Corporation Law

Handout 1A
 1. Definition of Corporation
1. A corporation is an artificial being
created by operation of law, having the
right of succession and the powers,
attributes and properties expressly
authorized by law or incident to its
existence [Sec. 2, Revised Corporation Code
of the Philippines (RCCP) (RA 11232),
effective February 23, 2019].
2. The statutory language employed owes
much to Chief Justice Marshall, who
defined a corporation precisely as "an
artificial being, invisible, intangible, and
existing only in contemplation of law"
(Tayag vs. Benguet Consolidated, Inc., 26
SCRA 242, citing Dartmouth College vs.
Woodward, 4 Wheat, 518 [1819]).
3. A corporation is a juristic person,
resulting from an association of human
beings granted legal personality by the
state (Ibid).
4. A private corporation as defined in the
RCCP is created by “operation of law.”
It is not created “by law” but “by
operation of law.” This means that it is
created by tolerance of the law or by
authority of the law through a general
law. This general law is the Corporation
Code [BP 68, Effective May 1, 1980; NDC
vs. Phil. Veterans Bank, 192 SCRA 257].
5. Sec. 16, Article XII of the Constitution
prohibits the formation of private
corporations by a special law, i.e. a law
specifically enacted to create a private
corporation and which applies to that
same corporation. Congress may
provide for the formation, organization
or regulation of private corporations
only by a general law like the
1
Corporation Code (NDC vs. Phil.
Veterans Bank, 192 SCRA 257).
6. The same provision of the Constitution,
however, allows the creation of
government-owned or controlled
corporations by special laws even if
organized to pursue a proprietary or
private purpose of the government
provided its formation is economically
viable and is in the interest of the
common good. Public corporations
(local political subdivisions e.g.
provinces, cities and municipalities) are
likewise created pursuant to a special
law (Ibid).
2. Classes of Corporations
1. As to existence of dividends
i. Stock corporations – a corporation
in which capital stock is divided
into shares and is authorized to
distribute to holders of such shares
dividends or allotments of the
surplus profits on the basis of the
shares held (Sec.3, RCCP)
Even if there is a statement of
capital stock, the corporation is still
not a stock corporation if dividends
are not supposed to be declared,
that is, there is no distribution of
retained earning [Collector of
Internal Revenue vs Club Filipino De
Cebu (1962)].
ii. Non-stock corporations – a
corporation which does not have a
capital stock or does not issue
stocks and goes not distribute
dividends or allotment of surplus
profits to its members (Sundiang Sr.
 and Aquino, Reviewer in Commercial
Law, 2019 ed., p.209).
iii. Many government
instrumentalities are vested with
corporate powers but they do not
become stock or non-stock
corporations, which is a necessary
condition before an agency or
instrumentality is deemed a
[GOCC]. Examples are the Mactan
International Airport Authority, the
Philippine Ports Authority, the
University of the Philippines and
Bangko Sentral ng Pilipinas. All
these government instrumentalities
exercise corporate powers but they
are not organized as stock or non-
stock corporations as required by
Section 2(13) of the Introductory
Provisions of the Administrative
Code. (Republic v. Heirs of
Bernabe, et al., G.R. No. 237663,
October 06, 2020; J. Caguioa)
2. As to number of persons who compose them:
i. Corporate aggregate- a corporation
that is formed by and is composed
of two or more stockholders or
members (Sundiang Sr. and Aquino,
Reviewer in Commercial Law, 2019
ed., p.209);
ii. Corporation sole - a corporation
that is organized and formed by
one person (who may be a chief
archbishop, bishop, priest, minister,
rabbi or other presiding elder of
such religious denomination, sect
or church) This applies to religious
corporations where a corporation
sole is allowed for purposes of
administering and managing, as
trustee, the affairs, property and
2
temporalities of any religious
denomination, sect or church (Secs,
107 and 108, RCCP).; and
iii. One Person Corporation- a
corporation with a single
stockholder, who may be a natural
person, a trust or an estate (Sec. 116,
RCCP). No other person/ entity,
outside those mentioned in the said
section may form OPC.
3. As to whether they are for religious
purpose or not:
i. Ecclesiastical Corporation or one
organized for religious purpose.
Under the Code, religious
corporations may be incorporated
by one or more persons. Such
corporations may be classified into
corporations sole and religious
societies (Sec. 107 RCCP); or
ii. Lay Corporation or one organized
for a purpose other than for
religion. Lay corporations, in turn,
may be either eleemosynary or
civil.
4. As to whether they are for charitable
purpose or not:
i. Eleemosynary corporation or one
established for or devoted to
charitable purposes or those
supported by charity (De Leon,
Corporation Code of the Philippines
Annotated, p.42); or
ii. Civil Corporation or one
established for business or profit,
with a view toward realizing gains
to be distributed among its
 members (De Leon, Corporation Code NOTE: The presumption is that all
of the Philippines Annotated, p.42). corporations are de jure, in terms of rights and
privileges, performance of powers, which the
5. As to laws of incorporation: law confers upon de jure corporations, de facto
may still do the same.
i. Domestic corporation- corporation
formed, organized or existing De jure De facto
under Philippine Laws (Sundiang Corporation Corporation
Sr. and Aquino, Reviewer in a. Created in a. Colorable
Commercial Law, 2019 ed., p.209); or accordance with the compliance with the
requirements of the requirements of the
law law
ii. Foreign Corporation- a corporation
b. No defect in b. Defective in the
formed, organized or existing
incorporation manner of
under any laws other than those of c. Those which have incorporation
the Philippines and whose laws strictly or c. An attempt, in good
allow Filipino citizens and substantially faith, to form a
corporations to do business in its complied with the corporation
own country or state (Sec. 123, statutory according to the
RCCP). requirements for requirements of
incorporation law.
6. As to their legal right to corporate d. Right to exist cannot
existence: be successfully One which actually
attacked even in a exists for all
direct proceeding practical purposes
i. De jure corporation - a corporation by the State . as a corporation but
which has no legal
organized in accordance with the
right to corporate
requirements of law (Sundiang Sr.
existence as against
and Aquino, Reviewer in Commercial the State.
Law, 2019 ed., p.207); or
d. Right to exist can be
ii. De facto corporation- a corporation successfully
where there exists a flaw in its attacked in a direct
incorporation. The requisites for its proceeding by the
existence are: State (Quo
a. The existence of a valid law Warranto)
under which it may be (Sundiang Sr. and
Aquino, Reviewer in
incorporated;
Commercial Law,
b. An attempt in good faith the
2019 ed., p.212).
incorporate;
c. Use of corporate power (Sec.
Bar 2012: The Articles of Incorporation of AAA
19, RCCP; Sundiang Sr. and Corporation was approved by SEC. After the
Aquino, Reviewer in receipt of the Certificate of Approval from the
Commercial Law, 2019 ed., SEC, AAA Corporation decided to immediately
p.207.) start the operation of its business despite the fact
that it has no approved By-Laws. What is the
legal status of the AAA Corporation?

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a. A de jure corporation;
b. A de facto corporation;
c. A corporation by estoppels;
d. An unregistered corporation.
Suggested Answer:
9.
a. A de jure corporation.
i.
7. As to whether they are open to the public
or not:
i. Close corporation or one which is
limited to selected persons or
ii.
members of a family (see Sec. 95,
RCCP); or
ii. Open corporation or one, which is
open to any person who may wish
to become a stockholder or member
thereto (De Leon, Corporation Code
Annotated, p. 43).
8. As to their relation to another
corporation:
i. Parent or holding corporation or
one which is so related to another
corporation that it has the power,
either directly or indirectly, to elect
the majority of the directors of such
other corporation (Ibid);
ii. Subsidiary corporation or one
which is so related to another
corporation that the majority of the
directors can be elected, either
directly or indirectly by such other
corporation. It is one in which
another corporation owns at least a
majority of the shares and thus has
control (Ibid); or
iii. Affiliated corporation or one
related to another by owning or by
being owned in common
management or by a long-term
4
lease of its properties or other
control device (Ibid, citing E.L.
Kohler, A Dictionary for Accountants,
1975 ed., p. 26).
As to whether they are for public or private
purpose:
Public corporation or those formed
or organized for the government of
a portion of the state for the general
good and welfare; or
Private corporations or those
formed for some private purpose,
benefit, or end. This includes:
1. Government-owned or
controlled corporations or
those created or organized by
the government or for which the
government is the majority
stockholder. When the
government engages in a
particular business through the
instrumentality of a corporation,
it divests itself pro hac vice of its
sovereign character, so as to
subject itself to the rules
governing private corporation
(Philippine National Bank v.
Pabalan, 83 SCRA 595).
2. Quasi-public Corporation or
private corporations which have
accepted from the State the
grant of franchise or contract
involving the performance of
public duties but which are
organized for profit (1 Fletcher,
p. 216, cited in De Leon,
Corporation Code Annotated, p.
45).
 NOTE: To determine whether a duties maintainable at law
corporation is government owned or (Sundiang Sr. and Aquino,
controlled or private in nature, use the Reviewer in Commercial Law, 2019
Charter Test. ed., p.208)

2. Corporation by estoppel or a
Charter Test – If it is created by its own
group of persons which holds
charter for the exercise of a public
itself out as a corporation and
function, or by incorporation under the
enters into a contract with a third
general corporation law.
person on the strength of such
If the corporation is created by the appearance cannot be permitted
State as the latter’s own agency or to deny its existence in an action
instrumentality to help it in carrying under said contract (Sec. 20,
out its governmental functions, then RCCP).
that corporation is considered public;
otherwise, it is private (Philippine A person who contracted with an
Society for the Prevention of Cruelty to officer who signed for
Animals vs. COA, September 25, 2007). corporation prior to the
corporation’s incorporation may
10. As to whether they are corporations in a also be estopped from saying
true sense or only in a limited sense: that the contracting party is not
the corporation. Both the
i. True Corporation or one which corporation and the other
exists by statutory authority (De contracting parties are bound
Leon, Corporation Code Annotated, p. (Paz vs New Environment
46); or Universality, Inc., 2015).

ii. Quasi-corporation or one which Bar 2013: Unknown to the other four
exists without formal legislative proponents, Enrico (who had been given the
grant (Ibid): task of attending to the Articles of Incorporation
of the proposed corporation, Auto Mo, Ayos Ko)
1. Corporation by prescription or misappropriated the filing fees and never filed
one which has exercised the Articles of Incorporation with the SEC.
corporate powers for an instead, he prepared and presented to the
proposed incorporators a falsified SEC
indefinite period without
certificate approving the Articles. Relying on the
interference on the part of the
falsified SEC certificate, the latter began
sovereign power and which by
assuming and discharging corporate powers.
fiction of law is given the status Auto Mo, Ayos Ko is a ______.
of a corporation (1 Fletcher, p. A. De jure corporation;
415); B. De facto corporation;
C. Corporation by estoppel;
A corporation that was not D. General partnership;
formally organized as such, but E. None of the above.
has been duly recognized by
immemorial usage as a Suggested Answer:
corporation, with rights and

5
 c) Corporation by estoppel— if the term “latter”
refers to the incorporators.
e) None of the above—if the term “latter” refers
to Enrico.
3. Nationality of Corporations
a. Control Test
1. The Control Test determines the
nationality of the corporation by the
nationality of the controlling stockholders.
2. Shares belonging to corporations or
partnerships at least 60% of the capital of
which is owned by Filipino citizens shall
be considered as Philippine nationality
(Opinion No. 018, s. 1989, January 19, 1989,
Department of Justice, cited in Dissenting
Opinion of Justice Velasco, Jr. in Gamboa vs.
Teves, 652 SCRA 690).
3. Although the Incorporation Test is the
primary test of nationality in the
Corporation Code, the control test applies
in certain cases (for investment purposes)
like:
a. In the exploitation and development
of natural resources, the State may
enter into a joint venture with
Filipino citizens or corporations or
associations wherein at least 60% of
its capital is owned by Filipino
citizens (Sec. 2, par. 1, Art. XII, 1987
Constitution).
b. In operation of public utilities, the
operator must be a Filipino or the
corporation must be organized under
Philippine laws and with at least 60%
of its capital is owned by Filipino
6
citizens (Sec. 11, Art XII, 1987
Constitution).
c. The ownership of mass media shall
be limited to Filipino citizens or
corporations wholly owned (100%)
and managed by Filipino citizens
(Sec. 11(1), par. 1, Art. XVI, 1987
Constitution).
d. Corporations engaged in advertising
must have Filipino control of at least
70% of its capital (Sec. 11(2), par. 2,
Art. XVI, 1987 Constitution).
b. Grandfather Rule
1. The "grandfather rule" is a method of
attributing the shareholding of a given
corporate shareholder to the second or
even the subsequent tier of ownership to
determine the ultimate ownership in a
corporation. This is consistent with the
rule that the “beneficial ownership” of
corporations engaged in nationalized
activities must reside in the hands of the
Filipino citizens. (Sundiang Sr. and Aquino,
Reviewer in Commercial Law, 2019 ed., p.193)
In the cases of a multi-tiered corporation,
the stock attribution rule must be allowed
to run continuously along the chain of
ownership until it finally reaches the
individual stockholders (Narra Nickel
Mining and Development Corporation vs.
Redmont Consolidated Mines, April 21,
2014).
2. The "Grandfather Rule" is applied
specifically in cases where the Filipino
equity is less than 60% of the outstanding
capital of a corporation that owns shares
in a partly nationalized enterprise- at least
60% of which must be owned by
Philippine Nationals (Ibid).
3. Apply Grandfather Rule only when the
60-40 Filipino-foreign equity ownership is
in doubt (i.e. in cases where the joint
venture corporation with Filipino and
foreign stockholders with less than 60%
Filipino stockholdings [or 59%] invests in
other joint venture corporation which is
either 60-40% Filipino-alien or 59% less
Filipino). Stated differently, where the 60-
40 Filipino-foreign equity ownership is
not in doubt, the Grandfather Rule will
not apply (Narra Nickel Mining and
Development Corporation vs. Redmont
Consolidated Mines, G.R. No. 195580,
April 21, 2014).
4. Illustration: Assume that in ABC
Corporation, 69% of the shares are owned
by XYZ Corporation while Filipinos own
31% of the shares. XYZ Corporation on the
other hand has the following ownership:
47% Filipino owned and 53% Alien
owned. May ABC Corporation engage in
the development of natural resources in
the Philippines (In other words, is 60% of
its capital Filipino owned)?
Under the grandfather rule there is a need
to determine Filipino ownership in ABC
Corporation. Thus, 47/100 multiplied by
69 = 32.43% (Filipino owned capital of
XYZ Corporation in ABC Corporation).
This should be added to the given 31%
Filipino ownership in ABC Corporation. It
appears that 63.43% of the capital of ABC
Corporation is Filipino owned. It is
qualified under the Constitution.
Bar 2011: The Articles of Incorporation of
ABC Transport Co., a public utility, provides
for 10 members in its Board of Directors.
What is the prescribed minimum number of
Filipino citizens in its Board?
a. 10
b. 6
7
c. 7
d. 5
Suggested Answer:
b. 6
Bar 2013: Bell Philippines, Inc. (BelPhil) is a
public utility company, duly incorporated
and registered with the SEC. its authorized
capital stock consists of voting common
shares and non-voting preferred shares, with
equal par values of P100/share. Currently, the
issued and outstanding capital stock of
BelPhil consists only of common shares
shared between Bayani Cruz, a Filipino with
60% of the issued common shares, and
Bernard Fleet, a Canadian, with 40%. To
secure additional working fund, BelPhil
issued preferred shares to Bernard Fleet
equivalent to the currently outstanding
common shares. A suit was filed questioning
the corporate action on the ground that the
foreign equity holdings in the company
would now exceed the 40% foreign equity
limit allowed under the Constitution for
public utilities.
Rule on the legality of Bernard Fleet’s current
holdings.
Suggested Answer:
The holding of Bernard Fleet equivalent to
the outstanding common shares is illegal. His
holdings of preferred shares should not
exceed 40%. Since the constitutional
requirement of 60% Filipino ownership of the
capital of public utilities applies not only to
voting control but also to beneficial
ownership of the corporation, it should also
apply to the preferred shares. Preferred
shares are also entitled to vote in certain
corporate matters. The State shall develop a
self-reliant and independent national
economy effectively controlled by Filipinos.
The effective control here should be mirrored
across the board on all kinds of shares.
 4. Corporate Juridical Personality
a. Doctrine of Separate Juridical
Personality
1. Law invests a corporation with a
personality separate and distinct from
those of the persons composing it as well
as from that of any other legal entity to
which it may be related. Mere ownership
by a single stockholder or by other
corporation of all or nearly all of the
capital stock of a corporation is not of
itself sufficient ground for disregarding
the separate corporate personality (Elcee
Farms, Inc. vs. NLRC, 512 SCRA 602).
2. The corporate legal structure draws its
“economic superiority” from key features
such as a separate corporate personality.
Unlike other business association such as
partnership, the corporate framework
encourages investment by allowing even
small capital contributors to be part of a
big business endeavor made possible by
the aggregation of their capital funds
(Pioneer Insurance & Surety Corporation vs.
Morning Star Travel & Tours, Inc., G.R. No.
198436, July 8, 2015).
3. When the separate juridical personality of
a corporation is used “to defeat public
convenience, justify wrong, protect fraud,
or defend crime, the law will regard the
corporation as an association of persons.”
(Granada vs. People, G.R. No. 184092,
February 22, 2017).
4. A corporation is an artificial entity created
by operation of law. It has a personality
separate and distinct from that of its
stockholders and from that of other
corporations to which it may be
connected. As a consequence of its status
8
as a distinct legal entity and as a result of a
conscious policy decision to promote
capital formation, a corporation incurs its
own liabilities and is legally responsible
for payment of its obligations. In other
words, by virtue of the separate juridical
personality of a corporation, the corporate
debt or credit is not the debt or credit of
the stockholder. This protection from
liability for shareholders is the principle of
limited liability (Philippines National Bank vs.
Hydro Resources Contractors Corporation,
693 SCRA 294; Zomer Development
Company, Inc. v. Special 20th Division of the
Court of Appeals, et al., G.R. No. 194461,
January 07, 2020).
5. A corporation is a juridical entity with a
legal personality separate and distinct
from those acting for and, in its behalf,
and, in general, from the people
comprising it. Thus, as a general rule, an
officer may not be held liable for the
corporation's labor obligations unless he
acted with evident malice and/or bad faith
in dismissing an employee. (Symex
Security Services, Inc. v. Rivera, G.R. No.
202613, 8 November 2017, J. Caguioa).
6. The following are the consequences of the
separate personality of the corporation:
a. A corporation can acquire property of
its own, enter into transactions,
business dealings, contracts or any
other contemplated juridical acts under
its own name;
b. The obligations and liabilities arising
from said contracts are regarded as
that of the corporation and not those of
the individual members or of the
officers of the corporation. Obligations
of the corporation are not to be
regarded as obligations of its members.
 Conversely, personal obligations of its
members are not regarded as
obligations of the corporation;
c. Properties of the corporation are not to
be considered as property of its
individual members or shareholders
and vice versa. Following this theory,
it is improper for a shareholder to
intervene in any action involving the
assets and properties of the
corporation. Conversely, it is improper
for the corporation to intervene in any
action or proceeding involving
personal properties of its members or
shareholders;
d. The interest of the shareholder in the
properties of the corporation is
inchoate only, not direct and actual. A
direct interest arises only when after
liquidation of corporate assets, a
particular property is assigned to the
stockholder;
e. If a stockholder passes away, the
properties registered in the name of
the corporations organized by the
deceased before his death are not to be
included in the inventory of the estate
of the deceased. The personality of the
corporation is distinct from those who
organized the corporation (Lim vs. CA,
323 SCRA 102).
f. A corporation is considered a person
under the Constitution and enjoys the
protection afforded by the due process
and equal protection clauses. The term
“person” in the Constitution
encompasses even juridical persons.
Hence, a corporation cannot be
deprived of its life without due process
of law. It is also entitled to protection
9
against unreasonable searches and
seizures.
g. There are, however, constitutional
rights which do not apply to a
corporation. For instance, the
guarantee against self-incrimination
would only extend to a natural person
(Bataan Shipyard vs. PCGG, 150 SCRA
181).
Bar 2019: In 2016, X Corp. obtained a loan worth
₱50,000,000.00 from J Bank, which was secured
by a third-party mortgage executed by Y, Inc. in
favor of X Corp. Since X Corp. was not able to
settle its loan obligation to J Bank when it fell
due, and despite numerous demands, J Bank
foreclosed the mortgaged properties. The
properties were sold in a foreclosure sale for
₱35,000,000.00, thereby leaving a ₱15,000,000.00
deficiency. For failure of X Corp. to pay said
deficiency, J Bank filed a complaint for sum of
money against X Corp., its President, Mr. P, and
Y, Inc.
With respect to Mr. P, J Bank argued that he
should be held solidarily liable together with X
Corp. because he signed the loan document on
behalf of X Corp. in his capacity as President.
On the other hand, J Bank contended that Y, Inc.
should also be held solidarily liable because the
shareholdings of both corporations are
identically owned and their operations are
controlled by the same people; hence, Y, Inc. is a
mere alter ego of X Corp.
(a) Should Mr. P be held liable? Explain. (2.5%)
Suggested Answer:
Mr. P is not liable. The corporation being a mere
artificial person can only act through its
representative. The corporate representative is
not liable for any act taken on behalf of the
corporation unless he acted in bad faith or with
gross negligence in directing the affairs of the
corporation or made himself liable solidarily
with the corporation. In this case, P, as
President, signed the loan document not for
himself but on behalf of X Corporation. Nothing
in the facts indicated show that he bound
himself liable with the corporation or he acted in
bad faith or with gross negligence.
(b) Should Y, Inc. be held liable? Explain. (2.5%)
Suggested Answer:
Y, Inc. is not liable. Interlocking shareholders,
directors and officers, per se, is not enough
reason to set aside the separate legal
personalities of X and Y.
Piercing the corporate veil based on the alter ego
theory requires the concurrence of three
elements, namely:
1) Control, not mere majority or complete stock
control, but complete domination, not only of
finances but of policy and business practice in
respect to the transaction attacked so that the
corporate entity as to this transaction had at the
time no separate mind, will or existence of its
own;
2) Such control must have been used by the
defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act
in contravention of plaintiff’s legal right; and
3) The aforesaid control and breach of duty must
have proximately caused the injury or unjust
loss complained of [Development Bank of the
Philippines v. Hydro Resources Contractors
Corporation, G.R. No. 167603, March 13, 2013].
Control then is not enough. The facts do not
show that the control over the corporation was
used to perpetuate fraud or violate a positive
legal duty in contravention of the J Bank’s right
and that such control and breach of duty was
the proximate cause suffered by the Bank.
Bar 2011: X Corp. operates a call center that
received orders for pizzas on behalf of Y Corp.
which operates a chain of pizza restaurants. The
10
two companies have the same set of corporate
officers. After 2 years, X Corp. dismissed its call
center agents for no apparent reason. The agents
filed a collective suit for illegal dismissal against
both X Corp. and Y Corp. based on the doctrine
of piercing the veil of corporate fiction. The
latter set up a defense that the agents are in the
employ of X Corp. which is a separate juridical
entity. Is the defense appropriate?
a. No, since the doctrine would apply, the two
companies having the same set of corporate
officers.
b. No, the real employer is Y Corp., the pizza
company, with X Corp. serving as an arm for
receiving its outside orders for pizzas.
c. Yes, it is not shown that one company
completely dominates the finances, policies, and
business practices of the latter.
d. Yes, since the two companies perform two
distinct businesses.
Suggested Answer:
c. Yes, it is not shown that one company
completely dominates the finances, policies, and
business practices of the latter.
Bar 2012: X sold all his shares in AAA Hotel
Corporation to Y. X owns 99% of AAA Hotel
Corporation. As the new owner, Y wanted a
reorganization of the hotel which is to include
primarily the separation of all existing
employees and the hiring of new employees.
Which statement is most accurate?
a. With the change in ownership, in effect there
is a new juridical entity and therefore all
employees are considered separated;
b. Despite the change in shareholder, there is
actually no change in the juridical entity and
therefore existing employees cannot
automatically be considered separated;
c. Y, as the new shareholder, has the right to
retain only those employees who in his
judgment are qualified;
d. For as long as the existing employees are
given their separation pay, they can be
terminated.
Suggested Answer:
b. Despite the change in shareholder, there is
actually no change in the juridical entity and
therefore existing employees cannot
automatically be considered separated.
Bar 2012: X owns 99% of the capital stock of SSS
Corporation. X also own 99% of TTT
Corporation. SSS Corporation obtained a loan
from VVV Banks. On due date, SSS Corporate
defaulted. TTT Corporation is financially
healthy. Which statement is most accurate?
a. X being a controlling owner of SSS
Corporation can automatically be held
personally liable for the loan of SSS Corporation;
b. TTT Corporation, owned by 99% by X, can
automatically be held liable;
c. SSS Corporation and TTT Corporation,
although both are owned by X, are 2 distinct
corporations with separate juridical
personalities hence, the TTT Corporation cannot
automatically be held liable for the loan of SSS
Corporation;
d. The principle of piercing the veil of
corporation fiction can be applied in this case
Suggested Answer:
c. SSS Corporation and TTT Corporation,
although both are owned by X, are 2 distinct
corporations with separate juridical
personalities hence, the TTT Corporation cannot
automatically be held liable for the loan of SSS
Corporation.
Bar 2014: In an action for collection of a sum of
money, the RTC of Makati City issued a decision
finding DSecurities, Inc. liable to Rehouse
Corporation for P10 M. Subsequently, the writ
of execution was issued but returned unsatisfied
because D-Securities had no more assets to
satisfy the judgment. Rehouse moved for an
Alias Writ of Execution against Fairfield Bank
(FB), the parent company of DSecurities. FB
opposed the motion on the grounds that it is a
separate entity and that it was never made party
to the case. The RTC granted the motion and
11
issued the Alias Writ of Execution.
In its Resolution, the RTC relied on the
following facts: 499,995 out of the 500,000
outstanding shares of stocks of D-Securities are
owned by FB; FB had actual knowledge of the
subject matter of litigation as the lawyers who
represented D-Securities are also the lawyers of
FB. As an alter ego, there is no need for a finding
of fraud or illegality before the doctrine of
piercing the veil of corporate fiction can be
applied. The RTC ratiocinated that being one
and the same entity in the eyes of the law, the
service of summons upon D-Securities has
bestowed jurisdiction over both the parent and
wholly-owned subsidiary. Is the RTC correct?
Suggested Answer:
No, the RTC is not correct. The court must have
first acquire jurisdiction over the corporation(s)
involved before its or their separate
personalities are disregarded; and the doctrine
of piercing the veil of corporate entity can only
be raised during a full-blown trial over a cause
of action duly commenced involving parties
duly brought under the authority of the court by
way of service of summons or what passes as
such service.
i. Liability for Tort and Crimes
1. Liability for Crimes. A corporation itself
cannot be criminally liable for felonies
described in the Revised Penal Code or in
special laws because it cannot perform
physical overt acts of a crime. It cannot
even be imprisoned. Nevertheless, the
officers of the corporation may, in their
individual capacities be liable for crimes
done in behalf of the corporation. While
the act of the officers may impose certain
obligations on the corporation because of
the criminal act of its officers, the officer
who performed the criminal act must
assume the criminal liability (Executive
Secretary vs. Court of Appeals, 429 SCRA 81;
 Singian, Jr. vs. Sandiganbayan, 478 SCRA indispensable to its commission
348). (Sec. 171, RCCP).

2. A corporation’s personality is separate b. Accordingly, the penalty of

and distinct from its officers, directors, payment of fine can be imposed
and shareholders. To be held criminally on the corporation itself under
liable for the acts of a corporation, there the RCCP. Thus, the penalty of
must be a showing that its officers, fine may be imposed on the
directors, and shareholders actively corporation under:
participated in or had the power to
prevent the wrongful act. (Securities and i. Section 161(RCCP)- on
Exchange Commission vs. Price Richardson violation of the duty to
Corporation, G.R. No. 197032, July 26, 2017). maintain records, to
allow inspection or
3. A corporation cannot be arrested and reproduction thereof;
imprisoned; hence, cannot be penalized
for a crime punishable by imprisonment. ii. Section 165 (RCCP)-
However, a corporation may be charged corporations that
and prosecuted for a crime if the conducts its business for
imposable penalty is fine. Even if the fraud;
statute prescribes both fine and
imprisonment as penalty, a corporation iii. Section 166 (RCCP)-
may be prosecuted and, if found guilty, corporations that is used
may be fined (Ching vs. Secretary of for fraud or for
Justice, 481 SCRA 609; Ong v. Court of committing or concealing
Appeals, 499 Phil. 691; W.H. Small & Co. graft and corruption;
v. Commonwealth, 120 S.W. 361).
iv. Section 167(RCCP)-
4. The existence of the corporate entity does involving a corporation
not shield from prosecution the corporate that appoints an
agent who knowingly and intentionally intermediary who
caused the corporation to commit a crime engages in graft and
(Republic Gas Corporation vs. Petron corrupt practices for the
Corporation, 698 SCRA 666). corporation’s benefit or
interest.
5. Criminal Liability under Revised
Corporation Code, effective February 6. Corporate criminal liability seems to be
2019: recognized in the Anti-Money Laundering
a. If the offender is a corporation, Law of 2001. The term “offender” under
the penalty may, at the the AMLA refers to any person who
discretion of the court, be commits a money laundering offense. It
imposed upon such corporation then defines a “person” as “any natural or
responsible for the violation of juridical person.” The penalty clause of
the provisions of the Revised the law also mentions a corporation as
Corporation Code or offender (Sec. 14, AMLA).

12
7. If the violation or offense (under the Trust
Receipts Law [PD 115]) is committed by a
corporation, partnership, association or
other juridical entities, the penalty
provided for in this Decree shall be
imposed upon the directors, officers,
employees or other officials or persons
therein responsible for the offense,
without prejudice to the civil liabilities
arising from the criminal offense (Crisologo
vs. People, G.R. No. 199481, December 3,
2012). Though the entrustee is a
corporation, nevertheless, the law
specifically makes the officers, employees
or other officers or persons responsible for
the offense, without prejudice to the civil
liabilities of such corporation and/or
board of directors, officers, or other
officials or employees responsible for the
offense. The rationale is that such officers
or employees are vested with the
authority and responsibility to devise
means necessary to ensure compliance
with the law and, if they fail to do so, are
held criminally accountable; thus, they
have a responsible share in the violations
of the law (Ching vs. Secretary of Justice, 481
SCRA 609; U.S. v. Park 421 U.S. 658, 95,
S.Ct. 190; Trust Receipts Law [PD 115]).
8. Liability for Torts. A corporation is civilly
liable in the same manner as natural
persons for torts, because "generally
speaking, the rules governing the liability
of a principal or master for a tort
committed by an agent or servant are the
same whether the principal or master be a
natural person or a corporation, and
whether the servant or agent be a natural
or artificial person. All of the authorities
agree that a principal or master is liable
for every tort which he expressly directs
or authorizes, and this is just as true of a
corporation as of a natural person. A
corporation is liable, therefore, whenever
13
a tortious act is committed by an officer or
agent under express direction or authority
from the stockholders or members acting
as a body, or, generally, from the directors
as the governing body (Philippine National
Bank vs. Court of Appeals, 83 SCRA 237).
9. The directors, however, are personally
liable if they acted with malice or bad faith
in illegally terminating the services of
their employees (Polymer Rubber
Corporation vs. Salamuding, 702 SCRA 153).
10. The settled rule is that, a corporation is
invested by law with a personality
separate and distinct from those of the
persons composing it, such that, save for
certain exceptions, corporate officers who
entered into contracts in behalf of the
corporation cannot be held personally
liable for the liabilities of the latter
(Saludaga vs. Far Eastern University, 553
SCRA 741; Powton Conglomerate, Inc. vs.
Agcolicol, 400 SCRA 523).
11. The Court notes that the wording of the
RCC reinforces the xxx interpretation that
a violation of Section 31 of the [Old]
Corporation Code, now Section 30 of the
RCC, is not covered by Section 144 of the
[Old] Corporation Code, now Section 170
of the RCC, there is now Section 158 on
administrative sanctions, xxx that the
Commission can impose if, after due
notice and hearing, it finds that any
provisions of the RCC has been violated.
Thus, under the RCC, the Commission has
now the authority to impose any or all
[administrative] sanctions in case “any
provision of [the RCC,] rules or
regulations, or any of the Commission’s
order has been violated xxx taking into
consideration the extent of participation,
nature, effects, frequency and seriousness
of the violation. (UPCB v. Sec, of Justice,
 G.R. No. 209601, 12 January 2021, J.
Caguioa)
ii. Recovery of Damages
1. Moral damages include physical suffering,
mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings,
moral shock, social humiliation, and
similar injury. Though incapable of
pecuniary computation, moral damages
may be recovered if they are the
proximate result of the defendant's
wrongful act for omission (Art. 2217, New
Civil Code).
2. A juridical person is generally not entitled
to moral damages because, unlike a
natural person, it cannot experience
physical suffering or such sentiments as
wounded feelings, serious anxiety, mental
anguish or moral shock (People v. Manero,
Jr.,218 SCRA 85).
A corporation may claim damages if it
falls under item 7 of Article 2219 of the
Civil Code. This provision expressly
authorizes the recovery of moral damages
in cases of libel, slander, or any other form
of defamation. Article 2219 (7) does not
qualify whether the plaintiff is a natural or
juridical person (Filipinas Broadcasting
Network, Inc. vs Ago Medical, January 17,
2005).
3. Although in some recent cases we have
held that the Court may allow the grant of
moral damages to corporations, it is not
automatically granted; there must still be
proof of the existence of the factual basis
of the damage and its causal relation to
the defendant’s acts (First Lepanto-Taisho
Insurance Corporation vs. Chevron
Philippines, Inc., 663 SCRA 309).
14
4. Exceptions under jurisprudence:
a. A corporation may have a good
reputation which, if debased or
besmirched resulting in social
humiliation, may be a ground for
recovery of moral damages and
attorney’s fees (Mambulao Lumber Co. vs.
PNB, 22 SCRA 359; People vs. Manero, 218
SCRA 85). HOWEVER, this statement in
PP vs Manero and Mambulao Lumber vs
PNB that a corporation may recover
moral damages if it has a good
reputation that is debased resulting in
social humiliation is an OBITER
DICTUM (ABS-CBN vs Court of Appeals,
1999).
b. Nevertheless, (the Corporation’s) claim
for moral damages falls under item 7 of
Article 2219 of the Civil Code. This
provision expressly authorizes the
recovery of moral damages in cases of
libel, slander or any other form of
defamation. Article 2219(7) does not
qualify whether the plaintiff is a natural
or juridical person. Therefore, a juridical
person such as a corporation can validly
complain for libel or any other form of
defamation and claim for moral
damages (Filipinas Broadcasting Network,
Inc. vs. Ago Medical and Eduacational
Central-Bicol Christian College of Medicine
[AMEC-BCCM], 448 SCRA 413).
c. Exception to exception: But a
corporation whose credit reputation is
not exactly something to be considered
sound and wholesome cannot be entitled
to a big amount of moral damages (Asset
Privatization Trust vs. CA, 300 SCRA 579).
NOTE: When confronted with an issue on
whether private corporations are entitled
to moral damages, look at the alleged
 basis of the damages. If the basis is
physical suffering, mental anguish,
serious anxiety, wounded feelings, moral
shock or similar injury, then a corporation
cannot seek for moral damages. If it could
be shown however, that it is claiming
damages for its, reputation, which had
been unduly besmirched by the
defendant, and if it could be shown that
indeed the latter performed the alleged
act, then a claim for moral damages is in
order.
b. Doctrine of Piercing the
Corporate Veil
i. Grounds for Application
of Doctrine
1. Doctrine of piercing the veil stems from
the theory / attribute that a corporation is
a legal entity distinct from the persons
composing it. This theory was adopted for
the purpose of convenience and to
promote the ends of justice. BUT, when
this veil of corporate fiction is used as a
shield to perpetuate fraud, to defeat
public convenience, justify wrong or
defend crime this fiction shall be
disregarded (pierced) and the individuals
composing it will be treated identically
(Sundiang Sr. and Aquino, Reviewer in
Commercial Law, 2019 ed., p. 198 citing Cruz
vs Dalisay, July 31, 1987).
2. The doctrine of piercing the veil of
corporate fiction applies to both stock and
non-stock corporation (International
Academy of Management Economics vs.
Litton and Company, December 13, 2017).
3. The Supreme Court (SC) has held that the
“existence of interlocking directors,
corporate officers and shareholders is not
15
enough justification to pierce the veil of
corporate fiction in the absence of fraud or
other public policy considerations.”
(Pioneer Insurance & Surety Corporation vs.
Morning Star Travel & Tours, Inc. G.R. No.
198436. July 8, 2015).
4. The doctrine of piercing the veil of
corporate fiction applies with equal force
to a One Person Corporation (Sec. 130,
RCCP).
5. The veil of corporate fiction may be
pierced attaching personal liability against
responsible person if the corporation's
personality "is used to defeat public
convenience, justify wrong, protect fraud
or defend crime, or is used as a device to
defeat the labor laws (Dutch Movers, Inc. et
al., v. Lequin et al., G.R. No. 210032, April
25, 2017).
6. Where it shows that business entities are
owned, controlled, and conducted by the
same parties, law and equity will
disregard the legal fiction that they are
distinct and shall treat them as one entity
in order to protect the rights of third
persons (Leo's Restaurant & Bar Cafe v.
Bensing, G.R. No. 208535, October 19, 2016).
7. When the separate juridical personality of
a corporation is used “to defeat public
convenience, justify wrong, protect fraud,
or defend crime, the law will regard the
corporation as an association of persons.”
The Sandiganbayan has proven beyond
reasonable doubt that petitioners
conspired with each other to forego the
required bidding process and to purchase
grossly overpriced construction materials
from Geomiche. There is sufficient basis to
pierce the corporate veil, and Dela Cruz,
as Geomiche’s president, should be held
equally liable as her coconspirators.
 (Granada vs. People G.R. No. 184092.
February 22, 2017).
8. The doctrine of piercing the corporate veil
applies only in three (3) basic areas,
namely:
a. defeat of public convenience as when
the corporate fiction is used as a
vehicle for the evasion of an existing
obligation;
b. fraud cases or when the corporate
entity is used to justify a wrong,
protect fraud, or defend a crime; or
c. alter ego cases, where a corporation is
merely a farce since it is a mere alter
ego or business conduit of a person, or
where the corporation is so organized
and controlled and its affairs are so
conducted as to make it merely an
instrumentality, agency, conduit or
adjunct of another corporation
(Philippine National Bank vs. Hydro
Resources Contractors Corporation, 693
SCRA 294; Gesolgon, et al. v. CyberOne
Ph., Inc., G.R. No. 210741, October 14,
2020).
9. In the above cases, the courts will not
hesitate to disregard the separate
personality of the corporation. In doing so,
the courts are said “to pierce the veil of
corporate entity” and “look into the
substance” of the corporation, not into its
corporate form (Villanueva vs. Andre, 172
SCRA 876; Francisco Motors Corporation vs.
CA, 309 SCRA 72).
10. The alter ego rule or conduit theory is a
rule which states that where a corporation
is so organized and controlled, and its
affairs conducted, so that it is in fact a
mere instrumentality or adjunct of the
other, the fiction of corporate entity of the
instrumentality may be disregarded.
16
However, mere ownership by a single or a
small group of stockholders of nearly all
of the capital stock of the corporation is
not, without more, sufficient to disregard
the fiction of separate personality (Mayor
v. Tiu, G.R. No. 203770, November 23, 2016).
11. The mere existence of interlocking
directors, management, and even the
intricate intertwining of policies of the two
corporate entities do not justify the
piercing of the corporate veil xxx, unless
there is presence of fraud or other public
policy considerations. To stress, the Alter
Ego Doctrine cannot be casually invoked
nor presumed. (Tiangco v. Sunlife Financial
Plans, Inc. et al., G.R. No. 241523, October
12, 2020)
12. In violation of labor laws, the veil of
corporate fiction can be pierced, and
responsible corporate directors and
officers or even a separate but related
corporation, may be impleaded and held
answerable solidarily, even after final
judgment and on execution, so long as it is
established that such persons have
deliberately used the corporate vehicle to
unjustly evade the judgment obligation, or
have resorted to fraud, bad faith or malice
in doing so. The key element is the
presence of fraud, malice or bad faith. Bad
faith, in this instance, does not connote
bad judgment or negligence but imports a
dishonest purpose or some moral
obliquity and conscious doing of wrong; it
means breach of a known duty through
some motive or interest or ill will; it
partakes of the nature of fraud (Guillermo
v. Uson, G.R. No. 198967, March 07, 2016).
ii. Test in Determining Applicability
13. Piercing the corporate veil based on the
alter ego theory requires the concurrence
of three elements:
a. control of the corporation by the
stockholder or parent corporation,
b. fraud or fundamental unfairness
imposed on the plaintiff, and
c. harm or damage caused to the plaintiff
by the fraudulent or unfair act of the
corporation. The absence of any of
these elements prevents piercing the
corporate veil (Philippines National Bank
vs. Hydro Resources Contractors
Corporation, 693 SCRA 294).
14. In this connection, case law lays down a
three-pronged test to determine the
application of the alter ego theory, which
is also known as the instrumentality
theory, namely:
a. Control or Instrumentality test -
Control, not mere majority or complete
stock control but complete domination,
not only of the finances but of policy
and business practice in respect to the
transaction attacked so that the
corporate entity as to this transaction
had at that time no separate mind, will
or existence of its own;
b. Fraud test - Such control must have
been used by the defendant to commit
fraud or wrong, to perpetuate the
violation of a statutory or other
positive legal duty, or dishonest and
unjust act in contravention of
plaintiff’s legal rights; and
c. Harm test - The aforesaid control and
breach of duty must proximately cause
the injury or unjust loss complained of
(Ibid; see also Concept Builders, Inc. vs.
National Labor Relations Commission, 326
Phil. 955, 966; Virata vs. Ng Wee, G.R.
Nos. 220926 et.al., July 5, 2017).
17
15. Effects of piercing the veil of corporate
entity are the following:
a. When the corporate existence is
pierced, the law will treat the
corporation and its members,
stockholders or officers as one and the
corporation will not be considered as
having a separate personality.
Consequently, the officers or
stockholders or members may now be
held liable for the liabilities of the
corporation and vice versa (Matugina
Integrated Wood Products vs. CA, 263
SCRA 490; Aratea vs. Suico, G.R. No.
170284, March 16, 2007).
b. “Piercing the veil” removes the barrier
between the corporation from the
persons comprising it to thwart the
fraudulent and illegal schemes of those
who use the corporate personality as a
shield for undertaking certain
proscribed activities (Francisco Motors
Corporation vs. CA, 309 SCRA 72).
c. It must be remembered that in order to
justify piercing the veil of corporate
entity, the wrongdoing must be clear
and convincing. It cannot be presumed
(Matugina Integrated Wood Products vs.
CA, 263 SCRA 490; Del Rosario vs.
NLRC, 187 SCRA 777).
d. The requisites before a director or
officer or a corporation can be held
personally liable for corporate
obligations are that:
i. The complainant must allege in the
complaint that the director or
officer assented to the patently
unlawful acts of the corporation, or
that the officer was guilty of gross
negligence or bad faith; and
 ii. The complainant must clearly and
convincingly prove such unlawful
acts, negligence or bad faith.
5. Capital Structure
a. Number and Qualifications of
Incorporators
1. Incorporators must comply with the
following requirements:
a. Any person, partnership, association
or corporation person, singly or
jointly with others;
b. Corporators must not be more than
15;
c. If the corporation is a stock
corporation, each incorporator must
own or be a subscriber to at least one
(1) share of the capital stock (Sec. 10,
RCCP).
Natural persons who are licensed to
practice profession, and partnerships
or associations organized for the
purpose of practicing profession, shall
not be allowed to organized as a
corporation unless otherwise provided
under special laws. Incorporators who
are natural persons must be of legal
age (Ibid.)
Bar 2012: X is a Filipino immigrant residing in
Sacramento, California. Y is a Filipino residing
Quezon City. Z is a resident alien residing in
Makati City. GGG Corporation is a domestic
corporation—40% owned by foreigners and 60%
owned by Filipinos, with T as authorized
representative. CCC Corporation is a foreign
corporation registered with the Philippines SEC,
KKK Corporation is a domestic corporation
18
(100%) Filipino owned. S is a Filipino, 16 years
of age, and daughter of Y.
A. Who can be incorporators? Who can be
subscribers?
B. What are the differences between an
incorporator and a subscriber, if there are any?
Suggested Answer:
A.
X, Y, Z and T could all be incorporators and
subscribers. Note, however, that Section 10 of
the Corporation Code requires that there must
be at least 5 but not more than 15 incorporators
(who must all be natural persons) and that a
majority of the incorporators must be residents
of the Philippines. S, being a minor, could
neither be an incorporator nor a subscriber.
GGG Corporation, CCC Corporation, and KKK
Corporation could not be incorporators as they
are not natural persons. However, they could be
subscribers.
B.
Some of the differences are as follows: first, all
the incorporators are required to sign and
acknowledge the Articles of Incorporation while
the subscribers, as such, are not subject to the
same requirement; second, the incorporators are
all required to be natural persons while the
subscribers could either be natural or juridical
persons; and third, the number of incorporators
cannot exceed 15 while the number of
subscribers could be more than 15 (subject to
compliance, in the appropriate cases, with the
requirements of the SRC).
b. Subscription Requirements
Under the Revised Corporation Code, Stock
corporations shall not be required to have a
minimum capital stock, except as otherwise
specifically provided by special law (Sec .12,
RCCP)
The requirement that 25% of the authorized
capital stock as stated in the articles of
incorporation must be subscribed at the time
of incorporation, and at least twenty five
(25%) per cent of the total subscription must
be paid upon subscription, was DELETED giving it perpetual existence, unless its
under the Revised Corporation Code. application for revival provides otherwise
(Sec. 11, RCCP).
c. Corporate Term
d. Classification of Shares
1. General Rule: A corporation shall have
PERPETUAL EXISTENCE unless its i. Preferred vs. Common Shares
articles of incorporation provides
otherwise.
1. Preferred shares are those, par value
shares, which are given preference in the
2. Corporations with certificates of
distribution of dividends and in the
incorporation issued prior to the effectivity of
distribution of corporate assets upon
this Code, and which continue to exist, shall
liquidation, or such other preferences as
have perpetual existence, UNLESS the
stated in the Articles of Incorporation.
corporation, upon a vote of its stockholders
(Sec. 6, RCCP).
representing a majority of its outstanding
capital stock, notifies the Commission that
A preferred share may be preferred
it elects to retain its specific corporate term
cumulative. In this type of share, if the
pursuant to its articles of incorporation
dividends are not paid for any year, the
unpaid dividends shall be added to the
3. EXTENSION OF CORPORATE PERIOD
dividends for the next year and the holder
A corporate term for a specific period may
of such share shall be entitled to be paid
be extended or shortened by amending the
the accumulated dividends before
articles of incorporation: Provided, That no
dividends shall be paid to the holder of a
extension may be made earlier than three
common share. If the preferred share is
(3) years prior to the original or subsequent
non-cumulative, its preference for any
expiry date(s) unless there are justifiable
given year is lost by the failure to pay the
reasons for an earlier extension as may be
dividend for that year.
determined by the Commission: Provided,
further, That such extension of the
A preferred participating share
corporate term shall take effect only on the
participates in the distribution of
day following the original or subsequent
dividends equal to the dividend paid to
expiry date(s).
the holder of a common share even after
the holder of the preferred participating
4. REVIVAL OF CORPORATE TERM
share already received his dividend for
A corporation whose term has expired
the preferred share. If the articles of
may, apply for a revival of its corporate
incorporation do not expressly provide for
existence, together with all the rights and
this type of share, then the preferred stock
privileges under its certificate of
is deemed non-participating.
incorporation and subject to all of its
duties, debts and liabilities existing prior to
2. A common share is the ordinary share of
its revival. Upon approval by the
the corporation entitling the owner to a
Commission, the corporation shall be
pro-rata dividend, without priority or
deemed revived and a certificate of revival
preference over other shares.
of corporate existence shall be issued,

19
 While it is true that under the Revised
Corporation Code, only preferred shares
and redeemable shares can be deprived of
voting rights, as an exception to this rule,
under the following instances, a common
share can be deprived of voting rights:
a. When shares are declared delinquent;
and
b. When shares have already exercised
appraisal rights.
iii. Founder’s Share
Founder’s shares are shares classified as such
by virtue of a provision in the articles of
incorporation, which may be given certain
rights and privileges not enjoyed by the
others. However, if the right is the exclusive
right to vote and be voted for as director, it
must be for a period not exceeding five (5)
years counted from the date of issuance of a
certificate of incorporation by the SEC (Sec. 7,
RCCP).
iv. Redeemable Shares
Redeemable shares are shares issued by the
corporation, which it may redeem or
purchase from their holders upon expiration
of the period fixed, whether or not there
exists unrestricted retained earnings in the
corporate books (Sec. 8, RCCP). This principle
is contrary to Section 40 of the Revised
Corporation Code, which authorizes a
corporation to acquire its own shares
provided the corporation has unrestricted
retained earnings. Redeemable shares should
be considered as an exception to the rule in
Section 40 of the Code.
Unrestricted retained earnings is not
necessary before shares can be redeemed but
there must be sufficient assets to pay the
20
creditors and to answer for operations.
(Republic Planters Bank vs Agana, 1997).
A redeemable share like a preferred share
maybe deprived of voting rights in the
Articles of Incorporation, unless otherwise
provided in the Code.
Once redemption is made, the shares, which
are redeemed, are automatically retired
(cancellation of such shares from the
statement of authorized capital stock) unless
the articles of incorporation would expressly
allow re-issuance of redeemed shares, then
for the meantime, they would form part of the
treasury stock of the corporation.
v. Treasury Shares
Treasury shares are shares which have been
previously issued and fully paid for but were
subsequently reacquired by the issuing
corporation by purchase, redemption,
donation or some other means. (Sec. 9, RCCP).
6. Incorporation and Organization
a. Promoter
Promoter is one who, acting alone, or with
others, takes initiative in founding and
organizing the business or enterprise of the
issuer and receives consideration therefore
(Sec. 3, Securities Regulation Code).
Promoters could not have acted as agent for a
projected corporation since that which no
legal existence could have no agent (Cagayan
Fishing Development vs. Sandiko, 65 Phil. 223).
i. Liability of Promoter
Contracts by the promoter for and in behalf of
a proposed corporation generally bind only
him, subject to and to the extent of his
representations and not the corporation
because a corporation, until organized, has no
being, franchises or faculties. A corporation
should have a full and complete organization
and existence as an entity before it can enter
into any kind of a contract or transact any
business, would seem to be self-evident (Ibid).
ii. Liability of Corporation for Promoter’s
Contract
Before incorporation and organization: Since
a corporation cannot before its organization,
have agents contract for itself, or be
contracted with, it is not liable upon any
contract which the promoter attempts to
make for it prior to its organization unless the
contract is expressly or impliedly adopted or
ratified by it after organization is completed
or liability is imposed by statute (De Leon,
Corporation Code of the Philippines Annotated, p.
102).
It should be pointed out, however, that the
Supreme Court did not say in the case of
Cagayan Fishing Dev’t. Co. vs. Sandiki that the
rule is absolute. It will be noted that
American courts generally hold that a
contract made by the promoters of a
corporation on its behalf may be adopted,
accepted or ratified by the corporation when
organized (Rizal Light & Ice Co., Inc. vs. Public
Service Commission, 25 SCRA 285).
When the corporation, after it has come into
existence, derived benefits from the contract,
it is only proper to compensate the promoter.
Failure to compensate would result in a
situation wherein one party is unjustly
enriched at the expense of another.
21
After incorporation and organization: The
contract must of course be one such as the
corporation can make itself. A corporation as
a legal entity cannot assume the obligation of
an ultra vires contract [see Sec. 45 (now 44)]
made by its promoters any more than it can
legally initiate such contract (18 Am. Jur. 2d
600-601; see Cagayan Fishing Development vs.
Sandiko, 65 Phil. 223; cited in De Leon,
Corporation Code of the Philippines Annotated,
p.103).
In the event the corporation is not duly
incorporated: Investors who are not the
“moving spirit” behind the organization of
the corporation, but who were merely
convinced to invest in the proposed corporate
venture on the basis of the feasibility study
undertaken, are not liable personally with the
corporation for the cost of such feasibility
study. The most that can be said is that they
benefited from such services, but that surely
is no justification to hold them personally
liable therefore (Caram, Jr. v. Court of Appeals,
151 SCRA 372).
b. Subscription Contract
A subscription contract is any contract for the
acquisition of unissued stock in an existing
corporation or a corporation still to be
formed. It is considered as such
notwithstanding the fact that the parties refer
to it as purchase or some other contract (Sec.
59, RCCP).
From the moment of subscription, the
stockholder has all the rights and obligations
of a stockholder even though he has not fully
paid the subscription. Note the term,
“unissued” in Section 59 of the Revised
Corporation Code, which signifies that
previously issued shares and which went
back to the corporation by any lawful means
like treasury shares cannot be the subject of a
subscription contract because such shares are
no longer unissued shares.
Bar 2011: It is settled that neither par value nor
book value is an accurate indicator of the fair
value of a share of stock of a corporation. As to
unpaid subscriptions to its shares of stock, as
they are regarded as corporate assets, they
should be included in the
a. Capital value.
b. Book value
c. Par value.
d. Market value.
Suggested Answer:
b. Book value.
Bar 2013: The BIR assessed ABC Corp. for
deficiency income tax for taxable year 2010 in
the amount of P26,731,208.00, inclusive of
surcharge and penalties.
The BIR can _______.
a. Run after the directors and officers of the
ABC Corp. to collect the deficiency tax and
their liability will be solidary;
b. Run after the stockholders of ABC Corp. and
their liability will be joint;
c. Run after the stockholders of ABC Corp. and
their liability will be solidary;
d. Run after the unpaid subscriptions still due
to ABC Corp., if any;
e. None of the above choices is correct’
Suggested Answer:
d. Run after the unpaid subscriptions still due
to ABC Corp., if any.
c. Pre-incorporation Subscriptions
1. This is a subscription made before the
corporation is incorporated (Sec. 60,
RCCP).
2. A pre-incorporation subscription is
entered into before the incorporation and
irrevocable for a period of at least six (6)
22
months from the date of subscription
unless:
a. All other subscribers consent to
the revocation;
b. If the corporation fails to
incorporate within the same 6-
month period or within a longer
period stipulated in the contract
of subscription (Sec. 60, RCCP).
3. Pre-incorporation subscriptions cannot be
revoked after the filing of the Articles of
Incorporation with the SEC even if the
filing is prior to the expiration of the 6-
month period (Sec. 60, RCCP).
d. Consideration for Stocks
Shares of stocks and bonds may be issued in
exchange for any or a combination of any two
or more of the considerations enumerated in
Section 61 of the Revised Corporation Code.
The following limitations must be noted:
a. Actual cash paid to the corporation;
b. Property, tangible or intangible, actually
received by the corporation and necessary
or convenient for its use and lawful
purposes at a fair valuation equal to the
par or issued value of the stock issued;
c. Labor performed for or services actually
rendered to the corporation;
d. Previously incurred indebtedness of the
corporation;
e. Amounts transferred from unrestricted
retained earnings (in case of stock
dividends);
f. Outstanding shares exchanged for stock in
the event of reclassification or conversion;
g. Shares of stocks in another corporation;
h. Other generally accepted form of
consideration.
• Shares of stocks and generally
accepted form of consideration are
 NEW considerations added by the
Revised Corporation Code.
• Promissory notes or future services are
NOT valid considerations.
• Corporation cannot off-set the unpaid
subscription with the unpaid salaries
of the share-holder employee.
Considerations provided above applies to
bonds.
e. Articles of Incorporation
The articles of incorporation of every duly
registered corporation constitutes as its
charter and the basis to judgment whether it
exists for legal purposes (Villanueva, Philippine
Corporate Law, p. 184).
The best proof of the purpose of a corporation
is its articles of incorporation and by-laws.
The articles of incorporation must state the
primary and secondary purposes of the
corporation, while the by-laws outline the
administrative organization of the
corporation, which, in turn, is supposed to
insure or facilitate the accomplishment of said
purpose (Gala v. Ellice Agro-Industrial Corp.,
418 SCRA 431)
Bar 2011: The Articles of Incorporation must be
accompanied by a Treasurer’s Affidavit
certifying under oath, among others, that the
total subscription paid is:
a. Not less than P25,000.00
b. Not more than P5,000.00
c. Not less than P5,000.00
d. Not more than P25,000.00
Suggested Answer:
c. Not less than P5,000.00
23
i. Contents
The Articles of Incorporation must
substantially contain the following matters,
except as otherwise prescribed by the
Corporation Code or by special law:
a. The name of the corporation;
b. The specific purpose or purposes for
which the corporation is being formed.
Where a corporation has more than one
stated purpose, the articles of
incorporation shall indicate the primary
purpose and the secondary purpose or
purposes: Provided, That a non-stock
corporation may not include a purpose
which would change or contradict its
nature as such;
c. The place where the principal office of
the corporation is to be located, which
must be within the Philippines;
d. The term for which the corporation is to
exist, if the corporation has not elected
perpetual existence;
e. The names, nationalities, and residence
addresses of the incorporators;
f. The number of directors, which shall not
be more than fifteen (15) or the number
of trustees which may be more than
fifteen (15);
g. The names, nationalities, and residence
addresses of persons who shall act as
directors or trustees until the first
regular directors or trustees are duly
elected and qualified in accordance with
this Code;
h. If it be a stock corporation, the amount
of its authorized capital stock, number of
 shares into which it is divided, the par
value of each, names, nationalities, and
residence addresses of the original
subscribers, amount subscribed and paid
by each on the subscription, and a
statement that some or all of the shares
are without par value, if applicable;
i. If it be a nonstock corporation, the
amount of its capital, the names,
nationalities, and residence addresses of
the contributors, and amount
contributed by each; and
j. Such other matters consistent with law
and which the incorporators may deem
necessary and convenient (Sec. 13,
RCCP).
ii. Non-Amendable Items
The SEC rules that there are certain portions
in the articles of incorporation which are
beyond the power of the stockholders or
members to alter or change, because they are
accomplished facts (‘fait accompli’) at the time
of incorporation. Such items would include
the following:
a. Names of incorporators;
b. Names of the incorporating
director/trustees;
c. Names of the original subscribers to the
capital stock of the corporation and their
subscribed and paid-up capital;
d. The Treasurer-in-trust elected by the
original subscribers;
e. Member who contributed to the initial
capital of a non-stock corporation;
f. Witnesses and acknowledgement thereof
(SEC Opinions dated July 10, 1990, Mr.
Rodrigo A. Deloso; July 9, 1990, Mr. Eugenio
S. Noriego; July 31, 1979, Mr. H.A. Reyes;
May 24, 1983, Luzviminda Padilla)
24
f. Corporate Name; Limitations on the Use
of Corporate Name
1. No corporate name may be allowed by the
Securities and Exchange Commission if
the proposed name is identical or
deceptively or confusingly similar to that
of any existing corporation or to any other
name already protected by law or is
patently deceptive, confusing or contrary
to existing laws. When a change in the
corporate name is approved, the
Commission shall issue an amended
certificate of incorporation under the
amended name (Sec. 18, Corporation Code;
see also SEC Memorandum No. 14, series of
2000 and SEC Memorandum 21, series of
2013).
2. To come within its scope, two requisites
must be proven, namely:
a. that the complainant corporation
acquired a prior right over the use of
such corporate name; and
b. the proposed name is either:
i. identical; or
ii. deceptively or confusingly similar
to that of any existing corporation
or to any other name already
protected by law; or
iii. patently deceptive, confusing or
contrary to existing law (Philips
Export B.V. v. Court of Appeals, 206
SCRA 457).
Bar 2011 : A, the proprietor of a fleet of 10
taxicabs, decides to adopt, as his business name,
“A Transport Co., Inc.” May this be allowed?
a. No, it would be deceptive since he is a
proprietor, not a corporation.
b. No, since “A” is a generic name, not suitable
for registration.
c. Yes, since his line of business is public
 transportation.
d. Yes, since such name would give his business
a corporate identity.
Suggested Answer:
a. No, it would be deceptive since he is a
proprietor, not a corporation.
3. Doctrine of Secondary Meaning - A word
or phrase originally incapable of exclusive
appropriation with reference to an article
on the market, because geographically or
otherwise descriptive, might nevertheless
have been used so long and so exclusively
by one producer with reference to his
article that, in that trade and to that
branch of the purchasing public, the word
or phrase has come to mean that the
article was his product (Lyceum of the
Philippines v. Court of Appeals, 219 SCRA
610).
4. As regards the first requisite, it has been
held that the right to the exclusive use of a
corporate name with freedom from
infringement by similarity is determined
by priority of adoption (Industrial
Refractories Corp. v. Court of Appeals, 390
SCRA 252).
5. In other words, while the appellant may
have proved that it had been using the
word 'Lyceum' for a long period of time,
this fact alone did not amount to mean
that the said word had acquired
secondary meaning in its favor because
the appellant failed to prove that it had
been using the same word all by itself to
the exclusion of others. More so, there was
no evidence presented to prove that
confusion will surely arise if the same
word were to be used by other
educational institutions (Lyceum of the
Philippines v. Court of Appeals, 219 SCRA
610).
25
6. Anent the second requisite, in determining
the existence of confusing similarity in
corporate names, the test is whether the
similarity is such as to mislead a person
using ordinary care and discretion and the
Court must look to the record as well as
the names themselves (Ibid).
7. The jurisdiction of the SEC is not merely
confined to the adjudicative functions
provided in Section 5 of P.D. 902-A, as
amended. By express mandate, it has
absolute jurisdiction, supervision and
control over all corporations. It also
exercises regulatory and administrative
powers to implement and enforce the
Corporation Code, one of which is Section
18 xxx. It is the SEC’s duty to prevent
confusion in the use of corporate names
not only for the protection of the
corporations involved but more so for the
protection of the public, and it has
authority to de-register at all times and
under all circumstances corporate names
which in its estimation are likely to
generate confusion. Clearly therefore, the
present case falls within the ambit of the
SEC’s regulatory powers (Ibid).
8. The effect of the change of name was not a
change in corporate being. The changing
of the name of a corporation is no more
the creation of a corporation than the
changing of the name of a natural person
is begetting of a natural person. There is
only a change of name, and not of being
(Philippine First Insurance Co., Inc. v.
Hartigan, 34 SCRA 252).
9. The name of a dissolved firm shall not be
allowed to be used by other firms within
three (3) years after the approval of the
dissolution of the corporation by the
Commission, unless allowed by the last
stockholders representing at least majority
 of the outstanding capital stock of the
dissolved firm (Indian Chamber of
Commerce Phils., Inc. v. Filipino Indian
Chamber of Commerce in the Phils., G .R. No.
184008, August 3, 2016).
g. Registration, Incorporation and
Commencement of Corporate Existence
1. A person or group of persons desiring to
incorporate shall submit the intended
corporate name to the Commission for
verification. If the Commission finds that
the name is distinguishable from a name
already reserved or registered for the use
of another corporation, not protected by
law and not contrary to law, rules and
regulations, the name shall be reserved in
favor of the incorporators. The
incorporators shall then submit their
articles of incorporation and bylaws to the
Commission.
2. If the Commission finds that the
submitted documents and information are
fully compliant with the requirements of
this Code, other relevant laws, rules and
regulations, the Commission shall issue
the certificate of incorporation.
3. A private corporation organized under
this Code commences its corporate
existence and juridical personality from
the date the Commission issues the
certificate of incorporation under its
official seal and thereupon the
incorporators, stockholders/members and
their successors shall constitute a body
corporate under the name stated in the
articles of incorporation for the period of
time mentioned therein, unless said
period is extended or the corporation is
sooner dissolved in accordance with law
(Sec. 18, RCCP).
26
4. If a corporation does not formally
organize and commence its business
within five (5) years from the date of its
incorporation, its CERTIFICATE OF
INCORPORATION SHALL BE DEEMED
REVOKED as of the day following the end
of the five-year period.
However, if a corporation has commenced
its business but subsequently becomes
inoperative for a period of at least five (5)
consecutive years, the Commission may,
after due notice and hearing, place the
corporation under delinquent status. (Sec.
21, RCCP).
Bar 2014: A corporation organized under the
Corporation Code commences to have
corporate existence and juridical personality
and is deemed incorporated:
a. From the date the application for
incorporation is filed with the SEC.
b. From the date the SEC issues a certificate of
incorporation under its official seal.
c. 30 days after the date the application for
incorporation is filed with the SEC.
d. 30 days after the date the SEC issues a
certificate of incorporation under its official
seal.
Suggested Answer:
b. From the date the SEC issues a certificate of
incorporation under its official seal.
Bar 2014: Guetze and his wife have 3 children:
Neymar, 25, who is now based in Rio de
Janeiro, Brazil; Muelter, 23, who has migrated
to Munich, Germany; and James, 21, who
resides in Bogota, Colombia. Neymar and
Muelter have since renounced their Philippine
citizenship in favor of their country of
residence. Nearing 70 years old, Guetze
decided to incorporate his business in
Binondo, Manila. He asked his wife and 3
children to act as incorporators with 1 share of
stock each, while he owned 999,996 shares of
the 1,000,000 shares of the capital stock.
 Assuming all other requirements are met,
should the SEC accept or reject the Articles of
Incorporation? Why?
Suggested Answer:
Yes, the SEC should accept the Articles of
Incorporation. If the Articles of Incorporation
substantially comply with the statute and all
other requirements are met, the SEC has no
discretion, but may be compelled by
mandamus to file them. The discretion
exercised by SEC does not extend to the merits
of an application for incorporation, although it
may be exercised as to matters of form.
h. Election of Directors or Trustees
1. Except when the exclusive right is
reserved for holders of founders’ shares
under Section 7 of this Code, each
stockholder or member shall have the
right to nominate any director or trustee
who possesses all of the qualifications and
none of the disqualifications set forth in
this Code
2. At all elections of directors or trustees,
there must be present, either in person or
through a representative authorized to act
by written proxy, the owners of majority
of the outstanding capital stock, or if there
be no capital stock, a majority of the
members entitled to vote. When so
authorized in the bylaws or by a majority
of the board of directors, the stockholders
or members may also vote through remote
communication or in absentia: Provided,
That the right to vote through such modes
may be exercised in corporations vested
with public interest, notwithstanding the
absence of a provision in the by-laws of
such corporations.
27
A stockholder or member who
participates through remote
communication or in absentia, shall be
deemed present for purposes of quorum.
(Sec. 23, RCCP)
3. The following are certain principles in
connection with the election of the
members of the board:
a. During the meeting in which the
election shall be held, the owners of
the majority of the outstanding capital
stock must be present either in person
or by proxy. In case of a non-stock
corporation, majority of the members
entitled to vote must be present;
b. Voting through remote communication
or in absentia is possible provided it is
authorized in the bylaws or by a
majority of the board of directors or
election is by ballot if requested by any
voting stockholder or member;
c. In stock corporations, cumulative
voting shall be observed; and
d. The candidates receiving the highest
number of votes shall be elected (Sec.
23, Corporation Code).
4. In stock corporations, stockholders
entitled to vote shall have the right to vote
the number of shares of stock standing in
their own names in the stock books of the
corporation at the time fixed in the bylaws
or where the bylaws are silent, at the time
of the election. The said stockholder may:
a. vote such number of shares for
as many persons as there are
directors to be elected;
b. cumulate said shares and give
one (1) candidate as many votes
as the number of directors to be
elected multiplied by the
number of the shares owned; or
 c. distribute them on the same
principle among as many
candidates as may be seen fit:
Provided, That the total number
of votes cast shall not exceed the
number of shares owned by the
stockholders as shown in the
books of the corporation
multiplied by the whole number
of directors to be elected:
Provided, however, That no
delinquent stock shall be voted.
5. Unless otherwise provided in the articles
of incorporation or in the bylaws,
members of nonstock corporations may
cast as many votes as there are trustees to
be elected but may not cast more than one
(1) vote for one (1) candidate. Nominees
for directors or trustees receiving the
highest number of votes shall be declared
elected.
6. IF NO ELECTION IS HELD, or the owners
of majority of the outstanding capital
stock or majority of the members entitled
to vote are not present in person, by
proxy, or through remote communication
or not voting in absentia at the meeting,
such meeting may be adjourned and the
corporation shall proceed in accordance
with Section 25 of this Code (Sec. 23,
RCCP).
Bar 2011: EFG Foundation, Inc., a non-profit
organization, scheduled an election for its six
member Board of Trustees. X, Y and Z, who are
minority members of the foundation, wish to
exercise cumulative voting in order to protect
their interest, although the Foundation’s Articles
and By-laws are silent on the matter. As toeach
of the three, what is the maximum number of
votes that he/she can cast?
a. 6
b. 9
c. 12
28
d. 3
Suggested Answer:
a. 6
Bar 2012: The term 1 year of the Board of
Directors of AAA Corporation expired last
February 15, 2012. No new election of the Board
of Directors was called, hence, the existing
members of the Board continue as Directors in
hold over capacity. Which statement is most
accurate?
a. This is allowed provided there is a valid and
justifiable reason for not calling for an election
of the new members of the Board;
b. This is not allowed because the term of the
directors must only be for a period of 1 year;
c. The positions of the members of the Board of
Directors will be automatically declared vacant;
d. Acting as member of the Board of Directors in
a hold over capacity must be ratified by the
stockholders.
Suggested Answer:
a. This is allowed provided there is a valid and
justifiable reason for not calling for an election
of the new members of the Board.
7. Any provision in the by-laws or the
practice of the corporation giving a
stockholder a permanent seat in the board
of directors or trustees would be against
the provisions of Sections 27 and 28 of the
Revised Corporation Code, which require
members of the board of corporation to be
elected.
Bar 2013: In the November 2010 stockholder’s
meeting of Greenville Corporation, 8 directors
were elected to the board. The directors
assumed their posts in January 2011. Since no
stockholders’ meeting was held in November
2011, the 8 directors served in a holdover
capacity and thus continued discharging their
powers. In June 2012, 2 of Greenville
Corporation’s directors—Director A and
Director B— resigned from the board. Relying
on Section 29 of the Corporation Code, the
remaining 6 directors elected 2 new directors
to fill in the vacancy caused by the resignation
of Directors A and B. Stockholder X questioned
the election of the new directors, initially,
through a letter-complaint addressed to the
board, and later (when his letter-complaint
went unheeded), through a derivative suit
filed with the court. He claimed that the
vacancy in the board should be filled up by the
vote of the stockholders of Greenville
Corporation. Greenville Corporation’s
directors defended the legality of their action,
claiming as well that Stockholder X’s
derivative suit was improper.
Rule on the issued raised.
Suggested Answer:
The remaining directors cannot elect new
directors to fill in the two vacancies. The board
of directors may fill up vacancy only if the
ground is not due to expiration of term,
removal or increase in the number of board
seats. In this case, the term of the two directors
expired after 1 year. They remained in office in
a hold-over capacity only until their
resignation. The hold-over period is not part of
their term. The vacancies should be filled up
by election by the stockholders. The derivative
suit was improper. In a derivative suit, the
corporation, not the individual stockholder,
must be the aggrieved party and that the
stockholder is suing on behalf of the
corporation. What stockholder X is asserting is
his individual right as a stockholder to elect
the two directors. The case partakes more of an
election contest under the rules on intra-
corporate controversy.
Bar 2014: To constitute a quorum for the
transaction of corporate business, only a
majority of the number of Board of Directors is
required:
a. As fixed by the corporate by-laws
b. As fixed in the articles of incorporation
c. Actually serving in the board
29
d. Actually serving in the board but
constituting a quorum
Suggested Answer:
b. As fixed in the articles of incorporation
i. Adoption of By-laws
1. By-laws are rules and regulations or
private laws enacted by the corporation to
regulate, govern and control its own
actions, affairs and concerns and of its
stockholders or members and directors
and officers in relation thereto and among
themselves in their relation to it, by-laws
are indispensable to corporations in this
jurisdiction. These may not be essential to
corporate birth but certainly these are
required by law for an orderly governance
and management of corporations.
Nonetheless, failure to file them within the
period required by law by no means tolls
the automatic dissolution of a corporation.
By-laws may be necessary for the
"government" of the corporation but these
are subordinate to the articles of
incorporation as well as to the
Corporation Code and related statutes.
There are in fact cases where by-laws are
unnecessary to corporate existence or to
the valid exercise of corporate powers
(Loyola Grand Villas Homeowners [South]
Association vs. Court of Appeals, 276 SCRA
681; See also Ching v. Quezon City Sports
Club, Inc., G.R. No. 200150, November 7,
2016).
2. For the adoption of bylaws by the
corporation, the affirmative vote of the
stockholders representing at least a
majority of the outstanding capital stock,
or of at least a majority of the members in
 case of nonstock corporations, shall be
necessary (Sec. 45, RCCP).
A corporation which has failed to file its
by-laws within the prescribed period does
not ipso facto lose its powers as such, and
may be considered a de facto corporation
whose right to exercise corporate powers
may not be inquired into collaterally in
any private suit to which such
corporations may be a party (Sawadjaan vs.
Court of Appeals, 459 SCRA 516).
3. By-laws may be adopted in two ways, to
wit:
a. By filing the by-laws prior to
incorporation; or
b. By filing the by-laws after
incorporation.
In the first, it is required that such by-laws
be approved and signed by all the
incorporators and submitted to the SEC,
together with the articles of incorporation.
In the second, the affirmative vote of the
stockholders representing at least a
majority of the outstanding capital stock,
or of at least a majority of the members in
case of non-stock corporations, shall be
necessary (Sec. 45, RCCP).
Since by-laws operate merely as internal
rules among the stockholders, they cannot
affect or prejudice third persons that deal
with the corporation, unless, they have
knowledge of the same (PMI College vs.
NLRC, 277 SCRA 462).
(i). Contents of By-Laws
A private corporation may provide the
following in its bylaws:
30
a) The time, place and manner of calling
and conducting regular or special
meetings of the directors or trustees;
b) The time and manner of calling and
conducting regular or special meetings
and mode of notifying the stockholders
or members thereof;
c) The required quorum in meetings of
stockholders or members and the
manner of voting therein;
d) The modes by which a stockholder,
member, director, or trustee may
attend meetings and cast their votes
(newly inserted);
e) The form for proxies of stockholders
and members and the manner of
voting them;
f) The directors’ or trustees’
qualifications, duties and
responsibilities, the guidelines for
setting the compensation of directors
or trustees and officers, and the
maximum number of other board
representations that an independent
director or trustee may have which
shall, in no case, be more than the
number prescribed by the
Commission;
g) The time for holding the annual
election of directors or trustees and the
mode or manner of giving notice
thereof;
h) The manner of election or appointment
and the term of office of all officers
other than directors or trustees;
i) The penalties for violation of the
bylaws;
j) In the case of stock corporations, the
manner of issuing stock certificates;
and
k) Such other matters as may be
necessary for the proper or convenient
transaction of its corporate affairs for
the promotion of good governance and
anti-graft and corruption measures.

An arbitration agreement may be provided in
the bylaws pursuant to Section 181 of this
Code (Sec. 46, RCCP).
(ii). Binding Effects
In all cases, by-laws shall be effective only
upon the issuance by the Securities and
Exchange Commission of a certification that
the by-laws are not inconsistent with this
Code.
(iii). Amendment or Revision
1. A majority of the board of directors or
trustees, and the owners of at least a
majority of the outstanding capital stock,
or at least a majority of the members of a
nonstock corporation, at a regular or
special meeting duly called for the
purpose, may amend or repeal the bylaws
or adopt new bylaws. The owners of two
thirds (2/3) of the outstanding capital
stock or two thirds (2/3) of the members in
a non-stock 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.
2. 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
31
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.
3. The amended or new bylaws shall only be
effective upon the issuance by the
Commission of a certification that the
same is in accordance with this Code and
other relevant laws (Sec. 47,RCCP).
4. The power to adopt the first original by-
laws cannot be delegated to the board of
directors or trustees. Only the power to
adopt new by-laws that will supplant the
old by-laws can be validly delegated
(Villanueva, Commercial Law Review, 2009
Ed., p. 603).
Bar 2011: In a special meeting called for the
purpose, 2/3 of the stockholders representing
the outstanding capital stock in X Co.
authorized the company’s Board of Directors
to amend its By-laws. By majority vote, the
Board then approved the amendment. Is the
amendment valid?
a. No, since the stockholders cannot delegate
their right to amend the By-laws to the Board.
b. Yes, since the majority votes in the Board
was sufficient to amend the Bylaws.
c. No, because, the voting in the Board should
have been by a majority of a quorum.
d. Yes, since the votes of 2/3 of the
stockholders and majority of the Board were
secured.
Suggested Answer:
a. No, since the stockholders cannot delegate
their right to amend the By-laws to the Board.
j. Effects of Non-Use of Corporate
Character
1. If a corporation does not formally
organize and commence its business
 within five (5) years from the date of its
incorporation, its certificate of
incorporation shall be deemed revoked as
of the day following the end of the five-
year period.
2. DELINQUENT CORPORATION.
However, if a corporation has commenced
its business but subsequently becomes
inoperative for a period of at least five (5)
consecutive years, the Commission may,
after due notice and hearing, place the
corporation under delinquent status.
A delinquent corporation shall have a
period of two (2) years to resume
operations and comply with all
requirements that the Commission shall
prescribe. Upon compliance by the
corporation, the Commission shall issue
an order lifting the delinquent status.
Failure to comply with the requirements
and resume operations within the period
given by the Commission shall cause the
revocation of the corporation’s certificate
of incorporation.
3. The Commission shall give reasonable
notice to, and coordinate with the
appropriate regulatory agency prior to the
suspension or revocation of the certificate
of incorporation of companies under their
special regulatory jurisdiction (Sec. 21,
RCCP).
7. Corporate Powers
a. General Powers;
Theory of General Capacity
1. The term ‘power of a corporation’ has
reference to the corporation’s capacity or
right under its charter and laws to do
certain things (6 Fletcher, p. 230).
32
2. An individual has absolute right to fully
use, enjoy and dispose of his properties, to
perform all acts and to make all contracts
without any control except when they are
forbidden by law. Since a natural person
and an ordinary partnership do not owe
their existence to the State, they can
perform an act not prohibited by law (De
Leon, Corporation Code of the Philippines
Annotated, p. 266).
b. Specific Powers;
Theory of Specific Capacity
A corporation has no power except those
expressly conferred on it by the Corporation
Code and those that are implied or incidental
to its existence. (Premium Marble Resources,
Inc. v. CA, 264 SCRA 11).
a) Express Powers – Those expressly
granted or authorized by law (Sec. 2,
RCC. For example, those powers
which are conferred by the Revised
Corporation Code under Sections 35,
37, 38, 39, 40, 41, 42, and 43.
b) Implied or Necessary Powers –
Powers which are reasonably
necessary to execute the express
powers and to accomplish or carry
out the purpose for which the
corporation was formed (De Leon,
Corporation Code Annotated, p. 268; See
Sec. 35(k), Revised Corporation Code).
c) Incidental Powers – Powers which a
corporation can exercise by mere fact
of its being a corporation and are,
therefore, impliedly granted. As
powers inherent in the corporation as
a legal entity incidental powers exist
independently of the express powers
(De Leon, Corporation Code Annotated,
p. 270; See Secs 2 & 44, Revised
Corporation Code)
 c. Power to extend or shorten corporate
term
1. A private corporation may extend or
shorten its term as stated in the articles
of incorporation 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 two-thirds (2/3) of the outstanding
capital stock or of its members. Written
notice of the proposed action and the
time and place of the meeting shall be
sent to stockholders or members at their
respective place of residence as shown in
the books of the corporation, and must
either be deposited to the addressee in
the post office with postage prepaid,
served personally, or when allowed in
the by-laws or done with the consent of
the stockholder, sent electronically in
accordance with the rules and
regulations of the Commission on the
use of electronic data messages. In case
of extension of corporate term, a
dissenting stockholder may exercise the
right of appraisal under the conditions
provided in this Code. (Sec. 36, RCCP).
2. Since the privilege of extension is purely
statutory, all of the statutory conditions
precedent must be complied with in
order that the extension may be
effectuated. And, generally these
conditions must be complied with, and
the steps necessary to effect the
extension must be taken, during the life
of the corporation, and before the
expiration of the term of existence as
original fixed by its charter or the
general law, since, as a rule, the
corporation is ipso facto dissolved as soon
as that time expires (Alhambra Cigar &
Cigarette Manufacturing Co., Inc. vs.
Securities and Exchange Commission, 24
33
SCRA 269citing 8 Fletcher, Cyclopedia
Corporations, Perm, ed., 1931, pp. 559-560).
3. The filing and recording of a certificate
of extension after that time cannot relate
back to the date of the passage of a
resolution by the stockholders in favor
of the extension so as to save the life of
the corporation (Ibid).
4. The contrary is true, however, and the
doctrine of relation will apply, where the
delay is due to the neglect of the officer
with whom the certificate is required to
be filed, or to a wrongful refusal on his
part to receive it (Ibid).
Bar 2011: The corporate term of a stock
corporation is that which is stated in its
Articles of Incorporation. It may be extended
or shortened by an amendment of the Articles
when approved by majority of its Board of
Directors and:
a. Approved and ratified by at least 2/3 of all
stockholders
b. Approved by at least 2/3 of the stockholders
representing the outstanding capital stock.
c. Ratified by at least 2/3 of all stockholders.
d. Ratified by at least 2/3 of the stockholders
representing the outstanding capital stock.
Suggested Answer:
d. Ratified by at least 2/3 of the stockholders
representing the outstanding capital stock.
Bar 2011: T Corp. has a corporate term of 20
years under its Articles of Incorporation or
from June 1, 1980 to June 1, 2000. On June 1,
1991 it amended its Articles of Incorporation to
extend its life by 15 years from June 1, 1980 to
June 1, 2015. The SEC approved this
amendment. On June 1, 2011, however, T
Corp. decided to shorten its term by 1 year or
until June 1, 2014. Both the 1991 and 2011
amendments were approved by majority vote
of its Board of Directors and ratified in a
special meeting by its stockholders
 representing at least 2/3 of its outstanding
capital stock. The SEC, however, disapproved
the 2011 amendment on the ground that it
cannot be made earlier than 5 years prior to the
expiration date of the corporate term, which is
June 1, 2014. Is this SEC disapproval correct?
a. No, since the 5-year rule on amendment of
corporate term applies only to extension, not
shortening, of term.
b. Yes, any amendment affecting corporate
term cannot be made earlier than
5 years prior to the corporation’s expiration
date.
c. No, since a corporation can in fact have a
corporate life of 50 years.
d. Yes, the amendment to shorten corporate
term cannot be made earlier than
5 years prior to the corporation’s expiration
date.
Suggested Answer:
a. No, since the 5-year rule on amendment of
corporate term applies only to extension, not
shortening, of term.
d. Power to increase or decrease capital
stock or incur, create or increase bonded
indebtedness
No corporation shall increase or decrease its
capital stock or incur, create or increase any
bonded indebtedness unless approved by a
majority vote of the board of directors and by
two-thirds (2/3) of the outstanding capital
stock at a stockholders’ meeting duly called
for the purpose. Written notice of the time
and place of the stockholders’ meeting and
the purpose for said meeting must be sent to
the stockholders at their places of residence as
shown in the books of the corporation and
served on the stockholders personally, or
through electronic means recognized in the
corporation’s bylaws and/or the
Commission’s rules as a valid mode for
service of notices.
34
Non-stock corporations may incur or create
bonded indebtedness, or increase the same,
with the approval by a majority vote of the
board of trustees and of at least two-thirds
(2/3) of the members in a meeting duly called
for the purpose (Sec. 37, RCCP).
Bar 2012: If ABC Corporation will increase its
authorized capital stock, the Corporation Code
requires—
a. The approval of the majority of the Board of
Directors only;
b. The approval of the majority of the
stockholders and the Board of Directors;
c. The approval of 2/3 of the shareholders of the
outstanding capital stock as well as the approval
of the SEC;
d. The approval of the majority of the Board of
Directors and approval of the shareholders
holding 2/3 share of the outstanding capital
stock.
Suggested Answer:
Examinees should be given full credit for
whatever answer they gave as the question is
vague.
e. Power to deny pre-emptive rights
1. Pre-emptive right refers to a
shareholder’s right to subscribe to all issues
or disposition of shares of any class in
proportion to his present stockholdings (Sec.
38, RCCP).
2. All stockholders of a stock corporation
shall enjoy pre-emptive right to subscribe to
all issues or disposition of shares of any class,
in proportion to their respective
shareholdings, unless such right is denied by
the articles of incorporation or an amendment
thereto (Sec. 38, RCCP).
3. The broad phrase “all issues or
disposition of shares of any class” in the
above provision is construed to include not
only new shares issued in pursuance of an
increase in capital stock or from the unissued
shares which form part of the authorized
capital stock, but also covers ‘treasury shares.’
Treasury shares would come under the term
‘disposition.’ Likewise, considering that it is
not included among the exceptions
enumerated therein, where pre-emptive right
shall not extend, the intention is to include it
in its application (See also SEC Opinion,
January 14, 1993, XXVI SEC Quarterly Bulletin
16 [No. 2, June 1993]).
4. In close corporations, the coverage is
clear and extends to re-issuance even of
treasury shares (Sec. 101, RCCP).
5. The pre-emptive right may be denied
by the articles of incorporation or by an
amendment thereto. Even if not denied, the
pre-emptive right does not exists in certain
cases like the following:
a. Shares issued in compliance with laws
requiring stock offerings or minimum
stock ownership by the public;
b. Shares issued in good faith with the
approval of stockholders representing
two-thirds (2/3) of the outstanding
capital stock; and
The broad phrase “all issues or disposition
of shares of any class” in the above
provision is construed to include not only
new shares issued in pursuance of an
increase in capital stock or from the
unissued shares which form part of the
authorized capital stock, but also covers
‘treasury shares.’ Treasury shares would
come under the term ‘disposition.’
Likewise, considering that it is not
included among the exceptions
enumerated therein, where pre-emptive
right shall not extend, the intention is to
35
include it in its application (See also SEC
Opinion, January 14, 1993, XXVI SEC
Quarterly Bulletin 16 [No. 2, June 1993]).
Bar 2019: In June 2018, DEF Corp. sent notices
to its stockholders informing them of the
corporation's issuance of new shares of stock.
The notice included a reminder that, pursuant to
DEF Corp.' s Articles of Incorporation, any
stockholder who fails to exercise his or her pre-
emptive right within three (3) weeks from
receipt of notice would be considered to have
waived the same.
Ms. Z, a stockholder of DEF Corp., failed to
exercise her pre-emptive right within the said
period. However, she claimed that she did not
validly waive her right to do so because a
waiver must be expressed in writing.
(a) Explain the concept of pre-emptive right
under the Corporation Code. (2 %)
Suggested answer:
A pre-emptive right is the shareholder’s right to
subscribe to all issues or disposition of shares of
any class in proportion to his present
stockholdings, the purpose being to enable the
stockholder to retain his proportionate control
in the corporation and to retain his equity in
surplus. (Sundiang and Aquino, p. 246)
Pre-emptive right is intended to protect both the
proprietary and voting rights of a stockholder in
a corporation. It allows him to retain and
maintain his proportionate interest in the
corporation, thus, preventing dilution of a
stockholder’s shareholdings in the corporation.
The pre-emptive right of stockholders, being a
common law right, is always available even if
not expressly granted or recognized.
(b) Is Ms. Z's contention correct? Explain. (3%)
Suggested answer:
Z’s contention is not correct. Pre-emptive right is
not absolute. It may be waived expressly or
impliedly. Failure of the stockholder to exercise
his right within the period set forth by the
corporation amounts to a waiver of pre-emptive
right.
Bar 2011: ABC Corp. increased its capital stocks
from P10 M to P15 M and, in the process, issued
1,000 new shares divided into Common Shares
 “B” and common shares “C”. T, a stockholder
owning 500 shares, insists on buying the newly
issued shares through a right of pre-emption.
The company claims, however, that its Bylaws
deny T any right of pre-emption. Is the
corporation correct?
a. No, since the by-laws cannot deny a
shareholder his right of preemption.
b. Yes, but the denial of his pre-emptive right
extends only to 500 shares.
c. Yes, since the denial of the right under the By-
laws is binding on T.
d. No, since pre-emptive rights are governed by
the articles of incorporation.
Suggested Answer:
a. No, since the by-laws cannot deny a
shareholder his right of pre-emption.
f. Power to sell or dispose of corporate
assets
1. Subject to the provisions of Republic Act
No 10667, otherwise known as “Philippine
Competition Act”, and other related laws,
a corporation may, by a majority vote of
its board of directors or trustees, sell,
lease, exchange, mortgage, pledge, or
otherwise dispose of its property and
assets, upon such terms and conditions
and for such consideration, which may be
money, stocks, bonds, or other
instruments for the payment of money or
other property or consideration, as its
board of directors or trustees may deem
expedient.
2. A sale of all or substantially all of the
corporation’s properties and assets,
including its goodwill must be authorized
by the vote of the stockholders
representing at least two-thirds (2/3) of the
outstanding capital stock, or at least two-
thirds (2/3) of the members, in a
36
stockholders’ or members’ meeting duly
called for the purpose.
3. In non-stock corporations where there are
no members with voting rights, the vote of
at least a majority of the trustees in office
will be sufficient authorization for the
corporation to enter into any transaction
authorized by this section.
4. The determination of whether or not the
sale involves all or substantially all of the
corporation’s properties and assets must
be computed based on its net asset value,
as shown in its latest financial statements.
A sale or other disposition shall be
deemed to cover substantially all the
corporate property and assets if thereby
the corporation would be rendered
incapable of continuing the business or
accomplishing the purpose for which it
was incorporated.
5. Written notice of the proposed action and
of the time and place for the meeting shall
be addressed to stockholders or members
at their places of residence as shown in the
books of the corporation and deposited to
the addressee in the post office with
postage prepaid, served personally, or
when allowed by the by-laws or done
with the consent of the stockholder, sent
electronically: Provided, That any
dissenting stockholder may exercise the
right of appraisal under the conditions
provided in this Code.
6. After such authorization or approval by
the stockholders or members, the board of
directors or trustees may, nevertheless, in
its discretion, abandon such sale, lease,
exchange, mortgage, pledge, or other
disposition of property and assets, subject
to the rights of third parties under any
contract relating thereto, without further
 action or approval by the stockholders or
members.
7. Nothing in this section is intended to
restrict the power of any corporation,
without the authorization by the
stockholders or members, to sell, lease,
exchange, mortgage, pledge, or otherwise
dispose of any of its property and assets if
the same is necessary in the usual and
regular course of business of the
corporation or if the proceeds of the sale
or other disposition of such property and
assets shall be appropriated for the
conduct of its remaining business. (Sec. 39,
RCCP).
8. Under these provisions (Sec. 23 and 36)
(now 22 and 35), the power to purchase
real property is vested in the board of
directors or trustees. While a corporation
may appoint agents to negotiate for the
purchase of real property needed by the
corporation, the final say will have to be
with the board, whose approval will
finalize the transaction. A corporation can
only exercise its powers and transact its
business through its board of directors
and through its officers and agents when
authorized by a board resolution or its by-
laws (Spouses Firme v. Bukal Enterprises and
Development Corporation, 414 SCRA 190).
9. Investments of a corporation in another
corporation in the form of shares of stock
constitute part of the assets or property of
the investor corporation, and cannot be
legally disposed of by mere endorsement
of the President, since such shares fall
within the disposition of properties being
part of the management power of the
Board of Directors (SEC Opinion, dated 21
August 1995, XXX SEC Quarterly Bulletin
12 (No. 1, June 1996, in Villanueva,
Philippine Corporate Law, p. 232).
37
10. Contracts or acts of a corporation must be
made either by the board of directors or
by a corporate agent duly authorized by
the board. Absent such valid
delegation/authorization, the rule is that
the declarations of an individual director
relating to the affairs of the corporation,
but not in the course of, or connected
with, the performance of authorized
duties of such director, are held not
binding on the corporation (AF Realty &
Development, Inc. v. Dieselman Freight
Services, Co., 373 SCRA 385).
g. Power to Acquire Own Shares
1. Provided that the corporation has
unrestricted retained earnings in its
books to cover the shares to be purchased
or acquired, a stock corporation shall
have the power to purchase or acquire its
own shares for a legitimate corporate
purpose or purposes, including the
following cases:
a. To eliminate fractional shares
arising out of stock dividends;
b. To collect or compromise an
indebtedness to the corporation,
arising out of unpaid
subscription, in a delinquency
sale, and to purchase delinquent
shares sold during said sale;
and
c. To pay dissenting or
withdrawing stockholders
entitled to payment for their
shares under the provisions of
this Code.
2. A corporation may re-acquire or
purchase its own stock under the
following conditions:
a. Its capital is not thereby impaired;
b. A legitimate and proper corporate
objective is advanced;
c. The condition of corporate affairs
warrants it;
d. The transaction is designed and carried
out in good faith;
e. There is intended and there results no
undue advantage to a few favored
stockholders at the expense of the
remainder;
f. The rights of creditors are not
jeopardized;
g. There must be unrestricted retained
earnings to acquire the same (SEC
Opinions dated 27 March 1995 [to Atty.
Marietta Turingan], 12 October 1992 [to
Mr. Lauris L. dela Pena], 11 September
1985 [to Tierra International Construction
Corporation] and 15 December 1982 [to
Trident Development Corporation]).
3. In contrast, Redeemable shares may be
issued by the corporation when
expressly provided in the articles of
incorporation. They are shares which
may be purchased by the corporation
from the holders of such shares upon
the expiration of a fixed period,
regardless of the existence of
unrestricted retained earnings in the
books of the corporation, and upon
such other terms and conditions stated
in the articles of incorporation and the
1. A private corporation may invest its funds
certificate of stock representing the
shares, subject to rules and regulations
issued by the Commission (Sec. 8,
RCCP).
4. The corporation may pay dissenting
stockholders who exercise their
appraisal right the value of their
shares. In doing so, the corporation
acquires its own shares (Sec. 81, RCCP).
38
Bar 2012: ABC Holdings Company, a Hong
Kong company, owns 10% of XYZ Bank.
Because of the peace and order situation in the
Philippines, ABC Holding Company wanted to
sell its shareholdings in XYZ Bank.
Unfortunately, nobody is interested to buy a
10% shareholdings in a bank. The board of
directors of XYZ Bank thought that it would be
a good idea to buy back the shares owned by
ABC Holding Company. Which statement is
most accurate?
a. Buying back the shares by XYZ Bank is
absolutely not allowed;
b. Buying back the shares may be allowed
provided it is with the approval of the
Monetary Board and disposed of within 6
months;
c. Buying back the shares may be allowed
provided such shares will be disposed of
within 10 years;
d. Buying back the shares may be done
anytime provided the Board of Directors will
approve the same.
Suggested Answer:
b. Buying back the shares may be allowed
provided it is with the approval of the
Monetary Board and disposed of within 6
months.
h. Power to invest corporate funds in
another corporation or business
in any other corporation or business or for
any purpose other than the primary
purpose for which it was organized when:
a. Approved by a majority of the board
of directors or trustees;
b. Ratified by the stockholders
representing at least two-thirds (2/3)
of the outstanding capital stock, or by
at least two thirds (2/3) of the
members in the case of non-stock
 corporations, at a stockholder's or
member's meeting duly called for the
purpose; and
c. There is prior written notice of the
proposed investment and the time
and place of the meeting shall be
addressed to each stockholder or
member at his place of residence and
deposited to the addressee by mail or
served personally (Sec. 41, RCCP).
2. Any dissenting stockholder shall have
appraisal right as provided for in the
Corporation Code (Ibid).
3. The approval of the stockholders or
members shall not be necessary where the
investment by the corporation is
reasonably necessary to accomplish its
primary purpose as stated in the articles of
incorporation (Sec. 41, RCCP).
4. The term “funds “under Section 42
includes any corporate property to be
used in the furtherance of the business,
and consequently when the property is
devoted in any business other than
pursuit of the primary purpose for which
the corporation was incorporated, it
would need the ratificatory vote of two-
thirds (2/3) of the outstanding capital
stock of the corporation (XXIX SEC
Quarterly Bulletin 2 No. 2, June 1995, in
Villanueva, Philippine Corporate Law, p. 260).
i. Power to declare dividends
1. The board of directors of a stock
corporation may declare dividends out of
the unrestricted retained earnings which
shall be payable in cash, in property, or in
stock to all stockholders on the basis of
outstanding stock held by them (Sec. 42,
RCCP).
39
2. Any cash dividends due on delinquent
stock shall first be applied to the unpaid
balance on the subscription plus costs and
expenses, while stock dividends shall be
withheld from the delinquent stockholder
until his unpaid subscription is fully paid
(Ibid).
3. No stock dividend shall be issued without
the approval of stockholders representing
not less than two-thirds (2/3) of the
outstanding capital stock at a regular or
special meeting duly called for the
purpose (Ibid).
4. Stock corporations are prohibited from
retaining surplus profits in excess of one
hundred (100%) percent of their paid-in
capital stock, except:
a. when justified by definite corporate
expansion projects or programs
approved by the board of directors; or
b. when the corporation is prohibited
under any loan agreement with any
financial institution or creditor,
whether local or foreign, from
declaring dividends without its/his
consent, and such consent has not yet
been secured; or
c. when it can be clearly shown that such
retention is necessary under special
circumstances obtaining in the
corporation, such as when there is
need for special reserve for probable
contingencies.
5. Where the financial statements of the
corporation show surplus profits in excess
of 100% of paid-up capital, it shall explain
by footnotes that the same has not been
declared as dividends; if the explanation is
not satisfactory, the SEC shall direct the
corporation to distribute the excess as
 dividends (Sec. 2, SEC Rules Governing the
Distribution of Excess Profits of Corporation).
6. Any declaration of dividends, whether
cash or stock, shall be reported to the SEC
within fifteen (15) days from the date of
declaration. For corporations whose
shares and securities are listed in the stock
exchange or registered and licensed under
the Securities Regulation Code, the report
shall be filed with the SEC before or
simultaneously with the release or
publication of the notice of declaration of
dividends to stockholders (Sec. 3, Ibid).
7. No bank or quasi-bank shall declare
dividends, if at the time of declaration:
a) Its clearing account with the Bangko
Sentral is overdrawn; or
b) It is deficient in the required liquidity
floor for government deposits for five
(5) or more consecutive days, or
c) It does not comply with the liquidity
standards/ratios prescribed by the
Bangko Sentral for purposes of
determining funds available for
dividend declaration; or
d) It has committed a major violation as
may be determined by the Bangko
Sentral (Sec. 57, General Banking Law of
2000).
Bar 2011: The rule is that no stock dividend
shall be issued without the approval of
stockholders representing at least 2/3 of the
outstanding capital stock at a regular or special
meeting called for the purpose. As to other
forms of dividends:
a. A mere majority of the entire Board of
Directors applies.
b. A mere majority of the quorum of the Board
of Directors applies.
c. A mere majority of the votes of stockholders
40
representing the outstanding capital stock
applies.
d. The same rule of 2/3 votes applies.
Suggested Answer:
b. A mere majority of the quorum of the Board
of Directors applies.
Bar 2015: DEF Corporation has retained
surplus profits in excess of 100% of its paid in
capital stock. However, it is unable to declare
dividends, because it had entered into a loan
agreement with a certain creditor wherein the
declaration of dividends is not allowed
without the consent of such creditor. If DEF
Corporation cannot obtain this consent; will it
be justified in not declaring dividends to its
stockholders? Explain.
Suggested Answer:
Yes. Stock corporations are prohibited from
retaining surplus profits in excess of 100% of
their paid-in capital stock except among
others, when the corporation is prohibited
under any loan agreement with any financial
institution or creditor; whether local or foreign,
from declaring dividends without the consent
of the creditor and such consent has not been
secured (Section 43 of the Corporation Code).
j. Power to enter into management contract
1. Management contract is an agreement
whereby a corporation undertakes to
manage or operate all or substantially all
of the business of another corporation,
whether such contracts are called service
contracts, operating agreements or
otherwise (Sec. 43, RCCP).
2. No corporation shall conclude a
management contract with another
corporation unless such contract shall
have been approved by the board of
directors or trustees (in case of a non-stock
 corporation) and ratified by stockholders
or members owning at least the majority
of the outstanding capital stock of both the
managing and the managed corporation,
at a meeting duly called for the purpose.
The management contract must be
approved by the stockholders of the
managed corporation owning at least two-
thirds (2/3) of the total outstanding capital
stock entitled to vote, or by at least two-
thirds (2/3) of the members in the case of a
non-stock corporation in the following
instances:
a. Where a stockholder or stockholders
representing the same interest of both
the managing and the managed
corporations own or control more than
one-third (1/3) of the total outstanding
capital stock entitled to vote of the
managing corporation; and
b. Where a majority of the members of
the board of directors of the managing
corporation also constitute a majority
of the members of the board of
directors of the managed corporation
(Ibid).
3. No management contract shall be entered
into for a period longer than five (5) years
for any one term (Sec. 43, RCCP).
Service contracts or operating agreements
which relate to the exploration, development,
exploitation or utilization of natural resources
may be entered into for such periods as may
be provided by the pertinent laws or
regulations (ibid).
k. Ultra vires doctrine
1. No corporation shall possess or exercise
corporate powers other than those
conferred by this Code or by its articles of
41
incorporation and except as necessary or
incidental to the exercise of the powers
conferred. (Sec. 44, RCCP).
2. An ultra vires act is one which although
not prohibited by law but which a
corporation cannot perform because it is
not within its expressed, implied or
incidental powers (Republic vs. Acoje
Mining Co., G.R. No. L-18062, Feb. 28,
1963).
3. Corporate acts that are outside those
express definitions under the law or
articles of incorporation or those
"committed outside the object for which a
corporation is created" are ultra vires. The
only exception to this rule is when the acts
are necessary and incidental to carry out a
corporation's purposes, and to the exercise
of powers conferred by the Corporation
Code and under a corporation's articles of
incorporation (University of Mindanao, Inc.
vs. BSP, G.R. No. 194964-65, January 11,
2016).
4. The term ultra vires include those that may
ostensibly be within corporate powers but
are, by general or special laws, prohibited
or declared illegal (Twin Towers
Condominium Corp. v. Court of Appeals, 446
Phil. 280).
5. An ultra vires act is not necessarily illegal
but an illegal act is always ultra vires; the
following summarizes the distinctions
between ultra vires acts vis-a-vis illegal
acts:
In sum, ultra vires act may be in the form
of the following:
a. Acts done beyond the powers of the
corporation as provided in the law or
its articles of incorporation;
 b. Acts or contracts entered into in behalf
of a corporation by persons who have
no corporate authority; and
c. Acts or contracts, which are per se
illegal as being contrary to law
(Villanueva, Philippine Corporate Law, p.
176).
6. Where the act is merely ultra vires and not
illegal, it may be ratified. A valid
ratification requires the concurrence of the
following elements:
a. The act to be ratified must be
consummated or already done;
b. The corporate creditors are not
prejudiced;
c. The rights of the State and the public
are not involved or affected; and
d. All the stockholders must give their
consent (Maria Carla vs. De la Rama
Steamship Co, Inc., December 29, 1954).
7. When a contract is not on its face
necessarily beyond the scope of power of
the corporation by which it was made, it
will, in the absence of proof to the
contrary, be presumed valid (Carlos v.
Mindoro Suger Co., 57 Phil. 343).
8. Ratification is a voluntary and deliberate
confirmation or adoption of a previous
unauthorized act. It converts the
unauthorized act of an agent into an act of
the principal. It cures the lack of consent at
the time of the execution of the contract
entered into by the representative, making
the contract valid and enforceable
(University of Mindanao, Inc. vs. BSP, G.R.
No. 194964-65, January 11, 2016).
9. The Doctrine of Apparent Authority is
determined by the acts of the principal
and not by the acts of the agent. As
applied to corporations, the doctrine of
apparent authority provides that "a
42
corporation is estopped from denying the
officer's authority if it knowingly permits
such officer to act within the scope of an
apparent authority, and it holds him out
to the public as possessing the power to
do those acts.” (Agro Food Processing
Corp. v. Vitarich Corp., G.R. No. 217454,
11 January 2021, J. Caguioa).
Applicability Of Ultra Vires Doctrine
1. The test to be applied is whether the act in
question is in direct and immediate
furtherance of the corporation’s business,
fairly incident to their exercise. If so, the
corporation has the power to do it ;
otherwise, not (Montelibano v. Bacolod-
Murcia Milling 1Co. 5 SCRA 36).
2. Who may invoke ultra vires?
a. State – Ultra vires acts, whether
otherwise wrong or not, are a breach of
the condition that when a State creates
a corporation, the grant of the charter
is on the implied condition that the
corporation shall act within the powers
conferred on it.
The State may proceed by quo warranto
to obtain a judgment merely ousting
the corporation from further exercise
of the unauthorized power (7 Fletecher,
p. 604-605; see Sec. 121). The SEC may
suspend or revoke the certificate of
registration of a corporation for
commission of ultra vires (see Sec. 6[1],
PD 902-A).
b. Stockholders, except when barred by
laches, participation in ultra vires acts,
or consented thereto, when
stockholder benefited from such act
(De Leon, Corporation Code of the
 Philippines Annotated, p. 377, citing 7
Fletcher, p. 600-6003).
c. Strangers – Except where it is
otherwise provided by statute, it is a
general rule, subject to certain
exceptions, that a plea of ultra vires
cannot be interposed by a stranger not
a party to the contract, at least if he is
not injured by such act or contract
(Ibid).
d. Competitors in business – A
competitor cannot attack acts of a
corporation as ultra vires, where such
acts are neither public nuisances or
trespasses. The only injury of which he
can be heard in a judicial tribunal to
complain is the invasion of some legal
or equitable right (Ibid, p. 378).
e. Creditors – Judgment creditors, may
impeach an ultra vires contract as in
fraud of creditors, the same as any
other contract. But creditors of the
corporation whose rights are not
infringed by the ultra vires contract
cannot attack it (Ibid).
3. When the doctrine cannot be invoked
when it would defeat the ends of justice or
work a legal wrong (Coleman v. Hotel de
France, 29 Phil. 323).
4. Defense of ultra vires cannot be set up or
availed of in completed transactions (7
Fletcher, p. 652).
Consequences of Ultra Vires Acts
An ultra vires contract, while executory on
both sides, cannot be enforced by either party
thereto (7 Fletcher, p. 607);
43
When an ultra vires contract has been fully
performed on both sides, neither party can
maintain an action to set aside the transaction
or to recover what has been parted with (De
Leon, Corporation Code of the Philippines
Annotated, p. 373).
When an ultra vires contract has been
performed on one side and the other received
benefits by reason of such performance,
recovery (or payment of reasonable value) is
permitted in most courts on behalf of the
former on the ground that it would be unjust
to sanction the retention of benefits coupled
with refusal to perform (Ibid, citing 7 Fletcher,
p. 620).
l. Doctrine of Individuality and
Indivisibility of Subscription
A subscription is one, entire and indivisible
whole contract even if two or more shares are
covered. The subscriber is not entitled to the
certificate for part or all of certificates covered
until full payment of the subscription price
plus interest and expenses in case of
delinquent shares (Sundiang, Sr. and Aquino,
Reviewer in Commercial Law, 2019 ed., p.282).
m. Doctrine of Equality of Shares
General Rule: Each share shall be equal in all
respects to every other share, EXCEPT as
otherwise provided in the articles of
incorporation and in the certificate of stock.
(Sec. 6, RCCP).
Section 6 of the Revised Corporation Code
authorizes the Board to “classify its shares for
the purpose of insuring compliance with
constitutional or legal requirements,” and
“when authorized by the articles of
incorporation, fix the terms and conditions of
preferred shares of stock or any series
thereof.” Section 6, however, contains a
proviso: “that such terms and conditions shall
be effective upon the filing of a certificate
thereof with the Securities and Exchange
Commission.” Thus, a preference or
restriction on shares may be valid and
effective only if the same has formally been
registered with the SEC and thereby becomes
public records binding on the public
(Villanueva).
n. Trust Fund Doctrine
Trust fund doctrine enunciates a rule that the
property of a corporation is a trust fund for
the payment of creditors, but such property
can be called a trust fund ‘only by way of
analogy or metaphor.’ As between the
corporation itself and its creditors it is a
simple debtor, and as between its creditors
and stockholders its assets are in equity a
fund for the payment of its debts (Halley vs.
Printwell, Inc., 649 SCRA 116, citing 42A,
Words and Phrases, Trust Fund Doctrine, p. 445,
citing McIver v. Young Hardware Co., 57 S.E.
169, 171, 144 N.C. 478, 119 Am. St. Rep. 970;
Gallagher v. Asphalt Co. of America, 55 A. 259,
262, 65 N.J. Eq. 258.).
Under the trust fund doctrine, a corporation
has no legal capacity to release an original
subscriber to its capital stock from the
obligation of paying for his shares, in whole
or in part, without a valuable consideration,
or fraudulently, to the prejudice of creditors
(Ibid).
The trust fund doctrine backstops the
requirement of unrestricted retained earnings
to fund the payment of the shares of stocks of
the withdrawing stockholders.
Under the doctrine, the capital stock,
property, and other assets of a corporation are
regarded as equity in trust for the payment of
44
corporate creditors, who are preferred in the
distribution of corporate assets. The creditors
of a corporation have the right to assume that
the board of directors will not use the assets
of the corporation to purchase its own stock
for as long as the corporation has outstanding
debts and liabilities.
There can be no distribution of assets among
the stockholders without first paying
corporate debts. Thus, any disposition of
corporate funds and assets to the prejudice of
creditors is null and void (Turner vs. Lorenzo
Shipping Corporation, 636 SCRA 13, G.R. No.
157479 November 24, 2010).
The Court recognized two instances when the
creditor is allowed to maintain an action
upon any unpaid subscriptions based on the
trust fund doctrine: (1) where the debtor
corporation released the subscriber to its
capital stock from the obligation of paying for
their shares, in whole or in part, without a
valuable consideration, or fraudulently, to the
prejudice of creditors; and (2) where the
debtor corporation is insolvent or has been
dissolved without providing for the payment
of its creditors. (Enano-Bote v. Alvarez, et.
al., G.R. No. 223572, 10 November 2020, J.
Caguioa).
Bar 2015: Define: Trust fund doctrine. (2015)
Suggested Answer:
By the trust fund doctrine subscriptions to the
capital stock of a corporation constitute a fund
to which the creditors have the right to look for
satisfaction of their claims. The scope of the
doctrine encompasses not only the capital
stock but also other property and assets
generally regarded in equity as a trust fund for
the payment of corporate debts (Halley v.
Printwell, GR No. 157549, May 30, 2011; Ong v.
Tiu, 401 SCRA 1).
 8. STOCKHOLDERS AND MEMBERS 5. Right to recover stocks unlawfully sold for
delinquent payment of subscription; and

a. Fundamental Rights of a Stockholder 6. Right to file individual suit, representative

suit, and derivative suit.
1. Direct or indirect participation in
NOTE:
management;
• It is well-settled that the ownership of
shares of stock gives stockholders the
2. Stockholders (whether with voting or non-
right under the law to be protected
voting shares) haves inherent right to vote
from possible mismanagement by its
for the:
officers (Terelay Investment and
Development Corporation vs. Cecilia
a. Amendment of the articles of
Teresita G.R. No. 160924, August 5,
incorporation;
2015).
b. Adoption and amendment of by-laws;
c. Sale, lease, exchange, mortgage, pledge
• A "stockholder of record" is defined as
or other disposition of all or
a person who desires to be recognized
substantially all of the corporate
as stockholder for the purpose of
property;
exercising stockholders' right and must
d. Incurring, creating or increasing
secure standing by having his
bonded indebtedness;
ownership of share recorded on the
e. Increase or decrease in the capital
stock and transfer book. Thus, only
stock;
those whose ownership of shares are
f. Merger or consolidation of corporation
duly registered in the stock and
or other corporations;
transfer book are considered
g. Investment of corporate funds in
stockholders of record and are entitled
another corporation or business in
to all rights of a stockholder (Guy v.
accordance with this Code; and
Guy, et al., G.R. No. 184068, April 19,
h. Dissolution of corporation (Sec. 6,
2016).
RCCP).

3. Right to elect (Sec. 23) and remove b. Participation in Management

directors or trustees (Sec. 27);

i. Proxy
4. Proprietary rights:

a. Right to dividends (Sec. 42, RCCP);
b. Appraisal right (Sec. 80, RCCP);
c. Pre-emptive right (Sec. 38, RCCP);
d. Right to inspect books and records
(Sec. 73, RCCP);
e. Right to be furnished with the most
recent financial statement (Secs. 73 &
74, RCCP);
PROXY - Stockholders and members may
vote in person or by proxy in all meeting of
stockholders or members.
When so authorized in the bylaws or by a
majority of the board of directors, the
stockholders or members of corporations may
also vote through remote communication or
in absentia: Provided, That the votes are

45
received before the corporation finishes the
tally of votes. Suggested Answer:

A stockholder or member who participates a. 10,000 shares

through remote communication or in
absentia, shall be deemed present for
purposes of quorum.

Proxies shall be in writing, signed by the

stockholder or member and filed before the
scheduled meeting with the corporate
secretary. Unless otherwise provided in the
proxy, it shall be valid only for the meeting
for which it is intended. No proxy shall be
valid and effective for a period longer than
five (5) years at any one time (Sec. 57, RCCP).

ii. Voting Trust

VOTING TRUST AGREEMENTS - One or

more stockholder 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 one time. However, the trustee
can also be voted as director.

If the voting trust was a requirement for a

loan agreement, period may exceed 5 years
but shall automatically expire upon full
payment of the loan (Sec. 58, RCCP).

Bar 2013: Dennis subscribed to 10,000 shares of

XYZ Corporation with a par value of 100 per
share. However, he paid only 25% of the
subscription or P250,000. No call has been
made on the unpaid subscription. How many
shares is Dennis entitled to vote at the annual
meeting of the stockholders of XYZ?

a. 10,000 shares;
b. 2,500 shares;
c. 100 shares;
d. 0 shares;
e. None of the above.

46
 iii. Cases When Stockholders’ Action is Required & Votes Required

Majority vote of All stockholder’s vote

2/3 vote of stockholders is required stockholders is required is required
a. Amendment of the articles of a. Election of directors or Ratification of ultra vires
incorporation (Sec. 15, RCCP); trustees (Sec. 23, RCCP); acts (Sec. 44, RCCP).
b. Removal of directors or trustees (Sec. b. Vacancies in the office
27, RCCP); of director or trustee
c. Dealings of directors, trustees or (Sec. 28, RCCP);
officers with the corporation (Sec. 31, c. Compensation of
RCCP); directors (Sec. 29,
d. Disloyalty of director (Sec. 33, RCCP); RCCP);
e. Power to extend or shorten corporate d. Power to enter into
term (Sec. 36, RCCP); management contract –
f. Power to increase or decrease capital proviso (Sec. 43, RCCP);
stock; incur, create or increase bonded e. Adoption of by-laws
indebtedness (Sec. 37, RCCP); (Sec. 45, RCCP); and
g. Sale or other disposition of asset (Sec. f. Amendment to by laws
39, RCCP); (Sec. 47, RCCP)
h. Power to invest corporate funds in
another corporation or business or for
any other purpose (Sec. 41, RCCP);
i. Power to declare dividends (Sec. 42,
RCCP);
j. Power to enter into management
contract (Sec. 43, RCCP);
k. Amendment to by-laws - delegation
(Sec. 47, RCCP);
l. Approval of merger or consolidation
plan (Sec. 76, RCCP); and
m. Voluntary dissolution where no
creditors are affected (Sec. 134, RCCP)
or where creditors are affected (Sec. 135,
RCCP).

Shareholders/members alone Board alone Shared

a. Election of directors or a. Unless otherwise a. Amendment of the Articles of

trustees (Sec. 22, RCCP);
b. Removal of directors or
trustees (Sec. 27, RCCP);
c. Compensation of directors
provided, the corporate Incorporation (Sec. 15, RCCP);
powers of all corporations
formed under the Code b. Power to extend or shorten
shall be exercised, all corporate term (Sec. 36, RCCP;
business conducted and
all property of such c. Power to increase or decrease

47
 (Sec. 29, RCCP); corporation controlled capital stock or incur, create or
and held by the Board increase bonded indebtedness
d. Dealings of directors, (Sec. 22, RCCP); and (Sec. 37, RCCP);
trustees or officers with
the corporation (Sec. 31, b. The directors or trustees d. Sale or other disposition of
RCCP); and officers to be elected assets (Sec. 39, RCCP);
shall perform the duties
e. Contracts between enjoined on them by law e. Power to invest corporate
corporations with and the by-laws of the funds in another corporation
interlocking directors (Sec. corporation (Sec. 24, or business or for any other
32, RCCP); RCCP). purpose (Sec. 41, RCCP);

f. Disloyalty of director (Sec. f. Power to declare dividends

33, RCCP); and (Sec. 42, RCCP); and

g. Adoption of by-laws (Sec. g. Power to enter into

45, RCCP) management contract (Sec. 43,
RCCP).

c. Proprietary Rights 4. Stock corporations are prohibited from

retaining surplus profits in excess of one
hundred (100%) percent of their paid-in
i. Right to Dividends capital stock, except:

d. when justified by definite corporate

1. The BOD of a stock corporation may
expansion projects or programs
declare dividends out of unrestricted
approved by the board of directors; or
retained earnings which shall be payable
e. when the corporation is prohibited
in cash, property, or in stock to all
under any loan agreement with any
stockholders on the basis of outstanding
financial institution or creditor,
stock held by them (Sec. 42, RCCP).
whether local or foreign, from
declaring dividends without its/his
2. Any cash dividends due on delinquent
consent, and such consent has not yet
stock shall first be applied to the unpaid
been secured; or
balance on the subscription plus costs and
f. when it can be clearly shown that such
expenses, while stock dividends shall be
retention is necessary under special
withheld from the delinquent stockholder
circumstances obtaining in the
until his unpaid subscription is fully paid
corporation, such as when there is
(Ibid).
need for special reserve for probable
contingencies.
3. No stock dividend shall be issued without
the approval of stockholders representing
5. Where the financial statements of the
not less than two-thirds (2/3) of the
corporation show surplus profits in excess
outstanding capital stock at a regular or
of 100% of paid-up capital, it shall explain
special meeting duly called for the
by footnotes that the same has not been
purpose (Ibid).

48
 declared as dividends; if the explanation is
not satisfactory, the SEC shall direct the
corporation to distribute the excess as
dividends (Sec. 2, SEC Rules Governing the
Distribution of Excess Profits of Corporation).
6. Any declaration of dividends, whether
cash or stock, shall be reported to the SEC
within fifteen (15) days from the date of
declaration. For corporations whose
shares and securities are listed in the stock
exchange or registered and licensed under
the Securities Regulation Code, the report
shall be filed with the SEC before or
simultaneously with the release or
publication of the notice of declaration of
dividends to stockholders (Sec. 3, Ibid).
7. No bank or quasi-bank shall declare
dividends, if at the time of declaration:
a. Its clearing account with the Bangko
Sentral is overdrawn; or
b. It is deficient in the required liquidity
floor for government deposits for five
(5) or more consecutive days, or
c. It does not comply with the liquidity
standards/ratios prescribed by the
Bangko Sentral for purposes of
determining funds available for
dividend declaration; or
d. It has committed a major violation as
may be determined by the Bangko
Sentral (Sec. 57, General Banking Law of
2000).
ii. Appraisal Right
a. When available
Any stockholder of a corporation shall have
the right to dissent and demand payment of
49
the fair value of the shares in the following
instances:
a. In case an amendment to the articles of
incorporation has the effect of
changing or restricting the rights of
any stockholder or class of shares, or of
authorizing preferences in any respect
superior to those of outstanding shares
of any class, or of extending or
shortening the term of corporate
existence;
b. In case of sale, lease, exchange,
transfer, mortgage, pledge or other
disposition of all or substantially all of
the corporate property and assets as
provided in this Code;
c. In case of merger or consolidation; and
d. In case of investment of corporate
funds for any purpose other than the
primary purpose of the corporation.
(Sec. 80, RCCP).
b. Manner of Exercise of Right
The dissenting stockholder who votes against
a proposed corporate action may exercise the
right of appraisal by making a WRITTEN
DEMAND on the corporation for the
payment of the fair value of shares held
within thirty (30) days from the date on
which the vote was taken: Provided, That
failure to make the demand within such
period shall be deemed a waiver of the
appraisal right.
If the proposed corporate action is
implemented, the corporation shall pay the
stockholder, upon surrender of the certificate
or certificates of stock representing the
stockholder’s shares, the fair value thereof as
of the day before the vote was taken,
excluding any appreciation or depreciation in
anticipation of such corporate action (Sec. 81,
RCCP).
Bar 2011: In case of disagreement between the
corporation and a withdrawing stockholder
who exercises his appraisal right regarding the
fair value of his shares, a three member group
shall by majority vote resolve the issue with
finality. May the wife of the withdrawing
stockholder be named to the three member
group?
a. No, the wife of the withdrawing shareholder
is not a disinterested person.
b. Yes, since she could best protect her
husband’s shareholdings.
c. Yes, since the rules do not discriminate
against wives.
d. No, since the stockholder himself should sit in
the three-member group.
Suggested Answer:
a. No, the wife of the withdrawing shareholder
is not a disinterested person.
Bar 2011: The rule is that valuation of the shares
of a stockholder who exercises his appraisal
rights is determined as of the day prior to the
date on which the vote was taken. This is true
a. Regardless of any depreciation or
appreciation in the share’s fair value.
b. Regardless of any appreciation in the share’s
fair value.
c. Regardless of any depreciation in the share’s
fair value.
d. Only if there is no appreciation or
depreciation in the share’s fair value.
Suggested Answer:
a. Regardless of any depreciation or
appreciation in the share’s fair value.
50
iii. Right to Inspect
1. 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 by-
laws of the corporation and all their
amendments;
b. The current ownership structure and
voting rights of the corporation,
including lists of stockholders or
members, group structures, intra-
group relations, ownership data, and
beneficial ownership;
c. The names and addresses of all the
members of the 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.
2. Corporate records, regardless of the form
in which they are stored, shall be open to
inspection by any director, trustee,
stockholder or member of the corporation
in person or by a representative at
reasonable hours on business days, and a
demand in writing may be made by such
director, trustee or stockholder at their
expense, for copies of such records or
excerpts from said records. xxx
A requesting party who is not a
stockholder or member of record, or is a
competitor, director, officer, controlling
stockholder or otherwise represents the
interests of a competitor shall have NO
RIGHT TO INSPECT or demand
reproduction of corporate records. xxx.
Any officer or agent of the corporation
who shall refuse to allow the inspection
and/or reproduction of records in
accordance with the provisions of this
Code shall be liable to such director,
trustee, stockholder or member for
damages, and in addition, shall be guilty
of an offense which shall be punishable
under Section 161 of this Code: Provided,
• That if such refusal is made
pursuant to a resolution or order of
the board of directors or trustees,
the liability under this section for
such action shall be imposed upon
the directors or trustees who voted
for such refusal:
• That it shall be a defense to any
action under this section that the
person demanding to examine and
copy excerpts from the
corporation’s records and minutes
has improperly used any
information secured through any
prior examination of the records or
minutes of such corporation or of
any other corporation, or was not
acting in good faith or for a
legitimate purpose in making the
demand to examine or reproduce
corporate records, or is a
competitor, 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 party may
report such to the Commission. Within
51
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. (Sec. 73, RCCP).
3. Rights of Stockholders; The Corporation
Code provides that a stockholder has the
right to inspect the records of all business
transactions of the corporation and the
minutes of any meeting at reasonable
hours on business days. The stockholder
may demand in writing for a copy of
excerpts from these records or minutes, at
his or her expense. (Philippine Associated
Smelting and Refining Corporation vs. Lim
G.R. No. 172948. October 5, 2016).
4. The right to inspect under Section 74 of
the Corporation Code is subject to certain
limitations. However, these limitations are
expressly provided as defenses in actions
filed under Section 74. Thus, this Court
has held that a corporation’s objections to
the right to inspect must be raised as a
defense: 2) the person demanding to
examine and copy excerpts from the
corporation’s records and minutes has not
improperly used any information secured
through any previous examination of the
records of such corporation; and 3) the
demand is made in good faith or for a
legitimate purpose. xxx Good faith and a
legitimate purpose are presumed. It is the
duty of the corporation to allege and
prove with sufficient evidence the facts
that give rise to a claim of bad faith as to
the existence of an illegitimate purpose.
The confidentiality of business
transactions is not a magical incantation
that will defeat the request of a
stockholder to inspect the records.
Although it is true that the business is
entitled to the protection of its trade
secrets and other intellectual property
 rights, facts must be pleaded to convince
the court that a specific stockholder’s
request for inspection, under certain
conditions, would violate the
corporation’s own legal right (ibid).
5. The submission that the stockholder's
"insignificant holding" of only .001% of the
corporation's stockholding did not justify
the granting of his/her application for
inspection of the corporate books and
records is unwarranted. The Corporation
Code has granted to all stockholders the
right to inspect the corporate books and
records, and in so doing has not required
any specific amount of interest for the
exercise of the right to inspect. Ubi lex non
distinguit nee nos distinguere debemos
(Terelay Investment and Development
Corporation vs. Cecilia Teresita G.R. No.
160924, August 5, 2015).
6. Section 74 (now 73) contemplates a
situation wherein a corporation, acting
thru one of its officers or agents, denies
the right of any of its stockholders to
inspect the records, minutes and the stock
and transfer book of such corporation. xxx
When what is sought to be enforced is the
proprietary right to be in possession of
such records and book, such right, though
certainly legally enforceable by other
means, cannot be enforced by a criminal
prosecution based on a violation of
Section 74 (Yujuico vs. Quiambao, G.R. No.
180416, June 2, 2014).
7. It shall be a defense to any action under
this section that the person demanding to
examine and copy excerpts from the
corporation's records and minutes has
improperly used any information secured
through any prior examination of the
records or minutes of such corporation or
of any other corporation, or was not acting
52
in good faith or for a legitimate purpose in
making his demand (Sec. 73, RCCP).
8. When the corporation denies the
stockholders of the right to inspect, the
latter could then go to court and enforce
their rights. It is then that the corporation
could set up its defenses and the reasons
for the denial of such right. Thus, the
proper remedy available for the
enforcement of the right of inspection is
undoubtedly the writ of mandamus to be
filed by the stockholders and not a
petition for injunction filed by the
corporation (Philippine Associated Smelting
and Refining Corp. vs. Lim, G.R. No. 172948,
October 5, 2016).
9. The right to inspect may be denied under
the following instances:
a. Obtaining of information as to
business secrets or to aid a competitor;
b. to secure business "prospects" or
investment or advertising lists;
c. to find technical defects in corporate
transactions in order to bring "strike
suits" for purposes of blackmail or
extortion (Terelay Investment and
Development Corp. vs. Yulo, G.R. No.
160924, August 5, 2015).
10. The right to inspect shall be available even
after the expiration of the corporate term.
Sections 122 and 145 of the Corporation
Code explicitly provide for the
continuation of the body corporate for
three years after dissolution. The rights
and remedies against, or liabilities of, the
officers shall not be removed or impaired
by reason of the dissolution of the
corporation. Corollarily then, a
stockholder's right to inspect corporate
records subsists during the period of
 liquidation (Chua vs. People, G.R. No.
216146, August 24, 2016).
11. STOCK AND TRANSFER BOOK (Sec. 73,
RCCP) - 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 alienation, sale or
transfer of stock made, the date thereof,
by and to whom made; and such other
entries as the by-laws may prescribe. The
stock and transfer book shall be kept in
the principal office of the corporation or
in the office of its stock transfer agent and
shall be open for inspection by any
director or stockholder of the corporation
at reasonable hours on business days.
A stock transfer agent or one engaged
principally in the business of registering
transfers of stocks in behalf of a stock
corporation shall be allowed to operate in
the Philippines upon securing a license
from the Commission and the payment of
a fee to be fixed by the Commission,
which shall be renewable annually:
Provided, That a stock corporation is not
precluded from performing or making
transfers of its own stocks, in which case
all the rules and regulations imposed on
stock transfer agents, except the payment
of a license fee herein provided, shall be
applicable: Provided, further, That the
Commission may require stock
corporations which transfer and/or trade
stocks in secondary markets to have an
independent transfer agent.
53
iv. Pre-emptive Right
1. This refers to a shareholder’s right to
subscribe to all issues or disposition of
shares of any class in proportion to his
present stockholdings (Sec. 38, RCCP).
2. All stockholders of a stock corporation
shall enjoy pre-emptive right to subscribe
to all issues or disposition of shares of any
class, in proportion to their respective
shareholdings, unless such right is denied
by the articles of incorporation or an
amendment thereto (Sec. 38, RCCP).
3. The broad phrase “all issues or disposition
of shares of any class” in the above
provision is construed to include not only
new shares issued in pursuance of an
increase in capital stock or from the
unissued shares which form part of the
authorized capital stock, but also covers
‘treasury shares.’ Treasury shares would
come under the term ‘disposition.’
Likewise, considering that it is not
included among the exceptions
enumerated therein, where pre-emptive
right shall not extend, the intention is to
include it in its application (See also SEC
Opinion, January 14, 1993, XXVI SEC
Quarterly Bulletin 16 [No. 2, June 1993]).
4. In close corporations, the coverage is clear
and extends to re-issuance even of
treasury shares (Sec. 101, RCCP).
5. The pre-emptive right may be denied by
the articles of incorporation or by an
amendment thereto. Even if not denied,
the pre-emptive right does not exists in
certain cases like the following:
 a. Shares issued in compliance with laws
requiring stock offerings or minimum
stock ownership by the public;
b. Shares issued in good faith with the
approval of stockholders representing
two-thirds (2/3) of the outstanding
capital stock; and
c. Shares issued in exchange for property
needed for corporate purposes or in
payment of a previously contracted
debt (Sec. 38, RCCP).
The holder of delinquent stocks shall not
be entitled to any of the rights of a
stockholder except the right to dividends
unless he pays the full amount due. Thus,
he cannot vote or be represented in
meetings, cannot examine the corporate
books, and exercise his pre-emptive right
and other rights.
Bar 2012: So that ABC Corporation could
venture into more projects, it needed to raise
funds by issuing new shares to increase its
capitalization. X, Y, Z, J and G are the 5
existing shareholders of the company. They
hold 20% each. How will the additional shares
be divided among the existing shareholders?
a. The existing shareholders can subscribe to
the new shares equivalent to their existing
shareholdings because the Corporation Code
provides that each of the existing stockholders
will have preemptive rights to the extent of
their existing shareholdings;
b. The existing shareholders’ preemptive rights
is equivalent to the percentage that they want;
c. Each of the existing shareholder can exercise
their right of first refusal against each other;
d. Preemptive rights and right of first refusal
are one and the same.
Suggested Answer:
a. The existing shareholders can subscribe to
the new shares equivalent to their existing
shareholdings because the Corporation Code
54
provides that each of the existing stockholders
will have preemptive rights to the extent of
their existing shareholdings.
Bar 2011: ABC Corp. increased its capital
stocks from P10 M to P15 M and, in the
process, issued 1,000 new shares divided into
Common Shares “B” and common shares “C”.
T, a stockholder owning 500 shares, insists on
buying the newly issued shares through a right
of pre-emption. The company claims, however,
that its Bylaws deny T any right of pre-
emption. Is the corporation correct?
a. No, since the by-laws cannot deny a
shareholder his right of preemption.
b. Yes, but the denial of his pre-emptive right
extends only to 500 shares.
c. Yes, since the denial of the right under the
By-laws is binding on T.
d. No, since pre-emptive rights are governed
by the articles of incorporation.
Suggested Answer:
a. No, since the by-laws cannot deny a
shareholder his right of pre-emption.
d. Remedial Rights
i. Individual, Representative, and
Derivative Suits
1. Individual suits are filed when the cause
of action belongs to the individual
stockholder personally, and not to the
stockholders as a group or to the
corporation, e.g., denial of right to
inspection and denial of dividends to a
stockholder (Florete vs. Florete, G.R. No.
174909, January 20, 2016).
2. If the cause of action belongs to a group of
stockholders, such as when the rights
violated belong to preferred stockholders,
a class or representative suit may be filed
 to protect the stockholders in the group directly committed wrongs
(Florete vs. Florete, supra). inflicted against a group committed
against him. of stockholders. against it, or
3. Derivative Suits; A derivative suit is an protect or
vindicate
action filed by stockholders to enforce a
corporate
corporate action. It is an exception to the
rights
general rule that the corporation’s power
whenever the
to sue is exercised only by the board of officials of the
directors or trustees. Individual corporation
stockholders may be allowed to sue on refuse to sue,
behalf of the corporation whenever the or the ones to
directors or officers of the corporation be sued, or has
refuse to sue to vindicate the rights of the control of the
corporation or are the ones to be sued and corporation.
are in control of the corporation. It is
allowed when the “directors [or officers] 5. A stockholder may suffer from a wrong
are guilty of breach of . . . trust, [and] not done to or involving a corporation, but
of mere error of judgment.” In derivative this does not vest in the aggrieved
suits, the real party-in interest is the stockholder a sweeping license to sue in
corporation, and the suing stockholder is a his or her own capacity. The
mere nominal party. (Villamor, Jr. vs. determination of the stockholder's
Umale, G.R. No. 172843. September 24, appropriate remedy—whether it is an
2014). individual suit, a class suit, or a derivative
suit— hinges on the object of the wrong
4. When the object is a specific stockholder done. When the object of the wrong done
or a definite class of stockholders, an is the corporation itself or "the whole body
individual suit or class/representative suit of its stock and property without any
must be resorted to. When the object of the severance or distribution among
wrong done is the corporation itself or the individual holders," it is a derivative suit,
whole body of its stock and property not an individual suit or
without any severance or distribution class/representative suit, that a
among individual holders, it is a stockholder must resort to (Florete, Jr. v.
derivative suit that a stockholder must Florete, et al., G.R. No. 174909, January 20,
resort to (Florete vs. Florete, supra). 2016).

Individual Representative Derivative 6. Derivative suit is not based on any express

suit suit suit provision of the Corporation Code, or
Brought by Brought by the Brought by even the Securities Regulation Code, but is
the stockholder in one or more impliedly recognized when the said laws
shareholder behalf of stockholders/ make corporate directors or officers liable
in his own himself and all members in for damages suffered by the corporation
name against other the name and and its stockholders for violation of their
the stockholders on behalf of fiduciary duties. Hence, stockholder may
corporation similarly the
sue for mismanagement, waste or
when a situated when a corporation to
dissipation of corporate assets because of
wrong is wrong is redress
a special injury to him for which he is

55
 otherwise without redress. In effect, the
suit is an action for specific performance
of an obligation owed by the corporation
to the stockholders to assist its rights of
action when the corporation has been put
in default by wrongful refusal of the
directors or management to make suitable
measures for its perfection. The basis of a
stockholder’s suit is always on equity (Ang
vs. Sps. Ang, June 19, 2013).
7. Five Requisites for Filing a Derivative Suit.—
a. He was a stockholder or member at the
time the acts or transactions subject of
the action occurred and at the time the
action was filed;
b. He 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
partnership to obtain the relief he
desires;
c. No appraisal rights are available for
the act or acts complained of; and
d. The suit is not a nuisance or
harassment suit. In case of nuisance or
harassment suit, the court shall
forthwith dismiss the case.
e. The fifth requisite for filing derivative
suits, while not included in the
enumeration, is implied in the first
paragraph of Rule 8, Section 1 of the
Interim Rules: The action brought by
the stockholder or member must be “in
the name of [the] corporation or
association. . . .” This requirement has
already been settled in jurisprudence.
(Villamor, Jr. vs. Umale, G.R. No. 172843.
September 24, 2014).
Among the basic requirements for a
derivative suit to prosper is that the minority
shareholder who is suing for and on behalf of
56
the corporation must allege in his complaint
before the proper forum that he is suing on a
derivative cause of action on behalf of the
corporation and all other shareholders
similarly situated who wish to join him.
Bar 2019: In May 2018, ABC Corp. entered
into a merchandising contract which terms
and conditions were totally lopsided in favor
of the counterparty, XYZ, Inc. As a result,
ABC Corp. suffered tremendous financial
losses.
A year after, or in May 2019, Mr. X became a
stockholder of ABC Corp. Learning about the
circumstances surrounding the
merchandising contract, Mr. X filed a
derivative suit against ABC Corp. 's directors
to claim damages on behalf of ABC Corp. due
to their mismanagement.
(a) What is a derivative suit? (2%)
or
Suggested answer:
A derivative suit is an action filed by the
stockholder in the name and on behalf of the
corporation to enforce a corporate right or
cause of action to set aside wrongful acts
committed by its directors and/or officers
[Ang, for and in behalf of Sunrise Marketing v.
Ang, G.R. No.
201675, June 19, 2013; Florete v. Florete, G.R.
No. 174909, January 20, 2016].
Note: This is an exception to the Business
Judgment Rule.
An individual stockholder is permitted to
institute a derivative suit on behalf of the
corporation wherein he held stock in order to
protect or vindicate corporate rights,
whenever the officers of the corporation
refuse to sue, or are the ones to be sued or
hold the corporation. (First Philippine
International Bank v. Court of Appeals, G.R. No.
115849, January 24, 1996; Filipinas Port Services
v. Go, G.R. No. 161886, March 16. 2007; Yu v.
Yukayguan, G.R. No. 177549, June 18, 2009)
(b) Was Mr. X's filing of a derivative suit
proper? Explain. (3%)
Suggested answer:
No, Mr. X’s filing of a derivative suit was not
proper because there was no showing
from the facts that he exhausted all available
intra-corporate remedies.
Bar 2012: X is a minority stockholder of CCC
Corporation. Y is a member of the Board of
Directors of CCC Corporation and at the
same time he is the President. X believes that
Y is mismanaging CCC Corporation hence, as
a stockholder and in behalf of the other
stockholders, he wanted to sue Y. which
statement is most accurate?
a. X can institute a derivative suit in behalf of
himself as a stockholder;
b. A derivative suit must be instituted in
behalf of the corporation;
c. Derivative suit is an exclusive remedy that
X can institute;
d. Derivative suit is not the remedy in this
situation.
Suggested Answer:
b. A derivative suit must be instituted in
behalf of the corporation.
Bar 2013: In the November 2010 stockholder’s
meeting of Greenville Corporation, 8
directors were elected to the board. The
directors assumed their posts in January
2011. Since no stockholders’ meeting was
held in November 2011, the 8 directors
served in a holdover capacity and thus
continued discharging their powers.
In June 2012, 2 of Greenville Corporation’s
directors—Director A and Director B—
resigned from the board. Relying on Section
29 of the Corporation Code, the remaining 6
directors elected 2 new directors to fill in the
vacancy caused by the resignation of
Directors A and B. Stockholder X questioned
the election of the new directors, initially,
through a letter-complaint addressed to the
57
board, and later (when his letter-complaint
went unheeded), through a derivative suit
filed with the court. He claimed that the
vacancy in the board should be filled up by
the vote of the stockholders of Greenville
Corporation. Greenville Corporation’s
directors defended the legality of their action,
claiming as well that Stockholder X’s
derivative suit was improper. Rule on the
issued raised.
Suggested Answer:
The remaining directors cannot elect new
directors to fill in the two vacancies. The
board of directors may fill up vacancy only if
the ground is not due to expiration of term,
removal or increase in the number of board
seats. In this case, the term of the two
directors expired after 1 year. They remained
in office in a hold-over capacity only until
their resignation. The hold-over period is not
part of their term. The vacancies should be
filled up by election by the stockholders.
The derivative suit was improper. In a
derivative suit, the corporation, not the
individual stockholder, must be the
aggrieved party and that the stockholder is
suing on behalf of the corporation. What
stockholder X is asserting is his individual
right as a stockholder to elect the two
directors. The case partakes more of an
election contest under the rules on intra-
corporate controversy.
Bar 2014: A, B, C, D and E were members of
the 2003-2004 Board of Directors of FLP
Corporation. At the election for the 2004-2005
Board of Directors, not one of them was
elected. They filed in court a derivative suit
on behalf of FLP Corporation against the
newly-elected members of the Board of
Directors. They questioned the validity of the
election as it was allegedly marred by lack of
quorum, and prayed for the nullification of
the said election. The 2004-2005 Board of
Directors moved to dismiss the complaint
because the derivative suit is not proper.
Decide.
 Suggested Answer:
The derivative suit is not proper. The party-
in-interest are the petitioners as stockholders,
who were members of the 2003-2004 Board of
Directors of FLP Corporation. The cause of
action devolves on the petitioners, not on FLP
Corporation, which did not have the right to
vote. Hence, the complaint filed by A, B, C, D
and E is a direct action by the petitioners,
who were the members of the Board of
Directors of the corporation before the
election, against respondents, who are the
newly-elected Board of Directors. Under the
circumstances, the derivative suit filed by
petitioners in behalf of FLP is improper.
e. Obligations of Stockholders
1. Liability for failure to create a corporation
(Sec. 10, RCCP);
2. Liability for dividends unlawfully paid
(Sec. 42, RCCP);
3. Liability to the creditors of a corporation
for unpaid subscription (Sec. 60, RCCP);
4. Liability for watered stock (Sec. 64, RCCP):
a. Watered stocks are those issued not in
exchange for its equivalent either in
cash, property, share, stock dividends,
or services; thus the issuance of such
stocks is prohibited (Sec. 64, RCCP).
b. Directors are liable for watered stocks.
A Director or Officer of a corporation
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, if
he/she:
58
i. Consents to the issuance of stocks
for a consideration less than its
par or issued value-including
those issued without
consideration (bonus share) or
issued as fully paid when the
corporation has received a lesser
sum of money than its par or
issued value (discounted share);
ii. Consents to the issuance of stocks
for a consideration other than
cash;
iii. Having knowledge of the
insufficient consideration, does
not file a written objection to the
corporate secretary (Sec 64,
RCCP).
c. “Water” in the stock refers to the
difference between the fair market
value at the same time of the issuance
of the stock (not at the time of
discovery of the inadequate
consideration or at the time of demand
for payment) and the par or issued
value of said stock. Subsequent
increase in the value of the property
used in paying the stock does not do
away with the “water” in the stock.
The existence of “water” is determined
at the time of the issuance of the stock
(Villanueva, Philippine Corporate Law,
2001 Ed., p. 808).
d. Three theories have been advanced as
basis for holding stockholders and
officers liable for watered stocks, to
wit:
i. Subscription contract theory;
ii. Fraud theory; and
 iii. Trust fund doctrine (Villanueva,
Philippine Corporate Law, 2001
Ed., pp. 384-386).
e. The subscription theory holds that the
subscription contract is the source and
measure of the duty of a subscriber to
pay for his shares. If the contract
releases him from further liability, the
subscriber ceases to be liable.
f. The fraud theory holds that a
shareholder is liable for watered stock
on the basis of tort or
misrepresentation. According to the
theory, the wrong done to the creditor
is fraud or deceit in falsely
representing that the par value has
been paid or has been agreed to be
paid in full. It shall be presumed that
subsequent creditor without notice has
been deceived by this
misrepresentation but prior creditors
with notice are not protected.
g. The trust fund doctrine holds that all
corporate creditors would have a legal
basis to recover against stockholders
and guilty officers. In Philippine
jurisdiction, the trust fund doctrine on
watered stock prevails (Philippine Trust
Corp. vs. Rivera, 44 Phil. 469).
The trust fund doctrine backstops the
requirement of unrestricted retained
earnings to fund the payment of the
shares of stocks of the withdrawing
stockholders.
Under the doctrine, the capital stock,
property, and other assets of a
corporation are regarded as equity in
trust for the payment of corporate
creditors, who are preferred in the
distribution of corporate assets. The
59
creditors of a corporation have the
right to assume that the board of
directors will not use the assets of the
corporation to purchase its own stock
for as long as the corporation has
outstanding debts and liabilities.
There can be no distribution of assets
among the stockholders without first
paying corporate debts. Thus, any
disposition of corporate funds and
assets to the prejudice of creditors is
null and void (Turner vs. Lorenzo
Shipping Corporation, 636 SCRA 13, G.R.
No. 157479 November 24, 2010).
Bar 2015: What is “watered stock” and what is
the legal consequence of the issuance of such
stock?
Suggested Answer:
Watered stocks are stocks issued for a
consideration less than its par or issued value
or for a consideration in any form other than
cash, valued in excess of its fair value. Any
director or officer of a corporation consenting
to the issuance of watered stocks or who,
having knowledge thereof, does not forthwith
express his objection in writing and file the
same with the corporate secretary shall be
solidarily liable with the stockholder
concerned to the corporation and its creditors
for the difference between the fair value
received at the time of issuance of the stock
and the par or issued value of the same (Section
65 of the Corporation Code).
5. Liability to the corporation for interest on
unpaid subscription if so required by the
by-laws (Sec. 65, RCCP); and
6. Liability to the corporation for unpaid
subscription (Sec. 66-79, RCCP).
- oOo –