REVISED CORPORATION CODE

REVIEWER (2020)
NOTES IN CORPORATION LAW
I. GOVERNING LAW - RA 11232 or the
"Revised Corporation Code of the
Philippines"
A. Historical Background
❖ The old Corporation Code was
approved and became effective on May
1, 1980. It had been amended by RA
11232 or the REVISED CORPORATION
CODE OF THE PHILIPPINES.
❖ REVISED CORPORATION CODE OF THE
PHILIPPINES
✓ signed to law on February 14,
C.
2019
✓ became effective on February 28,
2019
B. Rationale for Enactment
MAIN THRUSTS IN PASSING THE REVISED
CORPORATION CODE
✓ The law promotes ease of doing
business, hence, the provisions, among
others, on one-person corporation, the
option of the corporation to have
perpetual existence and the elimination
of the minimum subscription
requirement upon incorporation.
✓ It also adopted best practices on good
corporate governance. For instance,
the RCC requires certain items to be
contained in the bylaws, minutes and
agenda of regular stockholders’ meetings
all aimed at fostering transparency.
✓ The RCC also afforded greater
protection to minority stockholders.
Thus, it expanded the list of books and
records required to be kept by the
corporation available for examination
and expanded the remedies available in
D.
case of violation of stockholders’ right of
inspection
Code, or the Dissolution of a Corporation.
✓ It also codified internationally-
accepted practices and norms on
conducting business. Allowing the right
to vote through electronic
communication and sending notices of
meeting electronically and provisions for
1
Highlights of the Revised Corporation Code (lecture) by
DEAN NILO T. DIVINA - UNIVERSITY OF SANTO TOMAS
1
Professor: Atty. Leonardo Nick Gumabun
arbitration mechanism to resolve
disputes within the corporation are good
examples.
✓ The RCC strengthened the powers of
the Securities and Exchange
Commission (hereafter “SEC”) to be able
to fully exercise its regulatory authority
over corporations. Specifically, it
enumerated enforcement provisions and
authorized the SEC to administer,
investigate and prosecute violation of the
RCC provisions.1
Applicability
Applicability of the Code.
❖ RCC does not amend existing provisions
of special laws governing the
registration, regulation, monitoring and
supervision of special corporations such
as banks, nonbank financial institutions
and insurance companies. (SEC. 183 RCC)
❖ Regulators such as the Bangko Sentral
ng Pilipinas and the Insurance
Commission shall exercise primary
authority over special corporations such
as banks, nonbank financial institutions,
and insurance companies under their
supervision and regulation.
Applicability to Existing Corporation
❖ A corporation lawfully existing and
doing business in the Philippines
affected by the new requirements of
this Code shall be given a period of not
more than two (2) years from the
effectivity of this Act within which to
comply. (SEC. 185 RCC)
Effect of Amendment or Repeal
Effect of Amendment or Repeal of This
- 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,
NOTES IN CORPORATION LAW
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. (SEC. 184
RCC)
E. Effectivity
RCC took effect on FEBRUARY 23, 2019.
II. NATURE OF CORPORATION
A. Definition - Sec. 2, RCC
Corporation
-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.
B. Four (4) Attributes
The 4 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.
4. It has the powers, attributes, and properties
expressly authorized by law or incidental to its
existence.
➢ Artificial Being
- It is a juridical person.
- It only exists because of a law creating
and recognizing it.
- It is not a natural person. It has no
physical manifestations.
➢ Creation of Law
- Its life flows from the law creating it. Its
birth requires an imprimatur, a positive
act by the State, either by general or
special law.
- It cannot be created by mere agreement
or consent between parties.
➢ Right of succession
- Any change in the persons composing
the corporation, or any change in its
ownership, will not affect the
corporation’s existence.
➢ Powers, attributes, and properties
expressly authorized by law or
incident to its existence
2
Professor: Atty. Leonardo Nick Gumabun
- A corporation has limited powers.
- A corporation cannot perform acts
foreign to its primary purpose.
REYNOSO VS COURT OF APPEALS
345 SCRA 335 [GR NO. 116124-25 NOVEMBER
23, 2000]
FACTS:
Sometime in early 1960s, the Commercial Credit
Corporation (CCC), a financing company and
investment firm, decided to organize franchise
companies indifferent parts of the country,
wherein it shall hold 30% equity. Employees of the
CCC were designated as resident managers of the
franchise companies. Petitioner Bibiano O.
Reynoso IV was designated as the resident
manager of the franchise in Quezon City, known as
the Commercial Credit Corporation of Quezon
City. CCC-QC entered into an exclusive agreement
management contract with CCC whereby the
latter was granted the management and full
control of the business activities of the former.
Under the contract, CCC-QC shall sell, discount
and/or assign its receivables to CCC. Subsequently,
however, this discounting arrangement was
discontinued pursuant to the so called DOSRI rule,
prohibiting the lending of funds by corporations to
its directors, officers, stockholders and other
persons with related interest therein. On account
of the new restrictions imposed by the Central
Bank policy by virtue of the DOSRI rule, CCC
decided to form CCC Equity Corporation, a wholly-
owned subsidiary, to which CCC transferred its
30% equity in CCC-QC, together with 2 seats in the
latter’s Board of Directors. A complaint for sum of
money with preliminary attachment was filed by
CCC-equity against petitioner and the latter was
also dismissed from employment to which the
lower court’s decision was rendered in favor of the
petitioner and the same has become final and
executory. CCC changed its name to General Credit
Corporation (GCC).
ISSUE: Whether or not the judgement in favor of
the petitioner may be executed against
respondent GCC.
HELD:
Yes. 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 incident to its
existence. It is an artificial being invested by law
with a personality separate and distinct from
NOTES IN CORPORATION LAW
those of the persons composing it as well as from
that of any other legal entity to which it may be
related. It was evolved to make possible the
aggregation and assembling of huge amounts of
capital upon which big business depends. It also
has the advantage of non-dependence on the lives
of those who compose it even as it enjoys certain
rights and conducts activities of natural persons.
Any piercing of the corporate veil has to be done
with caution. However, the court will not hesitate
to use its supervisory and adjudicative powers
where the corporate fiction is used as an unfair
device to achieve an inequitable result defraud
creditors, evade contracts and obligations, or to
shield it from the effects of a court decision. The
corporate fiction has to be disregarded when
necessary in the interest of justice.
The defense of separateness will be disregarded
when the business affairs of a subsidiary
corporation are so controlled by the mother
corporation to the extent that it becomes an
instrument or agent of its parent. But even when
there is dominance over the affairs of the
subsidiary, the doctrine of piercing the veil of
corporate fiction applies only when such fiction is
used to defeat public convenience, justify wrong,
protect fraud or defend crime.
The organization of subsidiary corporations as
what was done here is usually resorted to for
aggrupation of capital the ability to cover more
territory and population, the decentralization of
activities best decentralized, and the securing of
other legitimate advantages. But when the mother
corporation and its subsidiary cease to act in good
faith and honest business judgement, when the
corporate device is used by the parent to avoid its
liability for legitimate obligations of the
subsidiary, and when the corporate fiction is used
to perpetrate fraud or promote injustice, the law
steps in to remedy the problem. When that
happens, the corporate character is not
necessarily abrogated. It continuous for
legitimate objectives. However, it is pursued in
order to remedy injustice, such as that inflicted in
this case.
TAYAG VS BENGUET CONSOLIDATED INC
[GR NO. L-23145 NOVEMBER 27,1968]
FACTS:
County Trust Company of New York, United States
of America is the domiciliary administration of the
decedent, Idonah Slade Perkins who owned 33,002
shares of stocks in the appellant, domestic
3
Professor: Atty. Leonardo Nick Gumabun
corporation, Benguet Consolidated Inc. located in
the Philippines. A dispute arose between the
appellee, Tayag who is the appointed ancillary of
Perkins in the Philippines and the domiciliary
administration as to who is entitled to the
possession of the certificate of shares, however,
County Trust Company refuses to transfer the said
certificate to Tayag despite the order of the court.
Hence, the appellee was compelled to petition the
court for the appellant to declare the subject
certificates as lost to which appellant allegeed
that no new certificate can be issued and the same
cannot be rendered as lost in accordance with
their by-laws.
ISSUE:
Whether or not the certificate of shares of stock
can be declared lost.
HELD:
Yes. Administration whether principal or ancillary
certainly extends to the assets of a decedent found
within the state or country where it was granted.
It is often necessary to have more than one
administration of an estate. When a person dies
intestate owning property located in the country
of his domicile as well as in a foreign country,
administration is had in both countries. That
which is granted in the jurisdiction of decedent’s
last domicile is termed the principal
administration, while any other administration is
termed the ancillary administration. The reason
for the latter is because a grant of administration
does not ex proprio vigore have any effect beyond
the limits of the country in which it
is granted.Hence, an administration appointed in
a foreign state has no authority in the Philippines.
The ancillary administration is proper, whenever
a person dies, leaving in a country other than that
of his last domicile, property to be administered in
the nature of the deceased’s liable for his
individual debts or to be distributed among his
heirs.
Since there is refusal, persistently adhered to by
the domiciliary administration in New York, to
deliver the shares of stocks of appellant
corporation owned by the decedent to the
ancillary administration in the Philippines, there
was nothing unreasonable or arbitrary in
considering them lost and requiring the appellant
to issue new certificates in lieu thereof. Thereby
the task incumbent under the law on the ancillary
administration could be discharged and his
responsibility fulfilled.
NOTES IN CORPORATION LAW
Assuming that a contrariety exist between the
provision of the laws and the command of a court
decree, the latter is to be followed.
A corporation as known to Philippine
jurisprudence is a creature without any existence
until it has received the imprimatur of state
according to law. It is logically inconceivable
therefore it will have rights and privileges of a
higher priority than that of its creator, more than
that, it cannot legitimately refuse to yield
obedience to acts of its state organs, certainly not
excluding the judiciary, whenever called upon to
do so.
C. Limitations on the Creation of
Corporation
1. Private Corporation
Section 16, Article XII, 1987 Constitution:
The Congress shall not, except by general law,
provide for the formation, organization, or
regulation of private corporations.
Government-owned or controlled corporations
may be created or established by special
charters in the interest of the common good
and subject to the test of economic viability.
Notes:
✓ General law referred to
here is the Revised
Corporation Code.
✓ Private corporations
cannot be created by
special law. They may only
be formed by virtue of a
general law that is
applicable to all citizens.
❖ Why is it that a private corporations
cannot be created by special law
- Because of Inclusivity. Anyone who
meets the requirements of starting
a corporation may form one. Not
allowing special laws
2. Government Owned and Controlled
Corporation ("GOCC"}
GOVERNMENT OWNED AND CONTROLLED
CORPORATION
- A government-owned or -controlled
corporation (GOCC) is an agency organized
as a stock or non-stock corporation, vested
with functions relating to public need,
whether governmental or proprietary in
nature, and owned by the government
directly or through its instrumentalities,
either wholly or in case of a stock
4
Professor: Atty. Leonardo Nick Gumabun
corporation, to the extent of at least 51% of
its capital stock.
MIAA V CA
(GR NO. 155650; JULY 20, 2006)
FACTS:
By virtue of EO no. 903 (1983), the Manila
International Airport Authority was created to
operate and administer the lands, improvements,
and equipment of the NAIA Complex. The MIAA
charter transferred to MIAA hectares of land,
runways, and buildings which were then under the
Bureau of Air Transportation.
In 1997, the Office of the Government Corporate
Counsel issued an Opinion, stating that the Local
Government Code (1991) had withdrawn the
exemption from real estate tax granted under the
MIAA Charter.
MIAA paid some of the real estate tax already due.
But in 2001, it received final notices of real estate
tax delinquency from the City of Paranaque for the
years 1992-2001.
The City then issued notices of levy on the airport
lands and buildings, and threatened a public
auction.
MIAA filed a petition for prohibition and
injunction, seeking to restrain the City’s
imposition of the real estate tax. But this was
dismissed for being filed late.
MIAA’s contention: It shouldn’t be taxed because
although its charter placed the title of the airport
lands in MIAA’s name, it cannot claim ownership
over them. The charter mandated that they be
devoted for the benefit of the general public. Thus,
their ownership remains with the State, and as
such, the lands cannot be the subject of real estate
tax by the local governments, because of the
principle that the government cannot tax itself.
The City’s contention: The Local Govt Code
expressly withdrew the tax exemption privileges of
GOCCs. The MIAA is a GOCC.
ISSUE:
Whether MIAA is a GOCC and whether the airport
lands and buildings it administers may be subject
to real estate tax by a local government unit.
RULING:
NOTES IN CORPORATION LAW
No. MIAA is not a GOCC. The airport lands and
buildings cannot be taxed by the City of
Paranaque. MIAA is not a GOCC. It is an
instrumentality of the national government and is
thus exempt from local taxation.
A GOCC is an agency organized as a stock or non-
stock corporation, vested with functions relating
to public needs whether governmental or
proprietary in nature, and owned by the
government directly or through its
instrumentalities, either wholly or in case of a
stock corporation, to the extent of at least 51% of
its capital stock.
MIAA cannot be considered a GOCC because it is
neither a stock nor a non-stock corporation.
A stock corporation is one whose capital stock is
divided into shares and is authorized to distribute
dividends or allotments of the surplus profits to
the holders of such shares. (Section 3, RCC)
MIAA is not a stock corporation because although
it has capital, such capital is not divided into
shares of stock.
A non-stock corporation is one where no part of its
income is distributable as dividends to its
members, trustees, or officers. (Section 86, RCC)
Any profit it may obtain incidental to its
operations shall, whenever necessary or proper, be
used for the furtherance of the purpose or
purposes for which it was organized.
MIAA is not a non-stock corporation because it has
no members. Moreover, non-stock corporations
are organized for charitable, religious,
educational, professional, cultural, recreational,
fraternal, literary, scientific, social, civil service, or
similar purposes like trade, industry, etc. (Section
87, RCC)
MIAA is not organized for any of these purposes. It
is a public utility organized to operate an airport
for public use.
What MIAA is is a government instrumentality
vested with corporate powers to perform
governmental function efficiently. Just because it
has corporate powers doesn’t make it a
corporation.
CARANDANG V DESIERTO
(GR NO 148076; JANUARY 2, 2011)
5
Professor: Atty. Leonardo Nick Gumabun
FACTS: Antonio Carandang was the general
manager and chief operating officer of Radio
Philippines Network (RPN) in 1998.
Before Carandang joined the company, RPN’s
assets were sequestered by the government in
1986, when the Cory Administration created the
PCGG, tasked with the seizing of ill-gotten wealth
of Marcos’ cronies. Among the unfortunate crooks
stripped of wealth was Roberto Benedicto,
stockholder of RPN. He entered into a compromise
agreement with PCGG and ceded all of his shares
in RPN. The court issued an order for the transfer
of Benedicto’s shares amounting to 72.4% of
RPN’s total shares. However, Benedicto filed a
motion for reconsideration, alleging that his
shares only comprise 32.4% of RPN’s total shares.
This motion was still pending at the time
Carandang’s case reached the SC. Bottomline:
40% of the government’s claim over RPN’s shares
(72.4 minus 32.4) was still being contested. Only
32.4% was conclusive.
In 1999, Carandang and other RPN officials were
charged with grave misconduct by the
Ombudsman, on account of having entered into a
contract with a corporation (AF Broadcasting
Inc.) where he was an incorporator, director, and
stockholder, contrary to the Code of Conduct and
Ethical Standards for Public Officials and
Employees.
In 2000, he was found guilty by the
Sandiganbayan and was dismissed.
Carandang argues that the Office of the
Ombudsman had no jurisdiction over him because
RPN was not a government corporation, and thus,
he was not a public official.
ISSUE: Whether RPN is a government corporation
which would put Carandang within the authority
of the Ombudsman, and within the jurisdiction of
the Sandiganbayan.
RULING:
No, RPN is not a government corporation. Hence,
the Ombudsman and Sandiganbayan had no
administrative authority and jurisdiction over
Carandang
CERVANTES vs AUDITOR GENERAL
91 SCRA 359
FACTS:
NOTES IN CORPORATION LAW
It appears that petitioner was in 1949 the
manager of the NAFCO with a salary of P15,000 a
year. By a resolution of the Board of Directors of
this corporation approved on January 19 of that
year, he was granted quarters allowance of not
exceeding P400 a month effective the first of that
month. Submitted the Control Committee of the
Government Enterprises Council for approval,
the said resolution was disapproved on August
3, 1949.The Government Enterprises Council was
created by the President under Executive Order
No. 93 pursuant to Republic Act No. 51,
authorizing the President of the Philippines,
among other things, to effect such reforms and
changes in government owned and controlled
corporations for the purpose of promoting
simplicity, economy and efficiency in their
operation. The petitioner challenged the
action of the Government Enteprises Council,
contending that Executive Order No. 93 was an
undue delegation of power.
ISSUE:
Whether or not Executive Order No. 93 is null and
void because it is based on a law that is
unconstitutional as an illegal delegation of
legislative power to the President
RULING:
No. As to the first ground, the rule is that so long
as the Legislature "lays down a policy and a
standard is established by the statute" there is no
undue delegation. Republic Act No. 51 in
authorizing the President of the Philippines,
among others, to make reforms and changes in
government-controlled corporations, lays down a
standard and policy that the purpose shall be to
meet the exigencies attendant upon the
establishment of the free and independent
government of the Philippines and to promote
simplicity, economy and efficiency in their
operations. The standard was set and the policy
fixed. The President had to carry the mandate.
This he did by promulgating the executive order in
question which, tested by the rule above cited,
does not constitute an undue delegation of
legislative power.
BASES CONVERSION AND DEVELOPMENT
AUTHORITY, Petitioner, v. COMMISSIONER OF
INTERNAL REVENUE, Respondent.
G.R. No. 205925, SECOND DIVISION, June 20,
2018, REYES, JR., J.
FACTS:
6
Professor: Atty. Leonardo Nick Gumabun
On October 8, 2010, BCDA filed a petition for
review with the CTA in order to preserve its right
to
pursue its claim for refund of the Creditable
Withholding Tax (CWT) in the amount of
Php122,079,442.53, which was paid under protest
from March 19, 2008 to October 8, 2008. The CWT
which BCDA paid under protest was in connection
with its sale of the BCDA-allocated units as its
share in the Serendra Project pursuant to the Joint
Development Agreement with Ayala Land, Inc.
The petition for review was filed with a Request
for Exemption from the Payment of Filing Fees
in the amount of Php1,209,457.90. On October 20,
2010, the CTA First Division denied BCDA's
Request for Exemption and ordered it to pay the
filing fees within five days from notice. BCDA
moved for reconsideration which was denied by
the CTA First Division on February 8, 2011. BCDA
was once again ordered to pay the filing fees
within five days from notice, otherwise, the
petition for review will be dismissed.
BCDA filed a petition for review with the CTA En
Banc on February 25, 2011, which petition was
returned and not deemed filed without the
payment of the correct legal fees.
BCDA once again emphasized its position that it is
exempt from the payment of such fees. It must be
emphasized that payment in full of docket fees
within the prescribed period is mandatory.
It is an essential requirement without which the
decision appealed from would become final and
executory as if no appeal had been filed. To repeat,
in both original and appellate cases, the court
acquires jurisdiction over the case only upon the
payment of the prescribed docket fees.
In this case, due to BCDA's non-payment of the
prescribed legal fees within the prescribed period,
this Court has not acquired jurisdiction over the
case. Consequently, it is as if no appeal was ever
filed
with this Court.
ISSUE:
Whether BCDA is a government instrumentality
vested with corporate powers, and as such,
exempted from the payment of docket fees. (YES)
RULING:
Many government instrumentalities are vested
with corporate powers but they do not become
stock or non-stock corporations, which is a
necessary condition before an agency or
NOTES IN CORPORATION LAW Professor: Atty. Leonardo Nick Gumabun
instrumentality is deemed a [GOCC]. Examples are - Consists of the certain rights and
the Mactan International Airport Authority, the privileges conferred upon existing
Philippine Ports Authority, the University of the corporations.
Philippines and Bangko Sentral ng Pilipinas. All
Primary vs. Secondary Franchise
these government instrumentalities exercise
corporate powers but they are not organized as PRIMARY SECONDARY
stock or non-stock corporations as required by FRANCHISE FRANCHISE
Section 2 (13) of the Introductory Provisions of the The franchise or Special authority given
Administrative Code. authority to exist as a to a corporation to
corporation engage in a specialized
These government instrumentalities are business (e.g. banks,
sometimes loosely called government corporate insurance companies,
right to use the streets
entities.
of a municipality to lay
However, they are not [GOCCs] in the strict sense
pipes of tracks, erect
as understood under the Administrative Code, poles, or string wires).
which is the governing law defining the legal Certain rights and
relationship or status of government entities. privileges conferred
upon existing
As previously mentioned, in order to qualify as a corporations (J.R.S.
GOCC, one must be organized either as a stock Business Corp. v.
or non-stock corporation. Section 321 of the Imperial Insurance,
Corporation Code defines a stock corporation as supra).
one whose "capital stock is divided into shares and The franchise to
x x x authorized to distribute to the holders of such exercise powers and
shares dividends x x x.'' privileges granted to
such corporation to the
business for which it
TWO CONDITIONS FOR THE CREATION OF A was created, including
GOCC those conferred for
purposes of public
1. It must be created for the common good
benefit such as the
or public purpose.
power of eminent
2. It must pass the test of economic domain and other
viability. This means it must be powers and privileges
self-sustaining. GOCCs don’t enjoyed by public
receive allocations or subsidy utilities (De Leon, 2010).
from the government. It must GR: Granted by the Granted by a
Corporation Code Government Agency, or
operate efficiently.
XPN: In GOCC’s with a Municipal
a special Corporation
D. Primary vs. Secondary Franchise
• Primary Franchise E. Theories on the Creation of
- Also called Corporate or General Corporation
franchises Concession vs. Genossenchaft
- It is the franchise to exist as a
corporation. ❖ Concession Theory
- A corporation is an artificial
Note: The primary franchise of a creature without any existence
corporation that is, the right to exist until it has received the
as such, is vested "in the individuals imprimatur of the state acting
who compose the corporation and not according to law, through the
in the corporation itself" SEC.
- A corporation owes its birth to
• Secondary franchise the state, therefore the state’s
- Also called Special Franchise

7
NOTES IN CORPORATION LAW Professor: Atty. Leonardo Nick Gumabun
recognition is necessary for a definite period was stipulated in its
corporation to exist. Articles.

❖ Genossenschaft Theory 7. As to when it starts its existence, a

- A corporation as "the reality of
the group as a social and legal
entity, independent of state
recognition and concession.”
- A corporation does not need
state recognition in order to be
considered as a corporation.
F. Doctrine of Limited Capacity
Doctrine of limited capacity
- a corporation is restricted by the law,
its Articles of Incorporation, its by-
laws, SEC regulations, and other
pertinent laws and rules.
G. Corporation vs. Other Business
Organization
partnership starts upon the meeting of
mind of the partners, while a corporation
commences upon the issuance of its
Certificate of Incorporation.
8. As to transfer of interest, a partner must
always obtain the consent of all his
partners before transferring his/her
interest, while for a stockholder, he/she
may transfer his shares whenever, even
without the others’ consent.
9. As to succession, death of a partner or a
change in the partnership’s composition
essentially dissolves it, while a
corporation enjoys the right of
succession, thus, its existence is not
affected by any change in its composing
members.

Distinguish Partnership from 10. As to management, the partners

Corporation
1. As to creation, a partnership is created
by mere agreement between parties who
bind themselves to contribute to a
common fund and to share in the profits.
A corporation on the other hand is
created by operation of law.
2. As to the governing laws, partnerships
are governed by the Civil Code, while
corporations are governed by the
Corporation Code.
themselves take care of the partnership’s
undertakings, while in a corporation, the
management is entrusted to a Board of
Directors or Trustees.
11. As to dissolution, a partnership may be
dissolved without the consent of the
State, while a corporation needs the
state’s consent to be dissolved
1. Advantages vs. Disadvantages

3. As to who may form, a partnership may ADVANTAGES DISADVANTAGES

be formed by at least two consenting The capacity to act More complicated in
parties. A corporation may be formed by as a legal unit formation and
any person, partnership, association, or management
corporation, singly or jointly, but not Limitation of, or Higher cost of
more than 15 in number. exemption from formation and
liability of operation
4. As to purpose, a partnership is formed shareholders
for profits or for the exercise of a Continuity of Lack of personal
profession, while a corporation is formed Existence element
either for profit or a benevolent purpose. Transferability ofGreater government
shares control and
5. As to liability, partners are liable in a regulation
personal extent (except for limited Centralized Management and
partners), while stockholders are not management of BOD control are separate
liable beyond their contribution. from ownership
Standardized Stockholders have
6. As to their life, partnerships exist for the method of little voice in the
period agreed upon, while corporations organization and conduct of business
have perpetual existence, unless a finance

8
NOTES IN CORPORATION LAW Professor: Atty. Leonardo Nick Gumabun
charter, a special private corporations are created for
law grants the benevolent or charitable purposes.
franchise
• Public corporations
Cannot be It may ordinarily be - those created thru a special law or
transferred without conveyed or Act by Congress, for the common
the approval of mortgaged under a good. They are governed primarily by
Congress (Sundiang general power the provisions of the special law,
Sr. & Aquino, 2011) granted to a supplemented by the Corporation
corporation to Code, whenever applicable.
dispose of its
property (i.e. Example: barangays, cities, municipalities,
Through board provinces; these local government units are also
resolution or called“municipal corporations”
approval of
stockholders Two reasons why private
(Villarey v. Ferrer G.R. corporations can only be
No. L-23893, October formed through a general law
29, 1968). and not by special laws:
It can be subject to
levy and sale on 1. to prevent corruption and
execution together undue advantages; and
with corporate 2. to enforce uniformity on how
property (Sundiang private corporations are formed
Sr. & Aquino, 2011). and regulated.

III. CLASSES OF CORPORATION

A. Stock vs. Non-Stock
• Stock corporation
- one whose capital stock is divided
into shares and is authorized to
distribute dividends or allotments of
the surplus profits to the holders of
such shares. (Section 3, RCC)
• Non-stock corporation
- one where no part of its income is
distributable as dividends to its
members, trustees, or officers.
(Section 86, RCC) Any profit it may
obtain incidental to its operations
shall, whenever necessary or proper,
be used for the furtherance of the
purpose or purposes for which it was
organized. (Sec. 85, RCC)
B. Public vs. Private Corporation
• Private corporations
- those created by general law, for the
purpose of creating gains for private
interest or for benevolent purposes.
They are regulated by the
Corporation Code.
Note: A corporation need not be “for
profit” to be categorized as private. Some
PHILIPPINE SOCIETY FOR THE PREVENTION
OF CRUELTY TO ANIMALS v. COA,
GR NO. 169752
FACTS:
The petitioner was incorporated as a
juridical entity over one hundred years ago by
virtue of Act No. 1285, enacted on January 19,
1905, by the Philippine Commission. The
petitioner, at the time it was created, was
composed of animal aficionados and animal
propagandists. The objects of the petitioner, as
stated in Section 2 of its charter, shall be to enforce
laws relating to cruelty inflicted upon animals or
the protection of animals in the Philippine Islands,
and generally, to do and perform all things which
may tend in any way to alleviate the suffering of
animals and promote their welfare. At the time of
the enactment of Act No. 1285, the original
Corporation Law, Act No. 1459, was not yet in
existence. Act No. 1285 antedated both the
Corporation Law and the constitution of the SEC.
For the purpose of enhancing its powers in
promoting animal welfare and enforcing laws for
the protection of animals, the petitioner was
initially imbued under its charter with the power
to apprehend violators of animal welfare laws. In
addition, the petitioner was to share 1/2 of the
fines imposed and collected through its efforts for

9
NOTES IN CORPORATION LAW Professor: Atty. Leonardo Nick Gumabun
violations of the laws related thereto. operations: the petitioner shall be managed or
Subsequently, however, the power to make arrests operated by its officers “in accordance with its by-
as well as the privilege to retain a portion of the laws in force.”
fines collected for violation of animal-related laws
were recalled by virtue of C.A. No. 148. Whereas,
NATIONAL COAL CO. v. CIR
the cruel treatment of animals is now an offense
GR L-22619
against the State, penalized under our statutes,
FACTS:
which the Government is duty bound to enforce;
When the COA was to perform an audit on them The National Coal Company was created
they refuse to do so, by the reason that they are a by Act No. 2705 and was granted the general
private entity and not under the said commission. powers of a corporation “and such other powers
It argued that COA covers only government as may be necessary to enable it to prosecute the
entities. On the other hand the COA decided that it business of developing coal deposits in the
is a government entity. Philippine Island and of mining, extracting,
transporting and selling the coal contained in said
ISSUE: W/N the said petitioner is a private entity.
deposits.” Two months later, the Philippine
RULING: Legislature passed Act No. 2719 to provide for the
leasing and development of coal lands in the
Essentially, the “charter test” provides that
Philippine Islands. Seven months after the
the test to determine whether a corporation is
company’s creation, the National Coal Company
government owned or controlled, or private in
took possession of coal lands within a reservation
nature is simple. Is it created by its own charter for
in the Zambaonaga Peninsula.
the exercise of a public function, or by
incorporation under the general corporation law? Plaintiff harvested coal on public lands
Those with special charters are government between 1920 and 1922 collecting a total of
corporations subject to its provisions, and its 24,089.3 tons of coal. Appellant CIR then subjected
employees are under the jurisdiction of the CSC, the mined coal to a specific tax of P0.50 per metric
and are compulsory members of the GSIS. ton under Act 1496 which subjected coal collected
by non-owners of land for P12,044.68. Plaintiff
And since the “charter test” had been
claimed a refund from the CIR arguing exemption
introduced by the 1935 Constitution and not
from taxes under the provision of sections 14 and
earlier, it follows that the test cannot apply to
15 of Act No. 2719, and prayed for a judgment
the petitioner, which was incorporated by
ordering the defendant to refund to the plaintiff
virtue of Act No. 1285, enacted on January 19,
said sum of P12, 044.68, with legal interest from
1905. Settled is the rule that laws in general have
the date of the presentation of the complaint, and
no retroactive effect, unless the contrary is
costs against the defendant. The trial court
provided. All statutes are to be construed as
decided in favor of Plaintiff extending the
having only a prospective operation, unless the
definition of ownership and should be understood
purpose and intention of the legislature to give
to mean “lands held in lease or usufruct” and
them a retrospective effect is expressly declared or
should be taxed only P0.04 per ton of coal under
is necessarily implied from the language used. In
Section 15 of Act No. 2719.
case of doubt, the doubt must be resolved against
the retrospective effect. ISSUE: Whether the plaintiff is subject to the taxes
under section 15 of Act No. 2719, or to the specific
Second, a reading of petitioner’s charter
taxes under section 1496 of the Administrative
shows that it is not subject to control or
Code?
supervision by any agency of the State, unlike
GOCCs. No government representative sits on the RULING:
board of trustees of the petitioner. Like all private
The plaintiff is a private corporation. The
corporations, the successors of its members are
mere fact that the Government happens to the
determined voluntarily and solely by the
majority stockholder does not make it a public
petitioner in accordance with its by-laws, and may
corporation. Act No. 2705, as amended by Act No.
exercise those powers generally accorded to
2822, makes it subject to all of the provisions of the
private corporations, such as the powers to hold
Corporation Law, in so far as they are not
property, to sue and be sued, to use a common seal,
inconsistent with said Act (No. 2705). As a private
and so forth. It may adopt by-laws for its internal
corporation, it has no greater rights, powers or

10
NOTES IN CORPORATION LAW
privileges than any other corporation which
might be organized for the same purpose under
the Corporation Law, and certainly it was not the
intention of the Legislature to give it a preference
or right or privilege over other legitimate private
corporations in the mining of coal.
C. Domestic vs. Foreign
• Domestic Corporation
- incorporated under the laws of the
Philippines.
• Foreign Corporation
- formed, organized, or existing under
any laws other than those of the
Philippines and whose laws allow
Filipino citizens and corporations to
do business in its own country or
state (Sec. 123, CC).
D. De Jure vs. De Facto
• De jure corporation
- one that strictly complies with the
law.
• De facto corporation
- one with a defect or flaw in its
incorporation; Its compliance with
the law is only
colorable.
Note: The legal personality of a de jure
corporation cannot be attacked. The State
through the Solicitor General. Private persons
cannot attack the legal personality of a de facto
corporation.
Section 19, RCC: The due
incorporation of any corporation
claiming in good faith to be a
corporation under this Code, and its
right to exercise corporate powers,
shall not be inquired into collaterally in
any private suit to which such
corporation may be a party. Such
inquiry may be made by the Solicitor
General in a quo warranto proceeding.
SEVENTH DAY ADVENTIST CONFERENCE
CHURCH OF SOUTHERN PHILIPPINES, INC. v.
11
Professor: Atty. Leonardo Nick Gumabun
NORTHEASTERN MINDANAO MISSION OF
SEVENTH DAY ADVENTIST, INC.,
GR NO. 150416
FACTS:
The subject of this case is a land situated in
Bayugan, Agusan del Sur. It was owned by Spouses
Felix & Felisa Cosio. In 1959, the spouses donated
the land to the South Philippines Union Mission of
Seventh Day Adventist Church of Bayugan (SDA
Bayugan). A Deed of Donation was executed. The
donation was allegedly accepted by one Liberato
Rayos, an elder of the church. Twenty-one years
later (1980), this land was sold by the spouses to
the Seventh Day Adventist Church of Northeastern
Mindanao Mission (SDA-NEMM). A TCT was issued
in its name. In 1987, SDA Conference Church of
Southern Philippines (SDA CCSP) filed a suit for
cancellation of title, quieting of ownership and
possession, declaratory relief and reconveyance
with prayer for preliminary injunction and
damages in the RTC of Bayugan, Agusan del Sur.
The SDA CCSP claimed to be the SDA Bayugan’s
successors-in-interest, and claimed ownership
over the land.SDA-NEMM opposed this, alleging
that SDA Bayugan could not legally be a donee
back then because it was not yet incorporated
then, thus, it had no juridical personality. The RTC
ruled against SDA CCSP and upheld the validity of
the sale to SDA NEMM. The CA affirmed. Hence this
petition.
ISSUE: Who is the legal owner of the land?
RULING:
SDA-NEMM is the legal owner. SDA CCSP cannot
claim ownership. Donation is an act of liberality
whereby a person disposes gratuitously of a thing
or right in favor of another person who accepts it.
The donation could not have been made in favor
of an entity yet inexistent at the time it was made.
Nor could it have been accepted as there was yet
no one to accept it. When the deed of donation was
executed, SDA Bayugan had no juridical
personality and therefore had no capacity to
accept. SDA CCSP also argued that SDA Bayugan
should be considered as a de facto corporation.
SDA Bayugan is not a de facto corporation.
Requisites of a de facto corporation:
1. the existence of a valid law under which it
may be incorporated;
2. an attempt in good faith to
incorporate; and
NOTES IN CORPORATION LAW Professor: Atty. Leonardo Nick Gumabun
3. assumption of corporate powers. have it dissolved because of bitter dissension
among the members, mismanagement and fraud
In this case, there was no proof that SDA
by the managers and heavy financial losses. The
Bayugan attempted to incorporate at the time.
defendants in the suit, namely, C. Arnold Hall and
They were not registered with the SEC. The filing
Bradley P. Hall, filed a motion to dismiss,
of the articles of incorporation and the issuance of
contesting the court’s jurisdiction and the
the certificate of incorporation are essential for
sufficiency of the cause of action. After hearing the
the existence of a de facto corporation. These are
parties, the Hon. Edmundo S. Piccio ordered the
manifestations of the corporation’s “attempt in
dissolution of the company; and at the request of
good faith to incorporate”. Corporate existence
plaintiffs, appointed the respondent Pedro A.
begins only from the moment a certificate of
Capuciong as receiver of the properties thereof,
incorporation is issued.
upon the filing of a P20,000 bond.
Since SDA Bayugan was not a corporation,
The defendants therein (petitioners
SDA CCSP cannot claim to be its successor in
herein) offered to file a counter-bond for the
interest with regard to the land. Moreover, there
discharge of the receiver, but the respondent judge
is sufficient basis to affirm the title of SDA-NEMM.
refused to accept the offer and to discharge the
A Certificate of Title is conclusive evidence of
receiver. Hence, this petition.
ownership of the land. The TCT in this case was
issued in favor of SDA NEMM based on a valid sale ISSUE: Whether or not the trial court has
that was executed in a public instrument. jurisdiction over the case?
RULING:
HALL VS. PICCIO
The court had no jurisdiction in civil case
86 PHIL 603 (1950)
No. 381 to decree the dissolution of the company,
FACTS:
because it being a de facto corporation,
On May 28, 1947, the petitioners C. Arnold dissolution thereof may only be ordered in a quo
Hall and Bradley P. Hall, and the respondents Fred warranto proceeding instituted in accordance
Brown, Emma Brown, Hipolita D. Chapman and with section 19 of the Corporation Law.
Ceferino S. Abella, signed and acknowledged in
Under our statute it is to be noted that it is
Leyte, the articles of incorporation of the Far
the issuance of a certificate of incorporation by
Eastern Lumber and Commercial Co., Inc.,
the Director of the Bureau of Commerce and
organized to engage in a general lumber business
Industry which calls a corporation into being. The
to carry on as general contractors, operators and
immunity of collateral attack is granted to
managers, etc. Attached to the articles was an
corporations ‘claiming in good faith to be a
affidavit of the treasurer stating that 23,428
corporation under this act.’
shares of stock had been subscribed and fully paid
with certain properties transferred to the Further, this is not a suit in which the
corporation described in a list appended thereto. corporation is a party. This is a litigation between
stockholders of the alleged corporation, for the
Immediately after the execution of said
purpose of obtaining its dissolution. Even the
articles of incorporation, the corporation
existence of a de jure corporation may be
proceeded to do business with the adoption of by-
terminated in a private suit for its dissolution
laws and the election of its officers. On December
between stockholders, without the intervention of
2, 1947, the said articles of incorporation were
the state.
filed in the office of the Securities and Exchange
Commission for the issuance of the corresponding
certificate of incorporation. E. Open vs. Close
On March 22, 1948, pending action on the • Close Corporation
articles of incorporation by the SEC, respondents - limited to selected persons or
Fred Brown, Emma Brown, Hipolita D. Chapman members of the family
and Ceferino S. Abella filed a suit against
petitioners before the Court of First Instance of • Open Corporation
Leyte alleging among other things that the Far - open to any person who may wish to
Eastern Lumber and Commercial Co. was an become a stockholder or member
thereto.
unregistered partnership; that they wished to

12
NOTES IN CORPORATION LAW
F. Holding, Affiliate, and Subsidiary - SEC
Opinion 15-15
• Parent or Holding Corporation
- related to another corporation that it
has the power either, directly or
indirectly to, elect the majority of the
director of such other corporation.
- a parent corporation that controls
or owns a controlling share of
stock and holds the assets of other
companies called subsidiary
corporations
• Subsidiary Corporation
- One so related to another corporation
that the majority of its directors can
be elected either, directly or
indirectly, by such other corporation
- a corporation owned and controlled
by another corporation
• Affiliate Corporation
- only a minority of its shares is
controlled by a parent corporation
G. Corporation by Estoppel
• Corporation by Estoppel
- It is neither a de jure nor a de facto
corporation.
- It has no personality per se, but it is
only regarded as a corporation by
virtue of a person/group’s conduct,
admission, or agreement.
- It becomes a “corporation” when
liabilities are invoked.
- In reality is not a corporation, either de
jure or de facto, because it is so
defectively formed, but is considered a
corporation in relation to those only
who, by reason of theirs acts or
admissions, are precluded from
asserting that it is not a corporation.
Section 20, RCC: 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. When any
13
Professor: Atty. Leonardo Nick Gumabun
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.
LIM TONG LIM VS. PHILIPPINE FISHING GEAR
INDUSTRIES, INC.,
GR NO. 136448
FACTS:
On behalf of "Ocean Quest Fishing
Corporation” (OQFC), Antonio Chua and Peter Yao
entered into a Contract for the purchase of fishing
nets of various sizes from the Philippine Fishing
Gear Industries, Inc. (PFG).Chua and Yao claimed
that they were in a business venture with Lim
Tong Lim, who was not a signatory to the
agreement.
The buyers failed to pay for the fishing nets
and floats; hence, PFG filed a collection suit
against Chua, Yao and Lim. PFG brought this suit
against the 3 in their capacities as general
partners. PFG alleged that OQFC was a
nonexistent corporation as shown by a
Certification from the SEC.
The trial court ruled against Chua, Yao,
and Lim, and declared that they, as general
partners, were jointly liable to pay PFG. This
finding was based on a Compromise Agreement
(in another case) where it could be presumed from
the equal distribution of the profit and loss that
they had joint liability.
The CA affirmed, agreeing that the 3
undertook a partnership for a specific
undertaking (that is, commercial fishing) and had
the goal of dividing profits which is an essential
feature of a partnership. Hence this petition by
Lim. He contends that he had no direct
participation in the purchase, that only Chua and
Yao took part in the negotiations, and that he has
not met any of PFG’s representatives. Thus, he
shouldn’t be liable for the unpaid purchase. He
also invokes the doctrine of corporation by
estoppel, arguing that only Chua and Yao should
be liable for this contract, because his name does
NOTES IN CORPORATION LAW
not appear on any of the contracts and he never
directly transacted with PFG.
ISSUE: May Lim avoid liability by invoking the
doctrine of corporation by estoppel?
RULING:
An unincorporated association has no
personality and would be incompetent to act and
appropriate for itself the power and attributes of
a corporation as provided by law; it cannot create
agents or confer authority on another to act in its
behalf; thus, those who act or purport to act as its
representatives or agents do so without authority
and at their own risk.
A person acting or purporting to act on
behalf of a corporation which has no valid
existence becomes personally liable for contracts
entered into or for other acts performed as such
agent. This doctrine also extends to a third
party who, knowing an association to be
unincorporated, nonetheless treated it as a
corporation and received benefits from it.
In this case, Lim might not have entered
into the contract with PFG personally, but he
benefited from the use of the nets that were
purchased. Under the law on estoppel, those
acting on behalf of a corporation and those
benefited by it, knowing it to be without valid
existence, are held liable as general partners.
INTERNATIONAL EXPERT TRAVEL & TOUR
SERVICES INC. VS. CA
GR NO. 118020
FACTS:
On June 30, 1989, petitioner International
Express Travel and Tours Services Inc., through its
managing director, wrote a letter to the Philippine
Football Federation through its President Henri
Kahn, wherein the former offered its services as a
travel agency to the latter. The offer was accepted.
Petitioner secured the airline tickets for the trips
of the athletes and officials of the Federation to
the South East Asian Games in Kuala Lumpur as
well as various other trips to the People’s Republic
of China and Brisbane. The total cost of the tickets
amounted to Php449,654.83. For the tickets
received, the Federation made two partial
payments, both in September of 1989 in the total
amount of Php176,467.50.
14
Professor: Atty. Leonardo Nick Gumabun
On October 4, 1989, petitioner wrote the
Federation, through the private respondent a
demand letter requesting for the amount of
Php265,844.33. On October 30, 1989, the
Federation, through the project gintong alay, paid
the amount of Php31,603. On December 27, 1989,
Henri Kahn issued a personal check in the amount
of Php50,000 as partial payment for the
outstanding balance of the Federation.
Thereafter, no further payments were made
despite repeated demands. Hence, this petition.
ISSUE: Whether or not private respondent can be
made personally liable for the liabilities of the
Philippines Football Federation.
RULING:
A voluntary unincorporated association,
like defendant Federation has no power to enter
into, or to ratify a contract. The contract entered
into by its officers or agents on behalf of such
association is binding or, as enforceable against it.
The officers or agents are themselves personally
liable.
In attempting to prove the juridical
existence of the Federation, Henri Kahn attached
to his motion for reconsideration before the trial
court a copy of the constitution and by-laws of the
Philippine Football Federation. Unfortunately, the
same does not prove that said Federation has
indeed been recognized and accredited by either
the Philippine Amateur Athletic Federation or the
Department of Youth and Sports Development.
Accordingly, we rule that the Philippine Football
Federation is not a national sports association
within the purview of the aforementioned laws
and does not have corporate existence of its own.
Thus being said, it follows that private
respondent Henri Kahn should be liable for the
unpaid obligations of the unincorporated
Philippine Football Federation. It is a settled
principle in corporation law that any person
acting or purporting to act on behalf of the
corporation which has no valid existence assumed
such privileges and becomes personally liable for
contract entered into or for other acts performed
as such agent.
ASIA BANKING CORPORATION VS. STANDARD
PRODUCTS COMPANY
46 PHIL 144 (1924)
FACTS:
 NOTES IN CORPORATION LAW
Standard Products, Co., Inc., was indebted to Asia
Banking Corporation for the amount of
P37,757.22. To secure its indebtedness, it executed
a promissory note in favor of plaintiff-appellee.
Upon demand for the balance due, the respondent-
appellant failed to pay. Hence an action was
brought by plaintiff-appellee to recover the sum of
P24,736.47. The court rendered judgment in favor
of the plaintiff-appellee for the sum demanded in
the complaint, with interest on the sum of
P24,147.34 from November 1, 1923, at the rate of
10 per cent per annum, and the costs. Hence this
appeal by the respondent-appellant. At the trial of
the case the plaintiff failed to prove affirmatively
the corporate existence of the parties and the
appellant insists that under these circumstances
the court erred in finding that the parties were
corporations with juridical personality and
assigns same as reversible error.
ISSUE: Whether or not respondent is estopped
from denying the corporate existence of the
plaintiff.
RULING:
The general rule is that in the absence of
fraud a person who has contracted or otherwise
dealt with an association in such a way as to
recognize and in effect admit its legal existence as
a corporate body is thereby estopped to deny its
corporate existence in any action leading out of or
involving such contract or dealing, unless its
existence is attacked for cause which have arisen
since making the contract or other dealing relied
on as an estoppel and this applies to foreign as
well as to domestic corporations. The defendant
having recognized the corporate existence of the
plaintiff by making a promissory note in its favor
and making partial payments on the same is
therefore estopped to deny said plaintiff's
corporate existence. It is, of course, also estopped
from denying its own corporate existence. Under
these circumstances it was unnecessary for the
plaintiff to present other evidence of the corporate
existence of either of the parties. It may be noted
that there is no evidence showing circumstances
taking the case out of the rules stated.
H. Corporation by Prescription
• Corporation by prescription
- has exercised corporate powers for an
indefinite period without interference on the
part of the sovereign power and which by
15
Professor: Atty. Leonardo Nick Gumabun
fiction of law, is given the status of a
corporation;
BARLIN VS. RAMIREZ
GR NO. L-2832
FACTS:
The defendant Ramirez, having been
appointed by the plaintiff parish priest, took
possession of the church on 7/5/01. He
administered if as such under the orders of his
superiors until 11/14/02. His successor having
been then appointed, the latter made a demand on
this def. for the delivery to him of the church,
convent, and cemetery, and the sacred ornaments,
books, jewels, money, and other properties of the
church. The defendant by a written document of
that date, refused to make such delivery, stating
that "the town of Lagonoy, in conjunction with the
parish priest of thereof, has seen fit to sever
connection w/ the Pope at Rome and his
representatives in these Islands, and to join the
Filipino Church, the head of which is at Mla. In 1/4,
the plaintiff brought this action against defendant
alleging in his amended complaint that the Roman
Catholic Church was the owner of the church
building, the convent, cemetery, the books, money,
and other properties belonging thereto, and
asking that it be restored to the possession thereof
and that the def. render an account of the
properties which he had received and w/c was
retained by him, and for other relief. The CFI-
Ambos Camarines ruled in favor of the plaintiff.
RULING:
Ramirez, having been appointed by the
plaintiff parish priest, took possession of the
church on 7/5/01. He administered if as such
under the orders of his superiors until 11/14/02.
His successor having been then appointed, the
latter made a demand on this def. for the delivery
to him of the church, convent, and cemetery, and
the sacred ornaments, books, jewels, money, and
other properties of the church.
The defendant, by a written document of
that date, refused to make such delivery, stating
that "the town of Lagonoy, in conjunction with the
parish priest of thereof, has seen fit to sever
connection with the Pope at Rome and his
representatives in these Islands, and to join the
Filipino Church, the head of which is at Manila.
The plaintiff brought this action against
defendant, alleging in his amended complaint that
the Roman Catholic Church was the owner of the
 NOTES IN CORPORATION LAW
church building, the convent, cemetery, the books,
money, and other properties belonging thereto,
and asking that it be restored to the possession
thereof and that the defendant render an account
of the properties which he had received and which
was retained by him, and for other relief. The CFI-
Ambos Camarines ruled in favor of the plaintiff.
It is suggested by the appellant that the
Roman Catholic Church has no legal personality in
the Philippine Islands. This suggestion, made with
reference to an institution which antedates by
almost a thousand years any other personality in
Europe, and which existed "when Grecian
eloquence still flourished in Antioch, and when
idols were still worshipped in the temple of
Mecca," does not require serious consideration.
l. Corporation as Partner in a
Partnership
❖ General Rule: A corporation cannot enter into a
contract of partnership with an individual or
another corporation.
❖ Exceptions: A corporation may be allowed to do
so provided it complies with certain conditions:
1. The authority to enter into a partnership
is expressly conferred by the charter or the AOI
of the corporation, and the nature of business
venture to be under-taken by the partnership is
in line with the business authorized by the
charter or AOI of the corporation involved;
2. If it is foreign corporation, it must obtain
license to transact business in the country in
accordance with the Corporation Code of the
Philippines.
Note: While a corporation has no power to enter
into a partnership, nevertheless, it may validly
enter into a joint venture agreement, where the
nature of that venture is in line with the business
authorized by its charter. (SEC Opinion no. 16-
22)
AURBACH VS. SANITARY WARES
MANUFACTURING
GR NO. 75875
FACTS:
ASI, a foreign corporation domiciled in
Delaware, United States entered into an
16
Professor: Atty. Leonardo Nick Gumabun
Agreement with Saniwares and some Filipino
investors whereby ASI and the Filipino investors
agreed to... participate in the ownership of an
enterprise which would engage primarily in the
business of manufacturing in the Philippines and
selling here and abroad vitreous china and
sanitary wares. The parties agreed that the
business operations in the Philippines shall be
carried on by an incorporated enterprise and that
the name of the corporation shall initially be
"Sanitary Wares Manufacturing Corporation."
The management of the Corporation shall be
vested in a Board of Directors, which shall consist
of nine individuals. As long as American-Standard
shall own at least 30% of the outstanding stock of
the Corporation, three of the nine directors... shall
be designated by American-Standard, and the
other six shall be designated by the other
stockholders of the Corporation. Later, the 30%
capital stock of ASI was increased to 40%.
The corporation was also registered with
the Board of Investments for availment of
incentives with the condition that at least 60% of
the capital stock of the corporation shall be
owned... by Philippine nationals. Unfortunately,
with the business successes, there came a
deterioration of the initially harmonious relations
between the two groups. According to the Filipino
group, a basic disagreement was due to their
desire to expand the export operations of the
company to which ASI objected as it apparently
had other subsidiaries or joint venture groups in
the countries where Philippine exports were...
contemplated. On March 8, 1983, the annual
stockholders' meeting was held. There were
protests against the action of the Chairman and
heated arguments ensued. These incidents
triggered off the filing of separate petitions by the
parties with the Securities and Exchange
Commission (SEC). The first petition filed was for
preliminary injunction by Saniwares, Ernesto V.
Lagdameo, Baldwin Young, Raul A. Boncan,
Ernesto R. Lagdameo, Jr., Enrique Lagdameo and
George F. Lee against Luciano Salazar and Charles
Chamsay.
The second petition was for quo warranto
and application for receivership by Wolfgang
Aurbach, John Griffin, David Whittingham,
Luciano E. Salazar and Charles Chamsay... against
the group of Young and Lagdameo (petitioners in
SEC Case No. 2417) and Avelino F. Cruz. The two
petitions were consolidated and tried jointly by a
hearing officer who rendered a decision upholding
the election of the Lagdameo Group and
NOTES IN CORPORATION LAW
dismissing the quo warranto petition of Salazar
and Chamsay. The ASI Group and Salazar
appealed the decision to the SEC en banc which
affirmed the hearing officer's decision.
RULING:
The legal concept of a joint venture is of
common law origin. It has no precise legal
definition but it has been generally understood to
mean an organization formed for some temporary
purpose. (Gates v. Megargel, 266 Fed. 811 [1920])
It is in fact hardly distinguishable from the
partnership, since their elements are similar
community of interest in the business, sharing of
profits and losses, and a mutual right of control.
The main distinction cited by most
opinions in common law jurisdictions is that the
partnership contemplates a general business with
some degree of continuity, while the joint venture
is formed for the execution of a single transaction,
and is thus of a temporary nature. (Tufts v. Mann
116 Cal. App. 170, 2 P. 2d. 500 [1931]; Harmon v.
Martin, 395 111. 595, 71 NE 2d. 74 [1947]; Gates
v. Megargel 266 Fed. 811 [1920]). This
observation is not entirely accurate in this
jurisdiction, since under the Civil Code, a
partnership may be particular or universal, and a
particular partnership may have for its object a
specific undertaking. (Art. 1783, Civil Code). It
would seem therefore that under Philippine law, a
joint venture is a form of partnership and should
thus be governed by the law of partnerships.
The Supreme Court has however
recognized a distinction between these two
business forms, and has held that although a
corporation cannot enter into a partnership
contract, it may however engage in a joint
venture with others.
PIONEER INSURANCE VS. CA
GR. NO. 84197
FACTS:
In 1965, Jacob S. Lim (petitioner in G.R. No.
84157) was engaged in the airline business as
owner-operator of Southern Air Lines (SAL) a
single proprietorship. On May 17, 1965, at Tokyo,
Japan, Japan Domestic Airlines (JDA) and Lim
entered into and executed a sales contract
(Exhibit A) for the sale and purchase of two (2)
DC-3A Type aircrafts and one (1) set of necessary
spare parts. On May 22, 1965, Pioneer Insurance
and Surety Corporation (Pioneer, petitioner in G.R.
17
Professor: Atty. Leonardo Nick Gumabun
No. 84197) as surety executed and issued its
Surety Bond No. 6639 (Exhibit C) in favor of JDA,
in behalf of its principal, Lim, for the balance price
of the aircrafts and spare parts.
It appears that Border Machinery and
Heavy Equipment Company, Inc. (Bormaheco),
Francisco and Modesto Cervantes (Cervanteses)
and Constancio Maglana (respondents in both
petitions) contributed some funds used in the
purchase of the above aircrafts and spare parts.
The funds were supposed to be their contributions
to a new corporation proposed by Lim to expand
his airline business. On June 10, 1965, Lim doing
business under the name and style of SAL executed
in favor of Pioneer as deed of chattel mortgage as
security for the latter’s suretyship in favor of the
former. It was stipulated therein that Lim transfer
and convey to the surety the two aircrafts. Pioneer
then filed a petition for the extrajudicial
foreclosure of the said chattel mortgage when Lim
defaulted in hi payment. Lim then proceeded to
question the CA’s decision that they must bear the
losses based on their contributions and that a de
facto partnership was created.
ISSUE: Whether a de facto partnership has been
created by the failure of the parties to incorporate.
RULING:
It is ordinarily held that persons who
attempt, but fail, to form a corporation and who
carry on business under the corporate name
occupy the position of partners inter se. Thus,
where persons associate themselves together
under articles to purchase property to carry on a
business, and their organization is defective as to
come short of creating a corporation within the
statute, they become in legal effect partners inter
se, and their rights as members of the company to
the property acquired by the company will be
recognized.
However, such a relation does not
necessarily exist, for ordinarily persons cannot be
made to assume the relation of partners, as
between themselves, when their purpose is that no
partnership shall exist. and it should be implied
only when necessary to do justice between the
parties; thus, one who takes no part except to
subscribe for stock in a proposed corporation
which is never legally formed does not become a
partner with other subscribers who engage in
business under the name of the pretended
corporation, so as to be liable as such in an action
NOTES IN CORPORATION LAW Professor: Atty. Leonardo Nick Gumabun
for settlement of the alleged partnership and fraudulently included in an Original Certificate of
contribution. Title.

They claimed that this OCT is void because no

survey or plan was submitted as its basis and that
the CFI that issued its Decree of Registration did
not validly acquire jurisdiction for failing to give
notice of the proceeding to SNB’s members who
were the actual possessors of the land. They
claimed that because the OCT is void, all
subsequent TCTs (including the one issued in the
name of GA), should also be declared void. SNB
filed an accion de revindicacion against GA, et al.,
to recover the ownership and possession of the
land. The trial court ruled against SNB and
dismissed the case for lack of cause of action.

ISSUE: Whether a corporation may institute an

action* on behalf of its individual members.
RULING:

The corporation has a separate. and distinct

lV. DOCTRINE OF CORPORATE
personality from its members, and this is not a
ENTITY/SEPARATE PERSONALITY
mere technicality but a matter of substantive law.
There is no allegation that the members have
1. Doctrine of corporate entity
assigned their rights to the corporation or any
- A corporation comes into existence upon
showing that the corporation has in any way or
the issuance of the certificate of
manner succeeded to such rights. The corporation
incorporation. Then and only then will it
evidently did not have any rights violated by the
acquire a juridical personality to sue and
defendants for which it could seek redress. Even if
be sued, enter into contracts, hold or
the Court should find against the defendants,
convey property or perform any legal act,
therefore, the plaintiff corporation would not be
in its own name.
entitled to the reliefs prayed for, which are
recoveries of ownership and possession of the
2. Doctrine of separate personality
land, issuance of the corresponding title in its
- A corporation has a personality separate
name, and payment of damages. Neither can such
and distinct from its members.
reliefs be awarded to the members allegedly
deprived of their land, since they are not parties to
SULO NG BAYAN, LNC. VS. ARANETA
the suit. It appearing clearly that the action has
GR NO. L-31061
not been filed in the names of the real parties in
interest, the complaint must be dismissed on the
FACTS:
ground of lack of cause of action.
Sulo Ng Bayan Inc (SNB) is a non-stock
corporation whose membership is composed of
MAGSAYSAY-LABRADOR VS. COURT OF
natural persons. They pioneered in the clearing of
APPEALS, GR NO. 58168
the subject land, cultivated it since the Spanish
FACTS:
regime and continuously possessed it openly and
public under concept of ownership adverse
On 9 February 1979, Adelaida Rodriguez-
against the whole world.
Magsaysay, widow and special administratix of
the estate of the late Senator Genaro Magsaysay,
SNB alleged that in 1958, Gregorio Araneta Inc.
brought before the then Court of First Instance of
(GA) ejected the members of SNB from a land in
Olongapo an action against Artemio Panganiban,
Bulacan, through force and intimidation; and that
Subic Land Corporation (SUBIC), Filipinas
in 1961, they found out that their land had been
Manufacturer's Bank(FILMANBANK)and the

18
NOTES IN CORPORATION LAW
Register of Deeds of Zambales, for the annulment
of the Deed of Assignment executed by the late
Senator in favor of SUBIC (as a result of which TCT
3258 was cancelled and TCT22431 issued in the
name of SUBIC), for the annulment of the Deed of
Mortgage executed by SUBIC in favor of
FILMANBANK (dated 28April 1977 in the amount
of P 2,700,000.00), and cancellation of TCT22431
by the Register of Deeds, and for the latter to issue
a new title in her favor.
On 7 March 1979,Concepcion Magsaysay-
Labrador, Soledad Magsaysay-Cabrera, Luisa
Magsaysay-Corpuz, Felicidad Magsaysay, and
Mercedes Magsaysay-Diaz, sisters of the late
senator, filed a motion for intervention on the
ground that on 20 June 1978, their brother
conveyed to them 1/2 of his shareholdings in
SUBIC or a total of 416,566.6 shares and as
assignees of around 41 % of the total outstanding
shares of such stocks of SUBIC, they have a
substantial and legal interest in the subject matter
of litigation and that they have a legal interest in
the success of the suit with respect to SUBIC. On
26July 1979, the trial court denied the motion for
intervention, and ruled that petitioners have no
legal interest whatsoever in the matter in
litigation and their being alleged assignees or
transferees of certain shares in SUBIC cannot
legally entitle them to intervene because SUBIC
has a personality separate and distinct from its
stockholders. On appeal, the Court of Appeals
found no factual or legal justification to disturb
the findings of the lower court.
The appellate court further stated that whatever
claims the Magsaysay sisters have against the late
Senator or against SUBIC for that matter can be
ventilated in a separate proceeding. The motion
for reconsideration of the Magsaysay sisters was
denied. Hence, the petition for review on
certiorari.
ISSUE:
Whether or not respondent Court of Appeals
correctly denied their motion for intervention.
RULING:
Shareholders are not owners of corporate
properties. While a share of stock represents a
proportionate or aliquot interest in the property
of the corporation, it does not vest the owner
thereof with any legal right or title to any of the
property, his interest in the corporate property
19
Professor: Atty. Leonardo Nick Gumabun
being equitable or beneficial in nature.
Shareholders are in no legal sense the owners of
corporate property, which is owned by the
corporation as a distinct legal person. Here, the
interest, if it exists at all, of petitioners-movants is
indirect, contingent, remote, conjectural,
consequential and collateral. At the very least,
their interest is purely inchoate, or in sheer
expectancy of a right in the management of the
corporation and to share in the profits thereof and
in the properties and assets thereof on dissolution,
after payment of the corporate debts and
obligations.
STRONGHOLD
INSURANCE COMPANY, INC. VS. CUENCA,
GR NO. 173297
FACTS:
Maranon filed a suit for the collection of a sum of
money and damages against the Cuencas in the
RTC. This included a writ of preliminary
attachment (PA), which the RTC granted,
conditioned upon the posting of a bond of ₱1M
executed in favor of the Cuencas. Maranon posted
such bond, issued by Stronghold Insurance Inc.
The sheriff enforced the writ of PA and levied upon
properties owned by Arc Cuisine, Inc. (ACI), found
in the leased corporate office-cum-commissary or
kitchen of the corporation.
The Cuencas filed a motion to dismiss and to quash
the writ of PA, on the ground that the action
involved intra-corporate matters that were within
the original and exclusive jurisdiction of the SEC,
and not the RTC. The RTC denied the motion and
ruled that since the action is for the recovery of a
sum of money and damages, it had jurisdiction.
The RTC ultimately held Stronghold and Maranon
jointly and solidarily liable for damages to the
Cuencas.
ISSUE:
Whether or not the Cuencas, as stockholders of Arc
Cuisine, claim damages from the levy of Arc’s
properties?
RULING:
The properties subject to the levy on attachment
belonged to Arc Cuisine, Inc. alone, not to the
Cuencas and Tayactac in their own right. They
were only stockholders of Arc Cuisine, Inc., which
had a personality distinct and separate from that
NOTES IN CORPORATION LAW
of any or all of them. The damages occasioned to
the properties by the levy on attachment, wrongful
or not, prejudiced Arc Cuisine, Inc., not them. As
such, only Arc Cuisine, Inc. had the right under the
substantive law to claim and recover such
damages. This right could not also be asserted by
the Cuencas and Tayactac unless they did so in the
name of the corporation itself. But that did not
happen herein, because Arc Cuisine, Inc. was not
even joined in the action either as an original
party or as an intervenor.
FRANCISCO MOTOR CORPORATION VS. CA,
GR NO. 100812
FACTS:
Petitioner Francisco Motors Corp filed a
complaint to recover from respondent spouses
Manuel the unpaid balance of the jeepney bought
by the latter from them. As their answer,
respondent spouses interposed a counterclaim for
unpaid legal services by Gregorio Manuel which
was not paid by petitioner corporation’s directors
and officers. Respondent Manuel alleges that he
represented members of the Francisco family who
were directors and officers of herein petitioner
corporation in an intestate estate proceeding but
even after its termination, his services were not
paid. The trial court ruled in favor of petitioner
but also allowed respondent spouses’
counterclaim. CA affirmed.
ISSUE:
Whether or not petitioner corporation may be
held liable for the liability incurred by its directors
and officers in their personal capacity.
RULING: The personality of the corporation and
those of its incorporators, directors and officers in
their personal capacities ought to be kept
separate in this case. The claim for legal fees
against the concerned individual incorporators,
officers and directors could not be properly
directed against the corporation without violating
basic principles governing corporations.
V. RIGHTS AND LIABILITIES OF
CORPORATION
A. Right Against Unreasonable Searches and
Seizure
Professor: Atty. Leonardo Nick Gumabun
STONEHILL VS. DIOKNO
GR. NO. L-19550
FACTS:
In violation of Central Bank Laws, Tariff and
Customs Laws, Internal Revenue (Code) and the
Revised Penal Code, 42 warrants were issued
against petitioners or the corporation where they
are officers to search the persons above-named
and/or the premises of their offices, warehouses
and/or residences, and to seize and take
possession of their books of accounts, financial
records, vouchers, correspondence, receipts,
ledgers, journals, portfolios, credit journals,
typewriters, and other documents and/or papers
showing all business transactions including
disbursements receipts, balance sheets and profit
and loss statements and Bobbins (cigarette
wrappers) which are the subject of the offense.
Petitioners filed with the Supreme Court this
original action for certiorari, prohibition,
mandamus and injunction, and prayed that,
pending final disposition of the present case, a writ
of preliminary injunction be issued alleging the
search warrants to be void since (1) they do not
describe with particularity the documents, books
and things to be seized; (2) cash money, not
mentioned in the warrants, were actually seized;
(3) the warrants were issued to fish evidence
against the aforementioned petitioners in
deportation cases filed against them; (4) the
searches and seizures were made in an illegal
manner; and (5) the documents, papers and cash
money seized were not delivered to the courts that
issued the warrants, to be disposed of in
accordance with law
ISSUE: W/N the seizure is valid.
RULING:
Petitioners herein have no cause of action to assail
the legality of the contested warrants and of the
seizures made in pursuance thereof, for the simple
reason that corporations have their respective
personalities, separate and distinct from the
personality of herein petitioners, regardless of the
amount of shares of stock or of the interest of each
A of them in said corporations, and whatever the
offices they hold therein may be.
Indeed, it is well settled that the legality of a
seizure can be contested only by the party whose
rights have been impaired thereby, and that the
20
NOTES IN CORPORATION LAW
objection to an unlawful search and seizure is
purely personal and cannot be availed of by third
parties.
Consequently, petitioners herein may not validly
object to the use in evidence against them of the
documents, papers and things seized from the
offices and premises of the corporations, since the
right to object to the admission of said papers in
evidence belongs exclusively to the corporations,
to whom the seized effects belong, and may not be
invoked by the corporate officers in proceedings
against them in their individual capacity.
B. Right to Due Process and Equal Protection
SMITH BELL & CO. VS. NATIVIDAD
GR NO. 15574
FACTS:
Smith Bellis a corporation organized and existing
under the laws of the Philippines but a majority of
its stockholders are British subjects. When Smith
Bell applied for a certificate of Philippine registry
of the vessel owned by it, the Collector refused to
issue the certificate, giving as his reason that all
the stockholders of Smith Bell were not citizens
either of the United States or of the Philippine
Islands.
ISSUE:
Whether or not the Government can deny the
registry of a vessel to
corporations having alien stockholders.
RULING:
Yes, the Government can deny the registry of
a vessel to corporations having alien
stockholders since it is within the purview of the
police power. However, the Supreme Court
acknowledged that a corporation having alien
stockholders, is still entitled to the protection
afforded by the due-process of law and equal
protection of the laws clause of the constitution
A corporation having alien stockholders, is
entitled to the protection afforded by the due-
process of law and equal protection of the laws
clause of the Philippine Bill of Rights, nevertheless,
Act No. 2761 of the Philippine Legislature, in
denying to corporations such as Smith, Bell &. Co.
Ltd., the right to register vessels in the Philippines
coastwise trade, does not belong to that vicious
species of class legislation which must always be
condemned, but does fall within authorized
exceptions, notably, within the purview of the
21
Professor: Atty. Leonardo Nick Gumabun
police power, and so does not offend against the
constitutional provision.
BACHE & CO. (PHIL.) VS. RUIZ
GR NO. L-32409
FACTS:
On 24 February 1970, Misael P. Vera,
Commissioner of Internal Revenue, wrote a letter
addressed to Judge Vivencio M. Ruiz requesting
the issuance of a search warrant against Bache &
Co. (Phil.), Inc. and Frederick E. Seggerman for
violation of Section 46(a) of the National Internal
Revenue Code (NIRC), in relation to all other
pertinent provisions thereof, particularly Sections
53, 72, 73, 208 and 209, and authorizing Revenue
Examiner Rodolfo de Leon to make and file the
application for search warrant which was
attached to the letter.
In the afternoon of the following day, De Leon and
his witness, Arturo Logronio, went to the Court of
First Instance (CFI) of Rizal. They brought with
them the following papers: Vera’s letter-request;
an application for search warrant already filled
up but still unsigned by De Leon; an affidavit of
Logronio subscribed before De Leon; a deposition
in printed form of Logronio already accomplished
and signed by him but not yet subscribed; and a
search warrant already accomplished but still
unsigned by Judge. At that time the Judge was
hearing a certain case; so, by means of a note, he
instructed his Deputy Clerk of Court to take the
depositions of De Leon and Logronio. After the
session had adjourned, the Judge was informed
that the depositions had already been taken. The
stenographer, upon request of the Judge, read to
him her stenographic notes; and thereafter, the
Judge asked Logronio to take the oath and warned
him that if his deposition was found to be false and
without legal basis, he could be charged for
perjury.
The Judge signed de Leon’s application for search
warrant and Logronio’s deposition. Search
Warrant 2-M-70 was then signed by Judge and
accordingly issued. 3 days later (a Saturday), the
BIR agents served the search warrant to the
corporation and Seggerman at the offices of the
corporation on Ayala Avenue, Makati, Rizal.
The corporation’s lawyers protested the search on
the ground that no formal complaint or transcript
of testimony was attached to the warrant. The
NOTES IN CORPORATION LAW
agents nevertheless proceeded with their search
which yielded 6 boxes of documents. On 3 March
1970, the corporation and Seggerman filed a
petition with the Court of First Instance (CFI) of
Rizal praying that the search warrant be quashed,
dissolved or recalled, that preliminary prohibitory
and mandatory writs of injunction be issued, that
the search warrant be declared null and void, and
that Vera, Logronio, de Leon, et. al., be ordered to
pay the corporation and Seggerman, jointly and
severally, damages and attorney’s fees. After
hearing and on 29 July 1970, the court issued an
order dismissing the petition for dissolution of the
search warrant. In the meantime, or on 16 April
1970, the Bureau of Internal Revenue made tax
assessments on the corporation in the total sum of
P2,594,729.97, partly, if not entirely, based on the
documents thus seized. The corporation and
Seggerman filed an action for certiorari,
prohibition, and mandamus.
ISSUE: Whether the corporation has the right to
contest the legality of the seizure of documents
from its office.
RULING:
An officer of a corporation cannot refuse to
produce the books and papers of such corporation,
we do not wish to be understood as holding that a
corporation is not entitled to immunity, under the
4th Amendment, against unreasonable searches
and seizures. A corporation is, after all, but an
association of individuals under an assumed name
and with a distinct legal entity. In organizing itself
as a collective body it waives no constitutional
immunities appropriate to such body. Its property
cannot be taken without compensation. It can only
be proceeded against by due process of law, and is
protected, under the 14th Amendment, against
unlawful discrimination .
C. Right Against Self-incrimination
BATAAN SHIPYARD & ENGINEERING CO., LNC.
VS. BATAAN SHIPYARD & ENGINEERING CO.,
LNC. VS. PRESIDENTIAL COMMISSION ON
GOOD GOVERNMENT, GR. NO. L-75885
FACTS:
Challenged in this special civil action of certiorari
and prohibition by a private corporation known as
the Bataan Shipyard and Engineering Co., Inc. are:
(1) Executive Orders Numbered 1 and 2,
promulgated by President Corazon C. Aquino on
February 28, 1986 and March 12, 1986,
22
Professor: Atty. Leonardo Nick Gumabun
respectively, and (2) the sequestration, takeover,
and other orders issued, and acts done, in
accordance with said executive orders by the
Presidential Commission on Good Government
and/or its Commissioners and agents, affecting
said corporation. The sequestration order which,
in the view of the petitioner corporation, initiated
all its misery was issued on April 14, 1986 by
Commissioner Mary Concepcion Bautista.
On the strength of the above sequestration order,
Mr. Jose M. Balde, acting for the PCGG, addressed
a letter dated April 18, 1986 to the President and
other officers of petitioner firm, reiterating an
earlier request for the production of certain
documents such as Stock Transfer Book and other
Legal documents (Articles of Incorporation, By-
Laws, etc.) Orders were also issued in connection
with the sequestration and takeover, such as
termination of Contract for Security Services and
abortion of contract for Improvement of Wharf at
Engineer Island; Change of Mode of Payment of
Entry Charges; Operation of Sesiman Rock Quarry,
Mariveles, Bataan; disposal of scrap, etc.; and the
provisional takeover by the PCGG of BASECO, “the
Philippine Dockyard Corporation and all their
affiliated companies.” While BASECO concedes
that “sequestration without resorting to judicial
action, might be made within the context of
Executive Orders Nos. 1 and 2 before March 25,
1986 when the Freedom Constitution was
promulgated, under the principle that the law
promulgated by the ruler under a revolutionary
regime is the law of the land, it ceased to be
acceptable when the same ruler opted to
promulgate the Freedom Constitution on March
25, 1986 wherein under Section I of the same,
Article IV (Bill of Rights) of the 1973 Constitution
was adopted providing, among others, that “No
person shall be deprived of life, liberty and
property without due process of law.” (Const., Art.
I V, Sec. 1).” It declares that its objection to the
constitutionality of the Executive Orders “as well
as the Sequestration Order * * and Takeover Order
* * issued purportedly under the authority of said
Executive Orders, rests on four fundamental
considerations:
First, no notice and hearing was accorded * * (it)
before its properties and business were taken
over;
Second, the PCGG is not a court, but a purely
investigative agency and therefore not competent
to act as prosecutor and judge in the same cause;
NOTES IN CORPORATION LAW
Third, there is nothing in the issuances which
envisions any proceeding, process or remedy by
which petitioner may expeditiously challenge the
validity of the takeover after the same has been
effected; and Fourthly, being directed against
specified persons, and in disregard of the
constitutional presumption of innocence and
general rules and procedures, they constitute a
Bill of Attainder.” It argues that the order to
produce corporate records from 1973 to 1986,
which it has apparently already complied with,
was issued without court authority and infringed
its constitutional right against self-incrimination,
and unreasonable search and seizure. 14 BASECO
further contends that the PCGG had unduly
interfered with its right of dominion and
management of its business affairs.
ISSUE:
Whether or not the sequestration order dated
April 14, 1986, and all other orders subsequently
issued and acts done on the basis thereof, inclusive
of the takeover order of July 14, 1986 and the
termination of the services of the BASECO
executives are valid;
RULING:
The right against self-incrimination has no
application to juridical persons. While an
individual may lawfully refuse to answer
incriminating questions unless protected by an
immunity statute, it does not follow that a
corporation, vested with special privileges and
franchises, may refuse to show its hand when
charged with an abuse of such privileges. The
corporation is a creature of the state. It is
presumed to be incorporated for the benefit of the
public. It received certain special privileges and
franchises, and holds them subject to the laws of
the state and the limitations of its charter. Its
powers are limited by law. It can make no contract
not authorized by its charter. Its rights to act as a
corporation are only preserved to it so long as it
obeys the laws of its creation. There is a reserve
right in the legislature to investigate its contracts
and find out whether it has exceeded its powers.
D. Criminal Liability
SIA VS. PEOPLE
GR. NO. L-30896
FACTS:
23
Professor: Atty. Leonardo Nick Gumabun
This is a petition for review of the decision of the
CA affirming the decision of the CFI of Manila
convicting the appellant of estafa. Based on the
information filed, the accused allegedly defraud
the Continental Bank, under the obligation on the
part of said accused of holding the said steel sheets
in trust receipt agreement, which cold rolled steel
sheets were consigned to the continental bank. In
reviewing the evidence, the CA came up with the
following findings of facts which the solicitor
general alleges should be conclusive upon this
court: Sia was general manager of the Metal
Manufacturing Company of the Philippines, Inc.
engaged in the manufacture of steel office
equipment. He applied for a letter of credit to
import steel sheets from Mitsui Bussan Kaisha,
Ltd. of Japan, the application being directed to the
Continental Bank.
ISSUE:
Whether Sia, having only acted for and in behalf of
the Metal Manufacturing Company of the
Philippines as president thereof in dealing with
the complainant, the continental bank he may be
liable for the crime charged.
RULING:
The Supreme Court acquitted the president who
signed the trust receipt in question, explaining
that; “in the absence of an express provision of law
making the petitioner liable for the criminal
offense committed by the corporation of which he
is a president as in fact there is no such provisions
in the Revised Penal Code under which petitioner
is being prosecuted, the existence of a criminal
liability on his part may not be said to be beyond
any doubt”.
CHING VS. SECRETARY OF JUSTICE
GR NO. 164317
FACTS: Ching was the Senior Vice-President of
Philippine Blooming Mills, Inc. (PBMI). Sometime
in September to October 1980, PBMI, through
petitioner, applied with the Rizal Commercial
Banking Corporation (respondent bank) for the
issuance of commercial letters of credit to finance
its importation of assorted goods. Under the
receipts, petitioner agreed to hold the goods in
trust for the said bank, with authority to sell but
not by way of conditional sale, pledge or
otherwise; and in case such goods were sold, to
turn over the proceeds thereof as soon as received,
NOTES IN CORPORATION LAW
to apply against the relative acceptances and
payment of other indebtedness to respondent
bank. In case the goods remained unsold within
the specified period, the goods were to be returned
to respondent bank without any need of demand.
Thus, said “goods, manufactured products or
proceeds thereof, whether in the form of money or
bills, receivables, or accounts separate and
capable of identification” were respondent bank’s
property. When the trust receipts matured,
petitioner failed to return the goods to respondent
bank, or to return their value amounting to
P6,940,280.66 despite demands. Thus, the bank
filed a criminal complaint for estafa6 against
petitioner in the Office of the City Prosecutor of
Manila.
ISSUE: Whether or not Ching is liable for estafa
HELD:
The principle of making corporate officers and
employees criminally liable applies whether or not
the crime requires the consciousness of
wrongdoing. It applies to those corporate agents
who themselves commit the crime and to those,
who, by virtue of their managerial positions or
other similar relation to the corporation, could be
deemed responsible for its commission, if by virtue
of their relationship to the corporation, they had
the power to prevent the act. Moreover, all parties
active in promoting a crime, whether agents or
not, are principals. Whether such officers or
employees are benefited by their delictual acts is
not a touchstone of their criminal liability. Benefit
is not an operative fact. A corporate officer cannot
protect himself behind a corporation where he is
the actual, present and efficient actor.
E. Tort Liability
PHILIPPINE NATIONAL BANK VS. COURT OF
APPEALS, GR. NO. L-27155
FACTS: PNB executed its bond w/ Rita Gueco
Tapnio as principal, in favor of the PNB to
guarantee the payment of Tapnio's account with
PNB. Indemnity Agreement w/ 12% int. and 15%
atty. fees Sept 18 1957: PNB sent a letter of
demand for Tapnio to pay the reduced amount of
2,379.91 PNB demanded both oral and written but
to no avail Tapnio mortgaged to the bank her
lease agreement w/ Jacobo Tuazon for her unused
24
Professor: Atty. Leonardo Nick Gumabun
export sugar quota at P2.80 per picular or a total
of P2,800 which was more than the value of the
bond PNB insisted on raising it to P3.00 per
picular so Tuazon rejected the offer
ISSUE:
Whether or not PNB should be liable for tort.
RULING:
A corporation is civilly liable in the same manner
as natural persons for torts, because "generally
speaking, the rules governing the liability of a
principal or master for a tort committed by an
agent or servant are the same whether the
principal or master be a natural person or a
corporation, and whether the servant or agent be
a natural or artificial person. All of the authorities
agree that a principal or master is liable for every
tort which he expressly directs or authorizes, and
this is just as true of a corporation as of a natural
person, A corporation is liable, therefore,
whenever a tortious act is committed by an officer
or agent under express direction or authority from
the stockholders or members acting as a body, or,
generally, from the directors as the governing
body."
F. Recovery of Moral Damages
COASTAL PACIFIC TRADING INC. VS.
SOUTHERN ROLLING MILLS, INC.
GR NO. 118692
FACTS:
Southern Rolling Mills was renamed into Visayan
Integrated Steel Corp (VISCO). On Dec. 11, 1961-
VISCO obtained a loan from DBP amounting to
P836,000. It was secured by a Real Estate
Mortgage covering VISCO's 3 parcels of land
including the machinery and equipments therein.
Second Loan: VISCO entered a Loan Agreement
with respondent banks (referred as "Consortium")
to finance its importation for various raw
materials. VISCO executed a second mortgage
over the previous properties mentioned, however
they were unrecorded VISCO was unable to pay its
second mortgage with the consortium, which
resulted in the latter acquiring 90%of the equity
of VISCO giving the Consortium the control and
management of VISCO. Despite the acquisition,
VISCO still remained indebted to the Consortium.
Transaction to Coastal: Between 1964 to 1965,
VISCO entered a processing agreement with
Coastal wherein Coastal delivered 3,000 metric
tons of hot rolled steel coils which VISCO would
NOTES IN CORPORATION LAW
process into block iron sheets. However, VISCO
was only able to return 1,600 metric tons of those
sheets.
On the loan to DBP: To pay its first mortgage with
DBP, VISCO sold 2 of its generators to FILMAG
Phils, Inc. DBP executed a Deed of Assignment of
the mortgage in favor of the consortium. The
Consortium foreclosed the mortgage and was the
highest bidder in an auction sale of VISCO's
properties. The Consortium later sold the
properties in favor of National Steel Corporation.
Coastal files a civil action for Annulment or
Rescission of Sale, Damages with Preliminary
Injunction. Coastal imputes bad faith on the action
of the Consortium, the latter being able to sell the
properties of VISCO despite the attachment of the
properties, placing them beyond the reach of
VISCO's other creditors.
The lower court ruled in favor of VISCO, declaring
the sale valid and legal. The CA affirmed this.
ISSUE:
Whether petitioner is entitled to moral damages?
RULING:
No. As a rule, a corporation is not entitled to moral
damages because, not being a natural person, it
cannot experience physical suffering or
sentiments like wounded feelings, serious anxiety,
mental anguish and moral shock. The only
exception to this rule is when the corporation has
a good reputation that is debased, resulting in its
humiliation in the business realm. In the present
case, the records do not show any evidence that
the name or reputation of petitioner has been
sullied as a result of the Consortium's fraudulent
acts. Accordingly, moral damages are not
warranted. Petitioner was able to recover
exemplary damages.
FILIPINAS BROADCASTING NETWORK, LNC.
VS. AGO MEDICAL AND EDUCATIONAL CENTER
- BICOL CHRISTIAN COLLEGE OF MEDICINE, GR
NO. 141994
FACTS:
Filipinas Broadcasting Network Inc. (FBNI) owns
radio station DZRC-AM which airs the radio
documentary “Expose” every morning, hosted by
Mel Rima and Jun Alegre, and heard by Albay
municipalities, and other Bicol areas. In 1989,
Expose covered various complaints from students,
25
Professor: Atty. Leonardo Nick Gumabun
teachers, and parents against Ago Medical and
Educational Center-Bicol Christian College of
Medicine (AMEC) and its administrators.
Claiming that the broadcasts were defamatory
and injurious to their institution’s reputation,
AMEC and Angelita Ago, as Dean of AMEC's
College of Medicine, filed a complaint for damages
against FBNI, Rima, and Alegre. FBNI, Rima, and
Alegre argued that the exposes were fair and true.
They claimed that they were plainly impelled by a
sense of public duty to report the goings-on in
AMEC, an institution imbued with public interest.
The trial court ruled against Alegre, finding that
his reports were libeous per se due to them having
no factual basis. It also held FBNI liable for failing
to exercise diligence in the selection and
supervision of its employees. As for Rima, the trial
court absolved him because his only participation
was that he agreed with Alegre. His statements
were within the bounds of freedom of speech,
expression, and of the press.
Alegre and FBNI were ordered to pay, jointly and
severally, P300k moral damages to AMEC;
P30,000 reimbursement of attorney's fees; and the
costs of suit.
On appeal, the CA made Rima solidarily liable with
FBNI and Alegre. The CA also denied Dean Ago's
claim for damages and attorney's fees because the
broadcasts were directed against AMEC, and not
against her. FBNI brings the petition to the SC,
contending that, among others, AMEC is not
entitled to moral damages because it is not a
natural person.
ISSUE:
Is AMEC, a juridical person, entitled to moral
damages?
RULING:
A juridical person is generally not entitled to
moral damages because, unlike a natural person,
it cannot experience physical suffering or such
sentiments as wounded feelings, serious anxiety,
mental anguish or moral shock. However, "a
corporation may have a good reputation which, if
besmirched, may also be a ground for the award
of moral damages" is an obiter dictum.
Nevertheless, AMEC’s claim for moral damages
falls under item 7 of Article 2219 of the Civil Code.
This provision expressly authorizes the recovery of
moral damages in cases of libel, slander or any
NOTES IN CORPORATION LAW
other form of defamation. Article 2219(7) does not
qualify whether the plaintiff is a natural or
juridical person. Therefore, a juridical person such
as a corporation can validly complain for libel or
any other form of defamation and claim for moral
damages. Moreover, where the broadcast is
libelous per se, the law implies damages. In such a
case, evidence of an honest mistake or the want of
character or reputation of the party libeled goes
only in mitigation of damages. Neither in such a
case is the plaintiff required to introduce evidence
of actual damages as a condition precedent to the
recovery of some damages. In this case, the
broadcasts are libelous per se. Thus, AMEC is
entitled to moral damages.
NOTES:
May a corporation be held criminally liable?
- If a crime is committed by a corporation
or other juridical entity, the directors, officers, or
employees responsible for the offense may be
charged and penalized for the crime.
- A corporation cannot be arrested and
imprisoned, since it is not a natural person who
may be put behind bars. Hence, it cannot be
penalized by a crime punishable only by
imprisonment. However, a corporation may be
charged and prosecuted for a crime if the
imposable penalty is a fine, or imprisonment and
fine.
Does a corporation have a right against
unreasonable searches and seizures?
- No. An officer of a corporation cannot
refuse to produce its record in its possession
upon the plea that such records will either
incriminate him or may incriminate it.
- Since a corporation is a creature of the
state, and it received its special privileges and
franchises from the state, it is subject to the laws
of such state and the limitations of its charter.
The state may inquire into how the franchises
had been employed, find out whether they had
been abused, and demand the production of the
corporate books and papers.
Does a corporation have a right against self-
incrimination?
- No because this right—the right of a
person to not be compelled to testify against
26
Professor: Atty. Leonardo Nick Gumabun
himself—only covers testimonies. Only a natural
person may invoke this right.
May a Corporation be liable for tort?
- Yes. A corporation may be held solidarily
liable for tortious acts (quasi-delicts) committed
by its officers or employees who were
performing acts related to their employment,
and where the corporation did not exercise due
diligence in their selection and supervision.
Is a corporation entitled to moral damages?
- Corporation is not entitled to moral damages
because, not being a natural person, it cannot
experience physical suffering or sentiments
like wounded feelings, serious anxiety,
mental anguish and moral shock.
- The only exception to this rule is when the
corporation has a good reputation that is
debased, resulting in its humiliation in the
business realm.
VI. DOCTRINE OF PIERCING THE CORPORATE
VEIL
A. Classifications
What is the theory of corporate entity?
- It states that a corporation has a
personality distinct from its stockholders,
and is not affected by the personal rights,
obligations and transactions of the latter.
When Can the Veil of Corporate Entity be
Pierced?
The doctrine of piercing the corporate veil
applies only in 3 basic areas:
1. defeat of public convenience as when the
corporate fiction is used as a vehicle for the
evasion of an existing obligation;
NOTES IN CORPORATION LAW
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.
THE THREE PRONGED TEST IN
DETERMINING AN ALTER-EGO CASE
1. Control, not mere majority or complete
stock control, but complete domination, not only
of finances but of policy and business practice in
respect to the transaction attacked so that the
corporate entity as to this transaction had at the
time no separate mind, will or existence of its
own;
2. Such control must have been used by the
defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act in
contravention of plaintiff’s legal right; and
3. The aforesaid control and breach of duty
must have proximately caused the injury or
unjust loss complained of.
PNB VS. HYDRO RESOURCES CONTRACTORS
CORP, GR NO. 167530
FACTS:
DBP and PNB foreclosed on mortgages made on
the properties of Marinduque Mining and
Industrial Corporation (MMIC). As a result, DBP
and PNB acquired substantially all the assets of
MMIC and resumed the business operations of the
defunct MMIC by organizing NMIC.
DBP owned 57% of the shares of NMIC, while PNB
owned 43% of the shares of NMIC. The members of
the Board of Directors of NMIC were either from
DBP or PNB.
NMIC engaged the services of Hercon, Inc., for its
Mine Stripping and Road Construction Program.
The services remain unpaid despite Hercon’s
several demands. After sending its final demand
letter, Hercon filed a complaint for sum of money
in the RTC, seeking to hold
NMIC, DBP, and PNB solidarily liable
27
Professor: Atty. Leonardo Nick Gumabun
Subsequent to the filing of the complaint, Hercon
was acquired by HRCC in a merger. The complaint
was amended to substitute HRCC for Hercon.
Later, pursuant to Proclamation No. 50 by Pres.
Aquino, creating the Asset Privatization Trust
(APT) for the expeditious disposition and
privatization of certain government corporations,
DBP and PNB transferred certain assets and
liabilities to the National Government, including
their stakes in NMIC. The National Government
then transferred these assets and liabilities to the
APT as trustee under a Trust Agreement. Thus, the
complaint was amended for the second time to
implead and include the APT as a defendant.
(So the case is now HRCC vs NMIC, DBP, PNB, and
APT.)
DBP and PNB both raised the defense that HRCC
had no cause of action against it because they
werew not privy to HRCC’s contract with NMIC.
Moreover, NMIC’s juridical personality is separate
from that of DBP and PNB.
The RTC ruled in favor of HRCC. It pierced the
corporate veil of NMIC and held DBP and PNB
solidarily liable with NMIC.
The RTC held that NMIC is owned by DBP and PNB,
all the members of NMIC’s Board of Directors are
either from DBP or PNB, and the business of NMIC
was being conducted and controlled by both DBP
and PNB. In fact, it was the Governor of DBP who
was signing and entering into contracts with third
persons on behalf of NMIC.
RTC: In this jurisdiction, it is well-settled that
"where it appears that the business enterprises
are owned, conducted and controlled by the same
parties, both law and equity will, when necessary
to protect the rights of third persons, disregard
legal fiction that two corporations are distinct
entities, and treat them as identical."
The CA afirmed, adding that to treat NMIC as a
separate legal entity from DBP and PNB, and then
using such separate entity to evade the payment of
a just debt, would be the height of injustice and
iniquity.
Hence this petition.
Petitioners assert that NMIC is a corporate entity
with a juridical personality separate and distinct
NOTES IN CORPORATION LAW
from both PNB and DBP. They insist that the
majority ownership by DBP and PNB of NMIC is
not a sufficient ground for disregarding the
separate corporate personality of NMIC because
NMIC was not a mere adjunct, business conduit or
alter ego of DBP and PNB.
ISSUE:
Should the doctrine of piercing the veil of
corporate fiction be applied in this case?
RULING:
No. NMIC is separate and distinct from DBP and
PNB.
The doctrine of piercing the corporate veil 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.
The case lays down a three-pronged test to
determine the application of the alter ego
theory, which is also known as the
instrumentality theory, namely:
(1) Control, not mere majority or complete stock
control, but complete domination, not only of
finances but of policy and business practice in
respect to the transaction attacked so that the
corporate entity as to this transaction had at the
time no separate mind, will or existence of its own;
(2) Such control must have been used by the
defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act in
contravention of plaintiff’s legal right; and
(3) The aforesaid control and breach of duty must
have proximately caused the injury or unjust loss
complained of.
28
Professor: Atty. Leonardo Nick Gumabun
The first prong is the "instrumentality" or
"control" test. This test requires that the
subsidiary be completely under the control and
domination of the parent. It inquires whether a
subsidiary corporation is so organized and
controlled and its affairs are so conducted as to
make it a mere instrumentality or agent of the
parent corporation such that its separate
existence as a distinct corporate entity will be
ignored. It seeks to establish whether the
subsidiary corporation has no autonomy and the
parent corporation, is operating the business
directly for itself.
The second prong is the "fraud" test. This test
requires that the parent corporation’s conduct in
using the subsidiary corporation be unjust,
fraudulent or wrongful. It examines the
relationship of the plaintiff to the corporation. It
recognizes that piercing is appropriate only if the
parent corporation uses the subsidiary in a way
that harms the plaintiff creditor. As such, it
requires a showing of "an element of injustice or
fundamental unfairness."
The third prong is the "harm" test. This test
requires the plaintiff to show that the defendant’s
control, exerted in a fraudulent, illegal or
otherwise unfair manner toward it, caused the
harm suffered. A causal connection between the
fraudulent conduct committed through the
instrumentality of the subsidiary and the injury
suffered or the damage incurred by the plaintiff
should be established. The plaintiff must prove
that, unless the corporate veil is pierced, it will
have been treated unjustly by the defendant’s
exercise of control and improper use of the
corporate form and, thereby, suffer damages.
To summarize, piercing the corporate veil based
on the alter ego theory requires the concurrence
of three elements: control of the corporation by
the stockholder or parent corporation, fraud or
fundamental unfairness imposed on the plaintiff,
and harm or damage caused to the plaintiff by the
fraudulent or unfair act of the corporation. The
absence of any of these elements prevents piercing
the corporate veil.
This Court finds that none of the tests has been
satisfactorily met in this case.
CLAPAROLS VS. CIR
GR L-30822
FACTS:
NOTES IN CORPORATION LAW
Claparols Steel and Nail Plant, which ceased
operation of June 30, 1957, was SUCCEEDED by
the Claparols Steel Corporation effective the next
day, July 1, 1957 up to December 7, 1962, when the
latter finally ceased to operate.
ISSUE:
Whether or not the veil of corporate fiction must
be pierced.
RULING:
Both predecessor and successor were owned and
controlled by petitioner and there was no break in
the succession and continuity of the same business.
All the assets of the dissolved Plant were turned
over to the emerging corporation. The veil of
corporate fiction must be pierced as it was
deliberately and maliciously designed to evade its
financial obligation to its employees.
This "avoiding-the-liability" scheme is very patent,
considering that 90% of the subscribed shares of
stocks of the Claparols Steel Corporation (the
second corporation) was owned by respondent
(herein petitioner) Claparols himself, and all the
assets of the dissolved Claparols Steel and Nail
Plant were turned over to the emerging Claparols
Steel Corporation.
It is very obvious that the second corporation
seeks the protective shield of a corporate fiction
whose veil in the present case could, and should,
be pierced as it was deliberately and maliciously
designed to evade its financial obligation to its
employees.
CIR VS. NORTON HARRISON CO., GR NO. L-
17618
FACTS:
Norton and Harrison is a corporation organized to
buy and sell at wholesale and retail all kinds of
goods and merchandise. Jackbilt is also a
corporation organized on for producing concrete
blocks. On 1948, the corporations entered into an
agreement whereby Norton was made the sole
and exclusive distributor of concrete blocks
manufactured by Jackbilt. On 1949, Norton
purchased all the outstanding shares of stock of
Jackbilt. This prompted the CIR to investigate and
eventually asses Norton and Harrison for
deficiency sales tax and surcharges.
ISSUE:
29
Professor: Atty. Leonardo Nick Gumabun
Whether Norton and Harrison is liable for the
deficiency sales tax and surcharges.
RULING:
The Jackbilt is merely an adjunct, business conduit
or alter ego, of Norton and Harrison and that the
fiction of corporate entities, separate and distinct
from each, should be disregarded. This is a case
where the doctrine of piercing the veil of
corporate fiction, should be made to apply. It has
been settled that the ownership of all the stocks of
a corporation by another corporation does not
necessarily breed an identity of corporate interest
between the two companies and be considered as
a sufficient ground for disregarding the distinct
personalities (Liddell & Co., Inc. v. Coll. of Int. Rev.
L-9687, June 30, 1961).
However, there are sufficient grounds to support
the theory that the separate identities of the two
companies should be disregarded. Among these
circumstances, are: (a) Norton and Harrison
owned all the outstanding stocks of Jackbilt; of the
15,000 authorized shares of Jackbilt, 14,993
shares belonged to Norton and Harrison; (b)
Norton constituted Jackbilt's board of directors in
such a way as to enable it to actually direct and
manage the other's affairs by making the same
officers of the board for both companies; (c)
Norton financed the operations of the Jackbilt; (d)
Norton treats Jackbilt employees as its own.
Evidence shows that Norton paid the salaries of
Jackbilt employees and gave the same privileges as
Norton employees, an indication that Jackbilt
employees were also Norton's employees; (e)
Compensation given to board members of Jackbilt,
indicate that Jackbilt is merely a department of
Norton. The offices of Norton and Jackbilt are
located in the same compound. Payments were
effected by Norton of accounts for Jackbilt and vice
versa. Payments were also made to Norton of
accounts due or payable to Jackbilt and vice versa.
FIRST PHILIPPINE INTERNATIONAL BANK VS.
CA
GR NO. 115849
FACTS:
In the course of its banking operations, the
defendant Producer Bank of the Philippines
acquired 6 parcels of land with a total area of 101
hectares located at Don Jose, Sta. Rosa, Laguna
and covered by TCT No. T-106932 to T-106937.
The property used to be owned by BYME
NOTES IN CORPORATION LAW
Investment and Development Corporation which
hd them mortgaged with the bank as collateral for
a loan. The plaintiff originals, Demetrio Demetria
and Jose Janolo wanted to purchase the property
and thus initiated negotiations for that purpose.
In the early part of August 1987 said plaintiffs,
upon the suggestion of BYME investment’s legal
counsel, Fajardo met with defendant Mercurio
Rivera, manager of the property management
department of the defendant bank. The meeting
was held in pursuant to plaintiffs’ plan to buy the
property.
After the meeting, plaintiff Janolo, following the
advice of defendant Rivera made a formal
purchase offer to the Bank through a letter dated
August 30,1987. Negotiations took place and an
offer price was fixed at P5.5million. During the
course of the negotiations, the defendant bank
was placed under conservatorship and a new
conservator was appointed to which the name has
been refused to recognize. A derivative suit has
been filed against Rivera for the damages suffered
from the alleged perfect contract of sale involving
the 6 parcels of land.
RULING:
When the fiction is urged as a means of
perpetrating a fraud or an illegal act or as a
vehicle for the evasion of an existing obligation,
the circumvention of statutes, the achievement or
perfection of a monopoly or generally the
perpetration of knavery or crime, the veil with
which the law covers and isolates the corporation
from the members or stockholders who compose it
will be lifted to allow for its consideration merely
as an aggregation of individuals.
The corporate veil cannot be used to shield an
otherwise blatant violation of the prohibition
against forum-shopping. Shareholders, whether
suing as the majority in direct actions or as the
minority in a derivative suit, cannot be allowed to
trifle with court processes, particularly where, as
in this case, the corporation itself has not been
remiss in vigorously prosecuting or defending
corporate causes and in using and applying
remedies available to it. To rule otherwise would
be to encourage corporate litigants to use their
shareholders as fronts to circumvent the stringent
rules against forum shopping.
UY VS. VILLANUEVA
GR NO. 157851
30
Professor: Atty. Leonardo Nick Gumabun
FACTS: Sometime in 1998, Countrywide Bank
experienced liquidity problems and its treasury
department was unable to comply with its
branches’ demands for fresh funds. Its various
branches eventually experienced bank runs.
Several of the bank’s depositors were alarmed at
the prospect of losing their deposits and
investments. A group of depositors, holding about
70% of the bank’s deposit accounts, met and
agreed to organize themselves into a "Committee
of Depositors." Petitioner Felix Yusay was elected
by the Committee as Chairman of the Interim
Board of Directors, while petitioner Atty. Andrea
Uy was designated Secretary. According to
petitioners, the Committee was formed for the
purpose of protecting their collective interests and
to increase their chances of recovering their
deposits.
With the consent and approval of the incumbent
Board of Directors, the Committee of Depositors
assumed temporary administrative control of the
remaining operations of the bank. The incumbent
Board of Directors informed the Committee that
some employees had tendered courtesy
resignations, while some had expressed their
willingness to resign upon official request. The
Committee then accepted some of the courtesy
resignations.
The Bangko Sentral ng Pilipinas (BSP)
subsequently placed the bank under receivership
and appointed a liquidator. Meanwhile, the
Philippine Deposit Insurance System (PDIC)
commenced the processing of claims for return of
deposits.
ISSUE: Whether or not the Corporate Veil should
be pierced.
RULING:
The doctrine of piercing the veil of corporate
fiction finds no application in the case. Piercing
the veil of corporate fiction may only be done
when "the notion of legal entity is used to defeat
public convenience, justify wrong, protect fraud,
or defend crime."
The general rule is that a corporation will be
looked upon as a separate legal entity, unless and
until sufficient reason to the contrary appears. For
the separate juridical personality of a corporation
NOTES IN CORPORATION LAW
to be disregarded, the wrongdoing must be clearly
and convincingly established. It cannot be
presumed.
Mere ownership by a single stockholder or by
another corporation of all or nearly all of the
capital stock of a corporation is not in itself
sufficient ground for disregarding the separate
corporate personality.
Petitioners are not even stockholders of the bank
but mere depositors. That they assumed
temporary control of the bank’s administration
did not change the character of their relationship
with the bank. In fact, their bid to convert their
interest in the bank to that of stockholders failed
as the BSP denied their plan to rehabilitate the
bank.
CONCEPT BUILDERS, LNC. VS. NLRC
GR NO. 108734
FACTS:
Petitioner Concept Builders, Inc., a domestic
corporation engaged in the construction business.
Private respondents were employed by said
company as laborers, carpenters and riggers.
However, they were illegally dismissed. Aggrieved,
private respondents filed a complaint for illegal
dismissal. The Labor Arbiter rendered judgment
ordering petitioner to reinstate private
respondents and to pay them back wages. It
became final and executory. The alias Writ of
Execution cannot be enforced by the sheriff
because all the employees inside petitioner’s
premises at 355 Maysan Road, Valenzuela, Metro
Manila, claimed that they were employees of
Hydro Pipes Philippines, Inc. (HPPI) and not by
petitioner. Thus, NLRC issued a break-open order
against Concept Builders and HPPI.
ISSUE: Whether the piercing the veil of corporate
entity is proper.
RULING:
It is a fundamental principle of corporation law
that a corporation is an entity separate and
distinct from its stockholders and from other
corporations to which it may be connected. But,
this separate and distinct personality of a
corporation is merely a fiction created by law for
convenience and to promote justice. So, when the
notion of separate juridical personality is used to
defeat public convenience, justify wrong, protect
31
Professor: Atty. Leonardo Nick Gumabun
fraud or defend crime, or is used as a device to
defeat the labor laws, this separate personality of
the corporation may be disregarded or the veil of
corporate fiction pierced. This is true likewise
when the corporation is merely an adjunct, a
business conduit or an alter ego of another
corporation.
The conditions under which the juridical entity
may be disregarded vary according to the peculiar
facts and circumstances of each case. No hard and
fast rule can be accurately laid down, but
certainly, there are some probative factors of
identity that will justify the application of the
doctrine of piercing the corporate veil, to wit:
1. Stock ownership by one or common
ownership of both corporations.
2. Identity of directors and officers.
3. The manner of keeping corporate books
and records.
4. Methods of conducting the business.
The SEC en banc explained the “instrumentality
rule” which the courts have applied in
disregarding the separate juridical personality of
corporations as follows: Where one corporation is
so organized and controlled and its affairs are
conducted so that it is, in fact, a mere
instrumentality or adjunct of the other, the fiction
of the corporate entity of the “instrumentality”
may be disregarded.
The control necessary to invoke the rule is not
majority or even complete stock control but such
domination of instances, policies and practices
that the controlled corporation has, so to speak,
no separate mind, will or existence of its own, and
is but a conduit for its principal. It must be kept in
mind that the control must be shown to have been
exercised at the time the acts complained of took
place. Moreover, the control and breach of duty
must proximately cause the injury or unjust loss
for which the complaint is made.
KUKAN INT'L VS. REYES
GR NO. 182729
FACTS:
Sometime in March 1998, Kukan, Inc. conducted a
bidding for the supply and installation of signages
in a building being constructed in Makati City.
Morales tendered the winning bid and was
awarded the PhP 5 million contract. Some of the
items in the project award were later excluded
NOTES IN CORPORATION LAW
resulting in the corresponding reduction of the
contract price to PhP 3,388,502. Despite his
compliance with his contractual undertakings,
Morales was only paid the amount of PhP
1,976,371.07, leaving a balance of PhP
1,412,130.93, which Kukan, Inc. refused to pay
despite demands. Shortchanged, Morales filed a
Complaint6 with the RTC against Kukan, Inc. for a
sum of money.
RTC rendered a Decision finding for Morales and
against Kukan, Inc.
After the above decision became final and
executory, Morales moved for and secured a writ
of execution against Kukan, Inc. The sheriff then
levied upon various personal properties found at
what was supposed to be Kukan, Inc.’s office at
Unit 2205, 88 Corporate Center, Salcedo Village,
Makati City. Alleging that it owned the properties
thus levied and that it was a different corporation
from Kukan, Inc., Kukan International
Corporation (KIC) filed an Affidavit of Third-Party
Claim. Notably, KIC was incorporated in August
2000, or shortly after Kukan, Inc. had stopped
participating in Civil Case No. 99-93173.
In reaction to the third party claim, Morales
interposed an Omnibus Motion. In it, Morales
prayed, applying the principle of piercing the veil
of corporate fiction.
ISSUE:
Whether the trial and appellate courts correctly
applied the principle of piercing the veil of
corporate
entity––called also as disregarding the fiction of a
separate juridical personality of a corporation––
to support a conclusion that Kukan, Inc. and KIC
are but one and the same corporation with respect
to the contract award referred to at the outset.
This principle finds its context on the postulate
that a corporation is an artificial being invested
with a personality separate and distinct from
those of the stockholders and from other
corporations to which it may be connected or
related. (NO)
RULING:
In the instant case, KIC was not made a party-
defendant in Civil Case No. 99-93173. Even if it is
conceded that it raised affirmative defenses
through its aforementioned pleadings, KIC never
abandoned its challenge, however implicit, to the
RTC’s jurisdiction over its person. The challenge
32
Professor: Atty. Leonardo Nick Gumabun
was subsumed in KIC’s primary assertion that it
was not the same entity as Kukan, Inc. Pertinently,
in its Comment and Opposition to Plaintiff’s
Omnibus Motion dated May 20, 2003, KIC entered
its "special but not voluntary appearance"
alleging therein that it was a different entity and
has a separate legal personality from Kukan, Inc.
And KIC would consistently reiterate this assertion
in all its pleadings, thus effectively resisting all
along the RTC’s jurisdiction of its person. It cannot
be overemphasized that KIC could not file before
the RTC a motion to dismiss and its attachments in
Civil Case No. 99-93173, precisely because KIC was
neither impleaded nor served with summons.
Consequently, KIC could only assert and claim
through its affidavits, comments, and motions
filed by special appearance before the RTC that it
is separate and distinct from Kukan, Inc.
Following La Naval Drug Corporation, KIC cannot
be deemed to have waived its objection to the
court’s lack of jurisdiction over its person. It would
defy logic to say that KIC unequivocally submitted
itself to the jurisdiction of the RTC when it strongly
asserted that it and Kukan, Inc. are different
entities. In the scheme of things obtaining, KIC had
no other option but to insist on its separate
identity and plead for relief consistent with that
position.
The principle of piercing the veil of corporate
fiction, and the resulting treatment of two related
corporations as one and the same juridical person
with respect to a given transaction, is basically
applied only to determine established liability; it is
not available to confer on the court a jurisdiction
it has not acquired, in the first place, over a party
not impleaded in a case. Elsewise put, a
corporation not impleaded in a suit cannot be
subject to the court’s process of piercing the veil of
its corporate fiction. In that situation, the court
has not acquired jurisdiction over the corporation
and, hence, any proceedings taken against that
corporation and its property would infringe on its
right to due process.
Aguedo Agbayani, a recognized authority on
Commercial Law, stated as much:
“Piercing the veil of corporate entity applies to
determination of liability not of jurisdiction. x x x
This is so because the doctrine of piercing the veil
of corporate fiction comes to play only during the
trial of the case after the court has already
acquired jurisdiction over the corporation. Hence,
before this doctrine can be applied, based on the
NOTES IN CORPORATION LAW
evidence presented, it is imperative that the court
must first have jurisdiction over the corporation. x
x x”
The implication of the above comment is twofold:
(1) the court must first acquire jurisdiction over
the corporation or corporations involved before
its or their separate personalities are disregarded;
and (2) the doctrine of piercing the veil of
corporate entity can only be raised during a full-
blown trial over a cause of action duly commenced
involving parties duly brought under the authority
of the court by way of service of summons or what
passes as such service.
UMALI VS. CA
GR NO.89561
FACTS:
Plaintiff Santiago Rivera is the nephew of plaintiff
Mauricia Mur Vda. de Castillo. The Castillo family
are the owners of parcel of land located in Lucena
City which was given as security for a loan from
the development Bank of the Philippines (DBP) for
their failure to pay the amortization, foreclosure
of the said property was about to be initiated. This
problem was made known to Santiago Rivera, who
proposed to them the conversion into subdivision
of the four parcels of land adjacent to the
mortgaged property to raise the necessary fund.
The idea was accepted by the Castillo family and
to carry out the project, a memorandum of
agreement was executed by and between Slobec
Realty and Development Inc. represented by its
president Santiago Rivera and Castillo family. In
this agreement, Santiago Rivera obliged himself to
pay the Castillo family the sum of P70,000
immediately after the execution of the agreement
and to pay additional amount of P40,000 after the
property has been converted into a subdivision.
Rivera, with agreement approached Mr. Modesto
Cervantes, president of defendant Bormaheco and
proposed to purchase from Bormaheco two
tractors model D7 and D8 subsequently a sales
agreement was executed on December 28, 1970.
On January 3, 1971, Slobec, through Rivera,
executed in favor of Bormaheco a chattel
mortgage over the said equipment as security for
the payment of the aforesaid balance of P180,000.
As further security of the aforementioned unpaid
balance, Slobec obtained from insurance
corporation of the Philippines a security bond,
with Insurance Corporation of the Philippines
(ICP) as surety and Slobec as principal, in favor of
33
Professor: Atty. Leonardo Nick Gumabun
Bormaheco, as borne out of by Exhibit 8. The
aforesaid surety bond was in turn secured by an
agreement of counter-guaranty with real estate
mortgage executed by Rivera as President of
Slobec and Mauricia Mur Vda. de Castillo,
Buenaflor Castillo Umali, Bertilla Castillo-Rada,
Victoria Castillo, Marietta Castillo and Leovina
Castillo Jalbuena as mortgagors and insurance
corporation of the Philippines as mortgagee. In
this agreement, ICP guaranteed the obligation of
Slobec with Bormaheco in the amount of
P180,000.
In giving the bond, ICP required that the Castillos
mortgage to them the properties in question,
namely, four parcels of land covered by TCT in the
name of the aforementioned mortgagors, namely
TCT no. 13114, 13115, 13116, and 13117 all of the
Register of Deeds of Lucena City. Meanwhile, for
violation of the terms and conditions of the
counter-guaranty agreement, the properties of
the Castillos were foreclosed by ICP as the highest
bidder with a bid of P285,212, a certificate of sale
was issued by the provincial sheriff of Lucena City
and TCT over the subject parcels of land were
issued.
ISSUE: Whether or not the foreclosure is proper so
as to apply the doctrine of piercing the veil of
corporate entity.
RULING:
Under the doctrine of piercing the veil of corporate
entity, when valid grounds therefore exist, the
legal fiction that a corporation is an entity with a
juridical personality separate and distinct from its
members or stockholders may be disregarded. In
such cases, the corporation will be considered as a
mere association of persons. The members or
stockholders of the corporation will be considered
as the corporation, that is, liability will attach
directly to the officers and stockholders. The
doctrine applies when the corporate fiction is used
to defeat public convenience, justify wrong,
protect fraud, or defend crime, or when it is made
as a shield to confuse the legitimate issues or
where a corporation is the 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.
Piercing the veil of corporate entity is not the
proper remedy in order that the foreclosure
NOTES IN CORPORATION LAW
proceeding may be declared a nullity under the
circumstances obtaining in the legal case at bar.
In the first place, the legal corporate entity is
disregarded only if it is sought to hold the officers
and stockholders directly liable for a corporate
debt or obligation. In the instant case, petitioners
do not seek to impose a claim against the
individual members of the three corporations
involved; on the contrary, it is these corporations
which desire to enforce an alleged right against
petitioners. Assuming that petitioners were indeed
defrauded by private respondents in the
foreclosure of the mortgaged properties, this fact
alone is not, under the circumstances, sufficient to
justify the piercing of the corporate fiction, since
petitioners do not intend to hold the officers
and/or members of respondent corporations
personally liable therefor. Petitioners are merely
seeking the declaration of the nullity of the
foreclosure sale, which relief may be obtained
without having to disregard the aforesaid
corporate fiction attaching to respondent
corporations. Secondly, petitioners failed to
establish by clear and convincing evidence that
private respondents were purposely formed and
operated, and thereafter transacted with
petitioners, with the sole intention of defrauding
the latter.
The mere fact, therefore, that the businesses of two
or more corporations are interrelated is not a
justification for disregarding their separate
personalities, absent sufficient showing that the
corporate entity was purposely used as a shield to
defraud creditors and third persons of their rights.
REMO VS. IAC
GR NO. L-67626
FACTS:
The Board of Directors of Akron Corporation
composed of petitioner Remo, Feliciano Coprada,
et al. adopted a resolution authorizing the
purchase of 13 trucks for use in its business.
Feliciano Coprada as President and Chairman of
Akron, purchased 13 trucks from respondent E.B.
Marcha Transport with a downpayment of
P50,000 and a security by way of promissory note
executed by Coprada in favor of Akron. Akron paid
rentals a day but sometime after lapsed in
payment. Coprada wrote respondent asking for
grace period and eventually returned the 10
trucks. Respondent filed a complaint for the
recovery of the sum or 13 trucks against Akron
34
Professor: Atty. Leonardo Nick Gumabun
and its officers/directors. The trial court and later
the IAC found for respondent. Petitioner contends
that he should not be held personally liable for the
corporation’s liabilities.
ISSUE: Whether or not petitioner may be held
personally liable for the corporation’s liabilities.
RULING: No cogent basis to pierce the corporate
veil of Akron and hold petitioner personally liable
for its obligation to private respondent. While it is
true that in December, 1977 petitioner was still a
member of the board of directors of Akron and
that he participated in the adoption of a
resolution authorizing the purchase of 13 trucks
for the use in the brokerage business of Akron to
be paid out of a loan to be secured from a lending
institution, it does not appear that said resolution
was intended to defraud anyone and more
particularly private respondent. Fraud must be
established by clear and convincing evidence.
Indeed, the new corporation confirmed and
assumed the obligation of the old corporation.
There is no indication of an attempt on the part of
Akron to evade payment of its obligation to
private respondent.
LAGUIO VS. NLRC
GR NO. 108936
FACTS:
April Toy Inc. is a domestic corporation engaged
in the manufacturing, exporting and dealing at
wholesale and retail, in stuffed toys. After a year of
operation, April Toy ceased operations because of
its dire financial condition. Hence the petitioners
filed a complaint for illegal shutdown,
retrenchment, dismissal and unfair labor practice.
Thereafter they amended their complaint to
implead Well World Toy Inc. In their complaint,
petitioners alleged that they were originally
probationary employees of Well World Toy Inc.
but were later laid off for starting to organize
themselves into a union. They applied and were
hired by April Toy. They won as the exclusive
bargaining agent for the workers and when they
submitted their CBA proposal, April Toy rejected
in view of its cessation of operations. The closure,
petitioners alleged, is April Toy’s clever ploy to
defeat their right to self-organization. Petitioners
further allege that the incorporators and
principal officers of April Toy are also the
incorporators of Well World Toy, thus both should
be treated as one corporation liable for their
claims. The Labor Arbiter and NLRC both
NOTES IN CORPORATION LAW
recognized said corporations as two distinct
corporations and the closure of April Toy valid.
Thus this petition.
ISSUE: Whether April Toy and Well World Toy
should be treated as one corporation liable for the
grievances of the petitioners.
RULING:
A corporation is invested by law with a personality
separate and distinct from those of the persons
composing it as well as from that of any other
legal entity to which it may be related. Mere
substantial identity of the incorporators of the two
corporations does not necessarily imply fraud nor
warrant the piercing of the veil of corporation
fiction.
In the absence of clear and convincing evidence
that April and Well World’s corporate
personalities were used to perpetuate fraud, or
circumvent the law said corporations were rightly
treated as distinct and separate from each other.
B. Judicial Function
Who has the power to pierce the veil of a
corporate fiction?
- Only the courts (or administrative
tribunals like the NLRC) can pierce the
veil of corporate fiction.
- judgment debtor in the case calls for disciplinary
Note: A sheriff who has a ministerial duty to
enforce a final and executor decision cannot
“pierce the veil of corporate fiction” by enforcing
the decision against stockholders who are not
parties to the action.
CRUZ VS. DALISAY
AM NO. R-181-P
FACTS:
A sworn complaint dated July 23, 1984 was filed
by Adelio Cruz charging Quiterio Dalisay, Senior
Deputy Sheriff of Manila, with malfeasance in
office, corrupt practices and serious irregularities
allegedly committed as follows: a. Respondent
attached and/or levied the money belonging to
complainant Cruz when he was not himself the
judgment debtor in the final judgment of an NLRC
case sought to be enforced but rather the company
known as “Qualitrans Limousine Service, Inc.”;
and b. Respondent also caused the service of the
alias writ of execution upon complainant who is a
resident of Pasay City, despite knowledge that his
35
Professor: Atty. Leonardo Nick Gumabun
territorial jurisdiction covers Manila only and
does not extend to Pasay City.
Respondent in his reply explained that when he
garnished complainant’s cash deposit at the
Philtrust bank he was merely performing a
ministerial duty. And that while it is true that said
writ was addressed to Qualitrans Limousine
Service, Inc., it is also a fact that complainant had
executed an affidavit before the Pasay City
assistant fiscal stating that he is the owner/
president of Qualitrans. Because of that
declaration, the counsel for the plaintiff in the
labor case advised him to serve notice of
garnishment on the Philtrust bank.
ISSUE: Whether or not the personal property of
Cruz (complainant) is properly levied or attached
as owner of the corporation?
RULING:
It is a well-settled doctrine both in law and in
equity that as a legal entity, a corporation has a
personality distinct and separate from its
individual stockholders or members. The mere
fact that one is president of a corporation does not
render the property he owns or possesses the
property of the corporation, since the president, as
individual, and the corporation are separate
entities. The respondent's actuation in enforcing a
judgment against complainant who is not the
action. Considering the ministerial nature of his
duty in enforcing writs of execution, what is
incumbent upon him is to ensure that only that
portion of a decision ordained or decreed in the
dispositive part should be the subject of execution.
C. Effects
What are the effects of disregarding the
corporate veil?
(1) Stockholders would be personally liable for
the acts and contracts of the corporation whose
existence at least for the purpose of the
particular situation involved is ignored.
(2) Court is not denying corporate existence for
all purposes but merely refuses to allow the
corporation to use the corporate privilege for the
particular purpose involved.
Lanuza vs. BF Corporation
NOTES IN CORPORATION LAW
GR NO. 174938
FACTS: Gerardo Lanuza, Jr. and Antonio Olbes are
members of the Board of Directors of Shangri-La
Properties, Inc. BF Corporation entered into
agreements with Shangri-La wherein it undertook
to construct a mall and a multilevel parking
structure along EDSA.Shangri-La had been
consistent in paying BF Corp in accordance with
its progress billing statements. However, Shangri-
La started defaulting in payment.BF Corp filed a
complaint against Shangri-La and its board of
directors. BF Corp alleged that Shangri-La
misrepresented that it had funds to pay and that it
was simply a matter of delayed processing of BF’s
progress billing statements.Construction
eventually was completed but despite demands,
Shangri-La refused to pay the balance. BF also
alleged that Shangri-La’s directors were in bad
faith so they should be held jointly and severally
liable with Shangri-La.
Shangri-La and respondent board members filed a
motion to suspend the proceedings in view of BF’s
failure to submit its dispute to arbitration. RTC
denied the motion. Petitioners filed an answer
saying they are resigned members of the board
since July 15, 1991.Shangri-La and respondents
then filed certiorari with CA which granted their
petition and ordered submission of the directors to
arbitration.
ISSUE: Whether the directors can be made parties
to the arbitration proceedings, pursuant to the
arbitration clause provided in the contract
between BF Corporation and Shangri-La
RULING:
When the courts disregard the corporation’s
distinct and separate personality from its
directors or officers, the courts do not say that the
corporation, in all instances and for all purposes,
is the same as its directors, stockholders, officers,
and agents. It does not result in an absolute
confusion of personalities of the corporation and
the persons composing or representing it. Courts
merely discount the distinction and treat them as
one, in relation to a specific act, in order to extend
the terms of the contract and the liabilities for all
damages to erring corporate officials who
participated in the corporation’s illegal acts. This
is done so that the legal fiction cannot be used to
perpetrate illegalities and injustices.
36
Professor: Atty. Leonardo Nick Gumabun
KUKAN LNTERNATIONAL CORPORATION VS.
REYES
GR NO. 182729
FACTS:
Sometime in March 1998, Kukan, Inc. conducted a
bidding worth Php 5M (reduced to PhP 3,388,502)
for the supply and installation of signages in a
building being constructed in Makati City which
was won by Morales. Despite his compliance,
Morales was only paid the amount of PhP
1,976,371.07, leaving a balance of PhP
1,412,130.93, which Kukan, Inc. refused to pay
despite demands. Morales filed a Complaint with
the RTC against Kukan, Inc. for a sum of money.
However, starting November 2000, Kukan, Inc. no
longer appeared and participated in the
proceedings before the trial court, prompting the
RTC to declare Kukan, Inc. in default and paving
the way for Morales to present his evidence ex
parte. On November 28, 2002, the RTC rendered a
Decision finding for Morales and against Kukan,
Inc.
After the above decision became final and
executory, Morales moved for and secured a writ
of execution against Kukan, Inc. The sheriff then
levied upon various personal properties found at
what was supposed to be Kukan, Inc.’s office at
Unit 2205, 88 Corporate Center, Salcedo Village,
Makati City. Alleging that it owned the properties
thus levied and that it was a different corporation
from Kukan, Inc., Kukan International
Corporation (KIC) filed an Affidavit of Third-Party
Claim. Notably, KIC was incorporated in August
2000, or shortly after Kukan, Inc. had stopped
participating in Civil Case No. 99-93173. In
reaction to KIC’s claim, Morales interposed an
Omnibus Motion dated April 30, 2003, praying,
and applying the principle of piercing the veil of
corporate fiction, that an order be issued for the
satisfaction of the judgment debt of Kukan, Inc.
with the properties under the name or in the
possession of KIC, it being alleged that both
corporations are but one and the same entity. KIC
opposed Morales’ motion. The court denied the
omibus motion.
In a bid to establish the link between KIC and
Kukan, Inc., Morales filed a Motion for
Examination of Judgment Debtors dated May 4,
2005 which sought that subponae be issued
against the primary stockholders of Kukan, Inc.,
among them Michael Chan, a.k.a. Chan Kai Kit.
This too was denied by the court. Morales then
NOTES IN CORPORATION LAW
sought the inhibition of the presiding judge,
Eduardo B. Peralta, Jr., who eventually granted
the motion. The case was re-raffled to Branch 21,
presided by public respondent Judge Amor Reyes.
Before the Manila RTC, Branch 21, Morales filed a
Motion to Pierce the Veil of Corporate Fiction to
declare KIC as having no existence separate from
Kukan, Inc. This time around, the RTC, by Order
dated March 12, 2007, granted the motion. From
the above order, KIC moved but was denied
reconsideration in another Order dated June 7,
2007. KIC went to the CA on a petition for
certiorari to nullify the aforesaid March 12 and
June 7, 2007 RTC Orders but on January 23, 2008,
the CA denied the petition and affirmed the
assailed Orders. The CA later denied KIC’s MR in
the assailed resolution. Hence, the instant petition
for review.
ISSUE: Whether the trial and appellate courts
correctly applied, under the premises, the
principle of piercing the veil of corporate fiction.
RULING: The principle of piercing the veil of
corporate fiction, and the resulting treatment of
two related corporations as one and the same
juridical person with respect to a given
transaction, is basically applied only to determine
established liability; it is not available to confer on
the court a jurisdiction it has not acquired, in the
first place, over a party not impleaded in a case.
Elsewise put, a corporation not impleaded in a suit
cannot be subject to the court’s process of piercing
the veil of its corporate fiction. In that situation,
the court has not acquired jurisdiction over the
corporation and, hence, any proceedings taken
against that corporation and its property would
infringe on its right to due process.
The court requires that the corporation or person
who is sought to be made liable must be impleaded
stating that the implication is twofold: (1) the
court must first acquire jurisdiction over the
corporation or corporations involved before its or
their separate personalities are disregarded; and
(2) the doctrine of piercing the veil of corporate
entity can only be raised during a full-blown trial
over a cause of action duly commenced involving
parties duly brought under the authority of the
court by way of service of summons or what passes
as such service.
Pamplona Plantation Co. lnc. vs. Tinghil, GR
No. 159121
FACTS:
37
Professor: Atty. Leonardo Nick Gumabun
Sometime in 1993, Petitioner Pamplona
Plantations Company, Inc. (company for brevity)
was organized for the purpose of taking over the
operations of the coconut and sugar plantation of
Hacienda Pamplona located in Pamplona, Negros
Oriental. It appears that Hacienda Pamplona was
formerly owned by a certain Mr. Bower who had
in his employ several agricultural workers.
Sometime in 1995, Pamplona Plantation Leisure
Corporation was established for the purpose of
engaging in the business of operating tourist
resorts, hotels, and inns, with complementary
facilities, such as restaurants, bars, boutiques,
service shops, entertainment, golf courses, tennis
courts, and other land and aquatic sports and
leisure facilities.
On 1996, the Pamplona Plantation Labor
Independent Union (PAPLIU) conducted an
organizational
meeting wherein several respondents who are
either union members or officers participated in
said
meeting.
Upon learning that some of the respondents
attended the said meeting, Petitioner Jose Luis
Bondoc,
manager of the company, did not allow
respondents to work anymore in the plantation.
Respondents filed their respective complaints with
the NLRC for unfair labor practice, illegal
dismissal, underpayment, overtime pay, premium
pay for rest day and holidays, service incentive
leave pay, damages, attorney's fees and 13th
month pay.
Carlito Tinghil amended his complaint to implead
Pamplona Plantation Leisure Corporation. On 31
August 1998, Labor Arbiter Jose G. Gutierrez
rendered a decision finding respondents except
Rufino Bacubac, Antonio Canolas and Felix Torres
who were complainants in another case, to be
entitled to separation pay.
NLRC reversed. It ruled that respondents, except
Carlito Tinghil, failed to implead Pamplona
Plantation Leisure Corporation, an indispensable
party and that 'there exist no employer-employee
relation between the parties.
Nonetheless, CA ruled on the matter and found
that respondents were illegally dismissed.
ISSUE:
Whether the case should be dismissed for the non-
joinder of the Pamplona Plantation Leisure
Corporation. (NO)
NOTES IN CORPORATION LAW
RULING:
In examination of the facts reveals that, for both
the coconut plantation and the golf course, there
is only one management which the laborers deal
with regarding their work. A portion of the
plantation (also called Hacienda Pamplona) had
actually been converted into a golf course and
other recreational facilities. The weekly payrolls
issued by petitioner-company bore the name
"Pamplona Plantation Co., Inc." It is also a fact
that respondents all received their pay from the
same person, Petitioner Bondoc - - the managing
director of the company. Since the workers were
working for a firm known as Pamplona Plantation
Co., Inc., the reason they sued their employer
through that name was natural and
understandable.
True, the Petitioner Pamplona Plantation Co., Inc.,
and the Pamplona Plantation Leisure Corporation
appear to be separate corporate entities. But it is
settled that this fiction of law cannot be invoked to
further an end subversive of justice.
The principle requiring the piercing of the
corporate veil mandates courts to see through the
protective shroud that distinguishes one
corporation from a seemingly separate one. The
corporate mask may be removed and the
corporate veil pierced when a corporation is the
mere alter ego of another. Where badges of fraud
exist, where public convenience is defeated, where
a wrong is sought to be justified thereby, or where
a separate corporate identity is used to evade
financial obligations to employees or to third
parties, the notion of separate legal entity should
be set aside and the factual
truth upheld. When that happens, the corporate
character is not necessarily abrogated. It
continues for other legitimate objectives.
However, it may be pierced in any of the instances
cited in order to promote substantial justice.
In the present case, the corporations have
basically the same incorporators and directors
and are headed by the same official. Both use only
one office and one payroll and are under one
management. In their individual Affidavits,
respondents allege that they worked under the
supervision and control of Petitioner Bondoc - -
the common managing director of both the
petitioner-company and the leisure corporation.
Some of the laborers of the plantation also work in
the golf course. Thus, the attempt to make the two
corporations appear as two separate entities,
insofar as the workers are concerned, should be
viewed as a devious but obvious means to defeat
the ends of the law. Such a ploy should not be
38
Professor: Atty. Leonardo Nick Gumabun
permitted to cloud the truth and perpetrate an
injustice.
We note that this defense of separate corporate
identity was not raised during the proceedings
before
the labor arbiter. The main argument therein
raised by petitioners was their alleged lack of
employer-employee relationship with, and power
of control over, the means and methods of work of
respondents because of the seasonal nature of the
latter's work.
Neither was the issue of non-joinder of
indispensable parties raised in petitioners' appeal
before the
NLRC. Nevertheless, the Commission concluded
that the plantation company and the leisure
corporation were two separate and distinct
corporations, and that the latter was an
indispensable party that should have been
impleaded.
Indeed, it was only after this NLRC Decision was
issued that the petitioners harped on the separate
personality of the Pamplona Plantation Co., Inc.,
vis -a-vis the Pamplona Plantation Leisure
Corporation.
NLRC dismissed the Complaints because of the
alleged admission of respondents in their
Affidavits that they had been working at the golf
course. However, it failed to appreciate the rest of
their averments. Just because they worked at the
golf course did not necessarily mean that they
were not employed to do other tasks, especially
since the golf course was merely a portion of the
coconut plantation. Even petitioners admitted
that respondents had been hired as coconut filers,
coconut scoopers or charcoal makers.
Consequently, NLRC's conclusion derived from the
Affidavits of respondents stating that they were
employees of the Pamplona Plantation Leisure
Corporation alone was the result of an improper
selective appreciation of the entire evidence.
Furthermore, we note that, contrary to the NLRC's
findings, some respondents indicated that their
employer was the Pamplona Plantation Leisure
Corporation, while others said that it was the
Pamplona Plantation Co., Inc. But in all these
Affidavits, both the leisure corporation and
petitioner company were identified or described
as entities engaged in the development and
operation of sugar
and coconut plantations, as well as recreational
facilities such as a golf course. These allegations
reveal that petitioner successfully confused the
NOTES IN CORPORATION LAW Professor: Atty. Leonardo Nick Gumabun
workers as to who their true and real employer (b) The specific purpose or purposes for which
was. the corporation is being formed. Where a
All things considered, their faulty belief that the corporation has more than one stated purpose,
plantation company and the leisure corporation the articles of incorporation shall indicate the
were primary purpose and the secondary purpose or
one and the same can be attributed solely to purposes: Provided, That a nonstock corporation
petitioners. It would certainly be unjust to
may not include a purpose which would change
prejudice the
or contradict its nature as such;
claims of the workers because of the misleading
actions of their employer.
(c) The place where the principal office of the
corporation is to be located, which must be
VII. INCORPORATION AND ORGANIZATION
within the Philippines;
A. Concept
(d) The term for which the corporation is to exist,
if the corporation has not elected
Incorporation
perpetual existence;
- Incorporation is the process of drafting the
(e) The names, nationalities, and residence
Articles of Incorporation, its submission to the
addresses of the incorporators;
SEC, and the subsequent approval of the SEC. It
means the performance of conditions, acts,
(f) The number of directors, which shall not be
deeds, and writings by incorporators, and the
more than fifteen (15) or the number of trustees
official acts, certification or records, which give
which may be more than fifteen (15);
the corporation its existence.
- A person or group of persons desiring to
(g) The names, nationalities, and residence
incorporate shall submit the intended corporate
addresses of persons who shall act as directors
name to the Commission for verification.
or trustees until the first regular directors or
trustees are duly elected and qualified in
If the Commission finds that the name is
accordance with this Code;
distinguishable from a name already reserved or
registered for the use of another corporation, not
(h) If it be a stock corporation, the amount of its
protected by law and is not contrary to law, rules
authorized capital stock, number of shares
and regulations, the name shall be reserved in
into which it is divided, the par value of each,
favor of the incorporators.
names, nationalities, and residence addresses of
the original subscribers, amount subscribed and
The incorporators shall then submit their
paid by each on the subscription, and a
articles of incorporation and bylaws to the
statement that some or all of the shares are
Commission.2
without par value, if applicable;
Authentication by Incorporators.
(i) If it be a nonstock corporation, the amount of
– The Commission will accept for registration
its capital, the names, nationalities, and
Articles of Incorporation that are accompanied
residence addresses of the contributors, and
by a Certificate of Authentication signed by all
amount contributed by each; and
incorporators in the form prescribed by the
Commission…both the Articles of Incorporation
(j)Such other matters consistent with law and
and the Certificate of Authentication need not be
which the incorporators may deem necessary
notarized nor consularized.3
and convenient.
B. Contents and Form of Articles of
Notes:
lncorporation
✓ An arbitration agreement may be provided
in the articles of incorporation.
(a) The name of the corporation;

2
Par. 1, Sec. 18, RCC 3
SEC MC NO. 16-2020

39
NOTES IN CORPORATION LAW
✓ Articles of incorporation and applications
for amendments thereto may be filed with
the Commission in the form of an electronic
document.
Professor: Atty. Leonardo Nick Gumabun
INDUSTRIAL REFRACTORIES CORPORATION
OF THE PHILS. VS. CA
GR NO. 122174

1. Corporate Name FACTS:

What is the relevance of a corporate name?
- It is in that name by which the
corporation will be known. (For identity
purposes)
What are the limitations as to the adoption of
a corporate name?
The Commission cannot allow a corporate name
that is:
1. Not distinguishable from that already
reserved or registered for the use of another
corporation
2. Already protected by law
3. Contrary to law, rules, and regulations4
A name is not distinguishable even if it
contains the following:
1. The word “corporation”, “company”,
“incorporated”, “limited”, “limited liability” or an
abbreviation of such
2. Punctuations, articles, conjunctions,
contractions, prepositions, abbreviations, other
tenses, spaces, or number of the same word or
phrase
What happens if the corporation does not
follow the rule on corporate names?
- The SEC will first conduct a summary
investigation. If it finds that the
corporation’s name violated the
limitations, it will issue a Cease and Desist
Order. It may also cause the removal of
visible signages, marks, advertisements,
labels, prints, and other effects bearing
the corporate name.
If the corporation fails to comply with the
Order, the SEC may:
1. Hold the responsible officers in contempt
2. Hold them administratively, civilly, or
criminally liable
3. Revoke the registration of the
corporation
Respondent Refractories Corporation of the
Philippines (RCP) is a corporation duly organized
on October 13, 1976 for the purpose of engaging
in the business of manufacturing, producing,
selling, exporting and otherwise dealing in any
and all refractory bricks, its by-products and
derivatives. On June 22, 1977, it registered its
corporate and business name with the Bureau of
Domestic Trade. Petitioner IRCP on the other
hand, was incorporated on August 23, 1979
originally under the name “Synclaire
Manufacturing Corporation”. It amended its
Articles of Incorporation on August 23, 1985 to
change its corporate name to “Industrial
Refractories Corp. of the Philippines”. It is
engaged in the business of manufacturing all
kinds of ceramics and other products, except
paints and zincs. Both companies are the only
local suppliers of monolithic gunning mix.
Discovering that petitioner was using such
corporate name, respondent RCP filed on April 14,
1988 with the Securities and Exchange
Commission (SEC) a petition to compel petitioner
to change its corporate name on the ground that
its corporate name is confusingly similar with that
of petitioner’s such that the public may be
confused or deceived into believing that they are
one and the same corporatio. The SEC decided in
favor of respondent RCP and rendered judgment
declaring the latter’s corporate name ‘Industrial
Refractories Corporation of the Philippines’ as
deceptively and confusingly similar to that of
petitioner’s corporate name ‘Refractories
Corporation of the Philippines’.
Accordingly, respondent is hereby directed to
amend its Articles of Incorporation by deleting the
name ‘Refractories Corporation of the Philippines’
in its corporate name within thirty (30) days from
finality of this Decision. Likewise, respondent is
hereby ordered to pay the petitioner the sum of
P50,000.00 as attorney’s fees.” Petitioner
appealed to the SEC En Banc, arguing that it does
not have any jurisdiction over the case, and that
respondent RCP has no right to the exclusive use of
its corporate name as it is composed of generic or

4 Sec 17. RCC

40
NOTES IN CORPORATION LAW
common words. In its Decision dated July 23, 1993,
the SEC En Banc modified the appealed decision in
that petitioner was ordered to delete or drop from
its corporate name only the word “Refractories”.
ISSUE: Whether or not there is confusing
similarity between the corporate names of the
petitioner and the defendant.
RULING:
Section 18 of the Corporation Code expressly
prohibits the use of a corporate name which is
"identical or deceptively or confusingly similar to
that of any existing corporation or to any other
name already protected by law or is patently
deceptive, confusing or contrary to existing laws".
The policy behind the foregoing prohibition is to
avoid fraud upon the public that will have
occasion to deal with the entity concerned, the
evasion of legal obligations and duties, and the
reduction of difficulties of administration and
supervision over corporation.
Pursuant thereto, the Revised Guidelines in the
Approval of Corporate and Partnership Names
specifically requires that: (1) a corporate name
shall not be identical, misleading or confusingly
similar to one already registered by another
corporation with the Commission; and (2) if the
proposed name is similar to the name of a
registered firm, the proposed name must contain
at least one distinctive word different from the
name of the company already registered. To fall
within the prohibition of the law, two requisites
must be proven, to wit: (1) that the complainant
corporation acquired a prior right over the use of
such corporate name; and (2) the proposed name
is either: (a) identical, or (b) deceptively or
confusingly similar to that of any existing
corporation or to any other name already
protected by law; or (c) patently deceptive,
confusing or contrary to existing law.
As regards the first requisite, it has been held that
the right to the exclusive use of a corporate name
with freedom from infringement by similarity is
determined by priority of adoption. Anent the
second requisite, in determining the existence of
confusing similarity in corporate names, the test is
whether the similarity is such as to mislead a
person using ordinary care and discrimination
and the Court must look to the record as well as
the names themselves.
41
Professor: Atty. Leonardo Nick Gumabun
ANG MGA KAANIB SA IGLESIA NG DIOS KAY
KRISTO HESUS, H.S.K SA BANSANG PILIPINAS,
INC. VS. LGLESIA NG DIOS KAY CRISTO JESUS,
GR NO. 137592
FACTS:
Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng
Katotohanan (Suhay), is a non-stock religious
society or corporation registered in 1936.In 1976,
Eliseo Soriano and other members of corporation
disassociated themselves from the church. In
1977, they succeeded in registering a new non-
stock religious society or corporation, named
Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan
ng Katotohanan (Saligan).In 1979, Suhay filed
with the SEC a petition to compel Saligan to
change its corporate name.
The SEC rule in favor of Suhay, ordering Saligan to
change its corporate name to another name that
is not similar or identical to any name already
used by a corporation, partnership or association
registered with the Commission.
No appeal was taken from said decision. During its
pendency, however, or in 1980, Soriano, et al.,
registered Ang Mga Kaanib sa Iglesia ng Dios Kay
Kristo Hesus, H.S.K, sa Bansang Pilipinas (Kaanib).
The acronym "H.S.K." stands for Haligi at Saligan
ng Katotohanan. In 1994, Suhay filed another
petition with the SEC, praying that Kaanib be
compelled to change its corporate name and be
barred from using the same or similar name on the
ground that the same causes confusion among
their members as well as the public. Kaanib filed a
motion to dismiss on the ground of lack of cause of
action. The motion to dismiss was denied. SEC
ruled against Kaanib and ordered it to change its
corporate name. SEC En Banc and the CA affirmed.
Hence this petition.
ISSUE: Should Kaanib be allowed to use the name
it registered?
RULING:
The additional words Ang Mga Kaanib and Sa
Bansang Pilipinas, Inc. in petitioners name are, as
correctly observed by the SEC, merely descriptive
of and also referring to the members, or kaanib, of
respondent who are likewise residing in the
Philippines.
These words can hardly serve as an effective
differentiating medium necessary to avoid
confusion or difficulty in distinguishing petitioner
from respondent. This is especially so, since both
NOTES IN CORPORATION LAW
petitioner and respondent corporations are using
the same acronym --- H.S.K.; not to mention the
fact that both are espousing religious beliefs and
operating in the same place.
Parenthetically, it is well to mention that the
acronym H.S.K. used by petitioner stands for Haligi
at Saligan ng Katotohanan. Then, too, the records
reveal that in holding out their corporate name to
the public, petitioner highlights the dominant
words IGLESIA NG DIOS KAY KRISTO HESUS,
HALIGI AT SALIGAN NG KATOTOHANAN, which is
strikingly similar to respondent's corporate name,
thus making it even more evident that the
additional words Ang Mga Kaanib and Sa
Bansang Pilipinas, Inc., are merely descriptive of
and pertaining to the members of respondent
corporation. Significantly, the only difference
between the corporate names of petitioner and
respondent are the words SALIGAN and SUHAY.
These words are synonymous --- both mean
ground, foundation or support. Hence, the names
are undisputably so similar that even under the
test of reasonable care and observation confusion
may arise.
LAUREANO INVESTMENT & DEVELOPMENT
CORP. VS. CA, GR NO. 100468
Under the Civil Code, a corporation has a legal
personality of its own (Article 44), and may sue or
be sued in its name, in conformity with the laws
and regulations of its organization. Additionally,
Article 36 of the Corporation Code similarly
provides: Every corporation incorporated under
this Code has the power and capacity: (1) To sue
and be sued in its corporate name. "Lideco
Corporation" had no personality to intervene since
it had not been duly registered as a corporation. If
petitioner legally and truly wanted to intervene, it
should have used its corporate name as the law
requires and not another name which it had not
registered. Indeed, as the Respondent Court found,
nowhere in the motion for intervention and
complaint in intervention does it appear that
"Lideco Corporation" stands for Laureano
Investment and Development Corporation.
INDIAN CHAMBER OF COMMERCE PHILS. LNC.
VS. FILIPINO LNDIAN CHAMBER OF
COMMERCE IN THE PHLIPPINES, LNC.,
GR NO. 184008
FACTS:
The Filipino-Indian Chamber of Commerce of the
Philippines, Inc (defunct FICCPI) was registered
42
Professor: Atty. Leonardo Nick Gumabun
with the SEC on November 24 1951. However, it
failed to request an extension of its corporate term
on November 24 2001, hence its corporate
existence expired on that date. On January 20
2005, Maresh Mansukhani reserved the name
FICCPI with the SEC. This was opposed by Ram
Sitaldas who claimed to be a member of the
defunct FICCPI, on the ground that FICCPI has
been in use for a long time by the defunct FICCPI
and that, hence, said name reservation by another
person who is not its member is illegal. The SEC
however, denied Sitaldas's opposition, and the
latter appealed to the CA. While this case was
pending, the SEC issued the certificate of
incorporation to FICCPI.
RULING:
FICCPI was incorporated on March 14, 2006. On
the other hand, ICCPI was incorporated only on
April 5, 2006, or a month after FICCPI registered
its corporate name. Thus, applying the principle in
the Refractories case, we hold that FICCPI, which
was incorporated earlier, acquired a prior right
over the use of the corporate name.
It is settled that a corporation is ipso facto
dissolved as soon as its term of existence
expires.However, the name of a dissolved firm
shall not be allowed to be used by other firms
within three (3) years after the approval of the
dissolution of the corporation by the Commission,
unless allowed by the last stockholders
representing at least majority of the outstanding
capital stock of the dissolved firm. ICCPI's name is
identical to that of FICCPI. ICCPFs and FICCPFs
corporate names both contain the same words
"Indian Chamber of Commerce."
The confusion and deception are effectively
precluded by appending the word "Filipino" to the
phrase "Indian Chamber of Commerce." The word
'Filipino' in the corporate name of the respondent
[FICCPI] is merely descriptive and can hardly
serve as an effective differentiating medium
necessary to avoid confusion. The other two words
alluded to by petitioner [ICCPI] that allegedly
distinguishes its corporate name from that of the
respondent are the words 'in' and 'the' in the
respondent's corporate name. The presence of the
words 'in' and 'the' in respondent's corporate
name does not, in any way, make an effective
distinction to that of petitioner."
NOTES IN CORPORATION LAW
SEC MC No. 13-2019
The Commission is adopting the following
guidelines and procedures in the registration of
corporate, one person corporate and
partnership names:
I.
a.) Corporate name shall contain the word
“Corporation” or “Incorporated” or the
abbreviations “Corp.” or “Inc.” respectively.
b.) In One Person Corporation, the corporate
name shall contain “OPC”.
c.) The partnership name shall bear the word
“Company” or “Co.” and if it is a limited
partnership, the word “Limited” or “Ltd.”. A
professional partnership may bear the word
“Company”, “Associates”, or “Partners”.
d.) The corporate name of a foundation shall use
the word “Foundation”.
e.) The corporate name of all non-stock, non-
profit corporations, including non-governmental
organizations and foundations, engaging in
microfinance activities shall use the word
“Microfinance” or “Microfinancing”
II.
a.) The name shall be distinguishable from other
corporate or partnership name registered with
the Commission or with the Department of Trade
and Industry.
b.) If the name applied for is similar to that of a
registered corporation or partnership, the
applicant shall add one or more distinctive
words to the proposed name to remove the
similarity or differentiate it from the registered
name
c.) Punctuation marks, spaces, signs, symbols,
and other similar characters, regardless of their
form or arrangement, shall not be acceptable as
distinguishing words for purposes of
differentiating a proposed name from a
registered name.
d.) A name that consist solely of special symbols,
punctuation marks or specially designed
characters shall not be registered.
43
Professor: Atty. Leonardo Nick Gumabun
III.
a.) The full name or surname of a person may be
used in a corporate or partnership name if he or
she is a stockholder, member or partner and
consented to such use, if the person is already
deceased, the consent shall be given by his
estate.
b.) A single stockholder of OPC may use his name,
or may also use the name of another provided
with consent of such use, and further provided it
be accompanied with descriptive words aside
from the suffix OPC.
c.) Commission may require a registrant to
explain to its satisfaction the reason for the use
of a person’s name.
d.) The meaning of the initials used in the name
shall be stated by the registrant in the AOI.
IV.
The name of an internationally known foreign
corporation, or something similar to it, cannot be
used by a domestic corporation unless it is its
subsidiary and the parent corporation has
consented.
However, a name cannot be registered when
such violates good morals, public order or public
policy, or has an offensive or indecorous
meaning in any of the country’s official languages
or major dialects.
a. Doctrine of Secondary Meaning
- a word or phrase originally incapable of
exclusive appropriation with reference to an
article in the market, because geographical or
otherwise descriptive might nevertheless have
been used so long and so exclusively by one
producer with reference to this article that, in
that trade and to that group of the purchasing
public, the word or phrase has come to mean that
the article was his produce.
LYCEUM OF THE PHILIPPINES, LNC. VS. CA
GR NO. 101897
FACTS:
Petitioner Lyceum of the Philippines had
commenced before the SEC a proceeding against
the Lyceum of Baguio to change its corporate
name alleging that the 2 names are substantially
identical because of the word ‘Lyceum’. SEC found
for petitioner and the SC denied the consequent
NOTES IN CORPORATION LAW
appeal of Lyceum of Baguio in a resolution.
Petitioner then basing its ground on the
resolution, wrote to all educational institutions
which made use of the word ‘Lyceum’ as part of
their corporate name to discontinue their use.
When this recourse failed, petitioner moved before
the SEC to enforce its exclusive use of the word
‘Lyceum.’ Petitioner further claimed that the word
‘Lyceum’ has acquired a secondary meaning in its
favor. The SEC Hearing Officer found for
petitioner. Both SEC En Banc and CA ruled
otherwise.
ISSUES:
(1) Whether or not ‘Lyceum’ is a generic word
which cannot be appropriated by petitioner to the
exclusion of others.
(2) Whether or not the word ‘Lyceum’ has
acquired a secondary meaning in favor of
petitioner.
(3) Whether or not petitioner is infringed by
respondent institutions’ corporate names.
RULING:
In the name of the petitioner, “Lyceum” appears to
be a substitute for “university;” in other places,
however, “Lyceum,” or “Liceo” or “Lycee”
frequently denotes a secondary school or a college.
It may be that the use of the word “Lyceum” may
not yet be as widespread as the use of “university,”
but it is clear that a not inconsiderable number of
educational institutions have adopted “Lyceum”
or “Liceo” as part of their corporate names. Since
“Lyceum” or “Liceo” denotes a school or institution
of learning, it is not unnatural to use this word to
designate an entity which is organized and
operating as an educational institution.
Appellant failed to satisfy the requisites of
doctrine of secondary meaning. While the
appellant may have proved that it had been using
the word ‘Lyceum’ for a long period of time, this
fact alone did not amount to mean that the said
word had acquired secondary meaning in its favor
because the appellant failed to prove that it had
been using the same word all by itself to the
exclusion of others. More so, there was no evidence
presented to prove that confusion will surely arise
if the same word were to be used by other
educational institutions.
5
(Republic Planters Bank v. CA, G.R. No. 93073, December
21, 1992)
44
Professor: Atty. Leonardo Nick Gumabun
We do not consider that the corporate names of
private respondent institutions are “identical
with, or deceptively or confusingly similar” to that
of the petitioner institution. True enough, the
corporate names of private respondent entities all
carry the word “Lyceum” but confusion and
deception are effectively precluded by the
appending of geographic names to the word
“Lyceum.”
b. Change of Name and its Effects
Note: A corporation that changes its corporate
name is not considered as a new corporation. It is
the same corporation with a different name, and
its character is in no respect changed.5
ZUELLIG FREIGHT AND CARGO SYSTEMS VS.
NLRC, GR NO. 157900
FACTS:
San Miguel’s contentions: The amendments of the
articles of incorporation of Zeta were for the
purpose of changing the corporate name,
broadening the primary functions, and increasing
the capital stock; and that such amendments
could not mean that Zeta had been thereby
dissolved.
Zuellig’s contentions: San Miguel’s termination
from Zeta had been for a cause authorized by the
Labor Code; its predecessor-in-interest had
complied with the requirements for termination
due to the cessation of business operations; it had
no obligation to employ San Miguel in the exercise
of its valid management prerogative. The Labor
Arbiter (LA) ruled in favor of San Miguel, holding
that he had been illegally dismissed.
LA: There was no valid cause for termination
because Zeta did not really cease its operations. It
merely changes itsbusiness name and primary
purpose and upgrading of stocks of the
corporation. Zuellig and Zeta are legally the same
person and entity.
The NLRC affirmed the LA’s decision. Zuellig
elevated the case to the CA, which also ruled
against it.CA: The closure of business operation
was not validly made. The amendment of the
articles of incorporation merely changed its
corporate name, broadened its primary purpose
and increased its authorized capital stocks. There
NOTES IN CORPORATION LAW
being no valid closure of business operations, the
dismissal of San Miguel on alleged authorized
cause of cessation of business was illegal. Hence
this appeal to the SC.
ISSUE: Whether or not San Miguel’s termination
was legal?
RULING:
The amendments of the articles of
incorporation of Zeta to change the corporate
name to Zuellig Freight and Cargo Systems,
Inc. did not produce the dissolution of the
former as a corporation. For sure, the
Corporation Code defined and delineated the
different modes of dissolving a corporation, and
amendment of the articles of incorporation was
not one of such modes. The effect of the change of
name was not a change of the corporate being, for,
as well stated in Philippine First Insurance Co., Inc.
v. Hartigan: “The changing of the name of a
corporation is no more the creation of a
corporation than the changing of the name of a
natural person is begetting of a natural person.
The act, in both cases, would seem to be what the
language which we use to designate it imports – a
change of name, and not a change of being.”
In short, Zeta and petitioner Zuellig remained one
and the same corporation. The change of name did
not give petitioner the license to terminate
employees of Zeta without just or authorized
cause. Zuellig, despite its new name, was the mere
continuation of Zeta’s corporate being, and still
held the obligation to honor all of Zeta’s
obligations, one of which was to respect San
Miguel’s security of tenure.
Philippine First lnsurance Co. vs. Hartigan –
GR No. L-26370
FACTS:
Plaintiff was originally organized as an insurance
corporation under the name of ‘The Yek Tong Lin
Fire and Marine Insurance Co., Ltd.,’ in 1953. But
on 26 May 1961, its Articles of Incorporation were
amended changing the name of the corporation to
‘Philippine First Insurance, Co., Inc.’. The case
arose when plaintiff, acting in the name of Yek
Tong, signed as co-maker together with
defendants, a promissory note in favor of China
Banking Corporation. Subsequently, as form of
security, defendants signed an indemnity
agreement in favor of plaintiff in case damages or
loses arises thereof. Defendant Hartigan failed to
45
Professor: Atty. Leonardo Nick Gumabun
pay, hence, the complaint for collection of sum of
money with interest and other fees. Defendants
deny the allegations, claiming, among others that
there is no privity of contract between them and
plaintiff since the plaintiff did not conduct its
business under the name of Yek Tong Insurance,
hence not entitled to the indemnification
agreement which is named in favor of Yek Tong.
RULING:
The general rule as to corporations is that each
corporation shall have a name by which it is to sue
and be sued and do all legal acts. The name of a
corporation in this respect designates the
corporation in the same manner as the name of an
individual designates the person." Since an
individual has the right to change his name under
certain conditions, there is no compelling reason
why a corporation may not enjoy the same right.
By the corporation's own act, it has to follow the
procedure prescribed by law for the purpose; and
this is what is important and indispensably
prescribed — strict adherence to such procedure.
A mere change in the name of a corporation,
either by the legislature or by the corporators
or stockholders under legislative authority,
does not, generally speaking, affect the
identity of the corporation, nor in any way
affect the rights, privileges, or obligations
previously acquired or incurred by it.
Indeed, it has been said that a change of
name by a corporation has no more effect upon
the identity of the corporation than a change of
name by a natural person has upon the identity of
such person. The corporation, upon such change in
its name, is in no sense a new corporation, nor the
successor of the original one, but remains and
continues to be the original corporation. It is the
same corporation with a different name, and its
character is in no respect changed.
LAUREANO LNVESTMENT & DEVELOPMENT
CORP. VS. CA, GR NO. 100468
FACTS:
Spouses Reynaldo Laureano and Florence
Laureano are majority stockholders of
LAUREANO INVESTMENT & DEVELOPMENT
CORPORATION. They entered into a series of loan
and credit transactions with Philippine National
Cooperative Bank (PNCB). To secure payment of
the loans, they executed Deeds of Real Estate
Mortgage. In view of their failure to pay their
indebtedness, PNCB applied for extrajudicial
foreclosure of the real estate mortgages.
NOTES IN CORPORATION LAW
Bormaheco, Inc. became the successor of the
obligations and liabilities of PNCB over subject
lots by virtue of a Deed of Sale/Assignment.
Bormaheco, Inc. filed an ex-parte petition with the
Registry of Deeds of Makati for the issuance of a
writ of possession over various lots that it bought
from a bank. A motion for intervention was filed
by LIDECO Corporation for certain adverse claims.
Bormaheco opposed the motion on the ground
that Lideco has no personality to sue because it is
not a juridical entity. Apparently, Lideco is not a
corporation registered with the Securities and
Exchange Commission. Bormaheco’s opposition
was granted. Lideco assailed the decision on the
ground that LIDECO is an acronym for Laureano
Investment & Development Corporation which is a
duly organized corporation. Both the lower court
and CA rendered a decision in favor of Bormaheco.
ISSUE: May a plaintiff/petitioner which purports
to be a corporation validly bring suit under a
name other than that registered with the
Securities and Exchange Commission?
RULING: Under the Civil Code, a corporation has a
legal personality of its own (Article 44), and may
sue or be sued in its name, in conformity with the
laws and regulations of its organization (Article
46). Additionally, Article 36 of the Corporation
Code similarly provides: Every corporation
incorporated has the power and capacity: To sue
and be sued in its corporate name. "Lideco
Corporation" had no personality to intervene since
it had not been duly registered as a corporation. If
petitioner legally and truly wanted to intervene, it
should have used its corporate name as the law
requires and not another name which it had not
registered.
PISON-ARCEO AGRICULTURAL DEVELOPMENT
CORP. VS. NLRC, GR NO. 117890
FACTS:
In the proceedings before the labor arbiter, only
the unregistered trade name of the employer-
corporation and its administrator/manager were
impleaded and subsequently held liable for illegal
dismissal, backwages and separation pay. On
appeal, however, the National Labor Relations
Commission motu proprio included the corporate
name of the employer as jointly and severally
liable for the workers claims. Because of such
6
Sec. 159, RCC
46
Professor: Atty. Leonardo Nick Gumabun
inclusion, the corporation now raises issues of due
process and jurisdiction before this Court.
ISSUE: Whether or not Public Respondent NLRC
acted without or in excess of jurisdiction or with
grave abuse of discretion when it included motu
proprio petitioner corporation as a party
respondent and ordered said corporation liable to
pay jointly and severally, with Jose Edmundo Pison
the claims of private respondents.
RULING:
Hacienda Lanutan is an arm of petitioner, the
organism of which it is an integral part.
Ineluctably, the real party in interest in this case is
petitioner, not Hacienda Lanutan which is merely
its non-juridical arm. In dealing with private
respondents, petitioner represented itself to be
Hacienda Lanutan. Hacienda Lanutan is roughly
equivalent to its trade name or even nickname or
alias. The names may have been different, but
the IDENTITY of the petitioner is not in dispute.
Thus, it may be sued under the name by which
it made itself known to the workers.
c. Penalty for Unauthorized Use
Unauthorized Use of Corporate Name
Penalties
- The unauthorized use of a corporate name shall
be punished with a fine ranging from Ten
thousand pesos (P10,000.00) to Two hundred
thousand pesos (P200,000.00).6
2. Purpose Clause
- clause in the articles of incorporation which
states the specific purpose or purposes for which
the corporation is being incorporated.
- purpose clause is important in order to assure
that persons who invest in corporate entities
would be aware of the business the corporation
is designed to engage in.
Sec 13(b), RCC
- The specific purpose or purposes for which the
corporation is being formed. Where a corporation has
more than one stated purpose, the articles of
incorporation shall indicate the primary purpose and the
secondary purpose or purposes: Provided, that a
nonstock corporation may not include a purpose which
would change or contradict its nature as such.
NOTES IN CORPORATION LAW
a. Primary vs. Secondary
1. Primary Purpose
- must be only one
- main purpose of the corporation
2. Secondary Purpose
- may be several
- other purposes not allied or incidental to the
primary purpose.
3. Principal Office
Sec 13(c), RCC
(c) The place where the principal office of the corporation
is to be located, which must be within the Philippines;
HYATT ELEVATORS AND ESCALATORS CORP.
VS. GOLDSTAR ELEVATORS, PHILS., INC.,
GR NO. 161026
FACTS:
In this case, the petitioner is Goldstar Elevator
Philippines Inc. and on the other hand the private
respondent, Hyatt Elevators and Escalators
Company. Both engaged in installing,
maintaining/servicing of elavators and escalators
Hyatt (herein petitioner) filed an unfair trade
practices and damages against LG industrial
systems Co. Ltd, and LG International Corporation
alleging that it was appointed as the exclusive
distributor of LG elevators and escalators in the
Philippines under Distributorship Agreement LG
filed a motion to dismiss alleging that lack of
jurisdiction over the persons of defendant,
improper venue and failure to state a cause of
action. Hyatt filed a motion for leave of court to
amend the complaint, alleging that LG transferred
all assets to a joint venue agreement with Otis
elevator Company of the USA to LG Otis Elevator
Company Goldstar filed a Motion to dismiss the
amended complaint alleging that venue was
improperly laid as neither the Hyatt, LG or
Goldstar itself resided in Mandaluyong city where
the case was originally filed. The RTC denied the
motion The CA dismissed the case and held that
Makati was the principal place of business of both
respondent and petitioner, as stated in the latter’s
Articles of Incorporation, that place was
controlling for purposes of determining the proper
venue.
ISSUE: Whether or not the “residence” of the
corporation is the same one as stated in the
Articles of Incorporation.
47
Professor: Atty. Leonardo Nick Gumabun
RULING:
Well established in our jurisprudence is the rule
that the residence of a corporation is the place
where its principal office is located, as stated in its
Articles of Incorporation. "For practical purposes,
a corporation is in a metaphysical sense a resident
of the place where its principal office is located as
stated in the articles of incorporation."
Jurisprudence has, settled that the place where the
principal office of a corporation is located, as
stated in the articles, indeed establishes its
residence. This ruling is important in determining
the venue of an action by or against a corporation.
Sec. 1, SEC MC No. 6, Series of 2020
Section 1. Objectives
- These guidelines provide corporations guidance
in formulating their internal procedures and bylaws which
will allow their directors, trustees, stockholders, members
and other persons to participate and vote in meetings in
absentia or through remote modes of communication as
defined in these guidelines, pursuant to the Revised
Corporation Code.
These guidelines also operationalize the objectives of
Republic Act No. 8792, otherwise known as the Electronic
Commerce Act, to facilitate domestic and international
dealings, transactions, arrangements, agreements
through the utilization of electronic, optical and similar
medium, mode, instrumentality and technology and to
promote the universal use of electronic transaction.
4. Term of Existence
Sec. 13(d) in relation to Sec. 11, RCC
Sec. 13(d)
(d) The term for which the corporation is to exist, if the
corporation has not elected perpetual existence.
Sec. 11, RCC
Corporate Term
– A corporation shall have perpetual existence
unless its articles of incorporation provides otherwise.
Corporations with certificates of incorporation issued prior
to the effectivity of this Code, and which continue to exist,
shall have perpetual existence, unless the corporation,
upon a vote of its stockholders representing a majority of
its outstanding capital stock, notifies the Commission that
it elects to retain its specific corporate term pursuant to its
articles of incorporation.
a. Extending or Shortening
Sec. 11, par. 3
NOTES IN CORPORATION LAW
A corporate term for a specific period may be extended or
shortened by amending the articles of incorporation:
Provided, That no extension may be made earlier than
three (3) years prior to the original or subsequent expiry
date(s) unless there are justifiable reasons for an earlier
extension as may be determined by the Commission:
Provided, further, That such extension of the corporate
term shall take effect only on the day following the original
or subsequent expiry date(s).
PHILIPPINE NATIONAL BANK VS. CFI OF
RIZAL, GR NO. 63201
FACTS:
Private respondents are the registered owners of
three parcels of land in Pasig, Metro Manila
covered by OCT No. 853, TCT Nos. 32843 and
32897 of the Registry of Deeds of Rizal. On March
1, 1954, private respondents entered into a
contract of lease with Philippine Blooming Mills,
Co., Inc., (PBM) whereby the latter shall lease the
aforementioned parcels of land as factory site.
PBM was duly organized and incorporated on
January 19, 1952 with a corporate term of twenty-
five (25) years. This leasehold right of PBM
covering the parcels of land was duly annotated at
the back of the above stated certificates of title as
Entry No. 9367/T-No. 32843. The contract of lease
provides that the term of the lease is for twenty
years beginning from the date of the contract and
“is extendable for another term of twenty years at
the option of the LESSEE should its term of
existence be extended in accordance with law.”.
The contract also states that the lessee agrees to
“use the property as factory site and for that
purpose to construct whatever buildings or
improvements may be necessary or convenient
and/or . . . for any purpose it may deem fit; and
before the termination of the lease to remove all
such buildings and improvements. In accordance
with the contract, PBM introduced on the land,
buildings, machineries and other useful
improvements. These constructions and
improvements were registered with the Registry
of Deeds of Rizal and annotated at the back of the
respondents’ certificates of title as Entry No.
85213/T-No. 43338.
On October 11, 1963, PBM executed in favor of
Philippine National Bank (PNB), petitioner herein,
a deed of assignment, conveying and transferring
all its rights and interests under the contract of
lease which it executed with private respondents.
48
Professor: Atty. Leonardo Nick Gumabun
The assignment was for and in consideration of
the loans granted by PNB to PBM. The deed of
assignment was registered and annotated at the
back of the private respondents’ certificates of
title as Entry No. 85215/TNo. 32843.
On November 6, 1963 and December 23, 1963
respectively, PBM executed in favor of PNB a real
estate mortgage for a loan of P100,000.00 and an
addendum to real estate mortgage for another
loan of P1,590,000.00, covering all the
improvements constructed by PBM on the leased
premises. These mortgages were registered and
annotated at the back of respondents’ certificates
as Entry No. 85214/T-No. 43338 and Entry No.
870971/T-No. 32843, respectively. On October 7,
1981, private respondents filed a motion in the
same proceedings which was given a different case
number to wit, LRC Case No. R-2744, because of
the payment of filing fees for the motion. The
motion sought to cancel the annotations on
respondents’ certificates of title pertaining to the
assignment by PBM to PNB of the former’s
leasehold rights, inclusion of improvements and
the real estate mortgages made by PBM in favor of
PNB, on the ground that the contract of lease
entered into between PBM and respondents-
movants had already expired by the failure of PBM
and/or its assignee to exercise the option to renew
the second 20-year lease commencing on March 1,
1974 and also by the failure of PBM to extend its
corporate existence in accordance with law. The
motion also states that since PBM failed to remove
its improvements on the leased premises before
the expiration of the contract of lease, such
improvements shall accrue to respondents as
owners of the land.
ISSUE:
Whether or not the corporate life of PBM was
extended by the continuance of the lease and
subsequent registration of the title to the
improvements under its name.
RULING:
Section 11 of Corporation Code provides that a
corporation shall exist for a period not exceeding
fifty (50) years from the date of incorporation
unless sooner dissolved or unless said period is
extended. Upon the expiration of the period fixed
in the articles of incorporation in the absence of
compliance with the legal requisites for the
extension of the period, the corporation ceases to
exist and is dissolved ipso facto (16 Fletcher 671
NOTES IN CORPORATION LAW
cited by Aguedo F. Agbayani, Commercial Laws of
the Philippines, Vol. 3, 1988 Edition p. 617).
When the period of corporate life expires, the
corporation ceases to be a body corporate for the
purpose of continuing the business for which it
was organized. But it shall nevertheless be
continued as a body corporate for three years
after the time when it would have been so
dissolved, for the purpose of prosecuting and
defending suits by or against it and enabling it
gradually to settle and close its affairs, to dispose
of and convey its property and to divide its assets
(Sec. 122, Corporation Code).
There is no need for the institution of a proceeding
for quo warranto to determine the time or date of
the dissolution of a corporation because the
period of corporate existence is provided in the
articles of incorporation. When such period
expires and without any extension having been
made pursuant to law, the corporation is dissolved
automatically insofar as the continuation of its
business is concerned.
The quo warranto proceeding under Rule 66 of the
Rules of Court, as amended, may be instituted by
the Solicitor General only for the involuntary
dissolution of a corporation on the following
grounds: a) when the corporation has offended
against a provision of an Act for its creation or
renewal; b) when it has forfeited its privileges and
franchises by non-user; c) when it has committed
or omitted an act which amounts to a surrender of
its corporate rights, privileges or franchises; d)
when it has mis-used a right, privilege or franchise
conferred upon it by law, or when it has exercised
a right, privilege or franchise in contravention of
law.
Hence, there is no need for the SEC to make an
involuntary dissolution of a corporation whose
corporate term had ended because its articles of
incorporation had in effect expired by its own
limitation. Considering the foregoing in relation to
the contract of lease between the parties herein,
when PBM's corporate life ended on January 19,
1977 and its 3-year period for winding up and
liquidation expired on January 19, 1980, the
option of extending the lease was likewise
terminated on January 19, 1977 because PBM
failed to renew or extend its corporate life in
accordance with law. From then on, the
respondents can exercise their right to terminate
49
Professor: Atty. Leonardo Nick Gumabun
the lease pursuant to the stipulations in the
contract.
b. Revival of Expired Term
✓ No extension can be made after the
expiration of the term. The remedy is now
revival of corporate existence under the
RCC. A corporation whose term has
expired may apply for a revival of its
corporate existence. Upon approval by
the SEC, the corporation shall be deemed
revived and a certificate of revival of
corporate existence shall be issued, giving
it perpetual existence, unless its
application for revival provides
otherwise.
✓ No application for revival of certificate of
incorporation of banks, banking and
quasi-banking institutions, preneed,
insurance and trust companies, non-stock
savings and loan association, pawnshops,
corporations engaged in money service
business, and other financial
intermediaries shall be approved by the
SEC unless accompanied by a favorable
recommendation of the appropriate
government agency.
Sec. 11, Pars, 4 & 5
A corporation whose term has expired may apply for a
revival of its corporate existence, together with all the
rights and privileges under its certificate of incorporation
and subject to all of its duties, debts and liabilities existing
prior to its revival. Upon approval by the Commission, the
corporation shall be deemed revived and a certificate of
revival of corporate existence shall be issued, giving it
perpetual existence, unless its application for revival
provides otherwise.
No application for revival of certificate of incorporation of
banks, banking and quasi-banking institutions, preneed,
insurance and trust companies, non-stock savings and
loan associations (NSSLAs), pawnshops, corporations
engaged in money service business, and other financial
intermediaries shall be approved by the Commission
unless accompanied by a favorable recommendation of
the appropriate government agency
SEC MC 23-2019
Section 1. Applicability
NOTES IN CORPORATION LAW
The following corporations may file a Petition for Revival
of Corporate Existence:
a. Generally, a corporation whose term has expired;
b. An Expired Corporation whose Certificate of
Registration has been revoked for non-filing of reports
(e.g. General Information Sheet, and Audited Financial
Statements), provided that it shall file the proper Petition
to Lift its Revoked Status, which may be incorporated in
its Petition to Revive, and must settle the corresponding
penalties thereof;
c. An Expired Corporation whose Certificate of
Registration has been suspended, provided that it shall
file the proper Petition to Lift its Suspended Status, which
may be incorporated in its Petition to Revive, and must
settle the corresponding penalties thereof; or
d. An Expired Corporation whose corporate name has
already been validly re-used, and is currently being used,
by another existing corporation duly registered with the
Commission, provided that the former shall change its
corporate name within thirty (30) days from the issuance
of its Certificate of Revival of Corporate Existence.
Section 2. Who May Not Apply for Revival
The following are not allowed to file a Petition for Revival
of Corporate Existence:
a. An Expired Corporation which has completed the
liquidation of its assets;
b. A corporation whose Certificate of Registration has
been revoked for reasons other than non-filing of reports
(e.g. General Information Sheet, and Audited Financial
Statements);
c. A corporation dissolved by virtue of Sections 6(c) and
6(d) of Presidential Decree No. 902-A, as amended by
Presidential Decree No. 1799; or
d. An Expired Corporation which already availed of re-
registration, in accordance with Memorandum Circular
No. 13, series of 2019 (Amended Guidelines and
Procedures on the Use of Corporate and Partnership
Names), or other memorandum circulars issued by the
Commission pertaining to re-registration, except when:
i. The re-registered corporation has given its
consent to the Petitioner to use its corporate
name, and has undertaken to undergo
voluntary dissolution immediately after the
issuance of the Petitioner's Certificate of
Revival; or
50
Professor: Atty. Leonardo Nick Gumabun
ii. The re-registered corporation has given its
consent to the Petitioner to use its corporate
name, and has undertaken to change its
corporate name immediately after the
issuance of the Petitioner's Certificate of
Revival.
Section 3. Required Vote to Initiate Revival
The required number of votes for the Revival of an
Expired Stock Corporation is at least a majority vote of the
board of directors, and the vote of at least majority of the
outstanding capital stock. For nonstock corporations, at
least a majority vote of the board of trustees, and the vote
of at least majority of the members.
5. Incorporators
- those stockholders or members mentioned in
the AOI as originally forming and composing the
corporation, and who are signatories thereof.
Sec. 13 (e) in relation to Sec. 10, RCC
Sec. 13 (e)
(e) The names, nationalities, and residence addresses of
the incorporators
Sec. 10, RCC
Number and Qualifications of Incorporators:
Any person, partnership, association or corporation,
singly or jointly with others but not more than fifteen (15)
in number, may organize a corporation for any lawful
purpose or purposes:
Provided, that natural persons who are licensed to
practice a profession, and partnerships or associations
organized for the purpose of practicing a profession, shall
not be allowed to organize as a corporation unless
otherwise provided under special laws.
Incorporators who are natural persons must be of legal
age.
Each incorporator of a stock corporation must own or be
a
subscriber to at least one (1) share of the capital stock.
A corporation with a single stockholder is considered a
One Person Corporation.
SEC Memorandum Circular No. 16,
Series of 2019
Sec. 1. Number of Incorporators
NOTES IN CORPORATION LAW
Two or more persons, but not more than 15, may organize
themselves and form a corporation.
Only OPC may have a single stockholder, as well as a
sole director.
Sec. 2. Qualifications of an Incorporator
Stock Corporation- must own or be a subscriber
to, at least one share of the capital stock.
Non-stock Corporation- must be a member of the
corporation.
Incorporators may be composed of any
combination of natural persons (of legal age, must sign
the AOI or by-laws), partnerships, domestic corporations,
as well as foreign corporations.
a. Promoters
Who is a Promoter?
- a promoter is a person who, acting alone or
with others, takes initiative in founding and
organizing the business or enterprise of the
issuer and receives consideration therefor.
i. Liability of a Promoter
CARAM, JR. VS. CA
GR NO. L-48627
FACTS:
Respondent Alberto Arellano was contracted by
Barretto and Garcia to do a project study and
other technical services in forming a corporation,
which was later on named Filipinas Orient
Airways. The project study was presented by
Barretto and Garcia to the Carams. After seeing
the project study, the Carams were convinced to
investand become stockholders of the said
company.The case involves the collection of the
unpaid compensation for
Arellano’s services. The CA decided that the
Carams were jointly and severally liable to
Arellano stating that:
“It was on the basis of this study that defendant
corporation was actually organized and rendered
operational. Defendants Garcia and Caram, and
Barretto became members of the Board and/or
officers of defendant corporation. Thus, not only
the defendant corporation but all the other
defendants who were involved in the preparatory
stagesof the incorporation, who caused the
preparation and/or benefited from the project
study and the technical services of plaintiff must
be liable”.
Hence this petition.
51
Professor: Atty. Leonardo Nick Gumabun
ISSUE: Whether or not the CA was correct in
holding the Carams liable.
HELD:
The Court held that the Carams were not liable.
The petitioners were not involved in the initial
stages of the organization of the airline, which
were being directed by Barretto as the main
promoter. It was he who was putting all the pieces
together, so to speak. The petitioners were merely
among the financiers whose interest was to be
invited and who were in fact persuaded, on the
strength of the project study, to invest in the
proposed airline. , there was no showing that the
Filipinas Orient Airways was a fictitious
corporation and did not have a separate juridical
personality, to justify making the petitioners, as
principal stockholders thereof, responsible for its
obligations. As a bona fide corporation, the
Filipinas Orient Airways should alone be liable for
its corporate acts as duly authorized by its officers
and directors. In the light of these circumstances,
we hold that the petitioners cannot be held
personally liable for the compensation claimed by
the private respondent for the services performed
by him in the organization of the corporation. To
repeat, the petitioners did not contract such
services. It was only the results of such services
that Barretto and Garcia presented to them and
which persuaded them to invest in the proposed
airline. The most that can be said is that they
benefited from such services, but that surely is no
justification to hold them personally liable
therefor. Otherwise, all the other stockholders of
the corporation, including those who came in
later, and regardless of the amount of their share
holdings, would be equally and personally liable
also with the petitioners for the claims of the
private respondent.
ii. Liability of a Corporation for Promoter’s
Contract
CAGAYAN FISHING DEVELOPMENT CO. VS.
TEODORO SANDIKO, GR NO. L-43350
FACTS:
Manuel Tabora is the registered owner of four
parcels of land and he wanted to build a Fishery.
He loaned from PNB P8,000 and to guarantee the
payment of the loan, he mortgaged the said
parcels of land. Three subsequent mortgages were
executed in favor of the same bank and to Severina
Buzon, whom Tabora is indebted to. Tabora sold
NOTES IN CORPORATION LAW
the four parcels of land to the plaintiff company,
said to be under process of incorporation, in
consideration of one peso (P1) subject to the
mortgages in favor of PNB and Severina Buzon
and, to the condition that the certificate of title to
said lands shall not be transferred to the name of
the plaintiff company until the latter has fully and
completely paid Tabora’s indebtedness to PNB.
The articles of incorporation were filed and the
company sold the parcels of land to Sandiko on the
reciprocal obligation that Sandiko will shoulder
the three mortgages.
A deed of sale executed before a notary public by
the terms of which the plaintiff sold, ceded and
transferred to the defendant all its rights, titles
and interest in and to the four parcels of land. He
executed a promissory note that he shall be 25,300
after a year with interest and on the promissory
notes, the parcels were mortgage as security. A
promissory note for P25,300 was drawn by the
defendant in favor of the plaintiff, payable after
one year from the date thereof. Further, a deed of
mortgage executed before a notary public in
accordance with which the four parcels of land
were given as security for the payment of the said
promissory note. All these three instruments were
dated February 15, 1932. Sandiko failed to pay,
thus the action for payment. The lower court held
that deed of sale was invalid. The corporation filed
a motion for reconsideration.
ISSUE:
Can promoters of a corporation act as agents of a
corporation?
RULING:
A corporation should have a full and complete
organization and existence as an entity before it
can enter into any kind of a contract or transact
any business. A corporation, until organized, has
no being, franchises or faculties. Nor do those
engaged in bringing it into being have any power
to bind it by contract, unless so authorized by the
charter there is not a corporation nor does it
possess franchise or faculties for it or others to
exercise, until it acquires a complete existence.
The contract here was entered into not between
Manuel Tabora and a non-existent corporation
but between the Manuel Tabora as owner of the
four parcels of lands on the one hand and the same
Manuel Tabora, his wife and others, as mere
promoters of a corporations on the other hand.
52
Professor: Atty. Leonardo Nick Gumabun
These promoters could not have acted as agent for
a projected corporation since that which no legal
existence could have no agent. A corporation, until
organized, has no life and therefore no faculties. It
is, as it were, a child in ventre sa mere (in the
mother's womb). This is not saying that under no
circumstances may the acts of promoters of a
corporation be ratified by the corporation if and
when subsequently organized. There are with
exceptions under the doctrine of ratification.
RIZAL LIGHT VS. MORONG, GR NO. L-20993
A corporation should have a full and complete
organization and existence as an entity before it
can enter into any kind of a contract or transact
any business.
It should be pointed out, however, that the Court
did not say that the rule is absolute or that under
no circumstances may the acts of promoters of a
corporation be ratified or accepted by the
corporation if and when subsequently
organized. Of course, there are exceptions.
American courts generally hold that a contract
made by the promoters of a corporation on its
behalf may be adopted, accepted or ratified by
the corporation when organized.
6. Directors and Trustees
Sec 13 (f) and (g) and Sec. 91, RCC
Sec 13 (f) and (g)
(f) The number of directors, which shall not be more than
fifteen (15) or the number of trustees which may be more
than fifteen (15)
(g) The names, nationalities, and residence addresses
of persons who shall act as directors or trustees until the
first regular directors or trustees are duly elected and
qualified in accordance with this Code
Sec. 91, RCC
Election and Term of Trustees
The number of trustees shall be fixed in the articles of
incorporation or bylaws which may or may not be more
than fifteen (15). They shall hold office for not more than
three (3) years until their successors are elected and
qualified. Trustees elected to fill vacancies occurring
before the expiration of a particular term shall hold office
only for the unexpired period.
NOTES IN CORPORATION LAW
Except with respect to independent trustees of nonstock
corporations vested with public interest, only a member
of the corporation shall be elected as trustee.
Unless otherwise provided in the articles of incorporation
or the bylaws, the members may directly elect officers of
a nonstock corporation.
See also Sec. 174, RCC
Designation of Governing Boards
The provisions of specific provisions of this Code to the
contrary notwithstanding, nonstock or special
corporations may, through their articles of incorporation
or their bylaws, designate their governing boards by any
name other than as board of trustees.
7. Capitalization
Sec 13 (h) and (i) in relation to Sec. 12, RCC
Sec 13 (h) and (i)
(h) If it be a stock corporation, the amount of its
authorized capital stock, number of shares into which it
is divided, the par value of each, names, nationalities,
and residence addresses of the original subscribers,
amount subscribed and paid by each on the
subscription, and a statement that some or all of the
shares are without par value, if applicable;
(i) If it be a nonstock corporation, the amount of its
capital, the names, nationalities, and residence
addresses of the contributors, and amount contributed
by each
Sec. 12, RCC
Minimum Capital Stock Not Required of Stock
Corporations
- Stock corporations shall not be required to have
a minimum capital stock, except as otherwise
specifically provided by special law.
a. Meaning of Capital Reserved to Filipinos
Sec. 11, Art 12, 1987 Constitution
No franchise, certificate, or any other form of
authorization for the operation of a public
utility shall be granted except to citizens of the
Philippines or to corporations or associations
organized under the laws of the Philippines, at
least sixty per centum of whose capital is owned
by such citizens; nor shall such franchise,
certificate, or authorization be exclusive in
character or for a longer period than fifty years.
Neither shall any such franchise or right be
granted except under the condition that it shall
53
Professor: Atty. Leonardo Nick Gumabun
be subject to amendment, alteration, or repeal
by the Congress when the common good so
requires. The State shall encourage equity
participation in public utilities by the general
public. The participation of foreign investors in
the governing body of any public utility
enterprise shall be limited to their
proportionate share in its capital, and all the
executive and managing officers of such
corporation or association must be citizens of
the Philippines.
GAMBOA v. TEVES
GR No. 176579
FACTS: In 1928, Act No. 3236 was enacted,
granting PLDT a franchise and the right to engage
in the telecommunications business. In 1969,
General Telephone and Electric Corporation
(GTE), an American company and a major
stockholder of PLDT, sold 26% of the outstanding
capital stock (OCS) of PLDT to Philippine
Telecommunications Investment Corporation
(PTIC).In 1977, Prime Holdings Inc. (PHI) was
incorporated. It later became the owner of
111,415 shares of PTIC thru 3 Deeds of Assignment
executed by PTIC’s stockholders.
In 1986, those 111, 415 shares were
sequestered by the PCGG. This represented
46.125% of PTIC’s OCS.
In 1999, First Pacific, a company registered
in Bermuda and based in Hong Kong, acquired the
remaining 54% of PTIC.In 2006, the government,
thru the Inter-Agency Privatization Council (IPC),
caused a public bidding for the sequestered shares.
Parallax Venture Fund won the bid. However, First
Pacific announced that it would exercise its right
of first refusal and buy the sequestered shares by
matching Parallax’s bid. It later entered into a
conditional sale and purchase agreement with the
government. The sale to First Pacific was
completed in 2007.
Since PTIC is a stockholder of PLDT, the
sale by the government is actually an indirect sale
of PLDT’s shares (specifically, 12 million shares
representing 6.3% of its OCS).This sale increased
First Pacific’s common shareholdings in PLDT
from 30.7% to 37%, thereby increasing the
common shareholdings of foreigners in PLDT to
81.41%. This violates Section 11, Article XII of the
Constitution. Section 11, Article XII, Constitution
states: “No franchise, certification, or any other
NOTES IN CORPORATION LAW Professor: Atty. Leonardo Nick Gumabun
form of authority for the operation of a public Philippines, at least sixty per centum of whose
utility shall be granted except to citizens of the capital is owned by such citizens.
Philippines, or to corporations or associations
ROY VS. HERBOSA, GR NO. 207246
organized under Philippine laws, at least 60% of
(NOVEMBER 22, 2016 AND APRIL 18, 2016)
whose capital is owned by such citizens.” —This
means that foreign ownership of a public utility is FACTS:
limited to not more than 40%. 60% must be
Before the Court is the Motion for Reconsideration
Filipinos. This provision was included in the
dated January 19, 2017 (the Motion) filed by
Constitution as a recognition the sensitive and
petitioner Jose M. Roy III (movant) seeking the
vital position of public utilities both in the national
reversal and setting aside of the Decision dated
economy and for national security. This ensures
November 22, 2016 (the Decision) which denied
that the Filipinos will have “effective control” over
the movant's petition, and declared that the
public utility companies. Later, the House of
Securities and Exchange Commission (SEC) did
Representatives Commission on Good Governance
not commit grave abuse of discretion in issuing
conducted a public hearing regarding the sale and
Memorandum Circular No. 8, Series of 2013 (SEC-
concluded that it followed due diligence and
MC No. 8) as the same was in compliance with, and
conformed to the legal procedures. It also
in fealty to, the decision of the Court in Gamboa v.
concluded that First Pacific’s acquisition will not
Finance Secretary Teves (Gamboa Decision) and
violate the constitutional limitation since PTIC
the resolution denying the Motion for
only holds 13.847% of PLDT’s OCS. Pablito and
Reconsideration therein (Gamboa Resolution).
Arno Sanidad joined themselves as petitioners-in-
The Motion presents no compelling and new
intervention, claiming that as PLDT subscribers,
arguments to justify the reconsideration of the
they have a stake in the outcome of the
Decision. The Decision has already exhaustively
controversy.
discussed and directly passed upon these grounds.
Main issue: Whether the term “capital” in Sec. 11, Movant's petition was dismissed based on both
Art. XII of the Constitution refers to total common procedural and substantive grounds.
shares only or to total OCS (which includes both
ISSUE:
common and non-voting preferred shares).
Whether or not SEC committed grave abuse of
discretion amounting to lack or excess of
Ruling: The term "capital" in Section 11, Article jurisdiction when it issued SEC-MC No. 8.
XII of the Constitution refers only to shares of
RULING:
stock that can vote in the election of directors.
SEC did not commit grave abuse of discretion
Mere legal title is insufficient to meet the
amounting to lack or excess of jurisdiction when it
60 percent Filipino-owned "capital" required in
issued SEC¬-MC No. 8. To the contrary, the Court
the Constitution. Full beneficial ownership of 60
finds SEC-MC No. 8 to have been issued in fealty to
percent of the outstanding capital stock, coupled
the Gamboa Decision and Resolution.
with 60 percent of the voting rights, is required.
The legal and beneficial ownership of 60 percent Gamboa Decision "capital" in Section II, Article XII
of the outstanding capital stock must rest in the of the I987 Constitution refers only to shares of
hands of Filipino nationals in accordance with the stock entitled to vote in the election of directors,
constitutional mandate. Otherwise, the and thus in the present case only to common
corporation is "considered as non-Philippine shares, and not to the total outstanding capital
national[s]." stock (common and non-voting preferred shares).
Gamboa Resolution Foreign Investments Act of
Filipinos hold less than 60 percent of the
1991 ("FIA") Gamboa Resolution put to rest the
voting stock, and earn less than 60 percent of the
Court's interpretation of the term "capital" Full
dividends, of PLDT. This directly contravenes the
beneficial ownership of stocks, coupled with
express command in Section 11, Article XII of the
appropriate voting rights is essential... reiterates
Constitution that "[n]o franchise, certificate, or
and confirms the interpretation that the term
any other form of authorization for the operation
"capital" in Section 11, Article XII of the 1987
of a public utility shall be granted except to x x x
Constitution refers to shares with voting rights, as
corporations x x x organized under the laws of the
well as with full beneficial ownership.

54
NOTES IN CORPORATION LAW
Section 2 of SEC-MC No. 8 clearly incorporates the
Voting Control Test or the controlling interest
requirement. In fact, Section 2 goes beyond
requiring a 60-40 ratio in favor of Filipino
nationals in the voting stocks; it moreover
requires the 60-40 percentage ownership in
the total number of outstanding shares of
stock, whether voting or not.
The SEC formulated SEC-MC No. 8 to adhere to
the Court's unambiguous pronouncement that
"[f]ull beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60
percent of the voting rights is required." Clearly,
SEC-MC No. 8 cannot be said to have been issued
with grave abuse of discretion
SEC MC No. 8, Series of 2013
The required percentage of Filipino ownership shall be
applied to BOTH
(a) the total number of outstanding shares of stock
entitled to vote in the election of directors; AND
(b) the total number of outstanding shares of stock,
whether or not entitled to vote in the election of directors.
Corporations covered by special laws which provide
specific citizenship requirements shall comply with the
provisions of said law.
b. Authorized Capital Stock, Outstanding
Capital Stock, Subscribed Capital Stock, Pai-
Up Capital Stock
Sec. 173, RCC
Outstanding Capital Stock
- the total shares of stock issued under
binding subscription contracts to subscribers or
stockholders, whether fully or partially paid,
except treasury shares.
Authorized Capital Stock
- The capital stock divided into shares.
Subscribed Capital Stock
- The total amount of the capital stock
subscribed whether fully paid or not.
Paid-Up Capital Stock
- Portion of the authorized capital stock that has
been subscribed and paid.
8. Shares of Stock
55
Professor: Atty. Leonardo Nick Gumabun
- a share of corporate stock has been defined as
the unit into which the proprietary interests in a
corporation are divided.
- the intangible interest or right which an owner
has in the management, profit and assets of the
corporation.
a. Classes of Shares
b.
Par Value vs. No Par Value
1. Par Value Shares
- are those with fixed value stated in the AOI and
the share certificate.
2. No Par Value Shares
- shares without an arbitrary amount
Voting vs. Non-Voting
1. Voting
2. Non-voting
Common vs. Preferred
1. Common Shares
- Common shares or stocks represent 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.
2. Preferred Shares
- Shares with a stated par value which entitle the
holder thereof to certain preferences over the
holders of common stock. The preference may be
(a) as to asset; or (b) as to dividends; or (c) as
may be determined by the board of directors
when so authorized to do so.
Limitations:
a. If deprived of voting rights, it shall still be
entitled to vote on matters enumerated in
Section 6, par. 6.
b. Preference must not be violative of the Code.
c. May be issued only with a stated par value.
d. 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.
NOTES IN CORPORATION LAW
Kinds:
a. Cumulative – one which entitles he owner
thereof to payment not only of current dividends
but also back dividends not previously paid
whether or not during the past years dividends
were declared or paid.
b. Non-cumulative – one which grants the
holders of such shares only to the payment of
current dividends but not back dividends when
and if dividends are paid to the extent agreed
upon before any other stockholders are paid the
same.
c. Participating - one which entitles the
shareholder to participate with the common
shares in excess distribution at some
predetermined or at a fixed ratio as may be
determined.
d. Non-participating – one which entitles the
shareholder thereof to receive the stipulated
preferred dividends and no more.
e. Cumulative participating – share which is a
combination of the cumulative share and
participating share.
b. Non-voting shares allowed to vote
Sec 6, RCC
Holders of nonvoting shares shall nevertheless
be entitled to vote on the following matters:
(a) Amendment of the articles of incorporation;
(b) Adoption and amendment of bylaws;
(c) Sale, lease, exchange, mortgage, pledge, or
other disposition of all or substantially all of the
corporate property;
(d) Incurring, creating, or increasing bonded
indebtedness;
(e) Increase or decrease of authorized capital
stock;
(f) Merger or consolidation of the corporation
with another corporation or other corporations;
(g) Investment of corporate funds in another
corporation or business in accordance with this
Code; and
56
Professor: Atty. Leonardo Nick Gumabun
(h) Dissolution of the corporation.
c. Treasury Shares
- shares of stock which have been issued and
fully paid for, but subsequently reacquired by the
issuing corporation through purchase,
redemption, donation, or some other lawful
means. Such shares may again be disposed of for
a reasonable price fixed by the board of
directors. (Sec. 9, RCC)
d. Redeemable Shares
- They are shares which may be purchased by the
corporation from the holders of such shares
upon the expiration of a fixed period, regardless
of the existence of unrestricted retained
earnings in the books of the corporation, and
upon such other terms and conditions stated in
the articles of incorporation and the certificate of
stock representing the shares, subject to rules
and regulations issued by the Commission. (Sec.
8, RCC)
REPUBLIC PLANTERS BANK VS. HON. ENRIQUE
AGANA, G.R. NO. 51765
FACTS:
Private respondent Robes Francisco Realty &
Development Corporation secured a loan from
petitioner Republic Planters Bank in the amount
of P120,000.00. As part of the proceeds of the loan,
preferred shares of stocks were issued to private
respondent. Instead of giving money in full,
petitioner lent partially in the form of stock
certificates for a total of P8,000.00. Said stock
certificates were in the name of private
respondent Adalia Robes. They bear the following
terms and conditions:
1. The right to receive a quarterly dividend of 1%,
cumulative and participatin; and
2. The preferred shares may be redeemed, by the
system of drawing lots, at any time after 2 years
from the date of issue at the option of the
petitioner.
Private respondents proceeded against petitioner
and filed a complaint anchored on private
respondents’ alleged rights to collect dividends as
to the preferred shares in question and to have
petitioner redeem the same under the terms and
conditions of the stock certificates.
The RTC ordered the petitioner to pay private
respondents the face value of the stock certificates
at
NOTES IN CORPORATION LAW
redemption price, plus 1% quarterly interest.
ISSUE:
Whether the private respondents have the right to
collect dividends and whether they can compel
petitioner to redeem the preferred shares. (NO)
RULING:
A preferred share of stock is one which entitles the
holder thereof to certain preferences over the
holders of common stock. The preferences are
designed to induce persons to subscribe for shares
of
a corporation. Their most common forms may be
classified into two: (1) preferred shares as to
assets;
and (2) preferred as to dividends. The former is a
share which gives the holder thereof the
preference
in the distribution of the assets of the corporation
in case of liquidation while the latter is a share
which makes the holder entitled to receive
dividends to the extent agreed upon before any
dividends at all are paid to the holders of common
stock. There is no guarantee, however, that the
share will receive any dividends.
The preferences cited above that are granted to
preferred stockholders do not give them a lien
upon the property of the corporation nor make
them creditors of the corporation, the right of the
former being always subordinate to the latter.
Shareholders, both common and preferred are
considered risk takers who invest capital in the
business and who can look only to what is left after
corporate debts and liabilities are fully paid.
On the other hand, redeemable shares are shares
usually preferred which by their terms are
redeemable at a fixed date, or at the option of
either the issuing corporation or the stockholder
or both at certain redemption price. It must be
noted that redemption may not be made where
the corporation is insolvent or if such redemption
will cause insolvency or inability of the
corporation to
meet its debts as they mature.
While the stock certificates, in the case at bar, does
allow redemption, the option to do so was clearly
vested in the petitioner. The redemption is
therefore optional. In any case, the redemption of
said shares cannot be allowed. The Central Bank
made a finding that said petitioner has been
suffering from chronic reserve deficiency. Such
finding resulted in the directive prohibiting the
petitioner from redeeming any preferred share on
the ground that said redemption would reduce the
57
Professor: Atty. Leonardo Nick Gumabun
assets of the bank to the prejudice of its depositors
and creditors.
e. Founder’s Shares
Founders’ shares may be given certain rights and
privileges not enjoyed by the owners of other
stocks. Where the exclusive right to vote and be
voted for in the election of directors is granted, it
must be for a limited period not to exceed five (5)
years from the date of incorporation: Provided,
That such exclusive right shall not be allowed if
its exercise will violate Commonwealth Act No.
108, otherwise known as the “Anti-Dummy
Law”; Republic Act No. 7042, otherwise known
as the “Foreign Investments Act of 1991”; and
other pertinent laws. (Sec. 7, RCC)
9. Other Matters - Arbitration Clause
Secs. 13(j) and 181, RCC
Sec. 13(j)
(j) Such other matters consistent with law and which the
incorporators may deem necessary and convenient.
Sec. 181, RCC
Arbitration for Corporations.
An arbitration agreement may be provided in the articles
of incorporation or bylaws of an unlisted corporation.
When such an agreement is in place, disputes between
the corporation, its stockholders or members, which arise
from the implementation of the articles of incorporation or
bylaws, or from intra-corporate relations, shall be referred
to arbitration. A dispute shall be nonarbitrable when it
involves criminal offenses and interests of third parties.
10. Undertaking to Change Corporate
Name
Par. 10, Sec. 14, RCC
That the incorporators undertake to change the name of
the corporation immediately upon receipt of notice from
the Commission that another corporation, partnership or
person has acquired a prior right to the use of such name,
that the name has been declared not distinguishable from
a name already registered or reserved for the use of
another corporation, or that it is contrary to law, public
morals, good customs or public policy.
11. Non-Transferability clause
(Partly-Nationalized Industries)
Par. 11, Sec 14, RCC
Corporations which will engage in any business or activity
reserved for Filipino citizens shall provide the following):
NOTES IN CORPORATION LAW
“No transfer of stock or interest which shall reduce the
ownership of Filipino citizens to less than the required
percentage of capital stock as provided by existing laws
shall be allowed or permitted to be recorded in the proper
books of the corporation, and this restriction shall be
indicated in all stock certificates issued by the
corporation.”
C. Grounds for Rejection of AOI
Sec. 16, RCC; See also Sec. 162, RCC
Sec. 16, RCC
The Commission may disapprove the articles of
incorporation or any amendment thereto if the same is not
compliant with the requirements of this Code: Provided,
That the Commission shall give the incorporators,
directors, trustees, or officers a reasonable time from
receipt of the disapproval within which to modify the
objectionable portions of the articles or amendment. The
following are grounds for such disapproval:
(a)The articles of incorporation or any amendment thereto
is not substantially in accordance with the form prescribed
herein;
(b)The purpose or purposes of the corporation are
patently unconstitutional, illegal, immoral or contrary to
government rules and regulations;
(c)The certification concerning the amount of capital stock
subscribed and/or paid is false; and
(d)The required percentage of Filipino ownership of the
capital stock under existing laws or the Constitution has
not been complied with.
D. Dual Franchise Requirement
Par. 2, Sec 16, RCC
No articles of incorporation or amendment to
articles of incorporation of banks, banking and quasi-
banking institutions, preneed, insurance and trust
companies, NSSLAS, pawnshops, and other financial
intermediaries shall be approved by the Commission
unless accompanied by a favorable recommendation of
the appropriate government agency to the effect that such
articles or amendment is in accordance with law.
E. Commencement of Corporate
Existence
Pars. 2 & 3, Sec. 18, RCC
If the Commission finds that the submitted
documents and information are fully compliant with the
requirements of this Code, other relevant laws, rules and
58
Professor: Atty. Leonardo Nick Gumabun
regulations, the Commission shall issue the certificate of
incorporation.
A private corporation organized under this Code
commences its corporate existence and juridical
personality from the date the Commission issues the
certificate of incorporation under its official seal and
thereupon the incorporators, stockholders/members and
their successors shall constitute a body corporate under
the name stated in the articles of incorporation for the
period of time mentioned therein, unless said period is
extended or the corporation is sooner dissolved in
accordance with law.
F. Amendment of AOI - Sec 15, RCC
1. Manner
Stock Corporation:
Any provision or matter stated in the articles of
incorporation may be amended by:
1. A majority vote of the board of directors and
the vote or written assent of the stockholders
representing at least two-thirds (2/3) of the
outstanding capital stock, without prejudice to
the appraisal right of dissenting stockholder.
Nonstock Corporation:
The articles of incorporation of a nonstock
corporation may be amended by the vote or
written assent of majority of the trustees and at
least two-thirds (2/3) of the members.
Note: The original and amended articles together
shall contain all provisions required by law to be
set out in the articles of incorporation.
Amendments to the articles shall be indicated by
underscoring the change or changes made, and a
copy thereof duly certified under oath by the
corporate secretary and a majority of the
directors or trustees, with a statement that the
amendments have been duly approved by the
required vote of the stockholders or members,
shall be submitted to the Commission.
2. Effectivity
Amendments shall take effect:
1. Upon approval by the Commission or
NOTES IN CORPORATION LAW
2. From the date of filing with the said
Commission if not acted upon within six (6)
months from the date of filing for a cause not
attributable to the corporation.
G. Effect of Non-Use of Corporate Charter
1. Concept of Delinquency and Lifting of
Delinquency Status
a. Failure to organize within 5 years from
incorporation:
If a corporation does not formally organize and
commence its business within five (5) years from
the date of its incorporation, its certificate of
incorporation shall be deemed revoked as of the
day following the end of the five (5)-year period.
b. Failure to operate for at least 5 consecutive
years:
If a corporation has commenced its business but
subsequently becomes inoperative for a period
of at least five (5) consecutive years, the
Commission may, after due notice and hearing,
place the corporation under delinquent status.
A delinquent corporation shall have a period of
two (2) years to resume operations and comply
with all requirements that the Commission shall
prescribe. Upon compliance by the corporation,
the Commission shall issue an order lifting the
delinquent status. Failure to comply with the
requirements and resume operations within the
period given by the Commission shall cause the
revocation of the corporation’s certificate of
incorporation.
The Commission shall give reasonable notice to,
and coordinate with the appropriate regulatory
agency prior to the suspension or revocation of
the certificate of incorporation of companies
under their special regulatory jurisdiction.
H. By-Laws
- relatively permanent and continuing rules of
action adopted by the corporation for its own
government and that of individuals composing it
and those having the direction, management and
control, in whole or in part, of its affairs and
activities.
1. Concept
59
Professor: Atty. Leonardo Nick Gumabun
LOYOLA GRAND VILLAS HOMEOWNERS
ASSOCIATION VS. CA, GR NO. 117188
FACTS:
Loyola Grand Villas Homeowners Association, Inc.
(LGVHAI) was organized in 1983 as the
association of homeowners and residents of a
subdivision called Loyola Grand Villas. It was
registered with the Home Financing Corporation,
the predecessor of Home Insurance and Guaranty
Corporation (HIGC), as the sole homeowners'
organization in the said subdivision. Its first
president was Victorio Soliven, owner of the
developer of LGV.In 1988, the officers of the
LGVHAI tried to register its by-laws but failed.
They discovered that there were two other
organizations within the subdivision: the North
and the South Association. The North Association
was registered with the HIGC in 1989. It submitted
its by-laws in 1988.In 1989, Soliven inquired about
the status of LGVHAI. HIGC informed him that
LGVHAI had been automatically dissolved (its
certificate revoked) for two reasons:
1. It did not submit its by-laws within the period
required by the Corporation Code; and
2. There was non-user of corporate charter
because HIGC had not received any report on the
association's activities.
This information resulted in the registration of the
South Association with the HIGC in 1989. It filed its
by-laws the same year. These developments
prompted the officers of the LGVHAI to lodge a
complaint with the HIGC. They questioned the
revocation of LGVHAI's certificate of registration
without due notice and hearing, and prayed for
the cancellation of the certificate of registration of
the North and South Associations.
After due notice and hearing, HIGC ruled in favor
of LGVHAI, recognizing it as the duly registered
and existing homeowners association for LGV
homeowners, and revoking the Certificates of
Registration of the North and South Associations.
The South Association appealed to the Appeals
Board of the HIGC, which dismissed the appeal for
lack of merit. Thus, it appealed to the CA. The CA
affirmed the HIGC Appeals Board, adding that,
there being no showing that the registration of
LGVHAI had been validly revoked, it continued to
be the duly registered homeowners' association in
the Loyola Grand Villas.
NOTES IN CORPORATION LAW
LGVHAI’s Contention: Requirement of adoption of
by-laws is not mandatory. Citing Chung Ka Bio v.
Intermediate Appellate Court, they contend that
Section 6(I) of that PD No. 902-A provides that
non-filing of by-laws is only a ground for
suspension or revocation of the certificate of
registration of corporations and, therefore, it may
not result in automatic dissolution of the
corporation. Section 9 of the Corporation Code
provides that the corporate existence and juridical
personality of a corporation begins from the date
the SEC issues a certificate of incorporation under
its official seal. Consequently, even if the by-laws
have not yet been filed, a corporation may be
considered a de facto corporation.
South’s Contention: The use of the word “must” in
Sec. 46 of the Corporation Code is no exception —
it means file the by-laws within one month after
notice of issuance of certificate of registration OR
ELSE.The OR ELSE, though not specified, is
inextricably a part of MUST. Hence, South
Association filed this petition for review on
certiorari with the SC.
ISSUE: May the failure of a corporation to file its
by-laws within one month from the date of its
incorporation, as mandated by Section 46 of the
Corporation Code, result in its automatic
dissolution?
RULING:
By-laws are "rules and regulations or private laws
enacted by the corporation to regulate, govern
and control its own actions, affairs and concerns
and its stockholders or members and directors and
officers with relation thereto and among
themselves in their relation to it,".
By-laws are indispensable to corporations in this
jurisdiction. These may not be essential to
corporate birth but certainly, these are required
by law for an orderly governance and
management of corporations.
Nonetheless, failure to file them within the period
required by law by no means tolls the automatic
dissolution of a corporation.
RURAL BANK OF SALINAS VS. CA
GR NO. 96674
FACTS:
Clemente Guerrero, President of the Rural Bank of
Salinas, Inc., executed a Special Power of Attorney
in favor of his wife, Melania, giving and granting
60
Professor: Atty. Leonardo Nick Gumabun
the latter full power of authority to sell or
otherwise dispose of and/or mortgage 473 shares
of stock of the Bank registered in his name. before
the death of Clemente, Melania, pursuant to the
said SPA, executed Deed of Assignments for the
shares of stock in favor of private respondents.
After the death of Clemente, Melania proceeded in
presenting the said Deeds and for registration
with a request for the transfer in the Bank’s stock
and transfer book of the 473 shares of stock so
assigned, the cancelation of stock certificates in
the name of Clemente and the issuance of new
stock certificates in the name of the new owners
thereof. The Bank however denied the request.
Melania then filed with SEC an action for
Mandamus against Rural Bank of Salinas, its
President and Secretary. The latter bank
contended in its answer that the shares of
Guerrero became the property of his estate and
thus must be first settled and liquidated before
distribution.
ISSUE:
Whether petitioner may restrict the registration
of shares of stock or its transfer.
RULING: A corporation, either by its board, its by-
laws, or the act of its officers, cannot create
restrictions in stock transfers, because:
Restrictions in the traffic of stock must have their
source in legislative enactment, as the corporation
itself cannot create such impediment.
By-laws are intended merely for the protection of
the corporation, and prescribe regulation, not
restriction; they are always subject to the charter
of the corporation. The corporation, in the
absence of such power, cannot ordinarily inquire
into or pass upon the legality of the transactions
by which its stock passes from one person to
another, nor can it question the consideration
upon which a sale is based.
2. Adoption
Sec 45, RCC
The By-laws may be adopted before or after the
incorporation. In all cases, the By-laws shall be effective
only upon the issuance by the SEC of a certification that
the By-laws are not inconsistent with the Corporation
Code.
1. Pre-Incorporation
NOTES IN CORPORATION LAW
- approved and signed by all the incorporators
and submitted to the Commission, together with
the articles of incorporation.
2. Post-Incorporation
a. Stock
- affirmative vote of the stockholders
representing at least a majority of the
outstanding capital stock
- duly certified by a majority of the directors
b. Non-stock
- affirmative vote of at least majority of the
members
- duly certified by a majority of the trustees
Note: The certified copy be countersigned by the
secretary of the corporation, and shall be filed
with the Commission attached to the original
articles of incorporation.
3. Contents
Sec. 46, RCC Contents of Bylaws.
– A private corporation may provide the following in its
bylaws:
(a) The time, place and manner of calling and conducting
regular or special meetings of the directors or trustees;
(b) The time and manner of calling and conducting regular
or special meetings and mode of notifying the
stockholders or members thereof;
(c) The required quorum in meetings of stockholders or
members and the manner of voting therein;
(d) The modes by which a stockholder, member,
director, or trustee may attend meetings and cast their
votes;
(e) The form for proxies of stockholders and members
and the manner of voting them;
(f) The directors’ or trustees’ qualifications, duties and
responsibilities, the guidelines for setting the
compensation of directors or trustees and officers, and
the maximum number of other board representations that
an independent director or trustee may have which shall,
in no case, be more than the number prescribed by the
Commission;
(g) The time for holding the annual election of directors or
trustees and the mode or manner of giving notice thereof;
61
Professor: Atty. Leonardo Nick Gumabun
(h) The manner of election or appointment and the term
of office of all officers other than directors or trustees;
(i) The penalties for violation of the bylaws;
(j) In the case of stock corporations, the manner of issuing
stock certificates; and
(k) Such other matters as may be necessary for the
proper or convenient transaction of its corporate affairs
for the promotion of good governance and anti-graft and
corruption measures.
An arbitration agreement may be provided in the bylaws
pursuant to Section 181 of this Code.
4. Requisites
GOVERNMENT OF PHILIPPINE ISLANDS VS. EL
HOGAR FILIPINO, 50 PHIL 399 (1927)
Court sustained the validity of a provision in the
corporate by-law requiring that persons elected
to the Board of Directors must be holders of
shares of the paid up value of P5,000.00, which
shall be held as security for their action, on the
ground that section 21 of the Corporation Law
expressly gives the power to the corporation to
provide in its by-laws for the qualifications of
directors and is "highly prudent and in
conformity with good practice".
GOCONGWEI VS. SEC 89 SCRA 336 (1979)
It is recognized that 'every corporation has the
inherent power to adopt by-laws 'for its internal
government, and to regulate the conduct and
prescribe the rights and duties of its members
towards itself and among themselves in
reference to the management of its affairs.
The by-laws may be necessary for the
government of the corporation
In this jurisdiction, under section 21 of the
Corporation Law, a corporation may prescribe in
its by-laws "the qualifications, duties and
compensation of directors, officers and
employees ... " This must necessarily refer to a
qualification in addition to that specified by
section 30 of the Corporation Law, which
provides that "every director must own in his
right at least one share of the capital stock of the
stock corporation of which he is a director ... "
NOTES IN CORPORATION LAW
GRACE CHRISTIAN HIGH SCHOOL VS. CA, GR
NO. 108905
The board of directors of corporations must be
elected from among the stockholders or
members.
But in the case of petitioner, there is no reason at
all for its representative to be given a seat in the
board. Nor does petitioner claim a right to such
seat by virtue of an office held. In fact it was not
given such seat in the beginning. The seat was
only given in 1975 when a proposed amendment
to the by-laws was sought. The amendment
contains a provision giving the petitioner a
permanent board seat.
Such provision is contrary to law, the fact that for
fifteen years it has not been questioned or
challenged but, on the contrary, appears to have
been implemented by the members of the
association cannot forestall a later challenge to
its validity. Neither can it attain validity through
acquiescence because, if it is contrary to law, it is
beyond the power of the members of the
association to waive its invalidity.
The members of the association may have
formally adopted the provision in question, but
their action would be of no avail because no
provision of the by-laws can be adopted if it is
contrary to law.
SALAFRANCA VS. PHILAMLIFE (PAMPLONA)
VILLAGE HOMEOWNERS ASSOCIATION
GR NO. 121791
Private respondent, in an effort to validate the
dismissal of the petitioner, posits the theory that
the latter's position is coterminous with that of
the Village's Board of Directors, as provided for
in its amended by-laws.
Admittedly, the right to amend the by-laws lies
solely in the discretion of the employer, this
being in the exercise of management prerogative
or business judgment. However this right,
extensive as it may be, cannot impair the
obligation of existing contracts or rights.
Private respondent's insistence that it can legally
dismiss petitioner on the ground that his tenure
has expired is untenable. To reiterate, petitioner,
being a regular employee, is entitled to security
of tenure, hence, his services may only be
terminated for causes provided by law. A
62
Professor: Atty. Leonardo Nick Gumabun
contrary interpretation would not find
justification in the laws or the Constitution. If we
were to rule otherwise, it would enable an
employer to remove any employee from his
employment by the simple expediency of
amending its by-laws and providing that his/her
position shall cease to exist upon the occurrence
of a specified event.
If private respondent wanted to make the
petitioner's position co-terminus with that of the
Board of Directors, then the amendment must be
effective after petitioner's stay with the private
respondent, not during his term. Obviously, the
measure taken by the private respondent in
amending its by-laws is nothing but a devious,
but crude, attempt to circumvent petitioner's
right to security of tenure as a regular employee
guaranteed under the Labor Code.
THOMAS VS. CA, GR NO. 116631
The Manila Polo Club does not necessarily
prohibit the transfer of proprietary shares by its
members. The Club only restricts membership to
deserving applicants in accordance with its
rules, when the amended Articles of
Incorporation states that: "No transfer shall be
valid except between the parties, and shall be
registered in the Membership Book unless made
in accordance with these Articles and the By-
Laws". Thus, as between parties herein, there is
no question that a transfer is feasible.
Moreover, authority granted to a corporation to
regulate the transfer of its stock does not
empower it to restrict the right of a stockholder
to transfer his shares, but merely authorizes the
adoption of regulations as to the formalities and
procedure to be followed in effecting transfer.
In this case, the petitioner was the nominee of
the private respondent to hold the share and
enjoy the privileges of the club. But upon the
expiration of petitioner's employment as officer
and consultant of AmCham, the incentives that
go with the position, including use of the MPC
share, also ceased to exist. It now behooves
petitioner to surrender said share to private
respondent's next nominee, another natural
person. Obviously this arrangement of trust and
NOTES IN CORPORATION LAW
confidence cannot be defeated by the
petitioner's citation of the rules to shield his
untenable position, without doing violence to
basic tenets of justice and fair dealing.
5. Amendment - Sec 47, RCC
Amendment may be done in two ways:
1. By majority vote of the Board of
Directors/Trustees and vote of the owners of
majority of the outstanding capital
stock/members, at a regular or special meeting
duly called for the purpose; or
2. By delegation of the power to amend, repeal,
or adopt new bylaws to the Board of
Directors/Trustees, by the vote of at least ⅔ of
the outstanding capital stock/members.
❖ Delegation is deemed revoked whenever
a majority of the outstanding capital
stock/ members shall so vote at a regular
or special meeting. The amended/new
bylaws will only be effective upon the
issuance of the SEC of a certification that
the bylaws is in accordance with the RCC
and relevant laws.
6. Effects to Third Parties
CHINA BANKING CORPORATION VS. CA
GR NO. 117604
FACTS:
On 21 August 1974, Galicano Calapatia, Jr. (Calapatia,
for brevity) a stockholder of private respondent Valley
Golf & Country Club, Inc. (VGCCI, for brevity), pledged
his Stock Certificate No. 1219 to petitioner China
Banking Corporation (CBC, for brevity). Petitioner
wrote VGCCI requesting that the aforementioned
pledge agreement be recorded in its books which the
latter approved and noted in its corporate book.
Calapatia obtained a loan from petitioner, payment of
which was secured by the aforestated pledge
agreement. Calapatia failed to pay his obligation,
hence a petition for extrajudicial foreclosure of the
pledged stock was filed by petitioner. The later
informed VGCCI of the proceeding and requested that
the pledged stock be transferred to its name and the
same be recorded in the corporate books. However,
VGCCI wrote petitioner expressing its inability to
accede to petitioner’s request in view of Calapatia’s
unsettled accounts with the club. VGCCI sent Calapatia
63
Professor: Atty. Leonardo Nick Gumabun
a notice demanding full payment of his overdue
account.
Subsequently, VGCCI caused to be published in the
newspaper a notice of auction sale of a number of its
stock certificates, including Calapatia’s. The former
informed the latter of the termination of his
membership due to the sale of his share of stock in said
auction. Petitioner advised VGCCI that it is the new
owner of Calapatia stocks by virtue of being the highest
bidder in said auction and requested that new
certificate be issued in its name. Petitioner likewise
protested the sale by VGCCI of the shares of stock and
thereafter filed a case with the court for the
nullification of the auction and for the issuance of a
new stock certificate in its name. The court dismissed
the complaint for lack of jurisdiction over the subject
matter on the theory that it involves and intra-
corporate dispute. Petitioner filed a complaint with
SEC for the nullification of the sale of Calapatia’s stock
by VGCCI; the cancellation of any new stock certificate
issued pursuant thereto; for the issuance of a new
certificate in petitioner’s name; and for damages.
Petitioner appealed to SEC en banc and the
Commission issued and order reversing the decision of
its hearing office. Stating that the appellant-petitioner
had a prior right over the pledged share and because
of pledgor’s failure to pay the principal debt upon
maturity, appellant-petitioner can proceed with the
foreclosure of the pledged share. VGCCI to seek redress
from the CA and the later rendered its decision
nullifying and setting aside the orders of the SEC on the
ground of lack of jurisdiction over the subject matter.
The CA declared that the controversy between CBC and
VGCCI is not intra-corporate. Hence, this petition.
ISSUE: Who has better right over Calapatia’s Stock?
RULING:
The general rule really is that third persons are not
bound by the by-laws of a corporation since they are
not privy thereto (Fleischer v. Botica Nolasco, 47 Phil.
584).
The exception to this is when third persons have actual
or constructive knowledge of the same. In the case at
bar, petitioner had actual knowledge of the by-laws of
private respondent when petitioner foreclosed the
pledge made by Calapatia and when petitioner
purchased the share foreclosed on September 17, 1985.
This is proven by the fact that prior thereto, i.e., on May
14, 1985 petitioner even quoted a portion of private
respondent’s by-laws which is material to the issue
herein in a letter it wrote to private respondent.
Because of this actual knowledge of such by-laws then
the same bound the petitioner as of the time when
petitioner purchased the share. Since the by-laws was
already binding upon petitioner when the latter
purchased the share of Calapatia on September 17,
1985 then the petitioner purchased the said share
NOTES IN CORPORATION LAW
subject to the right of the private respondent to sell the
said share for reasons of delinquency and the right of
private respondent to have a first lien on said shares as
these rights are provided for in the by-laws very very
clearly.
In order to be bound, the third party must have
acquired knowledge of the pertinent by-laws at the
time the transaction or agreement between said third
party and the shareholder was entered into, in this
case, at the time the pledge agreement was executed.
VGCCI could have easily informed petitioner of its by-
laws when it sent notice formally recognizing
petitioner as pledgee of one of its shares registered in
Calapatia’s name. Petitioner’s belated notice of said
by-laws at the time of foreclosure will not suffice.
Finally, Sec. 63 of the Corporation Code which provides
that “no shares of stock against which the corporation
holds any unpaid claim shall be transferable in the
books of the corporation” cannot be utilized by VGCCI.
The term “unpaid claim” refers to “any unpaid claim
arising from unpaid subscription, and not to any
indebtedness which a subscriber or stockholder may
owe the corporation arising from any other
transaction.” In the case at bar, the subscription for the
share in question has been fully paid as evidenced by
the issuance of Membership Certificate No. 1219. 41
What Calapatia owed the corporation were merely the
monthly dues. Hence, the aforequoted provision does
not apply.
VIII. CONTROL AND MANAGEMENT OF
CORPORATION
A. General Powers of the Board
A corporation can act only through its directors
and officers. The board is the central power that
authorizes the executive agents to enter into
contracts and to embark on a business.
Note: Board Resolutions are the express acts of
the Board. The directors/trustees don’t act
individually. The act of one director does not bind
the corporation. Every act must be passed upon by
the members of the Board, unlike in a partnership
where there is mutual agency, which means the
act of one agent will bind the partners and the
partnership.
General Powers of the Board
1. To exercise all powers provided for
under the RCC;
2. To conduct all business affairs of the
corporation; and
64
Professor: Atty. Leonardo Nick Gumabun
3. To control and hold the properties of
the corporation.
Note: The concentration of powers in the board is
necessary for efficiency in any large organization.
Stockholders are too numerous, scattered and
unfamiliar with the business of a corporation to
conduct its business directly.
FILIPINAS PORT SERVICES, INC. VS. GO
GR NO. 161886
The governing body of a corporation is its board
of directors. Section 23 (Now Sec. 22) of the
Corporation Code explicitly provides that unless
otherwise provided therein, the corporate powers
of all corporations formed under the Code shall be
exercised, all business conducted and all property
of the corporation shall be controlled and held by
a board of directors. Thus, with the exception only
of some powers expressly granted by law to
stockholders (or members, in case of non-stock
corporations), the board of directors (or
trustees, in case of non-stock corporations)
has the sole authority to determine policies,
enter into contracts, and conduct the ordinary
business of the corporation within the scope of
its charter, i.e., its articles of incorporation, by-
laws and relevant provisions of law. Verily, the
authority of the board of directors is restricted to
the management of the regular business affairs of
the corporation, unless more extensive power is
expressly conferred.
The raison d’etre behind the conferment of
corporate powers on the board of directors is not
lost on the Court. Indeed, the concentration in the
board of the powers of control of corporate
business and of appointment of corporate
officers and managers is necessary for
efficiency in any large organization.
Stockholders are too numerous, scattered and
unfamiliar with the business of a corporation to
conduct its business directly. And so the plan of
corporate organization is for the stockholders to
choose the directors who shall control and
supervise the conduct of corporate business.
In the present case, the board’s creation of
the positions of Assistant Vice Presidents for
Corporate Planning, Operations, Finance and
Administration, and those of the Special Assistants
to the President and the Board Chairman, was in
accordance with the regular business operations
of Filport as it is authorized to do so by the
NOTES IN CORPORATION LAW
corporation’s by-laws, pursuant to the
Corporation Code.
TOM VS. RODRIGUEZ, GR NO. 215764
FACTS:
On Sept 4 1992, Eliodoro C. Cruz, Filport’s
president from 1968-1991, wrote a letter to the
corporation’s BOD questioning the creation and
election of the following positions with a monthly
remuneration of P13,050.00 each. Cruz requested
the board to take necessary action/actions to
recover from those elected to the aforementioned
positions the salaries they have received. Cruz,
purportedly in representation of Filport and its
stockholders, among which is herein co-petitioner
Mindanao Terminal and Brokerage Services, Inc.
(Minterbro), filed with the SEC a derivative suit
against Filport's BOD for acts of mismanagement
detrimental to the interest of the corporation and
its shareholders at large. Cruz prayed that the
BOD be made to pay Filport, jointly and severally,
the sums of money variedly representing the
damages incurred as a result of the creation of the
offices/positions complained of and the aggregate
amount of the questioned increased salaries.
RTC: BOD have the power to create positions not
in the by-laws and can increase salaries. But
Edgar C. Trinidad under the third and fourth
causes of action to restore to the corporation the
total amount of salaries he received as assistant
vice president for corporate planning; and
likewise ordering Fortunato V. de Castro and
Arsenio Lopez Chua under the fourth cause of
action to restore to the corporation the salaries
they each received as special assistants
respectively to the president and board chairman.
In case of insolvency of any or all of them, the
members of the board who created their positions
are subsidiarily liable. Appealed: creation of the
positions merely for accommodation purposes -
GRANTED
ISSUES:
W/N there was mismanagement - NO
W/N there is a proper derivative suit - YES
RULING: The Court finds that the CA committed
grave abuse of discretion amounting to lack or
excess of jurisdiction in denying Tom’s prayer for
the issuance of a TRO and/or writ of preliminary
injunction. The issuance of an injunctive writ is
warranted to enjoin the RTC-Nabunturan from
65
Professor: Atty. Leonardo Nick Gumabun
implementing its November 13, 2013 and
December 11, 2013 Orders in the specific
performance case placing the management and
control of GDITI to Rodriguez, among other
directives. This pronouncement follows the
well-entrenched rule that a corporation
exercises its powers through its board of
directors and/or its duly authorized officers
and agents, except in instances where the
Corporation Code requires stockholders’
approval for certain specific acts.
B. Business Judgment Rule
What is the Business Judgment Rule?
- Under the Business Judgment Rule, the
will of the majority of the Board members
controls in corporate affairs, and
contracts intra vires entered into by the
Board of Directors are binding on the
corporation and courts will not interfere
unless such contract are so
unconscionable and oppressive as to
amount to a wanton destruction of rights
of the minority.
Purposes of the Business Judgment Rule:
1. It acts as a presumption in favor of
corporate management’s actions;
2. It provides a safe harbor that makes
both directors and their actions
unassailable if certain pre-requisites
have been met;
3. It is a means of conserving judicial
resources thereby permitting courts
to avoid being mired down in
rehashing judgments that are
inherently subjective;
4. The rule is the law’s implementation
of board economic policy built upon
economic freedom and
encouragement of informed risk
taking;
5. It is a means by which BOD adopt
take-over defenses and by which the
courts review the adoption of those
defenses; and
6. It is a means by which a corporation
and their lawyers evaluate and, based
upon that evaluation, recommend the
dismissal of derivative suits.
SABER VS. CA
GR NO. 132981
NOTES IN CORPORATION LAW
FACTS:
Marcos appointed Dr. Mamitua Saber, then Dean
of Research at the Mindanao State University and
Acting Director of National Science Museum, as
Executive Vice-President of the Philippine
Amanah Bank (PAB). He was also designated as
the Officer-in-Charge of the bank pending the
election of its president by the BoD.
Saber was sent to Malaysia to study how its
government prepared and managed the annual
Muslim pilgrimage (Hajj) to Mecca, and thus,
avoid the fiascos that plagued pilgrimages of
Filipino Muslims in the past. After his stint in
Malaysia, Saber resumed his duties at the PAB.
Thereafter, the PAB BoD Chairman directed him
to undertake the appropriate arrangement for the
Hajj.
Saber decided to charter the M/V Sweet Homes. In
behalf of the PAB, Saber executed a Uniform Time-
Charter to transport the pilgrims, as well as a
Rider to Charter Party in which the PAB was
allowed to load cargoes.
The PAB conducted a massive information drive to
urge people to join the Hajj through the bank.
Prospective pilgrims, including PAB depositors,
made reservations for the voyage and made
partial payments for their tickets.
Saber wrote to Marcos, requesting that other
parties not be allowed to charter any ship or
aircraft bringing pilgrims to Jeddah, to avoid
unfair competition with the PAB.
However, Marcos granted some politicians
permission to charter a plane to transport the
pilgrims.
Because of this, many prospective passengers
withdrew their reservations; and about 200 cabin
accommodations were rendered vacant.
Rather than allow the vessel to leave with many
vacant cabins, Saber decided to sell tickets to
AGEAC (via Basman) on credit: 40 first class cabin
accommodations and 30 second class
accommodations, paid via postdated checks.
Basman loaded exportable goods on board the
vessel. When the vessel arrived in Saudi Arabia,
the authorities did not allow the M/V Sweet
Homes to dock. Its passengers were boarded on
boats and transported to the pier. Basman failed
to unload and sell the exportable goods.
66
Professor: Atty. Leonardo Nick Gumabun
When the postdated checks were deposited on the
due dates in the account of the PAB, they were
dishonored. Consequently, PAB sustained a huge
financial loss.
During a meeting of the PAB BoD, where Saber
was present, a Resolution was approved, declaring
Saber liable for the losses on the ground that the
Board did not authorize him to sell tickets on
credit, payable via postdated checks, and to
execute the Freight Contract with AGEAC.
The Board directed Saber to collect the receivables
himself, because of its perception that if the PAB
were to collect the receivables, it would, thereby,
be ratifying the unauthorized acts of Saber.
The PAB BoD issued another Resolution, creating
an Investigating Committee, chaired by Aradji, to
look into the administrative and/or criminal
liabilities of the persons involved in the
Pilgrimage.
During the formal investigation, Saber testified
and submitted documentary evidence. Aradji
submitted his Report that there was basis for
Saber to be charged with violation of RA No. 3019
(Anti-Graft and Corrupt Practices Act) and
recommended that the proper criminal complaint
be filed.
Thus, PAB BoD issued a resolution to authorize the
filing of a criminal complaint against Saber.
Saber filed a civil complaint for damages in the
RTC against PAB, its BoD, and its officers, claiming
that the complaint caused him dishonor, shame,
discredit and contempt, shock, besmirched
reputation, and wounded feelings. He also alleged
that because of his preventive suspension, he failed
to receive his salary from the University, causing
him and his family severe economic losses.
Three Informations were filed against Saber, et al.,
for violation of Section 3(e) of RA 3019—causing
undue injury to any party, or giving unwarranted
benefits, advantage, or preference through
manifest partiality, evident bad faith, gross
inexcusable negligence.
After trial, the Sandiganbayan rendered a
Decision acquitting all the accused.
In acquitting Saber of the charge, the
Sandiganbayan ruled that no undue injury was
caused to PAB nor were unwarranted benefits,
advantage, or preference given to anyone. It also
NOTES IN CORPORATION LAW
held that Dr. Saber, who was then the EVP and OiC
must be deemed to have been impliedly clothed
with authority to enter into any contract related
to the pilgrimage. A corporate officer, entrusted
with the general management and control of its
business, has implied authority to make any
contract or do any other act which is necessary or
appropriate to the conduct of the ordinary
business of the corporation.
As for the civil case, the RTC also ruled in favor of
Saber, thereby holding PAB and Aradji solidarily
liable to pay Saber: 900k moral damages, 100k
nominal damages, and 70k attorney’s fees.
The RTC based the judgment partly on the
Sandiganbayan’s ruling, and on the following: (1)
Malicious Prosecution of the criminal cases;
(2) Libel arising from derogatory and
malicious publications; and (3) willful injury
against plaintiff under the provisions of the New
Civil Code on Human Relations.
On appeal, however, the CA reversed the RTC,
ruling that Saber failed to prove bad faith and
malice against the PAB and Aradji; and that they
could not be blamed for acting the way they did for
they were charged with the duty to act for the
bank with loyalty and dedication.
Questions of policy or of management are left
solely to the honest decisions of officers and
directors of a corporation, and so long as they act
in good faith, their orders are not reviewable by
the courts. (Concept of Business Judgment)
According to the CA, PAB and Aradji were not
motivated by any malicious intent or by a sinister
design to unduly harass Saber, but only by a well-
founded anxiety to protect the interests of the
bank.
In the meantime, Saber died intestate. His heirs
filed this petition for review on certiorari before
the SC, alleging that, among others, Saber acted in
good faith as OiC of the PAB, that he suffered
damages from the malicious prosecution, and that
PAB made Saber as a scapegoat.
ISSUE: Is Saber entitled to damages? Was there
malice on the part of PAB when it filed the
criminal complaint against Saber?
67
Professor: Atty. Leonardo Nick Gumabun
SC’S RULING:
No and no.
Saber anchored his claim for damages on Abuse of
right under Article 19 of the New Civil Code:
“Every person must, in the exercise of his rights
and in the performance of his duties, act with
justice, give everyone his due, and observe honesty
and good faith.”
The elements of abuse of rights are the following:
(a) the existence of a legal right or duty which is
exercised in bad faith; and (b) for the sole intent of
prejudicing or injuring another.
Malice or bad faith is at the core of said provision.
Good faith is presumed and he who alleges bad
faith has the duty to prove the same. Good faith
refers to the state of the mind which is manifested
by the acts of the individual concerned. It consists
of the intention to abstain from taking an
unconscionable and unscrupulous advantage of
another.
Bad faith does not simply connote bad judgment
to simple negligence, dishonest purpose or some
moral obloquy and conscious doing of a wrong, a
breach of known duty due to some motives or
interest or ill-will that partakes of the nature of
fraud. Malice connotes ill-will or spite and speaks
not in response to duty. It implies an intention to
do ulterior and unjustifiable harm.
The BoD of PAB did not act in bad faith or with
malice in designating Aradji as chairman. There
were 4 other members of the Investigating
Committee, all of whom could’ve ruled in favor of
Saber based on the evidence on record. Moreover,
the report and recommendations of the committee
were still subject to the review of the BoD, who
could’ve also ruled in his favor.
Even though the Sandiganbayan ruled that Saber
had the implied authority to do those acts and thus
he cannot be held criminally liable, it cannot be
concluded that the PAB BoD acted in bad faith or
with malice when it initiated the criminal case.
To constitute malicious prosecution, there must be
proof that the prosecutor was prompted by a
sinister or devious design to vex and humiliate a
person, and that it was initiated deliberately,
knowing that the charges are false and
groundless.
NOTES IN CORPORATION LAW
One cannot be held liable for damages for
malicious prosecution where he acted with
probable cause.
Probable cause is that which engenders a well-
founded belief that a crime has been committed
and that the respondent is probably guilty thereof
and should be held for trial. A finding for probable
cause needs only to rest on evidence showing that
in all probability, a crime has been committed by
the respondent.
In this case, there was probable cause to initiate a
case against Saber. The Tanodbayan found
probable cause based on the evidence, particularly
the following: (1) Saber allowed Basman of AGEAC
to buy tickets worth P756,000 payable on credit
via postdated checks that were blank as to the
amounts; and (2) Saber allowed the AGEAC to pay
freight charges of P178K via post-dated checks
although the balance of the account of Basman
was only P1,834.55.
That the Sandiganbayan later on acquitted him
does not automatically mean that the prosecution
against him had no probable cause.
Saber failed to prove that the criminal complaints
against him were filed with malice on the part of
PAB and despite lack of probable cause. Hence, he
(through his heirs) is not entitled to damages.
C. Qualifications and Disqualifications of
Board Members
Section 22, RCC: The only requirement needed
for one to qualify as a director/trustee is that he/she must
own at least one share (stock corporation), or be a
member (non-stock corporation). This is a continuing
requirement, which means that a director/trustee will
cease to be such when he/she ceases to own a share or
be a member.
Note: There is no residency requirement. The
requirement that majority of the
directors/trustees must be residents of the
Philippines under Section 23 of BP 68 was deleted
by RA11232, otherwise known as the Revised
Corporation Code.
Disqualification:
Section 26, RCC: A person cannot be a director,
trustee, or officer if, within 5 years prior to the
election, he/she was:
1. Convicted by final judgment of:
a. an offense punishable by imprisonment
exceeding 6 years;
68
Professor: Atty. Leonardo Nick Gumabun
b. a violation of the Corporate Code; or
c. a violation of the Securities Regulation Code
(RA no. 8799);
2. Found administratively liable for any offense
involving fraudulent acts; or
3. Found liable by a foreign court or equivalent
foreign regulatory authority for acts,
violations, or misconduct similar to (1) or (2).
Section 27, RCC: If a director/trustee is elected
despite having a disqualification, or if the
disqualification arose or is discovered
subsequent to election, the SEC may motu
proprio or upon verified complaint, and after due
notice and hearing, order the removal of such
director/trustee.
Section 160. Violation of Disqualification
Provision; Penalties. - When, despite the
knwoledge of the existence of a ground for
disqualification as provided in Section 26 of this
Code, a director, trustee or officer willfully holds
office, or willfully conceals such disqualification,
such director, trustee or officer shall be punished
with a fine ranging from Ten thousand pesos
(₱10,000.00) to Two hundred thousand pesos
(₱200,000.00) at the discretion of the court, and
shall be permanently disqualified from being a
director, trustee or officer of any corporation.
When the violation of this provision is injurious or
detrimental to the public, the penalty shall be a
fine ranging from Twenty thousand pesos
(₱20,000.00) to Four hundred thousand pesos
(₱400,000.00)
LEE VS. CA, GR NO. 93695
FACTS:
A complaint for a sum of money was filed by the
International Corporate Bank, Inc. against the
private respondents who, in turn, filed a third
party complaint against ALFA and the petitioners.
The trial court issued an order requiring the
issuance of an alias summons upon ALFA through
the DBP as a consequence of the petitioner's letter
informing the court that the summons for ALFA
was erroneously served upon them considering
that the management of ALFA had been
transferred to the DBP.
The DBP claimed that it was not authorized to
receive summons on behalf of ALFA since the DBP
had not taken over the company which has a
separate and distinct corporate personality and
NOTES IN CORPORATION LAW
existence. Subsequently, the trial court issued an
order advising the private respondents to take the
appropriate steps to serve the summons to ALFA.
The petitioners filed a motion for reconsideration
submitting that Rule 14, section 13 of the Revised
Rules of Court is not applicable since they were no
longer officers of ALFA and that the private
respondents should have availed of another mode
of service under Rule 14, Section 16 of the said
Rules, i.e., through publication to effect proper
service upon ALFA.
The private respondents argued that the voting
trust agreement dated March 11, 1981 did not
divest the petitioners of their positions as
president and executive vice-president of ALFA so
that service of summons upon ALFA through the
petitioners as corporate officers was proper. The
trial court upheld the validity of the service of
summons on ALFA through the petitioners. A
second motion for reconsideration was filed by the
petitioners reiterating their stand that by virtue of
the voting trust agreement they ceased to be
officers and directors of ALFA, hence, they could no
longer receive summons or any court processes for
or on behalf of ALFA and in support thereof, they
attached a copy of the voting trust agreement
between all the stockholders of ALFA and the DBP
whereby the management and control of ALFA
became vested upon the DBP.
The trial court then reversed itself and declared
that service upon the petitioners cannot be
considered as proper service of summons on ALFA.
The case was elevated to the CA which reversed
the above-mentioned Orders holding that there
was proper service of summons on ALFA through
the petitioners.
RULING:
By its very nature, a voting trust agreement
results in the separation of the voting rights of a
stockholder from his other rights. The execution of
a voting trust agreement, therefore, may create a
dichotomy between the equitable or beneficial
ownership of the corporate shares of stockholders,
on the one hand, and the legal title thereto on the
other hand.
In the instant case, the petitioners maintain that
with the execution of the voting trust agreement
between them and the other stockholders of ALFA,
as one party, and the DBP, as the other party, the
former assigned and transferred all their shares in
ALFA to DBP, as trustee and thus, they can no
longer be considered directors of ALFA. Under the
69
Professor: Atty. Leonardo Nick Gumabun
old Corporation Code, the eligibility of a director,
strictly speaking, cannot be adversely affected by
the simple act of such director being a party to a
voting trust agreement inasmuch as he remains
owner (although beneficial or equitable only) of
the shares subject of the voting trust agreement
pursuant to which a transfer of the stockholder's
shares in favor of the trustee is required.
No disqualification arises by virtue of the phrase
"in his own right" provided under the old
Corporation Code. With the omission of the phrase
"in his own right" the election of trustees and
other persons who in fact are not beneficial
owners of the shares registered in their names on
the books of the corporation becomes formally
legalized. Hence, this is a clear indication that in
order to be eligible as a director, what is material
is the legal title to, not beneficial ownership of, the
stock as appearing on the books of the
corporation. The facts of this case show that the
petitioners, by virtue of the voting trust agreement
executed in 1981 disposed of all their shares
through assignment and delivery in favor of the
DBP, as trustee. Consequently, the petitioners
ceased to own at least one share standing in their
names on the books of ALFA as required under
Section 23 of the new Corporation Code. They also
ceased to have anything to do with the
management of the enterprise. The petitioners
ceased to be directors. Hence, the transfer of the
petitioners' shares to the DBP created vacancies in
their respective positions as directors of ALFA.
Considering that the voting trust agreement
between ALFA and the DBP transferred legal
ownership of the stock covered by the agreement
to the DBP as trustee, the latter became the
stockholder of record with respect to the said
shares of stocks.
D. Election of Board Members
Each stockholder/member has the right to
nominate any qualified director/trustee, except
when the exclusive right is reserved for holders
of founder’s shares.
Required attendees: At all elections, the owners
of majority of the outstanding capital stock, or
majority of the members, must be present,
either:
1. In person;
2. Through a representative authorize to act by
written proxy; or
NOTES IN CORPORATION LAW
3. Through remote communication or in
absentia—but only when so authorized by the
by-laws or by a majority of the Board, or when it
is a corporation vested with public interest.
Note: Majority shall mean 50% plus 1.
METHODS OF VOTING (Sec 23, RCC)
Stockholders are entitled to vote the number of
shares they own as per the books at the time
fixed in the bylaws, or if the bylaws are silent, at
the time of the election.
The total votes of one stockholder cannot be
greater than the shares he/she owns multiplied
by the number of directors to be elected.
There are 3 modes by which a stockholder may
vote, namely:
1. Straight voting - A stockholder may vote
his/her number of shares for as many persons as
there are directors to be elected.
2. Cumulative voting - A stockholder may
cumulate his/her shares and give 1 candidate as
many votes as the number of directors to be
elected multiplied by the number of shares
owned.
Reason: To increase the chances of the minority
stockholders to elect a director; cumulative
voting ensures minority representation in the
board.
The advantages of Cumulative voting are:
a. It is democratic in that persons
with large (but minority) holdings would
have a voice in the conduct of the
corporation;
b. It is desirable to have as many
viewpoints as possible represented on
the BOD; and
c. The presence of minority director
may discourage conflicts of interest by
management since discovery is
considerably more likely.
3. Distributed cumulative voting - A
stockholder may distribute his/her total votes
among as many candidates he/she sees fit.
70
Professor: Atty. Leonardo Nick Gumabun
E. Independent Director
An independent director is a person who
is independent of management and free from any
business or other relationship which could, or
could reasonably be perceived to materially
interfere with the exercise of independent
judgment in carrying out his/her responsibilities
as director (Section 22, RCC).
Corporations vested with public interest
shall have independent directors that comprise
at least 20% of the Board.
These corporations include:
1. Those covered by the Securities
Regulation Code (RA no. 8799), with
securities registered with the SEC, listed
with an exchange or with assets of at least
50M and having at least 200 holders with
at least 100 shares each
2. Banks, quasi-banks, NSSLAs,
pawnshops, corporations engaged inn
money service business, trust and
insurance companies, and other financial
intermediaries
3. Other corporations engaged in
businesses vested with public interest as
may be determined by the SEC - SEC’s
criteria in determining whether an entity
is vested with public interest: (a) extent
of minority ownership; (b) type of
financial products or securities issued or
offered to investors; (c) nature of
business operations; and other relevant
factors germane to the objective and
purpose of requiring independent
directors.
F. Report of Election
Section 25 of the Revised Corporation
Code now requires reports to be
submitted to the SEC. Section 25
provides:
Section 25. Report of Election of Directors,
Trustees and Officers, Non-holding of
Election and Cessation from Office. - Within
thirty (30) days after the election of the directors,
trustees and officers of the corporation, the
secretary, or any other officer of the corporation,
the secretary, or any other officer of the
corporation, shall submit to the Commission, the
names, nationalities, shareholdings, and
NOTES IN CORPORATION LAW
residence addresses of the directors, trustees
and officers elected.
The non-holding of elections and the reasons
therefor shall be reported to the Commission
within thirty (30) days from the date of the
scheduled election. The report shall specify a
new date for the election, which shall not be later
than sixty (60) days from the scheduled date.
If no new date has been designated, or if the
rescheduled election is likewise not held, the
Commission may, upon the application of a
stockholder, member, director or trustee, and
after verification of the unjustifiable non-holding
of the election, summarily order that an election
be held. The Commission shall have the power
to issue such orders as may be appropriate,
including other directing the issuance of a notice
stating the time and place of the election,
designated presiding officer, and the record date
or dates for the determination of stockholders or
members entitled to vote.
Notwithstanding any provision of the articles of
incorporation or by laws to the contrary, the
shares of stock or membership represented at
such meeting and entitled to vote shall constitute
a quorum for purposes of conducting an election
under this section.
Should a director, trustee or officer die, resign or
in any manner case to hold office, the secretary
or the director, trustee or officer of the
corporation, shall, within seven (7) days form
knowledge thereof, report in writing such fact to
the Commission.
In summary, the following reports should
be submitted to the SEC:
1. Report on the names,
nationalities, shareholdings, and
residence addresses of directors,
trustees and officers elected – within
30 days after the election, the corporate
secretary or other officer of the
corporation shall submit the report;
2. Report on the non-holding of
elections, the reasons therefor and the
new date for the election – to be
submitted within 30 days from the date of
the scheduled election; and
3. Report that a director, trustee,
or officer died, resigned or in any
71
Professor: Atty. Leonardo Nick Gumabun
manner ceased to hold office – the
corporate secretary, or the director,
trustee, or officer shall submit a written
report within seven (7) days from
knowledge thereof.
PREMIUM MARBLE RESOURCES VS. CA, GR
NO. 96551
FACTS
Premium Marble Resources, Inc. (Premium for
brevity), assisted by Atty. Arnulfo Dumadag as
counsel, filed an action for damages against
International Corporate Bank. The complaint
states:
3. Sometime in August to October 1982, Ayala
Investment and Development Corporation issued
three
(3) checks [Nos. 097088, 097414 & 27884] in the
aggregate amount of P31,663.88 payable to the
plaintiff and drawn against Citibank;
xxx xxx xxx
5. On or about August to October 1982, former
officers of the plaintiff corporation headed by
Saturnino G. Belen, Jr., without any authority
whatsoever from the plaintiff deposited the
abovementioned checks to the current account of
his conduit corporation, Intervest Merchant
Finance (Intervest, for brevity) which the latter
maintained with the defendant bank under
account No. 0200-02027-8;
6. Although the checks were clearly payable to the
plaintiff corporation and crossed on their face and
for payee's account only, defendant bank accepted
the checks to be deposited to the current account
of Intervest and thereafter presented the same for
collection from the drawee bank which
subsequently cleared the same thus allowing
Intervest to make use of the funds to the prejudice
of the plaintiff;
xxx xxx xxx
14. The plaintiff has demanded upon the
defendant to restitute the amount representing
the value of
the checks but defendant refused and continue to
refuse to honor plaintiff's demands up to the
present;
15. As a result of the illegal and irregular acts
perpetrated by the defendant bank, the plaintiff
NOTES IN CORPORATION LAW
was damaged to the extent of the amount of
P31,663.88; Premium prayed that judgment be
rendered ordering defendant bank to pay the
amount of P31,663.88 representing the value of
the checks plus interest, P100,000.00 as exemplary
damages; and P30,000.00 as attorney's fees.
In its Answer International Corporate Bank
alleged, inter alia, that Premium has no
capacity/personality/authority to sue in this
instance and the complaint should, therefore, be
dismissed for failure to state a cause of action. A
few days after Premium filed the said case,
Printline Corporation, a sister company of
Premium also filed an action for damages against
International Corporate Bank. Thereafter, both
civil cases were consolidated.
Meantime, the same corporation, i.e., Premium,
but this time represented by Siguion Reyna,
Montecillio and Ongsiako Law Office as counsel,
filed a motion to dismiss on the ground that the
filing of the case was without authority from its
duly constituted board of directors as shown by
the excerpt of the minutes of the Premium's board
of directors' meeting.
In its opposition to the motion to dismiss, Premium
thru Atty. Dumadag contended that the persons
who signed the board resolution namely Belen, Jr.,
Nograles & Reyes, are not directors of the
corporation and were allegedly former officers
and stockholders of Premium who were dismissed
for various irregularities and fraudulent acts; that
Siguion Reyna Law office is the lawyer of Belen
and Nograles and not of Premium and that the
Articles of Incorporation of Premium shows that
Belen,
Nograles and Reyes are not majority stockholders.
On the other hand, Siguion Reyna Law firm as
counsel of Premium in a rejoinder, asserted that it
is the general information sheet filed with the
Securities and Exchange Commission, among
others, that
is the best evidence that would show who are the
stockholders of a corporation and not the Articles
of Incorporation since the latter does not keep
track of the many changes that take place after
new stockholders subscribe to corporate shares of
stocks.
In the interim, defendant bank filed a
manifestation that it is adopting in toto
Premium's motion to dismiss and, therefore, joins
it in the praying for the dismissal of the present
case on the ground that
Premium lacks authority from its duly constituted
board of directors to institute the action.
72
Professor: Atty. Leonardo Nick Gumabun
In its Order, the lower court dismissed the
consolidated cases and concluded that:
Considering that the officers (directors) of
plaintiff corporation enumerated in the Articles of
Incorporation, filed on November 9, 1979, were
"to serve until their successors are elected and
qualified" and considering further that as of
March 4, 1981, the officers of the plaintiff
corporation were Alberto Nograles, Fernando
Hilario, Augusto Galace, Jose L.R. Reyes, Pido
Aguilar and Saturnino Belen, Jr., who presumably
are the officers represented by the Siguion Reyna
Law Firm, and that together with the defendants,
they are moving for the dismissal of the above-
entitled case, the Court finds that the officers
represented by Atty. Dumadag do not as yet have
the legal capacity to sue for and in behalf of the
plaintiff corporation and/or the filing of the
present action (Civil Case 14413) by them before
Case No. 2688 of the SEC could be decided is a
premature exercise of authority or assumption of
legal capacity for and in behalf of plaintiff
corporation.
The issues raised in Civil Case No. 14444 are
similar to those raised in Civil Case No. 14413. This
Court is of the opinion that before SEC Case No.
2688 could be decided, neither the set of officers
represented by Atty. Dumadag nor that set
represented by the Siguion Reyna, Montecillo and
Ongsiako Law Office, may prosecute cases in the
name of the plaintiff corporation.
It is clear from the pleadings filed by the parties in
these two cases that the existence of a cause of
action against the defendants is dependent upon
the resolution of the case involving intra-
corporate controversy still pending before the
SEC.
On appeal, the Court of Appeals affirmed the trial
court's Order 4 which dismissed the consolidated
cases. Hence, this petition.
ISSUE
Whether the filing of the case for damages against
private respondent was authorized by a duly
constituted Board of Directors of the petitioner
corporation. (NO)
RULING
Petitioner, through the first set of officers, viz.,
Mario Zavalla, Oscar Gan, Lionel Pengson, Jose Ma.
Silva, Aderito Yujuico and Rodolfo Millare,
presented the Minutes 5 of the meeting of its
Board of Directors held on April 1, 1982, as proof
that the filing of the case against private
respondent was authorized by the Board. On the
NOTES IN CORPORATION LAW
other hand, the second set of officers, viz.,
Saturnino G. Belen, Jr., Alberto C. Nograles and
Jose L.R. Reyes, presented a Resolution 6 dated July
30, 1986, to show that Premium did not authorize
the filing in its behalf of any suit against the
private respondent International Corporate Bank.
Later on, petitioner submitted its Articles of
Incorporation 7 dated November 6, 1979 with the
following as Directors: Mario C. Zavalla, Pedro C.
Celso, Oscar B. Gan, Lionel Pengson, and Jose Ma.
Silva.
However, it appears from the general information
sheet and the Certification issued by the SEC on
August 19, 1986 that as of March 4, 1981, the
officers and members of the board of directors of
the Premium Marble Resources, Inc. were:
Alberto C. Nograles — President/Director
Fernando D. Hilario — Vice President/Director
Augusto I. Galace — Treasurer
Jose L.R. Reyes — Secretary/Director
Pido E. Aquilar — Director
Saturnino G. Belen, Jr. — Chairman of the Board.
While the Minutes of the Meeting of the Board on
April 1, 1982 states that the newly elected officers
for the year 1982 were Oscar Gan, Mario Zavalla,
Aderito Yujuico and Rodolfo Millare, petitioner
failed to show proof that this election was
reported to the SEC. In fact, the last entry in their
General Information Sheet with the SEC, as of
1986 appears to be the set of officers elected in
March 1981. We agree with the finding of public
respondent Court of Appeals, that "in the absence
of /any board
resolution from its board of directors the [sic]
authority to act for and in behalf of the
corporation, the present action must necessarily
fail. The power of the corporation to sue and be
sued in any court is lodged with the board of
directors that exercises its corporate powers.
Thus, the issue of authority
and the invalidity of plaintiff-appellant 's
subscription which is still pending, is a matter that
is also addressed, considering the premises, to the
sound judgment of the Securities & Exchange
Commission."
By the express mandate of the Corporation Code
(Section 26), all corporations duly organized
pursuant thereto are required to submit within
the period therein stated (30 days) to the
Securities and Exchange Commission the names,
nationalities and residences of the directors,
trustees and officers elected.
Sec. 26 of the Corporation Code provides, thus:
73
Professor: Atty. Leonardo Nick Gumabun
Sec. 26. Report of election of directors, trustees
and officers. — Within thirty (30) days after the
election of the directors, trustees and officers of
the corporation, the secretary, or any other officer
of the corporation, shall submit to the Securities
and Exchange Commission, the names,
nationalities and residences of the directors,
trustees and officers elected. . . .
Evidently, the objective sought to be achieved by
Section 26 is to give the public information, under
sanction of oath of responsible officers, of the
nature of business, financial condition and
operational
status of the company together with information
on its key officers or managers so that those
dealing with it and those who intend to do
business with it may know or have the means of
knowing facts concerning the corporation's
financial resources and business responsibility.
The claim, therefore, of petitioners as represented
by Atty. Dumadag, that Zaballa, et al., are the
incumbent officers of Premium has not been fully
substantiated. In the absence of an authority from
the board of directors, no person, not even the
officers of the corporation, can validly bind the
corporation.
G. Quorum in Board Meetings
Section 51, RCC: A quorum shall consist of the
stockholders representing a majority of the outstanding
capital stock (stock corporation) or a majority of the
members (non-stock), unless otherwise provided in the
RCC or in the bylaws.
Thus, for instance, the quorum for a
stockholders’/members’ meeting for the election
of directors/trustees upon order by the SEC
(after verification of the unjustified non-holding
of such election) under Sec. 25 of the RCC may be
less than a majority of the outstanding capital
stock or members (4th par of Sec. 25, RCC).
Moreover, under Sec. 96 of the RCC, the AOI of a
close corporation may provide for a greater
quorum and voting requirements in
stockholders’ meetings.
Note: Regarding quorum/required attendees in
elections, “majority of the outstanding capital
stock” does not pertain to the nominal
stockholders. It pertains to the capital stock.
Hence, if there are 6 stockholders: A with 5 shares,
B with 1 share, C with 1 share, D with 2 shares, and
E with 1 share, majority of the OCS does not mean
4 stockholders. Majority could be A and B only
NOTES IN CORPORATION LAW
(5+1 shares = 6 shares) because they already
represent the majority of the 10 outstanding total
shares. There is no quorum even if B, C, D, and E
are present (1+1+2+1) because 5 shares doesn’t
represent the majority of the total outstanding
shares.
PENA VS. CA
GR NO. 91478
The by-laws of a corporation are its own private
laws which substantially have the same effect as
the laws of the corporation. They are in effect,
written, into the charter. In this sense they become
part of the fundamental law of the corporation
with which the corporation and its directors and
officers must comply.
Apparently, only three (3) out of five (5) members
of the board of directors of respondent PAMBUSCO
convened by virtue of a prior notice of a special
meeting. There was no quorum to validly
transact business since it is required under its
by-laws that at least four (4) members must be
present to constitute a quorum in a special
meeting of the board of directors.
Under Section 25 of the Corporation Code of the
Philippines, the articles of incorporation or by-
laws of the corporation may fix a greater number
than the majority of the number of board
members to constitute the quorum necessary for
the valid transaction of business. Any number less
than the number provided in the articles or by-
laws therein cannot constitute a quorum and any
act therein would not bind the corporation; all
that the attending directors could do is to adjourn.
H. Minutes of Board Meetings
Notes on Minutes of Board Meetings:
1. It is a brief statement of what transpired
at a meeting.
2. Signing of all the Board members isn’t
required.
3. Signature of the Corporate Secretary
gives it probative value and credibility.
4. Entries in the minutes are prima facie
evidence of what actually took place during
the meeting.
5. The Minutes is different from a
Resolution. A Resolution is a formal action
by a Board or a corporate body, authorizing
an act, appointment, or transaction
LOPEZ REALTY, INC. VS. TANJANGCO
74
Professor: Atty. Leonardo Nick Gumabun
GR NO. 154291
In Dumlao, the Court ruled that the signing of
the minutes by all the is not a requisite and
that the lack of signatures on the minutes does
not mean that the resolution was not passed
by the board. However, there is a notable
disparity between the facts in Dumlaoand the
instant case. In Dumlao, the corporate secretary
therein recorded, prepared and certified the
correctness of the minutes of the meeting despite
the fact that not all directors signed the minutes.
In this case, it could not even be established who
recorded the minutes in view of Asuncion’s refusal
to do so.
The proper custodian of the books, minutes
and official records of a corporation is usually
the corporate secretary. Being the custodian
of corporate records, the corporate secretary
has the duty to record and prepare the
minutes of the meeting. The signature of the
corporate secretary gives the minutes of the
meeting probative value and credibility. In this
case, Antonio Eduardo B. Nachura, Deputy
Corporate Secretary, recorded, prepared and
certified the correctness of the minutes of the
meeting of 23 April 1982; and the same was
confirmed by Leonilo M. Ocampo, Chairman of the
GSIS Board of Trustees. Said minutes contained
the statement that the board approved the sale of
the properties, subject matter of this case, to
respondent La’o
Thus, without the certification of the
corporate secretary, it is incumbent upon the
other directors or stockholders as the case
may be, to submit proof that the minutes of the
meeting is accurate and reflective of what
transpired during the meeting. Conformably to
the foregoing, in the absence of Asuncion’s
certification, only Juanito, Benjamin and Rosendo,
whose signatures appeared on the minutes, could
be considered as to have ratified the sale to the
spouses Tanjangco.
I. Removal of Board Members - Sec 27,
RCC
Section 27, RCC: Removal of a director/trustee may be
done:
1. By a vote of stockholders holding or
representing at least ⅔ of the outstanding
capital stock or ⅔ of the members at regular
meeting or a special one called for the purpose,
and always after previous notice to
stockholders/members; and
NOTES IN CORPORATION LAW
2. By the SEC motu proprio or upon verified, after
due notice and hearing.
Note: 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.
J. Vacancies in the Board
Section 28, RCC: General rule—Vacancy in the
Board may be filled by the vote of at least a
majority of the remaining directors/trustees,
provided that they still constitute a quorum.
Exceptions—Vacancy can’t be filled by a
majority vote of the remaining directors or
trustees when the vacancy was because of:
1. Removal from office;
2. Expiration of term; and
3. Increase in the number of
directors/trustees. In these
cases, vacancy will instead be filed
by an election at a regular or at a
special meeting of
stockholders/members.
BERNAS VS. CINCO
GR NOS. 163356-57/163368-69
The removal of a director in a meeting called for
that purpose shall have no legal effect if the
meeting where the removal was made is
improperly called.
Consequently, such Special Stockholders' Meeting
called by the Oversight Committee cannot have
any legal effect. The removal of the Bernas
Group, as well as the election of the Cinco
Group, effected by the assembly in that
improperly called meeting is void, and since the
Cinco Group has no legal right to sit in the board,
their subsequent acts of expelling Bernas from the
club and the selling of his shares. at the public
auction, are likewise invalid.
TAN VS. SYCIP
GR NO. 153468
The filling of vacancies in the board by the
remaining directors or trustees constituting a
quorum is merely permissive, not mandatory.
The by-Laws of GCHS prescribed the specific mode
of filling up existing vacancies in its board of
75
Professor: Atty. Leonardo Nick Gumabun
directors; that is, by a majority vote of the
remaining members of the board, thus, remaining
member-trustees must sit as a board (as a body in
a lawful meeting) in order to validly elect the new
ones.
1. Emergency Board
When the remaining directors cannot
constitute a quorum and there is an
emergency event that requires immediate
action to prevent grave, substantial, and
irreparable loss or damage to the
corporation, the vacancy may be
temporarily filled from among the officers of
the corporation by unanimous vote of the
remaining directors or trustees (called an
emergency board).
The action by the designated director or
trustee shall be limited to the emergency
action necessary, and his/her term shall
cease within a reasonable time from the
termination of the emergency or upon
election of the replacement director or
trustee, whichever comes earlier.
Requisites for the Creation of Emergency
Board:
a. The remaining directors or trustees do
not constitute a quorum;
b. There is a need for emergency action;
c. The action is necessary to prevent grave,
substantial, and irreparable loss or
damage to the corporation;
d. The temporary replacement must be
elected by a unanimous vote of the
remaining directors or trustees;
e. The temporary replacement must come
from the officers of the corporation; and
f. Notice must be given to the SEC within
three (3) days from the creation of an
emergency board.
Note: The action by the designated director or
trustee shall be limited to the emergency action
necessary. In addition, the term of the designated
director/trustee shall cease within a reasonable
time from the termination of the emergency or
upon election of the replacement director or
trustee, whichever comes earlier (this are
limitations imposed on emergency board).
k. Compensation of Board Members
NOTES IN CORPORATION LAW
Section 29. Compensation of Directors or Trustees. -
In the absence of any provision in the bylaws fixing their
compensation, the directors or trustees shall not received
any compensation in their capacity as such, except for
reasonable per diems: Provided, however, That the
stockholders representing at least a majority of the
outstanding capital stock or majority of the members may
grant directors or trustees with compensation and
approve the amount thereof at a regular or special
meeting.
In no case shall the total yearly compensation of
directors exceed ten percent (10%) of the net income
before income tax of the corporation during the
preceding year.
Directors or trustees shall not participate in the
determination of their own per diems or compensation.
Corporations vested with public interest shall submit to
their shareholders and the Commission, an annual report
of the total compensation of each of their directors or
trustees.
Section 29 of the RCC, which prohibits the fixing
of compensation for directors in their capacity as
such in the absence of provisions in By-laws, now
expressly applies to trustees of non-stock
corporations. Trustees were not mentioned in
Section 30 of BP 68. Additional new rules under
Section 29 are as follows:
1. Directors or trustees shall not
participate in the determination of their
own per diems or compensation.
2. Corporations vested with public
interest shall submit to their shareholders
and the SEC, an annual report of total
compensation of each directors or trustees.
WESTERN INSTITUTE OF TECHNOLOGY, INC.
VS. SALAS, GR NO. 113032
FACTS:
Private respondents are the majority and
controlling members of the Board of Trustees of
Western Institute of Technology, Inc. a stock
corporation engaged in the operation, among
others, of an educational institution. Then, the
board of directors amended their by laws giving
the members of board of directors a
compensation. The ten per centum of the net
profits shall be distributed equally among the ten
members of the Board of Trustees.
Few years later, the private respondents were
charged of falsification of public documents and
76
Professor: Atty. Leonardo Nick Gumabun
estafa. The charge for falsification of public
document was anchored on the private
respondents’ submission of WIT’s income
statement for the fiscal year 1985-1986 with the
Securities and Exchange Commission (SEC)
reflecting therein the disbursement of corporate
funds making it appear that the same was passed
by the board on March 30, 1986, when in truth, the
same was actually passed on June 1, 1986, a date
not covered by the corporation’s fiscal year 1985-
1986. After a full-blown hearing TC handed down
a verdict of acquittal on both counts without
imposing any civil liability against the accused
therein.
ISSUE: WON the compensation of the board of
directors as stated in their by laws violates the
corporation code?
RULING:
There is no argument that directors or trustees, as
the case may be, are not entitled to salary or other
compensation when they perform nothing more
than the usual and ordinary duties of their office.
This rule is founded upon a presumption that
directors/trustees render service gratuitously,
and that the return upon their shares adequately
furnishes the motives for service, without
compensation.
Under the foregoing section, there are only two (2)
ways by which members of the board can be
granted compensation apart from reasonable per
diems: (1) when there is a provision in the by-laws
fixing their compensation; and (2) when the
stockholders representing a majority of the
outstanding capital stock at a regular or special
stockholders’ meeting agree to give it to them.
In the case at bench, Resolution No. 48, s. 1986
granted monthly compensation to private
respondents not in their capacity as members of
the board, but rather as officers of the
corporation, more particularly as Chairman, Vice-
Chairman, Treasurer and Secretary of Western
Institute of Technology. Clearly, therefore, the
prohibition with respect to granting
compensation to corporate directors/trustees as
such under Section 30 is not violated in this
particular case.
L. Hold-Over Principle
The Hold-Over principle is derived from Section
22 of the RCC, providing that the Board of
Directors or Trustees shall hold office for one
NOTES IN CORPORATION LAW
(1)/three (3) year/s and until their
successors are elected and qualified.
If a director resigns after the expiration of the
term of the directors, and while the latter
(directors) continue to function in a hold-over
capacity, the position of the resigning director
cannot be filled by the remaining hold-over
directors. A vacancy is created the moment the
term of the directors expires. Hence, only the
stockholders can fill the vacancy.
VALLE VERDE COUNTRY CLUB VS. AFRICA
GR NO. 151969
FACTS:
On February 27, 1996, during the Annual
Stockholders’ Meeting of petitioner Valle Verde
Country Club, Inc. (VVCC), the VVCC Board of
Directors were elected including Eduardo
Makalintal (Makalintal) among others. In the
years 1997, 1998, 1999, 2000, and 2001, however,
the requisite quorum for the holding of the
stockholders’ meeting could not be obtained.
Consequently, the directors continued to serve in
the VVCC Board in a hold-over capacity.
Later, Makalintal resigned as member of the VVCC
Board. He was replaced by Jose Ramirez
(Ramirez), who was elected by the remaining
members of the VVCC Board on March 6, 2001.
Respondent Africa (Africa), a member of VVCC,
questioned the election of Ramirez as members of
the VVCC Board with the Regional Trial Court
(RTC), respectively. Africa claimed that a year
after Makalintal’s election as member of the VVCC
Board in 1996, his [Makalintal’s] term – as well as
those of the other members of the VVCC Board –
should be considered to have already expired.
Thus, according to Africa, the resulting vacancy
should have been filled by the stockholders in a
regular or special meeting called for that purpose,
and not by the remaining members of the VVCC
Board, as was done in this case. The RTC
sustained Africa’s complaint.
Issue: Whether the remaining directors of the
corporation’s Board, still constituting a quorum,
can elect another director to fill in a vacancy
caused by the resignation of a hold-over director.
RULING:
Any vacancy occurring in the board of directors or
trustees other than by removal by the stockholders
or members or by expiration of term, may be filled
by the vote of at least a majority of the remaining
directors or trustees, if still constituting a quorum;
77
Professor: Atty. Leonardo Nick Gumabun
otherwise, said vacancies must be filled by the
stockholders in a regular or special meeting called
for that purpose. A director or trustee so elected to
fill a vacancy shall be elected only for the
unexpired term of his predecessor in office
When Section 23 of the Corporation Code declares
that “the board of directors shall hold office for
one (1) year until their successors are elected and
qualified,” the Court construe the provision to
mean that the term of the members of the board of
directors shall be only for one year; their term
expires one year after election to the office. The
holdover period – that time from the lapse of one
year from a member’s election to the Board and
until his successor’s election and qualification – is
not part of the director’s original term of office,
nor is it a new term; the holdover period, however,
constitutes part of his tenure. Corollary, when an
incumbent member of the board of directors
continues to serve in a holdover capacity, it
implies that the office has a fixed term, which has
expired, and the incumbent is holding the
succeeding term.
In this case, when remaining members of the VVCC
Board elected Ramirez to replace Makalintal,
there was no more unexpired term to speak of, as
Makalintal’s one-year term had already expired.
Pursuant to law, the authority to fill in the vacancy
caused by Makalintal’s leaving lies with the VVCC’s
stockholders, not the remaining members of its
board of directors. To assume – as VVCC does –
that the vacancy is caused by Makalintal’s
resignation in 1998, not by the expiration of his
term in 1997, is both illogical and unreasonable.
His resignation as a holdover director did not
change the nature of the vacancy; the vacancy due
to the expiration of Makalintal’s term had been
created long before his resignation.
M. Corporate Officers
Section 24. Corporate Officers. - Immediately after their
election, the directors of a corporation must formally
organize an elect: (a) a president, who must be a director;
(b) a treasurer, who must be a resident of the Philippines;
and (d) such other officers as may be provided in the
bylaws. If the corporation is vested with public interest,
the board shall also elect compliance officer. The same
person may hold two (2) or more positions concurrently,
except that no one shall act as president and secretary or
as president and treasurer at the same time, unless
otherwise allowed in this Code.
NOTES IN CORPORATION LAW
The officers shall manage the corporation and perform
such duties as may be provided in the bylaws and/or as
resolved by the board of directors.
Who are “corporate officers”?
- They are persons designated as corporate
officers in the RCC or in the By-Laws. The RCC
mentions the following:
1. President who must be a director
2. Treasurer who must be a resident
3. Secretary who must be a citizen and resident
of the Philippines
4. Such other officers as may be provided in the
bylaws.
5. If the corporation is vested with public
interest, there must also be a compliance officer.
How is an Office created?
- An office/corporate officer other than a
president, treasurer, or secretary, is created by
an amendment of the bylaws, thru a Board
Resolution. Amendment of bylaws is done:
(a) by a majority vote of the board and a
majority vote of the outstanding capital
stock/members; or
(b) by delegation of the power to amend
to the board by a ⅔ vote of the
outstanding capital stock/members.
Notes:
✓ Corporate officers are officers who are
designated or specified as such or given
that character in the law, the AOI and the
By-laws of the corporation.
✓ The corporate office must be specifically
indicated in the roster of corporate offices
in the by-laws of the corporation. It is not
enough that the by-laws merely empowers
the board of directors to create additional
offices.
✓ If the by-laws did not specify the
corporation office, the board may still
create appointive positions since the Board
is the corporation’s governing body with
the power to exercise its prerogatives in
managing the business affairs of the
corporation.
78
Professor: Atty. Leonardo Nick Gumabun
✓ Office and Employment Distinguished - An
"office" is created by the charter of the
corporation and the officer is elected by the
directors or stockholders. On the other
hand, an employee occupies no office and
generally is employed not by the action of
the directors or stockholders but by the
managing officer of the corporation who
also determines the compensation to be
paid to such employee.
✓ If a position is not in the bylaws, it is not a
“corporate officer” position even if such
position is called “VP” or “SVP”, etc. This
officer not mentioned in the bylaws is just
an “employee”, technically.
MARC II MARKETING, INC. VS. JOSON
GR NO. 171993
FACTS:
Before petitioner corporation was officially
incorporated, respondent has already been
engaged by petitioner Lucila, in her capacity as
President of Marc Marketing, Inc., to work as the
General Manager of petitioner corporation.
Petitioner corporation was officially incorporated
and registered with the SEC. Accordingly, Marc
Marketing, Inc. was made non-operational.
Respondent continued to discharge his duties as
General Manager but this time under petitioner
corporation.
Petitioner corporations Board of Directors
conducted a meeting where respondent was
appointed as one of its corporate officers with the
designation or title of General Manager to
function as a managing director with other duties
and responsibilities that the Board of Directors
may provide and authorized. Nevertheless, on 30
June 1997, petitioner corporation decided to stop
and cease its operations due to poor sales
collection aggravated by the inefficient
management of its affairs. On the same date, it
formally informed respondent of the cessation of
its business operation. Concomitantly, respondent
was apprised of the termination of his services as
General Manager since his services as such would
no longer be necessary for the winding up of its
affairs.
Feeling aggrieved, respondent filed a Complaint
for Reinstatement and Money Claim against
petitioners before the Labor Arbiter. Labor
Arbiter rendered his Decision in favor of
NOTES IN CORPORATION LAW
respondent. Aggrieved, petitioners appealed the
aforesaid Labor Arbiters Decision to the NLRC.
NLRC ruled in favor of petitioners by giving
credence to the Secretarys Certificate, which
evidenced petitioner corporations Board of
Directors meeting in which a resolution was
approved appointing respondent as its corporate
officer with designation as General Manager.
Therefrom, the NLRC reversed and set aside the
Labor Arbiters Decision and dismissed
respondents Complaint for want of jurisdiction.
When respondents Motion for Reconsideration
was denied, he filed a Petition for Certiorari with
the Court of Appeals ascribing grave abuse of
discretion on the part of the NLRC. Court of
Appeals rendered its now assailed Decision
declaring that the Labor Arbiter has jurisdiction
over the present controversy. It upheld the finding
of the Labor Arbiter that respondent was a mere
employee of petitioner corporation, who has been
illegally dismissed from employment without valid
cause and without due process.
ISSUE: Whether or not respondent was a mere
employee of petitioner corporation, who has been
illegally dismissed from employment without valid
cause and without due process.
RULING:
The Court rules that respondent was not a
corporate officer of petitioner-corporation
because his position as General Manager was not
specifically mentioned in the roster of corporate
officers in its corporate by-laws. The enabling
clause in petitioner corporations by-laws
empowering its Board of Directors to create
additional officers, i.e., General Manager, and the
alleged subsequent passage of a board resolution
to that effect cannot make such position a
corporate office. Matling clearly enunciated that
the board of directors has no power to create
other corporate offices without first amending the
corporate by-laws so as to include therein the
newly created corporate office. Though the board
of directors may create appointive positions other
than the positions of corporate officers, the
persons occupying such positions cannot be
viewed as corporate officers under Section 25 of
the Corporation Code.
In view thereof, this Court holds that unless and
until petitioner corporations by-laws is amended
for the inclusion of General Manager in the list of
its corporate officers, such position cannot be
79
Professor: Atty. Leonardo Nick Gumabun
considered as a corporate office within the realm
of Section 25 of the Corporation Code.
NACPIL VS. INTERCONTINENTAL
BROADCASTING CORP.,
GR NO. 144767
FACTS:
Dily Dany Nacpil was the Assistant General
Manager for Finance and Administration and
Comptroller of IBC. He had beef with Emiliano
Templo who told the Board that when he assumes
presidency, he would terminate Nacpil’s services.
He blamed Nacpil for the prior mismanagement of
IBC. Upon assumption of presidency, Templo
harassed Nacpil and pressured him into resigning.
Nacpil succumbed and resigned. Templo refused
to pay Nacpil his retirement benefits and to
acknowledge his employment, claiming that he
was not IBC’s comptroller and merely usurped the
powers of a comptroller. Nacpil filed a complaint
for illegal dismissal and non-payment of benefits.
The LA ruled in his favor. IBC appealed to the
NLRC which dismissed the appeal. And so the case
was raised to the CA. The CA ruled in favor of IBC
this time and reversed the NLRC. Hence this
petition to the SC.
Nacpil’s contention: He was not a corporate
officer but an employee. He was not elected by the
Board as comptroller. Such position isn’t even in
the bylaws of IBC. He was appointed by the general
manager. The labor courts, and not the SEC, have
jurisdiction.
ISSUE: Was Nacpil a corporate officer?
RULING:
It has been held that an "office" is created by the
charter of the corporation and the officer is
elected by the directors or stockholders. On the
other hand, an "employee" usually occupies no
office and generally is employed not by action of
the directors or stockholders but by the managing
officer of the corporation who also determines the
compensation to be paid to such employee.
TABANG VS. NLRC
GR NO. 121143
FACTS
Purificacion Tabang was a founding member, a
member of the Board of Trustees, and the
corporate secretary of private respondent
Pamana Golden Care Medical Center Foundation,
NOTES IN CORPORATION LAW
Inc., a non-stock corporation engaged in
extending medical and surgical services.
On October 30, 1990, the Board of Trustees issued
a memorandum appointing petitioner as Medical
Director and Hospital Administrator of private
respondent's Pamana Golden Care Medical Center
in Calamba, Laguna. As medical director and
hospital administrator, petitioner was tasked to
run the affairs of the aforesaid medical center and
perform all acts of administration relative to its
daily operations.
On May 1, 1993, petitioner was allegedly informed
personally by Dr. Ernesto Naval that in a special
meeting held on April 30, 1993, the Board of
Trustees passed a resolution relieving her of her
position as Medical Director and Hospital
Administrator, and appointing the latter and Dr.
Benjamin Donasco as acting Medical Director and
acting Hospital Administrator, respectively.
Petitioner averred that she thereafter received a
copy of said board resolution.
On June 6, 1993, petitioner filled a complaint for
illegal dismissal and non-payment of wages,
allowances and 13th month pay before the labor
arbiter. Respondent corporation moved for the
dismissal of the complaint on the ground of lack of
jurisdiction over the subject matter. It argued that
petitioner's position as Medical Director and
Hospital Administrator was interlinked with her
position as member of the Board of Trustees,
hence, her dismissal is an intra-corporate
controversy which falls within the exclusive
jurisdiction of the Securities and Exchange
Commission (SEC). Petitioner opposed the motion
to dismiss, contending that her position as Medical
Director and Hospital Administrator was separate
and distinct from her position as member of the
Board of Trustees. She claimed that there is no
intra-corporate controversy involved since she
filed the complaint in her capacity as Medical
Director and Hospital Administrator, or as an
employee of private respondent.
ISSUE
Whether or not the position as Medical Director
and Hospital Administrator was separate and
distinct from a amember of the Board of Trustees,
thus no intra-corporate controversy is. involved
RULING
NO. The charges against herein private
respondent partake of the nature of an intra-
corporate controversy. Similarly, the
determination of the rights of petitioner and the
concomitant liability of private respondent
80
Professor: Atty. Leonardo Nick Gumabun
arising from her ouster as a medical director
and/or hospital administrator, which are
corporate offices, is an intra-corporate
controversy subject to the jurisdiction of the SEC.
Contrary to the contention of petitioner, a medical
director and a hospital administrator are
considered as corporate officers under the by-laws
of respondent corporation. Section 2(i), Article I
thereof states that one of the powers of the Board
of Trustees is "(t)o appoint a Medical Director,
Comptroller/Administrator, Chiefs of Services and
such other officers as it may deem necessary and
prescribe their powers and duties."
The president, vice-president, secretary and
treasurer are commonly regarded as the principal
or executive officers of a corporation, and modern
corporation statutes usually designate them as
the officers of the corporation. However, other
offices are sometimes created by the charter or by-
laws of a corporation, or the board of directors
may be empowered under the by-laws of a
corporation to create additional offices as may be
necessary. It has been held that an "office'' is
created by the charter of the corporation and the
officer is elected by the directors or stockholders.
On the other hand, an "employee" usually occupies
no office and generally is employed not by action
of the directors or stockholders but by the
managing officer of the corporation who also
determines the compensation to be paid to such
employee.
In the case at bar, considering that herein
petitioner, unlike an ordinary employee, was
appointed by respondent corporation's Board of
Trustees, she is deemed an officer of the
corporation. Perforce, Section 5(c) of Presidential
Decree No. 902-A, which provides that the SEC
exercises exclusive jurisdiction over controversies
in the election appointment of directors, trustees,
officers or managers of corporations, partnerships
or associations, applies in the present dispute.
Accordingly, jurisdiction over the same is vested in
the SEC, and not in the Labor Arbiter or the NLRC.
A corporate officer's dismissal is always a
corporate act, or an intra-corporate controversy,
and the nature is not altered by the reason or
wisdom with which the Board of Directors may
have in taking such action. Also, an intra-
corporate controversy is one which arises between
a stockholder and the corporation. There is no
distinction, qualification, nor any exemption
whatsoever. The provision is broad and covers all
kinds of controversies between stockholders and
corporations.
NOTES IN CORPORATION LAW
Moreover, even assuming that the monthly
payment of P5,000.00 was a valid claim against
respondent corporation, this would not operate to
effectively remove this case from the jurisdiction
of the SEC. In the case of Cagayan de Oro Coliseum,
Inc. vs. Office of the Minister of Labor and
Employment, etc., et al., the Court ruled that
"(a)lthough the reliefs sought by Chavez appear to
fall under the jurisdiction of the labor arbiter as
they are claims for unpaid salaries and other
remunerations for services rendered, a close
scrutiny thereof shows that said claims are
actually part
of the perquisites of his position in, and therefore
interlinked with, his relations with the
corporation.
In Dy, et al.,vs. NLRC, et al., the Court said: "(t)he
question of remuneration involving as it does, a
person who is not a mere employee but a
stockholder and officer, an integral part, it might
be said, of the corporation, is not a simple labor
problem but a matter that comes within the area
of corporate affairs and management and is in
fact a corporate controversy in contemplation of
the Corporation Code.
1. Binding Effects of Acts
Section 24, RCC: “The officers shall manage the
corporation and perform such duties as may be
provided in the bylaws and/or as resolved by the
board of directors.”
So, officers may perform the acts stated in the (a)
bylaws; or (b) Board Resolutions. They are
considered the acts of the corporation.
General rule: Absent the authority from the
bylaws or Board Resolutions, the corporate
officer’s acts will not bind the corporation.
Exceptions: The act of the officer will bind the
corporation despite the absence of authority
when—
a. the act was ratified or confirmed by the
corporation. Here, it will be as if there was a prior
authority for that act.
b. the doctrine of apparent authority (also called
the holding out theory or the doctrine of
ostensible authority) applies. This is based on
the principle of estoppel. It imposes liability not
because of a contract but because because of a
principal’s act. This is evidentiary and applies on
a case-to-case basis.
81
Professor: Atty. Leonardo Nick Gumabun
LITONJUA JR. VS. ETERNIT CORP.
GR NO. 144805
A corporation is a juridical person separate and
distinct from its members or stockholders and is
not affected by the personal rights, obligations
and transactions of the latter. It may act only
through its board of directors or, when
authorized either by its by-laws or by its board
resolution, through its officers or agents in the
normal course of business. The general
principles of agency govern the relation between
the corporation and its officers or agents, subject
to the articles of incorporation, by-laws, or
relevant provisions of law.
The property of a corporation, however, is not the
property of the stockholders or members, and as
such, may not be sold without express authority
from the board of directors. Physical acts, like the
offering of the properties of the corporation for
sale, or the acceptance of a counter-offer of
prospective buyers of such properties and the
execution of the deed of sale covering such
property, can be performed by the corporation
only by officers or agents duly authorized for the
purpose by corporate by-laws or by specific acts of
the board of directors. Absent such valid
delegation/authorization, the rule is that the
declarations of an individual director relating
to the affairs of the corporation, but not in the
course of, or connected with, the performance
of authorized duties of such director, are not
binding on the corporation.
PEOPLE’S AIRCARGO AND WAREHOUSING, CO.,
INC. VS. CA, GR NO. 117847
Apparent authority is derived not merely from
practice. Its existence may be ascertained through
(1) the general manner in which the corporation
holds out an officer or agent as having the power
to act or, in other words, the apparent authority
to act in general, with which it clothes him; or (2)
the acquiescence in his acts of a particular nature,
with actual or constructive knowledge thereof,
whether within or beyond the scope of his
ordinary powers.
It requires presentation of evidence of similar
act(s) executed either in its favor or in favor of
other parties. It is not the quantity of similar
acts which establishes apparent authority, but
the vesting of a corporate officer with the
power to bind the corporation.
NOTES IN CORPORATION LAW
2. Doctrine of Apparent Authority
The Doctrine of Apparent Authority is a
species of the doctrine estoppel. The doctrine
of estoppel is based upon the grounds of
public policy, fair dealing, good faith and
justice, and its purpose is to forbid one to
speak against his own act, representations, or
commitments to the injury of one to whom
they were directed and who reasonably
relied thereon
An officer may be clothed with apparent
authority for specific acts. It is a familiar
doctrine that if a corporation knowingly
permits its officers or any other agent, to
do acts within the scope of an apparent
authority, and holds the officer or agent
out to the public as possessing power to do
those acts, the corporation will, as against
anyone who has in good faith dealt with the
corporation through such agent, be
estopped from denying this authority.
LAPULAPU FOUNDATION, INC. VS. CA
GR NO. 126006
FACTS:
Elias Tan, President of LLF obtained 4 loans from
Allied Banking Corporation, through 4
promissory notes for 100k each. Later, despite
demands, Tan failed to pay. The bank filed a
complaint in the RTC, praying that Tan and LLF
be held jointly and solidarily liable to pay the
obligation. LLF denied incurring the debts,
claiming that Tan obtained the loans in hid
personal capacity and for his own use and
benefit. LLF never authorized Tan to co-sign any
promissory note. Thus, LLF interposed a cross
claim against Tan, alleging that he exceeded his
authority, and that he should be solely liable for
the loans. Tan admitted that he obtained the loan
in his personal capacity, but that they agreed that
the loans were to be paid from the proceeds of
Tan’s shares of common stock in the Lapu-Lapu
Industries Corp., a real estate firm. The RTC ruled
against Tan and LLF and found them solidarily
liable.
ISSUE: Should Tan and LLF be solidarily liable?
RULING:
82
Professor: Atty. Leonardo Nick Gumabun
Corporate fiction on the part of LLF must be
pierced in this case. Tan represented himself as the
President of LLF, opened accounts in the name of
LLP. He submitted a Secretary’s Certificate
attesting that he is authorized to sign for and on
behalf of LLF any check, and to transact business
with the bank. All the while, LLF never questioned
Tan’s acts except no when court action has been
initiated.
LLF is liable for the transactions entered into by
Tan on its behalf. Per the Secretary’s Certificate,
LLF gave Tan ostensible and apparent authority
to deal with the bank. The corporation is estopped
from questioning Tan’s authority to obtain the
loans.
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,
and thus, 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.
ADVANCE PAPER CORPORATION VS. ARMA
TRADERS CORPORATION
FACTS:
Petitioner Advance Paper is a domestic
corporation engaged in the business of producing,
printing, manufacturing, distributing and selling
of various pa-per products. Petitioner George
Haw (Haw) is the President while his wife, Connie
Haw, is the General Manager.
Respondent Arma Traders is also a domestic
corporation engaged in the wholesale and
distribution of school and office supplies, and
novelty products. Respondent Antonio Tan (Tan)
was formerly the President while respondent Uy
Seng Kee Willy (Uy) is the Treasurer of Arma
Traders. They represented Arma Traders when
dealing with its supplier, Advance Pa-per, for
about 14 years. Arma Traders purchased on credit
notebooks and other paper products from
Advance Paper.On various dates, upon the
representation of Tan and Uy, Arma Traders also
obtained three loans from Advance Paper. As
payment for the purchases on credit and the loan
transactions, Arma Traders issued 82 postdated
checks payable to cash or to Advance Paper. The
petitioners claimed that the respondents
fraudulently issued the post-dated checks as
NOTES IN CORPORATION LAW
payment for the purchases and loan transactions
knowing that they did not have sufficient funds
with the drawee banks. The respondents also
claimed that the loan transactions were ultra
vires be-cause the board of directors of Arma
Traders did not issue a board resolution
authorizing Tan and Uy to obtain the loans
from Advance Paper.
They claimed that the borrowing of money must
be done only with the prior approval of the board
of directors because without the approval, the
corporate officers are acting in excess of their
authority or ultra vires. When the acts of the
corporate officers are ultra vires, the corporation
is not liable for what-ever acts that these officers
committed in excess of their authority. Further,
the respondents claimed that Advance Paper
failed to verify Tan and Uy’s authority to transact
business with them. Hence, Advance Paper should
suffer the consequences.
ISSUES:
1.) Whether or not Arma Traders is liable to pay
the loans applying the doctrine of apparent
authority. (YES)
2.) Whether or not the loan transaction made by
Tan and Uy were ultra vires because the board of
directors of Arma Traders did not issue a board
resolution authorizing Tan and Uy to obtain the
loans from Advance Paper. (NO)
RULING:
The doctrine of apparent authority provides that
a corporation will be estopped from denying the
agent’s authority if it knowingly permits one of its
officers or any other agent to act within the scope
of an apparent authority, and it holds him out to
the public as possessing the power to do those acts.
The doctrine of apparent authority does not apply
if the principal did not commit any acts or conduct
which a third party knew and relied upon in good
faith as a result of the exercise of reasonable
prudence. Moreover, the agent’s acts or conduct
must have produced a change of position to the
third party’s detriment
MEGAN SUGAR CORPORATION VS. RTC OF
IIOIIO, BRANCH 68, GR NO. 170352
FACTS:
Respondent New Frontier Sugar Corporation
(NFSC) obtained a loan from respondent
Equitable PCI Bank (EPCIB) which was secured by
83
Professor: Atty. Leonardo Nick Gumabun
a real estate mortgage over NFSC land consisting
of ninety-two (92) hectares located in Passi City,
Iloilo, and a chattel mortgage over NFSC sugar
mill. NFSC subsequently entered into a
Memorandum of Agreement (MOA) with Central
Iloilo Milling Corporation (CIMICO), whereby the
latter agreed to take-over the operation and
management of the NFSC raw sugar factory and
facilities.
NFSC filed a compliant for specific performance
and collection against CIMICO for the latter
failure to pay its obligations under the MOA.
CIMICO filed with the Regional Trial Court (RTC)
of Dumangas, Iloilo, Branch 68, a case against
NFSC for sum of money and/or breach of contract.
For NFSC failure to pay its debt, EPCIB instituted
extra-judicial foreclosure proceedings over NFSC
land and sugar mill. During public auction, EPCIB
was the sole bidder and was thus able to buy the
entire property and consolidate the titles in its
name. The RTC issued a restraining order,
directing EPCIB and PISA to desist from taking
possession over the property in dispute. Hence,
CIMICO was able to continue its possession over
the property.
CIMICO and petitioner Megan Sugar Corporation
(MEGAN) entered into a MOA whereby MEGAN
assumed CIMICO rights, interests and obligations
over the property. During the hearing on the
motion for intervention, Atty. Reuben Mikhail
Sabig (Atty. Sabig) appeared before the RTC and
entered his appearance as counsel for MEGAN.
Several counsels objected to Atty. Sabig
appearance since MEGAN was not a party to the
proceedings; however, Atty. Sabig explained to the
court that MEGAN had purchased the interest of
CIMICO and manifested that his statements would
bind MEGAN./span> In denying MEGAN petition,
the CA ruled that since Atty. Sabig had actively
participated before the RTC, MEGAN was already
estopped from assailing the RTC jurisdiction.
ISSUE: Whether Atty. Sabig is the agent of
MEGAN and is thus estopped from assailing the
jurisdiction of the RTC.
RULING: The doctrine of estoppel is based upon
the grounds of public policy, fair dealing, good
faith and justice, and its purpose is to forbid one to
speak against his own act, representations, or
commitments to the injury of one to whom they
were directed and who reasonably relied thereon.
The doctrine of estoppel springs from equitable
NOTES IN CORPORATION LAW
principles and the equities in the case. It is
designed to aid the law in the administration of
justice where without its aid injustice might result.
It has been applied by this Court wherever and
whenever special circumstances of a case so
demand.
Based on the events and circumstances
surrounding the issuance of the assailed orders,
this Court rules that MEGAN is estopped from
assailing both the authority of Atty. Sabig and the
jurisdiction of the RTC. While it is true, as claimed
by MEGAN, that Atty. Sabig said in court that he
was only appearing for the hearing of Passi Sugar
motion for intervention and not for the case itself,
his subsequent acts, coupled with MEGAN inaction
and negligence to repudiate his authority,
effectively bars MEGAN from assailing the validity
of the RTC proceedings under the principle of
estoppel.
MEGAN can no longer deny the authority of Atty.
Sabig as they have already clothed him with
apparent authority to act in their behalf.
IX. LIABILITY OF DIRECTORS, TRUSTEES
AND OFFICERS
A. Three-Fold Duties
In a broad sense, management has three
paramount duties, namely, (1) obedience, (2)
diligence, and (3) loyalty.
➢ Obedience
- Obedience requires compliance with law
and rules. In relation to this duty,
directors, trustees, and officers have the
duty to act intra vires and within
authority. Additionally, the duty of
obedience requires directors and officers
to comply with the provisions of the
corporation’s AOI and By-laws.
➢ Diligence
- The directors and officers are required to
exercise due care in the performance of
their functions. Negligence on their part
proximately causing damage to the
corporation will make them liable.
Broadly speaking, the directors, in
drawing to themselves the power of the
corporation, occupy a position of
trusteeship (fiduciary) in relation to the
stockholders in the same that the board
should exercise not only care and
84
Professor: Atty. Leonardo Nick Gumabun
diligence but also utmost good faith in the
management of corporate affairs.
➢ Loyalty
- The director or officer owes loyalty and
allegiance to the corporation – a loyalty
that is undivided and an allegiance that is
influenced by no consideration other than
the welfare of the corporation. Any
adverse interest of a director will be
subject to a rigid and uncompromising
scrutiny. The directors are bound by all
those rules of conscientious, fairness,
morality, and honesty in purpose that the
law imposes as the guides for those who
are under the fiduciary obligations and
responsibilities. They are held, in official
action, to the extreme measure of candor,
unselfishness and good faith. Those
principles are rigid, essential and
salutary.
B. Personal/ Solidary Liability of Board
Members and Officers
General rule — A corporate officer cannot be
held liable for acts done in his official capacity
because a corporation has a separate and distinct
personality from that of its officers and
members/stockholders.
Exceptions—Section 30, RCC: Directors or
trustees will be jointly and severally liable for
damages when:
1. They willfully and knowingly vote
for or assent to patently unlawful acts
of the corporation;
2. They are guilty of gross negligence
or bad faith in directing the affairs of
the corporation; or
3. They acquired any personal or
pecuniary interest in conflict with
their duty as such directors or
trustees.
They shall also not attempt to acquire, or acquire
any interest adverse to the corporation in
respect of any matter which has been reposed in
them in confidence. If they do, they shall be liable
as a trustee for the corporation and must account
for the profits which otherwise would have
accrued to the corporation.
NOTES IN CORPORATION LAW
Other instances where a director/trustee will be
solidarily liable with the corporation (not under
Section 30; jurisprudential):
4. When he/she consents to the issuance of
watered stocks7 or does not object thereto;
5. He/she agrees to hold
himself/herself personally and
solidarily liable with the corporation;
or
6. A provision of law makes him/her
personally answerable for the action.
Requisites to hold a director personally liable
for corporate obligations:
1. It must be specifically alleged in the
complaint that the director or officer
assented to patently unlawful acts of the
corporation or that the officer was guilty
of gross negligence or bad faith.
2. There must be clear and convincing
proof that the officer acted in bad faith.
Note: Bad faith does not connote bad judgment or
negligence. It imports a dishonest purpose or some
moral obliquity and conscious wrongdoing. It
means breach of a known duty through some ill
motive or interest.
CARAG VS. NLRC
GR NO. 147590
FACTS:
The National Federation of Labor Unions (NAFLU)
and Mariveles Apparel Corporation Labor Union
(MACLU), on behalf of the rank and file employees
of Mariveles Apparel Corporation (MAC) filed a
complaint against MAC for illegal dismissal
brought about by its illegal closure of business.
The dispute started when, in the absence of the
required notice of cessation of its business, MAC
ceased its operations with the intention of
completely closing its shop or factory. Such
intention was manifested in a letter, allegedly
claimed by MAC as its notice was filed only on the
same day that the operations closed. As a result of
the said business closure, the workers who
rendered their services were not paid their
salaries or wages. Hence, the rank and file
7
Section 64. Liability of Directors for Watered Stocks. - A
director or officer of a corporation who: (a) consents to the
issuance of stocks for a consideration less than its par or
issued value: (b) consents to the issuance of stocks for the
consideration other than cash, valued in excess of its fair
value; or (c) having knowledge of the insufficient
85
Professor: Atty. Leonardo Nick Gumabun
employees claimed that the manner of closure of
the operations of MAC was illegal.
While the complaint was lodged before the Labor
Arbiter, the complainant filed a motion to implead
MAC‘s Chairman of the Board Antonio Carag and
MAC‘s President Armando David. The inclusion of
Carag and David in the complaint is to guarantee
the satisfaction of any judgment favorable to the
complainants. However, the counsel for
respondents, submitted a position paper and
stated that complainants should not have
impleaded Carag and David because MAC is
actually owned by a consortium of banks. Carag
and David own shares in MAC only to qualify them
to serve as MAC’s officers.
ISSUE: When is a director personally liable for the
debts of the corporation?
RULING:
The rule is that a director is not personally liable
for the debts of the corporation, which has a
separate legal personality of its own.
Section 31 of the Corporation Code lays down the
exceptions to the rule, as follows: ―Liability of
directors, trustees or officers. – Directors or
trustees who wilfully and knowingly vote for or
assent to patently unlawful acts of the corporation
or who are guilty of gross negligence or bad faith
in directing the affairs of the corporation or
acquire any personal or pecuniary interest in
conflict with their duty as such directors or
trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the
corporation, its stockholders or members and
other persons.
Section 31 makes a director personally liable for
corporate debts if he willfully and knowingly votes
for or assents to patently unlawful acts of the
corporation. Section 31 also makes a director
personally liable if he is guilty of gross negligence
or bad faith in directing the affairs of the
corporation.
Neither did Arbiter Ortiguerra make any finding
to this effect in her Decision. Complainants did not
also allege that Carag is guilty of gross negligence
or bad faith in directing the affairs of MAC. To hold
consideration, does not file written objection with the
corporate secretary, shall be liable to the corporation or its
creditors, solidarily with the stockholder concerned for the
difference between the value receive at the time of issuance
of the stock and the par or issued value of the same.
NOTES IN CORPORATION LAW Professor: Atty. Leonardo Nick Gumabun
a director personally liable for debts of the Nite’s act of signing the Confirmation of Sale, by
corporation, and thus pierce the veil of corporate itself, does not make the corporate liability her
fiction, the bad faith or wrongdoing of the director personal liability.
must be established clearly and convincingly. Bad
To hold a director personally liable for debts of
faith is never presumed. Bad faith does not
the corporation, and thus pierce the veil of
connote bad judgment or negligence. Bad faith
corporate fiction, the bad faith or wrongdoing
imports a dishonest purpose. Bad faith means
of the director must be established clearly and
breach of a known duty through some ill motive or
convincingly. Bad faith is never presumed. Bad
interest. Bad faith partakes of the nature of fraud.
faith does not connote bad judgment or
Neither does bad faith arise automatically just
negligence. Bad faith imports a dishonest purpose.
because a corporation fails to comply with the
Bad faith means breach of a known duty through
notice requirement of labor laws on company
some ill motive or interest. Bad faith partakes of
closure or dismissal of employees. The failure to
the nature of fraud.
give notice is not an unlawful act because the law
does not define such failure as unlawful. Such
failure to give notice is a violation of procedural
GAGUI VS. DEJERO
due process but does not amount to an unlawful or
GR NO. 196036
criminal act.
For a wrongdoing to make a director personally The pertinent portion of Section 10, R.A. 8042
liable for debts of the corporation, the wrongdoing reads as follows: The liability of the
approved or assented to by the director must be a principal/employer and the
patently unlawful act. Mere failure to comply with recruitment/placement agency for any and all
the notice requirement of labor laws on company claims under this section shall be joint and several.
closure or dismissal of employees does not amount This provision shall be incorporated in the
to a patently unlawful act. Patently unlawful acts contract for overseas employment and shall be a
are those declared unlawful by law which imposes condition precedent for its approval.
penalties for commission of such unlawful acts.
In Sto. Tomas v. Salac, we had the opportunity to
There must be a law declaring the act unlawful
pass upon the constitutionality of this provision.
and penalizing the act.
We have thus maintained: the Court has already
held, pending adjudication of this case, that the
BANK OF COMMERCE VS. NITE liability of corporate directors and officers is
GR NO. 211535 not automatic. To make them jointly and
solidarily liable with their company, there
It is settled that the transaction between Bancom must be a finding that they were remiss in
and Bancap is an ordinary sale. We give weight to directing the affairs of that company, such as
the finding of both the trial court and the Court of sponsoring or tolerating the conduct of illegal
Appeals that Bancap’s liability arose from its activities.
contractual obligation to Bancom. The trial court
Hence, for petitioner to be found jointly and
and the Court of Appeals found that Bancom and
solidarily liable, there must be a separate finding
Bancap had been dealing with each other as seller
that she was remiss in directing the affairs of the
and buyer of treasury bills from December 1992
agency, resulting in the illegal dismissal of
until the transaction subject of this case on 25
respondents. Examination of the records would
April 1994, which was no different from their
reveal that there was no finding of neglect on the
previous transactions. Nite, as Bancap’s
part of the petitioner in directing the affairs of the
President, cannot be held personally liable for
agency. In fact, respondents made no mention of
Bancap’s obligation unless it can be shown
any instance when petitioner allegedly failed to
that she acted fraudulently. However, the issue
manage the agency in accordance with law,
of fraud had been resolved with finality when
thereby contributing to their illegal dismissal.
the trial court acquitted Nite of estafa on the
ground that the element of deceit is non-
existent in the case. The acquittal had long
become final and the finding is conclusive on this LOZADA VS. MENDOZA
Court. The prosecution failed to show that Nite GR NO. 196134
acted in bad faith. It is no longer open for review.

86
NOTES IN CORPORATION LAW
A corporation, as a juridical entity, may act only
through its directors, officers and employees.
Obligations incurred as a result of the acts of the
directors and officers as the corporate agents are
not their personal liability but the direct
responsibility of the corporation they represent.
As a general rule, corporate officers are not
held solidarily liable with the corporation for
separation pay because the corporation is
invested by law with a personality separate
and distinct from those of the persons
composing it as well as from that of any other
legal entity to which it may be related. Mere
ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock
of a corporation is not of itself sufficient ground
for disregarding the separate corporate
personality.
To hold a director or officer personally liable for
corporate obligations, two requisites must concur,
to wit: (1) the complaint must allege that the
director or officer assented to the patently
unlawful acts of the corporation, or that the
director or officer was guilty of gross negligence
or bad faith; and (2) there must be proof that the
director or officer acted in bad faith.
Clearly, what can be inferred from the earlier
cases is that the doctrine of piercing the corporate
veil 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.
The records of this case do not warrant the
application of the exception. The rule, which
requires malice or bad faith on the part of the
directors or officers of the corporation, must still
prevail. The petitioner might have acted in behalf
of LB&C Services Corporation but the
corporation’s failure to operate could not be
hastily equated to bad faith on his part. Verily, the
closure of a business can be caused by a host of
87
Professor: Atty. Leonardo Nick Gumabun
reasons, including mismanagement, bankruptcy,
lack of demand, negligence, or lack of business
foresight. Unless the closure is clearly
demonstrated to be deliberate, malicious and in
bad faith, the general rule that a corporation has,
by law, a personality separate and distinct from
that of its owners should hold sway. In view of the
dearth of evidence indicating that the petitioner
had acted deliberately, maliciously or in bad faith
in handling the affairs of LB&C Services
Corporation, and such acts had eventually
resulted in the closure of its business, he could not
be validly held to be jointly and solidarily liable
with LB&C Services Corporation.
JOSE MANUEL P. GUILLERMO VS. CRISANTA
USON, GR NO. 198967
In earlier labor cases, the Court held that persons
who were not originally impleaded in the case
were, even during execution, held to be
solidarity liable with the employer corporation
for the latter's unpaid obligations to
complainant-employees. Personal liability
attaches only when, as enumerated by the
said Section 31 of the Corporation Code, there
is a wilfull and knowing assent to patently
unlawful acts of the corporation, there is
gross negligence or bad faith in directing the
affairs of the corporation, or there is a
conflict of interest resulting in damages to
the corporation. The conferment of liability on
officers for a corporation's obligations to labor is
held to be an exception to the general doctrine of
separate personality of a corporation.
It also bears emphasis that in cases where
personal liability attaches, not even all officers
are made accountable. Rather, only the
"responsible officer," i.e., the person directly
responsible for and who "acted in bad faith"
in committing the illegal dismissal or any act
violative of the Labor Code, is held solidarily
liable, in cases wherein the corporate veil is
pierced
DAVID VS. CONSTRUCTION INDUSTRY AND
ARBITRATION COMMISSION, GR NO. 159795
As a general rule, the officers of a corporation are
not personally liable for their official acts unless it
is shown that they have exceeded their authority.
However, the personal liability of a corporate
director, trustee or officer, along with
NOTES IN CORPORATION LAW
corporation, may so validly attach when he
assents to a patently unlawful act of the
corporation or for bad faith or gross negligence in
directing its affairs.
The following findings of public respondent (CIAC)
would support its ruling in holding petitioners
severally and jointly liable with the Corporation:
“xxx When asked whether the Building was
underdesigned considering the poor quality of the
soil, Engr. Villasenor defended his structural
design as adequate. He admitted that the revision
of the plans which resulted in the construction of
additional columns was in pursuance of the
request of Engr. David to revise the structural
plans to provide for a significant reduction of the
cost of construction. When Engr. David was asked
for the justification for the revision of the plans, he
confirmed that he wanted to reduce the cost of
construction. xxx"
C. Self-Dealing Board Member and
Officers - Sec 31, RCC
A self-dealing director is a director (or his
spouse/relative within the 4th civil degree) who
contracts with the corporation where he is a
director.
Section 31, RCC: A contract between the corporation
and its (a) director/trustee; or (b) a director/trustee’s
spouse and relatives within the 4th civil degree of
consanguinity or affinity is voidable8, at the option of the
corporation, unless the following conditions are present:
1. The presence of such director/trustee in the
meeting in which the contract was approved wasn’t
necessary to constitute a quorum;
2. The vote of such director/trustee was not
necessary for the approval of the contract;
3. The contract is fair and reasonable.
If all 3 are present, the contract is valid. If any of 1, 2, or
3 is absent, the contract may be ratified by ⅔ vote of
the outstanding capital stock or ⅔ of the members,
provided that: (a) there is a full disclosure of adverse
interest; and (b) the contract is fair and reasonable.
4. In case of a corporation vested with public
interest, material contracts are approved by at least
⅔ of the entire membership of the board, with at least
a majority of the independent directors voting to
approve such material contracts.
8 10
A contract is voidable when there is vice of consent.
9
Substantial means the person’s total stockholdings in that
corporation exceeds 20% of the outstanding capital stock.
88
Professor: Atty. Leonardo Nick Gumabun
5. In case of a corporate officer, the contract has
been previously authorized by the Board of
Directors/Trustees.
D. Contracts Involving inter-Locking
Directors - Sec. 32, RCC
An interlocking director is a director of one,
some, or all corporations entering into a
contract.
Section 32, RCC: A contract between 2 or more
corporations having interlocking directors shall not be
invalidated on that ground alone, provided that:
1. The contract is not fraudulent; and
2. The contract is fair and reasonable.
Note: The status of contracts involving
interlocking directors is valid, provided that the
contract is not fraudulent and it is fair and
reasonable. If the two requisites are not present,
the contract cannot be ratified.
NOTE:
If the interest of the interlocking director in one
corporation is substantial9 and the interest in the
other is merely nominal10, the rule on self-
dealing directors (Section 31) will apply. This
means that ratification becomes necessary for
the contract to be valid.
Which corporation will ratify the contract?
- The nominal corporation will ratify.
The purpose of this rule is to prevent
officers from taking advantage of
information on the different corporations
or trade secrets in order to promote
individual interests. Officers are not
permitted to use their position of trust
and confidence to further private
interests.
E. Doctrine of Corporate Opportunity -
Sec. 33, RCC
Section 33. Disloyalty of a Director. - Where a director,
by virtue of such office, acquires a business opportunity
which should belong to the corporation, thereby obtaining
profits to the prejudice of such corporation, the director
must account for and refund to the latter all such profits,
unless the act has been ratified by a vote of the
stockholders owning or representing at least two-thirds
Nominal means less than 20%.
NOTES IN CORPORATION LAW
(2/3) of the outstanding capital stock. This provision shall
be applicable, nothwithstanding the fact that the director
risked one's own funds in the venture.
Requisites of Doctrine of Corporate
Opportunity
1. A director, by virtue of his/her office;
2. Acquires a business opportunity which
should belong to the corporation;
3. Thereby obtaining profits to the prejudice
of such corporation.
Note: This rule applies even if the director risked
his/her own funds in the venture.
When is there corporate opportunity?
There is corporate opportunity when the
following requisites are present—
1. When the corporation is
financially able to undertake an
opportunity;
2. The opportunity is consistent with
the nature of business of the
corporation; and
3. There is an expectation of profits
from undertaking that opportunity.
What should the liable director do?
He/she must account for, and refund to the
corporation all profits made in that business
opportunity. Exception—When the act is
ratified by a vote of ⅔ of the outstanding
capital stock.
GOCONGWEI, JR. VS. SEC
GR NO. L-45911
The doctrine of "corporate opportunity" is
precisely a recognition by the courts that the
fiduciary standards could not be upheld where the
fiduciary was acting for two entities with
competing interests. This doctrine rests
fundamentally on the unfairness, in particular
circumstances, of an officer or director taking
advantage of an opportunity for his own
personal profit when the interest of the
corporation justly calls for protection.
11
Because this requires a majority vote of stockholders in a
meeting called for the purpose of filling a vacancy.
89
Professor: Atty. Leonardo Nick Gumabun
It is not denied that a member of the Board of
Directors of the San Miguel Corporation has
access to sensitive and highly confidential
information, such as: (a) marketing strategies and
pricing structure; (b) budget for expansion and
diversification; (c) research and development; and
(d) sources of funding, availability of personnel,
proposals of mergers or tie-ups with other firms.
It is obviously to prevent the creation of an
opportunity for an officer or director of San
Miguel Corporation, who is also the officer or
owner of a competing corporation, from taking
advantage of the information which he acquires as
director to promote his individual or corporate
interests to the prejudice of San Miguel
Corporation and its stockholders, that the
questioned amendment of the by-laws was made.
Certainly, where two corporations are competitive
in a substantial sense, it would seem improbable,
if not impossible, for the director, if he were to
discharge effectively his duty, to satisfy his loyalty
to both corporations and place the performance of
his corporation duties above his personal
concerns.
F. Executive, Management, and Other
Special Committees - Sec. 34, RCC;
Section 34, RCC: If the bylaws so provide, the Board may
create an Executive Committee composed of at least 3
directors.
Note: This is like a “Mini Board”. It is not inferior
to the Board. It is as powerful as the Board, except
when it comes to the 5 acts that the RCC states the
Committee cannot act on.
Section 34, RCC: This Committee may act, by a
majority vote, on specific matters within the
competence of the Board as may be delegated to
it in the bylaws or by majority vote of the Board,
except on the following matters:
1. Approval of any option for which the
shareholders’ approval is also required;
2. Filling of vacancies in the Board11;
3. Amendment or repeal of bylaws or the
adoption of a new one12;
4. Amendment or repeal of any Board Resolution
which by its express terms is not amenable or
appealable; and
12
Because this requires either: (a) majority vote of the Board
and a majority vote of the outstanding capital stock; or (b)
delegation to the Board by a ⅔ vote of outstanding stock.
NOTES IN CORPORATION LAW
5. Distribution of cash dividends. 13
FILIPINAS PORT SERVICES, INC. VS. GO,
GR NO. 161886
The Board, in the exercise of its business
judgment can create committees that can give its
assistance in the performance of their functions.
They are not the executive committees
contemplated under Section 35 of BP 68. The
executive committee referred to in Sec. 35
that is as powerful as the board of directors
and in effect acting for the board itself, should
be distinguished from other committees that
the board may create at any time under the
business judgment rule; the actions of these
committees require ratification and
confirmation by the board.
X. Corporate Powers
A. Doctrine of Limited Capacity:
✓ The corporation has limited power to
invest in other corporations
✓ It has only such powers as are expressly
and impliedly granted and incidental to
its existence
✓ It may perform only those acts provided
by its by-laws
Limitation: acts which are unlawful and acts
beyond its powers to perform.
Ex: A corporation engaged in leasing of
real properties cannot engage in school
operations.
Concept of Ultra Vires Act
Ultra vires acts are those powers that are not
conferred to the corporation, by-laws, by its
Articles of Incorporation and those that are not
implied or necessary or incidental to the exercise
of the powers so conferred.
MANILA METAL CONTAINER CORP. V PNB, GR
NO. 166862 (2006)
FACTS:
13
The Committee is allowed to distribute stock dividends -
this because this provision specifically mentioned cash
dividends only.
90
Professor: Atty. Leonardo Nick Gumabun
The Special Assets Management Department
(SAMD) had prepared a recommendation for PNB
to accept MMCC's offer to repurchase the property
even beyond the one-year period; it recommended
that MMCC be allowed to redeem the property and
pay P1,574,560.00 as the purchase price. PNB
later approved the recommendation that the
property be sold to petitioner. But instead of the
P1,574,560.47, respondent set the purchase price
at P2,660,000.00.
RULING:
No evidence that the SAMD was authorized by
PNB's Board of Directors to accept petitioner's
offer and sell the property for P1,574,560.47. Any
acceptance by the SAMD of petitioner's offer
would not bind respondent.
A corporation can only execute its powers and
transact its business through its Board of
Directors and through its officers and agents when
authorized by a board resolution or its by-laws.
UNIVERSITY OF MINDANAO, INC V BSP
GR NO. 194964-65
FACTS:
University of Mindanao’s Vice President for
Finance executed a deed of real estate mortgage
over University of Mindanao’s property in
Cagayan de Oro City in favor of Bangko Sentral ng
Pilipinas.The mortgage served as security for First
Iligan Savings & Loan Association, Inc. (FISLAI)
P1.9 Million loan. It was allegedly executed on
University of Mindanao’s behalf.
RULING:
Petitioner does not have the power to mortgage its
properties in order to secure loans of other
persons. As an educational institution, it is limited
to developing human capital through formal
instruction. It is not a corporation engaged in the
business of securing loans of others. It does not
appear that securing third-party loans was
necessary to maintain petitioner’s business of
providing instruction to individuals.
Corporate acts that are outside those express
definitions under the law or articles of
incorporation or those "committed outside the
NOTES IN CORPORATION LAW
object for which a corporation is created" are
ultra vires.
XPN: those acts necessary and incidental to carry
out a corporation’s purposes, and to the exercise
of powers conferred by the Corporation Code and
under a corporation’s articles of incorporation.
(see Sec. 35,RCC )
Test: Whether the act in question is in direct and
immediate furtherance of the corporation’s
business, fairly incident to the express powers and
reasonably necessary to their exercise. If so, the
corporation has the power to do it; otherwise, not.
Professor: Atty. Leonardo Nick Gumabun
The power to borrow money is one of those cases
where corporate officers as agents of the
corporation need a special power of attorney. In
the case at bar, no special power of attorney
conferring authority on de Villa was ever
presented. The promissory notes evidencing the
loans were signed by de Villa (who was the
president of respondent corporation) as
borrower without indicating in what capacity he
was signing them. In fact, there was no mention
at all of respondent corporation. On their face,
they appeared to be personal loans of de Villa.

Ultra Vires Acts Unlawful Acts

YASUMA V HEIRS OF CECILIO DE VILLA Not illegal but merely Against the law,
GR. NO 150350 beyond the powers of morals, or public
FACTS: the corporation to order, public policy
perform
De Villa obtained loans from Yasuma as Void and
evidenced by three promissory notes signed by Voidable unenforceable
de Villa as borrower. The loans were initially
secured by three separate real estate mortgages Produces effects Cannot produce legal
on a parcel of land in the name of respondent effects
East Cordillera Mining Corporation. The deeds of Can be ratified or
mortgage were executed on the dates the loans express or implied Not susceptible of
assent by the ratification
were obtained, signed by de Villa as president of
stockholders or by
respondent corporation. The third real estate
reason of estoppel of
mortgage later cancelled the first two. the corporation or
RULING: the other party to the
transaction to raise
Being a juridical entity, a corporation may act objection,
through its board of directors. The corporation particularly where
can also act through its corporate officers who the benefits are
may be authorized either expressly by the by- retained
laws or board resolutions or impliedly such as by
general practice or policy or as are implied from B. Classes of Corporate Powers
express powers. The general principles of agency
govern the relation between the corporation and 1. Express Powers
its officers or agents. When authorized, their acts
Those powers expressly provided by the RCC,
can bind the corporation. Conversely, when
applicable special laws, administrative
unauthorized, their acts cannot bind it.
regulations, and the Articles of Incorporation.
However, the corporation may ratify the
General Powers of a Corporation
unauthorized act of its corporate officer. PAID SPACE P
Ratification means that the principal voluntarily a. To sue and be sued in its corporate name
adopts, confirms and gives sanction to some b. To have perpetual existence unless the
unauthorized act of its agent on its behalf. certificate of incorporation provides
Ratification can be made either expressly or otherwise
impliedly. Implied ratification may take various c. To adopt and use a corporate seal
forms — like silence or acquiescence, acts d. To amend its articles of incorporation
showing approval or adoption of the act, or e. To adopt by laws, not contrary to law
acceptance and retention of benefits flowing
morals or public policy, and to amend or
therefrom.
repeal the same

91
NOTES IN CORPORATION LAW
f. In case of a stock corporation, to issue or
sell stocks to subscribers and to sell
treasury stocks; 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 purpose s of partisan
political activity
✓ Domestic Corporations may now
donate to political parties or
candidates.
✓ Foreign Corporation is still
prohibited
j. To establish pension, retirement, and
other plans for the benefit of its directors,
trustees, officers, and employees
Specific Express Powers
a. To have perpetual existence unless its
articles of incorporation provides
otherwise (S11)
b. To amend the articles of incorporation
(S15)
c. To extend or shorten corporate term
(S36)
d. To increase or decrease capital stock
(S37)
e. To incur, create , or increase bonded
indebtedness (S37)
f. To deny preemptive right (S38)
g. To sell or dispose assets (S39)
h. To acquire own shares (S40)
92
Professor: Atty. Leonardo Nick Gumabun
i. To invest corporate funds in another
corporation or business or any other
purpose (S41)
j. To declare dividends (S42)
k. To enter into management contract (S43)
2. Implied Powers Sec. 35
Corporations are empowered 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
Doctrine of Necessary Implication:
Every statute is understood, by implication, to
contain all such provisions as may be necessary
to effectuate its object and purpose, or to make
effective rights, powers, privileges or
jurisdiction which it grants, including all such
collateral and subsidiary consequences as may
be fairly and logically inferred from its terms. Ex
necessitate legis. And every statutory grant of
power, right or privilege is deemed to include all
incidental power, right or privilege. (Chua v CSC,
1992 )
Example:
✓ A corporation authorized to operate a
cement factory has the implied power to
operate an electric power plant for such
factory.
✓
✓ A seller, dealer, trader or importer of
goods does not automatically classify one
as manufacturer because manufacturing
is not fairly and reasonably necessary or
incidental to the business of selling.
However, a manufacturing corporation
has an implied power to sell what it
manufactures.
Key: reasonably necessary + not expressly or
impliedly excluded
3. Incidental Powers
Those powers that are deemed conferred on the
corporation because they are incidental to the
existence of the corporation.
REASON: Corporations exist as juridical persons.
a. Right to succession
b. Right to have a corporate name
c. Right to make by-laws for its government
d. Right to sue and be sued
NOTES IN CORPORATION LAW
e. Right to acquire and hold properties for
the purposes authorized by the charter
C. Statutory Powers and Limitations on their
Exercise
A corporation is a juridical entity created by law
and, therefore, possesses no power or authority
other than what is vested by law. Corporations
can only do that which the law authorizes it to
perform.
As a creature of law, the power and attributes of
a corporation are those set out, expressly or
impliedly, in the law.
1. General Powers
GR: The Board exercises general powers of the
corporation
The approval of a resolution by the board is
sufficient.
2. Specific Powers
Those provided for in the Revised Corporation
Code including the specific requirements and/or
procedure for their exercise.
a. Amendment of Articles of Incorporation
b. Extending or Shortening of Corporate
Term
ALHAMBRA CIGAR V SEC
GR NO.L-23606 (1968)
May a corporation extend its life by amendment of
its articles of incorporation effected during the
three-year statutory period for liquidation when
its original term of existence had already expired?
RULING:
The common law rule, at the beginning, was rigid
and inflexible in that upon its dissolution, a
corporation became legally dead for all purposes.
Statutory authorizations had to be provided for its
continuance after dissolution "for limited and
specified purposes incident to complete
liquidation of its affairs”. Thus, the moment a
corporation's right to exist as an "artificial
person" ceases, its corporate powers are
terminated "just as the powers of a natural person
to take part in mundane affairs cease to exist upon
his death”. There is nothing left but to conduct, as
it were, the settlement of the estate of a deceased
juridical person.
93
Professor: Atty. Leonardo Nick Gumabun
S139,RCC
… every corporation whose charter expires
pursuant to its article of incorporation is annulled
by forfeiture, or whose corporate existence is
terminated in any other manner, shall
nevertheless remain as a body corporate for three
(3) years after the effective date of dissolution, for
the purpose of prosecuting and defending suits by
or against it and enabling it to settle and close its
affairs, dispose of and convey its property, and
distribute its assets, but not for the purpose of
continuing the business for which it was
established…
c. Increase or Decrease of Capital Stock
How to increase capital stock?
✓ By increasing the number of shares and
retaining the par value or
✓ By increasing the par value of existing
shares without changing the number of
shares or
✓ By increasing the number of shares and
increasing the par value
How to decrease capital stock?
✓ By decreasing the number of shares and
retaining the par value or
✓ By decreasing the par value of existing
shares without changing the number of
shares or
✓ By decreasing the number of shares and
increasing the par value
Requirements:
✓ majority vote of the board of
directors and by two-thirds (2/3)
of the outstanding capital stock at
a stockholders' meeting duly
called for the purpose
✓ Written notice of the time and
place of the stockholders' meeting
and the purpose for said meeting
must be sent to the stockholders at
their places of residence as shown
in the books of the corporation
served on the stockholders
personally, or through electronic
means recognized in the
corporation's bylaws and/or the
NOTES IN CORPORATION LAW
Commission's rules as a valid
mode for service of notices.
✓ certificate must be signed by a
majority of the directors of the
corporation and countersigned by
the chairperson and secretary of
the stockholders' meeting
✓ Must be approved by SEC and
Philippine Competition
Commission
Note: approval and Issuance by
the Commission of its certificate,
the capital stock shall be deemed
increased or decreased
✓ Sworn Statement of Treasure
showing
a. at least 25% of the increase in
capital stock has been
subscribed
b. at least 25% of the amount
subscribed has been pain in
actual cash or property (based
on the amount by which the
capital stock is increased and
not on the capital stock as
increased )
NOTE: No decrease in capital stock shall be
approved by the SEC if it will prejudice the rights
of corporate creditors.
Remedy: Secure consent of creditors.
d. Incurrence, Creation or Increase of Bonded
Indebtedness
Bonded indebtedness refers to secured
indebtedness or those secured by real or
personal property that are covered by
certificates. They refer to negotiable corporate
bonds secured by mortgage on property
✓ Bonds issued must be registered
with the Commission.
e. Deny Preemptive Right
Preemptive right is the right of shareholders to
purchase or subscribe to all issuances or
disposition of shares of any class, in proportion
to their respective shareholdings, before such
shares are offered to the public.
The purpose of this is to maintain the relative
and proportionate voting strength and control of
existing shareholders
94
Professor: Atty. Leonardo Nick Gumabun
Note: Pre-emptive right is not available when
shares are issued in exchange for shares in
another corporation if the same is the result of a
merger to which the corporations are parties
GR: Stockholders are entitled to preemptive
right
XPNs:
1. When denied in the Articles of
Incorporation
2. Shares are issued in compliance with laws
requiring stock offerings or minimum
stock ownership by the public
3. Shares are to be issued in good faith with
the approval of stockholders
representing 2/3 of the OCS in exchange
of property needed for corporate
purposes or in payment of previously
contracted debt
DEE V SEC
GR. NO 60502
While the group of Maggay was in control of
Natelco by virtue of the restraining order issued
in G.R. No. 50885, the Maggay Board issued
113,800 shares of stock to CSI Petitioner said
that the Maggay Board, in issuing said shares
without notifying Natelco stockholders, violated
their right of pre-emption to the unissued shares.
RULING:
The questioned issuance of the 113,800 stocks is
not invalid even assuming that it was made
without notice to the stockholders as claimed by
the petitioner. The power to issue shares of
stocks in a corporation is lodged in the board of
directors and no stockholders meeting is
required to consider it because additional
issuance of shares of stocks does not need
approval of the stockholders. Consequently, no
pre-emptive right of Natelco stockholders was
violated by the issuance of the 113,800 shares to
CSI.
Waiver
A stockholder who neither desires nor intends to
buy any of the stocks being offered may waive
such right. It is a personal right.
NOTES IN CORPORATION LAW
▪ The right to subscribe to new issues and
disposition may be transferred by the
shareholder unless there is an express
restriction in the Articles of
Incorporation.
f. Sale or Other Disposition of Assets
A sale or other disposition shall be deemed to
cover substantially all the corporate property
and assets if thereby the corporation would be
rendered incapable of continuing the business or
accomplishing the purpose of which it was
incorporated.
SEC MC 12-2020
The sale or disposal of corporate property and
assets amounting to at least 51% of the
corporation’s total assets shall be considered as
a sale of all or substantially all of corporate
property and assets, whether such sale accrued
in a single transaction or in several transactions
taking place within 1 yr from the date of the first
transaction (aggregate sale transactions) which
must be computed based on its total assets as
shown in its latest audited financial statements.
▪ Sale of all or substantially all of the
corporation’s properties and assets
Requisites:
1. Approval of the majority of the
directors or trustees
2. Assent of stockholders
representing 2/3 of OCS or 2/3 of
members in a meeting duly called
for the purpose after written
notice
▪ Does not cover all or substantially all of
the assets
✓ Decision of the board is sufficient.
There is an implied contract among the
stockholders to pursue the business for which
the corporation was created and therefore, as a
general rule, there should be no disposition of
the property used by the corporation in its
business until dissolution
▪ Section 39 of the RCC does not apply in
these cases :
✓ Sale of the entire property and
assets is necessary in the usual
95
Professor: Atty. Leonardo Nick Gumabun
and regular course of business of
the corporation
✓ Proceeds of the sale will be
appropriated for the conduct of its
remaining business
Nell Doctrine
- states the general rule that the transfer of
all the assets of a corporation to another
shall not render the latter liable to the
liabilities of the transferor. If any of the
above-cited exceptions are present, then
the transferee corporation shall assume
the liabilities of the transferor.
NELL CO. V PACIFIC FARMS,INC
GR NO.L-20850 (1965)
FACTS:
Nell filed an action for the collection of the
judgment against Pacific Farms, upon the theory
that Pacific Farms is the alter ego of Insular
Farms. Pacific Farms had purchased all or
substantially all of the shares of stock, as well as
the real and personal properties of the Insular
Farms, including the pumping equipment sold by
Nell to Insular Farms. The record shows that
appellee purchased 1,000 shares of stock of
Insular Farms for P285,126.99; that, thereupon,
appellee sold said shares of stock to certain
individuals, who forthwith reorganized said
corporation; and that the board of directors
thereof, as reorganized, then caused its assets,
including its leasehold rights over a public land in
Bolinao, Pangasinan, to be sold to herein appellee
for P10,000.00.
RULING:
Generally where one corporation sells or
otherwise transfers all of its assets to another
corporation, the latter is not liable for the debts
and liabilities of the transferor, except:
(1) where the purchaser expressly or impliedly
agrees to assume such debts;
(2) where the transaction amounts to a
consolidation or merger of the corporations;
(3) where the purchasing corporation is merely a
continuation of the selling corporation; and
NOTES IN CORPORATION LAW
(4) where the transaction is entered into
fraudulently in order to escape liability for such
debts.
There is neither proof nor allegation that Pacific
Farms had expressly or impliedly agreed to
assume the debt of Insular Farms in favor of Nell
Co. herein, or that the appellee is a continuation of
Insular Farms. Pacific purchased the shares of
stock of Insular Farms as the highest bidder at an
auction sale held at the instance of a bank to
which said shares had been pledged as security for
an obligation of Insular Farms in favor of said
bank. Neither is it claimed that these transactions
have resulted in the consolidation or merger of the
Insular Farms and appellee herein. On the
contrary, appellant's theory to the effect that
appellee is an alter ego of the Insular Farms
negates such consolidation or merger, for a
corporation cannot be its own alter ego.
Y-1LEISURE PHILIPPINES INC. V YU
GR NO. 207161 (2015)
Legal bases of the Nell Doctrine: where the
transaction is entered into fraudulently in order to
escape liability for such business-enterprise
transfer
In such transfer, the transferee corporation's
interest goes beyond the assets of the transferor's
assets and its desires to acquire the latter's
business enterprise, including its goodwill.
S39 of the RCC suitably reflects the business-
enterprise transfer under the exception of the Nell
Doctrine because the purchasing or transferee
corporation necessarily continued the business of
the selling or transferor corporation. Given that
the transferee corporation acquired not only the
assets but also the business of the transferor
corporation, then the liabilities of the latter are
inevitably assigned to the former.
XPN:
(1) if the sale of the entire property and assets is
necessary in the usual and regular course of
business of corporation, or
(2) if the proceeds of the sale or other disposition
of such property and assets will be appropriated
for the conduct of its remaining business.
The litmus test to determine the applicability of
Section 39 would be the capacity of the
96
Professor: Atty. Leonardo Nick Gumabun
corporation to continue its business after the sale
of all or substantially all its assets.
g. Acquisition of Corporate shares (S40)
General Rule: Corporation cannot acquire its
own shares if there is no funds from the
unrestricted retained earnings
Corporation cannot declare dividends in the
absence of unrestricted retained earnings
Exceptions
✓ To purchase of take up redeemable
shares (S8)
✓ When SEC orders a close corporation
to purchase the shares of
stockholders in case of deadlock in its
management (S104)(even without
unrestricted retained earnings)
Requirements:
1. The corporation has unrestricted retained
earnings
2. For legitimate corporate purposes
✓ To eliminate fractional shares arising out
of stock dividends
✓ To collect or compromise an
indebtedness to the corporation, arising
out of unpaid subscription, in a
delinquency sale, and to purchase
delinquent shares sold during said sale
✓ To pay dissenting or withdrawing
stockholders entitled to payment for their
shares under the provisions of this Code
✓ To acquire treasury shares(S9)
✓ To effect a decrease in capital stock (S37)
✓ To purchase of take up redeemable
shares (S8)
✓ When SEC orders a close corporation to
purchase the shares of stockholders in
case of deadlock in its management
(S104)
Conditions:
1. The capital of the corporation must not be
impaired
2. A legitimate and proper corporate
objective is advanced
3. The condition of corporate affairs
warrants it
4. The transaction is designed and carried
out in good faith
The capital stock, property, and other assets of a corporation are regarded as equity in trust for the payment of corporate
creditors, who must first be paid before any corporate assets may be distributed among shareholders.
NOTES IN CORPORATION LAW
h. Trust Fund Doctrine
- The capital stock and assets of the corporation
are held in trust for creditors. Accordingly, there
shall be no distribution of assets to shareholders
until the claims of creditors have been paid or an
appropriation of such assets has been made for
the payment of such claims.
HALLEY V PRINTWELL
GR NO.157549 (2011)
We clarify that the trust fund doctrine is not
limited to reaching the stockholder’s unpaid
subscriptions. The scope of the doctrine when the
corporation is insolvent encompasses not only the
capital stock, but also 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.
Also, under the trust fund doctrine, 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.3The 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. 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.
Notes:
Payment must be in legal tender. If check, the
check must be encashed.
Mere submission of the receipt issued in
exchange of the check did not satisfactorily
establish her allegation of full payment of her
subscription.
(ITR) and statement of assets and liabilities
has no bearing on the issue of payment of the
subscription because they did not by
themselves prove payment. ITRs establish a
97
Professor: Atty. Leonardo Nick Gumabun
taxpayer’s liability for taxes or a taxpayer’s
claim for refund. In the same manner, the
deposit slips and entries in the passbook
issued in the name of corporation were
hardly relevant due to their not reflecting the
alleged payments.
books and records of a corporation
(including the stock and transfer book) are
admissible in evidence in favor of or against
the corporation and its members to prove the
corporate acts, its financial status and other
matters (like the status of the stockholders),
and are ordinarily the best evidence of
corporate acts and proceedings.
Certificate of stock issued by corporations.
Such a certificate covering her subscription
might have been a reliable evidence of full
payment of the subscriptions.
PHILIPPINE TRUST CORP. V RIVERA
G.R. NO. L-19761 (1923)
FACTS:
A resolution was adopted to the effect that the capital
should be reduced by 50 per centum and the
subscribers released from the obligation to pay any
unpaid balance of their subscription in excess of 50 per
centum of the same. As a result of this resolution it
seems to have been supposed that the subscription of
the various shareholders had been cancelled to the
extent stated; and fully paid certificate were issued to
each shareholders for one-half of his subscription. It
does not appear that the formalities prescribed in
section 17 of the Corporation Law (Act No. 1459), as
amended, relative to the reduction of capital stock in
corporations were observed, and in particular it does
not appear that any certificate was at any time filed in
the Bureau of Commerce and Industry, showing such
reduction.
RULING:
It is established doctrine that subscription to the
capital of a corporation constitute a find 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.
(Velasco vs. Poizat, 37 Phil., 802.) A corporation has no
power to release an original subscriber to its capital
stock from the obligation of paying for his shares,
without a valuable consideration for such release; and
as against creditors a reduction of the capital stock can
take place only in the manner an under the conditions
prescribed by the statute or the charter or the articles
NOTES IN CORPORATION LAW
of incorporation. Moreover, strict compliance with the
statutory regulations is necessary.
i. Investment of Corporate Funds
a. Pursuing Secondary Purpose
✓ Approval by a majority of the board of
directors or trustees
✓ Such approval must be ratified by the
stockholders representing at least 2/3
of the OCS, or by at least 2/3 of the
members at a meeting duly called for
the purpose
✓ Notice
Note: Dissenting stockholders is given
the right of appraisal whenever the
corporation decides to pursue its
secondary corporate business
Reason: Stockholder will be exposed to a
line of business that is not being pursued
when the invested in the company
b. Pursuing Primary Purpose
✓ Only approval of the Board
DE LA RAMA V MA-AO SUGAR CENTRAL
GR NO. L-17504
FACTS:
Ma-ao Sugar Central Co., Inc., through its
President, subscribed for P300,000.00 worth of
capital stock of the Philippine Fiber Processing
Co. Inc., that payments on the subscription were
made; that at the time the first two payments
were made there was no board resolution
authorizing the investment; and that it was only
on November 26, 1951, that the President of Ma-
ao Sugar Central Co., Inc., was so authorized by
the Board of Directors.
Plaintiffs-appellants contend that even
assuming, arguendo, that the said Board
Resolutions are valid, the transaction, is still
wanting in legality, no resolution having been
approved by the affirmative vote of stockholders
holding shares in the corporation entitling them
to exercise at least two-thirds of the voting
power, as required in Sec. 17-½ of the
Corporation Law.
RULING:
Private corporation has the power to acquire,
hold, mortgage, pledge or dispose of shares,
98
Professor: Atty. Leonardo Nick Gumabun
bonds, securities, and other evidences of
indebtedness of any domestic or foreign
corporation. Such an act, if done in pursuance of
the corporate purpose, does not need the
approval of the stockholders; but when the
purchase of shares of another corporation is
done solely for investment and not to accomplish
the purpose of its incorporation, the vote of
approval of the stockholders is necessary.
Power to invest corporate funds
When the investment is necessary to accomplish
its purpose or purposes as stated in it articles of
incorporation, the approval of the stockholders
is not necessary
j. Declaration of Dividends
Dividends refers to corporate profits
allocated, lawfully declared and ordered
by the directors to be paid to the
stockholders on demand or at a fixed time.
Note: Stock corporations are prohibited
from restraining surplus profits in excess
of one hundred percent (100%} of their
paid-in capital stock.
XPN:
✓ when justified by the definite
corporate expansion projects or
programs approved by the board of
directors
✓ 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
✓ 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.
Unrestricted retained earnings the amount
of accumulated profits and gains realized
out of the normal and continuous
operations of the company after deducting
therefrom distributions of stockholders
and transfers to capital stock or others
accounts and which is:
NOTES IN CORPORATION LAW Professor: Atty. Leonardo Nick Gumabun
✓ Not appropriated by its board for The amount to be All formalities and
corporate expansion projects or distributed is severed necessary to a valid
programs from the general fund increase of stock must
✓ Not covered by a restriction for and becomes the be complied with
dividend declaration undera loan property of the SHs before SHs are entitled
agreement pro rata as soon as the to anything ,mere
✓ Not required to be retained under dividend is voted declaration does not
special circumstances obtaining in the give them vested right
corporations such as when there is a
need for special reserve for probable GR: Dividends cannot be declared out of capital.
contingencies
Reason: The Trust Fund Doctrine will be
GR: The Board of Directors has the discretion to violated. TFD considers the subscribed
declare dividends capital as a trust fund for the payment of
the debts of the corporation to which the
Requirements: corporation may look for satisfaction.

✓ Unrestricted retained earnings XPN:

✓ Resolution of the board
XPN: Stock dividends (with concurrence of 2/3 of
OCS), but still up to the board to declare it
o When stock dividends are declared, the
earnings are distributed to the
✓ Liquidating dividends
✓ Dividends from investments in wasting
assets corporation
Wasting assets corporation is a corporation engaged in
mining or cutting timber or some kind of busines, so that
Note: dividends are in fact paid out of capital, the assets being
consumed in the regular course of operations.

stockholders in the form of shares of stock. ✓ Paid-in surplus cannot be declared as

It involves conversion of surplus or dividends because they are part of the
undivided profits into capital. capital. Also called the premium (par
value-issued value or selling
Cash Dividend Stock Dividend price=paid-in surplus)
The declaration Majority vote of the
requires only majority directors + approval ✓ Treasury shares cannot be declared as
vote of the directors in of stockholders stock or cash dividends because they
a meeting constituting representing at least are not considered part of earned or
a quorum two-thirds (2/3) of surplus profits.
the outstanding
capital stock at a Reason: The conversion would be
regular or special converted into both a debtor and
meeting duly called creditor for the same amount at the
for the purpose. same time
any cash dividends Any stock dividend
due on delinquent shall be withheld from ✓ Revaluation surplus is an increase in
stock shall be first be the delinquent the value of the assets. Cannot be
applied to the unpaid stockholder until his declared as dividend because they
balance on the unpaid subscription is cannot be considered earnings of the
subscription plus fully paid corporation. They are by nature
costs and expenses, subject to fluctuations
while stock holders
until their unpaid Who is entitled?
subscription is fully
paid Stockholders are entitled to dividends pro rata
No revocation as to Can be revoked before based on the total number of shares and not on the
the legally declared the issuance of the amount paid for share.
dividends unless with dividend declaration
the consent of the Dividends belong to the person who owns the stock
stockholders (apply when the dividend is declared
to property dividends
as well) Even unpaid subscribers are entitled to dividends.

99
NOTES IN CORPORATION LAW
Even delinquent shareholders are entitled
When vested?
The right of the stockholders to be paid
dividends accrues as soon as the
declaration is made.
Result: Corporation becomes their debtor
for their respective shares in the dividends
k. Management Contract
It is an agreement whereby one undertakes
to manage or operate all or substantially all
of the business of another, whether such
contracts are called service contracts,
operating agreements or otherwise.
✓ Between two corporations
✓ If with natural person, it is more
appropriately an employment contract
Requirement:
✓ Majority vote of the Board + majority of
the OCS or members at a meeting duly
called for the purpose, or
✓ Approved by the stockholders of the
managed corporation owning at least 2/3
of the OCS or 2/3 of the members , if :
▪ If BOD constitutes a majority of
both the managed and managing
corporation
▪ if the shareholders representing
the same interest of both the
managing or managed
corporations own or control more
than 1/3 of the total OCS entitled
to vote of the managing
corporation
Period: shall not exceed 5 years for any one
term
l. Issuance of shares
MAJORITY STOCKHOLDERS OF RUBY
INDUSTRIAL CORPORATION, Petitioner, v.
MIGUEL LIM et al., Respondents.
G.R. No. 165887: June 7, 2011
100
Professor: Atty. Leonardo Nick Gumabun
FACTS:
Ruby Industrial Corporation (RUBY) is a domestic
corporation engaged in glass manufacturing.
Reeling from severe liquidity problems beginning
in 1980, RUBY filed on December 13, 1983a
petition for suspension of payments with the
Securities and Exchange Commission (SEC)
docketed as SEC Case No. 2556.On December 20,
1983, the SEC issued an order declaring RUBY
under suspension of payments and enjoining the
disposition of its properties pending hearing of the
petition, except insofar as necessary in its ordinary
operations, and making payments outside of the
necessary or legitimate expenses of its business.
On August 10, 1984, the SEC Hearing Panel
created the management committee (MANCOM)
for RUBY, composed of representatives from Allied
Leasing and Finance Corporation (ALFC),
Philippine Bank of Communications (PBCOM),
China Banking Corporation (China Bank),
Pilipinas Shell Petroleum Corporation (Pilipinas
Shell), and RUBY represented by Mr. Yu Kim
Giang.The MANCOM was tasked to perform the
following functions: (1) undertake the
management of RUBY; (2) take custody and
control over all existing assets and liabilities of
RUBY; (3) evaluate RUBYs existing assets and
liabilities, earnings and operations; (4) determine
the best way to salvage and protect the interest of
its investors and creditors; and (5) study, review
and evaluate the proposed rehabilitation plan for
RUBY.
Subsequently, two (2) rehabilitation plans were
submitted to the SEC: the BENHAR/RUBY
Rehabilitation Plan of the majority stockholders
led by Yu Kim Giang, and the Alternative Plan of
the minority stockholders represented by Miguel
Lim (Lim).
Both plans were endorsed by the SEC to the
MANCOM for evaluation.
On April 26, 1991, over ninety percent (90%) of
RUBYs creditors objected to the Revised
BENHAR/RUBY Plan and the creation of a new
management committee. Instead, they endorsed
the minority stockholders Alternative Plan. At the
hearing of the petition for the creation of a new
management committee, three (3) members of the
original management committee (Lim, ALFC and
NOTES IN CORPORATION LAW
Pilipinas Shell) opposed the Revised
BENHAR/RUBY Plan on grounds that:(1) it would
legitimize the entry of BENHAR, a total stranger,
to RUBY as BENHAR would become the biggest
creditor of RUBY;(2) it would put RUBYs assets
beyond the reach of the unsecured creditors and
the minority stockholders; and (3) it was not
approved by RUBYs stockholders in a meeting
called for the purpose.
Notwithstanding the objections of 90% of RUBYs
creditors and three members of the MANCOM, the
SEC Hearing Panel approved on September 18,
1991 the Revised BENHAR/RUBY Plan and
dissolved the existing management committee. It
also created a new management committee and
appointed BENHAR as one of its members. In
addition to the powers originally conferred to the
management committee under Presidential
Decree (P.D.) No. 902-A, the new management
committee was tasked to oversee the
implementation by the Board of Directors of the
revised rehabilitation plan for RUBY.
On March 17, 2000, Lim filed a Motion informing
the SEC of acts being performed by BENHAR and
RUBY through directors who were illegally
elected, despite the pendency of the appeal before
this Court questioning the SEC approval of the
BENHAR/RUBY Plan and creation of a new
management committee. Lim reiterated that
before the matter of extension of corporate life can
be passed upon by the stockholders, it is necessary
to determine the percentage ownership of the
outstanding shares of the corporation. The
majority stockholders claimed that they have
increased their shareholdings from 59.828% to
74.75% as a result of the illegal and invalid
stockholders’ meeting on September 3, 1996. The
additional subscription of shares cannot be done
as it implements the BENHAR/RUBY Plan against
which an existing injunction is still effective based
on the SEC Order dated January 6, 1989, and
which was struck down under the final decision of
this Court in G.R. Nos. 124185-87.
Hence, the implementation of the new percentage
stockholdings of the majority stockholders and the
calling of stockholders’ meeting and the
subsequent resolution approving the extension of
corporate life of RUBY for another twenty-five
(25) years, were all done in violation of the
decisions of the CA and this Court, and without
compliance with the legal requirements under the
Corporation Code.
101
Professor: Atty. Leonardo Nick Gumabun
There being no valid extension of corporate term,
RUBY’s corporate life had legally ceased.
Consequently, Lim moved that the SEC: (1) declare
as null and void the infusion of additional capital
made by the majority stockholders and restore the
capital structure of RUBY to its original structure
prior to the time injunction was issued; and (2)
declare as null and void the resolution of the
majority stockholders extending the corporate life
of RUBY for another twenty-five (25) years.
The MANCOM concurred with Lim and made a
similar manifestation/comment regarding the
irregular and invalid capital infusion and
extension of RUBY’s corporate term approved by
stockholders representing only 60% of RUBY’s
outstanding capital stock. It further stated that
the foregoing acts were perpetrated by the
majority stockholders without even consulting the
MANCOM,
which technically stepped into the shoes of RUBY’s
board of directors. Since RUBY was still under a
state of suspension of payment at the time the
special stockholders’ meeting was called, all
corporate acts should have been made in
consultation and close coordination with the
MANCOM.
ISSUE: Whether the additional capital infusion
was valid.
HELD:
NO.
A stock corporation is expressly granted the power
to issue or sell stocks. The power to issue shares of
stock in a corporation is lodged in the board of
directors and no stockholders’ meeting is required
to onsider it because additional issuances of
shares of stock do not need approval of the
stockholders.
What is only required is the board resolution
approving the additional issuance of shares. The
corporation shall also file the necessary
application with the SEC to exempt these from the
registration
requirements under the Revised Securities Act
(now the Securities Regulation Code).
In this case, that the payment schedules as
embodied in the said Revised plan which gives
Benhar undue advantage over the other creditors
goes against the very essence of rehabilitation,
NOTES IN CORPORATION LAW
which requires that no creditor should be
preferred over the other. One of the salient
features of the Revised Benhar/Ruby Plan is to Call
on unissued shares forP11.814 M and if minority
will take up their pre-emptive rights and dilute
minority shareholdings.
The validity of issuance of additional shares may
be questioned if done in breach of trust by the
controlling stockholders. Thus, even if the pre-
emptive right does not exist, either because the
issue comes within the exceptions in Section 39 or
because it is denied or limited in the articles of
incorporation, an issue of shares may still be
objectionable if the directors acted in breach of
trust and their primary purpose is to perpetuate
or shift control of the corporation, or to "freeze
out" the minority interest. In this case, the
following relevant observations should have
signaled greater circumspection on the part of the
SEC -- upon the third and last remand to it
pursuant to our January 20, 1998 decision -- to
demand transparency and accountability from
the majority stockholders, in view of the illegal
assignments and objectionable features of the
Revised BENHAR/RUBY Plan, as found by the CA
and as affirmed by this Court:
There can be no gainsaying the well-established
rule in corporate practice and procedure that the
will of the majority shall govern in all matters
within the limits of the act of incorporation and
lawfully enacted by-laws not proscribed by law. It
is, however, equally true that other stockholders
are afforded the right to intervene especially
during critical periods in the life of a corporation
like reorganization, or in this case, suspension of
payments, more so, when the majority seek to
impose their will and through fraudulent means,
attempt to siphon off Ruby’s valuable assets to the
great prejudice of Ruby itself, as well as the
minority stockholders and the unsecured
creditors.
m. Merger and Consolidation
Merger is one where a corporation absorbs
another corporation and remains in existence
while the other is dissolved
A+B= B
Consolidation is one where a new corporation
is created, and consolidating corporations are
extinguished
102
Professor: Atty. Leonardo Nick Gumabun
A+B=C
Possible purposes of Merger/Consolidation
✓ Economies of scale, meaning , a
combination of two production units
enlarges the production output over
which the fixed cost per unit of the output
✓ Economies of the scope, meaning, the
costs-and even management talent are
spread across a broader range of related
activities
✓ Costs are reduced through vertical
integration, meaning there is a merger
with a supplier or a customer
Effects:
1. The constituent corporations shall
become a single corporation
2. The separate existence of the
constituents shall cease except that of the
surviving corporation (merger) or the
consolidated corporation (consolidation)
3. The surviving or the consolidated
corporation shall possess all the rights,
privileges, immunities and powers and
shall be subject to all duties and liabilities
of a corporation and franchises of each
constituent and properties shall be
deemed transferred to the surviving or
consolidated corporation
4. All the liabilities of the constituents shall
pertain to the surviving or the
consolidated corporation
NOTE: There is no winding up of their affairs
or liquidation of their assets although there is
dissolution of the absorbed corporations.
PLAN OF MERGER OR CONSOLIDATION
The plan of merger or consolidation is a plan
created by the representatives of the constituent
corporations, providing for the details of such
merger.
Contents of a plan of merger or consolidation
The BOD/ BOT of each corporation party to the
merger or consolidation must set forth the
following in their plan of merger or
consolidation:
1. The names of the corporations proposing to
merge or consolidate, hereinafter referred to as
the constituent corporations;
2. The terms of the merger or consolidation and
the mode of carrying the same into effect;
NOTES IN CORPORATION LAW
3. A statement of the changes, if any, in the AOI of
the surviving corporation in case of a merger;
and, with respect to the consolidated
corporation in case of consolidation, all the
statements required to be set forth in the AOI for
corporations organized under the CC; and
4. Such other provisions with respect to the
proposed merger or consolidation as are deemed
necessary or desirable (CC, Sec. 76).
Approvals required for an effective plan of
merger or consolidation
The plan of merger or consolidation must be
approved by:
1. Majority vote of each of the BOD/ BOT of the
constituent corporation; and
2. Submitted for approval by the stockholders or
members of each of such corporations at
separate corporate meetings duly called for the
purpose.
The affirmative vote of the stockholders
representing at least 2/3 of the outstanding
capital stock of each corporation in the case of
stock corporations or at least 2/3 of the
members in the case of non-stock corporations,
shall be necessary for the approval of such plan
(CC, Sec. 77).
Amendment of a plan of merger or
consolidation
Any amendment may be made, provided such
amendment is approved by majority vote of the
respective BOD / BOT of all the constituent
corporations and ratified by the affirmative vote
of stockholders representing at least 2/3 of the
outstanding capital stock or 2/3 of the members
of each of the constituent corporations (CC, Sec.
77).
NOTE: Such plan, together with any amendment,
shall be considered as the agreement of merger
or consolidation.
Appraisal right is available to a dissenting
stockholder to a plan of merger or
consolidation
Any dissenting stockholder in stock corporations
may exercise his appraisal right in accordance
with this Code: Provided, that if after the
approval by the stockholders of such plan, the
BOD should decide to abandon the plan, the
appraisal right shall be extinguished (CC, Sec.
77).
ARTICLES OF MERGER OR CONSOLIDATION
103
Professor: Atty. Leonardo Nick Gumabun
After approval of the plan of merger or
consolidation, an article of merger or
consolidation is executed by each of the
constituent corporations to be signed by the
president or vice-president of the each
corporation and signed by their secretary or
assistant secretary setting forth:
1. The plan of the merger or the plan of
consolidation;
2. As to stock corporations, the number of shares
outstanding, or in the case of non-stock
corporations, the number of members; and
3. As to each corporation, the number of shares
or members voting for and against such plan,
respectively (CC, Sec. 78).
After the approval by the stockholders or
members as required by the preceding section,
articles of merger or articles of consolidation
shall be executed by each of the constituent
corporations, to be signed by the president or
vice president and certified by the secretary or
assistant secretary of each corporation setting
forth:
(a) The plan of the merger or the plan of
consolidation;
(b) As to stock corporations, the number of
shares outstanding, or in the case of nonstock
corporations, the number of members;
(c) As to each corporation, the number of shares
or members voting for or against such plan,
respectively;
(d) The carrying amounts and fair values of the
assets and liabilities of the respective companies
as of the agreed cut-off date; (e) The method to
be used in the merger or consolidation of
accounts of the companies;
(f) The provisional or pro-forma values, as
merged or consolidated, using the accounting
method; and
(g) Such other information as may be prescribed
by the Commission. (RCC, Sec. 77)
PROCEDURE
1. The Board of each corporation shall draw up a
plan of merger or consolidation.
2. The plan of merger or consolidation shall be
approved by majority vote of each board of the
concerned corporations at separate meetings.
3. The plan of merger or consolidation shall be
submitted for approval by the stockholders or
members of each such corporation at separate
corporate meetings duly called for the purpose.
Notice should be given to all stockholders or
NOTES IN CORPORATION LAW
members at least two (2) weeks prior to date of
meeting, either personally or by registered mail.
4. Affirmative vote of 2/3 of the outstanding
capital stock in case of stock corporations, or 2/3
of the members of a non-stock corporation shall
be required.
5. Dissenting stockholders may exercise the right
of appraisal. But if the Board abandons the plan
to merge or consolidate, such right is
extinguished.
6. The plan may still be amended before the same
is filed with the SEC; however, any amendment
to the plan must be approved by the same votes
of the board members of trustees and
stockholders or members required for the
original plan.
7. After such approval, Articles of Merger or
Articles of Consolidation shall be executed by
each of the constituent corporations, signed by
president or VP and certified by secretary or
assistant secretary, setting forth:
a. Plan of merger or consolidation;
b. In stock corporation, the number of shares
outstanding; in non-stock, the number of
members; and
c. As to each corporation, number of shares or
members voting for and against such plan,
respectively.
8. Four copies of the Articles of Merger or
Consolidation shall be submitted to the SEC for
approval. Special corporations like banks,
insurance companies, building and loan
associations, etc., need the prior approval of the
respective government agency concerned.
9. If SEC is satisfied that the merger or
consolidation is not inconsistent with the
provisions of the Corporation Code and existing
laws, it shall issue the Certificate of Merger or
the Certificate of Incorporation, as the case may
be.
10. If, upon investigation, the SEC has reason/s
to believe that the proposed merger or
consolidation is contrary to or inconsistent with
the Corporation Code or other existing laws, it
shall set a hearing to give the corporations the
opportunity to be heard and written notice of
said hearing shall be given to each constituent
corporation at least two weeks prior to the said
hearing (CC, Secs. 76-79).
104
Professor: Atty. Leonardo Nick Gumabun
EFFECTIVITY
The merger or consolidation shall become
effective upon issuance by the SEC of the
certificate of merger and consolidation.
In the case of merger or consolidation of banks
or banking institutions, building and loan
associations, trust companies, insurance
companies, public utilities, educational
institutions and other special corporations
governed by special laws, the favorable
recommendation of the appropriate government
agency shall first be obtained (CC, Sec. 79).
The articles of merger or of consolidation, signed
and certified as required by this Code, shall be
submitted to the Commission for its approval:
Provided, That in the case of merger or
consolidation of banks or banking institutions,
loan associations, trust companies, insurance
companies, public utilities, educational
institutions, and other special corporations
governed by special laws, the favorable
recommendation of the appropriate government
agency shall first be obtained. If the Commission
is satisfied that the merger or consolidation of
the corporations concerned is consistent with
the provisions of this Code and existing laws, it
shall issue a certificate approving the articles
and plan of merger or of consolidation, at which
time the merger or consolidation shall be
effective. If, upon investigation, the Commission
has reason to believe that the proposed merger
or consolidation is contrary to or inconsistent
with the provisions of this Code or existing laws,
it shall set a hearing to give the corporations
concerned the opportunity to be heard. Written
notice of the date, time, and place of hearing shall
be given to each constituent corporation at least
two (2) weeks before said hearing. The
Commission shall thereafter, proceed as
provided in this Code. (RCC, Sec. 78)
XI. RIGHTS OF SHAREHOLDERS
A. Right to Attend Meetings - SEC MC No. 6-
2020
1. Kinds of Meetings
SEC. 48. Kinds of Meetings. – Meetings of directors,
trustees, stockholders, or members may be regular or
special.
SEC. 49. Regular and Special Meetings of
Stockholders or Members. – Regular meetings of
stockholders or members shall be held annually on a date
NOTES IN CORPORATION LAW
fixed in the bylaws, or if not so fixed, on any date after
April 15 of every year as determined by the board of
directors or trustees: Provided, That written notice of
regular meetings shall be sent to all stockholders or
members of record at least twenty-one (21) days prior to
the meeting, unless a different period is required in the
bylaws, law, or regulation: Provided, further, That written
notice of regular meetings may be sent to all stockholders
or members of record through electronic mail or such
other manner as the Commission shall allow under its
guidelines.
At each regular meeting of stockholders or members, the
board of directors or trustees shall endeavor to present to
stockholders or members the following:
a) The minutes of the most recent regular meeting which
shall include, among others:
(1) A description of the voting and vote tabulation
procedures used in the previous meeting;
(2) A description of the opportunity given to
stockholders or members to ask questions and a
record of the questions asked and answers
given;
(3) The matters discussed and resolutions
reached;
(4) A record of the voting results for each agenda
item;
(5) A list of the directors or trustees, officers and
stockholders or members who attended the
meeting; and
(6) Such other items that the Commission may
require in the interest of good corporate
governance and the protection of minority
stockholders.
b) A members’ list for nonstock corporations and, for
stock corporations, material information on the current
stockholders, and their voting rights;
c) A detailed, descriptive, balanced and comprehensible
assessment of the corporation’s performance, which shall
include information on any material change in the
corporation’s business, strategy, and other affairs;
d) A financial report for the preceding year, which shall
include financial statements duly signed and certified in
accordance with this Code and the rules the Commission
may prescribe, a statement on the adequacy of the
corporation’s internal controls or risk management
systems, and a statement of all external audit and non-
audit fees;
e) An explanation of the dividend policy and the fact of
payment of dividends or the reasons for nonpayment
thereof;
f) Director or trustee profiles which shall include, among
others, their qualifications and relevant experience,
length of service in the corporation, trainings and
105
Professor: Atty. Leonardo Nick Gumabun
continuing education attended, and their board
representations in other corporations;
g) A director or trustee attendance report, indicating the
attendance of each director or trustee at each of the
meetings of the board and its committees and in regular
or special stockholder meetings;
h) Appraisals and performance reports for the board and
the criteria and procedure for assessment;
i) A director or trustee compensation report prepared in
accordance with this Code and the rules the Commission
may prescribe;
j) Director disclosures on self-dealings and related party
transactions; and/or
k) The profiles of directors nominated or seeking election
or reelection.
✓ A director, trustee, stockholder, or member
may propose any other matter for
inclusion in the agenda at any regular
meeting of stockholders or members.
✓ Special meetings of stockholders or
members shall be held at any time deemed
necessary or as provided in the bylaws:
Provided, however, That at least one (1)
week written notice shall be sent to all
stockholders or members, unless a
different period is provided in the bylaws,
law or regulation.
✓ A stockholder or member may propose the
holding of a special meeting and items to
be included in the agenda.
✓ Notice of any meeting may be waived,
expressly or impliedly, by any stockholder
or member: Provided, That general
waivers of notice in the articles of
incorporation or the bylaws shall not be
allowed: Provided, further, That
attendance at a meeting shall constitute a
waiver of notice of such meeting, except
when the person attends a meeting for the
express purpose of objecting to the
transaction of any business because the
meeting is not lawfully called or convened
.
✓ Whenever for any cause, there is no person
authorized or the person authorized
unjustly refuses to call a meeting, the
Commission, upon petition of a stockholder
or member on a showing of good cause
therefor, may issue an order directing the
petitioning stockholder or member to call
a meeting of the corporation by giving
proper notice required by this Code or the
bylaws. The petitioning stockholder or
NOTES IN CORPORATION LAW
member shall preside thereat until at least
a majority of the stockholders or members
present have chosen from among
themselves, a presiding officer.
✓ Unless the bylaws provide for a longer
period, the stock and transfer book or
membership book shall be closed at least
twenty (20) days for regular meetings and
seven (7) days for special meetings before
the scheduled date of the meeting.
✓ In case of postponement of stockholders’ or
members’ regular meetings, written notice
thereof and the reason therefor shall be
sent to all stockholders or members of
record at least two (2) weeks prior to the
date of the meeting, unless a different
period is required under the bylaws, law or
regulation.
✓ The right to vote of stockholders or
members may be exercised in person,
through a proxy, or when so authorized in
the bylaws, through remote
communication or in absentia. The
Commission shall issue the rules and
regulations governing participation and
voting through remote communication or
in absentia, taking into account the
company’s scale, number of shareholders
or members, structure, and other factors
consistent with the protection and
promotion of shareholders’ or member’s
meetings.
2. Requirements of a Meeting
SEC. 50. Place and Time of Meetings of Stockholders
or Members. – Stockholders’ or members’ meetings,
whether regular or special, shall be held in the principal
office of the corporation as set forth in the articles of
incorporation, or, if not practicable, in the city or
municipality where the principal office of the corporation
is located: Provided, That any city or municipality in Metro
Manila, Metro Cebu, Metro Davao, and other Metropolitan
areas shall, for purposes of this section, be considered a
city or municipality.
Notice of meetings shall be sent through the means of
communication provided in the bylaws, which notice shall
state the time, place and purpose of the meetings.
Each notice of meeting shall further be accompanied by
the following:
(a) The agenda for the meeting;
(b) A proxy form which shall be submitted to the
corporate secretary within a reasonable time
prior to the meeting;
106
Professor: Atty. Leonardo Nick Gumabun
(c) When attendance, participation, and voting
are allowed by remote communication or in
absentia, the requirements and procedures to be
followed when a stockholder or member elects
either option; and
(d) When the meeting is for the election of
directors or trustees, the requirements and
procedure for nomination and election.
All proceedings and any business transacted at a
meeting of the stockholders or members, if within
the powers or authority of the corporation, shall
be valid even if the meeting is improperly held or
called: Provided, That all the stockholders or
members of the corporation are present or duly
represented at the meeting and not one of them
expressly states at the beginning of the meeting
that the purpose of their attendance is to object
to the transaction of any business because the
meeting is not lawfully called or convened.
GUY V. GUY
G.R. NO. 184068, 19 APRIL 2016
FACTS:
Fifteen (15) days after the September 7,
2004 special stockholders’ meeting, Simny, a
stockholder of record and a member of the BOD of
the Goodland Company Inc. (GCI), received a
notice about the said hearing electing respondents
as new directors. Simny, for himself and on behalf
of GCI and Grace Cheu (Cheu), filed a Complaint
against respondents before the RTC of Manila for
the Nullification of the said Meeting and Election
of Directors with a prayer for TRO and/or WPI.
Simny avered that there was no previous notice to
him and Cheu, that the meeting was not called by
the proper person and that the notices were not
issued by the person who had legal authority to do
so.
Respondent Gilbert Guy (Gilbert) argued
that the meeting was legally called and held, that
the notice of meeting was signed by an authorized
officer (him, as Vice President) and sent in
accordance with the bylaws, and that Cheu was
not a stockholder of record. The RTC dismissed the
complaint. The CA affirmed in toto the RTC ruling.
Hence the petition before the SC.
ISSUE: Whether the assailed special stockholder’s
meeting was void.
RULING:
No. Notice of the stockholders’ meeting
was properly sent in compliance with law and the
by-laws of the corporation. For a stockholders’
special meeting to be valid, certain requirements
must be met with respect to notice, quorum and
NOTES IN CORPORATION LAW
place. In relation to Section 50 of B.P. 68, one of the
requirements is a previous written notice sent to
all stockholders at least one (1) week prior to the
scheduled meeting, unless otherwise provided in
the by-laws. Under the by-laws, the notice shall be
mailed not less than five (5) days prior to the date
set for the special meeting. The requirements
under the bylaws were met when Gilbert Guy
caused for the mailing of the notice on September
2, 2004 calling for the assailed special
stockholder’s meeting. Since the bylaws were clear
that only mailing was required, the courts must
apply the law and must not add an additional
requirement of actual receipt of the notice prior to
the date of meeting. It was proven that notice to
Simny was sent on Sept. 2, 2004 (5 days prior to
the meeting).
The claim that the notice suffered fatal
defects as it was not called by the proper person
was also without merit. Under the by-laws, special
meetings may be called by order of the President
and must be called upon the request of
stockholders representing (1/3) of the
outstanding stock provided that the VP, if
qualified shall exercise all the functions of the
president in absence or disability of the latter. It
was not disputed that the President suffered
Alzheimer’s; that Gilbert was the VP; and that he
represented 79.99% (more than 1/3) of the
outstanding stock of GCI. Thus, the requirements
under the bylaws were met. The records do show
that he is a stockholder, and he is neither also
Secretary nor Treasurer. Hence, he is qualified to
act as President.
Cheu was not a stockholder of record and
therefore not entitled to any notice of meeting.
Cheu alleged that she was considered a
stockholder of record for being in possession of
stock certificate of Paulino and Benjamin. As a
rule, however, a person who desires to be
recognized as a stockholder for the prupose of
exercising stockholders’ right must secure
standing by having his ownership of share
recorded on the stock and transfer book. Thus,
only those whose ownership of shares are duly
registered in the stock and transfer book are
considered stockholders of record and are entitled
to all rights of a stockholder. The requirements for
transfer, not having been met, Cheu is not a
stockholder of record, and thus not entitled to
notice.
3. Waiver of Defective Notice
All proceedings and any business transacted
at a meeting of the stockholders or members,
if within the powers or authority of the
corporation, shall be valid even if the meeting
is improperly held or called: Provided, That
107
Professor: Atty. Leonardo Nick Gumabun
all the stockholders or members of the
corporation are present or duly represented
at the meeting and not one of them expressly
states at the beginning of the meeting that the
purpose of their attendance is to object to the
transaction of any business because the
meeting is not lawfully called or convened.
B. Right to vote - Par.4, sec. 6, RCC
Holders of nonvoting shares shall
nevertheless be entitled to vote on the
following matters:
(a) Amendment of the articles of
incorporation;
(b) Adoption and amendment of bylaws;
(c) Sale, lease, exchange, mortgage, pledge, or
other disposition of all or substantially all of
the corporate property;
(d) Incurring, creating, or increasing bonded
indebtedness;
(e) Increase or decrease of authorized capital
stock;
(f) Merger or consolidation of the
corporation with another corporation or
other corporations;
(g) Investment of corporate funds in another
corporation or business in accordance with
this Code; and
(h) Dissolution of the corporation.
1. When Voting Right Not Available
Sec. 6, RCC)
Except as provided in the immediately preceding
paragraph, the vote required under this Code to approve
a particular corporate act shall be deemed to refer only to
stocks with voting rights.
2. When Non-Voting Can Vote - Par. 3, Sec 6,
RCC
3, Rules on:
a. Delinquent Shares - Sec. 70, RCC
SEC. 70. Effect of Delinquency. – No
delinquent stock shall be voted for, be entitled to
vote, or be represented at any stockholder’s
meeting, nor shall the holder thereof be entitled
to any of the rights of a stockholder except the
right to dividends in accordance with the
provisions of this Code, until and unless payment
NOTES IN CORPORATION LAW
is made by the holder of such delinquent stock
for the amount due on the subscription with
accrued interest, and the costs and expenses of
advertisement, if any.
b. Escrow Shares
- subject to a condition, not entitled to
vote
c. Unpaid Shares - Sec.71, RCC
SEC. 71. Rights of Unpaid Shares, Non
delinquent. – Holders of subscribed shares not
fully paid which are not delinquent shall have all
the rights of a stockholder.
d. Sequestered Shares
General Rule: It is not entitled to vote
✓ The registered owner has the right to
vote.
✓ The government entitled to vote because
it is only holding it in trust.
Exception:
(1) Where government shares are taken
over by private persons or entities
who/which registered them in their own
names, and
(2) Where the capitalization or shares that
were acquired with public funds somehow
landed in private hands.
REPUBLIC V. COCOFED
G.R. NO. 147062-64, DECEMBER 14, 2001
(Coconut levy funds are prima facie public funds
which should be subjected to COA audit)
FACTS:
The PCGG issued and implemented numerous
sequestrations, freeze orders and provisional
takeovers of allegedly ill-gotten companies, assets
and properties, real or personal. Among the
properties sequestered by the Commission were
shares of stock in the UCPB registered in the
names of the alleged “one million coconut
farmers,” the so-called Coconut Industry
Investment Fund companies (CIIF companies) and
Private Respondent Cojuangco Jr. In connection
with the sequestration of the said UCPB shares, the
PCGG instituted an action for reconveyance,
reversion, accounting, restitution and damages in
the Sandiganbayan.
108
Professor: Atty. Leonardo Nick Gumabun
Upon Motion of Private Respondent COCOFED, the
Sandiganbayan issued a Resolution lifting the
sequestration of the subject UCPB shares on the
ground COCOFED and the so-called CIIF
companies – had not been impleaded by the PCGG
as parties-defendants in its Complaint for
reconveyance, reversion, accounting, restitution
and damages.
This Sandiganbayan Resolution was challenged by
the PCGG in a Petition for Certiorari in this Court.
Meanwhile, upon motion of Cojuangco, the anti-
graft court ordered the holding of elections for the
Board of Directors of UCPB. However, the PCGG
applied for and was granted by this Court a
Restraining Order enjoining the holding of the
election. Subsequently, the Court lifted the
Restraining Order and ordered the UCPB to
proceed with the election of its board of directors.
Furthermore, it allowed the sequestered shares to
be voted by their registered owners.
On February 23, 2001, “COCOFED, et al. and
Ballares, et al.” filed the “Class Action Omnibus
Motion” referred to earlier in Sandiganbayan Civil
Case Nos. 0033-A, 0033-B and 0033-F, asking the
court a quo:
“1. To enjoin the PCGG from voting the UCPB
shares of stock registered in the respective names
of the more than one million coconut farmers; and
“2. To enjoin the PCGG from voting the SMC shares
registered in the names of the 14 CIIF holding
companies including those registered in the name
of the PCGG.”
ISSUE:
Who may vote the sequestered UCPB shares while
the main case for their reversion to the State is
pending in the Sandiganbayan?
RULING:
The government should be allowed to continue
voting those shares inasmuch as they were
purchased with coconut levy funds – funds that
are prima facie public in character or, at the very
least, are “clearly affected with public interest.”
General Rule: Sequestered Shares Are Voted by the
Registered Holder
At the outset, it is necessary to restate the general
rule that the registered owner of the shares of a
corporation exercises the right and the privilege of
voting. (Sec. 24, BP 68) This principle applies even
to shares that are sequestered by the government,
NOTES IN CORPORATION LAW
over which the PCGG as a mere conservator
cannot, as a general rule, exercise acts of
dominion. On the other hand, it is authorized to
vote these sequestered shares registered in the
names of private persons and acquired with
allegedly ill-gotten wealth, if it is able to satisfy the
two-tiered test devised by the Court in Cojuangco
v. Calpo (G.R. No. 115352, June 10, 1993) and PCGG
v. Cojuangco Jr., (133197, Jan. 27, 1999) as follows:
(1) Is there prima facie evidence showing that the
said shares are ill-gotten and thus belong to the
State?
(2) Is there an imminent danger of dissipation,
thus necessitating their continued sequestration
and voting by the PCGG, while the main issue is
pending with the Sandiganbayan?
Sequestered Shares Acquired with Public
Funds Are an Exception
From the foregoing general principle, the Court in
Baseco v. PCGG (“Baseco”) and Cojuangco Jr. v.
Roxas, G.R. No. 91925, April 16, 1991)
(“Cojuangco-Roxas”) has provided two clear
“public character” exceptions under which the
government is granted the authority to vote the
shares:
(1) Where government shares are taken over by
private persons or entities who/which registered
them in their own names, and
(2) Where the capitalization or shares that were
acquired with public funds somehow landed in
private hands.
The exceptions are based on the common-sense
principle that legal fiction must yield to truth; that
public property registered in the names of non-
owners is affected with trust relations; and that
the prima facie beneficial owner should be given
the privilege of enjoying the rights flowing from
the prima facie fact of ownership.
The “public character” test was reiterated in many
subsequent cases; most recently, in Antiporda v.
Sandiganbayan. (G.R. No. 116941, May 31, 2001)
Expressly citing Cojuangco-Roxas, this Court said
that in determining the issue of whether the PCGG
should be allowed to vote sequestered shares, it
was crucial to find out first whether these were
purchased with public funds, as follows:
“It is thus important to determine first if the
sequestered corporate shares came from public
funds that landed in private hands.” In short, when
sequestered shares registered in the names of
109
Professor: Atty. Leonardo Nick Gumabun
private individuals or entities are alleged to have
been acquired with ill-gotten wealth, then the
two-tiered test is applied. However, when the
sequestered shares in the name of private
individuals or entities are shown, prima facie, to
have been (1) originally government shares, or (2)
purchased with public funds or those affected with
public interest, then the two-tiered test does not
apply. Rather, the public character exceptions in
Baseco v. PCGG and Cojuangco Jr. v. Roxas prevail;
that is, the government shall vote the shares.
UCPB Shares Were Acquired With Coconut
Levy Funds
In the present case before the Court, it is not
disputed that the money used to purchase the
sequestered UCPB shares came from the Coconut
Consumer Stabilization Fund (CCSF), otherwise
known as the coconut levy funds. This fact was
plainly admitted by private respondent during the
Oral Arguments held on April 17, 2001 in Baguio
City. Indeed in Cocofed v. PCGG, this Court
categorically declared that the UCPB was
acquired “with the use of the Coconut Consumers
Stabilization Fund in virtue of Presidential Decree
No. 755, promulgated on July 29, 1975.”
The Petition is hereby GRANTED and the assailed
Order SET ASIDE. The PCGG shall continue voting
the sequestered shares until Sandiganbayan Civil
Case Nos. 0033-A, 0033-B and 0033-F are finally
and completely resolved.
e. Pledged or Mortgaged Shares or
Administered Shares
SEC. 54. Right to Vote of Secured Creditors and
Administrators. – In case a stockholder grants security
interest in his or her shares in stock corporations, the
stockholder-grantor shall have the right to attend and vote
at meetings of stockholders, unless the secured creditor
is expressly given by the stockholder-grantor such right in
writing which is recorded in the appropriate corporate
books.
Executors, administrators, receivers, and other legal
representatives duly appointed by the court may attend
and vote in behalf of the stockholders or members without
need of any written proxy.
LIM TAY VS. COURT OF APPEALS
293 SCRA 634, AUGUST 5, 1998
FACTS:
Sy Guiok and Sy Lim secured a loan from Lim Tay
secured by a contract of pledge whereby the
NOTES IN CORPORATION LAW
former pledged their 300 shares of stock each in
Go Fay & Company to the latter. However, they
failed to pay their respective loans. Lim Tay filed a
petition for mandamus against Go Fay & Company
with the SEC praying that an order be issued
directing the corporate secretary of the said
corporation to register the stock transfers and
issue new certificates in favor of Lim. Tay.Go Fay
& Company filed its answer contending that SEC
had no jurisdiction to entertain the complaint on
the ground that since Lim Tay was not a
stockholder of the company, no intra corporate
controversy took place; and furthermore, that the
default of payment of Sy Guiok and Sy Lim did not
automatically vest in Lim Tay the ownership of the
pledged shares.SEC dismissed the complaint.
ISSUE:
Whether the default payment of Sy Guiok
automatically vested Lim Tay the ownership of the
pledged shares.
HELD:
No. Reading into the contract of pledge, the
stipulation shows that Lim Tay was merely
authorized to foreclose the pledge upon maturity
of the loans, not to own them. Such foreclosure
was not automatic, for it must be done in a public
or private sale. Nowhere was it mentioned that he
exercised his right of foreclosure. Hence, his status
was still a mere pledgee, and under civil law, this
does not entitle him to ownership of the shares of
stock in question.
f. Shares Jointly Owned
SEC. 55. Voting in Case of Joint Ownership of Stock.
– The consent of all the co-owners shall be necessary in
voting shares of stock owned jointly by two (2) or more
persons, unless there is a written proxy, signed by all the
co-owners, authorizing one (1) or some of them or any
other person to vote such share or shares: Provided, That
when the shares are owned in an “and/or” capacity by the
holders thereof, any one of the joint owners can vote said
shares or appoint a proxy therefor.
g. Treasury Shares
SEC. 56. Voting Right for Treasury Shares. – Treasury
shares shall have no voting right as long as such shares
remain in the Treasury.
C. Right to Appoint Proxy
SEC. 57. Manner of Voting; Proxies. –
Stockholders and members may vote in person
or by proxy in all meetings of stockholders or
members.
When so authorized in the bylaws or by a
majority of the board of directors, the
110
Professor: Atty. Leonardo Nick Gumabun
stockholders or members of corporations may
also vote through remote communication or in
absentia: Provided, That the votes are received
before the corporation finishes the tally of votes.
A stockholder or member who participates
through remote communication or in absentia,
shall be deemed present for purposes of quorum.
The corporation shall establish the appropriate
requirements and procedures for voting through
remote communication and in absentia, taking
into account the company’s scale, number of
shareholders or members, structure and other
factors consistent with the basic right of
corporate suffrage.
Proxies shall be in writing, signed and filed, by
the stockholder or member, in any form
authorized in the bylaws and received by the
corporate secretary within a reasonable time
before the scheduled meeting. Unless
otherwise provided in the proxy form, it shall
be valid only for the meeting for which it is
intended. No proxy shall be valid and effective
for a period longer than five (5) years at any
one time.
D. Right to Execute Voting Trust Agreement -
SEC. 58. Voting Trusts. – One or more
stockholders of a stock corporation may create a
voting trust for the purpose of conferring upon a
trustee or trustees the right to vote and other
rights pertaining to the shares for a period not
exceeding five (5) years at any time: Provided,
That in the case of a voting trust specifically
required as a condition in a loan agreement, said
voting trust may be for a period exceeding five
(5) years but shall automatically expire upon full
payment of the loan. A voting trust agreement
must be in writing and notarized, and shall
specify the terms and conditions thereof. A
certified copy of such agreement shall be filed
with the corporation and with the Commission;
otherwise, the agreement is ineffective and
unenforceable. The certificate or certificates of
stock covered by the voting trust agreement
shall be cancelled and new ones shall be issued
in the name of the trustee or trustees, stating that
they are issued pursuant to said agreement. The
books of the corporation shall state that the
transfer in the name of the trustee or trustees is
made pursuant to the voting trust agreement.
The trustee or trustees shall execute and deliver
to the transferors, voting trust certificates, which
NOTES IN CORPORATION LAW
shall be transferable in the same manner and
with the same effect as certificates of stock.
The voting trust agreement filed with the
corporation shall be subject to examination by
any stockholder of the corporation in the same
manner as any other corporate book or record:
Provided, That both the trustor and the trustee
or trustees may exercise the right of inspection
of all corporate books and records in accordance
with the provisions of this Code. Any other
stockholder may transfer the shares to the same
trustee or trustees upon the terms and
conditions stated in the voting trust agreement,
and thereupon shall be bound by all the
provisions of said agreement.
No voting trust agreement shall be entered into
for purposes of circumventing the laws against
anti-competitive agreements, abuse of dominant
position, anti-competitive mergers and
acquisitions, violation of nationality and capital
requirements, or for the perpetuation of fraud.
Unless expressly renewed, all rights granted in a
voting trust agreement shall automatically
expire at the end of the agreed period. The voting
trust certificates as well as the certificates of
stock in the name of the trustee or trustees shall
thereby be deemed cancelled and new
certificates of stock shall be reissued in the name
of the trustors.
The voting trustee or trustees may vote by proxy
or in any manner authorized under the bylaws
unless the agreement provides otherwise.
Note: In a VTA, all rights of SH will be conveyed
in favor of the trustee (note only the right to
vote); as if the legal holder of the trust is the SH.
The security will be a Trust Certificate, which
will be transferred as a certificate of stock. Title
of trustor will be cancelled and a new cert. of
share in favor of trustee.
E. Right to lnspect Corporate Books -
Sec. 73, RCC;
SEC. 73. Books to be Kept; Stock
Transfer Agent –
(Par.3) Corporate records,
regardless of the form in which they are
stored, shall be open to inspection by any
director, trustee, stockholder or member
of the corporation in person or by a
representative at reasonable hours on
111
Professor: Atty. Leonardo Nick Gumabun
business days, and a demand in writing
may be made by such director, trustee or
stockholder at their expense, for copies
of such records or excerpts from said
records. The inspecting or reproducing
party shall remain bound by
confidentiality rules under prevailing
laws, such as the rules on trade secrets
or processes under Republic Act No.
8293, otherwise known as the
“Intellectual Property Code of the
Philippines”, as amended, Republic Act
No. 10173, otherwise known as the
“Data Privacy Act of 2012”, Republic Act
No. 8799, otherwise known as “The
Securities Regulation Code”, and the
Rules of Court.
GOKONGWEI V. SECURITIES AND EXCHANGE
COMMISSION
G.R. NO. L-45911, 11 APRIL 1979
FACTS:
Petitioner, as stockholder of respondent
San Miguel Corporation(SMC), filed with the SEC a
petition for “declaration of nullity of amended by-
laws, cancellation of certificate of filing of
amended by- laws, injunction and damages with
prayer for a preliminary injunction” against the
majority of the members of the Board of Directors
and SMC as an unwilling petitioner.
In connection with the same case,
petitioner filed with the SEC an "Urgent Motion for
Production and Inspection of Documents",
alleging that the Secretary of respondent
corporation refused to allow him to inspect its
records despite request made by petitioner for
production of certain documents enumerated in
the request, and that respondent corporation had
been attempting to suppress information from its
stockholders despite a negative reply by the SEC to
its query regarding their authority to do so.
Among the documents requested to be copied
were (a) minutes of the stockholder's meeting field
on March 13, 1961, (b) copy of the management
contract between San Miguel Corporation and A.
Soriano Corporation (ANSCOR); (c) latest balance
sheet of San Miguel International, Inc.; (d)
authority of the stockholders to invest the funds of
respondent corporation in San Miguel
International, Inc.; and (e) lists of salaries,
allowances, bonuses, and other compensation, if
any, received by Andres M. Soriano, Jr. and/or its
successor-in-interest.
The "Urgent Motion for Production and
Inspection of Documents" was opposed by
respondents, alleging, among others that the
NOTES IN CORPORATION LAW
motion has no legal basis; that the demand is not
based on good faith; that the motion is premature
since the materiality or relevance of the evidence
sought cannot be determined until the issues are
joined, that it fails to show good cause and
constitutes continued harrasment, and that some
of the information sought are not part of the
records of the corporation and, therefore,
privileged.
Issue: Whether Gokongwei has the right to inspect
corporate books.
Held:
Yes. The stockholder's right of inspection of
the corporation's books and records is based upon
their ownership of the assets and property of the
corporation. It is, therefore, an incident of
ownership of the corporate property, whether this
ownership or interest be termed an equitable
ownership, a beneficial ownership, or an
ownership. This right is predicated upon the
necessity of self-protection. It is generally held by
majority of the courts that where the right is
granted by statute to the stockholder, it is given to
him as such and must be exercised by him with
respect to his interest as a stockholder and for
some purpose germane thereto or in the interest
of the corporation. In other words, the inspection
has to be germane to the petitioner's interest as a
stockholder, and has to be proper and lawful in
character and not inimical to the interest of the
corporation. In Grey v. Insular Lumber, this Court
held that "the right to examine the books of the
corporation must be exercised in good faith, for
specific and honest purpose, and not to gratify
curiosity, or for specific and honest purpose, and
not to gratify curiosity, or for speculative or
vexatious purposes. The weight of judicial opinion
appears to be, that on application for mandamus
to enforce the right, it is proper for the court to
inquire into and consider the stockholder's good
faith and his purpose and motives in seeking
inspection. Thus, it was held that "the right given
by statute is not absolute and may be refused
when the information is not sought in good faith
or is used to the detriment of the corporation." But
the "impropriety of purpose such as will defeat
enforcement must be set up the corporation
defensively if the Court is to take cognizance of it
as a qualification. In other words, the specific
provisions take from the stockholder the burden of
showing propriety of purpose and place upon the
corporation the burden of showing impropriety of
purpose or motive. It appears to be the general
rule that stockholders are entitled to full
information as to the management of the
corporation and the manner of expenditure of its
funds, and to inspection to obtain such
112
Professor: Atty. Leonardo Nick Gumabun
information, especially where it appears that the
company is being mismanaged or that it is being
managed for the personal benefit of officers or
directors or certain of the stockholders to the
exclusion of others."
While the right of a stockholder to examine the
books and records of a corporation for a lawful
purpose is a matter of law, the right of such
stockholder to examine the books and records of a
wholly-owned subsidiary of the corporation in
which he is a stockholder is a different thing.
Some state courts recognize the right under
certain conditions, while others do not. Thus, it has
been held that where a corporation owns
approximately no property except the shares of
stock of subsidiary corporations which are merely
agents or instrumentalities of the holding
company, the legal fiction of distinct corporate
entities may be disregarded and the books, papers
and documents of all the corporations may be
required to be produced for examination, and that
a writ of mandamus, may be granted, as the
records of the subsidiary were, to all in contents
and purposes, the records of the parent even
though subsidiary was not named as a party.
mandamus was likewise held proper to inspect
both the subsidiary's and the parent corporation's
books upon proof of sufficient control or dominion
by the parent showing the relation of principal or
agent or something similar thereto.
On the other hand, mandamus at the suit of a
stockholder was refused where the subsidiary
corporation is a separate and distinct corporation
domiciled and with its books and records in
another jurisdiction, and is not legally subject to
the control of the parent company, although it
owned a vast majority of the stock of the
subsidiary. Likewise, inspection of the books of an
allied corporation by stockholder of the parent
company which owns all the stock of the
subsidiary has been refused on the ground that the
stockholder was not within the class of "persons
having an interest."
In the Nash case, The Supreme Court of New York
held that the contractual right of former
stockholders to inspect books and records of the
corporation included the right to inspect
corporation's subsidiaries' books and records
which were in corporation's possession and
control in its office in New York."
In the Bailey case, stockholders of a corporation
were held entitled to inspect the records of a
controlled subsidiary corporation which used the
same offices and had Identical officers and
directors.
NOTES IN CORPORATION LAW
In his "Urgent Motion for Production and
Inspection of Documents" before respondent SEC,
petitioner contended that respondent corporation
"had been attempting to suppress information for
the stockholders" and that petitioner, "as
stockholder of respondent corporation, is entitled
to copies of some documents which for some
reason or another, respondent corporation is very
reluctant in revealing to the petitioner
notwithstanding the fact that no harm would be
caused thereby to the corporation." There is no
question that stockholders are entitled to inspect
the books and records of a corporation in order to
investigate the conduct of the management,
determine the financial condition of the
corporation, and generally take an account of the
stewardship of the officers and directors.
In the case at bar, considering that the foreign
subsidiary is wholly owned by respondent San
Miguel Corporation and, therefore, under its
control, it would be more in accord with equity,
good faith and fair dealing to construe the
statutory right of petitioner as stockholder to
inspect the books and records of the corporation
as extending to books and records of such wholly
subsidiary which are in respondent corporation's
possession and control.
GONZALES VS. PNB,
GR NO. L-33320;
FACTS: Petitioner Ramon A. Gonzales instituted in
the Court of First Instance of Manila a special civil
action for mandamus against the herein
respondent praying that the latter be ordered to
allow him to look into the books and records of the
respondent bank in order to satisfy himself as to
the truth of the published reports that the
respondent has guaranteed the obligation of
Southern Negros Development Corporation in the
purchase of a US$ 23 million sugar-mill to be
financed by Japanese suppliers and financiers;
that the respondent is financing the construction
of the P 21 million Cebu-Mactan Bridge to be
constructed by V.C. Ponce, Inc. ,and the
construction of Passi Sugar Mill at Iloilo by the
Honiron Philippines, Inc., as well as to inquire into
the validity of Id transactions. The petitioner has
alleged that his written request for such
examination was denied by the respondent. The
trial court having dismissed the petition for
mandamus, the instant appeal to review the said
dismissal was filed.
ISSUE: Whether or not a stockholder of PNB can
insist on the inspection of its books.
RULING:
113
Professor: Atty. Leonardo Nick Gumabun
No. The court a quo denied the prayer of the
petitioner that he be allowed to examine and
inspect the books and records of the respondent
bank regarding the transactions mentioned on the
grounds that the right of a stockholder to inspect
the record of the business transactions of a
corporation granted under Section 51 of the
former Corporation Law is not absolute, but is
limited to purposes reasonably related to the
interest of the stockholder, must be asked for in
good faith for a specific and honest purpose and
not gratify curiosity or for speculative or vicious
purposes; that such examination would violate the
confidentiality of the records of the respondent
bank as provided in Section 16 of its charter,
Republic Act No. 1300,as amended; and that the
petitioner has not exhausted his administrative
remedies.
TERELAY INVESTMENT AND DEVELOPMENT
CORPORATION VS. YULO
GR NO. L60924
FACTS:
Asserting her right as a stockholder, Cecilia
Teresita Yulo wrote a letter to Terelay Investment
and Development Corporation (TERELAY)
requesting that she be allowed to examine its
books and records . TERELAY denied the request
for inspection and instead demanded that she
show proof that she was a bona fide stockholder.
Yulo owns only .001 % of the total shares of
TERELAY.
ISSUE: Whether Yulo has the right to inspect the
corporate books,
HELD:
Yes. Cecilia Yulo as the right to be fully
informed of TERELAY's corporate condition and
the manner its affairs are being managed. It is
well-settled that the ownership of shares of stock
gives stockholders the right under the law to be
protected from possible mismanagement by its
officers. This right is predicated upon
self¬preservation. In any case, TERELAY did not
adduce sufficient proof that Cecilia Yulo was in
bad faith or had an ulterior motive in demanding
her right under the law.
Petitioner's submission that the
respondent's "insignificant holding" of only .001%
of the petitioner's stockholding did not justify the
granting of her application for inspection of the
corporate books and records is unwarranted.
NOTES IN CORPORATION LAW
The Corporation Code has granted to all
stockholders the right to inspect the corporate
books and records, and in so doing has not
required any specific amount of interest for the
exercise of the right to inspect. Ubi lex non
distinguit nee nos distinguere debemos. When the
law has made no distinction, we ought not to
recognize any distinction.
Neither could the petitioner arbitrarily deny the
respondent's right to inspect the corporate books
and records on the basis that her inspection would
be used for a doubtful or dubious reason. Under
Section 74, third paragraph, of the Corporation
Code, the only time when the demand to examine
and copy the corporation's records and minutes
could be refused is when the corporation puts up
as a defense to any action that "the person
demanding" had "improperly used any
information secured through any prior
examination of the records or minutes of such
corporation or of any other corporation, or was
not acting in good faith or for a legitimate purpose
in making his demand."
The right of the shareholder to inspect the books
and records of the petitioner should not be made
subject to the condition of a showing of any
particular dispute or of proving any
mismanagement or other occasion rendering an
examination proper, but if the right is to be denied,
the burden of proof is upon the corporation to
show that the purpose of the shareholder is
improper, by way of defense.
Among the purposes held to justify a demand for
inspection are the following: (1) To ascertain the
financial condition of the company or the
propriety of dividends; (2) the value of the shares
of stock for sale or investment; (3) whether there
has been mismanagement; (4) in anticipation of
shareholders' meetings to obtain a mailing list of
shareholders to solicit proxies or influence voting;
(5) to obtain information in aid of litigation with
the corporation or its officers as to corporate
transactions. Among the improper purposes which
may justify denial of the right of inspection are: (1)
Obtaining of information as to business secrets or
to aid a competitor; (2) to secure business
"prospects" or investment or advertising lists; (3)
to find technical defects in corporate transactions
in order to bring "strike suits" for purposes of
blackmail or extortion.
ANG-ABAYA VS. ANG
GR NO. 1-785L1
In order therefore for the penal provision under
Section 144 of the Corporation Code to apply in a
case of violation of a stockholder or member's
114
Professor: Atty. Leonardo Nick Gumabun
right to inspect the corporate books/records as
provided for under Section 74 of the Corporation
Code, the following elements must be present:
First. A director, trustee, stockholder or
member has made a prior demand in writing for a
copy of excerpts from the corporation's records or
minutes;
Second. Any officer or agent of the
concerned corporation shall refuse to allow the
said director, trustee, stockholder or member of
the corporation to examine and copy said
excerpts;
Third. If such refusal is made pursuant to a
resolution or order of the board of directors or
trustees, the liability under this section for such
action shall be imposed upon the directors or
trustees who voted for such refusal; and,
Fourth. Where the officer or agent of the
corporation sets up the defense that 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, or was
not acting in good faith or for a legitimate purpose
in making his demand, the contrary must be
shown or proved.
Thus, in a criminal complaint for violation
of Section 74 of the Corporation Code, the defense
of improper use or motive is in the nature of a
justifying circumstance that would exonerate
those who raise and are able to prove the same.
“…the right to a preliminary investigation as not a
mere formal or technical right but a substantive
one, forming part of due process in criminal
justice. Due process, in the instant case, requires
that an inquiry into the motive behind Eduardo's
attempt at inspection should have been made even
during the preliminary investigation stage, just as
soon as petitioners set up the defense of improper
use and motive.”
1. Books Required to be Kept by a
Corporation
SEC. 73. Books to be Kept; Stock Transfer
Agent. – Every corporation shall keep and
carefully preserve at its principal office all
information relating to the corporation including,
but not limited to:
(a) The articles of incorporation and
bylaws of the corporation and all their
amendments;
NOTES IN CORPORATION LAW
(b) The current ownership structure and
voting rights of the corporation, including lists of
stockholders or members, group structures,
intra-group relations, ownership data, and
beneficial ownership;
(c) The names and addresses of all the
members of the board of directors or trustees and
the executive officers;
(d) A record of all business transactions;
(e) A record of the resolutions of the
board of directors or trustees and of the
stockholders or members;
(f) Copies of the latest reportorial
requirements submitted to the Commission; and
(g) The minutes of all meetings of
stockholders or members, or of the board of
directors or trustees. Such minutes shall set forth
in detail, among others: the time and place of the
meeting held, how it was authorized, the notice
given, the agenda therefor, whether the meeting
was regular or special, its object if special, those
present and absent, and every act done or
ordered done at the meeting. Upon the demand
of a director, trustee, stockholder or member, the
time when any director, trustee, stockholder or
member entered or left the meeting must be
noted in the minutes; and on a similar demand,
the yeas and nays must be taken on any motion
or proposition, and a record thereof carefully
made. The protest of a director, trustee,
stockholder or member on any action or
proposed action must be recorded in full upon
their demand.
FERRO CHEMICALS VS. GARCIA, GR NO.
158134
Only absolute transfers of shares of stock are
required to be recorded in the corporation's stock
and transfer book in order to have "force and
effect as against third persons.
The requirement that the transfer shall be
recorded in the books of the corporation to be
valid as against third persons has reference only
to absolute transfers or absolute conveyance of
the ownership or title to a share.
TORRES, JR. VS. CA, GR NO. L20138
“In the absence of (any) provision to the contrary,
the corporate secretary is the custodian of
corporate records. Corollarily, he keeps the stock
and transfer book and makes proper and
necessary entries therein.
115
Professor: Atty. Leonardo Nick Gumabun
Contrary to the generally accepted
corporate practice, the stock and transfer book of
TORMIL was not kept by Ms. Maria Cristina T.
Carlos, the corporate secretary but by respondent
Torres, the President and Chairman of the Board
of Directors of TORMIL. In contravention to the
above cited provision, the stock and transfer book
was not kept at the principal office of the
corporation either but at the place of respondent
Torres.
These being the obtaining circumstances,
any entries made in the stock and transfer book on
March 8, 1987 by respondent Torres of an alleged
transfer of nominal shares to Pabalan and Co.
cannot therefore be given any valid effect. Where
the entries made are not valid, Pabalan and Co.
cannot therefore be considered stockholders of
record of TORMIL. Because they are not
stockholders, they cannot therefore be elected as
directors of TORMIL. To rule otherwise would not
only encourage violation of clear mandate of Sec.
74 of the Corporation Code that stock and transfer
book shall be kept in the principal office of the
corporation but would likewise open the flood
gates of confusion in the corporation as to who has
the proper custody of the stock and transfer book
and who are the real stockholders of records of a
certain corporation as any holder of the stock and
transfer book, though not the corporate secretary,
at pleasure would make entries therein.
The fact that respondent Torres holds
81.28% of the outstanding capital stock of
TORMIL is of no moment and is not a license for
him to arrogate unto himself a duty lodged to (sic)
the corporate secretary.”
ANDAYA VS. RURAL BANK OF CABADBARAN,
GR No. 188769
The duty of the corporation to transfer is a
ministerial one and if it refuses to make such
transaction without good cause, it may be
compelled to do so by mandamus.
2. Basis and Extent of the Right of lnspection
The SH ‘s right to inspect corpo books is derived
from his ownership. It is an incident of
ownership which cannot just be denied by a
requesting SH. INCIDENT OF OWNERSHIP – no
reqt as to the amt of ownership being held upon
by the SH. 1 share or 1M shares.
Requirements for a stockholder to inspect:
1.There must be a demand on the part of
requesting stockholder.
NOTES IN CORPORATION LAW
2. Exercised during reasonable hours
(office hours) of business day.
3. Demand must be in good faith and for a
legitimate purpose.
4. No information secured thru previous
examination / previously abused by
requesting stockholder. Right of corpo to
denied. If he abused that right previously
granted, the same may be denied to the
requesting SH.
5. The requestor should be bound by
confidentiality such as trade secrets.
Respect on confidential matters of the
corpo.
6. Requestor should never be a
competitor. He/she must be a SH, or must
have an interest of the corporation.
3. Limitations
The inspection must be germane to his
interest as a stockholder; it must be proper
and lawful; and it must not be inimical to the
interests of the corporation. (Gokongwei v
SEC)
4. Remedies to Enforce the Right of
inspection
1.File a petition, compel a person to do,
petition for mandamus.
2.Complaint for damages.
3.File a complaint in SEC
If the corporation denies or does not act on a
demand for inspection and/or reproduction, the
aggrieved party may report such denial or
inaction to the Commission.
Possible defense of corporation if demand for
inspection is not proper:
1. There is information that this right has
been previously abused by requestor. The
person demanding to examine has
improperly used the information thru
prior examination.
2. The requestor is no acting in good faith,
and the demand is not in legitimate
purpose.
3. Requestor is a competitor, not a
stockholder, or represents an interest of a
competitor
5. Penalty for Violation
116
Professor: Atty. Leonardo Nick Gumabun
SEC. 161. Violation of Duty to Maintain
Records, to Allow their Inspection or
Reproduction; Penalties. – The unjustified
failure or refusal by the corporation, or by those
responsible for keeping and maintaining
corporate records, to comply with Sections 45,
73, 92, 128, 177 and other pertinent rules and
provisions of this Code on inspection and
reproduction of records shall be punished with a
fine ranging from Ten thousand pesos
(P10,000.00) to Two hundred thousand pesos
(P200,000.00), at the discretion of the court,
taking into consideration the seriousness of the
violation and its implications. When the violation
of this provision is injurious or detrimental to the
public, the penalty is a fine ranging from Twenty
thousand pesos (P20,000.00) to Four hundred
thousand pesos (P400,000.00).
The penalties imposed under this section shall be
without prejudice to the Commission’s exercise of
its contempt powers under Section 157 hereof.
SEC. 157. Contempt. – Any person who, without
justifiable cause, fails or refuses to comply with
any lawful order, decision, or subpoena issued by
the Commission shall, after due notice and
hearing, be held in contempt and fined in an
amount not exceeding Thirty thousand pesos
(P30,000.00). When the refusal amounts to clear
and open defiance of the Commission’s order,
decision, or subpoena, the Commission may
impose a daily fine of One thousand pesos
(P1,000.00) until the order, decision, or
subpoena is complied with.
F. Right to Financial Statements
SEC. 74. Right to Financial Statements. – A corporation
shall furnish a stockholder or member, within ten (10)
days from receipt of their written request, its most recent
financial statement, in the form and substance of the
financial reporting required by the Commission.
At the regular meeting of stockholders or members, the
board of directors or trustees shall present to such
stockholders or members a financial report of the
operations of the corporation for the preceding year,
which shall include financial statements, duly signed and
certified in accordance with this Code, and the rules the
Commission may prescribe.
However, if the total assets or total liabilities of the
corporation is less than Six hundred thousand pesos
(P600,000.00), or such other amount as may be
determined appropriate by the Department of Finance,
the financial statements may be certified under oath by
the treasurer and the president.
NOTES IN CORPORATION LAW
G. Pre-emptive Right
SEC. 38. Power to Deny Preemptive Right. – All
stockholders of a stock corporation shall enjoy
preemptive right to subscribe to all issues or disposition
of shares of any class, in proportion to their respective
shareholdings, unless such right is denied by the articles
of incorporation or an amendment thereto: Provided, That
such preemptive right shall not extend to shares issued in
compliance with laws requiring stock offerings or
minimum stock ownership by the public; or to Page 20 of
73 shares issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of the
outstanding capital stock, in exchange for property
needed for corporate purposes or in payment of a
previously contracted debt.
✓ Preemptive right applies to ALL issues
and disposition of any class. Thus, it
covers disposition of shares arising from
unissued shares
✓ Right of pre-emption – purpose: prevent
dilution of interest, for SH to control his
interest in the corporation.
NOTE: Even if there is no provision in the exercise
of right to pre-emption, it can still be exercised
even if absent corporate provision, this right is
equitable, it does not need positive act. Though in
RCC, it is expressly granted.
✓ Pre-emptive right is deemed waived if
he failed to exercise within a reasonable
period.
Pre-emptive right is not available if:
1. denied by the articles of incorporation or
an amendment
2. minimum stock ownership by the public;
or to shares
3. issued in good faith with the approval of
the stockholders representing two-thirds
(2/3) of the outstanding capital stock, in
exchange for property needed for
corporate purposes or in payment of a
previously contracted debt.
H. Appraisal Right - Sec. 80, RCC
1. Concept of Appraisal Right
SEC. 80. When the Right of Appraisal May Be
Exercised. – Any stockholder of a corporation
117
Professor: Atty. Leonardo Nick Gumabun
shall have the right to dissent and demand
payment of the fair value of the shares…
Appraisal right
- right of a stockholder who voted against a
particular corporate act, to demand the fail value
if his interest in the corporation due to a
fundamental change in the corporate structure.
2. lnstances of Appraisal Right
Instances where a stockholder may exercise
his appraisal right
Any stockholder of a corporation shall have the
right to dissent and demand payment of the fair
value of his shares in the following instances:
1. In case any amendment to the articles of
incorporation has the effect of changing or
restricting the rights of any stockholder or class
of shares, or of authorizing preferences in any
respect superior to those of outstanding shares
of any class, or of extending or shortening the
term of corporate existence;
2. In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of all or
substantially all of the corporate property and
assets as provided in the Code;
3. In case of merger or consolidation (CC, Sec.
81);
4. In case the corporation decides to invest its
funds in another corporation or business for any
purpose other than its primary purpose as
provided in Sec. 42 of the CC;
5. Under Sec. 105, any stockholder of a close
corporation may, for any reason, compel said
corporation to purchase his shares at their fair
value, which shall not be less than their par or
issued value, when the corporation has sufficient
assets in its books to cover its debts and
liabilities exclusive of capital stock.
Process of appraisal
Q: Who is entitled to this right of
appraisal?
A: It can only be exercised by a SH who
voted against a proposed corporate acts,
whether voting is in proxy or other modes
as per bylaws or by SEC.
NOTES IN CORPORATION LAW
3. Requirements for the Exercise of Appraisal
Right
Requirements for the Exercise of Appraisal
Right:
1. Any Ground for appraisal must be present.
2. A written demand on the corporation must be
made within 30 days after the date when the vote
was taken The Corporation Code
3. The dissenting stockholders attend the
meeting of the stockholders and voted against
the proposed action.
4. The price of the Fair Market Value of the
shares on the day before the date of voting.
Note: In case of disagreement, the value will be
determined by appraisal of 3 disinterested
persons (Sec 82. CC)
5. The corporation has sufficient unrestricted
retained earnings to pay (Turner vs. Lorenzo 636
scra 137)
4. Effect in exercise of appraisal right
Effects of the exercise of the right of
appraisal
1. Once the dissenting stockholder demands
payment of the fair value of his shares:
a. All rights accruing to such shares including
voting and dividend rights shall be suspended;
and
b. He shall be entitled to receive payment of the
fair value of his shares as agreed upon between
him and the corporation or as determined by
the appraisers chosen by him;
GR: He is not allowed to withdraw his demand
for payment of his shares XPN: Unless the
corporation consents thereto.
2. If the dissenting stockholder was not paid the
value of his shares within 30 days after the
award, his voting and dividend rights shall be
immediately restored until payment of his
shares (CC , Sec. 83);
NOTE: Even if his rights as stockholder are
suspended after his demand in writing is made,
he cannot be considered as an ordinary creditor
of the corporation (SEC Opinion, Jan. 11, 1982);
118
Professor: Atty. Leonardo Nick Gumabun
3. Upon payment of the stockholder’s shares, all
his rights as stockholders are terminated, not
merely suspended (CC, Sec. 82); and
4. If before the stockholder is paid, the proposed
corporate action is abandoned, his rights and
status as a stockholder shall thereupon be
permanently restored (CC, Sec. 84).
l. Right to Sue
1. Derivative Suit
- It is an action brought by minority stockholders
in behalf of the corporation to redress wrongs
committed against it, for which the
directors/majority stockholders (defendants)
refuse to sue or are the ones to be sued and are
in control of the corporation.
WESTERN LNSTITUTE OF TECHNOLOGY, LNC.
VS. SALAS
GR NO. 113032;
FACTS:
Private respondents are the majority and
controlling members of the Board of Trustees of
Western Institute of Technology, Inc. a stock
corporation engaged in the operation, among
others, of an educational institution. Then, the
board of directors amended their by laws giving
the members of board of directors a
compensation. The ten per centum of the net
profits shall be distributed equally among the ten
members of the Board of Trustees.
A few years later, the private respondents were
charged with falsification of public documents
and estafa which was anchored on the private
respondents’ submission of WIT’s income
statement for the fiscal year 1985-1986 with the
SEC reflecting therein the disbursement of
corporate funds making it appear that the same
was passed by the board on March 30, 1986, when
in truth, the same was actually passed on June 1,
1986, a date not covered by the corporation’s
fiscal year 1985-1986. After a full-blown hearing
TC handed down a verdict of acquittal on both
counts without imposing any civil liability against
the accused therein.
ISSUE: WON the compensation of the board of
directors as stated in their by laws violates the
corporation code.
HELD:
NO. There is no argument that directors or
trustees, as the case may be, are not entitled to
salary or other compensation when they perform
NOTES IN CORPORATION LAW
nothing more than the usual and ordinary duties
of their office. This rule is founded upon a
presumption that directors/trustees render
service gratuitously, and that the return upon
their shares adequately furnishes the motives for
service, without compensation.
Under the foregoing section, there are only two (2)
ways by which members of the board can be
granted compensation apart from reasonable per
diems: (1) when there is a provision in the by-laws
fixing their compensation; and (2) when the
stockholders representing a majority of the
outstanding capital stock at a regular or special
stockholders’ meeting agree to give it to them. In
the case at bench, Resolution No. 48, s. 1986
granted monthly compensation to private
respondents not in their capacity as members of
the board, but rather as officers of the
corporation, more particularly as Chairman, Vice-
Chairman, Treasurer and Secretary of Western
Institute of Technology. Clearly, therefore, the
prohibition with respect to granting
compensation to corporate directors/trustees as
such under Section 30 is not violated in this
particular case.
VILLAMOR VS. UMALE, GR NOS. L77843 &
172881;
“A derivative suit is an action filed by
stockholders to enforce a corporate action.56 It is
an exception to the general rule that the
corporation's power to sue57 is exercised only by
the board of directors or trustees.
Individual stockholders may be allowed to sue
on behalf of the corporation whenever the
directors or officers of the corporation refuse to
sue to vindicate the rights of the corporation or
are the ones to be sued and are in control of the
corporation.59 It is allowed when the "directors
[or officers] are guilty of breach of . . . trust, [and]
not of mere error of judgment."60 In derivative
suits, the real party in interest is the corporation,
and the suing stockholder is a mere nominal party.
Thus, this court noted:
The Court has recognized that a stockholder's
right to institute a derivative suit is not based on
any express provision of the Corporation Code, or
even the Securities Regulation Code, but is
impliedly recognized when the said laws make
corporate directors or officers liable for damages
suffered by the corporation and its stockholders
for violation of their fiduciary duties. In effect, the
suit is an action for specific performance of an
obligation, owed by the corporation to the
stockholders, to assist its rights of action when the
corporation has been put in default by the
119
Professor: Atty. Leonardo Nick Gumabun
wrongful refusal of the directors or management
to adopt suitable measures for its protection.”
Rule 8, Section 1 of the Interim Rules of Procedure
for Intra-Corporate Controversies (Interim Rules)
provides the five (5) requisites63 for filing
derivative suits:
SECTION 1. Derivative action. - A stockholder or
member may bring an action in the name of a
corporation or association, as the case may be,
provided, that:y
(1) He was a stockholder or member at the
time the acts or transactions subject of the action
occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and
alleges the same with particularity in the
complaint, to exhaust all remedies available under
the articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to
obtain the relief he desires;
(3) No appraisal rights are available for the
act or acts complained of; and
(4) The suit is not a nuisance or harassment
suit.
In case of nuisance or harassment suit, the court
shall forthwith dismiss the case.
The fifth requisite for filing derivative suits, while
not included in the enumeration, is implied in the
first paragraph of Rule 8, Section 1 of the Interim
Rules: The action brought by the stockholder or
member must be "in the name of [the] corporation
or association. ..." This requirement has already
been settled in jurisprudence.
CHING VS. SUBIC BAY GOLF AND COUNTRY
CLUB, INC., GR NO.174353;
FACTS:
Nestor Ching and Andrew Wellington filed a
Complaint with the RTC of Olongapo City on behalf
of the members of Subic Bay Golf and Country
Club, Inc. (SBGCCI) against the said country club
and its Board of Directors and officers. The
complaint alleged that SBGCCI sold shares to
plaintiffs at US$22,000.00 per share, presenting to
them the Articles of Incorporation. However, an
amendment to the Articles of Incorporation was
approved by the Securities and Exchange
Commission (SEC).
Petitioners claimed that SBGCCI did not disclose to
them the above amendment which allegedly
makes the shares non-proprietary as it takes away
NOTES IN CORPORATION LAW
the right of the shareholders to participate in the
pro-rata distribution of the assets of the
corporation in case of dissolution. This is fraud
against the stockholders who only discovered the
amendment when they filed a case for injunction
to restrain SBGCCI from suspending their rights to
use all the facilities of the club.
Furthermore, petitioners alleged that the Board of
Directors and officers of the corporation did not
call any stockholders’ meeting from the time of the
incorporation. Neither the financial statements of
the corporation nor the financial report of the
operation of SBGCCI was also furnished by the
directors and officers. Petitioners also claim that
SBGCCI presented to the SEC an amendment to its
By-Laws suspending the voting rights of the
shareholders except for the five founders’ shares.
Said amendment was allegedly passed without
any stockholders’ meeting or notice. Several
instances of fraud in the management allegedly
committed by its Board of Directors and officers
were also enumerated.
The RTC issued an order dismissing the complaint
for being a derivative suit without complying with
the second and fourth requirements stated in the
Interim Rules in order for its institution to be
proper. This was affirmed by the CA. Contrary to
the ruling, the petitioners assert that the present
case was not a derivative suit.
ISSUE: Whether the complaint is a derivative suit.
RULING: No. The nature of an action, as well as
which court or body has jurisdiction over it, is
determined based on the allegations contained in
the complaint of the plaintiff, irrespective of
whether or not the plaintiff is entitled to recover
upon all or some of the claims asserted therein.
While there were allegations in the complaint of
fraud in their subscription agreements,
petitioners do not pray for the rescission of their
subscription or seek to avail of their appraisal
rights.
Instead, they ask that defendants be enjoined
from managing the corporation and to pay
damages for their mismanagement. Petitioners’
only possible cause of action as minority
stockholders against the actions of the Board of
Directors is the common law right to file a
derivative suit. The legal standing of minority
stockholders to bring derivative suits is not a
statutory right, there being no provision in the
Corporation Code or related statutes authorizing
the same, but is instead a product of jurisprudence
based on equity. However, a derivative suit cannot
prosper without first complying with the legal
requisites for its institution.
120
Professor: Atty. Leonardo Nick Gumabun
Section 1, Rule 8 of the Interim Rules of Procedure
Governing Intra Corporate Controversies imposes
the following requirements for derivative suits:
(1) He was a stockholder or member at the time
the acts or transactions subject of the action
occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges
the same with particularity in the complaint, to
exhaust all remedies available under the articles
of incorporation, by-laws, laws or rules governing
the corporation or partnership to obtain the relief
he desires;
(3) No appraisal rights are available for the act or
acts complained of; and (4) The suit is not a
nuisance or harassment suit.
In the case at bar, it is found that petitioners failed
to comply with the second requirement. The
complaint contained no allegation of any effort to
avail of intra-corporate remedies. Even if
petitioners thought it was futile to exhaust intra-
corporate remedies, they should have stated the
same in the complaint and specified the reasons
for such opinion. Failure to do so allows the RTC to
dismiss the Complaint, even motu proprio, in
accordance with the Interim Rules. The
requirement of this allegation in the Complaint is
not a useless formality which may be disregarded
at will.
The RTC, however, is not correct in ruling that
the fourth requirement is also not complied with.
Although the shareholdings of petitioners are
indeed only 2 out of the 409 alleged outstanding
shares or 0.24%, such shareholdings are enough in
order for a member or a minority stockholder to
file a derivative suit for and in behalf of a
corporation.
FILIPINAS PORT SERVICES,LNC. VS. GO
GR NO. 161886;
FACTS:
Eliodoro C. Cruz sued on behalf of the stockholders
of Filipinas Port Services alleging that there had
been numerous cases of mismanagement by the
board of directors to wit;
a) creation of an executive committee not
provided for in the by-laws of the corporation
b) disproportionate increase in the salary of
officials
c) re-creation of already existing positions
NOTES IN CORPORATION LAW
d) creation of additional positions with holders
not doing any work to deserve any monthly
remuneration.
He prayed for the return of the salary received by
all the unnecessarily appointed members.
The Trial Court sided with the respondent and
ruled that the creation of the executive committee
and the additional position was legitimate given
that it was provided by the corporation’s by-law.
However, the prayer for the return of salaries
received was granted, even if the positions and the
committee were valid, for the court ruled that
Filipinas Port Services is not a big corporation
requiring multiple executive positions.
The respondents appealed the decision and they
received a favourable decision as the Court of
Appeals granted the respondents’ appeal, reversed
and set aside the appealed decision of the trial
court and accordingly dismissed the so-called
derivative suit filed by Cruz, et al.,
Cruz did not take the decision sitting down, hence
the petition.
To counter the appeal filed by Cruz, respondents
also claim that what Cruz filed is not a derivative
suit.
The petition was denied and the challenged
decision of the CA was affirmed. Only, the Supreme
Court clarified the issue involving the legitimacy of
the derivative suit.
ISSUE:
Whether the case filed by Cruz, on behalf of
Filipinas Port Services Inc. is a derivative suit.
HELD:
YES.
Under the Corporation Code, where a
corporation is an injured party, its power to sue is
lodged with its board of directors or trustees. But
an individual stockholder or an individual trustee
may be permitted to institute a derivative suit in
behalf of the corporation in order to protect or
vindicate corporate rights whenever the officials
of the corporation refuse to sue, or when a demand
upon them to file the necessary action would be
futile because they are the ones to be sued, or
because they hold control of the corporation. In
such actions, the corporation is the real party-in-
interest while the suing stockholder, in behalf of
the corporation, is only a nominal part.
121
Professor: Atty. Leonardo Nick Gumabun
Here, the action below is principally for
damages resulting from alleged mismanagement
of the affairs of Filport by its directors/officers, it
being alleged that the acts of mismanagement are
detrimental to the interests of Filport. Thus, the
injury complained of primarily pertains to the
corporation so that the suit for relief should be by
the corporation. However, since the ones to be
sued are the directors/officers of the corporation
itself, a stockholder, like petitioner Cruz, may
validly institute a “derivative suit” to vindicate the
alleged corporate injury, in which case Cruz is only
a nominal party while Filport is the real party-in-
interest.
Besides, the requisites before a derivative suit can
be filed by a stockholder or individual trustee are
present in this case, to wit:
a) the party bringing suit should be a
shareholder as of the time of the act or transaction
complained of, the number of his shares not being
material;
b) he has tried to exhaust intra-corporate
remedies, i.e., has made a demand on the board of
directors for the appropriate relief but the latter
has failed or refused to heed his plea; and
c) the cause of action actually devolves on the
corporation, the wrongdoing or harm having
been, or being caused to the corporation and not
to the particular stockholder bringing the suit.
Indisputably, petitioner Cruz (1) is a
stockholder of Filport; (2) he sought without
success to have its board of directors remedy what
he perceived as wrong when he wrote a letter
requesting the board to do the necessary action in
his complaint; and (3) the alleged wrong was in
truth a wrong against the stockholders of the
corporation generally, and not against Cruz or
Minterbro, in particular. And while it is true that
the complaining stockholder must show to the
satisfaction of the court that he has exhausted all
the means within his reach to attain within the
corporation itself the redress for his grievances, or
actions in conformity to his wishes, nonetheless,
where the corporation is under the complete
control of the principal defendants or other
trustees, as here, there is no necessity of making a
demand upon the directors. The reason is obvious:
a demand upon the board to institute an action
and prosecute the same effectively would have
been useless and an exercise in futility.
Bottom line, when it comes to cases involving
two or more trustees, an individual trustee can file
NOTES IN CORPORATION LAW
a derivative suit duly following the requisites
without the need to exhaust internal remedies
where the trusteeship is under the complete
control of the other trustees for it will be a waste
of time.
HI-YIELD REALTY, LNC. VS. CA, GR NO. 168863
G.R. NO. 168863, 23 JUNE 2009
FACTS:
On July 31, 2003, Roberto H. Torres
(Roberto), for and on behalf of Honorio Torres &
Sons, Inc. (HTSI), filed a Petition for Annulment of
Real Estate Mortgage and Foreclosure Sale3 over
two parcels of land located in Marikina and
Quezon City. The suit was filed against Leonora,
Ma. Theresa, Glenn and Stephanie, all surnamed
Torres, the Register of Deeds of Marikina and
Quezon City, and petitioner Hi-Yield Realty, Inc.
(Hi-Yield). It was docketed as Civil Case No. 03-892
with Branch 148 of the Regional Trial Court (RTC)
of Makati City.
On September 15, 2003, petitioner moved
to dismiss the petition on grounds of improper
venue and payment of insufficient docket fees. The
RTC denied said motion in an Order dated January
22, 2004. The trial court held that the case was, in
nature, a real action in the form of a derivative
suit cognizable by a special commercial court
pursuant to Administrative Matter No. 00-11-03-
SC. Petitioner sought reconsideration, but its
motion was denied in an Order dated April 27,
2004.
Thereafter, petitioner filed a petition for
certiorari and prohibition before the Court of
Appeals. In a Decision dated March 10, 2005, the
appellate court agreed with the RTC that the case
was a derivative suit. It further ruled that the
prayer for annulment of mortgage and
foreclosure proceedings was merely incidental to
the main action.
ISSUE:
Whether the ca erred in holding that the
annulment of real estate mortgage and
foreclosure sale in the complaint is merely
incidental [to] the derivative suit.
RULING:
A derivative action is a suit by a
shareholder to enforce a corporate cause of
action. Under the Corporation Code, where a
corporation is an injured party, its power to sue is
122
Professor: Atty. Leonardo Nick Gumabun
lodged with its board of directors or trustees. But
an individual stockholder may be permitted to
institute a derivative suit on behalf of the
corporation in order to protect or vindicate
corporate rights whenever the officials of the
corporation refuse to sue, or are the ones to be
sued, or hold control of the corporation. In such
actions, the corporation is the real party-in-
interest while the suing stockholder, on behalf of
the corporation, is only a nominal party.
Even then, not every suit filed on behalf of
the corporation is a derivative suit. For a
derivative suit to prosper, the minority
stockholder suing for and on behalf of the
corporation must allege in his complaint that he is
suing on a derivative cause of action on behalf of
the corporation and all other stockholders
similarly situated who may wish to join him in the
suit.
Further, while it is true that the
complaining stockholder must satisfactorily show
that he has exhausted all means to redress his
grievances within the corporation; such remedy is
no longer necessary where the corporation itself is
under the complete control of the person against
whom the suit is being filed. The reason is obvious:
a demand upon the board to institute an action
and prosecute the same effectively would have
been useless and an exercise in futility.
2. lndividual Suit
Is a suit instituted by a shareholder for his
own behalf against the corporation
3. Representative Suit
It is a suit filed by a shareholder in his
behalf and in behalf of other stockholders
similarly situated and with a common
cause against the corporation.
NOTE: DS – not found in the corporation
code, RCC, or in the SRC. But it is impliedly
recognized
The real party in interest – corporation
Stockholders – nominal
NOTES IN CORPORATION LAW
XII. SUBSCRIPTION CONTRACT
A. How to Become a Stockholder
A person may become a stockholder in a
corporation by voluntarily acquiring a share.
Voluntary onerous acquisition of shares can be
by 1) purchase or 2) through subscription.
Purchase may be from the corporation itself or
from other shareholders.
B. Concept of Subscription Contract
SEC. 59. Subscription Contract. – Any contract for the
acquisition of unissued stock in an existing corporation or
a corporation still to be formed shall be deemed a
subscription within the meaning of this Title,
notwithstanding the fact that the parties refer to it as a
purchase or some other contract.
C. Kinds of Subsription: Pre-lncorporation vs.
Post-lncorporation - Sec. 60, RCC
Kinds of subscription
1. Pre-incorporation subscription – entered
into before incorporation (CC, Sec. 61); and
2. Post-incorporation subscription – entered
into after incorporation (Sundiang Sr. & Aquino,
2009).
D. Consideration for the lssuance of Shares
SEC. 61. Consideration for Stocks. – Stocks shall not
be issued for a consideration less than the par or issued
price thereof. Consideration for the issuance of stock may
be:
(a) Actual cash paid to the corporation;
(b) Property, tangible or intangible, actually received by
the corporation and necessary or convenient for its use
and lawful purposes at a fair valuation equal to the par or
issued value of the stock issued;
(c) Labor performed for or services actually rendered to
the corporation;
(d) Previously incurred indebtedness of the corporation;
(e) Amounts transferred from unrestricted retained
earnings to stated capital;
(f) Outstanding shares exchanged for stocks in the event
of reclassification or conversion;
(g) Shares of stock in another corporation; and/or
(h) Other generally accepted form of consideration.
Where the consideration is other than actual
cash, or consists of intangible property such as patents or
copyrights, the valuation thereof shall initially be
123
Professor: Atty. Leonardo Nick Gumabun
determined by the stockholders or the board of directors,
subject to the approval of the Commission.
Shares of stock shall not be issued in exchange
for promissory notes or future service. The same
considerations provided in this section, insofar as
applicable, may be used for the issuance of bonds by the
corporation.
The issued price of no-par value shares may be
fixed in the articles of incorporation or by the board of
directors pursuant to authority conferred by the articles of
incorporation or the bylaws, or if not so fixed, by the
stockholders representing at least a majority of the
outstanding capital stock at a meeting duly called for the
purpose.
E. Payment for Subscription - Secs. 65 & 65,
RCC
SEC. 65. Interest on Unpaid Subscriptions. –
Subscribers to stocks shall be liable to the corporation for
interest on all unpaid subscriptions from the date of
subscription, if so required by and at the rate of interest
fixed in the subscription contract. If no rate of interest is
fixed in the subscription contract, the prevailing legal rate
shall apply.
SEC. 66. Payment of Balance of Subscription. –
Subject to the provisions of the subscription contract, the
board of directors may, at any time, declare due and
payable to the corporation unpaid subscriptions and may
collect the same or such percentage thereof, in either
case, with accrued interest, if any, as it may deem
necessary.
Payment of unpaid subscription or any
percentage thereof, together with any interest accrued
shall be made on the date specified in the subscription
contract or on the date stated in the call made by the
board. Failure to pay on such date shall render the entire
balance due and payable and shall make the stockholder
liable for interest at the legal rate on such balance, unless
a different interest rate is provided in the subscription
contract. The interest shall be computed from the date
specified, until full payment of the subscription. If no
payment is made within thirty (30) days from the said
date, all stocks covered by the subscription shall
thereupon become delinquent and shall be subject to sale
as hereinafter provided, unless the board of directors
orders otherwise.
1. Remedies to Enforce Payment
Remedies of corporations to enforce
payment of stocks
1. Extra-judicial sale at public auction (CC, Sec.
67)
2. Judicial action (CC, Sec. 70)
SEC. 67. Delinquency Sale. – The board of directors
may, by resolution, order the sale of delinquent stock and
NOTES IN CORPORATION LAW
shall specifically state the amount due on each
subscription plus all accrued interest, and the date, time
and place of the sale which shall not be less than thirty
(30) days nor more than sixty (60) days from the date the
stocks become delinquent.
SEC. 68. When Sale May be Questioned. – No action to
recover delinquent stock sold can be sustained upon the
ground of irregularity or defect in the notice of sale, or in
the sale itself of the delinquent stock, unless the party
seeking to maintain such action first pays or tenders to
the party holding the stock the sum for which the same
was sold, with interest from the date of sale at the legal
rate. No such action shall be maintained unless a
complaint is filed within six (6) months from the date of
sale.
SEC. 59. Subscription Contract. – Any contract for the
acquisition of unissued stock in an existing corporation or
a corporation still to be formed shall be deemed a
subscription within the meaning of this Title,
notwithstanding the fact that the parties refer to it as a
purchase or some other contract.
SEC. 42. Power to Declare Dividends. – The board of
directors of a stock corporation may declare dividends out
of the unrestricted retained earnings which shall be
payable in cash, property, or in stock to all stockholders
on the basis of outstanding stock held by them: Provided,
That any cash dividends due on delinquent stock shall
first be applied to the unpaid balance on the subscription
plus costs and expenses, while stock dividends shall be
withheld from the delinquent stockholders until their
unpaid subscription is fully paid: Provided, further, That
no stock dividend shall be issued without the approval of
stockholders representing at least two-thirds (2/3) of the
outstanding capital stock at a regular or special meeting
duly called for the purpose.
2. When Shares Considered Delinquent - Sec.
66, RCC
- If no payment is made within thirty (30) days
from the said date, all stocks covered by the
subscription shall thereupon become delinquent
and shall be subject to sale as hereinafter
provided, unless the board of directors orders
otherwise.
F. Certificate of Stock - Sec. 62, RCC
SEC. 62. Certificate of Stock and Transfer of Shares.
– The capital stock of corporations shall be divided into
shares for which certificates signed by the president or
vice president, countersigned by the secretary or
assistant secretary, and sealed with the seal of the
corporation shall be issued in accordance with the
bylaws. Shares of stock so issued are personal property
and may be transferred by delivery of the certificate or
certificates indorsed by the owner, his attorney in-fact, or
124
Professor: Atty. Leonardo Nick Gumabun
any other person legally authorized to make the transfer.
No transfer, however, shall be valid, except as between
the parties, until the transfer is recorded in the books of
the corporation showing the names of the parties to the
transaction, the date of the transfer, the number of the
certificate or certificates, and the number of shares
transferred. The Commission may require corporations
whose securities are traded in trading markets and which
can reasonably demonstrate their capability to do so to
issue their securities or shares of stocks in uncertificated
or scripless form in accordance with the rules of the
Commission. No shares of stock against which the
corporation holds any unpaid claim shall be transferable
in the books of the corporation.
1. Doctrine of Indivisibility of Subsciption
Contract - Sec. 63, RCC
Nature of a subscription contract
- 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.
NOTE: This is called the Doctrine of
Individuality (Indivisibility) of Subscription. A
subscription is one entire and indivisible whole
contract. It cannot be divided into portions (CC,
Sec. 64).
2. Quasi-Negotiable Character of Stock
Certificate –
REPUBLIC VS. SANDIGANBAYAN, GR
NO.1O7789
“ [A]lthough 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
estoppel.
That the PCGG found the stock certificates
endorsed in blank does not necessarily make it the
owner of the shares represented therein. Their
true ownership has to be ascertained in a proper
proceeding. Similarly, the ownership of the Nieto
shares has yet to be adjudicated. That they
allegedly belong to former President Marcos does
not make the PCGG, its owner. The PCGG must, in
NOTES IN CORPORATION LAW
an appropriate proceeding, first establish that
they truly belong to the former President and that
they were ill-gotten. Pending final judgment over
the ownership of these shares, the PCGG may not
register and vote the Nieto and the Malacañang
shares in its name. If the Sandiganbayan finds,
however, that there is evidence of dissipation of
these shares, the PCGG may vote the same as
conservator thereof.”
G. Transfer of Shares
❖ Shares of stock so issued are personal
property and may be transferred by
delivery of the certificate or certificates
indorsed by the owner, his attorney-in-
fact, or any other person legally
authorized to make the transfer. No
transfer, however, shall be valid, except
as between the parties, until the transfer
is recorded in the books of the
corporation showing the names of the
parties to the transaction, the date of the
transfer, the number of the certificate or
certificates, and the number of shares
transferred. The Commission may
require corporations whose securities
are traded in trading markets and which
can reasonably demonstrate their
capability to do so to issue their securities
or shares of stocks in uncertificated or
scripless form in accordance with the
rules of the Commission.
❖ No shares of stock against which the
corporation holds any unpaid claim shall
be transferable in the books of the
corporation.
FIL-ESTATE GOLF AND DEVELOPMENT, INC. V.
VERTEX SALES AND TRADING, INC.
G.R. No. 202079, 10 June 2013
FACTS:
Petitioner Fil-Estate Golf and
Development, Inc (FEGDI) is a stock corporation
engaged in the development of golf courses. and
FIL-ESTATE LAND, INC. (FELI) is also a stock
corporation but is engaged in real estate
development. FEGDI was the developer of the
Forest Hills Golf and Country Club (Forest Hills)
and, in consideration for its financing support and
125
Professor: Atty. Leonardo Nick Gumabun
construction efforts, was issued several shares of
stock of Forest Hills.
FEGDI sold, on installment, to corporation A one
Class “C” Common Share of Forest Hills. Prior to
the full payment of the purchase price,
corporation A sold the Class “C” Common Share to
respondent Vertex Sales and Trading, Inc.
(Vertex). Corporation A advised FEGDI of the sale
to Vertex and FEGDI, in turn, instructed Forest
Hills to recognize Vertex as a shareholder. For this
reason, Vertex enjoyed membership privileges in
Forest Hills.
Despite Vertex’s full payment, the share
remained in the name of FEGDI. Seventeen (17)
months after the sale, Vertex wrote FEDGI a letter
demanding the issuance of a stock certificate in its
name. Although Vertex complied with the request
FEDGI to first pay the necessary fees for the
transfer, no certificate was issued. This prompted
Vertex to make a final demand and as the demand
went unheeded, Vertex filed a Complaint for
Rescission with Damages and Attachment against
FEGDI, FELI and Forest Hills. It averred that the
petitioners defaulted in their obligation as sellers
when they failed and refused to issue the stock
certificate covering the subject share despite
repeated demands. During the pendency of the
rescission action a certificate of stock was issued
in Vertex’s name, but Vertex refused to accept it.
The RTC dismissed the complaint for
insufficiency of evidence. It ruled that delay in the
issuance of stock certificates does not warrant
rescission of the contract as this constituted a
mere casual or slight breach. It also observed that
notwithstanding the delay in the issuance of the
stock certificate, the sale had already been
consummated; the issuance of the stock certificate
is just a collateral matter to the sale and the stock
certificate is not essential to “the creation of the
relation of shareholder.” The CA reversed the RTC
and rescinded the sale of the share. Citing Section
63 of the Corporation Code, the CA held that there
can be no valid transfer of shares where there is no
delivery of the stock certificate. It considered the
prolonged issuance of the stock certificate a
substantial breach that served as basis for
respondent Vertex to rescind the sale. The CA
ordered the petitioners to return the amounts paid
by respondent by reason of the sale.
ISSUE:
NOTES IN CORPORATION LAW Professor: Atty. Leonardo Nick Gumabun
Whether the delay in the issuance of a stock suffered actual damage due to the delay in the
certificate can be considered a substantial issuance of the certificate of stock.
breach as to warrant rescission of the contract
of sale.
RURAL BANK OF LIPA CITY, INC. VS. CA, GR NO.
RULING:
124535
Yes, the delay in the issuance of a stock
FACTS
certificate is considered a substantial breach that
entitles one the right to rescind the sale. Reynaldo Villanueva, Sr., a stockholder of the
Rural Bank of Lipa City (Bank), executed a Deed of
Physical delivery is necessary to transfer
Assignment concerning 10,467 shares he own or
ownership of stocks. The factual backdrop of this
under his control in favor of the stockholders of
case is similar to that of Raquel-Santos v. Court of
the Bank represented by its directors Bernardo
Appeals, where the Court held that in a sale of
Bautista, Jaime Custodio and Octavio Katigbak.
shares of stock, physical delivery of a stock
certificate is one of the essential requisites for the
transfer of ownership of the stocks purchased.
Thereafter, Reynaldo and his wife, Avelina,
Section 63 of the Corporation Code executed an Agreement wherein they
provides that shares of stock so issued are acknowledged their indebtedness to the Bank in
personal property and may be transferred by the amount of P4,000,000.00 and stipulated that
delivery of the certificate or certificates indorsed said debt will be paid out of the proceeds of the
by the owner or his attorney-in-fact or other sale a specific real property. In a meeting of the
person legally authorized to make the transfer. Bank’s Board of Directors, the Villanueva spouses
assured that their debt would be paid on time,
In this case, Vertex fully paid the purchase
otherwise, the Bank would be entitled to liquidate
price by February 11, 1999 but the stock
their shareholdings including those under their
certificate was only delivered on January 23, 2002
control.
after Vertex filed an action for rescission against
FEGDI.

Eventually, the Villanueva spouses failed to settle

their obligation to the Bank on due date.
Under these facts, considered in relation to the
Consequently, the Board sent them a letter
governing law, FEGDI clearly failed to deliver the
demanding the surrender of all the stock
stock certificates, representing the shares of stock
certificates issued to them. However, they ignored
purchased by Vertex, within a reasonable time
the Bank's demands. Their shares of stock were
from the point the shares should have been
converted into Treasury Stocks. Later, they
delivered. This was a substantial breach of their
questioned the legality of the conversion of their
contract that entitles Vertex the right to rescind
shares.
the sale under Article 1191 of the Civil Code. It is
not entirely correct to say that a sale had already
been consummated as Vertex already enjoyed the
Meanwhile, the stockholders of the Bank met to
rights a shareholder can exercise. The enjoyment
elect new directors and set of officers for 1994 for
of these rights cannot suffice where the law, by its
which the Villanueva spouses were not notified. As
express terms, requires a specific form to transfer
such, the Villanueva spouses questioned the
ownership.
legality of the said stockholders' meeting. In reply
“Mutual restitution is required in cases thereto, the new set of officers of the Bank
involving rescission under Article 1191” of the informed them that they were no longer entitled
Civil Code; such restitution is necessary to bring to any notice since they had relinquished their
back the parties to their original situation prior to rights as stockholders in favor of the Bank.
the inception of the contract. Accordingly, the
amount paid to FEGDI by reason of the sale should
be returned to Vertex. On the amount of damages, The Villanueva spouses filed with the SEC a
the CA is correct in not awarding damages since petition for annulment of the stockholders'
Vertex failed to prove by sufficient evidence that it meeting and

126
NOTES IN CORPORATION LAW
election of directors and officers with prayer for
preliminary injunction which was granted upon
finding that since the Villanueva spouses have not
disposed of their shares, whether voluntarily or
involuntarily, they were still stockholders entitled
to notice.
ISSUE
Whether there was valid transfer of the shares to
the Bank. (NO)
RULING
For a valid transfer of stocks, there must be strict
compliance with the mode of transfer prescribed
by law. The requirements are: (a) There must be
delivery of the stock certificate; (b) The certificate
must be endorsed by the owner or his attorney-in-
fact or other persons legally authorized to make
the transfer; and (c) To be valid against third
parties, the transfer must be recorded in the books
of the corporation.
In the case at bar, compliance with any of these
requisites has not been clearly and sufficiently
shown. While it may be true that there was an
assignment of the subject shares to the petitioners,
said assignment was not sufficient to affect the
transfer of the said shares since there was no
endorsement thereof by the owners, their
attorneys-in-fact or any other person legally
authorized to make the transfer. Moreover, the
petitioners admit that the assignment was not
coupled with delivery. The rule is that the delivery
of the stock certificate duly endorsed by the owner
is the operative act of transfer of shares from the
lawful owner to the transferee.
It may be argued that despite non-compliance
with the requisite endorsement and delivery, the
assignment was valid between the parties. While
the assignment may be valid and binding on the
parties, it does not necessarily make the transfer
effective. The petitioners, as mere assignees,
cannot enjoy the status of a stockholder, cannot
vote nor be voted for, and will not be entitled to
dividends, insofar as the assigned shares are
concerned.
127
Professor: Atty. Leonardo Nick Gumabun
PONCE VS. ALSONS CEMENT CORPORATION,
GR NO. 139802
FACTS
Vicente C. Ponce filed a complaint with the SEC for
mandamus and damages against Alsons Cement
Corporation (ACC) and its corporate secretary,
Francisco M. Giron. Jr. Ponce alleged, among
others,that the late Fausto G. Gaid was an
incorporator of the then Victory Cement
Corporation (VCC) now ACC with 239,500 shares.
Ponce and Gaid executed a "Deed of Undertaking"
and "Indorsement" whereby the latter
acknowledged that the former is the owner of said
shares and he was therefore assigning/endorsing
the same to Ponce. However, from the time of
incorporation of ACC up to the present, no
certificates of stock were issued in the name of
Gaid and/or Ponce despite repeated demands.
ACC and Giron refused without any justifiable
reason to issue the certificates of stocks, in
violation of Ponce's right to secure the
corresponding certificate of stock in his name.
ACC and Giron moved to dismiss the case. In ruling
that a transfer or assignment of stocks need not be
registered first before it can take cognizance of
the case to enforce Ponce's rights as a stockholder,
the SEC cited the SC's ruling in Abejo vs. De la Cruz.
The CA, however, held that in the absence of any
allegation that the transfer of the shares from
Gaid to Ponce was registered in the stock and
transfer book of ACC, Ponce failed to state a cause
of action.
ISSUES
A. Whether ACC is wrong in refusing to issue the
stock certificates in favor of Ponce. (NO)
B. Whether Ponce can require the corporate
secretary to register Gaid’s share to his name.
(NO)
RULING
(A) A transfer of shares of stock not recorded in the
stock and transfer book of the corporation is
nonexistent as far as the corporation is concerned.
As between the corporation on the one hand and
its shareholders and third persons on the other,
NOTES IN CORPORATION LAW
the corporation looks only to its books for the
purpose of determining who its shareholders are.
It is only when the transfer has been recorded in
the stock and transfer book that a corporation
may rightfully regard the transferee as one of its
stockholders. From this time, the consequent
obligation on the part of the corporation to
recognize as tockholder’s rights as it is mandated
by law to recognize arises. Without such
recording, therefore, the corporation may legally
refuse the issuance of stock certificates in the
name of the transferee even when there has been
compliance with the requirements of Section 64 of
the Corporation Code.
The situation would be different if Ponce was
himself the registered owner of the stock which he
sought to transfer to a third party for then he
would be entitled to the remedy of mandamus.
(B) A mandamus should not issue to compel the
secretary of a corporation to make a transfer of
the stock on the books of the corporation unless it
affirmatively appears that he has failed or refused
so to do upon the demand either of the person in
whose name the stock is registered or of some
person holding a power of attorney for that
purpose from the registered owner of the stock.
The mere indorsement of stock certificates does
not in itself give to the indorsee such a right to
have the transfer of the shares on the books of the
company as will entitle him to the writ of
mandamus because, under such circumstances the
legal obligation is not so indisputable as to justify
the issuance of the writ. It must be noted that a
corporation looks only to its books for the purpose
of determining who its shareholders are so that a
mere indorsee of a stock certificate, claiming to be
the owner, will not necessarily be recognized as
such by the corporation in the absence of express
instructions from the registered owner or a power
of attorney.
That petitioner was under no obligation to request
for the registration of the transfer is not in issue.
One may own shares of corporate stock without
possessing a stock certificate. In Tan vs. SEC, the
Court had occasion to declare that a certificate of
stock is not necessary to render one a stockholder
in a corporation.
128
Professor: Atty. Leonardo Nick Gumabun
A certificate of stock is the tangible evidence of the
stock itself and of the various interests therein.
The certificate is the evidence of the holders
interest and status in the corporation, his
ownership of the share represented thereby. It
expresses the contract between the corporation
and the stockholder but it is not essential to the
existence of a share in stock or the creation of the
relation of shareholder to the corporation. In fact,
it rests on the will of the stockholder whether he
wants to be issued stock certificates. In Won vs.
Wack Wack Golf and Country Club, Inc. the Court
held that considering that the law does not
prescribe a period within which the registration
should be effected, the action to enforce the right
does not accrue until there has been a demand and
a refusal concerning the transfer.
THOMSON VS. CA,
GR NO. 116631
FACTS
Marsh Thomson was the Executive Vice-President
and, later on, the Management Consultant of the
American Chamber of Commerce of the
Philippines, Inc. (AmCham). While he was still
working with AmCham, his superior, A. Lewi
Burridge, retired as the President. He wanted to
transfer his proprietary share in the Manila Polo
Club (MPC) to Thomson. As such, through the
intercession of Burridge, AmCham paid for the
share listed in Thomson’s name. Accordingly, MPC
issued Proprietary Membership Certificate
Number 3398 in favor of Thomson who failed to
execute a document recognizing AmCham’s
beneficial ownership over said share.
Following AmCham's practice of yearly renewing
employment contracts, Thomson notified
AmCham that he would no longer be available as
Executive Vice President after September 30,
1989. As such, a consultancy arrangement was
attempted to be entered into between the two
However, when Thomson made a counter-
proposal of retaining the MPC share subject to
reimbursement of the purchase price to AmCham
or P110,000.00, the latter rejected the same.
AmCham then demanded the return and delivery
of the MPC share which it owns, but Thomson
refused to do so. Consequently, a case was filed by
AmCham before the trial court for the return of
the MPC share.
NOTES IN CORPORATION LAW
The trial court awarded the MPC share to
Thomson on the ground that the Articles of
Incorporation and By-laws of MPC prohibit
artificial persons to be club members. The CA,
however, reversed this decision.
Before the Court, Thomson claims ownership of
the MPC share, asserting that he merely incurred
a debt to AmCham when the latter advanced the
funds for the purchase of the share. On the other
hand, AmCham asserts beneficial ownership.
ISSUES
A. Whether AmCham as the beneficial owner of the
disputed share. (YES)
B. Whether Thomson may be ordered to transfer
said share to AmCham’s nominees. (YES)
RULING
(A) A debt is different from a trust. First, the
beneficiary of a trust has beneficial interest in the
trust property, while a creditor has merely a
personal claim against the debtor. Second, in trust,
there is a fiduciary relation between a trustee and
a beneficiary, but there is no such relation
between a debtor and creditor. Third, while a debt
implies merely an obligation to pay a certain sum
of money, a trust refers to a duty to deal with a
specific property for the benefit of another. If a
creditor-debtor relationship exists, but not a
fiduciary relationship between the parties, there is
no express trust.
When the purported trustee of funds is entitled to
use them as his or her own and commingle them
with his or her own money, a debtor-creditor
relationship exists and not a trust. In the present
case, as the Executive Vice-President of AmCham,
Thomson occupied a fiduciary position in the
business of AmCham. AmCham released the funds
to acquire a share in MPC for the use of Thomson
but obliged the latter to execute such document as
necessary to acknowledge
beneficial ownership thereof by the former. A trust
relationship is, therefore, involved in this case.
129
Professor: Atty. Leonardo Nick Gumabun
There was also no waiver of the beneficial
ownership over MPC share by the issuance of a
Release and Quitclaim in favor of the Thomson as
argued by the latter. The quitclaim executed does
not clearly show the intent to include therein the
ownership over the MPC share. Settled is the rule
that a waiver to be valid and effective must, in the
first place, be couched in clear and unequivocal
terms which leave no doubt as to the intention of
a party to give up a right or benefit which legally
pertains to him.
(B) The petitioner contends that the Articles of
Incorporation and By-laws of MPC prohibit
corporate membership. While true, this does not
mean anything in the present case AmCham does
not insist nor intend to transfer the club
membership in its name but to its designated
nominee. In any case, the MPC does not necessarily
prohibit the transfer of proprietary shares by its
members. It only restricts membership to
deserving applicants in accordance with its rules.
It must be noted that the authority granted to a
corporation to regulate the transfer of its stock
does not empower it to restrict the right of a
stockholder to transfer his shares, but merely
authorizes the adoption of regulations as to the
formalities and procedure to be followed in
effecting transfer.
Moreover, it has been held that so long as there
has been no denial or repudiation of the trust, the
possession of the trustee of an express and
continuing trust is presumed to be that of the
beneficiary, and the statute of limitations does not
run between them. With regard to a constructive
or a resulting trust, the statute of limitations does
not begin to run until the trustee clearly
repudiates or disavows the trust and such
disavowal is brought home to the other party,
"cestui que trust".
In the instant case, there was no declared or
explicit repudiation of the trust existing between
the parties. Such
repudiation could only be inferred as evident
when Thomson showed his intent to appropriate
the MPC share for himself. As such, the actions to
recover movables shall prescribe 8 years from the
time the possession thereof is lost unless the
possessor has acquired the ownership by
prescription for a less period of 4 years if in good
faith. Since AmCham filed the necessary action on
NOTES IN CORPORATION LAW
time and the defense of good faith is not available
to Thomson, there is no basis for any purported
claim of prescription, after repudiation of the
trust, which will entitle the latter to ownership of
the disputed share.
INTERPORT RESOURCES CORPORATION VS.
SECURITIES SPECIALIST, LNC.,
GR NO.L_54069
FACTS
Oceanic Oil & Mineral Resources, Inc. (Oceanic)
entered into a subscription agreement with R.C.
Lee covering 5,000,000 of its shares with par value
of P0.01 per share. Thereupon, R.C. Lee paid 25%
of the subscription. Oceanic then merged with the
petitioner, with the latter as the surviving
corporation. Thereafter, R.C. Lee endorsed the
subscription agreements to Securities Specialist,
Inc. (SSI), a domestic corporation registered as a
dealer in securities.
Subsequently, R.C. Lee requested Interport for a
list of subscription agreements and stock
certificates issued in its name and other
individuals. Upon finding no record showing any
transfer or assignment of the Oceanic subscription
agreements and stock certificates of Interport to
SSI, R.C. Lee paid its unpaid subscriptions and was
accordingly issued stock certificates.
Interport eventually issued a call for the full
payment of subscription receivables. SSI tendered
payment prior to the deadline through 2
stockbrokers of the Manila Stock Exchange.
However, the stockbrokers reported to SSI that
lnterport refused to honor the Oceanic
subscriptions. On the dateof the deadline, SSI
directly tendered payment to lnterport for the
balance covered by the Oceanic subscription
agreements. Interport rejected the same.
SSI learned that Interport had issued the
5,000,000 shares to R.C. Lee, relying on the latter's
registration as the owner of the subscription
agreements in the books of the former, thus, SSI
wrote R.C. Lee demanding the delivery of the
5,000,000 shares on the basis of a purported
assignment of the subscription agreements.
However, R.C. Lee failed to return the subject
130
Professor: Atty. Leonardo Nick Gumabun
shares inasmuch as it had already sold the same to
other parties. SSI, thus, demanded that R.C. Lee
pay not only the equivalent of the 25% it had paid
on the subscription but the whole 5,000,000
shares at current market value. SSI also made
demands upon Interport and R.C. Lee for the
cancellation of the shares issued to the latter and
for the delivery of the shares to SSl. After its
demands were not met, SSI commenced this case
in the SEC. The SEC, in its ruling, stated that it
would be inequitable to issue the 5,000,000 shares
in favor of SSI since it only paid 25% thereof. This
decision of the SEC was affirmed by the CA.
lnterport argues that R.C. Lee should be held liable
for the delivery of 25% of the shares inasmuch as
R.C. Lee had already received all the 5,000,000
shares upon its payment of the balance on the
subscription price and that it was only proper for
R.C. Lee to deliver 25% of the shares under the
Oceanic subscription agreements because it had
already received the corresponding payment
therefor from SSI for the assignment of the shares.
In any case, it merely relied on its records.
ISSUE
Whether Interport is liable to deliver the Oceanic
shares of stock or the value thereof to SSI. (YES)
RULING
Under the Civil Code, obligations may be modified
by: (l) changing their object or principal
conditions; (2) substituting the person of the
debtor; or (3) subrogating a third person in the
rights of the creditor. In this case, the SEC
correctly categorized the assignment of the
subscription agreements as a form of novation by
substitution of a new debtor which required the
consent of or notice to the creditor even without
the knowledge or against the will of the former.
The change of debtor took place when R.C. Lee
assigned the Oceanic shares under subscription
agreement to SSI such that that the latter became
obliged to settle the 75% unpaid balance on the
subscription.
The effect of the assignment was to extinguish the
obligation of R.C. Lee to Oceanic, now Interport, to
settle the unpaid balance on the subscription. As a
result of the assignment, Interport was no longer
NOTES IN CORPORATION LAW
obliged to accept any payment from R.C. Lee
because the latter had ceased to be privy to
subscription agreements. On the other hand,
Interport was legally bound to accept SSI's tender
of payment for the 75% balance on the
subscription price because SSI had become the
new debtor. As such, the issuance of the stock
certificates in the name of R.C. Lee had no legal
basis in the absence of a contractual agreement
between R.C. Lee and Interport.
Under Section 63 of the Corporation Code, no
transfer of shares of stock shall be valid, except as
between the parties, until the transfer is recorded
in the books of the corporation. This statutory rule
cannot be strictly applied herein because lnterport
had unduly refused to recognize the assignment of
the shares between R.C. Lee and SSI.
H. Lost and Destroyed Certificate of Stock
SEC. 72. Lost or Destroyed Certificates. – The
following procedure shall be followed by a corporation in
issuing new certificates of stock in lieu of those which
have been lost, stolen or destroyed:
(a) The registered owner of a certificate of stock in a
corporation or such person’s legal representative shall file
with the corporation an affidavit in triplicate setting forth,
if possible, the circumstances as to how the certificate
was lost, stolen or destroyed, the number of shares
represented by such certificate, the serial number of the
certificate and the name of the corporation which issued
the same. The owner of such certificate of stock shall also
submit such other information and evidence as may be
deemed necessary; and
(b) After verifying the affidavit and other information and
evidence with the books of the corporation, the
corporation shall publish a notice in a newspaper of
general circulation in the place where the corporation has
its principal office, once a week for three (3) consecutive
weeks at the expense of the registered owner of the
certificate of stock which has been lost, stolen or
destroyed. The notice shall state the name of the
corporation, the name of the registered owner, the serial
number of the certificate, the number of shares
represented by such certificate, and shall state that after
the expiration of one (1) year from the date of the last
publication, if no contest has been presented to the
corporation regarding the certificate of stock, the right to
make such contest shall be barred and the corporation
shall cancel the lost, destroyed or stolen certificate of
stock in its books. In lieu thereof, the corporation shall
issue a new certificate of stock, unless the registered
131
Professor: Atty. Leonardo Nick Gumabun
owner files a bond or other security as may be required,
effective for a period of one (1) year, for such amount and
in such form and with such sureties as may be
satisfactory to the board of directors, in which case a new
certificate may be issued even before the expiration of the
one (1) year period provided herein. If a contest has been
presented to the corporation or if an action is pending in
court regarding the ownership of the certificate of stock
which has been lost, stolen or destroyed, the issuance of
the new certificate of stock in lieu thereof shall be
suspended until the court renders a final decision
regarding the ownership of the certificate of stock which
has been lost, stolen or destroyed.
Except in case of fraud, bad faith, or negligence
on the part of the corporation and its officers, no action
may be brought against any corporation which shall have
issued certificate of stock in lieu of those lost, stolen or
destroyed pursuant to the procedure above-described.
Procedure for the issuance of a new stock
certificate in lieu of those which have been
lost, stolen or destroyed
1. The registered owner of a certificate of stock
in a corporation or his legal representative shall
file with the corporation an affidavit in triplicate
setting forth:
a. If possible, the circumstances as to how the
certificate was lost, stolen or destroyed;
b. The number of shares represented by such
certificate;
c. The serial number of the certificate and the
name of the corporation which issued the same.
He shall also submit such other information and
evidence which he may deem necessary.
2. After verifying the affidavit and other
information and evidence with the books of the
corporation, the latter shall publish a notice in a
newspaper of general circulation published in
the place where the corporation has its principal
office, once a week for three (3) consecutive
weeks at the expense of the registered owner of
the Certificate of Stock.
Contents of notice:
a. Name of the corporation;
b. Name of the registered owner;
c. Serial number of the certificate of stock; and
d. Number of share represented by the certificate
of stock.
NOTES IN CORPORATION LAW Professor: Atty. Leonardo Nick Gumabun
3. After the expiration of one (1) year from the
date of the last publication, if no contest has been
presented to said corporation regarding said
certificate of stock, the corporation shall cancel
in its books the certificate of stock which has
been lost, stolen or destroyed and issue in lieu
thereof new certificate of stock.
After the expiration of the 1 year period to
contest, such right shall be barred unless the
registered owner files a bond or other security in
lieu thereof as may be required, effective for a
period of 1 year, for such amount and in such
form and with such sureties as may be
satisfactory to the BOD, in which case, a new
certificate may be issued even before the
expiration of the 1 year period provided herein.
4. Provided that if a contest has been presented
to said corporation or if an action is pending in
court regarding the ownership of said certificate
of stock which has been lost, stolen or destroyed,
the issuance of the new certificate of stock in lieu
thereof shall be suspended until the final
decision by the court regarding the ownership of
said certificate of stock which has been lost,
stolen or destroyed (CC, Sec. 73).
Oppositions on the issuance of new
certificates
If there are oppositions on the issuance of new
certificates, the corporation may file an
interpleader proceeding to compel the parties to
litigate among themselves.
Liability of the corporation for the issuance of
new certificates of stock in case of lost or
destroyed certificate
General Rule: No action may be brought against
any corporation which shall have issued
certificate of stock in lieu of those lost, stolen or
destroyed pursuant to the procedure above-
described (safe harbor provision).
Exception: Where there is fraud, bad faith, or
negligence on the part of the corporation and its
officers.

- END -

132