CORPORATION LAW
ATTY. VJC | SECOND SEMESTER 2021-2022
Module 5
BYLAWS
BYLAWS
Specific aspects of corporate governance:
● creation of bylaws,
● conduct of meetings,
● stock ownership.
Bylaws are usually filed AFTER incorporation. However, it may
be filed together with the articles of incorporation.
● Sometimes, it’s just a pro forma document which
contains all the matters prescribed by law. You can have
comprehensive bylaws to be discussed in a special
meeting with the stockholders and incorporators and
you can just submit bylaws after incorporation.
It contains the rules and regulations regarding the conduct of
affairs in a corporation. It is agreed upon by the corporators or
incorporators that refers to the rules of action, how they’ll conduct
the business, and the procedures that are relevant for running the
business. It gives effect to what are the intentions of the
corporators/incorporators on how the corporation will be run.
Q: What is the purpose of having separate bylaws?
A: The law recognizes the preference of the corporators on how
business will be run. If there are matters in which the corporators
agree as to how the business will run, then that is to be respected
provided that these matters are not contrary to law, morals, public
policy, etc.
CONTENTS OF BY LAWS (Section 46)
SECTION 46. A private corporation may provide the
following in its bylaws:
1. time, place and manner of calling and conducting regular or
special meetings of the directors or trustees;
2. time and manner of calling and conducting regular or special
meetings and mode of notifying the stockholders or members
thereof;
3. required quorum in meetings of stockholders or members
and the manner of voting therein;
4. modes by which a stockholder, member, director, or trustee
may attend meetings and cast their votes;
5. form for proxies of stockholders and members and the
manner of voting them;
6. 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 SEC;
7. the time for holding the annual election of directors or
trustees and the mode or manner of giving notice thereof;
8. the manner of election or appointment and the term of
office of all officers other than directors or trustees;
9. the penalties for violation of the bylaws;
10. In the case of stock corporations, the manner of issuing
stock certificates;
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11. 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; and
12. arbitration agreement may be provided in the bylaws
pursuant to Section 181 of this Code.
TN: The law allows the corporation to add additional matters
which are not covered by the law.
1. time, place and manner of calling and conducting regular or
special meetings of the directors or trustees;
The corporation may state when they may conduct their meeting
for directors and trustees or stockholders and members.
2. time and manner of calling and conducting regular or special
meetings and mode of notifying the stockholders or members
thereof;
Under Sec. 23, stockholders have the right to vote such shares
which were stated standing in their own names at the time fixed
by the bylaws.
● If there are any meetings of stockholders, the conduct of
the meeting must be that stated in the bylaws. Where the
bylaws is silent, at the time of the election.
The law recognizes the preference of the corporators. If they
decide to have their meetings on a certain date, that must be
followed.
Default mode of service:
Written notices must be sent to stockholders through any of the
following modes:
1. Registered mail
2. Personal service
3. Electronic mail
In the absence of the bylaws, follow what is prescribed by the law.
Q: Can you choose a mode of service through private courier?
A: Yes. The law allows that mode of service.
Q: How about electronic mail?
A: Electronic mail is one of the alternatives of
the modes of services which is incorporated under
Revised Corporation Code. However, you can only
make use of electronic mail if the bylaws so provide. It
must be authorized by bylaws and in accordance with the
guidelines set forth by the SEC.
Two requirements for electronic mail as service:
1. Conform to the internal rules of procedure provided
in bylaws (regarding sending of notices through email)
2. Comply with the SEC guidelines for the sending of
notices via email
Memorandum Circular 28-2020
This allows corporations to create and designate an official email
account and cell phone number. Not only is this for compliance
but this is for communications and correspondences with its
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stockholders or members.The corporation must maintain an
official email address.
Q: Can the corporation send their notices through phone call?
A: NO. The law requires that the notices must
be in writing. The reason for this is in order to have
proof of notice that it was actually served to stockholder.
It is difficult to submit notice of mail matter if not
written.
We have a timeframe for sending notice. It is
difficult to determine the reckoning point of informing
stockholders if notice was given via phone. It is prudent
that notices must be in writing sent to its stockholders
or members.
3. required quorum in meetings of stockholders or members and
the manner of voting therein;
Quorum simply means the majority (50% plus 1).
Q: Can the corporation define the quorum in another manner (i.e.
quorum must be all of the directors)? Example, In a 10-member board,
the quorum must be 6 directors. Can it provide in its bylaws that
8 must be present before they can conduct business?
A: YES, they can provide a higher number in
the bylaws. However, they cannot provide for a lower
number.
Q: Can they provide for a lower number for quorum? For
example, in a ten member board, can quorum refer to three
directors?
A: NO. The contents of the bylaws must be in
accordance with law. Quorum refers to the majority
(50%+1). If the number is any less than what is
prescribed by law, this would not be allowed.
TN: Provisions in the bylaws must comply with what is legal. It
must not be contrary to laws, etc.
4. modes by which a stockholder, member, director, or trustee
may attend meetings and cast their votes;
We already discussed the provision where stockholders/members
may vote through remote communication or in absentia. Under
Sec. 23, they can do that when it is authorized by the bylaws. At
the onset, it must be stated in the bylaws that voting through
remote communication or in absentia is allowed.
5. form for proxies of stockholders and members and the manner
of voting them;
Under SEC Memorandum Order No. 06-2020, it prescribed
guidelines for tele-conferencing or video conferencing. Under the
RCC, the corporation may now deploy technology in order to
give directors situated elsewhere an opportunity to participate in
a meeting.
Under that memorandum circular, while there are alternative
modes in attending the meeting, the directors or trustees cannot
attend by proxy. Directors cannot be substituted by some other
persons. It is the stockholders who elected them. The directors
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must participate in that particular meeting. They cannot submit a
proxy form to attend that meeting.
TN: The directors were elected in the position by virtue of their
personal qualifications. They cannot be substituted by other
persons.
In contrast, under Sec. 46 par. 5, stockholders or members can
be substituted, so they can appear by proxy. It must be stated in
the bylaws the particular form of proxy for
stockholders/members in case they do not want to attend the
meeting or they want someone else to attend on their behalf.
6. 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 SEC;
The bylaws may also contain qualifications, duties, and
responsibilities of the directors.
Q: Can the bylaws provide additional qualifications?
A: Yes.
COMPENSATION OF OFFICERS
The bylaws can also provide guidelines for setting compensation
of directors, trustees or officers.
Section 29 which provides for the compensation of directors,
there is a requirement for the corporation to report to the SEC,
especially if it is a corporation vested with public interest. The
direction of the law now is for transparency or to encourage
transparency of disclosure of compensation.
Compensation schemes may be provided under the bylaws for
purposes of transparency.
DUTIES OF OFFICERS
The last paragraph of Section 24 provides that: “ 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.” The bylaws does not
just provide for the qualifications, duties or functions of the
directors trustees it even provides for the duties of officers.
Q: What is the relevance of including the duties of the officers?
A: The officers’ duties and functions should be
regularly assessed by the corporation. It would be easier
if it is based on a criteria set by the corporation from the
beginning. This criteria must be stated in the bylaws.
7. the time for holding the annual election of directors or trustees
and the mode or manner of giving notice thereof;
8. the manner of election or appointment and the term of office
of all officers other than directors or trustees;
ELECTION OF ALL OTHER OFFICERS
• It is not just the election of directors and trustees, but
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also for officers other than directors or trustees. The
bylaws may provide other positions which are not
prescribed by law or which are not those enumerated in
the RCCP. the bylaws may add other officers such as
Vice-President, General Manager, or the Chief
Executive Officer (CEO). If these persons are
designated in the bylaws as officers, only then can
you consider them as officers of the corporation.
• If the officers of the corporation are given such
character under the bylaws or the Corporation Code,
then they are considered as corporate officers. Other
than that, those other persons whose positions are not
stated in the bylaws, they are merely employees of the
corporation.
• The determination of whether a person is an officer or
an employee is relevant in relation to termination. If
termination involves an officer, it is considered an intra-
corporate controversy. If the termination involves an
employee of the Corporation, it involves ER-EE
relationship.
OFFICER EMPLOYEE
Intra-corporate controversy Employer-Employee
Relationship
9. the penalties for violation of the bylaws;
10. In the case of stock corporations, the manner of issuing stock
certificates;
Stock Certificates may be issued through paper certificates OR
Electronic securities. These could be tangible paper certificates or
scriptless, these are matters to be decided by the corporation.
11. 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; and
Paragraph 11 is a revision of the former law. There is a catch-all
provision in the former law but it did not include “ for the promotion
of good governance and anti-graft and corruption measures.”
Includes Formation of Executive Committee
The provision regarding the formation of an executive committee
also falls under this provision.
TAKE NOTE: Under Section 34, an executive committee can
only be formed if the bylaws provide for it. It must be found as
one of the provisions in the bylaws that the Board of Directors
may act through an executive committee otherwise they cannot
form an executive committee.
Q: What is the remedy in order for the BOD to act through an
executive committee?
A: They can just amend the bylaws to include
the provision where the formation of an executive
committee is authorized.
In drafting your bylaws, you must be able to foresee the
needs of the corporation in the future. You must be able to predict
if the corporation would need a particular officer (e.g.: Chief Risk
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Officer solely for the purpose of risk management of the
corporation; General Manager for a particular branch; or an
Executive Committee to act on particular matters which cannot
be acted upon by the Board of Directors). This must be decided
upon at the onset.
12. arbitration agreement may be provided in the bylaws
pursuant to Section 181 of this Code
Effect on Third Persons
Neither can we concede that such contract would be invalid just
because the signatory thereon was not the Chairman of the
Board which allegedly violated petitioner's by-laws. Since by-
laws operate merely as internal rules among the stockholders,
they cannot affect or preiudice third persons who deal with the
corporation, unless they have knowledge of the same. No proof
appears on record that private respondent ever knew anything
about the provisions of said by-laws. In fact, petitioner itself
merely asserts the same without even bothering to attach a copy
or excerpt thereof to show that there is such a provision. How
can it now expect the Labor Arbiter and the NLRC to belleve
it? That this allegation has never been denied by private
respondent does not necessarily signify admission of its
existence because technicalities of law and procedure and the
rules obtaining in the courts of law do not strictly apply to
proceedings of this nature.
PMI Colleges v. NIRC, G.R. No. 121466, August 15, 1997
Facts: It was stated in the bylaws that only the Chair of the Board
was authorized to sign contracts. The school hired an instructor
on a contractual basis. For the first three periods of the contract,
the instructor was paid his salary. However, payment of the
instructor’s salary was stopped because the contract was not
renewed as it was not signed by the chair.
Q: Is the instructor bound by that bylaw provision which requires
that all contracts must be signed by the Chair?
A: No, because the instructor was not apprised
of the bylaws.
Here, the SC emphasized that bylaws operate merely as
internal rules among stockholders. Thus, they cannot affect or
prejudice thor persons who deal with the corporation, unless if
they have knowledge of the bylaw provision.
Rule: The bylaws can only be binding upon the stockholders
or the members of the corporation. In the case at bar, the
instructor who is a contractual employee, could not be bound by
that bylaw provision because she was not apprised of the
particular provision. These are INTERNAL rules of the
organization. If the corporation would want to enforce the bylaws
to its employees, it must furnish the copies of the bylaws to such
persons.
GR: A third person may not be bound by the bylaws.
XPN: Unless such third person acquired knowledge of the bylaw
provision.
Adoption of Bylaws
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 CORPORATION LAW
ATTY. VJC | SECOND SEMESTER 2021-2022

not the bylaws are in accordance with the Revised

PROBLEM 1: On March 7, 2022, Bayswater Corporation filed
Corporation Code and other laws.
with the SEC its Articles of Incorporation. On April 7, 2022,
the SEC issued a Certificate of Incorporation in its name. On
Q: Why is it necessary to refer to the provision of the RCC?
April 18, 2022, the incorporators submitted to the SEC the
A: The bylaws must be in accordance with law,
proposed bylaws of the corporation, indicating therein that the
so it must comply with all these elements for the bylaws
regular stockholders meeting shall be held every 20th of April.
considered be valid:
Are the bylaws validly filed?

Elements of Valid Bylaws

Remember that the bylaws can be filed before or after
1. They must not be contrary to existing law and
incorporation. If the bylaws were filed before incorporation, Sec.
inconsistent with the Code.
45 provides that the bylaws must be approved and signed by all
2. They must not be contrary to morals and public policy.
incorporators and submitted to the SEC together with the articles
3. They must not impair obligations of contract.
of incorporation.
4. They must be general and uniform in their operation.
5. They must be consistent with the charter or Articles of
ANS TO PROBLEM 1: In this case, Bayswater Corporation was
Incorporation
already issued a certificate of incorporation. The incorporators
6. They must be reasonable.
submitted their bylaws after incorporation. Thus, the
incorporators must obtain the affirmative vote of the stockholders
representing at least majority of the outstanding capital stock. Q: If you have provision in bylaws which prescribes regularization
of an employee, which is different under that in the Labor Code,
So, the incorporators now cannot submit the bylaws on their own. would this be considered a valid bylaw provision? If it prevents
the employee from being regularized or deprives the employee of
right to security of tenure is this a valid provision in the bylaws?
SEC 45. For the adoption of bylaws by the corporation, the
affirmative vote of the stockholders representing at least a
A: No. Apart from it being contrary to law, this
majority of the outstanding capital stock, or of at least a
also violates or impairs an obligation of contract. The
majority of the members in case of nonstock corporations,
Principle of Security of Tenure is not only provided
shall be necessary. The bylaws shall be signed by the
under the Constitution but it is also deemed written in
stockholders or members voting for them and shall be kept in
an employment contract. Bylaw provisions cannot
the principal office of the corporation, subject to the
supersede those written in the Labor Code.
inspection of the stockholders or members during office
hours. A copy thereof, duly certified by a majority of the
It must not be discriminatory. It must apply to all.
directors or trustees and countersigned by the secretary of the
corporation, shall be filed with the Commission and attached
to the original articles of incorporation. Reasonableness of a Bylaw as a Question of Law

The validity or reasonableness of a by-law of a corporation is

purely a question of law. Whether the by-law is in conflict with
Approval Requirement for Adoption of Bylaws the law of the land, or with the charter of the corporation, or is
in a legal sense unreasonable and therefore unlawful is a
Before Incorporation After Incorporation question of law. This rule is subject, however, to the limitation
that where the reasonableness of a by-law is a mere matter of
only needs approval of the needs approval of judgment, and one upon which reasonable minds must
incorporators stockholders representing at necessarily differ, a court would not be warranted in substituting
least a majority of the its judgment instead of the judgment of those who are
outstanding capital stock or authorized to make by-laws and who have exercised their
majority of the members authority.
Gokongwei, Jr. v. Securities and Exchange Commission, G.R.
No. L-45911, April 11, 1979
In the instant case, on April 18, the bylaws were submitted and on
April 20, the meeting was held. There was a provision in the bylaws which disqualifies a
stockholder from becoming a director if the director has a
Under Sec. 45, in all cases whether the bylaws are submitted before or after competing interest in another business.
incorporation, it shall only be effective upon the issuance of the SEC
that the bylaws are in accordance with laws. Q: Is this a valid bylaw provision?
A: It is the court (and not the board of
TN: There must be approval of the SEC before the bylaws are directors) which will make a final determination whether
considered effective upon stockholders or members. or not a bylaw provision is valid or reasonable.

Q: What’s the purpose of submitting it with the SEC? Q: BUSINESS JUDGMENT RULE - Remember that the courts
A: The SEC would have to verify whether or cannot interfere into how the business is done as this is left to the
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sound judgment of the directors or trustees.
So, isn’t this a violation of the business judgment rule?
A: No. The test of reasonableness is only a
means of determining whether or not a bylaw provision
is contrary to law. There’s a separate metric.
a. With regard to a bylaw provision, the basis is the Revised
Corporation Code or the law so the determination of the
courts is a means to check if the bylaw is in accordance
with the Revised Corporation Code and the laws.
b. With regard to the running of the business, that’s with
regard to the business aspect. That’s subject to the
sound discretion of the directors or trustees.
TN: There are provisions in the law which prescribe who can
become directors and their qualifications and disqualifications.
You must refer to that, not just on the bylaw provisions.
Under Section 45 item 6, a corporation may validly modify the
qualifications for directors or trustees. They can amend the bylaws
by modifying the qualifications of directors.
Facts: Gokongwei, a stockholder, states he has a vested right to
be elected as a director in San Miguel considering that there was
no prohibition when he first entered the corporation. Is he
correct?
SC held:
Any person "who buys stock in a corporation does so with the
knowledge that its affairs are dominated by a majority of the
stockholders and that he impliedly contracts that the will of the
majority shall govern in all matters within the limits of the act
of incorporation and lawfully enacted by-laws and not forbidden
by law. " To this extent, therefore, the stockholder may be
considered to have "parted with his personal right or privilege
to regulate the disposition of his property which he has invested
in the capital stock of the corporation, and surrendered it to the
will of the majority of his fellow incorporators... It cannot
therefore be justly said that the contract, express or implied,
between the corporation and the stockholders is infringed.. by
any act of the former which is authorized by a majority..
Gokongwei, Jr. v. Securities and Exchange Commission, G..
No. L-45911, April 11, 1979
Even if you have invested money in the corporation, it does not
mean that your will has to be followed.
We have several provisions in the law which require the majority
(or even ⅔ of the outstanding capital stock) for a corporate act to
be validly passed, either by the stockholders or board of directors.
It’s reasonable to expect that you would surrender some control
over your investment—either to the directors, trustees, or to your
fellow stockholders or members.
There is a reasonable expectation that the rules of the corporation
will constantly change, such that the bylaws can be amended or
even a new set of bylaws can be adopted in lieu of the old bylaws.
The stockholder cannot claim that the original qualifications
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initially stated in the original bylaws should apply to him,
considering that the bylaws can be modified.
Pursuant to section 18 of the Corporation Law, any corporation
may amend its articles of incorporation by a vote or written
assent of the stockholders representing at least two-thirds of the
subscribed capital stock of the corporation If the amendment
changes, diminishes or restricts the rights of the existing
shareholders then the dissenting minority has only one right,
viz.: "to object thereto in writing and demand payment for his
share." Under section 22 of the same law, the owners of the
majority of the subscribed capital stock may amend or repeal
any by-law or adopt new by-laws. It cannot be said, therefore,
that petitioner has a vested right to be elected director, in the
face of the fact that the law at the time such right as stockholder
was acquired contained the prescription that the corporate
charter and the by-law shall be subject to amendment, alteration
and modification.
Gokongwei, Jr. v. Securities and Exchange Commission, G.R.
No. L-45911, April 11, 1979
The corporation has the power to provide qualifications for its
directors. The question that you need to ask yourself is: “Is the
disqualification of a competitor from being elected in the
board of directors reasonable?”
SC looked into the purpose of the disqualification.
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. xxx Indeed,
access by a competitor to confidential information regarding
marketing strategies and pricing policies of San Miguel
Corporation would subject the latter to a competitive
disadvantage and unjustly enrich the competitor, for advance
knowledge by the competitor of the strategies for the
development of existing or new markets of existing or new
products could enable said competitor to utilize such
knowledge to his advantage.
Remember Section 32 on Contracts with Interlocking Directors,
there was an opening statement: “except on cases of fraud and provided
that the contract is fair and unreasonable, the contract shall not be invalidated
on that ground alone”
If you look at those criteria, that would serve as the basis for the
test of reasonableness. You can assess if a contract is valid under
the law if it is fair and reasonable.
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In this case, the Supreme Court gave sufficient grounds to say that
bylaws
the provision is valid and reasonable. This is to prevent the
practice of corporate espionage.
TN: The provisions of the Articles of Incorporation prevail over
MUST APPLY TO ALL the provisions of the bylaws. Bylaws are just the rules and
TN: One of the elements of a valid bylaw is it must not be regulations, these are just rules of action which seek to implement
discriminatory. It must apply to all. the provisions of the Articles of Incorporation. It cannot be
inconsistent with the Articles of Incorporation. If there are
inconsistencies between the articles of incorporation and the
Neither are We persuaded by the claim that the by-law bylaws it will be the articles of incorporation which shall prevail.
was intended to prevent the candidacy of petitioner for
election to the Board. If the by-law were to be Q: What if there are amendments of the articles of incorporation,
applied in the case of one stockholder but waived
what is its effect on the bylaws (i.e change of corporate name,
in the case of another, then it could be reasonably
corporate term) ?
claimed that the by-law was being applied in a
A: The bylaws must be amended to reflect the
discriminatory manner. However, the by law, by its
changes of the articles of incorporation.
terms, applies to all stockholders. The equal
protection clause of the Constitution requires only
that the by-law operate equally upon all persons of
a class. Besides, before petitioner can be declared
ineligible to run for director, there must be hearing and
evidence must be submitted to bring his case within the REQUIREMENT OF REPEAL OR
ambit of the disqualification. Sound principles of public ADOPTION OF BYLAWS
policy and management, therefore, support the view
that a by-law which disqualifies a competition from Amendment, Repeal Bylaws, or
election to the Board of Directors of another Adoption of New Bylaws
corporation is valid and reasonable.
- Gokongwei, Jr. v. Securities and Exchange majority of the Board of Directors; and
Commission, G.R. No. L-45911, April 11,
1979 Stock
Corporations owners of at least a majority of the
outstanding capital stock at a regular or
In this case, the Supreme Court held that there was no special meeting duly called for the purpose
discriminatory application of the bylaws. It was not shown that
Gokongwei was singled out from the other stockholders. The majority of the Board of Directors; and
disqualification applies to all stockholders who maintain an Non-Stock
interest in the competing corporation. Corporations at least a majority of the members at a
regular or special meeting duly called for
BYLAWS VS ARTICLES OF the purpose
INCORPORATION
EFFECTIVITY: Upon the issuance of the SEC of a certification
Q: How are bylaws different from the articles of incorporation? that the amended bylaws is in accordance with law (similar to
A: The articles of incorporation refer to the original bylaws)
fundamental charter of the corporation. The Articles of
Incorporation together with the bylaws, the articles of When you adopt a new set of bylaws, the contents of the original
incorporation, they govern the conduct of the affairs of bylaws will be deemed superseded. What shall be effective will
the corporation. However, the articles of be the contents of the new bylaws upon the issuance of a
incorporation takes precedence over the bylaws. certification of the SEC that the new bylaws are in
accordance with law.

ARTICLES OF BYLAWS
INCORPORATION

Refers to the fundamental Rules and regulations which

charter of the corporation seek to implement the
provisions of the articles of
incorporation. Must be
consistent with the AOI

Takes precedence over the

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PROBLEM 2: Fulham, Inc., a nonstock corporation, filed with
the SEC its Articles of Incorporation together with its bylaws.
After incorporation, majority of the members entrusted to the
Board of Trustees the power to amend or repeal the bylaws, or
adopt new bylaws "as they may deem it necessary." After
consulting with a lawyer, the same members decided to
withdraw their decision as they now want full and active
participation in how the association is to be run.
SEC 47. xxx Whenever the bylaws are amended or new bylaws
are adopted, the corporation shall file with the Commission
such amended or new bylaws and, if applicable, the
stockholders' or members' resolution authorizing the delegation
of the power to amend and/or adopt new bylaws, duly certified
under oath by the corporate secretary and a majority of the
directors or trustees. xxx

Is the delegation of authority and the revocation thereof valid?

Q: In this case, was there a resolution passed by the
members authorizing the delegation of the authority to
amend the Bylaws?
Q: Why would you delegate the authority to amend the bylaws to A: There was NONE.
the board of directors?
A: For practical reasons and expediency. Since it is the trustees, in
this case, who are involved in the day-to-day operations of the ANSWER TO PROBLEM 2
corporation, it would be best to leave it to the Board of Trustees
to allow the trustees to change the rules as they see fit. A. DELEGATION IN THIS CASE WAS NOT
VALID ON 2 GROUNDS:
Q: But can the members surrender the power to amend the
Bylaws to the BOT? 1. Failure to meet the voting requirements, which is
A: Sec. 47 allows the delegation of the authority. 2/3 of the members.
2. Failure to comply with the resolution requirement,
wherein there must be a members’ resolution
SEC 47. xxx The owners of two- thirds (2/3) of the authorizing the delegation of the power to amend
outstanding capital stock or two-thirds (2/3) of the members Bylaws.
in a nonstock corporation may delegate to the board of
directors or trustees the power to amend or repeal the bylaws B. REVOCATION
or adopt new bylaws: Provided, That any power delegated to
the board of directors or trustees to amend or repeal the bylaws Q: Is the revocation of the authority valid? Can the same members
or adopt new bylaws shall be considered as revoked whenever (majority) withdraw their decision?
stockholders owning or representing a majority of the
outstanding capital stock or majority of the members shall so A:
vote at a regular or special meeting.

SEC 47. xxx The owners of two- thirds (2/3) of the

If you look at this case, only a majority of the members entrusted
to the BOT has the power to amend or repeal the Bylaws. This is
not in compliance with Sec 47, which requires that 2/3 of the
members must approve the delegation of authority.
Q: Was there a valid delegation?
A: There was NONE.
More importantly, the new law clarifies that the
delegation of the authority must be contained in a
stockholders’ or members’ resolution authorizing the
delegation of the power to amend to the BOT. This is
quite surprising because you’ve noticed that a resolution
is customarily passed by the BOD and the BOT when
making a collective decision. But under Sec 47 of the
RCCP, the law clarifies that there must be a signed
Resolution before the stockholders can validly delegate
the power to amend the Bylaws to the BOD or BOT.
This is a special requirement.
outstanding capital stock or two-thirds (2/3) of the members in
a nonstock corporation may delegate to the board of directors
or trustees the power to amend or repeal the bylaws or adopt
new bylaws: Provided, That any power delegated to the board
of directors or trustees to amend or repeal the bylaws or adopt
new bylaws shall be considered as revoked whenever
stockholders owning or representing a majority of the
outstanding capital stock or majority of the members shall so
vote at a regular or special meeting.
TWO IMPORTANT DETAILS TO REMEMBER
1. In revoking the authority, there must be a meeting called
for that purpose.
2. In the revocation of the authority, it requires a lower
voting requirement. Instead of 2/3, it now requires a
majority of the outstanding capital stock or members.
This means that it would be easier for stockholders or members
to revoke their initial decision to delegate the power to amend
Bylaws. The law here wants to maintain the power to amend the
Bylaws to the stockholders or members.

Q: Is a meeting required for the delegation of the authority?

A: Yes. For revocation of such delegation, it is
mentioned in Sec 47 that there must be a meeting—
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regular or special. But under the same provision

B.P Blg. 68 R.A. NO 11232
regarding the delegation of authority, there is no such
requirement.
Every corporation formed
The law requires the issuance of a stockholders’ under this Code must, within
or members’ resolution. So how were they able to draft one (1) month after receipt
this resolution if they have not met to discuss the of official notice of the
delegation of authority? While this provision did not issuance of its certificate of
expressly provide for a meeting in case of delegation of incorporation by the
the authority to amend Bylaws, it is implied in Sec 47 Securities and Exchange
that a meeting is necessary. Commission, adopt a code of
by-laws for its government
Meeting is necessary for: not inconsistent with this
(1) delegation of authority to amend the by-laws, and Code
(2) revocation of delegation of authority to amend the by-laws,.
(d) The modes by which a
In this case, they were able to comply with the requirement for stockholder, member, director,
or trustee may attend meetings
revocation of authority, since what is required is only a majority
of the members. But since there was no valid delegation of the and cast their votes:
authority of the power to amend the by-laws, then there can be (f) The directors' or trustees'
revocation to speak of. qualifications, duties and
responsibilities, the guidelines
for setting the compensation of
SUMMARY OF RULES directors or trustees and
Delegation to Revocation of officers, and the maximum
the Board Delegation number of other board
representations that an
Stock Owners of two- Stockholders independent director or trustee
Corporations thirds (2/3) of owning or may have which shall, in no
outstanding capital representing case, be more than the number
stock majority of the prescribed by the Commission;
outstanding capital (k) Such other matters as may
stock shall so vote be necessary for the proper or
at a regular or convenient transaction of its
special meeting corporate affairs for the
promotion of good governance
Nonstock two-thirds (2/3) majority of the and anti-graft and corruption
Corporations of the members members shall so measures.
vote at a regular or
special meeting An arbitration agreement may
be provided in the bylaws
pursuant to Section 181 of this
For the delegation of authority of the Board of Code.
Directors/Trustees, what is required is the affirmative vote of
owners of two-thirds (2/3) of the outstanding capital stock or ⅔
of the members.
➔ There is a higher requirement for delegation of power to SUBMISSION OF BYLAWS: OLD v NEW LAW
amend the by-laws. Under the old law, a corporation may submit their by-laws within
1 month after incorporation.
Whereas, for the revocation of the delegation of authority to ➔ Before, the law allowed the filing of by-laws before or
amend the by-laws, it requires a LESSER voting requirement. It after incorporation. But if it’s done AFTER
only requires stockholders representing a MAJORITY of the incorporation, it must be done within 1 month after
outstanding capital stock, or majority of the members. receipt of the certificate of incorporation.
➔ The voting requirement for revocation of delegation is
the same as the voting requirement for amendment of Now, the new law removed the option of adopting the bylaws
the by-laws, which only requires majority. within the limited period of 1 month.
➔ Effect: You can submit bylaws anytime after
incorporation.

CHANGES UNDER THE NEW LAW CHANGES IN SYNTAX

Under the RCCP, the syntax for the word “bylaws” was also

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changed. Before, it was hyphenated. Now, it is no longer

hyphenated. Same as nonstock corporations.

TN: No more hyphen in “bylaws” and “nonstock”!

OTHER CHANGES:
Under the new law, it added modes by which directors or trustees
may attend meetings and cast their votes. The new law now
included new provisions on:
★ Modes of service
★ Modes of attendance
★ Guidelines for setting the compensation of directors or
trustees, and officers

Compensation scheme may not necessarily be just reported after

the fact, it may stated at the onset in the bylaws for purposes of
transparency and full disclosure.

The bylaws also now provide the maximum number of other

board representations of independent directors.
➔ Independent Directors have no connection with the
corporation except that they receive fees, or that they
own shares in the corporation. Other than that, they do
not participate in the running of the business. They may
have other affiliations.
➔ The law now limits the number of affiliations of the
independent directors, which in no case be more than
the number prescribed by the SEC.
➔ RATIONALE: to ensure that the independent director
is not preoccupied with his/her other affiliations, and
for him/her to carry out his/her functions efficiently.

The catch-all provision under the old law was carried over under
the new law.
Such other matters as may be necessary for the proper or convenient
transaction of its corporate affairs…
But it included the purposes for the catch-all provision - for the
promotion of:
★ good governance, and
★ anti-graft and corruption measures.

Finally, the new law added the arbitration agreement. That is just
a parallel provision on the contents of the Articles of
Incorporation:
An arbitration agreement may be provided in the bylaws pursuant
to Section 181 of this Code.
Since the Articles of Incorporation may contain an arbitration
clause, the same may be reflected in the bylaws.

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 CORPORATION LAW
ATTY. VJC | SECOND SEMESTER 2021-2022

Module 6
MEETINGS TN: the rule is different for stockholders. They have very narrow
limitations to meetings. On the other hand, directors are given
Section 48. Kinds of Meetings. - Meeting of the directors, wide discretion.
trustees, stockholders, or members may be regular or special.

Two Types of Meetings NOTICE REQUIREMENT

● Regular meetings ● There must be prior notice given to the directors.
● Special meetings ● There must be WRITTEN NOTICE sent to the
directors before the meeting.
Case Problem No. 1
Q: When do we send the notices?
A: Section 52 (RCCP) Notices of meeting must be sent out to
The Board of Directors of St Pancras, Inc. regularly meet every
every director/trustee at least 2 days prior to the meeting
5th day of the month. On March 1, 2022, the Secretary sent to the
unless another time is provided in the bylaws.
directors written notices of the meeting, which will be held at 2:00
P.M. at Aldgate East Hotel in Taipei. On March 5, 2022, the
TN: This is a uniform requirement (applicable to both regular and
directors discussed the possibility of buying a commercial building
special meetings)
in Makati, which will be the site for their new branch office, but
they did not arrive at a final decision. On April 4, 2022, the
Application to problem:
Secretary sent to the directors written notices of the next meeting,
Q: Was the prior notice complied with? Is this compliant with the
which will be held at 2:00 P.M. at Marble Arch Hotel in Cebu. On
rules?
the day of the meeting, five (5) out of the ten (10) directors failed
to attend. Of those who attended, three (3) voted in favor of
First meeting:
buying a property at Bel-Air. They then signed the Board
On the first meeting it was only March 1 2022 when the secretary
resolution, authorizing the sale.
sent the notices containing the : time and place of the meeting.
YES, considering that the law only requires a notice 2 days prior
Q: Is the resolution valid? Explain.
to the meeting, in this case the notice was sent 4 days before the
meeting.
Directors need to meet to discuss how to conduct business; if they
are presented with options or alternatives, they discuss the merits
Second Meeting
of that decision such as purchasing a building to expand their
As to the second meeting, it was only on April 4, when the
business. They need to meet to arrive at a collective decision,
secretary sent the notices which contained the time and place of
which should be contained in a board resolution.
the meeting. However, it failed to comply with the timeliness
requirement under the law. In this case there was only one day
Application to Case Problem 1:
prior notice.
In this case, there was a regular meeting conducted. They had two
regular meetings. In this case it was held every 5th day of the
month. WAIVER OF NOTICE
TN: Under Section 52, the two day prior notice may be waived
Q: Is this compliant with the legal requirements? expressly or impliedly.

ANSWER: They were able to comply with the rule that the Q: If the directors attended the meeting despite the defect in the
meeting must be held monthly, the first meeting was on March 5, notice. Would that dispense the legal requirement?
2022. They had another meeting on April 5, 2022. A: YES, that is an implied waiver of the notice
requirement.
Q: Can they decide on a different date for their meeting, like for
example every 15th of the month? QUORUM REQUIREMENT
A: YES, provided that it is stated in the bylaws. ● Quorum - number of people required to conduct
business.
Q: Can it be held quarterly or meet twice a year? ● Default legal requirement - Presence of at least majority
A: Section 52 does not provide for any in order to validly conduct business. (50%+1)
prohibition, unless the bylaws provide otherwise.
Application to the problem:
VENUE Q: In this case, only 5 out of 10 who attended the meeting, the
Here the first meeting was held abroad. other 5 failed to attend. Were they able to meet the quorum
requirement?
Q: Is there any difference as to the validity of the meeting? A: NO, the law requires that there must be at
A: None, the meeting in Cebu is as valid/effective as the one held least 6 out of 10 to conduct business, the only option for
abroad. The law gives a wide discretion to trustees to meet at the the directors is to adjourn the meeting. This is
venue of their meeting. They can meet anywhere to decide the provided under Section 52, unless the articles of
conduct of the business. incorporation or bylaws provide for a greater majority, a
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 CORPORATION LAW
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majority of the directors or trustees shall constitute a

Law (RCC) Case Example
quorum. In this case it is immaterial that 3 of the 5
directors who were present voted in favor of the sale
Section 52. xxx The Board of
because they were not able to comply with the quorum
Regular meetings of the DIrectors regularly
requirement. The resolution is not considered valid.
board of directors or meets every 5th of the
On meetings trustees of every month (valid if
Q: Is the sale totally abandoned after not meeting the quorum of Directors corporation shall be expressly provided in
requirement?
held monthly, unless the the bylaws). They can
A: They are not precluded from conducting
bylaws provide meet quarterly or twice
another meeting. The only legal consequence of the
otherwise. a year. Valid.
defects in the notice and quorum, is that it makes the
resolution of the BOD susceptible to challenge. It can
Section 52. xxx The meeting is held in
be questioned by the stockholders and other parties.
Meetings of directors or Taipei. The second
trustees of corporations meeting is in Cebu.
RATIFICATION OF CORPORATE ACT On meetings may be held anywhere Valid.
of Directors in or outside the
The general rule is that a corporation, through its board of Philippines, unless the
directors, should act in the manner and within the formalities, if bylaws provide
any, prescribed by its charter or by the general law. Thus, otherwise.
directors must act as a body in a meeting called pursuant to
the law or the corporation's bylaws, otherwise, any action taken Section 52. xxx Notice First regular
therein may be questioned by any objecting director or of regular or special meeting:
shareholder. However, the actions taken in such a meeting by meetings stating the Notice sent on March
the directors or trustees may be ratified expressly or date, time and place of 1, 2022 while meeting
impliedly. "Ratification means that the principal voluntarily the meeting must be held on March 5, 2022
adopts, confirms and gives sanction to some unauthorized sent to every director or = valid
act of its agent on its behalf. It is this voluntary choice, trustee at least two (2)
knowingly made, which amounts to a ratification of what was On notice to days prior to the Second regular
theretofore unauthorized and becomes the authorized act of the Directors scheduled meeting, meeting:
party so making the ratification. The substance of the doctrine is unless a longer time is Notice sent on April 4,
confirmation after conduct, amounting to a substitute for a prior provided in the bylaws. 2022 while meeting
authority. Ratification can be made either expressly or impliedly. A director or trustee was held on the next
Implied ratification may take various forms like silence or may waive this day = invalid unless
acquiescence, acts showing approval or adoption of the act, or requirement, either waived
acceptance and retention of benefits flowing therefrom " expressly or impliedly.
Lopez Realty, Inc. v. Spouses Tanjangco G.R. No. 154291,
November 12, 2014
Section 52. Unless the Only 5 out of 10
The corporation must follow the rules that it had set in the first
articles of incorporation directors attended the
place - Articles of Incorporation and By-Laws, or in default
or the bylaws provides meeting. They must
thereof, the Corporation Code.
for a greater majority, a adjourn the meeting.
majority of the directors
Example: If the stockholders did not object to the sale or the or trustees as stated in
Directors issued subsequent resolutions which will give effect to the articles of
the sale. For example, dispensing for the funds or the registration incorporation shall
of the property in Bel-air or has already paid the purchase price constitute a quorum to
for the property and in return received the property. Based on the transact corporate
subsequent acts, the directors have already ratified the On the
business, and every
unauthorized act of the corporation. Quorum
Requirement decision reached by at
least a majority of the
TN: With regard to the defect in the notice requirement, it can be directors or trustees
cured by waiver. The defect in quorum requirement can be cured constituting a quorum,
by ratification. except for the election
of officers which shall
DEFECT IN NOTICE DEFECT IN QUORUM require the vote of a
REQUIREMENT REQUIREMENT majority of all the
members of the board,
Cured by waiver Cured by ratification shall be valid as a
corporate act.xxx
Summary of Case Problem 1:

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Q: Why is there a separate provision for stockholders meeting?
Why did the law not provide Rules of Procedure for both directors
and stockholders just the same?
A: There are instances where the resolution of the BOD is not
enough to make a corporate act valid; some might require the
concurrence of stockholders, such as:
1. The amendment of Articles of Incorporation under
Section 15 which requires the approval of BOD and the
concurrence of stockholders representing at least ⅔ of
the outstanding capital stock.
2. WIth regards to extension or shortening of the corporate
term, there must be ratification in the meeting called for
that purpose by stockholders owning ⅔ of the
outstanding capital stock.
In most cases, it requires ⅔ of the outstanding capital stock.
not preclude them from discussing other matters in that meeting.
Agenda of Regular Stockholders’ Meetings
[ANNUAL STOCKHOLDERS’ MEETING]
Section 49. Regular and Special Meetings of Stockholders or
Members. - Regular meetings of stockholders or members shall
be held annually on a date fixed in the bylaws, or if not so 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,
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:

Instances wherein concurrence of stockholder/members (a) The minutes of the most recent regular meeting which
required: shall include, among others:
1. increase or decrease of capital stock (Sec 37) (i) A description of the voting and the vote
2. creating bonded indebtedness (Sec 37) tabulation procedures used in the previous
3. denial of pre-emptive right (Sec 38) meetings;
4. power to sell all or “substantially all” of corporate assets (Sec (ii) A description of the opportunity given to
39) stockholders or members to ask questions and
5. investing funds in another corporation (Sec 41) record of the question s asked and answers
6. declaring stock dividends (Sec 42) given;
7. entering into a management contract, if there are substantial (iii) The matters discussed and resolutions reached;
shareholdings in the managing corporation (Sec 43) (iv) A record of the voting results for each agenda
item;
INSTANCES WHEN STOCKHOLDERS ACT (v) A list of the director or trustees, officers and
INDEPENDENTLY FROM THE BOARD: stockholders or members who attended the
1. Delegation of the power to amend or repeal bylaws (Sec meeting; and
47). (vi) Such other items that the Commission may
This can be done by stockholders owning at least 2/3 of the require in the interest of good corporate
OCS or the members. This does not require action by the governance and protection of minority
BOD. stockholders;

Q: Does this require action of the BOD? (b) A members' list for nonstock corporations and, for
A: It does not since they are stockholders delegating stock corporations, material information on the current
the power to the board of directors. It’s only the stockholders stockholders, and their voting rights;
who are required to act in this matter. Under Section 27, the (c) A detailed, descriptive, balanced and comprehensible
law requires a resolution by the stockholders and members assessment of the corporation's performance, which
for the purpose of delegating the power to amend/repeal shall include information on any material change in the
bylaws to the BOD. corporation's business strategy, and other affairs;
(d) A financial report for the preceding year, which shall
2. Granting compensation to directors or trustees (Sec 29). include financial statements duly signed and certified in
GR: Directors are not paid compensation accordance wit this Code and the rules and the
XPN: Reasonable per diem or as provided by bylaws, or Commission may prescribe, a statement on the adequacy
stockholders representing at least majority of the outstanding of the corporation's internal controls or risk
capital stock or members grant compensation to directors or management systems, and a statement of all external
trustees. During the meeting for grant of compensation, the audit and non-audit fees;
directors do not participate since it is the stockholders who fix the (e) An explanation of the dividend policy and the fact of
compensation of directors. Stockholders act payment of dividends or the reasons for nonpayment
INDEPENDENTLY from the BOD. thereof;
(f) Director or trustee profiles which shall include, among
Main Agenda of Regular Stockholders Meeting: The term of others, their qualifications and relevant experience,
office of a member of a BOD is one year, the stockholders who length of service in the corporation, trainings and
elect the BOD also need to meet every year to elect their directors. continuing education attended, and their board
This is the agenda of the regular stockholder’s meeting. It does representation in other corporations;
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(g) A director or trustee attendance report, indicating the
attendance of 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 ir seeking election
or reelection.
Discussion:
A. Minutes - In the spirit of full transparency, it is important to
give the stockholders a copy of these minutes. These are kept by
the corporate secretary.
B. Members' list for nonstock corporations and, for stock
corporations, material information on the current
stockholders - The corporators are being presented with the
stockholders who own an interest in the corporation. In order for
them to know the shareholdings of their fellow stockholders.
C. Assessment of the corporation's performance - To make an
assurance to the stockholders that the business is doing well. It
informs them of the progress of the business, the strategies and
prospects for growth of the business.
D. Financial Report for the preceding year - the finances must be
presented to the stockholders. For transparency, it must also
include a statement on the adequacy of the corporation's internal
controls or risk management systems to assure the accuracy of the
data. It must be verified by the internal audit of the corporation.
E. Dividend Policy
Payment of dividends and reasons therefore. The main purpose is
to share in the profits and to share in the distribution of assets
upon liquidation. That constitutes the proprietary rights of the
stockholders. These pieces of information regarding corporate
performance and corporation can be found in a document called
the annual report. It reflects the matters covered in regular
stockholder meetings. It is available online.
F. Director or trustee profiles - Their qualifications, relevant
experience, length of service, etc. This is to assure the
stockholders that the corporation is in good hands and are
handled by competent individuals
G. Director or Trustee Attendance
H. Appraisals and Performance
I. Director or Trustee Compensation Report
As for compensation, the compensation scheme of a corporation
may be indicated in the by-laws of the corporation. There must be
constant updates in any changes of compensation of directors.
That is why disclosure of the salaries of directors and trustees, to
ensure there is no excessive salary. For corporations vested with
public interest, they have to make a report to the SEC. It is also
part in the regular stockholders meeting.
Abellano ◦ Adolfo ◦ Bajar ◦ Cabeje ◦ Caceres ◦ Capuyan ◦ Cañales ◦ Daulo ◦ Delicano ◦ Dino ◦ Gabato ◦ Leopardas ◦ Ngo ◦ Panelo ◦ Prisco ◦ Reyes ◦ Velez ◦ Villagonzalo
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J. Director’s disclosure on self-dealings and related party
transactions
Sec 31 - Self-Dealing Directors or contracts entered into by two
corporations where there is an interlocking director. If these are
uncovered, such must be reported to the corporate secretary and
there must be full disclosure of adverse interest to the
stockholders for purposes of transparency..
● IOW if there is an adverse interest, it is not enough that
there is ratification, there must be full disclosure. So to
comply with this provision, this must be included in the
matters to be discussed in the regular stockholders’
meeting
K. Profiles of directors seeking election/re-election
NOTE: While there are 11 items stated under Sec 49 but this
is not an exclusive list. A director, trustee, stockholder, or
member may propose any other matter for inclusion in the agenda
at may regular meeting of stockholders or members. (Sec 49).
Case Problem No. 2: Stockholders’ Regular Meeting
Enfield Resort Co., Inc. has its principal office in Lapu-Lapu City.
Its Board of Directors scheduled the annual stockholders’ meeting
every 15th day of May. The Board agreed to conduct the
stockholders’ meeting at Islington Hotel in Mandaue City. On
April 30, 2021, written notices were sent to the stockholders
through their official e-mail accounts as allowed in the company
bylaws. They were informed that the meeting will start at 2:00
P.M. and that the agenda will include the expansion of the resort.
Attached to the e-mail are pdf copies of the agenda, proxy form,
and relevant guidelines. At the end of the meeting, one of the
stockholders, Jose, a septuagenarian, remarked that the meeting
was improperly called since he had not read the e-mail, containing
the notice of the meeting. Nevertheless, he was able to vote in
favor of the resort expansion.
Is the resort expansion a valid corporate act? Explain.
Application to the problem?:
Here, we are dealing with regular stockholder’s meeting.
First question: When is the regular stockholder’s meeting held?
REGULAR MEETINGS OF STOCKHOLDERS
Section 49. Regular and Special Meetings of Stockholders or
Members. - Regular meetings of stockholders or members shall
be held annually on a date fixed in the bylaws, or if not so fixed in
Report the bylaws, or if not so fixed, on any date After April 15 of every
Reports year as determined by the board of directors or trustees.
Q: For a regular stockholders meeting be held twice in a
year?
A: It must be held annually according to
the date fixed in the bylaws. IOW, it must be done
once a year
In the alternative, if it’s not fixed in the bylaws, it must be on any
date after April 15. IT does not provide for any other possibilities.
If it is otherwise provided in the bylaws that it can be quarterly or
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monthly, unlike director’s meetings. Therefore, for regular
meetings of stockholders, it must only be done once a year.
WHEN? Any date fixed by the bylaws, or if not fixed then any
date after April 15
Application: In this case, there is no date fixed in the bylaws, so
the meeting must be after April 15. Here, the meeting date was on
May 15, which is after April 15. So the time for the meeting is
compliant with the law.
Q: What is the reason that when the law provides no date, it should be a date
after April 15?
A: Because April 15 is the last day of filing your
Annual Tax Return. So it is for purposes of convenience.
Since one of the matters covered in the stockholder’s
regular meeting is the presentation of financial
reports/statements, this is in order to present not just an
aggregated data or process data. To make financial data
understandable and accurate, it would be better to
present financial reports and statements after tax reports
have been filed. SInce the reports are also based on the
tax returns, then for there to be no discrepancies
between what was reported as taxes or income of the
corporation, the meeting should be held after
submission of the tax return.
Q: Where should the regular stockholders’ meeting be held?
GR: Under Section 50, the law is clear that the meeting shall be
held in the principal office of the corporation as set forth in
the AOI. This is to avoid any inconvenience to stockholders or
members.
EXC: Only when it is not practicable, the meeting can be held
within the city or municipality of where the principal office
is located. The option provided by law is still limited.
Application to the problem: In our case, the principal office is
in Lapu-Lapu City, but the meeting was held in Mandaue
City, this is clearly violative of Section 50. Also there are no
circumstances that show that it is not practicable to have the
meeting in Lapu-Lapu City. Even if it was not practicable, the
alternative is to have the regular stockholders meeting in the same
city.
VENUE OF MEETINGS OF STOCKHOLDERS
Section 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 of municipality in
Metro Manila, Metro Cebu, Metro Davao, and other Metropolitan
areas shall, for purposes of this section, be considered a city or
municipality.
TIMELINESS OF THE NOTICE
SEC. 49. Regular and Special Meetings of Stockholders or
Members. – …xxx written notice of regular meetings shall be sent
to all stockholders or members of record at least twenty-one (21)
Abellano ◦ Adolfo ◦ Bajar ◦ Cabeje ◦ Caceres ◦ Capuyan ◦ Cañales ◦ Daulo ◦ Delicano ◦ Dino ◦ Gabato ◦ Leopardas ◦ Ngo ◦ Panelo ◦ Prisco ◦ Reyes ◦ Velez ◦ Villagonzalo
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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
Application to the problem. In this case, the regular stockholders
meeting was scheduled on May 15, 2021, so you count 15 days
from May 15, 2021. In this case the notice was sent 16 days before
the regular meeting. They were not able to comply with the at least
21 days prior notice of the meeting.
At least 21 days = at least 3 weeks
MODE OF SERVICE FOR NOTICE
SEC. 49. Regular and Special Meetings of Stockholders or
Members. – …xxx 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.
Q: Is that allowed?
A: Yes, the RCC incorporated this provision to
acknowledge the importance of technology
Q: Can it be through text message?
A: Yes, in such other manner as the
Commission will allow under its guidelines
CONTENTS OF A MINUTES OF MEETING
Section 50. 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.
A proxy form which shall be submitted to the corporate secretary
within a reasonable time prior to the meeting; 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 xxx
●
The stockholders must be guided as to the procedure
for attending the meeting via video or audio
conferencing.
TN: Notice must contain the relevant guidelines on how the
meeting will be conducted
PROXY FORM: Stockholders may have someone attend on
their behalf, the person must be indicated in the proxy form.
The proxy form is a written authority which allows the person to
attend and vote in the meeting.
● A quorum is necessary before a corporation can
conduct business. The corporate secretary must
encourage the SH to be present or fill-up their proxies
to fill the 50%+1, quorum requirement.
● Proxy form must be attached to the notice.
OTHER REQUIREMENTS
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SEC MEMORANDUM CIRCULAR NO. 6 Series of 2020 Section 49. April 30, 2021 -
Written notice
Section 6 - ..xx..
xxx Provided, That written sent
The notice of meetings shall include the following information:
notice of regular meetings
shall be sent to all May 15, 2021 -
a. The date, time and place of the meeting;
stockholders or members of annual
b. The agenda of the meeting;
record at least twenty-one (21) stockholders’
c. All pertinent materials for discussion which shall be numbered
On the days prior to the meeting, meeting
and marked in Timeliness of unless a different period is
such manner that the director or trustee can easily follow and Notices required in the bylaws, law, or Notice must be
participate in the sent at least 21
regulation.
meeting; days prior to the
d. That a Director or trustee may participate via remote meeting. Notice
communication; was sent only 16
e. Contact information of the Corporate Secretary or office staff days before.
whom the director Violative/Invali
or trustee may communicate; d.
f. When the meeting is for the election of directors or trustees or
officers, the Notice was sent
requirements and procedure for nomination and election; Section 49. xxx Provided, via e-mail. Valid
g. The fact that there will be a visual and/or audio recording of further, That written notice of
the meeting; and Written notices
regular meetings may be sent
h. Other instructions to facilitate participation in the meeting may now be sent
to all stockholders or
through remote through
members of record through
communications. electronic mail or such other electronic mails
manner as the Commission for reasons of
Summary of Case Problem 2: shall allow under its expediency.
Mode of guidelines.
Law (RCC) Case Example Sending
Provided, further, That Q: Can it be
Section 49. Regular meetings Annual written notice of regular through text
of stockholders or members stockholders’ meetings may be sent to all message?
shall be held annually on a meeting every stockholders or members of A: Yes, provided
On Date of
date fixed in the bylaws, or if 15th of May. This record through electronic such manner is
Stockholders’ allowed in the
Meeting not so fixed, on any date after is valid. mail or such other manner as
April 15 of every year as the Commission shall allow guidelines of the
determined by the board of under its guidelines. Commission.
directors or trustees:

Section 50. Stockholders' or Office was in E-mail

members' meetings, whether Lapu-Lapu City Section 50. xxx A proxy form attachments
regular or special, shall be held but the meeting which shall be submitted to included PDF
in the principal office of the was held in the corporate secretary within copy of agenda,
corporation as set forth in the Mandaue City. a reasonable time prior to the proxy form, and
articles of incorporation, or, if Violative/Invali meeting; When attendance, relevant
not practicable, in the city or d. On Notice of participation, and voting are guidelines. Valid.
On Venue of municipality where the Meetings of allowed by remote
Stockholders’ principal office of the Stockholders communication or in absentia,
Meeting corporation is located: the requirements and
Provided, That any city or procedures to be followed
municipality in Metro Manila, when a stockholder or
Metro Cebu, Metro Davao, member elects either option;
and other Metropolitan areas and xxx
shall, for purposes of this
section, be considered a city
or municipality.

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- Within a reasonable time before the meeting

Meeting was
(6) The SH must be informed that the meeting is recorded and
Section 50. xxx All improperly held
for future purposes.
proceedings and any business in a city, different
- The fact of an audio or visual recording must be
transacted at a meeting of the from the principal
disclosed to stockholders, for Data Privacy Law
stockholders or members, if office location
compliance. They must be informed that they are being
within the powers or authority (Sec 50).
recorded and that purpose for recording event is for
of the corporation, shall be future references.
valid even if the meeting is Notice was sent
improperly held or called: 15 days prior to
meeting while
MEETING IMPROPERLY CALLED
Provided, (1) That all the
stockholders or members of requirement is 21 SECTION 50. All proceedings and any business transacted at a
the corporation are present or days (Sec 49). meeting of the stockholders or members, if within the powers or
duly represented at the authority of the corporation, shall be valid even if the meeting is
meeting and (2) not one of However, Act improperly held or called: Provided, That all the stockholders or
them expressly states at the can be valid members of the corporation are present or duly represented at
beginning of the meeting that despite the meeting and not one of them expressly states at the
the purpose of Improper
their beginning of the meeting that the purpose of their attendance is
attendance is to object to theMeeting if: to object to the transaction of any business because the meeting
transaction of any business 1. All is not lawfully called or convened.
because the meeting is not stockholders are
lawfully called or convened. present (proxy is Other defects in the problem: notice requirement (timeliness) and
equivalent to venue (not held in the principal office of the corporation).
In the case: “At the end of presence to • Applicable provision: “All proceedings and any business
the meeting, one of the constitute transacted at a meeting of the stockholders or members, if within
stockholders, Jose, a quorum); and the powers or authority of the corporation, shall be valid even if the
septuagenarian, remarked that meeting is improperly held or called”
On Meetings
Improperly the meeting was improperly 2. Not one of • In this case, the meeting was held in a city different from
Called called since he had not read them expressly where the principal place of business was located. It was
the e-mail, containing the states at the also improperly called because the notice was sent not at
notice of the meeting. beginning of the least 21 days; here, it was sent 15 days prior to the
Nevertheless he was able to meeting that the meeting.
vote in favor of the resort purpose of their o These notwithstanding, the meeting can still be
expansion.” attendance is to valid provided that two conditions are met.
object to the
transaction of any For the meeting to be valid, two conditions must be present:
business because 1. All the stockholders or members of the corporation are
the meeting is not present or duly represented at the meeting and
lawfully called or 2. Not one of them expressly states at the beginning of the
convened meeting that the purpose of their attendance is to object
to the transaction of any business (either because it is not
Here, Jose lawfully called or it is improperly convened).
remarked that the
meeting was If all of the requirements are met, then the meeting is valid. It
improperly called does not matter whether you attended the meeting by proxy or by
since he had not remote communication.
read the email. He
voted in favor of Application to the problem:
resort expansion. - In regards to the first condition, all stockholders are
Objection was present. Those who appear by proxy are considered to
made at end of be present to constitute a quorum. (It doesn’t matter
meeting whether you physically attended the meeting or if you
(afterthought). attended the meeting by proxy; you are considered
The meeting can present.)
be validated. - Second, there is no objection.

OTHER RELEVANT GUIDELINES: SEC Application: In this case Jose remarked that the meeting was improperly called
MEMORANDUM NO. 6 2020 as he has not yet read the notice. Nevertheless, he was able to vote for the resort
expansion. How will it affect the meeting?
(4) The secretary is the point person; so the secretary must be
notified of your attendance or if there is a proxy or remote IT DOES NOT. The condition provided by Section 50
communication. is that any objection must be made at the beginning of

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the meeting, the stockholder must express the
purpose for his attendance - which is for the sole
purpose of objecting to the meeting. Here, it was not
the only objective of Jose in joining the meeting. In fact,
he voted for the expansion, his objection was done after
the meeting (like an afterthought). The second
condition is not violated.
Since both requirements are present, the rule is that all
business proceedings are validated.
LACK OF NOTICE OF REGULAR
STOCKHOLDERS MEETING
For regular meetings, you would know when the corporation
would regularly meet.
Q: The law requires 21-day notice. Is the meeting valid even
without prior notice to the stockholders or there is delay?
Lack of Notice of Regular Stockholders' Meeting
As shown in the Affidavit dated October 13, 2011 of San Juan,
NADECOR's messenger, he mailed the notices for the August 15,
2011 Annual Stockholders Meeting (ASM) to the petitioners'
address at the Ortigas Post Office on August 11. 2011, four days
prior to the ASM. This was confirmed by Gatmaitan in his
Affidavit dated November 21,2011. It must be noted that under
Article I, Section 3 of NADECOR's Amended By-Laws, what is
required is the mailing out of notices by registered mail at least
three days before the ASM: xxx
The shorter notice of three days instead of two weeks for
stockholders' regular or special meeting is clearly allowed under
Section 50 of the Corporation Code, to wit:
Ricafort v. Dicdican G.R. Nos. 202647-50, March 9, 2016
Facts: In this case, it was stated in the bylaws of the corporation
that the regular annual stockholder’s meeting will be held on the
3rd Monday of August. In the next stockholder’s meeting, some
of the SHs were not able to attend. They complained that they
were not given notice to the meeting. Such notice was given a day
late. Here, the court looked into the provisions of the bylaws.
The court looked into the bylaws. What is required there is the
mailing out of notices by registered mail at least 3 days before the
meeting. This is less than the 21 day notice under Sec. 50 [old law
requires 2 weeks]. Yet, the SC honored this agreement in the bylaws
since Sec. 50 allows it (“unless otherwise provided in the bylaws
of the corporation.”)
Lack of Notice of Regular Stockholders' Meeting
By failing to file their complaint below seasonably, the petitioners
must be deemed to have waived their right to notice of the August
15, 2011 ASM. Section 50 provides in effect that failure to give
notice of the regular or annual meetings, when the date thereof is
fixed in the by-laws, as in Section 1, Article 1 of the Amended By-
Laws of NADECOR, which is "at twelve thirty P.M., on the
THIRD MONDAY OF AUGUST in each year, if not a legal
Abellano ◦ Adolfo ◦ Bajar ◦ Cabeje ◦ Caceres ◦ Capuyan ◦ Cañales ◦ Daulo ◦ Delicano ◦ Dino ◦ Gabato ◦ Leopardas ◦ Ngo ◦ Panelo ◦ Prisco ◦ Reyes ◦ Velez ◦ Villagonzalo
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holiday, and if a legal holiday, then on the first day following
which is not a legal holiday," will not affect the validity of the
ASM or the proceedings therein. Thus, it is also provided in
Section 3, Article 1 of NADECOR's Amended By-Laws that:
Section 3. × xx. Failure to give notice of annual meeting, or any
irregularity in such notice, shall not affect the validity of such
annual meeting or of any proceedings at such meeting (other than
proceedings of which special notice is required by law or by these
By-laws)
Ricafort v. Dicdican G.R. Nos. 202647-50, March 9, 2016
This case is consistent with Section 50, you cannot just abandon
what was discussed in a regular stockholders’ meeting just because
of a notice defect, provided that there are reasons. In this case
there was already a prior notification in the bylaws, there is no
excuse for the stockholders not to attend the meeting.
Q: Would it be prudent to state the schedule of the regular meetings in the
bylaws beforehand?
A: Some would say it is prudent so that the stockholders are
already informed, but in this case, it's not a particular date. It even
gives conditions, such as when the date falls on a legal holiday.
Some would also advise that the day of the meeting is to be
decided by the BOD – “ at any date after April 15”.
COMPLIANCE WITH NOTICE REQUIREMENT
Q: Should the notice be actually received by the stockholders?
A: No, it only requires sending or mailing of notice of a
stockholders’ meeting to the stockholders (Guy v. Guy). Sending
or mailing is different from filing or service under the Rules of
Court. To send means to deposit in the mail or to deliver for
transmission by any other usual means of communication with
postage or any other means provided for and properly addressed.
Sending is just depositing the mail matter in the post office with
postage prepaid or by delivering it for transmission via private
courier. The moment you dispatch or deposit the mail matter in
the post office is already compliant with the law. The fact that it
was received by addressee means there was proper sending. The
Supreme Court is telling us that the fact that it was received by the
addressee means that there was proper sending.
Q: Can we also say the fact that it was NOT received by addressee means
there is no proper sending?
A: No. They are only mandated to notify stockholders by
depositing in the mail the notice of the stockholders' special
meeting. Proof of actual receipt of notice is not necessary. Sending
to stockholders is enough for prior notice.
Take Note!
With regard to prior notice, it is enough that the corporation has
sent or dispatched its notices to the stockholders. In any case, the
fact that the stockholders were informed with the bylaws should
have already apprised them. Apparently, the notice to the
stockholders just for compliance.
Compliance with Notice Requirement
The provisions only require the sending/mailing of the
notice of a stockholders' meeting to the stockholders of the
corporation. Sending/mailing is different from filing or service
under the Rules of Court. Had the lawmakers intended to include
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the stockholder's receipt of the notice, they would have clearly for the purpose, xxx A special meeting of the stockholders or
reflected such requirement in the law. Absent that requirement, members for the purpose of removing any director or trustee
the word "send" should be understood in its plain meaning: must be called by the secretary on order of the president, xxx
"Send" means to deposit in the mail or deliver for
transmission by any other usual means of communication Application to the problem: In this case, the president was
with postage or cost of transmission provided for and reluctant to initiate the meeting because the annual stockholders
properly addressed and in the case of an instrument to an meeting was already conducted.
address specified thereon or otherwise agreed, or if there be Q: Is this a valid apprehension of the President?
none, to any address reasonable under the circumstances.
The receipt of any writing or notice within the time at which it A: No since the removal of a director can be done in another
would have arrived if properly sent has the effect of a proper forum through a special meeting. The President can simply order
sending. the Secretary to call for a special meeting for the removal of the
director.
Clearly, respondents are only mandated to notify petitioner
by depositing in the mail the notice of the stockholders' Section 49. Special meetings of stockholders or members shall
special meeting, with postage or cost of transmission be held at any time deemed necessary or as provided in the bylaws:
provided and the name and address of the stockholder Provided, however, That at least one (1) week written notice shall
properly specified. be sent to all stockholders or members, unless a different period
Guy v. Guy, G.R. No. 184068, April 19, 2016 is provided in the bylaws, law or regulation.
Case Problem No. 3: Stockholders' Special Meeting
On Venue: Here, the President ordered the Secretary to send
The stockholders of Fulham, Inc. wanted to remove Marcelo
written notices to the stockholders, informing them of the
from the Board of Directors. They approached the President - the
intention to remove a director at 2PM in the principal office. This
person authorized in the bylaws to call a meeting, but he was
complies with the venue for the meeting of stockholders.
reluctant to initiate a meeting as the annual stockholders' meeting
was already concluded a month ago. After negotiations, the
On Notice: The notices were sent three days before the meeting.
President ordered the Secretary to send written notices to
The law requires at least one week's written notice. Here, it
stockholders, informing them of the intention to remove a
was only a 3 day prior notice. There was no compliance with the
director, and that the meeting will be held at 2:00 P.M. at the
notice requirement for a special meeting.
principal office. The notices were sent three (3) days before the
scheduled meeting. On the day of the meeting, stockholders, who
owned half of the outstanding capital stock, appeared during the Meeting Attendees Notice Requirement
meeting, while the other half attended the meeting by proxy. After
verification of the proxies, the stockholders unanimously voted in Regular at least 21 days prior to the
favor of the removal of Marcelo. Stockholders meeting (Sec 49)
/ Members
Is the removal of Marcelo valid? Explain. Special at least 1 week written notice
prior to the meeting (Sec 49)
GR: A director may be removed with or without cause
XPN: If he is a minority director. Any Directors / 2 days written notice (Sec 52)
Meeting Trustees
Let’s assume Marcelo is not a minority director in our problem.
Q: When can we remove a director?
A: Elections are conducted in REGULAR
stockholders’ meetings. Two requirements which make the meeting VALID even if
meeting was improperly called:
Q: Do you have to wait for a regular meeting next year to remove 1. That all the stockholders or members of the
a director? corporation are present or duly represented at the
A: No. Refer to Section 27 of the RCC. This meeting and
would require action from the outstanding capital 2. Not one of them expressly states at the beginning of
stockholders. the meeting that the purpose of their attendance is
A removal of a director can take place at a to object to the transaction of any business because
regular or special meeting called for the purpose. the meeting is not lawfully called or convened.

Application: All of the stockholders attended. IT is valid even if

REMOVAL OF DIRECTOR the other half of stockholders attended by PROXY, since this is
valid and you are deemed present for quorum requirement
Section 27. Any director or trustee of a corporation mav be
purposes. Both conditions are complied with, so the removal of
removed from office bv a vote of the stockholders holding or
Marclo is valid, notwithstanding the noncompliance of the notice
representing at least two-thirds (2/3) of the outstanding capital
requirement.
stock, xxx Provided, That such removal shall take place either at
a regular meeting of the corporation or at a special meeting called
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Q: If the Secretary was the one authorized to CALL the meeting,

stockholder) Resolution
who shall PRESIDE the special meeting?

WHO SHALL PRESIDE THE MEETING

REQUIREMENTS FOR PROXY VOTING
GR: It is the Chair of the Board who shall preside at the meetings
of the BOD and even the stockholders. Section 57. Manner of Voting; Proxies. - Stockholders and
XPN: In the absence of a Chair, the President will preside over members may vote in person or proxy in all meetings of
the meetings. stockholders or members

The BOD is composed of regular members and independent When so authorized in the bylaws or by a majority of the board
directors. Some directors hold executive positions (President, of directors, the stockholders or members of corporations may
Secretary, Treasurer). also vote through remote communication or in absentia:
Provided, That the votes are received before the corporation
finishes the tally of votes.
Section 53. Who Shall Preside at Meetings. - The chairman or, in
his absence, the president shall preside at all meetings of the
A stockholder or member who participates through remote
directors or trustees as well as of the stockholders or members,
communication or in absentia shall be deemed present for
unless the bylaws provide otherwise.
purposes of quorum.
Q: Why are stockholders encouraged to execute proxies, in The corporation shall establish the appropriate requirements and
case they are not able to attend? procedures for voting through remote communication and in
● Convenience - to allow stockholders to be present and absentia, taking into account the company's scale, number of
protect their interest in the corporation, even if they are shareholders or members, structure and other factors consistent
away with the basic right of corporate suffrage.
● Conduct Business - it allows the corporation to
comply with quorum requirements Proxies shall be in writing, signed and filed, by the stockholder or
● Voting Control - If there is a certain resolution or act member, in any form authorized in the bylaws and received by the
which must be passed by the stockholders, these must corporate secretary within a reasonable time before the scheduled
be included in the agenda. To ensure that the measures meeting. Unless otherwise provided in the proxy form, it shall be
will be passed by the corporation, a group of valid only for the meeting for which it is intended. No proxy shall
stockholders may invite other stockholders to align their be valid and effective for a period longer than five (5) years at any
votes and have a greater voting power in the meeting. one time. Manner of Voting; Proxies. - Stockholders and members
○ The stockholders may appoint their fellow may vote in person or proxy in all meetings of stockholders or
stockholders as proxies. Stockholders can have members
their co-stockholders attend the meeting for
and on their behalf. Here, stockholders can act When so authorized in the bylaws or by a majority of the board
as a group and have VOTING CONTROL of directors, the stockholders or members of corporations may
over actions of the corporation. also vote through remote communication or in absentia:
Provided, That the votes are received before the corporation
Q: What's the relationship between stockholder and proxy? finishes the tally of votes.
A: Relationship of agency wherein the
stockholder is the principal and the proxy is the agent. A stockholder or member who participates through remote
If the stockholder is a natural person, the stockholder will issue a communication or in absentia shall be deemed present for
power of attorney authorizing the proxy to appear, to attend the purposes of quorum.
meeting and to vote his/her shares in the corporation.
The corporation shall establish the appropriate requirements and
A corporation can become a stockholder of another procedures for voting through remote communication and in
corporation (corporate stockholder). absentia, taking into account the company's scale, number of
Q: How will it appear in the meeting? shareholders or members, structure and other factors consistent
A: The corporation must issue a Board with the basic right of corporate suffrage.
Resolution authorizing a natural person to 1) attend
meeting and 2) vote on behalf of the corporation. That Proxies shall be in writing, signed and filed, by the stockholder or
stands as a PROXY for an investing corporation. 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
If stockholder is a: How proxy is authorized: 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
Natural person In the form of power of one time.
attorney
Requirements for Proxy Voting (Sec 57):
Corporation (Corporate In the form of a Board 1. Must be in writing

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2. Authorized in the bylaws • Section 27- The stockholder can summon other
3. Received by secretary within reasonable time before the stockholders
meeting • Section 49 - The stockholder may file a petition directly
4. Signed by stockholder with the SEC.
5. It is only valid for the intended meeting (one time use
only), unless the proxy is continuing in nature
(proxy/authority shall be valid for a period longer than
that designated meeting.) Such a period should not
exceed 5 years at any one time.

Even if the stockholder already executed a proxy, that does not

prevent a stockholder from attending the meeting. The Summary of Case Problem 3:
stockholder has already effectively revoked proxy by his mere
attendance. This is called an implied revocation of the proxy. Law (RCC) Case Example
Other forms of revocation of proxy: Giving notice of
revocation of the proxy to the secretary, verbal or written notice. On Date of Section 49. xxx Special Annual
Stockholders’ meetings of stockholders’
It can be an implied or express revocation of proxy.
Special stockholders or meeting every
Meeting members shall be held at 15th of May.
Application to problem: Here the president was reluctant at first
to call the meeting, but the President was convinced to order the any time deemed Removal can be
secretary to conduct the meeting. What if the President refused to necessary or as in a special
call the meeting for the removal of the director? Or the President provided in the meeting. Valid.
may be a friend of the director who was to be removed and the bylaws:
President refused to call the meeting. What are the remedies of
the stockholder? On Notice of Section 49. That at least Notices were sent
Special one (1) week written 3 days before
Meetings for notice shall be sent to all scheduled notice.
Unjust Refusal to Call a Meeting Stockholders
Section 49. xxx Whenever for any cause, there is no person stockholders or Invalid.
authorized or the person authorized unjustly refuses to call a members, unless a Meeting
meeting, the Commission, upon petition of a stockholder or different period is improperly
member on a showing of good cause therefor, may issue an order provided in the bylaws, called.
directing the petitioning stockholder or member to call a meeting law or regulation. xxx
of the corporation by giving proper notice required by this Code
On Meetings Even if notice
or the bylaws. The petitioning stockholder or member shall Improperly
preside thereat until at least a majority of the stockholders or Section 50. xxx A was invalid and
Called proceeding can be valid meeting was
members present have chosen from among themselves, a
presiding officer. xxx even if the meeting is improperly called,
improperly held or it can still be
called. Provided: That all validated (Sec
The remedy is for the petitioning stockholder to apply or file a
the stockholders or 50).
petition before th eSEC to issue an order directing him/her to call
members of the
a meeting by giving proper notice.
corporation are present Stockholders who
or duly represented at owned half of the
PRESIDING OFFICER OF A MEETING CALLED BY
the meeting and not one outstanding
SEC UPON UNJUST REFUSAL: It is the petitioning capital stock were
of them expressly states
stockholder who needs to file a petition. The SEC shall issue an
at the beginning of the present, while the
order to the petitioning stockholder, the presiding officer will be
meeting that the other half
the petitioning stockholder, until at least the majority of the
purpose of their attended via
stockholders shall have chosen from among themselves the
attendance is to object proxy. All
presiding officer.
to the transaction of any stockholders were
business because the present. Meeting
NOTE: The same remedy is found in Section 27.
meeting is not lawfully can be
called or convened. validated.
Under section 27, if there is unjust refusal to call a special meeting,
the stockholder, signing the demand, may call for the meeting by
directly addressing the stockholders or members. (Direct remedy.
Stockholder will communicate with his fellow stockholders.) This
is a different remedy but this does not preclude the application of
Section 49.

There are two options:

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On Unjust
being the persons in charge with the conduct of the
If President did
Refusal to business or corporation.
Section 49. xxx not call meeting,
Call a Whenever for any cause, stockholders have
Meeting 4. Must be Held in Proper Place
there is no person a remedy.
GR: For stockholder’s meeting, the venue is at the principal
authorized or the person office of the corporation as stated in the Articles of
authorized unjustly Stockholder can Incorporation.
refuses to call a meeting, file a petition to XPN: It can be held in the city or municipality where the
the Commission, upon the SEC. SEC principal office is located if the principal office is not available
petition of a stockholder issues an order or a practicable venue.
or member on a showing directing
of good cause therefor, petitioning 5. Quorum and Voting Requirement Met
may issue an order stockholder to
Case Problem No. 4
directing the petitioning call a meeting of Gregorio is the President of Stratford Inc., a nonstock
stockholder or member the corporation corporation with principal place of business in Cebu. The
to call a meeting of the until the presiding approved bylaws provide that:
corporation by giving officer is chosen
proper notice required by majority
(1) the Secretary is authorized to call a meeting;
by this Code or the stockholders (Sec
bylaws. The petitioning 49).
(2) notice of meetings may be sent through electronic mail, while
stockholder or member
meetings can be conducted through videoconferencing; and
shall preside thereat Another option is
until at least a majority stockholder can
of the stockholders or summon other (3) the presence of three out of the ten trustees is necessary to
members present have stockholders (Sec transact corporate business.
chosen from among 27)
themselves, a presiding On March 24, 2022, the Secretary received an invitation from
officer. xxx Shepherd’s Bush Foundation to conduct a joint fundraising
campaign, which will be held in Stratford’s Recreation Center.
On March 25, 2022, the Secretary sent written notices to the
trustees through their official e-mail accounts, informing them
Requisites for a Valid Stockholders' Meeting that a meeting will be held via Zoom conference at 2:00 P.M. on
March 31, 2022, to discuss the matter. The three trustees, who
1. It must be held at the stated date and the appointed time or at joined the conference call, agreed to waive the rental fees for
a reasonable time thereafter. the use of its recreation center.
2. There must be previous notice.
3. It must be called by the proper person. Is the waiver of the rental fees a valid corporate act? Explain
4. It must be held in the proper place.
5. The quorum and the voting requirements must be met. In this case there was an event which led to the calling of a
special meeting. It was on March 24 when the Secretary received
an invitation to conduct a joint fund-raising campaign.
Discussion:
1. Held at stated date and time or at a reasonable time thereafter Q: Do they have to wait for another regular meeting?
● Reasonable time meaning it allows for the corporation A: No. Section 52 provides that special meetings can be held at
to postpone the meeting at a reasonable time. The law any time upon the call of the President or those authorized in the
provides that for postponement, there must be prior bylaws. In this case, after receiving the notice on March 25, one
notice of at least 2 weeks. day after, the Secretary immediately sent written notices to the
2. Previous Notice trustees, informing them that the meeting will be held via Zoom
● Notice must be in the form required in the bylaws and to discuss the matter. Since this is a meeting specifically intended
must be given within the prescribe time provided by law to address this particular issue, then it must follow the procedures
or provided under the bylaws (because there’s a for special meetings.
provision which also gives preference to the preference
of the corporation.) Q: In this case, can the trustees hold the meeting via Zoom
● In the case of Ricafort, the notice requirement was conference?
shortened. This was valid since it was stated in the A: Even for directors or trustees, they are given a wide discretion
bylaws. to choose not just the place of their meetings (here in the PH or
abroad); they can also conduct their meetings via video
3. Called by Proper Person conferencing to give them reasonable opportunity to participate
● The person authorized to call the meeting is normally in the meeting, and to ensure that there will be no impediment for
stated in the bylaws. However, if bylaws are silent, the the directors in conducting meetings.
proper person to call a meeting is the Board of Directors
SPECIAL MEETING OF TRUSTEE
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Section 52. Directors or trustees who cannot physically attend or
vote at board meetings can participate and vote through remote
communication such as videoconferencing, teleconferencing, or
other alternative modes of communication that allow them
reasonable opportunities to participate. Directors or trustees
cannot attend or vote by proxy at board meetings.
TAKE NOTE: Directors or trustees cannot attend or vote by
proxy at board meetings. Unlike the stockholders, it is important
for directors or trustees to be personally present in the meeting,
even if it is through remote communication. Remember, your
directors were elected by the stockholders. They were elected by
virtue of their personal qualifications; they would not have been
elected if they were not the ones chosen by the members. So, it is
important for the directors or trustees to appear in person or in
the video teleconferencing themselves.
SEC Memorandum Circular No. 6-2020
Section 4. Participation in Board Meetings Through Remote
Communication; Internal Procedures. - Directors or trustees who
cannot physically attend or vote at board meetings can participate
and vote through remote communication such as
videoconferencing, teleconferencing, or other alternative modes
of communication that allow them reasonable opportunities to
participate. However, directors or trustees cannot attend or vote
by proxy a board meetings.
If a director or trustee intends to participate in a meeting through
remote communication, he/she shall notify in advance the
Presiding Officer and the Corporate Secretary of his/her
intention. The Corporate Secretary shall note such fact in the
Minutes of the meeting.
Corporations may issue their own internal procedures for the
conduct of board meetings through remote communication or
other alternative modes of communication to address
administrative, technical and logistical issues.
If the meeting is conducted through remote communication, the
director must notify in advance the presiding officer and the
corporate secretary of his/her intention to participate because it
is possible that the other directors attend in person, while the
other directors attend via teleconferencing. The director must
inform the secretary of the mode in which he/she plans to attend
the meeting.
The guidelines provide that corporations must issue their own
internal procedure on top of the SEC guidelines to address
administrative, technical, or logistical issues.
Under the SEC guidelines, in order to ensure that the attendees
are the directors or trustees themselves, the Rules require that at
the start of the meeting, the Presiding Officer should instruct the
secretary to make a roll call. Every attendee should speak out and
state for the record the full name and the position, his/her
location, confirmation that he/she can clearly see and hear the
other attendees.
Just like remote hearings of the regular courts, the Clerk of Court
needs to ask the attendees preliminary questions such as “Can you
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hear me?” and “Can you see me?” to ensure that the persons
attending are present. They also need to confirm that they
received the notice of the meeting and specify the device being
used.
Purpose for the roll call: in order for the secretary to make a
certification on the existence of quorum
Here, it contemplates a scenario where the bylaws provide for a
different quorum requirement.
Sec. 52 only points to the possibility where the bylaws provide for
a GREATER MAJORITY; it does not provide for a lesser
majority.
TN: Bylaws to provide for a greater majority.
In this case, the bylaws provide for a lesser majority which is 3 out
of 10 and that is not allowed in so far as directors or trustees
meetings are concerned.
Directors or trustees must comply with the minimum requirement
allowed by law – MAJORITY.
SEC Memorandum Circular No. 6-2020
Section 7. Roll Call. At the start of the meeting, the Presiding
Officer shall instruct the Corporate Secretary to make a roll call.
Every attendee shall state for the record the following:
1 Full name and position;
2. Location;
3. Confirmation that he/she can clearly hear and/or see the other
attendees;
4. Confirmation that he/she received the Notice of the Meeting
including the agenda and materials; and
5. Specify the device being used (i.e., smartphone, tablet, laptop,
desktop, television, etc.)
Thereafter, the Corporate Secretary shall confirm and note the
participants and certify the existence of quorum.
NOTICE OF MEETING:
NOTICE FOR SPECIAL MEETINGS OF
TRUSTEES
Section 52 Meetings of directors or trustees of corporations may
be held anywhere in or outside the Philippines, unless the bylaws
provide otherwise. Notice of regular or special meetings stating
the date, time and place of the meeting must be sent to every
director or trustee at least two (2) days prior to the scheduled
meeting, unless a longer time is provided in the bylaws. A director
or trustee may waive this requirement, either expressly or
impliedly.
Application: In this case there was a six day prior notice, this is in
compliance with the 2-day prior notice for the scheduled meeting for trustees.
QUORUM FOR SPECIAL MEETINGS OF
TRUSTEES
Section 52. Unless otherwise provided in this Code or in the
bylaws, a quorum shall consist of the stockholders representing a
majority of the outstanding capital stock or a majority of the
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members in the case of nonstock corporations.

time is provided in the complies with at
bylaws. A director or trustee least 2 days prior
There were only three trustees who joined the meeting, and all of may waive this requirement, notice. Valid.
them agreed to waive the rental fees. Is this a valid corporate act? either expressly or impliedly.
Here, the bylaws point to a different quorum requirement but
Section 52 only provides for the by-laws to provide a greater
majority - NOT a lesser majority.

A lesser majority is not allowed insofar as directors and trustees

are concerned. They must comply with the bare minimum Bylaws expressly
requirement under the law. Section 52. Unless the provide that
articles of incorporation quorum
ONLY OPTIONS FOR QUORUM: or the bylaws provides for requirement is 3
1. MAJORITY PROVIDED BY LAW a greater majority, a out of 10 trustees.
2. GREATER MAJORITY (sec 52) majority of the directors or
trustees as stated in the The bylaws
Since the three directors do not constitute a valid quorum, the articles of incorporation provide for a
approval of the waiver was NOT a valid corporate act. shall constitute a quorum to lesser majority.
On Quorum transact corporate business, Invalid.
of Trustees in
Summary of Case Problem 4: Special
and every decision reached
Meetings by at least a majority of the
Law (RCC) Case Example directors or trustees
constituting a quorum,
except for the election of
Section 52. xxx Special Purpose was to
officers which shall require
meetings of the board of discuss the
On Special
directors or trustees may be invitation of a the vote of a majority of all
Meetings of the members of the board,
Trustees held at any time upon the fundraising
shall be valid as a corporate
call of the president or as campaign. It’s a
act. xxx
provided in the bylaws. special meeting.

Section 52. xxx Directors Notice was given

or trustees who cannot via e-mail. Case Problem No. 5: Director’s Special Meeting (Recusal)
physically attend or vote at Meeting will be
board meetings can held via Zoom. The Board of Directors of Hackney Corp. consists of six
participate and vote through Valid. directors– Jose, Maria, Andres, Marcelo, Pablo and Pedro, who
remote communication regularly meet every 5th day of the month. The agenda for the
such as videoconferencing, meeting on March 5, 2022 included the proposed purchase of
teleconferencing, or other equipment from Pedro for PhP1,000,000.00 in cash. Other
alternative modes of suppliers sell the same equipment for PhP1,350,000.00, payable in
On Mode of
Attendance
communication that allow two installments. The Secretary explained to the directors that he
them reasonable had to do the price canvassing himself, which is why he was only
opportunities to participate. able to send the written notices of the meeting on March 4, 2022.
Directors or trustees cannot At the time and place indicated in the notice, all of the directors
attend or vote by proxy at voted in favor of the purchase agreement except Maria, who
board meetings. XXX believed that Pedro should have abstained from voting. Is Maria
correct? Explain.
See: SEC Memorandum
Circular No. 6-2020. The agenda of the regular meeting included the purchase of
Section 4. equipment from ONE OF THE DIRECTORS.

March 25, 2022 - Under Section 52, A director or trustee who has a potential interest in any
Section 52. Xxx Notice of Notice sent to e- related party transaction must recuse from voting on the approval of the related
regular or special meetings mail account party transaction without prejudice to compliance with the requirements of
On Notice of stating the date, time and Section 31 of this Code.
a Meeting of place of the meeting must March 31, 2022 -
Trustees be sent to every director or meeting held Recusal means that the director or trustee must inhibit from
trustee at least two (2) days participating in the meeting. It is out of common decency or
prior to the scheduled There’s a 6 day propriety of the involved director or trustee to best avoid any
meeting, unless a longer prior notice. It allegation of bias.

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xxx notice
The rule,however, is without prejudice to the compliance with
requirement.
Sec. 31.

Law (RCC) Case Example

Section 52. xxx A Pedro wanted to

director or trustee who purchase the
has a potential interest in equipment of the
any related party corporation for
transaction must recuse P1M in cash.
On Recusal of
from voting on the 2-day notice not met. But go back to the proviso that a director
Directors or trustee may waive the 2-day notice requirement, whether
approval of the related
party transaction without expressly or impliedly. Attendance in the meeting is an implied
prejudice to compliance waiver. In this case, all directors participated and voted in favor of
with the requirements of the purchase. This is a valid implied waiver of notice requirement.
Section 31 of this Code.
Case Problem No. 6 Stockholders' Regular Meeting
Section 31. A contract of There are only 6 (Quorum)
the corporation with (1) directors. Legal The bylaws of Ilford Corporation provides that the
one or more of its quorum presence of stockholders owning 40% of the outstanding capital
directors, trustees, requirement is 4. stock is necessary to constitute a quorum. Leonora, Pablo, Maria,
officers or their spouses There are enough and Andres each own 10% of the outstanding capital stock in
and relatives within the directors to Ilford Corporation. Upon Leonora's death, Jose was designated as
fourth civil degree of constitute a the executor of her estate. For his part, Pablo issued a power of
consanguinity or affinity quorum without attorney to her spouse, Maria, to vote on their behalf on the next
is voidable, at the option Pedro’s presence. annual stockholders' meeting, which written authority was duly
of such corporation, As for Predo’s received and verified by the Secretary. Andres, on the other hand,
unless all the following vote, it is not borrowed money from Marcelo, and executed a security
conditions are present: necessary. agreement over his shares of stock as collateral for the loan. After
On Self- (a) The presence of such due notice was given to stockholders, only Jose, Maria and Andres
Dealing director or trustee in the The agreement is attended the meeting. Was the quorum requirement met? Explain.
Directors board meeting in which fair and
the contract was reasonable. It is Remember that quorum refers to the totality of the shareholdings
approved was not cheaper and of the stockholders which have been subscribed and issued. It
necessary to constitute a payable in cash. It does not necessarily refer to the number of shareholders.
quorum for such is fairly equivalent
meeting; (b) The vote of to the other What constitutes quorum?
such director or trustee offers. Valid. Stock corporation: Quorum refers to at least MAJORITY of the
was not necessary for the outstanding capital stock.
approval of the contract; Thus, no need for Non-stock corporation: Quorum is the numerical equivalent of all
(c) The contract is fair Pedro to recuse members. Per head basis. It refers to the MAJORITY of members
and reasonable since all entitled to vote and in good standing.
requirements are
met. The legal provision in quorum only applies if there is no other
provision in the by-laws describing the quorum. Corporations are
Section 52. xxx Notice March 4, 2022 - empowered to define what the quorum is.
of regular meetings notice was sent
stating the date, time and March 5, 2022 - In this case, bylaws of Ilford Corporation provides that the
place of the meeting must regular meeting presence of stockholders owning 40% of the outstanding capital
be sent to every director was held stock is necessary to constitute a quorum.
or trustee at least two (2) Q: Is this a valid bylaws provision?
On Notice of
Regular days prior to the 2-day notice not A: Yes, look at the introductory clause of Sec. 51 which says that
Meetings of scheduled meeting, met. However, all Unless otherwise provided in this Code or in the bylaws,
Directors unless a longer time is directors
provided in the bylaws. A participated and But if you compare this with the quorum in a directors’ meeting,
director or trustee may voted in favor of there is a different parameter. In the directors’ meeting, the one
waive the two-day notice the purchase. provided is either (a) majority or (b) greater majority. But for
requirement, either This is a valid quorum in stockholders’ meeting, there is no such parameter. The
expressly or impliedly. implied waiver of law allows a quorum of lesser majority or greater majority

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depending on the bylaws since the introductory clause in Sec. 51

shares of Leonora. His
is silent, it allows for all possibilities.
attendance is part of
the quorum.
Quorum in a director's meeting is different from a stockholders’
meeting.

Directors meeting = quorum is majority or greater majority

Shareholders’ meeting = the law allows for a quorum of lesser
or greater majority, depending on bylaws. It covers all possibilities.

Q: Is the presence of only Jose, Maria and Andres constitutive of

quorum?
Law (RCC) Case Example

Section 51. Unless The bylaws of Ilford

otherwise provided in Corporation provides
this Code or in the that the presence of
bylaws, a quorum shall stockholders owning
consist of the 40% of the
stockholders outstanding capital
representing a majority stock is necessary to
On Quorum of the outstanding constitute a quorum. Section 55. The consent Pablo and Maria are
for of all the co- owners spouses. The stocks are
Stockholder capital stock or a The corporation can
majority of the members decide what constitutes shall be necessary in co-owned property
s’ Meeting voting shares of stock based on absolute
in the case of nonstock as quorum.
corporations. owned jointly by two (2) community property
The law allows a or more persons, unless regime.
quorum of lesser there is a written proxy,
majority for On Voting signed by all the co- Pablo authorized
stockholders’ in Case of owners, authorizing one Maria to vote on her
meetings. Valid. Joint (1) or some of them or behalf. Written proxy
Ownership any other person to vote is valid; presence of
of Stocks such share or shares: Maria will be counted
Section 54. xxx Jose was executor of
Executors, her estate. There is no Provided, That when the for quorum.
administrators, receivers, need for a written shares are owned in an
and other legal proxy, as long as there "and/or" capacity by the
representatives duly is a court order of holders thereof, any one
appointed by the court appointment. of the joint owners can
may attend and vote in vote said shares or
behalf of the Jose can validly appoint a proxy therefor.
stockholders or represent the shares of
members without need Leonora, attend and Section 54. In case a Andres borrowed
of any written proxy. vote the shares of stockholder grants money and executed a
On Right to Leonora in a security interest in his or security agreement on
Vote of stockholders’ meeting. her shares in stock behalf of Marcelo.
Administrat corporations, the
ors/ stockholder- grantor Andres does not lose
Executor No need for a written
proxy as this is shall have the right to title over the shares of
On Right to attend and vote at stock. There is no
(JOSE) dispensed with but Vote of
Jose must prove that Secured
meetings of transfer of ownership
he is duly appointed by Creditors stockholders, unless the in a security agreement.
the court. He must secured creditor is Andres is still the legal
present to the expressly given by the title holder of the
corporate secretary a stockholder-grantor shares and he can
court order designating such right in writing attend the meeting.
him as an executor of which is recorded in the
Leonora’s estate. Thus, appropriate corporate
he can validly attend books. xxx
the meeting without
proxy and vote the 10% - Jose, as executor of Leonora

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10% - Maria, for herself
10% - Maria, for on behalf of Pablo
10% - Andres, as legal title holder
40% of the outstanding capital stock
Voting Trust Agreement - this confers upon the trustee the right
to vote with your shares. The trustee should appear in the meeting
and vote
Voting Trusts
Section 58. 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. xxx
Nature of Voting Trusts
By its very nature, a voting trust agreement results in the
separation of the voting rights of a stockholder from his other
rights such as the right to receive dividends, the right to inspect
the books of the corporation, the right to sell certain interests in
the assets of the corporation and other rights to which a
stockholder may be entitled until the liquidation of the
corporation. However, in order to distinguish a voting trust
agreement from proxies and other voting pools and agreements,
it must pass three criteria or tests, namely: (1) that the voting rights
of the stock are separated from the other attributes of ownership;
(2) that the voting rights granted are intended to be irrevocable
for a definite period of time; and (3) that the principal purpose of
the grant of voting rights is to acquire voting control of the
corporation.
Lee v. Court of Appeals, G.R. No. 93695, February 4, 1992
The relationship is that of a trust agreement. There are three
parties:
1. Trustor
2. Trustee
3. Beneficiary
Q: HOW ARE PROXIES DIFFERENT FROM VOTING
TRUST AGREEMENTS?
PROXY VOTING TRUST
Principal-agent relationship Trust Agreement relationship:
trustor, trustee and
beneficiary.
5 year maximum period May exceed 5 years
TEST
it must pass three criteria or tests, namely:
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(1) that the voting rights of the stock are separated from the
other attributes of ownership;
(2) that the voting rights granted are intended to be
irrevocable for a definite period of time; and
(3) that the principal purpose of the grant of voting rights is to
acquire voting control of the corporation.
Remember, in a trust agreement - there is a separation between
the legal title and the equitable title for the shares of stock.
1. The legal title to the shares of stock is vested to the
trustee. The shares of stock will now be in the name of
trustee, in this case, Marcelo. Marcelo, as the legal title
holder, will now have the right to vote the shares of
Andres.
2. Andres on the other hand retains the equitable title or
ownership over the shares of stock. He may still exercise
the proprietary rights of a stockholder.
Proprietary rights of a stockholder refers to:
★ The right to receive dividends of the corporation;
★ The right to participate in the distribution of
assets of the corporation;
These proprietary rights are retained by Andres. These can still be
exercised by Andres, the trustor, at the expiration or the
revocation of the voting trust agreement.
Meanwhile, the legal title belongs to Marcelo. It is Marcelo who
must vote on the shares of Andres.
PURPOSE OF THE VOTING TRUST AGREEMENT
➔ To acquire voting control of the corporation.
Voting trust agreement is used as a control device. If a group
of stockholders want to have a bigger bargaining power in the
corporation, and to have a say to how things are being run in the
corporation, they can execute voting trust agreements in order to:
★ take and appropriate the voting rights of their fellow
stockholders
★ increase their voting power.
A voting trust agreement can be used to increase your bargaining
power in the corporation so that you can also participate in how
the business will be run. But this control device is subject to
limitations provided under the law.
LIMITATIONS OF VOTING TRUST
AGREEMENT
Under Section 59 of the Corporation Code, supra, a voting trust
agreement may confer upon a trustee not only the stockholder's
voting rights but also other rights pertaining to his shares as long
as the voting trust agreement is not entered "for the purpose of
circumventing the law against monopolies and illegal
combinations in restraint of trade or used for purposes of
fraud." Thus, the traditional concept of a voting trust agreement
primarily intended to single out a stockholder's right to vote
from his other rights as such and made irrevocable for a limited
duration may in practice become a legal device whereby a
transfer of the stockholder's shares is effected subject to the
specific provision of the voting trust agreement.
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 CORPORATION LAW
ATTY. VJC | SECOND SEMESTER 2021-2022

Since Marcelo was not present, they only had 30% of the
outstanding capital stock - which is less than the quorum
The execution of a voting trust agreement, therefore, may create
requirement provided in the bylaws.
a dichotomy between the equitable or beneficial ownership of
the corporate shares of a stockholders, on the one hand, and the
10% - Maria, for herself
legal title thereto on the other hand.
10% - Maria, for and on behalf of Pablo
- Lee v. Court of Appeals, G.R. No. 93695, February 4, 1992
_____ Andres, as beneficial owner
30% of the outstanding capital stock

The voting trust agreement must not be entered for the

purpose of circumventing the law against monopolies and
illegal combinations in restraint of trade, or used for
purposes of fraud.

Section 58 of the RCC provides that:

No voting trust agreement shall be entered for the purpose of
circumventing the law 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.

Nationality and capital requirements are provided in the

Constitution and supplemented in the Foreign investments
Negative List.

Example: Foreigners who own a minority share in the

corporation cannot enter into voting trust agreements to increase
their voting shares in the corporation, because that would violate
the maximum foreign equity participation prescribed by law.

In a proxy, the maximum period is 5 years. In a voting trust it

can be extended for more than 5 years, if the voting trust is
executed pursuant to a loan agreement, whereby the period
is made contingent upon full payment of the loan. It can even
be lesser than the 5-year period, if the loan was already paid earlier.
In which case, the voting trust agreement which is a condition for
the loan will now be revoked or extinguished.

The law simply provides that a voting trust agreement is an

agreement in writing whereby one or more stockholders of a
corporation consent to transfer his or their shares to a trustee in
order to vest in the latter voting or other rights pertaining to said
shares for a period not exceeding five years upon the fulfillment
of statutory conditions and such other terms and conditions
specified in the agreement. The five year-period may be
extended in cases where the voting trust is executed pursuant to
a loan agreement whereby the period is made contingent upon
full payment of the loan.
- Lee v. Court of Appeals, G.R. No. 93695, February 4, 1992

ANSWER TO Q: If it were voting trust agreement entered

into by Andres, Andres loses legal title over the shares of
stock. It should have been Marcelo, the creditor, who is now
trustee of the shares of stock, who should appear and vote
with the shares of Andres.

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Abellano ◦ Adolfo ◦ Bajar ◦ Cabeje ◦ Caceres ◦ Capuyan ◦ Cañales ◦ Daulo ◦ Delicano ◦ Dino ◦ Gabato ◦ Leopardas ◦ Ngo ◦ Panelo ◦ Prisco ◦ Reyes ◦ Velez ◦ Villagonzalo
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 CORPORATION LAW
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BP BLG 68 R.A. No. 11232

Regular meetings of stockholders or members shall be held Regular meetings of stockholders or members shall be held annually on
annually on a date fixed in the bylaws, or if not so fixed, on a date fixed in the bylaws, or if not so fixed, on any date after April 15
any date on April. of every year as determined by the board of directors or trustees:

Atty: It did not specify that it must be on any date after April
15.

Provided, That written notice of regular meetings shall be Provided, That written notice of regular meetings shall be sent to all
sent to all stockholders or members of record at least two stockholders or members of record at least twenty-one (21) days
(2) weeks prior to the meeting, unless a different period is prior to the meeting, unless a different period is required in the bylaws,
required by the by- laws law, or regulation:

E-mail and electronic means not recognized. 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.

Matters to be discussed in the agenda NOT prescribed. Agenda prescribed under Section 49 (although not necessarily limited to
these items):

1. The minutes of the most recent regular meeting which shall

include, among others:
a. A description of the voting and vote tabulation procedures
used in the previous meeting;
b. A description of the opportunity given to stockholders or
members to ask questions and a record of the questions asked
and answers given;
c. The matters discussed and resolutions reached;
d. A record of the voting results for each agenda item;
e. A list of the directors or trustees, officers and stockholders or
members who attended the meeting; and
f. Such other items that the Commission may require in the
interest of good corporate governance and the protection of
minority stockholders;
2. A members' list for nonstock corporations and, for stock
corporations, material information on the current
stockholders, and their voting rights
3. 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
4. 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;
5. An explanation of the dividend policy and the fact of
payment of dividends or the reasons for nonpayment thereof;
6. Director or trustee profiles which shall include, among others,
their qualifications and relevant experience, length of service in
the corporation, trainings and continuing education attended, and
their board representations in other corporations;
7. 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

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Abellano ◦ Adolfo ◦ Bajar ◦ Cabeje ◦ Caceres ◦ Capuyan ◦ Cañales ◦ Daulo ◦ Delicano ◦ Dino ◦ Gabato ◦ Leopardas ◦ Ngo ◦ Panelo ◦ Prisco ◦ Reyes ◦ Velez ◦ Villagonzalo
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Notices of any meeting may be waived, expressly or
impliedly, by any stockholder or member.
Whenever, for any cause, there is no person authorized to
call a meeting, the Securities and Exchange Commission,
upon petition of a stockholder or member on a showing of
good cause therefor, may issue an order to the petitioning
stockholder or member directing him to call a meeting of the
corporation by giving proper notice required by this Code or
by the by-laws.
Abellano ◦ Adolfo ◦ Bajar ◦ Cabeje ◦ Caceres ◦ Capuyan ◦ Cañales ◦ Daulo ◦ Delicano ◦ Dino ◦ Gabato ◦ Leopardas ◦ Ngo ◦ Panelo ◦ Prisco ◦ Reyes ◦ Velez ◦ Villagonzalo
EH 308 Support Group
CORPORATION LAW
ATTY. VJC | SECOND SEMESTER 2021-2022
meetings;
8. Appraisals and performance reports for the board and the
criteria and procedure for assessment;
9. A director or trustee compensation report prepared in
accordance with this Code and the rules the Commission may
prescribe;
10. Director disclosures on self-dealings and related party
transactions; and/or
11. The profiles of directors nominated or seeking election or
reelection.
Atty: In any case, the new law allows basically anyone to propose any
other matter to be included in the meeting:
A director, trustee, stockholder, or member may for inclusion agenda at
any regular meeting of stockholders or members
A stockholder or member may propose the holding or 2 special
meetings and items to be included in the agenda.
Atty:
● The new law clarifies which waivers are prohibited.
● General waivers of notice in the articles of incorporation and
the bylaws shall not be allowed.
○ Example: if there is a provision in the bylaws that a
stockholder is already to have waived their right to
attend and vote in a meeting - this is not allowed.
● GR: that attendance in a meeting shall constitute a waiver of
the notice requirement.
● XPN: when attendance in the meeting has the purpose of
objecting to that transaction of any business (e.g. the meeting
is not duly called or convened.)
○ If you have any objection to the notice of any manner
or mode of calling the meeting, you must state it at
the beginning of the meeting.
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 bvlaws.
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 CORPORATION LAW
ATTY. VJC | SECOND SEMESTER 2021-2022

Atty: Unless the bylaws provide for a longer period, the

● Only 1 ground: no person authorized to call a stock and transfer book or membership book shall
meeting. be closed at least twenty (20) days for regular
meetings and seven (7) days for special meetings
before the scheduled date of the meeting.

Atty:
● New law replicated the provision of the old law but added
additional ground.
● Grounds:
○ there is no person authorized or
○ the person authorized unjustly refuses to call a
meeting
● Stock and transfer books must be closed for a certain period
of time so that there will be no transfer of shares that would
abruptly affect the equity structure of the corporation.
● The corporation needs to comply with the quorum
requirement and it is based on the shareholdings of the
stockholders/ members. If there are any abrupt changes in the
corporation, it might disrupt the meeting that might be
conducted.
● Used as a safeguard to prevent HOSTILE actions from
stockholders. If they figure out that some stockholders will not
vote in an ascertained way, they will enter into a voting trust
agreement or written proxies and try to beat the clock so they
can gain voting control - not allowed.

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.

Atty:
● it is NOT allowed to postpone a meeting indefinitely. A new
date must be given that the notices must be given at least 2
weeks prior to the new date.

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.

Stockholder's or member's meetings, whether regular or
special, shall be held in the city or municipality where the
principal office of the corporation is located, and if
practicable in the principal office of the corporation:
Provided, That Metro Manila shall, for purposes of this
section, be considered a city or municipality.
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.

OLD LAW Atty: NEW LAW

● GR: anywhere in the city where the principal office
of the corporation is located.
● XPN: if less practicable, in principal office of the
corporation
● NEW LAW REVERSED THE OLD LAW
● GR: stockholders’ meeting must be held in the principal office
● XPN: if not practicable, the meeting can be held in the
city/municipality where the principal office of the corporation
is located.
● Old law gives more flexibility. The new law states that the
meeting must be held in the principal office of the corporation.

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Abellano ◦ Adolfo ◦ Bajar ◦ Cabeje ◦ Caceres ◦ Capuyan ◦ Cañales ◦ Daulo ◦ Delicano ◦ Dino ◦ Gabato ◦ Leopardas ◦ Ngo ◦ Panelo ◦ Prisco ◦ Reyes ◦ Velez ◦ Villagonzalo
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 CORPORATION LAW
ATTY. VJC | SECOND SEMESTER 2021-2022

on certain corporate acts which the law

Module 7 expressly requires their approval.
STOCKS & STOCKHOLDERS 3. Remedial Rights
● Available to the stockholders on a contingent
basis.
● Examples: Appraisal right, preemptive right to
When the incorporators subscribe to shares of stock in a new new issuances of stock, right to inspect
corporation, they enter into a subscription contract. corporate books and records, be given a copy
of the financial statements of the corporation
Subscription Contract
Sec. 59. Any contract for the acquisition of unissued stock in
Q: If the Board commits wrongful acts, under Sec. 30, the
an existing corporation or a corporation still to be formed shall
directors can be held liable to the corporation or the stockholders.
be deemed a subscription within the meaning of this Title,
But who shall enforce an action against the directors when it is
notwithstanding that fact that the parties refer to it as a
the directors themselves who are authorized or empowered to sue
purchase or some other contract.
on behalf of the corporation?

1. Individual Suit
It may be filed by an individual stockholder if the cause
Contract of Sale/Purchase of action pertains to the individual stockholder
Subscription Contract
of Shares of Stock personally. In that case, if the individual stockholder is
injured by the act of the Board of Directors or tRustees,
The acquisition of shares that
can file an action in his or her name.
are already issued by the
Entered to purchase unissued
corporation. This refers to the
stock Examples: This can be filed when a stockholder is denied
secondary transfer of shares of
the right to inspect corporate books or records; or if they
stock.
are denied the right to dividends. In such cases, the
stockholders may file an individual suit against the
A subscriber is entitled to the rights of a stockholder. This is corporation.
regardless of the fact that the subscriber has not yet paid the full
amount of the fair value of the shares of stock, provided that the 2. Representative Suit
shares of the subscriber have not been declared delinquent by the The cause of action belongs to a group of stockholders.
BOD. All the rights of the stockholders shall already accrue to a It pertains to a class of persons who are similarly
subscriber by virtue of the subscription contract. situated. The violation of rights pertains to a group of
persons.
However, if the subscriber has not yet paid in full the issued price
of the shares of stock, corporate creditors may have a claim Examples: If the rights of preferred stockholders are
against the unpaid subscription following the trust fund doctrine violated; and there is an amendment in the Articles of
wherein corporate creditors have the right to rely on the unpaid Incorporation that affects their rights to receive
subscription to satisfy their claims. dividends. Who can file that action? It could be a
stockholder belonging in that group. They can file a class
Rights of a Stockholder action against the corporation.
1. Proprietary Rights
● The economic benefits that accrue to each 3. Derivative Suit
stockholder. This is the primary reason why The action is filed by the stockholder but the cause of
you invest in a corporation in the first place. action pertains to the corporation. Here, the injury is
● Examples: Right to receive dividends, share in directed against the corporation. It is the corporation
the surplus profits, participate in the that is considered a real party in interest.
distribution of assets during the liquidation
2. Management Rights Example: The Board of Directors is guilty of
● The powers of the management of the mismanagement of corporate funds, then the injury lies
corporation are lodged in the BOD pursuant to with the corporation.
the doctrine of centralized management,
wherein the BOD has the power to conduct Who shall file an action on behalf of the corporation if the Board
business, exercise all corporate powers and of Directors are the ones who are responsible for mismanaging the
control all properties of the corporation. funds? Any stockholder can file a derivative suit on behalf
● Stockholders can indirectly participate in the of the corporation. The party who stands to be benefited
management of the corporation by exercising or injured or is entitled to the avails of the suit is the
the right to elect the directors or trustees. corporation. While the stockholder suing is only
● The law provides several instances where the considered as a nominal party.
stockholders or members have the right to vote
Page 31
Abellano ◦ Adolfo ◦ Bajar ◦ Cabeje ◦ Caceres ◦ Capuyan ◦ Cañales ◦ Daulo ◦ Delicano ◦ Dino ◦ Gabato ◦ Leopardas ◦ Ngo ◦ Panelo ◦ Prisco ◦ Reyes ◦ Velez ◦ Villagonzalo
EH 308 Support Group

Why is that? The cause of action pertains to the
corporation. Thus, if the corporation prevails in that suit,
any award, damages, judgment, must be rendered in
favor of the corporation, not of an individual
stockholder.
In a derivative suit, why does it necessarily subsume the requisites
of an individual suit? Because if the corporation is injured,
then necessarily the stockholders are injured, such as
mismanagement of corporate funds.
Why should the stockholder file a derivative suit on behalf of the
corporation and not an individual suit, when its rights are
simultaneously/concurrently injured with the corporation? In the
case of Villamor, the reason why a stockholder must file
a derivative suit is in order to follow the general and basic
principles of corporation, regarding the doctrine of
separate legal entity and the trust fund doctrine. A
corporation has a personality which is separate and
distinct from the individuals composing it. It should be
the corporation and not the individual who shall file the
case, and is considered to be the real party in interest.
With regard to the trust fund doctrine, the unpaid
subscriptions are considered as a trust fund in favor of
the creditors, and preserved in their favors. Hence, if the
stockholders file an individual suit instead of a derivative
suit to enforce a cause of action belonging to the
corporation and the individual stockholders prevails in
that suit, the amawards, damages, and judgment will go
to that individual stockholder. That will constitute a
withdrawal of capital of the corporation and constitute a
dissolution of the assets of the corporation, and a
distribution of corporate assets, which is prohibited.
Also, another reason cited in order to prevent
multiplicity of suits, for reasons of public policy only one
case shall be filed. One for derivative suit, one that will
cover the cause of action of the corporation and even
subsumed the stockholders’ concerns.
Section, Rule 8 of A.M No. 01-2-SC provides the interim rules of
procedure governing intra-corporate controversies. There it
enumerates the requisites of a derivative suit.
1. He or she was a stockholder or member at the time the
acts or transaction subject of the action occurred and at
the time the action was filed;
2. He or she exerted all reasonable efforts, and alleges the
same with particularity in the complaint, to exhaust all
remedies available under the Articles of Incorporation,
bylaws, laws or rules governing the corporation or
partnership to obtain the relief he or she desires;
(procedures laid down by by-law, regulations must be
followed)
3. No appraisal rights are available for the act or acts
complained of; (there is no alternative remedy given
such as leaving the company and selling the shares) and
4. The suit is not a nuisance or harassment suit.
5. The suit must be filed on behalf of the corporation.
Abellano ◦ Adolfo ◦ Bajar ◦ Cabeje ◦ Caceres ◦ Capuyan ◦ Cañales ◦ Daulo ◦ Delicano ◦ Dino ◦ Gabato ◦ Leopardas ◦ Ngo ◦ Panelo ◦ Prisco ◦ Reyes ◦ Velez ◦ Villagonzalo
EH 308 Support Group
CORPORATION LAW
ATTY. VJC | SECOND SEMESTER 2021-2022
Jose, Maria and Andres are partners engaged in the real estate
business. They decided to form a corporation. Jose, the managing
partner, will receive salaries for facilitating the incorporation
process, but he agreed to apply them to his subscription in the
corporation still to be formed. Maria, the Capitalist partner, agreed
to sell her shares in Enfield Co. in exchange for shares in the new
corporation, while Andres promised to deliver a commercial office
space also in exchange for shares in the new corporation. On
August 2, 2021, they signed the subscription contracts. On
September 2, 202, Jose filed the Articles of Incorporation and
bylaws with the SEC. In the course of their dealings, Jose, Maria,
and Andres had a disagreement as to who should become President
of the company. Despite the protests of Jose and Maria, Andres
threatened to revoke his subscription.
May Andres validly revoke his subscription?
CASE PROBLEM:
Jose, the managing partner, will receive salaries for facilitating the
incorporation process, but he agreed to apply them to his
subscription in the corporation still to be formed.
Maria, the capitalist partner, agreed to sell her shares in Enfield
Co. in exchange for shares in the new corporation.
Andres promised to deliver a commercial office space also in
exchange for shares in the new corporation.
Consideration for Stocks
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;
xxx
In this case, Andres promised to deliver a commercial office space
in exchange for shares in the corporation. This property falls
under Sec. 61, par. B. So this is a valid consideration.
Requisites before a property may be considered as a valid
consideration for shares of stocks (Sec. 61, par. b):
1. Necessary or convenient for the use of the corporation
and for the and lawful purposes for which the
corporation was established.
EX: for a real estate company parcels of land may be
considered as necessary or convenient for the
corporation
Application: the commercial office space is necessary for
the carrying out of the business
2. The property must be fairly valued which means that it
is equal to the par or issued value of the stock issued;
Page 32

The valuation shall be initially determined by the
stockholders or the board of directors. Subsequently, the
valuation must be approved by the SEC
SEC. 61. Consideration for Stocks. – xxx
(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.
Application: Here, Jose rendered services to the corporation,
especially in the incorporation stage. The service he rendered,
which is to be converted into salary, can be considered as a valid
consideration.
(e) Amounts transferred from unrestricted retained earnings
to stated capital;
This refers to the issuance of stock dividends. Stock dividends can
be used as consideration for the purchase of additional stocks in
the corporation.
With regard to “unrestricted retained earnings”, this refers to the
surplus profits. So instead of distributing your surplus profits to
the stockholders, you can plow it back to the company by
distributing it in the form of stock dividends in order to increase
the capital of each of the stockholder in the corporation.
(f) Outstanding shares exchanged for stocks in the event of
reclassification or conversion;
This refers to redeemable shares or preferred shares which are
reclassified or converted. These could be given as consideration
for the purchase of shares of stocks.
(g) Shares of stock in another corporation;
This has monetary value which may be used as consideration for
the purchase of shares.
Application: In the case problem, Maria (capitalist partner)
agreed to sell her shares in the other corporation, Enfield Co., in
exchange for the shares in the other corporation. So she can use
these shares as consideration to acquire shares in the corporation
to be formed. IOW, her shares in Enfield Co., are now transferred
to the new corporation. Thus, the new corporation will not
become a stockholder of Enfield Co.
(h) Other generally accepted form of consideration.
This is a catch-all provision; This is to include all those which may
be considered as of value or which may be considered as a
consideration for the purchase of stocks.
Q: May cryptocurrency be used as a valid consideration for the
purchase of stocks?
Abellano ◦ Adolfo ◦ Bajar ◦ Cabeje ◦ Caceres ◦ Capuyan ◦ Cañales ◦ Daulo ◦ Delicano ◦ Dino ◦ Gabato ◦ Leopardas ◦ Ngo ◦ Panelo ◦ Prisco ◦ Reyes ◦ Velez ◦ Villagonzalo
EH 308 Support Group
CORPORATION LAW
ATTY. VJC | SECOND SEMESTER 2021-2022
A: You can argue that it is a valid consideration if, as a mode of
payment, it becomes a “generally accepted form of consideration”
Under the last paragraph of Sec. 61,
SEC. 61. Consideration for Stocks. – xxx
Where the consideration is other than actual cash, or consists
of intangible property such as patents or copyrights, the
valuation thereof shall initially be determined by the
stockholders or the board of directors, subject to the approval
of the Commission.
Q: Why should the valuation be approved by the SEC?
A: If the value of the property is less than the actual value of the
shares, then it will lead to the issuance of “watered stocks” and
the law expressly prohibits the issuance of watered stocks. It even
makes directors liable for the issuance thereof.
So to prevent that scenario where shares of stocks are issued for
less than their actual/ fair value, the law prescribes that the
valuation must be approved by the SEC.
CASE PROBLEM: On august 2, 2021, they signed the
subscription contracts.
On September 2, 2021, Jose filed the Articles of Incorporation
and bylaws with the SEC.
IIn the course of their dealings, Jose, Maria, and Andres had
a disagreement as to who should become President of the
company
Q: Andres wanted to withdraw his subscription, can Andres
validly do that?
Here, the subscription was entered into on August 2, 2021 so six
months after, counting from august 2, 2021, the subscription
contracts are irrevocable. Unless all of the other subscribers
consent to the revocation or the corporation fails to incorporate
within the same period.
SEC. 60. A subscription of shares in a corporation still to be
formed shall be irrevocable for a period of at least six (6) months
from the date of subscription, unless all of the other subscribers
consent to the revocation, or the corporation fails to
incorporate within the same period or within a longer period
stipulated in the contract of subscription. No pre-incorporation
subscription may be revoked after the articles of incorporation
is submitted to the commission.
GR: Subscription contract is irrevocable
Rationale: There must be certainty in determining the amount of
the corporation’s capital. You must manifest to the SEC the
maximum capital of the corporation and the names of the
stockholders.
A: Since on September 2, 2021, Jose already
filed the Articles of Incorporation and bylaws with the
SEC, there can be no revocation of the subscription.
Q: May Andres file an action of rescission against the
corporation?
Page 33
 CORPORATION LAW
ATTY. VJC | SECOND SEMESTER 2021-2022

A: He cannot, because there is no corporation to speak of. Here,

CASE PROBLEM: 2. Leonora bought 100 common shares
this pertains to a pre-incorporation subscription. There was yet no
in Brent Co., Inc. One half of the issued price was paid
approval by the SEC, there was no issuance of its certificate of
in cash while the other half was covered by promissory notes.
incorporation. So Andres cannot file for rescission of his
While the President was away, the Secretary issued and signed
subscription against the corporation.
50 certificates of stock in Leonora’s name. Leonora failed to
pay the amounts stated in the promissory notes. Before a
BP BLG 68 RA 11232 call was made on her unpaid subscription, she was able to sell
her shares to Pablo. She was also able to convince the Secretary
Section 62. Consideration for Section 61. Consideration for to record the details of the sale in the Stock and Transfer
stocks - Stocks shall not be stocks - Stocks shall not be Book. Subsequently, Leonora bought 100 common shares in
issued for a consideration less issued for a consideration less cash. Upon receipt of the certificates of stock – signed by the
than the par or issued price than the par or issued price Vice-President and the Secretary, Leonora delivered and
thereof. Consideration for the thereof. Consideration for the indorsed them in blank to her creditor, Marcelo. Marcelo
issuance of stock may be any issuance of stock may be”: presented the certificates of stock to the Secretary to record
or a combination of any two the transfer, but the latter refused. Are the two transfers valid?
or more of the following: Xxx Explain.

Xxx (f) Outstanding shares

Where the consideration is
other than actual cash, or
consists of intangible
property such as patents of
copyrights, the valuation
thereof shall initially be
determined by the
incorporators or the board of
directors, subject to approval
by the Securities and
Exchange Commission.
exchanged for stocks in the Let’s first look at the nature of a certificate of stock.
event of reclassification or
conversion; A certificate of stock is a tangible evidence of ownership of stocks
in a corporation. This would represent the stockholder’s interest
in the corporation. The manner of issuance of a certificate of stock
(g) Shares of stock in another
corporation; and/or is left to the discretion of the corporation; whether it be a
certificated form, or uncertificated form, or scriptless, or it could
(h) Other generally accepted be electronic security. That would be provided in the bylaws.
form of consideration.
Is it necessary for a stockholder (SH) to be issued a certificate of
Where the consideration is stock before the SH can exercise the rights (that we mentioned
earlier)?
other than actual cash, or
consists of intangible • There is no such requirement under the law. The
property such as patents or possession of a certificate of stock is not considered as a
copyrights, the valuation condition sine qua non for the exercise of the rights of
thereof shall initially be the stockholders. It’s possible that the corporation will
determined by the issue uncertificated stock for convenience in order to
stockholders or the board of save from printing costs. Yet, the SH can still exercise
directors, subject to the their rights even without these certificates of stocks
approval of the Commission. issued to them.

The new law added two items in the consideration for stocks. Par.
g: shares of stock in another corporation and the catch-all
provision Par. h: Other generally accepted form of consideration.
Old Law: The determination of the consideration that is not
actual cash shall be by the incorporators or board of directors. It
does not allow stockholders to make a preliminary valuation of
their consideration.
New Law: Allows stockholders to make a preliminary
determination of the consideration for the stocks.
In this case problem, there were already certificates of stocks
issued. This is not a preincorporation subscription. This is a sale
of shares of stock from a corporation. As a rule, a stockholder
may validly transfer his or her share to another person without the
consent of the corporation (unlike in partnership). In this case, as
part of the property rights of a SH, the SH may validly transfer a
share of stock to another person without the consent of the
corporation.
Here, Leonora bought 100 common shares. Half of the purchase
price was paid in cash, half was covered by promissory notes. Is
that allowed?

SECTION 61. 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.

As a rule, you cannot use promissory notes in exchange for

stocks in a corporation.

Page 34
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Here, the sale cannot be considered as a valid sale transaction.
Can the secretary issue a certificate of stock representing one half
of the 100 common shares?
SECTION 63. No certificate of stock shall be issued to a
subscriber until the full amount of the subscription together
with interest and expenses (in case of delinquent shares), if any
is due, has been paid.
As a rule, there must be full payment of the shares of stock.
Not allowed:
• Payment of promissory note
• Payment of future service
• Partial payment of shares of stock
Sec. 63 illustrates the Doctrine of Indivisibility of Subscription
Contract. The rule does not provide for any exception.
If 50% partial payment has been made, why are you not allowed
to be given certificate of stock representing the 50% partial
payment?
- You cannot do that pursuant to Doctrine of Indivisibility
of Subscription Contract. The partial payment will be
applied to each and every share (to 50% of each share
subscribed). If there are 10 shares, 50% of the first share
is considered to be paid, so on and so forth. There is no
share under the subscription that can be considered fully
paid yet. That is following the Doctrine of Indivisibility
of Subscription Contract
REMEMBER: The reason why you cannot issue a certificate of
stock for partially issued shares is because the law provides that a
certificate of stock may be transferred by indorsement or delivery.
If the share of stock is already represented by a certificate of stock,
it would give the impression that it is already fully paid and may
be transferred to third persons. To avoid fraudulent transfers of
partially paid shares of stock, the law requires that there is no
certificate of stock issued until full payment of the subscription.
Application in the case:
In this case, before a call was made on her unpaid subscription,
she was able to sell her shares to Pablo. Precisely because the
certificate of stocks were already issued to Leonora so she could
just indorse or deliver it to any person, as in this case, Pablo. She
was also able to convince the Secretary to record the details of the
sale in the Stock and Transfer Book.
Q: Is that valid?
A: Section 62 provides that “no shares of stock
against which the corporation holds any unpaid claim
shall be transferable in the books of the corporation.”
This would compound the defects of the issuance shares
of stock of Leonora with regard to the first 100 common
shares. First, it was half paid by promissory notes. Now,
certificates of stock covering half of the shares of stock
were delivered to a third person which is prohibited
considering that the corporation still holds an unpaid
claim over Leonora’s subscription. Thus, it was not
proper for the Secretary to issue the certificates of stock.
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Section 62, RCCP
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.
xxx
Under Section 62, the certificate must be signed by the president
or vice president, countersigned by the secretary or assistant
secretary. In the first transfer, the certificates of stocks were only
signed by the secretary because the president was away. Thus, the
certificate itself were irregularly issued.
Q: How about the second transfer?
Section 62, RCCP
xxx
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.
xxxxx
A: Here, Leonora bought another 100 shares in cash and the
certificates of stock were signed by the Vice President and
Secretary. Leonora delivered and indorsed it in blank to her
creditor, Marcelo. It appears to be regular because there were
certificates of stock released in her favor properly signed and the
transfer was effected through delivery and indorsement.
Q: Is that enough?
A: Here, there is no problem because the
shares were paid in cash and the certificates of stock
were properly signed by the authorized officers and the
transfers were effected in accordance laid down by the
law. However, the law provides that “No transfer, however,
shall be valid, except as between the parties, until the transfer is
recorded in the books of the corporation”. The problem in this
case was the creditor presented the certificates of stock
to the Secretary to record the transfer but the Secretary
refused.
Q: Is the second transfer valid insofar as the corporation is
concerned?
A: Requisites for a valid transfer
1. There must be a delivery of the stock certificate.
2. The certificate must be endorsed by the owner or his or
her attorney-in-fact or other person legally authorized to
make the transfer.
3. 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
Page 35

certificate or certificates, and the number of shares
transferred.
It tells us that there is a valid between the parties (buyer and seller
of the stock) because the corporation is not a party to the sale
transaction. The sale with regard to the seller and buyer is valid if
there is: (1) delivery and (2) indorsement.
Q: Does it matter that the certificates were indorsed in blank?
A: The law does not provide for a prohibition.
There is no requirement that it must be indorsed to a
specific person.
Q: Does it make it a bearer instrument (whoever holds the share
of stock will automatically be considered as an owner)?
A: No, it is not a bearer instrument.
Requisites for a Valid Transfer
1. There must be a delivery of the stock certificate.
2. The certificate must be endorsed by the owner or his or
her attorney-in-fact or other persons legally authorized
to make the transfer.
3. No transfer, however, shall be valid, except as between
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/s, and the number of shares transferred
A CERTIFICATE STOCK IS NOT A BEARER
INSTRUMENT: A share of stock or certificate of stock
representing a share of stock is NOT a bearer of instrument.
Reason: When you purchase shares of stock and you possess the
shares of stock, you must surrender the certificate of stock to the
corporate secretary for ereisgreation. The share of stock must be
registered in your name, as the buyer.
There must be registration of that interest in the corporation. You
cannot be considered a stockholder who has the rights of a
stockholder if the shares were not registered in your name. You
cannot say that a certificate of stock is a bearer instrument.
However, in this case, the 2nd transfer was not registered in the
corporation.
EFFECT OF NON-REGISTRATION OF TRANSFER:
Q: What is the effect of non registration of the transfer?
A: If the sale was not recorded by the corporation, the transfer
between buyer and seller is valid between the parties. However,
it is not effective against the Corporation (Section 62, RCC). You
cannot assert your rights against the corporation since the sale was
not recorded in the stock and transfer book.
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
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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 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. XXX
An unrecorded transfer is still valid between the two
parties (buyer and seller). The buyer can file an action for
collection or specific performance if the seller refuses to deliver
a certificate of stock since they have a valid contract of sale.
However, it is not effective against the corporation and third
parties if it is not recorded in the stock and transfer book.
If the transfer is registered in the stock and transfer book, the
sale is:
1. valid between and among the parties (buyer and seller);
and
2. effective and binding against the corporation (third
party to the sale)
Importance: A stockholder or transferee has no rights to be
enforced against the corporation if the sale is not registered in the
corporation. You cannot question the fact the sale is valid between
the parties.
SECRETARY’S REFUSAL TO RECORD SALE:
Q: Here, Marcelo actually presented the certificate of stock to the
Secretary to record the transfer, but the Secretary refused to
record the sale. Is this enough to clothe the buyer with authority
to enforce an action against the corporation? Will the right of the
buyer be effective against the corporation?
A: Yes, the fact that Marcelo surrendered the
certificate of stock is already equivalent to registration.
There was an effort from Marcelo to present and submit
the certificate of stock for the purpose of transferring
the name under the certificate of stock. Here, it was the
Secretary who refused.
GR: The sale of share of stock is valid as between the
parties, even if it was not recorded in the books of the
corporation. However, it is not effective and binding
against the corporation.
XPN: If notice is given to the corporation for purposes
of registration, such notice, coupled with the
presentation of certificate of shares, is already
equivalent to registration. It’s as if there was a valid
registration of the sale.
PROPRIETY OF THE REFUSAL OF SECRETARY TO
RECORD SALE TRANSACTION:
Page 36

Q: Can the Secretary refuse to record the transfer?
A: No. Recording of the sale is a ministerial duty on the part of
the Secretary, as long as all legal requirements of a valid transfer
have been complied with.IfIF all documents are proper and there
are no defects in the sale transaction, then the Secretary is without
discretion to deny or refuse registration.
REMEDY
The remedy to compel the corporate secretary to register the
transfer is to file an action for Mandamus.
Mandamus
Pursuant to the foregoing provision, a transfer of shares of
stock not recorded in the stock and transfer book of the
corporation is non-existent as far as the corporation is
concerned. As between the corporation on the one hand, and
its shareholders and third persons on the other, 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 such rights as it is
mandated by law to recognize arises.
Ponce v. Alsons Cement Corporation
G.R. No. 139802, December 10, 2002
In this case, the SC is of the opinion that the transferee is not the
proper party to call for the registration of the share of stocks
considering that the transferee is not yet a registered stockholder.
Hence, without such recording, the transferee may not be
regarded by the corporation as one among its stockholders and
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. This is the import of Section 63 which states
that “No transfer, however, shall be valid, except 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 situation
would be different if the petitioner 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.
Ponce v. Alsons Cement Corporation
G.R. No. 139802, December 10, 2002
Applying this to the case problem, Marcelo could not file a
petition for Mandamus to compel the transfer of the shares of
stocks.
This ruling was corrected by the SC in the case of Andaya v.
Rural Bank of Cabadbaran, Inc.
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Proper Party to File Mandamus
It is already settled jurisprudence that the registration of a transfer
of shares of stock is a ministerial duty on the part of the
corpropation. Aggrieved parties may then resort to the remedy of
mandamus to compel corporations that wrongfully or
unjustifiably refuse to record th transfer or to issue new
certificates of stock. This remedy is available even upon the
instance of a bona fide transferee who is able to establish a clear
legal right to the registration of the transfer. This legal right
inherently flows from the transferee’s established ownership of
the stocks, a right that has been recognized by this Court as early
as in Price v. Martin:
Andaya v. Rural Bank of Cabadbaran, Inc.
G.R. No. 188769, August 3, 2016
The proper party to file mandamus is either the transferror or
the transferee. If the transferee was able to prove, by presenting
the documents of conveyance (contract of sale, payment of
capital gains tax for the transfer of the sale) and has presented to
the corporate secretary all of the certificates of stocks subject to
the sale, the transferee is entitled to a registration of the sale
transaction. The transferee must be issued the certificate of
stock.
“We also rule that Andaya has been able to establish that he
is a bona fide transferee of the shares of stock of Chute. In
proving this fact, he presented to the RTC the following
documents evidencing the sale: xxx The existence,
genuineness, and due execution of these documents have
been admitted and remain undisputed. There is no doubt
that Andaya had the standing to initiate an action for
mandamus to compel the Rural Bank of Cabadbaran to
record the transfer of shares in its stock and transfer book
and to issue new stock certificates in his name. As the
transfer of the shares, petitioner stands too be benefited or
injured by the judgment in the instant petition, a judgment
that will either order the bank to recogniz the legitimacy of
the transfer and petitioner’s status as stockholder or to deny
the legitimacy thereof.”
Andaya v. Rural Bank of Cabadbaran, Inc.
G.R. No. 188769, August 3, 2016
In contrast, at the crux of this petition are the registration of
the transfer and the issuance of the corresponding stock
certificates. Requiring petitioner to register the transaction
before he could institute a mandamus suit in supposed
abidanance by the ruling in Ponce was a palpable error. It
led to an absurd, circuitous situation in which Andaya was
prevented from causing the registration of the transfer,
ironically because the shares had not been registered. With
the logic resorted to by the RTC, the transferees of shares
of stock would never be able to compel the registration of
the transfer and the issuance of new stock certificates in their
favor. They would first be required to show registration of
the transfer in their names — the ministerial act that is the
Page 37

subject of the mandamus suit in the first place. The trial
court confuses the application of the dicta in Ponce, which
is pertinent only to the issuanc of new stock certificates, and
not to the registration of a transfer of shares. As Ponce itself
provides, these two are entirely different events. The RTC’s
anomalous reasoning cannot be given legal imprimatur by
this Court.
Andaya v. Rural Bank of Cabadbaran, Inc.
G.R. No. 188769, August 3, 2016
Q: Who can file a petition for mandamus to compel the
corporation to register the transfer?
A: Either the transferor or transferee,
considering and only if all the documents for
registration are in order or as proper.
Case Problem 3
On July 10, 1991, Marcelo became an wonder of one (1) share
of stock in Bethnal Green Corporation in order to qualify him
as a director, A year later, he was not re-elected as a director,
but he remained as registered stockholder of Bethnal Green.
When he was still a director, he discovered that on January 5,
1991, the Board of Directors issued free of charge 10,000
shares to Pedro — a lawyer who represented Bethnal Green
in an ejectment case. Marcelo approached you as his counsel,
asking if he can bring an action in the name of Bethnal Green
to impute liability against the directors for the issuance of
watered stocks.
What legal advice can you give Marcelo?
SEC. 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 a
consideration other than cash, valued in excess of its fair value;
or (c) having knowledge of the insufficient consideration, does
not file a 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
received at the time of issuance of the stock and the par or
issued value of the same.
Q: What are watered stocks?
A: Description of watered stocks can be
found in Section 64. These are those stocks which are
issue (a) for a consideration less than its par or issued
value; (b) for a consideration other than cash, valued in
excess of its fair value.
The consideration refers to those mentioned under Section 61.
SEC. 61. Consideration for Stocks. – xxx 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
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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.
Paragraph c of Section 64 refers to the liability of the directors
who issue water stocks.
SEC. 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 a consideration other
than cash, valued in excess of its fair value; or
(c) having knowledge of the insufficient consideration, does not
file a 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 received at the
time of issuance of the stock and the par or issued value of the
same.
Watered stocks speak about discrepancies in the valuation of the
stocks or shares. It refers to the difference in the value of the stock
and the fair market value of the said stock.
RATIONALE OF DIRECTOR’S LIABILITY IN SEC. 64:
TRUST FUND DOCTRINE
Any subscription to a share of stock is considered as a trust fund
for the corporate creditors. This trust fund is relied on by the
creditors for the satisfaction of the creditors’ claims. So if the
stocks are undervalued, it would impair the trust fund to the
prejudice of the corporate creditors. WIth this, the law prescribes
the provision of watered stocks in following the trust fund
doctrine.
Q: Can treasury shares be disposed of even less than fair market
value?
A: Sec. 9, it provides that treasury shares can be
disposed of for a reasonable price, even less than par
value, fixed by the Board of Directors. So for treasury
shares, the BOD has the discretion to peg the price.
TN: TREASURY SHARES ARE NOT COVERED UNDER
SEC. 64.
In sum, treasury shares can be sold less than par value as long as
1) it is reasonable, 2) determined by the BOD.
TN: THE RULE ON WATERED STOCKS APPLY TO
ORIGINAL ISSUANCE OF SHARES OF STOCKS.
NOT APPLICABLE TO:
1. Stocks issued and already fully paid
2. Stocks transferred
3. Stocks sold to the corporation
Page 38

Here, Marcelo was a director. He discovered that on January 5,
1991, the Board of Directors issued free of charge 10,000 shares
to Pedro, the lawyer. Can he file a derivative suit for the alleged
issuance of watered stocks?
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:
1. He or she 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 or she exerted all reasonable efforts, and alleges the same
with particularity in the complaint, to exhaust all remedies
available under the Articles of Incorporation, bylaws, laws or
rules governing the corporation or partnership to obtain the
relief he or she 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.
At the time of the occurrence of the act complained of, and at the
time of filing the derivative suit, that person must be a stockholder
of the corporation. The problem in this case was Marcelo only
became a stockholder on July 10, 1991. After he became a
stockholder, it was only then that he discovered that there was an
alleged issuance of watered stock on January 5, 1991, which is six
months before he became a stockholder. In which case, this would
not comply with the first requisite because the filing party was not
yet a stockholder at the time that the act complained of occurred.
Although Marcelo was already a stockholder and continues to
become a registered stockholder, and is actually a stockholder at
the time of the filing of the action, the law requires that he must
be a stockholder in both times–at the time that the act complained
of occurred, and at the time of filing of the action.
Since he was not yet a stockholder at the time of the alleged
issuance of watered stock, then Marcelo cannot file derivative
action. What he can do is maybe convince another stockholder
who was then a stockholder at the time that the alleged issuance
of watered stock occurred and at the time of the filing of the
action.
Q: Was there really an issuance of watered stock?
A: Remember in this case, the previous BOD
issued 10,000 shares for Pedro in exchange for his legal
services. In Sec. 61, actual services rendered to the
corporation are a valid consideration for shares of stock.
However, do not be misled by the narrative that the
shares were issued free of charge. In fact, they were
issued in exchange for the services of Pedro as a lawyer.
In order to determine whether or not there was an issuance of
watered stock, you must first inquire if the value of the
consideration, i.e., the value of the legal services, is equivalent to
the par or issued value of 10,000 shares.
Your advice to Marcelo would be qualified. If the value of the legal
services is lesser than the fair value of the shares of stock received
by Pedro, then the directors may be held liable for the issuance of
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watered stocks. However, if the value of the legal services is equal
to the issued price of the shares of stock given to Pedro, then the
directors are not liable.
CASE PROBLEM 4
On March 8, 2021, Pablo subscribed to 1,000,000 shares
of stock in Homerton Inc. with par value of PhP1.00 per
share, payable in one year. Pablo immediately paid
PhP250,000.00 in cash. In the annual stockholders’ meeting
held on April 19, 2021, Pablo voted all of his shares to elect
directors. On March 8, 2022, a call was made on Pablo’s
unpaid subscription, but to no avail. On March 15, 2022,
Pablo voted all of his shares in a special stockholders’ meeting
to grant bonuses to directors. On April 7, 2022, the Board of
Directors issued a resolution, declaring that the shares of
Pablo have become delinquent, and ordered that a public
auction be conducted in the principal office at 2:00 P.M. on
May 16, 2022. Three (3) bidders were willing to settle the
PhP750,000.00 unpaid subscription plus interest, costs and
expenses. Jose tendered a bid for 1,000,000 shares. Maria
submitted a bid for 850,000 shares, while Andres made a bid
for 750,000 shares.
Who shall own the shares of Pablo? Explain.
In this case, Pablo is subscribed to one million shares, but he only
paid PhP250,000 representing 250,000 shares. So, he owes the
corporation PhP750,000 payable in one year. Pablo still has an
unpaid subscription. This notwithstanding, Pablo was able to vote
twice: (1) in the annual stockholders’ meeting on April 19, 2021;
and (2) in a special meeting on March 15, 2022.
Q: Can Pablo validly exercise his rights even if he has an unpaid
subscription?
A: Sec. 71 of the RCCP.
Section 71. Holders of subscribed shares not fully paid which
are not delinquent shall have all the rights of a stockholder.
CANALES 28:00-35:00
Since Marcelo was not yet declared a delinquent stockholder, since
the Board only made a call on March 8, 2022 (the date specified
in the subscription contract which is 1 year March 8, 2021), the
Resolution declaring the shares as delinquent shares occurred after
the special meeting, he was not yet declared a delinquent
stockholder. Thus, Marcelo has all the rights of a stockholder,
including the right to vote.
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 is made by the holder of
such delinquent stock for the amount due on the
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subscription with accrued interest, and the costs and
expenses of advertisement, if any.
In contrast, if you are a delinquent stockholder, you don’t have
the right to vote and other rights, except the right to dividends but
you need to follow the procedure under the law.
For cash dividends, the unpaid subscriptions must first be
deducted from the cash dividends.
For stock dividends, it must be withheld until full payment of the
unpaid subscription.
In any case, delinquent stockholders are not allowed to vote.
Q: What is the remedy to enforce payment of the unpaid
subscription?
A: Refer to Sec. 66 and 67.
Sec. 66. Payment of Balance of Subscription. Xxx 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.
It tells you that the entire shareholdings of a delinquent
shareholder shall be declared delinquent, and not just the part that
was not paid by the shareholder. Remember the doctrine of
indivisibility of a subscription contract, even if Marcelo made
a partial payment of 250k, what is declared delinquent is not just
the 250k but the entire 1M shares considering that the
subscription contract is an indivisible contract. Think of the 250k
as partial payment for each and every share subscribed by Marcelo.
SInce the par value for the share is 1 peso, then think that there is
only a payment of 25 cents for each share. In effect, no share was
fully paid yet. All shares are considered delinquent and can be
subject to delinquency sale under Sec. 67.
Q: When will the delinquency sale be held?
SEC. 67. Delinquency Sale. – The board of directors may, by
resolution, order the sale of delinquent stock and 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.
Since Marcelo was only declared delinquent on April 7, 2022
pursuant to the Resolution issued by the Board, the sale can be
conducted not less than thirty (30) days nor more than sixty (60)
days from April 7, 2022. The schedule of the sale on May 16, 2022
falls in the prescribed period under Sec. 67.
Abellano ◦ Adolfo ◦ Bajar ◦ Cabeje ◦ Caceres ◦ Capuyan ◦ Cañales ◦ Daulo ◦ Delicano ◦ Dino ◦ Gabato ◦ Leopardas ◦ Ngo ◦ Panelo ◦ Prisco ◦ Reyes ◦ Velez ◦ Villagonzalo
EH 308 Support Group
CORPORATION LAW
ATTY. VJC | SECOND SEMESTER 2021-2022
There is also a notice and publication requirement for the auction
sale to comply with the due process requirement.
SEC. 67. Delinquency Sale. – xxx Notice of the sale, with a
copy of the resolution, shall be sent to every delinquent
stockholder either personally, by registered mail, or through
other means provided in the bylaws. The same shall be
published once a week for two (2) consecutive weeks in a
newspaper of general circulation in the province or city where
the principal office of the corporation is located.
Q: Who shall own the delinquent shares? To whom shall it be
awarded?
A: In this case, 3 bidders were willing to settle the outstanding
indebtedness of 750k plus interests and costs.
They tendered the ff bid:
Jose- 1M shares
Maria- 850k shares
Andres- 750k shares
Maria tendered a bid for 850, 000 shares while Andres made a bid
of 750,000 shares.
Q: To whom will the shares be awarded?
A: Under Section 67, the delinquent stock shall
be sold at a public auction to such bidder who shall offer
to pay the full amount of the balance on the subscription
together with accrued interest, costs of advertisement
and expenses of sale, for the smallest number of
shares or fraction of a share. Here, Andres offered to
pay the full amount for the smallest number of shares
(750,000 shares) then the delinquent shares shall be
awarded to Andres.
The law gives preference to the sale of delinquent stocks that are
most profitable to the corporation, since they can sell it for the
smallest number of shares to Andres, then the delinquent shares
must be awarded to Andres.
Remaining Shares
Since Andres was able to purchase the total delinquent shares
(entire 1 million delinquent shares) in exchange for just 750,000
shares, Andres will be issued the corresponding certificates of
stock representing 750,000 shares. What will happen to the remaining
250,00 shares?
Section 67 provides that the remaining shares, if any, shall be
credited in favor of the delinquent stockholder who shall
likewise be entitled to the issuance of a certificate of stock
covering such shares. Section 67 provides an instance where if
the delinquent shares are sold for a smaller number of shares, the
balance or the ownership over the remaining number of
delinquent shares can be reverted back to the delinquent
stockholder. This is only possible if the bidder is willing to pay for
the smallest number of shares.
Scenario: What if the bidder pays for the shares equivalent to the
delinquent shares? In this case 1,000,000 shares. What if in this
scenario, Jose is the only bidder. If Jose is the only bidder then the
delinquent shares will be awarded to him alone. Since there is no
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remaining shares, Pablo will no longer have any shares in the
corporation.
No Bidder
Scenario: What if there is no bidder at all ?
Under Section 67, should there be no bidder, the
corporation may bid for the delinquent shares and the total
amount due shall be credited as fully paid in the books of the
corporation. Title to all the shares of stock covered by the
subscription shall be vested in the corporation as treasury
shares and may be disposed of by said corporation in
accordance with the provisions of this Code. The delinquent
shares will now become treasury shares - those owned by the
corporation and not part of the outstanding shares of the stock of
corporation. They are not counted in determining the ⅔
outstanding capital stock for ratification.
Q: Can Pablo still question the sale?
A: Under Section 68, the law allows the delinquent stockholders
to question the sale but it provides for certain conditions:
REQUISITES FOR QUESTIONING THE SALE
1. 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 the sale at the legal rate
2. The grounds for questioning the sale are limited to
two:
a. Irregularity or defect in the notice of sale
b. Irregularity or defect in the sale itself.
3. No such action shall be maintained unless a complaint
is filed within six months from the date of sale
a. 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 the sale
at the legal rate - This is in order to prevent frivolous
suit who just wants to question the sale, the law requires
that challenging party to make a deposit equivalent to the
amount paid by the highest bidder. This will serve as
security for the highest bidder.
b. The grounds for questioning the sale are limited to
two:
i. Irregularity or defect in the notice of sale -
It does not contain the requisites provided
under the law (i.e: number of share,s name of
owners of shares)
ii. Irregularity or defect in the sale itself.
c. No such action shall be maintained unless a complaint is
filed within six months from the date of sale - The
filing of the action to question the sale is time-bound.
This is to prevent the highest bidder from acquiring full
ownership over the property over the delinquent share
at a soonest possible time this also prevents a hiatus over
the ownership of the delinquent shares. Any challenge to
the auction sale must be filed within the 6 month period
from the date of the auction sale.
Abellano ◦ Adolfo ◦ Bajar ◦ Cabeje ◦ Caceres ◦ Capuyan ◦ Cañales ◦ Daulo ◦ Delicano ◦ Dino ◦ Gabato ◦ Leopardas ◦ Ngo ◦ Panelo ◦ Prisco ◦ Reyes ◦ Velez ◦ Villagonzalo
EH 308 Support Group
CORPORATION LAW
ATTY. VJC | SECOND SEMESTER 2021-2022
Aside from a delinquency sale, the corporation has another
remedy and this is provided under Section 69. The corporation is
entitled to judicial remedy. It can file a collection case in court to
enforce the payment of the unpaid subscription.
SEC. 69. Court Action to Recover Unpaid Subscription. –
Nothing in this Code shall prevent the corporation from collecting
through court action, the amount due on any unpaid subscription,
with accrued interest, costs and expenses.
REMEDIES OF THE CORPORATION
1. extrajudicial sale of the stocks following the procedure in
Section 67
2. file an action in court following Section 69
LOST OR DESTROYED CERTIFICATES
(SEC 72)
Remember: Even if a stockholder does not have a certificate of
stock, he is still entitled to the management, proprietary and
remedial rights.
Problem
If you are in possession of such a certificate and this is delivered
or endorsed to third persons, there can be a valid transfer of stock.
But what if there are fraudulent transfers? What if the stocks are
delivered to third persons without you even knowing it?
PROCEDURE BEFORE A CORPORATION MAY ISSUE
NEW CERTIFICATES OF STOCK OF LOST OR
DESTROYED CERTIFICATES (PURSUANT TO
SECTION 72)
Purpose of the procedure: To protect the interest of the
corporation and the original owner of the certificate of stock.
1. Notice of Loss – The registered owner 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;
This is basically an affidavit of loss by stockholder given to the
corporation.
The corporation shall verify that the certificates were actually lost.
It will have to make its own investigation. Only when it is
convinced or there is good reason to believe that the certificates
were lost that the corporation may proceed to publication.
2. Publication – The corporation, after verification, shall
publish a notice in a newspaper of general circulation in the
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place where the corporation has its principal office, once a week pursuant to the procedure above-described, except in case of
for three (3) consecutive weeks at the expense of the registered fraud, bad faith, or negligence on the part of the corporation
owner of the certificate of stock which has been lost, stolen or and its officers.
destroyed. The notice shall state:
GR: If the corporation has complied with the procedure laid
i. the name of the corporation,
down by Sec 72, then it will not be liable.
ii. the name of the registered owner,
iii. the serial number of the certificate,
XPN: In case of fraud, bad faith, or negligence on the part of the
iv. the number of shares represented by such certificate, and
corporation and its officers.
v. a statement that after the expiration of one (1) year from the
date of the last publication, if no contest has been presented to
Consider a scenario where the reason why the certificates of stock
the corporation regarding the certificate of stock, the right to
were lost or destroyed was because of the doing of the directors
make such contest shall be barred and the corporation shall
or officers. In which case, the corporation or the directors or
cancel the lost, destroyed or stolen certificate of stock in its
officers may be held liable.
books.

TN of the contents of the Notice.

3. Bond – The corporation shall issue a new certificate of stock,

unless the registered 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;

PURPOSE OF ISSUING BOND: To protect the interest of

any person who may challenge the issuance of new certificates of
stock, because for all you know, such certificates were already
validly delivered and endorsed to a third person. In order to
protect that third person claiming, the stockholder must post
bond for a period of 1 year.
Within this period, the ownership over the share of stock
represented by the certificate of stock that was lost or destroyed
MAY STILL BE CHALLENGED. In fact, if there is a contest
presented to the corporation or if an action is pending in court
regarding the said certificate, the corporation will not issue a new
certificate. It will be suspended until the court shall render a final
decision.

4. Contest – 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; and

IF THERE ARE TWO CONFLICTING CLAIMANTS

AGAINST THE CERTIFICATE OF STOCK, the corporation
may ask them to file an INTERPLEADER CASE in court to
determine who is the owner of the certificate. Issuance of a new
one will be suspended even if the stockholder will post a bond.

5. Non-liability of the Corporation – No action may be

brought against any corporation which shall have issued
certificate of stock in lieu of those lost, stolen or destroyed

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Abellano ◦ Adolfo ◦ Bajar ◦ Cabeje ◦ Caceres ◦ Capuyan ◦ Cañales ◦ Daulo ◦ Delicano ◦ Dino ◦ Gabato ◦ Leopardas ◦ Ngo ◦ Panelo ◦ Prisco ◦ Reyes ◦ Velez ◦ Villagonzalo
EH 308 Support Group
 CORPORATION LAW
ATTY. VJC | SECOND SEMESTER 2021-2022

Module 8 member on any action or proposed

CORPORATE BOOKS AND RECORDS
The law requires that all information pertinent to the corporation
must be kept and preserved in the principal office of the
corporation.
B.P. Blg. 68 R.A. No. 11232
SECTION 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;
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
action must be recorded in full
upon their demand.
Under the New Law (Section 73), it expanded the list of
documents that must be kept in the principal office:
1. The articles of incorporation and bylaws of the
corporation and all their amendments;
➔ There are amendments and certifications
issued by the SEC approving the amendments.
These must be kept by the corporation.
2. 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;
➔ This will enable the stockholder who wants to
check the corporate records to be aware of the
ownership or the equity structure of the
corporation.
3. The names and addresses of all the members of the
board of directors or trustees and the executive
officers;
4. A record of all business transactions;
➔ All important contacts involving the
corporation, commercial documents (e..g
receipts, ledgers, books, journals) must be
preserved by the corporation.
5. A record of the resolutions of the board of directors
or trustees and of the stockholders or members;
6. Copies of the latest reportorial requirements
submitted to the Commission; and
➔ Reportorial requirements that must be
submitted to the SEC every year - financial
statements, general information sheet.
7. 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.
STOCK AND TRANSFER BOOK
A corporation also needs to maintain a stock and transfer book.
Stock corporations must also keep a stock and transfer book,
which shall contain a record of all stocks in the names of the
stockholders alphabetically arranged; the installments paid and
unpaid on all stocks for which subscription has been made, and
the date of payment of any installment; a statement of every

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Abellano ◦ Adolfo ◦ Bajar ◦ Cabeje ◦ Caceres ◦ Capuyan ◦ Cañales ◦ Daulo ◦ Delicano ◦ Dino ◦ Gabato ◦ Leopardas ◦ Ngo ◦ Panelo ◦ Prisco ◦ Reyes ◦ Velez ◦ Villagonzalo
EH 308 Support Group
 CORPORATION LAW
ATTY. VJC | SECOND SEMESTER 2021-2022

alienation, sale or transfer of stock made, the date thereof, by and PENALTIES FOR ABUSE OF RIGHT OF
to whom made; and such other entries as the bylaws may INSPECTION
prescribe. The stock and transfer book shall be kept in the
principal office of the corporation or in the office of its stock B.P. Blg. 68 R.A. No. 11232
transfer agent and shall be open for inspection by any director or
stockholder of the corporation at reasonable hours on business Any stockholder who shall abuse
days. the rights granted under this
section shall be penalized under
This is where you register transfers of shares. Any alienation of Section 158 of this Code, without
the interest of a stockholder in a share of stock must be recorded prejudice to the provisions of
in the stock and transfer book. This refers to absolute transfer Republic Act No. 8293, otherwise
of ownership over shares of stock. Say, a Deed of Absolute Sale known as the "Intellectual Property
must be recorded in the stock and transfer book. Code of the Philippines," as
amended, and Republic Act No.
Section 73 enumerates what must be recorded in the stock and 10173, otherwise known as the
transfer book. "Data Privacy Act of 2012."
1. names of the stockholders;
2. the installments paid and unpaid on all stocks for
which subscription has been made, and the date of Any officer or agent of the
payment of any installment corporation who shall refuse to
➔ This would also pertain to the transactions allow the inspection and/or
involving the subscribers, as to their reproduction of records in
installments on the subscriptions made; accordance with the provisions of
3. a statement of every alienation, sale or transfer of this Code shall be liable to such
stock made, the date thereof, by and to whom made. director, trustee, stockholder or
member for damages, and in
These documents must be in the hands of the corporate addition, shall be guilty of an
secretary. The corporate secretary is the custodian of all offense which shall be punishable
corporate books and records. Since these documents are vital to under Section 161 of this Code:
operation of the business, there must be only one person who is Provided, That if such refusal is
considered as the official repository of these documents, so that made pursuant to a resolution or
if any stockholder or member of the corporation would like to order of the board of directors or
inspect them, then they know who to approach. trustees, the liability under this
section for such action shall be
PERSONS WHO ARE PROHIBITED FROM imposed upon the directors or
trustees who voted for such refusal:
EXERCISING THE RIGHT OF INSPECTION Provided, further, That it shall be a
B.P. Blg. 68 R.A. No. 11232 defense to any action under this
section that the person demanding
A requesting party who is not a to examine and copy excerpts from
stockholder or member of record, the corporation's records and
or is a competitor, director, officer, minutes has improperly used any
controlling stockholder or information secured through any
otherwise represents the interests prior examination of the records or
of a competitor shall have no right minutes of such corporation or of
to inspect or demand reproduction any other corporation, or was not
of corporate records. acting in good faith or for a
legitimate purpose in making the
demand to examine or reproduce
Under the New Law, a requesting party is bound by corporate records, or is a
confidentiality rules. The law now provides for persons who are competitor, director, officer,
prohibited from exercising the right of inspection: controlling stockholder or
1. not a stockholder or member of record, otherwise represents the interests
2. competitor, of a competitor.
3. director, officer, controlling stockholder or otherwise
represents the interests of a competitor

If the corporation denies or does

not act on a demand for inspection
and/or reproduction, the aggrieved

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Abellano ◦ Adolfo ◦ Bajar ◦ Cabeje ◦ Caceres ◦ Capuyan ◦ Cañales ◦ Daulo ◦ Delicano ◦ Dino ◦ Gabato ◦ Leopardas ◦ Ngo ◦ Panelo ◦ Prisco ◦ Reyes ◦ Velez ◦ Villagonzalo
EH 308 Support Group
 CORPORATION LAW
ATTY. VJC | SECOND SEMESTER 2021-2022

party may report such denial or If the corporation denies or does

inaction to the Commission. not act on a demand for inspection
Within five (5) days from receipt of and/or reproduction, the aggrieved
such report, the Commission shall party may report such to the
conduct a summary investigation Commission. Within 5 days from
and issue an order directing the receipt of such a report, the
inspection or reproduction of the Commission shall conduct a
requested records. summary investigation and issue an
order directing the inspection or
reproduction of the requested
records.
The law creates prohibited acts and their corresponding penal
provisions. Any unjustified refusal of the right of inspection, or if
a stockholder - whether individual or corporate - shall abuse the The Stock Transfer Agent engages principally in the business of
right of inspection - they can be liable for administrative sanctions registering transfers of stocks on behalf of the stock corporation.
provided under Section 158 of the Revised Corporation Code. These entities are allowed to operate if they are able to secure a
license from the SEC which would require them to pay a certain
SECTION 158. Administrative Sanctions. — If, after due notice fee.
and hearing, the Commission finds that any provision of this
Code, rules or regulations, or any of the Commission's orders has The new law expands the rights of a stockholder who is
been violated, the Commission may impose any or all of the denied the right of inspection.
following sanctions, taking into consideration the extent of ● VIOLATION: If the corporation unjustifiably denies
participation, nature, effects, frequency and seriousness of the or does not act on a demand for inspection and
violation: reproduction of corporate books and records
1. Imposition of a fine ranging from Five thousand pesos ● REMEDY: The aggrieved party may report to the SEC
(P5,000.00) to Two million pesos (P2,000,000.00), and the denial or the inaction of the corporation. Within 5
not more than One thousand pesos (P1,000.00) for each days from the receipt of that report, the SEC will
day of continuing violation but in no case to exceed Two conduct its own Summary Investigation; and when the
million pesos (P2,000,000.00); circumstances require, it may issue an order directing the
2. Issuance of a permanent cease and desist order; inspection and reproduction of the records.
3. Suspension or revocation of the certificate of
incorporation; and Case Problem 5
4. Dissolution of the corporation and forfeiture of its assets
under the conditions in Title XIV of this Code. The Board of Directors of Westham Inc. issued a Resolution,
limiting the examination of corporate records to a period of
INDEPENDENT TRANSFER AGENT ten (10) days prior to the annual stockholders' meeting. A
Under the New Law, the SEC may require the presence of an month before the regular stockholders' meeting, three (3)
independent transfer agent in case where a corporation stockholders filed a written request to inspect the corporate
transfers or trades stocks in the secondary market. books and financial records -
1. Jose, who owns 0.001% of the outstanding capital
Generally, with regard to the transfer of shares, it is the corporate stock of Westham Inc.;
secretary who facilitates the recording of transfers or alienations 2. Maria, who is a trustee in a voting trust agreement;
of shares of stocks. But if the corporation sells its shares in the and
secondary markets or trades these stocks in an exchange, the law 3. Andres, who controls 51% of the outstanding capital
allows for an independent transfer agent - which is an entity stock of Westham's competitor.
different from the corporation.
Pursuant to a resolution of the Board of Directors, the
B.P. Blg. 68 R.A. No. 11232 Secretary denied their request on two (2) grounds:
● one, Andres had in the past divulged Westham's
A stock transfer agent or one business strategies to aid the competitor; and
engaged principally in the business ● two, it would preempt the Board's presentation of
of registering transfers of stocks in the financial report in the upcoming annual
behalf of a stock corporation shall stockholders' meeting.
be allowed to operate in the
Philippines upon securing a license Q: Is the refusal valid? Explain.
from the Commission and the
payment of a fee to be fixed by the
Commission, which shall be Atty’s summary of the facts:
renewable annually; ● Here, the BoD established a rule that inspection can only
be done within 10 days prior to the annual stockholders’
meeting.

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Abellano ◦ Adolfo ◦ Bajar ◦ Cabeje ◦ Caceres ◦ Capuyan ◦ Cañales ◦ Daulo ◦ Delicano ◦ Dino ◦ Gabato ◦ Leopardas ◦ Ngo ◦ Panelo ◦ Prisco ◦ Reyes ◦ Velez ◦ Villagonzalo
EH 308 Support Group
 CORPORATION LAW
ATTY. VJC | SECOND SEMESTER 2021-2022

● However, under Section 73, RCCP, the 10-day provided

in the resolution of the BoD is NOT sanctioned by the Q: Here, it was raised by the Secretary that the request for the
law. In fact, that period is arbitrary. financial records is immature because this would preempt the
presentation by the BoD in the regular stockholder’s meeting. Is
that excuse valid?
SECTION 73. xxx
A: The fact that the Board will present the financial report is NOT
Corporate records, regardless of the form in which they are
a valid ground to refuse the request for inspection. The law does
stored, shall be open to inspection by any director, trustee,
not prevent the stockholders from requesting copies at some
stockholder or member of the corporation in person or by a
other time. They can request it even before or after the regular
representative at reasonable hours on business days, and a
meeting, for as long as they can comply with the requirements
demand in writing may be made by such director, trustee or
under the law.
stockholder at their expense, for copies of such records or
excerpts from said records. The inspecting or reproducing
Also, there should be no discrimination. Examining the facts of
party shall remain bound by confidentiality rules under
the case, there were three stockholders who made the joint
prevailing laws, xxx
request, Jose, Mari, and Andres. The law actually grants all of the
stockholders all of the stockholders to inspect the corporate
NOTE: books and records.
● Based on the requirements under Section 73, there is no
limitation as to the time as to which the stockholders With regard to Jose.
request for a copy of the corporate books or records. It does not require any specific amount of capital that the
● Section 73 only provides that the inspection may be stockholders must possess before he can inspect the right of
done at reasonable hours on business days. inspection. It does not matter, if the minority stockholder like
Jose, who owns 0.001% of the OCS would request for the
Q: Here, the request for inspection was made 1 month before the inspection of the corporate books. That request must be granted.
regular stockholder’s meeting. Can they do that?
A: Yes, Maria and Andress can do that With regard to Maria.
provided that the request be made at reasonable hours
SECTION 58. Voting Trusts.— xxx
on business days. Here, they were asking for financial
statements/records of the corporation. Stockholders
The voting trust agreement filed with the corporation shall be
can have access to the financial statement of the
subject to examination by any stockholder of the corporation in
corporation. (Section 74).
the same manner as any other corporate book or record:
Provided, That both the trustor and the trustee or trustees
SECTION 74. Right to Financial Statements.— A corporation may exercise the right of inspection of all corporate books
shall furnish a stockholder or member, within ten (10) days from and records in accordance with the provisions of this Code.
receipt of their written request, its most recent financial xxx
statement, in the form and substance of the financial reporting
required by the Commission.
Remember in a voting trust, legal title over the shares of stock is
transferred to the trustee, what is possessed by the trustee is
At the regular meeting of stockholders or members, the board
beneficial ownership. The trustee can now exercise the right to
of directors or trustees shall present to such stockholders or
inspect corporate books.
members a financial report of the operations of the corporation
for the preceding year, which shall include financial statements,
Thus, insofar as Jose and Maria are concerned, their request
duly signed and certified in accordance with this Code, and the
should not be denied.
rules the Commission may prescribe.
What is the remedy if the corporate secretary unjustly denied the request?
However, if the total assets or total liabilities of the corporation
are less than Six hundred thousand pesos (P600,000.00),or such
other amount as may be determined appropriate by the SECTION 73. Books to be Kept; Stock Transfer Agent.—
Department of Finance, the financial statements may be xxx If the corporation denies or does not act on a demand for
certified under oath by the treasurer and the president. inspection and/or reproduction, the aggrieved party may
report such denial or inaction to the Commission. Within
five (5) days from receipt of such report, the Commission shall
conduct a summary investigation and issue an order
directing the inspection or reproduction of the requested
records. xxx
NOTE:
● 2nd paragraph (Sec. 74), for purposes of disclosure,
imposes an obligation to the BoD to give a financial In this case, here the Secretary denied the request pursuant to a
report. Resolution made by the BoD.
● The 2nd paragraph does not even require a written
request by the Stockholders.
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 CORPORATION LAW
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What is the implication that the denial was done with the imprimatur of the 5. It is subject to other applicable laws. (Intellectual
BoD? property Code, Data Privacy Act, Revised Corporation
Code, Law on secrecy of Bank Deposits)
SECTION 73. Books to be Kept; Stock Transfer Agent.— xxx
Any officer or agent of the corporation who shall refuse to allow
Legitimate Purposes
the inspection and/or reproduction of records in accordance
with the provisions of this Code shall be liable to such director, Among the purposes held to justify a demand for inspection are
trustee, stockholder or member for damages, and in addition, the following:
shall be guilty of an offense which shall be punishable under 1. To ascertain the financial condition of the company or the
Section 161 of this Code: Provided,That if such refusal is made propriety of dividends;
pursuant to a resolution or order of the board of directors or 2. The value of shares of stock for sale or investment;
trustees, the liability under this section for such action shall be 3. Whether there has been mismanagement;
imposed upon the directors or trustees who voted for such 4. In anticipation of shareholders’ meetings to obtain a mailing
refusal:xxx 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.
Under Section 73, it is only the officer or agent who refused who
shall be liable to the requesting party for damages and may be
Among the improper purposes which may justify denial of the
held liable under Section 161 of the Code, which imposes both
right of inspection are:
administrative sanctions and penalties. But if the refusal was
1. Obtaining of information as to business secrets or aid
made pursuant to a resolution, the liability shall be imposed
to a competitor;
upon the Directors who voted for the refusal.
2. To secure business “prospects” or investment or
advertising lists;
With regard to Andres.
3. To find technical defects in corporate transactions in
He controls 51% of the OCS of Westham’s competitor.
order to bring “strike suits” for purposes of blackmail
Although it was the sentiment of the Secretary that Andres
or extortion.
previously divulged confidential strategies to aid the competitor.
Terelay Investment and Development Corporation v. Yulo
Is that Refusal on that ground valid? YES.
G.R. No. 160924, August 5, 2015
Defenses:
SECTION 73. Books to be Kept; Stock Transfer Agent.— xxx
Discussion:
rovided, further,That it shall be a defense to any action
4. It is not prohibited because the list of stockholders and
under this section that the person demanding to examine
members are already stated not only in the Article of
and copy excerpts from the corporation's records and
Incorporation but also in other records of the
minutes has improperly used any information secured
corporation. Stockholders can approach other
through any prior examination of the records or minutes of
stockholders to discuss corporate matters and maybe try
such corporation or of any other corporation, or was not
and influence others regarding the manner of voting in a
acting in good faith or for a legitimate purpose in making the
particular corporate act. It is a legitimate purpose unless
demand to examine or reproduce corporate records, or is a
it is intended to defraud third persons or controversial
competitor, director, officer, controlling stockholder or
foreign national equity restrictions.
otherwise represents the interests of a competitor. xxx
5. If a stockholder has filed a derivative suit against a
director, guilty of mismanagement of the corporate
It is clear he owns interest which is inimical to the corporation. funds, he can request for financial records or all the
Not only that, he also divulged information in the past. Andres records of business transactions involving that particular
should be rightfully denied the right to inspect the corporate director. In order to prosecute his or her derivative suit.
books.
Improper purpose
21:00- END In general, if the purpose is to defraud third persons.
Limitations on the Right to Inspection: That can be considered as an improper purpose.
1. It can only be exercised for a purpose germane to his or
her interest as a stockholder.
In general, however, officers and directors have no legal
2. He or she must be acting in good faith or for a legitimate
authority to close the office doors against shareholders for
purpose in making the demand to examine or reproduce
whom they are only agents, and withhold from them the
corporate records.
right to inspect the books which furnishes the most effective
3. It must be exercised during reasonable hours on
method of gaining information which the law has provided,
business days.
on mere doubt or suspicion as to the motives of the
4. Copies of corporate records or excerpts from said
shareholder.
records must be at the expense of the requesting
director, trustee, stockholder, or member.
While there is some conflict of authority, when an inspection
by a shareholder is contested, the burden is usually held to

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be upon the corporation to establish a probability that the

applicant is attempting to gain inspection for a purpose not
connected with his interest as a shareholder, or that his
purpose is otherwise improper. The burden is not upon the
petitioner to show the propriety of his examination or that
the refusal by the officers or directors was wrongful, except
under statutory provisions.

Terelay Investment and Development Corporation v. Yulo

G.R. No. 160924, August 5, 2015

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 CORPORATION LAW
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Module 9 COMPULSORY NOTIFICATION TO THE

MERGER AND CONSOLIDATION PHILIPPINE COMPETITION COMMISSION
This topic will be about different forms of corporations known as (PCC)
Merger and Consolidation.
Section 17. Compulsory Notification. - Parties to the merger or
Definitions of Merger and Consolidation. acquisition agreement referred to in the preceding section
MERGER CONSOLIDATION wherein the value of the transaction exceeds one billion
pesos (P1,000,000,000.00) are prohibited from consummating
It is a combination of two or It is when two or more their agreement until thirty (30) days after providing
more corporations wherein an corporations join to form a notification to the Commission in the form and containing
existing corporation is new corporation which is now the information specified in the regulations issued by the
absorbed by another existing considered as the consolidated Commission: Provided, That the Commission shall promulgate
corporation. corporation. other criteria, such as increased market share in the relevant
market in excess of minimum thresholds, that may be applied
The surviving corporation The consolidated corporation specifically to a sector, or across some or all sectors, in
retains its identity and takes will continue the operations of determining whether parties to a merger or acquisition shall
over all of the operations of the constituent corporations notify the Commission under this Chapter.
both corporations and now and the constituent
assumes all of the liabilities of corporations entity are Relevance of Section: THRESHOLD amount
the constituent corporations. extinguished. ● If the merger transactions exceed 1 billion pesos then the
constituent corporations must report the plan, terms of
In a meger, there are two the merger to the PCC. This is before the merger is
constituent entities: 1) consummated.
Absorbed corporation which ● This is done pursuant to the regulatory functions of the
ceases to exist after the PCC. The 1 billion is just an initial threshold provided
merger; and 2) surviving by the law.
corporation which continues ● Rationale of threshold: In order to determine whether or
to exist. not the merger will result in substantial lessening in the
competition in the industry. If a merger meets or exceeds
Example: If Corp A enters the threshold, the corporation must comply with the
into a merger with Corp B and compulsory notification requirement.
it is agreed that Corp A will
continue the business of both
corporations. COMPULSORY NOTIFICATION TO THE PCC
➔ Corp A- Size of the Person Test > PhP 6 Billion
SURVIVING CORP; Size of the Transaction Test > PhP 2.4 Billion
Corp B-
ABSORBED CORP There are TWO TESTS that will trigger the notification
requirement.
If there is a merger or consolidation of competitors or
competing businesses which are in the same industry. There is a 1. Size of the Person test
possibility that they would dominate the market and they would • determine the size of the
drive out competition in the market. If that is the effect of the person/entity/corporation
merger which is to prevent, restrict or distort competition in the • Based on the annual gross revenues of the
market then it might be considered as Anti-Competitive. constituent corporations or the value of the assets
of the constituent corporations found in the Ph
Market leadership or dominance in the market would • If the gross revenues or the assets of the
not make a transaction or a corporation guilty of anti-competitive corporation or the ultimate parent entity, not just
practices. It is the abuse of that dominant position which would the subsidiaries but the entire group of companies,
hold that corporation liable for anti-competitive practices. exceed 1 billion pesos then the merger transaction
must be reported to the PCC.
To prevent abuse of one's dominant position, the • When to report? Within thirty (30) days after providing
Philippine Competition Act reviews the mergers of competitors notification to the Commission.
before they are able to finalize the merger agreement. 2. Size of the Transaction Test
• This refers to the transaction value which must also
The law requires notification. exceed the PhP 1Billion mark
• Transaction value– refers to the consideration of the
merger or consolidation

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On March 1, 2020, the Philippine Competition Commission
(PCC) adjusted the thresholds for Compulsory Notification.
For the Size of person test it must now exceed PhP 6 Billion:
the assets or gross revenues must exceed Php 6 Billion. So if the
assets/ gross revenues do not exceed the threshold, then there is
no need to notify the PCC
For Size of the transaction test it must now exceed PhP 2.4
Billion: this threshold exceeds the 1Billion threshold under the
law.
● This is based on Memorandum Circular 18-001 of the
PCC, which now requires an automatic annual
adjustment of merger thresholds. So every year, they will
have to adjust the merger threshold based on the Gross
Domestic Product (GDP) or the growth of the
economy.
NOTE: If the merger transaction exceeds these thresholds, then
it is presumed to result in the substantial lessening of competition.
Must take note of this parameter because the criteria of substantial
lessening of competition is the basis of the PCC on whether or
not to strike down a merger as void.
In fact if the constituent corporations do not notify the PCC
about the intended merger/consolidation even if the value of their
assets exceeds 6Billion or the value of the transaction exceeds
2.4Billion, any resulting merger or consolidation from that
transaction would be void for non compliance with the
compulsory notification requirement.
CASE PROBLEM 6: Hampstead, Inc. operates luxury hotels,
while Tower Hamlets, Inc. operates historic inns and boutique
hotels. On June 24, 2019, Orion Bank granted Tower Hamlets
a loan of PhP5,000,000.00, payable in five (5) years. Due to the
pandemic, Tower Hamlets suffered a loss, which prompted its
Board of Directors to initiate a merger with Hampstead, Inc. On
October 5, 2020, the Board of Directors of both companies
approved a Plan of Merger, where it was agreed that all of their
hotels, resorts and inns will now be operated by Hampstead, Inc.
On December 7, 2020, all of their stockholders approved the
merger. On January 18, 2021, the SEC approved the Articles of
Merger. On January 20, 2021, Orion Bank filed an action against
Tower Hamlets to collect the loan, but the latter raised the
defense that it is not the real party-in-interest. Will the action
against Tower Hamlets, Inc. prosper?
In this case, there is a merger between Hampstead, Inc. and Tower
Hamlets, Inc. where the former is the surviving corporation while
the latter is the absorbed corporation. Now, one of the creditors
of the absorbed corporation filed a case against it even if there was
already a merger between the two corporations, can the creditor
do that? Will the action filed by the creditor against one of the
constituent corporations prosper?
So, we look at the effects of the merger
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SEC. 79. Effects of Merger or Consolidation. – The merger or
consolidation shall have the following effects:
(a) The constituent corporations shall become a single corporation
which, in case of merger, shall be the surviving corporation
designated in the plan of merger; and, in case of consolidation,
shall be the consolidated corporation designated in the plan of
consolidation;
(b) The separate existence of the constituent corporations shall
cease, except that of the surviving or the consolidated
corporation;
(c) The surviving or the consolidated corporation shall possess all
the rights, privileges, immunities, and powers and shall be subject
to all the duties and liabilities of a corporation organized under
this Code;
xxx
(b) The separate existence of the constituent corporations shall
cease, except that of the surviving or the consolidated
corporation;
Application: Tower Hamlets, its corporate personality has
already ceased or its existence has already been terminated by
virtue of the merger, it is one of the effects of a merger.
(c) The surviving or the consolidated corporation shall possess
all the rights, privileges, immunities, and powers and shall be
subject to all the duties and liabilities of a corporation organized
under this Code;
Application: Here, all the rights, privileges, immunities, and
powers shall now accrue to the surviving corporation–
Hampstead. Even Tower Hamlets has no control over the
properties that it previously owned.
SEC. 79. Effects of Merger or Consolidation. – The merger
or consolidation shall have the following effects: xxx
(d) The surviving or the consolidated corporation shall possess
all the rights, privileges, immunities and franchises of each
constituent corporation; and all real or personal property, all
receivables due on whatever account, including subscriptions to
shares and other choses in action, and every other interest of,
belonging to, or due to each constituent corporation, shall be
deemed transferred to and vested in such surviving or
consolidated corporation without further act or deed; and
This is just an emphasis on the third effect Par. C wherein the
rights, privileges, immunities, and powers are now transferred to
the surviving corporations.
SEC. 79. Effects of Merger or Consolidation. – The merger
or consolidation shall have the following effects: xxx
(e) The surviving or consolidated corporation shall be
responsible for all the liabilities and obligations of each
constituent corporation as though such surviving or
consolidated corporation had itself incurred such liabilities or
obligations; and any pending claim, action or proceeding
brought by or against any constituent corporation may be
prosecuted by or against the surviving or consolidated
corporation. The rights of creditors or liens upon the property
Page 50

of such constituent corporations shall not be impaired by the
merger or consolidation.
Q: How about the liabilities and obligations?
A: The surviving corporation shall be
responsible for all liabilities of each constituent
corporation as though such surviving corporation had
itself incurred those liabilities. Here, there was a loan
contracted by one of the constituent corporations from
orion bank. The liability shall be assumed by the
surviving corporation.
In this case, the collection case was filed against
tower hamlets, since tower hamlets had ceased to exist,
it is the surviving corporation that should be considered
as the real party of interest. The action should not be
dismissed, instead they should implead the surviving corporation as
the proper defendant. You cannot say that the action should
be dismissed.
TN: Mergers or consolidations are one of the exceptions in the
Nell Doctrine - Where the transferee corporation shall not be held
liable for the obligations of the transferor corporation.
Q: Are the employees of the constituent corporations absorbed
by the surviving corporation?
A: This was answered in BPI v BPI Employees
Union:
BPI v BPI Employees Union - Automatic Assumption of
Employment Contracts
In legal parlance, however, human beings are never embraced
in the term “assets and liabilities” Moreover, BPI’s absorption
of former FEBTC employees was neither by operation of law
nor by legal consequence of contract. There was no government
regulation or law that compelled the merger of the two banks
or the absorption of the employees of the dissolved corporation
by the surviving corporation. Had there been such law or
regulation, the absorption of employees of the non-surviving
entities of the merger would have been mandatory on the
surviving corporation. In the present case, the merger was
voluntarily entered into by both banks presumably for some
mutually acceptable consideration. In fact, the Corporation
Code does not also mandate the absorption of the employees
of the non-surviving corporation by the surviving corporation
in the case of a merger.
Remember: A merger is just like any contract, parties are free to
decide on any stipulation in the contract. So if the parties agree to
assume liability of the employment contracts of the constituent
corporations then that should be honored.
Q: If the plan of merger is silent, are the employees deemed
absorbed by the surviving corporation?
A: There is no legal obligation, it’s up to the corporations to decide
based on the plans of merger and the approved articles of merger.
(Nature) You cannot call human beings assets and liabilities
of the corporation. This is not what is contemplated under
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Sec. 79
Automatic Assumption of Employment Contracts
The rule is that unless expressly assumed, labor contracts such as
employment contracts and collective bargaining agreements are
not enforceable against a transferee of an enterprise, labor
contracts being in personam, thus binding only between the
parties. A labor contract merely creates an action in personam and
does not create any real right which should be respected by third
parties. This conclusion draws its force from the right of an
employer to select his employees and to decide when to engage
them as protected under our Constitution, and the same can only
be restricted by law through the exercise of the police power.
(BPI v. BPI Employees Union, G.R. No. 164301, October 19, 2011)
If the parties indicate in the plan of merger that the surviving
corporation will assume all the obligations under the employment
contract entered into by the constituent corporations, then that
must be followed. But when there is none, we cannot impose the
legal obligation under the employment contract to the surviving
corporation.
Automatic Assumption of Employment Contracts
Furthermore, this Court believes that it is contrary to public policy
to declare the former FEBTC employees as forming part of the
assets or liabilities of FEBTC that were transferred and absorbed
by BPI in the Articles of Merger. Assets and liabilities, in this
instance, should be deemed to refer only to property rights and
obligations of FEBTC and do not include the employment
contracts of its personnel. A corporation cannot unilaterally
transfer its employees to another employer like chattel. Certainly,
if BPI as an employer had the right to choose who to retain among
FEBTC’s employees, FEBTC employees had the concomitant
right to choose not to be absorbed by BPI. Even though FEBTC
employees had no choice or control over the merger of their
employer with BPI, they had a choice whether or not they would
allow themselves to be absorbed by BPI. Certainly nothing
prevented the FEBTC’s employees from resigning or retiring and
seeking employment elsewhere instead of going along with the
proposed absorption.
Here, the SC held that assets and liabilities should be deemed to
refer only to property rights and obligations of the bank and do
not include employment contracts of its personnel. A corporation
cannot unilaterally transfer its employees to another employer like
chattel.
If you noticed, the discussion of the SC in this initial case is hinged
on what is the definition of assets and liabilities as provided in Sec.
79.
Do they refer to employees and employment contracts? NO.
Automatic Assumption of Employment Contracts
The lack of a provision in the plan of merger regarding the
Page 51

transfer of employment contracts to the surviving corporation
could have very well been deliberate on the part of the parties
to the merger, in order to grant the surviving corporation the
freedom to choose who among the dissolved corporation’s
employees to retain, in accordance with the surviving
corporation’s business needs. If terminations, for instance due
to redundancy or labor-saving devices or to prevent losses, are
done in good faith, they would be valid. The surviving
corporation too is duty-bound to protect the rights of its own
employees who may be affected by the merger in terms of
seniority and other conditions of their employment due to the
merger. Thus, we are not convinced that in the absence of a
stipulation in the merger plan the surviving corporation was
compelled, or may be judicially compelled, to absorb all
employees under the same terms and conditions obtaining in
the dissolved corporation as the surviving corporation should
also take into consideration the state of its business and its
obligations to its own employees, and to their certified collective
bargaining agent or labor union.
“In the absence of a stipulation in the merger plan the surviving
corporation was compelled, or may be judicially compelled, to
absorb all employees under the same terms and conditions
obtaining in the dissolved corporation as the surviving
corporation should also take into consideration the state of its
business and its obligations to its own employees, and to their
certified collective bargaining agent or labor union”
• If it was not agreed upon in the merger plan, then the
surviving corporation is not obliged to absorb the
employees of the constituent corporation.
However, there was a dissent from Justice Brion. When the parties
filed a Motion for Reconsideration, the SC issued a resolution
clarifying its take on the matter.
Automatic Assumption of Employment Contracts
Taking a second look on this point, we have come to agree
with Justice Brion’s view that it is more in keeping with the
dictates of social justice and the State policy of according full
protection to labor to deem employment contracts as
automatically assumed by the surviving corporation in a
merger, even in the absence of an express stipulation in the
articles of merger or the merger plan. xxx
Not to be forgotten is that the affected employees managed,
operated and worked on the transferred assets and properties as
their means of livelihood; they constituted a basic component
of their corporation during its existence. In a merger and
consolidation situation, they cannot be treated without
consideration of the applicable constitutional declarations and
directives, or, worse, be simply disregarded. If they are so
treated, it is up to this Court to read and interpret the law so that
they are treated in accordance with the legal requirements of
mergers and consolidation, read in light of the social justice,
economic and social provisions of our Constitution. Hence,
there is a need for the surviving corporation to take
responsibility for the affected employees and to absorb them
into its workforce where no appropriate provision for the
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merged corporation's human resources component is made in
the Merger Plan.
Although they could not substantially change the dispositive
portion in the ponencia, they gave a different reasoning. It also set
a different rule as to the assumption of employment contracts.
• “it is more in keeping with the dictates of social justice
and the State policy of according full protection to labor
to deem employment contracts as automatically assumed
by the surviving corporation in a merger, even in the
absence of an express stipulation in the articles of merger
or the merger plan”
o Reason: there is a need for the surviving
corporation to take responsibility for the
affected employees and to absorb them into its
workforce where no appropriate provision for
the merged corporation's human resources
component is made in the Merger Plan.
So, in the absence of a provision in the merger plan, the
employment contracts are assumed by the surviving corporation.
There is an automatic assumption of employment contracts.
• This is different from what was originally stated in the
previous ponencia. Yet, this discussion is just contained
in the resolution (not an amended decision).
As to W/N this only applied pro hac vice (or with regards to this
case only), it is a matter left to be discussed by the SC. But in any
case, at least you know that the SC En Banc shared this sentiment.
So, the rule now is embodied in this paragraph:
Automatic Assumption of Employment Contracts
By upholding the automatic assumption of the non-surviving
corporation's existing employment contracts by the surviving
corporation in a merger, the Court strengthens judicial
protection of the right to security of tenure of employees
affected by a merger and avoids confusion regarding the status
of their various benefits which were among the chief objections
of our dissenting colleagues. However, nothing in this
Resolution shall impair the right of an employer to terminate the
employment of the absorbed employees for a lawful or
authorized cause or the right of such an employee to resign,
retire or otherwise sever his employment, whether before or
after the merger, subject to existing contractual obligations. In
this manner, Justice Brion's theory of automatic assumption
may be reconciled with the majority's concerns with the
successor employer's prerogative to choose its employees and
the prohibition against involuntary servitude.
(BPI v. BPI Employees Union, G.R. No. 164301, October 19, 2011)
If there is a merger and one corporation is dissolved and the other
continues to exist, and if the surviving corporation will not absorb
the employees then the employees’ service is deemed terminated
from the corporation.
What is essential for the employees is their tenure, if their tenure
is cut or interrupted by termination of business then they might
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not be entitled to higher benefits. recommendation of the appropriate government agency.

- If the SEC finds everything in order, that the merger and
To prevent a scenario where their tenure is interrupted by a consolidation is in accordance with the law, then the
merger transaction or consolidation, the law now upholds the rule SEC shall now issue a certificate of filing of articles of
on automatic assumption of employment contracts based on merger. This is a certificate which approves the articles
the Constitutional principle on the protection of labor. of merger.

In the case problem, what was relevant is the effects of the merger 5th. Conduct of Hearing (Sec. 78)
with regard to the creditors; it is different from the propriety of - However, if there is reason to believe that the merger is
the merger, whether or not it was carried out in the procedure contrary to law, such as when it is violative of the Ph
prescribed by law. Competition Act, the SEC will step in and conduct a
hearing.
- Here, the law requires at least 2 weeks written notice of
Merger Procedure
the time, date, and place of hearing to afford due process
to the constituent corporations.
● Approval of the Plan of Merger (Sec. 75)
- The SEC will not outrightly deny a merger by two
● Submission to Stockholders for Approval (Sec. 76)
corporations who may be involved in an anti-
● Execution of the Articles of Merger (Sec. 77)
competitive merger. The SEC will first have to hear
● Submission to SEC for Approval (Sec. 78)
them on oral arguments or based on position papers.
● Conduct of Hearing (Sec. 78)
● Issuance of Certificate of Merger (Sec. 78)
6th. Issuance of Certificate of Merger (Sec. 78)
- If there was a hearing and it was later proven that the
1st. Approval of the Plan of Merger (Sec 75) merger is in compliance with the law, then the SEC will
- Refer to Sec 75 as to the contents of the plan of merger. issue a certificate of merger.
- The BOD of the constituent corporations would have to
agree and draft a plan of merger. This plan lays down the Q: Can you still make changes to the plan of merger once you
terms and conditions of the merger; it defines who is the submitted to the SEC?
absorbed corporation and who is the surviving A. YES, under Sec 76.
corporation; and what are the changes in the articles of
incorporation of the surviving corporation; include
Amendments to the Plan of Merger
terms and conditions, assumption of liabilities; again
with employment contract it is automatically assumed by
Sec 76. xxx Any amendment to the plan of merger or
the surviving corporation.
consolidation may be made: Provided, That such amendment is
- This plan of merger must be approved by majority of the
approved by a majority vote of the respective boards of directors
members of the board of directors/trustees of both or
or trustees of all the constituent corporations and ratified by the
constituent corporations.
affirmative vote of stockholders representing at least two-thirds
(2/3) of the outstanding capital stock or of two-thirds (2/3) of the
2nd. Submission to Stockholders for Approval (Sec. 76)
members of each of the constituent corporations. Such plan,
- The plan of merger will now be submitted to the
together with any amendment, shall be considered as the
stockholders.
agreement of merger or consolidation.
- This is one of the instances where the approval of
stockholders is required.
- Here it requires the affirmative vote of the stockholders
owning at least ⅔ of the outstanding capital stock or ⅔
of the members, in a separate meeting duly called for that
purpose.

3rd. Execution of the Articles of Merger (Sec. 77)

- After approval, the constituent corporations will now
execute the articles of merger; and such must be signed
by the President or the VP and certified by the secretary
or assistant secretary.
- The articles of merger essentially reflect contents of the
plan of merger and other pertinent details as provided in
Sec 77.

4th. Submission to SEC for Approval (Sec. 78)

- The articles of merger will now be submitted to the SEC
for approval if the merger is between and among
financial institutions such as banks, quasi-banks etc.
- The law requires that they must submit a favorable
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 CORPORATION LAW
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Changes made under the new law
BP Blg. 68
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:
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,
stated in the articles of merger.
(f) The provisional or pro forma values, as merged or
R.A. No. 11232
consolidated, using the accounting method; and
After the approval by the • This requires the constituent corporations to give their
stockholders or members as financial estimates.
required by the preceding (g) Such other information as may be prescribed by the
section, articles of merger or Commission.
articles of consolidation shall • Catch all provision.
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.

Under the new law, the articles of merger shall now include
additional items stating with paragraph (d) to (g).

(d) The carrying amounts and fair values of the assets and
liabilities of the respective companies as of the agreed cut-off date:
• The law imposes an obligation upon the constituent
corporations to set forth in the articles of incorporation
the carrying amounts and fair values of the assets and
liabilities of the respective companies; and
• That the cut off date must be stated in the articles of
incorporation. Cut off date is the date where the assets
and liabilities of the constituent corporations are valued.
(e) The method to be used in the merger or consolidation of
accounts of the companies:
• For full transparency and disclosure, this must also be
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 CORPORATION LAW
ATTY. VJC | SECOND SEMESTER 2021-2022

Module 10 TAKE NOTE: Under the new law, it added an additional

APPRAISAL RIGHT instance where the appraisal right may be invoked.
1. In case an amendment to the articles of incorporation
APPRAISAL RIGHT has the effect of changing or restricting the rights of any
stockholder or class of shares, or of authorizing
The appraisal right the stockholder to demand the fair preferences in any respect superior to those of
value of the shares in case the stockholder dissents to a corporate outstanding shares of any class, or of extending or
act. The appraisal right is provided under Section 80. It is one of shortening the term of corporate existence
the remedial rights of a stockholder. A stockholder must be 2. In case of sale, lease, exchange, transfer, mortgage,
vigilant in the exercise of his/her rights. If the stockholder does pledge or other disposition of all or substantially all of
not agree with a corporate act, he/she must manifest his/her the corporate property and assets as provided in this
objection. The failure of a stockholder to exercise his appraisal Code
right within the prescribed period shall be considered as waiver of 3. Merger or consolidation
the appraisal right (Section 81, RCC). 4. Investment of corporate funds for any purpose other
than the primary purpose of the corporation.
CHANGES UNDER THE NEW LAW
BP BLG 68 RA NO. 11232 LIMITATIONS ON THE EXERCISE OF APPRAISAL
RIGHT
Section 81. Instances of Section 80. When the Right of Limitations on the Exercise of Appraisal Right
appraisal right. – Any Appraisal May Be Exercised. - 1. Any of the following instances provided by law for the
stockholder of a corporation Any stockholder of a exercise of the right by a dissenting stockholder must
shall have the right to dissent corporation shall have the right be present
and demand payment of the to dissent and demand 2. The dissenting stockholder must have voted against the
fair value of his shares in the payment of the fair value of the proposed corporate action
following instances: shares in the following 3. A written demand on the corporation for payment of
instances: his/her shares must be made within thirty (30) days
1. In case any amendment to after the date the vote was taken
the articles of incorporation (a) In case an amendment to
has the effect of changing or the articles of incorporation
restricting the rights of any has the effect of changing or a. Any of the following instances provided by law for the
stockholder or class of shares, restricting the rights of any exercise of the right by a dissenting stockholder must be
or of authorizing preferences stockholder or class of shares, present - The instances under Section 81 is an exclusive
in any respect superior to those or of authorizing preferences list, if it does not fall within the four instances under
of outstanding shares of any in any respect superior to those Section 81, the stockholder cannot exercise the right of
class, or of extending or of outstanding shares of any appraisal.
shortening the term of class, or of extending or
corporate existence; shortening the term of b. The dissenting stockholder must have voted against the
corporate existence; proposed corporate action - The right is not available if
2. In case of sale, lease, the stockholder was absent in the meeting or even if the
exchange, transfer, mortgage, (b) In case of sale, lease, stockholder was present in the meeting,but he or she
pledge or other disposition of exchange, transfer, mortgage, abstained from voting in the meeting. In which case, that
all or substantially all of the pledge or other disposition of stockholder cannot exercise the right of appraisal. It is
corporate property and assets all or substantially all of the fundamental for the stockholder to manifest his/her
as provided in the Code; and corporate property and assets objection to the corporate act.
as provided in this Code;
3. In case of merger or c. A written demand on the corporation for payment of
consolidation (c) In case of merger or his/her shares must be made within thirty (30) days after
consolidation; and the date the vote was taken - The second requirement is
essential considering that the reckoning point for the
(d) In case of investment of written demand would be counted from the date when
corporate funds for any the vote was taken.
purpose other than the primary
purpose of the corporation. CASE PROBLEM:
The stockholders of Lambeth Corporation proposed to amend its
Articles of Incorporation to deny the pre-emptive right of its
The new law adopted the instances provided under the stockholders. On April 12, 2021, Maria, a minority
old law, these are the instances where the right of appraisal may stockholder, voted against the proposed amendment. On May 12,
be available to a stockholder. You can only exercise the right to 2021, she sent a letter to the Corporate Secretary, demanding
dissent and demand payment for the value of shares if these are payment of the fair value of her shares, but her letter was not
present. acted upon since Lambeth had no surplus profits at that
time. On June 13, 2021, Maria filed a collection case against

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 CORPORATION LAW
ATTY. VJC | SECOND SEMESTER 2021-2022

Lambeth Corporation. However, she decided to attend the annual ● June 13, 2021 - Maria filed a collection case against
stockholders’ meeting on June 15, 2021, and was able to cast her Lambeth Corporation
votes for the new Board of Directors. ○ One of the essential requisites before one may exercise
appraisal right is that there must be unrestricted
Discuss the legality of Maria’s actions. retained earnings of the corporation.
○ No payment shall be made to any dissenting
Timeline: stockholder or unless the corporation has
● April 12 2021 - Maria voted against the proposed unrestricted retained earnings in its books to cover
amendment such payment (Section 81)
○ This is within her right to vote against a proposed ○ In this case, Lambeth Corporation had no surplus
amendment which may be inimical to her interests as a profits so it was premature for Maria to file a
stockholder. collection case against Lambeth in court.
○ Any stockholder of a corporation shall have the right to
dissent and demand payment of the fair value of the Q: Is it possible for Maria to file a collection case against Lambeth
shares (Section 80) Corporation in the following year?

A: YES! If the corporation already has

● May 12, 2021 - She sent a letter to the corporate secretary sufficient unrestricted retained earnings to cover the
demanding payment of the fair value of her shares. payment of the fair value of the shares of Maria, then she
○ This is the consequence for her dissent. can already file a collection case against Lambeth.
○ The dissenting stockholder may make a written demand
to the corporation for the payment of the fair value of
Section 82. Effect of Demand and Termination of Right. –
the shares. This written demand must be made within
From the time of demand for
30 days from the date of vote. (Section 81)
payment of the fair value of a stockholder’s shares until either the
○ In this case, the vote was taken on April 12, 2021, the
abandonment of the corporate action involved or the purchase of
letter was sent on May 12, 2021 (Thirtieth day from the
the said shares by the corporation, all rights accruing to such
time the vote was taken). The request was made well
shares, including voting and dividend rights, shall be suspended in
within the 30 day period.
accordance with the provisions of this Code, except the right of
such stockholder to receive payment of the fair value thereof:
SEC. 81. How Right is Exercised. – The dissenting
stockholder who votes against a proposed corporate action Provided, That if the dissenting stockholder is not paid the value
may exercise the right of appraisal by making a written demand of the said shares within thirty (30) days after the award, the voting
on the corporation for the payment of the fair value of shares and dividend rights shall immediately be restored.
held within thirty (30) days from the date on which the vote
was taken: Provided, That failure to make the demand within
● June 15, 2021 - She was able to cast her votes to elect new
such period shall be deemed a waiver of the appraisal right. If
directors
the proposed corporate action is implemented, the
corporation shall pay the stockholder, upon surrender of the
Q: Can Maria exercise her right as stockholder?
certificate or certificates of stock representing the
stockholder’s shares, the fair value thereof as of the day before
A: Under Section 82, it provides the effect of
the vote was taken, excluding any appreciation or depreciation
demand and termination of the right of appraisal of the
in anticipation of such corporate action.
stockholder. From the time that Maria demanded
payment of the fair value of her hares on MAY 12, 2021
If, within sixty (60) days from the approval of the corporate
until the time she will be paid, which in this case has not
action by the stockholders, the withdrawing stockholder and
yet occurred, the rights of Maria are suspended. In the
the corporation cannot agree on the fair value of the shares, it
same way, from the time Maria demanded payment on
shall be determined and appraised by three (3) disinterested
May 12 2021 until the time the corporation will abandon
persons, one of whom shall be named by the stockholder,
its corporate action which is disagreed upon –
another by the corporation, and the third by the two (2) thus
amendment of the articles of incorporation, to deny the
chosen. The findings of the majority of the appraisers shall be
preemptive right of the stockholder in which case the
final, and their award shall be paid by the corporation within
rights of the stockholder are also suspended.
thirty (30) days after such award is made: Provided, That no
payment shall be made to any dissenting stockholder unless
the corporation has unrestricted retained earnings in its books
Provided, That if the dissenting stockholder is not paid the value
to cover such payment: Provided, further, That upon payment
of the said shares within thirty (30) days after the award, the
by the corporation of the agreed or awarded price, the
voting and dividend rights shall immediately be restored.
stockholder shall forthwith transfer the shares to the
corporation.
• This refers to a scenario where the corporation acted
upon the demand for payment of the fair value of shares.
If the corporation granted the dissenting stockholder the
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 CORPORATION LAW
ATTY. VJC | SECOND SEMESTER 2021-2022

fair value of the shares but the payment was made on
some other date, the dissenting stockholder is entitled to
receive the payment which is already determined in that
award. If the corporation does not follow through with
its commitment to award the payment of the fair value
of the shares, the voting and the dividend rights of the
stockholder will be restored within 30 days after the
award was paid.
• Application to the problem: This proviso is not
applicable in this case, because there was no award. In
fact, the written request of Maria was not acted upon.
Maria’ s rights as a stockholder are suspended in the
meanwhile.
Appraisal Right
In case of disagreement as to the fair value of the shares within
sixty (60) days from the approval of the corporate action, the
fair value shall be determined and appraised by three (3)
disinterested persons, one of whom shall be named by the
stockholder, another by the corporation, and the third by the
two (2) thus chosen.
A: It's the corporation who bears the costs and
expenses of appraisal. (Section 84) The corporation will
pay the disinterested persons who will make the
valuation of the shares.
XPN: The stockholder will pay the costs of appraisal if the fair
value ascertained by the appraisers is approximately the same as
the price which the corporation may have offered to pay the
stockholder.
Rationale behind exception: The law prevents the scenario where
the stockholders would demand a higher value of their shares,
prompting the corporation to convene a committee consisting of
three disinterested persons to make a valuation at the expense of
the corporation. If it was found out later on that the valuation
made by the three disinterested persons is actually equivalent or
approximately with the corporation, that the corporation was not
wrong in its valuation, the stockholder who will be penalized,
he/she will cover the costs of appraisal by virtue of the dissent of
such stockholder.

Q: What if there is a disagreement as to the value of the shares of the dissenting

stockholders?
A: Under Section 81, within sixty (60) days
from the approval of the corporate action by the
stockholders, the withdrawing stockholders and the
corporation cannot agree on the fair value of the shares,
it shall be determined by three (3) disinterested persons:
1. Named by the stockholder,
2. Named by the corporation,
3. Named by the two (2) persons chosen by the
stockholder and the corporation.

They will convene a committee to determine the fair value of the

share of the stockholder.

COSTS OF APPRAISAL
SEC. 84. Who Bears Costs of Appraisal. – The costs and
expenses of appraisal shall be borne by the corporation,
unless the fair value ascertained by the appraisers is
approximately the same as the price which the corporation
may have offered to pay the stockholder, in which case they
shall be borne by the latter. In the case of an action to recover
such fair value, all costs and expenses shall be assessed against
the corporation, unless the refusal of the stockholder to
receive payment was unjustified.

General Rule: Corporation shall bear the costs and

expenses of appraisal

Exception: If the fair value ascertained by the appraisers is

approximately the same as the price which the corporation
may have offered to pay the stockholder. (Sec. 84)

Q: Who will shoulder the costs and expenses of appraisal.

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 CORPORATION LAW
ATTY. VJC | SECOND SEMESTER 2021-2022

Module 11-13 Section 131. When a single stockholder acquires all the stocks of
Non-Stock Corporation, Close Corporations, an ordinary stock corporation, the latter may apply for conversion
into a One Person Corporation, subject to the submission of such
and Special Corporations documents as the Commission may require. If the application for
conversion is approved, the Commission shall issue a certificate
of filing of amended articles of incorporation reflecting the
Corporations established not for profit but for conversion. The One Person Corporation converted from an
Nonstock
Corporations other purposes (i.e., religious, charitable, ordinary stock corporation shall succeed the latter and be legally
educational, scientific purposes) responsible for all the latter's outstanding liabilities as of the date
of conversion.
Corporation that has issued stocks but held by
Closed
Corporations specific number of persons, not exceeding 20 Statement C is true and provided under Section 119.
(i.e. family corporations) Q: How should a single stockholder in a one person corporation
carry out the business functions of the corporation?
A significant revision of the Corporation Code. A: Under Section 128, it shall be sufficient to
One Person It is composed of a single stockholder. It is like prepare a WRITTEN RESOLUTION. All that the
Corporations a sole proprietorship registered as a corporation. single stockholder needs to do is issue a written
(OPC) It is entitled to the limited liability feature of resolution by himself and record it in the minutes book.
corporations. There is no need for meetings; the record in itself is
enough to show there is a valid corporate act.

Q1: Which of the following statements about one person

corporations is FALSE? Section 119. The One Person Corporation is not
Bylaws
A. The principle of piercing the corporate veil applies required to submit and file corporate bylaws.
with equal force to One Person Corporations as with
other corporations. Section 127. A One Person Corporation shall
B. When a single stockholder acquires all the stocks of an Minutes maintain a minutes book which shall contain all
ordinary stock corporation, the latter may apply for Book actions, decisions, and resolutions taken by the
conversion before the SEC. One Person.
C. The OPC is not required to submit and file corporate
bylaws Section 128. When action is needed on any
D. The single stockholder, who is a self-appointed matter, it shall be sufficient to prepare a written
secretary, is required to post a surety bond to the resolution, signed and dated by the single
SEC. - FALSE Records in stockholder, and recorded in the minutes book of
lieu of the One Person Corporation. The date of
Meetings recording in the minutes book shall be deemed to
Statement A is TRUE and embodied in Section 130. be the date of the meeting for all purposes under
GR: A one person corporation has a personality separate and this Code.
distinct from that of a single stockholder composing it.
XPN: The separate entity may be pierced for the same reasons
of grounds that may be cited for all other corporations. If there
is bad faith or fraud, you may pierce the veil of corporate fiction. Statement D is false, provided under Section 122.
GR: A single stockholder cannot be appointed as a corporate
secretary.
Liability of Single Shareholder Section
XPN: A single stockholder MAY hold the position of a treasurer,
Section 130. xxx The principle of piercing the corporate veil
following the legal requirements of Section 122.
applies with equal force to One Person Corporations as with
other corporations.
Rationale: A secretary is the custodian of the corporate books
and records. In order to avoid the possibility that the single
Statement B is TRUE provided under Section 131. stockholder will manipulate the entries in the books and records,
Example: You have a stock corporation consisting of 50 he cannot be a corporate secretary.
stockholders and 1 of the stockholders acquired the shares of
stock of the remaining 49 stockholders, then the single Officers
stockholder may now convert the ordinary stock corporation to Section 122. xxx The single stockholder may not be appointed as
an OPC. It’s essential that the corporation must be the corporate secretary. A single stockholder who is likewise the
CONVERTED to inform the public that this is a corporation self-appointed treasurer of the corporation shall give a bond to
which is no longer composed of aggregate persons but of only a the Commission in such a sum as may be required: Provided, That
single stockholder. the said stockholder/treasurer shall undertake in writing to
faithfully administer the One Person Corporation's funds to be
Conversion from Ordinary Corporation to One Person received as treasurer, and to disburse and invest the same
Corporation according to the articles of incorporation as approved by the

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Commission. The bond shall be renewed every two (2) years or as
often as may be required.
If the single stockholder is also the treasurer, he must:
1. Post a bond for security purposes.
a. The single stockholder must ensure the public
that the interest of the OPC, which is different
from the interest of the single stockholder, is
adequately protected.
b. The bond must be renewed every 2 years, or as
often as may be required by SEC. This
2. Undertake in writing to faithfully administer the
OPC funds to be received as treasurer
a. There must be a written undertaking on the
part of the single stockholder who is at the
same time a treasurer
3. Disburse and invest the funds in accordance of the
articles of incorporation
Therefore, a single stockholder cannot be a secretary. He can be
a treasurer, following Section 122’s requirements.
I. Any profit which a nonstock corporation may obtain as
an incident to its operations shall, whenever necessary
or proper, be used for the furtherance of the purpose/s
for which the corporation was organized. TRUE (Sec
86)
II. A nonstock corporation can be converted into a stock
corporation by mere amendment of its Articles of
Incorporation. FALSE
Section 86. For purposes of this Code and subject to its
provisions on dissolution, a nonstock corporation is one where
no part of its income is distributable as dividends to its members,
trustees, or officers:
Q: May a nonstock corporation still earn profit? If so, what may
the nonstock corporation do with those profits?
A: The law does NOT prohibit nonstock
corporations to earn profits, for as long as these are only
incidental to purpose or purposes for which the
corporation was organized. But the law provides that:
any profit which a nonstock corporation may obtain incidental to
its operations shall, whenever necessary or proper, be used for the
furtherance of the purpose or purposes for which the
corporation was organized, subject to the provisions of this
Title. xxx
The profits obtained by a nonstock corporation must be
plowed back to the nonstock corporation. It will never be
distributed as dividends to the members. In other words, the
profits will now form part of the retained earnings of the nonstock
corporation
TAKE NOTE: A nonstock corporation can be converted into a
stock corporation by mere amendment of its Articles of
Incorporation. FALSE!
Abellano ◦ Adolfo ◦ Bajar ◦ Cabeje ◦ Caceres ◦ Capuyan ◦ Cañales ◦ Daulo ◦ Delicano ◦ Dino ◦ Gabato ◦ Leopardas ◦ Ngo ◦ Panelo ◦ Prisco ◦ Reyes ◦ Velez ◦ Villagonzalo
EH 308 Support Group
CORPORATION LAW
ATTY. VJC | SECOND SEMESTER 2021-2022
A nonstock corporation CANNOT be converted into a stock
corporation by merely amending the Articles of Incorporation
because before a nonstock corporation may be dissolved or
terminated, it must have to go through the process of distribution
of its assets.
If a nonstock corporation is automatically converted into a stock
corporation, that would be tantamount to a liquidation or
distribution of assets without going through the process of
distribution as prescribed under the Rules.
There must be compliance with Section 93 which provides for an
order or sequence of the distribution. You cannot simply amend
the Articles of Incorporation and convert it to a stock
corporation.
Section 93. Rules of Distribution. — The assets of a nonstock
corporation undergoing the process of dissolution for reasons
other than those set forth in Section 139 of this Code shall be
applied and distributed as follows:
a. All liabilities and obligations of the corporation shall be
paid, satisfied and discharged, or adequate provision shall be
made therefor;
b. Assets held by the corporation upon a condition
requiring return, transfer or conveyance, and which
condition occurs by reason of the dissolution, shall be
returned, transferred or conveyed in accordance with such
requirements;
c. Assets received and held by the corporation subject to
limitations permitting their use only for charitable, religious,
benevolent, educational or similar purposes, but not held
upon a condition requiring return, transfer or conveyance
by reason of the dissolution, shall be transferred or
conveyed to one (1) or more corporations, societies or
organizations engaged in activities in the Philippines
substantially similar to those of the dissolving
corporation according to a plan of distribution adopted
pursuant to this Chapter;
d. Assets other than those mentioned in the preceding
paragraphs, if any, shall be distributed in accordance with the
provisions of the articles of incorporation or the bylaws, to
the extent that the articles of incorporation or the bylaws
determine the distributive rights of members, or any class or
classes of members, or provide for distribution; and
e. In any other case, assets may be distributed to such persons,
societies, organizations or corporations, whether or not
organized for profit, as may be specified in a plan of
distribution adopted pursuant to this Chapter.
Assets held by the corporation upon a condition requiring
return, transfer or conveyance, and which condition occurs
by reason of the dissolution
➔ If there is a charitable institution and another person or
entity donates to the institution upon the condition that
it shall be returned to the donor when the charitable
institution has already been dissolved or terminated. If
there is such condition, and if the charitable institution
had already been in the process of dissolution - the next
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step is the property must be returned to the donor. But
only if there is a condition for the return of the property.
Assets without a condition for return
Q: What if there is no condition for the return of the property?
A: Sec 93(c)
Assets received and held by the corporation subject to limitations
permitting their use only for charitable, religious, benevolent,
educational or similar purposes, but not held upon a condition
requiring return, transfer or conveyance by reason of the dissolution,
shall be transferred or conveyed to one (1) or more
corporations, societies or organizations engaged in
activities in the Philippines substantially similar to
those of the dissolving corporation according to a plan of
distribution adopted pursuant to this Chapter;
Q: If a corporation donates a property to a charitable institution,
without any condition of the return of the property. Eventually,
the charitable institution has already dissolved. What will happen
to the property?
A: Under the Rules of Distribution, that
property must be transferred to another corporations,
societies or organizations engaged in activities in the
Philippines substantially similar to those of the
dissolving corporation.
If it’s a charitable institution, the property must be transferred to
another charitable institution.
Assets without a condition for return, or limitation to its use
Assets other than those mentioned in the preceding paragraphs, if
any, shall be distributed in accordance with the provisions
of the articles of incorporation or the bylaws, to the extent
that the articles of incorporation or the bylaws determine the
distributive rights of members, or any class or classes of members,
or provide for distribution; and
It is only after satisfying the first three requirements in the order
of sequence that we follow the provisions in the articles of
incorporation or the bylaws of the nonstock corporation.
e. In any other case, assets may be distributed to such persons,
societies, organizations or corporations, whether or not organized
for profit, as may be specified in a plan of distribution adopted
pursuant to this Chapter.
Finally, in any other case, assets may be distributed to aside these
organizations or corporations, whether or not they are organized
for profit. So, this is the provision which specifies in the plan of
distribution, adopted in the nonstock corporation.
The significance of paragraph E actually pertains to the recipient of
the property or properties of the nonstock corporation. The
recipient could be a stock or for profit organization if it was
provided under the plan of distribution. But if you notice the
distribution to organizations which may or may not be for profit
only comes last in the order. So that is the possibility that the
properties of a charitable institution may be transferred or
conveyed to a proprietary institution or to a stock corporation
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organized for profit if that is the will of the members as provided
in the plan of distribution.
TN: You cannot convert a nonstock corporation to a stock
corporation by amending its articles of incorporation. You must
follow the rules on dissolution which require a plan distribution.
Section 94. Plan of Distribution of Assets. – A plan providing for
the distribution of assets, consistent with the provisions of this
Title, may be adopted by a nonstock corporation in the process of
dissolution in the following manner:
(a) The board of trustees shall, by majority vote, adopt a resolution
recommending a plan of distribution and directing the submission
thereof to a vote at a regular or special meeting of members having
voting rights;
(b) Each member entitled to vote shall be given a written notice
setting forth the proposed plan of distribution or summary
thereof and the date, time and place of such meeting within the
time and in the manner provided in this Code for the giving of
notice of meetings; and,
(c) Such plan of distribution shall be adopted upon approval of
at least two-thirds (2/3) of the members having voting rights
present or represented by proxy at such meeting.
Q: Which of the following provision in the bylaws is not allowed
in a nonstock corporation?
A: Bylaw provision authorizing special
members’ meeting to be conducted abroad.
Section 88. Right to Vote. – The right of the members of any class
or classes to vote may be limited, broadened, or denied to the
extent specified in the articles of incorporation or the bylaws.
Unless so limited, broadened, or denied, each member, regardless
of class, shall be entitled to one (1) vote.
Unless otherwise provided in the articles of incorporation or the
bylaws, a member may vote by proxy, in accordance with the
provisions of this Code. The Bylaws shall likewise authorize
voting through remote communication and/or in absentia.
Sec. 88 is clear that a bylaw provision may authorize members to
vote in absentia.
Under Sec. 88, the right of the members of any class or classes
to vote may be broadened so a bylaw may provide for
cumulative voting by the members in a nonstock corporation.
A bylaw provision authorizing special members’ meeting to be
conducted abroad is not allowed pursuant to Sec. 92.
Section 92. List of Members and Proxies, Place of Meetings. –
The corporation shall, at all times, keep a list of its members and
their proxies in the form the Commission may require. The list
shall be updated to reflect the members and proxies of record
twenty (20) days prior to any scheduled election. The bylaws may
provide that the members of a nonstock corporation may hold
regular or special meetings at any place even outside the place
where the principal office of the corporation is located: Provided,
That proper notice is sent to all members indicating the date, time
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and place of the meeting: Provided, further, That the place of
meeting shall be within Philippine territory.
The only instance that a meeting can be held abroad is that of
directors in stock corporations.
A bylaw provision allowing regional or district voting of trustees
is allowed and valid in accordance with Sec. 88.
AO-AS v. CA, G.R. No. 128464, June 20, 2006
In any case, the stipulation in the By-Laws is not contrary
to the Corporation Code. Section 89 of the Corporation Code
pertaining to non-stock corporations provides that "(t)he right of
the members of any class or classes (of a non-stock corporation)
to vote may be limited, broadened or denied to the extent
specified in the articles of incorporation or the by-laws." This is
an exception to Section 6 of the same code where it is provided
that "no share may be deprived of voting rights except those
classified and issued as ‘preferred’ or ‘redeemable’ shares, unless
otherwise provided in this Code." The stipulation in the By-Laws
providing for the election of the Board of Directors by districts is
a form of limitation on the voting rights of the members of a non-
stock corporation as recognized under the aforesaid Section 89.
Section 24, which requires the presence of a majority of the
members entitled to vote in the election of the board of directors,
applies only when the directors are elected by the members at
large, such as is always the case in stock corporations by virtue of
Section 6.
This is an exception to Section 6 of the same code where
it is provided that “no share may be deprived of voting rights
except those classified and issued as ‘preferred’ or ‘redeemable’
shares, unless otherwise provided in this Code.”
Although the law provides for the general rule that no
share may be deprived of voting rights, it provides for an
exception: preferred or redeemable shares, or in other cases which
are provided in the RCCP. This is one of the instances of
exception where voting rights may be limited. It may even be
denied by the Articles of Incorporation or the bylaws.
In this case, the stipulation in the bylaws providing for the
election of the Board of Directors by districts is a form of
limitation on the voting rights of the members of a nonstock
corporation as recognized in Sec. 89. That limitation is valid.
I. The Plan of Distribution of Assets may be adopted by a
majority vote of the Board of Trustees and approval of
majority of the members having voting rights present or
represented by proxy at the meeting during which said
plan is adopted. (false)
• We discussed earlier the rules of distribution, and
the last item refers to a distribution of assets
according to the plan of distribution as approved by
the majority of the Board and at least ⅔ of the
members. Based on the requirements under Sec. 94,
this statement is false because it states there that it
only requires the approval of majority of the
members when, in fact, the law requires at least ⅔
of the members.
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II. Members’ meeting may be held at any place outside the
principal office of the corporation provided it shall be
within the Philippines. (true)
• This is with regard to the place of meetings.
Unlike stock corporations wherein the general
rule is that the meeting must be held at the
principal office of the corporation. It’s only an
exception that the meeting can be held in other
places within the city where the principal office is
located.
• For nonstock corporations, they can be held
outside the principal office of business of the
corporation. The only requirement is that it must
be held within the Philippines. This is provided
under Sec. 92.
Case Problem:
Leyton Corporation is a close corporation composed of five
stockholders, namely: Jose, Maria, Andres, Pedro, and Pablo.
On April 5, 2022, the SEC issued a Certificate of Incorporation
in their favor. Eager to start the business, Jose, Maria, and
Andres entered into a contract of sale over a commercial
building. A day after the sale, they called Pedro and Pablo and
told them that they had to act promptly since a lot were
interested in the property. On May 2, 2022, a certificate of title
was issued in the name of Leyton Corporation.
Which of the following statements is true?
A. The contract is valid as neither Pedro nor Pablo
filed a written objection to the sale.
B. The contract is not valid as there was no notice and
meeting.
C. The contract is not valid as the sale was a result of an
informal action of the directors.
D. The contract is valid as it was entered into by the
majority of the directors.
Before that, we must highlight the fact that Leyton
Corporation is a close corporation. In a close corporation, it is
composed of stockholders which do not exceed 20. This is
composed of a specific number of persons. In this case, 5. In stock
corporations in contrast, these are composed of stockholders
which may exceed 20. In that case, the stockholders will elect their
directors who are responsible for the management of the business.
The directors will be the ones to decide on the conduct of the
business, controlling the properties of the business, and exercising
corporate powers.
In this case, for close corporations, who should be responsible for
the management of the business?
Section 96. xxx The articles of incorporation of a close
corporation may provide that the business of the corporation shall
be managed by the stockholders of the corporation rather than by
a board of directors. So long as this provision continues in effect,
no meeting of stockholders need be called to elect directors:
Provided, That the stockholders of the corporation shall be
deemed to be directors for the purpose of applying the provisions
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of this Code, unless the context clearly requires otherwise:
Provided, further, That the stockholders of the corporation shall
be subject to all liabilities of directors. xxx
Remember that stockholders who act as directors of
close corporations shall be subject to the same liabilities as of the
directors of a stock corporation.
In this problem, they executed a contract of sale, but
only three of the stockholders who acted as directors signed the
contract. The remaining two were just informed later on that they
entered into a contract of sale. Is that contract valid? Yes.
Section 100. Unless the bylaws provide otherwise, any action
taken by the directors of a close corporation without a meeting
called properly and with due notice shall nevertheless be deemed
valid if:
(a) Before or after such action is taken, a written consent thereto
is signed by all the directors; or
(b) All the stockholders have actual or implied knowledge of the
action and make no prompt objection in writing; or
(c) The directors are accustomed to take informal action with the
express or implied acquiescence of all the stockholders; or
(d) All the directors have express or implied knowledge of the
action in question and none of them makes a prompt objection in
writing.
An action within the corporate powers taken at a meeting held
without proper call or notice is deemed ratified by a director who
failed to attend, unless after having knowledge thereof, the
director promptly files his written objection with the secretary of
the corporation.
In this case, Pedro and Pablo were informed of the
contract of sale but they did not object to the sale. And even if
there was objection, the objection was not made in writing. In fact,
a certificate of title was already issued in favor of the corporation,
without Pedro or Pablo filing a written objection. Even if there
was no meeting or notice given to them, that particular action by
Jose, Maria and Andres is valid.
Q: How about the fact that it was a result of an informal action
because there was no meeting, will that invalidate the action?
A: Under par. C, it is included as one of the
instances where the action is deemed valid.
(c) The directors are accustomed to take informal action with the
express or implied acquiescence of all the stockholders
Although this is an instance where an action is valid without a
meeting, this is not the applicable provision. This is only
applicable if there were past or previous dealings between and
among the stockholders acting as directors where they are used to
deciding matters informally. In such case, any action taken by
them subsequently in an informal manner is valid considering that
it is a customary practice between and among them. But it is not
applicable in this case because there is no fact showing previous
dealings.
(d) All the directors have express or implied knowledge of the
action in question and none of them makes a prompt objection
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in writing.
The rule only provides for a possibility where the
stockholders may act as directors. This does not preclude in a
close corporation for stockholders to elect directors. There are 20
stockholders for a close corporation and they decide to elect 5 of
them to become directors, that is allowed. The directors, who
have express or implied knowledge of the action, if they do not
make a prompt objection in writing, then the act committed by
one director is already considered valid. The actions provided in
this provision could still be subject to ratifications.
The following corporations cannot be incorporated as a close
corporation and one person corporation, except:
a. Bank
b. Publicly-listed company
c. Industrial company
d. Insurance company
Section 95. xxx Any corporation may be incorporated as a close
corporation, except mining or oil companies, stock exchanges,
banks, insurance companies, public utilities, educational
institutions and corporations declared to be vested with public
interest in accordance with the provisions of this Code.
Section 116. xxx Banks and quasi-banks, preneed, trust,
insurance, public and publicly-listed companies, and non-
chartered government-owned and -controlled corporations may
not incorporate as One Person Corporations: Provided, further,
That a natural person who is licensed to exercise a profession may
not organize as a One Person Corporation for the purpose of
exercising such profession except as otherwise provided under
special laws.
There are 8 instances where a corporation cannot be incorporated
as an OPC.
In the above problem, only an industrial company can be
incorporated as an OPC. For publicly-listed companies, they are
disqualified to be incorporated as an OPC. It can also be argued
that they can be disqualified to be incorporated as a close
corporation given that they are publicly-listed, therefore, vested
with public interest.
Which of the following statements is CORRECT?
a. The right of first refusal is available to all
stockholders unless such right is denied in the
Articles of Incorporation or amendment thereto.
b. The existing stockholders have no preemptive right
unless such restriction on transfer is embodied in the
Articles of Incorporation, bylaws and stock
certificate.
c. The transferring shareholders may sell their shares to
any person if existing shareholders and the
corporation failed to exercise their right of first
refusal.
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d. The preemptive right is the option granted to the Discussion on Distinction:

corporation and/or its stockholders to purchase the
• The pre-emptive right pertains to all stock
shares of a transferring shareholder on reasonable
corporations, even close corporations. Close
terms and conditions.
corporations have a preemptive right but this right is
called the right of first refusal.
SEC. 38. Power to Deny Preemptive Right. – All stockholders of • For pre-emptive right for stock corporations refers
a stock corporation shall enjoy preemptive right to subscribe to all specifically to the right to subscribe to original or new
issues or disposition of shares of any class, in proportion to their issuances of the corporation. This is in order to preserve
respective shareholdings, unless such right is denied by the articles the proportion of ownership of the stockholder in the
of incorporation or an amendment thereto: corporation. The purpose of the preemptive right is to
prevent the dilution of the interest of the stockholders
in a stock corporation, to protect the interests of existing
This statement describes the right of first refusal and preemptive stockholders.
rights.
• For pre-emptive right, refers specifically to the right to
subscribe to original or new issuances of the
Q: What is the right of first refusal?
corporation. For right of first refusal, it refers to an issued
A: This applies to close corporation. A close
stock already of the stockholder. The right of first refusal
corporation is a stock corporation considering that it is
refers to the right of the existing stockholders to first be
a corporation with issued stocks held by a specified
offered the shares of stock owned by the transferring
number of persons not exceeding twenty. As a stock
stockholder. The transferring stockholder cannot
corporation, they are also entitled to preemptive right.
transfer their stocks to third persons without first
This preemptive right is called the right of first refusal .
offering it to the existing stockholders.
There’s a specific name for this pre-emptive
right for close corporations. Which of the following statements is CORRECT?
A. The right of first refusal is available to all
Right of First Refusal in Closed Corporations. For close stockholders unless such right is denied in the
corporations, they have the right to sell their shares to a third Articles of Incorporation or any amendment
person who is not a stockholder of the corporation but they must thereto - FALSE. This refers to the pre-emptive
first offer the shares to existing stockholders. right which is applicable to stockholders in general
(Article 38).
Pre-emptive Right - The pre-emptive right pertains to all stock B. The existing stockholders have no pre-emptive
corporations, even close corporations. Close corporations have a right unless such restriction on transfer is embodied
preemptive right but this right is called the right of first refusal. in the Articles of Incorporation, bylaws and stock
certificate - FALSE. This refers to the right of first
Section 38. Power to Deny Preemptive Right. - All refusal of close corporations (Section
stockholders of a stock corporation shall enjoy preemptive 97:Restrictions on the right to transfer shares must
right to subscribe to all issues or disposition of shares of any appear in the articles of incorporation, in the
class, in proportion to their respective shareholdings, unless bylaws, as well as in the certificate of stock).
such right is denied by the articles of incorporation or an C. The transferring shareholders may sell their
amendment thereto: Provided, That such preemptive right shall shares to any person if existing stockholders and
not extend to shares issued in compliance with laws requiring the corporation failed to properly exercise their
stock offerings or minimum stock ownership by the public; or to right of first refusal. - TRUE. This refers to the
shares issued in good faith with the approval of the stockholders right of first refusal for close corporations (Section
representing two-thirds (2/3) of the outstanding capital stock in 97: If, upon the expiration of said period, the existing
exchange for property needed for corporate purposes or in stockholders or the corporation fails to exercise the
payment of previously contracted debt. option to purchase, the transferring stockholder may
sell their shares to any third person.)
RIGHT OF FIRST D. The preemptive right is the option granted to the
PRE-EMPTIVE RIGHT
REFUSAL corporation and/or its stockholders to purchase
shares of a transferring stockholder on reasonable
pertains to all stock Pre-emptive right of a Close terms and conditions.- FALSE. This refers to the
corporations even close corporation right of first refusal for close corporations (Section
corporations 97: restrictions shall not be more onerous than
granting the existing stockholders or the corporation
refers specifically to the right Refers to an already issued the option to purchase the shares of the transferring
to subscribe to original or stock of the stockholder stockholder with such reasonable terms, conditions
new issuances of the or period stated.)
corporation.

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RIGHT OF FIRST REFUSAL FOR CLOSE
CORPORATIONS
SEC. 97. Validity of Restrictions on Transfer of Shares. –
Restrictions on the right to transfer shares must appear in the
articles of incorporation, in the bylaws, as well as in the certificate
of stock; otherwise, the same shall not be binding on any
purchaser in good faith. Said restrictions shall not be more
onerous than granting the existing stockholders or the
corporation the option to purchase the shares of the transferring
stockholder with such reasonable terms, conditions or period
stated. If, upon the expiration of said period, the existing
stockholders or the corporation fails to exercise the option to
purchase, the transferring stockholder may sell their shares
to any third person.
The Articles of Incorporation of Brent Inc., a close
corporation provides that: “The shareholders may mortgage,
pledge or otherwise encumber all or part of their shares in the
corporation; provided that the other parties shall give their written
consent thereto; provided further that the written notice to the
other parties shall be sufficient if the mortgage or pledge is a
banking or financial institution. A similar provision can be found
in the bylaws and is annotated in the stock certificate.
So here we have an example of a restriction on the transfer of
ownership in a close corporation.
Q: Is the provision valid?
Choice 1: The provision is not valid because shares in a close
corporation are personal and non-transferable. - INCORRECT,
because this pertains to nonstock, not close corporations.
SEC. 91. Nontransferability of Membership. – Membership in a
nonstock corporation and all rights arising therefrom are personal
and non-transferable, unless the articles of incorporation or the
bylaws otherwise provide.
Choice 2: The provision is valid as it appeared in the Articles of
Incorporation, bylaws and stock certificate. - CORRECT under
Sec 97.
Section 97. Validity of Restrictions on Transfer of Shares. –
Restrictions on the right to transfer shares must appear in the
articles of incorporation, in the bylaws, as well as in the certificate
of stock; otherwise, the same shall not be binding on any
purchaser in good faith. Said restrictions shall not be more
onerous than granting the existing stockholders or the
corporation the option to purchase the shares of the transferring
stockholder with such reasonable terms, conditions or period
stated. If, upon the expiration of said period, the existing
stockholders or the corporation fails to exercise the option to
purchase, the transferring stockholder may sell their shares to any
third person.
Choice 3: The provision is valid as long as existing shareholders
are given their right of first refusal. - CORRECT under Sec 97.
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Section 97. Validity of Restrictions on Transfer of Shares. –
Restrictions on the right to transfer shares must appear in the
articles of incorporation, in the bylaws, as well as in the certificate
of stock; otherwise, the same shall not be binding on any
purchaser in good faith. Said restrictions shall not be more
onerous than granting the existing stockholders or the
corporation the option to purchase the shares of the transferring
stockholder with such reasonable terms, conditions or period
stated. If, upon the expiration of said period, the existing
stockholders or the corporation fails to exercise the option to
purchase, the transferring stockholder may sell their shares to any
third person.
Choice 4: The provision is not valid as it does not provide an
option period to be exercised by the existing stockholders and the
corporation. - MOST APPROPRIATE ANSWER.
Section 97. Validity of Restrictions on Transfer of Shares. –
Restrictions on the right to transfer shares must appear in the
articles of incorporation, in the bylaws, as well as in the certificate
of stock; otherwise, the same shall not be binding on any
purchaser in good faith. Said restrictions shall not be more
onerous than granting the existing stockholders or the
corporation the option to purchase the shares of the transferring
stockholder with such reasonable terms, conditions or period
stated. If, upon the expiration of said period, the existing
stockholders or the corporation fails to exercise the option to
purchase, the transferring stockholder may sell their shares to any
third person.
The law provides that there must be an option period
given to the existing stockholders and the corporation to exercise
their right of first refusal. It could not be for an indefinite period
of time because that would be tantamount to an absolute
restriction on the ownership of the shares of stock by the
transferring stockholder. The latter has the right to transfer his or
her shares in the corporation. That is a PROPERTY RIGHT. It
cannot be left to the will of the existing stockholders or to the
corporation.
PROBLEM IN THIS CASE: There was no option period. If
you’ve noticed, the Articles of Incorporation provides that “the
other parties shall give their written consent thereto.” So what if
the other parties, existing stockholders or the corporation do not
give their written consent? Does that mean that the transferring
shareholder can no longer transfer their shares of stock to a third
person? NO. The right of first refusal must be circumscribed by
an option period. In other words, the right must be limited for a
definition period of time before a transferring shareholder is
allowed to sell his or her shares to third person. In this case, there
was no option period.
Knowledge Check Question
On February 14, 2022, the SEC issued a Certificate of
Incorporation to Homerton, OPC. The corporation's lone
stockholder, Marcelo, executed and signed a resolution,
empowering him to buy on installments a commercial property
owned by Gregorio. The resolution was recorded in the minutes
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The single stockholder shall designate a nominee and an

book. After paying the down payment, Marcelo failed to pay the alternate nominee who shall, in the event of the single
remaining balance. Aggrieved, Gregorio filed a collection case stockholder's death or incapacity, take the place of
against Marcelo in his personal capacity, and prayed for the the single stockholder as director and shall manage the
attachment of his apartment and his car. In his defense, Marcelo corporation's affairs.
argued that he is only liable to the extent of his subscription in
Homerton, OPC. The articles of incorporation shall state the names,
residence addresses and contact details of the
Which of the following is NOT a valid defense in the collection nominee and alternate nominee, as well as the
case? extent and limitations of their authority in managing
1. That Homerton OPC was adequately financed. the affairs of the One Person Corporation.
VALID.
2. That the commercial property was not for Marcelo's The written consent of the nominee and alternate
personal use; and that his apartment and car were not nominee shall be attached to the application for
used in the business. VALID. incorporation. Such consent may be withdrawn in
3. That there is no fraud or bad faith that would warrant writing any time before the death or incapacity of
piercing the veil of corporate fiction. VALID. the single stockholder.
4. That it is the nominee or the alternate nominee, who
must be impleaded as defendant in the collection case. This is not a valid defense in the collection case
NOT VALID.
Knowledge Check Question
Answer: Which is a valid distinction between stock and nonstock
SECTION 130. Liability of Single Shareholder.— A sole corporations?
shareholder claiming limited liability has the burden of
affirmatively showing that the corporation was adequately 1. Stockholders' meetings shall be held in the principal
financed. Where the single stockholder cannot prove that the office of the corporation, while members' meetings
property of the One Person Corporation is independent of the shall be held at a place outside the place where the
stockholder's personal property, the stockholder shall be jointly principal office is located.
and severally liable for the debts and other liabilities of the One 2. Only the Board of Directors can appoint the officers
Person Corporation. The principles of piercing the corporate veil of the stock corporation, while only the Board of
applies with equal force to One Person Corporations as with other Trustees can elect the officers of the nonstock
corporations. corporation.
3. Only preferred and redeemable shareholders can be
That Homerton OPC was adequately financed. denied the right to vote, while a member's right to
This is a valid defense under Section 130 of the RCCP. It's the vote cannot be denied by the Articles of
burden of the sole stockholder to prove that the corporation or Incorporation.
the OPC was adequately financed. 4. An independent director should be a stockholder of
the corporation, while an independent trustee may
That the commercial property was not for Marcelo's personal use; not be a member. CORRECT ANSWER.
and that his apartment and car were not used in the business.
Under Section 130, when the single stockholder of the OPC
cannot prove that such assets are independent from the Answer:
stockholder’s personal property, the stockholder shall be jointly Stockholders' meetings shall be held in the principal office of the
and solidarily liable with the debts and obligations of the OPC. In corporation, while members' meetings shall be held at a place
order for the single stockholder to challenge the liability against outside the place where the principal office is located.
himself, he must prove that his properties are independent from This is a false statement on account of the word shall. Under
the assets of the OPC. This is a valid defense in a commercial case. Section 92, it provides that: “. . . The bylaws may provide that the
He must prove that there was no commingling of funds nor was members of a nonstock corporation may hold their regular or
there any abuse of the use of the assets of the OPC. special meetings at any place even outside the place where the
principal office of the corporation is located: Provided,That
That there is no fraud or bad faith that would warrant piercing proper notice is sent to all members indicating the date, time and
the veil of corporate fiction. place of the meeting: Provided, further,That the place of meeting
The principle of piercing the corporate veil applies with equal shall be within Philippine territory.” The law does not limit the
force with the OPC. This is a valid defense for the OPC. nonstock corporations. It may be held at any place for as long as
it is in the bylaws. But such accommodation is not mandatory.
That it is the nominee or the alternate nominee, who must be
impleaded as defendant in the collection case. Only the Board of Directors can appoint the officers of the stock
Not relevant to the collection case. Section 124 of the RCCP is corporation, while only the Board of Trustees can elect the
relevant, to wit: officers of the nonstock corporation.
Under Section 91, it provides that: “. . . Unless otherwise
SECTION 124. Nominee and Alternate Nominee.— provided in the articles of incorporation or the bylaws, the
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members may directly elect officers of a nonstock
corporation.” It is not at all times that it is the BOT that can elect
the officers of the nonstock corporation.
Only preferred and redeemable shareholders can be denied the
right to vote, while a member's right to vote cannot be denied by
the Articles of Incorporation.
This is a false statement. Section 88 provides, to wit:
SECTION 88. Right to Vote.— The right of the
members of any class or classes to vote may be limited,
broadened, or denied to the extent specified in the
articles of incorporation or the bylaws. Unless so
limited, broadened, or denied, each member, regardless
of class, shall be entitled to one (1) vote.
Unless otherwise provided in the articles of
incorporation or the bylaws, a member may vote by
proxy, in accordance with the provisions of this Code.
The bylaws may likewise authorize voting through
remote communication and/or in absentia.
An independent director should be a stockholder of the
corporation, while an independent trustee may not be a member.
The only connection of independent directors to a stock
corporation is either receiving some fees or having a share of
stock. While for an independent trustee, Section 91 provides, to
wit:
SECTION 91. 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. 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.
Thus, an independent trustee may not be a member of the BOD
if it is a nonstock corporation vested with public interest.
Knowledge Check Question
The Articles of Incorporation of a nonstock corporation
provides for ten (10) members of the Board of Trustees. Six (6)
months into the first years of their three- year term, four (4) of
them resigned. The remaining six (6) trustees called a special
board meeting to fill the vacancies.
Do the members of the Board of Trustees have the power to
fill the vacancies?
1. Yes, the majority of the remaining trustees, if they
constitute a quorum, may fill up the vacancies.
CORRECT ANSWER.
2. No, the remaining trustees cannot fill the vacancies as
it is the members who must vote for the replacement.
Abellano ◦ Adolfo ◦ Bajar ◦ Cabeje ◦ Caceres ◦ Capuyan ◦ Cañales ◦ Daulo ◦ Delicano ◦ Dino ◦ Gabato ◦ Leopardas ◦ Ngo ◦ Panelo ◦ Prisco ◦ Reyes ◦ Velez ◦ Villagonzalo
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3. Yes, the remaining trustees can fill the vacancies as
their right to vote cannot be limited by the Articles of
Incorporation.
4. No, the majority of the remaining trustees cannot fill
up the vacancies as the number of trustees is no longer
in multiples of five (5).
Answer:
Yes, the majority of the remaining trustees, if they constitute a
quorum, may fill up the vacancies.
Section 86 of the RCCP provides that: “. . . The provisions
governing stock corporations, when pertinent, shall be applicable
to nonstock corporations, except as may be covered by specific
provisions of this Title.”
Another relevant provision is Section 28, to wit:
SECTION 28. Vacancies in the Office of Director or
Trustee; Emergency Board.— Any vacancy occurring in
the board of directors or trustees other than by removal
or by expiration of term may be filled by the vote of at
least a majority of the remaining directors or
trustees, if still constituting a quorum; otherwise, said
vacancies must be filled by the stockholders or members
in a regular or special meeting called for that purpose.xxx
In this case, there were 10 directors and 4 of them resigned. Thus,
the reason for vacancy is those other than by removal or
expiration of term. Thus, it is allowed pursuant to Section 28.
No, the remaining trustees cannot fill the vacancies as it is the
members who must vote for the replacement.
This has no basis under the law. There is no such legal sanction.
Yes, the remaining trustees can fill the vacancies as their right to
vote cannot be limited by the Articles of Incorporation.
This has no basis.
No, the majority of the remaining trustees cannot fill up the
vacancies as the number of trustees is no longer in multiples of
five (5).
There is no such prohibition. Under the law, there is a provision
regarding multiples of five. This is Section 106 of the RCCP,
which provides that: “. . . For institutions organized as stock
corporations, the number and term of directors shall be governed
by the provisions on stock corporations.” Thus, for educational
institutions that are nonstock corporations, the number of
directors shall be in the multiples of five.
Knowledge Check Question
Which of the following statements about educational
corporations is FALSE?
1. The number of trustees in a non stock educational
corporation shall not be less than five nor more than
fifteen; provided that the number of trustees shall be
in multiples of five.
2. Trustees thereafter elected to fill vacancies,
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occurring before the expiration of a particular term,
shall hold office only for the unexpired period.
3. Educational corporations may be organized as a
stock or nonstock corporation.
4. Trustees shall be elected for a term of one year from
among the members in good standing in the
corporation's books. (FALSE)
Answer:
“Provided that the number of trustees shall be in multiples of
five.” - TRUE
● This provision is in compliance with the law, under Sec
106.
● IOW, the number of directors shall be 5, 10, 15.
Trustees thereafter elected to fill vacancies, occurring before the
expiration of a particular term, shall hold office only for the
unexpired period. - TRUE
● This is on replacement trustees, those who fill the
vacancy before the term of the person to be replaced
has expired.
● This is under Sec 106.
Educational corporations may be organized as a stock or
nonstock corporation- TRUE
● Under Sec 106
Trustees shall be elected for a term of one year from among the
members in good standing in the corporation’s books. - FALSE
● For education corporations, the board of trustees of
incorporated schools, colleges, or other institutions of
learning shall, as soon as organized, so classify
themselves that the term of office of one-fifth of their
number shall expire every year; trustees elected
thereafter t fill vacancies caused by expiration of term
shall hold office for 5 years (Sec 106).
● IOW, the term of trustees shall be for 5 years.
● TN: term of trustees for education corporations is on a
staggered basis: ⅕ of the number must retire from the
board of trustees. So for a board of trustees with 5
trustees, in the first year the first trustee must retire, in
the second year the second trustee must retire, so on and
so forth. For the trustees who shall replace them, they
will now hold office for 5 yrs.
● Do not be confused with regard to trustees who replace
the trustees shall have a term based on the remaining or
unexpired portion of the person who may replace. That
is for replacement of trustees OTHER THAN
EXPIRATION OF TERM.
ILLUSTRATION:
TN: For each year after the first year, only one -fifth of the
trustees will retire; and only 1 new trustee will enter into the
functions of the board of trustees.
5 member board of trustees (Jose,
Maria, Andres, Pablo,
Marcelo).
● In the first year, all
of them will serve.
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● In the second year, Jose will no longer be part of the
BOT because ⅕ of the number of trustees must retire;
he may now be replaced by Pedro who will now have a
term of 5 years.
● The same is true with Maria. For Maria, on the 3rd year,
she will now be replaced by Leonora who will now have
a term of 5 years.
● So on so forth.
● TN: the trustees who replace those terms who expired
will have a fresh mandate of 5 years, considering that the
vacancy was a result of expiration of term. If not because
of expiry of term, the replacement trustee can only hold
office for the expired or the remaining term of the
person whom he/she replaced.
● TN: for every year only 1 trustee must retire.
● This shuffling is in order to preserve the independence
of the board of trustees,to make sure that the
composition is diverse and to encourage deliberations
Section 103. Notwithstanding any contrary provision in the
close corporation's articles of incorporation, bylaws, or
stockholders' agreement, if the directors or stockholders are
so divided on the management of the corporation's business
and affairs that the votes required for a corporate action
cannot be obtained, with the consequence that the business
and affairs of the corporation can no longer be conducted to
the advantage of the stockholders generally, the Commission,
upon written petition by any stockholder, shall have the power
to arbitrate the dispute. In the exercise of such power, the
Commission shall have authority to make appropriate orders,
such as:
(a) canceling or altering any provision contained in the
articles of incorporation, bylaws, or any
stockholder's agreement;
(b) canceling, altering or enjoining a resolution or act of
the corporation or its board of directors,
stockholders, or officers;
(c) directing or prohibiting any act of the corporation or
its board of directors, stockholders, officers, or other
persons party to the action;
(d) requiring the purchase at their fair value of shares of
any stockholder, either by the corporation regardless
of the availability of unrestricted retained earnings in
its books, or by the other stockholders;
(a) appointing a provisional director;
(b) Dissolving the corporation; or
(c) Granting such other relief as the circumstances may
warrant.
A provisional director shall be an impartial person who is
neither a stockholder nor a creditor of the corporation or any
of its subsidiaries or affiliates, and whose further
qualifications, if any, may be determined by the Commission.
A provisional director is not a receiver of the corporation and
does not have the title and powers of a custodian or receiver.
A provisional director shall have all the rights and powers of
a duly elected director, including the right to be notified of and
to vote at meetings of directors until removed by order of the
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Commission or by all the stockholders. The compensation of
the provisional director shall be determined by agreement
between such director and the corporation, subject to
approval of the Commission, which may fix the compensation
absent an agreement or in the event of disagreement between
the provisional director and the corporation.
The SEC has the authority to make appropriate orders such as:
(d) canceling or altering any provision contained in the
articles of incorporation, bylaws, or any stockholder's
agreement;
● Not relevant here because no provision in the
bylaws is contested.
(e) canceling, altering or enjoining a resolution or act of
the corporation or its board of directors, stockholders,
or officers;
● Here, while there was no decision yet, there
were already steps taken by Pedro to execute
the decision, that is when he filed an
application for an import license. But there
was no resolution issued by the Board.
(f) directing or prohibiting any act of the corporation or its
board of directors, stockholders, officers, or other
persons party to the action;
● In this case, if the SEC prohibits the
importation of the two pieces of heavy
equipment upon filing the bond, that is
authorized by law as provided under Sec 103
par c.
(g) requiring the purchase at their fair value of shares of
any stockholder, either by the corporation regardless of
the availability of unrestricted retained earnings in its
books, or by the other stockholder
CASE PROBLEM
Jose, Maria, Andres and Pablo are the stockholders of
Stratford, Inc., a close corporation engaged in the
construction business. In their meeting, they discussed the
possibility of importing two pieces of heavy equipment from
Germany. Jose and Maria believed that the corporation needs
to settle first its debt to Orion Bank before buying assets,
while Andres and Pablo insisted that the equipment is urgently
needed for them to complete their projects. Pablo then
applied for an import license. Aggrieved, Maria filed a petition
with the SEC to arbitrate the dispute.
Q: The SEC can do the following actions
EXCEPT:
● prohibit the importation of the two pieces of heavy
equipment, upon filing of a bond.
● order the dissolution of Stratford, Inc.
● require Stratford, Inc. to purchase the shares of
Jose and Maria, at their fair value, regardless of the
availability of surplus profits.
Abellano ◦ Adolfo ◦ Bajar ◦ Cabeje ◦ Caceres ◦ Capuyan ◦ Cañales ◦ Daulo ◦ Delicano ◦ Dino ◦ Gabato ◦ Leopardas ◦ Ngo ◦ Panelo ◦ Prisco ◦ Reyes ◦ Velez ◦ Villagonzalo
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ANS: appoint a representative from Orion Bank to vote in the
corporate action.
This is a case involving a dispute in a close corporation. How do
you dissolve a dispute if there is a stand still? Here Jose and Maria
believed that they should not buy the equipment, while Andres
and Pablo that they should buy the equipment.
Q: How will they resolve the dispute?
A: Sec 103. If the directors or stockholders are so divided on the management
of the corporation's business and affairs that the votes required for a corporate
action cannot be obtained, the SEC upon written petition by any stockholder
shall have the power to arbitrate the dispute.
Q: Can the SEC order the dissolution of Stratford, Inc.
A: Under Sec 103, par. f, the SEC may order
the dissolution of the corporation. But this is only when
the circumstances warrant. For example, there is no
possibility for reconciliation or the dispute could no
longer be settled as the trustees are adamant in their
positions. So the SEC may order the dissolution as a
LAST RESORT.
Q: Can the SEC require Stratford, Inc. to purchase the shares of
Jose and Maria, at their fair value, regardless of the availability of
surplus profits?
A: With regard to purchasing the shares of Jose
and Maria, this is tantamount to the exercise of the
appraisal right. If the stockholder dissent to the
corporate act then the corporation may be compelled to
pay the fair value of the shares of the dissenting
stockholders.
FF up Q? Can the SEC compel the payment of the fair value of the
shares?
● Yes, under Sec 103, par d, the SEC may require the
purchase at their fair value of shares of any
stockholder, either by the corporation regardless of the
availability of unrestricted retained earnings in its books,
or by the other stockholders. This is regardless of the
availability of unrestricted retained earnings.
● Unlike your appraisal right which requires that it may
only be exercised if there are unrestricted retained
earnings. Under Sec 103, the SEC is empowered to order
the close corporation to buy back the shares of
dissenting stockholders, at the fair value of the shares,
regardless of the availability of surplus profits or
unrestricted retained earnings.
Finally, appoint a representative from Orion Bank to vote in the
corporate action.
● The SEC may appoint a provisional director ot break
the tie/deadlock/standstill.
● Under Sec 103, however, a A provisional director shall
be an impartial person who is neither a stockholder
nor a creditor of the corporation or any of its
subsidiaries or affiliates. So in this case, Orion Bank
being the creditor of the corporation cannot be
appointed as a provisional director.
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 CORPORATION LAW
ATTY. VJC | SECOND SEMESTER 2021-2022

CONCLUSION to case problem: THEREFORE, the SEC
can do all of the first three acts except appoint a creditor as a
provisional director.
Shepherd's Bush is a corporation sole organized in the
Philippines. Elder Price filed the Articles of Incorporation with
the SEC, stating therein, among others, that "any vacancy in the
position of the presiding elder, by reason of death or incapacity,
shall be filled by the elder, who is second-in-rank among the
Council of Elders;" and "that any property, real or personal,
belonging to the corporation sole, may be transferred or
conveyed upon majority vote of the Council of Elders, provided
further that the elder, who is second-in-rank, may veto the terms
of sale, without approval of the Council of Elders. " After his
death, his successor, Elder Cunningham, filed his commission
with the SEC, and thereafter, sold a large parcel of land
belonging to Shepherd's Bush to a nonstock corporation.
Is the sale of the parcel of land valid?
A. The sale is not valid as the successor is only a trustee
of all temporalities, estate and properties of Shepherd's
Bush.
B. The sale is not valid as the successor did not obtain a
written authority from the Regional Trial Court of the
province where the property is located.
C. The sale is valid provided that it complied with
procedure for transfer and convevance set forth in
the Articles of incorporation
Provided, That in cases where the rules, regulations, and discipline
of the religious denomination, sect or church, religious society, or
order concerned represented by such corporation sole regulate the
method of acquiring, holding, selling, and mortgaging real estate
and personal property, such rules, regulations and discipline shall
govern, and the intervention of the courts shall not be necessary.
IOW, if there is a rule providing for the transfer of church
property, then such rule must be honored. Court intervention is
no longer necessary. So you do not need to obtain an order from
the court, you only need to follow the rules provided in the AOI
or the bylaws of the corporation sole.
Application: In this case, there was already a provision in the
AOI of the corporation sole, "that any property, real or personal,
belonging to the corporation sole, may be transferred or conveyed upon majority
vote of the Council of Elders, provided further that the elder, who is second-
in-rank, may veto the terms of sale, without approval of the Council of Elders.
"
● Since there is already a procedure/ rule/ discipline
provided in the AOI, then all you need to do is follow
such rule. No need to obtain a court order.

So this problem refers to the acquisition/ alienation of property

belonging to a religious corporation, specifically a corporation
sole.

Section 111. Acquisition and Alienation of Property. – A

corporation sole may purchase and hold real estate and personal
property for its church, charitable, benevolent, or educational
purposes, and may receive bequests or gifts for such purposes.
Such corporation may sell or mortgage real property held by it by
obtaining an order for that purpose from the Regional Trial Court
of the province where the property is situated upon proof that the
notice of the application for leave to sell or mortgage has been
made through publication or as directed by the Court, and that it
is in the interest of the corporation that leave to sell or mortgage
be granted. xxx

The application for leave to sell or mortgage must be made by

petition, duly verified, by the chief archbishop, bishop, priest,
minister, rabbi, or presiding elder acting as corporation sole, and
may be opposed by any member of the religious denomination,
sect or church represented by the corporation sole: xxx

GR: A corporation sole must seek a court authority before it can

transfer any property belonging to the corporation. This is to
protect the interests of the religious corporation.

XPN:
Section 111. Acquisition and Alienation of Property. – xxx

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 CORPORATION LAW
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Module 14
Dissolution Notice of the meeting shall be published
once prior to the date of the meeting:
Dissolution (1) in a newspaper published in the place
GR: Corporations have a perpetual existence, while stockholders where the principal office of said
may transfer their interest the corporation continues to exist. corporation is located, or
- Stockholders and members may come and go, unlike in (2) if no newspaper is published in such
partnership, where they must stay together under the place, in a newspaper of general circulation
doctrine of delectus personae in the Philippines.

A corporation may decide to end its corporate existence, either Documentary (1) verified request for dissolution,
immediately terminate its existence or shorten its term. Requirements stating the matters in Sec. 134 (3)
(2) a copy of the resolution authorizing the
Dissolution - The time where the corporation ceases to exist dissolution, certified by a majority of the
board of directors or trustees and
Consists of two stages: countersigned by the secretary of the
1) Dissolution of corporation by virtue of legislative corporation;
enactment or grounds provided by law or at the will of (3) proof of publication; and
the incorporators if they decide to dissolve the (4) favorable recommendation from the
corporation appropriate regulatory agency, when
2) Even if the corporation is dissolved, the corporation will necessary.
continue to exist for a certain number of years, but only
for the purpose of winding up business Action by SEC Within fifteen (15) days from receipt of the
verified request for dissolution, and in the
Liquidation - corporation will distribute assets of corporation absence of any withdrawal within said
after paying debts and liabilities and complying with all the rules period, the SEC shall approve the request
of distribution, after these are complied with, the assets will be and issue the certificate of dissolution
distributed to the stockholders or members
It is not a highly contentious proceeding considering that it is a
TN: A corporation is a creation of the state so It cannot be decision by the corporation to dissolve its corporate existence and
dissolved without the consent of the state, there must be no creditors are affected.
compliance with the legal requirements under the law.
Where no creditors are affected:
The fact that the corporation has ceased to operate its business 1. Secure majority vote of directors
will not result to its dissolution. There are two methods provided 2. Majority vote of stockholders
under the law. 3. Notice and Publication requirement - before arriving at
1) Voluntary method the decision to dissolve there must be at least 20 days
2) Involuntary method prior notice. The notice shall be sent through:
. (1) personally,
The legal requirements depend on whether or not there will be a. (2) by registered mail, or
creditors affected by the dissolution. b. (3) by any means authorized under its bylaws.
Where no Creditors are Affected (Sec.
134)
TN: The frequency is limited to a one time publication since
Voting By majority vote of the board of there are no creditors affected. The publication must be made in
Requirement directors or trustees, and by a resolution the place where the principal office is located. If there is no such
adopted by the affirmative vote of the publication, it must be a newspaper of general circulation.
stockholders owning at least majority of
the outstanding capital stock or majority What if there are creditors affected by the dissolution.
of the members of a meeting to be held Try to think of a scenario where the corporation cannot pay its
upon the call of the directors or trustees. debts when it's due, or its liabilities have already exceeded its
assets; in which case, the corporation might fall and that decision
Notice and/or At least twenty (20) days prior to the might not be favorable to the creditors.
Publication meeting, notice shall be given to each
Requirement shareholder or member of record: For one reason or another, it might be better for the corporation
(1) personally, to continue doing business so creditors may still receive payment
(2) by registered mail, or for their credits, for example.
(3) by any means authorized under its
bylaws. How do you balance the scenario when the best decision must
favor both the corporation and the creditors?

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Unlike the first scenario where you only file of verified request
and it will be acted within 15 days, what you file in this scenario is
a verified petition for dissolution; because you will be dealing with
contentious issue on how to distribute the assets of the
corporation so that the creditors will be paid of their credits.
The procedure:
Where creditors are affected (Sec. 135)
By majority of the board of directors or
trustees, and by the affirmative vote of the
Voting stockholders representing at least ⅔ of the
requirement outstanding capital stock or at least ⅔ of the
members at a meeting of its stockholders or
members called for that purpose.
(1) Verified petition for dissolution,
signed by a majority of the corporation’s
BOD/T, verified by its president or
secretary or one of its directors or
trustees, and shall set forth all claims and
Documentary
demands against it;
requirements
(2) A copy of the resolution authorizing the
dissolution, certified by a majority of the
BOD/T and countersigned by the
secretary of the corporation; and
(3) A list of all its creditors
Note: the voting requirement is stricter.
The law requires a higher requirements considering that there are
creditors who will be prejudiced by the dissolution.
Documentary Requirements
You need to file a verified petition for dissolution and attach the
accompanying documents, together with the list of all creditors.
• If you notice, the law does not provide for any
requirements as to the notice and publication of the
meeting conducted for the dissolution where creditors
are affected.
• What the law provides is this:
Where creditors are affected (Sec. 135)
Actions by (1) If the petition is sufficient in form and
the SEC substance, the SEC shall issue an order, reciting
the purpose of the petition, fixing a deadline for
filing objections to the petition which date shall
not be less than thirty (30) days nor more than
sixty (60) days after the entry of the order;
(2) Before such date, a copy of the order shall be
published at least once a week for three (3)
consecutive weeks in a newspaper of general
circulation published in the municipality or city
where the principal office of the corporation is
situated, or if there be no such newspaper, then
in a newspaper of general circulation in the
Philippines;
(3) and a similar copy shall be posted for three
(3) consecutive weeks in three (3) public places
in such municipality or city.
(4) Upon five (5) days’ notice, given after the
date on which the right to file objections as
fixed in the order has expired, the SEC shall
proceed to hear the petition and try any issue
raised in the objections filed;
(5) If no such objection is sufficient, and the
material allegations of the petition are true, the
SEC shall render judgment dissolving the
corporation and directing such disposition of its
assets as justice requires, and may appoint a
receiver to collect such assets and pay the debts
of the corporation.
Discussion:
(1) The SEC will fix a deadline for filing objections to the
petition, which shall not be less than 30 days or more
than 60 days after the entry of the order.
• The SEC, in effect, invites third persons who
deal with a corporation (creditors, suppliers,
distributors) to comment on the dissolution.
(2) With regard to the order of the SEC, it has to be
published at least once a week for three consecutive
weeks.
• This publication requirement is for purposes of
uprising third parties regarding the dissolution.
(3) It can be posted in the public market, city hall, register
of deeds or registry of property.
• Aside from the publication requirement there
is a posting requirement.
• What do you publish?
o SEC order
o (It's different from the first scenario
where what you publish is the notice
to the stockholders of the meeting.
(4) This is what sets this procedure apart from the first: a
hearing conducted before the SEC in order to settle the
debts and liabilities of the corporation.
(5) What if there is some disagreement what if the creditors
might object to the proposals of the corporation?
• In highly contentious matters the SEC may
appoint a receiver, a third person will be
responsible for the distribution of the assets of
the corporation.
Shortening Corporate Term
Shortening Corporate Term (Sec. 136)
Voting A private corporation may shorten its
requirement corporate term when approved by a
majority vote of the board of directors or
trustees and ratified at a meeting by the
stockholders or members representing at
least ⅔ of the outstanding capital stock

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or of its members.
TN: The frequency is limited to a one time publication since there
are no creditors affected. The publication must be made in the
place where the principal office is located. If there is no such
publication, it must be a newspaper of general circulation.

Where Creditors are Affected (Sec. 135)

Notice and/or Written notice of the proposed action and
publication the time and place of the meeting shall be Voting By majority of the board of directors or
requirement sent to stockholders or members at their Requirement trustees, and by the affirmative vote of the
respective place of residence as shown in stockholders representing at least two-
the books of the corporation, and must thirds (2/3) of the outstanding capital stock
either be: or at least two-thirds (2/3) of the
(1) deposited to the addressee in the post members at a meeting of its stockholders or
office with postage prepaid, members called for that purpose
(2) served personally, or
(3) sent electronically in accordance with Documentary (1) verified petition for dissolution, signed by
SEC rules and regulations on the use of Requirements a majority of the corporation’s board of
electronic data messages, when allowed in directors or trustees, verified by its president
the bylaws or done with the consent of or secretary or one of its directors or trustees,
the stockholder. (Sec. 36) and shall set forth all claims and demands
against it;
Action by the SEC Upon the expiration of the shortened (2) a copy of the resolution authorizing the
term, as stated in the approved Amended dissolution, certified by a majority of the
Articles of Incorporation, the corporation board of directors or trustees and
shall be deemed dissolved without any countersigned by the secretary of the
further proceedings, subject to the corporation; and
provisions of this Code on liquidation. (3) a list of all its creditors

In the case of expiration of corporate Action by the (1) If the petition is sufficient in form and
term, dissolution shall automatically take SEC substance, the SEC shall issue an order,
effect on the day following the last day of reciting the purpose of the petition, fixing a
the corporate term stated in the Articles deadline for filing objections to the petition
of Incorporation, without the need for the which date shall not be less than thirty (30)
issuance of a certificate of dissolution. days nor more than sixty (60) days after the
entry of the order;
Comments: (2) Before such date, a copy of the order shall
• What you need to do is just to follow the requirements be published at least once a week for three
for the amendment of the Articles of Incorporation. (3) consecutive weeks in a newspaper of
o File an amendment by underscoring general circulation published in the
(underlining) the changes, the reduced number municipality or city where the principal
of years. office of the corporation is situated, or if
• Unlike the first 2 scenarios where the SEC has to issue a there be no such newspaper, then in a
certificate of dissolution before dissolution will take newspaper of general circulation in the
effect, in shortening the corporate term, the corporation Philippines;
shall be deemed dissolved without further (3) and a similar copy shall be posted for
proceedings. three (3) consecutive weeks in three (3)
• [Expiration of term] the dissolution shall automatically public places in such municipality or city.
take effect on the day following the last day of the (4) Upon five (5) days’ notice, given after the
corporate term. date on which the right to file objections as
fixed in the order has expired, the SEC shall
Where no creditors are affected: proceed to hear the petition and try any issue
1. Secure majority vote of directors raised in the objections filed;
2. Majority vote of stockholders (5) If no such objection is sufficient, and the
3. Notice and Publication requirement - before arriving at material allegations of the petition are true,
the decision to dissolve there must be at least 20 days the SEC shall render judgment dissolving the
prior notice. The notice shall be sent through: corporation and directing such disposition of
a. (1) personally, its assets as justice requires, and may appoint
b. (2) by registered mail, or a receiver to collect such assets and pay the
c. (3) by any means authorized under its bylaws. debts of the corporation.

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The voting requirement is more strict, considering there are

creditors involved. In the expiration of a term where there’s a set number of years
and the last year has arrived, dissolution shall
The law does not provide for any requirement for the meeting AUTOMATICALLY take effect on the day following the last
where creditors are affected what the law provides is the SEC’s day of corporate term.
actions after the filing of the verified petition for dissolution.
The SEC may appoint a receiver. INVOLUNTARY DISSOLUTION
Grounds
Another ground for voluntary dissolution: 1. Non-use of corporate charter (Section 21) - if the
corporation had failed to commence its business and
Shortening Corporate Term (Sec. 136)
despite the order of the SEC to commence its business,
it continuously refuses to commence business.
Voting A private corporation may shorten its
2. Continuous inoperation of the corporation (Section 21)
Requirement corporate term when approved by a
3. Upon receipt of a lawful court order dissolving the
majority vote of the board of directors or
corporation
trustees and ratified at a meeting by the
4. Upon finding by final judgment that the corporation
stockholders or members representing at
procured its incorporation through fraud;
least two-thirds (2/3) of the outstanding
● One of the penalties in administrative
capital stock or of its members. (See Sec.
sanction is forfeiture of charter or revocation
11, Sec. 35[b] and Sec. 36)
of license. If the corporation is held liable for
any violation of the RCCP, the SEC may,
Notice and/or Written notice of the proposed action and
motu proprio, issue an order dissolving the
Publication the time and place of the meeting shall be
corporation.
Requirement sent to stockholders or members at their
● Recall corporate records: If the stockholder
respective place of residence as shown in
abuses the right of inspection, it will be
the books of the corporation, and must
subjected to hefty fines. It also includes
either be:
forfeiture of charter. To whom does it refer
(1) deposited to the addressee in the post
to? Corporate stockholders.
office with postage prepaid,
5. Upon finding by final judgment that the corporation:
(2) served personally, or
a. Was created for the purpose of committing,
(3) sent electronically in accordance with
concealing or aiding the commission of
SEC rules and regulations on the use of
securities violations, smuggling, tax evasion,
electronic data messages, when allowed in
money laundering or graft and corrupt
the bylaws or done with the consent of
practices
the stockholder (Sec. 36)
b. Committed or aided in the commission of
securities violations, smuggling, tax evasion,
Documentary A copy of the Amended Articles of
money laundering or graft and corrupt
Requirements Incorporation shall be submitted to the
practices, and its stockholders know; and
SEC.
c. Repeatedly and knowingly tolerated the
Action by the Upon the expiration of the shortened commission of graft and corrupt practices or
SEC term, as stated in the approved Amended other fraudulent or illegal acts by its directors,
Articles of Incorporation, the corporation trustees, officers, or employees.
shall be deemed dissolved without any
TN: The SEC can, motu proprio or upon verified complaint,
further proceedings, subject to the
provisions of this Code on liquidation. dissolve the corporation. The creditors may go to the SEC and
petition for the dissolution.
In the case of expiration of corporate
term, dissolution shall automatically take
effect on the day following the last day of CORPORATE LIQUIDATION
the corporate term stated in the Articles Corporate Liquidation
of Incorporation, without the need for Section 139. Except for banks, xxx every corporation whose
the issuance of a certificate of dissolution. charter expires pursuant to its articles of incorporation, is
annulled by forfeiture, or whose corporate existence 15
terminated in any other manner, shall nevertheless remain as a
Just follow requirements of amendment of Articles of body corporate for three (3) years after the effective date of
Incorporation. You underscore the changes (i.e. underscore the dissolution, for the purpose of prosecuting and defending suits
reduced number of years). by or against it and enabling it to settle and close its affairs,
dispose of and convey its property, and distribute its assets, but
Unlike the first 2 scenarios, in shortening corporate term, the not for the purpose of continuing the business for which it was
corporation shall be deemed dissolved without further established.
proceedings.

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Upon dissolution of the corporation, its corporate existence does

not automatically terminate. It can still exist for a certain period
of time for specific purposes.
● If a corporation was already dissolved by a final
judgment of court, the corporation thereafter cannot
execute contracts with suppliers or customers. They
cannot enter into new business, unless the purpose of
which is to wind-up affairs (i.e. Sale of corporate assets
to distribute the value of these assets to stockholders).

Q: Can corporations enter into contracts after dissolution?

A: If the contracts are executed for winding up corporate affairs,
then they may do so.

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Module 15
Foreign Corporation
FOREIGN CORPORATIONS
Section 140 Foreign Corporation - A foreign corporation is one
formed, organized or existing under laws other than those of the
Philippines and whose laws allow Filipino citizens and
corporations to do business in its own country or State. It shall
have the right to transact business in the Philippines after
obtaining a license for that purpose and a certificate of authority
from the appropriate government agency.
For foreign corporations to operate in our country, they must be
subjected to our laws.
Q: Why are there legal requirements for foreign corporations?
A: To bring them under the coverage of our
laws; otherwise, there will be no way of enforcing
judgment against foreign corporations. The law requires
the foreign corporation to obtain 1 license or when
applicable, a certificate of authority from the concerned
regulatory agency.
Conditions Precedent to the Issuance of a License
Submission of required documents:
a. copy of its Articles of Incorporation and bylaws,
certified in accordance with law, and their translation to
an official language of the Philippines, if necessary
b. application for license, which shall be under oath
and, shall set forth the matters enumerated in Sec. 142,
unless already stated in its Articles of Incorporation
Accompanying documents to the application:
A. certificate under oath duly executed by the authorized official
or officials of the jurisdiction of its incorporation, attesting to the
fact that the laws of the country or State of the applicant allow
Filipino citizens and corporations to do business therein, and that
the applicant is an existing corporation in good standing
• Foreign Corporations are those 1) formed, organized,
and existing under laws other than that of the Philippines
and 2) whose laws allow Philippine corporations to do
business in their country.
• This is not a reciprocity clause. Operative term is to
“ALLOW” Filiipinso to do business. It does not say that
the laws of that country grants the same rights to
FIlipino citizens.
B. statement under oath of the president or any other person
authorized by the corporation, showing to the satisfaction of the
SEC and when appropriate, other governmental agencies that the
applicant is solvent and in sound financial condition, setting forth
the assets and liabilities of the corporation as of the date not
exceeding one (1) year immediately prior to the filing of the
application
- There must be assurance that the foreign corporation is
solvent.
- This is a snapshot—the foreignc corporation must give
the SEC a figure of its assets and liabilities as of that time
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CORPORATION LAW
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C. certificate of authority from the appropriate government
agency, whenever required by law
D. written power of attorney designating a resident agent on
whom summons and other legal processes against the corporation
may be served, and a written agreement or stipulation consenting
that such service may be made upon the SEC if at anytime, it shall
cease to transact business in the Philippines, or shall be without
resident agent (Sec. 144 and Sec. 145)
• The purpose of these requirements is to bring these
corporations in our jurisdiction
• The law requires a RESIDENT AGENT. Their only
purpose is to receive summons. He is the point person
in the PH who will forward the court order to the foreign
corporation.
• There’s a GUARANTEE that a foreign corporation will
still follow its obligations as against third persons or the
state. If the resident agent cannot be found or the
foreign corporation no longer does business in the PH,
summons can be received by the SEC. This is already
effective service.
Additional precedent requirement for foreign banking,
financial and insurance corporations: these companies shall
comply with the provisions of SPECIAL LAWS.
Conditions Subsequent to the Issuance of License
The law continually monitors foreign corporations, it must
comply with the continuing requirements provided under the law.
(1) The foreign corporation shall transact business only for the
purpose/s for which it is authorized under its license.
- The corporation cannot deviate from the purpose for
which it was granted by the SEC.
(2) Within sixty (60) days after the issuance of the license, the
licensee, except foreign banking or insurance corporations, shall
deposit with the SEC for the benefit of present and future
creditors of the licensee in the Philippines, satisfactory
securities with an actual market value of at least PhP
500,000.00, or such other amount that may be set by the SEC.
- After a license is issued, the foreign corporation needs
to invest in the Philippine economy. It does not only
provides security to us, Filipinos, but it also encourages
to invest in our economy.
- TN: What the law requires is investing in securities e.g
stocks, bonds and other commodities of domestic
corporations in the Philippines.
(3) Within six (6) months after each fiscal year of the licensee, it
shall deposit additional securities or financial instruments
equivalent in actual market value to 2% of the amount by which
the licensee’s gross income for that fiscal year exceeds PhP
10,000,000.00. Such deposit shall be increased if the actual market
value of the securities has decreased by at least 10% of their actual
market value at the time they were deposited.
• If their business is profitable, the law requires additional
securities equivalent to in actual market value to 2% of
the amount by which the licensee’s gross income for that
fiscal year exceeds Php 10 Million.
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• So, the foreign corporation must deposit 2% of the of, commercial gain or
difference between the gross income and the 10 Million. of the purpose and
• The corporation does not just invest money, but in object of the business
bonds, securities, etc. organization.
Such deposit shall be increased if the actual market value of the
securities has decreased by at least 10% of their actual market
value at the time they were deposited.

• The next requirement does not hinge on the licensee’s

profitability or performance. This requirement pertains
to the value of the securities. Again, this does not pertain
to monetary deposit but the corporation must invest in
stocks, bonds, etc.
• The corporation must cover for such securities if the said
securities have decreased by at least 10% of their actual
market value at the time they were deposited.
PHILIPPINE CONTRACTORS ACCREDITATION
TN: The additional requirements are based on: 1) Gross BOARD, PETITIONER, V. MANILA WATER
income of the Corporation if they increase, and 2) the Market COMPANY, INC., RESPONDENT)
Value of the Securities already deposited if they decrease. (G.R. No. 217590, March 10, 2020 ]
(4) The foreign corporation must comply with the provisions of The IRR does not discriminate since it does not totally
existing laws, rules and regulations; otherwise, its license may be prohibit foreign contractors but, instead, requires them to
revoked, suspended or annulled by the SEC. (Sec. 151) obtain a special license.

Doing Business
1) soliciting orders and
service contracts
2) opening offices,
whether called "liaison"
offices or branches;
3) appointing
representatives or
distributors domiciled
in the Philippines, or
who in any calendar
year stay in the country
for a period or periods
totalling 180 days or
more;
4) participating in the
management,
supervision or control
of any domestic
business, firm, entity or
corporation in the
Philippines; and any
other act's that imply a
continuity of
commercial dealings or
arrangements, and
contemplate to that
extent the performance
of acts or works, or the
exercise of some of the
functions normally
incident to, and in
progressive prosecution
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Not Deemed to Include Congress did not intend to discriminate against foreign
contractors as there is no restriction that may be found in R.A.
1) mere investment as a No. 4566.
shareholder by a
foreign entity in Discriminating in favor of certain market participants, without
domestic corporations valid economic basis or policy rationale, tends to reward poor
duly registered to do performance, reduce competitive pressure, and distort incentives
business, and or the to innovate. In this case, the stated objectives of the assailed
exercise of rights as provision of the IRR can and should be achieved in other ways
such investor: which do not necessarily favor certain players and lessen
2) having a nominee competition in the construction industry. Consumer welfare,
director or officer to which in this case refers to the welfare of both household and
represent its interests other businesses, is maximized when competition allows
in such corporation; consumers to access and choose the most efficient producers,
nor regardless of the service provider's nationality.
3) appointing a
representative or
distributor domiciled REVOCATION OF LICENSE
in the Philippines,
which transacts 1. Failure to file its annual report or pay any required fees
business in its own 2. Failure to appoint and maintain a resident agent in the
name, and for its own Philippines
account. 3. Failure, after change of its resident agent or address, to
submit to the SEC the required statement of such change
4. Failure to submit to the SEC an authenticated copy of any
amendment to its Articles of Incorporation or bylaws or of
any Articles of Merger or Consolidation within the
prescribed time
5. A misrepresentation of any material matter in any
application, report, affidavit or other document submitted
by such corporation
6. Failure to pay any and all taxes, imposts, assessments or
penalties, if any, lawfully due to the Philippine Government
or any of its agencies or political subdivisions
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7. Transacting business in the Philippines outside of the

purpose or purposes for which such corporation is
authorized under its license
8. Transacting business in the Philippines as agent of or acting
on behalf of any foreign corporation or entity not duly
licensed to do business in the Philippines
9. Any other ground as would render it unfit to transact
business in the Philippines (Sec. 151)

Q: Do you detect some issues on that policy by the government?

Does it encourage foreign investment?
A: Look at the case of Philippine Contractors
Accreditation Board v. Manila Water Company. There,
it gives you an overview of how foreign corporations are
discriminated over domestic corporations. That case
discusses the construction industry. For domestic
corporations, they are allowed to secure an ordinary
license for which they can enter into numerous projects
for a particular year. Whereas for foreign corporations,
they can apply for a special license, but such license only
allows them to enter into a limited number of projects.

Q: Is this not a violation of the competition laws in the

Philippines?
A: Look at that case decided in 2020.

Foreign corporations are not just obliged to comply with the

licensing requirement. As I've mentioned earlier, there are
questions subsequent to operating business in the Philippines. But
if you noticed under Sec. 151 of the RCCP, the law actually
impliedly requires foreign corporations to perform additional
obligations. Otherwise, if they are not able to comply with these
obligations, that would result to the revocation of their license.

REVOCATION OF LICENSE
Failure to file its annual report or pay any required fees.
• With regard to licensing requirements, these are
regulatory requirements. Meaning, before entry of the
foreign corporations, they must pay the fees. But there
are also conditions that must be complied with after
entry of that foreign corporation.
• They must file annual reports and perhaps even pay
subsequent fees. Failure to settle these obligations will
result to revocation of license.

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Securities Regulation Code
Q: What are the powers and functions of the Securities and
Exchange Commission (SEC)?
A: SEC has both administrative and
adjudicative functions. Its administrative function
pertains to its regulatory powers. Its adjudicative
functions pertain to its power to decide disputes within
corporations.
REGULATORY functions:
a) SEC may approve or deny applications for registration
of (1) corporations (2) partnerships or (3) associations.
b) SEC may suspend or revoke licenses based in grounds
provided by law.
Where can you find the powers of SEC?
A: You can find them in the law creating the agency, and the law
expanding its powers and functions– P.D. 902-A. You can also
find them in the RCCP. Also in the Revised Securities Law.
UNDER THE RCCP:
Section 154. The SEC has the power to investigate offenses or any
violation of the RCCP. It investigates corporate practices, whether
or not in violation of the law, and it is the one who initiates
administrative proceedings to investigate these corporate acts.
However, the SEC does not prosecute crimes under the regular
courts. For crimes that may be committed by the corporations,
e.g. illegal recruitment, or other offenses punishable by special
laws. The SEC would transmit the evidence to the DOJ. It will
merely endorse the case to the DOJ who will then be responsible
in prosecuting the violation of the offenses.
To carry out the functions of the SEC, the RCCP grants the SEC
the following powers:
A. Investigation and Prosecution of Offenses (Sec. 154)
B. Administration of Oaths, Subpoena of Witnesses and
Documents (Sec. 155)
C. Cease and Desist Orders (Sec. 156) - for their directives
to be given effect, the SEC can issue cease and desist
orders like regular courts.
Example: When a corporation appropriates the corporate name
of an existing corporation whose rights has already been
registered, the SEC may issue cease and desist orders to prevent
that corporation from using the corporate name.
Sec. 156. xxx The ex parte order shall be valid for a maximum
period of twenty (20) days,
D. Contempt (Sec. 157) - against any person, whether
natural or juridical, who unjustifiably refuses to comply
with the orders of SEC.
See Secs. 158-172 for the penalties for violations committed by
the corporation under the RCCP. These would fall under patently
unlawful acts of the corporation because the law provides certain
prohibited acts, at the same time, prescribes the corresponding
penalties for these prohibited acts.
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When a director, trustee, or officer commits a violation provided
under Secs. 158-172, this is a PATENTLY UNLAWFUL ACT of
the corporation. Thus, the director, trustee, or officer can be held
personally liable with the corporation.
UNDER P.D. 902-A.
This law reorganized the SEC. Its Section 5 vests the SEC the
power to resolve intra-corporate controversies pursuant to the
adjudicative functions of the SEC.
Presidential Decree No. 902-A
Section 5. In addition to the regulatory and adjudicative functions
of the Securities and Exchange Commission over corporations,
partnerships and other forms of associations registered with it as
expressly granted under existing laws and decrees, it shall have
original and exclusive jurisdiction to hear and decide cases
involving.
a) Devices or schemes employed by or any acts, of the board of
directors, business associates, its officers or partnership,
amounting to fraud and misrepresentation which may be
detrimental to the interest of the public and/or of the stockholder,
partners, members of associations or organizations registered with
the Commission;
b) Controversies arising out of intra-corporate or partnership
relations, between and among stockholders, members, or
associates; between any or all of them and the corporation,
partnership or association of which they are stockholders,
members or associates, respectively; and between such
corporation, partnership or association and the state insofar as it
concerns their individual franchise or right to exist as such entity;
and
c) Controversies in the election or appointments of directors,
trustees, officers or managers of such corporations,
partnerships or associations.
ORIGINAL AND EXCLUSIVE JURISDICTION:
a. Those schemes or devices employed by the BoD or
officers or partnerships, which amount to fraud and
misrepresentation.
b. Intra Corporate Controversies - When there are disputes
which governs the relationship of stockholders,
corporations and even the obligations of the corporation
in so far as the State is concerned.
c. Election and Appointment Controversies
EXPANDED POWERS UNDER RA 8799 REVISED
SECURITIES LAW “BLUE SKY LAW”:
RA 8799 regulates the selling of securities in the Philippines . It is
commonly called “Blue Sky Law”
“Blue Sky Law”: This is because it refers to the unrealistic
promises offered by sellers of securities to gullible investors who
are offered unrealistically high returns or their promises are not
grounded in reality.
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One of the primary aims of the law is to regulate the sale of
securities to prevent fraud against investors.
RA 8799 REVISED SECURITIES LAW “BLUE SKY
LAW”:
Section 5. Powers and Functions of the Commission.– 5.1. The
commission shall act with transparency and shall have the powers
and functions provided by this code, Presidential Decree No. 902-
A, the Corporation Code, the Investment Houses law, the
Financing Company Act and other existing laws. Pursuant thereto
the Commission shall have, among others, the following powers
and functions:
(a) Have jurisdiction and supervision over all corporations,
partnership or associations who are the grantees of primary
franchises and/or a license or a permit issued by the Government;
- This includes foreign corporations who are granted license
by SEC
(b) Formulate policies and recommendations on issues
concerning the securities market, advise Congress and other
government agencies on all aspect of the securities market and
propose legislation and amendments thereto; - Administrative
functions
(c) Approve, reject, suspend, revoke or require amendments to
registration statements, and registration and licensing applications;
Regulatory functions
(d) Regulate, investigate or supervise the activities of persons to
ensure compliance; i.e exchange
(e) Supervise, monitor, suspend or take over the activities of
exchanges, clearing agencies and other SROs;
(f) Impose sanctions for the violation of laws and rules,
regulations and orders, and issued pursuant thereto;
(g) Prepare, approve, amend or repeal rules, regulations and
orders, and issue opinions and provide guidance on and supervise
compliance with such rules, regulation and orders;
(h) Enlist the aid and support of and/or deputized any and all
enforcement agencies of the Government, civil or military as well
as any private institution, corporation, firm, association or person
in the implementation of its powers and function under its Code;-
It can call the police forces to implement its orders
(i) Issue cease and desist orders to prevent fraud or injury to the
investing public;
(j) Punish for the contempt of the Commission, both direct and
indirect, in accordance with the pertinent provisions of and
penalties prescribed by the Rules of Court; - Contempt Powers
(k) Compel the officers of any registered corporation or
association to call meetings of stockholders or members thereof
under its supervision;
Abellano ◦ Adolfo ◦ Bajar ◦ Cabeje ◦ Caceres ◦ Capuyan ◦ Cañales ◦ Daulo ◦ Delicano ◦ Dino ◦ Gabato ◦ Leopardas ◦ Ngo ◦ Panelo ◦ Prisco ◦ Reyes ◦ Velez ◦ Villagonzalo
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(l) Issue subpoena duces tecum and summon witnesses to appear
in any proceedings of the Commission and in appropriate cases,
order the examination, search and seizure of all documents,
papers, files and records, tax returns and books of accounts of any
entity or person under investigation as may be necessary for the
proper disposition of the cases before it, subject to the provisions
of existing laws;
(m) Suspend, or revoke, after proper notice and hearing the
franchise or certificate of registration of corporations, partnership
or associations, upon any of the grounds provided by law; and -
Adjudicative Functions
(n) Exercise such other powers as may be provided by law as well
as those which may be implied from, or which are necessary or
incidental to the carrying out of, the express powers granted the
Commission to achieve the objectives and purposes of these
laws.- Catch all provision
Section 5 of RA 8799 expanded the functions of the SEC. Some
of these powers and functions merely reiterate PD 902-A and the
Revised Corporation Code.
Expanded Functions under Section 5 of RA 8799 :
a. Jurisdiction and supervision over all corporations
including foreign corporations with license
b. Administrative Functions
c. Regulatory Functions - The SEC regulates the entry of
corporations in the market.
d. Supervisory
e. Contempt Powers
f. Compel the officers to call meetings - Based on our
discussions there are provisions where if the person
authorized to call a meeting unjustifiably refuses to call
a meeting, the remedy is for a stockholder to petition
the SEC to order the conduct of an election. The
petitioning stockholder will be the presiding officer,
they shall meet and those number of persons will be
the emergency quorum.
g. Adjudicative Functions
h. Catch all provision
TRANSFER OF JURISDICTION:
The jurisdiction over these cases is transferred to the
Regional Trial Court sitting as a special commercial court.
5.2. The Commission’s jurisdiction over all cases enumerated
under section 5 of Presidential Decree No. 902-A is hereby
transferred to the Courts of general jurisdiction or the appropriate
Regional Trial Court: Provided, That the Supreme Court in the
exercise of its authority may designate the Regional Trial
Court branches that shall exercise jurisdiction over the
cases. The Commission shall retain jurisdiction over pending
cases involving intra-corporate disputes submitted for final
resolution which should be resolved within one (1) year from the
enactment of this Code. The Commission shall retain jurisdiction
over pending suspension of payment/rehabilitation cases filed as
of 30 June 2000 until finally disposed.
The Court that has proper jurisdiction over these cases such as
intra corporate controversies is the Regional Trial Court being a
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court of general jurisdiction. partners or associates themselves. Thus, under the relationship
test, the existence of any of the above intra-corporate relations
“Appropriate Regional Trial Court” - refers to a specific makes the case intra-corporate.
branch in the regional trial court which is designated by the (Medical Plaza Makati Condo V Cullen GR 181416,
Supreme Court as a Special Commercial Court. November 11, 2013)

Q: What happens if a case is filed to a court which is not a Special Under the nature of the controversy test, "the controversy must
Commercial Court? not only be rooted in the existence of an intra-corporate
A: The remedy is for the Executive Judge to re-docket the case relationship, but must as well pertain to the enforcement of the
and file it before the branch which is a Special Commercial Court. parties’ correlative rights and obligations under the Corporation
If there are multiple branches designated as Special Commercial Code and the internal and intra-corporate regulatory rules of the
Court, the case will be raffled. corporation."24 In other words, jurisdiction should be determined
by considering both the relationship of the parties as well as the
SIGNIFICANCE OF DETERMINING AN INTRA- nature of the question involved.
CORPORATE CONTROVERSY (Medical Plaza Makati Condo V Cullen GR 181416, November
It is important to determine if an action is an intra corporate 11, 2013)
controversy or an ordinary civil action to determine where to file
a case. TWO TESTS TO DETERMINE INTRA-CORPORATE
CONTROVERSY:
INTRA CORPORATE ORDINARY CIVIL 1. Relationship Test - The rule is to look into the
CONTROVERSY ACTION relationships of the parties who have contesting claims.
Under the relationship test, the existence of any of the
Jurisdiction of RTC. Jurisdiction of Regular Courts above intra-corporate relations makes the case intra-
Heard by a Special (RTC, Municipal Trial Court, corporate.
Commercial Court Court of Appeals)
a) between the corporation, partnership or
association and the public;
b) between the corporation, partnership or
Q: Can you file a motion to dismiss on the grounds of Lack of association and the State insofar as its
Jurisdiction? If a case is filed with the Regional Trial Court but franchise, permit or license to operate is
in a branch not designated as a Special Commercial Court? concerned;
c) between the corporation, partnership or
A: The remedy is not to file a Motion to association and its stockholders, partners,
Dismiss since it is the RTC who has the jurisdiction members or officers;
over intra-corporate controversies. If you file it with d) among the stockholders, partners or associates
the RTC there is proper filing since the RTC has themselves.
jurisdiction to hear the case but its not just the
appropriate branch of the RTC. You should call the Jurisdiction is not only determined by the relationship of
attention of the executive judge to have the case the parties but also as well as the nature of the question.
raffled to a branch designated as a Special
Commercial Court.
2. Nature of the Controversy Test - It pertains to the
Medical Plaza Makati Condo V Cullen: It involves a member internal affairs of the corporation. It must involve the
of a condominium corporation who did not pay condominium rights and obligations of the corporators or the officers
dues because of this he was not allowed to vote in the elections and the corporators.
of board of directors. Does this involve an intra-corporate
• Aside from the relationship, you look at the
controversy? nature of the controversy
• How would you resolve the controversy?
INTRA-CORPORATE CONTROVERSY: Would you cite the provisions of the Civil
Code or the provisions of the Revised
In determining whether a dispute constitutes an intra-corporate Corporation Code.
controversy, the Court uses two tests, namely, the relationship
test and the nature of the controversy test.
TN: Not all conflicts between stockholders and corporations are
classified as intra-corporate controversies. If the case pertains to
An intra-corporate controversy is one which pertains to any of the
rights and obligations of stockholders under the Revised
following relationships: (1) between the corporation, partnership
Corporation Code or regulation of the corporation based on how
or association and the public; (2) between the corporation, it should conduct itself based on the obligations under the RCC,
partnership or association and the State insofar as its franchise, it is an intra corporate controversy.
permit or license to operate is concerned; (3) between the
corporation, partnership or association and its stockholders,
partners, members or officers; and (4) among the stockholders,
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Example: Case involving Validity of a Proxy: This is considered Other instruments as may in the future be determined by the
an intra corporate controversy because the resolution of that Commission.
conflict would require the parties to refer to the provision of the
RCC and it pertains to the relationship of the corporation and the Discussion:
stockholders. A. Shares of stocks, bonds, debentures, notes evidences of
indebtedness, asset-backed securities
Derivative Suits - As discussed, this is a suit which may be ○ Shares of stocks - this would refer to the
brought by a stockholder on behalf of the corporation and raising equity or capital of a corporation
a cause of action on behalf of the corporation. Since this deals ○ Indebtedness or debts - bonds, debentures,
with the internal affairs of the corporation, a derivative suit would notes of other evidences of indebtedness
fall under intra-corporate controversies. ○ Asset-backed securities - these are securities
whose values are based on the underlying
Q: Is the dismissal of a corporate officer intra corporate assets
controversy? B. Investment contracts, certificates of interest or
A: It depends. There are two kinds of officers participation in a profit sharing agreement, certifies of
provided under the law: deposit for a future subscription
1. Officers declared as such under the Revised C. Fractional undivided interests in oil, gas or other mineral
Corporation Code rights;
2. Officers designated by the corporation under ○ It could refer to commodities or rights to
its bylaws. exploit certain commodities
D. Derivatives like option and warrants;
If there are any matters or disputes involving these officers, these E. Certificates of assignments, certificates of participation,
disputes are considered intra corporate conversies. trust certificates, voting trust certificates or similar
instruments
Example: F. Proprietary or nonproprietary membership certificates
1) Dispute involving the President is an intra corporate in corporations; and
controversy. G. Other instruments as may in the future be determined
2) Disputes involving a General Manager (position not found in the by the Commission.
bylaws and RCC) -The video got cut** ○ A catch-all provision that will cover other
securities that may be determined by the SEC
It is crucial to know whether a person is a corporate officer or a as falling under this list
mere employee. This will tell you where you will file a case in case
of dispute either under the Regional Trial Court sitting as a Special Example:
Commercial Court or before Regional Arbitration Branch of the ● Your friend wants you to invest a certain sum of money
NLRC (Labor Arbiter) . on a certain venture. Your friend wants you to invest on
a regular basis. Your friend wants you to deposit it in a
SECURITIES certain account and you will be receiving interest which
Securities - shares, participation or interests in a corporation or represents the profit of that certain business. That would
in a commercial enterprise or profit-making venture and constitute as an investment contract seeing that it
evidenced by a certificate, contract, instruments, whether written involves a profit-sharing agreement
or electronic in character. ● The contract or instrument itself constitute a security

SECURITIES, Section 3 RA 8799 Q: Why is it important to determine whether a particular contract

"Securities" are shares, participation or interests in a corporation
or in a commercial enterprise or profit-making venture and
evidenced by a certificate, contract, instruments, whether written
or electronic in character. It includes:
(a) Shares of stocks, bonds, debentures, notes evidences of
indebtedness, asset-backed securities:
(b) Investment contracts, certificates of interest or participation
in a profit sharing agreement, certifies of deposit for a future
subscription;
(c) Fractional undivided interests in oil, gas or other mineral
rights;
(d) Derivatives like option and warrants;
(e) Certificates of assignments, certificates of participation, trust
certificates, voting trust certificates or similar instruments:
(f) Proprietary or nonproprietary membership certificates in
corporations; and
is a security?
A: Sec 8 of the Revised Securities Law
Requirement of Registration
Section 8. Requirement of Registration of Securities. - 8.1. Securities
shall not be sold or offered for sale or distribution within the
Philippines, without a registration statement duly filed with and
approved by the Commission. Prior to such sale, information on
the securities, in such form and with such substance as the
Commission may prescribe, shall be made available to each
prospective purchaser.
Note:
Before these securities may be sold or offered to the public for
distribution, these securities must be registered with the SEC first.
PURPOSE OF REGISTRATION: in order for that security to
be subject to the rules provided under the Revised Securities Law
and the IRR of the SEC.

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PURPOSE OF THE BLUE SKY LAW: to prevent fraud
among investors.
• The law requires that there must be transparency,
disclosure or the benefits and disadvantages of investing
in securities.
• There must be information given to the investors in the
form of a prospectus which details the underlying assets
for that particular security.
• Not all securities must be registered under the SEC:
Exempt Securities
(a) Any security issued or guaranteed by the Government of the
Philippines, or by any political subdivision or agency thereof,
or by any person controlled or supervised by, and acting as
an instrumentality of said Government.
(b) Any security issued or guaranteed by the government of any
country with which the Philippines maintains diplomatic
relations, or by any state, province or political subdivision
thereof on the basis of reciprocity: Provided, That the
Commission may require compliance with the form and
content for disclosures the Commission may prescribe.
(c) Certificates issued by a receiver or by a trustee in bankruptcy
duly approved by the proper adjudicatory body.
(d) Any security or its derivatives the sale or transfer of which,
by law, is under the supervision and regulation of the Office
of the Insurance Commission, Housing and Land Use Rule
Regulatory Board, or the Bureau of Internal Revenue.
Any security issued by a bank except its own shares of stock.
Discussion
A. Any security issued or guaranteed by the Government of
the Philippines, or by any political subdivision or agency
thereof, or by any person controlled or supervised by,
and acting as an instrumentality of said Government.
a. Basis: Reciprocity
b. If these financial instruments are issued by
foreign states may be considered exempt
securities ONLY IF they give reciprocal rights
to Filipino citizens.
B. Any security issued or guaranteed by the government of
any country with which the Philippines maintains
diplomatic relations, or by any state, province or political
subdivision thereof on the basis of reciprocity: Provided,
That the Commission may require compliance with the
form and content for disclosures the Commission may
prescribe.
C. Certificates issued by a receiver or by a trustee in
bankruptcy duly approved by the proper adjudicatory
body.
D. Any security or its derivatives the sale or transfer of
which, by law, is under the supervision and regulation of
the Office of the Insurance Commission, Housing and
Land Use Rule Regulatory Board, or the Bureau of
Internal Revenue.
E. Any security issued by a bank except its own shares of
stock
a. If the bank issues certificate of indebtedness,
that will be exempted from registration
Note:
Abellano ◦ Adolfo ◦ Bajar ◦ Cabeje ◦ Caceres ◦ Capuyan ◦ Cañales ◦ Daulo ◦ Delicano ◦ Dino ◦ Gabato ◦ Leopardas ◦ Ngo ◦ Panelo ◦ Prisco ◦ Reyes ◦ Velez ◦ Villagonzalo
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Based on these 5 items listed, these are actually securities already
subject to regulations by some other law or by some other
government agency.
● Securities issued by the Government of the Philippines
and those issued by the Bank The securities issued by
the Gov of PH and the Bank are regulated by the BSP.
Exempt Security of Bank
Any evidence of indebtedness issued by a financial institution that
has been licensed by the BSP to engage in banking or quasi-
banking shall be exempt from registration under Section 8.1 of the
Code, but the purchase and sale of such security shall not be
exempt from the coverage of the provisions of the Code on anti-
fraud, civil liability or other related liabilities.
TN: The exemption is not automatic. Any evidence of
indebtedness issued by a financial institution, licensed by the BSP
to engage in banking or quasi-banking, shall be exempt from
registration, but the purchase and sale of the securities of the bank
shall not be exempt. The provisions of anti-fraud, civil liability, or
other related liabilities.
Exempt Transactions
(a) At any judicial sale, or sale by an executor, administrator,
guardian or receiver or trustee in insolvency or bankruptcy.
(b) By or for the account of a pledge holder, or mortgagee or
any other similar lien holder selling or offering for sale or
delivery in the ordinary course of business and not for the
purpose of avoiding the provisions of this Code, to liquidate a
bona fide debt, a security pledged in good faith as security for
such debt.
(c) An isolated transaction in which any security is sold, offered
for sale, subscription or delivery by the owner thereof, or by his
representative for the owner's account, such sale or offer for
sale, subscription or delivery not being made in the course of
repeated and successive transactions of a like character by such
owner, or on his account by such representative and such owner
or representative not being the underwriter of such security.
(d) The distribution by a corporation, actively engaged in the
business authorized by its articles of incorporation, of securities
to its stockholders or other security holders as a stock dividend
or other distribution out of surplus.
(e) The sale of capital stock of a corporation to its own
stockholders exclusively, where no commission or other
remuneration is paid or given directly or indirectly in connection
with the sale of such capital stock.
(f) The issuance of bonds or notes secured by mortgage upon
real estate or tangible personal property, where the entire
mortgage together with all the bonds or notes secured thereby
are sold to a single purchaser at a single sale.
(g) The issue and delivery of any security in exchange for any
other security of the same issuer pursuant to a right of
conversion entitling the holder of the security surrendered in
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really being offered to the public.

exchange to make such conversion: Provided, That the security
so surrendered has been registered under this Code or was,
(e) The sale of capital stock of a corporation to its own
when sold, exempt from the provisions of this Code, and that
stockholders exclusively, where no commission or other
the security issued and delivered in exchange, if sold at the
remuneration is paid or given directly or indirectly in connection
conversion price, would at the time of such conversion fall
with the sale of such capital stock.
within the class of securities entitled to registration under this
Code. Upon such conversion the par value of the security
● This refers to the sale of new issuances of shares of stock
surrendered in such exchange shall be deemed the price at which
to its existing stockholders. Remember that stockholders
the securities issued and delivered in such exchange are sold.
have the preemptive right over the original issuances of
shares of stock of the corporation.
(h) Broker's transactions, executed upon customer's orders, on
any registered Exchange or other trading market.
(f) The issuance of bonds or notes secured by mortgage upon real
(i) Subscriptions for shares of the capital stock of a corporation
estate or tangible personal property, where the entire mortgage
prior to the incorporation thereof or in pursuance of an increase
together with all the bonds or notes secured thereby are sold to a
in its authorized capital stock under the Corporation Code,
single purchaser at a single sale.
when no expense is incurred, or no commission, compensation
or remuneration is paid or given in connection with the sale or
● The affected parties are the single buyers and the
disposition of such securities, and only when the purpose for
transaction itself is considered exempt.
soliciting, giving or taking of such subscriptions is to comply
with the requirements of such law as to the percentage of the
(g) The issue and delivery of any security in exchange for any
capital stock of a corporation which should be subscribed
other security of the same issuer pursuant to a right of conversion
before it can be registered and duly incorporated, or its
entitling the holder of the security surrendered in exchange to
authorized capital increased.
make such conversion . . .
(j) The exchange of securities by the issuer with its existing
● This refers to the conversion of shares of stock in a
security holders exclusively, where no commission or other
corporation. If the stockholder, for instance, holds a
remuneration is paid or given directly or indirectly for soliciting
preferred stock, the corporation’s bylaws allow that
such exchange.
stock to be converted to “x-number” of common shares;
that transaction is exempt.
(k) The sale of securities by an issuer to fewer than twenty (20)
persons in the Philippines during any twelve-month period.
(i) Subscriptions for shares of the capital stock of a corporation
prior to the incorporation thereof or in pursuance of an increase
(l) The sale of securities to any number of the
in its authorized capital stock . . .
following qualified buyers:
(i) Bank;
● This refers to pre-incorporation subscription or
(ii) Registered investment house;
subscription to increase in the authorized capital stock.
(iii) Insurance company;
This is an exempt transaction for as long as there are no
(iv) Pension fund or retirement plan maintained by the
underwriters or middlemen who will facilitate the sale
Government of the Philippines or any political
for a commission or compensation or remuneration. It
subdivision thereof or managed by a bank or other
is possible for the corporation to have its own system in
persons authorized by the Bangko Sentral to engage in
place for the issuance of these shares. No need to defray
trust functions;
expenses to pay third persons, or what you call a transfer
(v) Investment company; or
agent or a broker to facilitate these transactions. If a
(vi) Such other person as the Commission may by rule
broker or agent facilitates these types of issuances, it is
determine as qualified buyers, on the basis of such
no longer fall under exempt transaction.
factors as financial sophistication, net worth,
knowledge, and experience in financial and business
(j) The exchange of securities by the issuer with the existing
matters, or amount of assets under management.
security holders exclusively, where no commission or other
remuneration is paid or given directly or indirectly for soliciting
In Section 10, it is the transaction which is exempted from such exchange.
registration. All of the abovementioned instruments fall under the ● This refers to exchange of shares of stock with the
definition of securities, but considering the nature of the security interest of the creditors of the corporation.
transaction, it is exempt from registration. Shares of stock of the corporation may be issued to its
creditors in exchange for its debt. As long as it does not
These transactions are not generally for obtaining profit. go through any broker or middleman

If it pertains to the distribution of the stock of the corporation to (k) The sale of securities by an issuer to fewer than 20 persons
its shareholders (like the declaration of stock dividends to its in the Philippines during any twelve month period.
shareholders) this will not require registration because it's not ● The same is targeted to specific individuals no more than

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20 persons, then there is no need to register that security,
as it falls under exempt transactions. In addition,
Isolated transactions need not be registered during any
12 month period.
(l) The sale of any securities to any number of the following
qualified buyers:
1. Banks
2. Registered investment house
3. Insurance Company
4. Pension Fund or retirement plan by the Government of
the PH, or any political subdivision, or other persons
authorized by bangko sentral
5. Investment Company
6. Such other person that the commission may rule and
qualify as a buyer.
● The law protects the public or investors in general, who
may fall under the false pretenses of the seller of
securities but if the buyers of the securities are financial
institutions who have technical knowledge in dealing
with securities, then the law no longer requires the
registration of the securities sold to them, considering
their financial sophistication.
APPLICATION FOR EXEMPTION
10.3 Any person applying for an exemption under this Section,
shall file with the Commission a notice identifying the exemption
relied upon on such form and at such time as the Commission by
the rule may prescribe and with such notice shall pay to the
Commission fee equivalent to one-tenth (1/10) of one percent
(1%) of the maximum value aggregate price or issued value of the
securities.
As a general rule, the security has a value that fluctuates over time.
Hence, the basis is the maximum value.
Section 13. Rejection and Revocation of Registration of
Securities. – 13.1. The Commission may reject a registration
statement and refuse registration of the security there-under, or
revoke the affectivity of a registration statement and the
registration of the security there-under after the due notice and
hearing by issuing an order to such effect, setting forth its finding
in respect thereto, if it finds that:
(a) The issuer:
(i) Has been judicially declared insolvent;
(ii) Has violated any of the provision of this Code, the rules
promulgate pursuant thereto, or any order of the Commission of
which the issuer has notice in connection with the offering for
which a registration statement has been filed
(iii) Has been or is engaged or is about to engage in fraudulent
transactions;
(iv) Has made any false or misleading representation of material
facts in any prospectus concerning the issuer or its securities;
Abellano ◦ Adolfo ◦ Bajar ◦ Cabeje ◦ Caceres ◦ Capuyan ◦ Cañales ◦ Daulo ◦ Delicano ◦ Dino ◦ Gabato ◦ Leopardas ◦ Ngo ◦ Panelo ◦ Prisco ◦ Reyes ◦ Velez ◦ Villagonzalo
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(v) Has failed to comply with any requirements that the
Commission may impose as a condition for registration of the
security for which the registration statement has been filed; or
(b) The registration statement is on its face incomplete or
inaccurate in any material respect or includes any untrue
statements of a material fact required to be stated therein or
necessary to make the statement therein not misleading; or
(c) The issuer, any officer, director or controlling person
performing similar functions, or any under writer has been
convicted, by a competent judicial or administrative body, upon
plea of guilty, or otherwise, of an offense involving moral
turpitude and /or fraud or is enjoined or restrained by the
Commission or other competent or administrative body for
violations of securities, commodities, and other related laws.
This is to ensure the public is protected. The SEC laid down the
grounds for revocation of registration.
Another example of securities is an investment contract.
● To illustrate the example, think of a corporation that
issues commercial papers.
● If a corporation wants to increase its capital, it may either
issue stocks or bonds, or raise instruments of
indebtedness.
● If the corporation offers these certificates of
indebtedness then that would constitute as an
investment contract; hence a security.
● As a security it must be registered with the SEC.
Investment Contract
The scheme of the [petitioner] corporation requires an
investor to become a Business Center Owner (BCO) who must
fill-up and sign its application form. The Terms and Conditions
printed at the back of the application form indicate that the BCO
shall mean an independent representative of Power Homes, who
is enrolled in the company's referral program and who will
ultimately purchase real property from any accredited real estate
developers and as such he is entitled to a referral
bonus/commission. Paragraph 5 of the same indicates that there
exists no employer/employee relationship between the BCO and
the Power Homes Unlimited, Corp.
Power Homes Unlimited Corporation v. SEC, G.R. No. 164182,
February 26, 2008
In this case, the SC described how they conduct their business.
○ First, the investor enrolls into the program by paying an
enrollment fee of $234 which entitles him to recruit
additional investors who will also pay the same
enrollment fee of $234. From that amount the principal
(first investor) investor will receive $92. So there's an
incentive when you gain more recruits.
○ A minimum recruitment of 4 investors by the 2 recruits
who will then recruit 2 each, entitles the principal investor
to another $184. And the pyramid goes on.
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Investment Contract
The BCO is required to pay US$234 as his enrollment fee. His
enrollment entitles him to recruit two investors who should pay
US$234 each and out of which amount he shall receive US$92. In
case the two referrals/enrollees would recruit a minimum of four
(4) persons each recruiting two (2) persons who become his/her
own down lines, the BCO will receive a total amount of
USS147.20 after deducting the amount of USS36.80 as property
fund from the gross amount of USS184. After recruiting 128
persons in a period of eight (8) months for each Left and Right
business groups or a total of 256 enrollees whether directly
referred by the BC or through his down lines, the BCO who
receives a total amount of USS11,412.80 after deducting the
amount of US$363.20 as property fund from the gross amount of
USS11,776, has now an accumulated amount of US$2,700
constituting as his Property Fund placed in a Property Fund
account with the Chinabank. This accumulated amount of
US$2,700 is used as partial/full down payment for the real
property chosen by the BCO from any of [petitioner's] accredited
real estate developers.
Power Homes Unlimited Corporation v. SEC
G.R. No. 164182, February 26, 2008
After recruiting 128 persons in a period of 8 months for each left
and right business group or a total of 256 enrollees.
The BCO who receives a total amount of USS11,412.80 after
deducting the amount of US$363.20 as property fund from the
gross amount of USS11,776, has now an accumulated amount of
US$2,700 constituting as his Property Fund placed in a Property
Fund account with the Chinabank.
○ The more there are downlines, the more the principal
investor will earn; which is based on the enrollment fee.
There is no real business to speak of.
Q: How did the SC characterize these types of contracts?
Howey Test
It behooves us to trace the history of the concept of an investment
contract under R.A. No. 8799. Our definition of an investment
contract traces its roots from the 1946 United States (US) case of
SEC v. W.J. Howey Co. In this case, the US Supreme Court was
confronted with the issue of whether the Howey transaction
constituted an "investment contract" under the Securities Act's
definition of "security." The US Supreme Court, recognizing that
the term "investment contract" was not defined by the Act or
illumined by any legislative report, held that "Congress was using
a term whose meaning had been crystallized" under the state's
"blue sky" laws in existence prior to the adoption of the Securities
Act. Thus, it ruled that the use of the catch-all term "investment
contract" indicated a congressional intent to cover a wide range of
investment transactions. It established a test to determine whether
a transaction falls within the scope of an
"investment contract."
Power Homes Unlimited Corporation v. SEC
G.R. No. 164182, February 26, 2008
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To determine WON this is an investment contract, the SC used
what the US Supreme Court in SEC v Howey.
Howey Test
Known as the Howey Test, it requires a transaction, contract, or
scheme whereby a person (1) makes an investment of money, (2)
in a common enterprise, (3) with the expectation of profits. (4) to
be derived solely from the efforts of others. Although the
proponents must establish all four elements, the US Supreme
Court stressed that the Howey Test "embodies a flexible rather
than a static principle, one that is capable of adaptation to meet
the countless and variable schemes devised by those who seek the
use of the money of others on the promise of profits." Needless
to state, any investment contract covered by the Howey Test must
be registered under the Securities Act, regardless of whether its
issuer was engaged in fraudulent practices.
Power Homes Unlimited Corporation v. SEC
G.R. No. 164182, February 26, 2008
Known as the Howey Test, it requires a transaction, contract, or
scheme whereby a person (1) makes an investment of money, (2)
in a common enterprise, (3) with the expectation of profits. (4) to
be derived solely from the efforts of others. Before it may be
considered as an investment contract.
However, this rule in the Howey Test was modified in the
subsequent case of SEC v. Glenn W. Turner Enterprises
Howey Test
After Howey came the 1973 US case of SEC v. Glenn W.
Turner Enterprises, Inc. et
al. In this case, the 9th Circuit of the US Court of Appeals ruled
that the element that profits must come "solely" from the efforts
of others should not be given a strict interpretation. It held that a
literal reading of the requirement "solely" would lead to unrealistic
results. It reasoned out that its flexible reading is in accord with
the statutory policy of affording broad protection to the public.
Our R.A. No. 8799 appears to follow this flexible concept for it
defines an investment contract as a contract, transaction or
scheme (collectively "contract") whereby a person invests his
money in a common enterprise and is led to expect profits not
solely but primarily from the efforts of others. Thus, to be a
security subject to regulation by the SEC, an investment contract
in our jurisdiction must be proved to be: (1) an investment of
money. (2) in a common enterprise, (3) with expectation of
profits, (4) primarily from efforts of others.
Power Homes Unlimited Corporation v. SEC
G.R. No. 164182, February 26, 2008
● The Ph law, the revised securities law followed the ruling
provided under SEC v Turner Enterprises, it provided
that a literal reading of the requirement “solely” would
lead to unrealistic results. It reasoned out that there must
be a flexible reading of that term.
● Our law follows this flexible concept which provides
that an investment contract as a contract, transaction or
scheme (collectively "contract") whereby a person
Page 85

invests his money in a common enterprise and is led to
expect profits not solely but primarily from the
efforts of others.
● Thus, to be a security subject to regulation by the SEC,
an investment contract in our jurisdiction must be
proved to be: (1) an investment of money. (2) in a
common enterprise, (3) with expectation of profits, (4)
primarily from efforts of others.
In this case, the SC said that the transaction involving the business
center owner falls under an investment contract. It is an
investment in money; it is in a common enterprise; it is w/
expectation of profits; and finally, it’s primarily derived from the
efforts of other persons (those who exert effort to recruit). Since
all of the requisites were complied with, SC held that the
investment contract must be registered w the SEC.
We reject petitioner's claim that the payment of US$234 is for the
seminars on leverage marketing and not for any product. Clearly,
the trainings or seminars are merely desired to enhance
petitioner's business of teaching its investors the know-how of its
multi-level marketing business. An investor enrolls under the
scheme of petitioner to be entitled to recruit other investors and
to receive commissions from the investments of those directly
recruited by him. Under the scheme, the accumulated amount
received by the investor comes primarily from the efforts of his
recruits.
We therefore rule that the business operation or the scheme of
petitioner constitutes an investment contract that is a security
under R.A. No. 8799. Thus, it must be registered with public
respondent SEC before its sale or offer for sale or distribution to
the public. As petitioner failed to register the same, its offering to
the public was rightfully enjoined by public respondent SEC. The
CDO was proper even without a finding of fraud. As an
investment contract that is security under R.A. No. 8799, it must
be registered with public respondent SEC, otherwise the SEC
cannot protect the investing public from fraudulent securities. The
strict regulation of securities is founded on the premise that the
capital markets depend on the investing public's level of
confidence in the system.
REMEMBER: An investment contract is a contract/
transaction/ scheme wherein a person invests money to a
common enterprise and they expect to receive profits from such
investments. That the profits will be derived from the efforts of
another.
In contrast, the SC decided differently in the case of SEC v.
Prosperity. Com, Inc. G R No 164197 January 5, 2012
Network Marketing Scheme
Here, PCI's clients do not make such investments. They buy a
product of some value to them: an Internet website of a 15-MB
capacity. The client can use this website to enable people to have
internet access to what he has to offer to them, say, some skin
cream. The buyers of the website do not invest money in PCI that
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it could use for running some business that would generate profits
for the investors. The price of US$234.00 is what the buyer pays
for the use of the website, a tangible asset that PCI creates, using
its computer facilities and technical skills.
Actually, PCI appears to be engaged in network marketing, a
scheme adopted by companies for getting people to buy their
products outside the usual retail system where products are
bought from the store's shelf. Under this scheme, adopted by
most health product distributors, the buyer can become a down-
line seller. The latter earns commissions from purchases made by
new buyers whom he refers to the person who sold the product
to him. The network goes down the line where the orders to buy
come. (SEC v. Prosperity. Com, Inc. G R No 164197 January
5, 2012)
● It was not really an investment contract because the
investors were actually buying a product
● Here, what they are selling is actually intangible. There is
a product but it is intangible.
What makes this case different from the earlier case is that here,
there is a product being sold. This is actually a marketing scheme.
This is advantageous to reach a specific target market. So, instead
of making your product available in the stores, you approach
distributors who will sell it to third persons. This is valid. This
known as a “Network Marketing Scheme.”
Network Marketing Scheme
The commissions, interest in real estate, and insurance coverage
worth P50,000.00 are incentives to down-line sellers to bring in
other customers. These can hardly be regarded as profits from
investment of money under the Howey test.
The CA is right in ruling that the last requisite in the Howey test
is lacking in the marketing scheme that PCI has adopted.
Evidently, it is PCI that expects profit from the network
marketing of its products. PCI is correct in saying that the US$234
it gets from its clients is merely a consideration for the sale of the
websites that it provides. (SEC v. Prosperity.Com, Inc. G.R.
No. 164197, January 25, 2012)
So the fact that they are receiving these incentives, either in the
form of commissions, interests in real estates, insurance
coverages, it does not mean that these are profits from a common
enterprise. These are investments to encourage your sellers to sell
the products of the company.
DERIVATIVE
Financial instrument whose value changes in response to
changes in a specified interest rate, security price,
commodity price, foreign exchange rate, index of prices or
rates, credit rating or credit index, or similar variable or
underlying factor. It does not require an initial or small
investment relative to other types of contracts that have
similar responses to changes in market conditions. It is
settled at a future date. This term shall include, but not
limited, to the following:
Page 86

1. Options or contracts that give the buyer the right,
but not the obligation, to buy or sell an underlying
security at a predetermined date, called the expiry
date;
2. Call options or rights to buy
3. Put options or rights to sell; or
4. Warrants or rights to subscribe or purchase new
or existing shares in a company on or before a
predetermined date, called the expiry date, which
can only be extended in accordance with the rules
of the Commission and/or the exchange (Rule 3,
2015 SRC IRR).
• IOW: Derivatives are financial instruments whose value
fluctuates over time
• Interest rates - to debt instruments e.g. bonds
• Security price - e.g. market value of shares
• Commodity price - e.g. price of commodities like oil,
rice, etc
• Call or put options or rights to buy or sell
○ Attractive to investors because there is uncertainty
when dealing with shares of stock, because their
value depends on the sentiments of the investing
public.
○ Boost investor confidence by providing an
assurance to the investor that the price will remain
the same
• Warrants
○ Unlike options, warrants generally has a longer
period of time. Options are relatively shorter
COMMODITY FUTURES CONTRACTS
A contract providing for making or taking delivery at a prescribed
time in the future of a specific quantity and quality of a commodity
or the cash value thereof which is customarily offset prior to the
delivery date, and includes standardized contracts having the
indicia of commodities futures, commodity options and
commodity leverage, or margin contracts. (Rule 11, 2015 SRC
IRR)
• Commodity means any goods, articles, services, rights
and interest, including any group or index of any of the
foregoing in which commodity interests contracts are
presently or in the future dealt in.
• A promise to deliver certain commodities at a fixed date
at a particular price
Protecting the Investing Public
Any doubt that may arise in the interpretation of these Rules shall
be resolved by the Commission in a manner which would
establish a socially-conscious free market that regulates itself,
encourage the widest participation of ownership in an enterprise,
enhance the democratization of wealth, promote the development
of the capital market, protect the investors, ensure full and timely
disclosure of material information, and/or minimize, if not
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eliminate, fraudulent or manipulative devices and practices that
create distortions in a free market. (Rule 2, 2015 SRC IRR)
Take note: “protect investors”
In short, full and timely disclosure of material information and or
minimize (if not eliminate) insider trading and other fraudulent or
manipulative devices and practices which create distortions in the
free market.
The law encourages the free market. Meaning, it does not want a
distortion of the capital markets based on false representations
given by sellers of securities.
Manipulative practices
It shall be unlawful for any person to make a bid or offer, or deal
in securities, with the intention, or if that bid offer or dealing,
has the effect or is likely to have the effect, of creating a false or
misleading appearance of active trading in any security or with
respect to the market for, or the price of, any security.
It shall be unlawful for any Broker Dealer, associated person or
salesman of a Broker Dealer ( herein after collectively referred to
as “registered person”), to make a bid or offer for, or deal in
securities, on account of any other person where the registered
person intends to create, or the registered person is aware that
the other person intends to create, or taking into account the
circumstances of the order, the registered person reasonably
suspects that a person has placed the order with the intention of
creating, a false or misleading appearance of active trading in any
security or with respect to the market for, or the price of, any
security.
What is being prevented by law is the creation of a false or
misleading appearance of active trading.
Why is that?
Because if there is an appearance of active trading, it will lure the
investors to invest in that particular curity or transaction when in
fact, there is really no active activity in that particular security or
transaction. The law prohibits these practices which are
considered manipulative.
MANIPULATIVE PRACTICES
1. Wash Sale
2. Matched Order
3. Painting the Tape
4. Marking Close
5. Hype and Dump
6. Squeeze the Float
7. Boiler Room Operations
1. Wash Sale
A wash sale is basically in gauging in a transaction in which there
is actually no change in the beneficial ownership of the particular
securities. This is a false transaction which gives the appearance
of a transfer of security, when in fact there is no absolute transfer.
Ex. For the purposes of encouraging other potential investors to
invest in a security, the owners of stocks would sell it to their
relatives (for example) or to dealers or brokers whom they know,
Page 87

in collusion with them in order to create the appearance that there
is activity in the particular security. Therefore that it would
encourage investors to buy the security.
- That would be considered as in manipulative device that
is considered specifically a wash sale
2. Improper Matched Orders
This means engaging and transactions wherein the buy and sell
orders are entered into at the same time with the same price and
quantity but by different parties who colluded in order to give the
appearance that there are a lot of buyers who demand that
particular security at this particular price.
What you're doing there is your actually affecting the the
demand in the securities market. You're creating the impression
that it is in high demand when in fact it is not. You're creating an
artificial scenario where the particular security is really being
sought after by investors when in fact, it is not.
3. Painting the Tape
The tape refers to the “ticker tape” (that we can find in the web
sites of most trading platforms) which show the change in the
prices for the transactions per second. It would record the real
time transactions pertinent to a security.
In order to paint the tape (to make an appearance that there is
activity for that particular stock) certain investors would engage in
a series of sale transactions in that particular security to give the
impression that it is highly traded; to give an impression that the
price of that security has movement.
The intention is to mislead the public. That’s why it’s called a
manipulative device.
4. Marking Close
In some instances they do not do the series of transactions all
throughout the day. Rather, those who collude to mislead the
public would buy and sell the security at the last hour (in the close
of the market). This is an effort to affect price of the security. It’s
the reason why it’s called marking the close.
5. Hype and dump
These are all artificial devices. The investors engage in a buying
activity but in an increasingly higher prices. There is a trend where
the buyers are demanding to buy that particular stock at a higher
price. After buying it, the stock based on increasingly high prices,
they suddenly sell at the higher rate.
It would come as a surprise. As an innocent bywatcher, you
thought that there is activity in that security. At the end of the day,
you notice that suddenly there is a sale in that security. Then
suddenly, there is no longer any demand for that security.
And after buying it based on increasingly high prices, they
suddenly sell the price at a higher rate. So it would come as a
surprise. You thought, as an innocent by-watcher, that there is
activity in the particular security but at the end of the day, you
have noticed that there is suddenly a sale of that security; suddenly
there is no longer any demand for that security. This gives the
impression that will lead potential investors to invest in that
security.
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6. Squeezing the float
Taking advantage of the shortage of securities by controlling the
demand side. They are not trying to invest in that particular share
of stock but they exploit the market congestion so that during
such shortage, they can create artificial prices on their own.
Intention: In the future, there will be a high demand towards those
types of securities because you are constricting the supply of that
security. These are all false impressions. There is really no such
genuine trading.
7. Boiling room operations
Practice of companies where they sell their securities and most of
these securities are not even existing or registered ones. But they
sell these securities to gullible investors using high pressure sales
tactics, hence the term boiler room. They are trying to lock in
potential investors in a particular room and convince them with
vigorous marketing strategies to sell their securities.
ANOTHER PRACTICE REGULATED BY REVISED
SEC LAW
Short Sale
The term “short sale” shall mean any sale of a security which the
seller does not own or any sale which is consummated by the
delivery of a security borrowed by, or for the account of the seller
with the commitment of the seller or securities borrower to return
or deliver said securities or their equivalent to the lender on a
determined or determinable future date. A person shall be deemed
to own a security if: (1) he or his agent has title to it; (2) he has
purchased or has entered into an unconditional contract, binding
on both parties thereto, to purchase it and has not yet received it;
(3) he owns a security convertible into or exchangeable for it and
has tendered such security for conversion or exchange; (4) he has
an option to purchase or acquire it and has exercised such option;
or (5) he has rights or warrants to subscribe to it and has exercised
such rights or warrants provided, however, that a person shall be
deemed to own securities only to the extent he has a net long
position in such securities. (Rule 24.2-2.1, 2915 SRC IRR)
● This is a practice where the investor would make use of
a particular security (e.g. sell it to third persons) even if
that security is not yet owned by that investor. You own
that particular security on credit. It is based on a law.
You have not yet acquired full ownership over that
security. This refers to owning securities on credit,
meaning, there is an obligation on the part of the person
holding such security to either return or repay the
equivalent value for that security.
● Whereas, when you say a person has acquired a “long
position in such securities,” it means that that person
is already the owner of that security and holds that
security having legal title to it.
Q: Is that prohibited?
A:
GR- There is no absolute prohibition for short sales.
XPN- When it involves directors, officers or principal
shareholders of a corporation. They cannot make a short
sale of the securities of the corporation in which they are
Page 88

such, considering that there would be conflict of interest.
Instead of actively managing the corporation or
advocating for its interest, now, that investor involved in
the short sale will speculate also on the value of the share
of stock of that corporation and that is what’s
prohibited.
Insider Trading
It shall be unlawful for an insider to sell or buy a security of the
issuer, while in possession of material information with respect to
the issuer or the security that is not generally available to the
public, unless: (a) The insider proves that the information was not
gained from such relationship; or (b) If the other party selling to
or buying from the insider (or his agent) is identified, the insider
proves: (i) that he disclosed the information to the other party, or
(ii) that he had reason to believe that the other party otherwise is
also in possession of the information. A purchase or sale of a
security of the issuer made by an insider defined in Section 3.8 of
the Code, or such insider’s spouse or relatives by affinity or
consanguinity within the second degree, legitimate or common-
law, shall be presumed to have been effected while in possession
of material nonpublic information if transacted after such
information came into existence but prior to dissemination of
such information to the public and the lapse of a reasonable time
for market to absorb such information; Provided, however, That
this presumption shall be rebutted upon a showing by the
purchaser or seller that he was aware of the material nonpublic
information at the time of the purchase or sale.
● Trading in securities when you know something which
is not yet of public knowledge and the matter would
affect the decision of other investors to either buy, sell
or hold security.
● In other words, you have an unfair advantage of gaining
knowledge of a particular matter or information which
would affect the demand for that particular security.
Look at the definition under Section 27.
Insider trading
It shall be unlawful for an insider to sell or buy a security of the
issuer, while in possession of material information with respect to
the issuer or the security that is not generally available to the
public, unless: (a) The insider proves that the information was not
gained from such relationship; or (b) If the other party
selling to or buying from the insider (or his agent) is identified, the
insider proves: (1) that he disclosed the information to the other
party, or (1) that he had reason to believe that the other party
otherwise is also in possession of the information. A purchase or
sale of a security of the issuer made by an insider defined in
Section 3.8 of the Code, or such insider's spouse or relatives by
affinity or consanguinity within the second degree, legitimate or
common-law, shall be presumed to have been effected while in
possession of material nonpublic information if transacted after
such information came into existence but prior to dissemination
of such information to the public and the lapse of a reasonable
time for market to absorb such information; Provided, however,
That this presumption shall be rebutted upon a showing by the
purchaser or seller that he was aware of the material nonpublic
information at the time of the purchase or sale.
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while in possession of material information with respect to
the issuer or the security that is not generally available to the
public
For example, if you know a particular corporation engaged in a
mining activities - and you know that the Board of Directors is
about to pass a resolution acquiring mining rights over a particular
island in the country. This information is not yet available to the
public because the Board has not yet issued a resolution. You pre-
empt this corporate action by buying a security in that mining
company.
Q: Would that be considered as insider trading?
A: The law provides for a presumption that any
purchase or sale of a security shall be presumed to have
been effected while in possession of a material non-
public information if: transacted after such
information came into existence but prior to
dissemination of such information to the public and
the lapse of a reasonable time for market to absorb
such information.
From the time that the information came into
existence, e.g. there was an informal meeting between
the directors who decided to acquire mining rights.
From that date up to the date that the Board has issued
a resolution exercising their rights over that island - from
that time, if there is any sale transaction that you entered
into - either purchase of securities involving the mining
corporation, it will be presumed that the sale was
effected while in possession of material non-public
information.
There is a default presumption since this is
quite difficult to prove that the person was engaged in
insider trading had foreknowledge of the corporate
opportunity.
Provided, however, That this presumption shall be
rebutted upon a showing by the purchaser or seller that he was
aware of the material nonpublic information at the time of the
purchase or sale.
If a purchaser was aware of that material
nonpublic information, it means that it is available to the
public and therefore, it is not just you who knows that
fact. That would not be considered as insider trading if
there are other persons who knew about that corporate
opportunity.
Covers third persons
Nevertheless, what the law punishes is the trading while in
possession of material nonpublic information. In which case, you
will be considered as an insider. And if you relay that information
to a third person, the third person also in turn becomes an insider
- who is also covered by that prohibition. That person could not
also invest in that particular security while in possession of
material nonpublic information.
MATERIAL NONPUBLIC INFORMATION
Information is "material nonpublic" under this Rule if:
Page 89

(a) It has not been generally disclosed to the public and
would likely affect the market price of the security after
being disseminated to the public and the lapse of a reasonable
time for the market to absorb the information;
If that information would persuade, convince
potential investors to either buy or sell that security by
reason of that material nonpublic information.
or (b) would be considered by a reasonable person important
under the circumstances in determining his course of action
whether to buy, sell or hold a security. (Rule 27.2, 2015 SRC IRR)
For example, it is not just limited to corporate
opportunity that has opened to the corporation, it could
also refer to a business strategy or reorganization - e.g.
entering into a merger or consolidation with another
corporation. If that information was not yet disclosed to
the public, then that would constitute as a material
nonpublic information, which could affect the decision
of potential or existing investors, who either buy, sell, or
hold the securities.
TENDER OFFER RULE
Any person or group of persons acting in concert who
intends to acquire at least 15% of any class of any equity security
of a listed corporation of any class of any equity security of a
corporation with assets of at least fifty million pesos
(50,000,000.00) and having two hundred (200) or more
stockholders at least one hundred shares each, or who intends to
acquire at least thirty percent (30%) of such equity over a period
of twelve months (12) shall make a tender offer to stockholders
by filling with the Commission a declaration to that effect; and
furnish the issuer, a statement containing such of the information
required in Section 17 of this Code as the Commission may
prescribe. Such person or group of persons shall publish all
request or invitations or tender offer or requesting such tender
offers subsequent to the initial solicitation or request shall contain
such information as the Commission may prescribe, and shall be
filed with the Commission and sent to the issuer not alter than the
time copies of such materials are first published or sent or given
to security holders. (Sec. 19, R.A. 8799)
Making a public announcement of your intention to buy securities
in the company. Securities that you intend to acquire are the
outstanding equity securities in that particular company. This
company must be a public company.
PUBLIC COMPANY
a listed corporation of any class of any equity security of a
corporation with assets of at least fifty million pesos
(50,000,000.00) and having two hundred (200) or more
stockholders at least one hundred shares each, or who
intends to acquire at least thirty percent (30%) of such equity
over a period of twelve months
The law requires that this person or group of persons must make
a tender offer to stockholders by filing a declaration with the SEC
to that effect.
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Q: What is the purpose of making this declaration to the public?
A: It is important to make known your
intention to the public so that the existing stockholders
are apprised of the acquisition of stock. Remember the
stockholders have preemptive right over the shares of
stock but there is a possibility that an outside party may
acquire securities over the company. To forward existing
stockholders to potential investors who might invest in
the company, they must make a written declaration to
the stockholders with the outstanding capital stock.
Mandatory Tender Offer
19.2.1. Any person or group of persons acting in concert, who
intends to acquire fifteen percent (15 %) of equity securities in
a public company in one or more transactions within a period of
twelve (12) months, shall file a declaration to that effect with the
Commission.
19.2.2. Any person or group of persons acting in concert, who
intends to acquire thirty five percent (35%) of the outstanding
voting shares or such outstanding voting shares that is sufficient
to gain control of the board in a public company in one or more
transactions within a period of twelve (12) months, shall
disclose such intention and contemporaneously make a tender
offer for the percentage sought to all holders of such securities
within the said period.
Take Note: In the Implementing Rules, the 15% and 30% i
mentioned under the law have already been increased to 15% and
35%. While it may not be majority shares of stock, it can be
considered as a significant number of stocks which should be
relayed to existing stockholders in order to inform them of the
equity structure or inform them of the possible changes in the
equity structure.
● The acquisition of shares is not just on a one-time basis,
it could be on a staggered basis. If there is an intention
to acquire shares of stock in a particular company on a
monthly basis then that must be disclosed to the public
because you cannot subvert the law by making purchases
on different periods. The law requires that the 15%
should cover a 12-month period.
○ If every three months, you acquires shares of
stock and the equivalent amounts to 15% of
the equity securities then you must comply
with the mandatory tender offer.
The mandatory tender offer is basically a notification to apprise
the existing stockholder of the possible substantial movement in
the capital structure of the company.
19.2.5. If any acquisition that would result in ownership of over
fifty percent (50%) of the total outstanding equity securities
of a public company, the acquirer shall be required to make a
tender offer under this Rule for all the outstanding equity
securities to all remaining stockholders of the said company at a
price supported by a fairness opinion provided by an independent
financial advisor or equivalent third party. The acquirer in such a
tender offer shall be required to accept all securities tendered.
The IRR adds an additional requirement.
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● If any acquisition will result in over 50% of the total
outstanding equity of a public company, the acquirer
must make a tender offer. The valuation of the equity
securities shall be based on a fairness opinion which is
provided by an independent financial advisor or
equivalent third party.
Q: What is the purpose of a public declaration of the acquisition
of shares?
A:
Mandatory Tender Offer
Tender offer is a publicly announced intention by a
person acting alone or in concert with other persons to acquire
equity securities of a public company. A public company is
defined as a corporation which is listed in an exchange or a
corporation with assets exceeding P50,000,000 and with 200 or
more stockholders, at least 200 of them holding not less than 100
shares of such company. Stated differently, a tender offer is an
offer by acquiring persons to terms specified in the offer. Tender
offer is in place to protect minority shareholders against any
scheme that dilutes the share value of their investments. It gives
the minority shareholders the chance to exit the company under
reasonable terms, giving them the opportunity to sell their shares
at the same price as those of the majority shareholders.
(CEMCO Holdings vs National Life insurance Company of
the Philippines Inc. G.R. 171815,August 7, 2007)
Mandatory Tender Offer - Exemption
1. any purchase of shares from the unissued capital
stock provided that the acquisition will not result to a
50% or more ownership of shares by the purchaser;
2. any purchase of shares from an increase in authorized
capital stock;
3. purchase in connection with foreclosure proceedings
involving a duly constituted pledge or security
arrangement where the acquisition is made by the
debtor or creditor;
4. purchases in connection with privatization
undertaken by the government of the Philippines;
5. purchases in connection with corporate rehabilitation
under court supervision;
6. purchase through an open market at the prevailing
market price; and
7. merger and consolidation
Atty’s Discussion on the exemption of mandatory tender
offer (based on the numbering above):
1 - If these are new issuances, they are not covered under
mandatory tender offer rule.
2 - this is tantamount to a new issuance
3 - there is a separate transaction, which is not just an investment
or for-profit transaction
5 - this refers to dissolution or rehabilitation of corporate entity
6 - there are certain rules that apply to open market exchanges.
The interest of investors are adequately protected
Example: XYZ Corporation owns 61% of the outstanding
capital stock of ABC Corporation, another corporation which is a
public company with 200 or more shareholders and assets of at
least 50 million pesos.
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CORPORATION LAW
ATTY. VJC | SECOND SEMESTER 2021-2022
Q: Is the sale of shares in that company subject to the mandatory
offer rule? If Jose wants to buy controlling shares in XYZ
Corporation, does he need to comply with this rule? Is he actually
indirectly purchasing shares of stock in a public company (ABC
Corporation)?
A: Yes, the investor of a corporation that owns
controlling interest in a public company MUST comply
with the mandatory tender offer rule. This applies to
both direct and indirect ownership in a public company.
You cannot subvert the requirements of the law by
creating a shell corporation. (Cemco Holdings sv.
National Life Insurance Company)
PROXY SOLICITATION
20.1. Proxies must be issued and proxy solicitation must be made
in accordance with rules and regulations to be issued by the
Commission;
20.2. Proxies must be in writing, signed by the stockholder or his
duly authorized representative and file before the scheduled
meeting with the corporate secretary.
20.3. Unless otherwise provided in the proxy, it shall be valid only
for the meeting for which it is intended. No proxy 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 one
time.
20.4. No broker or dealer shall give any proxy, consent or any
authorization, in respect of any security carried for the account of
the customer, to a person other than the customer, without
written authorization of such customer. 20.5. A broker or dealer
who holds or acquire the proxy for at least ten percent (10%) or
such percentage as the commission may prescribe of the
outstanding share of such issuer, shall submit a report identifying
the beneficial owner of ten days after such acquisition, for its own
account or customer, to the issuer of security, to the exchange
where the security is traded and to the Commission. (Sec. 20, R.A.
No. 8799)
Rules on proxies: it must be in writing, valid only for the meeting
which it is intended, and no proxy should be valid and effective
for a period longer than 5 years at one time.
The law provides prohibition for brokers or dealers who hold the
proxy for at least 10% of the outstanding shares of stock of
the issuer. If the broker or dealer acquires a proxy and holds such
on behalf of other stockholders, this affects voting rights of
stockholders in the corporation. The broker or dealer must inform
the other stockholders by identifying the beneficial owner of that
proxy.
It’s possible that brokers or dealers are being used as proxies for
and on their behalf, but they actually want to vote in a particular
manner that would affect the corporation’s voting.
If you’re a broker and hold these shares of stock or securities by
proxy and the amount of the shares of stock is at least 10%, then
you need to submit a report. There must be FULL
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DISCLOSURE to the other stockholders of who is the true and
beneficial owner of the share of stock.
MARGIN TRADING
Margin trading is where a customer buys stocks by paying only a
portion of the purchase price. In other words, the stockholder
borrows money to pay for the difference. So, it will now be the
broker or the dealer who will, in the meantime, pay for the full
price of the share of stock or security. The broker or the dealer
will extend credit to the investor. In that sense, it’s like a loan
agreement.
Q: If you are an investor, what is in it for you?
A: If you are an investor, you want to increase
your buying power. So, you want to invest in securities
but without having to shell out money or cash. So, you
borrow funds, and in the meantime, have your stocks
invested and grow in value. By the time that it may now
be sold at a higher price, then you can repay the broker
who lent you the money.
Sec. 48 provides you the requirements for margin trading.
48.1. For the purpose of preventing the excessive use of
credit for the purchase or carrying of securities, the
Commission, in accordance with the credit and monetary
policies that may be promulgated from time to time by the
Monetary Board of the Bangko Sentral ng Pilipinas, shall
prescribe rules and regulations with respect to the amount of
credit that may be extended on any security. For the extension
of such credit, such rules and regulations shall be based upon
the following standard:
An amount not greater than whichever is the higher of–
(a) Sixty-five per centum (65%) of the current market
price of the security, or
(b) One hundred per centum (100%) of the lowest market
price of the security of during the preceding thirty-six
(36) calendar months, but not more than seventy-five
per centum (75%) of the current market price. (Sec.
48, R.A. No. 8799)
Here, the SEC shall prescribe rules and regulations with respect
to the amount of credit that may be extended on any security. For
the extension of credit, there are certain parameters that must be
met because you cannot just encourage the investing public to
make highly speculative investments without even thinking
through the sale or acquisition of their investment.
These parameters are provided in the law itself.
Illustration
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CORPORATION LAW
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Consider that the current market price of the share of stock is
Php. 100.00/share. So, if you look at the first parameter, 65% of
the current market price is Php. 65.00. That is your first
comparator.
Your second comparator is 100% of the lowest market price of
the security during the last three years. As you know, the value of
the security changes over time. If at any time during this three-
year period, the value of the share of stock plunged at its lowest
of Php. 40.00/share, that will be your second comparator.
However, your second comparator is subject to a cap–it must not
be more than 75% of the current market price. So, the cap is Php.
75.00 (75% of Php. 100.00). Since Php. 40.00/share does not
exceed 75% of the current market price, the Php. 40.00 is the
second comparator.
Q: Between the two (Php. 65.00 and Php. 40.00), which is the
amount which is greater?
A: It is Php. 65.00. So, the amount of credit will
only be equivalent to Php. 65.00.
As to the second example. What if the lowest market price of the
security during the last three years was only Php. 80.00, but there
is a cap that the lowest price must not be more than 75% of the
current market price. Here, since the lowest price is more than
Php. 75.00, we use the 75% of the current market price as the
comparator.
Q: Between Php. 65.00 and Php. 75.00, which is of greater value?
A: It is Php. 75.00. So, your credit limit should
now be equivalent to 75% of the value of the share of
stock. The broker can lend you 75% of the share of stock
that you intend to buy. However, take note that the rules
provide another cap.
48.1.1 A Broker Dealer shall not extend credit to a customer in an
amount that exceeds fifty percent (50%) of the current market
value of the security at the time of the transaction. In no event
shall new or additional credit be extended to an account in which
the equity is less than Fifty Thousand Pesos (PhP. 50,000.00)
48.1.2. The margin maintained in a margin account of a customer
shall be no less than twenty five percent (25%) of the current
market value of all securities “long” in the account and thirty
percent (30%) of the current market value of the securities “short
in the account. (Rule 48.1.1, 2015 SRC IRR)
The law provides for a cap of 50%. Follow this provision. The
credit that must be extended by the broker to the customer should
not exceed 50% of the current market value of the security. In
addition to that, the law requires that “In no event shall new or
additional credit be extended to an account in which the equity is
less than Fifty Thousand Pesos (PhP. 50,000.00)”
The law requires that the customer must have a minimum
investment balance like a maintaining balance. The account of that
investor must have at least Php. 50,000.00 either in cash or in
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 CORPORATION LAW
ATTY. VJC | SECOND SEMESTER 2021-2022

securities before that investor may be allowed to borrow money
on credit to buy securities.
There are now several requirements for marginal trading in order
to discourage excessive investments in highly speculative
securities.
This 50,000 pesos which is a minimum balance in your margin
trading account may be construed as a deposit or security on the
part of the broker dealer in case that the customer purchases
shares of stock which eventually drop in value.
(Rule 24.2 7, 2015 IRR)
In Margin Trading, the customer/margin trader has no funds to
purchase the shares of stock. It is the duty of the broker/dealer to
close that sale, it is his/her duty to pay that in cash or deliver
securities of equivalent value on the next business day after
settlement date.
The broker/dealer who is engaged in the business of trading
stocks also assumes the risk.

48.1.2. The margin maintained in a margin account of a customer
shall be no less than twenty five percent (25%) of the current
market value of all securities “long” in the account and thirty
percent (30%) of the current market value of the securities “short
in the account. (Rule 48.1.1, 2015 SRC IRR)
Long account - held in the capacity of an owner. You hold the
security and you have legal title in the security.
Short - holding a particular security on credit. You do not yet own
the security. (This is what is involved in Margin Trading)
PARAMETERS FOR MARGIN TRADING
REQUIREMENT:
• 25% Requirement for Securities held in Long - If you
have securities that you already own, the value there 25%
of the current market value of all securities is the
parameter provided by the law. The margin must not be
less than 25% of the value of your securities which
you have a legal title. (Long)
• 30% Requirement for Securities held in Short - It
must also not be less than 30% of the securities which
you do not hold as an owner yet. (Short)
Parameters in Margin Trading:
1. 50% Cap
2. 50,000 Investment/Balance
3. Cap on the Total Securities held in a LONG
position
4. Cap on the Total Securities held in a SHORT
position
It is not only the customer who is subjected to the Margin Trading
Rules, the broker is likewise subject to the Margin Trading Rules.
For a broker/dealer, they must comply with a Mandatory Close
Out Rule.
PURPOSE OF MANDATORY CLOSE OUT RULE
"The main purpose of these margin provisions xxx is not to
increase the safety of security loans for lenders. Banks and brokers
normally require sufficient collateral to make themselves safe
without the help of law. Nor is the main purpose even protection
of the small speculator by making it impossible for him to spread
himself too thinly – although such a result will be achieved as a
byproduct of the main purpose.
"The main purpose is to give a government credit agency an
effective method of reducing the aggregate amount of the
nation’s credit resources which can be directed by
speculation into the stock market and out of other more
desirable uses of commerce and industry x x x."
A related purpose of the governmental regulation of margins is
the stabilization of the economy.20 Restrictions on margin
percentages are imposed "in order to achieve the objectives of the
government with due regard for the promotion of the economy
and prevention of the use of excessive credit."21
Otherwise stated, the margin requirements set out in the RSA are
primarily intended to achieve a macroeconomic purpose -- the
protection of the overall economy from excessive speculation in
securities. Their recognized secondary purpose is to protect small
investors. (Abacus Securities Corporation vs Ruben U. Ampil,
G.R. No. 160016, February 27, 2006)
The law aims to prevent excessive speculation on the stock
market, especially considering that these investors do not use their
own money but on borrowed money. The problem there is that if
the stock exchange crashes, there will be a credit crisis wherein the
investors would default on their loans to financial institutions.

MANDATORY CLOSE OUT RULE

A contract involving a short sale which has not resulted in a
delivery by the Broker Dealer within the settlement period must
be closed by the Broker Dealer either by purchasing for cash
or guaranteed delivery, securities of like kind and quantity
on the next business day after settlement date, unless such
purchase cannot be effected within said period for justifiable
reasons in which case, notification in writing shall be made with
the Exchange and the Commission, or in accordance with rules of
the clearing agency that shall clear and settle the transactions.

Page 93
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