Divina Corpo Book 1

DIVINA
on
COMMERCIAL LAW
A Comprehensive Guide
VOLUME I
NILO T. DIVINA
i.u
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CONTENTS
Forewords
Estela M. Perlas—Bernabe.................. iii
Zenaida N. Elepano............................... v
Rev. Fr. Richard G. Ang, O.P............. vii
Justice Angelina Sandoval-Gutierrez ix
Dean Sedfrey M. Candelaria.............. xi
Marisol DL Anenias.............................. xiii
Dean Joan S. Largo ............................. xv
Alden Francis C. Gonzales.................. xvii
Argel Joseph T. Cabatbat.................... xix
I. INSURANCE
Concept of Insurance.................................................................. 1
Elements of an Insurance Contract....................................... 5
Characteristics and Nature of Insurance Contracts.......... 7
Insurable Interest....................................................................... 11
In life/health...................................................................... 11
In Property ........................................................................ 20
Double Insurance.............................................................. 35
Multiple or several interests on same property......... 39
Perfection of the Contract of Insurance................................ 41
Offer and acceptance/consensuality.............................. 41
Premium Payment............................................................ 44
Non-default options in life insurance........................... 57
Reinstatement of a Lapsed Policy of Life Insurance. 57
Refund of Premium.......................................................... 58
Rescission of Insurance Contracts......................................... 60
Concealment...................................................................... 60
Misrepresentations/Omissions...................................... 67
Breach of Warranties....................................................... 80
Claims Settlement and Subrogation..................................... 87
Notice and Proof of Loss................................................. 87
Guidelines on Claims Settlement................................ 95
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Unfair Claims Settlement; Sanctions.................... 95
Prescription of Action............................................... 96
Subrogation................................................................. 98
Classes.................................................................................. 108
Marine.......................................................................... 108
Coverage...............................
108
Fire............................................................................... 127
Casualty Insurance................................................... . 134
Suretyship.................................................................... 138
Life............................................................................... 143
Microinsurance............................................................ 149
Compulsory motor vehicle liability insurance...... 150
No Fault Indemnity Clause....................................... 153
Authorized Driver Clause.......................................... 158
Theft Clause................................................................ 161
Compulsory insurance coverage for agency-hired
workers....................................................... 164
Variable Contracts............................................................... 164
Business of Insurance; Requirements.............................. 164
Insurance Commissioner and Its Power.......................... 165
Insurance Agent.......................................................... 169
Reinsurance................................................................. 171
II. PRE-NEED CODE OF THE PHILIPPINES

(REPUBLIC ACT NO. 9829)
Definition...................................................................... 174
Registration of Pre-need Plans................................... 176
Licensing of Sales Counselors and General Agents ■F- 180
Default and Termination............................................. . 184
Claims settlement.......................................................... 185
III. TRANSPORTATION LAWS

COMMON CARRIERS............................................................ 188
Diligence required of common carriers........................ 199
Liabilities of common carriers....................................... 204
Classification of transport network vehicle services
and transport network companies............. 206
VIGILANCE OVER GOODS.................................................. 207
Exempting causes............................
207
Requirement of absence of negligence............... 213
Absence of delay..................................................... 213
Due diligence to prevent or lessen the loss....... 214
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Contributory negligence............................................................ 214
Duration of liability.................................................................. 214
Delivery of goods to common carrier............................ 214
Actual or constructive delivery...................................... 214
Temporary loading or storage....................................... 217
Stipulation for limitation of liability..............................219
Void stipulations............................................................... 219
Limitation of liability to fixed amount........................ 220
Limitation of liability in the absence of
declaration of greater value........................ 221
Liability for baggage of passengers.............................. 225
Checked-in baggage.......................................................... 225
Baggage in possession of strangers.............................. 225
SAFETY OF PASSENGERS.............................................................. 227
Void stipulations........................................................................ 228
Duration of liability................................................ ................... 229
Waiting for carrier or boarding a carrier................... 231
Arrival at destination...................................................... 231
234
Liability for acts of others..............................
Employees.......................................................................... 234
Other passengers and strangers................................... 237
Liability for delay in the commencement of the voyage... 240
Liability for defects in the equipment and facilities......... 240
Extent of liability for damages............................................... 241
BILL OF LADING................................................................................ 242
Three-Fold Character................................................................. 242
Delivery of Goods....................................................................... 244
Period for delivery............................................................ 244
Delivery without surrender of the bill of lading....... 246
Refusal of consignee to take delivery........................... 248
Period for Filing Claims........................................................... 248
Period for Filing Actions........................................................... 252
Coastwise (within Philippines)...................................... 252
International (Foreign ports to Philippine ports)..... 252
Effects of Stipulations................................................................ 253
MARITIME COMMERCE.................................................................. , 253
Charter Parties............................................................................ 253
Bareboat/Demise Charter............................................... 255
Time Charter..................................................................... 257
Voyage/Trip Charter ....................................................... 257
Liability of Ship Owners and Shipping Agents.................. 258
Liability for Acts of Captain.......................................... 262
Limited Liability Rule..................................................... 264
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Exceptions to the Limited Liability Rule 268
Accidents and Damages in Maritime Commerce... 271
General and Particular Averages 271
Collisions 275
Carriage of Goods by Sea Act (COGSA) 281
Application 281
Notice of Loss or Damage 286
Period of Prescription 287
PUBLIC SERVICE ACT (Commonwealth Act No. 146) 295
Definition of public utility 295
Necessity for Certificate of Public Convenience.... 299
Requisites 304
Citizenship . 304
Promotion of public interests . 306
Financial capability . 307
Prior Operator Rule............................................ 307
Meaning...................................................... 307
Exceptions 309
Ruinous competition 310
Fixing of rate...................................................... 310
Rate of return 313
Exclusion of income tax as expense 314
Unlawful arrangements 314
Boundary system 314
Kabit system 316
Approval of sale, encumbrance, or lease
of property 318
AIR TRANSPORTATION 320
The Warsaw Convention 320
Death or injury to passengers 326
Destruction, loss damage or delay in
carrying baggage 327
IV. BUSINESS ORGANIZATIONS

PARTNERSHIP 335
General provisions 335
Definition . 335
Elements . 339
Characteristics . 340
Rules to determine existence 343
Partnership term 349
Partnership by estoppel 351
Partnership as distinguished from joint venture. 351
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Professional partnership............................................ 353
Management................................................................. 353
Rights and obligations of the partnership
and partners ...................................................... 355
Rights and obligations of the partnership............. 355
Obligations of the partners among themselves..... 356
Obligations of the partnership/partners to
third persons............................................. 370
Dissolution and Winding Up.............................................. 379
Limited Partnership............................................................. 394
CORPORATIONS.......................................................................... 405
Definition of corporation..................................................... 405
Classes of corporations ...................................................... 409
Nationality of corporations............................................... 418
Control test.................................................................. 419
Grandfather rule........................................................ 421
425
Corporate juridical personality...................................
Doctrine of separate juridical personality............ 425
Doctrine of piercing the corporate veil.................. 425
Grounds for application of doctrine............... 425
Test in determining applicability................... 427
432
Capital structure...................................
Number and qualifications of incorporators......... 432
Subscription requirements........................................ 435
Corporate term............................................................ 438
Classification of shares............................................. 442
Preferred shares versus common shares..... 442
Scope of voting rights subject
to classification.............................. 445
Founder’s shares................................................ 446
Redeemable shares........................................... 447
Treasury shares................................................. 448
449
Incorporation and organization...................................
Promoter ..................................................................... 450
Subscription contract ............................................... 451
Pre-incorporation subscription agreements ....... 453
Consideration for stocks ......................................... 454
Articles of Incorporation ......................................... 456
Contents............................................................. 457
Non-amendable items ..................................... 460
Corporate name; limitations on use of
corporate name........................................ 462
Registration, incorporation and commencement
of corporate existence............................ 465
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Election of directors or trustees . 466
Adoption of bylaws............................................. 470
Contents of bylaws 471
Binding effects 473
Amendments 474
Effects of non-use of corporate charter . 475
Corporate powers ....................................................... 477
General powers; theory of general capacity ... 478
Specific powers; theory of specific capacity .... 482
Power to extend or shorten corporate term ... 486
Power to increase or decrease capital stock
or incur, create, increase bonded
indebtedness 488
Power to deny pre-emptive rights 496
Power to sell or dispose corporate assets 499
Power to acquire own shares 502
Power to invest corporate funds in another
corporation or business 505
Power to declare dividends .'......... 507
Power to enter into management contract 515
Limitations .................. 516
Ultra vires acts 516
Applicability of ultra vires doctrine 518
Consequences of ultra vires acts . 521
Doctrine of individuality of subscription.......... 522
Doctrine of equality of shares.................. k 522
Trust fund doctrine 523
How exercised 525
Stockholders and members 530
Fundamental rights of a stockholder 530
Participation in management 530
Proxy 530
Voting trust 532
Cases when stockholders’ action is required ... 536
Manner of voting 538
Proprietary rights 538
Right to dividends 538
Appraisal right 538
When available 538
Manner of exercise of right 542
Right to inspect 545
Pre-emptive right 555
Right to vote 555
Right to dividends 555
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Remedial rights............................................................ 555
Individual Suit..................................................... 555
Representative Suit............................................. 556
Derivative Suit..................................................... 556
Obligations of a stockholder....................................... 562
Meetings......................................................................... 563
Regular or special................................................ 563
Notice of meetings............................................... 564
Place and time of meetings............................... 566
Quorum................................................................. 567
Minutes and agenda of meetings.................... . 568
Board of directors and trustees.......................................... 572
Repository of corporate powers................................ 572
Tenure, qualifications, and disqualifications
of directors.................................................. 573
Requirement of independent directors.................... 579
Elections......................................................................... 581
Cumulative voting............................................... 582
Quorum................................................................. 582
Removal.......................................................................... 584
Filling of vacancies...................................................... 586
Compensation............................................................... 589
Disloyalty....................................................................... 591
Business judgment rule............................................. 592
Solidary liabilities for damages................................ 593
Personal liabilities....................................................... 593
Knowingly Voting or Assenting to
Patent Unlawful Acts of the
Corporation...................................... 594
Gross Negligence or Bad Faith in Directing
the Affairs of the Corporation.... . 595
Acquiring any personal or pecuniary
( interest in conflict with their duty as
directors or trustees...................... 596
Consenting to the issuance of watered stocks.. 596
Contractual liability................................................ 596
Statutory liability for corporate act
or omission............................... 596
Responsibility for crimes........................... 597
Special fact doctrine.................................... 598
Inside information....................................... 598
Contracts....................................................... 599
Executive and other special committees 602
Creation......................................................... 602
Limitations on its powers.................................. 604
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Meetings 604
Regular or special . 605
Who presides............................... ;........................ 606
Quorum .............. 607
Rule on abstention 609
Capital affairs............................................................... 611
Certificate of stock 611
Nature of the certificate 612
Uncertificated shares ..... 612
Negotiability; requirements for valid transfer
of stocks............................................. 613
Issuance 616
Full payment 617
Payment pro-rata 617
Stock and transfer book 618
Contents 618
Who may make valid entries 618
Stock transfer agent 620
Lost or destroyed certificates 620
Situs of the shares of stock 623
Watered stocks 623
Definition 623
Liability of directors for watered stocks 624
Trust fund doctrine for liability for
watered stocks 624
Payment of balance of subscription . 624
Call by board of directors..................................... 624
Notice requirement 624
Sale of delinquent shares 626
Effect of delinquency 626
Call by resolution of the board of directors 626
Notice of sale 626
Auction sale 626
Alienation of shares 633
Allowable restrictions on the sale of shares 634
Sale of partially paid shares 636
Sale of a portion of shares not fully paid... 636
Sale of all of shares not fully paid 637
Sale of fully paid shares 637
Requisites of a valid transfer 637
Involuntary dealings 639
Corporate books and records 639
Records to be kept at principal office 640
Right to inspect corporate records 641
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Dissolution and liquidation..................................................... 641
Modes of dissolution.................................................................. 641
644
Voluntary dissolution..............................
Where no creditors are affected.......................... 645
Where creditors are affected................................ 646
By shortening of corporate term......................... 649
Withdrawal of dissolution..................................... 651
Involuntary dissolution.......................................... 652
655
Methods of liquidation..............................
By the corporation itself........................................ 656
Conveyance to a trustee within a three-year
period..................................................... 656
By management committee or
rehabilitation receiver....................... 656
Liquidation after three (3) years......................... 660
Other corporations.................................................................... 663
663
Close corporations..............................
Characteristics of a close corporation................. 665
Validity of restrictions on transfer of shares.... 667
Issuance or transfer of stock in breach of
qualifying conditions.......................... 669
When board meeting is unnecessary or
improperly held................................... 670
Preemptive right..................................................... 671
Amendment of articles of incorporation............ 672
Deadlocks.................................................................. 673
674
Nonstock corporations.............................
674
. Definition.............................
Purposes..................................................................... 675
Treatment of profits................................................ 676
Plan and distribution of assets upon
3 dissolution............................................ 676
3 Educational corporations............................................... 678
Religious corporations..................................................... 679
Corporation sole; nationality................................ 679
Religious societies................................................... 681
682
One person corporations.............................
Excepted corporations........................................... 683
Capital stock requirement.................................... 684
Articles of incorporation and bylaws................. 684
Corporate name...................................................... 684
Corporate structure and officers......................... 685
Nominee.................................................................... 686
Minutes and records.............................................. 687
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Liability.................... 688
Conversion of corporation to one person
corporations and vice-versa.......... 688
689
Foreign corporations...................
Bases of authority over foreign corporations 690
Consent.............................................................. 690
Doctrine of “doing business”........................... 690
Necessity of a license to do business............. 696
Requisites for issuance of a license................ 696
Resident agent................................................... 699
Amendment of license...................................... 699
Personality to sue.............................................. , 700
Suability of foreign corporations..................... 701
Instances when unlicensed foreign
corporations may be allowed to sue
(isolated transactions).................... 702
705
Grounds for revocation of license...................
Merger and Consolidation.................................................. 706
Definition and concept............................................... 706
Distinguish: constituent and consolidated
corporation.................................................. 707
Plan of merger or consolidation............................... 708
Articles of merger or consolidation.......................... 708
Procedure...................................... 708
Effectivity...................................... 710
Limitations.................................... 711
Effects........................................... 712
Investigations, offenses, and penalties, 3 716
Authority of Commissioner.. 716
Investigation and prosecution of offenses 716
Administration of oath and issuance
of subpoena................................ 716
Cease and desist power.............................. 716
Contempt...................................................... 720
Sanctions for violations............................... 720
Administrative sanctions................... 720
Prohibited Acts................................... 721
Penalties............................................. . 721
Who are liable..................................... 726
Authority of the Securities and
Exchange Commission............... 727
Case index 729
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IV. BUSINESS ORGANIZATIONS
A. PARTNERSHIP
1. General provisions
a. Definition
1. What is a contract of partnership?
Partnership is a contract where two or more persons bind
themselves to contribute money, property, or industry to a common
fund, with the intention of dividing the profits among themselves.1
2. What are the kinds of partnerships?

As to its object, a partnership is either: (1) universal or (2)
particular. As regards the liability of the partners, a partnership
may be (1) general or (2) limited.2
3. What are the kinds of universal partnerships?

A universal partnership may refer to all the present property
or to all the profits.3
4. What is a universal partnership of all present property?

A partnership of all present property is that in which the
partners contribute all the property which actually belongs to them
to a common fund, with the intention of dividing the same among
themselves, as well as all the profits they may acquire therewith.4
'Article 1767, Civil Code.

’Article 1776, Civil Code.
335
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336 DIVINA ON COMMERCIAL LAW:
A COMPREHENSIVE GUIDE VOLUME I
In a universal partnership of all present property, the property

which belonged to each of the partners at the time of the constitution
of the partnership, becomes the common property of all the partners,
as well as all the profits which they may acquire therewith.
A stipulation for the common enjoyment of any other profits
may also be made; but the property which the partners may acquire
subsequently by inheritance, legacy, or donation cannot be included
in such stipulation, except the fruits thereof.5
5. What is a universal partnership of profits?

A universal partnership of profits comprises all that the
partners may acquire by their industry or work during the existence
of the partnership.
Movable or immovable property which each of the partners
may possess at the time of the celebration of the contract shall
continue to pertain exclusively to each, only the usufruct passing to
the partnership.0
6. What kind of universal partnership is entered into when its

nature is not specified?
Articles of universal partnership, entered into without
specification of its nature, only constitute a universal partnership
of profits.7
7. Who are disqualified from entering into a universal partnership?

Persons who are prohibited from giving each other any donation
or advantage cannot enter into universal partnership.8
Under Article 739 of the Civil Code, the following donations
shall be void:
a. Those made between persons who were guilty of adultery
or concubinage at the time of the donation;
b. Those made between persons found guilty of the same
criminal offense, in consideration thereof;
“Article 1779, Civil Code.

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IV. BUSINESS ORGANIZATIONS 337
C. Those made to a public officer or his wife, descendants,

and ascendants, by reason of his office.
8. Can a husband and wife form a limited partnership to engage

in real estate business, with the wife being a limited partner?9
Yes. The Civil Code prohibits a husband and wife from
constituting a universal partnership. Since a limited partnership is
not a universal partnership, a husband and wife may validly form
one.
While the spouses cannot enter into a universal partnership,
they can enter into a limited partnership or be members thereof.10
9. What are the objects of a particular partnership?

A particular partnership has for its object:
a. Determinate things;
b. Their use or fruits; or
c. Specific undertaking; or
d. Exercise of a profession or vocation."
10. Timothy executed a Memorandum of Agreement (MOA) with

Kristopher setting up a business venture covering three (3)
fast food stores known as "Hungry Toppings" that will be
established at Mall Uno, Mall Dos, and Mall Tres.
The pertinent provisions of the MOA provide that:
a. Timothy shall be considered a partner with thirty percent
(30%) share in all of the stores to be set up by Kristopher;
b. The proceeds of the business, after deducting expenses,
shall be used to pay the principal amount of P500,000.00
and the interest therein which is to be computed based
on the bank rate, representing the bank loan secured by
Timothy;
’BAR 1994.
10CIR v. Suter, el al., G.R. No. L-25532, February 28, 1969.
"Article 1783, Civil Code.
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The net profits, if any, after deducting the expenses and

payments of the principal and interest shall be divided as
follows: seventy percent (70%) for Kristopher and thirty
percent (30%) for Timothy;
d. Kristopher shall have a free hand in running the business
without any interference from Timothy, his agents,
representatives, or assigns, and should such interference
happen, Kristopher has the right to buy back the share of
Timothy less the amounts already paid on the principal
and to dissolve the MOA; and
e. Kristopher shall submit his monthly sales reports in
connection with the business to Timothy.
What is the contractual relationship between Timothy
and Kristopher?12
The contractual relationship between Timothy and Kristopher
is a contract of partnership as defined under Article 1767 of the
Civil Code, since they have bound themselves to contribute money,
property, or industry to a common fund, with the intention of dividing
the profits of the partnership between them. With a seed money of
P500.000.00 obtained by Timothy through a bank loan, they agreed
to divide the profits, 70% for Kristopher and 30% for Timothy.
However, to be more specific, theirs is a limited partnership as
defined under Article 1843 of the Civil Code because Timothy does
not take part in the control of the business pursuant to Article 1848
of the Civil Code. Nevertheless, Timothy is entitled to monthly sales
reports in connection with the business, a right enshrined in Article
1851 of the Civil Code.
11. Can two (2) corporations organize a general partnership?13

No, a corporation is managed by its board of directors. If the
corporation were to become a partner, co-partners would have the
power to make the corporation party to transactions in an irregular
manner since the partners are not agents subject to the control of the
board of directors. But a corporation may enter into a joint venture
with another corporation as long as the nature of the venture is in
line with the business authorized by its charter.
12BAR 2014.
nBARl&94.
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12. Can a corporation and an individual form a general

partnership?14
No. A corporation may not be a general partner because the
principle of mutual agency in general partnerships, allowing the
other general partner/s to bind the corporation, will violate the
corporation law principle that only the board of directors may bind
the corporation.
b. Elements
13. Spouses A and B entered into an agreement with the Spouses
C and D to provide mutual assistance to each other by way of
financial support to any commercial and agricultural activity
on a joint business arrangement. This business relationship
proved to be successful as they were able to establish a
manufacturing and trading business, acquire real properties,
and construct buildings, among other things.
Related to this. Spouses C and D executed a document
wherein they acknowledged that while registered only in C's
name, they were not the only owners of the capital of three (3)
businesses. In this same "Acknowledgement of Participating
Capital," they stated the participating capital of their co
owners. Is there a partnership?
Yes. Under Article 1767 of the Civil Code, there are two (2)
essential elements in a contract of partnership: (a) an agreement to
contribute money, property, or industry to a common fund; and (b)
intent to divide the profits among the contracting parties. The first
element is undoubtedly present in the case at bar, for, admittedly,
all the parties in this case have agreed to, and did, contribute money
and property to a common fund. Hence, the issue narrows down to
their intent in acting as they did. It is not denied that all the parties
in this case have agreed to contribute capital to a common fund to
be able to later on share its profits. They have admitted this fact,
agreed to its veracity, and even submitted one common documentary’
evidence to prove such partnership — the Acknowledgement of
Participating Capital.16
"BAR 1994.
l6Jnrnntilla, Jr. v. Jnrnntilln, G.R. No. 154489, December 1, 2010, 051 SCRA
13-38.
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c. Characteristics
14. Does a partnership have separate juridical personality?
Yes, the partnership has a juridical personality separate and
distinct from that of each of the partners.16
15. Toby, Shiela, Dustin, and Max are partners in TSDM Partnership,
They executed an "Acknowledgment of Participating Capital"
enumerating the three (3) parcels of land in Cotabato, Davao,
and Bukidnon being used in the partnership business. The
Acknowledgment of Participating Capital states that Toby is
not the sole owner of the three (3) parcels of land despite being
the only registered owner thereof. Shiela filed a complaint for
accounting of the assets and income of the co-ownership, and
for its partition and the delivery of her proportionate share. In
her complaint, she prayed for the distribution of the partnership
assets including a certain land in Zamboanga registered
under the name of Toby. Shiela claimed co-ownership of the
land in Zamboanga since, according to her, the only way Toby
could have purchased these properties were through the
partnership as they had no other source of income. Rule on
Shiela's contention.
Shiela’s contention has no merit. In Villareal u. Ramirez, tlw
Court held that since a partnership is a separate juridical entity,
the shares to be paid out to the partners is necessarily limited
only to its total resources, to wit: “Since it is the partnership, as
a separate and distinct entity, that must refund the shares of the
partners, the amount to be refunded is necessarily limited to its
total resources. In other words, it can only pay out what it has in its
coffers, which consists of all its assets. However, before the partners
can be paid their shares, the creditors of the partnership must first
be compensated. After all the creditors have been paid, whatever is
left of the partnership assets becomes available for the payment of
the partners’ shares.”
There is no evidence that the subject real properties were
assets of the partnership referred to in the Acknowledgement of
Participating Capital.17
’"Article 1768, Civil Code.

’’Jarantilla, Jr. v. Jarantilla, G.R. No. 154486, December 1, 2010, 651 SCRA
13-36
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16. Giles Partnership was a defendant in a civil suit for the

collection of a sum of money. Devin Giles, one of the partners of
Giles Partnership, requests to be impleaded as a co-defendant
alongside Giles Partnership. Does Devin Giles have a right,
as a partner, to be named a co-defendant in a suit against the
partnership?
No, in an action against a partnership which is a juridical
person, one partner is not entitled to be made a party as an individual
separate from the firm. As a partner of Giles Partnership, Devin
Giles is represented by the firm and has no right to appear as an
individual separate from the firm.18
17. When is a partnership governed by the provisions relating to

co-ownership?
Associations and societies, whose articles are kept secret
among the members, and wherein any one of the members may
contract in his own name with third persons, shall have no juridical
personality, and shall be governed by the provisions relating to co-
ownership.19
18. What is the purpose of a partnership?

A partnership must have a lawful object or purpose, and must
be established for the common benefit or interest of the partners.20
19. What happens to an unlawful partnership?

When an unlawful partnership is dissolved by a judicial decree,
the profits shall be confiscated in favor of the State, without prejudice
to the provisions of the Penal Code governing the confiscation of the
instruments and effects of a crime.21
20. Z partnership was declared an unlawful partnership and

dissolved by judicial decree.The partners of Z partnership claim
that their capital contributions do not fall within the profits to
be confiscated in favor of the State. Does the confiscation of
profits include the amounts contributed by the partners of the
unlawful partnership?
‘“Hongkong Bank v. Jurado & Co.. G.R. No. 414, November 9,1903.
■’Article 1775, Civil Code.
“‘Article 1770, Civil Code.
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No. Our Civil Code does not state whether, upon the dissolution
of the unlawful partnership, the amounts contributed are to be
returned to the partners, because it only deals with the disposition
of the profits; but the fact that said contributions are not included in
the disposal prescribed for said profits, shows that in consequence of
said exclusion, the general rules of law must be followed, and hence,
the partners must be reimbursed the amount of their respective
contributions. Any other solution would be immoral, and the law will
not consent to the latter remaining in the possession of the manager
or administrator who has refused to return them, by denying to the
partners the action to demand them.22
21. TRUE or FALSE. An oral partnership is valid.23

TRUE. Partnership is a consensual contract; hence, it is valid
even though not in writing.
22. Matthew is the proprietor of M&J Tools Shop. James, a former

friend of Matthew, began spreading the rumor that he was
the business partner of Matthew; that the "J" in M&J Tools
Shop referred to his name; and that they had entered into a
verbal partnership agreement. James proceeded to exercise
his legal right for an accounting of the partnership properties
and improvements, relying on testimonies of the reputation
and rumor that M&J Tools Shop is a partnership between
Matthew and James. Are these testimonies enough to prove
the existence of the oral partnership?
No, the declarations of one partner, not made in the presence
of his co-partner, are not competent to prove the existence of a
partnership between them as against such other partner. The
existence of a partnership cannot be established by general
reputation, rumor, or hearsay.24 Here, James did not present enough
evidence to establish the existence of the partnership, as he relied
solely on general reputation, rumors, and hearsay.
22Arbes v. Polistico, G.R. No. 31057, September 7, 1929 (citing Manresa).

“BAR 2009.
“Kiel v. Estate of Sabert, G.R. No. 21639, September 25, 1924.
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23. Is a public instrument required to constitute a partnership?

No. A partnership may be constituted in any form, except
where immovable property or real rights are contributed thereto, in
which case a public instrument shall be necessary.26
In addition, every contract of partnership having a capital of
P3,000.00 or more, in money or property, shall appear in a public
instrument, which must be recorded in the Office of the Securities
and Exchange Commission.26
24. What are the requirements whenever immovable property is

contributed?
There must be an inventory of said property, signed by the
parties and attached to the public instrument.27
Any immovable property or an interest therein may be acquired
in the partnership name. Title so acquired can be conveyed only in
the partnership name.28
25. When is an appraisal required?

When the capital or a part thereof which a partner is bound
to contribute consists of goods, their appraisal must be made in
the manner prescribed in the contract of partnership, and in the
absence of stipulation, it shall be made by experts chosen by the
partners, and according to current prices, the subsequent changes
thereof being for the account of the partnership.29
d. Rules to determine existence

26. What are applicable rules to determine the existence of a
partnership?
In determining whether a partnership exists, these rules shall
apply:
a. Except as provided by Article 1825, persons who are not
partners as to each other are not partners as to third
persons;

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b. Co-ownership or co-possession does not of itself establish

a partnership, whether such co-owners or co-possessors
do or do not share any profits made by the use of the
property;
c. The sharing of gross return does not of itself establish
a partnership, whether or not the persons sharing them
have a joint or common right or interest in any property
from which the returns are derived;
d. The receipt by a person of a share of the profits of a
business is prima facie evidence that he is a partner in
the business, but no such interference shall be drawn if
such profits were received in payment:
i. As a debt by installments or otherwise;
ii. As wages of an employee or rent to a landlord;
iii. As an annuity to a widow or representative of a
deceased partner;
iv. As interest on a loan, though the amount of payment
varies with the profits of the business;
v. As the consideration for the sale of a goodwill of
a business or other property by installments or
otherwise.30 r
27. In a Memorandum of Understanding, the individuals claiming

to be "partners" of ZAM Law Office provided that partners
Zaira, Aubrey, and Mica shall not in any way be liable for any
loss or liability that may be incurred by the law firm in the course
of its operation, and that all remaining assets upon dissolution
shall accrue exclusively to Kenneth and all liabilities shall be
solely for his account. Zaira, Aubrey, and Mica's contributions
were services.
The opening paragraph of the Articles of Co-Partnershipof
ZAM Law provides: “WE, the undersigned Zaira, Aubrey, Mica,
and Kenneth, all of legal age, Filipino citizens and members
of the Philippine Bar, have this day voluntarily associated
ourselves for the purpose of forming a partnership engaged
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in the practice of law, effective this date, under the terms and
conditions hereafter set forth, and subject to the provisions of
existing laws."
Based on the Memorandum of Understanding and the
Articles of Co-Partnership, is ZAM Law a sole proprietorship
ora partnership?
ZAM Law is a partnership. ZAM Law Office was constituted as a
partnership at the time its partners signed the Articles of Partnership
wherein they bound themselves to establish a partnership for the
practice of law, contribute capital and industry for the purpose, and
receive compensation and benefits in the course of its operation.
The opening paragraph of the Articles of Partnership reveals the
unequivocal intention of its signatories to form a partnership.
The Memorandum of Understanding evinces the parties’
intention to entirely shift any liability that may be incurred by ZAM
Law Office in the course of its operation to Kenneth, who shall also
receive all the remaining assets of the firm upon its dissolution.
This memorandum, however, does not serve to convert ZAM Law
Office into a sole proprietorship. As discussed, ZAM Law Office was
manifestly established as a partnership based on the Articles of
Partnership. The MOU, from its tenor, reinforces this fact. It did not
change the nature of the organization of ZAM Law Office but only
excused the industrial partners from liability.31
28, In 2012, Lisa and Tommy bought two (2) parcels of land located
in Laguna. A year later, they bought another three (3) parcels
of land in Laguna. The first two (2) parcels of land were sold
by Lisa and Tommy to B Corporation in 2015, while the three
(3) parcels of land were sold to Spouses Tecson in 2017. Lisa
and Tommy realized a net profit in the sale made in 2015 in the
amount of Php940,000.00 while they realized a net profit of
Php460,000.00 in the sale made in 2017. The BIR assessed that
corporate income taxes were due, as it alleged that Lisa and
Tommy formed an unregistered partnership. Does the sharing
of returns, in itself, establish a partnership?
31Saludo, Jr. v. Philippine National Bank, G.R. No. 193138, August 20, 2018.
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No, the sharing of returns does not in itself establish a

partnership whether or not the persons sharing therein have a joint
or common right or interest in the property. There must be a clear
intent to form a partnership, the existence of a juridical personality
different from the individual partners, and the freedom of each party
to transfer or assign the whole property.32
In the present case, there is clear evidence of co-ownership
between Lisa and Tommy. There is no adequate basis to support
the proposition that they formed an unregistered partnership. The
two (2) isolated transactions whereby they purchased properties
and sold the same a few years thereafter did not thereby make
them partners. They shared in the gross profits as co-owners.
Under the circumstances, they cannot be considered to have formed
an unregistered partnership which is thereby liable for corporate
income tax.
29. Clarence Santos Sr. was the father of five (5) children, including
Clarence Santos, Jr. After Clarence Santos, Sr. passed away, a
project of partition was approved. Instead of distributing the
estate of the deceased, pursuant to the project of partition,
the properties remained under the management of co-heir
Clarence Santos, Jr. who used said properties in business
by leasing or selling them and investing the income derived
therefrom and the proceeds from the sales thereof in real
properties and securities. This led to said properties and
investments steadily increasing in value yearly.
The heirs never actually received any share of the income
or profits from Clarence Santos, Jr., and instead, they allowed
him to continue using said shares as part of the common fund
for their ventures, even as they paid the corresponding income
taxes on the basis of their respective shares of the profits
of their common business as reported by the said Clarence
Santos, Jr. Is the arrangement formed by the heirs considered
an unregistered partnership?
Yes, the co-ownership of inherited properties is automatically
converted into an unregistered partnership the moment the said
common properties and/or the incomes derived therefrom are used
32Pascual Commissioner of Internal Revenue, G.R. No. 78133, October 18,

1988.
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rv. BUSINESS ORGANIZATIONS 347
as a common fund with intent to produce profits for the heirs in

proportion to their respective shares in the inheritance as determined
in a project partition either duly executed in an extrajudicial
settlement or approved by the court in the corresponding testate or
intestate proceeding.
The reason is simple. From the moment of such partition, the
heirs are entitled already to their respective definite shares of the
estate and the incomes thereof, for each of them to manage and
dispose of as exclusively his own without the intervention of the other
heirs, and, accordingly, he becomes liable individually for all taxes
in connection therewith. If after such partition, he allows his share
to be held in common with his co-heirs under a single management
to be used with the intent of making profit thereby in proportion
to his share, there can be no doubt that, even if no document or
instrument were executed for the purpose, for tax purposes, at least,
an unregistered partnership is formed.33
30. Santiago, Eliseo, Tomas, and David subscribed and paid

amounts from their separate funds to purchase a sweepstakes
ticket from the Philippine Charity Sweepstakes Office. The
ticket was registered in the name of Santiago and Company.
Upon the drawing of the sweepstakes, the ticket registered
under the name of Santiago and Company won a price of
PI,000,000.00, and the corresponding check was drawn by the
4 PCSO in favor of Santiago and Company.
Santiago appeared on behalf of the other three to collect
the check. The B1R claims that they formed a partnership and
should be assessed income tax. Santiago and Company raise
the defense that they merely formed a community of property,
and are exempt from income tax. Is the defense tenable?
Santiago, Eliseo, Tomas, and David organized a partnership of a
civil nature because each of them put up money to buy a sweepstakes
ticket for the sole purpose of dividing equally the prize which they
may win, as they did in fact in the amount of Pl,000,000.00 (Article
1665, Civil Code).
“Ona v. Commissioner of Internal Revenue, G.R. No. L-19342, May 25,1972.
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34S DIVI NA ON COMMERCIAL LAW:
The partnership was not only formed, but upon the organization
thereof and the winning of the prize, Santiago personally appeared
in the office of the PCSO, in his capacity as co-partner, as such
collected the prize, the office issued the check for Pl,000,000.00 in
favor of Santiago and Company and the said partner, in the same
capacity, collected the said check. All these circumstances repel the
idea that the four organized and formed a community of property
only.34
31. Juancho and Debbie entered into a written agreement to: (1)
organize a partnership for the bottling and distribution of Best
Milk Tea, with Juancho as the industrial partner, and Debbie
as the capitalist, furnishing the capital necessary; (2) that
Juancho was to secure the Best Milk Tea franchise for and in
behalf of the proposed partnership; and (3) that Juancho was
to receive 30% of the net profits of the business. It turned out
that Juancho did not have the Best Milk Tea franchise, and the
two had to go abroad to secure the franchise in Debbie's name.
Upon returning, they established the business, and
Juancho demanded for the execution of the partnership
agreement. Debbie countered that her consent to the written
agreement was secured by the representation of Juancho
that he was the owner, or was about to become owner of an
exclusive bottling franchise, which representation was false
and that Juancho did not secure the franchise, but such was
given to Debbie herself. Does the alleged fraud perpetrated by
Juancho annul the agreement to form a partnership?
No, in order that fraud may vitiate consent, it must be the
causal (dolo causante), not merely the incidental (dolo incidente),
inducement to the making of the contract. By pretending that he
had the exclusive franchise and promising to transfer it to Debbie,
Juancho obtained the consent of Debbie to give him a big slice in
the net profits. This is incidental fraud because it was used to get
the other party’s consent to a big share in the profits, an incidental
matter in the agreement. Thus, the agreement may not be declared
null and void.
3*Gatchalian v. Collector of Internal Revenue, G.R. No. 4B425, April 29,1939.
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Having arrived at the conclusion that the agreement to

organize a partnership may not be declared null and void, may the
agreement be carried out or executed? Under the Spanish Civil
Code, the defendant has an obligation to do, not to give. The law
recognizes the individual’s freedom or liberty to do an act he has
promised to do, or not to do it as he pleases. This is a very personal
act (acto personalisimd) of which courts may not compel compliance,
as it is considered as an act of violence to do so.36
32. Perfecto, the managing partner of Phoebe and Co., employed

Janice, a bookkeeper, whose compensation amounted to 5%
of the gross profits of the partnership. Janice threatened to
dissolve the partnership when she got into a fight with the
partners of Phoebe and Co. Does Janice have the power to
dissolve the partnership?
No. By the terms of the contract the salary of the bookkeeper
was to be 5% of the net profits of the business. This contract did not
make the bookkeeper a partner.36
e. Partnership term
33. When does a partnership commence?
A partnership begins from the moment of the execution of the
contract, unless it is otherwise stipulated.37
i
34. KLM Partnership was constituted in January 2020 for a fixed
period of five (5) years. What is the status of KLM Partnership
if it is continued by the partners after January 2025?
When a partnership for a fixed term or particular undertaking
is continued after the termination of such term or particular
undertaking without any express agreement, the rights and duties
of the partners remain the same as they were at such termination,
so far as is consistent with a partnership at will.
A continuation of the business by the partners or such of them
as habitually acted therein during the term, without any settlement
or liquidation of the partnership affairs, is prima facie evidence of a
continuation of the partnership.38
“Woodhouse v. Halili, G.R. No. L-4811, July 31,1953.

“Fortis v. Hermanos, G.R. No. 2484, April 11,1906.
37Article 1784, Civil Code.
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35. Dizon, one of the junior partners, withdrew from the

partnership of Batis, Marian, and Lloyd due to poor working
conditions. Dizon filed a petition for dissolution and liquidation
of partnership. A SEC hearing officer rendered a decision
that Dizon's withdrawal did not dissolve the partnership. The
partnership agreement did not have a specific duration, but
merely stated that the partnership shall continue so long as
mutually satisfactory and upon the death or legal incapacity
of one of the partners, shall be continued by the surviving
partners. The hearing officer however opined that the
partnership is one for a specific undertaking and hence not a
partnership at will.
The SEC En Banc reversed the said decision, and held
that the withdrawal of Dizon dissolved the partnership of
Batis, Marian, and Lloyd. The SEC En Banc ruled that, being
a partnership at will, the law firm could be dissolved by any
partner at any time, such as by his withdrawal therefrom,
regardless of good faith or bad faith, since no partner can be
forced to continue in the partnership against his will. Is thisva
partnership at will?
Yes, a partnership that does not fix its term is 'a partnership
at will. The birth and life of a partnership at will is predicated
on the mutual desire and consent of the partners. The right to
choose with whom a person wishes to associate himself is the very
foundation and essence of that partnership. Its continued existence
is, in turn, dependent on the constancy of that mutual resolve, along
with each partner’s capability to give it, and the absence of a cause
for dissolution provided by the law itself. Verily, any one of the
partners may, at his sole pleasure, dictate a dissolution of
the partnership at will. He must, however, act in good faith, not
that the attendance of bad faith can prevent the dissolution of the
partnership but that it can result in a liability for damages.
Neither would the presence of a period for its specific duration
or the statement of a particular purpose for its creation prevent
the dissolution of any partnership by an act or will of a partner.
Among partners, mutual agency arises and the doctrine of delectus
personae allows them to have the power, although not necessarily
the right, to dissolve the partnership. An unjustified dissolution by
the partner can subject him to a possible action for damages.39
“Ortega v. Court of Appeals, G.R. No. 109248, July 3,1995.
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f. Partnership by estoppel
36. Weyland and Porco were partners of a real estate business,
where they bought and sold properties for a profit. Weyland
was the managing partner who dealt with the clients of the
business. When Weyland died, his wife Irene continued dealing
with the clients of the business, with the approval of Porco.
After Porco and Irene's friendship turned sour, Porco denied all
of the transactions that Irene handled. The irate clients claim
that Irene is a general partner by estoppel, thus, her acts bind
the partnership. Are the clients correct?
Yes, the widow of the managing partner was authorized by
the other partner to manage the partnership, Irene is a partner
by estoppel. By authorizing the widow of the managing partner
to manage partnership property (which a limited partner could
not be authorized to do), the other general partner recognized her
as a general partner, and is now in estoppel to deny her position
as a general partner, with authority to administer and alienate
partnership property.
A third person has the right to presume that a general partner
dealing with partnership property has the requisite authority from
his co-partners. A third person may and has a right to presume that
the partner with whom he contracts has, in the ordinary and natural
course of business, the consent of his co-partner.
Where the express and avowed purpose of the partnership is
to buy and sell real estate (as in the present case), the immovables
thus acquired by the firm form part of its stock-in-trade, and the
sale thereof is in pursuance of partnership purposes, hence within
the ordinary powers of the partner.10
g. Partnership as distinguished from joint venture

37. Explain the differences and similarities of a partnership and
joint venture.
A partnership is defined as two (2) or more persons who bind

themselves to contribute money, property, or industry to a common
fund with the intention of dividing the profits among themselves.
wGoquiolay v. Sycip, G.R. No. L-11840, July 26,1960,
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On the other hand, joint ventures have been deemed to be “akin”

to partnerships since it is difficult to distinguish between joint
ventures and partnerships. Thus:
The relations of the parties to a joint venture and the nature of
their association are so similar and closely akin to a partnership that
it is ordinarily held that their rights, duties, and liabilities are to be
tested by rules which are closely analogous to and substantially the
same, if not exactly the same, as those which govern partnership. In
fact, it has been said that the trend in the law has been to blur the
distinctions between a partnership and a joint venture, very little
law being found applicable to one that does not apply to the other.
Though some claim that partnerships and joint ventures are
totally different animals, there are very few rules that differentiate
one from the other; thus, joint ventures are deemed “akin” or similar
to a partnership. In fact, in joint venture agreements, rules and legal
incidents governing partnerships are applied.
As a rule, corporations are prohibited from entering into
partnership agreements; consequently, corporations enter into
joint venture agreements with other corporations or partnerships
for certain transactions in order to form “pseudo partnerships.”
Obviously, as the intricate web of “ventures” entered into by
and among corporations was executed to circumvent the legal
prohibition against corporations entering into partnerships, then
the relationship created should be deemed as “partnerships,” and
the laws on partnership should be applied. Thus, a joint venture
agreement between and among corporations may be seen as similar
to partnerships since the elements of partnership are present.41
38. Are joint ventures governed by the law on partnerships?

Yes. Generally understood to mean an organization formed for
some temporary purpose, a joint venture is likened to a particular
partnership or one which “has for its object determinate things, their
use or fruits, or a specific undertaking, or the exercise of a profession
or vocation.” The rule is settled that joint ventures are governed by
the law on partnerships which are, in turn, based on mutual agency
or delectus personae.*2
"Narra Nickel Mining & Development Corp. v. Redmont Consolidated Mines

Corp., G.R. No. 195580, April 21, 2014, 733 SCRA 365-490.
4zJosefina Realubit v. Prosencio and Eden Jaso, G.R. No. 178782, September
21, 2011.
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h. Professional partnership
39. May a partnership be formed for the exercise of a profession?
Yes, two (2) or more persons may form a partnership for the
exercise of a profession.43
i. Management
40. K has been appointed manager in the Articles of Partnership of
KLM Offices. What are the acts that he may execute?
The partner who has been appointed manager in the articles
of partnership may execute all acts of administration despite the
opposition of his partners, unless he should act in bad faith; and his
power is irrevocable without just or lawful cause. The vote of the
partners representing the controlling interest shall be necessary for
such revocation of power.
A power granted after the partnership has been constituted
may be revoked at any time.44
41. May a managing partner act without the consent of the other
partners entrusted with the management of the partnership?
It depends.
If two (2) or more partners have been entrusted with the
management of the partnership without specification of their
respective duties, or without a stipulation that one of them shall not
act without the consent of all the others, each one may separately
execute all acts of administration, but if any of them should oppose
the acts of the others, the decision of the majority shall prevail. In
case of a tie, the matter shall be decided by the partners owning the
controlling interest.45
However, in case it should have been stipulated that none of
the managing partners shall act without the consent of the others,
the concurrence of all shall be necessary for the validity of the acts,
and the absence or disability of any one of them cannot be alleged,
unless there is imminent danger of grave or irreparable injury to the
partnership.46

k
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42. W, X, Y, and Z organized a general partnership with W and X

as industrial partners and Y and Z as capitalist partners. Y
contributed P50,000.00 and Z contributed P20,000.00 to the
common fund. By a unanimous vote of the partners, W and X
were appointed managing partners, without any specification
of their respective powers and duties.
A applied for the position of Secretary and B applied for

the position of Accountant of the partnership.
The hiring of A was decided upon by W and X, but was

opposed by Y and Z.
The hiring of B was decided upon by W and Z, but was

opposed byXandY.
Who of the applicants should be hired by the partnership?

Explain and give your reasons."
A should be hired as Secretary. The decision for the hiring

of A prevails because it is an act of administration which can be
performed by the duly appointed managing partners, W and X.
B cannot be hired, because in case of a tie in the decision of the
Jnanaging partners, the deadlock must be decided by the partners
owning the controlling interest. In this case, the opposition of X and
Y prevails because Y owns the controlling interest.48
43. What are the rules when the manner of management has not
been agreed upon?
When the manner of management has not been agreed upon,

the following rules shall be observed:
a. All the partners shall be considered agents and whatever
any one of them may do alone shall bind the partnership,
without prejudice to the provisions of Article 1801.
b. None of the partners may, without the consent of the
others, make any important alteration in the immovable
property of the partnership, even if it may be useful to
the partnership. But if the refusal of consent by the other
"BAR 1992.
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partners is manifestly prejudicial to the interest of the

partnership, the court’s intervention may be sought.19
44. Where shall partnership books be kept?
The partnership books shall be kept, subject to any agreement

between the partners, at the principal place of business of the
partnership, and every partner shall at any reasonable hour have
access to and may inspect and copy any of-them (Article 1805, Civil
Code).
2. Rights and obligations of the partnership and partners

a. Rights and obligations of the partnership
45. What are the obligations of the partnership to its partners?
The partnership shall be responsible to every partner for the
amounts he may have disbursed on behalf of the partnership and for
the corresponding interest, from the time the expenses are made; it
shall also answer to each partner for the obligations he may have
contracted in good faith in the interest of the partnership business,
and for risks in consequence of its management.60
46. Who bears the risk of specific and determinate things

contributed to the partnership? When is the partnership liable?
The risk of specific and determinate things, which are not

fungible, contributed to the partnership so that only their use and
fruits may be for the common benefit, shall be borne by the partner
who owns them.
If the things contributed are fungible, or cannot be kept without
deteriorating, or if they were contributed to be sold, the risk shall be
borne by the partnership. In the absence of stipulation, the risk of
things brought and appraised in the inventory, shall also be borne
by the partnership, and in such case the claim shall be limited to the
value at which they were appraised.61
‘“Article 1803, Civil Code.

‘‘Article 1795, Civil Code.
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I

47. John and Mark entered into a partnership for the operation of a
coffee shop, with John contributing cash and Mark contributing
coffee equipment. Mark sold the same coffee equipment to
another person without the consent of his partner. John claims
that Mark cannot do so without his approval as the coffee
equipment is now partnership property. Is John correct?
Yes, an equipment which was contributed by one of the
partners to the partnership becomes the property of the partnership
and as such cannot be disposed of by the party contributing the
same without the consent or approval of the partnership or of the
other partner.62
b. Obligations of the partners among themselves

48. How is the contribution among partners divided?
Unless there is a stipulation to the contrary, the partners shall
contribute equal shares to the capital of the partnership.53
49. When does a partner become a debtor of the partnership?

a. Every partner is a debtor of the partnership for whatever
he may have promised to contribute thereto.64
b. A partner who has undertaken to contribute a sum of
money and fails to do so becomes a debtor for the interest
and damages from the time he should have complied with
his obligation. tI
c. The same rule applies to any amount he may have taken
from the partnership coffers, and his liability shall begin
from the time he converted the amount to his own use.65
50. Is a partner liable for any warranty?

Yes. A partner shall be bound for warranty in case of eviction
with regard to specific and determinate things which he may have
contributed to the partnership, in the same cases and in the same
manner as the vendor is bound with respect to the vendee. He shall
also be liable for the fruits thereof from the time they should have
been delivered, without the need of any demand.66
“Lozana v. Depakakibo, G.R. No. L-13680, April 27, 1960.

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51. Using his own funds, Camaran, a partner in a partnership

together with Gorbert, redeemed the land after it is foreclosed
as a result of failure to pay the loan to which the said land is
mortgaged by the partnership. Camaran requested to cancel
the title in the name of the partnership and to issue a new one
in his name. Gorbert claims that Camaran exploited his status
as a partner to exclusively obtain benefits through the transfer
of title to the land. Is Gorbert correct?
Yes. Above all other persons in business relations, partners are
required to exhibit towards each other the highest degree of good
faith. In fact, the relation between partners is essentially fiduciary,
each being considered in law, as he is in fact, the confidential agent
of the other. It is therefore accepted as fundamental in equity
jurisprudence that one partner cannot, to the detriment of another,
apply exclusively to his own benefit the results of the knowledge and
information gained in the character of partner.
Thus, it has been held that if one partner obtains in his own
name and for his own benefit the renewal of a lease on property used
by the firm, to commence at a date subsequent to the expiration of
the firm’s lease, the partner obtaining the renewal is held to be a
constructive trustee for the firm as to such lease. And this rule has
even been applied to a renewal taken in the name of one partner
after the dissolution of the firm and pending its liquidation from the
latter his contribution to the amount of redemption.67
52. When does a partner become liable for damages?

Every partner is responsible to the partnership for damages
suffered by it through his fault, and he cannot compensate them
with the profits and benefits which he may have earned for the
partnership by his industry. However, the courts may equitably
lessen this responsibility if through the partner’s extraordinary
efforts in other activities of the partnership, unusual profits have
been realized.68
67Pang Lim v. Lo Seng, G.R. No. 16318, October 21,1921.

B8Article 1794, Civil Code
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53. Lopez and Carlos entered into a partnership to construct a

highway. Carlos promised that he would give his contribution to
the partnership after his bank loan had been approved. Lopez
continued with the financing and construction of the highway.
Carlos failed to give his timely contribution to the partnership,
leading to the cancellation of the highway construction project.
Can Carlos be made to reimburse Lopez for the money spent
on the failed construction of the highway?
Yes, a partner in a construction venture who failed to stand
by his commitment to the partnership will be ordered to reimburse
to his co-partner whatever the latter invested and spent for the
projects of the venture.69
54. Megan and Tanya entered into a partnership where they would
both invest P500,000.00 each for the purpose of carving
10 wooden figures. Tanya would also receive a P15,000.00
commission per month from April to December. The business
venture did not succeed, as Megan and Tanya both failed to
give their full contributions. Tanya filed a case in order to get
the promised profits of the venture from Megan and the eight
(8) months of commission worth P15,000.00 per month. Is
Tanya entitled to the supposed profits and commission?
No, being a contract of partnership, each partner must share
in the profits and losses of the venture. That is the essence of a
partnership. And even with an assurance made by one of the partners
that they would earn a huge amount of profits, in the absence of
fraud, the other partner cannot claim a right to recover the highly
speculative profits. A partner is entitled to recover share of profits
actually realized by venture.
The partnership agreement stipulated that the Megan
would give Tanya a monthly commission of P15,000.00 from April
to December for a total of eight (8) monthly commissions. The
agreement does not state the basis of the commission. The payment
of the commission could only have been predicated on relatively
extravagant profits. The parties could not have intended the giving
of a commission in spite of loss or failure of the venture. Since
the venture was a failure, Tanya is not entitled to the P15,000.00
commission.™
“Uy V. Puzon, G.R. No. L-19819, October 26,1977.

“Moran, Jr. v. Court of Appeals, G.R. No. 59956, October 31, 1984.
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55. Four (4) people formed a partnership to rehabilitate a flood

control project. The partnership failed as the four partners were
not able to raise the required capital to fund the rehabilitation
project. Two (2) of the four former partners subsequently
procured a contract between themselves to fund the same
flood control project rehabilitation. Are they compelled to
share the profits with their former partners?
No. After the termination of an agency, partnership, or joint
adventure, the party who stood in the fiduciary relation to the other
is free to act in his own interest with respect to the same subject
matter, provided he has done nothing during the continuance of the
relation to lay a foundation for an undue advantage to himself. To
act as fiduciary of another does not necessarily imply the creation of
a permanent disability in the fiduciary to act for himself in regard to
the same subject matter.61
56. May a partner engage in business for himself?

It depends.
An industrial partner cannot engage in business for himself,
unless the partnership expressly permits him to do so; and if he
should do so, the capitalist partners may either exclude him from the
firm or avail themselves of the benefits which he may have obtained
in violation of thisiprovision, with a right to damages in either case.62
The capitalist partners cannot engage for their own account
in any operation which is of the kind of business in which the
partnership is engaged, unless there is a stipulation to the contrary.
Any capitalist partner violating this prohibition shall bring to the
common funds any profits accruing to him from his transactions,
and shall personally bear all the losses.63
“‘Hanlon v. Haussermann, G.R. No. 14617, February 18,1920.

J9JC9B0M
57. Joe and Rudy formed a partnership to operate a car repair shop
in Quezon City. Joe provided the capital while Rudy contributed
his labor and industry. On one side of their shop, Joe opened
and operated a coffee shop, while on the other side, Rudy put
up a car accessories store. May they engage in such separate
businesses? Why?61
Joe, the capitalist partner, may engage in the restaurant
business because it is not the same kind of business the partnership
is engaged in. On the other hand, Rudy may not engage in any other
business unless their partnership expressly permits him to do so
because as an industrial partner he has to devote his full time to the
business of the partnership.65
58. Max is indebted to KLM Partnership in the amount of

P500,000.00 and to K, one of its partners, in the same amount
of P500,000.00. K, who is authorized to collect the sums due
KLM Partnership, received the amount of P500,000.00 from
Max. How should this payment be applied?
If a partner authorized to manage collects a demandable sum,
which was owed to him in his own name, from a person who owed the
partnership another sum also demandable, the sum thus collected
shall be applied to the two (2) credits in proportion to their amounts,
even though he may have given a receipt for his own credit only; but
should he have given it for the account of the partnership credit, the
amount shall be fully applied to the latter.
The provisions of this article are understood to be without
prejudice to the right granted to the debtor by Article 1252, but only
if the personal credit of the partner should be more onerous to him.66
59. Shiela borrowed the sum of Php300,000.00 from TFY

Partnership. After paying PhpWO,000.00 to Toby, one of the
three (3) partners, Shiela became insolvent. Is Toby obliged to
bring to the partnership capital the Php100,000.00 he received
from Shiela?
Yes. A partner who has received, in whole or in part, his share
of a partnership credit, when the other partners have not collected
6,bar 2001.
J9JC9B0M
r
theirs, shall be obliged, if the debtor should thereafter become

insolvent, to bring to the partnership capital what he received even
though he may have given receipt for his share only.67
60. Is there an obligation to render a true and full information of

things affecting the partnership?
Yes. Partners shall render on demand true and full information
of all things affecting the partnership to any partner or the legal
representative of any deceased partner or of any partner under legal
disability.68
Likewise, every partner must account to the partnership for any
benefit, and hold as trustee for it any profits derived by him without
the consent of the other partners from any transaction connected
with the formation, conduct, or liquidation of the partnership or
from any use by him of its property.88
61. When may a partner assert his right to a formal account as to

partnership affairs?
Any partner shall have the right to a formal account as to
partnership affairs:
a. If he is wrongfully excluded from the partnership business
or possession of its property by his co-partners;
b. If the right exists under the terms of any agreement;
c. As provided by Article 1807;
d. Whenever other circumstances render it just and
reasonable.™
62. How are the losses and profits of a partnership distributed?

The losses and profits shall be distributed in conformity with
the agreement. If only the share of each partner in the profits has
been agreed upon, the share of each in the losses shall be in the
same proportion.
67Article 1793, Civil Code.

’“Article 1806, Civil Code.
“’Article 1807, Civil Code.
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In the absence of stipulation, the share of each partner in

the profits and losses shall be in proportion to what he may have
contributed, but the industrial partner shall not be liable for the
losses. As for the profits, the industrial partner shall receive such
share as may be just and equitable under the circumstances. If
besides his sendees he has contributed capital, he shall also receive
a share in the profits in proportion to his capital.71
63. In 2005, L, M, N, O, and P formed a partnership. L, M, and N were

capitalist partners who contributed P500,000.00 each, while
O, a limited partner, contributed P1,000,000. P joined as an
industrial partner contributing only his services. The Articles
of Partnership, registered with the Securities and Exchange
Commission, designated L and O as managing partners; L was
liable only to the extent of his capital contribution; and P was
not liable for losses.
In 2006, the partnership earned a net profit of
P800,000.00. In the same year, P engaged in a different
business with the consent of all the partners. However, in 2007,
the partnership incurred a net loss of P500,000.00. In 2008, the
partners dissolved the partnership. The proceeds of the sale
of partnership assets were insufficient to settle its obligation.
After liquidation, the partnership had an unpaid liability of
P300,000.00.72
a. Assuming that the just and equitable share of the
industrial partner, P, in the profit in 2006 amounted to
PI,000,000.00, how much is the share of O, a limited
partner, in the P800,000.00 net profit?
a. P160,000.00
b. P175,000.00
c. P280,000.00
d. P200,000.00
e. None of the above
N.B.: Since after deducting the P100,000.00 share of P
there remains P700,000.00, the three (3) partners, L, M,
and N, will each have one (1) share and O will have two
’■Article 1797, Civil Code.

72BAR 2013.
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(2) shares (2:1). Given the three (3) shares plus two (2)
shares, the balance of P700,000.00 will be divided by five
(5) which will yield the result of P140,000.00 multiplied
by two (2) (for O).
b. In 2007, how much is the share of O, a limited partner, in

the net loss of P500,000.00?
a. P 0.00
b. P100,000.00
c. P125,000.00
d. P200.000.00
e. None of the above
N.B.i Article 1797 provides that the share in profits and
losses is proportionate to contribution.
64. Can the partnership creditors hold L, O, and P liable after all
the assets of the partnership are exhausted?
a. Yes, The stipulation exempting P from losses is
valid only among the partners. L is liable because
the agreement limiting his liability to his capital
contribution is not valid insofar as the creditors are
concerned. Having taken part in the management
of the partnership, O is liable as capitalist partner.
b. No. P is not liable because there is a valid stipulation
exempting him from losses. Since the other partners
allowed him to engage in an outside business activity, the
stipulation absolving P from liability is valid. For 0, it is
basic that a limited partner is liable only up to the extent
of his capital contribution.
c. Yes. The stipulations exempting P and L from losses
are not binding upon the creditors. O is likewise liable
because the partnership was not formed in accordance
with the requirements of a limited partnership.
d. No. The Civil Code allows the partners to stipulate that
a partner shall not be liable for losses. The registration of
the Articles of Partnership embodying such stipulations
serves as constructive notice to the partnership creditors.
e. None of the above is completely accurate.
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N.B.: Article 1799 provides that a stipulation which excludes

one or more partners from any share in profits and losses is void.
P, an industrial partner, may be exempt but that is only with
respect to the partners but not the creditors. O, by taking part in
the management even if he is a limited partner becomes liable as a
general partner.73
65. In a Memorandum of Understanding, the individuals claiming to

be "partners" of ZAM Law Office provided that partners Zaira,
Aubrey, and Mica shall not in any way be liable for any loss or
liability that may be incurred by the law firm in the course of its
operation, and that all remaining assets upon dissolution shall
accrue exclusively to Kenneth and all liabilities shall be solely
for his account. Zaira, Aubrey, and Mica's contributions were
services.
Theopening paragraph ofthe Articles of Co-Partnershipof
ZAM Law provides: "WE, the undersigned Zaira, Aubrey, Mica,
and Kenneth, all of legal age, Filipino citizens and members
of the Philippine Bar, have this day voluntarily associated
ourselves for the purpose of forming a partnership engaged
in the practice of law, effective this date, under the terms and
conditions hereafter set forth, and subject to the provisions of
existing laws."
Is the stipulation in the Memorandum of Understanding
exempting Zaira, Aubrey, and Mica from liability valid? How
will the stipulation affect Zaira, Aubrey, and Mica's liability as
to third persons?
Yes. The stipulation is valid, but their obligations as against
third persons will not be affected.
The law, in its wisdom, recognized the possibility that partners
in a partnership may decide to place a limit on their individual
accountability. Consequently, to protect third persons dealing with
the partnership, the law provides a rule, embodied in Article 1816 of
the Civil Code, which states:
,3Article 1848, Civil Code.
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Art. 1816. All partners, including industrial ones,

shall be liable pro rata with all their property and after
all the partnership assets have been exhausted, for the
contracts which may be entered into in the name and for
the account of the partnership, under its signature and by
a person authorized to act for the partnership. However,
any partner may enter into a separate obligation to
perform a partnership contract.
The foregoing provision does not prevent partners from
agreeing to limit their liability, but such agreement may only be
valid as among them. Thus, Article 1817 of the Civil Code provides:
Art. 1817. Any stipulation against the liability laid

down in the preceding article shall be void, except as
among the partners.
The MOU is an agreement forged under the foregoing provision.
Consequently, the sole liability being undertaken by Kenneth serves
to bind only the parties to the MOU, but never third persons.74
66. JZ-KAM Company, a general partnership registered under the

laws of the Philippines, purchased from Dustin a motor vehicle
on installment basis. Having failed to receive the installment
due, Dustin sued JZ-KAM Company for the unpaid balance
and impleaded Jairus, Zaira, Kenneth, Aubrey, and Mica as co
defendants in their capacity as general partners. On motion
of Dustin, the complaint was dismissed insofar as Kenneth is
concerned. Does the dismissal of a complaint to favor Kenneth,
one of the general partners of a partnership, increase the joint
and subsidiary liability of each of the remaining partners for
the obligations of the partnership?
No. Since the liability of the partners is pro rata, the liability
of the remaining general partners shall each be limited to only one-
fifth (1/5) of the obligations of JZ-KAM Company. The fact that the
complaint against defendant Kenneth was dismissed, upon motion
of Dustin, does not unmake Kenneth as a general partner in JZ-
KAM Company. In so moving to dismiss the complaint, Dustin
merely condoned Kenneth’s individual liability to him.75
75Island Sales, Inc. v. United Pioneers General Construction Company, et al.,
G.R. No. L-22493, July 31, 1975.
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67. May the designation of the share of each partner in the profits
and losses be entrusted to a third person? May the designation
be entrusted to one of the partners?
The designation may be entrusted to a third person, but not to
one of the partners.
If the partners have agreed to entrust to a third person the
designation of the share of each one in the profits and losses, such
designation may be impugned only when it is manifestly inequitable.
In no case may a partner who has begun to execute the decision
of the third person, or who has not impugned the same within a
period of three (3) months from the time he had knowledge thereof,
complain of such decision.
The designation of losses and profits cannot be entrusted to one
of the partners.’6
68. May a partner be excluded from any share in the profits or

losses?
No. A stipulation which excludes one or more partners from
any share in the profits or losses is void.”
69. Ollie and Pearl entered into a partnership agreement to

operate a restaurant, with Ollie furnishing the capital and
Pearl contributing her industry and talent. The restaurant
business was doing well and generated profits over the years.
The relationship of Ollie and Pearl turned sour, which led to
Ollie attempting to divert the profits of the restaurant overseas
away from the reach of Pearl. May Pearl claim for the entirety
of the profits because of the unlawful acts of Ollie?
No, we have here a situation where two (2) persons engaged in
a business venture, with one furnishing the capital, and the other
contributing his industry and talent. Justice and equity dictate that
the two share equally the fruit of their joint investment and efforts.
However, the Court cannot just close its eyes to the devious
machinations and schemes that Ollie employed in attempting to
dispose of, if not dissipate, the properties that he shares with Pearl.

’’Article 1799, Civil Code.
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Since Ollie acted with evident bad faith and malice, they should pay
moral and exemplary damages as well as attorney’s fees to Pearl.”
70. What are the property rights of a partner?

The property rights of a partner are:
a. His rights in specific partnership property;
b. His interest in the partnership; and
C. His right to participate in the management.”
71. What are a partner's rights with respect to specific partnership

property?
A partner is co-owner with his partners of specific partnership
property. The incidents of this co-ownership are such that:
a. A partner, subject to the provisions of Title IX of the Civil
Code (Partnership) and to any agreement between the
partners, has an equal right with his partners to possess
specific partnership property for partnership purposes;
but he has no right to possess such property for any other
purpose without the consent of his partners;
b. A partner’s right in specific partnership property is not
assignable except in connection with the assignment of
rights of all the partners in the same property;
c. A partner’s right in specific partnership property is not
subject to attachment or execution, except on a claim
against the partnership. When partnership property is
attached for a partnership debt the partners, or any of
them, or the representatives of a deceased partner, cannot
claim any right under the homestead or exemption laws;
d. A partner’s right in specific partnership property is not
subject to legal support under Article 291.80
’’Ramnani v. Court of Appeals, G.R. Nos. 85494 and 85496, May 7,1991.
’’Article 1810, Civil Code.
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72. What constitutes a partner's interest in the partnership?

A partner’s interest in the partnership is his share of the profits
and surplus.
73. A, one of the partners of ABC Firm, assigned to D his whole

interest in the partnership. What are the consequences of such
conveyance?
A conveyance by a partner of his whole interest in the
partnership does not of itself dissolve the partnership, or, as
against the other partners in the absence of agreement, entitle the
assignee, during the continuance of the partnership, to interfere
in the management or administration of the partnership business
or affairs, or to require any information or account of partnership
transactions, or to inspect the partnership books; but it merely
entitles the assignee to receive in accordance with his contract the
profits to which the assigning partner would otherwise be entitled.
However, in case of fraud in the management of the partnership, the
assignee may avail himself of the usual remedies.
In case of a dissolution of the partnership, the assignee is
entitled to receive his assignor’s interest and may require an account
from the date only of the last account agreed to by all the partners.81
74. Dielle, Karlo, and Una are general partners in a merchandising

firm. Having contributed equal amounts to the capital, they also
agreed on equal distribution of whatever net profit is realized
per fiscal period. After two (2) years of operation, however,
Una conveys her whole interest in the partnership to Justine,
without the knowledge and consent of Dielle and Karlo.82
a. Is the partnership dissolved?
No, a conveyance by a partner of his whole interest in a
partnership does not of itself dissolve the partnership in the
absence of an agreement.83
“‘Article 1813, Civil Code.

“BAR 1998.
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b. What are the rights of Justine, if any, should she desire to

participate in the management of the partnership and in
the distribution of a net profit of P360,000.00 which was
realized after her purchase of Una's interest?
Justine cannot interfere or participate in the management
or administration of the partnership business or affairs. She
may, however, receive the net profits to which Una would have
otherwise been entitled. In this case, P120,000.00.61
75. When may a partner be obliged to sell his interest to the other
partners?
If there is no agreement to the contrary, in case of an imminent
loss of the business of the partnership, any partner who refuses to
contribute an additional share to the capital, except an industrial
partner, to save the venture, shall be obliged to sell his interest to
the other partners.86
76. X, a partner of XYZ Partnership, is indebted to A in the amount of

P180,000.00. May A charge the interest of X in the partnership?
Yes. Without prejudice to the preferred rights of partnership
creditors under Article 1827, on due application to a competent court
by any judgment creditor of a partner, the court which entered the
judgment, or any other court, may charge the interest of the debtor
partner with payment of the unsatisfied amount of such judgment
debt with interest thereon; and may then or later appoint a receiver
of his share of the profits, and of any other money due or to fall
due to him in respect of the partnership, and make all other orders,
directions, accounts, and inquiries which the debtor partner might
have made, or which the circumstances of the case may require.66
77. How may the interest charged be redeemed?

The interest charged may be redeemed at any time before
foreclosure, or in case of a sale being directed by the court, may be
purchased without thereby causing a dissolution:
a. With separate property, by any one or more of the
partners; or
‘■‘Ibid.
J9JC9B0M
b. With partnership property, by any one or more of the

partners with the consent of all the partners whose
interests are not so charged or sold.8’
78. May a partner associate another person with him in his share?
Yes. Every partner may associate another person with him in
his share, but the associate shall not be admitted into the partnership
without the consent of all the other partners, even if the partner
having an associate should be a manager.88
c. Obligations of the partnership/partners to third

persons
79. Is a partnership name required?
Yes. Every partnership shall operate under a firm name, which
may or may not include the name of one or more of the partners.89
80. What is the effect of including the name of a person who is not
a partner in the partnership name?
Those who, not being members of the partnership, include
their names in the firm name, shall be subject to the liability of a
partner.90
81. When are partners liable on their personal property?

All partners, including industrial ones, shall be liable pro rata
with all their property and after all the partnership assets have been
exhausted, for the contracts which may be entered into in the name
and for the account of the partnership, under its signature and by a
person authorized to act for the partnership. However, any partner
may enter into a separate obligation to perform a partnership
contract.91
“’Article 1814, Civil Code.

“Article 1815, NCC.
xIbid.
“‘Article 1816, NCC.
J9JC9B0M
82, ZAM Law Office entered into a Contract of Lease with PNB,
whereby the latter agreed to lease the second floor of the PNB
Financial Center Building. ZAM Law Office then occupied the
leased premises and paid advance rental fees and security
deposit.
The Contract of Lease subsequently expired. However,
ZAM Law Office continued to occupy the leased premises,
but discontinued paying its monthly rental obligations.
Consequently, PN B sent a demand letter for ZAM Law Office to
pay its outstanding unpaid rents. ZAM Law Office sent a letter
proposing a settlement by providing a range of suggested
computations of its outstanding rental obligations, with
deductions for the value of improvements it introduced in the
premises.
Kenneth, in his capacity as managing partner of ZAM Law
Office, filed a complaint for accounting and/or recomputation
of unpaid rentals and damages against PNB in relation to
the Contract of Lease. PNB filed a motion to include an
indispensable party as plaintiff, praying that Kenneth be
ordered to amend his complaint to include ZAM Law Office as
principal plaintiff. PNB argued that the lessee in the Contract
of Lease is not Kenneth but ZAM Law Office, and that Kenneth
merely signed the Contract of Lease as the managing partner
of the law firm.
Is PNB's contention tenable?
Yes. ZAM Law Office is the real party in interest. Section 2,
Rule 3 of the Rules of Court defines a real party-in-interest as the
one “who stands to be benefited or injured by the judgment in the
Suit, or the party entitled to the avails of the suit.” ZAM Law Office
is the party that would be benefited or injured by the judgment in
the suit before the RTC. Particularly, it is the party interested in
the accounting and/or recomputation of unpaid rentals and damages
in relation to the contract of lease. It is also the party that would
be liable for payment to PNB of overdue rentals, if that claim
would be proven. This is because it is the one that entered into the
contract of lease with PNB. As an entity possessed of a juridical
personality, it has concomitant rights and obligations with respect
to the transactions it enters into. Equally important, the general
rule under Article 1816 of the Civil Code is that partnership assets
are primarily liable for the contracts entered into in the name of
k
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the partnership and by a person authorized to act on its behalf. All

partners, including industrial ones, are only liable pro rata with all
their property after all the partnership assets have been exhausted.”
83. The RTC found a partnership liable for damages. Can the
Sheriff immediately levy the personal property of the general
partner?
No. Article 1816 of the Civil Code governs the liability of the
partners to third persons, which states that: “All partners, including
industrial ones, shall be liable pro rata with all their property
and after all the partnership assets have been exhausted, for the
contracts which may be entered into in the name and for the account
of the partnership, under its signature and by a person authorized
to act for the partnership. However, any partner may enter into
a separate obligation to perform a partnership contract.” The
managing partner’s liability would only arise after the properties of
the partnership would have been exhausted.93
84. Is a stipulation exempting a partner from liability valid as to

third persons?
Any stipulation against the liability laid down in Article 1816
of the Civil Code shall be void, except as among the partners.94
85. Are acts and admissions of the partners binding to the

partnership?
Yes. Every partner is an agent of the partnership for the purpose
of its business, and the act of every partner, including the execution
in the partnership name of any instrument, for apparently carrying
on in the usual way the business of the partnership of which he is a
member binds the partnership, unless the partner so acting has iii
fact no authority to act for the partnership in the particular matter,
and the person with whom he is dealing has knowledge of the fact
that he has no such authority.
“Guy v. Gacott, G.R. No. 206147, 778 SCRA 308-326 (2016).
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An act of a partner which is not apparently for the carrying on

of business of the partnership in the usual way does not bind the
partnership unless authorized by the other partners.65
Further, an admission or representation made by any partner
concerning partnership affairs within the scope of his authority in
accordance with Title IX of the Civil Code (Partnership) is evidence
against the partnership.96
86. Greg and Irvin are business partners who stipulated in the
articles of partnership that one partner cannot enter into a
contract with a third person regarding the partnership business
without the consent of the other partner. Leslie, a third party
unaware of this arrangement, entered into a contract with Irvin
without the consent of Greg. Does Leslie's contract with the
partnership through Irvin have legal force?
Yes, the stipulation in the articles of partnership that any of
the two (2) managing partners may contract and sign in the name of
the partnership with the consent of the other, undoubtedly creates
an obligation between the two (2) partners, which consists in asking
the other’s consent before contracting for the partnership. This
obligation of course is not imposed upon a third person who contracts
with the partnership. Neither is it necessary for the third person
to ascertain if the managing partner, with whom he contracts, has
previously obtained the consent of the other.
A third person may and has a right to presume that the partner
with whom he contracts has, in the ordinary and natural course
of business, the consent of his co-partner; for otherwise he would
not enter into the contract. The third person would naturally not
presume that the partner with whom he enters into the transaction
is violating the articles of partnership but, on the contrary, is
acting in accordance therewith. And this finds support in the legal
presumption that the ordinary course of business has been followed,
and that the law has been obeyed.
This last presumption is equally applicable to contracts which
have the force of law between the parties. Unless the contrary is
shown, namely, that one of the partners did not consent to his
co-partner entering into a contract with a third person, and that

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the latter with knowledge thereof entered into said contract, the
aforesaid presumption with all its force and legal effects should
be taken into account. There is nothing in the case at bar which
destroys this presumption.97
87. What acts does one or more but less than all the partners have
no authority to do?
Assign the partnership property in trust for creditors or on
the assignee’s promise to pay the debts of the partnership;
b. Dispose of the goodwill of the business;
c. Do any other act which would make it impossible to carry
on the ordinary business of a partnership;
d. Confess a judgment;
Enter into a compromise concerning a partnership claim
or liability;
f. Submit a partnership claim or liability to arbitration;
g- Renounce a claim of the partnership.98
88. Explain the rules of conveyance on real properties by one or

more partners.
Where title to real property is in the partnership name, any
partner may convey title to such property by a conveyance executed
in the partnership name; but the partnership may recover such
property unless the partner’s act binds the partnership under the
provisions of the first paragraph of Article 1818 of the Civil Code,
or unless such property has been conveyed by the grantee or a
person claiming through such grantee to a holder for value without
knowledge that the partner, in making the conveyance, has exceeded
his authority.
Where title to real property is in the name of the partnership,
a conveyance executed by a partner, in his own name, passes
the equitable interest of the partnership, provided the act is one
within the authority of the partner under the provisions of the first
paragraph of Article 1818.
“’Litton v. Hill & Ceron, G.R. No. 45624, April 25, 1939.
J9JC9B0M
Where title to real property is in the name of one or more but

not all the partners, and the record does not disclose the right of
the partnership, the partners in whose name the title stands may
convey title to such property, but the partnership may recover such
property if the partners’ act does not bind the partnership under
the provisions of the first paragraph of Article 1818, unless the
purchaser or his assignee, is a holder for value, without knowledge.
Where the title to real property is in the name of one or more
or all the partners, or in a third person in trust for the partnership,
a conveyance executed by a partner in the partnership name, or
in his own name, passes the equitable interest of the partnership,
provided the act is one within the authority of the partner under the
provisions of the first paragraph of Article 1818.
Where the title to real property is in the names of all the
partners, a conveyance executed by all the partners passes all their
rights in such property."
89. Is knowledge of the partner considered as knowledge of the

partnership?
Notice to any partner of any matter relating to partnership
affairs, and the knowledge of the partner acting in the particular
matter, acquired while a partner or then present to his mind, and
the knowledge of any other partner who reasonably could and should
have communicated it to the acting partner, operate as notice to or
knowledge of the partnership, except in the case of a fraud on the
partnership, committed by or with the consent of that partner.100
90. Atty. Badua purchased two (2) transreceivers from Quack Shell
Corporation (QSC) in Manila through its employee Bonsol. Due
I to major defects, Badua personally returned the transreceivers
to QSC and requested that they be replaced. Badua received
the returned transreceivers and promised to send him the
replacement units within two (2) weeks.
7
Time passed and Badua did not receive the replacement
units as promised. Despite several demands, Badua was never
given a replacement or a refund. Thus, Badua filed a complaint
for damages. Summons was served upon QSC and Bonsol,
69Article 1819, NCC.

‘“Article 1821, NCC.
k
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after which they filed their Answer, verified by Bonsol. The RTC
found that the two (2) transreceivers were defective and that
QSC and Bonsol failed to replace the same or return Badua's
money. The decision became final. During the execution stage,
Badua learned that QSC was not a corporation, but was in fact
a general partnership. In the articles of partnership, Gayya was
appointed as General Manager of QSC.
To execute the judgment, the Sheriff went to the Land
Transportation Office (LTO) and verified whether Bonsol, QSC
and Gayya had personal properties registered therein. Upon
learning that Gayya had vehicles registered in his name, Badua
instructed the sheriff to proceed with the attachment of one of
the motor vehicles of Gayya.
The Sheriff attached Gayya’s vehicle by virtue of the
Notice of Attachment/Levy Upon Personalty served upon
the record custodian of the LTO. A similar notice was served
to Gayya through his housemaid at his residence. Thereafter,
Gayya filed his Motion to Lift Attachment Upon Personalty,
arguing that he was not a judgment debtor and, therefore, his
vehicle could not be attached. Rule on Gayya’s defense.
Gayya’s defense is meritorious. Although a partnership is
based on delectus personae or mutual agency, whereby any partner
can generally represent the partnership in its business affairs, it is
non sequitur that a suit against the partnership is necessarily a suit
impleading each and every partner. It must be remembered that
a partnership is a juridical entity that has a distinct and separate
personality from the persons composing it. Here, Gayya was never
made a party to the case. He did not have any participation in the
entire proceeding until his vehicle was levied upon and he suddenly
became QSC’s “co-defendant debtor” during the judgment execution
stage. It is a basic principle of law that money judgments are
enforceable only against the property incontrovertibly belonging to
the judgment debtor. Indeed, the power of the court in executing
judgments extends only to properties unquestionably belonging to
the judgment debtor alone. An execution can be issued only against
a party and not against one who did not have his day in court.
Further, Article 1821 of the Civil Code does not state that
there is no need to implead a partner in order to be bound by the
partnership liability. It provides that: “Notice to any partner of any
matter relating to partnership affairs, and the knowledge of the
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partner acting in the particular matter, acquired while a partner or

then present to his mind, and the knowledge of any other partner
who reasonably could and should have communicated it to the acting
partner, operate as notice to or knowledge of the partnership, except
in the case of fraud on the partnership, committed by or with the
consent of that partner.”
A careful reading of the provision shows that notice to any
partner, under certain circumstances, operates as notice to or
knowledge to the partnership only. Evidently, it does not provide
for the reverse situation, or that notice to the partnership is notice
to the partners.101
91. When is a partnership bound to make good the loss?

a. Where one partner acting within the scope of his apparent
authority receives money or property of a third person
and misapplies it; and
b. Where the partnership in the course of its business
receives money or property of a third person and the
money or property so received is misapplied by any
partner while it is in the custody of the partnership.102
c. Where, by any wrongful act or omission of any partner
acting in the ordinary course of the business of the
partnership or with the authority of his co-partners, loss
or injury is caused to any person, not being a partner in the
partnership, or any penalty is incurred, the partnership is
liable therefor to the same extent as the partner so acting
or omitting to act.103
92. ABC entered into a Joint Venture Agreement (JVA) with PP
i
for the development of a residential condominium project on
ABC's land. With ABC contributing the same property to the
joint venture and PP undertaking to develop the condominium,
the JVA provided, among other terms and conditions, that
the developed units shall be shared by the former and the
latter at a ratio of 17%-83%, respectively. While both parties
were allowed, at their own individual responsibility, to pre
sell the units pertaining to them, PP further undertook to use
101Guy v. Gacott, G.R. No. 206147, 778 SCRA 308-326 (2016).

'“Article 1823, NCC.
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all proceeds from the pre-selling of its saleable units for the
completion of the Condominium Project.
The Housing and Land Use Regulatory Board (HLURB)
issued a License to Sell in favor of ABC and PP as project
owners. By virtue of said license, PP executed a Contracts to
Sell with Spouses Magsombol over a condominium unit and a
parking lot.
The Spouses filed against ABC and PP the complaint for
the rescission of the aforesaid Contracts to Sell docketed before
the HLURB, contending that the promised date of turnoverwas
not fulfilled. ABC asseverated that, by the terms of the JVA,
each party was individually responsible for the marketing and
sale of the units pertaining to its share; that not being privy to
the Contracts to Sell executed by PP and respondents, it did
not receive any portion of the payments made by the latter;
and that without any contributory fault and negligence on its
part, PP breached its undertakings under the JVA by failing to
complete the condominium project. Is ABC's defense tenable?
No. A joint venture is considered in this jurisdiction as a
form of partnership and is, accordingly, governed by the law of
partnerships. Under Article 1824 of the Civil Code, all partners are
solidarity liable with the partnership for everything chargeable to
the partnership, including loss or injury caused to a third person or
penalties incurred due to any wrongful act or omission of any partner
acting in the ordinary course of the business of the partnership or
with the authority of his co-partners. Whether innocent or guilty, all
the partners are solidarity liable with the partnership itself.104
93. What is the extent of liability of a person admitted as a partner

in an existing partnership?
A person admitted as a partner into an existing partnership
is liable for all the obligations of the partnership arising before his
admission as though he had been a partner when such obligations
were incurred, except that this liability shall be satisfied only out of
partnership property, unless there is a stipulation to the contrary.1®
l0,J. Tiosejo Investment Corp. v. Spouses Ang, G.R. No. 174149, September 8
2010, 644 SCRA 601-616.
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r
94. Are the creditors of the partnership preferred over the private
creditors of each partner?
Yes. The creditors of the partnership shall be preferred to
those of each partner as regards the partnership property. Without
prejudice to this right, the private creditors of each partner may
ask the attachment and public sale of the share of the latter in the
partnership assets.100
3. Dissolution and Winding Up

95. Discuss the concept of dissolution.
The dissolution of a partnership is the change in the relation of
the partners caused by any partner ceasing to be associated in the
carrying on as distinguished from the winding up of the business.107
On dissolution, the partnership is not terminated, but continues
until the winding up of partnership affairs is completed.108
96. What are the causes of dissolution?

a. Without violation of the agreement between the partners:
i. By the termination of the definite term or particular
undertaking specified in the agreement;
ii. By the express will of any partner, who must act
in good faith, when no definite term or particular
undertaking is specified;
iii. By the express will of all the partners who have
not assigned their interests or suffered them to
be charged for their separate debts, either before
or after the termination of any specified term or
particular undertaking;
iv. By the expulsion of any partner from the business
bona fide in accordance with such a power conferred
by the agreement between the partners;

L
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b. In contravention of the agreement between the partners,

where the circumstances do not permit a dissolution
under any other provision of this article, by the express
will of any partner at any time;
c. By any event which makes it unlawful for the business
of the partnership to be carried on or for the members to
carry it on in partnership;
d. When a specific thing, which a partner had promised to
contribute to the partnership, perishes before the delivery;
in any case by the loss of the thing, when the partner who
contributed it having reserved the ownership thereof, has
only transferred to the partnership the use or enjoyment
of the same; but the partnership shall not be dissolved by
the loss of the thing when it occurs after the partnership
has acquired the ownership thereof;
e. By the death of any partner;
f. By the insolvency of any partner or of the partnership;
S- By the civil interdiction of any partner;
h. By decree of court under Article 1831 of the Civil Code.1”
97. Pauline, Patricia, and Priscilla formed a business partnership

for the purpose of engaging in neon advertising for a term
of five (5) years. Pauline subsequently assigned to Philip her
interest in the partnership. When Patricia and Priscilla learned
of the assignment, they decided to dissolve the partnership
before the expiration of its term as they had an unproductive
business relationship with Philip in the past. On the other
hand, unaware of the move of Patricia and Priscilla but sensing
their negative reaction to his acquisition of Pauline's interest,
Philip simultaneously petitioned for the dissolution of the
partnership.
a. Is the dissolution done by Patricia and Priscilla without
the consent of Pauline or Philip valid? Explain.
’“Article 1830. NCC.
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b. Does Philip have any right to petition for the dissolution

of the partnership before the expiration of its specified
term? Explain.110
Answer:
a. Under Article 1830(l)(c) of the NCC, the dissolution by
Patricia and Priscilla is valid and did not violate the
contract of partnership even though Pauline and Philip
did not consent thereto. The consent of Pauline is not
necessary because she had already assigned her interest
to Philip. The consent of Philip is not also necessary
because the assignment to him of Pauline’s interest did
not make him a partner, under Article 1813 of the NCC.
b. No, Philip has no right to petition for dissolution because
he does not have the standing of a partner.111
98. Will the death of a partner terminate the partnership?112

Yes. The death of a partner will terminate the partnership, by
express provision of paragraph 5, Article 1830 of the Civil Code.
99. Can a court issue a decree of dissolution?

Yes. On application by or for a partner, the court shall decree
a dissolution whenever:
a. A partner has been declared insane in any judicial
proceeding or is shown to be of unsound mind;
b. A partner becomes in any other way incapable of
performing his part of the partnership contract;
c. A partner has been guilty of such conduct as tends to
affect prejudicially the carrying on of the business;
d. A partner willfully or persistently commits a breach of the
partnership agreement, or otherwise so conducts himself
in matters relating to the partnership business that it
is not reasonably practicable to carry on the business in
partnership with him;
110BAR 1995.
“'Article 1813, NCC.
“2BAR 1997.
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e. The business of the partnership can only be carried on at

a loss; ■ p._
f. Other circumstances render a dissolution equitable.
On the application of the purchaser of a partner’s interest
under Article 1813 or 1814:
After the termination of the specified term or particular
undertaking;
b. At any time if the partnership was a partnership at will
when the interest was assigned or when the charging
order was issued.113
100. Will dissolution terminate all authority of any partner to act for
the partnership?
Yes. Except so far as may be necessary to wind up partnership
affairs or to complete transactions begun but not then finished,
dissolution terminates all authority of any partner to act for the
partnership:
a. With respect to the partners,
i. When the dissolution is not by the act, insolvency or
death of a partner; or
ii. When the dissolution is by such act, insolvency or
death of a partner, in cases where Article 1833 so
requires;
b. With respect to persons not partners, as declared in
Article 1834.
101. Explain the rules on liability of one partner to his co-partners

for his share of any liability created by any partner acting for
the partnership as if the partnership had not been dissolved.
Where the dissolution is caused by the act, death, or insolvency
of a partner, each partner is liable to his co-partners for his share of
any liability created by any partner acting for the partnership as if
the partnership had not been dissolved unless:
"’Article 1831, NCC.
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TV. BUSINESS ORGANIZATIONS 383
1 Ji/ Ml . ........................................ .
a. The dissolution being by act of any partner, the partner

acting for the partnership had knowledge of the
dissolution; or
b. The dissolution being by the death or insolvency of a
partner, the partner acting for the partnership had
knowledge or notice of the death or insolvency.”’
102. When can a partner bind the partnership even after dissolution?
After dissolution, a partner can bind the partnership,
a. By any act appropriate for winding up partnership affairs
or completing transactions unfinished at dissolution;
b. By any transaction which would bind the partnership if
dissolution had not taken place, provided the other party
to the transaction:
i. Had extended credit to the partnership prior to
dissolution and had no knowledge or notice of the
dissolution; or
ii. Though he had not so extended credit, had
nevertheless known of the partnership prior to
dissolution, and having no knowledge or notice
of dissolution, the fact of dissolution had not been
advertised in a newspaper of general circulation in
the place (or in each place if more than one) at which
the partnership business was regularly carried on.us
103. When is the partnership not bound by any act of a partner after
dissolution?
a. Where the partnership is dissolved because it is unlawful
to carry on the business, unless the act is appropriate for
winding up partnership affairs; or
b. Where the partner has become insolvent; or
c. Where the partner has no authority to wind up partnership
affairs; except by a transaction with one who —
“’Article 1833, NCC.

’“Article 1834, NCC
k
J9JC9B0M
i. Had extended credit to the partnership prior to

dissolution and had no knowledge or notice of his
want of authority; or
ii. Had not extended credit to the partnership prior
to dissolution, and, having no knowledge or notice
of his want of authority, the fact of his want of
authority has not been advertised in the manner
provided for advertising the fact of dissolution in the
first paragraph, No. 2(b) of Article 1834 of the Civil
Code.116
104. What is the effect of partnership dissolution to the existing

liability of a partner?
The dissolution of the partnership does not of itself discharge
the existing liability of any partner.
A partner is discharged from any existing liability upon
dissolution of the partnership by an agreement to that effect between
himself, the partnership creditor and the person or partnership
continuing the business; and such agreement may be inferred from
the course of dealing between the creditor having knowledge of the
dissolution and the person or partnership continuing the business.
105. Who has the right to wind up the partnership affairs?

Unless otherwise agreed, the partners who have not wrongfully
dissolved the partnership or the legal representative of the last
surviving partner, not insolvent, has the right to wind up the
partnership affairs, provided, however, that any partner, his lega
representative, or his assignee, upon cause shown, may obtain
winding up by the court.11’
106. How are partnership property applied in cases of dissolution

that are not in contravention to the partnership agreement?
When dissolution is caused in any way, except in contravention
of the partnership agreement, each partner, as against his co
partners and all persons claiming through them in respect of their
"“Article 1834, NCC.

“’Article 1835, NCC.
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interests in the partnership, unless otherwise agreed, may have the

partnership property applied to discharge its liabilities, and the
surplus applied to pay in cash the net amount owing to the respective
partners. But if dissolution is caused by expulsion of a partner, bona
fide under the partnership agreement and if the expelled partner
is discharged from all partnership liabilities, either by payment or
agreement under the second paragraph of Article 1835, he shall
receive in cash only the net amount due him from the partnership.119
107. How are partnership property applied in cases of dissolution

that are in contravention to the partnership agreement?
When dissolution is caused in contravention of the partnership
agreement the rights of the partners shall be as follows:
a. Each partner who has not caused dissolution wrongfully
shall have:
i. All the rights specified in the first paragraph of
Article 1837 of the Civil Code, and
1 ii. The right, as against each partner who has caused
the dissolution wrongfully, to damages for breach of
the agreement.
b. The partners who have not caused the dissolution
wrongfully, if they all desire to continue the business in
the same name either by themselves or jointly with others,
may do so, during the agreed term for the partnership and
for that purpose may possess the partnership property,
provided they secure the payment by bond approved by the
court, or pay any partner who has caused the dissolution
wrongfully, the value of his interest in the partnership
at the dissolution, less any damages recoverable under
the second paragraph, No. 1(b) of Article 1837, and in
like manner indemnify him against all present or future
partnership liabilities.
c. A partner who has caused the dissolution wrongfully
shall have:
i. If the business is not continued under the provisions
of the second paragraph, No. 2 of Article 1837, all the
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rights of a partner under the first paragraph, subject

to liability for damages in the second paragraph, No.
1(b) of Article 1837.
ii. If the business is continued under the second
paragraph, No. 2 of Article 1837, the right as against
his co-partners and all claiming through them
in respect of their interests in the partnership, to
have the value of his interest in the partnership,
less any damage caused to his co-partners by the
dissolution, ascertained and paid to him in cash,
or the payment secured by a bond approved by the
court, and to be released from all existing liabilities
of the partnership; but in ascertaining the value of
the partner’s interest the value of the goodwill of the
business shall not be considered.120
108. What are the entitlements of a party entitled to rescind when a

partnership contract is rescinded on the ground of the fraud or
misrepresentation of one of the parties thereto? t
Where a partnership contract is rescinded on the ground of the
fraud or misrepresentation of one of the parties thereto, the party
entitled to rescind is, without prejudice to any other right, entitled:
a. To a lien on, or right of retention of, the surplus of the
partnership property after satisfying the partnership
liabilities to third persons for any sum of money paid by
him for the purchase of an interest in the partnership and
for any capital or advances contributed by him;
b. To stand, after all liabilities to third persons have been
satisfied, in the place of the creditors of the partnership for
any payments made by him in respect of the partnership
liabilities; and
c. To be indemnified by the person guilty of the fraud or
making the representation against all debts and liabilities
of the partnership.121

““Article 1838, NCC.
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109. Mayurni was the managing partner of the Beta Gloria

Partnership. The other partners decided to dissolve the
partnership, which prompted Mayumi to claim for her partner's
share before liquidation of Beta Gloria Partnership. Is Mayumi
allowed to claim her share before liquidation?
No, a partner’s share cannot be returned without first dissolving
and liquidating the partnership, for the return is dependent on
the discharge of the creditors, whose claims enjoy preference over
those of the partners; and it is self-evident that all members of
the partnership are interested in its assets and business, and are
entitled to be heard in the matter of the firm’s liquidation and the
distribution of its property.
Unless a proper accounting and liquidation of the partnership
affairs is first had, the capital shares of the retiring partners cannot
be repaid, for the firm’s outside creditors have preference over the
assets of the enterprise (Article 1839, Civil Code), and the firm’s
property cannot be diminished to their prejudice.122
110. If only one of the partners of the Beta Gloria Partnership

decided to retire from the partnership. May the partners agree
to give the retiring partner his or her share, instead of going to
liquidation?
Yes. As a general rule, when a partner retires from the
partnership, he is entitled to the payment of what may be due him
after a liquidation. But no liquidation is necessary where there is
already a settlement or an agreement as to what the retiring partner
shall receive, and the latter was in fact reimbursed pursuant to the
agreement.123
111. Explain the rules to be observed in settling accounts between

the partners after dissolution.
In settling accounts between the partners after dissolution, the
following rules shall be observed, subject to any agreement to the
contrary:
122Magdusa v. Albaran, G.R. No. L-17526, June 30, 1962.

123Bonnevie v. Hernandez, G.R. No. L-5837, May 31, 1954.
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a. The assets of the partnership are:

i. The partnership property,
ii. The contributions of the partners necessary for the
payment of all the liabilities specified in No. 2 of
Article 1839.
b. The liabilities of the partnership shall rank in order of
payment, as follows:
i. Those owing to creditors other than partners,
ii. Those owing to partners other than for capital and
profits,
iii. Those owing to partners in respect of capital,
iv. Those owing to partners in respect of profits.
c. The assets shall be applied in the order of their declaration
in No. 1 of Article 1839 to the satisfaction of the liabilities.
d. The partners shall contribute, as provided by Article
1797, the amount necessary to satisfy the liabilities.
e. An assignee for the benefit of creditors or any person
appointed by the court shall have the right to enforce the
contributions specified in the preceding number.
f. Any partner or his legal representative shall have the
right to enforce the contributions specified in No. 4 of
Article 1839, to the extent of the amount which he has
paid in excess of his share of the liability.
g- The individual property of a deceased partner shall be
liable for the contributions specified in No. 4 of Article
1839.
h. When partnership property and the individual properties
of the partners are in possession of a court for distribution,
partnership creditors shall have priority on partnership
property and separate creditors on individual property,
saving the rights of lien or secured creditors.
i. Where a partner has become insolvent or his estate is
insolvent, the claims against his separate property shall
rank in the following order:
i. Those owing to separate creditors;
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ii. Those owing to partnership creditors;

iii. Those owing to partners by way of contribution.124
112. When will creditors of the dissolved partnership be also

creditors of the person or partnership continuing the business?
a. When any new partner is admitted into an existing
partnership, or when any partner retires and assigns
(or the representative of the deceased partner assigns)
his rights in partnership property to two or more of the
partners, or to one or more of the partners and one or
more third persons, if the business is continued without
liquidation of the partnership affairs;
b. When all but one partner retire and assign (or the
representative of a deceased partner assigns) their rights
in partnership property to the remaining partner, who
continues the business without liquidation of partnership
affairs, either alone or with others;
>•<
c. When any partner retires or dies and the business of the
dissolved partnership is continued as set forth in Nos.
1 and 2 of Article 1840, with the consent of the retired
partners or the representative of the deceased partner,
but without any assignment of his right in partnership
property;
d. When all the partners or their representatives assign
their rights in partnership property to one or more third
persons who promise to pay the debts and who continue
the business of the dissolved partnership;
e. When any partner wrongfully causes a dissolution and
the remaining partners continue the business under
the provisions of Article 1837, second paragraph, No. 2,
either alone or with others, and without liquidation of the
partnership affairs;
f. When a partner is expelled and the remaining partners
continue the business either alone or with others without
liquidation of the partnership affairs.126
l24Axticle 1839, NCC.

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113. A, B, and C entered into a partnership to operate a restaurant

business. When the restaurant had gone past break-even
stage and started to garner considerable profits, C died. A and
B continued the business without dissolving the partnership.
They in fact opened a branch of the restaurant, incurring
obligations in the process. Creditors started demanding for
the payment of their obligations.
a. Who are liable for the settlement of the partnership’s
obligations? Explain?
b. What is the creditors' recourse/s? Explain.126
Answer:
a. The two (2) remaining partners, A and B, are liable. When
any partner dies and the business is continued without
any settlement of accounts as between him or his estate,
the surviving partners are held liable for continuing the
business despite the death of C.127
b. Creditors can file the appropriate actions, for instance,
an action for collection of sum of money against the
“partnership at will” and if there are no sufficient funds,
the creditors may go after the private properties of A and
B.128 Creditors may also sue the estate of C. The estate
is not excused from the liabilities of the partnership
even if C is dead already but only up to the time that
he remained a partner.129 However, the liability of C’s
individual properties shall be subject first to the payment
of his separate debts.136
114. A, B, and C formed a partnership for the purpose of contracting

with the Government in the construction of one of its bridges.
On June 30, 1992, after completion of the project, the bridge
was turned over by the partners to the Government. On
August 30,1992, D, a supplier of materials used in the project
sued A for collection of the indebtedness to him. A moved to
126BAR 2010.
“’Articles 1841,1785, par. 2, and Article 1833 of NCC.
‘“Articles 1829, 1835, par. 2, NCC; Testate Estate of Mota v. Serra, 47 Phil.
464 (1925).
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dismiss the complaint against him on the ground that it was

the ABC partnership that is liable for the debt. D replied that
ABC partnership was dissolved upon completion of the project
for which purpose the partnership was formed.
Will you dismiss the complaint against A if you were the
Judge? 131
As Judge, I would not dismiss the complaint against A because
A is still Hable as a general partner for his pro rata share of one-
third (1/3).132 Dissolution of a partnership caused by the termination
of the particular undertaking specified in the agreement does
not extinguish obligations, which must be hquidated during the
“winding up” of the partnership affairs.133
115. Anna, Beth, and Christine formed a partnership with a capital

of P750,000.00 for the operation of a milk tea business under
the name "EquiTea." Daphne joined as a partner afterwards,
contributing P250.000.00 in capital. After Christine withdrew
from the partnership, her capital contribution of P250,000.00
was refunded to her in cash by agreement of the partners.
Without prior knowledge of Daphne, Anna and Beth closed
down the milk tea shop due to a loan encumbrance on the shop.
Two (2) months later. Daphne told Anna and Beth that she was
no longer interested in continuing their partnership and that
she was accepting their offer to return her capital contribution.
Since her request was left unheeded, Daphne filed a Complaint
for the collection of a sum of money from Anna and Beth. The
RTC ruled in favor of Daphne, ordering Anna and Beth to pay
Daphne P250.000.00 in actual damages.
Was the RTC correct in its ruling?
No. Daphne has no right to demand from Anna and Beth the
return of her equity share. It is the EquiTea partnership which has
a separate juridical personality that holds the equity and assets.
Thus, it is EquiTea that must refund the equity of the retiring
partners, not Anna and Beth. As to the amount to be refunded by
EquiTea, it is limited to the total assets the partnership has in its
coffers. However, before the partners can be paid their shares, the
131BAR 1993.
133Articles 1829 and 1830, par. 1-a, Civil Code.
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creditors of the partnership must first be compensated, as provided

for in Article 1839 of the New Civil Code. After all the creditors
have been paid, whatever is left of the partnership assets becomes
available for the payment of the partners’ shares.134
116. Alaya is the President and Chief Executive Officer of Alaya

Properties Corporation, a domestic corporation engaged in
real estate development, while Bunchun is the owner of two
(2) adjoining parcels of land. Alaya Properties Corporation,
represented by A and B, entered into a Joint Venture Agreement
(JVA)forthe development ofthesaid properties. Under the JVA,
Alaya undertook to contribute money, labor, personnel, and
other resources to develop the property and construct units
for sale to the public, while B obliged himself to contribute the
two (2) parcels of land. Despite B's repeated demands, Alaya
failed to comply with its obligations under the JVA. B filed with
the RTC a complaint for rescission and damages. The RTC
granted the rescission based on Alaya's willful and persistent
breach of the JVA and ordered Alaya to return the possession,
including all improvements of the real estate property to B.
Alaya appealed the decision, stating that the return of the
property with all its improvements to B without requiring B to
reimburse Alaya for their incurred expenses is confiscatory.
If you were the judge, how would you rule on Alaya's
appeal?
Alaya’s appeal has no merit. A JVA is a form of partnership,
and as such is to be governed by the laws on partnership. When
the RTC rescinded the JVA on complaint of respondents based on
the evidence on record that petitioners willfully and persistently
committed a breach of the JVA, the court thereby dissolved/
cancelled the partnership. With the rescission of the JVA on account
of petitioners’ fraudulent acts, all authority of any partner to act for
the partnership is terminated except so far as may be necessary to
wind up the partnership affairs or to complete transactions begun
but not yet finished.
According to Article 1836 of the New Civil Code, unless
otherwise agreed upon, the parties who have not wrongfully
dissolved the partnership have the right to wind up the partnership
134Villareal v. Ramirez, G.R. No. 144214, July 14, 2003.
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affairs. The transfer of the possession of the parcels of land and

the improvements thereon to B was only for a specific purpose: the
winding up of partnership affairs, and the partition and distribution
of the net partnership assets as provided by law.
It must be stressed, too, that although B acquired possession
of the lands and the improvements thereon, the said lands and
improvements remained partnership property, subject to the rights
and obligations of the parties, inter se, of the creditors and of third
parties under Articles 1837 and 1838 of the New Civil Code, and
subject to the outcome of the settlement of the accounts between the
parties as provided in Article 1839 of the New Civil Code, absent
any agreement of the parties in their JVA to the contrary.135
117. Edward was the Assistant General Manager of a marble

quarrying and export business operated by a registered
partnership with the firm name of "Twice Marble" with A
and B as general partners and C and D as limited partners.
Edward received only half of his stipulated salary. Without
the knowledge of Edward, A, B, C, and D sold and transferred
their interests to Jennie and Lisa who continued to use the old
firm name and continued the actual operation of the business
enterprise as before. Jennie informed Edward that she and Lisa
had bought the business and he is no longer allowed to work in
Twice Marble. They also told him that they are not liable for his
unpaid salaries as he was never hired as an employee by their
new partnership.
If you were the judge, rule on whether there was a new
partnership formed and who is/are liable for Edward's unpaid
salaries.
The legal effect of the changes in the membership of the
partnership was the dissolution of the old partnership which had
hired Edward and the emergence of a new firm composed of Jennie
and Lisa.
The occurrence of events which precipitate the legal consequence
of dissolution of a partnership do not, however, automatically result
in the termination of the legal personality of the old partnership. In
the ordinary course of events, the legal personality of the expiring
135Primelink Properties and Development Corporation v. Lazatin-Magat, G.R.

No. 167379, June 27, 2006.
J9JC9B0M
partnership persists for the limited purpose of winding up and

closing of the affairs of the partnership. In the case at bar, the
business of the old partnership was simply continued by the new
partners, without the old partnership undergoing the procedures
relating to dissolution and winding up of its business affairs. Both
the retiring partners (A, B, C, and D) and the new partnership itself
which continued the business of the old, dissolved, one, are liable for
the debts of the preceding partnership. Under Article 1840, creditors
of the old Twice Marble are also creditors of the new Twice Marble
which continued the business of the old one without liquidation of
the partnership affairs.'36
4. Limited Partnership
118. Define a limited partnership.
A limited partnership is one formed by two (2) or more persons
under the provisions of the following article, having as members
ne or more general partners and one or more limited partners. The
imited partners as such shall not be bound by the obligations of the
partnership.137
119. What are the requirements unique to the formation of a limited

partnership?
Two (2) or more persons desiring to form a limited partnership
shall:
a. Sign and swear to a certificate, which shall state —
i. The name of the partnership, adding thereto the
word “Limited”;
ii. The character of the business;
iii. The location of the principal place of business;
iv. The name and place of residence of each member,
general and limited partners being respectively
designated;
v. The term for which the partnership is to exist;
136Yu v. National Labor Relations Commission, G.R. No. 92712, June 30,1993.
■’’Article 1843, NCC.
J9JC9B0M
vi. The amount of cash and a description of and the

agreed value of the other property contributed by
each limited partner;
vii. The additional contributions, if any, to be made
by each limited partner and the times at which
or events on the happening of which they shall be
made;
viii. The time, if agreed upon, when the contribution of
each limited partner is to be returned;
ix. The share of the profits or the other compensation
by way of income which each limited partner shall
receive by reason of his contribution;
x. The right, if given, of a limited partner to substitute
an assignee as contributor in his place, and the
terms and conditions of the substitution;
xi. The right, if given, of the partners to admit additional
limited partners;
xii. The right, if given, of one or more of the limited
partners to priority over other limited partners, as
to contributions or as to compensation by way of
income, and the nature of such priority;
xiii. The right, if given, of the remaining general partner
or partners to continue the business on the death,
retirement, civil interdiction, insanity, or insolvency
of a general partner; and
xiv. The right, if given, of a limited partner to demand
and receive property other than cash in return for
his contribution.
b. File for record the certificate in the Office of the Securities
and Exchange Commission.138
120. Can a limited partner contribute services?

No. The contributions of a limited partner may be cash or
property, but not services.139

'“’Article 1845, NCC.
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121. Can the surname of a limited partner appear in the partnership

name?
No. The surname of a limited partner shall not appear in the
partnership name unless:
1. It is also the surname of a general partner, or
2. Prior to the time when the limited partner became such,
the business had been carried on under a name in which
his surname appeared."0
122. What is the liability of a limited partner whose surname was

included in the partnership name?
A limited partner whose surname appears in a partnership
name contrary to the provisions of the first paragraph is liable as
a general partner to partnership creditors who extend credit to
the partnership without actual knowledge that he is not a general
partner."1
123. What is the legal effect of a limited partner taking part in the
control of the business?
The limited partner becomes liable as a general partner.'42
124. After the formation of a limited partnership, may limited

partners be subsequently added?
Yes. After the formation of a limited partnership, additional
limited partners may be admitted upon filing an amendment to the
original certificate in accordance with the requirements of Article
1865.'“
125. In a limited partnership, what acts require the written consent

or ratification by all the limited partners?
Without the written consent or ratification of the specific act
by all the limited partners, a general partner or all of the general
partners have no authority to:

"'Ibid.
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a. Do any act in contravention of the certificate;

b. Do any act which would make it impossible to carry on
the ordinary business of the partnership;
c. Confess a judgment against the partnership;
d. Possess partnership property, or assign their rights in
specific partnership property, for other than a partnership
purpose;
e. Admit a person as a general partner;
f. Admit a person as a limited partner, unless the right so to
do is given in the certificate;
g- Continue the business with partnership property on
the death, retirement, insanity, civil interdiction, or
insolvency of a general partner, unless the right so to do
is given in the certificate.144
126. Can a limited partner:

a. inspect and copy the partnership books?
b. have on demand true and full information of all things
affecting the partnership?
c. have dissolution and winding up by decree of court?
Yes. A limited partner shall have the same rights as a general
partner to:
a. Have the partnership books kept at the principal place of
business of the partnership, and at a reasonable hour to
inspect and copy any of them;
b. Have on demand true and full information of all things
affecting the partnership, and a formal account of
partnership affairs whenever circumstances render
it just and reasonable; and
c. Have dissolution and winding up by decree of court.1’6
■’’Article 1850, NCC.

'’’Article 1851, NCC.
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127. Does a person become a general partner if he contributes to

the capital of a business on an erroneous belief that he has
become a limited partner in a limited partnership?
No. Without prejudice to the provisions of Article 1848, a
person who has contributed to the capital of a business conducted
by a person or partnership erroneously believing that he has become
a limited partner in a limited partnership, is not, by reason of his
exercise of the rights of a limited partner, a general partner with
the person or in the partnership carrying on the business, or bound
by the obligations of such person or partnership; provided that on
ascertaining the mistake he promptly renounces his interest in the
profits of the business, or other compensation by way of income.146
128. Can a person be a general partner and a limited partner in the

same partnership at the same time?
Yes. A person may be a general partner and a limited partner
in the same partnership at the same time, provided that this fact
shall be stated in the certificate provided for in Article 1844.
A person who is a general, and also at the same time a limited
partner, shall have all the rights and powers and be subject to all
the restrictions of a general partner; except that, in respect to his
contribution, he shall have the rights against the other members
which he would have had if he were not also a general partner.147
129. May a limited partner loan money to and transact other

business with the partnership?
Yes. A limited partner also may loan money to and transact
other business with the partnership, and, unless he is also a
general partner, receive on account of resulting claims against the
partnership, with general creditors, a pro rata shhre of the assets. “•
130. What are the prohibitions on a limited partner in respect to his

authority to loan money or transact other business?
No limited partner shall in respect to any such claim:
a. Receive or hold as collateral security any partnership
property, or
‘"Article 1852, NCC.

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b. Receive from a general partner or the partnership any

payment, conveyance, or release from liability, if at the
time the assets of the partnership are not sufficient to
discharge partnership liabilities to persons not claiming
as general or limited partners.
The receiving of collateral security, or payment, conveyance,
or release in violation of the foregoing provisions is a fraud on the
creditors of the partnership.149
131. Jeff and Aubrey are limited partners in ABCD Partnership. In

the articles of co-partnership, there is a stipulation that Jeff
enjoys priority as to the return of his contribution as compared
to Aubrey. Is the stipulation valid?
Yes. Where there are several limited partners the members may
agree that one or more of the limited partners shall have a priority
over other limited partners as to the return of their contributions, as
to their compensation by way of income, or as to any other matter.
If such an agreement is made it shall be stated in the certificate,
and in the absence of such a statement all the limited partners shall
stand upon equal footing.160
A limited partner shall not receive from a general partner or
out of partnership property any part of his contributions until:
a. All liabilities of the partnership, except liabilities to
general partners and to limited partners on account of
their contributions, have been paid or there remains
property of the partnership sufficient to pay them;
I
b. The consent of all members is had, unless the return of
the contribution may be rightfully demanded under the
provisions of the second paragraph; and
c. The certificate is cancelled or so amended as to set forth
the withdrawal or reduction.161
'"Article 1854, NCC.

““Article 1857, NCC.
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132. When may a limited partner rightfully demand the return of his
contribution?
Subject to the provisions of the first paragraph, a limited
partner may rightfully demand the return of his contribution:
a. On the dissolution of a partnership, or
b. When the date specified in the certificate for its return
has arrived, or
c. After he has given six (6) months’ notice in writing to all
other members, if no time is specified in the certificate,
either for the return of the contribution or for the
dissolution of the partnership.162
133. Kenneth is a limited partner in KLM Partnership. In the

certificate, it is stated that Kenneth has the right to demand
for the return of his contribution on May 8, 2020. On the same
day, Kenneth exercised such right, but the other partners of
KLM Partnership refused to return his contribution. He now
demands for the dissolution of the partnership. Rule on his
demand.
Kenneth’s demand is tenable. A limited partner may have the
partnership dissolved and its affairs wound up when:
a. He rightfully but unsisuccessfully demands the return of
his contribution, or
b. The other liabilities of the partnership have not been
paid, or the partnership property is insufficient for their
payment as required by the first paragraph, No. 1 of
Article 1857, and the limited partner would otherwise be
entitled to the return of his contribution.163
134. A partner cannot demand the return of his share (contribution)

during the existence of a partnership. Do you agree? Explain
your answer.161 I
Yes, he is not entitled to the return of his contribution to
the capital of the partnership, but only to the net profits from the
’“Article 1857, NCC.

164BAR 2012.
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partnership business during the life of the partnership period. If

he is a limited partner, however, he may ask for the return of his
contributions as provided in Articles 1856 and 1857, Civil Code.
135. Zaira is a limited partner in XYZ Partnership. Her co-partners

are Mica and Jairus. In the certificate, it was mentioned that
Zaira will contribute P1,000,000.00, but she only made actual
contributions of P750,000.00.
a. Is Zaira liable to XYZ Partnership for the deficiency?
b. Can Mica unilaterally waive Zaira's liability, if any?
Answer:
a. Yes. A limited partner is liable to the partnership:
i. For the difference between his contribution as
actually made and that stated in the certificate as
having been made, and
ii. For any unpaid contribution which he agreed in the
certificate to make in the future at the time and on
the conditions stated in the certificate.155
b. No. Mica cannot unilaterally waive Zaira’s liability
as the consent of Jairus is required. The liabilities of a
limited partner as set forth in Article 1858 can be waived
or compromised only by the consent of all members; but
a waiver or compromise shall not affect the right of a
creditor of a partnership who extended credit or whose
claim arose after the filing and before a cancellation or
amendment of the certificate, to enforce such liabilities.156
136. Is a limited partner's interest assignable? If yes, what is the

effect of the assignment? Distinguish the effect as to whether
or not consent of all the partners have been obtained.
Yes. A limited partner’s interest is assignable.
A substituted limited partner is a person admitted to all the
rights of a limited partner who has died or has assigned his interest
in a partnership.

lMIbid.
J9JC9B0M
An assignee, who does not become a substituted limited

partner, has no right to require any information or account of the
partnership transactions or to inspect the partnership books; he is
only entitled to receive the share of the profits or other compensation
by way of income, or the return of his contribution, to which his
assignor would otherwise be entitled.
An assignee shall have the right to become a substituted
limited partner if all the members consent thereto or if the assignor,
being thereunto empowered by the certificate, gives the assignee
that right.
The substituted limited partner has all the rights and powers,
and is subject to all the restrictions and liabilities of his assignor,
except those liabilities of which he was ignorant at the time he
became a limited partner and which could not be ascertained from
the certificate.
The substitution of the assignee as a limited partner does not
release the assignor from liability to the partnership under Articles
1847 and 1858.157
137. In what order are liabilities paid in a limited partnership upon

liquidation?
In settling accounts after dissolution, the liabilities of the
partnership shall be entitled to payment in the following order:
a. Those to creditors, in the order of priority as provided by
law, except those to limited partners on account of their
contributions, and to general partners;
b. Those to limited partners in respect to their share of the
profits and other compensation by way of income on their
contributions;
c. Those to limited partners in respect to the capital of their
contributions;
d. Those to general partners other than for capital and
profits;
e. Those to general partners in respect to profits;
f. Those to general partners in respect to capital.
J9JC9B0M
Subject to any statement in the certificate or to subsequent

agreement, limited partners share in the partnership assets in
respect to their claims for capital, and in respect to their claims for
profits or for compensation by way of income on their contribution
respectively, in proportion to the respective amounts of such
claims.168
138. Under what instances shall a certificate of a limited partnership

be amended?
A certificate shall be amended when:
a. There is a change in the name of the partnership or in
the amount or character of the contribution of any limited
partner;
b. A person is substituted as a limited partner;
c. An additional limited partner is admitted;
d. A person is admitted as a general partner;
e. A general partner retires, dies, becomes insolvent or
insane, or is sentenced to civil interdiction and the
business is continued under Article 1860;
f. There is a change in the character of the business of the
partnership;
g- There is a false or erroneous statement in the certificate;
h. There is a change in the time as stated in the certificate
for the dissolution of the partnership or for the return of a
contribution;
i. A time is fixed for the dissolution of the partnership, or
the return of a contribution, no time having been specified
in the certificate; or
j- The members desire to make a change in any other
statement in the certificate in order that it shall accurately
represent the agreement among them.159

J9JC9B0M
139. Discuss the requirements for amending the certificate of a

limited partnership.
The writing to amend a certificate shall:
a. Conform to the requirements of Article 1844 as far as
necessary to set forth clearly the change in the certificate
which it is desired to make; and
b. Be signed and sworn to by all members, and an amendment
substituting a limited partner or adding a limited or
general partner shall be signed also by the member to be
substituted or added, and when a limited partner is to be
substituted, the amendment shall also be signed by the
assigning limited partner.
The writing to cancel a certificate shall be signed by all
members.
A person desiring the cancellation or amendment of a certificate,
if any person designated in the first and second paragraphs as a
person who must execute the writing refuses to do so, may petition
the court to order a cancellation or amendment thereof.
If the court finds that the petitioner has a right to have the
writing executed by a person who refuses to do so, it shall order
the Office of the Securities and Exchange Commission where the
certificate is recorded to record the cancellation or amendment of
the certificate; and when the certificate is to be amended, the court
shall also cause to be filed for record in said office a certified copy of
its decree setting forth the amendment. 1
A certificate is amended or cancelled when there is filed for
record in the Office of the Securities and Exchange Commission,
where the certificate is recorded:
A writing in accordance with the provision^ of the first or
second paragraph; or
b. A certified copy of the order of court in accordance with
the provisions of the fourth paragraph;
c. After the certificate is duly amended in accordance with
this article, the amended certificate shall thereafter be for
all purposes the certificate provided for in this Chapter
(Limited Partnership).
‘“Article 1865, NCC
J9JC9B0M
B. CORPORATIONS
I, Definition of corporation
1. What is a corporation?
A corporation is an artificial being created by operation of
law, having the right of succession and the powers, attributes,
and properties expressly authorized by law or incidental to its
existence.161
2, What are the attributes of a corporation?

The attributes of a corporation are drawn from its statutory
definition.
a. It is an artificial being.
b. It is created by operation of law.
c. It has the right of succession.
d. It has the powers, attributes, and properties expressly
authorized by law or incidental to its existence.
3. Explain the attribute that the corporation is an artificial being.

By this, it means that the law regards a corporation as a
juridical person, with a legal personality separate and distinct
from the persons composing it. As a juridical person, it may own
properties, exercise rights, and incur obligations independently of
the persons comprising it.
As a juridical person, it is entitled to the rights of a person
under the Bill of Rights of the Philippine Constitution. The Supreme
Court pronounced in the landmark case of Stonehill v. Diokno'62
that a corporation may invoke the right against unreasonable
search and seizure. However, it cannot invoke the right against self
incrimination.103
A corporation may also sue for moral damages. While it
cannot experience wounded feelings, anxiety, and sleepless nights,
which are the causes of moral damages under the Civil Code of
l61Section 2, RCC.
,82Stonehill v. Diokno, G.R. No. L-19550, En Banc, June 19,1967.
163BASECO v. PCGG, G.R. No. 75885, En Banc, May 27,1987.
J9JC9B0M
the Philippines, it may acquire goodwill or reputation of its own,

which, if besmirched or tarnished, entitles the corporation to moral
damages.164
A corporation may also be criminally prosecuted if the
imposable penalty is not imprisonment, such as fine, forfeiture of
license, and revocation of franchise.165 ■< .„
4. Explain the attribute that a corporation is created by operation

of law. ,,,
A corporation is not created by mere agreement of the
incorporators nor by their execution of the articles of incorporation.
There ought to be a law from which the corporation derives its legal
existence. This may be a general law governing the formation of
private corporations, which is the RCC, or a special law passed by
Congress to create a government-owned and -controlled corporation.
Since February 8,1935, the legislature has not passed a single
law creating a private corporation. This is because the Constitution
itself precludes the passage of such statute, particularly, Section
16, Article XII of the 1987 Constitution™ which states that, “The
Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations.” The same
provision was contained in Section 7, Article XIV of the 1935
Constitution and Section 4, Article XIVof the 1973 Constitution.
In fact, a law enacted by the legislature to create a private
corporation is unconstitutional. ‘
5. Explain the attribute that it has the right of succession.

The right of succession of a corporation does not connote that
a corporation is immortal. It simply means that it had'the power to
exist continuously, either by opting to have perpetual existence or to
extend its corporate life if a fixed term is specified in its articles of
incorporation. Its capacity for continued existence is not affected by
any changes in the composition of corporators.
l64FiIipinas Broadcasting Network Ago Medical and Educational Center,

G.R. No. 141994, January 17, 2005.
165Ong v. Court of Appeals, G.R. No. 119858, April 29, 2003.
‘“Section 16, Article XII of the 1987 Constitution.
J9JC9B0M
r
6. Explain the attribute that it has the powers, attributes and

properties expressly authorized by law or incidental to its
existence.
This means that a corporation can only exercise powers
conferred upon it by law, its articles of incorporation, those implied
from the conferred powers, or incidental to its existence. Any act of
the corporation contrary to or outside these powers is ultra vires.
The test is whether the corporate act or transaction is related to
or in furtherance of the purposes of the corporation. For instance,
whether or not a corporation may acquire property will not only
be tested by the lawfulness of the consideration but whether such
property is necessary to achieve the purpose of the corporation.
Thus, a corporation engaged in mining cannot acquire properties for
urban development.167 A corporation organized as a lending investor
cannot engage in pawnbroking.168
7. Distinguish a corporation from other forms of business

organizations.
a. Sole Proprietorship v. Corporation
A sole proprietorship does not possess a juridical personality
separate and distinct from the personality of the owner of the
enterprise. The law merely recognizes the existence of a sole
proprietorship as a form of business organization conducted for
profit by an individual and requires its proprietor or owner to
secure licenses and permits, register its business name, and pay
taxes to the national government.169 Thus, the personal assets of the
proprietor may be held to answer for the obligations incurred by the
sole proprietorship in conducting its business.
In contrast, a corporation possesses a legal personality separate
and distinct from its owners.
,67Heirs of Antonio Pael v. Court of Appeals, G.R. No. 133547, December 7,2001.
■“See further discussion on ultra vires act under Section 44.
169Mangila v. Court of Appeals, G.R. No. 125027, Third Division, August 12,
2002.
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403 DIVIN'A ON COMMERCIAL LAW:
b. Partnership v. Corporation
As to definition:
A partnership is an agreement whereby two or more persons
bind themselves to contribute money, property, or industry to
a common fund, with the intention of dividing the profits among
themselves.”0 ..„ 0>
A corporation is an artificial being created by operation of
law, having the right of succession and the powers, attributes, and
properties expressly authorized by law or incidental to its existence.
As to the manner of creation:

A partnership is created by agreement while a corporation is
created by the operation of law.
As to composition:
In partnership, there should be at least two partners while one
person may compose a corporation.
As to commencement ofjuridical personality:

A partnership acquires juridical personality from the moment
two or more persons agree to form a partnership. The registration of
the Articles of Co-Partnership with the SEC is not a condition sine
Qua non for the acquisition of legal personality but is only necessary
for administrative convenience. Unless the partnership is registered
with the SEC, the partnership cannot obtain the requisite licenses
and permit to conduct its business.
Private corporation commences to have corporate existence
and juridical personality and is deemed incorporated from the date
the SEC issues a Certificate of Incorporation under its official seal.
As to liability:
The liability of the stockholders, who are not directors, officers
and agents, is limited to their subscription to the capital stock of the
corporation while the general partners may be held liable beyond
their contribution to the partnership if the assets thereof are not
sufficient to answer for creditors’ claims.
’’“Article 1767, Civil Code of the Philippines.
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As to transfer of shares or rights:

A stockholder may sell his fully-paid shares of stock without
the necessity of securing the consent of the corporation and/or the
other stockholders, while in a partnership, a partner cannot assign
his interest in the partnership in favor of a third party without the
consent of the partners, because a partnership is essentially based
on trust and confidence.
As to the management:
The business of a corporation is generally conducted by
the Board of Directors whereas a partnership is managed by the
Managing Partner designated in the Articles of Partnership, or in
the absence of designation, by anyone of the general partners.
As to the exercise of powers:

A corporation cannot exercise powers except those conferred
by law and its articles of incorporation, those implied from the
expressly-conferred powers and those incidental to its existence
while a partnership, may perform any act unless it is contrary to
laws, good morals, custom, public order, and public policy.
II. Classes of corporations

8. What are the classes of corporations?
Corporations may be classified as follows:
a. As to the Existence of Shares of Stock
i. Stock Corporation: has a capital stock divided into
shares and is authorized to distribute to the holders
of such shares dividends or allotments of the surplus
5 profits based on the shares held.'’*
The articles of incorporation which only
specifies the amount of authorized capital stock,
without stating the number of shares by which it is
divided, is not valid. Also, the silence in the articles
of incorporation and/or bylaws on the authority
of the corporation to declare dividends does not
make it a nonstock corporation. The provision of
'’•Section 3, RCC.
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■110 DIVINA ON COMMERCIAL LAW:
the RCC on the power of the corporation to declare

dividends should be deemed read into the articles
of incorporation. Similarly, the fact that the articles
of incorporation authorizes the stockholders of the
corporation to distribute the assets to a nonstock
non-profit corporation does not make it a nonstock
corporation, provided that the twin elements of a
stock corporation are present, because at the time
of dissolution, the stockholders, not the corporation,
own the assets and determine their disposition.'72
ii. Nonstock Corporation: has no capital stock and/
or not authorized to distribute dividends to its
members.173
A nonstock corporation may be organized for
any purposes except for profit and political ends.'”
b. As to Organizers:
i. Public: by the State only.
ii. Private: by private persons alone or with the State.
c. As to Function:
i. Public: organized for the government of a portion of
the State.
ii. Private: usually organized for profit.
d. As to Governing Law:
i. Government-owned and -controlled corporation
("GOCC”): governed by the special law creating it
and the provisions of the RCC suppletorily, to the
extent applicable. In case of conflict, the special law
prevails.
ii. Private: governed by the RCC. The RCC is also the
governing law for non-chartered GOCC.
”2BAR 1994.
'’’Sections 3 and 86, RCC.
'’’Section 87, RCC.
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e. As to Legal Status:
i. De Jure: is one that has fulfilled all the requirements
mandated by law and can successfully resist a suit
by the State to challenge its existence. De jure means
“a matter of law” that validates the corporation as a
legal entity.
ii. De Facto: is one organized with colorable compliance
with the requirements of a valid law. Its existence
cannot be inquired into collaterally. Such inquiry
must be by a direct attack by the State through a
quo warranto proceeding.”5
iii. By Estoppel: It exists when two or more persons
assume to act as a corporation knowing it to be
without authority to do so. They are liable as
general partners for all debts, liabilities, and
damages incurred or arising as a result thereof:
Provided, however, that when any such ostensible
corporation is sued on any transaction entered by
it as a corporation or on any tort committed by it
as such, it shall not be allowed to use as a defense
its lack of corporate personality. One who assumes
an obligation to an ostensible corporation as such,
cannot resist performance thereof on the ground
that there was, in fact, no corporation.”5
iv. By Prescription: one which has exercised corporate
powers for an indefinite period without interference
on the part of the sovereign power, e.g., Roman
Catholic Church.
f. As to Relationship of Management and Control:
i. Holding corporation: A corporation that holds
stocks in other companies for purposes of control
rather than for mere investment and ‘holding” them
in a conglomerate or umbrella structure along with
other subsidiaries.’”
■’'Section 19, RCC.

’’'Section 20, RCC.
’’’See: Maricalum Mining Corporation Ely. Florentino, G.R. No. 221813,
July 23, 2018.
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ii. Subsidiary corporation: A company that is owned

or controlled by another company, called the parent
company.
iii. Affiliates: Two companies are affiliates when one
company owns less than the majority of the voting
stock of the other.
iv. Parent company: A corporation that owns enough
voting stock in another company to control
management and operation by influencing or electing
its board of directors. Companies that operate under
this management are deemed subsidiaries of the
parent company.
g- As to Place of Incorporation:
i. Domestic: formed, organized, or existing under
Philippine laws.
ii. Foreign: 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.”8
h. Other Classifications:
i. Closed Corporation: is one whose articles of
incorporation provides that all of 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;
subject to specified restrictions on transfers; and
it shall not list in any stock exchange or make any
public offering of its stocks of any class.”9
Pertinently, a corporation is said to be “going
public” when its shares are being made available for
listing in the stock exchange and for public offering/
trading. On the other hand, a corporation is “going
private” when it is adopting the features of a Closed
Corporation.160
■’“Section 140, RCC.

■’“Section 95, RCC.
‘““BAR 1986.
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Special Corporations: These include educational

corporations'8' and religious corporations.182
Religious corporations include corporation sole188
and religious societies.184
One-Person Corporation: A corporation wherein all
of the stocks are held directly or indirectly by one
person. It is NOT necessarily illegal for as long
as it follows and observes the law throughout its
existence and conducts its business affairs lawfully,
otherwise, the doctrine of piercing the veil may be
applied in such a case.'85
9. The law creating the Bases Conversion and Development

Authority ("BCDA") provides that it has an authorized capital
of One Hundred Billion pesos (P100,000,000.00) which may be
fully subscribed by the Republic of the Philippines and shall
either be paid up from the proceeds of the sales of its land
assets.
It is created, among others, to own, hold and/or
administer military reservations in the country and implement
its conversion to other productive use.
Is it a stock or nonstock corporation?
It is neither a stock nor a nonstock corporation but a
governmental authority vested with corporate powers.
While it has an authorized capital of P100 Billion, it is not
divided into shares of stock. It has no voting shares. There is
likewise no provision which authorizes the distribution of dividends
and allotment of surplus profits to BCDA stockholders. Hence, it is
not a stock corporation.
It does not qualify as a nonstock organization because it is not
organized for any of the purposes mentioned under Section 87 of the
RCC.188
'“Sections 105-106, RCC.

‘“Section 107, RCC.
'“Section 108, RCC.
'“Bases Conversion and Development Authority v. Commissioner of Internal
Revenue, G.R. No. 205925, June 20, 2018.
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10. How are corporations created by special laws or charters

governed? < Jo;> <■■■ •
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 the RCC, insofar as they are applicable.187
11. What is a de facto corporation?

A de facto corporation is one that is organized with colorable
compliance with the requirements of incorporation under the law
and allowed to exist and exercise the powers of a corporation until
its corporate existence is assailed by the State in a quo warranto
proceeding.
12. What are the powers of a de facto corporation?

A de facto corporation has all the powers and authority of a
le jure corporation until it is ousted of its corporate existence. Its
existence cannot be assailed collaterally in a private suit but only
in a quo warranto proceeding. Thus, if a collection suit is initiated
by a de facto corporation, a motion to dismiss filed on the ground
that the corporation has no power to sue, should not prosper. A de
facto corporation, like a de jure corporation, may sue. The existence
of such de facto corporation cannot be questioned in a collateral
proceeding like a collection suit.
13. What are the elements of a de facto corporation?

The requisites of a de facto corporation are as follows:
a. Existence of a valid law under which it may be
incorporated;
b. Attempt in good faith to incorporate; and
c. Actual use or exercise in good faith of corporate
powers.
As such, if the law under which it is incorporated is declared
unconstitutional, there is neither de jure nor de facto existence.
‘“’Section 4, RCC.
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r
For instance, if Congress enacts a law to create a private

corporation, such corporation cannot be considered de facto because
the law creating it is unconstitutional. 188 Congress can enact a law
to create a corporation only if it is owned and controlled by the
government.189
With regard to the second element, attempt in good faith
to incorporate, at the very least, means obtaining a certificate
of incorporation from the SEC. The execution of the articles of
incorporation and adoption of bylaws, per se, are not enough to
warrant de facto existence. In other words, there is no bona fide
attempt to incorporate until the SEC at the very least issues the
certificate of incorporation.
The filing of articles of incorporation and the issuance of the
certificate of incorporation are essential for the existence of a de
facto corporation. In fine, it is the act of registration with the SEC
through the issuance of a certificate of incorporation that marks the
beginning of an entity’s corporate existence.190
14. Are the stockholders of a de facto corporation liable as general

partners?
, No, stockholders of a de facto corporation are liable in the same
)Way as stockholders of a de jure corporation. They are liable only
to the extent of their subscription to the corporation. Those liable
as general partners are persons who assume themselves to be a
corporation when they have no legal authority to do so.191
15. Cite examples of defects in the formation of a corporation

which give rise to a de facto existence.
a. The treasurer’s affidavit on the amount of subscription
and payment is false.
b. The required percentage of Filipino ownership in
corporations engaged in nationalized activities is not
complied with.
C. Natural person incorporators misrepresented their age.
188BAR 1994.
’“Feliciano v. Commission on Audit, G.R. No. 147402, January 14, 2004.
'"Missionary Sisters of Our Lady of Fatima v. Alzona, et al., G.R. No. 224307,
August 6, 2018.
■’■Section 20, RCC.
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16. What is a corporation by estoppel?

A corporation by estoppel is one that exists when two or more
persons assume to act as a corporation knowing it to be without
authority to do so.192
17. What are the liabilities under the doctrine of corporation by
estoppel?
All persons who assume to act as a corporation knowing it to
be without authority to do so shall be liable as general partners
for all debts, liabilities, and damages incurred or arising as a
result thereof: Provided, however, That when any such ostensible
corporation is sued on any transaction entered by it as a corporation
or on any tort committed by it as such, it shall not be allowed to
use its lack of corporate personality as a defense. Anyone who
assumes an obligation to an ostensible corporation as such cannot
resist performance thereof on the ground that there was in fact no
corporation.193
Thus, the persons who illegally recruited workers for overseas
employment by representing themselves to be officers of a corporation
which they knew had not been incorporated are liable as general
partners for all debts, liabilities and damages incurred or arising as
a result thereof.193 1
18. Are all those who subscribed for the stock of a proposed
corporation which was never legally formed liable as general
partners?
The doctrine of corporation by estoppel does not apply against a
person who takes no part except to subscribe for stock in the proposed
corporation which was never legally formed, and hence, cannot
be liable as a partner of those who engaged in business under the
name of the pretended corporation.196 However, a passive subscriber
who obtained benefit from a contract entered into by others with
whom he previously had an existing relationship is deemed to be
part of said association and is covered by the scope of the doctrine of
corporation by estoppel.196
™lbid.
'"Section 20, RCC.
""People v. Garcia, G.R. No. 117010, April 18, 1997.
'“Pioneer Insurance and Surety Corporation v. Court of Appeals, G.R. No.
84197, July 28, 1989.
I96Lim Tong v. Philippine Fishing Gear Industries, G.R. No. 136448, November
3, 1999.
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19. May a corporation by estoppel be sued?

In the case of Macasaet v. Francisco,187 a newspaper which the
plaintiff may have believed as registered with the SEC was sued
together with its publisher and editor. The lawyer of the newspaper
company filed a motion to drop such party-defendant because it was
not registered with the SEC and therefore, has no legal personality
to be sued. The court denied the motion. When the case reached the
Supreme Court, it was held that RTC did not abuse its discretion
by denying its motion to drop the ostensible corporation as a party
defendant.
The Supreme court said that a corporation by estoppel may
be impleaded as a party defendant considering that it possesses the
attributes of a juridical person, otherwise, it cannot be held liable for
damages and injuries it may inflict to other persons.198
20. Who cannot invoke the doctrine of corporation by estoppel?

When the petitioner is not trying to escape liability from the
contract but father the one claiming from the contract, the doctrine
of corporation by estoppel is not applicable. This doctrine applies
to a third party only when he tries to escape liability on a contract
from which he has benefited on the irrelevant ground of defective
incorporation."’9
In other words, the doctrine can only be invoked by the
aggrieved party who relied on the representations by others that
they are legally formed as a corporation. It cannot be invoked by the
one who benefited from the transaction.
In another case though, it was held that the doctrine of
corporation by estoppel is founded on principles of equity and is
designed to prevent injustice and unfairness. It applies when a non
existent corporation enters into contracts or dealings with third
persons. In which case, the person who has contracted or otherwise
dealt with the non-existent corporation is estopped to deny the
latter’s legal existence in any action leading out of or involving
such contract or dealing. While the doctrine is generally applied to
protect the sanctity of dealings with the public, nothing prevents
197Macasaet v. Francisco, G.R. No. 156759, First Division, June 5, 2013,

198Macasaet v. Francisco, G.R. No. 156759, June 5, 2013.
'"International Express Travel & Tour Services, Inc. v. Hon. Court of Appeals,
Henri Kahn, Philippine Football Federation, G.R. No. 119002, October 19, 2000.
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its application in the reverse, in fact, the very wording of the law
which sets forth the doctrine of corporation by estoppel permits such
interpretation. Such that a person who has assumed an obligation
in favor of a non-existent corporation, having transacted with the
latter as if it was duly incorporated, is prevented from denying the
existence of the latter to avoid the enforcement of the contract. In
this case, while the donation was accepted at the time the donee
was not yet incorporated, the subsequent incorporation of the donee
corporation and its affirmation of the recipient’s authority to accept
on its behalf cured whatever defect that may have attended the
acceptance of the donation, applying the doctrine of corporation by
estoppel under the Corporation Code.200
The Supreme Court likewise stated that the donee could not
be considered a de facto corporation because, at the time of the
donation, it was not registered with the SEC. The filing of articles of
incorporation and the issuance of the certificate of incorporation are
essential for the existence of a de facto corporation.
III. Nationality of corporations

21. What are the various tests to determine the nationality of a
corporation?
a. Place of incorporation test — This means that the
nationality of the corporation is determined by the state
of incorporation. Under this test then, a corporation
is a Philippine national if it is organized and existing
under Philippine laws, regardless of the nationality of
the shareholders. It is applied if the corporation is not
engaged in areas of activities reserved, in whole or in
part, for Filipinos.
This test presents a simple method of determining
the nationality of a corporation, the main criterion being
the state of the incorporation, regardless of the nationality
of the stockholders.201
200Missionary Sisters of Our Lady of Fatima v. Alzona, et al., G.R. No. 224307,
August 6, 2018.
2O1SEC-OGC Opinion No. 16-15.
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b. Control test - It is a mode of determining the nationality of

a corporation engaged in nationalized areas of activities,
provided for under the Constitution and other applicable
laws, where corporate shareholders with foreign
shareholdings are present, by ascertaining the nationality
of the controlling stockholder of the corporation. If the
capital of the investing Corporation is at least 60% owned
by Filipinos, then the entire shareholdings of the investing
Corporation shall be recorded as Filipino-owned thus
making both the investing and investee - corporations
Philippine national.
c. Grandfather rule — This is “the method by which the
percentage of Filipino equity in a corporation engaged in
nationalized and/or partly nationalized areas of activities,
provided for under the Constitution and other applicable
laws, is accurately computed, in cases where corporate
shareholders with foreign shareholdings are present,
by attributing the nationality of the second or even
subsequent tier of ownership to determine the nationality
of the corporate shareholder.” Thus, to arrive at the actual
Filipino ownership and control in a corporation, both the
direct and indirect shareholdings in the corporation are
determined. In the case of a multi-tiered corporation, the
stock attribution rule must be allowed to run continuously
along the chain of ownership until it finally reaches the
individual stockholders.
The purpose of this rule is to trace the nationality
of the stockholder of investor corporations to ascertain
the nationality of the corporation where the investment
is made.202
a. Control test
22. What is the prevailing mode of determining the nationality of
corporations engaged in nationalized activities?
The “control test” is the prevailing mode of determining the
nationality of corporations engaged in nationalized activities.
However, when in the mind of the Court there is doubt as to where
2O2SEC Opinion, May 4,1987.
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beneficial ownership and control reside, based on the attendant facts

and circumstances of the case, then it may apply the “grandfather
rule.”
In fact, the Control Test can be, as it has been, applied
jointly with the Grandfather Rule to determine the observance of
foreign ownership restriction in nationalized economic activities.
The Control Test and the Grandfather Rule are not, as it were,
incompatible ownership-determinant methods that can only be
applied alternative to each other. Rather, these methods can, if
appropriate, be used cumulatively in the determination of the
ownership and control of corporations engaged in fully or partly
nationalized activities.203
The Grandfather Rule, standing alone, should not be used
to determine the Filipino ownership and control in a corporation,
as it could result in an otherwise foreign corporation rendered
qualified to perform nationalized or partly nationalized activities.
Hence, it is only when the Control Test is first complied with that
the Grandfather Rule may be applied. Put in another manner, if
the subject corporation’s Filipino equity falls below the threshold of
60%, the corporation is immediately considered foreign-owned, in
which case, the need to resort to the Grandfather Rule disappears.201
The Supreme Court stressed, however, that when the 60%
Filipino ownership, is never in doubt, the control test prevails. In
the relevant case, it was held that the petition is severely wanting
in facts and circumstances to raise legitimate challenges to the
joint venture company’s 60-40 Filipino-Foreigner ownership. The
application of the control test will already yield the result that the
company is a Philippine national. The grandfather rule no longer
applies.205
“03Narra Nickel Mining and Development Corp. Redmont Consolidated

Mines Corp., G.R. No. 195580, April 21, 2014.
201Narra Nickel Mining and Development Corp. Redmont Consolidated
Mining Corp., G.R. No. 195580, January 28, 2015.
20jLeo Y. Querubin v. Commission on Elections, el al., G.R. No. 218787,
December 8, 2015.
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b. Grandfather rule
23. When is the grandfather rule applied?
The grandfather rule is applied in the following cases:
a. Under the Grandfather Rule Proper, if the percentage of
Filipino ownership in the corporation or partnership is
less than 60%, only the number of shares corresponding
to such percentage shall be counted as of Philippine
nationality.
b. Under the Strict Rule or Grandfather Rule Proper, the
combined totals in the Investing Corporation and the
Investee Corporation, when traced (i.e., “grandfathered”)
to determine the total percentage of Filipino ownership,
show less than 60% requirement.
c. If based on records, Filipinos own at least 60% of the
investing corporation but there is doubt as to where
control and beneficial ownership in the corporation really
reside.
24. Illustrate the application of the control test and grandfather rule.
For better understanding, below are various diagrams to
illustrate the application of the control test and grandfather rule.
Rule I:
iwmikwiobj'’
100,00!
60% f 40%
TjffiCQ
In this illustration, ABC is a public utility corporation.

Under the Philippine Constitution, at least 60% of its capital
must be owned by Filipinos. The outstanding capital stock is
PhplO million divided into 100,000 shares with par value of
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1OO/share. Of the 100,000 outstanding shares, 60% is owned

by XYZ while 40% is held by foreigners. XYZ, as investing
corporation in ABC, in turn, is 60% owned by Filipinos and 40%
owned by the same foreigners who directly own 40% of ABC
Corporation.
Is ABC a Philippine national? Is it compliant with the
Constitution insofar as 60% Filipino capital requirement is
concerned?
ABC is a Philippine national and compliant with the
Constitution.
The prevailing mode to determine the nationality of a
corporation engaged in nationalized activities is the control test.
ABC, as a public utility, is engaged in a nationalized activity and
as such, subject to the control test. Under the control test, if the
corporation is at least 60% owned by Filipinos, it is a Philippine
national. XYZ, the investing corporation, is also a Philippine
national because 60% of its capital is likewise owned by Filipinos.
Because XYZ is at least 60% owned by Filipinos, then the entire
60,000 shareholdings of XYZ must be registered as Filipino-owned,
making both ABC and XYZ Philippine nationals.
Note that under the control test, it is incorrect to attribute the
40% foreign ownership to the 60,000 shares owned by XYZ as the
entire shareholding should be recorded as Filipino-owned. In other
words, it is erroneous to say that because the foreigners own 40% of
XYZ, 40% of 60,000 shares (or 24,000 shares) should be registered
in their name. If this mode of computation is adopted, ABC will not
be compliant because the foreigners will then directly own 40% and
indirectly own 24% of the corporation, in excess of the 40% limit
that the Constitution has set. The foregoing structure and mode of
computation explain why the control rest is often called the liberal
test in determining the nationality of a corporation.
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Rule II:
W
90,000 10,000
[ wzz
1
In this illustration, XYZ owns 90,000 shares of ABC while

10,000 are held by foreigners. XYZ, in turn, is 50% owned by
Filipinos and 50% by foreigners. Is ABC a Philippine national?
It is not. Because XYZ is not at least 60% owned by Filipinos,
the control test cannot be adopted. Instead, only the percentage that
corresponds to the shares owned by Filipinos should be registered
in the books of the corporation as Filipino-owned, the rest must
be recorded as foreign-owned. The 50% of 90,000 shares or 45,000
shares, therefore, should be registered as Filipino owned and the
other 45,000 as foreign-owned. Adding the 45,000 shares indirectly
owned by foreigners to the 10,000 shares they directly own, the
aggregate shareholdings will exceed the allowable 40% limit.
NB: In the actual cases, there were nominal shares issued in favor of
incorporators to qualify as such. The diagrams limited the number
of shares held by corporations to illustrate the principles.
Rule III:
60,000 40,000
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This case calls for the application of the grandfather rule. First,
the control test is applied because ABC appears to be 60% owned by
a Philippine national, XYZ. XYZ is a Philippine national because
60% of its capital is owned by Filipinos. Let us assume, however,
that the share subscriptions of the Filipinos were not paid and the
foreign held-corporation basically contributed all, or almost all, of the
capital of ABC, creating a doubt as to where beneficial ownership and
control actually reside. Given such doubt, the grandfather rule then
is cumulatively applied with the control test. Under the grandfather
rule, only' the shares that correspond to the percentage owned by
Filipinos shall be registered as Filipino-owned. Therefore, only 60%
of the 60,000 shares owned by XYZ should be recorded as Filipino-
owned while 40% of the 60,000 shares shall be registered as foreign-
owned. Adding the 24,000 shares that the foreign-held corporation
indirectly owns in ABC with the 40,000 shares it directly owns, the
aggregate foreign shareholdings translate to 64,000 or 64% of the
capital of ABC, in excess of the 40% allowable limit.
Rule IV:
60,000 40,000
50%
|[ iWfiQ J | :^Tjiv ]j
Corporate layering is not prohibited provided that it is not used

to circumvent the rules on foreign ownership restriction. Following
the strict application of the grandfather rule, in this case of a multi
tiered corporation, the stock attribution rule must be allowed to run
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continuously along the chain of ownership until it finally reaches the

individual stockholders. In this illustration, despite the corporate
layering, the beneficial ownership and control of XYZ, which owns
60% of ABC, show less than 60% Filipino share ownership. The
grandfather rule, therefore, applies.
/V. Corporate juridical personality
a. Doctrine of separate juridical personality

b. Doctrine of piercing the corporate veil
25. What is the doctrine of piercing the veil of corporate fiction?
It is the doctrine that allows the State to disregard, for certain
justifiable reasons, the notion or fiction that the corporation has a
separate legal personality from those composing it. The doctrine of
separate legal entity is only a fiction to promote public convenience.
If this fiction is misused or abused, then the State shall pierce the
corporate veil and treat the corporation and the persons composing
it as one and the same entity.
i. Grounds for application of doctrine

26. In what areas does the doctrine apply?
The doctrine of piercing the corporate veil applies in three (3)
basic areas, namely: 1) defeat of public convenience as when the
corporate fiction is used as a vehicle for the evasion of an existing
obligation; 2) fraud cases or when the corporate entity is used to
justify a wrong, protect fraud, or defend a crime; or 3) alter ego
cases, where a corporation is merely a farce since it is a mere alter
ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs are so conducted as to make
it merely an instrumentality, agency, conduit or adjunct of another
corporation.200
“Development Bank of the Philippines v. Hydro Resources Contractors

Corporation, G.R. No. 167603, March 13, 2013; California Manufacturing Company,
Inc. v. Advanced Technology System, Inc., G.R. No. 202454, April 25,2017; ABS-CBN
Broadcasting Corporation v. Honorato Hilario, G.R. No. 193136, July 10,2019.
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The doctrine likewise applies in the following cases:

a. Under a variation of the doctrine of piercing the veil of
corporate fiction, when two business enterprises are
owned, conducted and controlled by the same parties,
both law and equity will, when necessary to protect the
rights of third parties, disregard the legal fiction that
two corporations are distinct entities and treat them as
identical or one and the same.207
b. When the complaint alleges that the directors and/
or officers committed bad faith or gross negligence in
conducting the affairs of the corporation.
27. Cite jurisprudence where the doctrine of piercing the
corporate veil was applied because the fiction of separate legal
personality was used to defeat public convenience.
a. The separate juridical personality of a corporation may
be disregarded where the majority stockholder filed a
derivative suit in behalf of the corporation to declare the
sale as unenforceable against the corporation although
the trial court in another case had already ruled that the
contract of sale between the corporation and its buyer was
deemed perfected. There is forum shopping where the
stockholders, in a second case, and in representation of
the corporation, seek to accomplish what the corporation
itself failed to do in the original case. In this case, the
fiction was used to circumvent the rule against non-forum
shopping.208
28. cite jurisprudence where the doctrine of piercing the corporate

veil was applied because the fiction was used to perpetuate
fraud.
a. At the time an unfair labor practice case was pending
against the corporation, its officers and stockholders
organized a run-away corporation, engaged in the same
line of business, producing the same line of products,
2O7Heirs of Fe Tan Uy, represented by her heir, Mauling Uy Lim v. International

Exchange Bank, G.R. No. 166282 and 83, February 13, 2013.
208First Philippine International Bank v. Court of Appeals, G.R. No. 115849,
January 24, 1996.
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occupying the same compound, using the same pieces of

machinery, buildings, laboratory, bodega and sales and
accounts departments used by the first corporation. It
was held that this is another instance where the fiction
of separate and distinct corporate entities should be
disregarded as the second corporation seeks the protective
shield of a corporate fiction whose veil in the present case
could, and should, be pierced as it was deliberately and
maliciously designed to evade its financial obligation to
its employees.209
b. Piercing the veil of corporate fiction is warranted when
a corporation ceased to exist only in name as it re-
emerged in the person of another corporation, for the
purpose of evading its unfulfilled financial obligation
under a compromise agreement. Thus, if the judgment for
money claim could not be enforced against the employer
corporation, an alias writ may be obtained against the
other corporation considering the indubitable link between
the closure of the first corporation and incorporation of
the other.210
ii. Test in determining applicability

29. What are the elements of the alter ego test?
Case law lays down a three-pronged test to determine the
application of the alter ego theory, which is also known as the
instrumentality theory, namely:
a. Control, 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;
b. 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 plaintiffs legal right; and
209A.C. Ransom Labor Union-CCLU v. National Labor Relations Commission,

a al., G.R. No. L-69494, May 29, 1987.
21°Livesey v. Binswanger Philippines, G.R. No. 177493, March 19, 2014.
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C. The aforesaid control and breach of duty must have

proximately caused the injury or unjust loss complained
of.
30. Cite jurisprudence where the doctrine of piercing the corporate

veil was applied based on the alter-ego or instrumentality test.
a. In one case, the owner of a business terminated the
employment of his workers on the pretext that there will
be an impending permanent closure of the business as a
result of an intended sale of the assets to an undisclosed
corporation, and that there will be a change in the
management. Subsequent events, however, revealed that
the buyer of the assets was a corporation owned by the
same employer and members of his family. Furthermore,
the business re-opened in less than a month under the
same management. Admittedly, mere ownership by a
single stockholder of all or nearly all of the capital stock
of the corporation does not by itself justify piercing
the corporate veil. Nonetheless, in this case, other
circumstances show that the buyer of the assets of the
proprietor employer is none other than his alter ego.211
31. Cite jurisprudence where the Supreme Court pierced the

corporate veil when two or more businesses are owned,
controlled, and conducted by the same parties.
a. Three (3) companies engaged in a work-pooling scheme,
in which their workers were constantly rotated and
periodically assigned among the three (3) establishments
to perform the same or similar tasks; they operated and
hired employees through a common human resource
department; and, they were under the control and
management of the same party. It was held that the
separate existence of the three (3) companies must be
disregarded in order to safeguard the right of the workers
and their unions to engage in collective bargaining.212
211Leo R. Rosales, el al. v. New A.N.J.H. Enterprises & N.H. Oil Mill
Corporation, el al., G.R. No. 203355, August 18, 2015.
212Erson Ang Lee Doing Business as “Super Lamination Services” v. Samahang
Manggagawa ng Super Lamination (SMSLS-NAFLU-KMU), G.R. No. 193816,
November 21, 2016.
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b. The internal Scenic Department which initially handled

the props and set designs of ABS-CBN was abolished
and shut down and CCI was incorporated to cater to the
props and set design requirements of ABS-CBN, thereby
transferring most of its personnel to CCI. Notably, CCI
was a subsidiary of ABS-CBN and was incorporated
through the collaboration of its former contractor (Ty) and
the other major stockholders and officers of ABS-CBN.
CCI provided services mainly to ABS-CBN and its other
subsidiaries. When Ty organized his own company, ABS-
CBN hired him as a consultant and eventually engaged the
services of his company. As a result of which CCI decided
to close its business operations as it no longer carried out
services for the design and construction of sets and props
for use in the programs and shows of ABS-CBN, thereby
terminating certain employees of CCI. ABS-CBN clearly
exercised control and influence in the management and
closure of CCI’s operations, which justifies the ruling of
the appellate court and labor tribunals of disregarding
their separate corporate personalities and treating them
as a single entity.213
32. Cite jurisprudence when the corporate veil may be pierced if the
complaint alleges that the directors and/or officers committed
bad faith or gross negligence in conducting the affairs of the
corporation.
a. The president of a family-owned corporation who
committed fraud in selling its vehicle to a customer and
collected down payment from the latter knowing fully
well that the vehicle was already sold to another cannot
hide behind the separate corporate personality of the
corporation to escape from liability.214
b. In another case, the building contractor of Shangri-La
mall sued Shangri-La Properties for unpaid fees. The
plaintiff impleaded the directors of the corporation for
bad faith and gross negligence in conducting the affairs of
213ABS-CBN Broadcasting Corporation v. Honorato Hilario, G.R. No. 193136,

July 10 2019.
214Sps. Pedro and Florencia Violago v. BA Finance Corporation and Avelino
Violago, G.R. No. 158262, July 21, 2008.
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430 DMNA ON COMMERCIAL LAW:
the corporation. The lower court, upon motion, suspended

the proceedings on the ground that the plaintiff failed
to submit the case to arbitration despite the arbitration
clause provided in the contract.
The issue is whether or not the directors who are not
parties to the arbitration agreement can be compelled to
participate in the arbitration proceedings.
The Supreme Court eventually held that corporate
representatives may be compelled to submit to arbitration
proceedings pursuant to a contract entered into by the
corporation they represent if there are allegations of bad
faith or malice in their acts representing the corporation
even though the arbitral only covers the corporation.
The Supreme Court stated that when the directors are
impleaded in a case against a corporation alleging malice
and bad faith on their part in directing the affairs of the
corporation, the complainants are effectively alleging that
the directors and the corporation are not acting as separate
entities; that the acts or omission of the corporation
that violated their rights are also the directors’ acts or
omission; that the contracts executed by the corporation
are contracts executed by the directors. Complainants
effectively pray that the corporate veil be pierced because
the cause of action between the corporation and the
directors is the same. In this case, however, the doctrine
was not applied. The arbitral ruling Was that both the
Shangri-La and its directors are not liable.215
33. Should the court first acquire jurisdiction over the corporation
involved before its separate legal personality may be
disregarded? ,
There appears to be a lack of conclusive yardstick as to when
the court may pierce the veil of corporate fiction of a corporation
that has not been brought to its jurisdiction by summons, voluntary
appearance, or other recognized modes of acquiring jurisdiction.
There are, in fact, conflicting Supreme Court decision in this regard.
The author believes that the corporate veil may be pierced without
having to conduct a full-blown trial as long as the corporation,
2l5Gerardo Lanuza, Jr. and Antonio 0. Olbes v. BF Corporation, G.R. No.

174938, October 1, 2014.
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whose veil the court wants to pierce, is given the opportunity to be

heard and based on the hearing, albeit summary in nature, evidence
exists to warrant the application of the doctrine. This is necessary
to prevent multiplicity of suits and save on expenses. Due process,
after all, can be afforded to the corporation even without a full-blown
hearing.
34. Is the doctrine of piercing the corporate veil applicable to a

nonstock non-profit corporation and natural persons?
Yes, the fact that the corporation involved is a nonstock
non-profit corporation does not by itself preclude the court from
applying the equitable remedy of piercing the corporate veil. The
equitable character of the remedy permits a court to look to the
substance of the organization and its decision is not controlled by
the statutory framework under which the corporation was formed
and operated. While it may appear to be impossible for a person to
exercise ownership control over a nonstock non-profit corporation,
a person can be held personally liable under the alter ego theory if
the evidence shows that the person controlling the corporation did
in fact exercise control even though there was no stock ownership.216
35. What is the doctrine of reverse piercing of the corporate veil?

In a traditional veil-piercing action, the court disregards the
existence of the corporate entity so a claimant can reach the assets
of a corporate insider (meaning, the directors, stockholders, and
officers). In reverse piercing action, however, the plaintiff seeks
to reach the assets of the corporation to satisfy claims against
corporate insider. Reverse piercing flows in the opposite direction (of
traditional corporate veil-piercing) and makes the corporation Hable
for the debt of the shareholders or members.
In International Academy of Management and Economics (1/
AME) Litton and Company, Inc. v. Litton and Company, Inc.,217
however, the Supreme Court appHed the reverse piercing doctrine
and made a nonstock corporation Hable for the debts of its member.
™Ibid.
217Intemational Academy of Management and Economics (I/AME) v. Litton
and Company, Inc., G.R. No. 191525, December 13, 2017.
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In this case, a lawyer-lessee failed to pay his rentals. The lessor

filed a complaint for unlawful detainer and secured a favorable
judgment. Judgment was not immediately executed but it was
eventually revived. The sheriff levied a piece of real property in
the name of International Academy of Management and Economics
Incorporated (I/AME), a nonstock corporation, in order to execute
the judgment against the lessee, who is a member of I/AME. The
Supreme Court agreed with the Court of Appeals and sustained the
levy, ruling that the corporation is an alter ego of the lessee and the
lessee - the natural person is the alter ego of the corporation. The
lessee falsely represented himself as president of the corporation in
the Deed of Sale when he bought the property at a time when the
corporation had not yet existed. Uncontroverted facts also revealed
that the lessee and the corporation are one and the same person: The
lessee is the conceptualizer and implementor of the corporation and
the majority contributor of the corporation. I/AME is basically the
corporate entity used by the lessee as his alter ego for the purpose of
shielding his assets from the reach of his creditors.
36. What are the effects of piercing the corporate veil? Does it
result in the dissolution of the corporation?
The piercing of the corporate veil does not dissolve the
corporation. It simply means that the stockholder and/or director
and/or officer, whose action/s became the basis for the application
of the doctrine, and the corporation shall be treated as one and
the same entity. In traditional piercing the corporate veil, the
concerned stockholders, directors/trustees, and officers become
liable for the obligation of the corporation. In reverse piercing the
corporate veil, the corporation becomes liable for the debts of the
concerned stockholders/members, directors/trustees, and officers of
the corporation.
In case the corporation is just an alter ego of another
corporation, both corporations become one and the same entity.
V. Capital structure
a. Number and qualifications of incorporators

37. What are the revisions under the RCC on the number and
qualification of incorporators?
a. Unlike the OCC, which required incorporators to be
natural persons numbering not less than five (5), the
RCC allows partnership, association, or corporation to
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organize a corporation without any minimum number

of incorporators. In fact, there can be a corporation with
only one (1) stockholder, other than a corporation sole, in
the form of a one (l)-person corporation under Title XIII
of the RCC.
b. The RCC likewise eliminated the residency requirement
for incorporators and expectedly, retained the legal
age requirement for natural-persons-incorporators
and ownership of at least one (1) share of stock of the
corporation or membership for a nonstock corporation.
c. Natural persons who are licensed to practice a profession
and partnerships or associations organized for the purpose
of practicing a profession may organize a corporation only
if they are allowed under a special law.
38. What are the number and qualifications of incorporators?

a. Any person, partnership, association or corporation, singly
or jointly with others but not more than 15 in number,
may organize a corporation for any lawful purpose or
purposes.
b. Natural persons who are licensed to practice a profession,
and partnerships or associations organized for the purpose
of practicing a profession, shall not be allowed to organize
as a corporation unless otherwise provided under special
laws.
c. Incorporators who are natural persons must be of legal
age.
d. Each incorporator of a stock corporation must own or be a
subscriber to at least one (1) share of the capital stock or
a be a member in a nonstock corporation.
e. A corporation with a single stockholder is considered a
One Person Corporation.218
218Section 10, RCC.
k
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39. May juridical persons be incorporators?

Yes, unlike the previous law, the RCC allows juridical persons
to be incorporators.219
40. Can a person who signs the AOI on behalf of a juridical

incorporator be named as director or trustee?
No, an individual who signs the AOI on behalf of an
incorporator, which is not a natural person, may not be named as
a director or trustee in the same AOI, unless the said individual is
also the owner of at least one (1) share of stock, or is also a member,
of the corporation being formed.220
41. Other than a one (1)-person corporation, can a corporation

have less than five (5) incorporators?
Yes, because the RCC eliminated the minimum number of
incorporators. Thus, a corporation can have three (3) incorporators
for instance unless otherwise provided by a special law.
Banks, for example, are required to have at least five (5) and a
maximum of 15 directors.221
While incorporators are different from directors, in actuality,
the incorporators are usually the first members of the board of
directors.
42. May foreigners be incorporators of a private domestic

corporation? ,
Yes, foreigners may be incorporators of a private domestic
corporation. The law does not require Philippine citizenship for
incorporators. However, if the corporation will engage in economic
activities which are reserved for Filipinos, foreigners can be
incorporators and/or directors but only in proportion to their foreign
ownership equity in the corporation, as allowed by law. Foreigners
cannot be incorporators of corporations engaged in wholly
nationalized activities.
™Ibid.
"“Section 8, SEC Memorandum Circular No. 16 series of 2019, July 30, 2019.
"'Section 15, R.A. No. 8791, otherwise known as the General Banking Law.
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r
b. Subscription requirements
43. What are the revisions under the RCC on subscription and
paid-up capital requirements upon incorporation?
a. The RCC dispensed with the minimum subscription and
paid-up capital requirement except as otherwise provided
by a special law.
b. After incorporation, however, in case of increase of capital
stock, at least 25% of the increase in capital stock must
be subscribed and at least 25% of the amount subscribed
should be paid in cash or property the valuation of which
is equivalent to at least 25% of the subscription.
44. Are stock corporations required to have a minimum capital

stock?
Stock corporations shall not be required to have minimum
capital stock, except as otherwise specifically provided by special
law.222
45. What do you mean by authorized capital stock, subscribed

capital stock, and paid-up capital stock?
Authorized capital stock means the amount fixed in the articles
of incorporation to be subscribed and paid by the stockholders
of the corporation. It is the maximum number of shares that the
corporation is legally allowed to issue without amending the articles
of incorporation.
Subscribed capital stock is the portion of the authorized capital
stock which is covered by subscription agreements whether fully
paid or not.
Outstanding capital stock means the total shares of stock issued
under binding subscription contracts to subscribers or stockholders,
whether fully or partially paid, except treasury shares.223
Subscribed capital stock and issued or outstanding capital
stock may be interchanged. But while every subscribed share which
is covered by a subscription agreement is outstanding, an issued
share may not have the status of outstanding shares like treasury
shares.
“Section 12, RCC.

“Section 173, RCC.
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Paid-up capital stock is the portion of the authorized capital

stock which has been subscribed and paid by the stockholders of the
corporation.
In one case, a wage order was issued but exempted from its
coverage employer corporation, the paid-up capital of which, is
impaired by a certain percentage. The issue is whether the paid-up
capital includes assets transferred to the company, as well as the
loans or advances obtained. It was held that not all funds or assets
received by the corporation can be considered paid-up capital, for
this term has a technical signification in Corporation Law which
is the portion of the authorized capital stock of the corporation,
subscribed and then actually paid up.224
46. How much of the authorized capital stock should be subscribed

and paid-up upon incorporation?
Unlike the OCC which required that at least 25% of the

authorized capital stock must be subscribed and at least 25% of total
subscriptions must be paid upon incorporation, the RCC dispensed
with the minimum subscription and paid-up capital requirement
except as otherwise provided by a special law.
After incorporation, however, in case of increase of capital
stock, at least 25% of the increase in capital stock must be subscribed
and at least 25% of the amount subscribed should be paid in cash or
property the valuation of which is equivalent to at least 25% of the
subscription.
47. Under the Philippine Constitution, at least 60% of the capital

of corporations engaged in public utility, large scale mining,
and exploration of natural resources should be owned by
Filipinos. What does the term "capital" mean in this context? Is
it synonymous with outstanding capital stock?
In an en banc decision, the Supreme Court clarified that the

term “capital” in Section 11, Article XII of the 1987 Constitution
refers to shares with voting rights, as well as with full beneficial
ownership. This is precisely because the right to vote in the election of
224MSCI-NACUSIP Local Chapter v. National Wages and Productivity SEC

and Monomer Sugar Central, Inc., G.R. No. 125198, March 3, 1997.
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directors, coupled with full beneficial ownership of stocks, translates

to effective control of a corporation.225
What the Constitution requires is the full and legal beneficial
ownership of 60% of the outstanding capital stock, coupled with
60% of the voting rights which must rest in the hands of Filipino
nationals.226
By way of example, ABC is a public utility corporation with
30,000,000 outstanding capital stock divided into 100,000 common
shares, 100,000 voting preferred shares, and 100,000 non-voting
preferred shares all with par value of P100 per share. In terms of
Filipino and foreign share ownership, the outstanding shares are
broken down as follows:
100,000 common shares
• 100% — Filipino-owned
> 100,000 voting preferred shares
• 60,000 — Filipino-owned
• 40,000 — Foreign-owned
> 100,000 non-voting preferred shares
• 80,000 — Foreign-owned
• 20,000 — Filipino-owned
If we follow the pronouncement in Gamboa v. Teves, the share
ownership structure will not be compliant with the Constitution
because the 60-40 Filipino-foreign ownership is not reflected in each
class or kind of shares but based on Roy v. Herbosa, this will be
compliant because Filipinos own at least 60% of the voting shares
(100,000 common shares and 60,000 voting preferred shares or
160,000/200,000 shares ) and at least 60% of the outstanding capital
stock (100,000 common shares + 60,000 voting preferred shares +
20,000 non-voting preferred shares or 180,000/300,000 shares).
““Jose M. Roy HI v. Teresita Herbosa, et al., G.R. No. 207246, November 22,
2016.
““Jose M. Roy III v. Teresita Herbosa, et al., G.R. No. 207246, April 18, 2017.
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c. Corporate term
48. What are the revisions under the RCC on corporate term?
a. A corporation shall have perpetual existence unless its
articles of incorporation provides otherwise.
b. Corporations with certificates of incorporation issued prior
to the effectivity of the RCC, and which continue to exist,
shall have perpetual existence, unless the corporation,
upon a vote of its stockholders representing a majority
of its outstanding capital stock, notifies the SEC that it
elects to retain its specific corporate term pursuant to its
articles of incorporation: Provided, That any change in
the corporate term under this section is without prejudice
to the appraisal right of dissenting stockholders.
c. The period to extend the corporate term has been reduced
from five (5) to three (3) years prior to the original or
subsequent expiry date(s).
d. Extension of the corporate term shall take effect only
on the day following the original or subsequent expiry
date(s).
e. A corporation whose term has expired is not ipso facto
dissolved but may apply for a revival of its corporate
existence. Upon approval by the SEC, the corporation
shall be deemed revived and a certificate of revival of
corporate existence shall be issued, giving it perpetual
existence, unless its application for revival provides
otherwise.
49. What is the term of a corporation under the RCC?

A corporation shall have perpetual existence unless its articles
of incorporation provides otherwise.227 In other words, the corporation
continues to exist until the corporation decides to end it, or it may
have a fixed term if specified in the articles of incorporation.
“’Section 11, KCC.
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50. With the enactment of RCC, is the corporate term of a

corporation now deemed perpetual without the need of
amending its Articles of Incorporation (AOI) with the requisite
2/3 affirmative vote of its outstanding shares?
The corporate term of a corporation is deemed extended and
amended to perpetual existence pursuant to paragraph 2, Section 11
of the RCC which provides:
“Section 11. Corporate Term. — A corporation

shall have perpetual existence unless its articles of
incorporation provide otherwise. Corporations with
certificates of incorporation issued prior to the
effectivity of this Code, and which continue to exist
shall have perpetual existence, unless the corporation,
upon a vote of its stockholders representing a majority
of its outstanding capital stock, notifies the SEC that it
elects to retain its specific corporate term pursuant to its
articles of incorporation: xxx” (Emphasis supplied)
It is clear from the aforementioned provision that the corporate

term of a corporation existing prior to, and which continues to exist
upon the effectivity of the RCC, shall be automatically deemed
perpetual without any further action on the part of the corporation.
Further, since the automatic conversion of the corporate term
to perpetual existence does not require an amendment of the AOI,
the 2/3 affirmative vote of the outstanding shares to amend the AOI
would not be required.228
51. What is the remedy of the stockholder in view of the automatic

conversion of the corporate term to perpetual existence of the
corporation organized prior to the effectivity of the RCC?
In view of the automatic conversion of the corporate term to
perpetual existence of a corporation organized prior to the effectivity
of the RCC, the stockholder may exercise his appraisal right,229
meaning demand the payment of the fair value of his shares, unless
the corporation, upon a vote of its stockholders representing a
22BRe: Corporate Term of Existing Corporations under the RCC, SEC-OGC

Opinion No. 28-19, July 22, 2019.
229Section 11, RCC.
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majority of its outstanding capital stock, notifies the SEC that it

elects to retain its specific corporate term pursuant to its articles of
incorporation.230
52. What are the remedies of a corporation whose term has

expired?
A corporation whose term has expired may apply for a revival
of its corporate existence, together with all the rights and privileges
under its certificate of incorporation and subject to all of its duties,
debts, and liabilities existing prior to its revival. Upon approval by
the SEC, the corporation shall be deemed revived and a certificate
of revival of corporate existence shall be issued, giving it perpetual
existence, unless its application for revival provides otherwise.
No application for revival of certificate of incorporation of banks,
banking and quasi-banking institutions, pre-need, insurance and
trust companies, nonstock savings and loan associations (NSSLAs),
pawnshops, corporations engaged in money service business, and
other financial intermediaries shall be approved by the SEC unless
accompanied by a favorable recommendation of the appropriate
government agency.231
The corporation may also decide to reincorporate particularly
if it has no intention to liquidate and wind-up its corporate affairs.232
Thus, the stockholders of the defunct corporation may organize
a new corporation. It may even adopt the name of the dissolved
corporation with the approval of the last stockholders representing
at least a majority of the outstanding capital stock.233
The old and the new corporation may have identical
incorporators, directors, and officers. The assets of the dissolved
corporation are not, however, automatically transferred to the
new corporation. However, the stockholders may assign their right
to the properties of the dissolved corporation in favor of the new
corporation as consideration for the subscription to the shares of the
latter."31
““Section 11, ibid.

“'Section 11, RCC.
“"Chung Ka Bio v. Intermediate Appellate Court, G.R. No. 71837, July 26,
1988.
““Indian Chamber of Commerce Phils., Inc. v. Filipino Indian Chamber of
Commerce in the Philippines, Inc., G.R. No. 184008, August 3, 2016.
“‘Chung Ka Bio, supra.
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53. What are the requisites for extension or shortening of the

corporate term?
The requisites for extension or shortening of the corporate
term are as follows:
a. A corporate term for a specific period may be extended or
shortened by amending the articles of incorporation.235
b. The extension of the corporate term must be approved
by at least the majority of the board of directors and the
stockholders representing at least 2/3s of the outstanding
capital stock.236
c. No extension may be made earlier than three (3) years
prior to the original or subsequent expiry date(s) unless
there are justifiable reasons for an earlier extension as
may be determined by the SEC.237
d. Such an extension of the corporate term shall take effect
only on the day following the original or subsequent
expiry date(s).238
e. The extension or shortening of the term is effective upon
approval of the SEC.
54. Can the extension of the corporate term be done during the
three (3)-year liquidation period?
No, the extension of corporate term can only be done during
the lifetime of the corporation but not earlier than three (3) years
prior to the original or subsequent expiry date(s) unless there are
justifiable reasons for an earlier extension as may be determined
by the SEC. The activities of the corporation during the liquidation
period should be limited to winding up of corporate affairs. Extension
of term is tantamount to the continuation of the business and as
such, incompatible with the purpose and nature of liquidation.
“•Section 11, RCC.

“•Section 36, RCC.
“’Section 11, ibid.
™Ibid.
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■142 DIVINA ON COMMERCIAL LAW:
d. Classification of shares
55. What are shares of stock?
Shares of stock are forms of securities representing equity
ownership in a corporation, divided up into units. They are the
measure of the stockholder’s proportionate interest in the corporation
in terms of the right to vote and to receive dividends, as well as the
right to share in the assets of the corporation when distributed in
accordance with law and equity.
56. What are the classes of shares?

The shares of stock corporations may be divided into classes or
series of shares, or both. These are as follows:
a. Common shares
b. Preferred shares
c. Par value shares
d. No par value shares
e. Voting shares
f. Non-voting shares
g- Founder’s shares
h. Treasury shares
i. Redeemable shares
j. Watered shares
k. Other classification as may be provided in the articles of
incorporation; provided it is not contrary to law.
i. Preferred shares versus common shares

57. What are preferred shares of stock?
These are shares of stock that are given certain preferences as
may be provided in the articles of incorporation but may be denied
the right to vote.
58. What are common shares of stock?

Common shares are the basic class of stock ordinarily and
usually issued without privileges or advantages except that
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they cannot be denied the right to vote. Owners are entitled to a

pro-rata share in the profits of the corporation and in its assets upon
dissolution and liquidation and, in the management of its affairs.
59. What preferences may be given to preferred shares of stock?

A preferred share of stock’s most common forms may be
classified into two (2): (1) preferred shares as to assets; and (2)
preferred shares as to dividends. The former is a share which gives
the holder thereof the preference in the distribution of the assets
of the corporation in case of liquidation while the latter is a share
which makes the holder entitled to receive dividends to the extent
agreed upon before any dividends at all are paid to the holders of
common stock.239
They may also be given other preferences as may be provided
in the articles of incorporation?10
The board of directors, where authorized in the articles of
incorporation, may also fix the terms and conditions of preferred
shares of stock or any series thereof: Provided, further, That such
terms and conditions shall be effective upon the filing of a certificate
thereof with the SEC.
60. Are holders of preferred shares creditors of the corporation?

The preferences granted to the holders of the preferred
stockholders do not give them a lien upon the property of the
corporation nor make them creditors of the corporation, the right
of the former being always subordinate to the latter. Shareholders,
, both common and preferred, are considered risk-takers who invest
capital in the business and who can look only to what is left after
corporate debts and liabilities are fully paid.241
There is also no guarantee that the shares will receive any
dividends. The right to receive dividends is conditioned on the
availability of the unrestricted retained earnings or surplus profit.
The holders cannot compel the payment of dividends if there is no
surplus profit. The preference as to dividends only applies if the
corporation legally declared dividends.
“Republic Planters Bank v. Hon. Enrique Agana, Sr., G.R. No. 51765, March
3,1997.
’“Section 6, RCC.
’’’Republic Planters Bank, ibid.
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61. Company X issued preferred shares to A. The terms and

conditions of the certificate of stock entitle the holder of
preferred shares to1%quarterly interest as a quarterly dividend.
After the end of the first quarter, A demanded the interest due
but Company X declined to pay for lack of unrestricted retained
earnings. Can A compel the payment of the quarterly interest?
No. Dividends cannot be declared for preferred shares which
were guaranteed a quarterly dividend if there are no unrestricted
retained earnings. “Interest-bearing stocks,” on which the
corporation agrees absolutely to pay interest before dividends
are paid to common stockholders, is legal only when construed as
requiring payment of interest as dividends from net earnings or
surplus only.242
62. What are the kinds of preferred shares as to dividends?

Holders of preferred shares as to dividends are paid first prior
to any distribution to the holders of common shares. Preferred
shares as to dividends may be:
a. Cumulative Preferred Shares: This means that the
stipulated dividend on this type of preferred shares, if not
paid on any given year, shall be added to the dividends
which shall be due the following year/s, and holders of
said preferred shares shall be paid the accumulated
dividends during the accumulated period before dividends
are paid to the holders of common shares. The payment
of cumulative dividends is on the assumption that
unrestricted retained earnings are available to cover the
entire amount. .
b. Non-Cumulative Preferred Shares: This means that if
dividends are not declared for a particular year within
the covered period, the right to receive dividend for such
year is extinguished.
c. Participating Preferred Shares: This means that after
payment of the dividends due to the shares, the holder
thereof is entitled to participate in the remaining
dividends with the holders of the common shares based
on the amount specified in the agreement, otherwise, in
proportion to the common shares.
242Republic Planters Bank v. Agana, G.R. No. 51765, March 3,1997.
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d. Non-Participating Preferred Shares: This means that after

receiving the dividend due on the shares, the remaining
dividends are distributed proportionately to holders of
the common shares.
Preferred shares may also have a combination of the foregoing
features.
ii. Scope of voting rights subject to classification

63. What are voting shares?
These are shares which can vote on all corporate acts requiring
stockholders’ approval. The corporation should always have voting
shares. These are the common shares of stock.
64. What are non-voting shares?

These are shares that are denied the right to vote in the articles
of incorporation. Provided, however, that there shall always be a
class or series of shares which have complete voting rights.
65. What classes of shares may be denied the right to vote?

No share may be deprived of voting rights except those classified
and issued as “preferred” or “redeemable” shares.243
Treasury shares, by their nature, cannot vote and there is no
need to deny them such right in the articles of incorporation.
Delinquent shares are also not entitled to vote244 and similar
to treasury shares, there is no need to deny them such right in the
articles of incorporation. The denial is statutory.
66. In what instances does the law vest the right to vote for non
voting shares?
Holders of non-voting shares shall be entitled to vote on the
following matters:
a. Amendment of the articles of incorporation;
b. Adoption and amendment of bylaws;
243Section 6, RCC.
Z44Section 70, RCC.
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C. Sale, lease, exchange, mortgage, pledge, or other

disposition of all or substantially all of the corporate
property;
d. Incurring, creating, or increasing bonded indebtedness;
e. Increase or decrease of authorized capital stock;
f. Merger or consolidation of the corporation with another
corporation or other corporations;
g- Investment of corporate funds in another corporation or
business in accordance with the RCC; and
h. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph,
the vote required to approve a particular corporate act under the
RCC shall be deemed to refer only to stocks with voting rights.
iii. Founder’s shares

67. What are the revisions under the RCC on the provision on
founders' shares?
a. The RCC made it clear that exclusive right of the holders of
the founders’ shares to vote and be voted as directors shall
not be allowed if its exercise will violate Commonwealth
Act No. 108, otherwise known as the “Anti-Dummy
Law”; R.A. No. 7042, otherwise known as the “Foreign
Investments Act of 1991”; and other pertinent laws.
b. The five (5)-year limitation is counted from the date of
incorporation and not from SEC’s approval.
c. There is no mention of the requirement of SEC’s approval
before the exclusive right to vote and be voted for in the
election of directors can be granted. The approval of the
incorporation is effectively, however, the approval of the
exclusive right to vote and be voted as directors.
68. What are founders' shares?

Founders’ shares are shares classified as such in the articles
of incorporation which may be given certain rights and privileges
not enjoyed by the owners of other stocks. Where the exclusive right
to vote and be voted for in the election of directors is granted, it
must be for a limited period not to exceed five (5) years from the
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date of incorporation: Provided, That such exclusive right shall

not be allowed if its exercise will violate Commonwealth Act No.
108, otherwise known as the “Anti-Dummy Law”; R.A. No. 7042,
otherwise known as the “Foreign Investments Act of 1991”; and
other pertinent laws.246
Note that only the exclusive right to vote and be voted for in
the election of directors is subject to a limited period of five (5) years
from the date of incorporation.
69. The Articles of Incorporation of a corporation provides for

voting rights privilege of its founders* shares, as follows:
"In terms of voting rights, FOUNDERS' shares shall
have a 1:10 ratio as opposed to 1:1 ratio for the COMMON
shares. In the other words, one FOUNDERS' share is
equivalent to ten votes. All shares regardless of whether
it is FOUNDERS' or COMMON shall be allowed to vote on
all matters of the holding corporation, including the right
to vote and be voted for in the election of directors.”
Is the 1:10 voting rights ratio for founders' shares subject
to a limited period not to exceed five (5) years provided under
Section 7 of the RCC?
The 1:10 voting rights ratio for founders’ shares is not subject to
the limited period not to exceed five (5) years provided under Section
7 of the RCC since this provision only applies to the exclusive right
to vote and be voted for in the election of directors.246
iv. Redeemable shares

70. What are redeemable shares?
Redeemable shares are shares classified as such in the
articles of incorporation which may be issued by the corporation
when expressly provided in the articles of incorporation. They are
shares which may be purchased by the corporation from the holders
of such shares upon the expiration of a fixed period, regardless of
the existence of unrestricted retained earnings in the books of the
corporation, and upon such other terms and conditions stated in the
245Section 7, RCC.
246Close Holding Corporation; Founder’s Shares, SEC-OGC Opinion No. 02-10,
January 15, 2010.
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articles of incorporation and the certificate of stock representing the

shares, subject to rules and regulations issued by the SEC.2"
Redeemable shares may be redeemed, regardless of the
existence of unrestricted retained earnings, and provided that the
corporation has, after such redemption, sufficient assets in its books
to absorb corporate debts and liabilities.
71. Can the corporation be compelled to redeem redeemable

shares if it has no available surplus profit?
Yes, if the redeemable shares are mandatory in nature,
the issuing corporation may be compelled to redeem the shares,
regardless of the existence of unrestricted retained earnings.248
It should be noted, however, that redemption may not be made
where the corporation is insolvent or if such redemption will cause
insolvency or inability of the corporation to meet its debts as they
mature. In the case of Republic Planters Bank v. Agana (supra),
while the stock certificate does allow redemption, the option to do
so was clearly vested in the issuing corporation. In any case, the
redemption of said shares cannot be allowed because the Central
Bank made a finding that the bank had been suffering from chronic
reserve deficiency. Such findings resulted in the directive prohibiting
the bank from redeeming any preferred share on the ground that
said redemption would reduce the assets of the bank to the prejudice
of its depositors and creditors.249
v. Treasury shares
72. What are treasury shares?
Treasury shares are shares of stock that have been issued
and fully paid for, but subsequently reacquired by the issuing
corporation through purchase, redemption, donation, or some other
lawful means. Such shares may again be disposed of for a reasonable
price fixed by the board of directors.260
247Section 8, RCC.
™Ibid.
249BAR 2009.
““Section 9, RCC.
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Treasury shares shall have no voting right as long as such

shares remain in the Treasury.261 No dividends can be declared
thereon as corporations cannot declare dividends to themselves.
A stock corporation shall have the power to purchase or acquire
its own shares provided that it has unrestricted retained earnings
in its books to cover the shares to be purchased or acquired. The
following are the legitimate corporate purpose or purposes where a
corporation is allowed to acquire its own shares:
a. To eliminate fractional shares arising out of stock
dividends;
b. To collect or compromise an indebtedness to the
corporation, arising out of the unpaid subscription, in a
delinquency sale, and to purchase delinquent shares sold
during the said sale; and
c. To pay dissenting or withdrawing stockholders entitled
to payment for their share under the provisions of the
RCC.262
If treasury shares are purchased from the stockholder, the
transaction in effect is a return to the stockholders of the value of
their investment in the company and a reversion of the shares to the
corporation.
VI. Incorporation and organization

73. Who composes a corporation?
a. Corporators are those who compose a corporation, whether
as stockholders or shareholders in a stock corporation, or
as members in a nonstock corporation.
b. Incorporators are those stockholders or members
mentioned in the articles of incorporation as originally
forming and composing the corporation and who are
signatories thereof.
c. Board of Directors are generally elected by the stockholders
to conduct the business, control the property, and exercise
corporate powers. Directors may also be elected by their
fellow directors in the cases and under the conditions
^Section 56, RCC.

^Section 40, RCC.
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•450 DIVINA ON COMMERCIAL LAW:
specified in Section 28 of the RCC. They are called the

Board of Trustees in a nonstock corporation.
d. Officers are those appointed to assist the Board to manage
the affairs of the corporation.
a. Promoter
74. What is a promoter?
A promoter is a person who brings about or causes to bring
about the formation and organization of a corporation by bringing
together the incorporators or the persons interested in the
enterprise, procuring subscriptions or capital to the corporation and
setting in motion the machinery which leads to the incorporation of
the corporation itself.263
In actuality though, a corporation is usually formed and
organized by the incorporators themselves, without the need for any
promoter.
75. Is the promoter considered the agent of the corporation?

The promoter of a corporation is not in any sense the agent
of the corporation before it comes to existence, for there cannot be
an agency unless there is a principal. But he may of course become
the agent of the corporation after it has been formed provided
that there is assent on the part of the corporation. He, however,
occupies a fiduciary or quasi-trust relation toward the corporation
when it comes to existence and towards the subscribers prior to its
organization. This fiduciary relation imposes upon the promoter
to act in good faith in all dealings on behalf of the corporation. A
promoter violates this duty, for example, if he secretly acquires a
property which he knows the corporation needs and then sells it
to the corporation for profit.261
76. What are the distinctions between corporators and

incorporators?
a. Incorporators are mentioned in the articles of incorporation
as those who originally form part of the corporation
and are signatories thereof, whereas corporators are
otherwise. ■
263 1 8 Am Jur.2d 647, as cited in De Leon: Corporation Code: Annotated, p. 34.

25118 C.J.S 522, cited in De Leon, ibid., page 65.
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b. Incorporators are corporators while corporators are not

necessarily incorporators.
C. Incorporators in a stock corporation should not exceed
15 whereas the number of corporators may exceed 15
taking into account the number of authorized shares of
the corporation.
Under the OCC, the majority of the incorporators should be
residents of the Philippines while no such requirement is imposed
on corporators under the RCC. Similarly, except for corporation sole,
the number of incorporators should not be less than five (5). These
distinctions no longer hold under the RCC because the requirement
of residency for incorporators was removed and a one (l)-person
corporation is now allowed.
b. Subscription contract
77. What is a 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, notwithstanding the fact that the parties refer to it as
a purchase or some other contract.255
It provides for the kind of shares to be issued, the consideration
for the issuance of the shares, date and other terms of payment.
78. Distinguish purchase/transfer of shares from subscription of

shares.
Purchase/Transfer of Shares Subscription of Shares

Pertains to shares already issued Pertains to unissued shares of the
by the corporation. corporation.
Buyer/transferee cannot exercise Subscriber is entitled to exercise the
the rights pertaining to the rights of a stockholder even without
purchased sales without full full payment of the subscription;
payment of the purchase price, provided the subscriber is not
unless the sale agreement provides delinquent.
otherwise.
255Section 59, RCC.
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The creditor of the corporation The creditor of the corporation may

cannot enforce payment of the enforce payment on the unpaid
unpaid purchase price for lack of subscriptions under the trust fund
privity to the contract. doctrine.
79. May a corporation condone subscription receivables due from

its shareholders?
Upon the acceptance of a stock subscription by a corporation,
the subscription becomes a binding contract to which the subscriber
cannot withdraw. Neither does the corporation have the power to
release an original subscriber from its subscription, and as against
the creditors, a reduction of the capital stock can only take place in
the manner and under the conditions prescribed by law or the charter
of the corporation. To do so would be violative of the Trust Fund
Doctrine since it does not fall under any of the allowable instances
where a corporation may distribute its assets to its creditors and
stockholders. As such, subscription contracts cannot be cancelled by
the board of directors without justifiable cause. This is tantamount to
relieving an original subscriber from the subscription, a contractual
obligation, which a corporation has no power to do so.2M
Subscriptions to the capital of a corporation constitute a fund
to which creditors have a right to look for the satisfaction of their
claims and that the assignee in insolvency can maintain an action
upon any unpaid stock subscription in order to realize assets for the
payment of its debt.
80. May the corporate creditors enforce payment of the unpaid

subscription?
Yes, a creditor is allowed to maintain an action upon any
unpaid subscriptions (in the same collection suit against the
corporation) and thereby step into the shoes of the corporation for
the satisfaction of the debt. To make out a prima facie case in a suit
against stockholders of an insolvent corporation to compel them to
contribute to the payment of its debts by making good the balances
upon their subscriptions, it is only necessary to establish that the
stockholders have not in good faith paid the par value of the stocks
of the corporation. Subscriptions to the capital stock of a corporation
25GRe: Condonation of Subscriptions Receivables or Cancellation of Subscriptions,

SEC-OGC Opinion No. 50-19, October 2019.
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constitute a fund to which creditors have the right to look for the
satisfaction of their claims.267
In Philippine National Bank v. Bitulok Sawmill, et al.,268 the
Supreme Court said that the assignee in an insolvency can maintain
an action upon any unpaid stock subscription in order to realize
assets for the payment of its debt. In case of insolvency, all unpaid
stock subscriptions become payable on demand and are immediately
recoverable. The impheation is that the creditor cannot collect
the unpaid subscription unless there is an insolvency proceeding
involving the corporation.
In Halley u. Printwell, Inc. ,2ra there was no insolvency proceeding
and yet the Supreme Court affirmed the right of the creditor to
enforce the payment of the unpaid subscription in the same collection
suit against the corporation. It is submitted that the appropriate
remedy is to enforce the judgment against the corporation first and
it is only when the writ of execution is returned unsatisfied for lack
of leviable assets sufficient to satisfy the judgment debt that the
judgment against the unpaid subscriber may be enforced. Otherwise,
the unpaid subscriber effectively becomes solidarily liable with the
corporation. Such solidary liability has no basis in law.
c. Pre-incorporation subscription agreements

81. What is a pre-incorporation subscription? When is it
irrevocable?
Pre-incorporation subscription refers to subscription of shares
in a corporation still to be formed. This shall be irrevocable for
a period of at least six (6) months from the date of subscription,
unless all of the other subscribers consent to the revocation, or the
corporation fails to incorporate within the same period or within
a longer period stipulated in the contract of subscription. No pre
incorporation subscription may be revoked after the articles of
incorporation is submitted to the SEC.260
“’Halley v. Printwell, Inc., G.R. No. 157549, May 30, 2011.

268G.R. Nos. L-24177-85, June 29,1968.
“9G.R. No. 157549, May 30, 2011.
26»Section 60, RCC.
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82. What happens to the pre-incorporation subscription if the

application for incorporation is rejected by the SEC?
In Fong v. Duenas,20' the Supreme Court ruled that the
parties’ joint venture agreement to incorporate a company, when
not implemented within the stipulated period, maybe rescinded and
will necessitate the return of the pre-incorporation subscription. By
parity of reasoning, the pre-incorporation subscription should also
be returned if the SEC rejected the application for incorporation.
d. Consideration for stocks

83. What are the allowable forms of consideration for the issuance
of shares of stock?
Consideration for the issuance of stock may be:
a. Actual cash paid to the corporation;
b. Property, tangible or intangible, actually received by the
corporation and necessary or convenient for its use and
lawful purposes at a fair valuation equal to the par or
issued value of the stock issued;
c. Labor performed for or services actually rendered to the
corporation;
d. Previously incurred indebtedness of the corporation;
e. Amounts transferred from unrestricted retained earnings
to stated capital;
f. Outstanding shares exchanged for stocks in the event of
reclassification or conversion;
g- Shares of stock in another corporation; and/or
h. Other generally accepted form of consideration.262
Shares of stock shall not be issued in exchange for promissory
notes or future service. The same considerations provided in this
section, insofar as applicable, may be used for the issuance of bonds
by the corporation.263
261G.R. No. 185592, June 15, 2015.

262 Section 64, RCC.
™Ibid.
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84. Under what conditions may a corporation accept property as

consideration for the issuance of its shares of stock?
A corporation may accept property as consideration for the
issuance of its shares of stock under the following conditions:
a. It must be necessary or convenient for its use and lawful
purposes.
b. It must be fairly valued, at least equal to the par or issued
value of the stock issued.
c. The valuation thereof shall initially be determined by the
stockholders or the board of directors.
d. The valuation is subject to the approval of the SEC.26*
If the shares will not be issued in favor of existing stockholders,
the issuance should be approved by the board of directors, as well
as by the stockholders representing at least 2/3 of the outstanding
capital stock, otherwise, it will amount to a violation of the pre
emptive right of the stockholders.266
85. Under what conditions may a corporation issue its shares of

stock in consideration for the payment of debt?
The conditions are:
a. The debt must be previously existing, thus shares cannot
be used in payment but only as security for future debts.
b. If the shares will be issued not to existing stockholders,
the issuance must be approved by the board of directors,
as well as by the stockholders representing at least 2/3 of
the outstanding capital stock, otherwise, it will amount to
a violation of the pre-emptive right of the stockholders.266
c. If its own shares will be acquired by a bank in payment of
a debt, the acquisition has to be approved by the BSP and
the shares have to be disposed of within six months from
acquisition.267
“‘Section 61, RCC.

“’Section 10 of R.A. No. 8791, otherwise known as the General Banking Law.
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86. What does the law mean by amounts transferred from

unrestricted retained earnings to stated capital as
consideration for the issuance of shares?
The law basically refers to the payment of stock dividends.
Stock dividends are capitalized profits. When the corporation
declares stock dividends, it issues shares of stock to the stockholders
in proportion to their shareholdings in the corporation. They do not
directly pay for these additional shares. The consideration therefor
is the corresponding amounts transferred from retained earnings of
the corporation to capital.
87. Give an example of outstanding shares exchanged for stocks

in the event of reclassification or conversion as a form of
consideration.
A corporation may issue common shares in exchange for
preferred redeemable convertible shares, meaning, the preferred
shares may be converted to common stocks if the corporation fails to
redeem the shares on the date specified in the agreement.
88. Does the board of directors, if authorized by the articles of

incorporation to fix the issued price of no-par value shares,
require a majority vote of the entire board of directors?
No, it only requires a majority of the quorum of the board of
directors. This is consistent with Section 52 of the RCC which states
that unless otherwise provided in the RCC, every decision of the
board of directors when it constitutes a quorum is valid.
e. Articles of Incorporation
89. What are the revisions under the RCC on the provision on
articles of incorporation?
a. An arbitration agreement may be provided in the articles
of incorporation.
b. Filing of the articles of incorporation or amendments
thereto may be in the form of an electronic document in
accordance with the rules on electronic filing of the SEC.
c. The articles of incorporation should include an
undertaking to change the corporate name immediately
upon receipt of notice from the SEC that another
corporation, partnership or person has acquired a prior
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right to the use of such name, that the name has been
declared not distinguishable from a name already
registered or reserved for the use of another corporation,
or that it is contrary to law, public morals, good customs
or public policy.
d. It provides that the corporation shall have perpetual
existence or a fixed term as may be indicated in the
articles of incorporation.
e. There is no need to state that at least twenty-five (25%)
percent of the authorized capital stock above stated
has been subscribed and that at least twenty-five (25%)
percent of the total subscription have been paid as this
double 25% requirement under the OCC has been deleted.
f. There is a requirement of certification of receipt of
the paid-up portion of subscription by the Corporate
Treasurer.
g- Since the requirement of Treasurer’s Affidavit has
already been deleted under the RCC, the format for the
said affidavit is omitted as well.
90. What are the nature and functions of the articles of

incorporation?
It is the document prepared by the incorporators organizing a
corporation containing the matters required by the RCC and filed
with the SEC. It offers the ultimate evidence of the nature and
purpose of a corporation and defines the contractual relationships
between the State and the corporation, the stockholders and the
State, and the corporation and the stockholders.268
i. Contents
91. What are the contents of the articles of incorporation?
The articles of incorporation shall contain substantially the
following matters, except as otherwise prescribed by the RCC or by
special law:
a. The name of the corporation;
2MForest Hills Golf and Country Club, Inc. Gardpro, Inc., G.R. No. 164686,
October 22, 2014.
k
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b. The specific purpose or purposes for which the corporation

is being formed. Where a corporation has more than one
stated purpose, the articles of incorporation shall indicate
the primary purpose and the secondary purpose or
purposes: Provided, That a nonstock corporation may not
include a purpose which would change or contradict its
nature as such;
c. The place where the principal office of the corporation is
to be located, which must be within the Philippines;
d. The term for which the corporation is to exist, if the
corporation has not elected perpetual existence;
e. The names, nationalities, and residence addresses of the
incorporators;
f. The number of directors, which shall not be more than
fifteen (15) or the number of trustees which may be more
than fifteen (15);
g- The names, nationalities, and residence addresses of
persons who shall act as directors or trustees until the
first regular directors or trustees are duly elected and
qualified in accordance with the RCC;
h. If it is a stock corporation, the amount of its authorized
capital stock, number of shares into which it is divided,
the par value of each, names, nationalities, and residence
addresses of the original subscribers, the amount
subscribed and paid by each on the subscription, and a
statement that some or all of the shares are without par
value, if applicable;
i. If it is a nonstock corporation, the amount of its capital,
the names, nationalities, and residence addresses of the
contributors, and amount contributed by each; and
j- Such other matters consistent with law and which the
incorporators may deem necessary and convenient.
An arbitration agreement may also be provided in the articles
of incorporation pursuant to Section 181 of the RCC.269
269Section 13, RCC.
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92. May the articles of incorporation provide for more than one (1)
purpose?
Yes, the articles of incorporation may have more than one (1)
purpose provided that the purposes are not contrary to law, capable
of being lawfully combined and there is only one primary purpose. It
is important to distinguish the primary from the secondary purposes
in the articles of incorporation because the stockholders have the
right to expect that the funds and assets of the corporation should be
primarily devoted to attain its primary purpose. Such disbursement
and use only require board approval. Investment of funds and assets
in the secondary purpose/s require the approval of at least a majority
of the entire board and stockholders representing at least 2/3s of the
outstanding capital stock.270
93. Does the SEC have the authority to inquire whether the
corporation has purposes other than those stated in the
articles of incorporation?
If the corporation’s purpose, as stated in the articles of
incorporation is lawful, then the SEC has no authority to inquire
whether the corporation has purposes other than those stated,
and mandamus will lie to compel it to issue the certificate of
incorporation.271
However, if it turns out that the corporation committed
misrepresentation as to its actual purpose, the SEC may revoke the
corporate franchise and dissolve the corporation.272 The corporation
may also be criminally liable for obtaining corporate registration
through fraud.273
94. What is the importance of indicating in the articles of

incorporationthe principal place of business ofthecorporation?
The principal place of business of a corporation, as stated in
the articles of incorporation, determines its residence or domicile. As
such, the place indicated in the corporation’s articles of incorporation
becomes controlling in determining the venue for the filing of legal
270Section 41, RCC.

271Alicia E. Gala, et al. v. Ellice Agro-Industrial Corporation, et al., G.R. No.
156819, December 11, 2003.
2,2Section 138(d), RCC.
273Section 164, RCC.
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action involving the corporation. The principal office ofthe corporation

is that which is stated in the articles of incorporation and not the
place of its actual operations. In one case, the corporation’s principal
office, as indicated in the articles of incorporation, is Makati but the
case was filed in Mandaluyong where the corporation transferred
its operations. The Supreme Court said the venue was improperly
laid.274
ii. Non-amendable items

95. What are the requisites to amend the articles of incorporation
of a private corporation?
a. Any provision stated in the articles of incorporation may
be amended provided there is no prohibition in the RCC
or special law and the amendment must be for legitimate
purposes.
b. The amendment should be approved by at least 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. The
articles of incorporation of a nonstock corporation may be
amended by the vote or written assent of a majority of the
trustees and at least two-thirds (2/3) of its members.
c. The original and amended articles together shall contain
all provisions required by law to be set out in the articles
of incorporation. Amendments to the articles shall be
indicated by underscoring the change or changes made,
and a copy thereof duly certified under oath by the
corporate secretary and a majority of the directors or
trustees, with a statement that the amendments have been
duly approved by the required vote of the stockholders or
members, shall be submitted to the SEC.276
If the amendments pertain to the increase of capital
stock, the certificate of amendments must contain the
matters set forth in Section 37 of the RCC.
274Hyatt Elevators and Escalators Corporation Goldstar Elevators Phils.,

Inc., G.R. No. 161026, October 24, 2005.
27£Section 15, RCC.
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d. The amendments will take effect upon approval of the

SEC or from the date of filing with the SEC if not acted
upon within six (6) months from the date of filing for a
cause not attributable to the corporation.216
96. What items in the articles of incorporation cannot be amended?

Matters of accomplished fact cannot be amended, such as names
and addresses of the incorporators, date and place of incorporation,
and the notary public before whom the articles of incorporation was
acknowledged. Thus, the incorporator who, after obtaining marriage
annulment, wants to change her name as incorporator to drop the
surname of the husband, may not legally do so. She can however
legally request the Corporate Secretary to change her name as a
stockholder.
97. What are the grounds for disapproval of the articles of

incorporation or amendments thereto?
The SEC may disapprove the articles of incorporation or
any amendment thereto if the same is not compliant with the
requirements of the RCC: Provided, That the SEC shall give the
incorporators, directors, trustees, or officers a reasonable time from
receipt of the disapproval within which to modify the objectionable
portions of the articles or amendment. The following are grounds for
such disapproval:
a. The articles of incorporation or any amendment thereto is
not substantially in accordance with the form prescribed
herein;
b. The purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral or contrary to
government rules and regulations;
c. The certification concerning the amount of capital stock
subscribed and/or paid is false; and
d. The required percentage of Filipino ownership of the
capital stock under existing laws or the Constitution has
not been complied with.
mIbid.
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Additionally, no articles of incorporation or amendment to

articles of incorporation of banks, banking and quasi-banking
institutions, pre-need, insurance and trust companies, NSSLAs,
pawnshops, and other financial intermediaries shall be approved by
the SEC unless accompanied by a favorable recommendation of the
appropriate government agency to the effect that such articles or
amendment is in accordance with law.”7
Other grounds include non-compliance with conditions
imposed by the SEC in relation to the filing of the registration of the
articles of incorporation or amendment thereto and violation by the
corporation of any law, rules, and regulations administered by the
SEC.’”
f. Corporate name; limitations on use of corporate

name
93. What are the limitations on the adoption and use of corporate
name?
Under Section 17 of the RCC, any corporate name is allowed,
provided that none of the following disqualifications are present, to
wit;
a. Not distinguishable from that already reserved or
registered for the use of another corporation.
b. Name is already protected by law.
c. Use is contrary to existing law, rules, and regulations.
Further, appending the following words to the corporate name,
does not mean that it is already distinguishable, to wit:
a. The word corporation, company, incorporated, limited,
limited liability, or an abbreviation of one of such words.
b. Punctuations, articles, conjunctions, contractions,
prepositions, abbreviations, different tenses, spacing, or
number of the same word or phrase.”9
’’’Section 16, RCC.

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99. When may a corporation prohibit the use of a corporate name

by another corporation?
A corporation may prohibit another corporation from adopting
a corporate name if the following requisites are present:
a. that the complainant corporation acquired a prior right
over the use of such corporate name through earlier
registration; and
b. the proposed name is either: not distinguishable from
that already reserved or registered for the use of the
complainant corporation or a name which is already
protected by law or its use is contrary to existing law,
rules and regulations.280
100. What are the remedies available to a corporation against the

unauthorized use of its corporate name?
The remedies are as follows:
a. File a petition with the SEC to compel the other
corporation to change it. Court action is not necessary.
The SEC may order a change of corporate name based on
its authority under the RCC and the undertaking of the
corporation contained in its articles of incorporation to
change its corporate name if it is not distinguishable from
that already reserved or registered for the use of another
corporation.
b. File a complaint against the unauthorized use of the
corporate name under Section 159 of the RCC.
c. If the corporate name is used as a tradename, file a
complaint for infringement of tradename.
101. Is the corporate name "GSIS Family Bank-A Thrift Bank"

distinguishable from BPI Family Bank?
It is not. The only words that distinguish the two are “BPI,”
“GSIS,” and “Thrift.” The first two words are merely the acronyms
of the proper names by which the two corporations identify
““See Indian Chamber of Commerce Phils., Inc. v. Filipino Indian Chamber of

Commerce in the Philippines, Inc., G.R. No. 184008, August 3,2016. Requisites were
made to conform to the RCC.
k
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themselves; and the third word simply describes the classification

of the bank. The overriding consideration in determining whether
a person, using ordinary care and discrimination, might be misled
is the circumstance that both corporations are engaged in the same
business of banking. The word “family” cannot be separated from
the word “bank.” This coined phrase, neither being generic nor
descriptive, is merely suggestive and may properly be regarded as
arbitrary. Arbitrary marks are words or phrases used as a mark that
appear to be random in the context of its use. They are generally
considered to be easily remembered because of their arbitrariness.
They are original and unexpected in relation to the products they
endorse, thus, becoming themselves distinctive service.281
GSIS Family Bank-A Thrift Bank was thus ordered to change
its corporate name. It changed its name to simply “GSIS Thrift
Bank”
102. Discuss the authority of the SEC to order a change of corporate

name.
The SEC, upon determination that the corporate name is: (1)
not distinguishable from a name already reserved or registered for
the use of another corporation; (2) already protected by law; or (3)
contrary to law, rules and regulations, may summarily order the
corporation to immediately cease and desist from using such name
and require the corporation to register a new one. The SEC shall also
cause the removal of all visible signages, marks, advertisements,
labels, prints, and other effects bearing such corporate name.
Upon the approval of the new corporate name, the SEC shall
issue a certificate of incorporation under the amended name.
If the corporation fails to comply with the SEC’s order, the SEC
may hold the corporation and its responsible directors or officers
in contempt and/or hold them administratively, civilly and/or
criminally liable and/or revoke the registration of the corporation.
281GSIS Family Bank-Thrift Bank (Formerly Comsavings Bank, Inc.) v. BPI

Family Bank, G.R. No. 175278, September 23, 2015 — answered to conform to RCC.
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g- Registration, incorporation and commencement of

corporate existence
103. What are the procedural steps to be taken for the registration
and incorporation of a corporation?
a. A person or group of persons desiring to incorporate
shall submit the intended corporate name to the
SEC for verification. If the SEC finds that the name
is distinguishable from a name already reserved or
registered for the use of another corporation, not protected
by law and is not contrary to law, rules and regulations,
the name shall be reserved in favor of the incorporators.282
b. The incorporators shall submit to the SEC the
documentary requirements listed below.
c. Payment of filing fees.
If the SEC finds that the submitted documents and information
are fully compliant with the requirements of the RCC, other relevant
laws, rules and regulations, the SEC shall issue the certificate of
incorporation.
104. When does a corporation commence its corporate existence

and juridical personality?
A private corporation organized under the RCC commences
its corporate existence and juridical personality from the date the
SEC issues the certificate of incorporation under its official seal
and thereupon the incorporators, stockholders/members and their
successors shall constitute a body corporate under the name stated
in the articles of incorporation for the period of time mentioned
therein, unless said period is extended or the corporation is sooner
dissolved in accordance with law.283
A corporation does not acquire legal personality from the mere
execution of the articles of incorporation or its filing with the SEC.
No amount of good faith on the part of the incorporators that they
are duly organized will suffice. It commences its corporate existence
and acquires juridical personality from the date the SEC issues the
certificate of incorporation under its official seal.
“Section 18, RCC.

Îbid.
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Thus, the owner, whose real property, was contributed by

another person as the latter’s subscription to the shares of stock
of the proposed corporation cannot sue for reconveyance of the
property the proposed corporation, pending SEC approval of the
incorporation. The suit should be directed against the treasurer who
received the property in trust for the corporation.284
A corporation created under a special law acquires legal
personality upon effectivity of the special law creating it or compliance
with the conditions imposed by such law for the commencement of
corporate existence. In one case, a sports federation was registered
with the SEC but the Supreme Court held the registration was
not enough to confer upon it legal personality because the law
creating sports federation, at that time, required accreditation
from the appropriate government agency before it can acquire legal
personality.285
h. Election of directors or trustees

105. What are the requisites for the election of the directors or
trustees to be valid?
a. Except when the exclusive right to be voted as directors
is reserved for holders of founders’ shares under Section 7
of the RCC, every stockholder or member has the right to
nominate the director or trustee to be elected.
b. There must be a notice of meeting sent to the stockholders
in accordance with the form and mode under the bylaws.***
c. The owners of the majority of the outstanding capital
stock or the majority of the members entitled to vote
must be present, either in person or by a representative
authorized to act by a written proxy. If voting through
remote communication or in absentia will be allowed,
such voter, voting through said means, shall be deemed
present for purposes of counting the majority/quorum.
2MBAR 1978.
Înternational Express Travel and Tour Services Court of Appeals, Henri
Kahn, el al., G.R. No. 119002, October 19, 2000.
286Section 50, RCC.
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d. The meeting must be presided by the officer indicated

under the bylaws.
e. The election must be by ballot if requested by any voting
stockholder or member.
f. For stock corporations, the stockholders may cast such
number of votes based on the shares registered in their
names in the books of corporation multiplied by the whole
number of directors to be elected.
g- On the other hand, for nonstock corporations, unless
otherwise provided in their articles of incorporation or
bylaws, members may cast as many votes as there are
trustees to be elected but may not cast more than one (1)
vote for one (1) candidate.
h. The nominees receiving the highest number of votes shall
be duly elected as directors or trustees.
i. The elected directors or trustees must possess all of the
qualifications and none of the disqualifications under the
RCC and the bylaws of the corporation.
106. How many votes are stockholders entitled to cast?

For stock corporations, the stockholders may cast such number
of votes based on the shares registered in their names in the books of
the corporation, at the time specified in the bylaws, or by the board
of directors or trustees, multiplied by the total number of directors
to be elected.
To illustrate, if a stockholder owns one thousand (1,000) shares
and there are 15 directors to be elected, said stockholder is entitled
to cast a total of fifteen thousand (15,000) votes.
107. How many votes are members of nonstock corporations

entitled to cast?
For nonstock corporations, unless cumulative voting is allowed
in their articles of incorporation or bylaws, members may cast as
many votes as there are trustees to be elected but may not cast more
than one (1) vote for one (1) candidate.
Hence, if there are six (6) trustees to be elected, a member has
six (6) votes but he cannot cast more than one (1) vote for one (1)
candidate. However, if cumulative voting is allowed by the articles
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or bylaws, he can cast all the six (6) votes in favor of any nominee or
spread out the six (6) votes among the nominees as he deems fit?’
108. What are the methods of voting for election of directors?

The stockholder may resort to straight voting or cumulative
method of voting.
Straight voting means voting such number of shares for as
many persons as there are directors to be elected.
Under the cumulative method of voting, he may cumulate said
shares and give one (1) candidate as many votes as the number of
directors to be elected multiplied by the number of the shares owned
or distribute them on the same principle among as many candidates
as may be seen fit: Provided, That the total number of votes cast
shall not exceed the number of shares owned by the stockholders
as shown in the books of the corporation multiplied by the whole
number of directors to be elected.288
Under this provision, there are two (2) methods of cumulative
voting: cumulative voting for one (1) candidate, and cumulative
voting by distribution.
Under the first method, a stockholder is allowed to concentrate
his votes and “give one candidate as many votes as the number of
directors to be elected multiplied by the number of his shares shall
equal.” By way of example, suppose a stockholder owns 200 shares
of stock and there are five (5) directors to be elected, he is entitled
to 1,000 votes all of which he may cast in favor of anyone candidate.
On the other hand, by the second method, a stockholder 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. To illustrate, a stockholder
with 100 shares of stock is entitled to 500 votes if there are five (5)
directors to be elected. He may cast his votes in any combination
desired by him provided that the total number of votes cast by him
does not exceed 500, which is the number of shares owned by him
multiplied by the total number of directors to be elected.289
z87BAR2011.
^Section 23, RCC.
289Re: Cumulative Voting in Condominium Corporation, SEC-OGC Opinion
No. 10-14, June 2, 2014.
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109. What is the procedure for voting if the corporation is required

to have independent directors or trustees?
The election of independent directors for a stock corporation
must be made together with the election for regular directors. The
manner of voting will also be the same. The stockholder may vote
such number of shares registered in his name in the books of the
corporation multiplied by the number of directors to be elected
inclusive of independent directors. He can cumulate his votes for
regular directors alone, for independent directors alone, or for a
Combination of both regular and independent directors as long as
his votes will not exceed the shares of stock he owns multiplied by
the total number of directors to be elected.
Ij
For example, a corporation vested with public interest has 10

directors under its articles of incorporation, with eight (8) regular
directors and two (2) independent directors. There are a total
of 18 candidates for regular directors and five (5) candidates for
independent directors. The votes for regular directors should be
segregated from the votes for independent directors. The top eight
(8) candidates who obtained the highest number of votes among the
18 nominees shall be considered elected as regular directors. The
top two (2) candidates, in turn, for independent directors will then
be considered elected even if said nominees obtained less votes than
the nominees for regular directors.290
The same procedure may likewise be applied for nonstock
corporation whether cumulative method of voting is allowed or
not. The candidates who obtained the highest number of votes
among all nominees for regular trustees and independent trustees,
respectively, shall be duly elected as such trustees.
110. What shares of stock are not included in the determination of

the majority of outstanding capital stock to elect directors of a
stock corporation?
a. Non-voting shares;
b. Delinquent shares; and
c. Treasury shares.
^See Procedure for Election of Directors, SEC-OGC Opinion No. 19-11, March
23,2011.
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However, unpaid shares which are not delinquent are included

in the said determination of the majority.
111, What happens if no election is held, or the owners of majority

of the outstanding capital stock or majority of the members
entitled to vote are not present in person, by proxy, or through
remote communication or not voting in absentia at the meeting?
The meeting may be adjourned and the outgoing directors
or trustee shall serve in a hold-over capacity.291
The non-holding of elections and the reasons therefor shall be
reported to the SEC within 30 days from the date of the scheduled
election. The report shall specify a new date for the election, which
shall not be later than 60 days from the scheduled date.
If no new date has been designated, or if the rescheduled
election is likewise not held, the SEC may, upon the application of
a stockholder, member, director or trustee, and after verification of
the unjustified non-holding of the election, summarily order that an
election be held. The SEC shall have the power to issue such orders
as may be appropriate, including orders directing the issuance
of a notice stating the time and place of the election, designated
presiding officer, and the record date or dates for the determination
of stockholders or members entitled to vote.
Notwithstanding any provision of the articles of incorporation
or bylaws to the contrary, the shares of stock or membership
represented at such meeting and entitled to vote shall constitute a
quorum for purposes of conducting an election under this section.®1
i. Adoption of bylaws
112. What are the nature and functions of bylaws?
Bylaws are set of rules and regulations adopted by the
corporation for its internal government, and to regulate the conduct
and prescribe the rights and duties of its members towards itself and
among themselves in reference to the management of its affairs.191
The corporation has the inherent and, at the same time, express
power to adopt bylaws.
291Section 23, RCC.

292Section 25, RCC.
2MJohn Gokongwei, Jr. v. Securities and Exchange Commission, et al„ G.R.
No. L-45911, April 11, 1979.
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1 i
Together with the articles of incorporation, bylaws of a

corporation are the fundamental documents governing the conduct
of corporate affairs; they establish the norms of procedure for
exercising rights, and reflect the purposes and intentions of the
incorporators.
113. How are the bylaws adopted?

* For the adoption of bylaws by the corporation, the affirmative
vote of the stockholders representing at least a majority of the
outstanding capital stock, or of at least a majority of the members
in case of nonstock corporations, shall be necessary. The bylaws
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 by a majority of the directors or trustees
and countersigned by the secretary of the corporation, shall be filed
with the SEC and attached to the original articles of incorporation.
Notwithstanding the provisions of the preceding paragraph,
bylaws may be adopted and filed prior to incorporation; in such case,
such bylaws shall be approved and signed by all the incorporators
and submitted to the SEC, together with the articles of incorporation.
The SEC shall not accept for filing the bylaws or any
amendment thereto of any bank, banking institution, building and
loan 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 bylaws or amendments
are in accordance with law.201
i. Contents of bylaws
114. What are the contents of bylaws?
A private corporation may provide the following in its bylaws:
a. The time, place and manner of calling and conducting
regular or special meetings of the directors or trustees;
b. The time and manner of calling and conducting regular or
special meetings and mode of notifying the stockholders
or members thereof;
^’Section 45, RCC.
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C. The required quorum in meetings of stockholders or

members and the manner of voting therein;
d. The modes by which a stockholder, member, director, or
trustee may attend meetings and cast their votes;
e. The form for proxies of stockholders and members and
the manner of voting them;
f. The directors’ or trustees’ qualifications, duties
and responsibilities, the guidelines for setting the
compensation of directors or trustees and officers, and the
maximum number of other board representations that an
independent director or trustee may have which shall, in
no case, be more than the number prescribed by the SEC;
g- The time for holding the annual election of directors or
trustees and the mode or manner of giving notice thereof;
h. The manner of election or appointment and the term of
office of all officers other than directors or trustees;
i. The penalties for violation of the bylaws;
j. In the case of stock corporations, the manner of issuing
stock certificates; and
k. Such other matters as may be necessary for the proper
or convenient transaction of its corporate affairs for
the promotion of good governance and anti-graft and
corruption measures.
An arbitration agreement may be provided in the bylaws
pursuant to Sections 46 and 181 of the RCC.
115. Will the non-submission of bylaws result in the automatic

dissolution of the corporation?
Non-filing of the bylaws will not result in the automatic
dissolution of the corporation. Under P.D. No. 902-A, the SEC is
empowered to suspend or revoke, after proper notice and hearing, the
franchise or certificate of registration of a corporation on the ground
inter alia of‘failure to file bylaws within the required period.295
295Loyola Grand Villas Homeowners (South) Association, Inc. v. Hon. Court

of Appeals, Home Insurance and Guaranty Corporation, Emden Encarnacion and
Horatio Aycardo, G.R. No. 117188, August 7,1997.
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r
Since the RCC removed the one (1) month period to submit
the bylaws, does it mean that non-submission of the bylaws ceased
to be a ground for the suspension or revocation of the certificate
of registration? It appears so. But what if the corporation does not
at all adopt any bylaws? What is the status of the corporation in
the meantime? In Sappari K. Sawadjaan v. Court of Appeals,** the
Supreme Court held that at the very least, by its failure to submit
its bylaws on time, the corporation involved in that case may be
considered a de facto corporation whose right to exercise corporate
powers may not be inquired into collaterally in any private suit to
which such corporations may be a party. The corporation involved
was Al-Amanah Investment Bank of the Philippines. While it was
not a private corporation but a corporation created under a special
law (R.A. No'.- 6848), the Supreme Court, nevertheless, applied the
provisions of the then OCC and the SEC Rules and Regulations for
Suspension/Revocation of the Certificate of Registration.
In actuality though, one of the SEC’s documentary
requirements for incorporation is the bylaws of the proposed
corporation. Nevertheless, for academic discussion, it is submitted
that a corporation which has not adopted bylaws, after incorporation,
should be considered a de facto corporation. It has all the powers
and privileges of a corporation under the RCC until the State
assails its existence in a direct proceeding. But because the one
(l)-month period to submit the bylaws was removed, it may adopt
the bylaws anytime and the basis of the suit against the corporation
is only the inaction or refusal of the corporation to adopt and submit
bylaws despite the order from the SEC.
ii. Binding effects

116. Are the bylaws of the corporation binding on third parties?
No, bylaws are only binding among the stockholders and
members of the corporation. To be bound, a third party must
have acquired knowledge of the pertinent bylaws at the time the
transaction or agreement was entered into. Thus, a provision in the
bylaws of a country club granting it a preferred lien over the share of
stock of a member for unpaid dues is not binding on the pledgee of the
same share of stock if the latter had no actual knowledge of it when
the shares were assigned to it as security for a loan transaction.2”
2MG.R. No. 141735, June 8, 2005.

“’China Banking Corporation v. Court of Appeals, G.R. No. 117504, March
26,1997.
k
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In another case, a school questioned the validity of the

employment contract entered into with its instructor because the
signatory thereon was not the Chairman of the Board as required
by its bylaws. However, since bylaws operate merely as internal
rules among the stockholders, they cannot affect or prejudice third
persons who deal with the corporation, unless they have knowledge
of the contents of bylaws.298
117. When do bylaws become effective?

Under Section 45 of the RCC, bylaws become effective only
upon the issuance of the SEC of a certification that the bylaws are
in accordance with the RCC.
Amended or new bylaws become effective upon the issuance by
the SEC of a certification that the same is in accordance with the
RCC and other relevant laws.299
Hi. Amendments
118. How are bylaws amended or revised?
Under Section 47 of the RCC, bylaws may be amended by at
least majority of the board of directors or trustees and the owners of
at least majority of the outstanding capital stock in case of a stock
corporation or of the members in case of a nonstock corporation, at a
regular or special meeting duly called for the purpose.
Owners of two-thirds (2/3) of the outstanding capital stock of
stock corporations or two-thirds (2/3) of the members in a nonstock
corporation can delegate to the board of directors or trustees the
power to amend or repeal the bylaws or adopt new bylaws. This
delegation is revoked by the vote of stockholders owning or
representing a majority of the outstanding capital stock or a majority
of the members at a regular or special meeting.
Whenever the bylaws are amended or new bylaws are adopted,
the corporation shall file with the SEC such amended or new
bylaws and, if applicable, the stockholders’ or members’ resolution
authorizing the delegation of the power to amend and/or adopt new
298PMI Colleges v. The National Labor Relations Commission and Alejandro

Galvan, G.R. No. 121466, August 15, 1997.
299Section 47, RCC.
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bylaws, duly certified under oath by the corporate secretary and a

majority of the directors or trustees.300
119. May the bylaws reflect the actual delegation of authority to the
board of directors to amend the bylaws?
Under the RCC, the delegation of authority should be made
through a shareholders’ or members’ resolution. The bylaws cannot
reflect the actual delegation. The delegated authority is temporary.
It may be revoked anytime by a majority vote of the shareholders or
members.301 If the delegation is in the bylaws, the authority cannot
be simply recalled for it would have required an amendment to the
bylaws itself.
j. Effects of non-use of corporate charter

120. What are the revisions under the RCC regarding the non-use of
corporate charter?
a. The period to organize and commence business is fixed
at five (5) years from incorporation. Under the OCC,
the corporation must organize within two (2) years from
incorporation.
b. The SEC is given the authority to place a corporation under
delinquent status but only after due notice and hearing,
that is, if a corporation has commenced its business but
subsequently becomes inoperative for a period of at least
five (5) consecutive years.
c. A delinquent corporation shall have a period of two
(2) years to resume operations and comply with all
requirements that the SEC shall prescribe. Upon
compliance by the corporation, the SEC shall issue an
order lifting the delinquent status. Failure to comply
with the requirements and resume operations within the
period given by the SEC shall cause the revocation of the
corporation’s certificate of incorporation.

“‘SEC-OGC Opinion 18-08, dated April 20, 2018.
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d. The SEC shall also give reasonable notice to, and

coordinate with the appropriate regulatory agency
prior to the suspension or revocation of the certificate of
incorporation of companies under their special regulatory
jurisdiction.
121. When should the corporation formally organize and commence

its business?
A corporation should formally organize and commence its
business within five (5) years from the date of its incorporation,
otherwise, its certificate of incorporation shall be deemed revoked
as of the day following the end of the five (5)-year period.302
However, if a corporation has commenced its business but
subsequently becomes inoperative for a period of at least five (5)
consecutive years, the SEC may, after due notice and hearing, place
the corporation under delinquent status.
Note that failure to formally organize and commence business
within five (5) years from incorporation results to the automatic
revocation of the certificate of incorporation, whereas commencement
of business but subsequent lack of operation for five (5) consecutive
years does not.
122. What is the consequence if a corporation is placed in delinquent

status?
A delinquent corporation shall have a period of two (2) years to
resume operations and comply with all requirements that the SEC
shall prescribe. Upon compliance by the corporation, the SEC shall
issue an order lifting the delinquent status. Failure to comply with
the requirements and resume operations within the period given by
the SEC shall cause the revocation of the corporation’s certificate of
incorporation.
The SEC shall give reasonable notice to, and coordinate with the
appropriate regulatory agency prior to the suspension or revocation
of the certificate of incorporation of companies under their special
regulatory jurisdiction.
“Section 21, RCC.
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VII. Corporate powers

123. What are the classifications of corporate powers and capacity?
The powers of a corporation can be classified as follows:
a. Express powers — those which are expressly granted
under the RCC303 and those embodied in the corporation’s
articles of incorporation, as sanctioned by the State.
b. Implied or incidental powers - these are the corporation’s
“powers, attributes and properties . . . incident to its
existence,” which may be “essential or necessary to carry
out its purpose or purposes as stated in its articles of
incorporation.”304
c. Inherent powers — those which are not expressly stated
but are deemed to be within the capacity of corporate
entities. Incidental powers are also called inherent
corporate powers and include those which a corporation
can exercise by the mere fact of its corporate existence,
such as:
i. Right to succession
ii. Right to have a corporate name
iii. Right to adopt its own bylaws
The inherent powers of the corporation are also included in the
enumeration of express powers under Section 35(k) of the RCC.
Acts outside these powers are ultra vires acts. The statutory
provision prohibiting them is Section 44 of the RCC.
124. Give example of implied or incidental powers.

In the case of National Power Corporation v. Vera,305 the
stevedoring services which involve the unloading of the coal
shipments into the NPC pier for its eventual conveyance to the
power plant were considered as incidental and indispensable to the
operation of the plant. The Court ruled that, “a corporation is not
“Sections 35 to 43.
^‘Corporate Powers: Ultra Vires Acts, SEC-OGC Opinion No. 20-09, August
4,2009.
“National Power Corp. v. Vera, G.R. No. 83558, Third Division, February 27,
1989, J. Cortes.
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restricted to the exercise of powers expressly conferred upon it by

its charter, but has the power to do what is reasonably necessary or
proper to promote the interest or welfare of the corporation,”
a. General powers; theory of general capacity

125. What is the theory of general capacity?
Under the theory of general capacity, a corporation holds such
powers which are not prohibited or withheld from it by general laws.
The general powers of a corporation are enumerated under
Section 35 of the RCC, to wit-.
a. To sue and be sued in its corporate name;
b. To have perpetual existence unless the certificate of
incorporation provides otherwise;
c. To adopt and use a corporate seal;
d. To amend its articles of incorporation in accordance with
the provisions of the RCC;
e. To adopt bylaws, not contrary to law, morals or public
policy, and to amend or repeal the same in accordance
with the RCC;
f. In case of stock corporations, to issue or sell stocks to
subscribers and to sell treasury stocks in accordance with
the provisions of the RCC; and to admit members to the
corporation if it be a nonstock corporation;
g- To purchase, receive, take or grant, hold, convey, sell,
lease, pledge, mortgage, and otherwise deal with such
real and personal property, including securities and
bonds of other corporations, as the transaction of the
lawful business of the corporation may reasonably and
necessarily require, subject to the limitations prescribed
by law and the Constitution;
h. To enter into a partnership, joint venture, merger,
consolidation, or any other commercial agreement with
natural and juridical persons;
i. To make reasonable donations, including those for
the public welfare or for hospital, charitable, cultural,
scientific, civic, or similar purposes: Provided, That no
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r
foreign corporation shall give donations in aid of any

political party or candidate or for purposes of partisan
political activity;
j. To establish pension, retirement, and other plans for the
benefit of its directors, trustees, officers, and employees;
and
k. To exercise such other powers as may be essential or
necessary to carry out its purpose or purposes as stated
in the articles of incorporation.300
126. Discuss the specific powers of the corporation under the

theory of general capacity.
Power of a Corporation to Sue and Be Sued in its Corporate
Name
Under Section 35 of the RCC, read in relation to Section 22, it is
clear that where the corporation is the injured party, the power to sue
is lodged with the board of directors or trustees. For this purpose, the
board may authorize a representative of the corporation to perform
all necessary physical acts, such as the signing of documents. Such
authority may be derived from the bylaws or from a specific act of
the board of directors, i.e., a board resolution. In the absence of any
clear authority from the board, charter, or by-laws, no suit may
be maintained on behalf of the corporation. A case instituted by a
corporation without authority from its board of directors is subject
to dismissal on the ground of failure to state a cause of action.307
Thus, in the absence of proof that he was authorized by
the board, a minority stockholder and member of the board had
no authority to sue (for violation of B.P. Big. 22) on behalf of the
corporation308 unless he is suing on a derivative cause of action.
It is also not lodged with the President of the corporation. In
one case, it was held that a derivative suit should not prosper if it is
filed by the president, not authorized by the corporate shareholder
for whose benefit the shares are held.309
C

“’Ago Realty & Development Corporation v. Dr. Angelita F. Ago, el al., G.R.
Nos. 210906 and 211203, October 16, 2019.
““Tam Wing Talk v. Makasiar, G.R. No. 122452, January 29, 2001.
3o9Nora Bitong v. Court of Appeals, G.R. No. 123553, July 13,1998.
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•180 DIVINA ON COMMERCIAL LAW:
The only instance that board resolution is not necessary in filing

legal action on behalf of the corporation is through a derivative suit.
A derivative suit is an action filed by a minority stockholder in the
name and on behalf of the corporation to enforce a corporate right
or cause of action against the directors and officers who committed
a wrongful act against the corporation. Obviously, the directors who
committed the wrongful act, being in control of the corporation, are
not expected to adopt a resolution to authorize the filing of legal
action to nullify their very own acts. To require a board resolution
on the part of the suing stockholder will render illusory the right of
a stockholder to file a derivative suit.
However, where a corporation under the effective control of
the majority is wronged, board-sanctioned litigation should take
precedence over derivative actions. After all, the law expressly vests
the power to sue in the board of directors, and a remedy based on
equity, such as the derivative suit, can prevail only in the absence of
one provided by statute. In other words, majority stockholders who
have undisputed corporate control cannot resort to derivative suits
when there is nothing preventing the corporation itself from filing
the case.310
b. Power of the Corporation to Have Perpetual Existence
As previously discussed, unlike the OCC which prescribed a
maximum corporate term of 50 years unless extended, corporations
are now expressly allowed to have perpetual existence unless their
certificate of incorporation provides otherwise.
&L. Power of the Corporation to Issue or Sell Stocks to
Subscribers
The power of the corporation to issue stocks includes the
authority to set the terms and conditions of the issuance. These may
include terms and dates of payment. Ordinarily, the 25% payment
requirement for subscription only applies in case of an increase of
capital stock. The corporation, however, by stipulation, may require
that 25% of the subscription be likewise paid upon issuance of the
shares and the balance on a specified date.
3,0Ago Realty, ibid.
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Power of Corporation to Deal with Properties

The RCC expressly allows corporations "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." This, however, is subject
to the following limitations:
i. It must be in furtherance of the purpose for which
the corporation was organized.
ii. It is subject to Constitutional limitations.
1) Corporations cannot acquire public lands
except by lease, for a period not exceeding 25
years, renewable for not more than 25 years,
and not to exceed 1,000 hectares in area.311
2) Only corporations at least 60 per centum of
whose capital is owned by Filipino citizens can
acquire private lands.312
iii. It is subject to the provisions of special laws such
as the Bulk Sales Law, Philippine Competition Act,
and other related laws.313
It shall be noted that under Section 36 of the OCC, corporations
were expressly allowed to only enter into merger or consolidation
with other corporations as a form of corporate combination.
g,. Power of Corporation to Make Donations
There is no more prohibition for domestic corporations to
donate in favor of a political party or candidate.
Hence, the following are the requisites for a valid donation by
a corporation:
a. The donation must be reasonable;
b. It must be for a valid purpose including public welfare
or for hospital, charitable, cultural, scientific, civic,
or similar purposes; and
311Section 3, Article XII, 1987 Constitution.

312Section 7, Article XII, 1987 Constitution.
3,3Section 39, RCC.
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C. The donation must bear a reasonable relation to the

corporation’s interest and must not be so remote and
fanciful.
For foreign corporations, there is an additional requirement in
making donations:
The donation must not be in aid of any:
i. Political party;
ii. Candidate; or
iii. Partisan political activity.
f. Power of Corporation to Provide Gratuity Pay
Providing gratuity pay is one of the express powers of the
corporation and therefore, resolutions duly passed by the board
approving the grant of gratuity pay to the employees of the
corporation are not ultra vires. The grant of gratuity pay does
not require shareholders’ approval as it is not tantamount to the
sale, lease, exchange or disposition of all or substantially all of the
corporation’s assets.31,1
b. Specific powers; theory of specific capacity
127. What is the Theory of Specific Capacity?

Under the Theory of Specific Capacity, a corporation cannot
exercise powers except those expressly or impliedly given to it.
The specific powers of a corporation can be found in Sections 36
to 43 of the RCC.
314Lopez Realty, Inc. v. Fontecha, G.R. No. 76801, Second Division, August 11,
1995.
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128. What are the different corporate powers and their respective
voting requirements?
Powers of Board of Directors Outstanding Capital

Corporation Stock (or members,
for nonstock
corporations)
Sec. 15 — Amendment At least majority of At least 2/3 of the
of Articles of the board outstanding capital
Incorporation stock
Sec. 23 - Election of At least majority

Directors of the outstanding
capital stock
Sec. 24 - At least majority of

Appointment of the board
Corporate Officers
Removal of Corporate At least majority of
Officers the board
Sec. 27 - Removal of At least 2/3 of the

Directors/Trustees outstanding capital
stock
Sec. 28 - Filling If the ground is If the ground is

Vacancy in the Board not expiration of expiration, removal,
the term, removal, increase in number
increase in number of of directors; or If
board seats and the the ground is not
remaining directors expiration, removal,
constitute a quorum increase in number
— Majority of the of board seats but the
remaining directors/ remaining directors
trustees do not constitute a
quorum - at least
majority of the
outstanding capital
stock
Sec. 29 - Payment At least majority

of Compensation to of the outstanding
Directors capital stock
Sec. 34 — Majority of the

Appointment of quorum
the members of the
Executive Committee
k
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for nonstock
corporations)
Sec. 34 - Creation of Majority of the
Special Committees quorum .
Sec. 36 - Extension/ At least majority of At least 2/3 of the
Shortening of the the board outstanding capital
Term stock
Sec. 37 - Incurring, At least majority of At least 2/3 of the
Creating or the board outstanding capital
Increasing Bonded stock
Indebtedness;
Increasing or
Decreasing Capital
Stock
Incurring Debt in the Majority of the
Ordinary Course of quorum
Business
Sec. 39 - Sale or In the ordinary
other Disposition of course of business <
Assets - Majority of the
quorum
All or substantially At least 2/3 of the
all of corporate assets outstanding capital
- At least majority of stock
the board
Sec. 41 — Invest Majority of the
Funds in the Primary quorum
Purpose
Invest Funds to Majority of the

Incidental Purpose quorum
for which Corporation
is Created
Invest the Funds in a At least majority of At least 2/3 of the
Secondary Purpose or the board outstanding capital
another business stock
Sec. 42 - Declaration Majority of the

of Cash Dividends quorum
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for nonstock
corporations)
Cash Dividends
Sec. 42 - Declaration Majoritôfjthe At least 2/3 of the
of Stock Dividends ( quorum J outstanding capital
stock
Sec. 43 - Enter Majority of the At least majority

into Management quorum for both of the outstanding
Contract managed and capital stock of
managing corporation each managed and
managing corporation
(but at least 2/3 of the
outstanding capital
stock is required
from the managed
corporation in case
interlocking directors
and stockholders)
Sec. 45 - Adoption, of Majority of the
By-laws « outstanding capital
stock
Sec. 46 - Amendment At least majority of At least majority
of Bylaws the board of the outstanding
capital stock.
If authority to amend
will be delegated by
stockholders to the
board at least 2/3
of the outstanding
capital stock.
Revocation of the
delegation made
to the Board-At
least majority of the
outstanding capital
stock.
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for nonstock
corporations)
Sec. 61 - Fixing Majority of the or At least majority
the Issued Value quorum (pursuant to of the outstanding
of No Par Value authority conferred capital stock
Shares (if not fixed by the Articles of
in the Articles of Incorporation or the
Incorporation) Bylaws)
Sec. 75 - Merger or At least majority of At least 2/3 of the
Consolidation the board outstanding capital
stock
Sec. 102 - At least majority of At least 2/3 of the
Amendment the board outstanding capital
of articles of stock
incorporation of a
close corporation
Sec. 134 - Voluntary At least majority of At least majority
Dissolution Where No the board of the outstanding
Creditors are Affected capital stock
Sec. 135-Voluntary At least majority of At least 2/3 of the

Dissolution Where the board outstanding capital
Creditors are Affected stock
c. Power to extend or shorten corporate term

129. When may the power to extend or shorten the corporate term
be exercised?
This power to extend the corporate term may be exercised in
case the corporation has opted to have a fixed term, as specified in
its articles of incorporation, in lieu of perpetual existence, and under
the conditions specified by the RCC.
On the other hand, the corporate term may be shortened for
corporations with a specified term in the articles of incorporation or
even those with perpetual existence.
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130. What are the requirements for extending or shortening the

corporate term?
The requirements are as follows:
a. At least majority vote of the board;
b. Ratification by the stockholders representing at least 2/3
of the outstanding capital stock or by at least 2/3 of the
members in case of nonstock corporations;
c. Written notice of proposed action and the time and place
of the meeting must be given to stockholders’ or members’
residences, served personally or sent electronically;
d. The extension or shortening of corporate term entails an
amendment of the articles of incorporation. As such, it
has to comply with the requirements of Section 15 which
requires a favorable endorsement of the appropriate
government agency in case of special corporations (banks,
banking and quasi-banking institutions, pre-need,
insurance and trust companies, NSSLAs, pawnshops,
and other financial intermediaries); and
e. The extension must be done during the lifetime of the
corporation but not earlier than three (3) years prior to
the original or subsequent expiry date unless there are
justifiable reasons for an earlier extension as may be
determined by the SEC.316
131. What is the effect of the failure of the corporation to extend its
corporate term?
In the case of Philippine National Bank v. Court of First
Instance of Rizal, Pasig,3'0 the Supreme Court ruled that upon the
expiration of the period fixed in the articles of incorporation, in the
absence of compliance with the legal requisites for the extension of
the period, the corporation ceases to exist and is dissolved ipso facto.
The automatic dissolution of the corporation is no longer applicable
under the RCC given the option available to the corporation to revive
the corporate term.317 Since the period of revival is not indicated in
’‘’Section 11, RCC.

316Philippine National Bank v. Court of First Instance of Rizal, Pasig, G.R. No.
63201, First Division, May 27,1992.
’‘’Section 11, RCC.
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the RCC, the option may be exercised within a reasonable period,

but prior to the dissolution and liquidation of the corporation. What
is a reasonable period is for the SEC to determine.
132. What is the remedy available to the stockholder not in favor of

the extension of corporate term?
The stockholder not in favor of extension of the corporate term
may exercise his appraisal right,318 that is, he may get out of the
corporation and demand for the payment of the fair value of his
shares subject to the conditions specified in Section 80 of the RCC.
133. May a stockholder also exercise appraisal right in case of

shortening of the corporate term?
Yes, a stockholder may also exercise appraisal right in case of
shortening of the corporate term. While Section 36 of the RCC refers
to the remedy of appraisal right only in case of extension of corporate
term, Section 80 of the RCC also provides for the same remedy in
case a stockholder votes against the shortening of corporate term.
It should be stressed, however, in relation to the appraisal
right of the dissenting stockholder, a distinction should be made
on whether the shortening of the term is intended to dissolve the
corporation or not. If the intention is to dissolve the corporation,
the exercise of appraisal right will be a mere superfluity, since the
dissolution of the corporation necessarily involves the distribution
of assets to the stockholders after the satisfaction of the claims of
corporate creditors.
d. Power to increase or decrease capital stock or incur,

create, increase bonded indebtedness
134. What are the practical reasons for increasing the capital stock
of the corporation?
The practical reasons are as follows:
a. To obtain additional funds — an increase in the capital
stock entails compliance with the 25% subscription-25%
payment requirement; in which case, the corporation is
guaranteed to obtain fresh equity from the stockholders.
3,8Section 36, RCC.
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b. To acquire corporate assets - Section 37 of the RCC

provides that the required additional paid-in capital can
be paid in cash or property. Moreover, Section 61 of the
RCC provides that a property may be used as consideration
for the issuance of shares. The properties exchanged for
shares become the assets of the corporation.
c. To support stock dividend declaration- if the unsubscribed
shares of the authorized capital stock of the corporation
are not sufficient to accommodate the shares that the
corporation may issue as a result of the stock dividends,
the capital stock must be increased to support such stock
dividend. Over-issuance of shares is not allowed, being an
u/tra vires act.3'9
135. The authorized capital stock of ABC Corporation is PhplOO

million divided into 100,000,000 shares with par value of Phpl/
share. The subscribed capital stock is P50,000,000 divided into
50,000,000 shares with par value of PhpVshare and fully paid-
up. The corporation posted a surplus profit of PhplOO,000,000
in the preceding year. The corporation would like to declare
200% stock dividends. What steps should the corporation
take?
The stock dividend declaration has to be approved by the
board of directors by at least majority vote and the stockholders
representing at least 2/3 of the outstanding capital stock.320
The corporation should also increase the capital stock. Their
base figure for the declaration of stock dividends is the number of
subscribed shares which is 50 million. The 200% stock dividend
declaration translates to 100 million shares. This means that the
corporation will have to issue this number of shares because of the
200% stock dividend declaration. The only available shares are the
50 million unsubscribed shares. The capital stock then has to be
increased by at least P150 million divided into 150 million shares to
support the stock dividend declaration.
3192001 Bar Exam.

320Section 42, RCC.
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136. What are the procedural requirements in increasing or

decreasing the capital stock of the corporation and in incurring,
creating, or increasing bonded indebtedness?
The procedural requirements are as follows:
a. At least majority vote of the board;
b. Ratification by the stockholders representing at least
2/3 of the outstanding capital stock, or at least 2/3 of the
members;
C. Written notice of proposed action and the time and place
of the meeting sent to the stockholders’ or members’
residences, served personally or sent electronically;
d. A certificate signed by at least majority of the directors
of the corporation, countersigned by the chairman and
secretary of the stockholder’s meeting, setting forth:
i. That the foregoing requirements have been complied
with;
ii. The amount of increase or diminution of the capital
stock;
iii. In case of 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 addresses 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
the subscription in cash or property, or the amount
of capital stock or number of shares of no-par stock
allotted to each stockholder if such increase is for the
purpose of making effective stock dividend therefor
authorized;
iv. Any bonded indebtedness to be incurred, created, or
increased;
v. The amount of stock represented at the meeting;
and
vi. The vote authorizing the increase or decrease of the
capital stock, or the incurring, creating or increasing
of any bonded indebtedness;
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e. In case of an increase in capital stock, the application

to be filed with SEC shall be accompanied by the sworn
statement of the treasurer of the corporation, showing
at least 25% of the increase in the capital stock was
subscribed and 25% of the said amount has been paid
either in actual cash to the corporation, or that property,
the valuation of which is equal to 25% of the subscription,
has been transferred to the corporation.
The law expressly requires the prior approval of the SEC, and
where appropriate, of the Philippine Competition Commission before
the increase or decrease in the capital stock can be effected, or before
the incurring, creating, or increasing of any bonded indebtedness.
137. What are the ways of increasing or decreasing capital stock?

The increase or decrease in the capital stock can be effected by:
a. increasing or decreasing the number of shares and
retaining the par value;
b. increasing or decreasing the par value of existing shares
and retaining the number of shares; or
c. increasing or decreasing both the number of shares and
the par value.
In decreasing the capital stock, resorting to reduction of number
of shares may also be done through i) redemption of redeemable
shares; ii) acquiring the corporation’s own shares; and iii) canceling
or retiring the shares, including treasury shares.
138. The authorized capital stock of ABC Corporation is Phpl billion

divided into 1 billion shares with a par value of P1.00 per share.
The subscribed capital stock is Php500,000,000 divided into
500,000,000 shares with par value of Phpl.OO per share while
the paid-up capital stock is Php250,000,000 divided into
250,000,000 shares with par value of Phpl.OO per share. ABC
Corporation intends to increase its capital stock to Php2 billion
pesos divided into 2 billion shares.
a. May ABC corporation increase its capital stock even if its

authorized capital stock is not yet fully subscribed?
Yes, a corporation is not prohibited from increasing its
authorized capital stock even if the same has not yet been fully
subscribed.
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b. Is the corporation required to collect payment on the

subscription to the increase in capital stock considering
that Php500,000,000 already amounts to 25% of the Php2
billion increased capital stock?
Yes, because the 25% subscription is based on the Pl billion
increase in the capital stock and not on the total capital stock as
increased. The 25% subscription requirement in case of an increase
of capital stock is intended to ensure the infusioniof fresh capital to
the corporation.
Are there other ways by which ABC Corporation can

increase its authorized capital stock from Phpl billion to
Php2 billion?
ABC Corporation may increase the number of shares from 1
billion to 2 billion while retaining the par value per share, or it may
maintain the number of shares at 1 billion while increasing the par
value from Phpl.00 to Php2.00 per share, or increase the number
of shares from 1 billion to 1.6 billion shares and increasing the par
value from Phpl.00 to Phpl.25 per share.
The most practical approach though is to increase the number
of shares and maintain the par value because the other way's of
increasing the capital stock may require the surrender of stock
certificates to change the par value thereof.
139. Is the 25% payment requirement for the increase in capital

stock imposed on per a subscriber basis or based on the
totality of subscription?
The law does not require each subscriber to pay 25% of his
subscription. The amount of payment therefore depends on the terms
of the subscription agreement. The 25% payment requirement is
based on the total amount of subscription. Thus, when the corporation
issues a mixture of shares, the 25% subscription requirement may
be applied to only one (1) class of shares or it may distribute to all
classes of shares as the corporation may determine.
140. Distinguish between issuance of shares arising from the

increase in capital stock and subscription to the unissued
portion of the authorized capital stock.
The distinctions are as follows:
a. The increase of capital stock requires approval by at
least the majority of the board and the stockholders
representing at least 2/3s of the outstanding capital
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stock while a subscription to the unissued portion of the

authorized capital stock only requires a majority of the
quorum of the board of directors.
b. At least 25% of the increase in capital stock must be
subscribed and at least 25% of the amount subscribed
must be paid while the required payment for subscription
to the unissued portion of the authorized capital stock
depends on the amount that the Board of Directors may
approve, which can be higher or lower than 25% of the
subscription.
141. How may the capital stock of the corporation be decreased?

The capital stock of the corporation may be decreased by
decreasing the number of authorized shares or by decreasing the
par value of the authorized shares, or both.
142. Cite instances of decrease of capital stock through decrease in

number of authorized shares.
a. Redemption of redeemable shares.
b. Purchase by the corporation of its own shares and then
canceling or retiring them.
c. Canceling shares that have not yet been issued.
There is, however, no decrease of capital stock despite the
redemption of redeemable shares or the purchase by the corporation
of its own shares unless the shares redeemed or acquired are
canceled or retired. Otherwise, these shares are considered treasury
shares and they can be resold upon such terms and conditions that
the Board of Directors may determine.
143. The authorized capital stock of the corporation is P100,000,000

divided into 100,000,000 shares with par value of Phpl.OO per
share. It is fully subscribed and paid-up. Can the corporation
reduce it to P50,000.00?
Yes, but it has to comply with the formalities for decrease of
capital stock.
144. If the subscribed capital stock is P60,000,000 divided into

60,000,000 shares with par value of Phpl.OO per share and the
paid-up capital stock is Php50,000,000 divided into 50,000,000
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shares with par value of P1.00 per share, can the corporation
reduce the capital stock to Php50,000,000?
No, the capital stock of the corporation may be decreased only if
it will not result in prejudice to corporate creditors. In this case, the
reduction of the capital stock to 50,000,000 will mean the release or
condonation of the 10,000,000 unpaid subscription, thereby causing
prejudice to the creditors as subscriptions to the capital stock are
funds held in trust for their benefit under the trust fund doctrine.
145. When is the increase or decrease in capital stock effective?

It is effective only upon approval by the SEC and its issuance of
a certificate of filing of increase or decrease of capital stock.
146. What is a bonded indebtedness?

It is a borrowing by the corporation which is long term in nature
involving a large number of lenders and secured by the encumbrance
on corporate assets. Since bonds are securities, they should also be
registered with the SEC.
147. ABC Corporation wants to obtain a loan from a bank in an

amount equivalent to 25% of the bank's net worth. Whose
approval is needed to authorize the transaction?
Such type of borrowing which is against the general credit of
the corporation only requires board approval despite the significant
amount.
148. Supposing that the corporation wants to obtain funds from the
public through the issuance of bond, is stockholders’ approval
required in addition to board approval?
No, even though the bond will be issued to the public, it does
not require stockholders’ approval. Board approval will suffice. The
bond though being in the nature of securities must be registered
with the SEC. Only borrowings in the nature of bonded indebtedness
require approval of the board by at least majority vote and by the
stockholders representing at least 2/3s of the outstanding capital
stock.321
32ISEC Opinion, April 6,1990.
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149. What are the characteristics or features of a bonded

indebtedness?
The two (2) principal elements of distinction are time duration
and the division of the whole debt into like aliquot part units of round
number denominations, represented by negotiable or assignable
certificates of indebtedness.
a. Such certificates are generally called bonds, the purpose
being to enable the corporation to make use of the
borrowed money for a long period of years, to obtain from
a large number of people and to facilitate the transfer of
the certificate of indebtedness from hand to hand during
the term of the collective obligation.
b. Such bond issues are usually secured by the transfer to a
trustee of specific property to secure payment of the debt.
c. The bonds usually, but not necessarily, run to bearer and
transferable by delivery.
d. The effect of the creation and issuance of such obligations
is borrowing from the general public.
Whenever a corporation resorts to this method of borrowing
funds, the resulting obligations constitute a bonded indebtedness,
subject to the requirements of Section 37 as to creation and
increase.322
150. What is the procedure to enable the corporation to incur,

create, and increase bonded indebtedness?
The procedure prescribed in Section 37 of the RCC regarding
an increase or decrease of capital stock also applies to incurring,
creating, and increasing bonded indebtedness. The certificate,
however, is not required to be accompanied by a treasurer’s certificate
concerning the amount of subscription and payment made in the
increase of capital stock, as this is obviously not applicable.
322H.C. Bentley, Corporate Finance and Accounting, cited in Fisher, pp. 315-
316, cited in De Leon: The Corporation Code, Annotated, p. 191.
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e. Power to deny pre-emptive rights

151. What is pre-emptive right?
It is the right of stockholders to subscribe to all issues or
disposition of shares of any class by the corporation, in proportion
to their respective shareholdings.323 In practical terms, this means
that the shares of stock of the corporation should first be offered
proportionately to the stockholders before they can be issued or sold
to nonstockholders.324
152. What is the rationale of pre-emptive right?

The foundation or underlying basis of this right is to maintain
the proportionate voting strength and control of existing stockholders,
that is, the existing ratio of their interest and voting power in the
corporation. This right prevents the dilution and impairment of the
stockholders’ interest in the corporation.
For example, the authorized capital stock of the corporation
is PhplOO.OOO.OOO divided into 100,000,000 shares with par value
of Phpl per share, 50,000,000 of which is fully subscribed. Of these
shares, A, B, C, D, and E subscribed to 10 million shares each. Each
of them gets to receive 20% of the dividends that the corporation
may declare. In case of dissolution, they will also receive 20% each of
the residual assets of the corporation. In case of new share issuance,
the stockholders should be given the first opportunity to subscribe
thereto, in proportion to their shareholdings in the corporation,
before such new shares can be issued to nonstockholders otherwise,
the 20% equity stake of each stockholder will be diluted.
153. What are the remedies available to stockhplders in case of an

amendment to the corporation's articles.'of incorporation to
create preferred redeemable shares?
The remedies of the stockholders in case of an amendment
to the corporation’s articles of incorporation to create redeemable
shares are as follows:
a. Vote in favor of the amendment but pass up to the
opportunity to subscribe to the preferred redeemable
shares since this type of shares is non-voting and as such,
will not dilute the stockholder’s voting rights, save for the
eight (8) cases under Section 6 of the RCC;
323Section 38, RCC.

3242019 Bar Exam.
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b. Subscribe to the new preferred shares since the

stockholders’ pre-emptive right covers shares of any class;
or
c. Exercise their appraisal right.326
154. Cite the instances when pre-emptive right does not apply.
The pre-emptive right of stockholders is not an absolute right.
It is subject to the following exceptions:
a. Denial of pre-emptive right in the articles of incorporation
or amendment thereto.
Take note that the denial of pre-emptive right must
be contained in the articles of incorporation or amendment
thereto. The denial cannot be by mere board resolution or
as an amendment to the bylaws of the corporation.326
b. Waiver of such right by the stockholder, whether express
or implied.
If the board resolution approving the issuance of
shares prescribes certain number of days to exercise the
pre-emptive right and the stockholder fails to exercise
such right within the fixed period, the stockholder is
deemed to have impliedly waived his right.
c. Shares issued in compliance with the laws requiring
minimum stock ownership by the public.
Public companies are required to have a portion of
their outstanding capital stock owned by the public. The
current minimum public ownership set by law is 10% of
the corporation’s outstanding capital stock. Failure to
comply with this requirement will result to the delisting
of the shares in the Stock Exchange. Thus, the issuance
of shares to comply with the minimum public ownership
requirement is not subject to pre-emptive right.
d. Issuance of shares ip exchange for property given for
a corporate purpose, if approved by the stockholders
representing at least 2/3 of the outstanding capital stock.

’“2011 Bar Exam.
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e. Issuance of share in payment of debt made in good faith,

if approved by the stockholders representing 2/3 of the
outstanding capital stock.
155. "X" Realty, Inc., a corporation engaged in the subdivision

business, has an authorized capital of P8, 000,000, all of
which has been fully subscribed. At a special meeting of the
board of directors, the majority vote decided, on the basis
of the recommendation of its Executive Committee, that the
corporation purchase a 5-hectare property offered to it because
it was ideal for its subdivision business, the price offered was
lower than the prevailing market price, and John Roque, the
owner of the property, was willing to accept P2,000,000 worth
of shares of the corporation in exchange of, or as payment for,
his property. No cash was involved in the transaction. Thus, the
board approved a resolution increasing the authorized capital
stock from P800,000 to PI Million, stipulating that the additional
P200,000 worth of shares shall be issued in exchange for the
5-hectare property and that the existing stockholders shall
have no pre-emptive right to subscribe to the additional shares
as the same were being issued to pay for the property.
Was the action of the Board correct and sufficient?
The action of the Board of Directors was correct, but not
sufficient. Under Sections 38 and 61 of the RCC, shares may be
issued for property needed for corporate purposes but subject to SEC
approval to ensure that the real property is fairly valued, to prevent
the issuance of watered stocks. The increase of capital stock is also
subject to the approval of the stockholders representing at least 2/3s
of the outstanding capital stock. No SEC and stockholders approvals
were indicated in the problem.327
156. What is the remedy of the stockholder not in favor of an

amendment to the articles of incorporation to deny pre
emptive right?
He can exercise his appraisal right. One of the instances
where appraisal right is available is in case of an amendment to the
articles of incorporation that has the effect of changing or restricting
3271982 Bar Exam but answered under the RCC.
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the rights of the stockholder or any shares.328 Denial of pre-emptive

right restricts his right to subscribe to the issuance of shares by the
corporation.329
f. Power to sell or dispose corporate assets

157. What are the two (2) kinds of sale, encumbrance, or disposition
of corporate assets that the corporation may undertake?
One is the sale, encumbrance or disposition (collectively
referred to as “disposition”) of any of its property and assets if the
same is necessary for the usual and regular course of business of
the corporation or if the proceeds of the sale or other disposition
of such property and assets shall be appropriated for the conduct
of its remaining business. The other is the disposition of all or
substantially all of the properties of the corporation.
Disposition in the ordinary course of business requires only
board approval, meaning, majority of the quorum of the board.
The disposition of all or substantially all properties of the
corporation requires approval by at least majority of the board and
the affirmative votes of the stockholders representing at least two-
thirds (2/3) of the voting power in the corporation in a meeting duly
called for that purpose330 or at least 2/3 of the members for a nonstock
corporation in a meeting called for the purpose.
In nonstock 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 the foregoing rule.331
158. Where the asset to be disposed of constitutes the only property

of the corporation, whose approvals are needed?
Where an asset constitutes the only property of the corporation,
its sale to a third-party is a sale or disposition of all the corporate
property and assets of said corporation falling squarely within
the contemplation of Section 39 of the RCC. In the case of Islamic
“Section 80, RCC.

“See Turner v. Lorenzo Shipping Corporation, G.R. No. 157479, November
24, 2010.
“Section 40, RCC; Rosita Pena v. Court of Appeals, et al., G.R. No. 91478,
February 7,1991.
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Directorate of the Ph ilippines v. Court of Appeals, the Court ruled

that for such sale to be valid, the majority vote of the legitimate
board, concurred in by the vote of at least 2/3 of the bona fide
members of the corporation should have been obtained.332
Similarly, the assignment of the right to redeem the only asset
of the corporation amounts to a sale of all or substantially all of
the corporate assets. As such, it requires approval by at least a
majority of the board and the affirmative vote of the stockholders
representing at least 2/3 of the outstanding capital stock.333
159. State the gist of the Bulk Sales Law.

Under the Bulk Sales Law, any sale in bulk must comply with
certain procedural requirements, otherwise, the sale is deemed to be
in fraud of creditors and therefore null and void.
A sale is in bulk in any of the following cases:
i. Sale, transfer, mortgage, or assignment of properties not
in the ordinary course of business;
ii. Sale, transfer, and mortgage or assignment of all or
substantially all of the assets used in and about the
business of the vendor, mortgagor, transferor, or assignor
(collectively referred to as vendor); and
iii. Sale, transfer, mortgage or assignment of all or
substantially all of the business or trade conducted by the
vendor of Section 2.
Under the Bulk Sales Law, the following requirements have to
be satisfied in case of sales in bulk:
i. The seller must provide the buyer with a verified list
of the creditors containing the names of the creditors,
their addresses, amounts owing to each of them, and the
respective maturity dates;
ii. There must be a full detailed inventory of the properties
or assets to be sold, including their cost or acquisition
price;
Îslamic Directorate of the Philippines, et al. Court of Appeals and Iglesia

Ni Cristo, G.R. No. 117897, May 14, 1997.
333Rosita Pena v. Court of Appeals, et al., G.R. No. 91478, February 7,1991.
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iii. The inventory and the list must be filed with the
Department of Trade and Industry.
If the sale in bulk failed to comply with these requisites and the
vendor does not apply the purchase price of the said properties to the
pro-rata payment of creditors’ claims, the vendor shall be deemed to
have violated the law and any such sale, transfer, or mortgage shall
be fraudulent and void.334
The buyer shall hold in trust the properties of the vendor for
the benefit of the creditors with the concomitant right to require the
return of the purchase price and ask for damages.
160. What is the remedy available to a stockholder not in favor

of the disposition of all or substantially all of the corporate
properties?
He may exercise his appraisal right, which means, that he can
demand the payment of the fair value of his shares subject to the
conditions under Section 80 of the RCC.335
161. AAA Corporation is a bank. The operations of AAA Corporation

as a bank were not doing well. So, to avert any bank run, AAA
Corporation, with the approval of the Monetary Board, sold all
its assets and liabilities to BBB Banking Corporation which
includes all deposit accounts. In effect then, BBB Corporation
will service all deposits of all depositors of AAA Corporation.
Will the sale of all assets and liabilities of AAA Corporation
to BBB Banking Corporation automatically dissolve or
terminate the corporate existence of AAA Corporation? Explain
your answer.330
No, the sale of all the assets and liabilities of AAA Corporation
to BBB Banking Corporation will not result in the automatic
dissolution or termination of the existence of the former. Such sale
is not one of the modes of dissolution under the Corporation Code.
Moreover, having assets is not a condition for the continuation of
juridical existence.
“’Section 4, Bulk Sales Law.

’“Sections 39 and 80, RCC.
“°2012 Bar Exam.
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162. Underthe Nell Doctrine, so called because it was first pronounced

by the Supreme Court in the 1965 ruling in Nell v. Pacific Farms,
Inc.,337 the general rule is that where one corporation sells or
otherwise transfers all of its assets to another corporation, the
latter is not liable for the debts and liabilities of the transferor,
State the exceptions to the Nell Doctrine.
The exceptions to the Nell doctrine are as follows:
a. When the buyer expressly or impliedly assumes the
liabilities of the seller;
b. If the sale amounts to a merger or consolidation;
c. If the sale is entered into fraudulently or made in bad
faith; and
d. If the buyer is merely a continuation of the personality
of the seller or the so-called business-enterprise transfer
rule.338
g- Power to acquire own shares

163. May a corporation acquire its own shares of stock?
Ordinarily, a stock corporation has no power to acquire its own
shares as it is illogical for the corporation to be its own stockholder.
Moreover, the funds of the corporation should be devoted to attain the
purposes of incorporation. However, the RCC allows the corporation
to acquire or purchase its own shares in certain instances.
164. Under what conditions may a corporation acquire or purchase

its own shares?
For a corporation to be able to acquire its own shares, the
following conditions must be present: (1) it is for a legitimate and
proper corporate purpose; (2) there shall be an unrestricted retained
earnings to purchase the same and its capital is not thereby
impaired; (3) the corporation acts in good faith and without prejudice
to the rights of creditors and stockholders; and (4) the conditions of
corporate affairs warrant it.”9
33,G.R. No. L-20850, November 29, 1965.

’’’Forced Acquisition of Foreign-Held Shares of Stock in an Educational
Institution, SEC-OGC Opinion No. 33-14, November 18, 2014.
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It is imperative that there must be unrestricted retained

earnings before it may purchase its own shares. Otherwise, this
would lead to an unauthorized increase of shares of stock, as well as
constitutes a violation of the trust fund doctrine. The rationale for
this is that share repurchase constitutes in effect a distribution to the
stockholders which, if abused and without proper safeguards, will
deplete and impair the assets of the corporation, to the prejudices of
the stockholders and creditors of the corporation.340
With respect to banks, as previously indicated, no bank shall
purchase or acquire shares of its own capital stock or accept its
own shares as security for a loan, except when authorized by the
Monetary Board; Provided that in every case the stock so purchased
or acquired shall, within six (6) months from the time of its purchase
or acquisition, be sold or disposed of at a public or private sale.3”
165. Cite examples of legitimate corporate purposes to warrant

acquisition or purchase by the corporation of its own shares of
stock.
a. To eliminate fractional shares arising out of stock
dividends.
j A fractional share is less than one (1) share.
For example, a stockholder owns 250 shares and the
corporation declares 25% stock dividends. 25% of 250 is
62.5; the 0.5 is the fractional share that the corporation
may acquire.
b. To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares sold
during the said sale.
In case of delinquent stocks, arising out of unpaid
subscription, the corporation may either file an action for
collection or bid for the delinquent shares, if in the public
auction, there is no bidder willing to pay the full amount
of the subscription plus interest, costs, and expense.3’2
“°SEC Opinion, ibid.

“’Section 10, R.A. No. 8791, General Banking Law.
“’Section 67, RCC.
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c. To pay dissenting or withdrawing stockholders entitled to

payment for their shares under the provisions of the RCC.
A dissenting or withdrawing stockholder is one
who exercised his appraisal right in any of the instances
specified in Section 80 of the RCC.343
d. To acquire redeemable shares.
Redeemable shares may be issued by the corporation
when expressly so provided in the articles of incorporation.
They may be purchased 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.344
e. To acquire treasury shares.
Treasury shares are shares of stock which have been
issued and fully paid for, but subsequently reacquired by
the issuing corporation through purchase, redemption,
donation, or some other lawful means. Such shares may
again be disposed of for a reasonable price fixed by the
board of directors.346
j
166. In what instances may a corporation acquire its own shares

despite the absence of unrestricted retained earnings?
A corporation may acquire its own shares despite the absence
of unrestricted retained earnings in the following cases:
a. Redemption of redeemable shares.
b. Donation of shares to the corporation.
c. Levy/garnishment of shares to satisfy the judgment in
favor of the corporation.
d. Conveyance of shares to the corporation in payment of a
debt.
By express provision of law, a corporation may redeem
redeemable shares regardless of the existence of retained earnings.
343Section 40, RCC.

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Surplus profit should only be required if the corporation will

disburse its funds. Thus, the conveyance and garnishment of shares
to satisfy a debt may be done even without surplus profit, otherwise,
the corporation’s right as a creditor will be significantly impaired.
h. Power to invest corporate funds in another

corporation or business
167. Where may the funds of the corporation be invested?
The funds of the corporation may be invested in the primary
purpose or in the secondary purpose/s of the corporation as specified
in the articles of incorporation or in any other corporation or business
other than the corporation’s primary and secondary purposes.
168. What are the distinctions among the different kinds of

investment of corporate funds?
Where the funds are invested in the primary purpose or any
activity reasonably necessary to accomplish the primary purpose
of the corporation, board approval suffices. For the other kinds of
investment, board and stockholders’ approvals are required. And if
the investment of funds will be made in any business other than
the corporation’s primary and secondary purpose, there should be a
corresponding amendment to the articles of incorporation to include
the desired business activity, otherwise, the investment is ultra
vires.
169. What are the requisites for the exercise by the corporation of
the power to invest corporate funds for purposes other than
the primary purpose?
a. Such action must be 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 case of a nonstock corporation, at a stockholders’ or
members’ meeting duly called for the purpose.
b. Notice of the proposed investment and the time and place
of the meeting shall be addressed to each stockholder or
member at the place of residence as shown in the books of
the corporation and deposited to the addressee in the post
office with postage prepaid, served personally, or sent
electronically in accordance with the rules and regulations
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of the SEC on the use of electronic data message, when

allowed by the bylaws or done with the consent of the
stockholders.
C. Any dissenting stockholder shall have appraisal right as
provided in the RCC.
170. ABC Corporation is engaged in the business of manufacturing

soft drinks. Forthe past 10 years, it has bought all its bottlesfrom
XYZ Corporation. Considering the volume of its production, it
now finds that it will be more economical to manufacture its
own bottles.
The board of directors, after studying and discussing
the matter thoroughly, decides to set aside the amount of 1
Million for this project. Most of this amount will go to the cost
of equipment and materials.
M is a stockholder of ABC Corporation and is against this
investment in the bottling project and would like to withdraw
from the corporation by exercising his appraisal right if the
project goes through. He, therefore, demands that the project
be submitted to the stockholders for approval, but the board
refuses to do so on the ground that there is no need for such
approval and that the calling of a special stockholders' meeting
would entail too much expenses.
M thus cannot have the opportunity to exercise his
appraisal right. He wants to sue the board to compel it to submit
the matter to the stockholders and to enjoin it from pursuing
the project until the stockholders shall have approved it.
Do you think the matter needs the stockholders' approval
or is the action of the board of directors sufficient? Explain.
No, it does not need stockholders’ approval. Under Section 41
of the RCC, a corporation may, as a general rule, invest its funds in
another business or in any purpose other than the primary purpose
for which it was organized, when approved by the board of directors
and by the stockholders representing at least 2/3 of the outstanding
capital stock in a meeting duly called for the purpose. Any dissenting
stockholder may exercise his appraisal right. However, where
the investment is reasonably necessary to accomplish its primary
purpose, the approval of the stockholders is not necessary. In this
case, the manufacture of bottles is reasonably necessary for the
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corporation’s primary business of manufacturing soft drinks and

does not, therefore, need the approval of the stockholders. Board
approval suffices.346
In a related case, the Supreme Court ruled that the purchase
of beer manufacturing facilities by a corporation in a foreign country
for the manufacture of beer thereat was held as an investment in
the same business stated as its primary purpose in the articles
of incorporation, which is to manufacture and market beer and
therefore, stockholder approval is not necessary.347
171. Stikki Cement Corporation ("STIKKI") was organized primarily

for cement manufacturing. Anticipating substantial profits,
its President proposed that STIKKI invest in (a) a power plant
project, (b) a concrete road project, and (c) quarry operations
for limestone used in the manufacture of cement.
What corporate approvals or votes are needed for the
proposed investments? Explain.
Unless the power plant and the concrete road project are
reasonably necessary to the manufacture of cement by STIKKI
(and they do not appear to be so), then the approval of the said
projects by a majority of the board of directors and the ratification
of such approval by the stockholders representing at least 2/3 of the
outstanding capital stock would be necessary.
As for the quarry operations for limestone, the same is an
indispensable ingredient in the manufacture of cement and may,
therefore, be. considered reasonably necessary to accomplish the
primary purpose of STIKKI. In such a case, only the approval of the
board of directors would be necessary.
i. Power to declare dividends

172. What are dividends?
Dividends are corporate profits allocated, lawfully declared
and ordered by the directors to be paid proportionately to the
stockholders in the form of cash, property, or stocks.
“Del Rama v. Maao Sugar Central, G.R. No. 17504, February 28,1969; 1983
Bar Exam.
“Gokongwei v. Securities and Exchange Commission, G.R. No. L-45911, April
11,1979.
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173. Are profits the same as dividends?

Profits are the sources of dividends. Profits are dividends only
when they have been set aside for distribution to stockholders under
the conditions specified by law.
Profits belong to the corporation while dividends once declared,
belong to the stockholder.348
174. Under what conditions may the corporation declare

dividends?349
a. The corporation must have unrestricted retained earnings
as of the last fiscal or calendar year.
Dividends, whether cash, property or stock, must
be declared out of unrestricted retained earnings of the
corporation. Accordingly, a corporation cannot declare
dividends when it has zero or negative retained earnings.
For such purpose, the surplus profits or income must
be a bona fide income founded upon actual earnings or
profits. The existence, therefore, of surplus profits arising
from the operation of corporate business is a condition
precedent to the declaration of dividend.360
The term unrestricted retained earnings may be
interchanged with surplus profit.
b. The dividends shall be payable in cash, in property, or in
stock to all stockholders based on outstanding stock held
by them.
c. The cash dividend declaration must be approved by the
board of directors. In case of stock dividends, in addition
to board approval, the declaration must likewise be
approved by the stockholders representing at least two-
thirds (2/3) of the outstanding capital stock at a regular
or special meeting duly called for the purpose.381
Board approval does not mean the majority of the
entire board. Majority of the quorum will suffice unless
the bylaws provide otherwise.382
34s2005 Bar Exam.

3492009 Bar Exam.
’“Section 5, SEC Circular No. 11-08.
36z2011 Bar Exam.
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175. What are retained earnings?

Retained earnings are the accumulated profits realized out of
normal and continuous operations of the business after deducting
therefrom distributions to stockholders and transfers to capital
stock or other accounts.363
Stated otherwise, the corporation has retained earnings if its
assets exceed the total liabilities and combined subscriptions to
the capital stock of the corporation. This may be expressed in the
following formula:
Retained Earnings = Assets - Liabilities and Subscriptions

Such retained earnings or portion thereof are unrestricted if
there are no legal and contractual impediment for their distribution
to the stockholders.
The total subscriptions are deducted from the assets to
determine the availability of retained earnings because, under the
trust fund doctrine, subscriptions to the capital stock constitute a
fund to which creditors have a right to look for the satisfaction of
their claims and which the corporation is not allowed to impair to
their prejudice.
176. Is it necessary for the corporation to wait for the written

approval/advice of the SEC before it can validly distribute cash
and stock dividends to its stockholders?
It is not mandatory for the corporation to seek prior approval/
advice from the SEC to declare cash and stock dividend provided the
following are complied with:
a. For cash dividend declaration:
i. Board of Directors approval of the cash dividend
declaration; and
ii. Sufficient unrestricted retained earnings as of the
last fiscal or calendar year.
b. For stock dividend declaration:
i. Board of Directors approval of the stock dividend
declaration;
3“SEC Circular, ibid.
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ii. Stockholders’ approval representing at least two-

thirds (2/3) of the outstanding capital and sufficient
portion of the present authorized capital; and
iii. Sufficient unrestricted retained earnings as of the
last fiscal or calendar year.
Further, if the stock dividend declaration requires an increase
of authorized capital stock, an application therefor is mandated to
be filed with the SEC pursuant to Section 37 of the RCC.364
177. Is it a ministerial duty of the corporation to declare dividends if

surplus profit is available?
The declaration of dividends is discretionary, covered by the
business judgment rule. However, stock corporations are prohibited
from retaining surplus profits in excess of one hundred percent
(100%) of their paid-in capital stock, except: (a) when justified by
definite corporate expansion projects or programs approved by the
board of directors; or (b) when the corporation is prohibited under
any loan agreement with financial institutions or creditors, whether
local or foreign, from declaring dividends without their consent, and
such consent has not yet been secured; or (c) when it can be clearly
shown that such retention is necessary under special circumstances
obtaining in the corporation, such as when there is need for special
reserve for probable contingencies.
Thus, the board of directors may be compelled to declare
dividends if the surplus profit is in excess of 100% of its paid-in capital
and no justifiable reasons exist to withhold dividend declaration.3"
Under Section 49 of the RCC, however, the board of directors
must endeavor to present to the stockholders an explanation on
dividend policy and the fact of payment of dividends or the reasons
for the nonpayment thereof.
178. What are the classes and sources of surplus?

a. Surplus arising from profits earned by the corporation in
the regular course of its business.
3MRe: SEC Approval of Issuance of Cash and Stock Dividends. SEC-OGC

Opinion No. 23-19, June 17, 2019.
3652015 Bar Exam; Section 42, RCC.
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b. Earned surplus which includes non-operating profits
arising from the sale of fixed assets, investments, and
other non-recurring profit transactions.
In one case, it was held that dividends received by a
company which is a stockholder in another corporation is
a corporate earning arising from corporate investment. It
forms part of the assets of the corporation.356
C. Paid-up surplus which arises from the issuance of shares
for a premium or a price above par value.
Unlike par value shares, when no par value shares
are sold at a premium, the entire consideration paid is
considered capital (Section 6, RCC).
d. Revaluation or appraisal surplus which arises from the
revaluation of the acquired corporate assets or marking
up their value in the books of the corporation.
e. Reduction surplus which arises from the reduction of the
corporation’s capital stock.
179. May dividends be paid out of the paid-in capital, meaning, the
premium above par value?
Additional Paid-In Capital Stock shall neither be declared
as dividend nor shall it be reclassified to absorb deficiency except
through an organizational restructuring duly approved by the
SEC.357
t
180. May the corporation declare dividends out of revaluation/
appraisal surplus?
■ No, the SEC opined that an increase in the value of a fixed
asset as a result of its revaluation is not retained earnings.353 Such
are mere increments in the value of corporate assets which may
fluctuate from time to time.
““Madrigal & Company. Inc. v. Zamora, G.R. No. L-48237, June 30,1987.
“’SEC Memorandum Circular No. 11-08.
’“SEC Opinion, January 25, 1977.
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Thus, if a parcel of land originally acquired for PIO,000,000 had

doubled in value after three (3) years, the recognition in the corporate
books of the revaluation does not justify dividend declaration. It is
the gain arising from the sale of the revalued property which may
serve as the basis for the declaration of dividends.369
181. What are the kinds of dividends?

Dividends may either be cash or stock. Any dividend other than
from the unissued shares of the corporation is, in contemplation of
law, a cash dividend. Thus, property dividend is essentially a cash
dividend. Stockholders’ approval, therefore, is not required for
property dividends.
A stock dividend is one that is declared and paid out from
the unissued shares of the corporation. It is paid in shares of stock
instead of cash.
182. Discuss the concept of stock dividends.

Stock dividend is actually a two-step process: (1) a dividend,
and (2) the enforced use of the dividend money to purchase additional
shares of stock at par value to be proportionately distributed to the
stockholders on the basis of the shares held.360
183. Palmavera Corporation has an authorized capital stock of

P500,000,000 all subscribed and outstanding as of December
31, 2019. The corporation also has unrestricted retained
earnings in its book amounting to P375,000,000. Since the
corporation needed the cash surplus to carry outits expansion
projects, the board of directors, in its meeting held on January
5, 2020, approved a resolution declaring and ordering the
issuance of 50% stock dividends in lieu of cash dividends.
a. Was the resolution declaring the issuance of stock
dividends valid? Explain your answer.
Yes, the resolution of the Board of Directors declaring the
issuance of stock dividends was valid, but still insufficient for
purposes of stock dividend.361
3591987 Bar Exam.

360Nielson & Co., Inc. v. Lepanto Consolidated Mining Co., G.R. No. L-21601,
En Banc, December 28, 1968.
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b. What is/are the step/s needed to be taken so that the

decision of the board could be implemented? State the
required vote.
The aforesaid approval of the Board of Directors for the
declaration of stock dividends should still be concurred in by the
stockholders representing not less than 2/3 of the outstanding
capital stock, at a regular or special meeting called for the purpose.
In addition, the authorized capital stock must be increased to
accommodate the stock dividends since the authorized capital stock
of Palmavera Corporation is fully subscribed. The increase in capital
stock is subject to SEC approval.362
184. Distinguish cash dividends from stock dividends.

A cash dividend involves the disbursement of earnings
to stockholders, while a stock dividend does not require any
disbursement.
A cash dividend increases the wealth of the stockholder, while
a stock dividend does not. While the stockholder may get additional
shares arising out of the stock dividend, the stock dividend decreases
the fractional interest in corporate property which each share
represents.
A cash dividend does not affect the fractional interest in
property which each share represents, while a stock dividend
decreases the fractional interest in corporate property which each
share represents.
Cash dividends when received by natural persons are subject
to tax, while stock dividends, regardless of the recipient, are not
subject to tax.
In this connection, the Supreme Court said that a stock dividend
representing the transfer of surplus to the capital account shall
not be subject to tax. In this case, the exchange of shares, without
more, produces no realized income to the subscriber. There is only a
modification of the subscriber’s rights and privileges — which is not
a flow of wealth for tax purposes. The issue of taxable dividend may
arise only once a subscriber disposes of his entire interest and not
when there is still maintenance of proprietary interest.363
Ânswered based Sections 37 and 42, RCC; 1982 Bar Exam.

^Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 108576,
January 20, 1999.
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Declaration of stock dividend requires the approval of at least

a majority of the board of directors and stockholders representing at
least 2/3 of the outstanding capital stock. In the declaration of cash
dividend, board approval suffices.
Declaration of cash dividends may not be revoked since, upon
declaration, a creditor-debtor relationship is established between
the stockholder and the corporation. Hence, the debtor-corporation
is bound to make good its obligation to the creditor-stockholder to
pay' the cash dividends. Stock dividends may be revoked even after
declaration but prior to the actual issuance of shares because what
consummates stock dividend is not the declaration but the share
issuance.
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.361
185. Can the corporation offset the cash dividends against any debt
of the stockholder to the corporation?
Yes, the corporation may offset or apply the cash dividends
against any debt of the stockholder because as to cash dividends
that are declared, the stockholders are creditors of the corporation.365
Thus, the principle of legal compensation under the Civil Code may
apply.
186. ABC Management, Inc. presented to DEF Mining Corp, the

draft of its proposed Management Contract. As'an incentive,
ABC included in the terms of compensation that ABC would be
entitled to 10% of any stock dividend which DEF may declare
during the lifetime of the Management Contract. Would you
approve of such provision? If not, what would you suggest as
an alternative?
I would not approve of a proposed stipulation in the management
contract that the managing corporation, as additional compensation
to it, should be entitled to 10% of any stock dividend that may be
declared. Stockholders are the only ones entitled to receive stock
“'2005 Bar Exam.

“Maria Carla Pirovano De La Rama Steamship Co., G.R. No. L-5377, En
Bane, December 29, 1954,
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dividends. I would add that the unsubscribed capital stock of a

corporation may only be issued for cash or property or for services
already rendered constituting a demandable debt. As an alternative,
I would suggest that the managing corporation should instead be
given net profit participation and, if later so desires, to then convert
the amount that may be due thereby to equity or shares of stock at
no less than the par value thereof.366
187. Can treasury shares be distributed as property dividends to

the stockholders?
Treasury shares are regarded as property owned by the
corporation and cannot be distributed as property dividends among
the stockholders in the absence of unrestricted retained earnings
other than the amount equivalent to the cost of treasury shares,
because to do so would violate the trust fund doctrine.367
j. Power to enter into management contract

188. What is a management contract?
A management contract is an agreement under which a
corporation delegates the management of its affairs to another
corporation for a certain period of time. The contract can have
a different nomenclature but falls within the purview of a
management contract for so long as the intention is to entrust to
another corporation the management of the business affairs of the
corporation.
189. What are the requirements and limitations for the exercise of
the power to enter into Management Contracts?
a. 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 the majority
of the members in the case of a nonstock corporation, of
both the managing and the managed corporation, at a
meeting duly called for the purpose;
b. Where a stockholder or stockholders representing the
same interest of both managing and managed corporation
own and control more than one-third (1/3) of the total
outstanding capital stock entitled to vote of the managing

“’Treasury Shares, SEC-OGC Opinion No. 06-12, April 20, 2012.
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corporation; or where a majority of the members of the

board of directors of the managing corporation also
constitute a majority 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 case of a nonstock
corporation; and
C. No management contract shall be entered into for a
period longer than five (5) years for one (1) term except for
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.
As a rule, the period of management contracts is five (5)
years for any one (1) term, and for so long as it is between two (2)
corporations. However, the following are some of the exceptions:
a. Management contract between two (2) corporations
pursuant to the Mining Act of 1995. Under this law, the
contract may be for 25 years.
b. Technical/Financial Service Agreement or Production
Agreement can be for 25 years.308
The aforementioned conditions 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, operations agreements,
or otherwise.309
k. Limitations
i. Ultra vires acts
190. What is the test to determine whether or not an act is within
the powers of the corporation?
The test to be applied is whether the act in question is in direct
and immediate furtherance of the corporation’s business, fairly
incident to the express powers and reasonably necessary to their
“’Section 2, Article XII, 1987 Constitution.

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exercise. If so, the corporation has the power to do it; otherwise,

not. It is a question therefore in each case of the logical relation of
the act to the corporate purpose expressed in the charter. If the act,
which is lawful in itself and not otherwise prohibited, is done for the
purpose of serving corporate ends, and is reasonably tributary to the
promotion of those ends, in a substantial, and not in a remote sense,
it may fairly be considered within the powers.370
In Querubin v. COMELEC,311 the Supreme Court reiterated
this test and held that notwithstanding the specific mention of
the 2010 national and local elections in SMARTMATIC’s primary
purpose, it is not precluded from entering into contracts over
succeeding ones. Here, SMTC cannot be deemed to be overstepping
its limits by participating in the bidding for the 23,000 new optimal
mark readers for the 2016 polls since upgrading the machines that
the company supplied to COMELEC for the automation of the 2010
elections and offering them for subsequent elections is but a logical
consequence of SMTC’s course of business and should, therefore, be
considered included in, if not incidental to, its corporate purpose.
191. What is an ultra vires act of the corporation?

The term is used to describe a corporate transaction that is
outside the objects for which the corporation was created as defined
in the law of its organization, and therefore, beyond the powers
conferred upon it by law.372
A corporation may exercise its powers only within those
definitions. Corporate acts that are outside those express definitions
under the law or articles of incorporation or those committed outside
the object for which a corporation is created are ultra vires. The only
exception to this rule is when acts are necessary and incidental to
carry out a corporation’s purposes and to the exercise of powers
conferred by the Corporation Code and under a corporation’s articles
of incorporation.373
370Montelibano v. Bacolod-Murqia Milling Co., Inc., G.R. No. L-16092, May 18,
1962.
371Querubin v. COMELEC, G.R. No. 218787, December 8, 2015.
372III Fletcher, Section 1511; 19 C.J.S. 419; Atrium Management Corporation
v. Court of Appeals, G.R. No. 109491, February 28, 2001.
373University of Mindanao, Inc. v. Bangko Sentral Pilipinas, et al., G.R. Nos.
194964-65, January 11, 2016.
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a. Applicability of ultra vires doctrine

192. Is ultra vires act limited to any act which is outside the express
and incidental powers of the corporation?
No, there are three (3) types of ultra vires acts;
a. Acts done beyond the powers of the corporation as
provided in the law or its articles of incorporation.
b. Acts entered into on behalf of the corporation by persons
who have no corporate authority or exceeded the scope of
their authority.
c. Acts or contracts, which are per se illegal as being contrary
to law.
193. Cite jurisprudence on ultra vires acts for being outside or

beyond the powers of the corporation.
a. Petitioner, an educational institution does not have the
power to mortgage its properties in order to secure loans
of a savings and loan association (“SLA”) even though
they have common stockholders. Securing SLA’s loans
by mortgaging the school’s properties does not appear to
have even the remotest connection to its operations as an
educational institution. Further, not having the proper
board resolution to authorize the signatory to execute
the mortgage contracts for the school, the contracts he
executed are unenforceable against the petitioner. While
the lender’s mortgage is annotated on the certificates
of titles of petitioner’s properties, the annotations are
merely claims of interest or claims of the legal nature and
incidents of the relationship between the person whose
name appears on the document and the person who
caused the annotation. It does not say anything about
the validity of the claim nor convert a defective claim or
document into a valid one.374
b. While Section 13 of DBP’s charter, exempts it from
existing laws on compensation and position classification,
it concludes by expressly stating that DBP’s system of
compensation shall nonetheless conform to the principles
iulbid.
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under the Salary Standardization Law (SSL). From this,

there is no basis to conclude that the DBP’s Board of
Directors was conferred unbridled authority to fix the
salaries and allowances of its officers and employees.
The authority granted DBP to freely fix its compensation
structure under which it may grant allowances and
monetary awards remains circumscribed by the SSL; it
may not entirely depart from the spirit of the guidelines
therein.
The grant of a wider latitude to DBP’s Board of Directors
in fixing remunerations and emoluments does not include an
abrogation of the principle that employees in the civil service “cannot
use the same weapons employed by the workers in the private sector
to secure concessions from their employees.” While employees of
chartered GFIs enjoy the constitutional right to bargain collectively,
they may only do so for non-economic benefits and those not fixed
by law, and may not resort to acts amounting to work stoppages
or interruptions. There is no other way to view the Governance
Forum Productivity Award (GFPA) other than as a monetary benefit
collectively wrung by DBP’s employees under threat of disruption to
the bank’s smooth operations.
All told, the grant of GFPA was indeed an ultra vires act or
beyond the authority of DBP’s Board of Directors.376
194. Cite instances where the corporate acts are within the powers
of the corporation but are considered ultra vires because they
were entered into on behalf of the corporation by persons who
have no corporate authority or have exceeded the scope of
their authority.
a. Another, a contract to sell cement signed by the president

and chairman of the corporation is not binding upon it
where they were not authorized by the board of directors
to enter into a contract and the company board of directors
disapproved the contract and the bylaws conferred the
power to manage the business of the corporation upon the
general manager.376
’’’Development Bank of the Philippines v. Commission on Audit, G.R. No.

210838, July 3, 2018.
3,6Yao Ka Sin Trading v. Court of Appeals, G.R. No. 53820, June 15,1992.
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b. There is also ultra vires act on the part of the board of

directors when it performs a corporate act without the
affirmative or ratificatory vote of the stockholders in
those instances where the RCC so requires.3” And there
is an ultra vires act on the part of the corporate officers
when they performed acts, purportedly on behalf of the
corporation, without having been so expressly or impliedly
authorized by the bylaws or board of directors, even when
the act or contract falls within the corporation’s express,
implied or incidental power, unless the acts are ratified
by the corporation.3’8 (l
195. Is an ultra vires act illegal?

An illegal act, such as one that is contrary to law, is necessarily
ultra vires but an ultra vires act is not necessarily an illegal act if it
only one that is outside the conferred powers of the corporation.”9
The term ultra vires should be distinguished from an illegal
act for the former is merely voidable which may be enforced by
performance, ratification, or estoppel, while the latter is void and
cannot be validated. It being merely voidable, an ultra vires act can
be enforced or validated if there are equitable grounds for taking
such action.380
196. May an ultra vires act be ratified?

An act that is ultra vires for being an illegal act cannot be
ratified. If a contract is ultra vires in the strict sense of the word,
it cannot ordinarily be ratified to make it valid. As to the question
of whether the consent of all the stockholders to an act of the
corporation can put such act within the powers of the corporation,
it may be stated as a general rule that the ratification of an ultra
vires act does not validate it, and this is also true as to ratification
by the stockholders. However, there is some authority tending to
hold the contrary case of ratification by stockholders, at least where
’’’Sections 36 to 43 of the RCC and 2009 Bar Exam.

”“2009 Bar Exam.
”9Maria Carla Pirovano v. De La Rama Steamship, Co., G.R. No. L-5377, En
Banc, December 29, 1954, J. Bautista Angelo; Republic v. Acoje Mining Co., Inc.,
G.R. No. L-18062, En Banc, February 28, 1963, J. Bautista Angelo; Gokongwei, Jr.
v. Securities and Exchange Commission, G.R. No. L-45911, En Banc, April 11, 1979,
J. Antonio.
“““Republic v. Acoje Mining Company, G.R. No. L-18062, February 28,1963.
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the rights of the state or creditors are not involved.3*1 The majority
of the cases though hold that acts which are merely ultra vires, or
acts which are not illegal, maybe ratified by the stockholders of a
corporation.382
It was held that a contract entered into by corporate officers
who exceed their authority generally does not bind the corporation
except when the contract is ratified by the Board of Directors. In
Office of the Ombudsman v. Antonio Z. De Guzman, there was no
evidence presented that the Board of Directors of the Philippine
Postal Corporation repudiated the contract with Aboitiz One for
outsourcing mail deliveries. The contract remained effective until
a certain period. Considering that the Board of Directors remained
silent and the Postmaster Generals continued to approve the
payments to Aboitiz One, they are presumed to have substantially
ratified the company official’s unauthorized acts. Therefore, the
official’s action is not considered ultra vires.363
The foregoing case affirms that an ultra vires act, which is not
an illegal act, may be ratified by the stockholders of the corporation.
6. Consequences of ultra vires acts

197. What are the consequences of ultra vires acts?
a. If the contract is executed on both sides, the courts will
not set aside or interfere to deprive either party of what
has been acquired under them.
b. If the contract is executory on both sides, it will not
be enforced at the suit of either party, because their
enforcement is not required by any equitable principles,
and will be contrary to public policy.
c. If the contract is executed on one side, and executory on
the other, courts in some jurisdictions, although not in
all, will enforce in favor of the party who has executed the
same on his part against the other party who has received
and retained the benefits on the ground that equitable
principles and outweighing considerations of public
38IIII Fletcher, Section 1518.

“’Brooklyn Heights R. Co. v. Brooklyn City R. Co., 135 N.Y. Supp. 1001, cited
in Pirovano v. Dela Rama Steamship, G.R. No. L-5377, December 29,1954.
’“Office of the Ombudsman v. Antonio Z. De Guzman, G.R. No. 197886,
October 4, 2017.
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policy, require that the latter should not be permitted,

while retaining the benefits of the contract, to escape
liability on the ground that it was ultra vires.
d. Contracts, whether wholly executory or executed on
one side, apparently authorized, but in fact, ultra vires
because they are made for a purpose not within the scope
of the business of the corporation, the ultra vires purpose
being unknown to the other party, are enforceable against
the corporation.384
198. What is the remedy of the stockholder against an ultra vires

act?
If the act is yet to be done, the remedy is one of injunction to
enjoin the performance or continued performance of the ultra vires
act. If the act has already been performed, a stockholder may file
a derivative suit on behalf of the corporation to set aside the ultra
vires act.
c. Doctrine of individuality of subscription

199. What is the doctrine of individuality of subscription?
This means that a subscription is one, entire, and indivisible
whole contract. This indivisibility of subscription is absolute as
Section 63 of the RCC speaks no exception.
The purpose of the doctrine is to prevent the partial disposition
of a subscription, which is not fully paid, because if it is permitted
and the stockholder subsequently becomes delinquent in the
payment of his subscription, the corporation may not be able to sell
as many of his subscribed shares as would be necessary to cover the
total amount from him pursuant to Section 67 of the RCC.
d. Doctrine of equality of shares

200. What is the doctrine of equality of shares?
The doctrine of equality of shares means that all stocks issued
by the corporation are presumed equal, with the same privileges
and liabilities, provided that the articles of incorporation is silent
384III Fletcher, Section 1515.
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on such differences.385 Stated otherwise, each share shall be equal

in all respects to every other share, except as otherwise provided
in the articles of incorporation and the certificate of stock.388 Thus,
all shares have the same rights and privileges unless classified
differently in the Articles of Incorporation, and such classification
is not contrary to law. Preferred shares, therefore, have the same
voting rights similar to common shares unless the preferred shares
are denied such right in the articles of incorporation.
Any restriction on shares should also be stated in the articles
of incorporation, otherwise, it is not valid. In a couple of cases,38’
the Supreme Court held that any lien on shares, like being held
as security for payment of dues and assessments, must be in the
articles of incorporation, not only in the bylaws, otherwise, it is
invalid.388
e. Trust fund doctrine

201. What is the trust fund doctrine?
The trust fund doctrine provides that subscriptions to the
capital stock of a corporation constitute a fund to which the creditors
have a right to look for the satisfaction of their claims.389 In a sense,
they have to be unimpaired for the protection of creditors. These
cover the entire consideration received for the issuance of no par
value shares or the aggregate amount for the par value shares
issued by the corporation.
It must be noted, however, that the trust fund doctrine is not
limited to the stockholders’ subscriptions. The scope of the doctrine
encompasses not only the capital stock but also other property and
assets generally regarded in equity as a trust fund for the payment
of corporate debts.390
’“Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 108576,

January 20,1999.
’“Section 6. RCC.
387Valley Golf and Country Club v. Vda de Caram, G.R. No. 158805, April 16,
2009; Calatagan Golf Club, Inc. v. Clemente, Jr., G.R. No. 165443, April 16,2009.
388See also discussion on restriction on transfers, infra.
™0ng v. Tiu, G.R. Nos. 144476 and 144629, April 8, 2003.
’“Halley v. Printwell, Inc., G.R. No. 157549, May 30, 2011; 2015 and 2019 Bar
Exams.
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202. When is the trust fund violated?

The Trust Fund Doctrine is violated in the following cases:
a. The corporation has distributed its capital among the
stockholders without providing for the payment of
creditors.
b. It released the subscribers to the capital stock from their
unpaid subscriptions.
c. It transferred corporate property in fraud of its creditors.
d. It distributed properties to stockholders except by way of
dissolution and liquidation, the redemption of redeemable
shares, and reduction of capital stock.391
e. When it declared dividends without unrestricted retained
earnings.392
f. When it acquired its shares without unrestricted retained
earnings.393
203. Does the additional paid-in capital ("APIC"), that is, the
premium above par value, form part of the trust fund doctrine?
APIC forms part of the equity emanating from the original
subscription agreement. APIC, as a premium, forms part of the
capital of the corporation and therefore, falls within the purview of
the trust fund doctrine.391 There have been previous SEC Opinions3”
that stock dividends can be declared out of APIC but the most
recent SEC regulation, as previously pointed out, is that APIC shall
neither be declared as dividend nor shall it be reclassified to absorb
deficiency except through an organizational restructuring duly
approved by the SEC.390
39lOng V. Tiu, G.R. Nos. 144476 and 144629, April 8, 2003; 2007 and 2015 Bar
Exams.
’91SEC-OGC Opinion No. 50-2019.
395SEC Letter Opinion, July 5, 1994; Re: William, Gothong & Aboitiz (WG&A)
SEC Opinion dated October 2, 2001.
396SEC-OGC Opinion No. 23-19, June 17, 2019; SEC Memorandum Circular
No. 11-08, December 5,2008; SEC Opinion No. 01-05, January 4,2005; SEC Opinion,
August 8, 1991.
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204. ABC Corporation ("ABC") obtained a loan from XYZ Bank

secured by a mortgage on its real property. ABC defaulted.
To stave off foreclosure, A, the controlling stockholder of ABC
invited investor X to invest in ABC. X subscribed to shares
of stock of ABC and became a significant stockholder. In
further consideration of his investment, X and A agreed on
how to manage the corporation. Unfortunately, the two (2)
stockholders had a disagreement, with each one claiming
a breach of the subscription agreement. May A rescind the
subscription of X?
No, the rescission of the Subscription Agreement will
effectively result in the unauthorized distribution of the capital
assets and property of the corporation, thereby violating the Trust
Fund Doctrine. Rescission of a subscription agreement is not one of
the instances when the distribution of capital assets and property of
the corporation is allowed. The Trust Fund Doctrine provides that
subscriptions to the capital stock of a corporation constitute a fund
to which the creditors have a right to look for the satisfaction of their
claims.397
i. How exercised
a. By the shareholders338
b. By the board of directors31>»
c. By the officers
205. When is the act of the officer of the corporation considered
the act of the corporation and therefore, valid and enforceable
against the corporation?
The authority of certain individuals to bind the corporation
is generally derived from law, corporate bylaws or authorization
by the board, either expressly or impliedly, by habit, custom or
acquiescence. Thus, the act of the officer binds the corporation if he
is authorized by law, the bylaws, or by the board of directors, or if
despite lack of authority from any of the three (3) sources, his act is
ratified by the corporation.100
3970ng Yong, et al. v. David S. Tiu, et al., G.R. No. 144476 and G.R. No. 144629,
April 8, 2003.
39sSee discussion on cases requiring stockholders’ approval, infra.
399See discussion on board of directors, infra.
400People’s Aircargo and Warehousing Company v. Court of Appeals, G.R. No.
117847, October 7, 1998; Citibank, N.A. v. Hon. Segundino G. Chua, et al., G.R. No.
102300, March 17, 1993.
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For instance, since the bylaws are a source of authority for

corporate officers and agents of the corporation, a resolution of
the Board of Directors of Citibank appointing an attorney in fact
to represent and bind it during the pre-trial conference of the case
at bar is not necessary because its bylaws allow its officers, the
Executing Officer and the Secretary Pro-Tem to execute a power of
attorney to a designated bank officer clothing him with authority to
direct and manage corporate affairs, including the appointment of
legal counsel.'01
The board, on the other hand, as previously discussed, has the
power to designate the officer who will perform specified acts on
behalf of the corporation.
In one case, it was held that a board resolution authorizing a
corporate officer to obtain a loan includes the authority to assign
receivables to secure the loan if the resolution empowers the officer
to agree to the terms and conditions of the loan and to sign the
implementing documents.'02 1
Even in the absence of authority from the articles of
incorporation and/or the bylaws or from the board of directors, the
acts of the officer are binding on the corporation if such acts are
ratified by the corporation, either subsequent thereto or under the
doctrine of apparent authority. In the People’s Aircargo case,'03 the
Supreme Court held that in the absence of charter or bylaw provision
to the contrary, the president is presumed to have the authority to act
within the domain of the general objectives of its business and falls
within the scope of his usual duties. And even if a certain contract
is outside the usual powers of the president, the corporation’s
ratification of the same and acceptance of benefits make it binding,
Thus, where the president of the corporation hired a consultant to
prepare an operations manual in connection with its application
for a license as a bonded warehouse, the corporation accepted the
operations manual and allowed the contract to conduct a seminar
for its employees, the contract is binding on the corporation even
though there was no written authorization from the board which is
deemed to have ratified the contract.
'“'Citibank, N.A. Hon. Segundino G. Chua, et al., G.R. No. 102300, March
17,1993.
'^Great Asian Sales Center Corporation v. Court of Appeals, G.R. No. 105774,
April 25, 2002.
mSupra.
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206. What is the doctrine of apparent authority?

The doctrine of apparent authority provides that a corporation
will be estopped from denying the agent’s authority if it knowingly
permits one of its officers or any other agent to act within the scope of
apparent authority, and it holds him out to the public as possessing
the power to do those acts.
Although an officer or agent acts without, or in excess of, his
actual authority if he acts within the scope of an apparent authority
with which the corporation has clothed him, by holding him out or
permitting him to appear as having such authority, the corporation
is bound thereby in favor of a person who deals with him in good
faith in reliance on such apparent authority, as where an officer
is allowed to exercise a particular authority with respect to the
business, or a particular branch of its continuously and publicly, for
a considerable time.404
207. Cite jurisprudence where the Supreme Court applied the

doctrine of apparent authority.
a. When a bank, by its acts and failure to act, has clearly
clothed its manager with apparent authority to sell an
acquired asset in the normal course of business, it is legally
obliged to confirm the transaction by issuing a board
resolution to enable the buyers to register the property
in their names. It has a duty to perform necessary and
lawful acts to enable the other parties to enjoy all benefits
of the contract which it had authorized.405
b. A bank is liable to the seller who transferred ownership
of his property in favor of its buyer after the seller relied
on the letter of the bank manager that the buyer had an
approved real estate loan with the bank and guaranteed
that subsequent releases from the loan would be made
directly to the seller, but the manager released the loan
instead to the buyer who, however, failed to pay the
seller.406
404TERP Construction Corporation v. Banco Filipino Savings and Mortgage

Bank, G.R. No. 221771, September 18, 2019.
405Rural Bank of Milaor (Camarines Sur) v. Francisca Ocfemia, et al., G.R. No.
137686, February 8, 2000.
406Games and Garment Developers v. Allied Banking Corporation, G.R. No.
181426, July 13, 2015.
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c. The records of the case show no evidence that the

corporation authorized the president to file a complaint
and enter into a compromise agreement on its behalf.
Neither was there any showing that the corporate bylaws
authorize its president to do such acts. The corporation’s
grant of authority to the president, however, falls under
the doctrine of apparent authority. Furthermore, having
availed of benefits under the Compromise Agreement, the
corporation is estopped from repudiating it.407
d. Banco Filipino purchased a bond from TERP Construction
(“TERP”) and relied on TERP senior vice president’s
(“SVP’) apparent authority to promise interest payments
over and above the guaranteed 8.5%, considering the
SVP’s position in TERP. His apparent authority was
further demonstrated when TERP paid Banco Filipino
what the SVP promised during the Bonds’ term.408
I
208. Cite jurisprudence where the Supreme Court did not apply the
doctrine of apparent authority.
a. There having been no quorum present during the meeting
where his authority was supposed to have been given, the
filing of a petition for the reconstitution of the owner’s
duplicate of a transfer certificate of title by the branch
manager is unauthorized. The doctrine of apparent
authority cannot apply because being a mere branch
manager, he could not be looked upon as a corporate
officer clothed with the implied or apparent power to
file the suit (particularly given his responsibility in the
corporation which is not at all connected with the filing of
the petition).409
b. Although a branch manager, within his field and as to
third persons, is the general agent and is in general
charge of the corporation, with apparent authority
commensurate with the ordinary business entrusted
“’Engineering Geoscience, Inc. v. Philippine Savings Bank, G.R. No. 187262,

January 10, 2019.
408TERP Construction Corporation v. Banco Filipino Savings and Mortgage
Bank, G.R. No. 221771, September 18, 2019.
409New Durawood Company v. Court of Appeals, G.R. No. 111732, February
20,1996.
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him and the usual course and conduct thereof, yet the
power to modify or nullify corporate contracts remains
generally in the board of directors. Being a mere branch
manager alone is insufficient to support the conclusion
that he has been clothed with “apparent authority* to
verbally alter terms of written contracts, especially
when viewed against the telling circumstances of this
case: the unequivocal provision in the mortgage contract;
the corporation’s vigorous denial that any agreement to
release the mortgage was ever entered into by it; and, the
fact that the purported agreement was not even reduced
into writing considering its legal effects on the parties’
interests.410
C. While in the absence of a charter or bylaw provision to
the contrary the president is presumed to have authority,
the questioned act should still be within the domain of the
general objectives of the company’s business and within
the scope of his or her usual duties. Here, the corporation
is an association of professional horse trainers in the
Philippine horse racing industry organized as a nonstock
corporation and it is committed to the uplifting of the
economic condition of the working sector of the racing
industry. It is not in its ordinary course of business to
enter into housing projects, especially not in such scale and
magnitude so massive as to amount to P101,150,000.00.4U
Based on these cases, the doctrine of apparent
authority will not apply if the transaction is not part of
the function of the officer within the corporation and/
or the transaction is not related to the purposes of the
corporation. As a simple example, the officer of the
corporation in charge of the administration of facilities
can never bind the corporation for contracts relating to an
investment in securities as the latter transaction is not
related to the function of the officer in the corporation.
110Banate v. Philippine Countryside Rural Bank (Liloan, Cebu), Inc., G.R. No.
163825, July 13, 2010.
‘■'Philippine Race Horse Trainer’s Association, Inc. v. Piedras Negras
Construction and Development Corporation, G.R. No. 192659, December 2,2015.
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VIII. Stockholders and members
a. Fundamental rights of a stockholder

209. What are the rights of a stockholder?
In exchange for his equity investment in a corporation, a
stockholder is entitled to the following rights:
a. Proprietary Rights — these rights pertain to certain
economic benefits that accrue to his shares, such as:
i. Right to receive dividends; and
ii. Right to participate in the assets of the corporation
upon dissolution and liquidation.
b. Management Rights - these refer to participation in
the conduct of the business of the corporation exercised
through the following:
i. Right to vote on all corporate acts requiring
stockholder’s approval; and
ii. Right to elect the directors of the corporation.
c. Remedial Rights — these refer to remedies the stockholder
may pursue depending on the issues involved, such as:
i. Appraisal right;
ii. Pre-emptive right;
iii. Right to inspect;
iv. Right to copy of the financial statements of the
company; and
v. Right to file a derivative suit.
b. Participation in management
i. Proxy
210. What is a proxy?
A proxy is the written instrument signed by the stockholder
authorizing another person to exercise the voting rights of the
former. It may also refer to the person exercising the voting authority
granted by the stockholder.
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211. What is the purpose of proxies?

A stockholder is allowed to vote in person or by proxy. Through
proxies, stockholders can ensure their participation and voting
during the stockholders meeting and protect their interest even
though they may not be physically present.
The system of proxy voting also helps the corporation achieve
quorum during stockholders’ meetings and assists Management
secure control of the corporation.
212. Who may be a proxy?

Any natural person who has the legal capacity to act may be
a proxy. He is basically an agent, with the stockholder granting the
proxy as his principal. A stockholder disqualified to vote under the
RCC or the bylaws of the corporation may be appointed proxy as
long as he has the legal capacity.
If the stockholder is a natural person, the proxy will be basically
in the form of a power of attorney. In case of corporate stockholder,
the proxy will be in the form of a board resolution authorizing
another person to exercise the stockholder’s voting rights in the
corporation.
213. What are the limitations on proxies?

a. Proxies shall be in writing, signed, and filed, by the
stockholder or member, in any form authorized in the
bylaws and received by the corporate secretary on the
date fixed in the bylaws but not later than a reasonable
time before the scheduled meeting.
b. Unless otherwise provided in the proxy form, it shall be
valid only for the meeting for which it is intended.
c. No proxy shall be valid and effective for a period longer
than five (5) years at any one (1) time.412 While the proxy
cannot exceed five (5) years, a new proxy can always be
given with another five-year period.
1l2Section 57, RCC.
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ii. Voting trust J
214. What is a voting trust?

It is an agreement where one (1) or more stockholders of a
stock corporation confer upon a trustee or trustees the right to vote
and other rights pertaining to the shares for a period generally not
exceeding five (5) years at any time.
By its nature, a voting trust agreement creates a dichotomy
between the voting rights of the stockholder and his other rights."’
The transferring stockholder parts away with his voting rights but
retains equitable or beneficial ownership over the stock. As such, he
has the right to receive dividends and other rights a stockholder is
entitled to, until the dissolution and liquidation of the corporation.
He also retains his right of inspection which he can exercise
concurrently with the voting trustee. But, having conveyed the legal
title to the trustee, the transferring stockholder is disqualified from
being elected as a director.
If he executes the voting trust agreement during his term as a
director, he shall cease to be a director of the corporation.'111
215. What are the powers of the voting trustee?

The voting trustee is entitled to all the rights of a stockholder
pertaining to the shares transferred subject to the terms and
conditions of the agreement. He may vote in person or by proxy
unless the agreement provides otherwise. Having legal title to the
shares, he is qualified to be elected as a director. However, he is
not entitled to proprietary rights, like to receive dividends and
the assets of the corporation upon dissolution and liquidation. He
may, however, create a security interest over the dividends of the
transferring stockholder, as a security for a loan.
216. A distressed company ("Company") executed a voting trust

agreement for a period of three (3) years over 60% of its
outstanding paid-up shares in favor of a bank to whom it was
indebted, with the Bank named as trustee. Additionally, the
Company mortgaged all its properties to the Bank.
n3Lee v. Court of Appeals, G.R. No. 91436, February 4, 1992.
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Because of the insolvency of the Company, the Bank

foreclosed the mortgaged properties, and as the highest
bidder, acquired said properties and assets of the Company.
The three-year period prescribed in the Voting Trust
Agreement having expired, the Company demanded the
turnover and transfer of all its assets and properties, including
the management and operation of the Company, claiming that
under the Voting Trust Agreement, the bank was constituted
as trustee of the management and operations of the Company.
Does the demand of the Company tally with the concept
of a Voting Trust Agreement? Explain briefly.
No. The demand of the Company does not tally with the concept
of a Voting Trust Agreement. Under a voting trust agreement, the
transferring stockholder merely conveys to the trustee the right to
vote and other rights of a stockholder over the transferred shares
except for proprietary rights.
The consequence of the foreclosure of the mortgaged properties
is distinct and separate from the Voting Trust Agreement and its
effects.416
217. What is the purpose of a voting trust?

Voting trust is a control device by which a group may gain or
retain control over the management of the corporation. This control
device is allowed as long as it is not entered into for purposes of
circumventing the laws against anti-competitive agreements, abuse
of dominant position, anti-competitive mergers and acquisitions,
violation of nationality and capital requirements, or for the
perpetuation of fraud.
218. What are the formalities and limitations on voting trust

agreement?
a. It should not exceed five (5) years at any time, provided,

that in the case of a voting trust specifically required as a
condition in a loan agreement, said voting trust may be for
a period exceeding five (5) years but shall automatically
expire upon full payment of the loan.
4161992 Bar Exam.
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b. A voting trust agreement must be in writing^nd notarized

and shall specify the terms and conditions thereof.
C. A certified copy of such agreement shall be filed with the
corporation and with the SEC; otherwise, the agreement
is ineffective and unenforceable.
d. 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. The books of
the corporation shall state that the transfer in the name
of the trustee or trustees is made pursuant to the voting
trust agreement.
e. 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.
f. The voting trust agreement filed with the corporation
shall be subject to examination by any stockholder of the
corporation in the same manner as any other corporate
book or record: Provided, That both the trustor and the
trustee or trustees may exercise the right of inspection
of all corporate books and records in accordance with the
provisions of the RCC.
g- No voting trust agreement shall be entered into for
purposes of circumventing the laws against anti
competitive agreements, abuse of dominant position,
anti-competitive mergers and acquisitions, violation
of nationality and capital requirements, or for the
perpetuation of fraud.
h. Unless expressly renewed, all rights granted in a voting
trust agreement shall automatically expire at the end of
the agreed period. The voting trust certificates, as well
as the certificates of stock in the name of the trustee
or trustees, shall thereby be deemed canceled and new
certificates of stock shall be reissued in the name of the
trustors.
i. The voting trustee or trustees may vote by proxy or in
any manner authorized under the bylaws unless the
agreement provides otherwise.
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219. Distinguish proxy from voting trust agreement.

__________ f______________________ ________ ________
__________ Proxy Voting Trust Agreement
As to form It must be in writing, signed It must be in writing,
by the stockholder and filed signed by the stockholder
with the corporate secretary and notarized. A copy of
on the date fixed in the the voting trust agreement
bylaws but not later than a must be submitted to the
reasonable time before the SEC, otherwise, it is not
meeting. enforceable.
The RCC clarified that proxy
may be in any form as long
as the same is authorized by
the bylaws.
As to the A proxy is vested the right to A trustee is vested legal
rights vote. title to the shares and as
conferred such, may exercise not only
No right to inspect is granted,
voting right but the right of
unless separately authorized
inspection as well.
for that purpose.
A trustee is qualified to be
A proxy cannot be voted and
elected as director or trustee.
cannot qualify as director of
a corporation unless he is a All rights of a stockholder
stockholder in his own right. may be exercised by trustee
EXCEPT proprietary
rights (e.g., right to receive
dividends and to receive
the assets upon dissolution
and liquidation of the
corporation).
As to term Valid only for the meeting Valid for a period not
intended, unless general and exceeding five (5) years.
continuing in nature but not The voting trust can be
to exceed five (5) years. longer than five (5) years if
executed pursuant to a loan
The presence of stockholder
agreement, but expires upon
or principal revokes the
full payment of a loan.
authority of the proxy holder.
The voting trust can be
extended if it is co-terminus
with the loan agreement.
The presence of trustor does
not revoke the authority of
the trustee.
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iii. Cases when stockholders’ action is.required

(a) By a majority vote
(b) By a two-thirds vote
220. Enumerate the corporate acts requiring stockholders' approval
in a meeting called for the purpose.
The concurrence of the stockholders to the resolutions of the
Board of Directors is required in the following cases:
a. By a Majority Vote of the Outstanding Capital Stock
i. To enter into management contract (Section 43,
RCC)
ii. To amend or repeal bylaws (Section 47, RCC)
iii. To dissolve a corporation when creditors are not
affected (Section 134, RCC)
b. By a Two-Thirds (2/3) Vote of the Outstanding Capital
Stock 1
i. To amend the articles of incorporation (except when
mere written assent is allowed) (Section 15, RCC)
ii. To extend or shorten the corporate term (Section 36,
RCC)
iii. To increase or decrease capital stock, and create or
incur bonded indebtedness (Section 37, RCC)
iv. To amend the articles of incorporation to deny pre
emptive right (Section 38, RCC)
v. To sell or dispose of all or substantially all of
corporate assets (Section 39, RCC)
vi. To invest corporate funds in another corporation or
business or for any other purpose (Section 41, RCC)
vii. To declare stock dividends (Section 42, RCC)
viii. To enter into management contract if (a) 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 (b) where a
majority of the members of the board of directors of
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the managing corporation also constitute a majority

of the members of the board of directors of the
managed corporation (Section 43, RCC)
ix. Merger or consolidation (Section 75, RCC)
x. Dissolution where creditors are affected (Section
135, RCC)
However, in the following instances, the stockholders may act
even without the concurrence of board resolution:
i. Delegate to the board the power to amend, repeal or adopt
new bylaws - by at least 2/3 of Outstanding Capital Stock
(Section 47, RCC)
ii. Ratification of contracts of the corporation with one (1) or
more of its directors, trustees, officers or their spouses and
relatives within the fourth civil degree of consanguinity
or affinity — by at least 2/3 of outstanding capital stock
(Section 31, RCC)
iii. Revocation of the power delegated to the board to amend,
repeal or adopt new bylaws — by at least majority of the
outstanding capital stock (Section 47, RCC)
iv. Grant of compensation to directors - by at least majority
of the outstanding capital stock (Section 29, RCC)
v. Election of director (Section 23, RCC) -by at least majority
of the outstanding capital stock
vi. Filling of vacancies in the board due to expiration of term,
removal or increase in the number of board seats, or if
the cause of the vacancy is not due to expiration of term,
removal, or increase in the number of board seats but
the remaining directors or trustees do not constitute a
quorum (Section 28, RCC) - by at least majority of the
outstanding capital stock
vii. Removal of directors (Section 27, RCC) - by at least 2/3 of
viii. Fixing the issue price of no-par value shares (Section 61,
RCC)—by at least majority of the outstanding capital stock
ix. Amendment of the articles of incorporation of a close
corporation which seeks to delete or remove any provision
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required to be contained in the articles of incorporation of

a close corporation (Section 102, RCC) — by at least 2/3 of
_• •! >ri: ci
(c) By cumulative voting
Please see discussion on cumulative voting.416
iv. Manner of voting

221. What are the modes of voting in a stockholders’ or members1
meeting under the RCC?
The right to vote of stockholders or members may be exercised
in person, through a proxy, or when so authorized in the bylaws,
through remote communication or in absentia.417
At all elections of directors or trustees, the right to vote
through remote communication or in absentia may be exercised in
corporations vested with public interest, notwithstanding the absence
of a provision in the bylaws of such corporations. A stockholder or
member who participates through remote communication or in
absentia shall be deemed present for purposes of quorum.418
The board may, therefore, allow such mode of voting even if
the bylaws are silent on such provision. Should the board, however,
resolve to allow voting through remote communication or in absentia,
it has to approve the guidelines and procedure therefor.
C. Proprietary rights
i. Right to dividends'
ii. Appraisal right
(a) When available
222. What is appraisal right?
It is the right of the stockholder to demand the payment of the
fair value of his shares after dissenting against a proposed corporate
act in the cases specified by law.420 In practical terms, it means the
right to get out of the corporation and get back his equity investment.
""Supra.
*xlIbid.
4l8Section 23, RCC.
419See previous discussion on dividends.
420Section 80, RCC.
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223. What are the instances when appraisal right is available?

The appraisal right can be exercised by a dissenting stockholder
in the following cases:
a. In case an amendment to the articles of incorporation
has the effect of changing or restricting the rights of
any stockholder or class of shares, or of authorizing
preferences in any respect superior to those of outstanding
shares of any class, or of extending or shortening the term
of corporate existence.
b. In case of sale, lease, exchange, transfer, mortgage,
pledge or other disposition of all or substantially all of the
corporate property and assets.’21
C. In case of merger or consolidation.
d. In case of investment of corporate funds for any purpose
other than the primary purpose of the corporation.’22
e. In a close corporation, a stockholder may, 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.423
224. Cite examples of the amendment to the articles of incorporation

that 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, which then warrants the exercise of appraisal right.
a. Denial of pre-emptive right.
b. Creating shares which are given preferences in payment
of dividends or in the distribution of assets or other
preferences as may be indicated in the amendment to the
articles of incorporation provided they are not contrary to
law.
’21See discussion in Section 39, RCC.

’“Article 104, RCC.
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C. Converting non-voting preferred shares to voting shares.

d. Making non-voting redeemable preferred shares into
convertible voting shares in case of non-redemption of the
redeemable shares.
225. What are the requisites for the valid exercise of appraisal right?
The requisites are:
a. It can only be exercised in cases specified by law.424
b. The dissenting stockholder must have voted against a
proposed corporate action specified by law.426
c. The stockholder must make a written demand on the
corporation for the payment of the fair value of shares
held within 30 days from the date on which the vote was
taken.426
d. If the proposed corporate action is implemented, the
corporation shall pay the stockholder, upon surrender
of the certificate or certificates of stock representing the
stockholder’s shares, the fair value thereof as of the day
before the vote was taken, excluding any appreciation or
depreciation in anticipation of such corporate action.427
e. The fair value must be determined in accordance with the
mechanism set forth by law.426
f. Within 10 days after demanding payment for shares held,
a dissenting stockholder shall submit the certificates
of stock representing the shares to the corporation for
notation that such shares are dissenting shares. Failure
to do so shall, at the option of the corporation, terminate
appraisal right.429
g- Availability of unrestricted retained earnings.420
424Section 79, RCC.

™Ibid.
™Ibid.
,2aIbid.
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226. Is the stockholder's presence in the meeting where the

proposed corporate action was taken up necessary?
He must be present to vote against the corporate act in
those cases where stockholders’ meeting is required by the RCC
or to approve such corporate act. All of the corporate acts where
appraisal right may be exercised require a stockholders’ meeting
under the relevant provisions of the RCC (Section 36 for extension
or shortening of term, Section 39, for sale of all or substantially all of
corporate assets, Section 41, for the investment of corporate funds in
the secondary purpose or another business and Section 76 for merger
and consolidation).
Amendment to the articles of incorporation that 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 can be approved by mere
written assent131 unless the articles of incorporation or the bylaws
require stockholders’ meeting for the purpose. In close corporation,
a stockholder may, for any reason, compel the said corporation to
purchase his share 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.
This does not require any meeting.
Under Section 11 of the RCC, a stockholder is entitled to
exercise his appraisal right by reason of the automatic conversion of
the term to perpetual existence.
In these cases where stockholders’ meeting is not compulsory
under the law, the vote of dissent can be communicated to the
corporation. This is particularly more true now under the RCC which
allows for voting in absentia or through remote communication, if so
provided in the bylaws or if approved by a majority of the board of
directors/32
227. ABC Corporation proposed to amend its articles of

incorporation to deny the pre-emptive right of its stockholders.
In the stockholders' meeting where the matter was taken up,
"X" a stockholder, voted against the proposal. He, thereafter,
demanded the payment of his shares. Unfortunately, when

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he made a demand for payment, the Corporation had no

unrestricted retained earnings. Thus, his demand for payment
was not acted upon. He filed a collection suit. While the case
was pending, the corporation posted surplus profit.
Is the exercise of appraisal right as a result of the
amendment of the articles of incorporation correct?
Yes, because the amendment of the articles of incorporation
to deny pre-emptive right restricts his right as a stockholder to
subscribe to issuance and disposition of shares by the corporation.
Under Section 80 of the RCC, such kind of amendment allows for the
exercise of appraisal right.
b. Is "X" entitled to payment?

No, his demand for payment and collection suit are premature
because, at the time of demand, the corporation had no available
surplus profit. The fact that the corporation posted retained earnings
during the pendency of the case did not cure the prematurity of
cause of action. The availability of surplus profit did not retroact to
the date of demand for payment/33
Please note while the law requires that demand for payment
should be made within 30 days the vote was taken, this is on the
assumption there are available unrestricted retained earnings.
Otherwise, the stockholder must wait. Based on Turner v. Lorenzo
Shipping Corporation,'34 once surplus profit is available, the
stockholder must make another demand for payment. Only if he is
refused that he can file the action in court to enforce the payment of
the fair value of his shares.
(b) Manner of exercise of right

228. How is appraisal right exercised?
The dissenting stockholder who votes against a proposed
corporate action may exercise the right of appraisal by making
a written demand on the corporation for the payment of the fair
value of shares held within 30 days from the date on which the
vote was taken: Provided, That failure to make the demand within
such period shall be deemed a waiver of the appraisal right. If the
‘“Turner v. Lorenzo Shipping Corporation, G.R. No. 157479, November 24,2010.

431G.R. No. 157479, November 24, 2010.
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proposed corporate action is implemented, the corporation shall pay

the stockholder, upon surrender of the certificate or certificates of
stock representing the stockholder’s shares, the fair value thereof as
of the day before the vote was taken, excluding any appreciation or
depreciation in anticipation of such corporate action.
If, within 60 days from the approval of the corporate action 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 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
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:
Provided, further, That upon payment by the corporation of the
agreed or awarded price, the stockholder shall forthwith transfer
the shares to the corporation.435
229. What is the effect of demand for the payment of the fair value
of the stockholder's share?
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 the
RCC, 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 the said shares within 30 days after the award, the
voting and dividend rights shall immediately be restored.435
230. May a dissenting stockholder withdraw his demand for

payment in order to be restored to his rights as a stockholder?
No demand for payment of the fair value of the shares may be
withdrawn unless the corporation consents thereto.437

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231. When does the right to demand payment cease? When are the
rights of the dissenting stockholder restored?
The right to demand payment of the fair value of the shares
ceases in the same cases where his rights as a stockholder are
restored. These are:
a. demand for payment is withdrawn with the consent of the
corporation.
b. if the proposed corporate action is abandoned or rescinded
by the corporation or disapproved by the SEC where such
approval is necessary.
c. if the SEC determines that such stockholder is not entitled
to the appraisal right.438
d. if the dissenting stockholder is not paid the value of the
said shares within 30 days after the award, the voting
and dividend rights shall immediately be restored.439
232. What is the effect of appraisal right on the right of the

stockholder to dividends?
Upon demand for the payment of the fair value of the shares,
the right of the stockholder to receive dividends is suspended/40
Once appraisal right ceases in the cases provided by law, all
dividends which would have accrued on the shares shall be paid to
the dissenting stockholder.441
If the dissenting stockholder is not paid the value of the said
shares within 30 days after the award, the voting and dividend rights
shall immediately be restored.442 The right to demand payment does
not, of course, cease.
Note that based on a plain reading of these provisions, it
appears that if appraisal right ceases, the effect thereof is retroactive
with respect to dividends but if the stockholder is not paid within 30
days from the award, the right to dividends is only prospective in
application.
"“Section 83, RCC.

u0Ibid.
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233. Who bears the cost of the 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 cost
and expenses shall be assessed against the corporation, unless the
refusal of the stockholder to receive payment was unjustified."3
234. A dissenting stockholder sold his shares while awaiting

payment from the corporation. Can the buyer demand the
payment of the fair value of the shares sold?
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 the RCC
shall cease and the transferee shall have all the rights of a regular
stockholder."’ This means that the buyer cannot demand the
payment of the fair value of the shares.
235. What are the rules on the determination of the fair value of
shares?
The fair value of the shares is determined by the parties.
However, if, within 60 days from the approval of the corporate
action 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 (2) thus chosen. The findings of the majority
of the appraisers shall be final, and their award shall be paid by the
corporation within 30 days after such award is made."6
iii, Right to inspect

236. What are the records that corporations are required to keep
and preserve at its principal office?
Every corporation shall keep and carefully preserve at its
principal office all information relating to the corporation including,
but not limited to:
"3Section 84, RCC.

"’Section 85, RCC.
’"Section 81, RCC.
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a. The articles of incorporation and bylaws of the corporation

and all their amendments; ■ •/■
b. The current ownership structure and voting rights of the
corporation, including lists of stockholders or members,
group structures, intra-group relations, ownership data,
and beneficial ownership;
c. The names and addresses of all the members of the board
of directors or trustees and the executive officers;
d. A record of all business transactions;
e. A record of the resolutions of the board of directors or
trustees and of the stockholders or members;
f. Copies of the latest reportorial requirements submitted to
the SEC;
g- The minutes of all meetings of stockholders or members,
or of the board of directors or trustees. Such minutes shall
set forth in detail, among others: the time and place of
the meeting held, how it was authorized, the notice given,
the agenda therefor, whether the meeting was regular or
special, its object if special, those present and absent, and
every act done or ordered done at the meeting. Upon the
demand of a director, trustee, stockholder, or member,
the time when any director, trustee, stockholder, or
member entered or left the meeting must be noted in the
minutes; and on a similar demand, the yeas and nays
must be taken on any motion or proposition, and a record
thereof carefully made. The protest of a director, trustee,
stockholder, or member on any action or proposed action
must be recorded in full upon their demand;”0
h. Book of accounts, original, and duplicate originals of
invoices and receipts for goods and services purchased;*1'
and
i. Records as may be required under other applicable laws.
Stock corporations must also keep a stock and transfer book,
which shall contain a record of all stocks in the names of the
stockholders alphabetically arranged; the installments paid and
’’“Section 73, RCC.

’’’Section 237 of the Tax Code, as amended by TRAIN Law.
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unpaid on all stocks for which subscription has been made, and the
date of payment of any installment; a statement of every alienation,
sale or transfer of stock made, the date thereof, by and to whom
made; and such other entries as the bylaws may prescribe.41*
237. Is the stock and transfer book conclusive evidence to show the
outstanding capital stock of the corporation?
A stock and transfer book is necessary as a measure of
precaution, expediency, and convenience since it provides the only
certain and accurate method of establishing the various corporate
acts and transactions and of showing the ownership of stock and like
matters. However, a stock and transfer book, like other corporate
books and records, is not in any sense a public record, and thus is
not exclusive evidence of the matters and things which ordinarily
are or should be written therein.449
238. What is the nature of the stockholders' right to inspect

corporate records?
Every stockholder has the right to inspect the records of a
corporation. The stockholders’ right of inspection of the corporation’s
books and records is based upon their ownership of the assets and
property of the corporation.
The Corporation Code has granted to all stockholders the right
to inspect the corporate books and records, and in so doing has not
required any specific amount of interest for the exercise of the right
to inspect. The right cannot be denied on the basis that the inspection
is for a doubtful or dubious reason. The right of the shareholder
to inspect the books and records should not be made subject to
the condition of a showing of any particular dispute or of proving
any mismanagement or other occasion rendering an examination
proper, but if the right is to be denied, the burden of proof is upon the
corporation to show that the purpose of the shareholder is improper,
by way of defense.460

’“Jesus v. Lanuza, et al. v. Court of Appeals, et al., G.R. No. 131394, March
28, 2005.
450Terelay Investment and Development Corporation v. Cecilia Teresita J.
Yulo, G.R. No. 160924, August 5, 2015.
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The burden of proof is on the corporation to show that the

stockholder’s action in seeking examination of the corporate records
was moved by unlawful or ill-motivated design.’61
239. Is the stockholder's possession of a stock certificate

a condition precedent for the exercise of the right of
inspection?
No, a stockholder may exercise his right of inspection even
though he is not in the possession of a stock certificate. A stock
certificate is prima facie evidence that the holder is a shareholder of
the corporation, but the possession of the certificate is not the sole
determining factor of one’s stock ownership. It expresses the contract
between the corporation and the stockholder, but it is not essential
to the existence of a share in stock or the creation of the relation of
a shareholder to the corporation. More so, if the stockholder being
denied the right of inspection is a former director of the corporation.
The corporation would not have allowed his election as a director if
he was disqualified for lack of stock ownership.’62
Moreover, a stock certificate is issued only upon full payment
of the subscription’63 and holder of subscribed shares not fully paid
which are not delinquent has all the rights of a stockholder,*51
including the right of inspection.
240. What is the extent or scope of the right of inspection?

The right of inspection extends to all corporate records,
regardless of the form in which they are stored.’66 It covers the stock
and transfer book because it is part of corporate records.’66
It also extends to books and records of the corporation’s
wholly-owned subsidiary which are in the corporation’s possession
and control as it is more in accord with equity, good faith and
’’’Republic Sandiganbayan, G.R. Nos. 88809 and 88858 (Resolution), July

10,1991.
’62Abra Valley. Grace Borgona Insigne, et al. Abra Valley Colleges, Inc. and
Francis Borgona, G.R. No. 204089, July 29, 2015.
’56Aderito Z. Yujuico v. Cezar T. Quiambao, et al., G.R. No. 180416, June 2,
2014; Section 73, RCC.
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fair dealing to construe the statutory right of a stockholder to

cover such books and records.457
241. Who are the persons allowed to inspect corporate records?

Corporate records, regardless of the form in which they
are stored, shall be open to inspection by any director, trustee,
stockholder, or member of the corporation in person or by a
representative at reasonable hours on business days, and a demand
in writing may be made by such director, trustee, or stockholder
at their expense, for copies of such records or excerpts from said
records.
A requesting party who is not a stockholder or member of
record, or is a competitor, director, officer, controlling stockholder
or otherwise represents the interests of a competitor shall have no
right to inspect or demand reproduction of corporate records.458
242. What is the penalty for unjustified refusal to grant the right of
inspection?
Any officer or agent of the corporation who shall refuse to allow
the inspection and/or reproduction of records in accordance with
the provisions of the RCC shall be liable to such director, trustee,
stockholder, or member for damages, and in addition, shall be guilty
of an offense which shall be punishable under Section 161 of the
RCC.459
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.400
Under Section 161 of the RCC, the unjustified failure or
refusal by the corporation, or by those responsible for keeping and
maintaining corporate records, to comply with Sections 45, 73, 92,
128, 177 and other pertinent rules and provisions of the RCC on
inspection and reproduction of records shall be punished with a fine
ranging from Ten Thousand Pesos (P10,000.00) to Two Hundred
457John Gokongwei, Jr. v. Securities and Exchange Commission, el at, G.R.

No. L-45911, April 11, 1979.
458Section 73, RCC.
,mIbid.
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Thousand Pesos (P200.000.00), at the discretion of the court,

taking into consideration the seriousness of the violation and its
implications. When the violation of this provision is injurious or
detrimental to the public, the penalty is a fine ranging from Twenty
Thousand Pesos (P20,000.00) to Four Hundred Thousand pesos
(P400,000.00).
243. Did the RCC de-criminalize violation of stockholder's right of

inspection?
The RTC did not de-criminalize the violation of stockholder’s
right of inspection. It only removed the penalty of imprisonment and
limited the penalty to monetary fines.
244. What are the requisites before the penal provision may be
applied in a case of violation of a stockholder or member's
right to inspect the corporate books/records?
The elements of the offense are:
First. A director, trustee, stockholder, or member has made a
prior demand in writing for a copy of excerpts from the corporation’s
records or minutes;
Second. Any officer or agent of the concerned corporation shall
refuse to allow the said director, trustee, stockholder, or member of
the corporation to examine and copy said excerpts;
Third. If such refusal is made pursuant to a resolution or order
of the board of directors or trustees, the liability under this section
for such action shall be imposed upon the directors or trustees who
voted for such refusal; and
Fourth. Where the officer or agent of the corporation sets up the
defense that the person demanding to examine and copy excerpts
from the corporation’s records and minutes has improperly used any
information secured through any prior examination of the records
or minutes of such corporation or of any other corporation, or was
not acting in good faith or for a legitimate purpose in making his
demand, the contrary must be shown or proved.
Thus, in a criminal complaint for violation of Section 74 of
the Corporation Code (now Section 73 of the RCC), the defense of
improper use or motive is in the nature of a justifying circumstance
that would exonerate those who raise and are able to prove the same.
Accordingly, where the corporation denies inspection on the ground
J9JC9B0M
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of improper motive or purpose, the burden of proof is taken from the

shareholder and placed on the corporation. However, where no such
improper motive or purpose is alleged, and even though so alleged,
it is not proved by the corporation, then there is no valid reason to
deny the requested inspection.461
245. What are the remedies of a stockholder if the corporation

denies or does not act on his demand for inspection?
The remedies are as follows:
a. If the corporation denies or does not act on a demand for
inspection and/or reproduction, the aggrieved party may
report such denial or inaction to the SEC. Within five (5)
days from receipt of such report, the SEC shall conduct a
summary investigation and issue an order directing the
inspection or reproduction of the requested records;462
b. He may file with a criminal complaint for violation of his
right of inspection;463 and
c. He may file a petition for inspection of corporate records
(Rule 7 of the Rules of Procedure for Intra-Corporate
Controversies).
246. Is an action to recover possession of a stock transfer from the

former secretary of the corporation enforceable by criminal
prosecution based on violation of the stockholders' right of
inspection?
No, a criminal action based on the violation of a stockholder’s
right to examine or inspect the corporate records and the stock
and transfer book of a corporation can only be maintained against
corporate officers or any other persons acting on behalf of such
corporation. A violation of Section 74 of the OCC (now, Section 73
of the RCC) contemplates a situation wherein a corporation, acting
through one of its officers or agents, denies the right of any of its
stockholders to inspect the records, minutes and the stock and
transfer book of such corporation.
461Sy Tiong Shiou, et al. v. Sy Chim, el al., G.R. No. 179438, March 30, 2009.
KiIbid.
’“Sections 73 and 161, RCC.
k
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The proprietary right of the corporation to be in possession

of such records and book, though certainly legally enforceable by
other means, cannot be enforced by a criminal prosecution based on
a violation of the Corporation Code.164
247. What are the limitations on the stockholder's right of

inspection?
The right of inspection is not absolute. It is subject to the
following limitations:
a. It can only be exercised for a purpose germane to his
interest as a stockholder;
b. He must be acting in good faith or for a legitimate purpose
in making the demand to examine or reproduce corporate
records;
c. It must be exercised during reasonable hours on business
days;
d. Copies of corporate records or excerpts from said records
must be at the expense of the requesting director, trustee,
or stockholder; and
e. It is subject to other applicable laws.465
248. What are the defenses available to the corporation against

a person demanding to examine and copy excerpts from the
corporation's records?
a. The stockholder demanding to examine and copy
excerpts from the corporation’s records and minutes
has improperly used any information secured through
any prior examination of the records or minutes of such
corporation or of any other corporation.
b. The stockholder was not acting in good faith or for a
legitimate purpose in making the demand to examine or
reproduce corporate records.
464Aderito Z. Yujuico v. Cezar T. Quiambao, et al., G.R. No. 180416, June 2,

2014.
46520 17 Bar Exam.
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C. The person demanding inspection or is a competitor,

director, officer, controlling stockholder or otherwise
represents the interests of a competitor.466
d. The purpose of inspection is not germane to his interest
as a stockholder.467
e. The right is not being exercised during reasonable hours
on a business day.
f. The subject matter of the inspection is a protected
information under other applicable laws R.A. No. 8293,
otherwise known as the Intellectual Property Code of the
Philippines, as amended, and R.A. No. 10173, otherwise
known as the Data Privacy Act of 2012 and R.A. No.
1405, otherwise known as Law on Secrecy of Philippine
Currency Bank Deposits.
249. Cite examples of legitimate purposes to warrant the exercise of

the right of inspection.
Among the purposes held to justify a demand for inspection
are the following: (1) to ascertain the financial condition of the
company or the propriety of dividends; (2) to determine the value of
the shares of stock for sale or investment; (3) to determine whether
there has been mismanagement; (4) in anticipation of shareholders’
meetings, to obtain a mailing list of shareholders to solicit proxies
or influence voting; (5) to obtain information in aid of litigation with
the corporation or its officers as to corporate transactions.468
250. Cite examples of improper purposes which may justify denial

of the right of inspection.
Among the improper purposes which may justify denial of the
right of inspection are: (1) obtaining of information as to business
secrets or to aid a competitor; (2) to secure business “prospects”
or investment or advertising lists; (3) to find technical defects in
corporate transactions in order to bring “strike suits” for purposes of
blackmail or extortion.'169

467Gonzales v. Philippine National Bank, supra.
468Terelay Investment and Development Corporation v. Cecilia Teresita J.
Yulo, G.R. No. 160924, August 5, 2015.
ttaIbid.
k
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251. Is the right of inspection extinguished by the dissolution of the

corporation?
The termination of the life of a juridical entity does not, by
itself, cause the extinction or diminution of the rights and liabilities
of such entity nor those of its owners and creditors. Thus, the
revocation of the corporation’s registration does not automatically
strip off the stockholder of his right to examine pertinent documents
and records of the corporation.470
The rights and remedies against, or liabilities of, the officers
shall not be removed or impaired by reason of the dissolution of the
corporation. Corollary then, a stockholder’s right to inspect corporate
records subsists during the period of liquidation. Accordingly, if
the stockholder was deprived of the exercise of an effective right of
inspection, offenses had in fact been committed, regardless of lack
of criminal intent.471
252. What are the obligations of the stockholder allowed to inspect

or reproduce corporate records?
The inspecting or reproducing party shall remain bound by
confidentiality rules under prevailing laws, such as the rules on
trade secrets or processes under R.A. No. 8293, otherwise known as
the Intellectual Property Code of the Philippines, as amended, R.A.
No. 10173, otherwise known as the Data Privacy Act of 2012, R.A.
No. 8799, otherwise known as The Securities Regulation Code, and
the Rules of Court.472
253. What is the liability of a stockholder who abused his right of

inspection?
Any stockholder who shall abuse the rights granted under this
section shall be penalized under Section 158 of the RCC, without
prejudice to the provisions of R.A. No. 8293, otherwise known as the
Intellectual Property Code of the Philippines, as amended, and R.A
No. 10173, otherwise known as the Data Privacy Act of 2012.
Under Section 158 of the RCC, if, after due notice and hearing,
the SEC finds that any provision of the RCC, rules or regulations,
or any of the SEC’s orders has been violated, the SEC may impose
470Alejandro - D.C. Roque v. People of the Philippines, G.R. No. 211108, June
7, 2017.
471Alfredo L. Chua v. People of the Philippines, G.R. No. 216146, August 24,2016.
472Section 73, RCC.
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any or all of the following sanctions, taking into consideration the

extent of participation, nature, effects, frequency and seriousness of
the violation:
a. Imposition of a fine ranging from Five Thousand Pesos
(P5,000.00) to Two Mihion Pesos (P2,000,000.00), and
not more than One Thousand Pesos (Pl,000.00) for each
day of continuing violation but in no case to exceed Two
Million Pesos (P2,000,000.00);
b. Issuance of a permanent cease and desist order;
c. Suspension or revocation of the certificate of incorporation;
and
d. Dissolution of the corporation and forfeiture of its assets
under the conditions in Title XIV of the RCC.
The last two (2) sanctions may obviously be imposed only if the
stockholder that abused the right of inspection is a corporation.
iv. Pre-emptive right"3

v. Right to vote"1
vi. Right to dividends"5
d. Remedial rights
254. What are the remedial rights available to stockholders

aggrieved by certain wrongful acts of the board and corporate
officers?
Certain wrongful acts on the part of the directors and corporate
officers may give rise to certain rights and the corresponding types
or kinds of suit, to wit:
i. Individual Suit
An individual suit is filed when the cause of action belongs to
the individual stockholder personally, and not to the stockholders as
a group or to the corporation (e.g., denial of the right to inspection
and denial of dividends to a stockholder).4’8
113 Supra.
474See previous discussion.
■’’“See previous discussion.
476Villamor v. Umale, G.R. Nos. 172843, 172881, September 24,2014.
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556 DIVINA ON COMMERCIAL LAW;
In one case, it was held that the suit cannot be characterized

as derivative, because she was complaining only of the violation of
her pre-emptive right and was merely praying that she be allowed
to subscribe to the additional issuances of stocks in proportion to her
shareholdings to enable her to preserve her percentage of ownership
in the corporation. She was therefore not acting for the benefit of the
corporation. Quite the contrary, she was suing on her own behalf,
out of a desire to protect and preserve her pre-emptive rights.4”
ii. Representative Suit

If the cause of action belongs to a group of stockholders, such
as when the rights violated belong to preferred stockholders, or
denial of the pre-emptive right to a group or class of stockholders, a
representative suit may be filed to protect the stockholders similarly
situated.478
Hi. Derivative Suit

255. What is a derivative suit?
A derivative suit is an action filed by stockholder in the name
and on behalf of the corporation to enforce a corporate right or cause
of action to set aside the wrongful acts of the corporation’s directors
and officers.
It concerns a wrong to the corporation itself. The real party in
interest is the corporation, not the stockholders filing the suit. The
stockholders are technically nominal parties but are nonetheless
the active persons who pursued the action for and on behalf of the
corporation.479
256. What is the rationale of the derivative suit?

A derivative suit is an exception to the general rule that the
corporation’s power to sue is exercised only by the board of directors
or trustees.
477Gilda C. Lim, el al. v. Patricia Lim-Yu, In her capacity as a Minority

Stockholder of Limpan Investment Corporation, G.R. No. 138343, Third Division,
February 19, 2001.
478Cua, Jr. v. Tan, 622 Phil. 661 (2009), e.g., denial of pre-emptive right of a
group of stockholders.
4,92019 Bar Exam; Florete v. Florete, G.R. No. 174909, January 20, 2016.
J9JC9B0M
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Individual stockholders may be allowed to sue on behalf of the

corporation whenever the directors or officers of the corporation
refuse to sue to vindicate the rights of the corporation or are the
ones to be sued and are in control of the corporation.
Remedies through derivative suits are not expressly provided
for in our statutes — more specifically, in the Corporation Code and
the Securities Regulation Code — but they are “impliedly recognized
when the said laws make corporate directors or officers liable for
damages suffered by the corporation and its stockholders for
violation of their fiduciary duties. They are intended to afford reliefs
to stockholders in instances where those responsible for running the
affairs of a corporation would not otherwise act.480
However, a derivative suit cannot prosper without first
complying with the legal requisites for its institution.481
257. What are the elements of a derivative suit?

Rule 8, Section 1 of the Interim Rules of Procedure for Intra-
Corporate Controversies (“Interim Rules”) provides the five (5)
requisites for filing derivative suits:
"SECTION 1. Derivative action. - A stockholder or
member may bring an action in the name of a corporation or
association, as the case may be, provided, that:
a. He was a stockholder or member at the time the acts or
transactions subject of the action occurred and at the time
the action was filed;
b. He exerted all reasonable efforts, and alleges the same
with particularity in the complaint, to exhaust all remedies
available under the articles of incorporation, bylaws,
laws or rules governing the corporation or partnership to
obtain the relief he desires;
c. No appraisal rights is available for the act or acts
complained of; and
d. The suit is not a nuisance or harassment suit.”
480Florete v. Florete, GR. No. 174909, January 20, 2016.

<81Nestor Ching v. Subic Bay Golf and Country Club, Inc., et al., G.R. No.
174353, September 10, 2014.
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In case of a nuisance or harassment suit, the court shall

forthwith dismiss the case.
The fifth requisite for filing derivative suits, while not included
in the enumeration, is implied in the first paragraph of Rule 8,
Section 1 of the Interim Rules: The action brought by the stockholder
or member must be “in the name of [the] corporation or association
to enforce a corporate right or cause of action.”482
258. AA, a minority stockholder, filed a suit against BB, CC, DD,
and EE, the holders of majority shares of MOP Corporation, for
alleged misappropriation of corporate funds. The complaint
averred, inter alia, that MOP Corporation is the corporation
in whose behalf and for whose benefit the derivative suit is
brought. In their capacity as members of the board of directors,
the majority stockholders adopted a resolution authorizing
MOP Corporation to withdraw the suit. Pursuant to said
resolution, the corporate counsel filed a motion to dismiss in
the name of MOP Corporation.
Should the motion be granted or denied? Reason briefly.
The motion should be denied. The complaint is in the nature of
a derivative suit. In Conmart (Phils.) Inc. v. Securities and Exchange
Commission)83 it was held that to grant the corporation concerned
the right of withdrawing or dismissing the suit, at the instance of
the majority stockholders and directors who themselves are the
persons alleged to have committed the breach of trust against the
interest of the corporation would be to emasculate the right of the
minority stockholders to seek redress for the corporation. Filing
such action as a derivative suit even by a lone stockholder is one of
the protections extended by law to the minority stockholders against
the abuses of the majority.'184
482OBcar C. Reyes v. Hon. Regional Trial Court of Makati, Branch 142, Zenith
Insurance Corporation, and Rodrigo C. Reyes, G.R. No. 165744, August 11, 2008;
Anthony Yu, et al. v. Joseph Yukayguan, et al., G.R. No. 177549, January 18, 2009;
Juanito Ang, for and in behalf of Sunrise Marketing (Bacolod), Inc. v. Sps. Roberto
and Rachel Ang, G.R. No. 201675, June 19, 2013; Alfredo L. Villamor, Jr. v. John S.
Umale, G.R. Nos. 172843 & 172881, September 24, 2014; Nestor Ching v. Subic Bay
Golf And Country Club, Inc., et al., G.R. No. 174353 September 10, 2014.
483Commart (Phils.) Inc., et al. v. Securities and Exchange Commission and
Alice Magtulac, G.R. No. 85318, June 3, 1991.
4842004 Bar Exam.
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259. What is the intent behind the second requisite for filing a
derivative suit - that there is exhaustion of intra-corporate
remedies?
The obvious intent behind the rule is to make the derivative
suit the final recourse of the stockholder after all other remedies to
obtain the relief sought had failed. Thus, the complaint before the
RTC should allege with particularity the remedies exhausted that
are available under the articles of incorporation, bylaws, laws or
rules governing the corporation to obtain the relief desired.
In one case, the Supreme Court held that the allegation of the
suing stockholder’s repeated attempts to talk to the other directors
regarding their dispute hardly constitutes “all reasonable efforts
to exhaust all remedies available.” The fact that the corporation
involved is a family corporation should not in any way exempt the
suing stockholder from complying with the clear requirements and
formalities of the rules for filing a derivative suit.485
260. What is the rationale for the fourth requisite for filing a
derivative suit - that the derivative suit is not a nuisance or
harassment suit?
The complaint must likewise allege that the derivative suit is
not a nuisance or harassment suit to remind the stockholders not to
abuse the remedy and that the same should only be resorted to when
warranted by the circumstances.
261. Cite jurisprudence where resort to derivative suit was held to

be improper for failure to meet the fifth requisite for its filing
- it should be filed in the name of the corporation to enforce a
corporate right or cause of action.
a. A derivative suit filed by stockholders of a corporation
against the bank that foreclosed the mortgage of the
property of the corporation, but without impleading the
corporation in the suit.486
485Anthony Yu, et al. Joseph Yukayguan, et al., G.R. No. 177549, January
18,2009.
486Asset Privatization Trust v. Court of Appeals, G.R. No. 121171, December
29,1988.
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b. A suit to enforce pre-emptive rights in a corporation is not

a derivative suit because it was not filed for the benefit of
the corporation.487
c. Whether as an individual or as a derivative suit, the
RTC — sitting as special commercial court - has no
jurisdiction to hear the plaintiffs complaint since what
is involved is the determination and distribution of
successional rights to the shareholdings of his mother as
the controlling shareholder of the corporation. Plaintiffs
proper remedy, under the circumstances, is to institute a
special proceeding for the settlement of the estate of the
deceased. The bare claim that the complaint is a derivative
suit will not suffice to confer jurisdiction to the RTC (as a
special commercial court) if plaintiff cannot comply with
the requisites for the existence of a derivative suit.488
d. Petitioners who are members of the board for 2003-2004
sought the nullification of the election where the new
board of directors for 2004-2005 pushed through with the
election even if petitioners had adjourned the meeting
allegedly due to lack of quorum. Petitioners are the injured
party whose right to vote and to be voted upon were
directly affected by the election of the new set of board
of directors. The party-in-interest are the petitioners as
stockholders who wield such right to vote. The cause of
action devolves on petitioners, not the condominium
corporation, which did not have the right to vote. Hence,
the complaint for nullification of the election is a direct
action by the petitioners who were the members of the
board of directors of the corporation before the election,
against respondents, who are the newly elected board
of directors. Under the circumstances, the derivative
suit filed by petitioners on behalf of the condominium
corporation is improper.489
48,Lim v. Lim-Yu, G.R. No. 138343, February 19, 2001.

4880scar C. Reyes v. Hon. Regional Trial Court of Makati, Branch 142, Zenith
Insurance Corporation, and Rodrigo C. Reyes, G.R. No. 165744, August 11, 2008.
489Legaspi Towers 300, Inc. v. Muer, G.R. No. 170783, June 18, 2012; 2014 Bar
Exam.
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e. The complaint filed by a stockholder to compel another

I stockholder to settle his share of the loan because
nonpayment would affect the financial viability of the
corporation could not be considered as a derivative suit
because the loan was not a corporate obligation but a
personal debt of the stockholders. There is no damage
caused to the corporation. The fact that the stockholders
attempted to constitute a mortgage over their pro-indiviso
share in a corporate asset cannot affect the corporation
since shares only represent an aliquot interest in the
property of the corporation. The right of a stockholder to
the corporate property is only inchoate which will ripen
into full ownership only upon dissolution and liquidation
of the corporation.490
f. There is no derivative suit where the action is clearly
not for the benefit of the corporation, particularly where
a judgment in favor of the plaintiff, in his capacity as
third party mortgagor, would mean recovery of his own
properties.491
g- The action should be a proper derivative suit even if the
assailed acts do not pertain to a corporation’s transactions
with third persons. The pivotal consideration is whether
the wrong done as well as the cause of action arising
from it accrues to the corporation itself or to the whole
body of its stockholders. An action “seeking to nullify and
invalidate the duly constituted acts [of a corporation]”
entails a cause of action that “rightfully pertains to [the
corporation itself and which stockholders] cannot exercise
. . . except through a derivative suit.” In this case, the
Marcelino Jr. Group prays for the cancellation of share
transfers and subscription to the capital stock of the
Rogelio Group, all intended to reconfigure the capital
structure of the corporation to reflect a status quo ante.
Erroneously pursuing a derivative suit as a class
suit not only meant that the Marcelino, Jr. Group
lacked a cause of action; it also meant that they failed
490Juanito Ang, for and in behalf of Sunrise Marketing (Bacolod), Inc. v. Sps.
Roberto and Rachel Ang, G.R. No. 201675, June 19, 2013.
491Bangko Sentral ng Pilipinas v. Vicente Jose Campa, Jr., et al., G.R. No.
185979, March 16, 2016.
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to implead an indispensable party. In derivative suits,

the corporation concerned must be impleaded as a party.
Hence, Marcelino Jr. Group’s complaint must fail for
failure to implead the corporation.492
262. Cite jurisprudence where recourse to a derivative suit was held

to be proper.
a. The complaint is one of a derivative suit if it avers
diversion of corporate income by the company president
and the relief prayed for is the recovery of a sum of money
in favor of the corporation.493
b. Where a minority stockholder alleged in his petition that
earnest efforts were made to reach a compromise among
family members/stockholders before he filed the case
and that the Board of Directors did nothing to rectify
the unauthorized loan and mortgage by the corporation,
the derivative suit is proper. The action to annul the real
estate mortgage should only be seen as incidental to the
derivative suit. The RTC of the city where the principal
office of the corporation is located has jurisdiction even
though the mortgaged properties are situated in a
different jurisdiction.494
e. Obligations of a stockholder
263. What are the obligations of a stockholder?
A stockholder has the following obligations:
1. To pay to the corporation unpaid subscription;
2. To pay to the corporation interest on unpaid subscription
if so required by the bylaws or in case of default;
3. He is liable to the creditors of the corporation for unpaid
subscription based on the trust fund doctrine;
4. He is liable for watered stocks;
492Marcelino M. Florete v. Rogelio M. Florets, et al., G.R. No. 174909, January

20, 2016; Rogelio M. Florete, Sr., et al. v. Marcelino M. Florete, Jr., et al., G.R. No-
223321, April 2, 2018, Second Division.
493Commart (Phils.) Inc., et al. v. Securities and Exchange Commission and
Alice Magtulac, G.R. No. 85318, June 3, 1991.
494Hi-Yield, Inc. v. Court of Appeals, G.R. No. 168863, June 23, 2009.
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5. He is liable to return dividends unlawfully paid; and

6. He is liable for claims against the corporation in cases
where the corporate veil is pierced.
f. Meetings
264. What are the types of meetings covered by the RCC?
Only two (2) types of meetings are covered by the RCC -
meetings of the (1) board directors or trustees, and (2) stockholders
or members. Management meetings, among others, are not indicated
therein.
i. Regular or special
265. What are the requisites of a valid stockholders meeting?
The following requisites must be present for a stockholders’
meeting to be considered valid:
a. It must be held at the stated date and the appointed
time or at a reasonable time thereafter. To determine the
date of the annual stockholder’s meeting, reference must
be made to the pertinent provision of the bylaws of the
corporation.
b. There must be previous notice. The notice must be in the
form required by the bylaws, given within the period fixed
in the bylaws and sent by the proper officer authorized
therein.
c. It must be called by the proper person. The person
authorized to call the meeting is normally stated in the
bylaws. If no person is designated in the bylaws, the
authority to call a stockholders’ meeting rests with the
board of directors.
d. It must be held in the proper place. It is mandatory that
stockholders’ meetings be held in the principal office of the
corporation, as indicated in the articles of incorporation,
and if not practicable, in the city or municipality where
the principal office of the corporation is located.
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e. The quorum and voting requirements must be met.495
ii. Notice of meetings

266. State the notice requirement for stockholders or members
meetings under the RCC.
That written notice of regular meetings shall be sent to all
stockholders or members of record at least 21 days prior to the
meeting, unless a different period is required in the bylaws, law,
or regulation: Provided, further, That written notice of regular
meetings may be sent to all stockholders or members of record
through electronic mail or such other manner as the SEC shall allow
under its guidelines.
For special meetings, at least one (1) week written notice shall
be sent to all stockholders or members, unless a different period is
provided in the bylaws, law or regulation.496
Notice of any meeting may be waived, expressly or impliedly, by
any stockholder or member: Provided, That general waivers of notice
in the articles of incorporation or the bylaws shall not be allowed;
Provided, further, That attendance at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting to the transaction of any
business because the meeting is not lawfully called or convened.497
Notice of meetings shall be sent through the means of
communication provided in the bylaws, which notice shall state the
time, place, and purpose of the meetings.
Each notice of meeting shall further be accompanied by the
following:
a. The agenda for the meeting;
b. A proxy form which shall be submitted to the corporate
secretary within a reasonable time prior to the meeting;
c. When attendance, participation, and voting are allowed by
remote communication or in absentia, the requirements
and procedures to be followed when a stockholder or
member elects either option; and
495Requisites for DirectorsVStockholders’ Meeting, SEC-OGC Opinion No. 09-

06, February 8, 2006; Mary E. Lim v. Moldex Land, Inc., et al., G.R. No. 206038,
January 25, 2017; answered based on RCC,
™Ibid.
mIbid.
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d. When the meeting is for the election of directors or

trustees, the requirements and procedure for nomination
and election.498
267. What are the modes of notice of meeting to stockholders?

Notices can be made personally, or by mail or publication or
through electronic mail or other modes as may be allowed by the
SEC; provided that the mode of notice conforms to what the bylaws
provide.
268. When is regular stockholder meeting valid even without notice

to the stockholders?
The regular stockholders’ meeting is valid despite lack of
written notice to the stockholders if the bylaws specify the date and
time of the annual meeting. It was held that the failure to give notice
of the regular or annual meetings, when the date thereof is fixed in
the bylaws, as in “at twelve-thirty P.M., on the THIRD MONDAY OF
AUGUST in each year, if not a legal holiday, and if a legal holiday,
then on the first day following which is not a legal holiday,” will not
affect the validity of the regular or annual stockholders’ meeting or
the proceedings therein.’99
269. Who calls the stockholders' or members’ meeting?

The meeting should be called by the person authorized by
the bylaws. However, whenever for any cause, there is no person
authorized or the person authorized unjustly refuses to call a meeting,
the SEC, upon petition of a stockholder or member on a showing of
good cause therefor, may issue an order, directing the petitioning
stockholder or member to call a meeting of the corporation by giving
proper notice required by the RCC or the bylaws. The petitioning
stockholder or member shall preside thereat until at least a majority
of the stockholders or members present have chosen from among
themselves, a presiding officer.600

’"Corazon H. Ricafort, et al. Honorable Isaias P. Dicdican, G.R. Nos.
202647-50, March 9, 2016.
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iii. Place and time of meetings

270. When are stockholders’ meetings conducted?
Regular meetings of stockholders or members shall be held
annually on a date fixed in the bylaws, or if not so fixed, on any date
after April 15 of every year as determined by the board of directors
or trustees.
Any date after April 15 of every year replaced “any date in
April” under the OCC unless the bylaws provide otherwise. April 15
is usually the last day to file the annual tax return for taxpayers.
It would be more practical and convenient to conduct the regular
meeting thereafter since the financial report to be submitted to the
stockholders is based on such return and its supporting financial
statements.
Special meetings of stockholders or members shall be held at
any time deemed necessary or as provided in the bylaws.
A stockholder or member may propose the holding of a special
meeting and items to be included in the agenda.601 ,
Shareholders, who alone or together with other shareholders,
hold at least five percent (5%) of the outstanding capital stock of a
publicly-listed company shall have the right to include items on the
agenda prior to the regular/special stockholders’ meeting. Further,
any director, officer, or agent of a publicly-listed company who shall
unjustly refuse to allow the exercise of such right of the shareholders
shall be Hable for administrative sanctions under Section 158 of the
RCC.602
271. Where is the required venue for the meetings of stockholders?

Stockholders’ meetings, whether regular or special, shall
be held in the principal office of the corporation as set forth in
the articles of incorporation, or, if not practicable, in the city or
municipality where the principal office of the corporation is located.
Any city or municipality in Metro Manila, Metro Cebu, Metro
Davao, and other Metropolitan areas shall, for purposes of this
section, be considered a city or municipality.603

6O2SEC Memorandum Circular No. 14 Series of 2020, April 28, 2020.
“"Section 50, RCC.
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Note that under the RCC, the stockholders or members

meeting should be held in the principal office itself and only if it is
not practicable that the meetings can be held in its vicinity, in the
city or municipality where the principal office is located. Under the
OCC, the meetings can be held in the city or municipality where the
principal office is located and if practicable in the principal office
itself. The RCC effectively removes the flexibility in the venue of
meetings.
If the bylaws indicate the City of Makati as the principal office
of the corporation, the meetings cannot be held in any other city
even though located within Metro Manila.
iv. Quorum
272, What is the quorum requirement for stockholders' meetings?
Unless otherwise provided in the Corporation Code or in the
bylaws, a quorum shall consist of the stockholders representing a
majority of the outstanding capital stock.604 Quorum is based on
the totality of the shares which have been subscribed and issued,
whether it be founders’ shares or common shares. The totality of
shares issued is not only based on the stock and transfer book of the
corporation but also the articles of incorporation and all records of
the corporation.605
To be more precise, for stock corporations, the quorum is the
majority of the outstanding voting stocks whereas for a nonstock
corporation, the basis in determining the presence of quorum in
nonstock corporations is the numerical equivalent of all members
who are entitled to vote, unless some other basis is provided by the
bylaws of the corporation.600 The bylaws, for instance, may provide
that members who are delinquent in the payment of their dues
are not entitled to vote, in which case, they are not included in the
computation of quorum.607

““Jesus V. Lanuza, et al. v. Court of Appeals, et al., G.R. No. 131394, March
28, 2005.
““Mary E. Lim v. Moldex Land, Inc., et al., G.R. No. 206038.
M7Re: Quorum in Meetings of a Nonstock Condominium Corporation, SEC-
OGC Opinion No. 31-19, September 9, 2019.
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273. Is it permissible for the bylaws to provide quorum of

stockholders' meetings which is less than a majority?
A corporation can state in its bylaws that a quorum shall be
less than the majority or greater than what was provided for in the
RCC unless the RCC specifically provides otherwise.
Worthy of note, however, is that the bylaws provision on
quorum will not apply in instances where the RCC explicitly requires
a specific number of stockholders or members necessary to resolve or
carry out a particular corporate proposal.608
274. Can a stockholders' or members' meeting be considered valid

even if it is improperly held or called?
All proceedings and any business transacted at a meeting of
the stockholders or members, if within the powers or authority of
the corporation, shall be valid even if the meeting is improperly
held or called. Provided, That all the stockholders or members of the
corporation are present or duly represented at the meeting and not
one of them expressly states at the beginning of thermeeting that
the purpose of their attendance is to object to the transaction of any
business because the meeting is not lawfully called or convened.509
v. Minutes and agenda of meetings

275. What are the matters required to be discussed in the Regular
Stockholders' Meeting?
At each regular meeting of stockholders or members, the board
of directors or trustees shall endeavor to present to stockholders or
members the following:
a. The minutes of the most recent regular meeting which
shall include, among others:
i. A description of the voting and vote tabulation
procedures used in the previous meeting;
ii. A description of the opportunity given to stockholders
or members to ask questions and a record of the
questions asked and answers given;
“’Answered based on RCC and SEC-OGC Opinion No. 37-06, November 9,

2006.
“Section 50, RCC.
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iii. The matters discussed and resolutions reached;

iv. A record of the voting results for each agenda item;
V. A list of the directors or trustees, officers and
stockholders or members who attended the meeting;
and
vi. Such other items that the SEC may require in
the interest of good corporate governance and the
protection of minority stockholders.
b. A members’ list for nonstock corporations and, for
stock corporations, material information on the current
stockholders, and their voting rights;
c. A detailed, descriptive, balanced and comprehensible
assessment of the corporation’s performance, which
shall include information on any material change in the
corporation’s business, strategy, and other affairs;
d. A financial report for the preceding year, which shall
include financial statements duly signed and certified in
accordance with RCC and the rules the SEC may prescribe,
a statement on the adequacy of the corporation’s internal
controls or risk management systems, and a statement of
all external audit and non-audit fees;
e. An explanation of the dividend policy and the fact of
payment of dividends or the reasons for nonpayment
thereof;
f. Director or trustee profiles which shall include, among
others, their qualifications and relevant experience, length
of service in the corporation, trainings and continuing
education attended, and their board representations in
other corporations;
g- A director or trustee attendance report, indicating the
attendance of each director or trustee at each of the
meetings of the board and its committees and in regular
or special stockholder meetings;
h. Appraisals and performance reports for the board and the
criteria and procedure for assessment;
i. A director or trustee compensation report prepared in
accordance with the RCC and the rules the SEC may
prescribe;
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j- Director disclosures on self-dealings and related party

transactions; and/or
k. The profiles of directors nominated or seeking election or
reelection.”0
A director, trustee, stockholder, or member may propose any
other matter for inclusion in the agenda at any regular meeting of
stockholders or members.’”
276. When should the stock and transfer book or membership book
be closed?
Unless the bylaws provide for a longer period, the stock and
transfer book or membership book shall be closed at least 20 days
for regular meetings and seven (7) days for special meetings before
the scheduled date of the meeting.
277. State the rule on the postponement of meetings.

In case of postponement of stockholders’ or members’ regular
meetings, written notice thereof and the reason therefor shall be
sent to all stockholders or members of record at least two (2) weeks
prior to the date of the meeting, unless a different period is required
under the bylaws, law or regulation.”2
For the regular stockholders meeting, the non-holding of
elections and the reasons therefor shall be reported to the SEC
within 30 days from the date of the scheduled election. The report
shall specify a new date for the election, which shall not be later
than 60 days from the scheduled date.
a stockholder, member, director, or trustee, and after verification of

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quorum for purposes of conducting an election under this section?13
278. Cite instances where the SEC ruled that the postponement of
the regular election of directors or trustees is not valid.
The SEC, on several occasions, had consistently opined that,
as a general rule, the regular election of directors and officers as
stated in the bylaws cannot be dispensed with or postponed by the
directors and officers in order to extend their term of office as fixed
in the bylaws. While ‘hold over term’ may be allowed under Section
22 of the RCC, such situation arises only when no successors are
elected due to valid and justifiable reasons.
In another SEC Opinion,614 incurring big expenses for the
purpose of holding a meeting and because there is the uncertainty
that a quorum can be secured is NOT considered a valid and justifiable
reason. If the members cannot be present in person, Section 88 of
the RCC (for nonstock corporation) allows voting by proxy, by mail,
or other similar means, that could sufficiently address the problem
of quorum.
279. What is the effect of the stockholder’s abstention during

stockholders* meetings?
In those cases specified by law on instances of appraisal right,
a stockholder present in a meeting but abstains, is not entitled to
exercise such right. He cannot demand payment of the fair value
of his shares, because one of the elements of appraisal right is his
vote against the proposed corporate act. As such, abstention is
tantamount to a waiver of appraisal right.
Stockholders who abstain from voting are, however, counted
for quorum purposes.

“4Re; Queries on Quorum, Special Election, & Financial Assistance, SEC-OGC
Opinion No. 31-11, July 13, 2011.
1
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IX. Board of directors and trustees

a. Repository of corporate powers
280. What is the function of the board of directors or trustees
in terms of exercising the powers of the corporation and
conducting its business?
Unless otherwise provided in the RCC, the board of directors
or trustees shall exercise the corporate powers, conduct all business,
and control all properties of the corporation.615 Stated otherwise,
corporate acts must be approved by the board of directors, otherwise,
such acts are generally not binding on the corporation. They do not
create rights nor impose obligations upon the corporation. Thus, if a
corporation will enter into contracts, initiate legal action or perform
any of the corporate acts under the RCC, the same must be supported
by a resolution that the board has duly adopted authorizing such
acts and designating the person who will carry them out on behalf
of the corporation.
281. What is the doctrine of centralized management?

It means that corporate powers are vested in a body, called
board of directors for a stock corporation and board of trustees for a
nonstock corporation. Except in those instances where stockholders’
or members’ approval is required for certain acts under the RCC or
the corporation’s bylaws, it is the board which exercises corporate
powers. The stockholders or members, regardless of number, will
have to delegate the power to manage the corporation to the board.
The concentration in the board of the powers of control of
the corporate business and appointment of corporate officers and
managers is necessary for efficiency in any large organization.
Stockholders are too numerous, scattered, and unfamiliar with the
business of a corporation to conduct its business directly. And so the
plan of corporate organization is for the stockholders to choose the
directors who shall control and supervise the conduct of corporate
business.610
In other words, stockholders or members periodically elect the
board of directors or trustees, who are charged with the management
of the corporation. The board, in turn, periodically elects officers to
carry out management function on a day-to-day basis. As owners
616Section 22, RCC.

6l0Filipinas Port Services v. Victoriano Go, el al., G.R. No. 161886, March 16,
2007.
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though, the stockholders or members have residual powers over

fundamental and major corporate changes. Acts of management
pertain to the board; and those of ownership, to the stockholders or
members.617
6. Tenure, qualifications, and disqualifications of

directors
282. What is the distinction between term and tenure?
Term is the time during which the officer may claim to hold
the office as a right and fixes the interval after which the several
incumbents shall succeed one another. The term is fixed by statute
and it does not change simply because the office may have become
vacant, nor because the incumbent holds over in office beyond the
end of the term due to the fact that a successor has not been elected
and has failed to qualify.
Term is distinguished from tenure in that an officer’s “tenure”
represents his actual incumbency. The tenure may be shorter (or, in
case of holdover, longer) than the term for reasons within or beyond
the power of the incumbent.
The former is fixed while the latter extends until his successor
is duly elected and qualified.518
283. What do you understand by the provision under the RCC that
each director and trustee shall hold office until the successor
is elected and qualified?
It means that if his successor is not elected and qualified, the
director, or trustee may continue to perform his duties in a hold-over
capacity. The hold-over period is not, however, part of the term of
office of the director or trustee.
Thus, if'a hold-over director resigns, the vacancy is due to the
expiration of term and not resignation. Accordingly, the vacancy
can only be filled by the stockholders in a meeting called for the
purpose and not by the board of directors even though the remaining
■directors may still constitute a quorum.619
I
517Paul Lee Tan v. Paul Sycip, et al., G.R. No. 153468, August 17,2006.
518Valle Verde Country Club, Inc., et al. v. Victor Africa, G.R. No. 151969,
September 4, 2009; Re-Election of The Members of The Board of Directors, SEC-OGC
Opinion No. 48-11, December 2, 2011.
519Valle Verde, ibid., see discussion on “Vacancies in the Office of Director or
Trustee”.
1
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284. The election of the new members of the Board of Directors of

the Condominium Corporation ("CondoCor”) has been nullified
due toa.) lack of quorum and b.) disqualification of the nominee
directors of the developer for the position. Consequently,
it caused the nullification of the subsequent organizational
meeting and election of officers. Under the circumstances,
may the incumbent Board of Directors continuously function
in a "hold-over" capacity until a new set of members of the
Board of Directors are elected and qualified? If the answer
is in the affirmative, is the authority of the Board of Directors
limited only to handle the corporation's daily operations such
as payment of utilities, salaries, the management of personnel,
and other issues/problems that requires immediate attention?
The old or incumbent Board of Directors can act as a legitimate
managing body pending the election of the successor directors.
Pursuant to the hold-over principle as provided in Section 22 of the
RCC the incumbent Board of Directors shall serve as directors until
their successors are elected and qualified in accordance with the
RCC or the Bylaws.
On the other hand, the position that the hold-over Board’s
authority is limited only to “handling the corporation’s daily operation
such as payment of utilities, salaries, the management of personnel
and other issues/problems that requires immediate attention” is
mistaken. The RCC expressly states that the “corporate powers of all
corporations formed under the Code shall be exercised, all business
conducted and all property of such corporations controlled and held
by the board of directors or trustees.” Thus, the Board of Directors
has the authority to: (1) exercise all powers provided for under the
RCC; (2) conduct all business of the corporation; and (3) control and
hold all property of the corporation.
t,
285. What are the qualifications of directors or trustees?
The directors and trustees must have all the qualifications
provided under Section 22, in relation to Sections 10, 13, and 91, of
the RCC as well as those provided under the bylaws, and none of the
disqualifications under Section 26 of the RCC and the bylaws.
Below are the qualifications for directors or trustees under the
RCC:
a. Since any person, partnership, association or corporation,
singly or jointly with others but not more than 15 in
number, may now organize a corporation for any lawful
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purpose or purposes,620 directors or trustees need not be

natural persons. However, juridical persons, as directors,
need to be represented by their nominees.
b. If the director or trustee is a natural person, he must be
of legal age.621
c. The director must own at least one (1) share of stock of
the corporation and the trustee must be a member of the
corporation.622
In Grace Christian High School v. Court of Appeals,
et al.,523 the Supreme Court held that a provision in
the bylaws which allots a permanent seat in the board
to a non-member of the association is contrary to law.
Similarly, the fact that said permanent seat was held for
15 years cannot give rise to a vested right and estoppel
cannot forestall a challenge against an act that it is
contrary to law.
d. The number of directors shall not be more than 15 while
the number of trustees may be more than 15.‘24
e. Except with respect to independent trustees of nonstock
corporations vested with public interest, only a member
of the corporation shall be elected as trustee.526
f. Trustees of educational institutions organized as nonstock
corporations or religious societies shall not be less than
five (5) nor more than 15.626 However, with respect to
educational institutions, the number of trustees shall
only be in multiples of five (5).627
On disqualification, the RCC expanded and qualified the
grounds such that a person shall be disqualified from being a
director, trustee or officer of any corporation if, within 5 years prior
to the election or appointment as such, the person was:

mIbid.
‘“Grace Christian High School v. Court of Appeals, et al., G.R. No. 108905,
October 23,1997.
624Sections 13 and 91, RCC.
‘“Sections 106 and 114, RCC.
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a. Convicted by final judgment:

i. Of an offense punishable by imprisonment for a
period exceeding six (6) years;
ii. For violating the RCC; and
iii. For violating Republic Act No. 8799, otherwise
known as “The Securities Regulation Code”;
b. Found administratively liable for any offense involving
fraudulent acts; and
c. By a foreign court or equivalent foreign regulatory
authority for acts, violations or misconduct similar to
those enumerated in paragraphs (a) and (b) above.
The foregoing is without prejudice to qualifications or other
disqualifications, which the SEC, the primary regulatory agency, or
the Philippine Competition Commission may impose in its promotion
of good corporate governance or as a sanction in its administrative
proceedings.
To be a ground for disqualification, it is not enough then that the
violation of the RCC, be committed within 5 years prior to election.
It is also required that there is conviction by final judgment.
Based on the language of the law, the administrative liability
may be imposed by any government agency, different from the SEC,
as long as it is an offense involving fraudulent act. The SEC, by
itself, is authorized to impose disqualification from being elected to
the board, as a sanction in its administrative proceeding.
286. X is a director of ABC Corporation. In the sixth month of his

term, he sold all his shares to A. A now claims that by reason
of his purchase of X's shares, he should serve the unexpired
portion of X's term.
X, on the other hand, insists otherwise citing the provision
of the Corporation Code that his term is one (1) year.
Who between X and A should be the director of the
corporation?
Neither of them should be the director of the corporation. The
director’s ownership of at least one (1) share of stock and the trustee’s
membership in the corporation is a continuing qualification. If at
any time, a director ceases to be a stockholder or a trustee ceases
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to be a member of the corporation, he shall automatically cease to

be such director or trustee. X then ceased to be a director of the
corporation after the sale. A cannot take the place of X just because
he acquired the share of the latter unless he is appointed by the
board of directors.628
287. Is it necessary that the director be the owner of the share of

the corporation in his own right to qualify as such director?
Generally, the director must have full ownership of the shares,
i.e. both the legal title and beneficial title. However, based on Lee v.
Court of Appeals;629 the Supreme Court ruled that a trustee, under a
voting trust agreement, can qualify as a director, and that in order
to be eligible as a director, what is material is the legal title to, and
not beneficial ownership of, the stock as appearing on the books of
the corporation. Similarly, when a director loses his legal title over
all his shares, he automatically forfeits his director position.
288. Can the bylaws require that the director own more than one (1)
share of stock?
Yes, the bylaws may enlarge the share ownership requirement
provided that it is not intended to deprive minority representation.
As provided under Section 46 of the RCC, additional
qualifications of directors and trustees may be prescribed under the
bylaws of the corporation.
In the absence of a provision in the bylaws, a corporation
cannot require additional qualifications for directors other than the
mandatory requirement under the RCC.630
289. Are directors or trustees required to be residents of the

Philippines?
The requirement of the OCC which provides that “[a] majority
of the directors or trustees of all corporations organized under this
Code must be residents of the Philippines” was removed under the
RCC. As such, it is possible that a majority or even all directors or
trustees may be non-residents.
6281984 Bar Exam.

6Z9Lee v. Court of Appeals, G.R. No. 93695, February 4,1992.
“SEC-OGC Opinion No. 51-19, October 11, 2019.
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290. Are directors or trustees required to be Filipino citizens?

Similar to the OCC, the RCC does not require Filipino
citizenship for the directors or trustees of a corporation. However,
if the corporation is engaged in nationalized activities, citizenship
becomes a qualification. Foreigners cannot be appointed to the
board of corporations engaged in wholly-nationalized activities. For
partly nationalized activities, foreigners can be elected to the board
of directors in proportion to their foreign equity, as allowed by law.
291. Bohol Mining Corporation is 60% Filipino-owned and 40%

Canadian-owned. As provided in its Articles of Incorporation
and Bylaws, its Board of Directors is composed of nine (9)
members. During the last annual stockholders meeting held on
May 31, three (3) of the nine (9) elected directors were Canadian
citizens. Juan de la Cruz together with two (2) other Filipino
stockholders petitioned the SEC to disqualify the said three (3)
Canadians and to enjoin them from discharging their functions
as directors, on the grounds that: (1) aliens cannot participate
in any capacity in a nationalized industry, like mining; and (2)
the exploitation of natural resources is reserved under the
Constitution to Filipino citizens.
a. Will the petition prosper?
The petition will not prosper. The elections of aliens as
members of the board of directors or governing body of corporations
or associations, engaging in partially nationalized-activities, are
allowed by law, in proportion to their allowable participation or
share in the capital of such entities, like mining or development of
natural resources, in which the foreigners may even own 40% of the
capital.631
b. Supposing that Bohol Mining Corporation is 70% Filipino-

owned while the 30% remaining stocks are owned by
foreigners, how many foreigners can be elected to the
board?
6311985 Bar Exam.
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Since 70% of the capital is owned by Filipinos and 30% by

aliens, only 30% of its directors may be foreigners. Since three (3)
out of nine (9) is more than 30% only two (2) aliens may sit in X’s
board. Rounding off to the nearest number is obviously not allowed
for the election of directors.632
292. Assuming that the stockholder has enough votes to be assured

of a board seat, does a stockholder have any vested right to be
elected as a director?
No, because while he may have enough votes, he may not
have the qualifications of a director or trustee under the law and
bylaws of the corporation. The bylaws, for instance, may provide
as a ground for disqualification being a director, stockholder, or a
representative of a competing corporation. Any person who buys
stock in a corporation does so with the knowledge that its affairs are
dominated by a majority of the stockholders and that he impliedly
contracts that the will of the majority shall govern in all matters
within the limits of the act of incorporation and lawfully enacted
bylaws and not forbidden by law. To this extent, therefore, the
stockholder may be considered to have parted his personal right or
privilege to regulate the disposition of his property which he has
invested in the capital stock of the corporation, and surrendered it
to the will of the majority of his fellow incorporators.533
c. Requirement of independent directors

293. Who is an independent director?
An independent director is a person who, apart from
shareholdings and fees received from the corporation, is independent
of management and free from any business or other relationship
which could or could reasonably be perceived to materially interfere
with the exercise of independent judgment in carrying out the
responsibilities as a director.
Independent directors must be elected by the shareholders
present or entitled to vote in absentia during the election of
directors. Independent directors shall be subject to rules and
regulations governing their qualifications, disqualifications, voting
6321983 Bar Exam.

633John Gokongwei v. Securities and Exchange Commission, G.R. No. L-45911,
April 11,1979.
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requirements, duration of term and term limit, the maximum

number of board memberships, and other requirements that the
SEC will prescribe to strengthen their independence and align with
international best practices.531
294. What corporations are required to have independent directors

in their Boards?
Independent directors are now explicitly required by RCC to
constitute at least twenty percent (20%) of the Board of corporations
vested with public interest.
Below are the corporations vested with public interest specified
in the RCC:
a. Public companies as described under the Securities
Regulation Code (“SRC”);
b. Banks and quasi-banks, NSSLAs, pawnshops,
corporations engaged in money service business, pre
need, trust and insurance companies, and other financial
intermediaries; and
c. Other corporations engaged in businesses vested with
public interest similar to the above, as may be determined
by the SEC.
A public company is any corporation with class of equity
securities listed for trading on an Exchange, or with assets in excess
of Fifty Million Pesos (Php50,000,000.00) and has 200 or more
holders, at least 200 of which hold at least 100 shares each.635 This
is also the definition of a public company for the purpose of electing
independent directors.630
295. CMCI is required by the Securitiesand Regulation Code("SRC")

to have two (2) independent directors in its Board. Thus, the
Bylaws of CMCI provides for the segregation of casting of votes
for the election of their regular and independent directors, as
follows:

635Rule 3 (O) of the Revised Implementing Rules and Regulations of the
Securities Regulation Code.
““Section 38 of the SRC.
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“1. That the segregation of the votes for regular

and independent directors is acceptable, such that
one vote cast per independent director (since there
are only two nominees for independent director)
would already be sufficient to elect them. On the
other hand, for the regular directors, the nominees
with the highest votes cast in their favor would be
elected. Under this procedure, the losing nominee
for regular director, even if he/she gets a higher
number of votes than the independent directors,
would still not be elected.”
Is the segregate casting of votes for regular and independent
directors sanctioned by the Corporation Code?
The segregate casting of votes for regular and independent
directors is not contrary to the Corporation Code. The segregation of
the voting for regular directors and independent ones is a practical
device in order to ensure that at least two (2) independent directors
are elected to the CMCI’s member Board of Directors in accordance
with SRC Rule 38.“’
d. Elections
296. What are the requisites for the election of the directors or
trustees to be for the valid?
a. Except when the exclusive right to be voted as directors
is reserved for holders of founders’ shares under Section
7 of the RCC, every stockholder or member has the right
nominate the director or trustee to be elected.
b. There must be a notice of meeting sent to the stockholders
in accordance with the form and mode under the bylaws.638
c. The owners of the majority of the outstanding capital
stock or the majority of the members entitled to vote
must be present, either in person or by a representative
authorized to act by a written proxy. If voting through
remote communication or in absentia will be allowed,
such voter, voting through said means, shall be deemed
present for purposes of counting the majority/quorum.
“’Procedure for Election of Directors, SEC-OGC Opinion No. 1911, March

23,2011.
“Section 50, RCC.
k
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d. The meeting must be presided by the officer indicated

under the bylaws.
e. The election must be by ballot if requested by any voting
stockholder or member.
f. For stock corporations, the stockholders may cast such
number of votes based on the shares registered in their
names in the books of corporation multiplied by the whole
number of directors to be elected.
g- On the other hand, for nonstock corporations, unless
otherwise provided in their articles of incorporation or
bylaws, members may cast as many votes as there are
trustees to be elected but may not cast more than one (1)
vote for one (1) candidate.
h. The nominees receiving the highest number of votes shall
be duly elected as directors or trustees.
i. The elected directors or trustees must possess all of the
qualifications and none of the disqualifications under the
RCC and the bylaws of the corporation.
i. Cumulative voting
ii. Quorum
297. EPCC is a nonstock corporation. Article 6 of EPCC Articles
of Incorporation states: "That the number of trustees of the
association shall be 15."
Based on the foregoing:
a. Should there be 11 nominees to the Board of Trustees,
which is below the required number of trustees to be
elected [15] as provided by the Corporation's Articles of
Incorporation, are all 11 considered automatically elected
regardless of the number of votes received by each?
While the Corporation Code requires the presence of at least a
majority of the members of a nonstock corporation for the election
of its Board, it does not require such number of votes for one to
be declared elected. Under the aforecited provision, the candidates
receiving the highest number of votes shall be declared elected.
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Thus, for a candidate to be elected as trustee, said candidate

must be among the group of candidates who received the highest
number of votes. In case the number of candidates does not exceed
the number of seats in the board, said candidates, provided they
received votes, can be said to have received the highest number
of votes, as the law requires only plurality of the votes cast at the
election.
b. What is the minimum number of trustees/nominees in

order for the election to be valid?
SEC has previously opined that an election of less number of
directors than the number which the meeting was called to elect is
valid as to those actually elected.
Thus, the stockholders or members of a corporation may opt to
elect a number of directors/trustees less than the number of directors/
trustees as fixed in the articles of incorporation. Such a situation
would merely give rise to a vacancy in the board, which may be later
filled up. The power of the board is not suspended by vacancies in
the board unless the number is reduced below a quorum.
The number of candidates elected, however, is not without
importance.
The grant of corporate power is to the Board as a body, and not
to the individual members thereof, and that the corporation can be
bound only by the collective act of the Board. In relation to this, the
Board can only transact business if it reaches a quorum.
298. What shares of stock are not included in the determination of

the majority of outstanding capital stock to elect directors of a
stock corporation?
a. Non-voting shares;
b, Delinquent shares; and
c. Treasury shares.
However, unpaid shares which are not delinquent are included
in the said determination of the majority.
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299. What happens if no election is held, or the owners of majority

of the outstanding capital stock or majority of the members
entitled to vote are not present in person, by proxy, or through
remote communication or not voting in absentia at the meeting?
The meeting may be adjourned and the outgoing directors or
trustee shall serve in a hold-over capacity.639
The non-holding of elections and the reasons therefor shall be
reported to the SEC within 30 days from the date of the scheduled
election. The report shall specify a new date for the election, which
shall not be later than 60 days from the scheduled date.
a stockholder, member, director, or trustee, and after verification of
quorum for purposes of conducting an election under this section.610
e. Removal
300. May a director or trustee be removed from office? If yes, under
what conditions?
Yes, a director or trustee may be removed from office. The
removal may be carried out by the stockholders or the SEC.
Within the corporation, only stockholders or members have the
power to remove the directors of trustees elected by them. The board
of directors or trustees may remove an officer but not a director or
trustee.641
639Section 23, RCC.

54°Section 25, RCC.
“’Nectarina Raniel v. Paul Jochico, G.R. No. 153413, March 1, 2007.
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I
The removal of a director or trustee by the stockholders or

members is subject to the following requisites:
a. There must be a previous notice of the meeting to
stockholders or members, and the procedures prescribed
by the RCC and bylaws must be followed.
b. The notice of the meeting must specify the intention to
propose the removal of a director.
Note, however, that RCC does not require that the
name of the director proposed to be removed be specified.
Thus, it is enough to include in the agenda that there is
such an intention to remove a director.
c. The removal must be approved by stockholders
capital stock or by at least two-thirds (2/3) of the members
entitled to vote for non-corporation.
d. The removal may be with or without just cause. However,
if the removal is intended to deprive the minority of their
representative, the removal has to be with cause.512
e. The vacancy brought about by the removal of the director
may be filled at the same stockholders’ meeting where
the removal was effected as long as this fact is similarly
stated in the agenda and notice of the said meeting,543 or
in a separate meeting called for that purpose.
Note, however, that only a majority of the outstanding capital
stock of the corporation must be present to have a quorum on the
election to be held to fill the aforesaid vacancy.
The SEC may order the removal, after due notice and
hearing, of a director or trustee who has been elected despite his
disqualification, or whose disqualification arose or is discovered
subsequent to an election.644
H2Section 27, RCC.

^Section 28, RCC.
“'Ibid.
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301. May the SEC remove a director or trustee motu propria?

The power to remove a director or trustee may be exercised
by SEC motu proprio or upon receiving a verified complaint. The
removal, however, cannot be carried out without due notice and
hearing,515 consistent with due process requirement.
The removal of a disqualified director shall be without prejudice
to other sanctions that the SEC nevertheless may impose sanctions
on the board of directors or trustees who, with knowledge of the
disqualification, failed to remove such director or trustee.646
In other words, the removal is without prejudice to the
imposition of sanctions against the responsible directors or trustees.
302. The bylaws of the corporation provide that a director or trustee

who is absent for three (3) consecutive meetings or not current
on the payment of his monthly dues to the corporation may be
removed by 2/3s vote of the board of directors or trustees. Is
this provision in the bylaws valid?
The provision is invalid. The board of directors has no power
to remove one (1) of their members. Within the corporation, such
power to remove belongs only to the stockholders.
The absences or nonpayment of dues and assessment of the
director or trustee can be considered as just cause for removal.
Thus, said director or trustee may be removed by the stockholders
representing two-thirds (2/3) of the outstanding capital stock, or
two-thirds (2/3) of the members for a nonstock corporation, even if
he is a representative of the minority group.
f. Filling of vacancies
303. What are the grounds or causes of vacancy in the position of
board director or trustee?
a. Vacancy in the position of director or trustee may be due
to expiration of term, removal or increase in the number
of board seats; or,
b. It may be due to resignation, retirement, withdrawal,
death, abandonment, or similar grounds, other than those
stated in the preceding paragraph.
545Z6id.
iwIbid.
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304. Who may fill the vacancy?

The stockholders or the board of directors, depending on the
circumstances may fill the vacancy.
a. The stockholders have the sole power to fill the vacancy in
the following cases:
b. The cause of the vacancy is the expiration of term, removal
of a director or increase in the number of board seats;
c. The cause of the vacancy is not any of the three (3)
grounds referred to above but the remaining directors do
not constitute a quorum;647 and
The cause of the vacancy is not any of the three (3) grounds
referred to above, the remaining directors constitute a quorum but
the board of directors referred the authority to fill the vacancy to the
stockholders.
The filling of vacancy by the stockholders is subject to the notice
and quorum requirements under Section 24 of the RCC. Nonvoting
shares are not included in the computation of quorum because the
election of directors is outside the eight (8) cases where nonvoting
shares are vested the right to vote.548
The board of directors may fill the vacancy if the following
requisites are present:
a. The cause of the vacancy is due to any ground other than
expiration of term, removal of a director or increase in
the number of board seats; and, .
b. The remaining directors constitute a quorum.549
305. What is the term of the replacement director?

A director elected to fill a vacancy shall be referred to as a
replacement director and shall serve only for the unexpired term of
the predecessor in office.550
“’Section 28.
“’Section 28, ibid.
’“Section 28, ibid.
1
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306. Within what periods should the vacancies be filled?

a. If the vacancy is due to term expiration, the election shall
be held no later than the day of such expiration.
b. If the vacancy arises as a result of removal by the
stockholders or members, the election may be held on
the same day of the meeting authorizing the removal,
However, this fact must be so stated in the agenda and
notice of the said meeting.
c. For all other cases, the election must be held no later than
45 days from the time the vacancy arose.
307. Who should fill the vacancy due to the resignation of a hold
over director?
In the case of Valle Verde Country Club, Inc., et al. v. Africa,1*'
the Supreme Court ruled the resignation as a hold-over director will
not change the nature of the cause of the vacancy which is due to the
expiration of director’s term. The term of a hold-over director has
expired. The hold-over period is not part of his term. So, the cause of
the vacancy is not resignation but the expiration of term. As such,
the vacancy must be filled by the stockholders in a regular or special
meeting called for the purpose pursuant to Section 29 of OCC.652
308. What are the requisites to create an Emergency Board?
The requisites are:

a. The vacancy prevents the remaining directors from
constituting a quorum;
b. Emergency action is required to prevent grave, substantial,
and irreparable loss or damage to the corporation;
c. The vacancy may be temporarily filled from among the
officers of the corporation;
d. The appointment must be made by the unanimous vote of
the remaining directors or trustees; and
“‘Valle Verde Country Club, Inc., et al. v. Africa, G.R. No. 151969, September
4, 2009.
“2Now, Section 28 of RCC.
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r
e. The action by the designated director or trustee shall be

limited to the emergency action necessary, and the term
shall cease within a reasonable time from the termination
of the emergency or upon the election of the replacement
director or trustee, whichever comes earlier.
The corporation must notify the SEC within three (3) days
from the creation of the emergency board, stating therein the reason
for its creation.
g. Compensation
309. Are directors or trustees entitled to compensation for their
services rendered to the corporation in their capacity as such?
As a general rule, directors, or trustees are not entitled to
compensation in their capacity as such, because they are supposed
to render their services to the corporation gratuitously, and the
return upon their shares adequately furnishes the motives for
service, without compensation.653 In other words, the directors
presumably have significant equity stake in the corporation since
one generally cannot be elected to the board unless he has sufficient
number of shares. The return on their equity is sufficient motive or
consideration for their work.
The exceptions to this rule are as follows: (1) the bylaws authorize
the said compensation, or, (2) the stockholders representing at
least a majority of the outstanding capital stock or a majority of
the members grant the directors or trustees with compensation and
approve the amount thereof at a regular or special meeting.
310. "A" is the President of ABC Corporation, a corporation vested

with public interest while X is a director and at the same
time Vice Chairman of the Board with executive functions.
The Compensation Committee of the Board of Directors
fixed their compensation package as President and Vice-
Chairman, respectively. The Board of Directors thereafter
confirmed it. When their compensation package was reported
to the stockholders during the regular meeting, a stockholder
representing minority interest argues that the compensation
is invalid and irregular because it is not authorized by the laws
nor approved by the stockholders. Is he correct?
653Western Institute of Technology, Inc., et al. v. Salas, et al., G.R. No. 113032,
August 21,1997.
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He is not correct. The Supreme Court held in Western Institute

of Technology, Inc., et al. v. Salas, et al.66* that the above proscription
against granting compensation to directors or trustees of a corporation
is not a sweeping rule. The said provision itself delimits the scope
of the prohibition to the compensation given to directors for the
services which were performed purely in their capacity as directors
or trustees. The members of the board may receive compensation, in
addition to reasonable per diems, when they render services to the
corporation in a capacity other than as directors/trustees.
In sum, there are, therefore, three (3) instances when directors
or trustees may receive compensation, to wit-.
a. the bylaws authorize the said compensation, or
b. the stockholders representing at least a majority of the
outstanding capital stock or a majority of the members
grant the directors or trustees with compensation and
approve the amount thereof at a regular or special
meeting, or
c. they render services in their capacity other than as
directors or trustees, even though the payment of
compensation is not authorized by the bylaws or the
stockholders.
311. The Board of Directors adopted a couple of resolutions, the first

one approving car and housing plans for the board members
and the second, fixing the per diem allowance of directors
to P35,000 for every board meeting. The board resolutions
shall be applicable to directors who will be elected in the next
stockholders' meeting.
Are the resolutions valid?
The first resolution is invalid. The housing and car plan are
considered forms of compensation. They are to be given to directors
as a form of remuneration for their services in their capacity as
directors. These require authority in the bylaws or approval by
the stockholders representing at least majority of the outstanding
capital stock in a duly called stockholders meeting.
6MIbid.
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r

I .'.H/ri ;< >/.'•Iill i,> ■■III., "
The second resolution is valid. The Board of Directors may

fix the directors’ per diem allowance. The only conditions are the
amount must be reasonable and the directors must not participate
in the determination of their own per diem allowance.
Per diem (Latin term for each day) is a specific amount a
corporation or organization gives an individual per day to cover
living expenses when traveling and attending board meetings.
The reasonableness depends on the amount, the stature of the
directors, the income and size of the corporation, and other related
considerations. Per diem of Php35,000 for every board meeting is
deemed to be reasonable.
312. Is there a limit on the amount of compensation of directors or

trustees?
Yes, total yearly compensation of directors shall not exceed ten
percent (10%) of the net income before income tax of the corporation
during the preceding year.
Note that unlike the OCC where the 10% limit applies to the
annual compensation of directors or trustees, as such, the 10%
percent limit under the RCC does not make any such qualification.
It should, therefore, apply to all forms of compensation for services
rendered by the directors or trustees to the corporation in whatever
capacity.
h. Disloyalty
313. What is the so-called "doctrine of corporate opportunity"?
What is the underlying philosophy upon which such doctrine
rests?
The doctrine of corporate opportunity means that if the director
acquired for himself a business opportunity that should belong
to the corporation, he must account to the corporation for all the
profits he obtained unless his act was ratified by the stockholders
representing at least 2/3s of the outstanding capital stock.
Under such doctrine, a director of the corporation is prohibited
from competing with the business in which the corporation is
engaged in, as otherwise, he would be guilty of disloyalty, where
profits he may realize will have to go to the corporate funds except if
the disloyal act is ratified.655
K5IENT v. Tullett Prebon, G.R. No. 189158, January 11,2017.
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This doctrine rests fundamentally on the unfairness, in

particular circumstances, of an officer or director taking advantage
of an opportunity for his own personal benefit when the interest of
the corporation should have been more paramount.666
Under Section 33 of RCC, when a director seized an opportunity
belonging to the corporation, there is an obligation to account for
and remit any profit he earned from that venture or transaction.
The obligation to account and remit is not excused even if he risked
his own funds unless the act was ratified by the stockholders
representing at least two-thirds (2/3) of the outstanding capital
stock.
i. Business judgment rule

314. What is the business judgment rule?
Questions of policy and management are left to the sound
discretion and honest decision of the officers and directors of a
corporation, and the courts are without authority to substitute their
judgment for the judgment of the board of directors. The board is the
business manager of the corporation, and so long as it acts in good
faith, its orders are not reviewable by the courts.667 Courts are barred
from intruding into the business judgments of the corporation when
the same are made in good faith.668
Similarly, under the same business judgment rule, stockholders
cannot interfere with the board in conducting the business affairs of
the corporation. They cannot, for instance, revoke resolutions of the
board or repudiate their acts on account of mere disagreement. If
the stockholders are not satisfied with the way the board exercises
its powers or manages the corporation, their remedies consist of
replacing the board members upon expiration of their term, or vote
for their removal under Section 27 of the RCC or file a derivative
suit on behalf of the corporation to set aside the board’s wrongful
acts but not to supplant the board’s business judgment for their
own. To repeat, save for the authority granted to them by law and
the bylaws, stockholders cannot exercise corporate powers and have
no management rights. In the absence of gross negligence or bad
6661985 and 2005 Bar Exams.

667Cua, Jr. v. Tan. G.R. Nos. 181455-56 and 182008, December 4, 2009; Sales v.
Securities and Exchange Commission, G.R. No. 54330, January 13, 1989.
668Balinghasay v. Castillo, G.R. No. 185664, April 8, 2015.
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r
faith,559 the board may not even be held liable for mistakes or errors
in directing the affairs of the corporation.
The business judgment rule is not absolute. Corporate acts
cannot be justified under the business judgment rule if they are
contrary to law. For instance, the board cannot invoke this rule to
declare dividends when there is no surplus profit or declare dividends
out of re-appraisal surplus,560 or to pay compensation to directors, as
this power is lodged with the stockholders. It cannot be relied upon
to support a request for a new stock and transfer book on the pretext
that the original is lost (when in fact it is not) and declare entries in
the supposed lost stock and transfer book as invalid.561
j. Solidary liabilities for damages

k. Personal liabilities
315. Are directors, trustees, and officers liable for action they have
taken on behalf of the corporation?
A corporation, as a juridical entity, may act only through its
directors, officers, and agents. Obligations incurred as a result of
the directors’ and officers’ acts as corporate agents are not their
personal liability but the direct responsibility of the corporation
they represent.662
As such, as a general rule, directors, or officers are not liable
for any action taken on behalf of the corporation.
316. What are the instances when personal liability may attach to
directors, trustees, or officers of the corporation?
A director, officer, or trustee may be held personally liable in
a. Knowingly voting for or assenting to patently unlawful
acts of the corporation;
b. Gross negligence or bad faith in directing the affairs of
the corporation;
M9Section 30, RCC.

6601985 Bar Exam.
“‘Provident International Resources v. Joaquin Venus, et al., G.R. No. 167041,
June 17, 2008.
“2Girly G. Ico v. Systems Technology Institute Inc., et al., G.R. No. 185100,
July 9,2014.
L
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C. Acquiring any personal or pecuniary interest in conflict

with his duty as director or trustee or officer resulting in
damage to the corporation;663
d. He consents to the issuance of watered stocks or who,
having knowledge thereof, does not forthwith file with the
corporate secretary his written objection thereto;
e. He agrees to hold himself personally liable with the
corporation; and
f. He is made, by a specific provision of law, to personally
answer for his corporate action.664
317. Explain each instance when personal liability may attach to

directors, trustees, or officers of a corporation.
a. Knowingly Voting or Assenting to Patent Unlawful Acts of
the Corporation
It is not just to vote for, but to assent likewise to, a patently
unlawful act which makes a director, trustee, or officer personally
liable. It is not enough that the act is unlawful, it must be a patently
unlawful act, meaning without doubt, whatsoever that the act is
unlawful.
In Carag v. NLRC,™ the Supreme Court ruled that what
makes the act unlawful is the existence of a law declaring the act
to be unlawful. Thus, the failure of a director or officer to inform
the Department of Labor and Employment about the termination of
an employee due to authorized cause may affect the legality of the
termination but it will not make the director or officer personally
liable because there is no law declaring such act to be unlawful.
The erring officer though may be held liable though if such omission
amounts to gross negligence or bad faith.
663Section 30, RCC.

564Pioneer Insurance Surety Corporation v. Morning Star Travel & Tours Inc.,
G.R. No. 198436, July 8,2015; Carag v. NLRC, G.R. No. 147590, April 2, 2007; Atrium
Management v. Court of Appeals, et al., G.R. No. 109491, February 28, 2001; John
F. McLeod v. National Labor Relations Commission First Division, et al., G.R. No.
146667, January 23, 2007; Philex Gold Philippines v. Philex Bulawan Supervisors
Union, G.R. No. 149758, April 25, 2005.
'“Carag v. NLRC, G.R. No. 147590, April 2, 2007.
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The Supreme Court similarly held in Carag v. NLRC that the

liability of the officers of the corporation is not determined by the
Labor Code but by the Corporation Code, particularly, Sections 31
and 34 of the Corporation Code (now Section 30, RCC).
b. Gross Negligence or Bad Faith in Directing the Affairs of

the Corporation
Directors, trustees, and officers are not liable for oversight,
imprudence, or ordinary negligence. They cannot be held Hable just
because they erred in their business decision. Under the business
judgment rule, questions of business policy and management are
left to the sound discretion of the board and they cannot be held
liable for any adverse consequence of those decisions as long as they
acted in good faith and not contrary to law.5“ They are not, after
all, insurers of the profitability of the corporation. Their liability
will attach under this ground only if their acts amount to gross
negligence or bad faith in directing the affairs of the corporation.
There is no hard and fast rule as to when an act amounts
to ordinary or gross negligence or bad faith. It depends on the
surrounding circumstances.
However, before a director or officer of a corporation can be held
personally liable for corporate obligations, the following requisites
must concur:
i. The complainant must allege in the complaint that the
director or officer assented to patently unlawful acts of
the corporation, or that the officer was guilty of gross
negligence or bad faith; and
ii. The complainant must clearly and convincingly prove
such unlawful acts, negligence, or bad faith.56’
It should be noted that the stockholders are not included in
the enumeration of persons who may be held personally liable.
Stockholders are liable only to the extent of their subscription563
unless they also act as directors, officers, or agents of the corporation.
“6Balinghasay v. Castillo, G.R. No. 185664, April 8, 2015.

“’Heirs of Fe Tan Uy v. International Exchange Bank, G.R. No. 166282,
February 13, 2013; See also Bank of Commerce v. Marilyn P. Nite, G.R. No. 211535,
July 22, 2015 and Polymer Rubber Corporation v. Ang, G.R. No. 185160, July 24,
2013.
“’Donnina Halley v. Printwell, Inc., G.R. No. 157549, May 30,2011.
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C. Acquiring any personal or pecuniary interest in conflict

with their duty as directors or trustees
This conflict of interest must result in damage to the corporation.
In relation thereto, the doctrine of corporate opportunity refers to
a case when 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. There
is a responsibility not just to account but to remit to the corporation
any profit he realized from the venture.569
d. Consenting to the issuance of watered stocks

Under Section 64 of the RCC, a director or officer of a corporation
who: (a) consents to the issuance of stocks for a consideration less
than their par or issued value; (b) consents to the issuance of
stocks for a consideration in any form other than cash, valued in
excess of their fair value, or (c) having knowledge of the insufficient
consideration, does not file a written objection with the corporate
secretary, shall be liable to the corporation or its creditors, solidarily
with the stockholder concerned for the difference between the value
received at the time of the issuance of the stock and the par or issued
value of the same.670
e. Contractual liability
If a director or officer makes himself contractually liable with
the corporation, is he automatically liable solidarily? It depends on
the nature of the agreement he entered to secure the obligation of
the corporation. If he signs a surety agreement, he is liable solidarily
with the corporation. If it is a guaranty agreement, he is liable
subsidiarily with the corporation because as a guarantor, he has the
right of excussion. However, if the guaranty agreement waives the
benefit of excussion, then he is liable solidarily with the corporation.
It is thus clear that the assumption of the corporation’s liability
does not always translate to solidary liability. It has to be read in
conjunction with the provisions of the Civil Code on guaranty.
f- Statutory liability for corporate act or omission

There are cases when the law makes the directors and
officers liable for the corporate act or omission. The general rule is
that directors, trustees, and officers can be held criminally liable
“’Section 33, infra.

6,0See discussion in Section 64.
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for acts or omission done on behalf of the corporation only when

they are made by specific provision of law to personally answer for
their corporate act or omission.571 If the offender is a corporation,
certain laws jimpose criminal liability on the directors, officers, or
even agents responsible for the violation or offense. An example is
Presidential Decree 115 (“P.D. No. 115”) or Trust Receipts Law.
In Ching v. Secretary of Justice™ the director/officer, who
signed the trust receipt agreement, did not receive the goods under
the trust receipt. He did not get the loan himself nor derived any
personal benefit under the trust receipt transaction. The Supreme
Court said that these are not valid justifications to negate his
criminal liability because it is the law that makes him liable for the
corporate act of violating the trust receipt.
The director or officer who signed the trust receipts cannot,
thus, hide behind the cloak of the separate corporate personality
of the corporation. In the words of Chief Justice Earl Warren, a
corporate officer, cannot protect himself behind a corporation where
he is the actual, present, and efficient actor.
In Edward C. Ong v. the Court of Appeals and the People of the
Philippines,573 criminal liability was imposed against the person who
signed the trust receipt agreement on behalf of the corporation even
though he is not a director or officer of the corporation. It is because
under P.D. No. 115, or the Trust Receipts Law, if the offender is a
corporation the penalty shall be imposed upon the director, officer,
or any person responsible for the violation.
g. Responsibility for crimes

Of course, even if the law does not impose liability upon
directors or officers for the corporate act omission, the officers of
the corporation, other than the board of directors, can be made
criminally liable for their criminal acts if it can be proven that they
participated therein.574
Labor disputes such as that of illegal recruitment can also
trigger the liability of employees and employers. An employee of
6,1Sia v. People of the Philippines, G.R. No. L-30896, April 28,1983.

5,2Ching v. Secretary of Justice, G.R. No. 164317, February 6, 2006.
573Edward Ong v. Court of Appeals and People of the Philippines, G.R. No.
119858, April 29, 2003.
6,4Gregorio Singian, Jr. v. Honorable Sandiganbayan and the Presidential
Commission on Good Government, G.R. Nos. 160577-94, December 16, 2005.
1
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a corporation engaged in illegal recruitment may be held liable as

principal, together with his employer, if it is shown that he actively
and consciously participated in illegal recruitment because the
existence of the corporate entity does not shield froiti prosecution
the corporate agent who knowingly and intentionally causes the
corporation to commit a crime. The corporation obviously acts and
can act, only’ by and through its human agents, and it is their conduct
which the law must deter.676
There is likewise jurisprudence that not only persons who
participated in the act can be made criminally liable. Even those
with power to prevent the illegal act may be held criminally liable.
Thus, to be held criminally liable for the acts of a corporation, there
must be a showing that its officers, directors, and shareholders
actively participated in or had the power to prevent the wrongful
act.6’6
h. Special fact doctrine

318. What is the special fact doctrine?
This doctrine makes a director or officer liable when he takes
advantage of an information by virtue of his office to the disadvantage
of the corporation.
i. Inside information
319. What is an inside information?
It is an information not known to the public that one has
obtained by virtue of being an insider — called also as insider
information.
320. When may a director be held liable for obtaining insider

information?
A director may be held liable for obtaining insider information
if he trades securities based on such insider information. Trading
on insider information amounts to an unfair manipulation of the
free market.677
676The Executive Secretary, et al. Court of Appeals, et al., G.R. No. 131719,
May 25, 2004.
“’“Securities and Exchange Commission v. Price Richardson Corp., et al., G.R.
No. 197032, July 26, 2017.
“’’Please see discussion on insider trading under the SRC part of the reviewer.
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j. Contracts
i. By self-dealing directors with the corporation
321. What is the legal status of a contract between the corporation
and any' of its directors, trustees, or officers or their related
interest?
A contract of the corporation with one (1) or more of its directors,
trustees, officers or their spouses and relatives within the fourth
civil degree of consanguinity or affinity is voidable, at the option of
such corporation, unless all the following conditions are present:
a. 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;
b. The vote of such director or trustee was not necessary for
the approval of the contract;
c. The contract is fair and reasonable under the
circumstances;
d. In case of corporations vested with public interest,
material contracts are approved by at least two-thirds
(2/3) of the entire membership of the board, with at least
a majority of the independent directors voting to approve
the material contract; and
e. In the case of an officer, the contract has been previously
authorized by the board of directors.
Where any of the first three (3) 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 and the contract is fair and reasonable under the
circumstances.678
Under this provision, such a contract is voidable at the option
of the corporation, meaning valid, until annulled by the corporation.
The option to void the contract ceases if the foregoing requisites are
duly complied with.
8™Section 31, RCC.
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Note further that the presence and vote of the self-dealing

director may be dispensed with in lieu of the ratification by the
stockholders representing at least 2/3s of the outstanding capital
stock or at least 2/3s of the members for a nonstock corporation
in a meeting called for the purpose. The condition that cannot be
dispensed with is that the contract must be fair and reasonable
under the circumstances.
ii. Between corporations with interlocking

directors
322. What is the legal status of a contract between two (2)
corporations with interlocking directors?
Except in cases of fraud, and provided the contract is fair
and reasonable under the circumstances, a contract between two
(2) 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 (1) corporation is substantial and the
interest in the other corporation or corporations is merely nominal,
the contract shall be subject to the provisions of the preceding section
insofar as the latter corporation or corporations are concerned.
Stockholdings exceeding twenty percent (20%) of the
outstanding capital stock shall be considered substantial for
purposes of interlocking directors.679
In other words, the mere fact that there is a contract between
two (2) corporations with common directors is not a ground to
invalidate the said contract. However, the contract must be fair and
reasonable under the circumstances and should not be tainted with
fraud.
323. What are the other requirements if the interest of the
interlocking director is substantial in one and nominal in the
other corporation?
In relation to Section 31 of RCC, if the contract is between
two (2) corporations with interlocking directors and the interest
of the interlocking director is substantial in one, and nominal in
the other, then such interlocking director shall be subjected to the
requirement of the aforesaid prior section. The interest shall be
considered substantial in the context of Section 32 of the RCC if it is
"’Section 32, RCC.
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more than twenty percent (20%), and not necessarily more than fifty
percent (50%). Conversely, an interest amounting to twenty percent
(20%) or less will be considered nominal.
To illustrate, let us assume that the interest of Juan Dela
Cruz in ABC Corporation is substantial and his interest in XYZ
Corporation is nominal, and Mr. Dela Cruz is also in the board of
both ABC and XYZ Corporation. Under Section 32 of RCC, in so
far as XYZ Corporation is concerned, Mr. Dela Cruz is subject to
the requirements of Section 31. Thus, his presence must not be
necessary in the meeting of XYZ Corporation, and also his vote
must not be necessary for the approval of the contract between ABC
and XYZ Corporation. Similarly, the said contract must be fair and
reasonable under the circumstances. It is as if the said contract
is between ABC Corporation and Mr. Dela Cruz in so far as the
nominal corporation is concerned.
The foregoing requirements will not apply if the interest of
the interlocking director in the corporations is both substantial or
nominal.
If the contract is a management contract under Section 43
of the RCC, in addition to the requirements under Section 32, the
following approvals must likewise be obtained:
a. board of directors of each corporation - majority of the
quorum of each of the managing and managed corporation
(not majority of their respective boards);580 and
b. stockholders representing at least majority of the
outstanding capital stock, or at least majority of the
members of both the managing and managed corporation.
Moreover, where: (a) a stockholder or stockholders representing
the same interest ofboth the managing and the managed corporations
own or control more than one-third (1/3) of the total outstanding
capital stock entitled to vote of the managing corporation, or (b) 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 further approved by the stockholders owning at
As a guide, if the RCC only mentions the approval of the “board of directors,"
a quorum of said directors will suffice. This must be distinguished from other
provisions, e.g., Sections 15, 36, 37, and 41, where the RCC provides the requirement
of approval of a “majority of the board of directors.”
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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 of the managed
corporation.
k. Executive and other special committees

324. What is the rationale for the creation of an executive committee?
Regular board meetings are often conducted only once a month.
There are occasions where transactions require corporate approval
but cannot wait for the Board to meet, given the urgency or the need
to make a prompt decision. The bylaws may authorize the creation
of an executive committee, which is an adjunct or extension of the
board, that can act on matters falling within the board’s competence.
i. Creation
325. Can the board of directors or trustees create positions or
committees?
Yes, the board has the power to create positions, committees,
or offices as may be necessary to conduct the business affairs of the
corporation. This is covered by the business judgment rule. It was
held that the determination of the necessity for additional offices
and/or positions is a management prerogative which courts are not
wont to review in the absence of any proof that such prerogative was
exercised in bad faith.6"1
In fact, this power is now explicit under the RCC which
provides that the board of directors may create special committees
of temporary or permanent nature and determine the members'
term, composition, compensation, powers, and responsibilities,™
However, the board cannot create the executive committee
referred to under Section 34 of the RCC nor a corporate office,
because these are required to be created by the bylaws.6"3
326. Who may create the executive committee?

The executive committee is created by the bylaws. Once
created, the board may fill the composition of the committee. As the
power to adopt bylaws is lodged with the stockholders, by parity of
■' Port '.y-r/m v. v. '/irlormooGo, <-/ «/., G.K. No. HIIHHIJ, Mnn h III, 2007.
"'•‘fioct.ion 34, Yf
h'fi'i
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reasoning, only the stockholders may decide to create a committee

that will serve as an adjunct or extension of the board of directors or
a mini-board of directors.
However, the board can create a committee and name it
“executive committee” as long as it will not perform the functions of
the executive committee referred to in Section 34 of RCC. Otherwise,
only the bylaws may authorize its creation.584
327. Who may be appointed members of the Executive Committee?

Only board directors, not less than three (3), can be appointed
members of the Executive Committee. Non-board directors can be
appointed members but only in an advisory capacity. Note that the
law does not set any maximum number. Obviously, it cannot be the
same size as the board as it will be inconsistent with the rationale of
its creation. The maximum number may be indicated in the bylaws
or determined by the Board, if authorized by the bylaws, taking into
account what is reasonably necessary to attain the purpose of its
creation.
328. Can a foreigner be appointed as a member of the Executive

Committee of a corporation engaged in partly nationalized
business activity?
While “foreigners” are disqualified to be elected/appointed
as “corporate officers” in wholly or partially nationalized business
activities, they are allowed representation in the "Board of
Directors” or “governing body” of said entities in proportion to their
shareholdings. The reason for the exception is that the Board of
Directors/governing body performs specific duties as a "body." Unlike
corporate officers, each member of the Board of Directors/governing
body has no individual power or authority to perform management
functions.
The logical conclusion is that the rule allowing foreigners to sit
in the Board of Directors extends to the "Executive Committee" which
in authorized to act on such specific matters within the competence
of the Board of Directors. Accordingly, a foreigner can be a member
of the Executive Committee without violating the Anti-Dummy Law.
provided, however, that foreign representation in the said governing
body shall only be in proportion to the foreign shareholdings in the
Port BovvieoH Inc. v. Gw G K No. IGtSSv. March Ux .VO
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corporation, and provided further, that the foreigners shall not be

given specific individual managerial responsibility.685
ii. Limitations on its powers

329. What are the powers of the executive committee?
Generally, the executive committee can do almost all the
authorized acts of the board under the RCC, except for the following:
a. any corporate act requiring stockholders approval;
b. filling of vacancies in the board;
c. amendment or repeal of bylaws, or the adoption of new
bylaws;
d. amendment of a board resolution, which by its express
terms is not amendable or repealable; and
e. distribution of cash dividends to shareholders.
It should be clear that the executive committee cannot also
approve stock dividends since the said act requires stockholders’
approval.
a. Meetings
330. What are the requisites of a valid board meeting?
a. The meeting must be held on the date fixed in the bylaws
or in accordance with law;
b. Prior written notice of such meeting must be sent to all
directors/trustees;
c. It must be called by the proper party;
d. It must be held at the proper place; and
e. Quorum and voting requirements must be met.685
MiRe: Anti-Dummy Law in Condominium Corporations, SEC-OGC Opinion

No. 19-14, July 15, 2014.
58GLim v. Moldex, supra.
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Hi. Regular or special

(a) When and where
331. When and where are board meetings conducted?
Regular meetings of the board, such must be held monthly,
unless the bylaws provide otherwise. On the other hand, special
meetings may be held at any time upon the call of the president or
as provided in the bylaws.
The aforesaid board meetings may be held anywhere in or
outside of the Philippines, unless the bylaws provide otherwise.
(b) Notice
332. What are the notice requirements for board meetings?
The notices of the regular or special board meetings must state
the date, time, and place of the meeting. Such notices must also be
sent to every director or trustee at least two (2) days prior to the
scheduled meeting, unless a longer time is provided in the bylaws.
However, a director or trustee may waive this requirement, either
expressly or impliedly.
Thus, the required period for notices was increased from one
(1) to two (2) days prior to the scheduled meeting. It must also be
noted that such notices need not be in writing, unless the bylaws
require otherwise.
333. What is the effect of failure to give notice of the board meeting
to even one director?
In Lopez Realty, Inc. v. Spouses Tanjangco,687 the Supreme
Court held that such board meeting is legally infirm considering that
there is a failure to comply with the requirements or formalities of
the law or the corporation’s bylaws. As such, any action taken during
the said meeting may be challenged. However, said action may be
subsequently ratified by the board. Ratification can be made either
expressly or impliedly. Implied ratification may take various forms
— like silence or acquiescence, acts showing approval or adoption of
the act, or acceptance and retention of benefits flowing therefrom.688
“’G.R. No. 154291, November 12, 2014.

“’Lopez Realty, Inc. v. Spouses Tanjangco, citing Yasuma v. Heirs of Cecilio S.
De Villa and East Cordillera Mining Corporation, G.R. No. 150350, August 22,2006.
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(c) Attendance in meetings

334. In what instances can the directors or trustees of a corporation
participate in a meeting through remote communication?
Directors or trustees who cannot physically attend or vote
at board meetings can participate and vote through remote
communication such as videoconferencing, teleconferencing, or other
alternative modes of communication that allow them reasonable
opportunities to participate. However, directors or trustees cannot
attend or vote by proxy at board meetings.
If a director or trustee intends to participate in a meeting
through remote communication, he/she shall notify in advance the
Presiding Officer and the Corporate Secretary of his/her intention.
The Corporate Secretary shall note such fact in the minutes of the
meeting.
Corporations may issue their own internal procedures for the
conduct of board meetings through remote communication or other
alternative modes of. communication to address administrative,
technical and logistical issues.689
335. Is a director or trustee who participates through remote

communication deemed present for purpose of quorum?
Yes, a director or trustee who participates through remote
communication shall be deemed present for purpose of attaining
quorum.690
if. Who presides

336. Who presides during board meetings?
Compared to the OCC, the RCC provides that the president
can only preside during meetings in the absence of the chairman,
unless the bylaws provide otherwise.
The revision recognized the long-standing practice wherein the
chairman presides over the board’s and stockholders’ meetings. As
such, the chairman need not be specifically authorized in the bylaws
to preside over the meetings.
689Seetion 4, SEC Memorandum Circular No. 6 series of 2020, March 12, 2020.
‘"Section 5, SEC Memorandum Circular No. 6 series of 2020, March 12,2020.
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Hi. Quorum
337. What is the quorum for board meetings?
Based on Section 52 of the RCC, a majority of the directors or
trustees as stated in the articles of incorporation shall constitute
a quorum to transact corporate business, unless the articles
of incorporation or the bylaws provides for a greater majority.
Furthermore, every decision reached by at least a majority of the
directors or trustees constituting a quorum, except for the election of
officers which shall require the vote of a majority of all the members
of the board, shall be valid as a corporate act.
338. Under the Bylaws of Corporation A, its Board of Trustees

(Board) is composed of five (5) members, two (2) of whom
are nominated and appointed by the three original members.
Further, under Section 2, Article I of the Bylaws, only a
majority of the three (3) original members of the Board shall be
necessary at all meetings to constitute a quorum. Is Section 2,
Article I of the Bylaws of Corporation A consistent with existing
Corporation laws?
Section 2, Article I of the Bylaws is not consistent with the law
for two (2) reasons:
a. It is not in accord with Section 52 of the RCC.
As a general rule, the quorum in board meetings
is the majority of the number of directors or trustees.
However, under Section 52 of the RCC, the articles
of incorporation or bylaws of the corporation may fix a
greater number than the majority of the number of board
members to constitute the quorum necessary for the valid
transaction of business.
Thus, the SEC opined that the articles of
incorporation or the bylaws cannot provide for a lesser
number than the majority provided in Section 52 of the
RCC. To provide that only a majority of the three original
members would be necessary to constitute a quorum
would be repugnant to the directive of Section 52 of the
RCC.
b. It is also conflicting with Section 91 of the RCC which
allows nonstock corporations to provide in their articles
of incorporation or bylaws the term of office of the board.
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While the term of directors or trustees of nonstock

corporations may vary under the articles of incorporation
or bylaws, lifetime or unlimited term of the board is
not allowed. A lifetime or unlimited term of the board
absolutely deprives other stockholders or members of
the opportunity to participate in the management of
the corporation. To provide that only the majority of the
original members of the board of trustees is required
to constitute a quorum for all board meetings implies
that the original members will be holding their office as
members of the board for an unlimited term.691
Note that while the articles of incorporation or bylaws cannot
fix the quorum to less than the majority of the board, or it may
provide for a greater majority. The case of Pena v. Court ofAppeals132
provides an example where the bylaws of a corporation provided for
a greater majority. The Supreme Court held that when only three
(3) out of five (5) members of the board of directors convened by
virtue of a prior notice of a special meeting, there was no quorum
to validly transact business since, under Section 4 of the amended
bylaws of the corporation, at least four (4) members must be present
to constitute a quorum in a special meeting of the board of directors.
339. What are the corporate acts under the RCC requiring only
majority of the quorum?
a. Declaration of dividends.
b. Entering into a management contract.
c. Fixing the issued price of no-par value shares.
d. And such other corporate acts which under the RCC and
the bylaws do not require approval by at least majority of
the entire board.
This is because under Section 52 of the RCC, unless the RCC or
the bylaws require otherwise, every decision reached by a majority
of the directors or trustees constituting a quorum shall be valid.
691Answered based on Section 91 of the RCC; Re: Quorum; Majority, SEC-OGC

Opinion No. 07-16, April 4, 2016.
69ZG.R. No. 91478, February 7, 1991
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Thus, whenever the RCC or the bylaws require board approval,

as opposed to the majority of the entire board, it means the majority
of the quorum of the board of directors.
340. How can a director or trustee cast vote in a meeting via remote
communication?
The director or trustee in the meeting via remote communication
may cast his vote through electronic mail, messaging service or such
other manner as may be provided in internal procedures. The vote
shall be sent to the Presiding Officer and the Corporate Secretary
for notation.593
iv. Rule on abstention

341. What is the effect of the stockholder's abstention during
stockholders' meetings?
In those cases specified by law on instances of appraisal right,
a stockholder present in a meeting but abstains, is not entitled to
exercise such right. He cannot demand payment of the fair value
of his shares, because one of the elements of appraisal right is his
vote against the proposed corporate act. As such, abstention is
tantamount to a waiver of appraisal right.
Stockholders who abstain from voting are, however, counted
for quorum purposes.
342. When is a director or trustee required to recuse from voting

during a board meeting?
Without prejudice to Section 31 of the RCC (Dealings of
Directors, Trustees or Officers with the Corporation), a director or
trustee who has a potential interest in any related party transaction
is required to recuse from voting on the approval of the related party
transaction pursuant to Section 52 of the RCC.
343. Is the director who abstained or recused himself from voting

on a particular measure counted for quorum purposes?
A director who abstained or recused himself from voting should
be considered as present for quorum purposes. His abstention,
however, may have a bearing on the validity of the board approval
693Section 8, SEC Memorandum Circular No. 6 series of 2020, March 12,2020.
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depending on whether the RCC or the bylaws require the majority

of the entire board or simply, majority of the quorum.
For example, if there are 15 board members and only eight
(8) are present, on matters where only a majority of the quorum is
needed, the abstention of a director on a particular item requiring
board approval will be immaterial. On the other hand, if the
approval of a majority of the entire board is required, the abstention
of a director is tantamount to a “No” vote and thus the transaction
cannot be effected.
344. Distinguish meetings of the board of directors/trustees from

stockholders/members' meetings.
As discussed above but for ease of reference, here are the
distinctions between meetings of the board of directors/trustees and
stockholders/members ’ meetings.
Regular Stockholders/ once a year

meeting members
Board/trustees once a month unless the bylaws
provide otherwise
Special Stockholders/ whenever needed
meeting members
Board/trustees whenever needed
Notice requirem:-;|j|
Regular Stockholders/ at least 21 days prior written notice
meeting members unless the bylaws provide otherwise.
Directors/Trustees at least 2 days’ notice unless bylaws
provide otherwise
Special Stockholders/ at least one-week written notice
meeting members unless bylaws provide otherwise
Directors/Trustees at least 2 days’ notice unless bylaws
provide otherwise
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Quorum-requiremer J
Regular Stockholders/ at least majority of the outstanding
meeting members capital stock or majority of the
members unless the RCC or the
bylaws provide otherwise. The
bylaws may provide for less or
greater than majority in determining
quorum
Special Board/trustees at least majority of the board of
meeting directors or trustees as fixed in the
articles of incorporation or bylaws.
The bylaws may provide for a greater
but not lesser than majority of the
board members for quorum purposes
Vent
Stockholders/ principal office of the corporation
Members and if not practicable in the city or
municipality where the principal
office is located
Directors/Trustees anywhere unless otherwise provided
in the bylaws
Modeol
Stockholders/ in person or by proxy, or through
Members remote communication or in absentia
when provided by the bylaws
Directors/Trustees proxy voting is not allowed
I. Capital affairs
a. Certificate of stock
345. What is a stock certificate?
A certificate of stock is 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. It indicates the name of the holder, the number, kind
and class of shares represented, and the date of issuance.
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Pertinently, it was held that the mere inclusion as a shareholder

in the General Information Sheet of a corporation is not sufficient
proof that one is a shareholder of such corporation.694
f. Nature of the certificate
346. What is the nature of shares of stock?
Shares of stock are units of capital stock. Once issued, they are
considered personal property of the stockholder owning it. While
shares of stock constitute personal property, they do not represent
the property of the corporation. The corporation has property of its
own. A share of stock only typifies an aliquot part of the corporation’s
property, or the right to share in its proceeds to that extent when
distributed according to law and equity.696
As personal property, shares of stock may be transferred, either
through sale, donation or succession, or encumbered or otherwise be
subject to a security interest.
347. Is possession of stock certificate an indispensable condition

for the exercise of stockholders' rights?
Possession of stock certificate is not an indispensable condition
for the exercise of stockholders’ rights. This is because a certificate
of stock shall only be issued to a subscriber upon payment of the full
amount of the subscription together with interest and expenses.596
Any holders of unpaid shares that are not delinquent have all the
rights of stockholders.697
ii. Uncertificated shares

348. Is there any revision under the RCC on the issuance of stock
certificates?
Yes, the SEC may require corporations whose securities are
traded in trading markets and which can reasonably demonstrate
their capability to do so to issue their securities or shares of stocks
in uncertificated or scripless form in accordance with the rules of
the SEC.
“‘David C. Lao v. Dionisio Lao, G.R. No. 170585, October 6, 2008.

696BoyerRoxasv.CourtofAppeals,G.R.No. 100866, July 14,1992; Stockholders
of F. Guanson v. Register of Deeds of Manila, G.R. No. L-18216, October 30,1962.
‘"Section 63, RCC.
697Section 71, RCC.
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Hi. Negotiability; requirements for valid transfer

of stocks
349. Is a stock certificate a negotiable instrument?
Although a stock certificate is sometimes regarded as quasi-
negotiable, in the sense that it may be transferred by delivery, it
is well-settled that the instrument is non-negotiable, because the
holder thereof takes it without prejudice to such rights or defenses
as the registered owner or creditor may have under the law, except
insofar as such rights or defenses are subject to the limitations
imposed by the principles governing estoppel. That the holder found
the stock certificates endorsed in blank does not necessarily make it
the owner of the shares represented therein. Their true ownership
has to be ascertained in a proper proceeding.598
350. What is the procedure in transferring a common/voting stock

and when is it legal?
The mere endorsement of the certificate of stock shall be
sufficient to legally effect the transfer of title to a share of stock, even
without executing a deed of assignment of the shares, provided the
same is coupled with delivery and recorded in the stock and transfer
book of the corporation. An unrecorded transfer, though valid
between the parties, cannot be effective as against the corporation.
The right of a stockholder accrues only upon entry of his name in the
books of the corporation.
However, the use of the word “may” means that the transfer
may be effected in a manner different from that provided for in the
law. In the case of Gonzalo Chua Guan v. Samahang Magsasaka,
Inc.,™ which covers Section 35 of Act 1459 and has been carried
over in Section 63 of the OCC (now Section 62 of the RCC), the
Supreme Court held that the use of the verb “may” does not exclude
the possibility that a transfer may be made in a different manner,
thus, leaving the creditor in an insecure position even though he has
the certificate in his possession.600
In view of the foregoing, while it is usual to effect the transfer
of shares by indorsement on the certificate, a conveyance may be
made by an assignment or sale in a separate instrument in lieu
““Republic of the Phils. (PCGG) v. Sandiganbayan, ibid.

“"G.R. No. L-42O91, November 2,1935
““Alfonso S. Tan v. Securities and Exchange Commission, G.R. No. 95696,
March 3,1992.
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of the indorsement of the certificate, unless the bylaws expressly

provide that the transfer shall be made exclusively in the manner
authorized by the statute.601
351. What are the documentary requirements on the transfer of

shares?
The documentary requirements for the transfer of shares will
depend on whether the stockholder is in possession of the stock
certificates covering his shares. If the stockholder has custody of
the stock certificates, the stock certificate must be endorsed by the
owner or his attorney-in-fact or any other person legally authorized
to make the transfer.
Accordingly, for as long as the certificate of stock is duly
indorsed in accordance with the provisions of the RCC, the same
may be considered a valid transfer of the shares covered by the
certificate of stock, even without executing a “deed of assignment”
of the shares.
A “deed of assignment” on the other hand is necessary only
when no certificate of stock has yet been issued or where the same is
not in the possession of the transferor.602
352. What is the nature of delivery that the law contemplates for the
transfer of shares?
The delivery contemplated in Section 63 (now 62 of the RCC),
pertains to the delivery of the certificate of shares by the transferor
to the transferee, that is, from the original stockholder named in the
certificate to the person or entity the stockholder was transferring
the shares to, whether by sale or some other valid form of absolute
conveyance of ownership. It is the delivery of the certificate,
coupled with the endorsement by the owner or his duly authorized
representative that is the operative act of transfer of shares from
the original owner to the transferee.603
w‘' Re: Classification of Corporations; Express Powers; Right of First Refusal;

Procedure in Transferring Shares of Stock; Qualifications of Directors; and Probative
Value of the Stock and Transfer Book. SEC-OGC Opinion No. 51-19, October 11,
2019.
““Transfer of Shares; Documentary Requirements, SEC-OGC Opinion No. 06-
07, April 19. 2007.
M3Anna Teng v. Securities and Exchange Commission, et al., G.R. No. 184332,
February 17, 2016.
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In another case, it was held that where the seller indorsed the
stock certificates but did not deliver them, ownership of the shares
cannot be transferred to the buyer. For an effective transfer of
shares of stock, the mode and manner of transfer as prescribed by
law should be followed.604
353. What other steps should the transferee take for the registration
of the transfer of shares and the issuance of the stockcertificate
in his favor?
He should pay the taxes due on the transaction, if any, then
obtain from the Bureau of Internal Revenue a certificate authorizing
registration (“CAR”). The transferee should present the CAR and
the document evidencing the conveyance, and surrender the duly
endorsed stock certificate to the secretary of the corporation who
shall then cancel the stock certificate of the transferor and issue a
new stock certificate to the transferee.
In one case, the Supreme Court ruled that with regard to the
issuance of a new certificate of stock, the surrender of the original
certificate of stock is necessary before the issuance of a new one so
that the old certificate may be cancelled. A corporation is not bound
and cannot be required to issue a new certificate unless the original
certificate is produced and surrendered. Surrender and cancellation
of the old certificates serve to protect not only the corporation but
the legitimate shareholder and the public as well, as it ensures that
there is only one document covering a particular share of stock.605
354. Is delivery or surrender of the certificate of stock a requisite

before the conveyance may be recorded in the books of the
corporation?
No, to compel delivery to the corporation of the certificates
as a condition for the registration of the transfer would amount
to a restriction on the right of a stockholder to have the stocks
transferred to his name, which is not sanctioned by law. The only
limitation imposed by Section 63 of the OCC (now Section 62 of the
RCC) is when the corporation holds any unpaid claim against the
shares intended to be transferred.606
“’Embassy Farms, Inc. v. Court of Appeals, G.R. No. 80682, August 13,1990.
605Anna Teng v. Securities and Exchange Commission, ibid.
mIbid.
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Nevertheless, as previously pointed out, the surrender of the

original certificate of stock is necessary before the issuance of a new
one so that the old certificate may be cancelled.60’’
iv. Issuance
355. What are the formalities for the issuance of a stock certificate?
a. The certificate should be signed by the president or vice
president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation.608
Thus, a mere typewritten statement advising a
stockholder of the extent of his ownership in a corporation
without qualification and/or authentication cannot be
considered a formal certificate of stock.609
b. It shall be issued in accordance with the bylaws of the
corporation.
c. Every certificate must state on its face that the corporation
is organized under the laws of the state, the name of the
person to whom issued, the number and class of shares
and the designation of a series if any which the certificates
represents, the par value of each share represented, or a
statement that the shares are without par value.610
d. It should be detached from the book of stock certificate
and issued to the stockholder.
e. No certificate of stock shall be issued to a subscriber until
the full amount of the subscription together with interest
and expenses (in case of delinquent shares), if any is due,
has been paid.
It should be noted that the SEC may require corporations whose
securities are traded in trading markets and which can reasonably
demonstrate their capability to do so to issue their securities or
shares of stocks in uncertificated or scripless form in accordance
with the rules of the SEC.611
mIbid.
“““Bitong v. Court of Appeals, ibid.
“'“Bearer Certificates, SEC Opinion No. 02-05, January 31, 2005.
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(a) Full payment

356. Can "Bearer" stock certificates be issued by a corporation
upon the request of a subscriber?
The issuance of “bearer” stock certificates is not allowed under
the law. Certificates of stock may be issued only to registered owners
of stock in a corporation upon full payment of subscription.612
357. Does "unpaid claim," which justifies the corporation to refuse

the registration of the transfer, include any obligation or liability
that the subscriber may owe the corporation?
No, the term “unpaid claim” only refers to “any unpaid claim
arising from unpaid subscription. It does include any indebtedness
which a subscriber or stockholder may owe the corporation arising
from any other transaction. It does not, for instance, include monthly
dues imposed by the corporation for the use of its facilities.613
(b) Payment pro-rata

358. May a corporation consider the portion paid by a shareholder
as full payment for the corresponding number of shares and
cancel the subscription as to the rest?
The SEC has consistently opined that a subscription is
one, entire and indivisible whole contract. This indivisibility of
subscription is absolute as Section 63 of the RCC speaks no exception.
The purpose of the doctrine is to prevent the partial disposition
of a subscription, which is not fully paid, because if it is permitted
and the stockholder subsequently becomes delinquent in the
payment of his subscription, the corporation may not be able to sell
as many of his subscribed shares as would be necessary to cover the
total amount from him pursuant to Section 67 of the RCC.
Applying the aforementioned doctrine, a corporation cannot
issue certificates of stock for the portion of the subscription that is
paid and cancel the portion which remains unpaid as it violates the
doctrine of indivisibility of subscription contracts. In effect, it is also
condonation of part of the subscription of a stockholder, which is
violative of the trust fund doctrine.614
6l2Re; Bearer Certificates, SEC Opinion No. 02-05, January 31,2005.

613China Banking Corporation v. Court of Appeals, and Valley Golf and
Country Club, Inc., G.R. No. 117604, March 26,1997.
614Re: Condonation of Subscriptions Receivables or Cancellation of
Subscriptions, SEC-OGC Opinion No. 50-19, October 11, 2019.
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V. Stock and transfer book

(a) Contents
359. What is a stock and transfer book ("STB")?
A stock and transfer book is a record of all stocks in the names
of the stockholders alphabetically arranged; the installments paid
and unpaid on all stocks for which subscription has been made,
and the date of payment of any installment; a statement of every
alienation, sale or transfer of stock made, the date thereof, by and to
whom made; and such other entries as the bylaws may prescribe.616
It is the quintessential record of all stockholders and their
corresponding stockholdings in the corporation. It is the best
evidence to prove the status of a person as a stockholder of the
corporation. However, the same is not conclusive in nature to prove
one’s stockholdings. Should the STB be lost or destroyed, other pieces
of evidence such as but not limited to the latest General Information
Sheet of the corporation or the stock certificate may be presented to
substantiate one’s claim as a stockholder.616
360. Is the stock and transfer book conclusive evidence to show the
outstanding capital stock of the corporation?
A stock and transfer book is necessary as a measure of
precaution, expediency and convenience since it provides the only
certain and accurate method of establishing the various corporate
acts and transactions and of showing the ownership of stock and like
matters. However, a stock and transfer book, like other corporate
books and records, is not in any sense a public record, and thus is
not exclusive evidence of the matters and things which ordinarily
are or should be written therein.617
(b) Who may make valid entries

361. What is the nature of the obligation of the corporate secretary
to register the transfer of the shares assuming that all the
formalities have been complied with?
el6Section 73, RCC; 2009 Bar Exam.

616SEC-OGC Opinion No. 51-2019.
617Jesus v. Lanuza, et al. v. Court of Appeals, et al., G.R. No. 131394, March
28, 2005.
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In transferring stock, the secretary of a corporation acts in a

purely ministerial capacity.618 In another case, the Supreme Court
ruled that where a stockholder executed a special power of attorney
(“SPA”) in favor of his wife who, pursuant to the SPA, sold the shares
but after the sale, the stockholder died, the corporation cannot refuse
to register the shares in favor of the assignee on the pretext that
upon the death of the stockholder, his shares of stock became the
property of the estate which should be settled and liquidated first
before any distribution could be effected. It is the ministerial duty
of a corporation to register the shares of stock which were assigned
in the name of assignees even if there is a pending action in court
questioning the validity of the assignment.619
362. What is the appropriate legal remedy if the corporation refuses

to register the transfer of shares?
Because it is its ministerial duty to register the transfer of
shares, the corporation, if it refuses without good cause to make
such transfer, may be compelled to do so by mandamus.620
363. Who may file the petition for mandamus to compel the
registration of the transfer?
In Ponce v. Alsons Cement Corporation621 the Supreme Court
ruled that only the transferor may file the petition for mandamus.
The transferee cannot compel the corporate secretary to cause the
registration and issuance of a stock certificate because the transferee
has not acquired standing yet in the books of the corporation and that
the transferee can only file such petition if he has been authorized
by the transferor to cause such transfer.
Subsequently, in Andaya t>. Rural Bank of Cabadbaran,6-
the Supreme Court held that transferees of shares of stock are real
parties in interest having a cause of action for mandamus to compel
the registration of the transfer and the corresponding issuance of
stock certificates.
618Anna Teng v. SEC, ibid.

619Rural Bank of Salinas, Inc. v. Court of Appeals, G.R. No. 96674, June 26,
1992.
62»Anna Teng v. SEC, ibid.
621G.R. No. 139802, December 10, 2002.
622G.R. No. 188769, August 3, 2016.
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The Supreme Court ruled that the reliance of the RTC on

the Ponce case in finding that petitioner had no cause of action for
mandamus against the defendant bank was misplaced. In Ponce,
the issue resolved by the Court was whether the petitioner therein
had a cause of action for mandamus to compel the issuance of
stock certificates, not the registration of the transfer. Ruling in the
negative, the Court said in that case that without any record of the
transfer of shares in the stock and transfer book of the corporation,
there would be no clear basis to compel that corporation to issue a
stock certificate.
In contrast, at the crux of this petition are the registration of
the transfer and the issuance of the corresponding stock certificates.
Requiring petitioner to register the transaction before he could
institute a mandamus suit in supposed abidance by the ruling in
Ponce was a palpable error. It led to an absurd, circuitous situation
in which the petitioner was prevented from causing the registration
of the transfer, ironically because the shares had not been registered.
With the logic resorted to by the RTC, transferees of shares of stock
would never be able to compel the registration of the transfer and
the issuance of new stock certificates in their favor. Transferees of
shares of stock are real parties in interest then having a cause of
action for mandamus to compel the registration of the transfer and
the corresponding issuance of stock certificates.
364. When may a corporation refuse to register the transfer of the

shares in the books of the corporation?
a. If the formalities prescribed by law for the transfer of
shares, which are endorsement of the stock certificate and
delivery to the transferee, are not complied with.
b. If the above-stated formalities have been complied with
but the corresponding taxes for the transfer have not
been paid.
c. If the corporation holds any unpaid claim on the shares.623
(c) Stock transfer agent

vi. Lost or destroyed certificates
365. What is the procedure to be followed by a corporation in issuing
new certificates of stock in lieu of those which have been lost,
stolen, or destroyed?
623Section 62, RCC.
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a. The registered owner of a certificate of stock in a

corporation or such person’s legal representative shall
file with the corporation an affidavit in triplicate,
setting forth, if possible, the circumstances as to how the
certificate was lost, stolen or destroyed, the number of
shares represented by such certificate, the serial number
of the certificate and the name of the corporation which
issued the same. The owner of such certificate of stock
shall also submit such other information and evidence as
may be deemed necessary; and
b. After verifying the affidavit and other information and
evidence with the books of the corporation, the corporation
shall publish a notice in a newspaper of general circulation
in the place where the corporation has its principal office,
once a week for three consecutive weeks at the expense
of the registered owner of the certificate of stock which
has been lost, stolen or destroyed. The notice shall state
the name of the corporation, the name of the registered
owner, the serial number of the certificate, the number
of shares represented by such certificate, and shall state
that after the expiration of one year from the date of the
last publication, if no contest has been presented to the
corporation regarding the certificate of stock, the right to
make such contest shall be barred and the corporation
shall cancel the lost, destroyed or stolen certificate of stock
in its books. In lieu thereof, the corporation shall issue a
new certificate of stock, unless the registered owner files
a bond or other security as may be required, effective for a
period of one 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 year period provided
herein. If a contest has been presented to the corporation
or if an action is pending in court regarding the ownership
of the certificate of stock which has been lost, stolen or
destroyed, the issuance of the new certificate of stock in
lieu thereof shall be suspended until the court renders a
final decision regarding the ownership of the certificate of
stock which has been lost, stolen or destroyed.624
624Section 72, RCC.
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366. What is the remedy available to the corporation in case of

conflicting claims of ownership over the same shares of stock
issued by the corporation?
The corporation may bring an action for interpleader to compel
the conflicting claimants to interplead and litigate their claims
between or among themselves (Rule 62 of the 1997 Rules of Court).
The corporation will basically recognize the claimant who will be
adjudged by the court as the owner of the shares.
367. Juan is the registered owner of 100,000 shares of stock of ABC

Corporation covered by stock certificate no. 143. He claims
to have lost his stock certificate. He filed an affidavit stating
the circumstances surrounding the loss of his certificate. The
affidavit further contains all the information required by the
Corporate Secretary. The Corporation caused the publication
of the notice of loss once a week for three (3) consecutive
weeks in a newspaper of general circulation in the city where
the principal office of the corporation is located. There being no
claimant after the one year publication period, the Corporation
canceled the stock certificate and issued a replacement in
favor of Juan.
Thereafter, Pedro came forward claiming that the stock
certificate was in fact endorsed to him pursuant to a sale transaction
and asked the Corporation to cancel the replacement certificate
issued to Juan.
a. Is the Corporation liable for issuing a replacement

certificate?
No, 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 laid down
in Section 72 of the RCC.
b. Can the corporation be compelled to cancel the

replacement certificate?
No, because in the books of the corporation, the stock certificate
of Juan as purportedly sold to Pedro had already been canceled and
is no longer outstanding in the books of the corporation. The remedy
of Pedro is to file an action against Juan.
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C. Suppose Juan did not really lose the stock certificate but
had previously endorsed it to Maria. After obtaining the
replacement stock certificate, Juan endorsed it to Anna.
Who has a better right, Maria as endorsee of the
. purportedly lost certificate, or Anna, the endorsee of the
replacement stock certificate?
The endorsee of the replacement certificate has a better right
because the lost certificate of Juan had already been canceled and is
no longer outstanding in the books of the corporation.
368. Is it mandatory on the part of the corporation to shorten the one-

year publication period if the stockholder is willing to furnish
the corporation with a bond to indemnify the corporation for
any loss or liability it may incur as a result of the issuance of
the replacement certificate?
There is nothing in the law that mandates the corporation to
waive the one-year publication period upon offer of a bond by the
stockholder. It is only an option available to the corporation to
protect itself from liability in case it agrees to waive the one-year
period.
vii. Situs of the shares of stock

369. What is the situs of the shares of stock?
The situs of share of stock is deemed to be the State where the

issuing corporation has its domicile which is ordinarily the State
under whose laws it was created, while a certificate of stock may
have a situs at the place where it is located or at the domicile of
the owner, even though the corporation is domiciled elsewhere. (2
Fletcher, pp. 62-63, 95.)
b. Watered stocks
i. Definition
370. What is a watered stock?
A watered stock is a stock issued for a consideration less than
the par or issued price thereof or for a consideration in any form
other than cash, valued in excess of its fair value.626
625Section 61, RCC; 2015 Bar Exam.
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“Water” in the stock represents the difference between the fan

value at the time of the issuance of the stock and the par or issued
value of the said stock.
ii. Liability of directors for watered stocks

iii. Trust fund doctrine for liability for watered
stocks
371. What is the liability of directors or officers relating to the
issuance of watered stocks?
A director or officer of a corporation who: (a) consents to the
issuance of stocks for a consideration less than its par or issued
value; (b) consents to the issuance of stocks for a consideration in
any form other than cash, valued in excess of its fair value; or (c)
having knowledge of the insufficient consideration, does not file
a written objection with the corporate secretary, shall be liable
to the corporation or its creditors, solidarily with the stockholder
concerned for the difference between the value received at the time
of the issuance of the stock and the par or issued value of the same.626
Applying the trust fund doctrine, the aggregated par value of
the shares subscribed, regardless if the consideration is less than its
par or issued value, is treated as equity in trust of the corporation’s
creditors. As such, the subscription for less than the par or issued
value of the shares is violative of the trust fund doctrine.
372. Can treasury shares be sold for a price below par value? If yes,
are they not considered watered shares?
Yes, treasury shares may be sold for a price below par value;
provided that such price is reasonable under the circumstances as
determined by the board of directors.027 They are not watered stocks
because rule against watered stocks only applies to the issuance of
original or primary shares and not disposition of existing shares.
C. Payment of balance of subscription

i. Call by board of directors
ii. Notice requirement

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373. When should the balance of subscription be paid?

The balance of subscription should be paid on the date specified
in the contract of subscription. In the absence of due date in the
contract of subscription, the board of directors may, at any time,
declare due and payable to the corporation unpaid subscriptions and
may collect the same or such percentage thereof, in either case, with
accrued interest, if any, as it may deem necessary.628
The due date for the payment of the balance is either the
stipulated date or in the absence of such stipulation, the call or
demand by the board of directors.
Demand is not necessary to put the subscriber in default if the
due date of payment is specified in the contract of subscription based
on Article 1169 of the Civil Code that demand is not necessary to put
the debtor in default when the law so declares.
374. What are the legal consequences if the balance of the

subscription is not paid on the due date?
Failure to pay the subscription on the due date shall render
the entire balance due and payable and shall make the stockholder
liable for interest at the legal rate on such balance, unless a different
interest rate is provided in the subscription contract. The interest
shall be computed from the date specified, until full payment of the
subscription.
If no payment is made within 30 days from the said date, all
stocks covered by the subscription shall thereupon become delinquent
and shall be subject to sale as hereinafter provided, unless the board
of directors orders otherwise.
The subscriber is also liable to pay interest on the unpaid
subscription.
375. What are the remedies available to the corporation to enforce

the payment of the unpaid subscription?
a. The corporation may declare the shares as delinquent
and subject such delinquent shares to sale;629 or
62flSection 66, RCC.

™Ibid.
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b. It may collect, through court action, the unpaid

subscription.630
376, Does the subscriber have any right as a stockholder despite

the failure to pay the subscription?
The subscriber retains all his rights as a stockholder despite
his failure to pay the balance of the subscription on the date specified
in the contract of subscription or upon call made by the board of
directors (“due date”). He is entitled to such rights until his stocks
become delinquent. Stocks become delinquent only if not paid within
30 days from due date.631 This is consistent with Section 71 of the
RCC which states that holders of subscribed shares not fully paid
which are not delinquent shall have all the rights of a stockholder.
If the stocks are delinquent, the only right available to the
subscriber is the right to dividends which should be exercised in
accordance with law. This means that the cash dividends due on
delinquent stock shall be applied against the unpaid balance on
the subscription plus interest, cost and expenses while the stock
dividends shall be withheld until full payment of the subscription.632
d. Sale of delinquent shares

i. Effect of delinquency
377. What are the effects of delinquency?
No delinquent stock shall be voted for, be entitled to vote, or
be represented at any stockholders’ 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 the RCC,
until and unless payment is made by the holder of such delinquent
stock for the amount due on the subscription with accrued interest,
and the costs and expenses of advertisement, if any.633
ii. Call by resolution of the board of directors

iii. Notice of sale
iv. Auction sale

631Section 66, RCC.
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378. State the procedure for the sale of delinquent stocks.

a. Subject to the provisions of the subscription contract,
the board of directors may at any time declare due and
payable to the corporation unpaid subscriptions 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.634
b. Failure to pay on the date specified in the subscription
contract or on the date stated in the call made by the
board 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 subscription contract.635
c. If no payment is made within 30 days from the date
specified in the subscription contract or on the date stated
in the call made by the board, all stocks covered by said
subscription shall thereupon become delinquent.636
d. 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 30 days nor more than 60 days from the date the
stocks become delinquent.637
e. Notice of the sale, with a copy of the resolution, shall be
sent to every delinquent stockholder either personally,
by registered mail, or through other means provided in
the bylaws. The same shall be published once a week
for two (2) consecutive weeks in a newspaper of general
circulation in the province or city where the principal
office of the corporation is located.638
f. The delinquent stock shall be sold at a public auction
to such bidder who shall offer to pay the full amount of
the balance on the subscription together with accrued

“Section 66, RCC.
“Section 66, RCC.
“Section 67, RCC.
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interest, costs of advertisement and expenses of sale, for

the smallest number of shares or fraction of a share.639
g- 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 the purchaser’s 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.640
h. 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 bid for the same,
and the total amount due shall be credited as fully paid
in the books of the corporation. Title to all the shares of
stock covered by the subscription shall be vested in the
corporation as treasury shares and may be disposed of by
said corporation in accordance with the provisions of the
RCC.641
379. On June 15, 2019, Pedro subscribed to 1 million shares of XYZ

Corporation in the amount of P1,OOO,OOO. He paid P250,000.00
and agreed to pay the balance on June 15,2020 as specified in
the contract of subscription. The contract stipulated that the
balance of the subscription shall earn 12% interest from the
date of the contract until full payment. Pedro failed to pay on
the due date. Despite demands, the balance remained unpaid
after 30 days from June 15,2020.
a. How much is the total amount of unpaid subscription?
It should be P750.000 plus 12% interest as stipulated in the
contract of subscription. Interest at the legal rate may also be
collected on the same amount of P750,000 from the due date until
full payment of the subscription. The first interest is due by reason
of stipulation while the second is by reason of the default of the
subscriber.

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b. How many shares are delinquent? 750,000 or 1,000,000

shares?
The 1,000,000 shares are considered delinquent. Under Section
66 of the RCC, if no payment is made within 30 days from the date
specified in the subscription contract or on the date stated in the
call made by the board, all stocks covered by said subscription shall
thereupon become delinquent.
This is because, under Section 63 of the RCC, 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. This implicitly sets
forth the doctrine that a subscription contract is one, entire and
indivisible contract. It cannot be divided into portions so that the
stockholder shall not be entitled to a certificate of stock until full
payment of his subscription together with interest, and expenses, if
any, is due. Therefore, the entire delinquent subscription cannot be
voted for or be entitled to vote.642
c. The board of directors adopted the appropriate resolution

to direct the sale of the delinquent shares in a public
auction. Assume that the total unpaid subscription
inclusive of interest, cost and expense is P850,000.00.
Three bidders who are willing to settle P850,000.00
unpaid subscription joined the auction sale. "A" tendered
a bid for 1,000,000 shares. "B" submitted a bid for 850,000
shares, while "C" made a bid for 750,000 shares.
Who among the three will be considered the winning
bidder?
Under Section 67 of the RCC, the delinquent stock shall be

sold at a public auction to such bidder who shall offer to pay the full
amount of the balance on the subscription together with accrued
interest, costs of advertisement and expenses of sale, for the smallest
number of shares or fraction of a share.643
The winning bidder is therefore “C” because he offers to pay
the full amount of the balance of subscription plus interest, cost and
expense for the least number of shares. The sale of delinquent shares
“Delinquent Stocks, Delinquency Sale, Effect of Delinquency, SEC-OGC

Opinion No. 15-10, April 23, 2010.
“Section 67, RCC.
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is not the same as execution or foreclosure sale of teal property

where the winning bidder is the one who offers the highest amount
for the purchase of the property.
d. Does Pedro have any right to the shares after the auction
sale?
Under Section 67 of the RCC, the stock so purchased during the
public auction shall be transferred to such purchaser in the books of
the corporation and a certificate for such stock shall be issued in the
purchaser’s 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.644
Therefore, C shall be issued a stock certificate for 750,000
shares corresponding to the stocks he purchased while Pedro will be
issued a stock certificate covering 250,000 shares.
In the event, however, that the auction is successful but there
is only one (1) bidder who offered to pay the full amount for the
entire delinquent stocks, the corporation must issue a certificate of
stock covering the entire subscription and not for only the unpaid
portion of the subscription.
The principle of indivisibility of subscription is absolute as
Section 63 of the RCC speaks of no exception. Thus, partial payment
to a subscription contract shall be deemed forfeited and the whole
subscription shall be declared delinquent.
May the corporation participate in the public auction for

the sale of delinquent shares?
The corporation may bid for the delinquent shares only if there
is 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. After the bid, the total amount due
shall be credited as fully paid in the books of the corporation. Title
to all the shares of stock covered by the subscription shall be vested
in the corporation as treasury shares and may be disposed of by said
corporation in accordance with the provisions of the RCC.646
UiIbid.
M6Ibid.
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I I,. ... ■ .■. • ■ ■.
380. A stockholder in a corporation subscribed to 59.99% of the

total stocks of a corporation, of which 46.12% thereof remained
unpaid. A call for payment was made by the corporation
wherein the said stockholder failed to pay for his subscription
and said subscription was subsequently declared delinquent.
Later on, the same was made the subject of an auction sale,
however, the same ended in failure for lack of a bidder.
a. Is a delinquent stockholder entitled to notices for the
stockholders’ meeting?
Notice need be given only to each stockholder of record entitled
to vote at the meeting, or to those entitled to be present. Section 70
of the RCC is explicit that the moment a stock becomes delinquent,
the holder thereof loses his right to vote, and thus his right to be
represented at any stockholders’ meeting.646
b. In the event that a delinquent subscription, which was

previously a subject of an auction sale with no bidder,
was again put up for sale in another auction sale, can the
corporation enter into an agreement with the bidder to
subject the payment for the said sale to terms of payment,
i.e., to be paid in installment basis?
The payment must be made in full at the time of the sale, and
not subject to terms, or in installment basis. In the sale of delinquent
stocks, the highest bidder is the person who offers to pay or is willing
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. Because a certificate of stock shall be issued in favor
of the successful bidder, with more reason should the payment be
made in full, otherwise, the certificate of stock cannot be issued, as
prescribed by Section 63 of the RCC.647
c. Assuming that the delinquency affects the whole

subscription of the delinquent stockholder, are the
stockholders of the remaining paid-up subscriptions
Ânswered based on RCC; SEC-OGC Opinion No. 27-10, August 27,2010.

MIbid.
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(40.01% of the total stocks), which are not delinquent,

the only ones entitled to vote during the stockholders'
meeting?
Because the corporation’s major stockholder (59.99% of the
total stocks) has been declared delinquent, only 40.01% of the total
stocks, fully paid and not delinquent, are the only stocks entitled to
vote during the stockholders’ meeting, based on Section 70 of the
RCC. Even if the subscriptions are not fully paid, as long as they are
not delinquent, the stockholders thereof are entitled to vote, based
on Section 71 of the RCC.
However, Section 51 of the RCC provides that unless otherwise
provided for in the RCC or in the bylaws, a quorum shall consist of
the stockholders representing a majority of the outstanding capital
stock.
Therefore, it appears that even if 40.01% of the total stocks,
fully paid and not delinquent, are entitled to vote, the corporation
cannot muster a quorum unless the 59.99% of the total stocks are
sold.648
d. Is there a limit to the number of times that unpaid

subscriptions may be auctioned?
Section 67 of the RCC provides for the sale in a public auction
of delinquent shares. Nothing therein provides any limit to the
number of times that unpaid subscriptions may be auctioned. The
RCC allows two (2) remedies for the enforcement of liability for
unpaid subscriptions: 1) to put up delinquent unpaid subscription
for sale under Section 67; and 2) to file an action in court under
Section 69 of the RCC.649
e. Can the corporation sell portions of the delinquent shares

("in small pieces") even while they are not treasury shares
inasmuch as the corporation cannot buy all the remaining
shares of the delinquent stockholder?
Again, because of the principle of the indivisibility of
subscription under Section 63 of the RCC, the subscription cannot
be divided into portions. The SEC has previously opined that:
C4SAnswered based on RCC; Delinquent Stocks, Delinquency Sale, Effect of

Delinquency, SEC-OGC Opinion No. 15-10, April 23, 2010.
™Ibid.
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IV. BUSINESS ORGANIZATION'S 333
“Accordingly, if the stockholder has not paid the full

amount of his subscription, he cannot transfer part of it in
view of the indivisible nature of subscription contract. It
is only upon full payment of the whole subscription that a
stockholder can transfer the same to several transferees.
However, the entire subscription, although not yet fully
paid, may be transferred to a single transferee, who
as a result of the transfer, must assume the impaid
balance. It is necessary, however, to secure the consent
of the corporation since the transfer of subscription right
contemplates a novation of contract which under Article
1293 of the Civil Code of the Philippines, cannot be made
without the consent of the creditor.”650
381. When may the sale of delinquent shares be averted?

The sale may be averted if the delinquent stockholder pays to
the corporation, on or before the date specified for the sale of the
delinquent stock, the balance due on the former’s subscription, plus
accrued interest, costs of advertisement and expenses of sale, or
unless the board of directors otherwise orders.651
382. Under what conditions may the stockholder recover the

delinquent stock if there is an irregularity in the notice of sale
or the sale itself?
No action to recover delinquent stock sold can be sustained
upon the ground of irregularity or defect in the notice of sale, or in
the sale itself of the delinquent stock, unless the party seeking to
maintain such action first pays or tenders to the party holding the
stock the sum for which the same was sold, with interest from the
date of sale at the legal rate. No such action shall be maintained
unless a complaint is filed within six months from the date of sale.652
e. Alienation of shares
383. When is the sale of shares perfected?
Sale of share is perfected not upon the meeting of the minds
by the parties on the cause, consideration and object of the sale but
upon compliance with the formalities prescribed by the RCC.
““/bid.
“2Section 68, RCC.
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In one case, the buyer of the shares had fully paid the purchase
price but the stock certificate was only delivered after close to three
(3) years from the sale. The seller clearly failed to deliver the stock
certificates to the buyer, representing the shares of stock purchased
by the buyer, within a reasonable time from the transaction. This
was a substantial breach of their contract that entitles the buyer the
right to rescind the sale under Article 1191 of the Civil Code. It is
not entirely correct to say that a sale had already been consummated
as the buyer already enjoyed the rights a shareholder can exercise.
The enjoyment of these rights cannot suffice where the law, by its
express terms, requires a specific form to transfer ownership.653
i. Allowable restrictions on the sale of shares

384. May the corporation impose restrictions on the transfer of
shares?
The authority granted to a corporation to regulate the transfer
of its stock does not empower it to restrict the right of a stockholder
to transfer his shares by means of bylaws provisions, but merely
authorizes the adoption of regulations as to the formalities and
procedure to be followed in effecting the transfer.65'*
The corporation may then impose restrictions on the transfer
of shares but subject to the following requisites:
a. Restrictions on the right to transfer shares must appear
in the articles of incorporation, in the bylaws, as well as
in the certificate of stock; otherwise, the same shall not be
binding on any purchaser in good faith.
b. 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.
c. Upon the expiration of the said period, the existing
stockholders or the corporation fails to exercise the option
to purchase, the transferring stockholder may sell their
shares to any third person.666
653Fil-Estate Golf and Development, Inc. Vertex Sales And Trading, Inc.,
G.R. No. 202079, June 10, 2013.
“’Marsh Thomson v. Court of Appeals and the American Chamber of
Commerce of the Philippines, Inc., G.R. No. 116631, October 28, 1998.
C55Section 97, RCC.
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As a rule, a stockholder has an absolute right to transfer, convey,

assign, sell or dispose of his shares. He may freely sell his shares in
a corporation to any party without having to offer the same to the
corporation or to his co-stockholders, unless a right of first refusal
is granted in favor of stockholders and such right is embodied in the
articles of incorporation, bylaws and stock certificate.
Note that third persons being transferees of shares are not
bound by the articles of incorporation and bylaws of a corporation.
As such, they can only be bound by the right of first refusal if
incorporated in the stock certificate.
While these restrictions appear in the chapter on close
corporations, there is no reason not to apply the same to open or
regular corporation.
385. Mr. A is a stockholder/founding member of Rural Bank of Maria

Aurora Incorporated, (RBMAI for brevity). Previously, he was
able to sell shares of stock of RBMAI.
However, at present, Mr. A could not sell his shares
to outsiders since the new manager/majority stockholder
imposed a new policy that the shares should be sold only
to insiders, particularly, to the employees who are also
stockholders of RBMAI. Mr. A is now questioning the new
policy since these employees/stockholders buy at very low
prices while there are third-party buyers willing to buy his
shares at a higher price.
Is the restriction on the transfer of shares to insiders a

valid restriction?
The company policy restricting the transferability of shares is

not valid.
In order to be valid and enforceable, any restriction on the
transfer of shares of stock must be explicitly provided for in the
articles of incorporation and in the certificate of stocks.
Restrictions on the transfer of shares are essentially contractual
in nature between the stockholders and the corporation. Hence, such
restrictions must be embodied in their contract, i.e., the articles of
incorporation.
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Considering further that shares of stock burdened with

restrictions on transferability may fall into the hands of innocent
purchasers, the SEC, as a matter of policy, also requires that the
restrictions on the transfer of shares must be printed in the stock
certificates.656
386. What are the remedies available to a creditor, who is a

successful bidder in an auction sale of shares of stocks of a
corporation, in the event that the corporate secretary refuses
to issue certificates of stock and record the auction sale in the
stock and transfer book in his favor?
If the corporation wrongfully refuses to issue a certificate of
stock, the following are the remedies available to an assignee or
transferee of shares of stock:
a. file a suit for specific performance of an express or implied
contract;
b. file for an alternative relief by way of damages where
specific performance cannot be granted; and
c. file a petition for mandamus to compel issuance of a
certificate.657
ii. Sale ofpartially paid shares

iii. Sale of a portion of shares not fully paid
387. How may partially paid shares be transferred?
Because partially paid shares are not covered yet by a stock
certificate, and as such, there is no certificate which can be endorsed
and delivered to the transferee as required by Section 62 of the RCC,
the subscriber, as the owner of the shares, may assign his right to
the contract of subscription in favor of the assignee.
The corporation, may, however, refuse the transfer of shares
based on Section 62 of the RCC which provides that the corporation
may refuse the transfer if it holds unpaid claim over the shares. The
term “unpaid claim” means unpaid subscription.668
c56Re: Restrictions on Transferability of Shares, SEC Opinion No. 22-05,

December 12, 2005.
“’Refusal to Issue Certificates of Stock; Remedies of a Successful Bidder in an
Auction Sale of Shares of Stock, SEC-OGC Opinion No. 21-06, March 23, 2006.
“8China Banking Corporation v. Court of Appeals and Valley Golf and Country
Club, Inc., G.R. No. 117604, March 26, 1997.
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iv. Sale of all of shares not fully paid

388. Is the consent of the corporation necessary or required in case
of sale of unpaid shares?
If the subscription is fully paid, the stockholder may sell or
dispose of his shares without having to secure the consent of the
corporation. In fact, the corporation cannot require its consent for
the transfer of the shares. It will be contrary to law and public policy.
To be valid, the restriction on transfer cannot be more onerous
than the option granted to a stockholder to purchase the shares
of a transferring stockholder on reasonable terms and conditions,
or simply, the right of first refusal. Requiring the consent of the
corporation is certainly more onerous than the right of first refusal.
However, if the subscription is not fully paid, the consent of the
corporation is necessary before the subscriber may assign his right
to the contract of subscription. Assignment of shares with unpaid
subscription basically amounts to novation as there will be a change
of debtor from the subscriber to the assignee. The obligation to pay
the balance of the subscription will be assumed by the assignee. To
be valid, novation requires the consent of the creditor which in this
case is the corporation.
V. Sale of fully paid shares

vi. Requisites of a valid transfer
389. What are the requisites for a valid transfer of stocks?
For a valid transfer of stocks, there must be strict compliance
with the mode of transfer prescribed by law. The requirements are:
a. There must be a delivery of the stock certificate;
b. The certificate must be endorsed by the owner or his
attorney-in-fact or other persons legally authorized to
make the transfer; and,
c. 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.669
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Thus, where an incorporator organized a corporation and

a certain number of shares was issued to a stockholder but the
certificate of stock covering said shares was in the possession of
the incorporator who refused to deliver the same to the heir of the
stockholder after the latter died, the stockholder of record should
be considered the owner of the shares since he did not indorse the
certificate in favor of the incorporator. The allegation that it was
delivered to him by the stockholder because he was the one who paid
for it does not hold.660
The fact that the stock certificates covering the shares registered
in the names of certain persons were found in the possession of
another does not necessarily prove that the latter owned the shares.
A stock certificate is merely a tangible evidence of ownership of
shares of stock. Its presence or absence does not affect the right of
the registered owner to dispose of the shares covered by the stock
certificates.661
390. Is the payment of the capital gains tax on the part of the seller,
assuming there was a gain in the sale, a requirement for the
validity of the sale or assignment or transfer of the shares to
the buyer?
Nonpayment of capital gains tax does not affect the validity
of the transfer as between the seller and the buyer. However, if the
capital gains tax is not paid, the sale or the transfer of the shares
shall not be registered in the books of the corporation by the transfer
agent or secretary of the corporation.602
391. Is the corporation, whose shares of stock are the subject of

a transfer transaction (through sale, assignment, donation, or
any other mode of conveyance), required to be a party to the
sale transaction?
The Corporation whose shares of stock are the subject of a
transfer transaction (through sale, assignment, donation, or any
other mode of conveyance) need not be a party to the transaction,
as may be inferred from the terms of Section 63 of the OCC (now
““Razon v. Intermediate Appellate Court, G.R. No. 74306, March 16,1992.

““‘Republic v. Estate of Hans Menzi, G.R. No. 152578, November 23, 2005.
“““Transfer of Shares; Documentary Requirements, SEC-OGC Opinion No. 06-
07, April 19, 2007.
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62 of the RCC). However, to bind the corporation as well as third

parties, it is necessary that the transfer is recorded in the books of
the corporation.663
vii. Involuntary dealings

392. Are transactions where the shares of stock are subjected to
security interest or encumbrance required to be recorded
in the books of the corporation in order to make the transfer
effective as against the corporation and third persons?
Only the transfer of shares resulting in a change of ownership
is required to be registered in the books of the corporation. These
include sale, donation or succession. Encumbrances, like security
interest on shares, are not required to be registered to bind the
corporation and third persons. They are binding and enforceable
against third persons if they are registered with the appropriate
registration registry under R.A. No. 11057, otherwise known as the
Personal Property Security Act.
f. Corporate books and records

393. What are the revisions under the RCC on corporate records
and stockholders' right of inspection?
a. It required all information about the corporation to be
preserved, and expanded the list of records required to be
kept by the corporation at its principal office.
b. Inspecting/reproducing party is bound by confidentiality
rules. However, a person who is not a stockholder or
member of record, a competitor, or who represents the
interests of a competitor is prohibited to inspect/reproduce
corporate records.
c. A stockholder who shall abuse the right to inspect/
reproduce shall be penalized under the provisions of the
following laws: (a) RCC, (b) Intellectual Property Code of
the Philippines; and (c) Data Privacy Act of 2012.
d. The SEC may require the presence of an independent
transfer agent in case the stock transfer corporation
transfers or trades stocks in secondary markets.
“’Forest Hills Golf & Country Club v. Vertex Sales and Trading, Inc., G.R. No.
202205, March 6, 2013.
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e. It expanded the remedies available to a stockholder

exercising his right of inspection in that if the corporation
denies or does not act on a demand for inspection and/
or reproduction, the aggrieved party may report such
denial or inaction to the SEC. Within five (5) days from
receipt of such a report, the SEC shall conduct a summary
investigation and issue an order directing the inspection
or reproduction of the requested records.
i. Records to be kept at principal office

394. What are the records that corporations are required to keep
and preserve at its principal office?
Every corporation shall keep and carefully preserve at its
principal office all information relating to the corporation including,
but not limited to:
a. The articles of incorporation and bylaws of the corporation
and all their amendments;
b. The current ownership structure and voting rights of the
corporation, including lists of stockholders or members,
group structures, intra-group relations, ownership data,
and beneficial ownership;
c. The names and addresses of all the members of the board
of directors or trustees and the executive officers;
d. A record of all business transactions;
e. A record of the resolutions of the board of directors or
trustees and of the stockholders or members;
f. Copies of the latest reportorial requirements submitted to
the SEC;
g- The minutes of all meetings of stockholders or members,
or of the board of directors or trustees. Such minutes shall
set forth in detail, among others: the time and place of
the meeting held, how it was authorized, the notice given,
the agenda therefor, whether the meeting was regular
or special, its object if special, those present and absent,
and every act done or ordered done at the meeting.
Upon the demand of a director, trustee, stockholder or
member, the time when any director, trustee, stockholder
or member entered or left the meeting must be noted in
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the minutes; and on a similar demand, the yeas and nays

must he taken on any motion or proposition, and a record
thereof carefully made. The protest of a director, trustee,
stockholder or member on any action or proposed action
must be recorded in full upon their demand;664
h. Book of accounts, original and duplicate originals of
invoices and receipts for goods and services purchased;665
and
i. Records as may be required under other applicable laws.
Stock corporations must also keep a stock and transfer book,
which shall contain a record of all stocks in the names of the
stockholders alphabetically arranged; the installments paid and
unpaid on all stocks for which subscription has been made, and the
date of payment of any installment; a statement of every alienation,
sale or transfer of stock made, the date thereof, by and to whom
made; and such other entries as the bylaws may prescribe.666
ii. Right to inspect corporate records1"
II. Dissolution and liquidation

a. Modes of dissolution
395. What is dissolution?
Dissolution is the extinguishment or cancellation of the
corporate franchise and the termination of its corporate existence
for business purposes.
396. What is the consequence of dissolution?

A corporation that has already been dissolved, be it voluntarily
or involuntarily, retains no juridical personality to conduct its
business save for those directed towards corporate liquidation. In
other words, the corporation ceases to be a body corporate for the
purpose of continuing the business for which it was organized. But
it shall, nevertheless, be continued as a body corporate for three (3)
years after the time when it would have been so dissolved, for the

““Section 237, Tax Code, as amended by TRAIN Law.
“’Please see discussion on right of inspection, supra.
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purpose of prosecuting and defending suits by or against it and of

enabling it gradually to settle and close its affairs, to dispose of and
convey its property and to divide its assets.668
Thus, a real estate mortgage executed by a corporation after
its dissolution is void. The redemption of the mortgaged property is
likewise void for being inconsistent with liquidation. A real estate
mortgage is not part of the liquidation powers that could have been
extended to the corporation. It could not have been 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 property and
to distribute its assets.
Consequently, any redemption exercised by the Corporation
pursuant to this void real estate mortgage is likewise void, and could
not be given any effect. If a real estate mortgage agreement was
entered prior to its dissolution, then the redemption of the subject
property, even if already after its dissolution (as long as it would not
exceed three [3] years thereafter), would still be valid because of the
liquidation/winding up powers accorded by the Corporation Code.669
A corporation whose term has expired and, ipso facto, dissolved
can no longer exercise an option to lease a property because the same
is tantamount to the continuation of the business.670
397. Barn filed an action to enjoin SN Company's board of

directors from selling a parcel of land registered in the
corporation's name, to compel the corporation to recognize
Barn as a stockholder with 50 shares, to allow him to inspect
the corporate books, and to claim damages against the
corporation and its officers. Subsequently, the corporation
and the individual defendants moved to dismiss the complaint
since the corporation’s certificate of registration was revoked
by the SEC during the pendency of Barn's case on the ground
of noncompliance with reportorial requirements. The special
commercial court granted the motion and reasoned that only
action for liquidation of assets can be maintained when a
corporation has been dissolved and Barn cannot seek reliefs
“““Philippine National Bank v. Court of First Instance of Rizal, et al., G.R. No.
63201, May 27, 1992.
“““Dr. Gil J. Rich v. Guillermo Paloma III, G.R. No. 210538, March 7, 2018.
“’“Philippine National Bank v. Court of First Instance of Rizal, et al., G.R. No.
63201, May 27, 1992.
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which in effect lead to the continuation of the corporation's

business. The court also ruled that it lost jurisdiction over
the intra-corporate controversy upon the dissolution of the
corporation.
a. Was the court correct?

The court is not correct. An action to be recognized as a
stockholder and to inspect corporate documents is an intra-corporate
dispute which does not constitute a continuation of the business. The
dissolution of the corporation simply prohibits it from continuing its
business. Moreover, under Section 145 of the OCC (now Section 184
of the RCC), no right or remedy in favor of or against any corporation,
its stockholders, members, directors and officers shall be removed or
impaired by the subsequent dissolution of the corporation.
The dissolution does not automatically convert the parties
into strangers or change their intra-corporate relationship. Neither
does it terminate existing causes of action which arose because
of the corporate ties of the parties. The cause of action involving
an intra-corporate controversy remains and must be filed as an
intra-corporate dispute despite the subsequent dissolution of the
corporation.671
The foregoing bar exam question is based on the case of Aguirre
v. FQB +7, Inc.672 In that case, the Supreme Court said that the
complaint does not show any intention to continue the corporate
business of FQB+7. It does not seek to enter into contracts, issue
new stocks, acquire properties, execute business transactions, etc.
Its aim is not to continue the corporate business, but to determine
and vindicate an alleged stockholder’s right to the return of his
stockholdings and to participate in the election of directors, and a
corporation’s right to remove usurpers and strangers from its affairs.
Neither are these issues mooted by the dissolution of the corporation.
A corporation’s board of directors is not rendered functus officio by
its dissolution. Since Section 122 of the OCC (now Section 139 of
the RCC) allows a corporation to continue its existence for a limited
purpose, necessarily there must be a board that will continue acting
for and on behalf of the dissolved corporation for that purpose. Thus,
the determination of which group is the bona fide or rightful board
of the dissolved corporation will still provide practical relief to the
67lAguirre v. FQB +7, Inc., G.R. No. 170770, January 9, 2013.

™Ibid.
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parties involved. The same is true with regard to the shareholdings

in the dissolved corporation. A party’s stockholdings in a corporation,
whether existing or dissolved, is a property right which he may
vindicate against another party who has deprived him thereof. The
corporation’s dissolution does not extinguish such property right.
b. Four (4) years later, SN Company files an action against

Barn to recover corporate assets allegedly held by the
latter for liquidation. Will this action prosper?673
The action cannot prosper because the corporation has no more
legal capacity to sue after three (3) years from its dissolution.674
It would have been different if the complaint was filed during
the three-year liquidation period for in such case, the action may be
continued even thereafter.
398. What are the methods of dissolution?

Dissolution may be voluntary or involuntary. It is voluntary if
the dissolution is initiated by the corporation and it is involuntary,
if it is against the will of the corporation or initiated by an aggrieved
party or the SEC.
i. Voluntary dissolution
399. What are the voluntary modes of dissolution?
The voluntary modes of dissolution are:
a. Verified request for dissolution which does not prejudice
the rights of creditors having a claim against it;
b. Petition for dissolution where creditors are affected;
c. Shortening of the corporate term;
d. Merger or consolidation; and
e. Affidavit of dissolution by a corporation sole.
6732015 Bar Exam.

674AJabang Development Corporation v. Alabang Hills Village Association,
G.R. No. 187456, June 2, 2014.
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(a) Where no creditors are affected

400. State the procedure for the dissolution of a corporation where
creditors are not affected.675
The procedure is as follows:
a. The dissolution must be effected by a majority vote of the
board of directors or trustees, and by a resolution adopted
by the affirmative vote of the stockholders owning at least
majority of the outstanding capital stock or majority of
the members for a nonstock corporation in a meeting to
be held upon the call of the directors or trustees.
b. At least 20 days prior to the meeting, notice shall be given
to each shareholder or member of record personally, by
registered mail, or by any means authorized under its
bylaws, whether or not entitled to vote at the meeting, in
the manner provided in Section 50 of the RCC and shall
state that the purpose of the meeting is to vote on the
dissolution of the corporation.
c. Notice of the time, place, and object of the meeting shall
be published once prior to the date of the meeting in a
newspaper published in the place where the principal
office of said corporation is located, or if no newspaper
is published in such place, in a newspaper of general
circulation in the Philippines.
d. A verified request for dissolution shall be filed with the
SEC stating: (a) the reason for the dissolution; (b) the
form, manner, and time when the notices were given; (c)
names of the stockholders and directors or members and
trustees who approved the dissolution; (d) the date, place,
and time of the meeting in which the vote was made; and
(e) details of publication.
e. The corporation shall submit the following to the SEC:
(1) a copy of the resolution authorizing the dissolution,
certified by a majority of the board of directors or trustees
and countersigned by the secretary of the corporation; (2)
proof of publication; and (3) favorable recommendation
from the appropriate regulatory agency, when necessary.
6,62012 Bar Exam.
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f. The application for dissolution of banks, banking and

quasi-banking institutions, pre-need, insurance and
trust companies, NSSLAs, pawnshops, and other
financial intermediaries should be accompanied by a
favorable recommendation of the appropriate regulatory
government agency.
g- Within 15 days from receipt of the verified request for
dissolution, and in the absence of any withdrawal within
said period, the SEC shall approve the request and issue
the certificate of dissolution. The dissolution shall take
effect only upon the issuance by the SEC of a certificate of
dissolution.676
401. What do you mean by a request for dissolution where no

creditors are affected?
This covers a situation where the corporation has no creditors
or with creditors but without conflicting claims and the corporate
assets are enough to satisfy the claims.
(b) Where creditors are affected

402. State the procedure for voluntary dissolution where creditors
are affected.
a. The dissolution should be adopted by at least majority of
the board of directors or trustees677 and resolved upon by
the affirmative vote of the stockholders representing at
least two thirds (2/3) of the outstanding capital stock or at
least two thirds (2/3) of the members at a meeting called
for the purpose.
b. The verified petition for dissolution should be signed by a
majority of the corporation’s board of directors or trustees,
verified by its president or secretary or one of its directors
or trustees, and shall set forth all claims and demands
against it, and that its dissolution was resolved upon

677Even though the RCC does not expressly state that board approval is
needed, this is implied from the requirement that the petition should be signed by at
least majority of the board.
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by the affirmative vote of the stockholders representing

at least two-thirds (2/3) of the outstanding capital stock
or at least two-thirds (2/3) of the members at a meeting
of its stockholders or members called for that purpose.
The petition shall likewise state: (a) the reason for the
dissolution; (b) the form, manner, and time when the
notices were given; and (c) the date, place, and time of the
meeting in which the vote was made.
c. The petition should be filed with the SEC. The corporation
shall likewise submit to the SEC the following: (1) a copy
of the resolution authorizing the dissolution, certified
by a majority of the board of directors or trustees and
countersigned by the secretary of the corporation; and (2)
a list of all its creditors.
d. If the petition is sufficient in form and substance, the SEC
shall, by an order reciting the purpose of the petition, fix
a deadline for filing objections to the petition which date
shall not be less than 30 days nor more than 60 days after
the entry of the order. Before such date, a copy of the
order shall be published at least once a week for three
consecutive weeks in a newspaper of general circulation
published in the municipality or city where the principal
office of the corporation is situated, or if there be no such
newspaper, then in a newspaper of general circulation
in the Philippines, and a similar copy shall be posted for
three consecutive weeks in three public places in such
municipality or city.
e. Upon five days’ notice, given after the date on which the
right to file objections as fixed in the order has expired, the
SEC shall proceed to hear the petition and try any issue
raised in the objections filed; and if no such objection is
sufficient, and the material allegations of the petition are
true, it shall render judgment dissolving the corporation
and directing such disposition of its assets as justice
requires, and may appoint a receiver to collect such assets
and pay the debts of the corporation.
f. The dissolution shall take effect only upon the issuance
by the SEC of a certificate of dissolution.678
6,8Section 135, RCC.
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403. Distinguish between voluntary dissolution where creditors are

not affected and creditors are affected.
The distinctions are as follows:
a. Where creditors are not affected, the dissolution should be
adopted by at least majority of the board of directors or
trustees and approved by the stockholders representing at
least majority of the outstanding capital stock or majority
of the members in nonstock corporation in a meeting to be
called by the board of directors or trustees.
Where creditors are affected, the dissolution should
be adopted by at least majority of the board of directors
and approved by the stockholders representing at least
2/3 of outstanding capital or 2/3 of the members in a
meeting called for the purpose.
b. Where creditors are not affected, verified request for
dissolution is filed with the SEC stating: (a) the reason
for the dissolution; (b) the form, manner, and time when
the notices were given; (c) names of the stockholders and
directors or members and trustees who approved the
dissolution; (d) the date, place, and time of the meeting in
which the vote was made; and (e) details of publication.
Where creditors are affected, a verified petition for
dissolution is filed with the SEC. The petition should be
signed by a majority of the corporation’s board of directors
or trustees, verified by its president or secretary or one of
its directors or trustees, and shall set forth all claims and
demands against it.
c. Where creditors are not affected, what is given to the
stockholders or members is written notice of the meeting.
Notice is given at least 20 days prior to the meeting and
should be published once prior to the date of the meeting
in a newspaper published in the place where the principal
office of said corporation is located, or if no newspaper
is published in such place, in a newspaper of general
circulation in the Philippines.
Where creditors are affected, what is published is a
copy of the order setting the date and time of the hearing
on the petition. It shall be published at least once a week
for three consecutive weeks in a newspaper of general
circulation published in the municipality or city where the
principal office of the corporation is situated, or if there
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IV. BUSINESS ORGANIZATIONS 6-19
be no such newspaper, then in a newspaper of general

circulation in the Philippines, and a similar copy shall be
posted for three consecutive weeks in three public places
in such municipality or city.
d. Where creditors are not affected, the SEC should approve
the request for dissolution within 15 days from receipt of
the verified request for dissolution, and in the absence of
any withdrawal within said period, the SEC shall approve
the request and issue the certificate of dissolution.
Where creditors are affected, the SEC shall render
judgment dissolving the corporation only after hearing
on the petition and determination that the material
allegations in the petition are true.
(c) By shortening of corporate term

404. What is the procedure for the dissolution of the corporation
through the shortening of corporate term?
a. The articles of incorporation should be amended to
shorten the corporate term.679
b. The amendment should be approved by at least the
majority vote of the board of directors or trustees, and
ratified at a meeting by the stockholders or members
capital stock or of its members in a meeting duly called
for the purpose.680
c. A copy of the amended articles of incorporation shall be
submitted to the SEC in accordance with the RCC.
d. Upon the expiration of the shortened term, as stated
in the approved amended articles of incorporation, the
corporation shall be deemed dissolved without any
further proceedings, subject to the provisions of the RCC
on liquidation.681
e. In the case of expiration of corporate term, dissolution
shall automatically take effect on the day following the

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last day of the corporate term stated in the articles of

incorporation, without the need for the issuance by the
SEC of a certificate of dissolution.682
When the shortening of the corporate term has
the effect of immediate dissolution, it is submitted that
there should be publication similar to a request for
dissolution where creditors are not affected. If creditors
will be affected, the rules similar to petition for voluntary
dissolution should be followed.
405. Is there any distinction between expiration of the original term

and expiration of the shortened term as a ground to dissolve
the corporation?
Expiration of the shortened term ipso facto results in the
automatic dissolution of the corporation. This is clear under
Section 136 of the RCC which provides that upon the expiration of
the shortened term, as stated in the approved amended articles of
incorporation, the corporation shall be deemed dissolved without
any further proceedings, subject to the provisions of the RCC on
liquidation. In the case of expiration of corporate term, dissolution
shall automatically take effect on the day following the last day of
the corporate term stated in the articles of incorporation, without
the need for the issuance by the SEC of a certificate of dissolution.683
The expiration of term should be without prejudice to the
remedy available to the corporation to apply for a revival of its
corporate existence.684 Since the law does not prescribe the period
to file it, the application may be filed prior to the liquidation of the
corporation.
It is submitted that the Supreme Court decision in Philippine
National Bank v. The Court of First Instance of Rizal, Pasig, et
al.™ that upon the expiration of the period fixed in the articles of
incorporation, the corporation ceases to exist and is dissolved ipso
facto and there is no need for the institution of a proceeding for
quo warranto to determine the time or date of the dissolution of a
corporation should now be construed to refer to corporations that
shortened their corporate term to dissolve the corporation.

“Section 11, RCC
68SG.R. No. 63201, May 27,1992.
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(d) Withdrawal of dissolution

406. Discuss the right of incorporator, director, trustee, shareholder
or member to withdraw the request for dissolution of the
corporation in cases where creditors are not affected.
The request for dissolution should be verified by any
incorporator, director, trustee, shareholder, or member but should
be signed by the same number of incorporators, directors, trustees,
shareholders, or members necessary to request for dissolution.686 This
means that the request should be signed by at least a majority of the
board of directors or trustees and by the stockholders representing
at least a majority of the outstanding capital stock or majority of the
members in nonstock corporation.687
The withdrawal should be submitted no later than 15 days
from receipt by the SEC of the request for dissolution. Upon receipt
of a withdrawal of request for dissolution, the SEC shall withhold
action on the request for dissolution and shall, after investigation:
(a) make a pronouncement that the request for dissolution is deemed
withdrawn; (b) direct a joint meeting of the board of directors or
trustees and the stockholders or members for the purpose of
ascertaining whether to proceed with dissolution; or (c) issue such
other orders as it may deem appropriate.688
407. May a petition for dissolution, where creditors are affected, be

withdrawn?
Yes, a withdrawal of the petition for dissolution shall be in the
form of a motion and similar in substance to a withdrawal of request
for dissolution but shall be verified and filed prior to pubheation of
the order setting the deadline for filing objections to the petition.659

“’Section 137, RCC. It is not clear under the RCC who will sign the motion to
Kithdraw the petition for dissolution. But since the withdrawal should be signed by
the same required number of directors or trustees and stockholders or members who
made the request for dissolution, then, for consistency, the withdrawal of the petition
for dissolution should likewise be signed by the same required number of directors
or trustees and stockholders or members for filing the petition, that is, majority of
directors or trustees and stockholders representing at least 2/3 of the outstanding
capital stock or 2/3 of the members in case of nonstock corporation.
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ii. Involuntary dissolution

408. What are the grounds for the involuntary dissolution of the
corporation?
A corporation may be dissolved by the SEC motu proprio or
upon filing of a verified complaint by any interested party. The
following may be grounds for dissolution of the corporation:
a. Non-use of the corporate charter as provided under Section
21 of the RCC.
Under Section 21 of the RCC, if a corporation does not formally
organize and commence its business within five (5) years from the
date of its incorporation, its certificate of incorporation shall be
deemed revoked as of the day following the end of the five-year
period.
b. Continuous in operation of a corporation as provided
under Section 21 of the RCC.
Under Section 21 of the RCC, if a corporation does not formally
organize and commence its business within five (5) years from the
date of its incorporation, its certificate of incorporation shall be
deemed revoked as of the day following the end of the five-year
period.
However, if a corporation has commenced its business but
subsequently becomes inoperative for a period of at least five (5)
consecutive years, the SEC may, after due notice and hearing, place
the corporation under delinquent status.
A delinquent corporation shall have a period of two (2) years to
resume operations and comply with all requirements that the SEC
shall prescribe. Upon compliance by the corporation, the SEC shall
issue an order lifting the delinquent status. Failure to comply with
the requirements and resume operations within the period given by
the SEC shall cause the revocation of the corporation’s certificate of
incorporation.
The grounds under (a) and (b) will lead to the dissolution of
the corporation unless the corporation files a petition to set aside its
delinquency status and the SEC grants it.
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C. Upon receipt of a lawful court order dissolving the

corporation.
This may involve or arise from a quo warranto proceeding
involving a de facto corporation690 or a liquidation proceeding
involving an insolvent debtor under R.A. No. 10142, otherwise
known as the Financial Rehabilitation and Insolvency Act (FRIA).
One of the effects of a liquidation order under FRIA is to dissolve the
corporation.891
d. Upon finding by final judgment that the corporation
procured its incorporation through fraud.
This may happen when the corporation misrepresented its
purpose of incorporation and/or the incorporators use fictitious
names.
e. Upon finding by final judgment that the corporation:
i. Was created for the purpose of committing,
concealing or aiding the SEC of securities violations,
smuggling, tax evasion, money laundering, or graft
and corrupt practices;
ii. Committed or aided in the commission of securities
violations, smuggling, tax evasion, money
laundering, or graft and corrupt practices, and its
stockholders knew of the same; and
iii. Repeatedly and knowingly tolerated the commission
of graft and corrupt practices or other fraudulent
or illegal acts by its directors, trustees, officers, or
employees.
If the corporation is ordered dissolved by final judgment
pursuant to the grounds set forth in subparagraph (e) hereof, its
assets, after payment of its liabilities, shall, upon petition of the
SEC with the appropriate court, be forfeited in favor of the national
government. Such forfeiture shall be without prejudice to the rights
of innocent stockholders and employees for services rendered, and
to the application of other penalties or sanctions under the RCC or
other laws.
690Section 19, RCC.

691Section 113, R.A. No. 10142.
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The SEC shall give reasonable notice to, and coordinate with,
the appropriate regulatory agency prior to the involuntary dissolution
of companies under their special regulatory jurisdiction.692
Note that it is only on the grounds specified in paragraph (e)
that the SEC may file a petition with the appropriate court that the
assets be forfeited in favor of the national government but without
prejudice to the rights of innocent stockholders and employees for
services rendered.
Note further that while the three (3) grounds provided in
paragraph (e) refer to commission of graft and corrupt practices,
fraudulent or other illegal acts, these are distinct from one another.
Under the first ground, the corporation was organized for the purpose
of creating, concealing or aiding in the commission of the specified
illegal acts. Obviously, in this case, there was misrepresentation too
as to the purposes of the corporation because the SEC will not approve
the incorporation if the articles of incorporation, on its face, indicates
as the corporation’s purposes the commission of illegal acts. Under the
second ground, the corporation is lawfully organized and conducting
business but it committed or aided in the commission of the same
specified illegal acts and its stockholders knew about them. Under
the third ground, the corporation is created for lawful purposes and
legally conducting business but it repeatedly and knowingly tolerated
the commission of graft and corrupt practices or other fraudulent or
illegal acts by its directors, trustees, officers, or employees.
409. Are there other grounds to dissolve the corporation upon order
of the SEC?
The SEC may also suspend or revoke, after proper notice and
hearing, the certificate of registration of private corporations upon
any of the following grounds:
a. Fraud in procuring its certificate of incorporation.
b. Serious misrepresentation as to what the corporation can
do or is doing to the great prejudice of or damage to the
general public.
c. Refusal to comply or defiance of any lawful order of the
SEC restraining commission of acts which amount to a
grave violation of its franchise.
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d. Failure to file bylaws.693

e. Failure to file required reports in appropriate forms as
determined by the SEC within the prescribed period.69*
The above-stated grounds under P.D. No. 902-A were
reinforced by Section 158 of the RCC which provides that, if, after
due notice and hearing, the SEC finds that any provision of the
RCC, rules or regulations, or any of its orders has been violated, the
SEC may impose any or all of the following sanctions, taking into
consideration the extent of participation, nature, effects, frequency,
and seriousness of the violation:
(P5,000.00) to Two Million Pesos (P2,000,000.00), and
Million Pesos (P2,000,000.00); and
b. Issuance of a permanent cease and desist order.
The SEC may also order the dissolution of a close corporation
when there is a deadlock in the management of its affairs695 or
upon petition of a stockholder whenever any acts of the directors,
officers, or those in control of the corporation is illegal, fraudulent,
dishonest, oppressive or unfairly prejudicial to the corporation or
any stockholder, or whenever corporate assets are being misapplied
or wasted.696
b. Methods of liquidation
410. What is liquidation?
Liquidation is the process of settling the affairs of the
corporation after its dissolution. This consists of: (1) collection of
693As previously explained, the RCC removed the one-month period to submit
the bylaws and therefore, non-submission of the bylaws within such period does not
appear to be a ground to suspend or revoke the certificate of registration. In actuality,
one of the SEC-prescribed documentary requirements for incorporation is the bylaws
of the corporation. Submission after incorporation is, therefore, merely theoretical for
private corporation. For corporations governed by special law and which are required
to submit bylaws, or if for whatever reason, the SEC approves the incorporation of
a private corporation sans the bylaws, it will be the refusal or failure to submit the
bylaws, despite SEC order, which will serve as a ground to suspend or revoke the
corporate franchise.
691P.D. No. 902-A, Section 6(i).
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all that is due the corporation, (2) the settlement and adjustment
of claims against it, and (3) the payment of its debts and (4) the
distribution of the remaining assets, if any among the stockholders
thereof in accordance with their contracts, or if there be no special
contract, on the basis of their respective interests. The manner
of liquidation or winding up may be provided for in the corporate
bylaws and this would prevail unless it is inconsistent with law.
The finds basis under Section 122 of the OCC (now Section 139
of the RCC), which empowers every corporation whose corporate
existence has been legally terminated to continue as a body
corporate for three (3) years after the time when it would have been
dissolved. This continued existence would only be for the purposes of
“prosecuting and defending suits by or against it and enabling it to
settle and close its affairs, to dispose of and convey its property and
to distribute its assets.”697
411. Do liquidation and winding up of corporate affairs automatically

follow after dissolution?
Generally, liquidation is the necessary consequence of
dissolution. However, winding up is the sole activity of a dissolved
corporation that does not intend to incorporate anew. If it does,
however, it is not unlawful for the old board of directors to negotiate
and transfer the assets of the dissolved corporation to the new
corporation intended to be created as long as the stockholders have
given their consent.698
i. By the corporation itself

ii. Conveyance to a trustee within a three-year
period
Hi. By management committee or rehabilitation
receiver
412. What are the methods of liquidation?
There are four (4) methods of liquidation, namely: a) by the
corporation itself; b) by the trustee duly appointed by the corporation;
c) by the receiver that the SEC may appoint upon judgment
dissolving the corporation after hearing the corporation’s petition
for voluntary dissolution; and, d) by the rehabilitation receiver or
697Dr. Gil J. Rich v. Guillermo Paloma III, G.R. No. 210538, March 7, 2018.
698Chung Ka Bio v. Intermediate Appellate Court, G.R. No. 71837, July 26,
1988.
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Equidator appointed by the court after judgment on a petition for

Equidation involving an insolvent debtor
a. By the corporation itself

Under Section 139 of the RCC, the corporation is granted a
period of three (3) years after dissolution, whether voluntary or
involuntary, to wind up it affairs. Ideally, the winding-up process
should be completed in three (3) years. Otherwise, it should appoint
a trustee to carry out the liquidation even beyond three (3) years.
But, in the absence of an appointed trustee, the board of directors
shall be deemed the trustees of the corporation.
b. By the trustee appointed by the corporation
Under Section 139 of the RCC, at any time during said
three-year liquidation period, the corporation is authorized and
empowered to convey all of its property to a trustee for the benefit
of stockholders, members, creditors and other persons in interest.
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 trustee, and the beneficial
interest in the stockholders, members, creditors or other persons-in-
interest.
The trustee is not bound by the three-year period. What
is important is the completion of the liquidation process so that
creditors will be paid and the residual assets are distributed to the
stockholders.
c. By the Receiver appointed by the SEC
Under Section 135 of the RCC, the SEC shall proceed to hear
the petition (filed by a corporation where creditors are affected) and
try any issue raised in the objections filed; and if no such objection
is sufficient, and the material allegations of the petition are true,
it shall render judgment dissolving the corporation and directing
such disposition of its assets as justice requires, and may appoint a
receiver to collect such assets and pay the debts of the corporation.
The receiver represents the SEC, as well as the stockholders
and creditors. The receiver is not bound by the three-year Equidation
period.699
699Pepsi Cola Products Philippines Court of Appeals, G.R. No. 145855,

November 24, 2004.
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The appointment of a receiver operates to suspend the

authority of a corporation and its directors and officers over its
property and effects, such authority being reposed in the receiver.
Thus, a corporate officer had no authority to condone a debt.700
In Bank of the Philippine Islands v. Eduardo Hong,101 the
Supreme Court held, however, that while the SEC has jurisdiction
to order the dissolution of a corporation, jurisdiction over the
liquidation of the corporation now pertains to the appropriate
regional trial courts. This is the correct procedure because the
liquidation of a corporation requires the settlement of claims for and
against the corporation, which clearly falls under the jurisdiction of
the regular courts. The trial court is in the best position to convene
all the creditors of the corporation, ascertain their claims, and
determine their preferences.
It should be noted that the power of the SEC to appoint a
receiver existed even under the OCC and retained under the RCC
despite the ruling in Bank of the Philippine Islands v. Eduardo Hong.
It is submitted that the receiver may carry out the liquidation of the
corporation if the creditors and the corporation are able to agree
among themselves on how the creditors’ claims shall be satisfied.
Otherwise, the RTC should carry out the liquidation process.
d. By the rehabilitation receiver or the liquidator appointed
by the competent RTC in cases involving insolvent debtor
under FRIA
The receiver who may be appointed by the SEC is different from
the rehabilitation receiver that the competent Regional Trial Court
may appoint in cases involving the rehabilitation of an insolvent
debtor under FRIA.
In cases falling under FRIA, the liquidation of the debtor
will be carried out by the rehabilitation receiver or the liquidator
appointed by the court.
Under Section 25 of the FRIA, the rehabilitation court may
convert a petition for rehabilitation to liquidation if there is no
showing that the debtor may be rehabilitated. In which case, the
rehabilitation receiver may perform the functions of the liquidator.
’“Victor Yam & Yek Sun Lent, doing business under the name and style of
Philippine Printing Works v. Court of Appeals and Manphil Investment Corporation,
G.R. No. 104726, February 11, 1999.
701G.R. No. 161771, February 15, 2012.
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The insolvent debtor may also file a petition for voluntary

liquidation or be the subject of a petition for involuntary liquidation
by his creditors. In either case, if the petition is sufficient in form
and substance, the rehabilitation court shall issue the Order of
Liquidation. Such order has the effect of dissolving the corporation
and title to the properties of the debtor shall be transferred to
the Liquidator who will then carry out the liquidation of the
corporation.702
413. How are the assets of the corporation distributed during the
liquidation process?
The assets of the corporation shall be used to pay off the claims
of various creditors based on the law on concurrence and preference
of credit. The residual assets shall then be distributed to the holders
of the preferred shares of stock, if any, then to the holders of common
shares based on their agreement, if any, otherwise, in proportion to
their respective shareholdings in the corporation.
Note that SEC approval is not required in the approval of the
distribution or liquidation of the assets of the dissolved corporation.
This falls within the authority of the directors and stockholders or
the duly appointed trustee or receiver.
Any asset distributable to the creditor or stockholder or
member who is unknown or cannot be found shall be escheated in
favor of the national government.703
414. Within what period should the liquidation of the corporation be

concluded?
Every corporation whose charter expires pursuant to its
articles of incorporation, is annulled by forfeiture, or whose corporate
existence is terminated in any other manner, shall nevertheless
remain as a body corporate for three (3) years after the effective date
of dissolution, for the purpose of prosecuting and defending suits by
or against it and enabling it to settle and close its affairs, dispose
of and convey its property, and distribute its assets, but not for the
purpose of continuing the business for which it was established.™
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’“Section 112, FRIA.

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In the absence of a statutory provision to the contrary, pending

actions by or against a corporation are abated upon the expiration
of the three-year period allowed by law for the liquidation of its
affairs.705
Nevertheless, a corporation that has a pending action and
which cannot be terminated within the three-year period after its
dissolution is authorized under Section 139 of the RCC to convey all
its property to a trustee to enable it to prosecute and defend suits by
or against the corporation beyond the three-year period. The trustee
may commence a suit which can proceed to final judgment even
bej’ond the three-year period.
Even if no trustee is formally appointed, the directors of the
dissolved corporation may be permitted to continue as trustees to
complete the liquidation of the corporation.706
iv. Liquidation after three (3) years

415. May a corporation be allowed to dispose of its remaining assets
after three (3) years from the time of its dissolution?
Yes, a corporation may still dispose of its assets despite the
lapse of the three-year period for liquidation of assets provided
under Section 139 of the RCC.
Based on the above provision, there is, as a general rule, no
juridical personality after dissolution. If there is, it is only a juridical
personality to serve but one purpose — liquidation, culminating
in the disposition and distribution of the dissolved corporation’s
remaining assets. As pointed out, any matter entered into that is
not for the purpose of liquidation will be a void transaction because
of the non-existence of the corporate party.
While Section 139 of the RCC gives a dissolved corporation
three (3) years to continue as a body corporate for purposes of
liquidation, the disposition of the remaining undistributed assets
must necessarily continue even after such period. This should not,
however, be construed to prevent a corporation from pursuing
activities which would complete the final liquidation of a dissolved
corporation. Accordingly, it should be allowed to continue liquidating
’“Mambulao Lumber Company v. Philippine National Bank, G.R. No, L-22973,

January 30, 1968.
’“Clemente v. Court of Appeals, G.R. No. 82407, March 27, 1995.
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its remaining assets in order to complete the process of dissolving

the corporation. Likewise, it should be allowed to distribute the
proceeds from the said disposition to its stockholders or creditors
if any. A contrary interpretation would have unjust and absurd
results.
In Clemente v. Court of Appeals, the Supreme Court affirmed
that if the three-year extended life has expired without a trustee or
receiver having been expressly designated by the corporation within
that period, the board of directors (or trustees) itself, following the
rationale of the Supreme Court’s decision in Gelano v. Court of
Appeals, G.R. No. L-39050, February 24, 1981, maybe permitted to
continue as “trustees” by legal impheation to complete the corporate
liquidation. Still, in the absence of a board of directors or trustees,
those having any pecuniary interest in the assets including not
only the shareholders but likewise the creditors of the corporation,
acting for and on its behalf, might make proper representations
with the SEC which has primary and sufficiently broad jurisdiction
in matters of this nature, for working out a final settlement of the
corporate concerns.707
In the Gelano v. Court of Appeals, the word “trustee” as used
in the corporation statute must be understood in its general concept
which could include the counsel to whom was entrusted in the
instant case, the prosecution of the suit filed by the corporation. The
purpose in the transfer of the assets of the corporation to a trustee
upon its dissolution is more for the protection of its creditor and
stockholders.708
416. May the following legal actions involving the corporation be

enforced by or against the corporation beyond the three-year
liquidation period?
a. Action filed during the lifetime of the corporation?
The trustee (of a dissolved corporation) may commence a
suit which can proceed to final judgment even beyond the three-
year period of liquidation. No reason can be conceived why a suit
already commenced by the corporation itself during its existence,
not by a mere trustee who, by fiction, merely continues the legal
7O7See SEC-OGC Opinion No. 31-09, December 9, 2009.

708Carlos Gelano v. Honorable Court of Appeals, et al., G.R. No. L-39050,
February 24, 1981.
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662 D1VINA ON COMMERCIAL LAW:
personality of the dissolved corporation, should not be accorded

similar treatment — to proceed to final judgment and execution
thereof. Indeed, the rights of a corporation that has been dissolved
pending litigation are accorded protection by Section 145 of the OCC
(now Section 184 of the RCC) which provides “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.”709
A dissolved corporation may also maintain actions in court for
the protection of its rights including the right to appeal from an
adverse decision.710
b. Action filed during the three-year liquidation period?

Yes, the trustee appointed by the corporation may initiate a
suit during the three-year liquidation period, which may continue
even beyond the said period.711 As pointed out, in Gelano v. Court
of Appeals, it was held that the lawyer handling the case for
the corporation is deemed a trustee with respect to that case. In
Clemente v. Court of Appeals, it was held that in the absence of a
trustee formally appointed, the board of directors shall be deemed
the trustees of the corporation to carry out the liquidation of the
corporation.”
Moreover, it is clear under Section 184 of the RCC that “no right
or remedy in favor of or against any corporation, its stockholders,
members, directors, trustees, or officers, nor any liability incurred
by any such corporation, stockholders, members, directors, trustees,
or officers, shall be removed or impaired either by the subsequent
dissolution of said corporation.”
™Rene Knecht and Knecht, Inc. v. United Cigarette Corp., represented by

Encarnacion Gonzales Wong, and Eduardo Bolima, Sheriff, Regional Trial Court,
Branch 151, Pasig City, G.R. No. 139370, July 4, 2002.
’’“Paramount Insurance Corp. v. A.C. Ordonez Corporation and Franklin
Suspine, G.R. No. 175109, August 6, 2008.
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Action filed more than three (3) years from the dissolution
of the corporation?
As previously expounded, an action filed more than three (3)
years from the dissolution of the corporation should be dismissed
since by that time the corporation lacks the capacity to sue because it
no longer possesses juridical personality by reason of its dissolution.
While there are cases that a corporation may still sue, even
after it has been dissolved and despite the lapse of the three-year
liquidation period, the corporations involved in those cases filed
their respective complaints while they were still in existence. In
other words, they already had pending actions at the time that their
corporate existence was terminated.712
417. Other than dissolution, when else may the assets or property
of the corporation be distributed?
Except by decrease of capital stock and as otherwise allowed by
the RCC, no corporation shall distribute any of its assets or property
except upon lawful dissolution and after payment of all its debts and
liabilities.713
III. Other corporations

a. Close corporations
418. What is a close corporation?
Under Section 95 of the RCC, a close corporation is one whose
articles of incorporation provides that:
a. 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 20;
b. all the issued stock of all classes shall be subject to one or
more specified restrictions on transfer permitted by this
Title; and
c. the corporation shall not list in any stock exchange or
make any public offering of its stocks of any class.
712Alabang Corporation Development v. Alabang Hills Village Association and

Rafael Tinio, G.R. No. 187456, June 2, 2014.
,13Section 139, RCC.
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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 rights is owned or controlled by another corporation
which is not a close corporation within the meaning of the RCC.714
419. Is the narrow distribution of share ownership the only criterion

in determining the nature of a close corporation?
No, in one case,715 the Supreme Court held that a corporation
does not become a close corporation just because a man and his
wife own 98.86% of its subscribed capital stock; So too, a narrow
distribution of ownership does not, by itself, make a close corporation.
The features of a close corporation under the Corporation Code must
be embodied in the articles of incorporation to make it as one.
420. What corporation cannot be incorporated as a close

corporation?
Any corporation may be organized as a close corporation except
the following:
i. Mining or oil companies;
ii. Stock exchanges;
iii. Banks;
iv. Insurance companies;
v. Public utilities;
vi. Educational Institutions; and
vii.
vn. Corporations declared to be vested with public
interest in accordance with the provisions of the
RCC.716
714Section 95, RCC.

71BSan Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, G.R.
No. 129459, September 29,1998.
,16Section 95, RCC.
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421. What is the main difference between a close corporation and

other corporations?
The main difference between a close corporation and
other corporations is the identity of stock ownership and active
management, that is, all or most of the stockholders of a close
corporation are active in the corporate business either as directors,
officers or other key men in management. Where business associates
belong to a small, closely-knit group, they usually prefer to keep
the organization exclusive and would not welcome strangers. Since
it is through their efforts and managerial skill that they expect
the business to grow and prosper, it is quite understandable why
they would not trust outsiders to come in and interfere with their
management of the business, and much less share whatever fortune,
big or small, that the business may bring.
i. Characteristics of a close corporation

422. What are the principal characteristics of close corporations?
The principal characteristics of close corporations are the
following:
a. The business of the corporation may be managed by the
stockholders of the corporation rather than by a board of
directors.
Stockholders who are actively involved in the management of
the corporation are liable in the same manner as directors are liable.
They are personally liable for corporate torts unless the corporation
has obtained reasonably adequate liability insurance. An example of
corporate tort is the nonpayment of separation benefits of employees
who were terminated due to authorized cause.717
While Section 97 of the Corporation Code (now Section 96,
RCC) only specifies that “the stockholders of the corporation shall
be subject to all liabilities of directors,” nowhere in that provision
do we find any inference that stockholders of a close corporation are
automatically liable for corporate debts and obligations.
’■’Sergio Naguiat and Clark Field Taxi, Inc. v. NLRC, G.R. No. 116123, March
13,1997.
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It is true that the stockholders who are actively engaged in

the management or operation of the business and affairs of a close
corporation, shall be personally liable for corporate torts unless the
corporation has obtained reasonably adequate liability insurance.
But, as can be read in that provision, several requisites must be
present for its applicability.718
b. If a corporation is classified as a close corporation, a
board resolution authorizing the sale or mortgage of the
corporate property is not necessary to bind the corporation
for the action of its president.719 . ,
c. Quorum may be greater than a mere majority.
d. Transfers of stocks to others which would increase the
number of stockholders to more than the maximum are
invalid.
Corporate actions may be binding even without a formal
board meeting, if the director had knowledge or ratified
the informal action of the others, unless after having
knowledge thereof, the director promptly files his written
objection with the secretary of the corporation.
f. Pre-emptive right extends to all stocks issued, including
re-issuance of treasury shares, whether for money or for
property or personal services, or in payment of corporate
debts, unless the articles of incorporation provide
otherwise.
g- Deadlocks in the board may be settled by the SEC, on
written petition by any stockholder.
h. A stockholder may withdraw for any reason and avail
himself of his right of appraisal when the corporation
has sufficient assets in its books to cover its debts and
liabilities exclusive of capital stock.720
’’“Joselito Hernand M. Bustos v. Millians Shoe, Inc., G.R. No. 185024, April
24, 2017.
71BManuel R. Dulay Enterprises, Inc. Court of Appeals, G.R. No. 91889,
August 27, 1993.
’“Sections 96-104, RCC.
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ii. Validity of restrictions on transfer of shares

423. What are the requisites for a valid restriction on the right to
transfer?
The requisites are:
a. Restrictions on the right to transfer shares must appear
in the articles of incorporation, in the bylaws, as well as
in the certificate of stock; otherwise, the same shall not be
binding on any purchaser in good faith.
b. 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.721
c. Upon the expiration of said period (period to exercise the
option to purchase shares), the existing stockholders or
the corporation fails to exercise the option to purchase,
the transferring stockholder may sell their shares to any
third person.
424. In a close corporation, is a provision prohibiting the transfer,

conveyance, sale or assignment of shares to non-blood
relatives allowed?
A close corporation’s articles of incorporation may provide
restrictions on the transfers of shares, as long as the said restrictions
are not 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. If the
existing stockholders or the corporation fail to exercise the option
to purchase, the Corporation Code expressly provides that the
transferring stockholder may sell his shares to any third person.
Thus, the provision prohibiting the transfer, conveyance, sale or
assignment of shares to non-blood relatives is not allowed.’-
721Section 97, RCC.

722Close Holding Corporation; Founder's Shares, SEC-OGC Opinion No. 02-10,
January 15, 2010.
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425. The board of directors of the corporation adopted a resolution

that no stockholder can sell his fully paid shares in favor of
any person without the prior consent of the corporation. Is this
restriction valid?
It is void. While the corporation may impose restrictions on
share transfers, to be valid, the restrictions should be embodied in
all of the articles of incorporation, bylaws and stock certificate of
the corporation and cannot be more onerous than the right of first
refusal. In this case, the restriction is only by way of board resolution.
Most importantly, securing the consent of the corporation prior to
the sale of fully paid shares is a restriction more onerous than the
right of first refusal. ,
426. The bylaws of the corporation provide that a stockholder has

the option to purchase the shares of a transferring stockholder
for a price equivalent to 25% above par value but the offer price
of the buyer of the shares of the selling stockholder is 100%
above the par value of the share. Is such restriction valid?
It is void because the restriction is only in the bylaws.
427. Assuming that the restriction is similarly incorporated in the

articles of incorporation and embodied in the stock certificate
but the offer price of the buyer of the shares of the selling
stockholder is 100% above the par value of the share, may
the existing stockholder validly enforce the pricing provision
restriction?
Yes, the restriction may be enforced. The selling stockholder
cannot complain that the offer of the buyer is higher than the option
price granted to existing stockholders because he is bound by the
restrictions as appearing in the articles of incorporation and bylaws
of the corporation. The proposed buyer, while not bound by these
documents, is charged with notice because the restriction also
appears in the stock certificate.
Also, the restriction on pricing is not more onerous than the
right of first refusal. In fact, the law does not require that the option
to purchase the shares of the transferring stockholder be on the
same price, terms and conditions. It is enough that they are based
on reasonable terms. The option to buy shares at 25% above par
value is a reasonable provision.
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428. Is a judgment creditor or a creditor with a security interest

over shares of stock bound by the right of first refusal granted
to stockholders of the corporation?
No, transfer in the context of the chapter on close corporation
means transfer for value.723 The right of first refusal therefore
contemplates voluntary transfer of shares. Judgment creditors
and lien holders are involuntary creditors of the stockholders. A
judgment creditor may, therefore, garnish shares in satisfaction of a
judgment against the judgment debtor and the creditor with security
interest may enforce his lien over the shares without having to give
existing stockholders the option to purchase first the shares covered
by the garnishment or lien.
Hi. Issuance or transfer of stock in breach of

qualifying conditions
429. What are the effects of issuance or transfer of stock in bread
of qualifying conditions?
Section 98 of the RCC provides for the following consequence
a. If a stock of a close corporation is issued or transferred
to any person who is not eligible to be a holder thereof
under any provision of the articles of incorporation, 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 the ineligibility to be a stockholder.
b. If the articles of incorporation of a close corporation states
the number of persons, not exceeding 20, who are entitled
to be stockholders of record, and if the certificate for such
stock conspicuously states such number, and 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.
c. If a stock certificate of a close corporation conspicuously
shows a restriction on transfer of the corporation’s stock
and the transferee acquires the stock in violation of such
4
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restriction, the transferee is conclusively presumed to

have notice of the fact that the stock was acquired in
violation of the restriction.
d. Whenever a person to whom stock of a close corporation
has been issued or transferred has or is conclusively
presumed under this section to have notice of: (1) the
person’s ineligibility to be a stockholder of the corporation;
or (2) that the transfer of stock would cause the stock of
the corporation to be held by more than the number of
persons permitted under its articles of incorporation; or
(3) that the transfer violates a restriction on transfer of
stock, the corporation may, at its option, refuse to register
the transfer in the name of the transferee.
e. The provisions of subsection (d) shall not be applicable if
the transfer of stock, though contrary to subsections (a),
(b) or (c), has been consented to by all the stockholders
of the close corporation, or if the close corporation has
amended its articles of incorporation in accordance with
this Title.
The foregoing shall not impair any right which the transferee
may have to either rescind the transfer or recover the stock under
any express or implied warranty.724
iv. When board meeting is unnecessary or

improperly held
430. When is any corporate action taken by directors valid even
without a meeting called properly?
Section 100 of the RCC provides that any action taken by the
directors of a close corporation without a meeting called properly
and with due notice shall nevertheless be deemed valid, unless the
bylaws provide otherwise, if:
a. Before or after such action is taken, a written consent
thereto is signed by all the directors; or
b. All the stockholders have actual or implied knowledge of
the action and make no prompt objection in writing; or
724Section 98, RCC.
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c. The directors are accustomed to take informal action with

the express or implied acquiescence of all the stockholders;
or
d. All the directors have express or implied knowledge of
the action in question and none of them makes a prompt
objection in writing.
v. Preemptive right
431. Distinguish right of first refusal from pre-emptive right.
Right of first refusal is the option granted to the corporation
and/or its stockholders to purchase the shares of a transferring
stockholder upon reasonable terms and conditions while pre-emptive
right refers to the right of the stockholder to subscribe to any and all
issuances and disposition of shares by the corporation.
' The corporation and its stockholders have no right of first
refusal unless such restriction on transfer is embodied in the articles
of incorporation, bylaws of the corporation and stock certificate f
the corporation. This means that a stockholder may freely conve
his shares to any person without having to offer the shares to th
corporation and/or the stockholders first, unless a right of first
refusal is granted to the latter.
Pre-emptive right is available to all stockholders unless such
right is denied in the articles of incorporation or amendment thereto.
Pre-emptive right pertains to stockholders by law and does not
require any statutory enabling provision, the right of first refusal, if
not provided for by law or by the articles of incorporation, does not
exist at all.726
432. How do you distinguish the pre-emptive right in ordinary

corporation from the same right in close corporation?
Pre-emptive right in an ordinary corporation does not extend
to issuance of shares in exchange for property given for a corporate
purpose or in payment of debt made in good faith, if approved by
the stockholders representing at least 2/3 of the outstanding capital
stock.726
’“SEC-OGC Opinion 51-19.

720Section 38, RCC.
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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
provides otherwise. ,
vi. Amendment of articles of incorporation

433. What are the permissible provisions in the articles of
incorporation of a close corporation?
Pursuant to Section 96 of the RCC, the permissible provisions in
the articles of incorporation of a close corporation are the following:
a. A classification of shares or rights, the qualifications for
owning or holding the same, and restrictions on their
transfers, subject to the provisions of Section 97 of the
RCC.
b. 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.
c. Greater quorum or voting requirements in meetings of
stockholders or directors than those provided in the RCC.
d. That the business of the corporation shall be managed by
the stockholders of the corporation rather than by a board
of directors.
e. 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.
Note that any amendment to the articles of incorporation
which seeks to delete or remove any provision required or to reduce a
quorum or voting requirement stated in said articles of incorporation
shall require 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.727
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Under Section 96 of the RCC, 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. This agreement that the stockholders shall
exercise the corporate powers in lieu of the board of directors likewise
distinguishes a close corporation from an ordinary corporation,
which is mandated to be managed and controlled by a board of
directors under Section 22 of the RCC.728
vii. Deadlocks
434. May the SEC interfere in the management of a close corporation
without violating the business judgment rule?
Under Section 103 of the RCC, if the directors or stockholders
are so divided on the management of the corporation’s business
and affairs that the votes required for a corporate action cannot
be obtained, with the consequence that the business and affairs
of the corporation can no longer be conducted to the advantage of
the stockholders generally, the SEC, upon written petition by any
stockholder, shall have the power to arbitrate the dispute.
In the exercise of such power, the SEC shall have the authorit
to make appropriate orders, such as:
a. canceling or altering any provision contained in the
articles of incorporation, bylaws, or any stockholder’s
agreement;
b. canceling, altering or enjoining a resolution or act of the
corporation or its board of directors, stockholders, or
officers;
c. directing or prohibiting any act of the corporation or its
board of directors, stockholders, officers, or other persons
party to the action;
d. requiring the purchase at their fair value of shares of any
stockholder, either by the corporation regardless of the
availability of unrestricted retained earnings in its books,
or by the other stockholders;
e. appointing a provisional director;
,28Close Corporations; Powers of the President; Right of Inspection, SEC-OGC

Opinion No. 23-14, August 26, 2014.
J9JC9B0M
f. dissolving the corporation; or

g- granting such other relief as the circumstances may
warrant.
Note that a provisional director, under the RCC, shall be an
impartial person who is neither a stockholder nor a creditor of the
corporation or any of its subsidiaries or affiliates, and whose further
qualifications, if any, may be determined by the SEC. A provisional
director is not a receiver of the corporation and does not have the title
and powers of a custodian or receiver. A provisional director shall
have all the rights and powers of a duly elected director, including
the right to be notified of and to vote at meetings of directors
until removed by order of the SEC or by all the stockholders. The
compensation of the provisional director shall be determined by
agreement between such director and the corporation, subject to
the approval of the SEC, which may fix the compensation absent an
agreement or in the event of disagreement between the provisional
director and the corporation.
b. Nonstock corporations
i. Definition
435. What is a nonstock corporation?
A nonstock corporation is one without a capital stock and/
or where no part of its income is distributable as dividends to
its members, trustees, or officers, subject to the provision on
dissolution.729 Any profit which a nonstock corporation may obtain
incidental to its operations shall, whenever necessary or proper, be
used for the furtherance of the purpose or purposes for which the
corporation was organized.
436. Is it unlawful for a nonstock corporation to obtain profit?

It is not unlawful for a nonstock corporation to obtain profit
provided that the profit is only incidental to its operations and shall,
whenever necessary or proper, be used only for the furtherance of
the purpose or purposes for which the corporation was organized.
The profits cannot be distributed as income to the members, trustees
or officers.730
’"Sections 3 and 86, RCC.

""Section 86, RCC.
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437. What are the most common characteristics of a nonstock

corporation?
The following are the most common characteristics of a
nonstock corporation:
a. Any profit derived by it from any authorized activity
cannot be distributed as dividends to its members;
b. It may not lawfully engage in any business activity for
profit as it would run counter to its very nature as a non
profit entity;
c. When incidental to the objects and purposes of the
corporation and without the end of making profits to be
distributed to the members, it may engage in certain
economic activities stated in its articles of incorporation;
d. Do not issue stock and distribute dividends to their
members; they are created not for profit but for public
good and welfare; and
e. The mere fact that a nonstock corporation may earn pro!
does not make it a profit-making corporation where su
profit or income is used to carry out the purposes set fort
in the articles of incorporation and is not distributed to its
incorporators, members, trustees or officers.731
ii. Purposes
438. What are the allowable purposes for a nonstock corporation?
It may be formed or organized for charitable, religious,
educational, professional, cultural, fraternal, literary, scientific,
social, civic service, or similar purposes, like trade, industry,
agricultural and like chambers, or any combination thereof, subject
to the special provisions governing particular classes of nonstock
corporations.732
731Nonstock Corporations; Use of Profits Derived by Nonstock Corporations.

Special Corporations; Nonstock Educational Corporations; Required Number of
Members of the Board of Trustees of Nonstock Educational Corporation, SEC-OGC
Opinion No. 29-06, June 7, 2006.
732Section 87, RCC.
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A nonstock corporation cannot be organized for profit since it

is not engaged in business. Neither can it be organized for political
purpose or end, otherwise, it should be registered as a party with the
Commission on Elections.
iii. Treatment of profits

439. If profits cannot be distributed to the members, trustees and
officers of the corporation, how are the profits treated?
Since profits that a nonstock corporation earns cannot be
distributed to the members, trustees, or officers, such profits will
form part of the income of the corporation. The income can be used
to invest in shares of stock, bonds and other securities provided
that such investment is allowed by the articles of incorporation and
income from such investments is used in furtherance of the purpose
for which the nonstock corporation was organized.
iv. Plan and distribution of assets upon dissolution

440. Are the members of the nonstock corporation entitled to the
assets of the corporation upon its dissolution?
The assets of a nonstock corporation cannot be distributed to
the members, trustees, or officers thereof unless their distributive
rights upon dissolution are specified in the articles of incorporation
or are specified in a plan of distribution duly adopted by at least
majority of the board of trustees and approved by at least 2/3 of the
members.733
Thus, during the lifetime of the corporation, there can be no
distribution of assets of the corporation, unlike in a stock corporation.
441. How are the assets of the corporation distributed upon its
dissolution?
Section 93 of the RCC provides for the rules of distribution, as
follows:
a. All liabilities and obligations of the corporation shall
be paid, satisfied and discharged, or adequate provision
shall be made therefor;
733Section 93, RCC.
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b. Assets held by the corporation upon a condition requiring

return, transfer or conveyance, and which condition occurs
by reason of the dissolution, shall be returned, transferred
or conveyed in accordance with such requirements;
c. Assets received and held by the corporation subject to
limitations permitting their use only for charitable,
religious, benevolent, educational or similar purposes,
but not held upon a condition requiring return, transfer
or conveyance by reason of the dissolution, shall be
transferred or conveyed to one or more corporations,
societies or organizations engaged in activities in the
Philippines substantially similar to those of the dissolving
corporation according to a plan of distribution adopted
pursuant to this Chapter;
d. Assets other than those mentioned in the preceding
paragraphs, if any, shall be distributed in accordance
with the provisions of the articles of incorporation or the
bylaws, to the extent that the articles of incorporation or
the bylaws determine the distributive rights of members
or any class or classes of members, or provide f-
distribution; and
e. In any other case, assets may be distributed to sue
persons, societies, organizations or corporations, whethei
or not organized for profit, as may be specified in a plan of
distribution adopted pursuant to this Chapter.
If the distributive rights are not specified in the articles of
incorporation, then there should be a plan of distribution upon
dissolution which should be adopted in the following manner as
stated in Section 94 of the RCC:
a. The board of trustees shall, by majority vote, adopt a
resolution recommending a plan of distribution and
directing the submission thereof to a vote at a regular or
special meeting of members having voting rights;
b. Each member entitled to vote shall be given a written
notice setting forth the proposed plan of distribution or
a summary thereof and the date, time and place of such
meeting within the time and in the manner provided in
the RCC for the giving of notice of meetings; and
c. Such plan of distribution shall be adopted upon approval
of at least two-thirds (2/3) of the members having voting
rights present or represented by proxy at such meeting.
1
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c. Educational corporations
442. What are educational corporations?
Educational corporations are those organized for educational
purposes, particularly the establishment and maintenance of a
school, college or university.
443. How are educational corporations organized?

Educational corporations may be organized as a stock or a
nonstock corporation. They are governed by special laws and by
the general provisions of the RCC. The special law applicable to
educational corporations is R.A. No. 7798, otherwise known as the
Education Act of 1982, as amended.
444. What is the number and term of trustees for educational

corporations? '
Unlike in an ordinary nonstock corporation where the number
of trustees may or may not be more than 15, the number of trustees
in educational institutions organized as nonstock corporations shall
not be less than five nor more than 15: Provided, That the number of
trustees shall be in multiples of five (5).734
Also, while the term of the trustees can be less than three
years for ordinary nonstock corporations, Section 106 of the RCC
provides that the board of trustees of incorporated schools, colleges,
or other institutions of learning shall so classify themselves that
the term of office of one-fifth (1/5) of their number shall expire every
year. Unless otherwise provided in the articles of incorporation
or bylaws. 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.736
For institutions organized as stock corporations, the number
and term of directors shall be governed by the provisions on stock
corporations.736
™Section 106, RCC.

™Ibid.
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d. Religious corporations
i. Corporation sole; nationality
445. What are the classes of religious corporations?
Religious corporations may be incorporated by one or more
persons. Such corporations may be classified as corporations sole or
religious societies.737
446. How are religious corporations governed?

Religious corporations are governed by Chapter II, Title XTTT
of the RCC and by the general provisions on nonstock corporations
insofar as applicable.738
447. What is a corporation sole?

A corporation sole is one which is formed by the chief archbishop,
bishop, priest, minister, rabbi, or other presiding elder of a religious
denomination, sect or church for the purpose of administering and
managing, as trustee, the affairs, property and temporalities of such
religious denomination, sect or church.739
448. What are the procedures for incorporating a corporation sole

In order to become a corporate sole, the chief archbishop,
bishop, priest, minister, rabbi, or presiding elder of any religious
denomination, sect or church must do the following:
a. He must file with the SEC articles of incorporation setting
forth the following:
i. That the applicant chief archbishop, bishop, priest,
minister, rabbi, or presiding elder represents the
religious denomination, sect or church which desires
to become a corporation sole;
ii. That the rules, regulations and discipline of the
religious denomination, sect or church are consistent
with becoming a corporation sole and do not forbid
it;
’’’Section 107. RCC.

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iii. That such chief archbishop, bishop, priest,

minister, rabbi, or presiding elder is charged with
the administration of the temporalities and the
management of the affairs, estate and properties of
the religious denomination, sect or church within
the territorial jurisdiction, so described succinctly in
the articles of incorporation;
iv. The manner by which any vacancy occurring in the
office of chief archbishop, bishop, priest, minister,
rabbi, or presiding elder is required to be filled,
according to the rules, regulations or discipline of
the religious denomination, sect or church; and
The place where the principal office of the corporation
sole is to be established and located, which place
must be within the territory of the Philippines.
The articles ofincorporation may include any other provision not
contrary to law for the regulation of the affairs of the corporation.740
b. The articles of incorporation must be verified, 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 SEC, 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.
c. From and after filing with the SEC 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 as such chief
archbishop, bishop, priest, minister, rabbi, or presiding
elder shall be personally held in trust as a corporation
sole, for the use, purpose, exclusive benefit and on behalf
of the religious denomination, sect or church, including
hospitals, schools, colleges, orphan asylums, parsonages,
and cemeteries thereof.741
’■““Section 109, RCC.

’^“Section 110, RCC.
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The procedure is a verbatim reproduction of the OCC. While

the law, then and now, provides that after the filing of the articles
of incorporation with the SEC, the chief archbishop, bishop, priest,
minister, rabbi shall become a corporation sole, the incorporation
becomes effective only upon approval of the SEC and its issuance of
the certificate of incorporation.
449. May a corporation sole acquire and hold real property in the
Philippines if its presiding bishop, priest, minister or rabbi is a
foreigner?
Yes, a corporation sole, regardless of the nationality of its
presiding bishop, priest, minister, rabbi or presiding elder, may
acquire real property in the Philippines; provided that at least 60%
of the members of the religious denomination are Filipino citizens
and the real property is necessary and convenient for the lawful use
of the corporation.
ii. Religious societies

450. What is the procedure for incorporating religious societies?
. Unless forbidden by competent authority, the Constitutioi
pertinent rules, regulations, or discipline of the religion
denomination, sect or church of which it is a part, any religious
society, religious order, diocese, or synod, or district organization
of any religious denomination, sect or church, may, upon written
consent and/or by an 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 SEC, 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:
a. That the religious society or religious order, or diocese,
synod, or district organization is a religious organization
of a religious denomination, sect or church;
b. That at least two-thirds (2/3) of its membership has given
written consent or has voted to incorporate, at a duly
convened meeting of the body;
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C. That the incorporation of the religious society or religious

order, or diocese, synod, or district organization 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 part;
d. 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;
e. The place within the Philippines where the principal
office of the corporation is to be established and located;
f. The names, nationalities, and residence addresses of the
trustees, not less than five nor more than 15, 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.742
451. What is the number and term of trustees for religious societies?
Like in educational institutions, trustees of religious societies
shall not be less than five (5) nor more than 15. Note, however, that
the term of these trustees can be one (1) 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.743
e. One person corporations

452. What is a One Person Corporation ("OPC")?
OPC is a corporation with a single stockholder: Provided, That
only a natural person, trust, or an estate may form a OPC.
453. What is the rationale for the RCC provision on OPC?

According to SEC Chairperson Emilio B. Aquino, the provision
for OPC aims to encourage the formation of businesses in the country
by making it easier for entrepreneurs to start a limited liability
company. In turn, this will benefit our economy where micro, small

™Ibid.
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I
and medium enterprises comprise the majority of the business

establishments and would generate more jobs in the Philippines.
454. May a foreign natural person organize an OPC?

In case of a natural person, the only requirement under the
RCC is that he/she must be of legal age. There is no provision
on any nationality requirement. Thus, subject to the applicable
constitutional and statutory restrictions on foreign participation in
certain investment areas or activities, a foreign natural person may
organize an OPC.744
455. What is the "trust" referred to under the RCC which can
organize an OPC?
The “trust” as used by the law does not refer to a trust entity,
but to the subject being managed by the trustee.745
456. What is the additional requirement for incorporation of an

OPC if the single stockholder is a trustee, administrator,
executor, guardian, conservator, custodian or any other person
exercising fiduciary duties?
If the single stockholder is a trustee, administrator, executoi
guardian, conservator, custodian or any other person exercising
fiduciary duties, proof of authority to act on behalf of the trust or
estate must be submitted at the time of incorporation.746
i. Excepted corporations
457. Which corporations are not allowed to incorporate as OPC?
Banks and quasi-banks, pre-need, trust, insurance, public and
publicly-listed companies, and non-chartered government-owned
and -controlled corporations may not incorporate as OPC: Provided,
further, That a natural person who is licensed to exercise a profession
may not organize as an OPC for the purpose of exercising such
profession except as otherwise provided under special laws.
’“Section 15, SEC MC No. 7.

’“Section 1, SEC MC No. 7.
’“SEC MC No. 7, ibid.
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ii Capital stock requirement

iii. Articles of incorporation and bylaws
iv. Corporate name
458. What are the characteristics of OPC?

An OPC has the following characteristics:
a. It has a single stockholder.
b. It is not required to have a minimum authorized capital
stock except as otherwise provided by special law. Further,
no portion of the authorized capital is required to be paid
up at the time of the incorporation, unless otherwise
required by applicable laws or regulations.7,17
c. It is not required to submit and file corporate bylaws.748
d. It is required to indicate the letters “OPC” either below or
at the end of its corporate name.749
e. The single stockholder shall be the sole director and
president of the OPC.760
f. The single stockholder is required to designate a nominee
and an alternate nominee who shall, in the event of the
single stockholder’s death or incapacity, take the place of
the single stockholder as director and shall manage the
corporation’s affairs.751
g- The liability of the single stockholder shall be limited to
his subscription to the corporation unless there is ground
to pierce to pierce the veil of corporate fiction.752
459. What should the articles of incorporation of a OPC contain?

OPC shall file articles of incorporation in accordance with
the requirements under Section 14 of the RCC. It shall likewise
substantially contain the following:
747Section 117, RCC and Section 8 of MC No. 7.

’^Section 119, RCC.
’■“’Section 120, RCC.
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rv. BUSINESS ORGANIZATIONS HH6
a. If the single stockholder is a trust or an estate, the name,

nationality, and residence of the trustee, administrator,
executor, guardian, conservator, custodian, or other
person exercising fiduciary duties together with the proof
of such authority to act on behalf of the trust or estate;
and
b. Name, nationality, the residence of the nominee and
alternate nominee, and the extent, coverage and limitation
of the authority.763
The articles of incorporation should also state the names,
residence addresses and contact details of the nominee and alternate
nominee, as well as the extent and limitations of their authority in
managing the affairs of the OPC.
The written consent of the nominee and alternate nominee
shall be attached to the application for incorporation. Such consent
may be withdrawn in writing any time before the death or incapacity
of the single stockholder.754
V. Corporate structure and officers

460. Who are the officers of a OPC?
OPC should appoint a treasurer, corporate secretary, and other
officers as it may deem necessary, within 15 days from the issuance
of its certificate of incorporation and should be reported to the SEC
within five days from appointment.
The single stockholder may not be appointed as the corporate
secretary.
A single stockholder who is likewise the self-appointed
treasurer of the corporation shall give a bond to the SEC in such
a sum as may be required: Provided, That the said stockholder/
treasurer shall undertake in writing to faithfully administer the
OPC’s funds to be received as treasurer, and to disburse and invest
the same according to the articles of incorporation as approved by
the SEC. The bond shall be renewed every two years or as often as
may be required.766

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The surety bond coverage is subject to renewal every two

years or as may be required, upon review of the audited financial
statements certified under oath by the company’s president and
treasurer. Further, the bond is a continuing requirement as long as
the single stockholder is the self-appointed treasurer of the OPC.
However, the bond may be cancelled upon proof of appointment
of another person as the treasurer and filing of amended form for
appointment of officers.
461. What are the special functions of the corporate secretary in a

OPC?
In addition to the functions designated by the OPC, the
corporate secretary shall:
a. Be responsible for maintaining the minutes book and/or
records of the corporation;
b. Notify the nominee or alternate nominee of the death or
incapacity of the single stockholder, which notice shall be
given no later than five days from such occurrence;
c. Notify the SEC of the death of the single stockholder
within five days from such occurrence and stating in such
notice the names, residence addresses, and contact details
of all known legal heirs; and
d. Call the nominee or alternate nominee and the known
legal heirs to a meeting and advise the legal heirs with
regard to, among others, the election of a new director,
amendment of the articles of incorporation, and other
ancillary and/or consequential matters.760
vi. Nominee
462. Who shall take the place of the single stockholder in managing
the affairs of the corporation in case of the latter's death or
incapacity?
The nominee and alternate nominee designated by the single
stockholder shall, in the event of the single stockholder’s death or
incapacity, take the place of the single stockholder as director and
shall manage the corporation’s affairs.767

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r
463. What is the term of the nominee and alternate nominee?

When the incapacity of the single stockholder is temporary, the
nominee shall sit as director and manage the affairs of the OPC
until the stockholder, by self-determination, regains the capacity to
assume such duties.
In case of death or permanent incapacity of the single
stockholder, the nominee shall sit as director and manage the affairs
of the OPC until the legal heirs of the single stockholder have been
lawfully determined, and the heirs have designated one of them or
have agreed that the estate shall be the single stockholder of the
OPC.
The alternate nominee shall sit as director and manage the
OPC in case of the nominee’s inability, incapacity, death, or refusal to
discharge the functions as director and manager of the corporation,
and only for the same term and under the same conditions applicable
to the nominee.768
464. How may the single stockholder change its nominee and
alternate nominee?
The single stockholder may, at any time, change its nomine
and alternate nominee by submitting to the SEC the names of tht
new nominees and their corresponding written consent. For this
purpose, the articles of incorporation need not be amended.7’9
vii. Minutes and records

465. How does an OPC approve a corporate act?
When action is needed on any matter, it shall be sufficient
to prepare a written resolution, signed and dated by the single
stockholder, and recorded in the minutes book of the OPC. The date
of recording in the minutes book shall be deemed to be the date of
the meeting for all purposes under the RCC.7“
An OPC shall maintain a minutes book which shall contain all
actions, decisions, and resolutions taken by the OPC.

L
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viii. Liability
466. What are the requisites for the limited liability of the single
stockholder of OPC?
The liability of the sole stockholder shall be limited to his
subscription to the corporation if the following requisites are present:
a. The sole shareholder must show that the corporation was
adequately financed;
b. He must prove that the property of the OPC is independent
of the stockholder’s personal property; and
c. There is no ground to pierce the veil of corporate fiction.
Otherwise, the sole stockholder shall be jointly and severally
liable for the debts and other liabilities of the OPC.761
ix. Conversion of corporation to one person

corporations and vice-versa
467. When may an ordinary corporation be converted to an OPC?
When a single stockholder acquires all the stocks of an ordinary
stock corporation, the latter may apply for conversion into a OPC,
subject to the submission of such documents as the SEC may require.
If the application for conversion is approved, the SEC shall issue a
certificate of filing of amended articles of incorporation reflecting the
conversion. The OPC converted from an ordinary stock corporation
shall succeed the latter and be legally responsible for all the latter’s
outstanding liabilities as of the date of conversion.702
468. When may a OPC be converted to an ordinary stockcorporation?

An OPC may be converted to an Ordinary Stock Corporation in
a. After due notice to the SEC of such fact and of the
circumstances leading to the conversion, and after
compliance with all other requirements for stock
corporations under the RCC and applicable rules. Such
notice shall be filed with the SEC within sixty days from the
occurrence of the circumstances leading to the conversion
’"'Section 130, RCC.

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into an ordinary stock corporation. If all requirements

have been complied with, the SEC shall issue a certificate
of filing of amended articles of incorporation reflecting the
conversion.
b. In case of death of the single stockholder, the nominee or
alternate nominee shall transfer the shares to the duly
designated legal heir or estate within seven days from
receipt of either an affidavit of heirship or self-adjudication
executed by a sole heir, or any other legal document
declaring the legal heirs of the single stockholder and
notify the SEC of the transfer.
Within 60 days from the transfer of the shares, the legal heirs
shall notify the SEC of their decision to either wind up and dissolve
the OPC or convert it into an ordinary stock corporation.
The ordinary stock corporation converted from an OPC shall
succeed the latter and be legally responsible for all the latter’s
outstanding liabilities as of the date of conversion.763
f. Foreign corporations
469. What is a foreign corporation?
A foreign corporation is one formed, organized or existing
under laws other than those of the Philippines and whose laws allow
Filipino citizens and corporations to do business in its own country
or State.764
470. A corporation, composed entirely of Filipino citizens, is formed,

organized and existing under the laws of the USA. Is this a
foreign or domestic corporation?
It is a foreign corporation. Whether the corporation is domestic
or foreign is determined by the country or State of incorporation.
Thus, a corporation is foreign if it is formed, organized or existing
under the laws of a foreign country regardless of the nationality of
the stockholders.

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i. Bases of authority over foreign corporations

(a) Consent
471. What is the legal consequence if a foreign corporation transacts
business in the Philippines without the corresponding license
from the SEC?
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.766
In other words, a foreign corporation doing business in the
country, without a license, cannot sue but can be sued.
(b) Doctrine of “doing business”

472. When is a foreign corporation deemed doing business in the
Philippines?
The term “doing business” is not specifically defined by the
OCC and the RCC. There are certain activities, however, which are
deemed as doing business under R.A. No. 7042, otherwise known as
the Foreign Investments Act of 1991 (“FIA”). Under the FIA, doing
business shall include:
a. soliciting orders;
b. service contracts;
c. opening offices, whether called “liaison” offices or
branches;
d. appointing representatives or distributors domiciled in
the Philippines or who in any calendar year stay in the
country for a period or periods totaling 180 days or more;
e. participating in the management, supervision or control
of any domestic business, firm, entity or corporation in
the Philippines; and
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I
f. 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, and in progressive
prosecution of, commercial gain or of the purpose and
object of the business organization.766
473. May one act or transaction be considered as doing business?

There is no general rule or governing principle laid down as to
what constitutes “doing” or “engaging in” or “transacting” business
in the Philippines. Each case must be judged in the light of its
peculiar circumstances. Thus, it has often been held that a single
act or transaction may be considered as “doing business” when a
corporation performs acts for which it was created or exercises some
of the functions for which it was organized. The amount or volume
of the business is of no moment, for even a singular act cannot be
merely incidental or casual if it indicates the foreign corporation’s
intention to do business. A foreign corporation engaged in ports
operation which participated in a bidding to operate the Subic Bay
ports is considered as doing business in the Philippines even thoug
it is only one transaction because it shows the intention of the foreig
corporation to attain the purpose of its incorporation. 767
In another case, a foreign corporation engaged in the
manufacture of uniforms entered into one purchase transaction
but involving thousands of soccer jerseys from the Philippines was
considered doing business in the Philippines since the purchase
was within its ordinary course of business. The Supreme Court said
that when a single act or transaction of a foreign corporation is not
merely incidental or casual but is of such character as distinctly to
indicate a purpose on the part of the foreign corporation to do other
business in the state, such act will be considered as constituting
doing business.708
474. What activities are specifically excluded under FIA as doing

business?
Under the FIA, the phrase “doing business” shall not be deemed
to include the following activities:
’“Section 3(d), R.A. No. 7042.

767Hutchison Ports Philippines Limited v. Subic Bay Metropolitan Authority,
G.R. Nos. 100801-02, August 25, 2000.
’“Litton Mill, Inc. v. Court of Appeals, G.R. No. 94980, May 15, 1996.
L
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a. Mere investment as a shareholder in a domestic

corporation duly registered to do business and/or the
exercise of rights as such investor;
b. Having a nominee director or officer to represent its
interest in such corporation;
c. Appointing a representative or distributor domiciled in
the Philippines which transacts business in its own name
and for its own account;
d. Publication of a general advertisement through any print
or broadcast media;
e. Maintaining a stock of goods in the Philippines solely
for the purpose of having the same processed by another
entity in the Philippine;
f. Consignment by FC of equipment with a local company to
be used in the processing of products for export;
g- Collecting information in the Philippines; and
h. Performing services auxiliary to an existing isolated
contract of sale which is not on a continuing basis.769
475. Cite jurisprudence where the Supreme Court ruled that the
foreign corporation is doing business in the Philippines.
a. When a foreign corporation engaged in the manufacture
of uniforms purchased thousands of soccer jerseys from
the Philippines since the purchase was within its ordinary
course of business. When a single act or transaction of a
foreign corporation is not merely incidental or casual but
is of such character as distinctly to indicate a purpose on
the part of the foreign corporation to do other business
in the state, such act will be considered as constituting
doing business.770
b. When it granted a 90-day credit term to a domestic
corporation over a period of seven months for every
purchase, as in the usual course of a commercial
transaction, credit is extended only to customers in good
’“Section 1, Implementing Rules and Regulations of R.A. No. 7402.

770Litton Mill, Inc. v. Court of Appeals, G.R. No. 94980, May 15, 1996.
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standing or to those on whom there is an intention to

maintain a long-term relationship.771
C. When as foreign corporation engaged in the port
operations, it participated in a bidding process to operate
the Subic Bay free ports.
The bidding for the concession contract is but
an exercise of the corporation’s reason for creation or
existence. Participating in the bidding process constitutes
“doing business” because it shows the foreign corporation’s
intention to engage in business here.772
476. Cite jurisprudence where the Supreme Court ruled that the
activities of the foreign corporation are not deemed as doing
business.
a. The hiring of an attorney-in-fact by a foreign corporation
which owns the copyright to foreign films and exclusive
distribution rights in the Philippines to file criminal cases
for the protection of its property rights, if the contracts are
consummated abroad, as this is merely for the protectic
of its property rights.773
b. A reinsurance company is not doing business in a certa
state merely because the property or Eves which ai
insured by the original insurer are located in that State.
The reason for this is that a contract of reinsurance is
generally a separate and distinct arrangement from the
original contract of insurance. Thus, a foreign reinsurance
company which accepted reinsurance from a domestic
insurance company cannot be sued in the Philippines.
c. Mere ownership by a corporation of a property in a certain
state, unaccompanied by its active use in furtherance of
the business for which it was formed, is insufficient in
itself to constitute doing business. A foreign corporation
which becomes the assignee of mining properties,
facilities and equipment and assumes the loan obligation
,71Eriks Pte. Ltd. v. Court of Appeals, G.R. No. 118843,1997.

’’’Hutchison Ports Philippines Limited v. Subic Bay Metropolitan Authority,
G.R. Nos. 100801-02, August 25, 2000.
’’’Columbia Pictures, Inc. v. Court of Appeals, G.R. No. M0318. August 28,
1996.
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of its subsidiary cannot be automatically considered as

doing business in the Philippines even if its subsidiary
was doing business in the Philippines.77'’
d. The filing of collection suits by a foreign corporation, as
an assignee to claims, does not constitute doing business
in the Philippines.776
The insurer is suing on a casual transaction when the
insured goods are covered by two bills of ladings but
arising from a single marine insurance policy that the
insurer issued in favor of the consignee.776
f. The mere act of exporting from one’s own country, without
doing any specific commercial act within the territory
of the importing country, cannot be deemed as doing
business in the importing country. The importing country
does not acquire jurisdiction over the foreign exporter who
has not performed any specific commercial acts within the
territory of the importing country. Without jurisdiction
over the foreign exporter, the importing country cannot
compel the foreign exporter to secure a license to do
business in the importing country.
Otherwise, Philippine exporters, by the mere act
alone of exporting their products, could be considered
by the importing countries to be doing business in those
countries. This will require Philippine exporters to secure
a business license in every foreign country where they
usually export their products, even if they do not perform
any specific commercial act within the territory of such
importing countries. Such a legal concept will have a
deleterious effect not only on Philippine exports, but also
on global trade.777
™MR Holdings, Ltd. v. Bajar, G.R. No. 138104, April 11, 2002.
776Aetna Casualty and Surety Co. v. Pacific Star Line, G.R. No. L-26809.
December 29, 1977.
7,cLorenzo Shipping Corp. v. Chubb and Sons, G.R. No. 147724, June 8, 2004.
777Van Zuiden Bros Ltd. v. GTVL Manufacturing Industries, G.R. No. 147905,
May 28, 2007; 2015 Bar.
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g- A foreign company that merely imports goods from

a Philippine exporter, without opening an office or
appointing an agent in the Philippines, is not doing
business in the Philippines.778
h. The appointment of a distributor in the Philippines is not
sufficient to constitute doing business unless it is under
the full control of the foreign corporation. If the distributor
is an independent entity which buys and distributes
products, other than those of the foreign corporation,
doing business for its own name and account, the latter
cannot be considered as doing business.779
i. A foreign corporation may file a petition to enforce a
foreign arbitral award even though it is not licensed to
do business in the Philippines. When a party enters into
a contract containing a foreign arbitration clause and
submits itself to arbitration, it becomes bound by the
contract, by the arbitration and by the result of arbitration,
conceding thereby the capacity of the other party to enter
into the contract, participate in the arbitration and cause
the implementation of the result.780
j. A foreign corporation, if it is a holder in due course c
a draft, can file a suit in the Philippines to enforce the
warranties of the drawer and endorser after the drawee
dishonored the instrument.781
k. Subscribing to shares to stock of a domestic corporation,
maintaining investments therein and deriving dividend
income therefrom does not qualify as “doing business”
contemplated under R.A. No. 7042. Hence, the foreign
corporation is not required to secure a license before it
can file a claim for tax refund.782
’’’Cargill, Inc. Intra Strata Assurance Corporation, G.R. No. 168266, March
16,2010.
’’’Steel Case v. Design International Selection, G.R. No. 171995, April 18,
2012; 2015 Bar Exam.
”°Tuna Processing, Inc. v. Philippine Kingford, Inc., G.R. No. 185582, February
29,2012.
”‘Llorente v. Star City Pty Limited, G.R. Nos. 212050 and 212216, January
15,2020.
’’’Commissioner of Internal Revenue Interpublic Group of Companies, G.R.
No. 207039, August 14, 2019.
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if. Necessity of a license to do business

(a) Requisites for issuance of a license
477. What are the requirements for the application by a foreign
corporation of a license to transact business in the Philippines?
a. A foreign corporation applying for a license to transact
business in the Philippines shall submit to the SEC a
copy of its articles of incorporation and bylaws, certified
in accordance with law, and their translation to an official
language of the Philippines, if necessary. The application
shall be under oath and, unless already stated in its
articles of incorporation, shall specifically set forth the
following:
i. The date and term of incorporation;
ii. The address, including the street number, of the
principal office of the corporation in the country or
State of incorporation;
iii. The name and address of its resident agent
authorized to accept summons and process in all
legal proceedings and all notices affecting the
corporation, pending the establishment of a local
office;
iv. The place in the Philippines where the corporation
intends to operate;
v. 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;
vi. The names and addresses of the present directors
and officers of the corporation;
vii. A statement of its authorized capital stock and the
aggregate number of shares which the corporation
has authority to issue, itemized by class, par value
of shares, shares without par value, and series, if
any;
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viii. A statement of its outstanding capital stock and the

aggregate number of shares which the corporation
has issued, itemized by class, par value of shares,
shares without par value, and series, if any;
ix. A statement of the amount actually paid in; and
X. Such additional information as may be necessary or
appropriate in order to enable the SEC to determine
whether such corporation is entitled to a license
to transact business in the Philippines, and to
determine and assess the fees payable.
Attached to the application for Ecense shall be a
certificate under oath duly executed by the authorized
official or officials of the jurisdiction of its incorporation,
attesting to the fact that the laws of the country or State
of the appEcant allow Filipino citizens and corporations to
do business therein, and that the appEcant is an existing
corporation in good standing. If the certificate is in a
foreign language, a translation thereof in EngEsh under
oath of the translator shaU be attached to the application.
The appEcation for a Ecense to transact busines
in the Philippines shall likewise be accompanied by i
statement under oath of the president or any other person
authorized by the corporation, showing to the satisfaction
of the SEC and when appropriate, other governmental
agencies that the applicant is solvent and in sound
financial condition, setting forth the assets and liabihties
of the corporation as of the date not exceeding one year
immediately prior to the filing of the application.
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 aU other foreign corporations,
no application for license to transact business in the
Philippines shall be accepted by the SEC without previous
authority from the appropriate government agency,
whenever required by law.783
a
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b. As a condition to the issuance of the license for a foreign

corporation to transact business in the Philippines,
such corporation shall file with the SEC written power
of attorney designating a person who must be a resident
of the Philippines, on whom 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. Such
foreign corporation shall likewise execute and file with the
SEC an agreement or stipulation, executed by the proper
authorities of said corporation, in form and substance as
follows:
“The (name of foreign corporation) hereby
stipulates and agrees, in consideration of being
granted a license to transact business in the
Philippines, that if the 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 process
may be served, then service of any summons
or other legal process may be made upon the
SEC in any action or proceeding arising out
of any business or transaction which occurred
in the Philippines and such service shall have
the same force and effect as if made upon the
duly authorized officers of the corporation at its
home office.”
Whenever such service of summons or other process
is made upon the SEC, the SEC shall, within 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 SEC shall
be a necessary part of and shall complete such service.
All expenses incurred by the SEC for such service shall
be paid in advance by the party at whose instance the
service is made.784
78'Section 145, RCC.
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It shall be the duty of the resident agent to

immediately notify the SEC in writing of any change in
the resident agent’s address.
If the SEC is satisfied that the applicant has complied
with all the requirements of the RCC and other special
laws, rules and regulations, the SEC shall issue a license
to transact business in the Philippines to the applicant
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, unless such license is
sooner surrendered, revoked, suspended, or annulled in
accordance with the RCC or other special laws.785
(b) Resident agent

478. Who may be a resident agent?
A resident agent may be either an individual residing in the
Philippines or a domestic corporation lawfully transacting busines
in the Philippines: Provided, That an individual resident ager
must be of good moral character and of sound financial standing
Provided, further, That in case of a domestic corporation who will act
as a resident agent, it must likewise be of sound financial standing
and must show proof that it is in good standing as certified by the
SEC.786
Note that the removal of the resident agent and failure to
appoint a replacement can be a ground for revocation or suspension
of its license to do business.787
(c) Amendment of license

479. What is the obligation of the foreign corporation authorized to
transact business in case there are amendments to its Articles
of Incorporation and/or Bylaws?
Whenever the articles of incorporation or bylaws of a foreign
corporation authorized to transact business in the Philippines are
amended, such foreign corporation shall, within 60 days after the

78720 12 Bar Exam.
1
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amendment becomes effective, file with the SEC, and in proper cases;
with the appropriate government agency, a duly authenticated copy
of the amended articles of incorporation or bylaws, indicating clearly
in capital letters or underscoring the change or changes made, duly
certified by the authorized official or officials of the country or state
of incorporation. Such filing shall not in itself enlarge or alter the
purpose or purposes for which such corporation is authorized to
transact business in the Philippines 788
It should also obtain an amended license in the event it
changes its corporate name, or desires to pursue other or additional
purposes in the Philippines, by submitting an application with the
SEC, favorably endorsed by the appropriate government agency in
the proper cases.789
Hi. Personality to sue

480. What confers upon the foreign corporation the legal capacity
to sue in the Philippines?
The foreign corporation has the legal capacity to sue if it has
procured from the SEC a license to do business or it is suing on a
casual or isolated transaction.
For purposes of acquiring jurisdiction by way of service of
summons, there is no need to prove first the fact that the defendant
is doing business in the Philippines. Where a complaint alleges
that the defendant has an agent in the Philippines, summons can
validly be served thereto even without prior evidence of the truth of
such factual allegation. If in fact, a foreign corporation does not do
business here, that is a matter that should be ventilated in the trial
on the merits but not in a motion to dismiss.790
It does not follow that the insurer, as subrogee, has also no
capacity to sue in this jurisdiction simply because the insured
party (which is a foreign corporation) has no legal capacity to sue
in the Philippines. The rights inherited by the insurer pertain only
to the payment it made to the insured and which amount it now
seeks to recover from the shipping company which caused the loss
sustained by the insured. The capacity to sue is a right personal to

’"Signetics Corp. v. Court of Appeals, G.R. No. 105141 (Resolution), August
31, 1993.
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its holder. It is conferred by law and not by the parties. The insurer
has satisfactorily proven its capacity to sue, after having shown that
it is not doing business in the Philippines, but is suing only under
an isolated transaction, i.e., under the one marine insurance policy
issued in favor of the consignee/insured.791
iv. Suability of foreign corporations

481. State the principles governing the right to sue and suability of
foreign corporations.
The following principles governing a foreign corporation’s right
to sue in local courts have long been settled, to wit-.
a. if a foreign corporation does business in the Philippines
without a license, it cannot sue before the Philippine
courts;
b. if a foreign corporation is not doing business in the
Philippines, it needs no license to sue before Philippine
courts on an isolated transaction or on a cause of action
entirely independent of any business transaction; and
c. if a foreign corporation does business in the Philippine
with the required license, it can sue before Philippic
courts on any transaction.
It is not the absence of the prescribed license but the “doing (of)
business” in the Philippines without such license which debars the
foreign corporation from access to our courts.792
Tersely, the issue on whether a foreign corporation, which
does not have a license to engage in business in the Philippines can
seek redress in Philippine courts depends on whether it is doing
business or it merely entered into an isolated transaction. A foreign
corporation that is not doing business in the Philippines must
disclose such fact if it desires to sue in Philippine courts under the
isolated transaction rule because, without such disclosure, the court
may choose to deny it the right to sue.793
791Lorenzo Shipping Corp. v. Chubb and Sons, G.R. No. 147724, June 8, 2004.
792MR Holdings, Ltd. v. Sheriff Carlos P. Bajar, Sheriff Ferdinand M. Jandusay,
Solidbank Corporation, and Marcopper Mining Corporation, G.R. No. 138104, April
11, 2002.
793Llorente v. Star City Pty Limited, G.R. Nos. 212050 and 212216, January
15, 2020,
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V. Instances when unlicensed foreign corporations

may be allowed to sue (isolated transactions)
482. What are the instances when an unlicensed foreign corporation
may be allowed to sue?
The following are the instances when an unlicensed foreign
corporation may be allowed to sue in the Philippines courts.
a. If the foreign corporation is suing on a casual or isolated
transaction.194
An isolated transaction will not result in the
enterprise being deemed as doing business in the
Philippines. The phrase “isolated transaction” has a
definite and fixed meaning, i.e., a transaction or series
of transactions set apart from the common business of a
foreign enterprise in the sense that there is no intention
to engage in a progressive pursuit of the purpose and
object of the business organization.796
The ascertainment of whether a foreign corporation
is merely suing on an isolated transaction or is actually
doing business in the Philippines requires the elicitation
of at least a preponderant set of facts. It simply cannot
be answered through conjectures or acceptance of
unsubstantiated allegations.796
b. Action to protect the good name, goodwill and reputation
of a foreign corporation.
Foreign corporation not doing business in the
Philippines may sue here even if not licensed in order
to protect intellectual property rights. Under the Paris
Convention for the Protection of Intellectual Property
Rights, the Philippines is obligated to assure nationals of
countries of the Paris Convention that they are afforded
effective protection against violation of their intellectual
property rights in the Philippines in the same way
™See discussions on Question No. 21 (cases where the Supreme Court held
that the activities of the foreign corporation do no amount to doing business).
’“Lorenzo Shipping Corp. v. Chubb and Sons, G.R. No. 147724, June 8, 2004.
796Rimbunan Hijau Group of Companies Oriental Wood Processing
Corporation, G.R. No. 152228. September 23, 2005.
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4 that their own countries are obligated to accord similar

protection to Philippine nationals.797
Our obligation under the Paris Convention is
incorporated in Section 3 of R.A. No. 8293, otherwise
known as the Intellectual Property Code.
C. Where the contract provides the Philippine court as the
exclusive venue for court action, to the exclusion of other
courts.
Stipulation as to venue which is not permissive but
exclusive in nature is binding to the parties.
d. A license to engage in business granted subsequent to
the transaction enables the foreign corporation to sue on
contracts executed before grant of license.
In one case, the Supreme Court ruled that a contract
entered into by a foreign corporation not licensed to do
business in the Philippines is not void even as against
the erring foreign corporation. The lack of capacity at the
time of the execution of the contracts was cured by the
subsequent grant of a license to engage in business.
It was likewise held in this case that while the grai
of the license retroacts to the date of the transaction, thi
is without prejudice to criminal prosecution against the
foreign corporation for doing business without a license.
The basis of criminal liability is Section 144 of the OCC
(now Section 170 of the RCC) that any violation of the
provisions of the Corporation Code or its amendments not
otherwise specifically penalized therein shall be punished
by a fine or by imprisonment. (The RCC retained the
language but removed the penalty of imprisonment.)
In TENT v. Tullett Prebon,™ the Supreme Court,
however, ruled that its declaration in Home Insurance
Company v. Eastern Shipping Lines that “the prohibition
against doing business without first securing a license
is now given a penal sanction which is also applicable to
’’’Converse Rubber Corporation v. Universal Rubber Products, Inc., G.R. No.

L-27906, January 8, 1987; Philip Morris, Inc. v. Court of Appeals, G.R. No. 91332^
July 16, 1993; Fredco Manufacturing Corporation v. T.~~ President and----------
----- ----- Fellows of
Harvard College, G.R. No. 185917, June 1, 2011.
798G.R. No. 189158, January 11, 2017.
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other violations of the Corporation Code under the general

provisions of Section 144 of the Code” is unmistakably an
obiter dictum. The issue in the Home Insurance case was
whether or not a foreign corporation previously doing
business here without a license has the capacity to sue
in our courts when it had already acquired the necessary
license at the time of the filing of the complaints. The
statement regarding the supposed penal sanction was
not essential to the resolution of the case as none of the
parties was being made criminally liable.
e. When the unlicensed foreign corporation has domestic
corporation as a co-plaintiff/petitioner.
This is necessary to prevent multiplicity of suits.
f. Under the doctrine of estoppel when the counterparty is
estopped or precluded from questioning the lack of legal
capacity of the foreign corporation, as held in the following
cases:
A foreign corporation which licensed a domestic
corporation to manufacture and market its products
and equipment is doing business in the Philippines and
cannot sue the domestic corporations if it has no license to
do business in the Philippines. For being in pari delicto,
the domestic corporation cannot ask the courts to prohibit
the foreign corporation from terminating its contract and
giving the license to produce and market its products to
another.799
A foreign corporation doing business in the
Philippines may sue in the Philippine courts although it
has no license to do business here against a Philippine
citizen who had contracted with and been benefited by
said corporation where such party is aware that the
foreign corporation is doing business in the Philippines
without a license and received benefits from transacting
business with it, under the principle of estoppel.800
’"Top-Weld Manufacturing, Inc. V. Eced, S.A., G.R. No. L-44944, August

9, 1985; See also Granger Associates v. Microwave Systems, Inc., G.R. No. 79986.
September 14, 1990.
““’Merrill Lynch Futures, Inc. v. 1Court of Appeals, G.R. No. 97816, July 24,
1992.
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i A party is estopped from challenging the personality

of a corporation after having acknowledged the same by
entering into a contract with it. The principle is applied
to prevent a person contracting with a foreign corporation
from later taking advantage of its noncompliance with the
statutes, chiefly in cases where such person has received
the benefits of the contract.801
vi. Grounds for revocation of license

483. When may the SEC revoke or suspend the license of a foreign
corporation to transact business in the Philippines?
Without prejudice to other grounds provided under special
laws, the license of a foreign corporation to transact business in the
Philippines may be revoked or suspended by the SEC upon any of
the following grounds:
a. Failure to file its annual report or pay any fees as required
by the RCC;
b. Failure to appoint and maintain a resident agent in the
Philippines as required by this Title;
c. Failure, after change of its resident agent or address, tc
submit to the SEC a statement of such change as require
by this Title;
d. Failure to submit to the SEC an authenticated copy of
any amendment to its articles of incorporation or bylaws
or of any articles of merger or consolidation within the
time prescribed by this Title;
e. A misrepresentation of any material matter in any
application, report, affidavit or other document submitted
by such corporation pursuant to this Title;
f. 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;
g- Transacting business in the Philippines outside of
the purpose or purposes for which such corporation is
authorized under its license;
“‘Global Business Holdings, Inc. v. Surecomp Software, B.V., G.R. No. 173463,
October 13, 2010; Steelcase, Inc. v. Design International Selections, Inc., G.R. No.
171995, April 18, 2012.
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h. Transacting business in the Philippines as agent of or

acting on behalf of any foreign corporation or entity not
duly licensed to do business in the Philippines; or
i. Any other ground as would render it unfit to transact
business in the Philippines.802
Upon the revocation of the license to transact business in
the Philippines, the SEC shall issue a corresponding certificate of
revocation, furnishing a copy thereof to the appropriate government
agency in the proper cases.
The SEC shall also mail the notice and copy of the certificate
of revocation to the corporation, at its registered office in the
Philippines.803
Merger and Consolidation

a. Definition and concept
484. What are the different forms of corporate combinations and
acquisitions?
The different forms of corporate combinations and acquisitions
are:
a. Sale of all or substantially all of the assets (asset sale).
b. Sale of controlling block of stock to new stockholder/s
(stock sale).
c. Merger or consolidation.
485. What is a merger?

A merger is a reorganization of two (2) or more corporations
that results in their consolidating into a single corporation, which is
one of the constituent corporations, one disappearing or dissolving
and the other surviving.
To put it another way, merger is the absorption of one (1) or
more corporations by another existing corporation, which retains its
identity and takes over the rights, privileges, franchises, properties,
claims, liabilities and obligations of the absorbed corporation(s). The

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r
surviving corporation continues its existence while the life or lives of

the other corporation(s) is or are terminated.804
486. What is consolidation?

Consolidation is the union of two (2) or more existing corporations
to form a new corporation called the consolidated corporation. It is a
combination by agreement between two (2) or more corporations by
which their rights, franchises, and property are united and become
those of a single, new corporation, composed generally, although not
necessarily, of the stockholders of the original corporations.805
487. Distinguish merger from asset sale between corporations.

In merger, the constituent corporations cease to exist except
the surviving corporation which retains its corporate identity but
acquires all the rights and liabilities of the acquired corporation/s
whereas in asset sale, both the seller corporation and buyer
corporation continue to exist. The seller corporation is not dissolved
even though it may not have any asset left.
In merger, the surviving corporation assumes all the liabilities
of the absorbed corporation whereas in asset sale, the buyer, as a
general rule, does not assume the liabilities of the seller.
b. Distinguish: constituent and consolidatei

corporation
488. Distinguish merger from consolidation.
Consolidation is the union of two (2) or more existing
corporations to form a new corporation called the consolidated
corporation.
Merger, on the other hand, is a union whereby one corporation
absorbs one or more existing corporations, and the absorbing
corporation survives and continues the combined business.
The parties to a merger or consolidation are called constituent
corporations. In consolidation, all the constituents are dissolved
and absorbed by the new consolidated enterprise. In merger, all
’‘’ ’Bank of Commerce v. RPN, G.R. No. 195615, April 21, 2014.
®°5McLeod v. National Labor Relations SEC First Division, et al., G.R. No.
146667, January 23, 2007; PNB v. Andrada Electric and Engineering Co., GK. No.
142936, April 17, 2002.
L
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constituents, except the surviving corporation, are' dissolved. In both

cases, however, there is no liquidation of the assets of the dissolved
corporations, and the surviving or consolidated corporation acquires
all their properties, rights and franchises and their stockholders
usually become its stockholders.
The surviving or consolidated corporation assumes
automatically the liabilities of the dissolved corporations, regardless
of whether the creditors have consented or not to such merger or
consolidation.606
c. Plan of merger or consolidation

d. Articles of merger or consolidation
e. Procedure
489. What is the procedure for merger or consolidation?
The RCC requires the following steps for merger or
consolidation:
a. The board of each corporation draws up a plan of merger
or consolidation. Such a plan of merger or consolidation
consists of:
i. The names of the corporations proposing to merge
or consolidate, hereinafter referred to as the
constituent corporations;
ii. The terms of the merger or consolidation and the
mode of carrying the same into effect;
iii. A statement of the changes, if any, in the articles
of incorporation of the surviving corporation in
case of merger; and, in case of consolidation, all the
statements required to be set forth in the articles of
incorporation for corporations organized under this
RCC; and
iv. Such other provisions with respect to the proposed
merger or consolidation as are deemed necessary or
desirable.607
““John F. McLeod v. National Labor Relations SEC First Division, et al., G.R.
No. 146667, January 23, 2007.
'“"Section 75, RCC.
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b. Upon approval by a 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.808
c. Notice of such meetings shall be given to all stockholders
or members of the respective corporations in the same
manner as giving notice of regular or special meetings
under Section 49 of the RCC. The notice shall state the
purpose of the meeting and include a copy or a summary
of the plan of merger or consolidation.808
d. 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 nonstock
corporations shall be necessary for the approval of such
plan.810
After the approval by the stockholders or members o:
the plan of merger or consolidation, articles of merger of
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 of each
corporation.811
The contents of the articles of merger or articles of
consolidation shall include the following:
i. The plan of the merger or the plan of consolidation;
ii. As to stock corporations, the number of shares
outstanding, or in the case of nonstock corporations,
the number of members;
iii. As to each corporation, the number of shares or
members voting for or against such plan, respectively;
iv. The carrying amounts and fair values of the assets
and liabilities of the respective companies as of the
agreed cut-off date;

“'“Section 76, RCC.
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V. The method to be used in the merger or consolidation

of accounts of the companies;
vi. The provisional or pro-forma values, as merged or
consolidated, using the accounting method; and
vii. Such other information as may be prescribed by the
SEC.
f. The articles shall be submitted to the SEC for its approval
provided that in the case of merger or consolidation
of special corporations governed by special laws, the
favorable recommendation of the appropriate government
agency shall first be obtained.812
g- If upon investigation, the SEC has reason to believe
that the proposed merger or consolidation is contrary or
inconsistent with the provisions of the RCC or existing
laws, it shall set a hearing to give the corporations
concerned the opportunity to be heard.813
h. Where the SEC is satisfied that the merger or consolidation
of the corporations concerned is not inconsistent with the
provisions of the RCC and existing laws, it shall issue a
certificate of merger or consolidation, at which time the
merger or consolidation shall be effective.814
f. Effectivity
490. When is merger or consolidation effective?
The merger or consolidation is effective upon issuance by the
SEC of a certificate approving the articles and plan of merger or
of consolidation.816 It is the operative fact by which the merger or
consolidation shall be effective.
In case of merger of banks, it is not the approval of the plan
of merger by the BSP that makes the merger effective but upon
issuance of by the SEC of the certificate of merger or consolidation.
Hence, prior to the SEC approval, any payment of an obligation
by the debtor of the absorbed corporation in favor of the surviving
“‘“Section 78, RCC.

“'"Section 78, RCC.
“‘■•Section 78, RCC; Bank of Commerce v. Radio Philippines Network, Inc., ibid.
“'“Section 78, RCC.
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corporation is not valid. The issuance of the certificate of merger is

crucial because not only does it bear out SEC’s approval but it also
marks the moment when the consequences of a merger take place.
By operation of law, upon the effectivity of the merger, the absorbed
corporation ceases to exist but its rights and properties, as well as
liabilities, shall be taken and deemed transferred to and vested in
the surviving corporation.816
g. Limitations
491. In 2015, Total Bank ("Total") proposed to sell to Royal Bank
("Royal") its banking business for P10 billion consisting of
specified assets and liabilities. The parties reached an eventual
agreement, which they termed as "Purchase and Assumption
Agreement" ("P&A") in which Royal would acquire Total’s
specified assets and liabilities, excluding contingent claims,
with the further stipulation that it should be approved by
the Bangko Sentral ng Pilipinas ("BSP"). BSP imposed the
condition that Total should place in escrow PI billion to cover for
contingent claims against it. Total complied. After securing the
approval of the BSP, the two (2) banks signed the agreement.
BSP thereafter issued a circular advising all bank and non
bank intermediaries that effective January 1,2016, "the banking
activities of Total Bank and Royal Bank have been consolidated
and the latter has carried out their operations since then."
a. Was there a merger and consolidation of the two (2)banks
in point of the Corporation Code? Explain.
There was no merger or consolidation of the two (2) banks in
point of the Corporation Code. The Supreme Court ruled in Bank
of Commerce v. Radio Philippine Network, Tnc.817 that there can be
no merger if the requirements and procedure for merger were not
observed and no certificate of merger was issued by the SEC.
The transaction is basically a sale of all or substantially all
of the assets. It is settled if one (1) corporation sells or otherwise
transfers all its assets to another corporation, the latter is not liable
for the debts and liabilities of the transferor if it has acted in good
faith and has paid adequate consideration for the assets, except:
8l6Mindanao Savings and Loan Association Willkom, G.R. No. 178618,

October 11, 2010.
817G.R. No. 195615, April 21, 2014.
L
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(1) where the purchaser expressly or impliedly'agrees to assume

such debts; (2) where the transaction amounts to a consolidation or
merger of the corporations; (3) where the purchasing corporation is
merely a continuation of the selling corporation; and (4) where the
transaction is entered into fraudulently in order to escape liability
for such debts.
The evidence fails to show that BOC was a mere continuation
of TRB. TRB retained its separate and distinct identity after the
purchase. Although it subsequently changed its name to Traders
Royal Holding’s, Inc., such change did not result in its dissolution.
As such, BOC and TRB remained separate corporations.
a. What is meant by a de facto merger? Discuss.818
De facto merger means that a corporation called the Acquiring
Corporation acquired the assets and liabilities of another corporation
in exchange for an equivalent value of shares of stock of the
Acquiring Corporation making the other corporation a stockholder
of the Acquiring Corporation.819
In the present case, there is no de facto merger because the
Acquiring Corporation acquired the assets and liabilities of the
other corporation but not in exchange for stocks. The assets were
acquired in exchange for the assumption of liabilities.
h. Effects
492. What are the effects of merger or consolidation?
The following are the effects of merger or consolidation:
a. The constituent corporations shall become a single
corporation which, in case of merger, shall be the surviving
corporation designated in the plan of merger; and, in case
of consolidation, shall be the consolidated corporation
designated in the plan of consolidation.
b. The separate existence of the constituent corporations
shall cease, except that of the surviving or the consolidated
corporation.
81820 1 6 Bar Exam.

819Bank of Commerce v. Radio Philippines Network, Inc., et al., G.R. No.
195615, April 21, 2014.
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C. The surviving or the consolidated corporation shall

possess all the rights, privileges, immunities, and powers
and shall be subject to all the duties and liabilities of a
corporation organized under the RCC.
d. The surviving or the consolidated corporation shall
possess all the rights, privileges, immunities and
franchises of each constituent corporation; and all real
or personal property, all receivables due on whatever
account, including subscriptions to shares and other
choses in action, and every other interest of, belonging to,
or due to each constituent corporation, shall be deemed
transferred to and vested in such surviving or consolidated
corporation without further act or deed.
e. The surviving or consolidated corporation shall be
responsible for all the liabilities and obligations of
each constituent corporation as though such surviving
or consolidated corporation had itself incurred such
liabilities or obligations; and any pending claim, action
or proceeding brought by or against any constituent
corporation may be prosecuted by or against the survivin
or consolidated corporation. The rights of creditors o
liens upon the property of such constituent corporations
shall not be impaired by the merger or consolidation.820
493. Is merger a mode of dissolution?

Yes, because the absorbed corporation ceases to exist upon
approval by the SEC of the merger.
494. Should the absorbed corporation undertake dissolution to

transfer its assets to the surviving corporation?
Although there is a dissolution of the absorbed corporations,
there is no winding up of their affairs or liquidation of their assets,
because the surviving corporation automatically acquires all their
rights, privileges and powers, as well as their liabilities.
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495. Can the surviving corporation collect a promissory note issued

in favor of the absorbed corporation after the effectivity of the
merger?
The fact that the promissory note was executed after the
effectivity date of the merger does not militate against the surviving
corporation because all contracts — irrespective of the date of
execution — entered into in the name of the absorbed corporation
shall be understood as pertaining to the surviving bank.821
496. Can the debtor of the absorbed bank invoke novation against
the surviving corporation which demanded payment of the
debtor’s loan?
A bank which merged with another bank can sue the debtor
of the absorbed bank because it acquired the rights of the latter.
Novation (because of the change of creditor) is not a valid defense
because it is settled that in a merger of two (2) existing corporations,
one of the corporations survives and continues the business, while
the other is dissolved and all its rights, properties and liabilities are
acquired by the surviving corporation.822
The surviving or consolidated corporation shall be responsible
for all the liabilities and obligations of each constituent corporation
as though such surviving or consolidated corporation had itself
incurred such liabilities or obligations; and any pending claim, action
or proceeding brought by or against any constituent corporation
may be prosecuted by or against the surviving or consolidated
corporation. The rights of creditors or liens upon the property of
such constituent corporations shall not be impaired by the merger
or consolidation.823
497. Cite jurisprudence where the surviving corporation was made

to assume the liabilities of the absorbed corporation.
a. Upon service of the writ of garnishment, the garnishee
becomes a “virtual party” or “forced intervenor” to the
case. Citytrust, therefore, upon service of the notice of
“'Associated Bank Court of Appeals and Lorenzo Sarmiento, Jr., G.R. No.
123793, June 29, 1998.
822Babst v. Court of Appeals, G.R. Nos. 99398 and 104625, January 26, 2001.
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r
garnishment and its acknowledgment that it was in

possession of defendants’ deposit accounts, became a
“virtual party” to or a “forced intervenor” in the civil case.
As such, it became bound by the orders and processes
issued by the trial court despite not having been properly
impleaded therein. Consequently, by virtue of its merger
with BPI, BPI, as the surviving corporation, effectively
became the garnishee, thus the “virtual party” to the
civil case. BPI cannot avoid the obligation attached to
the writ of garnishment by claiming that the fund was
not transferred to it, in Eght of the rule on merger that
all liabilities and obligations of the absorbed corporation
(Citytrust) shall be transferred to and become the
liabilities and obligations of the surviving corporation
(BPI) in the same manner as if the BPI had itself incurred
such liabilities or obligations.821
b. In a case where an employee obtained judgment against
two corporations holding them solidarity liable for
money claim and damages, the surviving corporation,
which absorbed one of the judgment debtor-corporations
assumes the same solidary liability and not only for tht
money claim corresponding to the period the employee
was employed with the absorbed corporation. One of the
effects of a merger is that the surviving company shall
inherit not only the assets, but also the liabilities of the
corporation it merged with.826
C. The merger of a corporation with another does not operate
to dismiss the employees of the corporation absorbed by
the surviving corporation. This is in keeping with the
nature and effects of a merger as provided under law and
the constitutional policy protecting the rights of labor.
The employment of the absorbed employees subsists.
Necessarily, these absorbed employees are not entitled to
separation pay on account of such merger in the absence
821Bank of Philippine Islands v. Lee, G.R. No. 190144, August 1, 2012.

825Sumifru (Philippines) Corporation (Surviving Entity In A Merger With
Davao Fruits Corporation and Other Companies) v. Bernabe Baya, G.R. No. 188269,
April 17, 2017.
1
J9JC9B0M
of any other ground for its award.826 The surviving

corporation, however, may terminate employment for
redundancies resulting from the merger.
d. Since BSA incurred delay in the performance of its
obligations and subsequently cancelled the omnibus line
without the mortgagor’s consent, its successor BPI cannot
be permitted to foreclose the mortgage for the reason that
its predecessor BSA violated the terms of the contract
even prior to the mortgagor’s justified refusal to continue
paying the amortizations. As such, BPI is liable for BSA,
its predecessor. BPI did not only acquire all the rights,
privileges and assets of BSA but likewise acquired the
liabilities and obligations of the latter as if BPI itself
incurred it.827
XI. Investigations, offenses, and penalties

a. Authority of Commissioner
i. Investigation and prosecution of offenses
498. Does the SEC have prosecutorial power to file criminal
information in court?
No, the SEC has no prosecutorial power. If the SEC has
reasonable basis to believe that a person has violated the RCC or
any of its rules and regulations, it may transmit the evidence to
the Department of Justice for preliminary investigation or criminal
prosecution and/or to initiate criminal prosecution for such violation.
By initiating criminal prosecution, it means that SEC will be the
complainant against the offender.
The only sanctions that the SEC may impose are administrative,
not penal, in nature.
ii. Administration of oath and issuance of

subpoena
Hi. Cease and desist power
820The Philippine Geothermal, Geothermal, Inc. v. Unocal Philippines, Inc.

(Now Known As Chevron Geothermal Philippines Holdings, Inc.), G.R. No. 190187,
September 28, 2016.
827Spouses Ong v. BPI Family Savings Bank, G.R. No. 208638, January 14,
2018.
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r
499. In what cases may SEC issue a cease and desist order under
the RCC?
The RCC contains two (2) provisions granting authority to the
SEC to issue a cease and desist order.
The first is Section 156, to wit:
“Whenever the SEC has reasonable basis
to believe that a person has violated, or is about
to violate this Code, a rule, regulation, or order of
the SEC, it may direct such person to desist from
committing the act constituting the violation.”
The SEC “may issue a cease and desist order ex
parte to enjoin an act or practice which is fraudulent
or can be reasonably expected to cause significant,
imminent, and irreparable danger or injury to public
safety or welfare” and the ex parte order shall be
valid for a maximum period of twenty (20) days.
Said order may also become permanent after due
notice and hearing.”
While the RCC explicitly allows the issuance of a cease and
desist order ex parte only when the act sought to be restrained is
fraudulent or can be reasonably expected to cause significant,
imminent and irreparable danger or injury to public safety or welfare,
it is submitted that a cease and desist order may also be issued by
the SEC ex parte to enjoin an actual or threatened violation of the
RCC any rule, regulation or order of the SEC, consistent with the
thrust of the RCC to strengthen the regulatory powers of the SEC.
The other is Section 179(f) which allows the issuance of a cease
and desist orders ex parte to prevent imminent fraud or injury
to the public. This is almost identical though with Section
156.
500. Is the power of the SEC to issue cease and desist orders under
the RCC the same as its authority to issue similar orders under
SRC?
They are different. The SRC is a different source of authority
for the SEC to issue a cease and desist order.
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J9JC9B0M
In GSIS v. Court of Appeals,828 GSIS was a stockholder of

Meralco. It was able to obtain a cease and desist order (“CDO”) from
the SEC to enjoin the Lopez family, then the controlling stockholder
of Meralco, from using and voting the proxies in the election of
directors, for alleged violation of the SRC rules on proxy solicitation.
The CDO, signed by only one SEC Commissioner, did not accordingly
state the exact provision of the SRC which was violated. It was held
that there are three (3) distinct bases for the issuance by the SEC of
the cease and desist order. The first, under Section 5(i) of the SRC, is
predicated on a necessity “to prevent fraud or injury to the investing
public.” No other requisite or detail is tied to this CDO authorized
under Section 5(i), SRC.
The second basis, found in Section 53.3 of the SRC, involves
a determination by the SEC that “any person has engaged or is
about to engage in any act or practice constituting a violation of
any provision of the SRC, any rule, regulation or order thereunder,
or any rule of an Exchange, registered securities association,
clearing agency or other self-regulatory organization.” The provision
additionally requires a finding that “there is a reasonable likelihood
of continuing [or engaging in] further or future violations by such
person.” The maximum duration of the CDO issued under Section
53.3 is ten (10) days.
The third basis for the issuance of a CDO is Section 64 of the
SRC. This CDO is founded on a determination of an act or practice,
which unless restrained, “will operate as a fraud on investors or is
otherwise likely to cause grave or irreparable injury or prejudice
to the investing public.” Section 64.1 plainly provides three (3)
segregate instances upon which the SEC may issue the CDO under
this provision: (1) after proper investigation or verification, (2) motu
proprio, or (3) upon verified complaint by any aggrieved party.
While no lifetime is expressly specified for the CDO under Section
64, the respondent to the CDO may file a formal request for the
lifting thereof, which the SEC must hear within 15 days from filing
and decide within 10 days from the hearing.
It appears that the CDO under Section 5(i) is similar to the
CDO under Section 64.1. Both require a common finding of a need
to prevent fraud or injury to the investing public. At the same time,
no mention is made whether the CDO defined under Section 5(i)
82eG.R. Nos. 183905 and 184275, April 16, 2009.
J9JC9B0M
r
may be issued ex-parte, while the CDO under Section 64.1 requires
“grave and irreparable” injury, language absent in Section 5(i).
Notwithstanding the similarities between Section 5(i) and Section
64.1, it remains clear that the CDO issued under Section 53.3 is a
distinct creation from that under Section 64.
The CDO as contemplated in Section 53.3 or in Section 64,
may be issued “ex-parte” (under Section 53.3) or “without necessity
of hearing” (under Section 64.1). Nothing in these provisions impose
a requisite hearing before the CDO may be issued thereunder.
Nonetheless, there are identifiable requisite actions on the part of
the SEC that must be undertaken before the CDO may be issued
either under Section 53.3 or Section 64. In the case of Section 53.3,
the SEC must make two (2) findings: (1) that such person has
engaged in any such act or practice, and (2) that there is a reasonable
likelihood of continuing, (or engaging in) further or future violations
by such person. In the case of Section 64, the SEC must adjudge that
the act, unless restrained, will operate as a fraud on investors or is
otherwise likely to cause grave or irreparable injury or prejudice to
the investing public.”
A singular CDO could not be founded on Section 5.1, Section
53.3 and Section 64 collectively. At the very least, the CDO under
Section 53.3 and under Section 64 have their respective requisites
and terms. It is an error on the part of the SEC in granting the CDO
without stating which kind of CDO as it is an act that contravenes
due process of law.
Also, the fact that the CDO was signed, much less apparently
deliberated upon, by only by one commissioner likewise renders
the order fatally infirm. The SEC is a collegial body composed of
a Chairperson and four Commissioners. In order to constitute
a quorum to conduct business, the presence of at least three (3)
Commissioners is required.829
It is also in this case that the Supreme Court ruled that if
the proxies were obtained on matters which are intra-corporate in
nature, like the election of directors or determination of quorum for
the election of directors, any issue about the validity and legality of
the proxies partakes of an election contest, falling under the rules
on intra-corporate controversy and outside the jurisdiction of the
SEC even though the petition may ostensibly raise a violation of
the SRC. If the proxies were sought and to be voted on any non-
8Z9GSIS v. Court of Appeals, G.R. No. 183905, April 16, 2009.
1
J9JC9B0M
intra-corporate matter, such as approval of certain corporate acts

under the RCC, the SEC has jurisdiction to rule on issues related
to validation of proxies. This ruling was reiterated in Securities and
Exchange Commission v. Omico and Court of Appeals.830
iv. Contempt
b. Sanctions for violations
i. Administrative sanctions
501. What are the administrative sanctions that the SEC may
impose if it finds that any provision of the RCC or any of the
SEC's orders has been violated?
The SEC may impose administrative sanctions against
the corporation any or all of the following sanctions, taking into
consideration the extent of participation, nature, effects, frequency
and seriousness of the violation.
(P5,000.00) to Two Million Pesos (P2,000,000.00), and
Million Pesos (P2,000,000.00);
b. Issuance of a permanent cease and desist order;
c. Suspension or revocation of the certificate of incorporation;
and
d. Dissolution of the corporation and forfeiture of its assets
under the conditions in Title XIV of the RCC.831
It should be noted that the SEC also has the authority to
punish for contempt, issue subpoena and summons, impose fines,
and suspend, revoke, after proper notice and hearing, the franchise
or certificate of registration of the corporation under the SRC.832 But
these are distinct from the similar powers and authority granted
to the SEC under the RCC. Obviously, the said powers of the SEC
under the SRC are for the purpose of implementing the provisions
of the SRC, its rules and regulations while the similar authority
granted to the SEC under the RCC is intended to enforce the RCC,
its rules and regulations.
™G.R. No. 187702, October 22, 2014.

““Section 5, SRC
J9JC9B0M
I
502. Is the involuntary dissolution imposed when a corporation

commits a violation of the RCC a form of criminal sanction?
No, it is an administrative penalty.833
ii. Prohibited Acts
Hi. Penalties
503. What are the acts penalized under the RCC and their
corresponding sanctions?
Violation Penalty
SECTION 159. Unauthorized use of a Fine ranging from
corporate name. P10,000.00 to P200,000.00.
Unauthorized
Use of Corporate
Name; Penalties.
SECTION 160. When, despite the Fine ranging from
knowledge of the PIO,000.00 to P200,000.00
Violation of existence of a ground at the discretion of the
Disqualification
for disqualification as court, and permanent
Provision; provided in Section 26 disqualification from being
Penalties. of the RCC, a director, a director, trustee or officer
trustee or officer of any corporation; if the
willfully holds office, violation is injurious or
or willfully conceals detrimental to the public,
such disqualification, the fine ranges from
such director, trustee or P20,000.00 to P400,000.00. I
officer.
“IENT v. Tullett Prebon, G.R. No. 189158, January 11, 2017.
I
J9JC9B0M
Violation Penalty
SECTION 161. Unjustified failure Fine ranging from
or refusal by the P10,000.00 to P200,000.00,
Violation of Duty
corporation, or by those at the discretion of
to Maintain
responsible for keeping the court, taking into
Records, to Allow
and maintaining consideration the
their Inspection
corporate records, to seriousness of the violation
or Reproduction;
comply with Sections and its implications.
Penalties.
45, 73, 92, 128, 177 and When the violation of this
other pertinent rules provision is injurious or
and provisions of the detrimental to the public,
RCC on inspection and the penalty is a fine
reproduction of records. ranging from P20,000. 00 to
P400,000.00.
The penalties imposed
under this section shall
be without prejudice to
the SEC’s exercise of its
contempt powers under
Section 157 hereof.
SECTION 162. Willful certification Fine ranging from
of a report required P20,000.00 to P200,000.00;
Willful
under the RCC, if the wrongful certification
Certification is injurious or detrimental
knowing that the same
of Incomplete, to the public, the auditor or
contains incomplete,
Inaccurate, False the responsible person may
inaccurate, false, or
or Misleading
misleading information also be punished with a fine
Statements ranging from P40,000.00 to
or statements.
or Reports;
P400,000.00.
Penalties.
SECTION 163. An independent Fine ranging from
auditor who, in P80,000.00 to P500,000.00.;
Independent if the statement or report
collusion with the
Auditor
corporation’s directors certified is fraudulent, or
Collusion;
or representatives, has the effect of causing
Penalties.
certifies the injury to the general public,
corporation’s financial the auditor or responsible
statements despite officer may be punished
its incompleteness or with a fine ranging from
inaccuracy, its failure to P100,000.00 to P600,000.00.
give a fair and accurate
presentation of the
corporation’s condition,
or despite containing
false or misleading
statements.
J9JC9B0M
I
Violation Penalty
SECTION 164. Those responsible for Fine ranging from
the formation of a P200,000.00 to
Obtaining corporation through P2,000,000.00; if the
Corporate fraud, or who assisted violation of this provision
Registration directly or indirectly is injurious or detrimental
Through Fraud; therein. to the public, the
Penalties. penalty is a fine ranging
from P400,000.00 to
P5,000,000.00.
SECTION 165. Conduct of the Fine ranging P200,000.00
corporation’s business to P2,000,000.00; if the
Fraudulent through fraud. violation of this provision
Conduct of is injurious or detrimental
Business; to the public, the
Penalties. penalty is a fine ranging
from P400,000.00 to
P5,000,000.00.
SECTION 166. A corporation used for Fine ranging P100,000.00 to
fraud, or for committing P5,000,000.00.
Acting as or concealing graft and
Intermediaries corrupt practices as
for Graft and defined under pertinent
Corrupt statutes.
Practices; When there is a
Penalties. finding that any of
its directors, officers,
employees, agents, or
representatives are
engaged in graft and
corrupt practices, the
corporation’s failure to
install:
(a) safeguards for the
transparent and lawful
delivery of services;
and (b) policies, code of
ethics, and procedures
against graft and
corruption shall be
prima facie evidence
of corporate liability
under this section.
J9JC9B0M
Violation Penalty
SECTION 167. A corporation Fine ranging from >. i
that appoints an P100,000.00 to
Engaging Pl,000,000.00. , 10
intermediary who
Intermediaries
engages in graft and
for Graft and
corrupt practices for the
Corrupt corporation’s benefit or
Practices; interest.
Penalties.
SECTION 168. A director, trustee, or Fine ranging from
officer who knowingly P500,000.00 to
Tolerating Graft Pl,000,000.00.
fails to sanction,
and Corrupt
report, or file the
Practices;
appropriate action
Penalties. with proper agencies,
allows or tolerates
the graft and corrupt
practices or fraudulent
acts committed by a
corporation’s directors,
trustees, officers, or
employees.
SECTION 169. Any person who, At the discretion of
knowingly and with the court, be punished
Retaliation
Against
intent to retaliate,
commits acts
with a fine ranging
from P100,000.00 to I
Whistleblowers. detrimental to a Pl,000,000.00.
whistleblower such as
interfering with the
lawful employment
or livelihood of the
whistleblower.
A whistleblower
refers to any person
who provides truthful
information relating
to the SEC or possible
SEC of any offense or
violation under the
RCC.
J9JC9B0M
Violation Penalty
SECTION 170. Violations of any of the Fine of not less than
other provisions of the PIO,000.00 but not more
Other Violations RCC or its amendments than Pl,000,000.00; if the
of the Code; not otherwise violation is committed by
Separate specifically penalized a corporation, the same
Liability. therein. may, after notice and
hearing, be dissolved in
appropriate proceedings
before the SEC: Provided,
That such dissolution
shall not preclude the
institution of appropriate
action against the director,
trustee, or officer of the
corporation responsible for
said violation: Provided,
further, That nothing in this
section shall be construed to
repeal the other causes for
dissolution of a corporation
provided in the RCC.
Liability for any of the
foregoing offenses shall be
separate from any other
administrative, civil, or
criminal liability under the
RCC and other laws.
The RCC shows the clear legislative intent to consider the

foregoing acts as criminal offenses. Under OCC, only the violation of
the right of the inspection was considered a criminal offense. While
Section 144 of the OCC provided that any other violation of the OCC
shall be punishable by fine or imprisonment, it was held in the case
of James IENT v. Tullett Prebon,834 that the sanction under this
section encompassed administrative penalties and not criminal in
nature, in the absence of clear legislative intent to criminalize the
violation.
“'G.R. Nos. 189158 and 189530, January 11, 2017.
L
J9JC9B0M
504. Are the enumerated acts considered criminal offenses if the

penalty is only a fine and not imprisonment?
Yes, under Article 26 ofthe Revised Penal Code, a fine, whether
imposed as a single or as an alternative penalty, shall be considered
an afflictive penalty, if it exceeds One Million Two Hundred
Thousand Pesos (Pl,200,000.00); a correctional penalty, if it does not
exceed One Million Two Hundred Thousand Pesos (Pl,200,000.00)
but is not less than Forty Thousand Pesos (P40,000.00); and a light
penalty, if be less than Forty Thousand Pesos (P40.000.00).
There are, in fact, various criminal offenses under the Revised
Penal Code and special laws when the penalty for the criminal
offense consists only of monetary fines such as: Occupation of real
property or usurpation of real rights in property under Article 312 of
the Revised Penal Code, Reckless acts of imprudence and negligence
resulting in damage to property of another under Article 365 of
the Revised Penal Code, violation of R.A. No. 10054 or Motorcycle
Helmet Act of 2009, violation of R.A. No. 8750 or “Seat Belts Use
Act of 1999,” violation of R.A. No. 10913 or the “Anti-Distracted
Driving Act”, violation of certain provisions of R.A. No. 11313 or
the “Safe Spaces Act”, violation of R.A. No. 9211 or the “Tobacco
Regulation Act of 2003.”
iv. Who are liable

505. If the offender is a corporation, against whom may the penalty
be imposed?
Under Section 171 of RCC, if the offender is a corporation, the
penalty may, at the discretion of the court, be imposed upon the
corporation and/or its directors, trustees, stockholders, members,
officers, or employees responsible for the violation or indispensable
to its commission.
Moreover, anyone who shall aid, abet, counsel, command,
induce, or cause any violation of the RCC, or any rule, regulation,
or order of the SEC shall be punished with a fine not exceeding that
imposed on the principal offenders, at the discretion of the court,
after taking into account their participation in the offense.835
I
J9JC9B0M
■
c. Authority of the Securities and Exchange

Commission
506. What are the powers, functions and jurisdiction of the SEC as
provided under the RCC?
It has the power and authority to:
a. Exercise supervision and jurisdiction over all corporations
and persons acting on their behalf, except as otherwise
provided under the RCC;
b. PursuanttoP.D. No. 902-A,retainjurisdictionoverpending
cases involving intra-corporate disputes submitted for
final resolution. The SEC shall retain jurisdiction over
pending suspension of payment/rehabilitation cases filed
as of 30 June 2000 until finally disposed;
c. Impose sanctions for the violation of the RCC, its
implementing rules and orders of the SEC;
d. Promote corporate governance and the protection of
minority investors, though, among others, the issuance of
rules and regulations consistent with international best
practices;
e. Issue opinions to clarify the application of laws, rules and
regulations;836
f. Issue cease and desist orders ex parte to prevent
imminent fraud or injury to the public;
g- Hold corporations in direct and indirect contempt;
h. Issue subpoena duces tecum and summon witnesses to
appear in proceedings before the SEC;
i. In appropriate cases, order the examination, search and
seizure of documents, papers, files and records, and books
of accounts of any entity or person under investigation as
may be necessary for the proper disposition of the cases,
subject to the provisions of existing laws;
j. Suspend or revoke the certificate of incorporation after
proper notice and hearing;
’“In Gamboa v. Teves, G.R. No. 176579, October 9, 2012, the Supremo Court
pronounced that only the SEC en banc can issue opinions which shiill have the force
and effect of rules and regulations.
J9JC9B0M
k. Dissolve or impose sanctions on corporations, upon final

court order, for committing, aiding in the SEC of, or in any
manner furthering securities violations, smuggling, tax
evasion, money laundering, graft and corrupt practices,
or other fraudulent or illegal acts;
1. Issue writs of execution and attachment to enforce
payment of fees, administrative fines, and other dues
collectible under the RCC;
m. Prescribe the number of independent directors and the
minimum criteria in determining the independence of a
director;
n. Impose or recommend new modes by which a stockholder,
member, director, or trustee may attend meetings or cast
their votes, as technology may allow, taking into account
the company’s scale, number of shareholders or members,
structure, and other factors consistent with the basic
right of corporate suffrage;
o. Formulate and enforce standards, guidelines, policies,
rules and regulations to carry out the provisions of the
RCC; and
P- Exercise such other powers provided by law or those
which may be necessary or incidental to carrying out the
powers expressly granted to the SEC.837
In imposing penalties and additional monitoring and
supervision requirements, the SEC shall take into consideration the
size, nature of the business, and capacity of the corporation.838
It may also exercise visitorial powers over all corporations,
which powers shall include the examination and inspection of
records, regulation and supervision of activities, enforcement of
compliance, and imposition of sanctions in accordance with the
RCC.839
Thus, a corporation cannot deny the SEC access to corporate
records on the pretext that it is not a stockholder.
“’Section 179, RCC

J9JC9B0M

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II. PRE-NEED CODE OF THE PHILIPPINES

III. TRANSPORTATION LAWS

IV. BUSINESS ORGANIZATIONS

2. What are the kinds of partnerships?

3. What are the kinds of universal partnerships?

4. What is a universal partnership of all present property?

'Article 1767, Civil Code.

In a universal partnership of all present property, the property

5. What is a universal partnership of profits?

6. What kind of universal partnership is entered into when its

7. Who are disqualified from entering into a universal partnership?

“Article 1779, Civil Code.

C. Those made to a public officer or his wife, descendants,

8. Can a husband and wife form a limited partnership to engage

9. What are the objects of a particular partnership?

10. Timothy executed a Memorandum of Agreement (MOA) with

The net profits, if any, after deducting the expenses and

11. Can two (2) corporations organize a general partnership?13

12. Can a corporation and an individual form a general

’"Article 1768, Civil Code.

16. Giles Partnership was a defendant in a civil suit for the

17. When is a partnership governed by the provisions relating to

18. What is the purpose of a partnership?

19. What happens to an unlawful partnership?

20. Z partnership was declared an unlawful partnership and

21. TRUE or FALSE. An oral partnership is valid.23

22. Matthew is the proprietor of M&J Tools Shop. James, a former

22Arbes v. Polistico, G.R. No. 31057, September 7, 1929 (citing Manresa).

23. Is a public instrument required to constitute a partnership?

24. What are the requirements whenever immovable property is

25. When is an appraisal required?

d. Rules to determine existence

“Article 1771, Civil Code.

b. Co-ownership or co-possession does not of itself establish

27. In a Memorandum of Understanding, the individuals claiming

“Article 1769, Civil Code.

No, the sharing of returns does not in itself establish a

32Pascual Commissioner of Internal Revenue, G.R. No. 78133, October 18,

as a common fund with intent to produce profits for the heirs in

30. Santiago, Eliseo, Tomas, and David subscribed and paid

“Ona v. Commissioner of Internal Revenue, G.R. No. L-19342, May 25,1972.

3*Gatchalian v. Collector of Internal Revenue, G.R. No. 4B425, April 29,1939.

Having arrived at the conclusion that the agreement to

32. Perfecto, the managing partner of Phoebe and Co., employed

“Woodhouse v. Halili, G.R. No. L-4811, July 31,1953.

35. Dizon, one of the junior partners, withdrew from the

“Ortega v. Court of Appeals, G.R. No. 109248, July 3,1995.

g. Partnership as distinguished from joint venture

A partnership is defined as two (2) or more persons who bind

wGoquiolay v. Sycip, G.R. No. L-11840, July 26,1960,

On the other hand, joint ventures have been deemed to be “akin”

38. Are joint ventures governed by the law on partnerships?

"Narra Nickel Mining & Development Corp. v. Redmont Consolidated Mines

"Article 1767, Civil Code.

42. W, X, Y, and Z organized a general partnership with W and X

A applied for the position of Secretary and B applied for

The hiring of A was decided upon by W and X, but was

The hiring of B was decided upon by W and Z, but was

Who of the applicants should be hired by the partnership?

A should be hired as Secretary. The decision for the hiring

When the manner of management has not been agreed upon,

partners is manifestly prejudicial to the interest of the