MIDTERMS o 3.
Where there are 2 corpos = merged into 1
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Blg. 68)
Q: What is a corporation?
Ø Sec. 2. Corporation defined. - A corporation is an artificial being created by
operation of law, having the right of succession and the powers, attributes
and properties expressly authorized by law or incident to its existence.
Q: What are the 4 attributes of a corporation?
Ø (SOAP)
Ø 1. It has the Right of Succession
Ø 2. It is created by operation of law
Ø 3. It is an artificial being with separate and distinct personality
Ø 4. It has the powers, attributes, and properties expressly authorized by law
or incident to its existence
Q: What is the doctrine of corporate entity?
Ø A corporation is a legal or juridical person with a personality separate and
apart from its individual SH or members and from any other legal entity to
which it may be connected
Q: What is the doctrine of piercing the corporate veil? What is the test?
Ø The court will not hesitate to disregard the corporate veil when it is
misused or when necessary in the interest of justice. The concept of
corporate entity was not meant to promote unfair objectives
Ø The doctrine is used for
o 1. Convenience
o 2. To subserve the ends of justice
Ø Instances:
o 1. Separate personality will be disregarded
o 2. The veil of corporate fiction will be pierced
o 3. A corporation will be treated as a mere alter ego
Ø Some purposes:
o To defeat public convenience, to justify a wrong, to protect fraud,
to defend a crime
Ø Caveat: the doctrine is frowned upon and must be proceeded with caution
Ø Presumption: Separate and distinct
Ø Effect: The corporate character is not necessarily abrogated, but the
corporation continues for legitimate purposes
o Effect as to liability:
o 1. Corpo = mere association of persons
o 2. SH or members = may be personally liable
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Q: What is the instrumentality or alter ego rule?
Ø Instrumentality Rule – a corporation controls another corporation
o Where one corporation is so organized and controlled and its
affairs are conducted so that it is in fact a mere instrumentality or
adjunct of the other
Ø Alter Ego – a SH of a group or a group of SH of a stock corporation controls
another corporation
o Where the corporation is a mere alter ego/farce/conduit of
individual SH; Where a subsidiary corporation is created by a
parent company merely as an agency especially if SH/officers are
the same
§ Factors:
§ 1. Parent owns all/most of capital stock
§ 2. They have common directors/officers
§ 3. Parent finances subsidiary
§ 4. Parent subscribes to all the capital stock
§ 5. Subsidiary has inadequate capital
§ 6. Subsidiary is only a department
§ 7. Parent uses property as its own
Q: What are the 3 tests IF BASED ON THE INSTRUMENTALITY RULE?
Ø 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;
Ø 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 rights;
and
Ø 3. The aforesaid control and breach of duty must proximately cause the
injury or unjust loss complained of. (Harm)
Q: What is the difference between a corporation and a partnership?
Ø As to creation
Ø As to # of incorporators
Ø As to commencement
Ø As to powers
Ø As to management
Ø As to effect of mismanagement
Ø As to existence of right of succession
Ø As to extent of liability to third persons
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 Ø As to transferability of interest o 8. SH have little voice
Ø As to term of existence Hypos from quiz:
Ø As to firm name Ø Redeemable shares problem
Ø As to dissolution Ø Can Redeemable shares become treasury shares?
Ø As to law governing Ø Mismanagement problem

Q: Can a corporation become a partner? Q: What are the classes of corporation?

Ø GR: No. In entering into partnership, the identity of a corporation is lost or Ø Sec. 3. Classes of corporations. - Corporations formed or organized under
merged with that of another and the direction of its affairs is placed in the this Code may be stock or non-stock corporations.
hands of other persons other than those provided for by law of its creation o Stock Corporation - Corporations which have capital stock divided
o EXPN: into shares and are authorized to distribute to the holders of such
o 1. Corpo may enter into a Joint Venture with another where the shares dividends or allotments of the surplus profits on the basis
nature of the venture is in line with the business authorized by its of the shares held are stock corporations.
charter § Purpose: profit
o 2. SEC allowed the JVP o Non-stock Corporation - All other corporations are non-stock
o 3. Where the agreement provides that the 2 will manage the corporations.
partnership so that the management of the corporate interest is § Purpose: public goal or welfare
not surrendered Ø As to # of persons:
o REQ: o Corporation Aggregate
§ 1. All corpos are managing partners o Corporation Sole
§ 2. Law/charter/AOI expressly allows it Ø As to whether they are for religious purposes or not:
§ 3. Foreign corpo has license to transact here o Ecclesiastical Corporation
o Lay Corporation
Q: What are the advantages and disadvantages of a corporation? Ø As to whether they are for charitable purpose or not:
Ø Advantages (ACS-MS-LAT) o Eleemosynary Corporation
o 1. Legal capacity to Act in its own name o Civil Corporation
o 2. Continuity of existence Ø As to State under whose laws they have been created:
o 3. Credit is Strengthened by continuity o Domestic Corporation
o 4. Management is with BOD o Foreign Corporation
5. Creation, Organization, Management, and Dissollution is Ø As to their legal right to corporate existence
Standardized o De Jure Corporation
o 6. Makes feasible gigantic financial undertakings o De Facto Corporation
o 7. SH have Limited Liability Ø As to whether they are open to public ownership or not
o 8. Not general agents o Open Corporation
o 9. Shares of stock may be transferred o Close Corporation
Ø Disadvantages: (CEWL-LGS-TV) Ø As to whether their relation to other corporation
o 1. Complicated in formation o Parent/Holding Corporation
o 2. Entails high cost o Subsidiary Corporation
o 3. Credit is weakened o Affiliated Corporation
o 4. Lack of personal element Ø As to whether they are for government purposes
o 5. Greater degree of governmental control o Public Corporation – mere instrumentality of the State subj to
o 6. Management and control is separated from ownership gov’t visitation and control
o 7. Voting rights have become theoretized
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 o Private Corporation - - A contract between the State and
corporation not subj to visitation by the State
§ GOCC’s
§ Quasi-Public Corporation
Ø As to whether they are corporation in a true sense or limited sense only
o True Corporation
o Quasi-corporation
§ Corporation by prescription
§ Corporation by estoppel
Sec. 4. Corporations created by special laws or charters. - Corporations created by
special laws or charters shall be governed primarily by the provisions of the special
law or charter creating them or applicable to them, supplemented by the provisions
of this Code, insofar as they are applicable.
Sec. 5. Corporators and incorporators, stockholders and members. - Corporators
are those who compose a corporation, whether as stockholders or as members.
Incorporators are those stockholders or members mentioned in the articles of
incorporation as originally forming and composing the corporation and who are
signatories thereof.
Corporators in a stock corporation are called stockholders or shareholders.
Corporators in a non-stock corporation are called members.
Q: Who are the persons composing a corporation?
Ø 1. Corporators – those who compose the corporation whether
o Stockholders; or
o Members
Ø 2. Incorporators – those corporations mentioned in the AOI as originally
forming and composing a corporation; and who executed and signed the
AOI; and acknowledged the same before a notary public
o Function: to enable a corporation to become a body politic under
the law
Ø 3. Stockholders – the owners of shares of stock in a stock corporation
Ø 4. Members – corporators of a stock corporation which has no capital
stock
Ø 3 OTHER CLASSES:
o 1. Promoter – persons who bring about the formation and
organization of a corporation by bringing together incorporators
or persons interested in the enterprise, procuring subscriptions or
capital for the corporation and setting in motion the machinery
which leads to the incorporation of the corporation itself; they lay
the “groundwork”
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o 2. Subscriber – persons who have agreed to take and pay for
original, unissued shares of a corporation formed or to be formed
o 3. Underwriter
Q: What are the classifications of shares?
Ø Common
Ø Preferred
Ø Voting
Ø Non-voting
Ø Share in escrow
Ø Over-issued
Ø Watered
Ø Par value
Ø No par value
Ø Convertible
Ø Fractional
Ø Promotion
Ø Founder’s
Ø Redeemable
Ø Treasury
Sec. 6. Classification of shares. - The shares of stock of stock corporations may be
divided into classes or series of shares, or both, any of which classes or series of
shares may have such rights, privileges or restrictions as may be stated in the
articles of incorporation: Provided, That no share may be deprived of voting rights
except those classified and issued as "preferred" or "redeemable" shares, unless
otherwise provided in this Code: Provided, further, That there shall always be a
class or series of shares which have complete voting rights. Any or all of the shares
or series of shares may have a par value or have no par value as may be provided
for in the articles of incorporation: Provided, however, That banks, trust companies,
insurance companies, public utilities, and building and loan associations shall not be
permitted to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference in the
distribution of the assets of the corporation in case of liquidation and in the
distribution of dividends, or such other preferences as may be stated in the articles
of incorporation which are not violative of the provisions of this Code: Provided,
That preferred shares of stock may be issued only with a stated par value. The
board of directors, where authorized in the articles of incorporation, may fix the
terms and conditions of preferred shares of stock or any series thereof: Provided,
That such terms and conditions shall be effective upon the filing of a certificate
thereof with the Securities and Exchange Commission.
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Shares of capital stock issued without par value shall be deemed fully paid and non-
assessable and the holder of such shares shall not be liable to the corporation or to
its creditors in respect thereto: Provided; That shares without par value may not be
issued for a consideration less than the value of five (P5.00) pesos per share:
Provided, further, That the entire consideration received by the corporation for its
no-par value shares shall be treated as capital and shall not be available for
distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring
compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the
certificate of stock, each share shall be equal in all respects to every other share.
Where the articles of incorporation provide for non-voting shares in the cases
allowed by this Code, the holders of such shares shall nevertheless be entitled to
vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other
corporations;
7. Investment of corporate funds in another corporation or business in accordance
with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary to
approve a particular corporate act as provided in this Code shall be deemed to refer
only to stocks with voting rights.
Sec. 7. Founders' shares. - Founders' shares classified as such in the articles of
incorporation may be given certain rights and privileges not enjoyed by the owners
of other stocks, provided that where the exclusive right to vote and be voted for in
the election of directors is granted, it must be for a limited period not to exceed five
(5) years subject to the approval of the Securities and Exchange Commission. The
five-year period shall commence from the date of the aforesaid approval by the
Securities and Exchange Commission.
Sec. 8. Redeemable shares. - Redeemable shares may be issued by the corporation
when expressly so provided in the articles of incorporation. They may be purchased
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or taken up by the corporation 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 as may be stated in the articles of
incorporation, which terms and conditions must also be stated in the certificate of
stock representing said shares.
Sec. 9. Treasury shares. - Treasury shares are shares of stock which have been
issued and fully paid for, but subsequently reacquired by the issuing corporation by
purchase, redemption, donation or through some other lawful means. Such shares
may again be disposed of for a reasonable price fixed by the board of directors.
Sec. 10. Number and qualifications of incorporators. - Any number of natural
persons not less than five (5) but not more than fifteen (15), all of legal age and a
majority of whom are residents of the Philippines, may form a private corporation
for any lawful purpose or purposes. Each of the incorporators of s stock corporation
must own or be a subscriber to at least one (1) share of the capital stock of the
corporation.
Q: What are the qualifications of incorporators a corporation?
Ø (5-MOAN)
Ø 1. Not less than 5 but not more than 15
Ø 2. Majority must be residents
Ø 3. Each must own or subscribe to at least 1 share of the capital stock
Ø 4. Of legal age
Ø 5. Natural Person not suffering from legal incapacity
Sec. 11. Corporate term. - A corporation shall exist for a period not exceeding fifty
(50) years from the date of incorporation unless sooner dissolved or unless said
period is extended. The corporate term as originally stated in the articles of
incorporation may be extended for periods not exceeding fifty (50) years in any
single instance by an amendment of the articles of incorporation, in accordance
with this Code; Provided, That no extension can be made earlier than five (5) years
prior to the original or subsequent expiry date(s) unless there are justifiable reasons
for an earlier extension as may be determined by the Securities and Exchange
Commission.
Q: What is the term of existence of a corporation?
Ø GR: Not exceeding 50 years
o Unless: sooner dissolved; period is shortened or extended
o Provided: not earlier than 5 years prior to the expiration date
§ EXPN: SEC determines that there are justifiable reasons
for an earlier extension
Ø Extension may be made but not exceeding 50 years in a single instance
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 Ø There is no limit to the number of extensions
Q: What is the requirement as to capital stock requirement?
Ø GR: Sec. 12. Minimum capital stock required of stock corporations. -
Stock corporations incorporated under this Code shall not be required to
have any minimum authorized capital stock (as long as the paid up capital
is not less than 5,000)
Ø EXPN: except as otherwise specifically provided for by special law, and
subject to the provisions of the following section.
o Sec. 13: The 25%-25% rule
Sec. 13. Amount of capital stock to be subscribed and paid for the purposes of
incorporation. - At least twenty-five percent (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, the balance to be payable on a date or dates fixed in the
contract of subscription without need of call, or in the absence of a fixed date or
dates, upon call for payment by the board of directors: Provided, however, That in
no case shall the paid-up capital be less than five Thousand (P5,000.00) pesos.
Sec. 14. Contents of the articles of incorporation. - All corporations organized
under this code shall file with the Securities and Exchange Commission articles of
incorporation in any of the official languages duly signed and acknowledged by all
of the incorporators, containing substantially the following matters, except as
otherwise prescribed by this Code or by special law:
1. The name of the corporation;
2. The specific purpose or purposes for which the corporation is being incorporated.
Where a corporation has more than one stated purpose, the articles of
incorporation shall state which is the primary purpose and which is/are he
secondary purpose or purposes: Provided, That a non-stock corporation may not
include a purpose which would change or contradict its nature as such;
3. The place where the principal office of the corporation is to be located, which
must be within the Philippines;
4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the incorporators;
6. The number of directors or trustees, which shall not be less than five (5) nor
more than fifteen (15);
7. The names, nationalities and residences 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;
8. If it be a stock corporation, the amount of its authorized capital stock in lawful
money of the Philippines, the number of shares into which it is divided, and in case
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the share are par value shares, the par value of each, the names, nationalities and
residences of the original subscribers, and the amount subscribed and paid by each
on his subscription, and if some or all of the shares are without par value, such fact
must be stated;
9. If it be a non-stock corporation, the amount of its capital, the names,
nationalities and residences of the contributors and the amount contributed by
each; and
10. Such other matters as are not inconsistent with law and which the incorporators
may deem necessary and convenient.
The Securities and Exchange Commission shall not accept the articles of
incorporation of any stock corporation unless accompanied by a sworn statement
of the Treasurer elected by the subscribers showing that at least twenty-five (25%)
percent of the authorized capital stock of the corporation has been subscribed, and
at least twenty-five (25%) of the total subscription has been fully paid to him in
actual cash and/or in property the fair valuation of which is equal to at least twenty-
five (25%) percent of the said subscription, such paid-up capital being not less than
five thousand (P5,000.00) pesos.
Sec. 15. Forms of Articles of Incorporation. - Unless otherwise prescribed by special
law, articles of incorporation of all domestic corporations shall comply substantially
with the following form:
First Meeting.
Sec. 16. Amendment of Articles of Incorporation. - Unless otherwise prescribed by
this Code or by special law, and for legitimate purposes, any provision or matter
stated in the articles of incorporation may be amended by a majority vote of the
board of directors or trustees and the vote or written assent of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock, without
prejudice to the appraisal right of dissenting stockholders in accordance with the
provisions of this Code, or the vote or written assent of at least two-thirds (2/3) of
the members if it be a non-stock corporation.
The original and amended articles together shall contain all provisions required by
law to be set out in the articles of incorporation. Such articles, as amended shall be
indicated by underscoring the change or changes made, and a copy thereof duly
certified under oath by the corporate secretary and a majority of the directors or
trustees stating the fact that said amendment or amendments have been duly
approved by the required vote of the stockholders or members, shall be submitted
to the Securities and Exchange Commission.
The amendments shall take effect upon their approval by the Securities and
Exchange Commission or from the date of filing with the said Commission if not
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acted upon within six (6) months from the date of filing for a cause not attributable
to the corporation.
Q: What is a Charter?
Ø It is an instrument or authority from the sovereign power bestowing the
right or privilege to be and act as a corporation
Q: How is it different from a Franchise?
Ø Franchise is the right or privilege itself of being a corporation
Ø Charter applies to the instrument bestowing such right and privilege
Q: What are the components of a corporate charter?
Ø It depends.
Ø As to corporations formed under the general incorporation law:
1. Law under which it was organized (B.P. 68)
2. Articles of Incorporation
3. By laws
4. All applicable provisions of the Constitution and the general laws of the
state in force at the time the corporation was incorporated
Ø As to corporations created by special laws, the charter consists of:
1. Special law which creates the corporation
2. Executive Orders of the President
3. Rules & Regulations applicable to such corps
4. All laws applicable thereto including the Corporation Code
Q: What are the requirements to Amend the Articles of Incorporation under
Section 16?
Ø Not otherwise prohibited by Corporation Code or by special law
Ø For legitimate purposes,
Ø With respect to Stock corporations: (RVS)
o (resolution) By a majority vote of the board of directors or
trustees and
o The vote or WRITTEN ASSENT of the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock, without
prejudice to the appraisal right of dissenting stockholders in
accordance with the provisions of this Code,
§ WRITEN ASSENT – the SH vote on the amendment need
not be taken at a meeting
o Submission and filing to SEC
Ø With respect to Non-stock corporations:
o The vote or written assent of at least two-thirds (2/3) of the
members if it be a non-stock corporation.
o Submission and filing to SEC
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Ø The original and amended articles together shall contain all provisions
required by law to be set out in the articles of incorporation.
Ø Such articles, as amended shall be indicated by underscoring the change or
changes made, and a copy thereof duly certified under oath by the
corporate secretary and a majority of the directors or trustees stating the
fact that said amendment or amendments have been duly approved by the
required vote of the stockholders or members, shall be (submitted) to the
Securities and Exchange Commission. Aside from the filing the
amendment, the corresponding fees must be paid.
Ø Date of effectivity: The amendments shall take effect upon their approval
by the Securities and Exchange Commission or from the date of filing with
the said Commission if not acted upon within six (6) months from the date
of filing for a cause not attributable to the corporation.
Sec. 17. Grounds when articles of incorporation or amendment may be rejected or
disapproved. - The Securities and Exchange Commission may reject the articles of
incorporation or disapprove any amendment thereto if the same is not in
compliance with the requirements of this Code: Provided, That the Commission
shall give the incorporators a reasonable time within which to correct or modify the
objectionable portions of the articles or amendment. The following are grounds for
such rejection or disapproval:
1. That the articles of incorporation or any amendment thereto is not substantially
in accordance with the form prescribed herein;
2. That the purpose or purposes of the corporation are patently unconstitutional,
illegal, immoral, or contrary to government rules and regulations;
3. That the Treasurer's Affidavit concerning the amount of capital stock subscribed
and/or paid if false;
4. That the percentage of ownership of the capital stock to be owned by citizens of
the Philippines has not been complied with as required by existing laws or the
Constitution.
No articles of incorporation or amendment to articles of incorporation of banks,
banking and quasi-banking institutions, building and loan associations, trust
companies and other financial intermediaries, insurance companies, public utilities,
educational institutions, and other corporations governed by special laws shall be
accepted or approved by the Commission unless accompanied by a favorable
recommendation of the appropriate government agency to the effect that such
articles or amendment is in accordance with law.
Q: What are the grounds for disapproval or rejection of amendment of the AOI?
(NUTO)
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 1. That the articles of incorporation or any amendment thereto is not
substantially in accordance with the form prescribed herein;
2. That the purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral, or contrary to government rules and
regulations;
3. That the Treasurer's Affidavit concerning the amount of capital stock
subscribed and/or paid if false;
4. That the percentage of ownership of the capital stock to be owned by
citizens of the Philippines has not been complied with as required by
existing laws or the Constitution.
Q: Is the enumeration under Section 17 exclusive?
Ø No. Under PD 902-A, the SEC may suspend or revoke after proper notice
and hearing the franchise of corporations, partnerships or associations
upon any of the grounds:
1. Fraud in procuring its certificate of incorporation
2. Serious misrepresentation
3. Refusal to comply with or defiance of a lawful order of the commission
4. Continuous inoperation for a period of at least 5 years
5. Failure to file by laws within the required period
6. Failure to file required reports in appropriate forms as determined by
the commission within the prescribed period
Q: Can you think of any other ground?
Ø Sec. 18. Corporate name. - 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.
Q: What are the limitations on the corporate name?
Ø Similarity with another trade name
o This is important for lawyers because the first thing that must be
done when organizing and usually it is done by reserving a
corporate name online
Ø Prohibited use of certain names under special laws
o ‘United Nations/UN’
o ‘Bonded’ if the company is not a licensed bonding company
o ‘Bank’, ‘Rural Bank’
o Savings and Loan association
o Financing companies
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Ø Doctrine of Secondary Meaning
o A word or phrase originally incapable of exclusive appropriation
with reference to an article on the market, because geographically
or other descriptive, might nevertheless have been used so long
and so exclusively by one producer with reference to his article, 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
Ø Part of name
o Corporation or Corp; Incorporation or Inc
Q: What is the undertaking required to be submitted to the SEC by the
corporation?
Ø The undertaking which is attached to articles of incorporation is that the
corporation will change its name later on in case it is discovered that it is in
use already by an existing corporation
LYCEUM V. CA
Ø Q: What is the meaning of Lyceum?
o Root word “Liceo” means institution for learning
Ø Q: Won’t it be confusingly similar?
o No, in the other schools, they put the geographical phrase so as
not to confuse the public (i.e. Lyceum of Aparri)
TH
7 DAY ADVENTIST V. NORTHEASTERN
Ø Q: One argument was that the church was a de facto government to give
them personality. How did SC rule?
o SC says that not all of the 3 requisites of a de facto corporation
was complied with
Ø Q: Which requisite was not complied with?
o There was no bona fide attempt to organize. There was no
application to become a corporation
Ø Q: Assuming that there was application, is this sufficient?
nd
o No, mere application is not sufficient. In order to complete the 2
requisite, there must be issuance of the Articles of Incorporation
by SEC
INDUSTRIAL REFRACTORIES V. CA
Ø Q: What are the instances that made the public confused?
o 1. Both have the same 3 words
o 2. Similar packaging
o 3. They cater to the same clientele – steel
Ø Q: How did the SC rule on the issue of jurisdiction?
o The SEC has the authority to approve the corporate name
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Q: When does the corporation acquire juridical personality?
Ø Sec. 19. Commencement of corporate existence. - A private corporation
formed or organized under this Code commences to have corporate
existence and juridical personality and is deemed incorporated from the
date the Securities and Exchange Commission issues a certificate of
incorporation under its official seal; and thereupon the incorporators,
stockholders/members and their successors shall constitute a body politic
and 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
Q: What is the effect when the AOI are issued by SEC?
Ø The incorporators, stockholders/members and their successors shall
constitute a body politic and 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.
Q: What is the corporate maximum term?
Ø 50 years extendible for another 50 years
Sec. 20. De facto corporations. - The due incorporation of any corporation claiming
in good faith to be a corporation under this Code, and its right to exercise corporate
powers, shall not be inquired into collaterally in any private suit to which such
corporation may be a party. Such inquiry may be made by the Solicitor General in a
quo warranto proceeding.
Q; Does a de facto corporation have juridical personality?
Ø Yes. A de facto may exercise the same power that a de jure exercises
Q: What is the difference between de facto and de jure as to the exercise of
corporate powers?
Ø No difference, as to the exercise of corporate powers.
Ø De Jure Corporation – a corporation created in strict or substantial
conformity with the mandatory or statutory requirements for
incorporation and the right of which to exist as a corporation cannot be
successfully attacked or questioned by any party even in a direct
proceeding for that purpose by the state
Ø De Facto Corporation – organized with a colorable compliance with the
requirements of a valid law and its existence cannot be inquired
collaterally but such inquiry may be made by the SolGen in a quo
warranto proceeding
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Q: What are the requisites of a De Facto Corporation?
Ø (LAC)
Ø 1. A valid law under which a corporation with powers assumed might be
incorporated
Ø 2. A bona fide attempt in GF to organize a corporation under such law
Ø 3. Actual user or exercise in Good Faith of corporate powers upon it by law
Q: What do you mean when you say collateral attack of the corporate existence
Ø One whereby corporate existence is questioned in some incidental
proceedings not provided by law for the express purpose of attacking the
corporate existence
Q: So can a private person attack the existence of a corporation?
Ø No. Only the State can do so.
Q: What must be done to attack the corporate existence?
Ø Direct Attack
o One whereby the State, in a proceeding brought for that purpose,
attacks the existence of an association claiming to be a
corporation
o Can only be instituted by the Solicitor General by Quo Warranto
proceedings
Q: Instances of De Facto Corporation? What is a good example? –
nd
Q: What is meant by the 2 requisite, “bona fide” intention to organize?
Ø Application to organize corporation
Ø Submission of all requirements
Ø Issuance of AOI
HALL V. PICCIO
Ø To become a De Facto Corporation, the articles of incorporation need to be
filed and the SEC must issue the certificate of incorporation. This is the
th
same doctrine reiterated in the 7 day Adventist case.
Assignment: starting from corporation by estoppel up to Sec. 25 plus 4 add’l cases
Second Meeting.
Q: What is a corporation by Estoppel?
Ø Sec. 21. Corporation by estoppel. - All persons who assume to act as a
corporation knowing it to be without authority to do so shall be liable as
8
 general partners for all debts, liabilities and damages incurred or arising
as a result thereof: Provided, however, That when any such ostensible
corporation is sued on any transaction entered by it as a corporation or on
any tort committed by it as such, it shall not be allowed to use as a defense
its lack of corporate personality.
Ø On who assumes an obligation to an ostensible corporation as such,
cannot resist performance thereof on the ground that there was in fact no
corporation
INTERNATIONAL BUSINESS TRAVEL V. CA & KHAN
Ø Q: Was the doctrine of corporation by estoppel applied here? Yes.
Ø Q: Why did the SC say that the CA misapplied the doctrine?
LIM TONG LIM V. PHILPPINE FISHING GEAR
Ø Q: How did the SC address that he was not even a signatory?
Ø Q: Does the fact that he benefitted mean that he was already part of the
corporation?
LOZANO V. DE LOS SANTOS
Ø Q: Why does the doctrine of corporation by estoppel apply?
Ø Q: So when does the principle only apply?
rd
o When 3 person believed in GF
Q: Is there such a thing as automatic dissolution?
Ø Yes.
Ø Sec. 22. Effects on non-use of corporate charter and continuous
inoperation of a corporation. If a corporation does not formally organize
and commence the transaction of its business or the construction of its
works within two (2) years from the date of its incorporation, its
corporate powers cease and the corporation shall be deemed dissolved.
Ø However, if a corporation has commenced the transaction of its business
but subsequently becomes continuously inoperative for a period of at least
five (5) years, the same shall be a ground for the suspension or revocation
of its corporate franchise or certificate of incorporation.
Ø This provision shall not apply if the failure to organize, commence the
transaction of its businesses or the construction of its works, or to
continuously operate is due to causes beyond the control of the
corporation as may be determined by the Securities and Exchange
Commission.
Q: What are the grounds for revocation or suspension?
nd
Ø Sec 22, 2 par: However, if a corporation has commenced the transaction
of its business but subsequently becomes continuously inoperative for a
Escudero
period of at least five (5) years, the same shall be a ground for the
suspension or revocation of its corporate franchise or certificate of
incorporation
Q: What is the meaning of “failure to formally organize”? What acts must be
done?
Ø This does NOT include the filing of the AOI. R: If there is already an existing
corporation, it already presupposes that AOI has been filed with the SEC
and the latter has already issued Cert. of Incorporation.
Ø Refers to the act of conducting election of directors and officers, adoption
of by-laws, and filing of the same with the SEC; establishment of a principal
office; providing for subscription and payment of capital stock
Sec. 23. The board of directors or trustees. - Unless otherwise provided in this
Code, the corporate powers of all corporations formed under this Code shall be
exercised, all business conducted and all property of such corporations controlled
and held by the board of directors or trustees to be elected from among the holders
of stocks, or where there is no stock, from among the members of the corporation,
who shall hold office for one (1) year until their successors are elected and
qualified.
Every director must own at least one (1) share of the capital stock of the
corporation of which he is a director, which share shall stand in his name on the
books of the corporation. Any director who ceases to be the owner of at least one
(1) share of the capital stock of the corporation of which he is a director shall
thereby cease to be a director. Trustees of non-stock corporations must be
members thereof. A majority of the directors or trustees of all corporations
organized under this Code must be residents of the Philippines.
Q: Who is the governing body?
Ø Board of directors which shall exercise the powers of the corporation;
enter into business on behalf of the corporation; and hold the property of
the corporation
Q: What is the Business Judgment Rule?
Ø Questions of policy or management are left solely to the honest decisions
of officers and directors of a corporation and so long as they act in GF,
their orders are not reviewable by the courts
Ø GR: Courts cannot interfere acts of directors so long as they are intra vires
o EXPN: The act is so oppressive and it adversely affects the
minority status of the corporation
Q: What is the term of the officers?
9
 Ø 1 year until a successor is elected and qualified
Ø There is a hold over status of a member of the Board of Directors (or
simply ‘Director’). Meaning, he will continue on the business unless a
successor is elected and qualified
Q: What are the qualifications of a Director?
Ø At least 1 share
o Which must be continuously owned by him. Otherwise, he ceases
to become a director
Ø His name is registered in the books of the corporation
Ø Majority of the members are residents of the Philippines
Q: Can the AOI or By-laws provide for other qualifications?
Ø Yes. Provided, that it will not be in conflict with the qualifications set out in
the Corpo Code
GRACE CHRISTIAN HIGH SCHOOL V. CA
Ø Issue as to the validity of the clause granting to a permanent seat on the
board.
Ø Doctrine: Directors must be elected, not appointed.
GOKONGWEI V. SEC
Ø Doctrine of Corporate Opportunity – Director occupies a position of trust
and confidence; of a fiduciary nature; he cannot take advantage of his
position for his own personal interest
Ø Cannot serve 2 masters
Ø 3 issues:
(1) WON the amended by-laws which provide for disqualification is valid?
Yes.
(2) WON petitioner has the right to look into the books of the corporation
as a shareholder? The SC did not allow the inspection. Reason?
(3) WON SEC was correct in allowing the ratification of petitioner in
investing in a foreign corporation?
INTER-ASIA INVESTMENTS V. CA
Ø Q: Why was the corporation bound even if there was no delegation?
Ø Q: How did the SC come up with the implied authority?
o The power of buying stocks includes all acts necessary thereto,
such as to enter into a payment scheme in order to settle an
obligation of the corporation
Sec. 24. Election of directors or trustees. - At all elections of directors or trustees,
there must be present, either in person or by representative authorized to act by
Escudero
written proxy, the owners of a majority of the outstanding capital stock, or if there
be no capital stock, a majority of the members entitled to vote. The election must
be by ballot if requested by any voting stockholder or member. In stock
corporations, every stockholder entitled to vote shall have the right to vote in
person or by proxy the number of shares of stock standing, at the time fixed in the
by-laws, in his own name on the stock books of the corporation, or where the by-
laws are silent, at the time of the election; and said stockholder may vote such
number of shares for as many persons as there are directors to be elected or he
may cumulate said shares and give one candidate as many votes as the number of
directors to be elected multiplied by the number of his shares shall equal, or he may
distribute them on the same principle among as many candidates as he shall see fit:
Provided, That the total number of votes cast by him shall not exceed the number
of shares owned by him 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. Unless otherwise provided in the articles of incorporation or in
the by-laws, members of corporations which have no capital stock may cast as
many votes as there are trustees to be elected but may not cast more than one
vote for one candidate. Candidates receiving the highest number of votes shall be
declared elected. Any meeting of the stockholders or members called for an
election may adjourn from day to day or from time to time but not sine die or
indefinitely if, for any reason, no election is held, or if there not present or
represented by proxy, at the meeting, the owners of a majority of the outstanding
capital stock, or if there be no capital stock, a majority of the member entitled to
vote
Q: We said that directors must be elected. What are the limitations/conditions of
election?
Ø A meeting must be called for the purpose
o Presence of majority of stockholders representing the outstanding
capital stock/members
Ø Method of voting permitted
o Viva voce (raising of hands), if there is a shareholder who wants to
vote by ballot, then it shall be mandatory
Ø In case of failure of election, then the meeting may adjourn from day-to-
day (except indefinitely)
Q: Is notice required? For what?
Ø Yes. For the meeting
Q: What does the law provide as to owners of delinquent stock?
Ø They cannot vote nor be voted for
10
Q: Stockholders cannot be deprived of the method of voting. What are the
methods?
Ø (1) Straight voting method
o Every SH may vote such number of shares for as many persons as
there are directors to be elected
§ A shareholder can vote such number of shares for as
many persons as there are directors equally
Ø (2) Cumulative voting for 1 candidate method
o A SH is allowed to concentrate his votes and give one candidate as
many votes as the number of directors to be elected multiplied by
the number of shares shall equal
§ A shareholder can give one candidate all his votes
Ø (3) Cumulative voting by distribution
o By this method, a SH may cumulate his shares by multiplying also
the number of his shares by the number of directors to be elected
and distribute the same among as many candidates as he shall see
fit
§ A shareholder can distribute his votes to diff directors as
he may see fit
Sec. 25. Corporate officers, quorum. - Immediately after their election, the
directors of a corporation must formally organize by the election of a president,
who shall be a director, a treasurer who may or may not be a director, a secretary
who shall be a resident and citizen of the Philippines, and such other officers as may
be provided for in the by-laws. Any two (2) or more positions may be held
concurrently by the same person, except that no one shall act as president and
secretary or as president and treasurer at the same time.
The directors or trustees and officers to be elected shall perform the duties
enjoined on them by law and the by-laws of the corporation. Unless the articles of
incorporation or the by-laws provide for a greater majority, a majority of the
number of directors or trustees as fixed in the articles of incorporation shall
constitute a quorum for the transaction of corporate business, and every decision
of at least a majority of the directors or trustees present at a meeting at which
there is a quorum shall be valid as a corporate act, except for the election of officers
which shall require the vote of a majority of all the members of the board.
Directors or trustees cannot attend or vote by proxy at board meetings.
Q: Who are the corporate officers?
Ø President, Treasurer, and Secretary
Q: Are they exclusive?
Escudero
Ø No. Can elect as indicated in the AOI or by-laws additional officers as the
need of the nature of the business so require
o Ex: VP, auditor, assistant treasurer or secretary
Q: What are the qualifications to become a president?
Ø Must be a director (he is the only officer required to be a member of the
board)
Ø Must own at least 1 share
Q: What are the qualifications to be secretary?
Ø Need not be a director
Ø Resident and citizen
o Does not need to be natural-born citizen. Does not need to own
one share
Q: What are the qualifications to be treasurer?
Ø No requirements
Q: Can a person hold 2 positions?
Ø GR: Yes
o EXPN: A president cannot be a secretary; he also cannot be a
treasurer. These are the Prohibited Concurrent Positions.
§ Reason: to ensure effective monitoring of each officer’s
separate functions
Q: What does the term ‘quorom’ mean?
Ø Requires persons to be present in order to competently transact business
Q: What is the required number of persons to constitute a quorum?
Ø Majority of the directors fixed in the AOI
Q: What is the required vote for a corporate act?
Ø Majority of the directors present of the meeting where there is a quorum
(majority of the quorum itself)
o EXPN: except for the election of officers which shall require the
vote of a majority of all the members of the board.
Ø Ex: there are 5 persons present. The vote of 3 of them would constitute a
quorum. Thus, the vote of 2 is sufficient to pass upon a corporate act
Q: What is the required vote for purposes of election?
Ø 50% of the entire membership
NACPIL V. INT’L BROADCASTING CORP
11
 Ø Q: What is the test to determine if the assistant manager is a corporate
officer?
o Under the Labor code, there are only 3 corporate officers
§ However, if there is board approval to constitute one as a
corporate officer, (not just approval of the human
resources), then he is a recognized corporate officer
o The jurisdiction of intra-corporate disputes under PD 902-A has
been transferred from the SEC to the RTC by virtue of the SRC.
o If the employee is not a corporate officer, then the Labor
arbiter/NLRC has jurisdiction
Q: Can directors vote by proxy?
Ø GR: No. They cannot attend or vote by proxy in Board Meetings. R: they
are elected officers
o EXPN: In a Shareholders or Members Meeting
Assignment: Sec. 26-35 plus 5 cases
Third Meeting.
Q: After election, what must be done?
Ø Sec. 26. Report of election of directors, trustees and officers. - Within
thirty (30) days after the election of the directors, trustees and officers of
the corporation, the secretary, or any other officer of the corporation, shall
submit to the Securities and Exchange Commission, the names,
nationalities and residences of the directors, trustees, and officers elected.
Q: What happens when a director, trustee or officer dies?
Ø Should a director, trustee or officer die, resign or in any manner cease to
hold office, his heirs in case of his death, the secretary, or any other officer
of the corporation, or the director, trustee or officer himself, shall
immediately report such fact to the Securities and Exchange Commission.
Q: Aside from the corporate secretary or the officer, who else may report the
death? –
Sec. 27. Disqualification of directors, trustees or officers. - No person convicted by
final judgment of an offense punishable by imprisonment for a period exceeding six
(6) years, or a violation of this Code committed within five (5) years prior to the
date of his election or appointment, shall qualify as a director, trustee or officer of
any corporation.
Q: How may directors, trustees or officers be disqualified?
Escudero
Ø 2 grounds:
o (1) Conviction by final judgment of an offense punishable by
imprisonment for a period exceeding 6 years, or
o (2) Commission of a violation of the Corpo Code committed within
5 years prior to the date of his election or appointment
Q: Are the grounds under Sec. 27 exclusive?
Ø No. Refer to the qualifications to become a Director, Corporate Secretary,
Treasurer or any other officer. The absence of a qualification will be a
ground for disqualification
Sec. 28. Removal of directors or trustees. - Any director or trustee of a corporation
may be removed from office by a vote of the stockholders holding or representing
at least two-thirds (2/3) of the outstanding capital stock, or if the corporation be a
non-stock corporation, by a vote of at least two-thirds (2/3) of the members
entitled to vote: Provided, That such removal shall take place either at a regular
meeting of the corporation or at a special meeting called for the purpose, and in
either case, after previous notice to stockholders or members of the corporation of
the intention to propose such removal at the meeting. A special meeting of the
stockholders or members of a corporation for the purpose of removal of directors
or trustees, or any of them, must be called by the secretary on order of the
president or on the written demand of the stockholders representing or holding at
least a majority of the outstanding capital stock, or, if it be a non-stock corporation,
on the written demand of a majority of the members entitled to vote. Should the
secretary fail or refuse to call the special meeting upon such demand or fail or
refuse to give the notice, or if there is no secretary, the call for the meeting may be
addressed directly to the stockholders or members by any stockholder or member
of the corporation signing the demand. Notice of the time and place of such
meeting, as well as of the intention to propose such removal, must be given by
publication or by written notice prescribed in this Code. Removal may be with or
without cause: Provided, That removal without cause may not be used to deprive
minority stockholders or members of the right of representation to which they may
be entitled under Section 24 of this Code.
Q: What is the rule on the removal of a director?
Ø The requisites under Sec. 28 are:
o (1) Meeting
o (2) Notice
rd
o (3) 2/3 vote of the stockholders representing the OCS
Q: Who must call the meeting?
Ø The secretary, upon order of the president; or
Ø Written demand of majority of the stockholders representing the OCS
12
Q: Before hearing, a notice must be transmitted. How is this done?
Ø Publication; or
Ø Written Notice thru ordinary mail or registered mail or courier mail. It does
not matter, so long as the notice is in writing
Q: Do you need to have cause in order to remove a director?
Ø No. So long as the 3 requisites are present, then removal is valid
Ø Sec 28 provides for only on limitation: Without prejudice to the right of
representation of the minority stockholder under Sec. 24
Ø Q: What does Sec. 24 provide with respect to minority stockholders? How
is elections related to removal?
Ø Q: Does the proviso apply even if the removal is with cause?
o No. The proviso only applies if the removal is without cause
Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the
board of directors or trustees other than by removal by the stockholders or
members or by expiration of term, may be filled by the vote of at least a majority of
the remaining directors or trustees, if still constituting a quorum; otherwise, said
vacancies must be filled by the stockholders in a regular or special meeting called
for that purpose. A director or trustee so elected to fill a vacancy shall be elected
only or the unexpired term of his predecessor in office.
A directorship or trusteeship to be filled by reason of an increase in the number of
directors or trustees shall be filled only by an election at a regular or at a special
meeting of stockholders or members duly called for the purpose, or in the same
meeting authorizing the increase of directors or trustees if so stated in the notice of
the meeting.
Q: Assuming that there has already been a vacancy, when should the vacancy be
filled?
Ø In the same meeting which provided for the removal; or
Ø In another regular meeting or special meeting
Q: What are the requirements if the filling the vacancy is done in a separate
meeting?
Ø 2 Basic Requirements:
o (1) Prior notice
o (2) Meeting called of the specific purpose of filling the vacancy.
This means that that it was the agenda of the meeting
Q: Under Sec. 29, how is a vacancy filled in? (memorize)
Ø With respect to Shareholders: (4)
Ø With respect to Director: (1)
Escudero
Sec. 30. Compensation of directors. - In the absence of any provision in the by-laws
fixing their compensation, the directors shall not receive any compensation, as such
directors, except for reasonable pre diems: Provided, however, That any such
compensation other than per diems may be granted to directors by the vote of the
stockholders representing at least a majority of the outstanding capital stock at a
regular or special stockholders' meeting. In no case shall the total yearly
compensation of directors, as such directors, exceed ten (10%) percent of the net
income before income tax of the corporation during the preceding year
Q: Are directors entitled to compensation under Sec. 30?
Ø GR: No. Except reasonable per diems
o EXPNs:
(1) Provided for under the By-laws
(2) Majority vote of the stockholder representing the OCS
Q: How is Compensation different from Per diem?
Ø Per diem is an allowance; it is the ‘motivation’ of a director to attend the
meetings
WESTERN INSTITUTE OF TECHNOLOGY V. SALAS
Ø GR: Directors or Trustees are not entitled to compensation because there
is a presumption that they give their services gratuitously to the corp
Ø EXPN: Unless it is provided under the by-laws or by majority vote by
stockholders representing OCS
Ø Doctrine: When a person holds a position in a capacity other than that of a
director, (i.e. corporate officer), then he is entitled to his income in the
capacity in which he acted
Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who
willfully and knowingly vote for or assent to patently unlawful acts of the
corporation or who are guilty of gross negligence or bad faith in directing the affairs
of the corporation or acquire any personal or pecuniary interest in conflict with
their duty as such directors or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the corporation, its stockholders or
members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in violation of
his duty, any interest adverse to the corporation in respect of any matter which has
been reposed in him in confidence, as to which equity imposes a disability upon him
to deal in his own behalf, he shall be liable as a trustee for the corporation and
must account for the profits which otherwise would have accrued to the
corporation.
13

Q: What are the instances under Sec. 31 that make a Director, Officer, or Trustee
solidarily liable for damages with the corporation (or personally liable for the
actions of the corporation)?
Ø 3 grounds under Sec. 31; Plus 3 more
Q: What is a watered stock?
Ø It is stock issued below its par value
SANTOS
Ø GR: Directors, Trustees, or Officers are not personally liable for the
corporation’s actions. R: Doctrine of Corporate Entity (Separate and
distinct)
Ø EXPNs: see above
Ø In the case at bar, none of the exceptions apply.
SPS. DAVID
Ø This is a good example of the first exception which makes a director
personally liable
Ø Q: What made Sps. David revise the design?
o To reduce the cost of construction. Thus, it is prejudicial to the
interest of Sps. Quiambao. There was the commission of patently
unlawful acts
o Doctrine: This is a case where the separate and distinct
personality of the corporation was NOT pierced, however, the
corporate officers/director were still made liable for the corporate
acts if they fall under any of the enumerated exceptions (Sir says
this is the same doctrine enunciated in the Santos case. However,
it must be noted that the corporate officers were not held
personally liable in the Santos case)
MALAYAN
Ø Same doctrine as the Santos and Sps. David
Sec. 32. Dealings of directors, trustees or officers with the corporation.- A contract
of the corporation with one or more of its directors or trustees or officers is
voidable, at the option of such corporation, unless all the following conditions are
present:
1. That the presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was nor necessary for the approval of
the contract;
Escudero
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the
board of directors.
Where any of the first two conditions set forth in the preceding paragraph is
absent, in the case of a contract with a director or trustee, such contract may be
ratified by the vote of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or of at least two-thirds (2/3) of the members in a
meeting called for the purpose: Provided, That full disclosure of the adverse
interest of the directors or trustees involved is made at such meeting: Provided,
however, That the contract is fair and reasonable under the circumstances.
Q: Who is a self-dealing director under Sec. 32?
Ø When a corporation enters into a contract with a director, the GR is that it
is VOIDABLE at the option of the corporation
Ø EXPN: It could be ratified by the presence of all 4 conditions precedent.
rd
Q: What if only the 3 requisite is present, can there be ratification?
rd
Ø Yes, provided that it is accompanied by 2/3 vote of the stockholders
representing the OCS
Ø This applies in the case of contracts entered into by a Director
Q: What if there is an absence of all the conditions, is it possible that the contract
be ratified?
Ø Yes. The contract is voidable, which means that it is valid until annulled
Ø If no one questions the validity of the contract in a proper suit, then it is
ratified (implied)
PRIME WHITE CEMENT
Ø Although the powers were delegable to Te and the contract were ratified,
still Te is a self-dealing director who failed to prove that the contract
complied with Sec. 32. Thus, the corporation can rescind the contract
Ø The SC ruled that the contract was not fair and reasonable
Ø Q: What was the SC’s ruling as to Te entering into contracts with other
companies?
Sec. 33. Contracts between corporations with interlocking directors. - Except in
cases of fraud, and provided the contract is fair and reasonable under the
circumstances, a contract between two or more corporations having interlocking
directors shall not be invalidated on that ground alone: Provided, That if the
interest of the interlocking director in one corporation is substantial and his interest
in the other corporation or corporations is merely nominal, he shall be subject to
14
the provisions of the preceding section insofar as the latter corporation or
corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall
be considered substantial for purposes of interlocking directors.
Q: What is a contract between interlocking directors under Sec. 33?
Sec. 34. Disloyalty of a director. - Where a director, by virtue of his office, acquires
for himself a business opportunity which should belong to the corporation, thereby
obtaining profits to the prejudice of such corporation, he must account to the latter
for all such profits by refunding the same, unless his act has been ratified by a vote
of the stockholders owning or representing at least two-thirds (2/3) of the
outstanding capital stock. This provision shall be applicable, notwithstanding the
fact that the director risked his own funds in the venture.
Q: Who is a disloyal director under Sec. 34?
Ø One who acquires for himself a business opportunity in which he gains
profit but which should belong to the corporation
Ø The consequence is that such director must account, return/refund the
amount to the corporation
rd
o EXPN: unless the act was ratified by 2/3 vote of the stockholders
representing the OCS
Ø Give a specific example of a disloyal director
Assignment: 35-45 + cases
Fourth Meeting.
Sec. 35. Executive committee. - The by-laws of a corporation may create an
executive committee, composed of not less than three members of the board, to be
appointed by the board. Said committee may act, by majority vote of all its
members, on such specific matters within the competence of the board, as may be
delegated to it in the by-laws or on a majority vote of the board, except with
respect to: (1) approval of any action for which shareholders' approval is also
required; (2) the filing of vacancies in the board; (3) the amendment or repeal of by-
laws or the adoption of new by-laws; (4) the amendment or repeal of any resolution
of the board which by its express terms is not so amendable or repealable; and (5) a
distribution of cash dividends to the shareholders.
Q: What is an executive committee?
Escudero
Q: What is its composition?
Q: What are the powers of the executive committee?
Q: Can they issue cash dividends? How about stock dividends? No.
Sec. 36. Corporate powers and capacity. - Every corporation incorporated under
this Code has the power and capacity: (PIMPS-DO-SCAB)
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the articles
of incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this
Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or
repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell
stocks to subscribers and to sell treasury stocks in accordance with the provisions of
this Code; and to admit members to the corporation if it be a non-stock
corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage
and otherwise deal with such real and personal property, including securities and
bonds of other corporations, as the transaction of the lawful business of the
corporation may reasonably and necessarily require, subject to the limitations
prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided in this
Code;
9. To make reasonable donations, including those for the public welfare or for
hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no
corporation, domestic or foreign, shall give donations in aid of any political party or
candidate or for purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry out its
purpose or purposes as stated in the articles of incorporation
Q: What are the powers of a corporation?
Ø Express
Ø Incidental to its existence
Ø Implied from express power
15
Sec. 37. Power to extend or shorten corporate term. - 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 representing at least two-thirds (2/3) of the outstanding capital
stock or by at least two-thirds (2/3) of the members in case of non-stock
corporations. Written notice of the proposed action and of the time and place of
the meeting shall be addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally: Provided,
That in case of extension of corporate term, any dissenting stockholder may
exercise his appraisal right under the conditions provided in this code.
Q: What are the requirements of extending or shortening the corporate term
Ø Approval by majority vote of BOD
Ø Written notice
rds
Ø Ratification by SH representing 2/3 of the OCS
Ø A copy of the amended AOI shall be submitted to the SEC for approval
Ø Q: What if notice is thru LBC or Fedex?
o Valid. Reason: it is equivalent to personal service because what
you are doing is to merely deputize the personal service to these
couriers
Q: What is the appraisal right of dissenting shareholders?
Q: Is there appraisal right apply both to extending and shortening?
Ø Yes
Ø Sec. 37 applies to extension
Ø Sec. 81 applies to shortening
Sec. 38. Power to increase or decrease capital stock; 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, at a stockholder's meeting duly called for the
purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or
diminution of the capital stock, or the incurring, creating or increasing of any
bonded indebtedness. Written notice of the proposed increase or diminution of the
capital stock or of the incurring, creating, or increasing of any bonded indebtedness
and of the time and place of the stockholder's meeting at which the proposed
increase or diminution of the capital stock or the incurring or increasing of any
bonded indebtedness is to be considered, must be addressed to each stockholder at
his place of residence as shown on the books of the corporation and deposited to
the addressee in the post office with postage prepaid, or served personally.
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A certificate in duplicate must be signed by a majority of the directors of the
corporation and countersigned by the chairman and the secretary of the
stockholders' meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number of
shares of no-par stock thereof actually subscribed, the names, nationalities and
residences of the persons subscribing, the amount of capital stock or number of no-
par stock subscribed by each, and the amount paid by each on his subscription in
cash or property, or the amount of capital stock or number of shares of no-par
stock allotted to each stock-holder if such increase is for the purpose of making
effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or increasing
of any bonded indebtedness shall require prior approval of the Securities and
Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the corporation
and the other shall be filed with the Securities and Exchange Commission and
attached to the original articles of incorporation. From and after approval by the
Securities and Exchange Commission and the issuance by the Commission of its
certificate of filing, the capital stock shall stand increased or decreased and the
incurring, creating or increasing of any bonded indebtedness authorized, as the
certificate of filing may declare: Provided, That the Securities and Exchange
Commission shall not accept for filing any certificate of increase of capital stock
unless accompanied by the sworn statement of the treasurer of the corporation
lawfully holding office at the time of the filing of the certificate, showing that at
least twenty-five (25%) percent of such increased capital stock has been subscribed
and that at least twenty-five (25%) percent of the amount subscribed has been paid
either in actual cash to the corporation or that there has been transferred to the
corporation property the valuation of which is equal to twenty-five (25%) percent of
the subscription: Provided, further, That no decrease of the capital stock shall be
approved by the Commission if its effect shall prejudice the rights of corporate
creditors.
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.
16
Bonds issued by a corporation shall be registered with the Securities and Exchange DEE V. SEC
Commission, which shall have the authority to determine the sufficiency of the Q: Why did SC say that there is no pre-emptive right?
terms thereof Ø Additional issuance of original shares, not new issuances. New issuances
arise only when capital stock is increased
Q: What are the requirements to increase or decrease capital stock or incur,
create, and in increase? Q: What is a pre-emptive right? When is it available to a shareholder?
(PDAF-CART) Ø The preferential right of SH to subscribe to all issues or disposition of
shares of any class in proportion to their present stockholdings
Q: What is the limitation to this power? o Purpose: to enable SH to retain his proportionate control in the
corporation and to retain his equity in the surplus
Q: What are the ways?
(CRAC-PaNuNu) Q: When will a corporation have new issuances?
Ø When it increases its capital stock
Q: What is bonded indebtedness? Ø See illustration in book
Ø It is the corporation indebtedness evidenced by bonds or notes
Q: What is the purpose of giving pre-emptive right?
Q: What is the difference between bond v. note? Ø So the shareholder can retain his interest. Otherwise, his interest will
Ø As to the amount diluted
Ø As to the term
Ø As to the persons involved Q: When is pre-emptive right not available?

Q: What are the parties to a corporate bond? Q: How will you deny a shareholder pre-emptive right?
Ø (1) Borrowing
Ø (2) Bondholder Q: What are the requisites to the validity of the sale of all or substantially all of
Ø (3) Trustee the property of the corporation
o He has the responsibility to secure the interest of shareholders
MCLEOD
Q: Give at least 3 kinds of bond Ø GR
Ø Mortgage bond Ø 4 exceptions
Ø Equipment bond Ø None of the exceptions apply in the case at bar
Ø Collateral trust bond Ø 31/41 (personally liable)
Ø Straight debenture Ø Andrada v. Mcleod

Sec. 39. Power to deny pre-emptive right. - 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: Provided, That such pre-
emptive right shall not extend to shares to be issued in compliance with laws
requiring stock offerings or minimum stock ownership by the public; or to shares to
be issued in good faith with the approval of the stockholders representing two-
thirds (2/3) of the outstanding capital stock, in exchange for property needed for
corporate purposes or in payment of a previously contracted debt.
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Sec. 40. Sale or other disposition of assets. - Subject to the provisions of existing
laws on illegal combinations and monopolies, a corporation may, by a majority vote
of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or
otherwise dispose of all or substantially all of its property and assets, including its
goodwill, 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, when authorized by the vote of the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock, or in case of non-stock
17
corporation, by the vote of at least to two-thirds (2/3) of the members, in a
stockholder's or member's meeting duly called for the purpose. Written notice of
the proposed action and of the time and place of the meeting shall be addressed to
each stockholder or member at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with postage prepaid,
or served personally: Provided, That any dissenting stockholder may exercise his
appraisal right under the conditions provided in this Code.
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.
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.
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 said corporation or if the
proceeds of the sale or other disposition of such property and assets be
appropriated for the conduct of its remaining business.
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.
Q: What are the requirements?
PARDS
Q: In sale of all or substantially all of the property, is there appraisal right of a
dissenting shareholder?
Ø Yes. It is the right to demand the fair value of the SH share, after dissenting
from a proposed corporate action involving fundamental change in the
corporation in cases provided by law
Q: Do all shareholders have such right?
Ø Yes. Shareholders have right to demand payment to the fair value of his
share
Ø Sale or other disposition shall be deemed to cover substantially all the
corporate assets if
o 1. The corporation would be rendered incapable of continuing the
business; or
o 2. Accomplishing the purpose for which it was incorporated
Q: Can board change its mind and not push through with the sale?
Ø Yes. The board has such discretion
ISLAMIC DIRECTORATE
PNB
Fifth meeting.
Sec. 41. Power to acquire own shares. - A stock corporation shall have the power to
purchase or acquire its own shares for a legitimate corporate purpose or purposes,
including but not limited to the following cases: Provided, That the corporation has
unrestricted retained earnings in its books to cover the shares to be purchased or
acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. 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
3. To pay dissenting or withdrawing stockholders entitled to payment for
their shares under the provisions of this Code
Q: What are legitimate purposes?
Ø Under Sec. 41: (EC-PaTREC)
o To eliminate fractional shares
o To collect or compromise an indebtedness
o To pay the shares of dissenting or withdrawing shareholders
Ø The enumeration under Sec. 41 is not exclusive. The following are other
instances not included in the enumeration:
o To acquire treasury shares
o To acquire redeemable shares
o To reacquire shares to effect a decrease in the capital stock of a
corporation
o In a close corporation, where there is a deadlock in the
management, SEC may order the purchase of share at their FMV
(to remove the deadlock)

Q: When do you consider an asset substantial? Q: What is a fractional share?

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 Ø It is a share which is less than 1 corporation share
Ø Ex: if a SH owns 250 shares and corp declares 25% stock dividend, his total
shares will be 312 and ½ shares. The corpo may purchase the fractional
shares
Ø Reason why fractional shares must be eliminated: they cannot be
represented at corporate meetings
Q: Can shareholders buy fractional shares? -
Q: What are the requirements before a corporation acquire its own shares?
Ø (CLUG-C)
Ø Its capital is not impaired
Ø Must be for a legitimate corporate purpose
Ø Corporation has unrestricted retained earnings
Ø The corporation act in good faith without prejudice to the rights of the
creditors
Ø The conditions of corporate affairs allow it
Q: What is the trust fund doctrine?
Ø The subscribed capital stock of the corporation is a trust fund for the
payment of debts of the corporation which the creditors have the right to
look up to satisfy their credits, and which the corporation may not
dissipate. The creditors may sue the SH directly for the latter’s unpaid
subscription.
Ø The assets of the corporation as represented by its capital stock are TRUST
FUNDS to be maintained unimpaired and to be used to pay corporate
creditor
o So that there can be no distribution of assets among shareholders
without first paying the corporate debts
Ø Any disposition of the corporation’s assets to the prejudice of creditors
who extended their credit on the faith of the corporation’s capital stock is
VOID
Sec. 42. Power to invest corporate funds in another corporation or business or for
any other purpose. - Subject to the provisions of this Code, a private corporation
may invest its funds in any other corporation or business or for any purpose other
than the primary purpose for which it was organized when approved by a majority
of the board of directors or trustees and 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. 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 as shown on the books of the
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corporation and deposited to the addressee in the post office with postage prepaid,
or served personally: Provided, That any dissenting stockholder shall have appraisal
right as provided in this Code: Provided, however, That where the investment by
the corporation is reasonably necessary to accomplish its primary purpose as stated
in the articles of incorporation, the approval of the stockholders or members shall
not be necessary.
Q: What are the requirements before a corporation can invest in another
corporation or business?
Ø With respect to purposes other than primary purpose: (A-RAMEN)
o Approval by a majority of the board of directors
o Ratification by the stockholders representing at least 2/3 of the
outstanding capital stock
o Without prejudice to a dissenting stockholder’s appraisal right
o Meeting duly called for the purpose
o Prior written notice
Ø With respect to primary purpose:
o Ratification by stockholders or member is not necessary
Q: Is investment without the approval of shareholders allowed? Give an example
Ø Yes, with respect to investments by a corporation reasonably necessary to
accomplish a primary purpose which is stated in the AOI
Q: Is there a possibility that an investment can be made in order to accomplish a
purpose other than the primary purpose and still there is no need for ratification
by the stockholders?
Ø Yes, if the purpose is incidental or reasonably necessary to accomplish the
primary purpose
o Ex: Beer manufacturer invests in equipment from another country
to brew beer (See book)
Sec. 43. Power to declare dividends. - The board of directors of a stock corporation
may declare dividends out of the unrestricted retained earnings which shall be
payable in cash, in property, or in stock to all stockholders on the basis of
outstanding stock held by them: Provided, That any cash dividends due on
delinquent stock shall first be applied to the unpaid balance on the subscription
plus costs and expenses, while stock dividends shall be withheld from the
delinquent stockholder until his unpaid subscription is fully paid: Provided, further,
That 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.
19
Stock corporations are prohibited from retaining surplus profits in excess of one o Excess of the profits – Retained Earnings
hundred (100%) percent of their paid-in capital stock, except: (1) when justified by o Negative balance – Deficit
definite corporate expansion projects or programs approved by the board of Ø Other term: surplus profits
directors; or (2) when the corporation is prohibited under any loan agreement with
any financial institution or creditor, whether local or foreign, from declaring Q: What is the meaning of “unrestricted”?
dividends without its/his consent, and such consent has not yet been secured; or (3) Ø Items which are not set aside or earmarked for the some purpose; free to
when it can be clearly shown that such retention is necessary under special be distributed
circumstances obtaining in the corporation, such as when there is need for special Ø Unrestricted – free for dividend distribution to shareholders, if they have
reserve for probable contingencies. not been reserved or set aside by the board of directors for some
corporate purpose or some other purpose in accordance with managerial,
Q: What is a dividend? legal, or contractual requirements
Ø It is that part or portion of the profits of a corporation set aside, declared, o Example of purpose that are restrictive:
and ordered by the directors to be paid ratably to the shareholders on § Corporate expansion
demand or at a fixed time § Payments for debt and liabilities
Ø Purpose: return of investment of the stockholders § Insurance reserves
§ Bank reserves
Q: What is the difference between dividend and profit?
Ø Dividend is that portion of the profits or net earning which the corporation Q: May dividends be declared out of capital?
has set aside for ratable distribution among the shareholders Ø GR: No. A corporation cannot make a valid contract to pay dividends other
o They are the assets of the shareholders than from retained earning or profits and an agreement to pay such
o There are generally 3 kinds of dividends: dividends out of capital is null and void
1. Cash dividend Ø EXPN:
2. Property dividend o (1) Dividends from investments wasting assets corporation (ex:
3. Stock dividend corp engaged in mining or timber cutting)
Ø Profit means return to capital rather than earning from labor performed or o (2) To utilize a lease or patent
services rendered. Profits are not dividends unless declared or set aside by o (3) Liquidating dividends
the corporation
o They are the assets of the corporation Q: What are the requirements before dividends may be declared?
Ø Dividends come from profits while profits are the source of dividends Ø With respect to Cash Dividends:
o Existence of unrestricted retained earnings (this is the most basic
Q: Who has the power to declare dividends? requirement)
Ø Board of directors have the power to declared dividends out of o Resolution of the Board declaring the payment of such earning to
unrestricted retained earnings the shareholders
Ø Stock dividends – requires ratification of shareholders representing 2/3 of Ø With respect to Stock Dividends:
the outstanding capital stock in a meeting called for the purpose o Existence of unrestricted retained earnings
Ø Other dividends – mere approval of the Board is sufficient to declare o Resolution of the Board declaring the payment of such earning to
dividends the shareholders
o Approval of stockholders representing not less than two-thirds
Q: What is the reason why ratification for stock dividends is required but it is not (2/3) of the outstanding capital stock at a regular or special
required in cash dividends? See p. 416 of book meeting duly called for the purpose.
o Corp must have sufficient number of authorized unissued shares
Q: What are unrestricted retained earnings? for distribution to stockholders
Ø Retained earnings = assets – liabilities and legal capital
Escudero 20
 § Otherwise, it must increase its capital stock to the extent
of the corporate earnings to be declared and distributed
as stock dividends
Q: What are the limitations in retaining surplus profits?
Ø GR: Stock corporations are prohibited from retaining surplus profits in
excess of one hundred (100%) percent of their paid-in capital stock
Ø EXPN: (SLEx)
Ø (1) When justified by definite corporate expansion projects or programs
approved by the board of directors; or
Ø (2) 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
Ø (3) When it can be clearly shown that such retention is necessary under
special circumstances obtaining in the corporation, such as when there is
need for special reserve for probable contingencies.
NIELSON CASE
Ø Stock dividends are payable only to shareholders of the corporation and
not to strangers or non-stockholders
o Reason: only shareholders are entitled to ANY KIND OF DIVIDEND
Ø Q: Could there be a possibility that you pay a stranger thru shares of stock?
o Yes
Sec. 44. Power to enter into management contract. - No corporation shall conclude
a management contract with another corporation unless such contract shall have
been approved by the board of directors and by stockholders owning at least the
majority of the outstanding capital stock, or by at least a majority of the members
in the case of a non-stock corporation, of both the managing and the managed
corporation, at a meeting duly called for the purpose: Provided, That (1) 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; or (2)
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, then 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. No management contract shall be
entered into for a period longer than five years for any one term.
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The provisions of the next preceding paragraph shall apply to any contract 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: Provided, however, That such
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.
Q: What is a management contract?
Ø It is an agreement whereby a corporation delegates the management of its
affairs to another corporation for a certain period of time (not exceeding 5
years)
o The managed corporation is bound by the acts of the managing
corporation. It is estopped from denying such authority.
Ø Any contract whereby a corporation undertakes or operates all or
substantially all of the business of another corporation whether such
contracts are service contracts, operating agreements or otherwise (Sec.
44)
Q: Can a natural person enter into a management contract with a corporation?
Ø No. The law expressly provides that only a corporation can enter into a
management contract with another corporation. A contract between a
corporation and a natural person is called an employment contract.
Q: What are the requirements of a management contract?
Ø (ARMA-5)
Ø 1. Approval by majority of the quorum of the board of directors
Ø 2. Ratification by shareholders owning at least majority of the outstanding
capital stock of BOTH:
o The managing corporation
o The managed corporation
Ø 3. Meeting duly called for the purpose
Ø 4. Approval by the shareholders of the managed corporation owning at
least two-thirds (2/3) of the total outstanding capital stock entitled to
vote:
o (1) Where a stockholder/s representing the same interest of both
the managing and the managed corporations own or control more
than 1/3 of the total outstanding capital stock entitled to vote of
the managing corporation (INTERLOCKING SHAREHOLDERS); or
o (2) 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
(INTERLOCKING DIRECTORS
21
 § See illustrations of these 2 cases in the book o Recovery is permitted in most courts by the one who performed
Ø 5. GR: No management contract shall be entered into for a period longer and not the one who received benefits
than 5 years for any one term o Other courts – unenforceable and orders the person benefitted to
o EXPN: Contracts which relate to exploration, development, return that which is received/pay its reasonable value
exploitation or utilization of natural resources that may be Ø Contracts ultra vires in part:
entered into for such periods as may be provided for by law o If separable, sustain/enforce the part which is not ultra vires and
hold invalid the ultra vires part
Q: What are the limitations of a management contract Ø Executory contract – no enforcement even at the suit of either party (void
Ø Must comply with: (1) Approval of the board, (2) Ratification of the SH or or unenforceable)
(4) Approval of SH if falling under either of the 2 cases, and (5) Period of Ø Executed contract – courts will not set aside or interfere with such
contract. contracts
Ø In the case of Interlocking directors, the contract must comply with the Ø Part executed and part authorized – principle of “no unjust enrichment at
requirements of Sec. 33 the expense of another” shall apply
Ø Also, a management contract cannot delegate entire supervision and Ø Executory contract apparently authorized but Ultra Vires – the principal
control over the officers and business of a corporation to another. In other of estoppel shall apply
words, there is no total abdication of the powers of the corporation
o Otherwise it will contravene Sec. 23, which provides for the rule HYDRO
that the corporate powers of all corporations shall be exercised by Ø Doctrine of apparent authority
the board
Q: Is an ultra vires act an illegal act? What is the difference between ultra vires
Sec. 45. Ultra vires acts of corporations. - No corporation under this Code shall act and other acts
possess or exercise any corporate powers except those conferred by this Code or by Ø By itself, it is not necessarily illegal.
its articles of incorporation and except such as are necessary or incidental to the Ultra Vires Acts Illegal Acts
exercise of the powers so conferred. As to nature Not necessarily Unlawful; against law,
unlawful, but outside public morals, public
Q: What is an ultra vires act? the powers of the corp policy, and public order
Ø Not within express, implied, and incidental powers. Not expressly, but As to susceptibility of Can be ratified Cannot be ratified
rather impliedly forbidden since it is not recognized power of the ratification (expressly or impliedly) because they are void
corporation by the shareholders. ab initio
Ø Intra vires acts – done within the legitimate powers of the corporation Reason: Such acts are
Ø It is an act committed outside the object for which a corporation is created merely voidable
as defined by the law of its organization and therefore beyond the powers
conferred upon it by law As to binding effect Can bind parties wholly Cannot bind the parties
or partly executed on
Q: What are the consequences/effects of an ultra vires act? the basis of estoppel
Ø Ultra vires contract which is executory on both sides: Ultra Vires Acts Acts beyond the powers of particular
o Unenforceable by either party officers or directors
§ This means that neither party can demand the Ultra Vires Acts Acts done w/o complying with
performance of the obligation certain conditions and formalities
Ø Ultra vires contract which has been performed on both sides: Ultra Vires Acts Acts involving inexistent contracts
o Neither party can maintain an action to set aside
transaction/recover
Ø Ultra vires contract which has been performed on one side: Q: Is an ultra vires act subject to ratification?
Escudero 22
 Ø With respect to contract or act illegal per se:
o No. it is wholly void and inexistent. It cannot be ratified. The
doctrine of estoppel cannot operate to give effect to a void act
Ø With respect to contract or act not illegal per se:
o Merely voidable and may be ratified or doctrine of estoppel may
be enforced
o Provided that ratification must be by the officer or governing
body having authority to make the contract
§ GR: Approval of the Board is sufficient to ratify an ultra
vires act
§ EXPN: Instances which require ratification of
stockholders
Assignment:
Up to Sec. 59 plus cases
Sixth meeting.
Sec. 46. Adoption of by-laws. - Every corporation formed under this Code must,
within one (1) month after receipt of official notice of the issuance of its certificate
of incorporation by the Securities and Exchange Commission, adopt a code of by-
laws for its government not inconsistent with this Code. For the adoption of by-laws
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 non-stock corporations, shall be necessary. The by-laws shall be signed by
the stockholders or members voting for them and shall be kept in the principal
office of the corporation, subject to the inspection of the stockholders or members
during office hours. A copy thereof, duly certified to by a majority of the directors
or trustees countersigned by the secretary of the corporation, shall be filed with the
Securities and Exchange Commission which shall be attached to the original articles
of incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws may be
adopted and filed prior to incorporation; in such case, such by-laws shall be
approved and signed by all the incorporators and submitted to the Securities and
Exchange Commission, together with the articles of incorporation.
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.
The Securities and Exchange Commission shall not accept for filing the by-laws or
any amendment thereto of any bank, banking institution, building and loan
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association, trust company, insurance company, public utility, educational
institution or other special corporations governed by special laws, unless
accompanied by a certificate of the appropriate government agency to the effect
that such by-laws or amendments are in accordance with law
Q: What are by-laws?
Ø By-Laws - the rules of action adopted by a corporation for its internal
government and for the government of its stockholders or members and
those having the direction, management, and control of its affairs in their
relation to the corporation and among themselves
o It includes rules for routine matters (i.e. calling meetings, etc)
Ø The power to adopt by-laws is inherent in every corporation
Ø The word “by-law” signifies a rule for future action (that is why it cannot
be retroactively applied if it will impair existing contracts or vested right)
Q: What are the functions of by-laws? (SuSoDeRegla)
Ø (1) To supplement the AOI
Ø (2) To be the source of authority for corporate officers and agents
Ø (3) To define the rights and duties of the corporate officers and
directors/trustees as well as of stockholders/members towards the
corporation and among themselves
Ø (4) To regulate business transactions of the corporation in a particular way
Q: Why does a corporation need to adopt by-laws?
Ø When a corporation comes to existence upon the issuance of the
certificate of corporation, it does not mean that it is already prepared to
do business. It may be in existence, but it is not yet organized.
Ø To be organized, it is required that: (1) There are executive officers
charged with the management of the corporation’s affairs, and (2) There
are rules governing the management of its affairs
Q: What are the requirements for the adoption of by-laws?
Ø With respect to by-laws adopted PRIOR to incorporation:
o The by-laws must be signed and approved by ALL the
incorporators and submitted with the SEC together with the AOI
o Q: What specific time should you file or submit the by-laws if you
file PRIOR to incorporation?
§ Upon filing of the AOI. Since the SEC already provides for
a ready-made form which contains AOI and by-law, what
needs to be done is to fill it up.
Ø With respect to by-laws adopted and filed AFTER incorporation
o The by-laws must be adopted within 1 month after receipt of
notice of issuance of the certificate of incorporation by the SEC
23
 o 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
Ø In either of the above cases, the following are also required:
o With respect to special corporations governed by special laws, the
SEC shall not accept their by-laws/amendment thereto unless
accompanied by a certification by the appropriate government
agency to the effect that such by-laws/amendments are in
accordance with law
o Must be signed by the voting stockholders and members voting
for them
o Must be kept in the principal office of the corporation subject to
the inspection of the stockholders or members during office hours
o Must file a copy of the entire by-laws (certified by majority of the
directors/trustees and countersigned by the corporate secretary)
with the SEC who will attach the same to the original AOI (but this
is only a formal requisite according to an SEC Opinion)
Q: When do by-laws take effect?
Ø Upon the issuance SEC of a certification that the by-laws are not
inconsistent with the Corporation Code
Q: Is the 30-day period mandatory? What is the effect if the corporation does not
file the by-laws within the required period?
Ø No, it is not mandatory. Failure to file the by-laws within 30 days from
incorporation does not automatically dissolve the corporation
o Reason: It is merely a ground for suspension or revocation of its
charter (See Sec. 22(2)) or imposition of administrative fine after
notice and hearing
o This was the doctrine cited in LOYOLA V. CA
Ø By failing to submit its by-laws within the prescribed period, a corporation
can be considered as a de facto corporation which cannot be collaterally
attacked.
Ø Under the rules and regulations of the SEC, the failure may be merely with
the imposition of an administrative fine
Q: What are the elements of valid by-laws? (LaMOG-CR)
Ø (1) Must not be contrary to existing law and inconsistent with the
Corporation Code (See Sec. 47)
o SC declared invalid the automatic and permanent seat in the
Board of Directors contrary to Sec. 23 of the Corpo Code. By-laws
contrary to law cannot attain validity on the basis of long practice
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nor give rise to any vested rights (Grace Christian High School v.
CA)
Ø (2) Must not be contrary to morals and public policy
Ø (3) Must not impair existing obligations of contracts or rights
o SALAFRANCA V. PHILAMLIFE
§ The right to amend the by-laws lie solely in the discretion
of the employer corporation. However, the right cannot
impair the obligation of existing rights such as the right
to security of tenure of regular EEs under the LC
§ Q: What right was violated?
• The security of tenure which is granted to an
employee who was become regular after
working for more than 1 year. Such regular
employee cannot be dismissed without just or
authorized cause under the Labor Code
Ø (4) Must be general and uniform in their operation and not directed
against particular individuals (or not discriminatory)
o A by-law disqualifying a person from being elected as a director if
he is already a director in a competitor corporation is VALID if it
equally applies to all stockholders (Gokongwei v. SEC)
Ø (5) Must be consistent with the charter or AOI
o By-laws are subordinate to the charter and AOI
Ø (6) Must be reasonable
Q: Explain the binding effect of the by-laws.
Ø Until repealed or amended, a by-law is a continuing rule for the gov’t of
the corporation and the individuals composing it
As to members and 1. They have the force of contract between the
shareholders members themselves
2. There is a conclusive presumption that they know
the provisions of the corporate by-laws by the fact of
their being such is charged with notice of by-laws. If he
remains actually ignorant of the provisions, he does so
at his peril
As to corporate 1. They have force and effect of laws of the
directors and its corporation
officers 2. They are bound by and must comply with them
unless and until they are changed
3. Subordinate employees without actual knowledge
of the by-laws are not bound
As to third persons GR: They are not bound to know the by-laws. Reason:
by-laws merely operate as internal rules among the
stockholders
24
 EXPN: unless they have notice/actual or constructive
knowledge.
CHINA BANK V. CA
• Q: So who has the better right to the stock
certificate?
o China Bank because at the time it
entered into the transaction with the SH,
it was not given notice as to the by-laws
of VGCCI and thus, is not bound thereby
• Q: Why did the SEC have jurisdiction?
o SC ruled that the interpretation of the by-
laws is clearly an intra-corporate dispute
which may be resolved thru the technical
expertise of the SEC
Q: What must be contained in the by-laws? Give at least 5
Sec. 47. Contents of by-laws. - Subject to the provisions of the Constitution, this
Code, other special laws, and the articles of incorporation, a private corporation
may provide in its by-laws for: (TiTiQuoP-D-Ho-Ma-PeStO)
1. The time, place and manner of calling and conducting regular or special
meetings of the directors or trustees;
2. The time and manner of calling and conducting regular or special meetings
of the stockholders or members;
a. Q: Why does this item not provide for the “PLACE” whereas in the
st
1 item it does?
i. The reason is because with respect to a board meeting,
the place of meeting may be ANYWHERE in or out of the
Philippines; Whereas the place of a SH/M’s meeting is
either:
1. The city/municipality where the principal office
of the corporation is located; or
2. The principal office of the corporation
3. The required quorum in meetings of stockholders or members and the
manner of voting therein;
4. The form for proxies of stockholders and members and the manner of
voting them;
5. The qualifications, duties and compensation of directors or trustees,
officers and employees;
6. The time for holding the annual election of directors of trustees and the
mode or manner of giving notice thereof;
7. The manner of election or appointment and the term of office of all
officers other than directors or trustees;
8. The penalties for violation of the by-laws;
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9. In the case of stock corporations, the manner of issuing stock certificates;
and
10. Such other matters as may be necessary for the proper or convenient
transaction of its corporate business and affairs.
Sec. 48. Amendments to by-laws. - The board of directors or trustees, by a majority
vote thereof, and the owners of at least a majority of the outstanding capital stock,
or at least a majority of the members of a non-stock corporation, at a regular or
special meeting duly called for the purpose, may amend or repeal any by-laws or
adopt new by-laws. 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 any by-laws or adopt
new by-laws: Provided, That any power delegated to the board of directors or
trustees to amend or repeal any by-laws or adopt new by-laws shall be considered
as revoked whenever stockholders owning or representing a majority of the
outstanding capital stock or a majority of the members in non-stock corporations,
shall so vote at a regular or special meeting.
Whenever any amendment or new by-laws are adopted, such amendment or new
by-laws shall be attached to the original by-laws in the office of the corporation,
and a copy thereof, duly certified under oath by the corporate secretary and a
majority of the directors or trustees, shall be filed with the Securities and Exchange
Commission the same to be attached to the original articles of incorporation and
original by-laws.
The amended or new by-laws shall only be effective upon the issuance by the
Securities and Exchange Commission of a certification that the same are not
inconsistent with this Code
Q: How may by-laws be amended/repealed or new by-laws be adopted?
Ø There are 2 ways:
o (1) By majority vote 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 non-stock corporation, at
a regular or special meeting duly called for the purpose, may
amend or repeal any by-laws or adopt new by-laws
o (2) The owners of 2/3 of the outstanding capital stock or 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 any
by-laws or adopt new by-laws.
§ Q: When is the delegated power revoked?
• The power delegated to the board of directors
or trustees to amend or repeal any by-laws or
25
 adopt new by-laws shall be considered as corporate will; applies action of the conduct of
REVOKED whenever stockholders owning or to a single act of the corporate affairs
representing a majority of the outstanding corporation
capital stock or a majority of the members in Rule in case of conflict Subordinate Prevails over resolution
non-stock corporations, shall so vote at a Necessity of approval by No need for SEC Subj to the approval of
regular or special meeting. SEC approval unless required SEC
§ Q: In the second way that by-laws may be amended, is a by law
meeting required?
• Yes. Although there is no express requirement Q: What is the difference between by-laws and AOI?
of a meeting in this case, such meeting is AOI By-Laws
necessary. Reason: if revocation of the As to nature Condition precedent to Condition subsequent;
delegated power requires a meeting, there is no corporate existence its absence is only a
reason why a meeting is not also required in the ground for
delegation of such power revocation/suspension
Ø Q: What are the formal requirements? of charter
o A meeting is required (Whether in majority vote, delegation, or As to purpose Constitutes the charter Merely rules and
revocation of delegated authority, meeting is required) of the corporation regulations of the
o The amended or new by-laws shall be attached to the original by- corporation
laws in the office of the corporation As to time of execution Executed before Executed within 1
o A copy of the amended or new by-laws shall be duly certified incorporation month after certificate
under oath by the corporate secretary and a majority of the of incorporation (but
directors or trustees and shall be filed with the SEC the same to may be prior thereto)
be attached to the original articles of incorporation and original As to Amendment Amended by majority Amended by majority
by-laws. vote by the Board AND vote of the Board AND
o With respect to special corporations governed by special laws, the stockholders owners of at least
SEC shall not accept their by-laws/amendment thereto unless representing 2/3 of OCS majority of OCS
accompanied by a certification by the appropriate government As to delegation of Cannot be delegated May be delegated to the
agency to the effect that such by-laws/amendments are in power to amend Board by owners of at
accordance with law least 2/3 of the OCS
§ Although this requirement is embodied under Sec. 46
and not in 48, still it is required. Reason: Since the power
Sec. 49. Kinds of meetings. - Meetings of directors, trustees, stockholders, or
to make by-laws implies the power to alter, amend, or
members may be regular or special.
enact new ones, it follows that the latter power has the
same limits as the former power Sec. 50. Regular and special meetings of stockholders or members. - Regular
meetings of stockholders or members shall be held annually on a date fixed in the
Q: When do the amended or new by-laws take effect?
by-laws, or if not so fixed, on any date in April of every year as determined by the
Ø The amended or new by-laws shall only be effective upon the issuance by
board of directors or trustees: Provided, That written notice of regular meetings
the Securities and Exchange Commission of a certification that the same
shall be sent to all stockholders or members of record at least two (2) weeks prior
are not inconsistent with this Code
to the meeting, unless a different period is required by the by-laws.
Q: What is the difference between by-laws and resolution? Special meetings of stockholders or members shall be held at any time deemed
Resolution By-Laws necessary or as provided in the by-laws: Provided, however, That at least one (1)
Nature and subj-matter Mere declaration of the Permanent rule of
Escudero 26
week written notice shall be sent to all stockholders or members, unless otherwise
provided in the by-laws. Q: What are the kinds of meetings?
Ø SH/M meeting
Notice of any meeting may be waived, expressly or impliedly, by any stockholder or o Regular
member. o Special
Whenever, for any cause, there is no person authorized to call a meeting, the Ø D/T meeting (or Board Meeting)
Securities and Exchange Commission, upon petition of a stockholder or member on o Regular
a showing of good cause therefor, may issue an order to the petitioning stockholder o Special
or member directing him to call a meeting of the corporation by giving proper
notice required by this Code or by the by-laws. The petitioning stockholder or Q: What is the importance of the meeting?
member shall preside thereat until at least a majority of the stockholders or Ø So that the persons SH/M or D/T may act upon certain corporate matters,
members present have been chosen one of their number as presiding officer. discuss issues, and exercise their right to vote in appropriate case under
the Corpo Code.
Sec. 51. Place and time of meetings of stockholders or members. - Stockholders' or
members' meetings, whether regular or special, shall be held in the city or Q: Is there Any instance wherein a meeting is no longer required?
municipality where the principal office of the corporation is located, and if Ø Yes.
practicable in the principal office of the corporation: Provided, That Metro Manila Ø GR: A meeting is always needed
shall, for purposes of this section, be considered a city or municipality. o EXPN: With respect to the amendment of the AOI, mere WRITTEN
ASSENT is required
Notice of meetings shall be in writing, and the time and place thereof stated
therein. Q: For example, the principal office is located in Las Pinas, can the SH meeting be
held in Muntinlupa?
All proceedings had and any business transacted at any meeting of the stockholders Ø Yes. With respect to the place of SH/M meeting, Metro Manila shall be
or members, if within the powers or authority of the corporation, shall be valid considered as a city
even if the meeting be improperly held or called, provided all the stockholders or
members of the corporation are present or duly represented at the meeting. Q: Can the SEC call for a meeting?
Ø No.
Sec. 53. Regular and special meetings of directors or trustees. - Regular meetings Ø A stockholder may petition before the SEC when there is no person
of the board of directors or trustees of every corporation shall be held monthly, authorized to call the meeting and if the SEC finds good cause, it will direct
unless the by-laws provide otherwise. the petitioning SH/M to call the meeting
Special meetings of the board of directors or trustees may be held at any time upon Ø The SEC will not call the meeting, it may only make an order directing SH to
the call of the president or as provided in the by-laws. hold a meeting

Meetings of directors or trustees of corporations may be held anywhere in or Q: Is there any instance wherein a SH/M may preside in a meeting?
outside of the Philippines, unless the by-laws provide otherwise. Notice of regular Ø Yes
or special meetings stating the date, time and place of the meeting must be sent to Ø Q: So any ordinary SH/M may preside?
every director or trustee at least one (1) day prior to the scheduled meeting, unless o No
otherwise provided by the by-laws. A director or trustee may waive this
requirement, either expressly or impliedly. Q: If the by-laws are silent, who shall preside?

Sec. 54. Who shall preside at meetings. - The president shall preside at all meetings EXPERT TRAVEL
of the directors or trustee as well as of the stockholders or members, unless the by- Ø A foreign corporation’s resident agent who is a lawyer is not authorized to
laws provide otherwise. sign the certification or verification of non-forum shopping in the absence
Escudero 27
 of a Board Resolution authorizing him to do so and such is submitted to any business transacted are
the court within the powers or
Ø The SC recognized teleconferencing, videoconferencing, audio- authority of the corporation
conferencing as a means to conduct business. However, these modes (not ultra vires); and
cannot be used to substitute a written board resolution 2. ALL the SH/M of the
o Bases: corporation are present or
1. R.A. 8792 – E-Commerce Act duly represented at the
2. SEC memorandum no. 15 – guidelines to be complied with meeting
a. (Sabi ni sir take a look at these) Notice Written Written Written notice must be given to
notice must notice must every Director or Trustee at
STOCKHOLDERS/MEMBERS DIRECTORS/TRUSTEES be given to be given to least 1 day prior to the
MTG. MEETING SH/M at least SH/M at meeting, unless: 1. Otherwise
Time Regular Special Regular Special 2 weeks prior least 1 week provided under the by-laws, or
meeting Meeting meeting meeting those to the prior to the 2. Waived by the D/T
those held those held those held by held by the meeting, meeting,
ANNUALLY: at ANY the board board at ANY unless: 1. unless: 1.
1. On a date TIME: MONTHLY, TIME: Otherwise Otherwise
fixed in the 1. Deemed unless the by- 1. Upon the provided in provided in
by-laws, or necessary or laws provide call of the by-laws, or 2. by-laws, or
2. On any 2. As or otherwise president or Waived by 2. Waived
date in April provided in 2. As the SH/M by the SH/M
of every year the by-laws otherwise
as provided in the Requisites of notice of meeting: (AW-DaBus-TiLaw)
determined by-laws 1. Must be issued by one who has authority to issue it
by the Board 2. Must be in writing
Place GR: (1) In the CITY OR ANYWHERE in or out of the 3. Must state date, time, and place unless otherwise
MUNICIPALITY where the Philippines, unless the by-laws provided in by-laws
principal office of the provide otherwise 4. Must state business to be transacted
corporation is located, and 5. Must be sent at a certain time before scheduled
(2) if practicable in the 6. Must comply with any other requirements prescribed
PRINCIPAL OFFICE of the by law or by-laws
corporation: Who may 1. Person/s designated in by- By the President, unless
Ø Provided, That call laws have authority to call otherwise provided in the by-
Metro Manila shall, SH/M meeting; laws
for purposes of this 2. In the absence of such
section, be provision in by-laws, it may
considered a city or be called by a D/T or by an
municipality officer entrusted with the
management of the corp;
EXPN: If the meeting be 3. A petitioning SH/M may
improperly held or called, it make the call upon the order
is still VALID, provided: of the SEC whenever for any
1. The proceedings had and cause, there is no person
Escudero 28
 authorized to call the § So with respect to Stock corporation, it is majority of the
meeting; OCS while in non-stock, it is the number of the members
4. A special meeting for of the corporation
removal of D/T may be called o EXPN: Unless otherwise provided for in the Corpo Code or in the
by the secretary or by SH/M By-laws (but not less than 2 SH/M may constitute a quorum)
Who may 1. President presides the President presides the
preside meetings unless the by-laws meetings unless the by-laws Q: What happens when some of the shareholders or members walked out in the
provide otherwise provide otherwise middle of the meeting and there is no more quorum, what is the effect?
Ø Once there is a quorum at the time the meeting is called to order, even if
2. A SH/M may preside in a some people walked out leaving less than the majority, the proceedings
temporary capacity where will be valid. A minority group cannot prevent corporate action by walking
the person authorized to out
preside is absent
Seventh meeting.
3. The petitioning SH/M
shall preside until at least a Sec. 55. Right to vote of pledgors, mortgagors, and administrators. - In case of
majority of the SH/M present pledged or mortgaged shares in stock corporations, the pledgor or mortgagor shall
have chosen one of their have the right to attend and vote at meetings of stockholders, unless the pledgee or
number as presiding officer mortgagee is expressly given by the pledgor or mortgagor such right in writing
(in rel. to #3 of “Who may which is recorded on the appropriate corporate books.
call”
Allowance of Proxy is allowed Proxy is not allowed Executors, administrators, receivers, and other legal representatives duly appointed
proxy by the court may attend and vote in behalf of the stockholders or members without
Requirement (PDP-NoQ) need of any written proxy.
s 1. Held at the proper place
2. Held at the stated date and appointed time or a Sec. 56. Voting in case of joint ownership of stock. - In case of shares of stock
reasonable time thereafter owned jointly by two or more persons, in order to vote the same, the consent of all
3. Called by the proper person the co-owners shall be necessary, unless there is a written proxy, signed by all the
4. There must be previous notice co-owners, authorizing one or some of them or any other person to vote such share
5. There must be a quorum or shares: Provided, That when the shares are owned in an "and/or" capacity by the
holders thereof, any one of the joint owners can vote said shares or appoint a proxy
Sec. 52. Quorum in meetings. - Unless otherwise provided for in this Code or in the therefor
by-laws, a quorum shall consist of the stockholders representing a majority of the
outstanding capital stock or a majority of the members in the case of non-stock Sec. 57. Voting right for treasury shares. - Treasury shares shall have no voting
corporations right as long as such shares remain in the Treasury

Q: What is quorum? Q: Explain the right to vote.

Ø It is that number of members of a body which when legally assembled in Ø With respect to stock corporations:
their proper places will enable the body to transact its proper business o Voting is based on the number of shares owned and not on the
Ø With respect to Stockholders or members meetings: number of stockholders or per capita
o GR: A quorum shall consist of the SH representing a majority of o Thru the right to vote, the SH participates in the management of
the OCS or a majority of the member of a non-stock corporation the corporation
o It is the SH’s “supreme right and main protection”
Escudero 29
 o It is an incident of ownership or the property in the stock of which
the SH cannot be deprived without his consent and he may vote it
as he chooses, although not in the manner or for the purposes
contrary to law, public policy or fraudulently
o This right may be lawfully denied under the AOI/By-laws
o The right to vote does not impose a legal duty to vote
o The vote is based on the number of shares represented, not the
number of SHs present
o A director has the right to vote as a director or as a SH
Ø With respect to non-stock corporations:
o GR: Each member shall be entitled to one vote
§ EXPN: The right of the members of any class to vote may
be limited, broadened or denied to the extent specified
in the AOI or by-laws (Sec. 89)
Q: Who are entitled to vote? Who are not entitled to vote?
Ø It depends upon the kind of share.
Ø Voting shares – Only the legal owners of shares have the right to attend
and vote in a corporate meeting
Ø Sequestered shares
o GR: the registered owners of shares sequestered by gov’t (PCGG)
or their duly authorized representatives or proxies may vote. The
gov’t is merely a conservator and cannot vote.
§ Q: How do you know if PCGG may vote sequestered
shares?
§ #1 EXPN: The 2-Tiered Test:
1. WON there is prima facie evid showing that the
shares are ill gotten wealth and thus belong to the
State
2. WON there is an immediate danger of dissipation
thus necessitating their continued sequestration and
voting by the PCGG while the main issue is pending
with the Sandiganbayan
o REPUBLIC V. COCOFED
§ #2 EXPN: Public Charter Exception: The 2-tiered test
does not apply in cases of sequestered shares purchased
with public funds or prima facie public funds or at least
funds affected with public interest even though the case
is still pending
• In the case of COCOFED, coco levy funds partake
the nature of taxes. The beneficial ownership
belong to the government although the shares
are in the name of Eduardo Cojuangco.
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§ Thus, the gov’t has the authority vote:
• 1. Where gov’t shares are taken over by private
persons or entities which registered them in
their own names; and
• 2. Where the capitalization or shares that were
acquired with public funds somehow landed in
private hands
Ø Non-voting shares – the owners may vote in certain instances:
o When law provides that 2/3 or majority vote of OCS “entitled to
vote”, the excludes non-voting shares
o GR: In all corporate acts, only voting shares are entitled to vote
§ EXPN: Holders of non-voting shares may vote in cases
provided in Section 6, par. 6, nos. 1-8
Ø Disqualified shares – not entitled to vote
Ø Preferred and redeemable – entitled to vote, but may be denied under the
AOI
Ø Delinquent shares – not entitled to vote
Ø Treasury shares – have no voting rights so long as they remain in treasury
o Reason: these shares are not part of the OCS. The only right a
corp has over them are to reissue them for a valuable
consideration
o To give voting rights to these shares could enable the directors to
prolong their stay in office against the wishes of the holders of
majority of the shares.
Ø Fractional shares – not entitled to vote
Ø Unpaid shares – if they are not delinquent, they are entitled to vote
Ø Escrow shares – not entitled to vote before fulfillment of the condition
imposed
Ø Pledged or mortgaged shares
o GR: The pledgor or mortgagor shall have the right to attend and
vote at meetings of stockholders
§ Q: So what is the effect of a pledge on the right to vote
on a SH who pledges his shares?
• No effect at all.
o EXPN: Unless the pledgee or mortgagee is
1. Expressly given by the pledgor or mortgagor such right in
writing
2. Which is recorded on the appropriate corporate books.
a. Q: Who must record this authority?
i. The PLEDGOR
Ø Voting rights for shares a deceased stockholder
o Exercised only where a legal representative has been appointed
30
 o Executors, administrators, receivers, and other legal
representatives duly appointed by the court may attend and vote
in behalf of the stockholders or members without need of any
written proxy.
Ø Shares jointly owned (effect by 2 or more persons own shares jointly)
o GR: In order to vote the same, the consent of all the co-owners
shall be necessary,
o EXPNs:
1. Unless there is a written proxy, signed by all the co-owners,
authorizing one or some of them or any other person to vote
such share or shares
2. Provided, that when the shares are owned in an "and/or"
capacity by the holders thereof, any one of the joint owners
can vote said shares or appoint a proxy therefor
Q: Explain the manner of voting.
Ø A SH/M may vote:
o 1. Directly (in person)
o 2. Indirectly, through a representative (PTA)
§ By means of a proxy
§ By a trustee under a trust agreement
§ By executor, administrators, receivers, or other legal
representatives duly appointed by the court
Ø Voting may either be straight or cumulative (Sec. 24)
Q: How about parents, can the vote for the minor children’s shares?
Ø Yes. Under the family code, parents are considered JOINT
ADMINISTRATORS of the property of the minor children
Q: What if the person represented is not a minor, there is no proxy, no trustee, no
legal representative, and he dies. Who may represent him?
Ø No one.
Ø Q: What is the remedy of the heirs who want to vote?
o They must file an action for partition
CHUA v. CA
Ø The 2 requirements of a derivative suit are:
o 1. It must be alleged that it is a derivative suit, meaning it is filed
on behalf of the corporation
o 2. It must include all indispensible parties, meaning that the
corporation itself must be impleaded
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Ø A derivative suit may be filed by a SH on behalf of the corporation as the
real party in interest only when the Board of directors do NOT file a case.
Reason: the power to sue in the name of the corp resides with the board.
Ø The SH may enforce a corporate cause of action thru a derivative suit
Ø In the case at bar, the petition was for certiorari and was not alleged to be
a derivative suit nor was the corporation impleaded as a party.
Sec. 58. Proxies. - Stockholders and members may vote in person or by proxy in all
meetings of stockholders or members. Proxies shall 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
Q: What is proxy?
nd
Ø Written authorization given by one person to another so that the 2
person can act for the first
Ø Used to apply to the holder of the authority or person authorized by an
absent SH/M to vote for him at a SH/M’s meeting
Ø Nature of proxy: purely personal. The right to appoint is an incident of
ownership.
Q: What are the requisites for a valid proxy?
Ø F5-SWV
Ø 1. Filed before the scheduled meeting with the corporate secretary
Ø 2. No proxy shall be valid and effective for a period longer than 5 years at
any time
Ø 3. It shall be signed by the SH/M concerned
Ø 4. Proxies shall be in writing
o Oral proxies are not allowed
Ø 5. Unless otherwise provided in the proxy, it shall be valid only for the
meeting which it was intended
Q: What are the kinds of proxy?
Ø 1. General Proxy – confers a general discretionary power of attorney to
attend and vote at an annual meeting “with all the powers the
undersigned would possess if personally present”
Ø 2. Limited Proxy – restricts the authority to vote specified matters only
and direct the manner in which the vote shall be cast
Ø 3. Specific Proxy – the authority granted is merely for a particular meeting
on a specific date
Ø 4. Continuing Proxy – authority given is to represent the SHs at any and all
regular and special SH’s meetings unless the SH revokes the same
31

Q: What is the purpose of proxy?
Ø 1. For convenience or favor to the distant and indifferent SH
Ø 2. Assured the presence of a quorum
Ø 3. Enables those who do not wish to attend a SH/M’s meeting to protect
their interest by exercising their right to vote thru representative
Ø 4. Secure voting control or management control in corporation
Q: What are the instances wherein the right to vote by proxy may be exercised?
Ø 1. Election of the Board of D/T (Sec. 24)
Ø 2. Voting in case of joint ownership stock (Sec. 56)
Ø 3. Voting by trustee under voting trust agreement (Sec. 59)
Ø 4. Voting by members in a non-stock corporation (Sec. 89)
Ø 5. Pledge or mortgage of shares
Ø 6. As may be provided for in its by-laws
Q: Who may be appointed as a proxy?
Ø No limitation under Sec. 58
Ø A SH/M may appoint anyone he sees fit to represent him. Such right
cannot be restricted by the by-laws (otherwise, such provision would be
void) with respect to Stock corporations. It may be denied with respect to
non-stock corporations, but the same must not be discriminatory
Ø D/T cannot attend or vote by proxy in Board Meetings
Q: May proxies be revoked? Yes. How? Explain the rules
Ø Proxies, even those with irrevocable terms, have always been considered
revocable, unless coupled with an interest
Q: How may revocation be done?
Ø 1. Formal notice
Ø 2. Verbal communication
Ø 3. Conduct
Q: What are the rules on revocation?
Ø Last proxy given revokes all previous proxies
Ø Where proxies are undated, the postmark dates become important
Q: What are the powers and rights of a trustee?
Ø Sec. 59. Voting trusts. - One or more stockholders of a stock corporation
may create a voting trust for the purpose of conferring upon a trustee or
trustees:
o 1. The right to vote and other rights pertaining to the shares for
a period not exceeding five (5) years at any time: Provided, That in
Escudero
the case of a voting trust specifically required as a condition in a
loan agreement, said voting trust may be for a period exceeding
five (5) years but shall automatically expire upon full payment of
the loan. A voting trust agreement must be in writing and
notarized, and shall specify the terms and conditions thereof. A
certified copy of such agreement shall be filed with the
corporation and with the Securities and Exchange Commission;
otherwise, said agreement is ineffective and unenforceable.
o 2. The certificate or certificates of stock covered by the voting
trust agreement shall be canceled and new ones shall be issued
in the name of the trustee or trustees stating that they are issued
pursuant to said agreement. In the books of the corporation, it
shall be noted that the transfer in the name of the trustee or
trustees is made pursuant to said voting trust agreement.
o The trustee or trustees shall execute and deliver to the transferors
voting trust certificates, which shall be transferable in the same
manner and with the same effect as certificates of stock.
o 3. The voting trust agreement filed with the corporation shall be
subject to examination by any stockholder of the corporation in
the same manner as any other corporate book or record:
Provided, That both the transferor and the trustee or trustees
may exercise the right of inspection of all corporate books and
records in accordance with the provisions of this Code.
o Any other stockholder may transfer his shares to the same trustee
or trustees upon the terms and conditions stated in the voting
trust agreement, and thereupon shall be bound by all the
provisions of said agreement.
o No voting trust agreement shall be entered into for the purpose
of circumventing the law against monopolies and illegal
combinations in restraint of trade or used for purposes of fraud.
o Unless expressly renewed, all rights granted in a voting trust
agreement shall automatically expire at the end of the agreed
period, and the voting trust certificates as well as the certificates
of stock in the name of the trustee or trustees shall thereby be
deemed canceled and new certificates of stock shall be reissued in
the name of the transferors.
o 4. The voting trustee or trustees may vote by proxy unless the
agreement provides otherwise.
Q: What is a voting trust agreement?
Ø It is an agreement whereby a SH of a stock corporation confers upon a
trustee/s the right to vote and other rights pertaining to the shares for a
period not 5 years at any time
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 Ø It is not governed by the law on agency. Unlike agency, a voting trust • TELECONFERENCING
agreement is not revocable at will o Can you conduct a SH meeting thru teleconferencing?
• VOTING
Q: What are the purposes of voting trust agreement? o When is it required that the majority vote of the board + majority
Ø Unified control of the affairs of the corporation and consistent policy and vote of SH representing 2/3 of the OCS be obtained?
management especially of a new corporation desirous of attracting o When may preferred or redeemable shares vote?
investors
Ø Assure continuity of policy and management especially of a new ESSAY
corporation desirous of attracting investors • ECE had a lot registered in its name. FHM took possession of the land. ECE
Ø Enable owners of majority of the stock of the corp to control the corp filed a complaint against FHM. The court ruled in ECE’s favor. A writ of
Ø Vest and retain the management of the corporation in the persons execution was filed against FHM to deliver. FHM bought a substantial
originally promoting it amount of the shares from ECE. FHM refused to obey the writ and argued
Ø Prevent a rival concern from acquiring control of the corp that there its acquisition of shares was a supervening event the effect of
Ø To carry out a proposed sale of the corp’s assets and to facilitate which makes FHM not liable.
dissolution • No pre-emptive rights on additionally issued shares
Ø To enable 2 holding companies to operate jointly a corporation controlled • Non-filing the by-laws within 30 days does not make a corporation a de
by them facto corporation
Ø To effect a plan for reorganization of a corp in financial difficulty or in • Ratification of 2/3 of SH is required under Sec. 40 if sale of all or
bankruptcy proceedings substantially all the assests of the corporation
Ø To aid a financially embarrassed corp to obtain a loan and protect its
creditor EXPLAIN
• Identity doctrine
Q: What are the limitations (requirements) of a voting stock agreement? • Instrumentality rule
Ø Not more than 5 years at any 1 time
• Alter ego doctrine
Ø Not used to circumvent the law against monopolies/illegal combinations in
• Trust fund doctrine
restraint of trade
• Business judgment rule
Ø Must be in writing, notarized, specifying the terms and conditions
Ø Certified copy must be filed with the Corporation and SEC
DOCTRINES
Ø Subject to examination by the SH
• Francisco v. CA
Ø Right automatically expired at the end of the period.
• Cruz v. Dalisay
Q: What is the difference between voting trust agreement and proxy? • Seventh day adventist v. Northeastern
• Grace Christian Highschool
MIDTERM EXAM • Western Institute v. Salas
• Santos v. NLRC
MULTIPLE CHOICE • PNB v. Andrada
• VOTING TRUST AGREEMENT • Salafranca v. Philamlife
o What are valid purposes? • Chua v. CA
o What is the difference between a voting trust agreement and all • Lyceum v. CA
other kinds of trust pools/arrangements?
o Something about liability for damages
• DIVIDEND
o How do you compute a guaranteed cumulative dividend?
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 FINALS
TITLE VII
STOCKS AND STOCKHOLDERS
Sec. 60. Subscription contract. - Any contract for the acquisition of unissued stock
in an existing corporation or a corporation still to be formed shall be deemed a
subscription within the meaning of this Title, notwithstanding the fact that the
parties refer to it as a purchase or some other contract.
Q: What is a subscription contract? Nature?
Ø Any CONTRACT for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed shall be deemed a
SUBSCRIPTION
Ø Unissued stock = stock never been issued (original issuance or the increase
of capital stock)
Ø No required form
Ø By accepting a stock certificate, or acting as SH (i.e. participate in SH
meeting, make payment), a person becomes a SH even without express
contract
Ø The subscription contract may cover one or more shares. Still, it remains an
indivisible contract
Ø Nature: The subscription contract is a consensual contract that is perfected
upon meeting of the minds of the parties . The name of the subscriber is
recorded in the stock and transfer book. From that time, the subscriber
becomes a SH of record and is entitled to all rights of a SH. Until the stocks
are fully paid, it continues to be a subsisting liability that is legally
enforceable
Q: What are the kinds of subscription contract? (Give an example for each)
Ø (PrePo-CAS)
Ø 1. Pre-incorporation subscription – entered into BEFORE INCORPORATION.
It constitutes as a binding contract among subscribers (See: Sec. 61)
Ø 2. Post-incorporation subscription – entered into AFTER INCORPORATION
for the acquisition of unissued stock
o It shall be deemed a subscription notwithstanding the fact that
the parties refer to it as a purchase or some other contract.
o Q: When does a subscriber become a SH?
§ Upon acceptance by the corporation of the subscriber’s
offer or by acceptance of subscriber of the corporation’s
offer (unless the agreement or law provides otherwise,
and in case of increase in ACS) even before full payment
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Ø 3. Conditional subscription – SUBJECT TO A CONDITION, which may be a
past event unknown to the parties or a future, uncertain event, that is, an
event which may or may not happen. (The subscriber becomes a SH only
upon fulfillment of condition)
Ø 4. Absolute subscription – NOT SUBJECT TO ANY CONDITION. (Subscriber
becomes liable on subscription and acquires rights of a SH from time the
subscription is accepted)
Ø 5. Subscription with a special term – where the corporation AGREES TO
DO SOMETHING, the fulfillment of which NOT being a condition precedent
to liability of subscriber or acquisition of rights as SH. It is an absolute
subscription.
Q: Are SH liable to corporate creditors for unpaid subscriptions?
Ø Generally, SH cannot be compelled to make good deficiency when
corporation is not able to meet its obligation. Reason: persons dealing with
the corporation are presumed to know that they can have recourse only to
property of the corporation.
Ø However, stock subscriptions are in the nature of a Trust Fund since they
are to be maintained unimpaired for the protection of the corporate
creditor. Subscribers who have not paid in full are debtors of the
corporation for the balance and if the corporation does not enforce the
liability, the creditors may do so.
Ø An unpaid subscription is an asset which the corporate creditors may look
for payment and may insist that it be collected
Ø Trust Fund Doctrine - the subscribed capital stock of the corporation is a
trust fund for the payment of debts of the corporation which the creditors
have the right to look up to satisfy their credits, and which the corporation
may not dissipate. The creditors may sue the SH directly for the latter’s
unpaid subscription
Q: When is rescission available in a subscription contract?
Ø When there is material or substantial breach of the contract.
Ø Q: Example of material breach?
ONG YONG TIU
Ø If there is no material or substantial breach in the subscription contract,
rescission is not allowed
Ø If the court will interfere, there will be a violation of the business judgment
rule
Ø Q: What should have been the proper remedy in this case?
o Specific performance
Ø Rescission is not proper remedy for distribution of capital assets and
property of the corporation - even if subscribers have legal standing to sue
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 for rescission of subscription contract based on breach of contract, such
action cannot prosper since rescission will violate the Trust Fund Doctrine
and the procedures for the valid distribution of assets and properties
under the Corpo Code.
o Otherwise, any SH may demand rescission for his subscription and
call for distribution of corporate assets to him without complying
with the requirements under the Corpo Code
Sec. 61. Pre-incorporation subscription. - A subscription for shares of stock of a
corporation still to be formed shall be irrevocable for a period of at least six (6)
months from the date of subscription, unless all of the other subscribers consent to
the revocation, or unless the incorporation of said corporation fails to materialize
within said period or within a longer period as may be stipulated in the contract of
subscription: Provided, That no pre-incorporation subscription may be revoked
after the submission of the articles of incorporation to the Securities and Exchange
Commission.
Q: Is pre-incorporation subscription required?
Ø Yes, it is mandatory.
Ø Recall 25%-25% Rule under Sections 13 and 14. The SEC shall not accept
the AOI of any stock corporation unless at least 25% of the ACS has been
subscribed and at least 25% of the total subscription has been fully paid.
Q: When is the pre-incorporation subscription irrevocable?
Ø RULE 1: It is irrevocable for a period of 6 months from the date of
subscription, unless:
o All of the other subscribers consent to the revocation
o The incorporation fails to materialize
Ø Q: Other than these 2 exceptions, are there any other circumstances in
which the subscription is revocable?
o Yes. If the 6-month period has already lapsed, the subscription
becomes revocable.
Ø RULE 2: It becomes irrevocable after the submission of AOI to the SEC
Ø Reason for irrevocability – it prevents a subscriber from speculating on the
stocks of a proposed corporation. Furthermore, the rule protects the
corporation from financially irresponsible subscribes
Sec. 62. Consideration for stocks. - Stocks shall not be issued for a consideration
less than the par or issued price thereof. Consideration for the issuance of stock
may be any or a combination of any two or more of the following:
1. Actual cash paid to the corporation;
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2. 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;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares exchanged for stocks in the event of reclassification or
conversion.
Where the consideration is other than actual cash, or consists of intangible
property such as patents of copyrights, the valuation thereof shall initially be
determined by the incorporators or the board of directors, subject to approval by
the Securities and Exchange Commission.
Shares of stock shall not be issued in exchange for promissory notes or future
service.
The same considerations provided for in this section, insofar as they may be
applicable, may be used for the issuance of bonds by the corporation.
The issued price of no-par value shares may be fixed in the articles of incorporation
or by the board of directors pursuant to authority conferred upon it by the articles
of incorporation or the by-laws, or in the absence thereof, by the stockholders
representing at least a majority of the outstanding capital stock at a meeting duly
called for the purpose.
Q: What are valid considerations in subscription agreements? (Explain each)
Ø (CaPLa-PAO)
Ø 1. Actual cash paid to the corporation;
o Q: What is evidence that cash has been paid?
§ In practice, the bank will allow the opening of a
temporary account in the name of the future corporation
where a deposit shall be made in compliance with the
25%-25% rule (25% of the ACS must be subscribed, 25%
of the subscribed capital must be fully paid. The bank
shall await the approval of the SEC. Payment of cash is
evidence by a certificate requested from the bank that a
deposit has been made to said temporary account
o With respect to items 1 and 2, payment for shares of stock must
be actually received by the corporation.
o Thus, receivables cannot be treated as cash since payment is to
take place in the future. (However, they may be treated as
property payment subject to SEC verification as to existence and
35
 credibility and to the condition that the same shall be held in
escrow until actual payment or collection of the receivables)
Ø 2. 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;
o Q: What are the requisites/conditions for property to be valid
consideration for a subscription agreement?
§ (RNV3-T)
§ 1. Property is actually received
§ 2. Necessary and convenient for the use and for lawful
purposes of the corporation
§ 3. Property is based on a fair valuation equal to the par
or issued value of the stock issued
§ 4. The valuation is INITIALLY determined by BOD or
incorporators
§ 5. The valuation is subject to SEC approval
§ 6. Capable of being transferred to the corporation and
applied to payment of debts
o Q: Example of intangible property?
§ Patents; copyrights; mining claim
o Where the consideration is other than actual cash, or consists of
intangible property such as patents or copyrights, the VALUATION
thereof shall initially be determined by the incorporators or the
board of directors, subject to APPROVAL by the Securities and
Exchange Commission.
o True Value Rule – if the consideration is other than actual cash (2-
4), its value must be worth the value of the stocks issued. That is
why SEC approval is required.
o US dollars should be duly converted to peso, otherwise they will
be considered payment by way of property
o Financial instruments may be considered as personal property
and may be legally accepted as capital contribution
Ø 3. Labor performed for or services ACTUALLY rendered to the corporation;
o Corporation is allowed to receive as payment for its stocks labor
or services actually performed/rendered, provided that the
transaction must be done in GF + no fraud is perpetrated upon
SHs and creditors
o Compensation payable/services actually rendered to corporation
is CREDIT which has ascertainable value.
o Future services is not acceptable as payment.
Ø 4. Previously incurred indebtedness of the corporation;
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o Sec. 62(4) expressly allows set off or satisfaction of previously
incurred indebtedness of a corporation by issuance of its shares
of stock where conflicting rights of creditor are not involved
o The indebtedness must be the kind that is ACKNOWLEDGED by
the board of directors
o Set off = payment to creditor with shares of stock of debtor
corporation in the form of property [See62(2)] in lieu of cash
[62(1)] at the option of the corporation
o Should the corporation enters into such set off, the SEC requires
that the corporation submit a report on the matter indicating the
total number of shares and the total amount to be paid for each
claim and a deed of assignment executed by subscriber/creditor
applying his claim in consideration of the shares of stock.
Ø 5. Amounts transferred from unrestricted retained earnings to stated
capital; and
o This means declaration of Stock Dividends.
o If stocks are issued in consideration of profits earned by the
corporation but not distributed among the SH, such issue is called
stock dividends. Such consideration is permitted under Sec. 62(5).
Once declared and issued, stock dividends are fully paid.
o Stock dividends involve issuance of stock directly paid from
amounts transferred from URE to stated capital. Since the
retained earnings have already been applied as payment to
issuance of shares covering stock dividend declaration, the same
can no longer be reapplied as payment to subsequent
subscription rights.
Ø 6. Outstanding shares exchanged for stocks in the event of reclassification
or conversion.
o Q: What does ‘conversion’ mean?
§ Conversion from a sole proprietorship or a partnership to
a corporation. The consideration shall be the net assets
of those enterprises/units.
o A corporation may reclassify its shares by amending its AOI and
exchange outstanding shares of SHs for stocks reclassified or
converted from one class to another.
o Thus, a holder of preferred shares with conversion privilege may
give his convertible preferred shares as a consideration for the
issuance of a certain number of common shares
Ø A corporation cannot issue its stock as a gratuity
Q: What are the conditions that must complied with respect to the valid
consideration?
36
 Ø 1. Where the consideration is other than actual cash, or consists of
intangible property such as patents of copyrights, the valuation thereof
shall initially be DETERMINED by the incorporators or the board of
directors, subject to APPORVAL by the Securities and Exchange
Commission.
Ø 2. Shares of stock shall not be issued in exchange for promissory notes or
future service.
o The same considerations provided for in this section, insofar as
they may be applicable, may be used for the issuance of bonds by
the corporation.
Ø 3. The issued price of no-par value shares may be FIXED: (ABS)
a. In the articles of incorporation or
b. By the board of directors pursuant to authority conferred upon it by
the articles of incorporation or the by-laws, or
c. In the absence thereof, by the stockholders representing at least a
majority of the outstanding capital stock at a meeting duly called for
the purpose.
o Thus, the Issued Value of no-par value shares may vary from time
to time
o But they may not be issued for a consideration less than 5 pesos
[Sec. 6(3)]
o However, the Stated Value of the issued no par value shares
cannot be changed anymore because they are deemed fully paid
and non-assessable upon issuance [Sec.6(3)]
Q: What are watered stocks? What is the consequence of issuing watered stocks?
(See Sec. 65)
Q: What is the difference between par value and issued value?
Ø Par value – the value of a share as fixed in the AOI and reflected in the
certificate of stock
Ø Issued value – the value fixed by the Board of Directors which can be
higher than the par vale
Q: What should be the amount of the consideration?
Ø GR: Under Section 65, shares of stock shall NOT be issued for a
consideration LESS than the par or issued price thereof
o Watered stocks – stocks issued for a consideration less than their
par or issued price
Ø EXPN: treasury shares so long as the price is reasonable (Sec. 9)
Ø It is implied under Sec. 62 that a corporation may issue shares of stock at a
price ABOVE the par or issued value. This does not necessarily reflect the
true or actual value of stock since book or market vale normally fluctuates
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Ø However, a new issue of capital stock above par value may be issued,
provided that old SHs are given the right to purchase their proportionate
part of the issue
Sec. 63. Certificate of stock and transfer of shares. - The capital stock of stock
corporations shall be divided into shares for which certificates signed by the
president or vice president, countersigned by the secretary or assistant secretary,
and sealed with the seal of the corporation shall be issued in accordance with the
by-laws. Shares of stock so issued are personal property and MAY be transferred by
delivery of the certificate or certificates endorsed by the owner or his attorney-in-
fact or other person legally authorized to make the transfer. No transfer, however,
shall be valid, except as between the parties, until the transfer is recorded in the
books of the corporation showing the names of the parties to the transaction, the
date of the transfer, the number of the certificate or certificates and the number of
shares transferred.
No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation.
Q: What is a certificate of stock?
Ø Certificate of stock – a WRITTEN INSTRUMENT signed by the proper officer
of a corporation stating or acknowledging that the person named therein is
the owner of a designated number of shares of its stock
Ø Q: Who is the ‘proper officer” referred to?
o The certificate must be signed by the PRESIDENT OR VICE
PRESIDENT, countersigned by the SECRETARY OR ASSISTANT
SECRETARY
Ø The Certificate must indicate:
o The name of the holder
o The number, kinds, and class of shares represented, and
o The date of issuance
Ø Certificate is NOT STOCK but is merely evidence of the holder’s interest
and status in the corporation. It is not equivalent to ownership. It
expresses the contract between the corporation and SH. It is based on the
# of shared owned by SH.
Ø Certificate is not essential to the existence of a share of stock
Ø It is prima facie evid that the holder is a SH in the corporation
Ø The certificate itself is property, but it has a value separate and distinct
from the value of the shares represented
Ø As between a General Information Sheet and corporate books, the latter
controls
Ø Only stock corporations can issue shares of stock
Ø A certificate of stock is not necessary to render one a SH
37

Q: Is a certificate of stock a negotiable instrument?
Ø No. Reason: A certificate of stock can only be issued to the registered
owner
Ø Also, a certificate of stock does NOT comply with Section 1 of the
Negotiable Instruments Law.
o Section 1. Form of negotiable instruments. An instrument to be
negotiable must conform to the following:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum
certain in money;
(c) Must be payable on demand, or at a fixed or determinable
future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable certainty.
Ø It is not a negotiable instrument. However, it is sometimes regarded as
quasi-negotiable in the sense that it may be transferred by indorsement
coupled by delivery, it is well-settled that it is non-negotiable because the
holder takes it without prejudice to the right or defenses as the registered
owner’s or transferor’s creditor may have under the law
o EXPN: When estoppel arises. Street Certificate of Stock is one
which is indorsed in blank by the owner thereof and thus is
transferrable by mere delivery. If a street certificate is delivered
by the owner to a broker who pledged it to a bank which had no
knowledge that the certificate did not belong to the broker, he is
estopped from claiming title or interest against the pledgee bank
Q: What are the REQ for the issuance of Certificate of stock?
Ø (SSID-RFSO)
Ø 1. Certificate must be signed by the president or vice president,
countersigned by the secretary or assistant secretary, and
Ø 2. Sealed with the seal of the corporation
Ø 3. Issued in accordance with the by-laws.
Ø 4. Delivery of the certificate with endorsement
Ø 5. To be valid against third persons, the transfer is recorded in the stock
and transfer books of the corporation
Ø 6. The par value, as to par value shares, or the full subscription as to no par
value shares, must first be fully paid
Ø 7. The original certificate must be surrendered where the person
requesting the issuance of a certificate is a transferee from the SH
Ø 8. Such other requirements as may be pursuant to AOI or valid by-laws
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Q: What must be recorded in the books of the corporation?
Ø (NaDaNuNu)
Ø 1. The names of the parties to the transaction,
Ø 2. The date of the transfer,
Ø 3. The number of the certificate or certificates and
Ø 4. The number of shares transferred.
Q: What are the remedies where the corporation refuses to issue a certificate?
Ø 1. A petition for mandamus
o See: Ponce v. Alsons
o Mandamus will not lie where the certificate was not indorsed by
the owner
Ø 2. A suit for specific performance of an express or implied contract
Ø 3. May sue for damages where specific performance cannot be granted
Ø 4. Rescission of contract of subscription and recover the consideration
paid
Q: Can you transfer shares?
Ø Yes
Ø (See modes and requirements below)
Q: What are the modes of stock transfer?
Ø According to De Leon, there is more than 1 mode of transferring stock.
Reason: Section 63 states: “Shares of stock so issued are personal property
and MAY be transferred”.
o 1. Indorsement and delivery of stock certificate and to issue a
new certificate unless the original certificate is surrendered unless
the original certificate is surrendered for cancellation or is clearly
shown to have been lost, stolen, or destroyed
o 2. Transfer made in a separate instrument – this mean the
transfer of stock by the execution of a Deed of Sale or
Assignment. While an assignment may be valid and binding
between the parties despite non-compliance with the requisite
endorsement and delivery, it does not necessarily make the
transfer effective for the assignee cannot enjoy the status of a SH
until and unless the issue of ownership is resolved with finality
o 3. Judicial or extra-judicial settlement of estate – upon the death
of the SH, his administrator or executor becomes vested with the
legal title of the stock until the settlement and division of the
estate is made
Ø However, jurisprudence (Rural Bank v. CA) provides that there is really only
1 mode: Indorsement + Delivery (in order to bind the parties) +
Registration in the corporate books (in order to bind the corporation).
38
 Without delivery and indorsement at the very least, the transfer shall be
fatally defective
Q: What are the requirements for a valid stock transfer?
Ø RURAL BANK OF LIPA V. CA – in case of shares represented by a
certificate, the transfer must strictly comply with the ff conditions:
o 1. There must be DELIVERY of the certificate
o 2. The share must be INDORSED by the owner or his attorney-in-
fact or any authorized person
rd
o 3. To be valid to the corporation and 3 persons, the transfer must
be duly REGISTERED in the books of the corporation
§ While an assignment or sale may be valid between the
parties, even without endorsement and delivery, it does
not necessarily make the transfer effective, for the
assignee cannot enjoy the status of a SH; and the
assignor cannot yet be deprived of his rights as SH until
and unless the issue of ownership and transfer of the
shares in question is resolved with finality
Ø If there is no certificate that has been issued yet, or where it is not in the
possession of the SH – shares may be transferred by means of a deed of
assignment duly recorded in the corporate books
Q: Who causes the registration?
Ø The registration of transfers of shares of stock in the stock and transfer
books is a function which usually pertains to that of the corporate
secretary or the transfer agent of the corporation (Lim Tay v. CA)
Ø The registered owner will REQUEST from the Secretary or transfer agent to
change the name under the certificate to the transferee’s name.
Q: What are the effects of unregistered transfer of shares?
Ø 1. It is valid and binding as between the transferor and the transferee
Ø 2. It is void as to the corporation except when notice is given to the
corporation for purposes of registration
Ø 3. It is void as against corporate creditors, and the transferor is still liable
to the corporation
Ø 4. It is void as to the attaching or executing creditors of the transferor, as
well as subsequent purchasers in good faith without notice of the transfer
Ø 5. Where no certificate has been issued or for some reason, it is not in the
possession of the SH, it may be transferred by means of a deed of
assignment but the same must be duly recorder in the books of the
corporation
Q: What is an unpaid claim?
Escudero
Ø Unpaid claim – those claims arising from unpaid subscription and not to
any indebtedness which a subscription may owe the corporation arising
from any other transaction
Ø No shares of stock against which the corporation holds any unpaid claim
shall be transferable in the books of the corporation.
PONCE v. ALSONS CEMENT
Ø Q: Is a corporation justified in refusing to register the transfer even
though delivery and indorsement has been made?
o Yes. The buyer/assignee of shares cannot just go to the
corporation and have the transfer registered in the corporate
books. Only the registered owner, his attorney, or any
authorized person, may cause registration. Absent any
instruction and despite the fact that there is valid indorsement
and delivery, the transfer is not consummated because there is no
valid registration.
Ø Q: What must the assignee do to protect his interest?
o He must secure a SPA executed by the registered owner of the
share authorizing the transferor to demand transfer in the stock
and transfer book
o The transferee must present the indorsed certificate to the
corporate secretary who shall effect the transfer in the corporate
books, issue a new stock certificate in favor of the transferee and
cancel the former certificate
Ø Mandamus as a remedy where corporation refuses to issue certificate –
mandamus should not issue to compel the secretary of the corporation to
make a transfer of the stock on the books of the corporation UNLESS it
affirmatively appears that he has failed or refused to do so upon demand
of the proper person
Ø Considering that the law does not prescribe a period within which the
registration of the transfer of shares should be effected, the action to
enforce the right does not accrue until there has been a demand and a
refusal concerning the transfer
NAVA V. PEERS
Ø As to the issue on assignment, in the absence of a certificate of stock,
there can be no transfer of shares of stock
Ø A stock subscription is a subsisting liability from the time it is made. The
subscriber is as much bound to pay his subscription, as he would be to pay
any other debt. The right of the corporation to demand payment is no less
incontestable, and this is true even in then absence of an express promise
to pay the amount subscribed.
39
 Ø Restrictions on transfer of stock – the power to impose restrictions on
transfer of shares cannot be exercised unless conferred upon the
corporation by law or it AOI
Ø Indorsement and delivery – The certificate must be properly indorsed and
title is vested to certificate by delivery of the duly indorsed certificate even
without executing a deed of assignment or sale of shares which is
necessary only when no certificate of stock has as yet been issued or where
the same is not in the possession for whatever reason of the transferor.
LIM TAY V. CA
Ø A mere pledgee of shares of stock does not have ownership over the
shares. If the obligation is not paid, the creditor (in this case, Lim Tay)
should have foreclosed the shares or caused the transfer in his own name.
There is no automatic appropriation allowed. In credit transactions,
automatic appropriation is referred to as “pactum commissorium” and is
void.
Ø Validity of stock transfer – A bona fide transfer of shares of a corporation
not registered or noted in the books, is invalid as against a subsequent
lawful attachment or execution of said shares regardless of whether the
attaching creditor had actual notice of the transfer or not. And indeed, as
to all persons interested, except the parties to the transfer
Ø Sec. 63 strictly requires the recording of the transfer in the corporate
rd
books, and not elsewhere, to be valid as against 3 parties
Ø Reason for requiring registration of stock transfer – intended principally
for the benefit and protection of the corporation to whom it must accord
the right granted to them by law and against whom it can enforce liability
that may arise from ownership of stock
Ø Right of corporation to refuse registration of transfer – the registration of
transfers of shares of stock in the stock and transfer books is a function
which usually pertains to that of the corporate secretary or the transfer
agent of the corporation
Assignment: Up to Sec. 73.
Sec. 64. Issuance of stock certificates. - No certificate of stock shall be issued to a
subscriber until the full amount of his subscription together with interest and
expenses (in case of delinquent shares), if any is due, has been paid.
Q: Can the corporation issue stock certificates without full payment of the
subscription?
Ø No. No certificate of stock shall be issued to a subscriber until the FULL
AMOUNT of his subscription together with interest and b (in case of
delinquent shares), if any is due, has been PAID
Escudero
Q: For instance, you subscribe to 5 shares at a par value of P100 for each share,
the full amount of which is P500. You paid P200 as down payment and have a
balance of P300. Can the corporation issue stock certificate?
Ø Generally, no. No stock certificate shall be issued until full payment of
subscription. Reason: Subscription is an indivisible contract. The
prohibition in Sec. 64 is to prevent partial disposition of subscription when
it is not yet fully paid
Ø However, De Leon has the following ‘contrary view’: when it is not
restricted by the by-laws, a corporation has the option to issue stock
certificates with respect to the shares that may be covered by the amount
paid (pro-rata)
o Note: Sir says that since this view is based on an SC case
promulgated in 1965 (prior to the enactment of the present corpo
code), the view is obsolete and Sec. 64 prevails. This was in
essence embodied in a SEC opinion.
Sec. 65. Liability of directors for watered stocks. - Any director or officer of a
corporation consenting to the issuance of stocks 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, 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.
Q: What is a watered stock? What are the instances wherein a watered stock is
issued?
Ø Watered stock – It is a stock issued not in exchange for its equivalent
either in case, property, share, stock dividends, or services. It includes
stock
o 1. Issued without corporation (bonus share)
o 2. Issued as fully paid when the corporation has received a lesser
sum than its par or issued value (discount share); or
o 3. Issued for a consideration other than actual cash, such as
property or services, the fair valuation of which is less than its par
or issued value
o 4. Issued as stock dividend when there are no sufficient retained
earning or surplus to justify it
Ø Purpose of prohibition against issuance of Watered stock: to protect
persons who may acquire stock and the creditors of the corporation
particularly those who may become such on the faith of its outstanding
capital stock being fully paid
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Q: What is the liability may be liable for issuance of watered stock?
Ø Any director or officer of a corporation:
o 1. Consenting to the issuance of watered stocks or,
o 2. Having knowledge thereof, does not forthwith express his
objection in writing and file the same with the corporate secretary,
o = shall be SOLIDARILY LIABLE with the stockholder concerned to
the corporation and its creditors
Ø Q: For how much?
o 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.
o Par value – the value of a share as fixed in the AOI and reflected in
the certificate of stock
o Issued value – the value fixed by the Board of Directors which can
be higher than the par vale
Ø Q: Is there any way to escape liability?
o Yes. Upon having knowledge of the issuance of the watered stock,
the director/officer must immediately file his written objection to
the issuance with the corporate secretary
Sec. 66. Interest on unpaid subscriptions. - Subscribers for stock shall pay to the
corporation interest on all unpaid subscriptions from the date of subscription, if so
required by, and at the rate of interest fixed in the by-laws. If no rate of interest is
fixed in the by-laws, such rate shall be deemed to be the legal rate
Q: When is a subscriber liable to pay interest for unpaid subscription?
Ø If so required by the by-laws and/or subscription contract
Q: What is the rate of interest?
Ø Generally, the rate fixed in the by-laws
Ø In the absence thereof, the legal rate of 12% per annum
Q: When should you reckon the payment interest?
Ø From the date of subscription until the payment of such interest is made
Sec. 67. Payment of balance of subscription. - Subject to the provisions of the
contract of subscription, the board of directors of any stock corporation may at any
time declare due and payable to the corporation unpaid subscriptions to the capital
stock and may collect the same or such percentage thereof, in either case with
accrued interest, if any, as it may deem necessary.
Escudero
Payment of any unpaid subscription or any percentage thereof, together with the
interest accrued, if any, shall be made on the date specified in the contract of
subscription or on the date stated in the call made by the board. Failure to pay on
such date shall render the entire balance due and payable and shall make the
stockholder liable for interest at the legal rate on such balance, unless a different
rate of interest is provided in the by-laws, computed from such date until full
payment. If within thirty (30) days from the said date no payment is made, all stocks
covered by said subscription shall thereupon become delinquent and shall be
subject to sale as hereinafter provided, unless the board of directors orders
otherwise
Q: When does a stock become delinquent?
Ø When the subscriber fails to pay the unpaid subscription or balance within
30 days
Ø Q: When is the 30-day period reckoned?
o 1. From the date fixed in the subscription contract to make
payment; OR
o 2. From the date fixed or stated in the call, if there is no date fixed
in the subscription contract
Ø Q: What is the effect if stock is declared delinquent?
o It may be subject to sale by the corporation
Q: What is a call?
Ø Call – a declaration officially made by a corporation requiring payment of
all or a certain prescribed portion of a shareholder’s stock subscription
Ø Q: What must be the form of the call?
o Resolution of the BOD
Ø Q: What must the resolution contain?
o The date in which payment is to be made (otherwise, non-
payment will make stock delinquent)
Q: Is call always necessary in order to make a stock delinquent?
Ø No. Even if there is no call, but the date of payment is fixed in the
subscription contract, a stock may become delinquent due to continuous
non-payment for 30 days from the date fixed in the subscription contract
Q: What are the REQ for a valid call?
Ø 1. Made by the BOD (thru a resolution)
Ø 2. Made in the manner prescribed by law
Ø 3. Must operate uniformly to all SH
Q: What is the meaning of ‘operate uniformly’? Example?
41
 Ø Firstly, when a call is made, it must be applied to all subscribers with
unpaid subscriptions
Ø Q: Assuming that the call complies with the first, is there any other way
rd
that the 3 requisite is violated? In other words, is there any other form
of discrimination?
o Yes. When some subscribers are called to pay a HIGHER RATE or
price than other, then the call does not operate uniformly
Q: What are the remedies to enforce payment of stock subscription?
Ø 1. Extrajudicial (Sec. 67-69)
Ø 2. Judicial (Sec. 70)
Ø 3. Collection of Cash Dividends – deduct the cash dividends before issuing
them
Ø 4. Withholding of Stock Dividends (recall Sec. 43)
Sec. 68. Delinquency sale. - The board of directors may, by resolution, order the
sale of delinquent stock and shall specifically state the amount due on each
subscription plus all accrued interest, and the date, time and place of the sale which
shall not be less than thirty (30) days nor more than sixty (60) days from the date
the stocks become delinquent.
Notice of said sale, with a copy of the resolution, shall be sent to every delinquent
stockholder either personally or by registered mail. The same shall furthermore be
published once a week for two (2) consecutive weeks in a newspaper of general
circulation in the province or city where the principal office of the corporation is
located.
Unless the delinquent stockholder pays to the corporation, on or before the date
specified for the sale of the delinquent stock, the balance due on his subscription,
plus accrued interest, costs of advertisement and expenses of sale, or unless the
board of directors otherwise orders, said delinquent stock shall be sold at public
auction to such bidder who shall offer to pay the full amount of the balance on the
subscription together with accrued interest, costs of advertisement and expenses of
sale, for the smallest number of shares or fraction of a share. The stock so
purchased shall be transferred to such purchaser in the books of the corporation
and a certificate for such stock shall be issued in his favor. The remaining shares, if
any, shall be credited in favor of the delinquent stockholder who shall likewise be
entitled to the issuance of a certificate of stock covering such shares.
Should there be no bidder at the public auction who offers to pay the full amount
of the balance on the subscription together with accrued interest, costs of
advertisement and expenses of sale, for the smallest number of shares or fraction
of a share, the corporation may, subject to the provisions of this Code, bid for the
Escudero
same, and the total amount due shall be credited as paid in full in the books of the
corporation. Title to all the shares of stock covered by the subscription shall be
vested in the corporation as treasury shares and may be disposed of by said
corporation in accordance with the provisions of this Code.
Q: What is delinquency sale?
Ø Sale of delinquent stocks in a public auction to the highest bidder
Q: What is the procedure for the sale of delinquent stock?
Ø 1. RESOLUTION declaring unpaid subscriptions payable
o This means that the BOD shall make a call for payment
o Q: What are the contents of the resolution?
§ The date which payment is to be made. Reason why this
is necessary: to know when to reckon the 30-day period
in determining when stock becomes delinquent
Ø 2. NOTICE to SHs of resolution
o Must give notice to SH to make payment, otherwise the stock
shall be delinquent
o The corporation must wait for 30 days to lapse
o After the days and the SH fails to make payment, the next step is:
Ø 3. RESOLUTION ordering sale of delinquent sale
o Q: What are the contents of the resolution?
§ FULL AMOUNT = Amount due + interest + costs of
advertisements + expenses of sale
§ Date, time, and place of sale which is not less than 30
days but not more than 60 days from date stock becomes
delinquent
Ø 4. NOTICE AND PUBLICATION of sale
o The SH shall be notified personally or thru registered mail
o Publication once a week for two (2) consecutive weeks in a
newspaper of general circulation in the province or city where the
principal office of the corporation is located
Ø 5. SALE of delinquent stocks
o Sale of so many shares so as to effect payment of the full amount
to the highest bidder
Q: Who is the highest bidder?
Ø Highest bidder – such bidder who shall offer to pay the full amount of the
balance on the subscription (together with accrued interest, costs of
advertisement and expenses of sale) for the smallest number of shares or
fraction of a share
42
Q: For instance, the corporation is offering 5 shares with a par value of 100 peso
each or a total amount of 500 for subscription for each SH. A subscribed to 5
shares and paid the full subscription of 500. B only paid the amount of 300, the
leaving 200 remaining unpaid. The corporation made a call and gave notice to the
SH but still B was not able to pay. The corporation made a call for payment but B
failed to pay. The corporation declared the unpaid stock of B delinquent and
caused its sale after notice and publication. There where 3 dealers who wanted to
buy the remaining shares: X bid 200 for 2 shares, Y bid 25 for 2 shares, and Z bid
250 for 1 share. The interest and cost and expenses cost 50 pesos
Ø Q: What is the minimum bid?
o The minimum bid is 250. The full amount = amount due, which is
200; + interest and costs and expenses, which is 50. Thus, yielding
a full amount of 250
Ø Q: Who is the highest bidder?
o Z is the highest bidder because he offers to pay the full amount of
the unpaid subscription for the smallest number of shares (250 for
1 share.
o X is not the highest bidder because he does not even meet the
minimum bid of 250
o Y is no the highest bidder because he is offering to buy 2 shares at
250, which is equivalent only to 125 per share. Thus, his offer
does not even meet the minimum bid
Ø Q: Where shall each share go?
o Of the total subscription of 5 shares:
§ B shall retain the 3 shares that he has already paid
§ Z, being the highest bidder of the sale shall own 1 share
§ And the remaining 1 share shall be deemed fully paid and
shall be credited to the delinquent SH, B.
Q: What if there are no bidders, can the corporation forfeit the delinquent stock?
Ø NO. The corporation may only purchase the stock from the net earning or
from the URE
Ø Q: What doctrine will be violated if no URE?
o The Trust Fund Doctrine which provides that the subscribed
capital stock shall not be impaired because it is the common fund
which shall be for the payment of creditors
Q: Assuming that there is already a highest bidder, is the corpo bound to accept
the offer of the highest bidder?
Ø NO. In a public auction, the bidders are the ones who are making their
offers to the corporation. Thus, the BOD have the discretion whether or
not to accept their offer.
Escudero
Sec. 69. When sale may be questioned. - No action to recover delinquent stock sold
can be sustained upon the ground of irregularity or defect in the notice of sale, or in
the sale itself of the delinquent stock, unless the party seeking to maintain such
action first pays or tenders to the party holding the stock the sum for which the
same was sold, with interest from the date of sale at the legal rate; and no such
action shall be maintained unless it is commenced by the filing of a complaint
within six (6) months from the date of sale.
Q: What are the grounds to question a delinquency sale? Example?
Ø IRREGULARITY or DEFECT:
o 1. In the notice of the sale
§ Ex: No notice was made; the date of sale in the notice
was incorrect (not less than 30 days, not more than 60
days from delinquency); no publication or the publication
was not fully complied with (I.e. only 1 week of
publication)
o 2. In the sale itself of the delinquents stock
§ Ex: Failure to conduct a public bidding or auction (i.e. the
corporation sold it to whomever it wishes); incorrect
determination of the correct full amount due
Q: Is Irregularity in call a ground to question the sale? Why or why not?
Ø No.
Q: What are the requisites before filing an action questioning the delinquency
sale?
Ø REQ:
Ø 1. Pay or tender the sum + interest
o Sum – the amount for which the stock was sold
Ø 2. Commence and file the action within 6 months from the date of sale
o Otherwise, the action will be barred/Prescribed
Sec. 70. Court action to recover unpaid subscription. - Nothing in this Code shall
prevent the corporation from collecting by action in a court of proper jurisdiction
the amount due on any unpaid subscription, with accrued interest, costs and
expenses.
Q: What are the requisites for judicial action?
Ø REQ:
Ø 1. Prior call
o Q: Why do you need a call?
o Reason: In oblicon, an obligation becomes due upon demand. The
call serves as a demand because it is the resolution by the board
43
 calling out to all SH to pay their unpaid subscriptions. A call is
necessary to make the obligation to pay due and demandable.
Ø 2. The action must be filed within the prescriptive period
o With respect to written subscription contract = 10 YEARS
reckoned from the date the right of action accrues (meaning from
the date of the subscription itself
o With respect to verbal subscription = 6 YEARS reckoned from the
LAST DEMAND
Ø 3. The amount must be limited to the amount due on any unpaid
subscription
o Amount due = balance of unpaid subscription + Interest + Costs of
SUIT + Expenses of LITIGATION
Ø 4. With respect to the jurisdiction, the commercial courts of the RTC have
jurisdiction
Sec. 71. Effect of delinquency. - No delinquent stock shall be voted for be entitled
to vote or to representation at any stockholder's meeting, nor shall the holder
thereof be entitled to any of the rights of a stockholder except the right to
dividends in accordance with the provisions of this Code, until and unless he pays
the amount due on his subscription with accrued interest, and the costs and
expenses of advertisement, if any.
Q: What are the effects of stock delinquency?
Ø 1. The SH cannot vote or be voted upon and to be represented in a SH
meeting
Ø 2. GR: All other rights are lost
o EXPN: The right to receive dividends
o Reason: One of the modes to collect payment of unpaid
subscription is through these dividends (i.e. collection of cash
dividends; withholding of stock dividends)
Ø 3. Subject the stock to delinquency sale (depending upon BOD’s discretion)
unless otherwise ordered by the board
Ø 4. Directors who are elected by virtue of delinquency stock may be subject
to quo warranto proceedings
o Reason:
Sec. 72. Rights of unpaid shares. - Holders of subscribed shares not fully paid which
are not delinquent shall have all the rights of a stockholder.
Q: If you are a subscriber with unpaid stock, do you lose all your rights as a SH?
Ø No. The subscriber is still entitled to all rights of a SH until the stock has
been declared delinquent
Escudero
Ø However, the subscriber is liable for interest on his unpaid subscription,
provided:
o It is required under the By-Laws. The amount of interest shall be
that stated in the Subscription Contract or By-Laws. In the
absence thereof, the interest shall be charged at the legal rate of
12%
o The liability to pay interest shall be reckoned from the date of
subscription
Sec. 73. Lost or destroyed certificates. - The following procedure shall be followed
for the issuance by a corporation of new certificates of stock in lieu of those which
have been lost, stolen or destroyed:
1. The registered owner of a certificate of stock in a corporation or his legal
representative shall file with the corporation an affidavit in triplicate setting forth, if
possible, the circumstances as to how the certificate was lost, stolen or destroyed,
the number of shares represented by such certificate, the serial number of the
certificate and the name of the corporation which issued the same. He shall also
submit such other information and evidence which he may deem necessary;
2. After verifying the affidavit and other information and evidence with the books of
the corporation, said corporation shall publish a notice in a newspaper of general
circulation published in the place where the corporation has its principal office,
once a week for three (3) consecutive weeks at the expense of the registered owner
of the certificate of stock which has been lost, stolen or destroyed. The notice shall
state the name of said corporation, the name of the registered owner and the serial
number of said certificate, and the number of shares represented by such
certificate, and that after the expiration of one (1) year from the date of the last
publication, if no contest has been presented to said corporation regarding said
certificate of stock, the right to make such contest shall be barred and said
corporation shall cancel in its books the certificate of stock which has been lost,
stolen or destroyed and issue in lieu thereof new certificate of stock, unless the
registered owner files a bond or other security in lieu thereof as may be required,
effective for a period of one (1) year, for such amount and in such form and with
such sureties as may be satisfactory to the board of directors, in which case a new
certificate may be issued even before the expiration of the one (1) year period
provided herein: Provided, That if a contest has been presented to said corporation
or if an action is pending in court regarding the ownership of said certificate of
stock which has been lost, stolen or destroyed, the issuance of the new certificate
of stock in lieu thereof shall be suspended until the final decision by the court
regarding the ownership of said certificate of stock which has been lost, stolen or
destroyed.
44
Except in case of fraud, bad faith, or negligence on the part of the corporation and
its officers, no action may be brought against any corporation which shall have
issued certificate of stock in lieu of those lost, stolen or destroyed pursuant to the
procedure above-described.
Q: What must a SH do if his stock certificate is lost or destroyed?
Ø 1. File an AFFIDVIT (of loss) in triplicate containing the following:
o 1. The circumstances as to how the certificate was lost, stolen or
destroyed,
o 2. The number of shares represented by such certificate,
o 3. The serial number of the certificate and
o 4. The name of the corporation which issued the same
Ø He shall also submit such other information and evidence which he may
deem necessary.
Ø Q: What could be evidence in addition to the affidavit of loss? What could
be supporting documents?
o Blotter in the barangay; police report; Certified True Copy of
either. The purpose of additional evidence is to prove to the
corporate secretary that the certificate was indeed lost
Ø 2. VERIFICATION of the affidavit and other information and evidence
Ø Q: Why is it necessary for the affidavit, etc. to be verified?
o In order to compare the same with the corporate books. (i.e. the
serial number and other details correspond with that reflected in
the books)
Ø 3. PUBLICATION of a notice in a newspaper of general circulation in the
place where the corporation has its principal office, once a week for 3
consecutive weeks at the expense of the registered owner of the
certificate of stock. The notice shall contain the ff:
o The name of said corporation,
o The name of the registered owner and
o The serial number of said certificate, and
o The number of shares represented by such certificate, and
o That after the expiration of one 1 year from the date of the last
publication, if no contest has been presented to said corporation
regarding said certificate of stock, the RIGHT TO CONTEST shall be
barred and said corporation shall cancel in its books the
certificate of stock which has been lost, stolen or destroyed and
issue in lieu thereof new certificate of stock
o Q: When may the 1 year period be dispensed with?
§ unless the registered owner files a BOND or other
SECURITY in lieu thereof as may be required, effective for
a period of one (1) year, for such amount and in such
Escudero
form and with such sureties as may be satisfactory to the
board of directors
o Q: What if there is a contest?
§ If a contest has been presented to said corporation or if
an action is pending in court regarding the ownership of
said certificate of stock which has been lost, stolen or
destroyed, the issuance of the new certificate of stock in
lieu thereof shall be SUSPENDED until the final decision
by the court regarding the ownership of said certificate
of stock which has been lost, stolen or destroyed
Q: Can you sue a corporation for issuing new stock certificates?
Ø GR: No action may be brought against any corporation which shall have
issued certificate of stock in lieu of those lost, stolen or destroyed pursuant
to the procedure above-described.
Ø EXPN: in case of fraud, bad faith, or negligence on the part of the
corporation and its officers
Q: What must the corporate secretary do?
Assign: Sec. 74-80
TITLE VIII
CORPORATE BOOKS AND RECORDS
Sec. 74. Books to be kept; stock transfer agent. - Every corporation shall keep and
carefully preserve at its principal office a record of all business transactions and
minutes of all meetings of stockholders or members, or of the board of directors or
trustees, in which shall be set forth in detail the time and place of holding the
meeting, how authorized, the notice given, whether the meeting was regular or
special, if special its object, those present and absent, and every act done or
ordered done at the meeting. Upon the demand of any director, trustee,
stockholder or member, the time when any director, trustee, stockholder or
member entered or left the meeting must be noted in the minutes; and on a similar
demand, the yeas and nays must be taken on any motion or proposition, and a
record thereof carefully made. The protest of any director, trustee, stockholder or
member on any action or proposed action must be recorded in full on his demand.
The records of all business transactions of the corporation and the minutes of any
meetings shall be open to inspection by any director, trustee, stockholder or
member of the corporation at reasonable hours on business days and he may
demand, writing, for a copy of excerpts from said records or minutes, at his
expense.
45

Any officer or agent of the corporation who shall refuse to allow any director,
trustees, stockholder or member of the corporation to examine and copy excerpts
from its records or minutes, 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 144
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: and
Provided, further, 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
his demand.
Stock corporations must also keep a book to be known as the "stock and transfer
book", in which must be kept a record of all stocks in the names of the stockholders
alphabetically arranged; the installments paid and unpaid on all stock 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, and
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.
No 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 unless he secures a license from the Securities and Exchange
Commission and pays a fee as may be fixed by the Commission, which shall be
renewable annually: Provided, That a stock corporation is not precluded from
performing or making transfer 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.
Q: What are the documents that must be kept in the principal office of a
corporation?
Ø 1. A record of all business transactions
Ø 2. Minutes of the SH/members meetings
Ø 3. Minutes of the Board/trustees meetings
Ø 4. Stock and transfer books (with respect to stock corporations only)
Q: What do you mean by Stock and Transfer Books?
Escudero
Ø Records all stock ownership, as well as any alienation, sale or transfer of
stocks. Before incorporation, the corporation must buy a blue book with
the SEC which is kept therein worth around 500 pesos
Q: What do you mean by record of business transactions?
Ø Includes all papers pertaining to the operation of the corporation to its
SHs, such as: journal, ledger, financial statement, income tax returns,
vouchers, receipts, contracts, etc.
Q: A corporation applied a loan with BPI. What should be kept in relation to the
transaction?
Ø Promissory note (to prove contract of loan);
Ø A Rea Estate Mortgage or Chattel mortgage (to prove that the loan is
secured by a mortgage)
Ø Receipts or bank deposits (to prove payment, assuming that the
corporation
Ø All other records in relation to the transaction must be kept at the principal
office
Q: What do you mean by minutes?
Ø All matters taken up during the meeting. It does not only include the time
it started and adjourned.
Q: Every SH is entitled to inspect corporate books. What are the remedies in case a
SH’s right is violated?
Ø 1. Petition for Mandamus
Ø 2. Civil Action
Ø 3. Criminal Action based on Section 144 which is the penal provision of the
Corporation Code
Q: What could be the grounds to deny the right to inspect corporate books?
Ø 1. Misuse of information previously obtained by the SH
Ø 2. The SH acted in bad faith
o Ex: to obtain trade secrets for the SH’s own benefit or to be
divulged to competitors
Ø 3. The exercise of the right was not for a legitimate purpose
o This applies when the SH did not act in BF but his purpose was not
legitimate
o A legitimate purpose could be to determine whether the fund
used to distribute dividends really come from URE, otherwise the
trust fund doctrine will be violated
o Ex of not legitimate purpose?
46
GONZALES V. PNB
Ø A SH can inspect corporate books, subject to limitations (the right is not
absolute).
Ø The SC ruled that the SH, Gonzales, acted on ulterior motives and in bad
faith. He only owned 1 share of stock. The significance of this is that he
acquired only 1 share not for the purpose of investing in the corporation’s
business, but to get information relevant to his case with PNB (since he
sued PNB for several transactions)
Sec. 75. Right to financial statements. - Within ten (10) days from receipt of a
written request of any stockholder or member, the corporation shall furnish to him
its most recent financial statement, which shall include a balance sheet as of the
end of the last taxable year and a profit or loss statement for said taxable year,
showing in reasonable detail its assets and liabilities and the result of its operations.
At the regular meeting of stockholders or members, the board of directors or
trustees shall present to such stockholders or members a financial report of the
operations of the corporation for the preceding year, which shall include financial
statements, duly signed and certified by an independent certified public
accountant.
However, if the paid-up capital of the corporation is less than P50,000.00, the
financial statements may be certified under oath by the treasurer or any
responsible officer of the corporation.
Q: What is included in the right to financial statements?
Ø 1. Balance Sheet as of the end of the last taxable year
Ø 2. Income Statement (profit or loss statement for the taxable year, stating
in detail the assets and liabilities of the corporation)
Q: Is it necessary to always have a request?
Ø No. There shall be an annual SH/members meeting and each SH shall
receive a copy of the financial statement
Ø Q: Who shall CERTIFY the financial statement?
o It depends
o If the paid-up capital of the corporation is MORE than P50,000.00
- By an Independent CPA
o If the paid-up capital of the corporation is LESS than P50,000.00 -
the financial statements may be certified under oath by the
TREASURER only (or any responsible officer of the corporation –
Sir did not mention this)
Ø Q: Who shall SIGN the financial statement?
Escudero
o Aside from the independent CPA, the other signatories are: the
President OR Vice-president
TITLE IX
MERGER AND CONSOLIDATION
Sec. 76. Plan or merger of consolidation. - Two or more corporations may merge
into a single corporation which shall be one of the constituent corporations or may
consolidate into a new single corporation which shall be the consolidated
corporation.
The board of directors or trustees of each corporation, party to the merger or
consolidation, shall approve a plan of merger or consolidation setting forth the
following:
1. The names of the corporations proposing to merge or consolidate, hereinafter
referred to as the constituent corporations;
2. The terms of the merger or consolidation and the mode of carrying the same into
effect;
3. A statement of the changes, if any, in the articles of incorporation of the surviving
corporation in case of merger; and, with respect to the consolidated corporation in
case of consolidation, all the statements required to be set forth in the articles of
incorporation for corporations organized under this Code; and
4. Such other provisions with respect to the proposed merger or consolidation as
are deemed necessary or desirable.
Sec. 77. Stockholder's or member's approval. - Upon approval by majority vote of
each of the board of directors or trustees of the constituent corporations of the
plan of merger or consolidation, the same shall be submitted for approval by the
stockholders or members of each of such corporations at separate corporate
meetings duly called for the purpose. Notice of such meetings shall be given to all
stockholders or members of the respective corporations, at least two (2) weeks
prior to the date of the meeting, either personally or by registered mail. Said notice
shall state the purpose of the meeting and shall include a copy or a summary of the
plan of merger or consolidation. The affirmative vote of stockholders representing
at least two-thirds (2/3) of the outstanding capital stock of each corporation in the
case of stock corporations or at least two-thirds (2/3) of the members in the case of
non-stock corporations shall be necessary for the approval of such plan. Any
dissenting stockholder in stock corporations may exercise his appraisal right in
accordance with the Code: Provided, That if after the approval by the stockholders
of such plan, the board of directors decides to abandon the plan, the appraisal right
shall be extinguished.
47
Any amendment to the plan of merger or consolidation may be made, provided
such amendment is approved by majority vote of the respective boards of directors
or trustees of all the constituent corporations and ratified by the affirmative vote of
stockholders representing at least two-thirds (2/3) of the outstanding capital stock
or of two-thirds (2/3) of the members of each of the constituent corporations. Such
plan, together with any amendment, shall be considered as the agreement of
merger or consolidation.
Sec. 78. Articles of merger or consolidation. - After the approval by the
stockholders or members as required by the preceding section, articles of merger or
articles of consolidation shall be executed by each of the constituent corporations,
to be signed by the president or vice-president and certified by the secretary or
assistant secretary of each corporation setting forth:
1. The plan of the merger or the plan of consolidation;
2. As to stock corporations, the number of shares outstanding, or in the case of
non-stock corporations, the number of members; and
3. As to each corporation, the number of shares or members voting for and against
such plan, respectively.
Sec. 79. Effectivity of merger or consolidation. - The articles of merger or of
consolidation, signed and certified as herein above required, shall be submitted to
the Securities and Exchange Commission in quadruplicate for its approval: Provided,
That in the case of merger or consolidation of banks or banking institutions, building
and loan associations, trust companies, insurance companies, public utilities,
educational institutions and other special corporations governed by special laws,
the favorable recommendation of the appropriate government agency shall first be
obtained. If the Commission is satisfied that the merger or consolidation of the
corporations concerned is not inconsistent with the provisions of this Code and
existing laws, it shall issue a certificate of merger or of consolidation, at which time
the merger or consolidation shall be effective.
If, upon investigation, the Securities and Exchange Commission has reason to
believe that the proposed merger or consolidation is contrary to or inconsistent
with the provisions of this Code or existing laws, it shall set a hearing to give the
corporations concerned the opportunity to be heard. Written notice of the date,
time and place of hearing shall be given to each constituent corporation at least
two (2) weeks before said hearing. The Commission shall thereafter proceed as
provided in this Code.
Sec. 80. Effects or merger or consolidation. - The merger or consolidation shall
have the following effects:
Escudero
1. The constituent corporations shall become a single corporation which, in case of
merger, shall be the surviving corporation designated in the plan of merger; and, in
case of consolidation, shall be the consolidated corporation designated in the plan
of consolidation;
2. The separate existence of the constituent corporations shall cease, except that of
the surviving or the consolidated corporation;
3. The surviving or the consolidated corporation shall possess all the rights,
privileges, immunities and powers and shall be subject to all the duties and
liabilities of a corporation organized under this Code;
4. The surviving or the consolidated corporation shall thereupon and thereafter
possess all the rights, privileges, immunities and franchises of each of the
constituent corporations; and all property, real or personal, and all receivables due
on whatever account, including subscriptions to shares and other choses in action,
and all and every other interest of, or belonging to, or due to each constituent
corporation, shall be deemed transferred to and vested in such surviving or
consolidated corporation without further act or deed; and
5. The surviving or consolidated corporation shall be responsible and liable for all
the liabilities and obligations of each of the constituent corporations in the same
manner as if such surviving or consolidated corporation had itself incurred such
liabilities or obligations; and any pending claim, action or proceeding brought by or
against any of such constituent corporations may be prosecuted by or against the
surviving or consolidated corporation. The rights of creditors or liens upon the
property of any of such constituent corporations shall not be impaired by such
merger or consolidation.
Q: What is merger?
Ø 2 or more corporations unite, where 1 corporation is dissolved and the
other is retained. In other words, there is an absorption of 1 corporation of
the other
Ø Surviving Corporation – The corp which absorbs the other corp
Ø Absorbed Corporation – The corp which is dissolved
Q: What are the effects of merger?
Ø The assets, rights, and privileges of the AC are transferred to the SC
Ø The liabilities and responsibilities of the AC shall be assumed by the SC
Ø The AC will be dissolved
Ø The SC will be retained
o Ex: Landbank and DBP merged. LB is the SC. DBP is the AC
Ø The SHs of the AC will become the SH of the SC
Q: What is consolidation?
Ø 2 or more corporations unite to give rise to a new corporation.
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 Ø The dissolved corporations are called Constituent Corporations
Ø The new corporation is called Consolidated Corporation
Q: What are the effects of consolidation?
Ø The assets, rights, and privileges of the constituent corps shall be
transferred to the consolidated corp
Ø The consolidated corp shall assume the liabilities and responsibilities of the
constituent corps
Ø The constituent corps will be dissolved
Ø A new corp shall be established
Ø The SH of the constituent corps shall become the SH of the consolidated
corp
Q: If you are a director of a corporation, which would you prefer? Why?
Ø (not answered)
Ø Merger – one of the corporations has already an established name
Ø Consolidation – can start a new slate
Q: Explain the procedure in case of merger/consolidation.
ST
Ø 1 STEP: Board approval - The BOD/BOT of each corporation to the
merger or consolidation, shall approve a plan of merger or consolidation
setting forth the following:
o 1. The names of the corporations proposing to merge or
consolidate, hereinafter referred to as the constituent
corporations;
o 2. The terms of the merger or consolidation and the mode of
carrying the same into effect;
o 3. A statement of the changes, if any, in the AOI of the surviving
corporation in case of merger; and, with respect to the
consolidated corporation in case of consolidation, all the
statements required to be set forth in the AOI for corporations
organized under the corpo code; and
o 4. Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or desirable
nd
Ø 2 STEP: SH’s approval – the plan of merger shall then be submitted for
approval by the SHs or members of each corporation at separate corporate
meetings duly called for the purpose. Notice of such meetings shall be
given to all SHs or members of the respective corporations, at least 2
weeks prior to the date of the meeting, either personally or by registered
mail. Said notice shall state the purpose of the meeting and shall include a
copy or a summary of the plan of merger or consolidation. The affirmative
vote of stockholders representing at least 2/3 of the outstanding capital
stock of each corporation in the case of stock corporations or at least
Escudero
(2/3) of the members in the case of non-stock corporations shall be
necessary for the approval of such plan.
rd
Ø 3 STEP: Draft the Articles of Merger or Consolidation - articles of merger
or articles of consolidation shall be executed by each of the constituent
corporations, to be signed by the president or vice-president and certified
by the secretary or assistant secretary of each corporation setting forth:
o 1. The plan of the merger or the plan of consolidation;
o 2. As to stock corporations, the number of shares outstanding, or
in the case of non-stock corporations, the number of members;
and
o 3. As to each corporation, the number of shares or members
voting for and against such plan, respectively.
o (Sir: in short, the matter set forth in 78)
th
Ø 4 STEP: If the proposal is inconsistent with the Corpo Code, the SEC will
hold a hearing to give the parties a chance to be heard (due process) - If,
upon investigation, the Securities and Exchange Commission has reason to
believe that the proposed merger or consolidation is contrary to or
inconsistent with the provisions of this Code or existing laws, it shall set a
hearing to give the corporations concerned the opportunity to be heard.
th
Ø 5 STEP: If a corporation is created by special law, a recommendation by
the appropriate government agency must first be obtained - That in the
case of merger or consolidation of banks or banking institutions, building
and loan associations, trust companies, insurance companies, public
utilities, educational institutions and other special corporations governed
by special laws, the favorable recommendation of the appropriate
government agency shall first be obtained
th
Ø 6 STEP: Issuance of Certificate of Merger/Consolidation by SEC. The
articles of merger or of consolidation, signed and certified as herein above
required, shall be submitted to the Securities and Exchange Commission in
quadruplicate for its approval. If the Commission is satisfied that the
merger or consolidation of the corporations concerned is not inconsistent
with the provisions of this Code and existing laws, it shall issue a certificate
of merger or of consolidation, at which time the merger or consolidation
shall be effective.
ASSOCIATED BANK V. CA
Ø AB can enforce the promissory note because there was an effective
merger. AB already assumed the assets and liabilities. It now has the right
to collect
Ø Principle of unjust enrichment under Article 19 of the CC – if AB will not be
able to collect, the defendant will be unjustly enriched.
MINDANAO SAVINGS V. CA
49
 Ø 1. The merger did not take effect. If the steps/procedure under the Corpo
Code are not followed, there will be no issuance of Certificate of Merger by
the SEC which will give rise to creation of MSLAI.
Ø Q: Why was MSLAI party to the case?
Ø MSLAI did not yet assume the assets and liabilities of FSLAI. Due to
incomplete submission of documents, SEC did not yet issue the
certification. Uy was correct in suing FSLAI, since the latter still continued
to exist and was not yet absorbed by MSLAI
Ø 2. Other than the Corpo Code, another issue was on novation. The REQ for
a valid novation are:
o Previous valid obligation
o Consent of the creditor is obtained
Ø In the case at bar, consent of the creditor Uy was not obtained
BAPST V. CA
Ø 1. BPI has standing to sue and is the real party in interest. There was a valid
merger between BPI and CBPC. Thus, BPI assumed the assets and liabilities
of CBPC
Ø 2. BPI cannot run after ELISCON. DBP has already assumed the debts and
liabilities of ELISCON. One of the requisites of novation is consent of the
creditor. There was implied consent on the part of BPI when it did not
object during the meeting. Thus, there was a valid novation. The obligation
of ELISCON is now extinguished and BPI can only run after DBP
Ø 3. The obligation of Bapst and Chua are likewise extinguished. A surety
agreement is an accessory contract which cannot exist on its own without
the principal contract. A spring cannot jump higher than its source.
Assignment: 81-86
TITLE X
APPRAISAL RIGHT
Sec. 81. Instances of appraisal right.- Any stockholder of a corporation shall have
the right to dissent and demand payment of the fair value of his shares in the
following instances:
1. In case any amendment to the articles of incorporation has the effect of
changing or restricting the rights of any stockholder or class of shares, or of
authorizing preferences in any respect superior to those of outstanding shares of
any class, or of extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition
of all or substantially all of the corporate property and assets as provided in the
Code; and
3. In case of merger or consolidation.
Escudero
Q: Define the appraisal right of a SH.
Ø Appraisal right – the right of a SH to demand payment of the fair value of
his shares, after dissenting from a proposed corporate action involving
fundamental change in the corporation in the cases provided for by law.
Ø REQ: (SDC)
Ø 1. You should be a SH of a corporation
o Thus, a treasurer or a secretary do not necessarily have appraisal
right since they are not required to be SH. Unless of course they
happen to be SH as well
Ø 2. The SH must dissent to a proposed corporate action involving
fundamental change in the corporation
Ø 3. Must exercise the right only in cases provided for by law
Q: What are the instances when the right may be exercised?
Ø (ASMIC)
Ø Under Sec. 81:
1. Amendment to the AOI that has the effect of:
o Changing or restricting the rights of any stockholder or class of
shares, or
o Of authorizing preferences superior to those of outstanding
shares of any class,
o Or of extending or shortening the term of corporate existence;
2. Sale, lease, exchange, transfer, mortgage, pledge or other of all or
substantially all of the corporate property and assets
3. Merger and consolidation
Ø Under Sec. 42:
4. Investment of corporate funds in another corporation or in a purpose
other than the primary purpose
Ø Under Sec. 105:
5. In a close corporation, a SH may, for any reason, compel the
corporation to purchase his shares when the corporation has sufficient
assets in its books to cover its debts and liabilities exclusive of capital stock
Sec. 82. How right is exercised. - The appraisal right may be exercised by any
stockholder who shall have voted against the proposed corporate action, by making
a written demand on the corporation within thirty (30) days after the date on
which the vote was taken for payment of the fair value of his shares: 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 or affected, the
corporation shall pay to such stockholder, upon surrender of the certificate or
certificates of stock representing his shares, the fair value thereof as of the day
50
prior to the date on which the vote was taken, excluding any appreciation or
depreciation in anticipation of such corporate action.
If within a period of sixty (60) days from the date the corporate action was
approved by the stockholders, the withdrawing stockholder and the corporation
cannot agree on the fair value of the shares, it shall be determined and appraised
by three (3) disinterested persons, one of whom shall be named by the stockholder,
another by the corporation, and the third by the two thus chosen. The findings of
the majority of the appraisers shall be final, and their award shall be paid by the
corporation within thirty (30) days after such award is made: Provided, That no
payment shall be made to any dissenting stockholder unless the corporation has
unrestricted retained earnings in its books to cover such payment: and Provided,
further, That upon payment by the corporation of the agreed or awarded price, the
stockholder shall forthwith transfer his shares to the corporation.
Q: What is the procedure in exercising the right?
st
Ø 1 STEP: SH shall make Written Demand - The appraisal right may be
exercised by any stockholder who shall have voted against the proposed
corporate action, by making a written demand on the corporation within
thirty (30) days after the date on which the vote was taken for payment of
the fair value of his shares
o Q: What is the effect is the SH does not make a demand?
§ Failure to make the demand within such period shall be
deemed a waiver of the appraisal right.
nd
Ø 2 STEP: Corpo shall pay the SH - If the proposed corporate action is
implemented or affected, the corporation shall pay to such stockholder
o Q: When shall the corpo pay?
§ Upon surrender of the certificate/s of stock representing
the SH’s shares within 10 days after demanding payment
if his shares
o Q: What shall be the basis of the amount to be paid?
§ The fair value thereof as of the day PRIOR to the date on
which the vote was taken
• Excluding: any appreciation or depreciation in
anticipation of such corporate action
§ Note: if the parties cannot agree to the fair value, an
appraisal committee shall be established. (To be
discussed later ons)
rd
Ø 3 STEP: SH shall transfer the shares - upon payment by the corporation of
the agreed or awarded price, the stockholder shall forthwith transfer his
shares to the corporation.
Q: Who shall determine the Fair Value of the dissenting shares?
Escudero
Ø Initially – BOTH
Ø However, in case of disagreement as to the value of the shares, an
Appraisal Committee shall be constituted. It shall be composed of 3
disinterested persons:
o 1. One shall be named by the stockholder,
o 2. Another shall be named by the corporation, and
o 3. The third by the two thus chosen
rd
§ This means that a 3 appraiser shall be chosen by both
parties, namely the SH and the Corpo
Ø The 3 appraisers will now determine and appraise the fair value of the
shares. A majority is sufficient to make an award deciding on the fair value.
Majority means 2 appraisers against 1
Ø Q: Is the award of the appraisers questionable or appealable?
o No. The findings of the majority of the appraisers shall be final
Ø Q: After the appraisers make an award, what happens next?
o The SH shall be paid by the corporation based on the award
within thirty (30) days after such award is made
Q: What are the limitations of the appraisal right?
Ø 1. Any of the instances under the law must be present
Ø 2. The dissenting SH must have voted against the proposed action
Ø 3. Demand for payment must be made within 30 days from the date the
vote is taken. Failure to demand shall be deemed a waiver
Ø 4. Price must be based on the fair value as of the day prior to the date on
which vote was taken
Ø 5. Submission by the SH of his shares to the corporation for notation of
being dissenting shares within 10 days from the written demand
Ø 6. Payment must be made only when the corporation has unrestricted
retained earnings (most important)
Ø 7. SH must transfer his shares to the corporation upon payment by the
corporation
TURNER V. LORENZO SHIPPING
Ø Q: What is the reckoning period in determining when the corporation
must have URE: upon demand, when the case is filed, or even when it is
still pending?
o At the time when the case is filed. Reason: civil cases must be
based on a cause of action at the time of the filing of the
complaint. If there is no URE at the time of filing, there is no COA.
o In the case at bar, the corporation only had URE during the
pendency of the case. When the case was filed, there was no URE
and consequently no COA. Thus, the case shall be dismissed.
51
 Ø Lesson learned: if you are the dissenting SH, check first for the existence of
URE before filing a complaint. Otherwise, wait for the corporation to have
URE
Sec. 83. Effect of demand and termination of right. - From the time of demand for
payment of the fair value of a stockholder's shares until either the abandonment of
the corporate action involved or the purchase of the said shares by the corporation,
all rights accruing to such shares, including voting and dividend rights, shall be
suspended in accordance with the provisions of this Code, except the right of such
stockholder to receive payment of the fair value thereof: Provided, That if the
dissenting stockholder is not paid the value of his shares within 30 days after the
award, his voting and dividend rights shall immediately be restored.
Q: What is the effect of the exercise of the right?
Ø All rights accruing to such shares, including voting and dividend rights,
shall be SUSPENDED
o EXCEPT the right of such stockholder to receive payment of the
fair value thereof:
Ø Q: What happens if the dissenting SH is not paid?
o The SH shall be restored in all his rights and status as a SH
§ If the dissenting stockholder is not paid the value of his
shares within 30 days after the award, his voting and
dividend rights shall immediately be restored.
Ø Q: What happens if the dissenting SH is paid?
o He shall lose all his rights as a SH permanently
Ø Q: What if the proposed corporate act is abandoned or not pushed
through?
o The SH shall be restored in all his rights and status as a SH
Sec. 84. When right to payment ceases. - No demand for payment under this Title
may be withdrawn unless the corporation consents thereto. If, however, such
demand for payment is withdrawn with the consent of the corporation, or if the
proposed corporate action is abandoned or rescinded by the corporation or
disapproved by the Securities and Exchange Commission where such approval is
necessary, or if the Securities and Exchange Commission determines that such
stockholder is not entitled to the appraisal right, then the right of said stockholder
to be paid the fair value of his shares shall cease, his status as a stockholder shall
thereupon be restored, and all dividend distributions which would have accrued on
his shares shall be paid to him.
Q: Can a SH withdraw his appraisal right?
Ø GR: No
Ø EXPN: When the corporation consents thereto
Escudero
Q: When is the appraisal right extinguished?
Ø 1. When demand for payment is withdrawn with the consent of the
corporation,
Ø 2. If the proposed corporate action is abandoned or rescinded by the
corporation, or
Ø 3. Disapproved by the SEC where such approval is necessary, or
Ø 4. If the SEC determines that such stockholder is not entitled to the
appraisal right
Q: What is the effect of extinguishment?
Ø The dissenting SH’s status as a SH shall be restored, and all dividend
distributions which would have accrued on his shares shall be paid to him
Sec. 85. Who bears costs of appraisal. - The costs and expenses of appraisal shall
be borne by the corporation, unless the fair value ascertained by the appraisers is
approximately the same as the price which the corporation may have offered to pay
the stockholder, in which case they shall be borne by the latter. In the case of an
action to recover such fair value, all costs and expenses shall be assessed against
the corporation, unless the refusal of the stockholder to receive payment was
unjustified.
Q: Who shall bear the cost of appraisal?
Ø It depends:
Ø GR: The corporation shall bear costs in the ff instances:
o 1. Where the price which the corporation offered to pay the
dissenting SH is lower than the fair value determined by the
appraisers
o 2. When an action is filed by the dissenting SH and his refusal to
accept payment is unjustified
Ø EXPN: The SH shall bear costs in the ff instances:
o 1. Where the price offered by the corporation is approximately
the same as the fair value determined by the appraisers
o 2. Where an action is filed by the dissenting SH and his refusal to
accept payment is unjustified
Sec. 86. Notation on certificates; rights of transferee. - Within ten (10) days after
demanding payment for his shares, a dissenting stockholder shall submit the
certificates of stock representing his shares to the corporation for notation thereon
that such shares are dissenting shares. His failure to do so shall, at the option of the
corporation, terminate his rights under this Title. If shares represented by the
certificates bearing such notation are transferred, and the certificates consequently
canceled, the rights of the transferor as a dissenting stockholder under this Title
52
shall cease and the transferee shall have all the rights of a regular stockholder; and
all dividend distributions which would have accrued on such shares shall be paid to
the transferee.
Q: After demanding payment, what must the SH do?
Ø Within ten (10) days after demanding payment for his shares, a dissenting
stockholder shall submit the certificates of stock representing his shares to
the corporation
Ø Q: What must the corporation do upon receipt of the stock certificate/s?
o The corporation shall make an annotation thereon that such
shares are dissenting shares
Ø Q: What is the effect of failure by the SH to submit the stock certificate/s?
o His right to be paid shall be terminated
Ø Q: What happens when the dissenting shares are transferred?
o If shares represented by the certificates bearing such notation are
transferred, and the certificates consequently canceled:
§ 1. The rights of the transferor as a dissenting stockholder
under this Title shall cease and
§ 2. The transferee shall have all the rights of a regular
stockholder; and all dividend distributions which would
have accrued on such shares shall be paid to the
transferee.
o Q: Who will now have the right to receive the fair value of the
dissenting share?
§ No one. Since the dissenting SH (transferor) has already
been paid, he will not receive the fair value. When he
transferred his right to another (transferee), the latter is
entitled to all rights and status of a SH. He is not entitled
to the fair value of the share.
§ The essence of appraisal right of a SH is that you want to
get back your investment. You want to get out of the
company because you disagree with a proposed
corporate action. You will then be given the fair value of
your share.
CUA V. OCAMPO
Ø The ff are the REQ for a valid derivative suit:
o 1. The petitioner was a SH/M at the time the acts or transactions
subject of the action took place and at the time the action is filed
o 2. He exerted all reasonable efforts and alleges the same with
particularity in the complaint, exhaust all remedies available
under the AOI, by-laws, laws, or rules governing the corporation
to obtain relief desired
Escudero
o 3. No appraisal rights are available for the act/acts complained
of
o 4. The is not a nuisance or harassment suit
th
Ø In this case, the 4 requisite was not complied with
Ø SC: the SH had appraisal rights but failed to exercise them. In this case, the
transaction falls under one of the instances wherein the appraisal right is
available under Sec. 81: sale of all or substantially all the property of the
corporation
Ø It was the SH themselves who caused the unavailability to exercise their
appraisal right by not voting against the proposed corporate action.
th
Instead, they filed a derivative suit which does not comply with the 4
requisite.
VILLAMOR V. UMALE
th
Ø Same REQ as Cua v. Ocampo, but the SC added a 5 :
o Although not expressly enumerated as a requisite, it is implied
that the corpo should be impleaded because it is the RPI whereas
the SH is only a nominal party
o This was recognized in the Western Institute case
Ø Q: Why did the SC rule that there is no derivative suit? --
Ø The essence of a derivative suit is that the SH shall file a case on behalf of
the corporation in order to prosecute a corporate cause of action because
the directors did not do anything/lift a finger in filing a case. The SH take
the cudgels in filing the suit
o Ex: the directors did not do anything to collect receivables
amounting to 1 million which matured in 2016. SH can now file a
derivative suit on behalf of the corpo provided that the REQ are
complied with, to wit: Sue in the name and on behalf of the
corporation; Implead the corporation; and the 4 other REQ
Assign: Sec. 87-95
TITLE XI
NON-STOCK CORPORATIONS
Q: What is a non-stock corporation?
Ø Sec. 87. Definition. - For the purposes of this Code, a non-stock
corporation is one where no part of its income is distributable as
dividends to its members, trustees, or officers, subject to the provisions
of this Code on dissolution: Provided, That any profit which a non-stock
corporation may obtain as an incident to its operations shall, whenever
necessary or proper, be used for the furtherance of the purpose or
53
 purposes for which the corporation was organized, subject to the o With respect to a homeowners association, the collection of
provisions of this Title. association dues
Ø The provisions governing stock corporation, when pertinent, shall be § In such instances, these are not the main business, but
applicable to non-stock corporations, except as may be covered by specific they are merely incidental. Meaning, that they are
provisions of this Title. reasonably necessary to the operation of the main
business
Q: What are the valid purposes of a non-stock corporation? (memorize) Ø Q: Can a non-stock corporation invest its funds in another activity?
Ø Sec. 88. Purposes. - Non-stock corporations may be formed or organized o Yes, as long as the profit is used for the purpose it is organized
for: § Ex: used to pay salaries, defray operational expenses, etc
o Charitable, Ø Q: Can a non-stock corporation invest its funds in a business other than
o Religious, its primary purpose?
o Educational, o Yes, as long as the profit is used for the purpose it is organized
o Professional, Ø Q: For instance, a member of a non-stock corporation dissents from a
o Cultural, proposed corporate action. Can he exercise his appraisal right?
o Fraternal, o No. An appraisal right is the right of a SH to demand the fair value
o Literary, of his share if he dissents to a proposed corporate action. A
o Scientific, member of a non-stock corporation does NOT have an appraisal
o Social, right because such right involves shares which applies only to
o Civic service, or stock corporations
o Similar purposes, like trade, industry, agricultural and like
chambers, or any combination thereof, Q: Can a non-stock corporation be converted to a stock corporation by mere
Ø Subject to the special provisions of this Title governing particular classes of amendment of the AOI?
non-stock corporations Ø No. Reason: because the assets will be converted into capital to be
Ø Q: Is the enumeration exclusive? distributed to its members who are now SHs. This is unfair because there
o Yes. Thus, a corporation engaging in political purposes is not a are certain rules for distribution with respect to non-stock corporation that
valid non-stock corporation must be complied with (Sec. 94)
o Other reasons: it will change the nature of the corporation from
Q: What are the requisites for a non-stock corporation? non-profit to profit; it will defraud persons who have already
Ø 1. No part of its income is distributable as dividends contributed or donated to the non-stock corporation only to find
Ø 2. Must be for any of the purposes under Sec. 88 out that it has been converted to a stock corporation
Ø 3. Must not own capital stock divided into shares Ø The non-stock corporation must first be dissolved and a new stock
corporation may be set up
Q: Is a non-stock corporation absolutely not allowed to earn profit?
Ø GR: a non-stock corporation is one where no part of its income is Chapter I - MEMBERS
distributable as dividends
Ø EXPN: Any profit which a non-stock corporation may obtain as an Q: What are the rules on voting rights?
INCIDENT TO ITS OPERATIONS shall, whenever necessary or proper, be Ø Sec. 89. Right to vote. - The right of the members of any class or classes to
used for the furtherance of the purpose or purposes for which the vote may be limited, broadened or denied to the extent specified in the
corporation was organized articles of incorporation or the by-laws. Unless so limited, broadened or
Ø Q: What is a good example of a purpose incident to its operation? denied, each member, regardless of class, shall be entitled to one vote.
o With respect to a school, a canteen business. Reason: it earns o GR: each member is entitled to 1 vote
money, but it is operated to that the students and teachers have o EXPN: unless it is limited, broadened, or denied
something to eat o Example for each:
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 o 1. BROADENED – If by-laws provide that for every 5,000 pesos
contributed, a member shall be entitled to 1 vote. Thus, if he
contributes 10,000, he shall be entitled to 2 votes.
o 2. LIMITED – If by-laws provide that regardless of contribution,
each member shall only be entitled to 4 votes
o 3. DENIAL – members must maintain good standing to be entitled
to vote. He is not in good standing if he commits an infraction,
does not pay association dues, etc
Ø Unless otherwise provided in the articles of incorporation or the by-laws, a
member may vote by proxy in accordance with the provisions of this Code.
Ø Voting by mail or other similar means by members of non-stock
corporations may be authorized by the by-laws of non-stock corporations
with the approval of, and under such conditions which may be prescribed
by, the Securities and Exchange Commission.
Q: Can membership be transferred?
Ø Sec. 90. Non-transferability of membership. - Membership in a non-stock
corporation and all rights arising therefrom are personal and non-
transferable, unless the articles of incorporation or the by-laws otherwise
provide.
Ø GR: No. Reason: it involves the personal element. A member is admitted to
the corporation because of his qualifications and personal attributes, and
not by his contributions
Ø EXPN: Unless otherwise allowed under the AOI/BL
Ø Q: What do you mean by the word ‘Transfer’? What does it cover?
o Transfer covers – sale, donation, inheritance (transfer by descent)
§ Unlike in stock corporation where the heirs can own the
shares after proper proceedings
o EXPN: Unless otherwise provided under the AOI/BL
Q: What are the rules on termination?
Ø Sec. 91. Termination of membership. - Membership shall be terminated in
the manner and for the causes provided in the articles of incorporation or
the by-laws. Termination of membership shall have the effect of
extinguishing all rights of a member in the corporation or in its property,
unless otherwise provided in the articles of incorporation or the by-laws.
o Must be terminated in accordance with the MANNER and for the
CAUSES provided for in the AOI/NBL
Ø Q: What are the usual CAUSES to terminate membership?
o Non-payment of membership dues
o Acts of disloyalty
o Acts of dishonesty
o Acts involving moral turpitude
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o Any act inimical to the interest of the corporation
§ When members dies, it is obvious that membership
terminates. What we are talking about are the usual
causes of termination as stated by the AOI/BL
LONG V. BASA
Ø The by-laws must conform to existing laws including the Constitution.
Petitioners contend that they were deprived of their right to due process
of law because they were not given ample notice of their expulsion as
members of the church
Ø SC: Although every person is entitled to due process of law, petitioners
were continuously warned for 5 years. It is NOT the lack of prior notice
which the law abhors, but it is the total absence of opportunity to be heard
Ø In the case at bar, the petitioners were continuously reminded and
admonished. This gave them the opportunity to reform their ways. But
still, they did not
Ø SC: there was implied waiver of the right to prior notice on the part of the
petitioners because when they joined the church, they knew the rules and
regulations including that the church had the right to expel any member by
resolution without the need of giving notice or the reasons for expulsion
o By adhering to the by-laws, they became members of the
corporation voluntarily. They bound themselves through their
consent
Assign: same (up to 95)
Chapter II - TRUSTEES AND OFFICERS
Sec. 92. Election and term of trustees. - Unless otherwise provided in the articles of
incorporation or the by-laws, the board of trustees of non-stock corporations,
which may be more than fifteen (15) in number as may be fixed in their articles of
incorporation or by-laws, shall, as soon as organized, so classify themselves that the
term of office of one-third (1/3) of their number shall expire every year; and
subsequent elections of trustees comprising one-third (1/3) of the board of trustees
shall be held annually and trustees so elected shall have a term of three (3) years.
Trustees thereafter elected to fill vacancies occurring before the expiration of a
particular term shall hold office only for the unexpired period.
No person shall be elected as trustee unless he is a member of the corporation.
Unless otherwise provided in the articles of incorporation or the by-laws, officers of
a non-stock corporation may be directly elected by the members
Q: Give an illustration of the term of office of trustees.
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 Ø The term of trustees shall be in a staggered basis
Ø The Board is composed of 15 trustees. The 15 shall be divided into 3.
Assuming that the elections is held on 2016, the term of the First 1/3 shall
be 1 year, or on 2017. Upon expiration of their term, an election shall be
held but this time the First 1/3 shall serve for 3 years
o After one year, or on 2018, the term of the Second 1/3 shall
expire. An election shall be held and the Second 1/3 shall serve for
3 years
o After one year, or on 2019, the term of the Third 1/3 shall expire.
An election shall be held and the Third 1/3 shall serve for 3 years
Q: When do you apply the last sentence of Sec. 92 which states: “trustees
thereafter elected to fill vacancies occurring before the expiration of a particular
term shall hold office only for the unexpired period.”?
Ø It is only applied when there is a vacancy in the middle of the term of the
trustee. A special election shall be held to fill such vacancy and the person
elected shall only serve for the unexpired term.
Q: How many trustees are allowed?
Ø No maximum provided for by law
o However, according to an SEC opinion, the number of trustees
should not exceed the total number of membership of the
corporation
Ø The minimum number of trustees is 5. Reason: Sec. 87 provides: the
provisions governing stock corporation, when pertinent, shall be
applicable to non-stock corporations, except as may be covered by specific
provisions of this Title. The law is silent as to the minimum number of
Trustees. Since the minimum number of directors in a stock corporation is
5, the minimum number of trustees in a non-stock corporation is also 5
Q: May the term of office be reduced from 3 years to 2 years?
Ø Yes. Sec. 92 provides: unless otherwise provided in the articles of
incorporation or the by-laws
Q: Who may elect the corporate officers?
Ø In a Stock corporation, it is the Board of Directors
Ø The law is silent as to who shall elect corporate officers in non-stock
corporation
Ø (Not sure ito:)
Ø GR: Board of Trustees shall elect
o EXPN: Unless otherwise provided under the AOI/BL
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Sec. 93. Place of meetings. - The by-laws may provide that the members of a non-
stock corporation may hold their regular or special meetings at any place even
outside the place where the principal office of the corporation is located: Provided,
That proper notice is sent to all members indicating the date, time and place of the
meeting: and Provided, further, That the place of meeting shall be within the
Philippines.
Q: Where shall meetings be held?
Ø GR: Place where the principal office of the corporation is located
Ø EXPN: The by-laws may proved that member may hold their meeting even
outside of the principal office, provided
o 1. Proper notice is sent to al member indicating date, time and
place of the meeting; and
o 2. The place of meeting shall be within the Philippines
Q: Can members conduct meetings thru teleconferencing?
Ø To answer this, we must first answer the MT question: Can SH meeting be
held thru teleconferencing?
o Yes, as long as it is held in the city or municipality where the
principal office is located.
o GR: SH meeting must be held, if practicable, in the principal office
of the corporation
o EXPN: In the city or municipality where the principal office of the
corporation is located
o The answer is not ‘as long as it complies with SEC circular 15’
because this only applies to board meetings
Ø By analogy, a Members’ Meeting of a non-stock corporation may be held
thru teleconferencing as long as it complies with Sec. 93 insofar as prior
notice is sent + it is done within the Philippines
Chapter III - DISTRIBUTION OF ASSETS IN
NON-STOCK CORPORATIONS
Q: What are the rules of distribution? (Memorize)
Ø Sec. 94. Rules of distribution. - In case dissolution of a non-stock
corporation in accordance with the provisions of this Code, its assets shall
be applied and distributed as follows:
o 1. All liabilities and obligations of the corporation shall be paid,
satisfied and discharged, or adequate provision shall be made
therefore;
o 2. Assets held by the corporation upon a condition requiring
return, transfer or conveyance, and which condition occurs by
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 reason of the dissolution, shall be returned, transferred or
conveyed in accordance with such requirements;
o 3. Assets received and held by the corporation subject to
limitations permitting their use only for charitable, religious,
benevolent, educational or similar purposes, but not held upon a
condition requiring return, transfer or conveyance by reason of
the dissolution, shall be transferred or conveyed to one or more
corporations, societies or organizations engaged in activities in
the Philippines substantially similar to those of the dissolving
corporation according to a plan of distribution adopted pursuant
to this Chapter;
§ Numbers 1-3 must first be settled before 4 and 5
o 4. Assets other than those mentioned in the preceding
paragraphs, if any, shall be distributed in accordance with the
provisions of the articles of incorporation or the by-laws, to the
extent that the articles of incorporation or the by-laws, determine
the distributive rights of members, or any class or classes of
members, or provide for distribution; and
§ 2 requirements:
• 1. Must be authenticated under the AOI
• 2. Must be specified under a Plan of Distribution
§ This is to determine whether members may be entitled
to distribution of assets
o 5. In any other case, assets may be distributed to such persons,
societies, organizations or corporations, whether or not organized
for profit, as may be specified in a plan of distribution adopted
pursuant to this Chapter.
§ Any person or entity may be entitled to distribution
under a plan of distribution
Q: What are the voting requirements for a plan of distribution of assets?
Ø Sec. 95. Plan of distribution of assets. - A plan providing for the
distribution of assets, not inconsistent with the provisions of this Title, may
be adopted by a non-stock corporation in the process of dissolution in the
following manner:
Ø The board of trustees shall, by majority vote, adopt a resolution
recommending a plan of distribution and directing the submission thereof
to a vote at a regular or special meeting of members having voting rights.
Ø Written notice setting forth the proposed plan of distribution or a
summary thereof and the date, time and place of such meeting shall be
given to each member entitled to vote, within the time and in the manner
provided in this Code for the giving of notice of meetings to members.
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Ø Such plan of distribution shall be adopted upon approval of at least two-
thirds (2/3) of the members having voting rights present or represented by
proxy at such meeting.
PADCOM V. ORTIGAS CENTER ASSOCIATION
Ø Freedom of association was not violated. Automatic membership was
provided for under the terms and conditions of the agreement (deed of
sale) and there was an annotation to the title to that effect
Ø Q: Assuming that PADCOM did not see the annotation, will it still be
bound thereby?
o Yes. Anything annotated in the title shall be constructive notice to
the whole world. This is a feature of the Torrens system. No one
forced PADCOM to but the land. They bough it voluntarily and
agreed to all the Terms and Conditions. Lesson: Always check a
title for annotations.
STA. CLARA HOMES ASSOCIATION V. SPS. GASTON
Ø Sps. Gaston cannot be compelled to become members of SCHA by the
simple expedient of including them in its AOI and BL without their express
or implied consent
Ø As to Jurisdiction: SCHA’s contention that RTC did not have jurisdiction
since the proper body which has jurisdiction is HIGC is erroneous. HIGC has
exclusive jurisdiction over intra-corporate disputes affecting homeowners
association. However, there is not intra-corporate dispute in the case at
bar because Sps. Gaston are NOT members of SCHA
o The new name of HIGC is Housing and Land Use Regulatory Board
(HLURB)
Ø Q: What is the difference between the Padcom case and the SCHA case?
o In PADCOM, the title had an annotation providing automatic
membership in the homeowner’s association which is binding
upon PADCOM
o In SCHA, there is no such annotation
Q: Assuming that you are a non-member but you live in an association and benefit
by their activities and projects. Can you be charged by the association for
association dues?
Ø Yes. No one shall be unjustly enriched at the expense of another. There is a
HLURB circular which provides that a homeowner who has benefitted by
the acts of the homeowner’s association may be liable for association dues
o There is a jurisprudence implementing this. In a case, a non-
member was sued by the homeowner’s association before the
HLURB. It submitted as evidence photos of the non-members
house showing that there was a lamp post which stood in front of
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 their house. This indicates that the non-member benefitted thru
the acts of the association
o Since such dispute does not involve a member of the association,
it is not an intra-corporate dispute. The proper entity with which
to file the case is the RTC
TAN V. SYCIP
Ø Quorum is determined by the actual number of trustees, NOT by the
number specified under the AOI. In the case at bar, there were 15 trustees
indicated under the AOI. But the actual number is only 11 because 4 had
already died
Ø Q: Since there was a quorum, was the election of the 4 who filled the
vacancies valid?
o No. The election was held in a members meeting when it should
have been held in a trustees meeting. This is wrong because in a
members meeting, members are allowed to vote by proxy,
whereas in a Trustee’s meeting, vote by proxy is not allowed. In
the case at bar, the election was held in a Member’s meeting
where all the trustees voted thru proxy
o Proxies cannot fill in the vacancies of trustees. Reason: Trustees
were elected by the SH/M to do their job. The proxies were not
the ones elected. The position of trustees involve trust and
confidence
Assign: Sec. 95-105 + 2 cases
TITLE XII
CLOSE CORPORATIONS
Q: What is a close corporation?
Ø Sec. 96. Definition and applicability of Title. - A close corporation, within
the meaning of this Code, is one whose articles of incorporation provide
that:
o (1) All the corporation's issued stock of all classes, exclusive of
treasury shares, shall be held of record by not more than a
specified number of persons, not exceeding twenty (20);
o (2) all the issued stock of all classes shall be subject to one or
more specified restrictions on transfer permitted by this Title; and
o (3) The corporation shall not list in any stock exchange or make
any public offering of any of its stock of any class.
Ø Notwithstanding the foregoing, a corporation shall not be deemed a close
corporation when at least two-thirds (2/3) of its voting stock or voting
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rights is owned or controlled by another corporation which is not a close
corporation within the meaning of this Code.
Q: Can all corporations be close corporations?
Ø GR: Any corporation may be incorporated as a close corporation,
Ø EXPN: except mining or oil companies, stock exchanges, banks, insurance
companies, public utilities, educational institutions and corporations
declared to be vested with public interest in accordance with the
provisions of this Code.
The provisions of this Title shall primarily govern close corporations: Provided, That
the provisions of other Titles of this Code shall apply suppletorily except insofar as
this Title otherwise provides.
Q: Why is there a need for special rules with respect to close corporations?
Ø (Not answered)
Ø A close corporation has been described as a corporation de jure and a
partnership de facto. A close corporation has special needs and problems
different from an ordinary corporation. It would not be fair to apply
indiscriminately to the 2 types of corporations the same rules. Hence, the
need for special provisions to govern close corporation
Q: What is the very objective of a close corporation?
Ø To enjoy the advantages of the corporate organization, like the limitation
of personal liability, and at the same time to retain internally the
partnership form of doing business. Close corporations are usually small
business corporations with few stockholders who participate actively in the
management of the business
Ø In other words, to take advantage of the benefits of both a corporation
and a partnership; to enjoy the best of both worlds
Ø A close corporation is also known as a “de facto partnership”
Ø Q: What is the best benefit of a corporation or the partnership?
o Corporation – Limited liability
o Partnership – Participation in management affairs
Q: What is the difference between close corporation, closed corporation, and
closely held corporation? (pwede itanong sa finals)
Ø Closed – emphasizes a determination on the part of the participants in the
enterprise to keep outsiders from acquiring any interest in the business
and may indicate that they have taken steps to accomplish that objective
by shareholders’ agreement or provision in the AOI
Ø Closely Held – focuses more on the number of shareholders in the
corporation at that particular time, indicating that they are few in
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 numbers. The shares of a closely held corporation are owned by relatively
limited number of stockholders)
Q: What are the permissible provisions which may be provided for in the AOI
under Sec. 97?
Ø Sec. 97. Articles of incorporation. - The articles of incorporation of a close
corporation may provide:
o 1. For a classification of shares or rights and the qualifications for
owning or holding the same and restrictions on their transfers as
may be stated therein, subject to the provisions of the following
section;
o 2. For a classification of directors into one or more classes, each of
whom may be voted for and elected solely by a particular class of
stock; and
o 3. For a greater quorum or voting requirements in meetings of
stockholders or directors than those provided in this Code.
Q: Is Section 97 in addition to Sec. 14 which provides for the general matters
which must be contained in the AOI? Or does Sec. 97 take the place of Sec. 14 with
respect to close corporation?
Ø It is in addition to Sec. 14. A close corporation must both comply with Sec.
14 and 97
Ø (Feeling ko nagkamali lang si sir. Nakalagay sa memaid with respect to
close corporation: “the AOI must contain the provisions required by Sec.
97 aside from the general matters in Sec. 14. Failure to do so precludes a
de jure close corporation status”. Dapat 96 yun. Kasi mandatory yung
provision under 96 whereas merely permissible lang yung provisions sa 97.
Feeling ko lang naman.)
Q: May a close be corporation be managed by the shareholders?
Ø Yes.
Ø The articles of incorporation of a close corporation may provide that the
business of the corporation shall be managed by the stockholders of the
corporation rather than by a board of directors. So long as this provision
continues in effect:
Ø Q: What are the effects if the shareholders act as directors?
o 1. No meeting of stockholders need be called to elect directors;
o 2. Unless the context clearly requires otherwise, the stockholders
of the corporation shall be deemed to be directors for the
purpose of applying the provisions of this Code; and
o 3. The stockholders of the corporation shall be subject to all
liabilities of directors.
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o 4. The stockholders shall be held to strict fiduciary duties to each
other and among themselves. (See Sec. 100)
§ This means that they have utmost trust and confidence
in the management of the corporation.
o 5. The stockholders shall be personally liable for corporate torts
unless the corporation has obtained reasonably adequate liability
insurance. (See Sec. 100)
The articles of incorporation may likewise provide that all officers or employees or
that specified officers or employees shall be elected or appointed by the
stockholders, instead of by the board of directors.
Q: When is a restriction on transfer of shares valid?
Ø Sec. 98. Validity of restrictions on transfer of shares. - Restrictions on the
right to transfer shares must appear in the articles of incorporation and in
the by-laws as well as in the certificate of stock; otherwise, the same shall
not be binding on any purchaser thereof in good faith. Said restrictions
shall not be more onerous than granting the existing stockholders or the
corporation the option to purchase the shares of the transferring
stockholder with such reasonable terms, conditions or period stated
therein.
Q: What is a good example of a restriction that is more onerous than the granting
of the pre-emptive right? (sir calls it pre-emptive right)
Ø (Not answered)
Ø Ex: a restriction fixing the purchase price far below the FMV of the shares =
more onerous because the term is unreasonable = invalid
Ø Ex: a restriction providing that no shares may be transferred without the
consent of the BOD or SH = more onerous because the condition
unreasonable = invalid
Ø Ex: a restriction which provides for a pre-emptive right which must be
exercised only within 24 hours = more onerous because the period to
exercise the pre-emptive right is unreasonable = invalid
Q: What is a good example of a restriction that is NOT more onerous than the
granting of the pre-emptive right?
Ø Ex sa other class: a restriction which provides that only lawyers may be
transferees of shares = NOT more onerous because it does not violate the
granting of a pre-emptive right with reasonable terms, conditions, and
period
Q: What is the effect of the existing shareholder or corporation fails to exercise
the pre-emptive right?
59
 Ø If upon the expiration of said period, the existing stockholders or the
corporation fails to exercise the option to purchase, the transferring
stockholder may sell his shares to any third person.
Q: What are the effects of a transfer of stock in breach of qualifying conditions?
Ø Sec. 99. Effects of issuance or transfer of stock in breach of qualifying
conditions. –
Ø 1. If stock of a close corporation is issued or transferred to any person who
is not entitled under any provision of the articles of incorporation to be a
holder of record of its stock, and if the certificate for such stock
conspicuously shows the qualifications of the persons entitled to be
holders of record thereof, such person is conclusively presumed to have
notice of the fact of his ineligibility to be a stockholder.
Ø 2. If the articles of incorporation of a close corporation states the number
of persons, not exceeding twenty (20), who are entitled to be holders of
record of its stock, and if the certificate for such stock conspicuously states
such number, and if the issuance or transfer of stock to any person would
cause the stock to be held by more than such number of persons, the
person to whom such stock is issued or transferred is conclusively
presumed to have notice of this fact.
Ø 3. If a stock certificate of any close corporation conspicuously shows a
restriction on transfer of stock of the corporation, the transferee of the
stock is conclusively presumed to have notice of the fact that he has
acquired stock in violation of the restriction, if such acquisition violates the
restriction.
Ø 4. Whenever any person to whom stock of a close corporation has been
issued or transferred has, or is conclusively presumed under this section to
have, notice either (a) that he is a person not eligible to be a holder of
stock of the corporation, or (b) that transfer of stock to him would cause
the stock of the corporation to be held by more than the number of
persons permitted by its articles of incorporation to hold stock of the
corporation, or (c) that the transfer of stock is in violation of a restriction
on transfer of stock, the corporation may, at its option, refuse to register
the transfer of stock in the name of the transferee.
Ø Q: Can the shareholder raise the defense of good faith?
o No. Good faith is not a defense because there is a conclusive
presumption of knowledge of the restriction
Ø Q: Are there exceptions to the rules that the shareholder will have
conclusive presumption of notice?
o 5. The provisions of subsection (4) shall not applicable if the
transfer of stock, though contrary to subsections (1), (2) of (3), has
been consented to by all the stockholders of the close
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corporation, or if the close corporation has amended its articles of
incorporation in accordance with this Title.
Ø Q: What does the term “transfer” cover?
o 6. The term "transfer", as used in this section, is not limited to a
transfer for value.
Ø 7. The provisions of this section shall not impair any right which the
transferee may have to rescind the transfer or to recover under any
applicable warranty, express or implied.
SAN JUAN V. CA
Ø Sec. 96
Ø Just because Spouses Gruenberg own 99.866% of the subscribed capital
stock of Motorich, it does not follow that the doctrine of piercing of the
veil of corporation is applicable in the absence of fraud or illegality at the
rd
expense of 3 persons like petitioner
Q: Enumerate the agreements by stockholders.
Ø Sec. 100. Agreements by stockholders. –
Ø 1. Agreements by and among stockholders executed before the formation
and organization of a close corporation, signed by all stockholders, shall
survive the incorporation of such corporation and shall continue to be valid
and binding between and among such stockholders, if such be their intent,
to the extent that such agreements are not inconsistent with the articles of
incorporation, irrespective of where the provisions of such agreements are
contained, except those required by this Title to be embodied in said
articles of incorporation.
Ø 2. An agreement between two or more stockholders, if in writing and
signed by the parties thereto, may provide that in exercising any voting
rights, the shares held by them shall be voted as therein provided, or as
they may agree, or as determined in accordance with a procedure agreed
upon by them.
Ø 3. No provision in any written agreement signed by the stockholders,
relating to any phase of the corporate affairs, shall be invalidated as
between the parties on the ground that its effect is to make them partners
among themselves.
Ø 4. A written agreement among some or all of the stockholders in a close
corporation shall not be invalidated on the ground that it so relates to the
conduct of the business and affairs of the corporation as to restrict or
interfere with the discretion or powers of the board of directors: Provided,
That such agreement shall impose on the stockholders who are parties
thereto the liabilities for managerial acts imposed by this Code on
directors.
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 Ø 5. To the extent that the stockholders are actively engaged in the
management or operation of the business and affairs of a close
corporation, the stockholders shall be held to strict fiduciary duties to each
other and among themselves. Said stockholders shall be personally liable
for corporate torts unless the corporation has obtained reasonably
adequate liability insurance.
Q: When is a board meeting unnecessary or improperly held?
Ø Sec. 101. When board meeting is unnecessary or improperly held. - Unless
the by-laws provide otherwise, any action by the directors of a close
corporation without a meeting shall nevertheless be deemed valid if:
Ø 1. Before or after such action is taken, written consent thereto is signed by
all the directors; or
Ø 2. All the stockholders have actual or implied knowledge of the action and
make no prompt objection thereto in writing; or
Ø 3. The directors are accustomed to take informal action with the express or
implied acquiescence of all the stockholders; or
Ø 4. All the directors have express or implied knowledge of the action in
question and none of them makes prompt objection thereto in writing.
Ø If a director's meeting is held without proper call or notice, an action taken
therein within the corporate powers is deemed ratified by a director who
failed to attend, unless he promptly files his written objection with the
secretary of the corporation after having knowledge thereof.
Q: What if a meeting is required under the AOI, but there was no proper notice or
call?
Ø The corporate act cannot become valid. The provision says “unless the by-
laws provide otherwise”
DULAY V. CA
Sec. 102. Pre-emptive right in close corporations. - The pre-emptive right of
stockholders in close corporations shall extend to all stock to be issued, including
reissuance of treasury shares, whether for money, property or personal services, or
in payment of corporate debts, unless the articles of incorporation provide
otherwise.
Q: What is the difference between the pre-emptive right under Sec. 39 and Sec.
102
Ø 1. Sec. 39 – applies only to newly issued shares; while Sec. 102 – applies to
all shares
Ø 2. Sec. 39 – subject to exceptions; Sec. 102 – not subject to exceptions
o Q: What are the exceptions under Sec. 39?
Escudero
o 1. Shares to be issued in compliance with laws requiring stock
offerings or minimum stock ownership by the public; or
o 2. To shares to be issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of the outstanding
capital stock, in exchange for property needed for corporate
purposes or in payment of a previously contracted debt.
Q: How is the AOI of a close corporation amended?
Ø Sec. 103. Amendment of articles of incorporation. - Any amendment to the
articles of incorporation which seeks to delete or remove any provision
required by this Title to be contained in the articles of incorporation or to
reduce a quorum or voting requirement stated in said articles of
incorporation shall not be valid or effective unless approved by the
affirmative vote of at least two-thirds (2/3) of the outstanding capital
stock, whether with or without voting rights, or of such greater proportion
of shares as may be specifically provided in the articles of incorporation for
amending, deleting or removing any of the aforesaid provisions, at a
meeting duly called for the purpose.
Q: When is there a deadlock?
Ø Sec. 104. Deadlocks. - Notwithstanding any contrary provision in the
articles of incorporation or by-laws or agreement of stockholders of a close
corporation, if the directors or stockholders are so divided respecting the
management of the corporation's business and affairs that the votes
required for any corporate action cannot be obtained, with the
consequence that the business and affairs of the corporation can no longer
be conducted to the advantage of the stockholders generally, the
Securities and Exchange Commission, upon written petition by any
stockholder, shall have the power to arbitrate the dispute.
Ø Q: What may the SEC do when there is a petition for the SEC to arbitrate
filed by a shareholder?
Ø In the exercise of such power, the Commission shall have authority to
make such order as it deems appropriate, including an order:
o (1) canceling or altering any provision contained in the articles of
incorporation, by-laws, or any stockholder's agreement;
o 2) canceling, altering or enjoining any resolution or act of the
corporation or its board of directors, stockholders, or officers;
o (3) directing or prohibiting any act of the corporation or its board
of directors, stockholders, officers, or other persons party to the
action;
o (4) requiring the purchase at their fair value of shares of any
stockholder, either by the corporation regardless of the
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 availability of unrestricted retained earnings in its books, or by the
other stockholders;
o (5) appointing a provisional director;
o (6) dissolving the corporation; or
o (7) granting such other relief as the circumstances may warrant.
Q: What are the qualifications of a provisional director?
Ø A provisional director shall be:
o 1. An impartial person
o 2. Who is neither a stockholder nor a creditor of the corporation
or of any subsidiary or affiliate of the corporation, and
o 3. whose further qualifications, if any, may be determined by the
Commission.
Ø Q: What are the rights and powers of the provisional director?
o 1. A provisional director is not a receiver of the corporation and
does not have the title and powers of a custodian or receiver.
o 2. A provisional director shall have all the rights and powers of a
duly elected director of the corporation,
§ Including the right to notice of and to vote at meetings of
directors, until such time as he shall be removed by order
of the Commission or by all the stockholders.
o 3. His compensation shall be determined by agreement between
him and the corporation subject to approval of the Commission,
which may fix his compensation in the absence of agreement or in
the event of disagreement between the provisional director and
the corporation.
Ø Q: How long will the provisional director serve?
o Until such time as he shall be removed by:
§ 1. Order of the Commission or
§ 2. By all the stockholders
Q: What are the 2 remedies of the shareholder under 105?
Ø Sec. 105. Withdrawal of stockholder or dissolution of corporation. - In
addition and without prejudice to other rights and remedies available to a
stockholder under this Title, any stockholder of a close corporation may:
o 1. Appraisal Right - for any reason, compel the said corporation
to purchase his shares at their fair value, which shall not be less
than their par or issued value, when the corporation has sufficient
assets in its books to cover its debts and liabilities exclusive of
capital stock:
o 2. File a Petition for dissolution with the SEC - Provided, That any
stockholder of a close corporation may, by written petition to the
Escudero
Securities and Exchange Commission, compel the dissolution of
such corporation
o 2 Grounds:
§ 1. Whenever any of acts of the directors, officers or
those in control of the corporation is illegal, or
fraudulent, or dishonest, or oppressive or unfairly
prejudicial to the corporation, or
§ 2. Any stockholder, or whenever corporate assets are
being misapplied or wasted.
Q: What is the difference between the appraisal right with respect to ordinary
corporations to close corporation?
Ø 1. With respect to ordinary corporations – must be for any of the cases
under Sec. 81; With respect to close corporations – may be for any reason
o Q: What are the cases provided for under Sec. 81?
o 1. In case any amendment to the articles of incorporation has the
effect of changing or restricting the rights of any stockholder or
class of shares, or
o 2. 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;
o 3. In case of sale, lease, exchange, transfer, mortgage, pledge or
other disposition of all or substantially all of the corporate
property and assets as provided in the Code; and
o 4. In case of merger or consolidation
o There is also appraisal right under Sec. 42 – investment in
corporate funds in another corporation or business or for any
other purpose
Ø 2. With respect to ordinary corporation – no need sufficient assets to cover
debts and liabilities exclusive of capital. What is required is that the
corporation has Unrestricted Retained Earnings; With respect to close
corporation – corporation needs sufficient assets to cover debts and
liabilities exclusive of capital
Q: What is the difference between an ordinary corporation and a close
corporation?
Ø (See memaid for table)
Assign: amendment of AOI of close corp up to special corporations, dulay case, 2
cases on special corporations
TITLE XIII
62
 SPECIAL CORPORATIONS
Chapter I - Educational Corporations
Q: What is an educational corporation?
Ø It is a stock or non-stock corporation organized to provide for facilities for
teaching or instruction
Q: What provisions govern educational corporations?
Ø Sec. 106. Incorporation. - Educational corporations shall be governed by
special laws
o Ex of special law: RA 7798 – amending the education act of 1982
Ø and by the general provisions of this Code.
Q: Is there any pre-requisite before incorporation of an educational corporation?
Ø Sec. 107. Pre-requisites to incorporation. - Except upon favorable
recommendation of the Ministry of Education and Culture (Now
Department of Education), the Securities and Exchange Commission shall
not accept or approve the articles of incorporation and by-laws of any
educational institution.
Q: What are the rules as to number of trustees and their terms?
Ø With respect to Non-Stock:
o Sec. 108. Board of trustees. - Trustees of educational institutions
organized as non-stock corporations shall not be less than five (5)
nor more than fifteen (15): Provided, however, That the number
of trustees shall be in multiples of five (5).
o Unless otherwise provided in the articles of incorporation on the
by-laws, the board of trustees of incorporated schools, colleges,
or other institutions of learning shall, as soon as organized, so
classify themselves that the term of office of one-fifth (1/5) of
their number shall expire every year.
o Q: Give an illustration of the staggering term of BOT.
o Q: When does the rule with respect to the serving of unexpired
period of the term apply?
§ Only in case of vacancy (Such as when a trustee has died,
been removed, or even resigned)
§ Trustees thereafter elected to fill vacancies, occurring
before the expiration of a particular term, shall hold
office only for the unexpired period. Trustees elected
thereafter to fill vacancies caused by expiration of term
shall hold office for five (5) years. A majority of the
trustees shall constitute a quorum for the transaction of
Escudero
business. The powers and authority of trustees shall be
defined in the by-laws.
Ø With respect to Stock:
o For institutions organized as stock corporations, the number and
term of directors shall be governed by the provisions on stock
corporations.
Chapter II - RELIGIOUS CORPORATIONS
Q: What is a religious corporation?
Ø A corporation composed entirely of spiritual persons and which is
organized for the furtherance of a religion or perpetuating the right of the
church or for the administration of church or religious works or property
Q: What are the classes of religious corporations?
Ø Sec. 109. Classes of religious corporations. - Religious corporations may be
incorporated by one or more persons. Such corporations may be classified
into:
o Corporations Sole, and (See Sec. 110)
o Religious societies or Corporation Aggregate (See Sec. 116)
Ø Q: What is the difference between the 2?
o Corporation Sole – 1 member/incorporator
o Religious Society – 2 or more members/incorporators
Ø Religious corporations shall be governed by this Chapter and by the
general provisions on non-stock corporations insofar as they may be
applicable.
ROMAN CATHOLIC V. DAVAO
Ø There was no violation of the constitutional requirement which provides
that agricultural lands must be 60% Filipino owned. The basis of ownership
is not the corporation sole. He is not the owner if such property. The true
owner is the Roman Catholic Faithful. The corporation sole is merely
holding the property in trust
IGLESIA EVANGELICA V. BISHOP LAZARO
Ø There is no need to dissolve the corporation sole to convert it to a
corporation aggregate in order to increase membership. Mere amendment
of the AOI is sufficient by the one member of the corporation sole with the
concurrence of 2/3 of the membership of the organization for whom he
acts as trustee
Q: What is corporation sole?
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 Ø Sec. 110. Corporation sole. - For the purpose of administering and
managing, as trustee, the affairs, property and temporalities of any
religious denomination, sect or church, a corporation sole may be formed
by the chief archbishop, bishop, priest, minister, rabbi or other presiding
elder of such religious denomination, sect or church.
Q: What must be contained in the AOI of a corporation sole?
Ø Sec. 111. Articles of incorporation. - In order to become a corporation
sole, the chief archbishop, bishop, priest, minister, rabbi or presiding elder
of any religious denomination, sect or church must file with the Securities
and Exchange Commission articles of incorporation setting forth the
following:
o 1. That he is the chief archbishop, bishop, priest, minister, rabbi or
presiding elder of his religious denomination, sect or church and
that he desires to become a corporation sole;
o 2. That the rules, regulations and discipline of his religious
denomination, sect or church are not inconsistent with his
becoming a corporation sole and do not forbid it;
o 3. That as such chief archbishop, bishop, priest, minister, rabbi or
presiding elder, he is charged with the administration of the
temporalities and the management of the affairs, estate and
properties of his religious denomination, sect or church within his
territorial jurisdiction, describing such territorial jurisdiction;
o 4. The manner in which any vacancy occurring in the office of
chief archbishop, bishop, priest, minister, rabbi of presiding elder
is required to be filled, according to the rules, regulations or
discipline of the religious denomination, sect or church to which
he belongs; and
o 5. The place where the principal office of the corporation sole is to
be established and located, which place must be within the
Philippines.
o The articles of incorporation may include any other provision not
contrary to law for the regulation of the affairs of the corporation.
Q: What is required to be filed when filing AOI?
Ø Sec. 112. Submission of the articles of incorporation. - The articles of
incorporation must be verified, before filing, by affidavit or affirmation of
the chief archbishop, bishop, priest, minister, rabbi or presiding elder, as
the case may be, and accompanied by a copy of the commission, certificate
of election or letter of appointment of such chief archbishop, bishop,
priest, minister, rabbi or presiding elder, duly certified to be correct by any
notary public.
Escudero
Ø From and after the filing with the Securities and Exchange Commission of
the said articles of incorporation, verified by affidavit or affirmation, and
accompanied by the documents mentioned in the preceding paragraph,
such chief archbishop, bishop, priest, minister, rabbi or presiding elder
shall become a corporation sole and all temporalities, estate and
properties of the religious denomination, sect or church theretofore
administered or managed by him as such chief archbishop, bishop, priest,
minister, rabbi or presiding elder shall be held in trust by him as a
corporation sole, for the use, purpose, behalf and sole benefit of his
religious denomination, sect or church, including hospitals, schools,
colleges, orphan asylums, parsonages and cemeteries thereof.
Q: Can a corporation sole acquire property?
Ø Yes.
Ø Sec. 113. Acquisition and alienation of property. - Any corporation sole
may purchase and hold real estate and personal property for its church,
charitable, benevolent or educational purposes, and may receive
bequests or gifts for such purposes.
Ø Q: Can a corporation sole sell or mortgage its property?
o Yes, provided that it has obtained a court order from the RTC of
the province where the property is situated. This done by filing a
verified petition. Such notice thru publication or any other
manner under the court order shall be made.
o Such corporation may sell or mortgage real property held by it by
obtaining an order for that purpose from the Court of First
Instance of the province where the property is situated upon
proof made to the satisfaction of the court that notice of the
application for leave to sell or mortgage has been given by
publication or otherwise in such manner and for such time as said
court may have directed, and that it is to the interest of the
corporation that leave to sell or mortgage should be granted. The
application for leave to sell or mortgage must be made by
petition, duly verified, by the chief archbishop, bishop, priest,
minister, rabbi or presiding elder acting as corporation sole, and
may be opposed by any member of the religious denomination,
sect or church represented by the corporation sole:
Ø Q: Is there any exception to the necessity of court intervention?
o Yes. When the rules, regulations of the religious denomination,
sect, or church, religious society, or order regulate the method or
manner of acquiring, holding, selling, or mortgaging the estate
o Provided, That in cases where the rules, regulations and discipline
of the religious denomination, sect or church, religious society or
order concerned represented by such corporation sole regulate
64
 the method of acquiring, holding, selling and mortgaging real
estate and personal property, such rules, regulations and
discipline shall control, and the intervention of the courts shall not
be necessary.
Q: How are vacancies filled in religious corporation?
Ø Sec. 114. Filling of vacancies. - The successors in office of any chief
archbishop, bishop, priest, minister, rabbi or presiding elder in a
corporation sole shall become the corporation sole on their accession to
office and shall be permitted to transact business as such on the filing with
the Securities and Exchange Commission of a copy of their commission,
certificate of election, or letters of appointment, duly certified by any
notary public.
Ø During any vacancy in the office of chief archbishop, bishop, priest,
minister, rabbi or presiding elder of any religious denomination, sect or
church incorporated as a corporation sole, the person or persons
authorized and empowered by the rules, regulations or discipline of the
religious denomination, sect or church represented by the corporation sole
to administer the temporalities and manage the affairs, estate and
properties of the corporation sole during the vacancy shall exercise all the
powers and authority of the corporation sole during such vacancy.
Q: How are religious corporations dissolved?
Ø Sec. 115. Dissolution. - A corporation sole may be dissolved and its affairs
settled voluntarily by submitting to the Securities and Exchange
Commission a verified declaration of dissolution.
Ø The declaration of dissolution shall set forth:
o 1. The name of the corporation;
o 2. The reason for dissolution and winding up;
o 3. The authorization for the dissolution of the corporation by the
particular religious denomination, sect or church;
o 4. The names and addresses of the persons who are to supervise
the winding up of the affairs of the corporation.
Ø Upon approval of such declaration of dissolution by the Securities and
Exchange Commission, the corporation shall cease to carry on its
operations except for the purpose of winding up its affairs
Q: What is a religious corporation?
Ø Sec. 116. Religious societies. - Any religious society or religious order, or
any diocese, synod, or district organization of any religious denomination,
sect or church, unless forbidden by the constitution, rules, regulations, or
discipline of the religious denomination, sect or church of which it is a part,
or by competent authority, may, upon written consent and/or by an
Escudero
affirmative vote at a meeting called for the purpose of at least two-thirds
(2/3) of its membership, incorporate for the administration of its
temporalities or for the management of its affairs, properties and estate by
filing with the Securities and Exchange Commission, articles of
incorporation verified by the affidavit of the presiding elder, secretary, or
clerk or other member of such religious society or religious order, or
diocese, synod, or district organization of the religious denomination, sect
or church, setting forth the following:
o 1. That the religious society or religious order, or diocese, synod,
or district organization is a religious organization of a religious
denomination, sect or church;
o 2. That at least two-thirds (2/3) of its membership have given
their written consent or have voted to incorporate, at a duly
convened meeting of the body;
o 3. That the incorporation of the religious society or religious
order, or diocese, synod, or district organization desiring to
incorporate is not forbidden by competent authority or by the
constitution, rules, regulations or discipline of the religious
denomination, sect, or church of which it forms a part;
o 4. That the religious society or religious order, or diocese, synod,
or district organization desires to incorporate for the
administration of its affairs, properties and estate;
o 5. The place where the principal office of the corporation is to be
established and located, which place must be within the
Philippines; and
o 6. The names, nationalities, and residences of the trustees elected
by the religious society or religious order, or the diocese, synod,
or district organization to serve for the first year or such other
period as may be prescribed by the laws of the religious society or
religious order, or of the diocese, synod, or district organization,
the board of trustees to be not less than five (5) nor more than
fifteen (15).
TITLE XIV
DISSOLUTION
Q: What is dissolution?
Ø The extinguishment of franchise to be a corporation and the termination of
its corporate existence
Q: What are the steps in corporate dissolution?
Ø STEP 1: Termination of the corporation at least as far as the right to go on
during ordinary business is concerned
65
 Ø STEP 2: Winding up of its affairs
o This refers to the settlement of debts and liabilities to unpaid
creditors. Whatever is left of the corporation’s assets will be
distributed to its stockholders or members
Ø STEP 3: Termination of the corporation for all purposes
Q: What are the methods of dissolution?
Ø Sec. 117. Methods of dissolution. - A corporation formed or organized
under the provisions of this Code may be dissolved:
Ø Voluntarily or
o 1. Dissolution where creditors are not affected
o 2. Dissolution where creditors are affected
o 3. Dissolution by shortening corporate term
o 4. With respect to Corporations Sole, submission of a verified
declaration of dissolution for SEC approval
§ Q: Who submits the verified declaration?
§ The sole incorporator of a corporation sole, or the chief
archbishop, bishop, priest, minister, rabbi or other
presiding elder of the religious denomination, sect or
church.
Ø Involuntarily.
o 1. Expiration of corporate term
o 2. Legislative enactment
§ Especially public utilities.
§ Reason: Congress have the inherent power to make laws
which carries with it the power to alter or repeal them
§ Q: What are the limitations to the exercise of this
power?
§ 1. Sec. 11, Art XII, 1987 Constition: “xxx neither shall any
such franchise or right be granted except under the
condition that it shall be subject to amendment,
alteration, or repeal by the Congress when the
COMMON GOOD so requires
§ 2. Sec. 145. Amendment or repeal: “No right or remedy
in favor of or against any corporation, its stockholders,
members, directors, trustees, or officers, nor any liability
incurred by any such corporation, stockholders,
members, directors, trustees, or officers, shall be
removed or impaired either by the subsequent
dissolution of said corporation or by any subsequent
amendment or repeal of this Code or of any part
thereof”
Escudero
§ 3. The dissolution must NOT impair existing obligations of
contracts or take away vested rights
§ Q: Can Congress dissolve by legislative enactment even
private entities, say San Beda?
§ Yes, provided that the limitations are complied with
o 3. Failure to formally organize and commence corporate business
within 2 years from the issuance of Certificate of Incorporation
§ Q: What do you mean by “formally organize or
commence”?
§ Election of corporate officers
o 4. Order of the SEC in cases provided for under existing law, rules
and regulations
§ Q: What are the grounds in which a petition for
dissolution may be filed with the SEC?
§ 1. Violations by a corporation
§ 2. Deadlocks in a close corporation
• Upon petition, SEC may arbitrate a corporation
and order dissolution
§ 3. Mismanagement of a close corporation
• Grounds: 1. Illegal, dishonest, fraudulent,
oppressive or unfairly prejudicial to the
corporation/SH; 2. Corporate assets are being
misapplied/wasted
§ 4. Suspension or revocation of Certificate of Registration
of a corporation
• Q: What are the grounds to suspend/revoke
COR?
• 1. Fraud in procuring the COR
• 2. Serious misrepresentation as to what the
corporation can do/is doing (to the great
prejudice to the general public)
• 3. Refusal to comply/defiance of any lawful
order of the SEC of acts which would amount to
grave violation of its franchise
• 4. Continuous inoperation for at least 5 years
• 5. Failure to file by-laws within the required
period
• 6. Failure to file required reports in appropriate
forms as determined by the SEC within the
prescribed period
Q: Explain the procedure with respect to dissolution where no creditors are
affected.
66
 Ø Sec. 118. Voluntary dissolution where no creditors are affected. - If
dissolution of a corporation does not prejudice the rights of any creditor
having a claim against it, the dissolution may be effected
Ø By majority vote of the board of directors or trustees, and
Ø By a resolution duly adopted by the affirmative vote of the stockholders
owning at least 2/3 of the outstanding capital stock or of at least 2/3 of the
members
Ø Of a meeting to be held upon call of the directors or trustees
Ø After PUBLICATION of the notice of time, place and object of the meeting
o For 3 consecutive weeks in a newspaper published in the place
where the principal office of said corporation is located; and
o If no newspaper is published in such place, then in a newspaper
of general circulation in the Philippines,
Ø After sending such NOTICE to each stockholder or member either by
registered mail or by personal delivery at least 30 days prior to said
meeting.
Ø A copy of the resolution authorizing the dissolution shall be CERTIFIED
(Certificate which is signed ) by a majority of the board of directors or
trustees and
o Q: What is the certification all about?
§ That the majority of the board is authorized by
corporation and the required vote is obtained
Ø COUNTERSIGNED by the secretary of the corporation.
Ø The Securities and Exchange Commission shall thereupon issue the
CERTIFICATE OF DISSOLUTION.
VESAGAS V. C.A.
Ø Members of the corporation complained that they were stripped off their
membership without due process. The defense of Vesagas was the
corporation no longer existed
Ø On the issue of WON the corporation was dissolved, the SC held in the
negative because the corporation failed to follow the required procedure
under the corporation code.
Ø The corporation merely submitted the following documentary evidence:
board resolution and minutes of the meeting. These alone do not prove
dissolution
Ø The procedure in dissolution must be strictly followed
Ø The 3 documents required to prove dissolution
o 1. Certificate of Dissolution issued by the SEC
o 2. Board Resolution
o 3. Certification countersigned by the majority of the board and
signed by the corporate secretary authorizing the dissolution
Escudero
Ø The Certificate of Dissolution issued by the SEC is the best evidence of
dissolution. Thru this, the corporation is presumed to have complied with
required procedure under the Corporation Code
Q: Explain the procedure with respect to dissolution where creditors are affected.
Ø Sec. 119. Voluntary dissolution where creditors are affected. - Where the
dissolution of a corporation may prejudice the rights of any creditor, the
petition for dissolution shall be filed with the Securities and Exchange
Commission.
Ø The petition shall be signed by
o A majority of its board of directors or trustees OR other officers
having the management of its affairs,
Ø Verified by its
o President or
o Secretary or
o One of its directors or trustees, and
Ø Shall set forth:
o All claims and demands against it, and
o That its dissolution was resolved upon by the affirmative vote of
the stockholders representing at least 2/3 of the outstanding
capital stock or by at least 2/3 of the members at a meeting of its
stockholders or members called for that purpose.
Ø If the petition is sufficient in form and substance, the Commission shall, by
an ORDER reciting the purpose of the petition, fix a date on or before
which OBJECTIONS thereto may be filed by any person,
o Which date shall not be less than 30 days nor more than sixty 60
days after the entry of the order.
o Timeframe: this means that the date of filing objections must be
fixed on a date NOT earlier than 30 days after the order and NOT
later than 60 days after the order.
o Ex: if the date of entry of the order is April 4, then the date for
filing objections must be fixed not earlier than May 4 and not later
June 5
Ø Before such date, a copy of the order shall be published
o At least once a week for 3 consecutive weeks in a newspaper of
general circulation published in the municipality or city where
the principal office of the corporation is situated, or
o if there be no such newspaper, then in a newspaper of general
circulation in the Philippines, and
Ø A similar copy shall be posted for 3 consecutive weeks in 3 public places in
such municipality or city.
Ø Upon 5 day's notice, given after the date on which the right to file
objections as fixed in the order has expired, the Commission shall proceed
67
 to HEAR the petition and try any issue made by the OBJECTIONS filed; and
if no such objection is sufficient, and the material allegations of the
petition are true,
Ø It shall render judgment dissolving the corporation and
o Directing such disposition of its assets as justice requires, and
o May appoint a receiver to collect such assets and pay the debts of
the corporation.
§ The function of the receiver is to administer the
liquidation, manage the settlement of liabilities and
debts
Q: Explain the procedure with respect to dissolution by shortening the corporate
term of existence.
Ø Sec. 120. Dissolution by shortening corporate term. - A voluntary
dissolution may be effected by amending the articles of incorporation to
shorten the corporate term pursuant to the provisions of this Code.
Ø A copy of the amended articles of incorporation shall be submitted to the
Securities and Exchange Commission in accordance with this Code.
Ø Upon approval of the amended articles of incorporation of the expiration
of the shortened term, as the case may be, the corporation shall be
deemed dissolved without any further proceedings, subject to the
provisions of this Code on liquidation.
Q: If the corporate term is shortened, do the shareholders still have appraisal
right?
Ø Yes.
Ø Under Section 37, shortening of the corporate term is not one of the
instances wherein the appraisal right is available
Ø Under Section 81, however, it is included.
Ø Thus, appraisal right is available in both shortening and extending the
corporate term
Sec. 121. Involuntary dissolution. - A corporation may be dissolved by the
Securities and Exchange Commission upon filing of a verified complaint and after
proper notice and hearing on the grounds provided by existing laws, rules and
regulations.
Sec. 122. Corporate liquidation. - Every corporation whose charter expires by its
own limitation or is annulled by forfeiture or otherwise, or whose corporate
existence for other purposes is terminated in any other manner, shall nevertheless
be continued as a body corporate for three (3) years after the time when it would
have been so dissolved, for the purpose of prosecuting and defending suits by or
against it and enabling it to settle and close its affairs, to dispose of and convey its
Escudero
property and to distribute its assets, but not for the purpose of continuing the
business for which it was established.
At any time during said three (3) years, the corporation is authorized and
empowered to convey all of its property to trustees for the benefit of stockholders,
members, creditors, and other persons in interest. From and after any such
conveyance by the corporation of its property in trust for the benefit of its
stockholders, members, creditors and others in interest, all interest which the
corporation had in the property terminates, the legal interest vests in the trustees,
and the beneficial interest in the stockholders, members, creditors or other persons
in interest.
Upon the winding up of the corporate affairs, any asset distributable to any creditor
or stockholder or member who is unknown or cannot be found shall be escheated
to the city or municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no
corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities.
Q: What is Liquidation?
Ø It is the winding up of the affairs of the corporation by:
o 1. Reducing its assets in money
o 2. Settling with the creditors or debtors, and
o 3. Apportioning the amount of profit or loss
Q: What are the methods of corporate liquidation?
Ø 1. Liquidation by the corporation itself
Ø 2. Liquidation by a duly appointed receiver
Ø 3. Liquidation by a trustee to whom the corporation had conveyed the
corporate assets
Q: What is the difference between a receiver and trustee?
Ø Receiver – appointed by the corporation or SEC to collect the corporate
assets and pay the debts of the corporation (Sec. 119)
Ø Trustee – appointed by the corporation
Q: What is the priority of obligations of corporations?
Ø 1. When corporation becomes insolvent - Creditors
Ø 2. SH/members/directors/officers who are also creditors
Ø 3. Remaining assets to be distributed to the SH/members
Ø 4. If no SH/members, escheated (forfeited) in favor of the government,
specifically the municipality or city where the asset is located
SPS. GELANO V. CA
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 Ø While the civil case against Sps. Gelano was pending, ISI amended its AOI
to shorten its corporate existence. The case was dismissed by the RTC on
the ground that it had no jurisdiction since the corporation is no longer in
existence
Ø WON RTC had jurisdiction? Yes.
Ø Sec. 122: Every corporation shall nevertheless be continued as a body
corporate for 3 years after the time when it would have been so dissolved.
xxx At any time during said 3 years, the corporation is authorized and
empowered to convey all of its property to trustees for the benefit of
stockholders, members, creditors, and other persons in interest.
Ø Even if the case continued beyond the 3 year period (in this case, 7 years
had already elapsed), as long as the case was filed when the corporation
was still in existence, the case will still SUBSISTS
Ø Also, a lawyer who prosecuted and defended the interest of a corporation
and appeared on behalf of the corporation before and after dissolution,
may be considered as a trustee contemplated in Sec. 122. In the case at
bar, there was a substantial compliance of the appointment of a trustee
when the lawyers prosecuted the interest of the corporation when it was
still in existence
PHILIPPINE VETERANS BANK V. VEGA
Ø The enactment of Republic Act No. 7169 has rendered the liquidation
court functus officio and respondent judge has been stripped of the
authority to issue orders involving acts of liquidation.
Ø Liquidation connotes a winding up or settling with the creditors and
debtors while rehabilitation connotes a reopening or reorganization. Both
are diametrically opposed to each other, such that both cannot be
undertaken at the same time. To allow the liquidation proceedings to
continue would seriously hinder the rehabilitation of the subject bank.
Ø Liquidation = termination; Rehabilitation = continuation
TAN TIONG BIO V. CIR
Ø Q: What if a corporation has no more assets, can the creditors still
collect?
o Yes, SH be liable. The creditors can follow the properties of the
corporation even beyond the 3 year period under Sec. 122 if the
assets of the corporation were distributed to the SH/members
without first settling the corporation’s debts and liabilities first
§ This is the principle enunciated in American
jurisprudence made applicable also in this case
Ø If the government was not allowed to collect taxes which are rightfully due
to it, then that would set a dangerous precedent for the reason that the
SH/members could easily escape tax liability by the simple expedient of
Escudero
transferring to other persons the property of the corporation. This is an
indirect tax evasion.
REBOLLIDO V. CA AND PEPSICO
Ø WON PEPSICO is a Real-Party-Interest? Yes.
Ø Sec. 122: Every corporation shall nevertheless be continued as a body
corporate for 3 years after the time when it would have been so dissolved.
xxx At any time during said 3 years, the corporation is authorized and
empowered to convey all of its property to trustees for the benefit of
stockholders, members, creditors, and other persons in interest.
Ø Assuming that a corporation is already dissolved but the action lasted
beyond the 3 year period, the action may still be prosecuted as long as the
corporation was still in existence at the time of filing
Ø In the case at bar, the case was filed within the 3 year period.
Ø As long as the properties are identifiable to the corporation and
transferred to another person, the creditors may follow the property
Ø Since the corporation is still subject to suit, it is incidentally subject to the
court processes such as summons
Assign: Up to foreign corporations
TITLE XV
FOREIGN CORPORATIONS
Q: What is a Foreign Corporation?
Ø Sec. 123. Definition and rights of foreign corporations. - For the purposes
of this Code, a foreign corporation is one formed, organized or existing
under any laws other than those of the Philippines and whose laws allow
Filipino citizens and corporations to do business in its own country or state.
Ø Q: From the definition under the Corporation Code, what are the 2
elements of a Foreign Corporation?
o 1. The FC is formed, organized or existing under any laws other
than those of the Philippines; and
o 2. The laws by which the FC is organized allows Filipino citizens
and corporations to do business in its own country or state.
§ This also known as the “Right of Reciprocity”
Ø Q: What right is granted to foreign corporations?
o It shall have the right to transact business in the Philippines after
it shall have obtained:
§ 1. A license to transact business in this country in
accordance with this Code and
§ 2. A certificate of authority from the appropriate
government agency.
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Q: How do you determine the nationality of a corporation? (3 tests)
Ø 1. Incorporation test – the nationality of a corporation is that of the state
of incorporation regardless of the nationality of the shareholders
Ø 2. Control test – the nationality of a corporation is depends upon the
nationality of the controlling stockholders
Ø 3. Grandfather rule – the combined totals in the investing corporation and
the investee corporation must be traced (grandfathered) to determine the
total percentage of Filipino ownership
Ø Q: In our jurisdiction, which test do we apply?
o According to a SEC circular, we apply the Control Test in
determining whether a corporation has complied with the
constitutional provisions requiring certain industries to be Filipino
owned (i.e. 100% Filipino-owned, 60%-40%)
Q: What happens when a foreign corporation was granted a license before the
effectivity of the Corporation Code?
Ø Sec. 124. Application to existing foreign corporations. - Every foreign
corporation which on the date of the effectivity of this Code is authorized
to do business in the Philippines under a license therefore issued to it, shall
continue to have such authority under the terms and condition of its
license, subject to the provisions of this Code and other special laws.
o However, the corporation must still comply with the new
requirements of the Corporation Code (I.e. Rule of Reciprocity)
within 2 years from the effectivity of the Code
Q: What are the requirements for the issuance of a license?
Ø The FC must file an application under oath
Ø Sec. 125. Application for a license. - A foreign corporation applying for a
license to transact business in the Philippines shall submit to the Securities
and Exchange Commission:
o A copy of its articles of incorporation and by-laws,
o Certified in accordance with law, and their
o Translation to an official language of the Philippines, if necessary.
o The application shall be under oath and,
Ø Q: What must be contained in the application?
o Unless already stated in its articles of incorporation, shall
specifically set forth the following:
§ 1. The date and term of incorporation;
§ 2. The address, including the street number, of the
principal office of the corporation in the country or state
of incorporation;
Escudero
§ 3. The name and address of its resident agent authorized
to accept summons and process in all legal proceedings
and, pending the establishment of a local office, all
notices affecting the corporation;
§ 4. The place in the Philippines where the corporation
intends to operate;
§ 5. The specific purpose or purposes which the
corporation intends to pursue in the transaction of its
business in the Philippines: Provided, That said purpose
or purposes are those specifically stated in the certificate
of authority issued by the appropriate government
agency;
§ 6. The names and addresses of the present directors and
officers of the corporation;
§ 7. A statement of its authorized capital stock and the
aggregate number of shares which the corporation has
authority to issue, itemized by classes, par value of
shares, shares without par value, and series, if any;
§ 8. A statement of its outstanding capital stock and the
aggregate number of shares which the corporation has
issued, itemized by classes, par value of shares, shares
without par value, and series, if any;
§ 9. A statement of the amount actually paid in; and
§ 10. Such additional information as may be necessary or
appropriate in order to enable the Securities and
Exchange Commission to determine whether such
corporation is entitled to a license to transact business in
the Philippines, and to determine and assess the fees
payable.
Ø Q: What are the necessary attachments to the application? (Conditions
Precedent)
o 1. Attached to the application for license shall be a duly executed
certificate under oath by the authorized official or officials of the
jurisdiction of its incorporation, attesting to the fact that:
§ The laws of the country or state of the applicant allow
Filipino citizens and corporations to do business therein,
and
§ That the applicant is an existing corporation in good
standing.
§ If such certificate is in a foreign language, a translation
thereof in English under oath of the translator shall be
attached thereto.
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 o 2. The application for a license to transact business in the
Philippines shall likewise be accompanied by a statement under
oath of the president or any other person authorized by the
corporation, showing to the satisfaction of the Securities and
Exchange Commission and other governmental agency in the
proper cases that:
§ The applicant is solvent and
§ In sound financial condition, and
§ Setting forth the assets and liabilities of the corporation
as of the date not exceeding one (1) year immediately
prior to the filing of the application.
o 3. Foreign banking, financial and insurance corporations shall, in
addition to the above requirements, comply with the provisions
of existing laws applicable to them. In the case of all other
foreign corporations, no application for license to transact
business in the Philippines shall be accepted by the Securities and
Exchange Commission without previous authority from the
appropriate government agency, whenever required by law.
o 4. (Sec. 128) Written power of attorney designating some person
who must be a resident of the Philippines, on whom any
summons and other legal processes may be served in all actions
or other legal proceedings against such corporation
o 5. (Sec. 128) Any such foreign corporation shall likewise execute
and file with the Securities and Exchange Commission an
agreement or stipulation, executed by the proper authorities of
said corporation, in form and substance with the SEC to the effect
that if the FC shall cease to transact business in the Philippines or
that there is no resident agent, then the SEC can receive summons
and legal processes on behalf of the FC
Q: What happens when all the requirements are complied with? (Conditions
Subsequent)
Ø Sec. 126. Issuance of a license. - If the Securities and Exchange
Commission is satisfied that the applicant has complied with all the
requirements of this Code and other special laws, rules and regulations,
the Commission shall issue a license to the applicant:
Ø 1. To transact business in the Philippines (only) for the purpose or
purposes specified in such license. Upon issuance of the license, such
foreign corporation may commence to transact business in the Philippines
and continue to do so for as long as it retains its authority to act as a
corporation under the laws of the country or state of its incorporation,
o Unless such license is sooner surrendered, revoked, suspended or
annulled in accordance with this Code or other special laws
Escudero
Ø 2. Within sixty (60) days after the issuance of the license to transact
business in the Philippines, the license, except foreign banking or insurance
corporation, shall deposit with the Securities and Exchange Commission
for the benefit of present and future creditors of the licensee in the
Philippines, securities satisfactory to the Securities and Exchange
Commission, consisting of bonds or other evidence of indebtedness of the
Government of the Philippines, its political subdivisions and
instrumentalities, or of government-owned or controlled corporations and
entities, shares of stock in "registered enterprises" as this term is defined
in Republic Act No. 5186, shares of stock in domestic corporations
registered in the stock exchange, or shares of stock in domestic insurance
companies and banks, or any combination of these kinds of securities, with
an actual market value of at least one hundred thousand (P100,000.)
pesos;
Ø 3. Provided, however, That within six (6) months after each fiscal year of
the licensee, the Securities and Exchange Commission shall require the
licensee to deposit additional securities equivalent in actual market value
to two (2%) percent of the amount by which the licensee's gross income
for that fiscal year exceeds five million (P5,000,000.00) pesos.
Ø 4. The Securities and Exchange Commission shall also require deposit of
additional securities if the actual market value of the securities on
deposit has decreased by at least ten (10%) percent of their actual
market value at the time they were deposited.
Ø 5. The Securities and Exchange Commission may at its discretion release
part of the additional securities deposited with it if the gross income of
the licensee has decreased, or if the actual market value of the total
securities on deposit has increased, by more than ten (10%) percent of
the actual market value of the securities at the time they were deposited.
Ø Q: May the corporation allow the licensee to substitute the securities?
o Yes. The Securities and Exchange Commission may, from time to
time, allow the licensee to substitute other securities for those
already on deposit:
o 1. As long as the licensee is solvent.
o 2. And allowed by the SEC.
o Such licensee shall be entitled to collect the interest or dividends
on the securities deposited.
Ø Q: What happens if a corporation ceased to conduct business?
o In the event the licensee ceases to do business in the Philippines,
the securities deposited as aforesaid shall be returned,
§ 1. Upon the licensee's application therefor and
§ 2. Upon proof to the satisfaction of the Securities and
Exchange Commission that the licensee has no liability to
71
 Philippine residents, including the Government of the
Republic of the Philippines.
Q: Who may be designated as a resident agent?
Ø Sec. 127. Who may be a resident agent. - A resident agent may be either:
Ø 1. An individual
o a. Residing in the Philippines or
o b. Of good moral character and
o c. Of sound financial standing
Ø 2. A domestic corporation
o lawfully transacting business in the Philippines:
Ø (Provided, That in the case of an individual, he must be of good moral
character and of sound financial standing.)
Q: What is the function of the resident agent
Ø Receive summons and other legal processes may be served in all actions or
other legal proceedings against such corporation
Ø Sec. 128. Resident agent; service of process. - The Securities and Exchange
Commission shall require as a condition precedent to the issuance of the
license to transact business in the Philippines by any foreign corporation
that such corporation file with the Securities and Exchange Commission a
written power of attorney designating some person who must be a
resident of the Philippines, on whom any summons and other legal
processes may be served in all actions or other legal proceedings against
such corporation, and consenting that service upon such resident agent
shall be admitted and held as valid as if served upon the duly authorized
officers of the foreign corporation at its home office.
Ø Q: Aside from the resident agent, who else may receive summons or legal
processes?
o The SEC after the FC executed an agreement/stipulation (as a
precondition to the issuance of license) with the SEC to the effect
that if the FC shall cease to transact business in the Philippines or
that there is no resident agent, then the SEC can receive summons
and legal processes on behalf of the FC
§ Provided that: the SEC shall, within ten (10) days
thereafter, transmit by mail a copy of such summons or
other legal process to the corporation at its home or
principal office.
§ All expenses incurred by the Commission for such service
shall be paid in advance by the party at whose instance
the service is made.
o Any such foreign corporation shall likewise execute and file with
the Securities and Exchange Commission an agreement or
Escudero
stipulation, executed by the proper authorities of said
corporation, in form and substance as follows:
§ "The (name of foreign corporation) does hereby stipulate
and agree, in consideration of its being granted by the
Securities and Exchange Commission a license to transact
business in the Philippines, that if at any time said
corporation shall cease to transact business in the
Philippines, or shall be without any resident agent in
the Philippines on whom any summons or other legal
processes may be served, then in any action or
proceeding arising out of any business or transaction
which occurred in the Philippines, service of any
summons or other legal process may be made upon the
Securities and Exchange Commission and that such
service shall have the same force and effect as if made
upon the duly-authorized officers of the corporation at
its home office."
o Whenever such service of summons or other process shall be
made upon the Securities and Exchange Commission, the
Commission shall, within ten (10) days thereafter, transmit by
mail a copy of such summons or other legal process to the
corporation at its home or principal office. The sending of such
copy by the Commission shall be necessary part of and shall
complete such service. All expenses incurred by the Commission
for such service shall be paid in advance by the party at whose
instance the service is made.
o In case of a change of address of the resident agent, it shall be his
or its duty to immediately notify in writing the Securities and
Exchange Commission of the new address.
Q: What do you mean by ‘transacting’ or ‘doing business’ in the Philippines?
Ø The Corporation Code itself does not define such terms
Ø Under the Foreign Investments Act (RA 7042):
o The phrase doing business shall include: (SSOAP)
§ “Soliciting orders, service contracts, opening offices,
whether called liaison offices or branches; appointing
representatives or distributors domiciled in the
Philippines; participating in the management,
supervision or control of any domestic business, firm,
entity or corporation in the Philippines; and any other act
or acts that imply a continuity of commercial dealings or
arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of
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 the functions normally incident to, and in progressive
prosecution of, commercial gain or of the purpose and
object of the business organization”
Ø The Corporation Code does not define this phrase
Ø Q: What if none of the circumstances are present, can the FC still be
considered to be doing business?
o Yes. Jurisprudence provides for the definition (See Eriks Pte v. CA)
Ø Q: Is a license always pre-requisite before a corporation is considered to
be ‘doing business’? Such that if a corporation does not have license, it
cannot be considered to be ‘doing business’?
o No
ERIKS PTE LTD V. CA
Ø WON Petitioner has the capacity to sue? No.
Ø Petitioner, a non-resident foreign corporation, has no legal capacity to sue.
License is required only in transacting business in the Philippines and not
required to grant the FC legal capacity to sue
Ø What is determinative as to whether a corporation is doing business or not
is its intent as well as the nature of the transaction
Ø The rule is that if a FC does business without license, any agreement
executed thereto is void. Moreover, it shall not have access to PH courts
o Q: Is this incapacity curable? How?
o Yes. By obtaining the requisite license
Ø However, a FC without license is not ipso facto incapacitated from bringing
an action. A license is necessary only if it is transacting or doing business in
the country.
Ø That is why there is a need to define “doing business”
Ø Q: How did the court define “doing business”?
o The true test, however, seems to be whether the foreign
corporation is continuing the body or substance of the business or
enterprise for which it was organized or whether it has
substantially retired from it and turned it over to another.
o “The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance
of acts or works or the exercise of some of the functions normally
incident to, and in progressive prosecution of, the purpose and
object of its organization” (Memorize this!)
Ø In the case at bar, the grant of the 90-day credit term by FC to DC for every
purchase made shows an intention to continue transacting with the latter
since in the usual course of commercial transactions, credit is extended to
members in good standing or to those on whom there is an intent to
maintain a long-term relationship
Escudero
Ø Therefore, granting credit term = continuity of commercial dealing = doing
business = needs license. Without license, Eriks Pte has no legal capacity to
sue.
Sec. 129. Law applicable. - Any foreign corporation lawfully doing business in the
Philippines shall be bound by all laws, rules and regulations applicable to domestic
corporations of the same class, except such only as provide for the creation,
formation, organization or dissolution of corporations or those which fix the
relations, liabilities, responsibilities, or duties of stockholders, members, or officers
of corporations to each other or to the corporation.
Q: If the AOI has been amended, what is the rule?
Ø Sec. 130. Amendments to articles of incorporation or by-laws of foreign
corporations. - Whenever the articles of incorporation or by-laws of a
foreign corporation authorized to transact business in the Philippines are
amended, such foreign corporation shall, within sixty (60) days after the
amendment becomes effective, file with the Securities and Exchange
Commission, and in the proper cases with the appropriate government
agency,
o 1. A duly authenticated copy of the articles of incorporation or
by-laws, as amended,
o Q: What do you mean by duly authenticated?
§ Certified by the appropriate government entity (In the
Philippines, we have NSO) in the country of origin
o 2. Indicating clearly in capital letters or by underscoring the
change or changes made,
o 3. Duly certified by the authorized official or officials of the
country or state of incorporation.
Ø Q: What is the effect if the license is amended?
o The filing thereof shall not of itself enlarge or alter the purpose
or purposes for which such corporation is authorized to transact
business in the Philippines.
Q: When is amended license necessary?
Ø Sec. 131. Amended license. - A foreign corporation authorized to transact
business in the Philippines shall obtain an amended license in the event it:
o 1. Changes its corporate name, or
o 2. Desires to pursue in the Philippines other or additional
purposes,
Ø Q: How is amendment done?
o By submitting an application therefor to the Securities and
Exchange Commission,
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 o The application must be favorably endorsed by the appropriate
government agency in the proper cases.
Q: Is it possible that a FC conduct business other than the main purpose for which
it is authorized to transact?
Ø GR: No. The FC may transact into business only for the purpose it is
authorized
Ø EXPN: If the FC undertakes merely an isolated transaction, or one which is
not in continuity with the commercial dealings of the corporation
Ø Q: Give an example of an isolated transaction.
o Ex: (not sure) assignment of rights/obligation to a domestic
corporation
Q: Can a Foreign Corporation merge with a Domestic Corporation?
Ø FC can merge with DC only when their respective laws provide that they
can merge
Ø FC – it depends if the country has a law allowing merger
Ø DC – there is no law in the Philippines which allow this kind of merger
Ø Therefore, the answer is NO.
Ø Sec. 132. Merger or consolidation involving a foreign corporation licensed
in the Philippines. - One or more foreign corporations authorized to
transact business in the Philippines may merge or consolidate with any
domestic corporation or corporations if such is permitted under Philippine
laws and by the law of its incorporation: Provided, That the requirements
on merger or consolidation as provided in this Code are followed.
Ø Q: How about a FC with another FC, are they allowed to merge?
o Yes, provided that the Sec. 132 is complied with
o 1. Allowed by the state of incorporation
o 2. Petition for withdrawal
o Q: Why is there a need for withdrawal?
§ There is only a need for withdrawal in cases of
ABSORBED corporation doing business in the Philippines.
§ (Alternative answer: withdrawal is important so that the
corporation will not get pregnant)
§ Q: What is a logical explanation for this? -
o Whenever a foreign corporation authorized to transact business
in the Philippines shall be a party to a merger or consolidation in
its home country or state as permitted by the law of its
incorporation, such foreign corporation shall, within sixty (60)
days after such merger or consolidation becomes effective, file
with the Securities and Exchange Commission, and in proper cases
with the appropriate government agency, a copy of the articles of
merger or consolidation duly authenticated by the proper official
Escudero
or officials of the country or state under the laws of which merger
or consolidation was effected:
o Provided, however, That if the absorbed corporation is the foreign
corporation doing business in the Philippines, the latter shall at
the same time file a petition for withdrawal of it license in
accordance with this Title.
o Q: What happens to the absorbed corporation after merger?
§ Its assets and liabilities will belong to the surviving
corporation; its debts and liabilities will be assumed by
the surviving corporation; and the absorbed corporation
will cease to exist
• This is the reason behind withdrawal: because
the corporation ceases to exist
o Q: If the corporation is the surviving corporation, what is the
rule?
§ Within sixty (60) days after such merger or consolidation
becomes effective, file with the Securities and Exchange
Commission, and in proper cases with the appropriate
government agency, a copy of the articles of merger or
consolidation duly authenticated by the proper official or
officials of the country or state under the laws of which
merger or consolidation was effected
Sec. 133. Doing business without a license. - No foreign corporation transacting
business in the Philippines without a license, or its successors or assigns, shall be
permitted to maintain or intervene in any action, suit or proceeding in any court or
administrative agency of the Philippines; but such corporation may be sued or
proceeded against before Philippine courts or administrative tribunals on any valid
cause of action recognized under Philippine laws.
FMC V. DELA ROSA
Ø WON the company was ‘doing business’? Yes.
Ø Under the rules and regulations promulgated by the Board of Investments,
the phrase 'doing business' has been exemption with illustrations, among
them being as follows:
o (1) Soliciting orders, purchases (sales) or service contracts.
Concrete and specific solicitations by a foreign firm, not acting
independently of the foreign firm amounting to negotiation or
fixing of the terms and conditions of sales or service contracts,
regardless of whether the contracts are actually reduced to
writing, shall constitute doing business even if the enterprise has
no office or fixed place of business in the Philippines. xxx
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 o (2) Appointing a representative or distributor who is domiciled in
the Philippines, unless said representative or distributor has an
independent status, i.e., it transacts business in its name and for
its own account, and not in the name or for the account of the
principal.
o (4) Opening offices, whether called 'liaison' offices, agencies or
branches, unless proved otherwise.
o (10) Any other act or acts that imply a continuity of commercial
dealings or arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of the
functions normally incident to, or in the progressive prosecution
of, commercial gain or of the purpose and objective of the
business organization
Ø Q: What are the circumstances in this case which constitute doing
business?
o The act by a non-resident foreign corporation of recruiting Filipino
workers for its own use abroad constitutes in the law doing
business in the Philippines.
Ø Test of "doing business": Whether the foreign corporation is continuing
the body or substance of the business or enterprise for which it was
organized or whether it has substantially retired from it and turned it over
to another.
Q: What are the grounds for revocation?
Ø Sec. 134. Revocation of license. - Without prejudice to other grounds
provided by special laws, the license of a foreign corporation to transact
business in the Philippines may be revoked or suspended by the Securities
and Exchange Commission upon any of the following grounds:
o 1. Failure to file its annual report or pay any fees as required by
this Code;
o 2. Failure to appoint and maintain a resident agent in the
Philippines as required by this Title;
o 3. Failure, after change of its resident agent or of his address, to
submit to the Securities and Exchange Commission a statement of
such change as required by this Title;
o 4. Failure to submit to the Securities and Exchange Commission an
authenticated copy of any amendment to its articles of
incorporation or by-laws or of any articles of merger or
consolidation within the time prescribed by this Title;
o 5. A misrepresentation of any material matter in any application,
report, affidavit or other document submitted by such
corporation pursuant to this Title;
Escudero
o 6. Failure to pay any and all taxes, imposts, assessments or
penalties, if any, lawfully due to the Philippine Government or any
of its agencies or political subdivisions;
o 7. Transacting business in the Philippines outside of the purpose
or purposes for which such corporation is authorized under its
license;
o 8. Transacting business in the Philippines as agent of or acting for
and in behalf of any foreign corporation or entity not duly
licensed to do business in the Philippines; or
o 9. Any other ground as would render it unfit to transact business
in the Philippines.
Sec. 135. Issuance of certificate of revocation. - Upon the revocation of any such
license to transact business in the Philippines, the Securities and Exchange
Commission shall issue a corresponding certificate of revocation, furnishing a copy
thereof to the appropriate government agency in the proper cases.
The Securities and Exchange Commission shall also mail to the corporation at its
registered office in the Philippines a notice of such revocation accompanied by a
copy of the certificate of revocation.
Q: Can a FC withdraw its license? What are the requisites?
Ø Yes.
Ø Sec. 136. Withdrawal of foreign corporations. - Subject to existing laws
and regulations, a foreign corporation licensed to transact business in the
Philippines may be allowed to withdraw from the Philippines by filing a
petition for withdrawal of license. No certificate of withdrawal shall be
issued by the Securities and Exchange Commission unless all the following
requirements are met;
o 1. All claims which have accrued in the Philippines have been paid,
compromised or settled;
o 2. All taxes, imposts, assessments, and penalties, if any, lawfully
due to the Philippine Government or any of its agencies or
political subdivisions have been paid; and
o 3. The petition for withdrawal of license has been published once
a week for three (3) consecutive weeks in a newspaper of general
circulation in the Philippines.
HUTCHINSON PORTS PHILS. V. SUBIC BAY METROPOLITAN AUTHORITY
Ø WON Hutchinson is doing business in the Philippines? Yes.
Ø Participating in the bidding process constitutes "doing business" because it
shows the foreign corporation's intention to engage in business here. The
bidding for the concession contract is but an exercise of the corporation's
reason for creation or existence.
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 Ø Participation in bidding process = intent to engage in business here
HOME INSURANCE COMPANY V. EASTERN SHIPPING LINES
Ø WON HIC has capacity to sue? No. A FC doing business without license has
no capacity to sue
Ø A contract entered into by a foreign insurance company without license to
do business in the Philippines is not void. It is valid and enforceable
o The effect of this is that:
o 1. The FC has no access to the courts
o 2. The FC is subject to penalty under Sec. 144 of the Corpo Code
(penal sanction)
o Thus, the officers or persons who executed the agreement can be
liable for criminal offense
MR HOLDINGS
Ø It is not the absence of license but the doing of business without license
which prohibits FC from access to the courts
Ø Same definition of doing business (continuity of commercial dealings
Ø Isolated Transactions – should not be defined so as to exclude every other
transaction. A transaction is isolated depending upon the circumstances
o Ex: assignment to a DC of certain right/obligation = no intent to
do business
Ø WON MR Holdings and Marcopper are one and the same?
o No. If a corporation is owned by a subsidiary, it does not mean
that the 2 corporations are one and the same
o The mere fact that a corporation owns majority of the stock of
another corporation is not sufficient in order to pierce the
corporate veil of fiction. There must be allegations of fraud or
wrongdoing
CASES ON SRC
SUMNDAD V. HARRIGAN
Ø The actions of BBCHI did not amount to fraud but only for the simple
collection of money which is cognizable by the regular courts. The mere
use of “in fraud of creditors” does not in itself throw the case within the
SEC’s jurisdiction Harrigan’s complaint does not sufficiently allege acts
amounting to fraud or misrepresentation
Ø Q: How did the SC interpret the phrase “in fraud of creditors”
o Fraud – embraces all multifarious means which human ingenuity
can devise and which are resorted to by one individual to secure
and advantage over another by false suggestions or by
Escudero
suppression of truth and includes surprise, trick, cunning,
dissembling and any unfair way by which another is cheated
Ø Q: Where there any such malicious acts done by the BOD?
o No. None that would amount to fraud or misrepresentation
Ø Petitioner’s contention that the case is intra-corporate dispute within the
domain of the SEC. The jurisdiction over intra-corporate disputes was
transferred from SEC to RTC pursuant to R.A. 8799 (SRC)
OREDAIN V. BF HOMES
VELARDE V. LOPEZ
Ø SC dismissed the case since Lopez is not RPI
Ø No piercing of corporate veil. Mere control of corporate stocks do not
amount to the perpetration of fraud or wrongdoing
Ø Under the SRC IRR, the dismissal of a director is an incorporate dispute
which is cognizable by SEC à RTC
Ø Sec. 5(c) of PD 902-A applies to a corporate officer’s dismissal.
Remuneration involving a person who is not a mere employee but a SH
and officer of the corporation is not a simple labor problem but a matter
that comes within the area of corporate affairs and is in fact an intra
corporate dispute
TIMESHARE REALTY V. CA
Ø Mere registration of Timeshare as a corporation does not authorize it to
deal with unregistered timeshares. Corporation registration is just one of
several requirements before it may deal with timeshares
Ø A corporation must first comply with the requirement of registration of the
securities, otherwise, not authorized
Ø B.P. 178 - Sec. 8. Procedure for registration. — (a) All securities required
to be registered under subsection (a) of Section four of this Act shall be
registered through the filing by the issuer or by any dealer or underwriter
interested in the sale thereof, in the office of the Commission, of a sworn
registration statement with respect to such securities, containing or having
attached thereto, the following:
o (36) Unless previously filed and registered with the Commission
and brought up to date:
§ (a) A copy of its articles of incorporation with all
amendments thereof and its existing by-laws or
instruments corresponding thereto, whatever the name,
if the issuer be a corporation
Ø Sec. 4. Requirement of registration of securities. — (a) No securities,
except of a class exempt under any of the provisions of Section five
hereof or unless sold in any transaction exempt under any of the
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 provisions of Section six hereof, shall be sold or offered for sale or
distribution to the public within the Philippine unless such securities shall
have been registered and permitted to be sold as hereinafter provided.
Ø o Public company – A corporation which is listed on an exchange,
Ø Q: What is time sharing? How do you share time?
UNION BANK V. SEC
Ø Petitioner is required to comply with IRR with respect to disclosure
Ø Sec. 5 (a) (3) of the B.P.178 (Revised Securities Act) does not state or even
imply that petitioner as a listed corporation is exempt from complying with
the reports required by the RSA
Ø Petitioner as a bank is primarily subject to the control of the BSP and as a
corporation trading securities in the stock market, it is under SEC
supervision
Ø There are certain securities exempted from the legislation provision.
However, in this case, there is none which would exempt from reporting.
There is still a need to comply with SEC rules
ONAPAL V. CA
Ø “Commodity Futures Contract” – not illegal but transaction between
parties to implement contract is in the nature of a gambling agreement
Ø After the CFC matures, the Trading Company shall make delivery of the
commodity. Delivery means the act of placing the subject in the actual or
constructive possession to the vendee.
Ø Q: Is a CFC allowed?
o Yes. Just because no delivery was made it does not follow that
there the CFC is invalidated
Ø TC only made a final settlement regarding purchase. There was no actual
delivery. TC only subtracted the loss incurred by the purchaser
Ø Just like in the law of sales, there must be delivery
Ø In this case, there was no delivery. There is only the intention to speculate
on the commodity
Ø Thus, the written contract in question is not illegal but the transaction
between the parties to implement the contract is in the nature of a
gambling agreement under Art. 2018 of the Civil Code which entitles
private respondent to refund from petitioner what she has paid
CEMCO HOLDINGS V. NATIONAL LIFE INSURANCE
Ø SEC is the regulatory agency with power of administration under Section
5.1(n) of the SRC. It can exercise powers necessarily implied to its express
powers or incidental thereto. Thus, the SEC has the incidental power to
conduct hearings and render decisions fixing the rights and obligations of
the parties
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Ø Tender Offer – a publicly announced intention by a person acting alone or
in concert with other persons to acquire equity securities of a public
company
or a corporation with assets exceeding 50M and with 200 or more
SHs, at least 200 of them holding not less than 100 shares of such
company
Ø Tender Offer Rule – a tender offer is an offer by the acquiring person to
SHs of a public company for them to tender their shares therein as a
corporation which is listed on an exchange or a corporation with assets
exceeding 50M and with 200 or more SHs, at least 200 of them holding not
less than 100 shares of such company
o When SH acquire at least 35% of a Public Corporation, it must first
offer to the minority SH the equivalent of their shares
o Nature: a public announcement that SH has the intention of
acquiring a certain number of shares. Must offer it to the minority
o Purpose: to regulate activities relating to acquisition of control of
the listed company and for the purpose of protecting the
minority stockholders of a listed company
o TOR is the remedy or exit to sell the shares at the same price as
those of the majority SH if the minority SH do not agree to the
transaction
Ø Rule 19(2) of the Amended Implementing Rules and Regulations of the SRC
provides for the ff. Mandatory tender offers:
o A. Any person or group of persons acting in concert, who intends
to acquire 35% or more of equity shares in a public company shall
disclose such intention and contemporaneously make a tender
offer for the percent sought to all holders of such class, subject to
paragraph (9)(E) of this Rule.
§ à Shall disclose such intention and contemporaneously
make a tender offer for the percent sought to all holders
of such class, subject to paragraph (9)(E) of this Rule.
§ In the event that the tender offer is oversubscribed, the
aggregate amount of securities to be acquired at the
close of such tender offer shall be proportionately
distributed across both selling shareholder with whom
the acquirer may have been in private negotiations and
minority shareholders.
o B. Any person or group of persons acting in concert, who intends
to acquire 35% or more of equity shares in a public company in
one or more transactions within a period of 12 months
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 § à Shall be required to make a tender offer to all holders o c) An issuer with assets of at least Fifty million pesos
of such class for the number of shares so acquired within (P50,000,000.00) or such other amount as the Commission shall
the said period. prescribe, and having Two hundred (200) or more holders each
o C. If any acquisition of even less than 35% would result in holding at least One hundred (100) shares of a class of its equity
ownership of over 51% of the total outstanding equity securities securities: Provided, however, That the obligation of such issuer to
of a public company, file reports shall be terminated ninety (90) days after notification
§ à The acquirer shall be required to make a tender offer to the Commission by the issuer that the number of its holders
under this Rule for all the outstanding equity securities to holding at least one hundred (100) shares is reduced to less than
all remaining stockholders of the said company at a price One hundred (100).
supported by a fairness opinion provided by an Ø PVB is a public corporation because Section 17.2 states that a Public
independent financial advisor or equivalent third Corporation is one that owns at least 50M worth of assets + 200 SH, each
party. The acquirer in such a tender offer shall be holding at least 100 shares.
required to accept any and all securities thus tendered Ø The reportorial requirements will be beneficial to the veterans-
Ø Doctrines: stockholders, because it gives these SHs access to information on the
Ø 1. “Acquisition” is construed to include direct or indirect transactions. Law bank’s financial status and operations, resulting in greater transparency on
does not distinguish. Still subject to TOR the part of the Bank.
o An indirect acquisition by petitioner of 36% of UCC shares thru o For many SHs, these annual reports are the only means of keeping
acquistion of non-listed UCHC shares is covered by the mandatory in touch with the state of health of their investments.
tender offer rule Ø Q: What constitute reportorial requirements?
Ø 2. Purpose of TOR o An annual report which shall include, among others, a balance
Ø 3. Nature of agency of SEC = can fix the rights and obligations of the parties sheet, profit and loss statement and statement of cash flows, for
such last fiscal year, certified by an independent certified public
ABACUS SECURITIES V. AMPIL accountant, and a management discussion and analysis of results
of operations;
PHILIPPINE VETERANS BANK V. CALLANGAN
Ø Reportorial Requirements – Sec. 17. Periodic and Other Reports of Issuers. SEC V. INTERPORT RESOURCES
Ø 17.1. Every issuer satisfying the requirements in Subsection 17.2 hereof
shall file with the Commission:
o a) Within one hundred 135 days, after the end of the issuer’s
fiscal year, or such other time as the Commission may prescribe,
an annual report which shall include, among others, a balance
sheet, profit and loss statement and statement of cash flows, for
such last fiscal year, certified by an independent certified public
accountant, and a management discussion and analysis of results
of operations; and
o b) Such other periodical reports for interim fiscal periods and
current reports on significant developments of the issuer as the
Commission may prescribe as necessary to keep current
information on the operation of the business and financial
condition of the issuer.
Ø 17.2. The reportorial requirements of Subsection 17.1 shall apply to the
following:

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