Corporation Accounting-Notes

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CORPORATION LAW 1. The articles of incorporation

expressly authorized the
 Corporation is one of the types of corporation to enter into
business organizations. It is also the contracts of partnership;
most important in economic
development. 2. The agreement or articles of
partnership must provide that all
INTRODUCTION the partners will manage the
 Sole proprietorship partnership; and
3. The articles of partnership must

- One man form of business entity,
stipulate that all the partners are
personally answers all liabilities, but
and shall be jointly and severally
enjoys all the profits with the
liable for all obligations of the
exclusion of others
partnership.
- Limited shareholders responsibility
DEFINITION AND ATTRIBUTES
- Paid subscription in full, you are no
 4 attributes of a corporation
longer liable
1. Artificial being
 Partnership
2. Created by operation of law
- Based on mutual trust and
confidence 3. Right of succession
 Joint venture 4. Powers, attributes and properties
expressly authorized by law or
- one time grouping of persons
incident to its existence.
whether they be natural or juridical
 Doctrine of limited capacity
- does not entail continuity because
after the undertaking is completed it - Only such powers as are expressly
is already the end granted to it by law and by its
articles of incorporation including
- particular partnership and joint
others which are incidental to such
venture would be similar, but there
conferred powers, those reasonably
is already a decision of the Supreme
necessary to accomplish its purpose
Court declaring them as different
and those which may be incidental
- when they do not register, it does to its existence
not exist
- Can do things as the law asks or
- Foreign corporations enters into an allows it to do
agreement with a domestic
- If it does anything beyond, it shall be
corporation, it must be registered.
considered as ULTRA VIRES
Generally they do not need to be
registered.  General rule: Moral damages
cannot be granted to corporations
 Corporations
 Exception: Filipinas Broadcasting
- They may enter into joint venture,
Network Inc. vs. Ago Med
but generally they cannot enter into
a partnership, but there are - In cases of slander, libel and other
exceptions allowed by the SEC: the forms of defamation (should not
3 exceptions must go hand in hand qualify because the code does not
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
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qualify whether natural or juridical)  Section 3 Stock and non-stock

Art. 2219 of the civil code:
- Importance of knowing, determining
Art. 2219. Moral damages what provisions of the code or the
may be recovered in the following law may be applicable
and analogous cases:
Section 3. Classes of
(1) A criminal offense resulting in corporations. - Corporations formed
physical injuries; or organized under this Code may
be stock or non-stock corporations.
(2) Quasi-delicts causing physical Corporations which have capital
injuries; stock divided into shares and are
authorized to distribute to the
(3) Seduction, abduction, rape, or holders of such shares dividends or
other lascivious acts; allotments of the surplus profits on
the basis of the shares held are
(4) Adultery or concubinage; stock corporations. All other
corporations are non-stock
(5) Illegal or arbitrary detention or corporations. (3a)
arrest;
 Non-stock- title 10
(6) Illegal search;
 Stock- section 51
(7) Libel, slander or any other form
of defamation;  Stockholders must generally cast
their votes in the meeting; section 4
(8) Malicious prosecution; governed primarily by the law
creating them
(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Section 4. Corporations

Articles 21, 26, 27, 28, 29, 30, 32, created by special laws or charters.
34, and 35. - Corporations created by special
laws or charters shall be governed
The parents of the female seduced, primarily by the provisions of the
abducted, raped, or abused, special law or charter creating them
referred to in No. 3 of this article, or applicable to them, supplemented
may also recover moral damages. by the provisions of this Code,
insofar as they are applicable. (n)
The spouse, descendants,
ascendants, and brothers and  Section 3
sisters may bring the action
mentioned in No. 9 of this article, in - The two requisites must always
the order named. concur
 Advantages (SEE LADIA BOOK) 1. That they have a capital stock

divided into shares; and,
- No. 2 may also be a disadvantage
2. That they are authorized to
- No. 5 may also be a disadvantage distribute dividends or allotments as
surplus profits to its stockholders on
 A corporation is a person, therefore the basis of the shares held by each
protected by the due process clause of them.
and equal protection clause of the
Constitution  Section 4
CLASSIFICATION OF CORPORATIONS - Created by a special law, they have

their own character
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- They are not immune from suit  Open corporation

unless provided by the law of their
creation - openly admit investors
- Primarily governed by the law - example: stock exchange

creating them  Domestic/ Foreign
- Their subsidiaries are entirely
 Test
different or independent from that of
the other - Incorporation test
 Close corporation - If incorporated under the laws of the
Philippines it is a domestic
- There is no exemption it is absolute
corporation
 Public corporation
 ME Gray vs. CA
- Political or governmental purposes
- Parent or Holding/ subsidiaries and
- Those formed or organized for the affiliates
government or a portion of the State
- Affiliates- no majority vote
or any of its political subdivision and
which have for their purpose the SMC 12%
general good and welfare
 Private Corporation
HERSHEY CBP CBPl
- Immediate benefit, aim or 12%
advantage of private individuals 12%
- Those formed for some private Affiliate is subject to common control by the
purpose, benefit, aim or end 12 % owners
 De jure
- Distinction: public for governmental
purpose - cannot be attached by the state
even in a quo warranto proceeding
 Corporation Sole
 De facto
- Exemption to the rule because it is
composed only of one person - exists by virtue of colorable
compliance
- An incorporator may also be a
juridical person - Attached directly only by the state in
a quo warranto proceeding
 Close corporation
 Corporation by estoppel
- There is exclusivity of shares of
stock - So defectively formed, but still
considered corporation, but only in
- Section 96-105 relation to those who cannot deny
- Restrictions to transfer shares their existence section 20 and 21
- Only those indicated can own FORMATION AND ORGANIZATION

shares  3 stages
- Article must provide that there will 1. Creation
be no public offering
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2. Re-organization or quasi- - If confusingly similar it will not be

reorganization allowed to be registered
3. Dissolution/winding-up - Verification slip from the records

officer
 Purpose clause
Section 19. Commencement
- Defining the scope of authority of
of corporate existence. - A private
the corporate enterprise pr corporation formed or organized
undertaking. Both confirmed and under this Code commences to
limited have corporate existence and
juridical personality and is deemed
 4 limitations of purpose clause incorporated from the date the
Securities and Exchange
1. Lawful Commission issues a certificate of
incorporation under its official seal;
2. Specific or stated concisely and thereupon the incorporators,
stockholders/members and their
3. More than one, the primary and successors shall constitute a body
secondary must be specified politic and corporate under the
name stated in the articles of
4. Lawfully combined incorporation for the period of time
mentioned therein, unless said
- Provision that states, cannot be
period is extended or the
issued less than par, exception is corporation is sooner dissolved in
treasury shares because it can be accordance with law. (n)
issued less than par
- Words corporation or inc. either in
 A corporation commences only upon full or abbreviated form must be
issuance of the certificate, prior included
thereto it has no being and cannot
transact business. Promoters Section 18. Corporate name.
cannot act for a projected - No corporate name may be
corporation allowed by the Securities and
Exchange Commission if the
 Metro Manila- paid up capital proposed name is identical or
requirement is 10 M deceptively or confusingly similar to
that of any existing corporation or to
 Non- stock- mere mention of the any other name already protected
operating capital by law or is patently deceptive,
confusing or contrary to existing
 Mention the authorized capital laws. When a change in the
corporate name is approved, the
 Restrictions Commission shall issue an
amended certificate of incorporation
- Mandatory in close under the amended name. (n)
- Not mandatory in ordinary  Doctrine of secondary meaning
 Non-stock
- If value is not more than 100,000 - A word or phrase originally

incapable of exclusive appropriation
 A corporation cannot use any other [usually generic] with reference to
name unless it has been amended an article in the market, because of
geographically or otherwise
 Section 19
descriptive, might nevertheless have
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been used so long and so - registration of chattel mortgage

exclusively by one producer with must be registered in the register of
reference to his article that, in that deeds where the principal office is
trade and to that branch of the located
purchasing public, the word or
phrase has become to mean that  Clavecilla Radio System vs. Antillon
the article was his product.
- action not upon a written contract
 Section 18
- city where the defendant resides
- Lyceum of the Philippines case, the  term of existence
additional geographical name does
not make it confusingly similar - corporate term required
- actual confusion is not necessary- - determining what point in time the

Philips case “it is enough that there juridical personality will cease to
is probable confusion” exist
 2 requisites must be proven - enter into contract only when it has

juridical personality
- that the complainant corporation
acquired a prior right over the use of - once it ceases to exist, it no longer
such corporate name has personality
- identical, deceptively or confusingly, - exist for another 3 years only for

patently deceptive purposes of liquidation
 principal office - Dissolution- it is automatic
- statement of principal office is  When should extension be made?

required
- General rule: Not earlier than 5
- city and municipality not only years
province must be specified
- Exception: unless there are
- principal office NOT operations justifiable reasons
office
 May it be extended after expiration?
- necessary because it will establish
the residence of corporations - Alhambra cigar vs. SEC once it
ceases to exist it has no vested
- venue of actions for or against the politic, exist only for a period of 3
corporations years only for liquidation and for that
purpose only
- venue of meetings
 Article 5 How many incorporators
- section 51 meetings may only be
should there be?
within the boundaries of the city
where the principal office - 5-15
- non-stock may be held anywhere in  May a corporation be an
the Philippines, if provided in its by- incorporator?
laws
- General rule: only natural persons
- where summons may be served

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- Exception: cooperatives and Corporators in a stock

corporation primarily organized to corporation are called stockholders
hold equities in rural banks or shareholders. Corporators in a
non-stock corporation are called
 How about minors? members. (4a)
- NO, because they must be of legal  May a corporation be a corporator?
age
- YES. There is nothing to prevent a
 May a corporation organized by corporation from being a
incorporators consisting solely of stockholder
foreigners
 Incorporator must subscribe to 1
- Yes, there is no nationality share
requirement only residence, as long
as majority are residents of the Phil  There are those that are exclusively
reserved to Filipinos
 Define incorporators <sec.5>
 An incorporator maybe a corporator
- Those person mentioned in the
as long as he is a stockholder
articles as originally forming the
corporation and who are signatories  section 6
of the articles of incorporation.
Section 6. Classification of
- Must be signatories to be shares. - The shares of stock of
incorporators stock corporations may be divided
into classes or series of shares, or
Section 5. Corporators and both, any of which classes or series
incorporators, stockholders and of shares may have such rights,
members. - Corporators are those privileges or restrictions as may be
who compose a corporation, stated in the articles of
whether as stockholders or as incorporation: Provided, That no
members. Incorporators are those share may be deprived of voting
stockholders or members mentioned rights except those classified and
in the articles of incorporation as issued as "preferred" or
originally forming and composing "redeemable" shares, unless
the corporation and who are otherwise provided in this Code:
signatories thereof. Provided, further, That there shall
always be a class or series of
Corporators in a stock shares which have complete voting
corporation are called stockholders rights. Any or all of the shares or
or shareholders. Corporators in a series of shares may have a par
non-stock corporation are called value or have no par value as may
members. (4a) be provided for in the articles of
incorporation: Provided, however,
 Define corporators <sec.5> That banks, trust companies,
insurance companies, public
- All persons who compose the utilities, and building and loan
corporation at any given time and associations shall not be permitted
need not be among those who to issue no-par value shares of
stock.
execute the articles of incorporation
at the start of its formation and Preferred shares of stock
organization. issued by any corporation may be
given preference in the distribution
- Originally or subsequently of the assets of the corporation in
case of liquidation and in the
- Section 5 provides:
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distribution of dividends, or such 3. Sale, lease, exchange, mortgage,

other preferences as may be stated pledge or other disposition of all or
in the articles of incorporation which substantially all of the corporate
are not violative of the provisions of property;
this Code: Provided, That preferred
shares of stock may be issued only 4. Incurring, creating or increasing
with a stated par value. The board of bonded indebtedness;
directors, where authorized in the
articles of incorporation, may fix the 5. Increase or decrease of capital
terms and conditions of preferred stock;
shares of stock or any series
thereof: Provided, That such terms 6. Merger or consolidation of the
and conditions shall be effective corporation with another corporation
upon the filing of a certificate thereof or other corporations;
with the Securities and Exchange
Commission. 7. Investment of corporate funds in
another corporation or business in
Shares of capital stock accordance with this Code; and
issued without par value shall be
deemed fully paid and non- 8. Dissolution of the corporation.
assessable and the holder of such
shares shall not be liable to the Except as provided in the
corporation or to its creditors in immediately preceding paragraph,
respect thereto: Provided; That the vote necessary to approve a
shares without par value may not be particular corporate act as provided
issued for a consideration less than in this Code shall be deemed to
the value of five (P5.00) pesos per refer only to stocks with voting
share: Provided, further, That the rights. (5a)
entire consideration received by the
corporation for its no-par value  How many directors should there
shares shall be treated as capital be?
and shall not be available for
distribution as dividends. - General rule: Not less than 5 not
more than 15
A corporation may,
furthermore, classify its shares for - Exceptions:
the purpose of insuring compliance
with constitutional or legal 1. Educational corporations registered
requirements. as non stock corporation whose
number of trustees, though not less
Except as otherwise provided
than five and not more than [15]
in the articles of incorporation and
stated in the certificate of stock, should be divisible by five [5],
each share shall be equal in all meaning they must have either five,
respects to every other share. ten, or fifteen trustees and no other;
Where the articles of 2. In close corporations where all the

incorporation provide for non-voting stockholders are considered as
shares in the cases allowed by this members of the board of directors
Code, the holders of such shares thereby effectively allowing twenty
shall nevertheless be entitled to vote
members in the board.
on the following matters:
3. The by-laws of a corporation may
1. Amendment of the articles of
provide for additional qualifications
incorporation;
and disqualifications of its members
2. Adoption and amendment of by- of the board of directors or trustees.
laws; However it may not do away with

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the minimum disqualifications lay or participation in the capital stock of

down by the Code. the corporation.
 Qualifications of the governing  Disqualifications <sec.27>

board
- The disqualifications provided for is
- Requires mere residency <sec. 23> absolute and may not be done away
with. Corporate by-laws may,
Section 23. The board of however, provide for additional
directors or trustees. - Unless qualifications and disqualifications.
otherwise provided in this Code, the
corporate powers of all corporations
Section 27. Disqualification
formed under this Code shall be
of directors, trustees or officers. - No
exercised, all business conducted
person convicted by final judgment
and all property of such corporations
of an offense punishable by
controlled and held by the board of
imprisonment for a period exceeding
directors or trustees to be elected
six (6) years, or a violation of this
from among the holders of stocks,
Code committed within five (5) years
or where there is no stock, from
prior to the date of his election or
among the members of the
appointment, shall qualify as a
corporation, who shall hold office for
director, trustee or officer of any
one (1) year until their successors
corporation. (n)
are elected and qualified. (28a)
 Section 27 and 23 minimum
Every director must own at
least one (1) share of the capital disqualifications and qualifications
stock of the corporation of which he
is a director, which share shall stand  Lee vs. CA
in his name on the books of the
corporation. Any director who - By laws may provide for additional
ceases to be the owner of at least
 Gov’t vs. El hogar Filipino,
one (1) share of the capital stock of
the corporation of which he is a Gokongwei vs. SMC
director shall thereby cease to be a
director. Trustees of non-stock Capital structure
corporations must be members
Foundation- minimum paid-up capital 3M
thereof. A majority of the directors or
trustees of all corporations Authorized capital 1 M No. of
organized under this Code must be
shares 1M shares par value
residents of the Philippines.
1.00
 May a domestic corporation have a
Amount of shares subscribed
governing board consisting solely of
foreigners? 50 K A
- YES, section 23 majority of them 50 K B

must be residents of the Philippines,
C 250K
no nationality requirement
D
 Anti-dummy act <sec.2-A>
E
- If the business undertaking or
activity is only partially nationalized, PAID UP =62,500
aliens can be elected as such
directors, [unless the law provides Corporation cannot exceed more than 1 M
otherwise] but their number shall it is the maximum amount it cannot issue
only be in proportion to their equity more unless amended
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Maximum shares it can issue is 1M shares  Shares of stock

unless amended
 Purpose of classification
 How much shares should be
subscribed? - To specify and define the rights and
privileges of the stockholders;
- Must be at least 25% of the
authorized capital stock - For regulation and control of the
issuance of sale of corporate
 Paid- up must be at least 25%- securities for the protection of
minimum purchasers and stockholders.
 Section 30 - As a management control device.
- Total subscription compliance with - To comply with statutory

minimum 25% total requirements particularly those
which provide for certain limitations
- Any combination would comply with on foreign ownership and shares
the minimum required by section 30 like overseas employment agencies
requiring to own at least 75% of the
Section 30. Compensation of
shares of stock thereof.
directors. - In the absence of any
provision in the by-laws fixing their - To better insure return on
compensation, the directors shall
investment which can be affected
not receive any compensation, as
such directors, except for through the issuance of redeemable
reasonable per diems: Provided, shares or preferred shares, i.e.,
however, That any such granting the holders thereof,
compensation other than per diems preference as to dividends and/or
may be granted to directors by the distribution of assets in case of
vote of the stockholders
liquidation; and,
representing at least a majority of
the outstanding capital stock at a - For flexibility in price, particularly, no
regular or special stockholders'
par shares may be issued or sold
meeting. In no case shall the total
yearly compensation of directors, as from time to time at different price
such directors, exceed ten (10%) depending on the net worth of the
percent of the net income before company since they do not purport
income tax of the corporation during to represent an actual of fixed value.
the preceding year. (n)
 Section 6
 Minimum for a domestic
corporation? - Each shall be equal in all respects
to every other share
- In no case shall the paid- up capital
be less than 5k  Preferred shares
 Is there a minimum authorized - Specific preference

capital imposed by the code?
- Dividends or during liquidation
- If there is minimum paid-up logically
 No par
there should also be a minimum
capital =5000 - Can sell it with the network of the
corporation
 Minimum paid-up capital for a
financing company metro manila 10  Distinction between the subscribed
M if located in MM and outstanding stocks?
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- Section 137 shares subject only to the limitations

imposed therein which are:
Section 137. Outstanding
capital stock defined. - The term a. They can be issued only with sated
"outstanding capital stock", as used par value; and,
in this Code, means the total shares
of stock issued under binding b. The preferences must be stated in
subscription agreements to the articles of incorporation and in
subscribers or stockholders, the certificate of stock, otherwise,
whether or not fully or partially paid, each share shall be, in all respect,
except treasury shares. (n)
equal to every other share.
- Voting and dividend rights, it refers  Participating
to the outstanding capital stocks
- Must be stated because the
- Only outstanding stocks are allowed presumption is that it is participating
to vote and receive dividends
 Cumulative
- Actually the same
- Irrespective of whether or not they
 Treasury shares
where earned
- are also subscribed shares  Preferred
- while they remain in the treasury, no
- May be denied
voting and dividend rights
- Unless denied they are still entitled
- may be reissued by the corporation
 What if hindi i-declare kahit na may
- once reissued they become
dividends rights for the previous
outstanding stocks again
years? May they be denied dividend
 common shares rights because they are non holders
of non-cumulative? NOTE: YOU
- carry the right to vote CANNOT COMPEL THE
CORPORATION TO DECLARE
 preferred shares
DIVIDENDS UNLESS IT EXCEEDS
- grants the holder preference 100 % PAID UP CAPITAL SEC. 43
- preference as to dividends Section 43. Power to declare

dividends. - The board of directors
- preference as to distribution of the of a stock corporation may declare
remaining assets upon dissolution dividends out of the unrestricted
or retained earnings which shall be
payable in cash, in property, or in
- both stock to all stockholders on the
basis of outstanding stock held by
- YOU MUST STATE THE them: Provided, That any cash
PREFERENCE BECAUSE IF NOT dividends due on delinquent stock
THEY ARE PRESUMED TO BE shall first be applied to the unpaid
balance on the subscription plus
EQUAL
costs and expenses, while stock
- It may include such other dividends shall be withheld from the
delinquent stockholder until his
preferences not inconsistent with
unpaid subscription is fully paid:
the Code. This is so because Provided, further, That no stock
Section 6 of the said law allows a dividend shall be issued without the
stock corporation to issue preferred approval of stockholders
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representing not less than two-thirds - once fully paid no longer liable
(2/3) of the outstanding capital stock
at a regular or special meeting duly  Corporations cannot use its capitals
called for the purpose. (16a) in declaring dividends; not all can
issue no par value section 6
Stock corporations are
prohibited from retaining surplus  Voting
profits in excess of one hundred
(100%) percent of their paid-in - entitled to vote at any motion
capital stock, except: (1) when brought up in writing
justified by definite corporate
expansion projects or programs  Non-voting
approved by the board of directors;
or (2) when the corporation is - not entitled to vote
prohibited under any loan
agreement with any financial  What types of shares may be
institution or creditor, whether local denied of the right to vote?
or foreign, from declaring dividends
without its/his consent, and such - Preferred and redeemable shares
consent has not yet been secured;
or (3) when it can be clearly shown  Is it correct to state that common
that such retention is necessary shares can never be denied the
under special circumstances right to vote?
obtaining in the corporation, such as
when there is need for special - Only preferred and redeemable
reserve for probable contingencies.
shares are denied unless provided
(n)
in this code
- It depends because there are three
- PWEDENG MA-DENY YUNG
types of non-cumulative preferred
COMMON SHARES, KASI YUNG
shares
FOUNDER’S SHARES MERON
- Discretionary dividend type SILANG EXCLUSIVE RIGHTS NA
SILA LANG ANG MERON, SO
- Mandatory if earned PWEDE SILANG BUMOTO WITH
REGARDS TO SOMETHING NA
- Earned cumulative or dividend credit
HINDI NA SAKOP NG COMMON
type
SHARE RIGHTS
 Compare cumulative share from
- Example: founders shares- may be
non-cumulative, earned cumulative
given certain rights and privileges
or dividend credit type
- Even common shares may be
- Cumulative share –whether or not
denied the right to vote of founders’
earned
shares issued <sec.7>
- Non-cumulative earned cumulative
or dividend credit type- only if Section 7. Founders' shares.
- Founders' shares classified as
earned such in the articles of incorporation
may be given certain rights and
 Par
privileges not enjoyed by the owners
- stated par value; shall not be issued of other stocks, provided that where
the exclusive right to vote and be
less than par voted for in the election of directors
is granted, it must be for a limited
 No par
period not to exceed five (5) years
subject to the approval of the
- without stated par value
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Commission. The five-year period “Although authorities may

shall commence from the date of the differ on the exact legal and
aforesaid approval by the Securities accounting status of so-called
and Exchange Commission. (n)
treasury shares, they are more or
 Do you include non-voting shares in less in agreement that treasury
shares are stocks issued and fully
passing a valid corporate act?
paid for and reacquired by the
- Even non-voting shares are entitled corporation either by purchase,
to vote under section 6 donation, forfeiture or other means.
Treasury shares are therefore
 Redeemable shares issued shares but being in the
treasury they do not have the status
- Discretionary/optional
of outstanding shares.
- Obligatory or mandatory Consequently, although a treasury
share, not having been retired by
 Generally a corporation can the corporation re-acquiring it, may
reacquire its own shares if it has be re-issued or sold again, such
unrestricted retained earnings shares, as long as it is held by the
corporation as a treasury share,
 Exception: redeemable shares may
participates neither in dividends,
be reacquired irrespective of
because dividends cannot be
retained earnings
declared by the corporation to itself,
 Treasury shares nor in meetings of the corporation
as voting stock, for otherwise equal
- They are treasury while in the distribution of voting powers among
treasury account of the corporation stockholders will be effectively lost
and the directors will be able to
 May they be reissued by the
perpetrate their control of the
corporation?
corporation, though it still represents
- YES a paid for interest in the property of
the corporation. The foregoing
 If they are reissued will they be essential features of a treasury
denied the right to vote? stocks are lacking in the questioned
shares.
- Once reissued they shall become
outstanding stocks again and In this case, and under the
purchasers shall be entitled to all terms of the trust agreement, the
the rights and privileges as the other shares of stock of Reese
holders have participated in dividends which the
trustee received and the said shares
 Section 57 treasury shares have no
were voted upon by the trustee in all
voting and dividend rights. Why not? corporation meetings. They were
not, therefore, treasury shares.”
Section 57. Voting right for
treasury shares. - Treasury shares  When the law speaks of outstanding
shall have no voting right as long as
rights it does not include treasury
such shares remain in the Treasury.
(n) shares
 Treasury shares may be reissued

- Answer: commissioner vs. manning
page 62 first par. - They are actually assets of the
corporation
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- Once re-issued they become  May the SEC refuse or reject

outstanding stocks again registration?
- The corporation may cancel them; in - <Section 17>

effect there will be a reduction in the
outstanding capital stocks Section 17. Grounds when
articles of incorporation or
- The code does not require ordinary amendment may be rejected or
corporations to provide for disapproved. - The Securities and
restrictions, but it does not likewise Exchange Commission may reject
prohibit restrictions the articles of incorporation or
disapprove any amendment thereto
- Example: right of first refusal if the same is not in compliance with
the requirements of this Code:
- The restriction must be contained in Provided, That the Commission
the articles of incorporation shall give the incorporators a
reasonable time within which to
- If provided in by-laws but not in the correct or modify the objectionable
articles of incorporation then it will portions of the articles or
amendment. The following are
not be binding
grounds for such rejection or
- Restrictions and preferences are disapproval:
mandatorily required in close 1. That the articles of incorporation
corporations or any amendment thereto is not
substantially in accordance with the
- If it does not provide restrictions it is form prescribed herein;
not a close corporation
2. That the purpose or purposes of
- Specified persons- close the corporation are patently
corporations unconstitutional, illegal, immoral, or
contrary to government rules and
- If not one of those specified you are regulations;
not included because there is
exclusivity in close corporations 3. That the Treasurer's Affidavit
concerning the amount of capital
- Should also be in the by-laws not stock subscribed and/or paid is
only in the articles of incorporation false;
 No transfer clause 4. That the percentage of ownership

of the capital stock to be owned by
 Execution clause citizens of the Philippines has not
been complied with as required by
 Acknowledgment existing laws or the Constitution.
 Treasurer affidavit part of the No articles of incorporation or

articles of incorporation amendment to articles of
incorporation of banks, banking and
 Section 23-27 minimum quasi-banking institutions, building
qualifications, but there may be and loan associations, trust
additional companies and other financial
intermediaries, insurance
 Grounds for disapproval companies, public utilities,
educational institutions, and other
- Only substantial and not strict is corporations governed by special
required laws shall be accepted or approved
by the Commission unless
accompanied by a favorable
14
recommendation of the appropriate From and after the filing with

government agency to the effect that the Securities and Exchange
such articles or amendment is in Commission of the said articles of
accordance with law. (n) incorporation, verified by affidavit or
affirmation, and accompanied by the
- But the grounds in section 17 are documents mentioned in the
not exclusive preceding paragraph, such chief
archbishop, bishop, priest, minister,
 When will the corporation rabbi or presiding elder shall
commence to exist? become a corporation sole and all
temporalities, estate and properties
- Section 19 of the religious denomination, sect
or church theretofore administered
Section 19. Commencement or managed by him as such chief
of corporate existence. - A private archbishop, bishop, priest, minister,
corporation formed or organized rabbi or presiding elder shall be held
under this Code commences to in trust by him as a corporation sole,
have corporate existence and for the use, purpose, behalf and
juridical personality and is deemed sole benefit of his religious
incorporated from the date the denomination, sect or church,
Securities and Exchange including hospitals, schools,
Commission issues a certificate of colleges, orphan asylums,
incorporation under its official seal; parsonages and cemeteries thereof.
and thereupon the incorporators, (n)
stockholders/members and their
successors shall constitute a body - CORPORATION SOLE- upon filing
politic and corporate under the of the verified articles of
name stated in the articles of incorporation, once filed it is vested
incorporation for the period of time with a judicial capacity
mentioned therein, unless said
period is extended or the  General rule section 19
corporation is sooner dissolved in
accordance with law. (n) - Vested with judicial capacity upon
issuance of the certificate by the
 A corporation de jure can come into SEC
existence only upon the issuance of
the certificate of registration by the o However it is not accurate
SEC? TRUE OR FALSE? according to atty. Ladia
because there are those that
- TRUE can issue for example
cooperatives- BUREAU OF
- EXCEPTION: CORPORATION
COOPERATIVES which
SOLE <sec. 112>
register, home insurance
Section 112. Submission of guaranty corporation- HOME
the articles of incorporation. - The OWNERS
articles of incorporation must be
verified, before filing, by affidavit or  Cagayan Fishing vs. Sandika
affirmation of the chief archbishop,
bishop, priest, minister, rabbi or - Corporations are created by law
presiding elder, as the case may be,
and accompanied by a copy of the - Commence to exist upon issuance
commission, certificate of election or by the CONCERNED government
letter of appointment of such chief corporation or agency
rabbi or presiding elder, duly - Prior there to it has no being
certified to be correct by any notary
public.
15
- The transfer of the property was not because the executive order is
valid, it likewise did not have the unconditional
right to transfer
- An unconditional act affords no
 De jure rights, creates no office
- Strict or substantial compliance - Legal contemplation it was never

passed at all
 De facto
- It can therefore be questioned by
- 4 requisites must go hand in hand any person
take out anyone of them there can
be no de facto corporation  If the certificate of registration has
not been issued, may a corporation
1. There is a valid statute under which de facto exist?
the corporation could have been
created as a de jure corporation. - NO!
2. An attempt, in good faith, to form a - Number 4 requirement, good faith in

corporation according to the claiming to be and doing business
requirements of law, which goes far as a corporation
enough to amount to a “colorable
compliance” with the law;  Hall vs. Piccio
3. A user of corporate powers, the - Missing link is good faith

transaction of business in some way - The certificate was not yet issued by
as if it were a corporation; and, the SEC, the members knew and
4. Good faith in claiming to be and therefore they were not acting in
doing business as a corporation. good faith, therefore anybody can
question its existence
 Are the rights and obligations
between officers and directors of a  Corporation by estoppel
de jure and de facto the same?
- So defectively formed so that they
- YES. Governed by the same law, are not to be considered a de jure or
rules and regulations de facto
 Only important in determining, is for - General partners- liable even

the purpose of applying the rules beyond his promise even his
with regards to the direct and personal properties are prone to
collateral attack attachment
 The existence of a de jure cannot be  Lozano vs. Delos Santos

questioned even by the State, either
- Founded on principle of equity
directly or indirectly
- Exercise corporate powers
 Existence of a de facto can be
questioned only by the State directly - Enters with business with 3rd parties
in a quo warranto proceeding only
- When there is no 3rd persons
 Municipality of Malabang vs. Benito involved and the problem arises
between there members, therefore
- What is the missing link so as to they themselves know that there is
consider it a de facto? A law, no corporation by estoppel

16
 Albert vs. University - No fraud in this case
- 1965 case, no section 21 yet - How come Kahn was made liable?
- Applied where the rules governing - Doctrine of incorporation

agency
- Applies only if that person is trying
- A person purporting in behalf of a to escape from a contract where he
non existing corporation is benefited
- Section 21, you arrive at the same - In this case petitioner is not trying to
decision escape liability, but rather the one
claiming from the contract
 Chiang Kai Siek vs. CA
 Would this apply to foreign
- SC based its decision from the corporation?
provision of the education act
- YES, it may apply
- It cannot immune itself by virtue of
its non compliance with the law - Georg Grotjahn vs. Isnami
 Assuming there was no law?  A foreign corporation cannot gain

access to our courts unless they
- YES, it may still be sued as a school attain a license to engage in
for the past 32 years the school business in the Philippines but
represented itself as possessed of applying corporation by estoppels,
juridical personality the court allowed
 General rule: a 3rd party transacting  Municipality of Malabang case
with a non existent corporation shall
be estopped to deny - No law, hence may be questioned
by any person
 Asia banking vs. standard products
- An unconstitutional act is not a law, t
- General rule: absence of fraud a confers no rights, it imposes no
person who has dealt with a non duties, it affords no protections, it
incorporated corporation shall be crates o office, it is in legal
stopped to deny from actions in contemplation, as inoperative as
which it had benefited though it had never been passes
- Exemptions: when there is fraud the  Hall vs. Piccio

general rule shall not apply
- No good faith
 Salvatierra vs. Garlitos
 Corporation by estoppel
- As a general rule a person who has
contracted it a corporation lacking - Admission, conduct or agreement
personality
- Will not apply among members
- Doctrine is not applicable where themselves there must be a 3rd party
fraud takes part in the transaction
- Cannot escape when benefited
 Another exemption
- General rule: you deal with a
 International express travel and corporation, as to estop it
tours vs. CA

17
- Exceptions: 1. fraudulently - Corporation exist separately and

misrepresents the third person may independently from the stockholders
file an action directly to those
members, 2. 3rd party will not be - Stockholders cannot bring an action,
estopped if he is not trying to to bring back the properties of a
escape liability corporation
 2 possible remedies - Corporation has no interest in the

individual properties of its members
- Chiang kai siek case
 Sulo ng Bayan vs. Araneta
- Albert case
- Corporation cannot bring an action
 What would be the effect if the for the recovery of the properties of
corporation failed to commence its members
transaction?
 Caram vs. CA
- Automatic
- Stockholders cannot be held liable
 Operated but becomes for the legitimate obligations of the
subsequently inoperative for 5 years corporation, they exist separately
only a ground for suspension, and independently from one another
proper notice and hearing
 Cruz vs. Dalisay
 Commencement
- Final judgment against a corporation
- Example realty company cannot be enforced against
stockholders
CORPORATE CHARTER AND ITS
AMENDMENTS  Rustan Pulp vs. CA
 What do you understand by the - Corporation exist separately and
word charter? Is it the same as independently
articles of incorporation?
- Corporation are juridical entities,
- Corporate charter is broader they exist only in legal
contemplation, can act only through
 Franchise
its authorized representatives
- Primary power granted by the state
 Soriano vs. CA
to be and act as a corporation
- They are not personally liable
- Secondary franchise is the right or
privilege that the corporation may - They where signed for and in behalf
exercise of the corporation
 You cannot issue investment  Palay inc. vs. Clave
contracts without a secondary
franchise, kailangan primary muna - Liabilities incurred by the
hindi pwede mauna secondary kasi corporation cannot be enforced
sa section 19 it does not exist until against stockholders, etc., even if
issued with a certificate of stockholders, etc. happens to own a
registration or incorporation substantial interest in the
corporation, mere ownership does
 Corporate entity not disregard the corporate entity
theory
18
 Corporate entity for legal or - Fely trans and the other corporation
legitimate purposes only is one and the same
 Two or more corporations, one of  Marvel bldg. vs. David

them will be treated as a mere alter-
ego - There must be facts before the court
will be justified in piercing the veil of
 You cannot pierce the veil of corporate fiction
corporate fiction when there are no
- Corporation was a mere extension
facts attendant in the case
of the personality of the person
 Corporate Entity Theory
 Yutivo and sons vs. Court of Tax
- The corporation is possessed with a Appeals
personality separate and distinct
- What where the facts or
from the individual stockholders or
circumstances arrived by the court
members and is not affected by the
here?
personal rights, obligations or
transactions of the latter - Subscribed capital where all
 Instrumentality rule advanced by Yutivo, the board
where the same as Yutivo
- Where one corporation is so
 Commissioner of Internal Revenue
organized and controlled and its
affairs are conducted so that it is, in vs. Norton and Harrison
fact, a mere instrumentality or - Court applied the general rule
adjunct of the other, the fiction of the
corporate entity of the - Mere substantial ownership does
“instrumentality” may be not mean that it has a same
disregarded corporate entity
- Courts are concerned with reality  La Campana Coffee Factory, Inc. vs.
and not form KKM
- Mere ownership of all or - Two corporations managed by the

substantially all of the shares of same family, workers were made
stock of a corporation is not, in itself, interchangeably
insufficient ground for disregarding
the separate corporate personality.  Emilio Cano vs. CIR
And for the separate personality of
- Sued in there official capacity
the corporation to be disregarded,
the wrong doing must be clearly and - Reverse of Soriano vs. CA (signed
convincingly established in their official capacity)
- Fraud must be proven by clear and  Tesco vs. WCC

convincingly evidence amounting to
more than preponderance. It cannot - The two corporations where located
be justified by speculation and can in the same office
never be presumed. And only if it
 Claparols vs. CIR
sought to hold the stockholders
liable directly for corporate debt - Same as NAFLU and A.C. Ransom
 Palacio vs. Fely  Concept builders vs. NLRC
- Piercing the veil of corporate fiction
19
- Instrumentality rule. What is the - were located in the same floor

instrumentality rule? “where one
corporation is so organized and - “while the mere ownership of all or
controlled and its affairs are nearly all of the capital stock of a
conducted so that it is, in fact, a corporation does not necessary
mere instrumentality or adjunct of mean that it is a mere business
the other, the fiction of the corporate conduit of the stockholder, that
entity of the “instrumentality” may be conclusion is amply justified where it
disregarded.” is shown, as in the case before us,
that the operations of the
- Has no separate mind of its own. corporation were so merged with the
What is the degree of control? stockholders as to be practically
indistinguishable from them. To hold
1. Control, not mere majority or the latter liable for the corporation’s
complete stock control, but obligations is not to ignore the
complete domination, not only of corporation’s separate entity, but
finances but of policy and business merely to apple the established
practice in respect to the transaction principle that such entity cannot be
attacked so that the corporate entity invoked or used for purposes that
as to this transaction had at the time could not have been intended by the
no separate mind, will or existence law that created that separate
of its own. personality.”
2. Such control must have been used
 Tan boon bee vs. Jarencio
by the defendant to commit fraud or
wrong, to perpetuate the violation of - Why would a drug company need a
a statutory or other positive legal printing machine
duty or dishonest and unjust act in
contravention of plaintiff’s legal - The property must be in pursuance
rights; and, of a company business
3. The aforesaid control and breach of  Cease vs. CA

duty must proximately cause the
- Alter-ego or the extension of the
injury or unjust loss complained of.
person of forest ware does the court
- The absence of one of the elements pierced the veil of corporate fiction
prevents “piercing the corporate
- As to not deprive the holders of their
veil.” In applying the
successional rights
“instrumentality” or “alter ego”
doctrine, the courts are concerned - Mere ownership of all or
with reality and not form, with how substantially all is not a justification
the corporation operated and the of piercing the veil of corporate
individual defendant’s relationship to fiction
that operation.
 Fraud must be proven by clear and
 There must facts and circumstances convincing evidence cannot
before warrant piercing the veil of presume or speculate, there must
corporate fiction be facts and circumstances
 The control necessary does not  Fraud must be clear and convincing
mean stock ownership evidence more than preponderance
 MCConnel vs. CA  Remo Jr. vs. IAC

20
- The resolution was not entered to 1. In case any amendment to the

defraud anyone articles of incorporation has the
effect of changing or restricting the
 Del Rosario vs. National Labor rights of any stockholder or class of
Commission shares, or of authorizing
preferences in any respect superior
- The wrongdoing must be clearly to those of outstanding shares of
established any class, or of extending or
shortening the term of corporate
- There must be facts to support existence;
- Payment of claims cannot thus be 2. In case of sale, lease, exchange,

presumed transfer, mortgage, pledge or other
disposition of all or substantially all
 Indophil Textile Mill vs. CALICA of the corporate property and assets
as provided in the Code; and
- How do you distinguish this ruling to
La Campana, having the same 3. In case of merger or
consolidation. (n)
issues:
- La campana, one payroll, - Right granted only in specified

employees were made instances
interchangeable. Acrylic had its own Are non-voting shares included in
standards amending the articles of incorporation
 PNB vs. Ritratto Group 1 100/s
XYZ-----ABC
- Control test
2 100/s
- Not mere majority but rather
complete To
- Twin ace was only a subsequent 10 100/s
interested party
=1M/S what
- Assets and machineries would be the 2/3?
 Amendment of the articles of Section 6 last paragraph

incorporation
Voting shares are excluded except the
- Express power granted to a foregoing instances
corporation
1 1
 Section 16
2 2
- Appraisal right
3 3
- Section 81 to object on certain acts
4 4
and transactions
Section 81. Instances of 5 5

appraisal right. - Any stockholder of
a corporation shall have the right to 6 6
dissent and demand payment of the
fair value of his shares in the 1 & 2=absent
following instances: 1&2=absent but gave their written
assent
21
3 & 4= objected creating, or increasing of any

3&4=objected bonded indebtedness and of the
time and place of the stockholder's
5 & 6= approved the amendment meeting at which the proposed
5&6=approved increase or diminution of the capital
stock or the incurring or increasing
Would there be a valid amendment of any bonded indebtedness is to be
considered, must be addressed to
 Special amendments 37 & 38 each stockholder at his place of
shortening that would result to residence as shown on the books of
dissolution require prior approval by the corporation and deposited to the
addressee in the post office with
the SEC
postage prepaid, or served
personally.
Section 37. Power to extend
or shorten corporate term. - A A certificate in duplicate must
private corporation may extend or be signed by a majority of the
shorten its term as stated in the directors of the corporation and
articles of incorporation when countersigned by the chairman and
approved by a majority vote of the the secretary of the stockholders'
board of directors or trustees and meeting, setting forth:
ratified at a meeting by the
stockholders representing at least (1) That the requirements of this
two-thirds (2/3) of the outstanding section have been complied with;
capital stock or by at least two-thirds
(2/3) of the members in case of non- (2) The amount of the increase or
stock corporations. Written notice of
diminution of the capital stock;
the proposed action and of the time
and place of the meeting shall be
(3) If an increase of the capital
addressed to each stockholder or
stock, the amount of capital stock or
member at his place of residence as
number of shares of no-par stock
shown on the books of the
thereof actually subscribed, the
corporation and deposited to the
names, nationalities and residences
addressee in the post office with
of the persons subscribing, the
postage prepaid, or served
amount of capital stock or number of
personally: Provided, That in case of
no-par stock subscribed by each,
extension of corporate term, any
and the amount paid by each on his
dissenting stockholder may exercise
subscription in cash or property, or
his appraisal right under the
the amount of capital stock or
conditions provided in this code. (n)
number of shares of no-par stock
allotted to each stock-holder if such
Section 38. Power to increase is for the purpose of
increase or decrease capital stock; making effective stock dividend
incur, create or increase bonded therefor authorized;
indebtedness. - No corporation shall
increase or decrease its capital
(4) Any bonded indebtedness to be
stock or incur, create or increase
incurred, created or increased;
any bonded indebtedness unless
approved by a majority vote of the
(5) The actual indebtedness of the
board of directors and, at a
corporation on the day of the
stockholder's meeting duly called for
meeting;
the purpose, two-thirds (2/3) of the
outstanding capital stock shall favor
(6) The amount of stock represented
the increase or diminution of the
at the meeting; and
capital stock, or the incurring,
creating or increasing of any bonded
(7) The vote authorizing the
indebtedness. Written notice of the
increase or diminution of the capital
proposed increase or diminution of
stock, or the incurring, creating or
the capital stock or of the incurring,
22
increasing of any bonded members in a meeting duly called

indebtedness. for the purpose.
Any increase or decrease in Bonds issued by a

the capital stock or the incurring, corporation shall be registered with
creating or increasing of any bonded the Securities and Exchange
indebtedness shall require prior Commission, which shall have the
approval of the Securities and authority to determine the
Exchange Commission. sufficiency of the terms thereof.
(17a)
One of the duplicate
certificates shall be kept on file in  The vote must be cast at the
the office of the corporation and the meeting called for that purpose
other shall be filed with the
Securities and Exchange  Written assent would not suffice
Commission and attached to the
original articles of incorporation.  When do amendments become
From and after approval by the valid and effective?
Commission and the issuance by - Only upon the approval of the SEC
the Commission of its certificate of TRUE OR FALSE?
filing, the capital stock shall stand
increased or decreased and the - FALSE because it can be valid upon
incurring, creating or increasing of the date of filing if not acted upon
any bonded indebtedness
within 6 months without fault
authorized, as the certificate of filing
may declare: Provided, That the attributable to the corporation
Commission shall not accept for  Why is it retroactive?
filing any certificate of increase of
 What provision may be amended,
capital stock unless accompanied
by the sworn statement of the altered or repealed
treasurer of the corporation lawfully
holding office at the time of the filing  Can you change name, address for
of the certificate, showing that at example she married or changed
least twenty-five (25%) percent of address?
such increased capital stock has
been subscribed and that at least - NO. you cannot change that
twenty-five (25%) percent of the
amount subscribed has been paid  Fait accompli, are beyond the
either in actual cash to the powers or authority of the
corporation or that there has been corporation to change, alter or
transferred to the corporation modify. These would include the
property the valuation of which is
following:
equal to twenty-five (25%) percent
of the subscription: Provided, - Names of the incorporators and
further, That no decrease of the
capital stock shall be approved by - The incorporating directors or
the Commission if its effect shall trustees,
prejudice the rights of corporate
creditors. - The name of the treasurer originally
or first elected by the subscribers or
Non-stock corporations may
incur or create bonded members to act as such until his
indebtedness, or increase the same, successor has been duly elected
with the approval by a majority vote and qualified,
of the board of trustees and of at
least two-thirds (2/3) of the - The number of shares and amount
originally subscribed and paid out of
23
the original authorized capital stock Any corporation may be

of the corporation, incorporated as a close corporation,
except mining or oil companies,
- The date and place of execution of stock exchanges, banks, insurance
the articles of incorporation, companies, public utilities,
educational institutions and
- The signatories and corporations declared to be vested
acknowledgment thereof. with public interest in accordance
with the provisions of this Code.
- All other provisions or matters
stated or contained in the articles The provisions of this Title
are subject to amendment. shall primarily govern close
corporations: Provided, That the
 Founder’s or signatories hindi provisions of other Titles of this
Code shall apply suppletorily except
pwede palitan
insofar as this Title otherwise
 Names, nationalities- you cannot provides.
 Capital- right granted by law to all  Transfer clause, executor clause,

corporation acknowledgment, treasury affidavit-
NO
 Paid up capital- NO
 Philippine First Insurance case
 Restriction and transfer of shares in
ordinary stock corporations - Mere change in the name of a
corporation or by merely complying
- You can, but close corporation with the law is general amendment
cannot
- It does not change its personality. It
- Section 96, otherwise it will not be a is the same person in a different
close corporation name. the charter is the same
Section 96. Definition and  Amendment of a corporate term

applicability of Title. - A close
corporation, within the meaning of - Extending the same can never be
this Code, is one whose articles of made 7 years prior? TRUE or
incorporation provide that: (1) All the FALSE
corporation's issued stock of all
classes, exclusive of treasury - FALSE. It can be if there are
shares, shall be held of record by justifiable reasons for earlier
not more than a specified number of extension as may be determined by
persons, not exceeding twenty (20); the SEC
(2) all the issued stock of all classes
shall be subject to one or more  Can you extend the corporate term
specified restrictions on transfer
if it has already expired?
permitted by this Title; and (3) The
corporation shall not list in any stock - Once the term expires without an
exchange or make any public
amendment having happen it
offering of any of its stock of any
class. Notwithstanding the ceases to exist as a body politic. It is
foregoing, a corporation shall not be dissolved automatically on the day it
deemed a close corporation when at expires.
least two-thirds (2/3) of its voting
stock or voting rights is owned or  Alhambra cigar and PNB case
controlled by another corporation
which is not a close corporation
within the meaning of this Code.

24
 Instances when the SEC allowed  General rule

extension whose term has already
expired - Corporations must sit and act as a
body
- All of them involved are institutions
of learning, it was the case in order - Will be bound by corporate officers if
to avoid confusion that would arise they acted within the 5 classification
later on. page 150
BOARD OF DIRECTORS/TRUSTEES  Ramirez vs. Orientalist co.
 Section 23 - What was the position of Fernandez

in this case? TREASURER
Section 23. The board of
- Why did the court rule that actions
directors or trustees. - Unless
otherwise provided in this Code, the of Fernandez bound the corporation
corporate powers of all corporations when he is not even a board of
formed under this Code shall be director?
exercised, all business conducted
and all property of such corporations “if a man is found acting for a
controlled and held by the board of corporation with the external indicia
directors or trustees to be elected of authority, any person not having
from among the holders of stocks, notice of want of authority, may
or where there is no stock, from
usually rely upon those
among the members of the
corporation, who shall hold office for appearances; and if it be found that
one (1) year until their successors the directors had permitted the
are elected and qualified. (28a) agent to exercise that authority and
thereby held him out as a person
Every director must own at competent to bind the corporation,
least one (1) share of the capital or had acquiesced in a contract and
stock of the corporation of which he
retained the benefit supposed to
is a director, which share shall stand
in his name on the books of the have been conferred by it, the
corporation. Any director who corporation will be bound,
ceases to be the owner of at least notwithstanding the actual authority
one (1) share of the capital stock of may never have been granted.”
the corporation of which he is a
director shall thereby cease to be a - Contracts must be made by the
director. Trustees of non-stock director and not the stockholders
corporations must be members
thereof. A majority of the directors or - Actions of the stockholders in such
trustees of all corporations matters is only advisory and not in
organized under this Code must be any way binding in the corporation
residents of the Philippines.
 Barreto vs. La previsora Filipina
- Controlled by the board of directors
- Everything emanates from the board
- Authority are however restricted to
of directors
the day to day
- Stockholders action is merely
- Stockholders may have all the profit
advisory except their approval or
but will turn over the management to
vote is necessary to prove a valid
the governing board
corporate act
- But unless the law provides the
 Qualifications:
power may be delegated

25
- No citizenship requirement, at least 2– transferring there voting rights in favor

majority must be residents of VT
- Can have a governing board Other rights will accrue in favor of them,
consisting solely of foreigners but not the voting rights
- But we have to take into voting rights must be recorder in the books
consideration partly nationalized of the corporation that it is transferred
industries and other laws which
PNB-IFL- wholly owned subsidiary of PNB
prohibits or limits foreign ownership
PNB will assign to PNB-IFL nominal shares
- Anti-dummy act
and PNB-IFL now will be able to be
- Utilization development of natural nominated
resources 60% must be owned by
 Gen. Rule:
Filipino citizens, therefore they only
own 40%---10 members they can - Term of one year who will serve as
only have 4 seats, but not entirely such until there successors are
correct because the law may elected and qualified
provide otherwise; educational
institutions restricted to Filipinos, but  Exception:
there are exceptions when created
- Non-stock corporation can serve for
by religious and charitable
institutions. a term of 3 years
- By-laws may provide additional - Educational non-stock- term of the

qualifications and disqualifications governing board can be 5 years
- To qualify as a director he must own  May this term exceed one year?
at least 1 share - Yes, they may serve in a hold over
 Should the stockholder be the capacity until their successors have
equitable or beneficial owner in been duly elected and qualified
order to qualify as a director?  Detective and protective bureau vs.
- NO, it is not necessary, as long as Cloribel
you are listed in the books as owner
- In the by-laws, managing director
of one share
must be elected from among
 Lee vs. CA themselves
- As long as you are listed in the - Must be duly elected and qualified
books as owner of one share How are the directors elected?
- Under the old law he must be the 1-100T/S
beneficial owner and legal owner
thereof but in the new law it is not 2-100T/S
required as long as it stands in his
3-100T/S
name he is qualifies
to 10=1M/S
1 A-100t/S B (own in the trust of X) is B
qualified to be a director?  Do you include the vote of 1 & 2 to
have a quorum to have a valid
2
meeting?
3-10
26
- NO, quorum requirements is  Is it allowed in a non-stock

401,000 corporation?
Quorum requirement is 501k - Not generally available
Holders of non-voting shares are only - Section 89 unless the articles or by-
entitled to vote in last par. Of section 6 laws allow cumulative voting
1-200k Section 89. Right to vote. -

The right of the members of any
2-200k
class or classes to vote may be
3-200k limited, broadened or denied to the
extent specified in the articles of
4-100k incorporation or the by-laws. Unless
so limited, broadened or denied,
5-100k each member, regardless of class,
shall be entitled to one vote.
6-100k
Unless otherwise provided in
7-50k the articles of incorporation or the
by-laws, a member may vote by
8-40k proxy in accordance with the
provisions of this Code. (n)
9-5k
10-5k Voting by mail or other similar

means by members of non-stock
=1MS corporations may be authorized by
the by-laws of non-stock
1&2 is absent, 3&4 ayaw tumakbo and corporations with the approval of,
hindi nagvote 6-10, tumakbo and and under such conditions which
may be prescribed by, the Securities
ninominate nila yung sarili nila and cast all
and Exchange Commission.
their shares on themselves
 Who wins? Or who gets elected?

 Other corporate officers other than
- No vote requirement, the one who
the governing board section 25
gets the most number of votes gets
elected, section24.
Section 25. Corporate
 What is cumulative voting? officers, quorum. - Immediately after
their election, the directors of a
- Process of multiplying the number of corporation must formally organize
by the election of a president, who
shares to the number of director to
shall be a director, a treasurer who
be elected may or may not be a director, a
secretary who shall be a resident
- Matter of right granted to
and citizen of the Philippines, and
stockholders in a stock corporation such other officers as may be
provided for in the by-laws. Any two
1 to 5 has 200k/s and members of the (2) or more positions may be held
same family- majority 800k they have 4M concurrently by the same person,
votes they are guaranteed 4 seats except that no one shall act as
president and secretary or as
6 to 10 are not related- 1 seat 1M votes president and treasurer at the same
time.
 Cumulative to allow the minority to
have a rightful representation in the The directors or trustees and
board officers to be elected shall perform
27
the duties enjoined on them by law 5

and the by-laws of the corporation.
Unless the articles of incorporation  Is it absolute?
or the by-laws provide for a greater
majority, a majority of the number of - NO, except in the election because
directors or trustees as fixed in the it requires the majority of all the
articles of incorporation shall members of the board
constitute a quorum for the
transaction of corporate business, - If by-laws or articles provide a
and every decision of at least a higher voting requirement
majority of the directors or trustees
present at a meeting at which there  Artificial beings must act through its
is a quorum shall be valid as a members and act as a body to have
corporate act, except for the election
a valid corporate act
of officers which shall require the
vote of a majority of all the members  Exception:
of the board.
- Delegation
Directors or trustees cannot
attend or vote by proxy at board - Expressly conferred
meetings. (33a)
- Where the officer or agent is clothed
 Is the president required to be a with actual or apparent authority
stockholder. YES
- Otherwise it will not bind the
 The chairman may be another corporation
person
 Yao ka sin trading case “already
 The president may also be another asked in the bar”
person
- Only bind the corporation to the
 Prohibited is president to be extent of authority confined to him or
secretary or treasurer at the same virtue of customs, usage and policy
time
- Must pass first the controller and
 Board of director must sit and act as counsel
a body to arrive at a corporate act
 What if the notice requirement is not
 What would constitute a quorum if 5 complied with?
then 3 must be present
 Lopez realty vs. Fotencha
 May the vote of 2 members past a 5
man governing board pass a valid - Notice requirement must be
corporate act? complied with hence it should have
been with force and effect, but
- YES. Voting requirement is majority according to the SC, it may be
of directors present at which there ratified expressly if there is a
where a quorum subsequent meeting called for that
purpose
1 1 and 2 present=valid
voting requirement - Impliedly through acts
2 1 and 2 voted yes - Asuncion was aware of the

corporations obligation
3 3 voted no
- There was implied ratification or she
4
was estopped
28
 Pua casim vs. Neumark and Co. corporation may be presumed from
acts of recognition in other
- Considered 3 circumstanced instances where the power was in
fact exercised.” “xx Thus, when, in
- Check which was the proceed of the
the usual course of business of a
loan which was endorsed and
corporation, an officer has been
deposit in the corporate account
allowed in his official capacity to
- Neumark as president and also manage its affairs, his authority to
stockholder represent the corporation may be
implied from the manner in which he
 Yu chuck vs. Kong Li Po has been permitted by the directors
to manage its business.”
- General manager usually has the
power to hire but the SC said the In the case at bar, the
contract must be reasonable practice of the corporation has been
to allow its general manager to
- The contract here is so onerous that
negotiate and execute contracts in
it would throw the corporation into
its copra trading activities for and in
insolvency
NACOCO’s behalf without prior
 Francisco vs. GSIS board approval. If the by-laws were
to be literally followed, the board
- GSIS cannot evade the binding should give its stamp of prior
effect of the telegram approval on all corporate contracts.
But that Board itself, by its acts and
- Only 15 months later that the
through acquiescence, practically
corporation said there was a
laid aside the by-law requirement of
mistake
prior approval.
- The silence coupled with the
- Kalaw signed alone and said
unconditional acceptance of the
contracts were submitted to the
other subsequent remittances is
board of directors after its
binding to the corporation
consummation and not before
 Board of liquidators vs. Kalaw
 Buenaseda vs. Bowen
“Settled jurisprudence has it
- Express ratification is made through
that where similar acts have been
a formal board action
approved by the directors as a
matter of general practice, custom - Implied ratification is through:
and policy, the general manager silence or acquiescence,
may bind the company without acceptance benefits and lastly
formal authorization of the board of recognition or adoption
directors. In varying language,
existence of such authority is  An unauthorized act may
established, by proof of the course nevertheless be binding either by
of business, the usages and express or implied by estoppels
practices of the company and by the
 By virtue of silence the board had
knowledge which the board of
impliedly accepted the act
directors has, or must be presumed
to have, of acts and doings of its  By recognition or adoption
subordinates in and about the affairs
of the corporation. So also, “xx  By virtue of payment of obligations
authority to act for and bind a arising therefore- Lopez realty
29
 May directors or trustees be  Who will fill up the vacancy created

disqualified to act as such? due to the ouster of a member of the
board of directors <section 29>
- YES, crime, etc. disqualifications in
book Section 29. Vacancies in the
office of director or trustee. - Any
- Possess or dispossess any of the vacancy occurring in the board of
qualifications or disqualifications , directors or trustees other than by
cease to hold at least one share removal by the stockholders or
members or by expiration of term,
 May directors be ousted from office? may be filled by the vote of at least
a majority of the remaining directors
- At least 2/3 of members or trustees, if still constituting a
representing outstanding capital quorum; otherwise, said vacancies
stock. Again notice requirement must be filled by the stockholders in
must be complied with a regular or special meeting called
for that purpose. A director or
1-200 1-5 same trustee so elected to fill a vacancy
family shall be elected only or the
unexpired term of his predecessor in
2-200 office.
3-200 Any directorship or

trusteeship to be filled by reason of
4-100 an increase in the number of
directors or trustees shall be filled
5-100 electing only by an election at a regular or at
a special meeting of stockholders or
6-100 6 to 10 members duly called for the
not related purpose, or in the same meeting
authorizing the increase of directors
7-50 or trustees if so stated in the notice
of the meeting. (n)
8-40
9-5  Other than by removal or expiration

of term they do not have the power
10-5
outstanding director  When will the vacancies be filled
up?
 Meetings called by the president or
the secretary ordered by the  Is notice required, to fill up
president vacancies due to removal?
 It depends if the removal is without  What if the vacancy is due to an

cause they cannot do so because increase, can it be filled up in the
removal without cause shall not same meeting where in the number
deprive the minority stockholders or is increased?
members of the right of
 Election due to removal-in the same
representative
meeting notice is not required
 If with cause they can even if it will
 Election due to increase in number-
prejudice the rights of the minority,
it must be so stated in the meeting
provided of course additional
requirements by-laws and articles of  Section 30
incorporation

30
Section 30. Compensation of - Compensation was granted without

directors. - In the absence of any by-laws authority
provision in the by-laws fixing their
compensation, the directors shall - Prohibition is not a sweeping rule
not receive any compensation, as
such directors, except for - Members of the board may receive
reasonable per diems: Provided, when they receive in a special
however, That any such capacity
compensation other than per diems
may be granted to directors by the - Mere act of the board will suffice
representing at least a majority of  Is the 10% ceiling applicable to
the outstanding capital stock at a other officers?
regular or special stockholders'
meeting. In no case shall the total - NO. the phrase “as such director”
yearly compensation of directors, as was used twice <Section 30>
such directors, exceed ten (10%)
percent of the net income before - The SC ruled that the 10% ceiling
income tax of the corporation during will not likewise apply if they acted
the preceding year. (n)
in a capacity other than “as such
- Generally not entitled to receive directors”
compensation because they render  Government vs. El Hogar
it gratuitously
- Judicial intervention is not proper
- Unless the by-laws allows
- The appropriates remedy is to those
- Stockholders may also grant
who can make or unmake the by-
pursuant to a majority vote
laws
- Must not exceed net income of 10%
 Liability of corporate officers
tax of the preceding year
- Obligations incurred by those acting
- Acting in special capacity
for and in behalf of the corporations
- In, sum directors may receive are not there’s BUT there are
compensation when exceptions even if they are acting
for and in behalf of the corporation
1. there is a provision in the by-laws to
that effect  Tramat vs. CA
2. When the stockholders, by a - General rule was applied in the case

majority vote of the outstanding
capital stock grant the same; and, - Ong acted as officers and acted
within the scope of his authority
3. If the director renders extra-ordinary
or unsual service - Court laid down 4 instances when
even if acting within the scope of his
 Central cooperative exchange vs. authority he is held solidarily liable
Tibe
1. He assents (a) to a patently unlawful
- By-laws may allow, stockholders act of the corporation, or (b) for bad
may also allow such faith, or gross negligence in
directing its affairs, or (c) for conflict
 What do you understand by the of interest, resulting in damages to
phrase “as such directors” the corporation, its stockholders or
other persons;
 Western institute vs. Salas
31
2. He consents to the issuance of subject to judicial review.

watered stocks or who, having Montelibano vs. Bacolod Murcia
knowledge thereof, does not Milling
forthwith file with the corporate
secretary his written objection - questions of policy and
thereto; management are left solely to the
board of directors
3. He agrees to hold himself personally
and solidarily liable with the - BOD, business manager of the
corporation; corporation and as long as they act
in good faith, its actuations are not
4. He is made, by a specific provision subject to judicial review
of law, to personally answer for his
corporate action. - They are not insurer of the property
of the company, they were
- Watered stocks- issued, fully paid guarantors that the enterprise
up when in fact they have not been undertaken by the corporation shall
fully paid or promised as such be successful
 Llamado vs. CA  Montelibano vs. Bacolod Murcia

Milling Co.
- The corporate entity theory cannot
be used as a defense to escape - Directors are not liable due to
liability in violation of B.P. 22 imprudence or honest error of
judgment
- Where the check is drawn by a
corporation the persons who signed - Duty of loyalty of corporate directors
the check shall be liable.
- 31,32,33,34
 Uichico vs. NLRC
- 31,32,33- specific instances when
- Labor case corporate directors and corporate officers may violate loyalty
officers are solidarily liable with the
- 32,33 self-dealing and interlocking
corporation for the termination of
director
employment of corporate employee
done with malice and bad faith  Corporate opportunity doctrine
 3 fold duty of directors - It places a director of a corporation
in the position of a fiduciary and
- obedient
prohibits him form seizing a
- diligent business opportunity and/or
developing it at the expense and
- loyal with the facilities of the corporation.
 Business judgment rule He cannot appropriate to himself a
business opportunity which in
- Questions of policy and fairness should belong to the
management are left solely to the corporation.
honest decision of the board of
 Last paragraph of section 31 and
directors and the courts are without
the provision of section 34 make
authority to substitute its judgment
reference to recovery of “forbidden
as against the former. The directors
profits”
are the business managers of the
corporation and as long as they act
in good faith, its actuations are not
32
 Distinction between section 31 and - It can be ratified he merely acquired

34 relative to the ratification by the a business owning to the
stockholders corporation
- The second paragraph of section 31 - It would be different if it was

which makes a director liable to entrusted in his confidence
account for profits if he attempts to
Another scenario:
acquire or acquires any interest
adverse to the corporation in Had A not attended the meeting he
respect to any matter reposed in would not have known of the sale it is then
him in confidence as to which equity a matter reposed in him in confidence
imposes a disability upon him to
deal in his own behalf is not subject  A corporation cannot reaquire its
to ratification by the stockholders. share if it has no restricted
Whereas, in section 34 if a director unretained earnings
acquires for himself a business
 Strong vs. Rapide
opportunity which should belong to
the corporation, he is bound to - What duty did he violate?
account for such profits unless his
act is ratified by the stockholders - He violated his duty of loyalty
owning ore representing at least 2/3
- The law would be impotent if the
of the outstanding capital stock.
sale were not invalidated
- If reposed in him in confidence, not
 Self-dealing director and interlocking
subject to ratification
director
- If the acquisition is merely that of a
business opportunity which has not  What is a self-dealing director?
been reposed in him in confidence,
- Director of a corporation dealing or
the same may be subject to
transacting business with his
ratification by the stockholders.
corporation
Director x co.
 Are the contracts and dealing of a
A-REALTY self0dealing director valid?
B  General rule: voidable
C Z owns property and is  May the contracts of a self-dealing

going abroad never to director be valid per se.
Return, he wants to
sell for 25M the fair - YES. If all the 4 conditions are
market value is 30M present they will be valid per se
D 1. That the presence of such director

or trustee in the board meeting in
E which the contract was approved
was not necessary to constitute a
E goes to Z and offers to pay the property
quorum for such meeting;
for 26 M and later he sells it for 30M
making 4M profit, one of the stockholders 2. That the vote of such director or
learned and complains that he should trustee was not necessary for the
submit the profits. E said that he will move approval of the contract;
for ratification of his actuation. Can it be
ratified?
33
3. That the contract is fair and constitute a quorum for such

reasonable under the meeting;
circumstances; and
2. That the vote of such director or
4. That in case of an officer, the trustee was not necessary for the
contract has been previously approval of the contract;
authorized by the board of directors.
3. That the contract is fair and
 When do they become voidable? reasonable under the
circumstances; and
- When any of the two requisites are
4. That in case of an officer, the
absent it is voidable, but subject to
contract has been previously
ratification by 2/3 of the outstanding authorized by the board of directors.
capital stock or 2/3 of the member
Where any of the first two
 Requisites for ratification (subject to conditions set forth in the preceding
ratification by the stockholders paragraph is absent, in the case of a
holding or representing at least 2/3 contract with a director or trustee,
of the outstanding capital stock or such contract may be ratified by the
2/3 of the members.) vote of the stockholders
representing at least two-thirds (2/3)
- it must be at a meeting called for the of the outstanding capital stock or of
purpose at least two-thirds (2/3) of the
members in a meeting called for the
- full disclosure of the adverse purpose: Provided, That full
interest of the director concerned disclosure of the adverse interest of
the directors or trustees involved is
must be made
made at such meeting: Provided,
- the contract is fair and reasonable however, That the contract is fair
and reasonable under the
under the circumstances
circumstances. (n)
 Problem if self-dealing director
 Prime white cement vs. IAC
involved owns all or substantially all
of the shares of stock of the - a director of a corporation owes a
corporation thereby making it easily position in trust
possible to have the contract ratified
- in case of conflict between himself
- last sentence of section 32 should and that of the corporation, he
be made to apply by determining the cannot sacrifice the interest of the
reasonableness and fairness of the corporation to his own advantage
contract
- as a director he should have acted
Section 32. Dealings of in a manner as not to unduly
directors, trustees or officers with prejudice the corporation
the corporation. - A contract of the
corporation with one or more of its - he cannot be allowed to enrich
directors or trustees or officers is himself
voidable, at the option of such
corporation, unless all the following  May corporate directors purchase
conditions are present: the corporate property?
1. That the presence of such  Mead vs. Mccullogh

director or trustee in the board
meeting in which the contract was - interlocking director- a director of
approved was not necessary to one corporation who deals and

34
transacts business with another  Derivative suit

corporation who is himself a director
- An action based on injury to the
A- director of X company also a corporation-to enforce a corporate
director of Y corporation right- wherein the corporation itself
is joined as a necessary party, and
B-
recovery is in favor of and for the
C- corporation.
D- - Remedy granted by law to

stockholders to institute a case to
E- remedy a wrong done directly to the
corporation and indirectly to the
 Both companies enter into a
stockholders, if the board refuses to
contract and A sits, is the contract
do so. Otherwise if not they would
valid?
be left without any recourse
- Yes on the ground of fraud or if it is
 Available suits
unfair
- May be subject to the provision of  individual or personal

section 32 - Wrong done against his person as a
- Section 32 contract may become stockholder
voidable, hence it may also be
 Class suit
ratified
- Filed by a stockholder in
X Co.
representation of other stockholders
Y Co.
- A wrong or redress done, a
A owe 20%
derivative suit in nature
A owe 20%
 Intra-corporate remedies
Is it generally valid or voidable? VALID
- Demand to the BOD to institute
25%
such action
25% VALID
- Negated by the BOD
15%
25% VOIDABLE SUBJECT TO - The one who instituted must be a
section 32 stockholder at the date when the act
More than 20 substantial was done, must have been a
stockholder by that time
 BOD mismanages corporate
 Demand will not be required if the
officers. Who may file a suit?
majority of the BOD are the one’s
- General rule: BOD which can guilty of the wrong charged
institute a case because it has all
the powers. To allow stockholders to  The corporation must be made a
file would violate the doctrine of party in the case whatever side will
corporate entity and may result to not matter because under Philippine
multiplicity of suits law misjoinder is not a ground for
dismissal
- Stockholders cannot therefore
generally file a case EXCEPT of  Non-joinder is a ground for
course in a DERIVATIVE SUIT dismissal
35
 Any benefit should inure to the - It is not the corporate interest to

corporation shield one from criminal prosecution
which is personal interest
 Stockholder bringing the action is
entitled to reimbursement such as - Perez is not suing in his behalf, but
attorney’s fee ONLY IF the case is in behalf of the corporation
SUCCESSFUL to avoid harassment
 Western institute vs. Salas
suit to their management
- Assuming it was filed in the proper
 Pascual vs. Orozco
forum would there argument that it
- By virtue of the fact that he is a is a derivative suit prosper? NO. it is
stockholder, may maintain a people of the Philippines vs.
derivative suit individual director, it must be stated
in the complaint that it is being
- Depend on how, when and what instituted as a derivative suit and for
reason and in behalf of the corporation
- Seeking for the years 1898 all the - Granting arguendo, that this is a
way 1907 derivative suit, the same is still
outrightly dismissible for having
- Only became a stockholder in 1903
been wrongfully filed in the regular
- He can sue only in 1903 forward court devoid of any jurisdiction to
because he must be a stockholder entertain the complaint. The case
should have been filed with the SEC
- The right of action is personal in which exercises original and
nature. He became a stockholder exclusive jurisdiction over derivative
only in 1902 suits, they being intra-corporate
 Derivative suit disputes, per Section 5 (b) of P.D.
902-A
- By a stockholder to address a wrong
 San Miguel vs. Khan
done against the corporation and
the stockholder indirectly - Was a demand made? NO
- Essential requisite must have been - It is not necessary because he
a stockholder from the time the act objected in the board meeting, but
complained of took place still it was adopted therefore it was
- Cannot institute an action from the useless
years he was still not a stockholder  Chase vs. Buencamino
 Everett vs. Asia Banking
- Argument that he should be in
- Stockholders cannot ordinarily estoppels since he filed in the U.S.
commence suit in equity and such is - Assuming the case prospered in the
in the hands of its BOD however U.S. would not estoppels apply as
there are exceptions when the BOD against him? NO for estoppels to
will not sue since they are step in it must be a case by the
themselves principals to the fraud. corporation
 Republic vs. Cuaderno  Reyes vs. tan
- The facts constitute sufficient cause - Corporate director are guilty of
of action breach of trust
36
- A stockholder may institute an demand on the board of directors for

action to remedy a wrong done the appropriate relief but the latter
had failed or refused to heed his
- Fraud in the conduct of corporate plea. Demand, however, is not
affairs required if the company is under the
 Gamboa vs. Victoriano complete control of the directors
who are the very ones to be sued
- Is derivative suit appropriate in this (or where it becomes obvious that a
case demand upon them would have
been futile and useless) since the
- They are not vindicatory damage law does not require a litigant to
done to the corporation, but rather perform useless acts;
they where vindicating damage
against him 3. The stockholder bringing the suit
must allege in his complaint that he
- Violation of their rights as is suing on a derivative cause of
individuals, hence derivative suit is action on behalf of the corporation
not the remedy and all other stockholders similarly
situated, otherwise, the case is
 Evangelista vs. Santos
dismissible. This is because the
- Derivative suit is not proper cause of action actually devolves on
the corporation and not to a
- Claim is not for the benefit of the particular stockholder.
corporation, but rather his individual
benefit 4. The corporation should be made a
party, either as party-plaintiff or
 From the cases above cited, these defendant, in order to make the
are the requirements and the court’s judgment binding upon it,
procedures that must be followed in and thus, bar future litigation of the
order that a derivative suit may same issues. On what side the
prosper corporation appears loses
importance when it is considered
1. That the party bringing the suit
that it lay within the power of the
should be a stockholder as of the
court to direct the making of
time the act or transaction
amendment of the pleading, by
complained of took place, or whose
adding or dropping parties, as may
shares have evolved upon him since
be required in the interest of justice.
by operation of law. This rule,
Misjoinder of parties is not a ground
however, does not apply if such act
to dismiss action; and,
or transaction continues and is
injurious to the stockholder or affect 5. Any benefit or damages recovered
him specifically in some other way. shall pertain to the corporation. This
is so because in all instances,
The number of his hares is
derivative suit is instituted for and in
immaterial since he is not suing in
behalf of the corporation and not for
his own behalf or for the protection
the protection or vindication of a
or vindication of his own right, or the
right or rights of a particular
redress of a wrong done against
stockholder, otherwise, the
him, individually, but in behalf and
aggrieved stockholder should
for the benefit of the corporation.
institute, instead, an individual or
2. He has tried to exhaust intra- personal suit to vindicate his
corporate remedies, he has made a personal or individual right. Or, for
37
that matter, representative or class express terms is not so amenable or

suit for all other stockholders whose repealable; and,
rights are similarly situated, injured
or violated, personally or 5. Distribution of cash dividends to the
individually. shareholders.
 Executive committee  May the board alone create an

executive committee without any
- Not allowed under the OLD law authority provided for the by-laws?
 How may executive committee - NO board of directors must sit and

created and constituted? act as a body to have a valid
transaction
- Section 35
 May a non-member of the board of
Section 35. Executive directors be a member of the
committee. - The by-laws of a executive committee?
corporation may create an executive
committee, composed of not less - NO, all of them must be members of
than three members of the board, to the board of directors
be appointed by the board. Said
committee may act, by majority vote - BOD cannot act by proxy it would be
of all its members, on such specific abdication of powers
matters within the competence of
the board, as may be delegated to it  Purpose clauses necessary
in the by-laws or on a majority vote because it confers and also limits
of the board, except with respect to:
(1) approval of any action for which the actual authority of the
shareholders' approval is also corporation
required; (2) the filing of vacancies
in the board; (3) the amendment or CORPORATE POWERS AND
repeal of by-laws or the adoption of AUTHORITY
new by-laws; (4) the amendment or
repeal of any resolution of the board  Corporate authority may be
which by its express terms is not so classified into three classes namely:
amendable or repealable; and (5) a
distribution of cash dividends to the 1. Those expressly granted or
shareholders. authorized by law inclusive of the
corporate charter or articles of
- Said committee may act and bind incorporation;
the corporation by the majority vote
of all its members except with 2. Those impliedly granted as are
respect to those matters provided essential or reasonably necessary
for in sec. 35 these are: to the carrying out of the express
powers;
1. Approval of any action for which
shareholders’ approval is also 3. Those that are incidental to its
required existence.
2. The filing of vacancies in the board;  Section 36 to 45- POWER

GRANTED BY LAW
3. Amendment or repeal of by-laws or
the adoption of new by-laws; Section 36. Corporate powers and
capacity. - Every corporation incorporated
4. Amendment or repeal of any under this Code has the power and
resolution of the board which by its capacity:

38
1. To sue and be sued in its 11. To exercise such other powers

corporate name; as may be essential or necessary to
carry out its purpose or purposes as
2. Of succession by its corporate stated in the articles of
name for the period of time stated in incorporation. (13a)
the articles of incorporation and the
certificate of incorporation; Section 37. Power to extend or
shorten corporate term. - A private
3. To adopt and use a corporate corporation may extend or shorten its term
seal; as stated in the articles of incorporation
when approved by a majority vote of the
4. To amend its articles of board of directors or trustees and ratified at
incorporation in accordance with the a meeting by the stockholders representing
provisions of this Code; at least two-thirds (2/3) of the outstanding
capital stock or by at least two-thirds (2/3)
5. To adopt by-laws, not contrary to of the members in case of non-stock
law, morals, or public policy, and to corporations. Written notice of the
amend or repeal the same in proposed action and of the time and place
accordance with this Code; of the meeting shall be addressed to each
stockholder or member at his place of
6. In case of stock corporations, to residence as shown on the books of the
issue or sell stocks to subscribers corporation and deposited to the
and to sell stocks to subscribers and addressee in the post office with postage
to sell treasury stocks in accordance prepaid, or served personally: Provided,
with the provisions of this Code; and That in case of extension of corporate
to admit members to the corporation term, any dissenting stockholder may
if it be a non-stock corporation; exercise his appraisal right under the
conditions provided in this code. (n)
7. To purchase, receive, take or
grant, hold, convey, sell, lease, Section 38. Power to increase or
pledge, mortgage and otherwise decrease capital stock; incur, create or
deal with such real and personal increase bonded indebtedness. - No
property, including securities and corporation shall increase or decrease its
bonds of other corporations, as the capital stock or incur, create or increase
transaction of the lawful business of any bonded indebtedness unless approved
the corporation may reasonably and by a majority vote of the board of directors
necessarily require, subject to the and, at a stockholder's meeting duly called
limitations prescribed by law and the for the purpose, two-thirds (2/3) of the
Constitution; outstanding capital stock shall favor the
increase or diminution of the capital stock,
8. To enter into merger or or the incurring, creating or increasing of
consolidation with other any bonded indebtedness. Written notice of
corporations as provided in this the proposed increase or diminution of the
Code; capital stock or of the incurring, creating, or
increasing of any bonded indebtedness
9. To make reasonable donations, and of the time and place of the
including those for the public welfare stockholder's meeting at which the
or for hospital, charitable, cultural, proposed increase or diminution of the
scientific, civic, or similar purposes: capital stock or the incurring or increasing
Provided, That no corporation, of any bonded indebtedness is to be
domestic or foreign, shall give considered, must be addressed to each
donations in aid of any political party stockholder at his place of residence as
or candidate or for purposes of shown on the books of the corporation and
partisan political activity; deposited to the addressee in the post
office with postage prepaid, or served
10. To establish pension, retirement, personally.
and other plans for the benefit of its
directors, trustees, officers and A certificate in duplicate must be signed by
employees; and a majority of the directors of the
39
corporation and countersigned by the incurring, creating or increasing of any

chairman and the secretary of the bonded indebtedness authorized, as the
stockholders' meeting, setting forth: certificate of filing may declare: Provided,
That the Securities and Exchange
(1) That the requirements of this Commission shall not accept for filing any
section have been complied with; certificate of increase of capital stock
unless accompanied by the sworn
(2) The amount of the increase or statement of the treasurer of the
diminution of the capital stock; corporation lawfully holding office at the
time of the filing of the certificate, showing
(3) If an increase of the capital that at least twenty-five (25%) percent of
stock, the amount of capital stock or such increased capital stock has been
number of shares of no-par stock subscribed and that at least twenty-five
thereof actually subscribed, the (25%) percent of the amount subscribed
names, nationalities and residences has been paid either in actual cash to the
of the persons subscribing, the corporation or that there has been
amount of capital stock or number of transferred to the corporation property the
no-par stock subscribed by each, valuation of which is equal to twenty-five
and the amount paid by each on his (25%) percent of the subscription:
subscription in cash or property, or Provided, further, That no decrease of the
the amount of capital stock or capital stock shall be approved by the
number of shares of no-par stock Commission if its effect shall prejudice the
allotted to each stock-holder if such rights of corporate creditors.
increase is for the purpose of
making effective stock dividend Non-stock corporations may incur or create
therefor authorized; bonded indebtedness, or increase the
same, with the approval by a majority vote
(4) Any bonded indebtedness to be of the board of trustees and of at least two-
incurred, created or increased; thirds (2/3) of the members in a meeting
duly called for the purpose.
(5) The actual indebtedness of the
corporation on the day of the Bonds issued by a corporation shall be
meeting; registered with the Securities and
Exchange Commission, which shall have
(6) The amount of stock represented the authority to determine the sufficiency of
at the meeting; and the terms thereof. (17a)
(7) The vote authorizing the Section 39. Power to deny pre-
increase or diminution of the capital emptive right. - All stockholders of a stock
stock, or the incurring, creating or corporation shall enjoy pre-emptive right to
increasing of any bonded subscribe to all issues or disposition of
indebtedness. shares of any class, in proportion to their
respective shareholdings, unless such right
Any increase or decrease in the capital is denied by the articles of incorporation or
stock or the incurring, creating or an amendment thereto: Provided, That
increasing of any bonded indebtedness such pre-emptive right shall not extend to
shall require prior approval of the shares to be issued in compliance with
Securities and Exchange Commission. laws requiring stock offerings or minimum
stock ownership by the public; or to shares
One of the duplicate certificates shall be to be issued in good faith with the approval
kept on file in the office of the corporation of the stockholders representing two-thirds
and the other shall be filed with the (2/3) of the outstanding capital stock, in
Securities and Exchange Commission and exchange for property needed for
attached to the original articles of corporate purposes or in payment of a
incorporation. From and after approval by previously contracted debt.
the Securities and Exchange Commission
and the issuance by the Commission of its Section 40. Sale or other
certificate of filing, the capital stock shall disposition of assets. - Subject to the
stand increased or decreased and the provisions of existing laws on illegal
40
combinations and monopolies, a assets be appropriated for the conduct of

corporation may, by a majority vote of its its remaining business.
board of directors or trustees, sell, lease,
exchange, mortgage, pledge or otherwise In non-stock corporations where there are
dispose of all or substantially all of its no members with voting rights, the vote of
property and assets, including its goodwill, at least a majority of the trustees in office
upon such terms and conditions and for will be sufficient authorization for the
such consideration, which may be money, corporation to enter into any transaction
stocks, bonds or other instruments for the authorized by this section.
payment of money or other property or
consideration, as its board of directors or Section 41. Power to acquire own
trustees may deem expedient, when shares. - A stock corporation shall have the
authorized by the vote of the stockholders power to purchase or acquire its own
representing at least two-thirds (2/3) of the shares for a legitimate corporate purpose
outstanding capital stock, or in case of or purposes, including but not limited to the
non-stock corporation, by the vote of at following cases: Provided, That the
least to two-thirds (2/3) of the members, in corporation has unrestricted retained
a stockholder's or member's meeting duly earnings in its books to cover the shares to
called for the purpose. Written notice of the be purchased or acquired:
proposed action and of the time and place
of the meeting shall be addressed to each 1. To eliminate fractional shares arising out
stockholder or member at his place of of stock dividends;
residence as shown on the books of the
corporation and deposited to the 2. To collect or compromise an
addressee in the post office with postage indebtedness to the corporation, arising out
prepaid, or served personally: Provided, of unpaid subscription, in a delinquency
That any dissenting stockholder may sale, and to purchase delinquent shares
exercise his appraisal right under the sold during said sale; and
conditions provided in this Code.
3. To pay dissenting or withdrawing
A sale or other disposition shall be deemed stockholders entitled to payment for their
to cover substantially all the corporate shares under the provisions of this Code.
property and assets if thereby the (a)
corporation would be rendered incapable
of continuing the business or Section 42. Power to invest
accomplishing the purpose for which it was corporate funds in another corporation or
incorporated. business or for any other purpose. -
Subject to the provisions of this Code, a
After such authorization or approval by the private corporation may invest its funds in
stockholders or members, the board of any other corporation or business or for
directors or trustees may, nevertheless, in any purpose other than the primary
its discretion, abandon such sale, lease, purpose for which it was organized when
exchange, mortgage, pledge or other approved by a majority of the board of
disposition of property and assets, subject directors or trustees and ratified by the
to the rights of third parties under any stockholders representing at least two-
contract relating thereto, without further thirds (2/3) of the outstanding capital stock,
action or approval by the stockholders or or by at least two thirds (2/3) of the
members. members in the case of non-stock
corporations, at a stockholder's or
Nothing in this section is intended to member's meeting duly called for the
restrict the power of any corporation, purpose. Written notice of the proposed
without the authorization by the investment and the time and place of the
stockholders or members, to sell, lease, meeting shall be addressed to each
exchange, mortgage, pledge or otherwise stockholder or member at his place of
dispose of any of its property and assets if residence as shown on the books of the
the same is necessary in the usual and corporation and deposited to the
regular course of business of said addressee in the post office with postage
corporation or if the proceeds of the sale or prepaid, or served personally: Provided,
other disposition of such property and That any dissenting stockholder shall have
41
appraisal right as provided in this Code: where a stockholder or stockholders

Provided, however, That where the representing the same interest of both the
investment by the corporation is managing and the managed corporations
reasonably necessary to accomplish its own or control more than one-third (1/3) of
primary purpose as stated in the articles of the total outstanding capital stock entitled
incorporation, the approval of the to vote of the managing corporation; or (2)
stockholders or members shall not be where a majority of the members of the
necessary. (17 1/2a) board of directors of the managing
corporation also constitute a majority of the
Section 43. Power to declare members of the board of directors of the
dividends. - The board of directors of a managed corporation, then the
stock corporation may declare dividends management contract must be approved
out of the unrestricted retained earnings by the stockholders of the managed
which shall be payable in cash, in property, corporation owning at least two-thirds (2/3)
or in stock to all stockholders on the basis of the total outstanding capital stock
of outstanding stock held by them: entitled to vote, or by at least two-thirds
Provided, That any cash dividends due on (2/3) of the members in the case of a non-
delinquent stock shall first be applied to the stock corporation. No management
unpaid balance on the subscription plus contract shall be entered into for a period
costs and expenses, while stock dividends longer than five years for any one term.
shall be withheld from the delinquent
stockholder until his unpaid subscription is The provisions of the next preceding
fully paid: Provided, further, That no stock paragraph shall apply to any contract
dividend shall be issued without the whereby a corporation undertakes to
approval of stockholders representing not manage or operate all or substantially all of
less than two-thirds (2/3) of the outstanding the business of another corporation,
capital stock at a regular or special whether such contracts are called service
meeting duly called for the purpose. (16a) contracts, operating agreements or
otherwise: Provided, however, That such
Stock corporations are prohibited from service contracts or operating agreements
retaining surplus profits in excess of one which relate to the exploration,
hundred (100%) percent of their paid-in development, exploitation or utilization of
capital stock, except: (1) when justified by natural resources may be entered into for
definite corporate expansion projects or such periods as may be provided by the
programs approved by the board of pertinent laws or regulations. (n)
directors; or (2) when the corporation is
prohibited under any loan agreement with Section 45. Ultra vires acts of
any financial institution or creditor, whether corporations. - No corporation under this
local or foreign, from declaring dividends Code shall possess or exercise any
without its/his consent, and such consent corporate powers except those conferred
has not yet been secured; or (3) when it by this Code or by its articles of
can be clearly shown that such retention is incorporation and except such as are
necessary under special circumstances necessary or incidental to the exercise of
obtaining in the corporation, such as when the powers so conferred. (n)
there is need for special reserve for
probable contingencies. (n) Section 36
Section 44. Power to enter into  Where should the corporation be

management contract. - No corporation sued?
shall conclude a management contract with
another corporation unless such contract - principal office is important because
shall have been approved by the board of it establishes the residence of the
directors and by stockholders owning at corporation and determining service
least the majority of the outstanding capital
of summons, venue of action
stock, or by at least a majority of the
members in the case of a non-stock - it can be sued in the city or
corporation, of both the managing and the
municipality where its principal office
managed corporation, at a meeting duly
called for the purpose: Provided, That (1) is found
42
 Principal office is also important for susceptible of broad and

venue of meetings sometimes illogical
interpretations, especially the
 Non-stock corporation may provide word “agent” of the
in its by-laws that the venue of corporation. The Filoil case,
meeting be anywhere in the involving the litigation lawyer
Philippines of the corporation who
precisely appeared to
 Upon whom service of summons be
challenge the validity of
made?
service of summons but
- Section 11. Service upon domestic whose very appearance for
private juridical entity- when the that purpose was seized
defendant is a corporation, upon to validate the defective
partnership or association organized service, is an illustration of
under the laws of the Philippines the need for this revised
with a juridical personality, service section with limited scope
may be made upon the president, and specific terminology.
managing partner, general manager, Thus the absurd result in the
corporate secretary, treasurer, or in Filoil case necessitated the
house counsel. amendment permitting
service only on the in-house
 Delta motor vs. Mangosing counsel of the corporation
who is in effect an employee
- strict compliance is necessary
of the corporation, as
- should be served to those named in distinguished from an
the statute independent practitioner.”
- secretary of a dep’t are not those o notes: additional knowledge

included in the statute
- special appearance enter for that
 E.B. Villarosa vs. Benito particular appearance you are not
the counsel in the case
- decision En Banc repeals all other
pronouncement - would apply only if it does not
involve an intra-corporate
- section 13 Rule 14 was repealed controversy (controversy between
and among the stockholders)
- the old rules was ambiguous and
broad and at all time illogical - upon any of the statutory officers or
officers fixed in the by-laws any
 the particular revision under Section
secretary, any of the directors; any
11 of Rule 14 was explained by managers in the by-laws
retired Supreme Court Justice
Florenz Regalado, thus:  Seal
“xxx the then section 13 of - merely ministerial or permissive

this Rule allowed service
upon a defendant corporation  Power to amend
to “be made on the president,
- section 16
manager, secretary, cashier,
agent or any of its directors.” - special 37,38,120
The aforesaid terms were
obviously ambiguous and  Power to adopt by-laws

43
- section 46-48 authorizes a corporation to make

donations. The only limitations
 Power to issue or sell stocks and to imposed are the following:
admit members
1. The donation must be “reasonable”;
- stock of stockholders and provision
governing non-stock 2. It must be for public welfare, or for
hospital, charitable, scientific,
 Power to acquire or alienate real or cultural or similar purpose; and,
personal property
3. It shall not be in aid of political party
- is there any limitation? YES or candidate, or for purposes of
partisan political activity.
- Two specific limitation
 Power to establish pension
1. Section 36, as lawful transactions of
business of the corporation may - Include any act to promote and
reasonably and necessarily require improve the convenience, welfare
and benefit of the employees or
2. Constitution and law
offices
 Luneta vs. A.D. Santos
 Republic vs. Acoje
- Importance of the purpose clause
- While as a rule an ultra-vires act is
- Cannot have the power to acquire one committed outside the object
for which a corporation is created as
- Cannot engage in land defined by law, there are however
transportation certain corporate acts that may be
- Doctrine of limited capacity performed outside of the scope of
the powers expressly conferred if
 Gov’t vs. El Hogar they are necessary to promote the
interest or welfare of the
- As the lawful transaction of its corporation. Thus, it has been held
business may reasonably represent that “although not expressly
authorized to do so a corporation
 Director of Lands vs. CA
may become a surety where the
- Exception to the rule in the particular transaction is reasonably
constitution necessary or proper to the conduct
of its business,” and here it is
- Alienable public land undisputed that the establishment
local post office is a reasonable and
- Converts the property to a private
proper adjunct to the conduct of the
land automatically once converted it
business of appellant company.
can now be registered
Indeed, such post office is a vital
 Power to make donation improvement in the living condition
of its employees and laborers who
- Limitation section 36 par.9 came to settle in its mining camp
which is far removed from the postal
- These are circumstances, however,
facilities or means of
under which a donation by a
communication accorded to people
corporation may be to its benefit as
living in a city or municipality.
a means of increasing its business
or promoting patronage. Thus,
paragraph 9 of section 36 expressly
44
 Power to exercise such other 1. Increasing the par value of the

powers essential or necessary to existing number of shares without
carry out its purpose (implied power) increasing the number of shares;
1. Acts in the usual course of 2. Increasing the number of existing

business; shares without increasing the par
value thereof; and,
2. Acts to protect debts owing to the
corporation; 3. Increasing the number of existing
shares and at the same time
3. Embarking in a different business; increasing the par value of the
4. Acts in part or wholly to protect or shares.
aid employees; and,  Why a corporation increases it
5. Acts to increase business capital stock?
 Teresa Electric and Power Co. vs. - Generate funds, business

P.S.C. expansion, or payment of liabilities,
purposes of acquiring other
- Examined the articles of business. (example: to buy cars for
incorporation to arrive at its decision the officers, purpose of acquiring
other business, expansion, other
 National Power vs. Vera valid reasons)
- For purpose of prohibiting the  How do you decrease capital stock
NAPOCOR and why a corporation decreases?
- The court must decide whether or - Reduce or wipeout existing deficit
not a logical and necessary relation where no creditors would thereby be
exists between the act questioned effected
and the corporate purpose
expressed in the NPC charter - When capital is more than
necessary to procreate the business
 Importance of PLACE of registration or reduction of capital surplus
- Residence - To write down the value of its fixed
assets to reflect those present and
- Venue
actual
- Place of meetings
o NOTE: any increase or decrease of
- Place or registration of chattel capital stock requires approval of
mortgage government agency like SEC it can
never take place unless SEC
 Power to extend its terms approves the same
- Once its term expires, already  Relevance of decrease of capital?
dissolved automatically, thus can no
longer ask for extension 1. To reduce or wipe out existing deficit
where no creditors would thereby be
- After dissolution, it has 3 years to affected;
windup
2. When the capital is more than what
 What are the modes of increasing is necessary to procreate the
capital stock? business or reduction of capital
surplus; or,
45
3. To write down the value of its fixed - Commonly understood as an

assets to reflect there present actual obligation of a state, its subdivision
value in case where there is a or a private corporation, represented
decline in the value of the fixed by a certificate or an instrument for
assets of the corporation. the principal and by detachable
coupons for the payment of
- Examples: Php 10M capital for
interests. In its simplest term, it is
grocery business, mayor didn’t want one where an obligor obliges
to issue license/permit because himself to pay a certain sum of
mayor has 3 other grocery stores, money to another at a day named.
only allowed sari-sari store permit,
reduce capital for sari-sari so that - There are different kinds of bond but
the money will not sleep in bank before they may be issued or floated
by the corporation, the same must
- Example: car rental agencies-Php
be registered and approved by the
10M capital for 20 taxi’s, after some SEC subject to the rules and
time each taxi is only 250K, regulations that may be adopted by
nagmura ang taxi, to reduce capital that agency. The procedure and
is to show actual assets requirements set forth in section 38
 Limitation imposed by law is the same as in increasing or
decreasing the capital stock except
- Decrease shall not in any way affect that the certificate does not have to
the rights of the creditors state the matters required in sub-
section 2 & 3 thereof.
 Philippine Trust Company vs. Rivera
 Pre-emptive rights
- Without the appraisal of SEC, a
decrease in capital stocks has no - A right granted by law to all existing
effect stockholders of a stock corporation
to subscribe to all issues or
 TRUST FUND DOCTRINE: disposition of shares of any class, in
- Subscription to capital stock of a proportion to their respective
corporation constitute a fund to stockholdings, subject only to the
which the creditors have a right to limitations imposed under section 39
look upon for satisfaction of their of the Code.
claims and that the assignee in - Internationally granted
insolvency can maintain an action
upon any unpaid stock subscription  Pre-emptive rights, why it is
in order to realize assets for the granted?
payment of its debts.
- In order that the existing
 Madrigal vs. Zamora stockholders may maintain their
proportionate right as not to dilute
- Decrease in capital has a their right
subterfuge to evade payment
 Power to deny pre-emptive rights
- Thus not valid and effective
Section 39. Power to deny
- Must not prejudice creditors which
pre-emptive right. - All stockholders
includes the employees of a stock corporation shall enjoy
pre-emptive right to subscribe to all
 Bond issues or disposition of shares of
any class, in proportion to their
46
respective shareholdings, unless reissuance of treasury shares,

such right is denied by the articles of whether for money, property or
incorporation or an amendment personal services or in payment of a
thereto: Provided, That such pre-
corporate debt, unless the articles of
emptive right shall not extend to
shares to be issued in compliance incorporation provide otherwise, if
with laws requiring stock offerings or not entirely absolute, in that it
minimum stock ownership by the extends to all issuance and
public; or to shares to be issued in disposition of shares
good faith with the approval of the
stockholders representing two-thirds - Such right of pre-emption may be
(2/3) of the outstanding capital lost by waiver of the stockholder,
stock, in exchange for property expressly or impliedly by his inability
needed for corporate purposes or in or failure to exercise it after having
payment of a previously contracted
been notified of the proposed
debt.
issuance or disposition of shares
 May it be denied? How?
 When is it unavailable?
- Yes, if provided by articles of
- In shares traded openly in stock
incorporation or by an amendment
exchange/market
- However, pre-emptive rights is
 Is it applicable to close
unavailable to shares in trading in
corporations?
stock exchange otherwise
stockholders must waive first their - See section 96, close corporations
right before they may sell such. must provide it first on its articles of
incorporation, that its articles does
 Exceptions
not really deny such pre-emptive
1. When the shares to be issued is rights.
in compliance with laws requiring
 Section 102, will not apply to close
stock offerings or minimum stock
corporations
ownership by the public
 The right of pre-emptive rights is
2. Shares to be issued in good faith
absolute in close corporations
with the approval of the
stockholders representing 2/3 of “All issues or depositing shares of any
the outstanding capital stock class” form part of ACS
either
 Certain instances when a
a. In exchange for property stockholder may nevertheless be
needed for corporate purpose unable to exercise this right:
or,
- Issued for public ownership
b. In payment of a previously
contracted debt - Issued in good faith, with approval
of 2/3 of outstanding capital stock
- The exceptions, however will not either a) in exchange for property
apply to stockholders of a close needed or b) for payment of a
corporation by virtue of a previously contracted debt
subsequent and specific provision of
the Code which provides that the  Pre- emptive rights of stockholders
“pre-emptive right of a stockholder in ordinary stock corporations may
in a close corporation shall extend be denied
to all stock to be issued, including
47
- if the shares are to be issued in old unissued shares because it is

compliance with laws requiring stock presumed that the original
offering or minimum stock subscribers is deemed to have
ownership by the pubic taken his shares knowing that they
form a definite proportionate part of
- In exchange for property needed for the whole number of authorized
corporate purposes shares
- In payment of previously contracted - When the shares, left unsubscribed
debts are re-offered, he cannot therefore
 This rule, however, does not apply claim. DILUTION OF INTEREST
in a close corporation as the pre-  Will the acquiring purchaser be
emptive rights of the stockholders liable for debts of the former
thereof is broadened to include all corporation?
issues without exceptions unless, of
course, denied or limited by the - Generally no, corporate entity theory
articles of incorporations. Section because there may be instances
102 provides: when purchasing corporation may
be held liable
Section 102. Pre-emptive
right in close corporations. - The  May a corporation acquire its own
pre-emptive right of stockholders in shares?
close corporations shall extend to all
stock to be issued, including - Yes
reissuance of treasury shares,
whether for money, property or  Is there any restriction provided for
personal services, or in payment of by law in reacquiring its own
corporate debts, unless the articles shares?
of incorporation provide otherwise.
- Yes, it must have been unrestricted
 Denial will not apply to a close retained earnings appearing in the
corporation, ABSOLUTE books of corporation
- section 96  A corporation can never acquire its
own shares if it has no unrestricted
 May a stock holder in a close
retained earnings
corporation insist in the exercise of
his pre-emptive rights? - False, exception close corporation
and redeemable shares
- Yes, section 102
EXAMPLE:
 What type or shares are covered by
pre-emptive rights? ACS 2M
 Does it include those originally SUBSCRIBED 1M

unsubscribed?
PAID UP 1M
- NO. Benito vs. SEC
1 100K
 Will the stockholders be able to
2 100K
exercise their pre-emptive right with
respect to the old unissued shares? TO
- Pre-emptive rights is applicable only 10 100K
to new issued shares and not to the
48
 If 1-5 became 200K each, may 6-10 2) Where the transaction amounts to
demand the exercise their pre- consolidation or merger of the
emptive right? corporations
- YES 3) When purchasing corporation is

merely a continuation of the selling
 May 1-5 subscribe to the corporation
unsubscribed capital stock to the
exclusion of 6-10? 4) Where the transaction is entered
into fraudulently in order to escape
- If a corporation makes 2M liability for such debt
unrestricted retained earnings, it is
the shares and not the number of  Legitimate purpose: for a
persons that matters corporation to reacquire its own
shares
 May 6-10 complain for a dilution of
their interest? - Limitation: it must have
surplus/unrestricted retained
- YES, it’s an internationally earnings
recognized right because it includes
“all issues and disposition of shares - Exception: may redeem irrespective
of any class” and all kinds of shares of unrestricted retained earnings
new or old
1) Exercise of stockholders’ right to
- If the remaining unsubscribed compel “close corporation” to
shares are issued, it’s an issuance purchase his shares
of any class
2) Where corporation has sufficient
 May a corporation sell/dispose all or assets in its books to cover its debts
substantially all of its corporate and liabilities exclusive of capital
assets and liabilities? stock
- YES ACS 1M
- 1) RESOLUTION 2) SUBSRIBED 1M
AUTHORIZATION 3) PAID-UP 1M
RATIFICATION 4) PRIOR
WRITTEN NOTICE 5) SALE ASSETS 500K
SUBJECT TO PROVISIONS OF
EXITING LAWS 6) DISSENTING 1M PROFITS
STOCKHOLDERS HAVE THE - 500K LIABILITIES
RIGHT TO EXERCISE THEIR
APPRAISAL RIGHT ____________________
 If a corporation sells substantially all 500K RESERVES IN A

of it assets and properties, will the CLOSE CORPORATION IT CAN USE
buyer assume liability? THIS TO REACQUIRE ISSUED STOCKS
- NO, EXCEPT X – REALTY CORPORATION
1) Express or implied agreement to the  THE ONLY

purchase PROPERTY OF
THE
CORPORATIO
N
49
 BOARD OF  IDP vs. CA

DIRECTORS
DECIDED TO - Consent of the members was not
SELL IT secured
Will it need the approval of the  Edward Nell Co. vs. Pacific Farms
stockholders?
- Generally where one corporation
- NO, if the same is necessary in the sells or otherwise transfers all of its
usual and regular course of assets to another corporation, the
business of said corporation or if the latter is not liable for the debts and
proceeds of the sale or other liabilities of the transferor, except:
disposition of such property and
1. Where the purchaser expressly
assets be appropriated for the
or impliedly agrees to assume
conduct of its remaining business
such debts;
 If X is a manufacturing company,
2. Where the transaction amounts
then it can sell its only property to a consolidation or merger of
upon approval of the stockholders the corporations;
because it will render itself capable
of continuing its business, BUT if the 3. Where the purchasing
proceeds will be used to purchase a corporation is merely a
better one for the continuance of its continuation of the selling
business, then it does not need the corporation;
approval of the stockholders
4. Where the transaction is entered
 Conditions for the valid exercise of into fraudulently in order to
this power are the following escape liability for such debts.
1. Resolution by the majority vote of  Power to acquire own shares

the board of directors/trustees
Section 41. Power to acquire
2. Authorization from the stockholders own shares. - A stock corporation
representing at least 2/3 of the shall have the power to purchase or
outstanding capital stock or 2/3 of acquire its own shares for a
the members; legitimate corporate purpose or
purposes, including but not limited
3. The ratification of the stockholders to the following cases: Provided,
or members must be made at a That the corporation has
unrestricted retained earnings in its
meeting duly called for that purpose
books to cover the shares to be
4. Prior written notice of the proposed purchased or acquired:
action and of the time and place of
1. To eliminate fractional shares
meeting must be made addressed arising out of stock dividends;
to all stockholders of record, either
by mail or personal service; 2. To collect or compromise an
indebtedness to the corporation,
5. The sale of the assets shall be arising out of unpaid subscription, in
subject to the provisions of existing a delinquency sale, and to purchase
laws on illegal combinations and delinquent shares sold during said
monopolies sale; and
6. Any dissenting stockholder shall 3. To pay dissenting or withdrawing

have the option to exercise his stockholders entitled to payment for
appraisal right
50
their shares under the provisions of where the investment by the

this Code. (a) corporation is reasonably necessary
to accomplish its primary purpose
 The corporation must at all times as stated in the articles of
have “unrestricted retained incorporation, the approval of the
earnings” to exercise this corporate stockholders or members shall not
power be necessary. (17 1/2a)
 Steinberg vs. Velasco
- For any other purpose other than
- For as long as there are debts and the primary purpose, stockholder’s
liabilities, a corporation may not consent or approval is necessary
reacquire its shares (subject to
exceptions) - Thus, if it’s for the secondary
purpose, it is necessary
- Creditors of a corporation have the
right to assume that so long as there - If it’s in connection with the primary
are outstanding debts and liabilities, purpose, only board resolution is
the board of directors will not use necessary
the assets of the corporation to  Requirements and steps to be
purchase its own stock, and that it
followed for a valid investment of
will not declare dividends to
corporate funds are:
stockholders when the corporation
is insolvent. 1. Resolution by the majority of the
board of directors or trustees;
 Power to invest funds <sec.42>
2. Ratification by the stockholders
Section 42. Power to invest representing at least 2/3 of the
corporate funds in another outstanding capital stock or 2/3 of
corporation or business or for any the members in case of non-stock
other purpose. - Subject to the
corporations;
provisions of this Code, a private
corporation may invest its funds in 3. The ratification must be made at a
any other corporation or business or
meeting duly called for that purpose;
for any purpose other than the
primary purpose for which it was 4. Prior written notice of the proposed
organized when approved by a
investment and the time and place
majority of the board of directors or
trustees and ratified by the of the meeting shall be made,
stockholders representing at least addressed to each stockholder or
two-thirds (2/3) of the outstanding member by mail or by personal
capital stock, or by at least two service, and;
thirds (2/3) of the members in the
case of non-stock corporations, at a 5. Any dissenting stockholder shall
stockholder's or member's meeting have the option to exercise his
duly called for the purpose. Written appraisal right
notice of the proposed investment
and the time and place of the  Dela rama vs. Ma-ao Sugar
meeting shall be addressed to each
stockholder or member at his place - There is a substantial and not
of residence as shown on the books remote connection between the
of the corporation and deposited to
sugar bags and the sugar
the addressee in the post office with
postage prepaid, or served manufacture, thus stockholder’s
personally: Provided, That any approval is not necessary for validity
dissenting stockholder shall have
appraisal right as provided in this - A private corporation, in order to
Code: Provided, however, That accomplish its purpose as stated in
51
its articles of incorporation, and Exchange Commission, compel the

imposed by the Corporation Law, dissolution of such corporation
has the power to acquire, hold, whenever any of acts of the
directors, officers or those in control
mortgage, pledge, or dispose of
of the corporation is illegal, or
shares bonds, securities and other fraudulent, or dishonest, or
evidences of indebtedness of any oppressive or unfairly prejudicial to
domestic or foreign corporation. the corporation or any stockholder,
Such an act, if done in pursuance of or whenever corporate assets are
the corporate purpose, does not being misapplied or wasted.
need the approval of the
 If shares are reacquired, what
stockholders; but when the
purchase of shares of another happens?
corporation is done solely for - It becomes treasury shares
investment and not to accomplish
the purpose of its incorporation, the  Stockholder’s consent/ approval is
vote of approval of the stockholders not necessary and mere board
is necessary. action is sufficient if in accordance
with primary purpose
 Gokongwei vs. SEC
 The logical relation of act done and
- Investments made by SMC is primary purpose of corporation and
necessarily connected with its between the board of directors to
primary purpose and this was undertake submission of acts is a
ratified in a meeting sound corporate practice
- Submission of previous action is a  Dividends
sound corporate practice
 Redeemable shares Section 43. Power to declare

dividends. - The board of directors
 Closed corporation (see section of a stock corporation may declare
dividends out of the unrestricted
105) retained earnings which shall be
payable in cash, in property, or in
- For any reason, compel the value of
stock to all stockholders on the
shares “withdrawal shares” provided basis of outstanding stock held by
corporation has sufficient funds to them: Provided, That any cash
cover its debts and liabilities dividends due on delinquent stock
shall first be applied to the unpaid
Section 105. Withdrawal of balance on the subscription plus
stockholder or dissolution of costs and expenses, while stock
corporation. - In addition and without dividends shall be withheld from the
prejudice to other rights and delinquent stockholder until his
remedies available to a stockholder unpaid subscription is fully paid:
under this Title, any stockholder of a Provided, further, That no stock
close corporation may, for any dividend shall be issued without the
reason, compel the said corporation approval of stockholders
to purchase his shares at their fair representing not less than two-thirds
value, which shall not be less than (2/3) of the outstanding capital stock
their par or issued value, when the at a regular or special meeting duly
corporation has sufficient assets in called for the purpose. (16a)
its books to cover its debts and
liabilities exclusive of capital stock: Stock corporations are
Provided, That any stockholder of a prohibited from retaining surplus
close corporation may, by written profits in excess of one hundred
petition to the Securities and (100%) percent of their paid-in
52
capital stock, except: (1) when 10-100k

justified by definite corporate
expansion projects or programs 1M
approved by the board of directors;
or (2) when the corporation is  Board decides to declare 1M, how
prohibited under any loan much will each receive? May the
agreement with any financial board declare stock dividend
institution or creditor, whether local
or foreign, from declaring dividends - NO. that would be over issuance of
without its/his consent, and such shares, violation of securities
consent has not yet been secured; regulation code
or (3) when it can be clearly shown
that such retention is necessary - It must have a free portion
under special circumstances
obtaining in the corporation, such as - The corporation may increase its
when there is need for special capital
reserve for probable contingencies.
(n)  Z co. 1M to X Co. is 2/3 of Xco.
Stockholders reacquired?
 What are dividends?
- No, because in property 2/3 is not
- Corporate profits set aside, declared required
and ordered by the Board of
Directors to be paid to the  What is the effect of declaration of
stockholders. dividends with regards to the assets
of a company?
 What are property dividends?
- As compared to stock dividends, the
- Those paid in property surplus declaration of cash or property
 Like tables and chairs? Can tables dividends have the effect of
and chairs make surplus profits? reducing corporate assets to the
extent of dividends declared.
- No, they do not make surplus,
- Neither would stock dividends
bonds, etc.
increase the proportionate interest
 Where should dividends come of the stockholders of the
from? corporation although it will have the
effect of increasing the subscribed
- Stock dividends are declared as and paid-up capital of the
stocks coming from corporation corporation. It gives the
 Who declares dividends to be stockholders nothing in the way of
distribution of assets but merely
declared? Do stockholders have any
divides his existing shares into
say?
smaller units.
- Board of Directors, if stock approval
 Earnings belong to the corporation
of 2/3 outstanding capital stock
until declared or given
ACS-1M SUB-1M P.U.-1M
 Revocation
1M-U.R.E. (surplus profits of the
corporation) - No revocation of dividend may be
1-100k has unless it has not been officially
communicated to the stockholders
2-100k or is in the form of stock dividends
To
53
which is revocable at any time prior - NO. You cannot declare if it does
to distribution. not come from unrestricted retained
earnings.
 Stock dividends- no reduction, you
capitalize your restricted retained 1. 1M-U.R.E. (is it true there is no way
earnings, what is issued is a piece to compel?)
of paper. The restricted earnings
2. 2M-U.R.E.
remain in the corporation
 May they be compelled to declare
 Cash and property- reduces
dividends
corporate assets
- Mandatory if earned, the board may
 Stock dividends increase corporate
be compelled to declare dividends
assets? No, it will only have the
effect of increasing the subscribed - if exceeds 100% of the paid-up
and paid-up capital of the capital the boards may be
corporation compelled
 Will there be a corresponding ACS 2M 1M U.R.E.
increase in their proportionate
interest? SUB 1M
- REMAINS THE SAME PU 800K
- Exception: when stock dividends will 1-100K 50K PU

result in a fractional share 2-100K 50K
ACS-2M 1-100K 200 (10%) TO
*VOTING AND DIVIDEND RIGHTS
STILL THE SAME 10-100K
SUB-1M TO 1M
10%
 Will 1 and 2 receive full amount of
PU-1M 10-100K dividends?
ACS 2M - YES. They are entitled however if

they are declared delinquent, the
SUB 1M
amount due them shall first be
PU 1M applied to his delinquency plus
expenses.
1M RE
 Delinquency occurs, you are called
1 100K to pay, but you failed to pay. In case
of stock dividend, the delinquent
2 100K
stock holder will not be entitled
TO thereto until he has paid his
subscription in full.
10 100K
 Are non-stockholders entitled to
1M
receive dividends?
 May they be compelled?
- No, tock dividends are civil fruits of
the original investment, and to the

54
owners of the shares belong the civil the right to rely on such subscription
fruits. and the paid-up capital for the
satisfaction of their claims
 How did the court decide dividends
in the case of Neilsen  Cannot accumulate surplus
unreasonably
- Stock dividends cannot be issued to
a person who is not a stockholder in  Basis is the paid-up capital
payment of services rendered.
 Entitled to dividends
- Whether cash, property or stock,
only stockholders may receive  Irrespective of whether the
dividends. Dividends are fruits of subscription is full
investments. They come from the
 Illegally declared
U.R.E. or surplus profits of the
corporation. - Declare dividend with the belief that
it formed part of the U.R.E., but yun
ACS 2M 1M U.R.E.
pala sa capital
SUB 1M JULY 24
 Directors are not liable, unless
DECLARATION JULY 31
sec31 acted in bad faith or gross
PU 1M negligence in the conduct of
corporate affairs
1 100K 100T JULY 26-
Y(NEW ONE WAS DECLARED  Directors even if acting in behalf of
TO Y) JULY 30- 100K the corporation, may still be held
solidarily liable
2
 Power to enter into management
TO TO HAVE THE
contract
TRANSFER RECORDED
- New provision
10 100K
1M Section 44. Power to enter

into management contract. - No
 Insofar as 1 and Y who has a better corporation shall conclude a
right? Already declared, but not yet management contract with another
corporation unless such contract
paid?
shall have been approved by the
- Right to receive vest upon board of directors and by
stockholders owning at least the
declaration. Who ever owns at the
majority of the outstanding capital
time of declaration owns the stock, or by at least a majority of the
dividends members in the case of a non-stock
corporation, of both the managing
- Unless there is a stipulation to the and the managed corporation, at a
contrary meeting duly called for the purpose:
Provided, That (1) where a
 TRUST FUND DOCTRINE stockholder or stockholders
representing the same interest of
- The power to declare it if paid-up both the managing and the
capital is not maintained or is managed corporations own or
impaired control more than one-third (1/3) of
the total outstanding capital stock
- Trust fund must be kept intact for entitled to vote of the managing
the protection of creditors who have corporation; or (2) where a majority
55
of the members of the board of  Every corporate act emanates from

directors of the managing the BOARD
corporation also constitute a
majority of the members of the  Is the voting requirements of a
board of directors of the managed majority stockholder ABSOLUTE?
corporation, then the management
contract must be approved by the - Not only a majority but 2/3 of the
stockholders of the managed outstanding capital stock or 2/3 of
corporation owning at least two-
the members in a non-stock
thirds (2/3) of the total outstanding
capital stock entitled to vote, or by at corporation would be required for
least two-thirds (2/3) of the the approval of a management
members in the case of a non-stock contract in the following instances:
corporation. No management
contract shall be entered into for a 1. Where the stockholders
period longer than five years for any representing the same interest of
one term. both the managing and managed
corporation own or control more
The provisions of the next than 1/3 of the total outstanding
preceding paragraph shall apply to
any contract whereby a corporation capital stock of the managing
undertakes to manage or operate all corporation; and
or substantially all of the business of
another corporation, whether such 2. Where a majority of the members of
contracts are called service the board of directors of the
contracts, operating agreements or managing corporation also
otherwise: Provided, however, That constitute a majority of the directors
such service contracts or operating of the managed corporation
agreements which relate to the
exploration, development, 3. Where the contract would constitute
exploitation or utilization of natural the management or operation of all
resources may be entered into for or substantially all of the business of
such periods as may be provided by
another corporation, whether such
the pertinent laws or regulations. (n)
contracts are called service
 The requirement for a valid contracts. If it will not constitute the
management contract are as management of all or substantially
follows: all of the business of another
corporation the first paragraph of
1. Resolution of the board of directors section 44 will apply and not that of
2. Approval by the stockholders
the second, that is, only the vote of
holding or representing a majority of
the outstanding capital stock or the stockholders holding or
majority of the members in case of representing at least a majority of
non-stock corporation of both the the outstanding capital stock or
managing and the managed majority of the members in the case
corporation of non-stock corporation will be
3. The approval of the stockholders or required.
members must be made at the
meeting called for that purpose  How long?
4. The contract shall not be for a
period longer than 5 years for any - Not longer than 5 years for any one
one term, except those which relate term
to exploration, development or
utilization of natural resources which - Exception: exploration, development
may be entered into for such or utilization of natural resources
periods as may be provided by
pertinent laws and regulations
56
 What is an ultra-vires act or business but Ballatine gives the

contract? following summary of the doctrines
evolved:
- Doctrine of limited capacity.
Corporation can do such acts and a. If the contract is fully executed
things as it is allowed to do on both sides, the contract is
effective and the courts will no
- Acts beyond it will be ultra vires, interfere to deprive either party
allowing a collateral attack of what has been acquired under
- If not illegal per se merely voidable. it
Can be ratified expressly or b. If the contract is executory on
impliedly or even stopped as both sides, as a rule, neither
equitable grounds party can maintain an action for
its non-performance
- Ultra-vires acts which are not illegal
per se may become binding and c. Where the contract is executor
enforceable either by satisfaction, on one side only, and has been
estoppels or equitable grounds fully performed on the other, the
courts differ as to whether an
 Consequences of ultra-vires acts?
action will lie on the contract
1. On the corporation itself against the party who has
received benefits of performance
- The proper forum, in accordance under it. Majority of the courts,
with the provisions of PD 902-A, as however, hold that the party who
amended and R.A. No. 8799 may has received benefits from the
suspend or revoke, after proper performance is estopped to set
notice and hearing, the franchise or up that the contract is ultra-vires
certificate of registration of the to defeat an action on the
corporation for serious contract. This is more in
misrepresentation as to what the conformity with the doctrine that
corporation can do or is doing to the no person shall be allowed to
great damage or prejudice of the enrich himself at the expense of
general public another
2. On the rights of the stockholders  Privano vs. Dela Rama
- A stockholder may bring either an - Court looked into the purpose
individual or derivative suit to enjoin clause
a threatened ultra-vires act or
contract. If the act or contract has - The purpose clause empowers and
already been performed, a limits
derivative suit for damages against
the directors may be filed, but their - Articles likewise provide that it may
liability will depend on whether they deal with any of its money
acted in good faith and with - “deal” broad enough to cover the
reasonable diligence in entering into donation it is not then ultra-vires
the contract.
- Not illegal per se hence (law of
3. On the immediate parties agency) excess powers are subject
- The courts have not agreed as to to ratification
the legal effect of a corporate - Ratified by passing the resolution in
contract outside of its authorized question
57
 Carlos vs. Mindoro sugar Co. contract with in its powers- CARLOS
CASE
- PTC- trust company as such, it also
has implied powers as to make - Purpose clause may be stretched to
them more attractable cover PLDT internet. It may be
within its business.
- Not ultra-vires in pursuance of its
legitimate business - May it sell computers? NO! other
line of business. Its trading!
 Japanese war notes vs. SEC
BY-LAWS
- Non-stock corporations cannot
make profits and distribute profits to  By-Laws
its shareholders
- Rule adopted by the corporation for
- Ultra-vires because Japanese war its internal governance
notes is a non-stock corporation
 Is the adoption of by-laws
 Crisologo-Jose vs. CA (ALWAYS mandatory?
ASKED BY DEAN SUNDIANG)
 When should the by-laws be
- The negotiable instruments law adopted or filed? Can it not be
which holds an accommodation adopted earlier?
party liable on the instrument to a
- After incorporation- within 1 month
holder for value, although such
(emanates from the BOARD)
holder at the time of taking the
instrument knew him to be only an - Prior-more convenient (signed by
accommodation party, does not the incorporators)
include nor apply to corporations
which are accommodation parties.  Who will sign the adoption clause?
This is because the issue or
- Majority of the stockholders or
indorsement of negotiable paper by
members attested to by the
a corporation without consideration
corporate secretary
and for the accommodation of
another is ultra-vires  What happens if the corporation
fails to adopt the by-laws from the
- Corporate officers may guarantee or
tie provided by the law? Would there
endorse an accommodation only if
be an automatic revocation or
specifically authorized
suspension?
Section 36 paragraph 11
- Proper notice and hearing, must first
Section 10 be complied with
Section 14 and 15  Loyola grand villas vs. CA
 Corporate powers depend on the - Not the SEC, but the HIGC
agreement of the stockholders
rather than any director - Must – not always imperative
- It may sell and it may guarantee, - Filing of by-laws mandatory

contract not necessarily illegal, it will - Empowered by SEC
in the absence of proof to the
contrary presumed within its power. - Merely a ground, there must be
Corporations are presumed to proper notice and hearing
58
- Not affect the status of the - Shares of stock are personal

corporation as a juridical person properties
- Subject the corporation to a fine, as - Shares of stock may transfer to

may be issued by the SEC whom ever he wishes
 When do by-laws become effective? - The by-laws is contrary to law
- Until and unless the SEC gives it  Articles of incorporation

stamped of approval
- May provide reasonable restriction
- Suspension of any government
agency. The permission must first - By-laws merely internal laws
be secured- section 46 - Articles is the contract between and
 Elements of a valid by-law among the parties and corporation
1. It must not be contrary to law, public  Gov’t vs. El Hogar

policy or morals; - Did the court categorically ruled
2. It must not be inconsistent with the here that the provision in the 5 th
articles of incorporation; cause of action is valid?
3. It must be general and uniform in its - Rules governing equity, considering

effect or applicable to all alike or the fact that there was always lack
those similarly situated; of quorum
4. It must not impair obligations and - Section 29 BOD if still constituting a

contracts or vested rights; and’ quorum may fill up a vacancy other
than by removal, etc.
5. It must be reasonable.
 Gokongwei vs. SEC
- Must not be inconsistent with
existing laws. Not be inconsistent - Section 48 allows a corporation to
with articles of incorporation amend it by-laws
 By-laws - Section 47 of the code, the by-laws

may provide for the qualification and
- None filing would not affect the disqualification
status of the corporation, Loyola
grand villas case - It cannot be said Gokongwei has a
vested rights
- The word “must” is not always
imperative - Prevent directors from taking
advantage of position to promote his
- Stockholders are conlusively individual interest to the damage of
presumed to know the provisions of others
the by-laws
- The validity or reasonableness of a
 How about 3rd persons? by-laws is a question of law
- NO. unless there is actual - Subject to the limitations that
knowledge of the same they are not reasonableness of a by-law is a
presumed to know of the provisions mere matter of judgment
of the by-laws
- Rule of the majority and not the
 Fleischer vs. Botika Nolasco tyranny of the minority
59
 May the by-laws be amended Whenever any amendment or

altered or appealed? new by-laws are adopted, such
amendment or new by-laws shall be
- YES. HOW? Two modes attached to the original by-laws in
the office of the corporation, and a
1. By a majority vote of the directors or copy thereof, duly certified under
trustees and the majority vote of the oath by the corporate secretary and
outstanding capital stock or a majority of the directors or
trustees, shall be filed with the
members in a non-stock
corporation, at a regular or special Commission the same to be
meeting called for that purpose; attached to the original articles of
incorporation and original by-laws.
2. By the board of directors alone
when delegated by 2/3 of the The amended or new by-laws
outstanding capital stock or 2/3 of shall only be effective upon the
the members in a non-stock issuance by the Securities and
corporation. Exchange Commission of a
certification that the same are not
- This delegated power, however, is inconsistent with this Code. (22a
considered revoked whenever a and 23a)
majority of the outstanding capital
 Baretto vs. La Previsora
stock or members shall so vote at a
regular or special meeting. - Any corporate act emanates from
 If it is to be amended what is the the board
proceeding? - Directors themselves cannot amend
- Section 48 2nd paragraph provides: the by-laws if they were not granted
the same
Section 48. Amendments to  Section 48
by-laws. - The board of directors or
trustees, by a majority vote thereof,  The power granted is not subject to
and the owners of at least a majority
of the outstanding capital stock, or revocation T or F?
at least a majority of the members of
- FALSE
a non-stock corporation, at a regular
or special meeting duly called for  If the by-laws are amended when
the purpose, may amend or repeal
any by-laws or adopt new by-laws. will they become valid?
The owners of two-thirds (2/3) of the
- Upon issuance of the SEC that they
outstanding capital stock or two-
thirds (2/3) of the members in a non- are not inconsistent
stock corporation may delegate to
 What if the SEC failed to act within
the board of directors or trustees the
power to amend or repeal any by- 10 months without fault attributable
laws or adopt new by-laws: to the corporation?
Provided, That any power delegated
to the board of directors or trustees  T or F any amendment of the by-
to amend or repeal any by-laws or laws will never become valid until it
adopt new by-laws shall be gives its stamp of approval even
considered as revoked whenever after 1 year
stockholders owning or representing
a majority of the outstanding capital - TRUE. Articles of incorporation and
stock or a majority of the members by-laws are different
in non-stock corporations, shall so
vote at a regular or special meeting. MEETINGS
60
 Meetings - Notice requirement is the by-laws is

a mandatory requirement
- Meetings of stockholders 1.
Date fixed in the by-laws or by-law - Improperly served, any action will be
invalidated at the objection of any
- Meetings of director or trustees stockholder or member
 Meetings are regular and special  Must be held in the proper place
 Meetings of stockholders  Where should it be held?
 What is regular and what is special? - Apparent from the foregoing
provision is that meetings of
 When are regular meetings of the
stockholders must, at all times, be
stockholders held?
held in the city or municipality where
- Fixed date provided by the by-laws the principal office of the corporation
is located and, as far as practicable,
 What if there is no date? in the principal office of the
corporation.
- April
 May the by-laws of a corporation
 Why april?
provide that meetings be held
- Point in time the audited financial anywhere in the Philippines?
statement have been prepared
- While there is no provision
 What if in the date specified in the authorizing a stock corporation to
by-laws or by the law itself the hold stockholders’ meetings outside
meeting was not convened, for of the City of Municipality where the
instance lack of quorum or force principal office is located, the law
majeure? allows a non-stock corporation to
provide in its by-laws any place of
- It may be postponed on a members’ meeting provided that
reasonable date proper notice is sent to all members
indicating the date, time and place
 Notice requirement?
of the meeting which shall be within
- Regular- 2 weeks prior notice the Philippines.
- Special- 1 week  T or F the by-laws of a stock

corporation may validly provide that
 May the notice requirement be meetings shall be held anywhere in
lessened? the Philippines?
- By-laws may provide a longer or a - FALSE. Non-stock corporations

shorter duration lang pwede provided nakalagay sa
by-laws and provided proper notice
 What if the notice requirement is not
is given
complied with?
 Corporation can do only such things
 What happened to any act passed
as the law allows it to do,
in a meeting when notice DOCTRINE OF LIMITED
requirement was not required with? CAPACITY
- Voidable, subject to ratification
 Board of directors vs. Tan

61
 San Miguel office located in Ortigas the stockholders or members of a

Center. May stockholders meeting corporation for the purpose of
be held in PICC center? removal of directors or trustees, or
any of them, must be called by the
- YES. Metro Manila, one single city secretary on order of the president
or on the written demand of the
 Must be called by the proper party stockholders representing or holding
at least a majority of the outstanding
 Who calls? capital stock, or, if it be a non-stock
corporation, on the written demand
- President until and unless there is a of a majority of the members entitled
provision , secretary on order of the to vote. Should the secretary fail or
president refuse to call the special meeting
upon such demand or fail or refuse
 What if there is nobody who can to give the notice, or if there is no
secretary, the call for the meeting
call?
may be addressed directly to the
- The petitioner, stockholder may stockholders or members by any
stockholder or member of the
petition the court corporation signing the demand.
Notice of the time and place of such
 What if there is a person who can
meeting, as well as of the intention
call, but he fails or neglects to call to propose such removal, must be
the meeting? May a stockholder given by publication or by written
petition to authorize a meeting? notice prescribed in this Code.
Removal may be with or without
- Ponce case only applies when there cause: Provided, That removal
is NO person authorized to call the without cause may not be used to
meeting. If there is a person, but deprive minority stockholders or
neglects his duty. Ponce will not members of the right of
representation to which they may be
apply.
entitled under Section 24 of this
 Writ of injunction may never be Code. (n)
issued ex parte  Cases of removal or ouster of a
 Is there any exception? director
- Section 28 only instance  Mandamus would be appropriate

remedy if there is a person
Section 28. Removal of authorized but refuses
directors or trustees. - Any director
or trustee of a corporation may be  Quorum and voting requirement
removed from office by a vote of the
stockholders holding or representing - Majority stockholders or members
at least two-thirds (2/3) of the constitute a quorum
outstanding capital stock, or if the
corporation be a non-stock  Is the presence of the majority
corporation, by a vote of at least owners of the outstanding capital
two-thirds (2/3) of the members stock ABSOLUTE to have a
entitled to vote: Provided, That such quorum?
removal shall take place either at a
regular meeting of the corporation or - NO. when the code requires a
at a special meeting called for the higher quorum it must also be
purpose, and in either case, after
equivalent to the vote required
previous notice to stockholders or
members of the corporation of the
intention to propose such removal at
the meeting. A special meeting of
62
 Do you include non-voting shares in corporation are present or

arriving at the voting requirement to duly represented at the
have a valid corporate act? meeting.”
- It depends.  Directors/trustees meeting
- Section 6 last par. If it falls within the  Regular (monthly) and special
penultimate par. Of section 6 (anytime)
 Five requisites of a valid meeting  May that be restricted (within or

outside the Phil)
1. It must be held on the date fixed in
the by-laws or in accordance with - YES. unless the by-laws provide
law otherwise.
2. Prior notice must be given  Is there any notice requirement?
3. It must be held at he proper place - YES. 1 day unless otherwise

provided by the by-laws
4. It must be called by the proper party
 What happens if notice is not
5. Quorum and voting requirements
complied with?
must be met
- If the notice requirement is not
 Date not complied with, notice,
complied with the meeting is illegal
place, not complied with and the
and will not bind the corporation
person who called not authorized,
except when subsequently ratified
what happens to any resolution
or in the case of a close corporation
called?
where the act of any one director
- Section 51, any meeting shall be may bind the corporation even
valid provided all the stockholders without a meeting under the special
are present or duly represented and provision of Section 101 of the
provided it is within the power of the Code.
corporation. 3RD paragraph of 324
 Can notice be waived? <sec.53>
- If the voting requirement is met, any
resolution passed in the meeting, Section 53. Regular and
even if improperly held or called will special meetings of directors or
trustees. - Regular meetings of the
be valid if all the stockholders or
board of directors or trustees of
members are present or duly every corporation shall be held
represented thereat. The last monthly, unless the by-laws provide
paragraph of section 51 is clear on otherwise.
the matter when it provides:
Special meetings of the
“all proceedings had and any board of directors or trustees may
business transacted at any be held at any time upon the call of
meeting of the stockholders the president or as provided in the
or members, if within the by-laws.
powers or authority of the
Meetings of directors or
corporation, shall be valid trustees of corporations may be held
even if the meeting be anywhere in or outside of the
improperly held or called, Philippines, unless the by-laws
provided all the stockholders provide otherwise. Notice of regular
or members of the or special meetings stating the date,
time and place of the meeting must
63
be sent to every director or trustee the articles provide for a greater

at least one (1) day prior to the quorum or voting requirement
scheduled meeting, unless
otherwise provided by the by-laws. A  Should the director or trustees be
director or trustee may waive this physically present?
requirement, either expressly or
impliedly. (n) - General rule, must sit and act as a
body to have a valid corporate act
- YES. Expressly and impliedly
 Five man member board, a meeting
- SEC ruling
was called today, should the
A special meeting is valid physical presence or warm bodies
without notice where the requires to constitute a quorum?
directors are all present or
- NO. it is not required.
where they consent to the
Teleconference or video conference
meeting. Presence at the
is allowed, E- commerce law
meeting waives the want of
notice. Moreover, it has been  Membership subject to laws
ruled that the meeting of the
directors without a formal call  Stockholder not yet
first being had, and notice
 May director vote by proxy?
thereof given to the
members, did not operate to - NO
invalidate it or to render the
proceedings which were  If A is a director and a meeting is
taken at it void, for every called for the purpose of electing a
member of the board were new set of BOD can A vote by
present, and their joint action proxy?
had completely bound the
- YES. Because it is a stockholders
corporation as if the meeting
meeting
has been called with due
formality, and everyone of the  If directors meeting, cannot vote by
directors had received proper proxy
notice.
 Stockholder’s right to vote
 What is the quorum and voting
requirement in the directors - Inherent in stock ownership
meeting?
- However this right is not always
- Majority of the members of the inherent, because it may be denied:
board of directors (entire
1. Redeemable and preferred
membership)
shares, however if founders
 Vote required to pass a valid shares are issued others may be
corporate act? denied the right to vote.
- Majority of those present at which 2. May be denied by the articles of

there is a quorum (3 present, vote of incorporation or contracts
2 sufficient)
- When not denied they may do so in
- Exception, majority of all the person or by proxy
members of the board in case of
 May the right to vote by proxy be
election of corporate officers, unless
denied?
64
 May the articles of incorporation to another or by sale of the shares.

deny? Thus it may be revoke orally by
conduct such that appearing and
 May the by-laws validly provide that asserting the right to vote at a
proxy voting is not allowed? meeting by the registered owner of
the shares revokes a proxy
- NO
previously given.
 Only non-stock may be denied
 Must be submitted to a validation
proxy voting (may be broaden,
committee
limited or denied)
 By-laws of non-stock corporations
 Proxy voting is a matter of right
may deny proxy voting
granted by law
 What is voting trust agreement?
 Requirements of a valid proxy?
- One created by an agreement
- Section 58
between a group of stockholders of
Section 58. Proxies. - a corporation and a trustee, or a
Stockholders and members may group of identical agreements
vote in person or by proxy in all between individual stockholders and
meetings of stockholders or a common trustee, whereby it is
members. Proxies shall in writing, provided that for a term o years or
signed by the stockholder or for a period contingent upon a
member and filed before the certain event, or until the agreement
scheduled meeting with the is terminated, control over the stock
corporate secretary. Unless owned by such stockholders, shall
otherwise provided in the proxy, it be lodged in the trustee, either with
shall be valid only for the meeting or without reservation to the owners
for which it is intended. No proxy or persons designated by them the
shall be valid and effective for a power to direct how such control
period longer than five (5) years at shall be issued.
any one time. (n)
- It is a devise of binding stockholders
 How long may a proxy exist? to vote as a unit and thus assuring a
desirable stability and continuity in
- Maximum of 5 years management in situations where it is
needed.
- Valid for the meeting in which it is
intended  What is the effect of a voting trust
 Is proxy revocable? agreement relative to the rights?
- Lee vs. CA must pass these criteria

- Generally revocable, unless coupled
with interest 1. That the voting rights of the stock
are separated from the other
 Revocation
attributes of ownership;
- A proxy, like agency in general is
2. That the voting rights granted are
revocable unless coupled with an
intended to be irrevocable for a
interest and revocation need not be
definite period of time; and,
made by formal notice in writing.
Revocation may be expressed to
the proxy holder, to the election
committee, by a subsequent proxy
65
3. That the principal purpose of the stockholder of the corporation in the

grant of voting rights is to acquire same manner as any other
voting control of the corporation. corporate book or record: Provided,
That both the transferor and the
 During the duration of the trust they trustee or trustees may exercise the
are irrevocable unless there is a right of inspection of all corporate
books and records in accordance
violation either by fraud
with the provisions of this Code.
 Requisites
Any other stockholder may
- Section 59 transfer his shares to the same
trustee or trustees upon the terms
and conditions stated in the voting
Section 59. Voting trusts. - trust agreement, and thereupon
One or more stockholders of a stock shall be bound by all the provisions
corporation may create a voting of said agreement.
trust for the purpose of conferring
upon a trustee or trustees the right
No voting trust agreement
to vote and other rights pertaining to
shall be entered into for the purpose
the shares for a period not
of circumventing the law against
exceeding five (5) years at any time:
monopolies and illegal combinations
Provided, That in the case of a
in restraint of trade or used for
voting trust specifically required as a
purposes of fraud.
condition in a loan agreement, said
voting trust may be for a period
Unless expressly renewed,
exceeding five (5) years but shall
all rights granted in a voting trust
automatically expire upon full
agreement shall automatically
payment of the loan. A voting trust
expire at the end of the agreed
agreement must be in writing and
period, and the voting trust
notarized, and shall specify the
certificates as well as the certificates
terms and conditions thereof. A
of stock in the name of the trustee
certified copy of such agreement
or trustees shall thereby be deemed
shall be filed with the corporation
cancelled and new certificates of
and with the Securities and
stock shall be reissued in the name
Exchange Commission; otherwise,
of the transferors.
said agreement is ineffective and
unenforceable. The certificate or
The voting trustee or trustees
certificates of stock covered by the
may vote by proxy unless the
voting trust agreement shall be
agreement provides otherwise.
cancelled and new ones shall be
(36a)
issued in the name of the trustee or
trustees stating that they are issued
 Does it need to be notarized?
pursuant to said agreement. In the
books of the corporation, it shall be
- Yes, otherwise it is ineffective and
noted that the transfer in the name
of the trustee or trustees is made unenforceable
pursuant to said voting trust
 Only legal ownership is transferred
agreement.
 Being still the beneficial owner they
The trustee or trustees shall
execute and deliver to the may transfer these rights
transferors voting trust certificates,
which shall be transferable in the  Is the right granted to a voting trust
same manner and with the same agreement absolute? (to inspect)
effect as certificates of stock.
- NO.
The voting trust agreement
- The voting trust agreement filed with
filed with the corporation shall be
subject to examination by any the corporation shall be subject to
66
examination by any stockholder of - Rights liabilities of a stockholder are

the corporation in the same manner there in their individual capacity-
as any other corporate book or corporate entity theory
record. Provided, that both the
transfer and the trustee or trustees  Voting trust agreements
may exercise the right of inspection - Normally executed in favor of
of all corporate books and records in
banking and financial institutions
accordance with the provisions of
this Code. - So that they can vote a certain set
of directors
 Legal title is transferred to the voting
trustee - They will be more secured
 May the voting trustee vote by  Voting pull agreement

proxy?
- Enters into an agreement
- Yes, legal owner may vote by proxy
- Pull all their shares to cast one vote
 May the proxy holder vote by proxy?
- Covered by rules governing
- NO, (AGENT) an agent can have no contracts
other agent unless specifically
- By pulling their votes they can
allowed by the principal
decline the resolution passed by the
 Stockholder executing as a proxy, is board
he qualified to be voted as a
 END OF MIDTERMS
director?
 Why is he qualified to act as a

director if the stockholder executes STOCKS AND STOCKHOLDERS
as a director?
 3 modes
- The beneficial owner of the shares
in a voting trust is disqualified to be 1. By a contract of subscription with
a director in a voting trust whereas the corporation;
in a proxy, the owner of the shares
2. By purchase of treasury shares from
may be elected as such since legal
the corporation; and,
title thereof remains with him
3. By purchase or acquisition of shares
- YES he remains to be the owner
from existing stockholders.
 Is the stockholder executing in a  Section 60 subscription
voting trust agreement, is he
qualified to act as a director? - Any contract
- NO. ceases to be stockholder of - Whether existing or still to be

record, no longer the legal owner of formed
shares
Section 60. Subscription contract. -
 May the corporation enforce the Any contract for the acquisition of
voting trust agreements executed by unissued stock in an existing
its stockholders? corporation or a corporation still to be
formed shall be deemed a subscription
- NO. NIDC vs. AQUINO within the meaning of this Title,
notwithstanding the fact that the parties
- Not a privy to the contract
67
refer to it as a purchase or some other - Treasury shares

contract. (n)
Y- 80T/S DECEMBER 08
th
 Under the old law the 4 mode is
40 % (AUGUST) WAS DESTROYED BY
PURCHASE
FIRE, IS HE STILL LIABLE TO PAY THE
 Purchase UNPAID PORTION?
- Reciprocal in nature  IT WAS AGREED THAT IT WAS A

PURCHASE AND WILL BE A
- Purchaser can neither require the STOCKHOLDER ONLY IF PAID IN
issuance FULL IS HE LIABLE?
Xco. Inc. - NO, because that was a purchase
P - First example galing sa unissued
stock
Authorized capital 1M - 2nd example galling sa treasury

shares hindi sa unissued share
500 SUBSCRIBED
 NO such thing as purchase of
500 UNISSUED STOCKS (AS LONG AS unissued stocks
GALING DITO)
 A subscription contract can be
Z wants to acquire 100K conditional provided there is nothing
in the charter or statute prohibiting it
Entered in June 50% shall be down
and not against public order, law,
payment remainder December 08
etc.
o he will not be considered a
 Must it be in writing?
stockholder unless he has paid in
full - NO, it may be oral
August 08 property is ravaged by fire all  5M should it be in writing to be valid
are turned into shares and binding as a subscription?
 Is Z liable to pay the balance of his - NO, statutes of frauds only applies
acquisitions? to SALES
- YES, no matter how the party refer  Trillana vs. Quezon College
to it, it is considered subscription
- Counter proposal, therefore there
- Once you subscribe, you become a
was a need for an acceptance
stockholder which is entitled to all
the liabilities of a stockholder - Facultative because it is in his own
free will, it is void
Z- subscribed to 100T/S of XCo.
 What may be used as a
Amount he paid 50k
consideration and how much should
Z did not pay on the date called and was be the consideration?
declared a delinquent share
 Corporation paid 100T/S therefore
the corporation reacquired the Section 62. Consideration
for stocks. - Stocks shall not be
shares again, what are they called?
issued for a consideration less than
68
the par or issued price thereof. capital stock at a meeting duly

Consideration for the issuance of called for the purpose. (5 and 16)
stock may be any or a combination
of any two or more of the following:  “Amounts transferred from
unrestricted retained earnings to
1. Actual cash paid to the stated capital” what does it mean?
corporation;
- Stock dividends will in effect
2. Property, tangible or intangible, capitalize the unrestricted retained
actually received by the corporation
earnings
and necessary or convenient for its
use and lawful purposes at a fair  After 5 years the founders shares
valuation equal to the par or issued
value of the stock issued; may be converted into common
shares or other kinds of shares
3. Labor performed for or services
actually rendered to the corporation;  May shares of stocks be issued
without consideration? Why?
4. Previously incurred indebtedness
of the corporation; - NO, two reasons by the SC,
discriminatory against other
5. Amounts transferred from stockholders and second unlawful, it
unrestricted retained earnings to prejudices the right of the creditors
stated capital; and “Trust Fund Doctrine”
6. Outstanding shares exchanged  If issued without a consideration
for stocks in the event of
reclassification or conversion. - Section 65, they will be considered
as watered stocks
Where the consideration is
other than actual cash, or consists
Section 65. Liability of
of intangible property such as
directors for watered stocks. - Any
patents of copyrights, the valuation
director or officer of a corporation
thereof shall initially be determined
consenting to the issuance of stocks
by the incorporators or the board of
for a consideration less than its par
directors, subject to approval by the
or issued value or for a
consideration in any form other than
Commission.
cash, valued in excess of its fair
value, or who, having knowledge
Shares of stock shall not be
thereof, does not forthwith express
issued in exchange for promissory
his objection in writing and file the
notes or future service.
same with the corporate secretary,
shall be solidarily, liable with the
The same considerations
stockholder concerned to the
provided for in this section, insofar
corporation and its creditors for the
as they may be applicable, may be
difference between the fair value
used for the issuance of bonds by
received at the time of issuance of
the corporation.
the stock and the par or issued
value of the same. (n)
The issued price of no-par
value shares may be fixed in the
- Subscribers may be compelled to
articles of incorporation or by the
board of directors pursuant to pay the value
authority conferred upon it by the
 Issuance of a certificate of stock is
articles of incorporation or the by-
laws, or in the absence thereof, by another thing
the stockholders representing at
least a majority of the outstanding
69
 What are the requisites for the  Are certificate of stocks considered
issuance of a valid certificate of negotiable?
stock?
- Quasi-negotiable
1. It must be signed by the president or
vice-president and countersigned by  Why are they considered quasi-
the secretary or assistant secretary; negotiable when it may be
transferred through endorsement
2. It must be sealed with the corporate and delivery?
seal; and the entire value thereof
(together with interest or expenses, 100t/s 001
if any) should have been paid. 10/s
While it appears, that a subscriber Abc co.

to shares of stock cannot be entitled
to the issuance of a certificate of B stole and forged the signature
stock until the full amount of his C is purchaser in good faith and for value
subscription together with interest will C acquire title
and expenses (in case of delinquent
shares) if any is due, has been paid,
a subscriber to shares of stock,
even if not yet fully paid, is entitled
to exercise all the rights of a
stockholder and the corresponding
liability that attach thereunder. Thus,
the Code provides:
Endorsement from
Section 72. Rights of unpaid When issued by owner
shares. - Holders of subscribed Endorsed by owner- strict compliance
shares not fully paid which are not
delinquent shall have all the rights of ANSWER: a certificate of stock is not
a stockholder. (n) regarded as negotiable in the same sense
 Is the issuance of a certificate of that a bill or note is negotiable, even if it is
stock necessary to consider the endorsed in blank. Thus, while it may be
subscriber a stockholder? transferred by endorsement coupled with
delivery thereof, and therefore merely
- NO, shall be considered a quasi-negotiable, it is nonetheless non-
stockholder even without a negotiable in that the transferees takes it
certificate of stock without prejudice to all the rights and
defenses which the true and lawful owner
 Instances when he may not be able may have except in so far as the principles
to exercise his rights as such governing estoppels may apply.
stockholder
He acquired it by virtue of a forged
- Declared delinquent instrument; no matter how innocent the
- When he exercises his appraisal purchaser is because it is subject to all the
right rights and defenses
 Are certificate of stocks  What if A endorsed it?

transferrable? - He is estopped, unless there are
- YES other available defenses

70
 Transfer is required to be recorded stockholder and to inform the

in the books of the corporation, corporation of any change in shares
however even if not recorded, it will ownership so that it can ascertain
be valid between the parties. Non- the persons entitled to the rights and
registration will not however, affect subject to the liabilities of a
the validity thereof at least in so far stockholder.”
as the contracting parties are
Thus, it was also ruled by the
concerned.
High Court in Nautica
Section 63. Certificate of Canning Corp. vs. Yumul that
stock and transfer of shares. - The “A transfer of shares not
capital stock of stock corporations recorded in the stock and
shall be divided into shares for transfer book of the
which certificates signed by the corporation is non-existent in
president or vice president, so far as the corporation is
countersigned by the secretary or
concerned.” This is so
assistant secretary, and sealed with
the seal of the corporation shall be because “the corporation
issued in accordance with the by- looks only through its books
laws. Shares of stock so issued are for the purpose of
personal property and may be determining who its
transferred by delivery of the stockholders are.”
certificate or certificates indorsed by
the owner or his attorney-in-fact or  Registration is necessary for the
other person legally authorized to following:
make the transfer. No transfer,
however, shall be valid, except as 1. To enable the corporation to know
between the parties, until the who its stockholders are;
transfer is recorded in the books of
the corporation showing the names 2. To enable the transferee to exercise
of the parties to the transaction, the his rights a s stockholders;
date of the transfer, the number of
the certificate or certificates and the 3. To afford the corporation an
number of shares transferred. opportunity to object or refuse
registration of the transfer in case
No shares of stock against
which the corporation holds any allowed by law;
unpaid claim shall be transferable in
the books of the corporation. (35) 4. To avoid fictitious and fraudulent
transfers; and,
 “Until registration is accomplished,
5. To protect creditors who have the
the transfer, though valid between
right to look upon stockholders, in
the parties, cannot be effective as
case of no-payment or watered
against the corporation. Thus the,
shares, for the satisfaction of their
unrecorded transfer cannot enjoy
claims.
the status of a stockholder; he
cannot vote nor be voted for, and he  Duty of the secretary is ministerial,
will not be entitled to dividends. The hence mandamus will lie if the
corporation will be protected when it secretary refuses to record the
pays dividend to the registered transfer, but he cannot be compelled
owner despite a previous transfer of when the transferee’s title to the
which it had no knowledge. The said shares has no prima facie
purpose of registration therefore is validity or uncertain
twofold: to enable the transferee to
exercise all the rights of a
71
 Transfer- absolute and unconditional title to a share need be entered and

transfer to warrant registration in the noted upon the books of the
books of the corporation in order to corporation in order that such
bind the latter and other third transfer may be valid, therefore,
persons. inasmuch as a chattel mortgage of
the aforesaid title is not a complete
 Other restrictions on the right to and absolute alienation of the
transfer shares would include: dominion and ownership thereof, its
entry and notation upon the books
1. It is not valid, except as between the
of the corporation is not necessary
parties, until recorded in the books
requisite to its validity
of the corporation;
 Chua guan vs. Magsasaka
2. Shares of stock against which the
corporation holds any unpaid claim - Was the mortgage valid and
shall not be transferable in the effective as against subsequent third
books of the corporation; unpaid parties
claims, refer to claims arising from
unpaid subscription and not to any - Register of deeds where the
indebtedness which a stockholder corporation resides and if different in
may owe the corporation such as the register of deeds of owner’s
monthly dues; domicile
3. Restrictions required to be indicated  Unson vs. Dinamito

in the articles of incorporation, by-
laws and stock certificates of a close - All transferred not register will not
corporation; have a valid force and effect
4. Restrictions imposed by special law,  Right to transfer may be regulated

such as the Public Service Act
 May not be unreasonably restricted
requiring the approval of the
government agency concerned if it  Violation of nationalization law-
will vest unto the transferee 40% of Central Bank
the capital of the public service
company;  Lambert vs. Fox
5. Sale to aliens in violation of - Valid , may be reasonably regulated,

maximum ownership of shares restricted by agreement of parties
under the Nationalization Laws;
- Reasonable agreement by the
6. Those covered by reasonable parties
agreement of the parties.
- Reasonable as to length of time
 Monserat vs. Ceron
 Padgett vs. Babcock
- Does it include mortgage?
- Any attempt to restrain transfer
- NO, it is not an absolute transfer
- SC, in the absence of a valid lien
- Will not affect the transfer through upon its shares
mortgage
- Valid restrictions shares are
- Absolute and unconditional transfer applicable
- Only the transfer or absolute

conveyance of the ownership of the
72
- Any restriction on a stockholder’s - Endorsement alone is not sufficient

right to dispose of his shares must nor delivery without endorsement is
be construed strictly; and any not allowed
attempt to restrain a transfer of
shares is regarded as being in - Endorsement plus delivery is
restraint of trade, in the absence of mandatory
a valid lien upon its shares, and  Is there any other mode of
except to the extent that valid transferring stock?
restrictive regulations and
agreements exist and are - Notarized deed
applicable. Subject only to such
restrictions, a stockholder cannot be - Deed of assignment
controlled in or restrained from  Rural bank of Salinas vs. CA
exercising his right to transfer by the
corporation or its officers or by other - If denied or refused without good
stockholders, even though the sale cause, mandamus will lie
is to a competitor of the company, or
to an insolvent person, or even  Tay vs. CA
though a controlling interest is sold
- Mandamus may issue if petition has
to one purchaser.
a clear legal right
 Certificate of stocks are
- Never issued in doubtful cases
transferrable
- Petitioner failed to establish a clear
- By endorsement and delivery of the
legal right and alleged ownership is
stock certificate to the transferee
without merit
 In order to be valid, must be
- Did not acquire ownership by virtue
registered in the books. If not, will of the contract of pledge
only be binding among parties
- In a contract of pledge there must
 How may shares of stock be
be foreclosure
transferred?
- In the case there was no attempt to
- Endorsement of stock certificate by foreclose
owner or attorney-in-fact with
delivery - Petitioner must have a prima facie
right
 Embassy farms vs. CA
 Nava vs. Peers Marketing
- Must be endorsed by owner or
attorney-in-fact coupled with - A stock subscription is a subsisting
delivery liability from the time the
subscription is made
- Endorsed not delivered
- The subscriber is as much bound to
- Proper mode and manner must be pay his subscription as he would be
complied with to pay any other debt
 Razon vs. IAC - No stock certificate was issued.
Without stock certificate, which is
- Delivered not endorsed
the evidence of ownership of
- Reverse of Embassy Farms corporate stock, the assignment of
corporate shares is effective only
73
between the parties to the - Valid between contracting parties

transaction even if not recorded in corporation
books
 Exception to the general rule
- Right accrues only if refused
 Rural Bank of Lipa vs. CA
- Statute of limitations does not apply
- By notarized deed in registration of shares of stock
- Certificate of stocks already issued - Must determined from the time of
must be coupled with delivery, refusal
exception (TAN vs. SEC)
 Why are they non-negotiable when
 Stock certificate has already been they may be transferred?
issued it must be coupled with the
delivery - Transferees pays it without
prejudice to all the rights and
 After certificate of stock is issued, defenses as the true and lawful
may it be effectively transferred owner may have under the law
even without endorsement or except insofar as such rights and
delivery of the stock certificate? defenses are subject to the
limitations imposed by the principles
- Person sought to be a stockholder is
governing estoppels
an officer and has custody
 De los Santos vs. Republic
 Endorsement and delivery is not
necessary (TAN vs. SEC) - Why is he, not considered as the
owner of shares? When it has been
 Tan vs. SEC (FULL KNOWLEDGE,
said that when endorsed by the
HE IS ESTOPPED)
owner it is considered as strict
- Persons sought to be stockholder is certificate? Because certificate of
officer and has custody of the book stocks are non-negotiable
(estopped)
- Although a stock-certificate is
 General Rule for valid transfer sometimes regarded as quasi-
negotiable, in the sense that it may
- Certificate of stock must be be transferred by endorsement,
endorsed by owner or attorney-in- coupled with delivery, it is well
fact coupled with delivery settled that the instrument is non-
negotiable, because the holder
 Exceptions
thereof takes it without prejudice to
- Section 63 uses the word “may” such rights or defenses as the
registered owner or creditor may
- Showing that there may be other have under the law, except insofar
modes of transferring shares as such rights or defenses are
subject to the limitations imposes by
 Is there a time frame or fixed period
the principles governing estoppels.
as when transfer can be made?
 Unauthorized issuance of stock
- NO, (WON vs. WACK WACK)
certificates
 Won vs. Wack Wack
100/s
100
XYZCo
74
 Stock certificate now in possession

of D. A knew of what happened and
100 pesos per share
went to the corporation and
Stolen by B and forged the signature of A
B sells to C will C acquire title? NO complains. Who will have a better
title?
- the corporation may be compelled to

recognize both, A as stockholder
(non-negotiable) D, reliance that the
stock certificate is valid and existing
and owned by C
ENDORSEMENT FORM
 Forged transfers
 C armed with the endorsement form
- If the corporation should issue a
certificate, sold to D (innocent
new certificate in pursuance of a
purchaser for value), will D acquire
forged transfer, the corporation
title?
incurs no liability to the person in
- NO, subject to such rights and whose favor it is issued and it may
defenses as the true and lawful demand its return for cancellation.
owner may have The corporation in such case has
been guilty of no misrepresentation.
 What if C now goes to the On the other hand, it is the duty of
corporation and presents the form? the purchaser to determine that the
- Then the corporation shall cancel the indorsement of the owner is
genuine. However, if the new
old certificate and issues a new one,
certificate issued to the purchaser
now in the name of C, now
comes into the hands of a bona fide
registered in the name of C, will C
purchaser for value, the corporation
acquire title?
will be stopped from denying validity
 A found out what happened and thereof, since by issuing such new
goes to the corporation who has a certificate it represents that the
better title C or A? person named therein is a
stockholder of the corporation. The
- A, A cannot be deprived of his right by corporation is thus forced to
virtue of an unauthorized transfer recognize both the original
 Corporation can compel C to deliver certificate and new certificate-the
original, because the true owner
the new stock certificate because he
could not be deprived of his title by
made a representation that the
a forged transfer, and the new,
certificate where good.
because of its representation that
 Armed with the new certificate the person named therein is the
issued to C, C delivers to D a owner of shares in the corporation.
purchaser in good faith and for But if the recognition of both
value will D acquire title? stockholders would result in an over
issue of shares, then only the
- D will acquire title took the shares not original and true owner can be
by virtue of a forged or unauthorized recognized as a stockholder. The
transfer, but on the reliance that the bona fide purchaser of the new
stock certificate is valid and owned certificate will however have a right
by C of damages against the corporation.
The corporation, in turn, would have
75
a right of action against the person - Third party complaint against C, but
who made false representations and what if he is a purchaser for value?
in whose favor it issued a new 4th party claim against B
certificate. The true owner of the
shares which were wrongfully  When may certificate of stocks be
transferred would of course have a issued?
right to compel the corporation to - Section 64 provides:
issue him a certificate in lieu of the
original one which was wrongfully Section 64. Issuance of
cancelled. stock certificates. - No certificate of
stock shall be issued to a subscriber
 Authorized capital stock 1M shares until the full amount of his
subscription together with interest
 All are subscribed who will the and expenses (in case of delinquent
corporation recognize as rightful shares), if any is due, has been
owner A or D? if both will be paid. (37)
recognized there will be over
 A certificate of stock cannot be
issuance
issued unless he fully paid the
- only A citing citizens national bank vs. amount subscribed
state (but if recognition of both
 Subscription to the capital stocks of
stockholders would result in an over
issue of shares, then only the the corporation are indivisible
original and true owner can be  Clear mandate of section 148 of the
recognized as a stockholder) code is that the ruling of the court in
- by virtue of the doctrine of non- Baltazar vs. Lingayen Gulf, no
negotiability of certificate of stocks longer holds true
 The true and lawful owner will never Section 148. Applicability to
be deprived of his rights existing corporations. - All
corporations lawfully existing and
 What happens to D? doing business in the Philippines on
the date of the effectivity of this
- D will have a cause of action against Code and heretofore authorized,
the corporation for the value of his licensed or registered by the
acquisition cost inclusive of Securities and Exchange
Commission, shall be deemed to
damages, attorney’s fees and cost have been authorized, licensed or
of suit registered under the provisions of
this Code, subject to the terms and
 D sues the corporation for the value conditions of its license, and shall
of his acquisition cost, inclusive of be governed by the provisions
damages, attorney’s fees and cost hereof: Provided, That if any such
of suit. What may the corporation corporation is affected by the new
do? requirements of this Code, said
corporation shall, unless otherwise
- NO defense, no valid defense, herein provided, be given a period
because it was represented to other of not more than two (2) years from
the effectivity of this Code within
parties that the certificate of stocks
which to comply with the same. (n)
is valid, subsisting, etc.
 Subscription to shares of stocks are
 2nd situation, what cause of action
indivisible
may the corporation have?
Remedy?
76
 Also apparent is that once a 2. For a consideration in property,

subscriber has paid his subscription tangible or intangible, valued in
in full, he becomes entitled to be excess of its fair market value;
issued a stock certificate and in the
3. Gratuitously or under an agreement
event that the corporation refuses to
that nothing shall be paid at all; or
do so, the stockholder my institute a
case for mandamus with damages. 4. In the guise of stock dividends when
Thus, it has been said that the duty there are no surplus profits of the
of the corporate officers to issue corporation.
stock certificates to those entitled
thereto is a ministerial duty  Why is stock watering illegal?
enforceable by mandamus.
1. The corporation is deprived of its
 Fua Cun vs. Summers and China capital thereby hurting its business
Banking Corp. prospects, financial capability and
responsibility;
- The court erred in holding the
plaintiff as the owner of 250 shares 2. Stockholders who paid their
of stock; “the plaintiff’s rights consist subscriptions in full, or promised to
in equity in 500 shares and upon pay the same, are injured and
payment of the unpaid portion of the prejudiced by the reduction of their
subscription price he becomes proportionate interest in the
entitled to the issuance of certificate corporation; and,
for said 500 shares in his favor.”
3. Present and future creditors are
- No certificate of stock until the full deprived of the corporate assets for
amount has been paid. the protection of their interest.
 Watered stock - Corporation is prejudiced
- One which is issued by the - Stockholders, dilution of interest

corporation as fully paid-up shares, - Creditors are prejudiced, virtue of
when in fact the whole amount of right to look upon corporations
the value thereof has not been paid. properties for the satisfaction of their
- Basis is par value and not the fair claims
market value  What is the effect of issuance of
 Section 62 states that stocks shall watered stocks
not be issued for a consideration 1. As to the corporation - when a
less than par or issued price thereof, corporation is guilty of ultra-vires or
while section 13 states that in no illegal acts which constitute an injury
case shall be paid-up capital be less to or fraud upon the public, or which
than five thousand [P5000] pesos. will tend to injure or defraud the
 If issued below par, issued value public, the State may institute a quo-
warranto proceeding to forfeit its
considered as water
charter for the misuse or abuse of
 How may watered stocks be its franchise.
issued?
2. As between the corporation and the
1. For a monetary consideration less subscriber- The subscription is void.
than its par or issued value; Such being the case, the subscriber
is liable to pay the full par or issued
77
value thereof, to render it valid and  What is the nature of the liability of
effective. the corporate directors consenting
to the issuance of watered stocks
3. As to the consenting stockholders -
and the extent of their liabilities?
They are stopped from raising any
objection thereto; - Solidarily liable with the holder of
the watered stocks to the extent of
4. As to dissenting stockholders - In
the water from said shares of stocks
view of the dilution of their
proportionate interest in the  Will all the directors be liable? What
corporation, they may compel the if you objected will you also be
payment of the “water” in the stock liable?
solidarily against the responsible
and consenting directors and - If you do not issue a written
officers inclusive of the holder of the objection, you are still liable
watered stocks;
- Even passive directors may be
5. As to creditors - They may enforce liable
payment of the difference in the
- Those having knowledge thereof,
price, or the water in the stock,
but did not interpose their objection
solidarily against the responsible
shall be liable
directors/officers and the
stockholders concerned; and’ - Section 65 provides:
6. As against transferees of the Section 65. Liability of

watered stock – His right is the directors for watered stocks. - Any
same as that of his transferor. If, director or officer of a corporation
however, a certificate of stock has consenting to the issuance of stocks
been issued and duly indorsed to a for a consideration less than its par
or issued value or for a
bona fide purchaser, without
consideration in any form other than
knowledge, actual or constructive, cash, valued in excess of its fair
the latter cannot be held liable, at value, or who, having knowledge
least as against the corporation, thereof, does not forthwith express
since he took the shares on reliance his objection in writing and file the
of the misrepresentation made by same with the corporate secretary,
the corporation that the stock shall be solidarily, liable with the
stockholder concerned to the
certificate is valid and subsisting.
corporation and its creditors for the
This is because a corporation is difference between the fair value
prohibited from issuing certificates received at the time of issuance of
of stock until the full value of the the stock and the par or issued
subscriptions have been paid and value of the same. (n)
could not, therefore, deny the
validity of the stock certificate it  ACS-100M 100M/S
issued as against a purchaser in PAR VALUE-1.00
good faith. Thus, Ballentine states
SUBSCRIBED-50M FAIR
that whether there is any liability on
MARKET VALUE-12.00/S
the part of the transferee of watered
stock is made to depend upon UNSUBSCRIBED-50M
whether he acquired the same
without notice, either as purchaser A
or donee. If he had knowledge B
thereof, he is subject to the same
liability as his transferor. C
78
D subscription, the board of directors

of any stock corporation may at any
E time declare due and payable to the
There is a denial of pre-emptive rights corporation unpaid subscriptions to
and directors A,B,C,D,E decided to the capital stock and may collect the
issue the remaining 50M and same or such percentage thereof, in
subscribed for 10M each at 2 per share. either case with accrued interest, if
any, as it may deem necessary.
 Is there stock watering if the fair
market value is 12.00? Payment of any unpaid subscription
or any percentage thereof, together
- No stock watering with the interest accrued, if any,
shall be made on the date specified
- The basis is the par value in the contract of subscription or on
the date stated in the call made by
- The shares where in fact paid more the board. Failure to pay on such
than the par value indicated in the date shall render the entire balance
articles of incorporation due and payable and shall make the
stockholder liable for interest at the
3 days later they sold their 10M share legal rate on such balance, unless a
for P11.00 each, therefore making a different rate of interest is provided
profit. in the by-laws, computed from such
date until full payment. If within thirty
 Can you question there actuations? (30) days from the said date no
What would be the cause of action? payment is made, all stocks covered
by said subscription shall thereupon
- It may be questioned. become delinquent and shall be
subject to sale as hereinafter
- Duty of loyalty or fiduciary duty as provided, unless the board of
such directors directors orders otherwise. (38)
- They cannot advance their own  Remedies of the corporation to

motives to the damage prejudice of enforce payment of unpaid
the corporation which they subscription
represents and stockholders as a
1. By board action in accordance with
whole instead of it being sold the procedure laid down in sections
outside 67 to 69 of the code
2. By a collection case in court as
- 500M would have gone to the provided for in section 70
coffers of the corporation, 500M
should be there for the protection of  Are subscribers of shares of stocks
creditors not fully paid, liable to pay interest?
- They are placed in a fiduciary - General rule is they are not liable to
relationship pay interest because the code says
unless requires in the by-laws
- Sila lang ba ang kikita, pano naman - Aside from the mandate of the law
yung corporation, opportunity na that subscribers to shares of stock
yun para kumita must pay the full value of their
subscription, they may likewise be
 When are unpaid subscriptions due required to pay interest on all unpaid
and payable? subscriptions if so imposed in the
contract or in the corporate by-laws
- Section 67. Payment of balance of at such rate as may be indicated
subscription. - Subject to the thereat or the legal rate if not so
fixed. Unless so required or
provisions of the contract of
79
provided, however, subscribers to subscription together with accrued

shares of stock, not fully paid, are interest, costs of advertisement and
not liable to pay interest on their expenses of sale, for the smallest
unpaid subscriptions. The code thus number of shares or fraction of a
provides: share. The stock so purchased shall
be transferred to such purchaser in
Section 66. Interest on the books of the corporation and a
unpaid subscriptions. - Subscribers certificate for such stock shall be
for stock shall pay to the corporation issued in his favor. The remaining
interest on all unpaid subscriptions shares, if any, shall be credited in
from the date of subscription, if so favor of the delinquent stockholder
required by, and at the rate of who shall likewise be entitled to the
interest fixed in the by-laws. If no issuance of a certificate of stock
rate of interest is fixed in the by- covering such shares.
laws, such rate shall be deemed to
be the legal rate. (37) Should there be no bidder at
the public auction who offers to pay
 Until a call is made, they are not due the full amount of the balance on the
and payable, but still subject to the subscription together with accrued
provisions of the contracts interest, costs of advertisement and
 Procedures in case of sale of expenses of sale, for the smallest
delinquent stocks number of shares or fraction of a
share, the corporation may, subject
- Section 68. Delinquency sale. - The to the provisions of this Code, bid
board of directors may, by for the same, and the total amount
resolution, order the sale of due shall be credited as paid in full
delinquent stock and shall in the books of the corporation. Title
specifically state the amount due on to all the shares of stock covered by
each subscription plus all accrued the subscription shall be vested in
interest, and the date, time and the corporation as treasury shares
place of the sale which shall not be and may be disposed of by said
less than thirty (30) days nor more corporation in accordance with the
than sixty (60) days from the date provisions of this Code. (39a-46a)
the stocks become delinquent.
 Who is the winning bidder in a
Notice of said sale, with a delinquency sale?
copy of the resolution, shall be sent
to every delinquent stockholder - Bidder who shall “offer to pay the full
either personally or by registered amount of the balance on the
mail. The same shall furthermore be subscription together with accrued
published once a week for two (2) interest, cost of advertisement and
consecutive weeks in a newspaper expenses of sale, for the smallest
of general circulation in the province number of shares or fraction of a
or city where the principal office of share.”
the corporation is located.
X Co. has 1M authorized capital
Unless the delinquent stock
stockholder pays to the corporation,
on or before the date specified for 500 thousand is already subscribed
the sale of the delinquent stock, the
balance due on his subscription, A subscribed to 100 thousand
plus accrued interest, costs of shares, 50 thousand is already paid
advertisement and expenses of leaving 50 thousand unpaid
sale, or unless the board of directors
otherwise orders, said delinquent The corporation is at a loss of 250
stock shall be sold at public auction thousand, the board decides to
to such bidder who shall offer to pay make a call for the payment of the
the full amount of the balance on the unpaid subscriptions, however A
80
could not paid, hence declared That the corporation has

delinquent and decides to sell his unrestricted retained earnings in
share at a public auction its books to cover the shares to be
purchased or acquired:
55 thousand is to be paid, remaining
balance plus cost and expenses 1. To eliminate fractional shares
arising out of stock dividends;
BIDDERS:
2. To collect or compromise an
X-55K FOR 99,900 shares indebtedness to the corporation,
arising out of unpaid subscription, in
Y-55K FOR 99,500 shares a delinquency sale, and to purchase
delinquent shares sold during said
Z-55K FOR 99,000 shares (winning sale; and
bidder)
3. To pay dissenting or withdrawing
 Assume there is no bidder, may the stockholders entitled to payment for
corporation bid? their shares under the provisions of
this Code. (a)
- NO. It cannot bid because the law
says, subject to the provisions of  What if the shares of A were sold
this CODE. Section 68 and 41 without compliance of the
should be reconciled. Section 68 requirements? May A question the
states that: sale?
Should there be no bidder at - The law prescribes two conditions

the public auction who offers to pay before an action to recover
the full amount of the balance on the delinquent stocks irregularly sold
subscription together with accrued may be allowed. These are:
interest, costs of advertisement and
expenses of sale, for the smallest 1. The party seeking to maintain such
number of shares or fraction of a action first pays or tenders to the
share, the corporation may, subject party holding the stock the sum for
to the provisions of this Code, bid which the same was sold, with
for the same, and the total amount interest from the date of the sale at
due shall be credited as paid in full the legal rate; and,
in the books of the corporation. Title 2. The action shall be commenced by
to all the shares of stock covered by the filing of a complaint within six
the subscription shall be vested in months from the date of the sale.
the corporation as treasury shares
and may be disposed of by said - The reason for such is the stability
corporation in accordance with the of transactions of the shares of
provisions of this Code. (39a-46a) stock
 Suppose in the example, since there

are no unrestricted retained
- There was no unrestricted retained earnings, hence the corporation
earnings in the example given cannot bid, is the corporation left
therefore the corporation cannot without any recourse?
bid , section 41, it states that:
- Section 70. Court action to recover
Section 41. Power to acquire unpaid subscription. - Nothing in this
own shares. - A stock corporation Code shall prevent the corporation
shall have the power to purchase or from collecting by action in a court
acquire its own shares for a of proper jurisdiction the amount
legitimate corporate purpose or due on any unpaid subscription, with
purposes, including but not limited accrued interest, costs and
to the following cases: Provided, expenses. (49a)
81
 Velasco vs. Poizat creditors have a right to look for

satisfaction of their claims and that
- The subscriber is as much bound to the assignee in insolvency can
pay the amount of the share maintain an action upon any unpaid
subscribed by him as he would be to stock subscription in order to realize
pay any other debt, and the right of assets for the payment of its debts.
the company to demand payment is
no less incontestable.  PNB vs. Bitulak
- Two available remedies: the first
and most special remedy given by - Where it not for the promise, the
the statute consist in permitting the defendants would have not
corporation to put up the unpaid subscribed
stock and dispose of it for the - Trust Fund Doctrine, it is established
account of the delinquent doctrine that subscriptions to the
subscriber. The other remedy is by capital of a corporation constitute a
action in court. fund to which creditors have a right
to look for satisfaction of their claims
 De Silva vs. Aboitiz and Co. and that the assignee in insolvency
can maintain an action upon any
- Discretionary on the part of the unpaid stock subscription in order to
board of directors to do whatever is realize assets for the payment of its
provided in the said article relative debts.
to the application of the part of the - A corporation has no power to
70 percent of the profit distributable release an original subscriber to its
in equal parts on the payment of the capital stock from the obligation of
shares subscribed to and fully paid paying for his shares, without a
valuable consideration for such
 Lingayen Gulf vs. Baltazar release; and as against creditors a
reduction of the capital stock can
- Exception: pursuant to a bona fide take place only in the manner and
compromise or to set off a debt due under the conditions prescribed by
from the corporation, a release the statute or the charter or the
supported by consideration, will be articles of incorporation.
effectual as against dissenting
stockholders and subsequent and  Edward Keller and Co. vs. COB
existing creditors. A release which
might originally have been held - May the stockholder be held liable
invalid may be sustained after a for the debts of the corporation?
considerable lapse of time YES. To the extent of their unpaid
subscription
 Apocada vs. NLRC - As to the liability of the stockholders,
it is settled that a stockholder is
- Set-off is without any legal basis personally liable for the financial
- It was premature obligations of a corporation to the
- Unpaid subscriptions will become extent of his unpaid subscriptions
due and payable only upon certain
instance  Is there a prescriptive period
- Call or if there is a stipulation in wherein a demand for unpaid
contract subscription should be made?
- If no call and no stipulation in
contract then it will not be - NO. Garcia vs. Suarez case
demandable or payable at all
 Garcia vs. Suarez
 Lumanlan vs. Cura
- Never became due and payable
- Trust Fund Doctrine- subscription to until there is a call made
the capital of a corporation - Prescription will not run until and
constitute a fund to which the unless there is demand
82
- Prescription should be determined - Yes, he loses all his right as a

from the time demand has been stockholder except his right to
made and not from the time of receive dividends
subscription - He remains to be a director, only
qualification to be a director is he
 If declared delinquent, what would must own at least 1 share and since
be the effect as to the owner of said it still stands in his name pending
shares? the sale, he remains to be and act
as a director
- Section 71. Effect of delinquency. - - Even if there is sale, he may still be
No delinquent stock shall be voted director because the winning bidder
for or be entitled to vote or to may not bid or pay for all the shares
representation at any stockholder's or there might be remaining shares,
meeting, nor shall the holder thereof which would be credited in favor of
be entitled to any of the rights of a the delinquent stockholder
stockholder except the right to - Section 43 provides:
dividends in accordance with the
provisions of this Code, until and Section 43. Power to declare
unless he pays the amount due on dividends. - The board of directors
his subscription with accrued of a stock corporation may declare
interest, and the costs and dividends out of the unrestricted
expenses of advertisement, if any. retained earnings which shall be
(50a) payable in cash, in property, or in
- However if the shares are not stock to all stockholders on the
delinquent, subscribers to the basis of outstanding stock held by
capital of a corporation, though not them: Provided, That any cash
fully paid, are entitled to all the dividends due on delinquent stock
rights of a stockholder, according to shall first be applied to the unpaid
section 72 balance on the subscription plus
costs and expenses, while stock
Section 72. Rights of unpaid dividends shall be withheld from the
shares. - Holders of subscribed delinquent stockholder until his
shares not fully paid which are not unpaid subscription is fully paid:
delinquent shall have all the rights of Provided, further, That no stock
a stockholder. (n) dividend shall be issued without the
approval of stockholders
 May the rules governing representing not less than two-thirds
delinquency sale apply to a non- (2/3) of the outstanding capital stock
stock corporation? Are there unpaid at a regular or special meeting duly
shares in a non-stock corporation? called for the purpose. (16a)
- Rules governing stock corporations, Stock corporations are

when applicable, also applies to a prohibited from retaining surplus
non-stock corporation profits in excess of one hundred
- There are delinquent shareholders (100%) percent of their paid-in
also in a non-stock corporation. capital stock, except: (1) when
Example is membership dues justified by definite corporate
expansion projects or programs
 A corporation paid 50% of approved by the board of directors;
subscription and was later on or (2) when the corporation is
declared delinquent when he could prohibited under any loan
not pay upon call; A is also a agreement with any financial
director of the corporation. Will A, institution or creditor, whether local
upon declaration of delinquency , or foreign, from declaring dividends
still be able to exercise his right as a without its/his consent, and such
director? consent has not yet been secured;
or (3) when it can be clearly shown
that such retention is necessary
under special circumstances
83
obtaining in the corporation, such as the certificate of stock which has

when there is need for special been lost, stolen or destroyed and
reserve for probable contingencies. issue in lieu thereof new certificate
(n) of stock, unless the registered
owner files a bond or other security
 When a certificate of stock is loss or in lieu thereof as may be required,
destroyed, what must be done by effective for a period of one (1) year,
the owner thereof? for such amount and in such form
and with such sureties as may be
- Section 73. Lost or destroyed satisfactory to the board of directors,
certificates. - The following in which case a new certificate may
procedure shall be followed for the be issued even before the expiration
issuance by a corporation of new of the one (1) year period provided
certificates of stock in lieu of those herein: Provided, That if a contest
which have been lost, stolen or has been presented to said
destroyed: corporation or if an action is pending
in court regarding the ownership of
1. The registered owner of a said certificate of stock which has
certificate of stock in a corporation been lost, stolen or destroyed, the
or his legal representative shall file issuance of the new certificate of
with the corporation an affidavit in stock in lieu thereof shall be
triplicate setting forth, if possible, the suspended until the final decision by
circumstances as to how the the court regarding the ownership of
certificate was lost, stolen or said certificate of stock which has
destroyed, the number of shares been lost, stolen or destroyed.
represented by such certificate, the
serial number of the certificate and Except in case of fraud, bad
the name of the corporation which faith, or negligence on the part of
issued the same. He shall also the corporation and its officers, no
submit such other information and action may be brought against any
evidence which he may deem corporation which shall have issued
necessary; certificate of stock in lieu of those
lost, stolen or destroyed pursuant to
2. After verifying the affidavit the procedure above-described.
and other information and evidence (R.A. 201a)
with the books of the corporation,
said corporation shall publish a - The rationale of the above-quoted
notice in a newspaper of general law is to avoid duplication of
circulation published in the place certificates of stock and the
where the corporation has its avoidance of fictitious and
principal office, once a week for fraudulent transfers.
three (3) consecutive weeks at the
expense of the registered owner of  When will the replacement
the certificate of stock which has certificate be issued?
been lost, stolen or destroyed. The
notice shall state the name of said - The code provides that:
corporation, the name of the
registered owner and the serial after the expiration of one
number of said certificate, and the (1) year from the date of the last
number of shares represented by publication, if no contest has been
such certificate, and that after the presented to said corporation
expiration of one (1) year from the regarding said certificate of stock,
date of the last publication, if no the right to make such contest shall
contest has been presented to said be barred and said corporation shall
corporation regarding said certificate cancel in its books the certificate of
of stock, the right to make such stock which has been lost, stolen or
contest shall be barred and said destroyed and issue in lieu thereof
corporation shall cancel in its books new certificate of stock,
84
 Could it be issued earlier than 1 corporation or acquire any personal

year? or pecuniary interest in conflict with
their duty as such directors or
- Yes it can be, the code states that: trustees shall be liable jointly and
severally for all damages resulting
unless the registered owner there from suffered by the
files a bond or other security in lieu corporation, its stockholders or
thereof as may be required, effective members and other persons.
for a period of one (1) year, for such
amount and in such form and with When a director, trustee or
such sureties as may be satisfactory officer attempts to acquire or
to the board of directors, in which acquires, in violation of his duty, any
case a new certificate may be interest adverse to the corporation
issued even before the expiration in respect of any matter which has
of the one (1) year period been reposed in him in confidence,
provided herein: Provided, That if a as to which equity imposes a
contest has been presented to said disability upon him to deal in his
corporation or if an action is pending own behalf, he shall be liable as a
in court regarding the ownership of trustee for the corporation and must
said certificate of stock which has account for the profits which
been lost, stolen or destroyed, the otherwise would have accrued to
issuance of the new certificate of the corporation. (n)
stock in lieu thereof shall be
suspended until the final decision by  Certificate of stock was lost, the
the court regarding the ownership of owner transfers his shares by way
said certificate of stock which has of a notarized deed will it be valid?
been lost, stolen or destroyed.
- He cannot do so, if a certificate of
 May corporate officers be held liable stock is issued by a corporation, a
for the unauthorized issuance? mere notarized deed will not suffice
- Deed of assignment was not
- YES, the code provides that: sufficient since there was no
endorsement (Rural Bank of Lipa
Except in case of fraud, bad vs. CA)
faith, or negligence on the part of
the corporation and its officers, no  Rights and liabilities of stockholders
action may be brought against any
corporation which shall have issued - RIGHTS
certificate of stock in lieu of those
lost, stolen or destroyed pursuant to 1. Participation in the management of
the procedure above-described. the corporate affairs by exercising
(R.A. 201a) their right to vote and be voted upon
either personally or by proxy as
 Assuming the last paragraph is not provided for under sections 50 and
there; would it be not the same, that 58 of the code;
they should be held liable due to 2. To enter into a voting trust
fraud, bad faith or negligence? agreement subject to the procedure,
requirements and limitations
- YES. Section 31 provides that: imposed under section 50;
3. To receive dividends and to compel
Section 31. Liability of their declaration if warranted under
directors, trustees or officers. - section 43;
Directors or trustees who willfully 4. To transfer shares of stock subject
and knowingly vote for or assent to only to reasonable restrictions such
patently unlawful acts of the as options and preferences as may
corporation or who are guilty of be allowed by law inclusive of the
gross negligence or bad faith in right of the transferee to compel the
directing the affairs of the registration of the transfer in the
85
books of the corporation as provided

for in section 63;
5. To be issued a certificate of stock for
fully paid-up shares in accordance
with 64;
6. To exercise pre-emptive rights as
provided for in section 39;
7. To exercise their appraisal right in
accordance with the provision of
section 81 and in those instance
allowed by law such as section 42
and 105;
8. To institute and file a derivative suit;
9. To recover shares of stock
unlawfully sold for delinquency as
may be allowed under section 69;
10. To inspect the books of the
corporation subject only to the
limitations imposed by section 73;
11. To be furnished by the most recent
financial statement of the
corporation as by section 75;
12. To be issued a new stock certificate
in lieu of the lost or destroyed one
subject to the procedure laid down
in section 73;
13. To have the corporation dissolved
under section 118 to 121, and
section 105 in a close corporation;
14. To participate in the distribution of
the assets of the corporation upon
dissolution under section 122;
15. In the case of a close corporation, to
petition the SEC to arbitrate in the
event of a deadlock as allowed
under section 104; and,
16. Also in the case of a close
corporation, to withdraw therefrom,
for my reason, and compel the
corporation to purchase his shares
as provided for under section 105.

86
- LIABILITIES proposition, and a record thereof

carefully made. The protest of
1. To pay to the corporation the any director, trustee, stockholder
balance of his unpaid subscriptions or member on any action or
subject to the provision of section 67 proposed action must be
to 70; recorded in full on his demand.
2. To pay interest on his unpaid
subscription if required by the by- The records of all business
laws or by the contract of transactions of the corporation and
subscription in accordance with the minutes of any meetings shall
section 66; be open to inspection by any
3. To answer to the creditors for the director, trustee, stockholder or
unpaid portion of his subscription member of the corporation at
under the TRUST FUND reasonable hours on business days
DOCTRINE; and he may demand, in writing, for a
4. To answer the “water” in his stocks copy of excerpts from said records
as provided for in section 65; or minutes, at his expense.
5. To be liable, as general partners, for
all debts, liabilities and damages of Any officer or agent of the
a determinable corporation as corporation who shall refuse to allow
envisioned under section 21 any director, trustees, stockholder or
(corporation by estoppel); and, member of the corporation to
6. To be personally liable for torts, in examine and copy excerpts from its
the event that a stockholder in a records or minutes, in accordance
close corporation actively with the provisions of this Code,
participates in the management of shall be liable to such director,
the corporate affairs. trustee, stockholder or member for
damages, and in addition, shall be
CORPORATE BOOKS AND RECORDS guilty of an offense which shall be
punishable under Section 144 of this
 What are these books and records Code: Provided, That if such refusal
that are required to be kept? is made pursuant to a resolution or
order of the board of directors or
- Section 74. Books to be kept; stock trustees, the liability under this
transfer agent. - Every corporation section for such action shall be
shall keep and carefully preserve imposed upon the directors or
at its principal office a record of trustees who voted for such refusal:
all business transactions and and Provided, further, That it shall
minutes of all meetings of be a defense to any action under
stockholders or members, or of this section that the person
the board of directors or trustees, demanding to examine and copy
in which shall be set forth in excerpts from the corporation's
detail the time and place of records and minutes has improperly
holding the meeting, how used any information secured
authorized, the notice given, through any prior examination of the
whether the meeting was regular records or minutes of such
or special, if special its object, corporation or of any other
those present and absent, and corporation, or was not acting in
every act done or ordered done at good faith or for a legitimate
the meeting. Upon the demand of purpose in making his demand.
any director, trustee, stockholder
or member, the time when any Stock corporations must also
director, trustee, stockholder or keep a book to be known as the
member entered or left the "stock and transfer book", in which
meeting must be noted in the must be kept a record of all stocks
minutes; and on a similar in the names of the stockholders
demand, the yeas and nays must alphabetically arranged; the
be taken on any motion or installments paid and unpaid on all
stock for which subscription has
87
been made, and the date of kept at the principal office of the
payment of any installment; a corporation; and,
statement of every alienation, sale 3. Stock and transfer book showing the
or transfer of stock made, the date names of the stockholders, the
thereof, and by and to whom made; amount paid or unpaid on all stocks
and such other entries as the by- for which subscription has been
laws may prescribe. The stock and made, a statement of every
transfer book shall be kept in the alienation, sale or transfer of stock
principal office of the corporation or made, if any the date thereof, and
in the office of its stock transfer by whom and to whom made which
agent and shall be open for must also be kept at the principal
inspection by any director or office of the corporation or in the
stockholder of the corporation at office of its stock transfer agent.
reasonable hours on business days.
These corporate books and records,
No stock transfer agent or inclusive of all business transactions
one engaged principally in the and minutes of meetings, are
business of registering transfers of subject to inspection by any of the
stocks in behalf of a stock directors, trustees, stockholders or
corporation shall be allowed to members of the corporation at
operate in the Philippines unless he reasonable hours on business days
secures a license from the and a copy of excerpts of said
Securities and Exchange records may be demanded. In fact,
Commission and pays a fee as may in so far as financial statement is
be fixed by the Commission, which concerned, the Code clearly
shall be renewable annually: provides:
Provided, That a stock corporation is
not precluded from performing or Section 75. Right to financial
making transfer of its own stocks, in statements. - Within ten (10) days
which case all the rules and from receipt of a written request of
regulations imposed on stock any stockholder or member, the
transfer agents, except the payment corporation shall furnish to him its
of a license fee herein provided, most recent financial statement,
shall be applicable. (51a and 32a; which shall include a balance sheet
P.B. No. 268.) as of the end of the last taxable year
and a profit or loss statement for
 To summarize: said taxable year, showing in
reasonable detail its assets and
1. Records of all business transactions liabilities and the result of its
which include, among others, operations.
journals, ledger, contracts, vouchers
and receipts, financial statements At the regular meeting of
and other books of accounts, stockholders or members, the board
income tax returns, and voting trust of directors or trustees shall present
agreements which must be kept and to such stockholders or members a
carefully preserved at its principal financial report of the operations of
office; the corporation for the preceding
2. Minutes of all meetings of year, which shall include financial
stockholders or members and of the statements, duly signed and
directors or trustees setting forth in certified by an independent certified
detail the date, time, and place of public accountant.
meeting, how authorized, the notice
given whether the same be regular However, if the paid-up capital of the
or special, and if special, the corporation is less than P50,000.00,
purpose thereof shall be specified, the financial statements may be
those present and absent, and certified under oath by the treasurer
every act done or ordered done or any responsible officer of the
there at which ,must likewise be corporation. (n)

88
 May books and records be by and to whom made; and such

examined? Who may examine? Can other entries as the by-laws may
they copy them? In whose prescribe. The stock and transfer
expense? book shall be kept in the principal
office of the corporation or in the
- Yes, according to the code: office of its stock transfer agent
and shall be open for inspection by
“The records of all any director or stockholder of the
business transactions of the corporation at reasonable hours
corporation and the minutes of on business days. “
any meetings shall be open to
inspection by any director,  Stock and transfer agent
trustee, stockholder or member
of the corporation at reasonable - Records every movement
hours on business days and he - Person who monitors movement by
may demand, in writing, for a the minutes or by the hours
copy of excerpts from said - Non-stock corporation- stock and
records or minutes, at his transfer books
expense. “ - Club share- membership
 Is there any defense available that  Are stockholders entitled to financial

could be raised? By the corporate statements?
officers to justify the refusal?
- Yes, they are entitled to a copy, the
- Yes, the code provides that: code provides that:
“and Provided, further, That it Section 75. Right to financial

shall be a defense to any action statements. - Within ten (10) days
under this section that the person from receipt of a written request of
demanding to examine and copy any stockholder or member, the
excerpts from the corporation's corporation shall furnish to him its
records and minutes has most recent financial statement,
improperly used any information which shall include a balance sheet
secured through any prior as of the end of the last taxable year
examination of the records or and a profit or loss statement for
minutes of such corporation or of said taxable year, showing in
any other corporation, or was not reasonable detail its assets and
acting in good faith or for a liabilities and the result of its
legitimate purpose in making his operations.
demand.”
At the regular meeting of
 What is the stock and transfer? stockholders or members, the board
Where should stock and transfer be of directors or trustees shall present
kept? Can it be kept elsewhere? to such stockholders or members a
financial report of the operations of
“Stock corporations must also the corporation for the preceding
keep a book to be known as the year, which shall include financial
"stock and transfer book", in which statements, duly signed and
must be kept a record of all certified by an independent certified
stocks in the names of the public accountant.
stockholders alphabetically
arranged; the installments paid However, if the paid-up
and unpaid on all stock for which capital of the corporation is less
subscription has been made, and than P50,000.00, the financial
the date of payment of any statements may be certified under
installment; a statement of every oath by the treasurer or any
alienation, sale or transfer of responsible officer of the
stock made, the date thereof, and corporation. (n)
89
- Audited financial statement filed in trustee to inspect and examine

the SEC, 120 days from the end of corporate books and records is
the final year, or must be filed on or considered absolute and unqualified
before April of each year and without regard to motive. This is
- Must be stamp received by the BIR because a director supervises,
directs and manages corporate
 Those in the stock exchange business and it is necessary that he
be equipped with all the information
- Disclosure of any matter that have and data with regard to the affairs of
to do with increasing and the company in order that he may
decreasing manage and direct its operations
- If not “kulong” violation of securities intelligently and according to his
and regulation act best judgment in the interest of all
the stockholders he represents.
 Why is this right of inspection Thus, while stockholders and
granted to a stockholder? members are entitled to inspect and
examine the books and records as
- The basis of the right of the provided in sections 74 and 75 they
stockholder to inspect the books may not gain access to highly
and records of the corporation for a sensitive and confidential
proper purpose is to protect his information. In the case of directors.
interest as a stockholder. Thus, it “it is not denied” that they have such
has been said that: access. This would include, among
others,
“The right of the shareholders
to ascertain how the affairs of a. Marketing strategies and pricing
his company are being structure;
conducted by its directors b. Budget for expansion and
and officers is founded by his diversification;
beneficial interest through c. Research and development;
ownership of shares and the d. Sources of funding, availability of
necessity of self-protection. personnel, proposals of mergers
Managers of some or tie-ups with other firms
corporations deliberately
keep the shareholders in  May this right be exercised, other
ignorance or under than by the stockholders
misapprehension as to the themselves?
true condition of its affairs.
Business prudence demands - Yes, while the right is founded on
that the investor keep a stock ownership thus personal in
watchful eye on the nature it may be made by the
management and the stockholder’s agent or
condition of the business. representative since it may be
Those in charge of the unavailing in many instances
company may be guilty of
gross incompetence or  What if the right of the stockholder
dishonesty for years and to inspect is denied? What is his
escape liability if the remedy?
shareholders cannot inspect
the records and obtain 1. Mandamus
information.” 2. Damages either against the
corporation or responsible officer
 Is there any distinction of the right of who refused the inspection
inspection of a stockholder and that 3. Criminal complaint for violation of
of a director? his right to inspect and copy
excerpts of all business transactions
- Yes, as compared to a stockholder and minutes of meeting. Section 74
or member, the right of a director or provides that Any officer or agent of
90
the corporation who shall refuse to  Pardo vs. Hercules Lumber Co.
allow any director, trustees,
stockholder or member of the - The law is clear, it may be exercised
corporation to examine and copy during reasonable hours on any
excerpts from its records or minutes, business days, the by-laws cannot
in accordance with the provisions of deny this right all together
this Code, shall be liable to such - The general right given by the
director, trustee, stockholder or statute may not be lawfully abridged
member for damages, and in to the extent attempted in this
addition, shall be guilty of an offense resolution. It may be admitted that
which shall be punishable under the officials in charge of a
Section 144 of this Code. The latter corporation may deny inspection
provision imposes a penalty of a fine when sought at unusual hours or
of not less than P1,000 but not more under other improper conditions; but
than P10,000 or an imprisonment neither the executive officers nor the
for not less than 30 days but not board of directors have the power to
more than 5 years, or both, at the deprive a stockholder of the right
discretion of the court. If the refusal altogether.
is pursuant to a resolution or order - The corporation, or its responsible
of the board, the liability shall be directors and officers cannot unduly
imposed upon the directors or restrict this right of inspection and
trustees who voted for such refusal. may not arbitrarily set a few days of
the year within which the
 Defense of the responsible stockholder may make the
corporate officer inspection.
- A by-law unduly restricting the right
1. That the person demanding has of inspection is undoubtedly invalid
improperly used any information
secured through any prior  Vegaruth vs. Isabela Sugar Co.
examination of the records or
minutes of such corporation or of - Directors of a corporation have the
any other corporation; unqualified right to inspect the
2. That he was not acting in good faith books and records of the
or for a legitimate purpose in making corporation at all reasonable hours.
his demand; - We do not conceive, however, that a
3. The right is limited or restricted by director or stockholder has any
special law or the law of it creation. absolute right to secure certified
copies of the minutes of the
 W.G. Philpotts vs. Philippine corporation until these minutes have
Manufacturing Co. been written up and approved by
the directors.
- The right of inspection given to a
stockholder can be exercised either  May a stockholder of a holding
by himself or by any proper company inspect the books and
representative or attorney-in-fact, records of a subsidiary?
and either with or without the
attendance of the stockholder - It depends
- The right may be regarded as - The right of the stockholders to
personal, in the sense that only a examine corporate books extends to
stockholder may enjoy it; but the wholly-owned subsidiary which is
inspection and examination may be completely under the control and
made by another. Otherwise it would management of the parent company
be unavailing in many instances. where he is such a stockholder. But
if the two entities (subsidiary and
o Note: Usually hires an auditor or parent) are legally being operated
accountant to safeguard his as separate and distinct entities,
interest there is no such right of inspection

91
on the part of the stockholder of the faith and for a legitimate purpose in
parent company. making his demand
- Admittedly, he sought to be a
AYALA- HOLDING stockholder in order to pry into
COMPANY/PARENT COMPANY transactions entered into by the
respondent bank even before he
SUBSIDIARIES: BPI/GLOBE/AYALA became a stockholder. His obvious
LAND (not wholly-owned subsidiary) purpose was to arm himself with
materials he can use against the
o HOLD ATLEAST 50 +1 shares in respondent bank for acts done by
order to be a PARENT the latter when the petitioner was a
COMPANY total stranger to the same.
- Bank was created by a special law,
 A, is a stockholder of Ayala, does he it has its own charter and primarily
have a right to inspect the records of governed by the law creating them
its subsidiaries? - The bank is only subject to the
inspection of the Central Bank and
- If wholly owned pwede, but its any information pertaining to the
subsidiaries are not wholly owned bank is confidential and shall not be
kaya hindi pwede revealed to any person other than
the President of the Philippines, the
 Gokongwei vs. SEC Secretary of Finance and the Board
of Directors, nor shall any
- San Miguel corporation owns all of information relative to the funds in
the shares of stock of San Miguel its custody, its current accounts or
International deposits belonging to private
- It is wholly-owned individuals, corporations or other
- It would be in accord with equity, entities except by order of a Court of
good faith and fair dealing to Competent Jurisdiction, hence
construe the statutory right of inspection sought to by the
petitioner as stockholder to inspect petitioner is violative of the
the books and records of such provisions of its charter and is even
wholly-owned subsidiary which are subject to penal sanctions
in respondent corporation’s
possession and control  Assuming you are a stockholder of
PNB, and then it was privatized,
 If being operated as separate and may you already have the right to
distinct corporations, there is no inspect?
such right
 Telecommunications- special - No, unless its charter has been
altered or repealed it is still subject
franchise, it is a legislative grant
to the same law
 Gonzales vs. PNB
 3 stages in the life of a corporation
- Provisions of the old law was
- Formation or birth
unqualified, when it granted
- We now discuss the union of the
stockholders the right to inspect
corporation
- However, whole seemingly
- The last would be its death or
enlarging the right of inspection, the
dissolution
new code has prescribed limitations
to the same. It is now expressly
MERGER AND CONSOLIDATION
required as a condition for such
examination that the one requesting
 Merger and consolidation
it must not have been guilty of using
improperly any information secured
through a prior examination and that - In corporate parlance it is called
the person asking for such spin-off
examination must be acting in good
92
- Almost a year ago San Miguel If, upon investigation, the

separated its brewery business Securities and Exchange
- San Miguel Corporation is now a full Commission has reason to believe
time holding company; it can later that the proposed merger or
on absorb the company consolidation is contrary to or
- Corporations are granted by the inconsistent with the provisions of
code to merge or consolidate this Code or existing laws, it shall
- most common type of corporate set a hearing to give the
recognition corporations concerned the
- not the same in every case opportunity to be heard. Written
- but most common in the weal notice of the date, time and place of
financial or insolvent condition, aim hearing shall be given to each
is to bring it back to its financial constituent corporation at least two
capability (2) weeks before said hearing. The
- also a method of recapitalization Commission shall thereafter
proceed as provided in this Code.
o purchase and sale of corporate (n)
assets is another form of
corporate reorganization  Merger
 How do you value the assets of the - A union effected by absorbing one
merging corporation, do you or more existing corporations by
consider goodwill? another which survives and
 First secure favorably continues the combined business
recommendation of government - It is the uniting of two or more
agency corporations by the transfer of
property to one of them which
- Section 79. Effectivity of continue in existence, the other or
merger or consolidation. - The the others being dissolved and
articles of merger or of merged therein.
consolidation, signed and certified
as herein above required, shall be A B
submitted to the Securities and
Exchange Commission in A transfers all assets, properties,
quadruplicate for its approval: rights, obligations, liabilities to B
Provided, That in the case of
merger or consolidation of banks B issues shares of stocks in
or banking institutions, building exchange of the transfer
and loan associations, trust
companies, insurance A is then dissolved and B
companies, public utilities, SURVIVES
educational institutions and other
special corporations governed by o Parties to a merger are called
special laws, the favorable constituent corporation
recommendation of the
appropriate government agency  Consolidation
shall first be obtained. If the
Commission is satisfied that the - The uniting or amalgamation of two
merger or consolidation of the or more existing corporations to
corporations concerned is not form a new corporation
inconsistent with the provisions of - In merger there is a surviving
this Code and existing laws, it shall corporation, the others are
issue a certificate of merger or of dissolved, while in consolidation, all
consolidation, at which time the constituent are dissolved and a new
merger or consolidation shall be one organized
effective.
A B

93
 Although merger and consolidation

is an express power granted to
C corporation, it is subject to
limitations, as maybe proscribed by
 Like all other corporate acts, it law
emanates from the board  What would be the effect of merger
or consolidation? <sec. 80>
1. The board of directors or trustees of
each constituent corporations shall 1. There will only be a single
approve a plan of merger or corporation. In case of merger, the
consolidation setting forth the surviving corporation or the
matters required in section 76; consolidated corporation in case of
2. Approval of the plan by the consolidation;
stockholders representing 2/3 of 2. The termination of the corporate
the outstanding capital stock or existence of the constituent
2/3 of the member in non-stock corporations, except that of the
corporations of each of such surviving corporation or the
corporations at separate corporate consolidated corporation;
meetings called for the purpose; 3. The surviving corporation or the
3. Prior notice of such meeting, with a consolidated corporation will
copy or summary of the plan of possess all the rights, privileges,
merger or consolidation shall be immunities and powers and shall be
given to all stockholders or subject to all the duties and liabilities
members at least two (2) weeks of a corporation organized under the
prior to the scheduled meeting, Code;
either personally or registered 4. The surviving or consolidated
mail stating the purpose thereof; corporation shall possess all the
4. Execution of the articles of merger rights, privileges, immunities and
or consolidation by each constituent franchises of the constituent
corporations to be signed by the corporations, and all property and all
president or vice-president and receivables due, including
certified by the corporate subscriptions to shares and other
secretary or assistant secretary choses in action, and every other
setting forth the matters required interest of, or belonging to or due to
in section 78; the constituent corporations shall be
5. Submission of the articles of deemed transferred to and vested in
merger or consolidation in such surviving or consolidated
quadruplicate to the SEC subject corporation without further act and
to the requirement of section 79 that deed; and,
if it involve corporations under the 5. The rights of creditors or any lien on
direct supervision of any other the property of the constituent
government agency or governed by corporations shall not be impaired
special laws the favorable by the merger or consolidation.
recommendation of the government
agency concerned shall first be  Is there a liquidation process in case
secured and; of merger or consolidation?
6. Issuance of the certificate of
merger or consolidation by the - None, there is nothing to distribute
SEC at which time the merger or
consolidation shall be effective. If  Associated Bank vs. CA
the plan, however, is believed to be
contrary to law, the SEC shall set a - By virtue of a specific provision in
hearing to give the corporations the merger agreement
concerned an opportunity to be - Although the subject promissory
heard upon proper notice and note names CBTC as the payee, the
thereafter, the Commission shall reference to CBTC in the note shall
proceed as provided in the Code. be construed, under the very
provision of the merger agreement,
94
as a reference to petitioner bank, - No properties transferred because

“as if such reference (was a) direct they will be the properties of the
reference to the latter for all intents surviving corporations
and purposes
- Section 80 par. 4 states: o Hardest part is the financial act,
regarding how many shares
The surviving or the would be issued, probability of
consolidated corporation shall collection and the like
thereupon and thereafter possess o In merger and consolidation,
all the rights, privileges, immunities there is due diligence and an
and franchises of each of the economist is usually hired
constituent corporations; and all
property, real or personal, and all APPRAISAL RIGHT
receivables due on whatever
account, including subscriptions to  Define appraisal
shares and other choses in action,
and all and every other interest of, - Right to withdraw from the
or belonging to, or due to each corporation and demand payment of
constituent corporation, shall be the fair value of his shares after
deemed transferred to and vested in dissenting from certain corporate
such surviving or consolidated acts involving fundamental changes
corporation without further act or in corporate structure <sec. 81>
deed; and
 What property? When may this right
- Without further acts, meaning it is be exercises?
automatic
 When do merger and consolidation
become effective? What if the SEC Section 81. Instances of
fails to act on it without fault appraisal right. - Any stockholder of
attributable to the corporation a corporation shall have the right to
involved? dissent and demand payment of the
fair value of his shares in the
- It will never become valid until and following instances:
unless the SEC gives its stamp of
approval 1. In case any amendment to the
- It will be up to the constituent articles of incorporation has the
corporation to follow it up effect of changing or restricting the
- It will never take effect until the SEC rights of any stockholder or class of
gives its approval and issues the shares, or of authorizing
articles of merger preferences in any respect superior
to those of outstanding shares of
o Granted 3 years to wing up any class, or of extending or
unless there is a trustee to wing shortening the term of corporate
up its affairs existence;
 Could there be liquidators and 2. In case of sale, lease, exchange,

winding up with respect to the transfer, mortgage, pledge or other
corporation in consolidation and disposition of all or substantially all
merger? of the corporate property and assets
as provided in the Code; and
- No, there is none
- No assets properties or rights to 3. In case of merger or
collect, they are transferred consolidation. (n)
- No debts and liabilities to pay
because they become the liabilities  May it be exercised by a stockholder
of the surviving corporations who dissents to the act of a

95
business other than a primary cannot agree on the fair value of the
purpose? shares, it shall be determined and
appraised by three (3) disinterested
X Co. inc persons, one of whom shall be
named by the stockholder, another
Principal office is in Quezon city, it by the corporation, and the third by
was changed to Paranaque the two thus chosen. The findings of
the majority of the appraisers shall
A objects and makes a written be final, and their award shall be
demand. May he exercise his right paid by the corporation within thirty
of appraisal? (30) days after such award is made:
Provided, That no payment shall be
- It is not available in all amendments made to any dissenting stockholder
of the corporation unless the corporation has
- It must be changing or restricting the unrestricted retained earnings in its
rights of any stockholder books to cover such payment: and
Provided, further, That upon
 What if the principal office is payment by the corporation of the
changed from QC to TAWI-TAWI, agreed or awarded price, the
will it change or affect the rights of stockholder shall forthwith transfer
A? his shares to the corporation. (n)
- To some it may change or restrict X Co.

the rights to others it may not
Principal Office- QC, it was changed
 How is the right exercised? to Manila
- According to section 82 of the code: A objects and makes a written

demand for payment of fair value of
Section 82. How right is shares. Can he make a demand of
exercised. - The appraisal right may payment of shares?
be exercised by any stockholder
who shall have voted against the  True or False, no stockholder in a
proposed corporate action, by stock corporation can ever demand
making a written demand on the if the principal office is amended,
corporation within thirty (30) days changing it from QC to Manila
after the date on which the vote was
taken for payment of the fair value - False, a stockholder in a close
of his shares: Provided, That failure corporation may for any reason
to make the demand within such compel the close corporation that he
period shall be deemed a waiver of be paid the fair value of his shares
the appraisal right. If the proposed
corporate action is implemented or Can he exercise his appraisal rights
affected, the corporation shall pay to in the first place? He hasn’t even
such stockholder, upon surrender of paid his subscription in full.
the certificate or certificates of stock
representing his shares, the fair  May a stockholder who hasn’t paid
value thereof as of the day prior to his subscription in full exercise his
the date on which the vote was appraisal rights?
taken, excluding any appreciation or
depreciation in anticipation of such - Yes, he can exercise his appraisal
corporate action. rights, by reconciling the provisions
of section 72, section 82 and section
If within a period of sixty (60) 86
days from the date the corporate
action was approved by the Section 72. Rights of unpaid
stockholders, the withdrawing shares. - Holders of subscribed
stockholder and the corporation shares not fully paid which are not
96
delinquent shall have all the rights a dissenting stockholder shall

of a stockholder. (n) submit the certificates of stock
representing his shares to the
Section 82. How right is corporation for notation thereon that
exercised. - The appraisal right may such shares are dissenting shares.
be exercised by any stockholder His failure to do so shall, at the
who shall have voted against the option of the corporation,
proposed corporate action, by terminate his rights under this Title.
making a written demand on the If shares represented by the
corporation within thirty (30) days certificates bearing such notation
after the date on which the vote was are transferred, and the certificates
taken for payment of the fair value consequently cancelled, the rights of
of his shares: Provided, That failure the transferor as a dissenting
to make the demand within such stockholder under this Title shall
period shall be deemed a waiver of cease and the transferee shall have
the appraisal right. If the proposed all the rights of a regular
corporate action is implemented or stockholder; and all dividend
affected, the corporation shall pay distributions which would have
to such stockholder, upon accrued on such shares shall be
surrender of the certificate or paid to the transferee. (n)
certificates of stock representing
his shares, the fair value thereof as - Notation is not mandatory, it is even
of the day prior to the date on which discretionary because the code
the vote was taken, excluding any provides “at the option of the
appreciation or depreciation in corporation” because it never issued
anticipation of such corporate one for that matter since the
action. subscriptions are not yet fully paid
If within a period of sixty (60)  May the corporation be compelled to

days from the date the corporate pay the interest of A
action was approved by the
stockholders, the withdrawing 300 T, 150T, 150T and 0
stockholder and the corporation unrestricted retained earnings
cannot agree on the fair value of the
shares, it shall be determined and  No stockholder may be able to
appraised by three (3) disinterested compel the corporation to pay the
persons, one of whom shall be value of his shares if the corporation
named by the stockholder, another has no unrestricted retained
by the corporation, and the third by earnings
the two thus chosen. The findings of
the majority of the appraisers shall - False, a stockholder of a close
be final, and their award shall be corporation may for any reason,
paid by the corporation within thirty provided only that the corporation
(30) days after such award is made: has sufficient assets to cover its
Provided, That no payment shall be debts and liabilities
made to any dissenting stockholder
unless the corporation has o General rule: there should be
unrestricted retained earnings in its unrestricted retained earnings
books to cover such payment: and o Exception: section 105 “close
Provided, further, That upon corporation”
payment by the corporation of the
agreed or awarded price, the
 The procedure and requirements for
stockholder shall forthwith transfer
the valid exercise of this rights are:
his shares to the corporation. (n)
1. The stockholder must have voted
Section 86. Notation on
against the proposed corporate
certificates; rights of transferee. -
action in any of the instances
Within ten (10) days after
demanding payment for his shares,
97
allowed by law for the exercise of dividend rights, shall be

the right of appraisal; suspended in accordance with
2. The written demand for payment the provisions of this Code,
must be made by the dissenting except the right of such
stockholder within thirty (30) days stockholder to receive payment
after the date on which the vote was of the fair value thereof:
taken thereon. Failure to make the Provided, That if the dissenting
demand within the said period shall stockholder is not paid the value
be deemed a waiver on the part of of his shares within 30 days after
the stockholder concerned to the award, his voting and
exercise his appraisal right; dividend rights shall immediately
3. Surrender of the certificate of stock be restored. (n)
by the dissenting stockholder for
notation in the corporate books and  How do you compare the rights of a
the payment by the corporation of stockholder, declared delinquent
the fair market value of the said compared to a dissenting
shares as of the day prior to the stockholder exercising his appraisal
date on which the vote was taken. If rights
the stockholder and the corporation  What if a stockholder exercising his
cannot agree on the fair market appraisal rights is also a director,
value thereof, the same shall be will he also lose his rights as a
determined in accordance with the stockholder?
provision of paragraph 2 of section
82; - The shares remain to stand in his
4. The fair value of the shares of the name until he is paid, unless there is
dissenting stockholder must be paid a stipulation in the by-laws
by the corporation only if it has
“unrestricted retained earnings” in  When may the right to be paid the
its books to cover such payment. If value of his shares cease? Can he
the corporation has no unrestricted withdraw his right of appraisal?
retained earnings, the dissenting
stockholder may not, therefore, be - Yes, he may withdraw, but there
able to effectively exercise his must be consent by the corporation
appraisal rights; as provided for by section 83 of the
5. Upon payment of the shares by the code:
corporation, the dissenting
stockholder shall transfer his shares Section 84. When right to
to the corporation. payment ceases. - No demand for
payment under this Title may be
 What would be the effect if the withdrawn unless the corporation
stockholder exercises his appraisal consents thereto. If, however, such
rights? What happens to his voting demand for payment is withdrawn
and dividend rights if he exercises with the consent of the corporation,
his appraisal rights? or if the proposed corporate action
is abandoned or rescinded by the
- It will be suspended, with a limitation corporation or disapproved by the
of 30 days, as provided for by Securities and Exchange
section 83 of the code: Commission where such approval is
necessary, or if the Securities and
Section 83. Effect of demand Exchange Commission determines
and termination of right. - From the that such stockholder is not entitled
time of demand for payment of the to the appraisal right, then the right
fair value of a stockholder's shares of said stockholder to be paid the
until either the abandonment of the fair value of his shares shall cease,
corporate action involved or the his status as a stockholder shall
purchase of the said shares by the thereupon be restored, and all
corporation, all rights accruing to dividend distributions which would
such shares, including voting and
98
have accrued on his shares shall be  The dissenting stockholder may also
paid to him. (n) sell, transfer or assign his shares
 Instances when the right of a Section 86. Notation on

dissenting stockholder to be paid certificates; rights of transferee. -
the fair value of his shares ceases. Within ten (10) days after
demanding payment for his shares,
1. When he withdraws his demand for a dissenting stockholder shall
payment and the corporation submit the certificates of stock
consents thereto; representing his shares to the
2. When the proposed action is corporation for notation thereon that
abandoned or rescinded by the such shares are dissenting shares.
corporation; His failure to do so shall, at the
3. When the proposed action is option of the corporation, terminate
disapproved by the SEC where such his rights under this Title. If shares
approval is necessary; represented by the certificates
4. When the SEC determines that he is bearing such notation are
not entitled to exercise his appraisal transferred, and the certificates
right; consequently cancelled, the
5. When he fails to submit the stock rights of the transferor as a
certificate within ten (10) days from dissenting stockholder under this
demand to the corporation for Title shall cease and the
notation that such shares are transferee shall have all the rights
dissenting shares; and, of a regular stockholder; and all
6. If the shares are transferred and the dividend distributions which
certificate subsequently cancelled. would have accrued on such
shares shall be paid to the
 Who bears the cost of appraisal? transferee. (n)
- It depends NON-STOCK CORPORATIONS

- The corporation bears the cost if
 What is a non-stock corporation?
a. The price offered by the
corporation is lower than the fair - A non-stock corporation is one
value of the shares of the where no part of its income is
dissenting stockholder as distributable as dividends to its
determined by the appraisers; members, trustees, or officers,
b. Where an action is filed by the subject to the provisions of this code
dissenting stockholder to recover on dissolution
such fair value and the refusal of
the stockholder to receive  What provision of the code will
payment is found by the court to govern non-stock corporations?
be justified. Would the provision governing stock
corporations also apply to non-stock
- Dissenting stockholder will be liable corporations?
for the cost and expenses of
appraisal when - Yes, 2nd par. Of section 87 provides:
a. When the price offered by the The provisions governing

corporation is approximately the stock corporation, when pertinent,
same as the fair value shall be applicable to non-stock
ascertained by the appraisers; corporations, except as may be
b. Where the action filed by the covered by specific provisions of
dissenting stockholder and his this Title. (n)
refusal to accept payment is
found by the court to be  How is the right to vote exercised in
unjustified. a non-stock corporation compared
to a stock corporation
99
 May a member in a non-stock is in the matter of general

corporation vote cumulatively? amendment of the articles of
incorporation where the written
- General rule is NO assent of the stockholder may be
sufficient.
 May it be granted or allowed by the
by-laws?  How is the governing board
constituted in a non-stock
- Yes corporation? How many members?
 May the right to cumulative voting - It may exceed 15 in a non-stock

be denied in a stock corporation? corporation unless the AOI or by-
laws provide otherwise, as provided
- No, Doctrine of Limited Capacity for by section 92 of the code:
 May members in a non-stock Section 92. Election and

corporation vote by proxy? term of trustees. - Unless otherwise
provided in the articles of
- Yes, section 89 provides that: incorporation or the by-laws, the
board of trustees of non-stock
“Unless otherwise provided in corporations, which may be more
the articles of incorporation or the than fifteen (15) in number as may
by-laws, a member may vote by be fixed in their articles of
proxy in accordance with the incorporation or by-laws, shall, as
provisions of this Code. (n) “ soon as organized, so classify
themselves that the term of office of
 May the right to vote by proxy be one-third (1/3) of their number shall
expire every year; and subsequent
validly denied in a stock
elections of trustees comprising
corporation?
one-third (1/3) of the board of
trustees shall be held annually and
- No, it is a matter of right in a stock
trustees so elected shall have a
corporation
term of three (3) years. Trustees
thereafter elected to fill vacancies
 May member of a non-stock
occurring before the expiration of a
corporation cast their vote by text? particular term shall hold office only
for the unexpired period.
- Yes, subject to the approval and
terms and conditions of the SEC No person shall be elected as
<sec. 89> trustee unless he is a member of the
corporation.
“Voting by mail or other
similar means by members of non- Unless otherwise provided in
stock corporations may be the articles of incorporation or the
authorized by the by-laws of non- by-laws, officers of a non-stock
stock corporations with the approval corporation may be directly elected
of, and under such conditions which by the members. (n)
may be prescribed by, the Securities
and Exchange Commission. “  Qualifications?
 How about in stock?
1. He is a member of the association;
2. Majority thereof must be residents of
- Voting by mail or other similar the Philippines; and,
means may also be authorized and 3. Other qualifications as may be
allowed by the by-laws of non-stock provided for in the by-laws.
corporations. Generally, in stock
corporations, the vote must be cast  Governing board in a non-stock
at a duly constituted meeting. The
only exception, in case of the latter,
100
- Board of Trustees, however section purpose, or in the same meeting

138 provides that: authorizing the increase of directors
or trustees if so stated in the notice
Section 138. Designation of of the meeting. (n)
governing boards. - The provisions
of specific provisions of this Code to Section 30. Compensation of
the contrary notwithstanding, non- directors. - In the absence of any
stock or special corporations provision in the by-laws fixing their
may, through their articles of compensation, the directors shall
incorporation or their by-laws, not receive any compensation, as
designate their governing boards such directors, except for
by any name other than as board reasonable per diems: Provided,
of trustees. (n) however, That any such
compensation other than per diems
 Disqualifications may be granted to directors by the
- Section 27 also applies to a non- representing at least a majority of
stock corporation, same holds true the outstanding capital stock at a
to the manner of removal <sec. 29 regular or special stockholders'
ad 30> meeting. In no case shall the total
yearly compensation of directors, as
Section 27. Disqualification such directors, exceed ten (10%)
of directors, trustees or officers. - No percent of the net income before
person convicted by final judgment income tax of the corporation during
of an offense punishable by the preceding year. (n)
imprisonment for a period exceeding
six (6) years, or a violation of this  Who elects the other officers?
Code committed within five (5) years
prior to the date of his election or - Directly by the general members
appointment, shall qualify as a unless the by-laws or articles
director, trustee or officer of any provide otherwise. <sec.92>
corporation. (n)
“Unless otherwise provided in
Section 29. Vacancies in the the articles of incorporation or the
office of director or trustee. - Any by-laws, officers of a non-stock
vacancy occurring in the board of corporation may be directly elected
directors or trustees other than by by the members. (n) “
removal by the stockholders or
members or by expiration of term,  In stock corporations who elect
may be filled by the vote of at least officers?
a majority of the remaining directors
or trustees, if still constituting a - Directors
quorum; otherwise, said vacancies
must be filled by the stockholders in  The provision that stock
a regular or special meeting called corporations cannot validly provide
for that purpose. A director or that members cannot be voted by
trustee so elected to fill a vacancy stockholders is only a general rule
shall be elected only or the because there is an exception
unexpired term of his predecessor in section 97 of the code states that:
office.
The articles of
Any directorship or incorporation of a close
trusteeship to be filled by reason of corporation may provide that the
an increase in the number of business of the corporation shall be
directors or trustees shall be filled managed by the stockholders of
only by an election at a regular or at the corporation rather than by a
a special meeting of stockholders or board of directors. So long as this
members duly called for the provision continues in effect:
101
1. No meeting of stockholders need or statutory restrictions, non-stock

be called to elect directors; corporations may determine who
shall be admitted to membership
2. Unless the context clearly and how they shall be admitted.
requires otherwise, the stockholders
of the corporation shall be deemed Section 36. Corporate
to be directors for the purpose of powers and capacity. - Every
applying the provisions of this Code; corporation incorporated under this
and Code has the power and capacity:
3. The stockholders of the 6. In case of stock corporations, to

corporation shall be subject to all issue or sell stocks to subscribers
liabilities of directors. and to sell stocks to subscribers and
to sell treasury stocks in accordance
The articles of with the provisions of this Code; and
incorporation may likewise provide to admit members to the corporation
that all officers or employees or if it be a non-stock corporation;
that specified officers or
employees shall be elected or - They can provide the manner in
appointed by the stockholders, which to admit depending on their
instead of by the board of own rules
directors.
 The power or authority to terminate
 Nature of membership is non- members in non-stock corporations
transferrable and personal in nature is said to be inherent but strict
unless the articles of incorporation compliance with the manner and
or by-laws provide otherwise procedure laid down in the by-laws
must be observed, otherwise it may
Section 90. Non- render the expulsion ineffective and
transferability of membership. - invalid.
Membership in a non-stock
corporation and all rights arising Section 91. Termination of
there from are personal and non- membership. - Membership shall be
transferable, unless the articles of terminated in the manner and for the
incorporation or the by-laws causes provided in the articles of
otherwise provide. (n) incorporation or the by-laws.
Termination of membership shall
 How is a membership requirement have the effect of extinguishing all
in a non-stock corporation rights of a member in the
corporation or in its property, unless
A holds a membership certificate otherwise provided in the articles of
incorporation or the by-laws. (n)
B goes to the corporation and
compels the corporation to record  Power is inherent and may be
the transfer in his name exercised in certain situations:
- Membership in non-stock 1. When an offense is committed

corporations may be acquired by which, although it has no
complying with the provisions of its immediate relation to a
rules prescribed in the by-laws. This member’s duty as such, it is so
is in consonance with the express infamous as to render him unfit
power granted by law under section for society of honest men, which
36, paragraph 6 of the code, is indictable at common law;
authorizing them to admit members 2. When the offense is a violation of
thereof and that authority carries his duty as member of the
with it the power to prescribe rules corporation; and,
on membership. It has thus been 3. When the offense is of a mixed
stated that in the absence of charter nature, being both against his
102
duty as a member of the judicial intervention, in the

corporation, and also indictable absence of arbitrariness, fraud or
at common law. collusion.
c. Are violative of the laws of the
If the conduct of the member comes society, or the law of the land, as
within any of this cases, it is a by depriving the person of due
ground for valid expulsion although process of law
it may not be expressly made so by d. There is lack of jurisdiction on
the by-laws the part of the tribunal
conducting the proceedings,
 Chinese YMCA vs. Ching where the organization exceeds
its powers, or where the
- Right of the corporation to choose proceedings are otherwise illegal
who the members are, cannot be
inquired or intervened by the court  Corporations, stock and non-stock,
- The appealed decision thus may be dissolved in accordance and
contravened the establish principle pursuant to the provisions of
that the courts cannot strip a Sections 118 to 121 of the
member of a non-stock corporation Corporation Code and the pertinent
of his membership therein without provisions of P.D. 902-A, as
cause. amended. If such be the case, the
assets of the corporation are to be
 Lions Club International vs. CA distributed in accordance with law
and established jurisprudence.
- Courts will not generally interfere on  If a non-stock corporation is
matters involving the internal affairs dissolved how will its properties be
of an unincorporated association distributed?
such as election contest unless the
acts complained of are arbitrary, Section 94. Rules of
oppressive, fraudulent, violative of distribution. - In case dissolution
civil rights and the like of a non-stock corporation in
- General rule is that the courts will accordance with the provisions
not interfere with the internal affairs of this Code, its assets shall be
of an unincorporated association so applied and distributed as
as to settle disputes between the follows:
members, or questions of policy,
discipline, or internal government, 1. All liabilities and obligations of
so long as the government of the the corporation shall be paid,
society is fairly and honestly satisfied and discharged, or
administered in conformity with its adequate provision shall be
by-laws and the law of the land, and made therefore;
no property or civil rights are
involved. 2. Assets held by the corporation
- Exceptions are the following: upon a condition requiring return,
transfer or conveyance, and
a. Where law and justice so which condition occurs by
require, and the proceedings of reason of the dissolution, shall
the association are subject to be returned, transferred or
judicial review where there is conveyed in accordance with
fraud, oppression, or bad faith, such requirements;
or where the action complained
of is capricious, arbitrary, or 3. Assets received and held by
unjustly discriminatory the corporation subject to
b. To grant relief in case property or limitations permitting their use
civil rights are invaded, although only for charitable, religious,
it has also been held that the benevolent, educational or
involvement of property rights similar purposes, but not held
does not necessarily authorize upon a condition requiring return,
103
transfer or conveyance by - If there is no distributive agreement

reason of the dissolution, shall then they may do so through a plan
be transferred or conveyed to of distribution under section 95
one or more corporations,
societies or organizations Section 95. Plan of
engaged in activities in the distribution of assets. - A plan
Philippines substantially similar providing for the distribution of
to those of the dissolving assets, not inconsistent with the
corporation according to a plan provisions of this Title, may be
of distribution adopted pursuant adopted by a non-stock corporation
to this Chapter; in the process of dissolution in the
following manner:
4. Assets other than those
mentioned in the preceding The board of trustees shall,
paragraphs, if any, shall be by majority vote, adopt a resolution
distributed in accordance with recommending a plan of distribution
the provisions of the articles of and directing the submission thereof
incorporation or the by-laws, to to a vote at a regular or special
the extent that the articles of meeting of members having voting
incorporation or the by-laws, rights. Written notice setting forth
determine the distributive rights the proposed plan of distribution or
of members, or any class or a summary thereof and the date,
classes of members, or provide time and place of such meeting shall
for distribution; and be given to each member entitled to
vote, within the time and in the
5. In any other case, assets may manner provided in this Code for the
be distributed to such persons, giving of notice of meetings to
societies, organizations or members. Such plan of distribution
corporations, whether or not shall be adopted upon approval of at
organized for profit, as may be least two-thirds (2/3) of the
specified in a plan of distribution members having voting rights
adopted pursuant to this present or represented by proxy at
Chapter. (n) such meeting. (n)
 Non-stock corporations with 4Billion

funds, may it be distributed for and
among its members? CLOSE CORPORATIONS
- Section 94 number 3 provides:  Section 96. Definition and

applicability of Title. - A close
3. Assets received and held corporation, within the meaning of
by the corporation subject to this Code, is one whose articles of
limitations permitting their use only incorporation provide that: (1) All
for charitable, religious, benevolent, the corporation's issued stock of
educational or similar purposes, but all classes, exclusive of treasury
not held upon a condition requiring shares, shall be held of record by
return, transfer or conveyance by not more than a specified number
reason of the dissolution, shall be of persons, not exceeding twenty
transferred or conveyed to one or (20); (2) all the issued stock of all
more corporations, societies or classes shall be subject to one or
organizations engaged in activities more specified restrictions on
in the Philippines substantially transfer permitted by this Title;
similar to those of the dissolving and (3) The corporation shall not
corporation according to a plan of list in any stock exchange or
distribution adopted pursuant to this make any public offering of any
Chapter; of its stock of any class.
Notwithstanding the foregoing, a
corporation shall not be deemed a
104
close corporation when at least two- or controlling the shares is also a

thirds (2/3) of its voting stock or close corporation.
voting rights is owned or controlled
by another corporation which is not “Notwithstanding the
a close corporation within the foregoing, a corporation shall not be
meaning of this Code. deemed a close corporation when at
least two-thirds (2/3) of its voting
- Between and among themselves, stock or voting rights is owned or
they feel and act alike controlled by another corporation
- Not more than 20 stockholders which is not a close corporation
- Specified persons, if you are not within the meaning of this Code.”
specified, you cannot be a
stockholder  What kind of corporations cannot be
- All the issued stocks of all classes is a close corporation?
subject to restrictions
- Shall not be listed in the stock 1. Mining or oil companies,
exchange not publicly offered 2. Stock exchange
- 3 qualifying conditions must be 3. Banks and insurance companies,
contained in the articles of 4. Public utilities
incorporation, to be considered as a 5. Educational institutions
close corporation, if not, it will not be 6. Corporations vested with public
considered as such and will be interest
governed by the general provisions
of the code  Classification of directors
- Even if 100 % is owned by one
person it will not be considered a - Ordinary stock- no such right
close corporation without the 3 - Close corporation-yes there is such
qualifying provisions a right
- Identity of stockholders, specified
persons  Section 97 is a permissive provision
- Active management either as
directors or partners in management Section 97. Articles of
- Combination of the corporation and incorporation. - The articles of
partnership type of business incorporation of a close corporation
may provide:
 May any type of corporation, be
organized as such close 1. For a classification of shares or
corporation? rights and the qualifications for
owning or holding the same and
- No, the 3 qualifying conditions must restrictions on their transfers as may
be present be stated therein, subject to the
provisions of the following section;
 What if 2/3 of the outstanding capital
stock is owned by another 2. For a classification of directors
corporation which is also a close into one or more classes, each of
corporation, will it be a close whom may be voted for and elected
corporation? solely by a particular class of stock;
and
- No, it will only be a closed
corporation if 2/3 of the voting 3. For a greater quorum or voting
stocks of a close corporation is also requirements in meetings of
owned by a close corporation. It stockholders or directors than those
must be “voting” stocks provided in this Code.
- Even if another corporation owns or
controls 2/3 of the voting stocks of a  After classification what then?
close corporation, the latter may still
be considered as such close - After classification, qualification and
corporation if the corporation owning then restriction as provided for
105
under the 3 qualifying conditions in - In a close corporation, the

section 96 restrictions must appear in the
articles of incorporation, the by-laws
 Cumulative voting is restricted in and the certificate of stocks.
close corporations if will be elected Otherwise, the same shall not be
solely by a particular class binding on any purchaser thereof in
 In a close corporation, the articles of good faith
incorporation may provide for a
greater quorum and voting  What if the stockholders do not want
requirement in meetings of both to exercise their right or option to
stockholders or directors to increase purchase may it be sold to any
the veto power of minority person?
stockholders, unlike in a stock
corporation wherein only directors - Yes, any third person, section 98
meetings may provide for greater provides:
quorum requirement and in
stockholders meeting which may not Section 98. Validity of
be altered or increased, as provide restrictions on transfer of shares. -
for in section 25, following the Restrictions on the right to transfer
doctrine of limited capacity shares must appear in the articles of
 The articles of a close corporation incorporation and in the by-laws as
may likewise provide that the well as in the certificate of stock;
business of the corporation shall be otherwise, the same shall not be
managed by the stockholders rather binding on any purchaser thereof in
than by the board of directors. good faith. Said restrictions shall not
However the same must contain the be more onerous than granting the
continuing provisions required in existing stockholders or the
paragraph 2 of section 97, that is: corporation the option to purchase
the shares of the transferring
1. No meeting of stockholders need stockholder with such reasonable
be called to elect directors; terms, conditions or period stated
2. Unless the context clearly therein. If upon the expiration of
requires otherwise, the said period, the existing
stockholders of the corporation stockholders or the corporation
shall be deemed to be directors; fails to exercise the option to
and; purchase, the transferring
3. The stockholders of the stockholder may sell his shares
corporation shall be subject to all to any third person.
liabilities of directors.
o ordinary stock corporations
 Liability of stockholders acting as are liable only if acted in Bad
directors in a close corporation are faith, fraud or negligence in
more extensive since they are performance of duty
personally liable for corporate torts
unless the corporation has obtained  What if there are already 20
a reasonable adequate liability stockholders and they want to add 2
insurance, unlike a ordinary stock more, may it compel?
corporation, wherein directors
thereof are only liable for corporate - In ordinary stock corporations, they
torts only if they have been may compel by mandamus
negligent or acted fraudulently in the - In close corporations, may not be
performance of their functions. compelled to admit because it
 Restrictions breaches the qualifying conditions
- In ordinary stock corporations, the  Since they cannot be compelled,

restrictions must appear in the may they admit?
articles of incorporation as well as
the certificate of stocks
106
- Yes, provided all the stockholders acts of the directors, officers or

consented or instead of consenting those in control of the corporation is
they decide to amend their articles illegal, or fraudulent, or dishonest, or
of incorporation oppressive or unfairly prejudicial to
- Will have to amend the articles of the corporation or any stockholder,
incorporation to accommodate other or whenever corporate assets are
purchasers of share being misapplied or wasted.
- Will cease to be a close corporation
if it amends and becomes in excess  Agreements may also be entered in
of 20 a close corporation <sec.100>
o Unless all the stockholders - They can even agree to be partners

consent they “may” in management
- Pre-incorporation
 What if the other stockholders object - Manner in which the business of the
to register? What will be the remedy corporation shall be managed
of the transferee?
 Board resolution
- His remedy is rescission. The effect
of rescission is mutual restitution - Ordinary stock corporations- sit and
act as a body at a duly constituted
 How about the stockholder, what is meeting, they may do so by virtue of
his recourse? the E-Commerce Act through
teleconference or video conference
- He may compel the close
corporation to purchase his shares  Exception to the rule: other officers
at their fair value for any reason, may be directly appointed and hired
provided the corporation has by the stockholders
sufficient assets in its books to cover  Close corporations may validly act
the debts and liabilities exclusive of even without a meeting provided the
capital conditions are obtained
- In a close corporation, there is a
withdrawing stockholder, unlike in Section 101. When board
an ordinary stockholder where there meeting is unnecessary or
is none, they may only do so in the improperly held. - Unless the by-
exercise of appraisal rights laws provide otherwise, any action
by the directors of a close
Section 105. Withdrawal of corporation without a meeting shall
stockholder or dissolution of nevertheless be deemed valid if:
corporation. - In addition and without
prejudice to other rights and 1. Before or after such action is
remedies available to a stockholder taken, written consent thereto is
under this Title, any stockholder of signed by all the directors; or
a close corporation may, for any
reason, compel the said 2. All the stockholders have actual
corporation to purchase his or implied knowledge of the action
shares at their fair value, which and make no prompt objection
shall not be less than their par or thereto in writing; or
issued value, when the
corporation has sufficient assets 3. The directors are accustomed to
in its books to cover its debts and take informal action with the express
liabilities exclusive of capital or implied acquiescence of all the
stock: Provided, That any stockholders; or
stockholder of a close corporation
may, by written petition to the 4. All the directors have express or
Securities and Exchange implied knowledge of the action in
Commission, compel the dissolution question and none of them makes
of such corporation whenever any of prompt objection thereto in writing.
107
 Pre-emptive rights in a close  Are treasury shares covered in the

corporation is absolute exercise of pre-emptive rights in
ordinary stock corporations?
Section 102. Pre-emptive  As regards amendments
right in close corporations. - The
pre-emptive right of stockholders in Section 103. Amendment of
close corporations shall extend to all articles of incorporation. - Any
stock to be issued, including amendment to the articles of
reissuance of treasury shares, incorporation which seeks to delete
whether for money, property or or remove any provision required by
personal services, or in payment of this Title to be contained in the
corporate debts, unless the articles articles of incorporation or to reduce
of incorporation provide otherwise. a quorum or voting requirement
stated in said articles of
 Why is it said to be absolute? incorporation shall not be valid or
effective unless approved by the
- Because there is no public offering affirmative vote of at least two-thirds
in a close corporation, otherwise it (2/3) of the outstanding capital
will not be considered as close stock, whether with or without voting
rights, or of such greater proportion
 In a close corporation the pre- of shares as may be specifically
emptive rights is broadened to provided in the articles of
include all issues without exception incorporation for amending, deleting
unless denied or limited by the or removing any of the aforesaid
articles of incorporation provisions, at a meeting duly called
 Section 39 is the governing for the purpose.
provision concerning rights of the
stockholder in an ordinary stock  What happens if there is a
corporation and it may be denied. If deadlock?
it is not denied a stockholder can
exercise his pre-emptive rights for - Section 104 provides for a remedy
all issues of shares whether money,
property or previously incurred Section 104. Deadlocks. -
indebtedness. Notwithstanding any contrary
provision in the articles of
Section 39. Power to deny incorporation or by-laws or
pre-emptive right. - All stockholders agreement of stockholders of a
of a stock corporation shall enjoy close corporation, if the directors or
pre-emptive right to subscribe to all stockholders are so divided
issues or disposition of shares of respecting the management of the
any class, in proportion to their corporation's business and affairs
respective shareholdings, unless that the votes required for any
such right is denied by the articles of corporate action cannot be
incorporation or an amendment obtained, with the consequence that
thereto: Provided, That such pre- the business and affairs of the
emptive right shall not extend to corporation can no longer be
shares to be issued in compliance conducted to the advantage of the
with laws requiring stock offerings or stockholders generally, the
minimum stock ownership by the Securities and Exchange
public; or to shares to be issued in Commission, upon written petition
good faith with the approval of the by any stockholder, shall have the
stockholders representing two-thirds power to arbitrate the dispute. In the
(2/3) of the outstanding capital exercise of such power, the
stock, in exchange for property Commission shall have authority to
needed for corporate purposes or in make such order as it deems
payment of a previously contracted appropriate, including an order: (1)
debt. cancelling or altering any provision
contained in the articles of
108
incorporation, by-laws, or any - The provision of the law above-

stockholder's agreement; (2) quoted gives the SEC a very wide
cancelling, altering or enjoining any discretion in respect to management
resolution or act of the corporation of a close corporation in the event of
or its board of directors, a deadlock. It may:
stockholders, or officers; (3)
directing or prohibiting any act of the 1. Cancel or alter any provision in
corporation or its board of directors, the articles of incorporation, by-
stockholders, officers, or other laws or any stockholders
persons party to the action; (4) agreement
requiring the purchase at their fair 2. Cancel, alter or enjoin any
value of shares of any stockholder, resolution or other act of the
either by the corporation regardless corporation or its board of
of the availability of unrestricted directors, stockholders or officers
retained earnings in its books, or by 3. Prohibit any act of the
the other stockholders; (5) corporation or its board of
appointing a provisional director; (6) directors, stockholders or officers
dissolving the corporation; or (7) or other persons party to the
granting such other relief as the action;
circumstances may warrant. 4. Requiring the purchase of the
par value of the shares of any
A provisional director shall be stockholders, either by the
an impartial person who is neither a corporation regardless of
stockholder nor a creditor of the availability of unrestricted
corporation or of any subsidiary or earnings, or by the other
affiliate of the corporation, and shareholders,
whose further qualifications, if any, 5. Appointment of a provisional
may be determined by the director
Commission. A provisional director 6. Dissolving the corporation; or
is not a receiver of the corporation 7. Other relief as the circumstances
and does not have the title and may warrant.
powers of a custodian or receiver. A
provisional director shall have all the  Section 105
rights and powers of a duly elected
director of the corporation, including - Dishonesty is a ground for
the right to notice of and to vote at dissolution of a close corporation
meetings of directors, until such - Even one stockholder may petition
time as he shall be removed by for dissolution
order of the Commission or by all
the stockholders. His compensation o when there is a relief
shall be determined by agreement available, dissolution would
between him and the corporation not be available in an
subject to approval of the ordinary corporation
Commission, which may fix his
compensation in the absence of CLOSE ORDINARY STOCK
agreement or in the event of CORPORATION CORPORATION
disagreement between the 1. The number No limitation as to
provisional director and the of stockholders number of
corporation. cannot exceed 20 shareholder
2. To the extent Maximum number of
- Powers of the SEC in intra- that all directors is 15
corporate concerns has been stockholders can
transferred to the proper commercial be deemed
courts directors, the
- Prohibit, even if acting in good faith number of
- Provisional director appointed by the directors can
court effectively be more
- Requiring the purchase, irrespective than 15
of unrestricted retained earnings
109
3. Shares of Generally no 11. It may Although the articles

stock are subject restriction on provide for greater of incorporation or
to specified transfer of shares quorum and voting by-laws may provide
restrictions requirements in for greater quorum
4. Shares of No prohibition meetings of and voting
stock are stockholders and requirements in
prohibited from directors directors’ meeting
being listed in the under section 25,
stock exchange or those for
offered for sale to stockholders’
the public meeting cannot
5. Stockholders Management is generally be altered
may take an active lodged in the Board 12. Restriction on Valid and binding if
part in corporate of Directors transfer of shares indicated in the
management by should be articles of
vesting indicated in the incorporation and
management to articles of stock certificates
them rather than a incorporation, by-
Board of Director laws and stock
6. Those active Directors are liable certificates
in management for torts only if they 13. Pre-emptive Pre-emptive rights
are personally have acted rights of may be denied as
liable for corporate negligently or stockholders is provided for in
torts unless the fraudulently broader as it section 39
corporation has include all issues
obtained an without exception
adequate liability 14. A stockholder Unless he sells his
insurance may withdraw and shares, a
7. Directors can Directors must, as a compel the stockholder cannot
validly act even rule, act as a body corporation to get back his
without a meeting at a duly constituted purchase his investment nor
meeting shares for any compel the
8. Agreements Not valid and reason with the corporation to buy
between binding since limitation only that his shares except in
stockholders stockholders’ the corporation the exercise of his
regarding the agreement cannot has sufficient appraisal right
operations of the limit the discretion of assets to cover its
business can the Board to liabilities exclusive
validly be made manage corporate of capital stock
affairs 15. The proper Courts cannot
9. To the extent Ordinarily, no such forum may interfere I the
that directors may classification and no interfere in the business judgment
be classified into restrictions on management of a of the
one or more cumulative voting close corporation directors/stockholder
classes and to be in case of s “BUSINESS
voted solely by a deadlocks under JUDGMENT RULE”
particular class of Section 104, even
stock, cumulative of the
voting may, in directors/stockhold
effect, be ers are acting in
restricted good faith
10. The articles Officers are elected 16. Any Dissolution may be
of incorporation by the Board of stockholder may had only on the
may provide that Directors petition the SEC grounds provided by
all officers shall be for corporate the provisions of the
elected or dissolution on Code on dissolution
appointed by the grounds among and P.D. 902-A, as
stockholders others, provides amended
for in section 105
110
 Manuel Dulay Enterprises vs. CA 2.1 Corporation Sole

2.2 Religious Societies
- What was the position of Manuel
Dulay here? President, General  What provision governs educational
Manager and Treasurer corporations?
- Cannot act both as president and
treasurer at the same time Section 106. Incorporation. -
- Since it is a close corporation Educational corporations shall be
owned by the family of Manuel governed by special laws and by the
Dulay, save and except the general provisions of this Code. (n)
secretary, it should be governed by
Title XII - Special laws like they Education Act
- Petitioner is classified as a close of the Philippines
corporation and consequently a - These institutions of learning, once
board resolution authorizing the sale recognized by the government as
or mortgage of the subject property such are mandated by law to be
is not necessary to bind the incorporated within ninety (90) days
corporation for the action of its under the provisions of the
president. At any rate, a corporate Corporation Code and must,
action taken at a board meeting perforce, comply with the
without proper call or notice in a requirements and procedure laid
close corporation is deemed ratified down there under. Their failure to so
by the absent director unless the will not immune the educational
latter promptly files his written institution from suit as a corporation.
objection with the secretary of the (Chiang Kai Siek Case)
corporation after having knowledge - Favorable recommendation of
of the meeting which, in this case, government agency involved
petitioner Virgilio Dulay failed to do.
- Virgilio Dulay is a signatory witness,  Two types of educational
he knows very well about the deed corporations
of absolute sale, he is estopped
- Certificate of completion in the
 Naguiat vs. NLRC academic field
- Vocational and technical one’s
- Section 100 par. 5. To the extent
that the stockholders are actively o Recommendation of DECS if
engaged in the management or certificate of completion in
operation of the business and affairs the academic field
of a close corporation, the
stockholders shall be held to strict  How is the governing board of an
fiduciary duties to each other and educational institution instituted?
among themselves. Said
stockholders shall be personally - Non-stock- multiples of 5 only
liable for corporate torts unless the (example: 5,10,15)
corporation has obtained reasonably - Stock- can be anywhere between 5
adequate liability insurance. to 15
 Family corporations is not  Can they consist of 7 or 9

automatically a close corporation members?
the 3 qualifying conditions must be
present. - Yes, if stock
SPECIAL CORPORATIONS  Can they be incorporated also as

non-stock?
 2 types of special corporations
- Yes
1. Educational corporations - B.P. 232 allows the organization of
2. Religious corporations an educational institution that is
111
stock corporation, only if they do not Directors or trustees cannot attend

issue a certificate of completion in or vote by proxy at board meetings.
the academic field (33a)
 Qualifications and disqualifications Section 27. Disqualification of

of the membership in the board of directors, trustees or officers. - No person
an educational corporation convicted by final judgment of an offense
punishable by imprisonment for a period
- Educational corporations are exceeding six (6) years, or a violation of
governed by special laws and this Code committed within five (5) years
general provisions, hence if there is prior to the date of his election or
no provision in the special law, you appointment, shall qualify as a director,
go back to section 25 and 27 of the trustee or officer of any corporation. (n)
general provisions
- Stock- must be a stockholder  Article 14 section 4 par. 2 of the
- Non-stock- must be a member Constitutions
- By-laws may provide for additional
qualifications and disqualifications Educational institutions, other
than those established by religious
Section 25. Corporate groups and mission boards, shall be
officers, quorum. - Immediately after owned solely by citizens of the
their election, the directors of a Philippines or corporations or
corporation must formally organize associations at least sixty per
by the election of a president, who centum of the capital of which is
shall be a director, a treasurer who owned by such citizens. The
may or may not be a director, a Congress may, however, require
secretary who shall be a resident increased Filipino equity
and citizen of the Philippines, and participation in all educational
such other officers as may be institutions. The control and
provided for in the by-laws. Any two administration of educational
(2) or more positions may be held institutions shall be vested in
concurrently by the same person, citizens of the Philippines.
except that no one shall act as
president and secretary or as No educational institution shall be
president and treasurer at the same established exclusively for aliens
time. and no group of aliens shall
comprise more than one-third of the
The directors or trustees and enrollment in any school. The
officers to be elected shall perform provisions of this sub section shall
the duties enjoined on them by law not apply to schools established for
and the by-laws of the corporation. foreign diplomatic personnel and
Unless the articles of incorporation their dependents and, unless
or the by-laws provide for a greater otherwise provided by law, for other
majority, a majority of the number of foreign temporary residents.
directors or trustees as fixed in the
articles of incorporation shall - Management is left solely to citizens
constitute a quorum for the of the Philippines
transaction of corporate business, - Board of Directors manages the
and every decision of at least a corporate affairs, foreigners cannot
majority of the directors or trustees therefore be elected in the board
present at a meeting at which there - Exceptions are, mission boards and
is a quorum shall be valid as a religious orders, which may have a
corporate act, except for the election governing board consisting of
of officers which shall require the foreigners
vote of a majority of all the members
of the board.  Term of office of governing board in
an educational institutions

112
- Can serve a term of 5 years. If that  Is it required to file the articles of

be the case, 1/5 of their number incorporation in the SEC?
shall expire every year
- Yes
 Non-stock or stock, can they serve
for a 1 year term only?  What should be contained in the
articles of incorporation?
- Yes, the articles of incorporation
may provide that it be 1 year only - Section 111 and section 112
provides for the contents and
 What are these religious procedures
corporations spoken off?
Section 111. Articles of
- Corporation sole and religious incorporation. - In order to become a
societies corporation sole, the chief
 What is a corporation sole? rabbi or presiding elder of any
religious denomination, sect or
- Consists of one person only and his church must file with the Securities
successor in some particular station, and Exchange Commission articles
who are incorporated by law in order of incorporation setting forth the
to give them some legal capacities following:
and advantages, particularly that of
perpetuity, which in their natural 1. That he is the chief archbishop,
persons they could not have had bishop, priest, minister, rabbi or
presiding elder of his religious
 May a corporation be organized by denomination, sect or church and
less than 5 natural persons? that he desires to become a
corporation sole;
- General rule, 5 to 15 natural
persons(except cooperatives and 2. That the rules, regulations and
corporations primarily organized to discipline of his religious
hold equities in rural banks and may denomination, sect or church are
rightfully become incorporators not inconsistent with his becoming a
thereof) corporation sole and do not forbid it;
- Exception, corporation sole, consist
of only one person 3. That as such chief archbishop,
bishop, priest, minister, rabbi or
 May any person form or organize a presiding elder, he is charged with
corporation sole? the administration of the
temporalities and the management
- No, not any person can form a of the affairs, estate and properties
corporation sole, section 110 of his religious denomination, sect
provides: or church within his territorial
jurisdiction, describing such
Section 110. Corporation territorial jurisdiction;
sole. - For the purpose of
administering and managing, as 4. The manner in which any vacancy
trustee, the affairs, property and occurring in the office of chief
temporalities of any religious archbishop, bishop, priest, minister,
denomination, sect or church, a rabbi of presiding elder is required
corporation sole may be formed by to be filled, according to the rules,
the chief archbishop, bishop, priest, regulations or discipline of the
minister, rabbi or other presiding religious denomination, sect or
elder of such religious church to which he belongs; and
denomination, sect or church.
(154a) 5. The place where the principal
office of the corporation sole is to be
113
established and located, which during a particular period until

place must be within the Philippines. dissolved in accordance with law
The articles of incorporation  When will it acquire judicial

may include any other provision not personality? How do you compare
contrary to law for the regulation of this to other types of corporation?
the affairs of the corporation. (n)
- After the filing the verified articles of
Section 112. Submission of incorporation along with the
the articles of incorporation. - The documents required in Section 112
articles of incorporation must be with the SEC, immediately becomes
verified, before filing, by affidavit or endowed with corporate personality,
affirmation of the chief archbishop, this serves as an exception to the
bishop, priest, minister, rabbi or rule that a corporation acquires
presiding elder, as the case may be, juridical personality only upon the
and accompanied by a copy of the issuance of a certificate of
commission, certificate of election or incorporation by the said
letter of appointment of such chief government agency.
archbishop, bishop, priest, minister, - Upon filing of verified articles of
rabbi or presiding elder, duly incorporation with the SEC, will not
certified to be correct by any notary require the approval of SEC
public.
 A corporation sole is possessed with
From and after the filing with the same power, rights and
the Securities and Exchange privileges, to own, acquire and hold
Commission of the said articles of or convey properties like any other
incorporation, verified by affidavit or corporation? True or False
affirmation, and accompanied by the
documents mentioned in the - False, they have the same power
preceding paragraph, such chief rights and privileges, but when it
archbishop, bishop, priest, minister, comes to alienation and acquisition,
rabbi or presiding elder shall it must possess a court order,
become a corporation sole and all however when there is a regulated
temporalities, estate and properties method, a court order may be
of the religious denomination, sect dispensed with <sec. 113>
or church theretofore administered
or managed by him as such chief Section 113. Acquisition and
archbishop, bishop, priest, minister, alienation of property. - Any
rabbi or presiding elder shall be held corporation sole may purchase and
in trust by him as a corporation sole, hold real estate and personal
for the use, purpose, behalf and property for its church, charitable,
sole benefit of his religious benevolent or educational purposes,
denomination, sect or church, and may receive bequests or gifts
including hospitals, schools, for such purposes. Such corporation
colleges, orphan asylums, may sell or mortgage real property
parsonages and cemeteries thereof. held by it by obtaining an order for
(n) that purpose from the Court of First
Instance of the province where the
 Is it required to indicate its terms of property is situated upon proof
execution? Why not? made to the satisfaction of the court
that notice of the application for
- Not required because they are leave to sell or mortgage has been
supposed to exist in perpetuity given by publication or otherwise in
- However, it does not mean that it such manner and for such time as
shall continue to exist forever, it said court may have directed, and
merely means that it has the that it is to the interest of the
capacity of continuous existence corporation that leave to sell or
mortgage should be granted. The
114
application for leave to sell or  Director of Lands vs. CA

mortgage must be made by petition,
duly verified, by the chief - Alienable public land is converted
archbishop, bishop, priest, minister, into private land when the same has
rabbi or presiding elder acting as been openly, continuously and
corporation sole, and may be exclusively in possession of the
opposed by any member of the property as concept of an owner for
religious denomination, sect or 30 years, automatically that is
church represented by the
corporation sole: Provided, That in  Republic of the Philippines vs. IAC
cases where the rules, regulations
and discipline of the religious - Determination of the character of
denomination, sect or church, the land should be in mind
religious society or order concerned - If they still form part of public
represented by such corporation domain they cannot be owned, but if
sole regulate the method of they are converted into private land,
acquiring, holding, selling and the constitutional prohibition will not
mortgaging real estate and personal apply
property, such rules, regulations and
discipline shall control, and the  If there is vacancy who will fill up the
intervention of the courts shall not
same? What if there is none, what
be necessary. (159a)
must the successor do?
 Since a corporation sole is consists
- According to section 114:
only of one person, will the
registration of the property in the Section 114. Filling of
name of the corporation sole vest vacancies. - The successors in
unto the head thereof the ownership office of any chief archbishop,
of the property? bishop, priest, minister, rabbi or
presiding elder in a corporation sole
- No, it will not vest unto the head, the shall become the corporation sole
head is acting merely as a guardian on their accession to office and shall
be permitted to transact business as
 Roman Catholic Apostolic Adm. Of such on the filing with the Securities
Davao, inc. vs. Land Reg. Comm, et and Exchange Commission of a
al. copy of their commission, certificate
of election, or letters of appointment,
- Act only as a guardian duly certified by any notary public.
- Ownership devolves upon the
congregation or religious During any vacancy in the
denomination office of chief archbishop, bishop,
- A corporation consists of one person priest, minister, rabbi or presiding
only and his successors (who will elder of any religious denomination,
always be one at a time, in some sect or church incorporated as a
particular station), who are corporation sole, the person or
incorporated by law in order to give persons authorized and empowered
them some legal capacities and by the rules, regulations or discipline
advantages, particularly that of of the religious denomination, sect
perpetuity, which in their natural or church represented by the
persons they could not have had corporation sole to administer the
- Roman Catholic Church has no temporalities and manage the
nationality and that the framers of affairs, estate and properties of the
the Constitution, as will be corporation sole during the vacancy
hereunder explained, did not have in shall exercise all the powers and
mind the religious corporations sole authority of the corporation sole
when they provided that 60 percent during such vacancy. (158a)
of the capital thereof be owned by
Filipino citizens.
115
 If a corporation exists in equity may - General rule: No, because a

it not be dissolved? corporation sole, is by its very
nature ecclesiastical and religious
Section 115. Dissolution. - A (doctrine of separation of church
corporation sole may be dissolved and state)
and its affairs settled voluntarily by - Exception: police power of the state,
submitting to the Securities and if its purpose is being carried out
Exchange Commission a verified and is instead being used for illegal
declaration of dissolution. purpose, it may be so dissolved
The declaration of dissolution shall  What are religious societies?

set forth:
- Under common law, a religious
1. The name of the corporation; society is a body of persons
associated together for the purpose
2. The reason for dissolution and of maintaining religious worship.
winding up;
 Is it also required to file its articles of
3. The authorization for the incorporation to the SEC?
dissolution of the corporation by the
particular religious denomination, - No <sec. 116> “may”
sect or church;
 What should be contained in the
4. The names and addresses of the articles of incorporation?
persons who are to supervise the
winding up of the affairs of the - Section 116 provides:
corporation.
Section 116. Religious
Upon approval of such societies. - Any religious society or
declaration of dissolution by the religious order, or any diocese,
Securities and Exchange synod, or district organization of any
Commission, the corporation shall religious denomination, sect or
cease to carry on its operations church, unless forbidden by the
except for the purpose of winding up constitution, rules, regulations, or
its affairs. (n) discipline of the religious
denomination, sect or church of
- While section 115 of the code which it is a part, or by competent
provides for the process and authority, may, upon written consent
procedure for the dissolution of a and/or by an affirmative vote at a
corporate sole, there is nothing in meeting called for the purpose of at
the law itself which would prohibit it least two-thirds (2/3) of its
from amending its articles of membership, incorporate for the
incorporation administration of its temporalities or
- It is believed that authorization for for the management of its affairs,
the dissolution by the particular properties and estate by filing with
religious denomination, sect or the Securities and Exchange
church, as required in sub- Commission, articles of
paragraph 3 of section 115 would incorporation verified by the affidavit
still be necessary in the case of of the presiding elder, secretary, or
amending the articles of clerk or other member of such
incorporation to affect dissolution. religious society or religious order,
or diocese, synod, or district
o Expiration of a corporate term organization of the religious
will not apply to a religious denomination, sect or church,
corporation setting forth the following:
 May a corporation sole be dissolved 1. That the religious society or

by judicial decree? religious order, or diocese, synod, or
116
district organization is a religious upon issuance of the certificate by

organization of a religious the SEC
denomination, sect or church;
o However it is not accurate
2. That at least two-thirds (2/3) of its according to atty. Ladia
membership have given their written because there are those that
consent or have voted to
can issue for example
incorporate, at a duly convened
meeting of the body; cooperatives- BUREAU OF
COOPERATIVES which
3. That the incorporation of the register, home insurance
religious society or religious order, guaranty corporation- HOME
or diocese, synod, or district OWNERS
organization desiring to incorporate
is not forbidden by competent  How may religious societies be
authority or by the constitution, dissolved?
rules, regulations or discipline of the
religious denomination, sect, or - Go to the general rules governing
church of which it forms a part; dissolution, because the rules under
special corporations do not provide
4. That the religious society or for such rule
religious order, or diocese, synod, or
district organization desires to DISSOLUTION
incorporate for the administration of
its affairs, properties and estate;  What is dissolution?
5. The place where the principal - Extinguishment of the corporate

office of the corporation is to be franchise and the termination of
established and located, which corporate existence
place must be within the Philippines;
and  3 modes of dissolution
6. The names, nationalities, and
1. By expiration of its term;
residences of the trustees elected
2. By voluntary surrender of its primary
by the religious society or religious
franchise (voluntary dissolution);
order, or the diocese, synod, or
3. By revocation of its corporate
district organization to serve for the
franchise (involuntary dissolution)
first year or such other period as
may be prescribed by the laws of
 Philippine National Bank vs. CFI
the religious society or religious
order, or of the diocese, synod, or
district organization, the board of - When the period of corporate life
trustees to be not less than five (5) expires, the corporation ceases to
nor more than fifteen (15). (160a) be a body corporate for purposes of
continuing the business for which it
 Is it required to indicate its term of is organized. But it shall
nevertheless be continued as a
existence?
body corporate for three years after
the time when it would have be
- Likewise to exist in perpetuity, the
dissolved, for the purpose of
law does not require to indicate its
prosecuting and defending suits by
term of existence
or against it and for enabling it
gradually to settle and close its
 When will it acquire juridical
affairs to dispose of and convey its
personality? property and to divide its assets.
- Only a corporation sole may come There is no need for the institution
into existence without SEC of a proceeding for quo warranto to
approval, section 19 will thus determine the time and date of the
govern, Vested with judicial capacity dissolution of a corporation because
117
the period of corporate existence is - The formal and procedural

provided in the articles of requirements necessary are the
incorporation. When such period following:
expires and without any extension
having been made pursuant to law, 1. Majority vote of the board of
the corporation is dissolved directors or trustees;
automatically insofar as the 2. Sending of notice of each
continuation of its business is stockholders or member either by
concerned. registered mail or personal delivery
- The rights of the lessor and the at least thirty (30) days prior to the
lessee over the improvements which meeting (scheduled by the board for
the latter constructed on the leased the purpose of submitting the board
premises are governed by Article action to dissolve the corporation for
1678 of the Civil Code. The approval of the stockholder or
provision gives the lessee the right members.);
to remove the improvements if the 3. Publication of the notice of time,
lessor chooses not to pay one half place and subject of the meeting for
of the value thereof. However, in the three (3) consecutive weeks in a
case at bar the law will not apply newspaper published in the place
because the parties herein have where the principal office of said
stipulated in the contract their own corporation is located or in a
terms and conditions concerning the newspaper of general circulation in
improvements before the the Philippines;
termination of the lease. Petitioner 4. Resolution adopted by the
PNB as assignee of PBM affirmative vote of the stockholders
succeeded to the obligation of the owning at least 2/3 of the
latter under the contract of lease. It outstanding capital stock or 2/3 of
could not possess rights more than the members at the meeting duly
what PBM had as lessee under the called for the purpose;
contract. Hence, petitioner was duly 5. A copy of the resolution authorizing
bound to remove the improvements the dissolution must be certified by a
before the expiration of the period of majority of the board of directors or
lease. Its failure to do so when the trustees and countersigned by the
lease was terminated was corporate secretary;
tantamount to a waiver of its rights 6. Issuance of a certificate of
and interest over the improvements dissolution by the SEC.
on the leased premise.
 Should this be strictly complied
o 3 modes of dissolution, 3 with?
modes of voluntary
dissolution and 3 modes of - Yes, compliance with the
liquidation and winding up- requirements and formalities
FREQUENTLY ASKED IN prescribed above is mandatory such
THE FINALS that failure to comply therewith will
have no effect on the legal existence
 What are the 3 modes of voluntary of the corporation.
dissolution?
 Will dissolution be effective and
1. Voluntary dissolution where no valid by a mere resolution of the
creditors are affected; <sec.118> BOD and stockholders?
2. Voluntary dissolution where
creditors are affected; <sec. 119> - No, a mere resolution by the
3. Shortening of corporate term. <sec. stockholders or the BOD of a
120> corporation to dissolve the same
does not affect the dissolution but
 Voluntary dissolution where no that some other steps,
creditors are affected <sec.118> administrative or judicial is

118
necessary. (Daguhoy Enterprises 7. Judgment dissolving the corporation

vs. Ponce) and directing of its assets as justice
- Since it is the State which grants its requires and the appointment of a
right to exist, it is only through the receiver (if necessary in its
State which can allow the discretion) to collect such assets
termination of its existence; without and pay the debts of the
consent of the State, it will not be corporation.
dissolved.
o The foregoing are also
 Voluntary dissolution where mandatory requirements
creditors are affected <sec.119>
 Is the appointment of a receiver
- By virtue of a petition, when there mandatory?
are creditors affected
- The following formalities would thus - No, it is merely permissive or
be required: discretionary on the part of the
court. The code uses the word
1. Affirmative vote of the stockholders “may”; the law intended to let the
representing at least 2/3 of the shareholders have the control of the
outstanding capital stock or at least assets of the corporation upon
2/3 of the members at a meeting dissolution and winding up.
duly called for that purpose; - The directors may also undertake
2. Petition for dissolution shall be filed liquidation and winding up of its
with the SEC signed by a majority of corporate affairs, and sound
its board of directors or trustees or business judgment, on how they will
other officers having the wind up
management of its affairs, verified
by the president or secretary or one  Dissolution by shortening of
of its directors or trustees, setting corporate term <sec.120>
forth all claims and demands
against it. - Will be valid upon approval of the
3. Issuance of an order by the SEC SEC, unlike general amendments,
reciting the purpose of the petition which will be deemed approved if
and fixing the date on or before not acted upon by the SEC within 6
which objections thereto may be months from the date of filing for a
filed by any person, which date shall cause not attributable to the
not be less than thirty days nor more corporation.
than sixty days after entry of the - Shortening of the corporate term
order. partakes the nature of an
4. Before such date, a copy of the amendment of the articles of
order must be published once a incorporation. Section 16 under
week for three (3) consecutive general amendments allows “written
weeks in a newspaper of general assent” section 37 mandates that
circulation published in the city or the vote must be cast at a duly
municipality where the principal constituted meeting.
office is situated or in a newspaper
of general circulation in the Section 120. Dissolution by
Philippines. shortening corporate term. - A
5. Posting of the same order for three voluntary dissolution may be
(3) consecutive weeks in three (3) effected by amending the articles of
public places in such city or incorporation to shorten the
municipality. corporate term pursuant to the
6. Upon five (5) days’ notice, given provisions of this Code. A copy of
after the date on which the right to the amended articles of
file objections has expired, the SEC incorporation shall be submitted to
shall hear the petition and try any the Securities and Exchange
issue made by the objections filed. Commission in accordance with this
Code. Upon approval of the
119
amended articles of incorporation of which would amount to a grave

the expiration of the shortened term, violation of its franchise;
as the case may be, the corporation 4. Continuous inoperation for a period
shall be deemed dissolved without of at least five (5) years;
any further proceedings, subject to 5. Failure to file by-laws within the
the provisions of this Code on required period;
liquidation. (n) 6. Failure to file required reports in
appropriate forms as determined by
o Intra-corporate- special the Commission within the
commercial courts prescribed period.
 Another way of dissolving a - Other grounds are provided for in

corporation is through involuntary the corporation code itself: among
dissolution them are:
Section 121. Involuntary 1. Violation of any provision of the

dissolution. - A corporation may be Code under section 144;
dissolved by the Securities and 2. In case of deadlock in a close
Exchange Commission upon filing of corporation as provided for in
a verified complaint and after proper section 105;
notice and hearing on the grounds 3. In a close corporation, any acts of
provided by existing laws, rules and directors, officers or those in control
regulations. (n) of the corporation which is illegal or
fraudulent or dishonest or
- Dissolution is tantamount to the oppressive or unfairly prejudicial to
imposition of death penalty the corporation or any stockholder
- Instead of dissolving the or whenever corporate assets are
corporation, courts normally enjoin being misapplied or wasted under
the further commission of the section 105.
questioned act
- The relief of dissolution will be - Mere dishonesty is also a ground in
awarded only where no other a close corporation
remedy is available and it will not be - Other grounds can be found in other
allowed where the rights of the special laws like the Securities
stockholders can be, or are, Regulation Code and the General
protected in some other way Banking Act as well as the
(Republic vs. Bisaya Land Trans. Insurance Code.
Co. Inc.)
 Government vs. Philippine Sugar
 What are the grounds for involuntary Estate
dissolution?
- It is necessary in order to secure
- It is commenced through a verified judicial foreclosure of respondent’s
complaint or motu proprio by the charter to show a mis-user of its
proper courts franchise justifying such a forfeiture
- Section 6 of PD 902-A provides for - Object is to protect the public, and
the grounds for involuntary not to redress private grievances,
dissolution as follows: the mis-user must be such as to
work or threaten a substantial injury
1. Fraud in procuring its certificate of to the public, or such as to amount
registration; to a violation of the fundamental
2. Serious misrepresentation as to condition of the contract by which
what the corporation can do or is the franchise was granted and thus
doing to the great prejudice of or defeat the purpose of the grant
damage to the general public; - Courts proceed with extreme
3. Refusal to comply or defiance of any caution which has for their object
lawful order of the Commission the forfeiture of corporate franchise,
restraining commission of acts and forfeiture will not be allowed,
120
except under express limitation, or - The corporation here is a lending

for plain abuse of power by which institution and not a banking
the corporation fails to fulfill the institution
design and purpose of its - Defendant corporation violated the
organization. But when the abuse or law because before a corporation
violation constitutes or threatens a may engage into a banking activity it
substantial injury to the public or must first obtain a secondary
such as to amount to a violation of franchise from the Central Bank
the fundamental conditions of its - Defendant corporation threatens
charter, or its conduct is substantial injury to the general
characterized by obduracy or public, dissolution is warrant
pertinacity in contempt of law, - If there is a bank run kawawa
dissolution will be granted naman yung depositors
- Did the court dissolve the
corporation? No, it did not, it granted  Republic vs. Bisaya Land
the corporation 6 months to cease Transportation Co. Inc
and desist the performance of the
questioned act otherwise it will be - The relief of dissolution will be
dissolved awarded only where no other
remedy is available and it will not be
 Government vs. El Hogar allowed where the rights of the
stockholders can be, or are,
- 3 causes of action, the first is that protected in some other way
the corporation violated the law by - Misuse and misapplication of the
holding on the property beyond that funds and assets of the respondent
provide for by law, the second is that were committed particularly by the
the corporation undertook the corporate officers, where they can
management f petitioners belonging instead be held personally liable
to delinquent shareholders of the - Since there is another remedy
association, and lastly that the by- available dissolution is not
law provision, which empowers the warranted
BD to cancel shares and to return to
the owners thereof the balance  Assuming the above stated
returning from the liquidation corporation is a close corporation,
would the court decree otherwise?
 Compare to Philippine Sugar Estate,
wherein the court ruled conditional - Yes, because in a close corporation,
dissolution. Why decree conditional mere dishonesty is a ground for the
dissolution in one and not in the dissolution
other case? - Can even be dissolved by petition of
only one stockholder on the
- Because in El Hogar the grounds stated in the code < sec.
government was at fault, the 105>
government wasn’t able to issue the
certificate of title on time  Financing Corporation of the
- When the case was instituted, El Philippines vs. Teodoro
Hogar was already able to dispose
the properties in question, in - Minority stockholders may not ask
Philippine Sugar Estate it was still for the dissolution of a corporation in
the holding the properties in order to private suits and that such actions
enrich itself at the expense of the should be brought by the
taxpayers Government through its legal
officers, except in cases where the
 Republic vs. Security Credit and intervention of the State, for one
Acceptance Corp. et al. reason or another, cannot be
obtained, as when the State is not
interested because the complaint
is strictly a matter between the
121
stockholders and does not Neither can it enforce a contract

involve, in the opinion of the legal executed prior its dissolution for the
officer of the Government, any of purpose of continuing the business
the acts or omissions warranting of its organization.
quo warranto proceeding , in - In general the rights and liabilities of
which minority stockholders are the corporation are not extinguished
entitled to have such dissolution. by its dissolution.
It should be exercised if necessary
in order not to entirely ignore and Section 145. Amendment or
disregard the rights of said minority repeal. - No right or remedy in favor
stockholders, especially when said of or against any corporation, its
minority stockholders are unable to stockholders, members, directors,
obtain redress and protection of trustees, or officers, nor any liability
their rights within the corporation incurred by any such corporation,
itself. Stockholders should not be stockholders, members, directors,
left without recourse trustees, or officers, shall be
removed or impaired either by the
 Present set up subsequent dissolution of said
corporation or by any subsequent
- Any stockholder or member of a amendment or repeal of this Code
corporation can institute a or of any part thereof. (n)
dissolution proceeding against his
own corporation before the proper  Buenaflor vs. Camarines Sur
forum Industry Corp.
- Special Commercial Courts, shall
hear and decide intra-corporate - From that time on Camarines Sur
disputes was plying in an activity that was
illegal
 May a corporation ask for - A corporation where the corporate
dissolution of the corporation when life has expired it cannot lawfully
there is no prejudice to the general pursue the business for which it was
public? organized.
- the Supreme Court held that a
- Yes, in a close corporation, a corporation, whose corporate life
petition for the dissolution of the expired, cannot lawfully pursue the
corporation may be instituted by any business for which it was organized.
one individual shareholder on the It cannot apply for a new certificate
ground, even by mere dishonesty or a secondary franchise for it is
incapable of receiving a grant.
 Effects of dissolution - Awarding it to Camarines Sur is
tantamount to a medal for its illegal
- The dissolution of a corporation not acts
only terminates its primary franchise - It cannot apply for a new certificate
to be a corporation, but generally or a secondary franchise for it is
prevents it from further exercising incapable of receiving a grant. It
other or secondary franchises which was not even a corporation de facto.
have been conferred to its. It And then, there is no application
terminates its power to enter into subscribed by the new corporation
contracts or t o continue the - And yet as stated, the new
business as a going concern. corporation has not filed any
- Based on this general rule, the application for certificate of public
Supreme Court held that a convenience in Sabang, and has not
corporation, whose corporate life published such application.
expired, cannot lawfully pursue the
business for which it was organized.  Cebu Port Labor Union vs. State
It cannot apply for a new certificate Marine Co
or a secondary franchise for it is
incapable of receiving a grant.
122
- Even a cursory reading of the on equal footing with common

provision would convey the idea shareholders
clearly manifested in the limitation - Preference may be participating or
“but not for the purpose of non-participating
continuing the business for which it
was established,” that the 3-year  Dissolved corporations are granted
period allowed by the law is only for a period of 3 years to liquidate
the purpose of winding up its affairs.
Section 122. Corporate
 Gonzales vs. Sugar Regulatory liquidation. - Every corporation
Administration whose charter expires by its own
limitation or is annulled by forfeiture
- Instead of applying the corporation or otherwise, or whose corporate
code, the court applied the existence for other purposes is
constitutional provision terminated in any other manner,
- Cannot be read as permitting to shall nevertheless be continued as a
destroy the substantive rights body corporate for three (3) years
- Such would collide with the non- after the time when it would have
impairment of contracts clause of been so dissolved, for the purpose
the constitution of prosecuting and defending suits
- Complainants will have the right to by or against it and enabling it to
follow the assets of the corporation settle and close its affairs, to
in the hands of SRA or any other dispose of and convey its property
agency for that matter and to distribute its assets, but not
for the purpose of continuing the
 After dissolution what next? business for which it was
established.
- Liquidation and winding up should
follow At any time during said three
(3) years, the corporation is
 What is the definition of liquidation authorized and empowered to
and winding up? convey all of its property to trustees
for the benefit of stockholders,
- Collection of all corporate assets, members, creditors, and other
the payments of all its debts and persons in interest. From and after
settlement of its obligations and the any such conveyance by the
ultimate distribution of the corporate corporation of its property in trust for
assets, if any of it remains, to all the benefit of its stockholders,
stockholders in accordance with members, creditors and others in
their proportionate stockholdings in interest, all interest which the
the corporation or in accordance corporation had in the property
with their respective contracts of terminates, the legal interest vests
subscription. in the trustees, and the beneficial
interest in the stockholders,
 Preference upon liquidation members, creditors or other persons
in interest.
- If there are preferred shares, the
Upon the winding up of the
preference granted to such should
corporate affairs, any asset
be complied with
distributable to any creditor or
- Preferred shares may give the
stockholder or member who is
holder thereof, preference only in
unknown or cannot be found shall
the dividends but also in the
be escheated to the city or
distribution of corporate assets upon
municipality where such assets are
liquidation or termination of the
located.
corporate existence. If such is the
intent, the contract of subscription
Except by decrease of capital
must so indicate lest they are placed
stock and as otherwise allowed by
123
this Code, no corporation shall recognize that in cases of voluntary

distribute any of its assets or dissolution there is no occasion for
property except upon lawful the appointment of a receiver except
dissolution and after payment of all under special circumstances and
its debts and liabilities. (77a, 89a, upon proper showing
16a) - If a receiver is appointed, the 3 year
period fixed by law within which to
 However the 3 year period is not complete the task of liquidation will
absolute not likewise apply because the
 Liquidation may be undertaken in dissolved corporation is substituted
either of the 3 ways by the receiver who may sue or be
sued even after that period
1. By the corporation itself through the
BOD o Mere appointment of a
receiver without anything
- Usual method or procedure of more does imply in the
liquidating a corporation and dissolution of a corporation
although there is no law authorizing
it, neither is there anything that  National Abaca other Fibers Co. vs.
prohibits the BOD from undertaking Pore
the same
- If this method is resorted to, the - Actions pending for or against the
board will only have a period of 3 corporation when the 3 year period
years to finish its task of liquidation expires, are abated since after that
- Claims for or against the corporate period, the corporation ceases for all
entity not filed within the period will intents and purposes and is no
become unenforceable as there longer capable of suing or being
exist no corporate entity against sued
which they can be enforced - May be continued by the trustee
- Actions pending for or against the provided done within the 3 year
corporation when the 3 year period period
expires, are abated since after the - Should the corporation, therefore,
period, the corporation ceases for all finds it difficult to finish its
intents and purposes and is no liquidation, it may, at any time during
longer capable of suing or being the three year period, convey all its
sued assets and receivables to a trustee
to prosecute and defend suits by or
2. By a trustee appointed by the against the corporation begun
corporation before the expiration of said period
- The effect of the conveyance is to
- The corporation may opt to convey make the trustees the legal owners
all corporate assets to a trustees of the property conveyed, subject to
who will take charge of liquidation the beneficial interest therein of
- If this method is used, the three year creditors and stockholders
period limitation imposed by section
122 will not apply provided the  Sumera vs. Valencia
designation of the trustee is made
within that period - Thus it was held that when a
corporation is dissolved and the
3. By appointment of a receiver liquidation of the assets is placed in
the hands of receiver or assignee,
- A receiver may be appointed by the the period of 3 years prescribed by
proper forum on petition or motu law is not applicable and the
proprio upon the dissolution of the assignee may institute all actions
corporation leading to the liquidation of the
- The appointment of a receiver is, corporation even after the expiration
however, permissive rather than of 3 years.
mandatory and the law tends to
124
- If the corporation carries out the - The counsel who prosecuted and
liquidation of its assets through its defended the interest of the
own officers and continues and corporation may be considered as a
defends the actions brought by or “trustee” at least with respect to the
against it, its existence shall matter in litigation only
terminate at the end of three years
from the time of dissolution; but if a  May a corporation that is already
receiver or assignee is appointed, dissolved, transfer and assign its
with or without a transfer of its assets and properties to a new
properties within 3 years, the legal corporation which will continue the
interest passes to the assignee, the business of the dissolved one?
beneficial interest remaining in the
members, stockholders, creditors - Yes, provided all the stockholders
and other interested persons and gave their consent (Chung Ka Bio
said assignee may bring an action, vs. IAC)
prosecute that which has already
been commenced for the benefit of  Republic vs. Marsman Development
the corporation, or defend the latter Company & Chung Ka Bio vs. IAC
against any other action already
instituted or which may be instituted - During the three year period granted
even outside of the period of three to a corporation to liquidate or wind
years fixed for the offices of the up its affairs, the BOD is not
corporation. normally permitted to undertake any
activity outside the usual liquidation
 Board of Liquidators vs. Kalaw of the corporation. There is,
however, nothing to prevent the
- If there is a trustee, assignee or stockholders from conveying their
liquidator, it can continue respective shareholdings toward the
prosecuting suit even beyond the 3 creation of a new corporation to
year period fixed by law because he continue the business of the old.
becomes the legal owner of the This is because winding up is the
rights, assets and properties sole activity of the dissolved
conveyed to him corporation that does not intend to
incorporate a new. If it does,
 Gelano vs. CA however, it is not unlawful for the old
board of directors to negotiate and
- “Trustee” as used in the corporation transfer the assets of the dissolved
statute must be understood in its corporation to the new corporation
general concept which could include intended to be created as long as
the counsel to whom was entrusted the stockholders have given their
in the instant case, the prosecution consent (Republic vs. Marsman
of the suit filed by the corporation. Development Company)
The purpose in the transfer of the - Winding up is the sole activity of a
assets of the corporation to a dissolved corporation that does not
trustee upon its dissolution is more intend to incorporate anew. If it
for the protection of its creditors and does, however, it is not unlawful for
stockholders. Debtors like the the old board of directors to
petitioners herein may not take negotiate and transfer the assets of
advantage of the failure of the the dissolved corporation to the new
corporation to transfer its assets to a corporation intended to be created
trustee, assuming it has any to as long as the stockholders have
transfer which petitioner has failed given their consent (Chung Ka Bio
to show, in the first place. To sustain vs. IAC)
petitioners’ contention would be to
allow them to enrich themselves at  What happens to the remaining
the expense of another, which all assets and properties of the
enlightened legal systems condemn. dissolved corporation if liquidation
and winding up as provided in
125
section 122 is not complied with, as but likewise the creditors of the
a result of which the 3 year period corporation, acting for and in its
has elapsed behalf, might make proper
representations with the SEC, which
- If the three year extended life has has primary and sufficiently broad
expired without a trustee or receiver jurisdiction in matters of this nature,
having been expressly designated for working out a final settlement of
by the corporation within that period, the corporate concerns
the board of directors o trustees
itself, following the rationale of the o the ruling is wrong
Supreme Court’s decision in Gelano according to atty. Ladia
vs. CA may be permitted to do so
continue as” trustees” by legal  According to atty Ladia: What
implication to complete the happens to a corporation that is
liquidation. Still in the absence of a already dissolved, that has not been
BOD or BOT, those having any able to appoint a trustee with in the
pecuniary interest in the assets, 3 year period?
including not only the shareholders
but likewise the creditors of the - a corporation dissolved which failed
corporation, acting for and in its to exercise its rights granted in
behalf, might make proper section 122 after the 3 year period
representations with the SEC, which has elapsed, ceases to exist for all
has primary and sufficiently broad intents and purposes, it can no
jurisdiction in matters of this nature, longer sue or be sued
for working out a final settlement of - according to 122 of the code, the
the corporate concerns (Clemente property should be escheated,
vs. CA) accordingly:
o According to atty. Ladia the Section 122. Corporate

ruling of the Supreme Court liquidation. - Every corporation
in the case of Clemente vs. whose charter expires by its own
CA is wrong, opinion is limitation or is annulled by forfeiture
further discussed after the or otherwise, or whose corporate
Clemente Case existence for other purposes is
terminated in any other manner,
 Clemente vs. CA shall nevertheless be continued as a
body corporate for three (3) years
- Who owns the properties? after the time when it would have
SOCIEDAD ANONIMA been so dissolved, for the purpose
- The termination of the life of a of prosecuting and defending suits
juridical entity does not by itself by or against it and enabling it to
cause the extinction or diminution of settle and close its affairs, to
the rights and liabilities of such dispose of and convey its property
entity or those of its owners and and to distribute its assets, but not
creditors. If the three year extended for the purpose of continuing the
life has expired without a trustee or business for which it was
receiver having been expressly established.
designated by the corporation within
that period, the board of directors o At any time during said three
trustees itself, following the rationale (3) years, the corporation is
of the Supreme Court’s decision in authorized and empowered to
Gelano vs. CA may be permitted to convey all of its property to trustees
do so continue as” trustees” by legal for the benefit of stockholders,
implication to complete the members, creditors, and other
liquidation. Still in the absence of a persons in interest. From and after
BOD or BOT, those having any any such conveyance by the
pecuniary interest in the assets, corporation of its property in trust for
including not only the shareholders the benefit of its stockholders,
126
members, creditors and others in corporation registered or organized

interest, all interest which the under the laws of another state is
corporation had in the property necessarily a foreign corporation
terminates, the legal interest vests whether or not the state of its
in the trustees, and the beneficial incorporation allow Filipino citizens
interest in the stockholders, or corporations to do business in
members, creditors or other persons that forum.
in interest. - The said phrase was inserted by the
framers of the law only as a
Upon the winding up of the condition precedent to the grant of a
corporate affairs, any asset license of a foreign corporation to do
distributable to any creditor or business in the Philippines.
stockholder or member who is
unknown or cannot be found  Composed of 100% Americans;
shall be escheated to the city or organized under the laws other than
municipality where such assets the Philippines
are located.
- The test is the “incorporation test”
Except by decrease of capital - General rule: the place of its
stock and as otherwise allowed by incorporation irrespective of the
this Code, no corporation shall nationality
distribute any of its assets or - Exception: control test would apply
property except upon lawful in determining the corporate
dissolution and after payment of all nationality, i.e., the citizenship of the
its debts and liabilities. (77a, 89a, controlling stockholders determines
16a) the nationality of the corporation
FOREIGN CORPORATIONS  If a foreign corporation wants to

transact business in the Philippines,
 Definition what must it do?
- Section 123. Definition and rights of - Obtain a license

foreign corporations. - For the
purposes of this Code, a foreign  How may it do so?
corporation is one formed,
organized or existing under any - According to sec. 125:
laws other than those of the
Philippines and whose laws allow Section 125. Application for
Filipino citizens and corporations to a license. - A foreign corporation
do business in its own country or applying for a license to transact
state. It shall have the right to business in the Philippines shall
transact business in the Philippines submit to the Securities and
after it shall have obtained a license Exchange Commission a copy of its
to transact business in this country articles of incorporation and by-
in accordance with this Code and a laws, certified in accordance with
certificate of authority from the law, and their translation to an
appropriate government agency. (n) official language of the Philippines, if
necessary. The application shall be
 What if the law of the state of the under oath and, unless already
foreign corporation does not allow stated in its articles of incorporation,
Filipino citizens to do business in shall specifically set forth the
their country? following:
- The phrase “and whose laws allow 1. The date and term of
Filipino citizens and corporations to incorporation;
do business in its own country or
state” is not, however, an accurate 2. The address, including the street
inclusion in the definition as ay number, of the principal office of the
127
corporation in the country or state of jurisdiction of its incorporation,

incorporation; attesting to the fact that the laws of
the country or state of the applicant
3. The name and address of its allow Filipino citizens and
resident agent authorized to accept corporations to do business therein,
summons and process in all legal and that the applicant is an existing
proceedings and, pending the corporation in good standing. If such
establishment of a local office, all certificate is in a foreign language, a
notices affecting the corporation; translation thereof in English under
oath of the translator shall be
4. The place in the Philippines attached thereto.
where the corporation intends to
operate; The application for a license
to transact business in the
5. The specific purpose or purposes Philippines shall likewise be
which the corporation intends to accompanied by a statement under
pursue in the transaction of its oath of the president or any other
business in the Philippines: person authorized by the
Provided, That said purpose or corporation, showing to the
purposes are those specifically satisfaction of the Securities and
stated in the certificate of authority Exchange Commission and other
issued by the appropriate governmental agency in the proper
government agency; cases that the applicant is solvent
and in sound financial condition, and
6. The names and addresses of the setting forth the assets and liabilities
present directors and officers of the of the corporation as of the date not
corporation; exceeding one (1) year immediately
prior to the filing of the application.
7. A statement of its authorized
capital stock and the aggregate Foreign banking, financial
number of shares which the and insurance corporations shall, in
corporation has authority to issue, addition to the above requirements,
itemized by classes, par value of comply with the provisions of
shares, shares without par value, existing laws applicable to them. In
and series, if any; the case of all other foreign
corporations, no application for
8. A statement of its outstanding license to transact business in the
capital stock and the aggregate Philippines shall be accepted by the
number of shares which the Securities and Exchange
corporation has issued, itemized by Commission without previous
classes, par value of shares, shares authority from the appropriate
without par value, and series, if any; government agency, whenever
required by law. (68a)
9. A statement of the amount
actually paid in; and  Is there any deposit or security
requirement?
10. Such additional information as
may be necessary or appropriate in - Yes, within 60 days after the
order to enable the Securities and issuance of the license, a foreign
Exchange Commission to determine corporation, except those engaged
whether such corporation is entitled in foreign banking or insurance,
to a license to transact business in shall deposit with the SEC, for the
the Philippines, and to determine benefit of creditors, securities
and assess the fees payable. consisting of bonds or other
evidence of indebtedness of the
Attached to the application Philippine government or its political
for license shall be a duly executed subdivision, or of government
certificate under oath by the owned or controlled corporation,
authorized official or officials of the
128
shares of stock in “registered exchange, or shares of stock in

enterprises” as this term is defined domestic insurance companies and
in R.A. 5186, shares of stock in banks, or any combination of these
domestic insurance companies and kinds of securities, with an actual
banks or any combination thereof market value of at least one
with an actual market value of hundred thousand (P100,000.)
100,000 pesos; Provided, however, That
- Additional securities may be within six (6) months after each
required by the SEC if the actual fiscal year of the licensee, the
market value of the securities on Securities and Exchange
deposit has decreased by at least Commission shall require the
10%. Section 126 of the code licensee to deposit additional
provides: securities equivalent in actual
market value to two (2%) percent of
Section 126. Issuance of a the amount by which the licensee's
license. - If the Securities and gross income for that fiscal year
Exchange Commission is satisfied exceeds five million (P5,000,000.00)
that the applicant has complied with pesos. The Securities and
all the requirements of this Code Exchange Commission shall also
and other special laws, rules and require deposit of additional
regulations, the Commission shall securities if the actual market value
issue a license to the applicant to of the securities on deposit has
transact business in the Philippines decreased by at least ten (10%)
for the purpose or purposes percent of their actual market value
specified in such license. Upon at the time they were deposited. The
issuance of the license, such foreign Securities and Exchange
corporation may commence to Commission may at its discretion
transact business in the Philippines release part of the additional
and continue to do so for as long as securities deposited with it if the
it retains its authority to act as a gross income of the licensee has
corporation under the laws of the decreased, or if the actual market
country or state of its incorporation, value of the total securities on
unless such license is sooner deposit has increased, by more than
surrendered, revoked, suspended or ten (10%) percent of the actual
annulled in accordance with this market value of the securities at the
Code or other special laws. time they were deposited. The
Within sixty (60) days after Commission may, from time to time,
the issuance of the license to allow the licensee to substitute other
transact business in the Philippines, securities for those already on
the license, except foreign banking deposit as long as the licensee is
or insurance corporation, shall solvent. Such licensee shall be
deposit with the Securities and entitled to collect the interest or
Exchange Commission for the dividends on the securities
benefit of present and future deposited. In the event the licensee
creditors of the licensee in the ceases to do business in the
Philippines, securities satisfactory to Philippines, the securities deposited
the Securities and Exchange as aforesaid shall be returned, upon
Commission, consisting of bonds or the licensee's application therefor
other evidence of indebtedness of and upon proof to the satisfaction of
the Government of the Philippines, the Securities and Exchange
its political subdivisions and Commission that the licensee has
instrumentalities, or of government- no liability to Philippine residents,
owned or controlled corporations including the Government of the
and entities, shares of stock in Republic of the Philippines. (n)
"registered enterprises" as this term
is defined in Republic Act No. 5186,  Other than section 125 and 126.
shares of stock in domestic What other requirements are set
corporations registered in the stock under Philippine Law before a
129
foreign corporation may transact Philippines, service of any summons

business in the Philippines or other legal process may be made
upon the Securities and Exchange
- Yes. A Resident agent is required. Commission and that such service
As a condition precedent to the shall have the same force and effect
grant of a license to do or transact as if made upon the duly-authorized
business in the Philippines, the officers of the corporation at its
foreign corporation is required to home office."
designate its resident agent on
whom summons and other legal Whenever such service of
processes may be served in all summons or other process shall be
actions or legal proceedings against made upon the Securities and
such corporation Exchange Commission, the
- Section 128 provides: Commission shall, within ten (10)
days thereafter, transmit by mail a
Section 128. Resident agent; copy of such summons or other
service of process. - The Securities legal process to the corporation at
and Exchange Commission shall its home or principal office. The
require as a condition precedent to sending of such copy by the
the issuance of the license to Commission shall be necessary part
transact business in the Philippines of and shall complete such service.
by any foreign corporation that such All expenses incurred by the
corporation file with the Securities Commission for such service shall
and Exchange Commission a be paid in advance by the party at
written power of attorney whose instance the service is made.
designating some person who must
be a resident of the Philippines, on In case of a change of
whom any summons and other legal address of the resident agent, it
processes may be served in all shall be his or its duty to
actions or other legal proceedings immediately notify in writing the
against such corporation, and Securities and Exchange
consenting that service upon such Commission of the new address.
resident agent shall be admitted and (72a; and n)
held as valid as if served upon the
duly authorized officers of the - The necessity of the appointment of
foreign corporation at its home a resident agent is only for the
office. Any such foreign corporation purpose of receiving summons and
shall likewise execute and file with other legal processes in any legal
the Securities and Exchange action or proceeding against the
Commission an agreement or foreign corporation
stipulation, executed by the proper
authorities of said corporation, in  Who may be appointed as a
form and substance as follows: resident agent?
"The (name of foreign - Section 127 provides that:

corporation) does hereby stipulate
and agree, in consideration of its Section 127. Who may be a
being granted by the Securities and resident agent. - A resident agent
Exchange Commission a license to may be either an individual residing
transact business in the Philippines, in the Philippines or a domestic
that if at any time said corporation corporation lawfully transacting
shall cease to transact business in business in the Philippines:
the Philippines, or shall be without Provided, That in the case of an
any resident agent in the Philippines individual, he must be of good moral
on whom any summons or other character and of sound financial
legal processes may be served, standing. (n)
then in any action or proceeding
arising out of any business or
transaction which occurred in the
130
 May a partnership be appointed as Philippines; but such corporation

a resident agent? may be sued or proceeded against
before Philippine courts or
- Yes, domestic corporation taken in administrative tribunals on any valid
its general sense not legal sense cause of action recognized under
Philippine laws. (69a)
 If there is a resident agent
appointed. May summons be served - if they do so, the responsible officers
to any officers of the corporation? may be subjected to the penal
sanctions provided for in section
- No, if there is a resident agent, the 144 of the code, which may either
designation is exclusive and service be fine or imprisonment
must be made only to the resident
agent or else the service is without  What if it is not doing business
force and effect unless made to him without a license?
- Thus, while the law allows service
upon the SEC or any of its officers - If it is not transacting business in the
or agents within the Philippines Philippines, even without a license,
- The two modes may become it can sue before the Philippine
effective only if the foreign Courts
corporation failed or neglected to
designate such a person or an  The general rule is that “it is not the
agent lack of required license but doing
- Summons must be made only to business without a license which
resident agent except when there is bars a foreign corporation form
no resident agent appointed access to our courts.”
- Where such foreign corporation  Exception:
actually doing business here has not
applied for a license to do and has 1. Foreign corporations can sue
not designated an agent to receive before the Philippine Courts if
summons, then service of summons the act or transaction involved is
on it will be made pursuant to the an “isolated transaction” or the
provisions of the rules of court. If corporation is not seeking to
such foreign corporation has a enforce any legal or contractual
license to do business, then rights arising from, or growing
summons to it will be served on the out of, any business which it has
agent designated by it for the transacted in the Philippines
purpose, or otherwise in accordance 2. Neither is a license required
with the Corporation Law (General before a foreign corporation may
Corporation of the Philippines vs. sue before the forum if the
Union Insurance Soc. Of Canton purpose of the suit is to protect
Ltd.) its trademark, trade name,
corporate name, reputation or
 If the foreign corporation conducts goodwill;
business in the Philippines without 3. Or where it is based on a
the license requirement. What is the violation of the Revised Penal
effect? Code;
4. Or merely defending a suit filed
- Section 133 provides: against it
5. Or where a party is stopped to
Section 133. Doing business challenge the personality of the
without a license. - No foreign corporation by entering into a
corporation transacting business in contract with it.
the Philippines without a license, or
its successors or assigns, shall be  Rules laid down by the SC
permitted to maintain or intervene in
any action, suit or proceeding in any A. As to B. As to
court or administrative agency of the whether or whether or
131
not it can not it can be exercise of some of the functions

sue sued normally incident to, and in
A foreign A foreign progressive prosecution of, the
corporation corporation purpose and object of its
transacting or transacting organization (Mentholatum Co. Inc.
doing business in business in the vs. Mangaliman)
the Philippines Philippines with
with a license can the requisite  Mentholatum vs. Mangaliman
sue before license can be
Philippine Courts sued in the - The true test, however, seems to be
Philippine Courts whether the foreign corporation is
Subject to certain A foreign continuing the body or substance of
exceptions, a corporation the business or enterprise for which
foreign corporation transacting it was organized or whether it has
doing business in business in the substantially retired from it and
the country without Philippines without turned it over to another. The term
a license cannot a license can be implies a continuity of commercial
sue in Philippine sued in Philippine dealings and arrangements, and
Courts Courts contemplates, to that extent, the
If it is not if it is not doing performance of acts or works or the
transacting business in the exercise of some of the functions
business in the Philippines, it normally incident to, and in
Philippines, even cannot be sued in progressive prosecution of, the
without a license, Philippine Courts purpose and object of its
it can sue before for lack of organization
the Philippine jurisdiction - Whatever transaction the Philippine-
Courts American Drug Co. had executed in
 A foreign corporation not doing view of the law, the Mentholatum
business in the Philippines, may it Co. did it itself. And the
be sued? Mentholatum Co. being a foreign
corporation doing business in the
- If it is not transacting business in the Philippines without the license
country it cannot be sued for lack of required by section 68 of the
jurisdiction Corporation Law, it may not
prosecute this action for violation of
 Is there any sanction that can be trade mark and unfair competition
enforced to foreign corporations
which are doing business without  Why is foreign corporations barred
the required license? access from our courts if they do
business without a license?
- Penal sanctions under section 144
- Any violation of the code is subject - Marshall-Wells Co. vs. Henry W.
to such penal sanctions Elser and Co.
 What would constitute doing  Marshall-Wells Co. vs. Henry W.

business? Elser and Co.
- The true test, however, seems to be - The object of the statute was to
whether the foreign corporation is subject the foreign corporation doing
continuing the body or substance of business in the Philippines to the
the business or enterprise for which jurisdiction of its courts. The object
it was organized or whether it has of the statute was not to prevent the
substantially retired from it and foreign corporation from performing
turned it over to another. The term single acts, but to prevent it from
implies a continuity of commercial acquiring a domicile for the purpose
dealings and arrangements, and of business without taking the steps
contemplates, to that extent, the necessary to render it amenable to
performance of acts or works or the suit in local courts.
132
 Bulakhidas vs. Navarro casual but indicates the foreign

corporation’s intention to do other
- It is settled that if a foreign business in the Philippines, said
corporation is not engaged in single act or transaction constitutes
business in the Philippines, it may “doing” or “engaging in” or
not be denied the right to file an “transacting” business in the
action in Philippine courts for Philippines
isolated transactions - In the case at bar, the transaction
- The object of section 68 and 69 of entered into by the respondent with
the Corporation law was not to the petitioners are not a series of
prevent the foreign corporation from commercial dealings which signify
performing single acts, but to an intent on the part of the
prevent it from acquiring a domicile respondent to do business in the
for the purpose of business without Philippines but constitute an isolated
taking the steps necessary to render one which does not fall under the
it amenable to suit in the local category of “doing business.”
courts. It was never the purpose of - The records show that the only
the Legislature to exclude a foreign reason why the respondent entered
corporation which happens to obtain into the second and third
an isolated order for business from transactions with the petitioner was
the Philippines, from securing because it wanted to recover the
redress in the Philippine courts loss it sustained from the failure of
the petitioners to deliver the crude
 The Swedish East Asia Co., Ltd. Vs. coconut oil under the first
Manila Port Service transaction and in order to give the
latter a chance to make good on
- It must stated that the section is not their obligation. From these facts
applicable to a foreign corporation alone, it can be deducted that in
performing single acts or “isolated reality there was only one
transactions.” There is nothing to agreement between the petitioners
show that the petitioner has been in and the respondent.
the Philippines engaged in - The three seemingly different
continuing business or enterprise for transactions were entered into by
which it was organized, when the the parties only in an effort to fulfill
sixteen bundles were erroneously the basic agreement and in no way
discharged in manila, for it to be indicate an intent on the part of the
considered as transacting business respondent to engage in a continuity
in the Philippines. The fact is that of transactions with petitioners
the bundles, the value of which is which will categorize it as a foreign
sought to be recovered, were corporation doing business in the
landed not as a result of a business Philippines
transaction, isolated or otherwise, - 3 contracts, but according to the
but due to a mistaken belief that court was not doing business in the
they were part of the shipment of Philippines
forty similar bundles consigned to
persons or entities in the  Far East Int’l import vs. Nankai
Philippines, there is no justification Kogyo Co. Ltd.
therefore, for invoking the section
- Only one contract , but according to
 There were 3 contracts entered into, the Supreme Court was doing
how come they were still not business in the Philippines
considered as doing business? - Every case shall be judged in the
(Antam Consolidted, Inc. vs. CA) light of its peculiar circumstances,
where a single act or transaction
- Every case shall be judged in the however, is not merely incidental or
light of its peculiar circumstances, casual but indicates the foreign
where a single act or transaction corporation’s intention to do other
however, is not merely incidental or business in the Philippines, said
133
single act or transaction constitutes reduce petitioner ASPAC to a mere

“doing” or “engaging in” or extension or instrument of the
“transacting” business in the private respondents
Philippines - ITEC was doing business without a
- In the instant case, the testimony of license, however ASPAC is
Atty. Pablo Ocampo, that appellant estopped
was doing business in the - by entering into the Representative
Philippines corroborated by no less Agreement” with ITEC, petitioner is
than Nabuo Toshida, one of charge with knowledge that ITEC
appellant’s officers, that he was sent was not licensed to engage in
to the Philippines to look into the business activities in the country,
operation of mines, thereby and is thus stopped from raising in
revealing the defendant’s desire to defense such incapacity of ITEC,
continue engaging in business here, having chosen to ignore or even
after receiving the shipment of the presumptively take advantage of the
scrap iron under consideration, same
making the Philippines a base - In top-weld we ruled that a foreign
thereof. corporation may be exempted from
- In such a case, the single act of the license requirements in order to
transaction is not merely incidental institute an action in our courts if its
or casual, but is of such character representative in the country
as distinctly to indicate a purpose on maintained an independent status
the part of the operations for the during the existence of the disputed
conduct of a part of corporation’s contract. Petitioner is deemed to
ordinary business have acceded to such independent
character when it entered into the
 If a corporation appoints a Representative Agreement with
distributor or a representative, will it ITEC
necessarily imply doing business in
the country?  Western Equipment and Supply Co.
vs. Reyes
- If the foreign corporation maintained
an independent status during the - The company is not here seeking to
existence of the disputed contract. enforce any legal or contract rights
- Appointment of a distributor or arising from, or growing out of any
representative in the Philippines, business which it has transacted in
unless it has an independent status the Philippine Islands. The sole
(transacts and does business in its purpose of the action is to protect its
own name and for its account and reputation, its corporate name, its
not of the foreign corporation) goodwill, whenever that reputation,
- if that be the case the mere corporate name or goodwill have
appointment of a distributor will not through the natural development of
constitute doing business its trade, established themselves
- And it contends that its rights to the
 How do you know if it has an use of its corporate and trade name,
independent status? is a property right, a right in rem,
which may assert and protect
- Communications Materials and against all the world, in any of the
Design vs. CA courts of the world even in
jurisdictions where it does not
 Communications Materials and transact business just the same as it
Design vs. CA may protect its tangible property,
real or personal, against trespass,
- A perusal of the agreements or conversion
between petitioner ASPAC and the - Since it is the trade and not the
respondents show that there are mark that is to be protected a
provisions which are highly trademark acknowledges no
restrictive in nature, such as to territorial boundaries or
134
municipalities or states or nations, obligated to similarly protect

but extends to every market where Filipino Citizen and firms
the trader’s goods have become
known and identified by the use of - The ruling in the aforecited case is
the mark in consonance with the Convention
of the Union of Paris for the
 General Garments Corporation vs. protection of Industrial Property to
Director of Patents which the Philippines became a
party. Article 8 thereof provides that
- A foreign corporation which has a trade name shall be protected in
never done business in the all the countries of the Union without
Philippine Islands and which is the obligation of filing or registration,
unlicensed and unregistered to do whether or not it forms part of the
business here, but is widely and trademark
favorably known in the Islands
through the use therein of its  Le Chemiste Lacoste vs. Fernandez
products bearing its corporate and
trade name has a legal right to - The French company may gain
maintain an action in the Islands access to our courts, in the first
- Mentholatum case was place it was not doing business in
subsequently derogated when the Philippines
Congress, purposely to “counteract - The marketing of its products in the
the effects” of said case, enacted Philippines is done through an
R.A. 638, inserting Section 21-A in exclusive distributor, Rustan
the Trademark Law, which allows a Commercial Corporation. The latter
foreign corporation or juristic person is an independent entity which buys
to bring an action in Philippine and then markets not only products
Courts for infringement of a mark or of the petitioner but also many other
trade-name, for unfair competition, products bearing equally well-known
or false designation of origin and and established trademarks and
false description, “whether or not it trade-names
has been licensed to do business in
the Philippines under Act Numbered  Assuming Rustans had no
Fourteen hundred and fifty-nine, as independent status would the SC
amended, otherwise known as grant Lacoste access to our courts?
Corporation Law, at the time it
brings complaint. - Even if Lacoste did business in the
Philippines it can bring action
 Puma Sporschufabriken Rudolf because the case involves a
Dassler, K.G. vs. IAC and MIL-ORO violation of our penal code
MFG. Corp. - Such was a violation of article 189
of the RPC, if prosecution follows
- Treaties for part of the law of the after the completion of the
land preliminary investigation being
- Quoting the Paris Convention and conducted by the Special
the case of Vanity Fair Mills Inc. vs. Prosecutor the information shall be
T. Eaton Co. this court further said: in the name of the People of the
Philippines and no longer the
“By the same token, the petitioner which is only an aggrieved
petitioner should be given the party since a criminal offense is
same treatment in the essentially an act against the State.
Philippines as we make It is the latter which is principally the
available to our own citizens. injured party although there is a
We are obliged to assure to private right violated
nationals of countries of the - The records show that the goodwill
Union an effective protection and reputation of the petitioner’s
against unfair competition on products bearing the trademark
the same way that they are Lacoste date back even before 1964
135
when Lacoste clothing apparels proceeding with a suit that it had no

were forst marketed in the jurisdiction to entertain
Philippines. To allow Hemandas to
continue using the trademark  What law govern foreign corporation
Lacoste for the simple reason that doing and transacting business in
he was the first registrant in the the Philippines with a license
Supplemental Register of a
trademark used in international - Laws of the Republic of the
commerce and not belonging to him Philippines save and except that
is to render nugatory the very would normally be those matters
essence of the law on trademarks which concern its formation,
and trade names organization or dissolution, or those
fixing the relationship, liabilities,
 Atlantic Mutual Insurance Co. vs. responsibilities, or duties of the
Cebu Stevedoring Co. stockholders, members or officers of
the foreign corporation or their
- The law denies to a foreign relations to each other.
corporation the right to maintain suit - In effect, intra-corporate or internal
unless it has previously complied matters not affecting creditors or the
with a certain requirement, then public in general are governed not
such compliance, or the fact that the by Philippine laws but the law under
suing corporation is exempt there which the foreign corporation was
from, becomes a necessary formed or organized
averment in the complaint
- These are matters peculiarly within Section 129. Law applicable.
the knowledge of appellants alone, - Any foreign corporation lawfully
and it would be unfair to impose doing business in the Philippines
upon appellee the burden of shall be bound by all laws, rules and
asserting and proving the contrary. It regulations applicable to domestic
is enough that foreign corporations corporations of the same class,
are allowed by law to seek redress except such only as provide for the
in our courts under certain creation, formation, organization or
conditions: the interpretation of the dissolution of corporations or those
law should not go so far as to which fix the relations, liabilities,
include, in effect, an inference than responsibilities, or duties of
those conditions have been met stockholders, members, or officers
from the mere fact that the party of corporations to each other or to
suing is a foreign corporation the corporation. (73a)
 Olympia Business Machines Co. vs.  Will the pre-emptive rights of a

E. Razon foreign corporation be governed by
the same section of the code? Is the
- How do you distinguish this case pre-emptive rights of a stockholder
with Atlantic? in a domestic corporation same as
- In Atlantic it dismissed the case, the pre-emptive of a stockholder of
while in Olympia it did not a foreign corporation.
 Time Inc. vs. Reyes - No
- We fail to see how these doctrines  M.E. Grey vs. Insular Lumber
can be a propos in the case at bar, Company
since the petitioner is not
“maintaining any suit” but is merely - PNB vs. Gonzales, will this apply to
defending one against itself; it did a foreign corporation? How do you
not file any complaint but only a distinguish this case from a
corollary defensive petition to Philippine law?
prohibit the lower court from further

136
- Since it concerns the rights of 7. Transacting business in the

stockholders it is the law of New Philippines outside of the purpose or
York that should govern purposes for which such corporation
is authorized under its license;
 Is the license to do business of a
foreign corporation subject to 8. Transacting business in the
suspension or revocation? What are Philippines as agent of or acting for
the grounds? and in behalf of any foreign
corporation or entity not duly
- Section 134 provides: licensed to do business in the
Philippines; or
Section 134. Revocation of
license. - Without prejudice to other 9. Any other ground as would render
grounds provided by special laws, it unfit to transact business in the
the license of a foreign corporation Philippines. (n)
to transact business in the
Philippines may be revoked or  SEC does not have the sole
suspended by the Securities and authority to suspend or revoke the
Exchange Commission upon any of license of a foreign corporation
the following grounds: doing business in the Philippines,
other government agencies like the
1. Failure to file its annual report or Central Bank , the Insurance
pay any fees as required by this Commission may also do so within
Code; their respective dominion, despite
the provision of section 134
2. Failure to appoint and maintain a  If the SEC believes that revocation
resident agent in the Philippines as is warranted, section 135 provides
required by this Title; that:
3. Failure, after change of its Section 135. Issuance of

resident agent or of his address, to certificate of revocation. - Upon the
submit to the Securities and revocation of any such license to
Exchange Commission a statement transact business in the Philippines,
of such change as required by this the Securities and Exchange
Title; Commission shall issue a
corresponding certificate of
4. Failure to submit to the Securities revocation, furnishing a copy thereof
and Exchange Commission an to the appropriate government
authenticated copy of any agency in the proper cases.
amendment to its articles of
incorporation or by-laws or of any The Securities and Exchange
articles of merger or consolidation Commission shall also mail to the
within the time prescribed by this corporation at its registered office in
Title; the Philippines a notice of such
revocation accompanied by a copy
5. A misrepresentation of any of the certificate of revocation. (n)
material matter in any application,
report, affidavit or other document  Voluntary withdrawal of license
submitted by such corporation
pursuant to this Title; - All 3 conditions must be complied
with
6. Failure to pay any and all taxes,
imposts, assessments or penalties, Section 136. Withdrawal of
if any, lawfully due to the Philippine foreign corporations. - Subject to
Government or any of its agencies existing laws and regulations, a
or political subdivisions; foreign corporation licensed to
transact business in the Philippines
may be allowed to withdraw from
137
the Philippines by filing a petition for - Pyramid scheme

withdrawal of license. No certificate (misrepresentation)-Special
of withdrawal shall be issued by the Commercial Courts
Commission unless all the following - Syndicated estafa- not bailable
requirements are met;
 Alleje case
1. All claims which have accrued in
the Philippines have been paid, - Falls squarely under sec. 5 (a)
compromised or settled; Special Commercial Courts
2. All taxes, imposts, assessments, - Allegation corporate officers

and penalties, if any, lawfully due to employing schemes in diverting
the Philippine Government or any of
its agencies or political subdivisions - Not only detrimental to corporation,
have been paid; and but general membership
3. The petition for withdrawal of - Fraud must be stated with
license has been published once a particularity
week for three (3) consecutive
weeks in a newspaper of general  Abad vs. CFI of Pangasinan
circulation in the Philippines.
- Fraud must be stated with
particularity otherwise it may be filed
to any court
P.D. 902-A
 Intra-corporate
 P.D. 902-A was amended by R.A.
8799 or the SECURITIES - Exclusive and original jurisdiction of
REGULATION CODE in the year special commercial courts
2000
- Sole criteria is there must be an
 The jurisdiction of SEC for cases intra-corporate relationship
falling under section 5 thereof was
transferred to the courts of general - Pertaining to a controversy (speaks
jurisdiction designated by the SC, also of intra-partnership controversy,
they were called special commercial that partnership must be registered
courts, the only exceptions were with the SEC)
revocation of corporate franchise
 Rule now
and calling of elections
1. Necessarily be an intra-corporate
 However the SEC retained
relationship; and,
receivership or suspension
payments within June 20,2000 2. The controversy must arise out of
said relationship
 Jurisdiction of special commercial
courts are exclusive and original,  Intra-corporate relationship alone
jurisdiction is conferred by law; 1 will not suffice to put it in the ambit
Special Commercial Court per of special commercial courts and
region except MAKATI and courts of general jurisdiction may
QUEZON CITY which has two take cognizance
 Devices or Schemes  Case of a transferee of shares of

stock to compel the corporation to
recognize him as a stockholder

138
 How can it be intra-corporate when servides performed, but by the

he is not yet fully paid incidents of the relationship on they
actually exist
- When the transferee has done all he
can be required to do to render the - Corporate officers dismissal is
transfer effectual and the always a corporate act or intra-
corporation refuses to register the corporate controversy
transfer, the requirement of the
 Midland construction vs. Movilla
registration is waived and the
transferee is considered technically - NLRC will be possessed of
a stockholder who may sue to jurisdiction exception will not apply
enforce the right to have the transfer to mere recovery
registered
 Main consideration
 Florendo vs. rivera, Embassy Farms
- Asserts his right to the office or
- The transferor withheld the delivery, questions the propriety or validity of
they are not yet prima facie; it will his ouster or removal, it will be the
not be considered intra-corporate special commercial courts and not
 Controversies in the appointment the NLRC
(asked in the bar)  Securities Regulation Code
- Cases involving election, - Transferred jurisdiction of the SEC
appointment and removal to Special Commercial Courts
 In Andaya the court said that a - Suspension of payment,
corporate officer elected or appointment of management
appointed by the BOD is always a receivership
corporate act
 What is the reason for suspension
- The fact that petitioner sought of all claims?
payment of his back wages, other
benefits as well as moral and - The reason for suspending actions
exemplary damages and attorney’s for claims against the corporation is
fees in his complaint will not operate not really to enable the
to prevent the SEC from exercising management committee or the
its jurisdiction under P.D. 902-A. The rehabilitation receiver to substitute
jurisdiction will not wrest on the the defendant in any pending action
NLRC just because of that against it before any court, tribunal
or body. The real justification is to
 Tabang vs. NLRC enable the management committee
or rehabilitation receiver to
- Jurisdiction lies originally and
effectively exercise his powers free
exclusively to special commercial
from any Judicial or extra-judicial
courts and not in the NLRC
interference that might unduly
- SEC has jurisdiction over cases of hinder or prevent the “rescue” of the
removal from employment of debtor company. To allow such other
corporate officers actions to continue would only add
to the burden of the management
- The relationship of a person to a committee pr rehabilitation receiver,
corporation, whether as officer or as whose time, effort and resources
agent or employee or not would be wasted in defending
determined by the nature of the
139
claims against the corporation - It asked for a management

instead of being directed towards committee without a receiver plan
restructuring and rehabilitation.(PAL (Victorius Milling case)
vs. Spouses Sadic and Kurangking)
 Convert their claims into equity
- To enable the receiver to effectively
exercise his or her power free form - Their liability was almost wiped out
any judicial or extra-judicial that may they became stockholders instead
disturb of creditors
 3 types of suspension of payments - After 5 years those who converted

sold it back to the corporation,
1. Simple suspension of payments thereby making profits
- where deferment of payment of  Amendment is for the economic

claims against a distress company; development of the country
ask the court to be given time to the
payment of liability by postponing  What if walang amendment, e mas
the payment maraming liabilities kesa assets
- When it has sufficient assets and  Suspension order- all actions for
liabilities but forces the impossibility claims against the corporation are
of meeting them when they accordingly suspended at whatever
respectively fall due stage the proceedings maybe
2. Suspension of receiver with a  Effect of suspension- you cannot

management committee with a foreclose
rehabilitation play or suspension of
 What are claims?
payments accompanied by a
proposal for rehabilitation (with or - Debts or demands of pecuniary
without rehabilitation) nature. Assertion of a right to have
- corporation has sufficient assets to money paid
cover its liabilities, but sees the - Claims against the corporation shall
possibility; is or without rehabilitation be suspended, assertion of a right to
plans; normally would attach the have money paid; it must present a
rehabilitation plan monetary claim, liquidated or
- For purpose of economic unliquidated
development  Nullification of corporations does not
3. Suspension of payments when the present a monetary claim of
corporation has no sufficient assets pecuniary nature
to its liabilities
 Union vs. CA
 May it still be revived?
- It does not allow a mere individual to
- Yes, it may still be revived file the petition which is limited to
corporations partnership or
 How can a corporation with more associations.
liabilities than assets continue its
operations profitably? - Where no authority is granted to
hear petitions of individuals for
- Even if the distressed company has suspension of payments, such
no sufficient assets and liabilities it
can go for suspension
140
petition are beyond the competence - To enable the management

of the SEC committee to exercise its powers
 What happens if there is a  Sy Chim vs. Sy Siy Ho (before a

suspension order? management committee may be opt
by a court)
 Explain the key phrase “quality is
equity” - 2 requisites for a valid appointment
of management committee
- All creditors stand on equal footing,
secure or unsecure, holding or lien 1. Imminent danger of dissipation,
or without a lien, no creditor may loss, wastage or destruction of
enforce his lien while rehabilitation assets or other corporate properties
is going (Alemar case)
2. Paralysis of business operations,
- No preference shall be given the mere apprehension of future
misconduct based upon prior
 RCBC vs. IAC management
- Decided on motion for - Save and except in the case of a
reconsideration close corporation in case of
deadlock management committee is
- It court 7 years to decide
allowed to take over right away
authentication
 Jacinto case
 Rule of the thumb
- 2nd par of page 676
- Automatic suspension even if not
decreed in the decision itself - 2 requisites where present
- Once lifted the preferred creditors - Wala ng mapautang, there was a
will regain their preference paralyzation
 Appointment of a management  Sy Chim
committee
- Did not appoint a management
- Take over the management committee
committee of the distressed
corporation - In the absence of a strong showing
of an imminent danger of
- Extraordinary and drastic remedy dissipation, loss wastage or
- Without any remedy destruction of assets or other
properties of a corporation and
 What is an intra-corporate paralysis of its business operations,
controversy? the mere apprehension of future
misconduct based upon prior
- Section 5(B) mismanagement will not authorize
- Sole criteria is whether there exists the appointment of a management
an intra-corporate dispute is that if committee
there is an intra-corporate  Section 5 and 6(D) governed by
relationship separate rules; interim rules and
 Why is there suspension of all intra-corporate controversy
actions against claims when a  Venue of actions
receiver is appointed?
141
- Rules of court- where the parties are - Will apply only if it is not an intra-
residing corporate controversy
- Intra-corporate- no matter where the  If the controversy arose out of an

parties are residing it will be in the intra-corporate dispute rules on
city or municipality where the interim rules of procedure of intra-
principal office is located corporate controversies shall govern
 Rehabilitation proceedings venue  Rule 4 section 17- immunity from

suit
- In rem
 Rehabilitation receiver shall not
- Acquired upon publication without
subject to any action, claim or
furnishing the creditors a copy of the
demand in connection with any act
petition and attachments thereof
done omitted by him in good faith in
- A creditor may now file the the exercise of his functions and
suspension proceedings; provides powers herein conferred
that creditors owns at least 25%
 Claim
 Intra-corporate- rule 1 section 6
- Right to payment, whether or not it
 Service of summons- rule 2 section is reduced to judgment, liquidated or
5 unliquidated, fixed or contingent,
matured or unmatured, disputed or
- Summons may be made to anyone undisputed, legal or equitable and
secured or unsecured
 In case of intra-corporate dispute,
elections, fraud, etc; if they are  Investment contracts
governed by interim rules of
procedure on intra-corporate - A contract, transaction or scheme
controversies whereby a person invests his money
in a common enterprise and is led to
 Venue expect profits primarily from the
effects of others
- Special commercial courts where
principal office is located/established  The management committee and
(section 5 rule 1) rehabilitation receiver are
empowered to:
- Matters of payment/suspension
must be filed in the city/ municipality 1. Take custody and control of all
where corporation is located assets of the corporation
 Under old rule, creditors have no 2. Evaluate assets and liabilities,

right to institute an action for earnings operations of the
receivership; now creditors, if they corporation
sold 20% they can institute an
3. Determine the best way to protect
action for receivership
the investors and creditors
 Section 5
4. Study, review evaluate the feasibility
- Service of summons may be made of continuing operation and
by fax/e-mail structures
 E.B. Villarosa vs. Benito 5. Submit recommendations to the

RTC regarding rehabilitation plan
142
6. Rehabilitate the corporation if certificates, voting trust certificates

determined to be feasible by the or similar instruments;
RTC b) Other instruments as may in the
future be determined by the
7. Report to the RTC until the Commission;
corporation is dissolved c) Fractional undivided interests in oil,
gas or other mineral rights;
THE SECURITIES REGULATION CODE d) Derivatives like option and warrants;
(RA8799) e) Investment contracts, certificates of
interest or participation in a profit
- Also known as the Blue Sky Law since it sharing agreement, certificates of
was enacted to protect the public from deposit for a future subscription;
unscrupulous promoters who stake f) Proprietary or non proprietary
business which have no basis and sell membership certificates
shares and interest therein to investors, incorporations; and
who are then left holding certificates g) Shares of stock, bonds, debentures,
representing nothing more than a claim to notes, evidences of indebtedness,
a square of the blue sky. asset-backed securities;
-SEC. 2. Declaration of State Policy. – The GR: Securities shall not be sold or offered
State shall establish a socially conscious, for sale or distribution within the PH,
free market that regulates itself, encourage without a registration statement filed with
the widest participation of ownership in and approved by SEC. Prior to such sale,
enterprises, enhance the democratization information on the securities, in such form
of wealth, promote the development of the and with such substance as the
capital market, protect investors, ensure Commission may prescribe, shall be made
full and fair disclosure about securities, available to each prospective purchaser.
minimize if not totally eliminate insider (Sec 8)
trading and other fraudulent or
manipulative devices and practices which EXCEPT: Exempt Securities under Sec 9
create distortions in the free market. a) Any security issued or
guaranteed by the Government of
BROKER - person who buys and sells the PH, or by any political
securities for the account of others. subdivision or agency thereof, or by
any person controlled or supervised
DEALER - person who buys and sells by, and acting as an instrumentality
securities for his/her own account in the of said Government.
ordinary course of business. b) Any security issued or
guaranteed by the government of
NOTE: No person shall any country with diplomatic relations
engage in the business of buying with the PH, or by any state,
or selling securities in the province or political subdivision
Philippines as a broker or dealer, thereof on the basis of reciprocity:
or act as a salesman, or an Provided, that the SEC may require
associated person of any broker compliance with the form and
or dealer unless registered as content of disclosures the
such with the Commission. (Sec Commission may prescribe.
28) c) Certificates issued by a
receiver or by a trustee in
SECURITIES - shares, participation or bankruptcy duly approved by the
interests in a corporation or in a proper adjudicatory body.
commercial enterprise or profit-making d) Any security or its derivatives
venture and evidenced by a certificate, the sale or transfer of which, by law,
contract, instrument, whether written or is under the supervision and
electronic in character. It includes: regulation of the Office of the
CODE: COFDIPS Insurance Commission, Housing
a) Certificates of assignments, and Land Use Regulatory Board, or
certificates of participation, trust the Bureau of Internal Revenue.

143
e) Any security issued by a bank under this Code or was, when sold,
except its own shares of stock. exempt from the provisions of this
Code, and that the security issued
AND Exempt Transactions under Sec 10 and delivered in exchange, if sold at
a) A judicial sale, or sale by an the conversion price, would at the
executor, administrator, guardian or time of such conversion fall within
receiver or trustee in insolvency or the class of securities entitled to
bankruptcy. registration under this Code. Upon
b) By or for the account of a such conversion the par value of the
pledge holder, or mortgagee or any security surrendered in such
other similar lien holder selling or exchange shall be deemed the price
offering for sale or delivery in the at which the securities issued and
ordinary course of business and not delivered in such exchange are sold.
for the purpose of avoiding the h) Broker’s transactions,
provisions of this Code, to liquidate executed upon customer’s orders,
a bona fide debt, a security pledged on any registered Exchange or other
in good faith as security for such trading market.
debt. i) Subscriptions for shares of
c) An isolated transaction in the capital stock of a corporation
which any security is sold, offered prior to the incorporation thereof or
for sale, subscription or delivery by in pursuance of an increase in its
the owner thereof, or by his authorized capital stock under the
representative for the owner’s Corporation Code, when no expense
account, such sale or offer for sale, is incurred, or no commission,
subscription or delivery not being compensation or remuneration is
made in the course of repeated and paid or given in connection with the
successive transactions of a like sale or disposition of such securities,
character by such owner, or on his and only when the purpose for
account by such representative and soliciting, giving or taking of such
such owner or representative not subscriptions is to comply with the
being the underwriter of such requirements of such law as to the
security. percentage of the capital stock of a
d) Distribution by a corporation, corporation which should be
actively engaged in the business subscribed before it can be
authorized by its AOI, of securities to registered and duly incorporated, or
its stockholders or other security its authorized capital increased.
holders as a stock dividend or other j) The exchange of securities by
distribution out of surplus. the issuer with its existing security
e) Sale of capital stock of a holders exclusively, where no
corporation to its own stockholders commission or other remuneration is
exclusively, where no commission or paid or given directly or indirectly for
other remuneration is paid or given soliciting such exchange.
directly or indirectly in connection k) The sale of securities by an
with the sale of such capital stock. issuer to fewer than twenty (20)
f) Issuance of bonds or notes persons in the Philippines during
secured by mortgage upon real any twelve-month period.
estate or tangible personal property, l) The sale of securities to any
where the entire mortgage together number of the following qualified
with all the bonds or notes secured buyers: (i) Bank; (ii) Registered
thereby are sold to a single investment house; (iii)insurance
purchaser at a single sale. company; (iv) Pension fund or
g) Issue and delivery of any retirement plan maintained by the
security in exchange for any other Government of the Philippines or
security of the same issuer pursuant any political subdivision thereof or
to a right of conversion entitling the managed by a bank or other
holder of the security surrendered in persons authorized by the Bangko
exchange to make such conversion: Sentral to engage in trust functions;
Provided, That the security so (v) investment company or; (vi) Such
surrendered has been registered other person as the Commission
144
may by rule determine as qualified 2. Matched Order (Sec 24.1(a)(ii)) –

buyers, on the basis of such factors order or orders for the purchase or sale of
as financial sophistication, net worth, security with the knowledge that a
knowledge, and experience in simultaneous order or orders of
financial and business matters, or substantially the same size, time and price
amount of assets under for the sale or purchase of such security
management. has, or will be entered by or for the same or
different parties.
PROTECTION OF SHAREHOLDERS
INTEREST Note: Wash sale and matched
orders become illegal when they are
1. Tender Offers (Sec 19) used as a means to create false
2. Proxy solicitation (Sec 20) appearance of active trading in the
3. Internal record keeping and security concerned.
accounting (Sec 22)
3. Marking the close – placing the
TENDER OFFER – A publicly announced purchase order, at or near the close of the
intention acting alone or in concert with trading period. The price that was closed
others to acquire equity securities of a will then be the price that will be posted on
company. (2002 Bar Exams) the following trading day.
4. Painting the tape – involves a
Instances when Tender Offer is series of transactions that are reported
Required publicly to give the impression of an activity
1. When the person intends to in a security.
acquire 15% or more of the equity 5. Squeezing the float – the part of an
share of a public company pursuant outstanding security intentionally held by
to an agreement made between or dealers or other persons with a view of
among the person and one or more reselling them later for profit.
sellers; 6. Hype and dump – Act employed by
2. When the person intends to a person or group of persons of purchasing
acquire 30% or more of the equity the outstanding capital stock of a dormant
share of a public company within a public shell company for a nominal amount
period of 12 months; and merge it with their privately held
3. When the person intends to company. They would then gain control of
acquire shares that would result in the majority stocks of the merged entity.
an ownership of more than 50% of Stock certificates are often re-issued in the
the equity shares of a public name of the merged entity to relatives and
company. associates who act as nominees of the
person or persons employing the device.
PROXY SOLICITATION They would then look for a broker-dealer
who would be willing to make a “hype” of
NOTE: A broker or dealer who holds or the securities. The broker-dealer then
acquires the proxy for at least ten per generates volume and advance bid price.
centum (10%) or such percentage as the When the market reaches a high price,
Commission may prescribe of the they would “dump” their shareholdings and
outstanding share of the issuer, shall bail out.
submit a report identifying the beneficial 7. Boiler Room Operations – involves
owner within ten (10) days after such an intensive selling campaign through
acquisition, for its own account or numerous salesmen by telephone or
customer, to the issuer of the security, to through direct mail offerings for securities
the Exchange where the security is traded of either a certain type or from a specific
and to the Commission. (Sec 20.5) issuer. Investors are induced to purchase
through hard-sell based on unfounded
FRAUDULENT TRANSACTIONS AND predictions and mailing of misleading
OTHER MARKET MANIPULATIONS market letters.
1. Wash Sale (Sec 24.1(a)(i)) – any Note: Marking the close, Painting
transaction in a security which involves no the tape, Squeezing the float, Hype
change in the beneficial ownership thereof. and dump, Boiler Room Operations
145
become unlawful if it is effected to being disseminated to the public

either raise the price or induce the and the lapse of a reasonable time
purchase of a security or of a for the market to absorb the
controlling, controlled, or commonly information; or (b) would be
controlled company by others or to considered by a reasonable person
depress the price to induce the sale important under the circumstances
of a security, whether of the same or in determining his course of action
of a different class, of the same whether to buy, sell or hold a
issuer or of a controlling, controlled security.
company or common controlled
company by others or to create Note: Who is an “insider”? -
active trading to induce the “Insider” means: (a) the issuer; (b) a
purchase through said devices or director or officer (or person
schemes. performing similar functions) of, or a
person controlling the issuer; (c) a
8. Circulating or Disseminating person whose relationship or former
Information – circulating an information relationship to the issuer gives or
that any of the security listed in the gave him access to material
exchange will or is likely to rise or fall information about the issuer or the
because of manipulative market operations security that is not generally
of any one or more persons conducted for available to the public; (d) a
the purpose of raising or depressing the government employee, or director,
price of the security and thus inducing the or officer of an exchange, clearing
purchase of such security. agency and/or self-regulatory
9. Making False or Misleading organization who has access to
Statements with respect to any material material information about an issuer
fact which he knew or had reasonable or a security that is not generally
ground to believe was so false or available to the public; or (e) a
misleading for the purpose of inducing the person who learns such information
purchase or sale of such security. by a communication from any of the
10. Pegging or Fixing Or Stabilizing foregoing insiders.
the price of security effected either alone or
with others through any series of INDEPENDENT DIRECTOR
transactions for the purchase or sale Person other than an officer or
thereof, if done for such purpose. employee of the corporation, its parent or
11. Short sale – selling of security subsidiaries, or any other individual having
which the vendor does not own unless a relationship with the corporation, which
done in accordance with the rules and would interfere with the exercise of
regulations of the SEC. independent judgment in carrying out the
12. Insider Trading – the act of an responsibilities of a director.
insider to buy or sell security of the issuer
while in possession of material information Corporations which require an
with respect to such security that is not Independent Director
generally made known to the public unless 1. An exchange; or
(a) The insider proves that the information 2. Any corporation with a class of
was not gained from such relationship; or equity securities listed for trading on an
(b) If the other party selling to or buying Exchange or with assets in excess of P50M
from the insider (or his agent) is identified, and having 200 or more holders, at least
the insider proves: (i) that he disclosed the 200 of which are holding at least 100
information to the other party, or (ii) that he shares of a class of its equity securities or
had reason to believe that the other party which has sold a class of equity securities
otherwise is also in possession of the to the public pursuant to an effective
information. registration statement shall have at least
two (2) independent directors or such
Note: When is information independent directors shall constitute at
“material non-public”? - if: (a) It least 20% of the members of such board,
has not been generally disclosed to whichever is the lesser.
the public and would likely affect the
market price of the security after OPTION TRADING
146
 Put – a transferrable option or offer

to deliver a given number of shares of
stock at a stated price on any given time
during the stated period.
 Call – a transferrable option to buy a
specified number of share at a stated price
 Straddle – a combination of put and
call.
SETTLEMENT OFFERS
At any time, during an investigation
or proceeding under this Code, parties
being investigated and/or charged may
propose in writing an offer of settlement
with the Commission. The Commission
may only agree to a settlement offer based
on its findings that such settlement is in the
public interest. Any agreement to settle
shall have no legal effect until publicly
disclosed. Such decision may be made
without a determination of guilt on the part
of the person making the offer.
DAMAGES
All suits to recover damages shall be
brought before the Regional Trial Court,
which shall have exclusive jurisdiction to
hear and decide such suits. The Court is
authorized to award damages in an amount
not exceeding triple the amount of the
transaction plus actual damages.
NOTES
 If there are goods involved in the
multimarket, it is beyond the jurisdiction of
SEC (Ex First Quadrant)
 Criminal charge for violation of SRC
is a specialized dispute, hence it must be
first referred with SEC (Baviera vs.
Paglinawan G.R. No. 168380 Feb
8, 2007)
 T3 Rule in trading of Securities –
Trading day + 3 more days you must
comply with your obligations.


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1

CORPORATION LAW 1. The articles of incorporation

3. The articles of partnership must

qualify whether natural or juridical)  Section 3 Stock and non-stock

(10) Acts and actions referred to in Section 4. Corporations

 Advantages (SEE LADIA BOOK) 1. That they have a capital stock

CLASSIFICATION OF CORPORATIONS - Created by a special law, they have

- They are not immune from suit  Open corporation

- Primarily governed by the law - example: stock exchange

- Only those indicated can own FORMATION AND ORGANIZATION

2. Re-organization or quasi- - If confusingly similar it will not be

3. Dissolution/winding-up - Verification slip from the records

- Not mandatory in ordinary  Doctrine of secondary meaning

- If value is not more than 100,000 - A word or phrase originally

been used so long and so - registration of chattel mortgage

- actual confusion is not necessary- - determining what point in time the

 2 requisites must be proven - enter into contract only when it has

- identical, deceptively or confusingly, - exist for another 3 years only for

 principal office - Dissolution- it is automatic

- statement of principal office is  When should extension be made?

Notes on Corporation Law

- Exception: cooperatives and Corporators in a stock

distribution of dividends, or such 3. Sale, lease, exchange, mortgage,

Where the articles of 2. In close corporations where all the

Notes on Corporation Law

the minimum disqualifications lay or participation in the capital stock of

 Qualifications of the governing  Disqualifications <sec.27>

- YES, section 23 majority of them 50 K B

Maximum shares it can issue is 1M shares  Shares of stock

 Section 30 - As a management control device.

- Total subscription compliance with - To comply with statutory

 Is there a minimum authorized - Specific preference

- Section 137 shares subject only to the limitations

- preference as to dividends Section 43. Power to declare

Commission. The five-year period “Although authorities may

 Treasury shares may be reissued

- Once re-issued they become  May the SEC refuse or reject

- The corporation may cancel them; in - <Section 17>

 No transfer clause 4. That the percentage of ownership

 Treasurer affidavit part of the No articles of incorporation or

recommendation of the appropriate From and after the filing with

- Strict or substantial compliance - Legal contemplation it was never

2. An attempt, in good faith, to form a - Number 4 requirement, good faith in

3. A user of corporate powers, the - Missing link is good faith

 Only important in determining, is for - General partners- liable even

 The existence of a de jure cannot be  Lozano vs. Delos Santos

Notes on Corporation Law

 Albert vs. University - No fraud in this case

- Applied where the rules governing - Doctrine of incorporation

 Assuming there was no law?  A foreign corporation cannot gain

- Exemptions: when there is fraud the  Hall vs. Piccio

Notes on Corporation Law

- Exceptions: 1. fraudulently - Corporation exist separately and

 2 possible remedies - Corporation has no interest in the

 Two or more corporations, one of  Marvel bldg. vs. David

- Mere ownership of all or - Two corporations managed by the

- Fraud must be proven by clear and  Tesco vs. WCC

- Instrumentality rule. What is the - were located in the same floor

3. The aforesaid control and breach of  Cease vs. CA

Notes on Corporation Law

- The resolution was not entered to 1. In case any amendment to the

- Payment of claims cannot thus be 2. In case of sale, lease, exchange,

- La campana, one payroll, - Right granted only in specified