CORPORATION LAW

(Provisions of B.P. Blg. 68, as amended by R.A. No. 11232)

What is a Corporation?
SEC. 2. Corporation Defined. – A corporation is an artificial being created by operation of law,
having the right of succession and the powers, attributes, and properties expressly authorized
by law or incidental to its existence.

What are the attributes of corporation?

Attributes of a corporation.
An analysis of the definition in Section 2 reveals the following attributes of a corporation:
(1) It is an artificial being;
(2) It is created by operation of law;
(3) It has the right of succession; and
(4) It has only the powers, attributes and properties expressly authorized by law or incident to
its existence.

A. General principles

1. Nationality of corporations
A corporation is also a resident:
What is the residence of a corpo?
 -  Place of business where it is located
 -  Or the state where it is incorporated Corporation has a nationality:
How do you determine the nationality of a corporation?
1. Control test - shares belonging to corporations or partnerships at least 60% of the
capital of which is owned by Filipino citizens shall be considered as of Philippine
nationality.
2. Strict rule test/grandfather rule test- if the percentage of the Filipino ownership in the
corporation or partnership is less than 60%, only the number of shares corresponding to
such percentage shall be counted as Philippine nationality

1) Control Test

What are the test to determine nationality?

1. Incorporation test

- Where the corporation is created

- If its created in the Phils then it is a domestic corp and if its created outside the Phils then it is
a foreign corp.

2. Control test

- shares belonging to corporations or partnerships at least 60% of the capital of which is owned
by Filipino citizens shall be considered as of Philippine nationality

2) Grandfather rule

grandfather rule test- if the percentage of the Filipino ownership in the corporation or
partnership is less than 60%, only the number of shares corresponding to such percentage shall
be counted as Philippine nationality.

Successive Application of the Tests

The Control Test can be applied jointly with the Grandfather Rule to determine the observance
of foreign ownership restriction in nationalized economic activities. They are not incompatible
ownership-determinant methods that can only be applied alternative to each other.

The Grandfather Rule, standing alone, should NOT be used to determine the Filipino ownership
and control in a corporation, as it could result in an otherwise foreign corporation rendered
qualified to perform nationalized or partly nationalized activities.

The Grandfather Rule is a method of determining the nationality of a corporation, which is

owned in part by another corporation, by breaking down the equity structure of the
shareholder corporation. [de Leon]

The Grandfather Rule is applied if doubt exists as to the locus of the “beneficial ownership” and
“control” of a corporation, even if the 60-40 Filipino to foreign equity ratio is apparentlymet by
the subject or investee corporation. [Narra Nickel Mining & Development Corp. v. Redmont
Consolidated Mines Corp., G.R. No. 195580, April 21, 2014]

It involves the computation of Filipino ownership of a corporation in which another

corporation, of partly-Filipino andpartly-foreign equity, owns capital stock. The percentage of
shares held by the second corporation in the first is multiplied by the latter’s own Filipino
equity, and the product of these percentages is determined to be the ultimate Filipino
ownership of the subsidiary corporation.

The Grandfather Rule must be applied to accurately determine the actual participation, both
direct and indirect, of foreigners in a corporation engaged in a nationalized activity or business.
[SEC Opinion re: Silahis Int’l Hotel (1987)]
Hence, it is only when there is doubt, based on the Control Test, that the Grandfather Rule is
applied.

1. If the subject corporation’s Filipino equity falls below the threshold 60%, the corporation is
immediately considered foreign-owned, in which case, the need to resort to the Grandfather
Rule disappears.

2. If a corporation that complies with the 60-40 Filipino to foreign equity requirement, it can be
considered a Filipino corporation, and if there is no doubt as to who has the “beneficial
ownership” and “control” of the corporation, there is no need for the application of the
Grandfather Rule.

3. However, if there is doubt as to who has the “beneficial ownership” and “control” of the
corporation (e.g. the Filipino-Owned corporation subscribed to 60% of the capital and the
foreign corporation subscribed to 40%, but the subscription of the former is only nominally
paid-up and such corporation entered into a financial assistance agreement with the foreign-
owned corporation), the application of the grandfather rule is necessary. [Narra Nickel Mining
and Dev. Corp v. Redmont Consolidated Mines Corp., G.R. No. 195580 (2015)]

a) Doctrine of separate juridical personality

Concept
A corporation has a personality separate and distinct from that of its stockholders and members and is
not affected by the personal rights, obligations, and transactions of the latter.

General Rule: Due the corporation’s seaparate juridical personality, a stockholder may not be made to
answer for acts or liabilities of said corporation, and vice-versa. [Land Bank of the Philippines v. CA, G.R.
No. 127181 (2001)]

Exceptions: The corporation’s seaparate juridical personality cannot be invoked to escape liability when:

1. This legal fiction is used for ends subversive to the policy and purpose behind its creation or
which could not have been intended by law to which it owes its being (i.e. to defeat public
convenience, justify wrong, protect fraud, defend crime, confuse legitimate legal or judicial
issues, used as a vehicle for the evasion of an existing obligation, perpetrate deception or
otherwise circumvent the law).

2. The corporate entity is a mere alter ego, adjunct, or business conduit for the sole benefit of
the stockholders or of another corporate entity. [Land Bank of the Philippines v. CA, G.R. No.
127181 (2001)] The corporation is merely a farce, as it so organized and controlled, and its
affairs are so conducted, as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation. [Lanuza et al v. BF Corporation, et al, G.R. No. 174938 (2014)]

Property
Corporate property is owned by the corporation as a juridical person, and the stockholders
have no claim on corporate property as owners. The latter only have a mere expectancy or
inchoate right to the same upon dissolution of the corporation and after all corporate creditors
have been paid. Such right is limited only to their equity interest (doctrine of limited liability).

Liability for Tort and Crime

Being an entity with a separate juridical personality, a corporation can be held liable for torts
committed by its officers under express direction from the stockholders or directors, acting as a
body. [PNB v. CA G.R. No. L-27155 (1978)]

The corporation itself cannot be arrested and imprisoned; thus, it cannot be penalized for a
crime punishable by imprisonment. However, a corporation may be charged and prosecuted for
a crime if the imposable penalty is a fine. [Ching v. Secretary of Justice, ̧G.R. No. 164317 (2006)]

Note: Sec. 170 of the RCC provides that for violations of the Code, if it is committed by a
corporation, the same may, after notice and hearing, be dissolved in appropriate proceedings
before the Commission.

Since a corporation as a person is a mere legal fiction, it cannot be proceeded against criminally
because it cannot commit a crime in which personal violence or malicious intent is required.
Criminal action is limited to the corporate agents guilty of an act amounting to a crime and
never against the corporation itself. [Time Inc. v. Reyes, G.R. No. L-28882 (1971)]

Recovery of Damages

A corporation, being an artificial person, has no feelings, emotions nor senses; therefore, it
cannot experience physical suffering and mental anguish, which are bases for moral damages
under Art. 2217 of Civil Code. [Manila Electric Co. v. Nordec Philippines, 861 SCRA 515 (2018)].

Nevertheless, a corporation can recover moral damages under Art 2219(7), if it was the victim
of defamation. [Filipinas Broadcasting Network v. Ago Medical and Educational Center, G.R. No.
141994 (2005)]

Note: Filipinas Broadcasting pointed out that the doctrine in Mambulao Lumber v. PNB (1968),
to the effect that a corporation may recover moral damages for besmirched reputation, is
obiter dictum.

b) Doctrine of piercing the corporate veil

A corporation will be looked upon as a legal entity as a general rule, and until sufficient reason
to the contrary appears but when the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud or defend crime, the law will regard the corporation
as an association of persons.
Piercing the veil of corporate entity is an equitable remedy developed to address situations
where the separate corporate personality of a corporation is abused or used for wrongful
purposes. [PNB v. Ritratto Group, G.R. No. 142616 (2001)]
Effect of Piercing the Corporate Veil
The corporation will be considered as a mere association of persons. Thus, the liability will
directly attach to the stockholders or to the other corporation. [China Banking v. Dyne- Sem,
G.R. No. 149237 (2006)]
For the juridical personality of a corporation to be disregarded, the wrongdoing must be clearly
and convincingly established, and cannot be presumed. [Del Rosario v. NLRC, G.R. No. 85416
(1990)]

What is piercing the veil doctrine/ the doctrine of piercing the veil of corporate fiction?
"Piercing the corporate veil"
refers to a situation in
which courts put aside limited liability and hold a
corporation's shareholders or directors personally
liable for the corporation’s actions or debts.

Application of doctrine in three areas.

— The doctrine applies only in three (3) basic areas, namely:
1) defeat of public convenience as when the corporate fiction is used as a vehicle for the
evasion of an existing obligation;
2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a
crime; or
3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business
conduit of a person, or where the corporation is so organized and controlled and its affairs are
so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation.

In the absence of malice, bad faith, or a specific provision of law making a corporate officer
liable, such corporate officer cannot be made personally liable for corporate liabilities.

B. De facto corporations versus corporations by estoppel

Section 19. De facto Corporations. –

The due incorporation of any corporation claiming in good faith to be a corporation under this
Code, and its right to exercise corporate powers, shall
not be required into collaterally in any private suit to which such corporation may be a party.
Such inquiry may be made by the Solicitor General in a quo warranto proceeding.

What is a de facto corporation?

A corporation which has a defect in its incorporation.

What are the requisite of a de facto corporation

1. A valid law under which a corporation with powers assumed might be incorporated
2. A bona fide attempt to organize a corporation under such law.
3. conferred upon it by law.

What is now the difference? Pare pareha rmn nis de jure?

- There is a defect in the corporation

Rule on De Facto Corporations

The due incorporation of any corporation claiming in good faith to be a corporation under this
Code, and its right to exercise corporate powers, shall not be inquired into collaterallyin any
private suit to which such corporation may be a party. Such inquiry may be made by the
Solicitor General in a quo warranto proceeding. [Sec. 19]
General Rule: The defect in the juridical personality of a corporation cannot be inquired into by
private individuals, much less used as a defense to avoid claims.
Exception: In quo warranto proceedings brought on behalf of the State where the main action
is to question the validity or existence of such juridical personality. [Villanueva]
Requisites
1. There is an apparently valid statute under which the corporation may be formed;
2. There has been colorable compliance with the legal requirements in good faith;
and
3. There has been user of corporate powers, i.e. the transaction of business as if it were a
corporation. [Campos]

An association of persons cannot claim to be a corporation if it has not been issued a certificate
of incorporation since that fact belies the claim of good faith compliance with the requirements
of the law. [Hall v. Piccio, G.R. No. L-2598 (1950)]

Corporation by estoppel –
SEC. 20. Corporation by Estoppel. – All persons who assume to act as a corporation knowing it
to be without authority to do so shall be liable as general partners for all debts, liabilities and
damages incurred or arising as a result thereof: Provided, however, That when any such
ostensible corporation is sued on any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use its lack of corporate personality as a
defense. Anyone who assumes an obligation to an ostensible corporation as such cannot resist
performance thereof on the ground that there was in fact no corporation.

Corporation by estoppel -
Where a group of persons misrepresent themselves as a corporation, they are subsequently
estopped from claiming lack of corporate life in order to avoid liability. Also, a third party who
had dealt with an unincorporated association as a corporation is precluded from denying its
corporate existence on a suit brought by the alleged corporation on the contract.
EFFECTS OF CORPORATION BY ESTOPPEL
As to liability
All persons who assume to act as a corporation knowing it to be without authority to do so shall
be liable as general partners for all debts, liabilities and damages incurred or arising as a result
thereof. [Sec. 20]

As to the defense of lack of corporate personality

When such ostensible corporation is sued, it shall not be allowed to use its lack of corporate
personality as a defense. [Sec. 20]

As to third party
Anyone who assumes an obligation to an ostensible corporation as such cannot resist
performance thereof on the ground that there was in fact no corporation. [Sec. 20]
The doctrine of estoppel applies to a third party only when he tries to escape liability on a
contract from which he has benefited on the ground of defective incorporation. It does not
apply to a third party who is not trying to escape liability from the contract, but rather is the
one claiming from the contract. [International Express Travel v. CA, G.R. No. 119002 (2000)]
C. Corporate Powers

POWERS OF CORPORATION
SEC. 35. Corporate Powers and Capacity. – Every corporation incorporated under this Code has
the power and capacity:
(a)To sue and be sued in its corporate name;
b)T o have perpetual existence unless the certificate of incorporation provides otherwise; (c)To
adopt and use a corporate seal;
(d)To amend its articles of incorporation in accordance with the provisions of this Code;
(e)To adopt bylaws, not contrary to law, morals or public policy, and to amend or repeal the
same in accordance with this Code;
(f)In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks
in accordance with the provisions of this Code; and to admit members to the corporation if it be
a nonstock corporation;
(g)To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage, and
otherwise deal with such real and personal property, including securities and bonds of other
corporations, as the transaction of the lawful business of the corporation may reasonably and
necessarily require, subject to the limitations prescribed by law and the Constitution;
(h)To enter into a partnership, joint venture, merger, consolidation, or any other commercial
agreement with natural and juridical persons;
(i)To make reasonable donations, including those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar purposes: Provided, That no foreign corporation
shall give donations in aid of any political party or candidate or for purposes of partisan political
activity;
(j)To establish pension, retirement, and other plans for the benefit of its directors, trustees,
officers, and employees; and
(k)To exercise such other powers as may be essential or necessary to carry out its purpose or
purposes as stated in the articles of incorporation.

Who exercises the powers of corporation?

Section 22. The Board of Directors or Trustees of a Corporation; Qualification and Term. -
Unless otherwise provided in this Code, the board of directors or trustees shall exercise the
corporate powers, condict all business, and control all properties of the corporation.

A corporation has:
i. Express Powers – such powers as
are expressly granted by law and its articles of incorporation;
ii. Implied Powers – those reasonably necessary to accomplish its purposes, as stated in its
articles of incorporation; and
Note: Such implied powers are deemed to exist because of the following provisions –
 “Except such as are necessary or incidental to the exercise of the powers so conferred”
[Sec. 44]
 “Such powers as are essential or necessary to carry out its purpose or purposes as
stated in the Articles of Incorporation” – catch-all phrase. [Sec. 35(k)]
iii. Incidental Powers – those which may be incident to its existence as a juridical entity
[Pilipinas Loan v. SEC, 356 SCRA 193 (2001)]

The Theory of General Capacitystates that a corporation is said to hold such powers as are not
prohibited or withheld from it by general law.

1. How powers are exercised

How Corporate Powers are exercised

i. By the shareholders
Corporate Acts Requiring All (Voting and Non-Voting) Shareholders’ Approval General Rule:
Vote necessary to approve a particular corporate act as provided in this Code shall be deemed
to refer only to stocks with voting rights [Sec. 6]
Exceptions [Sec. 6]:
Voting and non-voting shares shall be entitled to vote in the following cases:
a) Amendment of Articles of Incorporation [Sec. 15]
b) Adoption, Amendment and Repeal of By-Laws [Sec. 47]
c) Sale, Lease, Mortgage or Other Disposition of Substantially all corporate assets [Sec. 39]
d) Incurring, Creating or Increasing Bonded Indebtedness [Sec. 37]
e) Increase or Decrease of Capital Stock [Sec. 37]
f) Merger and Consolidation [Sec. 76-79]
g) Investment of funds in another corporation or business or for any purpose other than
the primary purpose for which it was organized [Sec. 41]
h) Dissolution of the Corporation [Secs. 133- 138]

Corporate Acts Requiring Voting Shareholders’ Approval

1. Declaration of Stock Dividends [Sec. 42]
2. Management Contracts [Sec. 43]
3. Fixing the Consideration of No-Par shares [Sec. 61]
4. Fixing the Compensation of Directors [Sec. 29]

ii. By the Board of Directors

Unless otherwise provided in this Code, the board of directors or trustees shall exercise the
corporate powers, conduct all business, and control all properties of the corporation. [Sec. 22]
Majority vote of the Board is needed in the exercise of the ff. powers:
(1)  Filling of vacancies in the board, except
when it is due to removal by the stockholders/members or by expiration of term
(2)  Extension or shortening of the corporate term
(3)  Increase or decrease of capital stock or the creation of bonded indebtedness
(4)  Sale or other disposition of all or substantially all assets
(5)  Acquisition of its own shares
(6)  Investment of corporate funds in any
corporation or business or for any purpose
other than its primary purpose
(7)  Declaration of cash, property, and stock
dividends
(8)  Entering into management contracts
(9)  Amendment of AOI
(10)  Amendment of the by-laws
(11)  Approval of the plan of merger or
Consolidation
(12) Dissolution of the corporation

iii. By the Officers

Authority of Corporate Officers
A person dealing with a corporate officer is put on inquiry as to the scope of the latter’s
authority, but an innocent person cannot be prejudiced if he had the right to presume under
the circumstances the authority of the acting officers.

Doctrine of Apparent Authority

Corporate officers have apparent authority to bind the corporation on matters that are
generally within the domain of corporate business, and the scope of their usual duties.
[Herbosa, 2019]
If a corporation knowingly permits one of its officers, or any other agent, to act within the
scope of an apparent authority, it holds him out to the public as possessing the power to do
those acts; the corporation will, as against anyone who has in good faith dealt with it through
such agent, be estopped from denying the agent’s authority.

a) Ultra vires doctrine

Ultra Vires Acts

Those acts which a corporation is not empowered to do or perform because they are outside or beyond
the express and implied powers conferred by its Articles of Incorporation or by the Revised Corporation
Code, or not necessary or incidental to the exercise of the powers so conferred.

Types of Ultra Vires Acts

a. Acts done beyond the powers of the corporation as provided in the law or its articles of
incorporation;
b. Ultra Vires acts of officers and not of the corporation
c. Acts or contracts, which are per se illegal as being contrary to law. [Villanueva]

Kinds of Ultra Vires acts by reason

a. By reason of Lack of Authority (ultra vires acts)
b. By reason of Illegality (illegal acs)
 b) Trust fund doctrine

The Trust Fund Doctrine states that the capital stock, properties and other assets of a
corporation are regarded as equity in trust for the payment of corporate creditors.
 All funds received by the corporation in payment of the shares of stock shall be held in trust
for the corporate creditors and other stockholders of the corporation.
 No fund shall be used to buy back the issued shares of stock except only in instances
specifically allowed by the Corporation Code. [Boman Environmental Development Corporation
v. CA, G.R. No. 77860 (1988)]

Effects of the trust fund doctrine

1. Dividends must never impair the subscribed capital stock and must only be declared out
of unrestricted retained earnings (URE). [Philippine Trust Co. v. Rivera, G.R. No. L-19761
(1923)]
2. Subscription commitments cannot be condoned or remitted.
3. General Rule: The corporation cannot buy its own shares using the subscribed capital as
the consideration therefore. [NTC v. CA. G.R. No. 127937 (1999)]

Exceptions:
1. Redeemable shares may be acquired even without surplus profit for as long as it will not
result to the insolvency of the Corporation;
2. In cases that the corporation conveys its stocks in payment of a Debt; or
 3. In a Close corporation, a stockholder may demand the payment of the fair value of
shares regardless of existence of retained earnings for as long as it will not result to the
insolvency of the corporation
4. Rescission of a subscription agreement is not allowed since it will effectively result in the
unauthorized distribution of the capital assets and property of the corporation. [Ong Yong v.
Tiu, G.R. No. 144476(2003)]

NOTE: Rescission of a subscription agreement is not one of the instances when distribution of capital
assets and property of the corporation is allowed (Ibid).

Exceptions to the Trust Fund Doctrine --- When Distribution of Corporate Capital is Allowed
The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine Trust Co.
v. Rivera is the underlying principle in the procedure for the distribution of capital assets,
embodied in Corporation Code, which allows the distribution of corporate capital only in three
instances:
1. Amendment of the AOI to reduce the authorized capital stock,
2. Purchase of redeemable shares by the corporation, regardless of the existence of
unrestricted retained earnings, and
3. Dissolution and eventual liquidation of the corporation.
The creditors of a corporation have the right to assume that so long as there are debts and
liabilities, the BOD will not use corporate assets to purchase its own shares of stock or to
declare dividends to its stockholders when the corporation is insolvent. [Steinberg v. Velasco,
G.R. No. L-30460 (1929)]

Scope of the Trust Fund Doctrine

The trust fund doctrine is NOT limited to reaching the stockholder’s unpaid subscriptions.
   A corporation has no legal capacity to
release an original subscriber to its capital stock from the obligation of paying for his shares, in
whole or in part, without a valuable consideration, or fraudulently, to the prejudice of creditors.
   The creditor is allowed to maintain an action upon any unpaid subscriptions and
thereby steps into the shoes of the corporation for the satisfaction of its debt.
The scope of the doctrine when the corporation is insolvent also encompasses other property and
assets generally regarded in equity as a trust fund for the payment of corporate debts.

All assets and property belonging to the corporation held in trust for the benefit of creditors that were
distributed or in the possession of the stockholders, regardless of full payment of their subscriptions,
may be reached by the creditor in satisfaction of its claim.

To make out a prima facie case in a suit against stockholders of an insolvent corporation to compel them
to contribute to the payment of its debts by making good unpaid balances upon their subscriptions, it is
only necessary to establish that the stockholders have not in good faith paid the par value of the stocks
of the corporation.

D. Board of directors and trustees

 1. Basic principles

a) Doctrine of centralized management

Repository of Corporate Powers

Doctrine of Centralized Management BOARD IS SEAT OF CORPORATE POWERS

BOARD IS SEAT OF CORPORATE POWERS General Rule: Unless otherwise provided in this Code,
the board of directors or trustees shall exercise the corporate powers, conduct all business, and
control all properties of the corporation. [Sec. 22]

General Rule: Unless otherwise provided in this Code, the board of directors or trustees shall exercise
the corporate powers, conduct all business, and control all properties of the corporation. [Sec. 22]

Governing Body of the Corporation

It is well established in corporation law that the corporation can act only through its board of directors
in the case of stock corporations, or board of trustees in the case of non-stock corporations. [de Leon]

Exceptions:
1. In case of an Executive Committee duly authorized in the by-laws; [Sec. 34] Exception to
Exception: The following may not be delegated to the executive committee:
0. (1)  Approval of any action for which shareholders' approval is also required;
1. (2)  The filing of vacancies in the board;
2. (3)  The amendment or repeal of by-laws or the adoption of new by-laws;
3. (4)  The amendment or repeal of any resolution of the board which by its express
terms is not so amendable or repealable; and
4. (5)  A distribution of cash dividends to the
shareholders. [Sec. 34]
2. In case of a contracted manager which may be an individual, a partnership, or another
corporation

Note: In case the contracted manager is another corporation, the special rule in Sec. 43 applies.

3. In case of close corporations, the stockholders may manage the business of the corporation rather
than by a BOD, if the Articles of Incorporation so provide [Sec. 96]

The power to purchase real property is vested in the BOD or trustees. While a corporation may
appoint agents to negotiate for the purchase of real property needed by the corporation, the
final say will have to be with the board, whose approval will finalize the transaction. [Spouses
Constantine Firme v. Bukal Enterprises and Development Corporation, G.R. No. 146608 (2003)]
Indisputably, one of the rights of a stockholder is the right to participate in the control or
management of the corporation. This is exercised through his vote in the election of directors
because it is the BOD that controlsor manages the corporation. [Gamboa v. Teves, G.R. No.
176579 (2011)]

Limitations on powers of BOD/BOT

1. (1)  Limitations imposed by the Constitution, statutes, articles of incorporation or by-
laws;
2. (2)  Certain acts of the corporation that require joint action of the stockholders and
BOD:
0. Removal of director [Sec. 27]
1. Amendments of Articles of Incorporation [Sec. 15]
2. Fundamental changes [Sec. 37]
3. Declaration of stock dividends [Sec. 42]
4. Entering into management contracts [Sec. 43]
5. Fixing of consideration of no-par shares [Sec. 61]
6. Fixing of compensation of directors [Sec. 29]
(3) Cannot exercise powers not possessed by the corporation.

Principle on Delegation of Board Power

Under Sec. 23 (now Sec. 22, RCC), the power and the responsibility to decide whether the
corporation should enter into a contract that will bind the corporation is lodged in the board,
subject to the articles of incorporation, by-laws, or relevant provisions of law.
However, just as a natural person may authorize another to do certain acts for and on his
behalf, the BOD may validly delegate some of its functions and powers to officers, committees
or agents. The authority of such individuals to bind the corporation is generally derived from
law, corporate by-laws or authorization from the board, either expressly or impliedly by habit,
custom or acquiescence in the general course of business. [People’s Aircargo v. CA, G.R. No.
117847 (1998)]
Corporate powers may be directly conferred upon corporate officers or agents by statute, the
articles of incorporation, the by-laws, or by resolution or other act of the board of directors.
[Citibank, N.A. vs. Chua, 220 SCRA 75 (1993)]

b) Business judgment rule

Business Judgment Rule

Business Judgment Rule As a general rule, when a wrong is committed against a

corporation, whether to bring the suit or not primarily lies within the discretion and
exercise of business judgment of the BOD.

General Rule: Questions of policy or management are left solely to the honest
decision of officers and directors of a corporation and the courts are without
authority to substitute their judgment for the judgment of the board of directors.
 The board is the business manager of the corporation and so long as it acts in good
faith, its orders are not reviewable by the courts or the SEC. [Montelibano v.
Bacolod-Murica Milling Co., G.R. No. L-15092 (1962); Phil. Stock Exchange, Inc. v. CA,
G.R. No. 125469, (1997)]

Exceptions:
1. If the contracts are so unconscionable and oppressive as to amount to a wanton
destruction of the rights of the minority [Ingersoll v. Malabon Sugar, G.R. No. L- 27770
(1927)];
2. If they violate their duties under Sec. 30 (director willfully and knowingly assents to
patently unlawful acts of the corporation, or are guilty of gross negligence or bad faith);
and
3. If they violate Sec. 33 (disloyalty of a director who acquires for himself a business
opportunity that should have belonged to the corporation, unless his act is ratified by a
2/3 vote of stockholders).

CONSEQUENCES OF THE BUSINESS JUDGMENT RULE

  The resolution, contracts and transactions of the board cannot be reversed or set
aside by the Courts even on the behest of stockholders or members, under the principle
that the business of the corporation has been left to the hands of the board.
  Directors and duly authorized officers cannot be held personally liable for acts or
contracts done with the exercise of their business judgment.

REQUIREMENTS FOR THE BUSINESS JUDGMENT RULE TO APPLY

1. Presence of a business decision including decisions on policy management and
administration;
2. The decision must be intra vires and must comply with the procedural and substantive
requirements of law;
3. Good faith;
4. Due care in making the decision;
5. The director must not have personal interest or nor self-dealing or otherwise on breach
of the duty of loyalty. [Villanueva]

REMEDIES IN CASE OF MISMANAGEMENT

1. (1)  Removal of directors pursuant to Sec. 27
2. (2)  Derivative suit or complaint filed with the RTC [Sec. 5.2, R.A. 8799, Securities
Regulation Code; A.M. No. 01-2-04 SC, Interim Rules of Procedure Governing
Intracorporate Controversies]
3. (3)  Receivership
4. (4)  Injunction if the act has not yet been done
5. (5)  Dissolution if abuse amounts to a ground for quo warranto but Solicitor General
refuses to act
Note: Dean Villanueva opined that a derivative suit may be an exception to the Business
Judgment Rule –
 This occurs when it is apparent that the
Board is not in a position to validly exercise its business judgment for the protection of the
corporation
 e.g., when the Board itself has committed an act causing damage to the corporation or when
the Board is placed in a conflict of interest scenario, whereby it is unlikely that it would use such
business discretion to file such suit for the best interest of the corporation.

2. Tenure and qualifications of directors or trustees

Tenure, Qualifications, and Disqualifications of Directors or Trustees

Tenure
 Directors – Term of 1 year from among the holders of stocks registered in the
corporation’s books. [Sec. 22]
 Trustees – Term not exceeding 3 years from among the members of the corporation.
[Sec. 22]

Holdover Principle
Upon failure of a quorum at any meeting of the stockholders or members called for an
election, the directorate naturally holds over and continues to function until another
directorate is chosen and qualified.

Each director and trustee shall hold office until the successor is elected and qualified.
[Sec. 22]

The failure to elect does not terminate the terms of incumbent officers nor dissolve the
corporation.
 Permanent representation not allowed in BOD
The board of directors of corporations must be elected from among the stockholders or
members directors every year. Estoppel does not set in to legitimize what is wrongful.(Grace
Christian High School v. CA, G.R. No.108905, October 23, 1997)

ii. Qualifications
a) Director: Must own at least one (1) share of
stock.
Trustee: Must be a member of the corporation.
o   A director who ceases to own at least one (1) share of stock or a trustee who
ceases to be a member of the corporation shall cease to be such. [Sec. 22]
o   In order to be eligible as a director, what is material is the legal title to, not
beneficial ownership of, the stock as appearing on the books of the corporation.
[Lee v. CA, G.R. No. 93695 (1992)]
b) Must be a natural person, of legal age, possess full legal capacity
c) Must not be convicted by final judgment of an offense punishable by imprisonment for a
period exceeding 6 years [Sec. 26]
d) Other qualifications as may be prescribed in the by-laws of the corporation. [Sec. 46]
 While additional qualifications may be prescribed, this cannot be in conflict with the
requirements as set by the RCC.

Note: The RCC removed the requirement that majority of the directors or trustees must
be residents of the Philippines.

iii. Disqualification
 A person shall be disqualified from being a director, trustee, or officer of any
corporation if, within five (5) years prior to the election or appointment as such, the person
was:
(a)  Convicted by final judgment:
(1)  Of an offense punishable by imprisonment for a period exceeding six (6) years;
(2)  For violating this Code; and
(3)  For violating Republic Act No. 8799, otherwise known as “The Securities
Regulation Code”;
(b)  Found administratively liable for any offense involving fraud acts; and
(c) By a foreign court or equivalent foreign regulatory authority for acts, violations or
misconduct similar to those enumerated in paragraphs (a) and (b) above. [Sec. 26]

Note: The foregoing is without prejudice to qualifications or other disqualifications, which

the Commission, the primary regulatory agency, or the Philippine Competition Commission
may impose in its promotion of good corporate governance or as a sanction in its
administrative proceedings.
An amendment to the corporation’s by-laws which renders a stockholder ineligible to be a
director, if he be also a director in a corporation whose business is in competition with that
of the other corporation, has been sustained as valid. This is based upon the principle that
where the director is so employed in the service of a rival company, he cannot serve both,
but must betray one or the other. Such an amendment "advances the benefit of the
corporation and is good." [Gokongwei, Jr. v. SEC, G.R. No. L-45911 (1979)]

3. Election and removal of directors or trustees

ELECTIONS
Number of Directors and Trustees
Directors: Not more than fifteen (15)
Trustees: May be more than fifteen (15) [Sec. 13 and 91]

The RCC removed the minimum number of directors which stood at five (5) under the
old code. [Sec. 14, Old Corporation Code]

Election of Directors or Trustees

See h. Election of Directors or Trustees under 6. Incorporation and Organization

Cumulative Voting Methods of Voting

(1) Straight voting
(2) Cumulative voting for one candidate (3) Cumulative voting by distribution

Rules Governing all Methods of Voting

 1. The total number of votes cast shall not exceed the number of shares owned by the
stockholders as shown in the books of the corporation multiplied by the whole number
of directors to be elected
2. No delinquent stock shall be voted. [Sec. 23]

Straight Voting
Every stockholder may vote such number of shares for as many persons as there are
directors to be elected. [Sec. 23]

Cumulative Voting
Cumulative Voting For One Candidate
A stockholder is allowed to concentrate his votes and give one candidate as many votes
as the number of directors to be elected multiplied by the number of his shares shall equal.
[Sec. 23]

Illustration:
If there are 5 directors to be elected and Pedro, as shareholder, has 100 shares, Pedro
can give 500 (5 x 100 shares) votes to just one candidate.

Cumulative Voting By Distribution

A stockholder may cumulate his shares by multiplying the number of his shares by the
number of directors to be elected and distribute the same among as many candidates as he
shall see fit. [Sec. 23]

Illustration:
In the illustration above, Pedro instead may choose to give 100 votes to candidate 1,
100 votes to candidate 2, 100 votes to candidate3, 150 votes to candidate 4, and 50 votes to
candidate 5.

Quorum
At all elections of directors or trustees, there must be present, either in person or
through a representative authorized to act by written proxy:
(1) Stock Corporations: The owners of majority of the outstanding capital stock
(2) Non-Stock Corporations: A majority of the members entitled to vote. [Sec. 23]
It is necessary that there be a quorum. An election without quorum is invalid.
If the owners of majority of the outstanding capital stock or majority of the members
entitled to vote are not present in person, by proxy, or through remote communication, or not
voting in absentia at the meeting, such meeting may be adjourned. [Sec. 23]
See subheading “When No Election is Held” under h. Election of Directors or Trustees
under 6. Incorporation and Organization
Election Contests
All matters affecting the manner and conduct of the election of directors are properly
cognizable by the regular courts. Otherwise, these matters may be brought before the SEC for
resolution based on the regulatory powers it exercises over corporations, partnerships, and
associations. [SEC v. CA, 739 SCRA 99 (2014)]

REMOVAL

General Rule: Any Director or Trustee of a corporation may be removed from office,
with or without cause. [Sec. 27]

Exception: If the director was elected by the minority, there must be cause for removal
because the minority may not be deprived of the right to representation to which they may be
entitled to under Sec. 23 of the Code. [Sec. 27]

Note: The right to representation refers to the right to cumulative voting for one
candidate.

Requisites for Removal:

1)  It must take place either at a regular meeting or special meeting of the stockholders or
members called for the purpose;
2)  A special meeting for the purpose of removing directors or trustees must be called by:
a) The secretary, on order of the president; or
b) The secretary, upon written demand of the stockholders representing or holding
at least a MAJORITY of the capital stock or a MAJORITY of the members entitled
to vote;
3)  There must be previous notice to the stockholders or members of the intention to
remove a director; and
4)  There must be a vote of the stockholders representing 2/3 of outstanding capital stock
or in case of a nonstock corporation, 2/3 of members entitled to vote.

New Power of the SEC under the Revised Corporation Code [Sec. 27]
The Commission shall, motu proprio or upon verified complaint, and after due notice and
hearing, order the removal of a director or trustee elected despite the disqualification, or
whose disqualification arose or is discovered subsequent to an election.

The removal of a disqualified director shall be without prejudice to other sanctions that
the Commission may impose on the board of directors or trustees who, with knowledge of the
disqualification, failed to remove such director or trustee. [Sec. 27]

4. Duties, responsibilities and liabilities for unlawful acts

1. Duties of Directors and Trustees

THREE-FOLD DUTY
In this jurisdiction, the members of the BOD have a three-fold duty: duty of obedience, duty of
diligence, and duty of loyalty.

1) Duty of Obedience - shall direct the affairs of the corporation only in accordance with the
purposes for which it was organized;

2) Duty of Diligence - shall not willfully and knowingly vote for or assent to patently
unlawful acts of the corporation or act in bad faith or with gross negligence in directing
the affairs of the corporation; and

3) Duty of Loyalty - shall not acquire any personal or pecuniary interest in conflict with
their duty as such directors or trustees. [Strategic Alliance Development Corp v.
Radstock Securities Ltd., G.R. No. 178158 (2009)]

Duty of Obedience

The Directors or Trustees and Officers should direct the affairs of the corporations only
in accordance with the purposes for which it was organized.

Duty of Diligence

The directors should not willfully and knowingly vote for or assent to patently unlawful
acts of the corporation or act in bad faith or with gross negligence in directing the affairs
of the corporation. [Sec. 30]

Note: The conditions for the application of Sec. 31 (now Sec. 30, RCC) of the Corporation
Code require factual foundations to be first laid out in appropriate judicial proceedings.
Hence, concluding that a person breached fiduciary duties as an officer and member of
the BOD of a corporation without competent evidence thereon would be unwarranted
and unreasonable. [Republic of the Philippines v. Sandiganbayan (First Division) et al.,
G.R. No. 166859 (2011)]

Duty of Loyalty
General Rule: Where a director, by virtue of such office, acquires a business
opportunity which should belong to the corporation, thereby obtaining profits to the
prejudice of such corporation, the director must account for and refund to the latter all
such profits.

Exception: Unless the act has been ratified by a vote of the stockholders owning or
representing at least two-thirds (2/3) of the outstanding capital stock. [Sec. 33]

DOCTRINE OF CORPORATE OPPORTUNITY

Unless his act is ratified, a director shall refund to the corporation all the profits he
realizes on a business opportunity which:
a. Corporation is able to undertake
b. from its nature, is in line with corporation’s business and is of practical advantage to
it; and
c. one in which the corporation has an interest or a reasonable expectancy.

The rule shall be applied notwithstanding the fact that the director risked his own funds
in the venture. [Sec. 33]

By embracing the opportunity, the self-interest of the officer or director will be brought
into conflict with that of his corporation. Hence, the law does not permit him to seize
the opportunity even if he will use his own funds in the venture. [Sundiang & Aquino]

A director, trustee, or officer shall be liable as a trustee for the corporation and must
account for the profits which otherwise would have accrued to the corporation if:

(1) He attempts to acquire, or acquire any interest adverse to the corporation in

respect of any matter which has been reposed in them in confidence; and

(2) Upon which, equity imposes a disability upon themselves to deal in their own behalf.
[Sec. 30]

Note: Differences between Sec. 30 and Sec. 33:

a) First, while both involve the same subject

matter (business opportunity) they concern different personalities; Sec. 33 is applicable

only to directors and not to officers, whereas Sec. 30 applies to directors, trustees and
officers.

b) Second, Sec. 33 allows a ratification of a transaction by a self-dealing director by vote

of stockholders representing at least 2/3 of the outstanding capital stock. [Villanueva]

LIABILITIES

Solidary Liabilities for Damages

Solidary Liability For Damages

a. The directors and trustees are solidarily liable for damages arising from the ff.:
b. Willfully and knowingly voting for and assenting to patently unlawful acts of the
corporation; [Sec. 30]
c. Gross negligence or bad faith in directing the affairs of the corporation; [Sec. 30]
d. Acquiring any personal or pecuniary
interest in conflict of duty; [Sec. 30]
e. Consenting to the issuance of watered stocks, or, having knowledge thereof, failing to
file objections with secretary; [Sec. 64]
f. Agreeing or stipulating in a contract to hold himself liable with the corporation; or
 g. By virtue of a specific provision of law

LIABILITY FOR WATERED STOCKS Watered Stocks – stocks issued for a consideration
less than its par or issued value or for a consideration in any form other than cash,
valued in excess of its fair value.

Any director or officer of a corporation shall be solidarily liable with the stockholder
concerned to the corporation and its creditors for the difference in value for:
(1)  Consenting to the issuance of watered stocks or;
(2)  Failing express his objection in writing and file the same with the corporate secretary
despite having knowledge thereof of such issuance [Sec. 64].

Personal Liabilities
General rule: Members of the Board, who purport to act in good faith for and on behalf of
the corporation within the lawful scope of their authority, are not liable for the
consequences of their acts. When the acts are of such nature and done under those
circumstances, they are attributed to the corporation alone and no personal liability is
incurred. [Price v. Innodata Phils., Inc., G.R. No. 178505 (2008)].

Exception: When sufficient proof exists on record that the officers acted fraudulently,
beyond his authority or when the officer agrees to be personally liable on behalf of the
corporation.

Note:
 Members of the BOD who are also officers are held to a more stringent liability because
they are in-charge of day-to-day activities. [Campos]
 The provisions on seizing corporate
opportunity and disloyalty [Secs. 30 and 33] shall also apply to corporate officers. [Price v.
Innodata Phils., Inc., G.R. No. 178505 (2008)]

RESPONSIBILITIES

Responsibility for Crimes

Since a corporation is a person by mere legal fiction, it cannot be proceeded against
criminally because it cannot commit a crime in which personal violence or malicious intent
is required.
Note: However, violations of the Code, if it is committed by a corporation, the same may,
after notice and hearing, be dissolved in appropriate proceedings before the Commission.
[Sec. 170]

If the offender is a corporation, the penalty may, at the discretion of the court, be imposed
upon:
(1) Such corporation and/or upon its directors,
 trustees, stockholders, members, officers, or employees responsible for the violation or
indispensable to its commission; or
(2) Anyone who shall aid, abet, counsel, command, induce, or procure any violation of this
Code, or any rule, regulation, or order of the Commission. [Sec. 171-172]
Criminal Liability of Corporate Agents Criminal action is limited to the corporate agents
guilty of an act amounting to a crime and never against the corporation itself.
Since the BOD is the repository of corporate powers and acts as the agent of the
corporation, the directors may be held criminally liable. [Time Inc. v. Reyes, G.R. No. L-
28882 (1971)]
Corporations, partnerships, associations and other juridical entities cannot be put to jail.
Hence, the criminal liability falls on the human agent responsible for the violation of the
Trust Receipts Law. [Ong v. CA, G.R. No. 119858 (2003); see also Sec. 13, P.D. 115]

E. Stockholders and members

1. Rights and obligations of stockholders and members

Fundamental Rights of a Stockholder

1. Direct or indirect participation in management [Sec. 6]
2. Voting rights [Sec. 6]
3. Right to remove directors [Sec. 27]
4. Proprietary rights
0. (a)  Right to dividends [Sec. 42 and 70]
1. (b)  Appraisal rights [Sec. 80]
2. (c)  Right to issuance of stock certificate for fully paid shares [Sec. 63]
3. (d)  Proportionate participation in the distribution of assets in liquidation [Sec.
139]
4. (e)  Right to transfer of stocks in corporate books [Sec. 62]
5. (f)  Pre-emptive right [Sec. 38]
5. Right to inspect books and records [Sec. 73]
6. Right to be furnished with the most recent financial statements/reports [Sec. 73]
7. Right to recover stocks unlawfully sold for delinquent payment of subscription [Sec. 68]
8. Right to file individual suit, representative suit and derivative suits

Nature of the Rights of Members

The eleemosynary nature (i.e. charitable) of every non-stock corporation defines the
characteristic of membership therein as being essentially personal in character and therefore
essentially non-transferable in nature. [Villanueva]
Sec. 88 of the Revised Corporation Code specifically provides that in a non-stock corporation,
the right of members of any class or classes to vote “may be limited, broadened or denied to
the extent specified in the articles of incorporation or the by-laws.”

a. Doctrine of equality of shares

 DOCTRINE OF EQUALITY OF SHARES
Each share shall be EQUAL in ALL respects to every other share, except as otherwise
provided in the Articles of Incorporation and stated in the certificate of stock. [Sec. 6]

Classification of shares:
(i)  Preferred Shares vs. Common Shares
(ii)  Scope of Voting Rights Subject to Classification
(iii)  Founders’ Shares
(iv)  Redeemable Shares
(v)  TreasuryShares
(vi)  Par value shares vs. No-par value shares

PREFERRED SHARES
Stocks which are given, by the issuing corporation:
1. Preference in dividends
2. Preference in the distribution of assets of
the corporation in case of liquidation, or
3. Preference in both dividends and
distribution, or
4. Such other preferences as may be stated
in the Articles of Incorporation which do not violate the Corporation Code.
Note: Preferred shares may be issued only with a stated par value. [Sec. 6]
Unless the right to vote is clearly withheld, a preferred stockholder would have such
right as it is an incident to stock ownership. The Board of Directors may fix the terms
and conditions only when so authorized by the Articles of Incorporation and such
terms and conditions shall be effective upon filing a certificate thereof with the SEC.
[Sec. 6]

Kinds of Preferred Shares

1. Preferred Shares as to Assets vs. Preferred Shares as to Dividends
2. Cumulative vs. Non-Cumulative
3. Participating vs. Non-participating
Preferred Shares as to Assets vs. Preferred Shares as to Dividends
1. Preferred shares as to assets –gives the
holder preference in the distribution of the assets of the corporation in case of
liquidation.
2. Preferred shares as to dividends - entitled to receive dividends on said share to the
extent agreed upon before any dividends at all are paid to the holders of common stock.

Cumulative vs. Non-cumulative

In the absence of any express stipulation, preferred stocks are deemed cumulative.
1. Cumulative - regardless of lack of profits in any given year, and lack of declaration of
dividends, the arrears for such year have to be paid to the preferred stocks in a
 subsequent year (once profits are made) before any dividends can be paid to the
common stocks.
2. Non-Cumulative – entitlement to receipt of dividends essentially depends on declaration
of such; types:
0. (i)  Discretionary – right to dividends in a particular year depends on the
discretion of the board, even if the corporation has profits.
1. (ii)  Mandatory – a positive duty is imposed to declare preferred dividends every
year that profits are earned.
2. (iii)  Earned cumulative or dividend credit – board has discretion not to declare
dividends, even if there were profits in a certain year; however, once the board
decides that dividends will be declared, the preferred stockholders have a right
to arrears in dividends for the years when there were profits but no dividend was
declared.

Participating and Non-participating

Unless otherwise provided, preferred stocks are non-participating.
1. Participating - those which, after getting their fixed dividend preference, share with
common stocks the rest of the dividends.
2. Non-participating - those which, after getting their fixed dividend preference, have no
more right to share in the remaining dividends with the common stocks.

Common shares
A common stock represents the residual ownership interest in the corporation. It is a
basic class of stock ordinarily and usually issued without extraordinary rights or
privileges and entitles the shareholder to a pro rata division of profits.” [CIR v. CA,
301 SCRA 152 (1999)]

The owners thereof are entitled to management (via exclusive right to vote) of the
corporation and to equal pro-rata division of profits.

Scope of Voting Rights Subject to Classification

Only preferred and redeemable shares maybe deprived of the right to vote [Sec. 6],
except as otherwise provided in the Revised Corporation Code.

General Rule: Non-Voting Shares are not entitled to vote. The law only authorizes the
denial of voting rights in the case of redeemable shares and preferred shares,
provided that there shall always be a class or series of shares which have complete
voting rights. [Sec. 6]

Exception: These redeemable and preferred shares, when such voting rights are denied,
shall nevertheless be entitled to vote on the following fundamental matters:
1. Amendment of the Articles of Incorporation
2. Adoption and amendment of by-laws
 3. Sale, lease, exchange, other disposition of
all or substantially all of the corporate
property
4. Incurring, creating or increasing bonded
indebtedness
5. Increase or decrease of capital stock
6. Merger and consolidation
7. Investment of corporate funds in another
corporation or business
8. Dissolution of the corporation

Founders’ Shares
Founders’ Shares are shares classified as such in the AOI, which are given certain rights and
privileges not enjoyed by the owners of other stocks. These may be given special preference in
voting rights and dividend payments.
Where exclusive right to vote and be voted for in the election of directors is granted, such right
must be for a limited period not to exceed 5 years, subject to approval by SEC The 5-year period
shall commence from date of approval by SEC.
Founder’s shares given the exclusive right to vote and be voted for are not allowed to exercise
that right in violation of the Anti- Dummy Law and the Foreign Investment Act. [Sec. 7]

Redeemable Shares
are shares which may be purchased by the corporation from the holders of such shares upon
the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in
the books of the corporation.

The RCC made the redemption subject to the rules and regulations that may be issued by SEC,
in addition to what may be stipulated in the AOI and Certificate of Stock. [Sec. 8]
Limitations
1. Redeemable shares may be issued only when expressly provided for in the AOI [Sec. 8].
2. The terms and conditions affecting said shares must be stated both in the AOI and in the
certificate of stock [Sec. 8].
3. Redeemable shares may be deprived of voting rights in the AOI. [Sec. 6]
4. The corporation is required to maintain a sinking fund to answer for redemption price if the
corporation is required to redeem. [SEC-OGC Opinion No. 07-03]
5. The redeemable shares are deemed retired upon redemption, unless otherwise provided in
the AOI (i.e., if the AOI allows for reissuance of such shares). [SEC Rules Governing Redeemable
and Treasury Shares, 26 April 1982]
6. Unrestricted retained earnings are NOT necessary before shares can be redeemed, but there
must be sufficient assets to pay the creditors and to answer for operations. [Republic Planters
Banks v. Agana, G.R. No. 51765 (1997)]
7. Redemption cannot be made if such redemption will result in insolvency or inability of the
corporation to meet its obligations. [SEC Opinion, 24 Aug 1987]
Kinds of redeemable shares
1. Compulsory - the corporation is required to redeem the shares.
2. Optional - the corporation is not mandated to redeem the shares.

Treasury Shares
Treasury Shares are shares which have been issued and fully paid for, but subsequently re-
acquired by the issuing corporation by purchase, redemption, donation or through some other
lawful means. Such shares may again be disposed of for a reasonable price fixed by the BOD.
[Sec. 9]

Shares may be reacquired without impairing the corporate trust fund. Reacquisition of shares is
allowed, provided the corporation will use assets up to the extent of its unrestricted retained
earnings. [SEC Rules Governing Redeemable and Treasury Shares, Sec 3, par (1)(a)]
It should be recalled that corporate earnings are not part of the corporate trust fund. [Herbosa,
2019] They are excluded from the definition of outstanding capital stock.
Pre-emptive right of stockholders in close corporations shall extend to reissuance of treasury
shares, unless otherwise provided in the AOI. [Sec. 101]
Delinquent stocks, which are stocks that have not been fully paid, may become treasury stocks
upon bid of the corporation in absence of other bidders. [Sec.67]

Limitations on treasury shares

1. They may be re-issued or sold again as long as it is for a reasonable price fixed by the
BOD.
2. Cannot participate in dividends.
3. It has no voting right as long as such shares remain in the Treasury. [Sec. 56]
4. It cannot be represented during stockholder’s meetings.
5. The amount of URE equivalent to the cost of treasury shares being held shall be
restricted from being declared and issued as dividends.

Note: When treasury shares are sold below its par or issued value, there can be no watering of
stock because such watering of stock contemplates an original issuance of shares.
For both stock corporations and close corporations, the pre-emptive right of stockholders
extends to the re-issuance or sale treasury shares, unless the articles of incorporation provide
otherwise. [Sec. 38 and 101; SEC Opinion, 14 January 1993]

Treasury Shares are not Retired Shares

Treasury shares do not revert to the unissued shares of the corporation, but are regarded as
property acquired by the corporation, which may be reissued or resold at a price to be fixed by
the Board of Directors. [SEC Rules Governing Redeemable and Treasury Shares, CCP No. 1-1982]
Note: Under the SEC Rules, the redemption of redeemable shares does not necessarily make
them as treasury shares. Instead, it leads to their automatic retirement or cancellation, unless
the contrary is specifically stipulated. The articles thus provide advance notice to ordinary
shareholders that the board may, at its own discretion, reissue redeemable shares with the
same features.
Treasury shares distributed by way of dividends
Treasury shares may also be distributed as property dividends. In order for treasury shares to
be distributed as property dividends, the amount of the retained earnings previously used to
support their acquisition must nothave been impaired by losses. Further, such retained
earnings must not be used to justify the distribution of treasury shares as property dividends.
They may only be distributed out of the other earnings of the corporation. [SEC- OGC Opinion
No. 12-06, dated April 20, 2012]
Note: Treasury shares are treated as assets of the corporation. [Herbosa, 2019] Since a treasury
share is a fully paid share re-acquired by the corporation, it is not outstanding and may be re-
issued and resold. It cannot receive dividends before the resale, because the corporation
cannot grant dividends to itself. [CIR vs Manning]

Par Value Shares vs. No-Par Value Shares

Par value shares
These are shares with a stated or fixed value set out in the Articles of Incorporation, which
remains the same regardless of the profitability of the corporation. This gives rise to financial
stability, and is the reason why banks, trust corporations, insurance companies and building
and loan associations must always be organized with par value shares.

Par value is minimum issue price of such share in the Articles of Incorporation which must be
stated in the certificate. [Sec 61]

No par value shares

These are shares without a stated value in the AOI. They are without nominal value. They may
be issued for the amount stipulated in the AOI, or fixed by the Board. [Sec 61]

Limitations on no par value shares [Sec. 6]

1. Cannot have an issue price of less than P5.00 per share
2. Once issued, they shall be deemed fully paid and non-assessable, and the holders of
such shares shall not be liable to the corporation or to its creditors in respect thereto
3. Entire consideration received by the corporation shall be treated as capital and shall not
be available for distribution as dividends
4. The AOI must state the fact that the corporation issues no-par shares and the number of
shares
5. Cannot be issued as preferred stock
6. Cannot be issued by banks, insurance companies, public utilities and building and loan
associations
7. Cannot be issued by all corporations authorized to obtain or access funds from the
“public”

Note: A new addition in the Revised Corporation Code is the prohibition on the issuance of no-
par shares being imposed on all corporations authorized to obtain or access funds from the
“public.” This prohibition is not anymore limited to banks, insurance companies, public utilities
and building and loan associations.

2. Participation in management

a) Proxy

Proxy
Stockholders and members may vote in person or by proxy in all meetings. [Sec. 57]
The word “proxy” may be understood in two ways:
1. (1)  First, it may refer to the person duly
authorized by a stockholder to vote in his
behalf in a stockholder’s meeting.
2. (2)  Secondly, it may refer to the document
which evidences this authority. [CAMPOS]

Right to Issue a Proxy

The right to issue a proxy is vested with public interest when it comes to stock corporations.
 Although it may be regulated under the by- laws, it cannot be denied, since it is an
aspect of ownership interest of stockholders.
 However, the right of members to vote by proxy may be denied under the articles of
incorporation or bylaws of a non-stock corporation. [Sec. 88; CAMPOS]

Requisites for a Valid and Enforceable Proxy:

1. It must be in writing;
2. Signed by the stockholder or member of record; and
3. Filed with the corporation before the scheduled meeting with the Corporate Secretary.
[Sec. 57]

Period of Effectivity
Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is
intended. No proxy shall be valid and effective for a period longer than five (5) years at any one
time. [Sec. 57]

Procedural Matters Relating to Proxies:

1. “Proxy solicitation” involves the securing and submission of proxies, while “proxy validation”
concerns the validation of such secured and submitted proxies;

2. The SEC’s power to pass upon the validity of proxies in relation to election controversies has
effectively been withdrawn, tied as it is to its abrogated quasi-judicial powers, and has been
transferred to the RTC Special Commercial Courts pursuant to the terms of Sec. 5.2 of the
Securities Regulation Code;
Note: The SEC has the power to mpose or recommend new modes by which a stockholder,
member, director, or trustee may attend meetings or cast their votes, as technology may allow,
taking into account the company’s scale, number of shareholders or members, structure, and
other factors consistent with the basic right of corporate suffrage. [Sec. 179]

3. Nevertheless, although an intra-corporate controversy may animate a disgruntled

shareholder to complain to the SEC a corporation’s violations of SEC rules and regulations,
that motive alone should not be sufficient to deprive the SEC of its investigatory and
regulatory powers, especially so since such powers are exercisable on a motu proprio basis.

The fact that the jurisdiction of the RTC Special Commercial Courts is confined to the voting on
election of officers, and not all matters which may be voted upon by stockholders, elucidates
that the power of the SEC to regulate proxies remains extant and could very well be exercised
when stockholders vote on matters other than the election of directors. [GSIS v. C.A., G.R. No.
183905 (2009)]

b) Voting trust

Voting Trust — An arrangement created by one or more stockholders:

(a)  For the purpose of conferring upon a
trustee or trustees the right to vote and
other rights pertaining to the shares;
(b)  For a period not exceeding 5 years at any
time [Sec. 58].

Under a voting trust agreement, a stockholder of a stock corporation parts with the naked or
legal title, including the power to vote, of the shares and only retains the beneficial ownership
of the stock.
Voting trustee — A share owner vested with colorable and naked title of the shares covered for
the primary purpose of voting upon stocks that he does not own.

A voting trust agreement shall be ineffective and unenforceable unless:

1. It is in writing and notarized;
2. It specifies the terms and conditions
thereof; and
3. A certified copy of such agreement is filed
with the corporation and with the SEC. [Sec. 58]

Period of Effectivity
General Rule: Voting trust agreements shall not exceed five (5) years at any one time.
Exception: Voting trust agreements may be for a period exceeding five (5) years if it is
specifically required as a condition in a loan agreement.
  This envisions a situation where a corporation obtains a loan from a bank, but as a
condition of the loan, the majority stockholders would be required to execute voting
trust agreements to ensure that the lending institution would have a controlling interest
in the corporate votes to be taken that may affect the ability of the borrowing
corporation to pay. The voting trust agreement therefore constitutes further security to
the lending institution. (VILLANUEVA, supra at 432)
 Such voting trust agreement conditioned upon a loan agreement, however, shall
automatically expire upon full payment of the loan. [Sec. 58]

Unless the agreement is expressly renewed, all rights granted in the agreement shall
automatically expire at the end of the agreed period. [Sec. 58]

Right to Inspect
The voting trust agreement filed with the corporation shall be subject to examination by any
stockholder in the same manner as any other corporate record. [Sec. 58]
Both the trustor and trustee may exercise the right of inspection of all corporate books and
records in accordance with the provisions of the RCC. [Sec. 58]

Limitation of a Voting Trust Agreement

No voting trust agreement shall be entered into for the purposes of circumventing the laws
against:
 Anti-competitive agreements;
  Abuse of dominant position;
  Anti-competitive mergers and acquisitions;
 Violations of nationality and capital requirements; or

 Fraud. [Sec. 58]

c) Cases when stockholders’ action is required

Right to Vote in Stock Corporations General Rule: Each share of stock is entitled to vote. [Sec.
6]
1. The stockholder of record has the right to
participate and to vote [Villanueva]
2. Executors, administrators, receivers, and other legal representatives duly appointed by the
court may attend or vote in behalf of stockholders without need of any written
proxy. [Sec. 54]

Exception: Unless otherwise provided in the articles of incorporation or declared delinquent

under Sec. 66. [Sec. 6]
Note: “Outstanding capital stock” means stocks entitled to VOTE.
Nevertheless, ALL stockholders, regardless of classification as voting or non-voting, are entitled
to vote in the following matters:
a) Amendment of the articles of incorporation;
b) Adoption and amendment of by-laws;
c) Sale, lease, exchange, mortgage, pledge, or other disposition of all or substantially all of
the corporate property;
d) Incurring, creating, or increasing bonded indebtedness;
e) Increase or decrease of capital stock;
f) Merger or consolidation;
g) Investment of corporate funds in another corporation or business; and
h) Dissolution of the corporation. [Sec. 6]

Right to Vote in Non-Stock Corporations

In non-stock corporations, the voting rights attach to membership. Members vote as persons, in
accordance with the law and the by- laws of the corporation.

General Rule: Each member shall be entitled to one vote. [Sec. 88]
 Executors, administrators, receivers, and

other legal representatives duly appointed by the court may attend or vote in behalf of stockholders
without need of any written proxy. [Sec. 54]

Exception: Unless the right to vote is limited, broadened, or denied in the articles of incorporation or by-
laws.
 When the principle for determining the

quorum for stock corporations is applied by analogy to non-stock corporations, only those who are
actual members with voting rights should be counted. [Sec. 88]
 i) By a majority vote

By a majority vote
(1) Power to enter into management contracts [Sec. 43]
General Rule: Requires approval by —
1. Majority of the BOD/BOT; and
2. Stockholders owning at least the majority
of the outstanding capital stock/majority of members of both the managing and the managed
corporation.

Exceptions: In the ff. cases, at least 2/3 votes of the outstanding capital stock/membership of
the managed corporation is required. BUT only majority vote is required for the managing
corporation:
1. Where a stockholder/s representing the same interest of both the managing and the
managed corporations own or control more than one-third (1/3) of the total
outstanding capital stock entitled to vote of the managing corporation; or
2. Where a majority of the members of the managing corporation’s BOD also constitute a
majority of the managed corporation’s BOD.

(2) Amendments to by-laws [Sec. 47]

Requires approval by:
a. Majority of the BOD/BOT; and
b. Stockholders owning at least the majority of the outstanding capital stock/majority of
members.
Includes all stockholders with or without voting rights.

(3) Revocation of delegation to the BOD of the power to amend or repeal or adopt by-laws
[Sec. 47]
Requires approval by stockholders owning at least the majority of the outstanding capital
stock/majority of members.

(4) Granting compensation other than per diems to directors [Sec. 29]
Compensation other than per diems may be granted to directors by the vote of the
stockholders representing at least a majority of the outstanding capital stock.

(5) Fixing the consideration for no-par shares [Sec. 61]

When the Articles of Incorporation or the BOD does not provide for the value of no-par shares,
the value of such shares shall be determined by the stockholders representing at least majority
of the outstanding capital stock.

(6) Voluntary dissolution of a corporation where no creditors are affected [Sec. 134]
If dissolution of a corporation DOES NOT prejudice the rights of any creditor having a claim
against it, the dissolution may be effected by:
a. Majority vote of the BOD/BOT; and
b. A resolution adopted by the affirmative vote of the stockholders owning at least majority of
the outstanding capital stock/membership.

(7) Revocation of Delegation to the Board of the Power to Amend/Repeal/Adopt By-laws

[Sec. 47]
Any power delegated to the board of directors or trustees to amend or repeal the by-laws or to
adopt new by-laws shall be considered revoked when stockholders representing a majority of
the outstanding capital stock or a majority of the members shall so vote at a regular or special
meeting.

(8) Calling a Meeting to Remove Directors or Trustees [Sec. 27]

A special meeting for the purpose of removing any director or trustee must be called:
1. By the secretary on order of the president;
or
2. Upon written demand of stockholders
representing or holding at least a majority of the outstanding capital stock, or a majority of the
members entitled to vote. [Sec. 27]
 ii) By a two-thirds vote

(1) Removal of directors or trustees [Sec. 27]

Any director or trustee of a corporation may be removed from office by a vote of —
 The stockholders holding or representing at least two-thirds (2/3) of the outstanding
capital stock; or
 At least two-thirds (2/3) of the members entitled to vote in a non-stock corporation.
Note: Such removal shall take place —
a. Either at a regular meeting of the corporation or at a special meeting called for the purpose; and
b. In either case, after previous notice to stockholders or members of the corporation of the intention to
propose such removal at the meeting.

(2) Amendment of AOI [Sec. 15]

Amendment of the AOI may be made by:
a) A majority vote of the BOD/BOT; and
b) The vote or written assent of the
stockholders representing at least two- thirds (2/3) of the outstanding capital stock, or by the vote or
written assent of at least two-thirds (2/3) of the members.

Note: Includes all stockholders with or without voting rights.

Amendment of Articles of Incorporation of close corporations [Sec. 102]

An affirmative vote of at least two-thirds (2/3) of the outstanding capital stock, whether with or without
voting rights, at a meeting duly called for the purpose is required to make any amendment to the AOI
which seeks to:
a) Delete or remove any provision; or
b) Reduce a quorum of the voting requirement
stated in the articles shall require.

(3) Delegating the power to amend or repeal by-laws or adopt new by-laws [Sec. 47]
Delegation to the BOD/BOT of the power to amend or repeal by-laws or adopt new by-laws requires
approval by at least 2/3 of the outstanding capital stock/membership.
Note: Revocation of the delegation requires only majority vote of the outstanding capital
stock/membership.

(4) Extending/shortening corporate term [Sec. 36]

Requires approval by a majority vote of the BOD/BOT and approval by at least 2/3 of the outstanding
capital stock/membership.

Includes all stockholders with or without voting rights.

(5) Increasing/decreasing capital stock [Sec. 37]

Requires approval by:
 a) A majority vote of the BOD; and
b) At least 2/3 of the outstanding capital stock
Includes all stockholders with or without voting rights.

Incurring, creating, increasing bonded indebtedness [Sec. 37]

Requires approval by a majority vote of the BOD and approval by at least 2/3 of the outstanding capital
stock.
Includes all stockholders with or without voting rights.

(6) Issuance of shares not subject to pre- emptive right [Sec. 38]
Shares in good faith in exchange for property or previously incurred indebtedness with the approval of
the stockholders representing 2/3 of the outstanding capital stock are not subject to pre-emptive rights.

(7) Sale/disposition of all or substantially all of corporate assets [Sec. 39]

A sale of all or substantially all of the corporation’s properties and assets, including its goodwill must be
authorized by the vote of:
 The stockholders representing at least 2/3 of the outstanding capital stock; or
 At least 2/3 of the members, in a stockholders’ or members’ meeting duly called for the
purpose.
- Note: In non-stock corporations where there are no members with voting rights, the vote of at least
a majority of the trustees in office will be sufficient authorization.

(8) Investment of funds in another business [Sec. 41]

Requires approval by:
1. A majority vote of the BOD/BOT; and
2. At least 2/3 of the outstanding capital
stock/membership.
Includes all stockholders with or without voting rights.
• However, where the investment by the corporation is reasonably necessary to accomplish its primary
purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not
be necessary.

(10) Stock Dividend declaration [Sec. 42]

Requires approval by:

a) A majority vote of the BOD; and
b) At least 2/3 of the outstanding capital stock.

Note: Declaration of cash and property dividends only requires BOD/BOT approval.

(11) Power to enter into management contracts [Sec. 43]

General Rule: Requires approval by —

a) Majority of the BOD/BOT; and
b) Stockholders owning at least the majority
of the outstanding capital stock/majority of members of both the managing and the managed
corporation.
Exceptions: In the ff. cases, at least 2/3 votes of the outstanding capital stock/membership of the
managed corporation is required. BUT only majority vote is required for the managing corporation:
a) Where a stockholder/s representing the same interest of both the managing and the managed
corporations own or control more than one-third (1/3) of the total outstanding capital stock
entitled to vote of the managing corporation; or
b) Where a majority of the members of the managing corporation’s BOD also constitute a majority
of the managed corporation’s BOD.

(12) Ratifying contracts with respect to dealings with directors/trustees [Sec. 31]

A contract of the corporation with one or more of its directors is voidable, at the option of such
corporation, unless ALL of the following conditions are present:
a. The presence of such director/trustee in the board meeting in which the contract was approved was
not necessary to constitute a quorum for such meeting;
b. The vote of such director or trustee was not necessary for the approval of the contract;
c. The contract is fair and reasonable under the circumstances;

 In case of corporations vested with public interest, material contracts are approved by at least two-
thirds (2/3) of the entire membership of the board, with at least majority of the independent directors
voting to approve the material contract; and

 In case of an officer, the contract has been previously authorized by the BOD.

Note: Where any of the first 3 conditions in the preceding paragraph is absent, in the case of a contract
with a director/trustee, the contract may be ratified by the vote of the stockholders representing 2/3 of
the outstanding capital stock or at least 2/3 of the members in a meeting called for that purpose.

Full disclosure of the adverse interest of the directors/trustees involved is made at such meeting and the
contract is fair and reasonable under the circumstances. [Sec 31]

(13) Ratifying acts of disloyalty of a director [Sec. 33]

General Rule: Where a director, by virtue of such office, acquires a business opportunity, which should
belong to the corporation, thereby obtaining profits to the prejudice of such corporation, the director
must account for and refund to the latter all such profits.

Exception: His act may be ratified by a vote of the stockholders owning or representing at least 2/3 of
the outstanding capital stock.

(14) Plan of merger or consolidation [Sec. 76]

Requires approval by:
a. Majority of each of the BOD/BOT of the
constituent corporations of the plan of merger or consolidation; and
b. At least 2/3 of the outstanding capital stock/membership of each corporation at separate corporate
meetings duly called.
Amendments to the plan of the merger or consolidation also requires approval by majority vote of each
of the BOD and 2/3 vote of the outstanding capital stock/membership of each corporation voting
separately.

Includes all stockholders with or without voting rights.

(15) Plan of distribution of assets in non-stock corporations [Sec. 94]

The BOT shall, by majority vote, adopt a resolution recommending a plan of distribution which shall be
approved by at least 2/3 of the members with voting rights.

(16) Incorporation of a religious society [Sec. 114]

General Rule: Any religious society or religious order, or any diocese, synod, or district organization of
any religious denomination, sect or church, may incorporate —
a) Upon written consent and/or by an affirmative vote at a meeting called for the purpose of at
least 2/3 of its membership;
b) For the administration of its temporalities or for the management of its affairs, properties and
estate

Exception: Unless forbidden by the Constitution, rules, regulations or discipline of the religious
denomination, sect or church of which it is a part, or by competent authority.

(17) Voluntary dissolution of a corporation where creditors are affected [Sec. 135]

If dissolution of a corporation may prejudice the rights of any creditor having a claim against it, the
dissolution may be effected by:
a) Majority vote of the BOD/BOT; and
b) A resolution adopted by the affirmative vote of the stockholders representing at least 2/3 of the
outstanding capital stock/membership

iii) By cumulative voting

Election of Directors or Trustees [Sec. 23]

Stockholders entitled to vote may:

a. Vote such number of shares for as many persons as there are directors to be elected [Straight Voting];
b. Cumulate said shares and give 1 candidate as many votes as the number of directors to be elected multiplied by
the number of the shares owned [Cumulative Voting for 1 Candidate]; or
c. Distribute them on the same principle among as many candidates as may be seen fit [Cumulative Voting by
Distribution].

Note: No delinquent stock shall be voted [Sec. 23].

Members of a non-stock corporation may cast as many votes as there are trustees to be elected, but
may not cast more than 1 vote for 1 candidate.

Nominees for directors or trustees receiving the highest number of votes shall be declared elected.
3.) Proprietary rights
d) Right to dividends

1. Right to Dividends
Concept of Dividends
A dividend is —
o   That portion of the profits of the corporation
set aside, declared and ordered by the directors to be paid ratably to the stockholders on
demand or at a fixed time.
o   Payment to the stockholders as a return upon their investment. [Villanueva]

Discretion of Board to Declare Dividends

General Rule: The board of directors of a stock corporation may declare dividends out of the
unrestricted retained earnings to all stockholders on the basis of outstanding stock held by
them. [Sec. 42]
 Upon lawful declaration of dividends by the BOD, dividends become a debt owing to the
shareholders. No revocation can be made.

Exceptions:
- Dividends are revocable if NOT yet announced or communicated to the stockholders.
- Stock dividends, even if already declared, may be revoked prior to actual issuance since these
are not distributions but merely representations of changes in the capital structure.
 Such declaration is essentially within the business judgment of the board of directors.
• The fact that profits have accrued in the prosecution of the corporate business does not
necessarily impose upon the directors the duty to declare them as dividends. [Villanueva]

Exception: Stock corporations are prohibited from retaining surplus profits in excess of 100% of
their paid-in capital stock.

Exception to the exception: Stock corporations may retain surplus profits in excess of 100% of
their paid-in capital stock: 1. When justified by definite corporate
expansion projects or programs approved
by the board of directors; or
2. When the corporation is prohibited under
any loan agreement with financial institutions or creditors, whether local or foreign, from
declaring dividends without their consent, and such consent has not yet been secured; or
3. When it can be clearly shown that such retention is necessary under special circumstances
obtaining in the corporation, such as when there is need for special reserve for probable
contingencies. [Sec. 42]

Note: Right to dividends vests upon declaration so whoever owns the stock at such time also
owns the dividends. Subsequent transfer of stock would not carry with it right to dividends
UNLESS agreed upon by the parties.
Unrestricted Retained Earnings
The board of directors of a stock corporation may declare dividends out of the unrestricted
retained earnings. [Sec. 42]

In case of no-par value shares, the entire consideration received by the corporation for its no-
par value shares shall be treated as capital and shall not be available for distribution as
dividends. [Sec. 6]

e) Right to inspect

Basis of Right
As the beneficial owners of the business, the stockholders have the right to know the financial
condition and management of corporate affairs.
A stockholder’s right of inspection is based on his ownership of the assets and property of the
corporation. Therefore, it is an incident of ownership of the corporate property, whether this
ownership or interest is termed an equitable ownership, a beneficial ownership, or quasi-
ownership. Such right is predicated upon the necessity of self-protection. [Gokongwei Jr. v. SEC,
G.R. No. L-45911 (1979)]

Records Subject to Inspection [Sec. 73]

Every corporation shall keep and carefully preserve at its principal office all information relating
to the corporation including, but not limited to:
a) The AOI and by-laws of the corporation and all their amendments;
b) The current ownership structure and voting rights of the corporation, including lists of
stockholders or members, group structures, intra-group relations, ownership data, and
beneficial ownership;
c) The names and addresses of all the members of the BOD or BOT and the executive
officers;
d) A record of all business transactions;
e) A record of the resolutions of the BOD or BOT and of the stockholders or members;
f) Copies of the latest repertorial requirements submitted to the Commission; and
g) The minutes of all meetings of stockholders or members, or of the BOD/BOT, which shall
set forth –
I. Time and place of the meeting held;
 II. How meeting was authorized;
III. Notice given;
IV. Agenda;
V. Whether meeting was regular or special (its object, if special)
VI. Those present and absent
VII. Every act done or ordered done at the meeting
h) Upon demand of the BOD/BOT/stockholder or member –
I. Time when any director, trustee, stockholder or member entered or left the
meeting must be noted in the minutes;
II. The yeas and nays must be taken on any motion or proposition, and a record
thereof carefully made;
III. The protest of a director, trustee, stockholder or member on any action or
proposed action

Requirements for the exercise of the right

Of inspection [Sec. 73]
a) The records are open to inspection only by any director, trustee, stockholder or member
of the corporation in person or by a representative.

b) Must be done at reasonable hours on business days.

c) A demand in writing may be made by the director, trustee or stockholder at their expense, for
such records or excerpts from the records.
d) The inspecting or reproducing party shall remain bound by confidentiality rules under prevailing
laws such as
a) Intellectual Property Code
b) Data Privacy Act
c) Securities Regulation Code
d) Rules of Court

Test to Determine Whether the Purpose of Inspection is Legitimate

A legitimate purpose is one which is genuine to the interests of the stockholders as such and not
contrary to the interests of the corporation [Gokongwei Jr. v. SEC, G.R. No. L-45911 (1979)].

Valid defenses of the officer or agent of the corporation who refuses to allow inspection and/or
reproduction of records:
a. The person demanding to examine and
copy excerpts from the corporation’s records and minutes has improperly used any information secured
through any prior examination of the records or minutes of such corporation or of any other
corporation;
b. The person was not acting in good faith;
c. The person was not acting for a legitimate purpose in making the demand to examine
or reproduce corporate records;
d. The person is a competitor, director, officer, controlling stockholder or otherwise represents the
interests of a competitor.
[Sec. 73]
Remedies when inspection is refused
a) Mandamus
 Under the Rules of Court, the writ of mandamus should be granted only if the court is satisfied
that justice so requires. [Sec. 8, Rule 65]
b.) Injunction
c.) Action for damages [Sec. 73]
d.) File an action under Sec. 161 to impose a penal offense by fine
 The unjustified failure or refusal by the corporation, or by those responsible keeping and
maintaining corporate records, to comply with the pertinent rules and provisions of the RCC
on inspection and reproduction of records shall be punished with a fine ranging from
P10,000.00 to P200,000.00, at the discretion of the Court
 When the violation of this provision is injurious or detrimental to the public, the penalty is a
fine ranging from P20,000.00 to P400,000.00 [Sec. 161]
e.) Summary investigation by SEC [Sec. 73]

f) Pre-emptive right

Definition
Pre-emptive right — An option or privilege of an existing stockholder to subscribe to a
proportionate part of shares subsequently issued by the corporation before the same can be
disposed of in favor of others.
 This right includes all issues and disposition of such shares any class.
 It is a common law right and may be exercised by stockholders even without legal
provision.
Basis of Preemptive Right: Preservation of the existing proportional rights of the
stockholders. [Campos]
Purpose of Pre-emptive Right
The purpose is to enable the shareholder to retain his proportionate control in the corporation
and to retain his equity in the surplus.

Scope of Pre-emptive Right

The broad phrase “all issues or disposition of shares of any class” is construed to include:
a. New shares issued in pursuance of increase in capital stock or from the unissued shares
which form part of the ACS; and also b. Treasury shares
 Treasury shares would come under the term “disposition”.
 Likewise considering that it is not included among the exceptions enumerated therein,
where pre-emptive right shall not extend, the intention is to include it in its application.
[SEC Opinion, 14 January 1993]

Limitations to Exercise of Pre-emptive right [Sec. 38]

1. Such pre-emptive right shall NOT extend to
shares to be issued in compliance with laws requiring stock offerings or minimum stock
ownership by the public;
2. It shall also NOT extend to shares to be issued in good faith with the approval of the
stockholders representing 2/3 of the outstanding capital stock, in exchange for property
needed for corporate purposes or in payment of a previously contracted debt;
3. It shall not take effect if denied in the AOI or an amendment thereto;
4. If one shareholder does not want to exercise his pre-emptive right, the other
shareholders are not entitled to purchase the corresponding shares of the shareholder
who declined. But if nobody purchased the same and later on the board re-issued the
shares, the pre-emptive right applies. [Sundiang and Aquino]

Exceptions to the Pre-emptive Right

1. When such right is denied by the articles of incorporation or an amendment thereto;
and
2. Shares to be issued:
a. In compliance with laws requiring stock offerings or minimum stock ownership by the
public; or
b. To shares to be issued in good faith with the approval of the stockholders
representing 2⁄3 of the outstanding capital stock in exchange for:
i. Property needed for corporate purposes; or
ii. In payment of a previously contracted debt. [Sec. 38]

Remedies in case of unwarranted denial

i. Injunction
ii. Mandamus
iii. The suit should be individual and not derivative because the wrong done is to the
stockholders individually
iv. SEC can cancel shares if the 3rd party is not innocent
Waiver/Denial of Preemptive Right
Allowed by the Code provided that it is made in the AOI
a. Waiver made through AOI would bind
present and subsequent shareholders;
b. 2/3 vote of the outstanding capital stock is necessary before waiver is binding;
c. Result of non-placement of waiver clause in AOI: Waiver shall not bind future stockholders
but only those who agreed to
it.

The shareholders must be given reasonable time within which to exercise their preemptive
rights.
 Upon expiration of such period, any shareholders who did not exercise such will be
deemed to have waived it.
 This is necessary so as to not hinder future financing plans of the corporation. Some new
investors may be willing to invest only if all the new shares will be issued to them.
[Campos]

g) Right of first refusal

Right of First Refusal — Obligates a stockholder who may wish to sell or assign his shares to
first offer the shares to the corporation or to the other existing stockholders under terms and
conditions which are reasonable.
 Grants the existing stockholders or the corporation the option to purchase the shares of
the transferring stockholder. [Sec. 97]
 Only when the corporation or the other stockholders do not or fail to exercise their
option, is the offering stockholder at liberty to dispose of his shares to third parties.

An agreement entered into between the two majority stockholders of a corporation, whereby they
mutually agreed not to sell, transfer, or otherwise dispose of any part of their shareholdings till after one
year from the date of the agreement is valid. [Lambert v. Fox G.R. No. L-7991 (1914)]

Nature of the Right of First Refusal

The right of first refusal is primarily an attribute of ownership, and consequently can be
effected only through a contractual commitment by the owner of the shares.

Consequently, the waiver of a right of first refusal when duly constituted can be effected only
by the registered owner. [PCGG v. SEC, G.R. No. 82188 (1988)]

4.) Remedial rights

i. Individual Suit
A suit brought by the shareholder in his own name against the corporation when a wrong is
directly inflicted against him.

ii. Representative Suit

A suit brought by the stockholder in behalf of himself and all other stockholders similarly
situated when a suit brought by the shareholder in his own name against the corporation when
a wrong is directly inflicted against him or a wrong is committed against a group of
stockholders.

iii. Derivative Suit

Definition
A suit brought by a stockholder for and on behalf of the corporation for its protection from the
wrongful acts committed by the directors/trustees of the corporation, when the stockholder
finds that he has no redress because the directors/trustees, are the ones vested by law to
decide whether or not to sue.

 It is an action brought by minority shareholders in the name of the corporation to

redress wrongs committed against the corporation, for which the directors refuse to
sue.
 It is a remedy designed by equity and has been the defense of minority shareholders
against abuses by the majority. [Villanueva]
Derivative Suit as Defined in Jurisprudence
It is a suit by a shareholder to enforce a corporate cause of action.

 It is a condition sine qua non that the corporation be impleaded as a party because not
only is the corporation an indispensable party, but it is also the present rule that it must
be served with process.
 The judgment must be made binding upon the corporation in order that the corporation
may get the benefit of the suit and may not bring subsequent suit against the same
defendants for the same cause of action. [Chua v. C.A., G.R. No. 150793 (2004)]

It is a suit brought by one or more stockholders/members in the name and on behalf of the
corporation to redress wrongs committed against it, or protect/vindicate corporate rights
whenever the officials of the corporation refuse to sue, or the ones to be sued, or has control of
the corporation. [Sundiang and Aquino]

Business Judgment Rule

As a general rule, when a wrong is committed against a corporation, whether to bring the suit
or not primarily lies within the discretion and exercise of business judgment of the BOD.
 But where corporate directors are guilty of a breach of trust, not of mere error of
judgment or abuse of discretion, and inta- corporate remedy is futile or useless,
a shareholder may institute a derivative suit in behalf of himself and other
stockholders and for the benefit of the corporation,
  The purpose of the suit is to bring about a redress of the wrong inflicted directly
upon the corporation and indirectly upon the stockholders. [Bitong v. C.A., G.R. No.
123553 (1998)]

Parties to a Derivative Suit

In a derivative suit, the suing stockholder is merely a nominal party, while the corporation is the
real party in interest. Thus, the action must be brought for the benefit and in the name of the
corporation. [Villanueva]
The corporation is an unwilling co-plaintiff. [Rule 3 Section 10, Rules of Court]
 The corporation should be made a party to the suit, either as plaintiff or defendant, for
res judicata to apply.
 BUT the personal injury suffered by the stockholder cannot disqualify him from filing a
derivative suit in behalf of the corporation. It merely gives rise to an additional cause of
action for damages against the erring corporate officers. [Gochan v. Young, G.R. No.
131889 (2001)].

Proper Forum for Derivative Suits

The Regional Trial Courts exercise jurisdiction over derivative suits. [Sec. 5.2., Securities
Regulation Code]

Requisites of Derivative Actions

a) That the person instituting the action be a stockholder or member at the time the acts or
transactions subject of the action occurred and the time the action was filed;
b) That the stockholder or member exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies available under the AOI, by-laws, laws
or rules governing the corporation or partnership to obtain the relief he desires;
c) That there is no appraisal right available for the act(s) complained of;
d) That the suit is not a nuisance or harassment suit; [Rule 8, Interim Rules of Procedure for
Intra-Corporate Controversies]
e) The action brought by the stockholder/member must be “in the name of the corporation or
association”. [implied from 1st par. of Rule 8, Sec. 1 of the Interim Rules; see also Florete v. Florete,
G.R. No. 174909 (2016)]

The action brought by the shareholder or member must be in the name of the corporation or
association. [Villamor v. Umale, G.R. No. 172843 (2014)]

Requisites of a Derivative Suit according to Jurisprudence [SMC v. Kahn, G.R. No. 85339
(1989)]
1. The party bringing the suit should be a
shareholder as of the time of the act or transaction complained of, the number of his shares not
being material;
2. He has tried to exhaust intra-corporate remedies, i.e., has made a demand on the BOD
for the appropriate relief but the latter has failed or refused to heed his plea; and
 3. The cause of action actually devolves on the corporation, the wrongdoing or harm
having been, or being caused to the corporation and not to the particular stockholder
bringing the suit. [Lisam Enterprises, Inc., represented by Lolita A. Soriano and Lolita A.
Soriano v. Banco de Oro Unibank, Inc. et al., G.R. No. 143264 (2012)].

Note: The “wrong” contemplated in a derivative suit is one in which the injury alleged be
indirect as far as the stockholders are concerned and direct only insofar as the corporation is
concerned. [de Leon] The reliefs sought pertain to the corporation. [Symaco Trading Corp. v
Santos, G.R. No. 142474 (2005)]

Stockholder may commence a derivative suit “for mismanagement, waste or dissipation of

corporate asset because of a special injury to him for which he is otherwise without redress.
[Yu v. Yukayguan, G.R. No. 177549 (2009)]

Exhaustion of Administrative Remedies General Rule:

A derivative suit can only be filed when there has been a showing of exhaustion of intra-
corporate remedies.

Exception: But where corporate directors are the ones guilty of a breach of trust, and intra-
corporate remedy is futile or useless, shareholders may institute a derivative suit for the benefit
of the corporation without having to exhaust intra-corporate remedies in order to bring about a
redress of the wrong inflicted directly upon the corporation and indirectly upon the
stockholders. [Villanueva]

5.) Intra-corporate disputes (individual vs. representative vs.

derivative suits)

INTRA-CORPORATE DISPUTE

JURISDICTIONS
On Jurisdiction of RTC in Intra-Corporate Disputes:
Section 5 of the Securities Regulation Code transferred the jurisdiction of the (SEC) over intra-
corporate disputes to RTCs designated by the Supreme Court as commercial courts. The
existence of an intra-corporate dispute must be clearly alleged in the complaint.

While the SEC has the authority to dissolve a corporation, it does not have the authority to
settle disputes arising from its liquidation. A commercial court is in the best position to convene
all stakeholders, including creditors, to ascertain their claims and determine their preferences
[Consuelo Metals Corporation v. Planters Development Bank G.R. No. 152580 (2008)].

Authority of the Securities and Exchange Commission (Sec. 179)

1. Exercise supervision and jurisdiction over all corporations and persons acting on their behalf,
except as otherwise provided under this Code;
2. Pursuant to Presidential Decree No. 902-A, retain jurisdiction over pending cases involving
intra-corporate disputes submitted for final resolution. The Commission shall retain jurisdiction
over pending suspension of payment/rehabilitation cases filed as of 30 June 2000 until finally
disposed;

SEC. 179. Powers, Functions, and Jurisdiction of the Commission. –

The Commission shall have the power and authority to:
(a) Exercise supervision and jurisdiction over all corporations and persons acting on their behalf,
except as otherwise provided under this Code;
(b) Pursuant to Presidential Decree No. 902-A, retain jurisdiction over pending cases involving
intracorporate disputes submitted for final resolution. The Commission shall retain jurisdiction
over pending suspension of payment/rehabilitation cases filed as of 30 June 2000 until finally
disposed;
(c) Impose sanctions for the violation of this Code, its implementing rules and orders of the
Commission;
(d) Promote corporate governance and the protection of minority investors, through, among
others, the issuance of rules and regulations consistent with international best practices;
(e) Issue opinions to clarify the application of laws, rules, and regulations;
(f) Issue cease and desist orders ex parte to prevent imminent fraud or injury to the public;
(g) Hold corporations in direct and indirect contempt;
(h) Issue subpoena duces tecum and summon witnesses to appear in proceedings before the
Commission;
(i) In appropriate cases, order the examination, search and seizure of documents, papers, files
and records, and books of accounts of any entity or person under investigation as may be
necessary for the proper disposition of the cases, subject to the provisions of existing laws;
(j) Suspend or revoke the certificate of incorporation after proper notice and hearing;
(k) Dissolve or impose sanctions on corporations, upon final court order, for committing, aiding
in the commission of, or in any manner furthering securities violations, smuggling, tax evasion,
money laundering, graft and corrupt practices, or other fraudulent or illegal acts;
(l) Issue writs of execution and attachment to enforce payment of fees, administrative fines,
and other dues collectible under this Code;
(m) Prescribe the number of independent directors and the minimum criteria in determining
the independence of a director;
(n) Impose or recommend new modes by which a stockholder, member, director, or trustee
may attend meetings or cast their votes, as technology may allow, taking into account the
company’s scale, number of shareholders or members, structure, and other factors consistent
with the basic right of corporate suffrage;
(o) Formulate and enforce standards, guidelines, policies, rules and regulations to carry out the
provisions of this Code; and
(p) Exercise such other powers provided by law or those which may be necessary or incidental
to carrying out the powers expressly granted to the Commission.
In imposing penalties and additional monitoring and supervision requirements, the Commission
shall take into consideration the size, nature of the business, and capacity of the corporation.
No court below the Court of Appeals shall have jurisdiction to issue a restraining order,
preliminary injunction, or preliminary mandatory injunction in any case, dispute, or controversy
that directly or indirectly interferes with the exercise of the powers, duties and responsibilities
of the Commission that falls exclusively within its jurisdiction.

F. Capital structure

a. Number and Qualification of Incorporators

Number: Not more than fifteen [Sec. 10]
 The Revised Corporation Code removed the prescribed minimum number of incorporators.
Previously, the incorporators must be no less than five except for special corporations.
[Herbosa, 2019]
 A corporation with a single stockholder is considered a One Person Corporation

Qualifications
1. Any person, natural or juridical, may organize a corporation [Sec. 10]
 Juridical entities (partnership, association
or corporation, singly or jointly with others) are now permitted to be incorporators, and not
merely initial subscribers under the Old Code.
 The following are NOT allowed to organize as a corporation, except as provided under special
laws:
a. Natural persons who are licensed to practice a profession
b. Partnerships or associations organized for the purpose of practicing a profession
2. Natural persons must be of legal age
3. Each incorporator must subscribe to at least one share of the capital stock

Note: The RCC removed the Philippine residency requirement for the majority of the
incorporators.

b. Subscription Requirements
No minimum capital requirement
Under the Old Corporation Code (CC), at least 25% of the authorized capital stock as stated in
the AOI must be subscribed at the time of incorporation, and at least 25% of the total
subscription must be paid upon subscription [Sec 13, CC].

Section 13 has been removed in the Revised Corporation Code, thus removing such minimum
capital requirements [Sec 12]. However, the increase in capital remains subject to the 25%
subscription and 25% payment of subscription rule [Sec. 37].

Subscription Agreements
Any contract for the acquisition of unissued stock in an existing corporation or a corporation
still to be formed shall be deemed a subscription contract. This is notwithstanding the fact that
the parties may refer to it as a purchase or some other contract. [Sec. 59]

Nature of Subscription Contracts

A subscription contract is indivisible. Consequently, where stocks were subscribed and part of
the subscription contract price was not paid, the whole subscription shall be considered
delinquent, and not only the shares which correspond to the amount not paid.

Nevertheless, holders of subscribed shares not fully paid, which are not delinquent, shall have
all the rights of a stockholder. [Sec. 71]
 SEC has opined that the entire subscription, although not yet fully paid, may be
transferred to a single transferee, who as a result of the transfer must assume the
unpaid balance. [SEC Opinion, 9 Oct. 1995]
 It is necessary, however, to secure the consent of the corporation because such transfer
contemplates a novation which under Art. 1293 (NCC) cannot be made without consent
of the creditor.

Characteristics
There can be a subscription only with reference to unissued shares of the Authorized Capital
Stock (ACS), in the following cases:
1. The original issuance of the ACS at the time of incorporation.
2. The opening, during the life of the corporation, of the portion of the original ACS previously
unissued; or
3. The increase in ACS achieved through a formal amendment of the Articles and registration
thereof with the SEC [Villanueva]

Status as Shareholder
One may become a stockholder in a corporation in either of two ways:
1. By SUBSCRIPTION to shares before or after incorporation
 becomes a stockholder upon acceptance of the corporation of his offer to subscribe
whether the consideration is fully paid or not
2. By acquisition of already issued shares
 from an existing stockholder
 purchase of TREASURY SHARES

Types of Subscription Contracts

1. Pre-incorporation subscription - It is a subscription for shares of stock of a corporation still to
be formed.
2. Post-incorporation subscription - Entered into after incorporation. [Sundiang Sr. & Aquino,
2009]

Rules on Pre-Incorporation Subscription General Rule:

A pre-incorporation subscription is IRREVOCABLE:
i. For a period of at least 6 months from the date of subscription;
(1) All of the other subscribers consent to the revocation, or
(2) The incorporation fails to materialize within 6 months or within a longer period as may be
stipulated in the contract of subscription

ii. After the submission of the Articles of Incorporation to the SEC. [Sec. 60]

Interest on Unpaid Subscription

General Rule: A stockholder is NOT liable to pay interest on his unpaid subscription. He is not
considered a corporate debtor for the unpaid amount of his subscription. [Herbosa, 2019]

Exception: If expressly stipulated in the subscription contract. [Sec 65]

Corporate Term

Perpetual existence

General Rule: The Revised Corporation Code provides that a corporation shall have perpetual
existence. The AOIs of existing corporations shall be deemed amended to reflect their perpetual
term.

Exception: The AOIs of corporations created under the effectivity of this Code provide for a
specific period. [Sec 11]
A corporation already existing upon effectivity of the RCC may opt out of the rule on perpetual
existence by:
i. Obtaining the vote of its stockholders representing majority of the Outstanding Capital
Stock, without prejudice to the appraisal right of dissenting stockholders
ii. Notifying the Commission that it elects to retain its specific corporate term, as provided
in its AOI. [Herbosa, 2019]

It is presumed that shareholders, when they incorporated, assented to the perpetual character
of their contract. Their corporate relations will only end upon agreement between or among
the prescribed number of shareholders or involuntarily upon the court’s or the SEC’s
determination.

Extending or shortening the corporate term General Rule: If a corporation wishes to extend its
corporate term, it may amend its AOI at least 3 years prior to the expiration of its term.
Previously, such change should be made at least 5 years prior to the expiration. [Sec. 11]

Exception: When there exists justifiable reasons for an earlier extension, to be determined by
the SEC.
Requisites: A private corporation may extend or shorten its term as stated in the articles of
incorporation when –
1. Approved by a majority vote of the board of directors or trustees, and
2. Ratified at a meeting by the stockholders or members representing at least two-thirds
(2/3) of the outstanding capital stock or of its members

Note: In case of extension of corporate term, a dissenting stockholder may exercise the right of
appraisal [Sec. 36]

Revival of Corporate Existence

Corporations with an expired term upon the effectivity of the RCC, may apply with the SEC for
revival of its corporate existence.

Upon approval by the SEC, it will then issue a certificate of revival giving it perpetual existence,
with all its rights and privileges, and subject to all its duties, debts and liabilities prior to revival,
unless it requests for a limited term. [Sec. 11]

This benefit does not extend to corporations whose dissolution was decreed by the SEC or the
courts.

Should the controlling stockholders or members wish to file the application, they must
represent the prescribed number of stockholders or members the application for voluntary
dissolution (i.e. at least 2/3 of OCS/membership). Dissenting stockholders may not exercise
their appraisal right. [Herbosa, 2019]

1. Shares of stock

a) Nature of shares of stock

Nature of Shares of Stock

Shares of stock are units into which the capital stock is divided. A share of stock represents
interest of the holder thereof to participate in the management of the corporation, to share
proportionally in the profits of the business and, upon liquidation, to obtain an aliquot part of
corporate assets after all corporate debts have been paid. [Campos]

b) Consideration for shares of stock

Stocks shall not be issued for a consideration less than the par or issued price thereof.
Consideration for the issuance of stock may be:
(a) Actual cash paid to the corporation;
(b) Property, tangible or intangible, which must be:
 i. Actually received by the corporation; and
ii. Necessary or convenient for its use and lawful purposes
iii. At a fair valuation equal to the par or issued value of the stockissued;
(c) Labor performed for or services actually rendered to the corporation;
(d) Previously incurred indebtedness of the corporation;
(e)  Amounts transferred from unrestricted retained earnings to stated capital;
(f)  Outstanding shares exchanged for stocks in the event of reclassification or conversion; (g)
Shares of stock in another corporation; and/or
(h)  Other generally accepted form of consideration. [Sec. 61]

Invalid Consideration

The following cannot be exchanged for the issuance of shares of stock: [Sec. 61]
(1) Promissory notes
(2) Future service
In case a subscription contract contemplates unlawful consideration exchanged for shares of
stock:
 The subscription contract would be valid and binding on both the corporation and
subscriber
 But the provision on such unlawful consideration is deemed void, such that the
subscription agreement would be construed to be for cash, and the unpaid amount
treated as part of subscription receivables

It would not be in consonance with the trust fund doctrine to consider the subscription
contract void. [Villanueva]

Valuation of Consideration
Where the consideration is other than actual cash, or consists of intangible property, the
valuation thereof shall initially be determined by the stockholders or the board of directors,
subject to the approval of the Commission. [Sec. 61]

c) Watered stock

i. Definition
Watered Stocks — Shares issued as fully paid when in truth no consideration is paid, or the
consideration received is known to be less than the par value or issued value of the shares.
[Sec. 64]
Watered stock are shares issued as fully paid when in truth —
(1) No consideration is paid in any form; or
(2)The consideration received is known to be
less than the par value or issued value of the shares [Sec. 64, RCC].

Watered stocks can either be par or no par value shares.

A watered stock is a stock issued in exchange for:
(a) A consideration less than its par value or issued price; and
(b)A non-cash consideration valued in excess of its fair value. [Herbosa, 2019]
Scope
Watered stocks include the following:
Issued without consideration (bonus share) Issued as fully paid when the corporation has
received less sum of money than its par or issued value (discounted share)

Issued for consideration other than actual cash (i.e., property or services), the fair valuation of
which is less than its par or issued value

Issue stock dividend when there are no sufficient retained earnings or surplus profit to justify it.
Note: Subsequent increase in the value of the property used in paying the stock does not do
away with the watered stocks, nor cure the defect in issuance. The existence of watered stocks
is determined at the time of issuance of the stock.

Rationale Behind Prohibition

Stock watering is prohibited because:

 Corporation is deprived of needed capital and the opportunity to market its securities to
its own advantage
 Existing and future stockholders who are also injured by the dilution of their
proportionate interests in the corporation
 Present and future creditors who are injured as the corporation is deprived of the assets
or capital and reduces the value of the corporate assets, which stand as a substitute for
the stockholders’ personal liability to them
 Persons who deal with it or purchase its securities who are deceived because stock
watering is invariable accompanied with misleading corporate accounts and financial
statements

ii. Liability of directors for watered stocks

A director or officer of a corporation who:
1)  consents to the issuance of stocks for a consideration less than its par or issued
value;
2)  consents to the issuance of stocks for a consideration other than cash, valued in
excess of its fair value
3)  having knowledge of the insufficient consideration, does not file a written objection
with the corporate secretary shall be solidarily liable with the stockholder concerned to
the corporation and its creditors for the difference in value [Sec. 64, RCC].

iii. Trust fund doctrine for liability for watered stocks

Trust Fund Doctrine

It is established doctrine that subscription to the capital of a corporation constitute a fund to
which creditors have a right to look for satisfaction of their claims, and that the assignee in
insolvency can maintain an action upon any unpaid stock subscription in order to realize assets
for the payment of its debts [Philippine Trust Corp. v. Rivera, G.R. No. L- 19761 (1923), citing
Velasco v. Poizat, (1918)]

A corporation has no power to release an original subscriber to its capital stock from the
obligation of paying for his shares, without a valuable consideration for such release
 As against creditors. a reduction of the capital stock can take place only in the manner
and under the conditions prescribed by the statute or the charter or the articles of
incorporation.
 Moreover, strict compliance with the statutory regulations is necessary [Philippine Trust
Corp. v. Rivera, G.R. No. L-19761 (1923)].

Trust Fund Doctrine for Liability for Watered Stocks

Where the corporation issues watered stock
and thereby assumes an ostensible capitalization in excess of its real assets, the transaction
necessarily involves —
 The misleading of subsequent creditors; and
 A constructive fraud upon creditors, whether done with that purpose actually in mind or
not

Hence, it is held that recovery may be had by a creditor in such case, even though the
corporation itself has no cause of action against the stockholders.

 Some of the earlier decisions put the right of recovery in such a case upon the so-called
“trust fund doctrine.”
 The creditors’ right of action to compel the making good of the representation as to the
corporation’s capital is based on fraud, and the trust fund doctrine is only another way
of expressing the same underlying idea [DE LEON].

Despite the view of foreign authors that the fraud theory is the prevailing view, it would seem
that in the Philippine jurisdiction, the trust fund doctrine on watered stock prevails.

d) Situs of the shares of stock

General rule: The situs of shares of stock is the country where the corporation is domiciled
[Wells Fargo Bank v. CIR, G.R. No. L-46720, June 28, 1940].

It is not the domicile of the owner of a certificate but the domicile of the corporation which is
decisive [Chua Guan v. Samahang Magsasaka, Inc., 1935].
The residence of the corporation is the place where the principal office of the corporation is
located as stated in its AOI, even though the corporation has closed its office therein and
relocated to another place [Hyatt Elevators and Escalators Corp. v. Goldstar Elevator Phils., Inc.,
G.R. No. 161026, 2005]

Exception: In property taxation – the situs of intangible property, such as shares of stocks, is at
the domicile or residence of the owner.

Exception to the Exception:

1. When a nonresident alien has shares of stock in a domestic corporation, then the situs will be
in the Philippines; and
2. For purposes of the estate tax, the gross estate of a resident decedent, whether citizen or
alien, or a citizen decedent, whether resident or nonresident, includes his intangible personal
property wherever situated [De Leon].

e) Classes of shares of stock

Classes of Shares of Stock

The shares in stock corporations may be divided into classes or series of shares, or both. The
rights, privileges, or restrictions, and the stated par value of the class or series of shares must
be indicated in the Articles of Incorporation. [Sec. 6]

General Rule: No share may be deprived of voting rights [Sec. 6]

Exceptions
 Preferred non-voting shares
 Redeemable shares,
 Provided by the Code (e.g. Treasury shares)
There shall always be a class/series of shares which have COMPLETE VOTING RIGHTS. [Sec. 6]

2. Certificate of stock
A certificate of stock is —
 An instrument formally issued by the corporation with the intention that the same constitute the best
evidence of the rights and status of a shareholder
  An instrument signed by the proper corporate officer acknowledging that the person named
in the document is the owner of a designated number of shares of stock. It is prima facie
evidence that the holder is a shareholder of a corporation. (Lao v. Lao, 567 SCRA 558, 2008)
  The paper representative or tangible evidence of the stock itself and of the various interests
therein.
  It is merely evidence of the holder’s interest and status in the corporation, his ownership of
the share represented thereby.
  It expresses the contract between the corporation and the stockholder [Makati Sports Club v.
Cheng, G.R. No. 178523 (2010)].

A certificate of stock is NOT —

  A condition precedent to the acquisition of of the rights and status of a shareholder
  A stock in the corporation
  The equivalent of ownership of the share it represents
  Essential to the existence of a share of
stock or the nature of the relation of shareholder to the corporation [Makati Sports Club v.
Cheng, G.R. No. 178523 (2010)].

a) Nature of the certificate

Nature of the certificate

Shares of stock so issued are personal property and may be transferred by delivery of the certificate or
certificates indorsed by the owner, his attorney-in-fact, or any other person legally authorized to make
the transfer. [Sec. 62, RCC]

b) Uncertificated shares

An uncertificated share is a subscription duly recorded in the corporate books, but has no
corresponding certificate of stock yet issued.

Uncertificated shares or securities are those evidenced by electronic or similar records [Sec.
3.14, Securities Regulation Code]

Added provision in Sec. 62 of the Revised Corporation Code:

The Commission may require corporations whose securities are traded in trading markets and,
which can reasonably demonstrate their capability to do so, to issue their securities or shares of
stocks in uncertificated or scripless form in accordance with the rules of the Commission.

Notwithstanding Sec. 62, RCC (Certificate of Stock and Transfer of Shares), a corporation
whose securities are registered pursuant to the SRC or listed on securities exchange may:
 If so resolved by the BOD and agreed by a shareholder, investor or securities
intermediary, issue shares to, or record the transfer of some or all its shares into the
name of such shareholders, investors or, securities intermediary in the form of
uncertified securities.
The use of uncertified securities in these circumstances shall be without prejudice tothe rights
of the securities intermediary subsequently to require the corporation to issue a certificate in
respect of any shares recorded in its name; and
If so provided in its articles of incorporation and by-laws, issue all of the shares of a particular
class in the form of uncertificated securities and subject to a condition that investors may not
require the corporation to issue a certificate in respect of any shares recorded in their name.
[Sec. 43, Securities Regulation Code]

TRANSFER OF UNCERTIFICATED SECURITIES, HOW MADE

Valid as between parties - validly made and consummated by appropriate book-entries in the
securities intermediaries, or in the stock and transfer book held by the corporation or the stock
transfer agent.

A transfer made pursuant to the foregoing has the effect of delivery of a security in bearer form
or duly indorsed in blank representing the amount of security or right transferred, including the
unrestricted negotiability of that security by reason of such delivery.

Valid as to corporation – when the transferis recorded in the books of the corporation so as to
show the names of the parties to the transfer and the number of shares transferred [Sec. 43.3,
Securities Regulation Code].

c) Negotiability; requirements for valid transfer of

stocks

Theory of Quasi-Negotiability
Although a stock certificate is sometimes regarded as quasi-negotiable, in the sense that it may
be transferred by delivery, it is well- settled that the instrument is NON- NEGOTIABLE, because
—
The holder thereof takes it without prejudice to such rights or defenses as the registered owner
or creditor may have under the law Except insofar as such rights or defenses are subject to the
limitations imposed by the principles governing estoppels. [Republic v. Sandiganbayan, G.R.
Nos. 107789 & 147214, April 30, 2003].

Certificates of stock are not negotiable instruments. Consequently —

A transferee under a forged assignment acquires no title which can be asserted against the true
owner, unless the latter’s negligence has been such as to create an estoppel against him.
If the owner of the certificate has endorsed it in blank, and it is stolen from him, no title is
acquired by on innocent purchaser for value [De los Santos v. Republic, G.R. No. L-4818 (1955)].

Street Certificate
When a stock certificate is endorsed in blank by the owner thereof, it constitutes what is
termed as street certificate.

Upon its face, the holder is entitled to demand its transfer into his name from the issuing
corporation.
Such certificate is deemed quasi-negotiable,
and as such the transferee thereof is justified in believing that it belongs to the holder and
transferor. [Santamaria v. Hongkong and Shanghai Banking Corporation, 89 Phil. 780, 788-789
(1951)].
d) Issuance

(a) Full payment

General Rule: No certificate of stock shall be issued to a subscriber until the full amount of his
subscription together with interest and expenses (in case of delinquent shares), if any is due,
has been paid [Sec. 63, RCC].

Exception: Where it was the practice of the corporation since its inception to issue certificates
of stock to its individual stockholders for unpaid shares of stock and to give full voting power to
shares fully paid [Baltazar v. Lingayen Gulf Electric Power Company, G.R. No. L-16236 (1965)].

(b) Payment pro-rata

The entire subscription must be paid first before the certificates of stock can be issued. Partial
payments are to be applied pro rata to each share of stock subscribed [Nava v Peers Mktg.
Corp., G.R. No. L-28120 (1976)].

e) Lost or destroyed certificates

Procedure for re-issuance in case of loss, stolen or destroyed certificates:

1) Filing of an affidavit of loss with the corporation by the registered owner.
2) Verifying the affidavit and other information and evidence with the books of the corporation
by the corporation.
3) Publishing by the corporation of a notice of loss in a newspaper of general circulation
published —
4) In the place, where the corporation has its principal office;
5) Once a week for 3 consecutive weeks;
6) At the expense of the owner of the certificate of stock.
7) Cancellation of the certificate in the books of the corporation and issuance of new
certificates, after the expiration of 1 year from the date of the last publication and there is no
contest. The right to make such contest shall be barred after the expiration of the one-year
period.
8) Issuance by the corporation of new certificates before 1 year period if the registered owner
files a bond and there is no pending contest regarding the ownership of said certificates. [Sec.
72, RCC]
Note: Except in cases of fraud, bad faith, or negligence on the part of the corporation and its
officers, no action may be brought against the corporation which shall have issued certificates
of stock in lieu of those lost, stolen or destroyed pursuant to the above procedure

3. Disposition and encumbrance of shares

a) Sale of shares

a.) Sale of partially paid shares

No shares of stock against which the corporation holds any unpaid claim shall be transferable in
the books of the corporation. [Sec. 62]

A corporation may refuse to acknowledge and register a sale or assignment of shares which are
not fully paid, and may continue to hold the original subscriber liable on the payment ofthe
subscription.
 However, the above principle in Section 62 cannot be utilized by the corporation to
refuse to recognize ownership over pledged shares purchased at public auction.
 The term “unpaid claims” refers to “any unpaid claims arising from unpaid subscription,
and not to any indebtedness which a subscriber or stockholder may owe the
corporation arising from any other transactions. [China Banking Corp. v. CA, G.R. No.
117604 (1997)]

b.) Sale of a portion of shares not fully paid

The SEC has opined on several occasions that a stockholder who has not paid the full amount of
his subscription cannot transfer part of his subscription in view of the indivisible nature of a
subscription contract.

Rationale Behind Prohibition

The reason behind the principle of disallowing transfer of not fully paid subscription to several
transferee is that it would be difficult to determine:
(1) Whether or not the partial payments made should be applied as —
 Full payment for the corresponding number of shares which can only be covered by
such payment; or
 Proportional payment to each and all of the entire number of subscribed shares
(2) The unpaid balance to be assumed by each transferee [Villanueva].

c.) Sale of all of shares not fully paid

The SEC has opined that the entire subscription, although not yet fully paid, may be transferred
to a single transferee, who as a result of the transfer must assume theunpaid balance.
It is necessary, however, to secure the consent of the corporation, since the transfer of
subscription rights and obligations contemplates a novation of contract which under Article
1293 of the Civil Code cannot be made without the consent if the creditor [Villanueva].
d.) Sale of fully paid shares
Shares of stock so issued are personal property and may be transferred by the delivery of the
stock certificate or certificates, indorsed by —
(1) The owner; or
(2) The owner’s attorney-in-fact; or
(3) Other person legally authorized to make the transfer. [Sec. 62]

b) Allowable restrictions on the sale of shares

Allowable restrictions on the sale of shares

General Rule: Free Transferability of Shares Shares of stock so issued are personal property and
may be transferred [Sec. 62].

Exception: In CLOSE corporations, restrictions on the right to transfer shares may be provided
in the Articles of Incorporation, by- laws and certificates [Sec. 97].

c) Requisites of a valid transfer

Same as requirements for valid transfer of stocks.

No transfer shall be valid, except as between the parties, until the transfer is recorded in the
books of the corporation showing:
i. The names of the parties to the transaction
ii. The date of the transfer,
iii. The number of the certificate or certificates
and
iv. The number of shares transferred [Sec. 62].

The failure to register a sale or disposition of shares of stock in the books of the corporation
would render the same invalid to all persons, including the attaching creditors of the seller.
[Uson v. Diosomito, 61 Phil. 535 (1935).]

See iii. Negotiability; requirements for valid transfer of stocks under a. Certificate of stock

d) Involuntary dealings

Right to Encumber Shares

Shares of stock are personal property and the owner has an inherent right, as incident of
ownership to transfer the same at will, which would include the power to encumber the shares.
The right of a stockholder to pledge, mortgage or otherwise encumber his shares is recognized
under Sec. 54 of the RCC which regulates the manner of voting on pledged or mortgaged
shares.

Right to Vote of Secured Creditors and Administrators

General Rule: In case a stockholder grants security interest in his or her shares in stock
corporations, the stockholder-grantor shall have the right to attend and vote at meetings of
stockholders

Exception: Unless the secured creditor is expressly given by the stockholder-grantor such right
in writing which is recorded in the appropriate corporate books. [Sec. 54]

Executors, administrators, receivers, and other legal representatives duly appointed by the
court may attend and vote in behalf of the stockholders or members without need of any
written proxy. [Sec. 54]

Attachment, Execution and Other Involuntary Dealings on Shares Attachments of shares of

stock are not included in the term “transfer” as provided in [Section 62, RCC]. Both the Revised
Rules of Court and [Revised Corporation Code] do not require annotation in the corporation’s
STB for the attachment of shares to be valid and binding on the corporation and third parties.
[Chemphil Export & Import Corp. v. CA, 251 SCRA 257 (1995).]

A bona fide transfer of shares, not registered in the corporate books, is not valid as against a
subsequent lawful attachment of said shares, regardless of whether the attaching creditor had
actual notice of said transfer or not. All transfers not so entered on the books of the
corporation are absolutely void; not because they are without notice or fraudulent in law or
fact, but because they are made so void by statute. [Garcia v. Jomouad, 323 SCRA 424 (2000).]

Bias Against Voluntary Sales

By the strict application of Sec. 63 of the Corporation Code [now Sec. 62, RCC] to cover only the
sale, assignment or absolute disposition of shares of stock, the SC has placed a bias against
voluntary sales, assignments or dispositions of shares of stock vis-à-vis pledges, mortgages,
attachment or levy thereof.
 To be valid and binding on third parties, the voluntary sale, assignment or disposition of
shares requires the essential element of registration in the stock and transfer book;
 Otherwise the sale, assignment or disposition is considered void as to third parties, even
when they have actual notice.

In contrast, when it comes to pledge, mortgage, encumbrance, attachment or levy of shares,

registration thereof in the stock and transfer book is not essential either for validity or as a
species of notifying third parties. [Villanueva].
G. Dissolution and liquidation

1. Modes of dissolution

Based on jurisprudence, the methods of effecting dissolution as prescribed by law are exclusive,
and a corporation cannot be dissolved except in the manner prescribed by law [De Leon].

a. Voluntary and involuntary dissolution

I. VOLUNTARY DISSOLUTION

(a) Where no creditors are affected [Sec. 134]

This type of dissolution is initiated by the corporation. It does not prejudice, or is not consented
by creditors.

Procedure
1. Notice of the meeting should be given to the stockholders or members by personal
delivery, registered mail, or by any means authorized under its by- laws at least 20 days
prior to the meeting.

2. The notice of meeting should also be published once prior to the meeting
a) Notice shall contain the time, place and object of the meeting
 b) in a newspaper published in the place where the principal office of said
corporation is located, or if no newspaper is published in such place, then in a
newspaper of general circulation in the Philippines.

3. The resolution to dissolve must be approved by the majority of the BOD/T and approved by
at least majority of the Outstanding Capital Stock or majority of the members.
a. In the old Corporation Code, only a vote of majority of the BOD/T and 2/3 of the
OCS/members was required.

4. The corporation must submit the following to the SEC:

a)  A verified request for dissolution stating the following:
o  the reason for the dissolution,
o the form, manner, and time when the notices were given
o names of the stockholders and directors or members and trustees who approved
of the dissolution
o  the date, place and time of the meeting in which the vote was made,
o date of publication
b)  A copy of the resolution certified by the majority of the BOD/T and countersigned by
the secretary.
c)  Proof of publication
d)  Favorable recommendation from the appropriate regulatory agency, when
necessary
e)  The signed and countersigned copy will be filed with the SEC and the latter will issue
the certificate of dissolution.

Withdrawal of the request

The corporation may withdraw its verified request for dissolution within 15 days from receipt
by the SEC. Otherwise, the SEC shall approve the request and issue the certificate of dissolution.

Effectivity of the dissolution

Dissolution shall take effect upon the issuance of the certificate of dissolution by the SEC

Favorable recommendation by the appropriate agency required

No application of dissolution will be approved without the favorable recommendation of the
appropriate government agency for:
1. banks,
2. banking and quasi-banking institutions,
3. pre-need, insurance and trust companies, 4. non-stock savings and loans associations
(NSSLA),
5. pawnshops, and
6. other financial intermediaries
(b) Where creditors are affected [Sec. 135]

This covers a case where the corporation petitions for its dissolution which may prejudice the
rights of creditors, or are not consented by all of them. Here, the corporation is not under
financial distress or in a state of insolvency. In those cases, the corporation must file a petition
for rehabilitation or liquidation in court. [Herbosa, 2019]

1. A petition shall be filed with the SEC containing the following:

(1)  signature by a majority of its BOD/T or
other officers having management of
its affairs;
(2)  verified by its president, or secretary or
one of its director or trustees;
(3)  all claims and demands against the
corporation; and
(4)  resolved upon by affirmative vote of the
stockholders representing at least 2/3 of the Outstanding Capital Stock or 2/3 of members;

2. The corporation must submit the following to the SEC:

(1)  The petition for dissolution stating the following:
a) the reason for the dissolution;
b) the form, manner, and time
when the notices were given;
c) the date, place and time of the meeting in which the vote was
made
(2)  A copy of the resolution authorizing
the dissolution, certified by the majority of the BOD/T and countersigned by the secretary.
(3)  A list of all its creditors

3. If the petition is sufficient in form and substance, the SEC shall issue an order fixing the date
on or before which objections to the petition may be filed. Such date shall not be less than 30
days nor more than 60 days after the entry of the order.

4. A copy of the order shall be published at least once a week for 3 consecutive weeks in a
newspaper of general circulation published in the municipality or city of the corporation’s
principal office. If none, in a news paper of general circulation in the Philippines. A similar copy
shall be posted for 3 consecutive weeks in 3 public places in such municipality or city.

5. A hearing of any issue or objections raised shall be conducted 5 days after the lapse of the
expiration of the time to file objections.

6. If the objections are insufficient or the material facts in the petition are true, judgment shall
be rendered dissolving the corporation and directing the disposition of assets. The judgment
may include appointment of a receiver.
a) As long as 2/3 vote is obtained, no member/ stockholder can prevent such dissolution
unless the majority stockholders acted in bad faith. The latter may be held liable for
damages [Campos].
b) Even where there are creditors of the corporation who may be prejudiced by the
dissolution, it is still possible for the corporation to terminate its existence prior to the
expiration of its term, provided said creditors are given the opportunity to present their
claims and objections so that their interests may be protected [Campos].

(c) By shortening of corporate term [Sec. 136]

A voluntary dissolution may be effected by amending the AOI to shorten the corporate
term under Sec 16.

Ipso Facto Dissolution

Upon approval of the expired shortened term, the corporation shall be deemed dissolved
without any further proceedings. The corporation shall be deemed dissolved without any
further proceedings, taking effect on the day following the last day of the corporate term.

(d) Withdrawal 137] of dissolution [Sec.

A withdrawal of the request for dissolution shall be:

(1)  Made in writing;

(2)  Duly verified by any incorporator, director, trustee, shareholder, or member;

(3)  Signed by the same number of incorporators, directors, trustees, shareholders, or

members necessary to request for dissolution as set forth in Sec. 133-136;

(4)  Submitted no later than fifteen (15) days from receipt by the Commission of the
request for dissolution.

A withdrawal of the petition for dissolution shall be in the form of a motion and similar in
substance to a withdrawal of request for dissolution but shall be verified and filed prior to
publication of the order setting the deadline for filing objections to the petition.

SEC Action

Upon receipt of a withdrawal of request for dissolution, the Commission shall withhold
action on the request for dissolution and shall, after investigation:

(a)  Make a pronouncement that the request for dissolution is deemed withdrawn;
 (b)  Direct a joint meeting of the board of directors or trustees and the stockholders or
members for the purpose of ascertaining whether to proceed with dissolution; or

(c)  Issue such other orders as it may deem appropriate.

II. INVOLUNTARY DISSOLUTION

BY EXPIRATION OF CORPORATE TERM

The RCC provides that a corporation shall have perpetual existence. The AOIs ofexisting
corporations shall be deemed amended to reflect their perpetual term. The exception is when
the AOIs of corporations created under the effectivity of this Code provide for a specific period
[Sec 11].

An existing corporation may opt out of the rule on perpetual existence by notifying the
Commission, provided it was approved by shareholders, and without prejudice to the appraisal
right of dissenting stockholders. [Herbosa, 2019]

When such term has expired, a petition for revival of corporate existence may be filed. [Divina]

LEGISLATIVE DISSOLUTION

The inherent power of Congress to make laws carries with it the power to amend or repeal
them. Involuntary corporate dissolution may be effected through the amendment or repeal of
the Revised Corporation Code [implied from Sec. 184, DE LEON].

The limitations on the power to dissolve corporations by legislative enactment are as follows:
1. Under the Constitution, the amendment, alteration, or repeal of the corporate franchise of a
public utility shall be made only “when the common good sorequires”;

2. Under Sec. 84 of the Code, it is provided that: “No right or remedy in favor of or against any
corporation, its stockholders, members, directors, trustees, or officers, nor any liability incurred
by any such corporation, stockholders, members, directors, trustees, or officers, shall be
removed or impaired either by the subsequent dissolution of said corporation or by any
subsequent amendment or repeal of this Code or of any part thereof”;

3. While Congress may provide for the dissolution of a corporation, it cannot impair the
obligation of existing contracts between the corporation and third persons, or take away the
vested rights of its creditors. [De Leon]

Note: Thus, except for the expiration of its term, no dissolution can be effective without some
act of the State [Daguhoy Enterprises v. Ponce, G.R. No. L-6515 (1954)].
NON-USE OF CORPORATE CHARTER [Sec 21; Sec 138(a)]
If a corporation fails to formally organize and commence the transaction of its business or
construction of its works within 5 years, its certificate of incorporation shall be deemed
revoked, its corporate powers shall cease and the corporation shall be deemed dissolved [Sec.
21].

Dissolution in this case is automatic [Campos].

 Contrary view: Since there is a defense available to the corporation, that is, if its failure to
organize and commence its business is due to causes beyond the control of the corporation as
may be determined by the SEC, therefore, the dissolution is not automatic.

Formal organization includes not only the adoption of the by-laws but also the establishment of
the body which will administer the affairs of the corporation and exercise its powers

 By-laws should be adopted within one month of receipt of official notice of the issuance of the
certificate of incorporation, otherwise the certificate may be suspended or revoked [PD 902-A,
Sec. 6 (i)(5)].

CONTINUOUS INOPERATION OF CORPORATION [Sec 21; 138(b)]

If a corporation commenced its business but fails to continue operations after least 5
consecutive years, the corporation is first placed on delinquent status, after due notice and
hearing.
 The delinquent corporation is given 2 years to resume operations and comply with all
the requirements that the SEC shall prescribe.
 Otherwise, the SEC will prescribe its dissolution. The corporation may have the
revocation reconsidered. Otherwise, the
SEC may proceed to involuntary dissolution with notice and hearing.

Dissolution in this case is not automatic [Campos].

DISSOLUTION BY THE SEC ON GROUNDS UNDER THE CODE AND OTHER EXISTING LAWS
The Revised Corporation Code also introduced a number of changes on involuntary dissolution.
Sec. 138 codified the grounds that may lead to involuntary dissolution by the Commission motu
proprio or upon filing of a verified complaint by any interested party.

Grounds for dissolution [Sec 138]

1. (a)  Non-use of corporate charter;
2. (b)  Continuous inoperation of a corporation;
3. (c)  Upon receipt of a lawful court order dissolving the corporation;
4. (d)  Upon finding by final judgment that the corporation procured its incorporation
through fraud;
5. (e)  Upon finding by final judgment that the corporation:
(1) Was created for the purpose of committing, concealing or aiding the commission of
securities violations, smuggling, tax evasion, money laundering, or graft and corrupt practices;
 (2) Committed or aided in the commission of securities violations, smuggling, tax evasion, money
laundering, or graft and corrupt practices, and its stockholders knew; and

(3) Repeatedly and knowingly toleratedthe commission of graft and corrupt practices or other
fraudulent or illegal acts by its directors, trustees, officers, or employees.

Non-use of corporate charter and continuous inoperation

The grounds for dissolution under (a) and (b) as discussed above, will lead to thedissolution of
the corporation unless the corporation files a petition to set aside its delinquency status,and
the SEC grants it.

Upon receipt of a lawful court order dissolving the corporation

The ground under (c) may involve or arise from a quo warranto proceeding involving a de facto
corporation (Sec 19, RCC) or a liquidation proceeding involving an insolvent debtorunder FRIA
(infra).

Upon finding by final judgment that the corporation procured its incorporation through fraud

The ground under (d) constitutes cases where a corporation misrepresented its purpose of
incorporation, or when the incorporators used fictitious names, there was then fraud in the
procurement of the certificate.

Upon finding by final judgment that the corporation was created for an unlawful purpose

The ground under (e) is a new provision.Here, a corporation found by final judgment to have
been created for the purpose of committing, concealing, or aiding the commission of securities
violations, smuggling, tax evasion, money laundering or graft and corrupt practices, may be
subjected to involuntary dissolution by the SEC, motu proprio or upon filing of a verified
complaint by any interested party. In addition, the corporate assets after payment of its
liabilities shall be forfeited in favor of the government upon petition of the Commission with
the appropriate court.

Grounds under other existing laws

The grounds enumerated above are not exclusive. There are other grounds to dissolve the
corporation upon order of the SEC which may be found in other laws. For example, the SEC may
also suspend or revoke, after proper notice and hearing, the certificate of registration of private
corporations under any of the following grounds:
  Fraud in procuring its certificate of incorporation;
 Serious misrepresentation as to what the corporation can do or is doing to the great
prejudice of or damage to the general public;
 Refusal to comply or defiance of any lawful order of the SEC restraining commission of
acts which amount to a grave violation of its franchise;
  Failure to file bylaws
 Failure to file required reports in appropriate forms as determined by the SEC within the
prescribed period (PD No. 902-A, Sec 6(i)).

2. Methods of liquidation

4. Other Corporations
a) Close corporations
b) Non-stock corporations
c) Foreign corporations
a) What constitutes “doing business”
b) Necessity of a license to do business
c) Requisites for issuance of a license
d) Resident agent
e) Personality to sue and suability
d) One-person corporations
5. Mergers and consolidations
a) Concept
b) Effects and limitations