase additional shares of
stocks at par. (Lincoln Phil. Life Insurance Co., Inc. vs. Lepanto
Consolidated Mining Co., 26 SCRA 540 [1968].)
(f), A corporation may increase its authorized capital stock
by way of stock dividends without touching its unissued shares
as long as there are retained earnings to justify the declaration.»
(see SEC Opinion, Oct. 11, 1972.)
(g) A stock dividend has the same effect as cash dividends
distributed to the stockholders who subsequently used said cash
dividends in purchasing shares of the corporation. Since selling
of shares at a premium is not prohibited (Sec. 61, par. 1.) stock
dividends may be declared at a premium for such declaration is
in the nature of a sale of shares at a premium.
(h) As long as the requirements for the declaration of stock
dividends are complied with, the issuance of common shares
in favor of stockholders holding preferred shares is valid (SEC
Opinion No. 28-04, April 27, 2004.);
(4) Optional dividend: — It is dividend which gives the
stockholder an option to receive cash or stock dividend;
(5) Composite dividend. —It is dividend partly in cash and partly
in stocks. Here, there is no option involved;
(6) Preferred or preferential dividend. —It is dividend payable, by
to that to
virtue of contract, to one class of stockholders in priority.
be paid to another class (19 Am. Jur. 2d 286.);
(7) Cumulative dividend. — It is dividend contracted to be paid
at a certain rate at stated times and, if net earnings at any dividend
period are insufficient to pay the contract dividend, it is to be made
out of subsequent net earnings (Ibid.);
*The procedure prescribed by Sec. 37 to effect an increase of capital stock must be

complied with. The increase will be to the extent of the retained earnings to be distributed
as stock dividends.

427
(8) Scrip dividend ;

certificate issued to a stockh, Ha dend in the form of a Ve
°° . . —lI ivi g oge
money, stock or other benef
(9) Bond dividend. . — It is div;

: ividend distributed in | bonds of the
e e to the stockholders, The bondholder becomes a credi
tor
of the corporation to the extent of the amount
of the bond. Thus
a corporation may Use its retained earnings in improvement off
its plant, or purch asing machinery or other property and issue its
bonds in payment of dividends e oT gs (see 11 Fletcher,
rom such earnin
p. 893.);893.); and
(10) Liquidating dividends. — They are dividends which
are actually distributions of the assets of the corporation upon
dissolution or winding up of the same. (Wise & Co. vs. Meer, 78 Phil.
655 [1947].) They are not paid because of earnings or profits, but as
a return of capital invested. So, the assets of a dissolved corporation
are not distributed as dividends, as dividends are commonly
known. The term has also been used to describe a distribution of
assets made upon a reduction of the capital stock. (19 Am. Jur. 2d
283-284.) A corporation can distribute liquidating dividends only
after it is dissolved and all its creditors have been paid. (see Sec.
139.)
Dividends may also be participating and non-participating. (see
Sec. 6.)
Ordinary and extraordinary dividends.

Dividends may be divided into the ordinary or regular current
dividends payable by the. corporation and extraordinary. or
“extra” dividends, which may consist of cash, property, or stock
distributions.
(1) As usually understood, ordinary div idends are those paid out
some fixed plan
of current earnings of a corporation according to
d to a
or scheme, usually at regular intervals and sometimes limite
, they
substantially fixed rate of return to the shareholder. Generally nary
aire cash dividends, stock dividends being regarded as extraordi

428
dividends,”
dividends and not included within the phrase “regular
unknown.
although a policy of regular stock dividends is not
or stock, usually
(2) Extraordinary dividends, whether cash rn on
mal retu
represent an accumulated excess of earnings over nor
a capitalization of
capital invested and constitute a distribution or
ordinary dividends,
surplus profits remaining after distribution of
(19 Am. Jur. 2d 287.)
property
Effect of declaration of cash or
dividend.
dividends,
(1) When a corporation i ssues cash and property
y the amount or
the assets of the corporation diminish by exactl
value paid out and correspondingly, the prope
rty of the individual
the net worth of the
stockholder increases. The dividend s reduce
corporation.
dividends is
(2) The declaration itself of cash and property
corporation to each of
considered effective to create a debt from the
thereof from the assets,
its stockholders and segregate the amount
is payable of
even though the resolution provides that the dividend
the stockholders in the corporate assets.
Effect of declaration of stock dividend.

(1) A stock dividend converts the surplus or profits of the
permanent account,
corporation covered by such dividend into the
tors to
thereby placing it beyond the power of the board of direc
holders.
withdraw from corporate use and to distribute to the stock
(Eisner v. Macomber, 252 U.S. 189.)
profits have
(2) It shows that the corporation's accumulated
rs or
been capitalized instead of distributed to the stockholde
OF kind,
retained as surplus available for distribution, in money
ts for
should opportunity offer. For from being a realization of profi
the stockholder, it tends rather to postpone said realization. (Nielsen
Co., Inc. vs. Lepanto Consolidated Mining Co., 26 SCRA 540 [1969].)
The declaration of a stock dividend is akin to a forced purchased
of stocks, (PLDT vs. National Telecommunications Commission,
539 SCRA 365 [2007].)
(3) Such a capitalization of surplus or transfer of such surplus
to the capital account of the corporation adds nothing to and takes

Sec 42 TITLE IV. POWERS OF CORPORATION 429
nothing from the corporation. The corporation merely transfers the

surplus to capital account and issues shares of stock to represent the
same. Such shares may be preferred and common stock. So far as
Se stockholder is concerned, the stock dividend does not result in
any increase in value in the holdings of the stockholder because he
ends up with merely a larger number of ownership’s units of shares
representing the same proportionate interest in the corporation
a he possessed before without decreasing the corporation’s
assets.
(4) The declaration likewise adds nothing to the interest
of the stockholders. After a declaration of stock dividends, the
stockholder receives no greater proportional interest in the assets of
the corporation than he heads before. In this respect, it is identical
in substance with a splitting of original shares (Infra.) in which
outstanding shares are exchanged for an increased number of new
shares of proportionally less par value that the old, leaving the
ageregate value of all his stock substantially the same. Such an
increase simply dilutes the shares as they existed before. (19 Am.
Jur. 2d 288-289.)
(5) A stock dividend is, in essence, not a dividend at all in the
ordinary. sense of the term since, as indicated above, no cash or
property leaves the corporation. It does not reduce the real worth of
the corporation or increase the real worth of the stockholder.
(6) When stock. dividends are . distributed among the
stockholders, the amount declared ceases to belong to the
corporation. The unrestricted retained earnings of the corporation
the
are diminished by the amount of the declared dividends, while
|
stockholder’s equity is increased.
forced to
The stockholders, by receiving stock dividends, are
, and
exchange the monetary value of their dividends of capital stock
or
the monetary value they forego is considered the actual payment
s given as stock
consideration for the original issuance of the stock on,
dividends. (PLDT vs. National Telecommunications Commissi
supra.)
to existing
(7) The declaration of stock dividend is advantageous
creditors of the corporation to the extent ‘that corporate earnings
to stockholders. At the
are capitalized, unavailable for distribution with
oration
same time, it improves the cash position of the corp
of borrowing
expansion projects Or programs obviating the necessity
rates.
and paying high interest

Sec. 42
ILLUSTRATION:
E or ga ni ze d a st oc k co rporation with an
A, B, C, D, an d
cap ita l sto ck of P4 00 ,0 00 divided into 4,000 shares
authorized Each subscribed to and paid
va lu e of P1 00 per sha re.
with a par ation at the
actual asset of the corpor
for 400 shares. Hence, the
ss was P200,000.
beginning of the busine
yea rs of pro fit abl e bus iness, the assets of the
After a few tead of
am ou nt ed to P40 0,0 00, with no debts. Ins
corporation l
cas h di vi de nd s, it wa s agreed to increase the capita
declaring each
an d for tha t pu rp os e, to issue 400 additional shares
stock ck dividends wi ith a total
value
kh ol de r in the fo rm of sto
stoc se of his
P40 ,00 0 wh ic h am ou nt represents the actual increa
of
ss.
share of interest in the busine
the sta rt of the yea r, eac h stockholder held 400
At which is 1/5 of the total
witha total value of P40,000,
At the close of the year, after
shares
cor por ate ca pi taof
l P20 0,0 00.
stockholder still holds 1/5
stock dividends ‘are declared, each 0
h his 800 shares worth P80,00
interest in the corporation wit
porate capital of P400,000. But
in relation to the increased cor
re in the ‘corporate assets is
the proportional int erest of each sha , from
rease in the number of shares
decreased because of the inc
“1/2,000 to 1/4,000.
dividends is not subject to
_ The mere issuance of the stock
ome tax as the y do not con sti tut e income to their recipients.
inc
scrip
Effect of declaration of bond or
dividend. | 7
Absent statutory provisioto n the contrary, a corporation may
its ret ain ed ear nin gs, for exa mpl e, in improvements of its
use
other property which it is
property of in, purchasing machinery or
tion to acquire and hold,
authorized under its articles of incorpora
from such earning. Or
and issue its bonds in payment of dividend -
Fletcher, pp. 1116
the corporation may issue a scrip dividend. (11
1117.)
pay is absolutely
(1) Such a dividend, when the obligation to
ned to a future
due to the stockholders, although payment is postpo
date, (Ibid.)
makes the
(2) The declaration of a bond or scrip dividend
of the bond
stockholder a creditor of the corporation for the amount

431
Distinctions betwee
n Cash dividend
and stock dividend
.
They are:
8S, while stock dividend involves no

disbursement:
(2) Cash dividend dec]
ared
property of the stockholder and cannand paid becomes the absolute
ot be reached by the creditors of
the corporation absent fr aud,
while stoc
of corporate property, may be reached k dividend, being still part
by corporate creditors;
(3) Cash dividend is declared only by
ts discretion, while stock dividend is de the board of directors, at
clared by the board with
e concurrence: of the stockholders representing
outstanding capital stock at a regular or at 2/3 of the
special meeting called for
the purpose (Sec. 42.)
(4) Cash dividend does not i erease the corporate capital, while it
is increased by a stock dividend; !
(5) The declaration of cash dividend creates a debt
corporation to each of its stockholders who then hold from the
whil
such stock,
e no’ debt from the corporation to the stockholders
is created
by the declaration of stock dividend, except in the sense that capit
al.
stock constitutes a liability. (19 Am: Jur. 2d 317.) 8
A dividend payable in ‘stock’is ‘not Synonymous with
, and ‘is
not always or necessarily, a stock dividend: A dividend paya
ble
in stock may, under,some.circumstances, bea cash dividend
(Ibid.,
292.),,as where the dividend consists in treasury stocks or in
stocks
of another corporation (Supra.); and
(6). Cash dividend is taxable as income to the stockholder, while
stock dividend is generally not subject to income tax.” ;
Stock dividend from issue
_ Of additional shares. ,
Whenever an increase is made in'the capital acco
unt of a stock
corporation, the increase is valid only when it represen
ts additional

shares issued for which the equivalent consideration is received by

the corporation.
(1) The increase may result from an issue of additional shares or
the re-investment of retained earning effected by the distribution of
shares as stock dividend. Hence, a corporation with outstanding no-
par value shares originally issued at P5.00 per share cannot increase
its capital account by transferring its surplus to its capital account
without issuing additional shares for the amount transferred. Under
such method, stockholders who have paid in full their no-par value
shares would in effect be made to pay additional amount for the
same shares to increase their value.
(2) Section 6 (par. 6.) provides that “shares of capital
stock issued without par value shall be deemed fully paid and
nonassessable.” Once no-par value shares have been issued at their
issued price, their value can no longer be changed. (see Sec. 61, last
par.) Accordingly, such stock dividend by a transfer of the surplus
to capital with no shares to be issued cannot validly be made. (SEC
Opinion, March 28, 1974.) _
Distribution or reissue of treasury

stocks.
__., The mere acquisition and distribution of previously issued stock
does not constitute a stock dividend. (11 Fletcher, p. OL.
~~ (1) As areissue of existing paid-up shares. — Treasury stocks (see
Sec. 9.), being property of the corporation, may not be distributed
among stockholders as stock dividends, but would: constitute
property ‘dividends. (SEC Opinion, June 13,: 1963; see SEC-OGC
Opinion No. 16016, June 27, 2016.)
No increase of capital is involved, since there is merely a reissue
of existing paid-up shares. Such a ‘distribution of treasury stock
would not be a stock dividend within the ordinary meaning of the
term: (Comm. of Internal Revenue vs. Manning, 66 SCRA 14 [1975],
citing Bass v. Comm. of Internal Revenue, 129 F.2d 300.)
(2) As a distribution of earnings. — If the dividend in stock
consists not of stock created or issued therefor ‘as evidence of the
transfer of surplus or undivided profits to fixed capital, but of
stock in which corporate earnings have been invested or for which
corporate assets have been exchanged or of stock received from the

Sec. 42
TITLE IV. POWERS OF CO
RPORATION
433
stockholders in payment of
In treasury, it is a cash divi debts to the corporation and carried
dend whether such stock is previous
issued and outstandin ly
g of th
€ Same corporation or stock of another
conPoration. (SEC Opinion, June 13, 1963.)
ubstituted property in specie as a divide

nd
portion of its earning us, in a case, where a company utilized a
“
and distributed such s to buy” the majority shares of a stockholder
held that the distriby tihares to the r emaining stockholders, it was
distribution of earnings was not a Stock dividend but in effect a
on
to stockholders and, ther
income tax. (Comm. efore, subject to
of Internal Revenue vs.
Manning, supra.)
(3) As representing a prior di
sbursement of purchase price to
stockholder. — The tei a former
of ti |
|
were acquired and is not increased .upon the

reissue. Such so-called. stock ir
dividend is simply stock wateri
which does not. repres ent net wo ng
rthor surplus, but only a prior
disbursement o f purchase pri
ce to a former stockholder. (SE
Opinion, June 13, 1963, citing Ballantine, p. 484.)
C
Stock splits. ; be |
(1). Distinguished from. stock::\dividen
ds,
— The courts: have
recognized a distinction between
ia. “ stock: split” and! a “stock
dividend.” ti
The essential distinction betwee
n a stock dividend and a ‘stock
Split is that in the former, there
is a capita
Profits, with a distribution of the. added lization of earnings or
sha ares, which evidence
the assets transferred to capital,
while in the latter, there is a mere
increase in the number of shares whi ch evidence ownership
altering the amount of the capital, surplus or segr without
egated earnings,
_ In brief, a stock split is merely a
dividing up of the outstanding
shares of a corporation into a greater number of ‘nits, without
disturbing the stockholder’s original proportio
na I participating
interest inthe corporation. A sto ck split is esse
ntially one of form
and not of substance.
:

(2) Way by which accomplished. — It is said that stock splits are

generally accomplished in two (2) different ways:
(a) If the stock is of the par value type, then the original
certificate is exchanged and a new certificate substituted,
embodying the original shares, plus the new number of shares
authorized by the split.
the stockholder
(b) If itis no-par value stock to be split, then
additional certificates
retains his original certificate and receives
2d 284-285.)
for the additional shares. (19 Am. Jur.
erse stock split.”
The reverse procedure is known as “rev
ILLUSTRATION:
ng shares of stock,
X Corporation has 100,000 outstandi
Because the market price
with a par value of P10,00 per share.
board feels that a lower
of the shares is considered high, the
the shares and attract
price will improve marketability of
the 100,000 shares be
more investors. It may authorize that
lac ed by 500 ,00 0 sha res wit h a par value of 2.00. Thus, each
rep
exchange for each share
‘stockholder will receive five shares in
of outstanding shares is
owned. This increase in the number 3
called stock split. ° ee 3
d, involves the
“Reverse stock split,” on the other hansmaller number of
reduction of the outstanding shares into a
by inc rea sin g the par val ue the reof. For example, there
shares orporation are
is a reverse stock split when'the articles of inc
structure from an authorized
amended by changing the equity n shares
million divided into two (2) millio
capital stock of P20
authorized capital stock of
with a par value of P10.00, to an h a par value of
~ PhP20 mil lion divided into 400,000 shares wit see SEC
n No. 06-17, June 24, 2017;
* P50.00. (SEC-OGC Opinio ; |
5.)"
Opinion No. 01-95, Jan. 4, 200
to additional
uld be charge or credited
‘
————————
—— ;
val ues of capi tal sto ck sho s hould

21Changes in par in capi tal sto ck values exceed APIC, they
the inc rea ses
paid-in-capital (APIC). If The com mon sou rce s of APIC are: (1) excess of par
gs.
be charged to retained earnin resaleor , retirement of treasury share;
(3) distribution
tal stoc k; (2) (5) changes
value paid for capi of det ach abl e stock purchase agreements; stment of
iss uan ce
of stock dividends; (4) ts; and (7) that created by
corporate readju
asse d to
in par val ue; (6) don ate d
tio n und er Sec. 80.) API C, however, shall not be use pt
annota t income exce
quasi-reorganization. (see fut ure yea rs of charges chargeable ag ainsrel
the cur ren t or ieved ofshe su d
relieve income of n a rec ogn i d enterprise may
ize
be
on whe rei
in the case of reorganizati ion that if the existing ent
erprise shall be con
aga ins t inc ome on con dit
charges

435
i . y changes the number of outstandin

serge
s nieaie eee the stockholders’ equity nor the capital
3 _ Shares as a result Of the split does not generate
taxa ome to either the stockholder or the co tporation.
Distinction between distribution in liquidati

and ordinary dividend, In liquidation
The distinction between a dis
tribution in liquidation and
ordinary dividend is factua an
Bethe l, the result in each case dependin
g on
the particular circumstances and the intent of the
parties.
If the distribution is in the n ature
of a recurring return on stock,
it is an ordinary dividend. Ho wever, if
the corporation is winding
up its business :or recapitaliz
ing and narrowing its activities, the
distribution may properly b € treated as in
complete or ‘partial
liquidation and as payment by the corp
oration to the stockholder
for his stock or as return of the capital inve
sted by him. The
corporation is, in the latter instances, wiping out all
or that part of
the stockholders’ interest in the company. (Wise & Co., Inc. vs.
Meer,
78 Phil. 655 [1947]. | > H3 5
Applicability to partnerships.
Section 42 applies only to stock corporations. A partnership has
neither shares of stocks or capital stock, nor does it have a board of
directors that can declare dividends out'of its unrestricted retained
earnings. Dividends are property of the corporation and is payable
only when the board of directors declare them as dividends even if
there are existing profits of the corporation. On’the other hand, in
partnership, profits are already due ‘to the partners during the life
of the partnership/ joint venture in proportion to their interest as set
forth in their agreement, and are deemed to have been actually or
constructively received in the same taxable year, (SEC-OGC Opinion
No. 13-17,2 Nov. 3, 2017.)
the same result may be attained even without reorganization, provided said facts are
fully disclosed and formally approved as in reorganization inwhich event the articles
of
incorporation shall be amended accordingly to refiect the changes in the capital structure
(SEC Opinion No. 01-05, Jan, 4, 2005, citing Statement of Financial Accounting Standard. ,
No. 18 which lays down the generally accepted accounting standards in our jurisdiction.)
S ea De Leon, Comments and Cases on Partnership, Agency and Trust, p. 157. |

[2010].

Sec. 43. Power to Enter into Management Contract. — No

corporation shall conclude a management contract with
another corporation unless such contract is approved
by the board of directors and by stockholders owning
at least the majority of the outstanding capital stock, or
by at least a majority of the members in the case of a
nonstock corporation, of both the managing and managed
corporation, at a meeting duly called for the purpose:
Provided, That (a) where a stockholder or stockholders
representing the same interest of both the managing
and the managed corporations own or control more than
one-third (1/3) of the total outstanding capital stock
entitled to vote of the managing corporation; or (b) where
a majority of the members of the board of directors of
the managing corporation also constitute a majority of
the members of the board of directors of the managed
corporation, then the. management contract must be
approved by the stockholders of the managed corporation
owning at least two-thirds (2/3) of the total outstanding
capital stock entitled to vote, or by at least two-thirds (2/3)
of the members in the case of a nonstock corporation.
These shall apply to any contract whereby a corporation
undertakes: to manage or operate all or. substantially
all of the business of another corporation, whether
such contracts are called service contracts, operating
agreements or otherwise: Provided, however, That such
service contracts or operating agreements which relate to
the exploration, development, exploitation or utilization of
natural resources may be entered into for such periods as
may be provided by pertinent laws or regulations.
No management contract shall be entered into for a
period longer than five (5) years for any one (1) term. (N)
Power to enter into management contract.

(1) With another corporation. — Under Section 43, a corporationis
allowed, without the need of amending its articles of incorporation,
to enter into a management contract with another corporation,
which refers “to any contract whereby a corporation undertakes to
manage or operate all or substantially all of the business of another

is 43
TITLE IV. POWERS
op CORPORATION
corporation,
ol
whether
operating agreements Such ¢o ntracts
oy otherwise,” are calle ervice contracts
Briefly stated, ioe
the management it is an agteement which 7
period of time. Of tis affairs to a c Orp oration delegates
Since the ©°rporationanother cor poration for a certain
to manage its can emp loy officers and agents
business, there
another corporation can be no o bje
ction to employing
for
is estopped to deny its by the acts of th © Managing
‘
corporattiion an d
Warehouse Associatio author
ity
n, 49 Phil. , 609(see National Bank vs. Producers’
[1922].)
| 2 convenience to both. Thus

company may, , a holding
affairs of its subsidiari , intervene in the Manage
ilates ment and
(3) With a natural person. — Section 43 refers only

management: contract with
to a
another corporation with another
Corporation, Hence, it does not apply to Mana
entered into by a corporation with nat gement contracts
ural persons.
! Limitations on the power.
The following are the limitations for the

exercise of the Power:
(1) Ratification of the contract. — The mana sement
contract must
beapproved by amajority of the board of direc tors or tr
ustees (before,
Majority of the quorum) and ratified by the Prescribed vote
outstanding capital stock entitled to vate or if the of the
members, as the
“ase may be, of both the managing and the managed co
rporations ,

at a meeting duly called for the purpose. Unless approved by the

required vote of the stockholders, the management contract cannot
take effect. (SEC Opinion, Dec. 1, 1992.)
In either of the two (2) cases mentioned in Section 43 (par. 1.) the
management contract must be approved by the stockholders of the
managed corporation owning at least 2 /3, not merely a majority, of
the total outstanding capital stock entitled to vote, or if the managed
corporation is a nonstock corporation, by at least 2/3, not merely
a majority, of the members. Where the contract is between two (2)
corporation having interlocking directors, the contract must comply
with the requirements of Section 32.
(2) Period of the contract. — The period of the management
contract must not be longer than five (5) years for any one term. The
term limitation affords the board of directors and the stockholders
an opportunity to review the situation every five years and decide
whether the contract will be allowed to expire or not. The period
guarantees that management contracts are looked into again by
the stockholders every five years so that if there have been abuses
by the managing corporation, the contract may not be renewed for
another term. (SEC Opinion, March 6, 1986.)
(3) Managerial power under the contract. — A management
contract cannot delegate entire supervision and control over
the officers and business of a corporation to another as this will
contravene Section 22, which lays down the fundamental rule that
the corporate powers of all corporations shall be ‘exercised by the
board.
In general, the management contract must always be subject to
the superior power of the board to give specific directions from time
to time or to recall the delegation of managerial power. The board
cannot surrender or abdicate its power and ‘duty of supervision
and control for otherwise, it becomes a’mere instrumentality of the
management company. (Ballantine, p. 136.)
ILLUSTRATIONS:
(1) Interlocking stockholders. — If A, B, and C, stockholders
in both X Corporation and Y Corporation, the managing and
managed corporations, respectively, own 35% ‘of the total
outstanding capital stock entitled to vote ‘of X Corporation,

ec: 44 TITLE IV. POWERS OF CORPOR
ATION 439
management contract must be a

2/3 vote of the stockholders of Y ppro ved by the prescribed
Corporation. The same vote
the only stockholder in both corporation
than X 1/3 a
of the e tottotal outstandin; g capita
stock ceo entitled to vote of Cor
poration. Only a majority vote is
required if the more than 1/3 ownership of A, B,
A refers to the outstanding capital stock of Y and C, or of
Corporation, the
managed corporation.
(2) Interlocking directors, — If A, B, C, D, and E constitute
_the majority of the members of the board of direc
tors of X
Corporation and also of Y Corporation, the bigger 2/3 vote by
the stockholders of Y Corporation‘is necessary. This is a
case’
é of a contract: between two)(2) corporations with inter
locking
directorates. (see Sec. 33.) The extent of the shareholdings of A,
B, C, D, and E in X Corporation is immaterial.
-’- ‘In’both illustrations, the management contract need only
be approved by the majority
of the outstanding capital stock of
X Corporation, or in illustration No. 2 of the members, in case
X Corporation is a nonstock corporation.
Sec. 44. Ultra’ Vires Acts of Corporations. -— No

corporation shall possess or exercise corporate powers
other than those conferred by this Code or by its articles
of incorporation and except as necessary or incidental to
the exercise of the powers conferred.
Ultra vires and intra vires acts

explained.
A corporation is not restricted to the exercise of powers expressly
conferred upon it but has the implied or incidental power to do
what is reasonably necessary to carry out its express powers and
to accomplish the purposes for which it was formed. Sections 35(k)
and 44 recognize these implied and incidental powers possessed by
private corporations. |” = cmt era ,
(1) Acts or transactions within the legitimate powers of a
corporation or are related to its purposes are said to be intra vires.
(2) Any business not authorized by law or the articles of
incorporation if pursued by a corporation as part of its regular
Or permanent business would be violative of law or articles of
incorporation, hence, “ultra vires”. (SEC Opinion, Dec. 17, 1990.)

According to the strict construction of the term, an on vires

incidenta ll
act is one not within the express, implied, and
ration 0 le or
of the corporation conferred by the Revised Corpo
the articles of incorporation. It is an act which is not positively
ly or
forbidden, but impliedly forbidden, because it is Na express
impliedly authorized or necessary or incidental in the ce of
the powers so conferred. Since corporations, unlike natural person,
have no inherent powers, third persons dealing with them cannot
assume that corporations and have powers.
The test to be applied is whether the act of the corporation is in
direct and immediate furtherance of its business, fairly incidental to
the express powers and reasonably necessary to their exercise. If so,
the corporation has the power to do it; otherwise, not. (6 Fletcher,
pp. 198-199; Montelibano vs. Bacolod-Murcia Milling Co., Inc., 5
SCRA 36 [1962]; see SEC-OGC Opinion No. 20-09, August 4, 2009.)
ILLUSTRATIONS: »
(1) A corporation was organized to engage in the buying
and selling of home appliances. The act of buying and selling
motor vehicles would be ultra vires although it is itself lawful
because it\is outside the object for which the.corporation is
created and, therefore, beyond its powers. |
The buying and selling of refrigerators would be intra vires.
(2) Acorporation was organized to engage in the business
of manufacturing a particular product. Marketing and selling
the product may be logically necessary, to the business of
manufacturing, considering that there must be an end-user
for
the goods manufactured or produced. a
Aseller, trader, dealer or importer of goods
is not necessarily
or indispensably the manufacturer of. the good
s. Therefore,
manufacturing cannot be treated as reasonably
necessary to the
Oe of the selling. (SEC-OGC Opinion
No. 14-07, July 18,
2007.
Contracts intra vires entered into by the boa

rd of directors
are binding upon the corporation
and courts should not
interfer
e unless such contracts are so unconscio
oppressive as
nable and
to amount to wanton ‘violation to the rights
of

Sec. 44 TITLE IV. POWERS OF CORP
ORATION
441
the minority, as when a Sto

ckholder avers that the board
directors has concluded a transa of
ction that will result in serious
injury to him. (Gamboa vs.
Victoriano, 90 SCRA 40 [1979]
Yong vs. Tiu, 401 SCRA ; Ong
1 [2003].)
Ultra vires acts distinguished

from
other acts.
Although the term ultra vires' act has bee
n used indiscriminately,
it properly differs from acts which are
illegal, in excess or abuse
of pow er, or executed in an unauthorized man
ner, or acts within
corporate powers but outside the authority
of particular officers or
agents . (19 CJ.S, 419.)
(1) From illegal act. — When proper
ly used, an ultra vires ‘act
simply means an act beyond the confer red powers
of a corporation
or the purposes or object for which it is cre
ated as defined by the
law of its organization. (Republic vs.
Acoje Min
SCRA 361 [1963]; Atrium Management Corpor ing Co., Inc., 7
ation vs. Court of
Appeals, 353 SCRA 23 [2001].) The langua
ge of Section 43 appears
to con
fine the term to this meaning. By itself, an ultr
a vires act is
not necessarily illegal. On the contrary,
it may be lawful, moral,
and even praiseworthy. Nevertheless, an
‘ultra vires act ostensibly
includes acts declared illegal by general or spe
cial laws. |
_An illegal corporate act, on the other hand,
isan act contr
to law, morals, good custom, public
order, or public policy (Art.
1306, Civil Code.) and, therefore, per se
illicit. (see Pirovano vs. De
la Rama, 96 Phil. 335 [1954].) The buying and
selling of contraband
goods would not only be illegal but also ultra vires
. The term ultra
vires is distinguished from an illegal act for the
former is merely
voidable which may. be enforced by performance,
ratification. or
esto ppel while the latter is void and cannot be
validated. (Ibid.)
SS
‘Literally, beyond the scope of the purpose (i.e, object

of the corporation) or the
Powers (i.e., the means by which the corporation carrie
s out the object) of the corporation.
"The only ground and policy upon
ave real basis is the interest of the sto which the defense of ultra ires, proper defined, can
of the corporation to the sco ckholders, if any, to confine the bus
pe of the purposes specif iness activities
ie‘in
d its articles of incorporatio
(Ballantine, p. 242.) Creditors cannot attack a n.
contract or transfer merely because it is ultra
vires. The only ground for objection by credi
tors is its effect as a fraudulent diversion of
©orporate assets from the payment of their claim s. (Ibid., p. 258.)

If a foreign-owned corporation authorized under. its articles

of incorporation to sell its products at wholesale only, the sale on
retail would be considered an ultra vires act, or an act beyond the
corporate powers conferred t it by the State. (SEC-OGC Opinion No,
10-18, June 4, 2018.)
(2) From act done without complying with certain conditions and
formalities. — Another class of corporate contracts sometimes said to
be ultra vires, although the phrase as applied to them is inaccurate,
is where the power exists to do what was done, provided the
corporation does it in a certain prescribed way. Thus, informalities
with the consent of stockholders (or members) to'the contract are
often incorrectly called ultra vires, using the term in its strict sense.
The fact that the required consent of stockholders is not obtained
does not make a contract ultra vires. (7 Fletcher, p. 567; also 14-ACJ,,
pp. 312-313)
(3) From act beyond powers of particular officers. — The expression
ultra vires has also been applied to acts by the directors (or trustees)
or other officers of a corporation in excess of the powers conferred
upon them by the stockholders (or members).
Such an act, however, is not necessarily ultra vires act of the
corporation. An act may be within the powers of,a corporation
and not within the powers of the directors, for the powers of
the latter are derived, not from the legislature, like the powers
of the corporation, but from the stockholders in their corporate
capacity.‘ (11 Fletcher, pp. 566-567.) , |
’ 3The general rule is that a corporation must act in the manner and with the formalities,
if any, prescribed by its charter or by the general law. However, a corporate transaction
or contract which is within the powers of the corporation, which is neither wrong in itself
nor against public policy but which is defective from a failure to observe in its execution
a requirement of the law enacted for the benefit or protection of a certain class, is voidable
only and is valid until voided; the parties for whose benefit the requirement was enacted
may ratify it or be estopped to assert its invalidity, and third persons acting in good faith
are not usually affected by an irregularity on the part of the corporation in the exercise of
its granted powers. (19 CJ.S, 432-444.) ; A
‘A result of the above distinction is that the stockholders of a corporation, while they
cannot, by ratification, render valid an act which is beyond the powers of the corporation,
may ratify an act which is within its powers, but beyond the powers of the directors. The
courts often refer to contracts as ultra vires where all that is meant is that a.particular
officer had no power to make the contract. In this class of cases, the question is merely
one of the agencies and, therefore, by old and well-settled rules of law relating to agency:
(Ibid.)

443
‘@) From act involving inexistent contract. — A

be illegal but inexistent
contract may not
. and, ther efor e, void, when it lacks one or
some of the essential elements (i.e., consent, object, and cause) of a
contract, such as those which are absolutely simulated or fictitious;
those whose cause or object is outside the commerce of men; those
which contemplate an impossible service; and those where the
intention of the Parties relative to the principal object of the contract
cannot be ascertained. (Art. 1409, Civil Code.)
Such contracts are not necessarily ultra vires. Neit
her party has
a right of action against the other who can always raise the
defense
of the inexistence of the contract to defeat the claim of the former.
Ratification of ultra vires acts.

@) Where the contract or act is illegal per se, it'is wholly void
or inexistent. It cannot be ratified in Article 1409 of the Civil Code
cannot also be ratified. The doctrine of estoppel cannot operate to
give effect to an act which is null and void.
~— (2) Where the contract or act is not illegal per se but merely beyond
the power of a corporation, the same is merely voidable and may be
enforced by performance, ratification, or estoppel, or on equitable
grounds. (Republic vs. Acoje Mining Co., Inc., supra.) |
(a) Acorporation, like an individual, may ratify and render
binding upon it the originally unauthorized acts of its offices
or other agents (Gokongwei, Jr. vs. Securities and. Exchange
‘Commission, 89 SCRA 336 [1979].) and ultra vires acts which are
not illegal especially so if,no creditors, are prejudiced and no
-rights of the State or the public are involved. (7 Fletcher, p. 585.)
(b) Ratification can never be made on the part-of the
corporation by the same persons who wrongfully assume the
power to make the contract, but the ratification must be by
the officer, or governing body ‘having authority to make the
contract. (Vicente vs. Geraldez,' 22 SCRA 210 [1973]; Arguenza
vs. Metropolitan Bank & Trust Co., 271 SCRA 1 [1997].) .
(c) Ratification by all stockholders could be express or
implied, e.g., receipt of benefits under the contract without
objection. }

Effects of ultra vires acts which

are not illegal.
These rules’ are recognized:
sides, cannot
(1) An ultra vires contract, while executory on both
be enforced by either party thereto. (7 Fletcher, p. 607.) It is in
transcend the powers
the public interest that corporations do not
ranted to them by law and their assets be not subjected to risks
created by forbidden acts;
(2) When an ultra vires contract has been fully performed on both
sides, neither party can maintain an action to set aside the transaction
or to recover what has been parted with. The well-settled doctrine
is that the defense of ultra vires cannot be set up or availed of in
to assure the
completed or consummated transaction (Ibid., p. 652.)
security of transactions that had been closed. Only the State may
challenge the contract on ultra vires grounds. No public interest is
involved here since both. parties have received to their advantage
the benefits of the contract voluntarily entered into; and
(3) When an ultra vires contract has been performed on one side
and the other has received benefits by reason of such performance,
recovery is permitted in most courts on behalf of the former (Ibid.,
p. 620.) on the ground that it would be unjust to sanction retention
of benefits coupled with refusal to perform. Other courts hold the
contract unenforceable but compel the party who has received the
'The effects of illegal contracts of a corporation are governed by the following

provisions of the Civil Code:
“Art, 1411. When the nullity proceeds from the illegality of the’ cause or object of
the contract, and the act constitutes a criminal offense, both parties being in pari delicto,
they shall have no action against each other, and both shall be prosecuted. Moreover, the
provisions of the Penal Code relative to the disposal of effects or instruments of a crime
shall be applicable to the things or the price of the contract. i
This rule shall be applicable when only one of the parties is guilty; but the innocent
one may claim what he has given, and shall not be bound to comply with his promise.”
not
“Art. 1412. If the act in which'the unlawful or forbidden cause consists does
constitute a criminal offense, the following rules shall be observed:
(1) When the fault is on the part of both contracting parties, neither may recover
what he has given by virtue of the contract, or demand the performance of the other’s
undertaking;
what he
(2) | When only one of the contracting parties is at fault, he cannot recover
been promised
has given by reason of the contract, or ask for the fulfillment of what has
him. The other, who is not at fault, or ask for the fulfillment of what has been promis?
what he has given without
him. The other, who is not at fault, may demand the return of
any obligation to comply with his promise.”

gec. 44 TITLE IV. POWERS OF CORPORATION 445
penefits of performance to return what he has received or, failing to

do that, to pay its reasonable value. (Ibid., p. 613.)
Contracts ultra vires in part only.

If the contract is separable, it may be sustained and enforced as
to the part not ultra vires, and held invalid as to the part ultra vires.
By way of illustration:
(1) Securities taken by a corporation, though ultra vires as to
some debts secured, may be enforced as to those debts for which the
corporation was authorized to take them.
(2) Where a corporation issues bonds and executes a mortgage
to secure the same, the bonds are valid if within the powers of the
corporation, though the mortgage may be ultra vires. .
(3) The rule also applies where the corporation executes a
mortgage covering property which it has no power to mortgage,
and property which it may mortgage. The mortgage is valid as to’
the latter. (7 Fletcher, p. 587.) | 4
Acts presumed to be within corporate

powers. bt
(1) Where private rights only are involved. — It is the policy of
the law to look with disfavor upon the defense of ultra vires, where
private rights only. are.involved, especially when interposed by a
corporation to avoid an obligation, otherwise legal and equitable.
(Ibid.; p. 570.) Thus, “when a contractis not on its face necessarily -
beyond the scope of the power. of the corporation by which it-was
made, it will, in the absence of proof to the contrary, be presumed
to be valid. It is not seemly for a corporation, any more for an
individual, to make a contract and then break it, to abide by it so long
as it is advantageous, and repudiate it when it becomes onerous.”
(Coleman vs. Hotel de France Co.,.29 Phil. 323 [1915].)
The defense of tiltra vires rests on violation of trust or duty toward
stockholders (or members), and should not be entertained. where its
allowance will do greater wrong to innocent parties dealing with
the corporation.(19 C.J.S. 433.) 7 |
(2) Where act clearly beneficial to the corporation. — The tendency
of more recent decisions is to hold an act within corporate powers

E OF THE PHILIPPINES Sec. 44
where it is clearly beneficial to the compan

y as where the act directly
tends to incr ease its business. Thus, a corporation, a
financial
institution, which owns and maintains a com
puter to service its
data processing needs may sell the computer to othe
r entities after
Servicing its needs. Whatever transactions as are fairly inci
dental or
auxiliary to the main business of a corporation may be und
ertaken
by the same. (SEC Opinion, May 3, 1976.)
Section 35(k) is broad enough to cover a wide range of impli
ed
powers as to make difficult the avoidance of corporate contracts
on
the ground of ultra vires. !
Ultra vires acts as the acts of the corporation.
The doctrine so often laid downby the courts—thata corporation
has such powers only as conferred upon it by its charter — if taken
literally, would be equivalent to saying that an act by the officers
of a
corporation on its behalf and in its name, but in excess of its powers,
even though authorized by the stockholders (or members)
in their
corporate capacity, is not the act of the corporation, as distinguished
from its officers and stockholders. ea
The rule that a corporation has no powers except such
as
conferred by its charter cannot and does not mean that it canno
t
exceed its powers.
(1) A corporation has no right or authority to do acts not withi
n
the powers conferred upon it by the legislature; but, as in the case
of
an individual, it is possible for it do wrong. It may exceed its powers
and do an ultra'vires act, and the act will be, ‘in'contemplati
on of the
law, not merely the act of the officers’or stockholders; but
the act of
the corporation itself, Thus, a conveyance or transfer of property to or
by a corporation may transfer the title; though the corporation has
no power under its charter to hold or transfer the property.
—
(2) When an ultra vires, contract with a corporation is fully
executed by both parties (Supra.), the court will not interfere at the
instance of either party to deprive the other of the rights acquired
under the contract. :
(3) Actions quasi ex contractual may be maintained under some
circumstances, by or against a corporation, for money or property
loaned, paid or delivered under an ultra vires contract.

Sec. 44 TITLE IV. POWERS OF CORPOR
ATION 447
: (4) et an ultra vires contract with a\ corpor

ation has been:
fu . peer by one party, and the other has received the benefits of
such performance (Supra), the latter is estopped to
vires chasacter
set up the ultra
of the transaction to defeat an action on the contract
itself.
(5) Torts and crimes are always ultra vire
may commit a tort and be liable in dam s, and yet a corporation
ages therefor, and it may
be e guigu lty of a misdemeanor,
and be indirectly convicted and
fined therefo
ee r. This. is sufficient to show beyond
a any doubt that a
aha may exceed its powers. (7 Fletcher, pp. 579-580; see Sec.
Invocation of ultra vires,

The doctrine of ultra vires cannot be invoked when
it would
defeat the ends of justice or work a legal wrong. (Coleman vs. Hotel
de France, 29 Phil:323[1915].) io! FASh
It cannot be allowed to prevail whether the pleas interposed for
or against a corporation when it will cause prejudice to a party who
acted in good faith. Thus, loans given to or by a corporation have to
be repaid notwithstanding that the transaction is ultra vires.
Who may invoke ultra vires. .

~ (1) (Generally. — The’ question as to the effect of ultra vires acts
often depends on who is invoking ultra vires. |
(a)' Thus, the State may have the right to invoke it, although
“neither party to the contract may'urge it, as in the case of an
‘» executed contract. 3
‘(b) A party to the contract may, under some circumstances,
urge ultra vires where a total stranger would not have that right.
(c) Likewise, dissenting stockholders sometimes sue to
enjoin the execution or performance of an ultra vires contract
where neither party to the contract could set up the claim.
(2) State. — When the State creates a corporation, the grant of
the charter is on the implied condition that the corporation shall
act within the powers conferred upon it. Ultra vires acts, whether
otherwise wrong or not, breach this condition.
‘See “Effects of ultra vires contracts which are not illegal” (Supra.)

(a) Such an act does not of itself put an end to the existence
of the corporation, but it is, subject to certain qualifications, a
ground for a direct proceeding by the State to obtain a judgment
of forfeiture.
(b) When a corporation is guilty of exercising powers not
authorized by its charter, the State instead of proceeding against
it to obtain a judgment forfeiting its charter may proceed by quo
warranto, to obtain a judgment merely ousting it from further
exercise of the unauthorized power. (7 Fletcher, pp. 604-605; see
Rules of Court, Rule 66, sec. 1[c].)
(c) The SEC may suspend or revoke the certificate of
registration of a corporation for commission of ultra vires acts,
(see P.D. No. 902-A, Sec. 6[1].)
(3) Stockholders. — The stockholders of a corporation have a
right to expect and to insist that its funds shall not be diverted by
giving them away or by employing them in an ultra vires business or
transactions.
(a). Any stockholders, therefore, has such an interest that
he may apply to a court for an injunction’ to. prevent such a
diversion, even though all other stockholders may consent to the
ultra vires act. In like manner, he may sue to enjoin a corporation
from using its funds in the ultra vires purchase of shares of stock
in another corporation.
(b) A’ stockholder, however, may be precluded from
attacking an: act as ultra vires, by his lache
s. If a stockholder
wants protection against the consequences of
an ultra vires act,
he mustask for it with sufficient promptness to enable the
to do justice to him without doing injustice court
to others.
(c) It need hardly be stated that where the sto
himself Par ckholder has
ticipated in the ultra vires act, or consen
he will be estopped from’ maintaini ted thereto,
ng legal proceedings to
secure the annulment of the consequen
ces thereof.
(d) So, also a stockholder may
be barred from asserting the
invalidity of a transaction wher eby a cor
money beyond the limit of its authorizeporation has borrowed
d indebtedness where
the money has been expended for the benefit
of the stockholders
and the corporation. (7 Fletcher
, pp. 600-603.)

sec. 44 TITLE IV. POWERS OF CORPOR
ATION 449
(4) Strangers, — Except where itis otherwise

it is a general rule th at a plea provided by statute,
of ultra vires cannot be interposed by
a stranger not a par ty to the
such act or contract
contract, at least if he is not injured by
(a) For instance, alth

ou gh the act of a corporation in
acquiring a cause of action
j S ultra vires, the want of power to
engage in such business c anno
t be interposed as a defense when
the corporation seeks to enforce
such cause of action. Thus, the
maker of a note cannot d efend upo
n the ground that the contract
whereby the note was tr ansferred
was ultra vires, on the ground
that the payee had'no p ower to indo
rse it for transfer.
(b) So also, if a person is in possession of real property
an action is brought against him by a corporation to
and
~ itor to quiet title or the like, defendant reco ver
cannot set up that the
~ title of plaintiff was acquired ultra vires, whe
re defendant was a
“” Stranger to the original transaction alleged to
be ultra vires. (Ibid.,
pp. 594-596.) - Cee. ee ,
(5) -Compensation in business. — A stranger
whose rights have
not been infringed by an ultra vires:act of-a competit
or corporation
cannot urge ultra vires to prevent the latter. from acti
ng beyond
its powers, unless the right to do so is given by a statute.
In other
words, a competitor cannot attack acts of a corporation as
ultra vires,
merely on the ground of injurious competition, where such acts are
neither public nuisances or trespasses,
~ The only injury of whichhe can be heard in a judicial tribunal
to complain is the invasion of some legal or equitable right: (Ibid.
,
Bap 98ai GA ys ae as 1s :
(6) Creditors. — Judgment creditors may impeach an ultra vires
contract as in fraud of creditors, the same as any other contract.
But creditors of the corporation, whose rights are not infr
inged
by the ultra vires contract, cannot. attack it. They cannot attack
4 corporate transaction as ultra vires unless its intent or effect
is fraudulently to divert the corporate assets from their.
debts.
Ordinarily, a subsequent creditor cannot object: (Ibid., p. 599.) .

Estoppel to deny corporate power

to contract.
(1) General rule. — As provided in Section 21, an association
which assumes to exercise corporate powers and enters into a
contract as a corporation and persons who contract with it as a
corporation are estopped, in an action on the contract, to deny its
corporate existence.
(2) Where power to enter into contract in issue. — The general
principle does not apply where the question is whether a contract
is within the powers conferred upon a corporation by its charter to
make, and hence, since estoppels must be mutual, the other party to
the contract is not estopped to set up that the contract was beyond
the powers of the corporation.. _ :
(3) Where contract wholly executory. — In other words, the mere
act of entering into the contract does not estop either party to show
that the contract is ultra vires. If it did, ultra vires could not be set
up as against a contract wholly executory, whereas.the rule that a
wholly executory contract may be attacked as ultra vires is one of the
few rules as to which there is no contention. All this does not mean
that either party to the contract may not, by his acts, be estopped
from setting up ultra vires. bag.
(4) Where contract apparently ultra vires. — It is held in some
states that a corporation may be estopped to deny its power to enter
into a particular contract, where the contract is apparently within
its-powers, and is rendered ultra vires because of extraneous facts
peculiarly within the knowledge of the corporation, and not known
to the other party. ? . arag
(5) Where contract has been performed on one side. — And in some
States, although notin all, the contention that a contract is ultra
vires, either against the corporation or against the other party, where
the contract has been performed by one party and the other has
received the benefit of such performance, is said 'to be precluded on
the theory of an estoppel. (7 Fletcher, pp. 580-581.)
Corporation liability for torts, crimes,

and other violations. )
(1) General rule. — A corporation, being a juridical entity, can
only act as such through its officers and agents. This being the case,

TITLE Iv, POWERS OF CORPOR
ATION 451
(a) The authority ma

members acting as 'y may come from the stockholders or
:
a bod , Or
od generally
trustees) as the governi ing y, bOr (P , from the directors (or
SCRA 237 [1978].) 8 body. (PNB vs. Court of Appeals, 83
(b) The act of th O

tt he scope © ofof hihis autheoritffyiceorr orcouragent must have been within
se
of employment; but sub- »
‘Ject to this limitation, it may have been without orders, or even
indisregard of the instructions to the officer or agent
have been in excess of instructions, or may have or may
been malicious
or willful. Nor need the corporation have authorized doin
particular act or ratified it after it was done.
g the
(19 C.J.S. 946-949.)
_(c). Acorporation cannot, to escape liability for damages
for
the wrongful acts of its agents or employees, assert that such
acts were beyond the scope of corporate power or that they
occurred with a transaction beyond the scope of such power. It
_is to be kept in mind that all torts are necessarily ultra vires, since
if an act is legally authorized,
it is lawful and nota tort. (Ibid.,
948.)
(d) In labor cases, the Supreme Court has held corporate
directors and officers solidarily liable with the corporation for
the termination of employment of employees done with malice
or in bad faith (Sunio vs. National Labor Relations Commission,
127 SCRA 390 [1984]; General Bank & Trust Co. vs. Court of
Appeals, 135 SCRA 569 [1985]; MAM Realty Development
Corp. vs. National Labor Relations Commission, 244 SCRA
797 [1995]; Uichico vs. National Labor Relations Commission,
273 SCRA 35 [1997]; Manarpus vs. Texan Philippines, Inc., 748
“ SCRA 511 [2015].) on the theory that the legal fiction of separate
corporate personality may be disregarded whenever it is used
as a means of committing an illegal act. (see Acesite Corporation
vs. National Labor Relations Commission, 449 SCRA 360 [2004].)
Any decision against the employer corporation can be
enforced against the officers in their personal capacities for

acting on behalf of the corporation should the corporation be

unable to satisfy the judgment in favor of an employee (as
where it is no longer existing). (A.C. Ransom Labor Union-
CCLU vs. National Labor Relations Commission, 142 SCRA 269
[1986]; Camelcraft Corporation vs. National Labor Relations,
186 SCRA 393 [1990]; Valderrama vs. National Labor Relations
(e), Under the Labor Code (Arts. 288, 289 thereof.), when a
corporation violates a provision declared to be penal in nature,
the penalty shall be imposed upon the guilty. officer or officers
of the corporation, disregarding the fiction of corporate entity.
(Reahs Corporation vs. National Labor Relations Commission,
271 SCRA 247 [1997].)
(f) Where an employment relationship exists, a corporation
may be held vicariously liable under Article 2176 (quasi-delict)
in relation to Article 2180 (principle of respondent superior) of the
Civil Code for damages caused by the negligence or fault of
its employees acting within the scope of their assigned tasks.
Absent, evidence of an employment relationship, a corporation
may be held liable under the principle of ostensible agency (see
Arts. 1431 and 1869, Civil Code.) for the negligence and pro hac
vice under the principle of corporate negligence for its failure or
negligence
to follow established standards of conduct to which
it should conform as a corporation. (Professional Services, Inc.
vs. Court of Appeals, 611 SCRA 282 [2010].)
(g) Even though a judgment or order is addressed to the
corporation, the officers as well as the corporation itself may
be punished for contempt for disobedience to its terms, at least
if they knowingly disobey the court’s mandate, since a lawful
judicial commend to a corporation is, in effect, a command to
the officers. (Heirs of T. de Leon’ Vda. de Roxas vs. Court of
Appeals, 422 SCRA 101 [2004].) | |
(h) If the drawer.
of a check is an officer of a corporation,
the notice of dishonor to the said corporation is not notice to the
employee or officer who drew or issued the check for and in its
behalf. Responsibility under Batas Pambansa Blg. 22 (Bouncing
Checks Law) is personal to the accused. The corporation has no
obligation to forward the notice addressed to it to the employee
concerned especially because ‘the corporation itself incurs

TITLE IV. POWERS OF
CORPORATION
453
"vs. People, 459 SC notice of dij

RA 169 Sen
oe eee
(2) Imputation of
criminal intent, —
agent's intention to do wr Although it has no mind, its
ong may be imputed to the corporation.
Accordingl y, corporations may be
. held liable for libel and malicious
prosecution. But since a Corporation as a person is mere legal
fiction,
it cannot be proceeded against criminally because it cannot commit
Sn which Personal violence or malicious intent is required.
Criminal action is limited to the corporate agents guilty of an
act
amounting to a crime and never against the corporation itself. (West
Coast Life Ins. Co. vs. V. Hurd, 27 Phil. 401 [1914]; Times,
Inc. vs.
Reyes, 39 SCRA 303 [1971].) .
(a) The existence of the corporate entity does not shield
from prosecution the corporate agent who knowingly and
intentionally causes the corporation to commit a crime (The
Executive Secretary vs. Court of Appeals, 429 SCRA 81 [2004].)
punishable under the Revised Penal Code. He cannot hide
behind the cloak’ of the separate corporate personality of the
corporation to escape criminal liability. (Republic Glass Corp.
‘vs. Petron Corporation; 698 SCRA 666.[2013]:) orl
- (b) It is the responsible officer or officers acting for the
corporation who must of necessity be the ones to assume the
_ -criminal liability; otherwise, this liability as created by law would
be illusory, and the deterrent effect of the law, negated. The
"corporate officer or employee must have actually participated
in the commission of the criminal offense or violation of law
attributed to the corporation, to be himself individually guilty
of the crime. (see Sia vs. People, 121 SCRA ‘655 [1983].)
(c) The principle applies to those corporate agents who, by__
virtue of their managerial positions or other similar relation to,
the corporation, could be deemed responsible for its commission,
if by virtue of their relationship to the corporation, they had the
power to prevent the act. Whether the officers or employees
are benefited by their delictual acts is not a touchstone of their
' criminal liability. Benefit is not operative act. If through the
or omission of ‘corporate officers or employees,
the default,
act, corporation ‘ commits ‘a ‘crime, they may themselves
be individually ‘held accountable for the crime: (Ching vs.

Secretary of Justice, 481 SCRA 609 [2006]; Espiritu, H. vs. Petron

Corporation, 605 SCRA 245 [2004].)
(d) Mere membership in the board or being president per se,
however does not mean knowledge, approval and participation
in the act alleged as criminal. There must be a showing of
active participation, not simply a constructive one. (ABS-CBN
Corporation vs. Gozon, 753 SCRA 1 [2015].)
(e) The Supreme Court has ruled that corporate officer and /
or agents may be held individually liable for a crime committed
through their act or default under the Intellectual Property
Code. In its current form, the Intellectual Property Code is
malum prohibitum and prescribes a strict liability for copyright
infringement. Good faith, lack of knowledge of the copyright,
or lack of intent to infringe is not a defense by the corporation
against copyright infringement. (Ibid.) :
(3). Penalties imposable. — While a corporation cannot be arrested,
imprisoned, or executed, it may be summoned, fined, or ousted by
quo warranto from the unlawful exercise of its powers. (10 Fletcher,
p. 651; see Rules of Court, Rule 66, sec. 1[c].)
The fine, however, is a mere:consequence of the conviction of
the corporate agent found guilty of violating the law. For violations
of any of the provisions of the Revised Corporation Code or,
on grounds provided by existing laws, rules and regulations, a
corporation is subject to fine and/or dissolution without prejudice
to the institution of appropriate action against the guilty director,
trustee, or officer of the corporation. (see Secs. 137, 161; see also PD.
No. 902-A, Sec. 6[i] thereof; see also R.A. No. 8791 [The General
Banking Law of 2000], Secs. 66, 70,91.) .
Again, the existence of the corporate entity does not shield from
prosecution the agent who knowingly and intentionally commits a
crime at the instance of a corporation, (Ong vs. Court of Appeals,
401 SCRA 648 [2003].)
(4) Liability for moral and exemplary damages. — As a rule, moral
damages are not awarded to a|corporation. unless it enjoyed a
good reputation that the offender debased and; besmirched by
his actuation. Moral damages are also, not recoverable in culpa
contractual unless bad faith has been proved. In breach of contract,
the court may award exemplary damages if the defendant acted in

sec. 44 TITLE IV. POWERS OF CORPORATION ci
a wanton, fraudulent, reckless, oppressive, or malevolent manner.

(Art. 2232, Civil Code.) Fees and expenses of litigation (Art. 2208,
ibid.) are proper only when exemplary damages are award. (San
Fernando Regala Trading, Inc. vs. Cargill Philippines, Inc., 707
SCRA 187 [2013].)
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Sec. 2 TITLE I.

(d) The interest of shareholders in corporate prop

(f) A tax exemption granted to a corporation cannot be

The participation by the general manager of a corporation in an

Corporation as a person, resident

‘Citing De Leon, The Corporation Code of the Philippines Annotated, p. 19 [2003].

panchise, allowing a petition to quiet title, and offering public

(2) As a resident or non-resident. — Since a corporation is a person

applicable, and for such purpose it is, as a general rule, a

Corporation as a collection of individuals.

(2) Recognized for many purposes. — This conception of a

Doctrine of piercing the veil of corporate

[1965].), on equitable considerations, this fiction will be disregarded

5Citing De Leon, The Corporation Code of the Philippines, p. 26 [2006].

Ferroalloy Corporation, 464 SCRA 409 [2005]; China Banking

the corporation Will be treated merely as an association or collection

where the corporation is so organized and controlled and its

Instances where doctrine applied.

Cuenca, 466 SCRA 714. [2005]; Union Bank of

The corporate mask may be removed and the two seemingly

(d) Where two corporations have identical incorporation

[2016].) absent clear and convincing proof showing that the

(j) Where the corporate fiction was used as a means to

corporation.’ (Mariano vs. Petron Corporation, 610 SCRA 487

Claparols vs. Court of Industrial Relations, supra;

corporate entity was envisaged for convenience and to serve justice.

transfer was within the purview of the rule which holds a

Liego, 314 SCRA

Application of the “instrumentality”

“The circumstances rendering the subsidiary an instrumentality,

Court has laid a three-

335 (2000), the Supreme Court (First

In Reynoso JV vs: Court of Appeals, 345 SCRA

ng General Credit Corporation (GCC),

Acquisition by court of jurisdiction over

where the doctrine can, if appropriate, be applied based on the

Corporation as a creation of law

(2) Compliance with conditions prescribed by law. — Corporations

Right of succession of a corporation.

of its stock without

(2) Corporations created by special laws have the right of

Powers, attributes, and properties

of the certificate of incorporation by the SEC under its official seal

(4) Powers. —A partnership may exercise any power authorized

(11) Dissolution. — A partnership may be dissolved at any time

Similarities between a partnership

(3) Like a partnership, a corporation (except a corporation sole

©) A partnership, no matter how created or organized, is

(2) Exception. — Under Section 35(h) of the Revised Corporation

'8Except general professional partnership or “partnerships formed for the sole

Now, a corporation or partnership singly, or jointly with other

Advantages of a business corporation.

(6) It permits high flexibility in obtaining and pooling capital

Other classifications of corporations.

(b) Corporation sole is a special form of corporation usually

‘Citing De Leon, The Corporation Code of the Philippines Annota

(2) As to whether they are for religious purposes or not:

(7) As to their relation to another corporation:

"It is a corporation organized to hold the stock of another or other corporations